Spanish Prime Minister, Mariano Rajoy
Air of confidence: Mariano Rajoy inside the Palacio de la Moncloa, his official residence on the outskirts of Madrid © Gianfranco Tripodo

In his first year in office, Mariano Rajoy, Spain’s prime minister, has at times resembled a latter-day Saint Sebastian. Assailed on all sides – by a meltdown in the banking sector, soaring unemployment and a crisis in the public finances – he has been forced to break one election promise after another. He has slashed spending and raised taxes, to the fury of Spanish voters. The low point came last June when he had to go cap-in-hand to the EU to negotiate a €100bn bailout for Spain’s tottering banks.

The economic and political turmoil has left Mr Rajoy bloodied but resolute. In a two-hour interview at the Palacio de la Moncloa, his official residence on the outskirts of Madrid, the Spanish prime minister is at pains to explain why he is determined to stay the course, and why he believes his strategy is beginning to bear fruit.

“It is the old cliché that Rajoy never takes decisions,” he says, “They say about the Gallegos [Galicians] that they like to wait and see – and they say the same thing about me. But in the year since I took over the government I reduced the public deficit in a situation where we were in recession. I pushed through structural reforms and a reform of the banking sector. I would like to know: How many non-Gallegos would have taken those decisions?”

Spaniards often describe their prime minister as a typical Galician – reserved, reluctant to give a clear answer, ever keen to keep his options open. Popular lore has it that when you meet a Galician on a staircase, you never know whether he is going up or down.

Mr Rajoy retorts that he is “proud and happy” to be from Galicia, a northwestern stronghold of his conservative Popular party. The prime minister’s attachment to his home region is evident from the pile of newspapers on his desk: ABC, the conservative daily, lies on top, followed by La Voz de Galicia, the main regional paper; El Mundo and El País, the biggest Spanish dailies, form the bottom of the pile.

With his air of small-town rectitude, Mr Rajoy offers a sharp contrast to more flamboyant predecessors, the outspoken José María Aznar or Felipe González, the charismatic socialist. Where his critics detect indecision and procrastination, Mr Rajoy sees calm and prudence. He bides his time. This is, after all, a man who lost two elections before he led the PP to a crushing victory in December 2011.

Yet, for all his caution, Mr Rajoy is strikingly assertive as he makes his case that the economic tide in Spain has finally started to turn. He points to rising exports and falling bond yields, and boasts that his labour market reform of last year has helped Spanish companies to regain competitiveness: “I think that the second half of 2013 is when we will start to see a recovery, and it will come through very clearly in 2014.”

Not everyone shares his optimism. Critics argue that the incipient recovery is being driven more by the prospect of intervention by the European Central Bank than the reformist spirit of the Rajoy government.

Spain’s prime minister firmly rejects that assertion, but is fulsome in his praise of Mario Draghi, the ECB president, whose promise last July to do “whatever it takes” to defend the single currency was seen as a turning point in the eurozone crisis. Now, says Mr Rajoy, any doubts about the future of the euro are “history”.

Mr Draghi threw Spain and other debtor countries another lifeline in September, when he announced a new programme that allows the ECB to buy government bonds in the secondary market. The catch is that Mr Draghi can only activate the programme (known as outright monetary transactions), once a government has formally requested a bailout or credit line from eurozone finance ministers. Until now, Mr Rajoy has not made that request, betting perhaps that the mere option of triggering ECB intervention is enough to calm markets.

Economists say this reluctance has made it more costly for Spain’s Treasury and Spanish companies to borrow money, delaying the recovery. There is also fear that the eurozone crisis will flare up again – for example, as a result of a potentially messy Italian election next month. (Mr Rajoy is following the run-off closely, as he refers to a recent poll in Lombardy.) Uncertainty in Italy could force Spain to seek an ECB programme amid fresh market turmoil, rather than locking in lower interest rates during the current, more tranquil period.

The failure to request intervention is often held up as Exhibit A in the case against Mr Rajoy, though it is likely that the prime minister was swayed as much by German resistance to a new programme as by his own doubts. He firmly rejects any suggestion that he was moved by a sense of Spanish pride.

“People might say that I wasn’t right by not entering the OMT. I am not really bothered by that …We took a decision that was right for Spain.”

The shift in market sentiment suggests he is right, for now. Last week, for example, the Spanish Treasury raised more than €5.8bn in its first debt auction of the year. The issue was oversubscribed, and yields were comfortably below the levels seen in recent auctions. The sale was hailed as a powerful signal that investor confidence is finally starting to return.

There are other positive signs: Spanish exports are on the rise, defying the economic slowdown in many of the country’s key trading partners. The current account has moved into surplus, and labour costs have been flattened – a result of fierce job cuts and stagnant wages.

In fact, Spain was the only large economy in the EU in which there was a fall in unit labour costs between 2009 and last year, a trend that has not gone unnoticed in boardrooms across the continent. Carmakers such as Peugeot, Ford and Renault have all announced recently that they are either expanding or maintaining production in Spain in spite of closures elsewhere in Europe.

Towards the end of last year, Spain also made significant progress in sweeping up the mess left behind by the banking crisis. The worst-affected banks have been recapitalised and have moved their toxic assets into a state-run “bad bank”. Doubts linger about the quality of the assets and loans that remain on the books of Spain’s lenders, but Mr Rajoy is adamant that there will be no more nasty surprises: “The banking system has done a complete striptease,” he says, in an unusually colourful reference to the bank stress tests conducted last year.

These bright spots, however, appear against the backdrop of a dismal – and worsening – economy and labour market.

Most international forecasters expect Spain’s gross domestic product to shrink by about 1.4 per cent this year, after a drop in output of 1.5 per cent in 2012. Spain’s shockingly high unemployment rate, meanwhile, is expected to remain above 25 per cent this year, and will continue to cast a deep shadow over the lives of millions of Spaniards and their families.

Mr Rajoy acknowledges that unemployment remains Spain’s “most important problem”, but insists that the labour market reform he pushed through last year will help. The legislation makes it easier for companies to depart from region-wide collective wage agreements, allowing more flexible deals at factory level. It also makes it easier and cheaper to fire workers on fixed contracts, a change long demanded by Spanish employers.

Economists say that the jury is still out on Mr Rajoy’s overhaul of the job market, and they highlight the lack of mobility of Spanish labour. But Mr Rajoy is sanguine. “Recent job losses have taken place in the real estate sector, in the financial sector and in the public sector,” he says. “But in other sectors of the economy jobs have not been lost. So the labour reform has started to bear fruit.”

The employment legislation was passed just three months after Mr Rajoy entered office. In other crucial areas, however, notably the banking sector, his government was slow out of the blocks. It was also too trusting of assurances given by institutions such as the Bank of Spain. Mr Rajoy says it is “pointless” (a favourite word) to look back at past mistakes – but he cannot resist a dig at his Socialist predecessors. “I found out only a few days after I took office that the deficit could be around 8 per cent,” he exclaims.

Spain’s continuing economic crisis will dominate the rest of Mr Rajoy’s tenure. But he faces at least one other daunting challenge: Catalonia.

In the past months there has been a surge in separatist sentiment in Spain’s most important economic region, heightening fears that the government in Barcelona and Mr Rajoy are destined for a cataclysmic constitutional battle.

Artur Mas, the Catalan leader, has promised to hold a referendum next year in which Catalans would vote on whether to form an independent state. Mr Rajoy and his government insist that such a plebiscite is not allowed under the Spanish constitution – and warn that they will not tolerate any move towards Catalan secession.

“One thing you cannot ask a prime minister to do is to give up on his own country,” Mr Rajoy says, suggesting that the very idea of Spain without Catalonia is unconscionable. Though he steers clear of the inflammatory rhetoric towards Barcelona used by some of his ministers, Mr Rajoy leaves no doubt that he regards national unity as non-negotiable.

“The unity of Spain goes back more than five centuries. This is the oldest country in Europe,” he says, insisting that Spaniards, including Catalans, are “united by many things”. Many Catalans offer a radically different interpretation of Spanish history, and insist that Catalonia has always been a nation – and a people – apart.

But Mr Rajoy argues that the Catalan push for independence runs counter not only to history, but also to the present. “The world is going in a totally different direction,” he asserts, pointing to the increasingly dense web of supranational alliances and federations that spans the globe. “We are working towards greater integration and not the opposite,” he says.

The prime minister says he is ready to discuss a new financial compact between Madrid and the regions, including Catalonia, suggesting that such a deal may be sufficient to calm the current tensions. Like many decision makers in the capital, he is convinced that the Catalan leadership, for all its rhetoric, will ultimately step back from all-out conflict with Madrid.

For much of his first year in office, Spain’s prime minister has been so busy stamping out political and economic fires that he has been preoccupied by crisis management. Asked what he hopes to achieve as his political legacy, Mr Rajoy responds that he would be happy to “lay the foundations for a strong economy” and “help European integration”.

These are challenging but modest goals for a country that, only a few years ago, was poised to join the Group of Eight leading world nations; that served as a crucial US ally during the Iraq war; and that – under Mr Rajoy’s predecessor – launched a high-flying diplomatic initiative known as the Alliance of Civilisations.

Where, then, is the poetry in his political ambition?

“Poetry?” asks Mr Rajoy, momentarily taken aback. “My thing is prose.”

Biography: Cautious path from provinces to power

Mariano Rajoy could have easily led a quiet life. Born, raised and educated in the coastal region of Galicia, he became the youngest Spaniard to pass the examination for property notaries after his law degree. The country’s registradores make up a much-envied caste that is well paid, protected from competition and redolent of a respected, comfortable existence in the provinces.

Instead, Mr Rajoy embarked on a career in politics that took him from his home region to Madrid, and finally on to the European stage. He served as minister for public administration, education and interior affairs – before taking over the leadership of the centre-right Popular party in 2004. What followed was seven years as opposition leader and two consecutive election defeats; he finally swept to victory in November 2011.

The 57-year-old father of two is widely seen as a cautious figure, lacking in charisma. His supporters, however, say he is hard-working, solid and persistent. Mr Rajoy is said to keep his distance from business leaders, and has shown little interest in the trappings of wealth and power.

Like many of his countrymen, Mr Rajoy is an avid sports fan, taking great pride in the recent successes of Spanish teams and athletes. Football is a particular passion, and he closely follows the fortunes of Real Madrid, his club side, and the national team. In fact, Mr Rajoy raised eyebrows when – fresh from negotiating a €100bn bailout package for Spain’s banks – he decided to travel to Poland to watch Spain’s opening match at the European Championships last year. Critics accused him of unstatesmanlike behaviour, saying he should have addressed the crisis-scarred nation instead.

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