How Spain’s financial system grew to become the envy of Europe

It is a chilly mid-winter afternoon in Segovia, in central Spain, and vacationers are gathered on the foot of town’s Roman aqueduct, gazing up at its well-known arches and taking selfies.

Lots of the guests are Spanish, however there are additionally individuals from different European nations, Asians and Latin Individuals, all drawn by Segovia’s historic attraction, gastronomy and dramatic location simply past the mountains north of Madrid.

“There was a second throughout Covid after I thought ‘possibly tourism won’t ever, ever be prefer it was earlier than’,” says Elena Mirón, a neighborhood information wearing a fuchsia-coloured beret who’s about to steer a gaggle throughout town.

“However now issues are superb and I really feel this 12 months goes to be a superb 12 months, like 2023 and 2024. I am glad, as a result of I can stay off this job I really like.”

Spain obtained a report 94 million guests in 2024 and is now vying with France, which noticed 100 million, to be the world’s largest international vacationer hub.

And the tourism business’s post-Covid enlargement is a significant cause why the eurozone’s fourth-biggest financial system has been simply outgrowing the likes of Germany, France, Italy and the UK, posting a rise in GDP of three.2% final 12 months.

Against this, the German financial system contracted by 0.2% in 2024, whereas France grew by 1.1%, Italy by 0.5%, and the UK by an anticipated 0.9%.

This all helps clarify why the Economist journal has ranked Spain because the world’s best-performing financial system.

“The Spanish mannequin is profitable as a result of it’s a balanced mannequin, and that is what ensures the sustainability of development,” says Carlos Cuerpo, the enterprise minister within the Socialist-led coalition authorities. He factors out that Spain was liable for 40% of eurozone development final 12 months.

Though he underlined the significance of tourism, Mr Cuerpo additionally pointed to monetary companies, know-how, and funding as components which have helped Spain bounce again from the depths of the pandemic, when GDP shrank by 11% in a single 12 months.

“We’re getting out of Covid with out scars and by modernising our financial system and due to this fact lifting our potential GDP development,” he provides.

That modernisation course of is being aided by post-pandemic restoration funds from the EU’s Subsequent Era programme. Spain is because of obtain as much as €163bn by 2026 ($169bn; £136bn), making it the largest recipient of those funds alongside Italy.

Spain is investing the cash within the nationwide rail system, low-emissions zones in cities and cities, in addition to within the electrical car business and subsidies for small companies.

“Public spending has been excessive, and is liable for roughly half our development for the reason that pandemic,” says María Jesús Valdemoros, lecturer in economics at Spain’s IESE Enterprise College.

Different main European economies have seen their development stymied by their larger reliance than Spain on business, which, she says, “is struggling loads in the mean time as a result of components such because the excessive price of power, competitors from China and different Asian nations, the price of the transition to a extra sustainable environmental mannequin and commerce protectionism”.

Since Covid, the opposite main financial problem for Spain has been the cost-of-living disaster triggered by supply-chain bottlenecks and the Russian invasion of Ukraine in 2022. Inflation peaked at an annual fee of 11% in July of that 12 months, with power costs hitting Spaniards significantly onerous, however by the tip of 2024 it had fallen again to 2.8%.

Madrid believes that subsidies it launched to chop the price of gas consumption and encourage public transport use had been key in mitigating the affect of the power worth rises, in addition to a number of will increase to the minimal wage.

On the peak of the European power disaster, Spain and Portugal additionally negotiated with Brussels a so-called “Iberian exception”, permitting them to cap the worth of fuel used to generate electrical energy to be able to scale back shoppers’ payments.

Mr Cuerpo argues that such measures have helped counter Spain’s conventional vulnerability to financial turmoil.

“Spain is proving to be extra resilient to successive shocks – together with the inflation shock that got here with the warfare in Ukraine,” he stated. “And I feel that is a part of the general protecting defend that we’ve put in place for our shoppers and for our companies.”

The nation’s inexperienced power output is seen as one other beneficial issue, not simply in guaranteeing electrical energy, but additionally spurring funding. Spain has the second-largest renewable power infrastructure within the EU.

The latter is a boon for a rustic that’s Europe’s second-biggest automobile producer, based on Wayne Griffiths, the British-born CEO of Seat and Cupra. Though Spanish electrical car manufacturing is lagging behind the remainder of Europe, he sees huge potential in that space.

“[In Spain] we’ve all of the components you must achieve success: aggressive, well-trained individuals and in addition an power coverage behind that,” he says. “There is no level in making zero-emission vehicles in the event you’re utilizing soiled power.”

Regardless of these positives, a longstanding weak spot of Spain’s financial system has been a chronically excessive jobless fee, which is the largest within the EU and virtually double the block’s common. Nevertheless, the scenario did enhance within the final quarter of 2024, when the Spanish jobless unemployment fee declined to 10.6%, its lowest degree since 2008.

In the meantime the variety of individuals in employment in Spain now stands at 22 million, a report excessive. A labour reform, encouraging job stability, is seen as a key cause for this.

This reform elevated restrictions on the usage of short-term contracts by firms, favouring larger flexibility in the usage of everlasting contracts. It has lowered the variety of employees in short-term employment with out hindering job creation.

Additionally, though the arrival of immigrants has pushed a fierce political debate, their absorption into the labour market is seen by many as essential for a rustic with a quickly ageing inhabitants.

The Socialist prime minister, Pedro Sánchez, has been outspoken in underlining the necessity for immigrants, describing their contribution to the financial system as “elementary”.

The European Fee has forecast that Spain will proceed to steer development among the many bloc’s massive economies this 12 months and stay forward of the EU common. Nevertheless, challenges are looming on the horizon.

The heavy reliance on tourism – and a rising backlash in opposition to the business by native individuals – is one concern.

One other is Spain’s huge public debt, which is greater than the nation’s annual financial output.

María Jesús Valdemoros warns that that is “an imbalance that we have to appropriate, not simply because the EU’s new fiscal norms demand it, however as a result of it might trigger monetary instability”.

As well as, a housing disaster has erupted throughout the nation, leaving thousands and thousands of Spaniards struggling to search out reasonably priced lodging.

With an unsure and deeply polarised political panorama, it’s troublesome for Sánchez’s minority authorities to deal with such issues. However, whereas it makes an attempt to resolve these conundrums, Spain is having fun with its standing because the motor of European development.