Spanish government proposals for labour reform, vital for reassuring investors that it can avoid a Greek-style budget crisis, got a tepid reception at home on Saturday after a pensions blueprint also fell flat. Commentators called the labour plan weak for failing to tackle head on the issue of cutting the cost of firing workers.
But in a recession which has put almost one in five Spaniards out of work, Friday's proposal at least got an initial green light from both unions and businesses. This offered a breather for Socialist Prime Minister Jose Luis Rodriguez Zapatero, who is battling with a credibility crisis and a towering budget deficit which he cannot cut if he does not reduce unemployment.
Right-leaning newspaper El Mundo slammed Zapatero for not presenting more concrete measures. "Zapatero continues to give the impression that he is not aware of the magnitude of the crisis," it said in an editorial. The Bank of Spain has said that the country can hope to emerge from its deepest recession in 40 years only through a labour market reform.
Zapatero's labour market blueprint will revive talks which have stagnated for months as Spain's problems mounted. But it has not removed the threat of a general strike by the biggest trade union over the badly-handled pensions proposal last week, which enraged even Zapatero's supporters.
Making Spain's labour markets more efficient would reassure investors that the government will be able to boost tax revenue when economic activity benefits from the changes, as well as controlling social spending such as unemployment benefits. This would help Spain to cut its budget deficit which hit 11.4 percent of gross domestic product in 2009.
The scale of the deficit, along with a crisis in Greece, has raised fears of a debt default in the southern euro zone and boosted the spread of Spanish 10-year Treasury bonds over benchmark German bunds to over 100 basis points. The left-leaning newspaper El Pais noted that the labour plan had won a positive response from unions and business.
But conservative daily La Vanguardia accused Zapatero of "trying to make an omelette without breaking any eggs". The government document made few specific proposals. But it suggested employers and unions should work together on encouraging more part-time contracts, reducing working hours as an alternative to firing workers and cutting youth unemployment - currently at 40 percent.
Economy Secretary Jose Manuel Campa starts a two-day roadshow in London on Monday to promote the government's debt plan for 2010, and hopes to boost investors' confidence. But the government's attempt to prove to debt markets it can be tough by announcing an unpopular overhaul of the pension system last week caused a furore which has yet to die down. The plan eroded goodwill among unions, and may yet scupper the chances of the labour reform talks succeeding.
Under pressure to prove it is not heading in the same direction as Greece, the government made a surprise announcement that it would raise the pension age to 67 from 65 - without having discussed the move with anyone else. "This couldn't have been done in a more cack-handed manner," said Alastair Seymour, a director of Henderson Global Investors. "For a reform of the pensions system you need to have consensus with the main opposition parties and trade unions."
Effects of the pension reform wouldn't begin until 2013 if passed, prompting claims that its timing has more to do with international criticism of Zapatero's handling of the crisis. Wages in Spain are indexed to inflation and, unable to devalue as part of the euro zone, the workforce has rapidly lost competitiveness against its European neighbours.