By Jason Webb
MADRID, March 26 (Reuters) - Spanish companies and unions have struck deals in the past to make the country more competitive and now they agree they urgently need to do so again -- but their recipes for saving the nation from years of economic misery are radically different.
In pre-euro days, Spain would devalue its way out of economic slumps, but the world financial crisis now finds it singularly ill-prepared, following a decade in which its growth was based on cheap debt, low-skilled labour and building houses which now stand unsold in their hundreds of thousands.
With joblessness already hitting 15 percent, almost twice the level of its pre-crisis low in 2007, continuing rises in unemployment will push Spain towards Depression levels.
"What can Spain do? It needs to become more competitive, but it can't have a devaluation, because it's a euro country. So the only alternative is wage cuts, which are desperately hard to achieve," wrote Nobel-Prize-winning economist Paul Krugman on his New York Times blog, adding that the alternative to cutting costs is years of stagnation.
He estimated that Spain has to cut its costs by 15 percent to become competitive again, after years in which it ran higher inflation rates than its euro zone peers. Together with the strong euro, this has made Madrid a more expensive city to live in than London, according to the Economist Intelligence Unit.
Avoiding strikes and social strife whilst making it cheaper to do business here will be immensely difficult. But Spain does have precedents for grand deals between government, business and unions, and all these sectors are now pinning their hopes on reaching a similar sweeping bargain.
One of the two major unions, Comisiones Obreras, wants an
agreement with business which will switch the economy's focus
from construction to productive industry. And Francisco
Gonzalez, chairman of the country's second-largest bank BBVA
"This requires effort, sacrifice and involvement from all sides," Gonzalez said at a shareholders' meeting.
"Our country has done it before. It did it 30 years ago, and it can do it again," he said, shortly before facing questioning from shareholders about whether a man with a 16 million euro compensation package was doing his own share of belt-tightening.
STRIKE NOT ON AGENDA
The Socialist government is sponsoring talks between business lobby CEOE and the main unions. The companies want tax cuts and for hiring and firing to be made cheaper, while the unions want workers' benefits protected, but, so far, both sides are playing down talk of any confrontation along the lines of the general strikes hitting France.
"At this time, protests and general strikes aren't on the agenda," said CEOE Secretary General Jose Maria Lacasa.
Comisiones Obreras has backed away from earlier threats of a strike if benefits are cut, and says it wants to give talks with companies a chance.
Comisiones Obreras' chief economist, Miguel Angel Garcia, agreed that Spain's wage costs were a problem but argued that businesses have to make sacrifices as well as workers.
"The price of goods or services is not only a product of wage costs," said Garcia, "It is also a product of the returns on capital, which in Spain are pretty high."
While it is relatively expensive and difficult to fire someone in Spain, wages are much lower than in Britain or Germany despite the high cost of living, and a majority of workers earn 1,300 euros a month or less.
During the boom years from 1997, the proportion of gross domestic product given to wages fell by more than 2 percentage points, as workers funded much of their consumption with debt.
At the same time, Spain's corporate sector grew enormously,
with many of its leading players, like Banco Santander
Whatever Spain does it will be painful. But at least has some Spain's advantages over fellow euro zone problem economy Italy, which is even less competitive and has much higher levels of public debt.
Charles Dumas of Lombard Street Research, who said the euro meant Spain was effectively 10 percent overvalued, said the country had a good chance of cutting costs, and a much better chance than Italy.
"The experience of Germany in the early part of this decade is that if you really grind the economy down you can actually recover competitiveness quite fast," he said.
"So the question is 'can Spain and Italy do that?' And the answer is, starting from 10 percent over the top, and with very strong determination to be part of core Europe on the part of the Spanish .... you can reasonably guess that the Spanish will bite the bullet and do the necessary," Dumas said, adding that he thought Italy would fail. (Editing by Toby Chopra)