The Madrid stock exchange rose yesterday, reflecting the widespread view that the convincing Socialist victory in the Spanish general election on Sunday gives José Luis Rodríguez Zapatero, the Prime Minister, a clear mandate to revive the sagging economy and confront the coming global challenges. With a turnout of around 75 per cent, the Socialists increased their share of the vote, winning five extra seats to bring their total to 169 of the 350 in parliament. They failed, by seven seats, to win an absolute majority, and will have to rely on the ad hoc support of two regional parties from the Basque Country and Catalonia. But Mr Zapatero has clearly established a political authority that lays to rest the lingering controversy over the upset Socialist victory in 2004, days after the Madrid train bombings.

The Prime Minister swiftly announced that he had a big enough majority to carry out his campaign promises. These include traditional left-wing pledges, including a rise in state pensions, an annual €400 income tax rebate and a boost in infrastructure spending. More importantly, however, the Government must prepare for the expected economic squalls, driven by the global credit squeeze, the recent sharp rise in unemployment and the abrupt end to the construction boom. The Government is already preparing a public works programme to absorb some of the workforce laid off by the building industry, and is proposing to use the budget surplus, currently running at 2 per cent of gross domestic product, to fund the new programme. In this way, it hopes, the increased spending will keep growth at 3 per cent, down from last year's 3.8 per cent, but still enough to calm fears that Spain's long run of high growth has come to a sudden end.

His plans make it clear that socialism in Spain has a distinctly pragmatic face. Mr Zapatero has already pushed through in his first term social reforms that provoked angry opposition from the Catholic hierarchy but which were widely endorsed by the electorate. He now promises to govern for the poor, women and the young over the next four years. But he is unlikely to seek any further clash with a conservative, older generation or with the Church. Instead, the Government must focus on the more intractable issue of liberalising labour markets and challenging entrenched interests at a time of rising unemployment. He must also deal with Basque separatism, which showed its last desperate flickering two days before the election with the murder of a former Socialist councillor. The Government's earlier attempts to engage Basque separatists in peace talks, modelled on the peace process in Northern Ireland, were sabotaged by militants who have no interest in a political settlement, and staged an attack on Madrid airport. Public revulsion at the latest murder and Madrid's tough line have isolated the hard core of Eta supporters. But setting aside emotion to deal with this divisive issue is not easy for anyone in Spain.

For now, the new Government must turn to the immediate issues: rising oil and food prices, the continued inflow of immigrants, improving education and competitiveness and consolidating Spain's entrepreneurial culture. Mr Zapatero starts with a stronger base than others facing the same challenges. He must now show the same sure touch in the coming four years that he demonstrated during his first term in office.