Spain’s attraction grows as more foreign cash floods in

Spain's economy has been bolstered and boosted by huge volumes of foreign investment

For Mariano Rajoy, 2014 could not have gone much better so far. The Spanish prime minister ended 2013 with scandals blowing all around him, the Royal Family lurching from crisis to crisis, and an economy that – while recovering – gave off the nervous air of a quivering chihuahua.

But what a difference a few months make. After earning the backing of the European Union for Spain’s impressive labour market reforms, and drawing praise from the International Monetary Fund, this week saw Rajoy’s premiership win the plaudits of Madrid’s famously sceptical academics, the backing of a number of international companies, and the approval of global economists…This all stems from figures released by Spain’s Economy Ministry that show foreign investment in Spain has jumped by nearly 40% in the past 12 months, with international investors and companies pouring close to €30 billion into Spanish businesses.

Capital from France, Japan, Hong Kong, Mexico and Venezuela has been joined by Vodafone Plc’s recent acquisition of Spain’s Grupo Corporativo Ono SA for more than €7 billion. Indeed, after Ireland, Spain was the world’s second-largest recipient of foreign capital in 2013, according to data from the United Nations.

Where once it was aid, now it is investment. Companies have cottoned-on to Spain’s recent labour reforms, and the country is reaping the benefit. Although wages have fallen, employment confidence is on the up, buoyed by a more flexible labour market that makes it easier to attract, hire and fire staff. As a result, Spain is now an extremely attractive destination for capital investment.

“Spain is recovering its capacity to attract investment,” said the head of the economy department at Pontificia Comillas University in Madrid, Alfredo Arahuetes García. “Growth will be more balanced in the next economic cycle as reforms have strengthened the foreign sector, which was neglected for years after Spain joined the euro.”

Encouraging news, and there was yet more to follow. Bayer AG, the German pharmaceutical giants, revealed that they invested €6 million last year in developing the Langreo plant in Asturias, Northern Spain. The plant, once open, will handle the company’s entire aspirin output. The manager of that plant, Manuel Fernández Ortega, said: “Spain’s qualified and flexible labour force, its competitive production costs and its strategic location make it very attractive.”

Nowhere is this more true than in Spain’s purring motor industry. General Motors (Opel in Europe) spent €165 million on its Figueruelas plant last year, and is eyeing a further €210 million investment in 2014, while Renault will create 250 jobs in Valladolid this year as the company ramps up production for the summer.

Foreign direct investment attributed three per cent of GDP last year, up from two per cent in 2012. “Confidence is returning,” said María Jesús Fernández Sánchez of Spain saving bank foundation, Funcas. “Declines in labour costs have restored lost competitiveness compared with other European countries, while the reform of labour rules has conveyed the message that rigidities aren’t as strong anymore.”

The questions the average Spaniard is likely to ask is: Does this mean more jobs? And: does this mean better pay? The short answer is ‘Yes’ and ‘No, not yet’. To boost employment opportunities, the government has essentially exerted pressure on wages, helping companies hire workers for less, and to contribute less towards social security. However, these changes have brought an additional €5 billion in tax revenues to the government’s coffers, which it will invest in helping local authorities retain jobs. After all, more people on lower pay is better than a handful drawing high wages.