Reuters Spain's new government will unleash a wave of spending cuts and strengthen economic reforms in the first months of its legislature, moves that will throw the economy back into recession and send unemployment higher before making things better. Polls show the center-right People's Party storming to an absolute majority in the parliamentary election on Nov. 20, sweeping aside the seven-year-old Socialist government blamed for a deepening crisis and high unemployment. The task facing the PP will be to assure markets that Spain will continue to do everything to meet its pledges to shrink the deficit, while stimulating a stagnant and worsening economy being hit hard by the European debt crisis. While cutting the deficit remains a key target, at home both parties focus on reducing unemployment as the main aim. But a much deeper reform of the labor market, which the PP plans, and even tougher cuts needed to meet deficit targets in the year ahead, will help push the economy into recession, and send the 21.5 percent unemployment rate higher in the short-term. “The first half of the year will be hard because they will have to cut brutally. It will be the hardest we've seen in the crisis,” said Pablo Vazquez, director of economic think-tank FEDEA. He believes the PP must take radical moves to make Spain more competitive. Rigid labor laws, expensive severance pay to lay off workers, high regulatory compliance costs and salaries tied to inflation all make Spanish companies less competitive. “It will be a painful process, but if it's done well Spain will come out of it stronger and it well help the eurozone.” He said a short-lived recession was possible over the coming quarters, in line with other eurozone countries, although Spain's economy will be hit further by new cuts and reforms. Even PP think-tank FAES recognized that Spain's economy will not see decent growth until after 2012 and 2013. PP leader Mariano Rajoy has warned he will “take the scissors to everything except public pensions, health and education.” Top on the agenda he said would be a restructuring of government administrations, including the possible closure of public foundations and works, with a freeze on hiring too. The economy stagnated in the third quarter and many analysts now forecast a contraction by year's end as a global downturn bites into exports that had supported a feeble recovery. In 2008 Spain's economy fell into a recession that was fiercer than that in other European countries thanks to the bursting of a housing and construction boom. Unemployment soared from 8.6 percent at the end of 2007 to more than 21 percent currently. For a decade previously Spaniards had piled into a booming housing sector in a binge fueled on cheap bank credit at a time when low eurozone interest rates stimulated prices in southern European countries. The PP has said it will intensify a restructuring of the banking sector to assure markets have confidence in the country's banks, and capital flows again to businesses. __
