Spanish Budget Avoids Austerity Measures

MADRID — Confident that Spain is emerging from a prolonged recession, the government on Friday presented a budget for 2014 that was largely free of the unpopular austerity measures of recent years.

The budget is based on a forecast that the Spanish economy will grow 0.7 percent next year, up from the government’s previous forecast of 0.5 percent. Gross domestic product is expected to contract 1.3 percent this year.

Calling it a “budget of economic recovery,” Cristóbal Montoro, the budget minister, forecast that the proposal would “open the door to job creation in our country” since it lacked the tax increases and heavy spending cuts of recent years.

The government also forecast that the unemployment rate would fall to 25.9 percent in 2014, down from the record 27 percent that it reached in the first quarter of this year.

As part of its belt-tightening, the government has extended a salary freeze for civil servants for a fourth consecutive year. And on Friday, it approved changes to the pension system intended to save about 800 million euros ($1.08 billion) next year.

Having requested a bailout for its suffering banks in June of last year, the Spanish government has been under pressure to stick to its budgetary commitments, even as it faced frequent street protests against a series of spending cuts and tax increases.

Given the depth of Spain’s recession, the European Commission agreed last May to give Madrid more time to reach its budgetary targets. The Spanish deficit is expected to fall to 6.5 percent of gross domestic product this year. That would be down from a revised deficit of 6.8 percent of G.D.P. last year, which was 0.2 percentage points less than what Madrid had initially estimated. For 2014, the target is for a deficit of 5.8 percent of G.D.P.

One of the most significant turnarounds for Spain has been the recent fall in its borrowing costs as investors shifted the spotlight to Italy’s political fragility and the perceived risk that Italy poses for the euro zone. The interest rate premium demanded by investors for buying Spanish government bonds rather than Germany’s benchmark bonds fell this month below that of Italy for the first time since March of last year.

Thanks to that improvement, Mr. Montoro said, the cost of financing the country’s debt should fall 5.2 percent next year, to 36.6 billion euros.

While Spain is emerging from a two-year recession, Prime Minister Mariano Rajoy and his ministers have recently cautioned that the country still faced a significant economic challenge, with continued weakness in consumer spending and a reluctance by banks to provide credit.

The 2014 budget and the proposed changes to the way pension payments are calculated will now need to go to Parliament for a vote, but that is expected to be a formality as Mr. Rajoy’s Popular Party holds an absolute majority.

High & Low Finance: Euro Avoids Collapse, but Its Future Remains Uncertain

Only a few months ago, it was front-page news. Would the euro collapse? Would most of southern Europe go broke, unable to borrow money at any reasonable rate? Would that bring on a new world recession?

But in this week’s foreign policy debate between President Obama and Mitt Romney, the euro never came up. Europe was mentioned once, but the reference had nothing to do with economics. Mr. Romney did refer to Greece, but only to say we were in danger of going down the same path if we did not change our ways.

To a surprising extent, the perception seems to be that the European situation is under control. That is true if all you worry about is whether bondholders will get paid. It is false if you have a broader perspective.

The focus of the last couple of years on borrowing costs for peripheral members of the euro zone was, in retrospect, unfortunate. It was always clear that Europe, as a whole, had the ability to solve that issue if it wished to do so. The European Central Bank, like the United States Federal Reserve, has the ability to print money, and that is what it finally did.

But the real issue was — and remains — whether the peripheral countries could turn into successful economies while staying in the euro zone. On that issue, progress is painfully slow.

“The actions of the E.C.B. and other policy makers in Europe have generally had the effect of filling large financial gaps in periphery bank and sovereign funding,” wrote Bob Prince of Bridgewater Associates this week, “but have done relatively little to resolve competitive imbalances among these economies.”

Banks are hesitant to lend. On Thursday, the European Central Bank report on loan activity in September showed a record 1.4 percent year-over-year decline in loans outstanding to private sector companies and individuals in the euro zone. “These numbers are rather consistent with the bleak picture painted by business surveys, showing an ongoing contraction of activity,” wrote François Cabau and Phillippe Gudin of Barclays Capital in a note to clients.

If peripheral countries simply had fixed exchange rates, rather than a common currency, they could and almost certainly would have devalued their currencies long before now. That is the normal prescription for countries in financial distress. Couple it with austerity and revivals can be surprisingly rapid, as exports surge and imports plunge.

As it is, the process is sure to be long and painful, but not certain to succeed.

As Europe stumbles and slows, there has been a temptation in the United States to turn our attention elsewhere, to Asia for economic reasons and to the Mideast for political ones. Mr. Romney has tried to add South America to that mix. But neither the Romney nor Obama campaign has wanted to talk much about Europe, a fact that has been noted with a little alarm in Europe.

Richard Lambert, the chancellor of Britain’s Warwick University — and a former editor of The Financial Times as well as a former central banker — was in New York this week trying to convince Americans that they should care, and predicting that the euro will survive.

“The European Union has the capacity to get its affairs into order, if it has the political determination to do so,” he said in a speech at New York University. “This is a crisis about economic imbalances within the euro zone, more than it is about fault lines with the rest of the world.”

That is a point worth remembering. The euro zone as a whole is running smaller budget and current account deficits than is the United States. If it were one country, there might be articles about depressed regions, but not talk of collapse.

But it is not one country. It is taking halting steps in that direction, with a move to unified bank supervision, but political union is not going to happen; Angela Merkel’s name is never going to be on a ballot outside of Germany. Nor is there going to be easy labor mobility around Europe, even though that is supposedly guaranteed now. Cultural and language differences assure that.

Floyd Norris comments on finance and the economy at nytimes.com/economix.