Spain Outpaces Europe: Is This a Sustainable Growth Model?

At a time when major European economies are struggling with stagnation or outright contraction, Spain has emerged as an unlikely success story. In 2024, its economy expanded by a robust 3.2%, far outpacing the 0.2% contraction in Germany and the sluggish growth of 1.1% in France and 0.9% in the UK. This surge has made Spain the fastest-growing major economy in Europe, earning accolades from economists and policymakers alike. So, what is fuelling Spain’s economic expansion? And, more importantly, is it sustainable?

A Multi-Sector Growth Model: More Than Just Tourism

Spain’s growth is often attributed to its tourism sector, and for good reason. The country welcomed a record 94 million visitors in 2024, trailing only France as the world's most visited nation. Tourism revenues have surged, boosting employment and consumption in key regions like Andalusia, Catalonia, and the Balearic Islands.

However, Spain’s economic engine is more diversified than it appears. While tourism remains a pillar, growth has also been driven by financial services, technology, and increased public investment, supported by the EU’s Next Generation Fund. With €163 billion in recovery funds, Spain has been modernising infrastructure, expanding green energy, and investing in its rail network.

Carlos Cuerpo, Spain’s economy minister, argues that this balanced approach is what makes Spain’s growth resilient:"We are modernizing our economy and lifting our potential GDP growth without carrying deep post-pandemic scars."

Public Spending: A Double-Edged Sword

A key driver of Spain’s growth has been high public spending, which has accounted for nearly half of its post-pandemic recovery. Investments in electric vehicle production, urban sustainability projects, and small business support have stimulated demand and employment.

Yet, this expansion comes at a cost: Spain’s public debt has surpassed 100% of GDP, a level that raises concerns about long-term fiscal sustainability. The EU’s new fiscal rules will require Spain to rein in spending, a difficult task given the political challenges facing the minority government.

"This is an imbalance that we need to correct," warns economist María Jesús Valdemoros. "Not just because of EU regulations, but because it could threaten financial stability."

Labour Market Reform: Tackling a Persistent Weakness

Spain has long suffered from structural unemployment, with a jobless rate that remains the highest in the EU, nearly double the bloc’s average. However, recent reforms aimed at limiting temporary contracts and promoting stable employment have begun to yield results.

By the end of 2024, unemployment had fallen to 10.6%, the lowest level since 2008. The total number of people employed reached a record 22 million, thanks in part to an increase in permanent contracts. The arrival of immigrantshas also helped offset Spain’s rapidly aging workforce—a politically contentious but economically vital development.

Green Energy and Industrial Transition

One of Spain’s strongest long-term advantages is its leadership in renewable energy. The country has the second-largest green energy infrastructure in the EU, a critical asset in an era of rising energy costs and climate policy shifts.

For Spain’s automotive sector, this transition is key. The country is Europe’s second-largest car producer, yet it lags behind in electric vehicle production. Wayne Griffiths, CEO of Seat and Cupra, highlights the potential for Spain to become a hub for zero-emission vehicle manufacturing:"We have the workforce, the energy policy, and the industrial base. Now, we need to scale production."

This shift could help Spain diversify away from its reliance on tourism while ensuring that industrial production remains globally competitive.

Challenges on the Horizon: Tourism Dependence, Housing, and Debt

Despite Spain’s strong growth, there are underlying vulnerabilities that could threaten its momentum:

1. Over-Reliance on Tourism – While tourism has been a growth engine, excessive dependence on the sector makes Spain vulnerable to external shocks such as pandemics, geopolitical instability, or shifts in travel behavior. Additionally, anti-tourism protests in regions like the Canary Islands and Majorca highlight growing local resentment over rising rents and overcrowding.
2. Housing Crisis – Spain’s economic expansion has exacerbated a housing shortage, with property prices soaring in major cities. Young Spaniards and low-income families struggle to afford accommodation, fuelling discontent.
3. Public Debt – With debt levels higher than Spain’s annual GDP, fiscal consolidation will become increasingly necessary. If borrowing costs rise, Spain could face severe budget constraints, limiting its ability to sustain high public investment.

Spain’s Economic Future: Sustainable Growth or Temporary Boom?

Spain’s economic resurgence is an impressive story of recovery, reform, and resilience. The combination of diversified sectoral growth, strategic public investment, and labour market improvements has allowed Spain to outperform its European peers.

However, serious structural challenges remain. Spain must carefully navigate fiscal discipline, housing policy, and industrial transition to maintain its growth trajectory. If it can reduce its reliance on tourism, invest in high-productivity industries, and manage its debt responsibly, Spain could solidify its position as a European economic powerhouse.

For now, Spain is enjoying its moment in the economic sun. But the real test will be whether it can sustain this growth in the years to come.

Glossary of Key Economic Terms

• Gross Domestic Product (GDP): The total value of goods and services produced within a country over a specific period.
• Public Debt: The total amount of money that a government owes to creditors, usually expressed as a percentage of GDP.
• EU Next Generation Fund: A post-pandemic recovery package by the European Union aimed at stimulating economic growth and investment.
• Labour Market Reform: Changes in policies and regulations governing employment to improve job stability and economic efficiency.
• Structural Unemployment: Long-term joblessness caused by economic shifts that make certain skills obsolete.
• Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
• Fiscal Consolidation: Government policies aimed at reducing deficits and stabilizing public debt.
• Renewable Energy Infrastructure: Facilities and systems used to generate power from sustainable sources like wind, solar, and hydro.
• Over-tourism: A situation where excessive tourist numbers negatively impact local residents, infrastructure, and the environment.
• Economic Diversification: A strategy to reduce reliance on a single industry by expanding into multiple sectors.

Graham Watson's insight:

This BBC article focuses on the relative success of the Spanish economy which grew by 3.2% last year, well ahead of other European nations.

So how has Spain managed this? There's a suggestion that it's a combination of factors - a balanced economy able to draw on tourism, finance, technology and investment and a high level of public spending, some of it funded by the EU's Next Generation programme.

However, there are also concerns - a high level of public debt, the reliance on tourism and a housing shortage being the most prominent