As is the case in most European countries, the Spanish services sector has grown steadily since the second world war and now dominates thye economy, accounting for 68% of GDP in 2005. This expansion has come largely at the expense of the agricultural, forestry and fisheries sector, which accounted for approximately one-third, reflecting the boom in construction activity over almost decade.

In the services sector, retailing, tourism, banking and telecommunications all account for a signoficant proportion of economic activity. The tourist activity industry is especially important and Spain is one of the most popular tourist destinations in the world. The most prominent manufacturing industry is vechicle production, which accounts for about nearly 6% of GDP and exports more than 80% of its output. Spain produced over 3m vechicles for the first time in 2000, consolidating its position as the third -largest vechicle manufacturer in Europe after Germany and France. The construction industry accounts for a higher proportion of GDP than in most other European countries. There are several reason for this, including strong demand for tourist-related buildings and second homes, high levels of investment in infrastructure (reflecting the large size of the country) and a structural shortage of quality housing.

In the agricultural sector, Spain is a particularly important producer of wine, olive oil, fruit and vegetables. It has developed a huge greenhouse industry in the south-east which, thanks to the benign climate, has become one of the most competitive supplier of fresh produce to the main European markets. Spain's fishing fleet and associated industry is also highly developed, thanks in part to its maritime location and the high domestic consumption of fish.

Economic policy during the 1990s focused on meeting the convergence criteria laid down by the EU's Treaty on European Union (Maastricht treaty) for economic and monetary union (EMU). These criteria forced the government to implement a major fiscal adjustment in the mid-1990s, with the public-sector balance moving from a deficit of GDP in 1993 to near-balance by a gradual liberalisation of the economy and a fall in fall in world oil and commodity prices, which helped push down inflation to a low of just 1.8% in 1998. At the same time, the Bank of Spain (the central bank), which was granted autonomy in 1994, implemented a cautious monetary policy, which played an important role in underpinning macroeconomic stability during this period. As a result, Spain's economy flourished and the country was admitted to EMU as a founding member in January 1999.

On January 1st 1999 the peseta's bilateral exchange rate was locked irrevocabily with the currencies of the ten other EU countries participating in EMU (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands and Portugal, with Greece joining in January 2001), and responsibity for monetary policy was transferred from the Bankof Spain to the European Central Bank (ECB). The ECB has since set a singel interest rate for the whole euro area, irrespective of the specific economic conditions prevailing in any one country.Given that spain accounts fo omly about 9% of total euro area GDP, conditions in the domestic economy have little bearing on ECB decsion-making. This caused policy strains in Spain in 1997-98, when interest to which Spain was unaccustomed. This produced a huge monetary stimulus and fuelled a surge in domestic demand, largely financed by soaring credit.

The loss of national monetary policy control has underlined the importance of fiscal policy, which is now the main instrument of domestic macroeconomic management. However, the government's fiscal autonomy is limited, to some extent at least, by the country,s obligationsunder the EU's Stability and Growth Pact (SGP). Although its strictures were formally eased in 2005, the SGP continues to require member states to keep their fiscal positions close to balance over the course of an economic cycle. Although the government overshot its public spending budgets in 1998-2001, the buoyancy of tax revenue (through to 2000) meant that it still managed to eliminate the general government deficit in 2001, for the first time in 25 years. Despite lower economic growth since then, the budget has been kept largely in balance. The Spanish Socialist Workers, Party (PSOE) government has stressed its commitment to macroeconomic stability anf fiscal prudence, keeping the budget largely in balance in its first year in office, but it has abandoned the previous government's self imposed commitment to a zero deficit, promising only to balance the budget over the full economic cycle.

In 2002 a new Budget Stability Law was passed, designed to ensure that regional and local governments maintain financial discipline. The law empowers central government to place legally biding limits in regional spending and debt as most public expenditure is now accounted for by subnational layers of government. However, questions remain about how this law is working in practice, with concerns about regional governments resorting to creative accounting techniques to keep some spending items of balance sheets.

Employment in agriculture has declined precipitously in recent decades. The number of workers in agriculture, forestry and fishing fell to 919,700 in 2005, compared with 2.6m in 1976, and the sector now accounts for just 5.4% of total employment. Yields in many agriculural sectors remain below those in mostother EU countries, reflecting the poor quality of the soil, irregular rainfall, an inefficient structure of land tenure in many parts of the country, and the low capitalisation of farms. In the north and east many holdings are small, while in the south, particulary in Andalucia, vast estates have often been run inefficiently.

However,agricultureal yields are high in the fruit and vegetable growing sector, and this now accounts for almost 30% of total agricultureal output, even though it receives the least aid under the EU,s common agricultureal policy (CAP). The country's climate is ideally suited to modern, irrigated horticulture.In contrast,cereal production, which is concentrated in the dry and relatively infertile central plains, is highly vulnerable to the vagaries of the climate. Spain is Europe's third-largest wine product and the world is largest producer of olive oil. Spanish manufacturers have sought to strenghthen their competitive positions by improving quality and marketing, with some notable success. By contrast, cereal and sugar producers, as well as cattle farmers, have faced increasing pressure from import. Despite EU subsidies which account for about 2.5%of the sector's total income, agriculture has suffered one crisis after another over the past two decades.

Spain has the largest fishing fleet in Europe and accounts for about 16% of the fish catch in the EU, reflecting both the countty's coastal location and its high cansumption of fish (an annual 40 kg per head, second in the world after Japan). Almost one-half of these boats are concentrated in the north-western region of Glacia, and the majority are small local vessels. About one in eight boats are deep-sea vessels which fish outside Spanish territorial waters, and these account for almost 70% of the country's catch. The main deep-sea port is found in the Galician city of Vigo, Europe's largest fishing port. The industry employs about 61,000 fishermen and approximately 375,000 workers in relatedactivites onshore.

Despite its large capacity, Spain runs a large trade deficit in fish as a result of high domestic consumption and the landing of fish by Spanish boats in foreign ports (often operated under flags of convenience). Spain's capacity encouraged the countries of the European Community (EC, now EU) to adopt measures to protect national stocks before Spain's accessions in 1986, but these have not prevented recurrent fishing disputes involving Spanish vessels. Spain,s full integration into the EU's common fisheries policy was finalised in 1996, giving it access to previously protected waters of the UK and Irish coasts. Faced with rapidly dwindling stocks in Atlantic fishing waters, however, the EU has imposed deep cuts in fishing quotas since 2001, and is seeking substantial cuts in the region's total fishing capcity. The Spanish fishing industry was also hit by the EU's failure to negotiate a major fishing agreement with Morocco, which expired in 1999, although talks to renwew the accord are expecteded to restart in 2005.

Spain has large mineral reserves, especially in non-energy minerals, but it is still dependent on net imports for one-thord of it needs. It is particulary rich in iron ore, mercury, potash and pyrites, anf to a lesser extent uranium deposits. The principal coal mines and iron ore deposits ore deposits are located in the north (in Asturias, Cantabria and the Basque Country), significant mercury reserves are located near Almaden in the south-west, and copper and lead deposits are found in Andalucia. A gold mine inm Asturias holds some of the largest deposits of this metals in Europe, and Spain is also one of the world's leading producers of granite and marble.

The country,s coal industry, which still employs 11,430 people, is heavily subsidised and has been undergoing a slow, but steady, process of restructuring for many years. Between 1997 and 2003 coal production dropped by 32%, 14,000 miners were given early retirement, and the National Coal Plan cost the government a total of €12.7bn. However, the EU continues to exert pressure on the government to accelerate the process of recstructuring and reduce public subsidies.

Trade liberalisation in the second half of the 1980s (as a result of accession to the EEC) and a surge in foreign direct investment (FDI) led to widespread restructuring. The latter development left much of the country's industrial base under foreign ownership and Spain is now host to a number of capital-industrial subsectors. The automotive sector is a particularly strong, and Spain is the third largest car producer in Europe, after Germany and France. On a global basis, however, Spain has been relegated form fifth- to seventh-largest car producer, following the spectacular expansion of South Korea and China in recent years. Moreover, none of the large motor vechicle manufacturers is Spanish-owned.

Other manufacturing sectors of importance include food,drinks and tobacco, chemicals, paper, and textiles and clothing. Industrial output boomed in the second half of the 1990s, with output rising by an average of 4.7% a year in year1997-2000 period. In 2001, however, production declined for the first time since 1996, and has remained sluggish ever since (rising by 0.1% in 2003, 1.6%in 2004 and 1.8% in 2005). Industrial employment has also declined for three consecutive years since 2001, in sharp contrast to the buoyancy of the labour market in other sectors.

Source : Banco de Espafia, Boletin Estadisto.

Domestic industry has therefore, continued its absolut decline relative to services, while the foreign-owned sector appears to be heading towards absolute decline as FDI in manufacturing has slumped quite dramatically in recent years, and seems unlikely to recover in the forseeable future. Stiff competition from Asia, combined with thye eastward expansion of the EU on May Ist 2005, has significantly reduced Spain's appeal for foreign industrial investors. Spanish wages are more than three times higher than in Poland, Hungary and the Czech Republic. Not only is Spain losing out as a location for new greenfield plants, foreign investors are now also relocating existing production away from Spain.

A notable recent exception to the big textile industrial relocation is to be found in the key car industry, where production reached 3.02m units in 2005. Despite its evident vulnerability, the sector has managed to sustain output thanks to the introduction of more flexible working practices at many plants, and to the competitive edge enjoyed by many plants within western Europe. When car manufacturers have relocated output from western to eastern Europe, they have usually sought to shift production out of higher-cost markets, such as Belgium or Germany.

In contrast, production in the big textile industry has been failing steadily for several years, reflecting the country's steady loss of competitiveness to low-cost producers in Asia. This process seems likely to accelerate in the years ahead. After a ten-year period of transition, textile quotas were abolished in January 2005 as the World Trade Organisation's Multi-Fibre Arrangement expired, giving Asian manufacturers a further competitive edge over Spanish producers.

The construction sector is markedly pro-cyclical, with output expanding strongly in times of economic buoyancy, and slumping durong recessions. Output rose by 51.1% between 1997 and 2005. The latest construction boom was triggered by the one-off decline in interest rates associated with the launch of the euro in 1999, and then sustained by an unprecedented surge in immigration in the early years of the current decade. The Spanish popultion rose by 3.2m between 2000 and 2005, putting huge pressure on the country's housing stock. However, despite high rates of output growth, housing supply has failed to match demand, resulting in a surge in property prices. Prior to 1997, about 200,000-250,000 houses were built every year in Spain; since 1997 the figure has more than doubled, and reached a record 675,000 units in 2005, more than the combined total of France, Germany and Italy. House building now accounts for about one-third of all construction activity.

Houses price rose by 146% between 1997 and 2005 (17.3% in 2005 alone), far out of line with the rise in consumer price infaltion and wage growth. By comparison, norminal prices rose by 103% during the previous boom (1987-1991), at a high a time of higher consumer price inflation. This last boom ended in 1992, and nominal house prices subsequently fell by 12.2% in 1992-93. In real terms, however, house prices fell by just over 30% between 1992 and 1996, and some studies suggest that a similar price correction will take place over the coming years. If this occurs, the construction industry will suffer another of its sharp cyclical declines in output.

Investment in civil engineering projects also tends to be pro-cyclical, reflecting the easing of budget constraints on the government during times of buoyant tax receipts. And this has been the case since 1997, as the Spanish government has enjoyede a cyclical boom in revenue. As a result, official public tenders have risen by an average 11.2% a year between 1997 and 2005, although substantial extra public investment has also been channelled through off-budget investment vechicles. For example, much of the investment associated with the country's high speed rail network does not appear in the government's budget accounts.

The Spanish construction sector is dominated by a smallm number of "giants": ACS (which absorbed Dragados in 2003 to become Europe's third-largest constructor), FCC, Ferrovial, Acciona, Obrascon-Huarte Lain (OHL), and Sacyr-Vallehermoso. Five of Europe's ten largest publicly listed construction groups are Spanish

Spain has a strong retail banking sector, which after a series of mergers during the 1990s is now dominated by two banking groups: Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Certral Hispano (BSCH). These two banks now dwarf their competitors, together accounting for almost 80% of the country's commercial banking assets (38% when the country's network of mutual savings banks is included). Both banks expanded aggressively into Latin America in the late 1990s, and managed to emerge relatively unscathed from the Argentinian financial crisis. Following a period of financial consolidation in the early 2000s, both banks have know turned their attention to expansion within Europe. In 2005 BSCH acquired the UK's Abbey National, to create Europe's fourth-largest bank, and in 2005 BBVA launched a €6.4bn takeover bid for Banca Nazionale de Lavoro (BNL), Italy's sixth-largest bank.

Despite the high level of market concentration, the retail banking sector is competitive thanks mainly to the prescence of a well developed network of regionally based mutual savings banks, which control about 50% of total banking deposits. The two largest savings banks, La Caxia and Caja Madrid, have expanded in recent years, although they are less than one-quarter of the size of either BBVA or BSCH. Nevertheless, changes to the regulartory framework of the saving bank sector, which came into the force in 2004, could permit more rapid expansion in the future. Savings banks can now issue shares (albeit with no voting rights) and raise capital on the stockmarket, and regional governments are not allowed to control more than 50% of the seats on the management board.

Many foreign banks have tried to establish retail banking operations in Spain, but strong competitive pressures and low margins have hampered their success. The advent of Internet banking has provided a new opportunity to enter the market without making heavy investment in retail outlets.

The stockmarket has developed rapidly over the past 15 years, aided by the introduction of electronic trading (which links the four stock exchanges in Madrid, Barcelona, Bilbao and Valcencia), an intensive privalisation programme, the growing popularity of investment funds, and the emergence of a popular stockmarket culture during the stockmarket to raise capital, and this is particularly true of family-owned operations, which have become far less conservaqtive than in the past. After three consecutive years of decline, equity prices rebounded strongly in 2004 and 2005, in line with developments elsewhere.

Madrid is the fifth-largest stockmarket in the EU in absolute terms, but ranks higher in terms of capitalisation as a proportion of GDP. Nevertheless, the market is still dominated by the stocks of a small number of leading companies in the utility, energy, telecommunications and banking sectors, which are global players in their fields and dwarf the rest of the Spanish corporate sector. In an effort to create a niche market for itself amid the trend towards the consolidations of European stock exchanges, the Madrid exchange in 2000 launched Latibex, a market in leading Latin American stocks.

Spain consistently recorded a net outflow of both direct and portfolio investment capital between 1997 and 2001, reflecting the country's growing importance as a foreign investor in thisperiod, with much of ots outward investment directed towards Latin American, where Spain is the world's leading investor. In 2002 this situation was reserved, and Spain registered a net inflow of both direct and portfolio investment for the first time in six years. Since 2003 the composition of capital flows has become quite volatile. At the aggregate level, a big net outflow was recorded in 2004, followed by a big net inflow in 2004.These movements mainly reflected large shifts in portfolio investment:for example, foreign portfolio investment in Spain trebled in 2004, to reach €106.8bn (13% of GDP), but FDI collapsed to an eight-year low of just €7.9bn (compared with €38.2bn in 2003). Following in two years of decline, Spanish direct investment aboard rose by 63% in 2005, to €33.8 bn.

Foreign investors have tradionally been attracted to Spain by relatively low wage levels, ease of access to the EU market and a favourable quality of life. The government has also been keen to welcome foreign investors, offering a range of incentives. Moreover, Spain's devolved administrative structures offer regional governments considerable fiscal autonomy (particularly in the Basque Country and Navarra). However, inward FDI is now tumbling as a result of the declining relative attractiveness of Spain vis-a-vis the countries in central Europe that have recently acceded to the EU and countries further afield, particularly in Asia.

Foreign dept surged in the late 1990s and in 2000, fuelled by greater international borrowing by domestic credit institutions to fullfill rising credit demand amid a sharp decline in household saving. After peaking in 2003 the foriegn dept/GDP ratio has fallen back as growth of non-resident dept has slowed. Although the Economist Intelligence Unit excepts the stock to have risen sharply by end-2004 in US dollar terms, to over US$860bn, this is mostly accounted for by a depreciation in the value of the dollar vis-a-via the euro (the currency in which most foreign dept is denominated).

The peseta entered the EU's exchange-rate mechanism (ERM) in July 1989, but it was realigned downwards on three occasions between September 1992 and May 1993. In March 1995 the peseta suffered renewed selling pressure on the international currency markets and was devalued by a further 7% in the ERM. However, this realignment was forced on the government for political rather than economic reasons, and once political uncertainties had passed, the peseta recovered strongly. On January 1st 1999, the date of the launch of thye EU's single currency, the euro, the peseta was irrevocably locked at its central rate of Pta166.386:€1 (Pta85.07:DM1). With the exception of some isolated incidents, the changeover to euro notes went smoothly, and the peseta ceased to be legal tender from February 28th 2002.

The euro weakened severly against the US dollar in the first two years following its introduction in January 1999, falling by just over 20% from its launch rate of US$1.17:€. In 2001 there was a degree of stabilisations, with the year-end rate of US$0.90:€ being almost the same as the average 2000 rate of US$0.92:€. The dollar's strength against the euro rested largely on assumptions about the relative growth prospects for the US and the euro area, with gains in US productivity assumed by institutional investors to support a long-term trend of outperformance by the US economy. However, the dollar's appreciation against relatively to the euro area. After the first quarter of 2002 the euro strengthened, reavhing parity late in the year. Although there were periods of stability in 2004, the trend in the previous year continued with the currency breaching US$1.20:€1 by the end of the year. In 2005 the rise continued, to average US$1.24:€1 for the year. On May 5th 2005 the exchange rate stood at just US$1.30:€1.