Spain's Minister rules out double-dip recession

Spain's economic recovery will be hit by spending cuts aimed at deflating its massive deficit, but the country will not sink back into recession, the labour minister told Reuters in an interview on Monday.

"If you cut salaries and withdraw public investment evidently that's going to affect the economy. But, in the case of Spain, we won't reach a recession" Celestino Corbacho said.

With Europe shifting its focus from stimulating growth to cutting deficits, Spain cannot help but be pulled along, Corbacho said, citing German demand for Spanish-built cars, for example.

"In the coming years, Spain's luck goes hand in hand with the rest of Europe" he said. Spain's economy emerged from a year-and-a-half recession in the first quarter.

Spain, with the highest unemployment in the euro zone at 20 percent, will begin net creation of jobs late this year or early 2011 as the economy begins to pick up and due to a labour reform package decreed by the government, Corbacho said.

Investors have punished Spanish sovereign debt since April, as fears that a growing deficit and heavy schedule debt obligations in July would force the country to seek a rescue package akin to Greece's.

On Monday the risk premium on Spanish debt, as measured by the spread between Spanish and German benchmarks , widened to 198 basis points down from a mid-June peak at 238, but still hugely blown out from April levels of 75.

An overhaul of Spain's labour laws, aimed at stimulating youth employment and making it easier for companies to cut back workers' hours during hard times, has been decreed along with other measures aimed at reviving the economy and calming market fears.

Corbacho said amendments to the labour law would pass through parliament by September, but he did not expect dramatic changes.

Although the reforms include incentives for companies to hire long-term unemployed people under 30 and over 45, and also subsidies for severance pay, Corbacho said those would be taken out of existing funds.

"The incentives do not mean an increase in government spending" he said.