How Spains economy became the envy of Europe

Its a chilly mid-winter afternoon in Segovia, in central Spain, and tourists are gathered at the foot of the citys Roman aqueduct, gazing up at its famous arches and taking selfies.

Many of the visitors are Spanish, but there are also people from other European countries, Asians and Latin Americans, all drawn by Segovias historic charm, gastronomy and dramatic location just beyond the mountains north of Madrid.

"There was a moment during Covid when I thought maybe tourism will never, ever be like it was before," says Elena Mirón, a local guide dressed in a fuchsia-coloured beret who is about to lead a group across the city.

"But now things are very good and I feel this year is going to be a good year, like 2023 and 2024. Im happy, because I can live off this job I love."

Spain received a record 94 million visitors in 2024 and is now vying with France, which saw 100 million, to be the worlds biggest foreign tourist hub.

And the tourism industrys post-Covid expansion is a major reason why the eurozones fourth-biggest economy has been easily outgrowing the likes of Germany, France, Italy and the United Kingdom, posting an increase in GDP of 3.2% last year.

By contrast, the German economy contracted by 0.2% in 2024, while France grew by 1.1%, Italy by 0.5%, and the UK by an expected 0.9%.

This all helps explain why the Economist magazine has ranked Spain as the worlds best-performing economy.

"The Spanish model is successful because it is a balanced model, and this is what guarantees the sustainability of growth," says Carlos Cuerpo, the business minister in the Socialist-led coalition government. He points out that Spain was responsible for 40% of eurozone growth last year.

Although he underlined the importance of tourism, Mr Cuerpo also pointed to financial services, technology, and investment as factors which have helped Spain bounce back from the depths of the pandemic, when GDP shrank by 11% in one year.

"We are getting out of Covid without scars and by modernising our economy and therefore lifting our potential GDP growth," he adds.

That modernisation process is being aided by post-pandemic recovery funds from the EUs Next Generation programme. Spain is due to receive up to €163bn by 2026 ($169bn; £136bn), making it the biggest recipient of these funds alongside Italy.

Spain is investing the money in the national rail system, low-emissions zones in towns and cities, as well as in the electric vehicle industry and subsidies for small businesses.

"Public spending has been high, and is responsible for approximately half our growth since the pandemic," says María Jesús Valdemoros, lecturer in economics at Spains IESE Business School.

Other major European economies have seen their growth stymied by their greater reliance than Spain on industry, which, she says, "is suffering a lot at the moment due to factors such as the high cost of energy, competition from China and other Asian countries, the cost of the transition to a more sustainable environmental model and trade protectionism".

Since Covid, the other major economic challenge for Spain has been the cost-of-living crisis triggered by supply-chain bottlenecks and the Russian invasion of Ukraine in 2022. Inflation peaked at an annual rate of 11% in July of that year, with energy prices hitting Spaniards particularly hard, but by the end of 2024 it had fallen back to 2.8%.

Madrid believes that subsidies it introduced to cut the cost of fuel consumption and encourage public transport use were key in mitigating the impact of the energy price rises, as well as several increases to the minimum wage.

At the height of the European energy crisis, Spain and Portugal also negotiated with Brussels a so-called "Iberian exception", allowing them to cap the price of gas used to generate electricity in order to reduce consumers bills.

Mr Cuerpo argues that such measures have helped counter Spains traditional vulnerability to economic turmoil.

"Spain is proving to be more resilient to successive shocks – including the inflation shock that came with the war in Ukraine," he said. "And I think this is part of the overall protective shield that we have put in place for our consumers and for our firms."

The countrys green energy output is seen as another favourable factor, not just in guaranteeing electricity, but also spurring investment. Spain has the second-largest renewable energy infrastructure in the EU.

The latter is a boon for a country that is Europes second-biggest car producer, according to Wayne Griffiths, the British-born CEO of Seat and Cupra. Although Spanish electric vehicle production is lagging behind the rest of Europe, he sees enormous potential in that area.

"[In Spain] we have all the factors you need to be successful: competitive, well-trained people and also an energy policy behind that," he says. "Theres no point in making zero-emission cars if youre using dirty energy."

Despite these positives, a longstanding weakness of Spains economy has been a chronically high jobless rate, which is the biggest in the EU and almost double the blocks average. However, the situation did improve in the last quarter of 2024, when the Spanish jobless unemployment rate declined to 10.6%, its lowest level since 2008.

Meanwhile the number of people in employment in Spain now stands at 22 million, a record high. A labour reform, encouraging job stability, is seen as a key reason for this.

This reform increased restrictions on the use of temporary contracts by companies, favouring greater flexibility in the use of permanent contracts. It has reduced the number of workers in temporary employment without hindering job creation.

Also, although the arrival of immigrants has driven a fierce political debate, their absorption into the labour market is seen by many as crucial for a country with a rapidly ageing population.

The Socialist prime minister, Pedro Sánchez, has been outspoken in underlining the need for immigrants, describing their contribution to the economy as "fundamental".

The European Commission has forecast that Spain will continue to lead growth among the blocs big economies this year and remain ahead of the EU average. However, challenges are looming on the horizon.

The heavy reliance on tourism - and a growing backlash against the industry by local people - is one concern.

Another is Spains vast public debt, which is higher than the countrys annual economic output.

María Jesús Valdemoros warns that this is "an imbalance that we need to correct, not just because the EUs new fiscal norms demand it, but because it could cause financial instability".

In addition, a housing crisis has erupted across the country, leaving millions of Spaniards struggling to find affordable accommodation.

With an uncertain and deeply polarised political landscape, it is difficult for Sánchezs minority government to tackle such problems. But, while it attempts to resolve these conundrums, Spain is enjoying its status as the motor of European growth.