Spain’s Boom

From the second quarter of 2019 to the present day, Germany’s gross domestic product (GDP) has grown by zero per cent. The situation differs in other eurozone economies; Spain in particular has experienced enviable economic growth.

Adjusted for inflation, its GDP is still 11 per cent higher than before the Coronavirus crisis. Although the US economy grew slightly faster, the eurozone and Germany lagged significantly behind Spain.

So, what makes Spain more economically successful than Germany? At first glance, the development seems like the fulfilment of an old euro promise: the living standards of the countries in the monetary union are converging. Fact is the difference in per capita income between Germany and Spain has shrunk significantly. While Spaniards earned an average of EUR 18,000 less per year in 2020, the figure is currently around EUR 15,000 less. But this is likely to be a consequence rather than a cause of the recent boom.

So has there been a Spanish productivity miracle? Hardly: labour productivity, measured as GDP per person employed, has risen only slightly more in Spain since 2012 (three per cent) than in Germany (two per cent). In the USA, conversely, productivity swelled by 19 per cent over the same period.

Advantages mainly due to successful immigration ...

However, the number of people in employment has risen much more sharply in Spain than in Germany. Whereas the average birth rate per woman in Spain is 1.12, in Germany it is slightly higher at 1.35.

Nevertheless, Spain’s working-age population, i.e. all persons between the ages of 15 and 64, has expanded by a total of 1.2 million since 2021; the number of people in employment even rose by 2.4 million to 22 million. In Germany, the labour force grew by around 800,000 people over the same period. The latter occurred abruptly after the outbreak of war in Ukraine in 2022. The number of people in employment rose by 1.6 million to 46 million in Germany. The increase in the number of people in employment since 2021 was therefore around 12 per cent in Spain, compared with only four per cent in Germany.

Although the proportion of foreign nationals in the total population is higher in Germany (14.7 per cent) than in Spain (13.8 per cent), the proportion of foreign nationals in the labour force is higher in Spain (16.1 per cent) than in Germany (15.3 per cent). The cultural and linguistic proximity to Latin America, where the majority of immigrants come from, also helps to minimise friction losses during integration.

This is especially true given that Germany’s generous social welfare system delays the integration of immigrants into the labour market. In Spain, significantly less social assistance is offered. In return, work on the informal labour market is tolerated ‒ and after two years, there is even the prospect of legalisation.

... and transfer payments from the EU

A second factor behind Spain’s boom is money from Brussels. Government spending in Spain is receiving a massive lift from transfers from the European Union (EU). Before the Coronavirus crisis, these amounted to one per cent of GDP. Even then, they were higher for Spain than for Germany, where they reached 0.3 to 0.4 per cent at the time. But that changed after Covid-19 and the EU’s Recovery and Resilience Facility (RRF), which was launched in February 2021, and the subsequent NextGenerationEU recovery plan. The programme alone provides grants and loans for Spain amounting to EUR 163 billion. As a result, inflows from Brussels to Madrid added up to two per cent of Spanish GDP in 2024, while Germany received an injection of only 0.6 per cent.

If we add the government deficit of 2.8 per cent in both countries to the EU transfer, the Spanish economy received a fiscal stimulus totalling almost five per cent of GDP in 2024. In Germany, however, the stimulus remained notably lower. Part of Spain’s growth is therefore imported demand, financed by European transfers.

So, while Spain is booming, Germany remains mired in crisis. On the one hand, Spain’s economic miracle is based on substantial financial injections from the European Union. On the other, it is also supported by the successful integration of migrants into the labour market. Tolerance of informal work and the prospect of legalisation apparently offer migrants a stronger incentive to participate in the labour market.