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Here is an article that I just found posted in the member section of the German-Spanish Circle of Young Professionals. I thought it´s very interesting, especially because I wonder as well, how the Spanish economy will develop over the next years.

Jan. 23 (Bloomberg) -- Europe has often had models to follow over the years: France in the 1960s, Germany in the 1970s, and the U.K. in more recent times.

And how about Spain? No other major European economy has been so consistently successful in the past decade.

Its boom has been going on for so long, everyone is used to it. The euro region's growth last outpaced Spain's in 1995, according to Bloomberg calculations.

Now the first signs are starting to emerge that the miracle may be running out of steam for Europe's fifth-largest economy. Spain's prosperity now looks more like a combustible mix of a real-estate frenzy and an influx of immigrants rather than a lasting transformation of the country's competitiveness.

Once that kind of boom runs into the ground, it can take a long time to sort out the mess.

``The property market is finally starting to slow down,'' said Henrik Lumholdt, chief strategist at Inversis Banco in Madrid, in a telephone interview. ``When we finally get to the end of the boom, the question is going to be, `How do we get the economy growing again?'''

There is no disputing the progress that Spain has made. Wind back 10 years, and it was a relatively underdeveloped country, looking as much to Latin America as it did to France and Germany for direction.

Spanish Companies

Now, it is part of the mainstream European economy, and arguably its most dynamic component. One way of measuring that was the growing global reach of big Spanish companies. Banco Santander Central Hispano SA took control of the U.K.'s Abbey National Plc, while Telefonica SA snapped up the mobile telecommunications operator O2 Plc. And it's impossible to walk through any mall in Europe without seeing a branch of clothing retailer Zara, owned by Inditex SA.

All those are signals of newly found economic confidence and wealth, amply reflected in the gross domestic product figures.

``The GDP growth differential probably widened to a full two percentage points last year, while final domestic demand expanded nearly four points faster on average than on the continent,'' Morgan Stanley economists Vincenzo Guzzo and Javier Rodriguez said in a note to investors this month. ``While this gap might narrow somewhat in 2006, we think that the country will continue to outperform by a wide margin; our current GDP forecast for this year stands at 3.3% versus 2.1% for the euro area.''

Perhaps they're ignoring the danger signals. Consumer prices in December rose 3.7 percent from a year earlier, the fastest pace in almost three years. That compares with just 2.2 percent for the euro area. The current account deficit widened to 5.3 billion euros (.4 billion) in October, the latest month for which figures have been published, as domestic manufacturers struggled to keep pace with cheap imports.

Rising Joblessness

And unemployment in December rose for a third straight month, suggesting economic growth may be easing.

The most significant worry is the property market. Bank of Spain Governor Jaime Caruana said this month there was a risk of a sharp drop in demand for Spanish real estate. The bank now says homes are overvalued by between 24 percent and 35 percent.

In 2005, average prices for new homes in Spain rose 10.1 percent, according to surveying company Sociedad de Tasacion SA. It expects more-modest increases in 2006. By recent Spanish standards, it was a sluggish market last year. Spanish house prices have surged almost eightfold since 1985, fuelled by low interest rates and rising employment. Nobody can say precisely when the housing boom will stop -- yet it must be soon.

Migrant Workers

Spain has been drawing in new people at a rapid rate. An analysis of the 2001 census last year, as Morgan Stanley puts it, ``literally re-wrote Spanish economic history.'' Inflows of migrant workers from Latin America and Eastern Europe have added more than 5 million people to the Spanish workforce in the past decade. All those building sites, it turns out, are crewed by Brazilians and Poles.

British or U.S. observers would find something spookily familiar about the Spanish boom. It has been pumped up by cheap money and high levels of immigration.

Spain has benefited mightily from the distortions created by the euro. While the European Central Bank held interest rates at a record low of 2 percent until last month to try and stimulate the economies of Germany and France, it created a construction boom in Barcelona and Madrid. All the demand has been compressed into the euro area's southern square. Spain has been living on borrowed rocket fuel -- great for the short-term, more worrying in the longer term.

At some point this decade, the Spanish economy will have to figure out how to generate sustainable growth of its own. That's far from impossible: Spain is bursting with bright young entrepreneurs, and now has an infrastructure that matches any in Europe. Still, it will be a lot harder than surfing on a housing boom fuelled by cheap money from the ECB.

Spain's economy has done well, yet it is far from a miracle -- and harder times may be just around the corner.

To contact the writer of this column:
Matthew Lynn in London at matthewlynn@bloomberg.net