Monday, December 19, 2011

The Pain in Spain

Today Mariano Rajoy, Spain’s newly elected President, gave his first speech in his new role before Parliament and laid out his plans to deal with the crisis. Like Monti, his counterpart in Italy, Rajoy’s proposed cuts fall at the lower end of estimates these countries were assumed to need. In the case of Spain, that amounted to a deficit reduction of somewhere between €15 and €30 billion in cuts and taxes. There is extensive coverage in El País of Rajoy’s plan, which offers €16.5 billion in cuts to the Administration and other measures.

Some of the highlights of Rajoy’s plan include:
·         Linking pensions to the consumer price index, the only increase in the proposal
·         Freezing public sector employment except for the armed and security forces and basic public services
·         Reform of regulatory bodies
·         Eliminate early retirements to bring the real age of retirement into line with the official age and not repeal the law raising the retirement age to 67 (that the PP had opposed while in opposition)
·         Shifting public holidays to the nearest Monday to avoid the ‘bridge’ holidays where any holiday now typically turns into stretch of days off to the closest weekend

But the biggest change is the Administrative cuts that he views as a fundamental restructuring of the State. Without elaborating the mechanics or specifics of cuts, this reform promises what all current plans in Europe intend to do to deal with the crisis, whether they come from parties in power or the opposition.

There is a focus on eliminating waste, reducing costs and improving services but without real proposals, that is the sort of meaningless rhetoric that often characterizes these debates and that the markets punish because they mask the lack of resolve. The devil is in the details and presumably over the next few months, the specifics will become clearer but there is little evidence that efficiency gains will be sufficient to tackle the deficit. There are fewer proposed tax increases than the new Italian Prime Minister offered in his budget that is to be voted on in Rome later this week. Rajoy has proposed however, similar to the Italian plan, a tax cut for firms that hire young workers and women in order to tackle the high unemployment among those groups.

For its part, the main opposition party the PSOE has been relatively supportive while at the same time underscoring both doubts and concern for the concretization of the plan. The lack of new taxes raises questions for the Socialists about where the money to pay for this plan will come from and they are insistent that the welfare state in Spain must be defended and not dismantled.

For everyone, the lack of specificity ought to make us wonder whether, when the details finally do become clear, the pain in Spain will be considerably higher than this first speech suggests.

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