Some difficult weeks are on the way. On September 1 the value-added tax hike comes into effect, but on this coming Friday or the next Prime Minister Mariano Rajoy will have to present the legal and economic reforms needed to meet the conditions set by Brussels in exchange for a bank bailout of up to 100 billion euros. These will determine, among other matters, the conditions relative to new labor market reforms and a shortening of the time-frame for a rise in the retirement age.
The arrival of the fall should at last bring reliable indications as to the attainability of the deficit reduction objective of 6.3 percent of GDP promised for 2012. And Rajoy will have to clear up the mystery he teased us with at the end of July, when he did not rule out the possibility of a request from the EU for a bailout, either hard or soft. But request or no request, it is likely there will be further adjustments, either imposed by Brussels, or in order to meet the objective for the deficit, which, according to recent estimates, now stands at around eight percent of GDP.
From recent statements by Economy Minister Luis de Guindos, it may be assumed that he now takes the bailout request for granted, though this will not be formalized until the first week of September when the ECB unveils its plans for reducing the risk premium. And only after the formal request will there be any discussion of the additional adjustment conditions that Brussels may impose in exchange.
Guindos believes, as does the managing director of the International Monetary Fund, that there is now no more margin for new spending cuts. This means that further adjustments will have to come on the revenue side — that is, from a new tax hike. Though the ruling Popular Party’s taboo on this possibility has already been broken with the rise in income tax and, above all, with the hike in value-added tax, any new step in this direction will have a heavy political cost for the PP, which campaigned on the repeated promise that it would not do this, and that tax hikes were no sure way to greater revenue.
The reproach Rajoy deserves on this point is not that of having changed his mind, but that of not having admitted his error in opposing the measures that his predecessor as prime minister had to introduce in 2010. He still has time to do so. Would it not be a good occasion for the prime minister to open the new political year, which will be that of the bailout, with some explanations that are long overdue, apart from complaining about the “bad inheritance” he received from his predecessor, and how he doesn’t like doing what he is doing? And would it not be a good occasion to propose an agreement with the principal opposition parties, to reach a consensus in which to address the sharp sacrifices that are going to affect the middle classes? And the opposition: should it not publicly promise to back the government in those policies that directly derive from the conditions of the bailout, or to jointly oppose those that they consider abusive?