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Spain’s New Conquistadors

BARCELONA: Espańa va bien (Spain is doing well). That phrase is on everyone’s tongue nowadays. So it should be. Spain has not boomed nor felt as self-confident since its Age of Discovery. Instead of sending out swashbuckling conquistadors, however, Spanish companies are exploring the world in search of new opportunities. From BSCH and BBVA in banking, Repsol-YPF, Endesa, Iberdrola in energy, and Telefónica in telecoms, Spanish companies have boldly displaced US firms as prime investors in Latin America. All this activity has put Madrid back on the map, not only as a force in the global marketplace but in diplomacy too.

Liberalization, accompanied by economic growth, is the engine for this overseas expansion. Spain’s economy has grown at over 3% for the past four years, and is now growing at 4%. In that time, the budget deficit was reduced 5 fold, and is now only about 1% of GDP, with unemployment dropping from 23% to 15%. Not surprisingly, strong growth rekindled inflation, now bumping up against the European Central Bank’s tolerance level. Nonetheless, Spaniards recognize that they have not had it so good for a long time, and recently returned Prime Minister José Maria Aznar to office with both a parliamentary majority no longer dependent on coalition partners and a mandate to modernize Spain even more.

Spain’s path to liberalization looks to the liberal British model, not, as is traditional in Spain, to the way things are done in France. During Prime Minister Aznar’s first term his Popular Party privatized most public sector firms and deregulated many service sectors. His new government vows to continue eliminating the public deficit and lowering unemployment. It also promises to cut income taxes, put the country’s Social Security system on firmer footing and reduce costs of shedding labor. Introducing real competition in energy and telecoms, lacking in the privatization process until now, is also pledged.

Aznar’s program is sensible yet ambitious. The question is whether his government, which has gone to great lengths to forge a consensus behind its reforms, will carry through on additional measures, the need for which have been hidden by a favorable economy and wage moderation by unions.