Economic history of Spain

Iberians, roughly located in the South and East, and Celts in the North and West of the Iberian Peninsula were the major earliest groups in what is now Spain (a third, so-called Celtiberian culture seems to have developed in the inner part of the Peninsula, where both groups were in contact).

Ruins of a Roman garum factory near Tarifa, Spain

Carthaginians and Greeks also traded with Spain and established their own colonies on the coast. Spain's mineral wealth and access to metals made it an important source of raw material during the early metal ages. Carthage conquered parts of Iberia after the First Punic War. After defeating Carthage in the Second Punic War, the Romans governed all of the Iberian Peninsula for centuries, expanding and diversifying the economy and extending Hispanic trade with the greater Republic and Empire.

While most of western Europe fell into a Dark Age after the decline of the Roman Empire, those kingdoms in the Iberian Peninsula that today are known as Spain maintained their economy. First, the Visigoths replaced the Roman imperial administrators (an international class at the top echelons). They established themselves as nobility. The kingdom had some degree of centralized power at their capital, which was eventually moved to Toledo from Toulouse. The Roman municipal and provincial governorships continued but the imperial superstructure of diocese and prefecture was of course completely gone as there was no need for it: these had existed to coordinate imperial defense and provide uniform administrative oversight, and symbolized as nothing else, except the professional army, the presence of the Roman. Though it suffered some decline, most Roman law and many physical infrastructures such as roads, bridges, aqueducts, and irrigation systems, were maintained to varying degrees, unlike the complete disintegration that occurred in most other former parts of the western empire with the exception of parts of Italy. Later, when the Moors occupied large parts of the Iberian Peninsula alongside the Catholic kingdoms, they also maintained much of this Roman legacy; in fact, as time went on they had Roman infrastructure repaired and extended. Meanwhile, in the countryside, where most people had always lived, life went on much as it had in Roman times, but with improvements due to the repair and extension of irrigation systems, and the introduction of novel crops and agricultural practices from the Islamic world. While trade dwindled in most of the former Roman lands in Europe, trade survived to some degree in Visigothic Spain and flourished under the Moors through the integration of Al-Andalus (Moorish Spain) with the Mediterranean trade of the Islamic world. After 800 years of intermittent warring, the Catholic kingdoms had gradually become more powerful and sophisticated and eventually expelled all the Moors from the Peninsula.

The Crown of Castile, united with the Crown of Aragon, had merchant navies that rivaled that of the Hanseatic League and Venice. Like the rest of late medieval Europe, restrictive guilds closely regulated all aspects of the economy-production, trade, and even transport. The most powerful of these corporations, the mesta, controlled the production of wool, Castile's chief export.

The Reconquista allowed the Catholic Monarchs to divert their attention to exploration. In 1492, Pope Alexander VI (Rodrigo Borja, a Valencian) formally approved the division of the unexplored world between kingdoms of what is today Spain and Portugal. New discoveries and conquests came in quick succession.

In 1493, when Christopher Columbus brought 1,500 colonists with him on his second voyage, a royal administrator had already been appointed for what the Catholic kingdoms referred to as the Indies. The Council of the Indies (Consejo de Indias), established in 1524 acted as an advisory board on colonial affairs, and the House of Trade (Casa de Contratación) regulated trade with the colonies.

Gold and silver from the New World

Main articles: Spanish Empire and Iberian Union

See also: School of Salamanca and Global silver trade from the 16th to 19th centuries

The port of Seville in the 1500s. Originally, all trade with the colonies in the Americas was required to go through this port.

Following the discovery of America and the colonial expansion in the Caribbean and Continental America, valuable agricultural products and mineral resources were introduced into Spain through regular trade routes. New products such as potatoes, tomatoes and corn had a long-lasting impact on the Spanish economy, but more importantly on European demographics. Gold and silver bullion from American mines were used by the Spanish Crown to pay for troops in the Netherlands and Italy, to maintain the emperor's forces in Germany and ships at sea, and to satisfy increasing consumer demand at home. However, the large volumes of precious metals from America led to inflation, which had a negative effect on the poorer part of the population, as goods became overpriced. This also hampered exports, as expensive goods could not compete in international markets. Moreover, the large cash inflows from silver hindered the industrial development in Spain as entrepreneurship seems to be indispensable.[1]

Domestic production was heavily taxed, driving up prices for Aragon and Castile-made goods, but especially in Castile where the tax burden was greater. The sale of titles to entrepreneurs who bought their way up the social ladder (a practice commonly found all over Europe), removing themselves from the productive sector of the economy, provided additional funds.

The overall effect of plague and emigration reduced peninsular Spain's population from over 8 million in the last years of the 16th century to under 7 million by the mid-17th century, with Castile the most severely affected region (85% of the Kingdom's population were in Castile), as an example, in 1500, the population of Castile was 6 million, while 1.25 million lived in the Crown of Aragon which included Catalonia, Valencia and the Balearic Islands.

The Spanish economy began to fall behind the British economy in terms of GDP per capita during the middle of the seventeenth century. The explanations for this divergence are unclear, but "the divergence comes too late to have any medieval origins, whether cultural or institutional" and "it comes too early... in order for the Napoleonic Invasions to be blamed."[2]

A slow economic recovery began in the last decades of the 17th century under the Habsburgs. Under the Bourbons, government efficiency was improved, especially under Charles III's reign. The Bourbon reforms, however, resulted in no basic changes in the pattern of property holding. The nature of bourgeois class consciousness in Aragon and Castile hindered the creation of a middle-class movement. At the instance of liberal thinkers including Campomanes, various groups known as "Economic Societies of friends of the Country" were formed to promote economic development, new advances in the sciences, and Enlightenment philosophy (see Sociedad Económica de los Amigos del País). However, despite the development of a national bureaucracy in Madrid, the reform movement could not be sustained without the patronage of Charles III, and it did not survive him.

Jan Bergeyck (advisor to Philip V) "Disorder I have found here is beyond all imagination". Castile's exchequer still used Roman numerals and there was no proper accounting.[8]

Spain's American colonies took advantage of the postwar chaos to proclaim their independence. By 1825 only Cuba and Puerto Rico remained under the Spanish flag in the New World. When Ferdinand VII was restored to the throne in 1813 and expended wealth and manpower in a vain effort to reassert control over the colonies. The move was unpopular among liberal officers assigned to the American wars.

The economy was heavily focused around agricultural goods. The period saw regional industrialization in Catalonia and the Basque Country and the construction of railways in the second half of the nineteenth century helped alleviate some of the isolation of the interior but generally little changed for much of the country as political instability, uprisings and unstable governments slowed or undermined economic progress.

At the beginning of the 20th century, Spain was still mostly rural; most of the large-scale, modern industry existed as textile mills around Barcelona in Catalonia and in the metallurgical plants of the Basque provinces and some shipyards around the country. The loss of Cuba and the Philippines benefited Spain by causing capital to return and to be invested in updated domestic industries. But even with the stimulus of World War I, only in Catalonia and in two Basque provinces (Biscay and Gipuzkoa) did the value of manufacturing output in 1920 exceed that of agricultural production. Agricultural productivity was generally low compared with that of other West European countries because of a number of deficiencies: backward technology, lack of large irrigation projects, inadequate rural credit facilities, outmoded landtenure practices, as well as the age-old problems of difficult terrain, unreliable climate, isolation and difficult transportation in the rugged interior. Financial institutions were relatively undeveloped. The Bank of Spain (Banco de España) was still privately owned, and its public functions were restricted to currency issuance and the provision of funds for state activities. The state largely limited itself to such traditional activities as defense and the maintenance of order and justice. Road building, education, and a few welfare activities were the only public services that had any appreciable impact on the economy.

A General, Miguel Primo de Rivera, was appointed prime minister by the king after a successful coup d'état and for seven years dissolved parliament and ruled through directorates and the aid of the military until 1930.

Protectionism, the Spanish neutrality during World War I (which allowed the country to trade with all belligerents) and state control of the economy led to a temporary economic recovery. The precipitous economic decline in 1930 undercut support for the government from special-interest groups. Criticism from academics mounted. Bankers expressed disappointment at the state loans that his government had tried to float. An attempt to reform the promotion system cost him the support of the army and, in turn, the support of the king. Primo de Rivera resigned and died shortly afterward in exile.

The republican government substituted the monarchy and inherited the international economic crisis as well. Three different governments ruled during the Second Spanish Republic, failing to execute numerous reforms, including land reform. General strikes were common and the economy stagnated.

During the Spanish Civil War, the country split into two different centralized economies, and the whole economic effort was redirected to the war industry. According to recent research,[9] growth is harmed during civil wars due to the huge contraction on private investment, and such was the case with the Spanish divided economy.

Franco's death in 1975 and the ensuing transition to democratic rule diverted Spaniards' attention from their economy.[17]

The return to democracy coincided with an explosive quadrupling of oil prices, which had an extremely serious effect on the economy because Spain imported 70% of its energy, mostly in the form of Middle Eastern oil. Nonetheless, the interim centrist government of Adolfo Suarez Gonzalez, which had been named to succeed the Franco regime by King Juan Carlos, did little to shore up the economy or even to reduce Spain's dependence on imported oil, although there was little that could be done as the country had little in the way of hydrocarbon deposits. A virtually exclusive preoccupation with the politics of democratization during the politically and socially unstable period when the new constitution was drafted and enacted, absorbed most of Spain's politics and administration at the expense of economic policy.[10]

Because of the failure to adjust to the changed economic environment brought on by the two oil price shocks of the 1970s, Spain quickly confronted plummeting productivity, an explosive increase in wages from 1974 to 1976, a reversal of migration trends as a result of the economic slump throughout Western Europe, and the steady outflow of labor from agricultural areas despite declining job prospects in the cities. All these factors contributed to a sharp rise in the unemployment rate. Government budgetary deficits swelled, as did large social security cost overruns and the huge operating losses incurred by a number of public-sector industries. Energy consumption, meanwhile, remained high.[10]

When the Spanish Socialist Workers' Party government headed by Felipe González took office in late 1982, inflation was running at an annual rate of 16%, the external current account was US$4 billion in arrears, public spending was large, and foreign exchange reserves had become dangerously depleted. In coping with the situation, however, the Gonzalez government had one asset that no previous post-Franco government had enjoyed, namely, a solid parliamentary majority in both houses of the Cortes (Spanish Parliament). With this majority, it was able to undertake unpopular austerity measures that earlier governments had not.[10]

The Socialist government opted for pragmatic, orthodox monetary and fiscal policies, together with a series of vigorous retrenchment measures. In 1983 it unveiled a program that provided a more coherent and long-term approach to the country's economic ills. Renovative structural policies—such as the closing of large, unprofitable state enterprises—helped to correct the relatively poor performance of the economy. The government launched an industrial reconversion program, brought the problem-ridden social security system into better balance, and introduced a more efficient energy-use policy. Labor market flexibility was improved, and private capital investment was encouraged with incentives.[10]

By 1985 the budgetary deficit was brought down to 5% of GNP, and it dropped to 4.5% in 1986. Real wage growth was contained, and it was generally kept below the rate of inflation. Inflation was reduced to 4.5% in 1987, and analysts believed it might decrease to the government's goal of 3% in 1988.[10]

Efforts to modernize and to expand the economy together with a number of factors fostered strong economic growth in the 1980s. Those factors were the continuing fall in oil prices, increased tourism, and a massive upsurge in the inflow of foreign investment. Thus, despite the fact that the economy was being exposed to foreign competition in accordance with EC requirements, the Spanish economy underwent rapid expansion without experiencing balance of payments' constraints.[10][18]

In the words of the OECD's 1987-88 survey of the Spanish economy, "following a protracted period of sluggish growth with slow progress in winding down inflation during the late 1970s and the first half of the 1980s, the Spanish economy has entered a phase of vigorous expansion of output and employment accompanied by a marked slowdown of inflation."[19] In 1981 Spain's GDP growth rate had reached a nadir by registering a rate of negative 0.2%; it then gradually resumed its slow upward ascent with increases of 1.2% in 1982, 1.8% in 1983, 1.9% in 1984, and 2.1% in 1985. The following year, however, Spain's real GDP began to grow strongly, registering a growth rate of 3.3% in 1986 and 5.5% in 1987. Although these growth rates were less than those of the economic miracle years, they were among the strongest of the OECD. Analysts projected a rise of 3.8% in 1988 and of 3.5% in 1989, a slight decline but still roughly double the EC average. They expected that declining interest rates and the government's stimulative budget would help sustain economic expansion. Industrial output, which rose by 3.1% in 1986 and by 5.2% in 1987, was also expected to maintain its expansive rate, growing by 3.8% in 1988 and by 3.7% in 1989.[10]

A prime force generating rapid economic growth was increased domestic demand, which grew by a steep 6% in 1986 and by 4.8% in 1987, in both years exceeding official projections. During 1988 and 1989, analysts expected demand to remain strong, though at slightly lower levels. Much of the large increase in demand was met in 1987 by an estimated 20% jump in real terms in imports of goods and services.[10]

In the mid-1980s, Spain achieved a strong level of economic performance while simultaneously lowering its rate of inflation to within two points of the EC average. However, its export performance, though increasing, raised concerns over the existing imbalance between import and export growth.[10]

View of the Torre Mapfre and Hotel Arts (Barcelona) built in 1992.

After Franco's death in 1975, the country returned to democracy in the form of a constitutional monarchy in 1978, with elections being held in 1977 and with the constitution being ratified in 1978. The move to democracy saw Spain become more involved with the European integration.

Felipe Gonzalez became prime minister when his Socialist Party won the 1982 elections. He enacted a number of liberal reforms, increasing civil liberties and implementing universal free education for those 16 and younger. He also lobbied successfully for Spain to join the European Economic Community (EEC) and to remain part of the North Atlantic Treaty Organization.

The European Union at the time Spain joined, in 1986, existed primarily as a trading union - the EEC, and better trade links were vital to the fragile Spanish economy. Unemployment was high, about 18 percent, and the Spanish GDP was 71 percent of the EU average. The single market and European funding offered a chance to bring the Spanish economy up to the standards of the rest of Western Europe, along with the support of Spain's wealthier neighbors. There was the promise of lucrative deals with influential countries such as Germany, France and the UK.

Although the Spanish Miracle years (1959–1974) witnessed unprecedented improvements in infrastructure and social services, Spain still lagged behind most of Western Europe. Education was limited, women were largely excluded from the workforce, health care was largely private and unevenly distributed and the country's infrastructure was relatively poor. In 1985, Spain had only 2,100 km (1,300 mi) of motorways. Since the end of the economic miracle in 1974, the country's economy had been stagnant. Joining the European Economic Community was perceived by most of the population as a way to restart the process of modernization and improvement of the population's average purchasing power.

Spain joined the European Economic Community, as the European Union was then known, in January 1986 at the same time as neighbor Portugal. Membership ushered the country into opening its economy, modernizing its industrial base and revising economic legislation to open its previously protected markets to foreign competition. With help of EU funds (Structural Funds and Cohesion Funds, European Regional Development Fund, etc.) Spain greatly improved infrastructures, increased GDP growth, reduced the public debt to GDP ratio. Spain has been a driving force in the European community ever since. The country was a leading proponent of the EU single currency, the euro, long before it had been put into circulation. Together with the other founding euro members, it adopted the new physical currency on January 1, 2002. On that date Spain terminated its historic peseta currency and replaced it with the euro, which has become its national currency shared the rest of the Eurozone. This culminated a fast process of economic modernization even though the strength of the euro since its adoption has raised concerns regarding the fact that Spanish exports outside the European Union are being priced out of the range of foreign buyers, with the country losing monetary sovereignty in favour of the European Central Bank, which must look after several different -often opposed- national interests.

In the early 1990s Spain, like most other countries, was hit by the early 1990s recession. which coincided with the end of the construction push put in place for the Barcelona Olympics.

Talgo 350 high-speed service, Madrid - Valencia

The country was confronted with very high unemployment, entrenched by its then rigid labour market. However the economy began to recover during the first José María Aznar administration (1996-2000), driven by a return of consumer confidence, increased private consumption and liberalization and deregulation reforms aiming to reduce the State's role in the market place. Unemployment at 7.6% (October 2006), represented a significant improvement from the 1980s levels and a better rate than the one of Germany or France at the time. Devaluations of the peseta during the 1990s made Spanish exports more competitive. By the late 1990s economic growth was strong, employment grew strongly, although unemployment remained high, as people returned to the job market and confidence in the economy returned. The last years of the 1990s saw property values begin to increase.

The Spanish economy was being credited for having avoided the virtual zero growth rate of some of its largest partners in the EU (namely France, Germany and Italy) in the late 1990s and at the beginning of the 21st century. In 1995 Spain started an impressive economic cycle marked by an outstanding economic growth, with figures around 3%, often well over this rate.[20]

Map showing regional variation in European GDP (PPP) per capita in 2006. Figures from International Monetary Fund

Growth in the decade prior to 2008 steadily closed the economic gap between Spain and its leading partners in the EU. For a moment, the Spanish economy was regarded as one of the most dynamic within the EU, even able to replace the leading role of much larger economies like the ones of France and Germany, thus subsequently attracting significant amounts of native and foreign investment.[21] Also, during the period spanning from the mid 1980s through the mid 2000s, Spain was second only to France in being the most successful OECD country in terms of reduced income inequality over this period.[22] Spain also made great strides in integrating women into the workforce. From a position where the role of Spanish women in the labour market in the early 1970s was similar to that prevailing in the major European countries in the 1930s, by the 1990s Spain had achieved a modern European profile in terms of economic participation by women.[23]

Spain joined the Eurozone in 1999. Interest rates dropped and the property boom accelerated. By 2006 property prices had doubled from a decade earlier. During this time construction of apartments and houses increased at a record rate and immigration into Spain increased into the hundreds of thousands a year as Spain created more new jobs than the rest of Eurozone combined. Along with the property boom, there was a rapid expansion of service industry jobs.

Torres de la Casería de Ossio apartment buildings in San Fernando completed in 2007. The collapse of the Spanish construction boom was a major contributor to the record unemployment.[27]

Spain bond rates during Spanish financial crisis

  20 year bond

  10 year bond

  2 year bond

  3 month bond

In 2008, the shockwaves of the global financial crisis punctured the Spanish property bubble, causing a property crash. Construction collapsed and unemployment began to rise rapidly. The property crash led to a collapse of credit as banks hit by bad debts cut back lending, causing a severe recession. As the economy shrank, government revenue collapsed and government debt began to climb rapidly. By the 2010 the country faced severe financial problems and got caught up in the European sovereign debt crisis.

Mariano Rajoy's government received an ECB bank bailout while stepping up austerity

In 2012, unemployment rose to a record high of 25 percent.[28] On 25 May 2012, Bankia, at that time the fourth largest bank of Spain with 12 million customers, requested a bailout of €19 billion, the largest bank bailout in the nation's history.[29][30] The new management, led by José Ignacio Goirigolzarri reported losses before taxes of 4.3 billion euros (2.98 billion euros taking into account a fiscal credit) compared to a profit of 328 million euros reported when Rodrigo Rato was at the head of Bankia until May 9, 2012.[31] On June 9, 2012, Spain asked Eurozone governments for a bailout worth as much as 100 billion euros ($125 billion) to rescue its banking system as the country became the biggest euro economy until that date, after Ireland, Greece and Portugal, to seek international aid due to its weaknesses amid the European sovereign debt crisis.[32] A Eurozone official told Reuters in July 2012 that Spain conceded for the first time at a meeting between Spanish Economy Minister Luis de Guindos and his German counterpart Wolfgang Schaeuble, it might need a bailout worth 300 billion euros if its borrowing costs remained unsustainably high. On August 23, 2012, Reuters reported that Spain was negotiating with euro zone partners over conditions for aid to bring down its borrowing costs.[33]

After deep austerity measures and major reforms, Spain exited the deep and long recession in 2013 and its economy began growing once again but despite the expansion of the number of jobs, the unemployment rate still stood at the historically high level of 22.6% as late as April 2015.[34] In 2014, the Spanish economy grew 1,4%,[35] accelerating to 3.4% in 2015 and 3.3% in 2016[36][37] and by 3.1% in 2017.[38][39] Experts say that the economy will moderate in 2018 to between 2.5% and 3%. In addition to this, the unemployment rate has been reduced during the years of recovery, standing at 16.55% in 2017.[40]

• Economy of Spain
• Science and technology in Spain
• Agriculture in Spain
• Economic history
• Economic history of Europe
• Economic history of Portugal
• Economic history of the world
• Plastimetal

 This article incorporates public domain material from The World Factbook. CIA.