Basque economy has lessons for Spain

Spain's dash into tourism in the 1970s and its property boom last decade largely passed by the Basque region, a cool, damp corner of the north with a reputation for separatist violence. Instead the Basques stuck with industry, by force of circumstance.

Euskadi, the Basque name for the hilly province of 2 million bordering France, now outshines the rest of Spain with a better credit rating than central government, the lowest regional unemployment and borrowing costs half those of other areas.

The success of Mondragon Assembly, one of the world's top producers of solar-panel manufacturing equipment, reflects the region's ability to weather a euro zone debt crisis that has forced Spain to ask for up to 100 billion euros of EU aid for its banks.

In a factory set in a forest, a multi-armed robot hisses behind a glass screen, lights flickering as it prepares to take in cobalt-blue tiles to stitch into solar panels. The machine could be shipped anywhere, from Germany to Kazakhstan, and business is flourishing.

The Basque region's secret has been in sticking to manufacturing over the property and tourism industries that ended in economic misery elsewhere in Spain when a real estate bubble fuelled by easy credit burst in 2009.

Tourism was always going to be a difficult sell for the Basques because of the separatist violence that only ended in October 2011 when ETA, Europe's last armed guerrilla group, called an end to its 50-year struggle.

"If we didn't export, we'd be having a hard time," said Mikel Lezamiz, a director at Mondragon. "It's thanks to exports that we survive or this whole thing would come crashing down. Survival comes from not depending on a single market, but on a number of markets.

Mondragon Assembly, part of the unlisted Mondragon group, is the world's largest cooperative and employs nearly 100,0000 people. Around 80 people work in this plant. It also has factories in France, Germany and Mexico.

The Basque Country is Spain's fifth largest regional economy, with a gross domestic product of 66.1 billion euros, meaning it accounts for around 7 percent of national GDP. The region's exports are more or less evenly balanced between the rest of Spain and markets beyond Spanish borders.

Its deficit-to-GDP ratio is just 0.25 percent, compared with nearly 90 percent for the central state. It has the lowest unemployment rate in Spain at 13.55 percent, compared with 24.4 percent nationally.

Tools not Tourism

By the time Spain returned to democracy after General Franciso Franco's death in 1975, many of its regions had already ditched the notion of developing their industry in favor of tourism, finance and telecoms.

Spain's sun-soaked eastern and southern coasts are dotted with apartment blocks and holiday homes, many of them impossible to sell since the domestic property market buckled. The wet Basque climate made its green hills a more likely home to farmhouses or factories than luxury villas.

The region, at Spain's border with continental Europe, is rich in natural resources. A cradle of the iron and steel industry, it was an obvious choice as a manufacturing base.

"There was a clear bet on industry here, a bet on those traditional sectors, such as iron, steel, energy and small and medium-sized companies that make all those components for the energy and car sectors, that make things that you can hold in your hand," Jose Luis Curbelo, director general of the Basque Institute for Competitiveness, said.

"That is the secret of the Basque economy," he said. "Basque industry immediately internationalized, whether that was by producing components and gadgets for overseas companies, or by setting up shop and manufacturing abroad."

"That process was much faster and much more committed than in the rest of Spain, so the collapse in the domestic market hasn't affected Basque companies as much. A lot of their sales are global and they can withstand the crisis in better shape."

Curbelo, speaking in the business school of the University of Deusto in Bilbao, said education and training have also been key in sharpening the Basque business edge.

The region has the highest per capita output in Spain - 31,288 euros compared with a national average of 23,271 euros and an EU average of 25,134 euros, according to the national statistics office.

"Euskadi is in better shape to weather this situation because over 20 years ago it bet on industrial policies," said Inigo Urkullu, the leader of the Basque Nationalist Party.

Many of Spain's biggest corporate names are Basque.

BBVA, the country's second-largest bank, is a major player in South America, source of more than half its revenues. BBVA has said it has no need of EU financial assistance. Gamesa is the world's fourth largest manufacturer of wind turbines. CAF, a producer of rolling stock, sells trains as far afield as the United States and China.

The severity of the European debt crisis has pushed the borrowing costs of the Spanish state to their highest since the launch of the euro in 1999 and many of Spain's overspending regions are shut out of capital markets altogether.

The Basque region, by contrast, can borrow two-year debt at 8.5 percent interest, compared with 18 percent for Valencia or nearly 14 percent for Catalonia.

But the Basque economy is not immune to events in Europe. It shrank by 0.3 percent in the first quarter mainly because of a drop in exports to other European nations. The Spanish economy contracted 0.4 percent over the same period.

Patxi Lopez, president of Basque Country, says the deep spending cuts that have hit the rest of Spain, are not the panacea. Spain needs to become a little more Basque.

"Spain needs to change its productivity model, the one people call 'the brick bubble'. That has to change," said Lopez, a Socialist. "We can't permanently spend more than we earn, but rather need to invest in the resources that we do have."

Lopez said the Basque government has marked up nearly half a million euros for those parts of the economy that have been most hurt by the financial crisis: small- and medium-sized companies, entrepreneurs and the self-employed.

A study from the OECD shows innovation and research and development in the Basque Country far outstrips that seen on average in the rest of Spain on most measures.

Innovation, Isolation

The Basques have a reputation among Spaniards as tenacious workers and their relative isolation in the past from the rest of Spain has been credited in part with making them more innovative.

The end of ETA's armed struggle has not brought an end to the desire of many Basques for greater political and financial autonomy. A November poll by the Sociological Research Center, or CIS, showed that 56 percent of Basques want a referendum on self determination now that peace is pretty well established and that most see themselves as Basque nationalists to some degree. The same poll shows 65 percent wanted all political parties linked to ETA to be legalized, something that has started to come about in a series of Supreme Court rulings.

In a cafe on a tree-lined avenue in Bilbao, opposite the city's San Mames football stadium, Jose Antonio del Moral, one of the founding partners of web portal Ya.com, reflects on the Basque experience.

"Making the jump to set up a company is huge and when you do it, it's like leaping into the abyss ... like bungee-jumping. You look into the void. Feeling that you will have the support of people when you do jump is crucial and it is true that here, there is a really solid, highly developed public-private ecosystem and I'm the first to say 'hey, I set up a company here for that reason.'"

[Source: By Amanda Cooper, Reuters, Mondragon, 28Jun12]

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