In 1996, Aznar inherited an economy with several notable strengths—annual growth of nearly 3% and inflation under 4%—and one overwhelming weakness—unemployment that hovered near the 25% mark, despite two years of sustained economic recovery. He also inherited an entrenched welfare state, established during 14 years of Socialist governments. Fears of a weak or unstable government were laid to rest with the emergence of a strong coalition that supported Aznar's pro-business, pro-EU position. From 1996 until early 2000, Aznar guided Spain into the European monetary unit, privatized many state assets, and lowered taxes. Yet Spain's standard of living remained below that of other members of the EU. Economists have pointed out that Spain's economy must continue to grow at 4% annually to catch up—a difficult goal.
In his second term, Aznar promised to continue to liberalize the economy. He wants to trim what he sees as a bloated bureaucracy; cut more taxes for citizens in the upper-income brackets; introduce competition in the energy and telecommunications industries to reduce prices and increase quality of service. He has proposed to increase the hours of operations for commerce, potentially disturbing a Spanish lifestyle that has endured for centuries. A higher GDP has meant greater energy consumption, which could lead to inflation. Also, while unemployment has decreased significantly, it remained at 11.3% in 2002. To accomplish his goals, Aznar has said he will make "democratic use" of his majority in Congress. That means he doesn't want to upset the many leftists who crossed party lines to vote for him. It also means he would not be likely to simply ignore those who do not agree with his policies.
Aznar also faced the difficult task of dealing with Basque separatist violence. In late November 1999, the ETA ended a self-declared ceasefire. The Nationalist Basque Party (PNV), which believes that only through negotiation can peace be achieved, was concerned that Aznar's resounding victory in March 2000 would hurt the peace process. Moderate nationalists fear Aznar will not negotiate with ETA, or even hold a dialogue with Basque separatists, perhaps leading to more violence. During the EU summit held in Seville in June 2002, ETA was held responsible for a series of bomb blasts in a number of tourist resorts. That August, the government and a Spanish judge outlawed Batasuna, the separatist Basque political party believed to be the political arm of the ETA. Batasuna's political activities (fundraising, meetings, campaigning) were suspended for three years while the judge, Baltasar Garzon, investigated alleged criminal links to ETA. The Spanish members of Parliament also voted to ban the party altogether, as it is the only political party in Spain that refuses to condemn ETA's attacks. Batasuna was outlawed by the Supreme Court in March 2003 on the grounds that it was a "constant political complement" to ETA. In April, the Justice Minister asked the EU to place Batasuna on its official list of terrorist organizations. As of 2003, more than 800 people have been killed by ETA in 35 years of fighting for an independent state.
Aznar had to face an environmental disaster in late 2002. In November, after suffering damage in a storm, the oil tanker Prestige split in two and sank to the bottom of the ocean 150 miles off the coast of Galicia. It was carrying 77,000 tons of oil, and the government was blamed for not adequately addressing the disaster. It failed to equip and coordinate efforts to clean up the spill and was slow in sharing information. Aznar was accused of being everything from arrogant to absent, yet no one in the government resigned.