Due to the repressive regime of Spanish dictator General Francisco Franco, Spain was isolated from key developments elsewhere in Europe after World War II, such as the success of democracy, free market economics, and the establishment of the European Union and NATO. Franco's death in 1975 sparked a sea change in Spanish domestic and foreign policy. Within three years, Spain moved from dictatorship to democracy. Economic reforms begun in the late Franco period were expanded and rapid economic growth ensued. Spain joined NATO in 1982 and the European Union in 1986. Spain has played an increasingly prominent role in the EU and other international bodies, with Spanish diplomats and politicians often assuming positions of leadership. The United States, looking for reliable allies in the Cold War, acquired naval and air bases in Spain in exchange for economic aid to the Franco regime. This support for Franco fed anti-American sentiment in Spain, particularly among the Spanish left. Nevertheless, it should be noted that the United States and Spain have generally maintained good relations in the post-Franco period, whether under Socialist or right-of-center governments. According to the terms of an Agreement on Defense Cooperation, the United States has retained access to several Spanish military bases, including a naval base at Rota and an airbase at Moron, which is a key transportation link between the United States and U.S. forces in Iraq and Afghanistan. The Socialist Party (PSOE), led by Prime Minister Jose Luis Rodriguez Zapatero, has governed Spain since 2004. After unseating conservative Popular Party (PP) leader and staunch U.S. ally Jose Maria Aznar in March 2004, Zapatero and the PSOE won a second term in office in March 2008 parliamentary elections. The Socialists won 169 seats in the 350-seat Congress of Deputies, up from 164 in the previous parliament. While again falling behind the PSOE, the PP gained parliamentary seats in the 2008 election, winning 154 seats, up from148 seats. As in 2004, the Socialists are short of an absolute parliamentary majority and are again expected to form a government which will depend on the support of one or more small leftist and regional nationalist parties. Unprecedented circumstances surrounding Zapatero's 2004 election led some to challenge the legitimacy of his victory and contributed to a tense political climate during his first term. The 2004 elections came three says after Islamic terrorists bombed four commuter trains in Madrid on March 11, 2004, killing 191 persons and wounding over 1,800 others. Until the bombings, Zapatero trailed Aznar in opinion polls, and observers agree that Zapatero's victory may have been more a reflection of public disenchantment with Aznar's handling of the bombings than of public support for Zapatero. Analysts expect Zapatero to face less united conservative opposition and enjoy broader political and public support during his second term. During his first term, and despite his narrow victory, Zapatero forged ahead with actions that infuriated the PP, the Catholic Church, and conservative sectors of Spanish society. Under his leadership, Spain has legalized gay marriage and liberalized divorce. He has called for a law that would publicly assign sole blame for the bloody 1936-1939 Spanish Civil War to General Franco, and force the removal of his name from streets and towns throughout Spain. Public debate over the war, and the misdeeds of Franco's dictatorship, had been muted for more than three decades in order to permit Spain to consolidate its democracy. Zapatero has also taken controversial steps in other areas. He negotiated a wide-ranging autonomy statute with the Catalonia region, giving increased powers over tax collection, the judiciary, and other key issues to local authorities. Opponents charged that the move was unconstitutional and would lead to the breakup of the Spanish state. Zapatero has also tried to negotiate an agreement with the Basque terrorist group Basque Fatherland and Liberty (ETA) to permanently give up violence. This effort suffered a devastating blow in December 2006 when ETA exploded a bomb placed in a parking lot at the Madrid airport, killing two persons. Zapatero's political reputation took a further beating after the attack when he initially appeared reluctant to give up the negotiations. Zapatero has since acknowledged the attempt to negotiate with ETA had been a mistake, and has taken a harder line on the Basque issue, particularly after ETA officially ended a formal cease-fire in June 2007. The PP largely failed to capitalize politically on Zapatero's missteps on the ETA peace talks. Instead, the 2008 election campaign centered on a downturn in what had been a booming economy and on increasing public concern with Spain's growing immigrant population. Analysts expect Zapatero to devote most of his attention in the foreseeable future to addressing Spain's worsening economic climate. After a decade of impressive economic performance during which Gross Domestic Product exceeded 3% per year for every year except 2002, Spain is expected to experience a sharp decline in economic growth in the coming year. Spain's once booming housing sector and other areas of the economy have been hit by global financial crises and higher energy prices. As a result, analysts expect year-on-year GDP growth to drop from 3.8% in 2007 to 1.9% in 2008 and 2009. After falling to 2.7% in 2006, inflation reached 4.4% in February 2008. Unemployment is expected to rise from an estimated 8.3% in 2007 to 9.6% in 2008. Zapatero has said he will seek to boost productivity growth in part by offering tax cuts and increasing public investment. He has promised a tax rebate of 400 Euros (about $600) for all wage earners, and is expected to boost government investment in infrastructure, education, research, and development. Analysts agree that Zapatero should win broad political support for his economic policy initiatives, but many also forecast an extended economic lull. Spain has been a key base for Islamist extremists throughout Europe, including some of those who carried out the September 11, 2001 attacks in the United States. In September 2005, Spain's High Court convicted a group of Islamist extremists accused of assisting in the September 11 attacks on the United States. The group's leader, Imad Eddin Barakat Yarkas, was sentenced to 27 years in prison for conspiring with the 9/11 plotters, but was cleared of charges of murder. Seventeen others were sentenced to lesser terms, mainly for membership in a terrorist group. Six defendants were acquitted. Spanish police have made progress in breaking up the terrorist cell responsible for the March 11 attack. Spanish officials determined that the Al Qaeda-linked Moroccan Islamic Combatant Group carried out the bombings. On April 3, 2004, seven men suspected of involvement in the Madrid attacks were killed when they blew themselves up after they were surrounded by police. Police found evidence that the group was ready to commit additional attacks. Twenty-nine other suspects in the 3/11 attacks--19 mostly Moroccan Arabs and nine Spaniards--went on trial in February 2007. 21 of the suspects were convicted and seven acquitted in October 2007. All had pleaded not guilty. Prime Minister Zapatero expressed his view that justice had been served during the trial. However, some analysts and victims' groups expressed frustration that the three alleged masterminds of the operation were either acquitted or handed relatively lenient sentences. Spanish police remain concerned about possible "sleeper cells" that may continue to operate in the country. They are particularly concerned about terrorists who leave Spain to fight against U.S. forces in Iraq and may then return to Spain or other countries to launch new attacks. In January 2006, Spanish police arrested a militant and 20 associates involved in recruiting Muslims from Spain to fight in Iraq. In January 2008, 6 suspects were arrested for allegedly plotting to attack Barcelona's public transport system. Spanish officials are worried about terrorist recruiting efforts in Ceuta and Melilla, two Spanish enclaves on Morocco's coast. More than 300 men have been imprisoned in Spain for offenses related to Islamist terrorism. France, Britain, Italy, and Spain have reportedly developed a list of about 200 suspected Islamist terrorists at liberty on European soil, 20 of whom are living in Spain. Observers believe Prime Minister Zapatero's philosophy on fighting terrorism may differ somewhat from that of the United States. Zapatero has said that he views military force as a "last resort" in the war on terrorism. He has stressed the need to address social and economic roots of terrorism both in Spain and in Islamic countries. He has called for an "alliance of civilizations" among Western countries and Islamic ones. Zapatero has underlined the need to integrate the Muslim population in Spain. Estimates of the Muslim population (mainly of Moroccan or Algerian ancestry) run from 600,000 to 1 million, out of a total Spanish population of 44 million. Most have been in Spain less than 20 years. Spain has boosted law enforcement resources devoted to fighting Islamist terrorism, a change from the period before March 11, when the main focus of Spanish efforts was on the Basque terrorist group ETA. (The 9/11 attacks had only a modest impact on Spain's counterterrorism priorities). Improvements include enhancing coordination between Spanish law enforcement and intelligence bodies, establishing an integrated database of suspects, and increasing the number of law enforcement officers and Arabic language translators. Spain has strongly backed anti-terrorist cooperation with its EU partners, although these efforts have reportedly been hampered by some countries' reluctance to share sensitive intelligence. Spain has also been eager to highlight its cooperation with the United States in fighting terrorism. In March 2005, the two countries set up a group of experts and prosecutors to improve legal and police cooperation on terrorism. Senior U.S. and Spanish officials have also met to try to improve the flow of anti-terrorism intelligence between the two countries. In November 2005, Spanish press sources claimed that CIA planes, perhaps carrying terror suspects, made at least 10 secret stopovers at Spanish airports in Majorca and the Canary Islands between January 2004 and 2005. Spanish officials replied that all flights concerned were legal under Spanish law, but pledged to be "vigilant" about such flights in the future. The issue is politically sensitive due to European investigations into alleged secret CIA detention facilities in Eastern Europe and abuse of detainees allegedly committed or facilitated by the United States in various parts of the world. On February 9, 2007, the Spanish government agreed to release to a Spanish High Court judge documents providing details on the secret flights. The judge is investigating whether terror suspects were held illegally or tortured in Spain. The government says that it has no evidence that such crimes took place on Spanish soil, but has conceded that the flights could have conveyed detainees to other countries where crimes were committed. U.S.-Spanish relations deteriorated after Prime Minister Zapatero took office in 2004. Zapatero has shifted Spain's foreign policy from the strongly pro-U.S. focus of the Aznar government to favoring ties with EU partners France and Germany. Zapatero has also placed more emphasis on strengthening the European Union's foreign policy role than his predecessor did. After his election victory, Zapatero strongly attacked U.S. policy on Iraq in highly undiplomatic terms, claiming that it was based on "lies," and suggested that Americans vote President Bush out of office in November 2004. Since President Bush's reelection, Spain has tried to repair its relationship with the United States, including with the exchange of many high-level visits. Personal ties between President Bush and Zapatero reportedly remain cool, however. The two leaders have yet to hold a bilateral meeting. The United States and Spain enjoy important links in other areas, including increasing cultural ties between Spain and Americans of Hispanic descent, and a strong economic relationship. The United States is Spain's largest export market outside of the EU. Iraq has been a major point of tension between the United States and Spain. On April 18, 2004, the day after the new Spanish government took office, Zapatero announced the withdrawal of Spain's 1,300 troops from Iraq. In a five-minute phone call to Zapatero, President Bush expressed regret about the "abrupt" Spanish decision and warned against taking actions that would give "false comfort to terrorists." Some U.S. officials sharply criticized the way the withdrawal was planned, saying it was done without proper coordination and in an "unprofessional" way that could unnecessarily jeopardize operations and lives. After the January 2005 Iraqi elections, Zapatero offered to train Iraqi soldiers in demining at a site near Madrid, as well as to contribute to a NATO trust fund to support Iraqi security forces. In October 2005, Spain's High Court issued warrants for the arrest of three U.S. soldiers for firing on a Baghdad hotel and killing a Spanish cameraman in April 2003. The men had been exonerated by a U.S. military investigation, which concluded that enemy troops had been firing from the hotel at U.S. forces. The Spanish government challenged the warrants on technical grounds, saying that the court must first rule that the case merited prosecution. The warrants were then withdrawn, but reissued in January 2007 after the High Court made such a ruling. Despite conflicts over Iraq, the United States and Spain have continued to cooperate in Afghanistan. Spain contributes about 740 troops to the NATO-led International Security Assistance Force (ISAF). Spain operates a Provincial Reconstruction Team in a remote region of western Afghanistan and leads a forward support base in Herat, in cooperation with Italy. The Spanish force has suffered losses. In August 2005, 17 Spanish soldiers died when their helicopter crashed during a training exercise. In 2003, Spain lost 62 peacekeepers when the plane transporting them home from Afghanistan crashed. Spain has rejected U.S. calls to send troops to southern Afghanistan, where the potential for conflict with Taliban insurgents is high. Instead, Spain has offered four unmanned aerial reconnaissance aircraft and training for the Afghan army. U.S.-Spain relations have been negatively affected by differences over Venezuela and Cuba. The Zapatero government has sought to improve ties with the leftist regimes in both countries. Spanish officials say that they are dedicated to the same human rights goals as the United States in the region, but believe that engagement, rather than isolation, is the best way to secure improvement. Spain has strong cultural ties to Latin America and Spanish firms are major investors there. Spain is a key player in EU policy toward the region, and is reported to advocate closer EU ties with Cuba. U.S. officials expressed particular concern about Spain's agreement to sell ten military transport planes and eight coast guard vessels to Venezuela. They claim it is part of an arms buildup by President Hugo Chavez that could destabilize the region. Spanish officials say that the equipment is earmarked for anti-drug trafficking operations. In January 2006, the United States blocked the sale of the planes, by refusing to permit the use of U.S. military technology in them. Spanish officials responded that the U.S. move was unjustified and that the sale would go forward after the U.S. parts were replaced by technology from other countries. However, Spain cancelled the aircraft deal in October 2006, after it failed to find the replacement parts it was seeking. In November 2006, Spain, France, and Italy proposed a peace plan for the Israeli-Palestinian conflict. The plan would involve a cease-fire, exchange of prisoners, and the formation of a national unity government by the Palestinians. International monitors would oversee the cease-fire, and an international conference would be held in Madrid to restart Middle East peace efforts. However, other EU countries, taken off guard by the Spanish initiative, were unenthusiastic about the plan, and it has not been adopted as EU policy. The United States did not publicly denounce the plan, but greeted it coolly. The EU, along with the United States, Russia, and the United Nations, form the "Quartet," an informal group aimed at promoting an Israeli-Palestinian peace. In addition to its active role in Israeli-Palestinian peace efforts, Spain plays an important role in UNIFIL, the U.N. peacekeeping force in Lebanon, contributing 1,100 of the force's 11,000 troops.

Summary:
In the more than three decades since the death of Spanish dictator General Francisco Franco, Spain has become a mature democracy and has experienced rapid economic growth. It has also become an increasingly important player internationally, including in NATO and the European Union. The United States and Spain have generally enjoyed good relations. However, problems have arisen in recent years over such issues as the war in Iraq, promoting democracy in Latin America, and the tactics to be used in fighting the war on terrorism. This report provides information on Spain's current political and economic situation, its struggle against Islamist terrorism, and its relations with the United States. It will be updated as needed.