EMU presents Aznar with dilemma

Date: 30/05/1996

By Tim Jones

JUST three weeks into government and the first centre-right administration in Spanish post-war history is playing the standard 'good cop, bad cop' political game.

Newly-appointed Foreign Minister Abel Matutes - a former member of both the European Commission and Parliament - warned that his country might not be able to join the first rank of countries forming a monetary union in 1999.

A week after that, Popular Party Prime Minister José Maria Aznar announced a swingeing round of cuts in public spending worth 1.25 billion ecu intended to give it the best possible chance of doing so.

Although he is still benefiting from a 'honeymoon effect' in the opinion polls, Aznar faces two major hurdles.

The first could be called the 'Chirac problem'. Like the French president elected last year on a ticket of fighting unemployment while making sure his country reined in public spending, Aznar too has to square a circle.

Like Chirac, he promised a miracle mixture of spending cuts to meet the Maastricht Treaty's budgetary targets, a defence of pensions and social welfare programmes and a renewed fight against unemployment.

“The priority is reducing the deficit while maintaining social aims,” said Aznar.

To oversee progress towards reducing the budget deficit to 4.4&percent; of gross domestic product this year from 5.8&percent; last year - with the ultimate aim of 3&percent; in 1997 - Aznar created a new and independent budget office.

Its head, José Barea, was quick to show his teeth. Only days after the cabinet announced its plans for a 1.25-billion-ecucut in spending, Barea declared that was not nearly enough. A shortfall in receipts for the social security budget meant that an extra 2.5 billion ecu of cuts would have to be found, he said.

On top of this, the government has to do more to rein in current spending and get a grip on subsidies for state-owned companies.

In part to address this problem but, more importantly, also to raise 4 billion ecu, Aznar is proposing a large-scale privatisation programme.

The holding company Teneo, which has stakes in a range of firms including the loss-making national airline Iberia, is number one on the list. Added to this comes petrochemical firm Repsol and electricity company Endesa, where the state holds a two-thirds stake.

The future of national telecoms operator Telefonica de España is yet to be settled, although the trend throughout Europe is to send these companies into the private sector.

Barea is only half impressed. For him, privatisation should begin immediately and should include loss-making enterprises such as the railways, shipyards, coalmines, the national airline and arms factories.

He believes the government could meet the 3&percent; deadline, but this will mean sacrifices, including no tax decrease this year or next and a possible freeze on civil service pay in 1997.

To win public support for his aims, Aznar will try to secure what former Prime Minister Felipe Gonzaléz failed to achieve: a social pact with organised labour.

Within a week of taking office, the new premier called for a pact with the unions to carry out structural reforms of the labour market and reduce unemployment.

The scale of the problem was highlighted last week with the news that unemployment in the first three months of the year was within a whisker of 23&percent; of the workforce, the highest in the EU.

“I am not going to ask any more or less than I am asking of myself or my government or business: strength, a desire for dialogue and a willingness to compromise,” said Aznar.

Throughout the Union, the language of common sacrifice and dialogue can be heard as governments stare the possibility of not being able to join Germany in a single currency bloc in the face.

Spain is coming to the game very late. Whether the gloom expressed by Matutes or the greater optimism of his prime minister prevails will become clear in the coming 18 months.