Tougher tests

Mariano Rajoy, Spain's new prime minister, will not have much time to congratulate himself over his election victory.

By December 9, at the next summit of the European Union, his fellow conservative leader Chancellor Angela Merkel will want to know what concrete plans he has for Spain to find a way out of its debt and budget crisis.

During the election campaign, it was possible for the opposition leader to make only general proclamations. The uncharismatic conservative, who shies away from speaking openly and prefers to avoid the press, did not want to put his cards on the table.

Rajoy will have to push through much harsher austerity cuts and tax increases than his failed Socialist predecessor, Jose Luis Rodriguez Zapatero, who put together a savings package of some 10 billion euros ($13.5 billion).

Experts reckon Rajoy will have to triple that amount to lead Spain from its debt trap. And despite its convincing win, the new administration is likely to face huge political resistance domestically. Depending on the situation in Spain, the "indignant" protest movement that currently brings thousands onto the streets could grow in orders of magnitude to numbers more like those seen in May.

Urgent battle for trust

The finance markets will also not allow Rajoy much time to get to grips with his new post. The interest that Spain must pay for government bonds has reached record levels that are unsustainable in the long-term.

With a increase in interest rates in recent days, the markets have clearly indicated they have already have little confidence in the new government. Seeing no other alternative, outgoing Prime Minister Zapatero has appealed to the European Central Bank to risk buying more of Spain's government bonds, something the bank has already been doing.

Whether it should put even more money into the bonds of the crisis countries in the eurozone is a highly controversial matter.

Spain's biggest problem is its exorbitantly high unemployment rate of 21 percent, with youth unemployment twice as high. The goal of limiting the budget deficit this year to 6 percent will not be met; it will probably be closer to 8 percent.

After the collapse of the property sector, an economic stimulus program and a broad rescue of the banking sector, government debt has certainly grown. However, at 66 percent of economic output, the amount is modest in comparison with other European economies.

Now it's up to Spain's new government to quickly submit a convincing plan for the rehabilitation of Spain that finance markets and the country's European partners find credible. By 2012, Spain must refinance 450 billion euros ($609 billion) in bonds - something that can only happen if interest rates on government bonds fall significantly.

Zapatero, who could not credibly cope with the crisis, had to go. Before the crisis he benefited from an enormous construction boom in Spain which led to a relatively low unemployment rate and balanced budgets. That, now, seems like such a long time ago.

The International Monetary Fund has forecast that Spain will need a five-year - if not 10-year - consolidation phase. The domestic reforms that Zapatero did put in place - greater equality for women, more rights for homosexuals, efforts to persuade the Basque terrorist group ETA to give up violence and attempts at bringing the country to terms with its past under Franco - all look likely to be forgotten.

Change across the board

With the conservative win in Spain, all of the troubled major eurozone countries in southern Europe have now experienced a change of government as a result of the debt crisis. In May, it was Cyprus and Portugal. Last week, it was Greece and Italy. Only Malta is still relatively stable. In contrast to Greece and Italy, however, Spain's new government has been voted in with a majority in parliamentary elections.

Here, at least, democracy has not yet capitulated to the markets. Spain does not yet need the type of emergency government now in place in Athens and Rome. Indeed, Spain might still find its own way out of the crisis.

Mariano Rajoy must use his chance decisively. He will have only one.

Author: Bernd Riegert / rc
Editor: Martin Kuebler