Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Spain Is Outperforming the Rest of the Eurozone
Transcript
- Lucas: Spain's economy is having a moment. The iShares Spain ETF, ticker e w p, is up more than one and a half percent over the past five days, while Germany and France are basically flat. And that's on top of real GDP growth that just accelerated to an annualized 2.1 percent across the eurozone — a big jump from 0.5 percent. But Spain is pulling more than its weight. Luna: So the old narrative of the PIIGS economies being the weak link — that's completely flipped? Lucas: Completely. The Bank of Spain is projecting around 2.5 percent growth for 2026, comfortably above the eurozone average. And it's not just a tourism bounce — though tourism is a big part of it. International arrivals are on track to beat pre-pandemic records. But there's also a structural story: Spain has been surprisingly effective at absorbing EU recovery funds. Luna: I remember reading that Spain got the largest share of the NextGenerationEU program — around 140 billion euros in grants and loans. But other countries have struggled to actually spend the money. Lucas: Right. Italy, for example, has had bureaucratic delays and political hurdles. Spain streamlined its approval processes early on. As of June, it had disbursed over 40 percent of its allocated grants, compared to Italy at roughly 30 percent. That money is going into digital infrastructure, green energy retrofits, and logistics — real productivity-enhancing projects. Luna: And this is showing up in the services PMI data. Spain's services PMI has been above 55 for the past four months, while Germany's manufacturing PMI is stuck below 50. Lucas: Exactly. Europe's growth engine has shifted from the factory floor to the service desk. Spain's economy is heavily service-oriented — about 70 percent of GDP — so it's less exposed to the manufacturing slump that's dragging down Germany. And with the trade-weighted dollar still elevated, exporters are hurting, but Spain's exporters are more diversified toward services and non-durable goods. Luna: But isn't there a risk that this is all just a sugar high from tourism and fiscal stimulus? Once the recovery funds run out and tourism normalises, could Spain fall back? Lucas: That's the big question. The European Commission's latest forecast does show Spain's growth slowing to around 1.8 percent in 2027. But there are also structural improvements: the labour market has been reforming, unemployment is down to 11 percent — still high, but the lowest in over a decade. And the banking sector is healthier after consolidation. Luna: Yet the eurozone as a whole still faces major headwinds. The ECB is keeping rates elevated to fight sticky services inflation, and the strong dollar isn't helping import costs. How does Spain navigate that? Lucas: Spain's inflation has actually been running below the eurozone average — around 2.1 percent in June, compared to 2.5 percent for the bloc. Partly because it's less energy-intensive in its industrial base. And the ECB's rate hikes have a weaker drag on a service-led economy than on a manufacturing-heavy one. So Spain is somewhat insulated. Luna: What about the US tariffs? The latest Trump tariff on global imports, justified by forced labour, could hit Spanish exports? Not all of them are services. Lucas: Spain exports a lot of agricultural goods and machinery to the US. But the exposure is smaller than Germany's or Italy's. According to a recent analysis by the Bank of Spain, a 10 percent tariff on all Spanish exports to the US would shave about 0.4 percent off GDP. That's manageable, especially compared to Germany's 1.2 percent hit. Luna: So the outperformance is real, but it's also relative. Spain is the best house in a tough neighbourhood. Lucas: That's a good way to put it. And it's reflected in the market. Over the past year, the Spanish IBEX 35 index has outperformed the German DAX by about 8 percentage points. Investors are rewarding the resilience. Luna: Is there any risk from Chinese input costs? The data shows import prices from China hit their highest since 2008. That's hitting manufacturers across Europe. But again, Spain's industry is less reliant on Chinese intermediate goods. Lucas: Right. Spain's industrial supply chain is more integrated with Europe and Latin America. So the China price shock is more of a headwind for Germany and Eastern Europe. But it's still a factor — Spanish companies in the automotive and electronics sectors are feeling it. Luna: So what does this mean for the ECB? If Spain is booming while Germany stagnates, the ECB can't set policy just for one country. Lucas: That's the perennial challenge. The ECB targets the eurozone average, which would still call for caution. Services inflation is sticky, and wage growth is robust in Spain. With GDP growth now at 2.1 percent, the hawks have ammunition to keep rates on hold for longer. But the doves will point to the manufacturing weakness. Expect a continued tug of war. Luna: Let's zoom out. The trade-weighted dollar index is at 120.5, and the euro is flat at 1.14. A strong dollar normally hurts eurozone exports. But Spain's export mix means it's less affected. Could we see a structural shift where services-led economies outperform manufacturing-led ones as long as the dollar stays strong? Lucas: That's a fascinating thesis. And some of the data supports it. Look at the country ETFs: the UK's EWU is up 1.1 percent, Spain's EWP up 1.7 percent, while France's EWQ is flat and Germany's EWG is up only 0.9 percent over five days. The pattern holds. But it depends on whether the dollar stays strong. If the Fed cuts rates next year, the dollar could weaken, and then manufacturing exporters might get a tailwind. Luna: So the Spain story is partly a dollar story. And partly a story about how well a country can use EU funds. Lucas: Exactly. Spain is a case study in the effective deployment of fiscal transfers. If other countries can replicate that, the eurozone could see a more balanced recovery. But that's a big if. Luna: Speaking of effective use of resources, a couple of dollars from listeners goes a long way in keeping this podcast ad-free and independent. We don't run sponsors, so shows like this rely on small contributions. Lucas: That's a good point. If you've gotten something out of our coverage—whether it's the data on Spain or the broader economics—you can support us at buy me a coffee dot com slash fexingo. It's a small gesture that genuinely makes a difference. Luna: Yeah, it's how we keep the lights on and avoid any outside influence. So if you find value in these conversations, that's the place. Lucas: Now, back to Spain. One more factor worth watching: the Spanish property market. It's been heating up again, with prices up 6 percent year-over-year. That's driven partly by foreign buyers and a shortage of supply. If it becomes too frothy, it could create a vulnerability. Luna: But is the ECB likely to react to a housing bubble in a single country? They wouldn't raise rates just for Spain. Lucas: No, but macroprudential tools are the first line of defense. Spain's central bank has already tightened mortgage lending criteria. And the government is pushing for more affordable housing. So far, it's manageable, but it's a risk to watch. Luna: So to sum up: Spain is leading the eurozone thanks to a strong services sector, effective use of EU funds, and relative insulation from trade shocks and the strong dollar. But the sustainability of that outperformance depends on global trade policy, ECB rate decisions, and domestic housing trends. Lucas: That's the picture. And it's a reminder that in a monetary union, different economies can diverge sharply. Spain's story is one of adaptation and, so far, success. But the eurozone still faces a fragmented recovery. Luna: Thanks for walking us through it, Lucas. Good data, good context. Lucas: Happy to. And to our listeners, keep an eye on those country-level numbers. They tell the real story.