Yesterday in Congress, Prime Minister Mariano Rajoy gave Spain a taste of realism about labor reforms. "They will not have immediate effects" on employment this year, and employment will continue to rise. A report on the issue published yesterday by BBVA cited that 2,000 jobs would be lost daily in 2012 until 5.7 million are jobless by the first quarter of 2013. It seems like a contradiction that just when labor reforms are enacted, views for both employment and credit markets turn gloomier than ever.
There are several explanations. Juan María Nin, CEO of La Caixa, has clearly stated that the financial reform will enable banks to deleverage and reduce debt balances from 1.8 billion to 1.4 billion euros during the next six years, a reduction of 22%, which could be even greater if measured in terms of new credit.
With less money circulating, it will be challenging to allocate funds to newer, more productive business and to create jobs. Not to mention, mergers within the banking industry will ultimately increase employment as well. Further, UBS estimates that the total cost of the cleanup will be greater than the 50 billion euros that the Spanish government estimates and could reach up to 100 billion euros. This means that the current financial reforms are not sufficient and that the lenders will have to support each other during a long, hard process of absorbing and managing assets. Credit will not return in the near term. Realistically, Spain needs faster and deeper changes within the labor and financial sectors.