More cutbacks imminent

On Saturday Mariano Rajoy announced that the government was preparing another round of fiscal adjustment in an attempt to comply with Spain’s public deficit objectives, while calling on the EU states to finally implement the agreements reached at the summit on June 28 and 29 and pointing out that their calming effect had evaporated in a few days.

In theory it has been accepted that the cost of the Spanish bank bailout would not be linked to the sovereign debt, and that the EU capital would not have repayment priority over the rest of the debt assets; but leaders of several EU countries have been questioning the implementation of this agreement. The Eurogroup is meeting on Monday, having so far specified nothing, a month after that June session at which agreement was reached on a line of credit of up to 100 billion euros to recapitalize the Spanish banks.

The next seven days will, once more, be crucial in gauging the Spanish Treasury’s capacity to stabilize the debt, and the so far non-existent ability of EU institutions to dispel the specter of a breakup of the single currency. We do not know the details of the conditions attached to the Spanish bank rescue, but above all the macroeconomic conditions of the rescue are unknown. The government denies any conditionality, but it is obvious it exists — it is apparent in the insistence on raising VAT, cutting back civil service salaries and, probably, a move toward a reduction in pensions. It is to be supposed that Rajoy is referring to these things when he speaks of “what they call cutbacks;” but, as is his habit, he explains nothing to the citizens.

These cutbacks, and others, would not be necessary if the government had acted soundly with a drastic financial reform, and if its budgetary policy were credible (like those of Italy and France, which envision cutbacks and austerity policies in the medium term, and on their own initiative, not forced by EU pressure), instead of getting in a jumble. Is it the government’s intention to reduce the deficit from 8.5 to 5.3 percent in half a year, with the fiscal instruments at its disposal? Well, no investor is going to believe that. And this distrust, as well as that which weighs upon the bank reform, leads to an unsustainable financial situation, which the European Central Bank is not prepared to resolve. A risk premium still on the rise, and plunging security markets, are the response to this indecision and uncertainty.

The government has to propose a three-year Budget Stability Plan, explaining how it is going to achieve a primary surplus. It is absurd to waste time in talk of generalities. The plan has to include the pertinent taxes, a rational explanation of the expenditures being cut back, and a commitment to the control of regional government spending — this last point having been underlined on Saturday by Rajoy.

It would come as no surprise, were this plan to coincide in more than one aspect with what the EU and the IMF are demanding.