How Spain’s economic 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 the 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 international locations, 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 once I thought ‘possibly 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 guide a bunch throughout the town.

“However now issues are excellent and I really feel this yr goes to be a great yr, like 2023 and 2024. I am completely satisfied, as a result of I can reside off this job I really like.”

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

And the tourism trade’s post-Covid growth is a significant purpose why the eurozone’s fourth-biggest economic system has been simply outgrowing the likes of Germany, France, Italy and the UK, posting a rise in GDP of three.2% final yr.

In contrast, the German economic 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 economic 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 chargeable for 40% of eurozone development final yr.

Though he underlined the significance of tourism, Mr Cuerpo additionally pointed to monetary companies, expertise, 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 economic 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 trade and subsidies for small companies.

“Public spending has been excessive, and is chargeable for roughly half our development for the reason that 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 larger reliance than Spain on trade, which, she says, “is struggling so much in the mean time because of elements such because the excessive price of vitality, competitors from China and different Asian international locations, 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 vitality costs hitting Spaniards notably exhausting, however by the tip of 2024 it had fallen again to 2.8%.

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

On the top of the European vitality disaster, Spain and Portugal additionally negotiated with Brussels a so-called “Iberian exception”, permitting them to cap the value of gasoline used to generate electrical energy with the intention 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 struggle in Ukraine,” he stated. “And I believe that is a part of the general protecting defend that we now have put in place for our shoppers and for our corporations.”

The nation’s inexperienced vitality output is seen as one other beneficial issue, not simply in guaranteeing electrical energy, but in addition spurring funding. Spain has the second-largest renewable vitality 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 monumental potential in that space.

“[In Spain] we now have all of the elements you might want to achieve success: aggressive, well-trained individuals and likewise an vitality coverage behind that,” he says. “There is not any level in making zero-emission automobiles for those who’re utilizing soiled vitality.”

Regardless of these positives, a longstanding weak point of Spain’s economic system has been a chronically excessive jobless fee, which is the largest 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 stage since 2008.

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

This reform elevated restrictions on the usage of non permanent contracts by corporations, favouring larger flexibility in the usage of everlasting contracts. It has diminished 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 economic system as “elementary”.

The European Fee has forecast that Spain will proceed to guide development among the many bloc’s large 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 trade by native individuals – is one concern.

One other is Spain’s huge public debt, which is larger 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.