BERLIN/DUBLIN: EU paymaster Germany softened its drive for austerity across the euro zone on Friday, agreeing to allow Spain more time to cut its deficit while its battles a deepening bank crisis, capital flight and recession.
Irish voters appeared to have backed a European budget discipline treaty in a referendum, a widely expected result which removed one political risk for the troubled currency area but left several bigger ones.
Investors stampeded to safe-haven US and German government bonds amid growing worries over Spain’s parlous finances and debt-stricken Greece’s uncertain future in the single currency area.
Asked about a European Commission call to grant Spain more time to reduce its deficit, a German Finance Ministry spokesman said Berlin understood Madrid’s difficulties in trying to cut its shortfall to 3 percent of gross domestic product in 2013.
“We support Spain in its efforts to implement the necessary measures. But we also recognize that because of negative economic developments it will be difficult for Spain to reach its goals,” spokesman Johannes Blankenheim told a news briefing.
Asked if that meant Madrid should be given more time, he replied: “I think that’s what I’ve been saying.”
Until now, Germany has taken a hard line with countries missing agreed deficit targets, worried that accepting failure would weaken the commitment to consolidate and hit market confidence.
But German officials close to Merkel have told Reuters in recent weeks that there is a recognition that some budget goals now look unrealistic and need adjusting to reflect unexpected economic weakness.
New French President Francois Hollande, Italian Prime Minister Mario Monti, US and IMF officials have called for an easing of the austerity drive to refocus on efforts to get the European economy moving.
In Dublin, Irish European Affairs Minister Lucinda Creighton said she was “very, very confident,” based on early counts, that Irish voters had approved the fiscal discipline compact in the only plebiscite on the treaty in the 17-nation euro area.
The pact, meant to enforce EU deficit cutting rules more strictly to prevent a repetition of the sovereign debt crisis, was set to pass by a margin of 57 to 43 percent, an official of the junior governing Labour party said. Referendum opponents conceded defeat.
Financial markets are more worried about accelerating capital flight from Spain, which is resisting pressure to seek international assistance for its banks, and about a repeat general election in Greece on June 17 that could lead to that country becoming the first to leave the euro area.
In another day of market turmoil, German bond yields fell to all-time lows, with investors effectively paying Berlin to park their money in its coffers at negative real interest rates while the borrowing costs of Spain and Italy are again becoming prohibitive.
The risk premium investors demand to hold Spanish 10-year debt rather than German bonds rose on Friday to its highest since the launch of the euro at 546 basis points.
BALANCED BUDGETS
Spain revealed on Thursday that investors had moved a record net 66.4 billion euros ($82 billion) out of the country in March alone, before the sudden nationalization of ailing lender Bankia , its fourth-largest bank.
Spanish Treasury Minister Cristobal Montoro sought to sooth markets by reporting that the country’s autonomous regions had balanced their budgets in the first three months and were on track to meet their 2012 deficit target of 1.5 percent of GDP.
The cabinet delayed plans to adopt a new mechanism to ease their funding problems and boost their liquidity positions but Montoro said he hoped to present the measure next week.
Overspending by the regions has been a big factor in the country’s fiscal problems, along with mountains of debt owed to savings banks after a property bubble burst.
The European Union’s top economic official said the euro zone faced a choice between degenerating or strengthening, keeping up pressure on the region’s leaders to take more radical steps to overcome the debt crisis.
“We face either a gradual degeneration of the euro area or a strengthening of Europe’s basis, that is the economic union,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a speech in Helsinki.
The European Commission, the European Central Bank and the International Monetary Fund have stepped up pressure on euro- zone leaders to adopt bolder steps, such as a banking union and a joint deposit guarantee, to ensure the euro zone’s survival.
But Germany, keen to limit liabilities to its own taxpayers, has so far resisted such moves. Greater flexibility on deficit reduction targets costs Berlin nothing.
Contradictory opinion polls ahead of the June 17 election in Greece, the euro zone’s most heavily indebted state, pointed to a knife-edge race between supporters and opponents of the tough terms of Athens’ EU/IMF bailout.
In a sign of the depth of Greece’s problems, the country’s power regulator told Reuters he had called an emergency meeting next week to avert a collapse of the electricity and natural gas system due to unpaid arrears owned by power producers.
A poll victory for the anti-austerity leftist SYRIZA party, which wants to tear up the bailout agreement, could lead to the country being forced out of the euro.
Most polls show the conservative pro-bailout New Democracy party narrowly ahead of SYRIZA, one day before a ban on their publication comes into force.
But one survey by the respected Public Issue agency gave the leftist group led by charismatic Alexis Tsipras a six-point lead, reflecting the angry and unpredictable mood of voters exasperated with austerity and soaring unemployment but still keen to stay in the euro area.
Greece’s electoral system gives the winning party an extra 50 parliamentary seats, making it almost impossible for rivals to form a government without it.
In the Netherlands, a court rejected an attempt by euroskeptic politician Geert Wilders to block a Dutch parliamentary vote on a permanent bailout fund for the euro zone, due to enter into force next month.
An opinion poll this week showed his anti-euro, Wilders’ anti-Islam PVV had overtaken Prime Minister Mark Rutte’s liberal party and was running second to the far-left anti-austerity Socialist party, in a sign that one of the core backers of orthodox fiscal policy in the euro zone faces a potential political earthquake.
