I. Fiscal Policy Spain has experienced a strong and stable expansion within their economy over the past few years. This is due in part to the importance the Spanish government has placed on fiscal consolidation. In recent years, the government has "given priority to a renewal of Spain's budgetary framework"ÃÂ (www.imf.org/external.com). One such arrangement that has been created in order to help capitalize on gains in Spain's decentralized fiscal system is the Budgetary Stability Law. This Law consists of four aspects that have been influential in helping to create a strong and successful fiscal policy. They include transparency, fiscal co-responsibility, ceilings on government spending, and fiscal discipline.
- Transparency requires timely reporting of fiscal performance by all levels of government. This helps to create public accountability (www.imf.org/external.com).
- Fiscal co-responsibility, within the setting of the EU Stability and Growth Pact, helps to create medium-term financial goals at each level of government.
These goals must "be consistent with the overall objectives of Spain's Stability Program-balance or a modest surplus"ÃÂ (www.imf.org/external.com).
- Ceilings on central government spending have helped Spain to reach their deficit and tax reduction objectives. They have also assisted in protecting Spain's investment program, which is essential to their rapid growth. By creating these ceilings Spain has helped to make room for greater public investment and lower taxes. In addition to reducing the risks involved with budgeting (www.imf.org/external.com).
- Fiscal discipline places strict control on spending by the central government and territorial administrations. However, this does not provide the right for investment cuts or tax increases when the economy is weak (www.imf.org/external.com).
By practicing the four components of the Budgetary Stability Law, Spain has earned fiscal credibility over the past few years. Within the last five years, Spain's budget deficit has declined from 6.6 percent of GDP to 0.3 percent of GDP. For the 2002 year the government aims for a balance with public administrations, which it should achieve. However, the next few years will be spent determining "how far fiscal policy should aim for a move into surplus at the general government level"ÃÂ (www.imf.org/external.com).
II. Monetary Policy Spain's monetary policy has experienced significant changes over the years. It has evolved from a monetary policy characteristic of a closed economy to that of a successfully expanding, open economy. Currently more emphasize has been placed on interest rates and exchange rates. This is due in part to the different monetary policies that have been the center of attention over the past decade. These include Spain's entrance into the European Monetary System, parliament's stress on the importance of an inflation-target regime, and Spain's eventual entrance into the European Union.
In addition to new monetary policies, Spanish banks have recently been experiencing a large and profitable expansion, especially in international markets. Recent steps have been taken into the development of bank investments in Latin America. Presently, over 20 percent of Latin America's banking sector is controlled by Spanish banks. Other changes that have occurred in the banking sector are the creation of a system that "will ensure a more adequate building of bank reserves over the business cycle"ÃÂ (www.imf.org/external.com).
The new fiscal and monetary policies that Spain has implemented in recent years should have a positive effect on the business environment. While the fiscal policies are helping to provide stability for Spain's expanding economy, the monetary policies are creating high levels of capital in the financial system. With the expansion of Spain into the Latin American banking sector, more opportunities are becoming available for international businesses and trading. Another factor that has contributed greatly to the economies growth is the transition of Spain to an open economy. This, along with the countries integration into the European Union, has helped to create new trading arrangements among various countries and MNC's. "After a long period of protectionism and political and economic isolation, Spain has elected to participate in globalization due to a desire to integrate with the rest of the world"ÃÂ (www.imf.org/external.com).
III. Real Growth The recent transition of Spain, within the past few years, to an open economy has caused a natural increase in real growth. As a member of the European Union, Spain has consistently outperformed the larger euro area economies. This is due to careful planning on the part of government concerning fiscal and monetary policies. Statistics for Spain show that real output has grown at an annual rate of 4 percent over the last four year and that "over the last six years, it has grown faster than for the euro area as a whole for each and every single year"ÃÂ (www.imf.org/external.com). During this same time frame real exports grew by an average of 10 percent annually, which is about one-third better than the other euro countries combined. These recent increases in real exports are the cause for Spain's current economic expansion (www.imf.org/external.com).
The following table lists real growth over the past five years for Spain: The following graph list real growth for the euro area over the past five years: If Spain continues to improve economic reform and outside factors remain consistent, real growth should continue to increase.