ROI-Spain offers Europe a lesson in modern economics: Peacock

(The views expressed here are those of the author, the former head of communications at the Bank of England.)

By Mike Peacock

LONDON, November 3 (Reuters) - Spain remains the euro zone's fastest growing economy, outperforming its peers yet again in the third quarter. The Iberian country's successful policy mix offers several lessons that fly in the face of global political trends.

Spain's economy grew by 0.6% quarter-on-quarter in the three months through September, slightly slower than in the previous period but well above the 0.2% rate for the euro zone as a whole, continuing a positive multi-year trend.

In fact, the International Monetary Fund recently ranked Spain as the fastest-growing advanced economy, raising its 2025 growth forecast for the country to 2.9%, following a 3.5% expansion in 2024. That's well above the 2025 forecast for the bloc overall, which comes in at only 1.2%.

This healthy growth has helped to lower Spain's debt/GDP ratio, which fell from 119% in 2020 to below 102% last year. The IMF expects that to drop into the double digits by 2030.

This is a trend many of Spain's EU peers are likely watching with envy, and it's a far cry from the early 2010s when the country was ravaged by a housing market bust and existential banking crisis.

So what explains the dramatic turnaround?

A tourism boom, successful use of pandemic-era recovery funds, and a focus on high-value services have all been crucial. Another key growth driver is Spain's high levels of well-targeted immigration, which comes just as many EU nations are aiming to curb migration.

SMART IMMIGRATION

Spain is rare in Europe today for continuing to tout immigration as a virtue.

The bulk of an 8.2 million rise in Spain's population between 2000 and 2024 was due to net international migration, according to think tank Elcano Royal Institute. Absent that, the rapidly aging country might not have seen any population growth at all, the institute said.

Prime Minister Pedro Sanchez recently heralded this fact in an interview with the Guardian newspaper, noting that immigration represented 25% of Spain's per capita GDP and 10% of its social security revenues, yet only 1% of public expenditures.

Credit ratings agency Fitch argues that immigration has helped boost Spain's productivity and raise its potential growth - the rate at which its economy can expand without fueling inflation - to 2.0% from 1.4%.

Importantly, Spain's recent immigration appears to have had such a beneficial impact because it has been weighted to skilled workers and toward sectors most affected by bottlenecks, according to Banco de Espana, the country's central bank. Spain has also been able to tap a deep pool of Spanish-speaking workers from Latin America

So while low productivity has weighed on major European economies since the 2007-2009 Global Financial Crisis, Spain has found a way to push back.

GREEN BOOST

As Spain looks for future sources of growth, one key advantage may be that it has a sun-drenched climate that lends itself to renewable energy.

Spain is targeting carbon neutrality by 2050, and according to the International Energy Agency, its massive investment in solar, wind and renewable hydrogen should boost growth, jobs and research and development in the coming years.

Spain is already reaping some benefits of its green push, as it now boasts some of the lowest wholesale electricity prices in Europe.

Moreover, Spain, which is Europe's second-largest car-producing nation, has won major investments including from Germany's Volkswagen and China's Chery and CATL after announcing a 5-billion-euro plan in 2020 to attract electric vehicle and battery manufacturing. Reports suggest it may soon lure China's BYD too.

There have been bumps along the way, however. In April, Spain suffered Europe's biggest power blackout in more than two decades. While there is no indication that increased reliance on renewable energy itself was the cause, the outage likely did reflect the country's failure to make the necessary changes in its existing power infrastructure to keep up with the rapid energy transition.

STUMBLING BLOCKS

Madrid's policy mix could get shaken up in the coming years, as one global trend Spain has not escaped is dissatisfaction with the ruling government.

There are some good reasons for this. High property prices have shut many Spaniards out of the housing market. And even though unemployment has fallen to levels not seen since 2008, almost 2.5 million people are still out of work. The government has also been beset by corruption allegations, which it denies.

The next election is due in 2027, and recent opinion polls suggest Sanchez's ruling PSOE party is lagging behind the centre-right PP party, though by a relatively slim margin.

Whatever happens, Spain's last decade shows that - despite much rhetoric to the contrary - it is possible to increase productivity in Europe and slow negative demographic trends.

Whether other European countries heed this message remains an open question.

(The views expressed here are those of Mike Peacock, the former head of communications at the Bank of England and a former senior editor at Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn, and X.

(Writing by Mike Peacock; Editing by Anna Szymanski and Diane Craft)