Spain austerity plan scrapes through parliament

MADRID Thu May 27, 2010 3:46pm EDT

Spain's Economy Minister Elena Salgado speaks on a mobile phone during a break before voting for the government's austerity plan at the Parliament in Madrid, May 27, 2010. REUTERS/Stringer

Spain's Economy Minister Elena Salgado speaks on a mobile phone during a break before voting for the government's austerity plan at the Parliament in Madrid, May 27, 2010.

Credit: Reuters/Stringer

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MADRID (Reuters) - Spain's governing Socialists won approval for a 15 billion euro ($18.4 billion) austerity package by a single vote on Thursday, but the narrowness of the victory raised doubts over the government's ability to steer the country through an economic crisis.

The razor-thin majority piled pressure on Prime Minister Jose Luis Rodriguez Zapatero, who has been forced to ditch his party's traditional alliances in pushing through spending cuts and labor reforms as markets fret Spain could suffer a similar crisis to Greece but on a larger scale.

The prime minister called off a scheduled trip to Brazil on Thursday, as an end-May deadline loomed for an agreement with unions and business on wide-ranging labor reforms -- a key policy demand by international markets.

Unions met Thursday and warned that they would call a general strike if the government goes ahead with changes to labor market rules without their consent, saying there were still big differences with business on the reform.

They said agreement may not come before the end-May deadline set by the government. A regular Europe-wide meeting of unions is scheduled to take place in Brussels on June 1.

"The government can set whatever deadlines it wants, we work at our own pace," the head of the CCOO union, Ignacio Fernandez Toxo, told journalists.

With the opposition Popular Party voting against the austerity bill, it was only saved when 10 deputies from center-right Catalan nationalists CiU abstained.

CiU parliamentary leader Josep Antoni Duran i Lleida told parliament he did not want to plunge Spain into an immediate Greek-style crisis by blocking the austerity measures but that Zapatero should call early elections next year.

"The problem is you and your government," Duran i Lleida told Zapatero, adding that his party would vote against the 2011 budget bill toward the end of the year.

Defeat for the budget would make it much more difficult for Zapatero, lagging the Popular Party in opinion polls, to stay in power.

"What is clear is the level of political instability, with parties asking for elections to be brought forward," said Javier Barrio analyst at BPI.

The austerity bill was approved by 169 votes to 168, as the Popular Party even made sure one of its deputies was brought to the session in an ambulance.

"This law is improvised, insufficient and unjust," PP leader Mariano Rajoy told parliament.

MARKETS WANT MORE

The PP, which has previously called for cuts in taxation, says the austerity package was made up on the hoof.

The cuts are a key plank in the Socialist government's efforts to cut the large budget deficit and restore confidence in Spain's ailing economy, which has barely edged out of recession after two years. It has the euro zone's highest jobless rate, at 20 percent.

The government's plan aims to save an additional 15 billion euros and includes wage cuts of 5 percent for civil servants this year. It aims to cut the budget deficit to 9.3 percent of gross domestic product this year and to 6 percent in 2011. It stood at 11.2 percent last year.

But the austerity bill's approval, while a relief, will not fully reassure markets, said Dirk Schnitker, international equity analyst at CM Capital Markets Bolsa.

"It is a potentially massive pitfall avoided but it still leaves us with all the other known problems in Europe and Spain," he said.

History professor Charles Powell of CEU San Pablo University said it was unlikely Zapatero would be ejected before the end of the year, pointing out that no Spanish government had been forced out of office since the start of democracy in 1978.

But he highlighted the extraordinary strain faced by Zapatero as he deals with international pressure to bring Spain's yawning budget deficit under control while pacifying unions and minority parties at home.

United States President Barack Obama and German Chancellor Angela Merkel have both spoken personally to Zapatero and pressed him to implement reforms. Spain's economy is more than three times the size of Greece's and a deeper crisis there could have grave consequences for the euro zone and beyond.

The government must call elections by May 2012, but most commentators expect general elections in 2011.

LABOR REFORM

A return to economic growth and a sustainable reduction of Spain's massive public deficit will be impossible without profound structural reforms to an economy that expanded too quickly due to a property boom and cheap credit.

The government has given tripartite talks with unions and business leaders until the end of May to agree on long-awaited reforms to the structure of the labor market.

While the unions said they may not meet the government's deadline, they stressed that they want to continue talking even though there were still big differences between their position and that of business.

"There is still a big difference between the positions of business leaders and unions at the negotiating table," Toxo said.

Analysts see the shaking up of the country's inflexible labor laws and the easing of hiring and firing as vital to restoring the country's competitiveness.

"The labor reforms are crucial. They will help to restore growth in the long term. Growth is the only way out of these adverse fiscal trends," said Luigi Speranza, analyst at BNP Paribas.

(Editing by Jason Webb and Noah Barkin)

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Comments (2)
Parker1227 wrote:
Overly easy credit is what caused the entire economic catastrophe – starting right here in the US.
And both parties enabled it. It spurred short term growth, brought in huge tax revenues to the states and the Fed, and it allowed democrats to “spread the wealth” and play ham-handed social engineers by giving big loans to millions of poor people who had marginal capacity for making monthly payments.
And the hot market and easy money brought in every manner of speculator, from small time house flippers to big time investors and money managers.
And millions got rich by getting out at the right time, like a sick game of musical chairs.
But the tax payers have been left standing.

May 28, 2010 6:45am EDT  --  Report as abuse
1stto3rd wrote:
The correct translation of “Partido Popular” is “People’s Party” rather than “Popular Party.” Reuters is not alone in making this common error, but it’s nevertheless an error.

May 29, 2010 7:50am EDT  --  Report as abuse
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