Spain: Gonzalez Seems Doomed By Scandal And A Sick Economy

Spanish Prime Minister Felipe Gonzlez seemed calm and self-assured on July 27 when he pleaded for his political life before parliament and a nation glued to TV screens. Gonzlez had called a special parliamentary session to answer charges that he condoned the assassination of Basque separatists in the 1980s.

For now, the Socialist Premier's centrist allies won't abandon him. But as Madrid office workers linger in cafes to argue politics these hot afternoons, no one doubts that the 13-year rule of Spain's only leftist leader since the death of Franco is almost over. Spaniards, who once loved the dashing Gonzlez and grew richer in the early years of his administration, are now sick of 22% unemployment and scandals that include influence peddling and pilfering public funds. At his allies' insistence, Gonzlez promises elections by mid-March. They may come sooner, if the Basque scandal worsens. At this point, the right seems bound to win. The "deadweight" of corruption dooms the Socialists, says Domingo Garca, economist at the Madrid Stock Exchange.

"OLD WAY OF THINKING." Should the right win, Spain's new ruler will almost certainly be Jose Mara Aznar, a slight, mild-mannered former tax inspector who heads the conservative Partido Popular. Nicknamed "El Bigote" for his big black mustache, Aznar has skillfully moved his party from its extremist origins in Franco's Spain to a center-right position. Aznar, 42, will use a "shock plan" to rejuvenate the sickly economy, promises Cristbal Montoro, the PP's economics specialist in parliament.

Many of Aznar's plans ape those of France's new conservative regime. Aznar would cut employers' social taxes from 27% to 24% over five years. He would loosen stiff labor regulations, which inhibit hiring and discourage foreign investors, who nowadays often prefer the lower costs of Eastern Europe, Portugal, or even Morocco over Spain. Aznar would privatize state-owned companies faster and try to switch part of the state pension system to the private sector. He also wants to cut the top personal income tax rate from 56% to 40%, while raising the corporate rate from 35% to 40%. All this assumes workers don't stage strikes, which they have done before to slow Socialist reforms.

Some observers see Aznar loosening state spending to create jobs, even though higher deficits could jeopardize the country's early admission to a European monetary union, one of Gonzlez' cherished goals. "Fiscal policy might be relaxed," predicts Giorgio Radaelli, a Lehman Brothers Inc. economist in London. Not so, claims the PP's Montoro. "Spain has high interest rates, so we can't have expansive budgets," he says. "That's the old way of thinking."

RECORD STOCK HIGHS. Voters still face months of turmoil before an election. On July 28, a state investigator found enough evidence of a Gonzlez role in the Basque killings to ask Spain's supreme court to consider formal charges against him. The Prime Minister, meanwhile, has just assumed the six-month rotating presidency of the European Union. He may try to deflect domestic flak through EU initiatives. The Socialists may also highlight the admitted roots of Aznar's party in the Franco dictatorship, even though Aznar himself was only 22 when Franco died.

Neither Spain's turbulent politics nor a once soaring economy that's limping along at a 2.6% growth rate have fazed portfolio investors. Stock prices have hit record highs recently--probably because a switch to conservative government is taken for granted, says the stock exchange's Garca. After the scandal and impotence that have marked Gonzlez' rule in recent years, a new regime seems a happy prospect indeed.

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