By Daniel Hunter
Newly-elected Spanish Prime Minister Mariano Rajoy is set to unveil what will be one of the country's toughest budgets in recent history.
With Spain's economy still in a bad way the prime minister warned that the budget will be 'very austere'.
Chris Towner, director of FX advisory services at currency specialist HiFX, has warned that this may just cause further problems.
“Austerity works if it is not too late, otherwise it acts as a catalyst for further misery," he said.
“Arguably due to the luck of the timing of the last General Election in the UK, the Government had an opportunity to implement tough measures as the economy, although weak, had enough meat left on the bone for some cuts.
“Spain is not in such a healthy position. There is no meat left on the bone prior to austerity measures and austerity measures now are all too late. In fact Spain is in a precarious position, not so much due to the weight of her sovereign debt compared to GDP, but due to the high levels of private debt and an extremely weak housing market. For PM Rajoy to try and pass ‘a very, very austere budget’ in this economic environment will only result in further strikes and unrest which will lead Spain deeper into a self-fulfilling downward spiral.
“However is there a better option? Can Spain afford not to be so austere? It has only taken one generation to get Spain into this mess and despite being the toughest option, now is the time for the pain and not passing more and more of a burden on to the future generations. Inaction now would result in more misery later.
“The Euro is proving resilient helped by increasing the size of the firewall. The commitment of the core European countries has survived its first test of Greece, but Spain really is another level!”
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