Europe has been the driving force of economic policy in Spain over the last four decades and the key factor behind the modernization and globalisation of the Spanish Economy. The accession to the EEC in 1986 was a crucial step in the process of economic and political integration. This process was carried out in several stages. First, trade openness. Exports were liberalized well before 1986, while imports boomed from that date onwards. Secondly, foreign direct investment (FDI) into Spain jumped with accession to the EEC. Finally, Spanish FDI abroad and portfolio investment grew exponentially in the run-up to Euro membership in the late 1990s. Integration has required a set of measures (increased competition, privatisation of public enterprises, industrial restructuring, deregulation) that have translated into efficiency gains. Efficiency gains have been reinforced by a more stable macroeconomic framework. Lower inflation and fiscal consolidation have led to lower real (and nominal) interest rates, which, in turn, have resulted in a higher sustainable growth. However, the process of real integration could have been even more successful. Spain’s real convergence path with Europe paused from 1975 to 1990. This was partly due to the necessary process of industrial restructuring, deregulation and privatisation Notwithstanding, the slow pace of reform, in particular in the labour market, with high labour costs leading to persistent unemployment, a real exchange rate appreciation and the impact of two oil shocks prevented Spain from reaping the full benefits of integration. The long-run benefits of monetary integration are clear. However, there are short-term costs. The losses of the exchange rate and of monetary sovereignty require a process of nominal convergence and fiscal consolidation, as well as higher cyclical correlation, for Euro membership to be successful. This should be taken into account for future EU and EMU candidate economies. It implies that, prior to monetary integration, candidates must carry out a process of modernisation and nominal convergence without fixing their exchange rate. This is a slow process, that must be kept in mind by those countries on the accession path now. Finally, the role of Structural Funds has also been crucial. These allow for the construction of public infrastructure vital for private sector productivity and real convergence.
