Spain leads Europe's rebellion against German austerity

Europe’s economic crisis is moving to the less predictable national political arenas, where country leaders are struggling to balance draconian austerity with the dire need for growth. Facing populations that are losing patience with worsening economic pain and an economic picture that has failed to improve, leaders are beginning to defy demands from Brussels. 

Leading the rebellion of sorts against the European Union’s mandated all-cut-and-no-growth strategy is Spain, the focus of market concerns. Spain’s economy is too big to bailout and the country has been among the most supportive of austerity measures. 

 “Now more than ever it’s imperative that we distance ourselves from delusional proposals, that we deal with realistic figures, and that we implement policies accordingly,” said conservative Prime Minister Mariano Rajoy yesterday in an address to European delegates of the People Party, which governs in most of Europe. “Only this way can we strengthen confidence [in policies] among citizens, our partners, and the markets.”

Mr. Rajoy was explaining why he defied the EU and abandoned Spain's commitment to cut its 2012 deficit equal to 4.4 percent of gross domestic product, recasting it at 5.8 percent. He left the 2013 binding target of 3 percent unchanged.

With its defiance, Spain drew a line. It has already delivered austerity and necessary reforms in the past four years, but now needs to stimulate growth to increase its tax base and spur job creation. Without growth, Spain’s debt problems and budget cuts can’t be resolved – politically or economically.

While not completely unexpected, many in the EU were surprised by the timing of Rajoy's announcement. Along with 24 other EU leaders, he had just signed the German-led fiscal compact that will force governments to balance their budgets by 2013, under the threat of hefty penalties. 

'The canary in the coal mine'

Spain is the first country to officially demand more flexibility with its deficit, at least for 2012. But it likely won’t be the last, analysts say. Belgium, Cyprus, Hungary, Poland, and Malta have already been warned that they are on track to miss their targets. France could also follow if voters boot out President Nicolas Sarkozy in the upcoming election.

Italy is increasingly balking at reforms. And even Germans and the Dutch are demanding more growth-oriented policies from their governments, even if they balk at more bailouts for their southern neighbors. 

“Spain is like the canary in the coal mine,” said José Ignacio Torreblanca, a senior policy fellow of the European Council on Foreign Relations. “It’s trying to avoid an either/or choice between austerity and stimulus.”

Until now, peripheral countries have had little choice but to accept austerity, not only because it was necessary, but because it was the only way to convince a German-led northern Europe to bail out Greece, Ireland, and Portugal to avert a wide meltdown of the eurozone.

But rising violent protests, unemployment, and poverty levels are swinging the debate to the national level as European governments recalculate the political fallout. Governments are under increasing pressure to seek more growth driven policies, even if it means less ambitious deficit targets.

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