By Matthew Barrett
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"Spain's economy records zero growth". "Spain unemployment at record high near 5 million". "Spanish Banks Tackle €26.2 Billion Capital Shortfall". "S&P downgrades Spain on weak growth outlook". Bad news stories about the Spanish economy trickle out almost daily. As a result of the economy grinding to a halt in the last quarter, fears about Spain's ability to meet deficit reduction targets have grown. It could even slip into a recession soon, and some forecasters predict 0% growth for the whole of 2012 – at best.
This is the background that should see Mariano Rajoy (pictured right), the leader of the conservative Partido Popular (or People's Party/PP), take office as Spain's next Prime Minister in the general election on the 20th November.
This will be 56-year-old Rajoy's third general election as PP leader. In 2004, the Partido Socialista Obrero Español (PSOE), or the Spanish Socialist Workers' Party – were able to use the aftermath of the 2004 Madrid train bombings to rally support and win the election, despite PP having led in polls until the terrorist attacks. In 2008, the PSOE government were able to use the financial crisis to rally last-minute electoral support again and deny Rajoy the premiership.
This time, Rajoy is taking no risks. He has presented a thin manifesto, and offered little in the way of specific policies. He and his party say that promises now can easily be broken in the coming months and years – given the ever-changing economic crisis. This is factually correct, but Rajoy's unwillingness to be specific is also motivated by his awareness that a policy mistake could jeopardise his double-digit lead in the polls over the PSOE's candidate, Alfredo Pérez Rubalcaba.
What Rajoy does present in the manifesto - cutting the size of government, and easing the regulatory burden on businesses – may sound pretty modest and indeed, not specific. However, Spain operates in a more federal system than Britain, and Rajoy is able to point to real and significant PP successes in regional governments.
The Guardian calls Rajoy "Bespectacled, bearded and boring", and says he is "hampered by a slight lisp and a tendency to appear more ponderous than prime ministerial on television". In truth, he is not an inspirational candidate. He is the least-worst candidate to many voters, and his own supporters would concede he can't persuade like Clinton or give a campaign speech as rousing as Obama.
He is steady and pragmatic, but maintains traditional Spanish conservative convictions: he intends to move Spain's abortion laws in a more pro-life direction, and has spoken out against the PSOE government's gay marriage laws.
His ability to stay leader despite losing two elections, without falling out with his party, demonstrates his quiet but determined nature. These character traits are somewhat similar to those of the current socialist Prime Minister, José Luis Rodríguez Zapatero, who is nicknamed "Bambi" for his soft and trusting image.
Zapatero's handling of the Eurozone crisis has mostly centred around trying to keep Spain afloat, without pushing for anything too radical or dangerous, and keeping a low profile. The Guardian reported earlier this week: "The less Spain is mentioned in reports from Brussels and Frankfurt, the more Madrid likes it. Let the spotlight remain on Italy, Greece and Portugal while Spain puts its house in order, officials say privately."
However, Spain's Eurozone-mandated budget deficit targets are unlikely to be met – the targets (2011: 6.0% of GDP; 2012: 4.4%) are based on growth assumptions of 1.3% this year and 2.3% in 2012, which now seem very optimistic, thanks to the 0% growth in the last quarter reported above.
Just as Zapatero tried to keep his name out of the headlines, so Silvio Berlusconi tried the same strategy in Italy – which went badly wrong in the last few days as bond yields surged.
Spain now looks like the most likely next victim of the Eurozone crisis. Spain's government deficit is not necessarily the problem – although it is in a less healthy position than other Eurozone members. Rather, the problem lies with Spain's banks, which are heavily caught up in toxic debts and unwise lending over the past decade, and its private sector borrowing in general (see charts here, for example).
The FT (£) reported earlier this month:
"UBS said it was increasingly concerned about Spain for three reasons: first, slippage in deficit reduction plans (the European Commission said on Thursday it expected the deficit this year to be 6.6 per cent of gross domestic product rather than the targeted 6 per cent); second, the possibility of a deep recession; and third, plans to help banks that could mean “a surge of liabilities being transferred to the government balance sheet”."
If Rajoy does win next week’s elections, as seems likely, his administration will probably have to take more austerity measures than it planned, in order to meet Spain's budget deficit targets, but also to stave off a recession, and restore market confidence. Good luck, Señor Rajoy!
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