Spain changes constitution to cap budget deficit

Spain's prime minister José Luis Zapatero has announced plans for a constitutional cap on the country's public deficit. Photograph: Pedro Armestre/Getty Images

Spanish politicians took a dramatic step to try to win back market confidence by agreeing on a reform of the country's constitution to introduce a cap on future deficits.

The socialist party (PSOE) of outgoing prime minister José Luis Zapateroand the conservative opposition People's party (PP) said the cap would come into effect in 2020. The limit will be set at 0.4% and will effect all levels of Spain's highly devolved administration, including the regional governments that run health and education.

The move came at the end of a month that has seen Spain's sovereign debt under severe pressure in the markets, amid fears that it might need a bailout similar to those of fellow eurozone nations Portugal, Greece or Ireland. It also came a week after Germany's Angela Merkel and France's Nicolas Sarkozy called for eurozone countries to establish legal limits on their deficits to integrate their economies. So far only Germany has such a cap.

Spanish politicians claimed the measure was a step towards eurozone integration. "August has been a month of financial instability. Investors have lost confidence in the eurozone," said Alfredo Pérez Rubalcaba, the PSOE candidate for prime minister in November's general election. "We have to win back confidence and show we are solvent."

The PP, led by Mariano Rajoy, had been demanding such a measure for years. "We want to be amongst the countries in the vanguard of European economic policy," said spokeswoman Soraya Saénz de Santamaría.

With more than 90% of deputies between them, the two parties can push through constitutional change before parliament is dissolved on 27 September.

Unlike Germany, Spain will not specify the size of the deficit cap in the constitution. According to the draft, the new clause will merely say a cap must be set by either the European Union or, in its absence, the Spanish parliament. The limit could also be broken at times of recession or national crisis.

Germany's constitution imposes a 0.35% cap by 2016. Spain's 0.4% limit will be set initially by a separate law.

Saénz de Santamaría claimed the agreement would force future governments to keep debt below an EU-set limit of 60% of GDP. However, Spain's debt is expected to hit 65% of GDP this year, below the eurozone average and behind Germany, France, Britain and the US. The IMF recently estimated it would total around 75% of GDP by 2016. While the new measure is meant to calm markets, it will have no impact on Spain's current deficit.

Figures released on Friday show annual GDP growth slipped to 0.7% in the second quarter, making it difficult to reach the government's predicted 1.3% for 2011.

Zapatero surprised many in his party on Tuesday when he announced he and Rajoy had agreed to change the constitution. Opinion polls show the socialists trailing the PP. The socialist regional leader in Andalucia, José Antonio Griñán, called the change "a grave error". Left-wing critics claimed it would lead to cuts in social spending.

Only a rebellion by socialist deputies, however, could stop the measure going through.