Spain Economy Facts
Spain is the fourth largest economy in the eurozone. Since the mid-1980s, it has been transformed from a poor agricultural country into an industry with a large service sector, mainly tourism. After a few years of rapid growth, intensive construction and many housing loans, a housing bubble burst in 2008 and a deep economic crisis followed budget cuts, sky-high unemployment, political protests and crisis loans from the EU to the banking sector in 2012. From 2014, a certain recovery took place despite an uncertain political situation (see Current Policy).
Under the bourgeois government in 1996–2004, Spain developed into a growth engine in the EU. The success was, among other things, privatizations, reduced taxes and reduced public spending. Spain was also the largest recipient of EU support before the Union was expanded to Eastern and Central Europe in 2004.
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The economy was still booming when Zapatero’s social government took office in 2004, even though economists had already warned of a property bubble and felt that households were saving too little and were over indebted. The introduction of the euro as a currency had contributed to relatively low interest rates giving cheap loans, and in addition, the banks were attracted by generous loan terms. Many people bought homes that they really couldn’t afford. Others invested in real estate to earn money from the rapidly rising property prices. At the end of 2006, household indebtedness amounted to over EUR 830 billion. The central bank also warned that the construction industry was too heavily indebted. Eventually, the government would be forced to demand 100 billion euros in EU loans to save the Spanish banks from large loan losses.
- Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including ESP which represents the country of Spain. Check findjobdescriptions to learn more about Spain.
Fight against a crisis economy
In the spring of 2008, property prices fell, construction declined and unemployment increased. At the same time, private consumption slowed down when the purchasing power of the Spaniards was weakened by higher mortgage rates and rising food and fuel prices. Both the construction sector and private consumption had been important drivers of the economic upswing. The government implemented several measures to stimulate the economy and help households to settle their loans. Among other things, it invested in infrastructure development, such as roads and new train lines, and SMEs received support. But the problems continued in the wake of the international financial crisis.
In 2009, the government adopted a number of new stimulus measures. Small companies that did not dismiss their employees were given tax cuts, new cars were subsidized and the tourism industry received increased state support. Nevertheless, gross domestic product (GDP) fell by over 3 percent and unemployment rose sharply.
In January 2010, the government decided on austerity measures of EUR 50 billion and in May came another tightening package with pay cuts for civil servants, frozen state pensions and frozen salaries from 2011. In addition, VAT and marginal tax would be increased and a special tax on assets of over EUR 1 million was introduced.. During the summer a labor market reform was also implemented (see Labor market).
In 2010, the economy shrank by 0.3 percent. The budget deficit was now just over 11 percent of GDP and household indebtedness grew to one billion euros. In an attempt to calm the market, in December the government presented a new savings package. Among other things, the state lottery company and airports would be partially privatized and a 28 percent increase in tobacco tax would give more money to the Treasury.
After the November 2011 election, the Conservative PP government presented new austerity measures with tax increases, budget cuts and continued frozen salaries. At the beginning of 2012, unemployment exceeded 24 percent. Among young people it was 51 percent.
In June of that year, the government requested 100 billion euros in EU loans to save Spanish banks from large loan losses. The EU gave the government a one-year deferral – from 2013 to 2014 – with the requirement to reduce the deficit in the state budget to less than 3 percent (a deferral that was later extended). In 2011, the budget deficit was 8.9 percent of GDP and already in the first half of 2012 it was 4 percent.
At the same time, central government debt had increased to 80 percent of GDP in the spring of 2012, the highest level since 1990. As a counterpart to the loan promise from the euro countries, the government decided on new budget savings as well as increased taxes and more privatizations. The measures were welcomed by the EU but met by continued protests in Madrid and many other Spanish cities.
The economic downturn proved to be deeper than the economists had expected. Private savings in Spanish banks decreased and investors moved their money abroad. In the first half of 2012, almost € 220 billion was transferred from Spain to other countries, which was the largest capital flight since Spain began to carry out statistics on transactions in 1990.
Tax revenues had fallen by a fifth since the start of the financial crisis in 2008. Tax evasion is common in Spain and had also increased during the crisis. The black economy was estimated to correspond to almost a quarter of the country’s GDP.
A “bad bank” is set up
The reduced tax revenue meant that several of Spain’s regions, which are responsible for some of the taxes themselves, were forced to borrow large sums. In the summer of 2012, Valencia, Murcia, Andalusia and Catalonia asked the central government for financial assistance. Catalonia is Spain’s most important region economically and accounts for almost one-fifth of the country’s GDP. The crisis made Catalonia the country’s most indebted region.
In August 2012, the government presented another savings package of EUR 102 billion, including increased taxes, reduced pensions, reduced unemployment benefits and extended employment in the public sector. The government also wanted to create a rescue fund for the regions and a bank emergency that would be financed by shareholders.
The 2013 budget, presented in September, contained even more cuts. The appropriations for the Ministry of Industry and Agriculture were significantly reduced, the freezing of salaries for civil servants was extended, while increased VAT would increase revenue. Reforms of the state administration were planned, as were deregulations in the energy and telecom sectors, and a special independent authority would examine the state’s finances. The structural reforms, many of which have been proposed by the EU, paved the way for future rescue efforts by the eurozone countries and the European Central Bank, which seemed inevitable to save the country’s economy. At the end of 2012, Spain’s national debt represented just over 84 percent of GDP.
The banks’ share of bad loans rose and hit a record, and the government decided to donate more capital to the largest crisis bank, Bankia. As part of a new banking law, the government created a so-called “bad bank”, which would take care of large parts of the crisis in the real estate market that has caused several Spanish banks to fall. The new bank would take over plots, unfinished construction projects and unsold completed buildings. The hope was to eventually be able to sell these at a profit. The new bank was a requirement from the euro area countries for crisis support to Spain.
The economy is turning upwards
The International Monetary Fund (IMF) stated in a report in June 2013 that Spain had made great strides in stabilizing the economy and reducing the budget deficit, but that unemployment of over 26 percent was unacceptably high. After just over two years of shrinking GDP, signs of a turnaround in the economy came in the third quarter of 2013, when a slight growth of 0.1 percent was reported. The turnaround was mainly a rise for tourism as well as a growing export, not least to Latin America. In 2017, the influx continued, with 9 per cent more visitors than 2016. Spain then became the world’s most visited country after France.
In 2014, the Spanish economy grew by 1.4 percent, the highest figure since the beginning of the crisis. At the same time, the country experienced deflation when prices fell by more than 1 percent in the second half of 2014. The following year there was a further recovery, as GDP grew by more than 3 percent.
The Spanish economy continued to grow. In the fall of 2016, the IMF projected that GDP would increase by just over 3 percent in 2016, although a slight decrease compared to the previous year, but considerably higher than the euro area average of 1.6 percent. Part of the explanation for the upturn was lower oil prices, low interest rates, tax cuts and a sharp rise in tourism – holiday makers had chosen Spain over troubled countries such as Egypt and Turkey.
The cloud of concern remains
However, there were warning signals. The IMF pointed out that unemployment was still unreasonably high, even though in 2016 it crept below the 20 percent mark for the first time in six years. In June, government debt reached its highest level since 1909, when it rose to over 100 percent of GDP. In the summer of 2016, Spain also risked – but escaped – fines from the EU, for not doing enough to reduce the budget deficit. EU countries are allowed a deficit of 3 percent; Spain had obtained the EU’s permission to have 4.2 percent for 2015 but had 5.1 percent.
In October 2016, the transitional government submitted a proposal to the EU on a budget for 2017 with various measures to further reduce the budget deficit. But the EU called for more reforms. There were also question marks about how the long political stalemate (see Current politics) had affected the economy. The political crisis in Catalonia in 2017 also hit the economy, and the government was forced to write down GDP growth forecasts several times. In late autumn 2017, the EU also gave Spain a backlash when it came to the budget for 2018, when the deficit seemed to be higher than allowed.
FACTS – FINANCE
GDP per person
US $ 30,524 (2018)
US $ 1 426 189 M (2018)
2.6 percent (2018)
Agriculture’s share of GDP
2.6 percent (2018)
Manufacturing industry’s share of GDP
12.6 percent (2018)
The service sector’s share of GDP
65.9 percent (2018)
0.7 percent (2019)
Government debt’s share of GDP
97.1 percent (2018)
US $ 338,531 M (2018)
US $ 375 433 M (2018)
US $ 12,797 million (2018)
Commodity trade’s share of GDP
51 percent (2018)
Main export goods
vehicles, machinery and machine parts, chemicals, wine, fruits, vegetables
Largest trading partner
France, Germany, Italy, Portugal, UK