Paul White, Associated Press
Spain's Prime Minister Jose Luis Rodriguez, left and Germany's Chancellor Angela Merkel review the honour guard during a one day summit between Spain and Germany, at the Moncloa Palace in Madrid Thursday Feb. 3, 2011.

MADRID — German Chancellor Angela Merkel on Monday praised Spain's recent moves to shore up its finances and avoid a bailout package like those taken by Greece and Ireland, suggesting that the risk is low for Europe's fourth largest economy to be forced into accepting rescue package.

Merkel said Spain took great strides forward by raising the retirement age from 65 to 67 for most workers last week, and by bringing government, unions and business leaders together in a united front this week with a pact promising further reforms to revive its fragile economy at the heart of Europe's debt crisis.

"Spain has really done its homework and I think it is on the right track," Merkel said after meeting for hours with Spanish Prime Minister Jose Luis Rodriguez Zapatero.

The latest reforms, which come on the heels of a host of other austerity measures imposed by the government, help "change the direction of Spain," she said. Spain in recent weeks has also taken steps to force savings banks bulging with property loans gone bad to boost their financial viability.

Investors have cheered the new government measures, sending Spanish stocks higher in recent weeks and lowering the cost for the government to issue debt.

But the government also announced this week that the number of people in Spain filing claims for unemployment benefits rose to a record 4.23 million last month as the country struggles to overcome recession. It said the total increased by 130,930 compared with December for a rise of 3.2 percent.

The government said last week the unemployment rate had surpassed 20.3 percent, a eurzone high. Joblessness is much higher in Spain for young adults.

The actual number of unemployed as of the end of 2010 is nearly 4.7 million. That's different from the claims number because jobless benefits have expired for many people.

Both Merkel and Zapatero warned that more financial reforms are needed to ensure that the 17-nation eurozone survives. Zapatero said Spain supports the idea of a new pact proposed by Germany and France aimed at enhanced economic cooperation of eurozone nations to promote uniform rules on debt limits and taxes.

European leaders will meet Friday to discuss the pact, but Merkel said she did not believe it will be finalized until March.

The controversial pact proposal has been widely leaked to the media and includes demands for countries to introduce "debt brakes" into their national constitutions, align retirement ages with life expectancy and other demographic developments, get rid of automatic salary increases in line with inflation, and find a common basis for corporate taxation.

"They are necessary measures with one sole purpose: To strengthen European competitivity," Merkel said."We're doing it for the good of our citizens and to guarantee their well-being."

Added Zapatero: "We must become more competitive, and reforms are needed."