Spain faced a puzzling trend in 2023: public and private investment declined even as the country posted a 2.5% growth rate. The formation of fixed capital fell by 0.5% year over year, challenging government hopes for a strong rebound. Investment in machinery and equipment dropped by 1.8%, a sharper fall than the government’s near 9% growth expectation. The decline is striking given the influx of European Next Generation EU funds that began arriving in 2021, with about 35 billion euros already executed by the end of 2023. If not for these European funds, the contraction would have been even larger. Why does investment in Spain fall despite European funds, and why does it lag behind a growing euro area?
Experts largely point to slower-than-expected disbursement of European funds as a key factor behind the disappointing investment picture. Yet there is another element that may be even more influential: the lingering memory of the financial crisis. This trauma shows up as a persistent focus on reducing debt. While balance sheets need to improve, an excessive emphasis on deleveraging can freeze activity, warns Raymond Torres, head of Economic Analysis at Funcas.
1. Worse performance than Europe
Rafael Domènech, chief of Economic Analysis at BBVA Research, warned that private investment in Spain has decoupled from the euro area even with European funds in play. He described the pattern as a lengthy phenomenon with short-term headwinds like corporate deleveraging and bottlenecks in value chains, including supply strains that reflect the post-pandemic period. Jorge Sicilia, BBVA’s chief economist, echoed that assessment, noting extra factors from the crisis era have weighed more heavily on Spain’s investment recovery.
After peaking in 2007 before the housing crisis, investment fell by 40% until it hit a floor in 2013. The recovery, briefly interrupted by the pandemic, faltered again in 2023 with a 0.5% drop. Funcas notes that Spanish investment in equipment remains below pre-pandemic levels, while the euro area as a whole has progressed beyond those levels. By four-trimester cumulative measure, Spain has seen the steepest drop in equipment investment among EU peers since 2019, whereas Greece, Italy, and Portugal have posted double-digit gains. Germany has yet to surpass its pre-pandemic peak but remains above Spain’s level.
Gregorio Izquierdo, CEO of the Institute of Economic Studies (affiliated with CEOE and former INE president), observes that investment in equipment remains roughly 9% below pre-pandemic levels, and construction around 4.5% below. He adds that weak investment also shows up in firm-level demographics, with indicators not fully recovering by January 2024.
2. Slower execution of European funds
Spain has been a major beneficiary of Next Generation EU, ranking second in receipts and initially appearing to be among the quickest to deploy the funds. Yet 2023 brought a slowdown. Political events delayed reforms and postponed the fourth payment request of 10 billion euros until December, after plans for two tranches totalling 17 billion had been in place for the year.
AEsadeEcPol report notes that with about two and a half years left in the funding window until mid-2026, Spain had spent roughly 41% of the 80 billion euros in non-repayable funds. If the pace continues, experts say speed needs to improve to meet the program’s timetable.
Izquierdo argues that funds are not moving through the private sector with the same efficiency as through public channels. The IEE views private-sector funding as more effective in triggering investment multipliers and foresees that the Official Credit Institute (ICO) could begin offering up to nearly 40 billion euros in financing for firms and self-employed individuals, leveraging the over 84 billion euros allocated to Spain by EU funds. This could surface in the latter half of the year, helping to raise private investment activity.
3. The debt memory problem
A striking factor in Spain’s investment weakness is the legacy of the financial crisis. Corporate debt soared to near 120% of GDP at the peak, compared with roughly 80% in the euro zone. Since 2009, debt levels have fallen by about 54 percentage points, approaching the mid-60% range of GDP, sometimes dipping below euro-area levels. When interest rates began to rise in late 2021, Spanish firms faced renewed pressure to reduce debt quickly. Izquierdo notes that firms with debt tied to short-term rates, like Euribor, are particularly sensitive to rate hikes. Tormenting debt concerns have led some firms to prioritize balance-sheet repair over new investment.
Funcas’ Raymond Torres describes this as a “debt memory.” The fear of falling into a debt trap similar to the 2008 crisis pushes companies to favor balance-sheet repair over expansion, a dynamic that can slow the investment cycle. While balance-sheet cleaning is beneficial, prolonged hesitation can resemble a balance-sheet recession that curbs both investment and consumption.
4. Rising corporate profits
Despite weaker investment, profits have risen. Spain’s quarterly Central Balance Sheet data from the Bank of Spain show a 7.5% gain in profits in the first three quarters of 2023, even as turnover fell about 7% in that period, compared with a 45% increase in 2022. The drop in energy and fuel prices, which carry substantial weight in the data, dampened turnover while profits advanced. Since 2019, corporate profits have more than doubled according to the Central Balance Sheet statistics.
5. What lies ahead?
After the 2023 investment slump, most forecasts anticipate a strong rebound ahead. Izquierdo sees the potential for funds to catch up and contribute to a better 2024 for investment. He also notes that with higher interest rates easing and more European funds available, investment could stabilize and accelerate after the summer, with corporate credit expected to pick up by the autumn. Santander’s Spain CEO Ángel Rivera suggested a climate where lending to businesses and, to a lesser extent, individuals, could intensify investment activity.
Looking to 2025, Funcas expects the European funds’ rollout and relatively low debt levels to provide a positive pull for the Spanish economy, supporting a more favorable trajectory.
Cited insights reference functional analyses from Funcas, BBVA Research, EsadeEcPol, and other financial authorities. These perspectives, while varied, converge on the idea that timing and channeling of funds, combined with prudent debt management, will shape investment dynamics in Spain for the near term. The core question remains whether reforms, faster fund deployment, and a clearer path for private investment can unlock a durable expansion in fixed capital and productivity across Spain.
(Cited sources include Funcas, BBVA Research, EsadeEcPol, and Banco de España analyses.)