The Spanish economy: The best of times, the worst of times

Spain seems the envy of many in Europe – with relatively low unemployment, a seemingly unstoppable housing boom driving growth and standards of living going up, the good times are definitely here.

But now more voices are joining a growing chorus of concern; they say Spain must act now or a downturn could be round the corner.

Essentially, its problem is being stuck between a rock and hard place.

Or, to put it another way, the advantages which Spain had enjoyed – low labour costs, robust foreign investment and being bankrolled by millions of euros of European Union aid – are ebbing away.

On paper, Spain has one of the highest rates of growth in Europe, at 2.7 percent last year. This year it is expected to repeat this level of expansion. But the problem is the type of growth, say analysts like Emilio Ontiveros, of the Madrid-based International Financial Analysts.

“There is a difference between growing a lot and growing well. Spain has grown a lot but not well,” he says.

What this means in plain terms is Spain has failed to invest in technology or advanced industries as well as research and development.

These are crucial to sustain the economy so it can continue to grow.

So it cannot hope to catch up with more advanced economies like that of Britain, France, Germany, Japan or the US without technological growth in the 21st Century.

Spain’s workforce is relatively unskilled in information technology, productivity is low and exports have never been worse.

Last week, Spain’s Socialist government moved to cut corporate tax to make competing abroad easier for Spanish companies.

The move was triggered after latest figures showed the trade balance, or the difference between exports and imports, had dipped to a record low.

In the end of 2004, imports rose 11.9 percent, while exports only went up 5.1 percent.

At the same time, the traditionally low Spanish wages which gave the country an advantage and made it attractive to multi-nationals, have gone up in recent years.

This is one of the reasons Eastern Europe and Asia have become more attractive to the same multi-nationals, who are leaving Spain in droves.

Economists say Spain has progressed enough so its wages have gone up, making that no longer an advantage.

At the same time, without enough investment in technology, it has failed to find enough new openings to allow it to compete internationally.

And there are relatively few industries where domestic growth can be assured.

So Spanish companies are increasingly looking to expand abroad.

Two examples have been the takeover, by Spain’s biggest bank, Banco Santander, of the British bank Abbey National and the attempt by Spain’s second largest bank, Banco Bilbao Vizcaya Argentaria to buy Banca Nazionale del Lavoro of Italy.

In terms of EU aid, the gravy train will carry on for at least another three years.

After 18 months of wrangling with Brussels, Spain won a reprieve which means EU aid will be gradually phased out by 2008.

Spain had been fighting to delay a sudden stop to the millions in EU cash which have bankrolled its economic expansion in the past 19 years.

Since Madrid joined the EU in 1986, it has received EUR 65 billion in aid, which has paid for better roads, a high speed train link between Madrid and Seville and a similar rail link between the capital and Barcelona.

Spain is now so much richer than the ten new countries who joined the EU in 2004, it cannot expect the gravy train to continue.

But it is not all bad news. Key industries, like tourism and house building, which are crucial to the Spanish economy, remain healthy.

And Spanish prime minister Jose Rodriguez Zapatero is alive to the risks of being left behind if the shape of the Spanish economy does not change.

So this year Zapatero is to increase investment in research and development by 25 percent this year.

Yet economists remain concerned.

Spain has one of the lowest rates of creating new businesses in Europe. In fact, figures released last year showed foreign entrepreneurs, principally Britons, Germans and Chinese, living in Spain were starting more new companies than Spaniards.

The ‘feel good factor’ which exists in Spain may also stop people doing something now before it is too late.

Jose Manuel Campa, a professor of finance at the prestigious IESE business school in Madrid, said: “There is a general satisfaction with the economy. People are more willing to support radical changes when times are difficult.”

Recent polls have shown that the business community are becoming more concerned the economy is weakening.

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Subject: Spain; Economic prospects