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Sep 26, 2012 | 15:33 GMT

4 mins read

Spain's Economic and Political Predicaments

Spain's Economic and Political Predicaments
Denis Doyle/Getty Images
Summary

Approximately 6,000 people gathered in Madrid on Sept. 25 to protest austerity measures imposed by the Spanish government. On the same day, Catalan regional government head Artur Mas announced that the region will hold early elections to legitimize its demands for greater autonomy.

Spain's economic crisis is weakening social stability and threatening the balance of power between the central government and the regions. At the same time, Spain is under international pressure to make decisions regarding its banking bailout and agreement with the European Union to reduce borrowing costs. The means to relieve these pressures are often contradictory, and Madrid will not be able to satisfy all of the parties involved.

The European Union and many members of the eurozone are eager for Spain to make a decision about its financial bailouts. In June, Madrid was granted a 100 billion-euro (128.4 billion-dollar) bailout for its banks but the government has not yet announced how much of these funds it will use. Madrid also wants to receive assistance from the European Central Bank and European Stability Mechanism to reduce its borrowing costs, but it has not yet taken steps to formally request help.

On Sept. 25, EU Competition Commissioner Joaquin Almunia became the latest in a long line of EU officials to ask Madrid for clarity. "It's highly risky (for Spain) to maintain the uncertainty, because you can come to a time when the cost of that uncertainty is bigger than any decision," Almunia said. Spain believes there is no need to rush into a decision as long as borrowing costs are tolerable, but the European Union and peripheral economies like Italy believe Spain's indecision only brings uncertainty to the markets.

Locator Map - Spain

Spain is also dealing with economic and political tensions at home. Madrid announced Sept. 25 that it will raise pensions in 2013 despite the economic crisis — a campaign promise that Spanish Prime Minister Mariano Rajoy will find difficult to keep if he wants to meet the European Union's deficit target of 3 percent of gross domestic product by 2015. Spain has already been granted easier deficit targets twice during 2012 after failing to meet its previous agreements.

Madrid also announced that later in the week it will activate a liquidity fund to help the Spanish regions finance their debts. A few hours later, Andalucia became the fourth of Spain's 17 regions to ask the central government for financial assistance. The regions have already requested roughly 14 billion of the 18 billion euros in the fund. Although Spain already has some of the money needed to help the regions finance their debts, it will need to go to the markets to come up with the rest of the funding.

The regions also pose a political problem for Rajoy. The central government wants to increase its oversight of the regional budgets because regional debts and deficits are a critical component of Spain's economic fragility. However, this idea has been rejected by the regions, especially those with long-standing disputes with Madrid over bids for greater autonomy, such as Catalonia.

The Catalan government used the region's National Day on Sept. 11 to request greater fiscal autonomy from Madrid and suggested that Catalonia could demand its independence. After a meeting in which Rajoy refused to accept Catalonia's request to raise and spend its own taxes, Mas announced Catalonia's plan to hold early elections Nov. 25 to legitimize its demands for autonomy. This move will increase political tension in Spain and call into question Madrid's ability to control the regions' budgets at a time when the government is trying to negotiate a new bailout with the European Union.

Spain's economic crisis fueled new protests in Madrid on Sept. 25 as demonstrators gathered in front of the Spanish parliament. The crowd consisted of Indignants — a youth protest movement that gained notoriety in 2011 for its protests against then-Prime Minister Jose Luis Rodriguez Zapatero — and members of various Spanish trade unions and activist groups. The protesters not only rejected Madrid's austerity measures but also expressed the belief that Spanish democracy has been "kidnapped" by the current government and that new elections are in order. Most of the protesters were young men and women; at present, half of the Spanish population under the age of 25 is unemployed. According to Madrid, clashes between demonstrators and police resulted in approximately 35 arrests and left 64 people injured, including 27 police officers. The protest came 10 days after a separate incident in which more than 50,000 people demonstrated in Madrid against austerity measures.

The Spanish government will present its 2013 budget (which is expected to include more spending cuts) on Sept. 27 and will likely announce new austerity measures sometime in October. Though the budget and measures will be unpopular, they could pave the way for an agreement with the European Central Bank and European Stability Mechanism on reducing the country's borrowing costs.

The array of challenges facing the Spanish government shows how Europe's economic crisis is affecting political, economic and social life in Spain. It has ignited old demands by the autonomous regions, threatening the country's constitutional order. It has also affected the two most vulnerable segments of the population: young people, who are impacted by widespread unemployment, and retirees, whose pensions are in jeopardy. The crisis is forcing Madrid to make decisions while under pressure from a number of forces with contradicting interests, making it impossible to satisfy everyone.

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