Spain's next PM warns of tough times ahead

By Daniel Woolls

Associated Press

Published: Monday, Dec. 19 2011 12:00 a.m. MST

Spain's Prime Minister Jose Luis Rodriguez Zapatero leaves after conservative leader and Spain's next prime minister Mariano Rajoy delivered his speech at the Parliament, in Madrid, Monday, Dec. 19, 2011. Rajoy, who will be voted in as premier on Tuesday, said his incoming conservative government aims to reduce Spain's deficit by euro 16.5 billion ($21.6 billion) next year.

Daniel Ochoa de Olza, Associated Press

MADRID — Spaniards had been waiting for a month for their future prime minister to reveal how he planned to revive a battered economy and create jobs. His message, delivered just days before Christmas, was ominous: more austerity.

Voters desperate for change after two years of recession that pushed unemployment to 23 percent carried conservative Mariano Rajoy to victory last month. But in his first policy speech since winning the election, Rajoy dashed all hopes that 2012 might be any better than the current misery.

"The panorama could not be more somber," Rajoy told Parliament as he rattled off a list of Spain's myriad woes and proposals to remedy them, including austerity cuts worth €16.5 billion ($21.6 billion).

Rajoy sought to combine measures to boost economic growth with debt reduction. He announced reforms to encourage companies to hire and tax breaks for small and medium-sized firms that make up the bulk of the economy. He will also streamline the government with a hiring freeze for most groups of civil servants.

He stopped short of announcing public sector wage cuts on top of the 5 percent reduction his Socialist predecessor enforced. On the bright side, he vowed to end a freeze on cost-of-living adjustments for retirement pensions.

Spain's economy is still recovering from the implosion of a real-estate bubble in 2009 that created mass unemployment, depressed house prices and piled up bad loans for banks and the government.

The government is desperate to keep the economy from falling into another recession and to reassure international investors that the country can handle its high loans. That is key if Spain is to avoid the fate of Greece, Ireland and Portugal, which needed bailouts because investors feared they would default on their debts.

Rajoy's Popular Party won a landslide victory and absolute majority in Nov. 20 elections but he will take office only on Tuesday due to legal procedures.

He avoided giving specifics on how he will reduce the deficit. That information will presumably come soon, as the first Cabinet meeting is Friday.

But opposition parties seized on the lack of detail, while analysts noted much of the plan's success will depend on how the economy fares. It posted zero growth in the third quarter and many economists fear another recession in 2012. Rajoy did not give a growth forecast for next year.

The initial austerity package is aimed at meeting Spain's commitment to reduce its deficit to 4.4 percent of GDP next year from an estimated 6 percent this year.

"That is our goal, that is our commitment and we are going to stick by it: 16.5 billion euros in deficit reduction in 2012," Rajoy said.

But he noted this depends on the outgoing government's deficit and GDP growth forecasts, and the numbers are not in yet. Rajoy's new government will approve by year's end an extension of the 2011 budget as a stopgap measure and then offer a full 2012 budget by the end of March.

Spain's overall debt stood at €706.34 billion ($919.6 billion) as of the end of September, about 66 percent of GDP. While that figure is not high compared with other European countries — Italy's is almost twice that — the regional debt levels are worrying and there is an overhang of bad loans from the collapsed property sector.

Ben May, analyst at Capital Economics, said the eurozone debt crisis is likely to worsen next year, hindering Spain's efforts to bring its finances and economy back to health.

Capital Economics forecasts Spain's economic output will fall by 1.5 percent in 2012. "In that environment, it will be very difficult to reduce the budget deficit even if they do implement additional austerity measures," May said.

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