Spain Takes Important Fiscal Plunge—Maybe

Setting a strict budget like the one that Spain has put forward is one thing—getting it accepted is quite another. The government of Mariano Rajoy is taking a far different position than was taken by the Greeks. Within seconds of the Greek austerity plan being announced, the regime leaders were looking to wiggle out of most of it. Spain looks set to make a good faith effort to wrench the budget into shape without having to resort to the rescue demands from the European Central Bank and the euro zone.

There are no real shocks in the budget other than that it looks set to take on some of the toughest tasks without making much in the way of concessions. The public sector, where there is much bloat, will see some dramatic wage cuts, and many will lose their jobs. For those in rural Spanish areas, these jobs  often are the only ones available and, once gone, the unemployment situation will be even more critical.

On top of these will be cuts to pensions—another area that has been abused in the past, but also one that millions in Spain depend upon. This is the fundamental issue in Spain. These are long-needed cuts, but it leaves the question: How does one make these without genuinely hurting people that trusted the system would provide? The answer is that it is impossible.

This is a real moment of truth for the Spanish. The severity of the budget is designed to keep the Spanish from having to submit to the rules and demands of a bailout controlled by the ESM, but that is dependent on the ability of the Rajoy government to stay in power to implement the plan. None of this is a done deal though as unions are threatening massive strikes, political organizations are ready to protest and a majority of the population is asserting that they have no intention of paying the taxes that are going to be coming due, not to mention that the regions are on the edge of rebellion already.

-Chris Kuehl, PhD, NACM economist

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