The Square Mile: A breakdown of trust is Rajoy's biggest headache

Increased civil unrest is staring the Spanish Prime Minister in the face as he strives to introduce reforms aimed at resolving his country's economic crisis

Margareta Pagano
Saturday 29 September 2012 16:01

An unspoken practice in Spain is that most workers get two salaries. One is the official salary, the taxable one, the other is cash in a brown envelope – the black market if you will. Many private-sector workers are paid in this two-tier manner.

Officials deny its existence, but I know it to be a common practice as friends and family who live in Spain tell me this is the case, and has been for decades. Ironically, the expression "Spanish practices" is a British one coined to criticise the unions in the 1970s and the 1980s for the way their members allegedly manipulated working hours.

Like the Greeks, the Spanish don't trust the political classes with their money, so avoid paying tax as much as they can. No wonder tax receipts have been falling. Reforming the system is part of the package of 43 new rules announced by Spain's Prime Minister, Mariano Rajoy, in the government's emergency Budget on Thursday, to make the country more competitive.

But Mr Rajoy knows he must be careful not to provoke a simmering public – which is why most of the ¤40bn (£31.8bn) package of austerity measures is aimed at slashing public spending rather than raising money through higher taxes. The anger goes deep, as we've seen from the scenes of policemen firing rubber bullets at protesters in Madrid last week, and the marches of more than a million Catalans calling for the right to self-determination.

Such is the fury at the proposed austerity measures that the Catalan regional prime minister, Artur Mas, has called for early elections on November 25 to launch a bid to allow the 7.6 million Catalan population to choose their future with a referendum. It's a devastating blow for Mr Rajoy as Catalonia has been the engine-house of growth in Spain but has also been badly hit by the crisis. Mr Mas has had to cut health, education and public sector salaries and applied for a regional financial rescue plan for €5bn from the Spanish state. More than half of the Catalans are said to want to become a sovereign state. They don't trust Madrid, let alone Brussels.

Mr Rajoy was meant to be the leader who could deliver the austerity necessary to secure a national bailout. That no longer looks certain as his government struggles to put through the latest package and Friday's bank stress tests showed ¤60bn is needed to recapitalise the banks and create a bad bank of toxic property loans.

He now wants to introduce these emergency measures in a bid to obtain an unconditional bailout from Brussels and help from the European Central Bank with its new bond-buying programme. But the surplus countries in the north – Germany, the Netherlands and Finland – may not let Mr Rajoy get away with this. They are not convinced the Spanish government will be able to push through its reforms, or that they will work. The new cuts will further shrink the economy, which means deficit reduction will be even harder to achieve. One in four people is unemployed. If that worsens, as it is bound to, unrest is set to spread further into rural Spain.

It's not just the less well-off who are troubled. Figures on Friday showed that Spanish investors took ¤331bn of capital overseas in the 13 months to the end of July – equal to a third of the output of the economy – although the rate slowed in August.

While Mr Rajoy still hopes to avoid requesting a bailout from the eurozone rescue funds, this now looks to many inevitable. What's the alternative? Spain exiting from the euro, and defaulting on its debts? That is the most probable outcome but almost secondary to the bigger task. Whatever is negotiated between Madrid and Brussels, the Spanish government has to regain the trust of its people before the social contract breaks down completely.

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