25 March 2012

FT: Spain 'causing concern', Monti warns

Spain's hesitancy in fixing its public finances risks spooking investors and rekindling the eurozone debt crisis, Italy's prime minister warned, as pressure rises on Madrid to dispel doubts over its budget-cutting credentials.

The note of alarm from Mario Monti, who is pursuing reforms of Italy’s labour market against stiff opposition from unions, underlines fears in the eurozone that complacency and indiscipline could jeopardise the fragile gains that appear to have abated the worst of the crisis. His concerns over Spain echoed those of Olli Rehn, the European Union’s senior economic official, who attributed a sharp rise in Madrid’s borrowing costs to the perception that it was trying to wriggle out of tough deficit-reduction targets.

In an answer to a question at a conference, Mr Monti said: “[Spain] certainly made profound reform of the labour market but it did not pay the same attention to public finances. This is causing us big concern because their yields are rising and it wouldn’t take much to recreate trends that could spread to us through contagion.”

Mr Rehn argued that Spain would need to shrink its 8.5 per cent deficit to the EU-mandated target of 3 per cent next year to regain market confidence – something that would require some of the deepest cuts of any eurozone country outside Greece. “Because there was a perception Spain was relaxing its fiscal targets for this year, there has been already a market reaction of several dozen basis points on yields of Spanish bonds”, Mr Rehn told reporters on the sidelines of an informal gathering of European leaders at a northern Finnish hamlet above the Arctic Circle. “That shows how fragile the situation still is.”

Some economists say Brussels-mandated austerity measures could push Spain into a downward debt cycle, where deep spending cuts hit the overall economy and tax revenues, forcing a fresh round of spending cuts.

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