SPAIN

GENERAL FEATURES

SPAIN – A PROFILE

I. Introduction
II. The country, its people and its institutions
1. Geography, climate and living conditions
2. Population and human resources
3. Political institutions
III. Spain and the European Union
IV. Infrastructure
V. Economic overview
VI. Domestic market
VII. Foreign trade and investment

I. Introduction
Spain is, at the beginning of the twenty-first century, one of the world’s most developed countries, with a very important role in the international political and economic arenas.

The country has well proved its capacity to effectively translate consistent economic growth into significant investments, including communication networks comprising thousands of kilometres of highways, high-speed train services and satellite facilities. This capacity and the constant effort made to ensure the competitiveness of its economic structure have enabled Spain to be placed among the world’s main economic players.

The process of development and enlargement of the EU has led to include ten new countries in the European Union in May 2004, the biggest enlargement ever in terms of scope and diversity. This enlargement will boost economic growth in Spain, therefore enhancing the opportunities of the Spanish market.

The single currency introduced in 2002 in twelve countries of the EU, the Euro Zone, has proved to be a success (the euro will be introduced in the new members once they comply with the Maastricht criteria). The Euro Zone is a monetary zone comparable to the United States and a consolidated, tariff-free market of more than 470 million consumers. With the euro, the opportunities of growth and development for Spain have been further increased.

The effective economic performance of Spain is the result of the legislative reforms undertaken and of the heavy investments made by Spanish enterprises to ensure competitiveness, develop foreign networks and join multinational projects.

II. The country, its people and its institutions
1. Geography, climate and living conditions
The Kingdom of Spain occupies an area of 506,013 square kilometres in the southwest of Europe, and is the second largest country in the EU. The territory of Spain covers most of the Iberian Peninsula, which it shares with Portugal, and also includes the Balearic Islands in the Mediterranean, the Canary Islands in the Atlantic Ocean, the North African cities of Ceuta and Melilla and some surrounding rocky islands.

Despite the differences among the various regions of Spain, the country can be said to have mainly a typical Mediterranean climate.

The weather in the northern coastal region (looking onto the Atlantic and the Bay of
Biscay) is mild and generally rainy throughout the year, with temperatures neither very low in the winter nor very high in the summer.

The climate on the Mediterranean coastline, including the Balearic Islands, Ceuta and Melilla, is mild in the winter and hot and dry in the summer. The most extreme differences occur in the interior of the Peninsula, where the climate is rather dry, with cold winters and hot summers. The Canary Islands have a climate of their own, with temperatures constantly around 20 Celsius degrees and only minor variations in temperature between seasons or between day and night.

Spain has an excellent quality of life and is very open to foreigners. Over four thousand kilometres of beaches, abundant sporting facilities and events and social opportunities are crowned by the diversity of the country’s cultural heritage as a crossroads of civilizations (Celts, Romans, Visigoths, Arabs, Jews, etc.).

2. Population and human resources
The population of Spain in 2003 was 42.7 million people, with a population density of nearly 84 inhabitants per square kilometre.

The last forecast offered by the National Statistics Institute (INE) is the figure for the Spanish population for year 2005, which will increase to almost 43.5 million people.

Spain is a markedly urban society, as evidenced by the fact that close to 34% of the population lives in the capitals of the provinces of Spain.

Population

* Figures refer only to the municipal district of each city Source: Revised registered population in Spanish cities as of January 1, 2003. National Statistics Institute (INE).

The official national language is Spanish, which is used jointly with other official regional languages in specific Autonomous Communities. Education is compulsory until the age of 16 and English is the main foreign language studied at school.

Spain has a labour force of nearly 20 million people, representing 56% of the country’s population over 16 years old (Labour Force Survey, released September 2004).

Compared with other OECD countries, Spain’s population is relatively young: approximately 15% is under 15 years old, 68% is between 15 and 64 years old, and only 17% is 65 and over, according to year 2003 figures.

Additionally, Spain is also experiencing in recent years a relevant inflow of immigrants which is beginning to offset the consequences of an aging population.

The structure of the labour force by economic sector has also changed significantly in recent years, with a notable increase in the number of those employed in the services sector and a decrease in the number of farm workers.

The labour force is very qualified, productive and capable of adapting to technological changes.

Lastly, in line with the existing commitment within the European Union to foster employment, since the mid-nineties the Government implemented wide-ranging reforms of the labour market regulations, introducing a high degree of flexibility in the use of the labour force by companies. The success of the reforms undertaken is attested by the fact that, according to the Employment in Europe Report 2004 Spain was the third country within the 25 EU Members with the highest employment growth during 2003.

3. Political institutions
Spain is a parliamentary monarchy. The King is the Head of State; and his primary mission is to arbitrate and moderate the regular functioning of the country’s institutions in accordance with the Constitution. He also formally ratifies the appointment or designation of the highest holders of public office in the legislative, executive and judicial branches.

The Constitution of 1978 enshrined the fundamental civil rights and public freedoms and assigned legislative power to the Cortes Generales (Parliament), executive power to the Government of the nation, and judicial owers to independent judges and magistrates.

The responsibility for enacting laws is entrusted to the Cortes Generales, comprising the Congreso de los Diputados (Lower House of Parliament) and the Senado (Senate), the members of which are elected by universal suffrage every four years.

The Cortes Generales exercise the legislative power of the nation, approve the annual State budgets, control the actions of the Government and ratify international treaties.

The Government is headed by the Presidente del Gobierno (President of the Government) who is elected by the Cortes Generales and is, in turn, in charge of electing the members of the Consejo de Ministros (Council of Ministers).

The members of the Council of Ministers are appointed and removed by the President of the Government at his or her discretion.

For administrative purposes, Spain is organized into 17 Autonomous Communities
(Regions) each containing generally one or more provinces, plus the Autonomous Cities of Ceuta and Melilla in Northern Africa; the total number of provinces is 50.

Each Autonomous Community (Region) exercises the powers assigned to it by the
Constitution as specified in its “Statute of Autonomy”. These Statutes also stipulate the institutional organization of the Community concerned, consisting generally of: a legislative assembly elected by universal suffrage, which enacts legislation applicable in the Community; a Government with executive and administrative functions, headed by a President elected by the Assembly, who is the Community’s highest representative; and a Superior Court of Justice, in which judicial power in the Community’s territory is vested.

A Delegate appointed by the Central Government directs the Administration of the State in the Autonomous Community (Region), and co-ordinates it with the Community’s administration.

The Autonomous Communities (Regions) are financially autonomous and also receive allocations from the general State budgets.

As a result of the structure above described Spain has become one of the most decentralized countries in Europe.

III. Spain and the European Union
Spain became a full member of the European Economic Community in 1986.

Therefore, EU legislation is fully applicable in Spain. In this connection and according to figures published by the European Commission, Spain fully complies with the objectives established by the European Council and has implemented 2,490 Directives into national law.

A major impact of European Union membership for Spain, and for the other Member States, came in the mid-nineties with the advent of the European Single Market and the European Economic Area, which created a genuine barrier-free trading space. Since then, the EU has advanced significantly in the process of unification by strengthening the political and social ties among its citizens. Spain, throughout all this process, has always stood out as one of the leaders in the implementation of liberalization measures.

The European Union joined 10 new countries in May 1, 2004 (Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia). Such enlargement of the UE poses a unique challenge since it is without precedent in terms of scope and diversity: an extension of land area of 23% and a population increase of almost 100 million people.

Spain has a strong responsibility in the EU, evidenced by the fact that it is, along with Poland, the fifth country in terms of voting power in the Council of Ministers.
During 2002, it held its third Presidency of the Council of the European Union with the overall intention of culminating the integration process and the historical changes which began over a decade ago.

This process has reached one of its most important milestones, as the 25 country members signed the Treaty that incorporates a Constitution for Europe in October 29, 2004.The Constitution will incorporate, once it is ratified by each of the members, relevant reforms to improve the decision-making process within the Union, to strengthen its means of action and to provide its citizens with a Charter of Fundamental Rights.

The introduction of the euro (January 1st, 2002) marked the beginning of the third
Spanish Presidency, representing the culmination of a lengthy process and a whole deal of growth opportunities for the Spanish and European markets.

With the euro in the European Union, a monetary zone has been established to form the world’s number one trading power, triggering the integration of the financial markets and economic policies of the Member States adopting it. Such changes have also fostered the coordination of the tax systems of the Euro Zone Member States, thus further increasing the stability of the EU.

The euro has yielded clear results at the international level, promoting the visibility of the Euro Zone both in international and financial form (the G-7 group meetings) and in multilateral organizations. The economic and commercial stability provided by the euro has further bolstered Spain’s current economic growth along with additional international political presence.

Spain is the EU Member State that in the last years has received the most EU structural and cohesion funds-used to finance infrastructure and development projects. In fact, Spain is expected to receive in total around 45 thousand million euros in various EU structural funds in the 2000-2007 period and over 11 thousand million euros in cohesion funds (62% of the total budget agreed by the European Council of Berlin). With these funds, the Government has undertaken actions in this area with the cooperation of private initiatives financing infrastructures.

IV. Infrastructure
Over the last decade Spain has undergone a process of modernization that has included an extensive renewal of its infrastructure.

The Government plans to continue investing heavily in the future. This is reflected in the Strategic Infrastructure and Transport Plan for 2005-2020, which provided for investment totalling over 241 thousand million euros. Rail transport is the main item in the Plan, absorbing nearly 50% of the investments.

The motorway network, totalling nearly 11,000 km, has more than tripled in length
since 1982 and has undergone continuous renovation to enhance efficiency and convenience.

The Government investment plan will result in over 15,000 km of motorway network by year 2020.

As far as rail transport is concerned, Spain has a network of over 15,000 km of track, and in 1992 introduced a 471-km high-speed train line from Madrid to Sevilla. High-speed train lines have become a priority for the Government infrastructure plans (the foreseen network of high-speed trains will total 7,200 km), and as a consequence of them Madrid will be connected by high-speed train to the French border via Zaragoza (Aragón) and Barcelona (Cataluña) and additionally via
Vitoria and Irún (Basque Country). In fact, the section Madrid-Guadalajara-Zaragoza-Lérida opened in October 2003 and it is planned the possibility of allowing a private company to create and exploit another international section, Figueras-Perpiñán. Furthermore, Madrid will be connected to the Mediterranean coast via Málaga and via Valencia in the coming years. In connection with the Northern route (Madrid-Valladolid - La Coruña), completion of works for the Madrid-Segovia-Valladolid section is expected for 2007.Additionally, an agreement has been entered into between Spain and Portugal; Madrid and Lisbon will be connected in less than 3 hours by 2010.

Noteworthy is the coming liberalization of the sector in 2005, since in January a new Law enters into force, which separates the management of the rail infrastructure from the service of transportation.

There are air transport services between the main cities. The approximately 250 airlines with scheduled flights operating out of the country’s 47 airports ensure complete service abroad. Spain is an important intermediate stop in the lines between Latin America and Europe and lies in a crucial position in the network to America and Africa from Europe. Spain also has excellent sea communications, with 53 international ports on the Atlantic and Mediterranean coasts.

Spain is also well equipped with industrial land and technological and industrial infrastructure.

In the last few years, technology parks have proliferated in the main industrial
areas and near universities and R&D centres.

There are currently 52 technology parks (18 fully operational, 34 in a development stage).

In these technology parks there are 1,520 companies in which 20% of the 40.575 people employed are dedicated to R&D activities.

R&D expenditure has risen significantly in recent years. The objective of the new national R&D Plan (2004-2007) expenditures amount to 1.4% of GDP by 2007; expenditures in innovation amount to 2.5% of GDP in the mentioned year.

The 2005 Budget has already increased in 16.3% the R&D expenditure. Specifically, civil investigation will increase its expenditure in 25.4%.The results of these important investments are significant, as demonstrates the fact that Spain is the fourth country within the EU in scientific production relating biotechnology and microbiology.

Lastly, Spain has a good telecommunications network. In addition to the extensive fibre optic network which covers almost all the territory, Spain manages one of the largest international undersea cable networks and has satellite connections with the five continents. In this respect, it is worthwhile mentioning the strong liberalization process undertaken in most industries, including the telecommunications sector, well within the European schedule. Among other benefits, this implies a more competitive and cost effective offering of this type of services, essential for an appropriate economic development.

V. Economic overview
Spain’s GDP increased by a 2.5% in 2003, totalling around US$ 743 billions, making it the eighth largest in the OECD. Growth of the GDP for 2004 is estimated to reach 2.6%.

The structure of the Spanish economy is that of an industrialized country, with the services sector being the main contributor to GDP, followed by industry. These two sectors represent almost 90% of Spain’s GDP with agriculture’s share today representing less than 4% of GDP, and declining sharply as a result of the country’s intense economic growth. Spain is a fairly dynamic country, and has consistently achieved high economic growth rates, clearly above the average for other industrialized countries. The growth in Spain continues to be much greater than the aggregate growth of the EU.

The prospects, taking into account that the world economic situation is beginning to
recover, are that Spain will have growth rates within the range of 3.3% (according to the OECD estimates) and 2.9% (according to the Spanish Government) in 2005, once again exceeding the average for the EU. In fact, the Spanish economy is accomplishing the projections given last year by the OECD.

Inflation in Spain has fallen steadily since the late 1980’s. The average inflation rate for 1987 through 1992 was 5.8%. The rate of inflation was kept under 5% for the first time in 1993, and has been further reduced in subsequent years. Year 2004 will end with an annual rate of inflation of 3.1%, reducing the differential with the Euro Area.

Also, since 1999 Spain has engaged in an earnest effort to reduce the budget deficit, including a successful program of major privatizations and of contention of public expenditure. The actions taken by the Government have once again proved the flexibility of the Spanish economy and the attainment of an important reduction of the deficit.

VI. Domestic market
Very noteworthy is the impressive reduction in the official interest rates in Spain from 10% in 1993 to the current 2.0%.

The growth of the Spanish economy in recent years has been driven by a strong demand and a substantial expansion of production in the context of an increasingly open economy.

Today Spain has a domestic market of almost 43 million people with a per capita income of around 20,800 euros and an additional injection of demand coming from the 53 million tourists who visit the country every year. The close links (economic, cultural, political) with Latin America and North Africa and the obvious advantages of using Spain as a gateway to those countries are worthy of mention.

The growth rate of the Spanish economy has stabilized due to rising domestic demand offset by a less positive contribution from the external sector. In addition to the significant rise in demand, there was a notable acceleration in gross fixed capital formation and all the main areas made positive contributions, with the exception of agriculture.

VII. Foreign trade and investment
In recent years, Spain’s exports and imports have grown rapidly, as has incoming foreign investment. As can be seen in Table 7, the balance of payments figures reflect a widening current account deficit, although the surplus in the services industry was maintained (mainly due to tourism) and the capital account surplus also increased. However, it should be noted that despite the strong volume of foreign direct investment received, Spanish direct investment abroad is since 1997 larger than foreign direct investment in Spain.

The main products traded by Spain in 2004 are shown in Table 8. The sophistication of the main products exported clearly shows the degree of technology and capability of Spanish economy.

Spain’s main trading partners are, according to figures released in September 2004, EU countries with 74.4% of total exports and 64.4% of total imports. Latin American countries represent 4.2% of Spanish exports and 3.8% of imports, the U.S. accounts for 3.8% of exports and 3.6% of imports and Japan accounts for 0.8% of exports and 2.8% of imports.

Perhaps the most striking feature of the Spanish balance of payments is the net inflow of foreign investment, consistently received by Spain since 1996, with the exception of 2001 and 2002, due to the international crisis.

According to the Annual World Investment Report released by the United Nations
Conference on Trade and Development, global foreign direct investment declined sharply in 2001 (59% in developed countries).

Spain did not escape this international trend, but it is one of the EU countries with lowest decreases and the thirteenth country in the world according to the ranking elaborated by the global consulting firm A.T.

Kearney (2004 Foreign Direct Investment Confidence Index, report elaborated with an annual survey of executives from the world’s largest companies) among the most attractive Foreign Direct Investment destinations.

Foreign direct investment is mainly routed, according to 2004 figures, to the sector denominated other manufactured products (24.42%), which includes the fabrication of other mineral non-metallic products (mainly cement) and metallurgy (mainly aluminium).

The second main investing sector was the financial (15.19%), where the insurance sub sector was especially important (8.01%), along with commercial (10.48%) and real estate (9.42%).

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