Strategic move

The meeting between Prime Minister Mariano Rajoy and the German Chancellor Angela Merkel, along with Finance Minister Cristobal Montoro's appearance before lawmakers in Congress, has helped clarify, albeit minimally, the government's strategy for dealing with the dangerous situation facing the Spanish economy, beset by doubts for some time now regarding its ability to pay its debts, and by a recession that has already left some 5.3 million people - about 23 percent of the workforce - out of a job.

The German chancellor continues to demand in public that members of the single currency continue to impose drastic spending cuts, and the Spanish prime minister continues to say in public that he is committed to reducing the budget deficit to 4.4 percent of GDP by the end of this year, despite the impossibility of meeting that commitment.

At the same time, it is clear that the government is looking to negotiate with Brussels to extend the period of time within which Spain must reduce its budget deficit. If it succeeds in those negotiations, this will give the government more time to stimulate demand and investment and to work on creating new jobs.

It is a risky strategy, given that creating jobs depends on Brussels' decision. That said, bearing in mind the pressure for the single currency area as a whole to take a less fundamentalist approach to reducing spending and the deficit, there is some room for optimism.

There is no reason to automatically assume that Germany will not cede some ground in support of specific plans to stimulate demand; but even if it were to do so, such plans would still depend in large part on the application of budget cuts, along with labor market and financial sector reforms. This is where the doubts emerge.

If the government really does support the objective of reducing the deficit, it is hard to understand why it is refusing to raise taxes further; at least it is hard to understand that refusal in terms of economic policy.

It makes more sense when seen in the context of the upcoming regional elections in Andalusia, which the PP hopes to wrest from the Socialist Party. A move that until winning the general elections needed to be applied with speed, can now be left until the end of March.

If labor market reform was urgent and the key to economic recovery, then it should have been signed and sealed by now. The same could be said of the next phase of financial sector reform: freeing up access to loans is essential to stop the further destruction of jobs.

Chancellor Merkel's support for Spain's "reforms" (until now the new government has not passed any; budget cuts and tax hikes do not constitute reforms) is nothing more than protocol. The reforms that Mariano Rajoy promised in opposition have yet to be implemented, and it may well be that they have yet to be drafted. If we accept that Rajoy will soon announce those he considers most important, the government has yet to detail its plans to reactivate the economy.

If it believes that it can create jobs by a few meager tax breaks for businesses, then the most likely outcome of the finance minister's measures will be failure.