The Peseta: Calm After The Storm

Despite Spain's improving economy, its financial markets languished earlier this year, as the peseta weakened and was officially devalued on Mar. 6. Now, however, the peseta has stabilized, and the stock market has hit a 1995 high with record volume, while bonds are rallying as well. Both foreign and domestic investors are showing enthusiasm amid strong first-quarter profits and continued economic gains.

Real gross domestic product rose at an annual rate of 3% in the first quarter, according to estimates by the Bank of Spain. That's in line with the 3% pace expected for all of 1995 and up from 2% in 1994. Exports, growing at a 20% annual rate, are fueling industrial output with help from business investment. Consumer spending still lags in the face of wage restraint, low confidence, and high--but diminishing--joblessness.

The peseta's new balance appears sustainable. Further interest-rate hikes to control inflation seem likely, and the Socialist government manages to hang on despite accusations of corruption. Also, the currency does well during the summer tourist months.

Risks remain, however, especially politically. The May 28 regional elections will shape the direction of Spain's much-needed fiscal reform, since regional governments have increasing sway in central government policy. Ruling Socialist Party Prime Minister Felipe Gonzlez wants a lean 1996 budget, but the Socialists are expected to lose ground in the upcoming elections.

The Socialist alliance with the center-right Catalan nationalists is showing cracks, and the main opposition, the center-right Partido Popular, is expected to gain. So chances for early general elections are rising, and the 1996 budget may be watered down, leaving the tough cuts to the next government.

The other potential spoiler in Spain's outlook is inflation. So far this year, wage demands are modest, and plenty of capacity remains idle--but pressure from both sources will grow next year.