MADRID, June 15 (Reuters) - Economists fear Spain, which was an outperformer in the euro zone for a decade, will not grow strongly again without painful economic reforms.
Following are key issues for investors in the country:
LABOUR REFORM
Business leaders and economists are almost unanimous in calling for Spain to reduce the high costs associated with hiring and firing staff, something which the Socialist government of Prime Minister Jose Luis Rodriguez Zapatero has rejected outright.
With unions threatening a general strike if worker benefits are reduced, the opposition conservative Popular Party has also been reluctant to propose detailed changes to labour legislation.
Economists estimate Spain, which had years of inflation at higher than the euro zone average, needs to become roughly 20 percent more competitive, a task made more difficult by the fact that as a member of the euro, Spain cannot unilaterally depreciate its currency against competitors.
UNEMPLOYMENT
At 18.1 percent in April, according to European Commission data, Spain already has the highest unemployment rate in the European Union as the low-productivity construction and services jobs created in the boom of the mid-1990s disappear. So far, soaring joblessness has caused little unrest, but economists fear the rate could go well over 20 percent.
GOVERNMENT SPENDING
Anti-crisis spending plans, which have turned swathes of many Spanish cities into mazes of trenches and building sites, will push up public debt by 15 percentage points of gross domestic product by the end of 2010.
If the markets decide that Spain's long term potential economic growth rate, and therefore its capacity to pay off that debt, has fallen, watch out for the bond market stepping in to limit future spending plans.
Ratings agency Standard & Poor's cut Spain to "AA+" from "AAA" in January, although rival agency Moody's said in June that its concerns over Spain were easing.
BANK RESCUE PLAN
Spain's economy will continue to suffer until the government approves a fund, said to be worth up to 99 billion euros, to bail out troubled savings banks. Talks between the Socialists and the opposition Popular Party, whose support in Congress is necessary to approve the fund, are bogged down.
The opposition wants to cut the power of regional governments in the savings banks, which are largely unlisted and were heavily exposed to property developers.
Another issue affecting all banks, including the listed giants, is the slow rise of bad debts as unemployment goes up and householders are unable to pay off their mortgages. Bad debt levels in Spain could rise to 7-8 percent of all loans by the end of 2009, up almost four times from a year earlier, according to consultancy PriceWaterhouseCoopers.
POLITICAL DEBATE
Even some politicians say Spain suffers from a lack of debate on vital issues, including the financial relationship between central and regional governments, the state of the education system, and inefficient public services.
One measure of the depth of economic suffering in the country will be whether public figures work up the courage to bring these matters to the fore.
(Reporting by Jason Webb; Editing by Andrew Torchia and Janet McBride)