Structural reforms in Spain

Spain promises Eurogroup that it will undertake structural reforms

Yesterday the second vice-president of Spain, Elena Salgado, explained in detail Spain’s plans to reduce its budget deficit to a meeting of the Europgroup.

The final examination of the austerity measures announced by Spain and Portugal will be carried out by the European Commission on 7th June within the context of the proceedings against them for their large budget deficits. Currently 20 countries in the EU are under scrutiny for their excessive budget deficits and have been asked to provide details of their austerity measures and structural reforms designed to reduce their debts.

So far the reaction of the Europgroup to Spain’s planned structural reforms has been positive. Its president, Jean Claude Juncker, said that ‘the measures adopted by Spain are brave and very ambitious’. He added that Spain was ‘acting in an exemplary manner’.

The president of the European Commission, José Manuel Durão Barroso, said that the decisions taken by the Spanish government meant that its budget deficit was forecast to go down from 11.

2% in 2010 to 6% in 2011 and added that it was ‘going in the right direction’.

Yesterday Salgado set out the main measures announced by the Spanish government last week designed to reduce spending. The measures include a 5% cut in public sector pay, the elimination of the one off payment of 2,500 euros for newborn babies a reduction in public investment, the freezing of pensions (except non-contributory ones and the minimum pension) as well as a 2 point rise in VAT in July. She said that she believed that these measures were ‘sufficient and credible’ and said that she did not think that European ministers would demand additional cuts in government spending.

With regards to the rescue fund of 750,000 million euros agreed in a historic 12 meeting of European ministers various countries, especially Germany, Holland, Finland and Sweden tried to get both Spain and Portugal to commit to a cut in spending of more than 3.

5% of their GDP.

However, one negative result of yesterday’s meeting of European ministers was that there was no agreement over 440,000 million euros which is part of the 750,000 million euro rescue package. Problems arose as a result of the opposition of Germany to the automatic activation of the plan should a country need help. The German chancellor said that if a country finds itself in trouble then the help available should be negotiated according to each individual case. As a result another meeting has been scheduled for 21st May in order to define the rules governing the use of the rescue fund. However, it is feared that the markets could interpret this as a sign of discord amongst EU states.

The German minister for the Economy also demanded that countries like Spain and Portugal with large Budget deficits redoubled their efforts reduce public spending.