Without the fantasy elements you would have a dark despairing albeit pretty realistic historical/political drama. 

The fantasy element is the key to the story as it is Ofelia's story and in Pan's Labyrinth, Ofelia is the living embodiement of Spain. Whereas the reality covers a short period, the fantasy can be seen as covering the whole period of Franco's rule right up to his death and beyond.

That's how I interpreted it anyway.

Cheers Trev.