| Spain's Prime Minister Mariano Rajoy in Madrid on Wednesday. (Reuters)
Madrid, July 11: Struggling to meet agreed financial targets, Prime Minister Mariano Rajoy of Spain unveiled another package of tough austerity measures today, including a rise in the sales tax, reversing his previous stance.
The package is intended to reduce the budget deficit by $80 billion over two and a half years. It came after euro zone finance ministers decided early yesterday to soften Spain’s deficit target for this year to 6.3 per cent of gross domestic product, rather than the 5.3 per cent target that was set only four months ago.
The new austerity plan came as Finland’s Prime Minister, Jyrki Katainen, issued a warning today that the euro’s predicament was as perilous as at any time in the past two years.
One of the main elements of the latest round of Spanish austerity measures is a rise in the value-added tax to 21 per cent from 18 per cent. Rajoy’s government had previously argued against raising the tax amid concerns that it would stifle consumer spending. However, the latest budget data indicated that Spain needed to generate further tax revenue if it wanted to come close to meeting its deficit pledges.
“I know these are not pleasant measures but they are necessary,” Rajoy told lawmakers. “The circumstances have changed and I have to adapt.”
Rajoy also announced today that civil servants would lose their traditional Christmas bonus payment this year. Unemployment benefits will be lowered by 10 percentage points after six months out of work.
Though an EU summit meeting last month brought some calm to jittery financial markets, doubts have grown in recent days, forcing the borrowing costs of Spain, and potentially Italy, back up to levels seen as unsustainable in the medium term.
Despite the decision by euro zone finance ministers to make available by the end of the month $37 billion of the $122.6 billion of rescue assistance for a Spanish bank bailout, financial markets remain wary. That makes it far from clear that euro zone leaders have done enough to tide their currency over the summer break.
Spain’s government must seek to strike a delicate economic and political balance. While financial markets and European officials want evidence that its budget deficit is under control, new austerity measures could sink the country deeper into recession, intensifying the debt trap.
Rajoy also warned of more pain for Spaniards. “Growing and creating jobs isn’t possible today,” he said. “The outlook is truly sombre.”
The terms of the Spanish banking bailout suggested that some small investors may face losses. A document that spells out the details says that holders of hybrid capital and subordinated debt in state-rescued banks will have to take a trimming of their investments in order to minimise the cost to taxpayers of the banks’ restructuring, Reuters reported.
In an interview with Finland’s biggest daily, Helsingin Sanomat, Katainen said the last time things were so critical for the euro was in May 2010, when leaders scrambled to bail out Greece for the first time and assembled a rescue fund.
After the European Central Bank decided last Thursday to cut the rate commercial banks earn for parking money with it to zero, the euro hit a two-year low of $1.2225 on Monday, though it since stabilised and was trading at $1.2260 today.
One of the latest factors apparently unsettling the markets is the lack of a clear timetable for a decision by the German Constitutional Court over whether the euro zone’s new and permanent bailout fund, the European Stability Mechanism, is compatible with German law.