Spanish election fails to calm nervous markets

Rajoy, known as a cautious public administrator, wants to check the public accounts before revealing detailed economic plans Keystone

The centre-right Popular Party’s election rout of the ruling Socialists on Sunday has failed to curb growing market pressure on Spain.

Two economic experts outline to swissinfo.ch the challenges ahead for Prime Minister-elect Mariano Rajoy and his team, expected to officially take charge in mid-December.

Investors have been concerned that Spain could become the next country to need financial support from its European neighbours if its borrowing rates climb to unmanageable levels.

On Tuesday the average yield on a three-month bill more than doubled to just over five per cent from almost 2.3 per cent a month earlier. The interest paid on a six-month bill also rose to over five per cent from more than 3.3 per cent in October.

Roberto Scholtes is strategy director for UBS in Spain and Sergio Rossi is professor of macroeconomics and monetary economics at Fribourg University.

swissinfo.ch: How do you view the next 12 months for Rajoy and his team?

Sergio Rossi: The situation is dramatic for the new government. Finance conditions are becoming complicated. Savings banks are still recovering and the unemployment rate is very high, especially among young people.

Future austerity measures will be unpopular and probably result in new protests.

swissinfo.ch: What are the first new economic measures we can expect?

Roberto Scholtes: There is strong pressure from the markets, which makes it urgent to restore confidence and implement larger economic reforms. From our contact with key Popular Party officials and think tanks we believe the new government will go in that direction and it’s likely to present a new royal decree with relevant measures before Christmas.

swissinfo.ch: The markets have not been that kind to the Popular Party since its victory.

R.S.: The markets will wait to see the measures taken by the new government. But we shouldn’t forget that Italy and Greece are also undergoing adjustment processes.

The risk premiums do not simply depend on news from one single country or on individual decisions. For the moment neither Spain nor its European neighbours are in charge of their own destinies.

But we have to look at the whole picture. It’s true that securing funds is becoming more expensive for Spain. Last week interest rates on ten year bonds rose to seven per cent, the level at which Greece, Portugal and Ireland began to experience major problems to finance themselves. But you have to also look at how long these rate rises last. If it’s only a few months Spain will not be particularly affected.

swissinfo.ch: From the population’s perspective the main issue for the new government is tackling unemployment. What reforms should be made to labour laws?

R.S.: They should reduce the dual situation of having workers on fixed and temporary contracts. Temporary workers find it hard to get training and this is damaging to productivity and for the country.

Companies should be given incentives to hire such staff, and collective work agreements should be revised to make them more flexible and closer to the real needs of companies.

swissinfo.ch: What new austerity measures are likely?

S.R.: The new government will most probably slash public spending on social programmes such as unemployment and family allowance. We will also see a proposal for reforms to pensions to raise the retirement age.

Taxes are also expected to rise, especially VAT, and the government may transfer some responsibilities to the autonomous regions to reduce central spending.

   

It will also probably freeze public investment projects in the health, transport and education sectors and privatise some public firms to reduce the debt burden and deficit.

swissinfo.ch: But implementing tight fiscal measures when the economy is in recession can be very risky. Does Spain really need such severe reforms?

S.R.: I think the government should also explore alternative scenarios and design a series of measures to boost domestic demand. A first step would be to negotiate with its foreign creditors, such as French or German banks, over a rescheduling of debts to extend their maturities beyond 2015 and also to renegotiate the interest rates.

This will allow the Spanish government some leeway internally. A programme of public spending directed towards productive investment would have a positive effect on domestic employment, and the overall economic situation.

swissinfo.ch: What public reaction can we expect to these reforms?

S.R.: The decisions taken by the government will be unpopular. They will have to implement them as soon as possible and this will surely increase social protests. Unfortunately, this dynamic will affect the performance of the Spanish economy well beyond next year.
 
R.S.: The measures will generate more discontent among the population. But such actions are required to stabilise the economy and ensure credit flows again.
 
Spain’s objectives should be medium rather than short term. If it achieves them, unemployment should begin to fall in 2013. For this to happen the medicine will be painful, but these reforms are necessary.

Spanish economy

During the 1990s Spain experienced a boom driven by the construction and real estate sectors and higher private credit and government debt levels.

The real estate bubble burst at the end of 2007. Coupled with low productivity and a complex international situation, this triggered an economic crisis and recession in Spain.
 
Today one out of every five Spaniards is unemployed. The high unemployment levels, and the national debt and financial crises led to early general elections.

On November 20 the conservative Popular Party (Partido Popular) swept to victory with 44.6% of the votes, ahead of the Socialist Party (Partido Socialista Obrero Español), which took 28.7%.

The Popular Party dominate the new congress with 186 of the 350 seats, compared with 110 for the Socialist Party.
 
The new prime minister Mariano Rajoy says he will form a government before Christmas to be able to announce a first package of economic reforms.

Six other countries have decided to announce early elections as a result of the ongoing economic crisis: Ireland, Portugal, Spain, Slovenia, Greece, Slovakia and most probably Italy.

Statistics

Unemployment: 21.5% of the population between 16 and 64, or 5 million people.

Growth: The economy is due to enter recession in 2012 when GDP will fall 0.8% but it is expected to pick up +0.4% in 2013, according to UBS.
 

Budget deficit: 11.1% of GDP in 2009 then fell to 9.3% in 2010. In 2011 the government has fixed a deficit target of 6% that will not be met.
 

Madrid told Brussels it is aiming for a budget deficit of 4.4% in 2012 and 3% in 2013. This will involve spending cuts of €20 billion next year.
 
Public debt: 65% of GDP in 2011.

(Translated from Spanish by Simon Bradley)