Spain in for hot spring

Spain's Prime Minister Mariano Rajoy is expected to unveil about 35 billion euros ($40 billion) in spending cuts and tax hikes Friday, as he presents his 2012 budget, primarily aimed at slashing a huge 8.5 percent deficit.

Rajoy said that government expenditure would be "thinned out" to make progress towards a European Union demand that the budget deficit be reduced to just 3 percent by 2013.

Spainneeds to shave a total of 60 billion euros off its budget in the next two years if it is to meet this goal.

Further belt tightening

Spain's 2012 austerity budget comes on top of cuts of 15 billion euros already unveiled in December as part of the country's effort to avoid joining Greece, Portugal and Ireland as a eurozone bailout candidate.

Although Rajoy has so far only hinted at what's in store in the next round of fiscal pain for Spaniards, trade unions called a general strike for Thursday, attempting to "practically paralyze" the country.

However, if Spain fails to rein in its deficit, contagion is likely to spread further in the eurozone, and would overstretch the bailout capacity of the currency area's rescue fund.

Sweeping reforms

So far, Spaniards have been largely tolerant of Rajoy's efforts to meet the EU goals.

But recent labor market deregulation, described by Economy Minister Luis de Guindos as "extraordinarily aggressive," has caused a public outcry.

Key to the reform is a substantial reduction in compensation payments for laid-off workers, as well as an extension of the probation period for new employees to one year.

In addition, the government announced more lay-offs in the education and health sectors, as well as in state-owned businesses.

By contrast, companies hiring staff, especially young people, will enjoy tax breaks.

Vicious watershed

This year, Spain is facing its second recession in three years, which is likely to add another one million people to swollen unemployment lines.

Spain's jobless rate of 23 percent is already the highest in the European Union, with half of all workers under the age of 25 being unemployed.

Spanish daily newspaper El Pais recently wrote that Spain was facing a "vicious watershed" unseen in the country's contemporary history.

"The swollen deficit makes cutbacks inevitable. At the same time, the measures worsen an already unstable economic situation. Spain is unable to meet reduction targets unless it is given more time," the newspaper wrote.

Until a few years ago, Spain was considered a booming economy, driven by cheap loans after the introduction of the euro.

However, the investment was mainly used to fuel a real estate bubble that dominated the economy until it burst in 2008.

It left millions of people without work and Spain's banks struggling with bad loans and toxic assets. Some economists fear further bank bailouts might drive up the country's debt much faster than the government can cut deficits.

Autor: Ralf Bosen / uhe
Editor: Michael Lawton