EU’s Model Student Spain Gets Punished

The Spanish election saga continues. It has now been eight months since the first round of voting, and Spain is nowhere near choosing a president. The second election, held last June, did not break the deadlock.

Spain has been a two party system since the death of its dictator, Francisco Franco, in 1975. But the recent appearance of two new parties — Podemos and Ciudadanos — has disrupted the political landscape. You can read more about it here.

The current president, Mariano Rajoy, needs 176 seats to be re-elected. He only has 137. And it does not seem likely that he will get any more support. The other two major parties, Podemos and PSOE, have said that they will not support his candidacy. So it seems that they are heading for a third round of voting.

Meanwhile, the country’s economy is paralysed. Youth unemployment is still at 45%. Recent government budgets decimated health and education.

And the government keeps on raiding the pension piggy bank. In 2011, the pension reserves were 66 billion euros. Today, only 36% of that amount — 24 billion — remain.

Not to mention that in the last six years debt has climbed from 60% to 99% of the GDP!

Yet the EU keeps on referring to Spain as an example to follow. It has praised its austerity and economic measures, especially the recent labour reform.

This reform has been aggressive. Even though it is currently easier to get a job, conditions for workers are much worse. The reform rewards temporality in working contracts, and salary reductions.

But things have recently turned sour between the teacher and its model student. You see, even though Spain’s economy grew last year, it has the second largest deficit to GDP ratio in the EU. And in 2015, Spain failed to fulfil its deficit goals.

The main reason was the tax discounts given during election year. Which meant that the government gained popularity, but received less money.

Now Brussels is requiring Spain to reduce its deficit 10 billion by 2017. From the current 5.1% to 2.5%, a reduction of 2.6 points.  To give you an idea, in the last three years, the government has reduced the deficit by a total of 1.8 points.

So whoever takes on the government has a tough job ahead. It is not surprising no one wants to ally with the current government to elect Rajoy as president.

And to top it off, Brussels has announced they will be imposing a fine for failing to meet its objectives. The fine could reach 2 billion euros. Plus they will be freezing the EU funds Spain is due to receive in 2017.

There are only two options to cut the deficit: either approve more budget cuts, or raise taxes. Both measures will restrict economic growth.

Rajoy has publicly vowed to do neither if elected. Yet to avoid the impending sanctions, he promised the EU to take new measures if he wins.

If Brussels decides to fine Spain, it may open another division in the already frail EU.

With Spain unable to elect a government, Brexit, a looming Italian banking crisis, and multiple terrorist attacks, the future looks gloomy for Spain — and the EU.


Selva Freigedo,
For Markets and Money

PS: Selva recently joined the Port Phillip Publishing team as our macroeconomic analyst. She works closely with Markets and Money editor Vern Gowdie on his advisory service,The Gowdie Letter.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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