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Analysis: Spain government is struggling in crisis
31 May 2010 @ 11:10

MADRID — Spain's Socialist government is watching its political power dwindle as it struggles to chart a path out of deep financial trouble, failing so far to satisfy conflicting demands to cut its budget and stimulate job creation.

The coming months could bring far deeper trouble as Prime Minister Jose Luis Rodriguez Zapatero moves to reform the country's labor market, risking national strikes and the loss of support from trade unions, a core source of his center-left party's strength.

Although there appears to be no immediate threat of it falling, Zapatero's minority government is already running into serious trouble.

A package of austerity measures passed by one vote in parliament's lower chamber Thursday. Fitch Ratings downgraded Spanish debt Friday. A poll published in the northeastern regional newspaper Periodico de Catalunya on Saturday said the conservative opposition Popular Party would win up to 42 more seats than the Socialists in the 350 member parliament — coming close to an overall majority — if elections were held now.

The austerity package aimed at slashing spending by euro15 billion ($18.4 billion) over two years included measures such as freezing pensions and cutting civil servants' wages.

But investors and lenders including the IMF are demanding reform of the labor market including overhauls of hiring and firing rules, encouragement of part-time contracts and moves to put the long-term unemployed and the young to work.

The governmment plans to begin negotiating with unions and hopes to arrive at a consensus about the changes by the end of May.

Union leaders have said that if the government presses ahead with implementing reforms without union approval, they will call on their members to vote for a general strike that could paralyze the country and probably cause deep ripples in global markets.

The conservative newspaper El Mundo, which supports the opposition, said Saturday that the government was trapped, caught between growing unpopularity and the financial realities that have forced it to abandon public spending and take on politically unappealing austerity measures.

"The government is cornered," the paper wrote.

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