Economy reaps benefits of entry to the 'club' : Spain's euro bonanza

By Eric Pfanner

Published: THURSDAY, JULY 11, 2002

MADRID: In a country that stubbornly clings to many traditions, no one laments the death of the peseta.

While Germany, Europe's economic powerhouse, has stumbled since the introduction of the euro, Spain makes the case for euro bulls. After several years of watching their economy grow at a frenetic pace — at least by European standards — Spaniards exude an economic enthusiasm rarely seen in other Continental capitals. They have benefited perhaps more than any other Europeans from the euro and from the economic reforms that were required to usher it in.

Aid from the European Union — not directly linked to the euro but intended to help Spain catch up with other users of the single currency — has financed vast transportation and infrastructure projects to link this still-fragmented country more closely. Spanish incomes have risen to 84 percent of the European Union average from 75 percent seven years ago, a demonstration of the economic "convergence" envisioned by the euro's founders.

The replacement of the volatile peseta with the euro has also lowered borrowing costs to levels historically associated with the Deutsche mark. That has allowed Spanish companies to shake off the insular legacy of the Franco years and compete in a global economy — even if their exposure to Latin America is making some investors nervous. "Spain became credible by joining a credible club," said Guillermo de la Dehesa, chairman of the Center for Economic Policy Research.

Perhaps more than any other country in the 12-member euro bloc, Spain has worked to build on that credibility, analysts say.

At a time when some euro members' budget deficits are pushing up against the limits imposed under monetary union, the center-right government of Prime Minister Jose Maria Aznar has used lower borrowing costs and other savings to bring its budget into balance. The government continues to encourage investment and entrepreneurship through tax cuts and privatization and is tapping the private sector to help finance toll roads and other projects.

Economists say Spain has also taken the most aggressive steps to loosen up its rigid labor market, which has helped slash the unemployment rate to 11.4 percent in May from Depression-like levels of more than 20 percent in the early 1990s.

"From 1970 to 1995, Spain was unable to create a single net job, which is an achievement nobody could be proud of," Finance Minister Rodrigo Rato said. "From 1995 to 2002, it created 3.4 million jobs. We have changed the social situation."

To be sure, analysts say reform remains incomplete. And job growth has been fueled as much by outside aid and investment as by internal reform.

Still, the improved economy and the money flowing into their country have put young Spaniards with the right skills in an enviable position.

"For the last three years, I have gotten a raise without even asking," said Marcos Sanchez, 32, an engineer who designs bridges at Ferrovial SA, a big construction company working on a high-speed rail link between Madrid and Barcelona. "They're afraid of people leaving."

Job-hopping is still an unusual concept to Spanish workers, who, like many in the euro zone, are used to sticking with one employer for life. But the Aznar government has taken preliminary steps to make the job market less restrictive. In 1997, the government managed to cut the cost of unemployment benefits from 45 days' pay per year worked to 33. It has encouraged temporary and part-time employment and provided incentives for hiring of the long-term jobless.

Now Aznar, whose Popular Party holds a majority in Parliament, is pushing ahead with plans to curb abuse of the unemployment benefit system. It also would eventually cut off benefits for the jobless who repeatedly turn down viable work offers within 30 kilometers (18 miles) of their homes.

"The position of the government is clear: We prefer social dialogue," said Luis de Guindos, secretary for economic policy and competition. "But in order to pursue improvement in labor markets, there has to be reform. I think Spanish society is quite open to these kinds of changes."

Although Spain's heady economic growth is helping the country catch up, unless Spanish companies improve their productivity as labor costs and other prices come into line with those of the country's richer northern neighbors, the economy's competitiveness may erode.

Indeed, even if euro membership has helped Spain pursue a reform program that is ambitious by European measures, the country still must tackle further painful changes if it is to capitalize on the momentum and take the economy to a higher level of efficiency.