How Spain’s financial system turned 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.

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

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

“However now issues are excellent and I really feel this yr goes to be a superb yr, like 2023 and 2024. I am glad, as a result of I can dwell off this job I 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 growth is a serious motive 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 yr.

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 answerable for 40% of eurozone development final yr.

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

“We’re getting out of Covid with out scars and by modernising our financial system and subsequently 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 most important 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 answerable for roughly half our development because the pandemic,” says María Jesús Valdemoros, lecturer in economics at Spain’s IESE Enterprise Faculty.

Different main European economies have seen their development stymied by their better reliance than Spain on business, which, she says, “is struggling quite a bit for the time being attributable to elements 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 yr, with power costs hitting Spaniards significantly exhausting, however by the top 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 have been key in mitigating the impression of the power value rises, in addition to a number of will increase to the minimal wage.

On the top 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 in an effort to cut 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 believe that is a part of the general protecting defend that we have now put in place for our shoppers and for our corporations.”

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, in line with Wayne Griffiths, the British-born CEO of Seat and Cupra. Though Spanish electrical car manufacturing is lagging behind the remainder of Europe, he sees monumental potential in that space.

“[In Spain] we have now all of the elements you’ll want to achieve success: aggressive, well-trained individuals and likewise an power coverage behind that,” he says. “There is not any level in making zero-emission vehicles in case 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 most important within the EU and virtually double the block’s common. Nevertheless, the state of affairs 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 motive for this.

This reform elevated restrictions on using non permanent contracts by corporations, favouring better flexibility in using everlasting contracts. It has decreased the variety of employees in non permanent 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 huge economies this yr and stay forward of the EU common. Nevertheless, challenges are looming on the horizon.

The heavy reliance on tourism – and a rising backlash towards 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 tens of millions of Spaniards struggling to search out inexpensive lodging.

With an unsure and deeply polarised political panorama, it’s tough 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.