Analysis: Spain's victory in Europe could backfire for Rajoy

Reuters News
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Posted: Mar 16, 2012 12:34 PM
Analysis: Spain's victory in Europe could backfire for Rajoy

By Julien Toyer

MADRID (Reuters) - Prime Minister Mariano Rajoy may have won praise at home for reaching a deal with the European Union to soften troubled Spain's deficit targets, but his tactics exposed a lack of diplomatic finesse that has delivered a hollow victory.

Rajoy, who came to power late last year at the same time as Italy's Mario Monti, committed a series of blunders during a four-week fight with the European Commission over budget cuts which have drawn comparisons with his smooth and accomplished counterpart in Rome.

The performance of Rajoy, 56, with little international expertise and limited English, sharply contrasts with that of Monti, 68, chosen as a technocrat leader and who as European Commissioner took on U.S. corporate titans General Electric and Microsoft.

"Monti is really doing a great job," a senior EU official told Reuters, summing up sentiment in Brussels where the prime minister has reshaped perceptions of Italy forged under Silvio Berlusconi. "We are more optimistic for Italy than for Spain."

As a consequence of Rajoy's Pyrrhic victory, the Commission will monitor Spain's public accounts more closely with frequent inspector visits to Madrid, while the jolt in trust will spell zero tolerance for any more budget slippage.

Both Rajoy and Monti, known as "Super Mario" for his work with the Commission, came to power with their nations struggling in the face of the euro zone debt crisis cyclone. Both have been pushing since January for more balance between austerity and growth for their suffering economies.

While Monti, whose sharp intellect and diplomatic skills are admired by the European and global policy-making elite, has joined the top table with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Rajoy looks somewhat isolated.

EXPOSED IN PUBLIC FIGHT

Monti, who leads an unelected technocrat government, was initially the most vocal in suggesting excessive German-sponsored austerity measures could crush growth.

But since then he has mostly lobbied quietly behind closed doors in Brussels and has convinced his peers of his commitment to credible economic reforms, particularly to Italy's pension system, leaving Rajoy exposed in a public fight.

Rajoy, who wears a scruffy beard first grown when the scars from a serious car accident prevented him from shaving, shocked other EU leaders at a Brussels summit on March 2 when he announced he would unilaterally set a looser deficit target of 5.8 percent of gross domestic product.

The conservative Spanish leader's timing, on the same day he and his peers signed up to a new pact enshrining tougher debt rules, and the lack of advance warning, infuriated other EU heads of state and government.

At the same time, Monti was working the corridors of power to bring Italy back to the centre of European decision-making, reversing the major slide in influence under his scandal-plagued predecessor Berlusconi.

When Rajoy cited Spain's national sovereignty in ditching a previously agreed deficit target of 4.4 percent of GDP for 2012 and asking for a much wider margin of 5.8 percent, Monti stuck to the goal of 1.6 percent for Italy which analysts consider just as hard to achieve.

Rajoy might have gained political advantage at home when he actually settled for a 5.3 percent target, but his gamesmanship left him exposed. In comparison, Monti, whose hard but reliable negotiating skills earned him the nickname "The Italian Prussian", has basked in praise for his performance.

A European Commission official said Spain will now face much closer scrutiny from the EU executive, which will make full use of new intrusive powers to check if the 2012 and 2013 budgets are in line with the targets.

"We will hold them much more tightly. The 5.3 percent doesn't come for free," said the official. "We will send more officials to Madrid, more often ... We'll stick our nose into their accounts and exert pressure."

"CLEAR MISCALCULATION"

Senior EU officials suggest Spain's new government misread signals from Merkel and other leaders and failed to understand immediately that the Commission was ready to trigger sanctions against Madrid for not doing enough to cut its deficit.

When Rajoy took the helm, some said he should be in tune with the mostly conservative European leadership of the moment but others said the new prime minister had not done enough to nurture a relationship with Merkel - a key ally as Spain and other Euro currency nations fend off market attacks.

Rajoy, the son of a judge and known for the impenetrable demeanor typical of his native Galicia in northern Spain, made the mistake of bringing his fight directly to leaders at this month's EU summit in Brussels, as Germany and France have done in the past.

"There was a clear miscalculation. These issues are not dealt with at the European Council, unless you are Sarkozy. But Rajoy is not," said a third senior source, who was involved in preparing the summit.

Referring to Rajoy's strategy, a senior Spanish government source acknowledged a "communication problem", which must be overcome to convince investors. "Our aim should be to disappear from the markets' radar screens," the source said.

A Spanish official played down any disagreements, telling Reuters European leaders indicated to Rajoy they were pleased with his economic initiatives, such as labor markets reform.

The official, who asked not to be named, said Spain played by the rules as it sought to set a credible 2012 target and that it remained on track to reduce its long-term deficit. He predicted the Commission would sign off in May on Spain's budget without imposing any sanctions.

Spain has promised to bring its deficit under 3 percent of GDP in 2013 despite heading, like Italy, for its second recession in four years.

SPAIN IS NO GREECE

But that came after a strong reprimand at last Monday night's meeting of euro zone finance ministers, at which Madrid's attitude was considered unacceptable by Germany and others, according to one senior source who was at the meeting.

There, Madrid was forced to backtrack on the tougher deficit target of 5.3 percent for 2012 and it could still face sanctions by June if it fails to deliver savings of about 20 billion euros on top of 15 billion already announced in December.

Now Rajoy, of the centre-right People's Party, or PP, must pass on much of the cuts to Spain's 17 autonomous regions. Government sources say he stands ready to cut the credit tap to the regions to force them to meet strict targets.

The previous Socialist government had little success when it used this threat last year, however, and the danger for Rajoy is that the fiscal credibility of his party will rest on its ability to enforce discipline in the regions.

The Spanish prime minister, who also irritated the Commission by waiting to present his 2012 budget until after a key regional election on March 25, will be shown less understanding by fellow euro zone countries in the future.

But Spain is no Greece, which suffered a terminal loss of trust among its European partners. The euro zone can ill afford to let the much larger Spanish economy fall over and while Rajoy may be put under scrutiny, he will not be cut adrift.

Euro zone leaders know he is the man they will have to deal with for some time. His Socialist opponents are in disarray and next weekend he is likely to win their last stronghold at an election in the populous region of Andalusia.

(Editing by Barry Moody, Fiona Ortiz and Peter Millership)