Spanish-US Economic Relations: How Important are the Aznar-Zapatero Gyrations?

Spanish-US Economic Relations: How Important are the Aznar-Zapatero Gyrations?


While the Spanish-US economic relationship arguably remains relatively underdeveloped, our tentative conclusion is that the impact on the bilateral economic relationship of the Aznar-Zapatero gyrations in Spain’s political relationship with the US has proved relatively insignificant and is likely to remain marginal in the future.


The priority that the Aznar government placed on tighter bilateral political relations with the US raised many hopes that Spanish business interests would gain from the resulting opportunities to further develop the bilateral economic relationship. Despite the fact that many remained sceptical that a high-profile relationship with the US could have a concrete positive impact on Spanish economic interests, in late 2003 and early 2004 Aznar’s policy circles began to develop a blueprint for a renaissance in Spanish-US relations. However, the results of the March elections in Spain and the subsequent removal of Spanish troops from Iraq began to sour the mood of optimism that Aznar had cultivated. As a result, many have feared that –far from further developing the relatively weak Spanish-US economic links– the recent political controversies between the two governments could actually begin to threaten Spanish interests. Nevertheless, the link between the state of the bilateral political relationship in the short run, and the course of the bilateral economic relationship over the middle run, remains tenuous. A more sustainable strategy for improving the prospects of Spanish interests within the economic relationship with the US would be one that was rooted in a policy to transform Spanish productivity. In the end, it is neither convenient nor efficient to view the bilateral economic relationship through the prism of the Spanish-US bilateral political relationship.


The Economic Case for Aznar’s Turn to the US
Since the summer of 2002, when former Spanish Prime Minister José María Aznar represented the EU presidency at the G-8 meeting in Canada, there has been a growing discussion in Spain as to the country’s evolving economic and political weight in the world and the potential links between the status of Spain’s political relationship with the US and the course of the bilateral economic relationship. Beyond the rhetoric of the Aznar government as to the moral and security issues justifying Spain’s support for the US position on the Iraq intervention, the former Prime Minister also made an economic case for an ever-tighter political relationship with the US. During the autumn of 2003 and the winter of 2004 much brainstorming and analysis took place within Aznar’s intellectual and policy circles as to what form tighter political relations with the US might take during the presumed coming term of Aznar’s successor, Mariano Rajoy, and the economic argument for a potential renaissance in Spanish-US relations.

The March 2003 Azores photo –in which Aznar appeared next to Bush, Blair and Barroso on the eve of the invasion of Iraq– was the first concrete evidence, according to the vision of the former Prime Minister, that Spain was once again, after a long hiatus, playing ‘in the big leagues’ of the international arena. In practical terms, this meant breaking out of Spain’s traditional foreign policy trajectory, focused on European integration, operating as a middle-sized country in what was perceived by Aznar as an inferior relationship with the centre of gravity in the EU. More to the point, it meant aspiring to much closer cooperation with the US in international realms (for example, in Latin America and the Maghreb, and on issues of international terrorism) where the Aznar government perceived Spanish national interests to be insufficiently addressed through the traditional channels of the EU.

But was there an independent economic case to justify Aznar’s ambitious turn towards the US? Suffice to say, within intellectual and policy circles close to Aznar, a fair amount of thinking was invested in the effort to design a blueprint for the future of tighter Spanish-US relations and to develop the political and economic case for pursuing such an agenda. Leaving aside the political case (which lies beyond the scope of this analysis), the economic argument that began to take shape looked something like what follows schematically here.

First, while Spain had successfully taken its initial major step in the internationalisation of its economy during the previous two decades, the perception was that its international economic linkages, particularly the all-important investment and banking flows, remained highly concentrated in Europe and Latin America. On the other hand, Spain’s underdeveloped presence in Asia was beginning to be addressed by the incipient Asia Plan developed by the Foreign Ministry. This left the US as a final remaining important economic partner with which to begin to seek untapped mutual benefits.

Second, according to this vision, Spanish interactions with, and presence in, the US economy –the single largest and most dynamic national economy in the world– remained highly underdeveloped. Spanish trade and investment interactions with the US were significantly underweight relative to both Spain’s position as an exporter and net investor in the world economy and the economic relationship of most of Spain’s EU partners with the US. Exports to the US have accounted for roughly only 5% of the Spanish total since the mid-1990s, while the trend in recent years has been for this percentage to fall. More importantly, while Spanish exports now account for more than 2% of the world total, their share in the US market has hovered around only 0.5% –only one-tenth the level of the German share, one-seventh of the UK’s, one-fifth of the French, and one-fourth of the Italian. While the US is currently Spain’s sixth most important national trading partner, Spain is number 31 for the US. Meanwhile, Spanish direct investment in the US has averaged around only 6% of Spanish outflows with a large degree of volatility. Furthermore, Spain’s FDI flows to and stocks in the US are dwarfed by those of the UK, Germany, the Netherlands and France.

Only the singular tie of US investment in Spain has been somewhat more significant than the bilateral trade relationship or Spanish investment in the US. These flows have also been quite irregular, but in recent years US direct investment in Spain has oscillated between 10% and 50% of total inflows, making the US the single largest national investor in Spain since the turn of the decade. However, if the unit of analysis is changed from countries to regional economic blocs, then the EU becomes Spain’s dominant economic partner in all terms, with the only other rival being Latin America during the 1990s as a destination for Spanish investment outflows. Therefore, in order to achieve a healthier and more mature diversification of Spain’s economic internationalisation, and to take advantage of a potentially profitable but relatively untapped bilateral economic linkage with the US, thinkers around Aznar argued that Spain should begin to more actively pursue trade and investment ties with the US.

Third, there were a number of specific concerns and motives which seemed to point in the direction of pursuing deeper economic ties with the US. In the European context, the Aznar government had attempted, at least half-heartedly, to change the direction of the Spanish economy so as to place it more firmly within the camp of the so-called ‘Anglo-Saxon model’ and at least aspired to influence a similar change of course within the EU. Tighter economic relations with the US seemed to make sense within the context of this aspiration to converge in policy terms with the Anglo-Saxon economies. In early 2004, Aznar even floated the idea of creating a US-EU free trade area (the Atlantic Economic Association) by 2015.

Furthermore, those promoting Aznar’s new project quickly identified the rapidly growing US “Hispanic market” –now roughly the same size as Spain itself in terms of population and total purchasing power– as a potential initial avenue along which deeper economic interpenetration with the US might be pursued. The significance of the Spanish presence in Latin America and the cultural and linguistic ties of the broader Hispanic family were seen as potential assets to be wielded in such a strategy. Finally, closer economic and political ties with the US, according to this vision, could produce beneficial spill-over effects for the stability of Latin American economies (where Spain remains the first or second largest national foreign investor in most countries) and for the future prospects of Spanish companies operating in what historically has been the US’s political and economic ‘backyard’ –even if the mechanisms for such bilateral collaboration, and the extent and concrete nature of the benefits for Spanish interests there, remained unclear–.

Fourth, given the underdeveloped nature of Spanish-US economic ties, it was posited within Aznar’s circle that a more profound political relationship would provide important leverage upon which the Spanish-US economic relationship might capitalise. Growing political sympathies and collaboration would pave the way for Spanish business interests in the US market, particularly among the rapidly growing Hispanic segments concentrated in the South-east, Texas and the South-west. A renaissance in political relations could possibly even lead to more active facilitation, on the part of relevant US public and corporate authorities, of Spanish economic penetration into the US market, at least when and where feasible and appropriate within a supposedly open and non-discriminatory free market. Furthermore, given that Aznar’s ambition to raise Spain’s profile in the international arena was intimately linked to his instinct to move ever closer to the US in policy terms, it was believed that the resulting improvement of Spain’s image in the US would also lubricate a deepening of economic linkages, both in terms of Spanish penetration in the US economy and in terms of creating a stronger and more lasting attraction for US investment in Spain.

Therefore, the tentative conclusion of those working under Aznar’s wing during the dying days of his second term was that, independently of the international political and security concerns underlying Aznar’s much-vaunted shift in Spanish foreign policy, Spain had much to gain economically –and relatively little to lose– by pursuing a full-blown renaissance in Spanish-US relations, in general, and an active deepening of the bilateral economic relationship, in particular. Indeed, key to the argument was the hypothesis that the former would facilitate the latter in concrete terms, with intense political interpenetration working as a catalyst to unleash fresh economic potential.

The Critique of the Economic Case for Aznar’s US Policy
While the critique of this economic argument prior to the March 14 elections tended to be even less developed than the argument itself, Aznar’s case did not go unchallenged. This critique coalesced around the following claims.

First, the link between the momentary status of the political relationship and the bilateral economic relationship was considered too weak, if not simply spurious, to be considered as even a secondary justification for a major foreign policy shift. The supposed weakness of this link was underlined by the assumption that in the context of an increasingly globalised economy, currently developing along the liberal lines championed by the Anglo-Saxon model, sustainable economic linkages were supposed to be increasingly immune to political discrimination. Furthermore, Spain’s economic relationship with the US was relatively underdeveloped not because Spain had previously eschewed such overt political rapproachment and policy convergence with the US, but rather because Spain was further back along the curve of economic internationalisation than most of its European partners. This situation was a natural –if not necessarily permanent– outcome of the fact that the Spanish economy remained relatively underdeveloped –too unsophisticated and unproductive– to have already generated the dense web of economic linkages with the US, particularly in terms of mutual investment flows, now enjoyed by many of Spain’s European partners.

Second, to the extent that even a weak link between the bilateral political and economic relationships was to be conceded, the economic benefits of Aznar’s US ambitions were only potential at best and remained still vaguely defined, meaning that they could easily prove illusory. Meanwhile, the potential risks of such a strategy to Spain’s dense economic relationships within Europe were perceived as tangible and much clearer, particularly in the context of ongoing negotiations over the future of political and economic governance within a wider and deeper EU, not to mention Spain’s European Funds. Perhaps, tighter political and economic ties with the US need not be mutually exclusive of Spain’s continuing effort to safeguard and pursue more vital and direct economic interests in Europe. Nevertheless, to successfully develop the former, wielding the political lever of closer relations with the US, without damaging the latter, would have required the most agile and astute diplomacy on the part of the Aznar government at a moment when Aznar’s European policy was increasingly perceived by many in the heart of Europe, particularly in Germany and France, as obstructionist, if not downright confrontational.

Third, while the pursuit of deeper economic ties with the US might be considered a constructive goal in and of itself –and possibly concretely justified, at least partially, by a strategic imperative to diversify the pattern of Spain’s economic internationalization– it was not considered by Aznar’s critics to be central and immediate enough of a national public priority to warrant using it as a justification for tighter political relations with the US. Such scepticism was reinforced by the widespread perception that the main component of the potential renaissance in political relations with the US desired by Aznar consisted of aligning Spain with the US –and against much of the EU– on a wide range of foreign policy issues –despite the widespread rejection of such a foreign policy stance among a majority of Spaniards– and attempting to engineer a Spanish policy convergence –if not an overall EU policy convergence– with the Anglo-Saxon economic model, a trajectory also rejected by a majority of Spaniards and Europeans alike.

Finally, the particular economic opportunities identified by Aznar’s government and think-tank circles –principally, the possibility for Spain to successfully tap the US Hispanic market and the potential for fruitful state-corporate collaboration between Spain and the US in Latin America– appeared to critics to be fruitless chimeras at best, if not dangerous delusions. The US Hispanics remain a heterogeneous lot, dominated by the Mexicans who, while having no particularly affinity with Spain, were increasingly prone to US cultural assimilation. Furthermore, for Spanish interests increasingly dependent on earnings from Latin America (nearly 30% of the total operating profit of the companies in the IBEX-35 –Spain’s blue-chip benchmark index– and approaching 50% for the largest Spanish investors) and ever more conscious of their own image problems in the region, it seemed a very tricky prospect indeed to appear to be operating in Latin America hand-in-hand with los yanquis.

Zapatero’s ‘Return to Europe’ and the Threat to Spanish-US Economic Relations
It would be difficult to deny that Spanish-US relations have undergone a major change since the Spanish general elections in March 2004, at least at the level of political rhetoric. The first eight months of Prime Minister Zapatero’s term have been marked by mutual recriminations and hostile rhetoric, both public and private, within the media and among the political classes, the policy communities and the broader public, both within and between the two countries.

The first casualty has been Aznar’s hoped-for renaissance in the bilateral political relationship. The Socialist Party’s (PSOE) victory at least temporarily shelved the project of Anzar’s intellectual circle to engineer a sharp upgrading of Spanish-US relations. This was confirmed first by Zapatero’s immediate and decisive follow-through on his electoral promise to withdraw Spanish troops from Iraq, followed by the brutal reaction from the US press which reflected the (albeit more contained) attitude of the US administration. The change in political direction was then seemingly cemented by Zapatero’s high-profile ‘return to Europe’. The deterioration in at least the rhetorical surface of the political relationship continued with Zapatero’s suggestion that other nations engaged in Iraq withdraw their troops and the failure of the US ambassador in Madrid to appear at the official commemorations on October 12.

The sense that this deterioration reached below the rhetorical surface has been reflected by a growing perception, at least in Spain, that Zapatero’s government has been deliberately and publicly shunned by President Bush and his circles. Furthermore, this transatlantic rift between governments has been exacerbated by the interlocking nature of the domestic political battle between the Partido Popular (PP) and the PSOE. While Zapatero and his government, including the Spanish ambassador in Washington, have seemingly little if any direct access to Bush and his high-level officials (at least for the time being), former Prime Minister Aznar and his intellectual advisers continue to enjoy relatively easy access to high-level US officials and even the White House. The interlocking nature of the domestic PP-PSOE battle and the Spanish-US rift was complicated further by the government’s high-profile reception of Hugo Chávez in Madrid and the polemic surrounding the statement by Miguel Ángel Moratinos, the Spanish Foreign Minister, that Aznar had supported the attempted coup d’etat against Chávez in early 2002.

The fear now among those who championed Aznar’s US policy –and among at least a noticeably minority within the Spanish business community– is that the second casualty of March 14 will be the Spanish-US economic relationship. The first potential avenue along which the economic relationship might deteriorate is that in which governments have the primary decision-making capacity, principally in the area of public procurement and the military sectors. Although US ambitions to supply more military hardware to Spain remained largely unfulfilled as Spain increasingly turned towards procurement cooperation with European partners, Aznar’s champions had hoped that one by-product of the renaissance in political relations would be a US decision to follow through on earlier plans to invest upwards of US$150 million in the expansion of the shared US-Spanish naval base in Rota. It was even hoped that the US would eventually transfer the headquarters of the Sixth Fleet from Naples to Rota, a move which presumably would yield further economic benefits for the surrounding Andalusian economy. Such a move might also, as a consequence, imply the contracting of significant fleet maintenance with the now-embattled public shipyard, Izar, injecting new liquidity and dynamism into the company. The spill-over from Aznar’s US renaissance was also supposed to spark more US purchases from Spain’s military producers, like the much talked of purchase of planes from the Spanish branch of EADS-CASA by the US Coast Guard. Many of these hopes –however unrealistic or intangible they may or may not have been– now appear, at the very least, to be in question.

Furthermore, some Spanish companies, like Cintra, have recently been awarded important public works projects in the US. It was also hoped that more Spanish companies would benefit from at least informal facilitation at winning further contracts and establishing important footholds in the US economy as a result of the much cosier political relationship that Aznar and his followers were intent on developing. A corollary of this fear of lost opportunities in the US for Spanish interests is the claim –probably credible– that the Zapatero government has scant interest in pursuing the US Hispanic market as a direct target for Spanish business interests.

The next area of fear concentrates on US investment flows to Spain, the most developed link in the Spanish-US economic relationship. In recent years, US flows of foreign direct investment into Spain have been somewhat volatile, but they have consistently accounted for between 10% and 50% of all flows of direct investment into the country since 1997. Indeed, in 2002, US interests contributed the single largest national net direct investment in Spain, accounting for more than half of the total.

A survey undertaken at the end of 2003 and beginning of 2004, and published by the American Chamber of Commerce and ESADE last March, revealed an overwhelming optimism on the part of US interests in Spain with respect to the future of their Spanish businesses, the trajectory of the Spanish economy, and the environment for further investment. One factor, if secondary, identified as contributing to the positive outlook was the favourable perception that US businesses in Spain had of their relations with the diverse layers of the government administrations and the functioning of relevant institutions. The survey also concluded that US businesses in Spain generated total turnover equivalent to 7% of Spanish GDP, were at least indirectly responsible for employing over 300,000 people (or some 2.2% of those employed in the private sector) and spend more than any other single national foreign investor on R&D in Spain.

The fear is that such enthusiasm has now been dashed, endangering the levels of future flows of US investment into Spain, particularly in an environment in which many other economies, within and beyond the EU, compete increasingly intensely for inflows of FDI. The tentative conclusion drawn by those who fear a drop-off in US investment is that such a development could significantly damage the Spanish economy. The concern is presently concentrated among the Spanish business enterprises most tightly linked to US interests. The picture, at least at the level of perceptions and expressed intent, should become clearer once the next issue of the ACC-ESADE survey, conducted during the second half of 2004, is published early in 2005.

There has also been a concern expressed that, far from benefiting from the once hoped-for cooperation with the US in Latin America, Spanish business interests operating there will become an explicit target of US diplomacy. In the realm of public procurement, public works and even other areas where local governments retain significant influence over investment and pricing decisions, the fear is that Spanish interests will be increasingly boxed out or prejudiced by the formal policies and informal attitudes of governments seeking to appease Washington, or at least willing to cede to hostile US pressures. Given that Latin America remains the most accessible destination for Spanish investment outside Europe, and considering that net earnings by Spanish companies account for upwards of 10% of the Spanish total, and well over 25% of those of the biggest Spanish firms, there are understandably some concerns in this terrain.

Is There Anything of Lasting Significance to Fear?
Nevertheless, there are reasons to be sceptical that the recent deterioration in political relations between Spain and the US will have any substantial and lasting impact on the bilateral economic relationship, at least in a form that would pose a significant problem for the Spanish economy. Broadly speaking, any new opportunities to be potentially created for Spanish interests in the US and Latin America, or directly with the US government, through tighter political relations never had sufficient time to materialise before the March elections, while Zapatero’s troop withdrawal immediately knocked Aznar’s renaissance off track. These supposed future benefits therefore remained hypothetical and, as such, highly intangible. Indeed, many Spaniards operating in the military sectors remained doubtful –even before the March elections– that much of significance would ever come from supposed political closeness to Washington, reflecting an historical scepticism produced by repeated Spanish disappointment at the concrete results of Spanish-US military arrangements over the years.

In fact, the above-mentioned EADS-CASA deal to sell planes to the US Coast Guard for its Deepwater project, signed in February 2004, has proceeded apace with no noticeable effects stemming from the recent disagreements between the two governments. EADS-CASA is now up for another sale of planes to the US Army, but even if its Italian competitors edge it out, it is more likely this would be a result of the US spreading the cake among the varied interests of its allies –as Italian interests lost out earlier to the Spanish in the Deepwater bid– than a direct punishment of Spain. Moreover, Cintra has just won another US project to develop the Trans-Texas corridor, suggesting a weak link between annoyance with Spain in Washington and the possibilities of Spanish firms pursuing business opportunities in the US.

However, much more tangible damage to the Spanish economy would come from a potentially sustained decline in US FDI flows to Spain. But there is more than sufficient reason to doubt that the bulk of decisions affecting US investment in Spain would be more than marginally influenced by the current rut in political relations. The primary factors affecting these decisions remain perceptions about the relative performance of the Spanish economy and the evolution of the fundamentals underlying it. Even the ACC-ESADE survey only mentions US business relations with the government as a secondary factor, and there is no indication at all that the Zapatero government has any intention of translating the current spats over foreign policy with the US into a policy of discriminating against US business interests in Spain.

On the contrary, the current government is likely to maintain the tone of administrative relations with US firms established previously and continue to welcome and promote US interests in Spain. One indirect sign of this was a statement by Moratinos, made in the face of growing claims that the government’s row with the US would harm the economic relationship, that Spanish-US trade had in fact increased slightly during the course of 2004, after having declined in the previous years during the heyday of Aznar’s US policy. Such a statement was meant to present fresh evidence that the economic relationship functioned largely independently of foreign policy. While such evidence is not exactly profound, as it excludes investment flows and remains too short-term in nature, it does point to the fact that the government views the political and economic relationship as independent, at least to a greater degree than did the Aznar government.

This leaves the decision in the hands of US companies operating in Spain. It is unlikely that purely ideological and probably fleeting political concerns will fundamentally affect their decisions. Nor is it clear that new firms, not currently present in Spain, will eschew the Spanish market on political, and largely foreign policy, grounds. Furthermore, despite recent influxes of US investment in Spain, it is not likely that the surge in US investment had anything to do with the bilateral political relationship. More likely factors are to be found in more fundamental concerns, including the evolution of exchange rates and global corporate strategies, the expected performance and policy evolution of the Spanish economy and the economic and business environments of alternative investment locations.

Most importantly, even should the level of US FDI inflows to Spain drop in absolute or relative terms in 2004, one should not jump to the conclusion that this would have been caused by a perceived deterioration in political relations. First, although US investment has become more significant in recent years, it has experienced a high degree of volatility. According to the Spanish Economy Ministry, US effective FDI in Spain was approximately €1 billion in 1998 (12% of total Spanish inflows), €8.5 billion in 1999 (45%), €11.4 billion in 2000 (29%), €4.8 billion in 2001 (14%), €15.9 billion in 2002 (51%), and €5.2 billion in 2003 (31%). If 2003 registered the high-water mark in the Aznar-Bush relationship, when inflows fell precipitously, clearly any movement in 2004 should not be attributed to the political relationship but rather to a number of other factors affecting flows of FDI globally. Furthermore, the ACC-ESADE survey actually found that, at the end of 2003, 86% of US firms operating in Spain had no major new investment plans on the immediate horizon, suggesting that any drop off of US inflows in 2004 would have resulted from business decisions taken before the change of government in Spain.

The relative importance of current US investment should also be placed in a more appropriate perspective. US business activity in Spain is indeed significant, but not overwhelmingly so. A study recently undertaken by the American Business Council in Spain reveals that while US businesses in Spain account for nearly 5% of total Spanish spending on R&D (and nearly 10% of total Spanish private R&D investment), along with some 8% of the manufacturing sector’s gross value-added, US firms contribute only 1.8% of the total Spanish economy’s gross value-added and own less than 1.4% of the total net stock of capital in Spain.

Finally, it is unlikely that the Aznar-Zapatero swing in the relationship with the US could ever significantly affect Spain’s standing in Latin America. At least it is not credible to argue that Spanish interests now have something significant to fear as a result of some hypothetical US revenge diplomacy. First, most of Spain’s FDI remains concentrated in South America, where the US has lost direct influence over the governments in Venezuela, Brazil and Argentina. Second, US and Spanish firms in the region have developed a different pattern of interests and relative dependencies, with the former concentrated in manufacturing, seeking cheap labour to produce for export and remaining less vulnerable to domestic slowdowns or instability, while the latter has concentrated in service sectors and depends on the economic evolution of domestic markets. The one institution with the single largest degree of influence over the macroeconomic stability of the region is the IMF, whose managing director, Rodrigo Rato, is a Spaniard with historic ties to the major Spanish firms present in Latin America. It is at least doubtful that he would collude with a US policy of outright hostility to Spanish interests in the region. Finally, even Chile and Mexico, where US influence is strong and where Spanish ambitions are rising, are unlikely to actively prejudice Spanish interests at the bidding of the US. Both showed themselves more than capable of resisting US pressures during the UN Security Council debates on Iraq. In that specific incident, Spain came together with the US to pressure both countries onto the Iraq bandwagon. The failure of the Spanish-US tandem to do so suggests that the Aznar strategy to improve the scenario for perceived Spanish interests through tighter collaboration with the US in the region was always at least somewhat dubious.

Further exploration of the potential direction of the Spanish-US economic relationship, and its ensuing impact on the Spanish economy, clearly must be undertaken (the Elcano Royal Institute has indeed begun a book-length study of the question to be written by former Times and Financial Times correspondent William Chislett). Nevertheless, the tentative conclusion here is that the economic relationship –long term by its very nature– is largely independent of the short-term status of the political relationship. Spanish-US relations would necessarily have to deteriorate to such an extreme that Spain would need to be considered a pariah nation for US business concerns to shun its economy. But even pariah nations continue to attract US interests on economic grounds. In any event, the bilateral economic relationship should certainly not be viewed through the prism of the bilateral political relationship.

Indeed, if the objective is to continue to project the Spanish economy into an increasingly integrated global market, and if deeper economic ties with the US constitute one of the pending strategies to pursue, economic internationalisation should be approached within the context of Spain’s overall economic policy, not wrapped into an unpopular and sudden shift in the trajectory of Spanish foreign policy, and used as a secondary argument to help justify such a course. If any single strategy would lay the sustainable foundation for further and more balanced economic internationalisation, it would be one which sought to usher Spain through a productivity revolution.

This alone would allow Spain to successfully complete its still unfinished transition from the autarchy and stagnation of the early Franco period to a dynamic, productivity-based, sophisticated market economy, capable of remaining entrenched within the most advanced core of the world economy. Such a conclusion is particularly relevant for the Spanish-US economic relationship where productivity increases would not only facilitate Spanish penetration of the US market, but also make Spain increasingly attractive for US direct investment, especially in manufacturing which, to date, remains the single most significant link within the bilateral economic relationship. To rely instead on a weak spill-over effect from cosier political relations would unlikely produce by itself any lasting gains, particularly in a rapidly globalising world economy increasingly susceptible to –and even generating– strong pressures for industrial restructuring and delocalisation.

Yet, despite the apparent success of the Aznar government’s economic policy –one of the few policy areas on which there has been a broader national consensus– on the key issue of productivity, it cannot claim anything in particular. One might even argue that the Aznar government was guilty of strategic neglect. Spain’s labour productivity levels relative to the EU did not noticeably change during the last government’s eight years (remaining some 80% of the EU-15 average), while growth in labour productivity fell (from 1.85% on average annually since 1975 to only 0.85% annually during the Aznar period). More significantly, the growth rate of the all-important total factor productivity index actually collapsed to near stagnation during Aznar’s watch (from nearly 1% on an average annual basis since 1975 to 0.5% during the Aznar period), leaving its level at 85% of the EU-15 average and much lower with respect to the US.

Nevertheless, a return to dynamic productivity gains (based on improved management, marketing and distribution techniques, along with an innovation and knowledge-based climb to higher rungs on the value-added chain) will be the key, not only to the continued attraction of foreign direct investment –from the US or elsewhere– within an increasingly competitive world marketplace, but also to the capacity of Spanish interests to successfully penetrate into new and tougher terrain, whether in Asia or North America.

This is an objective to which the current government at least claims to give high priority. This has been evident from the emphasis which Miguel Sebastián, Zapatero’s principal economic adviser, has given to productivity improvements. However, it will not be an easy task to undertake, and the results will not be felt, even in the best case scenario, any time soon. But it is an objective which Spain must pursue, under any set of circumstances. In contrast, Aznar’s ‘US renaissance’, regardless of any particular merits, was always only one among several options.

Conclusion: Tighter bilateral political relations, with one country or another, particularly over the short run, can have an impact on economic realities, but only at the margin, and typically only among very narrowly defined interests. Furthermore, to the extent that such an impact would be significant enough to be noticed widely, it would be a dangerous signal that the integration of the global economy was not evolving along the open, non-discriminatory and liberal lines which the Anglo-Saxon economic model professes to promote. Such spill-over effects from bilateral political to economic relations must also be weighed against the potential economic impacts stemming from a corresponding deterioration in political relations with other countries in Europe, particularly Germany and France.

Much more important to economic realities, in general, and bilateral economic relations, in particular, would be Spanish prospects for growth and the direction of overall economic policy, at least relative to other US economic partners, along with the evolution of Spanish productivity and competitiveness. The most important set of policies for the ongoing strength and balance of Spain’s economic internationalisation will be –however counter-intuitive this might seem to some– domestic economic policy reforms designed to increase the productivity of key economic sectors in a sustainable fashion.

None of this is to champion the direction that Spanish-US political relations seem to have taken as a result of, first, the Aznar-Bush flirtation, and, now, the apparent Zapatero-Bush chill. Nevertheless, the bilateral economic relationship should only be affected marginally. To expect a noticeable deterioration in economic ties would only be consistent with a complete breakdown of political relations over the long run, something which is clearly not on the cards. We would risk this tentative conclusion at present, the sometimes visceral nature of the critiques of the Zapatero government both in Spain and the US notwithstanding. In any event, we do not advocate viewing the bilateral economic relationship through the prism of the bilateral political relationship.

Paul Isbell
Senior Analyst for International Economy and Trade, Elcano Royal Institute