March 29, 2023

New Spanish Budget Free of Austerity Measures

The budget is based on a forecast that the Spanish economy will grow 0.7 percent next year, up from the government’s previous forecast of 0.5 percent. Gross domestic product is expected to contract 1.3 percent this year.

Calling it a “budget of economic recovery,” Cristóbal Montoro, the budget minister, forecast that the proposal would “open the door to job creation in our country” since it lacked the tax increases and heavy spending cuts of recent years.

The government also forecast that the unemployment rate would fall to 25.9 percent in 2014, down from the record 27 percent that it reached in the first quarter of this year.

As part of its belt-tightening, the government has extended a salary freeze for civil servants for a fourth consecutive year. And on Friday, it approved changes to the pension system intended to save about 800 million euros ($1.08 billion) next year.

Having requested a bailout for its suffering banks in June of last year, the Spanish government has been under pressure to stick to its budgetary commitments, even as it faced frequent street protests against a series of spending cuts and tax increases.

Given the depth of Spain’s recession, the European Commission agreed last May to give Madrid more time to reach its budgetary targets. The Spanish deficit is expected to fall to 6.5 percent of gross domestic product this year. That would be down from a revised deficit of 6.8 percent of G.D.P. last year, which was 0.2 percentage points less than what Madrid had initially estimated. For 2014, the target is for a deficit of 5.8 percent of G.D.P.

One of the most significant turnarounds for Spain has been the recent fall in its borrowing costs as investors shifted the spotlight to Italy’s political fragility and the perceived risk that Italy poses for the euro zone. The interest rate premium demanded by investors for buying Spanish government bonds rather than Germany’s benchmark bonds fell this month below that of Italy for the first time since March of last year.

Thanks to that improvement, Mr. Montoro said, the cost of financing the country’s debt should fall 5.2 percent next year, to 36.6 billion euros.

While Spain is emerging from a two-year recession, Prime Minister Mariano Rajoy and his ministers have recently cautioned that the country still faced a significant economic challenge, with continued weakness in consumer spending and a reluctance by banks to provide credit.

The 2014 budget and the proposed changes to the way pension payments are calculated will now need to go to Parliament for a vote, but that is expected to be a formality as Mr. Rajoy’s Popular Party holds an absolute majority.

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Euro Watch: Data Show Weakening in Euro Zone Economy

The data comes in a week when euro zone finance ministers are due to confer by telephone about further aid to the faltering Greek economy, and heads of the major global economic agencies are holding meetings with the leaders of France and Germany.

Spain’s gross domestic product contracted by 0.3 percent in the third quarter from the second quarter, the National Statistics Institute reported from Madrid.

The Spanish economy has now contracted for four consecutive quarters. A collapse real estate prices after the 2008 financial crisis and austerity measures to balance the public sector budget have inflicted severe pain on the country, driving unemployment to 25 percent.

In Nuremberg, the Federal Labor Agency said the number of Germans without jobs rose in 20,000 after seasonal adjustment, leaving the unemployment rate at 6.9 percent, unchanged from September.

“The weaker economic development is making itself noticeable in the labor market,” Frank-Jürgen Weise, director of the German Federal Employment Agency, told a press conference in Nuremberg. But he added that “overall, the labor market is showing itself to be robust and in fine condition.”

Eckart Tuchtfeld, an economist with Commerzbank in Frankfurt, noted that, perhaps more worryingly, the number of employed fell in September for the first time since early 2010.

“The ‘labor market miracle’ many observers had proclaimed is likely to continue taking a breather for now, in view of the poor economy,” Mr. Tuchtfeld wrote. “Only in the second half of 2013 do we expect the trend to point up again.”

The Spanish and German gloom were underscored by a report from the European Commission, which said in Brussels that its index of business and consumer sentiment fell 0.7 point to 84.5 this month from a revised 85.2 points in September.

An index value below 100 shows more respondents are pessimistic than optimistic.

“Marked decreases” in sentiment in the euro zone’s industrial and construction sectors outweighed improvement in retail, though service sector and consumer confidence were stable, the commission, said, though it noted a hopeful sign in that the rate of decline in the indexes was slowing.

Sentiment in the 27-nation European Union was “broadly stable,” the commission said.

The decline in sentiment shows the 17-nation euro zone began the fourth quarter “on a very weak note,” Jennifer McKeown, an economist in London with Capital Economics, wrote in a note. She said the sentiment data were “consistent with annual contractions in euro-zone G.D.P. of around 2.5 percent. That implies very steep quarterly falls in G.D.P. in the next few quarters.”

She also predicted the euro zone economy would shrink by about 2.5 percent next year.

More than three years after Greece’s disclosure that it had been fudging its government finance statistics, touching off a run on the sovereign debt of several euro zone governments, the region’s crisis has become a grinding, chronic affair.

Chancellor Angela Merkel will hold talks in Berlin on Tuesday with the leaders of the Organization for Economic Cooperation and Development, the International Monetary Fund, the World Bank, the World Trade Organization and the International Labor Organization.

The leaders were arriving in Berlin from Paris, where they held talks with the French president, François Hollande.

The meeting comes ahead of the latest report on Greece’s financial situation by the so-called troika of international lenders: the I.M.F., the European Central Bank and the European Commission. Germany has made the troika report a precondition for making any decisions on further assistance to Athens.

Nevertheless, discussion over how Germany might best help Greece to cover its growing financing gap has gathered speed in recent days. While the idea that Greece might need more time to pay back its debts remains open for debate among German lawmakers, both the chancellor and her finance minister have rejected the idea of a taking a loss on official loans to Greece.

Ms. Merkel’s spokesman, Steffen Seibert, told reporters on Monday that a write-off of Greece’s public sector debts was “out of the question.” He cited German law as stipulating that loans can only be granted to countries that are not considered in threat of default, meaning that such a write-down “would certainly not be in Greece’s interests.”

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Spanish Companies Look Abroad for Growth

While it is hardly a corporate exodus, the fear that trickle will become a flood if the Spanish economy worsens is already generating concern at a time when the government in Madrid is struggling to find additional revenue to close a gaping budget deficit.

Telefónica, the former public telephone monopoly, set off alarms in September when it said that it would create a new digital unit in London for its most promising mobile and online businesses.

The news came shortly after it announced major layoffs in Spain, where unemployment is already higher than 20 percent.

Other companies are taking smaller steps, like using foreign subsidiaries to circumvent punitive borrowing costs at home. At the same time, some multinationals, like the two biggest Spanish banks, Santander and BBVA, are playing down their nationality to reassure international investors as they seek to expand their business outside the country.

The value of Spain as a corporate brand has become “a lot worse,” said Pablo Vázquez, an economist at the Fundación de Estudios de Economía Aplicada, a Madrid-based research institute. The effect is felt not only in falling earnings, he said, but also “in terms of the intangible benefits that the Spanish brand transmitted before, those of a dynamic and youthful European society.”

Avoiding an exodus should be one of the priorities of the next government, following a general election Nov. 20, he added.

Company executives have been reluctant to discuss publicly their concerns about being located in Spain, particularly before the election.

Telefónica insisted that the decision to shift the digital unit, which includes its popular social network Tuenti, should not be viewed as an abandonment of Spain, even though the reorganization also involved folding its Spanish unit into a broader European business.

Guillermo Ansaldo, a Telefónica executive, told a conference a day after the relocation announcement was made that the group would continue to invest heavily in Spain, after spending €24.5 billion, or nearly $34 billion at the current exchange rate, in the country over the past decade.

Still, since the onset of the financial crisis, the proportion of Telefónica’s investments in Spain has fallen to 24.5 percent of its global capital investments in the past financial year, from 27.6 percent in the 2007 financial year.

In a surprising U-turn, the fashion retailing giant Inditex announced last month that it would move the online sales subsidiary of Zara, its flagship brand, back to Spain from Ireland. It made that statement shortly after reports in the Spanish media highlighting the tax savings that the Zara unit had made in Ireland.

Inditex, however, is among the few Spanish companies to have been relatively unscathed in the financial crisis.

On average, Spanish companies in the main Ibex stock market index have been trading recently at price-earnings ratios below those of their counterparts in Greece, which has suffered the most during the debt crisis, said Pankaj Ghemawat, professor of strategic management at the IESE business school in Spain.

“Spanish companies are really getting hit very hard in terms of their ability to issue shares and raise financing in general,” Mr. Ghemawat said. “It might not boost the market capitalization immediately, but it does make sense to shift assets to safer jurisdictions, should things really get more sour here.”

However, given the public outcry that any full-fledged departure could generate, Mauro Guillén, a Spanish professor of international management at the Wharton School at the University of Pennsylvania, said that companies were instead likely to use “lots of intermediary solutions.”

A company that followed Telefónica’s lead would be likely to benefit, since “being based in London would give them more favorable access to financing,” said Luis Garicano, a Spanish professor at the London School of Economics.

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