SCENARIOS-How Spain’s labour reform might conclude

* Ratification of labour decree seen likely

* But negotiations to amend it could drag on for months

By Elisabeth O’Leary

MADRID, June 16 (BestGrowthStock) – The Spanish government’s decree
on labour reform, seen as key to restoring Spain’s economy to
long-term health, is likely to be a prelude to a much longer
overhaul process.

Although the government does not yet have sufficient
political backing to get the decree ratified by parliament on
June 22, analysts say its passage — even if via abstention of
enough parties — is practically assured because everyone
understands its importance. [ID:nLDE65F13K]

Opposition parties are likely to give only muted backing
since measures such as cutting severance pay are unpopular with
the public and Prime Minister Jose Luis Rodriguez Zapatero’s
Socialist government is unpopular.

Labour reform is considered crucial to ensuring long-term
economic growth after a crippling recession has doubled
unemployment to 20 percent in just 2 years.

Cutting unemployment would reduce government spending on
benefits and boost tax revenue, helping to cut the budget
deficit which has been worrying financial markets fearing euro
zone contagion from Greece’s debt crisis.

The reforms include measures to cut the cost of firing, one
of the highest in the developed world, simplify contracting and
promote youth employment.

Following are possible outcomes:

LABOUR DECREE PASSES, BACKED BY SMALLER OPPOSITION PARTIES,
NEGOTIATIONS BEGIN

The decree, which goes into effect on June 17, is ratified
on June 22 with the backing of Catalan nationalist party CiU and
possibly other smaller parties.

The ratification will trigger a process that converts the
decree into a legislative bill to be debated by lawmakers and
possibly amended. Eventually a new law would emerge from
parliament to replace the decree.

The process could take six months to a year and during the
debate the reform is likely to become more far-reaching, cutting
severance pay and making companies more flexible, given that the
biggest political parties complain that the decree does not go
far enough.

Probability: Highly likely

The Catalan coalition, or CiU, is the government’s most
likely ally for labour reform, and getting this group on board
is the best option for the government given the Catalans have
said they are broadly in step with the expected measures such as
cutting severance costs and encouraging youth employment.

In the coming months the government may have to offer more
measures to favour businesses, to appease CiU, so final passage
of the reform with the backing of the Catalans is the option
mostly likely to please financial markets.

The Catalans have 10 seats in parliament, which added to the
Socialists’ 169 seats would give the government a majority in
the 350-seat house.

LABOUR DECREE PASSES AS PP ABSTAINS, LABOUR LAW NEGOTIATION
STARTS

An abstention by the conservative Popular Party, or PP, the
biggest opposition group, would be enough for the decree to pass
and for the negotiation process for a new labour law to start.

Probability: Possible

The PP could abstain to signal understanding of the severity
of the crisis, or if it perceives the government might offer
deeper measures to satisfy its right-leaning voters and the
business community.

However, political observers see full backing of the PP as
remote given the opposition has rarely voted with the government
and has been its most vociferous critic, arguing that the labour
reform has taken too long and has not gone far enough.

LABOUR DECREE FAILS TO GET APPROVAL IN PARLIAMENT,
GOVERNMENT FACES VOTE OF NO-CONFIDENCE

The government does not secure enough backing to ratify its
decree in parliament on June 22.

Probability: Unlikely

Given that Spain’s future economic viability and credibility
are at stake with this reform, this does not appear to be an
option for the moment.

A vote of confidence on the government would almost
certainly follow this scenario, and if the ruling party lost it
would mean early elections.

Some analysts question the political wisdom of pushing for
early elections which would add uncertainty to an already rocky
situation.

Added to that, some also question if a victory by the PP,
ahead around 10 points in opinion polls, would solve anything.
Firstly, Mariano Rajoy does not appear to have a strong mandate
as head of his party and secondly, Spain’s economic situation is
such that the reforms necessary are long-winded and arduous
under any administration.

Investing Research
(Reporting by Elisabeth O’Leary, Editing by Sonya Hepinstall)
[email protected]; +34 91 585 8295; Reuters
Messaging: [email protected]

SCENARIOS-How Spain’s labour reform might conclude