Tags: EU | Spain | Financial | Crisis

Analysis: Recession Erodes Power of Spanish Leaders

Tuesday, 01 Jun 2010 02:13 PM

Spain's Socialist government is seeing its political power erode as it struggles to chart a path out of deep financial trouble, failing so far to satisfy conflicting demands to cut its budget and stimulate job creation.

The coming months could bring far more problems as Prime Minister Jose Luis Rodriguez Zapatero reforms the country's labor market, risking national strikes and the loss of support from trade unions, a core source of his center-left party's strength.

Zapatero's minority government is already running into serious trouble, although there appears to be no immediate threat of it falling.

A package of austerity measures passed by only one vote in parliament's lower chamber Thursday and the Fitch Ratings agency downgraded Spanish debt on Friday. Opposition parties have called for new elections.

A poll published Saturday in the northeastern newspaper Periodico de Catalunya said the conservative opposition Popular Party would win up to 42 more seats than the Socialists in the 350 member parliament — coming close to an overall majority — if elections were held now.

The austerity package aims to cut spending by 15 billion euros ($18.4 billion) over two years by freezing pensions and cutting civil servants' wages.

But investors and lenders such as the International Monetary Fund are demanding that Spain reform its labor market, overhauling hiring and firing rules and moving to find jobs for the long-term unemployed and the young.

The government plans to begin negotiating with unions and hopes to arrive at an agreement about the changes by the end of May.

Union leaders have said if the government implements labor reforms without union approval, they will call for a general strike that could paralyze the country and cause deep unease in global markets.

The conservative newspaper El Mundo, which supports the opposition, said Saturday that Zapatero's government was trapped, caught between its growing unpopularity and the financial realities that have forced it to back politically unappealing austerity measures.

"The government is cornered," the paper wrote.

After winning a second term in the 2008 election, Zapatero insisted on trying to keep the economy ticking through stimulus packages, but the depth of the international recession dragged Spain into eight consecutive months of recession.

Europe's top job creator only two years ago, Spain now has the highest unemployment rate — just over 20 percent — of the 16 nations that share the euro currency.

In late April, credit agency Standard & Poor's lowered Spain's rating by one notch to AA, citing fears that the government would find it hard to reduce a deficit that totaled 11.2 percent of GDP last year.

The resulting austerity package, nicknamed the "scissors action" by Spanish media, was welcomed by the European Union and the IMF, which said Spain's "ambitious fiscal consolidation is under way to reach the three percent GDP deficit target by 2013."

The cuts were heavily criticized at home as a major about-turn in the Socialists' plans to stimulate the economy with targeted public spending, with the General Workers union labeling them as "unjust, wrong and sterile."

Apart from the deficit, Spain's overriding concern is unemployment following the virtual collapse of its once-buoyant construction sector.

Unemployment has risen from 1.76 million in the second quarter of 2007 to 4.6 million in the first quarter of 2010, with more than 40 percent of Spain's available under-25s unemployed.

The IMF, saying "the labor market is not working," asked for a "radical overhaul" including lowering severance payments, boosting wage flexibility and altering the collective bargaining system.

The Fitch Ratings agency interpreted the cuts approved Thursday as likely to slow economic growth and job creation and also reduced Spain's credit rating to AA.

The government on Friday then recalculated its GDP forecasts and said while growth would remain at minus 0.3 percent in 2010, it would only reach 1.3 percent in 2011 instead of the 1.8 percent previously expected. It also revised growth figures downward for 2012 and 2013.

"The adjustment will weigh down job creation and the rhythm of growth," said the normally supportive center-left El Pais newspaper.

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