Spain's Prime Minister Mariano Rajoy holds a news conference at the end of a European Union leaders summit in Brussels March 2, 2012 .YVES HERMAN/Reuters
Mariano Rajoy, Spanish prime minister, announced that his country's budget deficit target for this year was 5.8 per cent of gross domestic product, about €15-billion above the 4.4 per cent limit agreed between the European Union and the previous government.
Speaking in Brussels, Mr Rajoy insisted that the decision to exceed the EU target was "sensible, reasonable". Asked whether it met EU requirements, he added: "Is it within the norm? I say yes … We are going to make a very big effort."
After it took power in December, Mr. Rajoy's centre-right government discovered that Spain's public sector deficit had barely declined in 2011 despite earlier austerity plans, reaching 8.5 per cent of GDP instead of the targeted 6 per cent.
Ministers, and independent economists, have argued that an excessively drastic new austerity program risks plunging Spain into an economic depression that might reduce tax revenues and perhaps not even cut the deficit substantially.
But the European Commission, and some euro zone member states, have insisted publicly that Spain must stick to agreed targets to restore fiscal stability.
Although Mr. Rajoy's statement breaches a previously agreed target, he insisted that Spain would fulfill the EU's stability and growth pact by bringing the deficit down to 3 per cent of GDP in 2013.
He said he had not told his European counterparts about the deficit target because that was not required until April. "This is a sovereign decision made by Spaniards," he said.
The yield on Spanish 10-year government bonds, which moves in the opposite direction to the price, hit 4.92 per cent, rising above Italian government bond yields for the first time in six months.
Yields on Italian 10-year bonds have fallen sharply since the first long-term refinancing operation in December. They peaked above 7 per cent at the end of last year, a level which is broadly seen as unsustainable. In addition, the euro fell 0.7 per cent to $1.3225 (U.S.) against the dollar as investors also reacted to news that European banks deposited record amounts of cash with the European Central Bank overnight just days after the second LTRO program was launched.
Luis Garicano, professor of economics and strategy at the London School of Economics, said: "It's disappointing that Brussels is not being more flexible with the deficit numbers, but then we've lost a lot of credibility with the tiny amount of progress that was made last year."
He added: "It's not a moment to go for very, very drastic cuts. We could go into a spiral of cuts, drops in GDP, worsening credibility and worsening deficits that could be extremely damaging."
Spain does not intend to publish full details of the budget until the end of March, after the Andalusian election in which Mr. Rajoy's centre-right Popular party hopes to wrest control of the region from the Socialists.