Spain Going Places

William Chislett

Going Places

William Chislett was born in Oxford in 1951 and reported on Spain’s 1975-78 transition to democracy for The Times.

Between 1978 and 1984 he was based in Mexico City for The Financial Times and in 1986 he returned to Madrid. He has written books on Spain, Portugal, Chile, Ecuador, Panama, Finland, El Salvador and Turkey for Euromoney Publications.

The Writers and Scholars Educational Trust published his The Spanish Media since Franco in 1979. Banco Central Hispano published his Spain: At a Turning Point in 1994, and Spain: The Central Hispano Handbook, a yearly review, between 1996 and 1998. Banco Santander Central Hispano published his Spain at a Glance in 2001. The Elcano Royal Institute published his book The Internationalization of the Spanish Economy in 2002, Spanish Direct Investment in Latin America: Opportunities and Challenges in 2003 and The United States and Spain: In Search of Mutual Rediscovery in 2005 (all three are freely available as PDFs at www.realinstitutoelcano.org). He covers Spain for the Institute in a monthly article called Inside Spain and writes the piece on Spain for the Annual Register (founded in 1758 by Edmund Burke). He contributed to the book produced by the German Presidency of the European Union to mark the 50th anniversary of the Treaty of Rome. He has been a visiting scholar at the King Juan Carlos I of Spain Centre, New York University and has spoken about Spain at the universities of Harvard and Princeton in the United States and Bosphorous and Bilkent in Turkey. He is married with two sons.

Front cover photograph: Getty images.

Some comments on previous books on Spain: For up-to-date information and perceptive analysis presented in an elegant and incisive style, academics, economists, journalists and Hispanophiles in general are in William Chislett’s debt.

Paul Preston Stylish and impressive.

Eric Hobsbawm My staff found it to be an extremely valuable resource.

Richard Gardner, former US Ambassador to Spain An excellent book, which provides a detailed and well-documented account.

Kenneth Maxwell, Foreign Affairs One of the great attractions is the author’s capacity to gather, analyze and synthesize the most significant economic information and explain its implications concisely and directly.

Guillermo de la Dehesa, President of the Centre for Economic Policy Research, El País Crisply written and superbly well organised, it is a mine of information for businessmen, journalists, academics and indeed anyone interested in the country.

Edwin Williamson, King Alfonso XIII Professor of Spanish Studies, Oxford University.

Those who want to know what is going on in Spain today in the economic sphere cannot do better than to read Chislett’s excellent guide.

Alex Longhurst, Journal of Iberian Studies No one surveys the data more comprehensively, digests it more efficiently, relates it more lucidly or presents it with more critical intelligence.

Felipe Fernández-Armesto

William Chislett

Going Places

Published by Telef贸nica, S.A. Copyright: William Chislett

The information contained herein has been compiled from sources believed to be reliable but, while all reasonable care has been taken to ensure that the information is not untrue or misleading at the time of publication, Telef贸nica makes no representation that it is accurate or complete and it should not be relied upon as such. All opinions and any mistakes are solely those of the author.

Free copy. No sales allowed.

For Emilio Lamo de Espinosa and Antonio Muñoz Molina, who grew up under the Franco dictatorship, and my sons, Tomás and Benjamín, who grew up in Spain’s democracy.

Spain is not so different, so special as it is manipulatively said to be. We must stamp out once and for all the idea that Spain is an anomalous country ... a case apart, an exception that justifies any action.

Julián Marías, philosopher and sociologist (1914-2005)

Spain is different.

Tourism slogan in the 1960s

Spain Asturias

Autonomous Regions

Basque Country

Cantabria

La Rioja Navarra

Galicia Catalonia Castile and Leon 0 0

50

Aragon

100 kilometers 50

100 Miles

Madrid

Extremadura

Valencia

Castile La Mancha

Balearic Islands

Andalusia

Murcia

Canary Islands

Oviedo Santander

Major Cities

La Coru単a

Bilbao Pamplona

Santiago Leon Burgos

Zaragoza

Valladolid

Barcelona Tarragona

Salamanca Madrid Toledo Caceres

Ciudad Real

Badajoz

Valencia

Alicante Murcia

Cordoba Seville Granada Cadiz Gibraltar

Malaga

Almeria

Ceuta Melilla

Contents Introduction and Acknowledgements

Chapter 1 // Overview Immigration, 11; Demographics, 19; Taxation, 20; Welfare State, 23; Education, 25; Infrastructure, 29; Labour Market, 30; Political Scene, 34; The Regions, 45; Foreign Policy, 50; Society, 57

Chapter 2 // The Economy General Government Budget, 64; Inflation, 66; Impact of EU Funds, 67; Competitiveness, 68; The Current Account Deficit, 71; R&D, 73; Foreign Trade, 74

Chapter 3 // Main Economic Sectors Agriculture, 79; Auto Industry, 82; Construction, 83; Tourism, 87; Water, 89; Energy, 93; Telecoms, 97; Banking, 101; Stock Market, 106

Chapter 4 // The Emergence of Spanish Multinationals Telefónica, 116; Repsol YPF, 118; Gas Natural, 121; Santander, 121; BBVA, 124; Endesa, 125; Iberdrola, 127; Unión Fenosa, 128; Gamesa, 129; Ferrovial, 130; Acciona, 131; ACS, 131; FCC, 133; Sacyr Vallehermoso, 134; OHL, 134; Abengoa, 134; Acerinox, 134; Agbar, 135; CAF, 135; Cortefiel, 135; Ebro Puleva, 135; Iberostar, 135; Indra, 136; La Seda de Barcelona, 136; Mapfre, 137; Metrovacesa, 137; Mondragon Cooperative Corporation, 137; NH Hoteles, 138; Prisa, 139; Prosegur, 139; Roca, 139; Sol Meliá, 140; Antolin-Irausa, 141; Inditex, 141; Pronovias, 142; Talgo, 142

Chapter 5 // Spanish Direct Investment in Latin America Banking, 154; Construction and Infrastructure, 158; Electricity, 159; Manufacturing, 160; Media and Publishing, 160; Oil and Natural Gas, 160; Telecommunications, 162; Tourism, 166; Water, 166

Chapter 6 // Spanish Direct Investment in Europe, the US and Asia Europe, 169; Portugal, 175; US, 176; Asia, 184

Chapter 7 // Foreign Direct Investment in Spain Main Investor Countries, 192; Importance in Exports, 198; Sectors of Opportunity, 198; Spain as a Hub for Latin American and European Business, 199; Prospects, 200

Chapter 8 // An Image out of Sync with the Country’s Reality Chapter 9 // Gathering Clouds Appendices 1. The History of Spain in a Nutshell 2. Basic Statistics, 1975-2007 3. The Lisbon Strategy of Economic and Structural Reforms, Rankings and Scores Useful Internet Addresses Bibliography

Introduction and Acknowledgements When I first came to Madrid as a journalist in 1974, the twilight year of the Franco regime, a colleague twice my age in London asked me whether Spain produced cars. At that time I knew next to nothing about the country, but I did know that it manufactured cars (more than 700,000, making it the world’s ninth-largest producer).

Almost 30 years later, in 2003, when Spain was producing around two million cars and was the eighth-largest manufacturer, José María Aznar, the then prime minister, visited the ranch in Texas of President George W. Bush and before seeing Bush chatted with one of his close advisors. The conversation went as follows: “And what is the chief product exported by Spain?” “Cars,” replied Aznar. “No, I am asking about the number one product that Spain exports.” “Cars,” repeated Aznar. “No, no, what I want to know is which Spanish product sells most successfully abroad.” “Yes, cars, cars,” repeated an exasperated Aznar.1 In 1976 my wife and I bought a ruin of a cottage in a primitive village in Castile-La Mancha, the region where the novel Don Quixote by Miguel de Cervantes takes place. The village had no running water, 6

largely unpaved streets, making a phone call involved going through an operator who was the daughter of one of the bar owners, the primary school was rundown, and the nearest place where you could buy a newspaper was 20km away. For many years now, we have had running water, all the streets are paved, there is an automatic telephone exchange, a modern primary school and health centre and the local bakery sells newspapers. In the distance, on a hill overlooking the village’s big reservoir, 25 100-metre-high wind turbines that look like a modern version of the giant windmills Don Quixote tilted at in a famous scene of the novel were recently installed for local electricity needs. Spain is the world’s second-biggest producer of wind energy after Germany and slightly ahead of the US. Spain has been transformed in many ways.Yet it is surprising how little is still known about the country in the rest of the world other than its mass tourism, bullfighting, flamenco and the siesta – and that it is home to some of the world’s top football clubs: Real Madrid and FC Barcelona. This image is out of sync with reality.

The level of ignorance, however, is nowhere near as deep as it was when Dr. Samuel Johnson said in 1761 that “no country is less known to the rest of Europe”, but it is still fair to say that the world is largely ignorant of the full scope of Spain’s economic, political, social and cultural transformation. The stereotyped images persist. How many people, for example, know that many Britons now phone, switch on a light, bank, travel by Tube, fly out of an airport, turn on a tap or flush the toilet courtesy of several Spanish companies that have spent more than €60 billion over the last couple of years buying companies in the UK? It was Dr. Johnson who said that, “When a man is tired of London, he is tired of life; for there is in London all that life can afford.” The same can now be said of Madrid, Barcelona, Seville and other vibrant Spanish cities.

As this book is written for a foreign audience, I have given as much background as I believe it useful in order to put Spain’s successes and failures into an international context and, wherever possible, I use comparative statistics. I have also avoided using technical jargon as much as possible in order for the book to reach a wider audience.

I am particularly grateful to Luis Abril, an executive vice-president of Telefónica and director of the Chairman’s Office, for commissioning this book. But for Luis, I might never have found a way to

1. Cited in “El valor de la ‘marca’ España”, by José Luis Barbería (El País, June 19, 2006).

Spain: Going places.

supplement my income after leaving the Financial Times in 1986 and returning permanently to Spain, after four years in Madrid, six years in Mexico and two in London. It was Luis who invited me for a coffee one morning in 1987 after I had sent a rather cheeky letter to the CEO of his bank pointing out some errors in the English translation of the bank’s last annual report. Luis immediately hired me to do that year’s report, and in no time I found myself translating more than I could cope with. I also appreciate the enlightened approach that Luis took towards the book when he commissioned it: no stipulations were made as to what should or should not be written – and, had they been, Luis knew I would not have accepted them.

I would also like to thank Ángel Alloza, Oscar Álvarez, Alberto Andreu, Glynis Andrews, Alfredo Arahuetes, Miguel de Avendaño, Terry Baker-Self, José Luis Barbería, Paul Budde, Carmelo Calvo Ridruejo, Jaime Carvajal, Xavier Coller, Julián Cubero, Jesús de Blas Calvo, Guillermo de la Dehesa, José Luis del Valle, Matthew Desoutter, Juan Encinas, Felipe Fernández-Armesto, Humberto Figarola, Ana García, Aurora García, Domingo García, Isabel García Mora, José Ramón García Viches, Antonio Garrigues, William Gartland, Christopher George, Ian Gibson, Luis Gómez Cid, José Luis González Vallvé, Ferdi and Bubi Grafe, Antonio Hernández, Pablo Hernández de Cos, Chris Hickey, John Hooper, Paul Isbell, Gabriel Jackson, Henry Kamen, Paul Kennedy, Pablo López Gil, Matilde Madrid, Carlos Malamud, Ángel Martín Acebes, David Miles, Sara Mirete, Cristobal Morales, José Morales, Mariano Morcate, Valeriano Muñoz, Aránzazu Mur, Javier Noya, Dan O’Brien, Jaime Otero, Miguel Otero, Philip Pettit, Charles Powell, Paul Preston, Bill Reinhardt, Beatriz Rose, Rickard Sandell, Teresa Sanjaume, Javier Santiso, Miguel Sebastián, Fidel Sendagorta, Tim Simmons, Eric Southworth, Federico Steinberg, Jeremy Treglown, Giles Tremlett, Javier Valles Liberal, Benito Vera, Martin Wolf and Pedro Zamorro.

I am very grateful to Fernando Fernández, rector of the Antonio de Nebrija University, Madrid, and Mauro Guillén, who holds the Dr. Felix Zandman Endowed Professorship in International Management at the Wharton School of the University of Pennsylvania for reading the manuscript and making suggestions.The text was copiously edited by Thomas Dauterman. Photography by Bob Masters (pg 8, 60, 78), Tau Design and Getty Images.

William Chislett Madrid and Buendía, January 2008 chislett@arrakis.es

7

Chapter 1: Overview

8

Santa Caterina market, BARCELONA. Architect/s: Enric Miralles/Benadetta Tagliabue EMBT, 1997.

Just off the Ramblas in the center of Barcelona, this market was rejuvenated with a striking design by EMBT. The roof is a collage of tiles with a gamut of colours representing the fruit sold within.

Spain: Going places.

Spain is walking tall .

2

In 30 years it has moved from a

dictatorship to a fully consolidated democracy. Since the death in 1975 of General Francisco Franco, who won the country’s 1936-39 Civil War, its formerly autarchic economy is now the seventh-largest in the developed world on the basis of market exchange rates (the eighth globally if China is included, see Exhibit 1.1). During this period the Spanish economy grew 150% in real terms (compound annual growth rate of 3%). It is one of the most open economies (in terms of exports and imports as a percentage of GDP), accounts for 2% of world trade and is the sixth-biggest net investor abroad (its leading multinationals are major players in Latin America and several European countries, including the UK). In less than a decade, it has received more than 4.5 million immigrants, increasing its population by 10% (a proportionately greater increase than any other European country) and sharply reversing the previous trend of net migration. Spain has been rapidly transformed from a semi-rural country to an urbanised one – something that took more than 100 years in northern European countries.

Thanks to the much improved healthcare system and general conditions of life, Spaniards’ average life expectancy has risen from 73.3 years in 1975 to more than 80 today, higher than Americans and Britons (77.5 and 78.5 years, respectively). Spanish women live the longest in the EU after the French (83 years on average compared with 76 in 1975). In the 2007 Human Development Index, drawn up by the United Nations, Spain was ranked 13th out of 177 countries, just behind the US and three places ahead of the UK. The index measures the average achievements in three basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary and tertiary schools; and a decent standard of living, as measured

by GDP per capita in purchasing power parity, which converts GDP into a common currency and produces a better comparison.

EXHIBIT 1.1 Nominal GDP in 2008 (US$ bn at market exchange rates and purchasing power parity) United States Japan China Germany United Kingdom France Italy Spain Russia Canada

MARKET EXCHANGE RATES 14,909 4,954 3,832 3,398 2,801 2,693 2,222 1,529 1,361 1,341

PURCHASING POWER PARITY* 14,574 4,365 12,587 2,604 2,317 2,162 1,909 1,436 2,055 1,281

Source: Economist Intelligence Unit forecasts.

2. Spaniards born in the last 20 years are also noticeably taller than their parents. According to a study by a Barcelona hospital, he or she is, on average, 3.5cm (about 1½ inches) taller.

9

Chapter 1: Overview

Many factors have contributed to this progress. The most significant catalysts have been Spain’s membership of the European Union since 1986 (when it was known as the European Economic Community) and being one of the founder members in 1999 of European Monetary Union (EMU) and the single currency, the euro, which became legal tender in 12 of the then 15 EU Member States as of 2002. After spending close to half the 20th century in isolation from Western Europe, Spain qualified, for the first time, to be in the vanguard of a European movement.3 Significant parts of the EU-15 had been under Spanish rule more than 450 years earlier. The political democracy required to be an EU member and the macroeconomic stability needed for EMU membership locked Spain into an unprecedented virtuous circle of noninflationary growth that has been above the EU average every year since 1995.

As a result of the long period of higher growth, Spanish GDP per capita moved 10

from 71.6% of the EU-15 in 1985 to 92% in 2007. In 2006 Spain’s GDP per capita overtook Italy’s (see Exhibit 1.2). Not surprisingly, Spanish adults are the most positive among the five largest EU nations about the effect that joining the EU has had on their country. More than half (53%) of respondents in a Financial Times/Harris Poll in March 2007 stated that life had got better, compared with 24% in Italy, 22% in Germany, 19% in France and 13% in the UK.

EXHIBIT 1.2 GDP per person, PPP* (EU-27=100)

Italy

Euro area

Spain

120 115 110 105 100 95

F O R E C A S T

90 1997

1999

2001

2003

2005

2007

2008

Source: Eurostat. * Purchasing-power parity

3. The victory of the allies in 1945 left the Franco regime very much of a pariah in the United States and Europe. Spain was officially neutral during the Second World War, but Franco helped Hitler and Mussolini in various ways. They had aided him in the Civil War. For example, the División Azul (Blue Division) served on the German side, mainly on the Eastern Front. The destitute Spain did not receive any aid from the Marshall Plan, which benefited almost all European countries outside the Soviet bloc, and was subjected to a trade embargo for several years. Not until 1953, when the regime signed the Pact of Madrid with Washington establishing US bases in Spain, did the country’s GDP recover to its

1935 (pre-Civil War) level. The Spanish philosopher José Ortega y Gasset (18831955) had prophetically said, “If Spain is the problem, Europe is the solution.”

It is striking that four Spaniards have won the Charlemagne Prize, the most prestigious award for distinguished service on behalf of European unification, in the last 35 years. They are the historian and philosopher Salvador de Madariaga (1973), King Juan Carlos (1982), Felipe González (1993), the Socialist prime minister between 1983 and 1996, and Javier Solana (2007), the EU’s foreign policy chief. In February 2005, Spain was the first country to approve the EU constitution in a referendum.

Spain: Going places.

Immigration When Bernardo, a shepherd in the village where this author has a second home, decided to retire a couple of years ago, the only person he could find to take over his flock was a Romanian. Several women from Latin America look after elderly people and three Paraguayans work in the village’s hotel. Today, even the smallest of places in Spain cannot get by without hiring immigrants.

It is a remarkable turnaround: the village’s many migrants, mainly in the 1950s and 1960s to urban areas of Spain or abroad, are commemorated by an oldfashioned leather suitcase sculptured in stone. Largely as a result of the building of a huge reservoir, for which agricultural land had to be expropriated, the village’s population shrank from 1,833 in 1950 to not much more than 500 as of 1981.

11

Spain has more than 4.4 million immigrants (5.2 million including naturalised citizens), 10% of its total population (2% in 1998), compared with a mere 165,000 foreigners with a residency permit in 1975 (0.4% of the population). As a proportion of the population, Spain’s figure is the highest in the EU, and the absolute increase in the total population between 1998 and 2006 was the biggest in the EU. This figure includes everyone, from the more than 760,000 Brits estimated to be living permanently in Spain (many of them retirees and legal immigrants by virtue of being members of an EU country; EU citizens do not have to apply for a residence permit), to North Africans who illegally cross the Straits of Gibraltar in rickety boats, sub-Saharans who cross the Atlantic from Senegal and other West African countries to the Canary Islands in cayucos (many of whom die en route) and Latin Americans who entered Spain either directly by air or by various other means after entering another Schengen country (see Exhibit 1.3).

EXHIBIT 1.3 Ten Years of Immigration (‘000)

Naturalised population1 Foreign population Total Immigrants Population born in Spain Total population

2007 732 (2%) 4,483 (10%) 5,214 (12%) 39,903 (88%) 45,117

2006 693 (2%) 4,144 (9%) 4,838 (11%) 39,871 (89%) 44,709

2005 661 (1%) 3,731 (9%) 4,391 (10%) 39,717 (90%) 44,109

2004 659 (1%) 3,034 (7%) 3,694 (9%) 39,504 (91%) 43,198

2003 638 (1%) 2,664 (6%) 3,302 (8%) 39,415 (92%) 42,717

2002 616 (1%) 1,978 (5%) 2,594 (6%) 39,244 (94%) 41,838

2001 599 (1%) 1,371 (3%) 1,969 (5%) 39,148 (95%) 41,117

200 549 (1%) 924 (2%) 1,472 (4%) 39,027 (96%) 40,500

(1) The naturalised population are those born abroad who live in Spain and have Spanish nationality. Percentages rounded to the nearest full number.

Note: The figures for 2007 are preliminary.

Source: INE (National Statistics Office) and the Padrón Municipal (those registered with their town hall at January 1 of each year).

1999 510 (1%) 749 (2%) 1,259 (3%) 38,943 (97%) 40,202

1998 537 (1%) 637 (2%) 1,174 (3%) 38,679 (97%) 39,853

Chapter 1: Overview

The frontier between Morocco and Spain, which has two enclaves on the North African coast (Ceuta and Melilla), is the most unequal in the world in per capita GDP terms – more so than the one between Mexico and the US. Spain’s average income per head is 15 times higher than Morocco’s (based on nominal GDP) and 5.4 times more in purchasing power parity (PPP) terms.

Average US income, in both nominal and PPP terms, is ‘only’ six times more than Mexico’s. In October 2005 several hundred sub-Saharan Africans, armed with makeshift ladders, stormed Ceuta and Melilla. The assaults, which left 11 people dead as security forces opened fire on the assailants, occurred when the Spanish authorities were doubling the height of the razor-sharp fences.

Television and newspaper pictures of desperate sub-Saharans with their faces pressed against the fences separating the enclaves from Morocco horrified Spaniards and brought home to them the scale of the problem facing their 12

country. Morocco abandoned hundreds of them in remote desert areas without food or water until, as a result of international pressure, they were rescued and shipped out of the country on buses. Spain’s agreement with Morocco on the repatriation of illegal immigrants, which had been dormant since it was signed in 1992, was activated.

Immigration is a new phenomenon in the history of Spain, historically an intolerant country that for centuries drove its citizens into exile for religious, political or economic reasons. Between 1492, with the massive expulsion of Jews and Muslims, and 1975, when the Franco dictatorship ended, around three million Spaniards left the country under political or economic pressure, without counting the very many others who formed part of a regular process of emigration4. Spain, according to the eminent historian Henry Kamen, is the “only European country to have attempted to consolidate itself over the centuries not through offering shelter but through a policy of exclusion.”5 All the more remarkable then is the country’s swift transformation, in less than two decades, from a net source of emigrants to a big recipient of immigrants and the creation of a much more heterogeneous and tolerant nation. And this has happened at such a speed that Spaniards have hardly realised it. It is estimated that more than 50 languages are now spoken on the playgrounds of Spanish schools (200 in New York’s).

The face of Spain is changing at a brisk pace. The country was a comparatively racially homogeneous society until the mid-1990s, when immigrants began to arrive in large numbers – a consequence of, and now a contributor to, Spain’s prosperity. Almost 18% of total births in 2005 had a

4. See the preface of The Disinherited by Henry Kamen (Allen Lane, 2007). It is interesting to note that many of the most famous works of Spanish literature, painting and music were produced by Spaniards living in exile.

5. Ibid.

Spain: Going places.

foreign father or mother, more than double the rate in 2000. This is a striking twist to the country’s history: Spain conquered Latin America in the 15th and 16th centuries and created the term mestizo – people of mixed European and indigenous Amerindian ancestry – and today Latin Americans, who as a whole account for the largest share of Spain’s immigrants (roughly 1.5 million), are in their own way ‘conquering’ Spain and marrying Spaniards.

Spain, in particular Madrid, is becoming a melting pot of the Hispanic world, just like the United States (especially New York and Miami), but on a much smaller scale (the number of Hispanics legally in the US is roughly the same as Spain’s population of 44 million).

Whereas between 1960 and 1973, more than one million Spaniards emigrated as ‘guest workers’ (as the Germans called them), now Spain is the favoured country in Europe for immigrants in search of a better way of life.

According to an FT/Harris poll in early 2007 conducted in the UK, France, Germany, Italy, Spain and the US, 17% of respondents said they would most like to work in Spain, ahead of the UK (15%) and France (11%). A total of 42% of Spaniards believed immigration was good for the economy, compared with 19% in the UK and France.

Were it not for its immigrants, Spain would not be able to harvest its strawberries in Huelva, collect its pears in Lérida, sustain its construction boom, maintain hotels in tourist areas, find nannies to look after children and people to care for the elderly in their homes. Large landowners would also find it difficult to keep horses that require livery, as many of the stable boys today are Moroccan. A significant number of immigrants are also serving in Spain’s armed forces, three of whom serving in a peacekeeping mission were killed in the Lebanon in 2007 and one in a mission in Afghanistan. So far, immigrants have not taken away jobs from Spaniards; they are doing the menial work that Spaniards are no longer willing to do. Over the past ten years, Spain’s labour force has increased significantly, and yet the unemployment rate has been halved to just below 8%, the lowest level since 1978, albeit with the EU’s largest proportion of workers on temporary contracts (more than 30%). Even so, this is a remarkable achievement. Apart from the special cases of Luxembourg and Switzerland, Spain is the OECD country whose labour force includes the highest proportion of foreign workers (more than 10%). The majority of immigrants are aged between 16 and 34 and so provide considerable support for economic growth. Spain’s annual growth rate in 2001-05 for those aged between 15 and 64 was 1.5%, its highest ever in recorded history (1.2 points of which was due to immigrants).

The influx of immigrants has increased Spain’s per capita income, made the labour market more flexible and reversed the previously

13

Chapter 1: Overview

projected steep decline in the country’s population. In 1996 the United Nations forecast that Spain’s population would sharply fall by 2050 to around 28 million because Spanish women were not producing enough babies. The current forecast by Spain’s Statistics Office (INE) is that it will reach just over 52 million (see Exhibit 1.4) because of the influx of immigrants and a fertility rate that is no longer declining (2.8 children born per woman in 1978, 1.2 in 2000 and 1.3 as of 2004, although this is still one of the lowest rates in the world and below the ‘replacement rate’ of 2.1 children per woman needed to maintain a stable population). One reason for the increased fertility rate is that immigrant women tend to have more children, at least the first generation ones. However, the behaviour of second-generation immigrants in matters such as the number of children to have tends to be similar to that of the native population.

14 EXHIBIT 1.4 Spain’s Population, 2000-2050

INE (2005)

UN (1996)

}

million people

60 52

Difference: 24 million

44 36 28 2000

2005

2010

2015

2020

2025

2030

2040

2050

Source: INE (National Statistics Office) and the UN Population Division.

Immigrants were responsible for half of Spain’s average annual GDP growth of 3.1% between 2001 and 2005, compared with 12% of the 4.1% growth between 1996 and 2000, according to a report by the prime minister’s economic office. Without these immigrants, per capita income in 2001-05 would have been €623 lower (€124 a year). Immigrants’ home countries are also benefiting: the remittances of €3.7 billion in 2006 to Latin America were much higher than Spain’s total net official development assistance (ODA) to all countries (€3.0 billion). The immigrant phenomenon has provided very positive supply and demand shocks: on the supply side, it has constituted a hidden labour market reform by making Spain’s market more flexible and increasing geographical mobility (as well as keeping a lid on wage growth, as immigrants are less demanding than native workers); on the demand side, the population has surged, and with it the size of the domestic market, with the consequent multiplying effects on the economy and employment.

Immigrants have also changed Spain’s religious map. Although Catholicism remains the majority religion, there are now around one million

Spain: Going places.

Muslims (2.6% of the population and the fourth-largest absolute number in the EU6), 1.2 million evangelicals, 600,000 members of Orthodox Churches (Romania, Bulgaria and Russia) and 48,000 Jews (mainly from Latin America), according to the Registry of Religious Institutions. Although under the 1978 post-Franco constitution Catholicism is no longer the official religion, the Church remains in a very powerful position, particularly in education. In 2007 it was still the only faith that taxpayers could give money to in Spain via their annual tax return.

Bringing illegal immigrants out of the black economy and into the regulated one was a key factor behind the Socialists’ extraordinary regularisation in 2005, which turned some 560,000 irregular immigrants into legal ones. Although this was the decent and humane thing to do, it would have been wise for Madrid to have consulted with other EU Schengen Treaty countries allowing passport-free travel, particularly neighbouring France, whose government criticised Madrid for encouraging clandestine immigration by creating a ‘magnet effect’.7 Once legalised, these ‘regularised’ immigrants (who had to prove they had lived in Spain for a year and had a job) could move freely within Schengen countries. Regularisations by both the current Socialist government and the previous one of the conservative Popular Party have benefited 1.2 million immigrants since 1986, the thirdlargest number in Europe and the United States. Despite the regularisation, there is still a large number of illegal immigrants in Spain.

Under the previous law, illegal workers were obliged to obtain contracts from companies or individuals as a condition for seeking work and residency permits. However, under sometimes contradictory regulations, many could not get a work permit unless they had a job, and could not get a job without a work permit. The amnesty put an end to this Catch-22 situation, gave the immigrants basic rights and increased tax and social security revenues by bringing them and their employers into the official economy.

Spaniards have so far been remarkably tolerant of immigrants: there has been no backlash against immigrants nor the creation (yet) of an antiimmigrant and xenophobic party along the lines of France’s or Britain’s National Front. The only really serious anti-immigrant riots were at El Ejido in Almería in 2000, where hundreds of North Africans are employed in the plastic hothouses that produce Europe’s winter vegetables. Spaniards reacted with dignity to the bombs placed on commuter trains in Madrid in March 2004 by radical Islamists living in Spain that killed 191 people (a very large

6. Between 711 and 1492 large parts of Spain were under Muslim rule, including what was called Al-Andalus (the Arabic name given to the Iberian Peninsula by its Muslim conquerors).

7. Germany and the Netherlands were also critical of Spain and in 2007 undertook similar processes.

15

Chapter 1: Overview

number of whom were immigrants) and injured more than 1,8008. Should a far right party be formed, it could well start in one of the ‘nationalist’ regions, such as Catalonia, where there is already a large concentration of immigrants and calls for them to learn Catalan, or in areas where public education and healthcare are severely strained (overall, 66% of students go to state schools; 80% in the case of children of immigrants). Over the long term, nationalist politics in autonomous regions such as Catalonia could well be diluted by immigrants. Indeed, according to a ludicrous conspiracy theory held by the most nationalistic quarters, the central government has been permissive about immigration in order to achieve this.

There are reasons for believing, however, that Spain as a whole will not experience the kind of assimilation crisis that has hit France and the Netherlands. More than one-third of immigrants in Spain are Latin 16

Americans, who speak the same language as Spaniards and have a religious, cultural and historical affinity, and 11% are Romanians, who quickly pick up the language as it is similar to their own (see Exhibit 1.5). Latin Americans can apply for Spanish nationality after two years while everybody else has to wait ten years. As a result, they are gaining political power over other immigrant groups, who lag behind. Moroccans, however, have not integrated so easily: they alone account for around 25% of unemployed immigrants registered with job centres, compared with 8% for Ecuadorians and 7% for Romanians (roughly in line with the national average). Moroccans (officially numbering 576,344 at January 1, 2007) are the largest country group followed

by Romanians (524,995). Spain had the EU-27’s second-largest number of non-EU immigrants in 2005 (latest year available) and the seventh in terms of its percentage of the total population (see Exhibit 1.6).

EXHIBIT 1.5 Spain’s Foreign Population by Geographic Zone* EU-27 Rest of Europe Latin America Africa Asia North America Others Total

NUMBER 1,702,613 185,307 1,532,403 797,592 216,769 45,075 2,809 4,482,568

(*) Figures at January 1, 2007, based on foreigners registered with town halls.

Source: National Statistics Institute.

8. Between 2001 and October 25, 2007, 375 people were arrested in Spain for their alleged involvement in international terrorism activities.

% OF TOTAL 38.0 4.1 34.2 17.8 4.8 1.0 0.06

Spain: Going places.

EXHIBIT 1.6 Non-EU Immigrants in the European Union, Top 10 Countries (% of total population)* Germany Spain France United Kingdom Italy Greece Poland Austria Latvia Netherlands Total of all 27 countries

NUMBER 5,075,900 2,300,700 2,186,000 1,982,200 1,931,300 742,900 684,000 553,500 482,400 466,000 18,085,500

% OF TOTAL POPULATION 6.2 5.3 3.6 3.2 3.3 6.7 1.8 6.7 20.9 2.9 3.7

(*) Figures at January 1, 2005.

Source: Catholic University of Leuven.

Spain seems to be steering a middle path between the British approach toward assimilation, which has been to allow a multicultural model to evolve, and the French model, based on the ideas of the Revolution: everyone on becoming a French citizen accepts the same set of secular values. Neither of these approaches has worked satisfactorily, as riots by immigrants in the UK and France have shown. The real test of Spain’s tolerance will come when the booming economy slows down significantly, which it has to do at some point, and with it the intense job creation. Tolerance will also be put to the test when the children of the first generation of immigrants graduate from Spain’s universities and compete head on with Spaniards for the better jobs and do not seek the menial jobs their parents are doing.

So far, the net effect of the influx of immigrants has been very beneficial to the Spanish economy. To what extent can Spain keep on absorbing such a large number of immigrants? There is no clear answer to how many more immigrants Spain can comfortably receive, economically or politically. While politicians are becoming more prudent on the issue – opinion polls show that Spaniards are already worried about the large number and the pressures exerted on public healthcare and education – employers see significant room for more immigrants. In September 2007, the government began airing emotional television adverts across West Africa as part of its attempts to combat illegal immigration (see map). “My son left ... and we haven’t heard from him in eight months,” a distraught Senegalese woman says in one advert. It then cuts to a boy lying face down on the rocks, apparently drowned. The number of illegal immigrants detained after arriving in the Canary Islands rose from 875 in 1999 to 21,500 in 2006 and 6,659 in the first eight months of 2007.

17

Chapter 1: Overview

Key migrant routes from Africa to Europe

ITALY SPAIN CEUTA MELILLA LAMPEDUSA

MALTA

CANARY ISLANDS

MOROCCO LIBYA

WESTERN SAHARA

MAURITANIA

AFRICA

18 SENEGAL Source: Source:BBC. BBC.

The studies on immigration conclude that the impact on the wages and employment rates of Spanish workers has so far not been very significant.

One reason for this is that immigrants are much younger than the average Spanish worker and they have a lower level of education. They are generally more unskilled and their wages are lower. Around 21% of the immigrants who came to Spain between 2000 and 2006 had secondary school education, as compared with 32% in the case of Spanish workers.

As well as enabling the economy to grow more quickly, the contribution of immigrants to Spain’s social security system is one of the main factors for its current surplus (1.2% of GDP in 2006, up from 0.1% in 1999) and has pushed back the problem of financing the pension system, but probably only for a couple of years, as immigration in the long run will deepen the deficit unless the current system is reformed. Under the pay-as-you-go system, today’s workers pay for the pensions received by those who are retired. And those working today expect to enjoy the same benefit once they reach retirement age. It is unlikely, however, that they will.

There is considerable uncertainty about the level of future flows of immigrants. After all, no one predicted ten years ago that Spain would have as many immigrants today as it does, although it was clear there would be an influx as the country became richer.9 So far, Spain has coped well with the influx, underscored by its position in an EU-backed study that placed Spain and the 9. The UK was also taken by surprise when official figures released in August 2006 showed that 447,000 immigrants from Eastern Europe had registered to work in two years, far exceeding the government’s initial estimate of annual applications of no more than 5,000 to 13,000.

Spain: Going places.

other four states with the largest immigrant populations – the UK, Germany, Italy and France – in the top half of the ranking (see map). Only Sweden scored highly enough in the Migrant Integration Policy Index to be classed as a nation entirely favourable to promoting integration. Spain scored particularly well in labour market access (90%), reasonably in long-term residence (70%) and family reunion (66%), but not very well in political participation (50%), antidiscrimination (50%) and access to nationality (41%). Spain, the study noted, could meet best practice on labour market access with slight improvements to its eligibility rules and labour market integration measures, which both received the second-highest score of the 28 countries surveyed. It attained best practice on security of employment and rights associated.

Integrating migrants: Official attitudes across Europe

19

Note: researchers assessed laws in each country against a theorical “ideal” based on best practice across the EU.

0-100 101-200 201-300 301-400 401-500 501-600

SWEDEN

Worst Practice NORWAY

FINLAND

Best Practice ESTONIA

IRELAND

LATVIA UK

NETHERLANDS GERMANY

BELGIUM FRANCE

PORTUGAL

LITHUANIA

POLAND

CZECH REPUBLIC SLOVAKIA HUNGARY AUSTRIA

ITALY

SPAIN

SLOVENIA

SWITZERLAND

GREECE MALTA CYPRUS Source: Migrant Integration Policy Index, 2007.

Demographics Spain’s population began to rise rapidly starting in the year 2000 and is almost entirely due to the massive influx of immigrants as the fertility rate is still very low at 1.3 children per woman (less than half the rate in 1975, when General Franco died).10 The population rose by 3.59 million between 2001 and 2006, 10. In a bid to encourage natural population growth, in July 2007 the Socialist government proposed giving mothers €2,500 for every child born.

Chapter 1: Overview

2.77 million of them foreigners and the rest Spaniards. It grew at an annual average of 1.5% between 2001 and 2005, the highest rate in the EU-25 after Ireland and Cyprus, both tiny countries, compared to 0.4% between 1995 and 2000. The population density, however, at 83 inhabitants per square kilometre, is still well below the average of 123 for the Euro zone and 118 for the EU-15.

A vexing issue because of its ramifications throughout society, and one that will not go away despite the youthfulness of the immigrant population, is the overall ageing of Spain’s population. Today 17% of the total population is aged 65 or over, and this is forecast to reach 35% in 2050, three times higher than the proportion in 1975. Spain will have the third-oldest population among OECD countries in 2050, according to the latest data, only surpassed by Japan (39%) and Korea (38%). The ratio of inactive elderly to the total labour force is currently projected to increase from 38.2% in 2000 to 90.5% in 2050. This 20

would mean that for every elderly inactive person there would be only one person in the labour force. The sharp increase in this ratio is a Europe-wide problem, but substantially more acute in Spain (see Exhibit 1.7).

EXHIBIT 1.7 Ratio of Inactive Elderly to the Total Labour Force (%) France Germany Italy Spain Sweden United Kingdom OECD average

2000 36.4 33.3 42.5 38.2 31.9 30.8 24.8

2050 68.9 67.0 92.8 90.5 46.4 54.7 53.8

Source: OECD Factbook 2007.

Taxation Spain’s tax burden (total tax revenue as a percentage of GDP) doubled between 1975 and 2006 to 36%, bringing it into line with the OECD average (see Exhibit 1.8). The number of people filing annual tax returns in Spain increased from an insignificant number in 1975 to 17.6 million in 2006. The rapid growth in tax receipts went hand in hand with the accelerated creation of a welfare state.

Given the steep rise in the working population from the influx of immigrants, an economic boom that has lasted 14 years and has not yet petered out, and personal and corporate income taxes that have been higher than most European countries’, Spain’s tax burden should be larger.

Tax evasion and fraud remain high, although the tax agency has made considerable progress in fighting it. It is hard to quantify the extent of tax

Spain: Going places.

fraud and the size of the underground economy, but there is one revealing statistic that suggests it is considerable: in 2007, 26% of the total number of €500 notes in circulation in the Euro zone were in Spain, an abnormally high figure for a country whose GDP accounts for close to 12% of the zone’s total and its population for 14%. These notes, jokingly referred to as ‘Bin Ladens’ because, like the Al-Qaeda leader, no one has seen them, are commonly used in ‘black money’ transactions, particularly in the property market. When police raided the home of one of the people arrested in 2006 over a scam in two stamp-trading companies, they found €10 million in €500 notes in a wall behind freshly applied cement.

EXHIBIT 1.8 Total Tax Revenue (% of GDP), 1975 and 2006 1975 35.4 34.3 25.4 18.4 35.3 29.5

France Germany1 Italy Spain United Kingdom OECD average

2006* 44.5 35.7 40.8 36.4 38.6 36.0

(*) Provisional figures.

(1) Unified Germany beginning in 1991.

Source: OECD.

The first steps towards creating a modern tax system were taken in 1977, when parliament passed an elementary reform that unified the income tax system, applying the same tax assessment rules to wage earners and nonwage earners and, for the first time, outlawed tax evasion. The top marginal personal income tax rate was 65.5% in 1979-81, 68.4% in 1982-88, 56% in 1989-98, 48% in 1999-2002, 45% in 2003-2006 and 43% as of 2007 (see Exhibit 1.7). The corporate tax rate was also lowered as of 2007, from 30% to 25% for small and medium-sized firms and from 35% to 30% over two years for larger companies. The average corporate tax rate in 2007 for the EU-27 was 24.5% (35.3% in 1995).

EXHIBIT 1.9 Tax Rates in the European Union (%)

France Germany Hungary Italy Poland Spain United Kingdom

TOP MARGINAL INCOME TAX RATE 40.0 47.4751 36.0 43.0 43.0 43.0 40.0

(1) Increased by a 5.5% solidarity charge.

(2) In addition, a 4% surcharge applies.

Source: Garrigues.

CORPORATE TAX RATE 33.33 26.381 16.02 33.0 19.0 32.5 30.0

STANDARD VAT RATE 19.6 19.0 20.0 20.0 22.0 16.0 17.5

21

Chapter 1: Overview

Under the tax reform, effective as of 2007 and the third one since 1999, the tax code has once again been simplified by reducing the number of tax brackets to four and neutrality enhanced by uniform treatment of savings (18% rather than various rates depending on whether they are short- or longterm investments; the only exception is income from dividends, as the first €1,000 is exempt). While corporate tax has been lowered for the first time since 1995, all tax credits available to companies will be gradually phased out by 2011, except for the deduction for R&D spending and the reinvestment of profits in productive investment, and a different status has been artificially created for SMEs. The net effect, according to experts, will be to increase the tax pressure on larger companies.

However, a big difference remains between the still relatively high top marginal personal rate (43%) and the corporate tax rate on SMEs (25%). This 22

continues to make it attractive for individuals in high tax brackets to form small companies in order to reduce their tax payments.

Spain’s tax wedge (average personal income tax and contribution rates for a single person without dependents at 100% of the average wage) is higher than the OECD average and is only expected to be marginally affected by the reforms (see Exhibit 1.10).

EXHIBIT 1.10 Average Tax Wedge* Spain OECD-Europe OECD-Non-Europe OECD average

2000 38.6 41.2 21.4 37.9

2050 39.0 40.2 22.6 37.2

(*) Spain’s tax reform took effect as of 2007.

Source: OECD.

A new framework was also under discussion to incorporate the greater spending responsibilities of Spain’s regional governments, which now account for more than 50% of total public spending. The Basque Country and Navarre have their own distinct financing arrangements, and there is a common regime for the other regions based on transfers from the central government and on regions’ own tax-raising capacities, which they are loathe to use to any significant degree. Tax co-responsibility is an unresolved matter. Education and healthcare spending were fully devolved by 2002. Several regions, including Catalonia, one of the main engines of the economy, won greater tax and spending powers in 2006. The reform of the financing system is a very tricky issue and could open up a Pandora’s Box of tensions between the richer and poorer regions fighting for more revenue: the richer ones because they say they generate more and so should receive

Spain: Going places.

more, and the poorer ones because they say they need it to catch up and narrow their income gap.

Welfare State The Spanish welfare state was one of the last to arrive on the European scene. While most European governments were busy between 1960 and 1975 constructing pensions, unemployment benefits, health and housing schemes, etc, Spain’s social expenditure only represented 10% of GDP in 1970. But once democracy was consolidated, particularly after the Socialists came to power in 1982, Spain began racing to catch up and public spending soared (from 30% of GDP in 1977 to a peak of 47.8% in 1993 when the budget deficit reached 6.8% of GDP). In 1994 Spain’s social expenditure was 87.6% of that of the four largest EU countries (France, Germany, Italy and the UK), up from 62% in 1984, and in 2004 (latest year available) it represented just over 20% of GDP, down from a high of 23.2% in 1993 and still well below the EU-15 average of 27.6%. Spain’s social spending is lower in all elements apart from unemployment.

Income distribution is a lot less skewed as a result of the creation of a welfare state, the long period of high economic growth and very strong job creation. In 1974, the richest 20% of the population (top quintile) received 10.4 times more income than the poorest 20%; in 1990 this was down to 4.8 times. However, in 2005 their share was slightly higher at 5.4 times, compared with the EU-25 average of 4.9 times, according to Eurostat estimates. This widening of income distribution is due to the influx of immigrants in jobs paying very low wages.

The ageing of Spain’s population is causing the number of retired people to rise relative to the working population, putting pressure on parts of the welfare state. The proportion of elderly compared to the active population in Spain will double by the year 2040 (from 37% to 74%). Today, the state is balancing pension spending, relying on more than two contributors for every retired person. The advancement of population ageing will force it to do this with one contributor for every retired person. While Spain’s current capacity to balance pension expenditure is excellent, most indicators (both demographic and financial) under current population projections point to a deadline at around 2015-20.11 After that, Spain will either have to borrow money to cover its pension spending or seek alternative solutions, such as 11. The ageing of the Spanish population is dealt with in great detail by Rickard Sandell (www.realinstitutoelcano.org/analisis/272.asp and www.realinstitutoelcano.org/ analisis/289.asp).

23

Chapter 1: Overview

raising taxes or lowering benefits. Even in the most optimistic scenario based on various parameters, pension spending will increase to some 14% of GDP by 2050, 6.5 percentage points above recent levels. In the OECD’s view, the latest reforms, which include additional restrictions on partial retirement, are likely to have a limited effect. At the moment, the Social Security account is buoyant: a surplus (for the eighth year running) of 1.2% of GDP in 2006, while the Reserve Fund, a cushion for when the economic cycle dips, was officially forecast to reach €52.3 billion (4.7% of GDP and the equivalent of nine months of pension payments) at the end of 2008.

Spain has the fourth most comprehensive mandatory pension scheme among OECD countries. Future retirees can expect, under the current situation, to receive state pension benefits equivalent to 81% of their pre-retirement earnings as against 96% in Greece, the top of the league, and 31% in the UK, 24

the bottom (see Exhibit 1.11). The projected entitlements are for a typical worker entering the system today who retires after a full career. They are based on schemes that are required by law, whether public or private. Spain’s public pension system has a current ceiling for contribution and benefit purposes of €32,778 a year.

EXHIBIT 1.11 Mandatory Pension Schemes, Selected OECD Countries Greece Luxembourg Netherlands Spain Hungary Italy Sweden France United States Germany United Kingdom OECD average

BENEFIT AS % OF PRE-RETIREMENT EARNINGS 95.7 88.3 81.9 81.2 76.9 67.9 62.1 51.2 41.2 39.9 30.8 59.0

Source: Pensions at a Glance, OECD, 2007 edition.

The public health system is feeling the pinch from the sharp rise in the population and the longevity of Spaniards. Spain’s public expenditure on health (now the responsibility of regional governments) is among the lowest in the OECD in per capita terms (see Exhibit 1.12) and is below the OECD average as a percentage of GDP (close to 6% against nearly 7% for OECD-Europe). Spending on pharmaceuticals, however, is almost 25% of public health spending, a significantly higher share than in most other OECD countries. This increase appears to be caused more by the growth in the number of prescriptions than by any increase in spending per prescription.

Spain: Going places.

In 2006, a long overdue law of dependents was approved, benefiting more than 1.1 million people, 80% of whom are over the age of 65. Until then, family members, predominantly women, cared for those who could not care for themselves, and barely 11% of those over the age of 65 in need of support received some kind of help from the social services.

EXHIBIT 1.12 Public Expenditure on Health per Capita* France Germany Italy Spain United Kingdom United States OECD average

1990 135 182 126 79 95 126 100

2004 134 127 100 80 117 148 100

(*) As a percentage of the OECD average.

Source: OECD Factbook 2007.

Regional governments have so far coped with the increased pressures not by raising their own sources of revenue, but rather by successfully lobbying for additional transfers from the central government (around €1.6 billion in 2006).

A welfare state has been created, but its cornerstone is the extended family-based society. An estimated 60% of people aged 25 to 30 live at home, a high figure by European standards, and only 13% of households have one occupant, a comparatively low figure. The extended family looks after unemployed members, enables the young, if they wish, to live at home and save while they are beginning their working life and allows the great majority of pensioners to live with their children. In the latter case, this informal assistance from families provides older persons with living standards similar to those of the rest of the population, making up for any shortfall in pensions.

Education The average number of years of schooling for an adult over the age of 25 has risen from five in 1960 to nine, but this is still well below the EU’s 11 years and 13 in the US. However, expenditure per student is still lower than the OECD average at all levels of education (overall spending on public education has increased from 1.8% of GDP in 1975 to close to 4.5%), the drop-out rate among secondary school students is alarmingly high, universities have become enormous (the Complutense in Madrid has 88,000 students) without a proportionate increase in funding, and employers complain about the gap between labour market

25

Chapter 1: Overview

requirements and available skills. These problems have not yet held back the country, but it is fair to say that, as the economy becomes less labour-intensive and more knowledge-based, the shortcomings will be felt more.

Spain’s 15-year olds from secondary schools continued to perform badly in the latest (2006) Programme for International Student Assessment (PISA).

After focusing in 2000 on reading skills and in 2003 on mathematics, PISA 2006 tested students on how much they knew about science and their ability to use scientific knowledge and understanding to identify and address questions and resolve problems in daily life. Spain was ranked 31st out of 57 countries (26th out of 40 in 2003) and its score was virtually unchanged and still below the OECD average. Comparisons between the results of the 2006 tests and those of previous years are not strictly valid, as the nature of the tests varied. However, average scores showed some countries moving sharply upwards.

26

The country’s higher education attainment for age group 25-64 is above the OECD average and over the past 13 years has risen more than any other OECD country, albeit it from a relatively low starting point (see Exhibit 1.13). Since the 1970s, the percentage of the population with a university degree has increased at a faster rate than any other developed country, with the exception of Korea, and is higher for women than for men. It is now above the OECD average for the population aged 25-34, while the number of specialist engineers trained between 1995 and 2000, expressed as a proportion of the population (1:1,044), also exceeded the OECD average (1:1,242).12 The number of universities rose from 26 in 1976 to 73 in 2006, and there are more than 1.4 million university students – 16 times higher than in 1950. However, around 40% of students drop out before graduation, and the average share of graduates in all disciplines completing their studies within the normal time is low. Students pay the same very low fees wherever they go to public university.

They cover only about 10% of costs, which intensifies the demand for higher education and hardly encourages students to work hard and finish their studies on time.

EXHIBIT 1.13 Tertiary Attainment for Age Group 25-64 (% of population of that age group) France Germany Italy Spain United Kingdom United States OECD average

1991 15.2 20.5 6.1 9.9 16.3 30.1 17.9

Source: OECD Factbook 2007.

12. See the section on education in the OECD’s economic survey of Spain, published in January 2007 (pages 125-135).

2004 23.9 24.9 11.4 26.4 29.0 39.1 25.2

Spain: Going places.

Since 2002, regional governments have been responsible for education (and health) spending in what is one of the most decentralised OECD countries.

As with health spending, regional and local governments have relied heavily on transfers from the central government to finance spending increases as they are reluctant to use their own tax powers for fear of becoming unpopular with their electorates.

There is little competition between the public universities, although the arrival of private universities has injected some competition into the system. There is also little quality assessment in the state universities and no relationship between quality and the funds received (which means there is no control of standards and no effective penalisation). More than 90% of lecturers are estimated to teach in the very same department where they completed their first degree. This rate of ‘inbreeding’ resulting from social networks that, regardless of the candidates’ merits, systematically award positions to one of their members, is much higher than in other countries. There is very little outside competition for lectureships.

Many of the best brains, especially in science, end up in universities abroad, and those who complete doctoral or postdoctoral training abroad and return to Spain are often discriminated against when they apply for posts in their former universities. According to a study by two Spanish scientists working in the UK, 93% of researchers holding permanent faculty positions in science departments in the US had been external candidates for the posts, 83% in the UK, 50% in France and only 5% in Spain.13 These endogamic practices are a barrier to high-quality research and teaching in universities.

While there is no Spanish university among the top 150 in the global ranking produced by Shanghai’s Jiao Tong University, Spain does have worldclass business schools (which teach in English). Spain is the only country in Europe other than the UK with three of the top-ranked business schools (ESADE, IESE and the Instituto de Empresa). These schools are providing the country with first-class executives and play a major role in the internationalisation of the Spanish economy. IESE and ESADE, founded in the 1950s in Barcelona, were among the first three schools in Europe (along with INSEAD) to introduce the MBA, ahead of Switzerland, the UK and the Netherlands, even though Spain at the time was one of the poorest countries in Western Europe.

Education reforms are being implemented across the board, particularly in universities where attempts are being made to foster an assessment culture.

The OECD says that the lack of benchmarking for university performance is a ‘fundamental flaw’. The government is also addressing the need to harmonise the structure of university courses at European level, in accordance with the

13. See the letters “Returners Not Welcome at Spanish Universities” in Nature (October 26, 2000) and “High Rate of Inbreeding in Spanish Universities” in Nature (Volume 410, March 2001).

27

Chapter 1: Overview

Bologna Agreement, introducing a separation between the first degree and masters programmes.

Under the reform of the education system from pre-school to the end of secondary education, adopted in 2006, changes are gradually being introduced until 2010. They are mainly aimed at improving the quality of education and reducing the rate of early school leavers. In 2006, 30% of students aged 18 to 24 had not completed their upper secondary education, twice the EU-27 average and the third highest level (see Exhibit 1.14). The drop-out rate is also very high in professional training (taken instead of upper secondary education from the age of 16). And the proportion of 15-year-olds in state secondary schools who have to repeat a year because of failing exams has not ceased rising since 1998-99. In 2005-06, 42.3% of these students had to repeat their year, up from 35.3% in 1998-99. One of the reasons for this is 28

the influx of the children of immigrants, many of them not speaking Spanish or entering the system with learning problems. Children will start learning a foreign language earlier (at the age of five) in order to improve the country’s poor language skills. According to Eurobarometer (2006), 56% of Spaniards speak no foreign language at all, compared with a European average of 44%.

No provision has been made, however, to improve the teaching of maths and science nor teaching methods in general – the education system in general still puts far too much emphasis on learning by rote and does not sufficiently encourage creativity and critical thinking.

EXHIBIT 1.14 Early School Leavers in Selected EU-27 Countries (% of population aged 18-24), 2006* Malta Portugal Spain Italy

41.7 39.2 29.9 20.8

Germany France UK Hungary

13.8 13.1 13.0 12.4

Sweden Finland Poland EU-27

12.0 8.3 5.6 15.3

(*) Those aged between 18 and 24 who, at the most, have completed lower secondary education and do not participate in any other educational or vocational training activity.

Source: Eurostat.

Lastly, continuous training needs to be developed much more. This is particularly important in a country like Spain, where a substantial portion of the population has a lack of skills in the use of new technologies and where the knowledge economy is in an early stage of development. Less than 10% of the population aged 25 to 64 took part in non-formal employment-related training activities in 2003, compared with an OECD average of 23%. One reason for this is the country’s high proportion of temporary jobs (one in every three, the highest level in the EU), which reduces the incentive for companies to invest in continuous training.

Spain: Going places.

Infrastructure Anyone who has been visiting Spain over the past 30 years cannot help but be impressed by the tremendous improvements in infrastructure. For example, motorists can drive all the way from Madrid to the French border at Irún (more than 500km) by state-owned and privately run motorways, virtually without passing a single traffic light. What used to take this author around ten hours can now be comfortably done in six.

Greatly helped by EU funds, infrastructure spending in GDP terms has been consistently above the EU average. Total investment in non-residential construction during this period represented close to 9% of GDP a year on average, more than two points higher than that recorded in the other Euro zone countries. Spain’s toll road and motorway network density is higher than

29

the EU-15 average (see Exhibit 1.15), but not the railway system’s (excluding high-speed train lines, where Spain is a leader).

EXHIBIT 1.15 Density of Transport Networks, 2004 TOLL ROAD AND MOTORWAY NETWORK

France Germany Italy Spain UK EU-15

km per million persons 172.1 147.5 112.8 253.8 60.9 145.5

km per thousand km 19.1 34.1 21.7 21.2 14.9 17.2

RAILWAY NETWORK km per million persons 484.7 420.8 280.5 339.9 276.6 392.0

(*) Figures for 2004.

Source: European Commission and La Caixa’s Research Department.

The 2005-20 Infrastructure and Transport Strategy Plan envisages total investment of €249bn in the country’s transport infrastructure (over 1.5% of GDP a year). Almost half of the investment will be channelled into 9,000km of new high-speed train services (both newly built and modernised lines), up from just 1,000km currently. By 2010, Spain is forecast to have 2,230km of highspeed track, the world’s largest network ahead of Japan and France. The first line, between Madrid and Seville, in the south, came into operation in 1992 and cut the travel time for the 471km to the Andalusian capital to two hours and 15 minutes. Barcelona, in the east, was scheduled to be linked all the way to Madrid by early 2008 (651 km). A network connecting the southern cities of Malaga, Granada, Cadiz, Algeciras, Huelva and Jaen is currently being built, and Madrid and Valladolid will also be joined. The connection from Barcelona to the French border is scheduled for completion by 2009.

km per thousand km 53.8 97.3 53.9 28.4 67.7 46.4

Chapter 1: Overview

The second priority will be the road system, with 6,000km of new highways to be built (adding to the current network of 9,000km). The current radial model, which tends to focus on Madrid as the centre of the road network, will be abandoned.

By the end of the period, the government envisages that 95% of the population will live within fewer than 30km of a highway, and 90% within fewer than 50km of a high-speed train station. The plan also projects the doubling of the country’s airport capacity and an increase of 75% in seaport capacity. Also, 150 years after building a network of rail track whose width was different from the European norm (according to legend, in order to make it more difficult for the French to invade), there are very ambitious plans to bring all of Spain’s tracks into line with the rest of Europe, and not just those used by high-speed trains.

The electricity network, however, is increasingly stretched, often due to the difficulty of obtaining municipal permits for high-voltage lines, and the 30

water distribution network lacks the capacity to deal with the severe droughts that periodically hit Spain.14

Labour Market Spain’s labour market is fragmented and dual, but very dynamic. Between 1994, when the economy emerged from a one-year recession (its deepest since the country began to open up the economy under the Franco regime’s 1959 stabilisation programme), and 2006, 7.8 million jobs were created, an annual average of almost 600,000. Between 2004 and 2006, Spain created 36% of the new jobs in the EU-25, compared with 27% created by the four biggest economies (France, Germany, Italy and the UK). The number of jobs created during that period was one-third of that of the US, whose economy is 13 times larger than Spain’s. The labour market has not only absorbed the sharp rise in the working population from the influx of immigrants but reduced the unemployment rate (from close to 20% in 1993 to around 8% in 2007, only a little above the Euro zone average). But this impressive reduction was only made possible by a constantly high level of temporary jobs: their proportion in total employment of more than 30% is still by far the highest in the OECD (average of 13%). This is the main distinguishing feature of the Spanish labour market and one of the key factors behind the sluggish growth in productivity. This very high level of workers without permanent contracts and the consequent job insecurity and non-qualification for mortgages is a major headache for many families.

14. A power cut in Barcelona in July 2007 left 350,000 homes without electricity, brought the metro system and road traffic to a halt, forced hospitals to cancel operations, trapped people in lifts, forced shops and restaurants to close when lights, stoves and cash machines failed, silenced mobile phones, and prompted police to double street patrols to discourage smash and grab raids, all because of the collapse of a single power cable.

Spain: Going places.

Roughly half the new jobs created between 2001 and 2006 (threequarters in the first three months of 2007) were filled by immigrants, mainly in construction, domestic service, retail trade, hotels, restaurants and agriculture, all of them labour-intensive sectors. Immigrants are much more mobile than Spaniards and are prepared to work almost anywhere in the country and in any sector: unlike their hosts, they cannot afford to be too choosy. Partly thanks to them, real wages have fallen over the past few years and the labour market is more flexible. Among the 30 OECD countries, Spain was the only one whose average annual growth in real average wages declined between 1995 and 2005 after rising between 1990 and 1995. Real average wages rose 1.9% a year between 1990 and 1995 and then declined 0.5% a year in 19952000 and 0.3% in 2000-2005. This was because many of the huge number of jobs created in these years paid very low wages, pushing down the average wage, which in 2005 in current dollars stood at $26,926 in Spain (see Exhibit 1.16). Workers on the officially established minimum wage, however, saw their purchasing power rise by 18% between 2003 and 2006, the largest increase in the EU after the UK.15 EXHIBIT 1.16 Average Wages in Selected OECD Countries, 2005 France Germany Italy Poland Spain Sweden United Kingdom EU-15 average

IN CURRENT US$ 38,580 38,001 31,051 10,571 26,926 38,244 44,974 37,409

PURCHASING POWER PARITIES (US$) 32,981 34,310 27,724 16,502 27,388 30,351 40,520 33,357

Source: OECD.

Immigrants have boosted Spain’s employment rate (the share of persons of working age – 15 to 64 years – in employment) from 48.1% in 1996, 16 percentage points below the OECD average, to 64.8% in 2006, almost in line with the OECD average. In the preceding six years the employment rate stood virtually still at just over 50%. The rise for women was very significant – from 33.6% in 1996 to 53.2% (that for men over the same period was from 62.6% to 76.2%). One reason why it has risen sharply for women is the greatly increased number of domestic service jobs. The increase in the employment rate enables a country to generate more wealth and in Spain’s case has helped to narrow the country’s per capita income gap with the EU. 15. Spain’s minimum monthly wage in 2007 was €570 plus two extra payments a year (the equivalent of 12 payments of €666). The minimum wage in the EU varies between €92 a month in Bulgaria and €1,570 in Luxembourg. Although low, less than 1% of Spain’s workers in 2005 received the minimum wage, compared with 17% of French workers, according to Eurostat.

31

Chapter 1: Overview

While unemployment has declined substantially, there are still wide disparities in the jobless rate by region. Six of Spain’s 17 autonomous regions and the two North African enclaves of Ceuta and Melilla have higher unemployment rates than the national average. The regions with the highest unemployment are Andalusia and Extremadura (more than 12%). Regions like Navarre and Aragon have virtual full employment (jobless rates of less than 5%).

Temporary contracts were liberalised in 1984, under the first postFranco Socialist government, and quickly ballooned as employers took advantage of a way to get round permanent contracts and their costly severance payments, a remnant of the dictatorship’s paternalistic labour market laws.

Payments were relatively generous, as they were based on the job-for-life principle of the corporatist state in return for political obedience. Since the 32

door was opened wide to temporary contracts, there have been six more packages of labour market reforms, easing hiring and firing regulations, but the share of temporary jobs has abated little.

The 1994 reforms liberalised the hiring end of the market but did not touch the level of statutory redundancy payments. The 1997 reforms represented a trade-off whereby unions accepted lower redundancy costs for new hirings, while employers introduced more stable employment contracts. Redundancies for the permanent contract introduced in 1997, if ‘unjustified’ (most dismissals, as it is difficult to justify them) cost a maximum of 33 days’ salary per year worked, with a ceiling of 24 months, compared with the standard 45 days up to a 42-month maximum (still applied for unfair dismissals for workers on old permanent contracts). These less rigid contracts only applied to some types of workers: those under the age of 29 or over 40, workers with a temporary contract, women in sectors where they are underrepresented and disabled workers. Changes in 2001 applied the 33-day limit more widely and, in return, entitled people on short-term contracts to eight days of compensation and limited the use of such contracts in collective bargaining. Part-time employment (8% of total employment in 2001) was also made easier and subsidies were paid for employers’ social-security costs to encourage more hiring of women.

There has been no further reduction in dismissal costs for permanent contracts, leaving the segmentation between ‘expensive’ and ‘cheap’ contracts unchanged in an even more fragmented labour market. Spain’s employment protection is one of the highest in the OECD. For example, the average number of weeks of wages for someone on a permanent contract who is fired is 56 in Spain, higher than France (32), Italy (2) and the UK (22), but lower than Germany (69, see Exhibit 1.17). While boosting employment, the duality of the labour market has its costs. Different groups of workers are not

Spain: Going places.

treated equally, which is socially unjust, generating resentment among the least favoured and contributing to Spain’s poor labour productivity performance.

“Indeed, workers with a permanent contract enjoy stability beyond the protection given by firing costs, since temporary workers are the subject of employment adjustments at the margin and act as a buffer when jobs are being scaled back,” an OECD report noted. Workers on fixed-term contracts are more likely to make an effort to improve their productivity as they know their job is relatively safe, while those on short-term contracts are less inclined to do so and their employers are less disposed to train them precisely because they are not permanently on the payroll and may take the skills they have learned to another job.

EXHIBIT 1.17 Employing Workers INDICATOR* Difficulty of Hiring Index Rigidity of Hours Index Difficulty of Firing Index Rigidity of Employment Index Non-wage labour cost (% of salary) Firing costs (weeks of wages)

SPAIN 78 60 30 56 33 56

FRANCE 67 60 40 56 47 32

GERMANY 33 60 40 44 19 69

ITALY 33 40 40 38 37 2

UK 11 0 10 7 11 22

(*) Each index assigns values between 0 and 100, with higher values representing more rigid regulations. The Rigidity of Employment Index is an average of the three indices.

Source: Doing Business 2008, World Bank.

The last labour market reform in May 2006 was designed to reduce the market segmentation between permanent workers and those with temporary contracts, and employers’ abuse of them. Any employee that has held two or more short-term contracts with the same employer totalling more than 24 months, within a 30-month period, automatically has the right to be given a permanent contract or be fired. Also, companies transferring temporary workers onto permanent contracts by the end of the year were given subsidies (around €800) for two or three years. Nonetheless, in the third quarter of 2007 close to 32% of salaried workers were still on temporary contracts (34.6% a year earlier).

This reform, however, is only a palliative and weighs on the public purse. In its assessment of the Spanish economy in 2007, the IMF pointed out that “labour market duality and related problems are destined to persist as long as the rigidity and high dismissal costs of regular contracts are not directly addressed.” The flexibility provided by immigrants will not last forever without further reforms. Eventually, many immigrants will become ‘insiders’, exposing the regulatory rigidity.

The wage bargaining system is also in need of reform. Although trade union membership is very low in Spain (less than 13%), collective

33

Chapter 1: Overview

bargaining coverage is very high at more than 80%. Also, since 2000, trade unions and employers have agreed to negotiate wage agreements on the basis of the 2% European Central Bank inflation reference rate in exchange for the inclusion of safeguard clauses that protect workers against inflation rates above that figure. The overshoots in inflation are often the result of external costs, such as the price of imported oil, and by being incorporated to wages via these clauses could eventually end up damaging job creation.

Binding statutory extensions ensure that wage agreements of a specific territorial scope (national or provincial level, for example) cover non-unionised companies across the whole territory. Small firms, the backbone of the Spanish economy, with no trade union representation avail themselves of an agreement reached at a broader level than corresponds to them. These agreements are rarely attuned to their particularities and make business life particularly difficult 34

for companies in the traded-goods sectors that cannot easily pass on to the customer the extra costs of their inputs without becoming less competitive.

Political Scene Spain achieved a remarkably bloodless transition under King Juan Carlos from a dictatorship of 36 years imposed after a civil war to a consolidated democracy.16 The country was ranked 16th out of 167 in the first-ever democracy index drawn up by the Economist Intelligence Unit (EIU) in 2006, higher than the United States and the United Kingdom (see Exhibit 1.18).17 This surprised many Spaniards, who increasingly complain of the deteriorating quality of their democracy, particularly the rise in corruption and the politicisation of the justice system (which also moves at a snail’s pace), and bemoan the constant tensions and brittle relations between the two main parties, the conservative Popular Party (PP) and the Socialists.

Spain, however, is a long way from reaching Italy’s situation: there have been eight governments in Spain since the 1978 democratic constitution that buried the Franco dictatorship compared with 26 in Italy over the same period.18 Italy was ranked 34th in the EIU index and 41st out of 180 countries 16. The king, nicknamed ‘Juan Carlos the Brief ’, was written off by many Spaniards after Franco died because he owed his job to the dictator, who restored the Bourbon monarchy. When I met him in November 1977, shortly before his second anniversary as monarch, he told a joke against himself that showed his astuteness.

‘Why was I crowned in a submarine?’, he asked. ‘Because deep down I am not so stupid.’ A perfect English-speaker, the play on words works in both languages. See “The Man Who Would Be King”, by William Chislett (The Times, November 21, 1977). As well as the key role played by the king, another important factor was that the structure of Spanish society had changed considerably before Franco’s death and the challenge was to adjust the way Spain was organised politically to the new structure. Seven out of ten respondents in a survey conducted by Metroscopia in

October 2007 said the parliamentary monarchy was the best political system for Spain. The monarchy was also the most appreciated institution.

17. Spain coined the political label liberal, a body of thought dedicated to the proposition that the individual is the unit of supreme value, in the 19th century.

Parliamentary government was introduced under the 1812 Constitution, but the country’s history since then was a sad one of military coups, three Carlist wars, liberalism breaking down with the dictatorship of Miguel Primo de Rivera in 1923 and Alfonso XIII leaving Spain in 1931 when the Second Republic was proclaimed.

Five years later the Civil War started.

18. Franco’s face, however, did not totally disappear from coins until the end of 1996.

Spain: Going places.

in the 2007 corruption perceptions index, well below Spain’s 25th position (see Exhibit 1.19). The index, produced by the Berlin-based Transparency International, looks at perceptions of public sector corruption. Italy scored 5.2 out of 10 compared to Spain’s 6.7 (the closer to 10, the cleaner the country). In some parts of Spain, however, corruption is deep. In an unprecedented move in 2006, the government dissolved the city council of jet-setting Marbella and sent in administrators as part of a huge corruption investigation centred on bribes for building permits and money-laundering. Police seized or embargoed more than €2.4 billion in property, helicopters, thoroughbred horses, artwork and antique guns. The increasingly active anti-corruption squad has scored a number of major arrests.

EXHIBIT 1.18 Economist Intelligence Unit Democracy Index, 2006 I ELECTORAL OVERALL PROCESS AND II FUNCTIONING III POLITICAL IV POLITICAL V CIVIL RANK SCORE PLURALISM OF GOVERNMENT PARTICIPATION CULTURE LIBERTIES Full democracies Sweden Iceland Netherlands Norway Denmark Finland Luxembourg Australia Canada Switzerland Ireland New Zealand Germany Austria Malta Spain US

1 2 3 4 5 6 7 8 9 10 11= 11= 13 14 15 16 17

9.88 9.71 9.66 9.55 9.52 9.25 9.10 9.09 9.07 9.02 9.01 9.01 8.82 8.69 8.39 8.34 8.22

10.00 10.00 9.58 10.00 10.00 10.00 10.00 10.00 9.17 9.58 9.58 10.00 9.58 9.58 9.17 9.58 8.75

10.00 9.64 9.29 9.64 9.64 10.00 9.29 8.93 9.64 9.29 8.93 8.57 8.57 8.21 8.21 7.86 7.86

10.00 8.99 9.44 10.00 8.89 7.78 7.78 7.78 7.78 7.78 7.78 8.33 7.78 7.78 6.11 6.11 7.22

Source: The Economist Intelligence Unit.

EXHIBIT 1.19 Corruption Perceptions Index, 2007, Selected Rankings1 COUNTRY 1. Finland 12. UK 16. Germany 18. France 20. US 22. Chile 25. Spain 41. Italy 72. = Brazil 72. = Mexico (1) Out of 180 countries.

Source: Transparency International.

SCORE 9.4 8.4 8.0 7.8 7.2 7.0 6.7 5.2 3.5 3.5

9.38 10.00 10.00 8.13 9.38 8.75 8.75 8.75 8.75 8.75 8.75 8.13 8.75 8.75 8.75 8.75 8.75

10.00 10.00 10.00 10.00 9.71 9.71 9.71 10.00 10.00 9.71 10.00 10.00 9.41 9.12 9.71 9.41 8.53

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Chapter 1: Overview

Apart from the period between 1979 and 1982, when the country was ruled by the Democratic Centre Union (UCD) following the 1978 Constitution, which sealed Spain’s transition to democracy, Spain has basically had a two-party system at the national level. The Socialists ruled between 1982 and 1996, the Popular Party (PP) between 1996 and 2004 and since then the Socialists again (see Exhibit 1.20). The share of the votes cast for these two parties rose from 74.9% in 1982 to 80.3% in 2004, and the number of their seats in the 350-seat Congress from 308 to 312. While the Socialists’ share of the total votes declined from a high of 48% in 1982, when it won a sweeping victory, to 42.6% in 2004, when it was re-elected, the PP’s share rose over the same period from 26% to a peak of 39% in 2000 when it won its first absolute majority.

36

EXHIBIT 1.20 Results of General Elections, 1982-2004 (millions of votes and percentage share)* 1982 Socialists Popular Party United Left UCD (centrist) CDS (centrist) CiU (Catalan) PNV (Basque) ERC (Catalan) Other

1986

1989

1993

1996

2000

2004

Votes

% Total

Votes

% Total

Votes

% Total

Votes

% Total

Votes

% Total

Votes

% Total

Votes

% Total

10.12 5.54 0.82 1.38 0.60 0.77 0.40 1.40

48.4 26.5 3.8 6.5 2.9 3.7 1.9 6.3

8.90 5.25 0.77 1.84 1.01 0.31 2.08

44.6 26.3 4.5 9.2 5.1 1.6 8.7

8.11 5.29 1.86 1.62 1.03 0.25 2.23

39.9 26.0 9.1 8.0 5.1 1.3 10.6

9.1 8.2 2.23 0.41 1.16 0.29 2.14

38.7 34.8 9.6 1.8 4.9 1.2 8.9

9.3 9.6 2.6 1.14 0.3 1.5

37.5 38.8 10.6 4.6 1.3 7.2

7.9 10.3 1.3 0.97 0.30 0.19 1.09

34.1 44.5 5.9 4.2 1.3 0.8 4.7

11.0 9.7 1.3 0.8 0.4 0.6 1.4

42.6 37.7 4.9 3.2 1.6 2.5 5.4

(*) CiU stands for Convergència i Unió and is the conservative nationalist party of Catalonia, the ERC is the Republican Left of Catalonia Party, and the PNV is the conservative Basque Nationalist Party. Most of the other parties that ran in elections were regional ones.

Source: Interior Ministry.

The pragmatic Socialists, under Felipe González, whose first government was preceded by a failed military coup in 1981 were responsible for a large chunk of Spain’s modernisation.19 The Socialists’ leaders were very largely drawn from the ‘Generation of 1968’, which suffered the isolation endured by Spain under Franco, and university students during the 1960s.20 Their first experience of politics consisted of clandestine activities during the dictatorship. González won the referendum in 1986 which ratified NATO membership, began to articulate the process of regional autonomy (today, Spain is one of Europe’s most decentralised nations), built up the fledgling welfare state at a tremendous speed, launched industrial reconversion (which cost them two general strikes) and, most importantly, negotiated Spain’s entry into the European Union.

19. There were 45 pronunciamientos (calls to arms) between 1808 and 1981. The bullet holes in the ceiling of the Cortes (Spain’s parliament) made after Lt. Col. Antonio Tejero fired his pistol into the air have been left as a grim reminder.

20. According to the FOESSA report in 1975, 79% of those with a university degree said they were ‘liberals’ and 21% ‘authoritarian’, compared with 38% and 62%, respectively, for those who had only completed primary education. The more educated the person, the more of them said they were ‘liberal’.

Spain: Going places.

In 1996 the Socialists lost the confidence of Spaniards at the polls, partly because of the natural wear and tear of winning four elections, the arrogance that came from being in office for 13 years and a spate of corruption scandals. By then, the PP had successfully shrugged off an antiquated image and paternalistic outlook and turned the tables on the Socialists, portraying them as yesterday’s men.

The PP began life as the Popular Alliance (AP) after Franco’s death in 1975, but not until it shook off its Francoist associations (the AP was initially led

by Manuel Fraga, a former Information and Tourism Minister in the 1960s), rejuvenated itself and moved towards the centre ground under José María Aznar (who belonged to the ‘Generation of 1989’, which had come of age politically in a fully democratic, European context) did the PP break through its electoral ceiling and win its first general election in 1996. Aznar forged a credible conservative party out of former Francoists, Christian Democrats and free-market liberals. The PP’s victory was very good for Spain, as it helped to consolidate democracy by establishing the principle of alternating governments.

The last changeover from a left-wing to a conservative government as the result of a general election was in November 1933, but less than a year later, in October 1934, revolutionary miners rose against the government and were quelled by troops under the command of General Franco with the loss of more than 1,300 lives. This was a prelude to the Civil War. The PP made Spain a founder member of European Monetary Union (EMU) in 1999, a major achievement, moved Spain’s foreign policy closer to the United States (epitomised by Aznar’s support for the US- and UK-led invasion of Iraq in 2003) and resisted moves for greater autonomy by certain regions. Aznar decided not to run for a third term in 2004 and took an influential back seat as head of the PP’s think tank FAES. González has also bowed out of day-to-day politics (he stepped down as the Socialists’ secretary-general in 1997), although he is still active behind the scenes. The Socialists, led by José Luis Rodríguez Zapatero (a teenager when Franco died), were returned to power in 2004, three days after the March 11 bombs – placed on commuter trains by Islamic radicals protesting Aznar’s support for the war in Iraq – killed 191 people and injured more than 1,800 others. The Socialists won 164 seats in the 350-seat Congress and close to 11 million votes, up from 125 and 7.9 million, respectively, in 2000 and a record number of votes for the party. As the Socialists were 11 seats short of an absolute majority, they governed with the parliamentary support of the communist-led United Left and regional parties when necessary (essentially the Basque Nationalist Party and the Republican Left of Catalonia). The PP dropped from 183 to 148 seats after losing 700,000 votes to 9.7 million. The

37

Chapter 1: Overview

Socialists (more than the PP) benefited from the sharp rise in voter turnout from 68.7% in 2000 to 77% in 2004, not far short of the all-time record of 79.8% in 1982 when they first came to power.

The bomb blasts drove Spaniards to the polls for many different reasons.21 The PP first pointed the finger for the blasts at the Basque terrorist group ETA; Aznar went so far as to phone national newspaper editors, assuring them this was the case. Had ETA been responsible for the attacks, the PP probably would have won the election. The impression – whether true or not – that the government was withholding information about the attack outraged a small number of voters who, empowered with mobile phones, sent text messages, resulting in unprecedented flash demonstrations on the eve of election day.22 More likely, it was the connection established by many Spanish voters between the terrorist bombings and Aznar’s support for the war in Iraq 38

that proved his party’s downfall. About half of the three million new Socialist votes came from former absentee voters, who tend to be young (ages 18-29), as well as left-leaning. Spain is the most leftist country in the EU. On selfplacement scales, 28% said they were centre left (40% centre-left, left and extreme left) in the Transatlantic Trends survey (see Exhibit 1.21).

EXHIBIT 1.21 Self-Placement Scales (% of total respondents)* Extreme Left Left Centre Left Centre Centre Right Right Extreme Right Refusal

FRANCE 3 9 20 24 24 9 4 7

GERMANY 3 7 28 35 15 4 4 4

ITALY 2 9 21 15 19 10 3 20

NETHERLANDS 4 7 22 28 22 9 5 3

SPAIN 5 7 28 30 16 3 5 6

UK 2 3 18 37 20 4 5 11

(*) People were asked to place themselves on a scale from 1 to 7, where ‘1’ means the extreme left and ‘7’ means the extreme right.

Source: Transatlantic Trends 2007.

In a perverse way, the Islamist terrorists achieved the change of government desired by the terrorists: Zapatero quickly fulfilled a campaign promise and pulled Spain’s 1,200 peacekeeping troops out of Iraq, a popular move overwhelmingly supported in opinion polls long before the elections were held. Almost four years later, the two main political parties continued to squabble in public about what really happened on that tragic day and the extent to which both parties used the events to influence the outcome of the election in 2004. Some PP leaders, throughout almost all of Zapatero’s term in office, continued to push their conspiracy theory under which the Basque terrorist organisation ETA was involved in the massacre (asking more than 500 21. See “Did Terrorism Sway Spain’s Election?” by Charles Powell (Current History, November 2004).

Spain: Going places.

questions related to the issue in parliament), despite evidence to the contrary, particularly during the trial in 2007 of those accused of the attacks. The PP insisted that their allegations were based on the evidence available at the time.

Even after sentences were handed out to the terrorists in October 2007 and the presiding magistrate said that no proof had been that found ETA was linked in any way to the attacks, PP leaders continued to sow doubts.

Zapatero basically carried on the PP’s sound economic policy, shifted foreign policy away from the US and back toward Europe and started a third phase of devolution to regional governments, the success and desirability of which has yet to be determined. He also sought to negotiate peace with ETA, which has killed more than 800 people since 1968 in its struggle for an independent Basque country (see map and timeline), after ETA declared a socalled ‘permanent ceasefire’ in March 2006.Thirty years after Spain’s democratic constitution, ETA still viewed the Spanish state as if it was a continuation of the Franco dictatorship, even though the Basque Country enjoys more autonomy than many German federal states. Most of ETA’s gunmen (and gunwomen) today were not even born when Franco ruled. Zapatero’s move was virulently opposed by the PP unless ETA renounced violence and laid down its arms, which it did not do. An end to ETA’s political violence is a prize that has eluded all Spain’s democratically-elected prime ministers.23 The ceasefire was brutally broken in December when two people were killed in a bomb blast at Madrid’s airport. In June 2007, ten days after local elections in which ETA sympathisers polled 73,344 votes (7.4% of the total) in the three Basque provinces and gained control of 17 town halls, the group formally called off its truce and said it would resume fighting because “Zapatero’s character has turned into a fascism that left parties and citizens without rights”. Batasuna, ETA’s political wing in all but name, was banned in 2003 but under other guises has run in elections.

Bay of Biscay

F R A N C E Bilbao

Basque administrative region

San Sebastian

Vitoria

Pamplona

Territory claimed

by ETA

S PA I N Logroño

Source: BBC. 22. See Mobile Democracy: Text Messages,Voter Turnout and the 2004 General Election by Sandra L. Suárez (Representation, Vol. 42, No. 2, 2006, Routledge).

23. According to the writer Jorge Semprún, a former communist leader in the 1950s and culture minister (1988-91), ETA is all that remains of Francoism as, like the dictatorship, it imposes its will through the barrel of a gun, refuses to dialogue and demands submission to its ideas. See “ETA es el Único Rescoldo del Pasado” (El País, November 19, 2000).

39

Chapter 1: Overview

ETA Timeline 1959: ETA founded 1968: ETA kills San Sebastian secret police chief Meliton Manzanas, its first victim 1973: PM Luis Carrero Blanco assassinated 1978: Political wing Herri Batasuna formed 1980: 118 people killed in bloodiest year Sept 1998: Indefinite ceasefire Nov 1999: End of ceasefire, followed by more bomb attacks in January and February 2000 Dec 2001: EU declares ETA a terrorist organisation March 2003: Batasuna banned by Supreme Court May 2003: Two police killed 40

Nov 2005: 56 alleged ETA activists on trial in the largest prosecution of its kind March 2006: ‘Permanent’ ceasefire declared Dec 2006: Two killed in bomb blast at Madrid’s airport, first deaths in more than three years June 2007: Ceasefire ended November 2007: Two policemen killed in France December 2007: Anti-terror court sentences 47 people Zapatero also implemented some important social reforms, such as the dependency law, the law against gender violence, which seeks to protect women against domestic violence, a gender equality law that hopes to sweep away all relics of discrimination in macho Spain24, same-sex marriage and adoption by gay couples. Stem cell research was also made more flexible and divorce procedures speeded up. The budget for 2008, an election year, also included tax breaks for single parents and families with newborn children and measures to help young adults pay their rent. There is a €2,500 tax rebate (or lump sum payment) for every child born or adopted after July 2007 (dubbed ‘baby cheques’ by the media25), an extra €1,000 per child for single mothers, and young employed adults earning less than €22,000 a year are eligible to a receive a payment of €210 towards their rent and a loan of €600 towards the cost of the rent deposit. Spain’s spending on the family and children is the lowest in the EU-25, according to the latest comparative figures (2004) from Eurostat (see Exhibit 1.21).

24. A Barcelona judge ruled in September 2007 that El Corte Inglés, Spain’s largest retailer, discriminated against women at work as it failed to promote enough of them.

25. The average age of Spanish women having their first child is 29.3 years, the second highest in the EU after the UK and Switzerland.

Spain: Going places.

EXHIBIT 1.22 Social Spending on Families and Children (% of GDP), Selected EU-25 Countries* Luxembourg Ireland Denmark Hungary Germany France EU-25 UK Italy Spain

% OF TOTAL SOCIAL SPENDING 17.4 15.5 13.0 12.1 10.5 8.5 7.8 6.7 4.4 3.5

% OF GDP 3.8 2.5 13.9 2.5 3.0 2.5 2.1 1.7 1.1 0.7

(*) Figures for 2004.

Source: Eurostat.

Affordable housing has become one of the main demands of young adults, tens of thousands of whom have taken to the streets in various cities to protest the issue. They are caught between a rock and a hard place in the housing market: property prices are high and wages low. As a result, the generation of what are called mileuristas (those who earn €1,000 a month) are not getting a foot on the property ladder; and this in a country where home ownership has traditionally been high and where the number of housing starts in 2006 was more than in the UK, France, Germany and Italy put together (see Chapter 3).26 A 27-year-old Spaniard drew attention to the plight of the mileuristas in September 2007 by placing himself in a 26-square-metre pre-fabricated house in front of the Reina Sofía Museum in Madrid – the size of the ‘cage’ corresponded to the number of square metres that mileuristas can aspire to without committing more than 30% of their salary.

As a result of some of these reforms and changes to religious education in schools, including the introduction of a new obligatory subject called Education for Citizenship, the highly conservative Catholic Church hierarchy went on the offensive against what it views as the government’s ‘radical laicism’.

The Citizenship course, aimed at developing the capability for thoughtful and responsible participation in political, social, economic and cultural life, was part of an education reform approved by all parties except the PP.27 Bishops, backed by the Vatican, said the course would “form the moral conscience of students” and that the state should remain neutral in such matters as no one had the right “to impose a moral formation that is not chosen”. At the heart of the dispute was the Church’s belief that the state was undermining its position

26. The term mileurista was apparently first coined by Carolina Alguacil, a 27year-old graduate working in advertising. In a letter to the newspaper El País in August 2005, she wrote, ‘The mileurista is a young person with a degree, speaks languages, may even have done a Masters or a doctorate and courses (...) who does not earn more than 1,000 euros. She or he spends a third of their income on rent, because they like living in a city. They do not save, own property, have a car or children. They live from day to day. Sometimes it is fun, but we are tired of it (...)”.

27. Such courses are being increasingly promoted around the world and are an area in which the United Nations Education, Scientific and Cultural Organisation (UNESCO) is involved. In UNESCO’s view, “multicultural societies are faced with the problem of creating nation-states that recognise and incorporate the diversity of their citizens while embracing an agreed set of values, ideals and goals to which all citizens are committed”.

41

Chapter 1: Overview

(a monopoly during the Franco regime) as the country’s authority on matters of morals.28 The Socialists also changed the financing arrangement with the Church.

Taxpayers, as of 2007, were able to voluntarily donate to the Church a greater percentage from their yearly tax returns, but the government stopped making an annual contribution to cover the shortfall between the income estimated by the Church and expenditure. The percentage contribution rose from 0.52% to 0.7%. The Church is also no longer exempt from paying VAT on any sale or purchase of goods and property, as required by the European Union. The Church receives more than €5 billion a year from the state, a fraction of which comes from taxpayers. The main items are the state’s subsidies for private Catholic schools (known as concertadas) and paying the salaries of teachers of religion. Catholicism was still the only faith that received funds directly from taxpayers.

42

Some of these reforms derive from republicanism, the oldest of European political traditions, and Zapatero’s belief in one supreme political value, which Philip Pettit calls “freedom as non-domination”, and in one ultimate principle of government: to equalise and maximise the enjoyment of such freedom among the citizenry. Pettit, the Laurance S. Rockefeller University Professor of Politics and Human Values at Princeton University, has established himself as Zapatero’s mentor in much the same way as Anthony Giddens was considered Tony Blair’s guru.29 In his book Republicanism: A Theory of Freedom and Government (1997), Pettit proposes a conception of political freedom, or ‘non-domination’, which demands that nobody should be capable of interfering arbitrarily in the choices made by another individual.

The Socialist government’s application of this idea is particularly apparent in the area of individual and social liberties.

The Socialists also reformed the loss-making state-run RTVE, which has twoTV channels and had become too politically biased and close to whatever party was in power. The government absorbed RTVE’s debt – equivalent to about 1% of Spain’s GDP – in order to put the broadcaster on a fresh financial footing, eliminated ‘unlimited government guarantees’ for future debt and agreed to partly fund it. The board of directors is more independent and is

28. On July 1, 1937, the encyclical “To the Bishops of the Whole World” was published, in which the Church legitimised the military rebellion. The Church took Franco’s side, calling his cause a ‘crusade’, and was rewarded with privileges after his victory, enshrined in the 1953 Concordat with the Vatican. During most of the 193975 regime, when coins bore Franco’s portrait and the words ‘Caudillo de España por la Gracia de Dios’ (Caudillo of Spain by the Grace of God), the Church collaborated closely with the state. Catholicism was the official religion. Few churches in modern times were more powerful, privileged and compromised. Left-wing worker priests emerged as of the 1960s. In December 1971 a joint assembly of bishops and clergy, convened by Cardinal Vicente Enrique y Tarancón, Archbishop of Madrid, a man of great charisma and wisdom who later played a key role in the transition to democracy, approved a document. It said: “We humbly recognise and beg pardon

because we have not always known how to be true ministers of reconciliation in the sphere of our people, divided by a fratricidal war”. The vote on this was 123 in favour and 113 against, with 10 abstentions; since it failed to win the approval of two-thirds of the congregation, the text was not included in the assembly’s formal conclusions. In 1977, after the death of Franco, the Church disassociated itself from political groups – traditionally right-wing – that call themselves Catholic. For this and other reasons, Spain never developed a Christian Democrat party like the powerful one in Italy that dominated the political scene for so long.

29. I am grateful to Professor Pettit for sending me the text of a public lecture he gave in Madrid on June 18, 2007 called “Governing Spain 20042007: A Republican or Civist Audit” at the Centro de Estudios Politicos y Constitucionales.

Spain: Going places.

elected by parliament for six years – two more than a government’s four-year term in office, which was the previous situation. Under its new charter, the director general is a ‘professional’ and no longer a political appointee. In a bid to prevent future overspending, if RTVE fails to meet its budget for two consecutive years, the board of directors will be fired. As someone who has regularly watched RTVE over the last 20 years, the news programmes, at least for this author, are now more impartial. The two programmes in April 2007 when Zapatero and Mariano Rajoy, the PP leader, were freely asked questions for two hours was unthinkable when RTVE was more of a government appendage.

While the Board of RTVE is no longer based on the parliamentary strength of the main parties, essentially the Socialists and the PP, the Consejo General de Poder Judicial (CGPJ), the governing body of the judiciary, and the Constitutional Court remain ‘parliamentarised’. Until the Socialists’ landslide victory in the 1982 elections, members were appointed by political parties and by the judiciary. Since then, members have been appointed in accordance with the strength of the main parties in parliament. The political sympathies of a judge and not just his professional qualifications are taken into account when members are appointed to the Court. Indeed, Spain is one of the few countries where the two main political parties have lawyers’ associations clearly identified with them. And the practice of postponing political responsibilities (very few politicians have resigned in Spain as a result of scandals or errors of judgement) until penal ones have been clarified has inevitably led to a politicisation of the judiciary and, in turn, a ‘judicialisation’ of politics. As a result of unprecedented political squabbles between the Socialists, the two principal organs of the justice system ceased to operate properly during part of 2007. The Socialists challenged the suitability of two PP members of the Constitutional Court to decide on some issues, including whether the new Catalan charter was constitutional or not, and the PP challenged the suitability of three Socialist members. No agreement could be reached on renewing the members of the CGPJ whose term expired.

The political arena has become very polarised, leading Spaniards to hanker after the consensus policies of the 1975-78 transition to democracy when politicians of all persuasions could sit down and iron out issues. But that was a very different period because it was one that called for cooperation and restraint in order to avoid a repeat of past conflicts and move on. The constant state of warfare between the Socialists and the PP, part and parcel of normal democratic life, is, however, particularly vicious in Spain, with insults taking the place of substantive arguments. The press has also become increasingly sectarian. El País, the leading (centre-left, essentially pro-Socialist) daily,

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Chapter 1: Overview

which played a key role in the transition to democracy30, the centre-right ABC, the right wing La Razón and the populist right El Mundo (all three basically support the PP) write about Spain as if it was four different planets rather than one and the same country.

The PP has found it difficult to come to terms with losing the last election. Its strategy, according to the Socialists, for winning the next one is based on permanent confrontation (more intense than the one it pursued in 1993-96 during the last Socialist government) over virtually every single issue.

The PP denies that this is its strategy and accuses the Socialists of deliberately seeking confrontation by setting a provocative agenda that in its view breaks the rules of the game. The conflictive issues have ranged from the government’s anti-terrorist policy (seeking peace with the Basque terrorist organisation ETA without first requiring it to lay down its arms, something that the PP also tried 44

while in office) to greater autonomy for Catalonia (which the PP claimed was unconstitutional) and the regularisation of illegal immigrants. Instead of seeking pacts with the PP, as happened during the previous Socialist governments on some issues, Zapatero has sought them with the communist-led United Left and the Republican Left of Catalonia (ERC), which favours independence for the region. These two parties are the Socialists’ parliamentary allies.

The PP was particularly outraged by the Socialists’ agreement with several smaller parties to rehabilitate victims of the 1936-39 Spanish CivilWar and of General Franco’s 36-year dictatorship.31 During the dictatorship Republican sympathisers, particularly in the 1940s, suffered summary execution, internment in concentration camps or long jail terms. Thousands of civilians and former Republican army conscripts were used as slave labour. The Law of Historical Memory, the thorniest issue tackled by the Zapatero government, condemned the Franco regime, provided public funds to help associations locate mass graves and identify and bury the dead, declared the dictatorship’s political trials illegitimate, but did not repeal them outright, banned Francoist symbols on public buildings and political acts, such as the annual homage to Franco on the November 20 anniversary of his death at the vast underground basilica (built by Republican prisoners) at the Valle de los Caídos (Valley of the Fallen) where he is buried. Many churches in Spain, including the one in this author’s village, still bear plaques that display the yoke and arrows symbol of Franco’s Falange party and commemorate those who died for ‘God and the country’. Only those on the winning side are remembered.

30. Such was the influence of the newspaper, founded in 1976, that during the 1980s Felipe González, the Socialist prime minister, urged his ministers not to read it before cabinet meetings so that they could have their own views and not be unduly swayed by what the newspaper had to say that day.

31. José Luis Rodríguez Zapatero had a personal interest in the matter. His grandfather, Capt. Juan Rodríguez Lozano, remained loyal to the elected Republican government when it fought against the military rebels who had risen against it. He was imprisoned and shot in 1936, one month after the start of the

Civil War. See “The Grandsons of their Grandfathers”, by Giles Tremlett in Franco’s Mass Graves: An International Interdisciplinary Investigation, edited by Sam Amago and Carlos Jerez-Farrán (University of Notre Dame, 2008) and Jeremy Treglown’s “A Heartless Craft: Spain’s History Wars” (Dublin Review, no. 28 pp. 34-56, Autumn 2007). According to the human rights organisation Equipo Nizkor, Spain is the only country in Europe that has become a democracy without breaking judicially with its former dictatorship.

Spain: Going places.

The PP (whose honorary president and senator, Manuel Fraga, was a former minister in the dictatorship) opposed most parts of the law on the grounds that it broke the post-Franco political consensus and was divisive as, in its view, the demons of the Francoist past were exorcised more than 30 years ago by the transition to democracy and the 1978 Constitution. The left and the conservative Basque and Catalan nationalist parties, on the other hand, felt that the pacto de olvido (agreement to forget, or overlook), incorporated into the transition, had gone on long enough and that instead of consciously turning its back on the past the country should face up to it.32 An amnesty ensured that none of Franco’s officials were prosecuted. The law paid tribute to the estimated half a million dead, including priests and nuns, murdered by Republican supporters during the war, 498 of whom were beatified in St. Peter’s Square in the Vatican on October 28, 2007, the same day as the 25th anniversary of the Socialists’ sweeping victory in the 1982 elections.33 While the law bans Francoist symbols and plaques on public buildings, nothing has yet been done about the anomalous situation of streets in the Basque Country that bear the name of ETA terrorists who died while fighting for their cause.

The Regions Spain, the second-largest West European country in terms of area, has moved from the unitary state ruthlessly upheld during the Franco regime to one of the most decentralised nations in Europe. Excluding Social Security, the 17 regional governments account for just over 50% of total public spending, compared with 31% by the central government, down from more than 85% at the start of the 1980s, and 18% by local authorities. There are 1.2 million employees in regional administrations compared to 540,000 in the central administration.

In all but name, Spain today is effectively a federal state. Ruling the country as a whole from Madrid is a complex matter and one fraught with tensions, particularly with the Basque Country (where the terrorist organisation ETA has not yet given up its struggle of almost 40 years for an independent state) and Catalonia, the two most ‘nationalistic’ regions.

The English writer Richard Ford noted in his Handbook for Travellers in Spain, first published in 1845, that the country was a “bundle of local units tied together by a rope of sand.” More than 160 years later, the ‘rope’ is not much stronger. Ford said that Spain was the country of the patria chica. Patria 32. See “Exorcise the Demons of Francoist Spain” by David Gardner (Financial Times, August 23, 2007).

33. They were among an estimated 7,000 clergy killed by Republican forces between 1931 and 1939. Some clergy were also killed by Franco’s forces.

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Chapter 1: Overview

is first and foremost place of origin – more than mother country – and chica means little and hence something to be protected. A Spaniards’ first loyalty is often to the village, town or city where he was born, a tangible place, and not to his country: these feelings are expressed in the tens of thousands of annual fiestas that take place in villages.

The Supreme Court ruled in August 2007 that the Spanish flag must fly outside all public buildings and alongside the ensigns of the country’s 17 regions and the two autonomous cities of Ceuta and Melilla on the North African coast. The ruling came in response to an appeal by the Basque regional government, which had been ordered by a lower court to fly the Spanish flag outside the academy of its regional police force, the Ertzaintza. The Basque government said it had not flown the flag for more than 20 years, but the Court said this did not exempt it from doing so. Efforts were also being made 46

to put in place another symbol of unity: Spain’s national anthem has been without words since a Francoist paean to the fatherland was dropped after the dictator’s death in 1975.34 As a result, Spanish sportsmen and sportswomen are literally speechless when they win international competitions as they have nothing to sing. Thousands of proposals were made in 2007 after Spain’s Olympic Committee asked Spaniards to provide new lyrics. Parliament would then choose which should become the official words. Whether the word España would be one of them was a moot point.

The regions have widely different levels of wealth. The poorest are Andalusia and Extremadura and the richest Madrid, Catalonia, Navarra and the Basque Country (see Exhibit 1.23).

34. Spanish schoolchildren learned a ditty to the tune of the national anthem that was hardly respectful. It referred, among other things, to Franco, his mother and his buttocks.

Spain: Going places.

EXHIBIT 1.23 Spain’s Regional per Capita GDP Andalucía Aragón Asturias Islas Baleares País Vsco Islas Canarias Cantabria Castilla-La Mancha Castilla y León Cataluña Ceuta Extremadura Galicia La Rioja Madrid Melilla Murcia Navarra Valencia

GDP PER INHABITANT, 2004 PPS, EU-27 = 100 77.6 107.4 87.0 114.3 125.4 92.8 98.1 79.1 94.9 120.5 90.4 67.1 81.0 109.4 132.1 87.9 84.4 126.7 93.9

Source: Eurostat.

The 1978 Constitution recognised autonomous communities but, at the same time, entrusted the armed forces with the mission of “defending (Spain’s) geographical integrity and constitutional order.”

The Constitution was approved by all parties except the Basque Nationalist Party (PNV). Basques ratified their autonomy statute in a referendum in 1979. The ambiguity of the Constitutional text reflected the political realities of the heady post-Franco years, when the pressure for democratic change was intense. The centrist government of the UCD had to balance avoiding a head-on clash with the very active Basque and Catalan autonomous movements seeking redress after repression with averting a backlash from the military for undermining national unity (there was a failed coup in 1981). Catalonia had gained home rule under the Second Republic before the 1936-39 Civil War, the Basque Country enjoyed it in 1936 after the war started and Galicia was on the way to autonomy.

Between 1979 and 1983, 17 regions were created with varying degrees of power. Devolution defused conflicts with the central government, but it was somewhat artificial in that not all regions had enjoyed a degree of autonomy in the past (for example, Madrid). A pecking order was established among the autonomous regions. First came the ‘historic’ regions – the Basque Country, Catalonia and Galicia, all of which have their own languages.35 Andalusia does not have its own language but gained a similar status in a referendum. These four regions have the right to call their own elections, while the remaining ones

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Chapter 1: Overview

vote at the same time. Within this group, however, there are major differences, with the Basque Country (formally comprising the provinces of Vizcaya, Guipúzcoa and Alava) enjoying the greatest degree of fiscal autonomy (under an agreement dating back to 1878) and the strongest in all of Europe. It collects all direct taxes itself and passes on a share to Madrid, has its own police force (as does Catalonia) and can teach the Basque language in schools (spoken, it is estimated, by close to 30% of the population).

The central government controls foreign policy (which does not stop Catalan premiers, in particular, making their own high-level trips abroad and creating ‘embassies’), trade, defence, macroeconomic and competition policy and the administration of justice. The regions are responsible for education, healthcare, transport, public works (not of a state nature), housing and culture (many are very active in this field). Most of them have their own local television 48

and radio stations. This process of devolution was only completed a few years ago and is being reopened.

The Catalan government bitterly negotiated a greater degree of autonomy for its region in 2006; the final deal was a watered down version of the original plan approved by 90% of the regional Catalan parliamentarians.

Their bill proclaimed Catalonia a nation and assumed for itself some of the powers of an independent state, without formally proclaiming the creation of such a state. Tensions over it were such that General José Mena Aguado, the head of the army’s land forces, publicly stated that the army was obliged to protect the constitutional order, raising the spectre of military interference in the political process. He was dismissed. Those elements most clearly contravening the Spanish constitution, such as the definition of Catalonia as a nation, were removed and a deal was struck with the right-of-centre Convergence and Union (CiU), isolating the more pro-independence Catalan Republican Left (ERC). The jury was still out, however, on whether the new Catalan charter was constitutional or not. The PP denounced it as unconstitutional.

The PNV-led government in the Basque Country, meanwhile, pushed for a referendum on changing the region’s status to one of ‘free association’ with the Spanish state. Both main national political parties reject the idea of such a referendum on constitutional grounds. If held and won, it would give the Basque government the right to call referendums whenever it wanted, thereby opening the door to a future vote on outright independence. The PNV, the largest political party, has been in power since 1980. According to opinion polls, supporters of independence in the Basque Country and Catalonia represent between 15% and 30% of the electorate, depending on the political temperature.

35. Multilingual Spain is even present in ATMs. Users have the option of conducting their business in Spanish, Basque, Galician, Catalan and Valencian.

Spain: Going places.

The eight nationalistic parties (i.e., those that only ran candidates in their regions) captured close to 10% of the total vote in the March 2004 general election and won 33 of the 350 seats in the Congress, almost exactly the same number as in 2000. The largest of these parties, the conservative Catalan Convergència I Unió (CiU) lost five of the 15 seats it won in the 2000 election and the pro-independence Republican Left of Catalonia (ERC) increased the number of its seats from one to eight. The Basque Nationalist Party (PNV) held onto its seven seats. Other regional parties are the Canary Islands Coalition, the Galician Nationalist Block, Aragón Junta, Eusko Alkartasuna (Basque) and Nafarroa-Bai (Yes to Navarre).

The CiU and the PNV enabled the minority government of the Popular Party to have a parliamentary majority in 1996-2000, and the ERC (and the communist-led United Left) assumed this role for the current Socialist government. In both cases, the price of support from regional parties were concessions to their respective regions. In 2007, the Socialists controlled seven of the 17 autonomous regions, including Catalonia (in a coalition with other parties), and the PP also seven including Madrid and the tiny North African enclaves of Ceuta and Melilla.

Given that Spain is effectively a federal state, reforming the 256-seat Senate, a body which in its current form is marginal to political life,36 and turning it into a regionally-based upper house of the parliament, could help to defuse the tensions between regional governments and the central government and between the poorer and richer ones. The Senate is organised around Spain’s 50 provinces and not its regions.

There has been a lot of talk about reforming the Senate, but nothing has been done. One of the stumbling blocks is that the Catalan and Basque nationalist parties want some kind of explicit recognition of their hecho diferencial (historic differentiating factors that distinguish them from other regions), but at the same time the principle of equality needs to be seen to be respected, particularly in the way transfers from the central government are divided up among the regions. More pressing than reforming the Senate is the need to change the current financing system for the regions, which was last reformed in 2001, in order to take account of the influx of immigrants (which has affected the regions asymmetrically) and the changes made to the charters of some regions, which has given them more powers (most notably Catalonia). The regions (excluding the Basque Country, which is in a category of its own) account for just over 50% of public spending but generate only 19% of revenues, despite the tax-raising capacity transferred to them. The regional governments are happy to spend the money ceded 36. One politician who helped draw up the 1978 Constitution called the Senate “little more than a Royal Academy of Jurisprudence and Legislation”.

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Chapter 1: Overview

to them by the central government, but are reluctant to use their revenueraising powers to the maximum for fear of losing the support of their voters.

Foreign Policy Spain’s foreign policy after the death of Franco in 1975 was essentially European-focused and largely bipartisan because of the overriding priority of joining the European Union (in 1986), although there was also a strong Atlanticist component and a drive for closer relations with Latin America for cultural and historical reasons. It was not until the second government of the Popular Party (PP), when Spain backed the US- and 50

UK-led invasion of Iraq in 2003 (symbolised by the famous photo of George W. Bush, Tony Blair and José María Aznar at their summit in the Azores) that there was a significant shift and foreign policy became a fierce political battleground.

When George W. Bush arrived at the White House in 2001, Aznar sought to forge a Spanish equivalent of the UK’s ‘special’ relationship with the US, as a way for Spain, by then the eighth-largest economy in the developed world, to play a more prominent role in international affairs.

Aznar had become increasingly disillusioned with the EU for failing to foster serious economic reform in Europe and for doing little to combat international terrorism. The September 11 attacks galvanised the US connection. Aznar – who narrowly survived an assassination attempt in 1995 by the Basque terrorist organization ETA – had spoken at great length to Bush about terrorism during his visit to Spain earlier that year (the first stopping-off point on his first visit to Europe and the first time any US president had accorded Spain this privilege). Aznar was quick to offer immediate and unconditional support for the overthrow of the Taliban regime in Afghanistan. As well as the shared horror of terrorism (and the hope that a closer US connection would produce a greater involvement by Washington’s intelligence community in the fight against ETA), there were many other factors behind Aznar’s Atlantic commitment.

They included: a way to act as a counterweight to the Franco-German dominance of Europe; a counterbalance to the EU’s eastward enlargement and to offset Spain being on the periphery of Europe; security along the southern flank of the Mediterranean, the weak point in Spain’s defensive alliances; very significant Spanish investments in Latin America (in some years more than the United States’); the increasingly large number of

Spain: Going places.

Hispanics in the United States (more than Spain’s population of 44 million); and the potential for much greater trade with and investment in the United States.37 Aznar endorsed Washington’s attempts to exert renewed pressure on Iraqi President Saddam Hussein to demonstrate compliance with UN resolutions on the destruction of Iraq’s weapons of mass destruction (which, it subsequently turned out, Baghdad did not have). After Spain took up a non-permanent seat in the UN Security Council in January 2003, Aznar inspired the so-called Letter of the Eight, signed by the prime ministers of Spain, Britain, Italy, Portugal, Denmark, Poland, Hungary and the Czech Republic, which was published in The Wall Street Journal on January 29, 2003, and argued that “the transatlantic relationship should not fall victim to the current Iraqi regime’s attempts to threaten world security.” Spain, however, was not directly involved in the invasion of Iraq as it did not send troops until after the fall of Baghdad. Aznar had considered sending part of the Spanish fleet to the region during the invasion, but changed his mind after senior PP officials expressed concern at the impact this might have on the party’s prospects in local and regional elections scheduled for two months after the March invasion.38 José Luis Rodríguez Zapatero quickly reversed Aznar’s policy of closer relations with the US by unilaterally withdrawing Spain’s 1,200 peacekeeping troops from Iraq shortly after taking office in April 2004.

The abrupt pull-out, which followed the bomb blasts by Islamist radicals on commuter trains in Madrid on March 11 (three days before the elections), relegated Spain, in the eyes of the Bush administration, to the status of an ‘unreliable ally’ (indeed, the word ‘traitor’ was used in some quarters).39 US politicians, analysts and journalists accused Spaniards of appeasing terrorists on the grounds that they had given into them by voting out of office a party that had stood shoulder-to-shoulder with the Bush administration in its fight against global terrorism. According to this view, bin Laden, rather than Zapatero, won the Spanish elections. This was a simplistic interpretation and deeply offended many Spaniards who are no strangers to terrorism. “This conclusion was as absurd as it would have been to claim that the US presidential election in 1980 was won by Iran’s Ayatollah Ruhollah Khomeini and not Ronald Reagan, who ran successfully against Jimmy Carter, the incumbent who came to grief at the 37. See Spain’s Atlantic Vocation by Emilio Lamo de Espinosa, www.realinstitutoelcano.org/analisis/307.asp.

38. Aznar told Bush at their meeting on February 22, 2003 in Crawford, Texas, shortly before the invasion, that “we are changing the policy the country has followed in the last 200 years.” He also asked for Bush’s help in changing Spanish public opinion, massively against an invasion. See the secret minutes of the meeting published in El País on September 26, 2007 (pp 18-20).

39. As well as the PP’s support for the invasion of Iraq, another reason for attacking Spain was that Al Ándalus, the Arabic name given to those parts of the Iberian peninsula governed by Muslims at various times between 711 and 1492, is one of the territories which Al-Qaeda wants to ‘free’ and return to the fold of Islam.

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hands of the Iranian revolutionary leader”, noted Charles Powell.40 More than 10 million Spaniards poured into the streets to repudiate the bombers.

Not surprisingly, Zapatero was not invited to make an official visit to the US between 2004 and 2007 (Aznar made 16 official trips); he was one of the very few EU-25 leaders not to set foot in the White House. While Aznar sought to change public opinion on foreign policy and move Spain into a position of assuming greater international responsibilities, for which a pedagogic approach was needed but not given, Zapatero, particularly regarding Iraq, has followed public opinion: around 90% of respondents, cutting across both main political parties, expressed opposition to the war with Iraq in opinion polls, the highest level in Europe.

Anti-Americanism is higher in Spain than in most European countries (see Exhibit 1.24). This is for a variety of reasons ranging from 52

the Spanish-American War in 1898 (when Spain lost the last colonies, including Cuba, of her once enormous empire) to Washington’s support of Franco after the Civil War (with the establishment in 1953 of US bases in Spain41) and, more recently, the US invasion of Iraq.42 The degree of Spain’s cold feelings towards the US (towards the Administration and its foreign policy, not towards Americans, whom Spaniards generally admire and whose culture is prevalent in Spain), surprises many people.

EXHIBIT 1.24 Favourable Opinions of the US Great Britain France Germany Spain Russia Indonesia Egypt Pakistan Jordan Turkey Nigeria Japan India China

2000 83 62 78 50 37 75 23 52 46 77 -

2002 75 63 61 61 61 10 25 30 77 -

2003 70 43 45 38 36 15 13 1 15 61 -

2004 58 37 38 47 21 5 30 -

2005 55 43 41 41 52 38 23 21 23 71 42

2006 56 39 37 23 43 30 30 27 15 12 62 63 56 47

2007 51 39 30 34 41 29 21 15 20 9 70 61 59 34

Source: Pew Global Attitudes Project, 2007.

40. See “Did Terrorism Sway Spain’s Election?” by Charles Powell (Current History, November 2004, p.380).

41. According to a confidential poll in June 1976 by Louis Harris International for a Spanish business group, only one in ten Spaniards were in favour of the US presence in Spain. Thirty years later, 46% of those surveyed attributed the survival of the Franco regime to US support (El Mundo, July 30, 2006). See the essay by Charles Powell in Spain Transformed: The Franco Dictatorship 1959-77 edited by Nigel Townson (Palgrave, 2007).

42. For a much more detailed explanation of this complex issue, which cuts across classes and political parties, see Anti-Americanism in Spain: The Weight of History by William Chislett (www.realinstitutoelcano.org/documentos/259/259_Chislett_Spain_US_Relations.pdf).

Spain: Going places.

While the troops were withdrawn from Iraq, the Socialists stepped up Spain’s military presence in Afghanistan, started under the PP. These approaches pinpoint the two sides of their policy towards terrorism: on the one hand, the ‘illegal’ war in Iraq (because it did not have UN support) is regarded as counterproductive and fomenting international terrorism (which did not exist in Iraq before the US- and UK-led invasion) and, on the other, involvement in Afghanistan with some 700 peacekeeping troops because it is a training base for terrorists and, unlike over Iraq, there was a wide consensus in the international community on the need for action. As a result of the dictatorship, Spaniards set great store by the principles and institutions of international law.

The full scope of Spain’s contribution to Western security through peace-keeping and humanitarian operations is not generally appreciated

53

abroad. Spain, a pacifist country to a large extent, perhaps because of the trauma of its Civil War, has participated in around 60 such operations and has sent more than 50,000 troops abroad over the last 20 years.43 At the time of writing, there were close to 3,000 troops (the maximum allowed abroad at any one time under a law approved in 2005) in Lebanon, Afghanistan, Bosnia and Kosovo. Spain was ranked 21st out of 121 countries in the Global Peace Index drawn up in 2007 for the first time by the Economist Intelligence Unit.

It scored 1.63 out of 5, where one is most peaceful. According to the 2007 Transatlantic Trends report of the German Marshall Fund, Spaniards are the Europeans most in favour of using soldiers for keeping the peace: 81% of respondents were in favour of committing troops to reconstruction efforts in Afghanistan compared to an EU-12 average of 64%. Spain has around 700 troops in Afghanistan, the tenth largest number, but is not directly engaged in fighting like the US, the UK and Canada (see Exhibit 1.25).

EXHIBIT 1.25 International Security Assistance Force (ISAF) Troops in Afghanistan COUNTRY US UK Germany Canada

NUMBER 15,108 7,740 3,155 1,730

COUNTRY Netherlands Turkey France Poland

NUMBER 1,516 1,220 1,073 937

COUNTRY Australia Spain Romania Others

NUMBER 907 715 536 4,112

Figures at 22 October, 2007; total 41,144.

Source: Nato and ISAF.

Another shift in foreign policy concerns Latin America, particularly towards Cuba. Zapatero headed the push to overturn the EU’s diplomatic sanctions imposed in 2003 after the summary execution by firing squad 43. A total of 84 soldiers have died in or as a result of serving in Afghanistan – 62 of them in a plane crash in 2003 in Turkey when they were returning from the country

Chapter 1: Overview

of three people who had hijacked a ferry in an attempt to escape the country and the roundup of 75 dissidents. Aznar, whose policy towards Cuba was much more in line with Washington’s, was a prime mover behind the sanctions that favoured dissidents on the island. Madrid and Havana reached an agreement outside of the EU’s common policy and re-established co-operation with the government of Fidel Castro, who has been in power for 48 years.44 In 2007, Miguel Ángel Moratinos made the first visit to Cuba by a Spanish foreign minister since 1998 and the first by an EU foreign minister since 2003. The agreement between Madrid and Havana included an institutional mechanism to discuss political issues, including human rights, though there were few signs in 2007 that the situation had improved apart from some token releases of political prisoners. The accord should be seen in the context of Castro’s age (80) and ailing health and 54

Spain’s longstanding links with Cuba, a Spanish colony until 1898, which are by far the closest among EU countries. Even during the staunchly anti-communist dictatorship of General Franco, Spain never severed its relations with Cuba. The Socialists were clearly positioning Spain to be the ‘privileged interlocutor’ in a post-Castro future – but with the island’s status quo, not with the opposition inside and outside of Cuba. Spain is the leading direct investor in Cuba (between $2 billion and $3 billion), particularly in the tourism sector, and the country is the third-largest export market in Latin America (+28% in 2006 to $629 million). In late 2007, the Socialists restored official cooperation with the Cuban government.

Zapatero also nestled up to Venezuela’s firebrand president, Hugo Chávez, Washington’s other bête noire in Latin America after Castro, and to Evo Morales, the radical indigenista president of Bolivia. Relations subsequently cooled with Venezuela as Chávez, elected democratically, became increasingly authoritarian.45 In 2006, Madrid had to cancel the sale of 12 military aircraft to the avowedly anti-American government of Chávez after Washington banned the re-export of US technology in the aircraft. Madrid initially defied the ban and then gave in after EADS-CASA, the Spanish affiliate of the pan-European company, concluded that it was not commercially viable to substitute the parts with European-built components.

As regards North Africa, Zapatero mended fences with Morocco – the home of more than 500,000 of Spain’s immigrants – to the detriment of Spain’s traditional position in favour of those living in the Western Sahara.

Nevertheless, the first trip in November 2007 by King Juan Carlos and Queen

44. The Socialists’ position was summarised by Trinidad Jiménez, in charge of Latin American affairs for the foreign ministry, when she said: “Sometimes we ask ourselves what the US policy of isolation toward Cuba has accomplished. Cuba hasn’t budged an inch in its position toward the United States. Some people should cast ideological postures aside to try and obtain more effective results.” (Miami Herald, May 24, 2007).

Spain: Going places.

Sofía to Spain’s North African enclaves of Ceuta and Melilla – claimed by Morocco - outraged Mohammed VI and threatened to undo the progress made. The more than 30-year old conflict over the Western Sahara, annexed

by Morocco after Spain pulled out of its mineral-rich protectorate in 1975, has yet to be resolved. Relations between Spain and Morocco were so bad under the previous PP government that Rabat withdrew its ambassador to Madrid for more than a year, and in 2003 Morocco invaded and briefly held the uninhabited (apart from goats) islet of Perejil, which belongs to Spain but is close to the Moroccan coast. There were also tensions with the equally strategically important Algeria (the main supplier of natural gas to Spain). Algeria supports the Polisario Front, which wants a referendum on independence in the Western Sahara, while Morocco put forward a plan for a degree of autonomy, tacitly supported by Spain. Abdelaziz Buteflika, Algeria’s President, called on Spain to ‘assume its historic and moral responsibility and actively contribute to the Saharan people’s legitimate right to democratically decide their future’.

As regards Turkey, Zapatero actively supported its full entry into the EU (one of the few foreign policy issues where there is bipartisan support) and he joined forces with his Turkish counterpart, Recep Tayyip Erdogan, to launch a headline-grabbing initiative called the Alliance of Civilizations, subsequently adopted by the UN, to resolve cultural and religious differences between the Muslim and Western world.

Spain is a much richer country, but it still dedicates a small share of its GDP to official development assistance (see Exhibit 1.26). The Socialists committed themselves to almost doubling it to 0.7% of GDP by 2012, three years before the EU commitment date. In 2007 the government made the largest single contribution ever to the United Nations development system when it committed $700 million to set up the UNDP-Spain MDG Achievement Fund for programmes in developing countries. While Spain was ranked 15th out of 21 countries in the Commitment to Development Index (CDI) in 2007, the rise in its overall score since the CDI was established in 2003 was the highest of all nations (see Exhibit 1.27).

Spain’s highest rank (3rd) came in the migration component, reflecting the large number of immigrants from developing countries in the country. Its lowest rank was in the environment; there has only been a small decrease in Spain’s greenhouse gas emissions rate.

45. A spat between Spain’s King Juan Carlos and Chávez at the Ibero-American Summit in Chile in November 2007 led the Venezuelan president to say he would review political, diplomatic and economic ties with Spain. Chávez called Aznar a ”fascist” and asked the king whether Spain’s ambassador in Caracas had appeared with Venezuelan interim president Pedro Carmona during the two-day coup in 2002 with his blessing. When Chávez repeatedly tried to interrupt Zapatero’s response to his diatribe, despite his microphone being turned off, the king told him to “shut up.”

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Chapter 1: Overview

EXHIBIT 1.26 Official Development Assistance, Selected Countries* COUNTRY United States United Kingdom France Germany Sweden Spain Finland Ireland

AS % OF GDP 0.22 0.48 0.47 0.35 0.92 0.27 0.47 0.41

PER CAPITA (US$) 92.6 179.2 159.9 120.2 362.4 68.3 170.5 173.0

(*) Figures for 2005.

Source: Intermon-Oxfam.

5.4 EXHIBIT 1.27 Commitment to Development Index, 2007

56

COUNTRY RANKING 1. Netherlands 2. Denmark 3. Norway 4. Sweden 5. Finland 6. New Zealand 7. Canada 8. Australia 9. United Kingdom 10. Ireland 11. Austria 12. Germany 13. France 14. United States 15. Belgium 16. Spain 17. Switzerland 18. Portugal 19. Italy 20. Greece 21. Japan

AID TRADE 10.7 5.7 12.0 5.4 10.5 0.7 11.6 5.4 4.9 5.5 3.6 6.7 4.1 7.1 3.1 6.7 4.8 5.5 6.9 5.3 2.9 5.4 2.6 5.4 4.0 5.4 2.2 7.0 5.7 5.4 2.9 5.5 4.5 0.0 2.4 5.5 2.7 5.6 2.0 5.4 1.2 1.5

INVESTMENT 8.0 5.8 7.5 6.9 6.5 3.4 8.0 7.6 8.1 2.8 3.9 8.0 6.5 7.0 6.2 7.1 6.7 6.5 6.1 4.9 5.9

MIGRATION 4.8 4.6 4.9 5.2 2.9 7.1 5.1 6.5 3.0 6.2 10.4 6.0 2.7 4.7 2.9 7.1 9.3 1.3 2.7 1.9 1.7

ENVIRONMENT 7.3 6.1 8.4 6.1 7.7 6.8 4.3 4.3 7.5 7.9 6.2 6.5 6.5 2.9 7.0 3.3 4.8 5.8 4.8 5.1 4.7

SECURITY 5.4 5.9 7.1 4.2 5.7 6.5 4.3 6.8 5.2 4.8 3.8 3.6 3.4 6.4 2.4 2.7 3.3 5.6 3.8 5.1 1.7

TECHNOOVERALL CHANGE LOGY (AVERAGE) SINCE 2003 5.2 6.7 -0.1 5.4 6.5 -0.4 5.6 6.4 +0.4 5.3 6.4 +0.3 6.2 5.6 +0.5 5.0 5.6 -0.3 6.7 5.6 +0.4 4.6 5.6 -0.3 4.3 5.5 +0.3 3.1 5.3 +0.6 4.4 5.3 0.0 4.3 5.2 -0.1 6.9 5.1 +0.2 4.9 5.0 +0.3 4.5 4.9 +0.2 6.0 4.9 +1.1 4.9 4.8 -0.6 5.2 4.6 +0.2 5.0 4.4 +0.3 3.0 3.9 +0.2 6.3 3.3 +0.7

Source: Center for Global Development.

Lastly, the Socialists reversed the PP’s stance over Gibraltar and gave ‘the Rock’, a British overseas territory, a seat at the negotiating table (a formula known as ‘two flags, three voices’). Rather than continue to actively pursue Spain’s more than 300-year old sovereignty claim through megaphone diplomacy, with zero chances of success because of the stiff resistance of Gibraltarians, who have the last word on such issues in a referendum, the Socialists decided to launch a charm offensive. This led to a long overdue agreement for joint use of Gibraltar’s airport and direct flights to the Rock from Spain for the first time as of 2006. In the rest of Europe, however, the realignment of policy with France and Germany bore little fruit.

Spain: Going places.

In the PP’s eyes, Zapatero’s foreign policy “thwarted the important role that our nation might have played in the international arena after it finally overcame the complexes that plagued the country from the transition to well into the 1990s.” Spain has become a country that “counts for nothing.”46 As foreign policy is now part of the political battlefield, it is to be expected that a return to power by the PP would see some significant changes again.

Society In a remarkably short period, Spain has moved from being the Western European country with the most traditional values and attitudes to one of the most liberal, tolerant and permissive (some would even say libertine) societies.

The authoritarian Franco regime, backed for most but not all of the time by the Catholic Church, kept the lid on freedoms, but as soon as the dictator disappeared it blew off, like a pressure cooker releasing steam, and the country moved directly and rapidly towards a ‘post-modern’ society. Spain was able to do this because, as in so many other aspects, it arrived late and the pressure to catch up was intense. There are, however, strong intergenerational differences.

According to the World Value surveys of Ronald Inglehart, Spain and the US have moved in the same direction over the past 20 years in terms of a permissive attitude towards homosexuality, abortion, divorce47, euthanasia, suicide, secularisation, equality of women and rejection of traditional forms of authority. Spain began well behind but today is ahead of the US and, furthermore, does not have a significant movement in the other direction headed by the religious right. In 2005 Spain became the fourth country in the world, after Belgium, the Netherlands and Canada, to allow same-sex couples to marry and adopt children. Spaniards’ tolerance today is graphically illustrated by the classified advertising sections in all of its main newspapers, including a leading conservative and Catholic one, which provide a varied range of sexual services, something unthinkable in the establishment press of the US, the UK or France.48 Society is also very solidario (caring). This can be seen in Spain’s position as a leader in donating organs and its recent history of peace-keeping missions around the world. Spain’s voluntary workers abroad

46. See Shrinking Spain... Shrunk By Rafael Bardaji and Florentino Portero (FAES Paper 39, February 5, 2007). FAES is the PP’s think tank.

under certain circumstances was made legal in 1985. The number of abortions recorded since then rose almost sixfold to 91,664 in 2005 (latest year available).

47. Divorce was made legal in 1981. The divorce rate has risen steadily but is still very low (20 divorces per 100 marriages in 2003, half the rate for the EU-25). ).

Divorce rates have soared since the new law in 2005. According to the National Institute of Statistics, 126,952 divorces were registered in 2006, a 74.3% increase on the previous year. The sharpest rise was seen in divorces between those who had been married for less than a year: 945 were registered in 2006, up 330.6%. Abortion

48. The distinguished sociologist Emilio Lamo de Espinosa recounts that when he moved from Francoist Spain to the University of California in the early 1970s he moved “from counter-reformation to counter-culture, from the Council of Trent to Marcuse and hippy power. It was not so much travelling in space, but travelling in time: from the past to the future. Today, Spain is one of the world’s most liberal countries.”

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Chapter 1: Overview

today are carrying on the tradition of the country’s missionaries, albeit with very different aims.

Under the post-Franco 1978 Constitution, Catholicism is no longer the official religion in Spain, but the country still has a long way to go before it is a secular state (taking France as the model). The matter is not helped by the Constitution, which is ambiguous on this matter.49 According to a Financial Times-Harris Poll in 2006, 84% of respondents in Spain, the second-highest number among the five European countries surveyed, said church and state should be kept separate. Thirty years later, the Church is still the only religion that receives money directly via taxpayers’ annual returns (a box can be ticked), even though Spain today has around 1 million Muslims, the fourth-highest number in the EU-15 (see Exhibit 1.28). One should not forget, however, that the Church conducts a lot of social work 58

and has a considerable patrimony of buildings to keep up.

EXHIBIT 1.28 Main EU Countries with Muslim Populations COUNTRY France Germany United Kingdom Spain Netherlands Italy

NUMBER (MN) 3.51 3.40 1.58 1.06 0.97 0.72

% OF POPULATION 5.8 4.1 2.6 2.6 5.7 1.2

Source: European Monitoring Centre on Racism and Xenophobia.

One of the most striking changes has been the improved position of women in a country that still has a strong streak of machismo. In Franco’s day, married women needed the permission of their husbands to go out to work or open a bank account. The current government has an equal number of male and female ministers, and women outnumber men in the central administration, but there are very few women in top positions in Spain’s corporate world (in 2006 only 22 of the 498 directors of the companies that comprise the IBEX-35 index of the Madrid stock exchange). More women graduate from universities than men, and the proportion of women in work increased from 33.6% in 1996 to 53.2% in 2006. Prince Felipe, the heir to the Spanish throne, is also keen to set a good example. While he will become king after his father, even though he has two elder sisters, the constitution as

49. Article 16 of the Constitution proclaims that “no confession shall have a state character” and then states that “the public authorities will take into account the religious beliefs of Spanish society and maintain the consequent relations of cooperation with the Catholic Church and other confessions.” Jurists say the state’s commitment to finance the Church expired many years ago and that the Church has failed to meet the commitment in Article 2.5 of the 1979 Concordat to “achieve by itself sufficient funds to meet its needs.”

Spain: Going places.

regards the succession to the throne, where men are favoured over women, will be changed at some point so that Felipe’s eldest child, Leonor, can become queen. Domestic violence, however, has risen at an alarming rate (74 women were killed by their husband or partner in 2007).

Despite, or perhaps because of, the dizzying pace of social change, the family remains strong in Spain. According to official statistics, 15% of children under the age of three are looked after by their grandparents for more than 22 hours a week. The family is on the retreat throughout the developed world, particularly in Northern Europe, but to a much lesser extent in Spain. This is one reason why Spain was ranked high (5th out of 21 developed countries) in Unicef’s first league table of child well-being based on 40 indicators including family relationships, poverty and health (see Exhibit 1.29). The US and the UK occupied the last two rungs of the ladder.

59

EXHIBIT 1.29 Child Well-being According to Unicef RANKING 1. Netherlands 2. Sweden 3. Denmark Source: Unicef.

4. Finland 5. Spain 6. Switzerland

7. Norway 8. Italy 9. Ireland

10. Belgium 11. Germany 12. Canada

13. Greece 14. Poland 15. Czech Rep.

16. France 17. Portugal 18. Austria

19. Hungary 20. US 21. UK

Chapter 2: The Economy

60

The Forum building, BARCELONA. Architect/s: Herzog & de Meuron, 2005.

This triangular building, considered to be an icon of the “New Barcelona�, measures 180 metres on each side and is 25 metres high. It houses an auditorium and an exhibition hall.

Spain: Going places.

Spain’s transformation from an autarchic to a liberalised economy is one of the great success stories. Liberalisation, particularly since the country’s entry into the European Community (EC) in 1986 (now the European Union) and European Monetary Union (EMU) in 1999, has worked wonders. Per capita income, a good yardstick for measuring a country’s living standards, tripled between 1985 and 2007 to more than €23,000 in purchasing power parity terms. Spain’s success did not come easy and is especially notable when set against that of former colonies, such as Argentina, whose per capita GDP in 1950 was $4,978 while Spain’s was only $2,297.1 Although the two economies have had widely differing regional environments and different positions in the globalised context, broadly speaking, Spain’s success is the fruit of persistent free-market reforms (see Exhibit 2.1), the rule of law, sustained macroeconomic stability, a modern tax system, the good fortune of having received abundant EU funds, which have generally been put to good use, and large foreign capital inflows.

EXHIBIT 2.1 Index of Economic Freedom, Selective Countries* COUNTRY Hong Kong US UK Chile Germany Spain France Argentina

RANKING 1 4 6 11 19 27 45 95

(*) Ranking out of 157 countries in 2007.

Source: Heritage Foundation and Wall Street Journal.

Spain, Europe’s fifth-largest economy, started its road to greater wealth with several handicaps: its economy was (and still is) very dependent on imported oil and was very slow to adjust to the 1973 oil crisis; its steel, shipbuilding, textile and white goods industries were restructured much later than those of other European countries; the agricultural sector was inefficient; the banks were uncompetitive and too closely intertwined with industry; and labour market laws were too rigid. The adjustment process, following the 1978 Moncloa Pact of austerity measures, was a painful one and largely fell to the Socialist governments between 1983 and 1996.

EC membership, followed by EMU entry as one of the 11 founding members of the euro, rapidly integrated Spain into the global economy and 1. See The World Economy, A Millennial Perspective by Angus Maddison (OECD Development Centre, 2001). The figures are in 1990 dollars. In the ‘hungry’ 1940s, in the aftermath of Spain’s Civil War, Argentina came to the rescue of the dictatorship and saved the country – a pariah excluded from the US’s Marshall Plan – from starvation by supplying it with wheat and meat. In 2002, Spain returned the favour and shipped food and medicine donated by Spaniards, many of whose relatives had emigrated to Argentina. The aid was sent after cash-strapped Argentina massively devalued its currency and defaulted on its $155 billion public sector foreign debt.

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fuelled an unprecedented period of growth that slowed down in 2008 but was still strong by EU standards. Spain grew at an annual average of 3.7% between 1996 and 2006, compared with 2.1% for the Euro zone and 2.3% for the EU25. As a result, Spain’s per capita GDP rose from 79.4% of the EU-15 average in 1996 to a projected 91.3% in 2008 (101% of the EU-27) in purchasing power parity, a common currency that eliminates the differences in price levels between countries and allows meaningful volume comparisons (see Exhibit 2.2).2 Over the same period, Italy’s GDP per head dropped from 105.5% to 91.1%. The macroeconomic stability required for EMU membership (in terms of low inflation and interest rates, currency stability and fiscal discipline), coupled with free market reforms and the massive inflow of EU funds (and foreign direct investment), locked Spain into a virtuous circle of sustained GDP growth.

62 EXHIBIT 2.2 Per Capita GDP at Current Market Prices in Purchasing Power Parity (EU-15=100) France Germany1 Italy Spain UK

1960 98.7 126.8 86.6 60.8 126.0

1970 102.8 120.3 94.8 75.0 92.5

1980 104.1 121.8 101.4 73.9 92.2

1990 102.9 120.3 103.2 76.7 88.3

2000 103.3 101.8 103.1 84.0 115.2

2008* 98.2 102.7 91.1 91.3 114.2

(*) Forecast. (1) 1960-91 including Germany prior to unification.

Source: Eurostat.

Had Spain not joined the euro, its imbalances in inflation and the general government budget would not have improved to anywhere near the same extent.

By now, it almost certainly would have been forced to devalue the peseta in order to improve its ailing competitiveness (see section below), epitomised by the current account deficit reaching a massive 8.8% of GDP in 2006 and a similar figure in 2007 (see section below). The 1992 crisis of the European Monetary System – the peseta became part of the wide band of the Exchange Rate Mechanism (+/-6% of its central rate) in 1989 – led to three devaluations of the peseta and the destruction of many of the jobs created in the second half of the booming 1980s. As an EMU member, devaluation, which usually only provides temporary relief unless accompanied by belt-tightening measures, is an option no longer available to Spain unless it leaves the Euro zone, which is unthinkable. The adjustment will eventually have to come through other channels, notably in wages and prices and increasing productivity.

2. The number of dollar millionaires in Spain rose by almost 53,000 between 2002 and 2007 to 157,800, according to the World Wealth Report for high-net-worth individuals, prepared by the investment bank Merrill Lynch and the consultancy Capgemini. The calculation is based on the values of private equity holdings stated at book value as well as all forms of publicly quoted equities, bonds, funds and cash deposits, but excludes collectibles, consumables, consumer durables and real estate used for primary residences.

Spain: Going places.

Interest rates would also not have come down anywhere near as much had Spain remained outside the euro (12 percentage points between 1989 and 1999, when EMU came into existence). By adopting the euro, the peseta exchange rate risk disappeared. Real interest rates in Spain since the adoption of the euro have been either negative or neutral, depending on the country’s inflation rate, which has been (and still is) higher than the Euro zone average. The ‘one-size-fits-all’ monetary policy of the European Central Bank (ECB) has been too expansive for Spain and has driven the consumer boom, particularly the surge in mortgages. This, in turn, has sustained the decadelong construction boom and generated fears of the bursting of the real estate bubble. As this policy uses the weighted harmonised CPI of the Euro zone as a medium-term reference target, and the GDP weight of Germany, France and Italy is well above 50% of the total Euro zone economy, the rate of inflation in these countries (lower than Spain’s) is determinant for the ECB’s stance.

Household indebtedness is at a high level (130% of disposable income in 2006, up from 60% in 1990) and vulnerable to the higher Euro zone interest rates. Household savings only represented 9% of disposable income in 2006, the lowest level since 1999. Household wealth has also grown strongly, largely because of the steep rise in property prices.The debt service-disposable income ratio would be eroded by higher ECB interest rate rises, but at 9% in 2006 it was still lower than in most countries of the Euro zone. Spain’s mortgage debtto-GDP ratio increased from 32.4% in 2002 to 56.1% in 2006, higher than France’s (31.8%) and Italy’s (16.6%), but much lower than the UK’s (82.8% - see Exhibit 2.3).

EXHIBIT 2.3 Mortgage Debt-to-GDP Ratio (%) 2002 82.2 63.9 43.0 32.4 22.5 10.2

Denmark UK Germany Spain France Italy

2003 81.0 69.2 43.4 35.5 24.1 11.6

2004 85.4 73.9 43.0 40.0 26.0 13.3

2005 92.1 78.2 42.9 49.5 28.8 15.3

2006 98.1 82.8 42.3 56.1 31.8 16.6

Source: Morgan Stanley Research.

EMU imposes a discipline that, overall, has been clearly good for the economy, although at the individual level the special conditions it created in Spain may have encouraged people to live beyond their means and some companies to borrow heavily – notably construction groups – to finance acquisitions. Corporate debt was at a record high in 2007 (106% of GDP in 2006, compared with a Euro zone average of 70%, according to rating agency Standard & Poor’s).

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Chapter 2: The Economy

General Government Budget The most significant macroeconomic achievement has been the turnaround in the general government financial balance – from a deficit of 6.3% of GDP in 1995 to a surplus of 1.1% in 2005, for the first time in 30 years, and 1.8% in 2006 (see Exhibit 2.4). Only four Euro zone countries recorded a surplus in 2006. The others were Finland, Ireland and the Netherlands, all much smaller than Spain, whose contribution to budgetary stability, and therefore to successful Euro zone economic management, has been noteworthy.

The Socialists inherited a much improved budgetary situation from the previous Popular Party (PP) government (which left office in 2004 with the books balanced). The continued improvement, however, has been revenue- and not expenditure-based, thanks to the bonanza in tax receipts from the booming 64

economy. Public spending in GDP terms has remained virtually unchanged since 2003 at around 38%, (see Exhibit 2.5), while revenue has been growing at a faster pace than the economy and has pushed up the tax burden.

EXHIBIT 2.4 Balance of Consolidated General Government Sector (% of GDP) France Germany Italy Spain UK

1995 -5.5 -3.2 -8.2 -6.3 -5.8

2007* -2.4 -0.3 -2.4 +1.8 -3.1

1995 54.4 48.3 52.5 44.4 44.9

2006 53.4 45.4 50.1 38.6 43.8

Source: Eurostat. *Forecast.

EXHIBIT 2.5 Exhibit 2.5. Public Spending (% of GDP) France Germany Italy Spain UK Source: OECD.

The new Law of Budgetary Stability came into effect in 2007. This law reforms the 2003 Fiscal Stability Law, which obliged each level of government to keep its accounts permanently in balance without regard to the position of the economy over the economic cycle. Since no penalties were imposed on non-complying governments, fiscal discipline hinged on peer pressure and monitoring. Individual regional governments were subject to a zero-deficit objective but, even though the cyclical situation of the economy was good, some of them resorted to off-balance sheet operations.

Spain: Going places.

The main goal of the reformed law is to maintain fiscal balance over the course of the cycle. Every three years, the central government will publish two growth thresholds that will determine the required financial outcomes for central, regional and local governments. Growth above the higher threshold (initially set at 3%) generates a requirement for a surplus; growth between the thresholds requires balanced budgets and growth beneath the lower level (initially set at 2%) allows governments to incur deficits, which are bounded by a total deficit ceiling, allocated by level of administration. The maximum allowed overall deficit is 1% of GDP. A special allowance is made to exceptionally include increases in investment in programmes for productive activities, R&D included. This allowance is up to a maximum of 0.5% of GDP, divided between the central, regional and local governments (0.20, 0.25 and 0.05% of GDP, respectively).3 The new law constitutes a softening of the budget restrictions for regional and local governments and, when the economic cycle changes, will make it more difficult to conduct contractionary fiscal policies.

Preserving budgetary stability is important for longer-term sustainability and preparing for the day, which is not that far off, when slower economic growth will reduce the capacity to use revenues to generate a surplus instead of cutting expenditure, politically more difficult. Most analysts believe Spain should be using the current bonanza to achieve budget surpluses of around 3% of GDP in order to create a cushion for when it ends. Meanwhile, pressure to spend more on health and education, areas feeling the impact of the influx of immigrants, is intensifying. And the process of further devolution to the regions makes the central government more amenable to political pressure.

Further pension reform is needed to cope with the ageing of the population (see the relevant sections in Chapter 1). The enormous rise in immigration has improved short-term pension finances but has lulled the public (and especially politicians) into believing that the issue is no longer urgent and can be put off. The longer it is, the less chance there is of minimising adjustment costs.

Fiscal consolidation has enabled public debt to be retired (reducing the debt/GDP ratio by almost 25 percentage points since 1995 to 39.7% of GDP in 2006 – see Exhibit 2.6), a reserve fund to pay future pensions to be built up (expected to reach more than €50 billion in 2008, roughly nine months’ pension payments) and corporate and personal tax rates to be lowered as of 2007 (although they are still high by European standards – see Chapter 1).

Thanks to sound public finances, the Kingdom of Spain enjoys an Aaa rating from Moody’s for its foreign and local currency government bonds, one of 19 countries with the maximum sovereign rating (see Exhibit 2.7).

3. For a full explanation, see pages 107-108 of the OECD Economic Survey of Spain (January 2007).

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Chapter 2: The Economy

EXHIBIT 2.6 General Government Debt (% of GDP) 1995 54.6 57.0 124.3 63.9 51.8

France Germany Italy Spain UK

2006 64.2 67.5 106.8 39.7 43.2

Source: Eurostat.

EXHIBIT 2.7 Countries with Aaa Rating Austria Australia Canada Denmark

66

Finland France Germany Iceland

Ireland Luxembourg Netherlands New Zealand

Norway Singapore Spain Sweden

Switzerland UK US

Source: Moody’s Investor Services.

Inflation Spain’s consumer price index has remained stubbornly above the Euro zone average (see Exhibit 2.8). Between 1997 and 2007, the inflation differential reached a cumulative 11 percentage points, eroding competitiveness. It is not rampant wage growth that is to blame for this, as real wages have fallen over the past few years (although the wage formation system needs to be reformed), but the need for greater flexibility in labour (see Chapter 1) and product markets.

As a heavily energy dependent economy, inflation has also risen because of higher oil prices.

The new Competition Law has several positive features, including the enhanced independence accorded to a National Competition Commission – provided parliament appoints people via public hearings focused on the appointee’s expertise and not their political allegiance. The government, however, has kept the privilege of appointing the person in charge of prosecuting offenders. The OECD noted in its latest survey of Spain that regulation has become more procompetitive since 1998, according to its Product Market Regulation Indicators, but that progress has “not been any more rapid than elsewhere and, hence, there is still plenty of leeway for unleashing market forces.”

Spain: Going places.

EXHIBIT 2.8 Inflation Rate* Euro area France Germany Italy Spain

1997 1.6 1.3 1.5 1.9 1.9

20071 3.1 2.6 3.3 2.6 4.1

(*) Annual rate of change in Harmonised Indices of Consumer Prices (HICPs).

(1) November.

Source: Eurostat.

The Impact of EU Funds Spain was the largest net beneficiary of EU funds (the difference between what it paid into the EU budget and what it received) between 1986 and 2006 (€84.4 billion on a cash basis), but they are now gradually drying up because of the economy’s spectacular growth and the ‘statistical impact’ of EU enlargement.

Structural and Cohesion Funds amounted to €118 billion during this period, three times more than the total granted to all the countries that benefited from the Marshall Plan after World War II and from which Spain was excluded.4 For every euro that Spain contributed to the EU’s coffers, it received €1.85 in return – or, put another way, every single Spaniard received €130 every year during this period.

On average, transfers represented 0.8% of the annual GDP until 2006 and a maximum of 1.6% in 2003. This may not seem very much, but they have played an important role in economic growth both on the demand side (for example, public works) and on the supply side (increasing productive capacity).5 According to a report by the Economic Office of the Prime Minister, EU funds added 0.4 percentage points to annual economic growth between 1988 and 2006 or the equivalent of €600 per inhabitant per year. Spain’s per capita GDP rose from 72% of the EU-15 average in 1986 to 91.7% in 2007 in purchasing power standards.

Without these funds, Spain would have been hard pressed to build up its infrastructure or narrow the gap between the per capita income of the poorest and richest regions. In 1986 Spain had 773km of dual-carriage motorways and in 2006 6,267km (4km out of every 10km of which was financed by EU funds); in 1986 it had no high-speed trains, while today it has three lines (for every €100 invested, €36 came from Europe).

4. The European Commission’s office in Madrid appropriately called its book on this subject The Largest Solidarity Operation in History (La Mayor Operación de Solidaridad de la Historia).

5. See The European Union and Economic Reforms: The Case of Spain by Sebastián Royo for an extensive analysis of the impact of EU entry (www.realinstitutoelcano. org/documentos/243/243_Royo_EUandSpain.pdf).

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As a result of the ‘statistical effect’ of EU enlargement in 2004, which pushed Spain’s per capita GDP over the 90% threshold, the country, strictly speaking, no longer qualifies for Cohesion Funds.These are the funds that go to specific projects that may be carried out in any region of a member state, while Structural Funds are granted for programmes that foster the convergence of the most lagging regions, help economic and social restructuring in areas with structural problems and promote job creation and improve worker training.

Their qualifying requirement is a per capita GDP of 75% or less. The number of Spain’s regions eligible as Objective 1 for Structural Funds dropped from seven to four (Andalusia, Galicia, Extremadura and Castile-La Mancha).

Spain will remain a net recipient until 2013. The funds it will receive in 2007-13 represent an annual average transfer of 0.2% of GDP and include a special R&D fund for Spain of €2 billion for the technological convergence 68

of companies. Even without the EU’s enlargement, there would have been a reduction in these funds.

Competitiveness Spain’s ailing competitiveness is manifested by its huge current account deficit, the second largest in 2006 ($107 billion) in absolute terms after the US (see next section), its slipping in the main competitiveness rankings (IMD and World Economic Forum) over the past five years and various indices (see Exhibit 2.9). Consumer price competitiveness against developed countries took a knock in the early 1990s following the peseta’s entry into the European Monetary System at a high exchange rate. The successive devaluations of the peseta as of September 1992 produced a gain in competitiveness, and the macroeconomic stability in the years before the launch of European Monetary Union in 1999 helped to maintain the competitive level. However, since the year 2000 competitiveness has been eroded and, as a euro country, Spain can no longer use devaluation to compensate.

Spain: Going places.

EXHIBIT 2.9 Spain’s External Competitiveness (Indices, 2000=100) Relative unit labour costs (manufacturing)

Relative export prices**

Effective exchange rate 112 110 108 106 104 102 100 98 96

2000

2001

2002

2003

2004

2005

2006

** Exports of goods and services, relative to Euro zone.

Sources: OECD: Thomson Datastream.

In 2007 Spain inched up the IMD’s competitiveness scoreboard to 30th position out of 55 countries from 31st in 2006. The IMD defines competitiveness as the “ability of a country to create added value and thus increase national wealth by managing assets and processes, attractiveness and aggressiveness, globality and proximity, and by integrating these relationships into an economic and social model.” The rankings are based on four input factors: economic performance, government efficiency, business efficiency and infrastructure.

Spain’s position declined in all four areas during this period (see Exhibit 2.10).

The main challenges, according to the Spanish Confederation of Employers, are to enhance technological capability, improve the educational system, especially professional training, guarantee the efficiency of the national and European energy market, an in-depth reform of labour market regulations and lower corporate taxation (the latter was reduced as of 2007 – see Chapter 1).

EXHIBIT 2.10 Competitiveness Input Factors, Ranking in Each Category and Overall Ranking Economic performance Government efficiency Business efficiency Infrastructure Overall ranking

2003 22 24 27 24 26

2004 21 22 32 26 28

2005 24 27 39 27 32

2006 32 34 36 26 31

2007 27 29 33 29 30

Source: IMD World Competitiveness Yearbook 2007.

In the latest World Economic Forum’s Global Competitiveness Index, Spain was ranked 29th out of 131 countries. The WEF said that Spain’s ‘most gaping weakness’ is the lack of flexibility and efficiency of its labour markets and that more could be done to boost the quality of institutions of higher education, including those engaged in scientific research and technology innovation.

Spain’s labour costs have risen significantly over the past decade; the country is no longer a low-cost manufacturer and cannot compete on

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Chapter 2: The Economy

the basis of these costs alone (see Exhibit 2.11). Hence the drive to improve quality and productivity and move towards a knowledge-based economy through a better educated workforce and more investment in R&D. This is a natural part of the process of becoming a much richer country.

EXHIBIT 2.11 International Labour Costs

70

COUNTRY West Germany France Finland UK Ireland United States Italy Spain Portugal Hungary Poland

€/HOUR 33.59 29.20 31.28 26.32 25.22 23.94 23.72 18.87 8.81 6.06 5.16

Note: Cost per hour in 2006 in the manufacturing sector.

Source: German Economics Institute (IWD), Cologne.

The loss of competitiveness, whichever way it is gauged, is one of the reasons why more than 40 multinationals and Spanish companies have pulled out of Spain since 2002 and shifted their production to other countries, principally the new EU members in Eastern and Central Europe, but also China. Although still an important vehicle manufacturing centre in Europe, the production of parts is slowly drifting eastward.

Immigration has made the labour market more flexible (see Chapter 1), both functionally and geographically, but it has also contributed to sluggish growth in labour productivity. Most immigrants work in labour-intensive sectors. Between 1998 and 2006, employment contributed three percentage points of the 3.5% annual rise in Spain’s potential GDP and productivity just 0.5 percentage points. The contribution of total ‘factor productivity’ – or the increase in the efficiency with which factors of production are used – was negative at -0.2 percentage points a year. Companies, however, have not been as hard hit as one would expect from the lack of productivity gains because the low cost of financing, a plentiful supply of cheaper workers and the consequent moderate wage growth have compensated for the lacklustre productivity.

Spain: Going places.

The Current Account Deficit The rise in Spain’s current account deficit, from 5.3% of GDP in 2004 to 8.8% in 2006 and higher in 2007, has set off alarm bells.6 As a Euro area country, Spain cannot use devaluation as a weapon to achieve a necessary adjustment and so, at some stage, it will come via potentially painful changes in other areas. Spain’s problem highlights the age-old issue of how an economy adjusts within a common currency area. Jaime Caruana, the previous governor of the Bank of Spain, pinpointed the problem in 2005 when he said that “when a large external deficit emerges in a monetary union as a result of an economy’s difficulties in competing, a very costly dilemma may arise: nominal costs are either adjusted head-on, or the loss of competitiveness will check the generation of value added and job creation.”

71

There are many factors behind the current account deficit, which has become a structural feature of the Spanish economy, most notably the country’s huge trade deficit. In the past, Spain’s traditional trade deficit was eased by the substantial surplus on the services account, mainly from tourism receipts. This account’s surplus peaked in 2001 at 3.4% of GDP and in 2006 was 2.1%, partly due to the emergence of other countries competing with Spain in tourism and the increasing expenditure of Spanish tourists abroad.

The deficit in the income account has increased with external borrowing, and in transfers the balance has moved from a surplus to a deficit, reflecting the substantial rise in remittances by immigrants to more than €6 billion in 2006 and the reduction in EU funds (see Exhibit 2.12).

EXHIBIT 2.12 Current Account Balance (% of GDP) 1996 -0.2 -2.6 3.0 -1.2 0.5

Total Goods Services Income Transfers

2000 -4.0 -6.4 3.3 -1.2 0.3

2001 -3.9 -5.7 3.4 -1.8 0.2

2002 -3.3 -5.0 3.1 -1.7 0.3

2003 -3.5 -5.1 3.0 -1.3 -0.1

2004 -5.3 -6.4 2.6 -1.4 0.0

2005 -7.4 -7.6 2.5 -1.9 -0.3

2006 -8.8 -8.3 2.1 -2.1 -0.5

Source: Bank of Spain and INE.

Another way of looking at the performance of the current account deficit is to examine the difference between internal savings and investment.

While savings have remained virtually stable since 1996 at 22% of GDP, investment has risen to more than 30%, surpassed only by Estonia within the EU. A significant portion of investment has gone into construction, but also into equipment and technology, as many companies have been increasing their 6. For a succinct analysis of the age-old issue of adjustment within a common currency see “The Pain in Spain Will Follow Years of Rapid Economic Gain” by Martin Wolf (Financial Times, March 27, 2007).

Chapter 2: The Economy

production capacity, mostly in the services sector. Furthermore, construction companies have also invested heavily in other countries to diversify their risks at home and in other sectors unrelated to their own, such as energy, with better prospects. Government economists, as in any other country with an unsustainable external position, are keen to point out that the US’s current account deficit, unlike Spain’s, reflects a decline in savings and not a rise in investment. But they fail to acknowledge the structural changes that play against Spain.

The deficit has been generated by the private not the public sector, whose fiscal accounts are in good shape. This may not help much, however, if the need is to restore competitiveness through a currency adjustment that Spain cannot engineer itself.

Given that the deficit is private-sector driven, this raises the issue of 72

whether Spanish companies are too highly leveraged. Domestic credit to the corporate sector increased 30% in 2006 – and that was just by banks regulated by the Bank of Spain. International banks have also been major lenders.

Corporate debt rose from 47% of GDP in 2000 to 70% in 2006, compared with the European average of 43%. A Bank of Spain survey of 900 companies showed financial costs up 34.5% in 2006, the biggest jump since 2000.7 The most highly leveraged sector is construction, as measured by the debt/earnings before interest, tax, depreciation and amortization (EBITDA) ratio (see Exhibit 2.13).

EXHIBIT 2.13 Debt/EBITDA Ratio by Sectors (Listed Companies) Energy and water Construction and real estate Communications Industry, commerce and services Transport and motorways Total

2001 3.64 4,63 2.48 2.33 4.07 3.18

2006 2.17 11.52 3.07 2.37 6.87 3.86

Source: National Securities Market Commission.

While it is true that EMU membership protects Spain from a currency crisis, currency risk inside a monetary union turns into credit risk, and this could lead to a withdrawal of credit or the stopping of new loans, particularly in construction – the sector driving the economy – and the housing market.

Indeed, Spanish companies began to face tougher credit conditions in 2007 as a result of a change in perceptions of country risk.

7. See Bank of Spain Economic Bulletin, March 2007.

Spain: Going places.

R&D The spirit of the famous comment by philosopher Miguel de Unamuno (1864-1936), “Let them invent! The electric bulb illuminates here as much as where it was invented”, has haunted many governments. Spain has long lagged behind most other European countries in R&D expenditure and has a yawning gap between payments and receipts for patents, royalties and fees.

Even if the country manages to almost double its current spending to 2% of GDP by 2010, under the Ingenio Plan, which is very unlikely, it will be not much more than the current average of the EU-25 (see Exhibit 2.14) and still far below that of the leading countries Finland and Sweden.

Spain is the only OECD country that spends more on gambling every year than on R&D. In 2005 (latest figure), Spaniards spent €29 billion on all forms of gambling, including the national lottery, or €722 per capita, according to the Munich-based Media & Entertainment Consulting Network, while R&D expenditure (private and public sector) totalled only one-third of this at around €10 billion.

EXHIBIT 2.14 R&D Spending (% of GDP) 1995 2.29 2.19 0.97 0.79 1.95 1.82

France Germany Italy Spain UK EU-25

2006 2.12 2.51 1.10 1.20 1.76 1.84

Source: Eurostat.

It is striking that the last Spaniard to win a Nobel Prize for science was Severo Ochoa in 1959, although by then he was an American citizen after working for many years in the US. Before him, it was Santiago Ramón y Cajal in 1906. The low rate of inventiveness is underscored by the number of patents requested from the European Office of Patents: Spain accounts for a mere 0.8%, well below the economy’s share of the EU-15 GDP (8%).

There are many reasons for this lag, starting with the sectorial composition of Spain’s GDP and the low weight of industry and other factors, such as the generally poor school results in science and mathematics (see the Education section in Chapter 1) and, consequently, the relatively low production of engineers and scientists (many of the best often work or do their research abroad because of the lack of opportunities in their own country), the lack of cooperation between the academic and corporate worlds and a weak entrepreneurial culture, although this is very slowly beginning to improve.

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The Ingenio Plan uses a number of instruments to increase the focus and funding of government research, stimulate technology transfers by encouraging public/private partnerships and enhance the incentives for private-sector research and the diffusion of new technologies. Another element involves educational reforms at all levels, particularly in universities. A key factor here is whether there will be deep resistance by universities (because of their vested interests) to a culture of appraisal, something that Spain sorely needs. Although this has been achieved in the country’s business schools, which are now among the best in Europe, it is far from the case in universities. The selection and promotion system in universities is based on research, but the definition is very narrow and academic and excludes all remunerated work, however prestigious it may be.

74

Foreign Trade The Spanish economy is more open than the UK’s, as measured by exports and imports of goods as a percentage of GDP (see Exhibit 2.15). Spain began to liberalise its trade before joining the EU in 1986, but most trade creation has occurred since then, and particularly since the establishment of the European Single Market in 1993, by which time the country had completed the dismantling of tariffs with the EU as well as reducing them with the rest of the world (see Exhibit 2.16). Monetary Union has had little additional impact.

EXHIBIT 2.15 Merchandise Trade (% of GDP) 1990 36.4 45.5 32.0 17.3 51.1 27.5 41.2 15.8

France Germany Italy Japan Korea Spain UK US

2005 45.0 62.4 42.4 24.5 69.3 41.7 40.6 21.2

Source:World Development Indicators, 2007,World Bank.

EXHIBIT 2.16 Exports and Imports of Goods and Services (% of GDP) % 65 60 55 50 45 40 35 30

1980

Source: Eurostat and La Caixa.

EEC

Single Market

EMU

1986

1993

1999

2005

Spain: Going places.

The pattern of trade has also changed substantially, as one would expect, because of EU membership. Spain received 58.4% of its imports from the EU-25 in 2006 (50.3% from the EU-12 in 1986) and the EU took 70.3% of exports (60.3% went to the EU-12 in 1986 – see Exhibit 2.17). Neighbouring Portugal takes around 9% of Spain’s exports, double the amount taken by the US and almost double that of Latin America. It is normal for a country to trade a lot with its immediate neighbours (in the United States’ case Mexico and Canada), but what reveals a weakness in Spain’s case is that the UK, Germany, Italy and France trade much more with the United States as a proportion of their total trade. According to US figures, Spanish exports account for a mere 0.5% of America’s total foreign purchases: one-sixth the UK share, one-fourth the French share and one-fourth the Italian share – compared with Spain’s 2% share of global trade. Spain’s share of the US market is more in line with that of medium-sized EU countries, such as Austria, Belgium or Denmark, whose economies are much smaller. Although the volume of exports is small (and growing), the United States is Spain’s sixth-largest market, making it a top-tier trading partner, only exceeded by Spain’s ‘natural’ markets of France, Germany, Portugal, the UK and Italy.

EXHIBIT 2.17 Foreign Trade by Geographical Area (% of total)* EU-25 Euro area France Germany Italy Portugal Latin America OPEC China US Russia Japan Rest

IMPORTS 58.4 48.8 12.8 14.2 8.2 3.4 4.7 8.5 5.5 3.3 2.8 2.3 15.5

EXPORTS 70.3 56.2 18.7 10.9 8.5 8.8 4.9 2.5 1.0 4.4 0.9 0.8 15.2

(*) Figures for 2006.

Source: Department of Customs.

Traditionally an exporter of vegetables, fruit and wine, Spain today exports an increasingly diversified range of products (see Exhibit 2.18), from oddities such as doughnuts (Panrico/Donut) to information and air traffic control systems (Indra) and space navigation equipment (GMV). Over the past ten years, its share of the world’s merchandise exports has remained steady at around 1.8% (1% in 1980), while the country’s proportion of commercial services during that period rose from 3.3% to 3.6% (see Exhibit 2.19). Many of Spain’s top exporters of products are multinationals,

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particularly in the car industry, which accounted for almost 19% of total merchandise exports in 2006 (vehicles and components). However, whereas seven of the top ten exporters were car companies in 1995, today the top exporters include more Spanish companies: Repsol YPF (oil), Endesa (electricity), Telefónica (telecommunications) and Mondragón Cooperative Corporation (auto components and electrical household appliances). The country’s export base is still relatively small as are exports in per head terms (see Exhibit 2.20). The share of high-technology products in total exports has remained virtually unchanged since 1993 (see Exhibit 2.21).

EXHIBIT 2.18 Exports by Product Group, 1986 and 2006 (% of total)*

76

1986 16.2 6.3 3.2 17.3 8.6 17.3 15.4 15.8 -

Food Energy products Raw materials Semi-manufactured goods Chemical products Capital goods Automotive industry Consumer durables Other goods

2006 13.6 4.6 2.0 12.5 12.7 22.1 18.8 11.9 1.9

Source: Department of Customs.

EXHIBIT 2.19 Leading Exporters in World Merchandise Trade (% of total) US

Germany

France 14 12 10 8 6 4 2 0

1995

Japan

Italy

1996

1997

SPAIN

China

1998

1999

2000

2001

2002

2003

2004

2005

2006

Sources: WTO.

EXHIBIT 2.20 Goods Exports per Head (US$) Singapore Hong Kong Netherlands Switzerland Sweden Germany France

57,400 41,728 25,150 18,685 14,455 11,826 7,542

Source: Based on World Bank figures of exports and population for 2005.

UK Italy Korea Malaysia Australia Japan Spain

6,378 6,223 5,925 5,637 5,291 4,647 4,351

Spain: Going places.

EXHIBIT 2.21 High-Tech Exports* 1999 24 14 8 6 27 20

France Germany Italy Spain UK UE-25

2004 20 15 7 7 23 18

(*) Exports of high technology products as a share of total exports. These products are defined as the sum of the following products: aerospace, computers, office machinery, electronics, instruments, pharmaceuticals, electrical machinery and armament. The total exports for the EU do not include intra-EU trade.

Source: Eurostat.

Export performance (their growth was among the lowest in the EU25 in 2007) needs to be much better in order to offset the very high level of imports, the consequent ballooning of the trade deficit (to 8.3% of GDP in 2006 when the export/import ratio was 65%) and the current account deficit. A large chunk of the trade deficit is due to imports of energy products (see Chapter 3) as Spain is very dependent on other countries for its oil and natural gas (see Exhibit 2.22). Another factor behind the surge in imports is the euro’s appreciation against the dollar, which has cheapened goods and also, paradoxical as it may seem, hindered exports in the Euro area because Spanish companies are competing with those that use the dollar and benefit from its depreciation.

EXHIBIT 2.22 Imports by Product Group, 1986 and 2006 (% of total)* Food Energy products Raw materials Semi-manufactured goods Chemical products Capital goods Automotive industry Consumer durables Other goods (*) Figures for 2006.

Source: Department of Customs.

1986 13.0 19.1 8.1 8.6 11.6 23.7 6.8 9.1 -

2006 8.4 15.6 3.7 9.1 11.7 23.6 14.6 12.8 0.6

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Chapter 3: Main Economic Sectors

78

MACBA, BARCELONA. Architect/s: Richard Meier & Partners, 1995.

Most of the southern side of the Barcelona Museum of Contemporary Art (MACBA) is glazed, allowing in natural light and providing a view of the nearby Plaรงa dels ร ngels.

Spain: Going places.

The structure of the Spanish economy has changed enormously. The importance of agriculture has continued to decline and services to increase. Today Spain has the world’s eighth-largest motor industry, two of the biggest banks in Europe, both of which are major players in Latin America, and the world’s second-largest tourism industry in terms of the number of visitors, to mention but a few of the notable changes.

The economy is broadly similar in structure to that of the EU-25 as a whole, apart from the much greater importance of construction (see Exhibit 3.1) and the smaller contribution of industry.

EXHIBIT 3.1 Structure of the Economy (% share of total gross value added) Agriculture, hunting and fisheries Industry Construction Transport, trade and communication services Business activities and financial services Other services

SPAIN 3.3 17.9 11.6 26.0 20.6 20.6

EU-25 1.9 20.6 6.0 21.7 27.4 22.5

Figures for 2005.

Source: Eurostat.

Agriculture In 1960, 41% of the working population was employed in agriculture, 29% in 1970, 22% in 1975 (2.8 million people) and 4.8% in 2006, generating close to 4% of GDP. Nevertheless, it is still close to the hearts of Spaniards. Most city dwellers have family connections with the countryside (very many have second homes) and professional people are often absentee landlords.

There has been a tremendous flight from the land over the past 40 years, as Spaniards migrated from villages to towns and cities or emigrated. Had it not been for the major turnaround in emigration and the influx of immigrants over the past decade from North Africa, Latin America and Eastern Europe, large parts of Spain’s agriculture, particularly the picking and packing of fruit and produce, would have found it very hard to keep going.

The agricultural sector, which accounts for around one-sixth of Spain’s exports and enjoys a trade surplus, is characterised, at one end, by very efficient production of produce for export, mainly in the south and east of the country (often using droplet irrigation in hot-houses) and, at the other, largely in the north, tiny plots for subsistence farming by smallholders. More than 50% of Spanish farms have less than five hectares and less than 10% more than 50, according to official figures. Only 15% of useful agricultural surface is

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Chapter 3: Main Economic Sectors

irrigated, but it generates more than half of production. Spain’s irrigated area of more than 3.4 million hectares represents close to one-third of the EU-15 total. Lastly, there has been a surge in the land used for ecological agriculture, from 4,235 hectares in 1991 to 733,000 in 2004, the eighth largest in the world and the fourth in Europe.

Spain has the widest range of agricultural products in the EU. In the Atlantic provinces in the north, between 65% and 90% of production comes from the livestock sector (mainly dairy products), and a similar proportion comes from horticulture in the Mediterranean coastal provinces. Spain is the world’s fourth-largest producer of citrus fruits after Brazil, the US and China and the second-biggest producer of strawberries and artichokes. In the central plain the main products are cereals and wine. Jaén, in the south, has Europe’s highest concentration of olive oil production. By contrast, the main activity in 80

Badajoz and Salamanca in the west, provinces that border Portugal, is meat production, while Lérida, in the northeast, is famous for pork and olive oil.

The great variety of products is due to the diversity of weather and terrain. Spain is criss-crossed with mountain ranges, and the altitude of nearly 60% of its territory exceeds 600 metres, making it the second-most mountainous country in Europe after Switzerland. The climate varies from mild and wet conditions in the north, where the average yearly rainfall can be as much as 1,600 millimetres (the North Atlantic coastal area is known as ‘Green Spain’), to the arid desert of Almería in the southeast, where as little as 100 millimetres of rain can fall a year. Almería and Huelva are focal points of the Spanish agricultural ‘miracle’. Investment in irrigation and in plastic greenhouses, based on technology used in Israel, has produced a surge in the area intensively cultivated for horticultural produce. Beans, peppers, papaya and, particularly, strawberries grow under miles of shimmering plastic. Overall, Spain is the fourth-largest farm producer after France, Italy and Germany.

Spain is the second-largest beneficiary of funds from the Common Agricultural Policy (CAP) after France. Without these subsidies, the growing of cereals and certain other products would be practically unviable.

In wine, Spain is the world’s third-largest producer after France and Italy. There has been considerable investment in state-of-the-art wineries and something of a revolution in quality, needed to fight off the growing competition from wines of the New World, such as Australia. However, only four of Spain’s wines were ranked among the 2006 Top 100 by The Wine Spectator, the bible of the wine trade (see Exhibit 3.2). In 1982, Spain had about 1.5 million hectares of vineyards. Irrigation was not allowed and 30 to 34 million hl of wine were produced a year. There were 25 designations of origin (denominación de origen, the equivalent of France’s appellation contrôlée) and little more than 10% of the

Spain: Going places.

wine produced was exported. Today, the vine-growing area is smaller at just over 1 million hectares and the dry-farmed stocks have been transformed into modern plantations with the branches supported on structures and wires and often with drip irrigation. More wine is being produced, about 40 million hl and one-third of production is exported, mostly in bottles, and there are three times as many designations of origin (DOs).1 The DOs guarantee that a wine meets certain standards and are important for the export market, as wines under the denominación de origen scheme automatically receive the European distinction as ‘quality wines produced in a given area’, which appears as the initials VCPRD on the label. Among the best known quality reds are Rioja and Ribera del Duero, reds and whites from Penedés, fine whites from Rueda, sherry from Jerez and a sparkling wine known as cava produced under the méthode champenoise. The Catalan companies Freixenet and Codorníu lead the world in the production of cava.

EXHIBIT 3.2 The 2006 Top 100 Wines by Region COUNTRY Argentina Australia Austria California Chile France Germany Hungary Italy New Zealand Oregon Portugal South Africa Spain Washington

NUMBER RANKED 5 12 1 14 4 27 2 1 11 3 7 4 1 4 4

Source: Wine Spectator, December 31, 2006 – January 15, 2007 issue.

In fisheries, Spain has the largest share of the EU fishing fleet in terms of tonnage and number of vessels, as befits a country that is the secondlargest consumer of fish and seafood in the world after Japan. Nevertheless, the industry has shrunk considerably since the mid-1980s, because of strict limits imposed by the EU, when Spain’s 100,000 fishermen made up onethird of all manpower in the then EEC’s fishing sector and a further 700,000 jobs depended on fishing. This shrinkage is the result of reduced catch quotas under the EU’s Common Fisheries Policy in order to reduce the size of the EU fleet, which is too big for the resources in EU waters, some of which have been

1. This information comes from “Pressing On: A Retrospective of Spanish Wine, 1982-2007” by Andrés Proensa (Spain Gourmetour, September-December 2007).

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virtually depleted. Spain’s share of the world catch has dropped from 1.3% in 1995 to below 1%. Fishing, however, is still important in the economic life of Galicia in the northwest, principally the ports of Vigo and La Coruña, as well as in Huelva, Cadiz and Algeciras in the south, and Las Palmas and Santa Cruz in the Canary Islands. Spain will receive the largest amount (just over €1 billion) from the €3.8 billion European Fisheries Fund for 2007-2013.

Auto Industry In 1963 Spain’s motor industry was in its infancy, and the tiny Seat 600 (the not-so-elegant equivalent of the Mini in Britain) was the most popular car. In 2006, the country was the world’s eighth-largest producer of cars (see Exhibit 82

3.3). The industry generates around 5% of GDP, employs more than 70,000 people directly (some 2 million including indirect jobs, 9% of the working population) and exports more than 80% of output. Exports of vehicles and components account for around 22% of total merchandise exports. Following the sale of Seat to Volkswagen in the 1980s, all the producers in the country are foreign multinationals (Ford, Nissan, General Motors, Peugeot Citroën, Mercedes Benz, Renault, Santana and Iveco).

EXHIBIT 3.3 World Ranking of Car Producers, 2006 and 1974 (units) COUNTRY 1. Japan 2. Germany 3. China 4. US 5. South Korea 6. France 7. Brazil 8. Spain 9. India 10. UK

OUTPUT, 2006 9,756,515 5,398,508 5,233,132 4,366,220 3,489,000 2,723,196 2,092,029 2,078,639 1,473,000 1,442,085

COUNTRY 1. US 2. Japan 3. Germany 4. France 5. Italy 6. UK 7. Canada 8. Russia 9. Spain 10. Brazil

OUTPUT, 1974 7,324,504 3,931,868 2,839,596 2,698,785 1,630,686 1,534,119 1,165,635 1,119,000 704,574 691,310

Source: OICA and Ward’s.

Some auto and components companies have begun to shift part of their production to cheaper countries in East Europe. For example, Seat moved part of the production of its Ibiza hatchback to Bratislava in 2003.

Spain: Going places.

Construction More cement has been consumed in recent years in Spain than anywhere else in Europe and the fifth-largest amount worldwide after China, India, the US and Japan; almost everywhere you turn the skyline is dominated by construction cranes. The sector has become one of the mainstays of the Spanish economy, both in terms of activity and job creation (29% of the total jobs created in 2005 and 33% in 2006). It directly employs more than 2.5 million workers (14% of the labour force, double the Euro zone average) and generates more than 17% of GDP (11% in 1997). The sector has a big knock-on impact on the rest of the economy. It is estimated that a one percentage point rise in construction demand produces a multiplier effect of almost double that on the country’s overall output.

The driving force is residential construction, which generated 7.5% of GDP in 2006, up from 4% in the mid-1990s when it was roughly the same level as in the US. The number of housing starts averaged more than 600,000 a year between 1999 and 2006, and the peak of 800,000 in 2006 was more than France, Germany, the UK and Italy combined. In 2007 there were signs of oversupply in an overheated property market, with much slower annualised growth in house prices, falling sales of homes, jitters in the share prices of some of the main companies – dramatically so at Astroc, the property sector’s star, whose share price plummeted from €72.60 in February 2007 (11 times its initial public offering price of €6.40 in May 2006) to below €6 in December – and homes bought as an investment being sold for less than the purchasing price. Spain had one of the highest ‘bubble factors’ according to Morgan Stanley Research, which produced an indicator measuring the extent between 1997 and 2006 to which expectations contributed to rising house prices – possibly leading to a bubble (see Exhibit 3.4).

EXHIBIT 3.4 Property Market Bubble Factor (%)* GREECE SWEDEN BELGIUM DENMARK 60.7 53.7 53.3 45.3

SPAIN 45.0

UK 38.8

FRANCE IRELAND 8.6 8.1

(*) This refers to an indicator called ‘the contribution of estimated change in expected capital gains to 10-year house price growth.’

The higher the figure, the more a rise in anticipated capital gains has driven up house prices. For example, a figure of 50% means that greater optimism over capital gains over the 10-year period made house prices 50% higher.

Source: Morgan Stanley, Financial Innovation and European Housing and Mortgage Markets by David Miles and Vladimir Pillonca (July 18, 2007).

Nine factors propelled the domestic property market. First and foremost, low nominal interest rates (negative or neutral in real terms) that came when Spain joined the euro and the corresponding improvement in financial terms in mortgage lending. Second, the 10% rise in the population

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Chapter 3: Main Economic Sectors

between 2000 and 2006 as a result of the influx of immigrants. Third, increasing purchases of second homes by foreigners. Fourth, the baby boom came later in Spain than in most countries, so that the share of the population of household formation age is almost among the highest in Europe. Fifth, the steady increase in the female participation rate has raised the number of twoincome households, making purchases more affordable for couples. Sixth, the rise in disposable income stemming from the very long period of economic growth. Seventh, investment in alternative assets, such as housing, after the downturn in the stock market in 2001 and 2002. Eighth, the very favourable tax treatment of house purchases. Ninth, the very restrictive legal environment for house renting.

Despite the enormous supply of homes that has come onto the market, house prices have climbed inexorably, so much so that 40-year 84

mortgages are often the only way that many first-time buyers can get a foot on the property ladder (see Exhibit 3.5). This practice is becoming very popular, turning an asset into a permanent liability and blurring the difference between buying and leasing a house. Property prices have shot through the roof more because of the jump in the cost of land than because of a surge in building materials and labour costs. The employment of tens of thousands of immigrants in the construction sector has helped to keep down labour costs. Between 1997 and March 2007 the average cost per square metre of land rose from €703 to €2,024, while the average wage rose from €15,492 to €20,427. The house price/weighted average wage per family ratio rose from 3.2 in 1997 to 6.1 in 2006, according to Morgan Stanley Research.

EXHIBIT 3.5 Real house prices (Indices, 2000=100) SPAIN 200 180 160 140 120 100 80

2000

Ireland

2001

Italy

2002

2003

Euro zone

2004

2005

2006

Source: OECD: Thomson Datastream.

Spain has the highest home ownership rate in the OECD at 82%, and its rental market is almost the thinnest in the EU because of an unfriendly legal environment (see Exhibit 3.6). Buying a home is much preferred over renting for various reasons, including rent levels (in a context of rising house prices) and the lack of legal security for owners.

Spain: Going places.

EXHIBIT 3.6 Housing Tenure in the Early 2000s % Spain Ireland Italy UK France Germany

OWNER OCCUPIED 82 79 77 69 56 41

PRIVATE RENTED 11 7 12 10 21 44

SOCIAL RENTED 0 9 5 21 17 6

Source: OECD (2006), OECD Employment Outlook.

Spain’s housing transaction costs are also among the highest among OECD countries, according to the Global Property Guide.The guide calculates the total costs of buying and selling a property worth €250,000 in a European country’s principal city and $250,000 elsewhere as a share of the property’s price (see Exhibit 3.7).

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EXHIBIT 3.7 Housing Transaction Costs (% of Property Value), Selected Countries

Italy France Spain Germany United States United Kingdom

REGISTRATION COSTS 4.00 5.59 1.50 2.00 0.67 1.09

LEGAL FEES 1.20 1.14 1.16 0.00 1.00 1.00

SOCIAL RENTED AGENT’S FEES 4.80 9.57 2.50 5.95 6.00 2.94

SALES & TRANSFER TAXES 7.00 0.00 7.00 3.50 1.40 0.00

ROUNDTRIP COST 17.00 16.30 12.16 11.45 9.07 5.03

Source: Global Property Guide (www.globalpropertyguide.com).

A new Land Law came into effect in July 2007 in a bid to curb speculation and rampant corruption and provide more subsidised housing, but also to do some political marketing ahead of the elections. Reclassifying land – which is in short supply in urban and coastal areas and is controlled by local governments – for building purposes and the granting of building permits has become the main source of corruption in Spain2. Local governments are poorly funded and are under constant pressure to spend from their electorates. Receiving money via land deals is often the only way mayors can replenish the depleted coffers of town halls. Until local governments are properly funded, either with more money from the central government or from higher local taxes, the construction sector will be a ‘permanent focus of corruption’, according to the Berlin-based Transparency International.

Under the new law, owners of land in the five years prior to its urban development will be listed in official documents, senior local government

2. Most senior executives and all lawyers surveyed by the Instituto de Empresa, a leading business school, in 2007 said the real estate sector was the most corrupt part of the Spanish economy and that politicians did not have the will to end the problem.

Chapter 3: Main Economic Sectors

officials have to declare their assets, and there will be tougher checks on housing developments increasing a town’s population by more than 20%. Under the old law, municipalities received 10% of the land re-zoned for building purposes and could sell some of it, thereby encouraging them to keep land prices high.

This regulation, equivalent to a tax, earmarked land for the construction of subsidised housing, public spaces and other infrastructure. The new law changes the compulsory land grant that municipalities receive when land is rezoned to between 5% and 15% and stipulates that 30% of the residential land must be used for subsidised government housing.

The construction boom has doubled the number of Spaniards in the list of the world’s richest individuals drawn up every year by the magazine Forbes. The list of 946 billionaires in 2007 includes 20 Spaniards, double the number in 2006 and eight of whose fortunes are related to construction or 86

real estate activities. One of them, Enrique Bañuelos, the chairman of Astroc, entered the ranking in 95th position with a personal fortune estimated at $7.7 billion and was unlikely to stay there in subsequent years because of the very dramatic fall in the price of the company’s shares during 2007. The construction boom has produced a significant new class of capitalists. The downturn in Spain’s decade-booming property market during 2007 claimed its first victim in October when the property company Llanera, with debts of €764 million recorded at the end of 2006 and more than 600 employees, began bankruptcy proceedings. Debts related to the whole construction sector – households (mortgages), real estate developers and construction companies – amounted to €1,015 billion at the end of June, almost on a par with Spain’s GDP. Although the construction sector is slowing down, significant underpinnings for the dynamism of housing demand in the long run remain as a result of socio-demographic factors, such as the thrust of immigration, the growing incorporation of women into the labour market and the reduction in the average family size. And public works in Spain and the growing international activity of the big construction and infrastructure companies are offsetting the slowdown in the domestic property market. In 2006, revenues from business abroad amounted to €5 billion, 24% more than in 2005 according to SEOPAN. The main contributors were the European Union (56%), Latin America (27%) and North America (10%). This figure only covers construction activity in the purest sense; including other activities, such as toll road and airport concessions and management of airport terminals, it is much higher. The six main companies in the sector all have made significant acquisitions abroad (see Chapter 4).

Spain: Going places.

Tourism Spain is the world’s second-largest tourism destination in terms of arrivals and receipts (see Exhibit 3.8). The sector employs around 2 million people (roughly one in every ten people with a job), generates around 12% of GDP and its surplus has kept the current account deficit from ballooning even more than it has done. Receipts were $51.1 billion in 2006 ($3.3 billion in 1975). Tourism has also played a role in Spain’s democratic development, as it brought Spaniards into contact with different people and ideas and broadened their horizon (entry visas for tourists from Western Europe were abolished in 1959, 16 years before the end of the Franco dictatorship).

EXHIBIT 3.8 Top International Tourism Countries RANK 1. France 2. Spain 3. US 4. China 5. Italy

ARRIVALS (millions) 79.1 58.5 51.1 49.6 41.1

RANK 1. United States 2. Spain 3. France 4. Italy 5. China

RECEIPTS (US$ billions) 85.7 51.1 46.3 38.1 33.9

Figures for 2006.

Source: World Tourism Organisation.

Despite its undoubted success, the tourism industry does not rank anywhere near as high as one might expect in terms of competitiveness.

Spain was ranked 15th in the World Economic Forum’s first-ever travel and tourism competitiveness report in 2007 that looked at 13 factors in 124 countries, including policy rules and regulations, environmental regulation, safety and security, infrastructure and price competitiveness. The study, its authors emphasised, was not a “beauty contest” but a way to “measure the factors that make it attractive to develop the travel and tourism industry of individual countries”. Spain has been losing ground to emerging players like Turkey, which entered the top ten in ninth place in 2005. Nevertheless, every year Spain sets a new record in the number of international tourist arrivals (defined as a visitor who spends at least one night in the country). According to projections made by the World Tourism Organisation, the number of tourists will reach 74 million in 2020, when Spain will drop to fourth place, with a global market share of 4.7%, and China will be in the top spot (see Exhibit 3.9).

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EXHIBIT 3.9 International Tourist Arrivals (millions) and Market Share (%)*, 1995 and 2020 RANK 1. China 2. France 3. US 4. Spain 5. Hong Kong (China)

1995 20.0 (3.5) 60.0 (10.6) 43.3 (7.7) 38.8 (6.9) 10.2 (1.8)

2020 130.0 (8.3) 106.1 (6.8) 102.4 (6.6) 73.9 (4.7) 56.6 (3.6)

AVG ANNUAL GROWTH RATE, 1995-2020 (%) 7.8 2.3 3.5 2.6 7.1

(*) Market share in brackets.

Source: World Tourism Organisation.

Spain, which was one of the first countries to benefit from package holidays, traditionally sold itself on sun and sand. But it is no longer a cheap country, and many parts of the Mediterranean coast have become densely populated concrete jungles, particularly along the Costa del Sol. Between 1996 and 2005, 313,000 homes (flats or houses) were built in the province of Malaga alone. In 88

early 2007 a European Parliament committee severely criticised the rapid urban growth. The Parliament’s report, approved by the Petitions Committee, was drawn up after a visit to Spain by MEPs in response to a plea by 15,000 foreign homeowners – mostly British – about the so-called ‘land grab’ law in Valencia, a region ruled by the Popular Party. The opposition Socialist Party in Valencia was very active in this dispute. The controversy dates back to 1994, when the Ley Reguladora de la Actividad Urbanistica gave developers the right to compulsorily purchase homes and re-designate land for new estates or community facilities.

The law was amended in 2006, but in practice this changed only the consultation procedures surrounding developers’ compulsory purchase rights. The report by the MEPs said the law obliged some owners to “give up 10 per cent of their land without compensation – ostensibly for very ill-defined social purposes”. This law had been praised in OECD and World Bank reports as an interesting new initiative that promoted an efficient use of land.

With so much of the coast ravaged and much to enjoy in the interior of Spain, the tourism authorities are striving for a more diverse tourism, from golfing holidays to visiting wineries and walking El Camino de Santiago.

Moreover, foreigners are becoming increasingly wary of buying property on Spain’s crowded Mediterranean coast because of the over exploitation of land, growing corruption, high prices and the lack of judicial security generated in Valencia. In 2007, hotels and apartments hugged more than 600 km of shoreline. These illegal buildings were so close to the sea that they infringed that part of the beach demarcated as of public domain and were under threat from rising sea levels. Under Spanish law, beaches are considered public property and construction is banned within 100 metres of the coast, but the law is often flouted by construction companies. The Environment Ministry threatened to demolish illegally built hotels and homes.

Spain: Going places.

The shift in the government’s emphasis can be seen in the slogans used by the Tourist Board in their high-profile advertising campaigns – from the famous ‘Spain is Different’ in the 1960s (and, indeed, the country was so), when the tourism industry was getting off the ground, to ‘Spain. Everything Under the Sun’ in the 1980s, which highlighted the beaches and coasts, to ‘Smile! You’re in Spain!’ in 2007.

Spain has 40 buildings, towns and landscapes in Unesco’s latest World Heritage List, one fewer than Italy, and this despite being a late joiner in 1984 (see Exhibit 3.10). The list is wide and testimony to Spain’s situation as a cradle of different cultures and civilisations. It takes in almost the entire history and geography of Spain, including Atapuerca near Burgos, where archaeologists discovered human bones in the late 1990s that date back 800,000 years.

EXHIBIT 3.10 World Heritage List, Top Ten Countries* COUNTRY 1. Italy 2. Spain 3. China 4. Germany 5. France 6=. UK 6=. India 6=. Mexico 9. Russian Federation 10. US

89 NUMBER 41 40 35 32 31 27 27 27 23 20

At June 29, 2007.

Source: UNESCO.

Water The south and southeast of Spain, according to experts, could face permanent shortages of running water while the north and northwest of the country will continue to have more than they need. The south’s population swells in the sweltering summer months, with the arrival of millions of thirsty tourists.

This is the area where hundreds of thousands of homes have been built in unfettered developments, some without the prior approval of a water board to ensure water will be supplied, and where irrigation plays a significant role in agriculture; add to this the extra element of uncertainty from climate change, the effects of which Spain is already feeling. According to a study by the European Commission, Spain will be one of the EU countries to suffer the most from “drought, reduced soil fertility, fire and other climate-change driven factors.”3 One- third of the country is already affected by desertification.

Chapter 3: Main Economic Sectors

Historically, there has always been a ‘wet’ Spain and a ‘dry’ Spain.

Galicia, Asturias, Cantabria and the three Basque provinces in northern Spain occupy less than one-fifth of the land area and fewer than 20% of the population live there, but it has one-third of the country’s water. A popular saying among Galician farmers – la lluvia es arte (rain is art) – was once turned into a tourism slogan. Located between two sea masses (the Atlantic and the Mediterranean) and two continental masses (Europe and Africa), Spain has a very varied climate. Annual precipitation values in a ‘normal’ (i.e. drought-free) year vary greatly, from over 1,600 mm in extensive areas of the north, where levels can even exceed 2,000 mm, to 300 mm in wide areas of the southeast and less than 200 mm in parts of the Canary Islands.

Although the average rainfall over most of Spain is rather low, sometimes the values reached after very heavy rains exceed the average amount of 90

the whole year. These extraordinary rains, which have been happening increasingly, provoke an extremely high flow in rivers, which burst their banks.

Not only does Spain have too little water in the places where it is most needed, but it is also prone to drought. The year 2005 was the driest since records began in 1947, slashing crops, significantly reducing water reserves and producing water rationing in some areas, and 2007 was headed in the same direction because of the lack of rain.4 At the height of the 1990-95 drought, the restrictions on water supply were particularly strict in cities such as Granada, Jaén, Seville, Malaga (all of them in the south), Toledo, Ciudad Real and Puertollano and in areas in the Bay of Cadiz and the Costa del Sol. The restrictions reached up to 30% of the regular supply and water was cut off during nine to ten hours each day.

Agriculture is by far the largest consumer of water (around two-thirds), although it only generates 3% of GDP. Most farmers do not use the most efficient and less wasteful irrigation systems such as drip irrigation. Instead, they open the sluice gates to flood fields, a very wasteful use of a scarce resource.

Land under irrigation has increased by 30% since Spain joined the EU in 1986.

The EU’s Common Agricultural Policy (CAP) exacerbates Spain’s problem

3. Temperatures have been rising notably in Spain, heightening the risk of forest fires, producing the virtual disappearance of some species of fish in the Mediterranean and bringing forward the harvesting of grapes in some areas. Sand is also increasingly being blown over on dry winds from the Sahara in North Africa. Spain’s beaches could shrink by an average of 15 metres by 2050 because of global warming. Professor Raúl Medina, the coordinator of a report by Spain’s Environment Ministry in 2006, told the newspaper El País that he would not buy a house in La Manga on the Mediterranean coast because “I doubt that my children would be able to use it.” See “Las Playas Españolas Retrocederán 15 Metros por la Subida del Nivel del Mar” (El País, October 22, 2006) and the report drawn

up for the government in November 2007 (http://www.elpais.com/elpaismedia/ ultimahora/media/200711/27/sociedad/20071127elpepusoc_1_Pes_PDF.pdf).

In an apocalyptic view of the future, a book, Photoclima, launched by Greenpeace in November 2007, showed what parts of Spain might look like. Using statistics from the UN panel on climate change and a touch of digital makeup, hotels and apartment blocks in La Manga, Murcia, were shown to be underwater in a few decades.

4. Although August 2007 was the rainiest August in five years, the Buendía reservoir in central Spain, one of the largest in the country and near where this author has a house, was at only 11% of its capacity. Several years of plentiful rain are needed before the reservoir reaches even a reasonable level.

Spain: Going places.

by subsidising farmers to produce crops such as maize and sugar beet, which need a lot of water.

The price of water varies considerably between regions but, generally speaking, is very low by international standards, thereby discouraging conservation and encouraging waste. The price issue is a complex one. In the coastal areas, where the wealthy farmers grow export crops, an increasing price for water may well be no problem and lead to less waste. In other poorer inland areas (such as in Castilla y León and Castilla-La Mancha), there is a social problem: higher water prices would lead to the large-scale abandonment of irrigated agricultural land and movement to the cities.

Not surprisingly for such an arid country, Spain has the highest per capita water use of any country in the European Union. According to official estimates, 40 out of every 100 litres used in irrigation systems is wasted through faulty infrastructure. Obviously, most of this ‘wasted’ water subsequently returns to replenish the water table; however, some could be saved through investment. Groundwater has also been abstracted at unsustainable rates in many areas, seriously depleting reserves. This happens when uncontrolled drilling of wells causes the overall rates of withdrawal from aquifers greatly to exceed their replenishment from rainfall and other sources over decades or more. There are more than one million illegal wells in southern Spain, according to Greenpeace. The groundwater is also becoming increasingly polluted, affecting ecosystems that depend on it.

As a result of these and other factors, the previous government of the Popular Party decided to do something about Spain’s water problem. In 2001 its National Hydrological Plan, which followed the Socialists’ National Irrigation Plan in 1996, proposed to divert water through a 540-km canal network from the Ebro River south along the Mediterranean Coast to the Júcar, Segura and south Almeria basins and north to the internal basins of Catalonia.The project involved the transfer of 6% of the natural annual flow of the Ebro. The transported water would be used for agricultural, urban and industrial supply, as well as ecosystem restoration. A team of US experts from climatically similar California reviewed the technical aspects of the plan in 2003 and concluded that it was “well founded in terms of hydrology (water available) and water resources (need for water) and that the diversion of a small percentage of the Ebro’s annual flow would have small ecological consequences in the now degraded and highly modified Lower Ebro River and delta.” The plan involved over 800 projects, including water purification plants, sewage works, upgrading and repair of irrigation systems and the building of more dams.

The Ebro transfer provoked a highly politicised debate in Spain and received a great deal of attention in Europe from ecologists. The Ebro is a major

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European river whose delta is internationally recognised for its flora and fauna, especially the birds that frequent the area.There were big demonstrations against the plan in the regions of Catalonia and Aragón (from where the water would be transferred), both of them Socialist controlled. Some economists said the cost of pumping the water would be prohibitive.

In a country with 17 regional governments, with property rights to water in their respective regions, water management is an issue that crosses boundaries and inflames passions, as this writer can testify as he has a home in the village in Castilla-La Mancha from where the Tagus-Segura aqueduct carries water from a big reservoir south to Murcia and Alicante. Farmers feel aggrieved when the reservoir’s level declines sharply during a drought when the need in the south is greatest and use of what they regard as ‘their’ water is restricted. “Why should we ration water in Madrid, when farmers still irrigate 92

by flooding their fields?”, asked Esperanza Aguirre, Premier of the Madrid region. The population of the city of Madrid and its satellite towns has risen from 5 million to close to 7 million in the past ten years.

The European Commission became involved in the project in order to ensure that it complied with EU environmental policy and legislation and because the central government planned to request significant funding.

Various changes to the plan were made, including the exclusion of transferred water for the irrigation of golf courses. When the Socialists won the 2004 general election they scrapped the Ebro water transfer plan and decided to concentrate on building more desalination plants, improve irrigation practices and systems and promote a more sustainable use of water. Spain built Europe’s first desalination plant 40 years ago and is the largest user of desalination technology in the Western world. Its companies lead the market, operating in India, the Middle East and North America.5 But desalination plants are regarded as environmentally unsound and are not a long-term solution.

They require vast amounts of energy to convert salt water into drinkable water; this requires additional power stations which, as they need to be next to the plants, are most likely to be conventional and therefore polluting. The plants themselves generate a large amount of saline effluent which can have environmental implications as the effluent is normally discharged close to the coast. Security of supply is another consideration for which the only solution is storage reservoirs. As the plants by definition are on the coast, there is little possibility of deep natural storage and so shallow impoundments are required – which occupy valuable space and impact the environment. Spain’s water issue is one crying out for a national consensus.

5. See “Desalination in Spain” by Cynthia Graber, Technology Review, March 13, 2006 (www.technologyreview.com/microsites/spain/water/docs/Spain_desalination.pdf).

Spain: Going places.

Energy Spain is heavily dependent on imported energy and thus vulnerable to fluctuations in international oil and gas prices. In 2005, its energy dependence – imports as a proportion of domestic consumption – reached an all-time high of 85% (77% in 2004). The country’s demand for energy has long been rising at a much faster pace than the world average, as corresponds to a fast-growing economy catching up with the rich world and, unless there is a change in its energy policy and in consumption habits, this will continue to be the case.

While many EU economies are becoming more energy efficient (measured by the units of energy per unit of GDP), Spain’s energy intensity is still one of the highest among the EU-15. Energy is a key issue for the sustainability of Spain’s strong economic growth – and security of supply an increasingly important part of foreign policy.

Imported oil accounts for more than 50% of Spain’s primary consumption and gas for close to one-fifth (see Exhibit 3.11).The country’s own oil and gas reserves are insignificant, and the domestic coal mining industry is gradually shrinking (from 45,000 miners in 1986 to a projected 5,000 in 2012).

However, renewable energy (wind and solar power), a heavily subsidised sector in which Spanish companies are leading global players, is on the rise. Spain has the world’s second-biggest installed capacity of wind energy after Germany and is also a forerunner in other renewable energies, including solar power and biofuels. The country is the fourth in the world in its use of solar power, and the second in Europe after Germany. Within only the past ten years, the number of companies working in solar energy has leapt from a couple dozen to a few hundred. The key piece of legislation was the 1997 Electricity Act, which established three important rights for wind-power generators: firstly, the right to connect renewable energy sources to the national grid; secondly, the right to transfer their output to the grid; and thirdly, the right to charge a premium on top of the spot power market price. The government sets the premium at a level that gives producers reasonable rates of profitability for their investment and that reflects the environmental benefits of generating energy from renewable sources. Wind power and solar energy may serve at times as substitutes for gas and coal in electricity production, but not as alternatives to the basic use of oil in the transport and agricultural sectors.

At the company level, Iberdrola became the world’s biggest producer of power from wind turbines after acquiring the UK’s ScottishPower in 2007, Acciona Energia is the world’s largest developer and constructor of wind farms, Gamesa Eólica is the second-largest manufacturer of wind turbines and the largest promoter of wind farm and Isofoton is Europe’s leading manufacturer of

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solar panels (see Chapter 4). Iberdrola and Gamesa (as well as the infrastructure group Ferrovial, the fashion retailer Inditex and the information technologies and defence systems company Indra) are among the Global 100 Most Sustainable Corporations in the World, drawn up each year by Corporate Knights and Innovest Strategic Value and presented at the World Economic Forum in Davos.

EXHIBIT 3.11 Structure of Primary Energy Consumption (% of Total), 2006

94

OIL 36 41 54 40 21 41

World EU-27 Spain US China OECD

NATURAL GAS 24 25 21 24 3 23

COAL 28 18 13 24 70 21

NUCLEAR 6 13 9 8 1 10

HYDRO 6 4 4 3 6 5

Source: BP Statistical Review of Energy, 2007.

The leading exporters of oil to Spain are Russia, Mexico and Saudi Arabia (see Exhibit 3.12). More than 40% of the oil comes from five OPEC countries (Saudi Arabia, Libya, Nigeria, Iran and Iraq), countries that are far from being consolidated democracies and whose regimes are unpredictable.

Russia, which showed itself in 2006 to be an unreliable source during the crisis with the Ukraine, was the main supplier that year.

EXHIBIT 3.12 Spain’s Oil Imports by Country (% of Total), 1999-06 1. Nigeria 2. Mexico 3. Libya 4. Saudi Arabia 5. Iraq 6. Russia 7. Iran 8. UK* Others

1999 15.0 11.5 11.0 10.8 10.4 9.5 6.8 6.8 18.2

2003 10.8 12.7 13.3 12.2 2.7 17.3 7.5 23.5

2004 10.5 13.0 12.1 11.6 8.7 14.9 5.9 23.3

2005 12.0 15.1 10.4 10.6 4.9 14.4 8.3 24.4

2006 9.9 12.5 9.2 10.7 5.4 19.5 8.6 24.2

(*) Included in other countries in other years.

Source: Boletín Estadístico de Hidrocarburos, Ministry of Industry, Tourism and Commerce.

On the gas front, three North African countries – Algeria, Egypt and Libya – provide more than 45% of imports and, of this, the great bulk comes from Algeria via Morocco through the Maghreb-Europe pipeline or as liquefied natural gas in tankers (see Exhibit 3.13). The Megaz pipeline linking Beni Saf in Algeria directly with Almeria over land and under the Mediterranean (down to depths of 2,000 meters) is scheduled to begin in 2008-2009. Stability in the Maghreb is of major strategic importance for Spain.

Spain: Going places.

EXHIBIT 3.13 Spain’s Natural Gas Imports by Country (% of Total), 2002-06 1. Algeria 2. Norway 3. Libya 4. Qatar 5. Trinidad and Tobago 6. UAE 7. Nigeria Others

1999 66.3 14.9 6.2 5.5 4.6 2.0 0.5 -

2003 57.6 9.9 3.1 8.2 1.6 16.9 2.7

2004 51.2 8.1 2.4 4.5 1.2 18.2 14.4

2005 43.3 6.3 2.7 13.9 0.7 15.6 17.5

2006 32.3 5.8 1.9 15.4 9.1 20.4 15.1*

(*) Egypt supplied 12.4% and nothing in 1999.

Source: Boletín Estadistico de Hidrocarburos, Ministry of Industry, Tourism and Commerce.

While Spain has almost no oil or natural gas resources of its own (the oil produced supplies less than 2% of domestic needs), it is blessed with a lot of sun and is increasingly harnessing its wind through hi-tech turbines.

Navarra (population 600,000), in the northeast of Spain, has more than 1,100 windmills dotted around the region and is also home to one of the biggest solar energy parks in Europe. Around 70% of the region’s electricity comes from the wind and the sun. Wind power provided 8.8% of Spain’s electricity in 2006, slightly more than hydroelectricity, and on a particularly gusty day in 2007 (March 20) it generated 27% of the country’s total electricity supply, a record high and more than nuclear, coal or any other single energy source.

Some 100,000 people work in the green energy sector in Spain. The supply from these sources, however, is unpredictable.

These alternative sources of energy are also boosting Spain’s flagging efforts to meet its obligations under the Kyoto Protocol, which assigned mandatory emission limitations for the reduction of greenhouse gas emissions.

Spain is one of the main Kyoto offenders.

Spain opened its electricity market to full competition in 2003, four years ahead of the EU deadline. However, the power market is still almost entirely controlled by three companies – Endesa, Iberdrola and Unión Fenosa. Spain’s significant but poor-quality coal reserves mean that coal-fired production is a key source of power in Spain. Nuclear power accounts for close to a quarter of output, and the role of gas has risen strongly over the last decade to around 15%.

Gas consumers have been able to choose their supplier since 2003, five and a half years ahead of the full market opening deadline set by the EU Gas Directive. Gas Natural has a commanding position, but it is being slowly eroded by Spanish and foreign power utilities entering the gas market. Foreign players who have entered the Spanish market include Eni, BP and Shell.

Almost four years after Spain and Portugal agreed in January 2004 to create a single Iberian power market, the much delayed MIBEL, as it is known,

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was only half working during 2007. Formally, MIBEL was functioning, but in practice there were two separate markets. There was little political interest on either side, and Spanish companies were not very interested because of the continued entry barriers to Portugal (Electricidade de Portugal still enjoyed a virtual monopoly).

The competition between the Barcelona-based Gas Natural and Germany’s E.ON in 2006 to take over Endesa generated significant concern in Brussels over efforts by the government and the regulatory body to protect national companies. The National Energy Commission accepted E.ON’s higher offer, which spoiled the government’s desire to create a national champion, but found a way to accommodate the government by imposing a series of conditions on E.ON, including requirements to keep key assets under Spanish control. The European Commission brought 96

charges against Spain for infringing European competition law over the matter. In the end, E.ON was beaten by a higher last-minute offer, made after E.ON had submitted its final binding offer, from a white knight (in the government’s view) in the form of Italy’s Enel (30% owned by the Italian government) and Spain’s Acciona, a private infrastructure company. The battle for Endesa led to the resignation of Manuel Conthe, the head of the National Securities Market Commission (CNMV), who compared the rival offer by Enel and Acciona to two runners who “joined a marathon half-way, even though they had failed to register for the race...and then the referee fails to disqualify them.” Conthe and all independent analysts said the government had dented the CNMV’s independence by blocking an investigation into the rival bid. The Endesa saga left a mark on the image of Spain as a market economy, and the way the issue was handled was strongly criticised in editorials in the Financial Times and The Economist.

Under the new Takeover Code, which came into force in August 2007, four months after the Endesa battle was resolved, the last-minute pitch by Enel and Acciona would have been disallowed. The new rules are belatedly modelled on an EU directive of 2004.

Spain: Going places.

Telecommunications Spain’s telecoms market is one of the largest and fastest-growing in Europe and accounts for around 4% of the country’s GDP. A telling indicator of the sector’s rapid transformation is that since 2000 the country has had more mobile phone customers than fixed lines (46.2 million against 18 million fixed lines in 2006). Spain is the fifth-largest wireless market in Western Europe.

The spectacular growth in mobile phones is just one facet of a sector that has taken off since Spain fully liberalised the sector in December 1998, almost one year later than most other EU-15 countries. The country has one of the lowest fixed-line penetration rates in the EU, at around 38 lines per 100 inhabitants in 2006, even though local call rates are among the lowest in the EU. It is estimated there are around 3 million households without a fixed line, but with at least one mobile telephone.

To prepare for the new competitive environment, the government passed a law in June 1996 that created a second operator in basic telephony services (the broadcasting company Retevisión). The second operator began to compete in 1997 with Telefónica, the incumbent operator founded in 1924 and fully privatised as of 2006 when the government scrapped its ‘golden share’ in the company that entitled it to accept or veto share sales and transfers on strategic grounds. The monopolistic market structure was converted into a private duopoly for long-distance telephony during the transition period.

This followed the creation of a duopoly in mobile telephones in 1995, when private consortium Airtel (now owned by Vodafone) received a 25-year licence (followed by Amena, owned by Retevisión, in 1998) and broke Telefónica’s monopoly in mobile telephone services. This model only had one European equivalent: the UK. However, the British case took place over a period of 14 years, whereas in Spain it took place in only 18 months. Like so much else in Spain, the change was telescoped into a short period.

Fixed network number portability was introduced in 1999. Further advances in liberalisation came in 2000, when local loop unbundling was finalised, interconnection arrangements were advanced, pre-selection was introduced and price caps were introduced for fixed telephony. Four thirdgeneration/universal mobile telecommunications service (3G/UMTS) mobile licences were awarded to the three existing cellular operators and Xfera, a joint venture initially headed by Vivendi Universal of France, Sonera of Finland (now TeliaSonera) and several Spanish partners. In February 2006, the telecoms watchdog issued a resolution liberalising fixed telephony tariffs for retail markets, including individuals and companies. This abolished the price caps. Under the new regime, operators are required to inform customers

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in advance of the tariffs that will be charged and the conditions of service.

Telefónica is recognised as having Significant Market Power (SMP) in the provision of fixed-line telephony services and leasing of circuits and, therefore, has obligations regarding interconnection and access to public networks and the supply of universal service, as well as other obligations to provide public telephony service.

There are dozens of operators of one type or another: fixed network and mobile operators, infrastructure and voice services, data and internet services, etc. In July 2005 France Telecom burst onto the Spanish stage with the €10.6bn purchase of Amena, the country’s third-largest mobile operator, which was re-branded as Orange in October 2006. The cable assets of Auna, Amena’s parent and until then the second-largest telecoms group in Spain, were sold to rival Ono for €2.25bn. The entry of France Telecom significantly 98

stepped up the competition for Telefónica on its home ground as, for the first time, it created a nationwide player with the scope to challenge the incumbent. Nevertheless, Telefónica still very much dominates the market as the operator of the fixed-line network and the largest mobile phone and Internet provider.6 Since liberalisation, it has also greatly expanded abroad to become one of Spain’s most thrusting multinationals and the world’s thirdlargest telecoms group by number of customers (more than 218 million worldwide in 2007), with a presence in 23 countries, and Europe’s largest doing both fixed and mobile telephony (see Chapter 4). Telefónica’s share of fixed telephony in Spain was 80.1% in June 2007, compared with 82.5% in 2006 and 84.5% in 2005, and more than 45% in mobile telephony. The next two fixed-line operators in the ranking are Ono and Orange (France Telecom). Telefónica Móviles, the mobile telephony arm, is also far ahead of its rivals Vodafone and Orange. A fourth mobile operator, controlled by TeliaSonera, the Scandinavian group, began to operate at the end of 2006, despite the already saturated Spanish mobile market, where penetration stands at more than 105% (3% in 1996). TeliaSonera said the greatly reduced cost of mobile network infrastructure and handsets enabled it to make this bold leap.

Spain’s Internet penetration, however, is far from a saturation level, although it is rising very quickly. Its rate of 48% in 2006 for those over the age of 16 (2% in 1996) is among the lowest of the EU-15 countries, as is the number of broadband subscribers per 100 inhabitants, although it did rise fourteen-fold between 2001 and 2007 (see Exhibit 3.14). This is partly

6. In July 2007, the European Commission imposed a €151.8 million antitrust fine on Telefónica for operating a ‘margin squeeze’ during five years on its broadband rivals.

The anti-trust regulator said Telefónica set the wholesale cost of accessing its broadband network so close to the retail price that rivals were forced to make losses to stay in the market. Telefónica said the fine was ‘unjustified and disproportionate’ and appealed against it.

Spain: Going places.

due to the analogue status of many telephone lines in rural areas, where the infrastructure is being upgraded. Broadband tariffs are also higher than the EU average. However, the percentage of households connected to Internet and using broadband is the sixth highest in the EU-25 at more than 74%, and in 2006 87% of companies in Spain with ten or more employees used broadband, the third-highest level after Sweden and Finland.

Telefónica is the major broadband supplier, having provided wholesale services since 1999 and been authorised to offer a retail service since August 2001. Services are also available from many other providers, including Jazztel, Arrakis (part of BT Global Services) and Wanadoo (a subsidiary of France Telecom). Flat rate monthly charge schemes for Internet became widely available in 2000. Spain’s broadband subscription price is among the highest (see Exhibit 3.15) and the average download speed is in the middle range of OECD countries (see Exhibit 3.16).

EXHIBIT 3.14 Broadband Subscribers per 100 Inhabitants Sweden Germany Spain France Italy UK Poland EU average1

2001 5.4 2.3 1.2 1.0 0.7 0.6 0.1 1.6

2007* 28.3 21.1 16.8 22.3 15.9 23.8 6.8 18.2

(*) July.

(1) EU-15 for 2001 and EU-27 for 2007.

Source: OECD.

EXHIBIT 3.15 Broadband Average Monthly Subscription Price* Czech Republic Spain US Italy France UK Germany Finland (*) October 2007.

Source: OECD.

US$ PPP 88.99 67.74 53.06 41.09 36.70 33.34 32.22 31.18

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EXHIBIT 3.16 Average Advertised Broadband Download Speed by Country* Mbit/s1 93,693 44,157 13,056 10,624 9,188 8,860 6,901 1,395

Japan France Italy UK Germany US Spain Turkey

(*) October 2007.

(1) Advertised speeds are typically the theoretical maximum for the employed technologies. Users commonly have lower speeds.

Source: OECD.

While progress has been made relative to other Mediterranean countries, the supply side of Spain’s information, communications and technology (ICT) sector remains weak. In 2007, Spain slipped from 31st 100

to 32nd place in the World Economic Forum’s Networked Readiness Index, which ranks countries according to their potential to use Internet-based technologies to boost economic growth on the basis of 67 variables (see Exhibit 3.17). One very notable Spanish success in the ICT sector, however, is Panda Security, founded in 1990, which today has millions of customers in more than 200 countries. It is Europe’s leading antivirus software developer thanks to providing two further lines of defence. Genetic analysis recognises the code and characteristic ‘DNA’ traits of threats and behavioural analysis identifies any suspicious activity.

EXHIBIT 3.17 Networked Readiness Index Rankings*, 2006-2007 RANK AND COUNTRY 1. Denmark 4. Finland 7. US 9. UK 16. Germany 23. France 28. Portugal 31. Chile 32. Spain 38. Italy

SCORE 5.71 5.59 5.54 5.45 5.22 4.99 4.48 4.36 4.35 4.19

(*) Out of 122 countries.

Source: World Economic Forum.

The ‘triple-play’ (voice, broadband and television package) market is being strongly developed, largely as a result of the proliferation of ADSL2+ and increased investment in cable network upgrades. Digital satellite payTV has undergone considerable changes since the merger of Telefónica’s Via Digital with Canal Satélite Digital, owned by Sogecable, in 2003. Spain has one of the highest terrestrial television market shares in the EU and aims to be

Spain: Going places.

one of the first countries in Europe to switch to digital broadcast after Sweden in 2008. The shift was scheduled for 2010.

Telefónica has six fully equipped earth stations in Spain for broadcasting transmission over the Intelsat and Eutelsat satellites. The Spanish satellite company Hispasat, part owned by Telefónica, provides services for mainland Spain, the Canary and Balearic Islands and the Americas.

Growth in the sector is expected to accelerate in the next few years, driven by increased consumer demand, the greater variety in user equipment and the emergence of new, customised and interactive broadband products and services. By 2009, more than half of Spanish households are forecast to have a broadband Internet connection, 70% of laptop computers built-in wireless broadband and mobile telephony penetration could exceed 130%.

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Banking What around 20 years ago was a protected and oligopolistic banking industry, epitomised by the regular and cosy luncheon that the chairmen of the so-called Big Seven used to have, is today intensely competitive and aggressively expansionist. The two biggest private commercial banks, Santander, the Euro zone’s largest bank by market capitalisation and the world’s eighth largest, and Banco Bilbao Vizcaya Argentaria (BBVA) are the result of the merger of six banks over a number of years, and both are among the largest players globally with a predominant presence in Latin America and a significant one in several European countries (see Exhibit 3.18 and Chapter 4). The rest of the banking industry consists of three other relatively large commercial banks, Banesto (owned by Santander), Banco Popular and Banco de Sabadell, two big savings banks, La Caixa and Caja Madrid, and many other smaller commercial and savings banks and credit cooperatives (see Exhibit 3.19). Excluding the credit cooperatives, the commercial banks accounted for 49% of deposits, loans and mutual funds in Spain in 2006 and the savings banks for 51%.

Chapter 3: Main Economic Sectors

EXHIBIT 3.18 The World’s Largest Banks Ranked by Tier-1 Capital* BANK 1. Bank of America 2. Citigroup 3. HSBC 4. Crédit Agricole 5. JP Morgan Chase 6. Mitsubishi UFJ 7. ICBC 8. Royal Bank of Scotland 9. Bank of China 10. Santander 31. BBVA

COUNTRY US US UK France US Japan China UK China Spain Spain

TIER-1 CAPITAL (US$ MILLION) 91,065 90,899 87,842 84,937 81,055 68,464 59,166 58,973 52,518 46,805 25,779

(*) Ranked out of 1,000. Tier-1 capital is a bank’s core reserve capital, comprising equity, disclosed reserves and retained earnings.

Figures at December 31, 2006.

Source: The Banker.

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EXHIBIT 3.19 Spain’s Top Five Commercial and Savings Banks by Tier -1 Capital*

1. Santander 2. BBVA 3. La Caixa 4. Caja Madrid 5. B. Popular

TIER-1 CAPITAL (US$ MN) 46,805 25,779 15,797 9,563 8,152

ASSETS CAPITAL ASSETS RETURN ON COST/INCOME (US$ MN) RATIO (%) ASSETS (%) RATIO (%) 1,098,213 4.26 1.05 49.57 542,494 4.75 1.71 43.89 275,416 5.74 1.92 47.20 180,367 5.30 1.05 45.32 120,704 6.75 1.88 38.20

BIS CAPITAL RATIO (%) 12.49 12.00 11.50 12.81 9.87

Figures at December 31, 2006.

Source: The Banker.

As with so many other parts of the economy, the catalyst for change was Spain’s entry into the European Union in 1986, followed by the launch of European Monetary Union (EMU) in 1999 and the introduction of euro notes and coins in 2002 in 12 countries. The single currency eliminated exchange rate risk throughout the Euro zone, and banking products were able to compete directly with one another. In the case of Spanish banks, the number of competitors went from around 380 credit entities of one type or another on their home turf to close to 8,000 in their enlarged market. Moreover, the conditions that produced a zone sharing a common currency – low inflation and reduced budget deficit and public debt levels – created a more stable and favourable banking environment and increased consumer confidence, thus lifting the volume of business. This can be seen in Spain, for example, in the strong growth in private-sector lending, which doubled between 1991 and 2006 to 141% of GDP. Size became an important issue for those banks wishing to be supraregional or global players, as it creates the capacity needed to compete in specific business areas and generates the economies of scale for reducing costs. It also enables foreign predators on the home ground to be better fended off. Significantly, the first bank merger in the EMU took place in Spain in 1999 with the creation of Banco Santander Central Hispano (today known as Santander), a move which

Spain: Going places.

sparked a wave of consolidation in European banking.While Santander and BBVA have between them 31% of the loans, deposits and mutual funds held in Spain by commercial and savings banks and have successfully entered other countries through acquisitions, foreign banks in Spain have a very small share of the retail banking market. They began to move into the country for retail banking as a result of the 1978-85 banking crisis and acquired branch networks from ailing banks.

Barclays, for example, bought Banco de Valladolid and has carved out a niche for itself. Most of the foreign banks in Spain concentrate on corporate rather than retail business, for which they do not need a branch network.

The merger process among commercial banks in Spain has been intense, but this is not at all the case among savings banks because they do not have share capital and are governed by general assemblies that are dominated by local politicians. The number of branches, however, has risen and not fallen as one would expect from a process of concentration. At the end of 2006, commercial banks had 15,096 branches in Spain, while savings banks had 23,418. Commercial banks significantly cut the number of their branches (from a high of 18,154 in 1992 to 14,072 in 2002) but then reversed this trend as of 2005. Savings banks, on the other hand, freed in 1989 from restrictions that barred them from opening branches throughout Spain, increased their number over the same period from 14,123 to 20,326.

Although Spain may appear over-banked on the basis of the number of its branches (1,033 people per branch in 2005, well below the EU-25 average of 2,297 people), the number of employees per commercial bank branch declined from 20 in 1975 to around eight today as banks have become technologically advanced, while the number per savings bank branch over the same period remained virtually stable at around five.The number of people per branch in Spain has hardly changed (see Exhibit 3.20). Savings banks were ahead of commercial banks in developing self-service systems that made it possible to reduce the administrative workload at branches. Spain is also at the forefront of using ATMs; in 1995 it had the secondlargest number in the EU-15 after Germany, even though its population is smaller than France’s, Italy’s and the UK’s. Spanish banks are consistently ranked among the most efficient in the world.

EXHIBIT 3.20 Number of Inhabitants per Branch* France Germany Italy Spain UK EU-25 (*) All types of credit institution.

Source: European Central Bank.

2001 2,346 3,259 1,946 1,043 4,057 2,195

2005 2,315 1,872 2,315 1,033 4,397 2,297

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The large number of branches has proved to be an advantage for capturing business from Spain’s newest citizens, the more than 4 million immigrants who are now in the country. Their needs are basic: money transfers home, consumer credits and mortgages – the growth in which among immigrants is playing a significant role in the construction boom. The banks are competing keenly for their custom.

Spanish banks have become more efficient and profitable, in large part due to the technological revolution that has swept Spain’s banking industry.7 Loans per commercial bank branch almost doubled to €48 million between 2003 and 2006. The efficiency ratio (personnel and other general costs as a percentage of gross operating income and other operating income) improved from 45.6% in 2005 to 40.4% in 2006. The lower the ratio, the more efficient the bank. The average return on equity (ROE) in 2006 was 13.3%, up from 12.4% 104

in 2005 (on a consolidated basis, the respective figures were 18.8% and 21.1%).

This compared with a yield on 10-year government bonds of 3.39% in 2005 and 3.78% in 2006. Spanish banks, as a whole, are among the most profitable in the world, and one of them, Banca March, based in Palma de Mallorca, was ranked by the magazine The Banker as the most profitable bank in Western Europe in 2006 on the basis of profit on capital (see Exhibit 3.21).

EXHIBIT 3.21 Profit on Capital (%): Average Ratios of Banks in the Top 1000 from Each Country 2002 23.16 15.95 13.87 12.94 11.04 6.76

US Spain Italy UK France Germany

2003 22.24 16.63 12.96 16.04 13.74 6.96

2004 21.76 16.28 15.55 14.87 13.70 8.95

2005 23.15 16.76 18.72 17.79 18.43 9.56

2006 21.95 19.02 17.12 19.52 15.74 4.67

Source: The Banker.

The solvency of commercial banks is strong, as measured by the BIS ratio (the ratio between the risk-bearing capital and the risk-weighted assets), which in 2006 was 12%, well above the recommended level of 8%. The Bank of Spain became very aware of solvency requirements and the need to monitor compliance with them as a result of the 1978-85 banking crisis in Spain, one of the most severe in Europe, which affected 58 banks (more than half those existing in 1977), accounting for 27% of deposits and 28% of employees (almost 50,000 workers). The root of the crisis was the severe industrial crisis following the oil price increases in the 1970s, which hit Spanish banks hard because of their close links with industrial companies (loans to and stakes in them) and the effect of high 7. Spanish commercial banks employ more people abroad than they do in their home country. In 2006, they employed 108,002 people in Spain and an estimated 140,562 in the rest of the world, almost all of whom worked for either Santander or BBVA.

Spain: Going places.

interest rates on non-performing loans. Spain has regulated solvency in accordance with the Basle Agreement as of 1985, and since then it has always been well above the recommended level. However, Spain’s Tier 1 (core) capital/assets ratio is not among the strongest (see Exhibit 3.22).

EXHIBIT 3.22 Tier 1 Capital1/Assets Ratio: Average of the Banks in the Top 1000 from Each Country France UK US Germany Italy Spain US

2002 12.36 12.10 9.39 4.06 6.16 7.13 9.39

2003 14.09 13.27 9.34 4.18 6.37 7.11 9.34

2004 15.71 14.69 9.32 4.51 6.60 7.10 9.32

2005 14.45 12.19 9.33 4.71 6.24 6.71 9.33

2006 15.98 9.30 9.16 4.80 6.15 5.95 9.16

(1) Tier-1 capital is a bank’s core reserve capital, comprising equity, disclosed reserves and retained earnings.

Source: The Banker.

Spain’s banking system weathered well the fallout from the crisis in the US subprime market in the summer of 2007, and there were solid reasons for believing it would not be affected in any significant way. The banks did not set up conduits (off-balance sheet vehicles) to invest in high-risk US mortgages, and they did not experience liquidity problems when banks stopped lending to each other. They have been big borrowers in international markets, but most of this financing was long-term. As the Spanish economy slows down, particularly the construction sector, and heavily indebted households grapple with mortgage problems, the volume of non-performing loans (NPLs) is bound to rise, but from a very low level. Bad loans accounted for only 0.76% of total credit in the Spanish financial system in June of 2007 and loan-loss provisions were more than 250% of this level, a more than sufficient buffer against a deteriorating loan portfolio. In 1993, when the economy last dipped into recession, the NPL ratio of commercial banks was 8.4%. The five largest banks in Spain – Santander, BBVA, the savings banks La Caixa and Caja Madrid, and Banco Popular – increased their combined net profits by 19% in the first nine months of 2007 to €15,350 million, bucking the downward trend among big banks in other developed countries, particularly the US, hit by the fallout from the US subprime mortgage crisis.

The Bank of Spain, the unsung hero of the country’s economic transformation, has long enforced a very prudent policy for loan-loss provisions; in 2000 it introduced an innovative counter-cyclical provisioning policy that creates a cushion during the upward phases of the economic cycle in order to soften the impact of NPLs on banks’ earnings during periods of lower growth when defaults are higher. The strong banking system has played a key role in the internationalisation of Spanish companies.

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Stock Market Less than 20 years after Spain’s Big Bang in 1989, the Spanish stock exchange, part of Bolsas y Mercados Españoles (BME), which groups together the stock exchanges in Madrid, Barcelona, Bilbao and Valencia and the fixed income and derivatives markets, is among the ten largest in the world in terms of capitalisation and turnover (see Exhibits 3.23 and 3.24) and is unique in having a euro market for Latin American securities (Latibex). In 2006, BME’s capitalisation, the basic indicator for measuring the stock market’s importance in the economy, was 122% of Spain’s GDP, up from 22% in 1990. It was also the best-performing market between 1997 and 2006. BME became a publicly traded company in 2006. The annual compound return was 15%, compared to 8.3% in the US, 13.6% in Italy, 11.4% in France, 7.3% in the UK and 2.6% in 106

Japan (see Exhibit 3.25). In 2007 the IBEX-35 rose 7.3% compared with 6.9% for the Euro Stoxx 50, 4.1% for the FTSE and 7.2% for the Dow Jones.

EXHIBIT 3.23 Capitalisation of the Main Stock Markets (US$ trillion)* 1. NYSE 2. Tokyo 3. Nasdaq 4. LSE 5. Euronext 6. Hong Kong 7. Toronto 8. Germany (Deutsche Börse) 9. Spain (BME) 10. Switzerland

15.4 4.6 3.8 3.8 3.7 1.7 1.7 1.6 1.3 1.2

(*) Figures at the end of 2006.

Source: Morgan Stanley Capital International.

EXHIBIT 3.24 Turnover of the Main Stock Markets (US$ trillion)* 1. NYSE 2. Nasdaq 3. LSE 4. Tokyo 5. Euronext 6. Germany (Deutsche Börse) 7. Spain (BME) 8. Italy 9. Switzerland 10. Korea (*) Figures at the end of 2006.

Source: Morgan Stanley Capital International.

21.8 11.8 7.6 5.8 3.8 2.7 1.9 1.6 1.4 1.3

Spain: Going places.

EXHIBIT 3.25 Historical Performance of Main Stock Markets (%)* Spain Sweden Italy Canada France Switzerland Australia EMU index European Index EU index

2004-2006 25.0 28.1 21.0 19.0 19.5 19.7 25.2 20.7 19.0 19.0

1997-2006 15.0 13.3 13.6 11.6 11.4 10.5 12.9 11.3 10.1 10.1

(*) Annual compound growth at the end of 2006. Local currency. Including reinvestment of dividends (gross).

Source: Morgan Stanley Capital International.

Popular capitalism followed the Big Bang when the great majority of share trading and all settlement of transactions were computerised in the early 1990s. The traditional agentes de cambio – stockbrokers who notarised all transactions – were replaced by brokerage houses. The National Securities Market Commission (CNMV), the watchdog body, made the market more professional and transparent, tightened up reporting procedures and defined insider trading. A massive programme of privatisations reduced the public sector’s share of the Bolsa’s capitalisation from 16.6% in 1992 to almost zero as of 1998. It also changed the savings habits of households by greatly increasing the proportion of assets held in shares (see Exhibit 3.26). The number of listed domestic companies rose from 417 in 1989 to 3,512 in October 2007 (3,276 of them investment companies with variable capital known as Sicavs).

EXHIBIT 3.26 Composition of the Portfolios of Assets of Households and Non-Profit-Making Institutions (% of Total) Cash and deposits Securities other than shares Shares and other participations Other items

1989 56.0 7.1 22.6 14.3

2006 38.3 2.4 41.9 17.4

Source: Bank of Spain.

In 2006, the trading volume surpassed €1 trillion for the first time, as did Spain’s GDP. SIBE, the interconnected electronic system developed for the four exchanges by Madrid, traded €1.15 trillion and for the fourth consecutive year grew by more than 25% over the preceding year. In 2006 SIBE’s trading volume represented 208% of the market value of Spain’s shares at the end of 2005. The growth in trading has been higher than that of the main European markets.

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Foreign investment in the BME is high (58% of the total trading volume in 2006), enabling Spain’s multinationals to embark on growth strategies that would have been impossible with just Spanish savings or their own cash flow.

Foreign investment in the BME reached a record €664,757 million in 2006 and sales totalled €683,379 million, leaving a net withdrawal of €18,622 million (see Exhibit 3.27).

EXHIBIT 3.27 Foreign Investment in BME (€ million) PURCHASES 11,026 20,767 258,423 664,757 516,964

1992 1995 2000 2006 2007*

108

SALES 8,877 18,038 275,416 683,379 523,719

(*) First six months.

Source: Bolsas y Mercados Españoles.

The stock market is dominated by a handful of large companies in the banking, utility, energy and telecommunications sectors, which are global players in their fields and tower over the rest of the Spanish corporate sector.

The ten largest companies accounted for 40% of market capitalisation and 76% of turnover in the first ten months of 2007. Santander, BBVA, Telefónica, Endesa, Repsol YPF and Iberdrola are among the largest Euro zone companies in terms of turnover and capitalisation and form part of the Euro Stoxx 50.

Between 40% and 70% of the stock of these companies is owned by institutional, mostly European, investors.

Latibex, the euro market for blue chip Latin American shares and fixed-income securities, began to operate at the end of 1999. It enables European investors to trade in Latin American stocks using a single electronic trading and settlement platform in euros and ensures internationally recognised standards of transparency and security. For Latin American companies, Latibex provides direct access to euro funding. Until the arrival of Latibex in Spain (the natural place for such a market given the shared history and language – apart from Brazil, a former Portuguese colony – and the mother country’s growing investment in Latin America), investing in the region’s corporate sector involved transactions in a number of different countries, legal environments, exchange rate regimes and settlement systems. In short, a labyrinth requiring considerable knowledge before beginning to operate in these markets. Latibex cuts all this out.

Latibex offers the possibility of trading during the same hours as those of the European markets. This means that investors are able to trade for 10 to 12 consecutive hours, covering sessions in Europe and then in Latin

Spain: Going places.

America. Investors not only can ďŹ nd a counterparty with greater ease in their normal working hours but also have the chance to evaluate their portfolios on the basis of price formation in a system similar to their own without having to wait for markets to open in Latin America. As the European and Latin American trading sessions overlap during several hours, this also provides an opportunity for arbitrage between the two.

At the end of October 2007, 34 companies traded their shares on Latibex, and its capitalisation of â‚Ź430.4 billion, 29% of the capitalisation of the Spanish stock exchange, made it the third-largest market in Latin American shares after SĂŁo Paulo and Mexico City.

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110

Distrito C, Telefónica’s new headquarters, MADRID. Architect/s: Rafael de la Hoz. A pioneering campus of 17 buildings on the outskirts of Madrid covering 200,000 square metres and with a capacity for 14,000 employees. A glass canopy more than one kilometre long and 56 metres wide links most of the buildings.

Spain: Going places.

Anyone who had predicted 15 years ago that Spanish companies today would own the largest mobile telephone company (02) in the UK, operate three lines of the London underground and the country’s largest airports (including Heathrow), acquire a leading mortgage bank (Abbey) and power company (ScottishPower), or that its two largest banks would dominate the Latin American banking scene and Inditex would become the world’s second-largest fashion retailer by number of shops would have been laughed at for making an absurd joke. But this is precisely what has happened, and it is only a small part of the overall picture. While the influx of immigrants is the most significant inward factor, the most important outward factor is the massive investment abroad by Spanish companies and the creation of a significant number of multinationals.

The first wave of outward foreign direct investment (FDI) in the 1960s and early 1970s was very modest, accounting for a mere 0.1% of international FDI flows. It occurred at a time when Spain took its first timid steps to open up its economy and relaxed controls on capital outflows, moving away from the autarky that followed the country’s 1936-39 Civil War. The bulk of this investment went to European countries, followed by Latin America. Spain’s share in international flows increased to 0.3% in the 1970s, when investment in Latin American and Caribbean countries accounted for more than half the country’s total outflows, while that to EC countries and the United States lost relative share. Financial and commercial activities accounted for around threequarters of Spanish FDI in Latin America and there was also some investment in manufacturing. Outward flows averaged US$260 million during the 1970s.

Latin America’s external debt crisis, triggered by Mexico’s default in 1982, plunged many countries into recession and changed the course of Spain’s FDI. By 1985, the region’s share of Spain’s outward FDI had fallen from more than 50% to 20%. The 1980s were a ‘lost decade’ for Latin America.

The big change, and the catalyst for a much stronger drive in outward FDI, came from joining the European Economic Community (as it was then known) in 1986 and the introduction of the European Single Act in 1993, which created the European Union. The strategic focus of corporate Spain changed from one of defending the relatively mature home market to aggressively expanding abroad. The liberalisation of the domestic market as European single market directives began to unfold made the big Spanish companies – especially the state-run companies in oligopolistic sectors such as telecommunications (Telefónica), oil and natural gas (Repsol and Gas Natural) and electricity (Endesa), all of which were to be privatised and become cash rich – and the big private-sector commercial banks conscious of the need to reposition themselves in the more competitive environment. The

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tougher environment was underscored by an FDI boom in the first years after EEC entry, when hardly a week passed without an acquisition and it seemed that Spain was up for sale (see Chapter 8).

The strategic response to the threat of acquisition was to become bigger and go on the offensive. Liberalisation gave Spanish companies the chance to do this, and they seized the opportunity in the 1990s provided by the privatisation of companies in Latin America. Total outward FDI surged from an average of US$2.3 billion in 1985-95 to US$18.9 billion in 1998 and a peak of US$89.7 billion in 2006, the third-largest amount after the US and France, according to the OECD. Between 1997 and 2006, Spain’s net FDI outflows (inflows less outflows) of US$181 billion were the sixth largest among OECD countries (see Exhibit 4.1). The stock of outward investment stood at US$508 billion at the end of 2006, (41.4% of GDP, see Exhibit 4.2), 112

the eighth largest in the world, compared with a stock of inward investment of US$443.3 billion (36.2% of GDP), also the eighth biggest. Outflows of FDI have exceeded inward FDI since 1997 (with the exception of 2002).

EXHIBIT 4.1 Cumulative FDI Flows in OECD Countries, 1997-2006 (US$ billion) COUNTRY 1. France 2. Japan 3. UK 4. Switzerland 5. Netherlands 6. Spain 7. Italy 8. Canada 9. Germany 10. Norway

OUTFLOWS 871.8 330.9 1,045.3 318.5 513.1 420.8 198.2 323.1 510.2 67.0

INFLOWS 480.8 53.4 797.2 103.4 299.1 239.8 128.8 285.3 473.2 39.4

NET OUTFLOWS 391.0 277.5 248.2 215.0 214.0 181.0 69.4 37.9 37.0 27.5

Source: OECD.

EXHIBIT 4.2 Outward FDI Stocks of Selected Developed Countries (% of GDP) United Kingdom Germany France United States Italy Spain (*) Forecast by the Economist Intelligence Unit.

Source: UNCTAD.

1990 23.2 9.1 9.0 7.5 5.5 3.0

2000 62.4 29.0 33.5 13.5 16.8 28.9

2006 62.2 32.4 47.8 20.4 20.3 41.4

2011* 65.7 42.2 57.3 23.3 29.8 59.2

Spain: Going places.

The expansion abroad, as of the early 1990s, came after a wave of mergers, restructurings and privatisations that enhanced the critical mass of Repsol, Endesa and the big banks BBVA and Santander, among others. Their acquisitions abroad have turned these companies, and others, into significant players in the international corporate landscape. Spain has nine companies in Fortune’s Global 500 ranking of the world’s largest corporations based on 2006 revenues (a decade earlier it had none), one less than Italy but well below France’s 38 and Germany’s 37 (see Exhibits 4.3 and 4.4). Three of these companies – Repsol YPF, Endesa and Telefónica – are among the world’s top 100 non-financial transnational companies (TNCs); they were ranked 46th, 51st and 53rd, respectively, in the 2007 World Investment Report of the United Nations Conference on Trade and Development (UNCTAD) on the basis of assets, sales and employment in 2005. Grupo Santander and BBVA were ranked among the top financial TNCs (16th and 34th, respectively), and Mapfre was the world’s fourth-largest reinsurance group, ranked by the Geographical Spread Index. Also, 17 of Spain’s companies were among the 318 firms in the 2007 Dow Jones Sustainability World Index, which tracks the financial performance of the leading sustainability-driven companies, three more than in 2006 (see Exhibit 4.5). Dow Jones classified Repsol YPF in 2007 as the most transparent oil company in the world for the second year running.

Santander, BBVA, Telefónica, Endesa and Repsol YPF are also among the largest companies in the Euro Stoxx 50 by market capitalisation.

EXHIBIT 4.3 Spanish Companies in the Fortune Global 500 (US$ bn) RANKING OUT OF 500 75. Santander (banking) 77. Telefónica (telecommunications) 90. Repsol YPF (oil and natural gas) 163. BBVA (banking) 258. Endesa (electricity)1 297. Cepsa (oil)2 413. ACS (construction) 441. Ferrovial (construction, infrastructure) 482. Altadis (tobacco) (1) Since October 2007, 67% owned by Italy’s Enel.

(2) Cepsa is 48.8% owned by Total.

Source: Fortune Global 500, 2007.

REVENUE 68.0 66.3 60.9 38.3 25.8 23.1 17.6 16.6 15.6

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Chapter 4: The Emergence of Spanish Multinationals

EXHIBIT 4.4 Fortune Global 500 by Country* COUNTRY – NUMBER OF COMPANIES 1. US – 162 2. Japan – 67 3. France – 38 4. Germany – 37 5. UK – 33 6. China – 24 7. Canada – 16 8. Netherlands – 14 9. South Korea – 14

10. Switzerland – 13 11. Italy – 10 12. Spain – 9 13. Australia – 8 14. India – 6 15. Sweden – 6 16. Belgium – 5 17. Mexico – 5 18. Russia – 4

(*) Since October 2007, 67% owned by Italy’s Enel.

Source: Fortune Global 500, 2007.

EXHIBIT 4.5 Dow Jones Sustainability World Index, Companies by Country*

114

Australia - 21 Belgium - 1 Brazil - 7 Canada - 10 Denmark - 4 Finland - 5

COUNTRY – NUMBER OF COMPANIES France - 20 Malaysia - 1 Germany - 22 Netherlands - 15 Hong Kong - 1 Norway - 4 Ireland - 1 South Africa - 3 Italy - 7 South Korea - 2 Japan - 36 Spain - 17

Sweden - 6 Switzerland - 12 Taiwan - 1 Thailand - 1 UK - 68 US - 53

(*) As of September 24, 2007. The 17 Spanish companies are: Santander, Telefónica, BBVA, Endesa, Repsol YPF, Iberdrola, Abertis, Gas Natural, Ferrovial, Iberia, Inditex, Indra Sistemas, Red Eléctrica, Unión Fenosa, ACS, Gamesa and Acciona.

Source: Dow Jones.

Latin America was a natural first choice for Spanish companies wishing to invest abroad in a significant way. As well as the companies’ own push factors, there were several pull factors. Two of them were purely economic: liberalisation and privatisation opened up sectors of the Latin American economy that were hitherto off limits, and there was an ongoing need for capital to develop the region’s generally poor infrastructure. Two are cultural: the first is the common language and the ease, therefore, with which management styles can be transferred. Another attraction is the sheer size of the Latin American market and its degree of underdevelopment.

The macroeconomic fundamentals of Latin America as a whole and some countries in particular, such as Mexico, had also become sounder as a result of major reforms, making the region a less risky place to invest. Democracy was also gradually taking root in an increasing number of countries. Last but not least in importance, Spanish executives were ideally suited to handling new businesses in Latin America, as they had gained a lot of experience of how to compete in industries under deregulation in their own country.

Another factor behind the expansion that should not be overlooked is that Spanish companies are able to deduct the goodwill – the value ascribed to some of a business’s intangible assets – arising from foreign acquisitions against tax over a period of 20 years. Goodwill is the difference between the

Spain: Going places.

book value of assets and the actual price paid. Neelie Kroes, European Union Competition Commissioner, opened a formal investigation in October 2007 into this tax scheme after receiving complaints from European companies that said the tax treatment gave Spanish companies an unfair advantage and enabled them to outbid their rivals. The Spanish government said that since tax policy has not been harmonised across the EU, Brussels had no right to interfere with its tax incentives.

Most of the outward FDI in Latin America has taken place in public utilities, telecommunications, financial services and infrastructure, sectors protected like Spain’s once were and that began to be liberalised and privatised.

In the 1990s Latin America accounted for 55% of total receipts from the privatisation of companies (around $100 billion) in developing countries, well ahead of Eastern Europe and North Africa ($65 billion). The initial move into Latin America was, as Mauro Guillén has pointed out, the ‘path of least resistance’ for Spanish companies facing deregulation and takeover threats on their home ground1 . By 2005, Spanish companies had become the largest operators in telecommunications, electricity, water and financial services throughout the region.

The shift away from Latin America and into Europe (particularly the UK), the US and Asia is more recent and was marked by several investments: Santander’s €12.5 billion purchase of UK bank Abbey in 2004, the acquisition

by Banco Bilbao Vizcaya Argentaria (BBVA) of two small banks in California and Texas, and Telefónica’s purchase in 2005 of a stake in China Netcom and in 2006 of the O2 mobile telephony operator in the UK, Germany and Ireland for €26 billion – the biggest-ever Spanish acquisition of a foreign company so far.

These investments and others have become considerably more valuable than the price at which they were officially registered. According to an exercise carried out for the first time by the Bank of Spain, the difference at the end of September 2006 between the recorded value of the total stock of investment abroad (€372.8 billion) and the theoretical market value (€598.1 billion) was €225.3 billion. These are, at least in theory, the unrealised capital gains. Some 40% of the investment was in emerging countries, almost all of it in Latin America.

1. Guillén’s The Rise of Spanish Multinationals (Cambridge University Press, 2005) and La Internacionalización de la Empresa Española: Aprendizaje y Experiencia (Santander and Nebrija University, 2006, various authors) are the most comprehensive books on the subject.

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The Main Spanish Multinationals Telecommunications Telefónica Spain’s leading multinational is Telefónica, the world’s third-largest telecommunications company by number of total customers (more than 218 million) and Europe’s largest doing both fixed and mobile telephony, is present in 24 countries.

Telefónica was listed on the New York Stock Exchange in 1987, and in 1990 it began making its move into Latin America. It first acquired stakes in, and then took over, CTC and ENTEL in Chile and Argentina’s main operator (ENTEL). In 1994 it acquired CPT and ENTEL in Peru. These 116

five companies were privatised. In 1996, Telefónica entered Brazil as head of a consortium that acquired 35% of the voting shares of CRT in the southern state of Rio Grande do Sul, and in 1998 the Telefónica-led consortium won the tender to acquire Telesp, which operates in the state of São Paulo, the country’s economic powerhouse. In 2000, Telefónica acquired all the capital of its operators in Argentina, Brazil, Chile and Peru, and in 2001 acquired Motorola’s cellular assets in Mexico.

By 2002, Telefónica had more fixed lines in Latin America (21.6 million) than in Spain (18.7 million) and more mobile telephone customers too (21.3 million versus 18.4 million). In 2003, Telefónica and Portugal Telecom, the country’s incumbent in which Telefónica has a stake of 9.8%, set up a joint venture combining their mobile telephony assets in Brazil (under the name Vivo, Brazil’s largest mobile operator). In 2004 Telefónica acquired BellSouth’s interests in mobile operators in Argentina, Chile, Peru, Venezuela, Colombia, Ecuador, Uruguay, Guatemala, Nicaragua and Panama, consolidating its position as the leading mobile phone company in the region.

Like other Spanish companies, notably the banks Santander and BBVA, Repsol YPF, Gas Natural and Endesa, Telefónica was hit by the financial crisis in Argentina in 2002 and the freezing of tariffs. That year it made a net loss of €5.58 billion as a result of the write-off of more than €16 billion of goodwill relating to its Argentine companies, its US Internet portal Lycos and its third-generation mobile telephony licences in Europe. Latin America’s contribution to group revenues dropped from 43% to 35%.

In 2005, when it became the first Spanish company to join the NY Dow Jones Global Titans 50 index, Telefónica made a bold move into Asia and broke into China’s state-run telecommunications sector with the purchase of 5% of China Netcom, the country’s second-largest fixed-line operator.

Spain: Going places.

This stake was due to be raised to 10% by the end of 2007. It also put a toe into the European market by acquiring Cesky Telecom in the Czech Republic.

This purchase was followed in 2006 by the acquisition of the assets of the O2 mobile telephony operator in the UK, Germany and Ireland for €26 billion, the biggest-ever Spanish acquisition of a foreign company. O2 is the UK’s largest mobile operator. This deal made Telefónica the world’s fourth-largest mobile operator by number of customers after China Mobile, Vodafone and China Unicom, adding 24.6 million customers in Europe and making the company a truly global player. In 2007 Telefónica acquired a 10% stake in Telecom Italia.

Telefónica is also present in North Africa, where it owns 32.18% of Morocco’s Medi Telecom (more than 5 million mobile telephony customers) and shares management responsibilities with Portugal Telecom, which also holds a 32.18% stake. At September 30, 2007 Telefónica had 163.8 million fixed and mobile telephony customers abroad, compared with 37 million in Spain, and 7.4 million Internet and data clients (5.1 million in Spain, see Exhibits 4.6 and 4.7). It became the first Spanish company in 2007 whose market capitalisation surpassed €100 billion.

EXHIBIT 4.6 Telefónica’s Fixed and Mobile Telephony Customers Abroad (‘000) COUNTRY Argentina Brazil Central America Chile Colombia Czech Republic Ecuador Germany Ireland Mexico Morocco Peru Slovakia UK Uruguay Venezuela Total (1) At September 30, 2007.

(2) Joint venture.

Source: Telefónica.

COMPANY Telefónica de Argentina TEM Argentina Telesp Vivo2 Fixed Mobile Telefónica Chile TEM Chile Telefónica Colombia TEM Colombia T. O2 Czech Rep.(fixed) T. O2 Czech Rep. (mobile) TEM Ecuador O2 Germany O2 Ireland TEM México Medi Telecom Telefónica del Perú TEM Perú T. O2 Czech Republic O2 UK T. Móviles Uruguay TEM Venezuela

CUSTOMERS1 4,633 13,078 12,019 31,320 120 4,877 2,173 6,052 2,340 7,552 2,135 4,967 2,653 12,168 1,632 11,073 5,786 2,742 7,221 496 17,900 1,047 9,840 163,824

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Chapter 4: The Emergence of Spanish Multinationals

EXHIBIT 4.7 Largest Telecom Companies by Total Customers* MILLIONS 338.0 256.7 232.0 212.6 165.2 160.7 153.1 143.1 141.1 132.2

China Mobile China Telecom Vodafone Telefónica Deutsche Telekom France Telecom China Unicom AT&T AMX China Netcomn (*) June 2007.

Source: Telefónica and Bloomberg.

118

The impact of 02 was quickly felt. In 2006, Europe’s operating income before depreciation and amortisation (OIBDA) accounted for 20% of the total, up from 6% in 2005, and made a major contribution to the 40.2% increase in net profit to €6.2 billion, the highest in the European telecommunications sector (see Exhibit 4.8).

EXHIBIT 4.8 Cumulative FDI Flows in OECD Countries, 1997-2006 (US$ billion) Spain Latin America Europe Rest of world

2005 57 36 6 1

2006 43 36 20 1

2007* 40.5 29.1 22.7 7.7

(*) First nine months.

Source: Telefónica.

Oil, Natural Gas and Petrochemicals Repsol YPF Repsol took its leap abroad in 1999, when it added YPF to its name after acquiring the Argentine oil and gas giant for just under US$15 billion. Until Telefónica’s purchase of the UK mobile telephony operator O2 in 2006, this was the largest single investment by a Spanish company. Overnight, Repsol was turned into an integrated and fully diversified energy group and the largest private energy company in Latin America in terms of assets. It has also expanded its exploration and production activities into the Middle East and Africa and has a significant stake in one of the world’s largest liquefied natural gas (LNG) plants in Trinidad and Tobago as well as LNG projects under way in Canada, Peru, Algeria, the Middle East, Mexico and growing activities in Russia (see Exhibit 4.9). In 2006, Repsol was 16th in Platts Top 250 global

Spain: Going places.

EXHIBIT 4.9 Repsol YPF’s Main Presence in the World

Americas Argentina Bolivia Brazil Canada Chile Colombia Cuba Ecuador Guyana Mexico Peru Suriname Trinidad & Tobago United States Venezuela Europe Denmark France Germany Italy Kazakhstan Portugal Russia Middle East Dubai Iran Saudi Arabia Africa Algeria Angola Equatorial Guinea Kenya Liberia Libya Mauritania Morocco Sierra Leone Asia Singapore

EXPLORATION & PRODUCTION

REFINING & MARKETING

✓ ✓ ✓ ✓

✓ ✓ ✓

CHEMICALS

GAS & ELECTRICITY

✓

✓

✓

✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓

✓

✓

119 ✓ ✓ ✓

✓ ✓

✓

✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓

✓

Source: Repsol YPF.

energy company ranking.

Like Telefónica in telecommunications and Endesa in electricity, Repsol YPF is also by far the biggest player in its domestic market. The company, established as Repsol in 1987 as part of a complete restructuring of the oil and gas businesses owned by the state, was fully privatised by 1997. It is an integrated company engaged in all aspects of the energy business, including exploration, development and production of oil and natural gas, transportation of petroleum products and liquefied petroleum gas, oil refining, production of

Chapter 4: The Emergence of Spanish Multinationals

petrochemicals and product marketing.

Investment abroad in developing oil and gas fields after the megapurchase of YPF has been more modest but still significant and increasingly closer to home in Libya and the US, as Repsol had become heavily exposed to Latin America, particularly in Argentina and Bolivia. Between 2002 and 2006 investment outside of Spain accounted for 67% of the total of €19.6 billion (see Exhibit 4.10), and over the same period revenue generated in Spain declined from 69% of the total to 54% (see Exhibit 4.11).

A consortium led by Repsol YPF won in 2004 the contract for the €5 billion Gassi Touil natural gas project in Algeria, a strategically important country for Spain as it supplies it with more than 30% of its natural gas. Repsol YPF took a 48% stake, the Barcelona-based Gas Natural 32% and Algeria’s state-owned energy group Sonatrach 20%. The two Spanish companies were 120

dealt a heavy blow in September 2007 when Sonatrach dismissed them because of delays and cost overruns in the construction of the gas terminal, which was due to begin shipping liquefied natural gas in 2009.The two companies rejected the decision ‘to illegally appropriate the project’ and took it to international arbitration. Algeria’s move was particularly worrying for Repsol YPF, as it was looking to the country to help fill the gap in its depleted gas and oil reserves created after it was forced to write them down in 2006, largely in Bolivia and Argentina. Its reserves of 4,926 million barrels of oil equivalent (Mboe) at the end of 2004 had been overstated to the tune of 25% – the difference between what Repsol YPF booked and what independent auditors judged economically extractable. The reserves were written down as part of what Antonio Bufrau, Repsol’s YPF chairman, called a ‘complete health check’.

EXHIBIT 4.10 Geographic Distribution of Repsol YPF’s Investments (€ million)1

Spain Argentina, Bolivia, Brazil Rest of world

2002 986 1.607 80

2003 1.322 2.389 126

2004 1.677 968 1.102

2005 1.270 1.224 1.219

2006 1.228 1.379 3.130

Total

2.673

3.837

3.747

3.713

5.739

(1) Including capitalisation of spending distributed over several years. (2) First six months.

Source: Repsol YPF.

EXHIBIT 4.11 Geographic Distribution of Repsol YPF’s Revenues (€ millions) Spain Argentina, Bolivia, Brazil Rest of world

2002 25,135 9,530 1,825

2003 25,098 10,322 1,786

2004 21,573 11,408 7,311

2005 28,685 12,977 9,383

2006 29,800 14,334 10,946

Total

36,490

37,206

40,292

51,046

55,080

Source: Repsol YPF.

Spain: Going places.

Repsol YPF planned to invest €21 billion between 2005 and 2009 in lifting its oil and gas reserves and reducing its dependence on South America. It has a cooperation agreement with Gazprom of Russia and significant interests in Libya, which is viewed as a key country in its new upstream growth strategy.

In early 2007, Repsol YPF announced the discovery in Libya of its largest-ever oil field, which will double its reserves and production in that country, and it has a significant number of blocks in the US Gulf of Mexico, an area which it estimates will yield a total net production of 50,000 b/d in three years’ time.

Gas Natural Gas Natural, Spain’s former natural gas monopoly, entered Argentina in 1992 and in 1997 teamed up with other companies to win the tender for the privatisation of Brazil’s CEG and CEG Río, which distribute piped natural gas to the metropolitan area of Río de Janeiro and the rest of the state. Gas Natural also operates in Colombia and Mexico. It boosted its presence in Mexico in October 2007 when it acquired five power plants from Electricité de France and a gas pipeline for US$1.44 billion. In 2006, Latin America generated 20% of the group’s €1,912 million of EBITDA. Gas Natural also has companies in Puerto Rico and Italy.

Banks Santander Santander’s rise from a local note-issuing bank founded in 1857 in the region of the same name to its position today as the Euro zone’s leading retail bank (and the largest by market capitalisation) with the biggest financial franchise in Latin America is a remarkable one. The product of the merger of three banks (Santander, Central and Hispano Americano) between 1991 and 1999, Santander is present in 12 European countries, including the UK, where it owns Abbey, a leading mortgage bank, as well as in eight Latin American countries and (since 2006) the US, where it acquired 24.8% of Sovereign Bancorp and 90% of the auto finance company Drive Financial (see Exhibit 4.12). Santander’s reputation for aggressiveness and innovation started in 1989, when it was the first Spanish bank to offer remunerated current accounts. In 2006, Santander’s attributable profit of €7.6 billion was the world’s seventh largest among banks, and it had 23.2 million retail banking customers in Latin America, compared with 16.9 million in the UK and 10.3 million in Spain (including Banesto, the fourth-largest commercial bank, which it bought in

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EXHIBIT 4.12 Santander’s Main Banking Presence in the World NAME OF BANK Americas Argentina Brazil Chile Colombia Mexico Puerto Rico Uruguay United States Venezuela Europe Portugal UK

Banco Santander Río Santander Banespa Santander Santander Santander Santander Puerto Rico Santander Sovereign Bancorp1 Banco de Venezuela Santander Totta Abbey

(1) 24.8% stake, no management control (although it does have three board members).

Source: Santander.

122

1994). In 1985 Santander had just 750,000 customers worldwide.

Long before its marriage to Central Hispano in 1999 (Hispano Americano, founded in 1900, and Central, established in 1919, merged in 1991), Santander was internationally-minded. One of its earliest functions was to finance foreign trade between the port city of Santander and Latin America.

In 1947, it opened a representative office in Cuba, a Spanish colony until 1898, and in 1963 acquired its first bank in the Americas (Banco del Hogar Argentino). However, the big push into Latin America, a zone with a low level of ‘bankarisation’ and thus plenty of scope to develop business, took place between 1999 and 2001, when Mexico’s Serfin and Brazil’s Banespa were bought. Santander is Mexico’s third-largest banking group and Santander Banespa the fourth-biggest private-sector banking group in Brazil. By the end of 2006 the number of Santander branches in Latin America had grown from the one in 1947 (Cuba) to 4,368.

Santander opened its first office in London in 1954, and in 1988 established an alliance with Royal Bank of Scotland (RBS) that lasted 16 years. It included an exchange of shares and various cooperation agreements and joint investments. RBS helped Santander to acquire Banespa in Brazil and Santander aided RBS in its purchase of National Westminster. In the year 2000, Santander acquired Portugal’s Totta, the third-largest private-sector bank. In 2004, it made its largest single investment when it bought Abbey, the UK’s sixth-largest bank, for €12.6 billion. The purchase of Abbey gave Santander a better geographic diversification among emerging, mature and stable economies, a major presence in one of Europe’s most attractive and profitable banking markets and enabled it to be a player in the world’s three main currencies (the dollar, the euro and sterling). At the end of 2006, Santander had 6,484 branches in the UK and Continental Europe and, together with

Spain: Going places.

those in Latin America, they formed the largest international network of bank branches (10,978). Close to one-seventh of Santander’s ordinary attributable profit came from Abbey in 2007 compared with 54% from Continental Europe and 32% from Latin America (see Exhibit 4.13).

EXHIBIT 4.13 Geographic Distribution of Santander’s Ordinary Attributable Profit (% of total)1 Continental Europe Santander branch network Banesto Santander Consumer Finance Portugal Latin America Brazil

2004 59 25 11

2005 54 23 9

2006 51 22 9

20072 54 21 8

9

9

8

8

7

6

6

6

41

32

34

32

16

11

11

11

Mexico

9

7

8

8

Chile

6

6

7

7

-

14

15

14

United Kingdom Abbey (1) Excluding extraordinary capital gains and allowances.

(2) First nine months.

Source: Santander.

As a result of its participation (with €19.8 billion) in the Royal Bank of Scotland-led consortium that won control of the Dutch bank ABN Amro in October 2007, Santander substantially strengthened its presence in Brazil and Italy as it acquired Amro’s subsidiaries Banco Real and Banca Antonveneta.

It then sold Antonoveneta less than a month later to an Italian bank for a 60% profit, but kept its corporate banking division known as Interbanca. The combination of Santander’s Banespa and Real created the second-largest bank in Brazil in terms of deposits and the third by network size (market share of 12%). In the south/southeast, the source of two-thirds of the Brazilian GDP, the market share of the combined bank is 16%. Real provides a presence in areas where Santander is underrepresented, such as Rio de Janeiro and Minas Gerais, while Santander is strong in regions where Real is weaker, such as Rio Grande do Sul. Santander and Real also have a complementary business mix: Real is stronger in areas such as mass market, consumer loans and SMEs, whilst Santander is stronger in affluent banking and business/corporate banking. Santander’s market share in Latin America as a whole increased to between 10% and 15% in all major products.

Santander also operates in 12 Continental European countries through its consumer finance arm, Santander Consumer Finance (SCF), which has one of the largest networks for this business. It began its international expansion in the consumer credit segment in 1987, with the acquisition of CC Bank in Germany from Bank of America. In 2006, 36% of SCF’s revenues came from

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Germany, slightly more than the proportion from Spain.

Banco Bilbao Vizcaya Argentaria (BBVA) BBVA was also founded in 1857 and is the result of the merger of three banks, the last one in 1999 (BBV+Argentaria) and hard on the heels of Santander’s merger. BBVA’s roots are in the Basque Country (Banco de Bilbao and Banco de Vizcaya). It owns Bancomer, Mexico’s leading banking group, has the largest presence in the US among Spanish banks and was the first Spanish bank to break into China’s fast-growing financial sector in 2006, when it acquired 5% of CITIC Bank and a 15% stake in CITIC International Financial Holdings, its Hong Kong-based offshoot. BBVA is present in 32 countries (see Exhibit 4.14).

EXHIBIT 4.14 BBVA’s Main Banking Presence in the World

124

NAME OF BANK Americas Argentina Chile Colombia Mexico Panama Paraguay Puerto Rico Peru Uruguay United States

Venezuela Europe Portugal Asia China

BBVA Banco Francés BBVA Chile BBVA Colombia BBVA Bancomer BBVA Panama BBVA Paraguay BBVA Puerto Rico BBVA Continental BBVA Uruguay Laredo National Bancshares Texas Regional Bancshares State National Bancshares Valley Bank Compass Bancshares BBVA Provincial BBVA Portugal Citic Bank and Citic International Financial Holdings*

(*) BBVA acquired 5% and has an option to increase its stake to 9.9%.

Source: BBVA.

BBVA acquired Bancomer in 2000 and, partly as a result of this bank’s presence in the US and its successful money transfer service linking Mexican immigrants with Bancomer in Mexico, decided to directly enter the American market in 2004 with the purchase of Valley Bank of California for $16.7 million.

This was followed in 2005 by the acquisition of Laredo National Bancshares for $850 million, in 2006 by the €2.6 billion acquisition of Texas Regional Bancshares and State National Bancshares and in 2007 by the purchase of Compass Bancshares, a franchise covering six states, for €7.4 billion. By tapping the worker remittances market with Mexico, home of its large Bancomer bank franchise, BBVA can offer immigrant workers a range of other banking services.

Spain: Going places.

The purchase of Texas Regional Bancshares and State National Bancshares made BBVA the largest regional bank based in Texas and the acquisition of Compass, its largest acquisition, gave it a position of leadership in the southern strip of the so-called Sun Belt and put BBVA among the 20 leading banks in the US. Mexico, the US and South America generated 45.4% of BBVA’s total net attributable profit in the first nine months of 2007, compared with 40% from Spain and Portugal (see Exhibit 4.15).

EXHIBIT 4.15 Net Attributable Profit by Business Areas (% of total)1

Spain and Portugal Global businesses Mexico and US South America

2004 50.3 12.0 30.0

2005 43.0 12.6 34.8

2006 37.9 17.0 35.0

20072 40.0 14.5 34.5

7.7

9.6

10.1

10.9

(1) Figures rounded up and the calculations made without including the losses in corporate activities.

(2) First nine months.

Source: BBVA.

Electricity Endesa Endesa was formed in 1944, when Spain built up basic industries through the Instituto Nacional de Industria (INI), the holding company formed after the 1936-39 Civil War based on the Italian model. Endesa was privatised by 1998 and is the dominant power producer in Spain. It agreed to merge with Iberdrola, the second-largest power company, but the marriage was called off in 2001 for competition reasons after the government imposed strict conditions on the recommendation of the National Energy Commission that the companies said made tying the knot not worth the effort.

Endesa’s first foray into Latin America was in 1992, when it acquired a stake in Argentina’s Yacylec and entered Brazil through Enersis, the Chilean holding company, which had built up a considerable share in the electricity markets of other countries. Endesa established a strategic alliance with Enersis in 1997 and took a 32% stake in the company. The two companies then headed a consortium that was awarded the Brazilian distributor Coelce (see Exhibit 4.16). Endesa acquired 60% of Enersis, Chile’s largest private-sector electricity group, and used the company as the vehicle for other investments in Latin America. In 2006, Chile accounted for 36% of Endesa’s assets in Latin America, Brazil for 25% and Colombia 21%. Endesa’s main presence in Europe is in France and Italy. Snet is France’s second-largest producer after EdF, and Endesa Italia is Italy’s third-largest. In 2006 Endesa acquired

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an electricity company in Poland, the largest of the new EU members. Latin America accounted for 30% of Endesa’s total power capacity of 47,113MW in 2006 and Europe (excluding Spain and Portugal) for 20%.

EXHIBIT 4.16 Endesa’s Main Production and Distribution Presence in the World*

NAME OF COMPANY Americas Argentina

Costanera El Chocón Dock Sud Cachoeira Fortaleza Ampla Coelce Endesa Chile Chilectra Betania Emgesa Codensa Edegel Eepsa Edelmar

Brazil

Chile

126 Peru

Europe France Italy Poland Portugal

Snet Endesa Italia Endesa Polska Tejo Energía Sociedade Térmica Portuguesa Finerge

North Africa Morocco

Tahaddart

(*) End of 2006.

Source: Endesa.

Latin America’s share of Endesa’s EBITDA has been more than 30% since 2002, while Europe’s (excluding Spain and Portugal) rose from 5% to 16% (see Exhibit 4.17). Since October 2007, Endesa has been 67% owned

by Italy’s Enel (in which the Italian government has a 30% stake) and 25%

by Spain’s Acciona, following a bitter two-year takeover struggle. The new owners of Endesa agreed to sell to Germany’s E.ON, the big loser of the battle, some €10bn worth of Endesa’s French, Italian and Spanish generating assets.

EXHIBIT 4.17 Endesa’s EBITDA by Geographic Area (% of total)

Electricity business in Spain and Portugal Electricity business in Latin America Electricity business in Europe Other businesses Source: Endesa.

2002 60.7 32.8 4.9

2003 59.4 31.2 8.0

2004 54.6 33.6 11.8

2005 54.2 31.2 14.6

2006 53.7 30.6 15.7

1.6

1.4

-

-

-

Spain: Going places.

Iberdrola Iberdrola, Spain’s largest electricity group and the world’s biggest wind-power generator, is present in around 30 countries, either generating or distributing electricity, supplying gas or other activities (see Exhibit 4.18). In 2007, it had 27 million customers and was among the five largest electricity companies by market capitalisation.

EXHIBIT 4.18 Iberdrola’s Main Activities in the World (as of December 31, 2006) ELECTRICITY GENERATION Americas Bolivia Brazil Chile Guatemala Mexico US Venezuela Europe Estonia France Germany Greece Hungary Italy Poland Portugal Russia UK Africa Algeria Kenya Tunisia Asia China

✓ ✓

ELECTRICITY DISTRIBUTION

GAS SUPPLY*

ELECTRICITY SUPPLY*

✓ ✓

ENGINEERING PROJECTS

✓

✓ ✓ ✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓

✓

✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓ ✓

✓ ✓ ✓ ✓ ✓

✓

(*) Iberdrola engages in energy trading in Spain, Portugal, France, Switzerland, Germany, Austria, Belgium, the Netherlands and Italy, and also gas trading in Europe and Asia.

Source: Iberdrola.

In Latin America, which generated 19.4% of net profits in 2006, Iberdrola is primarily focused on Mexico (where it is the largest private-sector producer), Guatemala (the leading supplier) and Brazil (the leading distributor in the northeast of the country). In 2007, Iberdrola beat General Electric and Siemens to win the tender to upgrade the Laguna Verde nuclear power plant in the state of Veracruz, Mexico.

Iberdrola’s boldest move came in 2006, when it reached a €17.1 billion agreement to take over ScottishPower, one of largest power companies in the UK, and create the third-largest European energy company by enterprise value, a more accurate estimate of takeover cost than market capitalisation as

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it includes other factors (see Exhibit 4.19). The deal consolidated Iberdrola’s leadership in the renewable energy market and gave it a broader geographic scope and a strong platform for future growth.

EXHIBIT 4.19 Enterprise Value (€ billion)*

EDF E.On Iberdrola + ScottishPower Iberdrola ScottishPower

108 70 64 44 20

(*) Market capitalisation and exchange rates at November 28, 2006. Net debt excludes provisions and includes minority interests.

Source: Iberdrola.

ScottishPower has 1,650MW of wind-powered generation and gas 128

storage facilities in the US, the market targeted by Iberdrola for future growth, through the subsidiary PPM. Iberdrola’s interest in the US dates to 2000, when it studied an offer for Florida Power & Light, now the world’s second-biggest ‘clean generator’, but which did not go ahead because of opposition from Iberdrola’s shareholders. Iberdrola has several renewable energy investments in the US, including CPV Wind Ventures, based in Maryland, and Community Energy, based in Pennsylvania. In 2007, Iberdrola further enhanced its presence in the US by agreeing to acquire Energy East, an integrated power group serving about 3 million customers in New York, Maine, Massachusetts, New Hampshire and Connecticut, for €3.4 billion.

Unión Fenosa The other Spanish power company with a foreign presence is Unión Fenosa, whose internationalisation has been almost entirely concentrated in Latin America, particularly Mexico, where, after Iberdrola, it is a leading privatesector producer of electricity (see Exhibit 4.20). Its Hermosillo power plant was the first one to start operating in 2001 as a result of the opening-up of electricity production in Mexico to the international private sector. In 2006, 60% of its 8.7 million electricity and gas customers were in countries other than Spain.

Spain: Going places.

EXHIBIT 4.20 Unión Fenosa’s Main International Presence ELECTRICITY GENERATION Colombia Costa Rica Dominican Republic Guatemala Mexico Nicaragua Panama

ELECTRICITY DISTRIBUTION ✓

RENEWABLE ENERGY ✓ ✓

✓ ✓ ✓ ✓ ✓

Source: Unión Fenosa.

Fenosa is focusing on Mexico as a growth market. Its projects include building generation capacity in the border state of Baja California to export electricity to California, a state that has suffered major power cuts.

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Gamesa Gamesa is the world’s second-largest manufacturer of wind turbines after Denmark’s Vestas and the only one in the world that makes parts for wind-energy units and develops the wind farms itself. Its market share was 13% at the end of 2006. By the middle of 2007, Gamesa had installed 10,000MW of wind energy capacity in 20 countries and had another 10,000MW in the pipeline. In 2006, it launched its first production plant in China and four more in Pennsylvania.

Construction and infrastructure There are six large international construction and infrastructure companies that have found the Spanish market too small and have catapulted themselves onto the international market through domestic mergers and acquisitions abroad. All of them were among the world’s top 32 transportation developers in 2007 (see Exhibit 4.21) and four were among the top ten developers ranked by invested capital (see Exhibit 4.22).

EXHIBIT 4.21 Top Transportation Developers, 2007 1. ACS/Iridium (Spain) 2. Ferrovial/Cintra (Spain) 3. Macquarie (Australia) 4. Sacyr/Itinere (Spain) 5. Global Via (FCC-Caja Madrid) (Spain) 6. NWS Holdings (China) 7. Road King (China) 8. OHL (Spain) 9. Hochtief (Germany)1 10. Cheung Kong Infrastructure 11. Acciona/Necso (Spain)

CONST./OPERATING* 59 40 40 39 33 25 22 20 18 17 16

ACTIVE PROPOSALS 44 35 17 44 11 1 0 45 14 9 36

(*) Road, bridge, tunnel, rail, airport concessions; over $50 million in capital put under construction/operation since 1985.

(1) Spain’s ACS is Hochtief’s largest shareholder.

Source: PWFinancing.

Chapter 4: The Emergence of Spanish Multinationals

EXHIBIT 4.22 Top Transportation Developers by Invested Capital 1. Macquarie (Australia) 2. Ferrovial/Cintra (Spain) 3. ACS (Iridium Concessions) (Spain) 4. Vinci-Cofiroute 5. Hochtief (Germany) 6. Alstom (France) 7. Siemens (Germany) 8. Sacyr (Spain) 9. Global Via (FCC-Caja Madrid) (Spain) 10. Bouygues (France) Total

ACTIVE PROPOSALS 44,283 37,900 33,000 24,140 22,322 21,900 20,750 18,320 11,030 9,200 242,500 (276 concessions/leases)

(*) Aggregate value (in nominal currencies converted to dollars) of all of a firm’s transportation project concessions and asset leases signed since 1985. The number does not represent a firm’s equity commitment, but rather the total of all funds invested in the projects it has been involved in, i.e. the public infrastructure improvements it has helped to create or enhance.

Source: PW Financing.

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Ferrovial The most international company is the majority family-owned Ferrovial, which started out building Spanish railways in the 1950s, and in 2006 led a consortium that purchased the UK airports operator BAA – the world’s biggest private-sector airports business, which owns the three main airports serving London (Heathrow, Gatwick and Stansted) and six others – for €23.6 billion including debt. Airports are seen as substantial generators of revenues.

Ferrovial also owns Owen Williams, a UK engineering group, Swissport, the world’s largest airport handling company, the US construction group Webber and 20.7% of Sydney airport (see Exhibit 4.23). Ferrovial was no stranger to the UK when it acquired BAA, as it already operated Bristol airport with the Australian firm Macquarie and in 2003 bought Amey, the services and project management group that runs and maintains three of London’s underground rail lines (Jubilee, Northern and Piccadilly).

EXHIBIT 4.23 Ferrovial’s Main Activities in the World* Americas Canada Chile US Europe Greece Ireland Italy Poland Portugal Switzerland UK Asia Australia (*) At the end of 2006.

Source: Ferrovial.

Toll road: 407 ETR. Handling Five toll roads, Cerro Moreno airport and construction Chicago Skyway and Indiana toll road, Webber (construction), Trans-Texas corridor Toll road and construction Two toll roads, Belfast airport and construction Toll road, construction and handling Handling, construction (Budimex) and real estate Three toll roads and construction Swissport and handling BAA, Amey (services), Bristol airport, handling and construction Sydney airport

Spain: Going places.

Ferrovial has also broken into the US market. Cintra, its toll road operator, has a 99-year concession to operate the Chicago Skyway, and in partnership with Macquarie it won a 75-year concession to operate the Indiana Toll Road. Altogether, Ferrovial operates 22 motorway concessions around the world covering 2,500km. Cintra is also developing, with the State of Texas, a new cross-state corridor.

The volume of international sales in 2006 (59% of the total) was higher than domestic sales for the first time, largely due to the inclusion of BAA and Owen Williams. International activity generated 81% of the €2.3 billion of EBITDA recorded in the first nine months of 2007, up from 73% in 2006 (see Exhibit 4.24).

EXHIBIT 4.24 Ferrovial’s EBITDA by Geographic Area (% of total) 2005 46 22 17

2006 27 15 45

20071 19 12 60

Chile

7

5

4

Poland

1

1

0

Other European countries

8

5

4

54

73

81

Spain Canada and US UK

International total (1) First nine months.

Source: Ferrovial.

Acciona Acciona, also majority family-owned, teamed up with Italy’s Enel (30% owned by the state) in 2007 to take over Endesa, Spain’s largest electricity company.

It has also been very active abroad. It has built a big solar electricity plant in Nevada (US), wind-power parks in Australia and Canada, the first windpower parks in Slovenia and Greece and the largest aerogenerator plant in China, the first one with Spanish technology. Acciona Energía is the world’s largest developer and builder of wind farms, while Acciona Agua is strongly established in Italy, Portugal, Dubai and Algeria and is building the world’s largest desalination plant at Carlsbad, California.The company’s infrastructure division has participated in many emblematic projects, such as the Petronas twin towers in Malaysia and the Ting Kau Bridge in Hong Kong.

ACS ACS, the result of several mergers, is Spain’s largest construction company and the fourth in the world on the basis of sales (see Exhibit 4.25). In 2006 it paid €1.26 billion for 25% of Hochtief, making it the German company’s largest shareholder and giving it access to hitherto untapped markets in Asia-

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Pacific, Canada and Eastern Europe. Hochtief ’s strong business in the US and Asia is particularly attractive for ACS, which is seeking greater international expansion.

EXHIBIT 4.25 World’s Largest Construction Companies, 2006 COMPANY 1. Bouygues (France) 2. Vinci (France) 3. Hochtief (Germany) 4. ACS (Spain) 5. Skanska (Sweden) 6. Ferrovial (Spain) 7. Eiffage (France) 8. Colas (France) 9. Taisei (Japan) 10. FCC (Spain)

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SALES (€ MILLION) 26,408 25,634 15,000 14,067 13,502 12,355 10,745 10,717 10,174 9,481

Source: Bloomberg, ACS.

ACS is present in 75 countries, with activities ranging from the construction of motorways in Ireland and Greece, railway tunnels in New York and wind farms in Portugal to the refurbishing of three dams in the state of New York, motorway concessions in Chile, Portugal, the UK and South Africa and transmission line concession projects in Brazil and Peru. Abertis, its infrastructure company in which the big Spanish savings bank La Caixa also has a major holding, is the largest in Europe in terms of market capitalisation and number of projects, owns three British airports (Luton, Belfast and Cardiff) and is the main shareholder in Eutelsat, the European satellite dish operator (see Exhibit 4.26). Dragados, another construction arm of ACS, was part of the consortium that built for Monaco the world’s largest floating jetty – at over 350 metres, it is almost as long as the Empire State Building is high.

To minimise disruption to daily life in Monaco, the jetty was built in one piece in a dry dock in Algeciras, southern Spain, and then towed to the principality.

In 2006 Dragados was awarded its first contract in Poland (the construction of a ring road).

Spain: Going places.

EXHIBIT 4.26 Main International Activities of Abertis

Argentina Bolivia Canada Chile Colombia France Italy Morocco Portugal Sweden UK

MOTORWAYS ✓

AIRPORTS

CAR PARKING

TELECOMS INFRASTRUCTURE

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓ ✓ ✓ ✓ ✓

Source: ACS.

FCC Fomento de Construcciones y Contratas (FCC) was created in 1992 from the merger of two companies and operates in the construction, services and cement sectors. Its international activities include full-service water management in Argentina, Italy and Brazil, treatment and elimination of solid urban waste in the UK and Venezuela, waste collection and street cleaning in Egypt and Chile, the building of motorways, dual carriageways and roads in Romania, Costa Rica and Canada, ownership of two cement plants in the US and passenger terminal management in Chile. It also has 16 technical vehicle inspection stations in Argentina. In 2007, FCC won Mexico’s largest-ever water project contract, and through its UK subsidiary, Waste Recycling Group, it won a contract to manage the waste of the Welsh municipality of Wrexham for 25 years.

FCC is the third-largest services company in Europe and the world’s eighth-biggest cement producer (the fourth on the US East Coast). In 2006, 18% of its total revenues of €9,481 million were generated abroad (see Exhibit 4.27). Of this sum (€1,718 million), environmental services provided 38%, construction 29% and cement 21%.

EXHIBIT 4.27 FCC’s International Revenues by Geographical Area* Western Europe (excl Spain) Central and Eastern Europe Latin America US Other (*) As a percentage of the revenues of €1,718 million.

Source: FCC.

MARKET 39 25 17 16 3

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Sacyr-Vallehermoso Sacyr-Vallehermoso (SyV) acquired almost one-third of Eiffage, the third-largest French construction and engineering group, in 2006 for €1.78 billion (and was entangled in a battle for its control) and 50% of Europistas, the Spanish road concession operator, which has concessions in Chile, Portugal, Brazil, Costa Rica and Bulgaria. Europistas was merged with SyV’s Itinere. SyV also has water management and engineering interests in Portugal and Brazil and construction projects in Chile and Costa Rica. In 2006, 22% of its net revenues of €4,684 million came from activities outside Spain.

Even though they are big, Spain’s construction companies sometimes team up with their rivals. In 2007, the consortium of SyV and FCC won a 35-year concession for the M50 motorway in Dublin. This was their second concession in Ireland.

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OHL OHL entered the US construction market in 2006, when it acquired Community Asphalt and the Tower Group. It is also one of the five leading construction companies in the Czech Republic, after purchasing a company in 2003, has major infrastructure projects in Mexico and Chile, and in Turkey is renovating the railway between Ankara and Istanbul. Sales abroad in 2006 amounted to €1,365 million, 42% of total sales and up from €663 million (30%) in 2004. Mexico generated 9.2% of total sales, the Czech Republic 7.5% and the US 5.9%. In October 2007, OHL was awarded in a public auction five toll road concessions in Brazil after entering its bid of €6.5 billion and offering the lowest toll.

Other multinationals Abengoa The diversified group Abengoa, with interests in solar energy, biofuels, environmental services, information technology and industrial engineering and construction, is present in more than 70 countries. It is Europe’s largest bioethanol producer and the fifth in the US (with plants in Nebraska, Kansas and New Mexico). Gross cash flow was almost evenly divided in 2006 between Spain and abroad.

Acerinox Acerinox’s acquisition in 2002 of 64% of Columbus Stainless in South Africa made the company the world’s third-largest stainless steel producer. Since 2001 it has also been the sole owner of Kentucky-based North American Stainless

Spain: Going places.

(NAS). Acerinox sells to more than 80 countries. In the first nine months of 2007, 54% of Acerinox’s total net profit came from the US and South Africa.

Aguas de Barcelona (Agbar) Agbar, in which France’s Suez is a major shareholder, owns Chile’s Aguas Andinas, which engages in total water management in the basin of Santiago de Chile. In Mexico, Agbar is the operating partner of the company responsible for managing the drinking water supply and sewerage systems in Saltillo. Its biggest investment is in the UK, where in 2006 it acquired Bristol Water Group for €256.6 million. Two other Spanish companies with significant interests abroad in water treatment are Seta (in Egypt and Brazil) and Sistemas Azud (Tunisia, Latin America and China).

CAF CAF is one of the international market leaders in the design, manufacture, maintenance and supply of equipment and components for railway systems. It worked on the Heathrow Express in the UK, the Hong Kong airport rail link and in Turkey won contracts for the high-speed train link between Istanbul and Ankara and a tram network in Antalya.

Cortefiel Cortefiel, the second-largest apparel retailer after Inditex, has shops in 48 countries. It operates a multi-format network with three main concepts: Cortefiel (medium-to-high-quality classic clothing for men and women over 30); Springfield (18-30s fashion with a casual, contemporary look) and Women’s Secret (the leading underwear retailer in Spain). It planned to open 120 shops in Russia over the next seven years.

Ebro Puleva Ebro Puleva is the world leader in the rice sector and the second-largest pasta manufacturer. It acquired Houston’s Riviana Foods, the United States’ largest rice processor, in 2004 and with it Riviana’s subsidiaries in Central America, Belgium and the UK. Riviana and Ebro Puleva had been partners for many years. In 2006, it purchased Kraft Foods’ Minute Rice brand in the US and Canada and New World Pasta, the US pasta company. Ebro Puleva has a 30% market share of the rice sector in Europe and 17% in the US. Iberostar This is the largest Spanish tourism business group. It comprises the tour operators Iberojet, Solplan, Turavia and Viva Tours, the hotel group under the

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Iberostar Hotels & Resorts brand, the airlines Iberworld and Aerobalear, and the Viajes Iberia travel agency. It has hotels in 15 countries including Brazil, Bulgaria, Cuba, Jamaica and Turkey.

Indra Indra, Spain’s leading information technologies and defence systems company, started its activity in the US in 1994 when it was selected by the US Navy to supply full mission simulators, radar trainers and test programme sets for the AV-8B+ Harrier combat aircraft. Indra has also won tenders to supply simulators and test programme sets for other aircraft used by the US Navy (F-14 Tomcat, F-18 Hornet and the MH-60 Seahawk). It has a subsidiary in Orlando, Florida, and is the only non-American company selected as a prime contractor for the US Navy. Three out of every five flights reach their 136

destination thanks to air traffic control programmes developed by Indra. The company is also developing a stronger presence in information and control systems for the transport market, a field in which it is a reference company in the world. It created the ticketing and access control systems for the St. Louis subway (Missouri), for the Austin subway (Texas) and the tolling system for the Indiana Toll Road (see Exhibit 4.28). In 2006, 33% of its total revenues of €1,406 million were generated abroad.

EXHIBIT 4.28 Highlights of Indra’s International Projects Americas Brazil Chile Colombia Mexico US Europe France Germany Portugal Turkey Asia China Africa Morocco

Surveillance systems to control the Amazon and maritime zones Technological modernisation of the Valparaiso Port enlargement Monitoring systems and train traffic management for Medellín Metro Ticketing system for suburban railway line in Mexico City Indiana toll road systems, upgrading of eight H-60 Seahawk helicopter simulators Maintenance and development of France Telecom’s loyalty systems Electronic defence systems for submarines Digital health information system Simulation systems of radar signs scenery and disruptions generation Traffic control systems and toll gates in three highways Traffic management systems

Source: Indra.

La Seda de Barcelona La Seda, the textiles and chemicals group, is one of Europe’s largest producers of artificial and synthetic fabrics and yarns, such as polyester, polythene and viscose. In 2007 it bought the seven European plants of Australia’s Amcor, the

Spain: Going places.

world’s largest maker of plastic soft drink bottles, for €425 million, and in 2006 it acquired Turkey’s textiles group Advansa, which also has plants in the UK and Romania, for €320 million.

Mapfre Mapfre is Latin America’s leading non-life insurance group in terms of premium income (see Exhibit 4.29). Its market share of the region’s life and non-life business is more than 4%. In 2006, 41% of total premium income came from Spain, 26% from the Americas and 25% from the rest of Europe.

In 2007, Mapfre paid €285 million for 80% of Genel Sigorta, Turkey’s sixthlargest insurance company. This was Spain’s second-largest investment in the EU candidate country. It also acquired Commerce in the US for €1.53 billion.

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EXHIBIT 4.29 Top Five Non-Life Insurance Companies in Latin America 1. Mapfre 2. AIG 3. ING 4. GNP 5. Bradesco

COUNTRY Spain US Netherlands Mexico Brazil

MARKET SHARE* 6.1 6.0 5.7 5.5 4.4

(*) 2005.

Source: Mapfre.

Metrovacesa Metrovacesa acquired France’s Gecina in 2005 for €5.5 billion, creating the largest property company in Continental Europe. In 2007 it bought HSBC tower in Canary Wharf, London, for €1.6 billion, the largest single property transaction to date.

Mondragon Cooperative Corporation (MCC) The success of MCC, the largest cooperative group in the world and one of the ten largest companies in Spain, shows that worker ownership, given the right (and difficult-to-replicate) circumstances, is not an obstacle to becoming a significant multinational. Founded in 1956 in the Basque Country by the priest José María Arizmendiarrieta, MCC has 65 production subsidiaries in 18 countries that manufacture everything from automotion components to timber machinery (see Exhibit 4.30).

Chapter 4: The Emergence of Spanish Multinationals

EXHIBIT 4.30 MCC’s Main Production Activities in the World Americas Brazil Mexico US Europe Czech Republic

138

Taps and safety systems, casting of automotion components, coaches, dies for automotion sector Valves, components for electric cooking, catering equipment, coaches Camping and fitness equipment, bicycles Rubber parts, taps and safety systems, electric hotplates, casting, automotive components

France Germany Italy Poland

Industrial ironing, automatic assembly systems, robotics Grinding machines, automatic assembly systems, robotics, milling machines Gas rails and pipes

Portugal Romania Slovakia Turkey UK

Bicycles Ancillary industry for machine tools, timber machinery Rubber components, aluminium injection and machining Gas taps, commercial equipment

Africa Morocco South Africa Asia India China Thailand

Seal manufacture, electrical resistances, domestic appliances, transformation of plastics

Grinding machines, vertical transport systems, plastic injection moulding and finishing Domestic appliances, coach manufacture Coach manufacture Coach bodywork Components, automation and control, mini domestic appliances, coach manufacture Surface and axial mounting of discrete semiconductors

Source: MCC.

MCC, in the words of Jesús Larrañaga, one of the founders of Fagor Electrodomésticos, the home appliances market leader in Spain and Europe’s fifth-biggest manufacturer with an overall market share of around 6%, “uses a dual model, operating as a cooperative wherever feasible and as a capitalist company elsewhere”.2 MCC’s bank gives it financial independence, and workers who are members of the cooperative are highly motivated. The main current project is the construction of a business park in Kunshan, China, where four plants were being located: Orkli (safety components for domestic appliances), Wingroup (exercise equipment and tents), Orbea (bicycles) and Oiarso (healthcare material). In 2006, China took over from Spain as the leading market for Fagor Automation and Asia overtook Europe.

NH Hoteles NH Hoteles has 337 hotels in 21 countries in Europe, the Americas and Africa and is ranked third among European business hotels. In 2006, it was the fastest-growing hotel chain in Europe. Around 70% of its revenue comes from abroad.

2. See El País Vasco, May 4, 1998.

Spain: Going places.

Prisa Prisa, whose newspaper El País is the leading daily in Spain and which also has a TV channel (Cuatro), the largest radio network (Cadena Ser) and owns nearly 50% of Sogecable (owner of Canal+, the largest pay-TV service in Spain), is the biggest education, information and entertainment business group in Spanish-speaking markets. It is present in 22 countries through such brands as El País, 40 Principales and Unión Radio, a network of radio stations and the publishing houses Santillana and Alfaguara. International activity generated 15% of Prisa’s operating income in 2006. In July 2007, Prisa acquired 140 radio stations from Iberoamerican Radio Chile (IARC), the largest chain in Chile, for €54.5 million (see Exhibit 4.31). Marking its international ambitions, El País changed its masthead in October 2007 from ‘Independent Morning Daily’ to ‘The Global Newspaper in Spanish.’

139

EXHIBIT 4.31 Prisa’s Radio Stations in the Americas Argentina Chile Colombia Costa Rica Ecuador Guatemala Mexico Panama Peru US Total

NUMBER OF STATIONS 77 231 171 3 32 2 89 13 63 49* 760

(*) Two own (Miami and Los Angeles) and 47 associated.

Source: Prisa.

Prosegur Prosegur is a leader in private security in all the countries where it operates: Argentina, Brazil, Chile, Colombia, France, Italy, Mexico, Paraguay, Peru, Portugal, Romania, Spain and Uruguay.

Roca This bathroom installations company manufactures in 15 countries and is one of the world’s biggest in its sector. In 2006 it acquired Switzerland’s JohnsonSuisse, a company with production activities in Malaysia, the Croatian and Romanian subsidiaries of Austrian group Lasselsberger and a 50% stake in the Indian firm Parryware. Roca also has a plant of its own near St. Petersburg and in August 2007 agreed to acquire Russia’s Keramkia, making it the country’s largest producer of ceramic bathroom equipment.

Chapter 4: The Emergence of Spanish Multinationals

Sol Meliá Sol Meliá’s 219 hotels (407 including Spain) in 34 countries on four continents make it the world’s 12th largest hotel chain and the largest resort hotel chain (see Exhibit 4.32). In Latin America and the Caribbean it is the leader. This empire began in 1956, when the 21-year-old Gabriel Escarrer Juliá began to operate his first hotel on the island of Majorca. International expansion began in 1987 with the building of a hotel in the then relatively unknown, but now very fashionable, destination of Bali.

EXHIBIT 4.32 Top International Tourism Countries

140

Europe Belgium Croatia Cyprus Czech Rep. France Germany Greece Ireland Italy Monaco Netherlands Portugal Romania Spain Sweden Switzerland UK Americas Argentina Brazil

1 16 1 1 16 16 8 2 23 1 3 27 1 188 3 2 7 3 20

Chile Colombia Costa Rica Cuba Dominican Republic Mexico Panama Peru Puerto Rico Uruguay US Venezuela Africa Egypt Tunisia Asia Indonesia Malaysia Vietnam Total

1 1 3 26 5 10 1 1 1 1 1 2 5 3 5 1 1 219

Source: Sol Meliá.

After the US, Spain has the most hotel chains among the world’s 100 largest (see Exhibit 4.33).

EXHIBIT 4.33 The World’s 100 Largest Hotel Chains by Country* US Spain Japan Germany China UK France Other countries

NUMBER OF HOTEL CHAINS 40 11 10 7 6 4 3 19

(*) By number of rooms.

Source: Hotels (www.hotel-online.com/News/PR2007_2nd/Jun07_HotelRanking.html).

Spain: Going places.

Family-owned multinationals As well as Acciona and Ferrovial, there are other majority family-owned multinationals.

Antolín-Irausa Antolín is the world’s largest manufacturer of interior liners for cars and a leading producer of seats, door locks and electrical devices for windows.

Founded in 1959, up to 70% of its revenue comes from abroad. Its first plants were set up close to Renault’s assembly lines during the 1960s and in the 1970s near Ford’s plant in Valencia. In the 1990s it entered Germany, the UK, France, Portugal, US, Mexico, Turkey, the Czech Republic, Slovakia, Brazil, Argentina, South Africa, India, Thailand, Japan, South Korea and China.

Inditex The most spectacularly successful family firm is Inditex, a vertically integrated clothing manufacturer and retailer with 3,512 stores and eight sales formats around the world in early November 2007 including Spain (see Exhibit 4.34).

In March 2007, Inditex overtook GAP, and its network of stores became the world’s second largest after Italy’s Benetton. Its Spanish rival Mango, however, is present in more countries (89 against Inditex’s 66).

Inditex’s IPO in May 2001 turned Amancio Ortega, the founder and majority owner, into the world’s 18th wealthiest person ($10.3 billion) in the Forbes magazine’s annual ranking, a quarter the level of Bill Gates. Ortega’s empire began with a lingerie workshop set up with his first wife in their garage. One of the keys to Inditex’s success is its just-in-time manufacturing capabilities and state-of-the-art information systems, which enable it to keep low stocks in stores and respond very quickly to market trends and needs.

The US magazine Business Week, which in 2007 ranked Inditex the seventh European company with the best financial performance, said the company stood out for a business model based upon a quick rotation of the offer: “the faster the clothes change, the more often customers return to check out the new offering”.

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EXHIBIT 4.34 Inditex’s Stores* Zara Kiddy’s Class/Skhuaban Pull and Bear Massimo Dutti Bershka Stradivarius Oysho Zara Home Total

OUTSIDE SPAIN 804 36 212 187 250 119 130 85 1,814

IN SPAIN 295 181 269 231 237 238 135 103 1,698

(*) At November 2, 2007.

Source: Inditex.

Pronovias Pronovias is the world’s largest maker and seller of bridal wear (global market 142

share of 5%). It started in 1922 and distributes through a network of more than 2,500 points of sale. Like Inditex, it is able to quickly meet the needs of each market.

Talgo The innovative Talgo began in the 1920s when a Basque railway engineer, Alejandro Goicoechea, pioneered a new method for building railway cars.

Instead of making railway cars heavy enough to allow them to make turns at relatively high speeds, Goicoechea sought to minimise the equipment’s weight by using lighter materials and reducing the cars’ height. In addition, the wheels are mounted in pairs but not joined by an axle and are between rather than underneath the individual coaches The first prototype was launched in 1943, at a time when Spain was internationally isolated and its people starving. In 1974 the Talgo became the first high-speed sleeper train in the world (covering the Barcelona-Paris route). Another later feature is the suspension, which makes carriages tilt as they enter a curve and allows for higher speeds without passenger discomfort.

Talgo sold coaches to Germany in 1993 and in 1994 became the first European train with a regular commercial service in the US (between Seattle and Portland). This was followed in 1995 by Seattle-Vancouver. It entered Finland via acquisition in 1999, where it designs, builds and maintains various types of trains, and in 2003 began a service on the line between Almaty and Astana, the former and new Kazakh capitals.

Spain: Going places.

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Chapter 5: Spanish Direct Investment in Latin America

144

Hotel Marqués de Riscal, ALAVA. Architect/s: Frank Gehry, 2000.

Following the success of the Guggenheim Museum in Bilbao, this hotel marks an attempt to redefine the traditional image of Spain´s winery regions.

Spain: Going places.

Spanish companies have invested

more than

€120 billion in Latin America over the past 15 years, mainly in the banking, oil, electricity and telecoms sectors. In 2006, almost one-quarter of the earnings before interest and tax (EBIT) of companies comprising the IBEX35 index of the Spanish stock exchange came from the region (see Exhibit 5.1). Latin America generated 24% of these companies’ revenues in 2006, up from 19% in 2003. The region is a major factor in the bottom line of a significant number of companies and banks with dominant positions in various countries. Telefónica is the third-largest non-financial transnational company in Latin America, after Wal-Mart and General Motors of the US, with consolidated sales of $19,965 million in 2005 (latest year available). Endesa is the seventh, with $10,251 million and Iberdrola the 23rd with $4,007 million. What happens in this part of the world – all of whose countries, except for Brazil, were once part of the

145

Spanish empire – is of growing importance to corporate Spain. Increasingly, it can be said that what is good for Latin America is good for the Spanish economy.

EXHIBIT 5.1 Exposure to Latin America in EBIT (% of Total), 2006 COMPANY BBVA Santander Telefónica Endesa Repsol YPF Gas Natural Unión Fenosa Prisa Mapfre NH Hoteles Iberia Inditex Cintra Iberdrola Indra ACS Abertis Ferrovial REE FCC Sacyr-Vallehermoso Acciona IBEX35 IBEX35 ex banks

ARGENTINA 4 1 3 10 35 3 0 1 1 2 1 1 0 0 1 1 0 0 0 0 0 0 4 5

BRAZIL 0 13 18 8 0 8 0 3 4 1 2 2 0 4 1 1 0 0 0 0 0 0 5 5

MEXICO 42 12 0 0 0 7 7 6 1 6 3 2 0 3 1 1 0 0 0 0 0 0 7 1

OTHER LATAM 9 11 12 12 10 7 18 6 4 1 4 3 9 0 2 0 1 3 3 0 7 1 7 6

Source: Company reports and Santander Investment Bolsa.

Between 1993 and 2000, during the first phase of significant Spanish direct investment abroad, Latin America was the preferred destination for many of the country’s largest companies, including Telefónica, the banks Santander

TOTAL LATAM 55 37 33 30 45 25 25 16 10 10 10 8 9 7 5 3 1 3 3 2 7 1 24 18

Chapter 5: Spanish Direct Investment in Latin America

and BBVA, the oil and natural gas conglomerate Repsol, Gas Natural, the power companies Endesa, Iberdrola and Unión Fenosa and construction and infrastructure companies, such as Ferrovial, FCC and OHL (see Exhibit 5.2).

Latin America accounted for 61% of total net investment during this period, which averaged €13.1 billion a year excluding Special Purpose Entities (SPEs1), compared to 22.5% by the EU-15 and 9% by the US and Canada, according to Spain’s Investment Registry. Only the US, whose economy is ten times larger than Spain’s in terms of nominal GDP at market exchange rates and in whose ‘backyard’ Latin America lies, invested more. During the second phase of investment, between 2001 and 2006, when total net investment averaged €26.8 billion a year, Latin America’s share was 16%, the EU-15’s 67% and the US and Canada’s 6.4%.2 But even in this period Spain continued to be the main investor in the region (Exhibit 5.3). Brazil has the largest stock of 146

Spanish investment in Latin America. By the year 2000 Spain was the secondlargest investor in Brazil after the US; it accounted for 12.4% of the total stock, up from a mere 0.4% in 1995. Telefónica, Endesa, Repsol, Santander, BBVA, Iberdrola and Gas Natural acquired companies and banks in Brazil that were privatised. Virtually all the investment in Latin America has been in financial services, telecommunications, oil, electricity and gas and very little in industrial activities. This is hardly surprising given the nature of Spanish multinationals, but it means they are very exposed to reforms, both political and financial.

They do well if the countries do well.

EXHIBIT 5.2 Investments Flows to Latin America, 1993-2006 (€ million)

Net FDI in LA ex. SPEs Net FDI in LA Gross FDI in LA

Renewed expansion of the banks BBV, Santander and BCH in LA; Repsol in Argentina.

Telefónica invests in Peru

35,000

Banks and companies enter Telefónica´s operation Verónica in Argentina, Brazil, Chile and Peru; Brazil: Telefónica, Endesa, invests in mobiles in Mexico; banks continue to expand.

Iberdrola, BSCH; BBVA; Fenosa, Slowdown in investment Gas Natural.

Repsol buys YPF and steps up Telefónica in Brazil; BBVA in Mexico, its presence in other companies.

Endesa enters Elesur Gas Natural in Brazil, Repsol in Brazil.

BBVA and BSCH continue to and Enersis in Chile; Telefónica in Mexico and BBVA in Argentina, Aguas expand in Argentina, Mexico, banks continue to Barcelona in Chile, Gas Brazil; Repsol in Brazil, Brazil, Colombia, Chile and invest.

BBVA increases in Mexico, Natural in various.

Venezuela.

Telefónica Cepsa in Colombia.

Móviles buys BellSouth in LA and invests in Chile.

30,000 25,000 20,000 15,000 10,000 5,000 1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Source: Alfredo Arahuetes and Aurora García, based on figures from the Investment registry and their own data base.

2003

2004

2005

2006

Spain: Going places.

EXHIBIT 5.3 EU-25 FDI Outflows in Latin America, 2001-2005 (€ million) EU-25 2001 Spain EU-25 2002 Spain EU-25 2003 Spain EU-25 2004 Spain EU-25 2005 Spain

ARGENTINA 5,612 2,027 1,159 2,726 -1,455 -1,130 -1,166 -1,404 -1,313 -1,389

BRAZIL 10,050 3,435 -1,367 -1,812 2,149 1,553 5,180 1,490 5,490 1,751

CHILE 3,048 239 1,564 -11 1,643 539 1,976 1,312 939 220

COLOMBIA 420 316 369 143 369 158 605 333 -1,057 -72

MEXICO 4,825 3,124 6,608 3,785 1,999 1,188 10,805 7,341 2,512 2,252

VENEZUELA 2,914 142 -183 62 -275 Confidential 1,064 Confidential 945 Confidential

Notes: The EU-25 aggregates include Special Purpose Entities (SPEs). A negative value indicates a withdrawal of direct investment capital. The most frequent cases are where intercompany debt is paid back or where the direct investor sells a stake in the enterprise acquired.

Source: Eurostat.

After the decline of the Spanish empire (the last colonies of Cuba, Puerto Rico and the Philippines were lost to the US in 1898 as a result of the Spanish-American War), Spain returned late to Latin America. Before the First World War, Britain was responsible for two-thirds of foreign investment in the region: it controlled, for example, over half the tonnage of Argentine and Brazilian ports; the railways, which linked the ports to the production centres, were largely a British preserve; and Wheetman Pearson, the British MP, was lampooned as the ‘member for Mexico’ because of the scale of his oil industry and other interests in the country. Elevated to a peerage in 1910, he emblazoned his coat of arms with the image of a Mexican peon. After the Second World War, the US became the biggest foreign investor in Latin America, initially concentrating on the manufacturing sector and the exploitation of natural resources, mainly mining and hydrocarbons.

Until the early 1990s, Latin America’s main points of connection with Spain were cultural, historical and what one could term emotional. Tens of thousands of Spaniards fled into exile in Latin America after the 1936-39 Civil War (Mexico was the seat of the Republican government in exile) and were followed in the 1950s and 60s by a wave of mainly economic migrants seeking employment and a better way of life in the region. Latin America’s economic importance at that time to Spain was marginal and mainly consisted of a low volume of exports to the region (it still only accounts for 5% of the total) and remittances to Spain by Spaniards living there. Today, instead of Spanish immigrants sending money home from Latin America, there are now 1.5 million Latin American immigrants in Spain (one-third of the total number) sending remittances to their families.

1. SPEs are mainly foreign-owned financial holding companies principally engaged in cross-border financial transactions with no (or negligible) local activity.

2. See the Working Paper by Alfredo Arahuetes and Aurora Garcia for a very detailed analysis of Spain’s direct investment in Latin America. I am grateful to the authors for sending me their paper before it was published.

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Chapter 5: Spanish Direct Investment in Latin America

There is also a political dimension to the relationship with Latin America. Spain is the only EU country with a permanent institutional link with the region: through the Iberoamerican Community of Nations, founded in 1992 and based in Madrid since 2006 when an enhanced organisation was set up under Enrique Iglesias, the former president of the Inter-American Development Bank (IBD), who became its secretary-general.

Corporate Spain’s decision to invest massively in Latin America was motivated by various factors. Faced with much stronger competition on their home ground following EU entry in 1986 and the need to diversify, Spanish companies were attracted by the privatisation of state companies, economic liberalisation, greatly improved macroeconomic fundamentals after the ‘lost decade’ (as a result of the external debt crisis) of the 1980s, the size of the region’s market and its growth prospects, the spread of democracy and a 148

shared language that made it easier to transfer their management practices and corporate cultures. Also, Spain’s entry into European Monetary Union in 1999 made it much easier for companies to raise funds in hard currency at low interest rates. This was a major structural breakthrough. The largest investor in Latin America is Telefónica, which has spent around €70 billion on acquisitions and investment in infrastructure. In 2006, 36% of its operating income before depreciation and amortisation (OIBDA) came from the region. Its share of Latin America’s telephony market (fixed and mobile) is around 25%.

The region has undergone profound transformation over the past 20 years, ranging from sweeping market and democratic reforms to stronger links with the global economy. Only one country, Cuba, is still ruled by a dictator, Fidel Castro, who has been in power 47 years, while Venezuela has an increasingly authoritarian president. Latin America is no longer associated to anywhere near the same extent as in the past with military coups, guerrilla insurgency, scandalous levels of corruption and underdeveloped economies, although the continued importance of commodities still makes them vulnerable to shifts in world prices. As the historian Felipe Fernández-Armesto points out, the region came to be signified by unhappily naturalised words: junta, pronunciamiento, cacique, guerrilla, cartel, caudillismo.3 Readers of the ‘magical realism’ novels of Gabriel García Márquez who know Latin America well often found his fictional world close to the real one.

The macroeconomic fundamentals are much sounder as a result of greater fiscal discipline and liberalisation. Take the case of inflation, which has been steadily declining, as Exhibit 5.4 shows. The table is divided into

3. See The Americas, a Hemispheric History by Felipe Fernández-Armesto (Phoenix Press, 2003).

Spain: Going places.

a ‘before’ and an ‘after’ period. The cut-off point is the moment when annual inflation was below 20% and did not go back beyond it. The ‘before’ column shows annual average inflation between 1980 and the year of change whereas the ‘after’ column shows it between the year of change and 2006. All countries reduced their inflation below 10% on average, except for Venezuela, where inflation was relatively low until 1986 and has not decreased since then but increased. Fiscal and current account balances are also much improved.

EXHIBIT 5.4 Average Annual Inflation in Latin America BEFORE (%) 628.3 1,724.7 740.0

AFTER (%) 6.3 8.5 7.8

CUT-OFF YEAR 1993 1987 1996

Chile

21.3

5.3

1992

Colombia

22.8

6.5

1999

Ecuador

39.3

5.7

2002

Mexico

44.7

5.4

2000

Argentina Bolivia Brazil

916.1

6.3

1995

Uruguay

55.7

8.6

1998

Venezuela

12.6

37.5

1986

Peru

Source: Prepared by La Caixa and based on IMF figures.

Average real GDP growth using the same criteria adapted for inflation is more buoyant (see Exhibit 5.5). The region’s period of growth, fuelled to a significant extent by a commodity boom spurred by Asian demand, particularly from China, is the strongest and most prolonged since the 1970s: for the first time in a generation (25 years), Latin America’s GDP, per capita income and employment are growing on a sustained basis. This is consolidating and increasing the size of the middle classes that have been punished so heavily in the past by populist economic policies and the lack of rule of law. Francisco Luzón, executive-vice president for Latin America of Grupo Santander, believes that if the middle classes continue to develop as they have so far, thanks to faster growth, low inflation, expanding credit and liberal trade, they will do “more to consolidate democracy than all the politicians together and will make a return to other regimes unthinkable.”4 According to Santander’s calculations, some 15 million households ceased to be poor between 2002 and 2006. If this pace continues, by 2010 a small majority in the region will have joined the middle class, with annual incomes above $12,090 in purchasing power parity terms.5 On current trends, Latin

4. See the interview with Francisco Luzón in El País (July 10, 2007, page 72).

5. For the rise in Latin America’s middle class see “Adiós to Poverty, Hola to Consumption” (The Economist, August 18, 2007).

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Chapter 5: Spanish Direct Investment in Latin America

EXHIBIT 5.5 Average Real GDP Growth in Latin America BEFORE (%) 0.8 1.4 2.6

AFTER (%) 3.1 3.4 2.5

CUT-OFF YEAR 1993 1987 1996

Chile

4.6

5.0

1992

Colombia

3.2

3.9

1999

Ecuador

2.5

4.9

2002

Mexico

2.9

2.9

2000

Peru

0.6

4.8

1995

Uruguay

2.7

1.1

1998

Venezuela

0.1

2.7

1986

Argentina Bolivia Brazil

Source: Prepared by La Caixa and based on IMF figures.

America’s GDP is forecast to reach more than $5 trillion by 2025 and 150

Mexico and Brazil would be among the Top 15 $1 trillion economies.

Although the results are promising, the growth rates have yet to reach the levels of other emerging countries in Southeast Asia or Eastern Europe. It would therefore seem that macroeconomic stability is a necessary ingredient but not in itself sufficient to obtain economic growth rates that make it possible to reduce poverty and inequality. As the research department of La Caixa, the big Spanish savings bank, noted: “This clearly adds a political risk to macroeconomic stability. If people do not generally perceive an increase in their well-being, it is then more likely that we shall see the election of populist governments whose macroeconomic policies, including for instance the reversal of institutional reforms, could take the region back to the problems that formerly ravaged the region.”6 One reason why Latin America is not taking off to the same extent as Asia is because of the low education level of the labour force which, among other things, has held back gains in productivity (see Exhibit 5.6). In 1960 the percentage of people who completed high school in Latin America was 7% and in East Asia about 11%; today the percentages of high school completion are 18% in Latin America and 44% in East Asia, according to a World Bank report.7 Another reason is that Latin American exports continue to be concentrated on primary products and on manufactures of low technological content, in clear contrast to Asian countries, although there has been a significant rise in value-added exports (see Exhibit 5.7).

6. See La Caixa’s June 2007 Economic Report and its section on Latin America.

7. See Raising Student Learning in Latin America:The Challenge of the 21st Century, World Bank (October 2007).

Spain: Going places.

EXHIBIT 5.6 Education Indicators

Latin America Asia* Europe US

PRIMARY SCHOOL ENROLMENT (%) 94.9 93.4 98.9 92.4

SECONDARY SCHOOL ENROLMENT (%) 66.6 80.2 94.0 89.3

MATHEMATICS AND SCIENCE SKILLS (INDEX FROM 0 TO 10) 4.4 7.1 6.8 6.5

QUALITY OF EDUCATION (INDEX FROM 0 TO 10) 3.8 6.1 6.5 6.9

Note: Enrolment ďŹ gures are for 2004 and the quality indicator for 2005-2006. (*) Rates for secondary enrolment in Asia for 2000.

Source: Prepared by La Caixa and based on World Development Indicators (World Bank).

EXHIBIT 5.7 Composition of Latin America’s Exports (% of Total) Agricultural products Mining Energy Traditional products With high economies of scale Durables Technological spillover exportsinvestors

1970 30 7 15 20 24 2

2006 9 4 16 20 17 12 21

Source: CEPAL and Goldman Sachs.

Lastly, there is the continuing problem of the lack of sound institutions.

Economic prosperity and institutions are closely linked together, as shown by the fact that those countries in the region with the strongest institutions and rule of law in 1996 are the ones that on average grew the most in the period 1996-2006. Corruption remains high. Of the 32 countries in the 2007 Corruption Perceptions Index drawn up by Transparency International, 13 scored below 5 (out of 10), which indicates serious levels of corruption, and ten countries scored less than 3, which indicates rampant corruption.

One country, Chile, scored 7.0 and was ranked 22nd out of 180 countries, above Spain (in 25th position with 6.7). In effectiveness of government, control of corruption, rule of law, the quality of the regulatory framework, accountability and political stability and lack of violence, Latin America has a level of governance much lower than that of OECD countries. However, the overall institutional framework, taking the Index of Economic Freedom published by the Heritage Foundation as an indicator, is better in terms of business and trade freedom, defence of property rights and openness to foreign direct investment than it was ten years ago.

The corporate sector is much more dynamic than it was 20 years ago. The number of Latin American companies listed on the New York Stock

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Chapter 5: Spanish Direct Investment in Latin America

Exchange and Nasdaq has risen from one in 1990 to more than 100 today.

And since the end of 1999 the Spanish stock exchange, the seventh largest in the world by turnover, has a unique market in euros for blue chip Latin American companies called Latibex, which is the third-largest Latin American market after São Paulo and Mexico City (see Chapter 3).

The business environment, however, is still not very friendly; nationalisations are on the rise. The left-wing nationalist tone adopted by the governments of Bolivia, Ecuador and Venezuela is worrying foreign investors.

Many Latin American countries slipped down the business environment rankings of the Economist Intelligence Unit (EIU) for 2007-11, as the pace of improvement is slow compared with other emerging regions. The World Bank’s 2008 Doing Business survey found that Latin America was “falling further behind other regions in the pace of reform”. While it takes, on average, 152

47 days in Spain to satisfy the authorities that you are fit to establish and register a business, compared with seven days in France, 18 in Germany and 13 in the UK, this is nothing compared to the 152 days in Brazil.

Latin America tends to be viewed from afar as if it were a homogeneous whole, but in reality it is characterised by sharp contrasts as well as similarities. The major economies – Mexico, Brazil, Chile, Venezuela and Argentina – are increasingly decoupling from each other, both in terms of real economic links and in the minds of the investment community, which has become more discriminatory. For example, Mexico has moved more in sync with the US economy since forming part of the North American Free Trade Agreement (NAFTA) in 1994 with the US and Canada. While Europe is increasingly melding into one large market, Latin America is fragmenting economically. Brazil, Chile and Mexico have pressed ahead with reforms and greater integration into the global economy, while Argentina and Venezuela have been beset by economic and political problems. Mexico and Chile have both achieved investment-grade status, which means the risk of debt default is small and institutional investors are less hesitant about investing in their financial markets. Brazil, Colombia and Peru are moving towards investment grade; together with Mexico and Chile, they account for 85% of Latin America’s GDP. The country that received the most Spanish FDI between 1992 and 2000 was Argentina, largely because of Repsol’s mega purchase of the oil company YPF for $14.9 billion in 1999, at that time the largest-ever purchase by a foreign company in Latin America. The banks Santander and BBV, the electricity company Endesa and Telefónica also invested in the country.

All of them were hit by Argentina’s financial meltdown in 2001-2002 when the country defaulted on its debt of $155 billion, the largest sovereign debt

Spain: Going places.

default in history, and the currency board system, under which the peso was pegged from April 1, 1991 to January 6, 2002 at one-to-one to the US dollar was abandoned. The economy and bank balance sheets were ‘pesofied’ asymmetrically: dollar deposits were converted into pesos at the rate of 1.4 pesos per dollar while bank loans made in dollars were converted into pesos at one peso per dollar. Regulated electricity and telephone prices were frozen.

The peso depreciated by 58% against the euro in 2002.

The impact of Argentina’s crisis, however, was not as hard as some had anticipated, and it did not spread to the rest of Latin America. The share prices of Spanish companies with large investments in Latin America took a knock, but the Spanish economy as a whole was hardly affected.8 At the time of Argentina’s crisis, the 11 main Spanish companies in Latin America represented around 80% of the market capitalisation of the IBEX35 index of blue chip stocks and about 40% of total stock market capitalisation.

The well-capitalised Spanish banks were cushioned by the prudent provisioning made during before the crisis. The IMF noted that the Bank of Spain, which quite rightly monitors Latin America more closely than any other European central bank, had “already, in 2000, introduced a forward-looking and path-breaking provisioning system to ensure a more adequate building of bank reserves over the business cycle”.9 Santander, for example, established a special reserve of nearly €1.29 billion to cover its entire investment in Banco Río rather than leave the country. BBVA did the same. Excluding this provision, Santander’s net attributable income in Argentina was €58 million (3% of the total) compared to €231.3 million in 2000. These provisions brought 2002 and 2003 earnings to zero; in 2004, Banco Río returned to making a profit (€148 million), although the return on assets was still negative in 2006. The resilience of Santander and BBVA reflected their “strong starting position in terms of capitalisation, provisioning, efficiency, and profitability, based on a vibrant domestic franchise”, but it was also the result of the Bank of Spain’s “proactive role in promoting conservative risk management practices”.10 Repsol and Telefónica also made large provisions in Argentina in 2001 (€2,738 million and €1,424 million, respectively). Like the banks, these companies weathered the storm and did not pull out, unlike some of their foreign rivals.

8. Telefónica suspended a claim worth $2.8 billion against Argentina in a World Bank tribunal. The suspension of such claims, filed by dozens of foreign companies in the wake of Argentina’s crisis, was a prerequisite laid out by Argentina’s president, Nestor Kirchner, for the renegotiation of new contracts. These have progressed slowly. The contentious issue of the freezing of fixed telephone, gas and electricity tariffs for households since the hefty devaluation of the Argentine peso in 2002 had still not been resolved by the middle of 2007 (inflation during this period was nearly 100%). The Spanish Confederation of Business Organisations (CEOE) issued a statement in July 2007, after meeting Cristina Fernández de Kirchner, Kirchner’s

wife who succeeded him as president after winning the election on October 28, in which it said that Spanish companies wanted a “more stable framework that would enable them to continue to develop their investments and improve the global competitiveness of the Argentine economy”. See “Kirchner Tacha de ‘Incorregibles’ a Algunos Empresarios Españoles”, (El País, July 27, 2007).

9. See IMF, Spain: 2001 Article IV Consultation Mission, October 22, 2001 (www. imf.org/external/np/ms/2001/102201.htm).

10. See IMF, Spain: 2002 Article IV Consultation Mission, November 11, 2002 (www.imf.org/external/np/ms/2002/111102.htm).

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Chapter 5: Spanish Direct Investment in Latin America

Banking In less than a decade, Santander and BBVA have become the region’s leading financial groups (see Exhibits 5.8 and 5.9). In Mexico, BBVA Bancomer is the country’s largest bank and Latin America’s biggest private-sector bank, while in Chile Santander is the leader.

EXHIBIT 5.8 Santander’s Market Shares in Latin America1

154

COUNTRY Argentina Brazil Chile Colombia Mexico Puerto Rico Uruguay Venezuela Total Latam6

LOANS (%) 10.3 5.7 22.3 2.9 15.5 10.1 13.6 12.9 10.8

DEPOSITS 9.9 4.7 22.3 2.8 15.2 11.2 11.5 11.7 9.8

MUTUAL FUNDS (%) 12.4 4.4 22.1 1.6 17.3 21.8 7.1

RANKING2 2 54 1 135 3 3 4 3 1

PENSION FUNDS3 19.3 12.1 11.2 6.9 18.0 11.4

(1) At December 31, 2006 or latest available. (2) Ranking by loans, deposits and mutual funds. (3) Market share by assets.This business in Mexico, Chile, Colombia and Uruguay was sold in July 2007. (4) Among privately-owned banks. (5) By total assets. (6) Average in countries where business developed.

Source: Santander.

EXHIBIT 5.9 BBVA’s Market Shares in Latin America1 COUNTRY Argentina Bolivia Chile Colombia Dominican Rep. Ecuador Mexico Panama Paraguay Peru Puerto Rico Uruguay Venezuela Total ex Mexico3

DEPOSITS (%) 10.0 8.0 11.2 28.5 4.6 15.1 24.6 NA 9.1 10.3 10.4

RANKING 1 4 4 1 5 2 NA 5 4 1

PENSION FUNDS (%)2 18.6 52.2 31.0 17.2 23.1 82.1 21.1 23.9 24.0

MUTUAL FUNDS2 6.6 4.1 7.3 23.7 22.0 29.3 NA

(1) At December 31, 2006. (2) Market share by assets. (3) Mexico forms part of a division with the US and Puerto Rico.

Source: BBVA.

The push into Latin America during the 1990s came at a time when the two banks and long-time rivals were financially very strong, the Spanish market was very mature and they needed to become much bigger in order to fulfil their ambitions of becoming global players. By the end of 2006 Santander had invested $17.5 billion (see Exhibit 5.10) and BBVA $15.7 billion (see Exhibit 5.11). The two banks faced little competition from banks

Spain: Going places.

from other countries when they went on their acquisition trail. The 1980s were a bitter experience for American banks because of their exposure to the Latin American external debt crisis, Japanese banks were coming to terms with their country’s financial bubble, and French and Italian banks were reeling from financial problems. German banks were strong but focusing on Eastern Europe.

The region offered good opportunities for banks with a certain critical mass seeking increased size and competitiveness, entry into expanding markets, global utilisation of resources and organisational and technological capacities, and appropriate risk diversification based on a corresponding rate of return.

The Latin American banking market’s underdevelopment – as measured by the size of the sector in terms of deposits as a percentage of GDP and other indicators, such as customers per branch, attractive margins, high potential rates of return and improved supervisory and regulatory systems in an environment of liberalisation – opened up the kind of business opportunities that had existed in Spain 20 years before the expansion of Santander and BBVA abroad. Santander and BBVA were able to buy market share in Latin America much more cheaply than in mature European markets and finance the purchases at a very low interest rate thanks to the euro. BBVA’s Research Department roughly calculated, on the basis of the stock market capitalisation of each country’s biggest banks and their share of deposits at the end of 1999, that a 1% share of the German deposit market in 1999 cost $2.2 billion if this was attained by purchasing shares in the major listed banks. The same share would have represented an outlay of $196 million in Argentina or $205 million in Mexico. The banks’ foray into Latin America also coincided with the surge in direct investment abroad by Spanish companies in the region. The fact that these companies were customers of the banks was an added benefit; by being on the spot, the banks were able to provide a more direct service.

EXHIBIT 5.10 Santander’s Main Investments in Latin America* Argentina Brazil Chile

BANK Banco Río de la Plata Banco Santander Banespa Banco Santander Chile

(%) STAKE 99.30 99.97 76.73

Colombia

Banco Santander Colombia

97.64

680

Banco Santander

74.91

2,345

Banco Santander Puerto Rico

90.77

242

Banco de Venezuela

98.42

731

Uruguay

Banco Santander

100.00

143

Paraguay

Banco Asunción

99.33

Mexico Puerto Rico Venezuela

Total (*) At December 31, 2006.

Source: Santander.

INVESTMENT (US$ MN) 3,047 7,848 2,451

63 17,550

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Chapter 5: Spanish Direct Investment in Latin America

EXHIBIT 5.11 BBVA’s Main Investments in Latin America* BANK BBVA Banco Francés Banco Chile BBVA Colombia

(%) STAKE 76.09 67.80 95.43

INVESTMENT (US$ MN) 1,867 1,166 1,367

Mexico

BBVA Bancomer

100.00

10,065

Panama

BBVA Panama

98.93

21.6

BBVA Banco

99.99

29.7

BBVA Banco Continental

92.08

246

BBVA Puerto Rico

100.00

421

BBVA Banco

100.00

125

BBVA Banco Provincial

55.60

Argentina Chile Colombia

Paraguay Peru Puerto Rico Uruguay Venezuela

453 15,760

Total (*) At December 31, 2006.

Source: BBVA.

156

The percentage of the population that has a bank account in Spain is double, and in some cases up to triple, that of Latin American countries.

Apart from Chile, a small market and in many aspects Latin America’s most developed country, lending as a percentage of GDP is very low in Latin America (see Exhibit 5.12). There is thus tremendous scope for banking business to grow, and this has been happening. Bank savings increased from 41% of GDP in 2004 to around 50% in 2006. Santander, for example, opened 358 branches (the main channel for business) in Latin America between 2004 and 2006. The number of Santander’s banking customers in Latin America (individuals, SMEs, companies and institutions) increased by 3.3 million in 2006 to 23.2 million. Santander planned to open 1,000 new branches and install 5,000 more ATMs between 2007 and 2010 and was aiming to have 30 million customers.

EXHIBIT 5.12 Lending (% of GDP) US UK Spain Eastern Europe Brazil Mexico

% OF GDP 174 165 133 40 35 18

Source: IMF, BBVA.

BBVA generates a larger share of its profit from Latin America than Santander, although in absolute terms its figure is lower. In the first nine months of 2007, Latin America contributed €1,923 million, 42.7% of BBVA’s

Spain: Going places.

net attributable profit, compared with Santander’s €2,287 million (30% of its net attributable profit). Mexico generated €1,430 million for BBVA (74.3% of the net attributable profit from Latin America and 31% of the overall total), as against €1,279 million by Santander’s banks in Mexico and Brazil, its two main countries in the region. Of the two banks, BBVA is the most profitable as measured by return on assets (ROA). BBVA’s overall ROA was 1.71% in 2006 (4.06% in Mexico) and Santander’s 1.05% (2.2% in Mexico and -7% in Argentina, see Exhibit 5.13) The negative ROA in Argentina reflected the continued impact of that country’s financial crisis.

EXHIBIT 5.13 Spain’s Main Banks in Latin America and their Country Ranking Based on Tier-1 Capital1

Argentina 3. Banco Francés2 6. Banco Rio3 Brazil 7. Banespa3 Chile 1. Santiago3 6. BBVA Chile2 Mexico 1. Bancomer2 3. Serfin3 Peru 2. Continental2 Venezuela 3. Venezuela3 4. Provincial2

TIER-1 CAPITAL (US$ MN)

ASSETS (US$ MN)

CAPITAL ASSETS RATIO (%)

RETURN ON ASSETS (%)

COST/INCOME RATIO (%)

546 332

5,307 4,266

10.28 7.79

0.85 -7.02

47.73 64.36

3,173

38,006

8.35

2.40

67.08

1,638 504

5,470 8,283

6.43 6.08

2.21 0.80

44.60 70.15

5,582 3,737

53,161 34,721

10.50 10.76

4.06 2.23

50.90 57.26

321

5,329

6.03

3.30

36.46

495 493

5,124 4,690

9.65 10.52

3.25 2.74

62.51 70.21

(1) Tier-1 capital is a bank’s core reserve capital, comprising equity, disclosed reserves and retained earnings. Figures at December 31, 2006.

(2) Majority or wholly owned by BBVA. (3) Majority or wholly owned by Santander.

Source: The Banker.

Mexico, Brazil and Chile, which between them account for more than three-quarters of Latin America’s GDP and over 60% of the population of more than 500 million, are the main countries where Santander and BBVA have invested heavily in banking. Mexico and Brazil have huge growth potential in penetration and bankarisation. Mexico’s level of lending/GDP is around one-third of what it was before the crisis in 1995. Out of a population of 105 million, 50 million are employed and just 25 million have a relationship with a bank. Santander stepped up its presence in Brazil in 2007 when it acquired Banco Real as a result of its participation in the consortium which bought the Dutch bank ABN Amro. The combination of Santander’s Banespa and Real created the second-largest bank in terms of deposits, with a branch market share of 12% (see Exhibit 5.14).

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EXHIBIT 5.14 Branch Market Share by Region REGION Sâo Paulo Rio de Janeiro Minas Gerais Rio Grande do Sul Subtotal Brazil total

% OF GDP 34 13 10 8 64 100

MARKET SHARE (SANTANDER) (%) 13 3 2 8 9 6

MARKET SHARE (REAL) (%) 7 10 7 2 7 6

COMBINED MARKET SHARE (%) 20 13 9 11 16 12

Source: Santander.

The private pensions industry is also attractive, an area where BBVA is the largest fund administrator in Latin America. Santander sold its pension business in Mexico, Chile, Colombia and Uruguay for $1.3 billion in July 2007 158

to the Dutch bank ING. In the first nine months of 2007, this business, mainly in Mexico but also in the US and Puerto Rico, contributed €xxx million to BBVA’s net attributable profit. Afore Bancomer is the second-biggest Mexican pension fund manager in assets under management and subscribers.

As underscored by Argentina’s crisis, risk management is of great importance in Latin America. The two banks have non-performing loans (NPLs) and NPL coverage ratios that are substantially better than those of local banks in the region. Santander’s NPL ratio was 1.77% in September 2007 and coverage NPLs stood at 139%. Its NPL ratios varied between 1.09% in Colombia and 2.79% in Brazil (Spain’s ratio was a record low of 0.56%).

BBVA’s NPL ratio in Latin America (excluding Mexico) was 2.44% and Mexico’s 2.32%. The region’s NPL coverage stood at 132.4% and Mexico’s was 250.4%. Spain’s NPL ratio was 0.65%.

Construction and Infrastructure Latin America has enormous infrastructure needs, be it roads, bridges, airports, rail, electricity, water, sanitation or energy, and has become fertile ground for Spanish construction and utility companies. Brazil’s growth-acceleration programme, announced in 2007, includes US$280 billion of public- and private-sector infrastructure investment between 2007 and 2010, while the Mexican government is planning to spend US$230 billion on highways, railroads, airports, electricity, oil refineries and oil and gas production over the next five years. In 2005 and 2006, the region accounted for 28% and 27%, respectively, of the total revenues from abroad of Spanish construction companies, according to SEOPAN.

Spain: Going places.

Little investment in infrastructure was made during the 1980s, a ‘lost decade’ for Latin America in many areas. In the 1990s many governments began to open up utility sectors to private domestic and foreign investment.

Fiscal constraints and growing dissatisfaction with the poor efficiency, quality and coverage of service provided by state-owned utilities generated the necessary political momentum for privatisation and liberalisation.

Spain’s Big Six construction and infrastructure companies – Ferrovial, Acciona, ACS, FCC, Sacyr-Vallehermoso and OHL – all have projects or concessions in Latin America to a greater or lesser degree. In 2006, Latin America generated €1.3 billion of revenues, 27% of the total from construction activity abroad. Including revenues from activities other than pure construction, the figure is much higher.

Ferrovial, the most internationally diversified of the six, has five toll roads in Chile and manages the Cerro Moreno airport. Chile generated 5% of Ferrovial’s EBITDA in 2006. FCC’s activities include full-service water management in Argentina and Brazil, the building of roads in Costa Rica and passenger terminal management in Chile. In 2006, Latin America provided 17% of FCC’s international revenues. Abertis, the infrastructure arm of ACS, manages an airport in Bolivia and motorways in Chile and Colombia, while Sacyr-Vallehermoso has motorway concessions in Chile, Brazil and Costa Rica and water management in Brazil. OHL has construction projects in Mexico and Chile.

Electricity Latin American countries began to reform their electricity sectors in the early 1980s, led by Chile. Countries experimented with a wide variety of systems, ranging from administered systems to those that gave the market a broader role. Spain’s three main power companies, – Endesa, Iberdrola and Unión Fenosa – and Gas Natural, all have investments in Latin America, particularly Endesa, which is the region’s leading private-sector electricity multinational.

Latin America accounted for 30% of Endesa’s total installed capacity of 47,113MW in 2006 and contributed €462 million of the total net income of €2,969 million. It has companies in Argentina, Brazil, Chile, Colombia and Peru and more customers in Latin America (11.6 million) than in Spain and Portugal (11.1 million).

Iberdrola is the largest private-sector producer in Mexico, the leading supplier in Guatemala and the leading distributor in the northeast of Brazil. Its

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six combined-cycle plants in Mexico provide 8% of total electricity. In 2006, 14.5% of its total installed capacity of 30,384MW was in Latin America.

Unión Fenosa’s main focus is also Mexico, where 56% of the 2,773MW of power generated abroad is located. It is investing €1.65 billion in generating 1,400MW of energy from renewable sources (wind-power and hydraulic) in various countries, which would be added to the 900MW it already has. As a result of the purchase by Gas Natural in October 2007 of five power plants in Mexico belonging to Electricité de France, three Spanish companies now control two-thirds of the country’s private-sector electricity generating business.

Manufacturing 160

The main manufacturing presence is the Mondragon Cooperative Corporation (MCC), with plants in Brazil and Mexico that produce taps and safety systems, dies for the automotive sector, casting of automotive components, components for electric cooking, catering equipment and coaches.

Media and Publishing Spanish publishers were pioneers in the internationalisation of Spanish companies: they began to set up companies in Latin America in the 1950s and 1960s. Barcelona-based Planeta began to operate in the region in 1964, and Santillana and Alfaguara, part of Grupo Prisa, the biggest education, information and entertainment business group in Spanish-speaking markets, have subsidiaries in many countries. Prisa also has a network of radio stations, Unión Radio, distributed throughout Argentina, Chile, Colombia, Costa Rica, Ecuador, Guatemala, Mexico, Panama and Peru.

Oil and Natural Gas Spain has two players in Latin America’s oil and natural gas industry, one of whom, Repsol YPF, is the region’s largest private-sector energy group in terms of assets. Latin America accounted for just under 10% of the world’s proven oil reserves (those that can be recovered from known oil fields using existing technology) at the end of 2006. Venezuela, one of the founding members of OPEC, and Mexico, a non-OPEC member, have the region’s largest proven reserves (see Exhibit 5.15).

Spain: Going places.

EXHIBIT 5.15 Proven Oil Reserves in Latin America and the Caribbean Argentina Brazil Colombia Ecuador Mexico Peru Trinidad & Tobago Venezuela Other countries Total

BILLIONS OF BARRELS 2.0 12.2 1.5 4.7 12.9 1.1 0.8 80.0 1.3 116.4

% OF WORLD TOTAL 0.2 1.0 0.1 0.4 1.1 0.1 0.1 6.6 0.1 9.7

Source: BP.

Most of Repsol’s proven net reserves are in Latin America and particularly in Argentina, where it acquired YPF in 1999 for just under $15 billion (see Exhibit 5.16). This puts the company in an almost unique situation among the world’s major hydrocarbon giants as its sector peers – with the exception of the Chinese national companies and the state-owned Russian operator Gazprom – are losing interest in Latin America for geological reasons and issues of investment insecurity and are abandoning the region. Two US oil majors, ConocoPhillips and ExxonMobil, walked away from Venezuela in 2007 after they refused to accept the new terms for heavy oil producers under which they would be junior partners to PdVSA, the state oil company, and expected to write cheques for new investments over which they would not have full control. Repsol YPF’s heavy oil interests in Venezuela are comparatively not very significant, and it has so far enjoyed good relations with the left-wing populist government of Hugo Chávez. Repsol YPF began in 2006 a push to diversify and increase its reserves away from Latin America.

EXHIBIT 5.16 Repsol YPF’s Proven Net Oil Reserves in Latin America and the Caribbean Argentina Bolivia Brazil Ecuador Peru Trinidad & Tobago Venezuela Total (*) Barrels of oil equivalent.

Source: Repsol YPF.

MILLIONS OF BOE* 1,403.2 90.9 34.3 23.8 108.9 591.2 136.8 2,389.1

% OF TOTAL 58.8 3.8 1.4 0.9 4.6 24.7 5.7 100.0

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In Brazil, Repsol YPF, together with Petrobras, the state-owned oil company, operate the Albacora Leste field, making it the third-largest producer in the country. At the end of 2006, Repsol had 29 exploration blocks in Brazil, the largest number among private companies. In Bolivia, Repsol YPF had to renegotiate new contracts with the government in 2006 to increase the state’s tax take, following the nationalisation of the country’s gas reserves, the second largest in Latin America. Argentina, Brazil and Bolivia accounted for €7.5 billion of the total investment of €19.7 billion between 2002 and 2006 (including the capitalisation of spending distributed over several years) and €58.5 billion of the global revenues of €220.1 billion. Latin America produced 85% of the daily net output of oil in 2006, including condensates and liquid natural gas, and almost the entire production of natural gas (see Exhibit 5.17).

EXHIBIT 5.17 Net Daily Production of Oil and Natural Gas

162

Oil (kbbld) Latin America Argentina

2002

2003

2004

2005

2006

518 438

530 432

508 399

473 368

447 348

80

98

109

105

99

88.7

89.2

89.6

89.0

85.1

Latin America

2,209

2,916

3,288

3,351

3,313

Argentina

Other countries % of total Gas (Mscfd)

1,561

1,842

1,996

1,897

1,846

Other countries

648

1,074

1,292

1,454

1,467

% of total

94.6

96.5

97.8

98.1

97.8

Source: Repsol YPF.

Gas Natural operates in Argentina, Brazil, Colombia and Mexico and has more than 4.9 million customers (see Exhibit 5.18).

EXHIBIT 5.18 Gas Natural in Latin America Gas sales (GWh) Distribution network (km) Customers (thousands)

ARGENTINA 69,200 21,486 1,322

BRAZIL 45,274 5,387 753

COLOMBIA 13,557 16,050 1,712

MEXICO 43,719 15,229 1,120

TOTAL 171,750 58,152 4,907

Source: Gas Natural.

Telecommunications Latin America has embraced the privatisation of its telecommunications sector like no other region in the world. In nearly every country, the main operator is either fully or largely owned by a multinational, often Telefónica, which first entered the region in 1990 when it acquired the main operators

Spain: Going places.

in Chile and Argentina. By 2002, Telefónica had more fixed lines in Latin America (21.6 million) than in Spain (18.7 million) and more mobile telephone customers too (21.3 million versus 18.4 million). Its purchase in 2004 of the assets of the US company BellSouth in ten Latin American countries for €4.7 billion made it the largest mobile phone company in the region, where it also provides data and Internet services and pay-TV. At September 30, 2007, Telefónica Latinoamérica had more than 126 million customers (see Exhibit 5.19). Close to one-third of Telefónica’s total operating income before depreciation and amortisation (OIBDA) comes from Latin America.

EXHIBIT 5.19 Telefónica’s Main Customers in Latin America (‘000)* Argentina Brazil Chile Central America Colombia

FIXED TELEPHONY 4,633 12,019 2,173

MOBILE 13,078 31,320 6,052

INTERNET & DATA 1,101 4,246 656

PAY-TV 9 197

120

4,877

22

-

2,340

7,552

166

46 -

Ecuador

-

2,653

-

Mexico

-

11,073

2

-

2,742

7,221

608

628

-

1,047

-

-

Peru Uruguay Venezuela Total

-

9,840

-

-

24,027

94,713

6,803

880

(*) September 30, 2007.

Source: Telefónica.

Telefónica has invested more than €77 billion in the region since 1990 (including capex and acquisitions), by far the largest amount by a foreign investor in Latin America of any industry. The company plays a significant role in regional growth, generating 1%-2% of GDP in its main operating markets. It employs more than 140,000 people directly and a further 100,000 in indirect positions. It is a lynchpin in the development of the information society in the region, mainstreaming communications and broadband in its markets and boosting digital inclusion. Telefónica has considerably modernised Latin America’s telecoms sector. For example, the amount of time it takes to install a fixed telephone line in Peru and Argentina was cut between 1994 and 2005 from 72 and 49 months, respectively, to roughly two weeks in each country. The quality of service data for Latin America is gradually moving towards the standards in Spain (see Exhibit 5.20). Cellular phone coverage is another area where there have been tremendous improvements: coverage is more than 90% of the population in Argentina, Venezuela and Chile, more than 80% in Uruguay and around 70%

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Chapter 5: Spanish Direct Investment in Latin America

in Mexico. Telephone networks in Argentina, Brazil and Chile, the four main countries where Telefónica offers a fixed line service, are 100% digitalised and almost so in Peru.

EXHIBIT 5.20 Key Quality of Service Data, Latin America and Spain* Provision time for basic telephone service (days)1 Malfunctions/1,000 lines Billing complaints/1,000 invoices Average line repair time (hours) ADSL provision time (days)1 Malfunctions/1,000 lines Billing complaints/1,000 invoices Average repair time (hours)

164

LATIN AMERICA** 17.5 4.5 28.0 48.0 6.6 5.8 28.0 33.0

SPAIN 6.20 1.60 3.22 16.40 10.50 1.21 5.09 12.90

(*) Data for 2006. Information about Telefónica 02 Europe not available. (**) Residential and PNP segments.

(1) Latin America is better in these two items because of different methodology and the stronger demand in Spain, where Telefónica covers the whole country, including remote rural areas, which is not the case in Latin America where the service is mainly urban.

The data for Brazil, for example, refers mainly to São Paolo.

Source: Telefónica.

The ITC sector’s development has been considerable, particularly the spectacular rise in mobile telephony, but there is still a very long way to go and hence huge business potential for Telefónica (see Exhibit 5.21).

The region is the main engine of growth for the group, already accounting for one-third of Telefónica’s overall business. The telecoms sector has been growing in Latin America at around 8% a year as against 5.8% in Africa and the Middle East, 1.8% in Europe and 1.2% in North America. Telefónica Latinoamérica, the division for the region, aims to have 150 million customers in 2009. Growth in Latin America should be particularly strong in the cellular and broadband segments. According to José María Álvarez Pallete, general manager for Telefónica Latinoamérica, 65% of Telefónica’s operating cash flow in Latin America is expected to come from investment grade countries by the end of this decade. At the moment, only Mexico and Chile are investment grade countries.

Spain: Going places.

EXHIBIT 5.21 Information and Communication Technologies (ITC) in Latin America (per 100 inhabitants)

Argentina Brazil Chile Colombia Ecuador Guatemala Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela

FIXED 1999 2005 19.8 22.8 14.6 23.0 20.7 22.0 16.0 16.8 9.1 12.9 5.5 8.9 11.2 18.2 3.0 4.4 16.4 13.6 5.0 5.2 6.7 8.0 28.1 30.8 10.8 13.5

MOBILE 1999 2005 10.6 57.3 8.8 46.2 15.0 67.8 4.7 47.9 3.1 47.2 3.0 25.0 7.9 44.3 0.9 21.8 8.3 41.9 8.1 30.6 4.0 20.0 10.0 18.5 16.0 46.7

INTERNET 1999 2005 3.3 17.8 2.0 11.9 4.2 17.9 1.6 10.4 0.8 4.7 0.6 5.9 1.9 17.4 0.5 2.5 2.2 6.4 0.4 3.2 2.0 16.4 10.3 21.0 2.9 8.8

PCS 1999 5.8 3.6 7.7 3.4 2.0 1.0 4.4 2.0 3.2 1.1 3.6 10.3 4.2

2005 8.3 10.5 14.7 4.1 3.9 1.8 13.1 NA 4.6 7.5 10.0 13.3 8.2

BROADBAND 1999 2005 0.1 0.4 0.1 1.1 0.1 4.6 0.0 0.6 NA NA NA NA 0.1 0.6 NA NA 0.0 2.2 NA NA 0.0 0.1 NA NA 0.0 4.1

Source: Digiworld, América Latina, 2007 (Fundación Telefónica).

The global DigiWorld market (telecoms, information technology, consumer electronics and audiovisual services) was worth $3,312 billion in 2006, according to IDATE, and Latin America accounted for only 7% of it.

Between 2003 and 2005 the region grew at twice the pace of the global market (see Exhibit 5.22).

EXHIBIT 5.22 DigiWorld Markets by Geographic Zone (US$ billion) Europe US Asia-Pacific

2003 870 859 736

2004 913 903 783

2005 959 950 828

% Growth* 5.0 5.2 6.1

2006E 1,004 994 884

Latin America

157

184

204

14.0

233

Rest of world

140

161

178

12.8

197

2.762

2,944

3,119

6.3

3,312

Total (*) Average annual growth 2003-2005.

Source: IDATE.

The penetration rate of Telesp, Telefónica’s fixed line operator acquired in 1998 and based in São Paulo, the country’s economic powerhouse, was 32% in 2006. Telesp began to offer international and interregional long-distance services in 2003. Vivo, jointly owned with Portugal Telecom, is the leading mobile telephone operator in Brazil in terms of total number of customers.

The penetration rate in September 2007 in its market was 61.2%. The licensed areas of Vivo include 20 states in Brazil with an aggregate population of close to 140 million. Its main competitors are subsidiaries of Telecom Italia Mobile, América Móvil, Brazil Telecom and Telemar.

Telefónica’s mobile operator in Mexico is the country’s second largest based on the number of customers and had an estimated market share of 15% in 2006. The penetration rate in the wireless market was 60% in September 2007.

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Telefónica’s principal competitor is Telcel, a subsidiary of América Móvil. In the Venezuelan mobile business, where penetration reached 79% in September 2007, Telefónica is a leader. In Chile, Telefónica is the leading fixed line and mobile operator. The country’s penetration rate in the mobile market was 87% in September 2007. Telefónica has a similar leadership position in Argentina, where it is the main provider of fixed-line services and the leading mobile operator (penetration rate of 93% in September 2007, the highest of all Latin America). Argentina is the only Latin America market so far that has proved to be a headache for Telefónica (and other Spanish companies in the country), as a result of the country’s financial crisis in 2001. In Colombia, whose mobile market penetration rate was was 69% in September 2007, Telefónica is the second-largest operator in terms of customers, and in Peru it is the fixed-line and mobile leader.

166

Tourism The Spanish company that has invested the most in tourism in Latin America is Sol Meliá, which has a chain of hotels in many countries (see Exhibit 5.23).

EXHIBIT 5.23 Sol Melia’s Hotels in Latin America Argentina Brazil Chile Colombia Costa Rica Dominican Republic

3 20 1 1 3 4

México Panama Peru Puerto Rico Uruguay Venezuela

9 1 1 1 1 1

Source: Sol Meliá.

Water In water, Aguas de Barcelona (Agbar) owns Chile’s Aguas Andinas, which engages in total water management in the basin of Santiago de Chile, and in Mexico it is the operating partner of the company responsible for managing the drinking water supply and sewerage systems in Saltillo. More than 100 million in Latin America do not have access to safe drinking water.

Spain: Going places.

Too many eggs in the Latin American basket?

Investment in Latin America, to a greater extent than in other parts of the world, has made parts of corporate Spain significant actors on the global stage.

But have companies and banks tied a disproportionate share of their future well-being to the region? So far, they have demonstrated a notable capacity of resistance to the periodic crises that hit Latin America – the tequilazo in Mexico in 1994, when investment in the region was just beginning, and the tangazo in Argentina in 2002, at the height of the first phase of investment.

Unlike many companies from other countries, hardly any Spanish companies have pulled out of the region; they look as if they are there for the long haul, come what may.

The region, which has enjoyed macroeconomic stability as a whole over the past decade and strongly so in some countries, now accounts for a significant share of profits. The seven main investors in Latin America – Santander, BBVA, Telefónica, Repsol YPF, Iberdrola, Endesa, Unión Fenosa and Gas Natural – accounted for close to 70% of the IBEX35 index of the Spanish stock exchange in the middle of 2007, a greater degree of concentration than in other European indices, such as Germany’s DAX 30, France’s CAC 40 and the UK’s FTSE 100. A really big crisis in Latin America would send their shares tumbling, and hence the stock market as a whole, and have an impact on the bottom line of the most exposed companies and banks to varying degrees.

The question is whether the risks in Latin America are greater now than they were in the past. The answer to that would seem to be no, particularly in the two big countries, Mexico and Brazil, and even more so in the much smaller Chile, the region’s star economy. These three countries (and Argentina) account for the lion’s share of investment in Latin America.

Venezuela and Bolivia, however, under their left-wing populist presidents, are problematic countries, and Argentina’s future is equally unpredictable.11 A survey of 20 companies that form part of the IBEX35 and have investments in Latin America, published in November 2007, revealed that by far their main concern is the lack of legal security.

The diversification of investment away from Latin America and into Europe, particularly the UK, and into the US and Asia, to a lesser extent, is a healthy move, as we shall see in the next chapter, and is producing a solid stream of income from other sources.

11. In 1941, the Austrian writer Stefan Zweig prophesied in a book that Brazil was the land of the future. This gave rise to the joke many years later that ‘Brazil is the country of the future and always will be’, a land forever destined never to fulfil its huge potential. At that time Argentina was also talked about as one of the world’s richest countries.

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Chapter 6: Spanish Direct Investment in Europe, the US and Asia

168

Terminal 4, Barajas International Airport, MADRID. Architect/s: Antonio Lamela and Richard Rogers, 2006.

Winner of the 2006 Sterling Prize, T4 is one of the world´s largest terminals.

Spain: Going places.

Latin America was very much the focus of Spain’s first phase of direct investment abroad until the turn of this century, when companies and banks began to invest significantly in other parts of the world, particularly Europe. Between 1993 and 2000, according to Spain’s Investment Registry, the EU-15 accounted for 22.5% of Spain’s total net investment abroad – which averaged €13.1 billion a year excluding the Special Purpose Entities (SPEs) – compared to Latin America with 61% and the US and Canada with 9%. During the second phase of investment, between 2001 and 2006, when total net investment averaged €26.8 billion a year, the EU-15’s share was 67%, as against 16% for Latin America and 6.4% for the US and Canada.

Telefónica (telecoms), Santander and BBVA (banks), Repsol YPF (oil and gas), and Endesa and Iberdrola (electricity) all invested heavily in the region, some of whose countries, most notably Argentina, were in economic crisis by 2002. These companies and banks needed to diversify into other areas of the world and had the money to do so. Their Latin American ventures had proved to be worthwhile financially, with some hiccups, and acted as a kind of learning experience which could be put to use in other parts of the world.

Europe: Fast Catching Up While the great bulk of Spain’s trade is with the European Union, and increasingly so since 1986 when Spain joined the EU (see Chapter 3), direct investment in Europe was low until several companies landed in the UK starting in 2003 in what was dubbed in the media as the ‘new Spanish Armada’. The fleet included Ferrovial, the construction and infrastructure company, which bought the British Airports Authority (BAA), Santander, Spain’s biggest bank, which purchased Abbey, a leading mortgage bank, Telefónica, which acquired O2, the largest mobile phone company, Agbar, the water and waste utility, which bought Bristol Water, and Iberdrola, the power company, which acquired ScottishPower. The acquisitions of Telefónica and Ferrovial ($53.5 billion) accounted for 33.4% of the UK’s total FDI inflows in 2006. Telefónica’s purchase was the world’s secondlargest cross-border deal in 2006 and Ferrovial’s the third, while Iberdrola’s was the biggest in the first half of 2007 (see Exhibits 6.1 and 6.2).

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Chapter 6: Spanish Direct Investment in Europe, the US and Asia

EXHIBIT 6.1 Major Completed Cross-Border M&As, 2006 INVESTOR COMPANY Arcelor Mittal Telefónica Ferrovial Xstrata Linde Abertis

TARGET COMPANY Arcelor 02 BAA Falconbridge BOC Group Sanef

TARGET COUNTRY Luxembourg UK UK Canada UK France

VALUE OF DEAL (US$ BN) 32.2 31.7 21.8 17.4 14.1 4.8

TARGET COMPANY Scottish Power Alliance Boots Gallaher Rinker Inco Medimmune Hutchison

TARGET COUNTRY UK UK UK Australia Canada US India

VALUE OF DEAL (US$ BN) 28.9 24.2 19.5 14.0 16.7 14.7 13.1

INVESTOR COUNTRY Netherlands Spain Spain Switzerland Germany Spain

Source: World Investment Report, 2007, UNCTAD.

EXHIBIT 6.2 Major Completed Cross-Border M&As, January-June 2007

170

INVESTOR COMPANY Iberdrola KKR Japan Tobacco Cementos Mexicanos CIA Vale do Rio Doce Astrazeneca Vodafone

INVESTOR COUNTRY Spain US Japan Mexico Brazil UK UK

Source: Bloomberg.

It is striking that most Spanish investment in Europe has been in the UK, a country that is not a member of the Euro zone, unlike Spain, which was a founding member of the single currency but which is Europe’s most open and competitive market (see Exhibit 6.3)1. The UK economy (with few protectionist instincts, unlike France and Italy, where Spanish companies and banks have run into countless obstacles) is very attractive to Spanish companies. UK-Spain commercial bilateral relations are very strong. Over 400 Spanish firms of all sizes are already in the UK and around 7,000 companies regularly export from Spain to the UK (exports of goods and services were worth over €23 billion in 2006).

EXHIBIT 6.3 Net Spanish Direct Investment Abroad, 2001-2006 (€ mn)* EU-25 France Germany Italy UK Latin America US Total

2001 14,104 798 1,782 2,163 603 4,427 1,638 23,273

2002 7,868 499 5,862 138 -1,694 829 1,531 14,860

2003 10,058 629 834 832 3,631 2,922 1,430 15,358

2004 32,958 2,748 1,008 2,103 14,223 2,009 869 32,958

2005 22,860 5,590 -468 297 1,202 3,030 1,923 22,860

2006 51,684 4,718 272 -332 31,286 1,067 5,751 51,684

(*) Figures are rounded up and exclude Special Purpose Entities (SPEs), which are mainly financial holding companies, foreign-owned, and principally engaged in cross-border financial transactions, with no or negligible local activity.

Source: Foreign Investment Registry, Ministry of Industry, Tourism and Commerce.

1. Spain’s direct investment in the UK based on the book value of net liabilities rose from £606 million in 2001 to £8,784 in 2005 (latest year available), according to the UK’s Office for National Statistics.

Spain: Going places.

Telefónica entered the European telecoms market in 2005 through its acquisition of 69.4% of the Czech Republic’s Czesky Telecom. In early 2006 this was followed by its purchase of 100% of O2, the UK’s second-biggest mobile operator, for €26 billion. This is the largest single investment to date by a Spanish company or bank anywhere in the world and turned Telefónica into the world’s fourth-largest mobile operator by number of customers after China Mobile, Vodafone and China Unico. At the end of September 2007, Telefónica O2 Europe had 39 million fixed and mobile telephony customers in the UK, Ireland, Germany, the Czech Republic and Slovakia (see Exhibit 6.4). It also had more than 680,000 Internet and data and pay-TV customers.

This business unit generated €4,151 million of operating income before depreciation and amortisation (OIBDA) in the first nine months of 2007, 23% of the total.

171

EXHIBIT 6.4 Telefónica 02 Europe – Main Operations (millions) 2005

2006

2007*

UK Mobile customers Germany

16.0

17.6

17.9

Mobile customers

9.8

11.0

12.1

1.6

1.6

1.6

Mobile customers

4.7

4.9

4.9

Fixed telephony accesses

2.9

2.4

2.1

0.4

0.49

35.0

37.9

39.0

Ireland Mobile customers Czech Republic

Slovakia Mobile customers Total (*) September 30, 2007 Source: Telefónica.

O2 is the UK leader with a 25% share of the mobile market, and in Germany it has around a 13% share. In 2007 it became Apple’s exclusive carrier partner for the iPhone in the UK. In the Czech Republic, O2 is the largest provider of fixed and wireless voice and data services.

In the case of Santander, the purchase of Abbey in 2004 for €12.6 billion, at that time the largest cross-border financial acquisition ever carried out in Europe, provided a gateway to the profitable UK market. Abbey, the second-largest UK bank in mortgages (market share of 10.5%), had become an underachiever and needed renovation to realise its potential, an area where Santander has a good track record. This acquisition, which made Santander a global financial player, added 730 branches to Santander’s retail banking network, 18 million customers and diversified Santander’s risks and revenues by adding sterling to the other two currencies (the euro and the dollar) it was

Chapter 6: Spanish Direct Investment in Europe, the US and Asia

then operating in (see Exhibit 6.5). The purchase took the group’s market capitalisation to €57 billion, putting Santander among the top ten worldwide, fourth in Europe and first in the Euro zone, and increased to 85% the proportion of revenues deriving from retail activities.

EXHIBIT 6.5 Abbey’s Contribution to Grupo Santander Total assets (€ bn) Customer loans (€ bn) Mortgages (€ bn) Managed customer funds (€ bn) Number of employees Number of customers (million) Number of branches

CONTRIBUTION BY ABBEY 196.14 137.71 114.43 172.43 24,361 18 730

% OF TOTAL GROUP 34.1 40.2 59.3 32.0 19.3 28.6 7.3

Source: Santander.

172

Abbey has gradually been transformed from a predominantly mortgage lending bank into a universal bank. This process has been greatly aided by rolling out Santander’s Partenón technological platform, which has enhanced customer information and facilitated cross-selling of a broad range of products. The cost/income (efficiency) ratio improved from more than 70% in 2004 to 50% in the first nine months of 2007, substantially helped by a cut of 7,000 jobs in 2005 and 2006. In the first nine months of 2007, Abbey’s attributable profit of €906 million, 22% more than in 2006, accounted for 14% of the total.

Santander also operates in Europe via Santander Consumer Finance (SCF). Santander began its international expansion in the consumer credit segment with the acquisition in 1987 from Bank of America of CC Bank in Germany. SCF has more than 9 million customers in 11 countries, including relatively mature markets, such as Spain, Germany and Norway, and emerging markets, such as Poland, Hungary and the Czech Republic (see Exhibit 6.6). Its attributable profit of €473 million in the first nine months of 2007 accounted for 7% of attributable profit, and the business in Germany provided more revenues than Spain.

Spain: Going places.

EXHIBIT 6.6 Santander Consumer Finance’s Businesses in Europe

Czech Rep. Germany Hungary Italy Netherlands Norway Poland Portugal Sweden UK

VEHICLES ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

MOTORBIKES ✓

STOCK FINANCE ✓ ✓

CONSUMER GOODS

✓ ✓

✓

✓

✓

✓ ✓ ✓ ✓

✓

DIRECT LOANS ✓ ✓ ✓ ✓

✓ ✓

INSURANCE ✓ ✓

✓ ✓ ✓

Source: Santander.

BBVA’s sole European bank outside of Spain is BBVA Portugal, the former subsidiary of Lloyds that it acquired in 1991. BBVA abandoned an €8.3bn all-share bid for Italy’s Banca Nazionale de Lavoro (BNL) in 2005 after a counter-offer by Unipol, the Italian insurer, appeared to win backing from a majority of shareholders and Antonio Fazio, then governor of the Bank of Italy. Francisco González, BBVA’s chairman, said the bank had backed out of a battle for BNL because the ethical code of a competing bidder “was a long way from [that] of this bank”.

Several of the construction and infrastructure companies have moved into Europe in a big way, most notably Ferrovial, which led a consortium in 2006 that bought the British Airports Authority (BAA), the company that owns London’s Heathrow, Stansted and Gatwick and four other British airports. BAA also manages Naples and Budapest airports. Before buying BAA, Ferrovial acquired Amey, one of the UK’s leading services companies in infrastructure maintenance, and later Amey’s 33% stake in Tube Lines. This gave it majority control of the company, which holds a 30-year concession to maintain and renovate three lines of the London Underground.The purchase of BAA, the world’s largest private airport management company, has catapulted Ferrovial into the big league; it provided more than half of Ferrovial’s profits in 2006 and accounts for around 70% of its debt. With Spain’s construction and infrastructure sector slowing down, after a decade-long boom, Ferrovial’s income no longer depends heavily on its home market. Ferrovial also owns a construction company in Poland (Budimex) and Switzerland’s Swissport, the market leader in ground handling services that operates in 180 airports in 42 countries and provides services to 650 airlines. Ferrovial’s international sales exceeded domestic sales in 2006 for the first time, with Europe (excluding Spain) accounting for 47% of the total (see Exhibit 6.7).

Abertis, part of ACS, Spain’s biggest construction group, is the largest infrastructure company in Europe in terms of market capitalisation

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Chapter 6: Spanish Direct Investment in Europe, the US and Asia

and number of projects. In Europe, it owns three airports in the UK (Luton, Belfast and Cardiff) and two motorway concessions, one airport in Sweden (Stockholm Skavsta), motorways and car parks in Italy and motorways and telecommunications infrastructure in France. ACS is also the largest shareholder of Hochtief, Germany’s biggest construction group, with a 25% stake.

EXHIBIT 6.7 Ferrovial – Sales by Geographic Area (€ mn) Spain UK Canada and US

174

2005 4,461 1,871 498

% OF TOTAL 54 22 6

2006 5,110 4,087 1,081

% OF TOTAL 41 33 9

Poland

711

9

846

7

Chile

246

3

275

2

Other European countries

388

5

785

6

Other countries

145

2

170

1

International total

3,859

46

7,244

59

Total

8,320

100

12,354

100

Source: Ferrovial.

Property companies have also been on the move. Metrovacesa acquired France’s Gecina in 2005 for €5.5 billion, creating the largest property company in Continental Europe, and in 2007 it bought HSBC tower in Canary Wharf, London, for €1.6 billion, the largest single such transaction to date. Colonial, another property group, has a controlling stake in the Paris-based Société Foncière Lyonnaise (SFL). Sacyr-Vallehermoso became the largest single shareholder in Eiffage, the third-biggest French construction and engineering group, in 2006 when its stake reached 30.7%.

Aguas de Barcelona (Agbar), Spain’s largest private-sector water utility, entered the UK in 2006 when it acquired Bristol Water.

In electricity, Iberdrola owns ScottishPower, one of the largest power companies in the UK. This €17.1 billion acquisition, completed in April 2007, added 3.3 million customers to the 18.4 million in Continental Europe and the Americas and consolidated Iberdrola’s position as the world’s leading renewable energy operator with 7,000MW of installed capacity and a pipeline of more than 38,000MW. Iberdrola also has electricity generating operations in France, Germany, Greece, Italy, Poland and Portugal. As of June 2007, Europe (excluding Spain) accounted for 18% of Iberdrola’s total installed capacity of 40,485MW. Endesa, Iberdrola’s main rival in Spain, had 21% of its total installed capacity of 47,113MW in Europe in 2006 and, excluding Spain and Portugal, the area generated 16% of its €7.1 billion of EBITDA. Endesa has plants in France, Italy, Poland and Portugal. In October 2007 the bitter two-year struggle

Spain: Going places.

for Endesa came to an end when Italy’s Enel (30% owned by the Italian state) and Spain’s infrastructure company Acciona announced they controlled 92% of Endesa. Enel is the majority shareholder.

Spain has little direct investment in Europe, indeed anywhere in the world, in manufacturing. A notable exception, however, is the Mondragon Cooperative Corporation (MCC), which has plants in the Czech Republic, France, Germany, Italy, Poland, Portugal, Romania, Slovakia, Turkey and the UK, making valves, taps, timber machinery, rubber components, bicycles and milling machines, among other things. In 2006, these plants posted sales of €2.9 billion, 43% of the cooperative’s total.

In June 2007 La Seda, the textiles and chemicals group and one of Europe’s largest producers of artificial and synthetic fabrics and yarns, such as polyester, polythene and viscose, agreed to buy the seven European plants of Australia’s Amcor, the world’s leading maker of plastic soft-drink bottles, for €425 million. In 2006 La Seda bought Turkey’s textiles group, Advansa, which has plants in the UK and Romania, for €320 million.

Portugal: From Distant Neighbours to Uneasy Associates Portugal lay under Spanish dominance between 1580 and 1640; after the restoration of independence, the two countries lived like Siamese twins joined at the back for more than 300 years. Despite the similarity of the right-wing regimes run by Salazar in Portugal and Franco in Spain during a large part of the 20th century, the two countries still ignored one another. The Spanish film director Luis Buñuel (1900-93) recounts in his memoirs that Portugal seemed further away for Spaniards than India, and for the Portuguese poet Rui Bello, Madrid was one of the most ‘distant’ cities from Lisbon. Not until both countries joined the EU in 1986 did they come face to face.

Portugal’s deep mistrust of its neighbour is still epitomised in the popular saying: ‘Neither good winds nor good marriages come from Spain.’

Today, however, it is the economic not a military threat that worries the Portuguese. The strong Spanish corporate presence in the context of a single market is a very sensitive issue as it plays on Portuguese fears that they are being swallowed up by their much larger neighbour (see Exhibit 6.8). Between 1993 and 2006 Portugal received €13.2 billion of net direct investment from Spain, 9% of the total for all European countries (excluding Special Purpose Entities). Spanish companies and banks see Portugal as a natural extension of their domestic market. Among the big ones, El Corte Inglés, the giant

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Chapter 6: Spanish Direct Investment in Europe, the US and Asia

department store chain, chose Lisbon as its first venture outside Spain. Sacyr Vallehermoso owns Somague, the largest construction company; Repsol YPF owns around one-fifth of the petrol stations, Telefónica has a stake of close to 10% in Portugal Telecom (PT), Santander Totta is the country’s fourthlargest bank by assets, and BBVA bought the subsidiary of the UK’s Lloyds Bank in 1991 (the bank from Portugal’s oldest ally had been in the country 128 years). Some 3,000 Spanish companies operate in the country. In trade, Spain’s exports to Portugal are double those to the US and to all of Latin America.

One Portuguese magazine summed up the situation by putting the following on its cover: “We go shopping in El Corte Inglés, buy our clothes in Zara, book our holidays at Viajes Halcón and get our glasses at Multiópticas.

Even our savings are in Spanish banks.” The Nobel Laureate José Saramago 176

sparked controversy among his fellow Portuguese in 2007 when he suggested that they will one day be absorbed by their neighbour.2 A poll in the Sol weekly newspaper earlier in the year revealed that 28% of his countrymen were in favour of union with Spain.

EXHIBIT 6.8 Comparative Indicators, Spain and Portugal* Population (millions) Gross national income (US$ bn PPP) Per capita gross national income (US$ PPP) Per capita GDP (EU-27=100)

SPAIN 43 1,120.5 25,250 101

PORTUGAL 11 208.1 17,190 72

(*) Figures are for 2005 apart from per capita GDP, which are forecasts for 2007.

Source: World Development Indicators 2007, World Bank and Eurostat.

United States: On the Rise Spain’s direct investment in the United States is relatively small, but has been rising significantly in recent years. Acquisitions by Spanish companies amounted to $21.7 billion in the first ten months of 2007, the fourth-largest amount after Canada, the UK and the Netherlands. This was the first time that Spain was one of the top ten purchasers. According to the US Bureau of Economic Analysis, on a historical cost basis, Spain’s direct investment position tripled between 2000 and 2006 to $14.9 billion, but this was still only half that of the much smaller economy of Ireland and very far behind the big EU economies (see Exhibit 6.9). More than half of Spain’s investment is in financial institutions.

2. See “Portugal and Spain Will Be One” by Giles Tremlett (The Guardian, July 17, 2007).

Spain: Going places.

EXHIBIT 6.9 Foreign Direct Position in the United States* France Germany Ireland Italy Spain UK

2000 125.7 122.4 25.5 6.5

2004 137.9 164.9 16.4 6.8

2006 158.8 202.5 28.5 11.8

5.0

5.8

14.9

277.6

267.2

303.2

(*) On a historical cost basis.

Source: Bureau of Economic Analysis.

Telefónica, under its previous chairman, blazed a trail in 1999 when it bought the internet portal Lycos for a whopping $12.5 billion at the height of the dotcom bubble. Afterwards, Lycos went bust and Telefónica sold the US part of this business for a paltry $105 million in 2004 to South Korea’s Daum Communications. Iberdrola, the power company, sought in 2000 to acquire Florida Power & Light Company, but Iberdrola’s board never approved the $11 billion deal.

Until the bank BBVA entered the US in 2004 with acquisitions worth more than $850 million, the largest single Spanish investment was Acerinox’s stainless steel plant in Carroll County, Kentucky. North American Stainless (NAS) was formed as a partnership in 1990 between Acerinox and Armco, AMC. In 1994 Acerinox bought out all but 5% of Armco’s shares and since 2001 has been the sole owner of NAS, a low-cost, highly efficient, state-ofthe-art plant for flat-rolled products. It has around one-quarter of the stainless hot and cold sheet and strip market in the US and more than 40% of the plate market.

Indra, Spain’s leading information technologies and defence systems company, entered the US market in 1994 when it was selected by the US Navy to supply full mission simulators, radar trainers and test programme sets for the AV-8B+ Harrier combat aircraft. As well as for the Harrier, Indra has won tenders to supply simulators and test programme sets for other aircraft used by the US Navy (F-14 Tomcat, F-18 Hornet and the MH-60 Seahawk). It has a subsidiary in Orlando, Florida, and is the only non-American company selected as a prime contractor for the US Navy.

EADS CASA North America, the US marketing and support organisation for Spanish-based EADS CASA, the producer of C-212, CN235 and C-295 turboprop transport aircraft, has also had some success.

Following the deregulation of the internal US air transport market at the end of the 1970s, CASA saw an opening in the United States for its C-212 turboprop aircraft, some of which were sold via distributors. It established a subsidiary in the United States in 1984 but did not obtain any significant

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business until after 1999, by which time it was part of EADS, the world’s second-largest aerospace and defence company, and the largest in Europe.

It decided to maximise its possibilities of success by agreeing to be a subcontractor in all three bids (Boeing, Raytheon and Lockheed Martin) for a contract with the US Coast Guard, rather than tying itself to just one.

The breakthrough came in 2002, when the joint venture ICGS, between Lockheed Martin and Northrop Grumman, won the bid and decided to use EADS CASA’s CN-235-MPA twin-turboprop aircraft rather than the C-27J, the main rival of the CN-235 and produced by another division of Lockheed Martin. The three initial EADS CASA CN-235 MPAs were the first of a planned multiyear procurement of 36 MPAs for the Coast Guard’s Deepwater System programme. The total number to be bought depends on US budgetary priorities and could be worth more than $700 million, with 178

a back-up contract worth more than $400 million. EADS CASA has eight under contract and delivered the first three on time in 2006. As a result of this contract, in 2005 EADS CASA set up a Support Centre in Mobile, Alabama, to guarantee the best possible service. Other potentially lucrative avenues for EADS CASA include the possibility of selling C-295 aircraft to the Special Forces and to US Customs.

Tucked away in Cambridge, Massachusetts, is PharmaMar USA, a subsidiary of the Spanish company, PharmaMar, the leading biopharmaceutical company in the world for advancing the care of cancer patients through the discovery and development of new marine-derived medicines and part of the Zeltia group. The US unit is not randomly located; Cambridge has one of the world’s largest clusters of biotechnology research companies, as it is the home of Harvard University and the Massachusetts Institute of Technology and provides unique advantages in terms of knowledge and access to top-rank researchers. PharmaMar has the world’s largest library of marine samples.

The innovative Talgo, which has developed its own technology for trains based on guiding rolling stock wheelsets, began its involvement in the United States in 1994 when the Washington State Department of Transport (WSDOT) used two of its trains for a commercial test. This proved successful, and in 1998 WSDOT and Amtrak contracted five trains and coaches to operate the Seattle-Vancouver, Seattle-Portland-Eugene and Los Angeles-Las Vegas lines. Talgo’s contract runs until 2018.

In oil, Repsol YPF is consolidating the United States Gulf of Mexico among its strategic areas, as part of its move to diversify and increase its sources and reduce dependency on Latin America. At the end of 2006 Repsol had a share in 82 blocks located in the Green Canyon, Atwater Valley, Alaminos Canyon, Mississippi Canyon and Garden Banks areas and was the

Spain: Going places.

operator in 45 of them. It also has a 28% stake in the Shenzi oil fields, which are among the largest in the United States Gulf of Mexico and are considered one of the most profitable deep water areas. Commercial production was scheduled to start during 2009. The consortium that acquired the Shenzi fields also purchased the Genghis Khan oil field from the Anadarko Petroleum Corporation. The significance of this acquisition lies in it being an extension of the Shenzi field, with the same group of companies and the same operator and thus able to generate synergies in the development of both projects.

Repsol YPF expects its net production of oil in the US waters of the Gulf of Mexico to reach 50,000 bbl/day in three years’ time.

Repsol’s other significant investment in North America is the Canaport project, the first LNG (liquefied natural gas) regasification plant on the east coast of Canada. The plant (75% owned by Repsol YPF and 25% by Irving Oil) is one of the largest in North America and was scheduled to start by early 2009.

It will supply gas markets in the northeast of the United States and in Canada.

In infrastructure, Spain’s construction companies have scored some notable successes in the United States, a country which has invested little in its infrastructure. Cintra, one of the world’s largest private-sector developers of transport infrastructure and part of Grupo Ferrovial, teamed up with Australia’s Macquarie Infrastructure Group (MIG) to win the first contract in the United States to operate a privatised toll road. The two companies won a 99-year lease to operate the Chicago Skyway as of 2005 at a cost of $1.8 billion and also paid $3.8 billion to operate the Indiana Toll Road under a 75year concession. Cintra, together with the Texan company Zachry, followed this up by winning the contract to develop the first phase of the Trans-Texas Corridor (TTC-35) – a visionary transportation system for the future of the Lone Star State. The proposed Corridor will be a multi-use, state-wide network of transportation routes that will include separate lanes for passenger vehicles and large trucks, high-speed commuter railways, freight railways, infrastructure for utilities (such as water lines and oil and gas pipelines) and transmission lines for electricity, broadband and other telecommunications services. Cintra also has a toll road concession in Canada (the 407 ETR highway in Toronto).

The first phase of the TTC-35 involves building a $6 billion toll road between Dallas and San Antonio by 2010. In exchange for building and operating it as a toll facility, the consortium will pay the State of Texas an additional $1.2 billion, which the State may use to fund road improvements or high-speed and commuter rail projects. Ferrovial further strengthened its US presence in August 2005 when it agreed to buy Webber Group, the thirdlargest Texan construction group, for €178 million.

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Chapter 6: Spanish Direct Investment in Europe, the US and Asia

Acciona, ACS, OHL and FCC, the other big Spanish construction and infrastructure groups, are also active in the US. OHL acquired Community Asphalt and the Tower Group in 2006, FCC owns cement plants in Pennsylvania, South Carolina, Maine and Massachusetts, Acciona is building the world’s largest desalination plant at Carlsbad, California, and ACS has built railway tunnels in New York. ACS owns 25% of Germany’s Hochtief, which has business in the US. Abertis manages two airports in the state of Georgia through its subsidiary TBI. Spain has also taken its expertise in renewable energy to the US. Gamesa, the world’s second-largest largest manufacturer of wind turbines and the leading developer of wind farms, has four plants in the US. Abengoa, Spain’s leading producer of solar energy, created a solar energy subsidiary in the US in early 2007 and purchased the assets and technology of the Denver180

based Industrial Solar Technology Corporation. Abengoa is also a producer of biofuels, with three ethanol plants in the US and others under development and construction. Iberdrola has several renewable energy investments in the US, including CPV Wind Ventures, based in Maryland, and Community Energy, based in Pennsylvania. In 2007, Iberdrola considerably enhanced its presence in the US by acquiring Energy East, an integrated power group serving about 3 million customers in New York, Maine, Massachusetts, New Hampshire and Connecticut, for €6.4 billion (equity value and net debt). This acquisition made Iberdrola the second-largest wind power company in the US. It is also the third-largest player in gas storage.

Antolín, the world’s largest manufacturer of interior liners for cars and a leading producer of seats, door locks and electrical devices for windows, has several plants in the US. In the food industry, Ebro Puleva acquired Houston’s Riviana Foods, the United States’ largest rice processor, in 2004 for $380 million. With its Carolina, Mahatma and Success brands, Riviana is the main seller of rice in the United States by volume (17% market share). Riviana and Ebro Puleva had been partners for years; before the deal Ebro was Riviana’s largest shareholder.

In 2006, Ebro purchased Kraft Foods’ Minute Rice brand in the US and Canada and New World Pasta, the US pasta company, making it the world’s largest. Another Spanish company, Grupo SOS, owns American Rice, also based in Houston and one of the world’s premier millers and marketers of branded rice products including AA Rice, Adolphus Rice and Wonder Rice.

In wines, Torres has vineyards in California for Chardonnay and Pinot Noir cultivation, and Freixenet, the world’s largest producer of sparkling wine (cava), has vineyards in the Sonoma Valley (and in Mexico). Freixenet’s main rival, Codorníu, also has vineyards in California (Napa).

Spain: Going places.

Inditex, which has the world’s second-largest chain of fashion stores, has shops in the US, as do Mango and Dogi. In New York, Inditex’s Zara’s shop is in the heart of the plush Fifth Avenue.

Compared to their big retail banking investments in Latin America, the acquisitions of Spain’s two largest banks, Santander and BBVA, in the US are relatively modest but have risen considerably in the last few years. Like many foreign banks, they were established in the financial centres of New York and Miami with representative offices or agencies that were upgraded to branches. The first significant investment was Santander’s purchase of a 13.5% stake in First Fidelity, New Jersey, in 1991 for $220 million, which it built up to almost 30% by June 1995 while Fidelity bought several smaller banks. In 1995 North Carolina’s First Union Bank merged with First Fidelity, diluting Santander’s stake to 11.4%. Santander faced the choice of staying on as a minority shareholder, or realising its stake and taking profits. It chose the latter course and used the gain on the sale of more than $1.5 billion to amortise the goodwill on the acquisitions of banks in Argentina, Chile, Colombia, Mexico, Puerto Rico and Venezuela. Santander returned to the US in 2005 when it acquired almost 20% of Sovereign Bancorp, a Philadelphia-based bank and the country’s 18th largest by assets. In 2007 the stake stood at 24.9% (with no management control), for a total value of €2.4 billion. The agreement with Sovereign provided that from 2008 onwards Santander can sell its stake in the US bank, maintain its position or acquire the balance of the capital. Santander also acquired 90% of the auto finance company Drive Financial.

BBVA entered the US with a small investment in 2004 when it bought Valley Bank of California for $16.7 million, followed by the much bigger purchase of Laredo Nacional Bancshares (LNB) of Texas for $850 million.

LNB gave BBVA 49 branches and more than 100,000 customers. The roots of these acquisitions lie in the business of remittances between the US and Mexico developed by Bancomer, Mexico’s largest bank, which was bought by BBVA in 2000. Bancomer Transfer Services (BTS) became aware that there was scope for much wider business with the growing Hispanic community in the United States than just money transfers. BTS is the leading provider of US-Mexico money transfers with a market share of close to 40%; it also has a range of para-banking products. In 2000 Santander sold 24.9% of Serfin, its bank in Mexico, to Bank of America as part of a strategy to gain more Mexican-American customers in the US. Remittances are sent to Serfin via Bank of America’s SafeSend system.

In 2006 BBVA acquired Texas Regional Bancshares and State National Bancshares for $2.6 billion, making it the top regional banking group in Texas and the fourth in the state, behind Wells Fargo, Bank of America and

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Chapter 6: Spanish Direct Investment in Europe, the US and Asia

JP Morgan, if nationwide banks are included. Together with LNB, BBVA has 166 branches in Texas, a high-growth market and the second-largest state in the US with a population of more than 23 million. On a stand-alone basis, Texas, which has a large number of Hispanic inhabitants, would be the world’s eighth-largest economy. In 2007 BBVA made its largest purchase ever when it bought Compass Bancshares, a franchise covering six states (Alabama, Arizona, Colorado, Florida, New Mexico and Texas) and a network of 417 branches, for €6.7 billion. BBVA’s American franchise occupies 24th place in terms of assets and is the regional market leader in the Sunbelt.

BBVA initially believed its natural advantage was with the large Spanish-speaking community and the remittances market with Mexico, but it sees a lot of scope well beyond that and into the wider market with services such as its electronic-payment platform similar to that used in Spain, where 182

cheques are a rare sight and everything from utility bills and music download purchases are debited automatically to bank accounts. Another area with potential is the cross-selling of non-traditional products, such as insurance policies and mutual funds, which is in its infancy in the US and well developed in Spain. The US market is huge compared to Spain, but it is also much more fragmented and less developed in retail banking than Spain. For example, the four largest US banks control 27% of deposits (38% in Spain) and there are 31 branches in the US per 100,000 inhabitants compared with 96 in Spain.

The US (including Puerto Rico) and Mexico form a single division within BBVA (in Santander’s case, Mexico is part of its Latin America division).

This area turned in a net attributable profit of €1,555 million in the first nine months of 2007, 32.6% of the total.

On a much smaller scale, Banco Sabadell, Spain’s sixth-largest bank by Tier 1 capital, bought Transatlantic Bank Holding in Miami for $130 million in January 2007. Miami is the ‘capital of Latin America’, as it is the city of reference for Latin American business and finance and also its state (Florida) has the largest number of Spanish businesses.There are more than 350 Spanish businesses of one type or another in Florida.

In insurance, Mapfre paid €1.53 billion for Commerce, based in Massachusetts, strengthening its position in the US where it also has companies in Florida, New Jersey and in Puerto Rico.

Spanish media and publishing companies, and not just banks, are also benefiting from the size and growing economic importance of the Hispanic community in the US and a language shared with Spain. The number of Hispanics – 44.3 million at the last official count (July 1, 2006) and 14.8% of the total population – surpasses the total population of Spain, and it is

Spain: Going places.

growing more than three times faster than the US population as a whole.

Since 2003, Hispanics have outnumbered African Americans as the largest minority group.3 This community, which is forecast to reach 100 million by 2050 and currently has a median age of 27.4, compared with the population as a whole at 36.4, is demographically, politically and economically an increasingly important force, but Spanish business only recently began to take notice of it. The average Hispanic household income in 2006 was $34,200, compared with $30,100 for African Americans and a national average of $44,389. The Hispanic population is concentrated primarily in a dozen of the 50 states, although there are pockets of them in almost every state. It is a multifaceted community and is compared to a salad – in which each of the elements can be distinguished although they form part of a whole – as opposed to a melting pot, which dissolves the ingredients and achieves total assimilation.

The US is the fifth-largest Spanish-speaking country in the world, after Mexico, Colombia, Spain and Argentina, and Spanish is the most commonly taught foreign language in American schools and universities. According to the American Council on the Teaching of Foreign Languages, more than 4 million students in state secondary schools are learning Spanish (70% of all language enrolments in grades 7-12). And the number of Americans learning Spanish in institutions of higher education is more than the total studying all other languages, according to the Modern Languages Association (see Exhibit 6.10). The share of Spanish in total language course enrolments for the 14 most commonly taught languages rose from 32.4% in 1968 to 52.2% in 2006 (see Exhibit 6.11). Over the same period the proportion studying French dropped from 34.4% to 13.1%.

EXHIBIT 6.10 Main Language Course Enrolments in US Institutions of Higher Education Language Spanish French German Italian

1998 656,590 199,064 89,020 49,287

2002 746,267 201,979 91,100 63,899

2006 822,985 206,426 94,264 78,829

Japanese

43,141

52,238

66,605

Chinese

28,456

34,153

51,582

Russian

23,791

23,921

24,845

Arabic

5,505

10,584

23,974

1,193,830

1,397,253

1,577,810

Total Source: Modern Language Association.

3. Spain’s population was 45.1 million on January 1, 2007. The official figure for Hispanics in the US excludes the 4 million inhabitants of the Free Associated State of Puerto Rico, where both Spanish and English are the official languages, and undocumented workers (12 million, most of them from Latin America).

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Chapter 6: Spanish Direct Investment in Europe, the US and Asia

EXHIBIT 6.11 Percentage of Total Language Course Enrolments, 1968-2006 Language Spanish French German Italian

1968 32.4 34.4 19.2 2.7

1980 41.0 26,9 13.7 1.2

1990 45.1 23.0 11.3 4.2

2006 52.2 13.1 6.0 5.0

Japanese

0.4

1.2

3.9

4.2

Chinese

0.4

1.2

1.6

3.3

Russian

3.6

2.6

3.8

1.6

Arabic

0.1

0.4

0.3

1.5

Source: Modern Language Association.

Grupo Prisa, Spain’s largest multimedia group, whose businesses include El País, the main daily, has radio stations in the US and also sells textbooks to learn Spanish and English. Caracol Miami, along with WSUA, is the leader among 184

Hispanic AM stations in almost all time slots, and its 690AM (XTRA) radio station broadcasts in Los Angeles and Southern California. Prisa is building up a pan-American radio network; it has stations in Mexico, Colombia, Chile, Costa Rica and Panama. Planeta, Spain’s largest family-owned publisher, is also strong in Latin America. In 2007 it acquired 55% of Colombia’s Casa Editorial, owner of the El Tiempo and Portafolio newspapers and the TV channel Bogotá City.

Asia: The Next Challenge Spanish investment in Asia is very small and almost all of it is in China (see Exhibit 6.12). The largest investments so far are BBVA’s 5% stake in China’s Citic Bank, the country’s seventh-biggest lender, and its 15% stake in CITIC International Financial Holdings, its Hong Kong-based offshoot, which were acquired for $1.3 billion, and Telefónica’s purchase of 5% of China Netcom, the country’s second-largest fixed-line operator. This stake was due to be increased to 10% by the end of 2007.

BBVA, which beat out Santander and BNP Paribas of France in the auction for Citic, was the first Spanish bank to break into China’s fast-growing financial sector. Both BBVA and Telefónica bring to the companies in which they have invested large franchises in Latin America, an area where Chinese companies have been busy forging strategic links in recent years.

Another area with no shortage of potential in a country hungry for energy is wind power, an area where Spain is a world leader. Gamesa, the world’s second-largest largest manufacturer of wind turbines, launched its first plant in China in 2006.

Spain: Going places.

EXHIBIT 6.12 Net Spanish Direct Investment Abroad, 2001-2006 (€ mn)* EU-25 Latin America US Asia and Oceania Total

2001 14,104 4,427 1,638 111 23,273

2002 7,868 829 1,531 1,390 14,860

2003 10,058 2,922 1,430 86 15,358

2004 32,958 2,009 869 184 32,958

2005 22,860 3,030 1,923 118 22,860

2006 51,684 1,067 5,751 177 51,684

(*) Figures rounded up and exclude Special Purpose Entities (SPEs).

Source: Investment Registry, Ministry of Industry, Tourism and Commerce.

In July 2007, Cepsa announced it would enter Asia and build a €700 million aromatics plant in South Korea and acquire another already existing plant with Hyundai Oilbank. Production will be earmarked for China.

Additionally, the Mondragon Cooperative Corporation (MCC) is building a business park in Kunshan, China, for four plants: Orkli (safety components for domestic appliances), Wingroup (exercise equipment and tents), Orbea (bicycles) and Oiarso (healthcare material). In 2006, China took over from Spain as the leading market for Fagor Automation, part of MCC. Other companies eyeing China in 2007 included Ferroatlántica, the subsidiary of the construction and services group OHL, which was analysing the possibility of building China’s largest silicon production plant. China is expected to become the largest consumer of silicon in the coming years, and Ferroatlántica is set to branch out into the production of the silicon used in solar panels.

Outside of China, Spanish investment in the rest of Asia is small. In India, Roca, the bathroom ceramics group, owns 50% of Parryware.

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186

Reina Sofia National Museum of Art, MADRID. Architect/s: Jean Nouvel, 2005.

In 2005, the Reina Sofía enlarged its installations. Along with the Prado and the Thyssen museums it forms the ‘Art Walk’.

Spain: Going places.

Foreign direct investment (FDI) plays a prominent role in the Spanish economy. The inward FDI stock, according to the United Nations Conference on Trade and Development (UNCTAD), stood at $443.3 billion in 2006 (more than six times higher than in 1990 and the eighth largest in the world) and was divided up among more than 11,000 foreign companies (48 of them Fortune 100 companies) employing 1.27 million people (6.6% of total jobs).1 Among the world’s big economies, Spain’s stock in GDP terms (36.2%) is higher than the US’s, France’s, Germany’s and Italy’s (see Exhibit 7.1). The country received $240 billion of FDI between 1997 and 2006, 3.5% of the total for OECD countries and the eighth-largest amount (see Exhibit 7.2). Inward FDI’s importance is also seen in Exhibit 7.3.

EXHIBIT 7.1 Inward FDI Stocks by Selected Countries (% of GDP) France Germany Italy Poland

1990 7.1 6.7 5.4 0.2

187 2006 34.8 26.2 15.9 30.4

2011* 42.2 33.1 22.4 32.8

Spain

12.5

36.2

41.5

United Kingdom

20.6

47.5

57.5

6.9

15.5

19.8

United States (*) Forecast by the Economist Intelligence Unit.

Source: UNCTAD.

EXHIBIT 7.2 Cumulative FDI Inflows, Top 10 OECD Countries, 1997-2006 COUNTRY 1. United States 2. Belgium/Luxembourg 3. United Kingdom 4. France 5. Germany 6. Netherlands 7. Canada 8. Spain 9. Sweden 10. Mexico

US$ BILLION 1,637.2 1,188.7 797.2 480.8 473.2 299.1 285.3 239.8 192.9 178.4

Source: OECD.

1. The FDI figure does not include Special Purpose Entities (SPEs) which are mainly financial holding companies, foreign-owned, and principally engaged in cross-border financial transactions.

Chapter 7: Foreign Direct Investment in Spain

EXHIBIT 7.3 FDI Inflows in Relation to Population, GDP and Fixed Investment* COUNTRY France Germany Italy Spain United Kingdom United States

INWARD FDI STOCK PER HEAD (US$) 12,910 9,230 5,070 10,060 18,910 6,940

FDI INFLOWS /GDP (%) 3.9 1.5 2.1 1.6 5.8 1.4

FDI INFLOWS/FIXED GROSS INVESTMENT (%) 18.9 8.4 10.1 5.4 31.9 8.5

Source: Economist Intelligence Unit.

Barred from the post-World War II Marshall Fund, which benefited almost all European countries outside the Soviet bloc, because the Franco regime that won the 1936-39 Civil War sided with Hitler and Mussolini, it was not until the 1953 Pact of Madrid, which established US bases in Spain, that 188

the country began to receive a trickle of foreign investment and aid (nearly all of it from America)2. The total amount of all types of US aid in the first decade after the 1953 agreement was around $1.5 billion (half of what Italy received from the Marshall Plan).3 In the 1960s, the liberalisation and stabilization measures of 1959 under an agreement with the IMF and the World Bank, which put an end to 20 years of autarky, opened the country to tourism and started to integrate the peseta into a transnational monetary system. A more liberal approach towards FDI was adopted. Complete freedom was granted for such investment as long as foreign ownership of individual enterprises did not exceed 50%. For investments involving over 50% ownership, applications had to be submitted to the cabinet for approval. FDI jumped from $12 million in 1958 to $86 million in 1960.

Between 1961 and 1973, when the Spanish economy grew by 7% a year in real terms – the fastest growth among member states of the OECD apart from Japan – the US was the main source of inward FDI, accounting for some 40% of the total invested (and probably more if one includes investment by US subsidiaries in third countries such as Switzerland)4. Tiny Switzerland was the second largest investor, followed by Germany, the UK and France. As Mauro Guillén points out, the punitive taxation of imports of industrial and consumer goods in a domestic market of considerable growth potential spurred inward FDI.5 During the 1960s and early 1970s, annual inward FDI inflows ranged

2. Spain’s missing out on the Marshall Plan was amusingly satirised in Luis García Berlanga’s famous 1953 film Bienvenido Mr. Marshall, whose subtleties escaped Franco’s censors. One of the scenes shows a large American car carrying a Mr. Marshall speeding through a village and passing crowds, leaving nothing in its trail but dust and dashed hopes. The Allied powers also imposed a trade embargo that remained in place until the late 1940s.

3. Eximbank provided a $62.5 million credit line between 1953 and 1959 which was used to purchase food, coal, cotton, machinery and other capital goods. Economic

aid ceased as of 1963 and funds were restricted to military assistance. There were major differences between Spain’s US aid and the Marshall Plan assistance. While Spain’s aid was spread out over 14 years, the Marshall Plan lasted four years. Much of Spain’s aid was given in the form of concessional loans, while the bulk of the Marshall Plan consisted of grants.

4. See p. 36 of The Spanish Economy 1959-1976 by Alison Wright (Macmillan, 1976).

5. See pp. 9-11 of The Rise of Spanish Multinationals by Mauro Guillén (Cambridge University Press, 2005).

Spain: Going places.

between 0.15% and 0.59% of GDP, while outward stayed under 0.1% of GDP, i.e. 25 to 30 times smaller than inward FDI. At the end of 1973, according to the Commerce Ministry, one in five jobs were financed by foreign investment, much of which was in chemicals, glass, food and printing. Of the 25 main private industrial companies in 1975, only one was completely Spanish-owned (the steel plant Altos Hornos de Vizcaya). The rest, particularly automotive and petrochemical industries, were almost entirely foreign-controlled.

Inward FDI surged after Spain joined the European Economic Community (now European Union) in 1986; at times it seemed as if the country was up for sale (in 1991 inflows represented 4.2% of GDP).

Liberalisation of the economy opened up opportunities for foreign companies and inward FDI was also facilitated by regulatory changes. The motor industry (the world’s eighth-largest producer of cars and Spain’s main single export) has been entirely owned by multinationals since 1986 when Seat, founded in 1950 with Fiat assistance, was sold to Volkswagen.6 Multinationals are also strong in cement (Portland, Lafarge Asland and Cemex), electrical appliances (Sony, Philips and Electrolux), electronic components (Siemens and Robert Bosch), electronics (Philips and Honeywell), information technology (IBM and HP) and consumer products (Unilever and Procter & Gamble). It is estimated that foreign companies control about one-half of food production companies, one-third of chemical firms and two-thirds of the cement sector. Several foreign banks (Barclays, Citibank and Deutsche Bank) acquired retail banking networks from ailing Spanish banks, though their share of the total banking market remains small, and foreign firms have a not insignificant share of the insurance market (Allianz, Axa, Aviva and Generali). The French Auchan (known in Spain as Alcampo) and Carrefour groups led a revolution in Spanish retailing, opening hypermarkets on the outskirts of cities which lured customers away from traditional corner shops.

Marks & Spencer’s flagship store in Madrid, opened in 1990 on a prime site and was closed in 2001 as part of a Europe-wide scaling down, despite its extraordinary success. Before its arrival, upper middle-class Spaniards would fly to London with an empty suitcase to shop in M&S and pay for the trip on what they saved. Not even the wine industry has been immune from foreign takeovers: in 1994 Allied-Lyons acquired Pedro Domecq, the leading spirits company in Spain, and in 2001 the renamed Allied Domecq bought Bodegas y Bebidas, Spain’s largest wine producer. Many of Spain’s

6. The first car under the SEAT logo appeared in 1982 (the SEAT Ronda) and sparked a lawsuit from Fiat which claimed that it was too similar to its Ritmo model.

The then president of SEAT, Juan Miguel Antoñanzas, showed a Ronda to the press with all the parts different from the Ritmo painted in bright yellow, to highlight the differences. This ended the dispute. Rumour at the time had it that Fiat was angry because the Ronda restyling was in fact too close to their own planned restyling for the Fiat Ritmo, which they had to scrap.

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Chapter 7: Foreign Direct Investment in Spain

top exporters of products are multinationals, particularly in the car industry, which accounts for more than 20% of total merchandise exports (vehicles and components).

Spain had 9,255 foreign affiliates in 2006, the seventh-largest number in the EU and the 15th in the world, although these comparative figures have to be treated with some caution as the reference year varies considerably (see Exhibit 7.4). UNCTAD has developed an index to gauge the relative importance of FDI in an economy, over and above investments’ share of GDP or the number of foreign affiliates. This is measured by the Transnationality Index of host countries, which is calculated as the average of the following four shares: FDI inflows as a percentage of gross fixed capital formation over a three-year period; FDI inward stocks as a percentage of GDP in the latest year available and value added of foreign affiliates as a percentage of GDP and 190

employment of foreign affiliates as a percentage of total employment, both for the latest year. In its 2007 World Investment Report, Spain was ranked 18th among 31 developed countries based on the latest data (see Exhibit 7.5).

Belgium, a small economy and hence feeling the impact of FDI much more greatly than the much bigger Spain, topped the index. In the Inward FDI Performance Index, based on the average FDI received in the past three years, Spain was ranked 94th and above Italy (106th) and Germany (125th) and emerging economies like India (113th).

EXHIBIT 7.4 Foreign Affiliates Based in Selected EU Countries* FOREIGN AFFILIATES 10,713 (2002) 9,193 (2005) 7,181 (2005) 9,255 (2006) 13,667 (2005)

France Germany Italy Spain United Kingdom (*) Latest year is in brackets.

Source: World Investment Report 2007, UNCTAD.

EXHIBIT 7.5 Transnationality Index of Developed Countries, %* 1. Belgium 2. Luxembourg 3. Estonia 4. Ireland 5. Slovakia

70.1 65.0 47.0 46.3 35.4

13. Poland 18. Spain 19. France 22. UK 28. Germany

(*) Based on 2004 data. The weighted average of developed economies was 11.7%.

Source: World Investment Report 2007, UNCTAD.

22.0 18.8 18.3 16.9 12.0

Spain: Going places.

Foreign companies were enticed by the size of the domestic market, its growth potential and the possibilities of using the country as a platform for exports. These factors assumed as much if not more importance than wage levels, where the gap relative to the then EU-15 average had been narrowing fast until devaluations in 1992 and 1993 began to restore competitiveness. By 1993, Spain’s hourly wages in the manufacturing sector were 93% higher than in 1985, compared with an average rise for the EU of 52%.

FDI in Spain, however, has been on a downward trend since 2002 (although the volumes have still been significant) for many reasons, including the increasing location advantages of the new EU members, particularly Hungary, Poland and the Czech Republic, for manufacturers, little scope for further investment in some sectors, the rise in Spain’s labour and other costs and insufficient reforms in the labour market and the administrative

191

complexities of doing business in Spain (see Exhibit 7.6). In 2006, it received $20 billion, the 16th largest amount in the world (the $25 billion received in 2005 was the ninth biggest). Unlike other major EU economies, there were no really significant M&A operations in Spain during 2006. In 2005 France Telecom acquired Amena and in 2007 Italy’s Enel bought Endesa.

FDI in Spain as a result of M&A operations dropped from $23.6 billion in 2005 to $13.9 billion in 2006, while the number of greenfield projects, many of them small, rose from 153 to 241. Spain received more inward FDI (as a proportion of GDP) between 1975 and 1995 than the average of OECD countries, and less between 1995 and 2006 despite large global flows.

In order to proactively counter the downward trend and better coordinate investment between the 17 autonomous and competing regions, INTERES Invest in Spain was created in 2005 by the central government to attract, promote and maintain foreign investment in Spain. Greater efforts are also being made by the government to narrow Spain’s wide gap with the more advanced countries in R&D. Despite the upward trend, Spain’s expenditure on R&D is still low (see Chapter 2).

EXHIBIT 7.6 FDI in Selected European Countries (US $bn) France Germany Hungary Italy Poland Spain Turkey UK Source: OECD.

2001 50.5 26.4 3.9 14.9 5.7 28.3 3.4 52.7

2002 49.1 53.6 3.0 14.6 4.1 39.2 1.1 24.1

2003 42.5 32.4 2.1 16.4 4.9 25.8 1.8 16.8

2004 32.6 -9.2 4.5 16.8 12.5 24.8 2.9 56.0

2005 81.0 35.8 7.6 20.2 9.5 25.0 9.8 193.7

2006 81.1 42.9 6.1 16.6 13.9 20.0 20.2 139.6

Chapter 7: Foreign Direct Investment in Spain

Almost two-thirds of total FDI in Spain is in the sectors of other manufacturing, commerce, transport and communications and chemicals (see Exhibit 7.7). In common with other developed economies, inward FDI has been shifting from manufacturing to services, although so far Spain has had limited success in attracting foreign investment in the information communications and technology (ICT) sector. This is due to various factors including major shortcomings in the country’s educational system, the relatively low level of R&D spending (although this is beginning to increase) and the lack of a strong domestic industry in these areas.

EXHIBIT 7.7 Stock of Productive FDI in Spain by Sector*

192

SECTOR Other manufacturing industries Commerce Transport and communications Chemicals Real estate and services Banking and insurance Food, beverages and tobacco Electricity, gas, water distribution/production Paper, printing and graphic arts Mining Construction Hotel trade Textiles and clothing Agriculture, cattle, hunting and fisheries Other

% OF TOTAL 22.6 15.3 14.0 12.8 8.7 8.1 5.2 3.3 2.3 1.7 1.5 1.5 1.0 0.2 1.5

(*) Figures at the end of 2005 and excluding Special Purpose Entities.

Source: INTERES based on figures from the Investment Registry.

Main Investor Countries The main investors in Spain on the basis of the ultimate investing country as opposed to the intermediate country are the US, France, the UK and Germany; between them, they accounted for just over 60% of the total stock of productive investment of €212.1 billion at the end of 2005 (see Exhibit 7.8). The leading investor country is the US, which had ceased to be the main investor in the first years after Spain joined the EU and then came back with several particularly large investments, notably by General Electric (GE).

Spain: Going places.

EXHIBIT 7.8 Stock of Productive FDI in Spain by Main Ultimate Investing Countries (% of total)* US France UK Germany Switzerland Netherlands Mexico Italy Luxembourg Portugal Other countries

19.9 17.5 16.3 7.8 4.9 4.6 4.2 3.9 3.5 3.5 18.8

(*) Figures at the end of 2005 and excluding Special Purpose Entities.

Source: INTERES based on figures from the Investment Registry.

The four leading investor countries have invested in very different sectors. While the bulk of US investment is in the industrial sector, especially the motor industry, pharmaceuticals and chemicals, the main sectors for France are commerce and transport and communications (see Exhibit 7.9).

However, in recent years the presence of US companies in the services sector has been increasing steadily, particularly in information technology and consulting services. US companies account for more than one-third of total production of new passenger cars, around 15% of auto components and about 40% of the sales of pharmaceuticals. Some of these companies are among the largest in Spain and among the country’s biggest exporters (see Exhibit 7.10).

They include Opel (part of General Motors) and Ford in the motor industry, IBM and Hewlett Packard Compaq in IT, General Electric (plastics), Dow Chemical and DuPont in chemicals, Alcoa in metals and Procter & Gamble in consumer products.

EXHIBIT 7.9 Distribution of Productive FDI Stock and Main Countries (% of Each Country’s Total) SECTOR Chemicals Other manufacturing Commerce Banking and insurance Transport and communications Real estate and services Other sectors

US 32 23 12

FRANCE 14 32

UK 8 9

GERMANY 20 17 24

12

-

7

-

-

21

54

-

-

8

-

12

21

25

22

27

(*) Figures at the end of 2005.

Source: INTERES based on figures from the Investment Registry.

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Chapter 7: Foreign Direct Investment in Spain

EXHIBIT 7.10 Largest US Companies in Spain by Revenues*

979 SECTOR Automotive Automotive Chemicals

EMPLOYEES 7,500 8,000 898

REVENUES (€ MILLION) 6,765 5,727 1,348

Information technology

2,116

1,223

Capital goods

544

1,104

Food and Tobacco

394

922

Pfizer

Pharmaceuticals

1,518

869

Lilly

Pharmaceuticals

246

653

Refrescos Envasados (Coca-Cola)

Beverages

1,041

647

Esso Española

Petroleum

156

605

Ingram Micro

Information technology

240

574

Opel España Ford España Dow Chemical Ibérica Hewlett-Packard Atlantic Copper Philip Morris Spain

Capital goods

3,813

552

Consumer products

363

502

Automotive

3,522

479

Metals

1,100

420

Beverages

990

361

Zardoya Otis Procter & Gamble España Lear (MAI)

194

Alcoa Inespal PBG Holding (Pepsi Cola) Delphi Sara Lee (Southern Europe)

Automotive

1,171

181

Consumer goods

280

130

Automotive

400

125

Information technology

300

122

Plastics, medical systems, finance

979

121

Johnson Controls Lucent Technologies General Electric (*) 2005 figures.

Source: Fomento de la Producción.

US direct investment in Spain has averaged around 2% of the US’s total annual investment abroad since 1999 (see Exhibit 7.11). In terms of annual flows, Spain has ranked among the top eight countries in the EU receiving US FDI. At the world level, Spain ranks lower, generally among the top 20 and above China in most of the recent years (not in 2006). On a historical cost basis, US investment in Spain rose fivefold between 1994 and 2006 to $49.4 billion, compared with a doubling in Italy to $28.9 billion (see Exhibit 7.12). The growth in US investment in Spain has been among the fastest in Europe. Of the $49.4 billion, $14.2 billion is in manufacturing ($7.8 billion in chemicals), $6.3 billion in finance and insurance and $19 billion in non-bank holding companies.

Spain: Going places.

EXHIBIT 7.11 US Direct Investment Flows Abroad, 1994-2006 (US$ billion) 1994 73.2 34.4 2.6

1998 131.0 86.1 4.3

2002 134.9 79.5 4.6

2006 216.6 127.4 4.8

Germany

2.8

3.0

2.4

8.2

Italy

2.6

-0.9

1.2

3.1

Spain

1.5

1.8

3.0

2.7

UK

9.6

29.0

15.2

19.3

All countries Europe France

US direct investment abroad is the ownership or control, directly or indirectly, by one US resident of 10% or more of the voting securities of an incorporated foreign business. These figures are for total capital and consist of equity capital, intercompany debt and reinvested earnings.

Source: US Bureau of Economic Analysis.

EXHIBIT 7.12 US Direct Investment Position Abroad on a Historical Cost Basis (US$ million) All countries Europe France Germany Italy Spain UK

1994 612,592 297,133 27,322 38,878 14,808 9,5722 100,817

2006 2,384,004 1,250,508 65,933 99,253 28,936 49,413 364,084

Source: US Bureau of Economic Analysis.

US companies, in particular, have played a significant role in the internationalisation of the Spanish economy. Opel (General Motors) and Ford are regularly among the country’s top ten exporters. US firms operating in Spain account for around 9% of total exports of goods. In R&D, the role of US companies is also greater than that corresponding to their weight in the Spanish economy. The dissemination of technology and entrepreneurial know-how throughout the Spanish industrial structure has been a key contribution from US companies. This can be seen in the figures on R&D spending by American companies compared to average expenditure in Spain by all companies, and in the figures on the employment of research staff.

Ford’s first car produced in Spain, the Fiesta, came off the assembly line at Almussafes near Valencia on October 18, 1976. It was a far-sighted investment to make Spain a springboard for exporting, as it was finalised in 1973 in the final part of the Franco regime when the political climate was uncertain. The government had to pass a decree in order to let Ford invest, because at that time government approval was needed for foreign investment in the auto industry. Ford’s exports of cars rose from 4,526 units in 1976 (26% of total production) to 359,408 in 2006 (85%). During this period just over 9 million vehicles were produced and the average annual level of exports was 76%. Ford chose to manufacture its new KA model in the 1990s at this

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Chapter 7: Foreign Direct Investment in Spain

plant rather than at its facilities in Cologne, Germany, and Dagenham, United Kingdom. Albert Caspers, chairman of Ford Europe, said at the time that the plant in Spain was chosen because it has ‘one of the highest productivity levels in the world and a quality standard on a par with other European factories.’

In 2003 Spain began to assemble the Mazda2, the first car to be produced in Europe by Ford’s 33%-owned Japanese affiliate Mazda, and Almussafes became the second plant in 2005, after Ford’s Saarlius factory in Germany, to manufacture the new Focus car. The highly efficient and flexible plant (the only Ford plant capable of producing four different models at the same time) escaped the round of job cuts in Europe in 2003, and in August 2007 Ford agreed with workers to produce three new models at the plant, with an annual production target of 350,000 cars. Ford, which made a loss of €12.7 billion in 2006, the largest in its history, is to invest €425 million in the plant, securing 196

vehicle assembly until 2013. The agreement took two years to forge and was compared to the “pregnancy of an elephant” by Gonzalo Pino, the UGT trade union secretary at Almussafes. In return for guaranteeing its continued existence, workers agreed to moderate wage rises, not to press for a reduced working day and to split their holidays and adjust them more to the plant’s needs. The ‘sword’ hanging over workers was the possibility that Ford would strike a deal with the government of Romania.

Another victory for the automotive industry was the decision in 2006

by Adam Opel, part of General Motors, to build the next generation of its Meriva compact van in Spain and not in Poland, the other alternative. The decision was particularly important because some auto component firms in Spain have moved out of the country and relocated to ones with lower labour costs, particularly the Czech Republic. Delphi, the US car components manufacturer operating under bankruptcy protection since November 2005, closed its plant in Puerto Real, Cadiz in 2007.

In the chemicals sector, Dow Chemical’s Tarragona plant in Catalonia is its European production centre and hence an important link in its global supply chain. Its new €200 million plant to produce special polyethylene plastics came on stream in 2006. Exports of chemicals by US companies in Spain have more or less doubled since 1999. No other export by US companies in Spain has grown so much. Dupont has several plants in Asturias, making the region one of the most important production centres worldwide. US companies are also strong in pharmaceuticals. Eight companies, including Pfizer, have a market share of close to 30%.

In software, hardware and services, many of the big names are in Spain, including IBM (which first came to the country in 1926 and stopped manufacturing in Spain in 1995), Hewlett Packard and Microsoft. In 2005,

Spain: Going places.

IBM restructured its European operations and replaced Paris with two new coordination centres, one in Madrid and the other in Zurich. Madrid is responsible for business in France, Italy, Belgium, Holland, Luxembourg, Greece, Israel, Turkey and Portugal.

In the food and beverages industry, Spain has its ubiquitous McDonald’s fast-food chains, but it also has producers, such as Kellogg’s, Kraft, RJR Nabisco and Unilever Best Foods. PepsiCo’s Southern Europe Business Unit, which covers 11 countries, is in Barcelona, while Coors Brewing’s factory in Zaragoza, which it bought from Heineken in 1994, is its hub for the European market. This purchase was Coors’ first outside the United States. Wrigley, the world’s largest chewing gum maker, acquired confectionary businesses that were part of Joyco, a subsidiary of the Spanish food conglomerate Agrolimen.

US companies in Spain were generally satisfied with the performance of their businesses, particularly in the sectors of food, beverages and tobacco, other services, finance and insurance, business and consulting and the information society, but less so in the car industry, and to some extent chemicals, pharmaceuticals and other manufacturing industries, according to the 2007 barometer of US companies in Spain, an annual survey conducted by the American Chamber of Commerce and the ESADE business school. The sector with the highest concentration of companies more or less pessimistic about the future of their investment plans is the car industry (33%). Only two sectors reported significant increases in their production capacity (more than 50%): pharmaceuticals and other services.

Among European countries, France, Germany and the UK are well represented in Spain. According to INTERES Invest in Spain, there were 2,185 French companies in Spain in 2006, 1,483 from Germany and 1,360 from the UK. The largest UK companies include Altadis (the product of the merger between Spain’s Tabacalera and France’s Seita), the big tobacco group which was expected to be acquired by Imperial Tobacco in early 2008 for €12.6 billion, Vodafone, Asturiana de Zinc, Dinosol (supermarkets), Abbott Laboratories and Schweppes. Among the largest French companies are Orange (France Telecom), Peugeot and Renault, Cepsa (oil products), SaintGobain (glass), Sabeco (supermarkets), Alcampo (hypermarkets) and L’Oreal (cosmetics, perfumes). Germany’s include Seat (cars), Siemens, Robert Bosch (electrical components) and Makro (wholesale stores). Sweden’s IKEA is a big hit in Spain.

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Chapter 7: Foreign Direct Investment in Spain

Multinationals’ Importance in Exports Many of Spain’s top exporters are multinationals, particularly in the car industry, where all the manufacturers of vehicles are foreign. The auto components sector, however, is mainly Spanish. In 2006, exports of cars and engines accounted for 12% of the total exports of €169.8 billion and components for 6.8%. Other sectors with a strong presence of multinationals are food (13.6% of total exports) and chemicals (12.7%). There is also a foreign presence in domestic appliances and consumer electronics. Overall, foreign companies in Spain are estimated to account for around 40% of total exports. The figures for each sector other than the motor industry are not known as there is a dearth of information on this subject.

198

Sectors of Opportunity The main sectors of opportunity, as opposed to sectors that are solidly established, are the newly emerging ones, particularly renewable energy, life sciences and biotechnology, information and communication technology (ICT) and water treatment and desalination.

In renewable energy, Spain was the second most attractive country in the world in 2007 – along with India and the UK – after the United States, according to Ernst & Young’s Renewable Energies Attractiveness Indices (see Exhibit 7.13). Several Spanish companies are major players on the global renewable energy stage, particularly in wind power and solar energy (see the section on energy in Chapter 3). The government is encouraging the sector with subsidies and by 2010 aims to generate 30% of electricity from renewable sources.

EXHIBIT 7.13 All Renewables Index, Top Five Countries

1. United States* 2. India 2. Spain 2. United Kingdom 5. Germany

ALL RENEWABLE 72 64 64 64 63

WIND INDEX 73 65 64 65 63

ONSHORE WIND 80 75 71 63 62

OFFSHORE WIND 58 43 48 69 64

(*) This indicates US states with Renewable Portfolio Standards and favourable renewable energy regimes. (**) Combines with each set of technological factors to generate the individual technology indices.

Source: Ernst & Young, August 2007.

SOLAR 75 61 72 50 73

BIOMASS/ OTHER 64 55 58 58 61

INFRASTR.** 76 65 76 69 60

Spain: Going places.

Biotechnology is also taking off in Spain, the fourth-largest EU country in terms of the production of biotech research papers, but the country is at the back of the line in terms of patents.7 Foreign pharmaceutical firms including Merck, Lilly, Abbott, and Baxter have developed labs in Spain. The French company Sanofi-Aventis is investing nearly €8 million in a new basic-research centre outside Madrid. Growth in ICT is also well above the EU average.

Spain has a cluster of companies with expertise in advanced technologies, including Telefónica, Indra, Panda Security and Hispasat, and a number of ICT multinationals are located in Spain (BT, Lucent, Motorola, Vodafone).

The seawater desalination plant at Carboneras near the Mediterranean is Europe’s biggest. Production of desalinated water in Spain doubled from 2000 to 2004, and the government predicts it will double again by 2009. The country, which has a serious water scarcity problem (see Chapter 3), is the fourth-largest user of desalination technology in the world, behind Saudi Arabia, the United Arab Emirates and Kuwait. Its more than 700 plants produce around 1.6 million cubic metres of water a day (enough for about 8 million inhabitants).

Spain as a Hub for Latin American and European Business The cultural, historic and linguistic affinities with Latin America and Madrid’s growing importance as a crossing point between Europe and a region where there is now a significant European corporate presence make Spain a natural business hub. Madrid concentrates around 35% of total air traffic between Europe and Latin America, and there are 29 daily direct flights from Madrid to Latin American cities. Other attractions are that Santander and BBVA, the two largest Spanish banks, have Latin America’s largest franchises – well ahead of Citibank and HSBC – and are also among the biggest players in Europe, and that the Madrid Stock Exchange is unique in having a euro market for Latin American securities (Latibex). The six largest companies in the Madrid Stock Exchange’s IBEX35 index (around 60% of capitalisation) generate a significant part of their business in Latin America.

But the results so far are modest. The number of European and Latin American companies using Spain as a hub is very small. Notable examples are British Telecom and France’s Alstom, which transferred their Latin American centres from New York and Paris, respectively, to Madrid, and Mexico’s Pemex

7. See “Spain’s Biotech Revolution” by Cynthia Graber, Technology Review, May 4, 2007 (www.technologyreview.com/microsites/spain/biotech/docs/Spain_biotech.pdf).

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oil company, which transferred its European centre from London to Madrid.

The Spanish capital is also the European base of the Corporación Andina de Fomento (Andean Development Corporation), a multilateral financial institution, but not for the Inter-American Development Bank, which remains in Paris.

In the view of three distinguished economists, what Spain needs in order to enhance the prospects of having a successful hub is private-sector institutions along the lines of American think tanks, such as the Institute for International Economics, that analyse Latin America.8 “It is striking that the massive drive (for Latin America) by Spanish companies has not been accompanied by an equally forceful response in the world of knowledge.”9

200

Prospects According to the Economist Intelligence Unit (EIU), Spain will receive more inward FDI between 2007 and 2011 – an average of $44.9 billion a year – than in the previous five years ($26.9 billion a year), despite rising wage and non-wage costs, less flexible labour market regulations than in other EU countries and the growing attractiveness of alternative locations.10 This surprisingly high amount would be the ninth-largest in the world (see Exhibit 7.14). The EIU says that Spain “is not an obvious location for Greenfield investments except in a few niche fields,” but it is a “major market and many Spanish companies are profitable, making them potentially attractive targets for takeovers”.

EXHIBIT 7.14 FDI Inflows (2007-11 Average), Top Ten Recipient Countries COUNTRY 1. US 2. UK 3. China 4. France 5. Belgium 5. Germany 6. Canada 7. Hong Kong 8. Spain 9. Italy 10. Netherlands

US$ BN 250.9 112.9 86.8 78.2 71.6 66.0 63.2 48.0 44.9 41.6 38.5

% OF WORLD TOTAL 16.75 7.54 5.79 5.22 4.78 4.41 4.22 3.20 2.99 2.77 2.57

Source: Economist Intelligence Unit.

8. See “España: un ‘hub’ latinoamericano incompleto” by Mauro Guillén, Emilio Ontiveros and Javier Santiso (El País. November 14, 2006).

9. Ibid.

10. See World Investment Prospects to 2011 (Economist Intelligence Unit, September 5, 2007). Written with the Columbia Program on International Investment.

Spain: Going places.

One key issue will be whether the government impedes such takeovers in what it considers important sectors, as the Socialists did in 2006 and early 2007 when they obstructed the attempt by German energy company, E.ON, to acquire Endesa (see the section on energy in Chapter 3). Another one is to what extent foreign manufacturing companies will pull out of Spain and transfer their plants to lower-cost countries. At the moment it is a trickle and not a stampede. The British multinational SSL Healthcare Manufacturing announced in September that it was closing its Durex condom factory in Rubi, Catalonia, in 2008 and transferring production to India and Thailand where costs are much lower. The plant in Rubi employs 230 people. Siemens-Elasa, which produces public telephony terminals and systems, also announced the closure of its plant in Zaragoza with loss of 307 jobs.

In the 2007 edition of European Cities Monitor, an annual survey conducted by property consultant Cushman & Wakefield Healey & Baker, Barcelona overtook Amsterdam to break into the top five, while Madrid formed part of a leading group of seven cities. Both Spanish cities were praised for carrying out “strategic improvements over the past ten years – from updating their transport infrastructure to the education of the local workforce.” Barcelona is also the city perceived as doing the most in Europe to improve itself as a business location, followed by Prague and Madrid.

In another survey, drawn up by Ernst & Young Lawyers, Spain was cited as one of the countries with the lowest tax burden for foreign executives.

Spain has had a special regime since 2004 which benefits foreign executives who work in the country and make it their tax residence provided they meet certain requirements including not having been a tax resident in Spain for 10 years prior to entry, and the place of work is in Spain and benefits a Spanish company. Those qualifying pay a 24% general rate on income generated in Spain, substantially lower than what other taxpayers pay on their worldwide income (top rate of 43%). This regime can be adopted for up to six years.

Although Spain remains relatively well placed internationally in terms of a business friendly environment, the fact is that the country is falling behind because of the lack of reforms, a certain fatigue in policymakers and excessive complacency about past achievements. The EIU ranked Spain’s overall business environment 22nd out of 82 countries for 2007-11, the same position as in 2002-06 (see Exhibit 7.15). There are two significant changes, however, in Spain’s position in the segments that comprise the overall ranking: the country’s macroeconomic environment dropped from 39th to 54th, but in market opportunities it rose from 17th to 11th place. The economy, after an extraordinary decade, will slow down over the next five years.

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EXHIBIT 7.15 Business Environment Rankings

Overall scores and ranks Political environment Macroeconomic environment

SCORE (OUT OF 10) 2002-06 2007-11 7.4 7.82 7.8 7.8 7.5 7.2

RANK (OUT OF 82) 2002-06 2007-11 22 22 19 21 39 54

Market opportunities

7.1

7.7

17

11

Policy towards priv. enterp. & compet.

7.5

7.8

21

24

Policy towards foreign investment

8.2

8.2

17

20

Foreign trade & exchange controls

8.7

9.1

15

14

Taxes

5.6

6.3

42

42

Financing

7.8

8.9

20

18

Labour market

6.5

7.2

38

28

Infrastructure

7.5

8.2

24

22

Source: Economist Intelligence Unit.

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Spain’s seemingly bright inward FDI prospects and its business environment ranking, both on the basis of EIU reports, are at considerable variance with the country’s low ranking in the Ease of Doing Business Index, an annual report published by the World Bank. Spain was ranked 38th out of 178 countries in 2007 (39th in 2006) and was placed very low (118th) in the ranking for starting a business (see Exhibits 7.16 and 7.17). It takes 47 days in Spain to satisfy the authorities that you are fit to establish and register a legal business compared with seven in France, 18 in Germany and 13 in the UK. However, this is nothing compared with the 152 days in Brazil.

EXHIBIT 7.16 Ease of Doing Business Overall Index, Selected Rankings* 1. Singapore 2. New Zealand 3. United States 6. United Kingdom

8. Ireland 12. Japan 20. Germany 31. France

(*) Out of 178 countries.

Source: Doing Business 2008, World Bank.

33. Chile 38. Spain 44. Mexico 53. Italy

83. China 106. Russia 122. Brazil 178. Dem. Rep. Congo

Spain: Going places.

EXHIBIT 7.17 Ease of Doing Business Index: Spain EASE OF ...

Doing business (overall) Starting a business Dealing with licences

979 2007 RANK1 38 118 46

2006 RANK2 38 108 48

CHANGE IN RANK -1 -10 +2

Employing workers

154

152

-2

Registering property

42

41

-1

Getting credit

13

12

-1

Protecting investors

83

81

-2

Paying taxes

93

91

-2

Trading across borders

47

43

-4

Enforcing contracts

55

59

+4

Closing a business

17

15

-2

(1) Out of 178 countries. (2) Out of 175 countries.

Source: Doing Business 2008, World Bank.

INTERES, the central government’s inward foreign investment agency, takes issue with the World Bank’s rankings, as one would expect, because they put Spain in an unfavourable light in the eyes of potential foreign investors.

INTERES points out that the Doing Business overall ranking is based on a narrow selection of 38 indicators, compared with the 323 used by the Swiss business school IMD in its equally well-known World Competitiveness Yearbook (which ranked Spain 30th out of 55 countries in 2007). INTERES’s barometer, assessing foreign investors’ view of the business climate and drawn up with the IESE business school, stood at 3.4 out of 5 in October 2007. Of the companies consulted, 70% said they planned to invest more in 2008 and 63% said they would employ more people.

According to the Doing Business ranking, it is easier to do business in the former Soviet Republic of Georgia than in Germany, France, the Netherlands and Spain, something that is hard to believe. The ranking does not take into account such important variables for investors as the size of the domestic market, the proximity to other markets or macroeconomic stability.

Nevertheless, it does expose Spain’s weak areas which need to be improved.

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Chapter 8: An Image out of Sync with the Country’s Reality

Chapter 8: An Image out of Sync with the Country’s Reality

204

City of Arts and Sciences, VALENCIA. Architect/s: Santiago Calatrava, 1996.

The ‘city’ comprises an opera house and performing arts centre, a cinema complex, a planetarium and laserium, gardens, a science museum and an oceanographic park.

Spain: Going places.

No developed nation has as big a gap as Spain between how the country and its companies are generally perceived abroad and its business and socioeconomic reality. Spain’s progress over the last 30 years to become the world’s seventh-largest economy and sixth-largest net investor abroad (see Exhibit 8.1) is not matched by the perceptions abroad of the country.

Generally speaking, Spain is still viewed, to a varying extent around the world, as a land of fiesta and siesta, which is fine for the country’s flourishing tourism industry (the world’s second largest in terms of the number of visitors and receipts), but not when it comes to selling and promoting its products abroad and being taken as a serious and effective country.

In the increasingly globalised world, in which competition is getting tougher every year and price is not always the overriding factor, a brand, an intangible asset, is increasingly the way companies and countries differentiate themselves and add value. The better a country’s brand, the easier it is for it to be accepted by the rest of the world and for its products and services to enjoy success, particularly among first-time buyers, as this hinges, to some extent, on the prior image consumers have of the country that produces them. It also works the other way round: a country’s brand image depends, in part, on the brands of its goods and services, as well as on its cultural, social and political leaders.1 For example, thanks to the stunning success of Nokia, the world’s leading mobile phone supplier, and the Finnish government capitalising on this, the whole of Finland is firmly stamped on the world map as a high-tech and innovative country. Nokia has acted as a locomotive and pulled lesser known Finnish brands with it. Finland, with Nokia, and Spain, with the fashion retailer Zara, both have one company each in the Top 100 brands drawn up every year by BusinessWeek and Interbrand, but so far this has done little to burnish Spain’s overall image or that of other companies (see Exhibit 8.2).

1. This is well explained in an essay by Guillermo de la Dehesa – “Brands and Country Image, a Question of Synergy” (Spain, a Culture Brand, Leading Brands of Spain, 2005).

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EXHIBIT 8.1 Spain Today: Some Economic and Socioeconomic Realities GLOBAL RANKING Top 10 Top 10 Top 10 Top 10 Top 10 Top 20 Top 25 Top 25 Top 30 Top 30

DESCRIPTION Seventh-largest OECD economy Sixth-largest net investor abroad (1997-2006) Eighth-largest recipient of foreign direct investment (1997-2006) Eighth-longest life expectancy at birth, sixth for women Tenth-largest number of immigrants in the world (2005) Sixteenth in the EIU’s Democracy Index, ahead of the US Score of 6.7 out of 10 (the closer to 10, the cleaner the country), well ahead of Italy (5.2), in the Corruption Perceptions Index 13th in the United Nations’ Human Development Index 27th in the Index of Economic Freedom, well ahead of France 30th in IMD’s competitiveness index

Source: OECD, World Bank, United Nations Population Division, Transparency International, IMD Yearbook and the Heritage Foundation.

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EXHIBIT 8.2 The Top 100 Global Brands by Country

United States Germany France Japan United Kingdom Switzerland South Korea Netherlands Italy Finland Bermuda Sweden Spain

NUMBER IN TOP 100 52 10 9 8 6 4 3 2 2 1 1 1 1

HIGHEST RANKED COMPANY, BRAND VALUE AND POSITION Coca-Cola ($65.3bn, 1) Mercedes-Benz ($23.5bn, 10) Louis Vuitton ($20.3bn, 17) Toyota ($32bn, 6) HSBC ($13.5bn, 23) Nescafé ($12.9bn, 24) Samsung ($16.8bn, 21) Philips ($7.7bn, 42) Gucci ($7.6bn, 46) Nokia ($33.6bn, 5) Accenture* ($7.2bn, 50) Ikea ($10bn, 38) Zara ($5.1bn, 64)

(*) Accenture, once known as Andersen Consulting, changed its name and based itself in Bermuda when it went public on the New York Stock Exchange in 2001 after the scandal at Enron, the US energy firm of which Andersen was the auditor and which went bankrupt following the discovery of mass frauds.

Source: BusinessWeek and Interbrand, August 6, 2007.

Telefónica and Santander would make it into the Top 100 global brands if they had a significant distribution presence in the Americas, Europe and Asia (one of the requirements) but, unlike Zara, they are not spread throughout the world. Telefónica’s and Santander’s presence is largely in Latin America and the UK. Telefónica, however, was fourth out of 50 in the 2007 ranking of corporate brands by the European Brand Institute, just above Vodafone, and Santander 43rd (see Exhibit 8.3). The number of brands by country was as follows: UK (12), Germany (12), France (5), Italy (5), Sweden (4), Switzerland (3), Spain (2), Netherlands (2), Denmark (2), Finland (1), Belgium (1) and Austria (1).

Spain: Going places.

EXHIBIT 8.3 Ranking of Corporate Brands in Europe, Selected Brands RANK* AND BRAND 1. Nokia 2. LVMH 3. Unilever 4. Telefónica

979

INDUSTRY IT & Technology Luxury Consumer Goods

COUNTRY Finland France UK

BRAND VALUE (€BN) €32.3 €29.8 €25.1

Telecommunications

Spain

€23.8

Telecommunications

UK

€22.5

11. Deutsche Bank

Financial Services

Germany

€16.8

20. HSBC

Financial Services

UK

€12.0

21. RBS

Financial Services

UK

€11.9

24. Telecom Italia

Telecommunications

Italy

€10.4

28. BT

Telecommunications

UK

€9.4

Financial Services

UK

€9.0

Financial Services

Spain

€7.4

5. Vodafone

32. Barclays 43. Grupo Santander (*) Out of 50.

Source: European Brand Institute, 2007.

As well as the seamless transition to democracy and the economy’s transformation, there have been landmark events that have asserted Spain’s modernisation, most notably the 1992 Olympics in Barcelona and the 1992 World’s Fair (Expo) in Seville. The country’s film directors have won Oscars (José Luis Garcí, Fernando Trueba and Pedro Almodóvar, the latter twice)2, Camilo José Cela won the 1989 Nobel Prize for Literature, there is a bevy of top-notch opera singers (Plácido Domingo, José Carreras, Alfredo Kraus, Montserrat Caballé) and several internationally renowned architects (Ricardo Bofill, Santiago Calatrava and Rafael Moneo). Spanish is also a language that is very much on the rise worldwide and is increasingly the second language that children are learning after English. But when consumers evaluate Spain and its products with subjective criteria in surveys that measure perceptions/ stereotypes, the image is often out of step with the country’s reality. The image, however, is the reality as far as consumers are concerned. One consequence of this is that Spain’s exports are not as successful as they should be and the trade deficit is huge. This is not to say that Spain has a poor or a negative image, but rather one that does not properly reflect nor is wholly concordant with the country’s progress or is based disproportionately on stereotypes (which exist for all countries and are often beneficial). Indeed, Spain is ranked 12th out of 38 countries in the Anholt Nations Brand Index (NBI), ahead of countries such as Belgium, Denmark and Norway, and in the same range as the US and Netherlands (see Exhibit 8.4). The NBI is based on six elements – exports, governance, immigration and investment, culture and heritage, people, and tourism – and is the only analytical ranking of the world’s nation brands. It measures the power and appeal of a nation brand image and tells us how 2. The first Spanish director to win an Oscar for the best foreign language film was Luis Buñuel in 1972 with ‘Le Charme Discret de la Bourgeoisie’ (‘The Discreet Charm of the Bourgeoisie’).

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people around the world see the character of that brand. In the exports index, which measures the tendency of consumers to actively seek out or avoid products from each country (the country of origin effect), Spain is ranked 18th, its lowest position in the six dimensions and below Russia (see Exhibit 8.5). Its highest position is 4th in the tourism ranking, as one would expect, and in culture it is sixth (see Exhibits 8.5 and 8.6). In immigration and governance, it is ranked 14th and in people 8th.

EXHIBIT 8.4 Overall Ranking in the Anholt Nations Brand Index*

208

COUNTRY 1. UK 2. Germany 3. France 4. Canada 5. Switzerland 6. Sweden 7. Italy 8. Australia 9. Japan 10. US 11. Netherlands 12. Spain 13. Denmark 14. Norway 15. New Zealand 16. Ireland 17. Greece 18. Belgium 19. Wales

SCORE 128.41 127.59 126.41 126.30 125.21 124.41 123.92 123.56 123.46 122.65 121.54 120.53 119.92 119.89 117.84 115.58 115.50 115.34 114.42

COUNTRY 20. Portugal 21. Brazil 22. Russia 23. China 24. Argentina 25. Hungary 26. Czech Republic 27. Singapore 28. Poland 29. Mexico 30. Egypt 31. India 32. South Korea 33. South Africa 34. Turkey 35. Malaysia 36. Estonia 37. Israel 38. Indonesia

SCORE 112.08 107.87 106.20 104.28 104.12 104.11 103.87 103.37 102.65 102.60 102.60 102.55 101.02 98.74 97.62 97.34 96.97 95.58 94.87

(*) Second quarter, 2007.

Source: Simon Anholt and Global Market Insite, Inc.

EXHIBIT 8.5 Exports Ranking in the Anholt Nations Brand Index, Top 20* COUNTRY 1. Japan 2. US 3. Germany 4. UK 5. France 6. Switzerland 7. Sweden 8. Canada 9. Italy 10. Netherlands

SCORE 21.97 21.53 20.94 20.06 18.91 18.90 18.53 18.48 17.61 17.53

(*) Second quarter 2007.

Source: Simon Anholt and Global Market Insite, Inc.

COUNTRY 11. Australia 12. Denmark 13. Norway 14. Russia 15. China 16. South Korea 17. Belgium 18. Spain 19. New Zealand 20. Ireland

SCORE 17.39 17.20 17.12 16.83 16.50 16.50 16.47 16.33 15.88 15.84

Spain: Going places.

EXHIBIT 8.6 Tourism Ranking in the Anholt Nations Brand Index, Top Ten* COUNTRY 1. Italy 2. Greece 3. France 4. Spain 5. Australia

SCORE 24.84 24.81 24.46 23.97 23.75

COUNTRY 6. Switzerland 7. UK 8. Canada 9. Egypt 10. New Zealand

SCORE 23.74 23.74 23.68 23.64 23.42

(*) Second quarter, 2007.

Source: Simon Anholt and Global Market Insite, Inc.

EXHIBIT 8.7 Culture Ranking in the Anholt Nations Brand Index, Top Ten* COUNTRY 1. France 2. Italy 3. UK 4. Germany 5. US

SCORE 23.14 22.95 22.94 22.46 22.31

COUNTRY 6. Spain 7. Russia 8. Japan 9. China 10. Greece

SCORE 21.94 23.74 21.72 21.63 21.42

(*) Second quarter, 2007.

Source: Simon Anholt and Global Market Insite, Inc.

The NBI broadly reflects the generally held perceptions about Spain – a country that scores well in tourism, is welcoming, has a substantial culture and heritage, but whose products are perceived as inferior. When comparing Spain’s position in the NBI with that in 2005, when it was ranked 10th, it would appear that the country has declined in the ranking. In fact it has progressed, because in 2007 it was 12th out of 38 countries which is not the same as coming 10th out of 25 countries as it did in the 2005 ranking. Furthermore, Spain’s score is higher. Between the third quarter of 2005 and the same period of 2007 (during which period the methodology was unchanged) Spain’s score rose by almost three points, making Spain one of the countries whose image improved the most alongside Germany and Italy, but not as much as Ireland (+ 7 points)3.

The NBI points out that tourism is “often the most visibly promoted aspect of a nation’s brand, and tourism assets have a disproportionate effect on a people’s perceptions of the country as a whole.” In Spain’s case, this is particularly so. Tourism plays such a vital role in the Spanish economy (it generates around 12% of GDP and employs roughly one in every ten people) that it would be unwise to do anything that affected the country’s image as a Mecca for tourism, and yet the country is also striving to promote a more ‘serious’ (cold) image in order to help Spanish exports and make the country

3. For a more detailed explanation of the improvement in Spain’s image see From Sun to Crescent: Spain’s Current Image in the United States, Turkey and the European Union by Javier Noya (Elcano Royal Institute, www.realinstitutoelcano.org/wps/portal/rielcano_in/Content?WCM_GLOBAL_CONTEXT=/Elcano_in/Zonas_in/DT+102007).

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known for other achievements. Spain has a massive trade deficit (see the section in Chapter 2), a significant part of which is due to the hefty bill for energy imports but also to the generally lacklustre performance of exports with some notable exceptions.

Very few countries are viewed as both ‘cold’ (efficient, rigorous and thus serious) and ‘hot’ (creative, passionate and hence not serious) or ‘hard’ and ‘soft’. Germany and the UK are among the ‘cold/hard’ countries and Spain the ‘hot/soft’ ones. France, however, is successful both as a country for tourists (it receives more visitors than Spain) and as an exporter. The NBI rankings bear this out: France is first in the culture ranking, third in tourism and fifth in exports. Chile was so determined to impress upon the world its ‘coldness’ (hence seriousness) and to distance itself from the ‘hot’ (in all senses of the word) countries of the rest of Latin America that it shipped 210

a 60-tonne Antarctic iceberg to Seville and made it the centre piece of its pavilion at the six-month World’s Fair (Expo) in 1992 in the Andalusian city. While environmentalists gave it an icy reception and protested that the Antarctic was already threatened enough without huge chunks of it being cut off and sent to one of the world’s hottest cities, the iceberg left a deep impression on visitors to the Chilean pavilion – and perhaps changed their view, assuming they had one, of the country (which since then has become the most successful economy in Latin America). Spain, the host, had several pavilions around specific themes – the 15th century, navigation and discoveries.

A study of Spain’s image in Germany, France, Italy and the UK published in 1996, after the Expo and the Olympic Games in Barcelona in 1992, Spain’s banner year, concluded that “Spain is for many foreigners the ideal place for holidays and even for living. On the other hand, it is not regarded as the ideal place for working nor is it held up as an example of a modern and dynamic economy. What is clear is that we are a new frontier, a country with big possibilities and unrealised potential.”4 Since then Spain has enjoyed its strongest period of economic growth, and a dozen or so companies have become major players abroad, but the perception of the country is still distorted and out of sync with reality, although Spain is perceived to have better attributes than other Mediterranean countries, such as Italy or Greece, something which is relatively positive.

The ‘Made in Spain’ label does not sell well. “The truth is that for most people it probably wouldn’t sway their purchasing decision, but it would have an effect on the country brand and probably even more if it were to

4. La Imagen Exterior de España, Aspectos Comerciales,Turísticos e Inversores by Emilio Llamo de Espinosa and Javier Noya (Instituto Universitario Ortega y Gasset, 1996).

Spain: Going places.

say something like ‘Designed in Spain’ or ‘Fashion from Spain’”, says Tim Simmons, a Madrid-based consultant and expert in branding. Some Spanish companies have names that are not easily identified with the country, for example Massimo Dutti, part of the Inditex Group, one of the world’s largest fashion distributors, which sounds distinctly Italian and so better viewed in the customer’s eyes. Other examples are Nina Ricci in perfumes and scents and Loewe in leather goods (a name that sounds German)5. Many Spanish companies use ‘neutral’ brand names such as: Camper, Mango, Smint, Donuts, Fun & Basics, Panda Software, Women’s Secret, Springfield, Panama Jack. Freixenet and Codorníu are world leaders in the cava sector, but they do not enjoy the same perception of quality and sophistication as Moët and other French champagnes.

Spain has no shortage of brands registered at home (863,225 in force at the end of 2006), but very few of them are of global importance.

Probably the two most globally known are the football clubs Real Madrid and FC Barcelona. Telefónica (telecommunications) and the bank Santander are particularly well known in Latin America and increasingly so in other parts of the world, and companies such as Lladró (porcelain figurines) and Freixenet (cava or sparkling wine) have achieved positions of leadership in their category.

Some countries have no image (Belgium and Paraguay, for example).

Spain’s image is a strong one and one of the oldest, dating from the 16th century when its conquistadores forged an empire in Latin America and its armada set sail for England in the most significant engagement of the undeclared AngloSpanish War (1585-1604).6 The stereotyped views of Spain held abroad today essentially stem from the 18th and 19th centuries and offer totally opposing images. While the image of Spain in the 18th century is one associated with its empire, the Black Legend (Leyenda Negra7) and the powerful Catholic Church, the 19th century one is a romantic one emanating from British, American and French travellers who visited the country (see Exhibit 8.8). The ‘exotic’ Spain was epitomised by the phrase coined by Alexandre Dumas (1802-70), “Africa begins at the Pyrenees”.

5. Loewe, established in Madrid in 1846, was acquired by France’s LVMH Group in 1995 and the name was kept.

6. The word armada began to be frequently used in the British press as of 2006 in another context – after a handful of major Spanish companies and banks ‘conquered’ a mobile phone company, several airports, a power company and a bank. One cartoon put the names of the companies inside a Spanish galleon.

7. This term was coined by Julián Juderías in his 1914 book La leyenda negra y la verdad histórica (The Black Legend and Historical Truth), to describe the unfair and biased depiction of Spain and Spaniards as ‘cruel’, ‘intolerant’ and ‘fanatical’ in anti-Spanish literature starting in the 16th century.

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EXHIBIT 8.8 Historic Stereotyped Images of Spain 18TH CENTURY Western, European Traditionalist Intolerant, narrow minded Indolent, lazy Calculating, astute Artificial, baroque Mean El Escorial1 The gentleman, the inquisitor, the conqueror Catholic Very negative image ... ... but we are like everyone else, civilised

212

19TH CENTURY Verging on the oriental, exotic Anarchist, individualist Very tolerant, open minded Hyperactive, energetic Passionate, impulsive Natural Generous Granada1 The guerrilla, the bandit, Carmen2 Pagan, non-believers Very positive image... ... but we are different, uncivilised

(1) El Escorial is the austere monastery near Madrid built by Philip II (1527-98) and has been called an expression in stone of Catholicism in Spain. The floor plan of the building is in the form of a gridiron. The traditional belief is that this design was chosen in honour of St. Lawrence, who was martyred by being roasted to death on a grill. Granada, with its Alhambra, the residence of Muslim kings until the Christian conquest of the city in 1492, epitomised the romantic image of Spain.

(2) Carmen, a French opera by Georges Bizet premiered in 1875, is about a beautiful gypsy with a fiery temper who is responsible for the downfall of many men. It is still one of the most performed operas in the world.

Source: Prepared by Emilio Lamo de Espinosa.

The forces representing the Imperial and Romantic images clashed in the 1936-39 Civil War (in the form of General Franco’s Nationalists and the Republicans) and the image that emerged from the dictatorship established

by Nationalists combined the Black Legend and the Romantic view. The transition to democracy, as of 1975, softened these two images, but they still persist and have not been wholly replaced by one that really reflects today’s dynamic economy and society. Spain is still weighed down by her past. The British economic historian David Ringrose published in 1996 a major book in which he noted the following. “In one generation economic modernisation, democratisation, and integration into Europe have abruptly transformed our perceptions of Spain. Dramatic as it seems, however, I suggest that this change is surprising, not because of Spain’s actual history, but because of a longstanding historiographical tradition. That historiography is permeated with the assumption of failure – most versions of modern Spanish history assume (or assert) that Spain failed to attain one or another moral, religious, economic or political destiny. The nature of the failure depends on the ideology of the historian, but the assumption of her failure to live up to her potential is pervasive.”8 Interestingly, the title of Ringrose’s book in English is Spain, Europe and the Spanish Miracle while the version in Spanish is called El Mito del Fracaso (The Myth of Failure).

Among the most commonly mentioned ‘failures’ by Spanish historians is the 1898 Spanish-American War over Cuba and Puerto Rico,

8. Spain, Europe and the “Spanish Miracle” by David Ringrose (Cambridge University Press, 1996), pp 3-28.

Spain: Going places.

when Spain lost the remnants of its once enormous empire (still known as el desastre). Spanish history, until fairly recently, was recounted in very negative terms; the country’s ‘failure’ was generally attributed, among other things, to the lack of a bourgeois revolution and capitalist development in the 18th and 19th centuries, a weak state, a spirit of intolerance and little importance attached to science. In fact, say Ringrose and a new generation of Spanish historians who have written books in the last 20 years and revised the commonly held views, Spain was not such an anomalous country and an exceptional case in Europe as had been painted.9 “This allows us to revise certain inferences so that we can now see various events and crises in Spanish history not as failures but as Spanish variants of the general European movement toward modernity.” The Franco regime found it politically expedient to perpetuate the myth of failure and the Romantic image (and hence in its view an anarchic and ungovernable country that justified an authoritarian ruler).10 This created an inferiority complex among Spaniards and low self-esteem. Not for nothing was the first tourism slogan produced by the Spanish government in the 1960s, when mass tourism in Spain began, ‘Spain is different.’ If there is a leitmotif running through Spain over the past 30 years it has been ‘Spain is normal’, but this has not fully caught on in the outside world, even though a survey of Spain by the Economist magazine in 1999 concluded that Spain was a ‘fairly normal country.’ Subsequent tourism slogans have included ‘Spain.

Everything Under the Sun’ in the 1980s, which highlighted the beaches and coasts, to ‘Smile! You’re in Spain!’ in 2007. The branding strategy in tourism has been phenomenally successful. However, “To be viewed as a country that is entertaining and generally happy is something positive, but it is not enough,” says Julio Cerviño, an associate professor of marketing at the Carlos III University in Madrid. “The ideal thing would be if we managed to be viewed as a country that is entertaining and happy, but also one that is managing large enterprises and leading global brands.”

In Europe, Spain’s sphere of influence, the country is no longer simply associated with sunshine and the beach: it is becoming a country that is respected. In the view of Javier Noya, the senior analyst on Spain’s International Image and Public Opinion at the Elcano Royal Institute: “Spain is in the throes of a transition from being a sunshine country to a crescent

9. A good example of this is España, 1808-1996. El Desafio de la Modernidad by Juan Pablo Fusi and Jordi Palafox (Espasa, 1997).

10. Julian Pitt-Rivers (1919-2001), the distinguished British social anthropologist and author of the classic The People of the Sierra (Weidenfeld and Nicolson, 1954), did nothing to dispel the ‘Spain is different image’ when he wrote, ‘‘Being Spanish is the ultimate expression of the human condition. Spaniards in themselves are not so different from other human beings except that they are more... of everything.

In other words, when they are jolly, they are jollier than anyone and a good time in Andalusia is better than a good time anywhere else... When they are sad, they more tragic and dignified in their tragedy. If they are charming, no one can be more charming and their charm penetrates like a laser beam. But if they are unpleasant, they are the most pompous and insensitive people imaginable. If they love, they love more deeply then anyone, if they hate, they hate more deeply too, but they know how to hide their hatred better than anyone.’

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country.” Perhaps to the surprise of Spaniards, their country was the top one for European citizens wishing to emigrate, according to an FT/Harris poll in 2007. Spain obtained 17% of the votes, compared with 15% for the UK, 11% for France and only 6% for Ireland and Italy. The main reason for Spain’s popularity is ‘quality of life’, the factor regarded by 64% of Europeans as the main one that would persuade them to emigrate to another country. The same poll showed that for Europeans Spain is beginning to show signs of having a strong economy, a new image. It was chosen by 5% of respondents and ranked fifth, below the powerhouses of the UK and Germany (15% each) but perceived as more powerful than France (4%) or Italy (1%). In the 2006 Transatlantic Trends Survey, drawn up by the German Marshall Fund of the United States, Spain was the most highly-valued country after Germany (see Exhibit 8.9). Nevertheless, Spain’s brands are not highly-valued in Europe.

214

The country, and others such as France and Germany, was not included in the 2007 survey; had it been, Spain’s position would probably not have altered very much either way.

EXHIBIT 8.9 Rating of Different Countries in the EU* Germany Spain Italy France UK US Russia China Israel Turkey Palestine Iran

68 66 66 65 65 53 47 46 44 42 38 28

(*) People were asked to rate their feelings, with 100 meaning a very warm, favourable feeling, 0 meaning a very cold unfavourable feeling, and 50 meaning not particularly warm or cold.

Source: Transatlantic Trends 2006.

The two areas of the world where Spain needs to bring its image into line with the country’s reality the most are the US and Latin America, while in Asia it needs to promote an image more.11 And in the UK, despite the strong trade, investment and tourism ties, derogatory ‘Spanish’ phrases, some of them dating back to the time of the Spanish armada, are still commonly used. In October 2007, Adam Crozier, chief executive of Royal Mail, accused striking workers of ‘Spanish practices’ – an expression implying that they had invented

11. On October 23, 2004, as part of the Amazing Spain Programme, the first bull fight in China was held in Shanghai. Such a savage event did nothing to impress upon the 10,000 spectators an image of Spain as a modern country. Miguel de Cervantes’ Don Quixote was also recently translated into Chinese.

Spain: Going places.

all sorts of ruses to avoid doing a full day’s work. The Spanish embassy in London made its displeasure known.12

Spain’s Image in the US In the US, the word Spanish is synonymous with Hispanic. The Hispanic community in the US is larger than Spain’s population of 44 million and accounts for 15% of the total US population.13 Although sharing a common language with Spain, this community, which is growing three times faster than the US population as a whole and since 2003 has outnumbered African Americans as the largest minority group, is multifaceted and far from monolithic. This situation complicates the promotion of Spain’s image.

Spain should be better known and perceived in the US. After all, the two countries have a shared history: Spain played a decisive role in the American Revolution (1775-1783) by fighting against Britain. Moreover, Spanish is the most commonly taught foreign language in US secondary schools and universities, and Spain is the third most popular country in the world after the UK and Italy for American students studying abroad.

American schoolchildren learn about the Frenchman Gilbert du Montier, the Marquis of Lafayette, and how he fought in the Revolution against the British, but little or nothing about the Spaniard Bernardo de Gálvez, the governor of Louisiana, to name just one, whose troops seriously damaged British naval power in the Caribbean and the Gulf of Mexico and thus aided the rebel cause.14 Spain took the side of the American rebels, more out of hatred for Britain, its old rival, than for any enthusiasm for the cause of independence, which it feared would spread to the Spanish colonies in Latin America, as it eventually did. Spain established regular diplomatic relations with the US in 1785, six years before Britain. One hundred and thirteen years later Spain and the US went to war over Cuba – and Spain also lost Puerto Rico and the Philippines, the remnants of its once vast empire.

Spain’s cultural presence in the US today basically consists of the Cervantes Institute, the government institution founded in 1991 for the

12. See “Royal Mail Chief Aims Spanish Slur at Striking Workers” (The Independent, October 11, 2007). In Elizabethan times, people who were prepared to abandon their sense of duty for the sake of gold were guilty of ‘Spanish practices’. Venereal disease at that time was known as the ‘Spanish pox’ and a ‘Spanish padlock’ was a chastity belt.

13. The official calculation excludes the 4 million inhabitants of the Free Associated State of Puerto Rico, where both Spanish and English are the official languages, and undocumented workers (estimated at 12 million, most of them from Latin America).

14. In 2002, 168 years after he died, the US Congress made Lafayette an honorary citizen. He is only one of six people to be given this distinction. All Gálvez has is a city in Texas named after him (Galveston). The US-Spain relationship in all its dimensions is the subject of an earlier book of mine, Spain and the United States: The Quest for Mutual Rediscovery (Elcano Royal Institute, 2005, www. realinstitutoelcano.org/wps/wcm/myconnect/resources/file/eb7af548421f959/ ChislettEsp-EEUU-ingles.pdf?MOD=AJPERES).

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teaching of Spanish abroad and promoting knowledge of the culture of Spanish-speaking countries, which has centres in New York, Albuquerque and Chicago. New York has two private institutions: the Queen Sofía Institute (established in 1954) and The Hispanic Society of America (founded in 1904). The Meadows Museum in Dallas houses one of the largest and most comprehensive collections of Spanish art outside of Spain. There is nothing yet in Washington, the seat of government, although funds are being raised among Spanish and US companies to turn the splendid building that housed former Spanish ambassadors into a kind of Spain Centre. According to Emilio Cassinello, a former Spanish Consul General in New York, “Given the size of the United States, the operational capacity of official institutions with cultural missions is painfully insignificant. Although this scarcity is a structural fault of the Foreign Service, it is even more scandalous in the US – the leader in 216

practically all scientific, technological and cultural fields.”15 Spain is a blank slate for the great majority of Americans; only 930,000 out of the 58 million tourists who visited Spain in 2006 were from the US (compared with 16.2 million from the UK, 10.1 million from Germany and 9.1 million from France), so there is very little personal knowledge of the country. If there is any image etched on the American mind at all it is probably the traditional one related to flamenco and bullfights (for the very sophisticated, it is the films of Pedro Almodóvar) or to the withdrawal of Spain’s peacekeeping troops from Iraq in 2004 after the Socialists won the election, a decision that provoked the wrath of the George W. Bush administration.16 The pullout, however, did not produce a lasting deterioration of Spain’s image in the eyes of the average American citizen.

Spain was ranked fourth in the 2006 rating of different countries in the US in the survey conducted by Transatlantic Trends (Exhibit 8.10). The US appreciates Spain more than Spain does the US.

15. See Spain and the Hispanics: A Strategic Project by Emilio Cassinello (Elcano Royal Institute, 2004, www.realinstitutoelcano.org/documentos/163/Cassinello163-vale.pdf).

16. The New York Times carried the story on its front page with a headline across six columns, making it the most prominently displayed piece of news out of Spain since the Civil War of 1936-39.

Spain: Going places.

EXHIBIT 8.10 Rating of Different Countries in the US UK Italy Israel Spain Germany Russia Turkey France China Palestine Iran

74 64 61 61 61 51 50 50 46 37 27

Source: Transatlantic Trends 2006.

The reduction of the rich history and culture of Spain to the level of exotic folklore can be traced back in the US to Washington Irving (17831859). He brought the country to the general public’s attention through his books A History of the Life and Voyages of Christopher Columbus, Chronicle of the Conquest of Granada and Alhambra (116 editions and re-printings in its first 80 years) and Tales of the Alhambra. His Romantic image still resonates today.

For Irving, who knew Spain well, as he was envoy extraordinary and minister plenipotentiary in Madrid between 1842 and 1846, “the most miserable inn is as full of adventure as an enchanted castle” and “poverty is no disgrace.

It sits upon the Spaniard with a grandiose style, like his ragged cloak.” His books were standard texts in US universities throughout the nineteenth century. Another influential American Hispanist was William Hickling Prescott (1796-1859). Prescott juxtaposed the new country (the US) and the old one (Spain) and focused on Spain as a failed nation that had allowed progress to slip through his hands.17 The British Hispanist Martin Hume (1847-1910) published an article about the ‘instinctive mutual attraction’ of Spain and the United States that helps to explain the fascination of Spain.

“A strenuous people find in the repose of the Spaniards an antidote for their restlessness; a nation of businessmen are brought into contact with a people, the keynote of whose character is an almost disdainful regard for laborious and calculated gain; on the one hand, keen acquisitiveness, on the other a languid magnanimity incite in their opposites the wondering admiration that engenders a kind of humorous and tolerant affection on both sides.” That may have been true a century ago, but certainly not today, although the image still persists. According to Jonathan Brown, a distinguished professor of art history at New York University, who came to Spain in the early 1960s

17. The contemporary American Hispanist Richard Kagan studied this and came up with what he calls ‘Prescott’s paradigm’, defined as “an understanding of Spain as America’s antithesis.” “America was the future – republican, enterprising, rational; while Spain – monarchical, indolent, fanatic – represented the past.” (“Prescott’s Paradigm: American Historical Scholarship and the Decline of Spain”, American Historical Review 101, April 1996 by Richard Kagan).

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as a Fulbright scholar, “The creators of the American image of Spain largely agreed that Spain has been frozen in time by its slow pace of modernisation.

Spain continued to live in the past even as the United States was moving at full speed into the future. Spain, where the past seemed alive and the present mostly absent (especially in the rural areas), provided an escape where romantic fantasies could be brought to life.”18 Another influential American writer who stamped an image of Spain on the public’s mind was Ernest Hemingway, who went to Spain in 1937 to cover the Civil War for the Toronto Star. This experience inspired his novel For Whom the Bell Tolls, and bullfighting inspired another novel, Death in the Afternoon.

Not surprisingly, Spanish products, outside of those few areas where Spain is known, are often assumed to be products from Latin America and not from Europe. Americans are also confused by the institutional 218

missions of Spain’s regional governments. Apart from the Basque Country, Catalonia and Andalusia, and even they are largely unknown, very few of Spain’s regions are known in the US. For example, when the Castilla y León regional government (known in Spanish as the Junta de Castilla y León) sent a mission to New York and did not put Spain on its promotional literature, many people with a knowledge of Spanish thought it was something to do with a Latin American military government because of the word Junta. Such approaches only add to the confusing image of Spain. The Madrid Chamber of Commerce placed an expensive advert for fashion in the New York Times that said, ‘In Spain fashion is [spelt] with a capital M.’ Americans were baffled. This was a play on words that worked in Spanish (En España la moda es con M mayuscula, as both Madrid and moda begin with an ‘m’) but not at all in a literal translation in English. “If it is difficult to sell the Spain brand name, just imagine how difficult it is with one of Spain’s regions or even an individual city,” wrote Luis de Velasco, Spain’s former trade commissioner in New York.19 “All it does is create more confusion.” These missions sometimes spend more in a week than the annual budget of the Trade Commission in New York, and the return is minimal. They are essentially to impress voters in the home region and attract local media attention.

18. See his foreword to Spain in America,The Origins of Hispanism in the United States, edited by Richard Kagan (University of Illinois Press, 2002).

19. See “La Soportable Levedad de la Presencia Económica Española en EE.UU.” (La Estrella de Papel Independiente, December 14, 2003).

Spain: Going places.

Latin America As a result of the massive investment in Latin America by Spanish companies, the predominant image of Spain, the former colonial power, in the region today is that of nuevos conquistadores (‘new conquerors’), an expression the media love to deploy in hackneyed fashion. Furthermore, the bulk of Spain’s more than €120 billion investment in Latin America over the past 15 years has been in former state-owned utilities (telecommunications, water and electricity) that were monopolies and were privatised (see Chapter 5).20 These are sectors that affect a huge section of the population. Monopolies worldwide are generally viewed as big and impersonal and riding roughshod over consumers’ interests; the companies acquired in Latin America are no longer monopolies but they tend to be seen as such. And, as the new owners are Spanish, they are prone to accusations of dispossessing countries of their wealth, as happened during the colonial period.21 All of these handicaps, real or imagined, make it difficult for Spanish companies to enhance their image/ brand in Latin America and shake off the ‘Black Legend’.

Many of Spain’s big corporate names are in Latin America: Santander and BBVA (banks), Repsol YPF (oil), Endesa and Iberdrola (electricity) and Telefónica, the largest foreign investor in the region. Confidential surveys show that they do not rank very high among the most respected companies in each country where they have a significant presence, although Repsol surprised many people by being ranked first in Argentina (above Coca Cola and IBM) in the 2002 list prepared by PriceWaterhouseCoopers and published in the Financial Times. Industry insiders say this was because Repsol kept the name YPF after acquiring the Argentine state oil company in 1999 and used it worldwide.

In order to counter the perceptions, Spanish companies in Latin America have adopted different strategies, depending on the nature of their business.

Telefónica has the most work to do because it has another disadvantage: the telecommunications sector is the worst perceived among business activities (banks are not much better viewed), according to surveys. In 1998 Telefónica dropped ‘de España’ from its name and cleverly concealed the accent over the ‘o’ by incorporating it into the ‘f’. It did this because it no longer saw Brazil, Chile, Peru and the rest of Latin America as emerging markets but as part of its domestic market; it also wanted a more neutral name and one less

20. The Brazilian bank Banespa, belonging to the State of São Paulo, was also privatised and bought by Santander. The Mexican banks Serfin and Bancomer, acquired by Santander and BBVA respectively, were privatised in 1991-92, long before they bought them.

21. Spanish companies bid much higher in these privatisations or auctions than they needed to, which showed they were not looking to make a killing, but to establish themselves.

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specifically identified with Spain. Telefónica’s strategy in Latin America has been to concentrate on improving its services, as this is the best way to dispel the notion that it still operates as if it had a monopoly (monopolies do not have to care about the quality of service provided). It has scored some notable successes: for example, the amount of time it takes to install a fixed telephone line in Peru and Argentina was cut between 1994 and 2005 from 72 and 49 months, respectively, to roughly two weeks in each country.

The company is also very transparent about how the wealth it generates in each country is spent. Telefónica’s annual report gives a country-by-country breakdown of the revenue generated and the payments made (purchases, salaries, taxes and investment). In Brazil, for example, where the company had 65,993 employees in 2006 (more than the 57,058 in Spain and almost half its number for all its companies in Latin America), revenue amounted 220

to €7,644 million and it spent €4,651 million on purchases, €834 million on salaries, €3,288 million on taxes and €1,054 million on investment. It paid out (€9,827 million) more than it earned. It is also increasing its reputation among the community by providing funds for a variety of good causes: the Proniño Programme freed more than 25,000 children in 2006 from child labour and enabled them to return to school. Telefónica is one of 17 Spanish companies included in the Dow Jones Sustainability World Index (DJSI), a worldwide reference for socially responsible investment. Since 2005, surveys have been carried out into society’s perception of Telefónica in accordance with the RepTrak© model, produced by the Reputation Institute in collaboration with the Corporate Reputation Forum (see Exhibit 8.11).

EXHIBIT 8.11 Telefónica’s Reputation with Society (Scale from 1 to 100) Argentina Brazil Chile Mexico Peru Spain

2005 63 55 55 62 52 64

2006 63 54 50 63 52 68

Source: RepTrak Pulse.

Santander has established Universia, the world’s largest university cooperation network, as the focal point of its corporate social responsibility programme. The number of its cooperation agreements with universities in Latin America, Spain and Portugal increased from 250 in 2002 to 549 in 2006 and investment tripled to €77 million. BBVA, the other big Spanish bank in Latin America, launched a foundation for microfinance in 2007, enabling the poorest of the poor to improve their lives.

Spain: Going places.

The Spain Brand Project In 2003, the Elcano Royal Institute, the Association of Communication Managers (Dircom), the Institute for Foreign Trade (ICEX), and the Leading Brands of Spain Forum (FMRE) published a report putting forward proposals for strategies to improve and manage Spain’s perception and image abroad.22 The main conclusion was that as a nation brand is a matter of state, beyond party or ideological differences because it affects everyone, it needed to be centrally coordinated with the involvement of both the public and private sectors. The report was released under the previous government of the Popular Party, but very little was done during the Socialists’ government (2004-08) to actively implement the recommendations. Promoting the Spain brand does not sit well with all of Spain’s 17 autonomous regions, particularly the Catalans and the Basques, and these and other regional governments prefer to promote their own image and brands instead of going under a Spain umbrella.23 One of the Socialists’ parliamentary allies was the Catalan Republican Left (ERC), which wants independence for Catalonia. In general, Spain’s central government, whatever its political colour, has been loathe to get involved with civic society institutions, such as the FMRE, seeking to promote the Spain brand as it regards the issue as an area of its responsibility and hence control. Unlike in some other countries, there has not yet been a bipartisan approach in Spain to the nation brand concept.

The report, an initiative of Elcano and Dircom, emphasised that the central government needed an institution with sufficient authority to design and coordinate the image promotion tasks. It was considered vital to set up a suitable state body to manage the project, as this would give it the necessary stimulus and make for better coordination of the numerous public and private entities involved in actions that affect Spain’s image abroad. Such a body, however, has yet to be established.

The UK, Germany and the US have all carried out rebranding initiatives. A high-status Rebranding Britain panel was established in 1998 by the Foreign and Commonwealth Office, building upon the Cool Britannia logo projecting Britain as a dynamic, progressive, sophisticated nation and a world leader in creativity and innovation. Then there was Germany’s Concept 2000, an image of a new unified Germany, and following the 9-11 attacks in New York, the US government set up the Office of Global Communications whose

22. See Proyecto Marca España (www.realinstitutoelcano.org/wps/publicaciones/informe.pdf).

23. At international food fairs in Italy, for example, the Italians promote the country’s olive oil at a single stand, while those regions of Spain that produce olive oil have their own stands and it is often not made clear that they are Spanish. The irony is that the bulk of olive oil sold by Italian companies comes from Spain, but this is not mentioned on their labels, and it sells at a higher price than olive oil sold by Spanish companies.

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purpose was to change “the perception of our country in the world, which at best is misunderstood, and in the worst of cases is inaccurate.” Germany now communicates with the strap line ‘Land of Ideas’; the advisory board comprises leading companies and politicians and German President Horst Köhler is a patron of the initiative. Spain’s government could well do with following the German example.

Miguel Otero, the managing director of the FMRE (founded in 1999), designed a system for building Spain’s country brand comprising three pillars: companies (corporate and product brands), public institutions (Royal Household, Ministry of Foreign Affairs and embassies, etc) and other elements (civic society, Spanish VIPs, the media, business schools, among others). The public institutions, particularly the Royal Household, enjoy strong global prestige and there is a sufficient number of famous Spaniards.The weak link in this chain is the 222

image of Spain’s companies. A country’s brand image and that of its companies are closely interrelated and so they must be promoted simultaneously: the better a country’s brand, the better the sales therein, and the better the brands of the goods and services of that country, the better that country’s brand, perception and reputation abroad. But, unless all of Spain’s regions are prepared to work together in conjunction with the central government to forge a Spain brand, the chances of success are slight.

It is striking that Spain’s macroeconomic fundamentals and politics are much better than Italy’s (see Exhibit 8.12), and yet Spain’s products and nation brand enjoy a much lower reputation than Italy’s. This is the result of a vast improvement in Italy’s design, quality and innovation. Spain has to ensure that its companies (micro) attain the same excellent image as its macro situation.

EXHIBIT 8.12 Spain and Italy: Macroeconomic Fundamentals and Politics Public balance (% of GDP, 2006) General government debt (% of GDP, 2006) Inflation rate (%, 2006) GDP per capita (2006, purchasing power standards, EU-27=100) Number of governments between 1978 and 20071 Ranking and score in the 2007 Corruption Perceptions Index2

SPAIN +1.8 39.9 3.6 102.4 8 25th (6.7)

ITALY -4.4 106.8 2.2 103.7 26 41st (5.2)

(1) The year when Spain’s democratic constitution was approved in a referendum.

(2) Ranked out of 180 countries. The closer to 10, the cleaner the country.

Source: Eurostat and Transparency International.

The FMRE identified 150 ambassador brands among Spanish companies – they generate around 40% of Spain’s GDP and one-third of their turnover comes from international business (see Exhibit 8.13). Many of them have leading positions in their segments (see Exhibit 8.14). One way to enhance these brands and, consequently, the Spain brand would be

Spain: Going places.

through what is known as co-branding. This involves a person well known outside of the country attaching their name to a company. The financial group Santander, which in 2007 celebrated its 150th anniversary, ran a series of fullpage adverts during the year in The Economist, sometimes prominently on the back cover, with the bank’s name on a Vodafone McLaren Mercedes Formula 1 racing car – two of whose team drivers are Spaniards, Fernando Alonso and Pedro de la Rosa. In the BrandIndex 2007, Santander’s UK bank Abbey (which uses the Santander logo of the flame) improved its position from 11th in 2005 to 6th in 2006, making it the Top 10 bank in the UK that had most improved the recognition of its brand. There are many opportunities for co-branding. For example, Antonio Banderas and Penélope Cruz are well known in Hollywood as Spanish actors. Olive oil is widely seen in the US as not coming from Spain; almost all of it sold in the US states that it is a ‘Product of Italy.’ In fact, Spain produces 70% of the world’s olive oil. The desired perception is that olive oil comes from Spain. This could be achieved

by Banderas or Cruz teaming up with a Spanish producer of olive oil to promote the product.

Zara, the only Spanish company to make the Interbrand Top 100 brands, has put itself on the map by investing money in prime locations rather than on advertising. By acquiring some of the world’s most visible retail locations (for example its store on New York is on Fifth Avenue), Zara broke the rules of the game by using its stores as its only significant form of advertising. As Woody Allen once said, “Half of being successful in life is just showing up.”

EXHIBIT 8.13 A Selection of Spain’s Main Ambassador Brands Real Madrid (football club) F.C. Barcelona (football club) Zara (fashion retailer) Camper (shoes) Telefónica (telecommunications) Custo Barcelona (fashion designer) Iberia (national carrier) Santander (financial services) Mango (fashion retailer) Torres (wine) Source: Interbrand and Leading Brands of Spain Forum.

El Corte Inglés (department store chain) Tio Pepe (sherry) La Caixa (savings bank) Seat (cars) Borges (olive oil) Adolfo Domínguez (fashion retailer) Freixnet (cava) Carbonell (olive oil) Lladró (porcelain figurines) Grupo Osborne (wines, spirits, pork products)

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EXHIBIT 8.14 International Leadership of Spanish Brands Zara – Top 3 in clothing Roca – Top in bathroom products Indra – Top 3 in air traffic control Carbonell – Top 5 in olive oil Borges – Top 5 in olive oil Real Madrid – Top 5 in football Barcelona F.C. – Top 5 in football Iberdrola – Top in wind power Acciona – Top in building wind parks

Telefónica – Top 3 in telecommunications Pescanova – Top 5 in sea fisheries ACS – Top 5 in infrastructure management Ferrovial – Top in infrastructure management Repsol YPF – Top 10 in oil Freixenet – Top in sparkling wines (cava) Santander – Top 10 in banking BBVA – Top 30 in banking

Source: Various publications.

A study of more than 60 of Spain’s brands conducted in 2007 by Interbrand for the FMRE in 12 key markets (London, Paris, Moscow, Cologne, Milan, Shanghai, Tokyo, Melbourne, Sao Paulo, Mexico City, New York and 224

Toronto) concluded that Spain is perceived as a passionate and creative country with some innovative ideas, but there was a need to be more pro-active in sectors requiring significant investment, such as technology and R&D. There was also a perception of a lack of rigour and seriousness in business. Spain, it said, has many international brands, but very few global ones and many more of them needed to promote, rather than conceal, their Spanish origin. In order to enhance the Spain brand, the strong corporate brands should communicate their Spanish origin by adding the words ‘Made in Spain’, ‘Branded by Spain’ or ‘Designed in Spain’, using the national colours of red and yellow or some Spanish words. The FMRE has produced an image which clearly identifies Spain – through its colours and the tilde put over the letter ‘n’. The FMRE believes that companies should be encouraged to use it alongside their own images by offering them fiscal incentives.

ICEX is also very active in promoting the Spain brand. The focus of its efforts in 2007 was Spain’s technology in eight sectors: renewable energy, electronics and telecommunications, machinery and industrial technologies, biotechnology, aerospace, railways, public works, engineering and management, and water treatment – all areas where Spain has made a mark, but this is not widely known abroad. Although some companies have scored notable successes in technology, the country’s investment in R&D (just over 1% of GDP) is among the lowest in the EU-15, as is its patenting activity. The Ministry of Industry, Tourism and Commerce (to which ICEX reports) ran an eight-part series in

Spain: Going places.

English highlighting new technologies in Spain and produced by Technology Review’s custom-publishing division (see www.technologyreview.com/spain).

The logo ‘españa, technology for life’ is used and is preceded by an ‘e’ lying on its side and resembling a bull’s horn. The slogan echoes the earlier tourism slogan ‘Passion for Life’ (which in the 1990s replaced the slogan ‘Everything under the Sun’) and combines ‘hot’ and ‘cold’ aspects. The words ‘for life’ denote vitality, usefulness and durability. Variants of this slogan combined with the bullshaped ‘e’ could be used for a whole range of sectors and products – though whether all of Spain’s regional governments would agree to do this remains to be seen. Significantly, the slogan says ‘españa’ (in all countries, except those like China and Japan, where the word is not recognised and is therefore written using their alphabets) and not ‘Spain’. The Spanish language is an asset that can be capitalised on: it is spoken by more than 400 million people worldwide, the fourth most spoken language after Chinese, English and Hindi. Moreover, Spanish is the second most widely used language in Internet websites, together with Chinese. In Brazil (population 185 million), Spanish is a compulsory subject in secondary schools, and in the US (with a Hispanic population of 44 million) it is the most commonly taught foreign language in secondary schools and universities. It is estimated that by 2030, 7.5% of the world’s population will be able to communicate with each other in Spanish compared with 1.2% in German and 1.4% in French. In this respect, the Cervantes Institute, the equivalent of the British Council, has an important role to play in teaching Spanish around the world and promoting Spanish culture.

The gap between Spain’s image abroad and the country’s reality has been exhaustively identified. The next (and overdue) phase is to define the appropriate brand for Spain, a process that is not that much different from constructing a company brand. Companies, and the population in general, two of the stakeholders in this process, are in agreement that a clear and strong nation brand will benefit everyone. The politicians, however, are in disagreement. Defining the meaning of ‘Spain’ is an old problem and, because of the existence today of so many autonomous regions, it is more politically complex than in most other countries.

Spain’s negative stereotypes need to be neutralised, but this can only be done if everyone is in agreement on how to move forward and on the appropriate message to be put across. Spain needs a co-ordinated effort of the key stakeholders involved in branding a nation. Not until that happens will Spain successfully re-brand itself.

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226

‘Eco Bulevard’, Ensanche de Vallecas, MADRID Architect/s: Ecosistema Urbano, 2006.

Three oxygen-producing structures perform a similar function to trees and serve as meeting points in a new suburban development.

Spain: Going places.

Spain has enjoyed a spectacular period of economic, political and social progress for more than 30 years. Many Spaniards have never known anything else and have become so accustomed to the bonanza that they can be forgiven for believing it will continue ad infinitum. However, Spain faces pressing challenges.

The economy, too reliant on construction, private consumption and tourism, has begun to slow down, although it is still growing at a strong pace

by EU standards (the average consensus is 2.5% for 2008); the influx of immigrants, which has so far proved beneficial to the economy, is beginning to create difficulties in housing, health, education and crime; the education system, in general, leaves a lot to be desired at all levels and is hampering the need to move toward a knowledge-based economy; EU funds, after a long period with Spain as the biggest net beneficiary, are drying up; the Basque terrorist organisation ETA, which broke off its ceasefire in 2007, has renewed its campaign of violence for an independent Basque Country; the process of devolution to Catalonia and other regions runs the risk of fragmenting the country; and politics, the media and, to a certain extent, society are very polarised.

While the economy is slowing down (in 2009, according to the European Commission, it will grow at a slower pace than the EU-27 average for the first time in 15 years), the situation is far from a recession (defined as two consecutive quarters of negative growth in real GDP). In the last 30 years, Spain has suffered a small recession in 1981 and a more serious one in 1993. Since 1994 the economy has grown by an average of around 3.5% a year in real terms. The pattern of growth, however, is ‘lopsided’ (in the words of the IMF): the construction sector generates around 17% of GDP and, together with tourism, accounts for close to 30% of the Spanish economy. Tourism continues to set new records every year in terms of the number of visitors and receipts, but the construction sector, which generated one-fifth of total new jobs between 1997 and 2006 and employs a high proportion of immigrants, began to decelerate in 2007 after a ten-year house building boom petered out and sales of new homes fell sharply. House prices, which rose 133% in Spain between 1997 and 2006, the steepest increase in Europe after Ireland, rose by only 5.3% year-onyear in the third quarter of 2007, by which time many heavily indebted Spanish households with mortgages (almost all at variable rates) began to feel the impact of higher interest rates. House prices were generally agreed to be overvalued by as much as 30% and were widely expected to fall in 2008. Even the opaque Alan Greenspan (less so since he stopped being the chairman of the US Federal Reserve) has sounded a warning about the

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Chapter 9: Gathering Clouds

bursting of Spain’s huge asset price bubble. All predictions so far, however, have turned out to be excessively pessimistic.

Some analysts saw Spain entering into a slump (a hard landing) if the housing boom ended abruptly and there was a property crash and a crisis in mortgages, as domestic demand would plummet and external demand would not fill the gap. Others saw a gradual soft landing. Whether the landing is hard or soft depends on what happens in the housing market and, to some extent, on the strength of the recovery in the economies of Spain’s main trading partners in the Euro zone, particularly France and Germany. Either way, Spain’s unemployment rate (8% in 2007, the lowest in 30 years) is bound to rise. The construction sector alone accounts for roughly one in every eight jobs, and close to half of its more than 2.5 million workers are on temporary contracts, so they would be the first to lose their jobs when the downturn really bites. Construction 228

employs a disproportionate number of immigrants, so any significant increase in unemployment may provoke social unrest.

Spain is one of the few EU countries with a surplus in its general government accounts (1.8% of GDP in 2007) and a low level of public debt (36.2% of GDP in 2007), but private-sector indebtedness (household from mortgages and corporate from borrowing for acquisitions) has reached new highs and the current account deficit widened to close to 10% of GDP in 2007. By early 2007, mortgages were the equivalent of 60% of net household wealth, up from 20% in 2000. The current account deficit would be a cause for huge concern if Spain had kept the peseta out of the euro and not joined the single currency, as by now it would have been forced into a sizeable devaluation in order to restore competitiveness. Indeed, but for the euro, Spain would not have been able to run such a massive deficit for so long.

Obviously, there will not be a devaluation (unless Spain withdraws from the euro, which is unthinkable), but such a deficit cannot be sustained for ever. It reflects an undeniable loss of competitiveness that will have to be improved through other channels, notably in wages and prices and increasing productivity. It also means that Spain is particularly sensitive to the evolution of the international financial markets, which so far have been absorbing Spanish paper more than willingly (given the insufficiency of domestic savings to meet the investment demand). As the Circulo de Empresarios, a businessmen’s organisation, pointed out in the autumn of 2007, in the wake of the international credit crunch (triggered by the turmoil in the US Subprime mortgage markets and the flight from risk), “the problem of the lack of confidence that has extended throughout markets does not favour a country that needs external finance to keep on growing.”1 1. See PGE-08: Unos Presupuestos Ajenos a la Incertidumbre, Circulo de Empresarios, October 22, 2007.

Spain: Going places.

According to Miguel Ángel Fernández Ordóñez, the governor of the Bank of Spain, “the long expansionary phase has been accompanied by a buildup in certain imbalances that pose considerable risks to its sustainability. Thus, until they are sufficiently corrected, we should avoid complacency.”2 Another of the governor’s speeches was tellingly titled, ‘The Biggest Risk: Complacency’.3 Inflation is relatively high by EU standards, labour market reforms have not gone far enough, competition policy is toying with the idea of national champions and more market liberalisation is needed. Indeed, all reforms geared to increasing productivity are important. Collective bargaining agreements, for example, need to be better tailored to suit external competitiveness and the situation of different industries and firm-level requirements, and the costs associated with permanent contracts need to be reduced. Even the reforms in 2006 specifically to reduce the proportion of salaried workers on temporary contracts have had hardly any impact: in 2007 close to 32% of workers were still on these contracts.

Key elements for building on the success of the Spanish economy and moving more decisively toward a knowledge economy are education and R&D, both of them weak areas. Spain is a laggard in the Lisbon Strategy of economic and structural reforms, named after the host city of the March 2000 European Council in which it was launched (see Appendix 2). This set a ten-year timeline and defined a series of specific policy measures to make the EU “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.” Particularly worrying for Spain’s future is the low level in maths and science skills and the very high proportion of early school leavers (almost double the EU-27 average of 15% in 2006, according to the latest comparative figures). These youngsters have few if any skills. Many universities have become too large to provide quality degrees and the length of time it takes to obtain a degree is too long (though this is changing). The 2007 Education at a Glance report produced by the OECD revealed that Spain is the only developed country whose university graduates have lost salary advantages over people with lower qualifications, although, obviously, they continue to earn more.While the general education level of the population continues to rise, Spain fares badly in the league tables showing, for example, the proportion of students who go on to higher education or professional training after obtaining their school leaving certificate. The answer is not just to increase public expenditure on education, although Spain is not among the biggest spenders, but to spend more efficiently. According to the 2. See his presentation of the Bank of Spain’s annual report on the economy (www.bde.es/prensa/intervenpub/gobernador/mfo140607e.pdf).

3. See the speech given on January 31, 2007 to the Círculo de Economía in Barcelona (www.bde.es/prensa/intervenpub/gobernador/mfo310107e.pdf.)

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Chapter 9: Gathering Clouds

OECD report, Spain is one of the least efficient countries in education if one compares the level of spending with the results in, for example, mathematics (based on the PISA tests). Only Italy, Portugal, Greece and Mexico perform worse. The politicians also need to stop treating the education system like a football which is kicked around every four years and tinkered with, often to the despair of parents. The economy, however, has not suffered too much yet from these deficiencies thanks to a very well educated and trained executive class (the fruit of Spain’s excellent business schools), particularly in the country’s burgeoning multinationals. Having invested heavily in the past decade, Spain’s leading multinationals have entered a period of consolidation, but more acquisitions can be expected, particularly in Europe and the US, while Asia has hardly been touched.

As well as a growing number of poorly educated Spaniards with 230

limited job prospects outside sectors such as construction, many university graduates are also poorly paid and not able to get a foot on the property ladder because of the spectacular rise in house prices – even though the number of housing starts in Spain has been the highest in Europe.

Affordable housing for a significant chunk of the young adult population under the age of 30 – a generation known as mileuristas because they earn more or less €1,000 a month – has become a pressing social problem.

The influx of immigrants has been very beneficial so far, but it would be naïve to believe there will not be flashpoints in the future that set off alarm bells about how many more immigrants Spain can comfortably take – economically, politically and socially. So far, this new phenomenon for Spain has been an extraordinary success story, with very few blemishes. The first serious test of Spaniards’ tolerance will come when the economy slows down significantly (to below 2%) and unemployment rises sharply. The labour-intensive construction sector is the key as it employs a large number of immigrants. The construction sector federation estimates that two jobs are lost for every house that it not built. Where will alternative jobs be found?

Will Spaniards feel resentful at immigrants claiming unemployment benefits (forgetting, perhaps, that they have been contributing to the social security system and contributing to its surplus)? The public education and healthcare systems are already feeling the strain in some areas of the country where the proportion of immigrants is high and investment in these areas has lagged behind the demand for services, making Spaniards resentful.

In the political arena, the main issue is still the Basque terrorist organisation ETA which has been fighting for an independent Basque Country for 40 years. The efforts to resolve the ETA issue has a long history and no end is in sight. Briefly, the Socialist governments of Felipe González (1983-96)

Spain: Going places.

succeeded in involving the French government in the fight against ETA much more, notably improving the effectiveness of police action against the group in France, a relative safe haven for ETA activists. But ETA’s political ally, Herri Batasuna, was not isolated, perhaps because it was regarded as a potential interlocutor in negotiations to put an end to the violence. The Socialists also, despite their sweeping victories in 1982, 1986 and 1989, never strongly challenged the political leadership of the Basque Nationalist Party (PNV), which has ruled the Basque Country on its own or in coalitions since 1980. The PNV leadership rarely distanced itself very much from ETA; Xabier Arzalluz, the party’s president between 1980 and 2004, once said, “ETA shakes the tree and we will pick up the nuts.” The main achievement of the conservative Popular Party’s governments (1996-2004) was to weaken ETA’s political base by banning Batasuna, but it could not stop the PNV from moving towards positions of sovereignty, which came to a head in 2005 (by which time the Socialists were back in power) when the national parliament overwhelmingly rejected the plan put forward by Juan José Ibarretxe, the hardline Basque premier, for a referendum on an ‘associated free state’ between the Basque Country and the rest of Spain. When ETA declared a so-called ‘permanent’ ceasefire in March 2006, the Socialists saw within its grasp the prize of a peace process that has eluded previous governments and would yield electoral advantages. But the Popular Party played a belligerent anti-negotiations card – unless ETA first renounced violence and laid down its weapons – and never ceased to denounce the Socialists for being soft on terrorism (also electorally advantageous). The PP’s rallies against the government’s anti-terrorism policy were useful vehicles for mobilising supporters and (literally) keeping them on their toes. In the face of no concessions (at least none publicly known), the peace process got nowhere – if it ever started – and ETA called off its ceasefire in June 2007. Despite opposition from within the PNV (the party’s president, the more moderate Josu Imaz, resigned), Ibarretxe resurrected his idea in the autumn, roundly rejected again by the Socialists. Although militarily weakened by repeated arrests and the capturing of explosives and other material in both Spain and France, the intractable ETA problem was left for the next government to deal with. Meanwhile, bodyguards, not needed during the ceasefire, returned to their jobs of guarding Socialist and PP politicians, and Basque businessmen began to receive letters again from ETA demanding money for their cause; otherwise, their lives would be at risk. As expected, ETA returned to its practice of assassinating at gun point, killing two undercover civil guards in France.

Tensions in other regions, particularly Catalonia, were also running high, fuelled by the growing antagonism towards Madrid of the pro-

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Chapter 9: Gathering Clouds

independence Republican Left of Catalonia (ERC) party. The ERC is one of the three parties in the Socialist-led Catalan coalition government, and its leader, Josep Lluis Carod-Rovira, who once exclaimed “Catalonia would be better off without Spain”, is the region’s deputy premier. Catalan nationalistic sentiment towards the central government intensified in October 2007 after the collapse of various parts of the region’s infrastructure, including commuter train services that ceased to run for several weeks, affecting 160,000 people. Work on completing the high-speed train track between Madrid and Barcelona caused subsidence and put commuter train tracks at risk. In another incident, a massive power cut hit 350,000 homes, brought the metro system to a halt and gridlocked road traffic. Catalan politicians, though not the Socialists, blamed the breakdowns on Madrid for not investing enough in the region: they have long complained that Catalonia, 232

one of the powerhouses of the Spanish economy, receives funds from the central government disproportionate to its contribution to the economy. The perception of Catalonia from most of the rest of Spain is very different.

Spaniards in other regions believe Catalonia receives its due: the conservative nationalistic Convergència i Unió (CiU) party, which ruled Catalonia between 1980 and 2003, was frequently involved in budgetary discussions, as it gave parliamentary support to both the Socialists and the Popular Party at the national level during that period and would have received a premium for its support. The increased powers of autonomy granted to Catalonia under its new statute (financial and political), approved in a referendum in 2006 and replacing the 1979 charter, have not laid to rest the autonomy issue; a further push from Barcelona can be expected.

While the catastrophic vision of a ‘Balkanisation’ of Spain repeatedly announced by José María Aznar, the former PP prime minister, may be somewhat exaggerated, there is no doubt that the issue of regional autonomy remains a fractious one that will not go away. There are increasing signs of intolerance and fascistic thought in pro-independence circles in Catalonia and the Basque Country, epitomised in Catalonia by the banning of the Uruguayan writer Cristina Peri Rossi from Catalunya Ràdio, the public radio, for speaking in Castilian Spanish and not in Catalan, and the burning of portraits of King Juan Carlos amidst calls for the abolition of the Bourbon monarchy. The king took the unprecedented step of publicly saying the monarchy, restored after General Franco’s death in 1975, had provided Spain with the longest period of prosperity and stability in Spain’s democratic history. The monarchy has served Spain very well: apart from being cheaper than having a president, in a country still fraught with divisions and politically polarised, the king has manifestly stood above party politics (to a greater

Spain: Going places.

extent than a president would probably do) and proved the monarchy to be the one institution that is a unifying factor. Spaniards may not yet be totally convinced monarchists, but the great majority are Juan Carlistas.

Political life became very polarised during the 2004-08 government of José Luis Rodríguez Zapatero. The Socialists moved to the left and the PP to the right, but voters were still in the centre-left. The PP never gave the Socialists much of a honeymoon period before going on the offensive, as the Socialists had for previous PP governments (1996-2004) and the PP for Socialist governments (1982-2004). The PP started its belligerent electoral campaign for the March 2008 elections as soon as the Socialists were returned to power in 2004, three days after bombs placed on commuter trains by Islamist terrorists killed 191 people and produced an unprecedented swing in votes. Some of the PP’s best-known faces believe the train bombings robbed the party of a third term, and they steadfastly treated Zapatero as if he was not Spain’s legitimate prime minister. Zapatero, for his part, used the opportunity to deeply modify previous social consensus and rallied leftist and nationalist parties to exclude the PP from any decision. Whoever wins the election should build bridges with the other party and turn the page on a particularly vicious period in Spain’s life as a democracy. Spaniards deserve better of all their leaders.

It would also be healthy for the country if the ultra-conservative hierarchy of the Catholic Church toned down its strident criticism of the Socialists. The Church’s attacks have intensified the polarisation. While the armed forces and the monarchy have helped to consolidate democracy by withdrawing from the political sphere, the Church, the other institution, with a long history of political involvement, is resisting. Spain is still far from the secular state that it is supposed to be and should be; the 1978 Constitution is ambiguous on this issue. Just as the PP has never really recovered from losing the election in 2004, so, too, the Church has not come to terms with losing the power and influence it enjoyed during the Franco regime, particularly in education, when it was the sole religion under a concordat with the Vatican. Spain is a very different society today; not the least change is that there are now around 1 million Muslims in the country.

All in all, Spain has undergone an extraordinary renaissance in most walks of life. But after going places it risks standing still, like Italy has, if it rests on its laurels and does not continue to reform.

233

The History of Spain in a Nutshell Appendix 1 STAGE Arabic Spain and Reconquista

Catholic Monarchs

234

Hapsburgs

DATE

Moors enter the Iberian Peninsula by 771 and live there for seven centuries. Only some parts in the North of the Peninsula are occupied by Christians.

11th-15th centuries

By the end of the 11th century Catholic armies begin the Reconquista (actually a crusade) to take the land back from the Moors. Over the years, as territories are conquered, new kingdoms like Castile, Aragon, Valencia are created. These kingdoms have different political institutions. Two crowns share most of the Iberian Peninsula: the Aragon monarchs and the Castilian monarchs.

1469

The King of Aragon, Ferdinand, and the Queen of Castile, Isabella, marry and unite their kingdoms in a single dynasty. They were known as the Catholic Monarchs. The state-building process begins.

1492

Columbus discovers America. Colonization begins. The last Moorish kingdom in Spain, Granada, is conquered.

Jews are expelled, although some stayed and officially adopted Catholicism.

1512

Navarre goes to the Spanish crown. Territorial limits defined. Spanish unification completed.

1516

Ferdinand the Catholic dies.

1516

Charles I, grandson of the Catholic Monarchs, inherits the Spanish crown. As a Hapsburg, he also adds Northern European territories, creating a vast empire that includes America. Spain strengthens its European role.

1556

Charles retires and Philip II, his son, inherits the Spanish Crown. Spain’s wealth improves thanks to the Americas. Literature and art flourish during the 16th and 17th centuries.

1560s

A Protestant separatist movement emerges in the Netherlands. Felipe II fights it and keeps control thanks to the tercios, the fearsome Spanish troops.

1598

Philip III becomes king of Spain.

1609

The morisco population is expelled in a precedent of what would later be ethnic-cleansing policies. The Mediterranean area is mostly affected. Spain begins losing economic power. The Netherlands becomes independent, although its status will not be officially recognised until the Treaty of Westphalia (1648), which settled religious disputes and granted some tolerance.

1621

Philip III dies and Philip IV becomes king of Spain.

1665-1700

Bourbon Dynasty

EVENTS

8th-11th centuries

Charles II’s reign. He dies childless and wills the crown to his closest relative, Philip V, the Bourbon grandson of Louis XIV, king of France. Philip also inherits the French crown.

1701-14

England begins a war in Spanish territory to support the claims of Archduke Charles to the Spanish throne. The war ends in 1707 in Valencia and in 1714 in Barcelona.

Spain looses its European dominions and Gibraltar.

1714-46

Implementation of the New Foundation Decree.

Modern state-building. Centralisation. Absolutism.

Political homogenisation. Dismissal of regional institutions (except for the Basque region).

1746-59

Ferdinand VI’s reign.

1759-88

Charles III’s reign.

Spain: Going places.

1788-1808

1808-14 1812 1814-33

Charles IV’s reign. He abdicates in favour of his son, Ferdinand, but Napoleon forces him to return the crown to Charles. He is forced to surrender the Spanish crown to Napoleon who places his Brother Joseph (1808-13) on the Spanish throne.

War of Independence. Popular uprising fighting the invading French army.

Cádiz Constitution. First constitution in Spanish history.

Liberal. Modern Spanish nationalism is born.

Ferdinand VII returns to the throne as a side effect of the Congress of Vienna. Abolishes the constitution but a coup d’état (1820) forces him to accept it. After three years, he is restored to the throne with the help of the French army. His rule is absolutist.

1833

Ferdinand VII dies. His daughter Isabella II (three years old) becomes the Queen of Spain and her mother the Regent. Charles, Ferdinand’s brother, does not recognise Isabella and begins the Carlist War. In the background, liberals supported Isabella and conservatives supported Charles.

1836

Coup d’état. A liberal army officer rules Spain.

Cádiz Constitution restored.

1837

A new, liberal constitution is passed, revising certain articles of the Cádiz Constitution.

1839

Carlist War ends.

1843

Coup d’état. Conservatives in power.

1844

The Civil Guard is created to substitute the popular militia.

1845

New constitution. Conservative. Censitary suffrage.

1854

Coup d’état. Liberal constitution drafted but not enacted. Period of turmoil with several changes of government (liberal-moderates) at the Queen’s request.

1868

Revolution, called the Glorious Revolution, with republican and radical support. Army officers lead a new coup d’état supporting and thus leading the revolution.

Inspired by Cádiz 1812 principles.

1869

New constitution. Liberal. Established universal suffrage and a system of freedoms. The Queen goes into exile.

Leaders of the revolution begin looking for a new king.

Amadeus I

1870

Amadeus I of the House of Savoy (Italy), becomes King of Spain. He is unable to stabilise the country.

First Republic

1873

Amadeo leaves the country and the First Republic is proclaimed. It lasts a year and has four presidents.

Bourbon Restoration

1874

Coup d’état. The Bourbon dynasty is restored in the figure of Alfonso XII.

1876

New constitution mixing liberal and conservative principles. Restricted suffrage and system of freedoms.

Turnismo system: two parties (conservative and liberal) alternate in power.

1885

Alfonso XII dies and his son Alfonso XIII becomes king.

1890

Universal suffrage (for males) thanks to a liberal government.

1898

Spain loses the war against the US and its last colonies (Puerto Rico, Cuba, Philippines). Referred to as ‘the great disaster’.

1923

Coup d’état. General Primo de Rivera becomes president of the government with the support of Alfonso XIII.

Political turmoil: coups d’état, constitutions, war

235

Second Republic

Civil War and Franco

1930

Primo de Rivera resigns and the government calls for local elections for April 1931.

1931

Republican parties win and the Second Republic is proclaimed. The king leaves the country. The provisional government calls for national elections and the new parliament issues a new leftist, anti-clerical, constitution.

The new constitution grants autonomy to regions claiming it.

1934

Miners’ uprising in Asturias against the conservative government. Growing discontent and division.

1936

Spaniards give the majority of votes to the leftist coalition Popular Front. Intense conflicts. Army officers head a coup d’état that leads to the Civil War.

1936-39

1953

The Catholic Church’s privileged position is formalised in a concordat with the Vatican, and the Pact of Madrid with the United States establishes US bases in Spain.

The Pact provides military and other aid and brings to an end Spain’s period of isolation.

1973

ETA assassinates Admiral Luis Carrero Blanco, the prime minister, who was expected to continue the regime after Franco.

1975

Franco dies. King Juan Carlos succeeds him as head of State.

1976

After accepting the resignation of the last PM appointed

by Franco, King Juan Carlos appoints Adolfo Suárez, a former minister under the Franco regime, as PM. He begins the task of liberalisation and transition to democracy. Dissolves Francoist legislature, legalises political parties and calls for open and competitive elections.

1978

The constitution is passed by parliament and later ratified by referendum. The government calls for new general elections.

1981

Army officers and members of the Civil Guard fail in their attempt at a new coup d’état. Spain enters NATO.

1986

Spain enters the European Economic Community (now European Union).

1999

Spain is one of the founder members of European Monetary Union.

2004

Bomb blasts on commuter trains by an Islamist militant group inspired by al-Qaeda kill 191 people and injure more than 1,800.

236

Transition and Democracy

Civil War between Nacionales (Franco supporters) and Republicans (also known as ‘reds’ by Franco’s supporters). Republicans are defeated. Franco establishes a dictatorship.

Prepared by Xavier Coller, with the assistance of Rosa Badía and Sandra Bermúdez (see www.realinstitutoelcano.org/materiales/docs/XavierColler_SocietyPoliticsSpain.pdf). A few additions were made by William Chislett.

Going places: Spain.

Appendix 2 Basic Statistics, 1975-2007* Population (million) Foreign population Foreign population (% of total) Unemployment rate (%) Working age employment rate (%) Female labour force participation rate (%) GDP (current prices, € bn) GDP per head (PPP, EU-15=100) GDP structure (%) Primary sector Secondary sector Tertiary sector Exports of goods and services (at current prices, % of GDP) Imports of goods and services (at current prices, % of GDP) Number of tourists (million) Current account (at market prices, % of GDP) Consumer price inflation (%) Gross national saving (at market prices, % of GDP) Short-term interest rate General government balance (% of GDP) Public debt (% of GDP) Public spending (% of GDP) Inward stock of foreign direct investment (US$ bn) Outward stock of Spanish investment abroad (US$ bn) Total tax revenue (% of GDP) Spending on R&D (% of GDP) Passenger cars per 1,000 inhabitants Average number of children per woman Births to unmarried mothers per 100 births UN human development index Average life expectancy (years) Percentage of population under the age of 15 Percentage of population over the age of 64 Prison population (% of total population) Trade union affiliation (% of labour force)

19751 35.6 165,000 0.4 4.0 50.4 (1986-90) 18 (1970) 92 81.4

20071 45.2 4.5 million 10.0 8.1 64.8 (2006) 53.2 (2006) 1,044 90.8

10.1 38.0 51.9 12.6 16.2 27.3 -2.9 17.2 (avg. ann. incr. 1972-77) 25.5 15.5 (1977) -6.2 (1985) 42.3 (1985) 30.4 (1974-85) 5.1 (1980) 1.9 (1980) 18.4 0.57 (1985) 136 2.8 2.03 0.854 (1980)2 73.3 27.8 (1970) 9.7 (1970) 0.09 (1991) 26.0 (1978)

3.9 (2006) 29.7 (2006) 66.4 (2006) 26.7 (2006) 33.1 (2006) 58.5 (2006) -9.5 4.3 22.1 3.1 (2006) +1.8 36.2 38.3 443.2 (2006) 507.9 (2006) 36.4 (2006) 1.1 (2006) 558 (2004) 1.3 26.5 (2005) 0.949 80.2 (2005) 14.5 16.6 0.14 (2005) 13.0 (estimate)

(*) Estimates for 2007.

(1) Unless otherwise stated.

(2) The maximum value is one.

Source: Eurostat, National Statistics Office (INE), BBVA Foundation and UNCTAD.

Useful Internet Addresses Centro Investigaciones Sociológicas: www.cis.es Instituto Nacional de Estadística: www.ine.es Anuario Social of La Caixa: www.estudios.laCaixa.es/anuarioeconomico Elcano Royal Institute: www.realinstitutoelcano.org Bank of Spain: www. bde.es/homee.htm Foreign Ministry: www.maec.es/en/Home Ministry of the Presidency: www.la-moncloa.es/IDIOMAS/en-GB/default?idioma=en-GB Economy Ministry: www.mineco.es/portal

237

Appendix 3 The Lisbon Strategy of Economic and Structural Reforms, Rankings and Scores, 2006 SUBINDEXES FINAL INDEX COUNTRY

INFORMATION SOCIETY RANK SCORE

INNOVATION AND R&D RANK SCORE

LIBERALIZATION RANK SCORE

RANK

SCORE

Denmark

1

5.76

4

5.53

4

5.15

5

5.58

Finland

2

5.74

6

5.41

1

5.90

4

5.58

Sweden

3

5.74

1

5.93

2

5.73

6

5.43

Netherlands

4

5.59

2

5.63

5

4.82

2

5.62

Germany

5

5.53

10

4.98

3

5.31

1

5.71

EU-25

238

United Kingdom

6

5.50

3

5.61

6

4.82

3

5.59

Austria

7

5.30

7

5.24

9

4.55

7

5.35

Luxembourg

8

5.29

9

5.05

12

3.96

9

5.26

France

9

5.21

11

4.91

8

4.66

11

5.17

Belgium

10

5.15

14

4.44

7

4.67

10

5.25

Ireland

11

5.09

12

4.55

10

4.47

8

5.34

Estonia

12

4.93

5

5.49

11

4.06

12

4.98

Portugal

13

4.64

17

4.06

17

3.81

15

4.74

Czech Republic

14

4.53

15

4.10

16

3.85

13

4.96

Spain

15

4.49

20

3.93

15

3.89

16

4.62

Slovenia

16

4.44

13

4.50

13

3.96

22

4.30

Hungary

17

4.40

23

3.74

14

3.92

17

4.55

Slovak Republic

18

4.38

19

3.97

23

3.44

14

4.82

Malta

19

4.38

8

5.22

25

3.23

19

4.46

Lithuania

20

4.31

18

3.97

20

3.69

24

4.18

Cyprus

21

4.28

21

3.90

24

3.30

18

4.46

Latvia

22

4.25

22

3.76

21

3.63

20

4.32

Greece

23

4.19

25

3.17

18

3.77

21

4.32

Italy

24

4.17

16

4.06

19

3.73

23

4.29

Poland

25

3.76

24

3.32

22

3.57

25

4.02

EU-25 Average

--

4.84

--

4.58

--

4.24

--

4.92

United States

--

5.45

--

5.63

--

6.01

--

5.21

East Asia*

--

5.28

--

5.41

--

5.23

--

5.13

East Asia refers to the average of five highly competitive East Asian economies: Japan, Hong Kong SAR, Republic of Korea, Taiwan, China and Singapore.

Source: The Lisbon Review 2006. Measuring Europe’s Progress in Reform. World Economic Forum.

Spain: Going places.

SUBINDEXES NETWORK INDUSTRIES RANK SCORE

NETWORK INDUSTRIES RANK SCORE

ENTERPRISE RANK SCORE

SOCIAL INCLUSION RANK SCORE

SUSTAINABLE DEVELOPMENT RANK SCORE

2

6.24

5

6.28

1

5.63

1

5.49

3

6.17

8

5.93

4

6.29

4

5.24

2

5.35

1

6.23

5

6.14

3

6.36

7

5.07

3

5.09

4

6.15

6

6.01

6

6.23

2

5.48

4

5.06

6

5.87

1

6.38

2

6.39

12

4.69

10

4.53

2

6.23

7

5.97

1

6.47

5

5.13

9

4.74

8

5.69

9

5.87

8

6.15

15

4.43

8

4.75

5

6.09

4

6.16

9

6.14

8

4.91

5

5.05

7

5.82

3

6.18

7

6.19

9

4.87

15

4.25

10

5.44

10

5.84

11

5.91

11

4.77

6

4.83

9

5.47

18

4.95

10

6.13

3

5.35

7

4.82

11

5.10

17

5.01

12

5.72

6

5.10

12

4.37

16

4.69

12

5.37

13

5.66

14

4.50

17

4.10

14

4.90

13

5.16

21

4.84

21

3.99

11

4.44

13

4.90

11

5.41

14

5.65

16

4.33

23

3.63

18

4.48

15

5.07

20

4.88

23

3.76

19

4.02

12

5.00

21

4.80

17

5.22

19

4.18

16

4.16

17

4.61

22

4.76

22

4.84

17

4.33

18

4.09

15

4.76

23

4.64

15

5.44

22

3.83

13

4.35

25

3.84

19

4.86

19

4.96

13

4.57

20

3.95

21

4.26

16

5.02

18

5.12

18

4.25

14

4.30

24

3.86

24

4.57

24

4.79

10

4.78

21

3.87

20

4.29

14

5.09

16

5.27

20

4.14

22

3.79

23

3.98

20

4.82

23

4.80

24

3.71

24

3.54

19

4.40

25

3.86

25

4.23

25

3.60

25

3.41

22

4.10

--

5.36

--

5.60

--

4.59

--

4.40

--

5.05

--

5.72

--

5.97

--

5.21

--

4.58

--

5.26

--

5.96

--

5.54

--

5.11

--

4.87

--

5.02

239

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