Spain is set to usurp Germany as the strongman of Europe, due to the increasing competitiveness of its exports, say Morgan Stanley analysts, who think fiscal rebalancing will continue in the country despite its current political turmoil.
"Spain, where unit labor costs are falling due to recession and reforms, and where exports performance is strong, is on its way to become the euro area's next Germany," wrote analysts Joachim Fels and Sung Woen Kang in a weekly note on the global economy.
"Germany, helped by super-low interest rates, rising wages and inflating property prices, will see domestic demand improving and its external competitiveness deteriorating."
Fels told CNBC.com it would take three-to-five years for Spain to rival Germany as an export-led economy, due to the time lag before fiscal and structural reforms are felt.
He said that labor costs will remain low in Spain even when it recovers from recession, as "unemployment will still be high for years to come."
But Moorad Choudhry, a professor at Brunel University, disputed Fels's view that high unemployment benefited Spain's economy.
"There is more to productivity and competitive position than unit labor costs. If there wasn't, we could observe Bangladesh's average wage cost of one dollar a day and conclude that it will overtake Germany in the export league table," he said.
He added that Spain's economy has "eight or nine" major weaknesses that must be addressed, on top of export competitiveness.
"The Spanish economy suffers from bottlenecks on the supply side, labor market rigidity, stifling bureaucracy, heavy weight real-estate loan losses still to be recognized on bank balance sheets and an excessive social welfare bill, which is why I would not rush to suggest that Spain is the new Germany."
"The economic situation remains very challenging, with very high and rising unemployment, gross domestic product contraction, and a need to reduce large stocks of internal and external debt," the European Commission and the ECB said in a joint statement issued after the review.
Spain's gross domestic product fell 1.8 percent in the fourth quarter from a year earlier, according to preliminary data from the National Statistics Institute last month.
However, Fels said his clients concurred with his upbeat take on the Spanish economy. On Tuesday, ECB President Mario Draghi told reporters at a news conference in Madrid that Spain was making good progress towards economic recovery.
"There is now some tangible evidence to support the thesis - car manufactures like Ford (NYSE:F) and Renault (Euronext Paris: RNO-FR) moving production to Spain for example," Fels told CNBC.com.
Ford announced last year that it was increasing production in Valencia, Spain, while closing two U.K. factories and a plant in Belgium. Meanwhile, Renault said it would hire more workers and increase production at its Palencia and Valladolid plants in Spain.
Some analysts are concerned however that political uncertainty in Spain, stemming from corruption allegations leveled against Prime Minister Mariano Rajoy and other senior figures in the governing People's Party (PP), could inhibit progress in reforming the economy.
(Read More: Spain's Mariano Rajoy Denies Corruption Charges)
"Public confidence in the government may not recover. The scandal could prove to be a turning point in the public acceptance of fiscal consolidation," said AlexWhite, a European economist at JPMorgan, in a research note.
"Public anger will clearly make it more difficult for the Spanish government to sell the need for ongoing fiscal adjustment and structural reform. This will make the government's position significantly more difficult.
"Events since the last election have taken a major toll on the PP's poll ratings and there will be increased caution about any steps that could exacerbate its problems further."
(Read More: Expect Long-Term Damage in Spain: JPMorgan)
Fels disputed the impact of the scandal. "True, the talk and the headlines in Madrid have been dominated by the corruption allegations against the government last week. However, hardly anybody I met [in Madrid] believes this has the potential to bring down the government or reverse the policy course," he said.
-By CNBC's Katy Barnato
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