Time for agreement

Prime Minister Mariano Rajoy responded positively but without conviction to the offer of dialogue from Alfredo Pérez Rubalcaba, the secretary general of the main opposition Socialist Party, to forge a common front to deal with the state of semi-panic that has gripped the Spanish sovereign debt and stock markets. The risk premium hit 507 basis points on Wednesday before falling back to 482 points as the European Central Bank (ECB) threatened to intervene; the yield on the benchmark 10-year bond moved above 6.5 percent and the Ibex 35 fell further. This took place amid a flurry of rumors of bank deposit withdrawal restrictions and Greece’s imminent exit from the euro, all of which conspired to bring about an alarming deterioration in the solvency situation of Spain.

Faced with such a situation, it would have been good for the country if Rajoy had shown an interest in the offer of the main opposition party. The support of the Socialists would have allowed the government to milk this as a piece of its own political achievement and present to investors a common political front against the lack of faith on the part of Europe and investors in the solvency of the Spanish banking system. But the prime minister and his economic team failed to react with the required agility, seized by fear of the ongoing tension that the measures they have announced have failed to quell.

Five months after Rajoy arrived at La Moncloa, external perceptions of the Spanish economy have worsened. The fiscal consolidation measures have failed to convince the holders of Spanish public and private debt, and the markets’ reading of the reforms introduced has been to reduce them to mere placebos. In less than a quarter, the Economy Ministry has decreed two reforms to the financial system that Brussels deems to be less than sufficient.

People are becoming increasingly despondent, among other reasons because of the stance of the government. The economy minister arrived in Brussels with the message that Spain had made the adjustments within its reach and that it was now the time for decisions on a European level. He left Brussels explicitly acknowledging that the ECB would analyze the situation of the Spanish banks and pass judgment on them. If the budget adjustments and so-called economic reforms approved so far by the government are all that it is capable of, then it comes to mind that they have thrown in the towel too quickly. No one wants the backing of the ECB to recover the confidence of Europe more than the Spanish banks, which have in Frankfurt their main lender. But the government’s stance puts the Spanish banking system under direct control of the ECB. Is this what Rajoy, De Guindos and Montoro want?

Beyond the Greek crisis, the truth is that management of the Spanish economy is responsible for the added punishment meted out to it on a daily basis. The failure of the financial reforms has reduced the government’s room for maneuver to a policy of cutbacks that undermine the welfare state but do not, according to Brussels, serve to meet the deficit targets. To reject the opposition’s offer of dialogue in such a delicate situation is a serious political error. A pact is one of the few moves capable of restoring the morale of the country. The other would be to put back achieving the agreed fiscal stability until 2015, at least. A third would be to make a pact with Europe to fight the recession and create jobs.