„The labour reform will cost me a general strike” – said Mariano Rajoy, the Spanish prime minister, to the Finnish prime minister at the EU summit held on 30. January. He did not know that the microphone remained turned on…
Indeed, the first weeks of the new Spanish government have not been easy. Not that anybody had said they would be. But worse and worse data have been published during these weeks. Instead of the planned 6% of GDP, it turns out that a public deficit of around 8% is to be expected for 2011. The unemployment rate has reached an extreme of 22. 8%. Spanish analysts and the IMF expect a new recession, a 1.7% decline in GDP this year and 0.3% in the next. Pushed by these domestic facts and by outside pressure, the new government has thus far made three important decisions.
First a new austerity package
has been announced. The amount to be saved for the budget deficit is 8.9 billion euros. The measures include income and property tax increases, a one-year freeze in public sector salaries, a freeze on the minimum wage of 641.4 euros per month and cuts in subsidies to trade unions and political parties. The working week for civil servants will be extended from 35 to 37.5 hours and the budget of all ministries will be cut.
Second, a major financial reform has been launched. Because of the burst of the real estate bubble, banks have been burdened with bad loans and this – despite efforts so far – still undermines the creditworthiness of the financial system. Spanish banks own 323 billion euros in real estate loans and foreclosed assets, of which 175 billion euros is classified as either non-performing, or near non-performing. The reform
will require banks to make provisions, altogether a sum of around 50 billion euros, which will raise the share of potential losses covered by provisions to 80 percent in the case of land, from the current level of 31 percent. For real estate developments, the coverage ratio will increase to 65% from 27%. This amount of provisions can be compared to the 66 billion euros that banks gathered between 2008-2011. Banks will have to fulfil the new rules by the end of the year. Banks that pursue mergers will have two years. (In this way the reform promotes additional mergers in a long series of mergers that already took place among the savings banks to a large extent last year. See one previous post of mine: „The last weeks of the Spanish government”, 27. October 2011. http://www.vki.hu/sn_eng/sn-eng-38.pdf
) Banks unable to fulfil the requirements can borrow from the Fund for Orderly Bank Restructuring (FROB) whose equity will be increased from 9 to 15 billion euros.
The third decision was to implement the labour reform. “Oh, again? How boring” - we might say, since it is the eighth try since 1980 to do something about the peculiar Spanish labour market. But this time it goes somewhat further than usual. The maximum severance payment employees can receive was cut to 33 days salary per year of service, down from 45. Companies in difficulty will also be able to opt out of collective bargaining agreements reached with the trade unions and have greater flexibility to adjust working conditions depending on how the economy and the company are doing. This reform makes layoffs easier, but it still does not change the dual structure of the Spanish labour market. Temporary contracts (introduced in 1984 and used in high proportion) continue to exist. It is primarily the continued existence of both indefinite and fixed contracts (duality) that is responsible for the extremely high unemployment rate. In the cases of recession, firms dismiss workers with fixed contracts in great quantity.
This labour reform of course was not greeted warmly by the trade unions and indeed, a general strike is being planned. But the new government – elected with absolute majority – should manage to survive. Otherwise there will be no structural renewal in the Spanish economy. And even then, the big question remains: how and on what foundation the economy will grow in the medium- to long-term?