Spain Caps Its Debt — Rest of the Euro Zone Be Warned

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Pierre-Philippe Marcou / AFP / Getty Images

Spanish Prime Minister Jose Luis Rodriguez Zapatero listens to Spain's second Vice President and minister of Economy and Finance, Elena Salgado, during the votation of the constitutional reform at Madrid's Parliament, on September 2, 2011

Anyone who witnessed the protracted slugfest that was the U.S. government's attempt to agree on a debt ceiling might marvel at Spain's relatively peaceful efforts to do the same. After all, Prime Minister José Luis Rodríguez Zapatero announced an agreement to constitutionally limit the deficit on Aug. 23, and on Friday, just ten days later, the Spanish Congress of Deputies approved the measure by a vote of 316 to 5 (the Senate is expected to do the same on Sept. 7). But as both the public protests and the debate in the congress prove, all is not resolved. And therein lies a lesson for Europe.

At their Aug. 16 summit, German Chancellor Angela Merkel and French President Nicolas Sarkozy encouraged every member of the 17-state euro zone to work a debt ceiling into its constitution. Within a week, Zapatero had become the first leader to take their words to heart. He negotiated a pact with the lead opposition Popular Party (PP) that would reform the Spanish constitution to require every level of government — national, regional, and municipal — to limit its deficit. A separate law will allow the national government to accrue only 0.4% debt.

"It's a signal designed to calm the markets, calm Europe, and show that Spain is committed to not being a problem for Europe," says Antonio Lopéz-Istúriz, secretary general of the PP's European Parliament arm,whose own party has long made a legally balanced budget part of its platform. "Europe needs reassuring signs from Spain, and this is a big one."

No one doubts the symbolic impact that the amendment will have, and Zapatero has already received support for the gesture from the OECD and ratings companies like Moody's. But many analysts suggest that its real impact on the economy will be limited, not least because it allows governments to supersede the debt limits in times of crisis or other unusual circumstances. "There are a lot of 'buts'," says Soledad Pellón, market strategist for the Spanish branch of IG Markets, an international trading company. "It's a very flexible piece of legislation, so I think it's logical to expect that it will only be applied in years when the economy is doing okay."

The pact, coming just three months before elections that Zapatero's Socialist Party (PSOE) is widely expected to lose, took many by surprise. For one thing, the prime minister did not even consult members of his own party before agreeing to the reform. Even more surprising was the decision to rush the amendment — the first major change to the Spanish constitution since its creation in 1978 — through parliament.

"He really didn't have a choice," explains strategist Pellón. "In the past few weeks the Central European Bank has been buying up Spanish debt, which is a form of semi-rescue. And rescue packages always come with obligations."

Perhaps so, but today several sectors of Spanish society are wondering if it was necessary to meet those obligations quite so quickly. On the floor of the congress and in the streets of Madrid, many of the smaller political parties, unions and members of the broad protest movement known as "The Indignant" are vociferously objecting to restrictions on regional autonomy and to the cuts in social welfare spending that will likely result from a stabilized budget. And more than anything they are rejecting the rapid imposition of the amendment without a referendum.

Before the vote on Friday, Rosa Diez, of the Union of Progress and Democracy party, addressed her fellow members of parliament with barely contained outrage. Referring to the Socialist-PP pact, which refused to admit other parties' amendments to the bill, she demanded, "Who do you think you are? You have plundered Spanish democracy. We need constitutional reform, all right. We need constitutional reform to keep you guys from manipulating the constitution." So annoyed were three other minority parties that their members walked out of the legislature before the vote; two others stayed, but abstained.

Their outrage is echoed by protests that began last week and are expected to culminate on Sept. 6, with a march organized by Spain's two main labor syndicates. Holding signs etched with the words "Referendum Now," several hundred protestors maintained a vigil outside Congress this morning.

Why didn't Zapatero give his citizens a chance to vote on so momentous a piece of legislation? On Thursday, government spokesman José Blanco said that the prime minister would have liked to submit the amendment to referendum but that the "grave economic situation demanded a fast response." López-Istúriz finds that argument disingenuous, however. "Maybe there's not time now, but Zapatero should have implemented this change a year ago," the European parliamentarian says. "If he had done that, then there would have been time for a referendum."

Of course, limiting the deficit is hardly the normal purview of a Socialist government, and Zapatero may have held off as long as he could for fear of the move's political fallout. If that's the case, this constitutional rush job is unlikely to help his party in November. "The Socialists have been acting very neo-liberal recently, and there's some thought that to have a chance in these elections, they need to turn back to the left," says Pablo Oñate, executive secretary of the Spanish Political Science Association. "But the Indignant movement is already reproaching [Socialist candidate Alfredo Perez] Rubalcaba for adapting to the PP's platform. This could make them feel even more betrayed."

Certainly the scene outside Congress on Friday could give pause to other European member states considering the same sort of constitutional reform. As the angrily scribbled poster of one demonstrator declared, "We won't forget this."