By: Mike Campbell
The Spanish deficit is running at 11% of the nation’s GDP. As a Eurozone member, Spain is required to maintain its deficit at, or below, a maximum of 3% of GDP under the convergence criteria which paved the way for the adopting the single European currency. Of course, the extreme circumstances of the global financial crisis and the actions taken by sovereign governments within the zone (and, indeed, around the world) smashed that accord. However, the reason behind the requirement was that nations must live “within their means” to ensure the stability of the Euro and its credibility as a major global currency. Recent moves by the EU to provide a stability mechanism for countries with debt problems that cannot be solved by financing through normal money market channels and specific measures to help Greece get out of the hole it has dug for itself do not, of themselves, do anything to alleviate the core problem of paying off sovereign debt and managing borrowing in a responsible manner going forwards.
The Spanish government has announced plans to cut its deficit by €15 billion over a two year period, thereby reducing the deficit to 6% of GDP. The plan calls for a 5% reduction in the salaries of public sector employees, reduction in pension payments (through the removal of an automatic annual rise) and the amount of funding that regional governments receive from the state. Leading the way by personal example, Spanish Prime Minister, Mr Zapetero, will take a 15% cut in his own pay and those of his senior cabinet ministers. Spanish unemployment is 20%, the highest level in the Eurozone. Spain’s moves have been attributed to improved market sentiment around the world. Markets are starting to believe that the Greek debt crisis will not cause “contagion” in other economies after all.