Spain's PM warns of tough times ahead

SPANIARDS HAD been waiting for a month for their future prime minister to reveal how he planned to revive a battered economy and create jobs. His message, delivered just days before Christmas, was ominous: more austerity.

Voters desperate for change after two years of recession that pushed unemployment to 23 per cent carried conservative Mariano Rajoy to victory last month. But in his first policy speech since winning the election, Rajoy dashed all hopes that 2012 might be any better than the current misery.

"The panorama could not be more sombre," Rajoy told Parliament as he rattled off a list of Spain's myriad woes and proposals to remedy them, including austerity cuts worth €16.5 billion ($21.6 billion).

Rajoy sought to combine measures to boost economic growth with debt reduction. He announced reforms to encourage companies to hire and tax breaks for small and medium-size firms that make up the bulk of the economy. He will also streamline the government with a hiring freeze for most groups of civil servants.

He stopped short of announcing public-sector wage cuts on top of the five per cent reduction his Socialist predecessor enforced. On the bright side, he vowed to end a freeze on cost-of-living adjustments for retirement pensions.

Spain's economy is still recovering from the implosion of a real-estate bubble in 2009 that created mass unemployment, depressed house prices and piled up bad loans for banks and the government.

The government is desperate to keep the economy from falling into another recession and to reassure international investors that the country can handle its high loans. That is key if Spain is to avoid the fate of Greece, Ireland and Portugal, which needed bailouts because investors feared they would default on their debts.

Rajoy's Popular Party won a landslide victory and absolute majority in the November 20 elections, but he assumed office yesterday because of legal procedures.

He avoided giving specifics on how he will reduce the deficit. That information will presumably come soon, as the first Cabinet meeting is Friday.