Break-up threat to Spain as PM sets out E39bn austerity cuts

Sep 27, 2012

Eurozone crisis now threatens the survival of a nation-state, warns the Financial Times

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AMID violent anti-austerity protests and a brewing constitutional crisis over the Catalonia region, the Spanish prime minister will today attempt to calm the markets by announcing tough 2013 budget plans. He is expected to set out a combination of tax rises, pensions restrictions and other state expenditure cuts designed to reduce the national deficit by E39 billion.

Yesterday, Prime Minister Mariano Rajoy called on Spaniards to ignore "short-term interests", says the Financial Times. Alfredo Pérez Rubalcaba, leader of the country's opposition socialist party, said: "Spain is increasingly slipping from his hands. There are very clear fractures in Spain, and the one I am most worried about is social fracture."

The prospect of Catalonia voting to secede in a snap election has pushed Spain into a constitutional crisis, continues the FT in an analysis of the worsening situation. The eurozone crisis has brought down European governments, but it is now threatening the survival of a nation-state.  

"The north-south fractures inside the EU are starting to open up within member states," says the paper. Spain "must now contemplate the real possibility that its plurinational state, which replaced the suffocatingly centralist Franco dictatorship with highly devolved regional government, may break up."

Reuters reports that while Rajoy has been publicly resisting calls to move quickly to request assistance, he is working behind the scenes to put together the proposals to meet conditions for ECB aid. Today's presentation of a tough 2013 budget will be sold to voters as home-grown, not imposed from the outside. But they are designed at least in part to persuade eurozone partners and investors that Spain is doing its bit toward cutting the deficit despite the protests.

Yesterday, diplomats reported intense last-minute pressure on Madrid to freeze pensions and take tougher measures.

With violence also flaring up in Greece, European equities saw their worst day in two months. The euro hit a two-week low against the dollar and Spanish 10-year bond yields rose back above six per cent.

"The recent dose of central bank support has kept broader markets well-behaved for the time being," Barclays Capital said in a note to investors, reported Reuters. "The announcement of detailed stress test results, the 2013 budget, and a structural reform package from the Spanish government are expected before the end of the week. These will be crucial in determining whether the current episode intensifies or not," it said.

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Surely, it is time for all of the European Governments to sit around the table and have an honest and open debate - the question on the table being "What IS the Euro trying to achieve?".

As a layman but, hopefully, with some objectivity and common sense, it seems to me that this is not a sensible way to conduct an economic and financial policy, if most parties to this project have such widely divergent cultures, economies, industrial strengths, national GDPs and, indeed, expectations of membership of the common currency.

It is evident that political considerations, driven mainly by Germany, for whatever motive, have transcended economic common sense and reality.