WITH the highest unemployment rate in Europe and a gaping hole in its economy where a construction sector used to be, you might think Spain would be rushing to restore its competitiveness and rebalance its budget. But Socialist Prime Minister Jose Luis Rodriguez Zapatero is resisting calls for labor market reforms and doing little to tackle a budget shortfall heading for 10 percent of output. And so far, voters show little sign of forcing him into action. Support for Zapatero's Socialist Party has fallen just over a percentage point behind that of the conservative Popular Party to about 39 percent, according to the authoritative Centro de Investigaciones Sociologicas. That means Spain's greatest economic crisis since its 1930s Civil War has cost the Socialists about four percentage points, a political toll that would make leaders like Britain's Gordon Brown green with envy. The numbers tell the story clearly: Spain's gross domestic product is heading for a contraction of about 4 percent this year and is set to shrink slightly in 2010 as well. Unemployment is at 17.9 percent and the government admits it could rise to as high as one in five workers. In few European countries are the effects of recession so immediately visible. City streets are pockmarked by boarded-up shops and often adjacent roads have been dug up as part of the 25 billion euros ($35.97 billion) in stimulus spending undertaken in the first seven months of this year alone. So what's going on? First, the opposition has been weakened by scandals and uninspiring leadership. Secondly, Zapatero is winning support from Spaniards who fear economic reform. “The crisis is affecting a great deal of people, but you've got to remember that many of them are not really part of the Spanish establishment — we're talking immigrants, people who already had work contracts with poor conditions,” said Ismael Crespo, political analyst at the Ortega y Gasset Institute. “There is a mass of people who are continuing to consume,” Crespo said. While polls identify unemployment as Spain's main problem, it ranks fifth amongst issues personally affecting respondents, he said, adding that a close-to-normal six million cars traveled highways at the end of August, most carrying holiday-makers returning home. With little to offer voters on the economy, Zapatero is appealing to his core left-wing constituency with social policies, including a proposal to make abortion more freely available. The other part of his strategy is to wait for a world recovery to drag Spain from its hole, analysts said. Elections are not due again until 2012, so Zapatero has plenty of time to wait. But what works for Zapatero politically could be the country's undoing. Some economists say that without reform Spain, whose total public and private debt totals about 250 percent of GDP, could be heading for disaster. In a recent report, consultancy Variant Perception called Spain “the hole in Europe's balance sheet.” “Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level for an industrialized economy, a real estate collapse and general banking insolvencies,” it wrote. The Bank of Spain says the country must change rules which make it expensive to employ workers. But the government, keen to maintain the support of unions, has flatly ruled this out, despite calls by business lobby groups for incentives to replace the gap left in the economy by a construction industry that at one stage accounted for an unsustainable 18 percent of GDP. Barcelona-based economist Edward Hugh thinks the government will opt for inaction: “Electoral support for doing nothing comes from pensioners, government employees and people in the large industrial sectors with collective (wage) agreements. “They're all being protected at the moment, they have no crisis,” he said, arguing that Spain needed economic shock therapy to avoid a Japanese-style lost decade or worse. While voters may be a force for no change, Spain nonetheless is under pressure from the European Commission to cut its budget deficit back to 3 percent of GDP by 2012. Officials first suggested increasing income tax, but backed down following negative reactions in the media. Now the government proposes higher capital gains tax although the money this would raise would make little difference to the deficit. Bond markets have not yet punished Spain, although even a relatively optimistic observer such as Moody's credit agency, which sees little upside to the current 50 basis point spread of Spanish bonos over German Bunds, has said its long-term trend growth has been “permanently impaired.” Meanwhile, left-leaning paper El Pais, the country's most influential, has portrayed Zapatero as Mr. Bean, the slapstick comic character, and even Socialists are beginning to worry that not enough is being done to bring Spain back to growth. Former Prime Minister Felipe Gonzalez has accused Zapatero of inaction and the finance minister of the Catalonia region said the government had to “take the bull by the horns.” “We need austerity and reforms,” Catalonia's Antoni Castells told radio, “We have to really talk about the labour market.”
