Rajoy announces austerity plan to save €65bn

Thu, Jul 12, 2012, 01:00

SPAIN UNVEILED a €65 billion austerity plan to avert the threat of a full sovereign bailout, a move that came amid violence on the streets of Madrid as police fired rubber bullets at protesting miners.

The government said seven people were arrested and about 70 injured during clashes outside the industry ministry, which followed the miners’ two-week march from northern Spain in protest at earlier cuts in coal subsidies.

Yesterday Spanish prime minister Mariano Rajoy introduced the new austerity measures in congress, saying he recognised tax increases were at odds with his pledge to cut them.

The country’s main trade unions said they will mobilise large street demonstrations in response to the measures, which they said “will make the economic crisis and unemployment worse”.

The new measures include a three-point increase in the main VAT rate to 21 per cent, cuts to civil servants’ wages and a reduction in unemployment benefit. The saving will be made over the coming 2½ years.

“We Spaniards cannot choose whether or not to make sacrifices,” Mr Rajoy told deputies. “We don’t have that freedom.”

The prime minister also announced local government personnel cuts, a reduction in political party funding and new taxes on energy as well as plans to privatise airports, ports and railways.

The measures are due to be approved at tomorrow’s cabinet meeting and most are expected to come into immediate effect.

The package comes the day after euro zone finance ministers agreed to give Spain an extra year to cut its public deficit from 8.9 per cent to 3 per cent of national economic output. That target must now be met by 2014.

Spain is in a double-dip recession, unemployment has climbed to 24.4 per cent and tax revenues are down, raising doubt over the government’s ability to meet the new target. Uncertainty over its economy has kept Spain at the centre of the euro zone debt crisis for months. Market turbulence intensified in recent weeks as the government sought a European bailout for its banks.

Analysts believe that the interest rate Spain has been paying recently on international markets of about 7 per cent is not sustainable, fuelling concerns about the possibility of a full sovereign bailout.

Mr Rajoy, a conservative who took office in December 2011, acknowledged that he has broken campaign promises, but insisted the measures were needed.

“I said I would cut taxes and I raised them,” he said. “I haven’t changed my attitude. I don’t rule out reducing them when we can, but things have changed and we have to adapt to that. These are exceptional measures for exceptional circumstances.” Spain is in “a crucial moment that will decide our future”, he added.

Opposition socialist leader Alfredo Pérez Rubalcaba cast doubt on Spain’s ability to meet Brussels’s targets. “If you don’t change economic policy, Spain won’t reach its deficit goal and it won’t grow,” he said, pointing to the policies of France’s François Hollande as being more apt.

In separate developments, international regulators warned of significant challenges ahead for European banks and Italy’s technocratic government appointed a new finance minister.

The London-based European Banking Authority said an industry-wide recapitalisation exercise largely exceeded its goals, with the strengthening of banks’ capital base proceeding to plan.

“Significant challenges remain to exit the crisis and comply with the new regulatory standards approved by the G20, but this was a necessary and important step in the process of repairing banks’ balance sheets across the EU,” said Andrea Enria, the authority’s chairman.

Italian technocrat premier Mario Monti, who has held the finance portfolio since late last year, moved yesterday to hand over responsibility for it to deputy economy minister Vittorio Grilli.

Mr Grilli, formerly chief of the Italian treasury, has represented Mr Monti at several international meetings. He was a contender last year to succeed Mario Draghi as governor of the Bank of Italy when Mr Draghi left to take charge of the European Central Bank.