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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHMD #0725/01 2021504
ZNR UUUUU ZZH
R 211504Z JUL 09
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 0966
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 02 MADRID 000725

SENSITIVE
SIPDIS

STATE FOR EUR/WE; DRL/ILCSR M.MITTELHAUSER, A.IRONS; DOL
FOR ILAB, B.BRUMFIELD; TREASURY FOR
OIA/OEE/T.O'KEEFFE,D.WRIGHT; OSD FOR M.SADOWSKA

E.O. 12958: N/A
TAGS: ECON ELAB ETRD PGOV SP
SUBJECT: CONTENTIOUS LABOR REFORM TALKS TROUBLE ZAPATERO

SUMMARY

¶1. (SBU) Businesses, economists, and international observers
have long called for more flexibility in Spain's labor
market. Now they are using the economic crisis and an
exceptionally high unemployment rate--over 18% and inching
towards 20%--to press for structural changes. President Jose
Luis Rodriguez Zapatero insists that any reforms be approved
via the "social dialogue" process. Ongoing tri-partite
negotiations between government, labor, and business
representatives have yet to produce results. Labor and
business are at loggerheads on most issues and the government
is largely aligned with labor. Failure to reach an accord by
the end of July, as the GOS is aiming for, will weaken the
credibility of Zapatero,s government. However, any agreement
reached by the deadline is unlikely to contain significant
reforms. END SUMMARY.

LABOR SNAPSHOT

¶2. (U) Unemployment is now at over 18% and projected to reach
20% by 2010. The OECD, IMF and other international
organizations agree that Spain needs structural labor
reforms. They argue that financial and administrative
hurdles to dismissal, rigid collective bargaining structures,
and wage indexation with inflation weaken Spain's
competitiveness. Currently, employers must obtain government
authorization for layoffs of 50 or more employees and provide
45 days severance per year of service (maximum 42 months).
Rigid hiring regulations prompted the following comment by
Social Security Administrator Octavio Granado: "since we are
not able to hire anyone part-time, we hire them full-time,
knowing they will be picking their noses half the day." Also
at issue is the bifurcation of the workforce into permanent
and fixed-term employees. The introduction in 1997 of
fixed-term contracts with lower dismissal costs encouraged
job creation but also produced instability in the labor
market. While Spain's job growth outpaced its neighbors in
the boom period, the economic crisis has hit fixed-term
employees--predominantly youth, women, and immigrants--the
hardest. Spain has shed more than 20% of jobs in this
category over the last year.

¶3. (U) Calls for labor reforms have proliferated in the press
over the last several months. In April, a group of 100
economists issued a paper recommending structural changes to
increase flexibility in the labor market. Both the Governor
of the Bank of Spain, Miguel Angel Fernandez Ordonez, and the
President of the European Central Bank, Jean-Claude Trichet,
came out in support of such reforms. Minister of Labor
Celestino Corbacho publicly disagreed with Ordonez,s
position, proposing increased worker protections and economic
reforms instead. In June, a group of 700 specialists,
supported by the two main unions--the General Workers' Union
(UGT) and the Trade Union Confederation of Workers (CC
OO)--issued a paper countering the group of 100,s proposals.

SOCIAL DIALOGUE PROCESS

¶4. (SBU) President Jose Luis Rodriguez Zapatero has insisted
from the start that any labor reforms be approved via the
"social dialogue" process. Tri-partite negotiations between
government, labor, and business representatives began in 2006
and have intensified over the past year. With heightened
public awareness and over ten meetings during the last two
months, the GOS is under increasing pressure to reach an
accord. All are agreed that Spain needs reforms to
accelerate recovery and create sustainable economic growth.
However, there is serious disagreement on the reforms
required. Business, represented by the Confederation of
Employers, Organizations (CEOE), wants changes in
contracting and dismissal rules and improved flexibility in
collective bargaining among other measures. They have asked
for a 5-percentage-point reduction in social security
contribution rates, which currently average just under 30%.
Labor, represented by the unions, insists that Spain needs
economic, not labor reform. They want to maintain worker
protections and are seeking a program that would provide
training and 420 euros a month for up to a year for
unemployed workers whose benefits have expired.

¶5. (SBU) The GOS is largely aligned with labor in this
process and asked CEOE to table its proposal for a single
hiring contract with lower dismissal costs. Both Zapatero
and Minister of Labor Corbacho are focused on worker

MADRID 00000725 002 OF 002


protections and say that now is not the time for significant
structural reforms. As a compromise, the GOS offered to
lower the social security contribution rates by half of one
percentage point and to fund labor's requested training and
benefits program for up to six months (at a total estimated
cost of over 2 billion euros). CEOE suspended talks after
this and a subsequent offer, which included provisions for
autonomous community involvement in worker training programs.
CEOE calls the government's offers insufficient and says it
will not settle for a reduction of less than 3 percentage
points. Labor wants the government to commit to its program
for up to one year. They say any reductions in contribution
rates must be temporary and reversible or it will bankrupt
the social security system.

PROSPECTS FOR REFORM

¶6. (SBU) Economist Alvaro Espina Montero, formerly a senior
official in the Ministry of Labor, and Professor Maria
Angeles Fernandez of the Universidad Autonoma de Madrid told
Econoff that while labor reform is greatly needed, it is
unlikely to occur via the social dialogue process. President
Zapatero has been pressing for an agreement before August,
when most Spaniards take vacation, but the measures on the
table do not amount to structural reform. CEOE
representative Roberto Suarez Santos told Econoff that
give-and-take is difficult in this process because labor is
not proposing any substantive measures. While CEOE is
amenable to delaying implementation of more difficult
reforms, they are unwilling to settle for small measures.
Suarez also says the GOS is not in a position to move the
talks forward. Zapatero has little room to maneuver with his
insistence on accord by consensus. His weakened political
position makes him especially beholden to his major power
base, the unions. Furthermore, Zapatero has left himself
open to criticism from opposition party leader Mariano Rajoy,
who says the GOS should implement needed reforms with or
without the support of labor.

COMMENT

¶7. (SBU) This is a critical juncture for labor reform. All
eyes are on the social dialogue process, and the GOS has
promised results before the end of July. Zapatero is
counting on the training and unemployment programs to assuage
public dissatisfaction with his government. If the social
dialogue fails to produce an agreement before the end of
July, the GOS will lose credibility. It will also be that
much more difficult to reach consensus this fall. Second
quarter unemployment figures--due to be released July
24--could make matters worse if they match projections. Both
GOS and CEOE believe a general strike is a possibility. An
agreement, on the other hand, is not likely to contain any
structurally significant reforms, but it might improve the
chances for more substantive reforms in the future. END
COMMENT.
CHACON