Tough new Spanish austerity measures

José Luis Rodríguez Zapatero, Spain’s prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 per cent cut in civil service pay to accelerate cuts to the country’s budget deficit.

The new austerity drive – echoing moves by Ireland and Greece – followed intense pressure from Spain’s European neighbours, the International Monetary Fund and the US for budget cuts to raise the credibility of a €750bn ($947bn) emergency plan to shore up the eurozone.

President Barack Obama had urged Mr Zapatero in a telephone call on Tuesday to take “resolute action”.

In what he acknowledged was one of the hardest speeches of his life, Mr Zapatero told parliament how Spain planned to reduce its deficit by an extra 0.5 per cent of gross domestic product this year and 1 per cent of GDP in 2011, a total of €15bn.

The new measures should help bring the deficit down from 11.2 per cent of GDP in 2009 to just over 6 per cent of GDP in 2011.

His decision to cut civil service salaries by 5 per cent from June, and then freeze them next year, underlined the seriousness of the challenge facing Spain.

Analysts had said that such a move would be anathema to Mr Zapatero and his Socialist party. Ministers will take a 15 per cent pay cut.

Other measures included a €6bn cut in public sector investment, €1.2bn in savings by regional and local governments, a pension payments freeze, abolition of a €2,500 childbirth allowance from next year, a €600m cut in foreign aid and savings on the cost of pharmaceuticals in the public health system.

Trade unionists were outraged at what they said were harsh measures. One regional leader of the small United Left political party called for “rebellion and a general strike”.

“The situation is difficult and it would be nonsense to hide it,” Mr Zapatero said.

The measures were essential, he said, “to achieve now the promised deficit reduction, to reinforce confidence in the Spanish economy and to contribute to the financial stability of the eurozone.”

As he spoke, the European Commission was proposing tougher rules to enforce fiscal discipline in the eurozone and the establishment of a permanent crisis management mechanism to prevent sovereign debt disasters.

If approved by national governments, the change would be the most significant advance in eurozone economic governance since the euro’s launch in 1999.

Additional reporting by Tony Barber in Brussels and Ralph Atkins in Frankfurt