With its defiance, Spain drew a line. It has already delivered austerity and necessary reforms in the past four years, but now needs to stimulate growth to increase its tax base and spur job creation. Without growth, Spain’s debt problems and budget cuts can’t be resolved – politically or economically.
While not completely unexpected, many in the EU were surprised by the timing of Rajoy's announcement. Along with 24 other EU leaders, he had just signed the German-led fiscal compact that will force governments to balance their budgets by 2013, under the threat of hefty penalties.
Spain is the first country to officially demand more flexibility with its deficit, at least for 2012. But it likely won’t be the last, analysts say. Belgium, Cyprus, Hungary, Poland, and Malta have already been warned that they are on track to miss their targets. France could also follow if voters boot out President Nicolas Sarkozy in the upcoming election.
Italy is increasingly balking at reforms. And even Germans and the Dutch are demanding more growth-oriented policies from their governments, even if they balk at more bailouts for their southern neighbors.
“Spain is like the canary in the coal mine,” said José Ignacio Torreblanca, a senior policy fellow of the European Council on Foreign Relations. “It’s trying to avoid an either/or choice between austerity and stimulus.”