Spain’s unemployment rate rose above 20 percent for the first time in more than a decade, undermining Spanish Prime Minister Jose Luis Rodriguez Zapatero’s fight to cut the euro region’s third-largest budget deficit.
The jobless rate rose to 20.1 percent in the first quarter from 18.8 percent in the previous three months, the Madrid-based National Statistics Institute said yesterday.
The rate is above a median forecast of 19.8 percent in a Bloomberg News survey of 10 economists.
PHOTO: REUTERS
Spanish unemployment is the highest in the euro region and double the average rate in the EU, separate data from the EU’s statistics office showed.
Spanish borrowing costs have surged in the past two weeks on concern the country will struggle to push the deficit below the EU limit of 3 percent of economic output.
Standard & Poor’s (S&P) cut Spain’s credit rating on Wednesday, saying the government was underestimating its fiscal problems and overestimating growth prospects.
Adding to public spending, Zapatero has extended benefits for the long-term unemployed.
“The government’s scenario is a bit more optimistic than what we’re seeing, so the welfare costs for the unemployed are going to be higher,” said Jesus Castillo, an economist at Natixis in Paris. “If they don’t take new measures the 3 percent deficit target is not going to be met.”
The extra yield investors demand to hold Spanish debt rather than German equivalents fell to 97 basis points today from 99 basis points on Thursday. The premium reached the highest in more than a year over the past week.
Spain’s budget shortfall — 11.2 percent of GDP — was the third-biggest in the euro area last year, trailing only Greece and Ireland.
S&P said it expected the Spanish deficit to stay above 5 percent in 2013, the year the government has pledged to cut it to the EU’s 3 percent limit.
EU officials are speeding up efforts to agree a bailout package for Greece as the market turmoil caused by its fiscal crisis spreads.
In an interview published in the Cinco Dias newspaper yesterday, Spanish Finance Minister Elena Salgado urged European colleagues to be “clearer and faster” in lending aid to Greece as the situation is “generating instability” that’s affecting Spain.
S&P expects Spain’s economy to grow an average of 0.7 percent a year through 2016, and sees the jobless rate reaching 21 percent this year. The government, which says unemployment is peaking, forecasts 1.8 percent expansion next year, accelerating to 3.1 percent in 2013.
“I suspect employment will continue falling for most of the rest of this year,” said Ben May, an economist at Capital Economics Ltd in London. “Clearly it has knock-on implications for fiscal policy.”
The government has extended unemployment benefits for the long-term unemployed and 80 percent of those out of work receive some kind of subsidy, Labor Ministry data shows. Zapatero has pledged to maintain welfare payments even as he works to cut the budget shortfall.
Spain has some of the highest firing costs for open-ended contracts in Europe, the World Bank’s Doing Business Index says, while around a quarter of the country’s workers have temporary contracts.
The Bank of Spain says a labor-market overhaul is “urgent” as high unemployment poses a risk to banks and the Socialist government has pledged to change labor legislation after talks with unions and employers.
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