Spain PM says country's 'head out of water'

In his annual state of the nation address, embattled Mariano Rajoy says country's finances are on the road to recovery.

    Mariano Rajoy, Spain's prime minister, has claimed the country's economy is on the mend as he revealed a drop in the government's budget deficit.

    "Spain's head is out of the water," Rajoy told parliament on Wednesday in what was his first state-of-the-nation debate since taking office in December 2011.

    As well as problems with the economy, Rajoy is battling allegations that a slush fund was used to pay senior members of his Popular Party.

    Without mentioning the scandal explicitly, the prime minister confronted the issue by calling for harsher criminal penalties for corruption.

    The government has been trying to heal its public finances since it came to power 14 months ago by slashing spending and raising tax.

    While that has come at a price for the economy - which is in another recession and hobbled by 26 percent unemployment - Rajoy noted it was finally bringing the deficit down to less than 7 percent of the country's gross domestic product in 2012, from nearly 9 percent a year earlier.

    Spain last year pledged to European authorities it would cut its deficit to 6.3 percent after the 2011 figure was found to have soared to 8.9 percent, nearly three times the limit for European Union countries using the euro currency.

    In his pursuit of the promised deficit reductions, Rajoy has broken every major election campaign promise, stirring much social unrest and triggering two general strikes over the past 14 months.

    On Wednesday, Rajoy admitted he had failed to live up to some promises but insisted he had done his duty and promised "a second generation of reforms" that appeared to signal a shift in strategy away from austerity policies in favour of credit incentives and youth employment initiatives.

    The measures include a reduction - and in some cases elimination - of social security payments by companies that hire people under 30 years of age part time.

    He also announced a  $60bn credit programme for small- and medium-sized companies to be funded publicly and privately.

    Harsh climate

    Questionning Rajoy's optimism, Javier Diaz-Gimenez, economy professor at Spain's IESE Business School, said: "The need for external financing for Spain will depend on what happens this year, not what was achieved last year.

    "I have serious doubts that the deficit target for the coming year will be reached, given the cutbacks that have already been made and the GDP contraction predictions."

    About one million additional people have lost their jobs under Rajoy's administration, and the unemployment rate for people under 25 is now at 55 percent.

    Government borrowing costs soared to unsustainable highs last year, bringing the country close to having to seek a sovereign bailout loan like Greece, Ireland and Portugal.

    The economy, which is the fourth-biggest in the eurozone after Germany, France and Italy, has been shrinking for the last 18 months.

    The government predicts the country will continue in recession with 0.5 percent negative growth this year although analysts say this figure is conservative.

    Corruption allegations

    Opposition leaders have repeatedly called in recent weeks for Rajoy to resign, arguing that the unemployment figures and corruption allegations left him without credibility.

    The main corruption scandal affecting Rajoy erupted after the National Court said a former treasurer from Rajoy's ruling party had amassed an unexplained $52m in a Swiss bank account.

    Newspapers reports alleged that for years the treasurer made regular slush-fund payments to top party members, including the prime minister.

    Rajoy and his party have denied the allegations but have failed to explain how the former treasurer amassed the money.

    On Wednesday, Rajoy complained that the allegations of widespread corruption across the political system were unjust and damaging Spain's image.

    He also proposed audits for all political parties, labour unions and publicly financed companies as well as high-ranking officials and possibly deputies and senators.

    SOURCE: Agencies


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