A Social Pact That Could Spark Spain

Spain's business and labor leaders aren't spending much time at Mediterranean beaches this summer, but they have little choice. Faced with the sobering prospect that almost a quarter of the work force could be unemployed by yearend (chart), Felipe Gonzalez ordered his top aides to remain hunkered down with unions and employers in sweltering Madrid. His aim: to win approval for his plan to turn the plummeting economy around.

What the newly reelected Prime Minister is pushing is Spain's version of an economic remedy that's being tried elsewhere in Europe: a social pact between companies and unions to loosen restrictive work rules and hold down wage costs that stifle job creation. In Italy, the unions and the employers' federation agreed in July to tie wage hikes to productivity instead of inflation, ending a system that had been in force since World War II. And Germany's powerful IG Metall union is offering to negotiate more flexible contracts in return for a bigger voice in how work is organized.

Spain's unions are being asked to sacrifice even more--and urgently. The government wants a deal signed by Sept. 20, in time for Parliament to include specifics in a strict 1994 budget. When October rolls around, "there'll be an adjustment, with or without an agreement," warns Alfredo Pastor, a senior Economy Ministry official.

For Spain, which has one of Europe's most rigid labor markets, Gonzalez' proposals are revolutionary. The idea of the state as guarantor of job security has survived from four decades of rightist dictatorship through 15 years of centrist and social democratic governments. Unions promise to fight any change in layoff rules, although they may be more conciliatory on wages. Gonzalez is offering them a carrot: a new strike law that would allow aggressive picketing. There's no time to lose. After Spain joined the European Community in 1986, its economy steamed ahead of its competitors, as foreigners invested more than $35 billion. But last year, gross domestic product rose by only 1%, and it is expected to shrink nearly 1% this year. With wages still climbing steeply and inflation at an uncomfortable 4.5%, Gonzalez is at last pursuing a policy of austerity.

The government's new attitude is welcomed by negotiators for the employers' confederation, the CEOE. A wage pact and a change in labor laws "would completely change the morale and outlook of Spanish business," says Arturo Gil, first vice-president of the CEOE. But the pact will be useful, Gil says, only if the government also tackles other problems, such as the deficit, which keeps interest rates up, and high energy costs. Such pressures, Gil warns, are spurring companies to farm out production to Morocco and other low-cost locations.

Cutting a deal with labor, by contrast, is one of the toughest challenges that Gonzalez has faced in his 11 years in power. In the past, he promised action but caved in to two general strikes plus pressure from the left wing of his own Spanish Socialist Workers Party. But Gonzalez' new minority government, installed after the elections last month, depends on centrist votes. Paradoxically, that leaves him freer to act. And he has made the "pact for employment" a top priority.

It will be an uphill battle. With pay settlements running at an average of 7% this year, unions are being told to accept a 2.5% ceiling on pay raises in 1994, a below-inflation increase in 1995, and pay hikes in 1996--subject to economic recovery. Gonzalez wants employers who sign the three-year pact to agree not to cut their payrolls as long as they are making a profit. Dividends to shareholders would be frozen, and companies would have to do away with "golden parachute" job protections for executives.

TOUCHY TOPICS. A far harder part of the deal will be an easing of labor rules--among Europe's strictest--that are causing businesses in Spain to howl. "The idea of building up seniority in a firm, and never switching in order not to lose it, is at its extreme in Spain," complains Ramon Terraza, head of personnel at Asea Brown Boveri in Spain. "An employer with a high-seniority work force can be paying 50% more than his competitor with a young one." To sidestep this problem, employers have put 32% of Spanish workers on temporary contracts--the highest percentage in the EC. But the government and unions agree that the new regulations should limit temporary contracts to genuinely short-term jobs.

Other employers, such as General Motors Corp., want the right to lay off workers temporarily, without red tape, to adjust production levels. "We can do this much faster in other European countries, without union approval," says Jos Luis M rques, personnel director at GM's plant in Saragossa. Managements also seek power to transfer employees and to change job descriptions, now forbidden without unions' agreement. They also feel hobbled by the high cost of layoffs, averaging two years' wages.

Easing these labor bottlenecks is increasingly urgent. So far, manufacturing costs have remained relatively low, compared with those of European rivals--especially following three devaluations of the peseta in the past year and the de facto flotation of EC currencies on July 30. But the rigid work rules, along with a 50% wage rise in the past five years, are causing many companies to look elsewhere for plant sites.

The government insists the labor-reform legislation will be passed by Jan. 1, social pact or not. In exchange, labor also wants Gonzalez to put his overall economic policy on the bargaining table. That means airing such touchy subjects as where to cut the bloated state budget. Unions want to hold Gonzalez to a commitment they claim he has made not to cut social spending in his September budget. With the deficit topping 5% of GDP--closer to 6.5% if regional governments are included--he may be tempted to start slashing.

But if fractious Italy can get management and labor to agree, there's hope for Spain. Otherwise, "we face a steady deterioration of our economy" and a job flight to places with less rigid labor rules, such as Scotland, warns Juan Iranzo, head of research at Madrid's Institute for Economic Studies. For the reforms he has long promised, Gonzalez' moment of political truth has arrived.

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