By Paul Day MADRID

SPAIN'S Socialists are likely to ignore any labour union protests and push through a reform to de-link wage increases from inflation in a new effort to placate markets sceptical over long-term economic growth prospects.

Prime Minister Jose Luis Rodriguez Zapatero is enjoying the warm glow of a consensual pact with unions and business heads over pension reform at the end of January, but the honeymoon will be short lived as talks turn to an overhaul of collective bargaining.

In Spain, the collective bargaining process has unions negotiating wages for entire industrial sectors rather than on a company-by-company basis and sets inflation as a benchmark for hikes. Zapatero knows his drive to make Spain a more competitive euro zone economy will fail if he can't overturn wage indexation, and has said he's willing to follow Germany and France in their crusade for a trans-European competitiveness pact.

“Spain has not cared about the long-term for too long. Competitiveness is the elephant in the room. The underlying problem is that, when you have a large current account deficit, you're over-spending as a country. You can do that for a while, but not forever,” economist at ING Martin Van Vliet said. Since the creation of the euro zone Spain's consumer prices, inflated by the economic boom, have been persistently higher than their monetary peers at around 3 percent compared to the European Central Bank goal of near to, but less than, 2 percent.

As prices rose, wages followed close behind.
Spanish wages rose by an accumulated 20.8 percent from 2003 to 2008, according to Spanish university IESE figures, compared to just 9.7 percent in Germany and an EU average of 18.7 percent. “With the ECB warning that the inflation outlook ‘could move to the upside', and hinting that rates could rise despite the fragility in peripheral Europe, any sign of inflation-busting wage hikes would have been a big red flag for government bond markets” said economist at M&G Investments Jim Leaviss.

Zapatero has shown over the last year he is willing take painful steps to avoid further punishment by international debt markets and, even if he cannot bring the unions on board, he will have no trouble getting the reforms onto the statute book thanks to small-party support in parliament.

However, he could pay a heavy price in public support, with a general election just over a year away and his popularity already decimated by a slew of austerity measures.

The premium investors demand to hold Spanish over German debt has soared to euro zone era highs in the last nine months on concerns Spain would be forced to follow Greece and Ireland in applying for EU-backed aid.

Under pressure, the Socialists forgot their traditional union ties, cutting civil servants wages by 5 percent as part of measures worth around 50 billion euros and unilaterally pushing through a labour market reform.