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Thursday, March 15, 2012

Opening Pandora's Box?

Speaking to the press after the meeting of EU leaders earlier this month, Spanish Prime Minister Mariano Rajoy (see picture) surprised everyone by declaring that Spain had taken the "sovereign decision" to ignore the deficit reduction target of 4.4% of GDP agreed with the European Commission for this year.

As we pointed out here (and as Simon Nixon pointed out in the WSJ yesterday), the Commission had two options to cope with this situation: hardball or flexibility. And it has gone for the latter, although still asking Spain to bring its deficit down to 5.3% of GDP by the end of the year - that is, 0.5% lower than the 5.8% announced by Rajoy. This translates into an extra €5 billion of savings by the end of the year, something which Rajoy says Spain reasonably can achieve.

Leaving the bailouts aside for a second, Spain's behaviour may well be a hint at the true meaning of "economic governance" in the eurozone - constant bickering about who actually is in charge, the 'sovereign' member state or the European Commission (or some other vehicle of the Eurogroup).

In any case, the compromise 'deal' between the Spanish government and EU finance ministers gives rise to a number of questions:

Is this a victory for the Spanish government? Not at all. Despite Rajoy's efforts to sell it as such at home. Spain has only obtained a revision of its deficit target for 2012, but is still expected to cut its deficit to 3% of GDP by the end of 2013. In other words, the Spanish government is only kicking the can down the road and will have to make much tougher budget cuts next year in return for dodging them this year.

Is this a victory for the European Commission? Not really. At the end of the day, the Commission has allowed Spain to run a higher-than-agreed deficit for 2012. Needless to say, this did not go unnoticed. Explicit criticism has already come from Belgium and Austria, with the latter accusing the Commission of using "double standards" as Hungary - at the same meeting of finance ministers - saw almost half-a-billion euros of subsidies frozen for failing to comply with EU deficit rules.

Furthermore, Dutch Labour MPs have threatened to block the ratification of the new 'fiscal treaty' on budgetary discipline unless the Netherlands - like Spain - is allowed more time to put its own house in order. Dutch Prime Minister Mark Rutte’s coalition government needs the support of the opposition to pass the 'fiscal treaty' in parliament, as Geert Wilders’ far-right PVV party will vote against it.

The pact would still come into force if the Netherlands failed to ratify it - twelve eurozone ratifications would be sufficient. However, Triple-A countries are a rare breed in the euro area these days, and if one of them were to stay out, the 'fiscal treaty' would lose even more of its credibility. Uncertainty remains, but the Commission might really have opened a Pandora's box by revising Spain's deficit target for this year.

But are these targets even achievable? Almost certainly not. Spain's economy is expected to contract by 1% this year. Furthermore, the Spanish government has 'only' adopted a first package of around €15 billion in spending cuts and tax hikes, meaning that savings worth some €20 billion are necessary to meet the revised target for this year. Both of these facts are likely to increase the already sky-high unemployment rate. It's too early to tell whether the Spanish population is willing to stomach this. A new general strike against the Spanish government's labour market reform has been scheduled for 29 March - it won't be the last one.

The deficit target of 3% of GDP for 2013 looks even more out of reach - especially if this year's target is missed. As Rajoy told MPs yesterday, Spanish regions must be prepared to make "bigger" cuts, but some important Spanish regions (including Andalucía, where Rajoy's Partido Popular could win a majority after the 25 March elections, and wealthy Catalonia) do not seem particularly keen on taking more austerity. This is complicated by a feeling that the cuts are being 'imposed' by the central government. If the Spanish government fails to keep the regions on board, the chances of meeting the budget commitments look very slim indeed.

What's clear is that Spain will become a major testing ground for the effectiveness or otherwise of the eurozone's new economic governance structure.


Johne.payne1@btinternet.com said...

So Spain needs to find another 5 Billion. So what do they receive in Regionqal Aid? Interesting!

Denis Cooper said...

Although I have Spanish relatives, and see them from time to time, I have to admit that I don't know a lot about Spain.

I know it's not long ago that it was a dictatorship, but does it now have some kind of national parliament?

You know, a place where people elected by the Spaniards can meet together and make decisions about Spain - for example, how much the Spanish government can raise in taxes, and how much it can spend, and how much it can borrow.

Rather like our British Parliament, which meets in Westminster. Is there anything like that in Spain?

If so, why are those elected representatives allowing officials in Brussels to pre-empt their decisions?

I've heard that the Spanish are a fiercely proud nation, so why on earth are they putting up with this?

Is it because they're not yet used to the idea of democracy?

Or is that they were duped into joining a transnational system which promptly negated their new national democracy, without really understanding what they were voting for apart from free money from other countries?

Rik said...

1. In countries like Spain its welfare state is simply unsustainable/unaffordable.
Most of the spending goes in that.
So saying further cuts are not possible is simply letting them take more time to get to a sustainable level.
And in the mean time increase debt even more.
Spain simply has to cut costs for business to get people to work. Letting them work via/with the government simply doesnot work anymore you need to borrow more and more and nobody wants to do that anymore. Not able to borrow anymore means 'investing' in the future by lowering costs for business has to be paid be cuts and lower wages. The gap is so big it is very unlikely only cutting red tape will do the job and even that isnot really done very hard.
2. With countries like Holland its welfarestate looks as well unsustainable but 'they have been given time' to revise it by markets. But basically also there it is cuts that have to take place anyway (as the aging-costs will hit in and 'replace' basically other welfare goodies).
3. Spain is imho becoming a big problem, how will they create 2-3 000 000 new jobs. It looks like they are nowhere near the bottom yet so the number of unemployed is very likely to rise for the nexr couple of years.

Xualbeh said...

I'd like to respectfully offer you my point of view:
I am 27. I live 45' far from Barcelona, in Catalonia, nowadays one of the 17 Regions of Spain.
Let me get started with a bit of history:
After Franco's death in 1975, Spain turned into a democracy basically after 3-4 year period called 'transition', where all political parties were legalized (most of them had been forbidden for over 40y), and a new constitution was voted and approved. The 'Kingdom of Spain' that we still have today was then born, identifying already the 17 Regions within the country which would have own capacities / budget to take decisions on certain subjects.
This 'Regional' concept was due to the presence of historical and well defined nationalities (the Catalan and Basque), which later lead to other 'regions' to ask for similar privileges. This distribution of power was commonly called in the press like 'coffee for everybody'.
However, Central Government and Parliament (elected every 4 years) still has the control on many ministries, and all the duty is collected by the Spanish government, who later distributes the money at its own will (but not often considering the effort that each ‘region’ does).
At this stage, I am tempted to enter into personal terrain where I expose my Catalan nationalism and will to become an independent Country within the EU. But I will not, just not to enter in a separate discussion (however I encourage foreign people to do some more research on this).
People may tend to believe that the Catalan nation is a parallel case to the Scottish, for instance. But it is not exactly the case. Both nations have a different historical background (own culture, language, etc.) but in our case, Catalonia has always been a focal point and engine for trade, business and industry, in part due to its position, but also because of the nature of its people, known to be hard-working, nonviolent and saver. Note also that the Parliament of Catalonia, dating from the 11th century, is one of the first parliaments in continental Europe. Many centuries later, King’s marriage joint the Castilian Kingdom with the Catalanoaragones Kingdom in a equal-to-equal status, later abolished in 1714 when Castilian King Felipe V occupied by force Catalonia and abolished all its national symbols and traditions, including the language. For about 3 centuries the situation didn’t change –just with a few exceptions like the 2nd Republica years, when Catalonia was nearly to become independent–, and after the Spanish Civil War, Franco pushed again for the abolition of the ‘Catalan difference’. There is history to fill 3 blogs, so I prefer to stop here.
In economic terms, Catalonia has been recognized as one of the four engines of Europe. So, without underestimating the Scotts, our situation with regards to Spain is of an obvious financial deficit (which on the other hand, it has never been recognized –do not forget that is the Central government who collects all the duty–).
Our different roots and culture (please do not associate it with the ‘flamenco’, the ‘mañana’ and bullfighting –which has been abolished in Catalonia–), together with the flagrant economical grievance, is leading now more and more to people claiming for independence.

So back to the economical situation of Spain, I’d like to highlight some of the errors that lead us to this situation:
- Political corruption
- Volume and status of the public administration. Wrong concept of ‘public worker’.
- Wrong system to decentralize the power.
- Inefficient administration of the funds received from the EU during years (‘do not give fish… just give the fishing rod’)
- Unbalanced plan of infrastructures and distribution of resources
- Unbalanced levels of economical effort between regions
So having said that, I invite you to visit our small and peaceful country –mainly Barcelona, but not just Barcelona! – if you have chance, and make your own idea of that.