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Last Updated: Wednesday, 10 March, 2004, 17:54 GMT
Spanish economy booms as parties spar
ANALYSIS
By Katya Adler
BBC correspondent in Madrid

Enthusiasm for the January sales in Barcelona as spending booms
Enthusiasm for the January sales in Barcelona as spending booms
As Spain's general election campaign draws to a close, the ruling centre-right Popular Party is hoping to stay in power on the back of the country's strong economy.

Election campaigns are famous for mud-slinging.

They are largely designed to win over the undecided voters in the last weeks before an election.

So it's not simply about persuading them that your political party is the best, but also that your opponents are the worst.

Spain's left-wing opposition has run a campaign of complaints against the conservative government.

Socialist candidate Jose Luis Rodriguez Zapatero
The Socialists also endorse economic orthodoxy
It accuses Prime Minister Jose Maria Aznar of dragging the country to a war in Iraq against the will of the people, of cosying up to the United States to the detriment of European friendships, of riding rough-shod over Spain's regional sensibilities and of ignoring the poor and the needy.

But when it comes to Spain's economic performance the opposition becomes rather unstuck.

Poor cousin transformed

When Spain joined the EU in 1986, it was considered one of the continent's poor cousins.

But during the last eight years of conservative government, Spain has become the fastest growing big economy in Europe.

Saffron growers in rural Spain
Since joining the EU, Spain's economy has been transformed
During the 'matador years' as Spaniards nicknamed the late 1990s, annual economic growth averaged 4%.

Now it's down to 2.4% but that's still four times as fast as the rest of the EU.

This week European Union finance ministers announced that Spain's budget plans for the period of 2003 until 2007 looked sound and were based on realistic economic assumptions.

In fact Spain is targeting surpluses in the public budget.

So what's the magic formula?

Economic orthodoxy

Well, there is no Mediterranean glamour here - just plain and simple economic orthodoxy to achieve what economists call 'dynamic stability'.

Prime Minister Aznar is a self-professed admirer of the former British conservative Prime Minister Margaret Thatcher.

The retiring Spanish PM Jose Maria Aznar (right) with Mariano Rajoy, who will lead Aznar's party into elections
PM Aznar (right) is hoping to hand power to Rajoy
He certainly seems to have embraced her style of pro-business reform.

In his eight years as Prime Minister he has privatised almost every public industry, slashed taxes, cut public spending (from 48% of GDP to 40%), slim-lined the welfare state and balanced the budget in 2001.

Again in contrast that to others in the European Union.

Living in Spain you certainly get the feeling it's a country going places.

The shops, bars and restaurants are full.

One Europe-wide survey described Spaniards as amongst Europe's most confident consumers.

Problems ahead

There are a few caveats to this success story, though.

Tourism is Spain's biggest industry, with a ready supply of sun and sand
Tourism is Spain's biggest industry, with a ready supply of sun and sand
Many of those confident consumers can't afford to be out shopping.

85% of Spanish households are in some sort of debt.

Years of low mortgage rates have tempted people on to the house market who can't really afford to be there.

The result is a classic scenario of inflated house prices and personal debt.

And per capita income in Spain still lags 13% behind the EU average.

Unemployment - at 11.2% - remains the EU's highest.

This is still an improvement on a decade ago - when unemployment reached 24% - but most of the job creation schemes, trumpeted by the Aznar government, area based on short term contract work.

Of particular concern is the level of youth unemployment in Spain - also one of the highest in the European Union.

Prospects for young Spaniards seem gloomy when you look at its comparatively poor standards in secondary and university education.

The European Commission recently gave Spain a low competitiveness rating.

It invests comparatively little in Research and Development, has failed to reform its pension system to EU requirements and yet like much of Western Europe, has a rapidly aging workforce.

These are ticking time bombs for the Spanish economy.

Bureaucracy

More damaging in the short term, however, is that the Spanish labour market is extremely bureaucratic.

This is where Prime Minister Aznar turned his back on the Iron Lady's legacy.

Not for him the bitter struggle with mighty trade unions.

His threats (or promises) after the last general election to liberalise the labour market provoked a general strike nearly two years ago.

In the end, though, the Aznar government only slightly modified Spain's rigid labour laws, with worrying consequences.

Job protection and income guarantee clauses make employers hesitant to hire.

Temporary jobs encompass nearly a third of all employment in Spain.

So many restrictions and endless red tape also put off potential foreign investors.

East European rivals

The situation could be exacerbated by the opening up of Europe's former communist countries who will join the EU on 1 March.

With their skilled workforces and cheaper wages, Spain faces great losses in the manufacturing industry.

Right now Spain is the fifth largest car manufacturer in the EU, but it's unlikely to remain so.

Samsung and SEAT, for example, are already packing up their assembly lines and moving east.

There is one input in to the Spanish economy that's unlikely to disappear, however, and that is sunshine.

Sun and sand

Tourism accounts for some 12% of Spain's gross domestic product, and also provides around 10% of the country's total employment.

Over 52 million tourists holidayed here last year, making Spain the world's second most popular tourist destination after France, according to World Tourism Organisation figures.

A slogan used by the ruling Partido Popular conservative Party is that 'Espana va bien' - Spain is doing well.

The opposition Socialists reply with 'Merecemos una espana mejor', roughly translated as 'We deserve it to be better'.

Public opinion polls suggest that Spanish voters will stick with what they know.

The Partido Popular looks set to win Sunday's election, albeit with a reduced majority.

Prime Minister Aznar may be retiring from national politics but his successor Mariano Rajoy is tipped to follow faithfully in his predecessor's footsteps.

As regards economic policy though, little would change in Spain even if the Socialist won.

Mud-slinging and electioneering aside, centre left and centre right here share the same economic goal - that of continued dynamic stability for Spain.


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