Perhaps surprisingly, Spain‘s economy is outperforming most other economies of the European Union. This year, GDP growth in Spain is projected to be around 2.6%, after last year’s growth rate of 3.5%. The investment bank Goldman Sachs says the Spanish economy should continue to outperform the other countries of Europe in 2026 and 2027. The growth is being driven by Spain’s services sector, especially tourism. Spain is also experiencing growth in finance, real estate, and telecommunications. These subsectors add more value than tourism. Wages are higher. Productivity is higher, but still low.
Beneath the surface, however, the picture is less bright.
Spain’s per capita income is very low relative to that of the United States. Per capita income in the U.S. approaches $86,000. By contrast, Spain’s per capita income is just $36,000. If Spain were a U.S. state, it would be the poorest state by a significant margin. Spain is also burdened with high government debt. Its national debt exceeds 100% of GDP. Spain is projected to run annual fiscal deficits of more than 3% for each of the next several years. Spanish growth is also burdened with relatively high taxes. In Spain, taxes consume almost 40% of GDP. By contrast, taxes in the U.S. take less than 30% of national output. Among wealthy countries, lower taxes correlate with higher economic growth. That’s because the private sector is more dynamic than the public sector.
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Only Spain’s membership in the European Monetary Union enables the country to avoid very high borrowing costs. Spain’s total debt-to-GDP ratio is similar to that of the United Kingdom, but its cost to borrow 10-year money in international markets is almost 1.5% lower than the borrowing cost for 10-year money by the U.K. Spain enjoys the implicit guarantee of the European Central Bank. Recent research demonstrates that the European Monetary Union is a giant economic transfer system where the strong economies of Europe transfer money to the weaker economies. Indeed, Spain is very reliant on capital transfers from the EU.
Spain, like most European countries, also taxes its most productive workers at high rates. This acts as a disincentive to labor and innovation. Spain’s corporate tax rate is also significantly higher than that of the U.S. Corporate taxes are the least efficient means of raising revenue. Higher corporate taxes reduce investment and wages. Spain suffers from severe underinvestment in both physical capital and human capital.
The highest hurdles for Spain to overcome in its quest to become a wealthy nation include structurally high unemployment, especially among its youth. The unemployment rate in Spain routinely runs at low double-digit rates. Contributing to high youth unemployment, over 25%, is the tendency of too many young Spaniards to leave school without credentials. The high school dropout rate is double the European average.
Another challenge?
Spain struggles with low productivity growth. Among European nations, only Italy and Greece have worse records on national productivity. Over the past 20 years, apparent productivity has averaged less than 1%. This compares to 1.5% productivity growth in the U.S. and 1.1% growth in Germany. Low productivity growth is probably attributable to Spain’s low investment in both physical and human capital.
Spain is also burdened with political instability. Separatist movements in Catalonia, a region which includes Barcelona, Spain’s second-wealthiest city, and in the Basque region, enjoy widespread support. Many observers describe Spain as a loose coalition of 17 separate countries, in fact 17 autonomous communities, some of which have their own languages and enjoy control of education, health services, and other important functions.
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Finally and most importantly from the position of the U.S., Spain, as a member of NATO, free rides on the military spending of the U.S. Spain is vehemently resisting requests by other NATO countries to increase its defense spending. Spain’s national security shortcomings are so egregious that President Donald Trump now talks of ejecting Spain from NATO. Prime Minister Pedro Sanchez has also adopted a pro-China foreign policy that undermines critical U.S. strategic interests. This concern is so significant that it should lead to limits on Pentagon and U.S. intelligence community cooperation with Madrid.
Put simply, it is only fair to say that the economy of Spain looks good only because overall economic growth in Europe is so poor.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].
