Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Spain Is Becoming the Eurozone's Unexpected Growth Engine
Transcript
- Lucas: Luna, I want to start with a number that stopped me this morning. The Vanguard FTSE Europe ETF, ticker V-G-K, is up about one point two percent over the past five days. But if you peel that back by country, the big story isn't Germany. It's Spain. Luna: Spain? That's interesting. We usually talk about Germany as the engine, but the data's been looking softer there for a while. Lucas: Exactly. The iShares MSCI Germany ETF, ticker e w g, is up one point nine percent over the same period, which is actually solid. But Spain — the iShares MSCI Spain ETF, ticker e w p — is also up one point two percent, and that's on top of a much stronger run over the past year. Luna: So what's driving Spain right now? Is it tourism bouncing back, or is there something deeper? Lucas: It's deeper than tourism, though tourism is certainly part of it. What's really interesting is Spanish manufacturing output. It grew at nearly three percent year-over-year in the first quarter, while Germany's industrial production actually contracted. Spain is becoming a beneficiary of nearshoring — companies moving supply chains out of Asia and into southern Europe. Luna: Nearshoring usually benefits Eastern Europe, like Poland or Czechia. Why Spain? Lucas: Good question. Part of it is that Spain has a competitive labor cost structure within the Eurozone, and it has strong infrastructure in automotive and aerospace. But there's also a services angle. Spain's services trade surplus has been widening thanks to digital services exports — things like software development, consulting, and financial services — not just tourism. Luna: So the old narrative of 'Spain is just sun and sangria' is fading. They're actually building a modern export economy. Lucas: Exactly. And the markets are noticing. Spanish government bonds have been rallying — the spread over German bunds has narrowed to its lowest level since 2022. That's a vote of confidence from bond investors who see improving fiscal dynamics and growth potential. Luna: And yet, the ECB is still in tightening mode. The Bank of France governor just said they'll 'do what is necessary' to tame inflation. Doesn't that risk strangling this recovery? Lucas: It's a risk, yes. But the ECB's rate hikes are affecting the whole Eurozone unevenly. Germany, with its energy-intensive manufacturing, gets hit harder. Spain, with a larger services sector and more renewable energy capacity, is more insulated. So the same policy rate has different real-economy effects. Luna: That's the two-speed Europe problem in reverse. Usually the periphery suffers more from tightening. Now it's the core that's struggling. Lucas: Right. And that's creating interesting investment implications. The iShares Euro Stoxx 50 ETF, ticker f e z, is up one point six percent over five days, but the composition matters. Spanish stocks make up a bigger weight in the broad European ETFs than they did three years ago. Luna: So if you're a passive investor in a European ETF, you're actually getting more Spain exposure automatically. Lucas: Exactly. And that's not necessarily a bad thing, given the momentum. But it does mean investors should understand what they own. Spain isn't the sleepy bond market it used to be. Luna: Before we go deeper, I want to mention something. We're able to have these conversations without ads or paywalls because of listeners who support the show. Lucas: That's right. If walking through the economy with us has made something click, a couple of dollars a month at buy me a coffee dot com slash fexingo genuinely helps keep these episodes coming. Luna: It's a small thing that makes a real difference for us. And we really appreciate it. Lucas: Alright — back to Spain. One sector I find especially compelling is Spanish banking. Banks like Santander and BBVA have strong exposure to Latin America, which is benefiting from commodity demand and higher interest rates. That's boosting their earnings and, by extension, the Spanish index. Luna: But isn't that also a risk? If Latin American economies struggle, that could drag down Spanish stocks. Lucas: It is a double-edged sword. But right now, the tailwinds are stronger. And the domestic Spanish economy is improving too — unemployment is down to eleven percent, which is still high by European standards but the lowest in over a decade. Luna: Eleven percent is still painful for a lot of people. But the trend is in the right direction. Lucas: Absolutely. And it's worth noting that Spanish exports to non eu markets have been growing faster than German exports. Part of that is the weak euro — at one point one six dollars, it helps exporters. But part of it is genuine competitiveness gains. Luna: So what does this mean for the ECB's next move? Does the divergence within the Eurozone make their job harder? Lucas: It does. The ECB has one policy rate for a bloc that is increasingly fragmented. The hawks in Germany and the Netherlands want more hikes to fight inflation, while the doves in southern Europe argue that the economy can't take it. Spain's recent data gives the doves more ammunition. Luna: But inflation is still sticky. Energy prices are elevated because of the Iran conflict, and that's hitting everyone. Lucas: True. And that's the wildcard. The ECB's tightening cycle may not be over, but the pace will slow. And markets are pricing in a pause after the July meeting. If Spain continues to outperform, it might shift the center of gravity in Eurozone economic debates. Luna: It's a fascinating shift. And it reminds me that we shouldn't assume the old hierarchies are permanent. Lucas: Exactly. The Eurozone is an evolving organism. Spain's rise is a story about resilience, adaptation, and maybe a bit of luck. But it's also a reminder that economic narratives can change faster than we expect. Luna: And for listeners, that means keeping an eye on the data rather than the stereotypes. Lucas: Well said. Next time, we'll look at how this divergence is playing out in the bond market — because the narrowing of Spanish spreads might have further to run.