Business, Economics and Jobs

Spain risks further unrest with austerity budget


Demonstrators in Barcelona on Thursday celebrate the Catalan regional parliament's vote in favor of a referendum on independence, which is compounding the Spanish crisis.


David Ramos

BRUSSELS, Belgium — The Spanish government announced a new austerity budget Thursday that cuts $51.3 billion from ministerial spending but drops an unpopular pension freeze as it seeks to reassure markets and creditors while appeasing a mounting wave of public anger.

"This is a crisis budget to get us out of the crisis," said Deputy Prime Minister Soraya Saenz de Santamaria in Madrid.

Markets cautiously welcomed the 2013 budget and European authorities were quick to praise the economic reforms announced with the spending cuts.

"The reforms are clearly targeted at some of the most pressing policy challenges," said Olli Rehn, the European Union's finance commissioner. "Further enhancing the flexibility of product and labor markets will indeed be critical to boost growth and employment and to support fiscal consolidation."

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European approval could prove crucial. If Prime Minister Mariano Rajoy submits to pressure to appeal for help from the EU's $900 billion bailout funds and the European Central Bank to bring down Spain's borrowing costs, he'll need to convince them his government is doing enough to get public finances back on track.

Rajoy must also wait for the verdict from the streets. Youthful demonstrators have clashed for two nights with riot police outside parliament to protest against austerity measures in a country where over half of those under 25 are unemployed.

Adding to Rajoy's problems, a strident separatist movement in the Catalonia region has prompted elections in November that could trigger a drive for independence.

Despite the worries, markets stabilized Thursday following a spate of bad news Wednesday that brought the euro crisis back from a two-week respite with a bang.

Traders were also reassured by an announcement that Italian Prime Minister Mario Monti will consider staying on if elections due next spring fail to produce a clear winner. And in Athens, the government announced it had reached an agreement on $15 billion of spending cuts needed to secure payment of international loans that are keeping the country afloat.

There was more good news for the euro zone when Germany became the last of its 17 member countries to ratify the treaty setting up the European Stability Mechanism, a $900 billion financial backstop for struggling states.

"This is an historical achievement for European integration and a pledge of stability and sustainability for future generations," said Luxembourg's Prime Minister Jean-Claude Juncker, who chairs euro-zone summits. "The ESM will be globally the largest international financial institution."

Juncker called a first meeting of the ESM's board for Oct. 8 in Luxembourg. Speculation is sure to mount that the Spanish government will use the occasion to appeal for the ESM and the European Central Bank to activate its bond-buying program for Spain in order to bring down the country's huge borrowing costs.

The government is surely hoping its budget cuts will forestall international demand for more austerity measures in the event it does request aid.

The budget figures unveiled in Spain show that mounting interest payments on its bonds and the cost of supporting almost 6 million unemployed cancel out the spending cuts. Budget minister Cristobal Montoro acknowledged that interest payments were set to increase by 34 percent to $50 billion.

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Among the areas hit hardest by the spending reductions, the Agriculture and Environment Ministry will face a 25 percent cut, while the hard-pressed Culture Ministry will have its spending slashed by 17 percent.

Government sector salaries will be frozen for the third year in a row. Pensions will rise, but only by 1 percent. New taxes are aimed at raising an extra $5.5 billion, including from a levy on lottery wins.

Unions are sure to resist plans to liberalize the labor market and reduce job protection.

The government hopes the budget will bring the deficit down from 6.3 percent of gross domestic product this year to 4.5 percent in 2013, keeping it on track to meet the euro zone's 3 percent limit in 2014.

However, analysts have warned that the government's figures are based on the economy contracting just 0.5 percent next year, when others predict a much sharper recession.