Rajoy’s poll loss no ground for wavering on reform

March 27, 2012

By Fiona Maharg-Bravo

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

International markets shouldn’t normally care about who wins the local elections in Andalucia. But the elections on March 25 were important enough for Spain’s Prime Minister Mariano Rajoy to delay the announcement of the 2012 budget until after they were held. The tactic didn’t work. The ruling People’s Party failed to get enough votes to govern, confounding opinion polls. But for the government’s reform drive, it’s a setback more than a disaster.

The PP was always going to be a tough sell in a region that has been under socialist control for decades. The conservatives came out ahead, but fell short of the majority needed to govern. The left may now form a coalition government in Spain’s most populous region, the third-largest in terms of GDP, with 14 percent of the country’s total. In practice, this makes it less likely that Andalucía will cut its deficit by more than half this year to meet the 1.5 percent regional deficit target set by the central government. The Andalucian Socialists had already rejected it.

The risk for Rajoy is that other regional barons feel emboldened by his Andalucía setback. The PP still governs in the majority of the regions, but two of the three largest economies – Catalonia and Andalucia – will now fall outside the its control. Regions accounted for two-thirds of Spain’s budget deficit miss last year.

The delay in this year’s budget has eroded the mandate Rajoy was given by the PP’s results in last November’s general elections. The government has already undertaken some important reforms. And its labour market proposals were tough enough for the unions to call a general strike for March 29.

But the real political battle is yet to come. It will centre on who shares the austerity pain. The government must cut the budget deficit by 3.2 percent of GDP between 2011 and 2012. In the current recession, Funcas, the savings bank research foundation, reckons the actual adjustment would be close to 55 billion euros in spending cuts or tax hikes. That’s more than 5 percent of this year’s GDP – a feat which some economists have dubbed “mission impossible”.

The government still has absolute majority in parliament and so can push through difficult decisions. It should try while it’s still possible.

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