A SUPPLEMENT TO EUROMONEY/JUNE 1996The tasks of governmentBy conceding power to regional parties, Spain’s government may find it more difficult to make it into European monetary union. Jules Stewart reportsOn the day Spain’s centre-right government took office, it found out the hard way the high cost of shooting from the hip. Even before he was sworn in, foreign minister Abel Matutes said in an interview that if Spain failed to meet the Maastricht convergence criteria on time, the clock should be stopped to allow it a chance to catch up.The market scratched its head and pondered the implications of this Eurogaffe. But it reacted swiftly and mercilessly the following day, when finance minister Rodrigo Rato, pressed for a comment on his colleague’s remarks, said he believed the foreign minister’s statement to be “realistic”. In two hours the benchmark 10-year Bono was down half a point and the Deutschmark exchange rate fell from 83.4 to 83.85. “They [the new government] have spent the last 13 years in opposition saying whatever was politically expedient and knowing that it would have no impact abroad,” says a Spanish banker. “Now they’ve learned that it’s a different ball game. It was a painful lesson.” Prime minister José María Aznar, a former tax collector, is determined to convince the world at large that Spain will not slacken until it becomes a fully-fledged partner in an integrated Europe. But the Popular Party’s victory in the general election last March was narrower than forecast and the markets gave a sceptical reaction when Aznar negotiated an alliance with Catalan and other regional nationalist parties to ensure a clear parliamentary majority. The new government was forced to concede fiscal and economic powers to regional supporters in exchange for votes – an arrangement similar to the one former socialist prime minister Felipe González struck with the Catalans to hold onto power until last month. Commenting on this uncomfortable relationship, strategist Kit Juckes at NatWest Markets in London says that economic austerity measures and regional autonomy make for “uneasy bedfellows”. But Aznar is committed to Europe and to domestic reform. He has stated that all government policies, whether economic or political, will be aimed at reducing the budget deficit. Two days after taking office the government announced Pta200 billion ($1.6 billion) in spending cuts for the current year and expressed confidence that Spain could reduce its budget deficit from 5.7% to 4.5% of GDP in the current fiscal year and meet the Maastricht target of 3% in 1997. One of Aznar’s most enthusiastically-applauded appointments was that of José Barea, the man directly entrusted with the task of controlling the state budget. The 73-year-old professor of economics has served Spanish leaders from the late General Franco to socialist González. Barea heads the newly-created Office of Budget Control and reports directly to the prime minister. Barea has never been known to mince his words. His initial assessment calls for Draconian measures that include the removal of tax breaks, closure of public companies and a freeze on the civil service payroll and wages. “The Pta200 billion in spending cuts is not enough,” says Barea. “It has to go beyond that – and in this year. The social security deficit alone was forecast at 0.3% of GDP this year but the final figure will be 0.8%. Spending has to be reduced by at least another Pta400 billion.” Barea says that a certain degree of imagination is required to achieve this goal. For example the knife has to be taken to subsidies to state-owned companies which soak up about Pta1.2 trillion a year. Barea’s programme also calls for immediate privatization or even closure of loss-making public companies. Voters who believed the Popular Party’s election promises of tax cuts – Spain’s top rate is 56% – will be less enthusiastic about Barea’s programme. He has ruled out any chance of reducing taxes this year or next, although he says there is scope for restructuring the system. Aznar’s new team is at pains to give the impression that it has come in swinging an axe through the corridors of overstaffed government ministries. But not everybody is convinced there is enough fat to trim to make the stated deficit targets. “The budget deficit is bigger than those of most other EU countries but the public sector is also relatively smaller,” says César Molinas, chief economist at Spanish stockbroker FG Inversiones, which was recently acquired by Merrill Lynch. “We cannot cut back on social services to the degree that would be possible in Germany, for instance, and we have about half the number of civil servants per inhabitant as Britain. So it is no easy task to reduce public spending.” Molinas is even less optimistic about the government’s chance of success in reducing unemployment. The official jobless rate is 22%. “I don’t see the solution,” he says. “Unemployment has become institutionalized in Spain. We have the lowest level of worker participation in Europe. There are thousands of jobs that nobody wants to do and labour is far from cheap. It’s a case of a missing link in our economic development which has led to a marginalized generation of workers.” But Spain’s new government has entered office at a favourable time for the economy: interest rates are clearly on a downward trend, inflation is forecast to decline to 3.0% this year from 4.3% in 1995 and was well within the Bank of Spain’s target of 3.5% to 4.0% for the first quarter for this year. “The economic base is sound,” says Jorge Calvet, managing director of SBC Warburg in Madrid. “Equities are cheap and banks and industrials are fantastically healthy. The government’s determination to shrink the public sector is a cause for optimism.” “Cut whatever is necessary”Cristóbal Montoro, Spain’s secretary of state for the economy, is the new government’s key figure in matters of economic policy. His task is to “subordinate all political and economic policies to the reduction of the deficit”What are your most urgent economic priorities and how do you propose to achieve them?There are basically two challenges facing Spain. In the first instance we must consolidate our recovery because Spaniards have been living with an economic crisis for too long. The economy is growing but most Spaniards do not perceive this growth. So we need to encourage growth and especially employment. The other side of the same coin is to ensure Spain’s successful integration into European Monetary Union within the stipulated deadline. In Spain’s case, stimulating growth and meeting the criteria for Emu are one and the same. Growth will be achieved by lowering interest rates, creating a favourable environment for investment and laying the foundations for economic stability in order to boost business confidence. We need to contain inflation to remain competitive and we must not defend our position with exchange rate manipulations. There is no future for us if we fail to bring about a stable economic environment and stimulate domestic savings. As far as Spain is concerned, we would have to achieve these goals even if Maastricht did not exist. Doubt has been cast on Spain’s ability to meet the Maastricht convergence criteria on time. What are your views? It will not be easy and we have already lost a lot of time, but I am convinced that it is possible to meet the criteria on inflation and the budget deficit. The fundamentals provide hope and it is a task the government has taken on board from the very first day. I am optimistic that we will achieve convergence. Where do you see the budget deficit this year and next? We will cut back on whatever spending is necessary to bring it below 4.5% of GDP this year and our budget proposals for 1997 will set a target of 3% of GDP. So tighter control on spending is the primary weapon for combating the budget deficit? Yes, but it is not the only one. We also intend to further deregulate our economic structures and key sectors. We will open a dialogue with business and the unions on a social pact aimed at introducing greater efficiency into the labour market. This is crucial in a country where a high level of unemployment and job instability are undermining confidence and holding back consumer spending. We want to modernize the labour market and we believe that wage settlements should be set in line with productivity. Above all we want to eliminate any apprehensions about labour relations. Do your plans for deregulation call for speeding up the privatization programme? This is very much on the government’s agenda. Privatization is a way to improve the efficiency of key sectors such as transport, telecommunications and energy. But we do not look upon privatization as a one-off source of financing. It is part of our efficiency drive which is reflected in this ministry, where we have eliminated overlapping departments and cut back on the number of high-ranking offices. We have simplified the public administration structures and we will introduce extremely severe controls on public spending. Can you give any specific examples? We plan to submit a new budget law that will impose strict restrictions on this or any future government by subordinating increased spending to parliamentary approval. We also plan to rationalize the system of financing for Spain’s 17 autonomous regional governments by setting up a system of fiscal co-responsibility. The basic underlying idea is to ensure that public spending is a reflection of the country’s need to modernize its economy. Banks search for growthSpain’s top five banks reported first quarter operating profit increases of between 14.5% and 59%. But question marks hang over the future
Speculation about Argentaria’s future is greeted with sepulchral silence by staff still recovering from the shock of seeing their chairman, Francisco Luzón, summarily sacked by the new government to make way for stockbroker and political appointee Francisco González. “He has close links to power in the new government and he was after a high-profile job,” says a Spanish banker. |
