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Spanish report Spanish report
by Euro Reporter
2012-04-03 07:33:48
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Spain’s pain is not the solution

Spain’s economy, and the euro, are more at risk now than a week ago. This assertion certainly runs counter to general market impressions. The euro remains resilient and Spanish yields have fallen back a little. But that bright performance might have more to do with sheer relief in the investment community that the Spanish government bent to pressure and further slashed its budget while European Union finance ministers agreed to a so-called “firewall” against all the odds. What market reaction hasn’t taken into account is that Spain is probably even less equipped to meet its debt obligations than it was previously and the firewall will probably prove inadequate if ever tested. Prime Minister Mariano Rajoy may have won plaudits for his budget last Friday with an additional €27 billion of spending cuts and tax increases aimed at reducing Spain’s budget deficit to 5.3% of gross domestic product this year from 8.5% in 2011.

The cuts, which include a 17% reduction in spending by all ministries, will doubtlessly bring even more public-sector job losses in a country with a nearly 24% unemployment rate. A reminder of the severity of the slowdown in Spain came with the latest purchasing managers’ index for March, which fell to 44.5 from 45.0 in February. Any number under 50 represents economic contraction. With growth prospects likely to get even more dire, especially given that most other economies in the euro zone also face a slowdown, Madrid will likely find its austerity measures actually reduce tax income and its ability to meet debt obligations will be even more impaired. That means the risk of a sovereign debt default by Spain will become even higher. This has come as politicians essentially confirm that they are only prepared to do the bare minimum to stop Spain from going down.

At a meeting over the weekend, finance ministers agreed to let what is left of the existing European Financial Stability Facility run concurrent with the European Stability Mechanism, creating a €700 billion fund to that could be used to help other poor euro zone countries on the verge of defaulting on their debts. However, the fund–or firewall–has hardly been met with the enthusiasm that ministers might have expected. A breakdown of the contributions suggests considerable double-counting is contributing to the total. And, despite some initial positive sounds from the International Monetary Fund, there is no reassurance that other major lenders, such as the U.S. and BRIC countries (Brazil, Russia, India and China), will be any more willing to contribute additional funds to save the euro.

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Huge general strike as government enters deep crisis


It has taken less than 100 days for the Spanish government of Mariano Rajoy to go from being Europe’s arrogant newcomer, with his much-touted ’overall majority’, to being in the epicentre of the European crisis. Yesterday, it suffered the latest and most severe blow to it’s image of “stability” when well over 10 million workers joined a massive general strike against its policies. Such is the government’s spiral of crisis, that demonstrators who flooded the streets yesterday could be heard to chant “Mariano, at this rate you won’t reach the summer!”

The scale and strength of the strike surpassed that of September 2010, in all respects. Union figures put participation at an average of 77% of salaried workers, or 85% when ’obligatory’ minimum services are deducted. The strategic sectors of the Spanish economy were paralysed from midnight onwards. Union figures indicate that stronghold sectors of industry, transport, and agriculture witnessed rates of 97%, 95%, and 95% (excluding agreed ’minimum services’ – explained below) participation respectively, giving an indication of the scale of the mobilisations. Despite the government and capitalist media’s attempts to paint the mobilisations as weak, the real figures recorded by authorities often exposed the truth. For example, the data recorded by the Spanish Electricity Network indicate that energy consumption on 29 March equalled that of a public holiday, pointing to the blacking out of the pillars of the capitalist economy by this magnificent workers’ action.

All of the Spanish state’s regions saw generalised stoppages. However, the strike was especially solid in the Northern, more industrialised regions. In the Basque country, the strike saw the nationalist unions, which there organise the majority of activists, striking on the same day as the main Spanish trade unions, CCOO and the UGT, unlike September 2010, when Basque unions had refused to join the Spanish unions’ call (as has also happened vice versa on various occasions, such as in June 2011). This new unity in struggle was reflected in a 95% solid strike. 90% are said to have taken action in Navarra and the key industrial / port region of Galicia, and 89% and 82% respectively in Asturias and Catalunya, home of second city, Barcelona and with an economy bigger than that of Portugal. In many sectors, participation was dramatically up on that of the 2010 strike. For example, in Andalucia, the strike was twice as solid among public sector workers, as even the right-wing press was forced to acknowledge.

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Spain's finance minister sees 'no margin for error'


Spain's policy makers are wary that the high-risk budget overhaul deemed necessary to get the country's finances under control could damage its economy and its standing in international financial markets if things go wrong. "We have no margin for error," Finance Minister Luis de Guindos said during an interview Monday with The Wall Street Journal in his office. "From a budget perspective, the government is facing a lose-lose situation."

"If you don't make enough adjustments, markets will penalize you. But if you go too far, markets could also penalize you" due to concerns about economic growth, Mr. de Guindos added. Spain's new government Friday presented a 2012 budget with cuts valued at €27 billion ($36 billion) in order to slash its deficit to 5.3% of gross domestic product this year from 8.5% last year, a crucial part of its effort to shore up investor confidence in the fourth-largest euro-zone economy. After a second bailout deal for Greece in March, the focus in the euro-zone's long running debt crisis has shifted to whether Spain can slash its deficit while battling with a slumping economy and soaring unemployment, especially after surpassing last year's target by 2.5 percentage points.

The concern is that the cuts push the economy into a downward spiral that make debts increasingly difficult to pay off. In a sign of still high investor unease, the yield on Spain's 10-year bond was at 5.3% on Monday, little changed after a rise last week, and 3.5 percentage points over the German benchmark. The draft budget law will now be debated in Spain's Parliament amid rising public discontent over the massive scale of the cutbacks on a country already in economic recession. Unemployment, at more than 20% of the work force, has now topped 50% for younger workers. The government last week was hit by a general strike over its labour reforms that drew an estimated 800,000 people to protests, and union organizers have threatened more protests to come. The government predicts the local economy will contract 1.7% this year, a forecast Mr. de Guindos describes as "prudent, conservative," adding it should return to "slightly positive growth next year."



        
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