Spain’s economic revival

Richard Williams IV // 23 July 2018

Is Spain due to become a more influential power within the European Union? The country is expected to become a net contributor to the bloc while the United Kingdom’s departure from the union allows Spain to ‘move up’ the EU’s ladder. Spain’s rise, along with the UK’s departure, calls the country’s power within the European Union into question, both as a regional leader and as a potential role-model for economic recovery.

The 2008 financial crises and the woes it brought to the eurozone can undoubtedly be attributed to Spain’s economic troubles of the past decade. The crisis sparked a domino effect across the whole of Europe. Greece, Ireland, Italy, Portugal, and Spain were among a handful of European countries hit particularly hard by the crisis. Its cause, and eventual spread, can be attributed to several factors, such as: the high interconnectedness of the financial system, high-risk lending and borrowing procedures, and property bubbles.

These risks contributed to an unstable banking system and a sharp decrease in property investment that led to a downward spiral of the Spanish economy. The result – millions of Spanish citizens found themselves unemployed and many companies faced the reality of bankruptcy. The shockwave was, and continues to be, felt throughout the whole of Spain. 2013, however, brought new hopes for the Spanish economy. A steady, yet impressive GDP growth illustrates new signs of life for Spain. Rising from the economic shambles that once left the nation struggling to recover, Spain currently appears to be well on track to reconcile its previous economic downfall with a fresh perspective of the future.

Overall, the country’s handling of its financial crisis is noticed throughout the bloc. According to political authorities in Brussels, Spain’s economic recovery has since outpaced the economic growth rates of other countries affected by the eurozone crisis. Led by increasing demand for domestic product and refined exports, the Spanish economy has managed to position itself as the fifth largest economy in the EU.

Spain’s National Statistical Institute (INE) forecasts high hopes as well. Recent statistics from the institute illustrate a healthy, and slight, upward trend of growth in the first quarter of the current year. In Q1, domestic demand, as mentioned earlier, served as the primary driving force of the Spanish economy. Private consumption of goods increased by 0.7% per quarter up from the 0.6% increase noted in Q4 of 2017. Externally, export growth increased to 1.3% in Q1 in contrast to a 0.3% increase in Q4. Spain’s overall economic increase comes after approximately 10 years of widespread hardship.

Ten years ago, however, politicians in Brussels and Madrid were not confronted with the same challenges facing today’s European Union. The United Kingdom’s departure from the EU signifies different things for each member state. For example, Germany will most likely suffer the biggest economic impact from the UKs departure while Spain may suffer much less in comparison. A 5.48% share of Germany’s GDP is exposed to Brexit while only 0.77% of the Spanish GDP is at risk.

A 5.48% exposure of the German economy does not quite frighten a stable Germany as much as a 0.77% exposure of GDP might do for Spain. Germany has been perceived as a model of economic success within the European Union. The country has been subject to imitation, possessing a foundation that cannot simply be reproduced. Germany will maintain its leading position in the union for the foreseeable future.

Spain, however, has two options: 1) Remain comfortably within the peripherals of larger, more powerful EU economies or 2) get creative and reinvent themselves while promoting Spanish values of entrepreneurship, innovation, and energy.

Nonetheless, we should not be premature in our celebration of Spain’s success – they are not out of the woods yet. Elevated debt levels and labour market issues still scar the country. Yes – rates of unemployment have drastically decreased since the Great Recession but have been, more recently, characteristic of periods of uncertainty and measurable ‘ups and downs’. The unemployment rate, during the first months of the current year, rose to 16.74% from 16.55% in the period prior and remains among the highest in the EU.

A future crisis (economic, political, or other) could lead to a Spanish recession – exacerbating unhealed wounds within Spain’s psyche. The Catalan push for independence alone serves as evidence of a vulnerable state.

The country is reviving. The present progressive tense of the word captures best the current stature of Spain within the European Union.

The inspiration for this article is taken from a publication by Civismo.

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EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).