Madrid is once again the heart of the European crisis and, faced with the new austerity announcements, Spanish citizens have taken to the streets. The market reaction was swift: the ten-year Bonos soared over 6% and the spread accelerated again (with a dangerous domino effect on Italy). At a social level, separatist movements are reawakening: Catalonia (the most economically productive region of Spain) has requested approval to start a referendum to obtain independence from the Government in Madrid. The Moody's downgrade looms and the markets are expecting Rajoy to ask for help from the European Union soon: Mario Draghi has repeatedly invited the Spanish prime minister to choose this path and Olli Rehn declared in Madrid today that the EU Commission has everything ready should Madrid decide. This, the chronicle of the last week in Spain.
The publication of the Financial 2013 it has only partially reassured the markets: most see it as a first step for the bailout request and the intervention of the European Central Bank (through the OMT program announced by the ECB president Mario Draghi). The (thankfully positive) comment from European Commissioner Rehn was not long in coming: "Spain, with today's announcement, is responding to the specific recommendations of the Union and even goes beyond these requests in some areas", as if to say that Spain meets the "conditionality" loudly requested by Governor Draghi to start the "anti-spread shield" procedures. The announced 2013 budget foresees 40 billion euros of additional cuts (two-thirds lower expenses, the rest higher taxes). More austerity and poor growth (Spain has the record for the European unemployment rate 25,1%!) they are a negative spiral that does not bode well for the Iberians and for Europe as a whole.
In addition to the Budget Spain has announced the establishment of an independent tax authority whose goal is to monitor progress on the budget front, and a package that should consist of 43 new laws aimed at structural reforms with the main objective of increasing competitiveness. The basic assumptions of the Government provide GDP slowdown of -1,5% in 2012 and -0,5% for 2013 (which at first glance appears optimistic). Given the premises, according to the Madrid government, this will be sufficient to reach the deficit/GDP targets for 2012 (6,3%) and 2013 (4,5%).
An outcry last week by the "core" European countries: it is impossible for the ESM to take charge of bank debts. This would obviously have enormous repercussions especially on the balance sheets of countries - such as Spain and Ireland - the heart of the problem is precisely the banking system. If the "core" hypothesis were to pass, Spain would not be able to repay the debts of its banks and this would imply a further worsening of the deficit (or public deficit) at 7,4% in 2012 (the Maastricht Treaty required it below 3%, remember?).
Spain is awaiting months of pain to deal with the European recommendations on the one hand and the social discontent that they oppose on the other. The greater austerity, required by the Brussels guidelines, translate into a lower spread (what happens if the spread goes down?) and therefore lower interest charges (the deficit) but, at the same time, it revitalizes separatist impulses in the country. The hope is that the reforms will arrive soon and will be able to decisively improve the macroeconomic scenario, the only way to recover quickly, as the Irish case shows.
