Spanish Prime Minister Mariano Rajoy meets with German Chancellor Angela Merkel in Berlin, Jan. 26, 2012. Spain's business community is worried Mr. Rajoy's new government has stalled in its efforts to reform the country's ailing economy.
After years of decrying as incompetent the former Socialist government of Jose Luis Rodriguez Zapatero, Spain's business leaders and fund managers are having their first twinges of doubt about the Popular party administration they elected in November to replace it.
Mariano Rajoy, PP Prime Minister, had raised expectations he would enact radical economic reforms to save Spain from the euro zone sovereign debt crisis and the ignominy of a bailout such as those of Greece, Ireland and Portugal.
"They are already losing momentum," says the head of one financial business in Madrid after more than a month of the new government. "They lack determination, which is something everyone took for granted."
"Spain's new leaders have managed to generate a sensation of timidity, procrastination and confusion," is the verdict of Edward Hugh, an economist in Barcelona. One prominent Spanish economist privately called the transition to the new government a shambles.
Some business leaders are more sanguine, however. "The next three weeks will be very relevant," says the chief executive officer of a big Spanish exporter. "The current government believes in what they are doing. The previous one didn't."
So far the PP government's most significant move has been to raise income taxes – the one thing Mr. Rajoy and his team specifically promised not to do while campaigning for the November election – after announcing that the 2011 budget deficit bequeathed to them by Mr. Zapatero was much higher than foreseen.
Mr. Rajoy's reform program, which ministers promise will be announced in detail in the next few weeks, comes in three main parts.
First, austerity and deficit control. Mr. Rajoy's figures suggest the 2011 budget deficit could reach almost 8.4 per cent of gross domestic product, compared with the 6-per-cent target agreed with the European Union.
The new government has already announced €15-billion ($19.7-billion) of austerity measures and is expected to take further steps on Friday towards German-approved "budgetary stability." Spain would need to find a further €25-billion to meet the 2012 target of 4.4 per cent of GDP.
But Cristobal Montoro, the Budget Minister, and Luis de Guindos, the Economy Minister, have sent conflicting signals on how determined the government is to meet such a demanding goal in the face of an imminent recession. Mr. Montoro has hinted that the target could be renegotiated given that it is based on optimistic assumptions about economic growth, now turning negative, while Mr. de Guindos has spoken of an "absolutely inescapable commitment" to austerity.
The second reform promised by Mr. Rajoy concerns the labour market and the country's inflexible collective bargaining system. Employers doubt the changes will be as profound as they say will be needed to reduce unemployment from the current level of 5.4 million.
Finally, the PP has promised to clean up the balance sheets of the country's banks, burdened as they are with €176-billion of bad or doubtful property assets, and embark on a new round of mergers and restructurings.
On this matter, too, there is confusion. Until they took power and unveiled the true size of the deficit, Mr. Rajoy and his ministers wanted to set up an Irish-style "bad bank" funded by taxpayers to help clean up the system. Now they have changed their minds, with Mr. de Guindos saying that banks themselves will have to find €50-billion in extra funds from their own resources to cover increased provisioning requirements for bad loans.
When asked why the PP government did not come into office with a pre-cooked strategic plan, exasperated Spaniards complain that there is no U.K.-style tradition of a shadow cabinet. Ministers have little time to prepare for the role or find advisers. Some ministers were appointed only the day before the cabinet was announced.
Another theory is that Mr. Rajoy and his team are holding back the cruellest parts of their austerity and reform program to ensure victory in the regional elections in Andalusia in March. That lays them open to the charge of parochialism when the fate of the entire euro zone hangs in the balance.
Since the start of the year, sovereign-bond investors, soothed by hundreds of billions of euros in liquidity provided to banks by the European Central Bank, have been kind to Spain and bond yields have fallen. But the truce may not last if Mr. Rajoy does not announce substantial reforms.
"I think Rajoy is running a big risk," says the Spanish financial sector executive.
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