The market tears up Zapatero’s social contract

“My government’s ambition is to make this an innovative, creative, entrepreneurial country while upholding the social welfare state… I think we should learn the lesson of the Great Depression: when an economy enters a deep recession, the only way we can come out of it is from a big push from the public sector.”

José Luis Rodríguez Zapatero uttered these words less than a year ago. At the time, with Spain mired in recession, critics could argue with his ideological stance, but nobody could doubt his convictions.

However, the prime minister’s announcement on May 12 of a broad and radical raft of austerity measures has seen him perform the biggest U-turn of his six years in government and tear up his big-spending, social welfare doctrine.

Those measures include an average 5-percent cut in civil servants’ salaries (the first ever such reduction in the democratic era), a freeze on pensions next year, a €6-billion slashing of public investment, and a €600-million drop in foreign aid.

Some measures, such as the elimination of the €2,500 “baby bond” – a fixed-sum handout to all mothers following the birth of a child – were clearly more expendable than others. However, making savings through the revision of the price of medications in the state health system, for example, clearly pains a leader who has invested so much faith in the welfare state.

“No prime minister likes to announce cuts – and I like to do so least of all,” a stony-faced Zapatero told Congress as he revealed a plan which would, he said, reduce the budget deficit from 11.2 percent of GDP in 2009 to just over six percent in 2011. “Circumstances have forced us to take these measures,” he added.

Those circumstances were the markets, which had once again started buffeting Spain in recent days. These were the same markets that Zapatero viewed with such suspicion earlier in the year when speculation had sent Spanish bond yields soaring; the same markets that Public Works Minister Pepe Blanco had seen as part of an international conspiracy against Spain and the euro. Bowing down to them by abandoning a core policy tenet was clearly painful.

But Zapatero had little choice. Three weeks earlier, he had rejected opposition leader Mariano Rajoy’s calls for action to tackle the deficit. But now those calls were coming from the EU. Ignoring Rajoy may have been easy, but as holder of Europe’s rotating presidency and having (rather unrealistically) outlined plans to lead the bloc out of recession, the Spanish leader could hardly ignore Brussels. A timely phone call on May 11 from Barack Obama, who was concerned at how Europe’s woes could affect the American recovery, stiffened Zapatero’s resolve.

Zapatero had rejected these kinds of austerity measures previously not just due to ideology, but also because he believed that they would cripple an already weak recovery.  The government has already acknowledged that this package will slow growth.  But the more unpredictable – and probably dangerous – upshot of this for Zapatero is political, rather than economic.

The fallout

When the government unveiled reforms to the pensions system earlier this year there was a ripple of anger from the unions, which until then had enjoyed an almost idyllic relationship with this Socialist administration.  The May 12 announcement, however, appears to have destroyed that rapport.

“A social conflict has begun which will have a serene, reflective, responsible, but also clear and overwhelming expression,” noted Cándido Méndez, leader of the UGT union.

A public sector strike, mooted for June 8, is still more of a threat rather than a promise, but it is surely a prospect Zapatero fears, given the damage that such protests inflicted on his conservative predecessor José María Aznar and fellow Socialist Felipe González. The only way to avoid such action would probably be to climb down on some of the measures, thus appearing weak to voters, annoying European partners and further spooking the markets. Now he has started down the road of austerity, Zapatero has to keep going.

An El País poll taken the day after the package’s announcement painted a dismal picture for the Socialists, who had fallen nine points behind Rajoy’s Popular Party. Zapatero, meanwhile, was at his lowest-ever rating at 3.7 out of 10. For the government, the upside of this is that Rajoy himself has an even worse standing at 3.6 – the fruit of the PP’s corruption scandals and his own lack of charisma. Moreover, there is a chance that Zapatero’s own unpopularity has hit its lowest point.

As for the PP, it seems that instead of welcoming the kind of austerity policies the party had been broadly encouraging, the opposition party is intent on attacking the government further in this area.

Rajoy, as columnist Xavier Vidal-Folch so colourfully put it, “beat the monkey to make him speak English; and when he did speak English, he kept on beating him.” With an eye on Catalan elections in the autumn, Rajoy probably feels he can ill afford to publicly pat his rival on the back. The Socialists will therefore have to work hard to gain support from other parties to push these measures through – unless Zapatero does so by decree.

But outside the debating chamber, the prime minister needs to shake off the image of improvisation that has tainted his handling of the economy over the last two years. Some kind of austerity package was inevitable, but unveiling it earlier would have saved Spain a good deal of anxiety.

Spain’s leader might even come through social and political opposition to his measures relatively unscathed. But if he is going to recover his credibility, he needs to convince Spaniards that he is acting ahead of the curve on the economy and not simply responding to circumstances beyond his control. Standing firm on his latest political gamble will be risky but it might just earn Zapatero a new reputation for firmness and taking tough decisions.