NCPA - National Center for Policy Analysis

Viva Spain's Market Economy

May 20, 1997

Spain is in the midst of an economic boom and some observers credit a government which didn't do anything spectacular, but simply let it happen. But the government has privatized some operations and made efforts to get its economic house in order to qualify for membership in Europe's monetary union. Growth was also sparked by reduced deficits, monetary stability and lower interest rates.

  • Spain's gross domestic product rose 2.2 percent last year, far above the 1.5 percent average for the European Union countries -- and a 2.7 percent increase is expected this year.
  • Some 167,000 net new jobs were created last year.
  • Interest rates have fallen more than three full percentage points in the past year.
  • Spain's budget deficit fell from 6.6 percent of GDP in 1995 to 4 percent last year -- and is expected to be about 3 percent this year.

Spain's government has been following a policy of steady, market-oriented policies -- such as selling off the state's remaining 21 percent stake in the telecommunications giant Telefonica de Espana SA and 10 percent holding in oil giant Repsol SA.

Economists attribute the drop in the budget deficit largely to the decline in interest rates, which lowered debt service costs. Each one percentage point drop in interest rates saves about $840 million -- or 0.7 percent of GDP. A freeze on public employees' wages and $1.4 billion cut from public outlays also assisted in bringing the budget deficit closer to the goal of 3 percent of GDP needed for membership in the EU monetary union.

Other reforms have included ending minimum price floors on some services, cutting the capital gains tax by introducing a flat rate on profits from some investments, and encouraging a labor agreement that lowers the cost of layoffs in return for longer-term employment contracts.

Nevertheless, unemployment stands at nearly 22 percent, the highest rate in the 15-nation EU.

Source: Thomas Kamm and Carlta Vitzthum, "Spain is Booming as It Moves to Meet Rules of EU Monetary Pact," Wall Street Journal, May 20, 1997.


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