Analysis: Spain struggling amid recession, pressure from international institutions and voters

MADRID – MADRID (AP) — Spain's Socialist government is watching its political power dwindle as it struggles to chart a path out of deep financial trouble, failing so far to satisfy conflicting demands to cut its budget and stimulate job creation.

The coming months could bring far deeper trouble as Prime Minister Jose Luis Rodriguez Zapatero moves to reform the country's labor market, risking national strikes and the loss of support from trade unions, a core source of his center-left party's strength.

Although there appears to be no immediate threat of it falling, Zapatero's minority government is already running into serious trouble.

A package of austerity measures passed by one vote in parliament's lower chamber Thursday. Fitch Ratings downgraded Spanish debt Friday. A poll published in the northeastern regional newspaper Periodico de Catalunya on Saturday said the conservative opposition Popular Party would win up to 42 more seats than the Socialists in the 350 member parliament — coming close to an overall majority — if elections were held now.

The austerity package aimed at slashing spending by €15 billion ($18.4 billion) over two years included measures such as freezing pensions and cutting civil servants' wages.

But investors and lenders including the IMF are demanding reform of the labor market including overhauls of hiring and firing rules, encouragement of part-time contracts and moves to put the long-term unemployed and the young to work.

The governmment plans to begin negotiating with unions and hopes to arrive at a consensus about the changes by the end of May.

Union leaders have said that if the government presses ahead with implementing reforms without union approval, they will call on their members to vote for a general strike that could paralyze the country and probably cause deep ripples in global markets.

The conservative newspaper El Mundo, which supports the opposition, said Saturday that the government was trapped, caught between growing unpopularity and the financial realities that have forced it to abandon public spending and take on politically unappealing austerity measures.

"The government is cornered," the paper wrote.

After winning a second term at the helm of the country in 2008 general elections, Zapatero insisted on trying to keep the economy ticking over through stimulus packages, but the depth of the international recession dragged the exchequer into eight consecutive months of recession, rendering continued spending as close to suicidal.

Europe's top job creator only two years ago, Spain now has a Euro-zone highest unemployment rate of just over 20 percent.

In late April the credit agency Standard & Poor's lowered Spain's rating by one notch to AA, citing fears that the government would find it hard to reduce a deficit that totaled 11.2 percent of GDP last year.

The resulting austerity package, nicknamed the "scissors action" by Spanish media, was welcomed by the European Union, and the International Monetary Fund said Spain's "ambitious fiscal consolidation is underway to reach the three percent GDP deficit target by 2013," adding "we fully support this package."

The cuts were heavily criticized at home as a major about-turn in the Socialist's earlier plan to stimulate the economy by targeted public spending with the General Workers union labeling them as "unjust, wrong and sterile."

Apart from the deficit, Spain's overriding concern is unemployment following the virtual collapse of a once buoyant real estate construction sector.

Unemployment has rised from 1.76 million in the second quarter of 2007 to 4.6 million in the first quarter of 2010, with more than 40 percent of Spain's under-25s available for work unemployed.

The IMF said "the labor market is not working," and asked for a "radical overhaul" including lowering severance payments, boosting wage flexibility and altering the system for collective bargaining.

On May 4, Spain's unemployment figures for the previous month showed the first positive news in two quarters when the number of people signing for unemployment benefits fell by 24,188 out of a total population of 45 million.

Despite this, Fitch Ratings interpreted the cuts approved Thursday as likely to slow economic growth and job creation and the agency joined Standard & Poor's in reducing Spain's credit rating to AA.

The government on Friday then recalculated its GDP forecasts and said that while growth would remain at minus 0.3 percent in 2010 it would only reach 1.3 percent in 2011 instead of the 1.8 previously announced, adding that by 2013 the economy would increase by 2.7 percent instead of the once expected 3.1 percent.

"The adjustment will weigh down job creation and the rhythm of growth," said normally supportive center-left El Pais daily newspaper.