Spain as of Late 2010 Rumors in Essay

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Spain

As of late 2010, rumors in the financial community persist that Spain is going to be the next Eurozone nation to suffer an economic crisis. Spain's high unemployment rate, coupled with a lack of economic recovery and being unable to adjust interest rates due to its participation in the euro, has resulted in a rapid appreciation of interest rates in Spanish sovereign debt in recent weeks amid speculation in the bond markets that Spain will be unable to meet its obligations (Krugman, 2010; Krause, 2010). The Spanish economy, it would seem, has been suffering in recent years and that suffering is not expected to end any time soon.

For a company looking to do business in Spain, the current situation is certainly cause for alarm. The economic fundamentals of the country look troubling, and there are significant structural reasons why Spain will not be a good place in which to invest any time soon. However, in order to truly assess the situation, one must move beyond the headlines and get involved in a deeper analysis of the country and its economic circumstances. This paper will do just that. Spain will be analyzed in terms of both the big picture and its current economic situation. The intimation that Spain is overpriced as a place to invest will be addressed in this analysis, as will a number of other concerns. The perspective for this report will be that of an American firm seeking to invest in Spain. Economic, cultural and political elements of Spain and its society will be considered, so that an American firm looking to invest in Spain will be able to gain the full knowledge required in order to make the right decision for its business. At the core of the report will be a PEST analysis, in which four specific components are analyzed. Each will receive both a historical analysis and an interpretation of the present landscape. The four components of the PEST are the political environment, the economic environment, the social environment and the technological environment. Each of these plays an important role in the decision as to whether or not to invest in Spain at present, so each will be given due consideration.

The components of this paper, in order, are going to be the history of Spain, its government, the current climate, its culture, its employment and labor conditions, education, taxes, foreign investment climate, business practices and freedoms and the corruption climate. Lastly, the paper will bring all of this knowledge and insight together to come to a conclusion with respect to investing in Spain.

History

After emerging from Muslim rule in 1492, the Kingdom of Spain immediately became a colonial power with the Columbus expedition. This period saw Spain as one of the world's leading economic powers, a position it occupied for several hundred years through a series of dynasties, culminating the first republic in the late 19th century. Just before the Second World War, Spain's republic fell and the country became a dictatorship under Francisco Franco. After Franco died, the country began a transition to democracy that ushered in the country's modern age. Spain joined the European Union in 1986 and was one of the founding adopters of the euro in 1999, setting the stage for the country's current economic climate.

Today Spain is one of the largest and most important countries in Europe. The country has 46 million people in total. Of these, 74% are the majority Castilian ethnic group, 17% are Catalan, 7% are Galician and 2% are Basque. Among the Castilians are further breakdowns such as Asturian, Aragonese and Andalusian among others, each with distinct regional culture and dialect (CIA World Factbook, 2010).

Government

The current structure of the Spanish government is as a parliamentary monarchy. The royal family of Spain only has nominal control of the country, for the part it is run by elected officials in a parliamentary system. The country is governed by the National Assembly, which consists of a 264 person Senate, of which 208 are elected, and a 350-seat Congress. The structure of the Congress is unusual in that it costs of 248 representatives elected under a proportional representation system and a further 2 members from each of the fifty provinces, plus a single member each from the African enclaves of Ceuta and Melilla. There are a number of different political parties participating in Spanish government, including a number of regional parties representing Basque Country, Catalonia, the Canary Islands and a number of parties representing the Castillian population along different ends of the political spectrum. There are a significant number of socialist/communist parties represented. The head of state is King Juan Carlos I, but the head of government is Jose Zapatero, a member of the Spanish Socialist Workers' Party (CIA World Factbook, 2010).

Despite having a socialist leader, Spain's political climate in recent years has generally been favorable to investment interests. Spanish law remained unchanged following the election of the Socialists in 2004. Foreign investment is permitted up to 100% equity and capital movements are completely liberalized (Dimireva, 2009). As a result, Spain has seen significant capital inflows and indeed this was in part to blame for the country's current economic situation, as these inflows led to a real estate bubble that has since burst.

Current Climate

The bursting of that real estate bubble has led to considerable difficulty in the current Spanish economic climate. Unemployment at present stands at 18.1%, in 2009, up from 11.4% in 2008. Spain has the worst unemployment rate in the EU by far and the second-worst in Europe after Bosnia-Herzegovina. To put Spain's unemployment rate in perspective, it ranks in between Kyrgyzstan and Sudan, two landlocked third-world nations with considerable civil strife (CIA World Factbook, 2010). The Spanish GDP has declined 3.7% in 2009 and appears to have continued to decline this year.

There is intense speculation that the European Union is going to need to bail out the Spanish economy. Such a bailout could cost upwards of $1 trillion, severely depleting Europe's contingency reserves. This is turn could cause a crisis in the euro. Any reduction of the value of the euro would have a twice effect on Spain. On one hand it would make Spanish exports more competitive, but it would also serve to increase the value of Spain's sovereign debt. The overall impact of such a situation is expected to be negative.

At present, Spain is not yet in crisis, but interest rates on its sovereign debt have increased significantly in recent weeks. While this is largely speculative, it has real consequences for the cost of Spanish debt, making such actions a self-fulfilling prophecy of sorts. Spain is currently considered to be the second-riskiest country in Europe after Portugal, so depending on the reaction of major EU powers to the crisis Spain's situation could either stabilize or worsen dramatically over the course of the next couple of weeks (Faiola, 2010).

At the heart of this crisis was Spain's real estate bubble. When the euro was formed, it enabled money from around the continent to flow more freely, and this encouraged investment in what were then marginal economies like Ireland, Portugal and Spain. As early as 2004, there were signs that Spain was experiencing a real estate bubble that was prone to bursting, and the OECD warned of the likelihood of such at the time, with real estate prices growing at 17% at the time. A number of perverse incentives in the economy fueled the real estate boom, but when global credit markets began to dry up the bubble burst. This crippled Spain's GDP and through millions of Spaniards out of work. Whatever measures are undertaken in terms of Spanish government response and European bailout of the situation, there is little in the fundamentals of Spain's economy to indicate that demand will be restored any time soon, so the bleak outlook will continue for the foreseeable future (Knowledge @ Wharton, 2004).

Working in Spain's favor thus far has been its relative reluctance to engage in austerity measures, having passed a small package by only a single vote and taken its time in implementing that (Dowsett, 2010).. Austerity measures, which have been entirely worthless with respect to aiding Ireland's economy or lowering its cost of debt, essentially cripple any hope of economic recovery and cause dramatic civil unrest. If Spain was to implement tougher austerity measures, its economic situation would deteriorate, so it is hoped that the country's current strategy is sufficient to pull the country through the current crisis.

One of the most important considerations of the current crisis is that it is unlikely that any measures can be undertaken to restore the country's economic health in the near-term. In essence, the real estate bubble left Spain with an overpriced economy, characterized by price and wages that were higher than the equilibrium level. This problem persists, so Spain is in general a high-priced country right now, to an uncompetitive level. The primary skill set in the…[continue]

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