Spain moves to enshrine spending limits in constitution

Spain’s parliament moved Tuesday to put limits on government spending in the country’s constitution, a proposal supported across party lines and one that backers hope will cement their nation’s place among Europe’s deficit hawks.

The overwhelming procedural vote, 318 to 16 with two abstentions, set the stage for approval Friday in the lower house before the measure is sent to the Spanish Senate for final consideration.

The amendment does not require a balanced budget every year, and it can be waived for a broad set of reasons, including natural disasters or economic recession. But supporters say it should send a clear signal that Spain won’t follow Greece, Ireland and neighboring Portugal into European rescue programs.

Political parties agree

“We are going to do whatever is necessary to remain a part of core Europe,” Jose Manuel Campa, secretary of state for the economy, said in an interview. “The agenda of every major political party — the ideas of structurally sound public accounts, long-term sustainability, enhancing competitiveness — is not being challenged by anyone.”

The rare amendment to Spain’s 1978 constitution begins what will be a critical few weeks in parliaments across the 17-nation euro zone. Markets remain unsettled by high levels of public debt in some of the countries, the weak state of the financial system and heightened concerns about economic growth.

A broad array of tax increases, budget cuts, constitutional changes and bailouts have been proposed by national leaders in response, to be put before their legislatures in the coming weeks.

Key among the proposals: a renewed bailout program for Greece, new rules for a regionwide rescue fund, and austerity packages in Italy and France — large nations where leaders are trying to protect their national credit standing and their access to international bond markets. A debt crisis in Italy or a downgrade of France’s credit standing could deeply affect the European economy, and produce more drag on the U.S. recovery, as well.

It does not promise to be a smooth process. The Greek bailout is tangled up in demands by Finland that Greece start posting collateral for further rescue loans. A proposal to expand a rescue fund across Europe is being challenged by some lawmakers in the countries that would foot the bill, largely Germany and others in the euro zone’s economically stronger northern tier.

Additionally, Italian Prime Minister Silvio Berlusconi — facing political opposition — on Monday backtracked on plans to increase the sales tax, cut funding for local governments and impose a temporary income tax surcharge on high-income wage earners.

Berlusconi promised to offset the changes with other measures, but he still suffered a rebuke from an official of the Bank of Italy. The European Central Bank, which includes the Bank of Italy on its governing board, has been urging governments to take tougher steps to control public deficits. Italy, because of the size of its economy and its trillion-dollar-plus volume in outstanding bonds, drew particular concern when its borrowing costs began to rise this month. The country is considered too big to rescue, and a default on its bond payments could, according to analysts, create turmoil among the French, German and other banks that have lent the nation money.

Italy’s interest rates are being held down by ongoing bond investments by the central bank: On Tuesday, Italy was able to sell about $10 billion in long-term debt at an interest rate of 5.22 percent, lower than it paid in July.

Hair-trigger markets

Still, Bank of Italy deputy chief Ignazio Visco told a parliamentary committee that the markets are on a hair trigger.

“The costs of a possible deviation from the goals are very high,” he said, according to news service reports from Rome.

Spain is fighting a similar battle to be able to continue borrowing on its own. Compared with Italy and much of the rest of the euro zone, its outstanding level of debt is low. But annual deficits spiked during the recession, and the country must still complete a rescue of its banks, which were hit — as was the U.S. financial system— by bad investments in real estate.

The government has cut deeply over the past year, including trimming public employee salaries and raising the retirement age. But after Spain’s borrowing costs increased alongside Italy’s, the country was urged by the ECB to do more, and pushed forward the idea of a constitutional spending restriction.

Amendment vague

The amendment itself does not include numerical limits, only references to those set by the euro zone. The treaty establishing the common currency limits governments to annual deficits of no more than 3 percent of annual economic output, and a total outstanding debt of no more than 60 percent. The restrictions have never been enforced.

A follow-up law is expected to establish more precise targets, including stricter limits on Spain’s regional governments and cities.

With 20 percent unemployment and pressure for more austerity, Socialist Party Prime Minister Jose Zapatero called early elections for this fall — likely, according to polls here, to be won by the conservative Popular Party.

The election results, however, might not matter much. The constitutional amendment and other steps approved in recent months have a common goal.

“This sends a message that we are not going to be Greece,” said Pablo Vazquez, executive director of the Foundation for the Study of Applied Economics in Madrid.

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