Spain’s economy is thriving, with 2024 marking one of its best years in recent history.
It is projected to grow by 3%, almost four times the eurozone average.
The labor market has added 1.8 million jobs since 2019, bond yields have dropped below France’s for the first time since 2007, and inflation has cooled to manageable levels.
Spain is now considered the best-performing OECD economy of the year. This transformation is particularly striking for a nation once synonymous with economic crisis.
How did Spain turn its fortunes around, and what can Europe learn from this?
A recovery built on reforms
Spain’s current success is mainly the result of structural reforms made after the financial crisis a decade ago.
Labor market adjustments allowed greater flexibility in contract renegotiations and reduced the abuse of temporary employment. These reforms encouraged businesses to invest in permanent staff, fostering job stability.
Reforms to the financial sector played a crucial role too. The consolidation of banks following the 2008 crisis stabilized the financial system, which has boosted investor confidence.
Additionally, policies promoting renewable energy, such as scrapping the “sun tax,” have spurred a green energy boom, aligning Spain with future-oriented sectors.
These policy changes laid a foundation for consistent GDP growth, with the economy expanding at an annual rate of 3% between 2015 and 2019.
While the pandemic temporarily halted this progress, Spain has since rebounded, now outperforming larger European economies like Germany and France.
Source: OECD
Services, not manufacturing are leading the way
A key driver of Spain’s growth is its shift from traditional manufacturing to services.
Industrial production has stagnated, though it was less affected by high energy costs than in Germany.
Meanwhile, service exports have surged, particularly in technology, consulting, and engineering.
Non-tourism service exports overtook tourism revenues for the first time during the pandemic.
Tourism of course remains vital for Spain’s economy. The sector is thriving with an expected 90 million visitors in 2024, setting a record.
However, reliance on tourism has sparked concerns over sustainability, with rising property prices and “tourism phobia” among locals becoming more prevalent.
Immigration and labor market strength
Spain’s open-door approach to immigration has been another engine of growth.
The country’s population has increased by 1.5 million since 2019, with nearly all the newcomers being immigrants, predominantly from Latin America.
This influx has filled critical gaps in the labor market, particularly in hospitality, where a quarter of the workforce is foreign-born.
Immigration has also boosted economic output. While GDP is 7% higher than in 2019, it is only 3% higher per capita, reflecting the outsized role of new arrivals in driving overall growth.
Still, unemployment has dropped to 11%, its lowest level in over a decade.
Despite these gains, income inequality persists. Real wages for many families remain below pre-2019 levels, and only recently have average wages started to rise.
Nevertheless, increases in the minimum wage under Prime Minister Pedro Sánchez have lifted incomes for lower-wage workers faster than the national average.
Spain’s economy: risks and bottlenecks
It is not all sunshine and rainbows for Spain’s economy. Private investment remains below its 2019 levels, partly due to business hesitation over frequent tax changes and labor regulations.
The government’s decision to extend emergency taxes on banks and energy companies has fuelled concerns about stifling credit availability and discouraging investment.
Housing is another pressing issue. Immigration and a booming tourism sector have driven up property prices, creating a bottleneck that could limit future growth.
Without significant efforts to expand the housing supply, the country risks exacerbating inequality and losing its competitive edge in attracting talent.
Lastly, political instability is also an issue. Spain’s minority government, reliant on a coalition of leftist and nationalist parties, faces difficulties passing reforms.
While policies like the Next Generation EU funds have driven public investment, sustaining long-term growth will require a renewed focus on structural improvements, particularly in education and innovation.
What can Europe learn from Spain?
Spain’s recent success challenges the belief that Europe is destined for economic stagnation and offers valuable lessons for other countries.
The first lesson is prioritizing service exports. By focusing on high-value sectors like technology and engineering, Spain has managed to diversify its economy beyond tourism and manufacturing.
Countries heavily reliant on traditional industries could benefit from a similar pivot.
Second, embracing immigration has proven effective in filling labor shortages and boosting economic output.
Spain’s open-door policies offer a model for countries with aging populations, encouraging them to reconsider restrictive policies that limit labor force growth.
Finally, Spain’s experience underscores the transformative potential of structural reforms.
The long-term impact of its labor and financial system reforms demonstrates the importance of proactive policymaking.
When combined with forward-looking policies in energy and technology, such reforms can drive substantial economic progress.
Spain’s success story offers a blueprint for overcoming economic challenges through diversification, openness, and reform.
Eurozone economies perhaps need to pay more attention to the country’s strategy, because standing still is not an option anymore.
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