One-off cuts in Spain will fail to impress markets

MADRID | One-off cuts and further squeezing measures have been taken in a desperate attempt to avoid budgetary discomfiture. By mid-term central government deficit had already attained its full year target, not to mention a regional and local performance no one knows for sure where it stands. A drastic brake to such blatant slippery became an unavoidable option.

The markets and Brussels have done the rest. Free-running risk premium has not moved the European Central Bank to step in relieving the untenable pressure on Spanish bond sovereigns. The promise that the European Stability Mechanism might in future buy troubled countries’ bonds, hardly serves to deter speculation here and now. Brussels and Frankfort are deliberately refraining from supporting Spain in order to force Madrid in performing its tough homework. They mistrust a government that has failed to offer clear pledges on its ultimate intentions, playing all too often the sovereignty joker card.

They also feel unimpressed at the scope of the reforms so far undertaken. Labour rules reshuffle has certainly brought about some degree of flexibility, but firing costs still rank among the highest in Europe. Banking upgrading has so clumsily been managed as to cast a serious doubt on the overall financial system sustainability. Pension reform is still pe

nding. Just compare that record with the sweeping slash of unemployment and retiring allowances implemented by the German Schroeders’ cabinet some years ago. Spain has still a long way to match others performance and recoup its competitive gap.

Doing away with this year’s civil servants Christmas pay amounts to pocket money. Reducing dole benefits while preserving its full two years coverage reduces some of the burden but fails to promote a job-orientated labour policy. Other budgetary cuts lack any real significance. VAT increase will provide extra income at the price of scrapping consumption still further. Corporate withholding tax hike will help to cash in more money now but reduce accordingly final payments next year. All in all, the net effect of such stiffening measures will finance no more than half of the foreseeable deficit.

Unless drastic measures are introduced to bring down structural spending, there is little hope to reach the target. Reducing excess manpower in public administration, in particular at regional level, closing down redundant or useless bodies and enterprises, trimming down the range of good-for-nothing services and facilities, overhauling the unemployment benefits scheme and toughening pension allowance requirements will hardly help to win voters’ support. Yet failure to do so will force future adjustments sooner than expected. If Spain wants to avoid a full-fledged intervention, it has to act swiftly. Tomorrow, it might be too late.

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About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.