The PSOE remains a progressive party, but economically I think has moved rightwards like all other European Social Democratic parties did in the 1990's.

The PP is the result of the merger of Manuel Fraga's right-wing AP with the smaller Christian Democrat (Partido Demócrata Popular) and Liberal (Partido Liberal) parties in the late 1980's. You could argue that its rightward drift is creating a void that could be filled by a true Liberal party, but the most likely way for this to happen is a split of the PP itself.

It would be better if the approximately 15% of far-right voters (to judge from Europe-wide trends) voted for an explicitly right-wing nationalistic party except for a party which pretends to be centre-right. In 2000, after 4 years of Aznar having to compromise with the Basque and Catalan Nationalists (both Christian Democrat) a party called Democracia Nacional broke off to the right of PP, but was not able to take votes away from Aznar which (amazingly) proved a very charismatic leader for the Spanish right and won a majority of seats in both houses of parliament. If the PP fails to win the next elections (in 2007/8) we'll see what happens.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman