* Madrid sets deficit target at 5.8 percent for 2012
* Had previously agreed 4.4 percent with EU
* Spain a test case for austerity vs growth debate
By Robert Hetz and Julien Toyer
MADRID/BRUSSELS, March 2 Spain set itself
a softer budget target for 2012 on Friday than originally agreed
under the euro zone's austerity drive, putting a question mark
over the credibility of the European Union's new fiscal pact.
Prime Minister Mariano Rajoy insisted he was acting within
EU guidelines because the plan was still to hit the European
Union public deficit goal of 3 percent of gross domestic product
(GDP) in 2013.
Spain's new 2012 target of 5.8 percent of GDP was more
realistic than the original 4.4 percent goal but still
demanding, he said.
"I'm backing austerity and aim to reduce the deficit from
8.5 percent to 5.8 percent; that's significant austerity," he
said at the end of an EU summit in Brussels on Friday.
The announcement cast a pall over an agreement for tougher
debt rules in the bloc. All but two of the EU's 27 leaders
signed up to a 'fiscal compact' on Friday that commits euro zone
countries to balancing their budgets over the medium term.
Spain has already cut spending sharply and adopted economic
reforms to avoid getting sucked deeper into the crisis that has
forced Greece, Ireland and Portugal to seek bailouts.
German Chancellor Angela Merkel and European Council
President Herman Van Rompuy said there should be no flexibility
on fiscal targets for countries in economic difficulties.
"Meeting fiscal consolidation targets in vulnerable
countries has been and remains one of the cornerstones of the
EU's comprehensive response to the crisis. It is key to
reinforce confidence," said Amadeu Altafaj, spokesman for
European Commissioner for Economic and Monetary Affairs Olli
Rajoy said his move would not spook markets, but Spain's
long-term cost of borrowing rose after the news, bringing it to
parity with heavy debtor Italy for the first time since August,
as investors fretted Madrid may have to sell more debt than
Spain is emerging as a test case of whether Europe is
willing to ease fiscal rules that heap more cuts on member
states grappling with stunted growth, high unemployment and the
threat of growing social unrest.
The government said on Friday that Spain's economy will
shrink 1.7 percent this year, matching an International Monetary
Fund forecast. It sees the jobless rate at 24 percent.
Rajoy's decision made economic sense for Spain but Madrid
and Brussels should have avoided a clash, said Thomas Klau, head
of the European Council on Foreign Relations in Paris.
"It's the first step for undermining the credibility of a
system which has not even had time to accumulate any credibility
capital," Klau said, referring to the fiscal pact.
Rajoy said he did not bother lobbying other European leaders
at Friday's summit.
"I'm not going to tell the other presidents or heads of
state about the deficit figure that will be included in our
budget. I don't have to. It's a sovereign decision. I'll tell
the (European) Commission in April," Rajoy said.
The gambit will force the EU to decide whether to punish
Spain under new austerity rules.
"It's a dangerous game because you jeopardise the legitimacy
of the whole (fiscal stability) process," said Antonio Barroso,
a London-based political analyst with the Eurasia Group. "Either
he knows eventually they will make the objectives more flexible,
or he's very brave and prefers to get the sanction."
Rajoy, known as a cautious public administrator, campaigned
on strict adherence to the 4.4 percent target in the November
election that gave his centre-right party an overwhelming
But Spain's economy has deteriorated since then.
Recent cuts to spending in education and health have brought
tens of thousands of Spanish students onto the streets and a
heavy-handed police response has provoked widespread anger.
Madrid said on Friday it would shrink its budget by another
15 billion euros in 2012, on top of 15 billion in spending cuts
and tax rises announced in December. It cut its spending ceiling
by nearly 5 percent from 2011 to 118.6 billion euros.
Getting the deficit down to the 4.4 percent target from last
year's 8.5 percent would have entailed around 44 billion euros
in economies, probably provoking Greek-style riots.
EU Commissioner Rehn has insisted Spain provide more details
of why its deficit for 2011 overshot by such a wide margin. The
target had been 6 percent.
Sources have told Reuters that some at the European
Commission suspect Madrid inflated its deficit forecasts for
2011 to help it gain flexibility for its target this year. The
Spanish government has vigorously defended its figures.