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The big adjustment

Rajoy bows to European demands in return for an opportunity to turn the economy around

The prime minister on Wednesday unveiled a budget adjustment of wide dimensions in order to pull Spain from the brink toward which it had been heading for too many years owing to economic policy errors and financial reforms that were short of the mark. Nobody can say whether the harsh but necessary measures announced by Mariano Rajoy will be enough to avoid disaster, but they do entail a package of initiatives that, although tardy, embodies a genuine plan, the success of which depends in large part on the government being able to bring the opposition on board.

The Spanish economy was being left in a situation whereby it was unable to finance itself or cut the public deficit, sentencing the country to a serious deterioration in its economic and social fabric. The project unveiled on Wednesday implies willingness to undertake the internal devaluation that experts believe is necessary — in the absence of being able to devalue the single currency — at the expense of reducing the purchasing power and income of millions of people. In return, it improves the prospects for financial stability, but the recessionary impact of the measures announced must also be factored in.

The driving force behind the plan is European demands to find a solution to the main problem facing Spain: private debt, which has contaminated public debt. It is a question of sharing the burden between taxpayers and the financial sector. The former, who have already suffered the impact of a restrictive budget, are being asked to bear the load of a significant increase in value-added tax rates. On top of this are the spending cuts the administration hopes to achieve through a reform of the public administrations, a reduction in the number of state-owned companies, a cut in unemployment benefits and the slimming down of city halls. Rajoy estimates this will improve the state’s coffers to the tune of 65 billion euros over the next two and a half years. At the same time, the plan includes a reform of the financial sector that entails removing toxic assets from the banks’ balance sheets and transferring them to a bad bank.

Back to Congress

Rajoy’s rectification took place in Congress, which represents another fundamental political shift, after repeatedly delivered snubs to the lower house. The government is now giving the impression that it is appealing to Congress because it has no choice other than to seek greater legitimacy in deciding upon and implementing a raft of measures so detrimental to the working and middle classes. It would be completely impossible to push ahead unilaterally with such measures by merely calling on, as it has done so far, its power of absolute majority.

There is no doubt that Spain has reached a situation where there is no way forward without a certain degree of consensus. It was unacceptable for the government to stonewall the demands of democratic representation under the pretext of the economic crisis: debate was necessary precisely because of the crisis. The opposition leaders Alfredo Pérez Rubalcaba and Rosa Díez accepted the challenge with a more moderate stance than shown by the Popular Party in its day to the austerity measures announced by the previous Socialist government.

Need for consensus

Rajoy failed to respond to Rubalcaba’s offer to jointly draw up a plan for the period 2013-2015, although in his address on Wednesday he acknowledged the problems involved could not be addressed by a “government on its own.” The future of possible areas of consensus remains up in the air, but in the short term the two sides should back a reform of the banking system. Another weighty question is the reduction in Spain’s financial independence and the transfer of sovereignty to certain European institutions in exchange for financial support to meet the deficit target. As recipients of the bailout approved by the Eurogroup, the banks — and economic policy in general — will be subject to strict vigilance by the European Commission, the European Central Bank and the IMF. The loss of independence and the transfer of sovereignty is not something that should be decided unilaterally by a government because it involves the whole country.

The other big question is the impact on the public. Rajoy’s reforms go against his electoral promises. The management of the crisis so far has lacked credibility, hence the lack of confidence on the part of investors and the European authorities. This should be backed up by a critical evaluation of the performance of the finance minister and the appointment of a deputy prime minister to coordinate economic policy. All of this has been an enormous drain on Rajoy. But what the public needs now is for its leaders both in the government and the opposition to reach the consensus required to restore confidence and a sense that there is a genuine project in place after the severe treatment meted out by the euro-zone authorities. The fact that Spain’s acknowledgement of the need for rectification came late should not be a reason to deride it, but rather as an opportunity.

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