Seeds of hope in remaking of Iberia

The sovereign debt crisis has left both Portugal and Spain reeling from a contracting economy and high unemployment. In particular, the youth (under 25 years old) unemployment rate has been disconcertingly high — over 34 per cent in Portugal, and nearly 55 per cent in Spain in 2013.

The psychological impact of widespread unemployment can be discerned from the exasperation and helplessness in conversations with the Portuguese and Spanish people. The loss of belief in the future of the country has led to a “brain drain” of young educated professionals.

There was a net emigration outflow of nearly 60,000 Spaniards in 2012. The phenomenon is even more pronounced in Portugal. In 2012, over 100,000 Portuguese, or more than 1 per cent of the population, emigrated and the rate is accelerating.

Mr Miguel Relvas, Portugal’s Minister for Parliamentary Affairs, even commented that “if people are unemployed, they should leave their comfort zone and look beyond our borders”.

This flight of talent will have long-term ramifications for these countries but not necessarily all negatively.

In the short term, it means that the Iberian young are being jolted out of their comfort zones by not only fewer domestic opportunities but by a much reduced welfare state.

Consequently, younger Spaniards and Portuguese may become motivated to carve better futures for themselves, either abroad or by taking the initiative to start companies instead of trying to join bloated bureaucracies or look for “lifetime” employment with large local companies.

These newly enterprising may well represent a vision of future re-energised and vibrant economies for these struggling countries.

NECESSARY CHANGE

Economic crisis has led businesses to re-orientate their outlook to external markets and drive the impetus to improve their export competitiveness, resulting in increased amount of goods being exported.

Both Portugal and Spain’s exports have been on an upward trend over the past couple of years.

In Spain, the value of its goods sold abroad in 2013 rose to the highest level since at least 1971, and its trade deficit shrank to the smallest on record. As for Portugal, its export growth and contraction in imports have led to its first current account surplus in two decades.

Besides increasing exports, Portuguese and Spanish businesses are increasingly casting their nets wide, in particular, over their former colonies, for market opportunities.

Spanish firms have their eyes on the Latin America markets such as Mexico, Chile and Argentina, while Portuguese firms look to Brazil and its former African colonies of Angola and Mozambique for growth. For example, in 2012, Santander, the largest Spanish bank, earned twice its earnings from Latin America than from Continental Europe.

This trend is not one-sided, as investors from the former colonies are also taking the chance to buy up financially strained firms of their former colonial power. Recently, the state-rescued Spanish lender NCG Banco was sold to Venezuelan bank Banesco for €1 billion (S$1.73 billion).

Angolans, boosted by the country’s oil money, are also buying up or into major Portuguese companies from banks to energy firms.

INTRA-STATE LANDMINES

The eurozone crisis is also surfacing fault lines between the different European nations, as well as within these countries themselves.

Discontent towards European Union and Germany is apparent, as questions are raised on the value of a union that does not possess political and social unity. Further, its cultural unity is increasingly becoming a question mark as the EU enlarges to potentially include countries such as Turkey.

Political stability within Portugal and Spain is also at threat as citizens are increasingly critical of the government, whom they regard as incompetent.

Rivalries between regions within the country are also apparent as the second-tier cities such as Porto and Barcelona compete with their capitals for economic development.

In particular, the Catalonia independence movement seeks to repudiate what it regards as punitive taxes imposed and a repression of its language and culture by the government. Catalonia is seeking to hold a referendum on Nov 9 this year for independence from Spain.

These intra-state tensions are often overlooked due to the preoccupation with inter-State frictions within the EU. However, the domestic polarity is a landmine, which could blow up the larger Pan-European experiment by destabilising countries from within. It is in the interest of both national and international leaders to these intra-state issues if they want to avoid future awkward surprises at the systemic political level in the EU.

OPPORTUNITIES FOR ASIA

Asia economies can benefit from the growing export imperative of Iberian companies by taking stakes in exporting firms.

Strategically Iberian multi-nationals represent conduits into larger markets in Africa, Latin and Central America, which have historical and cultural links. Brazil, Angola, Columbia and Mexico are growth-trending economies. As of 2013 Spain had US$200 billion (S$250 billion) of assets in Latin America while leading Portuguese companies such as the Sonae group are major players in the economies of Brazil and Angola.

Asian economies can also benefit by attracting highly qualified talents leaving Iberia. Such talents represent free “shots in the arm” for absorbing economies. Asian firms thinking of entering Iberia need to not only have a strategic view but also a stomach for political and policy risk.

The continuing challenge for both Spain and Portugal is one of leadership. Neither country has the benefit of strong leaders of vision and conviction who have a clear sense of national direction and the gumption to drive the country forward.

This means policy problems are likely to continue to be met by a muddle-through approach. Policy challenges are also prone to “kick the can” responses rather than serious commitment to reform.

Festering frustration with conventional political options is also leading to a growing attraction for extremist leaders with simplistic ideas to complex problems and who are quick to blame immigrants and the rest of Europe for their problems.

Iberia’s future is then a mixed bag. But this in itself is a cause for optimism. A few years ago both economies were seen as basket cases. While they are still lagging badly, there are seeds of hope. And even as political leaders prove disappointing, business leaders are showing leadership.

The best hope for Iberia is that a successful economic future will not be because of politics but despite politics.

ABOUT THE AUTHOR:

Devadas Krishnadas is Managing Director of Future-Moves, a boutique strategic risk consultancy based in Singapore.