News

Spain''s prime minister, who has so far shied away from painful structural reforms opposed by the trade unions, is under new pressure from European colleagues to slash spending again to tackle his country''s economic crisis.

European Union and International Monetary Fund officials pledged $1 trillion of emergency aid to weak euro zone countries early on Monday, in return for action on public finances by Jose Luis Rodriguez Zapatero and his Portuguese counterpart.

"In Europe yesterday they read Mr Rodriguez Zapatero the riot act, they forced him to reduce the deficit," said Mariano Rajoy, leader of the opposition centre-right opposition Popular Party. "They have given him his homework."

A spokesman for German Chancellor Angela Merkel said Spain and Portugal -- whose public finances have caused the most concern after those of Greece -- would present more savings plans next week.

The Spanish government said it would not draw on any of the emergency funds but promised on Monday to cut the budget deficit by a further 15 billion euros ($20.13 billion), 0.5 percent of gross domestic product, by 2011.

The government has already promised to reduce its budget deficit to 3 percent of GDP by 2013 from 11.2 percent in 2009. "These measures (by the EU) offer the markets a truce," said Antonio Cabrera, an economist at Caja Madrid. "Now the ball is in the government''s court, not only to reduce the budget deficit, but also to adopt structural measures."

Financial markets were euphoric about the aid package on Monday, and the Madrid stock market jumped nearly 14 percent on relief at the EU/IMF plan.

But Zapatero has a long list of unachieved reforms, including long-demanded reform of the labour market to make it less expensive to hire and fire workers in an increasingly uncompetitive economy.

The government also appears to have backed away from raising the retirement age to 67 from 65 after union protests and it has not touched generous public sector wages.

Analysts say Zapatero''s biggest concerns are upsetting labour unions and his Socialist Party''s standing in the regions. Moving forward aggressively on reforms or more unpopular spending cuts could be especially risky for the ruling Socialists as Spain prepares for regional elections in the autumn. "There are some subjects which Zapatero won''t touch," said Juan Carlos Rodriguez, a researcher at the Madrid-based consultancy Analistas Socio-Politicos.

"Although it wouldn''t produce a short-term effect, a serious labour reform would be a signal of commitment, and we are not anywhere close to serious labour reform," he said.

Jose Ramon Pin, a professor at the IESE business school in Madrid, said Zapatero would feel the pressure from Europe and from powerful economic forces for reforms, but internal political pressures may be greater. "The truth is that the pressures (from Europe) have an impact on Zapatero but the greatest pressure is from members of his party who face municipal elections," he said.

Treasury Secretary Carlos Ocana said there would be no additional spending cuts than those announced on Monday. "It should not be forgotten that this adjustment is on top of previous cuts," Ocana told journalists. "I would not consider a greater adjustment reasonable."

Zapatero will provide details of the next budget measures to parliament on Wednesday and investors will have to wait until then to find out if more spending cuts are in the pipeline.

Many Spaniards fear that even though the economy has failed to rebound from recession for nearly two years, more austerity measures are imminent. "They''re going to rob the worker to pay for this, they''ll raise taxes, there will be less money and less work," said Juan Garcia Sanchez, a 57-year-old construction worker on a short-term contract for the town hall.