Spain took center stage this week in the seemingly unending drama that is the European debt crisis. The streets were rocked with violent protests, and many in the wealthy region of Catalonia are looking to unhitch themselves from Madrid’s control. The increasingly unpopular Prime Minister Marino Rajoy announced the latest federal budget would be heavier on spending cuts than on tax increases in an effort to fend off asking for a bailout from the European Union. Markets remained skeptical, with the yield for Spanish 10-year bonds headed into the danger zone of 7 percent yields.
Banks aren’t going to continue lending money to the Spanish government unless they believe real reform is on the agenda. Incurring more debt, whether from the open markets or the European Central Bank, will not put Spain back on a path toward prosperity. The country urgently needs pro-growth policies, as unemployment has risen by 3 percentage points this year, leaving a full one-quarter of the working population unemployed.
Those are crisis-level numbers requiring more than just tinkering around the edges to resolve. Unfortunately, despite some favorable elements, Mr. Rajoy’s latest budget is afflicted by all-too-common political myopia. Core spending, excluding interest payments and social security, is indeed expected to fall by just over 7 percent, or $16.7 billion. The bad news is that overall federal government outlays will still increase by 5.6 percent due to the growing cost of servicing the national debt. Another piece of bad news is that a significant part of the deficit reduction will be financed by implementing a 15 percent increase in the value-added tax — a consumption tax, which is intrinsically regressive. The country’s 17 autonomous regions will also have to come through with another $6.5 billion in spending cuts.
Despite this, Mr. Rajoy is resisting appeals for him to seek a bailout. The European Central Bank will likely step in and start buying Spanish bonds under its new expansion of authority. A bond-buying program will bring down bond yields and reduce the cost of debt servicing. That might be enough to avoid the need for an all-out bailout, something that would be exceedingly expensive considering Spain is the EU’s fourth-largest economy.
At the same time, Madrid is facing Catalonia’s calls for secession. The Spanish constitutional court recently struck down enhancements in home rule, on petition from Mr. Rajoy’s administration. The Catalonian regional government responded by setting a snap election in November, an election that could easily turn into a referendum on secession.
Whether Spain splits into multiple regions or stays united, simply fiddling with fiscal numbers while continuing to borrow will not resolve the underlying reasons for Spain’s stagnation. Like every country in Europe — and the United States as well — Spain needs to turn off the spending spigot. It also needs to scale back job-killing regulations and cut its intrusive government. Until it addresses these fundamental problems, Spain will remain in perpetual crisis.
The Washington Times