Malaga, Europe's Southern California

Raymundo Larraín Nesbitt, June, 11. 2021

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By Raymundo Larraín Nesbitt
Lawyer – Abogado
5th of June 2021

They called it the Californian miracle. Back in the early 80’s, nothing made anyone suspect that only two years later, in 1982, the US, and in particular California, was going to experiment an unprecedented economic boom, one of the of the strongest and most steady ones witnessed to date. The impending threat of an all-out nuclear war against the mighty U.S.S.R., the social fallout of losing Vietnam war, a heavy tax burden with top personal marginal income tax rates of 70%, huge unemployment rates all looked poised to drag down the country’s economy and lose the whole decade.

However, a new young administration stepped in, led by a not-so-young politician from Illinois who, to make matters worse, was an ex-actor of cheesy westerns. No one was expecting much, least of all his first ex-wife who famously said he would never achieve anything in life. Yet, he ploughed on and proved everyone wrong. He carried out a series of key changes within the country that would lay the framework to the economic boom that followed soon after and spill over into the next decade, all the while keeping a watchful eye on international affairs. Simplifying his reforms:

  • Deregulation.
  • Lowering taxes.
  • Reducing huge unemployment levels which translated into low wages
  • Incentivise new budding technologies & industries through the state-sponsored Strategic Defence Initiative (nicknamed the "Star Wars program")
  • End of Cold War, fall of the Iron Curtain

 

Having successfully averted nuclear armageddon (it was a close call), people were euphoric on having a new lease on life, and the stock markets climbed like there was no tomorrow. The real estate market followed suit with a massive boom across the board. Simply put, people wanted to live and enjoy life, spending money, big time. Unemployment levels dropped to an all-time low. People became spendthrift, (over)spending like there was no tomorrow, taking on cheap credit. There was a psychological component behind this spending mentality that can be explained after people are beset by a great pressure or threat (a nuclear one) and are in the need to find release by getting it out of their system (overspending). After all, being a capitalist society, what better way to prove you’re happy than spending, huh?

California in particular would greatly benefit from the changes brought about by the new administration. Huge unemployment levels, caused by former administrations, were channelled into new jobs in budding technological industries (computing), low wages, ultra-low taxation, booming real estate market, a huge budding technological demand instigated by the ambitious SDI initiative to thwart an ICBM threat all coalesced together creating the bedrock that would help to explain California’s 80’s economic miracle. Even by today’s standards, if California were an independent nation, it would stand on by itself as the 5th largest economy in the world.

And Málaga?

Ok, let’s fast-forward to our lovely virus-ridden world of 2021. So, how’s this history lesson relevant to Malaga you may be wondering? Well, you can draw some strong parallelisms to our current state of affairs, but you do need to pay close attention, reading between the lines to see the big picture, and not get lost in the nitty-gritty details, granted.

Spain, and in particular Malaga is marred by huge unemployment levels (the highest in all of Europe and out of any OECD country) as a result of the ongoing pandemic and its (short-sighted) overreliance in tourism, low wages in relation to European standards, high taxes at a national level, and a whole list of other woes. And to top it off a deadly virus, and all its mutant strains, impacts on Spain’s economy dragging it down. Could matters get any worse?

In view of all the above points, it doesn’t look at all like Malaga is anywhere near duplicating California’s 80’s miracle. Well, perhaps you’d be wrong, look closer:

  1. Ultra-low taxation. Spain is divided administratively into 17 autonomous regions with devolved competencies on tax matters, much like the states in the U.S. After almost 40 years of uninterrupted rule by one political party, 2019 saw a new administration taking office in Andalusia. This new regional government has vowed to bring down taxes. This low taxation trend started right off the bat only a few months in office when they spectacularly slashed inheritance tax (previously over 10,000 families in Andalusia had to renounce to their inheritance every year because they could not afford the ultra-high IHT tax rate set by the former incumbents) to the point they have completely negated it through successive tax reforms. Nowadays, only HNWI pay IHT, and it’s not much to be honest.

The new administration in Andalusia is resolute and has continued this trend unabated throughout 2021 slashing Property Transfer Tax and also Stamp Duty and now have their eyes set to lower Wealth tax, and fundamentally personal income tax (although its ability to tweak the latter is very limited as it’s a national tax). All these taxation changes I have been reporting in detail over the last three years are creating in Andalusia an area of ultra-low taxation that not only attracts individuals, which impacts on the real estate market through market acquisitions, but also, and most fundamentally, large companies (read below).

  1. Deregulation. Andalusia’s new administration is going out of its way to greatly streamline and simplify admin procedures, reducing red tape. As a small example, take tourism licences. What in 2016 was a nightmarish convoluted system with seven different classifications has now been brought to heel with only two options in 2021, making the life of all those involved much easier to apply online. These changes are continuously carried over to multiple aspects, getting rid of the deadwood in an oversized public sector and making it leaner and more efficient. It’s not just idle banter or wishful thinking, the changes implemented are real for us that work with them.
  2. Technology. Malaga has an impressive technology hub in its PTA, which houses over 3,000 technological start-ups. Malaga’s university closely works hand-in-hand with the PTA to supply a steady stream of highly-qualified engineers, programmers, IT designers to these small caps. In fact, some of the companies are becoming so prominent, they have drawn the attention of foreign venture capitalists. For example, Swedish EQT group recently bought for 300mn euros a Malaga technological startup (Freepik) that had created all by itself a market of over 40mn consumers.
  3. Education & languages. Renowned international private schools that dot the Costa del Sol provide the basis of an excellent education in English, German, and several other international languages. Top graduates are regularly invited to join the world’s best universities as per Shanghai’s ranking of leading universities (Oxford, Cambridge, Edinburgh, LSE, Harvard, Yale, Princeton, Stanford, etc).
  4. Low wages. Although Spain’s government has recently enforced a series of improvements by way of raising the minimum wage, the truth of the matter is that Spanish wages, and particularly those in Andalusia, are far behind EU standards, on average 1/3 lower. This is particularly attractive to foreign investors and large companies who have a mind to set up shop in Malaga.
  5. Excellent communications. Airports, toll highways, ports, modern high-speed rail network, etc.
  6. Investors and large companies. All these factors, working together, are attracting the interest of large global corporations which seek to establish outposts in Europe. For example, last week we learnt that Vodafone chose Malaga to create its new Research & Development hub in Europe creating in its wake over 600 highly qualified jobs.
  7. Weather. And last but not least, is Malaga’s gorgeous weather. Malaga boasts 330 days of sunshine throughout the year coupled with great white sandy beaches, scores of which have been awarded coveted EU blue flags. More on this in my blog: 8 reasons to buy property on the Costa del Sol (Andalusia). It’s kind of bizarre, but on a personal note Malaga’s weather, and even its scenery, reminds me of LA’s and California.

Ultra-low taxation, deregulation, technological ingenuity, highly qualified English-speaking local workforce, low wages by rapport to European standards, private international schools (education & languages), great climate etc all help to boost and foster attracting large companies & venture capitalists to Malaga. Do you start to see now the parallelisms? Please let me go on, I’m not done yet.

We are still missing the key psychological component to bind it all together and kickstart it into drive, much like in the 80’s. Fortunately for us, the nuclear threat is all but gone, to a large extent. But we do have something similar nowadays to replace it, the Chinese virus Covid-19. The new vaccinations will see to it that this threat is under control over the next two years and becomes a distant bad dream. The end of the pandemic will translate into people regaining their freedom to live their lives intensely after being grounded for so long with non-stop lockdowns. Freedom to travel abroad unfettered, freedom to spend lavishly in holidays, restaurants, second residences, going to the cinema etc. People need and want freedom badly after feeling trapped for so long under the looming threat of a deadly virus that has kept them grounded too long. Much like the end of the USSR’s nuclear threat in the 80’s, the end of the virus will spell the dawn of a new lease on life for us all which will translate into a burning desire to live intensely and spend money, spend it big time like there is no tomorrow. Spending would be viewed as a necessary cathartic behaviour to restore a semblance of normality back into our lives by way of overcompensation (on the lost time).

You think this sounds daft or far-fetched? Maybe. Would you be surprised to learn that this conduct would in fact mirror the human behaviour which took place in the years that followed the end of the Spanish flu in 1918 that killed 20 to 50 million victims worldwide, which incidentally also originated in China, triggering the golden age known as the ‘roaring twenties’? The end of the deadly virus would again lead to a collective euphoria that would galvanize society globally, acting as a psychological release valve unleashing a spendthrift economy. After all, as classic Greeks liked to point out at every instance, history is cyclical because human nature never changes, and we have Shakespeare’s plays to prove their point.

All of these factors, working in tandem, may coalesce in Spain over the next years, and particularly in Malaga, enabling a new roaring twenties. Don’t get me wrong, frankly, I don’t expect Malaga to (ever) surpass California, or even get anywhere near it for that matter (40mn population vs. 1.6mn), that’s just crazy talk; but if Malaga – and by extension Spain – plays its cards right into the new decade, it could be well on its way to resemble something close to Europe’s Southern California.   

 

 

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” – Ronald Reagan

Ronald Wilson Reagan (1911 – 2004). American 40th US President (1981 – 1989). He resolutely contributed to the Cold War victory which led to the fall of the Berlin Wall and the collapse of the communist U.S.S.R. Through cunning and resolute political plays, assisted unwaveringly by staunch political allies, such as Lady Margaret Thatcher, he ensured Western democratic values prevailed and flourished, likely averting World War III. Along with the U.S.S.R.’s greatest president, Mr. Mikhail Gorbachev, he signed the START treaty which would kickstart the denuclearization of the two world’s greatest superpowers avoiding a nuclear Armageddon. A mediocre actor of cheesy westerns turned into a great statesman. Through his steadfast ideals, which almost claimed his life in 1981, his undying legacy would be to ensure us all with freedom.

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