VZCZCXRO2520
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