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In Spain, An Opportunity Lost


Economic Viewpoint

IN SPAIN, AN OPPORTUNITY LOST

Poor Spain. It needed a Margaret Thatcher in this election and got a Spanish version of John Major. True, the Socialists were defeated by the conservative Popular Party, but the new government has three problems: It has no vision, it has no mandate, and it has no power. The victory was razor-thin, and the PP will be at the mercy of the ousted Socialists or like-minded regional parties. In what is likely to be a brief spell in office, Prime Minister Jose Maria Aznar will not have the clout to truly reform Spain's economy.

The country is now at a political stalemate. Whatever coalition Aznar might build, it can only come at the expense of real market reform. Both potential allies from the Basque region and from Catalonia are firmly wedded to the welfare state status quo.

When the Socialists ousted the conservative leftovers of the Franco regime, they were immensely successful in creating a broad-based democracy. Europe was thankful to finally say goodbye to fascism and welcomed the vigorous, smiling young politician Felipe Gonzalez. But the price for peaceful transition was no rocking of the economic boat. Spain made the transition from fascist corporate welfarism to liberal state welfarism smoothly.

Joining Europe brought money and market access, which more than paid for the opening of trade barriers. But deeper reform in the labor area, in the welfare system, and in deregulating the formidable corporatist structure never came to pass. In fact, the trend in recent years has run in the other direction. For example, stores used to be closed on weekends under Franco. They were opened for shopping under Gonzalez' Socialist government. Now they are closing again.

For more than a decade, Spain has seen little growth. Every step of the way has been obstructed by regulations, small shopkeepers, professional associations, and unions. Any attempt to increase competition was perceived as a threat to jobs and vetoed.

LITTLE HEADWAY. Spain is in desperate need of economic reform. The budget deficit is 5% of gross domestic product, growth is slow, inflation is high, and unemployment is at an amazing 23%. In a survey on labor-market conditions, a majority of respondents said high unemployment was likely to be a permanent feature of the Spanish economy--and they may well be right. Between the unwillingness to make labor markets more flexible and the growing competition from low-wage Eastern European countries such as Poland and the Czech Republic, Spain is losing out.

The election could have made a difference, but it didn't. The Socialists fought tooth and nail to hang on to power and painted the right as a return of Generalissimo Francisco Franco. Economic themes did not run high, at least not in the specifics. It is clear that after the budget battles and riots in France last fall, a weak, conservative Spanish Prime Minister is unlikely to take on the labor Establishment or small business. And he is just as unlikely to take on the budget deficit, which gets an "F" on the Maastricht exams.

CRISIS COURSE. Most of Europe is carefully trying to move in the direction of more restructuring, more pressure on labor to give up impossible demands, more room for business to do what must be done to be competitive. Everyone in Europe denounces loudly the American way and points to Pat Buchanan's protectionist message as the inevitable outcome of too much free market, too much deregulation. But as they publicly complain, they quietly act to copy the American economic model. The case of France, where welfare reform is going forward, makes this plain.

Can Spain afford to hold off economic reform forever? The election provided a key juncture for the country to vote on modernization and a genuine prospect for making it in Europe. The stalemate outcome now means major political instability, Italian-style, as virtually any economic proposition becomes a vote of confidence in Parliament. New elections with an uncertain outcome will come perhaps as early as two months from now or as late as next year, when the new budget is announced.

The issue is no longer that the Socialists made a good transition from Franco-style dictatorship. That was decades ago. The conservatives, for their part, failed to recognize that a partnership with the regional parties on economic issues, at the sacrifice of some regional autonomy, would have built a beachhead for reforms here and now. As a result, Spain has lost the illusion that something can be done easily on the economic front. Now we can watch the spectacle of how, after the inevitable financial crisis down the road, change comes the hard way. The only question is: Who will be the Spanish Thatcher?BY RUDI DORNBUSCH


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