Spain: Mariano Rajoy loses some of his shine

10 April 2012 – El Mundo (Madrid)

The Spanish Prime Minister is bringing in one austerity measure after the other to stave off the economic collapse of his country. But after seven years in opposition, he is finding it difficult to be entirely credible and effective, three economists argue.

Spain is at a key moment in its history. With some debt markets getting nervous once again, a Budget for 2012 that has convinced few and an economy in recession, we are headed for a bail-out that must be avoided at all costs, because the consequences would be extremely dire.

First, because those who would intervene are our creditors and would therefore not have our best interests in mind. Second, the bailout would impose an even harsher fiscal adjustment. Third, because while we know how to get into these interventions, we don’t know how to get out of them; the bail-outs lead to a flight of private capital and a drying up of the liquidity of a country. And fourth, because it won’t work: the interventions of the IMF are based on currency devaluations and a subsequent rise in external demand. Since this is not possible in the eurozone, the interventions in Greece and Portugal haven’t improved anything.

So what went wrong? How have the dark clouds that went away temporarily after the December action by the ECB rushed back in so quickly? The answer is simple but devastating: the new government, though it has undertaken a decisive labour reform, has failed to tackle the two fundamental problems undermining our credibility: the financial sector and budgetary policy.

Autonomous regions continue to bleed out

The financial system is in a critical state. We have failed resoundingly to convince the capital markets to refinance our banking liabilities. Spanish banks can only issue credits with government guarantees and are only staying afloat thanks to the liquidity provided by the ECB. Their logical reaction to the new capital requirements has been to tighten credit, which has choked off many companies.

Fiscal policy has been suffering for four reasons. The first is the absurd dance of the deficit figures that we have suffered from since autumn and that has led observers to question the true status of our public finances.

The second is the intolerable delay in bringing in the budget. Not only has the grace period of 100 days that was granted to the new government been squandered but, in bringing in the budget just after the elections in Andalusia, we have made it clear that, in Spain, urgency takes second place to politicking.

The third is that these budgets have fallen foul of years of opposition based on populism. As promises were made not to cut pensions and officials’ salaries and not to raise the VAT, the budget has no choice but to cut back on public investment and to try out a tax amnesty. But markets are not deceived by balancing acts. They grasp that these budgets will worsen our fiscal situation over the medium term and that they demonstrate the inability of our leaders to face up to the difficulties.

And finally, the finances of the autonomous regions continue to bleed out and no one believes that those regions will really cut €27 billion from their budgets in 2012.

Mistaken populism

What to do? First, the Government should forget about the elections, whether they are in Galicia, the Basque regions or anywhere else, and they should pack the pollsters off to other tasks. The absolute priority is to sort out our lack of credibility.

Second, to restore the flow of credit as soon as possible. This will be achieved only if confidence returns to the banking sector and the banks can gain access to the capital markets without government guarantees or the liquidity from the ECB. A clear alternative is to use the European Financial Stability Fund to recapitalise the financial system, which does not imply any intervention. Spain has sufficient cause to ask for different treatment than other less responsible partners have received.

Third, to develop a multiyear fiscal consolidation plan that is credible, calm and systematic. Regarding spending, this plan should cut the salaries of officials, thin their ranks and freeze pensions, while budget items devoted to education, productive investments and R & D should be maintained where possible.

Regarding revenues, this plan should introduce a VAT rise staggered over the next five years. Regarding institutions, the plan should create an independent fiscal council and radically rethink the autonomous regional financing modes to give us a rational state model. It is unacceptable that the regulations discussed by the European Commission give the Commission more power to control the Government of Spain than the Spanish government itself has to deal with its fractious autonomous regions.

After four years of crisis in which the governments of Spain, this one and the previous one, have been dragged along by events, it may already be too late to change things. But it’s still worth trying because we are certainly facing what may be our last chance to straighten out this interminable crisis. For that, though, we need a radical change of attitude that starts with abandoning the mistaken populism of the last two years of the opposition to the Zapatero government.

Translated from the Spanish by Anton Baer

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