SPAINFINANCIAL TIMES SPECIAL REPORT | Friday June 17 2011 Page 3

TravelSectortries totrade onculturalattractions

www.ft.com/spain­2011 | twitter.com/ftreports

Hard slog to reach sunlit uplands Inside this issueBankingTheSpanishsystem isundergoingone of thebiggestupheavalsin its modern historyPage 2

Economy Ministers areconvinced they have doneenough to stave off adisastrous collapse ofconfidence in theeurozone’s fourth­largesteconomy Page 3

Property With such alarge overhang ofreal estate, the chances ofa meaningful recovery inthe medium term remainslim Page 3

EducationFew candeny theextent ofSpain’syoung,jobless‘lost

generation’, as tens ofthousands graduate into astagnant economy Page 4

Cuisine The country’sculinary prowess is finallybeing recognised by thecognoscenti Page 4

Guest columnSecessionists tend toignore the economic tiesthat bind Catalonia to therest of the country Page 4

More on FT.ComPalomaAlmogueraprovides ayoungperson’sopinion onwhereeverythingwent wrong

www.ft.com/spain­2011

A fter three years of economiccrisis and seven years ofSocialist party rule underJosé Luis Rodríguez Zapatero,

the prime minister, Spain looks set fora change of course.

The defeat of the Socialists inregional and local elections on May 22was so comprehensive that the right-wing Popular party is the strongfavourite to win the general electionthat must be held within a year – per-haps even with an absolute majoritythat would allow it to govern withoutsupport from small regional parties.

The local polls were preceded by anunexpected outburst of youth demon-strations.

Collectively known as the “May 15movement”, from the day on which themobilisation was launched, the protest-ers occupied town centres, includingPuerta del Sol, a square in the heart ofMadrid, the capital, to complain abouta youth unemployment rate of 45 percent and the domination of politics bythe two main parties.

The movement was a sign of frustra-tion with the grim state of the jobmarket and with the austerity pro-gramme belatedly and reluctantlyimposed by Mr Zapatero, but seemedtoo amorphous to mount a serious chal-lenge to Spain’s entrenched, bipartisanpolitical system.

The next election, then, will pitchMariano Rajoy, the PP leader, againstthe Socialists’ Alfredo Pérez Rubalcaba,the interior minister and chosen candi-date of Mr Zapatero, who will stepdown after two terms.

No date has yet been fixed, althoughMr Rajoy has called for an early elec-tion. It would take an extraordinarypolitical upheaval to overcome the dis-advantages of incumbency that weighon the current government.

Neither Labour’s Gordon Brown inthe UK nor the Portuguese SocialistJosé Sócrates could avoid defeat intheir encounters with the voters afteryears of crisis.

Whoever wins will face a dauntingtask over their four-year term. The

challenge is to reduce unemployment –at 21 per cent of the workforce, the rateis double the European Union average– by ensuring that the anaemic econ-omy continues to grow.

At the same time, however, Spainneeds to convince the sovereign bondmarkets that it will not go the way ofGreece, Ireland and Portugal in seekinga multibillion-euro bail-out from theEU and the International MonetaryFund.

Even if it can convince investors,who are concerned about its high levelof private sector debt and its exposureto foreign creditors, that it is not nextin line for a rescue, the harsh austeritymeasures deployed to do that could inturn endanger growth.

Spain, the fourth-largest economy in

the eurozone, enjoys some formidableadvantages. Its accumulated public sec-tor debt is lower as a share of grossdomestic product than that of most ofits European neighbours, and itsexports – albeit relatively modest inabsolute terms – have been growingsteadily.

Tourism is profiting this year fromthe arrival of holidaymakers nervousabout political instability in the rivalnorth African destinations of Egypt,Tunisia and Morocco.

Nor was the investment poured intoSpain from Germany and France dur-ing the growth years before the crisisall wasted on building holiday flats orurban homes that no one now wants tobuy.

A large share of the money went on

transport infrastructure that has pro-vided the country with excellent ports,roads and airports and the biggesthigh-speed rail network in Europe.

Perhaps most important of all, Spainboasts some of Europe’s most success-ful global companies in sectors rangingfrom banking (Santander and BBVA)and clothing (Inditex with its Zarabrand) to infrastructure (Abertis) andalternative energy (Iberdrola, Abengoaand Gamesa).

President Barack Obama chose aGamesa wind-turbine factory in Penn-sylvania as the background for aspeech in April on the importance ofnew energy sources.

“Spain has created a collection ofinternational companies that controlgood assets abroad,” says Juan Anto-

nio Samaranch, chief executive of GBSFinanzas, an independent investmentbank.

He says that gloomy economicassessments of Spain’s private sectordebt burden often omit to mention theimportance of corporate expansionabroad from the 1990s onwards. “Amassive part of this private debt wasused to buy international assets,” saysMr Samaranch.

Whatever they think of the govern-ment, the country’s entrepreneursand financiers can grow quite heatedin defending its economic record, incriticising the doubts of foreigninvestors and in rejecting the ideathat the country will need a bail-out.

Victor Mallet finds plentyof people defending Spain’sperformance so far but theyall agree there will be atough few years ahead

Outburst: protesters occupy Puerta del Sol (above) in Madrid to complain about youth jobless rate of 45 per cent and the domination of politics by two main parties Getty

Continued on Page 2

2 ★ FINANCIAL TIMES FRIDAY JUNE 17 2011

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Spain

Hard slog to reachsunlit uplands

“Look, a bloke in the USsaid the world would endthree Saturdays ago,” saysPedro Gómez de Baeza, GBSchairman, in a reference tothe doomsday predictions ofUS preacher Harold Camp-ing.

“We [Samaranch and I]are both engineers. We bothlike numbers. And we saythere will be no bail-out forSpain.”

In the real economy, it ispossible to find foreigninvestors who are equallyupbeat about Spain’s pros-pects, at least in the longerterm.

General Electric, the UStechnology and financialservices group, is looking atmaking a big investment,perhaps in the energy ortransport sectors.

“We’re cautious aboutSpain in the short term,”says Rafael Díaz-Granados,president and chief execu-tive of GE Iberia. “We con-tinue to be very bullishabout Spain in the mediumand long term.”

Concerned observers fromSpanish politicians to for-eign executives, however,are painfully aware that forSpain to reach the sunlituplands of the “mediumand long term”, the countryis going to have to over-come a series of obstacles,many of them of its ownmaking.

It is true that Spain isoften unfairly lumpedtogether by speculators,hedge fund analysts andbond traders with theweaker eurozone economiesof Greece and Portugal andthat its strengths some-times go unrecognised.

But it is also true thatSpain’s rigid labour market– which makes it so expen-sive to fire staff that fewcompanies want to hirethem – and the bureaucracyassociated with the highlydevolved political systemhave helped underminecompetitiveness in recentyears.

GE executives have seenboth of these obstacles close

up. After years in the Amer-icas, Mr Díaz-Granados ispuzzled by the “weirdincentives” of Spain’s old-fashioned collective wage-bargaining system, whichgroups people by region aswell as by sector ratherthan by company, leavinghim with employees in arange of collective bargain-ing agreements, includingglass (because GE makeslight bulbs).

As for Spain’s 17 autono-mous regions and the frag-mented market that results,Mr Díaz-Granados jokesthat he was hired to beGE’s boss in two countries,Spain and Portugal, but“found that I’m president of18”.

It is no coincidence that afuture PP governmentwould be expected to makethe biggest course changeson these very issues.

Mr Rajoy is likely to holdMr Zapatero’s line on reduc-

ing the public sector deficitto appease the bond mar-kets, but wants to liberalisethe labour market and limitthe negative effects ofdecentralisation.

Whoever ends up as thenext occupant of the Mon-cloa prime ministerial com-plex in Madrid, it is a trib-ute to the underlyingstrength of Spain’s econ-omy that most analysts, atthe time of going to press,still think it will pullthrough the crisis withoutthe need for a bail-out thatwould shake the entire edi-fice of the euro.

On the other hand, it is ameasure of the depth of thewestern world’s fiscal andfinancial trauma that noone is absolutely sure – andthat almost every Spanishhouseholder and businessexecutive foresees a verytough few years ahead.

Rafael Díaz­Granados:bullish aboutSpain in themedium andlong term

Regionalsavingsinstitutionsconsolidate

Spain’s banking sys-tem is undergoingone of the biggestupheavals in its

modern history.Lenders and regulators

have on previous occasionsstruggled through banking

busts after the collapse ofinflated asset values, butthis is the first time such abattle at home has coin-cided first with a globalfinancial crisis and thenwith sovereign debt jittersin the eurozone.

When the world wasshaken by the collapse ofLehman Brothers in Sep-tember 2008, Spanish banksfound themselves in a rela-tively comfortable position.

They were already facedwith falling property valuesand rising bad debts, buthad little exposure to thecomplex “toxic” derivativesand US subprime mortgagelending that wreaked suchhavoc elsewhere.

All Spanish banks andunlisted cajas, the regionalsavings banks that accountfor about half the system byassets, were also protectedby large reserves of coun-tercyclical “generic” provi-sions built up in the goodyears that preceded 2008.

The largest commercialbanks, Santander andBBVA, were further insu-lated from trouble by theirinvestments in fast-growingemerging markets, particu-larly Latin America, andhave continued to generatebillions of euros of netprofit through the recessionand afterwards.

But as year followed year,the property market contin-ued its decline and thegeneric bad-loan provisionswere steadily consumed toprotect the bottom line, itbecame clear the financialsystem was running out oftime.

This was especially trueof many of the cajas, which

were heavily exposed toproperty developers andhome loans and often con-trolled by regional politi-cians lacking the profes-sional skills to manage indifficult times.

Lenders have suffered onseveral fronts. Bankruptcustomers, especially prop-erty developers and con-struction companies, areunable to repay their loans,while the banks and cajasthemselves remain depend-ent on wholesale financingfrom abroad to fund theiroperations.

The response of the Bankof Spain and of the currentgovernment has been topush through a radicalreform of the whole net-work of cajas, opaque insti-tutions with charitableaims and unclear ownershipstructures that in manycases date back more than acentury.

Two small, failing cajaswere “intervened” and thensold by the central bank,while most of the rest wereoffered loans from the Fundfor Orderly Bank Restruc-

turing (Frob) and told tomerge, cut costs or rational-ise themselves in a wave ofdeals that has alreadyreduced their number from45 to 17.

In the latest phase of thereform process, the regula-tor has threatened theweaker cajas with partialnationalisation if they failto raise capital from privatesources.

Nationalisation is ex-pected to be the fate, forexample, of Caja Mediterrá-neo (Cam), the savingsbank whose plan for amerger with three othercajas collapsed when theyconcluded that Cam’s loan-book was too burdensomefor the merged entity toabsorb without itself beingnationalised.

Others have sought out-side investors, and fourgroups of cajas intend tolist on the stock exchangethrough initial public offer-ings. This process isexpected to reach a criticalstage in the coming weekswhen Bankia – the productof the merger of Caja

Madrid and six other sav-ings banks and by somemeasures the largest domes-tic bank in Spain – seeks€3bn ($4.3bn) to €4bn fromthe markets.

La Caixa, always thestrongest of the largercajas, is taking a differentroute and needs no IPObecause it is using the exist-ing listing of Criteria, itsindustrial holding group, as

a vehicle to launch Caixa-bank on the stock exchangeon July 1.

The estimates of howmuch new capital the sys-tem needs cover an extraor-dinarily wide range – theBank of Spain puts the fig-ure at just over €15bn,while some analysts say itcould reach €120bn – but

Banking systemThe ‘cajas’ networkhas been at theforefront of reform,says Victor Mallet

ContributorsVictor MalletMadrid Bureau Chief

Miles JohnsonMadrid Correspondent

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

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La Caixa, the strongest of the larger cajas, is using the listing of its holding group to launch on the stock exchange Reuters

The estimates ofhow much newcapital the systemneeds range from€15bn to €120bn

Continued from Page 1

even the worst outcome isregarded as a manageablesum.

Regulators and officialsalso argue that they havebeen more transparent thanother European countries.That is why Spain is sub-mitting 95 per cent of itssystem to European “stresstests”, while some Euro-pean Union states havedone only the minimum 50per cent required.

For Bankia and the otherIPO candidates, these areanxious days, given the vol-atility of European marketsand the low valuation thatoutside investors areinclined to give to Spanishfinancial institutions.

Bankia, which is so largeand systemically importantthat the success or failureof its IPO will affect Spain’sstanding in the sovereigndebt markets, is the linch-pin.

“Every Spanish institu-tion has an interest in mak-ing it work,” says oneMadrid-based investmentbanker. “We can’t allow itnot to work.”

FINANCIAL TIMES FRIDAY JUNE 17 2011 ★ 3

Spain

Country takes pains to avoid a bail­out

If Spanish politics is thetale of two beards – theleader-in-waiting of theSocialist party, Alfredo

Pérez Rubalcaba, and MarianoRajoy, chief of the oppositionPopular party – then the coun-try’s economy is a story of twodeficits: the budget shortfall andthe current account deficit.

For the past two years, inves-tors and speculators have beenwatching these two numbers,and the financial data behindthem, with almost obsessiveinterest.

With Greece, Ireland and Por-tugal having already beenforced to seek tens of billions of

euros in rescue packages fromthe European Union and theInternational Monetary Fund,Spain finds itself sweatingunder the spotlight as the nextmost likely “peripheral” euro-zone nation to need a bail-outfrom the spreading sovereigndebt crisis.

Spanish ministers – from JoséLuis Rodríguez Zapatero, theprime minister, downwards –insist that the government andthe country have launchedenough austerity measures andeconomic reforms since thewestern world’s financial crisisbegan three years ago to staveoff a disastrous collapse of confi-dence in the eurozone’s fourth-largest economy.

So far, most economists andbond traders agree, althoughthey have periodically lost theirnerve, sold Spanish bonds andpushed the closely observedspread between Spanish andGerman 10-year bonds – a meas-ure of the greater perceived risk

of holding Spanish paper –towards an uncomfortably high300 basis points.

“It’s true that markets havebeen going back and forth onSpain. They even once wenttowards questioning Italy,” saysNatacha Valla, Paris-based econ-omist for Goldman Sachs. Butshe adds: “There is no reasonwhy Spain should be comparedto what we’ve seen in Greece,Portugal or Ireland.”

First, the budget. Mr Zapaterowas slow to accept the severityof the crisis and the need forspending restraint, leaving anembarrassingly large deficit of11.1 per cent of gross domesticproduct in 2009 and attractingunwelcome attention from themarkets.

For the past year, however,the government has imposed aseries of austerity measures,including a 5 per cent pay cutfor civil servants, a near-freezeon hiring of public employees,and tax increases.

The results are evident. Thebudget deficit fell to 9.2 per centof GDP last year, and is targetedto fall further to 6 per cent thisyear.

That is an ambitious aim – “Ithink it will be difficult to reach6 per cent,” says Antonio GarcíaPascual, chief southern Euro-pean economist at Barclays Cap-

ital – in part because the coun-try’s 17 autonomous regions col-lectively failed to meet their def-icit targets last year and lookset to do so again in 2011.

Catalonia, an economy thesize of Portugal, says its deficitwill be double the official limiteven after harsh spending cuts.

But analysts believe the cen-

tre will compensate, at least inpart, for the regional overshoot,just as it did last year. And atleast Spain – unlike GordonBrown’s UK – ran a budget sur-plus in the boom years beforethe crisis and thus started froma much stronger position thanits neighbours.

“The starting conditions werevery favourable,” says Ms Valla.“[The ratio of] outstanding pub-lic debt to GDP was one of thelowest in Europe.”

The second deficit, for the cur-rent account, is potentiallyharder to manage downwards.As in other “peripheral” euro-zone states, the deficit swelledto unsustainably high levels inthe mid-2000s – to more than 10per cent of GDP in Spain’s case– as the fast-growing economysucked in finance from abroadto fuel investment in infrastruc-ture and unproductive realestate.

With currency devaluationnot an option to boost exports

and curb imports because ofmembership of the single cur-rency, the weaker eurozonestates are forced to curb domes-tic demand and try to restorecompetitiveness through a bru-tal process of “internal devalua-tion”, including reductions inlabour costs.

So far, Spain has done a fairjob on this. The current accountdeficit fell to 4.5 per cent of GDPlast year and is set to declinefurther to 2.9 per cent this year,according to research fromBBVA, the Spanish bank.

Like other fragile Europeannations, Spain has to balancethe need for reforms and deficit-cutting against the requirementfor enough stimulation to pro-mote continued growth, particu-larly since nearly 5m are unem-ployed.

Still, Spain has managed toboost its exports, benefiting inpart from the strong perform-ance of Germany, one of its big-gest markets.

Tourism revenues are alsoproving to be robust this year,with many Europeans turningto the safety of Spanish holidaysin preference to the riskiershores of north Africa followingthe upheavals in destinationssuch as Egypt and Tunisia.

For Spanish employers, andforeign investors, the mostimportant reform still to betackled concerns labour. Pres-sure is growing for a deeper lib-eralisation of the labour market– a rigid system marked by col-lective bargaining and costlyredundancy payments that dis-courage employers from hiringin the first place.

Negotiations between employ-ers and trade unions over howto modernise the system haverecently broken down.

But if labour reform can beimplemented, the budget deficitcut and the banking systemrecapitalised, policymakers sayinternational confidence inSpain will return.

EconomyMost urgent are deficitreduction and reformof the labour market,writes Victor Mallet

Antonio GarciaPascual:autonomousregions areunlikely to meetdeficit targetsfor 2011

Food, festivals andhistory to replacesun, sea and sand

Sun, sea and sand was once the sim-ple maxim that governed the vaststretches of resorts lining Spain’sMediterranean coastline.

Fuelled by cheap holiday packagesdropping millions at its airports eachsummer, and cheap credit helping theconstruction of new hotels to housethem, for decades there seemed littlereason to find a new philosophy.

That benign climate, however, haslong since ended. For the country’shoteliers and tour operators, the pastthree years have been the most diffi-cult in their professional memories. In2009, the number of foreign visitors toSpain slumped by 10 per cent, leavingthousands of cheap hotel roomsempty and English-themed pubs inlocations such as Benidorm eerilysubdued.

The secondary effects on Spain’sdomestic economy have been bleak.The tourism sector, which represents12 per cent of gross domestic product– compared with building and con-struction’s pre-crisis peak of 18 percent – has shed about 180,000 jobs inthe past three years, escalatingnational unemployment levels thatremain above 20 per cent.

At the same time as the collapse ofSpain’s construction industry, thecountry’s other great economic motor,the model of playa y sol, or bulk salebeach tourism, has been called intoquestion by industry experts whoargue that structural changes willneed to be made to persuade tourists

to pick Spain over cheaper competitornations such as Croatia and Turkey.

“Spain still has a model of offeringcapacity, with operators typically say-ing, ‘I have this many beds, how can Isell them?’,” says Professor PhilipMoscoso of the Iese Business School.

“The type of tourist demand overthe past 10 years has been changing,but the offer we have as a country hasremained largely the same. Now,more people are coming on their own,using the internet more than touroperators, so Spain must start tothink harder about how to differenti-ate itself.”

One way destinations can win backvisitors is by trading on their culturalattractions, an advantage that someexperts argue should see Spanishoperators attempt to emulate Italy’sability to project the attractiveness ofits cuisine and art globally.

Michelle Obama’s visit to Marbellalast year brought welcome publicityto the increasingly unfashionableregion, with operators later reportingthat the First Lady’s reflected glam-our triggered a rise in interest fromthe US and beyond.

Such “cultural tourists”, Prof Mos-coso argues, are likely to be of highervalue in the amount of money theyspend and, while still a small portionof the yearly numbers of visitors,could provide a route out of high-volume, low-value beach holidays tothe Canary islands and eastern coast.

Spain’s cultural pull is alsoexpected to draw more visitors fromAsia over the next decade, a trendthat has seen a renewed round ofinvestment in the country’s hotelindustry from foreign companies.

“Europe has the most visitors ofany continent in the world . . . and wethink that emerging markets willprovide a tremendous influx of newtravellers to Spain,” says Bill Marri-ott, chairman and chief executive ofMarriott International, the US hotelchain. In June, it signed a distribution

deal with Spain’s AC Hotels that willsee them renamed “AC by Marriott”.

Cultural events, such as the grow-ing series of music festivals, areincreasingly capturing a younger mar-ket of European travellers that wouldhave previously attended similarevents in their own countries.

Barcelona has enjoyed particularsuccess on this front, with the Sonarfestival in summer and the PrimaveraSound festival in the spring, whichhas grown from attracting just under8,000 people in its first year in 2001 tomore than 100,000 this year.

With performances from mostlyAmerican and British acts, PrimaveraSound’s organisers have managed tobuild the international profile of thefestival to a level where it now regu-larly attracts groups of internationalstature and draws most of its audi-ence from other European countries.

Bulk tourism still dominates fornow, with the political upheaval andrevolution in north Africa expected toincrease the number of visitors toSpain by 1m after two years of succes-sive declines. This has coincided withsigns that tourism is starting toemerge from the downturn. In April,the number of foreign visitors was up13 per cent on last year at 8.1m, withthe total amount spent by touristsincreasing by 24 per cent to €4.2bn.

For the country’s hard-pressedhoteliers the spring also brought bet-ter news, with 53 per cent of roomsbeing registered as occupied by the

government’s national institute oftourism, an annual increase of 10.6per cent.

For Prof Moscoso, while such signsare encouraging, they should not dis-tract from the need to use Spain’scuisine, museums, religious monu-

ments and festivals to reduce depend-ence on more fickle bulk tourism.

“We have a top location, so whatcan we offer, not just to compete onprice, but to differentiate ourselves?This is where culture, the arts, andour historical heritage come in.”

TourismThe industry has to adaptto a drop in demand forbulk beach bookings andfocus on what makesSpain a unique destination,writes Miles Johnson

Primavera Sound festival inBarcelona attracts most of itsaudience from other countries

Few signs of respite ina long chain of misery

Spain’s housing minister’strip to London last monthto promote real estate wasalways going to be a hardsell.

As Beatriz Corredordeclared that investing inthe country’s real estatesector was “safe”, a protestwas being staged outsidethe Spanish embassy byBritish buyers whose place-in-the-sun dreams havesoured.

Spain’s decade-long prop-erty and construction bub-ble began to deflate at thestart of the credit crisis, ascheap mortgages and devel-opment loans dried up,leaving many cities pock-marked with half builtdevelopments.

In a market where thevalue of the average resi-dential property has fallenby 17 per cent since thepeak, thousands of foreignbuyers, have been left withnothing, after makingdownpayments on what are

now incomplete ghost flats.Against such a backdrop,

Ms Corredor, on a trip thatalso took in Germany,France, Sweden and theNetherlands, argued thatthe price of Spanish hous-ing was now so low that itrepresented a sound invest-ment for northern Europe-ans.

“At the height of the big-gest boom in 2008, we calcu-late that prices were 30 percent higher than theyshould have been. But wehave never made any pre-dictions about how muchprices are going to fall. Wethink the market has nowlevelled out,” she says.

The multibillion euroquestion for Spain’s publicfinances, its banking sector,and the millions of home-owners in negative equity,is whether Ms Corredor’srelatively upbeat assess-ment proves correct.

Once accounting for 18per cent of gross domesticproduct, 13 per cent ofemployment, and 60 percent of domestic bankcredit, activity in thebuilding sector thatpowered the housingboom has collapsed, addinghundreds of thousandsto the 21 per cent unem-ployment rate – the highest

in the European Union.Elsewhere in this chain of

misery sit the banks thatfunded the developers andmortgage holders duringthe boom. Banks hold bil-lions of euros in half-builtdevelopments that they arestruggling to offload. A nowfamous statistic is thatSpain built more newhomes than France, Ger-many and the Beneluxcountries combined in theyears preceding the crisis.

According to analysts atNomura, Spanish banksmay be funding 24 to 36years worth of housingstock, with almost half ofthe €300bn of loans to thesector potentially problem-atic.

The Bank of Spain esti-mates that at least 1mhomes remain unsold, whilein March official datashowed house prices fell forthe 12th consecutive quar-ter. Many banks are alsooffering mortgages on nearpre-crisis terms to offloadhomes they have takenback from developers.

Though a small fractionof overall lending for mostbanks, the fact that somenew mortgages feature aloan-to-value ratio of above80 per cent – meaning theyare usually ineligible for

covered bond inclusionunder Spanish law – is seenas demonstrating thelengths lenders are takingto remove troubled propertydirectly from their balancesheets.

High loan-to-value mort-gages made up 11.9 per centof all house loans last year,according to central bankdata.

The immediate futureshows few signs of respite.

Nomura forecasts thathouse prices could fall byanother 15 per cent at atime when the EuropeanCentral Bank is signallingthat it will further increaseinterest rates. This wouldput pressure on mortgageholders who had beenenjoying low interest pay-ments to compensate forlosses on property invest-ments.

While such a large over-hang of property remains,the chances of a meaningfulrecovery in the mediumterm remain slim, increas-ing the likelihood of furtherpromotional tours.

PropertyMiles Johnsonreports on efforts topromote real estatein a cold climate

Beatriz Corredor: hard sell

4 ★ FINANCIAL TIMES FRIDAY JUNE 17 2011

Spain

The ties that bind Catalonia

Language is the most obviousdifference between Catalonia and therest of Spain, but there are manyothers. When the politicaltemperature rises, these differenceslead to calls for secession.

Discussions of the economics ofsecession mostly focus on Catalonia’snet fiscal transfers to the rest ofSpain. But what secessionists tend toignore are the economic ties thatcontinue to bind Catalonia rathertightly to the rest of the country.

One such tie is illustrated in thetables to the right, which rankforeign countries and other regionsof Spain in proportion to theirmerchandise trade with Catalonia in2007. The table of exports indicatesthat it sells more to the rest of Spainthan to the rest of the world.

Catalonia’s largest export market,in fact, is the adjacent Spanishregion of Aragón, even though itssecond largest market, France, alsoadjacent, has an economy more than50 times larger than Aragón’s.

The second table shows that itsimports tend to travel further thanits exports. This pattern reflectsCatalonia’s role as an import hub. In2007, It ran an international tradedeficit of €30bn, which was largelyoffset by a €22bn trade surplus withthe rest of Spain.

Catalonia imports products fromaround the world, adds value tothem and sells them on to marketsacross the country.

What might happen to thesenumbers if the regional border werereplaced by a national one?International economics suggeststhat when two companies are locatedon opposite sides of a nationalborder, implying a notional physicaldistance of zero, trade between themfalls by about two-thirds.

Analysis of more than 100independence events since 1900confirms a two-thirds drop in tradeintensity, although how quickly thishappens depends greatly on whether

separation is hostile or amicable.In the “Velvet Divorce” between

the Czech Republic and Slovakia,trade intensity dropped by three-quarters within five years of theseparation, even though a customsunion and a cross-border paymentmechanism were put in place.

The two-thirds drop-off is alsoconsistent with how much moreintensely German federal states tradewith one another than with otherEuropean Union countries – and thisin the country with the lowestnational border effects of any big EUmember.

Applying such estimates toCatalonia in 2007, a reduction of ahypothetically independentCatalonia’s trade with the rest ofSpain to one-third of its actual levelwould have caused the trade balanceto widen from a deficit of 4 per centof gross domestic product to a deficit

of 13 per cent, and its GDP wouldhave contracted by 7 per cent.

Although this is a very roughcalculation that could be refined, forinstance by accounting for theimpact of reduced inter-regionalexports on international imports, themagnitudes suggest that this is aneffect that should be taken intoaccount when weighing the pros andcons of secession.

A similar logic also applies toother parts of Europe subject tosecessionist sentiments – Spain’sBasque region, northern Italy,Belgium and Scotland, for example.

While secession is most oftenraised as a solution to artificialpostcolonial boundaries in non-European parts of the old world, it isworth adding that secession is likelyto be even more of an economicproblem where regional integrationis not as advanced as in the EU.Subdividing African countries, manyof which are already considered toosmall to be economically efficient,does not seem the best recipe for thedevelopment that the continentdesperately needs.

The broader point is that despiteclaims that globalisation hasrendered national borders irrelevant,they continue to matter economicallyas well as politically. Emphasis ofthis point is not meant to suggestthat secession never makes sense,but to make it clear that it comes ata price – with one of the costs beingdiminished commerce with formerlydomestic trade partners.

Aspiring independent nations mayconclude this is a price worthpaying, but should at least weighsuch pros and cons explicitly. Theymight also want to remember that,over the past few millennia, humanprogress has been spurred byexpanding rather than contractingcircles of co-operation.

Pankaj Ghemawat is AnselmoRubiralta professor of global strategyat Iese Business School and author ofWorld 3.0: Global Prosperity andHow to Achieve It (Harvard BusinessReview Press, 2011)

Guest ColumnPANKAJ GHEMAWAT

Imports1 Germany 13.4%2 Italy 8.3%3 France 7.7%4 China 5.1%5 Aragón 4.9%6 Valencia 4.7%7 Madrid 4.2%8 Netherlands 3.5%9 Andalusia 3.5%10 Japan 2.9%

Exports1 Aragón 11.3%2 France 9.7%3 Madrid 7%4 Valencia 6.6%5 Germany 5.1%6 Italy 5%7 Andalusia 3.9%8 Basque Country 3.8%9 Portugal 3.7%10 Castilla­La Mancha 3.7%

Young failed by system in need of structural adjustment

Less than a month after furiousSpanish youth unexpectedlytook to the streets of Madrid toprotest against the country’spolitical establishment, normallife is beginning to return to thecity’s occupied central square.

Bemused tour groups trundlebetween the scores of impro-vised administration tents andcamp sites spread around thePuerta del Sol, and men inbright yellow jackets offer tobuy gold jewellery off thosepassing through on their jour-ney to work.

In spite of hundreds of openmeetings held by youthful activ-ists in the squares of Madridand other large cities, frustra-tion has appeared to replace theinitial fervour of the “indignantones” – the name given to theyoung people enraged by asense that they are being failedby a state that has allowedyouth unemployment to rise to45 per cent.

Many of the protesters holddegrees, and the number ofSpaniards attending tertiaryeducation has increased byabout 7 per cent a year since1998, according to the Organisa-tion for Economic Co-operationand Development. The unem-ployment rate for universitygraduates in Spain is abouttwice the European Union aver-age, not helped by the country’sinflexible labour laws.

Few can deny the extent ofSpain’s young unemployed “lostgeneration”, as tens of thou-sands have graduated into astagnant economy.

As a panel comprising topbusinesspeople consults withthe government about strategiesto improve the country’s com-petitiveness, the crisis has alsoforced academics and policy-makers to focus on ways thateducation reform can bolster theeconomy from the bottom up.

According to Jordi Canals,dean of the Iese business school,education reform over thecoming years will be crucial toremedying economic problems.

“Education is the most impor-tant thing for the economy,” hesays. “The top educational insti-tutions are world class, but wehave too few of them.”

The number of Spanish gradu-

ates in unskilled work is about 6per cent higher than the EUaverage, according to a study bya Spanish knowledge and devel-opment think-tank – a factorthat has formed part of theanger of those partaking in therecent protests.

Spain has two universitiesranked in the world’s top 200,according to the Times HigherEducational Supplement rank-ings, compared with France’sfour, and Germany’s 14.

Mr Canals argues that a large

number of Spanish people areleaving school at the age of 18with a lower standard of educa-tion than their western Euro-pean counterparts.

As he sees it, this is a conse-quence of overly centralisededucational institutions that arerarely accountable to studentsand teachers because of theirclose links with local andnational government.

“What we should do is veryclear,” he says. “We need toimprove the quality of the sec-ondary education of kidsbetween 10 and 18, to raise thestandard of basic stuff.

“In France and Germany, theskills high school graduateshave who enter straight intothe workforce tends to behigher.”

“Our educational institutionsshould be run by people who

know the most about education,the teachers, rather than tradeunions or non-teaching staff.Too often parents feel that theschool is not their own, and thismeans they tend to be confron-tational rather than collabora-tive with teachers.”

Another approach to pre-university reform, designed toincrease the competitiveness ofyounger Spaniards in the inter-national labour market, hascome in the form of state-runbilingual schools in which atleast a third of all teaching timeis in English.

In these schools, subjects suchas music, physical educationand social sciences are taught inEnglish.

For Lucía Figar, head of edu-cation for the Madrid regionalgovernment, which has spear-headed the policy, an increase

in the standards of foreign lan-guage learning is crucial tohelping Spaniards catch up withother European Union members.

“Spain has not traditionallybeen a country with a high levelof foreign language learning,”she says. “Our model has beensuccessful in teaching pupilsEnglish as they learn in a natu-ral way.”

For the graduate protesters incentral Madrid, however, thetalk of reform, and the pro-grammes already under way,will be too late to be of anybenefit to them.

“There is an important needto fine-tune the system,” saysMr Canals. “This is not aquestion of resources, of spend-ing more money, but one ofmaking the structural changesthat will have an impact for thenext generation.”

EducationMiles Johnson reportson the frustration ofgraduates without jobs

Jordi Canals:educationalinstitutionsare rarelyaccountableto studentsand teachers

Cuisine is givenits due by worldcritics and diners

In the decades of pov-erty and dictatorshipafter the second worldwar, Spain was terra

incognita for internationalgourmets, known more forcheap wine, basic if whole-some ingredients and thebland pleasures of the tor-tilla, a potato omelette.

British students of the1970s favoured a brand ofwine they called “Spanishpetrol”, whose most attrac-tive quality was that itcould be bought for lessthan £1 a bottle.

It takes a long time tobuild the reputation of acompany or a product, letalone that of a whole coun-try, but over the past 20years Spain has graduallyestablished itself as a leaderin global haute cuisine, justas the nation has modern-ised its economy and seenits industry and commercecatch up with the rest ofthe European Union.

Spanish produce is stillfar behind that its French

and Italian rivals, not interms of quality but interms of international rec-ognition and marketing,which means that visitorscan enjoy excellent foodand wine at reasonableprices.

However, the country isfinally being given its dueby the world’s critics anddiners, reaping an annualharvest of more than 100Michelin stars, which putsit fifth in the somewhatarbitrary national rankingsthat can be extracted fromthe Michelin red guides –behind France, Japan, Italyand Germany.

Spain’s most famous eat-ery is El Bulli. This ruralrestaurant on the northCatalan coast, co-ownedand run by chef FerranAdrià, is repeatedly judgedthe world’s best place todine.

It is typical of Mr Adrià’sboldness that he and hispartner, Juli Soler, havedecided to close El Bulli toguests from the end of Julythis year, at what looks likethe peak of their culinarysuccess and internationalfame. The plan is to turnthe restaurant, in a quietcove near Roses, just southof the French border, into acreative research laboratoryfor cooking.

“At this historical

moment, the culinaryavant-garde of the world ishere in Spain. It’s the epi-centre of creativity andinnovation in the world,”says Silviya Svejenova, pro-fessor in the business policydepartment of Esade, theBarcelona-based businessschool. “It has challengedthe hegemony that Frenchcuisine has had for acentury.”

Spain is not alone inenjoying a culinary renais-sance. The increasingwealth and sophistication ofrestaurant-goers, as well asthe rapid spread of ideasfrom one country toanother, make this a world-wide phenomenon.

The UK, for example, longscorned by the rest ofEurope for its terrible food,now boasts several celebritychefs, and its restaurantsare generally much betterin reality than they are inthe minds of Spaniards andother Europeans.

But Mr Adrià is innova-tive in the way he has har-nessed science to the needsof the kitchen and in hisbusiness methods.

Rather than franchisingthe El Bulli name to subsid-iary restaurants in Tokyoor New York, or encourag-ing the mystique of a cleverchef with secret recipes andtechniques, he is eager to

share: the El Bulli researchcentre will publish every-thing it does each day onthe internet, he says.

Prof Svejenova says:“Instead of a search for reci-pes, there’s a search fornew concepts. The role ofscience in this is to helpchefs understand betterwhat is happening,” addingthat art and design helpimprove the aesthetics ofwhat diners see on theirplates. One of the trends ofthe Spanish movement isprecisely this caring andsharing.”

Mr Adrià and his collabo-rators were the first chefsexplicitly to apply scientificmethods to cooking, firstthrough their workshopElBullitaller and thenthrough Catalonia’s AlíciaFoundation.

Now he teaches at Har-vard University on cookingand creativity, a course thatwill be extended to 2015 byagreement between Alíciaand Harvard and willinclude new chefs such as

Carles Gaig. “There are notmany disciplines as univer-sal as cooking,” says anenthusiastic Mr Adrià, urg-ing Spanish businesses totake advantage of the coun-try’s success in the culinaryfield. “It includes science,ecology, agriculture, eco-nomics, design, art andhealth.”

Prof Svejenova and herEsade colleague Marcel

Planellas are now updatinga case study on Mr Adrià’screativity. They say modernSpanish cooking has bene-fited from co-operationbetween the Basque andCatalan regional traditionsrepresented by Juan MariArzak and Mr Adrià, respec-tively, just as it has man-aged to combine a drive for“zero kilometre” naturalingredients grown outside

the restaurant with a fasci-nation for Japanese andother far-flung interna-tional influences.

“The Catalan style ismore Mediterranean cook-ing, and the Basque is moretraditional French cuisine,”says Prof Planellas.

What name should begiven, then, to a movementthat generates income forSpain but whose protago-

nists are motivated by pas-sion for their peculiar con-catenation of art and sci-ence, rather than by profits?

Some call it “molecularcuisine”. Others say thecooking is “techno-emotional”. For Prof Sve-jenova, these outré sugges-tions show “this avant-garde cuisine seeks to sur-prise you, to challenge you.It’s very playful.”

FoodEl Bulli restauranthas revolutionisedthe field, saysVictor Mallet

Ferran Adrià (above) and his partner Juli Soler are to turn the El Bulli restaurant, at the peak of its success, into a research laboratory for cooking Getty