How Spain's economy became the envy of Europe

In Segovia, central Spain, on a chilly winter afternoon, tourists gathered at the foot of the city's Roman aqueduct, gazing up at the famous arches and taking selfies. Among these tourists were Spaniards and visitors from other European countries, Asia, and Latin America, all drawn to Segovia's historical charm, cuisine, and stunning scenery near the mountains north of Madrid. The city's allure continues to attract a diverse range of people eager to experience its unique offerings.

Elena Mirón, a local tour guide wearing a magenta beret, was preparing to lead a tour group through the city. "During the COVID-19 pandemic, I once thought that tourism might never recover to its previous levels," she said. "But now things are very good, and I feel like this year will be a good year, just like 2023 and 2024. I am very happy because I can make a living doing what I love." This resurgence in tourism has brought renewed hope and opportunities to those who depend on the industry.

In 2024, Spain hosted a record 94 million tourists and is currently competing with France (which hosted 100 million tourists) to become the world's largest foreign tourist center. The expansion of tourism in the post-pandemic era is a major reason why the Eurozone's fourth-largest economy has been able to easily outperform countries such as Germany, France, Italy, and the United Kingdom, with Spain's GDP growing by 3.2% last year. In comparison, the German economy shrank by 0.2% in 2024, while France grew by 1.1%, Italy by 0.5%, and the UK is projected to grow by 0.9%.

Spanish Minister of Economy, Trade and Business, Carlos Cuerpo, said: "The Spanish model is successful because it is a balanced model, which guarantees the sustainability of growth." He also pointed out that Spain contributed 40% of the Eurozone's growth last year. Cuerpo emphasized the importance of tourism while also noting that factors such as financial services, technology, and investment have also helped Spain rebound from the depths of the pandemic, when its GDP shrank by 11% in one year. He added, "We are emerging from the effects of COVID without scars and by modernizing the economy to increase potential GDP growth."

The EU's Next Generation plan, which provides post-pandemic recovery funds, is helping Spain to modernize. By 2026, Spain is expected to receive up to 163 billion euros ($169 billion; £136 billion) in funding, making it the largest beneficiary alongside Italy. Spain is investing this money in the national railway system, low-emission zones in towns and cities, the electric vehicle industry, and subsidies for small businesses. These investments are aimed at fostering sustainable growth and innovation across various sectors.

María Jesús Valdemoros, an economics lecturer at IESE Business School in Spain, said: "Public spending has been high and has accounted for about half of our growth since the pandemic." She also noted that other major European economies have been hampered by their greater reliance on industry compared to Spain. "Industry is currently suffering due to high energy costs, competition from China and other Asian countries, the costs of transitioning to a more sustainable environmental model, and trade protectionism," she said.

Another major economic challenge facing Spain since the COVID-19 pandemic has been supply chain bottlenecks and the cost-of-living crisis triggered by Russia's invasion of Ukraine in 2022. The inflation rate peaked at 11% in July of that year, and energy prices hit Spaniards particularly hard, but by the end of 2024, the inflation rate had fallen back to 2.8%. Madrid believes that government subsidies to reduce fuel consumption costs and encourage the use of public transportation, as well as several increases in the minimum wage, were key to mitigating the impact of rising energy prices.

At the height of the European energy crisis, Spain and Portugal also negotiated a so-called "Iberian exception" with Brussels, allowing them to limit the price of natural gas used for electricity generation in order to lower consumer bills. Cuerpo believes that these measures have helped to counter Spain's traditional vulnerability to economic turmoil. "Spain is proving that it is more resilient to successive shocks, including the inflationary shock from the war in Ukraine. I think this is part of the overall protection shield we have built for consumers and businesses," he said.

Spain's green energy production is considered another favorable factor, not only guaranteeing electricity supply but also stimulating investment. Spain has the second-largest renewable energy infrastructure in the EU. Wayne Griffiths, the British CEO of Seat and Cupra, said that this is a boon for Europe's second-largest car producer. Although Spain's electric vehicle production lags behind other European countries, he sees great potential in the sector. "In Spain, we have all the ingredients for success: competitive, well-trained talent and an energy policy that supports it. There is no point in making zero-emission cars if you use dirty energy," he said.

Despite these positive factors, a long-standing weakness of the Spanish economy has been its persistently high unemployment rate, which is the highest in the EU, almost double the EU average. However, this situation improved in the last quarter of 2024, with Spain's unemployment rate falling to 10.6%, its lowest level since 2008. At the same time, Spain's employment rate is currently at a record high of 22 million. Labor reforms that encourage job stability are considered a key reason for this.

This reform has increased companies' restrictions on the use of temporary contracts, favoring greater flexibility in the use of permanent contracts. It has reduced the number of workers in temporary employment without hindering job creation. In addition, although the arrival of immigrants has sparked heated political debate, many believe that their integration into the labor market is essential for a rapidly aging country. Socialist Prime Minister Pedro Sánchez has been outspoken in emphasizing the need for immigrants, calling their contribution to the economy "fundamental."

The European Commission forecasts that Spain will continue to lead the major EU economies this year and remain above the EU average. However, challenges are looming. Over-reliance on tourism and growing local resistance to tourism are a cause for concern. Another issue is Spain's massive public debt, which is higher than the country's annual economic output. María Jesús Valdemoros warned that this is an imbalance that we need to correct, not only because the EU's new fiscal rules require it, but also because it could lead to financial instability.

Furthermore, a housing crisis has already erupted across the country, making it difficult for millions of Spaniards to find affordable housing. With an uncertain and highly polarized political landscape, Sánchez's minority government is struggling to address these issues. However, while working to solve these puzzles, Spain is enjoying its position as a growth engine for Europe.