Spain Risks ECB Wrath With Unemployment Extension

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.”