If the Prime Minister is made to testify, all bets are off.

By Don Quijones, Spain & Mexico, editor at WOLF STREET .

After taking almost a whole year to form, Spain’s coalition government is already showing signs of strain. Chief among its problems is the endless string of corruption scandals engulfing the government’s majority party, the People’s Party.

In the latest scandal the regional government of Madrid — a bastion of the party’s national apparatus — is accused of channeling illegal funds through the local water company, Canal de Isabel II. Also, the embattled construction behemoth OHL allegedly gave the former president of the regional government, Ignacio González, a €1.4 million bribe in return for the tender of a light-rail project in Madrid.

González is now in jail awaiting charges, as is his brother who is promising to drag down others. Javier López Madrid, OHL’s chief executive, has also been arrested by Spain’s Civil Guard.

The latest scandal raises serious questions about the durability of Spain’s fragile coalition government. True to form, Prime Minister Mariano Rajoy continues to say nothing on the matter. But his silence may soon be broken following news last week that he has been called as a witness in the ongoing Gürtel kickbacks case. It will be the first time that a sitting prime minister has taken the witness stand in 42 years of ostensibly democratic rule.

Rajoy will be questioned about the multi-million euro slush fund run for over a decade by the Popular Party’s former treasurer Luis Bárcenas, much of which was squirreled away in tax havens like Switzerland. The prosecution argues, given his position as party secretary at the time, Rajoy should have been perfectly aware of the illegal activities in which Bárcenas was allegedly involved.

The court is yet to decide whether Rajoy should take the stand in person, or whether he will be allowed to submit his answers in writing. His party is praying for the latter, since Rajoy does not stand up well to questioning. For years he has been avoiding live press conferences — apart from those via video connection — and he’s even reluctant to give interviews.

One of the few televised interviews Rajoy agreed to was in 2013. He’d apparently only prepped for soft questions about Spain’s blossoming “economic miracle.” But Bloomberg TV asked about the Bárcenas kickbacks scandal and the Popular Party’s alleged destruction of key evidence in the case. The whole thing turned into a fiasco. Rajoy’s team went into panic mode, begging Bloomberg TV not to publish the footage, but to no avail.

If Rajoy is made to testify in court, in person and under oath, and responds to questioning in his trademark slapstick fashion, there’s no telling what could come out.

In recent days it has emerged that the consultancy firm founded by Spain’s current finance minister, Cristobol Montoro, the man who has spent the last five years tightening the austerity screw on Spanish taxpayers, is under investigation for influence peddling. The more scandals arise, the harder it will be for Rajoy’s coalition partners to stay on board, especially with the Socialist PSOE party poised to hold fresh primaries. If the PSOE’s former leader, Pedro Sanchez, wins, he’s almost certain to withdraw the party’s support for Rajoy’s government, which could only mean one thing: new elections.

Rajoy’s only response to the plethora of scandals affecting his party – Gürtel, Púnica, Lezo and more – is to travel abroad (he’s currently in Brazil), keep mum about domestic troubles, and offer speeches about the importance of maintaining economic growth and job creation in Spain.

But even here, there could be a scandal brewing — and one of potentially major proportions. The Spanish economists Juan Laborda, Juan Carlos Barbas, Juan Carlos Bermejo, and Roberto Centeno, Professor Emeritus of Economy at the Technical University of Madrid, have just sent a letter to the Eurogroup President, Jeroen Dijsselbloem, urging him to probe the Spanish national accounts, which they claim have been manipulated by Spain’s National Statistics Office (INE):

“The official growth in 2012 was -1.7%, a figure validated by Eurostat although it was manifestly false – a fact that the undersigned denounced in the Spanish media at the time. Three years later, in 2016, the Spanish National Statistical Office (INE) reduced the 2012 growth figure to -2.9%, an ‘error’ of 70% that Eurostat could not or did not want to detect.”

If the economists’ allegations are correct and the size of Spain’s GDP is indeed being over-reported, it implies that Spain’s public debt overhang is not in the order of 100% of GDP, as per the official statistics, but much higher.

As the authors note, it wouldn’t be the first time that the Eurozone’s statistical office Eurostat had conveniently overlooked unseemly data. “What happened to Greece, which between 1999 and 2004 systematically manipulated its national accounts, is a precedent that we all remember.”

And in the case of measuring Spain’s economy, Brussels is apparently continuing to look the other way. By Don Quijones.

Investment bank Mediobanca warns of “clear risk of contagion.” Read… Just How Safe is Spain’s Banking System?

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