Published: October 1, 2012 183 Comments
The spotlight is now on Spain, where Prime Minister Mariano Rajoy is struggling to make new budget cuts, without provoking further explosions of anger at home and fueling secessionist talk in restive regions like Catalonia, the country’s economic powerhouse. But the harsh mix of new public service cuts, pay freezes and tax increases that Mr. Rajoy announced last week will almost certainly make both the political and economic situations worse. Experts now forecast a second straight year of negative growth in Spain for 2013, while unemployment, at more than 25 percent, is more than double the European Union average.
Yet unless Spain goes through with those self-defeating measures or the Spanish economy miraculously produces new tax revenues to meet unrealistic budget targets, Germany threatens to hold up a desperately needed new European banking union that would help recapitalize foundering Spanish banks. Unlike Greece and Portugal, Spain has, so far, avoided a formal European Union bailout. That gives it a little more freedom to set its own economic course. But Mr. Rajoy is not really a free actor. Without German approval for the European banking union, Spain, too, could soon be forced into a binding debt bailout deal.
Spain’s current debt problems are not the result of profligate government spending during the boom years. They came from the abrupt collapse of a reckless housing bubble in the private sector, fueled by artificially cheap credit. The bursting of that bubble wiped out millions of Spanish jobs, dragging down tax revenues and consumer spending. It also forced the government to pledge billions of euros that it did not have and could no longer raise to rescue its tottering banking system. New cuts to remaining jobs and spending power will not bring recovery. It would only bring further misery and turmoil.
Mr. Rajoy also wants to rein in spending by Spain’s 17 regional governments, which pay a large share of education and health care costs. Regional governments squandered billions on wasteful public-works projects during the boom years. But that money is lost, and health and education should not be subject to big cuts even in hard times.
Nor is a deep recession the right time to tackle the long-term problem of pension costs and the demographics of an aging population. With unemployment benefits ending for many of the long-term unemployed, pension payments are the main remaining source of income for hundreds of thousands of extended families.
There are no easy places left for Mr. Rajoy to cut services or spending without risking social disaster. The story is much the same in Greece and Portugal.
Time is running out. Only a sharp change in economic policies can save the euro. European leaders — most of all Chancellor Angela Merkel of Germany — need to recognize that returning the euro zone to solvency will require renewed efforts to encourage economic growth through less rigid budget targets, not continued austerity imposed on desperate governments by Berlin and Brussels.