Rajoy’s duty is clear

Though stresses have abated somewhat in recent days, the Spanish economy is still taking an intense beating from the markets, the immediate consequences of which are higher interest on its debt and high risk that a full bailout will finally be necessary and inevitable. The main tasks the present government now faces are those of reducing the Treasury’s financing costs; recovering confidence in Spanish banks; and achieving the budgetary stability needed for recovery. Spending cuts are not enough; nor is recovery possible as long as the debt markets will not lend to Spain at reasonable rates.

To prevent a bailout, the priority is the reduction of the cost of the debt. The risk has to be faced with rapid, firm decisions. Even if the strategy is the right one and is carried out with precision, there is no guarantee the markets will ease their pressure; but if decisive action is not taken, disaster will be hard to avoid.

First the market has to be calmed by concluding the bank restructuring. Speedy calculations have to be made for the individual recapitalization of each bank, and a streamlined mechanism set in motion for the state Orderly Bank Restructuring Fund (FROB) to apportion the EU money to each bank. One necessity is extreme attention to detail — which is what moves the markets — concerning the quantity of the aid and the conditions (return date, interest rates). It must be clarified, once and for all, whether it is not only desirable (as the government rightly holds), but also legally possible, to inject EU capital directly into the banks (confusion on this point has deteriorated the credibility of the bailout), while demanding of the states that the EU capital input not have preference over the assets of other creditors. The importance of this last point justifies all the belligerence that Rajoy might invest in obtaining it.

The government must also bring forward a stability plan for the next three years that will give it the political initiative; and propose necessary measures resulting from its own analysis and not just that imposed by the EU dynamic. This Plan A must include a detailed explanation, with a time frame, of how it is going to achieve an 80-billion spending cutback — without overlooking VAT, unemployment insurance, pensions and civil service salaries — while articulating a strategy for increased revenue (VAT, special taxes), and a structural reform in pensions, combined with policies for stimulating demand. Also useful would be the preparation of a Plan B, in case these objectives are not achieved: making it clear to the international community that Spain will not falter in its determination to return to stability, whatever the political costs involved.

In the EU, Rajoy has been touting his clear parliamentary majority as an asset. He is right, but must act in consonance, presenting a plan for the next three years (his mandate), and hold to it rigidly, sparing us the Friday surprises after each Cabinet meeting, seeking the support of the opposition (which can hardly refuse it), and using a firm hand to prevent the catastrophe that seems to be looming.