Spanish Lessons

By Stryker McGuire
Newsweek International - Feb. 2, 2004 issue

Jose Maria Aznar engineered Spain’s economic miracle. Can it last? You bet.

Forty years ago, Spain looked a lot like Mexico, only worse. The average worker earned just $443 a year, less than the average Mexican. In the countryside of Andalucia and Extremadura, women scrubbed laundry in riverbeds. Spaniards who could leave left; those who stayed behind faced bleak prospects. Between 1970 and 1995, not a single net new job was created; half the economy was agriculture. “In 1979 we had the same per capita income as Iraq,” says Finance Minister Rodrigo Rato. “That should tell you something.”

It does, especially if you’re sitting with Rato in the Madrid of 2004.

The capital’s broad boulevards are home to some of the globe’s most dynamic financial institutions, including two of Europe’s largest, Banco Santander Central Hispano and BBVA. Bars and restaurants burst with prosperity. The picture is similarly rosy in Spain’s second city, Barcelona, one of Europe’s most stylish—and most fun—metropolises (following story). With the economy booming—in stark contrast to the rest of Europe—it’s no wonder Spaniards these days are the most optimistic consumers on the Continent, according to surveys. Columnist Raul del Pozo of the newspaper El Mundo argues that Spain’s new golden age is an epic achievement—the greatest European economic leap forward since postwar France and Germany.

The man behind the good times, Prime Minister Jose Maria Aznar, is now set to leave the scene. (As a candidate in 1996 he vowed to serve no more than two four-year terms.) Elections are on March 14. Aznar’s time is up—but not Spain’s. Stability, both political and economic, was the hallmark of his era. It’s also likely to distinguish what comes next, whoever wins the election. The opposition Socialist Party has largely embraced Aznar’s pro-business reforms. And if his own Popular Party should win, as polls suggest, Aznar’s handpicked successor, Mariano Rajoy, will carry on. “Don’t worry,” says the political columnist Felipe Sahagun, jokingly. “Spain will be open for business.”

That means Aznar will likely be a happy retiree. Once dismissed as Don Nadie, Mr. Nobody, he took an economy that was just lifting off and made it soar. How? “There are no miracle recipes,” says Juan Iranzo, director of the Institute of Economic Studies. “There’s only economic orthodoxy.” And Aznar was nothing if not orthodox. He privatized nearly every publicly owned enterprise. He slashed taxes, twice. He cut public spending from 48 percent of GDP to 40 percent, reshaping a welfare state that ended up looking more British than Franco-German. And he balanced the budget by 2001, again —in contrast to others in the European Union.

Spain under Aznar has been the fastest-growing big economy in Europe. During the bullish “matador years,” as Spaniards took to calling Aznar’s tenure of the late 1990s, Spain grew an average of 4 percent a year. Today, it’s down slightly, to 2.4 percent, but that’s still four times as fast as the rest of the EU. Half the new jobs created in the Union last year were in Spain—and a third of the jobs created over the past eight years, a remarkable 4.5 million. Attracted to this new Spain, expats are returning and, perhaps more tellingly, other Europeans are seeing their neighbor in a new light. Says Jan Randolph, chief economist at the World Markets Research Centre in London: “Spain is the new princely peacock, after being looked down on by the northern Europeans as a poor Mediterranean country.”

Aznar could never have imposed his economic regimen if the country hadn’t been ready to accept it. Having endured Gen. Francisco Franco’s autocracy from 1939 until his death in 1975, says Rato, Spain has been “predisposed to change” ever since. “Because we have such a traumatic past, we’re very future-oriented,” adds Juan Iranzo, director of the Institute of Economic Studies in Madrid. Change has come in waves, beginning with a measure of economic liberalization under the first Socialist Prime Minister Felipe Gonzalez in the’80s and early ‘90s.

If Spain weren’t so open to innovation and change, the country’s post-Aznar prognosis would be less upbeat. Just last week the European Commission gave Spain a “poor” competitiveness rating. Inflation runs consistently higher than in neighboring countries. Per capita income still lags 13 percent behind the EU average. Despite the impressive number of jobs created, unemployment remains the highest in the Union—11.3 percent, though that compares with 24 percent a decade ago. Job-protection and income-guarantee clauses have made employers hesitant to hire. As a result, temporary jobs make up almost a third of total employment. Other medium- and long-term weaknesses tick away like time bombs: an aging population, inadequate investment in R&D, subpar secondary and university education.

Ironically, the greatest challenge could be the very process that helped launch Spain’s transformation: EU enlargement. Come May 1, 10 new countries will join the EU, just as Spain did in 1986. They will be eligible for subsidies that, for Spain, account over time for roughly 1 percent of GDP. Spain, meanwhile, will get less. Most economists are not concerned. “Subsidies do not explain why Spain has grown faster than Germany,” says Antonio Ciccone of the Centre for Economic Policy Research in London. He does worry, however, that manufacturing jobs will be lost to the new EU members of Eastern Europe, with their skilled work force and lower wages. Already companies such as Samsung and the automaker SEAT have begun to make the move. “You’re going to see a parade of those stories,” says one economic attache in Madrid. “Spain is now the fifth largest automobile manufacturer in the EU. That’s not going to be true in five years.”

Alejandra Kindelan, chief economist for Banco Santander, is far more sanguine: “Spanish companies have demonstrated creativity and strategic thinking in the past. They will again.” Not so long ago, such cool confidence would have been unthinkable in Spain. “In one generation this country has turned itself completely upside down,” says Rato. It’s important to remember, he adds, that Spain’s rebirth came not through turmoil but from what economists call “dynamic stability.” That was the great triumph of the former Don Nadie. If Spain is lucky, it will be his legacy.