TOPWRAP 2-Spain joins euro zone austerity bandwagon

* Spanish PM announces public sector pay, job cuts

* EU executive seeks power to pre-vet budgets

* Resistance likely from France, Germany

* Estonia gets green light to join euro zone

* Portuguese, German bond auctions successful

(adds Estonia green light, Portugal measures, bond auctions)

By Martin Roberts and Jan Strupczewski

MADRID/BRUSSELS, May 12 (BestGrowthStock) – Spain became the latest
euro zone country to announce sweeping austerity measures on
Wednesday as the executive European Commission sought
unprecedented power to pre-vet national budgets.

Prime Minister Jose Luis Rodriguez Zapatero said Madrid
would slash civil service pay by 5 percent this year, freeze it
in 2011, cut investment spending and pensions and axe 13,000
public sector jobs in a drive to meet EU deficit targets.

“We have to make a singular, exceptional and extraordinary
effort to reduce our public deficit and we have to do it when
the economy is starting to recover,” he told parliament.

The announcement came two days after euro zone governments,
the European Central Bank and the IMF agreed on a $1 trillion
rescue package to stabilise the euro in exchange for pledges
from highly indebted European countries to cut their deficits.

Portugal’s finance minister said his government had picked a
set of new measures for deeper spending cuts and would discuss
them with the opposition before announcing them. [ID:nLIS002364]

U.S. President Barack Obama, who has intervened in the euro
zone crisis because of risks to U.S. banks and economic growth,
telephoned Zapatero on Tuesday to press for “resolute action” to
strengthen the Spanish economy, the White House said.

Spain enjoyed more than a decade of rapid growth fuelled by
EU regional aid and low euro interest rates, and long boasted a
healthy budget balance and low debt. But public finances were
severely hit by the collapse of a construction bubble in the
2007-8 credit crisis. The economy has lost competitiveness and
unemployment stands at 20 percent of the workforce.

After months in denial about the need for tougher measures,
Zapatero announced an estimated 6 billion euros in additional
savings this year. [ID:nLDE64B0F9]

European shares (.FTEU3: ) rose despite figures showing the
euro zone economy got off to a weak start in 2010 that will make
deficit cutting harder, with paltry first quarter growth in
Germany and France. [ID:nLDE64B0HB] [ID:nLDE64B0K0]
Euro zone crisis in graphics:
Rescue package and EU debt
Bank exposure to Greece,Portugal
For other stories on the euro zone crisis (EU/LOOK: )
For Top News on the crisis


In a reminder that east European countries are still keen to
join the 16-nation single currency, Estonia won a green light
from the European Commission to join the euro area in 2011.

EU finance ministers are expected to ratify the decision in
June, but the Baltic state is likely to be the last country to
join for at least four years because other candidate countries
have seen their deficits rise beyond the EU limit in the crisis.

Spanish and Portuguese borrowing costs soared last week as
investors fled peripheral euro zone government bonds amid
jitters over Greece’s acute debt crisis spread to other highly
indebted EU countries.

But Portugal and Germany staged successful bond auctions on
Wednesday after European Central Bank purchases of euro zone
government debt in the market steadied investors’ nerves.

In a drive to tighten fiscal discipline and prevent a re-run
of Greece’s fraudulent statistics and ballooning deficit, EU
Economic and Monetary Affairs Commissioner Olli Rehn unveiled
proposals for greater budget coordination on Wednesday.

The key plank would be for governments to submit their draft
budgets to Brussels for scrutiny and peer review by other member
states before they are adopted by national parliaments.

Rehn said this would enable the Commission and the European
Parliament to “identify economic challenges for the EU and the
euro zone” at an earlier stage and recommend changes.

But it is a big challenge to national fiscal sovereignty and
is likely to face stiff resistance from euro zone heavyweights
France and Germany, which want closer supervision of serial
budget sinners’ finances, but not of their own.

In a pre-emptive response, French Finance Minister Christine
Lagarde suggested on Tuesday that each government should put its
so-called stability and growth programme — a three-year fiscal
plan — to a national parliamentary vote before sending it to
Brussels. That could make it harder for EU officials to unpick
budget measures.

The Commission also proposed a stricter use of existing
sanctions, including a cut-off of EU funds to countries that
violated the bloc’s budget rules.


Rehn said Greece’s crisis had highlighted the weakness of
mechanisms which are supposed to show whether European Union
governments are sticking to the bloc’s budget rules.

The Eurogroup of euro zone finance ministers should also be
advised in advance and therefore “play a decisive role in the
new system of expanded coordination”, he said.

ECB policymakers, meanwhile, said their weekend decision to
buy euro zone government bonds on the open market was having the
desired effect in calming markets and curbing speculation.

“Any observer will notice that a number of markets which had
been functioning very abnormally are gradually operating more
normally,” ECB President Jean-Claude Trichet said in an
interview on France’s Europe 1 radio.

He rejected a warning by ECB governing council member Axel
Weber, head of Germany’s influential Bundesbank, that the bond
purchases could cause inflation.

“All the liquidity that is being injected in through these
interventions will be taken back. We are not printing money. Our
objective is price stability in the medium and long term,”
Trichet said. [ID:nLDE64A1ZV]

ECB executive board member Juergen Stark said euro zone
central banks would hold the government bonds they bought until
maturity, and the ECB would resist any political pressure to
allow higher inflation to ease governments’ debt problems. But
he acknowledged other economies might take the inflation route.

Economists have said the United States and Britain may
accept higher inflation to cope with their debt mountains,
leaving the euro zone out of step with a tight monetary policy.

Investment Research

(additional reporting by Marcin Grajewski in Brussels,
Crispian Balmer and Sudip Kar-Gupta in Paris, Axel Bugge, Nigel
Davies and Elisabeth O’Leary in Madrid, David Stamp in Berlin;
writing by Paul Taylor, editing by Elizabeth Fullerton)

TOPWRAP 2-Spain joins euro zone austerity bandwagon