Live News From Spain As It Happens

Greece is the sideshow, a warm-up act. Spain is the main event, the country that will have a huge impact on the future of the euro and on whether a new governance system will be put in place to control euro-zone members' budgets. The pain in Spain will fall, well, just about everywhere. That's why key figures from the world's financial institutions converged on Madrid late last week.

Spain matters because its economy is the euro zone's fourth largest, four times larger than Greece's. In the words of Goldman Sachs economists, if Spain were to experience a real financial fiasco, "the degree of cross-border financial exposure for the entities based in the larger euro-area economies would multiply dramatically." Spain's banks are already frozen out of interbank loan and capital markets, and are now the European Central Bank's largest customer. Last month they borrowed €85.6 billion ($105.9 billion) from the lender of last resort, up from €74.6 billion in April. Spain's banks account for roughly 10% of the euro zone banking system, but account for 16% of all net euro-zone loans. Next stop, the €440 billion European Financial Stability Facility, created by the euro zone powers-that-be as part of a €750 billion rescue package aimed at reassuring markets that there will be no defaults.

The need for a bailout is hotly denied by all of the players in this financial drama. A U.S. Treasury delegation joined International Monetary Fund head Dominique Strauss-Kahn in Madrid to meet with Spanish Prime Minister José Luis Rodríguez Zapatero and key government officials in what was represented as a rather routine, long-scheduled affair to discuss growth prospects over the next decade. European Council president Herman Van Rompuy stressed the "normality" of the meeting. No emergency measure was even discussed. Speculators and others circulating rumors that the EFSF is preparing a €250 billion rescue package are tilting at windmills.

"I am really confident in medium- and long-term prospects for the Spanish economy," announced Mr. Strauss-Kahn as he emerged from the Madrid meeting, adding, "providing the efforts that have to be made will be made." Quite a proviso, given Mr. Zapatero's long period of denying that a crisis exists, his initial refusal to cut the size of the public sector and the one-vote margin by which some of his reforms passed a parliament convinced that his future prospects are about as bright as those of Tony Hayward's.

The markets remain appropriately skeptical, nervous that the premium that Spain has been paying over safe(r) German bunds will balloon when it taps the debt markets for some €50 billion over the summer. Even more important, with Spain's government in no position to help its banks, failures would rain pain throughout Europe and on the U.S. and Britain. Miguel Ángel Fernández Ordóñez, governor of the Bank of Spain, hopes to calm the financial waters by releasing the results of the stress tests some of Spain's banks have undergone. He claims these will show that the nation's banks are adequately capitalized to withstand defaults by over-borrowed construction and property companies, and individual mortgagees. Markets are not reassured: the tests are confined to a handful of banks, and contain not very stressful assumptions.

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Spain's Socialist government on Friday unveiled details of its proposed labour market reform that is aimed at reviving economic growth and allaying jitters over its public finances.

Among the measures included in the draft published by the labour ministry is the creation of a government-sponsored fund for each worker that could be used by firms to pay a portion of an employee's severance in case of a dismissal.

The fund, modelled after a system in place in Austria, would be set up in 2012.

The reformed labour law would also limit the length of fixed-term contracts to two years, with the possibility of an extension of one year, and allow companies to reduce worker hours in a downturn instead of dismissing staff.

Spain's unemployment rate has soared to 20 percent of the workforce -- the second highest in the European Union after Latvia -- since the collapse of a property bubble at the end of 2008.

Many economists blame the high jobless rate on the high cost of firing workers in Spain, which makes employers reluctant to hire staff and encourages the use of temporary contracts that have few benefits and rights.

Nearly one in four Spanish employees, 24.3 percent, were on temporary contracts during the first quarter of this year, according to national statistics agency INE.

Prime Minister Jose Luis Rodriguez Zapatero's cabinet will approve the labour reform on Wednesday and it will then be voted on by parliament on June 22 where his socialist government are seven seats short of a majority.

"It's going to be a substantial labour reform for our labour market, and I trust it will have majority support in parliament," Zapatero told reporters on Thursday during an official visit to Italy.

Last month the assembly passed the government's 15-billion-euro austerity package, which includes cuts to public workers' salaries, by just one vote as a number of government backbenchers either abstained or voted against the plan.

The government is pushing ahead with its own version of the labour law reform after talks between unions, employers and the government to reach a consensus collapsed Thursday after nearly two years of meetings.

Spain's two largest unions, the CCOO and the UGT, have threatened a general strike if the government unilaterally imposes reforms that hurt workers.

Source:  France24

Spanish Prime Minister Jose Luis Rodriguez Zapatero is bracing for the biggest strike since his 2004 election as efforts to tame Europe’s third-largest deficit with wage cuts rile the Socialist premier’s core supporters.

About 2.5 million government workers have been called on to strike today, hobbling services from schools to television broadcasts. The walkout may be a prelude to a general strike that unions have threatened over the government’s plan to overhaul labor rules that may make it easier to fire workers in a country where the unemployment rate has reached 20 percent.

“The margin to avoid a general strike is very narrow as a profound labor reform is needed,” said Jose Luis Martinez, a strategist for Spain at Citigroup in Madrid.

Zapatero, who said in 2005 he slept with his union card by his bed and pledged full employment, has been forced to cut wages and freeze pensions to convince investors and European allies he can reduce a budget deficit of 11.2 percent of gross domestic product. The risk premium on Spanish debt is at a 13- year high as the domestic backlash fuels concerns he won’t be able to make good on the deficit controls.

The strike comes a day before government leaders, union officials and employers hold what may be the last round of talks on changing labor laws before a June 16 deadline when the administration will impose a new system. The government is backing employers’ calls to loosen firing rules by making it easier for companies to claim economic hardship and pay less severance.

Firing Rules

Currently employers must offer 45 days’ pay for every year worked to fire individuals protected by permanent job contracts. That severance drops to 20 days in cases when the company can convince a labor court it needs to reduce staff for economic reasons. The government is proposing to make it easier for employers to qualify for the 20-day payout, state-controlled radio network RNE reported on June 3, citing a draft of the plan.

“Spain cannot afford to not do a labor reform,” said Alfredo Pastor, a former deputy finance minister and a professor at Spain’s IESE business school. “Until something is done in that direction, confidence won’t be regained in the markets.”

Workers have said any changes to the rules that harm job security will trigger a general strike, the first in Spain since 2002, when the country was ruled by the opposition People’s Party. Employers and economists say that Spain has some of the most rigid labor market rules in Europe, discouraging companies from taking on workers even when times are good. Unions argue that the doubling of the unemployment rate to 20 percent in two years proves that companies have no problem cutting workers.

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