Earlier this week Spaniards were told to brace themselves for further austerity measures, as the Spanish government prepared for further tax rate increases and spending cuts to prepare the country for a potential bailout from the European Union. This was followed by clashes between protesters and police outside Parliament in Madrid after an estimated 6000 people took to the streets in response.
Spain is currently experiencing its second recession in three years, with a deficit reaching €50.1 billion, or 4.77% of GDP in August. The unemployment rate stands at 26% and now, like his former counterparts in Ireland and Greece, Spanish Prime Minister Mariano Rajoy has to balance domestic pressure to uphold Spanish sovereignty and demands from Brussels to shape up and accept a rescue package.
While Rajoy has stated he is willing to accept a second bailout, it would only occur if debt-financing costs remain too high and the strings attached are “reasonable”. Rajoy may be attempting to appease the Spanish public with show of sovereignty by pre-empting bailout conditions with structural reforms and spending cuts. After all, surrendering an element of financial and sovereign control to the unpopular troika of the International Monetary Fund, the European Commission and the European Central Bank could be potential political suicide for Rajoy.
Spain is part of the infamous PIIGS (Portugal, Ireland, Italy, Greece and Spain), a group of EU member states that have been the central focus of the eurozone crisis. However, the Spain stands out from the PIIGS for several reasons; unlike the Greek, Irish and Portuguese economies, it is not a small, peripheral economy and its ties to Italy (the EU’s third largest economy) means that a Spanish exit would have far more catastrophic impact on the EU than say, a Greek or Irish exit.
The Spanish government has tried to distance itself from the other members of the PIIGS by claiming it has been more fiscally responsible and until the eve of the global financial crisis in 2008, the Spanish government had managed to control its borrowing and maintain a balanced budget on average. Before the GFC, Spanish households were borrowing well beyond their means in the midst of a property bubble. House prices rose 44% between 2001 and 2008, and have since fallen by at least 25%.
This combined with the Spanish economy shrinking at an annual rate of 1% has forced the Spanish government to borrow heavily to deal with the effects of the collapse of the property boom, the recession and one of the worst employment rates in the eurozone.
The first bailout was designed primarily to help restructure the Spanish banking sector. It was believed that a rescue of the banks would stimulate the economy, however, the reality proved quite different as Spain is now looking toward a full-scale international rescue package. Earlier this year, the banks were sitting on an estimated debt of €180 billion and in August it was reported that bad debt had risen to a record 9.425 of total lending.
With German Chancellor Angela Merkel recently issuing a bleak warning that painful reforms are the only way forward for the PIIGS, it seems Rajoy is simply delaying the inevitable in an attempt to save his own skin. The Spanish story may differ slightly to previous tales of eurozone woe, but there still remains a level of uncertainty and short-sightedness to any new bailouts and further austerity measures.