It is a mistake to lump Spain in with Portugal, Italy, Ireland and Greece as a fiscal failure like the other PIIGs

by Joost de Jong

I must protest. I am tired of the endless repetition of news flashes listing Spain among European economies destined to collapse and destroy the euro. Spain simply does not belong on this list.

Sure, the Greek economy is in pain. And frankly, they are low on my sympathy list. Greece has been holding the EU hostage for decades, blatantly trading cash for votes back in the days when unanimous assent was still required. Besides tourism, the country has little in the way of foreign earnings potential. It has virtually no industrial base. Besides, official mismanagement is widespread and corruption the order of the day. It has become the ambition of many a young Greek to find a government job as soon as possible, which will secure employment and early retirement. Clearly, this is not the basis for sustainable economic growth.

Spain, however, is an entirely different kettle of fish. First, let me point out the bad. Indeed, the nation had become over dependent on the construction of new homes. Semi-abandoned developments Spanish coast sequined the Spanish coast. Finished but empty, they slowly rot away as no buyers can be found at any price. Most of them will never be sold. Poor construction and lack of imagination will destine many of them to be converted to social housing for the destitute, provided that enough people that far down on their luck can be found.

Similarly, the major Spanish cities, like Madrid and Barcelona, are girt with newly developed neighbourhoods where nobody wants to live. The town halls, largely funded by the taxes on property sales and new construction, are broke. House prices are plunging precipitously. Furthermore, capital is scarce, and Spanish labor laws provide almost overwhelming reasons not to hire staff. Unsurprisingly, unemployment is hovering near 20 percent. Even higher in regions where construction and tourism are the major or often the only employer.

And yet, the Spanish economy has some bright spots. Unlike the other PIIG nations with which it is lumped together, Spain has a multi-polar economy which is able to provide a solid foundation for growth. Rather than one large business center near the capital, Spain can boast of multiple industrial regions like those around Barcelona, Bilbao, and Madrid. Rather than just manufacturing, the nation also has a solid presence in technology, medicine, education, agriculture, and telecommunications.

It certainly is no longer the poor country that depends on tourism to make ends meet. Go to Madrid or Barcelona, and you will find busy and active cities where commerce and investment are the rule of the day. The business climate in these cities is positive, and a far cry from what one would find in Athens or Lisbon, or even Rome, for that matter.

Another key differentiator from the PIIG nations is that the Spanish government is relatively effective, and become more so over the last decade. The Madrid-based central government is generally pragmatic, and the national debt hovers somewhere near the high of 70% of GDP. Although public expenditures and borrowing is still rising, the nations’ tax base is large. Whereas few declare their full income in Greece, the Spanish government is quite able to collect the taxes that are owed.

Although nowhere near as efficient as the tax collectors of Germany and the masters of the art in the Netherlands, Spain does collect its dues. Most important among all taxes is the Value Added Tax, here know as the IVA. It is the one tax that is almost unavoidable. Enforcement is swift. It is slated to increase from 16% to 18% this July, a large receipt increase for the central government.

Another positive point is the state of Spanish banks. In the good years, they were forced to place large reserves with the central bank. Now that they are in the winter of their discontent, these reserves serve them well. Few banks are truly in trouble. The major ones have taken advantage of this time to improve their competitive position. Those that are in trouble are mostly the smaller community owned “Cajas de Ahorros” or savings banks. These often have large exposures to the construction industry, and if at the risk of becoming insolvent, are forcibly fused together without incurring risk or major inconvenience to their depositors. There have been no runs on the banks here.

Lastly, the Spanish are a proud and industrious people. An unemployed Spaniard is rarely truly unemployed. There is a lively culture of small business, family owned enterprise, and private investment.

Unemployment benefits are often seen as a small subsidy towards these activities. So, discount the official figures. In reality, small business in Spain is subject to few regulations, that is, to enforced regulations. Small business is the source of Spain’s development, and the government is smart enough to wait until they become a little larger before applying taxes and strictures.

All in all, Spain is a country that has a far broader economic foundation than the other nations with which it has been repeatedly compared. It is a misfit on the misfit list. Although definitely struggling at the moment, it has both the commercial ingredients as well as the public management in place to ride out this economic storm and return to growth.

iTulip Select: The Investment Thesis for the Next Cycle™
__________________________________________________

To receive the iTulip Newsletter/Alerts, Join our FREE Email Mailing List

To join iTulip forum community FREE, click here for how to register.

Copyright © iTulip, Inc. 1998 - 2010 All Rights Reserved

All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer