His Way Works; Spain's Zapatero May Have Quietly Found the Secret to Balancing High Economic Growth and Social Harmony

Article excerpt

Byline: Stryker Mcguire and Eric Pape (With Mike Elkin, Cathleen McGuigan and Alex McRae)

Shortly after Jose Luis Rodriguez Zapatero became Spain's prime minister, his chief economic adviser ran a little business-school experiment. Go out and start a company, Miguel SebastiAn told a handful of aides. Sure enough, they were quickly caught up in the morass of red tape that ensnarls most startups looking to hire (and, if need be, fire) employees in one of Europe's least business-friendly labor markets. "It was so complicated they quit," says SebastiAn, formerly chief economist for Spain's second-largest bank. "The P.M. was appalled."

For Spain's young leader, just 43, it was the first of many crystallizing moments. Taking power two years ago this week, in the aftermath of the infamous Madrid bombings, Zapatero came to office as a lefty bent on reforming Spain's hidebound and highly conservative social landscape. But quickly he came to recognize a fundamental fact of political life: if he were going to transform Spanish society with his left hand, he would have to manage the economy with his right.

He's done so with a quiet dexterity that many Spaniards--and certainly the rest of Europe--have barely noticed. Neighboring France and Italy, in particular, would do well to start paying attention. With their political elites paralyzed, and their populaces terrified by the prospect of tough reforms, Europe's traditional powers see no third way between their unsustainable social-welfare systems and so-called Anglo-Saxon capitalism. Zapatero may have found just that: in only two years he's given Spain its first budget surplus in two decades. In that time, joblessness has dropped from 12 percent to 8.7 percent. Having created 60 percent of all new jobs in the European Union last year, the Spanish economy is projected to grow by 3.3 percent in 2006--impressive by European standards.

Zapatero has managed this feat largely by following in the footsteps of his right-wing predecessor Jose Maria Aznar, embracing dramatic fiscal reforms and adding his own tax cuts and entrepreneurship incentives. But he's maintained his left-wing support with equally striking social reforms. Half of his government's cabinet ministers are women. New legislation cracks down on gender violence and promotes equal incomes in the workplace. Gay men and women are not only free to marry but can adopt children. Divorce has been made easier; mandatory religious education in state schools is a thing of the past. Smoking has been restricted in public spaces and amnesty granted to hundreds of thousands of illegal immigrants. "We are witnessing social changes that were unimaginable three or four years ago," says Manuel Monzon, a Barcelona film producer.

Zapatero's successes are the more remarkable for the fact that they were so unexpected. He was projected to lose to Aznar's hand-picked heir, Mariano Rajoy, in the 2004 elections. But then came the Madrid bombings of March 11, and the government's misguided efforts to pin the blame on Basque terrorists when the evidence in fact pointed to Al Qaeda. Three days later, angry voters turned away from Aznar's Popular Party at the polls and swept Zapatero's socialists into power. Whether he was actually prepared to govern remains an open question. But compared with his seasoned predecessor, he did seem a political lightweight--dubbed "Bambi," no less, by pundits even before he took office.

Tyro or no, Spain's new leader has smartly taken a leaf from another social democrat once derided as a "Bambi" for his supposed inexperience and naA[macron]vete--Britain's Tony Blair. Like Blair, who in 1997 began as prime minister by embracing 18 years of Thatcherite economic reforms, Zapatero was quick to see that he could only sell the social measures he ran on against a background of strong growth.

That heady combination of social freedom and economic vibrancy seems to have given the entire country a lift. …