Zapatero Bets Future on Spanish Austerity as Support Wavers Before Vote

Spain’s deepest budget cuts in 30 years may be just the start of a U-turn by Prime Minister Jose Luis Rodriguez Zapatero that’s already sent his popularity plunging and prompted calls for a general strike.

As parliament in Madrid debates the first wave of cuts today, his minority administration is preparing the ground for further measures that his traditional Socialist allies may oppose. After cutting civil servants’ salaries by 5 percent, the government now plans to rein back some of the best worker protection in Europe and raise the retirement age.

Zapatero’s latest steps to reduce the euro region’s third- biggest deficit won applause from the International Monetary Fund as the government tries to reassure investors that Spain can avoid the same fate as Greece. With smaller parties still refusing to guarantee support for those measures in today’s vote, the risk for Zapatero is that he’ll struggle to push through further cuts.

“He’s convinced he has no political future if he doesn’t go with the reforms, but it’s not obvious that he has a political future with the reforms,” Luis Garicano, an economics professor at the London School of Economics who has edited a book on the Spanish economy, said in a telephone interview. “Some of the things he still needs to propose will create trouble. But he has to push them.”

Protest

At least three Socialist lawmakers refused to join the rest of the party in a standing ovation when Zapatero first announced the cuts on May 12 and the opposition, pro-business People’s Party says it will vote against them today. With 169 seats in Spain’s 350-member assembly, Zapatero’s Socialists are seven short of a majority and pass legislation on a vote-by-vote basis.

The debate started at 9 a.m. local time and a vote will be held later today. As four parliamentary groups plan to reject the measures, Zapatero is depending on the abstention of 10 lawmakers from the Catalan Convergencia i Unio party to assure passage by a plurality.

“We don’t support this plan but we need to be responsible,” CiU member Josep Duran told lawmakers in parliament today, indicating his party would abstain. “I don’t want Spain to be intervened like Greece.”

Coalicion Canaria and Union del Pueblo Navarro said they would abstain, decisions that would bring the number of abstentions to 13 including the CiU seats. Such actions would allow the plan to go ahead by one vote with the 169 seats that the Socialist party has.

Early Elections?

Duran blamed Spain’s economic woes on Zapatero, saying he should hold early elections, “not now in the worst moment of the crisis,” but when the government debates the 2011 budget law later this year. Duran said his party would not support Zapatero’s budget, complicating the premier’s ability to pass the plan, which is generally voted on by parliament in December.

“It seems there’s no going back on the budget cuts, but we’ll have to see what happens to the decree in parliament,” said Juan Rubio-Ramirez, a professor at Duke University and a visiting scholar at the Federal Reserve Bank of Atlanta. “The budget is going to be very difficult.”

Zapatero’s popularity is also waning outside of parliament. Support for the Socialists fell to 33.7 percent in a poll by Metroscopia published May 16 in El Pais newspaper. The PP has 42.8 percent. A poll by the Centre for Sociological Research published on May 10, put the Socialists on 38 percent and the largest opposition party on 39.5 percent.

Investors are still selling Spanish stocks and bonds, erasing a rally sparked by the EU’s 750 billion-euro lifeline for debt-stricken nations and by Zapatero’s initial announcement that his government would cut public wages.

Stocks Suffer

The IBEX-35 share index has lost 24 percent this year, more than the 6 percent loss in European shares, and is close to its level before the EU package was announced on May 10. The extra yield investors demand to hold Spanish bonds rather than German equivalents is close to a euro-era high, even after a wave of unprecedented purchases by the European Central Bank designed to protect countries such as Spain from the debt crisis.

Zapatero’s policies mark a turnaround for a prime minister who has raised pensions, courted unions, and created subsidies for new mothers since coming to power in 2004.

Finance Minister Elena Salgado said as recently as February that Spain wouldn’t cut wages for government workers. A public sector strike is planned for June 8 and the largest union, Comisiones Obreras, has said a general strike is getting closer.

Unemployment

“There are definitely risks of broader action given the high levels of unemployment and lack of scope for that to change,” said Phyllis Reed, head of bond research in London at Kleinwort Benson, which manages about $30 billion.

To tackle an unemployment rate of 20 percent, the highest in the euro region, the government has pledged a labor market overhaul. Spain has some of the highest firing costs for permanent workers in Europe, according to the World Bank’s Doing Business Index, and around a quarter of workers have temporary contracts. Zapatero has asked unions and employers to thrash out the details of a deal.

“I don’t think the unions and employers will reach an agreement on real reform so he’ll have to do it on his own,” said Garicano, who is a member of the Madrid-based Fedea think tank and runs a blog on the Spanish economy. “The question is whether they can hold the Socialist Party together.”

Overhauling the pension system, which the IMF has said needs “bold” changes soon, looks more difficult since polls show popular opposition to the government’s plan to freeze pensions next year, which a majority of parties also oppose. The government proposed raising the retirement age to 67 years from 65, and has left that suggestion in the hands of a cross-party parliamentary committee to debate.

“The U-turn will continue with fits and starts,” said Ken Dubin, a political science professor at Carlos III university in Madrid who also teaches at the Instituto de Empresa business school. “The markets have cut him off on the pass, he has no choice but to go in a different direction.”

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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