Azca Business Center

By Gonzalo Garland

Three decades of political transition in Spain accompanied by significant economic growth have brought about a dramatic transformation. In the 1970s Spain was considered one of the least developed countries in Europe. Even more importantly, together with Portugal, politically speaking it was light years away from the more developed democracies of Western Europe. The situation could hardly be more different today. Spain now has the eighth largest economy in the world and is a full member of the European Union, where it plays as active a role as other large European countries like Germany, Britain, France or Italy. What has happened in Spain is not so different from the transformation of Ireland, another European country that has managed to achieve sustained economic growth that has permeated the whole society, causing a seismic shift from a quiet traditional society to a vibrant modern economy.

But a large trade deficit, a housing market boom that is starting to level off, and the effects of the cooling down of the United States economy are starting to make some analysts wonder whether the growth really is sustainable in the future, and whether Spain needs to implement measures that will enable the country to face the future with optimism.

It is generally agreed that Spain will not emerge unscathed from the present slowdown of the economy. In fact the whole of Europe is expected to feel the draught. However, given that the Spanish economy grew at a healthy 4% during the second quarter of 2007, and the latest number is 3.7% for the third quarter, most analysts think that growth in 2008 will be slower but by no means slow enough to plunge the economy into a recession. Forecasts move on the range of 2.7 to 3.3%. Unless world events take a drastic turn for the worse, it is likely that the country will continue along the path of constant growth. This optimistic forecast does not mean, however, that Spain can afford to relax if it wants to maintain the dynamism of the last 30 years.

Even though Spain has achieved a fiscal surplus much faster than other European countries, productivity growth is not only still low, it is also accompanied by a large trade deficit. Before the introduction of the Euro, EU member countries always had the option of depreciating their currencies to re-establish equilibrium in their foreign trade, but that option went out with the Peseta. Spain therefore has no alternative but to learn to deal with the new situation, and that means investing in education and research and development to make Spanish goods and services more attractive to the rest of the world. Of course tourism, the traditional stalwart of the Spanish economy, will continue to play a key role, but construction is already slowing down and will need to be replaced by other economic activities in order to maintain overall high growth.

Fortunately Spain has been preparing itself for some years for its long term challenges. Investment in infrastructure has been a priority and there is a commitment to increase R&D levels to move them closer to the averages of other European countries. Moreover the country continues to welcome foreign investment and to respect European Union decisions, despite some recent tension over external bids to take over Endesa, the largest electricity company in the country.

In this modern Spain, the Madrid region continues to play a pivotal role. With less than 14% of Spain’s population, and 18% of GDP, in 2006 the region of Madrid received 43.2% of all foreign direct investment in the country and shows the highest per capita income of any Spanish region. Said per capita income is more than 20% higher than the European Union average. A visit to the capital serves as an illustration of the transformation of the region and the country. The ultramodern new terminals of the internattional airport, the striking new company offices of Telefónica and Santander on the outskirts of the city or the new buildings of the Prado Museum are just a few of the reasons why the visitor is left with the sense that this is a country on the move.

Editor’s note: Since publication of this article, the European Commission cut its forecast for growth in the Spanish economy next year in the wake of the turbulence in the financial markets.

The EC now expects Spain’s GDP to grow 3% next year, compared to an earlier forecast of 3.4%.
The downward adjustment remains more optimistic than the most recent forecast by the International Monetary Fund, which is expecting a slowdown to 2.7% in 2008.

Nevertheless the Spanish Government is sticking to an official target of 3.3%.

As this article accurately pointed out, the Spanish economy has outpaced the rest of the euro zone for over a decade. GDP was up to 4%.

The job creation rate in Spain is also expected to drop from 3.0% to 2.1% in 2008. According to Joaquin Almunia, the European Commissioner for economic affairs,”this is a situation other countries would be happy with.”