By Nigel Davies
MADRID, May 12 (Reuters) - Spain will cut wages of state employees and slash investment spending, sparking union anger at the government's toughest moves yet to rein in a budget deficit some feared could ignite a bigger version of the Greek crisis.
Prime Minister Jose Luis Rodriguez Zapatero's fresh austerity measures came hours after U.S. President Barack Obama pressed him to be 'resolute' in efforts to implement economic reforms, and after conversations with German Chancellor Angela Merkel and French President Nicolas Sarkozy.
'We need to make a singular, exceptional and extraordinary effort to cut our public deficit and we must do so now that the economy is beginning to recover,' Zapatero told parliament on Wednesday as he detailed the cuts totalling 15 billion euros ($19.05 billion) in 2010 and 2011.
Civil service salaries will be cut by 5 percent in 2010 and frozen in 2011, and more than 6 billion euros will be cut from public investment, said Zapatero, who has been widely criticised for being slow to take decisive action against the crisis.
News of the austerity plan, which follows news of a $1 trillion fund to prop up weaker euro zone states, cut the yield on Spanish 10-year Treasury bonds to around 3.97 percent from around 4.02 percent and helped push U.S. stocks higher.
'These measures ... are what the market was waiting for, although not many people thought the prime minister would dare to take them,' said Nicolas Lopez, of Madrid brokerage M&G Valores.
The move was badly received by unions which, while so far maintaining good relations with the Socialist government, have already put the brakes on a government move to raise the retirement age to 67 from 65. The government had until now indicated it would not cut wages.
'The proposed cuts merit outright rejection,' said Ignacio Fernandez Toxo, leader of Spain's biggest union confederation, Comisiones Obreras, saying that unions would take some time to consider their response.
But the leader of the second-largest labour grouping, Candido Mendez of the Union General de Trabajadores, sounded a more conciliatory note, saying that he still thought it possible unions might agree to key labour market reforms.
Unions only represent about 16 percent of Spanish workers and marches earlier this year against earlier austerity measures were tiny in comparison with the mass fury unleashed by their Greek equivalents.
STRIKES TO COME?
But Zapatero's latest measures for the first time directly target the unions' main constituency -- public sector workers -- which could put labour leaders, criticised by some of their members for inaction, under pressure to take more aggressive action.
Civil service jobs in Spain are prized for their fixed hours and stable conditions, although many Spaniards see the public sector as having been protected so far from the vicious cuts of a labour market suffering the highest unemployment in the eurozone.
'The unions didn't strike against the fact there are four million unemployed. If they do so now because of the public sector wage cuts, then I will go out and make a counter-strike,' said 30-year old Madrid engineer Pablo Almarcha.
Juan Carlos Garcia, a 40-year-old unemployed teacher married to a civil servant also welcomed news of the salary cuts.
'I think cutting civil servant salaries is an excellent idea, even though I live with one,' he said.
The cuts, which follow an earlier 50 billion euros in austerity measures which failed to convince markets, aim to reduce the budget deficit to 9.3 percent of gross domestic product this year, from 11.2 percent in 2009, 6 percent in 2011 and the 3 percent limit stipulated by European rules by 2013.
'These measures go in the right direction,' said European Economic and Monetary Affairs Commissioner Ollie Rehn.
But others warned that the cuts, however harsh, may not be enough for Spain, whose public sector is coming under strain from huge debts accumulated by companies and households during a property boom. Unemployment has hit 20 percent, and economists already doubt that Spain's relatively uncompetitive economy will be able to reach the levels of economic growth that underpin the government's deficit forecasts.
DEEPER CUTS NEEDED
Data released on Wednesday showed the economy grew for the first time in nearly two years in the first quarter, expanding 0.1 percent quarter on quarter.
'We feel that Spain is going to fall short of the government's latest growth projections of 1.8 percent in 2011, 2.9 percent in 2012 and 3.1 percent in 2013. This could imply that even deeper spending cuts or steeper tax rises will be required,' said Raj Badiani, of IHS Global Insight.
The measures were announced after European Union and International Monetary Fund officials agreed at the weekend on a $1 trillion emergency fund for weak euro zone countries that have been hit by debt crises.
'After the weekend EU meeting it became very clear Spain and Portugal, and particularly Spain, would have to go the extra mile in cutting the deficit,' said Jose Garcia Zarate, an economist at 4Cast.
Portugal also unveiled extra fiscal measures over the weekend, including putting on ice the building of a new airport in Lisbon.
For a factbox detailing the austerity plans, click on ). For scenarios of possible union reactions, see
(Additional reporting by Martin Roberts, Elisabeth O'Leary, Clara Vilar and Carlos Ruano)
(Writing by Axel Bugge; editing by Jason Webb) ($1=.7872 Euro) Keywords: ECONOMY SPAIN/ (martin.roberts@thomsonreuters.com; +34 91 585 2130; Reuters Messaging: martin.roberts1.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
MADRID, May 12 (Reuters) - Spain will cut wages of state employees and slash investment spending, sparking union anger at the government's toughest moves yet to rein in a budget deficit some feared could ignite a bigger version of the Greek crisis.
Prime Minister Jose Luis Rodriguez Zapatero's fresh austerity measures came hours after U.S. President Barack Obama pressed him to be 'resolute' in efforts to implement economic reforms, and after conversations with German Chancellor Angela Merkel and French President Nicolas Sarkozy.
'We need to make a singular, exceptional and extraordinary effort to cut our public deficit and we must do so now that the economy is beginning to recover,' Zapatero told parliament on Wednesday as he detailed the cuts totalling 15 billion euros ($19.05 billion) in 2010 and 2011.
Civil service salaries will be cut by 5 percent in 2010 and frozen in 2011, and more than 6 billion euros will be cut from public investment, said Zapatero, who has been widely criticised for being slow to take decisive action against the crisis.
News of the austerity plan, which follows news of a $1 trillion fund to prop up weaker euro zone states, cut the yield on Spanish 10-year Treasury bonds to around 3.97 percent from around 4.02 percent and helped push U.S. stocks higher.
'These measures ... are what the market was waiting for, although not many people thought the prime minister would dare to take them,' said Nicolas Lopez, of Madrid brokerage M&G Valores.
The move was badly received by unions which, while so far maintaining good relations with the Socialist government, have already put the brakes on a government move to raise the retirement age to 67 from 65. The government had until now indicated it would not cut wages.
'The proposed cuts merit outright rejection,' said Ignacio Fernandez Toxo, leader of Spain's biggest union confederation, Comisiones Obreras, saying that unions would take some time to consider their response.
But the leader of the second-largest labour grouping, Candido Mendez of the Union General de Trabajadores, sounded a more conciliatory note, saying that he still thought it possible unions might agree to key labour market reforms.
Unions only represent about 16 percent of Spanish workers and marches earlier this year against earlier austerity measures were tiny in comparison with the mass fury unleashed by their Greek equivalents.
STRIKES TO COME?
But Zapatero's latest measures for the first time directly target the unions' main constituency -- public sector workers -- which could put labour leaders, criticised by some of their members for inaction, under pressure to take more aggressive action.
Civil service jobs in Spain are prized for their fixed hours and stable conditions, although many Spaniards see the public sector as having been protected so far from the vicious cuts of a labour market suffering the highest unemployment in the eurozone.
'The unions didn't strike against the fact there are four million unemployed. If they do so now because of the public sector wage cuts, then I will go out and make a counter-strike,' said 30-year old Madrid engineer Pablo Almarcha.
Juan Carlos Garcia, a 40-year-old unemployed teacher married to a civil servant also welcomed news of the salary cuts.
'I think cutting civil servant salaries is an excellent idea, even though I live with one,' he said.
The cuts, which follow an earlier 50 billion euros in austerity measures which failed to convince markets, aim to reduce the budget deficit to 9.3 percent of gross domestic product this year, from 11.2 percent in 2009, 6 percent in 2011 and the 3 percent limit stipulated by European rules by 2013.
'These measures go in the right direction,' said European Economic and Monetary Affairs Commissioner Ollie Rehn.
But others warned that the cuts, however harsh, may not be enough for Spain, whose public sector is coming under strain from huge debts accumulated by companies and households during a property boom. Unemployment has hit 20 percent, and economists already doubt that Spain's relatively uncompetitive economy will be able to reach the levels of economic growth that underpin the government's deficit forecasts.
DEEPER CUTS NEEDED
Data released on Wednesday showed the economy grew for the first time in nearly two years in the first quarter, expanding 0.1 percent quarter on quarter.
'We feel that Spain is going to fall short of the government's latest growth projections of 1.8 percent in 2011, 2.9 percent in 2012 and 3.1 percent in 2013. This could imply that even deeper spending cuts or steeper tax rises will be required,' said Raj Badiani, of IHS Global Insight.
The measures were announced after European Union and International Monetary Fund officials agreed at the weekend on a $1 trillion emergency fund for weak euro zone countries that have been hit by debt crises.
'After the weekend EU meeting it became very clear Spain and Portugal, and particularly Spain, would have to go the extra mile in cutting the deficit,' said Jose Garcia Zarate, an economist at 4Cast.
Portugal also unveiled extra fiscal measures over the weekend, including putting on ice the building of a new airport in Lisbon.
For a factbox detailing the austerity plans, click on ). For scenarios of possible union reactions, see
(Additional reporting by Martin Roberts, Elisabeth O'Leary, Clara Vilar and Carlos Ruano)
(Writing by Axel Bugge; editing by Jason Webb) ($1=.7872 Euro) Keywords: ECONOMY SPAIN/ (martin.roberts@thomsonreuters.com; +34 91 585 2130; Reuters Messaging: martin.roberts1.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.