The Spanish government is challenging the EU. Without discussing his decision with peers, Rajoy decided that he will adjust Spain's debt/GDP ratio objectives at a slower pace than Zapatero's government promised last year. Instead of meeting the 4.4% debt/GDP ratio that the EU is demanding for 2012, he plans to set Spain's target ratio at 5.8%, which for the time being will preclude further cutbacks to state spending and leave the weight of cuts to fall on regional governments.
The regional governments will have to reduce most of the 15 billion euros of their deficit. After most of the affirm that they are already at their limits, but still resist closing government-funded telecoms, what will happen if they default once more? This is a misguided strategy. Our credibility is already compromised by the last government and should not be jeopardized.
The current government has a critical mission to enact and enforce hard measures, but it is not making the most of its opportunities with such concessions. Rajoy should never forget Nixon's maxim: the political costs of half reforms and full reforms are always the same. The reality is that we are stuck in unsustainable spending patterns.
Before adjustments can be made, the economy needs to be cleaned up. And with an ambitious budget that starts from scratch, if possible. But the Cabinet is avoiding this work by withdrawing behind three defenses. First, it is arguing that the exact amount of cutbacks is not as important as establishing a means for tax consolidation.
Second, growth is also just as important as austerity. Third, expectations need to be trimmed. Still, the risk for turbulence has not disappeared. The economy could contract further. So the EU and the ECB will have to do more to foster investment and relax national debt objectives. But they should only require this from the countries that have the capacity. Spain is still not in this group. Rajoy was too quick to declare that Spain is credible.
