Spain: Off To A Slow Start

Painful reforms in Spain may require tougher leadership

Rodrigo Rato, now Spain's Economics Minister, chatted with a French economist before the Mar. 5 elections which brought Spain's conservative Popular Party to power and ended 14 years of Socialist rule. Rato "promised to avoid the mistakes of French conservatives," recalls Patricia Lormeau, an economist at France's Banque Paribas. When the French right replaced Socialists last year, its leaders frittered away a mandate for change by acting too slowly. Now, Lormeau fears Rato and his boss, Prime Minister Jose Maria Aznar, are catching the French disease. "What they're doing helps," she says, "but these are just small strokes."

Those who hoped, like Lormeau, that the new regime would quickly come to grips with Spain's economic problems--and perhaps build a model of competitiveness for the rest of Europe--are growing uneasy. So far, Aznar has made just a few changes in such things as taxes and housing (table), and he seems less than eager to tackle the tougher issues. Spain's main weaknesses are a deficit-ridden social-welfare system and rigid labor regulations, which make layoffs expensive and thus discourage hiring. Unemployment is 23% and may get worse because the economy is slowing. But Aznar says that he won't touch welfare. And he'll leave labor issues to employers and unions. At an initial meeting of unions and managers in mid-June, the unions staunchly opposed change.

EASING GRIDLOCK. To move Spain toward a free-market economy as promised, Aznar vows to speed up privatization. Yet he has indicated that he will drop a Socialist plan to open up telecommunications in 1998. Instead, he'll choose a single, home-grown company--satellite ground-station operator Retevision--to compete with monopoly Telefonica de Espana. Both companies, now state-owned, will be privatized. But U.S. and European telecom operators that have been eyeing Spain are unhappy with this change, which delays their entry.

Aznar has excuses for disappointing those who expected rapid change. After failing to win a parliamentary majority, it took him more than a month to negotiate an alliance with a regional party from Catalonia, the Barcelona region. His deep cuts in inheritance taxes are largely to help preserve small family businesses, the mainstay of the Catalan economy.

Moreover, after years of Socialist gridlock, Spanish business leaders are delighted that things are moving at all. Aznar's measures so far, especially a low capital-gains tax, are "very positive for investment and economic growth," believes Gonzalo Hinojosa, chairman of clothes retailer Cortefiel. He thinks this tax reform will help capital circulate more easily into productive investment, and free money that consumers may spend in his stores. It may also lift the Madrid bourse, where prices have risen 15% since Aznar's electoral win.

A bouncier bourse, in turn, will help Aznar's plans to spur privatization. Economics czar Rato--a free-market economist with a PhD from the University of California at Berkeley--is working up plans to sell the remaining government stakes in oil producer Repsol, electric utility Endesa, and Argentaria, a large bank.

ENLIGHTENING UNIONS. Some observers worry that the new government won't do enough to cut budget deficits. Last year, deficits hit 5.8% of gross domestic product, far above the 3% goal of the Maastricht Treaty on monetary union, which Spain is unlikely to meet. Although Aznar plans to slash state spending this year by $1.5 billion, his tax cuts may cost at least that much in lost revenue. However, analyst Jose Maria Castellan of Madrid brokerage F.G. Inversiones thinks the economic stimulus will offset part of this loss.

More reforms are coming that will push Spain toward the mainstream of global capitalism, Rato says. On the crucial labor front, some observers hope that Aznar's hands-off attitude, leaving it to the unions and management to start talking about such issues as the costs of layoffs, will help avoid a painful aspect of last year's French disease. In France, bitter labor strikes erupted when a late-acting government decided to impose changes such as pension cuts with little consultation. "Spanish unions are blind about the situation--we must first open their eyes," says Hinojosa of retailer Cortefiel.

Maybe so. But painful labor reforms, which Spain's Socialists promised for years without delivering, may require firmer leadership than Aznar seems inclined to exert so far.