Spain's New Premier Will Face Impossible Equation

Posted by: Ben Vickers on November 14, 2011

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Angela Merkel’s call for a “breakthrough to a new Europe” will find sympathizers well beyond the CDU party members she was addressing in Leipzig today. Many in the euro-zone’s most indebted countries will applaud the concept, even without knowing the details, largely in the hope that a “new Europe” of any sort might help solve their debt problems.

Still, Spain, Portugal, Italy and Greece need more immediate solutions. For them it’s tougher governance at home that will make the most difference—rather than the amendments to the EU treaties that Merkel has in mind, not least because any euro-zone makeover may be long in coming: the last amendments to the EU’s treaties, signed in Lisbon, took eight years to negotiate.

Greece and Italy have both set about getting new governments, which will allow them to rethink spending and reschedule their debts. Meanwhile, Spain will elect a new government next Sunday and can then be expected to take a fresh look at its accounts, too. However, the new Spanish prime minister, which polls suggest will be Mariano Rajoy of the right-wing Partido Popular, will have a more complex task than his Greek and Italian counterparts. Spain has a political system that replicates many of the euro-zone’s weaknesses, all within one country.

Spain is divided into 17 autonomous regions, each of which has some regional responsibilities, ranging from health, education and tourism to planning and tax collection. There are differences in economic growth and economic models: regions such as the Basque country and Catalonia are more industrial and richer, while Andalucia and Extremadura are more agricultural and poorer.

Each regional government has its own budget and the ability to raise money in the capital markets. And they have been raising money. Lately, quite a lot of it. The regional authorities were responsible for 133 billion euros of debt at the end of June, or 19 percent of the national total, according to the bank of Spain.

The new prime minister will have to contend with fiercely autonomous regions that over the past four years have moved increasingly to fund themselves from debt: 14 of the 17 regions have more than doubled their borrowings since 2007, according to central bank data. The position of whoever governs from Madrid will not be easy.

Madrid may try to lower national debt by cutting funding to the regions, many of which are governed by rival political parties. But it’s unlikely the regions will quietly cut services—and take the blame for cuts when the regional elections come round. They will probably choose to increase their borrowing to keep services going, so boosting national debt. It will take a fine statesman to solve that political equation without fueling regional independence movements which, to complete the parallel with the euro zone, will reiterate calls for breaking up the country.

Reader Comments

Pablo

November 14, 2011 5:45 PM

Spain is a great nation and reserves a decent government like the one me Rajoy is proposing.

Fernando Fuster-Fabra Fdz.

November 14, 2011 6:23 PM

Your information is somewhat inaccurate. After the autonomic elections last May 22, only 5 of the regions are in the hands of other parties and not Rajoy's Partido Popular, albeit one of said 5 is governed by an ex-leader of Rajoy's PP. Therefore only Andalucía is fully in the hands of the socialist whilst the Basque country is governed by the socialist in a rather rare agreement with PP; Catalonia is governed by nationalist CIU and Canary Islands by nationalist Coalición Canaria. Therefore, Rajoy has it easier to impose austerity criteria to his colleagues. Another thing is whether they will be willing to tow the line.

Rocio

November 14, 2011 8:00 PM

As far as I know, there is only one political party that has been consistently saying the current model of state is not viable any longer: UPyD. So far Rajoy does not seem to very concerned about this.

Smythe

November 15, 2011 1:34 AM

Last year Spain met its target of scaling back its deficit from 12 percent to 9 percent of GDP, a difficult feat when the economy is barely growing. It set itself another hard target at 6 percent by the end of this year and 4.4 the next. Has the Spanish government set the markets up for disappointment by setting itself what could be unrealistically hard to reach targets in such a short time?

Lithuanian

November 15, 2011 2:24 AM

I wish Spain cuts its deficit promptly and alligns the social welfare system with the country's ability to fund itself, and not through borrowing from outside resources. Healthy eurozone is the condition for other EU member states to join in sooner or later.

Manmonday

November 15, 2011 2:46 AM

Spain, like most Western countries, is facing up to the cost of being governed by politicians who borrowed money that the nation could not afford in order to buy votes. The prosperity of these nations will fall, which will be as painful as it is inevitable.

Pepe

November 15, 2011 4:45 AM

Your article lacks professionalism. Any map you pick of Spain is almost all blue (PP's colour) at almost all levels of government. Sunday night, Rajoy will have a resounding majority which will allow him to pass any law in parliament. Most of his closest advisers are already Presidents of autonomous Communities (Madrid, Valencia, Castilla la Mancha, Galicia, Murcia). The only big autonomous community not ruled by PP or the right is Andalucía, which is bound to fall in march.

Smythe

November 15, 2011 6:05 AM

Manmonday, Spain's government debt to GDP is 65 percent, which compares to Italy's at 120 percent and Greece's 150 percent. Its lower than that of the UK, France and even Germany. Its hardly extravagant. When the crisis began it was less than 40 percent. So I can hardly credit your statement. What happened was the property bubble, like that in Ireland, collapsed and now credit to businesses and consumers from those banks hurt by the collapse have restricted credit, choking the economy. With the government slashing its deficit, demand is being depressed even more. While this has to be done to prevent the public debt blowing right out, my fear is that if it is done too fast it will send the weakened economy into a deep recession. And remember which countries export a lot to Spain: Italy, France and Germany!

RH/Cantabria

November 15, 2011 9:50 AM

How can Spain grow? This is the fundamental question with nearly 5 million people without work..there are nearly 1.5 million families without anyone working. How they survive economically is an ongoing question.

Corruption, hidden debt yet to uncovered...millions of properties abandoned, unsold or in foreclosure will be or could be what breaks the back of the Spanish economy.

This new guy..who had lost in two previous elections has promised what...no one knows what will come to the people of Spain...in short, there will be more and enduring pain..how long the Spanish people can endure this is the real question.

Expat/USA..Cantabria

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Financial markets are on the edge as investors await a solution to the European debt crisis. This blog examines the banks that hold billions of euros worth of Greek, Italian, and other sovereign debt; the governments that must pay off or refinance that debt; and the implications for the worldwide financial system if they can't.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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