During the last weeks Mr Rajoy’s government has been engaged in a nasty tug-of-war with Britain over Gibraltar. An initiative seen by many observers as a mere smoke screen to deviate attention from the corruption charges eroding the ruling party. Confronted with a unilateral closure of coastal fishing waters to Spanish vessels, Madrid retaliated by stiff frontier controls. A move that prompted David Cameron to require a swift European Commission intervention.
Fearing being outflanked, Spain raised a number of complaints to Brussels ranging from fiscal opacity and money laundering to massive smuggling, areas where infringements can only be based on lack of co-operation by the Gibraltar authorities. A most nagging issue for Spain’s entrenched reluctance to recognise them: the first demand ever made for fiscal co-operation was only filed at the end of July. Thus, bringing the case to Brussels can backfire by reinforcing Gibraltar’s self-rule status.
Fortunately for Mr Rajoy, the economic outlook seems brighter. Recession might be over this quarter even if prospects for the coming year point to a rather sluggish growth. But having endured such rough times since coming into office last year, the shift in sentiment has been hailed as a revealing proof that the tide is at last turning back.
Yet, getting back to school from holidays might prove harder than expected. The budgetary performance is markedly lagging behind as deficit currently runs beyond its yearly goal. The scope to improve this poor record seems all too narrow, spending cuts proving harder to implement while further tax hikes might blow off the chances of an early recovery. Thus, Spain might indulge in a hefty fiscal deviation triggering fresh fears about the sustainability of its public finances. Public debt is over 90% GDP and no reversal in such trend is in sight for the coming years.
Potential contingencies from pension payments and banking salvages add an extra burden to that figure. Even if the financial reform overhaul has removed most bad loans to the real estate sector, impaired assets are increasing while margins are rapidly shrinking. Trouble might be looming for many credit institutions, with the State likely to act as a last resort bulwark and all too ready to foot the bill as the past record shows. No wonder any foreseeable financial imbalance is seen as a public liability.
To make things worse, the current easy liquidity window will not stay open for ever. As growth takes up in both sides of the Atlantic, interest rates will start an upside drive. Unless Spain puts under tight control its public accounts and accomplishes the ongoing adjustment in the private sector, reducing indebtedness and increasing competitiveness, it might be confronted with an adverse outlook next year. Getting stuck in judiciary or jurisdictional problems, can only turn away efforts from the pressing need to enforce sweeping reforms, vital for ensuring the economy gets back on track.