My latest article, on Spanish startups, in Fair Observer

The Spanish Struggle to Duplicate Silicon Valley

http://www.fairobserver.com/article/spanish-struggle-duplicate-silicon-valley

Blueprint for Banking Union

Note: this essay draws heavily on “What kind of European banking union?” by Jean Pisani-Ferry, André Sapir, Nicolas Véron, and Guntram B. Wolff. However, the synthesis is my own and does not necessary reflect those authors’ research.

The rationale for a European banking union complementing monetary union is straightforward. To start, there is an inherent contradiction between pan-European banking and exclusive national responsibility for bank crisis resolution. Developments during the recent crisis have exposed further weaknesses: capital is seeking safety rather than moving freely; asset ring-fencing and risk-shifting may actually increase the overall public cost; and finally, the ECB simply cannot address solvency concerns while staying committed to its primary target of combatting inflation. A banking union can address these problems while not veering into the more dangerous fiscal union territory, as Stephen Castle argued in the New York Times.

Consensus on some elements

What would a banking union entail? First, a European banking charter to create a single rulebook for all bank entities. Second, a supervisory body that, unlike today’s EBA, has direct authority over banks. And lastly, European deposit insurance funded by contributions from participating banks. These elements are present in Brussels’ latest plan for a banking union that will take effect in 2013. 

While it is imperative that the banking union include the Eurozone countries, incorporating the entire EU-27 would harmonize the functioning of financial markets with the free movement of goods, capital, services, and people. However, an EU-27 banking union is probably too ambitious given the objections of the UK and other countries.

Decisions to be made

Many aspects of the banking union have yet to be determined. Chief among them are which banks will be involved, who will act as the supervisor and how to structure the deposit insurance. Pisany-Ferry and his co-authors offer the following thoughts on these issues:

Which banks: The union should cover the entire banking sector – if political consensus can be achieved for it – rather than only those banks considered systematically important at a European scale. This would avoid distortions between smaller and larger banks, while also removing the possibility of skirting rules through subsidiaries.

Which supervisor: The ECB is better suited than the EBA to act as the banking union supervisor, due to its greater resources and higher credibility. However, this could place new political pressure on the ECB, interfering with fiscal policy. Therefore, it will likely be necessary to create a new supervisory institution.

What deposit insurance: Deposit insurance will most likely occur through a re-insurance of the existing national deposit insurance schemes, potentially with additional contributions from member states’ governments. To create a fiscal “backstop” for the re-insurance, it is necessary to give the managing entity the ability to draw on additional resources in case of crisis – either through contingent taxation or borrowing. Again, these merely create an “intervention chest” for crisis resolution.

An uphill but important battle

Implementation of a banking union is far from simple. It requires, at the least, increased empowerment of the European Parliament, and at the most, the creation of a new European Ministry of Finance. Authorities must be vigilant so that banks do not hide their losses in the hope that they will eventually be mutualized.

Nonetheless, the failure to move forward on this issue could greatly endanger the viability of the monetary union. The proposed banking union would not only help address the negative feedback loop between sovereigns and banks; it would also demonstrate that the euro area has the political will to draw lessons from the crisis.

Don't Fly Ryanair. Just Don't.

A 12 Euro flight from Barcelona (Girona) to Milan (Bergamo) on a Friday night seemed too good to be true. When it landed 2 hours late in the wrong city, I knew it was. Welcome to Ryanair.

What happened? I arrived on time for my flight on a Friday night from Barcelona (Girona) to Milan (Bergamo), scheduled to depart at 22:35h and land at 23:55h. I had paid 12 Euros for the flight - 0 Euros base fare plus the mandatory taxes and fees.

Boarding was delayed by about an hour in Girona. Once we had boarded, however, the plane did not move. The crew gave us vague updates: mechanical problems, technicians arriving, more senior technicians arriving, calculations being performed in offices. To no avail. An hour later we had to de-board with our carry-on luggage and get on another plane. This one finally took off - 2 hours late.

But that wasn't the end. We were almost at our destination when Ryanair made the announcement that the Bergamo airport was closed. We instead landed at about 2am in Verona, about an hour and a half away by ground.

Upon arrival, passengers were promised a bus back to Bergamo Airport, 100km away. This did not seem particularly appetizing. What ground transportation could we hope to find now that the airport was closed? Would Ryanair still offer the connecting bus to Milan? Nonetheless we waited outside the airport. 45 minutes went by and the bus showed no sign of materializing. We saw the pilot and crew sneak off in a van (so much for the notion of the captain going down with the ship). There was no airport staff anywhere.

At this point my girlfriend and I made a desperation move. We hailed the only cab at the airport and asked him to take us to the Verona Airport Hotel, visible in the distance. We arrived quickly at the hotel and went to sleep. Hotel and cab fare cost 125 Euros.

Parts of the story made sense. Maintenance problems were discovered just prior to takeoff, forcing passengers, crew, and luggage to change planes. Pushing the late scheduled takeoff to 2 hours later caused issues at the destination airport, which diverted the flight to a nearby airport.

But other parts defied logic. What kind of aircraft service operation requires the technician to scurry back and forth to his office inside the terminal to perform some calculations? Why was our flight prevented from changing planes to allow four successive incoming flights to land, when the only chance we had to arrive at our destination airport was to switch immediately? How could the flight crew wait until 20 minutes to landing to notify us that we would be landing not at Bergamo but at Verona? Why did the airline neglect to offer better bus options and why was there no one on hand to answer our questions?

Was it an unfortunate series of bad breaks or deliberate mismanagement and utter disregard for the customer? For me, there is too much evidence in favor of the latter. I understand that maintenance delays are part of air travel but the airline had so many contact points at which to improve both its operations and its service to avoid stranding us unaccompanied at the wrong airport in the middle of the night.

Luckily, passengers have rights. According to European Law (EU Regulation 261 / 2004), airlines are required to reimburse passengers for expenses incurred due to a delay longer than 2 hours. Ryanair's website states that they only reimburse for cancelled flights, in blatant disagreement with the law, but I decided to submit a claim anyway. My first attempt failed; their online claims submission form doesn't work. Eventually I sent a letter through fax. In it, I argued that according to European Law a delay longer than 2 hours amounted to a cancellation and rendered Ryanair liable for the incremental expenses I had incurred.

The response came through a week later (to my email address, oddly), ignoring the distinction between a delay and a cancellation but asserting innocence because factors outside the airline's control had caused the flight to be diverted from Bergamo to Verona.

I interpreted Ryanair's response as denying my first claim automatically with a flimsy justification and hoping I would go away. I had to again reply by fax since Ryanair does not accept customer communications via email even though they had emailed me their response. This time I told Ryanair that ignoring the 2-hour mechanical delay which actually caused the diversion was an unacceptable oversight. It's not as if the flight took off on time and had to change course due to bad weather. The law clearly states that mechanical failure is the airline's responsibility. I asserted my right to elevate my claim to the Italian air travel authority, which could subject Ryanair to a € 5,000 fine.

The next response arrived a few days later. While again denying blame, the airline had decided to pay my claim in full via a check. I had demonstrated that I knew my rights and Ryanair was keen to avoid the investigation and potential fine at the hands of the Italian air travel authority. Victory for the consumer! The check eventually did arrive, though after three weeks instead of the two the airline promised.

Meanwhile, I decided to see if I could verify Ryanair's ever-present claim that it is the "No.1 on-time airline in Europe with the least flight disruptions; as detailed in audited statistics issued by the UK Civil Aviation Authority." I ran some numbers on the 2011 data, analyzing 1.4mn flights, the output of which is below. Ryanair's performance is not bad according to this data. Nonetheless, I believe the claim is wrong for 3 reasons:

1. Ryanair is NOT the most on-time airline in Europe, according to this data. Other airlines that have less flights are more on-time. Ryanair could choose to claim (correctly) that it is the most on-time budget airline, or is better than British Airways, or that it exceeds the UK average of 80% (Interestingly, the US average is 85%, according to a recent FT piece) - instead, they opt for a boast which sounds better but is false.
 

2. It is unclear whether the data is actually audited by anyone, as the CAA says they compile it from various sources (i.e., the airlines themselves) and can neither certify the data's "accuracy, integrity, or reliability" nor comment on any conclusions drawn from it.

3. The UK CAA, as its name implies, publishes data on arrivals to UK airports. Yet Ryanair operates throughout Europe. The agency responsible for compiling Europe-wide delays is Euro Control, which says it cannot disclose data on individual airlines. 

Why would Ryanair consistently make this claim (it is ever present in communication with customers as well as public filings)? First, to counteract well-publicized horror stories and customer campaigns. Or perhaps the airline cites UK CAA data because Euro Control's data is less flattering. Either way, when your flight has been delayed or cancelled the claim is of little consolation.

I won my battle against Ryanair by getting a refund for the expenses I had incurred due to their mismanagement of my flight. I wonder how many consumers in the same situation have had the patience and tenacity to do the same.

Airline	# Flights	On-Time	Late
BRITISH AIRWAYS PLC	277,063	80%	20%
EASYJET AIRLINE COMPANY LTD	200,146	82%	18%
RYANAIR	127,843	85%	15%
FLYBE LTD	110,573	85%	15%
BMI BRITISH MIDLAND	48,558	78%	22%
THOMSON AIRWAYS LTD	40,711	77%	23%
LUFTHANSA	33,679	71%	29%
MONARCH AIRLINES	29,765	70%	30%
AER LINGUS	28,394	83%	17%
THOMAS COOK AIRLINES LTD	27,906	75%	25%
BA CITYFLYER LTD	25,416	86%	14%
VIRGIN ATLANTIC AIRWAYS LTD	19,771	76%	24%
SWISS AIRLINES	18,278	81%	19%
SAS	17,959	84%	16%
KLM	16,428	87%	13%
AER ARANN	16,210	84%	16%
VLM (BELGIUM)	15,935	90%	10%
WIZZ AIR	15,686	72%	28%
LOGANAIR	15,494	88%	12%
CITY JET	14,757	88%	12%
JET2.COM LTD	14,417	61%	39%
BMI REGIONAL	13,859	92%	8%

* On-time flight: Within 15 minutes of stated arrival.

Ageing and the Financial Crisis

I published this article last week in Fair Observer, working with the noted economist and ageing expert Edward Hugh. Enjoy!

http://www.fairobserver.com/article/ageing-and-financial-crisis-more-meets-eye

Groupon On the Up in Spain

Nursing a beer yesterday at my neighborhood bar while the wait staff prepared for the dinner crowd, I casually eavesdropped to their typical machismo chit-chat about football and motorcycles. Then, my ears perked up at the mention of Groupon.

In the US, Groupon's growth has slowed. Vendors find it difficult to deal with the influx of new clients, and at the same time realize many are unlikely to develop into repeat patrons, which unfortunately influences how they treat Groupon holders. Customers, meanwhile, are frustrated by (among othe things) stringent, often confusing conditions that prevent them from using their Groupons.

But my neighborhood bar was still in the honeymoon phase with Groupon. In one day of Groupon sales in February for a 20€ / pax tapas or seafood menu, they had sold 2,000 Groupons. A month later, only 400 holders had redeemed their Groupon but the increase in traffic was still noticeable. Last night, a Thursday, the restaurant was booked. Same for the next night, and in fact for ever Thursday-Sunday in March. "We're taking bookings through May!" the Maitre-D exclaimed to one of the waiters. I listened in mild shock as he told a customer over the phone, "Nothing for next weekend, no. Yes, maybe there will be a cancellation. Call me Tuesday, 6-8. That's when I can take calls."

I have eaten at this restaurant and I can assure you it's nothing special. If the tapas or seafood prix-fix is anything like a recent meal I had there, diners will be disappointed. But Groupon's 1 million customers in Spain are, for the moment, all too eager to find out for themselves.

Follow me at the Esade MBA's blog

To my 3 loyal readers, just letting you know that I am now posting on the official blog for the Esade MBA. You'll find recent posts about a trip to the Global Sports Forum in Barcelona, the latest Javier Solana lecture, and this year's annual Esade alumni reunion.

http://mba.esadeblogs.com/

Spanair - La Deuda de Todos

The Spanair debacle shows that perhaps Catalans' trust in their government is misplaced. The airline ate public money every year since its 2009 purchase and finally went bankrupt last month. Ferran Soriano, the former management consultant installed at the helm, comissioned turnaround studies by management consulting firms BCG and Europraxis which, as consulting studies do, predicted that profits would skyrocket. Meanwhile, the airline was no more operationally sophisticated than any of its peers and did not have a real value proposition besides having a hub in Barcelona.

Whether Spanair did not possess the expertise to implement the consulting advice or whether the profit forecasts were just pie-in-the-sky inventions is impossible to determine. But the government and Soriano were clearly out of their element. You should never buy an airline that costs 1 euro, precisely BECAUSE it costs 1 euro!!!

Even if the operation was somewhat political, as a new regime entered office and cut the faucet, Spanair was clearly not viable, ceasing operations with €350mn in debt and only €100mn in assets (they did not even own their fleet). In my mind, Catalunya owes its citizens an explanation.

For the full story, check out my article on Fair Observer:
http://www.fairobserver.com/article/la-deuda-de-todos-fate-spanair

Bicing Barcelona

Being an MBA student, you can request a meeting with practically anybody as long as your motive is pure (enough). And so I found myself in the Barcelona Serveis Municipals office earlier today to discuss the management of Bicing, the citywide bike share.

Bicing is a fascinating business: 6,000 bicycles, 340 stations, and a network of maintennance and replacements to hold it all together. Barcelona has outsourced day-to-day management to ClearChannel - ostensibly a media company but also a public tansport tactical partner - so city hall has only a skeleton liaison team. ClearChannel evidently has gone from operating these bike share schemes as a favor in exchange for advertising concessions to doing so because they're good at it.

Even with ClearChannel's logistic wherewithal, Bicing places great strain on Barcelona's finances. Membership dues from the roughly 120,000 socios amount to only a fraction of operating expenses so Barcelona city hall has to subsidize 60% of the cost of each Bicing trip, compared to only 40% for other public transport. Claims of indirect environmental benefits may be overly optimistic in view of the 30 maintennance trucks that circulate almost all day repairing and moving the bikes (and polluting). Moreover, lament Bicing directors, too many trips are coming from people who otherwise would simply walk to their destination - not those foregoing a car or moto.

One solution is a tiered fee structure (currently all users pay a yearly flat fee of €35) where riders pay more for traveling at peak times, traveling more often, or traveling "downwards" without a return journey, which is typical of beachgoers. But last year's contentious negotiations of just a €5 fare increase were highly politicized so a broader revision of fees would be difficult. Bicing could also offer day passes like in Paris or London, an idea which would likely find receptive tourists but which would generate more flow to the city center and the beach.

We're hoping to work more with Bicing at Esade, perhaps inviting them to do a case study with the Operations Club.

An Audience With Solana

About once a month, Esade offers a course on Geopolitics and Global Governance with Javier Solana, the noted Spanish physicist and, more importantly, former secretary general of the EU.

Last night's session focused on nuclear proliferation. First, Solana the physicist reviewed how uranium is enriched to produce an atomic bomb. Then, Solana the diplomat offered a series of stark predictions. Iran would continue its slow but steady progress, he said, until it eventually has the capacity to build and deliver a nuclear weapon. After Iran, Turkey and Saudi Arabia would likely feel pressured to join the club, and would have no problem buying the knowledge from Pakistan.

Solana didn't seem too bothered by the prospect of another rogue state with nuclear weapons. The detente argument still holds water since every country knows that one missile fired would launch a world war. Even the most hopeful disarmament treaties would leave weapon-holding countries with an arsenal sufficient to end the planet.

There is also a practical side to the argument. Developing countries are using much more energy since the 1990 and almost all of the increase has come from gas and coal. With the Stern Review recently estimating that carbon emissions must fall 80% to reach sustainable levels, nuclear energy is a cost effective (albeit dangerous) solution.

It was a pleasure to share time and space with the quick-witted Solana. As Spanish politicians continue to look inward and struggle to communicate in English, he is part of a historic generation of international Spanish diplomats.

Javier Solana - former secretary general of the EU
Rodrigo Rato - former managing director of the IMF
Juan Antonio Samaranch - former president of the International Olympic Committee
Federico Mayor Zaragoza - former director general of UNESCO

In a future post I'll dissect why Spain has a low incidence of English speaking.

Responses To Rajoy's Economic Policy

Republished from http://www.spainreview.net/index.php/2012/01/17/response-to-rajoy-economic-policy/

A month into Mariano Rajoy’s tenure as Spanish President, his economic policy has crystalized around better governance and austerity amidst the revelation that Spain’s deficit is larger than previously thought. In short, the economy policy contains the following elements:

The crackdown on provincial spending has produced perhaps the loudest political response, with the opposition socialist party accusing Rajoy of using the crisis as an excuse to impose his centrist ideology. Catalonia, Andalucia, and the Canary Islands vow to bring the matter to the Supreme Court. Catalonia in particular has made important strides in the last year through its own austerity measures and a local bond issuance, though its debt still straddles the prescribed limit.

But Rajoy’s tax policy is probably of most interest to European policymakers still searching for the right balance between austerity and stimulus. Rajoy’s hand was forced towards austerity after the finance ministry revealed that Spain’s deficit will reach 8.2% of GDP this year, up from a projected 6%. As late as November, the government estimated the deficit at just 4.8%.

Though the tax increase breaks Rajoy’s campaign promise, a majority of those surveyed by El País prefer this route over the alternative of cuts in social services. The sentiment is likely aided by rhetoric that the taxes disproportionately affect wealthy citizens and that the value-added tax will remain untouched. There is also a plan to recoup €8.17bn a year in unpaid taxes, mostly from corporate offenders – a quick hit that could reduce the deficit by up to 0.7% of GDP.

Meanwhile, the government will raise pensions for the country’s poorest and hold electricity tariffs constant for small consumers. The safety net, however, does not apply to the roughly 5 million illegal immigrants or the estimated 300,000 migrants who have lost working visas.

All told, the policies trim €16.5bn off the government bill and Rajoy is adamant Spain will meet the EU’s deficit target of 4.4% of GDP in 2012.

Pundits’ opinions about Rajoy’s strategy are mixed. An analysis from El País found that, while the top marginal rate had increased 7% to up to 55% in some autonomous communities, “working people” would still bear two thirds of the increase. With that in mind, Joachim Voth at the Barcelona Graduate School of Economics predicted in a blog post that the tax hike “will hardly produce any extra revenue” and that Spain would “repeat some of the Greek experience,” with growth slumping further.

The business journal Expansión simply accuses Rajoy of a political identity crisis since conservative candidates typically opt for supply-side regulation. The previous socialist government had already lowered the small business tax rate from 30% to 20%.

Capital Requirements are Hurting Big Banks

A more detailed version of my post about stress tests was published on Fair Observer. In the article, I analyze Banco Santander's situation more and discuss options for banks from around Europe.

Check it out!
http://www.fairobserver.com/article/capital-requirements-are-hurting-big-banks

Stress Test Pain

There is substantial evidence that last week's European Banking Authority stress tests are squeezing banks' business instead of making them safer. Let's consider Spain's Banco Stantander, which has the largest reserve deficit in Europe at €15bn.

Spain just sold a chunk of its Chilean subsidiary for about €800mn. Though they still have a 67% stake, this is not a disposal of a superfluous investment, like the auto parts company that holds equity in a computer chip manufacturer. This is Santander's core businesses! And Santander Chile is one of the best parts of its business. It's a cash cow in a growing and stable foreign market. Its ROE over the last 9 months was 24%, one of the highest returns in the Chilean financial system. The sale valued the whole subsidiary at about US $10bn, down from $13bn in the summer. In summary, a distressed sale in a down market - the kind of transactions that erode shareholder value and make it harder for the bank to finance other activities.

Perhaps this is a game of high-stakes chicken. The EBA challenged banks to boost capital ratios by foregoing dividends and soliciting fresh contributions from shareholders. The banks have taken a left turn by selling assets, shooting themselves in the foot but calling into question the stress test system itself.

Euro still in crisis mode

The euro is still in crisis mode despite central banks moderating borrowing rates to give the ECB easier access to forex. Germany's recent failure to sell a full allotment of 10-year notes indicates that countries are unable to issue new debt to meet cash obligations. The Eurozone has a collective $241bn funding gap between bonds issued in 2011 and payments due at the end of the year. There is no way they can simply cover that in 30 days by selling assets. A Financial Times commentator asserted several days ago that "the Eurozone really has only days to avoid collapse."

Perhaps the most unfortunate aspect is that a Germany-sponsored bailout would be best for everyone, says a UBS Investment Research report. Germany doesn't want to end up with an overvalued currency like Switzerland, so it needs the peripheral countries just as much as they need a German-led guarantee for their debt. The problem is Germany doesn't have the cash to bail everyone out, and markets are not going to tolerate the idea of a Eurobond composed in part of peripheral country contributions (a house of cards if there ever was one).

The wheels for a breakup are already being set in motion. Icap, the world’s largest electronic trading platform for foreign currency, said last Sunday that it was testing its trading mechanism for Greek drachma, just to make sure it still works. Countries are quietly unearthing old images for coins and bills. It’s anybody’s guess as to whether they will still work, since they are configured on obsolete technology. Several countries have completely deactivated their federal mints (for 17 member countries, only 11 actually print euros). The restoration of old currencies will be aided by more sophisticated automated teller machines and cash registers but it will still require a lengthy transition period.

Meanwhile, no one really knows what the rules are for the breakup. Will the weaker countries simply be kicked out of the Euro? If so, under what criteria? Will it be enough just to expel Greece or will stricter criteria have to be used to effectively limit the Euro to the northern zone? Will castaway countries fend for themselves or reorganize into another currency bloc - and, if so, will the ECB support them or will they need to create new institutions? These are just a few of the pertinent questions.

Finally, let’s not forget that there is a cost to restoring fiat rights. It was estimated that the Euro’s introduction provided a one-time 0.5% boost to GDP for each member state due to savings from not having to exchange the single currency, so we can expect the reverse for the return to national currencies. In addition, retailers in some countries will incur significant cost as rapid inflation will force them to adjust their prices.

One thing's for sure: it will be a cold, painful winter.

Corruption to the fore

In the last few weeks, disturbing allegations of corruption have emanated from all sectors in Spain. Today, a major paper reported that directors of Caixa Penedes (which was absorbed by another bank and subsequently bailed out by the state) gave themselves pensions worth €20 million. Meanwhile, a member of the royal family is accused of siphoning public funds from a nonprofit in Palma de Mallorca, the chief-executive at construction conglomerate Sacyr was sent packing after betting against his own company, and a judge is investigating allegations of corruption among members of parliament.

Cronyism, bribery, and embezzlement has always been looked on with a sort of amusement in Spain. The classic example if the Marbella city council. One city councilwoman was ousted after using 800,000 euros of public funds to purchase champagne. This after two former mayors had accused each other of embezzlement on live TV - and both turned out to be completely correct. One went on to marry a famous singer; another later owned a football team.

Today, Spain is ranked 30th in the corruption perception index. This seems quite dire considering that the likes of the UAE and Qatar - which recently bribed its way to a World Cup - are ahead, but perhaps should be taken lightly since the United States is also ranked only 22nd.

Hope rests in reforming the pulic sector

President-elect Mariano Rajoy’s announcement on Sunday night that his first action in office would be to meet with Spain’s 17 provincial leaders could spell big news for the debt-ridden nation. Having always grumbled about the cost of decentralization, Rajoy now has the political mandate to wrest duplicative powers away from provinces, making government smaller and more efficient.

Rajoy is hoping Spain can overcome its post-dictatorship fear of central government that has led to a maze of interdependent municipal, regional, and federal bureaus. Today, for instance, one has to visit an office at each level to get a national ID card (submitting paperwork and paying fees at each). The World Bank placed the nation in the 133rd spot for ease of starting a business due to the litany of legal permits required. Spanish people use the term “vuelva usted mañana” to describe the bureaucracy’s slow pace.

The outgoing socialist government cut as much around the fat as it could with hiring freezes and wage cuts but it did not advocate streamlining the levels of government. Indeed, there has never been a publically acknowledged government study on whether it makes economic sense to have different standards of primary education and unique methods of healthcare delivery in each province.

Spain’s public sector predicament is also found in Italy, Greece, and Portugal. A recent analysis by German and Austrian central bank economists found that those countries’ public sectors are 20-60% larger than Germany’s as a share of the work force, without an increased tax base. It also found that they had the lowest public sector performance indicators among EU members. Combined, the two factors are a major drag on overall economic productivity.

Rajoy will begin by altering labor laws to relax hiring and firing standards, removing risk from business owners’ balance sheets. It’s a positive start but let’s hope he and his counterparts in other new governments take advantage of a unique opportunity to change how their countries’ public sector is structured.

From the Basement to the Boardroom

The IBEX-35 is an old boys club, there’s no way around it. The companies have been around for an average of 67 years and the only recently founded companies are in relatively new industries: alternative energy (Gas Natural, SA) and business services (Indra, SA).

The US also has its industrial-age barons and behemoths, but what about Amazon, Google, E-Trade, Ebay, and Facebook, all founded after 1994? There is nothing in Spain that can remotely match that growth trajectory.

It’s probably unfair to cite all those tech examples. The Silicon Valley feeding frenzy that started with Netscape in the 1990’s has never been duplicated, anywhere in the world. Spain doesn’t have the network of programmers, seed funding, and research institutions that would help tech companies grow – much less all of those concentrated in one place like Silicon Valley.

But there are examples in other sectors. Nike, Bed Bath & Beyond, and Victoria’s Secret were all founded in the 1970’s. Capital One, the credit card company, was founded in 1988! There are 6 financial institutions in the Ibex-35 and none were founded after 1965.

There are several reasons that so few young companies are among Spain’s giants. The first is the dynamics of the local market. Due to vast regional differences, companies need multiple strategies just to conquer Spain. Mutua Madrileña, the auto insurer, is an example. In the early 2000’s they had 40% market share in Madrid and just 3% in the rest of Spain. To enter Catalunya, they had to downplay associations with Madrid by calling themselves just MM or “La Mutua.”

Then, once you conquer Spain you still haven’t really gotten anywhere in world terms. You need to expand to Europe or Latin America – again, necessitating new product and marketing strategies, in addition to long-distance logistics. In the US, by comparison, if you have a nationwide presence you reach 25% of the rich world. And if you’re selling on both coasts you already have the logistics wherewithal to expand internationally.

Finally, there is a cultural factor. John Q. Spaniard opens up a shoe store or a bookshop to earn a modest living, not to sell online or ship to Abu Dhabi. American small businesses are more likely to have multiple locations and multi-channel presence.

Again, I’m not suggesting Spanish companies are badly run. But it certainly would be interesting to model economic growth against the presence of young companies that have reached a critical mass. Let’s see if I can find an academic with some on his/her hands...

Playing Politics in a Debt Crisis

With Spanish general elections on the docket for November 20, it is interesting to see how candidates from opposite ends of the political spectrum are reacting to the various policy options to reduce Spain’s government debt. First, a run through of the key players:

Jose Luis Rodriguez Zapatero
Outgoing President, Socialist Party
The outgoing President's 8-year reign has a critical influence on these elections. Lauded for a social policy that brought convergence with the rest of Europe, Zapatero will feel he was blamed unfairly for the economic crisis in Spain. However, he has proved utterly incapable of making Spain’s government more efficient, instead granting even more autonomy to regional governments.

Alfredo Perez Rubalcaba
Presidential Candidate, Socialist Party
A former pilot and chemist, Rubalcaba has been the socialist party’s utility man, first as Minister of Education under Felipe Gonzalez in the early 1990’s and then as Minister of the Interior for Zapatero. Has always served with distinction but never really become a champion of the people. He's had a hard time distancing himself from Zapatero's perceived failures.

Mariano Rajoy
Presidential Candidate, Conservative Party
Twice embarrassed by Zapatero in previous elections, Rajoy has largely kept his mouth shut and reminded voters that Rubalcaba and Zapatero are responsible for Spain’s problems. It’s been a good enough strategy to build a double-digit poll lead. He has attributed his silence on economic issues to an uncertain economic environment where promises are difficult to keep, but some suspect he is keen to avoid espousing unpopular measures.

And now, the issues...

Issue 1: Taxes
Here Rubalcaba and Rajoy break cleanly along ideological lines. Rubalcaba wants to institute a special income tax for wealthy individuals and raise sales tax for certain items. Rajoy opposes both, favoring trickle-down economics such as homebuyer tax credits and business tax breaks.

Issue 2: Privatization
Zapatero secured congressional approval to privatize Spain’s lottery and sell concessions to manage the country’s two biggest airports. These were courageous decisions meant to put overcoming the looming government debt over his political beliefs. Because both measures were unpopular, Rajoy stridently opposed them and the sales were eventually scrapped amid flimsy market conditions. It’s very probable Rajoy will do an about-face once elected.

Issue 3: Size of Government
Spain has one of Europe’s most complex bureaucracies. In a country of just 48 million people, many of the 17 provinces have full autonomy in spheres ranging from education to police forces to healthcare. There is a desperate need to trim the fat and reduce the paper pushing. But the issue is strictly political. Every time anyone speaks of reducing the size of government, the linguistic minority regions cry wolf because the memory of Francoist oppression is still relatively fresh. It’s unfortunate Zapatero did not tackle this because only a liberal leader could pull it off.

Issue 4: Healthcare
Rajoy’s conservative party quietly embraces privatization of healthcare, outsourcing management of public hospitals to the private sector in two large provinces. However, the national government does not have the right to legislate about healthcare for each province without a change to the constitution.

MBA Career Fair Provides Cautious Optimism for Spain

Esade recently hosted an MBA career fair and it was exciting to see both Spanish companies and MNC's defiantly saying, "We are growing; we are hiring." This jives with a recent Victor Mallet assertion (Victor is the FT's Madrid Bureau Chief) that Spain doesn't have an innovation problem - it has a construction problem. There are two reasons:
1) Too many people work in construction. Construction still employs an astonishing 10% of the workforce, though that has fallen from 12% in 2008.
2) Cronyism and corruption impedes productivity in the Spanish construction industry, as the recent Sacyr scandal illustrate.

Though certain brands continue to thrive, with Zara's sales growing 8% last year and Desigual planning to add 1000 workers in Asia alone, times are tough in many sectors. As alternative energy subsidies dry up several firms announced lawsuits against the government for failing to deliver promised subsidies. Any healthcare firms stated one after the other that demand is stable (or growing) but they feel the pressure to innovate at cost.

Finally, we take a moment to remember our fallen comrades: the MNC's with significant headcount in Barcelona that were conspicuously absent from the career fair. Among them were Deloitte, Sony, HP, and Ricoh.

The Next 10 Years

I want to take a step back from my focus on Spain to talk about a few broad innovations I expect to see in the next few years. These are big ideas and whoever can execute them will make a ton of money.


1. Medical adherence: In developed countries, chronic lifestyle diseases (diabetes, hypertension, asthma) kill more people and cost more money than cancer. The reason? People simply can't take care of themselves. Even after diagnosis, the regime of diet, exercise, and medicine is overwhelming - particularly considering the correlation between these conditions and income/education. What's needed is some kind of system - with the right monetary incentives in place - so that physicians and health coaches actively manage a patient's recovery. All the players, from big pharma to insurance payers and governments, already know this, but it's a monster to operationalize.


2. Do-it-all device: I still carry too much in my pockets. Cell phone, car keys, wallet - it's a lot to keep track of and it's heavy. How about a device that does it all? Not just a phone, but also a virtual wallet and remote car starter. It requires a broad series of industry partnerships and vastly improved security standards but the technology basically exists.

3. Stop pirates: Not in Somalia, but in Asia. Software companies like Microsoft lose 3 revenue dollars to piracy for every revenue dollar earned. No matter your opinion of software prices, it's not fair for companies to earn nothing for their R&D. Computer use increases exponentially in China each year, almost all of it on Windows, and Microsoft sales grow at a snails pace.

4. Selling solar: Today, wind energy is far ahead of solar in market share due to its cost effeciency. Solar gets installed basically only when governments offer large subsidies or feed-in tariffs. But solar energy is far more available and reliable than wind, and easier to incorporate into urban design (you can put solar panels on top of any building; not so with windmills). So it's just a question of finding radically cheaper ways to produce the components in solar panels, and also continuing to increase the energy storage capacity of the panels.

More to come...

Export Friction

Yesterday the third leading Spanish export insurer announced it would no longer insure exports destined for Italy, Greece, and Portugal. This was not a front page item but is nonetheless an important one as policymakers try to curb contagion resulting from the EU sovereign debt crisis.

The news makes it more difficult for exporters to protect against accidents, spoilage, and non-payment. Contracts typically specify that ownership of goods is not transferred until they reach their shipping destination. Exporters can pass along 50% of the potential liability to an insurer.

One could see this development driving up prices for insurance - and hence the prices for goods - and forcing companies to cut back on exports. Goods with high spoilage rates could be particularly affected, which is is relevant for Spain as the EU's leading exporter of fruits and also a significant exporter of dairy products.

The magnitude of the news is not excessive. Coface is responsible for only 10% of the Spanish export insurance market and the three countries account for 16.6% of Spanish exports. Furthermore, contract terms vary so not all exports are affected. Still, this is yet another example of the kid of corporate contagion governments are keen to prevent at such a critical juncture in the Euro's survival.