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Spain to adopt austerity budget despite protests

By Daniel Woolls

Associated Press

Published: Friday, March 30 2012 5:05 a.m. MDT

Thousands of demonstrators march during a general strike to protest against the government's tough new labor reforms and cutbacks in Madrid, Thursday, March 29, 2012.Spanish workers are livid over labor reforms they see as flagrantly pro-business staged a nationwide strike Thursday and tried to bring the country to a halt. Banner reads 'Labor reform, legal violence'.

Daniel Ochoa de Olza, Associated Press

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MADRID — The Spanish government prepared to approve on Friday a new austerity budget that hundreds of thousands protested against this week in sometimes violent demonstrations, but which Madrid says is vital to avoid financial ruin.

The Cabinet was due to approve €30 billion ($40 billion) in spending cuts and tax hikes in the draft 2012 budget — another taste of painful reforms that fueled popular outrage and culminated in clashes between protesters and police in major cities on Thursday.

"Spain is going to stop being a problem, especially for the Spanish people but also for the European Union," Economy Minister Luis de Guindos spoke as he entered an informal meeting of eurozone colleagues in Copenhagen.

Unions staged their general strike to push the government to soften the labor reforms, which will make it easier and cheaper for companies to fire people or cut wages. The walkouts crippled public transport and industry and brought about 800,000 thousand people out in protest, according to government estimates.

The government, which is not yet 100 days old, is focused on the task of keeping the country out of financial trouble. The economy is sliding back into recession, banks are saddled with huge amounts of bad loans due to the bursting of a property bubble and unemployment is at the highest in the entire 17-nation eurozone.

International investors and the European Union are monitoring the Spanish government's efforts to heal public finances and turn the economy around.

If the investors fear the country will not recover, they will demand higher interest rates to lend it money. If those rates become too high, Spain would eventually follow Greece, Ireland and Portugal in seeking a bailout.

De Guindos, who was explaining the budget to EU colleagues at a meeting in Denmark, did not go into detail in comments to reporters but said the deficit reduction would be achieved more with spending cuts than tax hikes. The new conservative government has already raised income and property taxes and cut spending in some areas.

He said he trusted his eurozone counterparts to "understand perfectly the effort that the Spanish government is making."

Although Spain's borrowing rates have fallen in recent months, they have edged back up recently. That was partly due to the government decision to put off presenting the 2012 budget until after a regional election last weekend, in which it did worse than expected. Bond investors also worried that the general strike and protests might push the government to water down its reforms.

The yield on the benchmark 10-year bonds was at 5.4 percent on Friday, up from 4.96 percent a month ago. By contrast, the interest rate on the equivalent German bonds — considered the safest in Europe — was only 1.82 percent.

The austerity package will draw money out of the Spanish economy at a time when it is entering recession for the second time in three years.

Many economists in Madrid say that, for the time being, Prime Minister Mariano Rajoy is clearly governing more with an eye to satisfying investors and officials in Brussels — by reducing the deficit from 8.5 percent in 2011 to 5.3 percent this year — than avoiding criticism at home.

"Spain is in a very difficult situation," said Olli Rehn, the EU Commissioner for Economy and Finance at the ministers' meeting in in Copenhagen, Denmark.

"But on the other hand Spain has many strengths and now it's important that Spain will continue with consistency in order to improve the sustainability of its public financing, and to boost such kinds of reforms that will help economic growth and employment in the country," he said.

Jan Olsen in Copenhagen, Denmark, contributed to this report.

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