Spain's Rajoy tries to take charge after rocky start

MADRID (Reuters) - Mariano Rajoy thought he could pull Spain out of economic crisis by sticking close to fellow conservative Angela Merkel.

But six months after he was elected prime minister the German chancellor's slow-motion approach has let him down; Spain's banks look in need of international rescue, state funding costs are near unaffordable, Spanish stocks are down a quarter and Rajoy's party is sinking fast in the opinion polls.

His answer has been to break with the habitual reserve that Spaniards associate with his native Galicia in the dour, damp north and to speak out more firmly, calling for common euro zone fiscal rules while pitching for a bank bailout that would spare his government the embarrassment of taking orders from abroad.

Yet months of public relations missteps, including conflicts between the two cabinet ministers whom Rajoy appointed to share responsibility for financial policy and his own record of public hesitation mean many doubt whether this new Rajoy can influence his EU peers any more than the much derided earlier version.

"Being a Merkel disciple didn't work and now the government is trying to set the agenda in Europe for the first time," said an independent analyst in Madrid who has advised Rajoy's centre-right People's Party and who spoke privately to Reuters.

But setting the agenda will not come easily to a man whose European counterparts are unimpressed by his uncertain debut in diplomacy: "Who is Rajoy going to ally with? It's not clear," the analyst said. "He can't lead a coalition of losers."

The 57-year-old local land registry lawyer from Santiago de Compostela led the opposition for eight years before having his chance to rule when a burst property bubble and economic despair turned voters against Jose Luis Zapatero's Socialists.

Uncertain in English and untried in foreign affairs having held only domestic ministerial posts including education when last in government, his first instinct as the crisis deepened was to seek what seemed a natural European alliance with Merkel and to trust to his programme of liberal economic reforms and strict austerity measures to win back market confidence and satisfy the EU's paymaster that Spain could remain solvent.

Yet Rajoy "hit a wall" with Merkel, Spanish officials say; he was frustrated when he found that despite using a strong new parliamentary majority to take deeply unpopular measures like easing employment protection - in line with German prescriptions for improving competitiveness - he did not secure the kind of financial backing from Merkel that would cut Spain's debt costs.

CODE

In a burst of uncharacteristic boldness at an EU summit in March, Rajoy told other leaders he was unilaterally loosening Spain's budget deficit targets to avoid further choking growth.

But that moment aside, he has avoided taking on Merkel over her rejection of measures such as more European Central Bank help for euro zone governments and banks or pooling of government debt into 'eurobonds' to cut Spain's funding costs.

Instead Rajoy has tended to speak in a form of code, saying Spain was "doing its homework" - braving voters' wrath with severe budget cuts and market reforms - and that Europe should do something in response, without spelling out what he wanted.

He let the leaders of Italy and France stick out their necks to ask for specifics, such as eurobonds, which Berlin opposes.

Yet with financial markets almost closing to Spain - Rajoy's treasury minister said they were, but the economy minister disputed that - and urgent talks under way with German and EU officials to help Spain's sick banks, Rajoy seems to Spaniards to be coming out of his shell and spelling out his demands.

On Saturday, he called on Europe to move toward a fiscal union, saying Spain could cede sovereignty toward that end, while making it clearer that he hopes for urgent measures by the European Central Bank to tame bond markets wary of Madrid.

There are signs that Rajoy has more sympathy now after being seen as inept compared with Italian technocrat leader Mario Monti, who used his deep experience as an EU commissioner to reshape perceptions of Italian risk in Berlin and Brussels after the removal of premier Silvio Berlusconi.

"It's an improvement," said one European official who has watched Rajoy's performance closely and who applauded his latest comments before adding: "But it's still not totally clear what the strategy is."

Merkel is showing flexibility, open to a rescue for Spanish banks without the most onerous conditions for the sovereign, and signaling Spain could win an extra year to cut its deficit. [ID:nL5E8H656X] Officials are working on a way to use European rescue funds to help Spain's crippled banks. [ID:nL3E8H6173]

Some see Rajoy growing in confidence, realizing that, unlike say Greece, Spain, as the euro zone's fourth economy, is "too big to fail", that its neighbors will pay to avoid the chaos for their own economies that a Spanish collapse would cause.

"PARALYSED"

Yet Rajoy, whose leadership of the PP has been marked by a preference for cautious rather than decisive action, has a long road ahead of him to win the confidence of others.

"His communication has been dreadful, miserable," said a senior EU official who has frequent meetings with Rajoy. "He looks paralyzed, as if he was only concerned by finding a way not to be overthrown by the next wave but had no real clue of how to do it."

In recent weeks his government has sent conflicting messages over the nationalization of the country's fourth biggest lender, Bankia. First the ECB was to be involved, then it wasn't. And the amount of capital Bankia needed has been changed repeatedly.

One adviser to Rajoy, also speaking anonymously, conceded that communication on the Bankia rescue had been a "catastrophe". The government has also sent conflicting messages about its plan to solve a liquidity crunch in the country's 17 autonomous regions. And local media have pounced on backroom bickering between Economy Minister Luis de Guindos and Treasury Minister Cristobal Montoro, Rajoy's two-headed economic team.

Rajoy has won praise in Europe for using his hefty majority in parliament to enact reforms and austerity measures, making the rigid labor market more flexible, enacting a German-inspired financial stability law and cutting budgets in the highly devolved autonomous communities.

That has not come without cost at home. Support for the PP has dropped to 37 percent from 45 percent when he was elected, though that is well above the Socialists' 26 percent.

Accused by the Socialists of making up policy on the hoof - a jibe he used against them to good effect while in opposition - Rajoy can count on a solid parliamentary majority for another three years. But he will be wary of doubts within his own party about his effectiveness, just as he must convince his peers around the summit tables in Brussels to trust his judgment.

(Additional reporting by Andres Gonzalez and Tracy Rucinski; Editing by Alastair Macdonald)

james harrison falcons giants game norman borlaug santorum new hampshire debate rupaul