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Cablegate: Madrid Weekly Econ/Ag/Commercial Update Report

VZCZCXRO1058
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0717/01 1091749
ZNR UUUUU ZZH
R 191749Z APR 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 2307
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2627

UNCLAS SECTION 01 OF 02 MADRID 000717

SIPDIS

SENSITIVE
SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: BEXP EAGR EAIR ECON EFIN EIND ETRD TBIO SP
EINV, UK
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT


MADRID 00000717 001.2 OF 002


ECON: State of Economy message - positive spin for Zapatero
EINV: Manuel Conte Apparently out Soledad Abad probably in at
the CNMV
SENV: Spain struggles with Kyoto
EAGR/EINV: Cotton subsidies and DOHA

ZAPATERO EXTOLS SPANISH ECONOMIC SUCCESS AT MADRID STOCK
EXCHANGE ON 04/16/07

1. (U) In what was billed by the GOS as the first annual
"State of Economy" message, Zapatero praised the performance
of the Spanish economy and released a report. He
deliberately did not choose parliament as the venue for
delivering the message as he reportedly wanted to avoid
criticism from the opposition. Zapatero's Economic Office
came up with this idea and based the initiative loosely on
our annual "Economic Report of the President." Zapatero's
Economic Adviser, David Taguas, is coming to the Embassy
April 23 to brief the Ambassador and Econ Section on the
report. Zapatero's speech was criticized widely in the
Spanish press as too triumphalist and as not focusing on the
vulnerabilities of the Spanish economy. The Financial Times
4/18/07 lead editorial title captures the essence of this
criticism: "Vulnerable Spain's economy needs reform - It is
not enough for Zapatero to celebrate economic success." As
the FT points out, it is natural that Zapatero is trying to
make political capital out of the continuing Spanish boom.
But: "Keeping a lid on spending is a necessary but
insufficient policy; in reality, the Socialists appear to see
virtue in doing nothing." The FT posits that low eurozone
interest rates, employment creation and the construction
boom, coupled with very low productivity growth, a weak
technology/education base, and the second largest current
account deficit in the world is a dangerous combination.
(Comment: The critics undoubtedly focus on the right economic
factors, but, given that the IMF forecasts continued high
growth in 2007 and 2008, Zapatero the politician is going to
continue to extol the positive, even though he rejected
"exaggerated optimism, because self-satisfaction is a
conservative trait." The problem for the critics is that
although they are unquestionably right that Spain's current
growth model is not sustainable indefinitely, it appears to
have some life in it yet. And the debate continues over how
international events will spill over into Spain. One analyst
suggests that in addition to European Central Bank interest
rate hikes putting a damper on Spanish housing, the mortgage
market in Spain will be affected by the fact that lenders are
taking a second look at the vulnerabilities associated with
the international securitization of mortgages - this analyst
says mortgage lending in Spain in recent years has been made
possible by international securitization - in part because of
what happened in the American sub-prime market, such
securitization may be less available in the future. Again
though, this risk does not appear to pose an immediate threat
to the economy. (Financial Times, 4/18/07; Expansion,
4/16/07)

NEW NATIONAL SECURITIES MARKET PRESIDENT

2. (U) Speculation that Departing National Securities Market
(CNMV - SEC equivalent) President Manuel Conte to be Replaced
by Finance Minister Chief of Staff Soledad Abad: Abad is
known to the Embassy as a hard-working and highly competent
official. She is considered closer to Finance Minister
Solbes than to President Zapatero. We have heard speculation
from other sources as well that Abad might get the job.
(Expansion, 4/18/07)

GREENHOUSE GAS EMISSIONS MAY HAVE FINALLY STOPPED GROWING

3. (SBU) Spain has been the EU's worst offender when it comes
to compliance with the Kyoto Protocol. Spain's 2005
emissions were 52 percent above 1990 levels, while Kyoto
calls for Spanish emissions to be no more than 15 percent
over 1990 levels by 2012. But the steady growth of Spanish
emissions may have finally peaked. According to a Spanish
labor union/NGO study, Spanish greenhouse gas emissions in
2006 dropped from 52 above 1990 levels to 48 percent above
1990 levels. This drop, if confirmed by official Spanish
Government figures, suggests that Spain's Kyoto compliance
plan is not as wildly unrealistic as it first appeared.
Spain's current plan calls for reducing emissions to 37
percent above 1990 levels by 2012. The other 22 percent
reduction (required to reach the Kyoto target of 15 percent
above 1990 levels by 2012), would come from buying emissions
credits on the EU carbon market and from gaining carbon
credits via development projects consistent with Kyoto's
Clean Development Mechanism. Reasons for the reduction

MADRID 00000717 002.2 OF 002


include: nuclear power plants that suffered fewer service
interruptions in 2006 versus 2005, higher than average
rainfall that resulted in a greater contribution of hydro
generated electricity, and the first indications that Spain's
heretofore out-of-control electricity use growth rate may
have finally stabilized. While there is a case to be made
that Spain's greenhouse gas emissions are finally stopping to
grow and leveling out, it is harder to demonstrate that
serious reductions (e.g., to 37 percent above 1990 levels)
can be obtained without significant changes to the Spanish
electricity generation mix. The continuing move from oil to
natural gas (combined cycle) plants will help, but will not,
according to most observers, be enough in and of itself. The
GOS is betting on an increased contribution from renewables,
but its targets, if met, will not result in a significant
drop in greenhouse gas emissions. Most observers believe
that Spain will remain seriously out of compliance with the
Kyoto unless it opts to construct more nuclear power plants.
And that remains a political nonstarter, at least for now,
for the Zapatero Government. Environment Ministry officials
privately admit that Spain will never comply with Kyoto but
underscore their willingness to induce economic pain to get
Spain as close to compliance as politically possible.

DOHA AFFECTS COTTON EXPORTS

4. (U) In recent years, cotton production and export
subsidies provided by "rich" industrialized countries have
become the focal point for "us vs. them" negotiations on
agricultural subsidies in the Doha Development Agenda Round
of negotiations at the World Trade Organization. The
European Union (EU) has effectively dodged the intense
criticism showered on the United States because Europe was
reforming its cotton subsidy policies.

5. (U) In response to that reform, Spanish cotton farmers
dramatically cut their production during Marketing Year (MY)
2006 (the first year of reform). Farmers reduced their
plantings by about 25 percent, and harvested even less
because they chose to minimize variable costs (fertilizer,
irrigation, and weed control) leaving about 9,000 hectares
un-harvested. As a result, during MY 2006 Spanish farmers
produced and exported about 60 percent less cotton than the
previous year. And, while it is too early to provide a
definitive summation of MY 2007, we do expect that Spanish
cotton farmers will continue to reduce harvested cotton area,
resulting in less cotton to export to the world market where
it would have competed with cotton grown by poor African
farmers.
Aguirre

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