ANALYSIS: Government instability fuels concern over Spain's economy

By Sinikka Tarvainen May 28, 2010, 13:24 GMT

Madrid - Spanish Prime Minister Jose Luis Rodriguez Zapatero is nowadays being compared to the captain of the Titanic, the passenger liner where an orchestra according to legend continued playing while it was sinking into Northern Atlantic in 1912.

Zapatero's overly optimistic economic forecasts had eroded his credibility for some time, but now his government has come dangerously close to sinking as pressure mounts on him to stage early elections.

Parliament approved an austerity package aimed at bolstering the country's financial credibility with the majority of only a single vote this week, making Zapatero's Socialist minority government look weaker than ever before.

The unpopular austerity measures aim to keep the economy from drifting into a Titanic-style situation, amid international concern that Spain could be heading for a financial meltdown similar to Greece's.

Socialist spokesman Jose Antonio Alonso on Friday rejected calls for early elections, saying the government would hold firm until the end of its term in 2012.

However, the government's lack of political allies was expected to make it more difficult for it to cope with trade union protests, and Zapatero could even face a general strike if he fails to win union approval for a planned labour market reform.

About 80 per cent of Spaniards do not trust the government's ability to handle Spain's worst economic crisis in more than 50 years, according to a recent poll.

The effects of the global crisis were worsened by the collapse of Spain's key construction sector, which had grown disproportionately well before Zapatero took power in 2004.

However, the government is also blamed for the seriousness of the crisis insofar as it first denied, then downplayed and took what were seen as improvised and insufficient measures against it.

Spain finally rose out of recession in the first quarter, as one of the last large Western economies to do so, but experts expect growth to remain slow for years to come.

Spain's unemployment rate of about 20 per cent is the highest in Western Europe, and public deficit soared to 11.2 per cent in 2009.

International concern over Spain's economy finally forced the government to adopt a tough austerity package aimed at cutting spending by 15 billion euros (24 billion dollars) in 2010-11.

The measures include Spain's first cuts in public sector salaries since the 1975 death of dictator Francisco Franco, freezing pension payments and slashing public investments by 6 billion euros.

The government has also announced a tax on the highest earners, in an attempt to counter accusations that it was making 'the weakest' members of society pay for the crisis. It has not yet given details on the new tax.

The austerity package was received well by international financial analysts. However, they stressed the need for deeper structural reforms including moves to dismantle some of the strongest workers' rights in Europe.

The high cost of firing employees has led to the emergence of a divided labour market in Spain, where nearly a third of work contracts are temporary.

Zapatero will find it difficult to negotiate a labour reform acceptable to both unions and employers, analysts said.

The government's main strength could be the weakness of the main opposition conservative People's Party (PP), whose perceived wavering leadership and corruption scandals undermine its credibility as an alternative to the Zapatero government.

Several PP representatives have called for early elections, but party leader Mariano Rajoy refrained from doing so openly.

Snap elections would create market uncertainty over economic policy, a situation which would 'mean collective suicide,' the daily El Pais warned in a recent editorial.