Mariano Rajoy, Spain’s next prime minister, is right when he says the country can’t count on miracles. But, a landslide victory in Sunday’s national elections, at least, gives him a chance to implement bold reforms. Still, the situation is tricky, especially as the new government will not take office until just before Christmas. Rajoy should keep the European Central Bank on speed-dial.
Rajoy said all the right things in his victory speech. The government’s priorities will be to cut the 21.5 per cent unemployment rate, the budget deficit and excessive debt. He called on the Spanish people to make a collective effort, saying the country needs to be part of the solution, not the problem. He will also summon the heads of all the regions, presumably to discuss their excessive deficits. Since the Popular Party already governs in a majority of them, a tough collective plan should be doable.
But, as far as markets are concerned, talk is cheap. Investors will want to see evidence that the new government can actually address the country’s long-standing structural weaknesses. The spread between Spain’s long-term bonds over their German equivalent widened 20 basis points on Monday morning.
That puts helpful pressure on Rajoy and the nation. The new leader can get started before taking office. The planned meeting with the regional governments is a good start. He should also name the economy minister, a crucial figure to get Spain’s economy on track again. Another priority must sitting down with the Bank of Spain — still run by a socialist appointee — to discuss the next steps in Spain’s long and complicated financial restructuring.
The Popular Party may have unprecedented power but it still faces a daunting task. Rajoy has pledged to meet next year’s deficit target of 4.4 per cent of GDP, even as the country is likely to miss this year’s target of six per cent. And, Rajoy probably does not have enough power to calm investors, who are in panic mode. Without help from the ECB, a quick and substantial fall in Spain’s sovereign bond yields — at 6.5 per cent on Monday morning — really would be a miracle.
