Late last year, The Economist magazine declared Spain’s economy the best in the world. Key indicators forecast a strong 2024: expected GDP expansion of 3%, which would comfortably beat the EU, US, and UK (though the data for the last quarter of 2024 have yet to be published); unemployment, always a problem in Spain, down to its lowest since 2007; and a 3% reduction in public debt.
Spanish finance minister María Jesús Montero attributed the ranking to the success of the Socialist government’s policies of Pedro Sánchez, claiming: “[W]e are growing, creating jobs, expanding rights and reducing our public deficit.” According to Montero, Spain’s GDP performance in 2024 was directly due to actions taken by the country’s government.
But Montero’s claim oversimplifies the connection between government policies and economic growth. Beyond a few areas where the government may deserve some credit (and even then, the situation is not as straightforward as the finance minister suggests), it seems that 2024’s expansion occurred despite Sánchez’s leadership.
The biggest problem with Montero’s claim is that, since scraping back into office after the 2023 general election, Sánchez has often found it impossible to pass legislation. Due to the coalition’s minority status in parliament—the Socialists and their partner, leftist alliance Sumar, occupy 152 of parliament’s 350 seats, and are propped up by a febrile confidence-and-supply arrangement with Catalan and Basque separatists—Sánchez was unable to secure approval for the 2024 budget. He faces a similar challenge in passing a fiscal blueprint for 2025. Lack of new fiscal policy also means that the government can’t claim to have had much influence over the Spanish stock market last year, one of five criteria used by The Economist to rate the world’s economies.
As suggested by Sánchez’s difficulties in passing a budget, GDP expansion (another of The Economist’s criteria) doesn’t, by itself, point to beneficial governmental intervention in an economy. In 2016, Spain went for ten months without a functioning government, after a general election in late 2015 resulted in prolonged deadlock; yet the Spanish economy expanded by 3.2%, the same rate as the year before and the highest since the global financial crisis. The same thing happened in Belgium between 2010 and 2011, during the country’s record 541-day stint without a government: a 2019 study found that the political freeze had no negative impact on Belgium’s GDP. Clearly, if a country posts strong economic expansion, its government can’t always take the credit.
Perhaps surprisingly, Montero didn’t mention her government’s attempts to combat inflation, another factor in The Economist’s ratings. After Russia’s invasion of Ukraine in early 2022, Sánchez introduced a number of measures to minimize the effect of increased living costs, such as a cap on electricity prices and a reduction of VAT on some food items. He funded these measures in part with a controversial “one-off” tax on Spanish banks, criticized at the time by the governor of the Bank of Spain for targeting revenues rather than profits. Despite the fact that similar measures have been disastrous in other countries in which they have recently been tried (Italy and Canada, for example), Sánchez wants to extend this windfall levy for another three years.
One of the major contributors to Spain’s expansion last year was tourism, which accounts for around 13% of the country’s GDP. In the first eleven months of 2024, a record 88.5 million visitors traveled to Spain, two million more than the whole of 2023, spending almost €120 billion ($122 billion). But governmental non-interference, rather than shrewd policy-making, appears to be the key in this respect. The only new legislation affecting tourism introduced by Sánchez last year—the so-called Big Brother law, which requires travelers to provide much more personal information than previously when reserving accommodation or vehicles—is likely to have a negative impact on the industry, if it has any at all. Barcelona’s ban on holiday flats, introduced by the city’s leftist mayor to assuage residents’ concerns about over-tourism, is also now in place; industry experts warn that it could reduce tourist activity by 40%.
Tourism is closely related to employment, another criterion used by The Economist in its world rankings. Here, too, Spain posted impressive-looking figures for 2024: last December, the jobless rate was at its lowest since 2007, although seasonal work always boosts that month’s statistics (as it does during summer). Last year also saw the creation of just over 500,000 new jobs—a figure that, by itself, doesn’t necessarily indicate improved prosperity or stability. Mariano Rajoy, Sánchez’s Conservative predecessor, largely delivered on his promise to create half a million new jobs every year; most of them, however, consisted of almost worthless temporary contracts, some for just a day’s work. Almost 450,000 of last year’s new positions were in the tertiary sector, a high percentage of which will therefore have been seasonal.
Employment contracts with the lifespan of a mayfly have long been the scourge of Spain’s labor market, but the current government has at least tried to tackle this problem. Reforms made by labor minister Yolanda Díaz have reduced the number of employees with temporary contracts from 25% to around 16%—the lowest that figure has ever been. However, research by the Bank of Spain shows that turnover in so-called permanent positions has more than doubled, leading only to a “slight increase” in labor market stability. Spain still has the highest adult and youth unemployment rates in the EU, at 11.2% and 25.8%, respectively.
Though not a factor in The Economist’s rankings, public spending and investment must also be considered when looking at Spain’s economic growth last year. The enormous budgets of 2022 and 2023, bolstered by billions from the EU’s post-pandemic “Next Generation” scheme, were presented by Sánchez as the solution to all the country’s troubles; but no one outside the Spanish government seems to know where the money is going.
In February 2023, Monika Hohlmeier, chairwoman of the EU’s Committee on Budgetary Control, traveled to Madrid because she was “very worried” about the opacity surrounding Spain’s use of EU payouts: “[T]he Spanish government doesn’t tell us where the recovery funds are,” she said. In a report published last summer, the European Court of Auditors identified Spain as the bloc’s most ineffective spender of EU funds, and called for the return of misused or unspent disbursements. Brussels is also investigating the possibility that EU money was misused in connection with the Koldo face mask scandal.
Possible governmental corruption is not the only reason why Brussels is keeping an eye on Spain. The fifth factor assessed by The Economist is budgetary deficit, an area in which Sánchez’s government has repeatedly failed to hit EU targets (although it is expected to have done so last year, hence Spain’s number one ranking). Last October, the European Fiscal Board ruled that the EU Commission should have imposed sanctions on Spain for running a 3.6% deficit in 2023.
In many respects, Spain is a different country from the one that emerged, devastated, from the 2008–12 recession. But it’s hard not to suspect that last year’s GDP growth would also have occurred if the Conservatives—or, as has happened before, no one—had been at the helm.
The post The Complex Reality Behind Spain’s Economic Growth was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.
