Scenarios: How Spain's labor reform could conclude

 

Spain's minority Socialist government will have to seek a deal with regional parties in parliament now that talks with unions and employers on how to overhaul the labor market have ended without agreement.

Keen to avoid a parliamentary session like the one on its austerity measures, which passed by just one vote last month, the government will have to ensure in advance it has the necessary support to get the labor reform through parliament.

The government has also said that informal talks to reach a last-ditch deal with unions will continue, however.

Labor reform is considered crucial to ensuring long-term economic growth after a crippling recession has doubled unemployment to 20 percent in just 2 years.

Cutting unemployment would reduce government spending on benefits and boost tax revenues, helping to cut the budget deficit which has been worrying financial markets fearing euro zone contagion from Greece's debt crisis.

The reform package should include measures to cut the cost of firing, one of the highest in the developed world, simplify contracting and promote youth employment. The government hopes the cabinet will pass the reform on June 16, after which it is likely to go to parliament before the end of June.

The government will seek the widest possible backing to give the impression of strength amid an economic crisis. There appears to be no chance the largest opposition party, the conservative Popular Party, will back the measures.

Following are possible outcomes:

Labor REFORM PASSES, BACKED BY CATALAN NATIONALISTS

The government presents reform within a week, for which it has already secured the backing of Catalan nationalist party CiU, allowing the decree to be immediately passed into law.

Probability: Highly likely

The Catalan coalition is the government's most likely ally for labor reform, and getting this group on board is the quickest option for the government given the Catalans are broadly in step with the expected reforms such as cutting severance costs and encouraging youth employment.

The government may have to offer further measures, likely to favor businesses, to appease CiU, so this scenario is therefore the one mostly likely to please financial markets.