Last December the European Union agreed to implement a “harmonized golden rule” on deficits, which would impose sanctions on euro zone member states with budget deficits exceeding 3% of its GDP.
It wasn’t until yesterday, however, that the EU made a move to actively enforce its sanctions. Let’s take a look at the reasons why Hungary and Spain are first in the EU’s line of fire.
Since 2001, Hungary has failed to register a government budget deficit that’s less than 3.0% its GDP. In fact, it even went as high as 9.3% in 2006! This time around market geeks predict Hungary’s budget deficit to clock in at 3% of GDP in 2011 and 3.6% in 2012.
Unfortunately, EU finance ministers remain unimpressed. In its first ever move to implement its deficit-related sanctions, the EU is threatening to suspend around 495 million EUR worth of financial aid unless the government steps up its efforts in controlling its deficit. Duhn duhn duhn duhn.
Good thing that the U.K., Austria, and Poland backed up Hungary in the latest EU meeting. The country has been given until June to show increased efforts in reigning in its deficit. Apparently, EU hotshots want to see additional measures that would meet a deficit target of 2.5% of GDP in 2012 and commitment to keep the deficit below 3% of GDP in 2013.
Meanwhile, Spain was also given a warning about its budget deficit. However, to many, this felt more like a gentle wake-up call as opposed to the slap in the face that Hungary got.
EU officials defended their decision, saying that unlike Hungary, the Spanish government is committing to reduce its budget deficits and have said that they will agree to additional austerity measures that European officials may require.
In fact, Spanish Finance Minister Luis de Guindos quickly revised Prime Minister Mariano Rajoy’s estimates, declaring that additional austerity measures will bring the deficit down to 5.3% of GDP, and on pace to hit the EU’s recommended 3.0% target in 2012 instead of hitting 5.8% as Rajoy predicted.
Furthermore, hotshot economist Simon Tilford said that the reason why Hungary was hit with tougher warning is because Spain has properly managed its economy and managed to keep it afloat despite tough fiscal tightening measures.
All I can say to that is “Muy bien, mi amigos!“
Still, we’ll have to keep a close eye on these developments. In particular, I’d keep an eye out for those Spanish bond yields. 2-year yields hit new highs once again yesterday, which caused bond prices to fall. Should yields continue to rise, don’t be surprised if the euro takes a beating as well!
In the end though, while the EU’s latest moves might threaten Hungary and Spain’s economies in the short term, it could be positive in the long run. The EU’s toughness is indicative of its commitment to clamp down on the region’s uncontrolled spending that started the crisis in the first place.