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Feb 12, 2011 12:04 PM IST | Source: Reuters

Spain seen unhooking wages from prices despite protest

Spain's Socialists are likely to ignore any labour union protests and push through a reform to de-link wage increases from inflation in a new effort to placate markets sceptical over long-term economic growth prospects.

Spain seen unhooking wages from prices despite protest

Spain's Socialists are likely to ignore any labour union protests and push through a reform to de-link wage increases from inflation in a new effort to placate markets sceptical over long-term economic growth prospects.


Prime Minister Jose Luis Rodriguez Zapatero is enjoying the warm glow of a consensual pact with unions and business heads over pension reform at the end of January, but the honeymoon will be short lived as talks turn to an overhaul of collective bargaining.


In Spain, the collective bargaining process has unions negotiating wages for entire industrial sectors rather than on a company-by-company basis and sets inflation as a benchmark for hikes.


Zapatero knows his drive to make Spain a more competitive euro zone economy will fail if he can't overturn wage indexation, and has said he's willing to follow Germany and France in their crusade for a trans-European competitiveness pact.


"Spain has not cared about the long-term for too long. Competitiveness is the elephant in the room. The underlying problem is that, when you have a large current account deficit, you're over-spending as a country. You can do that for a while, but not forever," economist at ING Martin Van Vliet said.


Since the creation of the euro zone Spain's consumer prices, inflated by the economic boom, have been persistently higher than their monetary peers at around 3% compared to the European Central Bank goal of near to, but less than, 2%.


As prices rose, wages followed close behind.


Spanish wages rose by an accumulated 20.8% from 2003 to 2008, according to Spanish university IESE figures, compared to just 9.7% in Germany and an EU average of 18.7%.


"With the ECB warning that the inflation outlook 'could move to the upside', and hinting that rates could rise despite the fragility in peripheral Europe, any sign of inflation-busting wage hikes would have been a big red flag for government bond markets" said economist at M&G Investments Jim Leaviss.



Market punishment


Zapatero has shown over the last year he is willing take painful steps to avoid further punishment by international debt markets and, even if he cannot bring the unions on board, he will have no trouble getting the reforms onto the statute book thanks to small-party support in parliament.


However, he could pay a heavy price in public support, with a general election just over a year away and his popularity already decimated by a slew of austerity measures.


The premium investors demand to hold Spanish over German debt has soared to euro zone era highs in the last nine months on concerns Spain would be forced to follow Greece and Ireland in applying for EU-backed aid.


Under pressure, the Socialists forgot their traditional union ties, cutting civil servants wages by 5 percent as part of measures worth around 50 billion euros and unilaterally pushing through a labour market reform.


The recent agreement over pensions is more a sign of the unions adjusting to the new reality than the Socialists returning to their leftist roots.


After a largely unsuccessful general strike in September, the unions dropped warnings they would call new protests and stood behind a reform that gradually raises the retirement age to one of the highest in the European Union at 67 years.


At a recent event with Zapatero, the union heads said they would be willing to reform the collective bargaining process as long as it wasn't torn up completely.


"It's important for the unions to become ever closer to decisions taken by businesses and they understand wages are closely linked to the success of a business," head of economic consultancy AFI Emilio Ontiveros said.


The government, unions and business representatives have until March 15 to reach an accord, or the Socialists said they will go it alone.



Rude awakening


The euro zone debt crisis jolted Spain awake after years of strong growth on cheap credit.


During the housing boom, students dropped out of college to work as builders and, credit cards in hand, could earn enough to pay for fancy cars and massive mortgages. Wage growth was not a problem because the economy was looking inwards.


"That was a direct consequence of growth being powered by domestic demand and construction, but now they need to reorientate their economy to more sustainable sources of growth such as trade. To facilitate that transition they need to become more competitive," economist at BNP Paribas Eoin O'Callaghan said.


Gross domestic product shrank 0.1% in 2010, according to official preliminary data, but would have grown 1.6% if the collapsed construction sector had not been a factor, Economy Secretary Jose Manuel Campa said.


The only area preventing another slump has been a robust return to growth in exports, rising 24.1% in November, and the government is hoping trade will replace construction.


But unless their workers can compete with the French and the Italians, not to mention Asians and Eastern Europeans, any chance of rebuilding their shattered economy is remote.


It is likely the Socialists will opt for a model which will allow unions to negotiate wages on a company by company basis with a greater emphasis on productivity than inflation.


By threatening annual wage increases, the government runs the risk of spooking an already shaken consumer, scared to touch what little rainy day funds they can muster.


Weak consumer sentiment has hurt Spain's recovery and a wage reform could make this worse in the short term, but analysts say the economy must become less reliant on the consumer if it is to grow in the long term, a feeling shared by the market.

And, as with much of the debt crisis and politicians' response it over the last year, it has not been Spain's electorate which has dictated policy, but the investor.

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