Spain's Zapatero pushes austerity but has few allies

Prime Minister Jose Luis Rodriguez Zapatero, facing opposition to tough spending cuts, urged lawmakers on Wednesday to back pension reforms and other austerity measures to lift Spain out of its economic crisis.

Opening the annual state of the nation debate in parliament, he said the government must hold to its path of austerity in the 2011 budget, even if this restrains economic growth next year.

The large opposition conservative Popular Party (PP) and the Catalan nationalist party CiU have said they will oppose the 2011 budget. But analysts expect Zapatero's minority Socialist government úto squeeze it through parliament in the autumn with the backing of small regional parties.

"Additional adjustments and a new restrictive budget for 2011 could affect the speed of the economic recovery" Zapatero said, reiterating forecasts that the economy will shrink in 2010 compared with 2009 but that quarter-on-quarter growth will show Spain has emerged from recession.

Investors have punished Spanish bonds in recent months, concerned about the sluggish economy and a deficit which soared to 11.2 percent of gross domestic product at the end of 2009.

Zapatero has pushed through a labour market reform, a restructuring of the banking sector and austerity measures to try to restore confidence on the financial markets, and aims to cut the deficit to 3 percent of GDP by 2013.

But with one in five Spanish workers unemployed, Zapatero's popularity has plummeted in his second term in office, to 26 percent.

The leader of the PP, which has a 10-point lead in opinion polls, took the opportunity to call for Zapatero to step down and call an early general election.

"I can't imagine a better way to help Spain than one single measure: you are not in any condition to govern" Mariano Rajoy told Zapatero in a round of questions and answers.

"The best service you could do for Spain is dissolve parliament and call general elections" he said.

Lawmakers from almost every other party strongly criticized Zapatero's speech in parliament, the opening volley in a debate that was expected to extend into the early hours of Thursday.

"It's as though he just stepped off a space ship and arrived in a country where he had just won elections and didn't have 5 million unemployed people... He's like a knocked-out boxer," PP deputy Celia Villalobos told Reuters.

NEEDS THE CATALANS

Zapatero appeared to court the Catalan CiU, which has 10 seats in the lower house, saying he recognized the northern region's right to self-government and promising to continue talks on controversial aspects of its autonomy drive.

Spain's Constitutional Court recently ratified most of the region's Statute -- akin to a local constitution.

But the ruling set off protests in Catalonia by saying that some aspects of the document were unconstitutional, particularly the definition of Catalonia as a nation.

Zapatero's Socialists are seven seats short of an absolute majority in the lower house, and support from the CiU would help him pass his budget and thrust through pension reforms.

Zapatero said Spain must gradually raise the retirement age to 67 from 65 to keep the pension system healthy at a time when the populating is ageing.

He said his proposals for pension reform had been set out in a document and would soon go to parliament as a bill.

Industrial production and other data show that the economy will have a second period of quarter-on-quarter growth in the April-June period, Zapatero said, as the country emerges from a deep recession.

But he reiterated the official outlook for the economy to shrink in 2010 from the previous year.