Few would disagree that Spain’s economy is facing an unusual mix of challenges right now. The country is struggling with the highest unemployment rate in Western Europe, hovering around 20%, as well as soaring national debt and a pension shortfall that make many people wonder if the region’s fifth-largest economy will require a large bailout similar to those granted to Greece and more recently to Ireland.

Indeed, a former leader of Spain — Jose Maria Aznar, the conservative-leaning prime minister who served from 1996 to 2004 — noted during a recent talk at Wharton that his homeland is being severely tested right now. Yet despite Spain’s epic challenges, the solution to the country’s problems, according to Aznar, is fairly simple: more fiscal discipline. “The Spanish state at this moment is unsustainable, politically and financially,” Aznar stated, adding, however, that Spain, which has been ruled by an opposition Socialist coalition since he left office, could bounce back with a bold program that includes not only reducing its deficit but also lowering taxes and increasing privatization.

Individual European nations such as Spain can regain competitiveness, but success in this area requires “a more flexible country with less costs,” Aznar noted. In addition to lowering taxes, he urged nations to address the issue of high labor costs and expensive welfare programs that exist across the European Union.

Back in Spain, Aznar’s successors are dealing with the real-world difficulties of making those kinds of reforms and also gaining public buy-in. A proposal to increase the nation’s retirement age from 65 to 67 — similar to the plan that caused widespread social unrest in France — and other Spanish austerity measures are provoking discontent among labor unions. That includes air traffic controllers who, in December, staged a brief “wildcat” strike (one that is worker initiated without the authorization of trade union officials) in part to protest the type of government privatization that Aznar supports.

But Aznar held firm to the primarily conservative core principles that also guided his eight years as Spanish prime minister. These are highlighted by a belief in free markets and democratic government; a close cross-Atlantic alliance between Europe and the United States; a strong European Union with the euro as its economic foundation; global free trade, and strong measures to confront terrorism and the threat of nuclear proliferation. He told the audience that Europe’s alliance with America is especially critical because of the continents’ shared values “based on freedom, democracy, the rule of law in governance, liberalism, transparency, a free economy and equality between men and women.”

During his tenure in government, Spain created five million jobs — some 60% of all job creation in the euro zone — and reduced its national debt. Aznar himself became a leading proponent of the euro as a common European currency. His conservative Partido Popular, or People’s Party, seemed on track to continue leading Spain in 2004 until that spring’s Madrid terrorist bombings turned the political tide to the Socialists. Since leaving government, Aznar has headed a think tank closely tied to the Partido Popular, taught courses at Georgetown University in Washington, D.C., and served as a director of Rupert Murdoch’s News Corp.

‘A Declining Continent’

Although much of his Wharton talk was a broad overview, Aznar offered several criticisms of the liberal policies of other governments, including the rise in deficit spending in the United States under President Barack Obama. “I don’t understand how [it] is possible to reduce debt with more debt,” he said.

He expressed a similar level of bemusement, tossing his hands skyward, at the uproar in France over raising that county’s retirement age to 62, which is still three years younger than Spain’s retirement age, even before the current proposed increase. “This is not 70!” Aznar noted. “This is 62.” He said that major reforms in the European labor market are needed to reverse rising youth unemployment.

Still, Aznar also acknowledged that much has changed in the world since he left office, particularly the rapid growth of Asian economic power and the decreasing ability of both Europe and the United States to wield political muscle. “Europe in this world is a declining continent — a wealthy continent obviously, a rich continent — but it’s a declining continent,” Aznar said.

He also noted his surprise that a U.S. proposal to urge China to reevaluate its economy was rejected by the rest of the G-20 group of economic powers, a move he said would not have happened during the years that he was prime minister. “This means that the strategic situation that existed in the world after the collapse of the Soviet Union has disappeared.”

Also, like many world leaders, Aznar expressed some disappointment that the U.S. government’s internal security measures were not able to prevent the recent massive release of classified State Department cables and other key documents onto the Wikileaks website and into major mainstream newspapers. That said, he noted that the Internet had dealt a blow to past efforts at secrecy and that world leaders must act accordingly. “In the Internet world, privacy does not exist. But confidence must exist.”

Forging a Transatlantic Alliance

Nonetheless, Aznar argued that the rise of Asia and the weakening position of Western Europe and the United States necessitate a strong cross-Atlantic alliance, even at a time when American officials may be paying more attention to developments in China and elsewhere in the Pacific Rim.

According to Aznar, modern Europe essentially owes its existence to the historic alliance with the United States. As prime minister, he had argued for an expanded membership and broader role for the North Atlantic Treaty Organization (NATO), saying that a strong military alliance could help protect the spread of Western ideals, such as democracy and free markets. He said closer U.S./European ties could also ward off temptation stemming from the ongoing economic slowdown to turn away from global free trade and toward protectionism.

“Protectionism was the worst consequence [adopted] by countries in the 1930s,” Aznar noted, referring to the Great Depression era. “Taking protectionist [actions] was terrible for the world economy…. If the Chinese people, or government of Brazil, [or] the governments of other emerging economies defend free trade while the United States and Europe defend protectionist decisions, that is not, in my view, the right path. That is not a good decision for the world at this moment.”

Another reason Aznar supports a strong trans-Atlantic alliance is because it will help establish a unified stance in the fight against international terrorism. He made it clear that this is a very important issue to him personally, although he did not go into details about the 1995 incident during which Aznar’s armored car protected him from serious injury in a bomb attack by the Basque separatist group ETA.

“In Washington, you can visit the memorial to the Korean War [which] has an inscription that reads, ‘Freedom is not free,'” Aznar said. “There are people who don’t like it, [who] don’t like democracy, and they are trying to destroy it.” The former Spanish prime minister voiced his concern that America has grown too complacent in combating terrorism because there has not been a major attack on U.S. soil in nearly a decade.

Aznar also maintained that strong ties between Western nations are necessary to fight what he sees as an increasing threat of global nuclear proliferation. “If Iran became a nuclear power, [many] changes [would] happen in the world, but one is sure — a lot of countries [might make] the decision to become nuclear powers,” Aznar suggested. “Imagine a world with 30 nuclear powers.”

However, it seems clear that Europe’s ability to create any type of united front on any issue may suffer if the economic struggles of some key members of the European Union — and the potential need for bailouts or other types of intervention — lead to increased nationalism and continental disunity. Aznar expressed disapproval of the way in which the massive financial rescue of Greece was handled. “I think it would be more responsible to accept a Greek default and to restructure Greek debt, and to accept that some private companies [would] suffer the consequences.” Part of the problem, he noted, is that, based upon the Greek model, it is simply impossible to organize a bailout of every major European national economy that needs one. Future bailouts, he added, need to offer more requirements imposing the type of major reforms he would like to see in Spain and elsewhere.