Spain's Nascent Economic Boom Is Cut Short

IN the Plaza de Lima, along Madrid's prestigious Paseo de la Castellana, two eye-catching towers stand unfinished, stark reminders of the boom that was and the bust that is the Spanish economy.

Leaning over a stretch of glass and steel like modern-day towers of Pisa, the two skyscrapers of the Torres Puerta de Europa project were clearly designed to make a statement about a Spain where high growth, booming foreign investment, and brisk public and private consumption had delivered prosperity. Instead, the abandoned site and windowless upper floors tell the story of an economic boom cut short.

"Our expectations changed dramatically in the third quarter of '92 when suddenly all indicators, from industrial output to car sales, dropped in a way never before seen in Spain," says Ignacio Gomez Montejo, general manager for strategy at FG Inversiones Bursatiles, Spain's largest independent stock broker. "We [economists] would say that translates into a 1 percent drop or more in the country's GNP. Others just say the fiesta is over."

Spain did indeed experience a fiesta of economic growth from the mid-1980s to the early 1990s. Average annual growth rates topped 4 percent, annual foreign investment tripled between 1988 and 1991 to $34 billion, and personal income soared - to which the squadrons of new cars on the streets of Spanish cities testified.

But few here dispute that the party is now over, as unemployment has soared to 22 percent of the work-age population, industrial activity and foreign investment have tumbled, and the budget deficit has ballooned.

A spurt of hope followed the Spanish peseta's three devaluations between September 1992 and May of this year, making the country's exports - and travel here for foreigners - about 20 percent cheaper than before. New government measures

A crucial signal on Spain's economic prospects came this week as newly reelected President Felipe Gonzalez named a Cabinet including eight new ministers, three of them women. The next move will come this fall, economists say, as the new government moves to implement its priorities.

Already at his investiture debate last week, Mr. Gonzalez used many of the words economists are looking for - austerity, competitiveness, structural reforms - but words will not be enough.

"The outlook for '94 is actually better than we had earlier thought," largely as a result of the devaluations, Mr. Gomez says. "But much will depend on whether or not the new government takes the necessary measures to increase confidence."

"Either steps are taken to restructure government spending, cut the deficit, and make the labor market more flexible," he adds, "or what optimism is out there will be lost."

Zardoya Otis, Spanish subsidiary of the international elevator maker, is one company already benefiting from the devaluations. "We expect our exports to increase about 15 percent this year, and that in a country with negative overall growth," says Alberto Ibarburu, Zardoya Otis's chief financial officer. But Mr. Ibarburu says he is not overly optimistic, in part because the devaluations will mean the price of imports and the company's costs will go up, "and that means inflation." And he says the spending

cuts and labor market reforms Spain needs are not going to be easily approved.

"Everyone was happy when wages, benefits, spending, foreign investment, everything was up, up, up," Ibarburu says, "but agreement is harder when you're going the other way.

"The truth is that the government spent so much on 1992 [the year of the summer Olympics in Barcelona and the Universal Exposition in Seville] to show that Spain had arrived, but we pursued an image of ourselves that was beyond our means." High deficit, unemployment

Economists say Spain must work on bringing down its deficit - currently 5.4 percent of the gross domestic product and rising, according to the Organization for Economic Cooperation and Development - but they agree that this will be hard to do in bad economic times.

This is one reason Gonzalez has been so adamant about securing development stimulus funding from the European Community: If the EC is going to demand that Spain run a tighter financial ship, especially in preparation for an eventual Community-wide monetary union, then the EC must help pay for the kind of development and infrastructure programs the national government is being required to cut back.

But reducing the deficit will not of itself address Spain's unemployment, which Carmen Alcaide Guindo, director of macroeconomic studies at Banco Bilbao Vizcaya, calls "our most serious problem." More than 3.3 million are unemployed, and the number is going up. "Spain's problem is that in order for employment to grow we need a growth rate over 2.5 percent - compared to 1 or 1.5 percent in Germany," Ms. Alcaide says, "and we do not expect to see such growth before 1995. The only way to reduce the growth n eeded to create jobs is to reform the labor market. The same is true all over Europe." Labor regulations

Spain in many respects has an even more rigid labor market than many of its EC partners - a vestige of the Franco dictatorship, when social appeasement was basically bought with employment laws favorable to the employee. "The labor regulations from the Franco years appear to protect employment, but what they really do is discourage business from creating new jobs," says Antoni Subira, Catalonia's minister of industry and energy.

Companies are unable to transfer an employee geographically or within departments, and a employee who is performing poorly can in principle be fired but only at very high cost.

"The Spanish employee can add value and be competitive, but only if there is a greater degree of flexibility," adds Julio Bonet Arques, chief finance officer of Hewlett Packard Spain. "Clearly the rigidities we have here are discouraging investments."

Observers will be watching how diligently Gonzalez pursues his call for a "social pact" among the government, employers, and unions to hold down wage costs and begin reforming Spain's labor laws. The longevity of the new government may depend on it, since the Catalan nationalists, who hold a pivotal number of seats in Parliament, have made clear that their support of the government will depend on how forcefully it addresses Spain's economic problems.

"If this government hopes for stable support from us," Mr. Subira says, "it will have to propose a labor reform package to boost competitiveness, and a fiscal policy aimed at driving down interest rates. We see that as the only way out for Spain."