EU’s success depends a lot on Spain’s performance
April 13, 2012
Spain is finding difficult to bring down the cost of borrowing from the open market despite its newly formed conservative government’s resolve to undertake the strictest ever austerity measures. This became evident last week when its 10-year bond hit 5.81%. Only a month back it was sold at 4.9%.
Risk runs high that Spain may join the ranks of the countries like Greece, Portugal and Ireland, which have applied for bailout.
Spain’s disappointing performance in the bond market represents investors’ fear deeply rooted in the poor performance of the economy which fails to recover since the property bubble of 2008. The unemployment rate which was 6.2% in 2006 stands now at 27% and economy is projected to contract 1.8 percent and national debt to shoot up to 80% of the GDP mainly due to the rising cost of borrowing.
Only two days before bond auction the finance minister spelled the details of the 2012 with a promise to bring down the deficit from 8.5 % to 5.3 % through spending cuts and tax increases. But investors failed to respond these measures positively.
Lest the Spanish government fails to prevent the rising borrowing cost and the bond yield touches the dangerous mark of 7%, there will be no way left for it except to ask for a bail out. But the problem is that the rescue will not be easy to manage for the Brussels as Spain’s economy is fourth largest in eurozone and nearly the double the size of the economies on the edge.
Investor’s response to Spain’s austerity plan has also put a question mark on the ability of the EU to pull the region out of recession. The regional body tried recently through the joint initiative of Germany and France to reinvigorate itself by singing a new pact with a pledge to bring more budgetary discipline among the 17 eurozone countries.
Against the calls for making Central Bank of Europe to act as ‘the lender of the last resort’, France and Germany pushed the 27 members this March to move for fiscal consolidation that could force member countries to keep fiscal deficit close to the prescribed limit of 3% — UK and Czech Republic stayed out.
Spain which practices mixed capitalist economy was progressing amorously and was expected to catch up Germany in terms of per capita income due to the reforms introduced after it joining eurozone. The unemployment rate had been brought down to 7.6% by 2006 as compared to 20% of the early 1990s.
During first half of the last decade the country produced more than half of the jobs in European Union and became a promising avenue for foreign investors but the trend reversed in 2008 when property bubble, building since 1998, exploded and the growth trend reversed with the effect that unemployment rate touched the mark of 18% by the end of 2009.
The inability of socialist regime in France to put on halt the economic recession cost it a crushing defeat at the hands of the conservative Peoples Party last year, which resolved to bring down the fiscal deficit to 3%, as a condition set by the EU. It pledged the figure of 4.4% initially but has lately said that it would stick to 5.3%.
Germany, the leading economy of the eurozone believes that the austerity measures are the only way out for the economies struggling under the debt crisis. By adhering to the standard 3% fiscal deficit will earn them the confidence of private investors and their rising stakes will help revive their economies.
In the Spain’s case, as with other Mediterranean economies, removing social security umbrella at a time employment is high and growth rate touching zero level, may result in social unrest. The Franco-German experiment with the EU is reported of fuelling tensions in the southern countries of the EU. Labor unions are planning protests and making demands on the politicians to save them from the burden of economic recession.
The lower and middle income groups are turning against the capitalists and there are calls to restrain the banks from charging high interest rates on loans. What makes the situation highly explosive is the absence of the alternative leadership while socialist parties stand discredited.
All eyes are set on Germany, which has benefited highly when economies were in upswing but the answer they have get so far is only snatching away a larger chunk of sovereignty of the member states and placing it in the hands of Brussels, which will now, after signing of the Budget Treaty, monitor budgets and inflations without the responsibility to help employment.