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A Continent in Trouble
Don’t Look Now, but Club Med Is Still in Trouble

Austerity fights and political uncertainty are back on the menu in southern Europe, starting with Spain. The Financial Times reports:

The name of the next Spanish prime minister will remain unknown for at least several more weeks. The first challenge facing the new leader, however, is clear: a yawning hole in the government budget that will force Madrid to seek emergency talks with Brussels on day one.

According to the latest European Commission forecast, Spain will report a budget deficit of 4.8 per cent of gross domestic product for last year and 3.6 per cent this year. Both numbers are well above the budget targets set by Brussels, and suggest a shortfall of at least €8bn this year alone.

And Brussels isn’t interested in granting leniency or exceptions right now, the FT notes. That ought to interest Spain’s Mediterranean neighbor, Italy, which suddenly finds its own fiscal situation worse than expected. The

[Italy’s national statistics body] Istat said GDP expanded by only 0.1 percent from the third to the fourth quarter of last year.

That produced an annualised rate of one percent in the final three months of the year, significantly below most analysts’ predictions of quarterly growth around 0.3 percent and an annual rate closer to 1.2 percent.[..]

Slower-than-anticipated growth could threaten Italy’s pledge to start reducing its €2.2 trillion debt mountain this year and exacerbate festering tensions with Brussels over economic policy.

Renzi has been using a series of media appearances and diplomatic meetings since December to put pressure on Brussels—and Berlin—to grant Italy an exception to the EU’s budgetary rules. That will now likely be a harder “get.” In light of the Spanish news, the EU will worry that if it goes easy on Italy, Madrid would be in an uproar, and that if it goes easy on both, such a double accommodation would signal open season on the EU’s austerity rules.

So expect austerity politics and north-south fights to be back on the agenda in Spain, Italy, and the EU as a whole. As if the Continent didn’t have enough else to worry about. . .

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