FT: We’re experiencing the first crisis of European monetary union…What specific steps do you favour for closer economic coordination?
Zapatero: In terms of the monetary and economic union I think it’s crucial that we have more and better coordination of our financial systems. Obviously the new regulations must seek common standards not just within the monetary union but within the union in general but also internationally. And second we must develop the internal market. The internal market has been a great success, it has made us more competitive in those sectors where it has operated and worked, and now we have ahead of us two or three crucial sectors where we need to achieve an internal market and that’s energy and the digital market.
FT: Let’s talk about the economic crisis. Greek bond yield spreads have widened again and markets are talking of a bailout. Do you anticipate having to act in the near future?
Zapatero: It’s really hard to predict, but we do need to issue a clear message to the markets and the message cannot contain any element of uncertainty or lack of clarity. The message is that there is an agreement in the European Council to provide support to any country in the eurozone that is in trouble, support hand in hand with the IMF, and that means shared responsibility, co-responsibility, first of course the responsibility lies with Greece but also all the other countries of the eurozone.
FT: Do you agree with Mr Van Rompuy when he said Greece cannot be allowed to fail?
Zapatero: Absolutely.
FT: Is that realistic? What can you do to stop Greece defaulting if the markets dictate that?
Zapatero: I think markets basically work on trust and confidence and the EU has to provide that confidence and the Greek government has to generate that confidence. I think that right now in these coming days we have to rebuild and re-establish and remind everyone that there is a standing agreement whereby the countries of the eurozone will back if necessary and will bail out Greece if necessary, with the support of the IMF.
FT: Do you anticipate announcements next week?
Zapatero: I think in the next days there will have to be some clarification of Greece’s status and position and the possibilities of resorting to the IMF and a reminder by the countries of the eurozone that the markets require that sort of reassurance, and in fact tonight last thing I will be speaking to [Greek prime minister] George Papandreou.
FT: A senior banker told me this morning that the Greek crisis was the best possible news for Spain in that this was the perfect political cover for you and your government to take decisive action to tackle the budget deficit. Do you agree with that?
Zapatero: That is one possible interpretation that I respect but don’t share. My government had a surplus […] and we are now equally determined to bring down the public deficit to 3 per cent by 2013 in accordance with the EU’s requirements. We have a plan, a credible, quantified plan which we have already begun to implement, a plan to reduce the public deficit.
Everything that we’ve committed for 2010 in terms of deficit reduction has already been executed. And therefore we are on target and there are I think elements of credibility already demonstrated in the plan. I of course preside over a Socialist government but it’s the first government that worked to have a surplus because I feel it essential for a country to have well balanced public accounts and in fact the process that we experienced before the crisis was a process in which the public sector was saving and we reduced debt
FT: Mr Prime minister, the good times are over, they’re not coming back.
Zapatero: Yes but even in good times there were others who had deficits and we at the time were able to obtain surpluses and reduce debt down to 30 per cent of GDP which has given us leeway now.
FT: But you’re looking at a budget deficit of 11 per cent, more than that, and you’re talking about surpluses. On the best possible scenario you’re not going to be in surplus for quite some time.
Zapatero: No but what I was saying just as an example was that in the four years before the crisis we showed this budgetary discipline and cut our debt and had a surplus, with very high economic growth rates it’s true, because I have always held that principle, and now that there’s a recession we’ve had to make a huge effort in public expenditure to provide social protection to our unemployed citizens and to bolster production and activity as far as we were able but now that the deficit has got to a point that’s unsustainable I am completely determined and we do have a three-year plan to bring it down and we will meet those targets.
FT: You’ve said you’re proud to be a socialist prime minister. What do you say to those critics who say that because you face elections in two years time you’re not prepared to take any really difficult decisions until then and that a lot of the difficult decisions just happen to fall in 2012?
Zapatero: No, we’ve just taken difficult decisions. Raising the VAT, I can tell you that’s not something that’s been done to get people applauding us. You just have to take a look at the reaction of public opinion. Of course our citizens don’t like their taxes being raised. We’ve raised VAT by two points, we’ve just cut our public employment offer to 10 per cent of the replacement rate and that’s a tremendous sacrifice for the government and we’ve also had to introduce an additional €5bn cut for this year cancelling investment commitments and from here to the elections our policy is going to have to be one of austerity and cost cutting and cutting also in terms of investment and resources and that’s clear. But that’s the only way, there is no other way. And to date, our commitments to reduce the deficit in the year 2010 are being complied with impeccably.
FT: So, what of this theory that some have that everything will be fine in Spain because the difficult decisions will be taken when Mr Zapatero begins his third term?
Zapatero: The essential reforms I want to have already complete by the end of the year. Reforms to improve competitiveness, reforms of the labour market and also to reduce public expenditure. And when you’re on your second term, as is my case now, and you’ve gone through such a severe crisis, such a severe crisis and you know that your country has serious problems your option is to adopt the measures even if they are not very nice and agreeable to all. Always out of a conviction that I have which is always guaranteeing the broadest possible social protection and that cuts that we are now doing and that we will have to continue to do in the coming years do not affect all the efforts in investment and research and development and innovation which is one of the great needs of Spain’s economy.
FT: You don’t believe that you need to announce further measures beyond what you’ve already announced in the last few months in order to convince markets that you’re serious about cutting the deficit?
Zapatero: What we have to do is implement the plan we already have on the table. We’ve all seen that the economy is evolving in sometimes unforeseeable ways but in principle with the deficit reduction plan that we have and that we’ve sent to the European Commission we will be meeting this target of ours of reducing the deficit. What we have to be judged on in the future is whether we gradually do implement all the different items included in that plan. We will certainly do so, whatever the cost.
FT: You made employment a signature of your premiership and said it would go down but in fact it’s gone up. How did you get that so badly wrong and what are you going to do about it?
Zapatero: Well, yes, unemployment is Spain’s greatest societal problem. As president of the government I must refer to the past - in 2007, unemployment was at its lowest ever in history, reaching 7.9 per cent, slightly below the European average. We created 3m jobs during my last term in office and the crisis has brought about an extremely severe destruction of jobs. It is true that our forecast before the explosion of the international financial crisis was to continue creating jobs. We were not right in our forecast but neither was anyone – though that isn’t something that helps.
FT: Some would say you’re an incurable optimist.
Zapatero: I’ve always expressed myself as an optimist and I remember one of Bill Clinton’s sentences, because pessimism does not create a single job, that’s something that was said by Bill Clinton, I’m quoting him. When you’re leading a government you have to adopt a positive vision of your country and I have a positive vision of Spain. Spain has major achievements during its 30 years of democracy but also problems. Now we’re going through a difficult time, but we’re going to get out of this and we’ll do so, we’ll leave it behind and if we do things well, we’ll be stronger for it. Yes, I have to admit that criticism of being an optimist.
FT: When did you realise that this crisis was something really serious and would not pass after six months?
Zapatero: In September 2008 [after the collapse of Lehman Brothers], that was when we started to understand the severity of the financial crisis when you see those huge North American financial companies topple and you realise that the interbank rates are gone, because no-one is lending anyone anything, and you start to realise that all companies are feeling the crunch, every small and large company was unable to get any money from the banks at all, and that’s when really that historical meeting in October 2008 at the Elysée in France where every European, well every country in the eurozone, plus the UK with Gordon Brown himself – and it was a great help that he was there in my opinion – came out and said ‘We are going to put all our GDP’ – because that it what it took – ‘to bail out the financial system’. And that was really the turning point; I had the feeling of experiencing a moment in history where we either got it right or there would be a major economic disaster.
FT: On labour reform, do you favour a situation where small businesses could say to their workers, ‘We don’t want to lay you off, so how about a wage cut or reduced working hours?’?
Zapatero: We cannot be compared with other economies if we do not take into account the heavy weight of the construction sector. But we want to introduce new measures to reduce the working day, to reform collective bargaining and we want this to be done through an agreement. Within the broad array of reforms I presented to parliament is precisely the reform of the labour market, and that’s what people have talked about the most. Perhaps because it the most demanding job to be done, because it is essential. It is true that I have not changed the labour market, the labour market is as it was when I got to the job. And those who demand the reform most fervently are those who did not do a thing about it and left the law just as it was. But we are now in a process of dialogue talking to both the business world and trade unions and we are doing this most intensely and we want to reach an agreement that includes more flexibility while preserving guarantees and rights of employees.
There are many recipes for this. You have to use your imagination. We are working on formulas that promote cost-cutting for businesses while not cutting the rights of workers. There are models; for example we have the Austrian model. There is an Austrian capital injection model that we are exploring that we might be able to use in part and adjust it to our system and it might turn out to be useful. And we are trying it in out talks with both business and the trade unions. And it is clear that we want an agreement on the reform. We want that to be the result of consensus and based on trust. Because all of this will contribute to job creation. And we think that will begin to happen at the end of this year. But the key to begin creating jobs again is to recover growth again. And we do think that we are already on the road to growth recovery.
FT: You spoke about new measures by the end of the year for competitiveness, labour reform and cutting the budget, but then you implied that most of these were already under way and had been announced. As well as announcing more spending, more aid, might you not also have to announce more austerity, because it’s essential for Spain and the markets will demand it?
Zapatero: I’ve explained about the cuts for 2010, and of course of the increase in taxes, too.
FT: But there’s not much left for contingencies, for instance if you have to contribute to a bailout for Greece, or the German economy doesn’t recover. And you’re constrained by the need to spend on debt repayments, and the spending of regional governments.
Zapatero: Well, if we had to bail out Greece, it would be a loan, not a deficit, so as you know the level of our debt [relative to GDP] is 20 points below the European average, although it has gone up. Second, the fact that a significant part of public expenditure is in the hands of regional governments does not mean that we cannot influence that expenditure, and bring it down. For instance personnel costs – the remuneration of all public employees is decided on by the central government, and therefore we do have more ability to influence those items than it might seem.
But right now, if we meet strictly the deficit reduction of 2.5 points in GDP, 2 points in 2011, and 2 points in 2012 and 2 in 2013, we will be at 3 per cent deficit in 2013, and that is with moderate forecasts of economic growth. Let’s wait and see how we end 2010 and where we are on the budget and whether we are meeting our targets, and of course if we have to make more cuts or demand more austerity, then we will do so.
So far, the concrete plan that we have in place means we have to cut public expenditure on investments by 13 per cent over the next three years, 35 per cent in transfers to the regional governments and 15 per cent overheads we are going to cut that, no matter what it costs just as we said at the beginning of the year that we are going to cut expenditure by another €5bn, and it was approved by cabinet immediately.
So we do meet our commitments, and when we make an announcement we execute it. The reduction in public employment we just approved. We’ve gone from 15,000 new jobs last year to only 2,000 new jobs this year, almost half for the police and Guardia Civil, where we still want to make progress. It has been bad news of course for those people who sat their public service entrance exams. I understand that – so it is not quite a popular measure. It has been a big sacrifice for many but it is necessary for the country.
FT: Some have said Spain has become more polarised in the last few years. In America, things are polarised too. But some people in Spain blame your government’s legislation. Do you accept that Spain is more polarised and should you do something?
Zapatero: Well I used to think that our country was polarised but at the same level as other countries, really. In fact, I have seen times of much greater division in Spain, back in the 90s, for instance, with huge confrontation between Felipe González and Aznar. That last stage was really tough. It is true there has been polarisation but that has had a lot to do with the strategy set by the American neocons which has spread to many conservative forces elsewhere and I believe we should get past that as soon as possible.
And now in this term, I feel there is slightly less polarisation than in the first term in government, when there was some major conflicts in the fight against ETA, a lot of tension between government and opposition, as you said, when we passed progressive laws, of different types.
The gay marriage law has actually made me feel extremely proud. I think people see it as something entirely normal in Spain, gay marriages. We were told that we were killing the family in Spain and yet the Spanish family is in rude health, and a lot more people are happy. We’ve managed to recognise the right of people who have been discriminated against and harassed for many years, because of their sexual orientation and I hope that is an unstoppable trend in advanced societies.
So it’s a law I am particularly proud of - it contributes to tolerance in society as a whole. And it’s true that Spain is supposed to be a secular state but not everybody understands that in the same way, and we have a relationship with the Catholic church and there are certain sectors where any European law that you transpose they feel it’s going to be an end to the nuclear family and our tradition and our culture - the very traditions that kept us really apart and separate from Europe and history. We’ve now passed a new abortion law which is very much within the European average.
FT: I wonder how history will judge you. Will historians look back and say here was a truly enlightened leader of Spain, a true socialist who remained faithful to his values but who ultimately missed the moment, missed the historic moment when necessary decisions had to be taken to preserve the legacy of González and Aznar, which was to put Spain in the premier league and when they look back they will see this was the moment when Spain slipped off into the second division?
Zapatero: No, no, Spain is not going to fall back into the second division. Yes, times are difficult, but we will be in the first division, with the strong countries. To tell you the truth, I don’t know how history will judge me. I’m sure that opinions will be divided as is only normal in a democracy. I think what counts is for me to have been loyal to my commitments to have acted them on and another element is accepting the mistakes. I’m sure that Aznar thought that everything he did was great. I know that I get some things right and I don’t get others right and I suppose that’s how I’d like to be remembered.