Spain announced it will adhere to budget cuts demanded by the European Union, ending the first tussle over new, stricter budgetary rules within the trading bloc.
The nation agreed to limit its budget deficits to 5.3 percent of gross domestic product this year, while claiming to have won concessions from the EU.
Spain is absolutely committed to budget adjustment and is absolutely committed to structural reforms, so from this point of view, that recommendation will be accepted by the government of Spain, Spanish Finance Minister Luis de Guindos said Tuesday, according to the Wall Street Journal.
The finance ministers of 17 countries that use the euro asked Spain on Monday to deduct a further half-percentage point from its projected budget deficit for 2012, with even tougher cuts coming in 2013.
The plan would call for even more drastic austerity measures next year, aiming to cut the budget deficit to 6 percent of GDP over the next two years, piling more bad news onto an already contracting economy with a 23 percent unemployment rate, according to the Journal.
The standoff over the budgetary restrictions was the first test of new rules passed in response to the euro zone debt crisis. Prime Minister Mariano Rajoy said last week his country would not meet the 4.4 percent of GDP goal Spain had initially set for 2012, shifting the target to 5.8 percent and drawing the ire of EU officials.
New rules could penalize Spain 0.2 percent of GDP for not meeting its commitments to budget cuts.
Spain has yet to announce how it will meet its new budgetary goals, postponing any discussions until after the March 25 election in Andalusia.
Analysts fear drastic cuts or revenue increases by the government could suppress Spain's economy even further.
We remain concerned that it will be very difficult for Spain to achieve this level of fiscal consolidation, especially given that the economy has already moved into recession, Barclays Capital said in an analyst's note on Tuesday, according to the Financial Times.