AMCHAM REPORTS GROWING CORPORATE PESSIMISM TOWARD

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.

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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.

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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.

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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.



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