The Spanish Test

A strike has been called in Spain on Thursday - the first since Prime Minister Mariano Rajoy came to power.

 

The unions are angry about reforms that will make it easier to hire and fire workers. Their banners will read "Unfair - say 'no' to the labour reform law".

 

The government says these reforms are key to making Spain more competitive and eventually bringing down the country's chronic unemployment. 

 

The unions see it not just as a trial of strength but as a battle over the future of the welfare state. 

 

Javier Doz, head of International Relations of Workers Commission Union, said: "Our plan is to start a long term fight. This strike is not going to be the end because we are risking so much: the future of the social model of this country and of Europe."

 

It is not yet clear what level of support the strike will get. No more than 30% says one paper. But the government is anxious after the left did better than expected in last weekend's elections in Andalusia. 

 

The second and much greater challenge is the budget on Friday. Spain is struggling to reduce its deficit. It has already re-negotiated the target for the deficit this year with Brussels. Even to bring it down to 5.3% of GDP, cuts of 35bn euros (£29bn: $47bn) will be needed.

 

The government in Madrid has been warning of a "very, very austere budget". Treasury Minister Cristobal Montoro said it will be "the most austere since Spain became a democracy".

Difficult decisions

 

But the government faces a dilemma: the country has just slipped back into recession, unemployment is running at 23% and increasing. 

 

Many economists are saying the cuts may push Spain into a downward spiral. But if Madrid was to back off reducing its budget, the markets would push up its borrowing costs to a point where the country needed a bailout. 

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These cuts are a throw of the dice. If the economy weakens further, Spain will be heading for a bailout. ”

 

"Spain is on a very, very slippery slope now," said Nicholas Spiro at Spiro Sovereign Strategy. William Buiter of Citigroup says the risk of a Spanish debt restructuring is higher now than than it's been since the beginning of the crisis.

 

Some in the European Commission believe that Spain should begin drawing on the EU's rescue fund right now to help its banks, still heavily indebted by the property crash. 

 

Their argument is that Spanish banks will struggle to find the extra 52bn euros they have been asked to find and that will only put more pressure on the Spanish government. 

 

Much of the burden for reducing spending will fall on the regions. The expectation is that health and education budgets will have to be cut. 

 

These cuts are a throw of the dice. If the economy weakens further, Spain will be heading for a bailout. If that happens, attention will turn to Italy. 

 

That is why eurozone finance ministers meeting in Copenhagen at the end of this week will not just discuss Spain but the size of the EU's rescue fund, the so-called firewall. 

'Boiling point'

 

The German government has reluctantly agreed that the 250bn euros remaining in the existing fund - the European Financial Stability Facility (EFSF) - can run alongside the 500bn euros that will eventually make up the permanent fund the European Stability Mechanism (ESM). 

 

That will beef up the defences to 750bn euros. The IMF and others would like to see a trillion euros in the pot. That way both Italy and Spain could be rescued. But such a firewall is not yet in place. 

 

The Spanish people have been remarkably passive in the face of unemployment and recession. The pain is certainly eased by a huge black economy and powerful family networks. The next few days will show whether Spanish patience is wearing thin and whether the people will resist further cuts. 

 

The other day I spoke to the former Spanish Prime Minister Jose Maria Aznar. He said the big challenge was the future of the welfare state. He doubted whether it was sustainable in its present form. The present crisis meant it would have to change - that would be painful.

 

These will be challenging days for Spain and the euro-zone will be on edge. Quite simply, Spain could bring the eurozone crisis back to boiling point.