There has been much speculation in recent weeks that, after Portugal, Spain is about to join Greece and Ireland in requiring a bail out from the EU/IMF.   Naturally Spain's politicians deny this is the case, wax lyrical about the austerity measures they have announced (under duress), the strength of their banking system and that market speculators are the problem.

As a result, there have been innumerable articles about Spain's economic and financial situation and a lot of disparate information published.  As an Anglo-Spaniard with a financial services background and many years of doing business in Spain I have had for a number of years serious concerns about Spain's economic management and the strength of their banking system (I wrote back in March 2009 how the Cajas in particular were a disaster waiting to happen and look what has happened to them).

So what do the numbers and various reports tell us about Spain's economy?

Looking at the economy as a whole, based on various measures, e.g. growth, unemployment and productivity, Spain is in a very weak position (as the EU's 4th largest economy) versus its peers. Why?

Well, for a start there has been an over reliance on tourism and construction, especially residential property, while Spain has a small manufacturing base as a percentage of GDP versus the EU average.  In fact, since joining the euro which led to the property and consumer driven economic boom, very few efforts have been made to diversify the economy via the development of other industries (the main exceptions being banking and clothes retailing).

In fact the vast majority of businesses in Spain are small, i.e. <10 employees, with no critical mass to compete internationally.  Many are family owned business serving the domestic and, in many cases the very local market, e.g. bars and restaurants.  Apart from a few exceptions, exports of value added physical products have been extremely poor - quality, competitiveness and a lack of export culture being the main culprits.

Just in terms of competitiveness - Spain's productivity has gone backwards versus its major competitors.  Culture, e.g. nice lifestyle, and restrictive working practices are major reasons for this but for me equally important factors are the quality of education, bureaucracy, an over complex and inefficient legal system and endemic corruption.  In fact, a recent World Bank report placed Spain 25th in the European league of countries with  favourable climate for entrepreneurial activity and 147th (out of 183) for the high cost of closing a business.  Hardly an incentive for people to start a business.

Looking at education, a recent IMF survey placed Spain's quality of education below the average of leading EU countries with one of the highest drop out rates from secondary education - 30% versus 12.9% for Germany, 17.3% for Holland, 23.1% for Italy and 23.4% for France.  Language skills are essentially zero versus major competitors - without going into detail this is mainly due to censorship (under Franco who didn't allow foreign language films or TV programmes); teaching methods (emphasis on grammar and learning by rote); and a lack of interest from much of the population - why do we need to speak another language, we have Spain and Latin America.

At the same time, there has been an emphasis on encouraging people to get a university degree - with the consequence that the quality and relevance of degrees has suffered.  Also, the quality of Spanish university education seems to be pretty poor - there are only 3 Spanish universities in the European top 100 (http://www.topuniversities.com/university-rankings/world-university-rankings/2010/european-universities).

In a recent report by Everis, a leading consulting firm based in Spain, 100 experts stated that urgent changes were needed to the Spanish education system to focus on developing knowledge, innovation and talent.  They said that the education system should be more transparent and focused on finding an adequate balance between quality and quantity; university and professional education and training; and classic competences versus modern competences.  They also commented that there were big socio-cultural obstacles to change.

One of the indicators of the failings of the Spanish education system, along with poor economic management, is the fact that with an unemployment rate of more than 20%, 49% of the unemployed are less than 25 years old while the level of unemployment amongst the 45+ age group is also very high.  This amounts to a talent gap which will take generations to solve even if the correct policies are adopted.

So, in short, Spain does not have the human capital to compete effectively in an increasingly globalised world and many of its most talented and qualified people, e.g. doctors, engineers, architects, have left the country to work abroad.  Interestingly, as I finished writing the first draft of this article, the Spanish government announced a five year "Integral Industrial Plan" which will involve an investment of €83bn between 2011 and 2015 to:

o       improve industrial competitiveness;
o       encourage R&D;
o       foster growth and dynamism of SME's;
o       encourage exports; and
o       strengthen strategic sectors.

So at last recognition of where some of the long term problems lie and an important step in the right direction.  Nevertheless, there is still much to do especially, as noted above, in the area of education.