Spain Remains Mired in Recession

Despite high unemployment, Spain’s government is delaying labor reforms.

The long road ahead for Spain just got a little longer as the country’s seasonally adjusted unemployment rate rose slightly in July, up to 20.3 percent. Meanwhile the country’s socialist prime minister is attempting to reassure markets that Spain will be able to meet its target of reducing its budget deficit to 6 percent of GDP next year.

Last March Prime Minister José Luis Rodríguez Zapatero was forced to admit that his government’s interventionist policies hadn’t managed to improve the economy’s long-term prospects at all. Unemployment rates have been hovering near 20 percent since the summer of 2009 with little hope of them dropping any time soon.

In December, Zapatero announced labor market reforms, among them reductions in high dismissal costs and working hours to preserve employment. The country’s labor regulations remain inflexible however. Non-salary costs of employing a worker are high and regulations on work hours rigid.

In Tokyo on Wednesday, the prime minister blamed workers for their lack of flexibility. “All countries make sacrifices today for a better tomorrow,” he said. A general strike is likely to be called by unions on September 29 unless the government repeals it plan to make it easier for businesses to hire and fire workers.

Total government expenditures, including consumption and transfer payments, have skyrocketed in the wake of the crisis. Government spending already amounted to nearly 40 percent of GDP in the years preceding the downturn; a stimulus package enacted last year to promote a recovery equaled a little over 1 percent of Spain’s total economic output, providing for public works investments, support of the auto industry and increased social benefits.

As Spain struggles to emerge from recession and fend off worries over its ability to fund its debt, Zapatero has promised significant spending cuts. The opposition is out for his head though. Conservative foreman Mariano Rajoy Brey suggested earlier this year that both the prime minister and his proposals lack credibility. “It’s not Spain that inspires lack of confidence,” Rajoy told Zapatero in parliament last February; “it’s you and your government’s way of handling the economy.” The prime minister is struggling to keep his government in power until the 2012 elections.

Markets have worried over Spain’s rising public deficit which peaked at 11.2 percent of GDP last year, dreading that the country could suffer the same fate as Greece. Zapatero assured investors that Spain does “not need assistance from the EU or IMF” however, adding: “we have never thought it will be necessary.” Nevertheless, Spain has recently seen firm demand for its bonds issuance on abating investor concerns over the nation’s ability to cut its fiscal gap.

With one in five Spanish workers unemployed, Zapatero’s popularity has plummeted in his second term in office, to 26 percent.