By Andrew Hay and Daniel Flynn
MADRID/ATHENS, Jan 16 (Reuters) - European countries hit hardest by the global slowdown have opted to boost public spending and risk debt rating downgrades rather than stoke social unrest as their economic booms turn to bust.
Yet with unemployment soaring among young people and immigrants, faltering economies like Greece, Spain, Ireland and Portugal may struggle to avoid both outcomes.
Caught between the demands of investors and voters, governments in Athens, Madrid and Dublin have stuck to spending plans that will shatter European Union budget deficit limits.
"There is consensus that the only solution to this crisis is fiscal stimulus -- monetary stimulus is not working," said Federico Steinberg, an economist at Madrid's Elcano think-tank.
Many countries have used monetary policy, cutting interest rates to make it easier for firms and individuals to borrow money, and when that proved inadequate, turned to fiscal measures -- increasing public spending, even when this lifted their budget deficits and made the nation less creditworthy.
Greece paid the price of such a policy on Wednesday when Standard & Poors cut its credit rating, saying the country had failed to cut public spending and faced rocky growth. [ID:nLE498478]
S&P warned Spain, Ireland and Portugal of similar moves this week as the credit crunch worsened their economic outlooks. [ID:nLC477283]
The alert sent Spain's 10-year bond spread to the widest since the euro was introduced but brought a resigned response from Economy Minister Pedro Solbes, who said it was inevitable after Spain's rapid change of economic fortunes.
An EU government's bond 'spread' is the higher rate of interest that government has to pay buyers of its bonds compared with ultra-safe German bonds, reflecting how its economy is performing and hence how risky the bonds are.
Greece saw the consequences last year of enforcing unpopular economic policies when the police shooting of a teenager sparked the worst riots in decades as young Greeks demanded higher pay and a greater share of the country's prosperity.
Shocked policymakers from Lisbon to Dublin quickly told citizens that everyone in society would suffer during the global economic crisis, and everyone had to make sacrifices.
SHARING BENEFITS AND PAIN
Analysts like Steinberg say such statements will ring hollow, and could stoke tension, unless political leaders ensure that government aid is fairly distributed among those suffering from the economic crisis.
Governments' handling of economic problems has also sparked protests, some violent, in Russia, Bulgaria, Latvia and Iceland in recent days.
Among economies facing the greatest challenge is Spain, suffering its first recession in 15 years after the collapse of housing and credit booms. Spanish unemployment is the highest in the European Union and some jobless are losing their homes.
Spanish Prime Minister Jose Luis Rodriguez Zapatero, who remains ahead of the conservative opposition in opinion polls, is treading lightly.
The Socialist leader has shied away from labour reforms that could boost low economic competitiveness but might spark protests like those in Greece that preceded the 2008 riots.
He has won the broad support of the unions, which are close to the government, with over 70 billion euros in economic stimulus measures. S&P forecasts the Spanish fiscal deficit will remain above the EU limit of 3 percent of GDP until 2011.
Zapatero may run into political trouble unless he can convert stimulus plans into jobs, as unemployment is expected to top 4 million in 2009 after rising by one million last year.
There is concern he waited too long to admit the economy was in crisis and is doing little to ensure that up to 50 billion euros in credit from banks reaches households and firms.
"The problem isn't so much the actions the government took as guarantees they will have an impact," said Fernando Lezcano, spokesman for the COOO, Spain's largest union grouping.
Greece's government is in a trickier position after powerful unions vowed to overturn Prime Minister Costas Karamanlis unless he changes economic policies and rolls back privatisations.
The dismissal of Finance Minister George Alogoskoufis in a cabinet reshuffle last week helped the government trim an opposition poll lead, but Greeks are closely watching the performance of his successor, Yannis Papathanassiou.
Since Wednesday's S&P downgrade, Papathanassiou has said balancing the budget is not a top priority and he is more worried about social spending.
The change of tack did little to lift morale on the streets where Greeks will feel the pinch as growth dips to around 1 percent in 2009 after averaging 4 percent for years.
"The government has taken no measures for the coming economic crisis, either for employment or education," said Asimina Kotsou, 59, a public sector employee, who thinks the prime minister should quit. (Editing by Sarah Morris and Tim Pearce)