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Spain, the European Union and the Global Economy

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1 Spain, the European Union and the Global Economy

2 Modern Spain: In 1813 Spaniards, with British help, booted the French out (Napoleon conquered in 1789) Differences over how Spain should be governed fuelled civil war in the 19th century, with some demanding the establishment of a republic. After a false start in 1873, a second Spanish Republic was finally and enthusiastically welcomed in 1931, along with a modern, democratic and secular constitution. But divisions between right and left over religion, land and social reforms sparked the Spanish civil war ( ) in which some 500,000 Spaniards died. It was won by the right under General Francisco Franco, a Fascist dictator who annulled most Republican reforms, brutally suppressed regionalism and re-established the power of the Catholic church. In 1969 Franco designated Juan Carlos, of the Bourbons, as the next head of state and maintainer of Franco’s authoritarian regime. But when Franco died in 1975 the new king instead helped stage-manage the re-establishment of parliamentary democracy. A new constitution, approved in 1978, established modern Spain as a constitutional monarchy, restricted the Catholic church and army, and offered Spain's diverse regions limited autonomy. Following the legalization of political parties, the first free election for 40 years was held in In 1978 a referendum approved a new democratic constitution and repealed many of the laws of the Franco era. In 1986 Spain joined the European Community (now EU). Spain was one of the founder members of economic and monetary union (EMU) in January 1999.

3 Political structure Spain is a constitutional monarchy. The king, Juan Carlos, will be succeeded by his son, Felipe. The parliament, or Cortes, is bicameral, but effective power resides in the 350-seat lower house (Congress of Deputies). The upper house (Senate) has 208 directly elected members and 51 regional representatives. Parliament is elected for a maximum term of four years. Spain, alongside Germany, is now the most decentralized large country in the EU after Belgium, but demands for greater autonomy by Catalonia and the Basque Country are a source of political tension. There are 17 autonomous community (regional) parliaments within Spain. For the national government the Council of Ministers is headed by the president (prime minister), who is appointed by the king, but must win investiture vote in parliament. Jose Luis Rodriguez Zapatero, the leader of the Spanish Socialist Workers' Party (PSOE), was re-elected president in March 2008. Main political parties: Spanish Socialist Workers' Party (PSOE); Popular Party (PP); United Left (IU), including the Communist Party (PCE); Convergence and Union (CiU), a centre-right Catalan nationalist federation; the centre-right Basque Nationalist Party (PNV); Herri Batasuna (HB), an outlawed separatist Basque coalition with links to the paramilitary Euskadi ta Askatasuna (ETA); Catalan Republican Left (Esquerra Republicana de Catalunya—ERC), a left-wing Catalan separatist party; Canary Island Coalition (CC); Galician Nationalist Block (BNG); Union, Progress and Democracy (UPyD), a centre-left anti-nationalist party.

4 Let’s look at some graphs and statistics reflecting the state and recent trends in Spain’s major economic indicators: Annual data   2009 Historical averages (%)      Population (m)   45.5  Population growth   1.1  GDP (US$ bn; market exchange rate)  1,464.5 Real GDP growth   2.5  GDP (US$ bn; purchasing power parity)  1,388.87 Real domestic demand growth   2.9  GDP per head (US$; market exchange rate)  32,000 Inflation   2.7  GDP per head (US$; purchasing power parity)  30,350 Current-account balance (% of GDP)   -8.0

5 But this snapshot doesn’t give us a sense of how Spain’s economy has been changing…so we need to look at the change in GDP: Okay, this dip in GDP growth look bad yet this is what happens in a recession. So why has Spain been in the news so much lately and said to now be in a state of contracted crisis?


7 So why is this particular state of things a “crisis”?
After examining data from dozens of countries over the past two centuries, economists Carmen Reinhart and Kenneth Rogoff found a connection between high debt and reduced economic growth. Specifically, they found that when a nation's gross debt reaches 90% of its economy, it often loses about one percentage point of growth a year. One percentage point lower growth may not seem huge. But it's equal to roughly a third of the average annual GDP forecast over the next decade. And slower growth can reduce the number of jobs created, which in turn can hold down household incomes. The more debt the government accrues, the more it will pay in interest and the less it will have to spend on the basic services Spaniards expect from their government. Reinhart has said the relationship between high debt and low growth is "self-feeding." Low growth ravishes government revenue and increases the need to borrow. More borrowing builds more debt. Higher debt increases pressure to tighten fiscal policies in order to reduce the risk that investors lose confidence in the country. But tighter policies can slow economic growth. Before we move on lets look at the things Spain sells to the rest of the world and what they buy as well…

8 Principal exports 2007   % of total   Principal imports 2007  Raw materials & intermediate goods (excl energy)   50.7   47.1  Consumer goods (excl energy)   35.7   27.4  Capital goods (excl energy)   9.2  Energy   14.9  Energy  4.4   10.6  Main destinations of exports 2007  Main destinations of imports 2007  France   18.6  Germany   15.2   10.8   France   12.2  Italy   8.5   Italy   8.7  UK   7.5   OPEC  EU  70.1   EU   59.1

9 Types of Economic Systems
Private State Resource Ownership Resource Allocation Market Capitalism Command Centrally Planned Socialism

10 Types of Economic Systems
United States Private State Resource Ownership Resource Allocation Market Capitalism Command Centrally Planned Socialism

11 Types of Economic Systems
Private State Resource Ownership Resource Allocation Market Capitalism Command Centrally Planned Socialism Spain,

12 Types of Economic Systems
Private State Resource Ownership Resource Allocation Market Capitalism Command Centrally Planned Socialism North Korea

13 Types of Economic Systems
Private State Resource Ownership Resource Allocation Market Capitalism Command Centrally Planned Socialism Spain Today

14 Understanding an Economic System:
Need some definitions before we go on... Institution: Institutions are rules of the society that structure the interaction among people. - Are made up of formal rules and regulations. - And informal rules as well at times. - They are the informed ways by which people deal with each other every day → norms of behavior. Institutions, collectively, are the framework within which all of human interaction... political, social and economic... takes place. Economy: The economy of a society is comprised of institutions that perform economic functions. These institutions are structured and behave according to established working rules. Philosophical Basis for an Economy: A viewpoint which specifies the place of an individual within society; an ideal state of political, social and economic reality to serve as a set of ultimate goals for society; and a general program suggesting broad policy measures that will guide society from its actual conditions toward the ideal reality. This economic philosophy will be multidimensional in the sense that social, political, and cultural, as well as economic elements are contained therein.

15 Capitalism → Adam Smith - dominance of "the invisible hand" in guiding economic activity. Limited role of government (provide public goods and define the rules of the game). A “process” ideology. B. Institutional Economics: While there is no hierarchy of importance in the tenets of institutional economics, one of the most important for our purposes is that... [a] Economies are fluid rather than static. [b] The second tenet is that one can understand an economy only within its historical context. - The constellation of factors shaping an economy is unique. - A corollary to this tenet is that what might work for one nation might not work for some other due to historical inconsistencies. [c] Third, the values of a nation's people can be understood best by studying the philosophical/religious underpinnings of its culture. - Old and new philosophies alter attitudes that may subsequently lead to a change in work rules and therefore institutions.

16 [d] A fourth general tenet is that the values, institutions and work rules which operate in one nation will not necessarily function in another nation. - A corollary tenet is that values, institutions and work rules which functioned in the past may not function in the future. G. C. Allen: "One of the most common fallacies in the minds of academics, or the citizenry of a nation, is that once a trend is established it will persist indefinitely." [e] Finally, the basic structure and performance of an economy are influenced by the dynamics of the society's social and political structure. 4. This broad theory is based upon the interrelationship between a society's beliefs, power structures, and working rules of institutions. [a] The theory can be used to explain the nature and evolution of economic systems. [b] Changes in working rules can modify institutions or create new ones, with the economy evolving in the process. [c] The philosophical basis accepted by authorities and the economy's performance determines whether the working rules are retained, modified, or replaced. 5. Working rules... Establish the boundaries of economic activity between institutions. 6. Principal institutions... - Socially determined: not inherent.

17 [a] Instrumental in establishing and coordinating most production and distribution patterns of behavior, and giving meaning and durability to routine activities. [b] Significant features: Origin, the activities participants perform, working rules governing them, their impact on the economy, and the philosophical basis for these activities and rules. 7. Behavior of the economy... Three components: How it is organized to resolve the economic problem (what, when, how, for whom), institutional change, and performance. In describing how each society is organized to resolve its economic problem, three questions need to be addressed: 1. How is the resource allocation decision organized... [a] Centralized (state control) or decentralized (markets) or some combination. Decision making rules and institutions. 2. What are the rules regarding ownership and control over productive resources? In each economy the rules differ...even where similar, differing restrictions exist. 3. What type of social process has been adopted for coordinating information and for making production and distribution decisions? - Including markets, traditional mechanism, or some form of economic planning.

18 Concepts to Define & Understand at the Beginning…
1. Comparative advantage - def: A nation has a comparative advantage over a trading partner in the production of an item if it can produce that item at a lower unit cost than its partner. Implications... Any country can increase its real income by trading, because the world market provides an opportunity to buy some goods at relative prices that are lower than those which would prevail at home in the absence of trade. The smaller the country the greater this potential gain from trade, but all countries benefit to some extent. A country will gain most by exporting commodities that it produces using its abundant factors of production most intensively, while importing those goods whose production would require more of the scarcer factors of production. The theoretical benefits of freer trade: Theory of comparative advantage…focuses on relative labor costs (David Ricardo). 2. Heckscher-Ohlin theorem (labor and capital): factor proportions determine the direction of trade….. A country relatively well endowed with capital should produce and export capital intensive goods, one well endowed with labor should produce and export labor intensive goods (relative costs).

19 Stolper-Samuelson effect: if a labor-abundant country produces cheap labor-intensive goods, over time the increase international demand for these goods will raise their price and by association the price of their key input: labor. Stolper-Samuelson effect => trade will in time benefit the least well-off…. The poor workers. Factor price equalization theorem: over time wages will rise in labor-abundant countries and fall in capital-rich countries => international prices of labor and capital will each converge (idea behind PPP & Convergence Hypothesis). 5. Other theoretical work by Krugman suggests that once a country opens itself up to trade there will be a period in which inequality will increase, followed by a period in which the Stolper-Samuelson effect will assert itself and inequality will decline (importance of growing middle class with increasing political power). 6. Empirical work conducted by the World Bank for the period show that those countries with open trade regimes grew at a 5.0% per capita rate. Nonglobalizing developing countries struggled through this period with a 1.4% per capita growth rate (David Dollar)=> trade does seem to create higher growth (but not necessarily development [Rodriguez & Rodrik]).

20 2. Balance of Payments - Exports (X) & Imports (M) B of P = PxX – PmM
Px = vector of prices of exports Pm = vector of prices of imports Surplus = excess of exports over imports Deficit = excess of imports over exports Merchandise trade account, service account, capital account, reserve account. 3. Exchange rates - def: The price of one nation's monetary unit in terms of the monetary unit of another country. - Foreign exchange market: A market in which buyers and sellers of bank deposits denominated in the monetary unit of many nations exchange their funds. - Exchange rates can be allowed to fluctuate freely, can be "managed" or can be pegged to the currency of a major trading partner. => Graph (1€:$1.20) Demand side - People who want to import European goods, invest in Europe, travel in Europe, or others who just want to hold Euros. … When North Americans demand more European cars, wine, or whatever, (D curve shifts right) the price of the Euro will rise in terms of dollars. Current account = +merchandise trade account +service account +interest payments +transfers (remittances)

21 Supply side - those who want to import goods into Europe from the US, invest in the US, travel in the US or just hold $. When Europeans demand more US cars or computers (S curve shifts right) the price (in $) of the Euro will tend to decline (S of Euros shifts r). Note: Size of the FOREX market: an average of $1.9 trillion crosses national borders each day. Appreciation and depreciation of a currency: When country A's currency becomes more valuable relative to country B's, country A's currency is said to appreciate relative to that of country B … and country B's currency is said to depreciate relative to that of country A. Determinants of Exchange Rates: 1. What determines the relative positions of S&D curves for currency? (a) Relative price levels - constantly changing (b) Relative rates of growth (c) Relative interest - rate levels (d) Expectations (Speculation)… (e) Random daily trade and financial flows…noise Note: Market exchange rates vs. PPP rates (purchasing power parity).

22 The Big Mac Index (7/2009) The Big Mac index is based on the theory of “purchasing-power parity”. Under PPP, exchange rates should adjust to equalize the price of a common basket of goods and services across countries. Our basket is the Big Mac. Video Clip Econ. 4132

23 An international organization of 27 European states
The European Union An international organization of 27 European states Members of the European Council


25 GDP Total (2008): $18.394trillion (nominal US dollars)
Population Total (2010): 501,259,840 GDP Total (2008): $18.394trillion (nominal US dollars) Note: Larger than US’s $14.2 trillion Per capita GDP (2008): $30,513 The EU economy is expected to grow further over the next decade as more countries join the union - especially considering that the new States are usually poorer than the EU average, and hence the expected fast GDP growth will help achieve the dynamic of the united Europe. However, GDP per capita growth for the whole Union will lag behind the US. In the long-term, the EU's economy suffers from below-replacement birth rate and a rapidly aging population in the context of generous social welfare systems. Good example of evolution of supranational institutions and working rules… Also a unique example of where institutions follow working rules. Levels of economic integration: Free trade area – each member has their own trade barriers (tariffs/quotas/regulations) with non-member nations yet have none between members. (e.g. NAFTA) Customs union – uniform trade barriers with non-members. (e.g. EEC)…only covers finished and semi-finished goods. Common market – free flow of factors of production between member nations.

26 Full economic integration – unified government. (e.g. USA)
Economic and monetary union – Supranational institutions power increases … common currency. (e.g. the Euro/EMU) Full economic integration – unified government. (e.g. USA) Economic effects resulting from economic integration: Trade creation – elimination of trade barriers generate gains => increasing the volume of imports from member nations – each country concentrates more on producing the goods in which it has a comparative advantage relative to other member nations (trade and GDP expands). Trade diversion – trade diverted away form lower-cost, non-member nation producers toward higher-cost member nation producers. Necessarily inefficient since purchase is made from a higher cost producer. 20 outside, 25 inside, 50% tariff…foreign good comes in at 30…demand diverted to higher cost internal producer

27 2008



30 Two descriptions of the EU…
One economy - comprised of the combination of member nations' economic performances (growth of GDP, trade flows, rates of unemployment, inflation, investment, etc.) Second pertains to the level of integration => 25 nations seeking to achieve the economic and monetary union level of integration. EU is comprised of four separate organizations: European Coal and Steel Community (ECSC) European Atomic Energy Community (Euratom) European Economic Community (EEC) European Central Bank – 1999 (EMU …euro)

31 In reality the four are one entity
... In reality the four are one entity. Members have surrendered some national sovereignty to supranational authorities. Treaty of Rome – 1957 Six signators: Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. Cornerstone of EU: established the goals and formal working rules which provided the basic tenets for European economic integration.

32 History… A united Europe was first proposed in 1834 by a group known as Young Europe. After WWI another unification group began calling for the establishment of a Pan-European Union. Neither resulted in EU yet established "important precedents" and helped promote the idea across Europe. More history - after WWII Europe was in ruins and in a weak position of global power vis a vi America and the USSR. Prominent European leaders began to push for the EU ('46 Churchill called for establishing a “United States of Europe”), Within a decade, formal means for unification came into existence (OECD, the Western European Union, the North Atlantic Treaty Organization (NATO), the Council of Europe, and the European Community). A gradual emergence of formal rules beginning with the ECSC (1951) - considered a success - led to formation of… …the EEC in intent was to promote economic integration "by means of four progressive harmonization processes.“ [1] Elimination of internal barriers to trade through removing customs barriers. [2] Achieve of a customs union through applying a common external tariff toward nonmember nations. [3] Establish of a common market by permitting the free flow of factors of production plus goods and services. [4] Attainment of further integration by adopting common policies (e.g. agricultural, competition, social, transportation).

33 Goal was to have a common market by 1970 (common working rules and policies should be implemented that applies to all aspects of economic and social life of member nations). Monetary Union (no provision for in the Treaty of Rome) - first proposed at the Hague Summit in 1969 with a proposed target date for full harmonization of macroeconomic and monetary policies. Proposed in response to a collective sense that they were still behind and that they had little control individually in the global economy. Global oil crisis of collapse of the Bretton Woods agreement => inflation and unstable exchange rates throughout Europe => 1979 the European Monetary System (EMS) established … designed to reduce currency fluctuations through an exchange-rate mechanism (keep exchange rates in bands). In 1986: signing of the Single European Act - agreement to enlarge the scope of economic and social cooperation to the monetary sphere. European Parliament established a commission to investigate and in Aug presented proposal for an Economic and Monetary Union (EMU) … primary purpose: to tighten coordination of economic and monetary policies throughout the EU.

34 Called for a common currency, a central bank and a single monetary policy, close coordination of fiscal policy, prohibition of monetizing public deficits, and avoidance of large fiscal deficits for all members. Approved by members in Maastrict Treaty: set target of 1/1/99. EMU went off without a hitch. More rapid adoption of the euro than expected – new bond issuance in euros initially (mergers and acquisitions). … Still, the euro was weaker than expected and fell below parity with the dollar in 2000 (in mid-2002 rose above parity and has stayed there since). Due almost totally to the fact that the European Central Bank kept interest rates relatively low. … While euros were initially used exclusively for government payments and financial markets in , they began to be substituted for national currencies on 1/1/2001 by being issued to the general public. 7. Need to turn our attention to outlining the major institutions of the European Union. First, let’s take a diagrammatic look at the evolution of the European Union:

35 Lisbon Treaty of 2009 = ?

36 The European Union has several major institutions:
1. The European Parliament… The European Parliament is one half of a bilateral legislature (the other half is the Council of the European Union). It has co-legislative power with the Council in most EU policy areas, able to accept, amend or reject proposals as it sees fit. Unique in that it is directly elected by the people and has legislative power. 2. The European Council… The European Council, sometimes informally called the European Summit, is a meeting of the heads of state or government of the European Union, and the President of the European Commission (picture at beginning of EU slides). 3. The Council of the European Union (or “Council of Ministers”)… Along with the European Parliament, the legislative arm of the European Union (EU). It contains ministers of the governments of each of the member-states of the EU. The Council of the European Union is sometimes referred to in official European Union documents simply as the Council, and it is often informally referred to as the Council of Ministers. 4. The European Commission… The European Commission (formally the Commission of the European Communities) is the “executive” of the European Union. The Commission is headed by a President (since 2004 José Manuel Barroso of Portugal). Its primary role is to propose legislation and to carry it out.

37 5. The European Court of Justice…
The ECJ is the supreme court of the European Union. It adjudicates on matters of interpretation of European law. 6. The European Court of Auditors… The Court of Auditors checks that all the Union's revenue has been received and all its expenditure incurred in a lawful and regular manner and that the EU budget has been managed soundly (their Treasury). There are several financial bodies, yet the most important is: 7. European Central Bank… The main goal of the ECB is to focus on price stability. In order to keep prices stable, the ECB may cut or raise interest rates. Decision-making procedures: … The decision-making procedure within EC institutions is significant, since working rules passed at the supranational level influence each member nation. … Prior to the Single European Act unanimity, was required for new initiatives or objectives, not majority rule. By the late 1980s, under the cooperation procedure specified in the Single European Act, qualified majority votes were to be taken when EC institutions passed certain measures, regulations or administration actions. The cooperation procedure has enhanced the efficiency and reduce time spent in decision-making at the EC level.

38 Important issues: Enlargement process – (accepting a new member or members) is important, for … [1] It increases the opportunity for trade creation while changing the political face of Europe. The Maastricht criteria establishes basic standards to be met by European countries if they seek to become full members of the EU. The economic criteria are: 1. Candidate countries must have price stability and an inflation rate of no more than 1.5 percentage points above the rate for the three EU countries with the lowest inflation over the previous year. In terms of budget deficit, a candidate must have a rate below 3 percent of its GDP. Its public debt must not exceed 60 percent of GDP, but if debt levels are in steady decline, it may be allowed to adopt the euro as its basic currency even though its debt level may be higher than this rate. The long-term interest rate should be no more than 2 percentage points above the rate in the three EU countries with the lowest interest rates over the previous year. The exchange rate of the currency of a candidate country should have stayed within certain pre-set margins of fluctuation for two years. The enlargement issue hinges on whether advantages to existing members in the form of trade creation, gains from greater specialization of labor, and a stronger political bond with European neighbors outweigh the disadvantages. Others democracy and human rights

39 … The latter include reduced political influence for each member, more social divergence within the EC, a larger agricultural sector (necessitating more funds to support the new member's agricultural sector), the possibility of trade diversion, and the threat of migration of labor if the applicant nation has high rates of unemployment plus lower wages than EC members. Nations seeking to join the EC recognize the potential economic benefits they can enjoy while increasing their political influence in world matters. New members must be committed to democratic political and economic institutions, and be accepted by vote of existing members. Common agricultural policy … costly yet politically expedient. Affects price and production decisions for most agricultural products. … Some goals of the policy are to enhance the EC's ability to lessen dependence on outside sources for its agricultural needs, reduce the risk of food shortages, continue farming as away of life for many people currently engaged in the agricultural sector, stabilize food prices, and protect farmers’ incomes. Interventionist measures, such as regulating the volume of imports, are employed to manipulate market prices to desired levels. Such measures are costly, accounting for almost two thirds of all EC expenditures.

40 William Chislett: Spain: Going Places, Economic, Political and Social Progress , Chapter #1: Overview ¿ What are Ceuta & Melilla? ¿ Are per capita GDP between Morocco and Spain similar to that between Mexico and the U.S.? ¿ What happened on October 2005 in Morocco? ¿ What are the major immigrant groups and how much do they contribute to Spain’s GDP? ¿ What is the E.U. Schengen Treaty? ¿ Does Spain have a demographic problem? ¿ How does regional public spending compare to federal government spending? ¿ What can you say about the Spanish Welfare State? ¿When are they going to run out of money? ¿Is their university education system a high quality system? ½ of GDP attributable to immigrants Regions make more than 50% of all public spending but of this only 19% comes from local tax revenue. They will hit a fiscal wall between : retirees are entitled to 81% of preretirement income. Public education is heavily subsidized (students pay 10% of cost), If you are laid off you receive a severance package equivalent to 56 weeks of pay plus you are entitled to 24 months of unemployment compensation. Public health is free…and there are numerous other perks (Pichu: 3 days paid leave if your mother is sick) Complutense – 88k: low quality, 90% of lecturers graduated from same university, underfunded, 40% dropout rate

41 ¿ Is their judiciary objective (separation of powers)?
¿What is the difference between Common Law and Civil Law Legal Systems? The Morning After, The Economist, November 6, 2008     ¿ Which country has been the single largest beneficiary of EU regional funds? ¿What happened to interest rates after Spain joined the Euro zone in 1999? ¿ In the current crisis have there been any financial problems with the big Spanish banks? ¿Why might Spain have an “L-shaped depression?” Zapatero’s Gambits, The Economist, November 6, 2008 ¿ How and why did Zapatero challenge the “pact of silence”, attempt to make peace with ETA and co-opt the Catalan Socialist Party? How Much is Enough? The Economist, November 6, 2008 ¿Café para todos: 17 autonomous communities…is this a good idea and has it worked? Unemployment rising, current account deficit is > 10%, EU funds are no longer flowing and public finances are deteriorating markedly, low productivity, redirection of FDI to Eastern Europe…need structural changes.

42 ¿What is the 2007 Law of Budgetary Stability?
William Chislett: Spain: Going Places, Economic, Political and Social Progress , Chapter #2: The Economy ¿Between 1985 and 2007 by how much did Spain’s per capita GDP increase. And what does Chislett say is the cause of this? ¿How big is Spain’s current account deficit…and how does he suggest this being addressed in the future? ¿What is exchange rate risk and how did it change once Spain joined the EMU…and what was its immediate effect? ¿ How does the ECB determine interest rate policy and what effect has this had on Spain? ¿How high is household indebtedness in Spain…and what about corporate indebtedness? ¿And what about the central governments finances…are they in bad shape…what has driven this change? ¿What is the 2007 Law of Budgetary Stability? ¿What’s been going on with national debt? 1. Tripled…persistent free market reforms, 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. 2. adjustment will eventually have to come through other channels, notably in wages and prices and increasing productivity. 4. 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…too expansionary for Spain. 5. 130%... 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 Corporate debt was at a record high in 2007 (106% of GDP in 2006, compared with a Euro zone average of 70%. 6. 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…tax revenue not expenditures. 7. 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. 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 (1% of GDP). 7. 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… 2011 = 54% (still lower than most in Europe) in 2006…has earned Spain the coveted Aaa rating by Moody’s and S&P…dropped to AA+ in 1/2009 due to rapidly deteriorating public finances (US = 83% as of 2009)…Credit-default swaps on Spain’s debt rose 5 basis points to a record 137

43 ¿Is Spain a competitive economy…what needs to be done to change this?
¿ What does he say has been driving Spain’s relatively higher rate of inflation? ¿ Has Spain benefited from the EU’s Structural and Cohesion Funds…and will this continue? ¿Is Spain a competitive economy…what needs to be done to change this? ¿How does Jaime Caruana (former head of the Bank of Spain) suggest a current account deficit might be resolved within a currency union? ¿ Does Spain trade much with the US…who are their largest trading partners and which firms do most of the exporting? Banks, Bricks and Mortar, The Economist, November 6, 2008 ¿ Spain has two giant banks, Sandander and BBVA, a handfull of smaller banks, and 45 cajas (largest is La Caixa). Which segment is in financial trouble? ¿The default rate is low…2.9%...why is unlikely to go higher? ¿What’s been the most visible effect of the global financial crisis within the Spanish economy? Mainly oil of late…real wages have been falling…plus lower than average productivity gains (talk about role of productivity) 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…represented 0.8% of the annual GDP until 2006 and a maximum of 1.6% in 2003…€118 billion…Spain’s per capita GDP rose from 72% of the EU-15 average in 1986 to 91.7% in 2007 in purchasing power standards…longer qualifies for Cohesion Funds…Spain will remain a net recipient until 2013. 3. No…ranks 31 out of 55 countries (IMD’s competitiveness) 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 labor market regulations and lower corporate taxation. Spain’s labor costs have risen significantly over the past decade; the country is no longer a low-cost manufacturer and cannot compete…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. 4. “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.” 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…a private, not public, sector cause…in the end there will be reduced access to credit and lower investment. 5. No…4% of exports go to US…or .5% of US imports are from Spain…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). Banks… 1. the cajas: 2/3 of loans are mortgages, 12% are to developers and building firms. 2. loan-to-value ratio of 80% for La Caixa…50% on average: Spanish banks insist on guarantees…also, homeowners are liable for mortgage payments even if they turn in their keys…finally, when laid off they get severance package + 80% of their pay for 18 months. 3. Higher interest rates: government paying 100 basis points more than before…businesses 300 basis points more => credit squeeze

44 In Search of a New Economy, The Economist, November 6, 2008
¿What is Spain’s “new economic model”? ¿What green technology has Spain invested heavily in? ¿What has the rate of growth in Spanish productivity in recent years and what does the article say are the cause of its “plodding productivity”? ¿What does the article suggest is the best hope for recovery? A Cooler Welcome, The Economist, November 6, 2008 ¿Talk about the history of immigration/emigration in Spain…and what groups have been arriving on Spanish shores over the past 10 years? ¿Why hasn’t there been a backlash against foreigners? ¿Why wasn’t their an increase in Islamophobia after the 2004 bombings against the 1.1 million Muslims in the country? Public spending on R&D has tripled since 2000…yet is still low by OECD standards (10% UK or Germany’s spending)…prob. Translating r&d into patents Wind and solar (renewable energy)… 22% of its electricity Productivity … level: = .3% per year (1/3 of EU average), OECD => = -.2%, low innovation/R&D, Spanish education, too much red tape, internal transportation costs (all by road), inefficient and slow judiciary (archaic civil law sytem…stuck in Franco days + politics), labor mkt rigidities. (30% of employment governed by temporary contracts) Its multinational corporations A cooler welcome: More have come than for any other country in the world save the US. History of emigration still remembered, many from south america (same language, culture), they know that the social security system paid for by the immigrants, not a sense that immigrants are straining public services (although they are the public school system) They are seen as “exceptionally moderate and well-integrated”

45 ¿ Is the agricultural sector of Spain large…and is it important?
William Chislett: Spain: Going Places, Economic, Political and Social Progress , Chapter #3: Main Economic Sectors ¿ Is the agricultural sector of Spain large…and is it important? ¿ Name one Spanish carmaker…so is the automotive industry unimportant…and what development have there been of late in this industry? ¿What is Spain’s national bird?...the “crane”…the building crane. ¿How has this industry figured in Spain’s economic landscape over the past decade or so? ¿ What are the nine factors propelled the domestic property market? ¿Are real estate transactions cost high in Spain? ¿Has the government tried to slow down the inflation bubble? ¿What are the construction companies exposure to the domestic market and have they done anything to diversify operations? ¿Is tourism important to the Spanish economy…and what can you say about this sector’s competitiveness, changes over time and likely development in the coming years? no, 4% of GDP and, yes, it is important…run a trade surplus (1/6th of exports), widest array of goods produced in EU, second-largest beneficiary of funds from the Common Agricultural Policy (CAP) after France, drip ag in sw: Israel method, wine (3rd largest global producer), in fisheries, Spain has the largest share of the EU fishing fleet in terms of tonnage and number of vessels (changes in this industry…EU limits…still largest recipient of subsidies). world’s eighth-largest producer of cars, generates around 5% of GDP, all the producers in the country are foreign multinationals (Ford, Nissan, General Motors, Peugeot Citroën, Mercedes Benz, Renault, Santana and Iveco. Directly or indirectly 9% of the working population. Firms are shifting operations to lower cost nations. 3. The sector has become one of the mainstays of the Spanish economy, both in terms of activity and job creation (about 33% of new jobs in recent years). It directly employs more than 2.5 million workers (14% of the labor force, double the Euro zone average) and generates more than 17% of GDP. Has a large multiplier effect. The driving force is residential construction. 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 annualized growth in house prices, falling sales of homes, jitters in the share prices of some of the main companies: a massive bubble that is bursting. 4. 1) low nominal interest rates 2) the 10% rise in the population in the 2000s (immigrants) 3) increasing purchases of second homes by foreigners 4) late baby boom after Franco now in household formation mode 5) increase in the female participation rate has raised the number of two income households, making purchases more affordable for couples 6) rise in disposable income 7) investment in alternative assets, such as housing, after the downturn in the stock market in 2001 and ) very favorable tax treatment of house purchases 9) the very restrictive legal environment for house renting (rent ceilings and renters' rights). And I would add availability of credit (40 yr. mortgages) 5. Yes: 12.16%...UK=5.03% and US=9.07%...transfer tax alone is 9% 6. Yes, new Land Law came into effect in July 2007…targets local governments activities to fill their coffers by selling land (10% of new zone goes to municipalities under old laws)…a tax: some of the $ must go to subsidized housing, public spaces and other infrastructure. 7. 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%). 8. Spain is the world’s second-largest tourism destination in terms of arrivals and receipts. The sector employs around 2 million people (10% of employment), generates around 12% of GDP and its surplus has kept the current account deficit from ballooning even more.

46 ¿ Are they doing anything to diversity their energy dependency?
¿ Does Spain have a water problem…and has the government done anything about it? ¿ Is Spain energy independent and are they efficient in their use of energy? ¿ Are they doing anything to diversity their energy dependency? ¿ Is the energy market competitive in Spain? ¿ What can you say about Spain’s telecommunications market. Is Telefónica a monopoly? ¿What are the names of Spain’s 2 largest banks and how has this industry developed over the past two decades? ¿What is the IBEX-35? ¿And what is Latibex? The Spanish Legion, The Economist, November 6, 2008 ¿What have been the three factors contributing to Banco Santander’s success? ¿ Have they been sitting out the current credit crisis? Yes, to suffer the most from “drought, reduced soil fertility, fire and other climate-change driven factors.” One- third of the country is already affected by desertification. Agriculture is by far the largest consumer of water (around two-thirds), although it only generates 3% of GDP. Prices are lower than they should be. Aquifers are dropping. Plan to divert portion of flow of Ebro River…stiff opposition from 17 regional governments over water rights. Socialist abandoned plan…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. 2. Spain is heavily dependent on imported energy and thus vulnerable to fluctuations in international oil and gas prices. Demand has been rising quickly due to higher incomes and development. Spain’s energy intensity is still one of the highest among the EU-15. 3. 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. 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. Iberdrola became the world’s biggest producer of power from wind turbines. 4. Although legally open to competition since 2003, 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%. 5. 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. Telefónica was a monopoly until the mid-90s. Now there are dozens of operators of one type or another: fixed network and mobile operators, infrastructure and voice services, data and internet services. The entry of France Telecom in 2005 (Orange) significantly 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. 6. Santander, the Euro zone’s largest bank by market capitalization and the world’s eighth largest, and Banco Bilbao Vizcaya Argentaria (BBVA). 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. Santander and BBVA have moved operations aggressively in LA over he past 15 years. 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. Foreign banks in Spain have a very small share of the retail banking market. 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. Spanish banks are consistently ranked among the most efficient in the world (embracing technology and reducing employees: efficient and profitable)…solvency of commercial banks is strong. The Bank of Spain, the unsung hero of the country’s economic transformation, has long enforced a very prudent policy for loan-loss provisions (due to crisis back in the late 70s). 7. 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 capitalization and turnover. 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 (Santander, BBVA, Telefónica, Endesa, Repsol YPF and Iberdrola). 8. Latibex, the euro market for blue chip Latin American shares and fixed-income securities, began to operate at the end of 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. The Spanish Legion Excellent execution, sticking with commercial banking, lack of big mistakes…only 35% of revenue comes from within Spain No, pecking at the banking carrion…Sovereign Bancorp in US Diversification before current crisis

47 The Perils of Parochialism, The Economist, November 6, 2008
¿ What does the article suggest has been a common theme of all Spanish multinationals that have contributed to their relative success? The Perils of Parochialism, The Economist, November 6, 2008 ¿Is Spain an outward-looking country? ¿ How does the article suggest this might change? Spain’s Property Crash: Builders’ Nightmare, The Economist, December 4, 2008 ¿Does this sound familiar: “…, some still find it hard to grasp that prices can ever fall.”? ¿What factors are at work that are driving housing prices in Spain? Victor Mallet, Spain’s Recession: After the Fiesta, Financial Times, February 17, 2009. ¿ What level might unemployment hit this year, and the budget deficit and the fall in real GDP for 2010? ¿ What does every chief executive, orthodox economist and rightwing opposition politician conclude is the only way for Spain to emerge stronger from the crisis…and how likely will this happen? diversification…examples on second page, second paragraph…and arriving in the EU just as new technology was available (jump on competition) The Perils of Parochialism It would seem so given the foreign policies of Gonzalez and Aznar (less so Zapatero)…but in fact Spain suffers from “exaggerated localism” that is becoming a weakness. Starting in 2013 they will become a net contributor to EU funds…and early next year they will hold the EU presidency. Also, article suggests they need to amend their constitution to formally embrace federalism…and the solution for Spain’s future growth will demand pushing through unpleasant reforms and and even more outward looking bias. Spain’s Property Crash: Builders’ Nightmare Continued building of new homes, rising unemployment, credit squeeze, many construction groups are highly indebted and are dumping new houses on the market well below asking price (Martinsa-Fadesa backruptcy…largest in Spanish history). Mallet article: 19%, 6.5%, of the steepest in Europe Improved productivity and competiveness by adopting structural reforms (mainly labor market reforms…although R&D important for the long term)

48 ¿Weekly quotas for arresting illegal immigrants? Comment.
¿What is a “monoculture” and what does the tile industry of Villarreal have to do with this? Thomas Catan, Spain Largely Avoids Unrest Evan as Economy Slumps, Wall Street Journal, May 4,2009 ¿Weekly quotas for arresting illegal immigrants? Comment. ¿What is the reason the article cites for why Spaniards haven’t taken to the streets to defend their economic interests? ¿ How does the Spanish family figure into the lack of unrest? ¿ How big is Spain’s underground or “black” economy and what role does it play in downturn? ¿ What European nation has seen the most protests over the global economic crisis…and is noted as an exception? Talk about “Dutch disease”…strong multiplier effects Thomas Catan, Spain Largely Avoids Unrest Evan as Economy Slumps, Wall Street Journal, May 4,2009 1. The very factors that make some European economics sluggish and inflexible during times of plenty also help cushion the impact of a downturn: rigid labor laws creating virtually guaranteed jobs, social welfare system, lavish government subsidies. Family members don't move far from home (labor immobility => lower productivity) Families are “a lifeline”…help one another pay the mortgage, if someone loses a house they move in with family…forms a back-stop social-welfare network Up to 20% of Spanish economy…gives many Spaniards secret, undeclared sources of income…cushions economic blow. Greece…20% live below poverty line, high-youth unemployment…clashes and rioting in Dec. 08

49 ¿ What Spanish firm has the largest operations in LA?
William Chislett: Spain: Going Places, Economic, Political and Social Progress , Chapter #5: Spanish Direct Investment in Latin America (LA) ¿ What four major LA sectors have Spanish firms heavily invested in…and what percent of earnings come from the region? ¿ What Spanish firm has the largest operations in LA? ¿Why have Spanish firms moved into this particular region of the global economy? ¿ What country made more FDI than Spain in the early 2000s? ¿ Which LA country has the greatest amount of Spanish investment. Why? ¿ In what sector does Spain make little investment…and is this good or bad? ¿ When did Spanish FDI peak…and why hasn’t it risen to its former lofty level? ¿ What happened after the Spanish American War of 1898 regarding FDI in LA? ¿ Has the move into LA been good for Spanish companies? ¿Role of Latibex? William Chislett 1. 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. 2. 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 (Exhibit 5.1) share of Latin America’s telephony market (fixed and mobile) is around 25%. 1. 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 privatization of state companies, economic liberalization, greatly improved macroeconomic fundamentals after the ‘lost decade’. (what was that?) 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. 2. 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. Brazil has the largest stock of Spanish investment in Latin America. 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. In 2000 at the time Repsol bought YPF (nationalized Argentine energy firm) then Spanish firms got burned: 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…largest sovereign default in history 155 billion…Spanish economy hardly effected: provisioning…Bank of Spain’s “proactive role in promoting conservative risk management practices. 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. 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. Yes, mainly because the region has remained macro-economically and politically stable since around 1990…but the region is still very vulnerable to the outside world due to its dependence on commodity exports (and low quality manufactured goods), low investment in human capital (only 18% finish high school), high level of corruption (due to Spanish colonial legacy) and persistent balance of payments deficits….note: book written before current crisis and LA is suffering which will feed into Spanish multinational earnings and profits…political risk rising (history of populism) 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 (bovespa) and Mexico City (bolsa)

50 ¿ What worries Spanish multinational about the region?
¿How important is Spanish banking in the region? ¿ Does Spain have too many eggs in the Latin American basket…and are they doing anything about it? Two-tier flexibility, The Economist, July 9, 2009. ¿What can you say about Spain’s two tier labor market? ¿Why did it come about? ¿What is the “Red Line” Zapatero said his government would not cross? ¿Toni Ferrer is quoted as saying “The problem is not labor regulation”: what do you think? Spain's growing budget deficit: Taxing times, The Economist, September 10, 2009 ¿How does the article suggest Zapatero will raise taxes? ¿Has Zapatero shown much of an appetite for long-term spending cuts? 8. The left-wing nationalist tone adopted by the governments of Bolivia, Ecuador and Venezuela is worrying foreign investors…“falling further behind other regions in the pace of reform” 9. 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…they went on their acquisition trail in the 1990s…very undeveloped financial markets to build and profit from…and coincided with the upsurge in FDI to region that they could profit from by providing intermediation. 10. 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…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, Two-tier flexibility, The Economist, July 9, 2009. 2. Labor market reform that will make it easier for employers to lay off privileged, full-time workers. Spain's growing budget deficit: Taxing times, The Economist, September 10, 2009 alcohol, tobacco, gas and capital gains (18%...below top Y tax rate of 43%). Not at the time this article was printed…promises to increase spending in 2010.

51 ¿What does the article suggest is forcing fiscal retrenchment?
Spain's economic troubles: Unsustainable, The Economist, November 26, 2009 A couple of our articles suggest that Spain entered the current economic crisis in worse shape than other EU countries. ¿Why? ¿What was the “sustainability economy” law Zapatero introduced into the Cortes late 2009 and what approach did it reflect the Zapatero government was taking in tackling Spain’s economic problems? ¿What does the article suggest is forcing fiscal retrenchment? ¿What is Elena Salgado, the new finance minister, doing to respond? The property bubble bursting in 2007: got drunk of bricks and mortar: over 1 million recently constructed homes stand empty. Long on good intentions and short of tough measures: renewable energy, modest liberalization and more training…no big, structural changes. The shocking deterioration in public finances >10% Putting the breaks on fiscal expansion (this was late 2009): tax increases and slowdown in pubic spending…though infrastructure continues to receive more money: Europe’s most extensive high-speed rail system: part of Zapatero’s new sustainable economy. As part of a range of deficit-cutting austerity measures, Spain will increase its VAT rate from 16% to 18% from 1 July 2010.

52 ¿ In 2007 where did Spain rank regarding FDI in the United States?
William Chislett: Spain: Going Places, Economic, Political and Social Progress , Chapter #6: {Only} United States: On the Rise…pp ¿ In 2007 where did Spain rank regarding FDI in the United States? ¿ What industry does the bulk of US FDI go into? ¿ How and when did Spain move into the US M&A market? ¿ What is the company EADS better known as? ¿ What other Spanish companies in America stories did you find interesting? ¿Have the Spanish banks moved into the US market like they did in Latin America…why or why not? ¿Are Santander and BBVA strategies in the US similar? ¿In what US city will you find the most Spanish businesses…and why? Fourth…22 billion Financials…1/2 of the total 3. 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-of-the-art plant for flat-rolled products. It has around one-quarter of the stainlesshot and cold sheet and strip market in the US and more than 40% of the plate market. Telefónica blazed a trail in 1999 when it bought the internet portal Lycos for a whopping $12.5 billion …Afterwards, Lycos went bust and Telefónica sold the US part of this business for a paltry $105 million in 2004. 5. Airbus…producer of C-212, CN- 235 and C-295 turboprop transport aircraft 4. Indra, Spain’s leading information technologies and defense systems company…supply full mission simulators, radar trainers and test programme sets for the AV-8B+ Harrier combat aircraft…only non-American company selected as a prime contractor for the US Navy. 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. 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. Ferrovial (Cintra), 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 $1.8billion and also paid $3.8 billion to operate the Indiana Toll Road under a 75-year concession. 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. 6. 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. 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. 7. Yes, 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 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. 8. 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 9. 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. Story starts in manufacturing (autos) and increasingly into services…on a downward path since 2002

53 Spanish banks: Savings and groans, The Economist, November 19, 2009
¿How would you characterize the ownership structure of the Cajas…and comment on their market strategy over the past 10 years? ¿What percentage of outstanding loans are non-performing ? ¿What does Spain’s central bank governor, Miguel Fernández Ordóñez, predicts will happen to the cajas? ¿Is the state of the cajas feeding into the Spanish credit crunch? Richard Barley, Spain's Problem is Growth, Not Its Deficit, Wall Street Journal, February 18,2010 ¿Does Spain have any fiscal credibility? ¿ Does Spain have any economic strengths? Zapatero's stability plan indicates that Spain’s nominal GDP growth of 3.3% in 2011, 4.9% in 2012 and 5.2% in ¿So what’s the problem? Spanish banks: Savings and groans, The Economist, November 19, 2009 Mutually owned and controlled by a mix of depositors, employees and local politicians…since the 1960s they have increase mkt share from 10% to 50% by opening branches and moving into people and businesses ignored by market leaders (higher risk, lower margins) In 11/09 at 5.2% and could rise to 10%...hidden losses by moving around non-performing loans. At least a third of the country’s cajas will have been absorbed by stronger institutions by next spring (2010) semi-paralysis in the caja sector means less credit and a more protracted recovery for all. Total loan volumes in the system could shrink by 10% between 2009 and 2011 Richard Barley, Spain's Problem is Growth, Not Its Deficit It was the private sector that built up debt in the boom years. The government's debt-to-GDP ratio fell steadily, reaching 40% by Spain has already announced tax hikes for 2010, including a two-percentage-point rise in the value-added tax and higher capital-gains taxes. 2. The economy is rebalancing: the current account deficit nearly halved in the first nine months of 2009 against the same period of 2008, and imports have fallen sharply. Major banks are just fine (BOS fiscal prudence) 3. What could damage confidence in Spain is a lack of growth: the country's growth model of construction, property and leverage has been discredited by the financial crisis.

54 ¿What are the three options most economists see for Spain?
Stephen Fidler, The Euro's Next Battleground: Spain, Wall Street Journal, February 24,2010 ¿Why does Desmond Lachman say that “Spain is the real test case for the euro <zone>”? ¿What are the three options most economists see for Spain? ¿What would happen if Spain chose option #3? ¿What does Lorenzo Bernaldo de Quirós mean when he says, Spaniards still "think like Cubans and live like Yankees.“ Talk about the difference between public and private debt in Spain. ¿Where did the debt explosion originate and how bad has it become? ¿The article states that for years to come Spain will be at the mercy of what? ¿And what will determine that mercy…or punishment? Any bailout for Spain—whose $1.6 trillion economy is nearly double those of troubled euro-zone partners Greece, Portugal and Ireland combined—would be far costlier. A "shock and awe" infusion aimed at renewing faith in Spain's finances, should it be necessary, would take roughly $270 billion, according to an estimate by BNP Paribas. It estimates similar confidence-restoring moves in Greece, Ireland or Portugal would require $68 billion, $47 billion and $41 billion, respectively. 2. The first is for the government to do nothing, leaving the economy to wallow through years of high unemployment and debt defaults. The second is for the government to take a more active role, slashing its spending while taking unpopular measures to boost the supply side of the economy, including overhauling a rigid labor market. Third option: splitting the euro zone asunder by withdrawing from the common currency. That would permit a devaluation that would, at a stroke, increase Spain's competitiveness and allow the economy to grow again. 3. financial chaos such a move would unleash. "It's extremely costly to leave the euro," said Jean Pisani-Ferry of Bruegel, a pro-European think tank in Brussels. The moment a government hinted at a possible devaluation, there would be a run on the banks and an effective default on every euro financial contract with that country. "The day you start to admit that you're thinking about it, you're in a financial mess.“ 5. The housing bust shows how Spain differs from Greece in the current crisis. Economists say Greece's troubles stem from its profligate government. Madrid ran budget surpluses for years— but Spain's private sector went on a debt fueled spending binge. Spanish private and public debt rose an average of 14.5% a year from 2000 to 2008, according to McKinsey Global Institute. Total debt peaked at the end of 2008 at $4.9 trillion, or 342% of GDP—a higher percentage than the level in the U.S. and most major economies except Britain and Japan. Six-sevenths of that is owed by the private sector. 6. For years to come, Spain will largely be at the mercy of wary bond investors to finance its governments, banks and companies…investors' worries will ebb and flow over what he calls "a real risk of default" as they await decisive government action.

55 ¿ Why is a country’s “brand” important?
William Chislett: Spain: Going Places, Economic, Political and Social Progress , Chapter #8: An Image out of Sync with the Country’s Reality ¿ How is Spain viewed in the world and why is this “out of sync” with the reality of Spain? ¿ What is the “Leyenda Negra”? ¿ Why is a country’s “brand” important? ¿ What are Spain’s top corporate brand names? ¿ In what category does Spain rank highest in the Anholt Nations Brand Index? ¿ In the US the word Spanish is synonymous with what other word? ¿ Does Spain have a positive image in Latin America? ¿How does co-branding work and will it help Spain? ¿ Is there any resistance within Spain to the promotion of a national image? land of fiesta and siesta…world’s seventh-largest economy and sixth-largest net investor abroad. Cruel, intolerant and fanatical…imperial Spain period 2. 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. 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. Zara (1)…Telefónica and Santander (don’t have big enough footprint) Tourism (4th place) 5..Hispanic…44 million and accounts for 15% of the total US population…growing three times faster than the US population…largest minority group…complicates the promotion of Spain’s image… 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. 6. No…nuevos conquistadores: 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…seen as “public goods” that belong to the people and should be provided by gov’t…difficult for Spanish companies to enhance their image/ brand in Latin America and shake off the ‘Black Legend’ (leyenda negra)…telefonica and sandander: corporate social responsibility programs. 7. Yes, Promoting the Spain brand does not sit well with all of Spain’s 17 autonomous regions, particularly the Catalans and the Basques…socialist put PP plans on ice.

56 Country Report: Spain, Economist Intelligence Unit, London, April 2010
¿Have the PSOEs difficulties favored the PP? ¿ Does the EIU think that the Stability Program, announced last fall and expanded upon and approved this past spring by the Cortes, will reign in the government’s deficit? The Spanish government established a “special commission” to explore cross-party agreements on economic policy measures. ¿Does the EIU think this commission will produce solutions to Spain’s problems? I said early in the semester that an indebted nation needs to run a trade surplus to be in a position to service it’s external debt. ¿Does the EIU think Spain’s dramatic reduction in the current account deficit between 2008 and 2009 will produce such a trade surplus? Mapping the EU's debt, jobs and growth worries It is clear that Spain has major economic, social and political challenges ahead that will play out in a dramatic fashion over the next 10 years. It will be interesting to follow the unfolding developments in this fascinating country. But, whatever happens, keep in mind how far Spain has come since Franco died in 1975… Country Report: Spain, Economist Intelligence Unit, London, April 2010 1. although the PP is now clearly ahead in the opinion polls and has recently outlined its policy proposals in more detail, it has yet to emerge as a credible alternative Government and remains embroiled in political scandals and financial investigations, 2. The public finances will remain deeply in deficit in Following a deficit of 11.4% of GDP in 2009, as a result of expansionary fiscal policy as well as lower revenue owing to the economic downturn, the deficit is forecast to worsen slightly in 2010, to 11.5% of GDP, as tax revenue remains weak and unemployment continues to rise. The 2010 budget includes a cut in central government spending of 3.9%, although the Economist Intelligence Unit expects that total government spending will continue to grow by a small margin. We forecast that public debt will rise from 55.2% of GDP in 2009 to 77.2% of GDP at end-2011. 3. it seems unlikely to produce far-reaching agreements. The main demand of both the PP and the moderate Catalan nationalist party, Convergence and Union (CiU), is that the government revoke its decision to hike VAT rates in July. The government has refused to do this, thus reducing the scope for a major accord. The commission will not address major reforms of the labor market, the tax system or the financial system, and seems unlikely to consider a cross-party agreement on public-sector pay. 4. achieved largely through a slump in domestic demand and imports, rather than improving export demand. Indeed, merchandise export earnings fell by 16% in 2009, while the value of import payments was down by 26%. Nonetheless, the deficit still stood at 5% of GDP in 2009, huge by historical standards, and its financing remains a challenge. Indeed, since the credit crisis began in 2007, much of the required external financing has been in the form of loans to the banking system from the European Central Bank (ECB). This is not sustainable, especially since the ECB will gradually end its special lending facilities in

Top 10 Seventh-largest OECD economy Top 10 Sixth-largest net investor abroad ( ) Top 10 Eighth-largest recipient of foreign direct investment ( ) Top 10 Eighth-longest life expectancy at birth, sixth for women Top 10 Tenth-largest number of immigrants in the world (2005) Top 20 Sixteenth in the EIU’s Democracy Index, ahead of the US Top 25 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 Top 25 13th in the United Nations’ Human Development Index Top 30 27th in the Index of Economic Freedom, well ahead of France Top 30 30th in IMD’s competitiveness index El Fin

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