Troubled Spain amends constitution to limit debt

By Daniel Woolls

Associated Press

Published: Friday, Aug. 26 2011 9:14 a.m. MDT

MADRID — Spain's main political powers agreed to amend the constitution Friday to make the government legally obliged to keep its deficit low, an effort to reassure financial markets that it will keep its troubled finances under control and not need a bailout.

The ruling Socialists and the opposition center-right Popular Party cut a deal after hours of frantic negotiations to propose a law under which, starting in 2020, the national deficit cannot surpass 0.4 percent of the country's GDP.

That threshold can be surpassed only in cases of natural disaster, economic recession or other extraordinary circumstances that will have to be declared formally by a vote in Parliament.

The constitutional amendment is expected to be voted on Sept. 2 in the lower house of Parliament, while the actual law is due to be passed by July 2012.

Spain insists it is not acting under pressure from European authorities, even though French President Nicolas Sarkozy and German Chancellor Angela Merkel last week called for all eurozone nations to enact constitutional amendments requiring balanced budgets.

Spain is struggling to recover from nearly two years of recession prompted largely by the collapse of a real estate bubble. The jobless rate is near 21 percent — almost 45 percent for young people — and economic growth remains anemic.

The global economic crisis "has only made it more appropriate to incorporate the principle (of budgetary discipline) into our Constitution so as to boost confidence in the stability of the Spanish economy over the medium and long term," the two main parties wrote.

Alfredo Perez Rubalcaba, the Socialist candidate for prime minister in Spain's Nov. 2 general election, praised the accord as an essential tool to restore confidence in Spain and the eurozone after a turbulent month on the bond and stock markets. He also said the deal allows for essential wiggle room.

"We wanted stability with flexibility to let Spain react to situations that we cannot now predict," Perez Rubalcaba told reporters.

The government is in a rush to pass the constitutional amendment, both to shore up market confidence and because Parliament breaks up at the end of September ahead the general election.

The government also approved labor reforms Friday designed to encourage firms to hire new workers, especially young people.

One of the changes is an about-face from a measure passed just last year, which gave companies tax breaks if they turned temporary employees into full ones. Temporary workers make up nearly a third of the Spanish work force and were the first to be let go when the economy tanked.

Labor Minister Valeriano Gomez said the policy approved last year is not working, as companies simply roll over temporary contracts as long they can then fire people when they expire. So the government is suspending for two years a rule that says companies have to make permanent employees of people it has had on temporary contracts for two years.

"At times of crisis, the important thing is to keep people working, no matter what, be it with a temporary job or an open-ended one," Gomez said. "We prefer someone to have a temporary job rather than be jobless."

The government also raised the eligibility age for apprentice contracts that give companies tax breaks and broadened the power of a government agency that helps companies make severance payments for layoffs. It also extended special aid of €400 ($580) a month to jobless people whose benefits have run out, so long as they are undergoing job training.

Concerns that Spain could not handle its debt saw its borrowing rates rise this year to the point that the European Central Bank was forced to intervene in markets in August to buy bonds and bring the rates back down.

On the constitutional amendment, the 0.4 percent deficit limit breaks down into 0.26 percent for the central government and 0.14 percent for Spain's regional governments, many of which are struggling with high debt. Local governments in Spain, many of them also burdened by heavy borrowings, will be required to balance their budgets.

The 0.4 percent limit will be up for review in 2015 and 2018.

Spain as a whole aims to bring its deficit down to 6 percent of GDP this year from 9.2 percent in 2010, with the ultimate goal of hitting the EU limit of 3 percent in 2013.

Prime Minister Jose Luis Rodriguez Zapatero's proposal to change the constitution was not without controversy. Some officials in his own party complained that such a move made the Socialist party seem too economically conservative and beholden to markets and authorities in Brussels.

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