I am in Madrid for 8 days. Fon HQ are here, and so is my holding company. I also have great friends, a nice home, and my children who are visiting for Thanksgiving.
I love Spain regardless of the sorry condition the country is in. There is something special, historic, unique about this country. Life here is still good. The crisis has not increased crime or made life in any way uncomfortable for those who still have their jobs. But I just wish people here were more focused on getting out of the crisis and less focused on tribalisms and mutual accusations. Most commentary I read says that Spain is in the mess it is in because of something that somebody else did. Few Spaniards consider themselves the reason why Spain is in the mess it is in, but millions who over borrowed and now can’t pay are that very reason. Nobody who I read or speak to says, “well I overextended myself in real estate, I made a huge mistake, I lived beyond my means. I had a choice to buy or not to buy property, to get a mortgage or not get one. And I was ambitious, and greedy, and had a poor understanding of the economy. Now I have to pay and I don’t know how.”
Because in the end the Spanish crisis is the result of millions of individuals and thousands of companies going into debt in order to get homes, second homes, rental properties that now nobody wants. The rest of the economy is working well, but it has to finance the 25% of the economy that is stalled because construction came to a standstill. So credit died for everyone else. For us at Fon, if we weren’t able to raise funds in the USA or the UK we would not be able to grow. But other than an R&D credit we got from the Basque government few have appetite here to finance technology (the Basque region is by far the best managed part of Spain now). If a project does not have a few tons of concrete in it, it just does not get financed. And most times not even those do. All the credit available still goes into the black hole of construction and bad banks.
And on top of this there is now the dismembering of Spain. The parts of Spain that are threatening to become independent. Mainly Catalonia. But the Catalans have an economy that is extremely poorly managed. As badly managed as that of Madrid. The economies of Madrid and Barcelona suffer from exactly the same problems yet the Catalans think they will do better alone. While I respect their desire to try it out, I don’t think they would succeed in a generation. Catalans also have too much reliance on infrastructure as a main source of, first employment and now, unemployment. They also have enormous quantities of uneducated young people who need to be retrained for jobs other than construction. I can only imagine an independent Catalonia adding costs, hiring more people in government, building an army and other non sensical moves that make the financial hole Catalonia is in even deeper. But instead of joining forces to fight similar problems, Madrid and Catalonia are accusing each other of a number of absurdities. It’s as if a couple who had a child with cancer argued rather than focusing on the child. Pretty sad and discouraging.
In the meantime there is the USA in our lives. We moved there at the beginning of September and it’s been absolutely amazing. Teaching at Columbia, expanding my angel investing activities, making Fon grow globally. The atmosphere is vibrant, there is opportunity everywhere I look. It is paradoxical to listen to Americans talk about how poorly the economy is doing. If only they knew how it is in other parts of the world. How a country, a pretty developed economy as Spain, an economy the size of Texas, in which life expectancy is still higher than that of the USA, can put all its eggs in one basket, and go into a death spiral with unemployment shooting from 8% to 25%. The US economy is vibrant, extremely diversified, creative. Yes for decades now the USA has been living beyond its means and that explains a sort of fake growth that occurs when countries say their GDP is going up but so is their total debt. I have always argued that GDP growth should be discounted by credit expansion. In this sense the USA is going through a process similar to that of Spain except that so far it still has credit. The USA has to slowly borrow less, spend less, collect more, close that trillion dollar budget deficit, close the trade deficit. It has to do what Clinton did, balanced the budget, and Bush with his unnecessary wars and credit expansion, destroyed. That is Obama’s job for his second term. But if you ask me, I think he will pull it off especially with the help of this new trend in which the USA, thanks to shale gas and oil, will become energy independent and therefore much more competitive than China and the EU in terms of manufacturing. I see a return of robotics based manufacturing to the USA as a result of cheap energy. I am optimistic that the USA will make it beyond the fiscal cliff.
For Spain the jury is still out. What is missing here is entrepreneurship activity. Yesterday I read that Spain is offering nationality to all the Sephardic Jews it expelled in 1492 when Jews were 10% of the population of the country. This measure is more than symbolic. Something tells me that because if there is one thing us Jews are is entrepreneurial that this country would not have 25% unemployment and 50% youth unemployment if 10% of its population was still Jewish. But now it may be too late. Bombs and all, Israel, the “start up” nation, is a better magnet for Jews around the world than a Spain without credit to get companies started. Until most people in Spain realize that a welfare state is not an inherent human right but something that nations earn as a result of the wealth created by effective entrepreneurial activity, I am not optimistic that Spain will emerge out of the crisis.
First, an anecdote.
When I moved from the United States to Spain and created Jazztel in 1998, I opted to offer health insurance to my employees—a very North American concept. I asked them if they would prefer that Jazztel pay for a private health insurance plan, or instead, that I give them that money directly. It wasn’t substantial, something like 60 euros (75 dollars) a month. It surprised me to learn that hardly anyone chose the private health insurance plan, that few were interested in private health care, that they were remarkably content with the public health system and that they preferred to earn 60 euros more a month.
Later, I was given the chance to check out the Spanish public health care system for myself, partly due to my mountain biking injuries and also because of my children’s various accidents. I saw firsthand that it was really very good and very free. Especially coming from the US where health care costs some 600 euros (750 dollars) per month and, you have to pay for additional things that are included as insured here in Spain.
Now, let’s “fast forward” to 2012.
We have a bankrupt Spain being bailed out by the EU day-to-day. A bankrupt health care system and with massive defaults, but still with good quality medicine and full of new hospitals freshly equipped with the latest “bubble” models from when we still had credit. All this accompanied by a great debate over the topic of copays and the plan to charge 710 euros (890 dollars) a year to illegal immigrants. Seeing the situation and being an entrepreneur, it occurred to me to make a business out of this tragedy.
Or let’s just say: make the tragedy less tragic by constructing a business to help it.
Spain is the fourth largest tourist destination in the world. We receive almost 60 million tourists per year and almost all of them come from countries where medicine is more expensive. Why don’t we sell our medical services—that are so good and so cheap—to our tourists? Why don’t we launch medical tourism to a larger scale? Why don’t we transform public health care into an export-oriented industry?
How do you do this? The government could launch a big publicity campaign in which they offer medical insurance to foreigners and allow them access to public health care for 100 euros per month. And for those foreigners who travel here without an insurance plan, they would be charged 40 euros (50 dollars) each time they wanted medical attention and not be seen for free as they are now. North American friends that had health problems in Menorca, for example, couldn’t believe it when after receiving medical treatment, were released without being charged. They were willing to pay 100 euros for a consultation; 40 euros would seem like a bargain. Foreigners don’t expect it, but they receive free medical treatment in Spain.
From here we can start to promote medical tourism. Come get yourself treated with the Spanish national health system! We are the longest-living of all big countries in the world!
If the government ensured that one million of the 60 million tourists pay this medical tourism insurance, it could obtain 1.2 billion euros (1.5 billion dollars) a year. To North Americans, being able to come to Spain and while here, go to the doctor for free, all for an insurance premium of 1,200 euros annually, would be very beneficial. The Germans pay 300 euros a month for insurance. And we won’t even speak of the uninsured people in many countries who have money but not enough to afford insurance in their country. In Argentina, for example, insurance that provides the same quality of service as Spanish health care costs about 300 euros per month. I know that getting a million customers isn’t easy, but the market has 60 million. Later we will have to determine the costs of treating these patients, but I find it possible to make a profit. Especially when there is so much infrastructure already in place.
I think the Spanish government has a possibility to finance a part of the health of its people with medical tourism, and that this opportunity should at least be studied. I know many Spanish people think that health care should be free for everyone, but it isn’t—we pay for it ourselves and we can find more customers overseas. It’s time to be creative and sell medical insurance to foreigners with the Spanish national health system.
Before you read my post, you must read this Economist article.
Are you done? Do you now understand how terrible the future looks not only for the periphery of Europe but for Germany as well? Is it clear that as we stand we are headed for the perfect storm? OK, let’s move on to what I think Europe should do to get out of the crisis, which is basically to start the United States of Europe.
Consider this: it will cost Germany and all of Europe more if there is a wide default, and if Spain and Italy leave the Eurozone. So I think it’s time for Europe to unite and risk inflation as the USA did before.
If you had to summarize the reaction of the FED to the multi-trillion default of 2008, you’ll find that the FED risked inflation and won. That the FED stood there providing unlimited credit, and so did the Treasury. And that thanks to a gigantic state intervention, the US banking system, car industry and many other industries along with the economy as a whole were saved. And there was no inflation. Europe needs to do the same now, but for that, it needs to become the United States of Europe from a regulatory point of view. The other choice is the end of Europe, massive defaults and devaluations and possibly a tremendous shock to the global economy.
How does EU become the United States of Europe?
1) Europe starts the European Treasury. An agency that regulates how all tax revenue is distributed, and can give or withhold government expenditures from EU member nations depending on revenue. Short of that, I don’t see how the EU can prevent a country like Greece from meeting its deficit targets, for example. This European Treasury has to set 5 year objectives for all European nations to go into fiscal surplus to begin paying down European debt.
2) This European Treasury needs to consolidate all European debt into one debt pool regardless of nationality to eliminate risk spreads and with a credible deficit reduction package to bring down all euro interest rates to something slightly higher than Germany’s rates today.
3) The European Central Bank needs to become the regulator of all European banks and offer deposit guarantees for all European banks to stop the massive South to North capital flight that is taking place. All European banks would subject to the same rules, regulators and bank deposit guarantees.
As I see it, the future in Europe is United we Stand, Divided we Fall.
Do countries want to lose so much sovereignty? I think given the alternative, they should. As it is, Europe is a continent in which each country is married but it can mess around. That regime won’t work. It’s either Europe or divorce. Europe needs to unify a lot more as a result of this. One European traffic control, one European army, one European anything that is managed at the Federal level in USA. The USA has found a balance between cities, states and federal that Europe needs to emulate. Otherwise, the euro will not hold.
The enemy? Local powers. But if we were able to do away with tons of people who worked at European borders, European currency agencies we can do away with local patent offices, local traffic controllers, local air forces, local armies, local 100 other things, imagine how efficient we would be. How much better off. How much better prepared to compete globally.
PS: This is a first draft, will be modifying/improving this article as I do more research and get comments.
There is a myth going around that Greece went bust because of the size of its welfare state. And the extension of this myth is that sound finances are incompatible with a sizable welfare state. That it is the welfare state itself that is making other countries such as Spain and Italy approach bankruptcy. But this is not true, many European countries have a bigger welfare state in relation to GDP. Greece did not go bust because of the size of its welfare state in relation to GDP but because of the size of its debt in relation to GDP. Countries can choose to be more or less socialist. What they cannot choose is to be socialist when they can’t afford it. Nordic countries are more socialist than Greece, but they provision for their generosity.
For Spain to avoid default in its national debt two unrelated events must happen: one is that EU guarantees Spanish national debt lowering country risk, and the second one, which is even harder,is that Spain regains competitiveness.
Regaining competitiveness is the biggest challenge for Spain. To achieve this the country must focus on liberalizing its growing companies. I propose that all start ups be given 3 years in which their employees do not pay social charges nor receive forced severance pay in order for government to recognize the risks that VCs and entrepreneurs take in investing in new companies. This would be applied in start ups of up to 10 people and only while they are not profitable so it would have a negligible effect in the social security system overall initially and hopefully a very positive effect when start ups begin contributing. For those unfamiliar with the system Spanish social charges plus all other taxes, these can take up to 45% of what a person who costs €3000 per month to a company takes home. But so far PP, the conservatives now in power, has done little for new and growing companies focusing instead on measures that make firing, not hiring, cheaper.
I am normally quite an optimistic entrepreneur but right now I am sorry to say, I am not. We can still avoid the perfect storm, but it looks harder every day. Still as we know markets do turn around, and if Spanish unemployment numbers turned around, so would financial markets.
This post could be a book and it is about a subject that I still need to address in Spanish. The substance of this post is easier to explain in English because the English/American culture is a culture in which the role of business in society is much better understood than in Spain. Indeed, the biggest obstacle I see with the Spanish crisis is that most Spaniards, voters and government included, don’t really understand how wealth is created. They don’t understand how capitalism works and, therefore, how it sometimes does not work. They don’t understand the concept that a rising tide lifts all boats (economic expansion) and a falling tide…lowers all boats (recession). So as Spain goes into record high unemployment of 25% and youth unemployment of 50% the emphasis is not in improving the workings of the Spanish economy but in blaming each other.
In Spain it is more common to complain about what others are doing poorly than focusing on the “what can I do to help” that is needed for all Spaniards to collaborate to restart the economy. Many Spaniards unfortunately suffer from a serious case of “blinding envy” of others and thus have a false understanding of the economy. Envy makes them see the economy as a pie of have and have nots. Instead of realizing that a shrinking GDP makes everyone worse off, they think that if they are doing worse is because somebody else “stole” what they used to have, that if they are doing worse then somebody else is doing better. They don’t get the concept that everyone is worse off! As a result, Spaniards are constantly looking for the few people who are doing better and crucifying them. But these are the entrepreneurs who could save Spain. Instead they are convinced that either foreigners or rich Spaniards ended up with what they used to have. Spaniards in general, have a lack understanding of entrepreneurship, of innovation, of job creation, of wealth creation of how hard it is nowadays to compete in a globalized economy. Interestingly they get it in football and Spain has some of the best football teams in the world, but they don’t in normal life. Their best entrepreneurs, people like the founders of Zara or Mango, some of Spain’s most successful multinationals, live in hiding for fear of what the average Spaniard may think of them. Amancio Ortega (Inditex) one of the wealthiest men in the world and his famous picture in which he looks as a convict, is an “only in Spain” story. Entrepreneurs are seen as people who get what is not due to them, not as wealth creators, but as thieves. For me as the founder of Viatel (partly in Spain), Jazztel, Ya.com and now Fon all in Spain, it is painful to read my own Twitter line and see how confused the average Spaniard is about the subject of entrepreneurship and job creation. I am tired of getting called “rico de mierda” people focus on what I have and not on what I do for the economy. Nor what all other entrepreneurs do. Having a daily twitter conversation with around 30K Spaniards has given me a great insight as to what people think on subjects such as compensation, social charges, labor flexibility and other crucial aspects of wealth creation.
And in this mix, the government does not help: the Socialists want to spend their way out of the crisis, the Conservatives want to cut their way out of the crisis. Nobody seems to understand that it is the type of spending that has to change, not the level. That less spending and more investment is needed. That Spain needs to invest on what works in Spain and less in what is dying in Spain. But the new economic plan seems tailored to old industry. The conservatives made it much easier to fire, but equally hard to hire.
As things stand Spain is in a much deeper crisis than any of the larger economies of Europe and as much as it is an economic crisis, it is a crisis of understanding. Without agreeing on the root of the problem: a lack of entrepreneurs, entrepreneurship, business imagination combined with a labor force that is to a great extent trained for an obsolete industry, construction, Spain will not turn around. But I don’t see anyone marching on the streets promoting new business creation. What I see is a lot of people trying to cling to a past in which Spain borrowed and build white elephants. A past that is gone forever.
I end my post with a link to the plan that I presented to Cristobal Montoro. I still consider it a great plan for 2013 but it was not taken seriously by the conservative government.
And here is another article in which I explain in more detail what is wrong with Spain that is different than what is wrong with the rest of Europe.
10 years ago all of us on the Internet were licking our wounds. We had been taken for a crazy ride in which we went from a point in whatever we touch was champagne to whatever we did was shit.
As an entrepreneur that lived through 1998 to 2002 I emerged reasonably well, I sold my shares in Viatel when it was worth $1.2bn, I sold Ya.com for $700 million but did not sell Jazztel when it was worth $5bn because I was its CEO and saw it go down to $700M (now it`s worth $1.4bn). Then I lost $50M in Einsteinet one of the best cloud computing start ups in Europe that was killed by the post bubble era in which financing completely dried out. So as you read this post you will see no bitterness.
But looking back at 2001/2002 I see this time, not as a period in which Internet companies destroyed the financial markets, but as a time in which the financial markets almost destroyed the Internet. It was financiers/analysts who drove those insane valuations up and then down. What should have been a smooth ride on the internet, an era of taking more and more global citizens in its midst, became a crazy ride in which the internet itself gained enormous prestige and was later, for a while, seen as a useless gimmick. Only around 2007 people again realized that the Internet was simply transforming the world economy and was here to stay.
And then came 2008, when the financial industry practically destroyed the world economy. That was when the same financial firms did to the world what they had done to the Internet, inflate it and let it fall like dead weight.
Having been a happy customer of Goldman Sachs, Morgan Stanley and others I don’t want people to read this post as a rant against financial firms. We need financial firms. But what we don’t need is financial firms to do what they did first to the Internet and then to the overall economy, namely to hype them out of value and sink them hard for no reason. In simple terms what I am advocating has been done before and that is to separate trading from advising. The Chinese Walls in these firms never worked and never will.
I wonder what many wonder, and that is whether Angela Merkel’s insistence with austerity is wise. I think that what Southern Europe needs is not to reduce the overall level of spending. Doing so it risks to make the economy shrink and budget deficits expand without end in sight. What we need to do instead is to keep the level of spending and investment but change its nature. We have to tweak with the economy, not kill the economy. Focus on what works, kill what slows us down.
I agree that in the South of Europe there was a lack of reform and a great deal of waste. In Greece, Italy, Spain, Portugal a lot of privileges were given to people who did not deserve them, growth was built on credit, and the economies collapsed as a result. There was and there is corruption in most of Southern Europe, more than in the North, and many white elephants were built, airports that are not used, high speed train lines that are not needed.
But a drastic stop to a lot of economic activity without reasonable alternatives to generate growth will only exacerbate the problem. This is happening in Spain right now. We are cutting spending, we are not focusing on intelligent credit creation and we are making many viable businesses suffer or die of credit starvation. We need to create emergency credit lines for all businesses who are hiring. We have to find the pockets of growth and support them. We can’t indiscriminately cut spending.We have to move workers from dying industries to growing industries, we have to reeducate the population for the globalized economy of this century. The challenges of evolving from an industrialized economy to a service economy are not new, but now we have to deal with the challenges of evolving from the service economy to the digital economy. None of these problems are financial or monetary, they are real and require real intervention. Fiscal tightening is akin to chemotherapy, we can’t kill all cells because some are bad. We have to have a smart bullet approach to economic intervention. Which if you think about it this is what Germany did to itself. Because Germany is making the same mistake as the large shareholders of the IMF did. They applied for themselves much more elaborate and detailed growth policies that worked and ask Latin America to implement simplistic, “chemo” type policies. The results were disastrous.
Germany is doing to Southern Europe what the IMF did to Latin America for decades and this is dangerous for Germany and Southern Europe. In Latin America by preaching austerity at all cost the IMF created failed policies and a decade of stagnation. Moreover as its failure became apparent the IMF ended up being mostly hated by Latin Americans and around the world. Germany could end up in the same spot. This would be sad because in the end we all know that Germany means well, it is just applying the wrong economic model as the IMF did. The USA, closely associated with the IMF lost most of Latin America sympathy in the last 15 years. It is sad to see how many Latin Americans now think that China is a better country and economic model than USA and have emulated China with regimes such as that of Venezuela, Nicaragua, Ecuador and Bolivia. Same could happen to Germany and the German model if it insists in implementing wrong policies. The European Union could fall apart and Southern Europe could end up experimenting with populist political regimes that only make the whole situation for Europe much worse.
There’s an active debate on this post in Google+ you may want to comment here.
This moved me. It is a make believe restaurant in Vigo in which unemployed parents in Spain take their children to “eat out”. They take turns as volunteers. It is really a charity that makes children believe that their parents can afford to take them out to a restaurant. I felt so bad for those parents.
If you don’t live in Spain and you come here and go around you would be surprised. Spain is actually a wealthy country in global terms and it doesn’t look poor when you travel around here. But since the construction industry collapsed unemployment grew from 8% to 21%. Basically all of those who worked in that industry are having a very hard time finding a new role in the economy for themselves. The collapse of real estate had a tremendously negative multiplier effect. It is a huge part of the population that is in such bad shape and it will probably take a decade for unemployment to go down to where it was in 2008. In the meantime initiatives like this help alleviate the pain of those who have fallen into poverty.
This is the year in which Europe will either fall apart or emerged stronger. I give it 75% that it emerges as a stronger union but the risk of collapse is still there. Germany has the key to solve the problem because of the size of its economy, its saving rate and its export volume. Germany has to decide on whether it continues to transfer some of its wealth in order to create markets for its exports or it let’s Europe fall apart and ends up with an overvalued currency and deteriorated markets. Already today it started paying negative interest rates which is a prelude in my view to a huge rise in the DM should it be born again. Tough choice. I think Germany can actually both save Europe and make money by buying underpriced Italian and Spanish bonds and selling them after stabilization. It can do what the FED did with many financial institutions, make a profit by providing much needed liquidity at a critical time.