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26 March 2014

Bloomberg: Rajoy wavering brings Italian risks to Spain


Prime Minister Mariano Rajoy is running out of time to make good on his pledge to complete an overhaul of Spain's economy.

With an election due by November 2015, the government is showing wavering resolve to tackle the European Union’s second-highest jobless rate or revamp the tax system after pushing through unpopular measures including a labour law reform and public sector wage cuts. The government this month rejected tax-change proposals from a task force Budget Minister Cristobal Montoro himself had appointed.

“What threatens Spain is an Italian scenario, where the recovery doesn’t gather enough speed to gain momentum", said Fernando Fernandez, a professor at IE business school in Madrid and a former International Monetary Fund economist. As pressure from financial markets and EU peers abates, Spain is paying less to fund itself than Italy, the euro region’s third-largest economy. That has allowed Rajoy to turn his back on measures economists say the Iberian country needs to grow more than 1 percent and dent a 26 per cent jobless rate.

Fernandez, a member of Montoro’s tax task-force, said he doesn’t expect the government to follow the group’s advice to boost growth while reining in one of the largest budget deficits in the EU. Spain last year emerged from its second recession since 2008. “From now on the government wants consensus, it won’t continue using its absolute majority to push aggressive reforms that could achieve growth of 3 per cent", he said in an interview.

Rallying political support is coming to the forefront of Rajoy’s agenda as Spain pays the least on record to borrow for three and five years. The Treasury has covered a third of its medium and long-term funding needs for 2014 as the yield on its 10-year benchmark bond has fallen to 3.29 per cent from a euro-era high of 7.75 per cent in 2012, when the nation sought EU aid. That’s five basis points less than the amount Italy, which has respected EU deficit limits for the past two years, has to pay for the same period of time. Investors remain wary of the country after a fragmented parliament brought down three governments in the last three years, hobbling efforts to foster growth.

The Bank of Spain said that the government missed its budget deficit target of 6.5 per cent of gross domestic product in 2013. Overspending amounted to 7.1 per cent of GDP including aid to the banking sector, it said.

Corrective action taken by the government to finance pensions isn’t enough, central bank Governor Luis Maria Linde said during a news conference in Madrid. “It is one of the economy’s major financial and social problems and more measures should be taken.”

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