Spain and Portugal: From Distant Neighbours to Associates

I first went to Portugal on holiday in the summer of 1974 shortly after the April revolution, and when I started to work for The Times of London in 1975, covering Spain’s transition to democracy, I used to go to Portugal from time to time. On one of those visits in 1977 I interviewed Don Juan, the grandfather of King Felipe, at his home in exile in Estoril. I was back in Estoril last year for the first time in many years, staying not far from where Don Juan lived in Villa Giralda in the for me appropriately named street Rua de Inglaterra. That visit gave me a dizzying sense of history, as I also know King Juan Carlos and Felipe.

I will now give you a broad brush summary of the relationship between Spain and Portugal.

A little history

Portugal lay under Spanish dominance between 1580 and 1640 and after the restoration of independence the two countries lived like ‘Siamese twins joined at the back’ for more than 300 years until they joined the European Union (EU) at the same time in 1986 and came face to face. The Spanish film director Luis Buñuel recounts in his memoirs that Portugal seemed further away for Spaniards than India, and for the Portuguese poet Rui Bello Madrid was one of the most ‘distant’ cities from Lisbon.

Portugal managed to remain free from permanent Spanish domination by belonging to different international alliances. The country could easily have gone the way of Catalonia, Andalusia and other regions absorbed by Castile into a united Spain. Portugal is often described as Britain’s ‘oldest ally’ –this goes back to 1386 when England allied itself permanently with Portugal after English archers helped to secure the Portuguese throne from the Castilians. This alliance was solidified when Catherine of Braganza married Charles II of England, and Charles then played a part in achieving Spanish recognition of Portugal’s independence.

There is a more than 200-year old dormant claim by Portugal to territories ceded to Spain around the town of Olivenza near the border with Elvas. Portugal does not recognize Spanish sovereignty over Olivenza and as a result the border between the two countries in the Olivenza area has never been clearly defined.

Even under the right-wing dictatorships of General Franco (1939-75) in Spain and António de Oliveira Salazar (1932-68) in Portugal the two countries ignored one another. Nevertheless, in March 1939, six months before the outbreak of the Second World War, and as the Spanish Civil War was ending, they signed a treaty of friendship to mutually protect their interests and independence.

Franco played a double game: he harboured ambitions of taking over Portugal with Axis help, but was happy to allay suspicions of his designs and also to provide a channel to the British in the event that the war went their way.

‘We were taught to hate Spain’, declared Major Vitor Alves, born in 1931 and one of the prime movers in the 1974 revolution that ended Portugal’s dictatorship (under Salazar’s successor Marcelo Caetano).

Spain and Portugal followed similar political and economic paths during the 20th century: Portugal deposed the monarchy in 1910 and declared a Republic (Spain followed the Republican route in 1931, which was cut short by its 1936-39 civil war); both countries had long dictatorships (1932-74 for Portugal and 1939-75 for Spain); both countries liberalised their heavily protected economies to varying degrees (Spain began in the 1950s and Portugal not really until the 1970s), both joined the then European Economic Community in 1986 and both were founder members in 1999 of European Monetary Union (the euro).

Spain and Portugal are part of the same military and economic alliances (Nato and the EU) and Portugal no longer feels threatened, at least militarily. Nevertheless, the Portuguese still mistrust Spain, epitomised in their still popular saying: ‘Neither good winds nor good marriages come from Spain’. This is because of Spain’s economic invasion of the country as a result of EU membership. All the more reason then why Portugal was jubilant when its football team knocked Spain out of the 2004 Eurocup.

On the international front, Spain and Portugal, once former rivals in Latin America (Brazil, the most populous country, was under Portuguese rule for three centuries), work together in the Iberoamerican Community of Nations, founded in 1991, which holds annual summit meetings of heads of state and government.


Comparative Indicators, Spain and Portugal (2015)
Spain Portugal
Population (millions) 46.4 10.6
Nominal GDP (US trillion) 1.47 230bn
Per capita GDP ($) 33,000 22,000
Per capita GDP (EU-28 = 100), 2014 91 78
Unemployment rate (%) 20.9 12.0
(*) Production workers in the manufacturing sector.
Source: Eurostat, Economist Intelligence Unit and Confederation of Swedish Enterprise.

Spain is the main supplier of goods to Portugal (around one-third of Portugal’s total imports). Spain’s exports more to its tiny neighbour (7.2% in 2015) than to the whole of Latin America (5.9% of the total in the same period) and to the United States (4.6%). Portugal, a natural extension of Spain’s domestic market, is Spain’s fifth largest client after France, Germany, Italy and the UK.

Portugal, in turn, supplies Spain with 4% of its imports, the sixth largest amount.

Spain runs a large trade surplus with Portugal: more than €6.5 bn in 2015.

Spain’s Main Exports to Portugal

Motor industry components and accessories
Fuel and lubricants
Plastic raw materials and semi manufactures
Computer hardware
Source: ICEX.

Portugal’s Main Exports to Spain

Chemical products
Motor industry components and accessories
Bottles and packaging
Wood and paper semi-manufactures
Source: ICEX.

Around 3,000 Spanish companies operate in Portugal. Several companies have strong positions in the Portuguese economy, most notably Santander, Spain’s largest bank, which acquired the Totta Group (market share of 11%) in 2000 and last month acquired from the state the failed Banco Internacional do Funchal (Banif) for €150 million. The purchase of Banif increases Santander’s market share in loans and deposits in the country from 12% to 14.5% and makes it the second-largest privately-held bank after BCP-Milenium. Banif is the main bank in Madeira and the Azores.

Adding in Bankinter (which acquired Barclays’ Portuguese unit last year), Popular and BBVA, all of which own banks in Portugal, and the total market share of Spanish banks in Portugal is around 20%. According to some analysts, the European Central Bank regards Portugal, for banking purposes, as a Spanish region and was happy for Santander, the euro zone’s second largest bank and one of the global systemically important banks (meaning it is too big to fail), to acquire the failed Banif.

BBVA, Spain’s second largest bank, bought Lloyds Bank in Portugal in 1991. Lloyds had been in Portugal for 128 years and was known simply as o banco inglês, the English bank. For a bank from Portugal’s oldest ally to decide to pull out was a bad enough blow for the government. Selling it to Portugal’s historical enemy was tantamount to being stabbed in the back by your best friend.

While Santander has been strengthening its presence in Portugal, BBVA has been scaling it back.

Other big Spanish companies in Portugal include El Corte Inglés, the giant department store chain which chose Lisbon as its first venture outside Spain; Prosegur (security) and Sacyr which owns Somague, the largest construction company;. Cepsa and Repsol have petrol stations. Spanish fashion stores like Zara, Massimo Dutti and Pull & Bear, all owned by the Inditex group, have clustered around the landmark Corte Inglés store creating an ‘Avenida de Espanha’ in the heart of Lisbon, a symbol of Spanish business prowess. Inditex has 339 stores in Portugal at the latest count.

Spanish direct investment in Portugal averaged €1.15 billion a year between 1993 and 2003 compared to €415 million of Portuguese investment in Spain during the same period. Between 1994 and 2004 Spanish investment in Portugal was just over €1 billion a year and Portuguese in Spain €375 million per annum. In the first nine months of 2015, Portugal’s direct investment in Spain was down to €41.4 million compared to Spanish investment of €222 million in the same period.

The strong Spanish presence in the context of the single European market is a sensitive issue as it plays on Portuguese fears that they are being swallowed up by their neighbour. Furthermore, most of the investment is in highly visible sectors such as banking and construction. Spanish net direct investment in Portugal between 1992 and 2002, in the first wave, amounted to €6.4bn, compared with €5.1bn for the UK, €4.2bn for the Netherlands and €2.4bn for Germany.

The fears may be exaggerated, but they are the logical consequence of a small country sharing a border with a much larger and more powerful one. Fifty four per cent of Portugal’s territory borders Spain.

In what was known as the ‘patriots’ manifesto’, 40 top economists and businessmen warned in 2003 of the danger of Portugal’s ‘decision-making centres’ –a euphemism for its biggest companies– being moved abroad. Jorge Sampaio, the then president of Portugal, commented that ‘without centres of decision-making, there is no nation’. Newspapers at that time abounded with headlines like ‘Spanish Armada’, whenever there is a major Spanish acquisition, and magazine covers d the border with Spain and mad Madrid the capital of Portugal. One Portuguese magazine summed up the situation by putting the following on its cover: ‘We go shopping in El Corte Inglés, buy our clothes in Zara, book our holidays at Viajes Halcón and get our glasses at Multiópticas. Even our savings are in Spanish banks’. The weekly newspaper Expresso ran a section called ‘The Spanish Question’ during February 2004 with all manner of opinions for and against (mainly the latter) the hypothetical idea of Portugal losing its independence and becoming part of Spain. I believe these fears no longer exist. Perhaps our Portuguese guests can enlighten me.

The flow of trade and investment, however, is not all one way. Just as Portugal is Spain’s largest market for its exports, so Spain is also Portugal’s main export market . More than 300 Portuguese companies operate in Spain. The main ones include Sonae, which owns Tafisa, the leading wood-based board company (with companies in Germany, the UK, France and Africa), Galp, which has more than 240 petrol stations, the transport company Luís Simões and Electricidade de Portugal (EDP), which has acquired Hidrocantábrico, Spain’s fourth largest power company.

Portugal’s main banking presence in Spain is through Caixa Geral de Depósitos, which acquired Banco Extremadura from BBVA in 1991, Banco Luso Espanhol from Chase Manhattan in 1991 and Banco Simeón from Argentaria in 1995. The combined market share of the three banks is small. The failed Banco Espírito Santo, which was split into two banks in 2014, is or was also present in Spain. I am not sure of the current situation.

The pace of integration of the two economies was stepped up when the two countries began to operate in July 2007 the much-delayed Single Iberian Electricity Market (known as MIBEL). The original start up date was January 2003. Spain is western Europe’s fifth largest power market and Portugal the eleventh largest. Together, they form a market slightly larger than Italy’s. Both markets are reasonably similar as regards generation. The Spanish market is more diversified as it has nuclear energy.

Development of an Iberian gas hub has been slow. The Iberian natural gas and Liquid Natural Gas market has around 7.5 million consumers. Neither the Spanish nor the Portuguese gas system has significant gas production of their own, which means that virtually all Natural Gas consumed in Iberia is imported, either via pipeline or via Liquid Natural Gas tankers.

The Spanish system is interconnected with France, with Algeria (via the Medgaz pipeline) and with Morocco (via the Maghreb pipeline), while the Spanish and the Portuguese systems are interconnected via the Badajoz and Tuy pipelines.

The project with the greatest potential impact on the integration of Spain and Portugal is the building of high-speed rail links between the two countries if it ever happens. This is something that has been talked about for years. As someone who loves Lisbon, I hope it is built during my life time. I first went to Lisbon in 1974 on the overnight train and I remember how long it took. A high speed train between the two capitals would cut the travel time from 10 to three hours. Madrid and Lisbon are already linked by a dual carriageway that goes virtually all the way between the two capitals.

The economic progress made by both countries, as measured by per capita income, has been strong over the past 50 or so years. Spain’s per capita income rose from 60% of the EU-15 average in 1960 to a peak of 103% of the EU 28 average in 2007 and Portugal’s from 40% of the EU-15 average to a high of 81% of the EU 28 average in 2009. Both countries’ living standards have declined in recent years as they have been hard hit by varying degree of recession. Booth are now slowly recovering.

As well as a much larger economy, Spain also has the advantage of a more dynamic private sector than Portugal’s. This is not to belittle the efforts that Portugal has made in some quarters to create stronger private companies. The sheer size of the Spanish economy makes it easier for Spanish companies to become bigger through mergers and acquisitions and so attain critical mass and economies of scale. Spanish companies have been much bolder in venturing abroad, most clearly exemplified by the massive direct investment abroad.

The Spanish economy is six times larger than Portugal’s, but Spanish direct investment abroad is 11 times higher at $674 billion, according to the latest UNCTAD figures.

Galicia and Northern Portugal

Nowhere are the ties between Spain and Portugal stronger than between Galicia and Northern Portugal. The two regions, on either side of the border, with a shared history, culture, language (to some extent) and economy, particularly in fisheries, form what is called a Euro-region. Their combined population is more than 6 million. They work closely together on various projects which have helped to boost the development of two of the poorest regions of the EU-15 and overcome their peripherality on the edge of Europe.

Both regions benefited a lot from EU structural fund as their per capita GDP was less than 75% of the EU average (known as Objective 1 regions).

The relationship between Galicia and North Portugal was strengthened in 1991 with the creation of a Working Community between the two regions. The so-called Territorial Co-operation Communities combine all the Galician town councils and Portuguese municipal councils along the border. There is also official co-operation between trade unions, consumer institutes and employers’ associations. As an autonomous region Galicia is able to negotiate some matters directly with the Portuguese government in Lisbon without having to refer them to Spain’s central government in Madrid.

Both regions have dynamic private sectors (Galicia, for example, is the home of the world-renowned fashion group Inditex and Porto is the bastion city of Portuguese entrepreneurs).

Lastly, there are some similarities in the political situation. The centre right Portugal Ahead coalition won the most seats in last October’s parliamentary election, but lost its absolute majority, as did Spain’s Popular Party in last December’s election. This led to the formation in Portugal of a minority Socialist government backed by Communist, Green and Left Bloc parties. The Left Bloc is the sister party of Greece’s anti-austerity Syriza and thus an ally of Spain’s Podemos. Pedro Sánchez, the Spanish Socialist leader, went to Lisbon last month to meet his political counterpart, Prime Minister Antonio Costa, and learn for himself how the coalition was formed. Whether Sánchez, who has been entrusted with forming a government, is successful in emulating Costa and forming a so called progressive coalition remains to be seen. It is a question we would all like answered soon.