Yesterday, the Eurozone leadership granted Spain some allowances on its austerity program, with the budget targets eased for this year and next. But getting to those targets would still require further austerity measures, and Spanish PM Mariano Rajoy announced them today.
Recession-plagued Spain unveiled new austerity measures on Wednesday designed to slash 65 billion euros from the public deficit by 2014 as Prime Minister Mariano Rajoy yielded to EU pressure to try to avoid a full state bailout.
The conservative leader announced a 3-point hike in the main rate of Value Added Tax on goods and services to 21 percent and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition.
“These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billions of euros,” he told parliament.
Analysts said the draconian savings plan, tearing up several of Rajoy’s campaign promises, showed Madrid was already under de facto supervision from Brussels even though it has not requested a sovereign bailout and retains access to bond markets. Some said the tax increases could exacerbate the recession.
Many rejoiced when austerity measures were not demanded as part of the bailout of Spanish banks. But as seen here, they don’t have to be. The fiscal pact among EU member states still controls, and that asks for deficits within 3% of GDP by 2014. So Rajoy will accommodate.
Meanwhile, in addition to the budget, the banking system is now out of the purview of the Spanish government. Eurozone institutions, in exchange for a €100 billion bailout, will supervise Spanish banks, and junior bondholders will likely take the losses.
So we have another case of a sovereign country losing their authority in the wake of a debt crisis. If that were matched by a real fiscal union that helped countries like Spain back to economic health, it would be one thing. But forcing austerity on a country already in the midst of massive unemployment, hitting 24.4%, makes no sense whatsoever. This combines the worst elements of federalism without any of the fiscal transfers that smooth over economic performances across member states and make things more palatable. And the people know it – expect massive strikes and protests in reaction to this announcement.
Rajoy also announced plans to privatize a number of port, aviation and rail assets, part of the selling of the public assets that has been prevalent in the crisis. The taxes hit consumption and energy rather than income and labor, but they still fall mostly on the middle/lower closses, even though there’s at least a mix of taxes and spending rather than falling entirely on the spending side of the ledger. But the circumstances dictate that this will do nothing but further depress the Spanish economy, by lowering the purchasing power of the great majority of citizens. The International Labor Organization notes that continued austerity in the Eurozone will cost the region 4.5 million jobs over the next four years.
The European Commission cheered the new Spanish program, because they are apparently also sadists.