SPAIN´S ECONOMY / THE FINANCIAL TIMES LEX ( HIGHLY RECOMMENDED READING )

Spain’s economy


Published: February 1 2010 09:30

Procrastination has been a hallmark of southern European governments, putting off until mañana what they should have done years ago. Greece’s debt levels and budget deficit have occupied centre stage recently. But a potentially greater drama is unfolding in Spain. With a Greek-style budget deficit forecast to top 12 per cent of gross domestic product this year, Madrid now forecasts sovereign debt will peak at 74 per cent of GDP in 2012, double the pre-crisis figure – although still far off Greece’s current 115 per cent level. That means Spain still has time to put its house in order, which is just as well: with an economy four times bigger than Greece’s, any Spanish problems are likely to be more widely felt.

Nonetheless, Spanish finance minister Elena Salgado last week announced an austerity programme that aims to cut its budget deficit to 3 per cent of GDP by 2012. Half of that shrinkage will come from public spending cuts – tricky, as much of the required adjustment is supposed to come from Spain’s fiercely independent regional governments. The other half is expected to come from higher economic growth, though that can’t be counted on. Meanwhile, one in five Spaniards is unemployed.

Ms Salgado’s measures went further than Portugal’s, but fell far short of Ireland’s. Even so, Spanish debt investors appear to have warmed to her plan; spreads on Spain’s 10-year government debt over bunds narrowed to 85 basis points on Monday from 100bp last week. Spreads do, however, remain wider than before the crisis. Indeed only Dublin’s budget plan has managed to soothe bond markets since fears that Greece’s crisis might spread first appeared.

Brussels’ response to Athens’ travails, much like investors’ to Madrid, has been like a game of chicken: to force an adjustment, Greece has to believe it will drown in debt. At the same time, it is essential to the eurozone project that the Greek economy stays afloat. To the extent that Greece is a rehearsal for other spendthrifts about to run into trouble, Spain – with its pretend plan – is keeping to script.

Copyright The Financial Times Limited 2010.