The prime minister’s speech on Friday, in defense of seven months of economic management, leaves three clear messages. The first is that Spain now sees an EU rescue fund as an option, though before making a decision Mariano Rajoy wants Brussels and the ECB to define the conditions and non-conventional financing measures to be applied in the cases of Spain and Italy. The second message is that his government will not reduce pensions for the moment, though one of the probable conditions to be imposed in exchange for an ECB bailout will be precisely this. Thirdly, he rules out a Cabinet reshuffle, though the attrition suffered by the economic team is obvious.
The prime minister’s speech raises doubts due to previous instances of unkept promises. To mention the two most recent, the government systematically denied it was going to raise VAT, and repeatedly averred that the Spanish economy would not need “a second bailout.” But the conditions to be imposed in this soft bailout will depend on the degree of credibility of the budgetary adjustments between 2012 and 2014 to reduce the structural deficit to 2.8 percent of GDP. And, to judge by the two-year plan presented on Friday by the government in Brussels, the doubts persist.
The plan, proposing a 102-billion-euro adjustment between this year and 2014, contains inconsistencies which Brussels may end up punishing with further direct controls on economic policy. It is questionable to predict an economic growth of 1.2 percent in 2014, coming after a 0.6-percent contraction of GDP in 2013. Because, with the supposed adjustments of 38 billion in 2013, and of more than 50 billion in 2014, the forecasts for demand, growth and deficit are hard to believe.
Next year the GDP contraction will be greater, and this supposed growth in 2014 is an exercise in wishful thinking. Any detailed analysis must take into account the fact that the possible revenue-producing effect of the VAT hike will be neutralized by a drop in consumption and economic activity.
The 50-billion adjustment for 2014 raises further doubts. It may be that the government intends a further tax hike, or new cutbacks in civil service salaries or pensions — but none of this is mentioned in what is known of the two-year plan. The government also says it will impose new cutbacks in health and education to the tune of 15 billion euros. But this amount was initially estimated at 10 billion. How has it now become 15 billion? This is not to mention the fact that some regional governments (notably Andalusia and Catalonia) are at odds with the government; and so far, in the opinion of some foreign investors, the government has been unable to coordinate an effective policy to deal with the regions.
The Rajoy government has not explained the adjustments well, partly because many of them are hard to implement, and partly because others do not cause the economic effects which the administration’s economic team hopes for.