Zapatero’s economic challenges

Rafael Pampillón. Professor. Instituto de Empresa

25 March 2004

Prof. Pampillon explains that the challenges facing the Spain's socialist government include the tasks of improving productivity processes, streamlining economic structures, removing barriers to the creation of new businesses, making more development land available, stimulating technological advancement and maintaining the budget surplus.

In order to point to the economic challenges and objectives the new government is facing, it is necessary to look back, albeit briefly, at the economic history of the last 8 years. The first thing that should be highlighted is that the Spanish economy has grown at an average annual rate of 3.5%, while the average in the EU was 2.3%. As a consequence of this positive growth differential (1.2% annual average) with the EU, the Spanish per capita GDP has converged by 8 decimal points – from 79.2 percent of the EU average in 1995 to 87.3 percent in 2003. Spain’s superior economic growth has been a direct result of its increased macroeconomic stability, the reduction of taxes, having managed to achieve a healthy combination of expansive monetary policy and fiscal balance, together with the reforms carried out in the factor markets (labour, electricity, gas, telecommunications, etc.). However, the other three major economies in the eurozone (France, Germany and Italy) implemented fewer and more timid reforms and, therefore, have been supporting lower rates of economic growth for years now. Maintaining that rate of growth (and increasing employment) is the challenge facing the new government.

In order to achieve this, it is necessary to insist on improved productivity, as Miguel Sebastián has been indicating throughout the election campaign, by incorporating the new technologies into companies and striving to favour those projects that entail increased investment in Research and Development. The latest data published by the INE (National Statistics Institute) on Spain’s expenditure on R&D do indeed reveal that 2002 saw R&D as a percentage of GDP surpass, for the first time in history, the psychological barrier of 1%. Nevertheless, average expenditure within the European Union is 2% of GDP, which demonstrates that Spain is still significantly lagging behind the rest of Europe in this area.

Price stability

Secondly, in the last 8 years, the Spanish economy has struggled (sometimes with little success) to attain the goal of price stability. To this end, and as an initial measure, Spain fulfilled the criteria laid down in the Maastricht Treaty and later joined the EMU right from its foundation. Since then, there has been tighter control of inflation. Indeed, with the introduction of the single currency in 1999, traditionally inflationary countries, like Spain, have had to stabilise their prices (with restrictive fiscal policies, competition incentives and structural reforms) in order to be able to compete in a global economy. Proof of this can be seen in the year-on-year inflation figure for February, which reflected a rise in Spanish prices of 2.2 percent, just six tenths from the eurozone average. Reducing still further this inflation differential or, at least, maintaining it is something the new socialist government must consider.

In order to achieve this, there must be continued liberalisation of the country’s productive sectors, favouring competition with a view to preventing business leaders from taking advantage of possible dominant situations in the marketplace to raise prices. Every effort should also be made to avoid, insofar as is possible, excessive interventionism that is becoming prevalent in the territorial bodies: creation of public companies, increasing duties and bureaucratic procedures that generate increased business costs.


The third challenge is to do away with temporality. It is true that, in recent years, the rate of temporality, although it is still very high, has been diminishing (it has dropped from 35% of wage-earners in 1995 to 31% in 2003), but it remains an issue to be resolved. A reduced rate of temporality and greater training yield greater benefits for employers. In future, unions and employers' associations must continue giving way from their respective postures: the unions should accept a reduction in the indemnities for dismissal and, in return, employers should simultaneously reduce the number of fixed-term contracts and increase permanent employment contracts. Finally, it proves necessary to further develop a labour reform that enables wage negotiations to take place within companies and allows wage rises to be linked to increased productivity.

In short, the new government will have to consider striving for the price stability goal. The best way to do so is by giving a new boost to the processes of improved productivity and economic flexibility, removing hurdles to the creation of companies, making more development land available, stimulating technological improvement and maintaining the budget surplus. On the contrary, greater inflation will sooner or later lead to reduced exports and significant losses on the international markets, which will have an adverse effect on growth and job creation within the economy.


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