The government now has at hand Brussels' macroeconomic projections, and on the basis of the figures, it can draw up the budget for this year and accordingly make the necessary deficit adjustments. The European Commission has confirmed that in 2012 the Spanish economy will suffer a contraction of GDP of around one percent, and will remain in recession for at least the first three quarters of the year. Given that this calculation includes the dampening effects of the 15-billion-euro budget savings applied by the Rajoy government in December, but does not take into account the cutbacks that will have to be included in the budget (another 25 billion euros or so more), it is safe to venture that the contraction in the Spanish economy this year will be around 1.5 percent. In the context of a recession (the euro zone will contract by around 0.3 percent), it would appear that the Commission will be forced to revise the calendar for complying with deficit targets, once the Spanish government has made its amendment proposals public.
Once the Commission has accepted that it can negotiate making the commitments on deficits more flexible, a demanding and meticulous political task will lay ahead. Because what Spain will be arguing with Brussels is not just the simple concession of a few tenths of a percentage point, but rather a whole new scheme of deadlines and figures, giving the country at least two years to get the deficit under three percent. Based on the little that Chancellor Merkel and the European bureaucrats have learned from the case of Greece (a country in ruins that has been left in a permanent state of social revolt due to impossible conditions attached to its bailout packages), Spain can achieve a reasonable timetable and, of course, ensure that it is observed.
What's more, another delicate negotiation appears to be necessary. Brussels' argument, as announced by commissioner Olli Rehn, is that Spain must come up with a 2012 budget at the end of March that will include the criteria of 4.4 percent of GDP; then the Commission will make a decision. This approach reveals a high level of mistrust in terms of Spain's ability to make spending cuts and bring down the deficit; mistrust that has been translated into demands that the job is done in the worst conditions possible, while trusting in the generosity of the auditor to improve the conditions of the adjustment. But once the possibility of bringing down the deficit to 4.4 percent of GDP is committed to paper, there is nothing to stop Brussels from sticking to those drastic figures, and opting for minimal flexibility. It would be much more useful to know exactly what the limits of that flexibility are and draft the budget on that basis.
But even with the most generous timetable to achieve the necessary cutbacks, this period of recession will be very destructive for the Spanish economy. The fall in demand and the destruction of jobs (this time of open-ended contracts) could spark protests and social unrest. As such, it is necessary to insist that economic policies bring something more to the table than just spending cuts and restrictive decisions, and that there is some kind of stimulus for activity and employment. Until now, in place of a response to that question, silence has abounded.