World Affairs - Business & Finance

Rocketing unemployment is going to make it even harder for Spain to meet promises to slash its budget deficit, and it is already hard to find an analyst who believes the growth assumptions behind the forecasts.

The number registered as unemployed topped 4 million in January, official data showed Tuesday, an ominous development for a government that last week promised to save €50-billion but neglected to say exactly how.

The government's forecasts were also based on the assumption that growth would be around 3 per cent again by 2012, a scenario dismissed by analysts as wishful thinking for an uncompetitive economy still suffering from a deflating Spanish property bubble.

The austerity announcement came as Socialist Prime Minister Jose Luis Rodriguez Zapatero returned from the World Economic Forum in Davos, where he was forced to try to reassure investors that Spain was not headed for similar trouble to Greece.

Cutting spending is going to be particularly hard given that the country that created jobs at the highest rate in Europe for a decade from the mid-1990s is now destroying them more quickly than anywhere else on the continent.

For now Spain has largely escaped a government bond selloff thanks to a public-debt-to-GDP ratio that is still a relatively low 60 per cent, only about half that of Greece.

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Elena Salgado, the normally sprightly Spanish finance minister, could not disguise her discomfort when she announced an austerity plan designed to slash successive budget deficits and restore the country's credibility on international markets.

She had good reason to be uneasy. The table of figures she presented on Friday showing Spain's "fiscal consolidation path" through €50bn ($69bn, £43bn) of savings over four years had some embarrassingly blank spaces for projected budget deficits in 2010, 2011 and 2012.

Spain, the empty boxes tell us, wants to reduce its total public sector deficit from 11.4 per cent of gross domestic product in 2009 to the European Union target of 3 per cent of GDP in 2013, but is not sure if it can - or how to do it.

Central government intends to play its part, but budget cuts need the support of autonomous regions, local authorities and trade unions. They may not co-operate.

It is bad enough that investors have lost faith in Greek economic policy but, if the eurozone is to remain intact, it is essential that Spain swiftly restores order to its public finances.

As one of the "big four" eurozone economies - with Germany, France and Italy - Spain is four times as large as Greece, five times the size of Ireland and six times that of Portugal.

Yet Spain's immediate prospects are dismal. It is the only big developed economy not expected by the International Monetary Fund to record year-on- year growth in 2010. It is forecast to shrink 0.6 per cent.

Spain’s Cabinet will discuss spending cuts of as much as 50 billion euros ($70 billion) by 2013 as it aims to slash the budget deficit by two-thirds to meet a European Union target.

The government will discuss the so-called austerity plan that aims to cut current spending in the central and regional administrations, said an official at the prime minister’s office in Madrid today who declined to be named in line with policy.

Spain, mired in recession with the highest jobless rate in the euro region, has come under scrutiny amid concerns that smaller European countries like Greece may struggle to finance their growing debt. Even as Spain’s public-debt burden is about half the size of Greece’s, the risk premium on Spanish bonds has surged to the highest in nine months.

Spain’s public-sector deficit probably amounted to 11.2 percent of gross domestic product last year, according to forecasts from the European Commission, which has set a 2013 deadline to cut the shortfall to the 3 percent EU limit. The country’s debt burden is set to double from before the crisis to 74 percent in 2011.

Spain’s economy has been contracting since the second quarter of 2008, pushing the unemployment rate to 19.4 percent as the collapse of a construction boom destroyed more than a million jobs. In response, the government created one of the biggest stimulus programs in Europe, putting builders back to work, and extended jobless pay for the long-term unemployed.