About time. Portugal and Spain have finally grasped the nettle, announcing extra fiscal tightening to tame yawning budget deficits. Both were forced into playing catch-up with their peripheral eurozone peers after Greek contagion engulfed their markets last week. U.S. President Barack Obama put pressure on Spanish prime minister José Luis Rodríguez Zapatero to take “resolute action” as procrastination by Madrid – and Lisbon – risked undermining the credibility of the eurozone’s €750bn stabilization package. This week Mr Zapatero announced extra spending cuts; his Portuguese counterpart José Sócrates followed suit on Thursday with a mixture of expenditure cuts and tax increases.

Investors welcomed the additional fiscal tightening, and the Iberian duo’s borrowing costs fell. There had been widespread skepticism for months about their willingness to tackle their deficits. Spain, which made a first stab at cuts in February, repeatedly argued that it was different from Greece. While its budget deficit at 11.2 per cent of gross domestic product is almost at the Greek level, its government debt, at 55 per cent of output, is much lower. But, what Spain and Portugal had in common with Greece was a stubborn refusal to contemplate measures on a scale demanded by the fix they were in.
Madrid’s €15bn of further expenditure shrinkage will cut 1.5 percentage points off the deficit this year and next. And by immediately cutting public servants’ salaries by 5 per cent and freezing them next year, Mr Zapatero is following Ireland’s lead. Mr Sócrates, meanwhile, will more than halve Portugal’s deficit to 4.6 per cent in two years.
These are certainly steps in the right direction. The immediate danger is that further austerity risks pushing the peninsula back into recession. They also do not remove the need to tackle the structural reasons for the chronic uncompetitiveness of Spain and Portugal.