Strategy Op. Ed.

Why PP loses today; Spain's real challenges

Politicians and an election campaign is the stuff Petrie dishes were invented for. Like diligent laboratory slogs, we heartless strategists zoom in on the colors of failure. Today, our subject is Spain's Partido Popular destined to lose handily today's Presidential election despite running against an ineffective Rodríguez Zapatero government.

Rodrígeuz Zapatero and the ruling PSOE was vulnerable for: 1) running a zigzag economic policy that now simply looks ridiculous as the economy tanks; 2) inventing an incoherent immigration policy that is coming part with rising unemployment; 3) demonstrating that it was thoroughly informed and confused in its failed negotiations with ETA, culminating in a terrorist attack just days before the elections; 4) nuzzling up to Chavez and Castro and getting dumped on by Merkel and Zarkozy; etc., etc. During four years, PSOE proposed and undid policy after policy, passed into law programs it could not fund, and in general demostrated a level of incompetenence that ought to send a ruling party into exile.

And yet, PP's candidate, Mariano Rajoy, was incapable of making inroads on a single issue. On the economy he had no real proposals despite growing inflation and unemployment. On the negotiations with ETA, PP whined and protested to the point that it seemed that they were undermining a government when the government was screwing up all on its own.

PP did an ever worse job with regional national demands. For decades, PP has presented a vision of Spain as a social club for Spanish speakers. This was always a bad strategy. Which leads to a good question: Why would PP pursue a losing strategy year after year?

A story might help to provide an answer. Three and a half years ago, not long after PP lost the last elections by making a mess of its response to the horrifying terrorist attack of March 11th, I taught a strategy class to members of Spain National and Madrid Autonomous Community Parliaments. It gave me a chance to challenge the strategy skills of politicians from PP, PSOE and Izquierda Unida.

During one class break, I suggested to several PP class participants that they propose an education bill offering parents the opportunity to send their kids to school in any of the four national languages anywhere in Spain. I told them to put on their strategists' hats and ask themselves, "How many parents will sign up their kids for the Madrid Ikastola?" I said, "Do what I say and you will look like the avatars of tolerance while you fight back against the nationalists." I said, "This is a no-brainer for you guys."

My idea was rejected out of hand. And so the idea sat dormant until this election season when PSOE, smelling an opportunity, came forward in Andalucia with their own language proposal. As befits PSOE, the plan was a mess, with the utopian goal of trilingual Andalusians conversing in Spanish, English and `pidgin Catalan without spending money to do it. PP, of course, rejected the idea as "insane".

But this seemed to open up saner minds, so that in the last minute of the campaign, the President of the Autonomous Community of Madrid, Esperanza Aguirre, figured this out and offered Catalan schooling in Madrid. Way too little, and way too late. PP had already secured its rightful place with the electorate as the anti-Basque and anti-Catalan party.

[I might add here that Aguirre was the only candidate PP could have fielded with a chance to defeat Rodríguez Zapatero.]

In large part, PP will lose this election due to its failed strategy for managing regional nationalism. PP should have realized that following the devolution of power to the local autonomous governments, the only real issue left is language. This was, of course, always the most emotionally charged issue. Culture, as we know, is rooted in language and religion.

Accordingly, PP loyalists do everything they can to defend the Spanish language. But it does so by fighting against the use of the minority languages and position themselves as the big ugly oppressor. This is as stupid as telling a teenage child to listen to Mom and Dad and not his friends. The right strategy, as we know now, was cooptation via offering the regional nationalists the opportunity to use their languages in the rest of Spain.

PP's strategic inability to reflect and change is evidenced in its other failures as well. On immigration, PP did almost as bad as it has on regional nationalism. Spain's immigration mess was an opportunity PP could not afford to flub, but as they had never come to terms with the failures of the Aznar government, they were stuck defending old failed policies. As a result, they came off as racists, when in fact their proposals were similar, or even less restrictive, than those proposed by many other European governments.

This is not to say that getting the strategy on immigration is easy. PP needed to demonstrate that they had learned from the mistakes made during their eight years in power. The had to make the case that as the first Spanish government to face immigration that had to go up the learning curve ... and it so doing that they had turned a dangerous corner on immigration only to have PSOE then drive the country off the cliff. Instead, once again, just as they had on Iraq and the terrorist attacks of March 11th, PP decided to stand its ground. This was bad strategy.

And so on the economy, on regional nationalism and on immigration, PP shot itself it the foot. But even after getting all this wrong, they might still have won the elections if they had been able to field a solid candidate.

However, Mr. Rajoy is a terrible candidate. He is an  awful public speaker. He mumbles and modulates his voice in a way that makes the trivial important and the important incomprehensible. Numbers seem beyond him; each time he inserts a statistic he stumbles around looking for an idea to which he can connect the number. On occasion, he projects passion and interest, but this is precisely when he most looses connection with his arguments. I have been told that in private Mr. Rajoy is intelligent and warm. Unfortunately, In public, he is clumsy, cloying and needy. If possible, he is an even worse candidate than John Kerry.

After such virulent criticism of Mr. Rajoy, I will be accused of being a Rodríguez Zapatero supporter. This is not true, though I am a social democrat. In this election, we are faced sadly with a choice between an incompetent party in power and an opposition party with outdated ideas, no discernable program, and a bad candidate.

Among Spaniards with an interest in politics, the read on the four years of the Rodríguez Zapatero government is that the best thing that happened was that mostly nothing happened. The standard line is the following: Lame schemes were proposed and then shot down by the Minister of Economy, Pedro Solbes, or when they were passed into law there was no money to fund them.

Unfortunately, benign confusion will no longer do. Rising unemployment and inflation will be accompanied by rising crime and social unrest. We face hard times. Hopefully, the Zapatero Rodríguez government will awaken from its dogmatic slumber and behave like a professional government and not just a bunch of weekend aviation enthusiasts proud of having gotten their model airplane off the ground. We have run into foul weather and need a steady hand.   

9 - 11 on 9 - 10

In lock-step with the Bush Administration's non-strategy, Rudolph Guiliani and the rest of the Republican Presendential candidates have demonstrated that they too are prepared to depend on nothing more than self-righteousness to wage war in Iraq and combat global terrorism.

This is an awful thought to have on 9-10, the eve of 9-11. As I prepare for tomorrow's mourning, it is tremendously painful to recall that 9-11 was made possible by the progressive loss of American moral standing throughout the world. The truth is ugly, but needs saying -- more than once. Nothing, of course, can justify 9-11, but our responsibility as strategists is to discover in our own actions the weaknesses that the enemy exploited to attack us and consequently take strategic action to defeat the enemy. The U.S. itself is responsible for undermining America's moral standing over the last decade and permitting terrorists to develop an anti-American, anti-Western ideology supported by millions. Nothing could be worse for a country called on to lead.

Such leadership, according to Machiavelli, is based on respect and fear. "Respect and fear" is the internalized, unchallenged belief held by both rulers and ruled that those in power today are doing what must be done, and will continue to do what must be done in the future. This is "moral standing".

Moral standing provides three main benefits. 1. Moral standing establishes guideposts for strategic action; 2) Moral standing is the basis of social cohesion and commitment; 3) Moral standing cowers potential enemies before they take action.

Moral standing is difficult to achieve and even harder to maintain. In order to create and hold moral standing, it is necessary to profess and defend ideals that are coherent, congruent, and consistent. In short, ideals must make sense, they must meet a real need, they must be adhered to across generations.

This may sound to some like idealistic globbly-goop, but it is not. Quite simply, unworthy ideals eventually undo themselves and fall, like the Berlin Wall, though admittedly the process may be long and painful.

In the years following World War II, the U.S.'s moral standing seemed unquestionable. Having defeated Nazi totalitarianism, the U.S. confronted the Cold War and a Communist enemy so perverse that the U.S.'s moral superiority hardly seemed an issue; even Vietnam did little to undo that leadership. But then came the first oil crisis. The U.S. caved into OPEC. The U.S. made a mess in the Middle East, Northern Africa and Asia. The United States wavered, and we suffered terrorist attacks supported by Libya. We bombed the Libyans, and this quieted them. We slowed, but did not stop, the demise of U.S. moral standing. And as we continued to borrow from the rest of the world to pay for our oil and consumption habits, as we made ourselves vulnerable to our enemies, our moral standing continued to wane. Nowhere was this more evident than in the first Gulf War where the U.S. and its allies failed to achieve closure. Throughout the world, it was considered a sign of weakness to leave in power a leader whom we had defeated in war. All we cared about it seemed was making sure we had the oil.

The Clinton Administration sought to undo some of the damage, but failed to achieve peace in the Middle East. Focused on a single strategic action, the U.S. committed too few resources to foreign diplomacy, foreign intelligence gathering, and the emerging Islamic fundamentalist threat. When its peace initiatives failed, The Clinton Adminstration was left with no strategy and billion dollar commitments to arms for Israel and Egypt, and millions more to a corrupt Arafat regime in Palestine as well as to the Saudis. Periodically during the Clinton Administration, fundamentalists tested the U.S.'s moral standing via terrorism against American targets. The response was tepid and disorganized.

9-11 put the terrorist threat at the top of the agenda. The world asked the U.S. to make a serious strategic response. World sympathy provided an opportunity to revitalize America's damaged moral standing. Unfortunately, the Bush Administration spurned strategic thinking, and instead relied on the crude tools of self-righteousness -- scare tactics, lying, secrecy and torture. Self-righteous is an ideology that speaks only to itself; it will never win over the uninitiated. It may kill subjugate them, but it will never convert. Rather than revitalize the U.S.'s moral standing and world leadership, the Bush Administration create dangerous enemies.

Why did Americans let this happen? Self-righteousness ideologies have never been acceptable to the American moral consciouness, but following 9 -11 the American public and Democrats were unable to say no to the Bush Administration. 9-11 had presented the Bush Administration with an opportunity to reconfigure and reassert U.S. moral standing, and Americans stood by as our world leadership was dismantled.

The Bush's administration most agregious attack on U.S.'s moral standing was the invasion of Iraq itself. Remarkably, our French and German allies called U.S. military action "immoral". As I have written on other occasions, the French and German response to the exercise of U.S. power was staggering. It signaled the end of America's power and privilege. It was now legitimate to kill immoral Americans. Nearly half a decade later, hunting season in Iraq is still open, and any fool can take out a license to murder.

If you want to know how this all worked (and didn't work) you can read Frank Rich, who every Sunday in The New York Times does his duty by spelling out in detail the weekly catastrophe. I read his column quickly, as I no longer have the stomach for navigating in Bushian self-righteous ruin. As Mr. Rich correctly reminds us, this tragedy is not Mr. Bush's, but America's and Iraq's.

The American tragedy is not just about failure in Iraq. Having cowed the American public and the Democratic party and desemboweled U.S. moral standing, the Bush Administration has proceeded to engage in astonishing incompetence.The tragedy lived by the "average American" is not about moral standing. What drives Americans crazy is trying to make do in a country that does not work. Iraq, Katrina, and the sub-prime mortgage crisis are not easy to swallow. Yet, most Americans simply shrug their shoulders and wait for something better. Insecure and confused, Americans are demoralized to the point that they have not even taken to the streets to demonstrate against a hated war. Our enemies are gaining ground without having made another attack.

In my search for answers for how this could have happened, I have turned to looking at big concepts, like moral standing. And I ask myself, as a strategist, whether the moral self-righteousness the Bush Administration suffers from is necessarily linked to operational incompetence and corruption.

Frankly, there is no way to be certain, but there is reason to believe that moral self-righteousness only works in simple situations where the goals are short-term and easy to achieve. In a complex world, moral self-righteousness is a blunt instrument that leads to rigidity and an inability to adapt to new circumstances. At every failure, the self-righteous refuse to change and claim they are staying the course. As the failures mount, they bend the truth, and when that does not work they begin to rewrite the rules in the name of their self-righteous ideals. And so they justify torture, lying, corruption and chronyism, and manipulate the news and information. In this fashion,the Bush Administration created fertile ground for its incompetence.

Putting my readers through this brief discourse on morals and government failure is only justifiable if it somehow helps us to respond to the disaster left by the Bush Administration and threat of terrorism. The key is to understand the link between moral standing and the social contract. A new strategy must be based on reclaiming the core values of our social contract. We have a right to a government which does its job of ensuring the necessary public goods -- universal free education and health, public safety, honest government . We seek a society in which the differences between the best off and the worst off diminish as we become wealthier.

Under the Bush Administration, every single public good has been damaged and large and petty corruptions have become standard practice. The Bush Administration legalized and defended corruption and torture. It has defended gross and perverse economic inequality as the "fair outcome of competition which rewards the most talented and hardest working," while consistently rigging the game in favor of those who have. While exalting meritocracy, it made chronyism and loyalty more important than abilily.

As a result of these myriad failures, our free society is weaker and we are more vulnerable to enemies who self-righteously believe that they can impose their values on others through violence.

On 9-10, I seek to comprehend the enormity of these moral, social and economic failures. As I mourn tomorrow, 9-11, those who died and were injured in my city, New York, and in the other terrorist attacks, I renew my pledge to work to re-build America and recuperate the values that in the past have protected us from our enemies not matter how brutal their methods nor immoral their aims.

-Hugo Chavez -- "dictator-in-training"

With the shut down and takeover of independent television broadcaster RCTV, Hugo Chavez appears to be about to take off the training wheels and convert himself into a "freely-elected socialist dictator".  It appears that Mr. Chavez has sufficient support in Venezuela and Latin America and elsewhere for him to convert a Venezuela's struggling democracy into a proprietary dictatorship.

Castro is Chavez's role model. Once a pariah, Fidel Castro's PR has improved thanks to the Bush Administration's abuses in Iraq and Guantánamo, as well as the election of sympathetic Presidents in Bolivia, Argentina and Brasil. Even Castro's illness has helped; he hardly looks like a dangerous dictator anymore. Then again, neither did Franco nor Pinochet.

Michael Moore's recent appearance at Cannes, with his much acclaimed "Sicko", was also a boost for Castro. Moore counterpointed the "success" of Cuba's bare bones medical system with the horrifically expensive U.S. system that leaves 40 million Americans uninsured while it makes drug companies and doctors rich. At Cannes, no one seemed to worry that Moore does not see how badly Cuban medicine has deteriorated without Soviet subsidies. Just as in "Fahrenheit 9-11", he was right about the message of what a mess the U.S. is in, though Moore's tendency to take cheap shots stripped credibility from a story that needed to be told.

But as annoying as Castro is, China and the democratically-elected Latin American Presidents Chavez counts as allies will have a much more serious influence on Chavez's future.

Why China? China's growing power and status is a boon to dictatorships all over the world that claim that democracy is an obstacle to serving the people. No surprise then that corrupt governments, e.g., Sudan, are happy to deal with the Chinese who systematically turn a blind eye to human rights violations. We can expect strengthened relations between China and Venezuela, particularly in oil.

With the U.S. engaged in it own violations of rights in Iraq, we don't seem to have a good answer to China's policies. Our moral standing has been badly damaged. In the 1990's it seemed that we were making progress, however, with tougher laws and healthy pressure from NGOS and the press, but the war in Iraq has taken us several giant steps backwards.

That said, I have great hope for China. We should not forget that China's capitalist revolution is a permanent threat to a selectively repressive one-party State, China will change, but not soon enough to help Venezuela.

Which brings us back to RCTV and the immediate problem in Venezuela. The Chavez government depends on support from Bolivia, Brasil and Argentina for its legitimacy. The dependency is due largely to the failure of the Chavez government to make real progress meeting its citizens fundamental needs despite the influx of billions in oil money. As yet this has not undermined popular support for Mr. Chavez, who see their leader welcomed as part of a group of committed socially-oriented Latin American Presidents.

We should not underestimate Chavez's support in Venezuela. During decades the majority of Venezuelans suffered under corruption and incompetent governments. Chavez won election by giving voice to the formerly disenfranchised; in fact, Chavez was also supported by many middle-class and professional Venezuelans anxious for change. But Chavez was impatient with democracy from the start, and his authortarian bent and populist rhetoric divided the country. Sadly, the incompetent opposition, unable to defeat Chavez at the polls, supported a coup attempt. Chavez survived, and since has progressively moved to install his version of socialism. Increasingly he has maintained power by engaging in populists measures against the "oligarchy", encouraging squatters to expropriate land, nationalizing utilities, and has invented a broad array of Chavezist social programs and citizens groups with great fanfare. While it is difficult to gauge the real impact of the Chavezist social policies, the real data on crime and unemployment have worsened considerably and key infrastructure appears to be deteriorating.

As the situation inside Venezuela deteriorates, the Chavez government has become increasingly authoritarian. Finally, Chavez moved to take over RCTV, the television broadcaster in Venezuela not emitting hours and hours of Chavez talks and "educational" programming.

Which brings us to big question: Why haven't Latin America's other leftist democratic government condemned his actions? To begin with, Chavez provides financial support as well as trade agreements on highly favorable terms. Second, other leftist leaders are delighted that Chavez has the U.S. government so worried that they look like positive allies. Third, Chavez's expropriations and violations of legal agreements with multinationals gives them bargaining power at home.

The Presidents of Brasil, Bolivia and Argentina could do a great deal by coming out strongly against Chavez's takeover of RCTV. Brasil's Lula da Silva is probably the most important, but he has refused to comment: "It is a problem of Venezuelan legislation. A problem of the Venezuelan government... In the same way I don't want them to give opinions about what I do here, I don't want to comment on what they do."

And so Chavez will continue to disregard minority rights, separation of powers, and the rule of law. Recent violations include expropriating property without compensation, creating a private militia, assuming control of the judiciary and now the media. Without pressure from friendly governments, Chavez will move ahead to institutionalize control. With the pieces in place, Chavez will get the legislature to "vote" for dictatorship. Chavez's dictatorship will squash those foolish enough to express disagreement. They will be hounded, their civil rights abused, jailed and forced to leave the country. Or, as in the case of some stubborn landowners, simply murdered.

Corporate Identity: Love Our Company and We Will Take You to the Promised Land

As luck would have it, just as Endesa was losing its status as Spain's flagship among the world's largest energy companies, Iberdrola bought Scottish Power and leaped to #5 in the world.

To celebrate its new status as one of the world's mega-multinationals, Iberdrola has launched a corporate identity campaign, extolling the virtues of size and international presence. The television ads run against the backdrop of Iberdrola printed large on the sail of El Desafío Español, semfinalist in the America's Cup. It's all rather majestic ... and here too luck has played its role. The decision to sponsor El Desafío Español was taken years before the takeover, at a time when not many would have bet on the Spanish team reaching the semi-finals.

As for the ad campaign itself, Iberdrola's ad is remarkably similar to Endesa's ambitious "All You Need Is Love" campaign. I'll turn to the two advertising blitzes in a moment, but first a few remarks on corporate identity advertising.

Often corporate identity advertising is done to defend the company against some dangerous weakness, with the company proclaiming to be exactly the opposite of what it is suspected of being. For me, the most striking example is Dow Chemical's launching in 1985 of its "Dow Lets You Do Great Things" campaign to counterattack the company's awful reputation for having provided the U.S. Armed Forces with napalm during the Vietnam War. For those of you don't remember Dow and napalm, I am sure that you will recall Robert Duvall's famous line in Apocalypse Now, "I love the smell of napalm in the morning."

During the Vietnam War, Dow was truly reviled. The company was target of demonstrations on college campuses all over the United States, When I was 16, my college interview at the University of Pennsylvania had to be delayed because of a demonstration against Dow Chemical recruiting on campus.

The demonstrations did not stop Dow from continuing to manufacture napalm and Agent Orange throughout the war. The effect, however, on Dow's reputation was so severe and lasting that the company had to wait a whole decade after the end of the war to go ahead with its clean-up corporate identity campaign.

Dow ran the ad campaign year after year. The company's diligence was rewarded. More than a decade later, when I was finishing up my MBA at New  York University, a couple of classmates mentioned that they were interviewing with Dow Chemical. I recounted my college interview experience. I was a bit taken aback by their response. Though they recalled napalm, Agent Orange, and knew about the breast implant lawsuits against Dow Corning, they still had a positive view of Dow as a market leader and innovator.   

I had to give Dow credit. Years of persistent, upbeat, we help make the world a better place advertising had done its job. In fact, Dow was so pleased with the results, that the company became one of the first to make being green and CSR an integral part of its strategy. Dow's most recent campaign, launched in 2006, is "The Human Element", proclaims Dow's vision of addressing some of the most pressing economic, social and environmental concerns facing the global community in the coming decade."

For those of you who are concerned that this might just be opportunism, it turns out that pledging to be socially responsible does have at least one, important positive effect. Employees and NGOs end up expecting firms to live up to their rhetoric, and when they stray, as was the case with BP, the response can be brutal.

Well-desigend corporate identity programs work. What, then, about Endesa and Iberdrola. On several occasions, I have written about how amused I was by the Endesa's use of the Beatles' "All You Need Is Love" in their ads, as if somehow management knew that without the "love" of Spaniards, the company would get taken away from them. Intuitively, management understood that there was no imperative demanding the continued existence of Endesa. Apparently, no very many of us are convinced that the world is like to be better or worse because of Endesa.

Iberdrola's message is nearly a photocopy of Endesa's. Once again, no one, other than the Spanish government, which wants to have its big multinationals, seems to really care. With all the attention focused on the Spanish government's attempt to keep Endesa, Iberdrola's apotheosis has gone almost unnoticied. In their ad, then, you can sense a yearning for attention. Once again, the music gives it all away. This time it's Carly Simon's "Let the River Run", her version of the traditional "The NewJerusalem".

"The New Jerusalem" was the theme song for Working Girl, a charming Harrison Ford - Melanie Griffith "Dr. Doolittle" retelling, directed by the astute Mke Nichols. As the movie closes, Melanie Griffith, having achieved her aim: the transmorgrification from secretary to boss substantiated by being given an office. And the music kicks. It's upbeat, just a few happy notes to the words of

Let the river run,
Let all the dreamers
Wake the nation.
Come, the new jerusalem.

But the New Jerusalem may not be all it's cracked up to be. While Melanie Griffith's Tess luxuriates in her office, the camera pulls back and back and back to reveal hundreds and thousands of tiny squares windows all exactly alike, thousands of identical dot-sized new Jerusalems, no more substantive than the firms that go by names like Endesa, Iberdrola, e.on, Chrysler, companies with no meaningful institutional legacy, firm that will be bought, sold, privatized like Chrysler or taken public, firms that talk of their proud history, their commitment to same values everyone else is committed to  ... when in fact most companies are simply a collection of assets and activities designed to create economic value.

This is not all bad. Once we get rid of the idea that firms should be created to make the world a better place, we are free to judge the actions of those who are running firms now without the safety net of a proud corporate legacy. There is no fall back position, no appeal to what "the founders has in mind". Management is responsible for its success and failures, both economic and social.

There is no compelling reason to keep Endesa, Iberdrola, or Chrysler for that matter, alive. All we need are firms and management that innovate, create wealth, and behave responsibly. We don't need to love Endesa and we don't need Iberdrola to lead us to the New Jerusalem. Perhaps we could do with less corporate identity and lot more managerial integrity.

What A Quote in The Economist Can Do

The Economist decided to quote me in an article on Spanish multinationals. The result was a spike in my blog hits, mostly from people who had entered and, having read my blog, left perplexed by how little my blog is about the issues raised in The Economist article. For those who will come to blog the rest of this week because of The Economist quote, here goes.

I am fascinated by the power of interest rates to change our lives. Yesterday, my colleague, Rafael Pampillón, gave in his economics blog a clear and concise explanation of the EURIBOR, the price of money for Euro currency. On 19 occasions over the last 5 years, the European Central Bank has raised interest rates and made life worse for all of us who have a variable-rate mortgage. Why would they do such a horrible thing?

The European Central Bank must balance the divergent economic policies of socialist and conservative governments against the data on real and expected inflation (oil prices), real and expected growth, consumer confidence, etc. before fixing the price of money and, in effect, how much we pay on our home loans.

What drives European central bank decisions? Europeans, especially Germans, fear inflation, Europeans have live through runaway inflation, followed by social unrest and war. European Union rules emphasize government control of spending and combating inflation. As the number of EU menbers have grown, controlling government spending has become more difficult and the challenges facing the European Central Bank have increased. Combating inflation has become more, not less important, as price stability is fundamental to the continued success of the European project in the face of expansion and the rejection of the European constitution. The European Central Bank will continue to raise combat inflation by making borrowing more expensive if need be. Raise the price of money, people have less money, and prices must fall.

It is all so deceptively simple. If only real life worked this smoothly. During the Nixon Administration in the U.S. we had a bout of stag-flation -- slow growth with high inflation spurred on by a spike in oil prices. Nixon imposed wage and price controls. Would a Republican administration do something so interventionist? Yes, it would. Even better yet, Nixon opted for special windflall profit taxes on oil companies that benefitted from having acquired cheap oil rights before prices skyrocketed.

Did intervention work? Not very well, but it gave the appearance that government was taking action. Curiously, the damage to home owners was less severe than the scenarios painted by The Economist this week. Back then, we had only fixed-rate mortgages, and homeowners did not have to worry about interest rate risk. As long as they hung onto their jobs, they were fine. While other things got more expensive, their home loan payments remained the same, so that the relative cost of owning a home actually decreased. The downside for mortgage holders was that margins were bigger for banks to compensate for assuming the interest rate risk.

Today, most Spaniards have variable interest loans at miraculously low prices, with the average loan at EURIBOR + 0,76%, between 1% - 3% lower than what most would pay with a fixed-rate mortage. In fact, Spain has, I believe, the cheapest variable-rate home loans in the world. Unfortunately, individuals are far less prepared to take on interest rate risk than banks. After 19 straight central bank EURIBOR increases, and interest rates back at 2001 levels, many who took out loans when interest rates were low are hurting. As their pain increases, loan defaults go up; at the same time, contractors slow home building, economic growth slows, people lose jobs. The economy adjusts, almost automatically; it's all part of the economic cycle.

As I am not an economist, I don't have much more to say about how it works. Rather, my analysis starts here, where classical economics bleeds into sociology. I am interested in how this plays out in social life. In Spain, an economic slowdown would quite different consequences than in France or Germany, where demographic and social change has been less dramatic in the last decade. In Spain, housing starts last year, approximately 800,000, were higher than France, Germany and Great Britain put together. Much of the work force for the housing boom is immigrant labor which has entered Spain in the last few years also at a rate greater than France, Germany and England combined. Without immigrant labor, the housing boom would have been impossible. Immigrants, many illegal, are frequently underpaid and work often in unhealthy and dangerous conditions. But they have work. A slow down in the construction industry will fall disproportionally on them. Out of work, their options are few, magnifying the social ills that accompany unemployment and discrimination.

To make matters even more difficult, Spanish banks, which have led much of Spain's economic renaissance, would also suffer. No wonder The Economist is worried. The Spanish government's options are limited. It can do little to affect monetary policy which is run by the European Central Bank. Rodríguez Zapatero probably would not get much support from the much more conservative German and French governments either, especially if Germany continues to build growth and the new Sarkozy government institutes economic reforms. I can imagine Sarkozy once again lambasting Spain for being an immigrant "sieve" and suggesting that Rodríguez Zapatero cut taxes if he wants to help Spaniards have more money to pay their home loans. Silent but smiling, Angela Merkel will nod her head, Yes, happy to get even over the E.on deal.

The bottom line is that the two interrelated factors that could most affect the Rodríguez Zapatero government in the year running up to the Presidential elections are out of its hands -- interest rates and energy prices. Of course, most Spaniards are not worried about what's good for the government, they are worried about what's good for them. If things go badly, they will blame the government for failing to control what it had little control over. Believe it not, it is perfectly fair.

Endgame Endesa: Winners and Losers

With the announcement of the pending Acciona-Enel takeover bid of 42 Euros for Endesa, it appears that we are finally entering into the endgame. E.ON's bid of 38,75 Euros is more than 10% less, and, even more importantly, is opposed by the Spanish government. In short, E.ON can except no regulatory support from the Spaniards, whereas the Acciona-Enel bid follows meetings between Presidents Rodríguez Zapatero and Prodi.

What can the Germans do? They can be foolish and beat the bid and consummate the transfer of 15.000 - 25.000 million Euros from German hands to mostly Spanish hands. Or they can pull back and buy energy assets at reasonable prices and where they are welcome.

This is not the way the European Union said it was supposed to be, but it is the way it is, customarily has been, and will continue to be in most places in the world for the foreseeable future.

Acciona and Enel shareholders will surely be short term losers here, though perhaps the support of the two Mediterranean economic powers may make a difference. Spain and Italy have similar concerns in immigration and tourism; the countries share cultural traditions and feel comfortable with each other. We shall now see, as well, if the Italians return the favor to the the Spaniards by letting the Abertis-Autostrade take-over go through and by favoring Spanish banks in the coming consolidation of the banking industry in Italy.

Where did the Germans go wrong? Their ONLY MISTAKE was making a hostile take-over bid without buying shares first. Once the bid was made, they were prohibited by law from buying. Had they bought before announcing, they could have pocketed billions. Why they made this mistake is impossible to say for sure. Perhaps they thought that they had a wonderful strategy for building the world's largest energy company. Unfortunately, growth is not a strategy, it is an objective. They had no strategy for meeting their objective other than trying to take away from Spain the company the Spanish government had tried to give to Gas Natural. The mistake will cost them several hundred million Euros, far less than if they proceed with their folly.

Why the U.S. Has No Anti-Terrorism Strategy

On October 10th, 2006 I wrote "Values and Facts: A Strategíst's Guide to Defeating Terrorism" in which I argued that internal strength was the best way to defend the U.S. from international terrorism. The argument is clear: Bush administration measures violate U.S. values and ideals, and this, not terrorist attacks, is the principal threat to the United States.

i am afraid that I underestimated the incompetence of the Bush Administration. Attorney General Gonzales' infantile "please catch me for doing this, Daddy" firing of federal judges demonstrates once again the lack of sophistocation the Bush Administration brought to even the simplest dirty tricks. They never figured out that the skulldudgery played in election campaigns simply won't cut it once you are in office. No one told them that governing is not just spin and that you make policy decisions that affect people's lives ... or worse, cost people's lives.

The enemies of the United States (Ahmadinejad, Chávez, the Taliban, Al Quaeda) revel in the failure. Among the enemies' successes we have: The Iraq disaster, the tragi-comic federal response to Hurricane Katrini, no energy policy, no immigration policy, no education policy -- no policy on anything other than defending the Administration's improvised initiatives and lame cover-ups of wrong-doing. Consider a banal but telling example. Bush administration incompetence gives dictator-in-training Hugo Chávez his day in the sun on whirlwind parallel Latin American tour that consists of little more than slandering the President of the United States to cheering crowds while President Bush encounters a chorus of boos and protest. The principal success of the Bush Latin American tour is to consecrate Mr Chávez, a megalomanic who will one day, no doubt, do great damage to Venezuela, as a hero.

Alas, the U.S. shoots itself in the foot, and we, and the rest of the world, suffer because there is no anti-terrorism strategy. Nothing could be more obvious on a weekend when demonstrations throughout the world call for the end of U.S. operations in Iraq and the international presence in Afghanistan, and the closure of the detention center in Guantanomo. The demonstrations call for a stop to the U.S. role in death and stupidity. They don't, however, provide an answer to terrorism. Nor do they address the equally serious problem of the maintenance and expansion of fundamentalist regimes that systematically violate the rights of women.

At the moment, for the American demonstrators, September 11th seems like one awful but distant nightmare against the constant nightmare of demoralizing U.S. failures -- big and small, morally egregious and farcical. How does one balance the threat of a terrorist attack inside the United States against death in Iraq, corruption of the legal system, Iran with the bomb, North Korea with the bomb, tremors in the U.S. real estate market, global warming, a rise murder rate, New Orleans converted into a permanent disaster area, etc.?

Yes, we need a strategy to combat international fundamentalist Muslim terrorism, but first we need a government that can give us back government. When I predicted that the American people would begin massive protests in February, 2005, it was in the hope that there was a chance, even with a Bush Administration, to fix things.

Once again, I was much too optimistic. Two years later, this weekend's protests lack the energy and commitment we need. Americans are demoralized and confused. Americans have witnessed government corruption and chancanery in the past (remember Reagan's, Edward Meese "the Sleaze"), but never so persistently. Our expectation is that governments will lie and commit wrong-doing to defend its specific interests and cover-up mistakes; we never thought that our government's disregard for the law and American values and traditions would thoroughly permeate and incapacitate public life. The American people are in shock and awe of their own government. The most damaging event to the American psyche was the Bush Administration's decision to offer up to the entire world the Guantanomo fiasco, including defending "mild forms of torture" as a legitimate interrogation tactic. I, for one, never imagined that an American government would violate in this bold way our most deeply held values.

We, the American people, are depressed and we need out of this funk. Unfortunately, there is not much chance of this happening before 2008 elections.

In the interim, international terrorism and repressive fundamentalist regimes will prosper. There are few signs of a coordinated international response that includes the resolve to carry out the necessary coordinated, and sometimes covert, operations. Foreign governments are retreating from cooperation with the U.S. and the European Community has yet to show that it can substitute for the U.S. in the fight against terrorism.

Two things, however, could change the current situation: 1) a deepening of the Sunni - Shiite rift that erupts in violence within Iran; or 2) a major terrorist attack in China. I wish for neither. No one ought to be so sick as to pin his hopes on death. The mere thought gives us a good idea of how much damage an incompetent Bush administration can do.

Rajoy, Rodríguez Zapatero, and the Death of Strategy

Dear Readers,

I apologize beforehand for the strident tone and language in this post.  Rarely have I been so frustrated by the incompetence of politicians. We in Spain (I am a resident for 15 years) and in the United States (I am a U.S. citizen) are increasingly unhappy with those entrusted to govern.

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On Saturday, March 10th, I listened to Mariano Rajoy, leader of the opposition Popular Party (PP) in Spain, bungle the opportunity to address a protest march audience of nearly 1,000,000 people. Rajoy's confused attempt to capture why we fight terrorism and defend human dignity served principally to demonstrate why his party had lost the elections following the terrorist attacks on March 11th, 2004.

The only coherent argument Rajoy made was to ask Spaniards ("the good Spaniards" as he calls his supporters) to reject the PSOE government because in its arrogance it is unwilling to listen to the people and return the ETA terrorist Iñaki de Juana Chaos to prison.

While Rajoy bumbled, PSOE fumed. Before, during, and after Rajoy was finished speaking, the ruling PSOE government was busy trotting out its list of epithets, accusing PP of playing politics with terrorism and undermining democracy. PSOE called PP liars and hypocrits. PSOE leaders made faces, groaned, lamented, bellowed, whined, and bleated.

The proverbial dance of history repeating itself first as tragegy, then as farce ... repeated itself. The tragedy we have lived and died with over and over again. Nearly 1,000 men and women have been murdered at the hands of ETA over a period of more than 30 years. And now one of the cruelest of the ETA assassins, Iñaki de Juana Chaos, has achieved, via a hunger strike, his transference to a hospital in San Sebastián, near his home in the Basque region, where he was welcomed by a throng of supporters. de Juana's triumphant arrival at the hospital was the lead on television news, as were reports of ETA political party leaders coming to the hospital for their "state visits" to de Juana. It is difficult to imagine how the government could have managed this worse.

No wonder 1,000,000 men and women desparate for justice were prepared to demonstrate in protest on the weekend of the anniversary of the March 11th terrorists attacks here in Madrid, perpetrated, in this case, by Muslim extremists. No doubt millions more would have been ready had the protests be organized by a civil society group other than PP.

Perhaps the protest is best understood as an event organized by the government itself. The government's incompetence gave de Juana Chaos the opportunity to return home in style. Throw in pictures of de Juana Chaos strapped to hospital bed in Madrid being force fed, stories of de Juana Chaos showering with his girlfriend in hospital and receiving conjugal visits (I have no idea if these stories are true, though I did, as everyone in Spain has, see the photos), and we have a government capable of infuriating nearly everyone, even its most fervent supporters. In the end, 1,000,000 protesters were willing to listen to Mariano Rajoy as the price they had to pay for shouting No! to the unspeakable.

Can anything be done to help politicians learn how to lead? At IE business school, we have a program in management that we run for parliamentarians. Party members and office holders from PSOE, PP, and Izquierda Unida (the leftist party here in Spain). I have been privileged to teach the strategy classes on a couple of occasions. It's fantastic. What could be better than for a strategy professor to be in a room with professional politicians from different political parties and talk strategy. Moreover, I like the students; they are fun, engaging; they lack skills.

Last year, in discussing the Endesa case, we established that PSOE did not have an effective strategy and was thus taken by surprise by E.ON's takeover bid. Since then, PSOE apparently has learned something about how takeovers work, and today E.ON appears cornered and Spanish government may yet achieve its goal of keeping control of Endesa in Spanish hands.

During the same session, just to make sure that the PSOE parliamentarians did not think I had anything against them, I discussed how PP lost the March 14th 2004 elections. The elections had come just three days after the terrorist attack of March 11th. On March 13th, there were protests outside PP headquarters accusing PP of lying about who perpetrated the attacks. PP insists that they believed it was ETA not Muslin extremists; PP blames the loss on PSOE dirty tricks, including breaking the law on campaigning the day before elections.

I told the PP parliamentarians that they were a bunch of cry babies. They had the elections won, but they defeated themselves. I explained that they could have easily won the elections: all that was needed was for then President, José María Aznar, to call the leader of the opposition, José Luis Rodríguez Zapatero, to appear with him before the Spanish people, call for national unity, fair elections, and promise to find and punish the perpetrators. But in his arrogance, Aznar decided to accuse ETA of the attacks, ignore the opposition, and PP was summarily voted out of office.

In my arrogance, I suggested to ALL the politicians in the class that they must never blame the opposition for their defeat; that's what the opposition reason for being is to defeat always seeks. Sometimes, the opposition even does things you think are not very nice. Following defeat, the strategist's job is to seek within his own actions the cause of failure. Only then may he avert the tragedy of repeating his worst mistakes. When I finished with my little speech, I offered, just as arrogantly, my services as a strategist to help them get it right next time. I failed to convert them in clients. Their loss, I arrogantly maintain.

If elections were held today, President Rodríguez Zapatero would likely suffer the same fate as his predecessor, José María Aznar, for precisely the same reasons. The electorate may excuse a politician for defending a losing strategy. The people may even excuse a politician for insulting their intelligence and common sense (I am afraid that this is a daily practice in most parts of the world). But the people do not excuse a politician insulting their pain, their shared tragedy. For this, there should be no pardon.

Then again, things could get still worse. The Spaniards still have a few things to learn about incompetent government from the Bush adminstration.

Lula da Silva Becomes a Free-Trade Hawk; President Bush Becomes A Social Justice Advocate

On Monday, Brasil's President Lula da Silva slammed the U.S. for placing tariffs on cane sugar ethanol (54 cents per gallon) and U.S. President George Bush announced a Latin American tour and an aid package to help Latin America solve its social problems.

The flipflop of roles is welcome, but I am afraid President Bush and the U.S. comes out rather shabbily in all this. Despite the noise President Bush's new Latin American focus, the U.S. proposal will only lift aid to the region to $1,6 billion, chicken feed compared to the oil money Hugo Chavez, dictator-in-training, is throwing around.

[Please excuse the bad mixed agricultural metaphor. Chicken feed, which is also thrown, like oil money; corn which is feed for chickens but is being shifted to ethanol; sugar cane which is cut, shabby clothes that are badly cut. You get the idea. Playing with words instead of facing the problem.]

A little playful, however forced, comic relief is to be expected when the news at home is the latest, worst, and most depressing scandal of the Bush Administration: American soldiers die for nothing in Iraq, and the wounded return to the horrors of Walter Reed Hospital.

Returning, however, to the good news. The shift in U.S. - Latin American relations is a welcome change from puerile ideologies to real-politik. Joining "puerile" with "ideology" are something both Mr. Bush and Mr. Chavez are skilled at. They brandish ideology about, employing lame insults and stock phrases ("liar", "axis of evil") in an attempt to justify ill-advised actions rather than providing reasoned arguments.

I will try to demonstrate that I do care about reasoned arguments. The two reasons I have supported the election of "Anti-Bush" and "Anti-MNE" leftists to the Presidency of Latin American countries is that: 1) these leaders represent formerly underrepresented groups; and 2) once elected they need to provide economic growth, jobs and progress on social issues for their constituents in order to get re-elected.

There is hope even in Venezuela, where Hugo Chavez (whom I did not and do not support) has foolishly sought to waste oil money on buying votes, building an civil society infrastructure loyal to him personally, and investing in Cuba's dictatorship.

Though other elected leftist leaders don't mind taking Venezuela's money and enjoying photo opportunities, they have shown a much more reasoned and pragmatic approach to defending their ideologies. Brasil's Lula de Silva, President Kirchner of Argentina, Uruguay's Tabaré Vázquez, and even Bolivia's Evo Morales all realize that social justice requires economic growth and investment. While none has been able to eradicate corruption, elections are free and fair, there is a free press, economic growth is encouraging if not spectacular, despite unnecessary intervention in the economy. The balance is positive, though there is the threat, especially in Bolivia, that if things go badly, leaders may curtail economic and civil liberties and take a step backwards,

I think we can say that South America is doing better now than 10 years ago, and that the poor, the vast mayority in the continent, are far better represented, though progress on improving their living conditions is painfully slow.

The picture from the United States is much less encouraging. The last five and half years since September 11th in the United States are best described as a series of awful failures. A month after the attacks, American were hopeful thanks to the extraordinary response of civil society. Since then, not much has gone right. The scandal at Walter Reed, the Veterans' hospital, is the next step in a general deterioration of government consistent with the mismanagement of Hurricane Katrina, incompetence and corruption in Iraq, and curtailment of civil liberties.

No wonder Latin American leaders say they do not look to the U.S. for leadership anymore. If they need a political model, Chilé will do nicely. If they need an economic theory, free trade is not bad: You let us sell our stuff to you and you can sell your stuff to us. Of course, in this respect Lula da Silva has it easy; Brasil has something to sell. For other Latin American Presidents, it's more complicated, but we know the right formula: Free trade, free elections, eliminate corruption, fiscal responsibility: spend on education, health services and family planning.

Meanwhile, in the United States, we will have to survive another 21 months with a President whose administration is now responsible for mistreating wounded American soldiers. If there is an unpardonable offense in the United States, it is failing war veterans.

The Most Important Book of the 21st Century: John Rawls' "A Theory of Justice"

Marx's Communist Manifesto  (1848), Darwin's The Origin of Species (1859) and Freud's Psychopathology of Everyday Life (1900) largely determined our 20th century understanding of politics, biology and human behavior. Together, these three book form the core of "the mind behind the last 100 years." For it is a truism that men and women treat ideas as empirical data and act accordingly.

If books matter so much, maybe we ought to know what books have mattered since Freud demonstrated that we reveal our most secret desires in our most banal acts. My vote for most important book goes to a fat, philosophy tome by John Rawls entitled A THEORY OF JUSTICE.

Today, just about anyone who does an MBA gets a dousing of Rawls in the required ethics class, or as is the case at IE Business School, in our course "Business, Government and Society". Logically, Rawls has not appeared in the curriculum out of nowhere. Rawls' work arrived at business schools following its enormous influence on philosophy, politic science and legal studies. As a result, politicians and CEOs now find themselves responding to Rawls' arguments whether they know (or like) it or not.

Rawls' argument rests on answering a deceptively simple question: assuming you did not know whether you would be born rich or poor, smart or dumb, healthy or sick, what kind of rules for society would you want to have? Rawls' phrases the question using two fundamental concepts: "the original position" and "the veil of ignorance". He asks, Given an "original position" in which all human beings are equally subject to a "veil of ignorance" what social contract would you choose?

No doubt we would all choose a system of social institutions in which each human being had a truly equal chance to achieve success and in which no one person's success depended on sacrificing another's freedom and well-being.

Sounds enticing? But before you run out and buy Rawls' A Theory of Justice, you should know that Rawl's work has been attacked by economists and philosophers as wishful thinking, at best, and as a recipe for state socialist disaster. Robert Nozick, the philosopher, whose Philosophical Explanations was my nighttable book for some time, was an assiduous critic. And should also know that you will have 500 plus pages of reading ahead of you.

Personally, I find Rawls' argument sufficiently compelling to overcome the objections, but I won't ask you to take my word for it. Allow me to propose the following. Read just Chapter 1: "Justice as Fairness". It's 44 pages. It's beautifully written. Rawls' begins with "The Role of Justice".

Justice is the first virtue of social institutions, as truth is of systems of thought. A theory however elegant and economical must be rejected or revised if untrue; likewise laws and institutions no matter how efficient and well-arranged must be reformed or abolished if they are unjust. Each person possesses an inviolability founded on justice that even the welfare of society as a whole cannot override. For this reason justice denies that the loss of freedom for some is made right by the greater good shared by others.

Enjoy the read!