Tags: France | Spain | Reforms | Euro | Zone

France, Spain Set Reforms Amid Euro Zone Pressure

Wednesday, 16 June 2010 01:07 PM

Spain and France announced politically unpopular labor and pension reforms on Wednesday in the face of unrelenting financial market pressure on euro zone states to clean up their finances.

On the eve of a European Union summit that is expected to approve tougher fiscal rules to prevent a repeat of the Greek debt crisis, the European Commission and the IMF were forced to deny a new report that Spain is on the brink of seeking a financial help.

The risk premium investors demand to hold Spanish debt rather than benchmark German bonds rose to a euro lifetime high of 223 basis points due to bailout rumors ahead of a closely watched Spanish bond auction on Thursday. (One basis point is equivalent to 0.01%, or one-hundredth of a percentage point.)

After two German media reports in the last week that Madrid could seek help, Spanish business daily El Economista said on Wednesday that the United States, the EU and the International Monetary Fund were preparing a 250 billion euro ($308.6 billion) credit line for Spain, eliciting more denials all round.

French and German officials said Spain's fiscal problems were not on the agenda of Thursday's one-day EU summit on fiscal and economic reforms.

"We don't see any specific reason today to be worried about Spain and there is no Spanish issue on the agenda of the Council," a source in French President Nicolas Sarkozy's office said.

The cabinet in Madrid approved a decree to overhaul rigid hire-and-fire laws aimed at restoring economic competitiveness, while France announced plans to raise the retirement age to 62 from 60 and hike taxes on the rich to balance strained pension accounts by 2018.

Both are the sort of structural reforms recommended by the European Commission and economists to adapt European economies to global competition and an aging population, and make public finances more sustainable.

But they face fierce opposition from trade unions which see them as an assault on workers' rights and plan protest strikes.

In Greece, the Athens metro was closed by a one-day strike against lay-offs, austerity measures and wage cuts. And the labor union of tourism workers, which accounts for almost a fifth of the economy, staged a 4-hour stoppage.

Private and public sector unions were to hold another protest rally against proposed reforms of the pension system at a central Athens square later in the day.

Financial market analysts described the Spanish and French reforms as too timid compared with efforts elsewhere in Europe.

"After 20 years of foot-dragging, missed opportunities and aborted reforms, France has finally decided to look reality in the face ... but don't cry victory too soon," said Marc Touati, director of research at brokerage Global Equities.

"First of all, the reform has not yet been ratified ... and it could yet be changed or emptied of meaning. Above all, the real problem is that the new French retirement (forecasts) are based on over-optimistic scenarios," he said.

Germany is raising the retirement age from 65 to 67 by 2029, while Britain and Italy are standardizing on 65 for all.

The Spanish labor reform, imposed by decree after two years of talks with unions and employers ended without agreement last week, will reduce severance payments for most workers, simplify contracts, promote youth employment and permit short-time working at firms in difficulty.

But Javier Perez de Azpillaga, an analyst at Goldman Sachs in Madrid, said the reform ran the risk of being too light to have much impact on Spain's 20 percent unemployment rate.

He expressed hope it could be beefed up in parliament, which is due to ratify the decree on June 22, and begin a legislative process in which it could be amended in the coming months.

The minority Socialist government is seeking support from conservative and regionalist opposition parties.

Pressure mounted meanwhile for European regulators to publish the results of stress tests on individual banks to restore market confidence and overcome a partial freeze in inter-bank lending.

EU sources said euro zone officials were holding a conference call on the issue on Wednesday after the Bank of Spain said it would publish results of tests on its country's banks soon.

A German Finance Ministry spokeswoman said Berlin was coordinating with EU partners on the publication of stress tests, which Germany, France and the European Central Bank have so far opposed.

The euro zone's fiscal woes have reduced the attractiveness of membership of the single currency to other EU countries.

The three parties forming a center-right government in the Czech Republic agreed on Wednesday there was no point in aiming for euro adoption until the existing members have sorted out the debt crisis. A survey showed Poles have cooled on euro entry.

And an opinion poll in Denmark, which voted against joining the euro in a 2000 referendum, found support for adopting the common currency was at a 17-year low at a mere 36 percent.

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Spain and France announced politically unpopular labor and pension reforms on Wednesday in the face of unrelenting financial market pressure on euro zone states to clean up their finances. On the eve of a European Union summit that is expected to approve tougher fiscal...
Wednesday, 16 June 2010 01:07 PM
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