Confidence and stability

Wednesday was another fateful day for the Spanish stock market, which was dragged down not only by doubts about the US economy, but also misgivings about the Spanish banking system after Standard & Poor’s downgraded the ratings of 16 Spanish lenders on Monday. These doubts need to be cleared up as soon as possible.

The announcement of the Stability Plan and its accompanying reforms as the “backbone” of the government’s economic policy has done little to boost confidence. As an economic guide and tool to convince investors, the plan has a number of inconsistencies and weaknesses, which turn it into little more than an exercise in political voluntarism. It is not that the government has misjudged what its objectives should be, given that the correction of the public deficit is an unavoidable necessity, but rather that the government seems to have incorrectly calculated the effects of the recession on its ability to comply with budgetary targets.

The principal inconsistency is to be found in the commitment to bringing down the public deficit by more than three percentage points of GDP during a financial year that will see a contraction of 1.7 percent. This is very unlikely to happen, and, as such, generates mistrust among the financial sector and compromises the rest of the stability forecasts.

If a deficit of 5.3 percent is not achieved this year, it will be impossible to reach three percent in 2013, and begin the path toward a primary surplus. In that case, the government will find itself in a bind, and only the European Commission will be able to save it should it decide to extend the timetable for stability.

Nor do the forecasts for growth seem credible. It is not easy to argue that from a contraction of 1.7 percent in 2012 we will achieve growth of 0.2 percent in 2013 — not just due to the quantitative jump, of two whole percentage points, but also because the sources of this growth have not been explained. As in the case of the deficit, an error in the prognostics of growth, which is fairly likely in this macroeconomic framework, compromises the rest of the decisive variables for economic recovery, such as the creation of jobs, increased consumption and the confidence of foreign investors.

There is another problem: the political instruments that are included in the plan have not been defined with sufficient precision. The economy team has made a generic declaration of discipline in all public administrations, but it has not laid down the fundaments of how they will be applied nor has it quantified the savings that will be achieved. The plan has an inconsistency at its very root, which is that of identifying cuts and reforms. An economic reform would be a rise in VAT and a reduction in social security costs in order to create jobs, but it is not clear as to whether that will be the strategy of the government; a cut is to communicate to the state and the regions that they have to shave 10 billion euros off health and education spending.

This government is selfishly maintaining that mistaken identification. But citizens are beginning to notice (and feel) the difference.