Monday, November 29, 1999

Spain approves crucial but contested labour reform

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Spain's minority government issued a decree on Wednesday aimed at shaking up the country's rigid labour laws and said it would continue to seek support for the bill from other parties ahead of a parliamentary vote.Market worries about Spain's debt position continued to simmer, driving Spanish yield spreads against the German benchmark to their highest level since the common currency was adopted.Analysts believe the bill will be ratified in parliament on June 22, although key opposition parties have not yet given it their support, because the opposition understands the importance of labour reform in restoring confidence in the country."We will continue to work intensively to get as much support as possible," Maria Teresa Fernandez de la Vega told reporters after the cabinet meeting.Economists say labour reform is a vital step to restoring long-term economic growth by easing the cost of hiring and firing, amongst the most expensive in the developed world, and making Spain's manufacturing industry more competitive.The package includes measures to cut the cost of firing, simplify contracting and promote youth employment.The decree becomes law as of Thursday but still needs to be ratified next week. Unlike the austerity measures also passed by decree last month, in the case of labour reform the parliament will be able to debate and pass amendments which can take effect retroactively, a process which could take up to a year.Analysts say this process will likely make the reform package tougher, firming up the matter of dismissal costs and simplifying firing procedure."The labour market reform set to be approved today runs the risk of being too light, although parliamentary passage should beef it up," said Javier Perez de Azpillaga, analyst at Goldman Sachs.NECESSARY BUT UNPOPULARGiven that measures such as cutting severance pay are unpopular with the public and the government is out of favour, opposition parties do not want to be seen to publicly back the Socialists, political commentators said."They will get enough support to pass (the decree) because everybody is convinced that it is necessary, although the measures are very unpopular and (most parties) don't want to be seen as supporting them openly," said Juan Aviles, Professor of Contemporary History at Spain's Open University, UNED.The governing Socialists can muster 169 votes in the 350-seat lower chamber, but the conservative Popular Party (PP) with 153 votes and key minority parties have so far kept their cards close to their chest as to how they will vote.The austerity measures passed by just one vote.The PP has not objected to labour reform in principle but has criticised the decree, drawn up after the government failed to reach consensus with unions and business."The government does not want to tackle labour reform in a thorough manner," said PP Secretary General Maria Dolores Cospedal. "True reform is needed and not a slapdash job drawn up to satisfy social groups and international markets."Spain is pushing through several economic programmes at the same time, including the austerity and an overhaul of its banking system, while bond markets fret about contagion in the euro zone following Greece's debt crisis.The European Commission on Wednesday denied the European Union, the IMF and the U.S. Treasury were drawing up a bail-out plan for Spain including a credit line of up to 250 billion euros.Spain's biggest unions called on Tuesday for a general strike in September against the labour reforms but commentators say unions are in a weak position with unemployment at 20 percent and many workers on temporary contracts, so the strike was unlikely to get much support.Meanwhile the Bank of Spain said it would soon publish its own stress tests on Spanish banks to prove they are sufficiently capitalised to meet future economic downturns.(Editing by Sonya Hepinstall)
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