By Jason Webb
MADRID, June 15 (Reuters) - With unemployment rocketing past four million, the Spanish government chose to focus its campaign for European elections earlier this month on a homophobic German skinhead.
"Homosexuality is a sickness!" he spat out in a television spot prepared by the governing Socialist Party. The advertisement aimed to associate the conservative Popular Party opposition with hard-right views from around Europe.
At a time when Spanish joblessness is growing more quickly than in any other major European country, and the economy dwarfs other issues in opinion polls, the government is trying to steer thoughts towards its liberal social agenda.
As a tactic in a country where the economy has rarely decided elections, it seems to have been successful in limiting damage to the Socialists despite growing hardship among voters.
But it hardly bodes well for the economic overhaul economists say is necessary if Spain, where gross domestic product could fall by close to 4 percent this year, is to become competitive again and avoid years of stagnation.
The opposition has also shown little enthusiasm for suggesting unpopular economic reforms, particularly the thorniest of them all: labour reform.
Other issues which may be key to the country's future, but which are not subject to rigorous public debate, include improving education and making big-spending regional governments more efficient.
Spain's politicians are failing to tackle the country's underlying problems and look set to continue to fail to do so, even if the Socialists are replaced in elections in 2012, said Charles Powell, history professor at San Pablo-CEU University.
"There is a growing opinion that Spain's political class will be unable to undertake reform," said Powell.
In addition to trying to shift political debate to gay rights and abortion, Prime Minister Jose Luis Rodriguez Zapatero hopes a massive public works plan will have revived the economy by the time he next has to face the voters. In order to keep unions on his side, he has flatly refused calls from business to make it cheaper to hire and fire workers.
WEAK RECOVERY
But while government spending will boost public debt by 150 billion euros or 15 percentage points of GDP by 2010, private economists think Spain's eventual recovery will be anaemic.
After a decade bingeing on debt, during which the private sector's deficit hit up to 12 percent of GDP, the country has to reduce its cost base by some 20 percent and find something to replace construction as its economic foundation stone, many analysts believe.
If it doesn't do these things, Spain could face years of stagnation. In some ways, the country could return to the 1990s, when Spain endured unemployment rates of over 20 percent without major social unrest. But society is different now, with a middle class that has become used to rising living standards, and a large immigrant population.
"Spain's problem is the absence of debate," said Gabriel Elorriaga, a parliamentarian from the Popular Party who regrets his own party's lack of reformist zeal.
"Spain is probably still traumatised for historical reasons, with an instinctive aversion to debating issues that can lead to confrontation or disagreement. In Spain, consensus is idolised."
In the 1936-39 civil war, ideological disagreements led to hundreds of thousands of deaths. Now, according to Elorriaga, the lack of adequate political reaction to the global credit crisis is causing growing disillusionment with politics.
On the surface there are few signs that Spain faces any political upheaval to match the scale of its economic pain.
POLITICAL SEA CHANGE?
Opinion polls show the Socialists level with the Popular Party, or lagging by a few percentage points -- levels only marginally changed from those during the March 2008 elections.
But there are indications that voters might be preparing for a future realignment, according to Belen Barreiro, head of the Centro de Investigaciones Sociologicas, a government-funded body which produces the most respected opinion polling in Spain.
"Citizens are perceiving the crisis as a sign that values have to change, towards a world with less consumerism, in which people show more solidarity towards each other, towards a world with less inequality," Barreiro said.
This could augur better for the Socialists than for the Popular Party, which has based its economic policy on calls for tax cuts. But Powell sees few political winners as citizens lose faith in institutions in general, including the European Union.
Elorriaga expects Spain to experience a grim "L-shaped" recession, with contraction followed by no recovery, not the rapid resumption in growth of a "V-shaped" downturn. But this could provide grounds for hope in the long term.
"I think Spain could go from L to V, if, when we hit bottom, we start a debate about why we're in such a state," Elorriaga said. (Reporting by Jason Webb; editing by Andrew Torchia and Janet McBride)