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Spain lawmakers ratify govt labour reform

Source: Reuters - Sat 26th Jun 2010

Spain moved further toward rebuilding credibility with markets on Tuesday when parliament ratified labour reforms aimed at reviving the euro zone's No. 4 economy, plagued by high unemployment after a deep recession.

An abstention by the main opposition Popular Party (PP) gave the minority Socialist government enough votes to pass the reforms, even though the conservatives and other opposition groups have said the changes to labour law are insufficient.

The votes were 168 in favour, eight against, and 173 abstentions, including the Catalan nationalist CiU party.

"The reforms are about firing, not hiring" said PP spokeswoman Soraya Saenz de Santamaria during the debate, signalling her party's lukewarm support.

Along with labour reform Spain's government has shaken up the banking system and adopted austerity measures to curb a soaring budget deficit as debt markets punished its sovereign bonds over concerns the country could need a Greek-style bailout.

The labour reform includes measures to cut the cost of firing, one of the highest in the developed world, simplify contracts and promote youth employment at a time when one in five are jobless. But unions oppose the changes and have called a general strike for Sept. 29.

Before the government announced the measures, Spanish bond spreads last week hit record highs against the German benchmark on concerns of a looming fiscal crisis. But in recent days they have moderated and they were trading at around 180 basis points late on Tuesday.

A 15-billion-euro austerity bill scraped through parliament last month by just one vote, narrowly averting a vote of no-confidence for Prime Minister Jose Luis Rodriguez Zapatero as he tries to sooth market fears about Spain's giant deficit.

Zapatero decreed the reforms last Thursday but parliamentary ratification triggers a process that converts it into a bill which can be debated and amended by lawmakers. This process could take up to a year.

"All the opposition parties are going to want to make some amendments, but I don't think that for example the PP will call for any major changes. They want to protect their image (with workers) for the future" MG Valores head economist Nicolas Lopez said.

The government's crisis measures - including labour reform, banks consolidations and spending cuts - come along with a pledge to reduce Spain's deficit to 3 percent of gross domestic product by 2013 from a target of 9.3 percent this year.

The International Monetary Fund has welcomed the reforms, including the overhaul of what it called the "dysfunctional" labour market, as a means to making Spain's economy more competitive, reducing unemployment and so easing the burden on the public purse.

But opposition parties criticised the labour reforms as not being flexible enough at the company level to stimulate Spanish exports and amendments are likely to focus on firming up curbs on dismissal costs and simplify firing procedures.

Even if the passage of the labour reforms now seems secure, the government faces more tough decisions on the economy, and several challenges await Zapatero after the summer.

But for now markets have been soothed, partly by Spain's commitment to publish the results of stress on its banks to show how they could resist further economic downturns.

"But it looks like the autumn will be a tough time for the government in terms of job creation as spending cuts in other euro zone countries such as Germany curb demand" said Jose Luis Alvarez, professor at one of Spain's leading business schools, ESADE.

Also looming are parliamentary approval for the 2011 budget in September and the Catalan regional elections later in the autumn. If the budget is not approved, early elections could be on the cards.

"Whether the budget goes through or not will be a political decision, not an economic one. It depends on whether the PP in particular thinks early elections are in its interest or not" Lopez said.

Pension reforms, tax hikes and further spending cuts - potentially in health sectors, which would be unpopular - are other measures the government still has on its "to do" list.

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