AFTER the PANDEMIC Reﬂections and Challenges for Galicia

AFTER THE PANDEMIC Reﬂections and challenges for Galicia

This is the English version of the volume After the pandemic: Refections and challenges for Galicia. Citations of this work must refer to the original bilingual version

EDICIONES After the pandemic: Refections and challenges for Galicia

Edited by Miguel Ángel Escotet Álvarez Verónica Rego López Begoña Jamardo Suárez

Spanish language supervision by Laura Gómez Lorenzo English language supervision by Alba Rodríguez Saavedra Tables and fgures supervision by Dolores Martínez Martínez Translation by Eurolingua Traducións Cover and layout design by Jacobo Pérez-Bouzada Vázquez Daniel Landesa Porras Printed by Gráfcas Bolfer, S. L.

IESIDE Ediciones is part of the Intercontinental Higher Education Business Institute, which belongs to Afundación, ABANCA’s Social Responsibility Institution. Spain

ISBN: 978-84-96982-77-2 Legal deposit: C 8-2021 INDEX Prologue ...... 11 Chapter VII: The COVID-19 pandemic and oil demand: Juan Carlos Escotet Rodríguez A global and regional point of view ...... 89 Pedro Antonio Merino García Chapter I: COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 ...... 19 Chapter VIII: COVID-19 pandemic: Francisco Botas The answer of monetary and ﬁnancial authorities ...... 111 Soledad Núñez Ramos Chapter II: Impact of COVID-19 from the perspective of European economies: A spotlight on human capital ...... 31 Chapter IX: What can economic policy do in the face of the pandemic? ...... 131 Alicia García-Herrero Carlos Ocaña Pérez de Tudela

Chapter III: Business impact of the pandemic ...... 43 Chapter X: China, origin and destination of the new post-pandemic world order: Mauro F. Guillén And Galicia? ...... 143 Xulio Ríos Chapter IV: The e!ects of COVID-19 on the ﬁshing sector and changes in consumer habits ...... 53 Chapter XI: COVID-19 and its impact on digital transformation and businesses’ Fernando González Laxe internationalization: A perspective on Galicia ...... 153

Chapter V: Africa: New insights and economic opportunities ...... 67 Ana Teresa Tavares-Lehmann Ainhoa Marín Egoscozábal Basic references ...... 167 Chapter VI: The cross-sectional challenge of telework ...... 79 Ignacio Martín Maruri Authors ...... 179 PROLOGUE

Juan Carlos Escotet Rodríguez 12 | Prologue Juan Carlos Escotet Rodríguez | 13

The situation that arose as a result of the coronavirus pandemic is unprecedented in the contemporary world. No event with which we can establish any similarity, not even the so-called “Spanish fu” from 1918 to 1920, has had such a widespread impact, or threatened at the same time the lives of so many people worldwide. At that historical time, at the beginning of the 20th century, the global order was different, as were the economic and interpersonal relations, and one’s own mobility. Thus, that earlier epidemic was fought under other rules and on a different playing feld.

As we write these lines, the pandemic is already responsible for millions of infections and deaths over the short period of a few months. The covid-19 wave has affected every aspect of life. It has altered and modifed behaviors, actions, and methods: from the private sphere to movement in public spaces; from productive organizations to non-proft entities; and from communities of disparate character to the functioning of governments. Our world is on the verge of a new era, one marked by changes in obligations, rules, protocols, and the way we relate and interact. To this, we must add the vast imbalance in the functioning of the world economy, which, in the case of some countries, has headed to a depression. A signifcant percentage of the world’s productive sector has been affected, resulting in the reduction of production, and in the loss of several million jobs, entailing socioeconomic consequences. Entire economic sectors, such as tourism, travel, hotels, restaurants, and entertainment, among others, have been severely affected. It is no exaggeration to say that there is no form of human exchange nowadays that escapes the dialectic imposed by the coronavirus. 14 | Prologue Juan Carlos Escotet Rodríguez | 15

All these elements lead to a complex state of uncertainty that has overwhelmed in the hours of confnement aiming to continue to provide answers to citizens us as individuals, families, communities, and organizations. We know that regardless of distance and presence. And this is how we created ieside Without change is the only constant; however, human beings usually have trouble coping Walls and Afundación At Home (now Afundación tv), two digital content platforms with it, as do with the uncertainty derived from it. And it is this resistance to continue with our activities, but by virtual means. to change what, precisely, creates this crisis. Its healthy management lies in establishing a much needed dialectic between the emotional and the cognitive, Those who were able to follow the entire series of live sessions could see that, so we can see it as a source for opportunities. Thus, education and knowledge although each participant focused their proposal on the topics of their own are the most powerful tools that will enable us to commit to a topsy-turvy and specialty, they were all fairly interconnected. One by one, they articulated constantly evolving reality. a series of approaches regarding the future of Galicia and its environment, both socially and economically. They all agree on a single point of departure: We have stated on several occasions, and we would like to emphasize in this acceptance of the fact that we are facing the emergence of new requirements threshold to After the pandemic: Refections and challenges for Galicia, that for economic agents. All of them also share the same overriding purpose: the organizations must continue to fulfll our duties as businesses. But, at the to inspire strategies and actions that allow us to make decisions, overcome same time, we need to provide leadership in dealing with uncertainty. We have diffculties in the short and medium term, and, ultimately, outline a horizon a responsibility not only to preserve as many jobs as possible, but we must towards which we could march in order to relentlessly move forward. The also help defne strategies and seek solutions that enable us to identify, within works presented here are original papers and refect the thinking of each of the the crisis and the constant change, the opportunities that will allow us to grow authors at this critical time. and move forward. The commitment of individuals and organizations to the promotion of a human-centered civilization of progress is over any pandemic. Francisco Botas, ceo of abanca, analyzes the environment of Spain and Galicia and its future prospects; Pedro Antonio Merino García, Director of As soon as the Spanish authorities decreed a State of Alarm, abanca initiated Studies at Repsol, focuses on the key aspects of the energy issue. Mauro F. multiple activities aimed at protecting the health of staff and clients, to Guillén Rodríguez, Professor of International Business Management at The contribute to the strengthening of the healthcare system of Galicia, and, in a Wharton School of the University of Pennsylvania (usa) addresses challenges to more general approach, offer answers to many of the questions and challenges businesses. Fernando González Laxe, Professor at the University of A Coruña, posed in these new times. In May – when we were still escalating to the peak describes the impact on the fshing sector and consumer habits. Carlos Ocaña of the pandemic – we created the abanca Observatory by ieside. Its purpose Pérez de Tudela, General Director of funcas, analyses medium-term prospects. is to periodically provide current and accurate information on the economy Xulio Ríos, Founder and Honorary President of the Galician Institute for of Galicia to companies, freelancers, smes, stores, professionals, students, the International Analysis and Documentation (igadi), examines the China factor media and any citizen interested in public affairs, based on the analysis of and its potential impact on Galicia. Ignacio Martín Maruri, Expert Consultant consumption and economic interactions. in Leadership and Professor at the Masters of Public Administration Program at Harvard University, focuses on the challenges and consequences of teleworking. This effort in diagnosing was complemented by the iniciative presented in Alicia García-Herrero, Senior Researcher at the European Bruegel Think-Thank, this volume: a cycle of online and live sessions organized by Afundación, Chief Economist for Asia-Pacifc at Natixis and Associate Professor at the Hong abanca’s Social Responsibility Institution. Many prestigious specialists in Kong University of Science and Technology, sheds light on the key factors of diverse subjects were invited to present there their visions regarding a pressing the new world economic order. Ainhoa Marín Egoscozábal, Senior Research and fundamental issue. This encompassed the present and future of the world Associate of the Real Instituto Elcano, refects on the impact of the pandemic order, including an analysis of its repercussions in Galicia, from the realities in Africa and Galicia. Soledad Núñez Ramos, PhD in Economics from the created by the pandemic, that are now compiled in the present volume. This University of Minnesota, analyses the responses of economic and fnancial cycle was held as part of a broader project of our foundation – a project born authorities to the pandemic. Finally, Ana Teresa Tavares-Lehmann, Portugal’s 16 | Prologue Juan Carlos Escotet Rodríguez | 17

former Secretary of State for Industry, examines the impact of digitalization on the internationalization of businesses and corporations in both, her own country and Galicia.

There are exceptional readings that derive from exceptional circumstances. It can be stated that this is one of them: a strategic reading profoundly rooted in the current reality of Galicia, while at the same time, outlined to open the doors for the future. After the pandemic: Refections and challenges for Galicia will provide the reader with what we are so lacking at the moment: ideas that stimulate critical thinking and overcome self-complacency; strategic challenges that will lead us to overcome the uncertainty and complexity of today’s world; and the inspiration that will allow us to break through barriers in order to reach our deepest aspirations. Reconstruction is obligatory and must be based on analytical capacity and observation in a way that allows us to be ahead in order to continue to move forward.

Anatole France, who was awarded the Nobel Prize in Literature in 1921, once stated that “the future is hidden behind the people who make it”. I encourage each of you, the readers of these refections on our present situation, to join us in the exciting challenge of building our future, whose outcome will exceed our greatest expectations. Such are the spirit and energy that guide these programs of abanca and its Social Responsibility Institution, formed by Afundación and its Intercontinental Higher Education Business Institute (ieside), a nonproft entity responsible for the publication of this volume. Chapter I

COVID!19: CIRCUMSTANTIAL AND STRUCTURAL ACTION. SPOTLIGHT ON GALICIA 2030

Francisco Botas 20 | COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 Francisco Botas | 21

CURRENT SCENARIO

The present refection on the true dimensions of the health, economic and social crisis brought about by covid-19 is being written coinciding with the peak of uncertainty: September 2020. As regards the economy, the fall in gdp during the second quarter of the year was 17.8% and 14.5% for Spain and Galicia respectively. The signifcance of the impact of covid-19 is so severe that it demands a profound consideration of the scenarios we are likely to encounter in the following quarters.

Figure 1. GDP for the 1st and 2nd quarters of 2020

Spain Galicia

-5.2 % -4.9 %

-14.5 %

-17.8 % 1st quarter 2nd quarter

Source: Spanish Institute of Statistics (INE) and Galician Institute of Statistics (IGE). 22 | COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 Francisco Botas | 23

We now know the global macroeconomic prospects for Europe and Spain, and, The effects are and will be both circumstantial and structural. Some are directly to a lesser extent, those for Galicia and the other autonomous regions. These linked to the consequences of the pandemic, and will disappear once we get back projections, which would have seemed inconceivable just a short time ago, to normal. Others will linger either because they arose from previously existing give rise to great uncertainty concerning the effects and length of the present situations, or because of the changes and acceleration of new social patterns. crisis, of which we are gradually gaining a better understanding. We now need to move swiftly in defning and implementing the strategies based Figure 2. GDP projections for the period 2020-2022 upon analyses that are more agile and fexible than those traditionally conducted, so that they might result in yield better knowledge of the current situation and 7.0 % its own course. This is how permanent and certain solutions, factors which are key in building trust in society, and, consequently, within the economy, will be 4.1 % provided. All this needs to be approached with the necessary fexibility and bearing 2.0 % in mind that lack of previous experiences in this regard could lead to drawing erroneous conclusions.

In any case, what should we do? What questions should we be wondering?

First, we should consider the current scenario as regards some of the fundamental and well-known factors that have had an impact on its course; for instance, a signifcant net growth in global population which increased by more than 63 million people1 during the period from January to September 2020. None of the European countries can be found among the 15 most populated or with the highest demographic rates. And neither Galicia nor Spain are expected to see an increase -11.8 % in their population. These trends demand attention, strategies and actions that take them into consideration. On the other hand, the use of digital means has increased 2019 2020 2021 2022 worldwide: more than 50% of the global population has internet access, with the fgures in Spain being considerably higher reaching 90%.2 These data show a clear Source: Internal estimates by ABANCA’s Area for Strategy. competitive advantage on which we could rely. At the same time, health is and will be a key factor. Spain has one of the highest life expectancy rates, and its With a correct defnition of the strategic priorities, detailed planning, the healthcare system has been ranked among the best ones worldwide. Yet, the impact necessary capacity for implementation, and long-term vision we will enable of the pandemic has varied greatly from one region to another. Another factor that Galicia to mitigate the adverse effects of the current situation, and contribute is worth mentioning is the sustainability of our society, which serves as a strategic to a sustainable recovery while becoming stronger in the long-term. In order pillar, and which we must preserve. This latter goal has also been established as a to accomplish this, we need everybody’s cooperation. priority for the European Union. But, how do we manage the risk derived from the transition? How can we compete with other regions of the world which do not share In the current scenario of necessity and, more than six months after the outbreak our concerns? To these global issues, we must add other concerns that affect us of the pandemic – during which several measures of varying scope have been locally, and which, obviously, must be interpreted and evaluated. But these concerns taken – it seems necessary to deepen our knowledge of the profound impacts

of this unprecedented crisis so that the diagnosis enables us to swiftly accelerate 1 Source: Worldometer. and implement the most suitable measures. 2 Source: World Bank. 24 | COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 Francisco Botas | 25 that we have pointed out serve as a clear example of what is happening beyond our These situations will affect the world’s economy, and therefore also Galicia’s. We region, and they are what we must necessarily bear in mind when identifying our own should understand them according to a sectorial point of view, focusing on those strategic priorities. which are already operating in Galicia or which are likely to start operating, from the territorial or spatial perspective of micro-geography, bearing in mind urban, rural In this shared context, with trends and prospects pointing to different courses, and semi-urban areas, inland and coastal regions, etc., or according to the diverse what is going to happen? Will it be successful? Or will the fgures that we have measures implemented in them. By way of example, let us observe the different been mentioning be just the averages for the different countries? Can the fgures be impacts on a quarantined and a non-quarantined area within the same territory. compared to one another? Will there be a tremendous variation of results depending on micro-geographies or economic sectors?... Figure 4. Observatory ABANCA by IESIDE. A quarantined area is compared with the rest of the territory

It is of the essence to conduct dynamic analyses and implement cutting-edge tools, Evolution of the amount of credit card payments (Base 100- pre-covid on weekly operational basis) such as the case of Big Data, which helps in understanding the trends and the decision-making process. We must focus on the analysis of the geographical micro- environment, and of course understand the clear differences in behavior among Total Galicia sectors. In short, we must exponentially accelerate the knowledge of the macro- Areas with mobility restrictions level and from there focus on a very active management of the micro-level. All BEGINNING OF MOBILITY this needs to be strategically coherent, and must include both short-term and long- RESTRICTIONS JULY 6TH term visions. For instance, we could depict the uneven behavior of payments among MARCH APRIL MAY JUNE JULY sectors in Galicia during the pandemic until September. 1ª 2ª 3ª 4ª 1ª 2ª 3ª 4ª 1ª 2ª 3ª 4ª 5ª 1ª 2ª 3ª 4ª 1ª 2ª 3ª

Figure 3. Observatory ABANCA by IESIDE on the uneven impact of COVID-19 on different economic sectors 123 120 Food Transportation Home Fashion & Accessories Enterntainment 116 111 107 108 MAY JUNE JULY AUGUST SEPTEMBER 105 104 1ST 2ND 3TH 4TH 5TH 1ST 2ND 3TH 4TH 1ST 2ND 3TH 4TH 5TH 1ST 2ND 3TH 4TH 1ST 2ND 3TH 4TH 1ST 102 100 PRE- PHASE 0 PHASE 1 PHASE 2 PHASE 3 NEW NORMAL 94 COVID The ﬁrst 92 68% week of the Saturday 63% new normal 15th HIBERNAT 58% is included (holiday) 43% 44% 47% 43% 41% 38% 33% 77 44% 42% 33% 31% 34% 32% 35% 72 31% 31% 26% 28% 29% 25% 19% 28% 28% 30% 24% 30% 20% 20% 21% 21% 20% 70 19% 16% 14% 19% 18% 16% 13% 13% 9% 100 59 PRE- COVID -18% -11% -14% -16% -20% -20% 61 -16% -24% -15% -11% -23% -19% 24% -21% -19% -19% -22% -20% -24% -3% 4% 4% -2% -26% -28% -29% -28% -26% -25% - -27% - 23% -28% -35% -26% -24% -26% -30% -28% -29% -26% -33% -36% 28% -28% -29% -28% -40% -38% -33% -39% -33%-33% -34% 32% -30% -31% -41% 42% -44% PRE!COVID LOCKDOWN PHASE 0 PHASE 1 PHASE 2 PHASE 3 NEW NORMAL -50% 46% -46% The ﬁrst -51% 55% -50% -30% -60% 60% week of the 31% 18% new normal -73% -74% -29% -21% is included -80% -83% - % inter-annual growth as regards of the same period last year

- 26 | COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 Francisco Botas | 27

With all this information it would seem necessary to conduct a profound and scenario at the same time that we take a resolute step forward toward the smart swift refection, which, at the same time, may allow us to defne our priorities: transformation of our environment for a new future, whose arrival we anticipate the most pressing ones in the short-term and those with a long-lasting trajectory. will become real once we sum up opportunities or new needs and shift our common defcits. In other words, there is still plenty of room for improvement. At present, our priorities are, and should continue to be, as follows: social support in view of the current scenario, support aimed at the protection of health as the In this way, with the correct management of the short-term as a starting point, immediate priority, and the protection of employment as a guarantee of social we will be able to strategically design for the future wellbeing of Galicia. protection. At the same time, we should address our efforts towards ensuring the protection of the current economic capacity, which took so much work and It is at this time of crisis when we must consider whether it is possible for time to be achieved, and which is the foundation of our welfare state. us to improve, to transcend our limitation, and swiftly adapt to new times and opportunities, all while, of course, retaining the advantages we currently Guaranteeing the protection of the sustainable established capacity should be have. The people of Galicia will undoubtedly be key to the success of this our utmost priority for the eventual normality, in order to ensure the jobs and transformation, with their enormous capacity to adapt without losing their the income that, consequently, allow us to bear the costs of our welfare state. proud identity, just as it has been happening throughout history, and as can be These three levels of protection must be ensured for a period of time similar to seen in a number of personal and collective experiences. Now, at a time when that expected for the effects to last. we are integrated in a world with greater global interconnections, we must rely on the new existing mechanisms. One of them, which will undoubtedly help, is Additionally, and foremost, emphasis should be placed on communication the release of the funds provided by the European Union of which we already and the provision of stability and certainty for the people and businesses know some of the key features, such as the Next Generation eu program: digital affected. Secondly, but equally important, we must be able to discern at all support, support for sustainability and support for the social area. times which effects of the pandemic are circumstantial and must therefore be mitigated right away, and which are structural, and thus require a very different Below, and for the purpose of improving for 2030, some specifc lines of action approach. to be designed and implemented are proposed, in no particular order of priority.

In the long-term, we need to address the structural and permanent changes 1- Focus on digital opportunities. For the frst time in history, geographical taking place in our society. location is no longer decisive, given the sudden emergence of the digital world. From Galicia we must emphasize both the promotion of innovation in this feld, We must understand that the current crisis is actually the ideal time to fnally and the support to the transition of the current productive sector. redirect and promote the key transformations that our environment needs in the long-term. Some of them have been being acknowledged for a long time and 2- Focus on the sustainability of our own economic proposal as a measure to have been partially addressed. Some others will arise from the new behaviors provide momentum and added value. We have repeatedly seen that an essential of the society in which we are living. part of the added value of some raw materials and services originating in Galicia ends up yielding dividends in other territories. We must undertake to focus on As regards long-term actions, this paper comprises a larger number of proposals, integrating the value proposition and, in some cases, seek vertical and horizontal since it is our contention that there is still a lot of work to be done when it comes to integration at the local level. suggesting approaches that will lead to a positive evolution through the year 2030. 3- Focus on stimulation of the quality of life from the social and healthcare In Galicia, a region that has been very active from the very beginning, we must context, understood as a service provided to a society with a greater life continue to focus our efforts on the urgent and essential needs of the current 28 | COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 Francisco Botas | 29

expectancy, and based on the provision of quality services training and research, economic promotion could be the strategy that differentiates Galicia from other bearing in mind Galicia’s natural advantages and requirements. regions, at both national and European levels.

4- Focus on our population, and on recruiting talent. Understanding how I would like to conclude by highlighting the great competitive advantage that large the population will be, and where and how we will live in 10, 20, 30 we have in order to develop the above factors, given the existence of a prestigious or 50 years’ time, is no trivial matter. In addition to robust policies to foster fnancial entity which is present throughout the region and committed to Galicia, population growth, it is important to promote various long-term analyses from both within the current scenario and its eventual transformation. Moreover, a social perspective, with the help of mathematics and statistics, to allow to being aware that part of what has been suggested here is being tackled with the become a talent recruitment hub. A positive and integrated strategy with a greatest interest by the competent professionals in charge. However, I encourage long-term vision will ensure our collective future. accelerating its implementation, prioritizing the short-term mitigation measures mentioned above, but bearing in mind the medium-term transformational 5- Focus on promoting the sectors where our traditional know-how can be measures which will allow us to build a much better Galicia towards 2030. applied with a clear and forward-looking vision: agriculture and farming, fsheries, textile, automotive and green energy, among others, and with their natural evolution food, industry, services, biomedicine, etc., placing special emphasis on their added value and sustainability, and encouraging their local roots.

6- Focus on a robust promotion of innovation, free of geographical boundaries and aimed at sectors considered as strategic (in addition to those mentioned above). We should undoubtedly enhance our innovative efforts in both public and private sectors and, of course, with a strategy and a scope that allow us to feed back this critical function, with a Galician perspective and a global vision.

7- Focus on supporting private initiatives and entrepreneurship, understood as the elements that stimulate our society, especially in strategic sectors. It is necessary to create new services or companies to adapt to the new needs, and this requires a society which is dynamic, capable and motivated.

8- Focus on quality sustainable tourism, enhancing its offer. Firm positioning regarding sustainability, an intrinsic factor of our territory, built on the basis of a diverse geography and renowned gastronomy.

9- Focus on fscal competitiveness, aimed at stimulating private initiatives, entrepreneurship, strategic sectors, and the recruitment of entrepreneurial talent, as well as investment capacity.

10- Focus on becoming a real entry bridge for added value from America and on reinforcing links with Portugal. Implementing policies for fscal and Chapter II

IMPACT OF COVID!19 FROM THE PERSPECTIVE OF EUROPEAN ECONOMIES: A SPOTLIGHT ON HUMAN CAPITAL

Alicia García-Herrero 32 | Impact of COVID-19 from the perspective of European economies: A spotlight on human capital Alicia García-Herrero | 33

With the rapid recovery of an economic superpower such as China, covid-19 is believed by many to constitute no more than a temporary shock, at least in economic terms. But this is probably not the case. Artus and García-Herrero1 (2020) argue that the economic shock will have signifcant long-term effects, as the global economy becomes less productive. To be sure, production is expected to be “square root”-shaped for the next few years. The sudden fall in economic activities caused by the lockdown will be immediately followed by a rapid recovery as restrictions ease. However, potential growth will decline in the medium term. This is especially true for export-dependent economies, such as those of European countries, which have suffcient accumulated savings. The rapid recovery stems from the spending of some of the forced savings built up during lockdown, as well as the income support provided by expansionary fscal policies. The sudden fall and the rapid recovery are already visible (Figure 1) in China as a frontrunner, and will become increasingly so for the rest of the world.

The author is grateful to Junyu Tan, economist at Natixis, for his contribution. 34 | Impact of COVID-19 from the perspective of European economies: A spotlight on human capital Alicia García-Herrero | 35

Figure 1. China: Composite PMI (CAIXIN index) Figure 2. OECD*: Total real corporate investment (2002: 1 = 100)

* United States + United Kingdom + euro zone + Japan 60 (*) United States + United Kingdom + euro zone + Japan

55 160

50 150

45 140

40 130

120 30

110 25 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

100 Source: WIND, Natixis.

90 However, such speedy recovery does not come without a cost. The ultra- 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 expansionary policies in response to the crisis may actually be irreversible.

The rapid increase in debt levels will make it impossible to raise interest rates, Sources: Datastream, BEA, ONS, Eurostat, CAO, Natixis. and this will probably discourage the accumulation of savings. This is particularly worrisome for the small open economies of Europe, More importantly, potential growth will inevitably trend downwards in the given their aging population and a falling labor productivity that predated the medium term due to the covid-19 shock. This results from the loss of capital as pandemic. In fact, this is not the frst time that potential growth has fallen investment falls and bankruptcies are declared (Figure 2). In addition, the crisis because of a crisis. The same thing happened during the subprime crisis involves a loss of human capital, due to the rise in unemployment, the persistent (Figure 3) but the effects resulting from covid-19 are likely to be far more problems for some sectors (such as airlines, tourism, traditional retail, etc.), dramatic. Therefore, governments enacting policies for these economies must and restrictions of access to education. Furthermore, on-the-job training will fgure out ways to prevent potential growth from falling further. be much less effcient as workers work from home and companies may not be able to afford investing in the improvement of their human capital in the face of continuing accumulation of corporate debts. 36 | Impact of COVID-19 from the perspective of European economies: A spotlight on human capital Alicia García-Herrero | 37

Figure 3. OECD*: Real potential growth** Artus (2020) also proposes that investment on human capital be scaled up to

* United States + United Kingdom + euro zone + Japan accommodate the rise in structural unemployment and concomitant fall in ** Per capita productivity smoothed over the last 5 years + labor force (Y/Y as %) productivity. In the short run, the government should increase its spending on vocational training in order to facilitate the transition of jobless workers from 3.5 struggling sectors to sectors where workers will be in demand (e.g., it, online retail, health care). Meanwhile, the government should also improve the quality of human capital by encouraging higher levels of enrollment in education 3.0 programs. Most of the key economies in Europe lag behind Korea in terms of higher education enrollment (Figure 4). In the case of young dropouts, 2.5 apprenticeship programs or vocational training would provide support in developing competencies.

2.0 Figure 4. School enrollment, higher education (% gross)

1.5 100

90 1.0 80

70 0.5 60

0.0 40 02 04 06 08 10 12 14 16 18 20 30

Sources: Datastream, BEA, BLS, ONS, Eurostat, CAO, Natixis. 20

Given such foreseeable developments, the losses of human capital must be 0 reduced in the short run. Pelinescu (2015) has highlighted the role of human Korea Spain Germany France China capital in growth, arguing that it could infuence the sustainable development of the State. In the case of the covid-19 shock, this will require efforts at preventing Source: UNESCO, Natixis. not only bankruptcies (which destroy productive capital), but unemployment (which destroys human capital and weakens productivity). In addition, the covid-19 cannot be dismissed as a temporary shock, but must instead be seen deterioration of the fnancial situation of corporations should also be prevented, as a phenomenon that will have a lasting impact on potential growth. The because poor fnancial health leads to lower corporate investment and therefore economic policies of aging European nations should have a twofold focus: the lower potential growth. It would therefore be preferable to temporarily subsidize preservation human capital (to accommodate the structural shifts in sectors), struggling companies, instead of allowing them to continue to add to their debt and the accumulation of human capital (to address falling productivity). burden. 38 | Impact of COVID-19 from the perspective of European economies: A spotlight on human capital Alicia García-Herrero | 39

ANALYSIS FOR GALICIA Figure 5. Evolution of the total number of births, mortality and net population growth. Galicia 1975-2019

As regards of its human capital, Galicia is facing an enormous challenge: the MORTALITY fertility BALANCE Mortality Births Net population growth total of its active population is been heading towards a negative evolution for the last seven years, especially in the age group between twenty and twenty nine years old, where the decrease reaches 5%. The economic recovery recorded in 50.000 the years prior to 2020 is not implying a shift in the trends regarding the active 40.000 population evolution, whose ageing since 2014 is very relevant, with serious increases in those people active who are more than 40 years old and dramatic 30.000 reductions between 20 and 39 years old, namely, in the age group between 30 20.000

and 34 years old. 10.000

The demographic data available for Galicia and published by the ige (Galician 0

Institute for Statistics) refect an increasingly low birth rates and a rise in -10.000 mortality, which leaves us with a negative net population growth, as it can be seen in chart 5. Galician population sums up 2.7 million people, 15% youngsters -20.000 1975 1977 1991 2011 1976 1978 1979 1981 1982 1983 1985 1987 1992 1993 1995 1997 2012 2013 2015 2017 1980 1984 1986 1988 1989 1990 1994 1996 1998 1999 2001 2007 2010 2014 2016 2018 2019 under 18 years old, 3.6% lower than the Spanish results as a whole. Galicia 2000 2002 2003 2004 2005 2006 2008 2009 faces a serious problem of losing young people. Its average age is 47.2 years old. Its life expectancy is 83.52 years old, lower than the Spanish average life Source: IGE. expectancy, which rises up to 83.59, the highest within Europe. There nowadays 653,554 individual older than 65 in Galicia, 24.2% of the whole population. At a Spanish level this percentage is 18.5%. The ageing of Galician population is a fact that can be dated back to 1975, because the cohort of the population older As regards of higher education as a key element of the human capital than 65 have been constantly growing for the last 40 years, while the birth rates accumulation, the total number of university students is not the most relevant follow a continuous decrease. fgure. On the contrary, in order to be able to see the whole image, we should observe the competence accumulation variable, especially within the stem feld (Science, Technology, Engineering and Mathematics), which can provide us If we establish a relationship between education and unemployment rate, with a clearer notion of what is happening. In Galicia, the number of stem the latter decreases in all education levels, with a more intense reduction in the graduates has been dramatically reduced for the last 20 years. In the academic higher education stages, as it can be observed in all of our neighbor economies. year 1999-2000 the total of the university population reached its peak with A clear decision in favor of promoting education and adjustment of its offer, in 98,691 enrollments. In 2019 the number of all the students enrolled in Galicia’s both higher education and vocational training, to the new needs of the labor University System (sug) rises up to 61,029, of which 28,761 signed for stem market are compulsory measures to be developed by the Government. degrees (10,629 in Health, 5,572 in Science and 12,560 in Engineering and Architecture), 47.13% of the total amount. Also, in 2019, 10% of university candidates chose to conduct their higher education degrees outside Galicia, mainly in Madrid (6%). This fact is chiefy determined by two factors: high cut- off marks to entering the programs within the stem feld in the Galician region and a limited offer of new degreers linked to science and technology. 40 | Impact of COVID-19 from the perspective of European economies: A spotlight on human capital Alicia García-Herrero | 41

As regards of foreign investment expected to be driven to creating job opportunities to prevent young talent emigration, the total amount of fdi received in Galicia in 2019 (722.9 million Euros) has barely impacted the real economy, since an important part of this whole is due to internal transactions within the Brazilian group, focused on the concrete sector, Votorantim (formerly known as the Portuguese multinational Cimpor). Although it is true that in 2019 Galicia was ranked sixth in the Spanish Autonomous Communities with more fdi, right after Madrid, Catalonia, Castilla y León, Andalucía and Valencia, it is also true that there is a considerable gap in between. For instance, when regarding the amount received by Madrid (61% of the whole).

In conclusion, and in order to promote a competitive Galician economy, we should focus on developing long-term policies aiming to strengthen and retain our human capital, targeting the youngsters. In addition, we should ease our appeal for productive fdi in order to create technologically innovative projects that help industrial and service sectors to be seen as real options. R&D&I are crucial in this process. Both are the two main challenges that Galicia must face in the future. Chapter III

BUSINESS IMPACT OF THE PANDEMIC

Mauro F. Guillén 44 | Business impact of the pandemic Mauro F. Guillén | 45

The market economy is constantly fowing. This is what Joseph Schumpeter used to say when describing the phenomenon of “creative destruction”, the real driving force for innovation and for the unprecedented ability of this economic system to provide ever higher standards of living. However, besides the continuous economic evolution and the many technological, and otherwise, disruptions, the market economy also faces crisis periodically. Most crises are originated by the fnancial economy and the real economy infecting one another in a downward spiral. The current crisis, unlike other crises that we have been experiencing for the last one hundred years, is different in its origins. A sharp downward turn in the economy and a rise in unemployment are due to the response in the face of a public health emergency. For now, the fnancial system has not been affected by the crisis, although it is still too early to know to what extent a fnancial meltdown can be avoided.

The ups and downs of the economy have immediate repercussions on the business world, one of them being company bankruptcies, highly reported among small businesses. Besides, there are many other effects both inside and outside the company environment. In order to survive this crisis and take adequate steps to recover from it, companies will have to closely study the nature of the new trends emerging from the crisis, as well as those accelerated by it. 46 | Business impact of the pandemic Mauro F. Guillén | 47

CHANGES IN THE SUPPLY CHAIN principle as regards supply. The main consequence of these transformations will be raising costs. Predicting whether these additional costs of increased Companies’ relationships with suppliers, employees and customers have been robustness in supply chains will be borne by companies or consumers becomes undergoing an accelerated transformation since the beginning of the crisis. an essential consideration for the future. On the one hand, companies might Starting with the supply chain, this crisis has challenged the reliability and be expected to pass on the additional costs to the end consumer. However, in continuity of the traffc of intermediate goods (i.e., spare parts and components) the long term, competition in consumer markets might reduce this negative from the origin of the chain, which is often thousands of miles away from effect on the end consumer. the place where the company actually makes use of these supplies. Many companies have been forced to halt production, not due to a lack of demand, This crisis also encourages companies to invest in automation along the supply but because they could not procure the necessary supplies starting with the chain and in internal operations. The reason is not only the need to reduce sudden disruption in the Chinese economy early this year. Delays in delivery costs, but also the new importance placed on continuity, which is threatened times have slowed down operations of numerous companies. These problems during a pandemic that prevents staff from going to work. Automation will have led companies to reconsider the structure of their supply chains, rethink also increase in all activities requiring employees to come into physical their geographical distance and the degree of diversifcation. contact with customers.

Friction and disruption in global supply chains are by no means a new phenomenon. For instance, some of the problems related to their lack of EMPLOYEES AND REMOTE WORK diversifcation were pointed out in 2011. That year, an earthquake and a tsunami hit Japan, causing the Fukushima nuclear accident, provoking very The second major transformation is the relationship between the company serious consequences for the shipment of components manufactured in Japan and its employees. Remote work is the most relevant effect of the crisis. Up to that supplied automobile manufacturers all over the world, including those 40% of the jobs in the current economy can be carried out exclusively from located in Galicia and the rest of Spain. home or elsewhere. This means that many of the employees will not have to return to the workplace on a full-time basis. In all likelihood, mixed work Trade frictions have historically caused disarray in supply chains. The schemes combining onsite and remote models will be put forward as a solution trade war between the United States and China during 2018 and 2019 is involving certain compromises, given the advantages and disadvantages of the most recent example. Due to rising tariffs, many companies decided to working remotely: fexibility on the one hand, but isolation and diffculties in diversify their suppliers, especially in sectors such as clothing, footwear, coordinating tasks on the other. electronic components, and an endless number of other sectors. As expected, companies decided not to look for suppliers in the United States. Instead, However, there are other consequences, if remote work becomes widespread, they found alternatives in countries such as Vietnam, Taiwan, Mexico and that should also be borne in mind. If a certain job can be carried out from some Eastern European countries, whose costs were fairly similar to those home or elsewhere, the company can actually hire anyone in the world for of Chinese frms. that position. In other words, remote work creates a potentially global labor market, with a considerably ferce competition for talent. This trend would Companies are expected to restructure their supply chains in the medium beneft workers with unique knowledge or skills, but it could also bring and long term in order to become more resistant to adverse events, such as wages down to a level of effcient equilibrium in a context that is global, earthquakes, trade wars or pandemics. This requires not only diversifying the rather than national or local. origin, but also increasing their level of stock in order to avoiding shortages. This second step involves the partial abandonment of the just-in-time 48 | Business impact of the pandemic Mauro F. Guillén | 49

IN THE FACE OF SO MUCH CHANGE, WHAT IS THE BEST STRATEGY? RELATIONSHIPS WITH CUSTOMERS AND CONSUMERS There is always the temptation to want to change before events take place Lastly, relations between the company and its customers are also changing in order to be ahead of them and gain a strategic advantage. There is much rapidly. E-commerce boom aside, this crisis has also altered the composition of debate in the media, for example, about whether this is the end of retailing, demand as well as consumer behavior. Essential goods and services are known the age of telework, or the reversal of globalization. In a crisis such as this to have been in unusually high demand since the beginning of the pandemic. one, where short and long term effects are defnitely uncertain, nothing However, the defnition of the concept of essential demand in this crisis is very can be taken for granted and therefore no drastic decisions should be made different. In addition to the essential goods and services that meet vital needs about the future of companies in terms of strategy, positioning, products and and make it possible to have a pleasant and healthy home, essential demand market approach. also includes goods and services linked to e-commerce, telework and distance learning. Even goods and services aimed at home entertainment could well be This is why it is important to think not in terms of great transformations classifed as essential items. within companies, but in terms of pivoting towards a position that favors: (1) adjustment in company approaches to the trends revealed during the crisis; Perhaps the most important and lasting changes will be those regarding (2) effective deployment of resources and capabilities; and (3) contribution consumer preferences. Among the physical attributes of the product, consumers to a company’s fnancial sustainability and to the strengthening of its brand will probably place more emphasis on safety and reliability. This aspect requires image in the market. This means to swing towards a new positioning, or the company to explain, among other things, the origin of the components or way of conducting businesses, but maintaining the current consumer base ingredients used for its products. As for social attributes, consumers are already or with other new groups of consumers. For example, many restaurants have tilting towards attributes related to the experience of the good or service. And developed a take away or delivery system, and some have proposed some kind regarding the self-expressive attributes, consumers are increasingly turning, of subscription service whereby the customer receives a complete meal at due to the pandemic, to products and services that provide psychological home several days a week. Small-scale farms have seen some of the demand comfort at a time when we are all re-examining the meaning of life and the for restaurants disappear, but have managed to restructure their packaging, opportunities and threats it implies. In general terms, consumers will be drawn distribution, and sales strategies in order to reach the end consumer directly. to goods and services that contribute to physical and mental well-being, quality of life and safety. In the feld of digital platforms, Spotify, the leader in music streaming services, has pivoted towards the creation of contents as podcasts, something In terms of distribution and sales channels, there is no doubt that e-commerce that will surely contribute to greater proftability. Airbnb, in turn, has has received a huge boost as a result of the lockdown at home and social launched a program of digital experiences which are directly created by the distancing due to the crisis. Some consumers who were not used to e-commerce hosts within the Airbnb platform as videos or podcasts. Thus, the company have been forced to make frequent use of it. Many small companies have also would become a lifestyle platform rather than a mere intermediary between set out to create a sound digital presence and, in the case of tangible goods, to hosts and guests. develop a whole system of electronic sales and subsequent delivery. 50 | Business impact of the pandemic Mauro F. Guillén | 51

CONCLUSION AND OPPORTUNITIES FOR GALICIA

Every crisis presents an opportunity for a company to reconsider its strategy. The aim should always be to fnd a positioning and use of resources and capabilities that favor greater sustainability and fnancial success as well as a strengthened brand image. The effects of the recession are certainly unbearable for many companies, especially for the smaller ones, and many larger businesses would be unable to weather the crisis without fscal or monetary assistance. It is always worth remembering the maxim that a crisis is an opportunity too good to miss.

In the case of Galicia, there are several circumstances resulting from the pandemic that are conducive to innovation and transformation according to the new scenario. The automotive sector, extremely important in the region, could evolve towards shorter supply chains, allowing greater value creation within the vicinity of the assembly plants. The clothing sector vertically integrated towards the end consumer could take advantage of the crisis to intensify its digital transformation, consolidating and restructuring its onsite store network, as is already the case of leading companies. In the era of distance and caution, rural tourism could acquire new enthusiasts, as it offers a less crowded experience, creating higher quality jobs, and contributing to the recovery of the “emptied regions” – inland areas sparsely populated due to massive migrations to more industrialised destinations – of Galicia and Spain. Finally, small-scale agriculture, specialized in high quality at an affordable price, will also be strengthened in the present circumstances, given the frequent problems of infection in mass food processing facilities. In short, this is a crisis that presents tangible opportunities for an economy like Galicia’s, which relies not only on large-scale industrial activities such as automotive and clothing, but also on smaller-scale production sectors such as rural tourism and organic farming. Chapter IV

THE EFFECTS OF COVID!19 ON THE FISHING SECTOR AND CHANGES IN CONSUMER HABITS

Fernando González Laxe 54 | The effects of COVID-19 on the ﬁshing sector and changes in consumer habits Fernando González Laxe | 55

The effects of covid-19 are taking their toll on all economic activities, affecting both production and consumption at the same time, while also affecting the personal safety and health of seafarers. The repercussions of this pandemic are palpable, not only when it comes to boarding fshing vessels but also as regards ensuring the supply of fsh products for the food industry. There is little doubt that, after the period of lockdown and restrictions on economic activities and on the free movement of fshermen, the situation will change and there will be a signifcant shift in positions. Our purpose here is to analyze these changes.

If we take the time to consider our immediate future, right after the period of lockdown brought about by covid-19, we will frst appreciate the revaluation of certain consumer goods and foods as compared to previous times. Fish products will continue to be an essential product for shoppers, although we may see changes in both the presentation of those products, in consumer preferences and in fuctuations in seasonality. Secondly, new services linked to 56 | The effects of COVID-19 on the ﬁshing sector and changes in consumer habits Fernando González Laxe | 57

innovative technology, detection, logistics it and tertiary knowledge systems factors affecting stock recruitment, the impact of pollution, or the alteration of will be gradually incorporated into the market. All of these will help provide ecosystems. This is why fshing resources are depicted as feeting, mobile, and guidance, while also reinforcing demands from both consumers and producers. depletable, failing to consistently produce at the same rates or under the same Consequently, new global supply and support chains will be established for conditions. In addition, seas cannot be purchased, leased or inherited. Having producers, resulting in two different dynamics working simultaneously: one taken all these reasons into consideration, the 1984 fao conference on fsheries sustained by relationships of proximity and another that reinforces decentralized management declared that “fshing management is an art.” This statement trade fows. Thirdly, we will witness a process of “de-commodifcation” of highlights the complexity of its regulation, as well as the great diffculty certain primary goods as a result of the new procedures that differentiate fsh inherent to implementing measures that would be conducive to sustainable and products. This process will occur as a result of a combination of technical effective regulation. advance and the issuing of new certifcates for denomination of origin and sustainable fsheries. The above description suggests that analyzing the impact of coronavirus is a challenging task. On the one hand, we see extractive activities halted and Given these considerations, the repercussions of covid-19 on the fshing sector suspended while, on the other hand, there is a reduction of the demand, caused impel us to address these new concerns. The discussions that, until recently, by the lockdown of most of the world’s population. These are two facts of the used to be focused on certain goals will be shifting due to the pressing issues fshing sector that lead to a high degree of uncertainty when planning and arising from the new circumstances. By way of example, we will outline acting within the fshing sector (Figure 1). four relevant topics. First, there will be a delay in reviewing and approving international conventions and guidelines on environmental matters. Thus, the Any partial or total suspension of fshing activities means that vessels remain expected initiatives in this regard will be halted or put on hold for a while. docked, which results in the reduction of supply. This creates fnancial problems Secondly, there will be a shift in political priorities, with certain objectives for companies, who fnd themselves unable to cover their overheads because being shelved indefnitely. We should not lose sight of the fact that some of their fnancial resources are too fragile. At the same time, such circumstances them, such as social goals and sustainability indicators, are essential, and must cause a decrease on working incomes, and thus affecting the living conditions not be forgotten. Thirdly, if the goal is to maintain the whole economic activity, of coastal communities that serve as the base of operations for fshing units. steps should be taken in order to focus on how to attempt to subsist until we Seasonal fsheries, whose operations are exclusively confned to a specifc are completely back to normal. Fleets could be provided with incentives and time of the year, are also severely affected. Finally, the supply of aquaculture measures of adjustments and adaptation. Lastly, the current situation must not products is reduced, because their distribution channels are not fully operating. serve as an excuse to avoid initiating or updating fshery management periods. Similarly, initiatives promoting ecological transition, food sovereignty, and The lockdown leads to a reduction in demand. On the one hand, we should sustainable fsheries should not be postponed. In sum, now is the time to take take into consideration the effects directly derived from confnement, namely action in order to ameliorate the negative effects. the restriction of free movement, the diffculty in maintaining distribution channels fully operating, the complications involved in full-availability of Fishing is one of the most complex activities to study and to regulate. It depends all fsh species, or the reduction in export levels, since many countries lack on operations derived from a defned strategy and daily management. However, suitable transport and distribution conditions for the product. On the other there are external factors which escape human control almost entirely, making hand, consumer habits shifted from the necessity factor to the leisure factor it diffcult for fshing conditions to remain invariable over time. Some of them during lockdown, meaning that nourishment needs varied accordingly. arise from changes and fuctuations in currents, salinity or water temperature, 58 | The effects of COVID-19 on the ﬁshing sector and changes in consumer habits Fernando González Laxe | 59

Figure 1. Disruptions in the ﬁshing sector caused by COVID-19 outlets during the frst weeks of lockdown) and, unexpectedly, other products such as meat and legumes over fresh fsh products.

Restrictions on free movement as a result of lockdown.

The halt to the activity results in Table I. Trends in amount of fish products consumed in Spanish households, from January to Both vessels and fishers a more limited supply volume. May, 2020 (% change compared to the same week of the previous year) remain at port. Progressive Points of sale, markets and reduction of distribution channels close. Total Fish Fresh Fish Frozen Fish Canned Fish Total or partial halt of activity Week (2020) and businesses. demand Products Products Products Products Supply chains become more complex and vulnerable. Capture of seasonal species Week 1 (January 6-12) 29.9 7.5 23.9 23.2 as a whole is affected. Fishing and aquaculture Week 2 (January 13-19) -13.0 -18.8 -14.5 -4.5 operators (normally micro- Staggered supply of businesses) do not have financial Week 3 (January 20-26) -5.8 -21.4 12.0 8.9 reserves to cover their overhead. aquaculture products in Week 4 (January 27-February 2) -6. -15.1 3.6 4.5 order to cover the costs of Unstable price fluctuations. managing stocks. Swift drop in Week 5 (February 3-9) -4.6 3.6 -14.3 -5.8 supply The fall in oil prices impacts Week 6 (February 10-16) -0.9 0.2 -4.7 4.7 product demand in oil-producing countries. Week 7 (February 17-23) -9.5 -14.3 1.1 -2.3 Week 8 (February 24-March1) -0.8 0.1 -6.3 6.0 Week 9 (March 2-8) -1.9 -8.9 1.8 11.3 Week 10 (March 9-15) 0.6 -4.3 13.3 6.0 EFFECTS Week 11 (March 16-22) 21.2 7.2 38.1 82.1 1. Considerable impact on artisanal and coastal fishing, which adversely affects employment in local communities. 2. No demand in hospitality and catering services. Week 12 (March 23-29) 4.5 1.1 33.2 4.7 3. Reduced exports. 4. Presence of competitors offering lower prices. Week 13 (March 30- April 5) -4.0 -1.5 17.8 -1.3 5. Product prices are negotiated in a bear market. 6. Households reduce consumption. Week 14 (April 6-12) 0.8 -4.4 37.9 -0.7 7. Increased uncertainty, increased capacity, and increased recovery time. Week 15 (April 13-19) 19.6 4.3 39.5 18.6 Week 16 (April 20-26) 35.5 57.1 55.4 15.5 Week 17 (April 27-May 3) 18.5 21.4 25.8 3.0 Week 18 (May 4-10) 31.7 33.0 40.9 13.2 Once both situations are combined, two direct impacts can be observed: the Week 19 (May 11-17) 38.7 32.4 67.0 33.4 frst one being instability of prices, and the second one being changes in Week 20 (May 18-24) 28.3 25.9 37.7 35.3 consumption patterns. As regards the former, a fall in prices at fsh products auctions is being recorded, going against the logical expectation stated by the law of supply and demand, according to which a scarce good would draw a higher price. However, this valuation does not reach the consumer; conversely, After the frst week of the year, in which a signifcant increase regarding the distribution channels manage to place the fshing products at higher levels than previous year can be observed, the subsequent eight weeks, until mid-March, fsh those they would have attained in pre-covid-19 circumstances. With regards products consumption in Spain decreased in comparison with that same week to the second impact, consumer habits have been heavily altered as a result of of the previous year. From week 11 onwards, consumption increases although lockdown, and consumption outside the home has been signifcantly reduced continuously fuctuating in demand. The most signifcant rises occurred during within what is known as the food service industry (Horeca channel in Spanish). the last weeks of the month of May. Consumer current preferences target both supermarkets (rather than larger retail 60 | The effects of COVID-19 on the fishing sector and changes in consumer habits Fernando González Laxe | 61

Table II. Evolution of the consumption and price of fresh fish products, and comparison of since the growing presence of imported products contributes to destabilizing the trends in fresh fish products consumption and food consumption as a whole in Spanish households (%) the positioning of certain specifc products and their markets. Likewise, the current exceptional and temporary circumstances make it possible to violate Consumption of the principles of equivalence and homogeneity, so emphasis should be placed Total food Price of fresh fish fresh fish consumption products on actions aimed at ensuring that imported products abide by the same control products and phytosanitary safety standards as those produced in the European Union. Week 11 (March 16-22) 29.8 7.2 0.9 In other words, we must adapt globalization to our current new circumstances. Week 12 (March 23-29) 10.9 1.1 8.9 Week 13 (March 30-April 5) 17.6 -1.5 7.5 Faced with this situation, both the Spanish Government and the European Week 14 (April 6-12) 22.2 -14.4 10.0 Commission have reacted swiftly. The agreement approved on the adaptation Week 15 (April 13-19) 36.3 4.3 14.9 of the emff (European Maritime and Fisheries Fund) regarding subsidies for Week 16 (April 20-26) 50.6 57.1 3.6 specifc treatments and campaigns to promote the consumption of fsh products Week 17 (April 27-May 3) 23.4 21.4 6.1 is a reliable indicator of heightened institutional sensitivity regarding the issue. Week 18 (May 4-10) 27.0 33.0 0.6 However, there is still a long path ahead and much work to be done if we are to Week 19 (May 11-17) 30.6 32.4 1.2 revert to the conditions that prevailed prior to the outbreak of covid-19. Week 20 (May 18-24) 27.0 25.9 3.0 Within this scenario, there are a growing number of studies dealing with the Sources: theory of real investment options. Several factors encourage the use of this MAPA (2020). Análisis de los consumos alimentarios. Government of Spain, Ministry of Agriculture, Fisheries and Food (MAPA). approach when making decisions for the present and, specially, for the future. Martín Cerdeño. V. J. (2020). La cadena alimentaria en tiempos de la COVID-19. Distribución y Consumo, Vol. 2, pp. 24-42. I tackle three of them as examples. First, the costs of investing in fsheries are This table shows relevant changes in shopping and consumption habits. irrecoverable (that is, the investment made in a fshing vessel cannot be used Qualitative differences can also be observed depending on the different levels in a different activity). Secondly, there is a high level of uncertainty regarding of confnement during lockdown periods. In this way, for the frst weeks of the abundance and price of fshing resources. And thirdly, the decision-making lockdown, less fresh fsh products were consumed. However, as restrictions on process as to whether or not to continue to exploit a certain fshing ground or free movement limitations were eased, the demand for fresh fshing products invest in it may be delayed or halted altogether. If we review the conditions of experienced an intense and rapid increase. Consequently, the prices began the current scenario, we can see that we are in an increasingly volatile position, to adjust to the potential levels of demand, overcoming the fuctuations that with constant restrictions on fshing activity. Consequently, the choice to characterized the strictest periods of lockdown. suspend activity depending on product price seems possible. This would mean that if the price becomes lower than the variable costs, in all likelihood the This remarkable change in behavior is to be stressed because the consumer activity will be interrupted. It is not diffcult to deduce then that the price of surveys conducted every year by the Spanish Ministry of Agriculture, Fisheries fshing products is not appealing for investments. Hence the need to accept and Food had been showing that the elderly and the unemployed (who spend and adapt to the possibility of making fshing processes more fexible in order more time at home and have more free time) were the groups consuming more to prevent opportunity costs and the reduction and diversion of investments. fresh fsh products. In short, neither of these two direct impacts is consistent Recent studies on the topic show that there is a close relationship between with what had been the dominant hypothesis until recently in studies prior to proftability and risk, meaning that the more volatile the price of the asset is, the the pandemic. greater the likelihood of movements which may favor the value of the options, ultimately resulting in lower relevance of the sector. A third element in the analysis is the opportunity for imported products with lower prices. Local producers have already started to sound the alarm, 62 | The effects of COVID-19 on the fishing sector and changes in consumer habits Fernando González Laxe | 63

Consumer habits evolve according to times. Changes are assumed, as are Third phase: distrust of food products (1985-2000). The 1980s were a turning adaptation to new situations and accommodation to new social customs. point and saw a shift in the consumer/industry relationship. Technical Currently, the so-called consumption-oriented society is the combined progress, initially conceived and appreciated as something positive, was outcome of decades of mass consumption, the introduction and application hard hit by the change in consumer perceptions during this period. The of progress and technological innovation, and the advent of innovative social main reasons for these changes were a series of food crises affecting various changes. Five major periods can be discerned as regards the consumption of species and products (e.g., mad cow disease, mercury poisoning), ultimately fsh products. These phases are linked to different socioeconomic and political extended to all markets. Countries that have not experienced these phases events which have contributed to modifying consumer habits and behaviors of uncertainty and distrust are rare. Scandals continued to occur and had an (Table III). impact on consumption patterns. Habits and customs were altered, followed by a phase of suspicion and food crises, to which the agro-food industry First phase: the arising of modern consumers (1950-1970). After World War responded with modifed strategies, coming to rely on the establishment of a II, technical progress paved the way for new and more automatized means of closer link between health and product. Light, organic and natural products production. Markets made it possible for the supply to reach the consumers, emerged as the new trends in consumption, and the industry called on and the supply exceeded the demand. In these circumstances, producers scientists to play a more prominent role in order to spur innovation. There focused on being involved in promoting and highlighting their products were a wealth of regulations on food safety, and a revival of territorial through differentiation strategies. To this end, the phase of advertising considerations by means of trying to highlight certain traditional and well- started, revolving around food products and their marketing. As far as known products. distribution is concerned, at this time large retail outlets emerged, and women entered the labor market. Both trends contributed to modifying the Fourth phase: shift in consumer approach (2000-2008). This is a period structure of household incomes, and had an impact on the time available for of great transformation concerning the speed of change and versatility of cooking. consumer habits. On the one hand, food expenditures were reduced; on the other, new changes in household structures became apparent, affecting either Second phase: consolidation of the agro-food industry (1970-1985). This family structure, commuting, or requirements of workforce mobility. The is the golden age of the food industry. The economic growth of that period, feld of nutrition embraced several new key concepts by insisting on certain commonly known as the “glory years”, is to a large extent connected nutritional characteristics (e.g., omega-3), with an emphasis on all health- to citizens’ increased acquisitive power, mainly represented in a more related issues. Information for consumers was made available in a larger generalized consumption. During this period, emphasis was placed on product scale, free of charge and world-wide (via Internet, smartphones and apps). diversifcation, and mass consumption was cast aside. The freezer was the These changes affected consumer habits and the ways in which fshing great innovation, which came hand in hand with new ways of preparing and products were purchased (e.g., the advent of e-commerce). Distribution preserving food and led to the advent of new products and the reduction of brands gained market by being globalized and, given the enormous promotion the time devoted to cooking. Economic prosperity accelerated foreign trade. they underwent, we became a world of global consumption. However, at the Imported products fooded large retail outlets, and the globalization of the same, three important factors continued to stand out: local, organic, and food market put an end to the seasonality of certain products. Consumers exotic. gradually grew away from their appreciation of and links to their sense of territorial commitment and belonging for their nearest and most traditional Fifth phase: from crisis to recovery (2008-2020). The crisis of 2008 had products. Eventually, consumption was no longer tied to seasonality, global a considerable impact on consumer habits. During this period, signifcant supply became standardized, and thus fresh products consumption decreased changes occurred that gained enhanced traction with the emergence of new signifcantly. ways of life that demanded a more intense pace, better facilities and a high 64 | The effects of COVID-19 on the ﬁshing sector and changes in consumer habits Fernando González Laxe | 65

level of “destructuration” of food products. Current social behaviors are A new ecological conscience has been born, one that is based on modern characterized by an increasing workforce mobility and nomadism as regards consumption systems, such as the advent of foods which are different, specifc, not only people’s but also business’ demography (e.g., foundation, continuity, peculiar, customized and in which producers, industry and distributors exploit termination and relocation). New opportunities on the job market show that the product to the fullest. Expenditure on food is reduced and price becomes a the workforce is widely distributed and, consequently, food demand is very factor in food choices. In short, a great divergence in habits and behaviors has specifc and atomized. occurred, one which widens the consumption gap among different consumers and different consumer stereotypes. Lastly, consumers require greater Table III. Comparative analisys among the phases of the ﬁsh-food industry and consumer habits transparency in product labelling, and also demand traceability in order to of ﬁsh products guarantee food safety.

Phases Characteristics Generation Periods We are now entering a new phase, the post- covid phase, whose characteristics, Modern consumer Technical progress. Generation of scarcity 1950-1970 as yet unknown, will undoubtedly be infuenced by our life experiences and by Supply exceeded demand. expectations that are very different from those we had beforehand. Therein lies Consolidation of the Glory years. Remarka- Generation of refrige- 1970-1985 the choice between progress and deceleration for this sector. We will be paying agro-food industry ble growth in product rators close attention in order to contribute to the strengthening of our legacy, our consumption. advantages, and our strategic decisions. Distrust of food pro- Food crises. Natural Generation of the 1985-2000 ducts products emerge, large retail outlets linked to health: “organic” and “light”.

Consumer shift Versatility and new Generation of food 2000-2008 customs. New services purchasing channels (e-commerce). Nutritional products and predominance of distribution brands. From crisis to reco- Intensiﬁcation of the Low-cost generation 2008-2012 very pace of life. Atomi- zed and very speciﬁc Nomad generation 2012-2020 demand. Ecological conscience and tra- Internet generation 2008-2020 ceability. Post COVID-19 A!ected by lockdown. New generation 2020-… Demand for enhanced safety standards. Co- llapse of distribution channels. Promotion of local-based relationships.

Source: Author. Chapter V

AFRICA: NEW INSIGHTS AND ECONOMIC OPPORTUNITIES

Ainhoa Marín Egoscozábal 68 | Africa: New insights and economic opportunities Ainhoa Marín Egoscozábal | 69

INTRODUCTION

In the last years there has been a growing economic and political interest in African countries. After decades in which a pessimistic view of the situation on the continent held sway, recent years have seen the great world powers – especially China – set their sights on Africa. African countries are no longer attractive just because they are rich in raw materials (e.g., oil, uranium, iron), but also as rising consumer countries and markets that offer business opportunities. With a growing population, an upwardly mobile middle class and a slow but inexorable democratization process, Africa has increasing international value as both a strategic ally and an investment market.

Spain is no stranger to this new interest for the continent. In 2019, the Spanish government approved the Third Africa Plan (iii Plan África) and in July 2020, the new guidelines for the African Outlook (Horizonte África) strategy were submitted. The main objective of these strategies is to strengthen the Spanish presence in Africa on the basis of national interest and they also envision higher levels of political and economic involvement with the continent. The European Union (eu) is also creating during 2020 a new eu-Africa strategy with the same objectives, namely strengthening ties – especially business and investment ties – with African countries. 70 | Africa: New insights and economic opportunities Ainhoa Marín Egoscozábal | 71

AFRICAN ECONOMIC OUTLOOKS AND A NEW SCENARIO highly dependent on oil exports (e.g., Nigeria, Angola, Libya), (ii) countries highly dependent on tourism revenues (e.g., Seychelles, Cape Verde) and (iii) a fall in In economic terms, Africa is no longer the hopeless continent it was two decades diaspora remittances from foreign countries (The Comoros, The Gambia, and ago. Since the year 2000, African countries have been taking over, year after Senegal suffering the most due to their high dependency). year, the international economic institutions’ list of countries with the highest economic growth. In 2019, for example, of the 10 fastest growing economies in According to Africa´s Pulse, a report from the World Bank, the decline in the world, six were African nations (Table 1): economic growth in sub-Saharan Africa’s countries in 2020 will be within the range of -2.1% and -5.1%. Africa is a continent highly dependent on exports to Table I: Ten countries with the highest growth in 2019 foreign countries - a key element in the long period of economic prosperity prior to the pandemic. With the decrease in global demand and in crude oil prices, GDP variation in % recession is thus unavoidable, especially given the fact that regional African Dominica 9.4 markets are barely dynamic. As soon as lockdowns began, for example, tons of South Sudan 7.9 fowers destined for export to Europe had to be disposed of in Kenya. Rwanda 7.8 Bangladesh 7.8 The covid-19 pandemic has exposed two essential questions. The frst of these Côte d’Ivoire 7.5 is the excessive dependency and vulnerability of many African countries on oil Ghana 7.4 exports and fuctuations in crude oil prices. The second is the fact that value Ethiopia 7.4 chains can be disrupted, something that happened for several months during 2020. Nepal 7.0 Without regional African markets to make up for the sharp fall in international Cambodia 6.9 demand, many African countries cannot sustain stable growth rates. Mauritania 6.6 World average 2.4 Furthermore, although Africa has experienced rapid growth, its transformation has been slow. African economies are still very dependent on the production Source: Author, based on data from the International Monetary Fund (2020). and export of primary goods (e.g., oil, coffee or cocoa). Many experts, such as Several African countries, including some oil exporting nations (e.g., South Carlos Lopes, state that a comprehensive industrialization program is needed Sudan, Ghana) and also others that are in the process of industrialization (e.g., to transform that gdp growth into real advances. On the other hand, “Africa is Ethiopia) experienced considerable growth in 2019, as well as in prior years. barely trading with Africa”, and the pandemic has proven that it is necessary to These countries, together with some others such as Côte d’Ivoire or Mauritania, strengthen economic ties among these countries, which have since the colonial had better growth forecasts than emerging countries such as China or India, era been stuck in an economic model based on exports to third countries and they have been in the midst of a long period of economic prosperity. (especially European countries, and increasingly also China). One of the main In continental terms, Africa would have doubled its gdp (i.e., the size of its economic objectives of the newly established African Continental Free Trade economy) in little more than a decade. Area is to strengthen African supply chains and “made in Africa”.

The outbreak of covid-19 in Africa brought all this positive economic growth to a screeching halt, and Africa is now experiencing its frst recession in 25 THE AFRICAN CONTINENTAL FREE TRADE AREA !AfCFTA" years. Although the health impact is not being as severe as expected (except in countries with a high transmission rate, such as South Africa and Egypt), The creation of the afcfta area was the key project of the African Union, the the economic impact is being serious, especially on three fronts: (i) countries main institution in the continent. The treaty was signed by 44 of the 55 African 72 | Africa: New insights and economic opportunities Ainhoa Marín Egoscozábal | 73

countries in Kigali (Rwanda) in March 2018, and represented an unprecedented STRATEGIC INTEREST OF AFRICA FOR SPAIN AND GALICIA: success. In spite of the fact that the two main continental powers, South Africa ECONOMIC OPPORTUNITIES 1 and Nigeria, were not initially parties to the treaty, the fact that so many countries joined afcfta constituted a milestone in the economic integration of Although the African continent certainly continues to have signifcant problems this continent, and was a great step forward for Pan-Africanism. (poverty, armed conficts and diseases, among others), these are ongoing challenges that have often silhouetted an unfair image of the continent. It is a heterogeneous Essentially, afcfta consists of an agreement to eliminate barriers to international continent, and includes some countries that are very stable both economically and trade of goods and services (mainly tariffs). The goal of this measure is to politically. As noted above, most such countries were in an expansive economic increase intra-African trade to 52% of the total by 2022 (now it stands at cycle prior to the outbreak of covid-19 pandemic, and it is expected that, once the below 20%). In addition, afcfta seeks to achieve goals such as the promotion pandemic subsides, they will resume their paths of growth. of sustainable and inclusive socioeconomic development, gender equality, and structural transformation. Other goals of this initiative are the facilitation of The great world powers have shown increasing levels of involvement with and interest personal mobility, the promotion of competitiveness of economies, and the in Africa as both a market and a strategic area, which points to an incontrovertible implementation of a system aimed at solving trade disagreements. truth: Africa is a continent full of opportunities. In general terms, Africa’s greatest assets are, of course, its natural resources. However, it is also important to take afcfta therefore constitutes a landmark project. Its expected launch – as regards note of the continent’s growing middle class, young population, and improvements the elimination of tariffs – is January 1, 2021. The expected socioeconomic effects in the business environment. For example, Rwanda has the same score as Portugal in of afcfta are highly ambitious: according to the most optimistic projections, the World Bank Doing Business 2020 ranking. Also worthy of mention are Africa’s this initiative would not only promote intra-African trade and industrial exports, increased levels of democratization and stabilization. but would also increase investment and employment. afcfta could also support diversifcation of African economies, and help promote industrialization, The Spanish government has jumped on the bandwagon of international interest in economic growth, and sustainable development. the continent. The Third Africa Plan establishes a number of priority countries for Spain: South Africa, Nigeria and Ethiopia are viewed in the plan as anchors of stability, As regards the positive effects of a political nature, it is common to attribute to regional growth and economic projection, while Ghana, Kenya, Mozambique, Côte regional economic integration schemes the ability to promote peace and stability d’Ivoire and Tanzania are identifed as preferred partners (Figure 1). among nations. As economic dependence and commercial links develop and diplomatic relations grow stronger, the costs of a potential confict are higher and therefore less likely. That is what happened in Europe. Thus, afcfta could also serve as a political tool in this sense.

The effects of afcfta will not be immediate and will depend on several factors besides the elimination of tariffs. For instance, an increase in trading among African countries can only be achieved in the future by enhancing infrastructures and by removing other barriers to trade (e.g. customs autocracy, differing national technical and health regulations, and domestic regulations that designate the national origin of certain products). In order to carry out this transformation and industrialization, it will also be necessary to diversify African exports (as suggested by Lopes) so that mutual needs of partners within 1 The author would like to thank Professor Javier Moreno for his help securing and analyzing data for Galician business afcfta can be satisfed. operations in Africa. 74 | Africa: New insights and economic opportunities Ainhoa Marín Egoscozábal | 75

Figure 1: Priority countries for Spanish foreign policy in sub-Saharan Africa Table II: Trade balance of Galicia with the sub-Saharan Africa as proportion of total trade

Galician Trade Balance (In millions of Euros) YEAR 2015 2016 2017 2018 2019 SUB"SAHARAN AFRICA 774.3 565.7 707.1 957.9 953.9 Inter-annual increase % -16.5 % 37.7 % -18.8 % 5.5 % WORLD 274.772 253.393 302.431 319.647 322.068 IMPORT Inter-annual increase % -7.8 % 19.4 % 5.7 % 0.8 % Senegal Sub-Saharan Africa % of total balance 0.28 % 022 % 0.23 % 0.30 % 0.30 % Nigeria Ethiopia SUB"SAHARAN AFRICA 203.3 169.8 233.8 189.8 200.3 Ghana Inter-annual increase % -26.9 % 25.0 % 35.3 % -0.3 % Côte d’Ivoire Kenya EXPORT WORLD 249.794 273.778 276.142 285.260 290.089 Inter-annual increase % 9.6 % 0.9 % 3.3 % 1.7 % Tanzania Sub-Saharan Africa % of total balance 0.08 % 0.06 % 0.08 % 0.07 % 0.07 % Angola Anchor countries Source: Author, from DATACOMEX Ministry of Economy. Priority countries We can see how the trade balance between Galicia and Africa is clearly negative, with exports reaching only 21% of the imports (i.e., imports valued at 953.9 million Mozambique euros, compared to exports of 200.3 million euros in 2019).

As regards of the countries with which Galicia has more trade exchanges, they are as follows: South Africa Table III. Trade balance for Galicia in 2019 by country

Source: Third Africa Plan. España y África: desafío y oportunidad (Spain and Africa: challenge and opportunity). Ministry of Foreign Affairs, European Union and Cooperation (2019). Country EXPORT Country EXPORT (in millions of euros) (in millions of euros) 388 South Africa 13.60 389 Namibia 95.88 Spain’s trade and fnancial strategy with respect to the continent is presented in the 288 Nigeria 6.64 260 Guinea 78.30 2020 document African Outlook of the Ministry of Industry, Trade and Tourism. 366 Mozambique 6.21 388 South Africa 55.44 Information in the document was obtained from questionnaires completed by companies and economic and trade offces, and points to Algeria, Egypt and 389 Namibia 5.36 288 Nigeria 53.16 Morocco as priority countries, while identifying Côte d’Ivoire, Senegal and Kenya, 355 Seychelles 4.00 228 Mauritania 21.85 as well as Tanzania and Uganda, as favorable business environments. Furthermore, 310 Equatorial Guinea 3.74 366 Mozambique 21.84 the strategies identify investment, water and sanitation, transport (especially rail) 248 Senegal 3.51 318 Congo 17.97 and energy infrastructures as key sectors. 274 Côte d’Ivoire 3.10 247 Cape Verde 17.10 228 Mauritania 3.07 248 Senegal 14.81 Trade fows between Galicia and the countries of sub-Saharan Africa constitute an 302 Cameroon 2.87 355 Seychelles 12.19 exceedingly modest proportion of Galician trade as a whole: 0.06% of imports and 247 Cape Verde 2.70 373 Mauritius 11.97 0.33% of exports. Source: Author, from DATACOMEX Ministry of Economy. 76 | Africa: New insights and economic opportunities Ainhoa Marín Egoscozábal | 77

The most frequently imported products are from the fshery sector, whereas most of the exports are items related to transportation (i.e., vehicles).

Galician fshing companies have traditionally had an important presence in the region, drawn by the abundant fshing grounds of a number of its countries. Thus, Namibia and South Africa on the Atlantic Coast and Mozambique on the Indian coast, have fshing vessel bases and fsh processing factories with Galician investment (Grupo Pescanova, Mascato). Construction companies and environmental management companies have also been operating in this part of Africa for some time now, especially as regards water treatment operations. On the other hand, some shipyards (Cardama) have been working on a regular basis over the past few decades in order to renew the feets of some of the countries in this region. As regards equipment goods, the exports of vehicles (psa-citroën) are worth mentioning, although some Galician smes have also penetrated this sector.

Currently, a newly emerging middle class in the countries with the highest per capita income opens the way for new opportunities in sectors previously closed to foreign companies, such as consumer goods and food, which Galician companies should seize.

In conclusion, the covid-19 pandemic has caused economic forecasts to change for African countries, and has made it clear that they need to transform their economy and become industrial countries, and that they need to generate regional value chains in order to reduce their vulnerability. However, it is no less true that the achievements of these countries during the past 20 years, and recent initiatives such as the afcfta, which will create a free trade market of 1.2 billion consumers, represent a frm commitment to the generation of more dynamic markets and more opportunities for investment, which Spanish and Galician businesses should not miss. Chapter VI

THE CROSS!SECTIONAL CHALLENGE OF TELEWORK

Ignacio Martín Maruri 80 | The cross-sectional challenge of telework Ignacio Martín Maruri | 81

THE CHALLENGE OF TELEWORK

The covid-19 pandemic has led to a proliferation of telework as a common practice. During the lockdown, many businesses decided to encourage teleworking, an option that they had previously been reluctant to offer. According to Eurostat data, in 2018 only 4.3% of workers in Spain teleworked on a regular basis, compared to 14% in the Netherlands, and 13.3% in Finland.1 The pandemic has driven 34% of Spanish employees to swiftly adopt this option.

Even though it is expected that most employees will return to onsite working after the lockdown, at least for a transitional period, it is highly likely that, for the next few years, teleworking will remain far more common and frequent than it had been prior to the pandemic. The reason for this normalization of teleworking is that many of the assumptions that had previously limited its development have been challenged by this startling test. Once these barriers are fallen down, it is likely that in the mid-term a growing number of usual teleworkers could be registered. According to the consulting company Global Workplace Analytics (gwa), the percentage of teleworkers who work from home at least two days per week is expected to increase up to 30% in all developed countries by the end of 2021. This entails potential benefts of all kinds, for workers as well as for businesses, but also important challenges that we should properly analyze and face.

1 Whereas European average was 5.8%. 82 | The cross-sectional challenge of telework Ignacio Martín Maruri | 83

MENTAL MODELS MUTUAL BENEFITS

The benefts of teleworking have been studied and reported for many years. Even though regulation of all legal and labor aspects of telework is crucial, Companies would supposedly beneft from savings amounting to more than this is only the frst step. A legal framework and a series of tools that enable 9000 euros per year for every employee who teleworks, plus the costs of travel telework are only two elements within a far more complex challenge. But they and accommodation to attend meetings and events in person that could be are the two frst elements that, hopefully, will receive the greatest possible joined virtually. In addition, when properly implemented, telework leads to an support from all the stakeholders involved. What is really important is to increase in productivity, to talent attraction and retention, and to a rise of worker clearly defne what we want to achieve with the implementation of telework, satisfaction. For employees, the possibility of teleworking means crucial savings given that it could simply be used to search for an enhanced effciency of our in travel time and fuel, as well as greater degrees of fexibility and autonomy current models, or to establish new strategies for innovation and generation of that could potentially improve their work-life balance. Regardless of all these higher added value. advantages, only 12.9% of company managers and directors teleworked in 2019, when, virtually, all of them were supposed to have this option. Out of a total If teleworking is only imposed to save on costs by reducing facilities or as of 59.9% of technical staff and professionals who could telework, only 13.8% a way to indefnitely extending working hours – while retaining the same worked from home on a regular basis. processes, team dynamics and traditional leadership implementation – the most likely outcome would be an increase in job insecurity and stress, and The explanation of these data is not due to economic reasons, but is instead to a decrease in performance and productivity. Therefore, teleworking should be found in deeply rooted mental models. According to gwa, problems identifed not be chiefy seen as an instrument for increasing effciency of the current in implementing telework had to do with managers being suspicious of the productive patterns, but as a mechanism to open new strategic possibilities, to productivity of their employees if they were not directly supervised. As regards encourage innovation and to attract and retain the best talent. Especially the workers, the main fear was the loss of visibility, that is, the chance that they would talent of the younger generations, for whom remote, asynchronous and online not be professionally valued if they were not seen in the workplace. These fears connections are part of their day-to-day lives, and who are likely to feel more have been largely overcome over the course of these past months of social isolation, comfortable in a working space that meets these criteria. This is, therefore, even though it is true that working conditions during the pandemic have been much a cross-sectional challenge in which companies should be involved, but also harder than they would have been under normal teleworking schemes, because public authorities. what was lived during these months was an improvised and precarious teleworking implementation. On the one hand, in many cases, workers did not received the required technical training and equipment, such as computers, programs and BUSINESS CHALLENGE applications, suffcient broadband, workstations, etc. But, mainly, due to the extraordinary circumstances involved in teleworking during this period: lockdown, A business mindset designed to attract the best talent and to promote innovation stress, families sharing a limited space, children out of school and in constant need based on generalized telework requires a complete revision of the current of support and attention, professional uncertainty, fear for the health of our loved paradigms and productive processes, and their adaptation to remote work. ones and ourselves’, etc. All of these factors have made teleworking during these Currently, companies tend to essentially focus on the tasks that need to be months much more diffcult and demanding than it would have been under normal carried out, setting aside dynamics and collective purposes. And it is exactly conditions. And, in spite of all this, the outcome has been suffciently positive so as these last two aspects which take on a special relevance in teleworking, because to be able to predict a substantial increase of this working system. human beings, as the gregarious animals that we are, need to feel as part of a group to which relate ourselves and commit. An individual job without a sense of belonging and sustained bonds can result in unmotivated workers, a lack of commitment, and emotional stress. 84 | The cross-sectional challenge of telework Ignacio Martín Maruri | 85

Working onsite, sharing a space and a common schedule, being together and In this way, workers could effectively manage their working hours, adapting interacting, even while having coffee, generates bonding dynamics which them to their personal and family needs in order to achieve a proper work-life help maintain a certain collective spirit. In spite of that, and according to a balance. This requires the offer of different schemes of total or partial telework study conducted last December by Boston University, 76% of the executives – only a few days per week or spending a few hours a day in the offce. The were already experiencing problems when it came to feeling connected with important thing is to allow employees to select among different modalities in a their work group. If those same methods that generated distancing and lack of fexible and dynamic way according to the demands daily reported at work or motivation were to be maintained in a telework scheme, the outcome would within personal or family contexts. probably be much more negative. A second point to consider would be the development of strategies to keep In fact, during the period of social isolation, teamwork has already started to working groups united and motivated in this new, more dynamic and fexible show signs of weakening. According to a study published last May in hbr, out of scenario, with fewer meetings based on a shared physical space. In the absence 250 American executives interviewed, the majority stated that the coronavirus of that physical space that summons and connects us within the online space this situation was negatively impacting teamwork and innovation. Furthermore, and factor should be strategically intended. This task should be assumed directly by as a recent study by Circular hr points out, the engagement and the ability to team leaders. Above and beyond merely reviewing the performance of assigned concentrate have decreased substantially, while burnout is increasingly being tasks, the role of the team leaders should focus on maintaining the collective experiences by workers. spirit, motivation, commitment, and bonding among their own teams and among them and other areas within the organization. To this end, it is important to The lockdown has forced us to pay more attention to our individual and family clearly defne and convey the sense of purpose of both the organization and the circumstances, resulting in a gradual deterioration of team connections and team. Any style of leadership focused on micromanagement and performing collective commitment to the company. Even in the new normal without the traditional command and control would probably end up cancelling the extreme factors of the confnement, the risks for teamwork and innovation will advantages that teleworking might have for workers. This is why it is necessary be just as high. For this reason, it will be crucially important to encourage to develop new ways of exercising leadership within teams. strategies to maintain working links, by promoting bonding, exchange and cohesion spaces among team members and between them and the company. The third point to consider is that teleworking is inextricably tied to family challenges. The fact of taking work to home vanishes completely the line, hardly perceptible lately, between both spheres. Thus, the family, as an agent present POINTS TO BE REVISITED at the workplace, cannot, therefore, be the sole responsibility of the employee. The company should also assume an active role in ensuring that these two In order to achieve all this, companies should focus on, at least, three essential worlds do not merely coexist, but are positively empowered. Otherwise, it will points. First, we should start by carefully analyzing current operational and negatively affect the employee performance in the long term. Moreover, if the administrative processes, considering whether they are suitable for remote great incentive of teleworking for employees is precisely the fexibility and and fexible environments, and removing unnecessary obstacles limiting the consequent possibility of striking a better work-life balance, the company fexibility and autonomy, the main benefts for employees. Furthermore, it would should set the stage for this beneft to actually come true. Otherwise, commitment be necessary to carry out a deep revision of the current regulations and incentives and productivity are likely to be affected. and adapt them to a space of greater autonomy, freedom, responsibility and empowerment for workers, because this is the frst cornerstone of teleworking: a greater trust in employees. Without a higher level of trust it is impossible to generate collaborative, creative and innovative spaces necessary to create a higher added value. 86 | The cross-sectional challenge of telework Ignacio Martín Maruri | 87

PUBLIC CHALLENGE much more than fnding answers to a technological challenge. It necessarily demands a revision of the traditional paradigms for private and public spheres The points mentioned above are essential not only for keeping current employees in order to get this working pattern to effectively offer actual possibilities for and teams united and motivated, but for attracting new talent as well. Given the progress both to companies and workers. Attempting to introduce teleworking increasing prevalence of teleworking, one of the possible effects might be that without reviewing the traditional paradigms may lead to a decline in quality of people may choose their place of residence according to reasons not exclusively life and working performance. If we are to take advantage of the opportunities related to proximity to the offce. As we have seen, the way in which companies offered by telework, we must, therefore, be impelled to outline new cross- implement telework will be crucial, but also other factors, such as quality of sectional strategies and dynamics based on the principles of ubiquity, fexibility, life, education, health services, connectivity, environment, or housing prices, responsibility and autonomy. will become more important criteria as telework spreads. For this reason, many regions which are far from current economic nodes will be able to compete in recruiting talent, something that, until now, was far more determined by the geographical workplace. This new dynamic is opening an enormous opportunity for Galicia to offer new spaces for professional development with a high level of well-being.

In order to achieve it, it will not suffce to ensure communication services and broadband access in all villages, including rural ones. A series of public administration policies and reforms are also necessary to consolidate the benefts of teleworking and the efforts of companies. Especially, public services should be able to offer individuals and families the same principles of fexibility and virtual contexts that we propose for companies. In this sense, it would be necessary to promote reforms which allow all public services to be managed remotely and fexibly, in order to avoid commuting and limited working hours. The services of greatest relevance to family life, such as health and education, should also move towards mixed models, combining onsite and online, but especially fexible and independent from the place of residence. This represents an important shift of paradigm, since public services are often determined by people’s place of residence. A profound change in public administrations would support the efforts of the private sector to generate an attractive environment for talent, resulting in a higher level of progress in Galicia.

CROSS#SECTIONAL CHALLENGE

The pandemic has toppled many of the mental barriers that for many years have limited the development of telework. It seems clear that we are facing a new scenario and that teleworking, whether it is total or partial, is defnitely going to be part of the new normal. Nevertheless, this way of working requires Chapter VII

THE COVID!19 PANDEMIC AND OIL DEMAND: A GLOBAL AND REGIONAL POINT OF VIEW

Pedro Antonio Merino García 90 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 91

INTRODUCTION

The crisis generated by the covid-19 pandemic is the most severe since the crisis of the Spanish fu of 1918. In the particular case of oil, the crisis is the largest in its history if we focus on the imbalance created between global supply and demand. It cannot be compared to previous crises in terms of the severity of the isolated drop in demand, although it remains to be seen whether it will endure longer than the oil crisis of the late 1970s and the fnancial crisis of 2008. The effects on prices and on demand have been dramatic. For the frst time in history, the price of us benchmark crude, West Texas Intermediate (wti), was a negative number.

However, talking about the impact in global terms obscures important regional details. Among its neighbors, Spain is one of the countries that is suffering the most adverse health and economic impact, with the implications that this entails for energy demand in general and fossil fuels in particular. Regarding the differences of these effects within Spain, the situation of each autonomous community varies depending on its particular economic and urban structure, and the dynamics of mobility and confnement, past and present.

In this sense, this document aims to tackle the impact of the covid-19 pandemic on oil demand and prices from a global context to national and regional ones. 92 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 93

THE GLOBAL OIL MARKET The supply shock – increased production – arose as a result of disagreements between Saudi Arabia and Russia about the strategy to follow in order to The covid-19 pandemic has led to an unprecedented crisis in the history of contain the obvious drop in demand explained above. These disagreements oil. The coexistence of a demand shock and a supply shock during the frst four led to a price war, which began after Russia refused to increase the production months of 2020 caused crude oil prices to fall to levels not seen in 20 years, cuts that had been agreed on by opec+ in December 2019. Saudi Arabia and even the American benchmark wti to quote in negative numbers for a few wanted to cut production even further in order to balance the petroleum hours. market after the fall in demand due to the coronavirus, and thus assure that oil prices were maintained around the reasonable level of $50 per barrel ($/ The demand shock came from the repercussions of the pandemic, as governments bbl). However, Russia claimed that further cuts would lead to us production limited social interactions with important restrictions on mobility affecting gaining market share at the expense of opec+ members, so its position was to entire populations in order to prevent the virus from spreading. The prohibition extend the agreement until June or, ideally, until the end of 2020. When Russia of leaving the house meant a drop in demand for gasoline and diesel, among walked out on the emergency meeting on March 6th, Saudi Arabia retaliated other petroleum products. The travel ban and the closure of borders meant a by increasing production by an additional two million barrels per day, thus drop in the demand for air travel. Consequently, jet kerosene became the fuel reaching 12.3 million bbl/d, while its Gulf allies, the United Arab Emirates and that was hardest hit by the crisis. The heavy fall in international trade meant Kuwait, increased production by another million barrels. In short, they fooded a drop in the demand for marine fuels. All these dynamics together led to the the market with more than 3 million bbl/d of crude oil that no one was going to greatest decline in oil consumption in history. Estimates of the International consume, and that was directly stored as inventory. Energy Agency (iea) indicate that, during the peak of global confnement, around the month April, oil consumption fell by almost 25 million barrels per day (bbl/d) on a global scale, a reduction of 27% compared to 2019 levels. It The conjunction of both shocks focused the discussions on oil inventories, should be remembered that, during that same month, around 4 billion people – which resumed the prominent role that they have always had in situations of almost 70% of the world population – were in confnement. extreme oversupply, such as in 2015 and 2016, only this time the rate of stocks exceeded any historical record. So much so that global stock capacity was Figure 1. Trend in world demand by quarters literally pushed to the limit and, in mid-April, the rate of accruable inventory 105 suggested that the world would run out of capacity to store crude between May Q4-19 101.0 and early June. Being able to store in order to obtain a higher price in forward 100 sales could sustain prices, but if there is a suspicion that it will not be possible to continue storing, prices can go into free fall with zero or negative price risks. 95 In fact, for the frst time in the history of the oil fnancial markets, a situation 90 was reached in which the seller “would pay” whoever “would buy” a barrel of wti crude grade. The us wti crude futures market closed on Monday, April th 85 20 at $-37.63/bbl. This paradoxical situation was contextualized within the

Q2-20 supply-demand imbalances, as well as on the peculiarities of the wti futures 83.0 80 contract in the Chicago Mercantile Exchange (cme), which provides that, upon expiration of the future contract, in case of not liquidating by differences (i.e.,

75 the monetary difference between the future price at the time of purchase and at 1 1 1 1 7 7 7 7 5 5 5 5 3 3 3 3 2 2 2 2 6 6 9 9 6 6 9 9 4 4 4 4 8 8 8 8 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 0 1 1 0 0 0 0 0 0 0 0 0 2 2 0 0 0 0 0 0 0 0 the expiration date) the physical delivery is to take place in Cushing, Oklahoma, ------Q4 Q2 Q4 Q2 Q4 Q4 Q4 Q2 Q2 Q4 Q4 Q2 Q2 Q4 Q4 Q4 Q2 Q2 Q2 Q2 Q2 Q4 Q2 Q2 Q2 Q2 Q4 Q4 Q2 Q2 Q2 Q2 Q4 Q4 Q4 Q2 Q4 Q4 Q4 Q4 Q4 a hub in the south-central usa where oil pipelines are found and crude oil is Source: International Energy Agency (IEA). stored in tanks. These tanks were already few weeks away from reaching 94 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 95

their maximum operating capacity, which made it quite impossible to set new Beyond this circumstantial phenomenon that led to wti crude being quoted at volumes if such capacity had not been previously agreed. Thus, as the maturity negative values, prices have continued to be damaged by balance sheet imbalances, date of the future contract approached (Tuesday, April 21) the imperative need and have only recovered thanks to the following three dynamics: to settle by difference in order to eliminate the obligation to carry out the physical delivery of crude oil that nobody wanted, and that was impossible First, the opec+ agreement to enact the biggest price cut in its history. In mid- to store, made companies with available capacity to charge much more than April, Saudi Arabia and Russia fnally set aside their differences and reached an expected for keeping of the oil. At the same time, the seller of oil futures – unprecedented agreement as regards volume and duration. The reason was clear: usually a non-commercial agent or fnancial investor who was assuming that crude prices below $20/bbl and rather unfavorable prospects in the short/medium prices would rise, and who by defnition never enters the market of actual crude term due to the pandemic. oil – would have to pay whatever it took to get rid of the contract that, upon expiration, assumed physical barrels of oil would be delivered. In addition, Opec+ agreed to cut its joint production by 9.7 million bbl/d in May and June, automated decision-making also intervened. Thus, if a very pronounced loss is by 7.7 million bbl/d during the second half of 2020, and by 5.8 million bbl/d experienced, the machine operated algorithm leads to more sales to liquidate from January 2021 to April 2022. In theory, the cuts seem to be having the effect the position, with a subsequent acceleration of the price drop and massive that was expected, and crude oil has managed to recover to the level of $45/ losses in those fnancial investments. Outside the us market, this phenomenon bbl lost in early March. The opec+ has shown more dynamism and resolution did not occur, mainly because, in the Intercontinental Exchange (ice) market, than in March, and prove of that is that the cut of 9.7 million bbl/d was extended the possibility of physical delivery of Brent benchmark crude upon expiration in July, after opec+ concluded that this was required in order to retain global is limited, and ship delivery is scheduled well in advance. equilibrium. However, not all countries have strictly complied with what was agreed, and opec+ has called upon all its members to resolve this situation and, in Figure 2. Trend in the price of one-month future delivery of Brent and WTI crudes addition, to compensate for the deviations that have accumulated from previous periods. Everything seems to indicate that, unless the health situation worsens,

70 70 thus adversely impacting consumption again, the opec+ agreement would serve to prevent further imbalances in the market. 60 60

50 50 Second, the decline in production in countries outside opec+. The balance sheet has 40 40 also been regaining stability in response to the production adjustment of countries outside opec+, due to both scheduled closures as a result of the fall in demand, and 30 30 the natural decline due to the sharp fall in investment, which is estimated to correct 20 20 this year by around 30%. The most important example of this dynamic in action 10 10 is the United States, where production fell by more than 2.5 million bbl/d from US $ / Bbl

0 0 March levels to 10 million bbl/d at its lowest point in June. However, the us has not been the only country outside opec+ to experience this impact. Canada, Norway -10 -10 and Brazil are among the countries that have cut their production, taking almost -20 -20 another 2 million bbl/d off the market. Brent WTI -30 -30

-40 -40 Third, the recovery of demand resulted from the plan to ease lockdown. Since 1-1-20 2-1-20 3-1-20 4-1-20 5-1-20 6-1-20 7-1-20 8-1-20 9-1-20 the April lows, global oil consumption has been on an upward trend, as expected,

given that, once restrictions on the population are lifted, mobility increases. Sources: Thomson Reuters and Research Dept. at Repsol. According to iea data, the demand for fuels for private transport was slightly 96 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 97

higher than expected during the frst half of 2020. In the case of diesel, there Figure 3. Comparison of the trends of product demand in Spain during two contexts of crisis is evidence that recovery in business and industrial activity, combined with 100 continued growth in e-commerce, is driving increased trucking activity, as more products are delivered to customers. Demand for aircraft fuel, however, is still a 95 weakness. In April, the number of aviation kilometers traveled was almost 80% lower than last year. In July, the defcit was still 67%, with no real prospect of a signifcant improvement in the short-term. 90

Although the data for total oil consumption are positive, caution is eminently 85 advisable, because the pandemic continues, and available data provide no indication that it is tailing off. After a steady increase since late May, new 80 confrmed covid-19 cases appear to have stabilized at around 300,000 a day globally, the highest rate since the early days of the pandemic. The easing of 75 the frst wave of lockdown measures has undoubtedly led to a second outbreak, as people returned to normal activity. Social distancing measures are being 70 Index=100 in 4Q the year before crisis Crisis 2008-2009 (4Q-2007=100) reintroduced in many countries alongside some localized lockdowns, and Crisis 2020 (4Q-19=100) it remains to be seen whether the increase in cases will lead to a remarkable 65 1 1 1 1 7 7 1 7 2 3 4 5 6 7 8 9 2 3 4 5 6 8 9 2 3 4 5 6 2 3 4 5 6 8 9 8 9 0 0 0 0 0 1 1 4 1 1 1 1 1 3 3 1 1 2 2 1 3 3 3 3 3 3 3 2 2 reduction of activity and mobility. 2 2 2 2 2 4 3 2

number of quarters

OIL DEMAND IN SPAIN AND EUROPEAN COMPARISON Sources: International Energy Agency and Repsol Research Department.

Spain Compared to the crisis of 2008, the current crisis has had a more widespread and immediate impact on the demand for crude oil in Spain, even falling in Q2-2020 by Oil demand in Spain has suffered from one of the most important setbacks in its 35% from the levels of Q4-2019. However, demand is expected to recover to 93% history, just when it was beginning to display a sustained growth trend following of its previous level before the end of the year. In other words, if we do not consider the ravages of the 2008 fnancial crisis. During that crisis, demand fell from other existing dynamics, the effect of the pandemic on oil consumption should be historical highs of about 1.6 million bbl/d to a 2014 low of 1.2 million, a reduction temporary, with more structural dynamics affecting some products such as jet fuel of ~400,000 bbl/d over a period of about six years. The covid-19 pandemic (the demand for which is obviously linked to air travel and international tourism). has caused a remarkably similar contraction, but within the space of just a few For 2020, the iea estimates that the average Spanish demand for oil products will be months. This has caused demand during Q2-2020 to fall back to levels of the late at 1.1 million bbl/d this year, a decrease of 227,000 bbl/d compared to the average 1980s (i.e., around 900,000 bbl/d). However, it must be recognized that this fall for 2019, which would represent a drop of around 17%. did not last longer than a single quarter. As noted above, jet fuel has experienced the greatest degree of contraction, and has not yet recovered. The explanation for this lies in the fact that international tourism is the sector that has been most adversely affected by the pandemic. 98 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 99

It would suffce to point out that the entry of international tourists by airport Figure 5. Comparison of European countries in terms of demand for jet fuel and total products into Spain fell to zero during the months of April and May, and by July (i.e., 110 110 the last month for which data are available) it was still 80% below the levels of JET KEROSENE July 2019. 100 100 90 90 Figure 4. Link between the consumption of jet kerosene and the entry of international tourists by 80 80 airport into Spain Italy 70 70

30% 60 Portugal 60 20% 50 50 France 10% 40 40 0% 30 Germany 30 -10% 20 20

-20% Index= 100 in Dec-2019 Spain 10 10 -30% 0 0 -40% dic-19 ene-20 feb-20 mar-20 abr-20 may-20 jun-20 jul-20 -50% Annual variation of international tourist arrivals by airport -60% Annual variation in demand for jet kerosene 110 110 -70% TOTAL PRODUCTS -80% 100 100 -90% Correlation coe!cient 0.89 -100% 90 90 1 7 7 5 3 2 9 9 6 6 4 8 8 0 0 Italy 1 1 1 1 1 1 1 1 1 1 0 0 0 0 2 ------l - - - - l l l l l l l l l l l l l l u u u u u u u u u u u u u u u J J J J J J J J J J J J J J J 80 Portugal 80

France Sources: International Energy Agency and Repsol Research Department. 70 70 Germany Comparison with surrounding countries Index= 100 in Dec-2019 60 60 Spain

But how does the trend in our data compare with that of other European countries? We 50 50 have conducted a comparative analysis involving Spain and the following countries: Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Germany, France, Italy and Portugal. Figure 5, which deals with total products, indicates similar trends among the fve nations, except in Germany, where the reduction Source: International Energy Agency and Repsol Research Department. of consumption has been lower given the lower incidence of covid-19, less severe lockdown measures, and protections afforded to German economic activity. In jet The fall in demand for kerosene is not only more acute, but has a much greater kerosene, the magnitude of the reduction in demand in Spain, compared to Germany, impact on our economy than on that of Germany, France, or Italy. The contribution France, and Italy, is shocking. In fact, while the demand trend for total products has a of international tourism to our gdp is much higher than in that of those three V shape, in the case of jet kerosene, the trend line resembles the letter L. countries (Figure 6), and has resulted in a greater fall in gdp. 100 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 101

Figure 6. Weight of international tourism income in GDP (2019 data) Figure 8. Apple Mobility Index (rescaled to 100, ﬁrst week of February) 7,0 200

6,0 180 5,0 5.7 160 4,0 140 3,0 120 2,0 2.4 2.5 100 1,0 1.1 80 0,0 Germany Spain France Italy 60 Sources: Eurostat and Repsol Research Department.

40 Spain Germany The fgure that probably best refects the severity of the lockdown and the France Portugal reduction in mobility in Spain is the drop in gasoline consumption (Figure 7), 20 since it only affects people, and not goods. This comparatively severe impact, Italy together with the weight of international tourism, explains the steep drop in 0 Spanish gdp during the second quarter of 2020. Jul-7-20 Jun-7-20 Apr-8-20 Feb-8-20

Figure 7. Comparison of European countries in terms of gasoline demand Mar-9-20 Aug-6-20 May-8-20 Jul-17-20 Sep-5-20 Jul-27-20 Apr-18-20 Jun-17-20 Sep-15-20 Feb-18-20 Mar-19-20 Aug-16-20 Apr-28-20 May-18-20 Jun-27-20 Feb-28-20 Mar-29-20 Aug-26-20 120 120 May-28-20 GASOLINE 110 110 Source: Apple and Repsol Research Department.

100 100 The problem is that it is hard to have a positive outlook in light of either recent 90 90 – month of August – or projected trends. If we look at the high-frequency

80 Italy 80 data, shown in Figure 8, mobility since mid-August has declined due to new outbreaks and seasonal factors. 70 Portugal 70 60 60 France

Index=100 in Dec-2019 50 50 Germany 40 40 Spain 30 30

20 20 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20

Source: International Energy Agency and Repsol Research Department. 102 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 103

COMPARATIVE ANALYSIS OF FUEL DEMAND BY AUTONOMOUS Figure 9. Inter-annual variation of gasoline consumption: March-July 2020 COMMUNITIES: GALICIA

Focusing on Galicia, we frst need to show that the differences that we have briefy Basque noted among European countries are much greater than those that exist among Country Spain’s autonomous communities, although we will briefy make mention of the latter. These differences within Spain have to do with the severity of the lockdown, Galicia the importance of Galicia’s agricultural and fsheries sector, the lesser importance of international tourism, and the mobility response among autonomous communities during the summer months. Andalusia

As regards the trend in consumption of oil products, data are available for gasoline NATIONAL and diesel oil through July. In order to extrapolate estimated data for August and September, we will use the high-frequency data from Apple and Google, which will prove to be consistent with tthese consumptions, and we will advance some ideas. Catalonia

Fuel consumption Balearic Islands During the confnement period, the differential trend in petrol and diesel consumption in Galicia is moderate and derives from a lower reduction in mobility during the -50.0 -45.0 -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 months of May and June in Galicia than in other autonomous communities. The fgures, considering the period from March through July and comparing with the Sources: INE (Census Bureau) and Repsol Research Department. same period in 2019, of the total consumption of automotive fuels, fell by 30.1% The time profle of this improved trend can be seen in Figure 10. The temporal in Galicia, in line with Andalusia and Catalonia, and notably less than other evolution of this gasoline consumption would indicate a clearly less severe autonomous communities, such as the Balearic Islands (-41.5%), and below the lockdown in Galicia during the months of April and May, and a gradual Spanish average. recovery of the rates during the month of July. But this trend does not allow us to draw conclusions. This is because, of the total consumption of fuels, the part corresponding to goods varies greatly among the autonomous communities. We estimate that it is responsible for 70% of total consumption in the Basque Country, 60% in Catalonia and 50% in Andalusia and Galicia. For this reason, it works best to use only gasoline consumption as an indicator of personal mobility and real lockdown, and to serve as a proxy for the operation of the service sector, which is the most important component of the gdp. As shown in Figure 9, the Basque Country and Galicia suffered the least adverse impact on consumption, thus refecting a less restrictive lockdown. 104 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 105

Figure 10. Inter-annual variation of gasoline consumption Figure 11. Car mobility (rescaled to be 100 = ﬁrst week of February and applying a weekly moving average)

30 230

10 210 190 170 -10 150 Catalonia 130 Andalusia -30 Galicia 110 Basque Country 90 Balearic Islands Inter-annual variation (%) -50 70 50 -70 30 Spain Car. Weighed by GDP Galicia 10

-90 0 0 20 2 2 - - - . . . Jul-8-20 l y Apr-9-20 Aug-7-20 n Jun-8-20 Feb-9-20 Sep-6-20 Jul-18-20 u May-9-20 Jul-88-20 Apr-19-20 a Aug-17-20 Jun-18-20 Feb-19-20 Apr-29-20 Aug-27-20 u Jun-28-20 Feb-29-20 Apr-20 May-19-20 J Jan-20 Feb-20 May-29-20 Mar-10-20 Mar-20 Mar-30-20 Mar-20-20 J M

Sources: Apple and Repsol Studies Department. Sources: INE (Census Bureau) and Repsol Research Department. Consumption dynamics and covid-19 This trend correlates, approximately, with indicators of high frequency of mobility, which until July displayed a similar trend, and which was more To a large extent, this better behavior of the demand for gasoline is explained by positive in Galicia than in other autonomous communities. These indicators trips to vacation and recreation areas. This can be explained to some extent by the suggest that this behavior has been modifed in August, with a rise of this lower incidence of the pandemic in Galicia, which would relate to a lesser degree behavior in Galicia, although we will have to wait for the fnal data. of fear to engage in certain activities among the local population and/or a softer fall of tourism. 106 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 107

Figure 12. Fortnightly incidence of the pandemic per 100,000 population The higher dependence on local tourism in Galicia has led Galician touristic sector to suffer less than this sector in the rest of Spain. The total of overnight stays in Galicia fell by 50.9% annually in July, while those in the rest of Spain fell by 74.0%. 250 Spain 225 Figure 14. Trend in hotel overnight stays Galicia 200 20 175 Catalonia Balearic Andalusia Galicia 150 0 125 100 -20 75 -40 50 25 -60 0 -80 Jul-5 Sep-3 Jun-5 Sep-8 Aug-9 Jul-15 Aug-4 Jul-10 Jul-25 Jul-30 Jul-20 Interannual variation rate (%) Jun-15 Jun-10 May-11 Jun-25 Aug-19 Aug-14 Jun-30 Jun-20 May-31 May-21 May-16 Aug-29 Aug-24 May-26 -100 Source: Apple and Repsol Research Department.

-120 In any case, in addition to the lower incidence of the pandemic, another factor in Galicia that helps explain the reduced economic impact of the pandemic is the Jul-20 Apr-20 Feb-20 Jun-20 Mar-20 lower relative importance of international tourism. May-20

Sources: INE (Census Bureau) and Repsol Research Department. Figure 13. Proportion of local residents’ overnight stays in hotels over the total of overnight stays (%) Although these data might lead us to think that Galicia’s fuel consumption profle should 80 be above the national average, and especially the average of autonomous communities 70 that heavily rely on international tourism, the data presented above point to a rather 60 modest difference. One reason for this could be the high synchronicity of activity in much of Spain, as demonstrated by the similar profle of industrial production across 50 autonomous communities during the pandemic. The other relevant factor in this 40 regard has already been mentioned: the greater relative weight of diesel consumption 30 for goods in certain autonomous communities. Although industrial production fell

20 by 20%, personal mobility fell double at least. We also need to consider the delivery of goods purchased online in very urban areas which would partly explain the lower 10 reductions in diesel consumption in regions that have suffered greater reductions in 0 industrial activity and tons transported than has Galicia. Further analyses in this Galicia Andalusia Catalonia Balearic regard can only be conducted when additional data are available. Source: INE (Census Bureau) and Repsol Research Department. 108 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 109

CONCLUSIONS

What the world is experiencing is an extraordinary event. The foremost conclusion that we must draw is that the economy and the demand for fossil fuels is subject to the course of the pandemic. It is also clear that stronger confnement processes have resulted in less activity, lower demand, and lower oil prices.

Thus, following the end of the lockdown, the price of oil gradually increased until it reached almost $46/bbl at the end of August. However, the worsening of the pandemic in September has contributed to a setback of prices in prices from those levels.

Also, we have seen that the economic structure and the management of the pandemic are crucial to the most exposed sectors. Spain’s greater dependence on international tourism, as well as a greater severity in confnement measures – clearly visible in the higher reductions in fuel consumption in Spain compared to the rest of the large countries in the Eurozone – explain the greater fall in Spain’s gdp during the second quarter of 2020.

In the particular case of Galicia, the data indicate a lower drop in fuel consumption during the March-July period. This refects a better situation in terms of the severity of lockdown, and less exposure to non-resident tourism. There are some issues to be analyzed once more data become available. For example, high-frequency data from Apple and Google would lead one to predict stronger recovery of fuel consumption in Galicia. In addition, data as regards tons transported, as well as Google data as regards visits to leisure centers, should translate into greater diesel consumption than in other autonomous communities, which is not happening. One hypothesis to be tested once more data become available is the notion that the penetration of e-commerce has not been as strong in Galicia as in areas with larger urban centers. This urban transport should have helped slow down the fall in diesel consumption in certain autonomous communities.

In conclusion, we hope that the improvement in the consumption of oil products, so closely linked to economic growth, will not stagnate in the coming months, which will clearly be linked to the evolution of the pandemic and the measures to be implemented. Chapter VIII

COVID!19 PANDEMIC: THE ANSWER OF MONETARY AND FINANCIAL AUTHORITIES

Soledad Núñez Ramos 112 | COVID-19 pandemic: The answer of monetary and ﬁnancial authorities Soledad Núñez Ramos | 113

INTRODUCTION

In addition to the high toll it has taken in human lives, the covid-19 pandemic has led to a disruption of economic activity that is unprecedented in times of peace. The necessary measures restricting people’s mobility and the activity of numerous productive sectors that were introduced to fght the pandemic have had highly adverse effects on the production of goods and services, as well as on the employment and income of households and businesses.

The severity of the economic disturbance, both at a national and a global level, has demanded swift and decisive action via economic policies (fscal, monetary and fnancial), with the aim of reducing negative impact in the short-term, supporting the income of households and businesses, and paving the way for a rapid and robust recovery.

As regards monetary policies, central banks in both advanced and emerging economies have lowered reference interest rates when possible, and have deployed a set of unconventional policy tools via long-term fnancing and acquirement of assets. Similarly, authorities responsible for micro- and macro-prudential supervision and regulation have relaxed certain regulatory requirements in order to facilitate the private sector’s access to credit. 114 | COVID-19 pandemic: The answer of monetary and ﬁnancial authorities Soledad Núñez Ramos | 115

At the national level, the Spanish economy, as is the case in other countries, In connection with liquidity injection measures, the ecb has increased the has seen the launching of guarantee programs and loan moratoria with a amount of money that banks can request on loan in more favorable conditions, view to supporting the income of companies and households, and facilitating so that they can offer fnancing to those most affected by the pandemic, access to credit and liquidity for companies and freelancers who are coping particularly small and medium businesses. Specifcally:2 with the economic and social impact of covid-19. • The ecb decided on March 12 through its Governing Council to conduct Overall, these measures have served to ease tensions in fnancial markets at weekly fnancing operations (Bridge-tltro) in order to offer immediate the beginning of the crisis caused by the pandemic and to avoid an even more liquidity under favorable conditions to banks before the fourth long-term marked and prolonged recession, and avert an even bleaker outlook as regards fnancing operation (which had previously been scheduled) tltro-iii,3 infation. Injections of liquidity, along with guarantee programs, have promoted which occurred on June 24, 2020. Altogether, these operations to be due a credit fow for the real economy. In addition, assets acquisition programs in on June 24, 2020 have been granted at a rate equal to that of the deposit particular have provided national authorities with access to the necessary funds facilities, -0.50%, and the allocation has amounted to 100% of what had to fnance the support measures launched to assist households and companies been requested (full allotment). Thirteen operations have been carried out in coping with the crisis caused by the pandemic. with an allocated amount of 389 billion euros.

This chapter describes the main economic and fnancial policy measures that • The ecb decided on March 12, 2020, also through its Governing Council, most directly affect the Spanish economy: those deployed by the ecb and other to apply considerably more favorable conditions to all tltro-iii European fnancial authorities, as well as the guarantee programs and loan operations in force between June 2020 and June 2021. These conditions moratoria launched by the Government of Spain. Next, the evolution of fnancial were the subject of further improvement at the ecb meeting on April 30.4 markets and credit to companies and families will be analyzed in order to shed The established improvements have contributed to the loan request by light on the effects of these measures. entities in the tltro-iii operations on June 24, reaching 1.3 trillion euros, considerably above previous applications. After subtracting the maturities and early repayments of previous tltros and the Bridge tltro-iii, the net THE RESPONSE OF ECB’S MONETARY POLICY TO THE CORONAVIRUS injection of liquidity into the system by the ecb amounted to 548 billion PANDEMIC euros.

The ecb’s reaction to the economic crisis caused by the pandemic has been signifcantly quicker and frmer than its response during the global fnancial 2 See the ECB’s press releases on monetary policy decisions from March 12, March 18, April 30 and June 4 as well as other ecb crisis that began in 2008. The president of the , Christine Lagarde, said, decisions from March 15 and April 7. “Extraordinary times require extraordinary action. There are no limits to our 3 TLTROs or targeted longer-term refinancing operations, are one of the unconventional monetary policy tools used by the commitment to the euro. We are determined to use the full potential of our tools, ECB. Through these operations, long-term loans are offered to banks at a lower interest rate than normal in order to promote within our mandate.”1 The general objective of the ecb measures is to ensure borrowing for businesses and consumers in the Eurozone. These are unconventional operations: first, because they are long term - four years - and second, because the amount of money that the banks can obtain and the cost of financing depend on that the credit fow continues to reach the real economy, thus guaranteeing a the volume of loans to the real economy. That means that the entities which give more loans to the real economy can secure proper transmission of monetary policies and a reduction in systemic risk. The more financing and a better interest rate. The first series of TLTRO started in 2014, the second, TLTRO-II, in March 2016, and the measures focused on the provision of long-term liquidity to organizations, and third in June 2019. 4 Thus, after this improvement, the maximum applicable rate is 50 bp lower than the average rate of the main financing (MRO), on the acquisition of assets. currently at 0%, while for previous operations dated before June 2020, it was the average of MRO. For entities that maintain their credit provision levels, the interest rate will be 50 bp lower than the deposit facility, currently at -0.5% (for previous operations, this credited rate was the average of the deposit facility and it was applied if the entity had increased its credit provision by 2.5%). In addition, for these operations, the limit for requesting funds per entity has been increased to 50% of the outstanding 1 Christine Lagarde tweet sent on March 18, 2020. balance of its eligible loans (30% in previous operations). 116 | COVID-19 pandemic: The answer of monetary and financial authorities Soledad Núñez Ramos | 117

• On April 7, the ecb announced a series of temporary measures that guided by the capital key of 9.69 % in the case of Spain, without affecting the aimed at increasing the fexibility of the assets accepted as collateral for aforementioned fexible application of the program in the short-term. fnancing operations. These measures aimed at increasing the capacity of banks to request funds in Eurosystem fnancing operations, and to prevent a The pepp, together with the new app purchases, will increase the portfolio of possible shortage of assets in guarantee connected with the pandemic from the Eurosystem’s securities purchase programs, which will reach approximately reducing the capacity of entities to obtain liquidity. At the same meeting, 4.4 trillion euros in June 2021. As at August 27, the outstanding balance of the ecb also decided to reduce the haircuts applied to both marketable and the pepp portfolio is 497.11 billion euros. According to data from the end non-marketable assets and presented as collateral in fnancing operations of July, the composition of the portfolio is as follows: 87.3% public bonds; 7.9% by percentages ranging between 20% and 36%. commercial paper; 4% of corporate bonds; and 0.7% bank bonds. The public securities portfolio contains 12% Spanish public securities. This represents a percentage slightly • In addition, at its meeting held on April 30, the ecb introduced new above Spain’s capital key, and is similar to the case of Italy and its public securities, pandemic emergency ltros (peltros) to support liquidity conditions whose capital key and portfolio weight are 13.8% and 15.4% respectively. in the fnancial system, and to contribute to the proper operation of the monetary market. Specifcally, a total of seven operations will be carried Furthermore, the ecb together with the central banks of the United Kingdom, out, beginning in May and concluding in December, with maturities Japan, usa, Canada and Switzerland agreed on March 15 to strengthen the which are gradually reduced starting at a period of 16 months for the frst currency swap lines that exist among them, with an interest rate reduction operation and ending with a period of eight months for the last one. These of 25 basis points and weekly operations in dollars at 84 days - in addition operations are conducted through tender procedures at a fxed interest rate to the existing seven-day term.5 These lines represent an important liquidity with full allotment, at an interest rate 25 bp lower than the average mro support to relieve tensions in global fnancing markets, and this contributes to rate in effect for the life of each peltro - currently 0 %. By the end of mitigating the effects of such tensions on the supply of credit to households and August, the injection of liquidity belonging to the three operations carried companies, both nationally and internationally. out had reached 1.38 trillion euros. Similarly, the ecb has activated a series of bilateral swap and repo lines with As regards the acquisition of assets, the ecb, at its meeting held on March other central banks, and in June launched the Eurosystem Repo Facility (eurep), 12, committed to buying net assets within its Assets Purchase Program which can be accessed by a broader spectrum of central banks. These measures (app for an additional 120 billion euros until the end of 2020. This was have helped stabilize markets, especially in countries where the euro is used as an amount that the market deemed insuffcient. On March 18, with a view to an international currency. reducing the cost of fnancing to companies and public administrations, and increasing the extension of credit in the Eurozone, the ecb announced a new In short, the action of the ecb during these months has been decisive, and it asset purchase program, the Pandemic Emergency Purchase Program is estimated that the effects of all these measures will increase the size of the (pepp), valued at 750 billion euros, to be in effect until at least December Eurosystem balance sheet to at least two trillion euros in 2020 - slightly above 2020. On June 4, the ecb decided to extend the amount of this program to the increase of just over 500 billion euros that constituted the ecb’s initial answer 1.35 trillion euros, and its effective period until at least June 2021, and to also to the 2008 fnancial crisis. In addition, the Governing Council of the ecb has reinvest maturing securities until at least December 2022. In the framework reaffrmed on numerous occasions its commitment to doing everything that of this program, Greek debt and non-fnancial commercial paper are accepted is necessary to support the economy in this diffcult situation, and has shown as eligible assets for purchases, and fexible criteria are applied regarding their a willingness to adjust both the amounts and maturity dates of its purchasing temporal distribution, by asset class and by jurisdiction. However, in the case programs and, in general, to explore all possible options. of the purchases of public bonds, distribution by jurisdiction continues to be 5 The goal of these swap lines is to allow the central bank of the country to exchange reserves in national currency for the currency of another central bank and ensure that central banks can satisfy the demand of the entities within their jurisdiction. 118 | COVID-19 pandemic: The answer of monetary and ﬁnancial authorities Soledad Núñez Ramos | 119

THE ACTIONS OF SUPERVISORY AND REGULATORY AUTHORITIES of provisions, limiting their growth rate and moderating their negative impact on the proftability and supply of bank credit. The supervisory and fnancial regulatory authorities have also enacted several relaxation measures, in both macro-prudential and micro-prudential accounting At the micro-prudential level, operational, prudential, and regulatory fexibility areas. The common goal is for entities to continue to provide loans in order to measures have been promoted in order to support the proper functioning of support households and companies in mitigating the effects of the economic the banking system and facilitate the maintenance of credit fow. Calendars crisis arising from the pandemic.6 have therefore been adapted and adjusted; deadlines and processes have been extended with regard to on-site inspections, corrective measures resulting Thus, the ecb announced on March 12 that it would allow entities to temporarily from recent inspections, supervisory measures, and non-critical information operate at levels below the Pillar 2 Guidance (p2g), the Capital Conservation requests; the fexible application of the ecb’s guidance on doubtful assets has Buffer (ccb) and the Liquidity Coverage Ratio (lcr), which are buffers been allowed; and the European Banking Authority (eba) has postponed the accumulated by entities precisely for the purpose of absorbing losses in adverse eu-wide stress tests scheduled for 2020.7 In addition, the ecb has urged entities scenarios. It also temporarily allows for the partial use of capital instruments to include the risk of a pandemic in their contingency schemes, and to review not classifed as Common Equity Tier 1 (cet1) for the purpose of meeting Pillar their business continuity plans. 2 Requirements (p2r). The European fnancial authorities (ecb, eba, European Systemic Risk Board This set of measures provides substantial relief to banks in terms of capital esrb) have also issued recommendations to entities to refrain from distributing requirements (it is estimated that around 120 billion has been released for profts before January 2021, and to be extremely cautious in their variable 8 entities supervised by the ecb). These measures have also been promoted in the remuneration policies. The Bank of Spain has extended this recommendation expectation that banks will take advantage of this freeing up of capital in order to Spanish entities under its supervision. All the Spanish entities that were to support the economy. legally in a position to suspend or postpone the dividend on 2019 results have followed the eba’s recommendation to do so. These temporary and exceptional In addition, many European macro-prudential authorities that activated the measures are required in order to preserve the capacity of entities to absorb Countercyclical Capital Buffer (ccyb) in the past, generally due to excessive losses and provide credit to households and families. credit growth, have now set its value at 0%. In Spain, the ccyb had already been set at 0%, given the absence of warning signals for its activation. Following The European Commission has also adopted a few measures, like those the outbreak of covid-19, the Bank of Spain has anticipated the ccyb will be proposed by supervisors and other fnancial authorities. These are measures inactivated for a prolonged period of time, at least until the main economic and aimed at promoting the provision of credit to the economy, and at mitigating fnancial effects of the current crisis have been overcome. the impact of the pandemic. One of these measures was an April directive that encouraged banks to make use of the fexibility offered by current accounting In accounting matters, initiatives have been taken to improve the distinction and prudential rules. Its purpose is for banks to support the real economy between temporary and permanent deterioration in credit quality. Their purpose during the exceptional circumstances of the covid-19 pandemic. With the is to consider the value of the public guarantees granted, irrespective of the same goal in mind, it promoted a series of amendments to the Regulation on fact that entities continue to apply appropriate standards in measuring actual Capital Requirements (rcr), which was called “a quick fx”. These amendments losses, and providing reasonable coverage for credit risk. This accounting adaptation seeks to avoid an excessively pro-cyclical and mechanical behavior 7 However, this entity has published a sensitivity analysis to assess the impact of COVID-19 based on the information collected in the 2018 stress exercise. See ABE (2020, May). Thematic note - Preliminary analysis of impact of COVID-19 on EU banks. EBA/ REP/2020/17. https://bit.ly/3jFtu3a 6 For a more detailed description, see Bank of Spain (2020). Annual report 2019, section 3. https://bit.ly/2HNQujw 8 See ECB (2020). Recommendation (ECB/2020/35) and Bank of Spain (2020 July 28). Recommendation on dividend distribution. https://bit.ly/34IkSnS 120 | COVID-19 pandemic: The answer of monetary and ﬁnancial authorities Soledad Núñez Ramos | 121

were approved by the European Parliament on June 18 and,9 in general terms, or fnancial or operational leasing of motor vehicles for road transport for entailed a reduction in capital requirements. professional use, 500 million. In the frst two sections, the guarantee is provided in order to fnance routine operations. But for the tourism sector, the purpose of the fnancing may be to both cover liquidity needs and fnance THE GOVERNMENT’S FINANCIAL MEASURES TO SUPPORT BUSINESSES investments. AND HOUSEHOLDS On July 3, the Council of Ministers approved a new line of guarantees worth In Spain, as in other European economies, the Government, supported by 40 billion euros, which has not yet been released. These monies are aimed at Parliament with the approval of the relevant royal legislative decrees, has promoting new business investment projects in the areas where the greatest promoted a series of measures. The purpose of these measures is to mitigate added value is generated, along two main lines: environmental sustainability the economic and social costs of the crisis caused by the covid-19 pandemic, and digitalization. alleviate the pressure on the healthcare system, and guarantee the income of households and businesses. In addition, it aims to prevent this temporary crisis Measures to support workers, families and vulnerable groups include moratoria from causing long-term damage to the potential for economic growth, and to on loan repayment obligations. These include the legislative moratorium on prevent any destruction of viable businesses and jobs that would hamper the mortgage debts on primary residences, properties utilized for commercial economy’s eventual recovery. activities and rental housing, and the temporary suspension of obligations arising from non-mortgage credit contracts for individuals who are in a In the fnancial area, the main measures have consisted of the launch of a guarantee situation of economic vulnerability as a result of the health crisis caused by program for loans to companies and the self-employed, and of legislative loan covid-19. Furthermore, to encourage the deferment of credit and loan payments moratoria. Thus, royal legislative decree 8/2020 of March 17, in its chapter iii.i, with a broader scope than that provided for in the legal moratoria, a special section 1, establishes a line of state guarantees of up to 100 billion euros. Its regimen has been established for sectorial moratorium agreements, covering purpose is to facilitate access and liquidity for companies and the self-employed, both mortgage and non-mortgage credit, reached between lenders and their in order to help them cope with the economic and social impact of the pandemic. customers through their representative associations. Finally, at the beginning The line of guarantees is managed by the ico through the fnancial entities and of July, two new moratoria were approved, referring to the tourism sector and are applied to new loans and renewals granted by the entities. In the case of to the public transport sector of goods and non-essential passenger transport by freelancers and smes, the guarantee will ensure 80% of the principal of new bus for both individuals and legal entities. fnancing operations and renewals. For the rest of the companies that are not smes, the guarantee will cover 70% in the case of new loan operations, and 60% for renewals. THE IMPACT ON FINANCIAL MARKETS

So far, a total of 95.5 billion euros have been activated 10 and distributed as Figures 1 show the trend in fnancial markets thus far in 2020. Specifcally, follows: smes and self-employed workers, 67.5 billion; non-sme companies, Figure 1.1 depicts the trend of different stock market indices from the end of 25 billion; tourism sector and related activities, 2.5 billion, and acquisition 2019. Figure 1.2 shows the trend of sovereign debt yield spreads in relation to German sovereign debt, of the 10-year bond, and of the yield indices of higher-risk 9 Among other measures, this change in the RCR advances the entry of the favorable treatment of exposures to SMEs and infrastructure, advances the date of application of the exemption of certain software assets from capital deductions of banks, corporate bonds (i.e., the “high yield bonds”) in relation to lower-risk bonds delays the effective date of the leverage ratio buffer for global systemic entities, introduces a favorable treatment of publicly (i.e., bonds with an investment grade rating, i.e. bbb or higher). Figure 1.3 guaranteed loans granted in the context of COVID-19, and extends for a period of two years the RCR’s transitional provisions shows the trend of two volatility indicators: the vix, which is an indicator of that mitigate the impact on equity of the introduction of IFRS 9. See European Commission, 2020, April 8, Coronavirus Response: Banking Package to facilitate bank lending- Supporting households and businesses in the EU. https://bit.ly/37WpGYP 10 In the Agreements of the Council of Ministers of March 24, April 10, May 5, May 19, and June 16. 122 | COVID-19 pandemic: The answer of monetary and ﬁnancial authorities Soledad Núñez Ramos | 123

equity volatility, and the gvi,11 which is an indicator of general volatility, and Figure 1.2. Sovereign and Corporate Debt Spreads refects the volatility of global equity and fxed income markets.

700 It can be seen that, with the outbreak of the covid-19 pandemic, the fnancial 400 markets experienced moments of great tension, refecting the fact that investors anticipated that the pandemic itself and the measures that would be taken to 600 contain it would have serious economic consequences. In fact, the disruptions corporate bonds (**) observed in the markets during the pandemic’s time frame (second half of 300 500 February, and especially the beginning of March) were even more intense than those experienced during the crisis caused by the bankruptcy of Lehman 400 Greece Brothers in 2008. Thus, by mid-March, the SP500 had fallen 28% from the 200 beginning of the year, and the ibex 35 and Eurostock had fallen 32%. 300

Italy (*) 200 Figure 1.1. Stock Indices. Base 100 = 31.12.2019 100 Spain (*) 100 110

0 0 January February March April May June July August

100 (*) German debt spreads (**) Differential between highest (“high yield”) and lowest risk bonds (“investment grade”)

90 Figure 1.3. Volatility indices

80 80 5

VIX (right axis) IVG (left axis) 60 70 3

40 1 60 January February March April May June July August

20 -1

-3 0 11 The GVI is a global volatility indicator obtained from a set of implied volatility indices covering different asset classes (stock January March May July exchanges, ﬁxed income, and currencies) and jurisdictions (USA, Europe, Japan). By applying the dynamic factor methodology Source: Bloomberg and Bank of Spain. to these indices, the indicator derives a factor common to all of them. 124 | COVID-19 pandemic: The answer of monetary and ﬁnancial authorities Soledad Núñez Ramos | 125

In the debt markets, the differential of the sovereign spreads with respect to March 2020 following growth at rates above 10% during the last two years. In German bonds increased from the beginning of the year until March 17 as contrast, credit to the self-employed, which until March 2020 had rates of -2%, follows: by 81 basis points (bp) in the case of the Spanish bond; 108 bp in the has experienced remarkable growth since then, climbing to a rate of 3.1% in case of the Portuguese bond; 119 bp in the case of the Italian bond; and 244 September, although this rate is somewhat lower than that experienced in the bp in the case of the Greek bond. High-risk corporate bonds increased their last four months. interest rate differential with respect to investment grade bonds by 348 bps. Market volatility also increased very sharply. Figure 2.a. Financing for households Figure 2.b Financing for non-ﬁnancial (Deriving year-on-year rates, %) companies (Deriving year-on-year rates, %) The measures announced by the ecb at its March 12, 2020 meeting, including the purchase of 120 billion euros in bonds through the end of the year, did not 20,0 20,0 seem to satisfy the market, which judged this purchase to be insuffcient, leading to an even greater increase in spreads and a more pronounced drop in European 12 stock markets (Figure 1.1). On the contrary, the announcement on March 18 of 15,0 15,0 an asset purchase program (the pepp) for 750 billion euros (extended on June 4 CREDIT FOR FIXED!INCOME by a further 750 billion), did cause the markets, particularly in Europe, to react CONSUMPTION SECURITIES very positively. Thus, within one week after the decision, the Spanish bond 10,0 10,0 differential was reduced by 54 bp, and those of Portugal, Italy, and Greece by 7,2 63, 120 and 213 bp, respectively (Figure 1.2). The stock markets also began to recover, as can be seen in Figure 1.1, although in the corporate debt market, LOANS FROM 5,3 ABROAD the recovery had to wait a little longer. In general, volatility indices also 5,0 5,0 4,3 5,6 experienced a marked improvement (Figure 1.3). TOTAL FUNDING TOTAL FUNDING

-0,3 Since mid-March, specifcally since March 18, the general trend in the markets 0,0 0,0 0,1 has been one of recovery, although levels have not attained the heights seen at -0,8 CREDIT OF CREDIT FOR -1,7 ENTITIES the beginning of the year, except for the American stock market and China. An CREDIT FOR HOME REELANCERS PURCHASES elevated level of volatility continues to be experienced, refecting uncertainty -5,0 -5,0 about the end of the pandemic and economic recovery. Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20

Source: Bank of Spain. CREDIT EVOLUTION Total fnancing to companies (Figure 2.b) has also experienced a remarkable increase since April 2020, with a growth of 4.4% in September 2020 and a Figures 2 show credit evolution, at an annualized rate, for credit extended to growth of credit entities and cfe’s credit to companies of 8.2%. households and non-fnancial businesses through July 2020. It can be seen that total household fnancing (Figure 2.a) was in negative territory in September The driving force behind this positive trend in credit to companies and the 2020, with an annualized growth rate of -0.9%, with growth of -1.5% in credit self-employed has most assuredly been the measures taken by the ecb to inject for house purchases and -1.8% in consumer credit, which plummeted after liquidity; and the measures of the fnancial authorities to facilitate credit - especially the covid-19 ico guarantee lines.

12 In all Figures 1, the vertical lines correspond to the ECB’s decision-making dates for asset purchases: March 12, March 18, and June 4, 2020. 126 | COVID-19 pandemic: The answer of monetary and ﬁnancial authorities Soledad Núñez Ramos | 127

Through October 15, 2020, a total of 842,614 operations conducted by 539,287 Figure 3. Distribution of Bank Guarantees ICO COVID-19 per autonomous community (%) different companies have been guaranteed.13 The total amount guaranteed is in excess of 79 billion euros. This has allowed companies to receive 103.9 billion euros in fnancing for the purposes of guaranteeing their liquidity and covering their working capital needs. Some 88% of the companies with formalized operations are directly managed by freelancers and micro-smes (less than 10 Financing employees). Overall, smes and freelancers have obtained 73.1% of the guarantee Guarantees granted granted and 69.5% of the fnancing granted. Number of companies

In the case of Galicia, the fnancing obtained by Galician companies was in excess of 5 billion euros, which represents 4.85% of the national total (see Figure 3), a percentage somewhat lower than the weight of the Galician gdp in the national gdp, which is around 5.2%. The number of Galician companies that have been granted guarantees is 33,324, 6.18% of the total number of companies, a higher percentage than the fnancing granted, possibly as a result of the proportionally greater presence of smes in Galicia than Spain as a whole.

In short, the role of the credit extended to businesses during the current crisis has served as a vital support to the economy. It contributes to reducing the risk of bankruptcy of viable companies which face temporary liquidity problems, with the negative implications this would have in terms of job destruction and the productive fabric, and on the process of economic recovery.

In the upcoming months, it is estimated that the entire program of public guarantees, which amounts to 140 billion euros following the latest extension, could cover about 75% of the fnancing needs of companies.14 In order to cover the remaining 25%, companies will have to resort to self-fnancing or to taking on new debt without a guarantee. In this context, the results of the last Bank Loan Survey, corresponding to the second quarter, anticipate the possibility of restricting conditions for granting credit to European companies during the third quarter of this year. If this happens, an extension of the liquidity support measures through the guarantee lines would appear to be advisable.15

13 See ICO (2020). Fortnightly report on COVID-19 guarantee line. https://bit.ly/2HNEjTP 14 See, R. Blanco, S. Mayordomo, Á. Menéndez and M. Mulino (2020). The liquidity needs and solvency of Spanish non-financial companies after the COVID-19 disruption. Occasional Documents, 2020, Bank of Spain. https://bit.ly/3mD8Wdn 15 See speech by the Governor of the Bank of Spain at the closing of the seminar “The financial system in the crisis COVID-19. Challenges and commitments”, by the International University Menéndez P. Hernández, P. (2020). The impact of the COVID-19 crisis on financial stability, September 1. https://bit.ly/31Vrk9B Source: ICO. Data through August 31, 2020. 128 | COVID-19 pandemic: The answer of monetary and financial authorities Soledad Núñez Ramos | 129

Regarding legislative and sectoral moratoria, which, while not constituting credit Since the end of the second quarter, a certain gradual recovery of the economy operations, have alleviated liquidity needs, until August 2020, the number of requests can be observed. But this recovery is very incomplete and it will be many accepted under the terms of the legislative moratorium has been 226,644, collectively quarters before we reach the activity and employment levels of the end of 2019. representing an outstanding balance of more than 20.3 billion euros.16 The total number The recovery is uneven, both by sector and by agent. For some sectors and of requests accepted for the legislative moratorium on non-mortgage guaranteed loans agents, the effects will be persistent, with damage to the productive fabric was 391,904, representing an outstanding balance of 2.88 billion euros. The accepted in terms of businesses and employment. In addition, the recovery is subject requests for sectorial moratoria reached 666,699, with an outstanding balance of to a high degree of uncertainty, which makes it diffcult for agents to make suspended loans of slightly more than 25.7 billion euros. investment and consumption decisions.

For all three types of moratoria, about 30% of the debtors are freelancers. The main In this context, economic policy at European, national and regional levels must sectors benefting from the moratorium for freelancers are commerce, hotels and continue to act with the aim of supporting the most affected companies and restaurants and other services, followed at some distance by professional, scientifc, households, fostering recovery and ensuring movement in the direction of a and technical activities; transport; and construction. Together, these sectors of more solid and sustainable growth model. activity account for almost 80% of the total moratoria for the freelancers that have thus far been implemented. At the European level, the action of the ecb, which has repeatedly reiterated its commitment to supporting the euro economy in this very adverse situation, and the approval in July of the European recovery plan, which includes the CONCLUSIONS creation of a fund worth 750 billion euros, are unprecedented responses that have provided vital assistance. The impact of the covid-19 pandemic on the world economy has been severe. In the Eurozone, gdp in the frst quarter fell by 3.6% from the same quarter of 2019; For this common European response to yield the desired results, national and and during the second quarter (when the most restrictive containment measures regional economic policies must be up to the challenges facing our economy. were instituted) by 12.1%. In the case of Spain, the corresponding numbers were They need a design that allows the necessary structural adjustments to be made, 5.2% and 18.5%, respectively. The Bank of Spain forecasts a drop for the year as which includes a medium-term fscal consolidation program and which takes a whole of between -9% in the most favorable scenario and -15.1% in the most European funds and utilizes them to support the restructuring of our production adverse one, with -11.6% constituting a mean projection. It is foreseeable that the networks, and in this aspect, each of Spain’s Autonomous Communities can Galician economy will decrease in any scenario – more than the Spanish economy highly contribute. as a whole, given its sectoral composition and the greater presence of smes.17

The forceful response of economic, fscal, monetary, and fnancial policy, and at the European, national, and regional levels has been crucial in mitigating the economic and social costs of the pandemic. In addition, this response has helped avert an even greater recession, calm the fnancial markets, and provide liquidity to viable companies experiencing diffculties.

16 See Bank of Spain. (2020). Information note on the application of the legislative and sectoral moratoria until August 31st, 2020. September 4. https://bit.ly/3e8QnLb 17 Thus, E. Prades and P. Tello estimate that if the national GDP were to fall by 9.1% by 2020, Galicia’s GDP would drop by 10%. See E. Prades and P. Tello (2020). Heterogeneity in the economic impact of COVID-19 between regions and countries of the euro area, Economic Bulletin, 2/2020. Bank of Spain. Chapter IX

WHAT CAN ECONOMIC POLICY DO IN THE FACE OF THE PANDEMIC?

Carlos Ocaña Pérez de Tudela 132 | What can economic policy do in the face of the pandemic? Carlos Ocaña Pérez de Tudela | 133

What can economic policy do to minimize the impact of the coronavirus pandemic? The initial response to the pandemic focused on maintaining employment and the business network through public subsidies aimed at guaranteeing the income of employees and freelancers, mainly. As the pandemic continues, these policies became untenable - due to their high cost, and their effectivity diminishes because the jobs and companies these policies were designed for are themselves no longer viable. As an alternative, the eu is implementing public investing programs in order to reactivate and modernize the economy. These investment programs can helpthe reactivation if they are aimed at socially proftable projects. Experience over the past twenty years with European funds shows that some of the investments proved useful, whereas others did not. However, the magnitude of these funds cannot make up for the slump in employment and economic activity that is expected in the coming years. Since maintaining current public expenditure is impossible, in order to improve the Spanish economic outlook it is necessary to enact structural measures that can bring stability to public fnances, and that can create a predictable environment suited to both investments and job creation. 134 | What can economic policy do in the face of the pandemic? Carlos Ocaña Pérez de Tudela | 135

TWO VIEWS ON WHAT ECONOMIC POLICY CAN DO TO of pandemic.1 The next question is: What should these incentives consist of? MINIMIZE THE IMPACT OF THE DOWNTURN CAUSED BY THE Regarding this matter we can, at the risk of oversimplifying, talk about two (non- COVID#19: A ROUGH PATCH OR A CHANGE OF TIMES? mutually exclusive) views that offer different visions for overcoming the current economic crisis caused by the 2020 pandemic. What economic policy is best suited to minimize the impact of the current downturn caused by covid-19? From the beginning of the pandemic, it was widely accepted that we needed to make up for the enormous decrease in activity and employment SAFEGUARDING COMPANIES AND EMPLOYMENT !BRIDGING" by implementing an expansive macroeconomic policy. Thus the vast majority of developed countries have moved in this direction. However, it is less clear which The frst view – one that inspired the frst measures adopted by government and should be the micro content of these macro measures. Let´s examine the debate central banks – is based on the idea that we are currently experiencing a temporary with regard to this question. situation, a “rough patch” that we will be able to leave behind in a few months. This view seeks to “[…] preserve the economic value of what we already have, For the most part, those responsible for economic policy, economic agents, and leveraging the available resources and capacities as soon as possible, and return to scholars agree that it is necessary to implement highly expansive fscal and monetary the activity trend we were used to […]” (Salas, 2020; also Hassler, Krusell, Ravn policies in order to compensate for decreases in economic activity and employment and Storesletten, 2020). The role of economic policy would, according to this view, during the year 2020. The ability to implement such policies varies from country consist of bridging the gap between the pre- and post-coronavirus economies; to country. Those countries in a better fnancial situation will have more room to preventing the destruction of the business sector and employment for as long as maneuver - as refected in the number of resources allocated to mitigate the impact health-based restrictions on economic activities remain in effect. The economic of this crisis. This resource allocation varies widely among countries, as it can be situation will be restored as soon as such health-based restrictions are lifted. The seen in Table I. Spain ranks among the countries that have allocated the fewest fnancial support measures (guarantees, loans, grants, deferments, etc.) aimed at resources to addressing the pandemic. companies and people, and the changes in labor legislation, and in regulations pertaining to company closures, that we have seen since the beginning of the Table I: Fiscal measures enacted to cope with the pandemic (in % of 2019 GDP) pandemic in the vast majority of the developed countries, all are in accordance with this view. Immediate tax Other measures Deferment Updated relief (liquidity/guarantees) France 4.4% 8.7% 14.2% 06/18/2020 Although they are necessary to reduce the impact of the crisis, these anti-cyclical policies carry with them some important disadvantages that need to be managed. Germany 8.3% 7.3% 24.3% 08/04/2020 On the one hand, in many cases, they require massive public funding: in order to Italy 3.4% 13.2% 32.1% 06/22/2020 recapitalize companies, to fnance temporary layoffs, etc. These policies therefore Portugal 2.5% 11.1% 5.5% 05/04/2020 give rise to a substantial increase in the public debt that will place future constraints Spain 3.7% 0.8% 9.2% 06/23/2020 on many countries, especially those, such as Spain or Italy, which already had high United Kingdom 8.0% 2.3% 15.4% 07/16/2020 debt levels. Ensuring the sustainability of the public debt in indebted countries USA 9.1% 2.6% 2.6% 04/27/2020 will in the future require implementation of tax consolidation measures – such as

Source: Bruegel (https://bit.ly/3mUD5VN). cutbacks in public expenditure or higher taxes – that will reduce growth within the current context of recession and high unemployment. The intervention of There is unquestionably broad agreement about the steps that governments and central banks buying public and private debt bonds on a large scale constitutes a central banks need to take regarding macroeconomic policy during these times 1 The consequence of this highly expansive outlook is a significant deterioration in public finances from a baseline that in many countries, including Spain, was already untenable. This gives rise to the question of how to reallocate public finances after the pandemic – a subject on which there is little agreement. But this paper is not tackling this matter. 136 | What can economic policy do in the face of the pandemic? Carlos Ocaña Pérez de Tudela | 137

decisive support for ameliorating and delaying an adjustment that, nevertheless, hampered recovery. We anticipate a 13% drop in gdp in 2020, and only a partial will eventually occur. recovery of about 7 or 8 points in 2021. The activity levels of 2019 are unlikely to resume until 2023. If we compare these forecasts with what is happening in the rest of On the other hand, anti-cyclical policies create distortions in the incentives of the eu, we can see that the contraction of activity in Spain is one of the most pronounced economic agents. Thus, support for companies can create “zombie companies” in Europe (Figure 1). This is a concern, because it points to the risk that Spain’s (i.e., those that would close unless bailed out), and can distort competition in economic gap with the rest of Europe will widen, thus reverting the convergence a way that favors the least effcient and most prestigious companies. This is a advances previously attained, with enormous effort, over the last decades. problem that has already been detected in some countries. In addition, fnancial support aimed at preserving employment can end up in the hands of employees Figure 1: Impact of the crisis in Europe (% difference from Q4 2019) that work in companies that really do not need that support, and in some cases they might be used to preserve jobs that, nevertheless, are going to disappear. 0

-2.0 -2.2 The longer such support goes on, the worse these distortions will become. A temporary -5 -5.5 layoff plan that can be implemented over the course of two or three months, during -5.2 -5.9 the period coinciding with the compulsory standstill of economic activity, can save jobs. But such a plan may be ineffective if it is unnecessarily prolonged, especially -10 if applied to companies that are still not operating when activity resumes. This -11.5 same scenario can be applied to support for companies. The longer the anti-cyclical -15 policies go on, the lower their effectiveness. And following the same logic, the more selective the continuation of these policies is, the more higher their effectiveness. -17.1 Q1-20 Thus, the challenge, once these company and employment preservation measures are -20 -18.9 implemented, is to ensure that they are gradually withdrawn. Q2-20 -22.2 -22.7 -25 Despite these drawbacks, the measures that have been implemented since March Germany Spain France Italy United Kingdom 2020 were, in my opinion, the most sensible answer to the scenario we were facing in March, when it was expected that the compulsory standstill of the economic Source: Eurostat. activity would only last a few months. This change of scenario forces us to reconsider the response to the crisis. This THE SECOND WAVE reconsideration has, in fact, already occurred. The cost in public treasury increases in proportion to the duration of the pandemic and, therefore, budgetary restrictions The reality has proven to be more adverse and the standstill, especially in certain will increasingly limit the possibilities of governmental action. In addition, the sectors such as tourism, leisure, or transport, has continued through the third ability of businesses to maintain and revive employment diminishes the longer quarter of the year, and will likely extend to the fourth quarter and the beginning the economic hibernation continues. This situation of even more prolonged crisis of 2021. What was expected to be a rapid recovery (a V curve) seems instead to be and increasing constriction of the sphere of action of public policies makes it taking the shape of a slow recovery. necessary for spending to be carried out selectively, reserving the increasingly scarce public resources for those companies, jobs and sectors that have greatest The economic scenario has deteriorated after a summer that was worse than potential to survive a prolonged crisis. The diminishing of public fnances will expected. The exponential increase in infections, with its deterrent effect on foreign make it increasingly diffcult to implement horizontal policies (A. Nadal, 2020; tourism and negative impact on business and consumer confdence, have together 138 | What can economic policy do in the face of the pandemic? Carlos Ocaña Pérez de Tudela | 139

Torres, 2020). Managing targeted policies is not easy, but as resources become Other drawbacks have to do with the cost of the transition to the new economy, increasingly scarce, there is no alternative. which increases with speed of implementation (Hassler et al., 2020), and with the asymmetric distribution of investment among countries. The most technologically The prolonging of the pandemic has given rise to a second vision of what the advanced countries, such as those in Northern Europe, will suffer less during the response to the crisis should be, based on the idea that we are experiencing a transformation than countries like Spain. profound structural change, a change of era, within which the coronavirus crisis (the pothole) is just another episode, although one of very considerable magnitude. The There is also a risk that funds may be allocated on the basis of political rather climatic challenges and the technological revolution that digitization entails force than economic criteria, thus investing resources in sectors or regions where they all economies to make unprecedented investment efforts. Therefore, if a recession will not serve to modernize economies or make them more productive. Some caused by the coronavirus forces us to spend, this view holds that there needs to be analysts point out that there are signs that this could be happening in Germany and a commitment to accelerate the structural changes that were already taking place in France, countries that have progressed farther than Spain in defning the second the economic fabric. We must invest more and faster in digitalization, in renewable wave of anti-crisis policies (Eurointelligence, 2020). This risk also exists in Spain. energies, in sustainable mobility, in health and, of course, in education. All of these Nevertheless, we still have a chance to do it right. investment efforts would have to be made even if there were no pandemic, according to this view. Thus, we should take advantage of the present historical moment and, This balance of costs and benefts suggests, on the one hand, that Spain has an as a consequence of these investment efforts, more sustainable jobs and activities opportunity to promote a modernization of its economy that needs to be seized. will be created to replace those that are going to disappear as a result of the crisis On the other hand, it also shows that it is necessary to invest wisely, given the high in sectors such as tourism, traditional automobiles and non-renewable energy. In opportunity cost of the resources that are going to be dedicated to modernizing the short, government spending on production is preferable to spending on transfers to economy. For an investment to be productive, it is not enough for it to be allocated workers and businesses, especially when the effectiveness of the latter diminishes, to a productive sector; it is also necessary that the project targeted be viable and as it is already happening. proftable. Spain’s experience with European funds over the last 20 years offers an excellent illustration of the importance of distinguishing between sectors and projects. In a twenty-years-ago scenario, Spain needed to develop infrastructure. EUROPEAN FUNDS Thus, European funds were used to invest in them. However, it could also be seen that not all kinds of infrastructure were necessary. Along with successful projects, The recovery fund proposed by the eu Commission and endorsed by the eu Council types of infrastructure that were useless or underutilized also ended up being last July is the paradigmatic example of this view. This fund will make available to developed. The examples of this linger in Spain’s national memory. In short, the Spanish companies 140 billion euros for investments during the period 2021-2027. implementation of the European investment program will require an unprecedented These resources will be available mainly from 2022 to 2026. Although these are management effort. It is not just about spending; it is about selecting projects indeed signifcant sums, they do not come close to compensating for the collapse in that will truly drive productivity. It is not about distributing funds (i.e., between consumption and investment that occurred in 2020. administrations and sectors). The investments must be selected judiciously.

Like everything in economics, this option, in addition to possible benefts (in this In short, can these European investment programs promote recovery of the case, especially in the long-term) has costs (especially in the short-term). The most economy? The answer is that increased public investment efforts will help stimulate obvious cost is that much of these investments are fnanced with public resources, economic activity, but the effect will be limited in time and will by no means offset further eroding public debt balances. In addition, out of the European funds that the collapse in activity caused by the pandemic. Spain will receive, almost half are loans, and the rest will have to be partially fnanced through the eu budget. 140 | What can economic policy do in the face of the pandemic? Carlos Ocaña Pérez de Tudela | 141

GALICIA committed to excellence. There are two spheres of action especially important. First, it is essential to maintain and strengthen the educational system, particularly The economic trend in Galicia during the frst twenty years of the new century as regards higher education and vocational training, in order to attract and retain has been positive in many felds. It is the autonomous community with the largest population. Secondly, it is important to engage businesses from high (or at least not gdp per capita growth since 2000 and the one which has ascended most in the gdp extremely low) added value sectors in order to attract and retain population. These per capita ranking (climbing from 15th in 2000 to 10th in 2018). Productivity has two areas require a developed educational and R&D system. also increased signifcantly (it grew by 6.3% between 2014 and 2018, Galicia thus becoming the autonomous community with the largest growth, compared to the Other autonomous communities have been successful in creating business attraction national average of 2.6%). Nevertheless, Galician productivity still lags behind hubs. For instance, Catalonia has made great strides in attracting talent and jobs the Spanish national average by 3.2% (although it should be noted that this reduced through their system of public and private universities, and through their institutions productivity is largely the result of sector specialization). Exports are also one of this devoted to R&D. The Basque Country has also succeeded in creating technological economy’s strengths, as the exports of goods reached 35.5% of the gdp compared clusters based on advanced R&D, resulting in a dynamic business network capable to an average of 23.7% at the national level. The contribution of exports to Galician of attracting population in general and professionals in particular. gdp has increased by 10% since 2000. Galicia has also an opportunity to strengthen all levels of its educational institutions The impact of the crisis in Galicia will be below the Spanish average because as well, rather than giving up on them and letting them decline as the numbers its economy is not as reliant on the sectors that have been affected the most by of their students fall. The private initiative now emerging in the sector of higher the pandemic (i.e., tourism, transportation, etc.) Nevertheless, the impact will be education should be allowed to grow and to consolidate in order to promote R&D, signifcant, and will entail considerable pressure on social expenditure, just as in a feld in which Galicia lags behind both the Spanish and European averages. every other area of Spain. Therefore, it is advisable to invest more in human capital (i.e. education, R&D and What advice would help Galicia cope with this crisis in the best possible way? other forms of productive investment). What are needed now are no macro-projects Economic growth largely depends on a fragile balance among various factors of a but unique and high-quality projects. social, institutional, political and economic nature. Many of these factors are not exclusively Galician. For example, Spain as a whole needs to improve its educational system, fnd a solution for the untenable fnancial imbalance of its Social CONCLUSION Security system, and reduce the duality and instability of its labor market. In conclusion, the policies aimed at preserving jobs and companies that have been If we take a moment to consider Galicia’s distinctive features and try to identify implemented since March 2020, as well as the investment policies to be implemented the obstacles to its growth and prosperity, we will see that human capital is a key by the second half of 2021, will help mitigate the impact of the economic crisis, but are concern. At present, Galicia is simultaneously faced with two important challenges: severely constrained by the paucity of public resources available to fund them. Thus, it an aging population and the diffculty in attracting and retaining its best and brightest is necessary to fnd a way to manage them differently from how it has been done. The young people. This is a problem that was not created by the pandemic, although it lack of resources renders cross-sectional measures unfeasible, and forces the policies may have been exacerbated by it, but it is very important and it is likely to last longer. to become selective, and thus to take account of the merits of each individual case.

Reverting these demographic trends is not an easy task. However, there are Measures which merely reactivate policies will not be enough. For this reason, it is some initiatives that might make a difference. It is interesting to note that these now more pressing than ever to design reforms aimed at improving the economic initiatives do not always involve massive, expensive and cross-sectional programs. system. Failing to do so would distance us from Europe again, after 20 years of Sometimes, it suffces to develop projects of limited cost and scope that are convergence. Chapter X

CHINA, ORIGIN AND DESTINATION OF THE NEW POST!PANDEMIC WORLD ORDER: AND GALICIA?

Xulio Ríos 144 | China, origin and destination of the new post-pandemic world order: And Galicia? Xulio Ríos | 145

A recent forecast conducted by the International Monetary Fund (imf), prior to the pandemic, depicted estimated fgures refecting the importance of gnp in terms of purchasing power parity for 2024. According to these estimates, China would represent 21.4% (18.7% in 2018) compared to 13.9% for the us (15.2% in 2018). The eu, India and Japan would come to represent 14.6%, 9.58% and 3.5% respectively (16.3%, 7.74% and 4.13% in 2018). This trend is well-acknowledged, and appears to be unstoppable. But to what extent could covid-19 infuence its future course?

Against this backdrop, it is possible to elucidate the future of the current international system: from the decline of the us, to the rise of China, to the dreaded political dismemberment of the eu. It is also possible to see the future of globalization and the extent of its correction, as well as the future of the multilateral system, and whether or not a hypothetical multipolarity could become a reality. Nothing is certain yet, but the trends seem to point that way.

China was able to weather the global crisis of 2008 thanks to an ambitious modernization program. Since 2009, the Chinese Government has invested more in current dollars than the United States. Under present circumstances, China is also likely to make great progress as regards new technological infrastructure, including the Industrial Internet. The Chinese economy remains strong, while the us economy is slowly recovering from the crisis. 146 | China, origin and destination of the new post-pandemic world order: And Galicia? Xulio Ríos | 147

Measured in terms of purchasing power parity, the gnp of China exceeded that of FACTORS FOR AN OUTCOME the us in 2014. This resulted in a true “sputnik effect” (i.e., referring to the space race myth recently resurrected by Trump) that shocked Washington. In an effort As regards China, the factors that could infuence the outcome of this complex to slow the rise of China, Barack Obama promoted, along with New Zealand and development would be, at minimum, as follows. In the frst place, there is the Singapore, the creation of the Trans-Pacifc Partnership (tpp). This treaty proposed economic recovery within the expected “new normal” framework. China has a head an economic integration based on trade, social and environmental regulations that start but, even though its enormous domestic market offers important advantages, Beijing found diffcult to accept. The partnership would later be abandoned by its dependence on foreign trade raises important concerns about China’s stability, Obama’s successor. One year into offce, Trump began to wage a battle against especially as regards its internal labor market. Secondly, this is a crucial year for China to ruin the dream of Xi Jinping, who seeks to bring China back to the center the future of several cooperation and economic integration agreements among of the international system. important actors. At the regional level the Regional Comprehensive Economic Partnership (rcep) and the Free Trade Agreement among China, South Korea The offensive tackles several fronts: increases in tariffs to levels unseen since 1993; and Japan should be settled. The growing regional economic integration serves the technological rivalry that blocked purchases of us companies and restricted as a valuable safety net in the event of any actual possibility of stopping China’s exports of sophisticated products to China; and, at the same time, the highest pressure growth. Some 60% of the trade in Asian countries is carried out at a regional level, is being put on us’s allies to prevent them from adopting Huawei technology. All a level similar to that of the eu. Moreover, China’s exports within Asia are growing of this happened within the framework of the National Security Strategy that was at a higher rate than its exports to the us, which have remained stagnant since adopted at the end of 2017, a key document depicting China as the main threat to 2014. By offering its neighbors a path to prosperity, the Pentagon’s offensives are American supremacy. It is clear to everyone that the trade truce agreed on January unlikely to succeed. In a different sphere, the investment agreement with the eu 15, 2020, did not imply a cessation of hostilities, exacerbated as covid-19 deaths should be issued under the German presidency during the second half of this year. increase and the us presidential election approaches. Even though certain reservations persisted, the link Berlin-Washington was made obvious during the pandemic by the recurrent phone calls Merkel-Xi. Have we reached the point of no return in the deterioration of bilateral relations? Are we heading towards a cold war between two economies that are still heavily interconnected A third important factor is political stability, with different open fronts. The strength despite the reduction in bilateral trade and the decline of Chinese investment in the us? of the Chinese political system is relatively fragile. The creation of the “xiaokang”, According to Lawrence Summers, disconnecting China from America would lead to a modest middle-class society, soon to be offcially announced with much fanfare, a mutual assured destruction that would prove devastating for these two countries and as well as the eradication of extreme poverty bolster the legitimacy of a Chinese the rest of Asia. In an article published in Foreign Affairs, Singapore’s Prime Minister, Communist Party about to celebrate its 100th anniversary. Yet much remains to Lee Hsien Loong, refects on the danger of us’s decision: “The United States is not be done. Prime Minister Li Keqiang said at a press conference in Beijing on the a declining power. It has great resilience and strengths, one of which is its ability to occasion of the closing event for the two parliamentary sessions that the average attract talent from around the world; of the nine people of Chinese ethnicity who have annual income per capita in China is 30,000 yuan ($ 4,236), and he added that been awarded Nobel Prizes, eight were us citizens. On the other side, the Chinese more than 600 million Chinese had annual earnings of little more than 1000 yuan, economy possesses tremendous dynamism and increasingly advanced technology, not enough to rent a room in a medium-sized Chinese city. How can it be that 43% which the Soviet Union lacked. Any confrontation between these two great powers is of the 1.4 billion people in China, the second largest economy in the world, with a unlikely to end as the Cold War did, in one of these two country’s peaceful collapse. gnp per capita of approximately $10,000 in 2019, have such paltry earnings? Some Neither Beijing nor Washington would beneft from the confrontation between their 75% of these 600 million people live in rural areas, and around 70% of them live interconnected economies.” And he continues: “The prospect of an Asian century will in the central and western regions of the country. This means that, despite China’s depend greatly on whether the United States and China can overcome their differences, unquestionable progress, many Chinese continue to have diffculty in fnding jobs build mutual trust, and work constructively to uphold a stable and peaceful international and relying on an incomeand wealth inequality is rising due to the effect of the order. This is one of the fundamental issues of our time.” pandemic on the economy. 148 | China, origin and destination of the new post-pandemic world order: And Galicia? Xulio Ríos | 149

In addition to the challenging management of this complex reality – a diffcult who withdraws from both the Paris Climate Pact and Iran Nuclear Deal; and who task – there are political tensions of a diverse nature whose impact on stability jeopardizes European security by withdrawing from the Intermediate-Range could assume critical importance in the near future. Such is the case of the Nuclear Forces Treaty and the Treaty on Open Skies. The pandemic presented current crisis in Hong Kong, the heart of the us geopolitical strategy in the frst China with an opportunity to help affected European countries, especially chain of islands, as it is also the deterioration of the relationship with Taipei. Italy and Spain, but also many others, and thus demonstrate its effcacy while On the other hand, Xi Jinping’s highly personal style of leadership, very distant revealing a contrast between its well-organized potency and the debacle from Deng Xiaoping’s sage counsel, which seems to have been swept away observed in the us. by the rising tide of nationalism, impatiently displaying its power, will face important challenges at the 20th Congress of the cpc in 2022, a highly symbolic As a ffth factor there is the One Belt, One Road Initiative, China’s most event for the Communist China collective imagery, that could increase the risk ambitious foreign policy project, and which establishes the coordinates for its of exacerbating internal conjectures. own world map. The outbreak of covid-19 and its effects will impose new adjustments and perhaps a revision of the priorities, and more comprehensive As a fourth factor, as regards the geopolitical tensions with the us, several fronts approaches should not be entirely dismissed. The Indo-Pacifc Strategy, which will remain open, in a constant rivalry to be disputed inch by inch. It remains was conceived as an example of international programing that would compete to be seen how the anticipated degradation and consequent vulnerability of with Chinese proposals, and highly promising at frst, could suffer severe the supply chains wrought by the pandemic will evolve, and how Chinese damage as it faces the expansionist drive of a Chinese economy within the initiatives for industrial relocation abroad will turn out. Anything is and will region by mechanisms that are currently under negotiation. be permitted to sabotaging Chinese ambitions. The Western world has realized that it is heavily dependent on the industrial capacity of the Asian giant, and will attempt to set limits according to its interests. To the extent possible, ACCELERATION OF THE COMPETENCE obviously. In the current scenario, the fact that China has surpassed the industrial production of the us led to serious concerns, because this production The pandemic has strengthened us’s resolution to maintain its global hegemony, constitutes the foundation of formidable military might and, consequently, the and to face China as a competitor. Nonetheless, the country has seen its soft capacity to compete for global hegemony. power and international luster diminish under the Trump Administration.

In this regard, Europe’s decision to reinforce its strategic autonomy is of great The unfathomable isolation of the us and the increased capacity of China importance. A change can be perceived in geopolitical approaches, which to impose its own agenda in international politics constitute a threat to could be accelerated depending on the results of the us elections in November. the privileged position of the Western countries’ vision. They also threaten the In the new post-pandemic context, Europe might win again a major key role. ability of Western countries to organize global industry, trade, fnance – as well Especially if the Trump Administration continues to ignore the fact that it has as the global system that shapes public opinion and the interpretation of our overestimated its own capacities when confronting China without previously own reality. Facing these trends, China, increasingly involved with multilateral consulting its allies. approaches, is designing a foreign policy based on high-profle initiatives such as brics, the Shanghai Cooperation Organization, and the Asian Infrastructure China remains a strategic competitor and systemic rival of the eu, but this Investment Bank. At the same time, the country spreads its presence in the fact will neither hinder the Asian giant’s advance nor put an end to bilateral boards of directors of multilateral organizations of all kinds. This process is cooperation. Europe plays a key role in preventing that a reediting scenario of still in its nascent stage, and is slowly taking shape based on cooperation rather a new cold war could become a tangible reality. It is not a question of choosing than on the convergence of alliances that are clearly antagonistic. sides, but it is worth acknowledging who abandons unesco or the who; 150 | China, origin and destination of the new post-pandemic world order: And Galicia? Xulio Ríos | 151

The main area of competence will continue to shift during the next technological do need is an institutional mechanism to plan, coordinate and monitor strategic generation. At frst, the strict control exercised by the People’s Party, in the priorities. That is how we will succeed as a region, and especially, with China. ideological and general contexts, was expected to limit its systemic capacity for innovation. It turns out that nothing could be further than the truth. China In order to approach China, we need to focus with a far-reaching perspective, to is the leading power in vital sectors, and it seems that us pressures on its allies persevere, and to identify assets and to plan accordingly, by promoting ties and to ban the use of Chinese equipment are destined to fail, given the economic relationships that remark our uniqueness. If we concede that an institutional advantages involved and the diplomatic efforts aimed at defecting accusations approach is essential to establishing a relationship with China, we may fnd of jeopardizing national security. As of today, the us does not have any an opportunity to create a vast network with great potential, given that our alternative technology to compete with China in key areas such as 5G. distinctive political and territorial structure is highly valuable for China. We can succeed in this purpose, but we need to tackle it with confdence in our The Chinese and global economies, especially the us’s, are interconnected and abilities and with an open mind. We currently lack both qualities. Hopefully, interdependent. Therefore, it might seem that any calls for disengagement will the pandemic will serve as a vaccine that might immunize us against these have limited practical effects, due to their unsustainability. In a market economy, affictions of the soul that have been the bane of our existence over the course the political approach will hardly impose on considerations of a purely corporate of centuries. nature in the long term. Some analysts estimate that approximately 5 million jobs will migrate from China over the next few years. That might be true. Between October 2018 and October 2019, the countries which benefted the most from companies leaving China were Vietnam (26) and Taiwan (11), but also Japan (5) or Mexico (6). Out of 50 documented cases, only three companies relocated to the us. China will continue to be an essential partner that no economy can afford to disregard, especially at a time when the global economy is faced with unprecedented pressures as a result of the covid-19 pandemic.

GALICIA AND CHINA

Galicia also had to look to China during the current pandemic. In the new scenario ahead, complementing our Atlantic and continental inclination with establishing an important trade relationship with China would be of the highest importance. Over the past few years, despite our having high-valuable assets to issuing an ambitious and coordinated relationship with China, we have been giving it up. Certain tactics, our peninsular context, and the poor sensitivity towards foreign affairs of our public institutional leadership have demoted our region.

A small nation such as Galicia needs to be wide open in order to prosper. If we are to seize the opportunities ahead, it is essential to have a clear understanding of our role within the region and the world. This is the only way to take optimal advantage of the great shift expected in the international system. We do not need brilliant heads of state with a more or less developed common sense, what we Chapter XI

COVID!19 AND ITS IMPACT ON DIGITAL TRANSFORMATION AND BUSINESSES’ INTERNATIONALIZATION: A PERSPECTIVE ON GALICIA

Ana Teresa Tavares-Lehmann 154 | COVID-19 and its impact on digital transformation and businesses’ internationalization Ana Teresa Tavares-Lehmann | 155

INTRODUCTION: THE CONTEXT

The covid-19 pandemic sneaked up on all of us at a time when the global economy was already undergoing signifcant changes: techno-economic (i.e., digitalization), geopolitical (i.e., a slowing in the intensity of globalization) and social (i.e., a growing awareness of the sustainability imperative).

The pandemic caused major disruptions in all spheres of the economy, leading to a near standstill and putting companies’ growth and internationalization plans on hold. A signifcant contraction in global gdp, global trade and global foreign direct investment (fdi) is expected (unctad, 2020). The pandemic highlighted the structural weaknesses of countries and frms, emphasizing the need to reconfgure and develop value chains that are more resilient and marked by greater proximity (Gereff, 2020).

This chapter focuses on a discussion of the role covid-19 had in accentuating and accelerating the impact of digitalization on internationalization strategies, highlighting the qualitative and quantitative changes involved, with special reference to Galicia. 156 | COVID-19 and its impact on digital transformation and businesses’ internationalization Ana Teresa Tavares-Lehmann | 157

There is no doubt that covid-19 represented a shock to economy and society. price for that, increases the need to have more agile and smaller operations However, our main argument is that – focusing on the economic angle – rather closer to the user. This challenges ib networks, making them more diverse than changing the nature of processes under way, it simply accelerated those and unpredictable. processes. What precisely were these processes? In other words, what was the pre-covid context? The exponential growth of digital platforms and of the business models supporting are hallmarks of the last decade. Digital platforms are disrupting The frst group of trends relates to digital transformation, contemporary a vast range of sectors and capturing a growing share of markets for goods innovation, and the platform economy. and services (e.g., retail, mobility, entertainment, tourism/hospitality, etc.). The platform economy brought new and unexpected actors/protagonists to the Digital transformation (the integration of digital technologies in all business fore, notably gigantic companies with global reach such as Amazon, Uber and areas) has been spreading to all sectors and types of human interaction, and has Tencent, among others. had a signifcant impact on the ways value is added, on business models, and on how International Business (ib) is conducted. This process represents one A platform is a business that creates value by facilitating exchange between of those rare moments in which we are experiencing a change in the techno- two or more interdependent groups – often consumers and producers. User- economic paradigm (Freeman and Pérez, 1988), with the advent of the Fourth centeredness is a defning characteristic of successful platforms, and is part Industrial Revolution – more commonly referred to as Industry 4.0. This new of the contemporary perspective on innovation previously described, one in paradigm essentially consists of the digitalization of frms and of the economy which the consumer tends to become more closely involved in the increasingly at large, and has benefted from major breakthroughs in technologies such open innovation process. as Artifcial Intelligence, Internet of Things (iot), and quantum computing, among others. The importance of platforms has become even more evident during the pandemic crisis, with the pervasive concern over minimizing physical contact, Microsoft’s ceo, Satya Nadella, recently said that covid-19 was a major and has acted as a catalyst for “Low Touch Economy” (Board of Innovation, accelerator of the uptake of digital technologies, arguing that two years of 2020) – especially during the “last mile delivery” phase (i.e., the end point digital transformation happened in two months (between January and March where the fnal consumer receives the goods). The crucial role of platforms is 2020). also evident in terms of workplace relations, where they allow more remote work than ever before. As we will shortly discover, these are changes that have Another related trend reflects changes in the way innovation occurs. important consequences for internationalization processes and strategies. Today, innovation is a complex phenomenon, involving the convergence of different stakeholders, types of knowledge and technologies. We live in an When it comes to internationalization, a platform-based economy (i.e., one increasingly democratic era of Open Innovation (Chesbrough, 2003) and that externalizes most activities) is not necessarily conducive to considerable User Innovation (von Hippel, 1986, 2005). It seems an obvious point that no amounts of fdi. Furthermore, a platform-based economy, in which borderless one innovates alone, and this points to the need for collaborative approaches platforms are the relevant markets, challenges the traditional view of markets and an ecosystem view, as well as involvement and input from a new breed as territorial entities, and thus calls into question the wisdom of investing in a of consumer. This “New Consumer” is crucial to the innovation process, certain territory/geography. covid-19 reinforced platforms more than ever, as as he or she aims not only to be a user of the good or service, but also to the latter enable the transactions to be made without physical contact, something be a co-creator, and often even co-producer and co-distributor. This more that confned or socially distant consumers need. interactive innovation process, with an ever-more demanding consumer, reclaiming new and personalized features without wanting to pay a premium 158 | COVID-19 and its impact on digital transformation and businesses’ internationalization Ana Teresa Tavares-Lehmann | 159

The second trend is geopolitical. The growing importance and market power of remote supplies, decreasing risks of supply disruption, and reducing negative digital mnes, as well as the changes in technological leadership brought about environmental impact. covid-19 made all these different dynamics even more by digitalization, have geopolitical implications of the highest order. In a digital pertinent than they had been before. world, the quest for technological dominance is key. This is an issue of national security and sovereignty, affecting not only political relations, but also attitudes towards trade and investment. covid-19 has heightened the importance of COVID#19 AS AN ACCELERATOR OF DIGITALLY BASED this dynamic, and has increased the general salience of geopolitics. A good INTERNATIONALIZATION STRATEGIES example of this technological race is the battle for 5G. Another is the search for the much-needed covid-19 vaccine. Digital transformation, accelerated by the pandemic, is expected to bring about major changes in the nature and speed of internationalization. The platform Geopolitics and digitalization are linked to new strategic threats (e.g. economy increases the ability to reach a huge number of consumers in a short cyberattacks), which result in signifcant regulatory and security-related time and across a wide geographic spectrum. And, by using massive amounts challenges at both the national and supranational levels. All of this is occurring of data and analytics to process them, allows to fnd a better match between within a context where traditional geopolitics – which relies on national states supply and demand, enables identifcation of more clearly defned niches, maintaining centrality of action and control – does not suffce. Digital activities and even stimulates new kinds of demand, given the tools available for mass create a new type of space (just as, in economic terms, these activities lead to customization and remote co-creation. Our key argument is that the pandemic new type of markets). This space within the digital domain is defned by the in just a few months overcame resistance and precipitated changes that, while major roles held within it by private, non-State, non-traditional digital players. already underway, would have taken many years to materialize, were it not for the outbreak of covid-19. This fast change may have important long-term Given this state of affairs, economic actors, including mnes, cannot make repercussions – both quantitative and qualitative - on international production decisions without according to the geopolitical context the prominent role and value chain strategies. that it warrants, and without factoring this context into their risk assessments. covid-19 is of course a key risk factor that tends to lead to increased While it is true that the gigantic platforms dominating a vast group of markets fragmentation and strained relations. worldwide involved massive investments (i.e., in the technologies underlying such platforms), it is no less true that digitalization allows for less costly A third trend relates to the sustainability Imperative. Environmental degradation strategies, thus extending platform-related opportunities to smaller frms. and resource depletion due to human action, phenomena often cited as causes of In that sense, digitalization would seem to constitute a force that promotes current and future pandemics, led to a growing awareness of the need to embrace a democratization of both entrepreneurship and internationalization. more sustainable pattern of production and consumption. Industry 4.0 (by enabling the optimization of resource use, preventing unnecessary waste, and promoting the Digital technologies help promote the international expansion of smes, allowing circular economy) and the new techno-economic paradigm, together provide an internationalization using fewer resources, and propelling an increase in the opportunity for promoting increased sustainability (unctad, 2020). number of startups (which for the most part are born as global companies), and scale-ups – and beneftting from the exponential growth possibilities Recently, there has been a growing sense of nationalism and protectionism in offered by platforms. Digital platforms provide access to international several countries. During a pandemic, there is a need to keep the specter of market knowledge, facilitate interaction with partners/customers, access nationalism at bay and reinforce cooperation. And the circumstances call for networks, ease entry barriers, and help overcome resource constraints. They different and more sustainable (i.e., economically, socially and environmentally may also promote fruitful relationships between large corporations and smes – in a “triple bottom line” holistic view) business models and strategies, such (established and startups), potentially stimulating closer linkages between as adopting more regional supply chains and minimizing reliance on more 160 | COVID-19 and its impact on digital transformation and businesses’ internationalization Ana Teresa Tavares-Lehmann | 161

multinational (mne) subsidiaries and local frms. Even for established mnes, in all value chain activities. This is because digitalization has an impact not the expansion of e-commerce is leading to divestment in brick-and-mortar only on the factory, but also on the whole value creation process, as noted retail (see, for example, the recent announcement by the leading clothing above. retailer Inditex, which will close 1200 physical stores and invest us$3 billion in further development of their online business and their “integrated store In an era where platforms generate more turnover than any traditional concept”). competitor in certain sectors, digitalization will reduce the importance of geography, challenging and de-territorializing the very concept of markets. covid-19 was a factor that helped drive these major changes, in order to address Markets are now platforms, gvcs, and tenders of multilateral institutions two important consumer concerns: physical contact and the “last mile delivery.” (which are also platform-based). Due to digital technologies, such markets These developments reinforce the notion that platforms are compatible with are more easily accessible than before: to the titanic multinational, to the sme the pandemic-fueled “low-touch economy”. In addition, 3D-printing and other or to the individual entrepreneur, across all sectors. This new world is full 4.0 technologies allow for more effcient production of smaller series closer to of opportunity but also of challenging side effects – e.g., the future of work, the client, with much less investment than the large factories of an earlier era. upskilling/reskilling, unemployment, inequality, and others. This is crucial in a covid-19 and post-covid-19 world, where proximity and more predictable sourcing are of critical value, and where investments must be cautious. POLICY IMPLICATIONS

Given the foregoing analysis, and considering the causal linkages between LOW#COST INTERNATIONALIZATION !AND A REDUCTION OF FDI?" covid-19, on the one hand, and digital transformation, internationalization and fdi attraction, on the other, it is recommended that policies emphasize the Digital transformation gives rise to a new breed of low-cost internationalization following features: that has profound implications for business models, and for the use of distinct entry modes and internationalization strategies. It may be conducive to a • Digital Transformation – which increases investment attractiveness, and decrease in relevance of fdi, due to the reduced need to set up physical stores which makes it possible to thrive in the platform economy. Specifcally and large factories. Conversely, digital transformation may increase exports important are those initiatives aimed at promoting the development and as well as contractual forms (i.e., digitalization makes it easier to connect and deployment of Industry 4.0-related technologies. contract). In short, it is likely that models with less associated costs/investment/ risk will be favored. And covid-19 is very important here, as an accelerator • Open innovation (in line with the collaborative approach advocated above, of trends and also as frms fear risky strategies amid current and future and recognizing the complexity of innovating in an environment of complex and uncertainties. Moreover, many frms are struggling fnancially as a result of converging technologies). the shockwaves caused by the global pandemic, leading to greatly reduced investment capacity. Many companies are going through radical restructuring • Sustainability (including criteria for Sustainable Development Goals (sdgs), processes, implementing leaner/less costly strategies – reducing numbers of and requirements for receiving support for sustainability). employees and other fxed costs (e.g. real estate) due to new (especially remote) work schemes that were proven effective during the covid-19 period. This may • Ecosystem-based measures (including support for entrepreneurship and lead to increases in effciency and in the overall competitiveness of businesses startups), for the purpose of stimulating linkages between actors, notably of all sizes, including established smes as well as startups, because of their large corporations, startups and smes). Foreign multinational players are very being better able to respond better to demand and supply challenges. It may relevant in this regard, as they are often fagship companies in ecosystems. allow better access and integration in gvcs, even if disruption may also occur 162 | COVID-19 and its impact on digital transformation and businesses’ internationalization Ana Teresa Tavares-Lehmann | 163

• Openness of markets – Protectionist measures (aggravated in part by businesses, and toward this end has launched a series of public policy measures covid-19) may in the long run lead to zero-sum games. Countries should and support initiatives. therefore try to see beyond their short-term interests. That includes supporting Digital Innovation Hubs (dih), collaborative initiatives • Internationalization and fdi attraction (i.e., calibrating incentives to national that act as centers for sharing and disseminating knowledge and resources priorities and linking them to domestic players; creating incentives for the concerning specifc areas. For instance, ceaga (a grouping of automotive development of closer, more resilient and sustainable value chains – i.e., companies in Galicia), focused on the Internet of Things and Artifcial Intelligence, what unctad (2020) calls resilience-seeking fdi. two technological areas that are crucial for Industry 4.0. The objective of this dih is to promote the “Factories of the Future” initiative, and has objectives in line These recommendations would necessitate certain changes in current policies, with several eu projects in this same area. Another dih is bioga, focused on which tend to be more focused on the short term, and more defensive in nature. the life sciences and big data. These collective initiatives are crucial, given that Although the panic induced by covid makes the current approach understandable, they aim to acquire critical mass in priority areas for advanced manufacturing. it would behoove policymakers to shift their focus to long-term competitiveness These initiatives seek to offer a wide array of services and resources in order to if their economies are to remain prosperous in a digital era. promote the digital transformation of companies, with hoped-for spillover and demonstration effects on the economy at large. Smes are potentially the main benefciaries of these projects. This is because they would never be able to access GALICIA these resources if they each acted individually. The dih are very much at the center of the Digital Europe Program 2021-2027, helping the region to attract Galicia is no exception to the above-described trends and patterns, opportunities important funding for digitalization and innovation. and challenges. A territory with a strong industrial tradition, and one comprising diverse sectors, Galicia is now facing the need to adapt to a new Other relevant areas being promoted are inter-cluster collaboration and cooperation techno-economic paradigm that requires the digitalization of processes and among companies, universities and other research centers. The purpose of this business models. Galicia as a region is a “moderate” innovator, according to would also be to have a signifcant impact on smes, and to help promote the the Regional Innovation Scoreboard of the eu (European Commission, 2019), culture of innovation that is vital to competitiveness in the global economy. lagging behind the European average in most variables. While it is true that Galicia’s innovation indices have improved over time, intensifying innovation More specifcally, and partially in response to the pandemic, the Xunta de Galicia efforts remains a major priority. launched the Plan for Digital Transformation of smes and for the Digitalization of Commerce. These initiatives recognized the particular diffculties of such actors, As is the case with similar territories in Europe, the Galician economy consists and the need to change approaches vis-à-vis commercial channels – in order overwhelmingly (over 90%) of small and medium enterprises (smes), and also to boost online sales, in a way that is in line with what was noted above about includes large numbers of microbusinesses. Hence, the growth of the region the “low-touch” economy. These measures represent steps in the right direction, depends largely on the performance of these frms. Such smes experience in their promotion of internationalization, new trade channels, and the use of additional diffculties when embarking on digital transformation, as they have innovative digital tools. fewer resources (i.e., fnancial and human capital) than their larger counterparts. Often, they lack funding and their equity structure is weak, especially at times A paramount challenge highlighted by the pandemic crisis relates to the future of a severe crisis like the one occurring now. of work. In this connection, public policies were also implemented to support technological solutions for facilitating remote work arrangements. Training The Xunta de Galicia (the governing body of the Autonomous Community of programs (i.e., upskilling/reskilling, so central for digital transformation) were Galicia) has recognized the need to promote the digital transformation of local also put in place. 164 | COVID-19 and its impact on digital transformation and businesses’ internationalization Ana Teresa Tavares-Lehmann | 165

Other relevant initiatives involve the digital transformation of the social economy and the promotion of entrepreneurship in rural areas (where the pandemic has actually led to opportunities for positive change).

A key argument of this paper was that internationalization of smes can be signifcantly helped by digital transformation, as the costs of internationalizing decrease (notably through the use of digital platforms). In this regard, the program “Galicia Exporta Dixital” aims precisely at helping companies to develop the following activities: diagnosing their export potential; preparing and implementing multi-channel internationalization plans; creating – or improving - their digital marketplaces and online catalogs; and also supporting the software acquisition needed to undertake digital transition.

All these measures supportive of internationalization and innovation involve a collaborative and partnership approach, and truly do represent the best path forward, allowing increasing numbers of Galician frms to thrive in the ever more competitive and volatile global economy. Apart from the cost/ risk reduction in internationalization, companies – after suffering from lack of demand – may, in the medium- to long-term, beneft from the shortening of global value chains generated by the pandemic shockwaves. This is something that raises the need for more local supply, and redundancies in value chains in order to decrease risks of supply shortages. This is a change that will in turn create an opportunity for more linkages between large multinationals and local companies, and that will lead smes to adopt a more cooperative stance, in order to be viable and effective suppliers.

In sum, Galicia faces the same challenges as other similar regions in Europe and is taking measures aimed at effectively meeting those challenges: human capital training; cooperation; inter-cluster linkages; technological upgrading, etc. The adoption of similar measures by the private sector will help determine the ultimate success of such policies. The banking sector, and groups like abanca, are also launching several instruments to support the Galician entrepreneurial fabric – particularly smes. This is of crucial importance, given that funding is indispensable for making possible signifcant investments in digital and international expansion. BASIC REFERENCES 168 | After the pandemic: Reﬂections and challenges for Galicia Basic references | 169

CHAPTER II

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CHAPTER XI

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Juan Carlos Escotet Rodríguez President of abanca. Master of Management Sciences from the University of Miami and graduated in Economics from the Universidad Católica Andrés Bello at Caracas

Francisco Botas Chief Executive Offcer (CEO) of ABANCA. Postgraduated degree in International Business Finance from the University of California at Berkeley and graduated in Economic Sciences, Business Administration, and Law from the Universidad Pon- tifcia de Comillas at Madrid

Alicia García-Herrero Senior Researcher at the European Bruegel Think-Thank, Chief Economist for Asia-Pacifc at Natixis, and Associate Professor at the Hong Kong University of Science and Technology. PhD in Economics from the George Washington University, BA in Economic Sciences from the Università Bocconi at Milan and graduated in Economic Sciences and Business Administration from the Universidad de Burgos 182 | After the pandemic: Reﬂections and challenges for Galicia Authors | 183

Fernando González Laxe Soledad Núñez Ramos Professor of Applied Economy and Director of the Maritime Studies University Member of the General Council and Executive Commission of the Bank of Spain. Institute of the Universidade da Coruña. Former President of the Xunta de Galicia PhD in Economics from the University of Minnesota and graduated in Economic (1987-1990). PhD and graduated in Economic Sciences and Business Sciences from Sciences from the Universidad Complutense de Madrid the Universidade de Santiago de Compostela Carlos Ocaña Pérez de Tudela Mauro F. Guillén General Director of funcas. PhD in Economics from the Northwestern University Professor of International Business Management at the Wharton School of The at Chicago and graduated in Economic Sciences from the Universidad de Zaragoza University of Pennsylvania and Adviser to the World Economic Forum. PhD from and the Universidad Autónoma de Barcelona the University of Yale and graduated in Sociology and Economic Sciences from the Universidad de Oviedo Xulio Ríos Director of the Galician Institute for International Analysis and Documentation Ainhoa Marín Egoscozábal (IGADI), member of the Advisory Board of the Casa Asia, and Director of the Senior researcher of the Real Instituto Elcano and lecturer in the Department of Chinese Politics Observatory. Graduated in Law from the Universidade de Santiago Applied and Structural Economics and History at the Universidad Complutense de de Compostela Madrid. PhD and graduated in Economic and Business Sciences from the Universidad Complutense de Madrid Ana Teresa Tavares-Lehmann Professor of Economics of the Universidade do Porto at Portugal, business manager Ignacio Martín Maruri and consultant and Former Secretary of State for Industry of the Government of Specialist in Adaptative Leadership and Organization Transformation, lecturer in Portugal. PhD and MSc in Economics from the University of Reading of UK and several university postgraduate programs. Senior Telecommunications Engineer Postdoctoral Studies in Internationalization of Foreign Direct Investment from the from the Technische Universität Darmstadt (Germany), Executive MBA from University of Strathclyde of UK Instituto de Empresa at Madrid and MPA from Harvard University

Pedro Antonio Merino García Director of Research and Economist Chief at Repsol. MBA from the Instituto de Administración de Empresas (IADE) at Madrid and graduated in Economic Sciences from the Universidad Autónoma de Madrid 184 | After the pandemic: Reﬂections and challenges for Galicia Bibliographic cards | 185

Citation of this volume An example for citation of a chapter

Escotet, M. A., Rego, V. and Jamardo, B. (Eds.) (2021). Botas, F. (2021). COVID-19: Circumstantial and structural After the pandemic: Reﬂections and challenges action. Spotlight on Galicia 2030. In Escotet, M. A., for Galicia. A Coruña: IESIDE Ediciones, 281 pages Rego, V. and Jamardo, B. (Eds.). After the pandemic: (bilingual edition). Reﬂections and challenges for Galicia. A Coruña: IESIDE Ediciones, pp. 21-39 (bilingual edition).

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