A similar crisis a week earlier pushed the government of Greece, led by the Panhellenic Socialist Movement, to implement deep cuts aimed at the working class in exchange for $140 billion in loans from the European Union (EU) and International Monetary Fund (IMF) to avert an imminent debt payment default.
Fearing further government defaults, in particular from the southern European governments of Spain and Portugal, the EU and IMF set up a $1 trillion fund for emergency loans.
Fears Intensify That Euro Crisis Could Snowball, read the headline in the May 16 New York Times, noting that the bailout is not solving the crisis. With many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds, said the Times. Banks and financial institutions in France and Germany each hold more than $200 billion of Spanish bank debt.
With U.S. banks holding a similar amount, the Federal Reserve has reinstated a program to provide short-term credit to the European Central Bank.
The debt mountain that brought down some of the worlds biggest banks and dragged the international financial system to the brink of disaster has simply shifted to governments, noted Marketwatch in an article titled The second debt storm. These governments may be no more capable of repaying their debts than the banks and insurance companies they saved.
Austerity measures in Spain
With the 12th largest capitalist economy in the world, Spain had a public debt of more than 50 percent of its gross domestic product at the end of 2009, with figures rising rapidly. Its budget deficit is 11.2 percent of GDP, substantially above the 3 percent limit set by the EU.
Spanish prime minister José Luis Rodríguez Zapatero announced a 5 percent cut in wages of public-sector workers this year and a freeze on them next year. Pensions will be frozen and payment of a $3,170 baby check to families for each newborn child will be eliminated. Other public spending cuts include reductions in payments for health care and to people caring for elderly parents. Zapatero called these measures fair and justified.
Were a Socialist government and therefore cutting salaries and freezing pensions is something we only do because we have to, Spains finance minister, Elena Salgado, told the Financial Times. There is a moment when you have to do it, and we did it.
The day before the package was announced, President Barack Obama telephoned the Spanish premier to urge him to take resolute action to build market confidence.
The official unemployment rate in Spain is 20 percent, the second-highest rate in the European Union, ranking only behind Latvia. According to EU statistics, half the jobs eliminated throughout the euro zone over the past two years have been in Spain.
In response to the austerity moves, leaders of Spains two largest union federations called for a strike by public workers June 2. Officials from the Unión General de Trabajadores (UGT) said the work stoppage would be preceded by a series of protest actions beginning May 20.
Labor union officials hope these actions will blow off steam over the assault on workers rights. Neither federation is calling for all workers to join the protests. Ignacio Fernández Toxo, leader of Comisiones Obreras (CCOO), the largest federation, told the media that he opposed a full general strike that included the private sector because it was the last thing the country needs at a time like this. He added, The behavior of the trade unions has been and is impeccable during these times of crisis and will continue to be so.
The Financial Times, in a May 11 editorial titled Zapatero finally wields the axe, praised the government slashing while noting that even deeper attacks on workers will be needed. Spains most urgent task now is to gain credibility with bondholders, the editorial stated, without losing sight of the need to reform a rigid labour market that hinders growth from taking root.
Its not certain this will work, the editorial concluded. The deficit could end up wider than hoped.
Raising similar concerns, the Wall Street Journal noted that the announced measures do not on their own do anything to reduce the totality of debt weighing on euro-zone economies. Rather, they shift the burden from one area to another as if the transfer of risk were the same as its reduction.
The day after the moves taken in Spain, Portuguese prime minister José Sócrates announced new austerity measures there, including tax hikes and pay cuts for some state employees.
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