‘Politically bankrupt’ Rajoy running out of options in Spain

Speigel International earlier this week described a bit of the hopelessness of prime minister Mariano Rajoy who, only eight months into a government that was supposed to allow Spain to turn the corner, is watching his country sink even further into crisis.

Read it all, but this part, in particular, struck me as particularly insightful:

For too long, the prime minister believed that his mere presence at the head of the government was enough to ensure that Spain would stop “being a problem and become part of the solution.”

Rajoy’s bet was that a win by his center-right Partido Popular (PP, People’s Party) over the center-left Partido Socialista Obrero Español (PSOE, Spanish Socialist Workers’ Party) would be enough to assure investors that Spain could make it through the crisis. Sure enough, Rajoy’s PP won 186 seats to just 110 for the PSOE, even after José Luis Rodríguez Zapatero, prime minister since 2004, made clear he was stepping down as prime minister.

But that hasn’t stopped the crisis — if anything, Spain’s nightmare has accelerated in the past eight months, which makes Spiegel‘s description all the more depressing:

And what has Prime Minister Mariano Rajoy done? He hasn’t given a television address or uttered so much as an explanatory or reassuring word to Europe or his people. Instead Rajoy, 57, has disappeared into his office at the Moncloa Palace on the outskirts of the capital Madrid. Some say that he spends his time there staring helplessly and powerlessly at charts. He meets with business leaders like Siemens CEO Peter Löscher in rooms decorated with modern art, and he has even met with Spanish trade union leaders for the first time, though it was after they had already spoken off the record with German Chancellor Angela Merkel. Others say that Rajoy is irritating his European partners with hectic phone calls.

This behavior doesn’t inspire confidence. It seems more like a declaration of political bankruptcy.

What went so wrong?

After all, here was a government that would do whatever it takes to bring down yields on Spanish debt!  With much bravado, Rajoy promised that his government would never stoop to any sort of bailout.

Part of the problem is that the prior government wasn’t exactly profligate — it was already addressing Spain’s budget problems.  Although Zapatero’s government (and the PP government of José María Aznar before it) did nothing to stop the credit-fueled real estate boom in the 2000s, it was more responsible with its budget than many of its eurozone neighbors — from 2004 to 2007, the Spanish government actually ran a budget surplus.  Only when the boom ended and tax revenue declined did the budget slip into deficit — even then, Zapatero’s government moved quickly to raise certain taxes and start cutting Spain’s budget.

With Spain’s unemployment rate at an European high of 24.8% (it’s climbed nearly 3% in just the eight months of Rajoy’s government), and with Spain’s economy shrinking by a projected rate of 1.8% this year alone, it’s clear that Spanish voters were punishing Zapatero for a worsening economy.

If anything, Spain has proven too good a pupil — the budget cuts and tax hikes have exacerbated the Spanish recession, which had always been much worse than the rest of Europe’s.  As the recession worsens, and tax revenues continue to plummet, the budget gap has only widened, leaving Spain in an untenable position notwithstanding who’s running the government.

The latest crisis point comes even as the Rajoy government seems resigned to pushing for more cuts to the Spanish social safety net.  As The Economist notes this week:

Since [the Rajoy government took office,] Spain has, broadly, been as good as its word and Mariano Rajoy’s government has cut budgets, freed its labour market, played its part in countless “make-or-break” summits in Brussels and secured up to €100 billion ($121 billion) to prop up its banks.

Back in June, when Spain turned to the European Union for the bailout to shore up its domestic banks following the Bankia crisis, it seemed clear that Spain had done all the “right” things to assuage the bond market — unlike Greece, it was working hard to narrow its budget deficit.  Indeed, the EU seemed to acknowledge that during the Bankia crisis by taking a step closer towards eurozone banking union in allowing the European Stability Mechanism to inject funds directly into eurozone banks rather than loans via domestic governments.

Now, though, Spain seems inevitably on course to require a bailout in respect of its own bottom line.  Although the 10-year rate on Spanish bonds has fallen from its high of nearly 7.75% last week, it remains, as of today, still above the 7% mark — way too high for a country in a recession.  Everyone assumes that the next crisis point will come when Europeans return from August holidays.

What all of this means for Spanish politics remains unclear, although early elections now seem a possibility.  That both major Spanish political parties are sullied by the realities of budget-cutting has brought faint whispers of a return to Franco-style authoritarianism.  That seems too alarmist by far — Spain has worked long and hard over the past 35 years to build a democratic and pluralistic nation.

More likely? If (or when) Spain does seek a bailout, it is not difficult to imagine that such a 180-degree contradiction by Rajoy would result in his resignation in favor of a technocratic government — like that of Mario Monti in Italy (although Spain does not have the same tradition of technocratic governments as Italy does).  Any such government would likely require the support of both the PP and the PSOE and might perhaps buy enough time for Spain to pull out of recession and reduce its debt pressure.

If not, that approach, too, runs the risk of enabling more radical and Euroskeptical voices in Spain, to say nothing of regional autonomist parties in the Basque Country and Catalonia.

With Greece potentially running out of money later this month and another fraught election in The Netherlands over budget austerity on September 4, we may not have to wait long for the next chapter.

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