In yesterday's State of the Nation address, Prime Minister Mariano Rajoy did not overpromise a thriving recovery and give false hopes that the worst has passed. It is true that a lot of work remains, and unfortunately the economy has probably not bottomed out. Still, Spain should turn the corner in 2013 and begin a long road to recovery.
This news shouldn't let us lose sight of the current unemployment crisis, which is the nation's worst problem and will continue to rise for several months. Borrowing words from Rajoy, "Today we have the future in sight when a year ago this was not the case." Rajoy gave his first State of the Nation address with many people wishing against him -- a major challenge. But he rebounded by offering up a dose of realism and the announcement of stimulus measures and plans to fight corruption. The business world was happy with the news of a 45-billion euros injection of cash into the Spanish economy through various measures. The bulk of this injection -- 32 billion from the ICO (a state-owned bank attached to the Ministry of Economic Affairs and Competitiveness) and the cleaned-up banking sector -- will go toward small- and medium-sized businesses that need the funds to pay for jobs and create growth. Rajoy also outlined a plan to make sure that VAT taxes are not charged until invoices are collected. This initiative will start in 2014 and will benefit 2.3 million small- and medium-sized businesses and self-employed workers. It will give these companies and workers the funds to contract young employees with a 50-euro flat tax for the first six months of work. All of the measures combined, which are going to be very helpful, should not let us forget that we need to carry out the structural reforms that are still pending. This is the case for reforms to government employment and the tax and pension systems. Rajoy hardly mentioned these reforms in his speech, although they are critical if Spain wants to rebuild its economy.
The markets responded to Rajoy's announcement that Spain's deficit was less than 7% at the end of 2012 by pushing the risk premium down to 353 basis points. Investors seem to accept the 7% ratio even though Spain did not meet the 6.3% ratio it had agreed on with the EU given the depth of the recession and unexpected government spending cuts. More cuts will have to be made if Spain wants to reach the 3% previously mandated by the EU, and even though its time frame for meeting this goal will be extended this Friday, the road toward that goal will be long and paved with cutbacks. In 2012 the Social Security system will continue to struggle and some regional governments will not be able to keep putting off their debt payments if they cannot successfully collect enough revenues from the Impuesto sobre Sociedades tax levied against major companies last year. Despite this risk, Rajoy thinks that the "worst threat to a recovery is dissolving before our eyes." But a request for aid will ease the debt load and yesterday Standard & Poor's said, "an aid package would help the reforms to succeed." Corruption was also a part of the speech. Rajoy did not mention Bárcenas or the ex-treasurer fiasco specifically, but he did offer proposals to fix corruption generally. He also said he was open to discussions with Catalonia that "cover everything there is to talk about" including a fiscal agreement. The Prime Minister was in top form considering the circumstances. He did not balk at Spain's tough economic condition and offered the parliament initiatives that could steer the country on a positive course.
