Spain's Economy Struggles As Elections Approach

FOR Spaniards, it has already gone down in history as Black Thursday.

In a single day - May 13 - Prime Minister Felipe Gonzalez Marquez's socialist government devalued the peseta 8 percent against other European currencies and announced the country's worst-ever unemployment and growing inflation.

Coming just three weeks before Spain's national elections, the devaluation is a "point of departure for regeneration" for this once-booming economy, Mr. Gonzalez declared optimistically. If Gonzalez, one of the European Community's longest-serving prime ministers, loses the June 6 election, he may well look back regretfully on Black Thursday.

The peseta's drop was the third and largest in eight months. In that period it has lost 22 percent of its value against the other currencies in the Exchange Rate Mechanism, which is designed to keep European Community currencies within a narrow trading band on either side of an agreed value.

The news is good for northern European tourists, now expected to flock to Spanish beaches this summer. But it means many middle-class Spaniards, for whom foreign holidays became one of the most coveted rewards of the late-1980s boom, will stay home.

For Spanish companies the devaluation was a mixed blessing.

"We will receive more pesetas for the cars we sell abroad," says Juan Antonia Diaz Alvarez, head of Volkswagen's Spanish subsidiary Seat, which exports 80 percent of production. "But the parts and motors we buy from Germany will be more expensive. On the finance side it is very bad because a large part of our debt is in German marks."

"We all thought last year that the peseta was overvalued by something like 20 percent," says economist Antonio Pulido of Madrid stockbroker FG Inversiones Bursatiles. "Between 1989 and 1992 foreign investment increased a lot, keeping the value up."

But "in the end, market pressures were too much," Mr. Pulido says. Portuguese and Irish currencies have also been forced downward by market pressures in recent months, and the Italian and British currencies were forced out of the Exchange Rate Mechanism.

Helmut Schlesinger, president of the Bundesbank, Germany's central bank, called Spain's devaluation "the correct step and, from a political point of view, very brave."

But for Gonzalez and Finance Minister Carlos Solchaga Catalan, the devaluation represented a humiliating switch. Both had promised repeatedly the peseta would not devalue before the elections.

BLACK Thursday's unemployment report left no doubt that the Spanish economy, considered Europe's star performer until last year, was in trouble. Joblessness hit 3.3 million, 22 percent of the working population. This was a rise of 567,000 in one year. Spain's economic growth, about 5 percent a year in the 1980s, came to a halt at the end of last year. First-quarter estimates for 1993 put the rate at minus 1.5 percent.

Nobody is quite sure whether Spain's economic miracle can be revived.

"What happens in Europe now is so important," says economist Pulido. "The peseta is at its correct value against the mark now and should stay there for two or three years.... I don't think we are going into a recession such as Britain has had. I think there will be growth again in 1994. But we will have to wait and see."

Investors expected the devaluation to be accompanied by a cut in the Bank of Spain's 13-percent base interest rate, which was supporting the peseta. Mr. Solchaga gave them what they wanted, cutting the rate 1.5 percentage points.

Behind Spain's current problems lie a large trade deficit - which devaluation should help close - and high labor costs. Wage agreements in January were still giving average raises of 6.4 percent. Inflation numbers, also released May 13, showed a slight rise to 4.6 percent.

Gonzalez hopes the decisions made May 13 will get the economy moving. But with his Socialist Workers Party of Spain running even with the right-wing opposition Popular Party in opinion polls, he still cannot be sure that he will be in charge after June 6.