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April 2013

The EuroFuture Project

Paper Series
Spains Hidden Strengths
by Toms Dupl del Moral
Spain today is often viewed as on the verge of collapse, with an unsustainable deficit and a broken economy, following the burst housing bubble and the financial crisis. It is depicted as uncompetitive, with socially explosive levels of unemployment and a bankrupt political class. Corruption appears rife, with financial scandals engulfing the governing party and even the royal family. Catalan separatism sparks speculation about the countrys disintegration. The February 25, 2013, issue of The New Yorker features an article by Nick Paumgarten entitled The Pain in Spain. The summary (an economy in meltdown), the heading The Hangover, and subtitle The euro zones fourth-largest economy has become its biggest liability all suggest that Spain is a country that New Yorker readers would do well to avoid.1 Such critical treatment of Spain in crisis is understandable. Spanish borrowers and eurozone lenders have pursued irresponsible policies over the past decade, with inadequate oversight. Now the countrys population is paying the price. Many young professionals and skilled workers are seeking a better future abroad in the absence of domestic job opportunities
1 http://www.newyorker.com/ reporting/2013/02/25/130225fa_fact_paumgarten

Summary: Spain today is often viewed as on the verge of collapse, with an unsustainable deficit and a broken economy, following the burst housing bubble and the financial crisis. There is no denying the depth of the present crisis. However, it is only part of the picture. In fact, Spain is open for business and attracts extraordinary amounts of foreign investment. This policy brief outlines Spains economic strengths.

in Spain. Every day, Spaniards question the competence of their leaders and the effectiveness of the measures they have put in place to deal with the crisis. There is no denying the depth of the present crisis. However, it is only part of the picture. Spains institutions and economy have proved their resilience since the overthrow of Francos dictatorship almost four decades ago. Spain is open for business and attracts extraordinary amounts of foreign investment. Its labor productivity is high and the country is home to several of Europes most competitive industries. Spain can be expected to rebound quickly once public finances and the banking sector have been stabilized. Street movements such as the Indignados, the Spanish version of Occupy Wall Street, expressed widespread public contempt for economic mismanagement and party financing scandals. This has taken a toll on the two main national political parties as well as regional parties. Ultimately, Spaniards will judge the legitimacy of their leaders by the results obtained in the fight against corruption. But this will take time. Scandals over the financing of political parties have created the misleading impression that Spain is

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ridden with corruption. In fact, Spain does rather well in international comparisons. In 2012, Spain scored 65th in the Transparency International corruption index, in the same range as Ireland, Austria, Portugal, and Israel, and just six points below France. It is safe to do business in Spain. There is a high degree of legal certainty; rules are respected and enforced. Tolerance for corruption in business, government, or even the royal family has fallen rapidly. Political parties are widely perceived today as self-serving machines, accepting illegal donations and evading taxes. This is viewed as unacceptable, given the plight of ordinary citizens, and there is a call for tighter controls in the future. Rating agencies such as Moodys, Fitch, or Standard & Poor, as well the European Commission and the International Monetary Fund, have highlighted the weaknesses of the Spanish economy. The government has approved a drastic program of reforms to reduce the role of the state and the coverage of social benefits. The European Central Banks declared willingness to take any measures needed to maintain the stability of the eurozone has brought down interest rates and restored confidence in Spains solvency. Still, austerity, especially the enforcement of social cuts while banks receive vast amounts of taxpayers money, is increasingly hard for the Spanish people to swallow and is the subject of constant debate and demonstrations. Recent expressions of Catalan separatism owe much to the crisis. This movement remained muted during periods of economic growth. A referendum on independence will take time to arrange, and meanwhile signs of economic recovery should start to appear. So far, Catalans have not had to squarely face the consequences of separation, including questions about EU membership. When they do, their views may shift. Spains current travails tend to obscure its underlying strengths. It is the fourth largest eurozone country, measured by population and the size of its economy. It has the fifth largest economy in the EU as a whole. The Spanish economy is highly diversified. Inflation is stable and moderate.2 Household debt is high, but the ratio of household debt to disposable income is more favorable than in
2 Fitch, February 22 report; IMF, 27 July 2012 Public Information Note on 2012 Article IV consultation with Spain

Germany or Italy and close to that of France.3 Households are net creditors.4 The Spanish tourism industry has remained strong, despite the crisis. Spain received over 57 million tourists last year.5 There is considerable scope to develop both upmarket and mass tourism through improved services. Spanish tourism is highly competitive and can be an important source of economic growth in the future. Tourism, however, is only part of Spains economic reality. Spain has excellent infrastructure (roads, railways, airports, maritime transport), financed from tax revenues and supplemented by EU structural funds. This is one of Spains key strengths, allowing businesses to operate across the country. Spanish infrastructure companies are very competitive.6 Seven of the top ten infrastructure companies worldwide are Spanish, and they are present in many countries, including the United States.7 In addition, Spain has a highly qualified workforce. Thirtynine percent of Spains 25 to 34 year olds have a university degree.8 Successive governments have made education a priority. While it is among the sectors affected by spending cuts, there is widespread awareness of the need to maintain educational standards. Three of the worlds top 20 business schools are in Spain. Only the United States and the U.K. have more.9 Spain is a crucial entry point for the economic relationship between the European Union and rapidly emerging Latin American markets, where Spain is the second largest foreign investor. Spain has the third highest outwards FDIto-GDP ratio globally,10 twice as much as the United States or Italy and four times as much as Japan.11
3 Jos Mara Beneyto, El Pas, April 27, 2012 4 Fitch, February 22 report 5 Institute of Tourism Studies, Ministry of Industry, Energy and Tourism, Government of Spain, Border Tourist Movement Survey December 2012 6 Consejo Empresarial para la Competitividad, Fortalezas y perspectivas de la economa espaola (Strengths and Perspectives of the Spanish Economy), July 2011 7 Foro de Marcas Renombradas, Atlas of the Leading Brands of Spain, Volume 2, Madrid 2013 8 Fortalezas y perspectivas de la economa espaola 9 Ibid 10 Total world FDI in Spain 2007-2012: 165 billion; total outwards Spanish FDI 20072012: 275 billion (Secretara de Estado de Comercio, Government of Spain, Madrid, 2012) 11 Fortalezas y perspectivas de la economa espaola

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Starting from a long decline just after joining the euro, the Spanish economy has experienced yearly improvements in competitiveness since 2008, built on strong productivity gains (both in terms of output per worker and hour of labor12). Since the beginning of the crisis, Spain has maintained its share of world exports in goods (particularly capital goods and manufactures13) and has increased its share of world exports of non-tourism services by 40 percent. Spain is the seventh global recipient of FDI. The ratio of FDI to GDP in Spain is twice as high as in Germany or Italy. Over 10,000 foreign companies, including 75 of the top 100, are established in Spain, many with strong research and development units. There were 430 international investment projects in Spain in 2011, ahead of Japan or Italy and nearly four times as many as in the Netherlands. Spains labor market is increasingly flexible. Unit labor costs have decreased by 5 percent since 2008 and are now 30 percent below the EU average.14 Three out of five worldwide flights use Spanish navigation systems.15 This reflects Spains leading position in the field of transport and logistics, including aerospace, high speed trains, and shipping, using innovative Spanish technology and manufacturing systems. Spain is among the ten largest world car manufacturers and the second largest in Europe. It is number two in the world in the field of desalinization. The top global retail fashion company, Inditex, is Spanish. Spain is a world leader in renewable energy, especially wind and solar, with three of the worlds top ten companies in this sector.16 Spanish innovation is also prominent in sectors such as biotechnology and pharmaceuticals, with many small and medium-sized hi-tech companies. Although the banking sector still requires considerable restructuring, some

Spanish banks and insurance companies rank amongst the most profitable internationally.17 This summary of the underlying strength and resilience of Spains political system and economy helps to put the current crisis into perspective. Spains diversified economy and comparative advantages should enable it to return to economic growth after the current long and painful process of adjustment ends. Spains underlying assets are the results of decades of individual initiative, creativity, and entrepreneurship. These assets may have been obscured by the real estate bubble and the banking crisis, but they have not gone away.
17 Ibid

About the Author

Toms Dupl del Moral was the Director for the Americas for the European External Action Service from March 2011 until his retirement in February 2013. He joined the European Commission in 1989, starting as a desk officer for Palestine and Lebanon and moving up to director for Latin America in 2004 and director for North Africa and the Middle East in 2007. He has a degree in law (1970) from the Universidad Complutense de Madrid and a masters degree (1983) and a Ph.D. (1985) in Sociology from the University of Wisconsin, Madison.

About The EuroFuture Project

The German Marshall Fund of the United States understands the twin crisis in Europe and the United States to be a defining moment that will shape the transatlantic partnership and its interactions with the wider world for the long term. GMFs EuroFuture Project therefore aims to understand and explore the economic, governance and geostrategic dimensions of the EuroCrisis from a transatlantic perspective. The Project addresses the impact, implications, and ripple effects of the crisis in Europe, for the United States and the world. GMF does this through a combination of initiatives on both sides of the Atlantic, including large and small convening, regional seminars, study tours, paper series, polling, briefings, and media interviews. The Project also integrates its work on the EuroCrisis into several of GMFs existing programs. The Project is led by Thomas KleineBrockhoff, Senior Transatlantic Fellow and Senior Director for Strategy. The group of GMF experts involved in the project consists of several Transatlantic Fellows as well as program staff on both sides of the Atlantic.

12 IMF, July 27, 2012 Public Information Note on 2012 Article IV consultation with Spain: productivity growth supported by labor shedding and steady decrease in unit labour costs in manufacturing from 2010 on; Jos Mara Beneyto, El Pas, April 27, 2012 13 Maribel Nez, ABC Economy, June 26, 2012 14 Fortalezas y perspectivas de la economa espaola 15 ILS (Instrumental Landing System), DME (Distance Measuring Equipment) and DVOR (Doppler VHF Omni Range Radio) systems developed by Indra, a Spanish technological company. 16 Atlas of the Leading Brands of Spain