Spain's Remarkable Economic Resurgence: Outpacing France in Fiscal Discipline and Growth

In a surprising turn of events, investors have started demanding more compensation to lend money to France than they do to Spain, a clear indication of the shifting economic landscape within the Eurozone. This reversal of fortunes has been driven by Spain's strong economic performance, which has been rewarded by investors, while France's failure to address its ailing finances has been met with punishment. The article explores the four key ways in which Spain is outperforming its northern neighbor, France, in the economic arena.

Defying Expectations: Spain's Ascent to "Semi-Core" Status

A Remarkable Milestone

France's 10-year government bond yield has risen above Spain's for the first time since 2008, a remarkable turnaround considering the vast gap that existed between the two during the height of the Eurozone debt crisis in 2012. This shift has been driven by a significant influx of investors into the Spanish market, with many moving away from France. Analysts now believe that Spain, once seen as part of the Eurozone's "poorer periphery," may be on its way to achieving "semi-core" status among bond investors, a label that has traditionally been associated with France due to its high credit rating and liquidity as the bloc's largest bond market.The narrowing of the yield gap between France and other Eurozone countries, such as Portugal, Italy, and Greece, further underscores Spain's growing appeal to investors. This remarkable shift in market sentiment is a testament to Spain's ability to outperform its peers in the region.

Fiscal Discipline and Debt Reduction

While France's budget deficit risks rising above 6% of output, more than double the European Union's 3% limit, Spain's deficit is expected to reach just 3% this year, with the EU not recommending disciplinary measures as it has for France. This contrast in fiscal discipline has not gone unnoticed by investors.Moreover, Spain has been more successful in reducing its debt burden in the post-pandemic era. The Spanish government expects its debt-to-GDP ratio to drop to under 103% this year, a significant improvement from the around 120% recorded in 2020. In contrast, France's debt stood at 111% last year and is forecast to rise to 114% by 2025, further widening the gap between the two economies.

Booming Growth and the EU Recovery Fund

Spain's economy has been growing at a much faster pace than France's, thanks to a robust tourism sector and a strong labor market bolstered by immigration. In 2022, Spain's economy expanded by 2.7%, nearly seven times faster than the Eurozone average and more than double France's 1.1% growth. The Spanish central bank now expects the country's economy to grow by 2.8% this year, a significant upward revision from the initial 1.9% forecast.The EU's COVID-19 recovery fund has also played a crucial role in Spain's economic resurgence, with around four times more funds earmarked for the country compared to France. This influx of EU support has provided a significant boost to Spain's growth prospects, further widening the gap with its northern neighbor.

Ratings Convergence and Market Validation

Despite its lower debt and stronger growth profile, Spain's sovereign credit ratings have historically been lower than France's, with the former rated 2-5 notches below the latter by major agencies such as S&P Global, Moody's, and Fitch. However, this gap has been steadily narrowing as Spain has seen multiple upgrades, while France has only experienced downgrades.Analysts believe that the market has effectively been telling the ratings agencies that Spain should be on par with France, as evidenced by the convergence of bond yields between the two countries. This market validation of Spain's economic resilience and fiscal prudence is a clear indication of the country's remarkable transformation and its growing stature within the Eurozone.The reversal of fortunes between Spain and France is a testament to the power of sound economic policies, fiscal discipline, and a strong growth trajectory. As investors continue to favor Spain over its northern counterpart, the implications for the Eurozone's economic landscape are profound, with Spain emerging as a shining example of resilience and economic prowess.