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Spain and the European Community

The year 1992 promised to be one of the most momentous for Spain in the twentieth century. The Summer Games of the XXVth Olympiad were to be held in Barcelona; the five hundredth anniversary of the discovery of the New World was to be celebrated in Seville, with an ambitious international exposition known as Expo 92; and Madrid had been designated as Europe's cultural capital for that year. Moreover, 1992 would mark the culmination of a forced march to modernize the country's economic, social, and financial institutions, because Spain would be fully exposed to the bracing winds of unfettered economic competition from the members of the EC. By the end of 1992, the EC's plan to eliminate barriers to trade, employment, and the flow of capital across the twelve member states' borders was to take effect.

Spain's long adherence to protectionism had been a major factor in its technological and economic backwardness. The Socialist government's commitment to economic modernization and to Spain's integration into the European economic mainstream thus represented a historic landmark. The end of authoritarian rule in 1975 led Spain to embrace a system of political democracy, but changes in the economic sphere proved more difficult. In the 1980s, true economic modernization was only beginning, as the Gonzalez government cast Spain's national goals in terms of increasing its competitiveness, both within Europe and around the world.

The Spanish economy had long functioned on a two-tiered basis. One part--including most notably the automobile manufacturing and chemical industries--was technologically advanced. An even larger part was accustomed to operating inefficiently, protected from outside competition and highly fragmented into a host of small and medium-sized enterprises that accounted for as much as 90 percent of Spain's commerce and industry. It was in this second economic area that the brunt of accelerated change was being felt in the second half of the 1980s, as many small, inefficient concerns faced the effects of free market competition.

Spain had been trying to join, or to align itself with, the EC since 1962. The barriers to Spanish membership were primarily political, and they reflected varying degrees of European hostility to the Franco government rather than fear of economic competition. Among the members of the EC, only Italy and France, with similar agricultural export commodities, had substantial economic motives for opposing Spain's entry into the EC.

After long negotiations, which began in 1962, Spain and the EC signed a preferential trade agreement in June 1970. The agreement called for mutual tariff reductions, ranging from 25 to 60 percent, to be applied gradually over a six-year period. Quantitative restrictions for a number of items were eased under a special quota system.

At the end of the Franco era, little attention was given to Spain's urgent economic problems. Spaniards and their postFrancoist governments tended to regard membership in the EC as a symbolic political act that obtained recognition for Spain's return to democracy, rather than as a portentous economic policy decision irretrievably linking Spain's economic future with that of Europe. The result was that, although Spain had applied for membership nearly a quarter of a century earlier, little national debate took place prior to the signing of the 1985 accession agreement, which was concluded only after arduous negotiations.

The accession agreement called for gradual integration to be carried out over a seven-year period, beginning on January 1, 1986. This adjustment transition involved a number of significant features. Customs duties were to be phased out as of March 1, 1988, and industrial tariffs on EC goods were to be phased out on a reciprocal basis until January 1, 1993. Additional import levies, most notably Spain's tax rebate on exports, were to disappear upon its entry into the EC. With some exceptions, import quotas were to be removed immediately. Quotas on color television sets and tractors were to be eliminated by the end of 1988, and those for chemicals and textiles, by the close of 1989.

In principle, EC-based companies were free to invest in Spain. National assistance programs for industrial projects were subject to strict EC regulations, but special allowances were made for the steel industry, and Spain was allowed to keep its 60 percent local content rule for automobile manufacturing until the end of 1989. Spain became subject to EC antitrust rules immediately, however.

Spain was obliged to adhere to EC product and consumer protection standards at once. Like other EC members, Spain was required to levy a value-added tax (VAT--see Glossary), which was the EC's principal source of revenue. Spanish workers were to be able to circulate freely and seek employment in the EC by 1993.

Phased alignment with the EC's Common Agricultural Policy (CAP) was to be completed only in 1996. The Spanish widely regarded this as a discriminatory action taken by EC countries to prevent imports of Spanish tomatoes, olive oil, and wines until as late a date as possible. Spain's fishing industry, the largest in Western Europe, received the right to fish in most EC waters, but its catch was sharply restricted until 1995.

Despite a favorable attitude toward the establishment of an eventual EC-wide monetary union in the late 1980s, the government was reluctant to commit the peseta to stabilization within the European Monetary System (EMS) because of its over-valued exchange rate. In mid-1988 the Bank of Spain took what was regarded as a symbolic step toward full membership in the EMS by formally accepting the 1979 Basel agreement. By the terms of the agreement, EC central banks made 20 percent of their gold and foreign currency reserves available to the European Monetary Cooperation Fund, against the equivalent in European Currency Units (ECUs--see Glossary). The subject of the peseta's inclusion in the ECUs, in all likelihood a prerequisite of Spain's full participation in the EMS's exchange-rate system, was to be taken up in September 1989, when the composition of the next ECU would be determined.

The Spanish government sought special treatment for the peseta, the exchange rate of which was considered inflated. Such an arrangement would permit relatively wide margins of fluctuation similar to those enjoyed by the Italian lira. The International Monetary Fund (IMF--see Glossary) urged Spain's early membership in the EMS, and the pressure to reach a decision on this EMS question was bound to increase when Spain assumed the EC presidency during the first half of 1989.

In the late 1980s, some of the more painful aspects of Spain's integration into the EC were cushioned by the country's expansionary economic boom, the continuing fall in oil prices, a sharp reduction in the exchange value of the United States dollar, and the massive inflow of foreign investment, as numerous foreign multinational companies endeavored to participate in Spain's expanding consumer market. Observers expected that Spain's industrial enterprises, especially the more inefficient and backward ones, would be absorbed by more modern domestic and foreign entrepreneurs or would cease operations. Over the long term, however, the Spanish economy was expected to resemble that of its more advanced EC counterparts much more closely by the year 2000 than it had in the past.

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Although there is a growing literature in Spanish and in English on the Spanish economy during the Franco regime (1939- 75), there is little available in English on the post-Franco period, with the notable exception of Ramon Tamames's classic and encyclopedic The Spanish Economy. Among the more useful books on the Franco period, in English, are Joseph Harrison's The Spanish Economy in the Twentieth Century and Stanley Payne's The Franco Regime, 1936-1975. For information and analysis of industrial, financial, and economic developments in more recent years, readers should consult the annual country surveys of the OECD and the quarterly Country Report: Spain and the Country Profile: Spain, both published by the Economist Intelligence Unit. The annual reports of the Bank of Spain also are particularly useful. Current statistical data can be found in the Anuario Estadistica, a yearbook issued by the Spanish government's statistics bureau, the Instituto Nacional de Estadistica. For up-to-date information on government and private-sector economic activities, London's Financial Times and the Economist provide some of the most comprehensive coverage and also publish survey supplements on various aspects of Spanish economic and financial activities. (For further information and complete citations, see Bibliography.)

Data as of December 1988

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