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September 23, 2013, 3:26 p.m. ET

Spain Emerges From Recession but Sees More Austerity Ahead

Prime Minister Says Task Now Is to Create Jobs

By RICHARD BOUDREAUX and CHRISTOPHER BJORK
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[image] Juan Manual Castro/VU for The Wall Street Journal
 Spain's Prime Minister Mariano Rajoy said the economy would improve 'little by little.'


MADRID Spain emerged from two years of recession late this summer, but faces a long period of more austerity and painful adjustments before it can regain its footing and put most of its 6 million unemployed back to work, Prime Minister Mariano Rajoy said on Monday.
 
"Spain is out of recession but not out of the crisis," Mr. Rajoy said in an interview with The Wall Street Journal, cautiously touting the effects of budgetary and structural overhauls that have been among the deepest in the euro zone. "The task now is to achieve a vigorous recovery that allows us to create jobs."
 
His comments echoed a wider belief among Europe's leaders that they are finally overcoming a financial crisis that has hammered the continent for half a decade. Borrowing costs for Spain and others on the euro zone's stricken periphery have plunged over the past year, and the 17-nation bloc as a whole registered a tepid return to growth in the second quarter of this year.
 
At the same time, Mr. Rajoy said he hoped the easing of the crisis won't stall the euro zone's movement toward expanded political and financial integration—a process that would help beleaguered countries like Spain by putting the bloc's collective financial strength behind a safety net for the region's banks.
 
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The conservative Spanish leader voiced his support for a more closely knit Europe in a telephone call Monday to Chancellor Angela Merkel while congratulating her on what he called her conservative party's "magnificent" victory in national elections Sunday.
 
An early riser, Mr. Rajoy said he had stayed up till 1:30 a.m., well past his bedtime, to follow the German returns. Some in Ms. Merkel's party and in others that might join her coalition have voiced skepticism about a European "banking union," but Mr. Rajoy said he was "reasonably satisfied" that the project would move ahead, albeit more slowly than he'd like.
 
Spain has been a test case in Europe for whether austerity and structural overhauls, an agenda pushed vigorously by Ms. Merkel, can save its fiscally weak economies.
 
Spain's economy, the fourth-largest in the bloc after Germany, France and Italy, crashed in 2008 when a real-estate boom went bust, taking down much of its banking system and raising doubts about the country's solvency. The gross domestic product, which briefly rebounded in 2010 and 2011, has shrunk 7.5% in the past five years.
 
During the hourlong interview at Palacio de la Moncloa, his oficial compound on the edge of Madrid, Mr. Rajoy said his medicine was working and "things are on a good path." Labor costs have been cut, exports are on the rise, and the current-account deficit, once 10% of GDP as cheap money poured in to fuel the building boom, has turned to surplus.
 
A real recovery won't come, he acknowledged, until Spaniards start spending more, house prices bottom out, and the country's external debt stabilizes. But he said that consumer spending had flattened in the past two months after falling steadily since the start of the crisis.
 
Spain's banking system, he said, is "more transparent, more solvent and better capitalized" since it got a €41.3 billion ($56 billion) bailout loan from the European Union last year.
 
Mr. Rajoy is awaiting an assessment by the EU and other creditors in November but added: "If you ask me today, I would say that Spain won't need to extend the [bailout program] into 2014."
 
Mr. Rajoy spoke on the eve of a trip to New York to lobby for a five-year seat for Spain on the United Nations Security Council, and four days before his government was to unveil growth estimates and budgetary plans for next year.
 
Spain's GDP will have inched up by 0.1% to 0.2% in the three months ending Sept. 30, he said, giving the first official confirmation that growth had resumed. That increase over second quarter GDP represents an annualized growth rate of 0.4% to 0.8%.
 
The economy will expand by a modest 0.5% to 1% next year, he said, enabling it to start creating jobs on a sustained basis.
 
"I won't dare to speculate," he added, on how long it will take to whittle down Spain's 26.3% unemployment rate, the highest in the euro zone after Greece. "The improvements will happen little by little."
 
His overhaul of labor laws last year made it cheaper for companies to hire and fire workers, and Mr. Rajoy said these changes will be enough to spur job growth in the second half of next year.
 
The International Monetary Fund said job gains will be "limited" without an even more flexible labor market; Mr. Rajoy said he was open to further changes if warranted.
 
Mr. Rajoy said Spaniards had endured the worst of the budget-slashing and tax hikes he introduced after taking office in December 2011.
 
But he said his cabinet would approve two new adjustments Friday: Starting next year, increases in pension payments will no longer be automatically indexed to annual inflation; nor will many government-controlled prices, including electricity rates and highway tolls.
The pension overhaul will dig into the income of Spain's 9 million retirees.
 
Financial pressure on Spain has eased in the year since the European Central Bank pledged large-scale bond buying to save struggling euro-zone economies from default. That backstop has helped reduce the interest-rate risk premium demanded by investors for buying Spanish bonds by more than half.
 
As Spain's borrowing costs teetered at unsustainable levels last year, Mr. Rajoy began following Spanish, German and U.S. bond rates on an iPad app, often on an hourly basis—an exercise he continues to this day, he said, although "it's a little stressful."
 
What worries him more these days, he said, is unemployment and a shortage of credit to boost spending by households and small business.
 
With Mr. Rajoy's Popular Party and the main opposition Socialists both snared in corruption scandals and deeply unpopular, business leaders and bankers here have begun to speak of a political risk to the Spanish economic recovery. Mr. Rajoy has a solid majority in Parliament, they note, but smaller parties are gaining strength and could produce a deadlocked legislature following elections in late 2015, stalling further economic measures.
 
In recent surveys, Spaniards say allegations made by the jailed former Popular Party treasurer Luis BĆ”rcenas—that Mr. Rajoy and other party leaders pocketed cash from a slush fund fed by Spanish companies seeking government contracts—are more credible than Mr. Rajoy's denials.
 
Mr. Rajoy acknowledged that his popularity had been hurt by the allegations and by his harsh austerity medicine. He said he had broken off all contact with Mr. BƔrcenas and was confident that a judicial investigation would prove his own innocence.
 
The Spanish leader said he now has two years to show voters that the economy is moving.
 
"If people see that what we have done is producing results, and also see that what has been done is creating a solid base for the future, I think we are in condition to recover," he said. "But you can't govern a country thinking every day whether or not they're going to vote for you."
 
Asked whether he'd run for re-election, he said: "I have no intention to retire, but my party will decide."
 
 
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