Opinion

Hugo Dixon

Rajoy’s ploys risk stoking cynicism

By Hugo Dixon
March 19, 2012

At a dinner in Madrid earlier this month, the main complaint about Mariano Rajoy was that the new prime minister was treating the electorate like children. Many of the guests, supporters of Rajoy’s Popular Party (PP), understood that Spain had to cut its fiscal deficit and restore its competitiveness. But they didn’t like the fact that the prime minister hadn’t been frank about his plans.

In advance of last November’s general election, Rajoy said he wouldn’t raise taxes, make it cheaper to fire people or cut the welfare state. But he has now done the first two. After this week’s election in Andalusia, Spain’s largest region, he is expected to do the last.

Rajoy’s camp doesn’t see any problem in failing to be upfront. It would have been foolish to talk too much about austerity in the general election campaign as that might have frightened the voters. For the same reason, it would be foolish to tell them about reforming the welfare state in advance of the Andalusia election.

In the long run, the failure to treat the population like adults could cause trouble. But in the short run, the strategy has paid off. The socialist party lost nearly 40 percent of its votes in the general election, not least because it had done a poor job in government. It is now expected to lose control of Andalusia, its last main bastion, according to an opinion poll by Metroscopia.

Rajoy has already used the absence of any serious opposition – even a general strike called for next week doesn’t pose much threat – to push through one batch of reforms. The most important is of the labour market. He has made it cheaper for companies to fire people and largely dismantled the nationwide system of collective bargaining. The net effect will be that wages, which rose rapidly during the early years of the single currency, will fall – so restoring Spain’s competitiveness.

Between end 1998 and end 2009, Spain’s unit labour costs rose 38 percent, compared to 23 percent for the euro zone as a whole. In the past two years, they have come down 4 percent. The latest labour reforms could cut wages another 5 percent this year, according to Fernando Fernandez, economics professor at Madrid’s IE Business School. If the trend continues for another year or so, Spain will no longer be out of kilter with its euro peers.

The other main reform – cleaning up toxic loans from banks’ balance sheets following the country’s real-estate bubble – has had more mixed reviews. The government has told the industry to take provisions and stash away capital to the tune of 50 billion euros. While the number sounds high, the detailed rules mean many banks won’t need to raise capital and some of the rest could have nearly two years to do so. The government itself has been reluctant to put any more of its own money into banks. So it is trying to push weak banks into the arms of stronger ones and fill any capital shortfalls with guarantees from an underfunded deposit insurance scheme rather than with real cash.

The litmus test of whether this financial jiggery-pokery works will be whether banks are able to borrow in the markets and are then willing to support economic recovery by lending to businesses and consumers. There are some positive signs: Santander last week issued 1 billion euros in five-year senior debt. But most of the industry is still relying on handouts from the European Central Bank.

Rajoy’s second blast of reforms will be about putting the public finances onto a sustainable basis. In 2011, the budget deficit hit 8.5 percent of gross domestic product. Spain last week reached a deal with its euro zone partners to cut it to 5.3 percent this year. Although this is not as severe as the 4.4 percent originally pledged, it will still constitute a severe squeeze. What’s more, the government remains committed to bring the deficit down to 3 percent next year.

The prime minister has already given some ideas about what he will do. Income taxes were raised and some spending cut in an emergency budget just before the New Year. Rajoy is also putting in place a straitjacket to control the borrowing of the country’s profligate regional governments. If he wins this week’s Andalusia election, he will be in an even better position to impose his will as the vast majority of the regions will then be under the PP’s control.

But more will be needed. The regions, which are responsible for education and healthcare, will probably be allowed to charge people for part of the cost. And Rajoy will have to cut the number of public-sector employees and increase taxes further in next week’s budget.

Economically, this is logical. The concern is that Rajoy’s failure to be frank with the electorate could increase its cynicism. The people already have little trust in politicians of all stripes. Witness last year’s indignado movement, when hundreds of thousands of protestors took to the streets to complain.

This won’t matter if the economy, which the government expects to shrink 1.7 percent this year, stabilises next year. But what if GDP keeps shrinking, unemployment (now 23 percent) continues rising and the deficit remains stubbornly high? Spain would face renewed bond market jitters and further pressure from its euro partners to cut its deficit. Rajoy would then have to sell another dose of austerity to voters that wouldn’t believe him. Having treated them like kids, they might even throw a tantrum.

Comments
3 comments so far | RSS Comments RSS

Dear Mr Dixon,
Had he been frank before the election, he would not have been elected. Democracy is the problem!

Posted by nossnevs | Report as abusive
 

With unemployment at 23% (Spanish youth at 50%), Spain’s options are few. The euro just exacerbates the problem because the state of the Spanish economy is not reflected in the value of their currency. They can’t print money which leaves austerity as the only option. Spain is in a deep recession. Austerity will, in the short term, only make matters worse. The probability of a Spanish recovery in the near term is not encouraging. A default could be the tipping point for the euro. Whether or not the Spanish people resent being lied to will be of little consequence in the long run.

Posted by gordo53 | Report as abusive
 

Being lied to is of great consequence nowadays because Spanish people have become adults and they won’t forget it so easily as they have not forgotten other sad periods of their past history. Cynicism was already obvious during his campaign against the socialists and it is the right word for all the headlines related to Rajoy and his party. They’ve only been interested in leading the country and now there they are. However, what you are starting to see is how urban landscapes are changing: lots of small shops and business are closing or run by foreigners; people are buying the cheapest products they find in supermarkets, which will affect health in a not a very long term, with its consequent cost which will need further rising of health taxes, they are blind and unable to see it; quality of life is getting worse and inhabitants are cutting on consume and pleasures; the ones who work, work long hours under great pressure, and they are angry and they know that today’s general strike won’t change Rajoy’s abusing manners even though he’s going to make this country better. I wonder how will then Mariano and his gang of experts manage with a society that is depressed, exhausted and lacks any motivation. To be a good politician he should care for people’s happiness and wellbeing, and this is not, and won’t ever be, in his priority list.

Posted by miBARCELONA | Report as abusive
 

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