I am taken aback by this article. The fact that Spain is setting an unrealistic budget deficit target is not surprising but the EU calling out Spain for this is. Since the onset of the Eurocrisis, countries have been routinely missing budget deficit forecasts.
The pattern can be expressed thus. The country makes the forecast and the mainstream media repeats the figure without any context. Later, the country misses the forecast by a shocking amount.
Turn your eyes to the chart above. The actual Greek budget deficit has remained over 10% since the onset of austerity. Greece is in the classic deflationary debt trap: the more the debtor pays, the more he owes.
The first step to solving a problem is admitting that there is a problem. Greek forecasts show that the politicians are still deluding themselves. Next year is always going to be better. Compare the two series of forecasts to Greece’s actual deficit, and you will see delusion at work. The finance ministry’s forecasts are not even in the ballpark. I am not sure if this is the result of incompetence or mendacity, but in Greece it could be both.
If you extend the natural line of Greek actual budget deficits to 2013, a figure of 14% is likely. Greece will need a third bailout.
Spain is playing the same game as Greece. Wildly optimistic forecasts are followed by the biting truth of reality. Spain’s deficit has improved slightly since 2010 but not a the rate it expects in order to bring down the deficit to 4.5% next. In fact, I would expect Spain’s deficit to follow the Greek trajectory in worsening in the third year of its crisis. Increased unemployment and decreasing GDP will lead to lower tax revenues despite tax increases, just like what happened in Greece.
Spain is caught in the deflationary debt trap, too. Its politicians continue to delude themselves with forecasts based on rosy economic growth numbers and their own current projections. Every extra euro that Spain needs to borrow this year leads to a higher interest cost in its budget next year.
Another problem with the forecast is that tax increases in a distressed country do not increase revenue as much as planned. This has been the pattern in Greece, but Spain ignores this fact and makes optimistic revenue assumptions.
There is no light at the end of the tunnel for either country as long as they continue using the euro. If I were leading either country and making decisions in the country’s best interest rather in my political party’s, I would take as much money as I could get from the eurozone and then leave. In the meantime, buy this t-shirt: