Spain Economy

March 30, 2010Spainby EW World Economy Team

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Spain has the 14th largest economy by nominal GDP in the world. The Spanish economy is the fifth largest in the European Union (EU) and the fourth largest in the Eurozone—based on nominal GDP. In 2012, Spain was the 12th largest exporter in the world and the 16th largest importer. The UN Human Development Index lists Spain as 23rd, while the World Bank ranks Spain as 32th in GDP per capita based on purchasing power parity (PPP).

However, Spanish economic performance following the global recession of 2008 has been relatively poor. Over 25 percent of the Spanish workforce remained unemployed in 2012 and the economy remained in recession until the third quarter of 2013—much longer than most other European nations. However, after significant economic reforms following the recession, Spain managed to achieve a trade surplus in 2013: its first in three decades. Many now forecast larger growth in Spain than in other Eurozone economies.

Spain is a member of the European Union, the Organization for Economic Co-operation and Development (OECD), and the World Trade Organization (WTO).

Economic History

Humans have inhabited Spain since prehistoric times. In those days, Spanish trade focused largely on agriculture and metalworking. Trade occurred with civilizations as geographically remote as Greece. After defeat to the Romans in the Carthaginian Wars, the area became a territory of the Roman Empire and remained so until the beginning of the Middle Ages.

While the rest of Europe sank into economic collapse with the beginning of the Middle Ages, the region today known as Spain largely maintained its economy. Initially ruled by the Visigoths, Roman infrastructure survived in this region. The Moors eventually took over control of large parts of the Iberian Peninsula and not only maintained Roman infrastructure but added to it.  They extended irrigation and introduced new crops and agricultural techniques from the Islamic world. Trade flourished under Moorish control, as the Middle East opened its markets to Spanish goods.

After 800 years of near constant warfare, the Catholic contingent in Spain eventually overcame the Moors and expelled them from the peninsula. As the area now known as Spain unified, it developed a vast merchant fleet. Restrictive early corporations controlled all aspects of the economy, including production, trade, and transport. Thus, Spain remained an important and powerful economy throughout the Middle Ages and into the Renaissance.

In 1492, Spain famously funded Christopher Columbus on his exploratory voyage that ultimately discovered the New World. Shortly thereafter, Spain embarked on an ambitious plan of colonization and conquest of the native people of the Americas. Valuable agricultural products and mineral resources flowed across regular trade routes, through Spain, and into the economies of Europe. However, the large volumes of new wealth created enormous inflation, widening the gap between rich and poor members of Spanish society. The inflation also hampered international trade, making Spanish goods noncompetitive in world markets. Taxes on domestic goods also hurt the poorer rungs of society. Reforms came slowly, and Spain's economic system prevented the growth of a meaningful middle class.

Following the defeat of Napoleon, Spain's New World colonies took advantage of the confusion to declare their independence. Spain vainly tried to retake control of the colonies, spending large amounts of money in the process. Starved of resources from the colonies, Spain refocused on its domestic agrarian pursuits, but experienced a largely isolated economy that stagnated for much of the 19th century.

By the start of the 20th century, Spain was still mostly rural. Modern industry had only made significant progress in the textile industry. The country lagged far behind much of Europe in technological development and economic power. The Bank of Spain remained in private ownership, and its public functions consisted only of issuing currency-providing funds for state activities. The state served to do little more than provide for defense and maintain order. Very few public works projects existed.

A rapid succession of ineffectual government regimes, often based on absolutist policies, failed to grow the economy or lift it out of depression. This led to the Spanish Civil War, during which the country split into two different centralized economies. The Civil War did enormous damage to the Spanish economy. Francisco Franco emerged as the leader of the new Spanish government, but he achieved victory with the help of fascist Germany and Italy. As a result, Allied Nations ostracized the nation after the war.

In the 1940s, Spain was even more backward than it had been at the start of the 20th century. The government initially pursued a policy of self-sufficiency but eventually abandoned this when it failed to sustain the economy. By the early 1950s, Spain's per capita GDP was a mere 40 percent of the average for other West European countries. Only after the nation abandoned its attempts at self-sufficiency did the economy begin to grow, albeit slowly.

In 1959, Spain introduced a stabilization plan it had prepared in cooperation with the International Monetary Fund (IMF). The plan converted Spain's economy into something more closely resembling a free market. This led to the greatest period of economic growth and industrialization in Spain's history. After Franco's death in 1975, the nation converted to a free democratic state. However, by the mid-1970s, Spain's economy faced plummeting productivity, an enormous increase in wages, and an economic slump throughout Western Europe. Following a lengthy period of sluggish growth and high inflation, the Spanish economy finally turned the corner in the mid-1980s and entered a phase of vigorous expansion accompanied by a significant slowdown of inflation. Spain also began to integrate more closely with the rest of Europe during this time.

Spain joined the European Union in 1986. Following a global recession in the early 1990s, Spain entered a boom era from 1997-2007. Property values soared and the services industry expanded at a phenomenal rate. By 2006, some regions of the country even approached full-employment.

Current Economic Situation

In 2008, the Global Recession punctured the Spanish property bubble just as it had in America, causing a domestic property crash. The crash in property caused construction and finance to collapse, leading to a recession and rising unemployment. This also created to a sharp increase in government debt, leading to Spain's involvement in the European sovereign debt crisis. By 2012, unemployment reached a record high of 25 percent.

Following significant austerity measures and major reforms of the Spanish economy, Spain exited the recession in 2013. While unemployment remains high—22.6 percent as of April 2015—most economic indicators look strong.

Spain has a strong infrastructure, which contributes to its industrial output and export. Spain has the second largest tourism industry in the world, accounting for five percent of its GDP in 2006. The automotive industry, on the other hand, is the largest employer in Spain, employing nine percent of the Spanish population and contributing 3.3 percent to GDP in 2009. Spain is also a world leader in renewable energies, both as a producer of energy and as an exporter of this technology. In 2013, wind power became the chief form of energy production in Spain—the only nation to do so.

Economic Forecast

OECD predicts that the recovery of the Spanish economy will strengthen gradually in 2015-16. First quarter reports show that Spain became one of the fastest growing economies in the Eurozone. While unemployment remains elevated and the public debt is a matter of great national concern, all indicators point to strong recovery.

Projections for Spanish growth anticipate an expansion of 2.5 percent in GDP for 2015 and a slightly more modest growth of 2.3 percent for 2016.

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