EUROPE NEWS
Updated April 26, 2013, 6:37 p.m. ET
Spain Rethinks Austerity
By MATT MOFFETT And ART PATNAUDE
MADRID — Spain's government, under intense public pressure over record-high unemployment, said it was easing up on austerity and developing new measures aimed at breathing life into an economy that it acknowledged was even weaker than previously thought.
The announcement Friday of a "stability program" came one day after a devastating first-quarter jobs report showed unemployment at 27.2%—the highest rate since Spain started keeping records in the 1970s.
On Thursday night, the conservative government had to mobilize a massive show of force, involving hundreds of policemen in riot gear who turned Madrid's colonial-era boulevards into a virtual armed camp, to head off a march on parliament that had the declared aim of provoking "the fall of the regime."
Deputy Prime Minister Soraya Sáenz de Santamaría said on Friday that Spaniards could take a breather from further belt tightening. She said the country's previous sacrifices "allow us not to have to ask Spaniards to make great efforts at this moment."
Luis de Guindos, left, confers with Soraya Saenz de Santamaria in Madrid on April 26.
With the blessing of the European Union and the International Monetary Fund, the government said it was relaxing its budget-deficit target this year to 6.3% of gross domestic product from the previous goal of 4.5%.
Spain was given an additional two years, until 2016, to reach the European Union deficit limit of 3%.
Yet even as the conservative government tried to assure angry citizens that the worst days of the five-year crisis were behind them, its own revised economic projections showed Spain staging only a modest rebound in the coming years.
The government revised its estimate of this year's economic contraction to minus 1.3% of GDP, from minus 0.5%. A recovery will begin next year, officials said, though it will be 2016 before growth surpasses 1% of GDP.
Private economists remained skeptical that even that much progress could be attained without more dramatic policy shifts.
Government officials tried to emphasize areas where Spain has made progress—including a 20% increase in exports to emerging markets last year—and said they were displaying realism in the face of adversity.
"These are very prudent forecasts," said Finance Minister Luis de Guindos. He added: "2014 is the year of recovery."
The government said it hoped to add juice to the economy with measures to stimulate entrepreneurship in the private sector and public sector efficiency.
Among them are expanding tax breaks for corporate research and development; de-linking some pricing decisions from the rate of inflation; streamlining the visa system for foreigners who want to invest in Spain; liberalizing the railroad sector; and increasing efficiency of airports to cut costs in travel.
The government also wants to promote home rental, as opposed to buying, at a time when millions of houses are vacant following the bursting of a real-estate bubble.
The International Monetary Fund's managing director Christine Lagarde lauded the shift in direction.
"I strongly support the Spanish government's objectives of restoring a sound fiscal position while securing a recovery and creating jobs," Ms. Lagarde said. "Today's announcement to pursue a more gradual consolidation path is a welcome step toward meeting these goals."
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Police vans blocked protesters from marching on the parliament building in Madrid on Thursday night.
But analysts said the government's explanation of how and when it intended to push the changes was so fuzzy that much of the program amounted to a statement of good intentions.
In addition, some analysts said the measures were timid given the magnitude of the crisis facing Spain, where half of people age 16 to 24 who are looking for jobs cannot find any.
"There is no shock and awe here," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "The new initiatives are quite modest."
Even the promise of easing austerity was less than meets the eye, analysts said, because the government said it would extend what had been touted as a temporary increase in the personal income tax by at least one more year.
A report by Barclays BARC.LN -1.02%PLC criticized the absence of further changes to the labor code, such as a reduction in the minimum wage to encourage hiring of millions of unemployed youths.
Spain made some changes in its rigid labor-market rules last year, though not as many as advocated by such international research groups as the Organization for Economic Cooperation and Development.
Some economists suggested Spain might be shifting to a middle ground that represents the worst of both worlds—not enough austerity to impress markets and not enough pro-growth measures to rev up the economy.
"There are just partial measures here," said Javier Diaz-Gimenez, an economist at Madrid's IESE Business School. "Not any new surprises and not any new hope for Spain."
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