Spain Risks ECB Wrath With Unemployment Extension

Prime Minister Rajoy calls six-month extension for long-term jobless ‘just’

Spaniards protesting austerity in February. Spain could see more mass demonstrations in the fall. (Photo: AP) Spaniards protesting austerity in February. Spain could see more mass demonstrations in the fall. (Photo: AP)

Prime Minister Mariano Rajoy of Spain courted the displeasure of northern European members of the eurozone by extending for another six months unemployment benefits for those out of work for as long as two years. Calling the move “just” in a country whose current unemployment rate nears 25%, Rajoy also said that he was still considering asking for help from Europe to combat cripplingly high bond yields.

Bloomberg reported Wednesday that Rajoy announced the benefit extension as concerns mounted over the possibility of massive demonstrations in the fall. Three years of recession and high unemployment have taken a toll on Spain and on Rajoy’s government’s popularity as he continues to implement mandated cuts.

However, Rajoy has acted against cut mandates before, drawing the ire of European Central Bank (ECB) policymakers by easing some of the steps intended to further tighten Spain’s economy. In March he changed his country’s deficit target only a few hours after he had signed off on a eurozone budget coordination pact, angering officials who were intent on implementing tight austerity measures.

Rajoy, who had campaigned on a very different platform, has found himself putting in place stringent measures to cut Spain’s deficit even as the country’s recession deepens. Both his own and his party’s popularity has waned as a result, even as European officials press for more reductions in benefits and higher taxes.

The extended unemployment benefits he continued Tuesday were set to expire Wednesday. They had been put in place three years ago to aid the long-term unemployed; as of this June, 1.7 million households were without jobs. Under the extension, eligible Spaniards would continue to receive 400 euros ($491) a month.

Still, Rajoy continues to consider asking for more European aid in the form of bond purchases by the bloc’s rescue fund, something which would require strict conditions, if it is “in the best interest” of Spain. However, he could be rebuffed over his latest action, which more prosperous European countries see as a lack of resolve to fix the problem and which ECB policymakers see as a response to relaxed requirements—such as the extra year Spain was given to bring its budget in line.

“We haven’t forgotten what happened in August of last year: We bought Italian bonds and right after that the Italian government reneged on its pledges,” said ECB Governing Council member Luc Coene in the report. He added, “The conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act.”

Stuart Thomson, a fund manager at Ignis Asset Management in Glasgow, was also critical of Rajoy’s move. In the report he said, “He’s going to provoke an angry response and make the ECB even less willing to provide support. Why poison the negotiations with resistance and decisions that will annoy the northern Europeans?”

While the extension of long-term unemployment benefits “probably isn’t central for Spanish public finances,” according to Gilles Moec, co-chief European economist at Deutsche Bank in London, he was quoted saying, “I would hope the ECB wouldn’t focus on that.”

However, Ken Wattret, chief European economist at BNP Paribas, said in the report that the ECB’s reaction was likely more dependent on the previous record of both Rajoy and the Spanish government with regard to a number of their actions.

Wattret was quoted saying, “The problem is that the government’s credibility has been damaged by the way it’s handled a number of issues. Something that ordinarily might be seen as unimportant from the ECB’s perspective might be seen as more important now because of the mistakes the government has made in the past.”

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