Spanish leader vows to update economy

(New York Times) – Prime Minister Jose Luis Rodriguez Zapatero came to power in 2004 when Spain was riding high, its economy surging. He rode the wave to push through an aggressive social agenda, legalizing gay marriage and promoting gender equality.

Today, he governs a country with 18 percent unemployment, the highest in the euro zone, largely because of the collapse of a 10-year building boom. And many Spaniards are wondering if he has what it takes to combat the crisis.

Zapatero, 48, is a young Socialist visionary with an old entrenched economy. In an hourlong interview at the Moncloa Palace here this week, Zapatero explained how Spain could confront its economic crisis. His strategy is to invest in Spain’s future — education, research, biotechnology and renewable energy — without moving an inch to curtail workers’ rights and while extending government unemployment benefits.

In a country poised between innovation and stagnation, experts say, this could be a bold strategy — or pure naivete. They contend that Zapatero is long on visions for the future but lacks a plan for creating jobs in the medium term, or for financing his generous social policies.

For many, the numbers do not add up. Spain’s budget deficit is projected to soar to 9.5 percent of gross domestic product in 2010, according to the Organization for Economic Cooperation and Development, although Zapatero has promised to bring it back within the 3 percent limit set by the European Monetary Union by 2012.

Skeptics say that Zapatero, for all his imagination, has run up against his own unwillingness to carry out the painful structural reforms that business leaders and the country’s central bank say are inevitable if Spain is to fight unemployment and take its economy into the 21st century.

“My government’s ambition is to make this an innovative, creative, entrepreneurial country while upholding the social welfare state,” Zapatero said.

“Some people will say that a social welfare state and a competitive economy are incompatible, that innovation is incompatible with workers’ rights,” he said. “They want to deregulate workers’ rights, deregulate social rights. That is exactly the same tune as people who say we have to deregulate the financial markets, and I do not dance to that tune.”

Instead, Zapatero added, “it’s a question of making companies more competitive and more innovative.” He said Spain should diversify its economy to sectors in which it excels and which are showing growth, including renewable energy, biotechnology, civil engineering and high-speed railroads.

Zapatero’s critics are not convinced.

“Zapatero has been saying this since before he became prime minister, and the fact that he is still saying these things is an indication of how little has been done,” said Jose Antonio Herce, the chief economist at Analistas Financieros Internacionales, a financial consultancy based in Madrid. “For the past five years, we’ve been laying bricks, not making iPods.”

Indeed, Spain rose and fell so quickly because its boom was fueled by cheap credit and construction. That helped its economy grow an average of 3.8 percent a year from 1997 to 2007, and to bring 4 million new immigrants to a country that now has a population of 46 million people. (Many are now heading back home.)

When the housing bubble burst and the global recession hit, Spain fell faster than its neighbors. Four million people are unemployed. Half receive government benefits. For all its growth, the country still lags in productivity rates and labor costs.

In the interview, Zapatero contended that most job losses were in the construction sector. To stem them, the government has introduced a $15 billion infrastructure plan.

Another sticking point is Spain’s two-tier labor system. For all of Zapatero’s defense of workers’ rights, Spanish workers on permanent contracts have far more protections than those on temporary ones, who make up much of the nation’s unemployed.

“Workers’ protection does vary, it is true,” Zapatero said. “We are working on it. We have to increase part-time employment; we do have to make the labor market more flexible in that sense.” He added that the government was “making progress” on that front, “but we do have some way to go.”

Talks between the government, unions and business leaders broke down recently after the government refused the business sector’s demand that its contributions to the social security system, and the cost of firing or laying off workers, be reduced. Under the current system, to lay off workers, Spanish companies have to pay them 30 to 45 days’ salary for each year worked. Businesses had unsuccessfully asked the government to reduce that to 20 days’ salary.

Zapatero said he would not try to make it easier for businesses to lay off workers. “Twenty-first-century democratic Spain is not a country that is going to take a single step back in terms of rights that we have conquered,” he said. “When I see a worker, I see a citizen.”

But Lorenzo Amor, the leader of the national federation of self-employed workers, said small and medium-size companies, which account for more than 90 percent of companies in Spain, were staggering under inflexible labor rules.

“In this country we have over a million households where nobody has a job,” Amor said.

“Ask those million households if they would prefer a work contract that offered 20 days’ pay,” he added, referring to the reduced compensation proposed by business leaders. “They would say yes. They want to work.”

Political and economic analysts acknowledged that Zapatero, a committed socialist, was unlikely to take on the tough structural reforms that his right-leaning predecessor, Jose Maria Aznar, could not pull off during the fat years.

Zapatero said the government could finance its initiatives by taking on more debt. “I think we should learn the lesson of the Great Depression. When an economy enters a deep recession, the only way we can come out of it is from a big push from the public sector,” he said.

For now, Zapatero still has some refuge from the economic turmoil. Spain, which once counted Julio Iglesias as perhaps its best-known international figure, continues to shine in tennis, cycling, cuisine and even basketball — a fact the prime minister noted with undisguised delight.

And with that, Zapatero was off — to receive Alberto Contador, who came from behind for his second victory in the Tour de France.