US embassy cable - 05MADRID2437

UNCLAS SECTION 01 OF 02 MADRID 002437 
 
SIPDIS 
 
SENSITIVE 
 
COMMERCE PASS 4211/ITA/MAC/OEURA/DCALVERT 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, SP 
SUBJECT: AMCHAM REPORTS GROWING CORPORATE PESSIMISM TOWARD 
SPAIN 
 
 
1.(SBU) Summary: U.S. companies operating in Spain are 
becoming increasingly pessimistic about the economic outlook, 
according to a new report commissioned by the American 
Chamber of Commerce in Spain. In the report, expectations for 
job creation and investment have dropped notably since 2004. 
U.S. companies were most critical of bureaucracy and labor 
and trade union relations.  The report may fuel GOS fears 
that foreign investment in Spain will continue to drop, 
although foreign investment in 2004 was about the same as it 
was in 2003. There are no forecasts yet for foreign 
investment levels in 2005. End Summary. 
 
2. (U) A new report, "Barometer of North American Companies 
in Spain 2005," by Spain's ESADE business school on behalf of 
the American Chamber of Commerce in Spain, describes a 
negative shift in the outlook of U.S. companies in Spain. 
U.S. companies are the biggest investors in Spain with 532 
registered firms and a turnover of 56.9 billion Euros 
annually. 
 
--------------------------------- 
Evaluation of the Spanish Economy 
--------------------------------- 
 
3. (U) Seventy-four percent of U.S. firms surveyed still 
consider the outlook for the Spanish economy to be good or 
very good.  However, this figure is down from 90 percent in 
2004.  The percentage of firms pessimistic about the economic 
outlook in Spain jumped from zero percent in 2004 to 14 
percent in 2005.  At a sectoral level, the general outlook of 
the companies is similar to 2004, though more pessimism is 
emerging.  Companies with a pessimistic view have increased 
from 4 percent in 2004 to 14 percent in 2005.  The most 
frequently cited problems in the report in relation to the 
economic outlook were institutional and regulatory 
bureaucracy and problems with public policies. 
 
--------------------------------- 
Job Creation and the Labor Market 
--------------------------------- 
 
4. (U) The ability of firms to increase or maintain current 
levels of employment has also diminished from 2004 as 24 
percent of surveyed firms will reduce their labor force in 
2005.  Only 31 percent plan to increase employment in the 
long term, a 12 percent drop from 2004.  60 percent were 
"pessimistic" about their ability to create new jobs in the 
short term. Labor market rigidity and inflexibility in work 
practices are a major factor in the reduction of employment 
plans.  According to the President of the Chamber of Commerce 
in Spain, Jaime Malet, "the cost of laying somebody off, in a 
country with such high unemployment and lack of job security, 
does not make sense."  Further, "the system is not able to 
adapt its manpower to the areas of the economy where it is 
needed." 
 
5. (U) The study also analyzes compatibility of Spanish 
workers with the needs of the U.S. firms.  Managers 
frequently cited their appreciation of the workers' ability 
to learn, their customer relationships, and their ability to 
problem-solve and be team players.  In spite of this, the 
lack of foreign language skills, and in particular English, 
was cited as a major hurdle to overcome. 
 
---------------- 
Investment Plans 
---------------- 
 
6. (U) Despite the fact that the majority of the U.S. 
companies evaluated their overall position as highly 
satisfactory in 2004, many of them did not make significant 
investments. Only 49 percent of companies developed new 
investment projects in 2004.  Further, only 27 percent plan 
to create new investment projects in 2005, whereas 22 percent 
plan to reduce their investments.  On a sectoral level, 
finance, insurance, consulting, and marketing companies are 
optimistic about future investment.  Automotive and other 
general services show the most pessimistic plans for the 
future. 
 
-------------------- 
Economic Environment 
-------------------- 
 
7. (U) The study shows a drop in the level of satisfaction 
with the economic, institutional, and public regulation 
environment in which U.S. companies have operated in Spain 
between 2004 and 2005.  Companies remain satisfied with the 
standard of living offered to foreign personnel, the 
facilities and quality of banking services, the degree of 
contract fulfillment, and the level of education of their 
Spanish collaborators.  Declining satisfaction is 
demonstrable in the bureaucracy of the public administration, 
payment conditions offered and demanded between companies, 
union and labor relations, and labor laws and their 
application. 
 
------------------ 
Political Jitters? 
------------------ 
 
8. (U) Several media reports cite the possibility that the 
increased pessimism may be a result of the 2004 change in 
government.  Although the study outlines a decline in the 
degree of satisfaction with the government and its civil 
service, it does not state whether this is in relation to the 
change in government.  Concerns about bureaucracy were not 
broken down in the report by autonomous regions versus the 
national government. Malet stated that he believes the 
negative trends in the report are due to the political change 
which temporarily unsettled managers.  He further stated that 
he is "convinced that this is just a phase." 
 
9. (U) Note: It is important to mention that only 14 percent 
of the U.S. firms registered in Spain responded to the survey 
used in writing the "Barometer 2005" report.  Further, the 
report does not list the names of the firms nor their 
geographic location with Spain.  Consequently, it is 
difficult to verify that the report portrays an accurate 
picture of the situation in Spain as geographic distribution 
and company size are not clearly revealed in the report. 
 
 
10. (SBU) Comment: This report on U.S. companies' pessimism 
may further play into fears that foreign investors may 
continue to withdraw from Spain. The past 11 years have been 
marked by a wave in foreign investment in everything from 
electronics and car manufacturing to chemicals and spare 
parts.  However, recent media reports have commented on the 
new era of "deslocalizacion," in which foreign firms lay off 
workers, close plants, and move to newer EU member states 
with cheaper labor costs and greater financial incentives. In 
all, more than 40 multinationals have closed or sold 
factories in Spain since 2002, averaging one shutdown per 
month.  As a response, the GOS announced in February a 
package of over 100 measures to improve Spain's 
competitiveness.  Critics claim, however, that the plan is 
too vague and little has been done to decrease labor market 
rigidity and bureaucratic red tape within Spain, two major 
concerns cited in the Barometer 2005 report. Spaniards are 
right to be concerned about competitiveness issues.  It is 
worth noting though that foreign investment in Spain reached 
its highest level in 2000 at roughly 38 billion Euros with 
major investments in telecoms and banking. The big drop in 
foreign investment occurred in 2003 when it went down to 
about 18 billion Euros from 32 billion Euros in 2002. In 
2004, foreign investment was stable at almost 18 billion 
Euros.  Clearly, there are one-off (privatization and 
deregulation), as well as competitiveness, factors at work in 
driving foreign investment. Moreover, the percentage share of 
American investment in Spain declined from over 30% of 
foreign investment in Spain in 2003 to about 10% in 2004.  We 
do not know if this represents a trend, but this may have had 
something to do with the respondents' pessimism. End Comment. 
 
 
 
MANZANARES