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Cablegate: Madrid Weekly Econ/Ag/Commercial Update Report -

VZCZCXRO1687
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0981/01 1411641
ZNR UUUUU ZZH
R 211641Z MAY 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 2582
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2730

UNCLAS SECTION 01 OF 02 MADRID 000981

SIPDIS

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 -
MAY 14

MADRID 00000981 001.2 OF 002


EINV: First quarter shows economy increased by 4%
EINV/ETRD: Lower growth forecasted as early as 2008
EINV/ECON: Telefonica sells Endemol for 2.6 billion euros
EINV/ECON: Zapatero to visit Panama, possibly seeking
cooperating tax haven
EINV/ETRD: AMCHAM survey results - US investors leery of
investing in Spain
ELAB: Galicia workers strike for new contracts


SPANISH ECONOMY CONTINUES TO GROW

1. (U) Spanish economy grew by 4% on an annualized basis
during the first quarter of 2007, according to the National
Institute of Statistics (INE). The composition of the growth
(exports, domestic demand, construction etc.) will be
released in the next couple of weeks. Analysts will be
looking to see if Spanish exports are increasing or if the
fragile construction sector remains the engine of growth.
(Comment: Recent stock market jitters probably came too late
in the quarter to have an impact on the figures. It will be
interesting to see if growth can be sustained in the
subsequent two quarters. Observers remain skeptical that
Spain can maintain this pace in growth given productivity
problems and low competitiveness in general.

MORGAN STANLEY FORECASTS LOWER GROWTH STARTING IN 2009, MAYBE
EVEN IN 2008

2. (U) Morgan Stanley analyst Eric Chaney has three scenarios
for the Spanish economy. The most pessimistic one says
Spanish growth will average 2% a year between 2008 and 2017.
Chaney talks about a possible recession in 2009 as well.
Why? European Central Bank interest rate hikes responding to
French/German salary increases; bankruptcies in the
construction sector; and a global recession sparked in part
by increased protectionism. The first and third of Chaney's
factors are outside of Spanish control. The other two
scenarios contemplate softer landings but still significantly
slower growth. (Comment: The reality is that everybody knows
that Spain's construction-led growth model cannot last
indefinitely. The issue is how much longer it will last and
more to the point, when does Spain stop performing above the
Eurozone average? For President Zapatero, who has to fight
parliamentary elections by March 2008 at the latest,
hopefully not for a year or so.) (Expansion, May 18, 2007)

MEDIASET AND TELE 5 BUY ENDEMOL

3. (U) Berlsusconi-controlled Mediaset and Tele 5 buy TV
producer Endemol from Telefonica for Euros 2.6 billion: This
acquisition means that in addition to Berlusconi owning
Spain's most profitable TV channel, Tele 5, Berlusconi now
also owns Spain's biggest TV producer, Endemol. Among other
programs, Endemol produces the Spanish version of the hugely
popular "Big Brother".

COOPERATING TAX HAVEN STATUS FOR PANAMA?

4. (U) Spanish Construction Companies want GOS to declare
Panama a "cooperating tax haven" in order to compete for
contracts for canal expansion: President Zapatero's Economic
Adviser, David Taguas, is involved in negotiating such status
for Panama and reportedly met with Panama's Vice President to
discuss the matter. President Zapatero will visit Panama on
July 17. There are procedures worked out by the OECD for
obtaining "cooperating tax haven" status. (Comment: Given
the Euros 4 billion at stake, it is understandable that
Spanish construction companies are pressuring the Spanish
government on this matter.) (El Pais, May 21, 2007)

AMCHAM REPORTS TENTATIVE ATTITUDE FOR NEW US INVESTMENTS IN
SPAIN

5. (U) AmCham "Barometer" of American companies reports
cautious attitude towards new investments in Spain: According
to the AmCham survey, which is conducted every year, American
firms do not see much scope for increasing their investments
in the automotive, chemicals or metallurgy sectors. The
survey finds limited opportunities in consulting and less
specialized services. Government bureaucracy and the
inflexible labor market are the U.S. firms main gripes.
(Comment: There is no doubt that U.S. firms will invest less
in manufacturing in Spain over the coming years as Spanish
wages have mostly caught up with their richer European
neighbors and productivity lags in Spain. What this survey
does not capture, however, is whether U.S. firms are
investing less in general overseas. Moreover, it does not

MADRID 00000981 002.2 OF 002


capture the relatively new phenomenon of massive American
portfolio investment in Spanish firms, which is likely to
continue.) (Expansion, May 21, 2007)

PROTEST IN VIGO

6. (U) Shipyard workers in Vigo, Galicia, continued their
almost two week long strike to protest the high ratio of
workers employed via temporary contracts (a breach of an
agreement from the previous year). The protest turned
aggressive this week with laborers blocking streets and
setting fires to tires and trash cans. On Tuesday, the
protesters broke into the Council headquarters throwing
hundreds of files out of the windows.
LLORENS

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