Spain reforms labour market amid concern over economy (Roundup)

Jun 16, 2010, 15:18 GMT

Madrid - The Spanish government Wednesday approved a reform to make the labour market more flexible, amid growing international concern over the stability of the country's economy.

Deputy Prime Minister Maria Teresa Fernandez de la Vega described the reform as 'ambitious, substantial and far-reaching.'

Trade unions have called a general strike for September 29 over the reform, which will make firing workers easier in an attempt to revive the economy and to dent Spain's 20 per cent unemployment rate.

Prime Minister Jose Luis Rodriguez Zapatero's minority Socialist government is in talks with opposition parties to win initial parliamentary approval for the decree on June 22.

Later on, the decree was expected to be submitted to a wider parliamentary debate, which could lead to parliament modifying it before it is turned into a law.

Should parliament reject the reform, the government will have to abandon it in a major political setback for Zapatero's already weak government, analysts said.

The government decided to adopt the reform unilaterally after unions and employers failed to reach an agreement in talks lasting for months.

The reform favours work contracts with a severance pay of 33 days per year worked, instead of the current norm of 45 days per year worked. A government-managed fund will cover a part of the severance pay for indefinite work contracts.

The high cost of firing workers is seen as one of the factors contributing to Spain's unemployment rate of 20 per cent, the highest in the European Union after Latvia.

The reform is also aimed at increasing the rights of some workers by making it more expensive for employers to hire temporary workers. More than a quarter of Spanish employees are on temporary contracts giving them few rights.

The general strike will be the first faced by Zapatero, who had good relations with unions for six years, until he was forced to trim social benefits under growing international pressure over Spain's 11.2 per cent budget deficit and large private debt.

The EU and the International Monetary Fund (IMF) had requested the labour reform as part of efforts to guarantee Spain's economic stability amid concerns that Spain could be heading for an economic meltdown similar to that of Greece.

The European Commission on Tuesday backed the 15-billion-euro (18-billion-dollar) austerity package which has been approved by Spain, but called for additional spending cuts, according to Spanish media.

The additional cuts were covered by an agreement by Spain's regional governments to slash spending by 11 billion euros in 2010 and 2011, Economy Minister Elena Salgado said Wednesday.

Meanwhile, Spanish bonds were falling relative to German bunds, amid reports that Spain might seek aid from the EU's 750-billion-euro rescue fund after Spanish banks were unable to obtain credit on the international market.

European Commission spokesman Amadeu Altajaf Tardio dismissed as 'rubbish' a report by the Spanish newspaper El Economista that Spain was about to seek 250 billion euros from the EU fund.

Salgado said such reports were 'absolutely not' true. The visit of IMF director Dominique Strauss-Kahn to Madrid on Friday was not linked to the reports, according to government sources.

Bank of Spain governor Miguel Angel Fernandez Ordonez said the central bank would make public stress tests that have been carried out on Spanish banks to show that they had 'enough capital' to face 'even complicated growth scenarios in the near future.'

Government sources said Zapatero would defend the economy against constant 'speculative rumours' at Thursday's EU summit, where he will present the labour reform.