Monday, November 29, 1999

Spanish job reform is coming but will it be enough?

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Spain's long-awaited jobs reform, likely this week, will cut the cost of hiring and firing but may not provide enough flexibility to erase financial markets' doubts about the economy in the longer term, economists said.The reform is key to Spain's ability to create jobs, pay down its debts and build up muscle to turn around an economy which shrank 3.6 percent year-on-year in 2009.But after a week in which the government announced an austerity plan which it had spent months denying was necessary, some believe that Socialist Prime Minister Jose Luis Rodriguez Zapatero has finally woken up.That could mean the kind of measures which cut the cost of firing fixed workers, and some relief for financial markets worried about the size and cost of Spain's debt, as the nation's ability to create work and boost tax revenues rises."For the first time the government has shown that it is willing to assume the political cost of government and start taking unpopular decisions," said Javier Diaz-Gimenez, Economics Professor at Madrid's IESE Business School."But they won't have the courage to go all the way and create one employment contract," he said, adding that he was expecting the government to cut the cost of firing fixed workers to above 8 days -- possibly to about 20 days -- from 45 days per year worked, and with a time limit.That could cut the yield on Spanish 10-year Treasury bonds just as the austerity plan did last week.The political cost of Zapatero's measures became more evident on Sunday, when an opinion poll showed the conservative opposition has more than doubled its lead over the Socialists since the measures were announced.DUAL CONTRACTS HOLD ECONOMY BACKOne in five people in Spain are unemployed, double the euro zone rate and double the number two years ago. There are also 1.3 million households in which not one member has a job.Spain especially needs to get rid of a crippling two-tier jobs market, where the cost of sacking those with fixed contracts is among the highest in Europe. Meanwhile, firing those on temporary contracts costs next to nothing."I expect some flexibilisation (of the jobs market)," said Jose Zarate, economist at 4Cast in London."(But) markets want a labour reform along the lines of the UK and that is not going to happen. So they will not be pleased."Unemployment is also 40 percent among the young, while older workers take up the bulk of fixed contracts with damaging potential consequences for productivity."The result of not pushing ahead with this could be catastrophic," Zarate said, referring to the spillover effects of high unemployment -- depressed consumption, lower government revenues via income taxes and higher expenditure in benefits.Labour reform talks between unions and employers have taken months because of clashing demands, especially over firing costs, and Zapatero's unwillingness -- until now -- to push them.But that has changed under new pressure from the EU and market jitters about the euro and its members following the fallout from the Greek bailout package. The reform appears to be close to agreement, with media reporting this weekend that Zapatero last week gave them a 10-day ultimatum.The danger might be that, in its haste to present the markets with something, the government pushes through a blueprint which initially looks good but then becomes weak."Labour reform will be done under pressure and will be a low-quality affair, something that in the longer term will have to be modified," said Josep Soler, Economist and Director at Barcelona business school IEF."Initially the market reaction will be positive ... and then when people realise that measures do nothing to boost employment, it will respond badly," he said.(Editing by Paul Tait and David Cowell)
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