As European heads of government assembled to sign the super-strict fiscal treaty the Germans insist on, Spain’s prime minister came with an announcement for the group: Spain plans to break the rules in year one.
Under the agreement, Spain is supposed to slash its budget deficit this year to 4.4 percent of GDP, but Prime Minister Mariano Rajoy says it just can’t be done. Because of deceptive bookkeeping and sloppy practices by the outgoing Socialist government, and various tricky dodges by spendthrift Spanish regional governments, last year’s deficit was much worse than believed, and Rajoy doesn’t see how Spain can make up the difference this year.
He’s probably right, but this is bad news for Europe. First, it means that Spain is closer to the edge than believed. The plan has been to isolate Greece’s problems from the rest of the zone. But if Spain is this much worse closer to the cliff’s edge than was expected, Europe’s debt woes could just be beginning.
Second, and even more troubling, Spain’s defiance of the new budget rules could sink Europe’s new fiscal governance system before the ship leaves port. Under the (still unratified) fiscal treaty that theoretically will govern the financial conduct of the euro’s member states, countries that don’t meet their deficit targets face heavy fines. The trouble is, imposing heavy fines on struggling Spain would worsen the very financial crisis the zone is trying to head off.
If Brussels finds Spain in contempt of the new rules and levies huge fines, Spain is that much closer to bankruptcy and the eurozone crisis gets worse. But if it rewrites the rules at the first sign of trouble and gives Spain a pass, the new European fiscal system loses all credibility. If rules can’t be enforced, what good are they?
European monetary policy is in a state of advanced meltdown and European leaders are flat out of ideas. With France’s Socialist Party presidential candidate Francois Hollande growing more strident about the faults of the fiscal treaty and more committed to reopening negotiations as he consolidates his lead in the polls, it seems more and more likely that the chicken wire and spit now holding the system together will be falling apart by midsummer.