PART 4: Spain’s half-way house

Spain, like Greece, is in quite a perilous position. In 2011 it had the third-largest pile of debt in the eurozone, just after Ireland and Greece. Germany, wary of an ever-depleting bailout kitty, won’t give Spain the green light for unlimited and unconditional financial support.

In Spain, prime minister Mariano Rajoy’s plans for cost-saving austerity cuts have been met with widespread public protest. There have also been serious political quarrels over who will bear the brunt of cuts; these are serious cuts, too (about 10% of the total value of Spain’s goods and services).

The cuts have been met with such a poor response that Rajoy now seems politically vulnerable. Conscious of this, Rahoy has risked enraging the ECB by relaxing cuts to pension funds and also for aid to the long-term unemployed. Here’s his problem: pension overhauls, which account for 32% of government spending, are one of the key recommendations made to bailed-out countries. By “going soft” on cuts, Rahoy may have saved himself politically but he has not enamoured Spain to the euro area.

As the increasingly public rows between its senior ministers reveals, the Spanish government is far from united in its goals. The industry ministry, for example, wants to attack an enormous deficit built up by subsidizing renewable energy companies for years. However, powerful lobbying against the proposed reforms by both conventional and renewable electricity generating firms, is delaying any action, and the treasury is threatening to veto any new taxes on energy firms.

Rajoy recently announced a €65 billion cost-cutting package to try to reduce Spain’s debts by 2014, but economists are now predicting that overspending may be bigger than anticipated.

Rebellion in Spain’s semi-autonomous regions

Spain has a system of governance which delegates a sizeable portion of decision-making power to local authorities; this means that the central government accounts for only 18% of public spending. The remaining budget is divvied up amongst Spain’s semi-autonomous regions. The regional governments receive 38% of Spain’s spending power, the local councils 13%, and the remainder goes to Spain’s social security system.

In Spain, 73% of the austerity cuts have been shouldered by regions and municipalities. This means that funding to public services (healthcare and education) has been cut at a time when income from tax is particularly low. Needless to say, the cuts have not been well-received by either the public or the local governing authorities.

Spain’s regions, unwilling to accept austerity, are rebelling. The Socialist president of the northern Basque region is bringing forward the date for local elections, so that Basque voters can decide for themselves how to deal with the crisis.

Andalusia, in the south, is even taking the State (the central government) to court. The court case focuses on “debt ceilings” imposed on the regional government (RG) by the central government (CG). The “debt ceilings” simply refer to caps on borrowing – the regional government feels that it cannot grow its economy unless it borrows; conversely, the central government feels obligated to restrict borrowing because Spain cannot afford repayments.

Five regional governments will boycott rules depriving illegal immigrants of free health care, while towns such as Hospital de Orbigo and Cartagena are trying to lessen the austerity burden on families, one by paying for school books, the other by compensating civil servants for wage cuts.

Policies like these cost money, and Spain’s 17 semi-autonomous governments won’t keep their economic promises this year. Overspending for the regions may reach 4% of GDP – instead of the targeted 1.5% – compared with 3.3% last year. Their debt is still growing.

Grexit gossip influences Spanic

Spain’s vulnerability leaves it vulnerable to damage from a potential Grexit. If Greece were to exit the euro, all cross-border transactions between Greece and Spain would immediately be placed in jeopardy. With the Grexit looming, many of Spain’s investors are pulling their money out of the country en masse, pouring it into sterling and dollars. If the Greek exit happens, the worry is that this activity will increase.

In the introduction we discussed how difficult it is for a country to recover from a financial crisis if investors lose faith. It’s a simple matter of finance; once money leaves the country, no one can access funding because investors have taken their finances elsewhere.

Perhaps the only way to tackle this problem is through the eurozone’s political and monetary authorities. If the central European authorities step in to thrash out the problem, Spain may have a chance of balancing its books.


Next up!

In PART 5 of our eurozone report, we look at:

  • Why Italy got into financial trouble.
  • Whether Italy can tax its way out of recession.
  • Italy’s enormous debt (€47.7 billion) and the quick-fix plan to pay it back.


{ 1 comment… read it below or add one }

mintug June 22, 2013 at 2:37 pm

An expat who is a resident in Spain living with spouse, has some savings in UK, is he or his wife is liable for inheritance tax on thier world wide income or the tax only applies to Spain on spanish assets and uk tax applies to uk assets (which is nil between spouses)
Can an expat reside in Spain only for 182 days in a year and avoid all taxes including incomes, pensions and Bank interests (UK Banks) Pleae some one clarify as a friend of mine wants to decide if he wants to uproot his UK home to settle here. Spanish tax is so complexed, especially the asset declaration, which is driving so many Brits out of the Spanish resorts. The word paradise has become a nightmare

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