Overseas Business Risk – Spain
Political and Economic
Against a backdrop of steadily declining British exports to the EU countries, Spain remains an important market (8th largest export market) and business partner, with bilateral trade amounting to almost £37 billion in 2011. Spain also ranks amongst the top 12 foreign countries investing in the UK, with a net investment flow over €97 billion FDI between 2001 and 2010 and some key M&A operations, including Ferrovial (BAA), Iberdrola (Scottish Power), Santander (Abbey) and Telefonica (O2).
Spain is a member of the WTO, OECD, G20, OSCE and Council of Europe. Spain is a constitutional monarchy in the form of a multi-party parliamentary democracy with a Chamber of Deputies (legislative branch), and a Council of Ministers (executive branch) presided by the Prime Minister.
Spain’s three-tier political system (comprising central, regional and local government) is one of the most decentralised states in Europe. Excluding the social security system it places twice as much public spending in the hands of its 17 autonomous regional governments as the centre. While the centre sets the broad parameters, regions are responsible for the provision of basic public services including health, education and social services, and have significant influence over the regulatory environment for business. Over the last thirty years there has been an increase in the number of services provided by regional and local governments, but as revenues have dried up during the economic recession, doubts about regional finances have become one of the key causes of wider concern over Spain’s fiscal position. Regional government deficits improved sharply in 2012 but many regions still depend heavily on transfers from the centre to pay their bills. The next tier, local government, also plays a key role. The 50 county councils, and 8,000 plus town halls account for circa 13% of all spending and are responsible for delivering a wide range of public services. While their debt and deficit levels are relatively low, local government also suffered from competence creep during the boom years which they are now addressing.
The last general elections were held in November 2011 and were comfortably won by Mr. Mariano Rajoy of the centre-right Partido Popular (PP). The PP took 186 seats (44.6% of the total), above the 176 needed for an overall majority and the best result in the party’s history. Rajoy runs a small, but experienced and economically strong Cabinet of only 13 ministries. The PP are also in power in 11 of Spain’s 17 autonomous regions and many of the big town halls, giving the party significant leverage over policy making at all levels of government.
Soon after Rajoy’s appointment it transpired that the public accounts were in a worse state than expected (a projected 6% deficit turned out to be 9%) and, as a result, Spain quickly came under intense scrutiny from the financial markets and EU institutions, pressure that was compounded by the wider Eurozone crisis. In response the Government embarked on an ambitious, far-reaching structural reform agenda based on the principles of austerity and efficiency, which continue to frame Spanish policy making. The main economic challenges facing the Government are reducing unemployment, the deficit and indebtedness and restoring growth. The Government has also committed to reforming the quasi-federal structure including the financing arrangements at a time when it faces growing tensions with separatist tendencies in Catalonia.
Since January 2012 the Government has introduced deep administrative reform to reduce the size and cost of the public sector, resulting in over 3,750,000 job losses. The headline reforms are: a labour market reform which seeks to reduce the duality in the Spanish labour market and make recruitment more flexible; measures to tackle fiscal fraud and boost transparency in public spending; fiscal incentives for SMEs and entrepreneurs; pension reform; together with continuing steps towards deregulation and reform of local government. This has been complemented by legislation to inject liquidity into the most cash-strapped regions and an unwavering commitment to bring down regional deficits and debt levels with forceful legal instruments such as the Budgetary Stability Law, which sets legally binding spending, debt and deficit ceilings. On top of this, 2012-2013 has seen health and education cuts, the freezing of civil servants’ salaries, a reduction in public investment and tighter access to social benefits. On the revenue side, there has been a determined effort to turn around the slump in tax receipts via a raft of fiscal measures; VAT and income tax hikes, increases in green taxes and excise duties, and rises in capital gains and corporation taxes.
Measures that will be particularly welcomed by British companies include new legislation obliging the administrations to pay bills within 30 days and which allow the Finance Ministry to retain transfers in the case of non-compliance, the €65bn fund to clear outstanding debt to suppliers and cover regional debt redemptions, and moves to ease outsourcing of elements of the delivery of public services. The Single National Market Bill currently going through Parliament should also help iron out inconsistencies between regions and make it easier to set up and trade in Spain.
The financial sector is also undergoing a major clean up that involves increased capital provisions, more independence for the Bank of Spain, penalties for financial mismanagement, capped CEO salaries in banks that have received public money and the creation of a holding company to sell off distressed assets. Meanwhile, in June 2012, Spain formally applied for a banking sector bailout, and while the EU has earmarked €100bn, so far only €40bn has been requested. This estimate comes after a scrupulous external audit, which saw two-thirds of the sector pass.
Despite these efforts, in January 2013 unemployment peaked at 27% and is not expected to fall significantly before the end of the year. The economy is again set to shrink, this time by around -1.3 % as budgetary consolidation and deleveraging in the private sector weigh on lending, domestic demand and investment. Debt levels will continue to rise and are expected to reach a record 100% of GDP next year (currently at 92%). Growth is export-led and Spain’s export performance over the last five years is among the best in Europe. Growth is forecast to return in 2014, for the first time since 2010. However, bringing down the public deficit remains one of the biggest challenges for Spain, who in May was granted an extra 2 years to hit its -3% target due to recognition of adverse macroeconomic situation and a significant structural adjustment. In return, the Government now has to comply with deficit targets of -6.5% of GDP in 2013, -5.8% in 2014, 4.2% in 2015 and 2.8% in 2016. Pursuit of these objectives will result in an ongoing policy environment based on austerity and reform.
Spain is signed up to the European Convention on Human Rights and the UN Universal Declaration of Human Rights.
Spain is a strong supporter of gender equality. During the Spanish Presidency of the European Union in 2010 Spain held the 2nd European Women in Power Summit which concluded with the Cadiz Declaration on the full participation of women in all areas of society. Same sex marriage has been legal in Spain since 2005.
The Government has committed to reform Spain´s justice system to improve the efficiency of the courts. The reform programme includes over 20 separate pieces of legislation covering all aspects of the justice system: procedural reforms to improve efficiency of investigations and take cases out of the courts; ambitious changes to the responsibilities, structure and organisation of the courts; institutional changes to key judicial bodies; and the introduction of fees and changes to the legal aid system. The government aims to pass the key elements of its reform programme this legislature.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
The Bribery Act came into force on 1 July 2011 and British businesses and exporters should ensure they comply with the new regulations.
Spain ranked 30 in 2012 in Transparency International’s corruption perception index, reflecting year-on-year improvements in terms of transparency levels in public procurement and financing procedures. However, according to this organisation significant regulatory challenges persist, to do mostly with political financing, judicial independence, access to information, and lobbying.
Spain has also had a number of high profile corruption cases over recent years. Most of these cases have been linked to the housing boom and involved mostly regional and municipal governments in the awarding of contracts for cash payments. The Bárcenas corruption case, which broke in January 2013, is the first major corruption case to affect members of the central government and the ruling party (Partido Popular). The case centres on allegations that ex-PP treasurer used undeclared party donations from private companies to make illegal bonus payments to senior party figures. Other major corruption cases include the ERE case, involving alleged fraudulent payments of redundancy pay by the regional socialist government (PSOE) in Andalusia and the Noos case, involving the King´s son in law Iñaki Udangarin, involving allegations of misuse of public funds intended to finance a sports centre in Palma de Mallorca.
The OECD also reported on Spain´s legal framework against bribery in 2012. The review highlighted Spain´s record of zero prosecutions and expressed concerns that Spain operated different sanction regimes for bribery of EU and non-EU MS.
The second GRECO (EU Group of States Against Corruption) compliance report on Spain, dated June 2013, encouraged the Spanish authorities “to pay further attention to the international dimension of corruption”, and acknowledged that lack of transparency of political funding “constitute a major source of citizen’s concern”. A recent opinion poll showed that 85% of Spaniards think corruption is widespread or very widespread in business and government alike.
Corruption is cited as one of the factors behind declining support for the two main political parties. Both the government and the opposition have committed to tackling corruption in order to reverse this trend. A first ever Transparency Law is currently being negotiated in the Spanish parliament but there has been some controversy over its scope. Following the State of the Nation debate this February a clear majority in the Congress voted in favour of a motion mandating the government to bring forward the following reforms:
A new Law on the Control of the Economic and Financial activities of Political Parties;
A new Regulatory Law on the Exercise of Political Functions (´statute of public office´) which will clarify requirements on public figures to publish their tax returns and declarations of assets;
Modification of the penal code to include a crime of illegal financing and unjustified profit of elected public officials;
Reform of the Court of Auditors to give it more tools to monitor and investigate;
Reform of the Public Sector Contracting Law to prohibit contracts being awarded to people previously sentenced for corruption;
New measures to modernise electoral campaigns.
The Basque terrorist organisation ETA announced a definitive cease-fire in October 2011. Recent reports from Spain´s intelligence and policing agencies suggest that the risk of ETA breaking this ceasefire is extremely small and that ETA´s operational capacity has been severely reduced by police action. ETA’s last major attack was in 2006 when a car bomb in the car park at Barajas International Airport in Madrid killed two people.
In March 2004, 192 people died and over 1,400 were injured following bomb attacks on three trains in Madrid. A group purporting to represent Al Qa’ida claimed responsibility.
The Spanish authorities take measures to protect visitors and a high level of alert is maintained, but business travelers should be vigilant. You are advised to follow the instructions of the local police and other authorities in case of disruption.
Protective Security Advice
Street crime does exist in Spain’s largest cities and the main tourist areas, and is occasionally accompanied by violence. You are advised to remain alert and guard valuable personal items at all times. The majority of reported thefts are a result of items (mobile phones, laptops) being left unattended or thieves using distraction techniques.
There is a requirement to provide proof of your identity if requested by a Police Officer. The only legally acceptable documents are a passport or a national ID card. The Spanish Police have the right to hold you at a police station until your identity is confirmed.
IP rights are territorial, that is they only give protection in the countries where they are granted or registered. If you are thinking about trading internationally, then you should consider registering your IP rights in your export markets.
For information on registering your Trademark in Spain, you should contact:
Office for Harmonisation in the Internal Market:
Avenida de Europa, 4
T: +34 96 513 9100
F: +34 96 513 1344
There have been complaints about scams, often related to lottery prizes, in which a person receives what appears to be an official notification from a Spanish government department and are required to make advanced payments or deposit sums in a bank account.
As in many other major European countries, international organised criminal activity takes place in parts of Spain, in particular linked to drugs and people trafficking. There has been government action to tackle these issues and the UK and Spain work closely together in this area.