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Spain leads Europe's rebellion against German austerity

Prime Minister Mario Rajoy told EU officials that Spain would not meet its deficit target for 2012. Other countries, struggling to avoid further recession, may follow suit. 

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But Spain’s woes are not the result of spendthrift irresponsible politicians, at least not entirely, but rather the failure of an economic model based on construction and cheap labor – markets that collapsed with the beginning of the credit and debt crises. Spain has traditionally had much less debt than most of its neighbors, but it will take years to reconvert its economy and spur growth. 

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“In Spain’s case, markets aren’t worried about reforms, but about jobs and growth,” Torreblanca said. “It makes no sense to ask Spain to commit suicide.” 

The Central Bank expects the economy to shrink another 1.5 percent this year, after four years of lethargic contraction. The government has already warned that the unemployment rate of 23 percent – by far the EU’s highest – will continue to rise this year and public services and spending will be trimmed.

While the EU Commission and Germany might not be satisfied by Rajoy’s new deficit target, it is still a substantial trim. It assumes around 40 billion euros in cuts, on top of tax increases, labor reforms, massive layoffs, and salary cuts in the public sector. More importantly, it comes after a battery of austerity cuts from the previous government.

“I don’t know if in modern history there is any EU country that has made such an effort [as Spain has],” said Rajoy.

The Socialist government implemented some of the most severe cuts in Europe starting in 2009, cutting its deficit of more than 11 percent of GDP in 2009, to 9.3 percent in 2010, and was supposedly in line to meet its 6 percent target in 2011.

Rajoy also said the new deficit target simply reflects a new reality. The previous government set the previous target in 2009 expecting growth to pick up starting 2011. The EU, OECD, and several institutions confirmed the targets then. But instead, the economies of Spain and the rest of Europe stagnated.

“With Rajoy’s government balking – rightly – at further austerity, the focus is now where it arguably should have been all along,” Paul Krugman, a columnist for The New York Times and frequent critic of Europe's tough austerity prescription, wrote in a blog post this week

“And with Spain now front and center, the essential wrongness of the whole European policy focus becomes totally apparent. Spain did not get into this crisis by being fiscally irresponsible. What’s clear is that even more austerity does nothing to help; all it does it reinforce the downward spiral, and bring the possibility of real catastrophe nearer,” Krugman concluded.

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