The Greek saga has taken center stage in European financial market news over the past weeks, overshadowing other countries that at one time not too long ago, faced many of the same challenges that Greece continues to face.
Today, however, countries such as Spain, Portugal and Ireland have successfully exited their bailout programs. The implementation of and adherence to austerity measures has paid off and these countries now appear to be on a positive course again, and their efforts have been recognized by the market.
Spain in the particular is proving to be an investor favorite. The Spanish economy is slated to grow by 3% this year and some believe that by the end 2016, Spanish GDP could get back to pre-crisis levels. Money has been pouring into Spanish ETFs: iShares MSCI Spain Capped ETF has reportedly accumulated $15.51 million in assets under management since the beginning of July.
But how exactly is Spain, and other European peripheral countries, placed to perform going forward? Here are some key points:
Reforms Have Helped Spanish, Portuguese Exports Rebound
Because of its adherence to reforms, and because they were able to avail of mechanisms and institutions created by the European Union when it needed them, Spain and Portugal have been successful, among others, in improving their goods exports. These now stand at around 28% of GDP for the latter and 20% for the former (compared to 15% before the crisis). Considering that exports represent about 40% of Germany’s GDP, that is a definite improvement, said Yvan Mamalet, senior European economist at Societe Generale Corporate and Investment Banking in London, even if there’s still room for growth.
Austerity Equals Better Growth, Improved Competitiveness–for Now
Spain’s economy has also been growing and the forecast for a 3% growth this year is favorable compared to many European economies.
“The strength of the economy may be partly attributed to the current Spanish government, which has implemented a raft of comprehensive reforms, particularly in the labor markets that have helped to make businesses more competitive,” Mamalet said, “but in our opinion, there’s still a lot to be done. If these are not addressed, then the weaknesses in Spain will manifest themselves in the longer term.” Longer Term Labor Market, Education Reforms Are Key
Spain has one of the largest school drop out rates in Europe “and the problem with education is that it takes potentially a generation to improve, but in addition to that, Spain is also having some difficulty in terms of formation and training of its workforce,” Mamalet said. The inability to train and cultivate a skilled workforce will continue to impact productivity and performance, so that even though things look positive for Spain in the short term, it’s predominantly by introducing further labor market and education reforms that the Spanish economy can hope for longer term growth and increased competitiveness, he said.