The 35-year-old defender became a free agent at the end of last season after his contract was not renewed by the Citizens, despite the fact that he featured 31 times for the club last season.
The centre-back, who has 50 caps for Argentina, penned a one-year deal with the Periquitos and becomes the sixth new arrival of the off-season as they look to improve on their 13th place last season.
Demichelis won the Premier League and the League Cup twice in three seasons with City and will now begin the next, and perhaps final, chapter in his illustrious career at Espanyol.
He is no stranger to La Liga having spent two seasons with Malaga and between 2011 and 2013, and also joined Atletico Madrid for two months before moving to Manchester City without playing a single match for Atleti.