Spain's Troubles Threaten Eurozone (Dispatch)
Video Transcript:
Video Transcript:
The Spanish government today presented its budget for 2013, which includes tax increases and spending cuts. Madrid hopes to please financial markets and the European Union should Spain have to negotiate for financial aid. However, the plans are straining the economic, social and even institutional stability of the country and will continue to destabilize the eurozone.
On Sept. 27 the Spanish government announced the budget for 2013. Financial markets are waiting for Spain to ask for financial assistance from the European permanent bailout fund and the European Central Bank. By applying austerity the government wants to avoid being under strict supervision like a traditional bailout country -- such as Greece, Portugal or Ireland -- in case it requires outside help.
With its spending cuts Madrid is however upsetting the domestic population. Protests have been taking place for several days and lately even turned violent. The austerity and poor economic outlook is threatening social stability. Officially over half of the young Spaniards are unemployed and the social safety net is being stretched thin as the government cuts social contributions.
Adding to the troubles of the central government is the dire situation of its banking sector and regions.
Later this week it should become clear, how much aid Spanish banks need. The eurozone countries have pledged 100 billion that would be channeled to troubled banks through the central government. Madrid was hoping that Europe's permanent bailout fund could directly bailout banks. This would reduce the burden on the central government. The likelihood that this will happen anytime soon is slim, since the eurozone first needs a centralized bank supervisor and northern eurozone countries are resisting the idea to relieve governments completely from being responsible for troubled banks.
On Sept. 27 Castilla La Mancha became the fifth Spanish region to ask for aid from the central government. Madrid is still setting up an 18 billion euro fund with the purpose of helping its 17 regional governments. Although the fund isn't ready yet already 85 percent of the money has been pledged.
In return for providing assistance Madrid demands stronger budgetary oversight of the regions. These regions are unwilling to give up budgetary sovereignty and accuse Madrid of putting to question the constitutional order, which devolves some powers from the central government to the regions and was created when the Spanish dictatorship ended in the late 1970s.
Interestingly, in its struggle with regions Madrid faces a problem that applies to the wider eurozone. Northern eurozone states are only willing to help countries if they delegate a certain degree of budgetary oversight. However, struggling eurozone countries are not willing to give away sovereignty lightly.
The range of challenges Madrid is facing, shows how the European crisis affects more than the economy and Spanish interest rates. The social stability and integrity of the constitution are being strained. However, the means to relieve the pressure coming from financial markets and the EU are contradictory to what would have to be done to calm the situation domestically. Therefore, the crisis in the fourth largest eurozone country will likely deepen, putting the stability of the entire eurozone to question.
