SPAIN’S central bank has sounded the alarm over the economy, urging the government to lower public spending and cut debt levels to protect the country from the impact of geopolitical instability such as President Trump’s tariff war.
“It is necessary to adopt concrete measures for expenditure control and/or revenue enhancement,” the Bank of Spain said in a twice-yearly financial stability report published on Thursday.
It said debt remains ‘high, both from a historical perspective and in the European context’ and must be slashed to protect the Spanish economy from ‘potential sudden shifts in market financing conditions’.
Currently, Spain’s public debt sits at 103 percent of GDP – although the debt ratio is predicted to fall below 100 percent by 2027.
Public debt peaked during the pandemic at a high of 124.2 percent of GDP as the government borrowed heavily to support healthcare and protect jobs.
But the Bank of Spain warns that more challenges are on the horizon, citing the examples of an aging population, geopolitical tensions, the digital transformation and climate change.
“These issues will require higher public expenditure, which will exacerbate the imbalance in public finances unless compensatory measures are adopted,” it said.
The cautious tone struck in the report contrasts with the current fortunes of Spain’s economy, recently ranked by the International Monetary Fund (IMF) as the world’s fastest-growing advanced economy with forecast annual growth of 2.9 percent – 0.4 percentage points higher than originally predicted and more than double the Eurozone average.
Fuelled by tourism, low energy prices, strong domestic consumption and an influx of immigrant labour, Spain has recorded nine consecutive quarterly GDP rises of 0.6% or more.
In the report, the Bank of Spain also said it would step up oversight of credit standards amid a sharp increase in new mortgage lending.
New mortgage loans leapt 26% year-on-year in the second quarter of 2025, hitting their highest level in a decade – although the central bank said vulnerabilities in the property market remain far below those seen prior to the devastating late-2000s housing crash.
Last month, Santander and Bankinter warned of ‘irrational competition’ in housing financing, with some mortgage rates falling below market prices.
Spanish lenders currently offer the second-lowest mortgage price in the Eurozone with an average of 2.66%, significantly lower than the 3.32% Eurozone average.
Only Malta offers lower mortgage prices, according to data released by the European Central Bank (ECB).
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