Spain’s crisis threatens EU

Almost 25 per cent of Spaniards are unemployed, according to economic data released last week, prompting Foreign Minister Jose Manuel Garcia-Margallo to remark that this was “terrible for everyone and terrible for the government”.

This is like the Titanic. If there’s a sinking here, even the first-class passengers drown- Anthony Manduca

The latest figures show that 367,000 people lost their jobs in the first three months of the year, which means that 5.6 million Spaniards, or 24.4 per cent of the workforce, are jobless, close to a 1994 record high figure.

Half of young people aged under 25 have no work and in more than 1.7 million households no one has a job.

“Spain is undergoing a crisis of enormous proportions,” Garcia-Margallo said on a radio programme, while insisting that the reforms being carried out by the government of Prime Minister Mariano Rajoy would eventually pay off.

The day after the grim jobless figures were announced Spain officially entered another recession after experiencing two consecutive quarters of negative economic growth. More bad news followed when credit rating agency Standard and Poor’s cut the country’s sovereign credit rating by two notches and predicted that the recession in Spain would continue into 2013.

Last November Rajoy’s centre-right Popular Party won a convincing victory in the country’s general election which was dominated by the country’s debt crisis, slow economic growth and high unemployment.

The Popular Party won 44.6 per cent of the popular vote, its biggest win ever, and received an absolute majority of 186 seats in the 350-seat Parliament.

It is very clear that Rajoy inherited a very difficult economic situation after eight years of Socialist Party rule and received a very clear mandate to bring about much needed change and reform.

As is usual in such scenarios the situation always gets worse before it can get better and the Spanish government certainly introduced some very harsh economic measures when the Budget was announced just over one month ago.

Rajoy believes that austerity is the key to regaining confidence which in turn lays the foundation for economic growth and employment, and this was the central message when he presented his government’s Budget.

His target is to reduce the country’s 8.5 per cent deficit in 2011 to 5.3 per cent (not 4.4 per cent as originally agreed to with the European Commission) by the end of 2012. This will then be further reduced, if the targets are reached, to three per cent by the end of 2013.

To achieve his deficit target and help revive the economy Rajoy announced Budget cuts and tax increases worth €30 billion, the freezing of public sector salaries and a freeze in most public sector employment. He also introduced some labour market reforms and tax breaks for SMEs. The question some analysts are now asking is whether cutting a deficit in such a harsh way during a recession will not only fail but make a recession deeper.

The unemployment figures, furthermore, certainly don’t help the overall economic situation. Having 5.6 million jobless Spaniards means there is less money to be spent, less tax to be paid and more defaults on mortgages likely.

Also, public opinion in Spain, as expected in these difficult circumstances, is moving against the Rajoy government. This was evident in the regional election in the southern region of Andalucía in March, four months after the Popular Party’s landslide victory at the polls. The Popular Party was expected to win this election but saw its share of the vote reduced to 41 per cent compared to 46 per cent in November.

Although the Popular Party won the most votes in the Andalucía election, it fell five seats short of an absolute majority in the regional parliament, which allowed the Socialists to form a minority government backed by the Communist-led United Left party.

Had Rajoy won that election it would have given him control of a huge big-spending regional government, and made his task of controlling the national Budget deficit a bit easier.

The regions have been blamed for much of the country’s overspending and the news last Friday – announced by a Spanish economic institute – that Spain’s regional governments will exceed their deficit target this year, has certainly complicated efforts by the central government to sort out its finances.

Despite strong denials from the government, some analysts believe Spain’s financial system will need rescuing if it fails to cut the deficit, and its borrowing costs surpassed the six per cent threshold recently, which is always a bad sign.

Many eurozone members increasingly fear that Spain – whose economy is twice the size of that of Greece, Ireland and Portugal put together – could be the biggest threat to the survival of the single currency, so it is clear that Spain is simply too large to default, although many would argue that it is simply too big to rescue.

What is very evident, however, is that the EU, and in particular the eurozone, must work hard together and focus all its efforts on helping Spain as it is engulfed in a eurozone crisis which threatens the whole EU project.

Perhaps Foreign Minister Jose Manuel Garcia-Margallo summ­ed up the situation perfectly when he told a radio journalist: “This is like the Titanic. If there’s a sinking here, even the first-class passengers drown.”