The zapping of Zapatero

IF GREECE is broke, can Spain be far behind? More than four times as big as Greece, Spain has received almost as much unwelcome attention from investors. This month the Madrid stockmarket has tumbled and the risk premium on Spain"s bonds has risen (see article). Aides to José Luis Rodríguez Zapatero, the Socialist prime minister, claim that Spain is the victim not just of a speculative attack but also of a plot led by ?the Anglo-Saxon press? to destroy the euro.

To this piffle the best retort is: grow up. It is true that Spain is not Greece. Its public debt, relative to the size of the economy, is lower than that of Britain or the United States. It has not had to bail out its banks. And fears of financial contagion have made the markets unnaturally volatile. But there are good reasons for investors to worry about Spain. It has the highest unemployment rate in Europe, at 19.5%; an economy still in recession, which will not grow appreciably until next year; and a fiscal deficit that jumped to 11.4% of GDP last year, as recession cut tax revenues and forced up spending on the unemployed. Without a faster return to growth, the public debt will quickly become unsustainable.

To make matters worse, Mr Zapatero looks out of his depth. He was a popular leader in the good times, during Spain"s long boom. But he failed to see the bust coming. When he belatedly recognised that the economy was in trouble, he misdiagnosed the problem as an imported recession that he could safely wait out. He carried on doling out public money and raising pensions and public-sector wages while shunning reform. Over the past month the markets have grasped that this course, if he persists in it, would lead to ruin. They are one step ahead of the government, which has reacted with fumbling confusion, abruptly launching an austerity plan and a vague scheme for labour-market reform, only to withdraw bits of both at the first cheep of protest.

Many of Spain"s troubles start at home. The boom relied on a housing bubble, and on the low interest rates that came with the euro. Growth will now have to come from investment in other parts of the economy and from exports. But relative to the rest of Europe, Spain has become a high-cost, low-productivity economy. Wage indexation has made businesses uncompetitive. Generous severance arrangements discourage firms from hiring workers and have created a two-tier labour market and mass unemployment. Years of buying off regional governments with cash and exaggerated devolution means that the central government now directly controls only a fifth of spending, while businesses must surmount sierras of overlapping regulation.

A national pact for reform and growth Rekindling growth and mustering a commitment to start slashing the deficit once the economy revives will take more than an executive decision. To reform the labour market, the economy and public spending, Spain should take a leaf from Germany"s book?or indeed from its own transition to democracy in the late 1970s?with a national pact involving the unions, business and all the main parties. An earlier Socialist prime minister, Felipe González, was capable of such statesmanship. But Mr Zapatero has offered only tactical fixes to placate the unions, the regional barons?and now the bond market. He has only a few months to show that he can take the radical decisions needed to prevent years of stagnation, which could unleash the social disorder he fears. Delaying the pain will only increase it. If he cannot find it in himself to start leading, many in his own party as well as ordinary Spaniards may soon wonder why he is in the Moncloa palace.