Spanish Prime Minister Rajoy deserves considerable credit for his defiant stance against Europe’s fiscal hawks. After Spain recorded a worse-than-expected budget deficit last year of 8.5% of GDP, Brussels had refused to countenance any adjustment to the 4.4% target it had laid out for the current year, despite various attempts by the new Spanish government to get the EU to reconsider. In response, Rajoy instead announced at the recent EU Summit his own deficit target for 2012 of 5.8% of GDP , still a very tall order with the economy in recession and unemployment at 23%. Interestingly, the response at home to Rajoy’s resistance has been incredibly supportive.
At the same time, Spain’s open mutiny at Europe’s fiscal dictats risks seriously undermining the newly-signed fiscal compact treaty before the ink has had a chance to dry. The Commission has now vowed to look at Spain’s case very closely. It will need to tread very carefully. Rajoy’s government has aggressively pursued both fiscal austerity and structural reform despite an immensely challenging political and financial environment. He needs Europe’s support and not its intransigence. Fiscal orthodoxy has definitely been required in Europe, but it always needs to be implemented with care or else it risks triggering a deadly decline into destructive depression.