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Thursday, Sep 6, 2012 9:30 AM UTC

Spain defends austerity moves before Merkel visit

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Topics: From the Wires,

MADRID (AP) — Spain’s economy minister on Thursday defended the country’s unpopular austerity measures pushed through this year by Prime Minister Mariano Rajoy, ahead of a key visit to Madrid by German Chancellor Angela Merkel.

Spain’s government is under pressure to accept a sovereign bailout for its public finances that could come with conditions that would mean more economic pain for a country in a deep recession with unemployment at nearly 25 percent.

But Luis de Guindos said Spain has already made significant progress this year with labor reforms and efforts to reduce a growing deficit through tax hikes and spending cutbacks.

“Spain is doing what Germany did 10 years ago,” de Guindos told a gathering of Spanish and German business leaders at the presidential palace ahead of the Rajoy-Merkel meeting.

Over the last decade, Germany has raised its retirement age, amended its constitution to require a balanced budget and put in place labor market and welfare reforms. A key round of measures in 2003 reduced job benefits and protections — and was criticized at the time for cutting away at a cherished social welfare system.

While Rajoy and Merkel meet, the European Central Bank is expected to announce a plan to buy government bonds from countries like Spain which are struggling with high borrowing costs on their debt.

Rajoy said in an interview published Thursday that he views the possibility of an ECB bond program as part of its broader role beyond its key function of keeping inflation in check for the 17 countries that use the euro common currency.

“Orthodox thinking is very good, and I stand by it,” he told Germany’s Frankfurter Allgemeine Zeitung newspaper. “But everything is not always black or white.”

Spain has already accepted a loan of up to €100 billion ($126 billion) to rescue its banks. But the government is struggling to pay punishingly high interest rates to raise money on bond markets. Investors are concerned that the country cannot afford to protect its financial system and its heavily indebted semiautonomous regional governments without asking for a full-blown sovereign bailout.

Before Merkel arrives, Spain will hold a bond auction that will be a test of investor sentiment.

The interest rate on Spain’s benchmark 10-year bond fell to 6.24 percent Thursday morning ahead of the auction, but that level still makes it difficult for the government to finance itself. And it is close to the 7 percent rate that forced Greece, Ireland and Portugal to ask for sovereign bailouts.

Rajoy also told the newspaper that he believes Spain’s economy will turn around during the slightly more than three years he has left in office, while acknowledging deep frustration among Spaniards facing increasingly tough economic times with no immediate end in sight.

“All steps in the right direction will bear fruit,” he said. “Reforms and austerity measures usually have, however, no immediate effect and that is difficult to explain to the country’s citizens.”

___

Associated Press writer David Rising contributed from Berlin.

More Alan Clendenning.

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