Rajoy, Spain's new PM, warns of tough economic road ahead

Spain's new prime minister Mariano Rajoy was sworn in today amid muted optimism that he can make the tough economic reforms that the eurozone wants.

Spain?s new Prime Minister Mariano Rajoy was sworn in today amid cautious optimism here and across Europe that he will deepen painful but necessary economic reforms, and that the country will be a driver of recovery, not of stagnation.

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Unlike most other troubled European countries, namely Italy, Spain has not shied away from reforms, even with the outgoing Socialist government. Mr. Rajoy, a conservative, is not so much an agent of change but of continuity for policymakers and markets alike, analysts say. He will control parliament because of his party's absolute majority in November elections, allowing him to push through legislation quickly.

?The future could not be any more somber,? Rajoy said in his investiture speech today. The debt to GDP ratio increased to nearly 70 percent in 2011, compared to 36 percent in 2007, he said. ?We face huge difficulties, and very demanding challenges are ahead.? ? But those who believe Spain will not implement the reforms to be successful in Europe are totally wrong.?

Rajoy was sworn in for his four-year term today before King Juan Carlos, and his cabinet will be in place by tomorrow. Difficult economic times, and at least a one-year recession, likely lie ahead.

The greatest challenge will be finding a balance between growth and austerity. Markets have rebounded since Rajoy?s November victory in anticipation of economic reforms in the financial and labor sectors that would spur growth and decrease unemployment, while still cutting public spending.?Spaniards' endurance of cuts is likely to be further tested after three years of austerity and stagnation.?

Keeping the 18-wheeler on track?

The euro zone, a 17-member fiscal union that shares a single currency, is like an 18-wheeler. Spain has the fourth-largest economy and population in the eurozone, and as such it?s one of four critical axles, along with Germany, France, and Italy. Just about any tire can go flat, perhaps even fall off, and the truck will still roll on ? unless the tire is on one of those four axles.?

A broken down eurozone would quickly drag the United Kingdom with it and the rest of Europe would follow, with the US trailing close by. Rajoy's job of steering the Spanish economy is thus a critical one.?

?Spain though is quite constructive. We saw good success. Fiscal adjustment has been credible, social acceptance is good. It?s a good example,? said Luigi Speranza, a London-based eurozone economist with French bank BNP Paribas. ?But it?s very important, not just because of size. It?s politically important. If Spain fails everything will fail.??

The cost of borrowing for Spain has plummeted from nearly 7 percent to 5.3 percent since Rajoy was elected, although much has to do with the European Central Bank?s decision to inject almost ?500 billion of cheap cash into the European financial system. Still, Italy and other countries have not benefited as much, due to a lack of political consensus, which Spain has.?

The pain ahead

But during the two-day debate on his appointment that started Monday, Rajoy did not paint an optimistic short-term future. Instead, he pleaded for Spaniards' patience.?

Source: http://rss.csmonitor.com/~r/feeds/csm/~3/4uIUU_OPpWo/Rajoy-Spain-s-new-PM-warns-of-tough-economic-road-ahead

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