Spain’s Transition to the European Union
Over the last 35 years Spain has developed from an agricultural and rural country into a flourishing nation with a diversified economy made up of a strong manufacturing and service sector. During the 1960’s and the early 1970’s the growth of the Spanish economy was 7% per annum with a per capita income of on average $500. This altered Spain’s image more towards a developed nation. Spain’s entrance into the European Union has largely boosted Spain’s success and prosperity. After decades of dictatorship, Spain wished to achieve credibility in the political spectrum and saw EU membership as a means of solidifying its shift to democracy.
Furthermore EU membership represented a new chapter in the history of Spain, making a clear distinction from the country’s past. On the economic side, joining the EU meant access to the EU’s agricultural market as well as potential gains from attracting foreign direct investment. Additionally Spain’s decision to apply for EU membership was also driven by the large amounts of structural funds that Spain would receive once membership was granted. However entrance did not come easily, there were many barriers which called for major reforms in Spain. Over the last couple years Spain qualified as one of the world’s fastest growing economies.
Its industrial growth has been such that it is now among the world’s top industrial nations, with international operations in many of the major international markets. Economic growth had been more than 1% higher than the EU average, making the Spain the fifth largest economy in Europe accounting for 9% of the EU economy. Spain joined the EU in 1986, despite General Franco’s petitioning for membership since as early as the 1960’s. Although Spain had, in 1970, reached a trade agreement with the EU, its full admission was delayed for decades. One of the main reasons for this was Spain’s political situation at the time.
The EU strongly felt there was a need for democracy before joining and thus the dictatorial government under Franco meant that full membership was out of the question as long as he remained in power. The motion towards parliamentary democracy began moving only following the death of Franco in 1975, who had ruled as a military dictator from the end of the Spanish Civil War in the 1930s. The outlook for Spain’s relations with the EU began to change. However there was considerable opposition to Spain’s membership by other EU members such as France and Italy who feared the effects of competition from Spain’s much cheaper food products.
And furthermore there still existed an economic barrier preventing membership into the EC. The economic performance and development in Spain at that time, which was largely protective: characterized by state-owned enterprises and economic inefficiency, had left the economy in a mess, greatly segregating itself in comparison with their prosperous EC neighbours. Competition and effects of market forces were poor largely hindering the development of modern capital markets and modern enterprises. Franco had left Spain greatly dependent on these state-owned companies which didn’t enable much growth.
The ability for state-owned firms to obtain state aid in bad times had become a drain on the treasury, resulting in a huge public deficit, and thus heightening inflationary pressures. Furthermore Spain suffered form a high and growing rates of unemployment. The oil price shocks of the 1970s hit hard since Spanish firms were not accustomed to responding to market forces and thus it was apparent that modernization through greater integration with the EU offered perhaps the only realistic policy option. Adolfo Suarez, the first post-Franco Prime Minister, began to implement political reforms.
Parliamentary elections were held in June 1977 and a new constitution was adopted in 1978. Spain would be governed as a bi-cameral parliamentary democracy with a constitutional monarch. Political and economic reform was accelerated under the Spanish Socialist Workers Party (PSOE), led by Felipe Gonzalez who became Prime Minister in 1982. One of the party’s main objectives was to make tremendous efforts in changing the situation of Spain in aims of attaining EC membership through modernization. The Gonzalez government had made an aggressive move to sell off its state-owned enterprises.
This dramatically reduced Spain’s public sector borrowing requirement and helped trim inflation. Spain was in the process of major national restructuring in order to create privatized newly reoriented and recapitalized enterprises that could eventually become corporations capable of world-class economic performance. In the past the majority state ownership of economic enterprises had crowded out private sector enterprises and initiative, raised costs for goods and services, and created manufacturing and service industries that were in capable of competing efficiently and effectively in international markets.
Many of these state controlled enterprises date back to the 1930s. Franco had founded a massive agglomeration of state-owned commercial entities, the Instituto Nacional de Industria (INI). This hugely diverse enterprise consisted of over 150 industrial and service companies which were active in many fields such as electronics, steel, shipbuilding, aerospace and defence production and dominated for decades various sectors of the Spanish economy including manufacturing, mining, and transport. However by the 1980’s INI was outdated and largely inefficient.
The structural weaknesses of sectors where state-owned enterprises like INI operated had cost the Spanish, resulting in for example, the highest electricity rates and, nearly the highest telephone costs in Europe. Many INI subsidiaries had to be restructured to make them suitable for privatization, because they still lacked the capital resources, management talent, R&D capability and product sophistication necessary to convert them into independent players competing in the international market. Spanish privatization had been taking several forms.
Firstly there was a need for reduction of government interest in several monopoly enterprises such as REPSOL (oil), Telefi?? nica (telecommunications), Tabacalera (tobacco) and ENDESA (electric utilities). Secondly the partial privatization of INI-owned firms was placed in a subholding company called TENEO. These included companies which were deemed to be in national interest. These subsidiaries were regarded as either profitable or potentially profitable and thus could potentially be able to meet the new demands of a global market more effectively.
Moreover there was a need for selective sell-offs of partial equity interests in some of TENEO’s problem companies including Construcciones Aeronauticas, S. A. (aerospace), Paradores Nacionales (hotels) and Artespai?? a (handicrafts). And finally, there was a requirement for the restructuring of money-losing firms in heavy industry that had no chance of privatization. This included steel, coal, shipbuilding and defence firms as well as some transportation firms. These firms generally operated in mature international markets which were characterized by large structural overcapacity, excess employment and inefficient production practices.
The international implication of privatization in Spain was possibly much greater than that of its other neighbours in southern Europe, undergoing similar changes. With the ninth largest domestic market in Europe and the economic critical mass to develop world-class economic players, the newly privatized Spanish companies have looked to expand in markets further than mainland Europe. Spain established a special identification with Latin America, where historical ties, a common language and culture can give Spanish companies an advantage.
Spain also continues to focus attention on North Africa, especially on Morocco due to the countries geographic proximity and long historical contacts. Spain has placed itself strategically in huge markets in Asia such as China as well as in the new emerging markets of Eastern Europe. Spain’s accession to the European Union in January 1986 required the country to open its economy, modernize its industrial base, improve infrastructure, and revise its economic legislation in order to meet EU guidelines.
This was largely aided by the EU Structural funds which were directed towards industrial and agricultural regions that were in need of economic development and improving environmental and transportation sectors. EU membership has also allowed Spain to emerge as a strong negotiator among member states and has advanced and continues to solidify democracy within the country. As a result for a decade now, Spain’s performance has been impressive. GDP growth increased to 2. % in 2004 and is expected to rise to 3% in 2006, enabling a real convergence with other EU members. This is highlighted by the fact that the initially huge lag in Spain’s standard of living compared with other EU countries has narrowed from 20% below the average to less than 13% during 1995 to 2003. The public debt to GDP ratio and inflation has also diminished along with reduced unemployment from 23% to 15% in 3 years. The main challenges remaining for Spain now include further reducing the public sector deficit, reforming labour laws and investment regulations.
Though Spain’s per capita income has to be further boosted since it is still low compared to the EU average, it is far above countries like Greece, Portugal and Ireland. Unemployment which is significantly lower than previously still remains a problem at 10. 5%. And inflation which still stands above the euro area average is eroding Spain’s competitiveness and must be reduced. Specifically, maintaining economic stability and competitiveness while advancing further convergence signifies a difficult task, as this demands speeding up structural reform.
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