Euro crisis: “The expectation, however, must be for a fudge.”

When 25 of 27 EU leaders signed the “fiscal compact” [pdf file] designed to enforce budget discipline within the eurozone there was a rare, and unexpected, mood of optimism in the corridors of Frankfurt Brussels.  An enthusiastic editorial in the Irish Times today calls for widespread political debate about the required new economic and political architecture.

…the euro zone will not be stabilised without putting some such new economic architecture in place.

A new political structure will also be required to ensure the accountability of such large-scale economic arrangements. It should reassert the role of the EU institutions, strengthen national parliamentary scrutiny and experiment with new federal ways to enhance democracy. This is also a time for political innovation and renewal.

But, even before the recent opinion polls are close to being tested by a referendum in Ireland, there are signs of more problems ahead.

Greece has only a few days to convince Frau Bundeskanzlerin that they can secure sufficient private investor involvement in their deal.  And show “more proof that it would implement hastily agreed spending cuts and reforms” to secure the further release of more than half of the latest €130billion bail-out. [some free reg required]

Perhaps more worryingly, Spain’s new Prime Minister Mariano Rajoy unilaterally declared on Friday that “his government, which came to power at the end of 2011, will prepare a 2012 budget that aims to reduce its deficit to 5.8% of gross domestic product, far in excess of the 4.4% target his predecessor, José Luis Rodríguez Zapatero, had committed to.”

Earlier this week, the government said Spain’s 2011 budget deficit stood at 8.51% of GDP, compared with a target of 6%.

Mr. Rajoy said he hadn’t announced Spain’s new budget target at a meeting in Brussels Thursday and Friday where EU leaders signed off on new fiscal rules. “This is a sovereign decision made by Spain, that I am announcing now, to you,” he said at a press conference.

Today, EU Economy Commissioner Olli Rehn’s spokesman Amadeu Altafaj said there was “serious, grave” gap in Spain’s figures.

Analysts worried that the Spain case was a sign of “backpedalling” by leaders who “may have signed off more sovereignty than they have prepared their electorates for,” in the words of Sony Kapoor, head of economic consultancy Re-Define.

Altafaj said Rehn already asked Spain for “clarity” on the figures during talks among eurozone finance ministers last Thursday and is still waiting.

“It’s clear we need these hard figures, validated, in order to do a full assessment,” he said.

As a eurozone state, Spain risks a cash fine worth between 0.2 percent and 0.5 percent of GDP depending on the severity of the circumstances under new laws meant to tighten budgetary discipline that came into force at the start of the year.

“Once we have clarity,” Altafaj said of the detailed figures and analysis wanted in Brussels, “we will do our analysis and make our recommendations.

Rajoy has argued his new 5.8-percent goal was a “sensible” position to adopt, and two senior EU diplomats have suggested that Madrid could be allowed to postpone some of the toughest decisions on cuts to 2013.

One of these diplomats said to expect Madrid to slash its deficit from 8.5 percent of GDP to 4.4 percent as planned in one year would be “a rather steep reduction — probably simply not possible.”

This source said that Spain had indicated the problem lay with its autonomous governments, such as Catalonia or the Basque Country.

However, he also noted that “an underlying issue is that you shouldn’t have different rules for small and bigger countries.”

The Telegraph’s Ambrose Evans-Pritchard salutes the “Spanish rebellion” [Ya basta! – Ed]  Indeed.

This then is the fermenting mood in the fiercely proud and ancient nation of Spain in Year III of depression, probably the worst depression the country has seen since the 1640s – or have I missed a worse one?

As for the “Fiscal Compact”, it is rendered a dead letter by Spanish actions.

Gracias a Dios. If the text were enforced, the consequences would be ruinous. It enshrines Hooverism in EU law, and imposes contractionary policies without the consent of future parliaments – including any future Bundestag. Indeed, it probably violates the German constitution.

But it won’t be enforced in any meaningful sense because the political realities of the EU are already intruding, and will intrude further. A president François Hollande of France will rip it up.

The Latin Bloc is awakening.

Maybe…  The BBC’s Europe editor Gavin Hewitt has a more sober assessment

Its actions underline a simple truth. Governments can sign pacts, but in the end they are elected to act in the best interests of their voters, rather than officials in Brussels.

There were hints today that Spain could be at risk of fines and sanctions for a “grave” breach of budget limits.

But as austerity deepens and recession looms other countries too will baulk at meeting deficit targets set by Brussels. As Sony Kapoor from the Re-Define think tank said, “this could be the shape of conflicts to come”. Governments locking horns over budgets with EU officials.

The mood in Brussels is stubborn. They are aware that if they start negotiating with Madrid the financial markets and others will question what all the summits and new regulations were for.

Some officials believe that the EU’s credibility is on the line and want to move to infringement proceedings. How suspending EU grants would help Spain is hard to explain.

The expectation, however, must be for a fudge. Spain is too important a country to be in dispute over its budget, but if it is allowed to postpone some of its toughest cuts it sends out a clear signal that bilateral deals can be done.

In the meantime, “the political trilemma” remains unresolved [and under-discussed? – Ed].  Which is where the Irish Times editorial came in…

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