The Spanish economy has been growing much more strongly than the Eurozone average in recent years, and almost three times as strongly as the German economy. Spain’s growth in GDP in 2003 was 2.4%. But the impressive growth process is on a shaky base, according to DIW Berlin’s current Wochenbericht (No. 11/2004). The main reasons for the rapid rate of expansion in Spain - low real interest rates, the multiplier effects of EU funds and fiscal incentives - cannot be sustained long term. Moreover, most of them are outside the immediate sphere of influence of Spanish economic policy. Spain elected a new parliament on 14 March 2004, and with it a new government. It should make good use of the mood of optimism and the desire for change at the start of the legislative period and tackle the necessary changes quickly.
The new Spanish government urgently needs to take further steps to strengthen Spain’s long-term growth potential and competitiveness. Scrapping wage indexing and introducing a mechanism for setting wages that is oriented to productivity were important first steps in stopping the loss of price competitiveness vis-à-vis the other EMU member states, but the problem is not only the persistent real rise in prices, which is just under 8% on long-term average (1980-2002). Spain’s price level had already reached 83% of the EU average by 2002 and so it is far above that of the new competitors from eastern Europe.
A more serious reason to increase competitiveness is the fact that Spain still has the second (after Portugal) highest share of low-skilled workers in the EU at 57%. The EU average is 37.8%. So the workers in the accession countries are not only cheaper, most of them are also more highly skilled. If Spain wants to retain a long-term growth prospect without extensive grants from Brussels it must not miss the boat in the high-tech field. But high-tech products account for an under-average share in Spain’s value creation and its exports, by EU comparison. In view of the relatively low expenditure on research and development in the corporate sector, which is not even half the EU average in relation to GDP, there is much leeway to be made up here.
The government took some steps last year to promote the new technologies, especially information and communications technology, and increase the expenditure on research and development to 1.4% of GDP by 2007. That would be almost a threefold increase. Among other things, corporate innovation is to be encouraged with tax incentives, which seems meaningful for a limited period in view of the amount Spain has to make up. Other tax concessions, such as those for housing construction, on the other hand, should gradually be stopped.