Only a political suicide or national unity government can save Spain and the euro

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Spanish Prime Minister Mariano Rajoy is caught between a rock and a hard place. On the one hand, his voters are being bled dry on all sides. At the same time, an impatient EU is piling on the pressure to inflict even more pain at speed. It is a difficult balancing act for Rajoy, who needs his voters to believe that he has their best interests at heart under relentless pressure from the markets and the EU, writes Andy Langenkamp.

Andy Langenkamp is a political analyst for ECR Research and Interest & Currency Consultants.

"Only a political suicide or national unity government can save Spain and the euro. The markets have lost faith in the Spanish economy as jobless rates and budget deficits are high, banks are wavering and households are vulnerable. The government's reform programmes have not done much to restore confidence.

Perhaps last week's €65 billion package could be the tipping point, but the markets don't seem convinced. Their suspicions are partly justified as earlier programmes were not implemented to a sufficient degree. That the wounds continued to fester recently forced Madrid to go cap in hand to its European partners.

Obviously, Prime Minister Mariano Rajoy is aware that the situation is very precarious. Contrary to his electoral promises, he has raised the sales tax and announced other sweeping (and very painful) cutbacks. 

Two questions are very important.

Number one, will the 17 autonomous regions cooperate with the central government? They have extensive powers. For instance, they are responsible for education and the regional infrastructure.

A large part of Spain's debt was actually run up by the regional governments yet the central government provides most of their income. There have been a lot of complaints in the regions about footing the bill for reforms as Madrid sends them less money. Particularly the richer regions are very unhappy.

The relationship between Madrid and the regions has always been tense; even more so now. This is no surprise. Nowhere else in Europe or North America is so much money transferred between regions as a matter of course.

Clearly, the Spanish provinces fear that the central government will use "their money" in order to reduce its deficits, which will reflect badly on them and could strengthen Madrid's grip. Such fears mean that around 40% of the people in Catalonia say they want to secede from Spain. That is to say, Rajoy has his work cut out to get the regions to balance their books instead of being at each others' and Madrid's throats.

Number two, has Rajoy seen the light and will he have enough time to effect changes? Spain's weakening economy is badly equipped to cope with the fallout of a fresh round of reforms and spending cuts and is at risk of going under.

A more flexible job market is a good thing in the long run and the same applies to a higher sales tax. However, measures to achieve this will send jobless rates higher and undermine consumption in the short run. Spain might not be able to recover from such setbacks, also because young people and those who are already vulnerable will be hit hardest.

This will increase dissatisfaction and destabilise the country further yet frustration is already high. Last week's protests and violence are a bad sign.

Rajoy is caught between a rock and a hard place. On the one hand, his voters are being bled dry on all sides. At the same time an impatient EU is piling on the pressure to inflict even more pain at speed. It is a difficult balancing act for Rajoy, who needs his voters to believe that he has their best interests at heart under relentless pressure from the markets and the EU.

He also needs to get the EU off his back or he may be replaced by EU technocrats. When all is said and done Rajoy's choices are limited. Either he helps to save the euro and will be voted out of office, or he plays a part in blowing up the euro.

Yet Rajoy has not been elected on a programme to do everything within his power to rescue Spain and the euro. There is only one potential way out.

Eventually, he could aim for a government of national unity that is supported by the unions as well as employers and sets aside all political differences. This happened in 1977 when the so-called Moncloa pact helped to shield Spain against a return of the military dictatorship as it contained high inflation and substantial deficits.

However, if Rajoy believes he can lean back and count on his comfortable parliamentary majority and the regional governments (dominated by his party), such a pact will remain a mirage.

In that case, Spain will continue to be at the mercy of the markets and the officials of the EU, ECB, and IMF. The latter may well find that they have bitten off more than they can chew."

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