Spain's Economy: Beleaguered Public Swallows Bitter Austerity Pill

The Spanish government has proposed a very tough austerity budget to deal with the country's devastating debt problems. Spaniards, who are already burdened by a 20-plus percent unemployment rate (the highest in the euro zone) and a collapsed property market, will now face a series of draconian spending cuts and tax hikes.

Already, unions, students and others have protested the proposed cuts by staging huge demonstrations in Barcelona, Madrid and other cities across the beleaguered country.

With an economy four to five times the size of Greece, a financial collapse and bailout of Spain would be unthinkable for Europe.

International Business Times spoke with an expert on Spain to discuss the country's economy and near-term prospects.

Laura Gonzalez-Alana is an assistant professor of finance and business economics at Fordham University in New York City.

IB TIMES: The Spanish government has proposed €27 billion in spending cuts this year. Will this be sufficient to reduce Spain's deficit from 8.5 percent of GDP last year to 5.3 percent in 2012, as the EU has mandated?

GONZALEZ-ALANA: Newly elected Prime Minister Mariano Rajoy's conservative government is trying to impose very tight budgets, combined with higher taxes, a freeze on salaries, and labor reforms that would allow wages to fall below the current legal minimum, while price of real estate, food, utilities and clothing remain very high. All these measures will likely be embraced by the EU and especially Germany.

Unfortunately, Rajoy's administration has also made the poor choice recently of proposing a fiscal amnesty that will largely benefit the wealthy, who already enjoy the benefits of a tax system that imposes a higher burden on salaries/labor income than on capital income or inheritance income. This has fuelled the clamor in the streets towards for fairer reform measures that don't punish the middle class for the most part.

The current crisis in Spain is largely the consequence of poor short-term-oriented political leadership; the inefficient (and sometimes corrupt) administration of public funds, as well as very risky behavior by the banks. As a result, the middle class, who did not benefit from the excesses, is now being punished, while the very wealthy continue receiving preferential treatment.

IB TIMES: The new budget will freeze public sector workers' salaries and reduce government budgets by almost 17 percent. The unions are obviously outraged by these cuts and have already protested, but do you think the average Spaniard understands the need for such a bitter austerity pill?

GONZALEZ-ALANA: Spaniards understand sacrifice very well and are willing to work hard, but only in a transparent, fair system.

The Spanish economic miracle, following the transition to democracy in the 1970s, was the result of hard work and sacrifice. What most Spaniards will not accept is a non-egalitarian reform.

They may not be able to do much about it. They are not desperate enough yet to go to the streets and fight the police, but they are fully aware of what is happening and do not like the burdens imposed on the middle class while the very wealthy remained favored by the government through capital income and inheritance laws, in addition to the new fiscal amnesty.

IB TIMES: During his successful election campaign, Prime Minister Mariano Rajoy warned of tough times ahead. Surely he cannot be criticized since he inherited the economic crisis and is now doing exactly what he said he would?

GONZALEZ-ALANA: But the crisis was not created by his predecessor José Luis Rodríguez Zapatero either; rather, it was the product of long-term mistakes perpetrated by several administrations, both liberal and conservative, like in the U.S.

Warning of tough times ahead would not justify such an unfair unbalanced reform package. Rajoy's election was successful because Spaniards were also tired of Zapatero, but they are now already angry with Rajoy.

Spaniards are afraid and exasperated with their politicians, in general. The difference is that some lawmakers are just inefficient, while others are also corrupt (in both parties) or quite disengaged with the realities of the middle class.

IB TIMES: Are the Socialists too weakened and fractured now to mount any kind of real opposition against the new government's proposals? Or are they willing to back it?

GONZALEZ-ALANA: The mistakes of the conservative party are now helping the Socialists unite to start an opposition movement and also to reconstruct their tarnished public image in record time.

IB TIMES: The budget will also raise taxes on large corporations. Historically, has Spain had the kinds of problems with tax evasion which have plagued Greece and Italy?

GONZALEZ-ALANA: Yes, tax evasion is a big problem that affects both small and big corporations.

IB TIMES: Does Spain's business community support Rajoy and his programs?

GONZALEZ-ALANA: Most big firms do support Rajoy -- the conservative party always tends to favor them, whether or not employment is created.

IB TIMES: Are we seeing a serious rise in crime, suicides and home repossessions across Spain?

GONZALEZ-ALANA: Given the strong emotional and economic support the Spanish culture provides through family and friends, it will be unlikely to see the youth committing suicide or becoming criminals, but they will be leaving the country in record numbers -- an exodus Spain will pay for greatly and dearly. This will lead to the loss of the best college graduates, and the loss of family support for the elderly. Home repossessions are expected to continue at least for a year.

IB TIMES: What is the mood among Spain's college-educated young? Are they seeking to flee the country?

GONZALEZ-ALANA: Of course, they'll leave, there is no other choice. Their mood is that they'll go wherever they need to. Spaniards are not lazy and they are not hopeful this will economic crisis will only last one or two years.

IB TIMES: The euro zone just increased the size of its rescue bank to €1 trillion. Do you think they are preparing for a bailout of either Spain or Italy?

GONZALEZ-ALANA: Spain and Italy are not insolvent yet, just illiquid. But the European Union has to be ready. Greece may need another bailout.

IB TIMES: Is the crisis in Spain worse than Italy given that Spain's long-term borrowing costs have climbed above Italy's figures?

GONZALEZ-ALANA: Yes, the main problem Spanish banks are facing is that they are penalized not because of their balance sheet status (which is quite healthy for the most part) but simply because they are based in Spain.