Spain's new PM seen pushing austerity to parties

 

Incoming Prime Minister Mariano Rajoy will hammer home his commitment to austerity in Spain and is expected to back closer euro zone fiscal unity when he meets centre-right European counterparts this week in Marseille.

The meeting will mark Rajoy's first major public appearance since winning election and is particularly important because he will not attend a summit in Brussels later this week, as he will not be sworn in until around December 20. Outgoing Prime Minister Jose Luis Rodriguez Zapatero will attend the Brussels gathering.

Rajoy, who won a solid parliamentary majority in Spain's November 20 election, is due to meet one-on-one with France's Nicolas Sarkozy, Germany's Angela Merkel and U.S. Treasury Secretary Timothy Geithner at the Wednesday-Thursday event.

He will also address the European People's Party meeting, which ends just before the summit of 27 European Union leaders in Brussels that could be decisive in producing a definitive solution to the euro zone debt crisis.

With investor doubts focused on Spain and Italy and forcing up their borrowing costs, Rajoy must impress on fellow conservative leaders that he can control the public deficit even though economic output and tax income are declining.

"We have to transmit the clear message that we are the Prussians of southern Europe, that we will meet all our commitments," said political consultant Narciso Michavila, president of GAD3 in Madrid.

Rajoy has a unique opportunity to impose harsh measures, even though unemployment is painfully high, because Spaniards are convinced of the need, Michavila said.

"Spaniards are conscious that we lived beyond our means. The crisis has made us, for the first time in history, aware that the welfare state comes from our pockets, not from the Three Kings."

LINGERING UNCERTAINTY

Spain, the euro zone's fourth largest economy, has avoided the need for external aid due to a slew of spending cuts and reforms by the Socialist government, but risk premiums remain volatile as leaders bicker over a cross-border solution.

While euro zone leaders hammer out an agreement which many hope will mean a significant step toward closer fiscal union by Friday, Spain, under a prolonged attack by nervous debt markets, is struggling to keep afloat.

Optimism that an accord is imminent has brought Spain's bond yields back down from last month's spike that approached the 7% threshold seen as unsustainable. But at a December 1 auction bonds due in April 2015 were sold with a yield of 5.187%, a 14-year high, showing that uncertainty lingers.

Unemployment is more than double the EU average at over 21%, the public deficit is one of the highest in the euro zone, expected to top 6% of GDP this year, and the economy is on the cusp of a recession.

In some ways Spain has anticipated the drive toward a euro zone fiscal union: last year the Socialists and the PP passed constitutional debt limits in a rare joint Parliamentary vote.

And Rajoy has said one of the first things he will do is to make those even stricter, giving the central government more power to intervene in regions' finances should they go astray.

"We must be more German than the Germans in terms of austerity, discipline and correcting economic imbalances. More French than Sarkozy in economic governance and more Europeanist than (Jacques) Delors in finding new ways to stimulate growth," said Jose Manuel Garcia-Margallo, a Spanish People's Party member of the European Parliament.

Rajoy will reaffirm his commitment to the monetary union, Margallo told Reuters.

"Spain must be within the euro zone core and whatever level of discipline they ask, we will be the first to comply."

Rajoy is likely to drop calls made previously by Spanish leaders for more help from the European Central Bank. The bank says it will not be lender of last resort for fear that would discourage necessary economic reforms.

Instead, Rajoy will focus on strengthening the European Financial Stability Facility (EFSF) and the funding of credit lines available from the International Monetary Fund (IMF), a source close to the party said.

"He understands that speaking to Germany about quantitative easing by the ECB is like asking them to light a fire in the first floor of their own homes. Better to concentrate on the funds already under consideration," the source said.