Editor’s note: This article was first published in November 2011, the day after the general election: risk premium near 500 points, nearly 5 million unemployed, a European Commission deficit forecast of 6.6% of GDP for 2011, Rajoy’s targets of 4.4% (2012) and 3% (2013), and forecasts of 5.5 million unemployed. All have been superseded.
The risk premium keeps rising, now close to 500 points, and European stock markets are falling. This very morning we learned that several Chinese funds have pulled their exposure to Spain, and that’s not good news. Mariano Rajoy faces a difficult task after his absolute-majority victory. On one side there are nearly 5 million unemployed people waiting for a job, and on the other a market hungry for swift, decisive measures.
Even before 20N (the general election of 20 November), we were already announcing that Europe was officially in recession, and now there’s also Moody’s threat to downgrade France’s rating because of its heavy exposure to Greece. So let’s talk about the “bull” that Mariano Rajoy has to face in Spain.
The European Commission takes it for granted that Spain will miss its deficit target in 2011, 2012 and 2013. For this year, it estimates that the hole in the public accounts will stand at 6.6% of GDP, six tenths of a point above target. Everything suggests the hole could reach 7.5% of GDP, which would force cuts of 30 billion euros, while Freemarket says the deficit will be 8.3% of GDP, after growing by 264 billion euros between 2007 and 2010.
Rajoy has committed to bringing the deficit down to 4.4% by the end of 2012 and to 3% in 2013. To achieve this, the new government will not only have to tighten its belt but also make sure the autonomous communities (Spain’s regional governments) do the same.
The markets’ lack of confidence in Spain is making its debt more expensive to service, and next year 330 billion euros of debt falls due, according to PricewaterhouseCoopers. Of that total, 120 billion corresponds to the banks, 30 billion to companies, 150 billion to the Treasury and 20 billion to the regions.
This situation is unsustainable, and not only for the Spanish economy. It would be for any country, which is why Mariano Rajoy has already announced that he will take measures many Spaniards won’t like. They will come in the form of cuts of all kinds, although Rajoy has also said he will “cut everything” except pensions, education and health. Simply keeping that promise would be a real achievement, since the markets are calling for adjustments to pensions, education and health to reduce the public deficit.
Cleaning up the banks, “reviving” credit and dealing with toxic assets will be a pipe dream for any politician over the next 4 years.
Experts predict that by the first quarter of 2012 Spain could easily reach 5.5 million unemployed, although Rajoy has stated that by the end of his term Spain will be creating jobs in a sustained and stable way.
I wouldn’t like to be in Mariano Rajoy’s shoes right now because, as we argued in previous articles, whatever the political colour of the government, the economy is heading towards negative growth, and there’s little a country can do when we’re talking about a global crisis.
If Spain manages to improve its situation over the next 4 years, I admit I’ll be the first to be surprised, as it wouldn’t be the logical outcome from an economic point of view; but in this case, the last word belongs to Mariano Rajoy. Good luck to him, because if there’s one thing he’s going to need, it’s luck.
Featured image: Partido Popular de Cantabria, CC BY 2.0, via Flickr.
