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Peace in Greece... but pain in Spain
14 March 2012 @ 14:55

There have been signs of spring returning to debt-stricken Europe. Eurozone ministers in Brussels have this week signed off on the Greece bailout package. The International Monetary Fund will confirm its own contribution to the relief deal tomorrow. An agreement on bolstering the eurozone's bailout fund is expected later this month.

The European Central Bank's €1trillion liquidity operation has averted the threat of a Continental banking crisis. Financial markets are calm. Some European officials are even daring to talk privately about a "turning point" in the long-running crisis. But in the corner of this encouraging scene, a dark, ominous cloud is growing. It is in the shape of Spain.

The Greek deal was the main topic of this week's Brussels meeting. But a close second was the problem of Spain's budget deficit. Last year Madrid's borrowing came in at 8.5 per cent of GDP, rather than the 6 per cent that had been expected. Spain had originally been tasked by Brussels with reducing its deficit to 4.4 per cent of GDP in 2012. But earlier this month the government of Mariano Rajoy announced that it would be unable to hit this target. Instead Rajoy announced a goal of 5.8 per cent of GDP, in what was seen as a direct challenge to his European partners.

At this week's Eurogroup meeting finance ministers hammered out a compromise. They said that Spain would not be expected to hit the original 4.4 per cent target this year. But Madrid would be expected to impose an extra 0.5 per cent of GDP in cuts – and the head of the Eurogroup, Jean-Claude Junker, stressed that Spain must not waver from reducing its deficit to 3 per cent of GDP by the end of 2013.


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