The pain in Spain as tough action kicks in

Three-way talks in Spain between the government, employers and the unions have failed to reach a consensus, writes JANE WALKERin Madrid

THE SPANISH economy minister Elena Salgado is confident that the tough measures she introduced last month, combined with the new labour law approved by the cabinet this week, will be sufficient to kick start the economy and halt fears that Spain could follow Greece down the path to financial meltdown.

Before flying to Brussels for yesterday’s EU summit, Prime Minister José Luis Rodríguez Zapatero strongly defended Spain’s solvency and angrily denied rumours that the country would need a financial bailout.

But Spain is making efforts to get its finances into better balance. Salgado, who is also a deputy prime minister, recently introduced cuts of €15 billion between now and 2011 to reduce Spain’s budget deficit which currently stands at over 11 per cent of GDP. The EU target figure is only 3 per cent.

To achieve this, the government approved a 5 per cent wage cut for public sector workers – up to 15 per cent for senior officials – as of June 1st, to be frozen until the end of next year.

Pensions have been frozen at current levels, without the annual cost-of-living adjustment, and new parents will no longer receive their €2,500 “baby cheque” after the birth of their baby. There will be a €6 billion cut in spending in public works, infrastructure and to the regions.

The cabinet this week also approved a new labour law which, among other measures, will reduce the severance pay from 45 days for every year worked to 33 days for each year worked, and only 20 days when the company is in financial difficulties.

At the same time it has announced plans to encourage youth unemployment to try to cut the 20 per cent unemployment rate which has affected the young particularly hard. Many people under the age of 25 have never worked in their lives.

First deputy prime minister Maria Teresa Fernandez de la Vega defended the unpopular reforms. “It is a necessary labour reform and is one of the most important reforms in Spain for the last 20 years,” she said.

Spanish workers have always enjoyed generous work benefits which have made it difficult and expensive for the bosses to lay off workers. Three-way talks between the government, workers and the unions have failed to reach a consensus. This week the government was forced to approve the reform by decree, although it will have to be approved in the parliament. Its clauses are controversial and have have left few sectors truly satisfied.

Salgado’s predecessor as finance minister, Pedro Solbes, who resigned last year after differences of opinion with Zapatero over ways out of the recession, welcomed the reforms, but said yesterday they did not go far enough.

The CEOE, the employers’ confederation, also complained that they were insufficient and that there should be greater liberty for bosses to dismiss workers if and when necessary. On the other side, trade unions complain the new law will make it too easy for an employer to lay off workers simply to reduce costs.

The unions, who staged a public sector strike two weeks ago, are already planning a nationwide general strike for later this summer and have called for a change of leadership.

“This government has exhausted its credibility,” said Ignacio Fernandez Toxo, the head of the Workers Commission, Spain’s largest union. “I don’t know whether the change should take the form of new elections or not, but at the moment we are have no political, financial or labour leadership in this country and we need a drastic change of government.”

Zapatero has another two years before he must convene elections, but Toxo is not alone in calling for new leaders or a change of government. Although the reform has been approved by decree, it will be debated and voted in the Cortes (parliament) next week.

Since the last general elections two years ago Zapatero has been governing with a minority government and reliant on smaller and regional parties to pass legislation, but he is confident he has sufficient support for this reform for it to pass next week.

Artur Mas, the president of the Catalan CiU coalition party, said that his group was prepared to vote in favour although he added that there was “obviously room for improvement”.

Zapatero addressed the leaders of the 27 EU countries for the last time yesterday as Spain’s rotating presidency which comes to an end this month. His government had hoped that this six-month presidency would add to Mr Zapatero’s prestige as a leader and statesman and provide an opportunity for the country to demonstrate its position as an influential first-world nation.

Instead he has been forced to preside over a series of emergency meetings to defend the European economy and preside over an economy which shrank by 3.6 per cent over the past 12 months and where the unemployment rate approaches 20 per cent.

The European leaders in Brussels have tried desperately to play down any idea of a Spanish – or any other – crisis. They agreed to carry out regular “stress tests” of banks to prevent “unfounded suspicions” about solvency of specific banks and face up to possible problems which could arise in the future.

In his inaugural address, European Commission president Herman van Rompuy denied there was a crisis and said that this was the first normal summit since he took over. “It is now 10.30am, and there is no crisis,” he said.