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Economy

Mariano Rajoy’s Quixotic Priorities

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Never a dull moment when it comes to the antics of the Spanish government. Prime Minister Mariano Rajoy recently hosted German Chancellor Angela Merkel[1], also known as “La Patrona”. Mrs. Merkel went to Madrid to shore up support in Europe’s fifth largest economy for a continuation of austerity measures. This was made necessary by the political upheaval in France, where President François Hollande was faced by the collapse of Prime Minister Manuel Valls government after only four months in office. This was precipitated by the inability of the government to reconcile the official position of alignment with Germany with the reality that austerity is killing the French economy, a view expressed by the Economic Minister Arnaud Montebourg, who has continually questioned the German “obsession” with budgetary rigor.[2]

Mrs. Merkel wants to head the French off at the pass. Furthermore, she wants at all costs to avoid the isolation of Germany in Europe: at least among the “big four” Eurozone economies. The French have been calling for an end to austerity for two years or more and any new government that Mr. Valls form is likely to face a similar dilemma, or else outright accept the need for budgetary “easing”. Add to this the fact that Mr. Renzi’s Italian government has shown signs of bucking the fiscal straightjacket[3], and suddenly Germany starts to look very lonely indeed. Hence the trip to Madrid.

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Spain, and Mariano Rajoy’s government, has become the poster children of austerity in Europe. At one point, that title was held by Portugal, but with the recent implosion of Banco Spirito Santo and its likely contagion effects on the local economy, that title now passes to Spain. Mr. Rajoy has done an excellent job implementing the directives coming out of Berlin and Frankfurt: he has cut the government budget deficit from above 10% of GDP in 2010 to around 7% of GDP in 2013; he has raised taxes and slashed public spending across the board. The Spanish banking sector was “saved” though the burden of non-performing loans remains undigested and indigestible for the foreseeable future; and “wage deflation” has made Spanish businesses more competitive at the cost of 25% unemployment, a reversal in immigration trends and the creation of a new and permanent category of second-class workers on temporary contracts. Poster child.

It is true that some of the recent economic news from Spain is positive: new government debt is selling at pre-crisis lows thanks to Super Mario’s promise of “doing what it takes to save the Euro”, also known as OMT. Spanish GDP is also set to grow between 1.2% and 1.5% depending on who is making the prediction[4]. But much of this growth is sustained by government spending, which makes reducing the fiscal deficit an almost impossible task. Where the government to attempt to meet their deficit target of 6% this year, it would wipe out all the GDP growth of the year and plunge the economy back into recession.

Regardless of the country’s dubious qualifications as a poster child of anything except machine politics and cronyism, Spain retains a significant weight in Europe if only because of the size of its population and economy. So Mrs. Merkel went to Madrid, made all the polite noises of praise, walked with Mr. Rajoy along the Camino de Santiago for a mile or so, and then got down to the serious business of horse trading. What did Spain want in return for her continued support of an economic policy which was strangling her?

Not too much, it would appear. Mr. Rajoy apparently asked for three concessions:

  • Germany’s vocal support of Spain’s position on Catalonia;
  • Turning a blind eye on Spain’s obvious coming miss of the 2014 deficit target;
  • Supporting Economy Minister de Guindos and Partido Popular MEP Miguel Arias Cañete for top jobs in the European bureaucracy.

Mrs. Merkel must have breathed a sigh of relief. That was it? She undoubtedly thought that Mr. Rajoy might ask for debt mutualization, a large stimulas package or a significantly higher inflation target, things that might actually help his country. Luckily for the Kanzlerin, Mr. Rajoy is merely a politician and asked for purely political favors. These were favors that were easily agreed to:

  • Firstly, Germany has not the slightest interest in getting involved in the Catalan dispute at this time and not at all if it can be avoided.
  • Secondly, turning a blind eye on a miss of the fiscal deficit target is no problem: Spain hasn’t hit the target since 2010, why should Mrs. Merkel get in a huff this year?
  • Lastly, supporting Rajoy’s favorites for top EU positions is a snap. Mr. deGuindos is an intelligent and capable man who has proven he can follow unpleasant orders from Germany without batting an eye; why wouldn’t they want him in Brussels?!? As for Mr.Cañete, whose virtues include an unparalleled haughtiness, an almost inhuman degree of social insensitivity and the power to make everyone in the room dumber every time he speaks…well, why not? Considering some of the other personages being sent to Brussels, and Mr.Cañete ceasesto be such an outlier in terms of personality disorders.In any event, it little matters what positions they eventually land in, all the decisions are being taken in Berlin and Frankfurt anyway. Where once there was a Paris-Berlin entente, with the French taking the lead, the axis of power today lies squarely within Germany’s borders. Unlike France, Spain at least recognizes the fact and doesn’t balk at being in the second tier.

Mr. Rajoy is undoubtedly pleased with his achievement. Not only does Mrs. Merkel’s visit bring luster to his administration, he has increased Spain’s weight with Germany. Additional favors might be for the asking come November, should it prove necessary to intervene in Catalonia with the Guardia Civil. Mr. Rajoy might want to consult with the Governor of Missouri before then.

And let’s not overlook the other positive result of the visit. In a nation with over 4.5 million unemployed persons, at last Mr. Rajoy has managed to find jobs for two of them.

The Good, the Bad and the Ugly:  Seven Pairs of Charts that Explain Why Spain’s Recovery is by No Means Certain [5]

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Sources and Notes:

[1] “Merkel, Rajoy sing praises of recovering Spain,” Deutsche Welle, 25 August 2014

[2] Reuters, “French government resigns, PM Manuel Valls to form new government on Tuesday,” The Economic Times, 25 August 2014

[3] Ilaria Polleschi, “Italy’s Renzi, ECB’s Draghi hold ‘secret’ meeting as economy slides,” Reuters, 13 August 2014

[4] The lower figure comes from the IMF while the higher figure comes from Spain’s Economy Ministry

[5] All charts are reproduced from Trading Economics except for the 2050 Population Pyramid Estimate, which is courtesy of the US Census Bureau

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