Economy of Spain

Important Cities

Madrid is the capital of Spain. Barcelona is the largest commercial center

and tourist destination. Other important cities in Spain include Valencia, La
Coruña, Sevilla, Malaga, Granada, Ibiza, Palma de Mallorca and Santa Cruz.

Economic Sectors

Spain has been progressing economically since the Spanish Civil War in 1939
when its economy was devastated. Today, tourism, industry and agriculture
play a major role in the country’s economy. Spain has seen the fastest
economic development in Western Europe since the 1960’s.

Tourism has played a major role since the 1960’s and in the last 40 years,
tourism has been the fastest growing economic sector of the country’s GDP,
helping to accelerate growth overall. Millions of visitors flock to Spain and
contribute almost $50 billion USD to Spain’s economy each year.

Agriculture contributes less than 5% of the nation’s GDP, which is high

compared to other countries in Western Europe. Fishing is another important
economic sector for Spain.

Industry contributes about 35% of Spain’s GDP, but industry is still

somewhat dependent on foreign investment. The most common products
from this sector are motor vehicles, steel, textiles, chemicals and ships.

IN THE MID-1980s, Spain's per capita gross domestic product ranked low
among the industrial countries represented in the Organisation for Economic
Co-operation and Development, though well ahead of such nations as
Greece, Yugoslavia, and Portugal. In the latter half of the decade, however,
the Spanish economy entered a phase of strong expansion and employment.

Spain was a latecomer to economic and industrial modernization. Early in

the twentieth century, economic progress was made in fitful starts, but in
the 1960s the process of renewal began in earnest. Before then, the Spanish
economy was one of the most underdeveloped in Western Europe, and it
was sometimes characterized as a Third World economy. A spectacular
period of growth and modernization during the 1960s and the early 1970s
profoundly transformed the Spanish economy, bringing it much closer to the
West European consumer society prototype. However, in late 1975, when
the authoritarian rule of Francisco Franco Y Bahmonde (in power, 1939-75)
came to an end, and democratic processes were restored, there were huge
increases in the price of imported oil upon which Spain was heavily
dependent for its energy needs. Vigorous economic expansion was replaced
by recession, stagnation, and a dizzying increase in the number of
unemployed wage earners.

The Socialist government, headed by Felipe Gonzalez Marquez, that came to

power in late 1982--the first post-Franco government with an absolute
parliamentary majority--was committed to a program of industrial renewal
and economic modernization and, at the same time, to lowering the rate of
inflation. Under its guidance, in the second half of the 1980s the economy
experienced a growth rate and a level of foreign capital investment that
were the highest in Europe. Budget deficits were reduced, inflation was
lowered, foreign currency reserves were greatly increased, private enterprise
enjoyed record profits, and consumer spending grew. A major
accomplishment during this period was the liquidation of excess personnel
and overcapacity in key industries, such as steel and shipbuilding, and the
redirection of substantial capital resources to more promising high
technology industries.

Despite the excellent economic performance of the late 1980s, the Gonzalez
government was unable to reduce an unemployment rate that was then the
highest among the members of the European Community (EC). The number
of workers employed as a result of the economic boom was equivalent to the
number of new entrants into the labor market, so that the boom only
marginally reduced the number of job seekers. A mitigating circumstance,
however, was that although the official unemployment rate was 20 percent,
perhaps as many as one-third of those registered as unemployed were
working in the "underground economy."

Spain's accession to the EC on January 1, 1986, was a driving force behind

the country's accelerated modernization effort. Under the terms of its entry
into the EC, Spain was required to adapt to EC norms and regulations, over
a period of seven years. The EC plan to eliminate existing barriers to trade,
employment, and the flow of capital throughout the EC by the end of 1992
was still another impetus. Observers believed that, barring unforeseeable
adverse developments in the international economic situation, by the year
2000 Spain would at last closely resemble its neighbors, who, for most of
the twentieth century, had been socially and economically more advanced.
2010: Spain's economy rides the storm

2010 was a difficult year for the Spanish economy, although it is possible to
say that after the "perfect storm" that it experienced at the end of 2008, it
appears that the fall has been stopped and the basis for recovery
established.

At the start of 2010 the government began to realize the time had come to
end with stimulus packages and concentrate on fiscal adjustment. The
rumors about the insolvency of Greece provoked continuous speculative
attacks on the bonds sold against the public deficit by the countries on the
periphery of the Euro.

Given the slow reactions of European authorities, the differential of the

Spanish bond against the German bond began to rise which the main risk
assessment agencies began to lower the rating of the Spanish public debt.
This meant an increase in the price of public expenditure in interest on the
debt which has continued all year, peaking after the bailouts of Greece and
Ireland.

This shock in the public debt markets, along with the recommendations of
the European Union, led the government to adapt successive packages of
measures to reduce the deficit.

The first reduction in the salaries of public employees in the history of

Spanish democracy (around 5 percent) was passed by the government along
with a pensions freeze and numerous cutbacks in other areas. This has led
to a 11,500 million Euro (15,137 million U.S. dollars) reduction in public
spending.

Several taxes were also increased, especially sales tax (IVA) and taxes on
tobacco, while there was a minimal rise in income tax for the highest
earners. These measures have allowed Spain to succeed in its aim of
reducing the public deficit during 2010 (it is currently below the predicted
9.3 percent) and allow the government to fulfill its future objectives.

The unions and the parties from the left have criticized this adjustment,
labeling it as anti-social and pointing out it could lead to a return into
recession. However, despite the government' s austerity policy, it seems the
Spanish economy hit bottom in 2010 and will not continue to fall.
The first two quarters of the year ended with slight growth in GNP and the
last published data, from the third quarter, shows a growth of 0.2 percent in
comparison to 2009.

The rise in unemployment also appears to have halted in 2010. Following the
loss of 1,600,000 jobs between May 2008 and December 2009, the number
of jobs in 2010 has remained just about the 17, 500,000 mark.

Not only have the fall in production and the rise in unemployment been
halted, but previous imbalances have begun to recover. Early estimations
show the external deficit of the balance for current accounts and for capital
began to be reduced in 2010, falling to below 4.5 percent of GNP.

This is due mainly to a rise in exports, especially to countries outside of the

Euro zone. The construction industry continues to lose influence in the
national economy, given that its production fell by 6.8 percent in the third
quarter of the year when compared with 2009. Meanwhile the service sector
grew by 1 percent and the energy and industrial sector by 2.3 percent. All of
this has helped boost Spain's competitively in outside markets

As a result, the Spanish economy is reducing its dependence on the

construction industry as well as domestic consumption and saw a slight
growth following the second quarter, thanks to bigger external demand,
private investment and industry, while tourism is also showing signs of
recovery.

There are still some important imbalances: the black economy has increased
as a result of the crisis and it is estimated that it makes up around 20
percent of GNP. Although these "informal" jobs allow many unemployed
people to make a living, they also mean a major reduction in state earnings.

House prices have also failed to hit bottom and are expected to continue
falling in 2011. Finally there is still a high level of duality in the labor market,
with Spain "boasting" one of the highest levels of temporary employees in
Europe.

In conclusion, 2010 has been a difficult year. The need to redirect resources
from construction and its dependent industries to other sectors has coincided
with the harsh fiscal adjustments of the government, which was provoked by
the public deficit and has caused the elimination of social protection and led
to tax increases.
Despite these problems there are details that indicate that unless there are
new and unexpected negative shocks, such as insolvency of banks, new
financial turbulence or a new setback to the European economy, it is
possible to say that the Spanish economy has been able to heal its wounds
and is putting together the basis to begin a slow, but balanced process of
growth.