Zapatero contemplates the fiscal abyss

ON A small plot of land near Candeleda, in Ávila province, Antonio de la Cruz is planting tobacco. It is years since he grew anything. During Spain's decade-long boom, he worked on construction sites, which paid better. But building has ground to a halt. “I've got to do something,” he says. He is lucky: few of Spain's 4.3m unemployed (almost 20% of the workforce) have bits of land to plough.

A morale-boosting advertising campaign, backed by 18 large banks and companies, tells glum Spaniards that their problems can be fixed “between us all”. The opposition People's Party disagrees. This has to be fixed by whoever broke it, says its spokesman, Esteban González Pons. He means that the Socialist prime minister, José Luis Rodríguez Zapatero, should do the fixing—and that he is failing.

The list of things that need repair is extensive. Spain's structural faults were long hidden by a housing bubble and have been glaringly exposed now that it has burst. From unemployment and low productivity growth, and from troubled savings banks to creaky public finances, the problems are piling up. With the government unwilling to apply radical surgery, there are fears that Spain will fall further behind its neighbours. “The risk is that we will have a lost decade, like Portugal or Japan,” says Lorenzo Bernaldo de Quirós, an economist at Freemarket International Consulting in Madrid.

Unemployment tops most people's worries. Faster growth is needed to bring it down. Yet Spain has been in recession for seven quarters; the government expects GDP to shrink again this year; and the IMF forecasts growth of less than 1% in 2011.

The public finances must also be fixed. Last year's deficit ballooned to over 11% of GDP. In January Elena Salgado, the finance minister, produced an outline of austerity measures that calmed market fears about Spanish debt. But two months later the plan still lacks detail—and has an obvious flaw. An optimistic Ms Salgado predicted growth of 3% in both 2012 and 2013, bringing added revenues to cut the deficit. Spain's European commissioner, Joaquín Almunia, has warned against the sin of over-optimism. Growth will not go over 2% until 2014, says Ángel Laborda, an economist at FUNCAS, the savings banks' foundation. He reckons that more tax rises and spending cuts are inevitable if the government is to hit its 3% deficit target by 2013.

Ms Salgado is already raising value-added tax, with the top rate going from 16% to 18% in July. Mr Zapatero says this will finance the unemployed. “We can pay unemployment benefits to half a million people,” he said in a television interview. Yet higher taxes will also dampen consumer spending, sending growth lower still.

Deeper reforms to Spain's economy look unlikely. The Bank of Spain's governor, Miguel Ángel Fernández Ordóñez, is calling for reform of a rigid labour market that makes most employees too costly to fire but condemns a third of workers to unstable, unprotected temporary jobs. Yet the government has repeatedly delayed pension and labour reforms. Mr Zapatero's great goal is to conserve social peace. That means keeping trade unions happy, even if reforms (and growth) have to wait.

Some detect a whiff of cowardice. Mr Zapatero's determination to avoid general strikes is proof that he will never take a difficult decision, says Artur Mas, head of the Catalan Convergence and Union coalition. And because broad agreements on public-spending cuts lack detail, they also lack urgency. A recent austerity deal with regional governments, responsible for over a third of Spain's public spending, allows for two more months of haggling.

In the meantime Spain's financial sector is jibbing at reform plans. Some cajas (savings banks) are heavily exposed to construction and housing loans. Mr Ordóñez says a third of the 45 cajas need to disappear (by being absorbed by others). A €99 billion ($132 billion) rescue fund is producing only limited consolidation so far, with perhaps seven Catalan cajas merging into two. Local politicians, who have a big say in their cajas, do not want to lose power. The Bank of Spain must act urgently, says Luis Garicano of the London School of Economics. The system cannot improve so long as doomed entities are kept alive, says Miguel Martín, president of the Spanish Banking Association.

The delay in sorting out the cajas adds to the sense of drift. Most Spaniards do not see the economy improving any time soon. Faith in the political class is at rock bottom. The Spanish now rate politicians as a bigger problem than their old bugbear, terrorism. Mr Zapatero's Socialists are trailing in the polls—but an election is not due for two more years.