EU backs 10 percent wage cut for Spain

The European Commission's Vice President has come out in favour of an International Monetary Fund plan to slash Spanish salaries in a bid to spur jobs growth in the crisis-hit country.

EU backs 10 percent wage cut for Spain
Spain needs to reallocate resources from construction into more productive uses like exports, says European Commission Vice President Olli Rehn. Photo: Georges Gobet/AFP

The International Monetary Fund (IMF) caused a stir recently when it said Spain should look at cutting wages to boost jobs growth.

The country was facing structural unemployment of up to 18 percent at the end of the decade, the organization said, touting "faster wage adjustment" as a way to bring down job losses.

To back up its case, the IMF suggested Spain could cut wages by ten percent, and suggested this would lead to increased exports and a 5 percent rise in GDP over three years.

The organization also said such a move would push down unemployment drop by 6 to 7 percent by 2016.

The IMF proposal was, however, shouted down in Spain with unions and political parties across the spectrum coming out against the proposal.

But the Europe Commission's second-in-command Olli Rehn has now come out in support of the IMF wages proposal in a blog piece published on Tuesday.

In the article, the Finn, also the European Commissioner for Economic and Monetary Affairs and the Euro, gave the European economy a gentle pat on the back.

"Most recent data provided by forward-looking economic indicators tend to point to an improved outlook," said Rehn.

Spain also came in for some praise with the top economist citing the country's one percent trade balance surplus in 2012 and recent improved jobless figures.

But Rehn stressed unemployment remained "unacceptably high" across Europe and that a "rebalancing and reform" of the European economy was "clearly underway".

Spain now needs to "reallocate its resources from the non-tradable sectors, notably construction, to more productive uses, notably the export sector", the European Commissioner said.

Rehn also backed the IMF proposal for broad-based ’social agreement’ between "employers and trade unions on an internal devaluation".

This would see "employment increases (and price cuts)" in exchange for unions giving the green light to "significant further wage moderation".

"Such a rise in employment and lower inflation would boost consumption growth," said the European Commission's Vice President.

Rehn recognized the political difficulties of such a plan, but argued it "would be worth a serious try, for the sake of those millions of young Spaniards who are currently unemployed ". 

The economist concluded by citing the examples of Ireland and Latvia as examples of economic reform and internal devaluation. 

Rehn's analysis is unlikely to be welcomed by Spain's unions.

Maribel Ballesteros from the Basque wing of Spain's major UGT union has already called the IMF plan "outrageous", saying previous wages cuts in Spain had not created jobs growth.

Similary, Fernando Lezcan, Secretary for Organization and Communications from the general workers union the CCOO, said it was higher wages that would reactivate the economy.

Lezcan told Spanish news agency Europa Press that IMF predictions for Spain were in stark contrast to the "triumphalist" pose of a Government which was saying the country was coming out of the recession.  

Some 63.3 percent of Spaniards earn less than €1,200 ($1,600) a month according to figures from Spain's social research body, the CIS. 

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