New European treaty already looking shaky

Cristobal Montoro is finance minister of Spain, which said it would miss deficit targets this year to spare itself from too many austerity measures, presenting EU officials with a test case.
Cristobal Montoro is finance minister of Spain, which said it would miss deficit targets this year to spare itself from too many austerity measures, presenting EU officials with a test case. (DANIEL OCHOA DE OLZA / Associated Press)
Posted: March 03, 2012

BRUSSELS, Belgium - The leaders of 25 European countries on Friday signed a new treaty designed to limit government overspending, but their good intentions were immediately put to the test when Spain said it would miss deficit targets this year to spare itself from an austerity overload.

By signing the new treaty, known as the fiscal compact, the leaders hope to achieve closer political and economic integration and longer-term confidence in Europe's finances. But the economic reality in the region - record unemployment and a slide back into recession - suggests the leaders need to reconsider their focus on austerity and seek ways to boost growth.

Hours after signing the new pact, Spanish Prime Minister Mariano Rajoy acknowledged his government's deficit would be 5.8 percent of economic output this year instead of the 4.4 percent earlier promised to the European Union. The EU's executive, the European Commission, will be forced to back off its demands for deficit cuts or to sanction Madrid.

The clash illustrates the bind Europe's leaders are in - having to reduce the debts that created the crisis, while at the same time needing to foster economic growth, without which debt-reduction measures will be futile. "I did not consult other European leaders and I will inform the commission in April," Rajoy said. "This is a sovereign decision by Spain."

Rajoy said he still planned to cut the deficit to 3 percent in 2013, which would put the country back in line with EU rules, and he insisted he was committed to austerity as the best way of getting the country back in shape.

Still, Spain's case will provide an indication of how strict European officials intend to be about enforcing debt reduction in a recession. A spokesman for the European Commission warned that Madrid, which currently has unemployment higher than 20 percent and a shaky banking sector, could come under renewed market pressure if it fails to rein in its deficit.

"There is an issue of confidence at stake here," said Amadeu Altafaj Tardio, spokesman for the EU. He added that the commission still wanted Madrid to provide details of why last year's deficit was so much higher than expected - and what it plans to do about it this year - before the end of the month.

European leaders at the summit, however, offered few concrete measures for boosting economic activity. Only Britain and the Czech Republic declined to sign the agreement.

Though the summit was held under the calmest conditions in financial markets in months, the economic outlook is darkening. Eurozone unemployment is at 10.7 percent and several countries are forecast to fall back into recession this year, yet EU leaders were hesitant to back off austerity. "We remain in a fragile situation," German Chancellor Angela Merkel warned. "The crisis is far from over."

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