Europe austerity debate to weigh on Spain's new economic plans

Thu Apr 25, 2013 7:00pm EDT

* Spain to announce raft of reforms, new growth targets

* Madrid caught in Europe's crisis response dilemmas

* Plan to be middle way between austerity, growth policies

* EU officials warn against complacency, implementation key

By Julien Toyer

MADRID, April 26 (Reuters) - Spain will unveil new economic plans on Friday that government officials say will tread a fine line between growth and austerity.

Prime Minister Mariano Rajoy will present a package of reforms he want to have implemented by 2015 in a bid to obtain more leeway from the European Union to cut its public deficit and to turn around the economy in time to win re-election.

The announcements come as a heated debate about Europe's austerity drive has flared back into life.

Leading International Monetary Fund and European Central Bank officials are sharply at odds over continued budget cutting in an era of recession while Angela Merkel has declared that Germany requires higher interest rates.

Rajoy, a keen advocate of austerity in his first year in power, has tried since February to find a middle way between the pro-austerity and pro-growth camps, saying Spain would always be disciplined on spending but indicating that he would also now lean more to stimulating growth.

"There will be no relaxing of the austerity drive because we believe in this policy. Having said that, with all Europe in recession, it would be absurd not to adjust the deficit-cutting path," a government source told Reuters on condition of anonymity on Thursday.

"The plan will be a specific, comprehensive and credible set of structural reforms rather than spending cuts for the sake of spending cuts," the source said.

According to several Spanish and European officials who have been briefed on it, the government will commit to pass by the summer a new reform of the public pension system to speed up a planned increase in the retirement age and end inflation-linked reviews of pension payments.

The plan, which could still be amended, would also include a review of unemployment benefits, measures to curb a growing energy tariff deficit, steps to boost small business growth and making permanent the temporary tax hikes decided in 2011 and 2012.

COMPLACENCY

The government will also show it aims to rebalance its policies by revising its growth and deficit forecasts to put them at more realistic levels and in line with European Commission and International Monetary Fund estimates.

The economy ministry said this week the government would now forecast a recession of between 1 and 1.5 percent of Gross Domestic Product from a 0.5 percent contraction currently expected, while seeing a slight growth in 2014.

It will also put its deficit at around 6 percent of economic output, from 4.5 percent currently, and seek one or two extra year to bring it below the 3 percent European ceiling, a government source told Reuters earlier this month.

Europeans officials said the issue of giving Spain more leeway to cut it spending gap was still intensely debated in Brussels and will probably not be resolved until May 29 when the European Commission is due to announce its decision.

The officials said some policymakers believed Spain needed to loosen the belt on its economy in a credible way in order to reassure financial markets it can soon return to growth and eventually repay its debts.

Others insist that being too lenient on the targets would remove any incentive on the government to act as market pressure already eased since the European Central Bank said last summer it stood ready to backstop troubled euro zone economies.

"Some complacency over the state of the economy and the pace of reforms exists in Spain and this is raising eyebrows in Brussels," one of the officials said.

The official also said the European Commission viewed Spain as lagging behind by up to nine months on its reform agenda and that the Spanish authorities will this time be judged not on the size of the reform list but on how quickly they'll deliver them.

While most economists acknowledge Spain has worked hard to tick all the reform boxes demanded by its European partners, few believe the new plan will be ambitious enough to counter a deep recession and put back at work the 6.2 million people currently unemployed.

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