June 1, 2012 / 11:42 AM / 7 years ago

Germany shifts, gives Spain more time on deficit

BERLIN (Reuters) - The German government shifted ground on Friday, supporting a European Commission proposal to give Spain more time to reduce its budget deficit, in a sign Berlin is prepared to take a more flexible approach to tackling the euro debt crisis.

The European Commission called this week for Spain to be given an extra year to make the cuts demanded of it, because it is forecast to be in recession this year and next.

Until now, Berlin has been cool to any measures that dilute austerity drives.

“Spain presented a stability programme in which it stated its clear intention to reach the 3 percent threshold in 2013,” German finance ministry spokesman Johannes Blankenheim told a news conference when asked about the Commission proposal.

“We support Spain in its efforts to implement the necessary measures. But we also recognise that because of negative economic developments it will be difficult for Spain to reach its goals.”

Asked if this meant that he supported giving Spain more time, he replied: “I think that’s what I’ve been saying.”

“Spain is meeting its obligations in the deficit procedure, so we see no reason to escalate this procedure,” Blankenheim added. “The Spanish government is moving decisively to implement the required reforms and the German government is convinced that this decisiveness will be reflected in the markets.”

Madrid had aimed to cut its budget deficit to three percent of GDP next year.

But having realised its 2011 shortfall was far higher than anticipated, it would have to lop around six percentage points off the deficit in two years to get there, a level of cuts economists say would choke an economy already in recession.

Spanish borrowing costs have soared on fears about the country’s banking sector, which is beset by bad loans, and its heavily indebted regions. Many experts now expect it to need a Greek-style bailout although the government insists it will not.

GROWTH STRATEGY

EU leaders have been searching for a growth strategy to run in parallel with efforts to cut debt.

New French President Francois Hollande, Italian Prime Minister Mario Monti and others have called for a refocus on efforts to get the European economy moving.

The measures discussed until now - ‘project bonds’ backed by the EU budget to finance infrastructure spending, doubling the paid-in capital of the European Investment Bank and redirecting EU structural funds to areas which might reap short-term growth rewards - will help a little but will not make a significant difference, economists say.

Giving Spain 50 percent more time to complete its debt-cutting could be more of a help.

The European Union’s executive has also pressed for a form of European “banking union” with cross-border deposit guarantees and a bank resolution fund.

That would help ward off the threat of a bank run by depositors fearing their country could leave the currency bloc and redenominate their euros into a vastly devalued national currency.

Berlin continues to reject those proposals.

Blankenheim said his government did not see how these ideas would help solve the debt crisis in the short term.

Reporting by Noah Barkin and Annika Breidthardt, writing by Mike Peacock; Editing by John Stonestreet

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