The New Europe's Front Runner Stumbles

The flaming arrow that lit the huge Olympic torch in Barcelona was a fitting symbol for Spain's own rise as the new Europes hottest economy. But now, it looks as if the Olympics and the Expo '92 world's fair in Seville this summer may mark the high point of Spain's glory. Thats because the country's drive toward Europe's front ranks is sputtering.

After the athletes fly off to other climes, Prime Minister Felipe Gonzalez Socialist government will face its sternest test since it took over in 1982curbing rising inflation and soaring budget deficits as hot growth cools. The huge boost from Gonzalez bringing Spain into the European Community in 1986 is finally wearing off. Spain's 5% economic growth and attractiveness to foreign investors have long been the envy of its European partners. But this year, the economy will probably expand less than 2%not enough to keep sky-high 17% unemployment from rising.

The deteriorating economy could take some of the luster off Gonzalez golden reputation and knock Spain off course from becoming a key player in the emerging new Europe. Gonzalez, who has reshaped Spain in his own technocratic image, is facing parliamentary elections, which he must call by the fall of 1993. While only one-third of Spanish voters now approve of Gonzalez performance, analysts do not think he is in danger of being toppled. Still, the socialists could lose their absolute majority and their free hand. "I can't see any way the government is going to turn around the economic trend in time for elections," says a Madrid economist.

Growing pessimism about European economic union is compounding Gonzalez problems. Perhaps more than any of its European partners, Spain is economically dependent on European integration. The reason: Spain's hopes of persuading investors that its economy is solid have rested on last year's Maastricht Treaty, which forces European leaders to bring budget deficits, inflation, and interest rates in line. Gonzalez has used the EC targets to beat down union demands for higher wages.

So when Danish voters rejected the treaty in June, it was bad news for Spain. In the ensuing weeks, falling investor confidence has pushed up interest rates, sunk the Madrid bourse to 13% below its 1991 yearend level, and put downward pressure on the peseta. Investors also know Spain could lose at least $11 billion in EC assistance over five years if the treaty is not ratified.

FRESH PASTURES. Already, Spain's wages, now rising at a 7.5% rate, are making Spanish investments less attractive and exports less competitive. German auto makers and Japanese electronics companies that have favored Spain in recent years are shifting investments elsewhere.

Responding to inflation worries, Gonzalez is trying to tighten fiscal policy. But Gonzalez is in a bind because he has already helped drive up inflation to the 6.5% range by spending an enormous $4 billion on the Olympics and Expo. Businessmen are adding to the pressure. Former governor of the Bank of Spain Jose Maria Lopez de Letona, argues that Spain has to act quickly to avoid getting out of step with Europe.

The prime minister's austerity program calls for higher withholding and value-added taxes and lower government spending. But it is not clear whether he will be able to stay the course. Already, the unions, whose support is key, are sniping at him and threatening a general strike in October, when a grand celebration of the 500th anniversary of Christopher Columbus' discovery of America is planned. The idea is to focus tourists and investors attention on Spain. But they may not come away with the image Gonzalez intends.

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