Pain in Spain As Austerity Reaches $80bn

July 12, 2012Spainby EW News Desk Team

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Spain has announced another sweeping round of budget cuts, as Prime Minister Mariano Rajoy warned that the country would struggle to meet its debt reduction targets mandated by the European Union.

In a six-hour address to parliament, Rajoy called on Spaniards to back the new austerity measures which include a value-added tax increase to 21 percent from 18 percent, as well as a reduction of unemployment benefits and public sector wages.

Spain currently has the highest unemployment rate in the eurozone, a staggering 25 percent.

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Warming that the economy may not grow at all next year, Rajoy described Spain’s economic situation as “extraordinarily serious”. Madrid is anticipating a 1.7 percent economic contraction this year, as the economy fell back into recession in the first quarter this year.

The government had previously said it would not need to make additional cuts this year, and had rejected the VAT hike. Acknowledging the contradiction, Rajoy said:

Circumstances change and I have to adapt to them.

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"The excesses of the past are being paid for right now," he said, adding that Spaniards had never before experienced such a recession.

Recent government data showed that Spain is on track to overshoot its deficit reduction target for this year, which currently stands at 5.3 percent of its gross domestic product. Spain had a budget deficit of 8.9 percent last year.

Eurozone finance ministers agreed earlier this week to give Spain another year to meet its budget targets, as well as a 30 billion euros ($36.7 billion) bailout for ailing Spanish banks.

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However, the additional austerity measures could instead inflict more harm on the Spanish economy and prolong what is already a severe recession. Greece, which is in its fifth year of recession, is a prime example of how difficult it is to balance austerity and growth.

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In a note to investors, Nicholas Spiro of Spiro Sovereign Strategy wrote:

In the eyes of most investors, not to mention Spaniards, the fiscal retrenchment is never-ending and potentially ruinous.

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