Spain's budget cuts are not enough

Spain has taken steps to reduce their budget deficit from 11% of GDP to 6% of GDP by 2011. This is in apparent contradiction to my prediction that the bailout fund would result in a lack of interest for politicians to tackle the financial problems of their country. I do hope that Spain’s austerity measures are indeed the beginning of action but on its own it is not sufficient to deal with the problem.

6% of GDP deficit is not a 0% of GDP deficit. Spain will still be taking on debt if the economy (and thus government revenue) doesn’t improve enough to make up the difference. Even if the Spanish economy does recover soon, the government still needs a strategy to reduce and ultimately eliminate their massive debt.

The BBC appears to believe that the Spanish Prime Minister is bringing forward austerity measures due to pressure from the European Commission. But there is a limit to what the Commission can accomplish to push Spain into real action. All that Spain would have to do is demonstrate that they were taking some measures, even of those measures are not sufficient. Then the Commission’s much lauded ‘soft power’ will lose most of its potency.

With the bailout fund giving economic coverage, Spain’s leaders have less of an incentive to take the political risks of real large scale cutbacks to the welfare state. It remains to be seen if Spain will possess the political will to eliminate the deficit and manage its debt.