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A chance for change

Brussels gives Rajoy breathing space and scope for measures to promote economic recovery

Brussels’ decision to give Spain two more years to bring its deficit back within the European Union ceiling, in exchange for speeding up reforms of the state pension system and the labor market, should be viewed as proof of two failures wrapped up as a success, the importance of which only time will tell. The European Commission has erred in taking so long to acknowledge the fact that its dyed-in-the-wool adherence to spending cuts has had limited payback in solving the evident problems, and what’s more, a large part of the fruits of such an approach in the short term are reliant on the technical and political skills of the government in making the theoretical benefits of such a policy a reality. The administration has also suffered a clear setback in failing to comply with the commitments it made to Europe, despite its insistence that the stability plans it took on board would be fulfilled to the letter.

It wasn’t to be, and it is debatable whether this administration was ideally suited to put in place a very drastic adjustment program in the context of competing regional interests and the weakness of a labor market that generates millions of unemployed whenever there is a crisis or a recession. However, the failures of both parties have led Brussels to take a more realistic approach. Given the impossibility of the Spanish economy rapidly achieving the EU requirement of a fiscal deficit of under three percent of GDP, and a significant reduction in the levels of public debt, the more pragmatic approach is to relegate the importance of achieving the quantifiable manifestations of budget stability and to place more emphasis on commitments to structural reforms. The merits of substituting measurable criteria in terms of the deficit and levels of public deficit for others less amenable to quantification is open to debate. How, after all, does one measure the success of a reform? But this change of tack should provide something of a breather on the fiscal front, and open the door for some form of public investment.

What would be a mistake is sticking to an economic policy whose limits have been clearly set by Brussels

It is hard to pin down what form such opportunities might take, in that these again are a function of the technical and political abilities of the government. One of the possible ways to go would be to take advantage of the initiative to address youth unemployment, which was proposed in Paris on Tuesday. What would be a mistake is sticking to an economic policy whose limits have been clearly set by Brussels, and waiting patiently for the recession to run its own course while continuing to intone the mantra that the reforms “will shortly bear fruit.”

The government’s economic team should take on board the fact that the Organization for Economic Cooperation and Development has just ripped the economic forecasts formulated in Spain’s Stability and Growth plan to shreds. The Paris-based organization estimates that Spain’s GDP will shrink 1.7 percent this year, while the jobless rate will rise to 28 percent. At the same time, it predicts the public deficit will narrow by only a tenth of a percentage point to 6.9 percent of GDP, meaning that the government will fall short of even the more generous target of 6.5 percent conceded by the European Commission. The OECD said that “boosting growth should be the government’s number-one policy priority.” It also called on the government to take the “positive steps” it has already made in reactivating the labor market further. In order to reduce massive unemployment, the administration should not take such advice lightly.

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