Rajoy keeps his course

This year has seen the economy worsen, unemployment grow and protests spread

But the Prime Minister shows no sign of wavering from the course he has chosen

Prime Minister Mariano Rajoy, photographed at a November 27 press conference / PIERRE-PHILIPPE MARCOU (AFP)

On Monday, December 3, Spain woke up to the news that one of the country's leading businessmen, and the former head of the confederation of employers, Gerardo Díaz Ferrán, had been arrested on charges of money laundering and trying to conceal assets sought by 47 banks and businesses, as well as more than 10,000 of his former employees. Later in the day, health professionals in Madrid would stage another strike in protest at plans to privatize the capital's hospitals and for ongoing spending cuts. The labor unions would highlight the government's decision not to keep pensions in line with inflation, while staff at Spain's leading airline Iberia were preparing a six-day strike over the Christmas period against plans to lay off up to 4,000 of their number.

Prime Minister Mariano Rajoy was meeting with labor leaders, two weeks after a general strike, and would tell them that there was no alternative to the policies he had applied over the last year: "We have no choice. Next year we need to seek new loans of 230 billion euros."

The labor leaders were told by Rajoy that German Chancellor Angela Merkel had let him know that a bailout, which could bring some relief to public accounts, might not be approved by the German parliament, besides possible opposition from other EU states. The prime minister said that he was prepared to continue talking, and the union bosses said that they too were prepared to continue talking. But the reality is that Rajoy is not about to change direction.

We have no choice. Next year we need to seek new loans of 230 billion euros"

During his first year as prime minister, unemployment has grown by 500,000, with a quarter of the workforce now jobless: 5.78 million people. No progress has been made on reducing a public deficit that reached 90 billion euros at the end of 2011, and the economy continues to worsen and poverty increase.

The Popular Party (PP) leader was given a convincing majority in last November's elections to sort out a country mired in crisis. But opinion polls show that Spaniards now have little confidence in his ability to steer the country out of the doldrums, and faced with an administration that shows little inclination to listen either to the opposition or the labor unions, growing numbers of people are taking to the streets to protest the austerity cuts and their impact on health, education and public sector jobs. Salaries have been cut, income and sales tax raised, and there have been two general strikes.

Over the last year, the prime minister has broken just about every election pledge he made in the hope of getting the economy going again. But Spain remains firmly anchored in crisis, with no light at the end of the tunnel.

Since his inauguration on December 21, 2011, Rajoy has focused on little else other than the public deficit - trying to balance the country's books by cutting spending and attempting to increase income - along with reducing the cost of borrowing; unemployment, which seems headed inexorably toward the six million mark; and GDP. But he knows that there will be no economic growth without jobs, and without jobs there will be no increase in consumption, and without more consumption there will be no income, and without income the deficit will be higher. And with a higher deficit, borrowing costs will continue to be a problem.

He has broken every electoral pledge in the hope of getting the economy going

But Rajoy's hands are tied, and the real decisions are being made in Brussels and Berlin: the German government and the European Union have made it clear that there will be no financial aid without major sacrifices.

Rajoy knew this when he took office. A few days before he was sworn in, he resignedly told his colleagues at the PP's Madrid headquarters: "I don't have much room for maneuver. I have to do what Europe tells me. I have read the letter that they sent to Zapatero and have to do what it says."

The missive, which Rajoy's predecessor, José Luis Rodríguez Zapatero, did not follow to the letter, recommended implementing labor market reform "with low levels of redundancy payments for a limited period of time," and eliminating collective wage agreements in favor of allowing companies to negotiate deals with their workforce. The European Central Bank (ECB) called for budget cuts and changes to the law to increase competitiveness in the energy and services sectors, as well as freeing up empty properties for the rental market.

Broken promises

  • Tax hikes. In March 2010 Rajoy said that "sales tax will mainly affect pensioners and the unemployed, who spend most of their income on consumption. Increasing sales tax is a sign of poor government. Raising taxes, particularly those related to consumption, at a time of crisis, is madness." What he did: On December 30, 2011, the government hiked income tax and property tax by up to seven percent. In July of this year, the government put up two rates of sales tax from 18 to 21, and eight to 10 percent. 
  • Health and education. What he said in November 2011 : "I am going to cut spending on everything except pensions, and [...] I will avoid cuts to health and education. Speaking at an electoral campaign meeting in November 2011, the then-mayor of Madrid, Alberto Ruiz-Gallardón, said: "The PP promises that neither health nor education will be affected by the economic crisis." What really happened: In April 2012, the government approved measures to cut 10 billion euros from education and health spending.
  • Pensions. What Rajoy said on December 21 at his swearing-in ceremony: "Our aim is to guarantee the purchasing power of pensioners." What the government did: In November, the government decided not to increase pensions in line with inflation, meaning that their purchasing power has fallen by 1.9 points in 2012, more than in the seven preceding years under the Socialist Party.
  • Housing. What Rajoy said at his swearing-in: "We will maintain the low rate of tax on house purchases, but only in the case of first homes, and with a price limit." The government raised property tax from four percent to 10 percent on July 14, 2012.

Fully aware that for the foreseeable future he would be taking his orders from the EU and Germany, at his swearing in ceremony, Rajoy said that he was about to write "a new page in the history of Spain's democracy," and that he would "tell the truth, even if it hurts, with no embellishments and without excuses." In short, he would call a spade a spade.

What Rajoy didn't say at his inauguration is that he would be introducing labor reform that would make it easier and cheaper for firms to sack people by reducing redundancy payments to 20 days per year worked, up to a maximum of 12 months' compensation; or that he would allow pensioners' spending power to fall; that he would pass unprecedented spending cuts in health and education; let tax dodgers off; nationalize failed savings bank merger Bankia; ask the EU for money to bail out the banking sector; and agree to set up a bank in which to store the sector's bad assets.

This would all come later.

At his second Cabinet meeting, just nine days after that inauguration speech, Rajoy's government approved an income tax hike, as well as raising property taxes, extending the office hours of public sector workers, cutting funding to political parties and labor unions, as well as a pay freeze for public sector workers. This would be the beginning of an avalanche of unpopular measures he would implement in a desperate bid to balance the budget.

Meanwhile, the job of telling the plain and painful truth would fall to Deputy Prime Minister Soraya Sáenz de Santamaría and other ministers.

Since then, ministries and other government departments have been searching for new sources of income given their ever-thinner slice of the budget pie, while looking at how to reduce their spending. The result has been a series of meetings at which a specially set-up commission has pushed through increases in taxes and reductions in spending, and which have led to widespread protests involving just about every section of society.

Prescription costs have been raised, as have the number of pupils in classrooms to make up for a reduction in staffing levels. Immigrants without residency papers are now liable to a monthly contribution toward medical costs, legal aid has been cut, and the scope of the previous administration's legislation to provide funding to families who look after elderly or infirm relatives at home has been drastically cut back, while rent subsidies to help young people leave home have been chopped. The latest proposal is co-payment for non-urgent ambulance journeys. The government is also considering introducing a toll system for the country's network of motorways, although some voices within the administration have said that this would hit road transport businesses hard and reduce competiveness.

The priority objective is to cut the deficit, as the EU has demanded"

"All efforts must be made to achieve the priority objective of reducing the deficit, as demanded by the European Union. All decisions are subordinate to agreements with Brussels," is how one senior government official puts it. Brussels is a presence at the weekly Cabinet meeting, and sets the lines that Rajoy and his government cannot cross.

The outcome of these policies has so far only worsened Spain's situation. The depression continues unabated. Unemployment continues to rise. The risk premium stubbornly sits above 400 basis points, a figure that in August 2011, led Zapatero's government to pass a law limiting the level of the public deficit.

Rajoy has also paid a political price for his policies. After following the example of British Prime Minister David Cameron, who skillfully managed to avoid committing himself to any pledges during his election campaign in 2011, he kept his true intentions to himself, knowing that they were going to be very unpopular. He also knew that they would provoke at least one general strike, but what he didn't count on was that some in his own party would turn on him.

The regional elections in Andalusia in March, where the Socialist Party managed to hold on to power thanks to support from the United Left, surprised and worried many in the PP, seeing it as a referendum on the government's performance. Polls showed that PP voters were deeply concerned and unhappy about tax hikes, as well as a sensation that the government was continually improvising.

Rajoy now finds himself between a rock and a hard place: the crisis and the demands of the European Union. His response has been to keep as low a profile as possible, and above all, avoid appearing before Congress to explain his policies.

Instead, the task of pushing forward tough new policies has fallen to Education Minister José Ignacio Wert and Justice Minister Alberto Ruiz-Gallardón, who have taken the political flak. Rajoy is happy to give the impression that they are acting on their own initiative. Some observers have suggested that Rajoy's refusal to carry the can has encouraged most of his Cabinet to follow his lead and keep a low profile, hoping that the storm will pass over them. Others say that Rajoy is so absorbed by the crisis that he has no time or energy to formulate longer-term policies and that government is to all intents and purposes on hold.

Ministers' proposals to restrict abortion or reform schools provide a distraction

Gallardón, a political survivor if ever there was one, and Wert, who before taking office was Rajoy's strategist, are very useful to the prime minister. Their proposals to restrict abortion or to inflict further changes to the education system meet the approval of the PP's more conservative elements and to some extent provide a welcome distraction, as demonstrated by media uproar over Wert's plans for teaching Spanish in Catalonia in recent weeks, which has diverted attention away from the issue of the deepening impoverishment among the country's eight million pensioners.

The prime minister's supporters highlight his ability to stand firm through the crisis, and applaud his having resisted calls from the increasingly squeezed banking and business sectors to ask for an EU bailout that would lower their borrowing costs. In fact, Rajoy is ending his first year in office without a major crisis within government ranks, although several ministers and other senior party figures admit that many in the Cabinet are close to breaking point. What some interpret as examples of Rajoy's inaction, meaning that many problems go unaddressed, others prefer to see as yet another sign of his ability to remain focused on the task at hand.

Finance Minister Cristóbal Montoro is said to be at the end of his tether, although his influence is greater than ever, given the key importance of his ministry in controlling spending. With Rajoy, nothing is ever definitive. For a while it looked as though somebody would have to pay the political price for the failure to meet the deficit reduction, and that Montoro's would be the head to roll. So far, despite his failure to get the regions to cut spending, he remains in office. It has now been widely accepted that the country will not meet this year's deficit target. The prime minister himself is prepared to concede something that even until a few weeks ago was considered impossible. But in a Cabinet on a war footing, life is measured from day to day, and what was unthinkable a week ago it now takes in its stride.

Economy Minister Luis de Guindos has also been through a tough time, particularly in Europe, but he has implemented Rajoy's maneuvers to avoid a bailout, and that is the most important thing. The prime minister is under a lot of pressure to appoint a deputy directly in charge of the economy, somebody capable of keeping the Cabinet on message, as well as projecting an image of confidence to the electorate. In reality, the job is Rajoy's, given that he is the head of the special commission set up to oversee economic affairs. But the Galician politician never explains his decisions, for example, why he opted to not increase pensions in line with inflation last month.

De Guindos and Montoro both see themselves occupying the position of deputy prime minister tasked with overseeing economic policy. De Guindos is probably the more likely of the two to get the job, say many close to the inner circle, but Rajoy has always preferred to leave his decisions to the last minute, and will continue to do so. Álvaro Nadal, Rajoy's economic advisor, is also in the running. He has been behind many of the government's key decisions, and attends all of Rajoy's important meetings at home and abroad, including those with Merkel, French President François Hollande and Italian leader Monti.

Rajoy is ending the year without a major crisis within goverment ranks

Rajoy comes to the end of his first year in office weather-beaten but composed. After all, there is always somebody else to blame. First it was the mess that the Socialist administration had left behind; then it was Europe's fault, when it couldn't agree on a deal over banking union. The perfect storm that could sink his boat is nowhere on the horizon: a strong opposition or an internal crisis within the party.

The PP's convincing win in the regional elections in Galicia in October were a lifeline. After disappointment in Andalusia, there were fears that the party's regional leaders might start to gang up. Now Rajoy has another two years of electoral peace, until the 2014 European elections, which will be followed by municipal and regional polls early in the following year, and general elections at the end of 2015, if all goes to plan. He has time to try to regain the initiative, and above all to wait, his favorite game, hoping that things will improve and that his polices will be seen to be vindicated.

Rajoy is obsessed by the economy and borrowing costs. But he faces a longer-term problem: the Catalan government's plans for independence, which were the core issue in last month's regional elections. The PP adroitly managed to turn the contest into a battle between Rajoy and Catalan regional premier Artur Mas, and Rajoy won. That said, the pact between the rightwing CiU and the left-leaning ERC in the region will produce problems very soon.

Rajoy now faces his second term in office, a year that will once again be about holding on, about resisting the different pressures he faces: from Europe, from the electorate, the labor unions, banks and the business sector. But Rajoy has managed to keep them all at arm's length for the moment. His electoral program is but a memory, all his promises broken. As he says, he is now governed by reality, not by what he would like to do.

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