SEPTEMBER 22, 2010.

Europe Debt Crisis Is Over, Declares Spanish Leader

By SANTIAGO PéREZ

NEW YORK—Spanish Prime Minister José Luis RodrÃ*guez Zapatero declared that the European debt crisis is over but said that the governments have to work better together and with markets to stave off such events.

"I believe that the debt crisis affecting Spain, and the euro zone in general, has passed," Mr. Zapatero said in an interview with The Wall Street Journal on Tuesday.

One lesson learned from the market turbulence that hit the euro zone in recent monthsis that a single monetary policy isn't enough for the European Union, Mr. Zapatero said. "We require further convergence to boost competitiveness, and stronger principles to implement balanced economic and fiscal policies."

Mr. Zapatero, who said he expects no contractions in gross domestic product in coming quarters, offered a robust defense of Spain's economy and the austerity package he has pushed through Parliament.

Another lesson that emerged from the crisis is the need to push for greater economic policy coordination within the European Union.

Earlier Tuesday, the Spanish leader met with senior executives from major U.S. financial-services companies and investment funds to talk about Spain's economy, in an effort to shore up investor confidence on the country's fundamentals.

Mr. Zapatero said his message is that "confidence has been restored," particularly after the country released results of tests that evaluated the soundness of its banking system in late July. The risk aversion toward Spain has also subsided as the government has shown progress in reducing its deficit. Spanish banks' reliance on European Central Bank funding fell in August from record highs in June and July as international capital markets started opening up again for Spanish institutions.

Interview Excerpts
On Spain and the crisis:

"It's evident that the Spanish government has taken decisions that, in our opinion, are essential to confront the challenges that the Spanish economy faced during the crisis.

There's a contradiction (in perceptions), because Spain's financial system has been among the best resisting the crisis within the euro zone.

In spite of the real estate crisis, banks stood like rocks due to solid provisioning and the strictest bank supervision within the euro zone."

On Obama:

"As president of the world's most powerful nation he talks to other leaders with great respect and humility. He understands international relations as a multilateral issue."

On Afghanistan:

"I was always against the Iraq invasion, but always supported the intervention in Afghanistan.

Spanish troops will remain in Afghanistan. The work needs to be completed to end violence and terrorism."

On France's Sarkozy and Roma:

"President Sarkozy explained his deportation policy affecting citizens from Romania and Bulgaria. Some of them were Roma, some others weren't .

They haven't been deported because of their ethnic origin.

The measures were adopted within the rule of law. Integration principles must work, but also public order must be respected in suburban settlements lacking sanitary or security conditions."
.Mr. Zapatero reiterated his government's commitment to economic reform and fiscal austerity, including plans to cut the country's budget gap to 6% next year and to 3% in 2011. The gap is forecast to be 9.3% in 2010.

Spain plans to cut spending at its ministries by 15% to 16% next year. Mr. Zapatero's government plans to submit its 2011 budget proposal to Parliament in coming days. Negotiations to pass next year's budget plan are well advanced in Parliament, he said.

A gaping budget deficit and weak economy left Spain vulnerable to the spread of the Greek-centered sovereign-debt crisis earlier in the year. As Spain's financing costs surged to levels not seen since the creation of the euro and credit dried up for many Spanish companies, Mr. Zapatero also is pushing a fiscal-adjustment plan that included spending cuts to reduce Spain's budget deficit.

Spain reported a total public-sector deficit equal to 11.2% of gross domestic product in 2009, nearly four times the 3%-of-GDP limit for European Union countries, coming under intense pressure from the EU and financial markets to rein in this deficit.

The Socialist prime minister abandoned an earlier pledge to not make any changes to labor laws not backed by unions and pushed in Parliament an ambitious overhaul of archaic regulations that economists say are a drag on growth.

The long-awaited overhaul of labor laws is expected to help cut unemployment and spur economic growth. The changes aim to encourage hiring by reducing Spain's high cost of dismissal and giving companies more flexibility to reduce working hours and staff levels in economic downturns.

The change has come at high political cost for Mr. Zapatero, who has seen his standing fall in opinion polls and who faces a general strike on Sept. 29 called by unions to protest the government's overhaul of labor laws.

The country is also grappling with the collapse of a decadelong housing boom that pushed the economy into a deep recession with an unemployment rate of 20%. Its economy returned to weak growth in the first and second quarters of this year after six consecutive quarters of contraction.

Write to Santiago Perez at santiago.perez@dowjones.com

http://online.wsj.com/article/SB1000142 ... 04198.html