Spain’s economy is currently in a relatively good moment. GDP is growing more strongly than in other large countries in the eurozone and unemployment is at its lowest level in years. However, this cyclical growth does not erase decades of productivity stagnation, poor labor market performance, and the intensity of low value-added sectors in the productive sector. With all of this, the International Monetary Fund has revealed in its latest forecasts that up to three Eastern European countries will surpass Spain in GDP per capita before the end of this decade and will approach the levels of Italy. This “sorpasso” reveals that economic growth in Europe is shifting eastward, while the south and center remain stagnant.
In the 1990s and early 2000s, it was common to see a massive influx of citizens from Poland, Romania, Bulgaria, and even the Baltic countries in Spain’s industrial areas. However, in recent years, the arrival of these citizens from Eastern Europe has decreased, as revealed by data from the National Institute of Statistics. This situation is, among other things, a reflection of what is happening in the economies of the Old Continent.
While Eastern countries are growing intensively, generating employment, and enjoying very low unemployment rates, Mediterranean countries, including Spain, are experiencing a sort of economic lethargy that has lasted for several decades. Spain has been losing positions in the global ranking of aggregate GDP for years. However, this indicator is not very useful or precise for assessing the well-being of a society. There are countries with a very large production (GDP), but they are actually still submerged in the low or middle-income economies area.
Therefore, the International Monetary Fund prefers to use GDP per capita in purchasing power parity, which, in principle, shows a much more accurate picture of a country’s economic reality. This indicator divides production by all the country’s inhabitants, eliminating the ‘distortion’ caused by population size. Additionally, by being done in purchasing power parity, it also eliminates the ‘distortion’ caused by price differences: a hamburger in Lithuania or Spain provides the same nutrition and satisfaction, even though it may be more expensive in Spain. What matters is the quantity of goods and services produced, not their price.
With all of the above, nearly four decades after the collapse of the Soviet Union, the living standards in the countries that broke free from its orbit to join the European Union are expected to exceed those of the southern bloc, as reported by the financial agency Bloomberg, using IMF projections. GDP per capita in Slovenia has already surpassed that of Spain. But the story goes even further, this small Balkan country will surpass Italy in GDP per capita in 2029 if adjusted for purchasing power according to the latest IMF projections.
Furthermore, according to IMF estimates, Poland and Lithuania will also imminently surpass Spain, while catching up to Italy by the end of this decade. This trend will fulfill the promises of greater development and prosperity in the nations that became EU members starting in 2004.
As reported by the European Central Bank, these Eastern European countries are experiencing real convergence with the more developed countries on the continent. Valuable human capital (good and widespread education), open systems to foreign investment, relatively lower labor costs, and a desire to progress after freeing themselves from the Soviet yoke are generating this kind of ‘miracle’ in terms of economic convergence.
The Eastern Convergence Process
While it is true that this process has not occurred as rapidly as predicted, and that convergence has suffered repeated setbacks from the volatile period of the 1990s to the global crisis of 2008 and the subsequent debt crisis, it now seems to be gaining momentum. Eastern Europe is experiencing a strong increase in its production thanks to foreign investment, access to the market and EU funds, something that has also been favored by the relocation of industries from southern European countries precisely to Eastern countries, where labor costs are still lower and the capacity for growth is higher.
According to Bloomberg, the economic improvement in these countries is already reaping benefits: the outflow of workers seeking higher wages in other regions of the continent has begun to reverse (many citizens from these Eastern countries are returning home). Governments in the region also expect that the proportionally larger economies (such as Poland) will increasingly gain political influence in the European Union.
Thus, the success of these Eastern countries is contrasted with the chronic problems facing countries in southern Europe. Despite the current good moment that some countries like Spain, Portugal, or Greece are experiencing, their productivity levels remain stagnant, unemployment is on average higher than in the Eurozone, and they have a very high public debt to GDP ratio. The opposite is true in Eastern economies, where unemployment is extremely low, productivity is growing intensively, and public debt is low.
The engines that drive the economy in the long term in Italy and Spain have been stuck for a long time. Although there may be short-term upward movements due to cyclical factors, neither the OECD nor the IMF predict a bright future for these economies.
There will be better and worse years, but the outlook for several decades is bleak. Economic growth is determined by an increase in the factors of production (land, capital, and labor) or by an increase in what is known as total factor productivity (TFP). Unless a revolution occurs, productivity, a new baby boom, a migration influx, or some other unlikely event happens, Spain and Italy’s economies seem destined to suffer decades of economic mediocrity and be surpassed by many economies.
