Only a political suicide or national unity government can save Spain and the euro
25/07/2012 10 comentarios
The markets have lost faith in the Spanish economy as jobless rates and budget deficits are high, banks are wavering and households are vulnerable. The government’s reform programs have not done much to restore confidence. Perhaps last week’s €65bn package could be tipping point, but markets don’t seem convinced. Their suspicions are partly justified as the earlier programs were not implemented to a sufficient degree. That the wounds continued to fester recently forced Madrid to go cap in hand to its European partners. Obviously, prime minister Rajoy is aware situation is very precarious. Contrary to his electoral promises he has raised sales tax and announced other sweeping (and very painful) cutbacks. Two questions are very important (…..) Number 2, has Rajoy seen light and will he have enough time to effect changes? Spain’s weakening economy is badly equipped to cope with the fall-out of a fresh round of reforms and spending cuts and is at risk of going under. A more flexible job market is a good thing in the long run and same applies to a higher sales tax. However, measures to achieve this will send jobless rates higher and undermine consumption in the short run. Spain might not be able to recover from such setbacks, also because young people and those who are already vulnerable will be hit hardest. This will increase dissatisfaction and destabilize the country further yet frustration is already high. Last week’s protests and violence are a bad sign. Mr. Rajoy is caught between a rock and a hard place. On the one hand, his voters are being bled dry on all sides. At same time an impatient EU is piling on the pressure to inflict even more pain at speed. It is a difficult balancing act for Rajoy, who needs his voters to believe that he has their best interests at heart under relentless pressure from the markets and the EU. He needs to get EU off his back or he may be replaced by EU technocrats armed with a feared “Memorandum of Understanding”. When all is said and done Rajoy’s choices are limited. Either he helps to save the euro and will be voted out of office or he plays a part in blowing up euro. Yet Rajoy has not been elected on a program to do everything within his power to rescue Spain and the euro. There is only one potential way out. Eventually, he could aim for a government of national unity that is supported by unions as well as employers and sets aside all political differences. This happened in 1977 when the so-called Pact of Moncloa helped to shield Spain against a return of the military dictatorship as it contained high inflation and substantial deficits. However, if Rajoy believes he can lean back and count on his comfortable parliamentary majority and the regional governments (dominated by his party), such a pact will remain a mirage. In that case, Spain will continue to be at mercy of markets and officials of the EU, ECB, and IMF. The latter may well find that they have bitten off more than they can chew.