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Rajoy Drives Spanish Revolution With Low-Cost Manufacture

Dec. 20 (Bloomberg) -- Spain’s turn toward wage cuts to restore competitiveness without leaving the euro is starting to bear fruit. At least that’s how it seems for Pablo Garcia, a 34-year-old autoworker who just got hired after a year out of work.

“This has been the best Christmas gift I could ever have imagined,” Garcia said as he prepared to enter a PSA Peugeot Citroen plant on the Madrid outskirts for the afternoon shift. “In the factory there’s a good atmosphere; people are optimistic about the future.”

As labor costs fall and Prime Minister Mariano Rajoy’s legislation makes it easier for companies to cut wages and reorganize staff, carmakers including Ford Motor Co., Renault SA and Peugeot are boosting production in Spain. Rajoy says the increase in investment and rising exports will translate into jobs as he battles an unemployment rate of 26 percent, the highest in Europe.

A surge in exports and foreign corporate investment indicates Spain is quietly being transformed within the constraints of the single currency. Rajoy is emulating the policies Germany carried out a decade ago to overhaul its then-sluggish economy, and the euro’s chances of hanging together may hinge on his success.

“Circumstances may be more dramatic in Spain now but it is going through the same kind of internal devaluation as Germany did,” said Nicolas Doisy, an economist at CA Cheuvreux in Paris and a former French Treasury official.

Merkel Advice

German Chancellor Angela Merkel, who has reaped the rewards of the measures that cost her predecessor Gerhard Schroeder his public support, advised Rajoy to learn from her country’s experience. She said in a Sept. 6 press conference with Rajoy in Madrid that while “no country wants to impose anything on another for the sake of it,” Germany’s efforts had cut its ranks of jobless to fewer than 3 million from 5 million.

Spain’s labor overhaul, which prompted two general strikes this year, makes it cheaper for companies suffering a downturn to fire workers, reduces severance pay and prevents unions from being able to cling to wage deals made during the boom.

Spanish unit labor costs fell 4 percent from 2008 to the first half of 2012, and the decline relative to the euro area average amounted to 10 percentage points, according to data compiled by Commerzbank AG in Frankfurt. As the implementation of the new labor law allows for further wage cuts, Spain may outstrip the 16 percentage-point decline against the euro region that Germany achieved in the decade through 2008, said Joerg Kraemer, Commerzbank’s chief economist.

“The new law could be the beginning of a decade of wage moderation,” Kraemer, who calls Spain’s labor overhaul a “revolution,” said in a telephone interview.

Cars Coming

Forecasts such as those are luring carmakers, now struggling with a slump in European sales as the sovereign debt crisis tips the region back into recession. Boulogne-Billancourt, France-based Renault, which last month opened talks with French labor unions to lower costs at home, plans to boost output in Palencia, northern Spain. Dearborn, Michigan-based Ford said Oct. 25 it will shut three plants in the U.K. and Belgium while increasing capacity near Valencia, Spain.

Even as Spanish demand for new cars has shown record declines, Paris-based Peugeot is making a stripped-down sedan at its Vigo plant. The biggest export markets for cars are France, Germany, the U.K. and Italy, with exports to France accounting for almost a third of Spanish production, according to Anfac, the Madrid-based carmakers’ association.

Peugeot said in October its Madrid factory will make a new Citroen model starting in 2014. The company has hired 70 people in Spain this year, according to Pierre-Olivier Salmon, a spokesman.

Produce More

Samuel Castillo, 59, who’s worked at the factory for 43 years, says he doesn’t mind the company’s demands to be more flexible on schedules or that they are “asked to work and produce more with less.”

“We’re happy to still have a job these days,” he said in an interview outside the Peugeot plant in Madrid. “For the first time in at least eight years I’m seeing some light at the end of the tunnel.”

Rajoy celebrated Renault’s expansion decision by paying a Nov. 21 visit to the Palencia site, saying the labor market overhaul served to “strengthen confidence,” even if the decision was “controversial.”

“There have been obvious improvements over the past three years in Spain,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “Transfers in production show Spain is benefiting from efforts to address the labor market’s immense rigidity.”

Labor Costs

Spanish labor costs fell in the second quarter and third quarters from a year earlier. They had risen 4 percent on average in the seven years through 2008, the year that labor costs rose 5 percent even as the collapse of the property market started prompting job losses.

Unions oppose the labor changes, saying they undermine workers’ rights and increases joblessness. Spain should invest more in education and research to improve quality rather than relying on cutting costs, said Toni Ferrer, head of union activity at UGT, one of Spain’s two biggest federations.

“They want Spain to specialize in low wages and low qualifications, where the gains in productivity are made via reductions in wages and working conditions,” he said in a phone interview. “It’s a vision for a third-world country.”

Still, unions were ready to tame wage increases even before the labor law was approved in February. Workers’ representatives and employers agreed in January to limit salary increases to 0.5 percent and 0.6 percent this year and next, severing the link with inflation and tying 2014 wage deals to growth.

Export Push

That deal helped boost exports, erasing the current account deficit that amounted to 10 percent of gross domestic product during the debt-fueled boom. The government forecasts a surplus next year for the first time since the start of the euro. Bank of Spain Governor Luis Maria Linde said on Nov. 21 he expects Spain to have recovered by 2014 “practically all” the competitiveness lost from 1998 to 2008 in unit labor costs.

“Spain is adjusting its current account deficit without devaluing its currency for the first time in its economic history,” said Alberto Nadal, deputy secretary-general of CEOE, Spain’s main business lobby in Madrid.

In addition to the two general strikes, street protests over the labor changes grew and Rajoy’s popularity fell. His support fell to 36 percent in November, according to state polling unit CIS, from 45 percent a year earlier when he secured the biggest parliamentary majority any Spanish party had won in three decades.

German Wages

Former Social Democratic Chancellor Schroeder suffered a similar fate after he revamped the German “cradle-to-grave” safety net starting in 2003. Schroeder encouraged accords that allowed companies to opt out of collective wage agreements brokered by unions, letting firms make their own arrangements on pay and conditions tailored to their business situation. Germany also cut jobless benefits, putting pressure on the unemployed to seek work, and reduced taxes.

The changes helped take the German economy from a contraction in 2003 to a growth rate of more than 3 percent in 2007. Spain is home to almost three times as many unemployed as Germany, a country with almost twice Spain’s population and an unemployment rate of 5.4 percent.

Even with rising exports and foreign investment, Spain’s economy will continue to contract next year, according to the International Monetary Fund. That may increase joblessness and undermine the government’s efforts to rein in a budget deficit that proportionately was the same size as Greece’s last year. Rajoy continues to postpone the decision on whether to seek a European bailout to bring down borrowing costs that are stifling companies as well as the Spanish Treasury.

Funding Needs

Spain’s funding needs of at least 230 billion euros next year will add to the pressure on Rajoy to seek aid. Any bailout deal will be accompanied by strict budget targets, which may further undermine the fragile recovery that the government hopes will start next year.

Still, for now the workers at Peugeot’s Madrid factory are enjoying the optimism that comes with new colleagues joining the workforce and chat eagerly about the model they’ve been told to expect to start building in 2014.

Garcia, who works in the paneling assembly line for eight hours a day and previously worked in Madrid’s subway system, feels the mood.

“I’ve started to consider buying a new house in the neighborhood next to the factory,” he said. “We have increased production in recent weeks and it seems there might be a new car model coming next year or 2014.”

To contact the reporters on this story: Angeline Benoit in Madrid at, Manuel Baigorri in Madrid at Emma Ross-Thomas at

To contact the editor responsible for this story: Kenneth Fireman at

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