A Spanish pledge to accelerate budget cuts provided a base for the euro to stage a small rebound in Europe yesterday as the executive European Commission (EC) sought unprecedented power to curtail national budgets. The EC said governments should "decisively" toughen budget rules and speed up enforcement procedures for countries breaching the region's deficit limits, after the Greek fiscal crisis forced leaders to adopt a bailout package worth almost US$1 trillion (Dh3.67tn).
Jose Luis Rodriguez Zapatero, Spain's prime minister, said Madrid would cut civil service pay by 5 per cent this year, freeze it next year, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets. "We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover," Mr Zapatero told parliament.
The announcement came two days after euro zone governments, the European Central Bank (ECB) and the IMF agreed on the rescue package to stabilise the euro in exchange for pledges from highly indebted European countries to cut their deficits. Fernando Teixeira dos Santos, the Portuguese finance minister, said his government had picked a set of new measures for deeper spending cuts and would discuss them with the opposition before announcing them.
The US President Barack Obama, who has intervened in the euro zone crisis because of risks to US banks and economic growth, spoke to Mr Zapatero on Tuesday to press for "resolute action" to strengthen the Spanish economy, the White House said. Spain enjoyed more than a decade of rapid growth fuelled by EU regional aid and low euro interest rates, and long boasted a healthy budget balance and low debt.
But public finances were severely hit by the collapse of a construction bubble in the credit crisis. The economy has lost competitiveness and unemployment stands at 20 per cent. After months in denial about the need for tougher measures, Mr Zapatero announced an estimated €6bn (Dh27.93bn) in additional savings this year. Those pledges helped to lift market sentiment, which earlier in the day was still being knocked by fears that Greece could default on its debt.
The ECB has been forced to defend its policy reversal at the weekend, in which it extended its credit easing through the purchase of sovereign debt. European shares rose despite figures showing the euro zone economy got off to a weak start this year that will make deficit cutting harder, with paltry first-quarter growth in Germany and France. Quarterly GDP growth in the 16 countries that use the euro rose to 0.2 per cent in the first three months of this year from no growth in the final three months of last year. GDP on an annual basis was 0.5 per cent stronger from the first quarter of last year, according to a flash estimate from the EU's Eurostat statistics agency.
In a drive to tighten fiscal discipline and prevent a repeat of Greece's problems, Olli Rehn, the European commissioner for economic and monetary affairs, unveiled proposals for greater budget co-ordination yesterday. The key plank would be for governments to submit their draft budgets to Brussels for scrutiny and peer review by other member states before they were adopted by national parliaments.
Mr Rehn said this would enable the EC and the European parliament to "identify economic challenges for the EU and the euro zone" at an earlier stage and recommend changes. But it is a major challenge to national fiscal sovereignty and is likely to face stiff resistance from the euro zone heavyweights France and Germany, which want closer supervision of the finances of countries with serious debt problems but not of their own.
The EC also proposed a stricter use of existing sanctions, including a cut-off of EU funds to countries that violated the bloc's budget rules. ECB policymakers, meanwhile, said their weekend decision to buy euro-zone government bonds on the open market was having the desired effect in calming markets and curbing speculation. "Any observer will notice that a number of markets which had been functioning very abnormally are gradually operating more normally," said Jean-Claude Trichet, the president of the ECB.
* with agencies
