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Spain rings with sounds of progress

Employment is up, and the nation may soon surpass Italy in income.

February 04, 2007|Paul Haven | Associated Press Writer

MADRID — Cranes, bulldozers and other heavy machinery clog nearly every road leading into Madrid, signs of the extraordinary transformation that has turned this once-poor nation into an economic power.

But for Spain, one of the sweetest steps is yet to come.

Three decades after the death of dictator Francisco Franco, Spain is on the verge of surpassing Italy in per capita income. The development has been the talk of both countries, particularly Italy, which has long looked on Spain as its permanently poorer cousin.

The signs of Spain's success are everywhere: in the gleaming folds of the capital's ultramodern new airport, in the international reach of architects like Santiago Calatrava and Rafael Moneo, in its buzzing nightlife and cultural scene and, most notably, in record economic growth and lowest-in-a-generation unemployment.

"It's a good time to be a Spaniard," said Jose Manuel Campa, a professor of economics and finance at IESE Business School in Madrid. "Spain has always had exceptional people, but there was this perception that they made it despite being Spaniards. But now there is a sense, especially among the younger generation, that the world is theirs."

Take a look up, down, left or right on many streets in Madrid and experience the earsplitting sound of progress. In fact, there are so many improvements going on that many people complain the city feels like a giant construction site.

The crowning jewel has been the $7.2 billion upgrade of Madrid Barajas International Airport, with a shiny new terminal that features an undulating ceiling and driverless trains that take commuters to their terminal.

But the boom is not limited to the capital. Nationally, GDP grew 3.5% in 2005 and the government expects to tally growth of at least 3.4% for 2006.

Unemployment, about 8%, is at its lowest in 27 years, down from more than 20% in the early 1990s. House prices have more than tripled the last 10 years, the Spanish Central Bank says, outpacing even the red-hot U.S. market over that span. And prices are still rising.

How did this happen?

A big part of the answer is the European Union. Over the last decade, Spain has benefited from an unprecedented rise in construction investment and private consumption, fueled by interest rates set by the European Central Bank. The rates have been low, and inflation in this fast-moving economy relatively high, so it has become virtually free to borrow money.

At the same time, Spain has been one of the largest recipients of EU structural economic aid -- nearly $85 billion since 2000.

Since Franco's death, Spain has had a succession of stable governments -- both left and right -- that have implemented responsible, business-friendly economic policies. They have liberalized labor laws to make it easier to hire and fire people and privatized state-owned giants such as Telefonica, Gas Natural and Iberia Airlines.

At the same time, the country's prime minister, 46-year-old Jose Luis Rodriguez Zapatero, has shaken up the nation's Roman Catholic traditions by legalizing gay marriage and making it easier to divorce or get an abortion.

Meanwhile, Italy -- led by aging politicians -- has fallen into economic doldrums. Growth is near zero and its budget deficit has exceeded 3% of GDP every year since 2002, in violation of EU rules.

The government formed by Premier Romano Prodi last spring has been so hamstrung by its coalition partners, which include former communist parties with deep union ties, that structural reforms haven't been seriously tackled.

The previous center-right government of Silvio Berlusconi disappointed those who thought he would apply his business acumen to solving Italy's economic problems. Berlusconi's critics accused him instead of pushing through laws designed to protect his own business interests.

According to EU figures, Spain's per capita GDP is 98.2% of the bloc's average, while Italy's stands at 100.5%. Spanish economists and politicians say Spain will overtake Italy by 2009, possibly sooner.

In recent years, some 4 million jobseekers from South America, Eastern Europe and Africa have poured in, providing much-needed cheap labor as Spaniards eagerly embraced modernization after decades of stagnation under Franco.

Spanish companies have extended their reach beyond the border. In 2006, Grupo Ferrovial led a group of investors in the $19.5 billion acquisition of Britain's BAA, the world's largest airport operator. Late in the year, Iberdrola SA offered $22.5 billion in a bid to acquire Scottish Power PLC.

Spain recently passed Canada as the world's eighth-largest economy, according to the World Bank, a fact that many feel should merit a place at the Group of Eight club of the world's leading industrial powers.

Despite the good times, trouble may lie ahead.

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