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France and Spain set reforms under euro zone pressure

Source: Reuters - Wed 16th Jun 2010

Spain and France announced politically unpopular labour and pension reforms on Wednesday in the face of unrelenting financial market pressure on euro zone states to clean up their finances.

On the eve of a European Union summit that is expected to approve tougher fiscal rules to prevent a repeat of the Greek debt crisis, the European Commission and the IMF were forced to deny Spain is on the brink of seeking financial help.

The risk premium investors demand to hold Spanish debt rather than benchmark German bonds rose to a euro lifetime high of 223 basis points because of bailout rumours before a closely watched Spanish bond auction on Thursday.

But Spain won praise from German Chancellor Angela Merkel after the cabinet in Madrid approved a decree to overhaul rigid hire-and-fire laws intended to restore economic competitiveness.

"Spain has made an important contribution to enhancing the competitiveness of the whole of Europe. Our continent as a whole must be regarded as competitive" she said in Brussels. "I think we should encourage Spain that this is the right way."

EU leaders denied a report by Spanish business daily El Economista that the United States, the EU and the International Monetary Fund were preparing a 250-billion-euro (208.8-billion pound) credit line for Spain.

"We don't see any specific reason today to be worried about Spain and there is no Spanish issue on the agenda of the Council" a source in French President Nicolas Sarkozy's office said.

French and German officials said Spain's fiscal problems were not on the agenda of Thursday's one-day EU summit in Brussels on fiscal and economic reforms.

Like Spain, France took a step on reforms, announcing plans to raise the retirement age to 62 from 60 and increase taxes on the rich to balance strained pension accounts by 2018.

Both are the sort of structural reforms recommended by the European Commission, the EU executive, and by economists to adapt European economies to global competition and an ageing population, and make public finances more sustainable.

But they face opposition from trade unions which see them as an assault on workers' rights and plan protest strikes.


In Greece, the Athens metro was closed by a one-day strike against lay-offs, austerity measures and wage cuts. And the labour union of tourism workers, which accounts for almost a fifth of the economy, staged a four-hour stoppage.

Private and public sector unions were to hold another protest rally against proposed reforms of the pension system at a central Athens square later in the day.

Financial market analysts described the Spanish and French reforms as too timid compared with efforts elsewhere in Europe.

"First of all, the reform has not yet been ratified... and it could yet be changed or emptied of meaning. Above all, the real problem is that the new French retirement (forecasts) are based on over-optimistic scenarios" said Marc Touati, director of research at brokerage Global Equities.

Germany is raising the retirement age from 65 to 67 by 2029, and Britain and Italy are standardising on 65 for all.

The Spanish labour reform, imposed by decree after two years of talks with unions and employers ended without agreement last week, will reduce severance payments for most workers, simplify contracts, promote youth employment and permit short-time working at firms in difficulty.

But Javier Perez de Azpillaga, an analyst at Goldman Sachs in Madrid, said the reform ran the risk of being too light to have much impact on Spain's 20 percent unemployment rate.

He expressed hope it could be beefed up in parliament, which is due to ratify the decree on June 22, and begin a legislative process in which it could be amended in the coming months.

The minority Socialist government is seeking support from conservative and regionalist opposition parties.


European finance ministers agreed a $750-billion-euro plan on May 10 to contain the euro zone crisis, after approving a 110-billion-euro aid mechanism for Greece.

IMF chief Dominique Strauss-Kahn urged Europe to use the so-called European Financial Stability Facility to generate higher economic growth, suggesting it could be used to boost economic output.

"The real question is growth and if institutions are created they should serve a purpose and not just a form of security for times of need" he told a conference in Paris.

Pressure is also rising for European regulators to publish results of stress tests on individual banks to restore market confidence and overcome a partial freeze in inter-bank lending.

EU sources said euro zone officials were holding a conference call on the issue after the Bank of Spain said it would publish results of tests on its country's banks soon.

A German Finance Ministry spokeswoman said Berlin was coordinating with EU partners on the publication of stress tests, which Germany, France and the European Central Bank have so far opposed.

Yves Mersch, a member of the ECB's Governing Council, said a wider publication of the tests could help improve the crisis of confidence in Europe.

"In an environment where Europe has maybe less a problem of economic fundamentals than of confidence, transparency is an essential element" he said in Luxembourg.

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