Spain's Rajoy Adds Some Stimulus to the Austerity

Prime Minister of Spain, Mariano Rajoy.
Pierre-Philippe Marcou | AFP | Getty Images
Prime Minister of Spain, Mariano Rajoy.

Spain's conservative prime minister is preparing a package of small measures - such as tax breaks for young entrepreneurs - to stimulate the economy even as he vows to stick to budget cuts.

Prime Minister Mariano Rajoy, whose popularity has plummeted after a year in the job, will announce the steps on Feb. 20 in his first State of the Union address in an effort win back public trust after severe spending cuts.

He took office promising to reduce Spain's high public deficit and win back investor confidence but the recession has deepened and more than a quarter of the workforce is unemployed.

"It's a plan of micro-policies, focused on concrete sectors," a spokeswoman for Rajoy said.

She declined to provide details or a specific cost to the program but said: "In no way does it undermine our commitment to reducing the deficit."

The package will include tax incentives for small exporters, developing a commercial paper market for small companies that will give them access to funds, and a new official credit line for businesses, according to media reports.

Labor Minister Fatima Banez also told reporters on Monday that women under 35 and men under the age of 30 who want to start a small business will get a major break on social security tax, paying 50 euros a month instead of more than 250 euros.

Last week, during official visits to Peru and Chile, Rajoy said that Spain's massive deficit - expected to stand at some 7 percent of gross domestic product at the end of 2012 - still blocked the country from investing in the economy.

But in the same trip he announced he would extend a 2,000-euros-per-car rebate program that would cost 150 million euros and help stem the fall in automobile sales.

On Monday Spain's Official Credit Institute, or ICO, priced a 1 billion euro seven-year bond. New low-interest credit lines from the ICO for small businesses are among the measures Rajoy is expected to announce in February, ABC newspaper reported.

Pleas to Germany

The International Monetary Fund and leaders from the Americas have criticized the emphasis on austerity in the euro zone debt crisis, saying it has made the recession worse.

On Monday, the European Union's economic and monetary affairs commissioner,Olli Rehn, said Spain's fiscal targets could yet be relaxed again if the economy was found to have seriously deteriorated. Spain was already given an extra year, until 2014, to meet its deficit target.

Rehn called for measures to create jobs, though he praised Spain's efforts to cut its deficit and said these should continue.

"We've seen some big advances on Spain towards a more sustainable growth model...the labor reform needs to be complimented with policies to help unemployed people find work," Rehn told a news conference in Madrid.

In recent weeks Rajoy has called on euro zone creditor countries such as Germany to do more to stimulate growth, a plea that has largely fallen on deaf ears.

He broached the subject in a brief meeting with German Chancellor Angela Merkel in Chile last week and will bring it up again when the two leaders meet at a Spain-Germany summit on Feb. 4 in Berlin, the government spokeswoman said.

Last year his government made an estimated 20 billion euros in budget savings and must make a similar effort this year to stay on track to cut the deficit to an EU-agreed level of under 3 percent of GDP in 2014.

Spain's borrowing costs have come down steeply since last July when the European Central Bank said it would do whatever it took to protect the euro. A 40 billion euros rescue for Spanish banks also helped confidence and talk of Spain needing a full international bailout has died down.

But unemployment is now 26 percent, the highest level since the 1970s, and the economy shrank in the fourth quarter, dragged down by a steep drop in private consumption due in part to a September VAT hike and public wage cuts