The ruling Socialists and the main opposition Popular Party reached an agreement in the early hours of Friday morning that constitutionally imposes budget discipline on the government.
The proposed constitutional amendment requires both the state and the regions from surpassing the limits of structural deficit - a shortfall that is not the result of shifts in the economic cycle - set down by the European Union.
In the wake of opposition within the Socialists ranks and other political groups as well as calls from the country's main labor unions for protest action, the constitutional amendment does not include the 0.4-percent off GDP figure for the deficit agreed by the country's main parties. That will be enshrined in an organic law to be approved by the Socialists and the PP before the end of June next year.
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The proposed legislation also includes the requirement of meeting the EU limit on public debt of 60 percent of GDP. The European cap on the budget deficit is 3 percent of GDP. Spain is aiming to lower the shortfall in its finances from 9.2 percent of GDP last year to 6 percent this year before bringing it back within the European limit of 3 percent in 2013.
The 0.4 percent figure is broke down into a maximum structural shortfall for the central government of 0.26 percent of GDP and 0.14 percent for the regions, and comes into effect from 2020. The figures may be revised in 2015 and 2018.
The draft law was filed with Congress on Friday and is due to be approved on September 2 without recourse to a referendum, allowing it to be in place before general elections called for November 20 in which Prime Minister José Luis Rodríguez will not be standing, and which are expected to be won by the PP.
The government's latest effort to ward off attacks on its sovereign debt also affords a decree of flexibility in cases of "natural disasters, economic recession and situations of exceptional emergency out with with the control of the government that considerably prejudice the economic or social sustainability of the state."
At a news conference after the regular Friday Cabinet meeting, government spokesman José Blanco "categorically" denied that reform had been carried out under heavy pressure from the European Central Bank. "The ECB never brought up the reform of the Constitution," he said. "You can't respond to a demand that never existed."
Blanco said the government was "very satisfied" with the agreement with the PP on what he described as "very good reform." The PP's congressional spokeswoman, Soraya Sáenz de Santamaría said: "With this agreement Spain is backing the euro."
The secretary of state for the economy, José Manuel Campa, said the reform enhanced the credibility of the Spanish economy, but some analysts were skeptical about the import of the agreement. "In our opinion, the agreement according to the terms they've laid out doesn't really offer credibility (...) on the commitment to containing the deficit," Spanish bank Banesto said in a note. "Not so much because of the lack of a concrete numbers, but because they leave the door open to too many exceptions (...) as well as the possibility of changes in the future."
Other analysts said the agreement could end up being a straight-jacket for the government by holding back growth, although the Socialist candidate for prime minister in the elections, Alfredo Pérez Rubalcaba, insisted it guaranteed room for maneuver.
There was also a mixed reaction for the regions. The Socialist premier of Andalusia, José Antonio Griñán said it was a "grave error" to amend the Constitution in response to passing developments, while the head of the economic department of the region of Valencia, José Manuel Vela, said the reform "will mark a before and after in the history of Spain's finances.