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Empty coffers

July 20, 2012

While EU staffers in Brussels are on vacation, it's a different story in Madrid. Officials there are working into the hot months to fix their economy. But spending cuts and tax hikes might not be enough to end recession.

Spanish flag
Image: Fotolia/elxeneize

The European Union's glass buildings at Robert-Schumann-Platz in Brussels are nearly empty. Even the typically crowded streets and overflowing traffic have all but disappeared. It's vacation time in the city, and most EU officials are on holiday. But some 1,300 kilometers away, in Madrid, top officials can ill afford kicking up their feet for a holiday. The search for ways to implement the cost-cutting program agreed upon in Brussels is keeping some of them hard at work late into the night.

That program calls for Madrid to reduce its deficit to 2.8 percent of its budget by 2014. That amounts to 65 billion euros (about $80 billion) in cuts. Spanish Prime Minister Mariano Rajoy, under pressure to pick up the pace, has announced he will reform the public sector, reduce unemployment subsidies, and raise Spain's value-added tax from 18 to 21 percent.

Will that be enough for Europe's biggest problem child to pull itself out of the debt quagmire? Some doubt it. Spanish daily El Pais has calculated that the most recently announced reform package will likely not do enough to help refill Spain's coffers. Rajoy may have to adjust his figures and announce more harsh cuts.

Spain's Prime Minister Mariano Rajoy
Spain's Prime Minister has his hands full this summerImage: Reuters

Dependent on the global economy

Walther von Plettenberg, managing director of the German Chamber of Commerce for Spain, said Spain's ability to meet cost-cutting goals depends on factors beyond its control.

He told DW that Spain has managed to keep its head above the water thanks to its well-functioning export industry, "but if the global economy does not pick up substantially, Spanish exports and the country's tax revenues will face dramatic difficulties. Then the ambitious goal of saving more than 60 billion euros will be at risk."

Given the fluctuations of the global economy, Spain's reform-minded politicians are walking on thin ice. Meanwhile, the Spanish populace is also on edge. The situation has not escalated yet. Violent outbursts on the sidelines of demonstrations have stayed at a minimum, at least compared to other countries.

Von Plettenberg said Spaniards have accepted the situation amazingly well, realizing "they had been living well beyond their means for 10 to 15 years."

He added that Spaniards were willing to tighten their belts, "but now it will get severe because no one will be spared from the new cost-cutting measures. Civil servants who are supposed to forego their much-loved Christmas bonus may not remain quiet."

That may really put civil society to the test.

Protestors march during a demonstration against cuts in public services in central Valencia in June
Faced with record unemployment, Spaniards continue to protest tough austerity measuresImage: Reuters
Walther von Plettenberg, managing director of the German Chamber of Commerce for Spain
Von Plettenberg says the economic crisis is beyond Madrid's controlImage: AHK

Fear of EU scrutiny

Just a few weeks ago, Spain managed to create some breathing room. By throwing its economic and political weight, it negotiated special terms for aid from the EU. For the first time, a nation would not have to completely surrender to surveillance by its financial backers.

The rescue fund known as the European Financial Stability Facility (EFSF) has earmarked up to 100 billion euros for the reorganization of Spain's banks. Unlike Greece, Portugal and Ireland before it, Spain will not be subject to intense European controls. Given Spain's national pride, that would have been like admitting absolute defeat. Moreover, Spain feared such controls would lead to a loss of faith from financial markets

Spain hopes banks recapitalized with EFSF fund will once again be able to provide loans for necessary investments. But Stefan Schneider of Deutsche Bank's financial analysis center, DB Research, has his doubts.

He said you have to accept that loans are always linked to demand. But in Spain, the private sector, companies and households have debts amounting to 200 percent of the country's gross domestic product.

"The willingness to take out new loans will thus remain quite limited for now," Schneider said. He added that is why the Spanish economy is unlikely to undergo a quick recovery through massive lending.

Stefan Schneider, Chief International Economist for DB Research
Schneider says there's low demand for loans from recapitalized Spanish banksImage: DB Research

Huge solidary effort needed

What can Spain do to fill its coffers? Von Plettenberg said all of the country's cost-cutting measures have been efficiently put into place. But one task he still sees for the Spanish government is to "motivate the autonomous regions to participate in this huge effort of solidarity by radically reducing their spending and probably also letting go of their public employees, which has not happened until now. That topic is still taboo."

That's no wonder, since Spain's central government is not permitted to poke its nose into regional governments' affairs.

Ricardo Wehrmann, a banking expert for the Roland Berger consulting firm in Madrid, also thinks Madrid does not have a lot of wiggle room left. He agrees that the regional governments have to save. He said otherwise, Spain needs new ideas on how to generate more growth.

"There are many ways to support the export economy in order to better sell Spain as a brand abroad," Wehrmann told DW. 

He looked to business delegations that accompany German politicians on trips to Spain. Wehrmann said on those occasions, Spanish companies could present their products and make crucial contacts with potential future partners abroad. He also suggested that "small- and medium- sized companies be supported by giving them tax advantages for international deals."

Royal solidarity

Spain has been unable to get out of its deep economic crisis since its real estate bubble burst. Thousands of companies have gone bankrupt, and Spain has the EU's highest unemployment rate - a staggering 23 percent. Unemployment for people 25 and younger stands at almost 50 percent.

Spain's King Juan Carlos, right, and Crown Prince Felipe
Spain's king and prince are trying to show solidarityImage: dapd

Times are tough for Spain. And when the people are suffering, they look to their monarch. King Juan Carlos wants to tighten his belt a bit, too. He and Prince Felipe have said they will cut their annual wages by 7.1 percent.

Up until now, the king's annual salary was about 272,000 euros, and the prince's was about half that sum. They face pay cuts of 21,000 and 10,500 euros, respectively. In light of the Spanish court's wealth, that is mainly a symbolic gesture. It might also be an attempt for the monarchs to brush up their image.

In April, the king came under heavy criticism for embarking on a luxurious hunting expedition in Botswana. While his compatriots were suffering from the crisis, the monarch was shooting elephants. Most likely, the expenses for that trip came out to about the cost of his proposed salary cut.

Author: Ralf Bosen / als, ai
Editor: Shant Shahrigian