As Spain’s new government settled in to the reality that 2012 may just be worse than they dared dream it could be – with unemployment hitting 22.8 percent today – Prime Minister Mariano Rajoy appears to have realized that straight cuts and deficit reduction may not be the only path to recovery. Indeed, Rajoy now joins a host of Mediterranean leaders who are withering under the deficit demands of the EU’s strongest and most influential figure, Germany’s Angela Merkel. They want to get things under control, they insist, but all austerity and no efforts to spur growth are leaving them stagnant and facing increasingly frustrated populations. Making matters worse, they are facing a growing chorus of critics who suggest that the very cuts so vital to Merkel’s plans for recovery and assurances of fiscal support are actually making growth harder to achieve. At this week’s World Economic Forum in Davos, both George Soros and IMF Chief Christine Lagard echoed those sentiments with what could be construed as appeals for Merkel to back off and let a more collaborative approach take over, with the IMF head noting, “Resorting to across-the-board, across-the continent, budgetary cuts will only add to recessionary pressure.”
For Rajoy and heads of state like Italy’s Mario Monti, the situation has left them appealing to Merkel directly, asking her to ease up on deficit cutting demands to allow for some efforts to spur growth when their countries need it and jobs most.
The Guardian’s Giles Tremlett reported, “While Rajoy, who met German chancellor Angel Merkel in Berlin on Thursday, publicly maintains his target of reducing the deficit to 4.4% from more than 8% last year, his ministers are letting it be known that they want the EU to ease up on deficit targets which require severe adjustments. Rajoy himself has pointed out that the EU’s target for 2011 supposed not only that last year’s deficit would be 6%, but also that growth this year would reach 2.3%.”
However, despite such appeals, Merkel appears unmoved while the debate continues to build around her. Still, its worth asking how long she can hold out until she begins to feel the pinch as sustained unemployment and negative economic growth in the southern states continue to weigh down Germany’s flagship economy.