By Paul Day MADRID (Reuters) - Spain’s Socialist government grappled with a deepening political crisis on Sunday, with reforms of a “dysfunctional” labor market hanging by a thread and its chances of survival beyond the autumn looking shaky.

Spain's Prime Minister Jose Luis Rodriguez Zapatero sits in his seat before voting for the government's austerity plan at the Parliament in Madrid May 27, 2010. REUTERS/Sergio Perez

Weekend opinion polls showed Prime Minister Jose Luis Rodriguez Zapatero’s government far behind the opposition, and that many voters believe he will have to call early elections as support for a 2011 austerity budget will be hard to muster.

“The government faces not only an economic crisis, but a political crisis too because the way it’s governing is not good enough,” said Angel Laborda, an economist at Spanish savings banks consultancy FUNCAS. “I believe that early elections will be called, sooner or later.”

Spain’s Socialists are battling to prove to nervous world markets the euro zone’s fourth largest economy will not go down the same path as Greece, but with growing political opposition at home their ability to push through reforms is limited.

Zapatero’s problems, as he battles soaring unemployment and tries to avoid a Greek-style debt crisis, are immediate.

A deadline for the government, trade unions and business to agree on labor reforms, aiming to cut unemployment and make the Spanish economy more competitive, looms in the coming week.

Government debt is also likely to take a drubbing when bond markets reopen after a ratings downgrade late on Friday.

EXTAORDINARY SPEED

A poll conducted for El Mundo newspaper by Sigma Dos showed on Sunday that the opposition Popular Party (PP) would take 45.6 percent of the vote if an election were held now, 10.5 percentage points ahead of Zapatero’s Socialists.

The Socialists held a 3 point lead over the conservative PP at the March 2008 general elections. But their handling of the economic crisis and unemployment, which has more than doubled to 4.6 million since then, has gutted their support.

The right-of-center El Mundo said the pace of their loss of support stood out. “What is so extraordinary is the speed at which its happened as if Zapatero’s whole plan had suddenly imploded and he himself had fallen from his pedestal,” it said.

Another opinion poll in the El Periodico newspaper on Saturday put Zapatero’s party 8 percentage points behind the PP.

Conducted May 25-27, the Sigma Dos poll followed the government’s announcement of an additional 15 billion euro ($18 billion) austerity plan imposing pay cuts on civil servants and freezing welfare handouts.

This week’s most pressing problem is the labor reform talks. Already one deadline set for May 31 has been pushed back a week. If the talks fail, the government says it will propose its own changes by a cabinet meeting on June 11, risking a confrontation with the unions.

In a report last week, the International Monetary Fund listed “a dysfunctional labor market” as being among Spain’s many severe challenges.

The tripartite labor talks — considered by economists as vital to dealing with 20 percent unemployment and unproductive and uncompetitive workforce — remained deadlocked this weekend.

The unions, traditionally close to the Socialists, have said they will respond to any imposed reform with a general strike.

Spanish debt faces a sharp drop on international markets after Fitch rating’s agency downgraded Spanish sovereign debt to one point below top on Friday evening.

The spread of the Spanish 10-year bono against the German bund has risen to 156 basis points from around 80 in mid-April as doubts grow about the Spanish economy.

“The political crisis is completely reversing any positive effects the austerity measures could have, because it’s hitting the investors confidence more than the possible benefits of the measures themselves,” said Laborda.

PARLIAMENTARY SUPPORT

The government has promised to cut the deficit from 11.2 percent of gross domestic product to 3 percent of GDP by 2013, but Zapareto is having trouble raising parliamentary support.

The 15 billion euro austerity plan scraped through parliament by just one vote on May 27, prompting speculation that Zapatero may be forced to call early elections if his 2011 budget proposal, due in September, is rejected.

According to the El Mundo poll, half of Spaniards expect general elections to be brought forward from 2012, and the PP and Catalan party CiU have already called for early elections.

Without an absolute majority in parliament or support from either the PP or the CiU, Zapatero’s only way to avoid a vote of no confidence will be win backing from small parties such as the Basque Nationalist Party (PNV) to pass the budget.

The Basque Nationalists were pivotal in passing the 2010 budget and a first round of budget cuts. But they voted against Zapatero’s austerity plans on Thursday and the government will need to offer a handsome incentive to get them back on board.

editing by David Stamp

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