Analysis: Spain should temper austerity, look to growth

Fri Jan 13, 2012 10:07am EST
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By Nigel Davies

MADRID (Reuters) - Meeting Spain's draconian austerity targets would cost every worker more than 2,000 euros this year, and even unforgiving markets sense it may be time for the government to moderate the pain and try to bolster a stagnant economy.

New Prime Minister Mariano Rajoy insists he can slash Spain's deficit to 4.4 percent of economic output by December.

But that would mean estimated cuts of 40 billion euros, ushering in a deep recession that would undermine an EU drive to stimulate growth and likely raise the country's chronically high unemployment rate further beyond 20 percent.

Underlying Rajoy's pledge are well-founded concerns that, after missing its deficit target in 2011, Spain would be punished further by investors if it rowed back on this year's budget goals, potentially leaving it unable to pay back its debts.

But some market players now believe he would be better off setting a more manageable goal of a deficit around 5.5-6 percent of GDP compared with last year's 8 percent-plus, freeing up funds for much-needed labor reforms and a banking sector crippled by soured property loans.

"(A cut to 4.4 percent) is not going to happen, but if you look at it positively and dilute the targets then this would be welcomed as more realistic by markets," said Silvio Peruzzo, economist at RBS.

Spaniards have reluctantly accepted a first round of austerity worth around 15 billion euros, but 25 billion euros more would likely mean cuts to the country's prized welfare state.

That might well eat into the popularity of a government elected by a landslide in November.   Continued...