Spanish reform talks struggle

Spain is among the 'peripheral' countries whose debts have stretched unity in the single currency zone to the limit as the richer members, led by Germany, have been forced to set up a $1 trillion safety net.

European Central Bank policymaker Lorenzo Bini Smaghi of Italy accused Germany of exacerbating the crisis with alarmist language, and said Europe's predicament was an early signal of similar problems in other regions.

We could say that euro area tensions are the 'canary in the coal mine' of the challenges that policymakers worldwide are going to face, he said in the text of a speech to be delivered at a conference in Morocco.

He said financial markets were testing countries' ability to force through necessary fiscal corrections, and the problems facing Greece and other financially strained euro zone members were already spreading.

Just look at the screens and you'll see the contagion under way, spreading not only to peripheral countries but also to the largest euro area countries and through the financial system.

Spain's public debt is modest by the standards of Greece, Ireland or Italy.

But economists say cutting the cost of hiring and firing is vital if Spain is to regain competitiveness and achieve sustainable growth.

On Friday, Madrid revised down its growth forecasts and said unemployment would remain close to 20 percent.

The difficulty of combining fiscal cuts with economic growth was highlighted by HSBC group chairman Stephen Green, who said:

We may yet see further shocks to some Western nations as they come to terms with the reality of large national debts, while conditions will remain challenging for households and businesses alike, as long as jobs and growth remain elusive.

CLOCK TICKING

With swingeing budget cuts already announced in Spain under pressure from markets, the government must now try to broker agreement in the next few days between labor unions and business leaders who failed to reach a deal in bilateral talks.

If there is no deal by May 31, the government will ram through changes to labor laws anyway, said the parliamentary spokesman for the governing Socialists, Jose Antonio Alonso.

I am aware that things are not going too well and it is possible that the government will have to reform the labor market through a royal decree, he told Spanish radio.

Unions are already set for a one-day strike over public sector pay cuts for June 8, and said on Thursday that reform by decree would prompt a general strike -- piling pressure on a minority government already struggling to hang on to power.

It seemed to narrowly avoid being brought down on Thursday when parliament approved a vital 15 billion euro austerity package by just one vote.

However, Spanish unions had a limited turnout at their last anti-austerity protest, like other protests elsewhere in Europe that have failed to put governments under pressure, and Spanish government bond prices showed little reaction.

A Greek rally last week drew only half the crowd that turned out for a riot-scarred protest on May 5.

France signaled on Friday it would go ahead with plans to raise the retirement age after unions failed to rally enough street power against the reform of a costly pension system.

Whether one regrets or welcomes it, one must say the idea of necessary sacrifice is advancing, wrote the French left-wing daily Liberation.

Austerity programs and labor reforms are widely seen as vital to underpin the emergency $1 trillion safety net.

Greece, Portugal, Spain and Italy have all agreed to push through multi-billion euro savings despite fierce opposition.

Germany, furious at having to dig deep to help profligate nations despite the EU treaty's no-bailout clause, has insisted the mechanism is only temporary and does not breach the treaty.

It indicated on Friday that it would make permanent some of the bans on short selling of securities --- uncoordinated with euro zone partners that triggered falls in stocks and the euro last week.

ALARMIST

Bini Smaghi, one of the ECB's six-strong Executive Board, accused Germany of making the situation worse as it tried to win domestic support for aid to Greece.

In one large euro area country it was thought that public support for swift action could be achieved only by dramatizing the situation, for instance, by telling the public that 'the euro is in danger', he said referring to comments by Chancellor Angela Merkel on May 19.

But it was not realized that, in the midst of a financial upheaval, such words are like fanning the flames and that the cost of the support package could only increase following such dramatic declarations, he said.

World equities rose for the third day running and the euro was stable against the dollar as investors refrained from betting on further trouble in the euro zone ahead of a holiday in major markets.

(Additional reporting by Paris and Frankfurt bureaux and London Markets team; Writing by Kevin Liffey, editing by Mike Peacock)