Draghi’s admonition
The government should heed his advice to draw up a credible medium-term fiscal plan
Despite the almost protocol-like nature of his visit to Spain and his extreme courtesy, European Central Bank (ECB) President Mario Draghi imparted a few messages on Spain and its economic policy that, at least for the moment, the government of Prime Minister Mariano Rajoy has unreservedly resisted accepting. The most notable of these was Draghi’s call for a medium-term budget plan that details the spending cuts that should be introduced and identifies possible sources of increased revenues.
Although Draghi had some laudatory remarks on the “advances” made in the area of fiscal consolidation, he also drew attention to the undeniable fact that the government has so far failed to present a satisfactory program of budget adjustments — in other words, its economic policy.
The European authorities do not believe the outlines the Rajoy administration presented to the European Commission constitute a policy per se. The ECB president reminded the government that this task is still pending, while at the same time making it clear that the process of fiscal restrictions has yet to run its course.
Draghi’s request can in no way be considered as equivalent to the disgruntled demands of a creditor on a borrower. The ECB president knows full well that the perception of rationality in a process of economic adjustment as drastic as the one being applied in Spain goes some way toward lifting the bewilderment created among the public in that it confers some sense upon the cutbacks, and above all holds out the promise of an eventual recovery. That is why the ECB chief took pains to acknowledge that the Spanish people are having a bad time, particularly the unemployed.
It is perhaps because of a lack of ability that the government has failed to put rational time limits on the spending cuts and this lack of definition continues to place a further drag on the expectations of Spaniards.
The second important message conveyed by the head of the European monetary authority was an optimistic one, at least in theory. He said Spain’s banks are well capitalized and in a position to lend, and yet they are not doing so. Spanish analysts predict that the banks’ healthy situation will not translate into more lending until well into 2014. The two positions are not mutually exclusive, but confirm that an economic recovery is not likely to make itself evident this year, despite a few green statistical shoots — of which Draghi reminded us of — that unfortunately will be of insufficient scope to translate into more jobs.
The public does not get it
In this respect, the ECB president’s reading of the situation is more realistic and convincing than the government’s repetition of the mantra “the reforms will soon start to bear fruit.” Draghi explained in a straightforward way that the improvements have not caught on with the public and that the adjustment is not bringing about a visible impact on the “day-to-day lives of people.”
The government does not have a good track record of accepting advice. There is little hope of it starting to do so now, given that according to its particular interpretation of reality, the narrowing of Spain’s risk premium is the product of the decisions it has taken. It would make good sense to take on board Draghi’s recommendations before they become orders that are mandated.
