Thread: Spain faces unrest as new austerity plan is announced

Spain faces unrest as new austerity plan is announced

By Anita Brooks in Madrid
Thursday, 13 May 2010
REUTERS


Spanish Prime Minister José Luis Rodriguez Zapatero prepares to announce the unpopular cuts yesterday

Under pressure from Brussels and the White House, Spanish Prime Minister José Luis Rodriguez Zapatero made an about-turn yesterday, announcing a barrage of painful measures to curb his country's ballooning deficit.

The new austerity package – aimed at averting a bigger version of the Greek crisis, but likely to anger the Spanish unions – includes a 5 per cent pay cut for Spain's 2.5 million public sector workers this year, scrapping the €2,500 (£2,100) "baby cheque" for new mothers and a €6bn cut in public investment.

Spaniards surviving on minimum pensions kissed goodbye to promised cost-of-living increases yesterday, while unpopular cuts to state medical expenditure, payments to people caring for elderly parents and international development projects were also announced. Mr Zapatero said government ministers would take a 15 per cent pay cut whilst also hinting that he would raise taxes for the wealthy.

The measures, he said, would save €15bn and reduce the deficit – which last year shot up to 11.2 per cent of GDP – to 9.3 per cent this year, 6 per cent next year and 3 per cent by 2013. Data published yesterday showed that the Spanish economy had grown for the first time in nearly two years in the first quarter of 2010, but only by a measly 0.1 per cent.

"We are going to ask for a greater effort by everyone – by Spanish society, the citizens, and also by the government – and we will ensure that it is fair and justified," Mr Zapatero said. "We need to make a singular, exceptional and extraordinary effort to cut our public deficit, and we must do so now that the economy is beginning to recover."

In an attempt to allay the fears of unions and his home constituency, the Socialist Prime Minister stressed that despite the new austerity measures, "the pillars of the welfare state will remain untouched".

Until now, Mr Zapatero has managed to avoid the type of unrest that has brought thousands on to the streets of Athens, despite a unemployment rate of 20 per cent and an earlier round of austerity cuts. This was in part because he managed to preserve social benefits and protections in the face of repeated calls by economists and business leaders for labour reform.

Following yesterday's announcement, however, union leaders issued veiled threats of taking to the streets. "The behaviour of the trade unions has been and is impeccable during these times of crisis and will continue to be so, but [yesterday's] announcement is a turning point," Ignacio Fernandez Toxo, president of one of Spain's largest trade unions, told reporters. He said he expected citizen reaction to be "massive". The union leader warned that cuts in salaries and pensions would be counter-productive to Mr Zapatero's objectives, because they would dampen consumption and cause even more unemployment.

But Brussels welcomed the Prime Minister's belt-tightening plan. The European Commissioner for Economic and Monetary Affairs, Olli Rehn, said that the measures "seem to go in the right direction" and that he expected similar announcements soon from Portugal. EU Competition Commissioner Joaquin Almunia, a one-time Socialist leader from Spain, called the cuts "a logical step" that is necessary "to avoid greater evils in the financial markets and emerge from the crisis sooner".

It is likely that the measures have also pleased the White House. US President Barack Obama had called Mr Zapatero the day before his announcement to discuss the importance of "Spain taking resolute action as part of Europe's effort to strengthen its economy and build market confidence".

In a parliamentary debate after Mr Zapatero's speech yesterday, his political rivals chided him for letting the economy deteriorate to the point that Washington and Brussels had to prod him into action. "They got Zapatero to see the light," said Mariano Rajoy, leader of the opposition Popular Party.

But Mr Zapatero's political allies expressed dismay at his plan. "It is the weak who are paying," said Joan Herrera of the Left Green Party. Spain's ruling Socialist Party has been trailing in polls against the conservative Popular Party – but not by much because of a corruption scandal involving high-ranking opposition leaders and voter distrust of Mr Rajoy.

Yesterday's austerity measures came after the EU and IMF deal at the weekend to set up a $1 trillion emergency fund for weak eurozone countries pummelled by debt crises. After Greece, Spain and Portugal are seen as the next two weakest links among the 16 countries that use the European single currency.

Hola! austerity

11.2 per cent Size of Spanish deficit at end of last year.

20 per cent Current rate of unemployment in Spain.

5 per cent Size of the pay cut civil servants will have to take.

http://www.independent.co.uk/news/world ... 72211.html

EU imposes wage cuts on Spanish 'Protectorate', calls for budget primacy over sovereign parliaments

Spain has followed Ireland and Greece in imposing 1930s-era wage cuts to slash the budget deficit, complying with EU demands for further austerity in exchange for the €720bn `shock and awe’ rescue for eurzone debtors.

By Ambrose Evans-Pritchard, International Business Editor
Published: 11:15PM BST 12 May 2010

Comments 165

Premier Jose Luis Zapatero told a stunned nation that public sector pay will be reduced by 5pc this year and frozen in 2011. "We must make an extraordinary effort," he said.

Pension rises will be shelved. The country’s €2,500 baby bonus will be cancelled. Aid to the regions will be slashed and infrastructure projects will be put on ice. Mr Zapatero’s own monthly pay will fall 15pc to €6,515.

Ambrose Evans-Pritchard: Europe's nuclear rescue of the euro Mariano Rajoy, the conservative opposition leader, said years of ostrich-like denial by the Zapatero team had reduced the country to an EU "protectorate".

Commission president Jose Barroso unveiled plans for EU control over national budgets, including an incendiary demand that Brussels should vet budgets before their first reading in Westminster, the Bundestag, and other parliaments. Current account deficits and credit growth will be monitored. Brussels can imposing sanctions on states that let booms run out of control. "We must get to the root of the problems," he said.

Such a plan would greatly improve the working of the EMU system, but it would also entail a drastic erosion of sovereignty. The intrusive surveillance is a wake-up call for states that have tended to view the euro as a free lunch.

Mr Zapatero - who long prided himself on being an "anthropological optimist" - plans to cut the deficit from 11.2pc to 6pc of GDP this year, with further cuts next year. The fresh move is to placate bond vigilantes and to calm German fears that eurozone discipline is breaking. He has already raised income taxes and lifted VAT from 16pc to 18pc.

US President Barack Obama played a key role behind the scenes, pleading with Mr Zapatero for "resolute action". The telephone call from the White House is a clear indication that contagion from Greece and Portugal to the much larger debt markets of Spain had become a global systemic threat by late last week.

"The markets were going in for the kill: the eurozone itself was on the brink of collapse," said Jose Garcia Zarate from 4Cast. The austerity package has gained time but investors are eyeing the response of the Spanish people.

"Just months ago the government said it would never cut wages, so this is a very humiliating U-turn. There will be protests, but we don’t know yet whether there will be a general strike," he said.

Spain’s UGT union federation warned of "social conflict" and vowed to inflict "maximum punishment" on the government. However, the nation as a whole has so far handled a property slump and a rise in unemployment to 20pc with stoicism, befitting the tradition of the Spanish-born Stoic philosopher Seneca.

Javier Perez de Azpillaga from Goldman Sachs said Spain has climbed rapidly up the technology ladder. Its exports have grown faster than those of Italy or France. It has a low public debt of 53pc of GDP, but a "highly leveraged" private sector. Real estate companies have debts of €445bn, or 45pc of GDP. "Banks may not be able to recoup large parts of these loans. These losses will have to be recognized eventually, bringing down many institutions and forcing the government to recapitalize them," he said.

The `Cajas’ -- public sector banks -- have assets of €1.3 trillion and account for most mortgage debt. Many are struggling. The saving grace is that the two giants, Santander and BBVA, have global portfolios and are in "excellent shape".

Caixa Catalunya said the stock of unsold homes in Spain reached 926.000 at the end of last year, equivalent to 6.5m in the US. It expects the market to touch bottom this year with real falls of 20pc to 25pc from the peak. Spanish households have been able to draw on a very high savings rate of 17.9pc to absorb the shock .

Spain’s wage cuts amount to an "internal devaluation" within EMU. Stephen Lewis from Monument Securities said the EU is pushing a clutch of countries into contractionary policies at the same time. These will feed on each other, creating a deflation bias across the region akin to the 'Gold Bloc’ in the 1930s.

"It is not a viable policy. Weakening demand will cause the tax base to shrink. If the population could see light at the end of the tunnel, they might put up with it, but there is no light: it is a long dark passage leading nowhere," he said.

The EU cites the Irish austerity plan as a model, but Ireland has an open economy with a dynamic export sector, and may be sui generis. In any case, Ireland’s nominal GDP has fallen 18.6pc, without a commensurate fall in debt. Ireland is not yet safely out of its debt-deflation trap.

http://www.telegraph.co.uk/finance/fina ... ments.html