Spanish fears expose eurozone cracks

Spanish PM Mariano Rajoy (17 March 2012) Mr Rajoy will present Spain's 2012 budget on Friday

Suddenly the focus is on Spain. Many eurozone ministers and officials have since the new year wanted to sell the story that the worst of the eurozone crisis lies in the past.

Occasionally cracks appear in the narrative.

At the weekend, the EU's Economics Commissioner Olli Rehn conceded that the situation in Spain was "fragile".

It caused considerable irritation in Madrid when Italian Prime Minister Mario Monti weighed in to say Spain was causing "big concern". The Spanish felt a crisis was being talked up.

The central question for Spain is this: has it reached the limits to what austerity can achieve? The fear in government circles is that to push further with spending cuts will tip the country into a cycle of decline.

There is, without doubt, risk to what is being attempted. The government of Mariano Rajoy is committed to cutting the deficit to 5.3% this year, less than had been originally agreed with the EU, but still a cut.

Further austerity is coming at a time when unemployment is at almost 23% and rising. The economy will contract by at least 1.7% this year, perhaps more. House prices are still falling and the debt carried by Spain's banks is still causing concern.

When the Spanish government later this week presents its budget for 2012 it will almost certainly have to push for cuts in education and health care. On Thursday there is a general strike although it is questionable how much support it will get.

The problem for Brussels is that so much has been staked on the recently signed fiscal pact that commits countries to meet targets to reduce deficits.

Olli Rehn, at the weekend, was offering no concessions. "Spain," he said, "needs to stick to its targets in order to avoid any setbacks in terms of its borrowing costs".

What happens to Spain will determine whether the eurozone is just enjoying a pause in its crisis. It will determine too whether the German-led austerity culture will save Europe or drive parts of it into a long period without growth.

Italian PM Mario Monti (20 Mar 2012) The Italians fear economic contagion from Spain

Italy, this year, has managed to de-couple itself from Spain. Its Prime Minister, Mario Monti, has been given high marks for bringing responsibility to the Italian economy.

His comments about Spain reflect the fact that last week Italy's borrowing costs began edging up again. The Italians feared contagion from Spain.

Privately, the Spanish believe that Mario Monti has got a bit carried away by all the good publicity. He has been feted in European capitals.

An Italian commentator, Massimo Franco, said that "Monti did the negotiations more with an eye on Europe than to Italy". At times, he seems more like the EU commissioner he once was rather than Italy's prime minister.

The real tests for Italy lie ahead. So far the government has failed to reach agreement with the labour unions on making it easier to hire and fire and open up the labour market.

Those proposals are likely to be put directly to parliament. Their passage is not certain. Italy has a history of watering down measures that might make the country more competitive.

All the indications are that Italy too will remain in recession this year. Its unemployment rate is rising and its debt to GDP ratio remains around 120%. The main union is implacably opposed to the reforms. Mario Monti's biggest challenge is at home.

These two economies are the key to the eurozone crisis. All the signs are that German opposition to boosting the size of the bailout fund is weakening.

Other member states have been pushing to combine the remaining funds of the EFSF with the permanent rescue mechanism, the European Stability Mechanism.

That will be the focus of a meeting in Copenhagen at the weekend.

The hope is to have what is called a firewall of 750 billion euros at the very least.

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 17.

    Sorry for the irrelevant but I found the previous thread amusing with Suileroua baffling about USSR (he must be deep in his retirement) and Powermeerkat trying to comprehend basic engineering working methodologies such as reverse engineering.

    Reverse engineering has nothing to do with methodologies.

    And mixing the two demonstrates an intellectual ineptness and irrelevance.

  • rate this

    Comment number 16.

    "At the weekend, the EU's Economics Commissioner Olli Rehn conceded that the situation in Spain was "fragile"."

    So far Monti's "expert" government has not done anything itself to make Italian economy competitive by opening closed professions and reining in unions with a Socialist mentalilty of 1950s.

    So Italy may well be next.

  • rate this

    Comment number 15.

    Maybe we could let them have George Osborne.

  • rate this

    Comment number 14.

    So on Saturday ECB president Draghi claims "the worst is over" then we have "Spanish Banks in further difficulty" "Portugal general strike and should seek a restructure now and not wait like Greece" " Greece will need a further restructure within 2 years" "Strike in Italy over austerity" and "Ireland seeks to renegotiate" as headlines in the last two days.

    If the worst is over whats all this lot?

  • rate this

    Comment number 13.

    Ok, Spain now... what next? What is wrong with Spain? It has industry, it has agriculture, along with Portugal it is just the natural door of Europe to the 2/3 of the Americas. And it has of the lowest total (aka real) debt ratio in Europe (among normal-sized countries, i.e. not including Luxemburgs etc.) along with Greece and Italy. But in the EU, the least you owe the more problems you face.

  • rate this

    Comment number 12.

    Semeta cited "fairness" at the top. (It's about time!) FTT will "help" financial institutions pay their fair share. Revenues offer great potential for public spending, reduced deficits. So UK, what's your problem? Semeta is being particularly careful in design (e.g. strong measures to mitigate relocation risks & tax avoidance schemes.) So, I ask again, UK what is your problem - the real one?

  • rate this

    Comment number 11.


    In fact it must be France and Germany that are key to the eurozone crisis.

  • rate this

    Comment number 10.

    UK has categorically rejected FTT, with UK saying it would drive financial-sector firms away from London. Personally, I believe this should read: it would drive financial sector firms, fearful of audit trails & transparency, away from London.
    FTT applied across entire EU is best way of imposing transparency, accountancy & ensuring every EU citizen will benefit.

  • rate this

    Comment number 9.

    "Enhanced Co-Operation" = member states agree to proceed when EU-level unanimity can't be reached. e.g. Schengen passport-free travel area. But in order to resort to enhanced cooperation, EU has to show it has exhausted all chances of getting unanimity. Semeta: Some countries are already asking whether we should look for alternative routes to agreement, by moving ahead at less than 27.

  • rate this

    Comment number 8.

    "These two economies are the key to the eurozone crisis."

    That is this week's official view.

    What about Portugal, Ireland, ongoing Greek problems (English law bonds decision delayed until next week), Hungary (not in EZ but will cause trouble), Austria (bank exposures) etc. etc. etc.

    The official line gets ever more less believable.

  • rate this

    Comment number 7.

    Algirdas Semeta, EU's TOP EXECUTIVE ON TAX POLICY, said he believed the EU is moving in direction of political compromise in order to achieve consensus amongst all 27 member states. Semeta dismissed voices calling for willing countries to go ahead without their reluctant peers. With only some EU countries on board, implementation would be through method of "enhanced cooperation".

  • rate this

    Comment number 6.

    Wasn't it just last week that barosso said that everything was ok in the USSEUR ?, wishful thinking. I'm going to hazard a guess and say the response to this will be, hmmm let me think, oh yeah ' more integration!'

  • rate this

    Comment number 5.

    Combining funds of EFSF with the permanent rescue mechanism (European Stability Mechanism) may be one topic on the agenda in Copenhagen. But there will be another huge topic: efforts to introduce tax on financial transactions (FTT). Focus: getting all 27 EU member states on board.

  • rate this

    Comment number 4.

    I thought it was too good to be true, the FTSE edges past 5900 and then the Euro crisis is back to blight everything.

  • rate this

    Comment number 3.

    Great more bailout money. Our politicians will say anything to get more free money from Brussels but once the cheques clear will anything have changed?

  • Comment number 2.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 1.

    The 5.3% deficit represents an unrealistic reduction from the 8% in 2011 and additional austerity will make it even more difficult to achieve or even exacerbate the gap. Similarly with Italy how will throwing more workers out of their jobs serve the deficit reduction? It is more likely to make it worse. Continuing with the economics of masochism (or is it Teutonic sadism?) will threaten the EU.


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