LONDON (ICIS)--The Spanish chemicals industry is hoping for another golden decade as it prepares for the green revolution, despite a worsening political environment where paralysis and instability have become the dominant feature.
Spain's post-pandemic recovery is set to be marked by a drive to decarbonise the economy, helped by more than €140bn coming from the EU's Recovery Fund as of the second half of this year, of which €75bn will be awarded as grants, not loans, over a three-year period to projects focused on the green and digital economies.
The package is linked to the EU Green Deal, the 27-country bloc’s attempt to decarbonise by 2050. While the deadline may prove to be tight, most analysts agree that the more concrete plans and timings are set, the more the action to reduce emissions and slow down global warming.
The implementation of this three-year recovery plan will be overseen in Spain by a highly decentralised Administration, where the 17 regions have key competencies devolved, and where the ruling class at all levels has yet to embrace, and make it work, the multi-party system born after the 2008 financial crisis.
The current government must fight every vote in Parliament as it lacks an overall majority.
While the opportunity is historic, there are fears among economists that Spain will not fully take advantage of it, allowing political quarrels to put obstacles in the way, as has happened in the past.
The chemicals sector awaits concrete plans which have already suffered some delay.
While the industry is aiming to make this crisis another catalyst for growth, just like it did in the 2010s when it decoupled from other shrinking industrial sectors and found customers abroad to weather the domestic downturn that followed the collapse of the housing bubble in 2008.
This is the second part of an interview article with the director general at Spain’s chemicals trade group FEIQUE. In the first part, published on Thursday, director general Juan Labat said chemicals has already recovered to pre-pandemic production levels, but demanded more public support for the petrochemicals-intensive automotive sector, still reeling from the pandemic hit.
NEW ECONOMY, OR LOST
For Spain and Italy, the third and fourth economies in the 19-country eurozone, the stakes at an EU summit had never been higher than in July 2020, when the leaders of the 27 members states met in Brussels to agree a recovery package for the economies most affected by the pandemic.
With their tourism sectors accounting for around 10-15% of economic output, the two large southern members needed help. Greece and Portugal, where tourism weighs around a fifth, were fighting the same battle.
The two-day summit dragged on, as richer EU members, expected to chip in, put up a fight. The historic north-south divide was again in full view, but the decisive support from Germany and France – the two largest economies and contributors to EU budgets – tilted the balance.
In a summer when the pandemic gave Europe a break, the news propped up optimism; an exultant Labat spoke to ICIS soon after the summit, arguing the phenomenal sums agreed did provide a historic opportunity for Spain to diversity and jump into the green future.
But EU affairs are slow; nearly a year on, the package’s final approval by the EU’s executive arm the European Commission is still pending, after a few deferrals.
“The Commission is set to give the final approval in July, and we do expect this will happen now. Funds could start flowing as soon as the third quarter. But for the funds to flow, you need to have concrete plans, and that is delayed in Spain,” said Labat.
In April, Spain’s cabinet sent to Brussels plans which contained flashy promises but lacked detail. In highly decentralised Spain, 17 regions need to converge with the national government to move this forward and discussions are still ongoing.
“In April, we sent to the government our strategy plan, just to put forward our ideas about what projects could work. Earlier in the year, the government had said they were planning to use a mechanism that allows national governments to bring payments forward and are later on covered by the EU funds,” said Labat.
“This did not happen, and the cabinet is being much more cautious now. As of now, we know what areas will be allocated funds. For instance, circular economy is set to be funded with €880m, but that is it. What companies need to know is what projects will be favoured, as well as how much of the total cost would be funded, and the conditions: there is still a lot of work to do.”
In the plans sent to Brussels, Spain’s cabinet said the two largest areas it wants to promote are the transition to electric vehicles (EVs), with intended funding of around €13bn, and investments in energy efficiency in housing as well as “urban regeneration” at around €7bn.
A further €4.3bn will go towards modernising public administrations, and another €4bn towards the digitalisation of small- and medium-sized enterprises (SMEs) and 5G.
However, the lack of concrete plans, still, would it not be a sign that Spain is not rising to the challenge? A diplomatic Labat would not comment.
He preferred to highlight how chemicals capex in Spain is high, a lot of it focused on overhauls to turn the sector greener; global chemicals firms are pursuing hydrogen projects with domestic utilities, he said.
“Everyone is doing hydrogen,” said Labat.
A hydrogen project is being developed at the Tarragona chemicals park in Catalonia, led by US chemicals major Dow and with participation of Germany’s major BASF and Spain's energy producer Repsol.
Saudi petrochemicals major SABIC is also developing a hydrogen project at its facilities in Cartagena, south Spain, in a joint venture with Spain’s utility major Iberdrola.
“Everyone is doing hydrogen,” said Labat.
Labat is not too optimistic on the idea of the political environment improving; while the private sector may still lead a strong recovery, with better politics competitiveness could improve, in turn benefitting the state coffers at the same time on the back of higher income from taxes.
But agreeing anything in Spain’s politics today is difficult, polarisation is high, and historic challenges do not suit a divided ruling class that has practically forgotten it is there to serve.
Until the 2010s, the electoral system facilitated a bipartisan democracy that returned large, stable majorities for either the socialists of PSOE or the conservatives of PP, but the 2008 financial crisis contributed to their demise.
Amid a rampant economic downturn, Spaniards started to find out the housing bubble had indeed been riddled with corruption, as a younger generation of judges decided to prove.
PSOE and PP lost large chunks of their support, which went to newly created parties; to the left of the socialists, the far-left UP, which gathered support from discontent young people who had spent years in education amid a boom but found the door closed to quality jobs thereafter.
In the conservative camp, a new centre-right party called Ciudadanos (Citizens) gained support from the urban middle classes who found PP’s corruption charges hard to digest.
A multi-party system had been born, and Spain’s Nueva Politica was set to take the country fully into the European realm of coalition governments, hard-won votes in Parliament requiring a lot of deal-making, a kinder way of politics.
The problem is that it just did not happen. It brought the need for coalitions at several regional governments and municipalities, and finally reached the national government in 2019, but the coalitions are weak, tend to display in public disagreements that should be fixed in private, and citizens are getting demoralised about the new politics being just as the old.
Amid all this, Spain’s perennial territorial conflicts remain; after the unrecognised independence referendum held in 2017 by the Catalan regional government, not even a global pandemic that hit Spain hard has made the Catalan scenario change much.
In elections earlier this year, the nationalist parties again reached a majority in parliament despite obtaining fewer than 50% of the votes, favoured by the electoral system.
A combination of conservatives, progressives, and even anarchists who have little in common but the independence, have said they will continue to push for another referendum.
It is the Catalan problem what also worries Labat. The region is one of Spain’s industrial hubs, hosting the large Tarragona chemicals park where many investments are being made; the park also needs better infrastructure, and for that agreement between the Catalan and national governments would help.
The Catalan ministers who in 2017 organised the referendum were charged, among others, with insurrection, a charge many in Spain and mostly outside Spain considered too harsh for a healthy democracy that had not been threatened in earnest.
Other, more reasonable charges were, for instance, for corruption: while many Spaniards struggle to make ends meet, Catalan leaders spent money – and time – in organising a useless referendum, which was not legal nor supported by an overwhelming majority of Catalans.
Where are they at now? In prison, which has intensified nationalist myths about repression. But current prime minister Pedro Sanchez needs the votes of a Catalan nationalist party in Congress because his PSOE-UP coalition lacks an overall majority.
A few leaders of that party are in prison as well. And Sanchez, despite the overwhelming opinion inside and outside his party, is said to be planning to pardon them.
He seems set on doing so because. despite the expected initial outrage, if he manages to keep his government alive to 2023, the latest another election could be called, he expects a booming economy will grant him another term.
The above saga is a good example of why many analysts think Spain is not ready for the historic challenge of dealing with the aftermath of a pandemic that hit its economy hard and badly needs diversifying.
Sadly, analysts also think Italy will not take up on the challenge, which could confirm the EU northern nations’ suspicions about their southern neighbours being very good at living a tranquil life, but not at looking ahead strategically.
In a note published in May, analysts at Oxford Economics analysed the potential for Italy’s economy as the country prepares to receive EU recovery funds of up to €235bn.
“The spending could directly add 1.5%-2% of GDP in the medium-term. And if the resources are allocated efficiently, targeting high-impact productivity measures and human capital, and the structural reforms are successful, it could boost GDP growth to 1.3% from 0.7% over the next 20 years,” said the analysts.
“However, Italy has struggled to spend previous European funds due to a lack of institutional preparedness – public sector performance and institutional quality indicators remain poor ... In Italy, ambitious reform agendas that need strong, sustained political support typically run up against enormous political hurdle.”
As we have seen, Spain has rather Italianised as of late. The more pessimistic even say it is on a clear path towards Latin Americanisation.
EU REACH: GIVE US MORE
For many Spaniards, joining the EU in 1986 was seen as a landmark that guaranteed that democracy would stay forever as the Pyrenees would stop being the cultural – as well as physical – barrier that had always set them apart from the heart of Europe.
In a way, that did happen. EU directives of mandatory implementation have modernised Spain in ways many could not have imagined in the 1980s, but the current political embarrassment is a reason for concern.
In line with that thinking about the EU being always better than whatever Spain’s ruling class has to offer, Labat has always had an interesting opinion about the EU chemicals regulation Reach.
Far from the cry of other company executives, who complain about implementation costs denting their global competitiveness, Labat believes it is the other way around.
And, as the European Commission prepares to harden Reach even further, Labat says that regulatory oversight for some chemicals in the bloc may one day be like that of medicines – and welcomes the idea.
“I remember some analysts arguing Reach would dent GDP by as much as 3%, and other inflammatory statements. Well, since 2007 when first introduced, Spain’s chemicals sales and output have risen 30% and 18%, respectively, and this with two global crisis in between," said Labat.
"Hardly a downturn caused by a piece of legislation. Moreover, Reach does protect our competitiveness: if you want to trade with the EU, you must comply, end of the matter.
“The upcoming revision of Reach will look now even deeper into the chemicals we use for sensitive sectors like alimentation: endocrine disrupters, fertilizers, etcetera. Some people even think that, for some chemicals, regulation will be as strict as that for medicines,” concluded FEIQUE's director general.
Insight article by Jonathan Lopez
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