By ALAN CLENDENNING, Associated Press
MADRID (AP) — Investors concerned that Spain is fast becoming Europe's riskiest economic link and could be the next bailout candidate have plenty to worry about this week.
On Thursday, much of the country will shut down in a general strike against labor market reforms that make it cheaper for companies to fire and offers incentives for them to hire.
The next day, new center-right Prime Minister Mariano Rajoy is expected to unveil about €30 billion ($40 billion) in spending cuts and tax hikes in a deficit-slashing budget. This comes fast on the heels of a similar €15 billion austerity package unveiled less than three months ago as part of Spain's push to avoid joining the ranks of bailed-out Greece, Portugal and Ireland.
So far, Rajoy has only given hints about what's in store in the next round of fiscal pain for Spain, which is already lurching toward recession and is battered with an unemployment rate of nearly 23 percent, the highest among the 17 countries that use the euro.
But economists predict that government workers could face additional pay freezes or cuts, and that Spain's important regional governments may be forced to lay off temporary teachers and unveil reviled co-payments under which patients would pay part of the cost for national health care.
Infrastructure projects for new high-speed rail lines and highways are almost certain to be delayed, and higher taxes could be levied on corporations, tobacco and alcohol. Spain's military, already hit by huge debts, could see further cost cuts.
And while Rajoy has downplayed the idea of raising the country's 18 percent sales tax, experts don't rule out an increase.
All these measures are likely to cement predictions that the fourth-largest economy in the eurozone — behind Germany, France and Italy — won't grow start growing again until 2013.
Spain has already gone through successive rounds of cuts, tax hikes and deep fears that the country — reeling from the bursting of a massive property bubble — could be next in line for a bailout.
The country's economy is almost twice the size of the economies of Greece, Ireland and Portugal combined — sparking fears that its financial failure would send shockwaves throughout the region and the world's markets. More importantly, financial troubles in Spain would likely trigger a run on Italy and could ultimately lead to a breakup of the currency union.
"If you put Spain in danger, Italy is in danger and maybe even France," said Antonio Barroso, an London-based analyst with the Eurasia Group consulting firm.
Fears over Spain's future grew more intense in February when Rajoy's conservative Popular Party, which ousted the left-of-center Socialists in November, revealed that the country's 2011 deficit came in at 8.5 percent of economic output — far above an earlier 6 percent estimate.
Rajoy had already imposed a new round of tax hikes and budget cuts seen as crucial for the country's economic health, but he then went on to unnerve investors and European leaders by proclaiming his government would miss this year's deficit target.
Instead of sticking to a deficit target of 4.4 percent of its gross domestic product in 2012, one that had been promised to the European Union by the Socialists, Rajoy declared he would instead aim for 5.8 percent, while still pledging to bring it down to 3 percent in 2013.
Rajoy's unilateral move did not go down well in Brussels, home to the European Commission that sets the financial rules for eurozone members.
In a lighthearted reflection of the EU's frustrations, Spain's economy minister, Luis de Guindos, at a recent meeting was photographed being jokingly strangled by Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the regular get-togethers of the currency union's finance ministers.
The Commission argues that countries that use the euro must slash high deficits to convince investors that the currency union can overcome a more than two-year-old debt crisis.
Spain and the EU have since agreed on a new 2012 target of 5.3 percent of GDP, but doubts that the government can actually meet even this easier target pushed the country's borrowing costs higher on financial markets in the following days.