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

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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0143/01 0421702
ZNR UUUUU ZZH
R 111702Z FEB 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 4235
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3283

UNCLAS SECTION 01 OF 02 MADRID 000143

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/WE AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: EAGR EAIR ECON EFIN EINV ELAB ELTN ENRG ETRD
SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - FEBRUARY
4-8

MADRID 00000143 001.2 OF 002


Table of Contents:

ECON/ELAB: Record one-month jump in unemployment
ECON/EFIN: Banks report healthy profits
EINV/ENRG: Zapatero says EDF needs to negotiate to enter
Spanish electricity market
EAGR: EU policy to propel Spanish wine shift
EAGR/ETRD: French protest against agricultural imports from
Spain
ELTN/EAIR: AVE set to compete for travelers on
Madrid-Barcelona run
EAIR: Varig opens new route to Brazil


RECORD ONE-MONTH JUMP IN UNEMPLOYMENT

1. (U) Registered unemployment rose by 132,000, or 6.2
percent, in January, the largest one-month increase in the 21
years that records have been kept in their current form. The
month's increase was primarily concentrated in temporary
employment, but the permanent sector is likely to be affected
too; unemployment is predicted to worsen during 2008 as a
result of the slump in the construction and real estate
sectors. The deceleration of the economy appears to be
somewhat worse than had been expected a few months ago, and
some analysts now predict 2008 GDP growth of only 2.5
percent. Despite the recent increase, the unemployment rate
- 8.6 percent in the fourth quarter of 2007 - remains well
below the 11.5 percent rate when Socialists came to power in
2004. However, the number of registered unemployed has
increased to 2.26 million because of growth in the labor
force, including the arrival of approximately 2.5 million
immigrants. Opposition PP presidential candidate Mariano
Rajoy is using this decline to sway Spanish voters against
the present government by calling unemployment reports, "a
real drama." Others argue that despite slow employment
growth the economy is far from a recession or a "drama," but
that spurring growth and employment will require quick
government action, such as encouraging more public
investment. (EL PAIS, 2/5/08 and 2/6/08)

BANKS REPORT HEALTHY PROFITS

2. (U) Santander reported a 9 billion euro profit and BBVA a
6.1 billion euro profit for 2007. Out of 15 banks listed in
El Pais, only two reported losses: La Caixa and Banco
Sabadell. This is of course in stark contrast to some of the
big losses racked up elsewhere by Citigroup, Merrill Lynch,
UBS, Morgan Stanley, Bank of America, JPMorgan, HSBC,
Barclays and Societe Generale. (Comment: It appears to be
true that the Spanish banks were less exposed to U.S.
sub-prime related instruments in 2007 than many of their
foreign counterparts. However, given that most observers
believe that housing will face a tough 2008 in Spain, it will
be a distinct challenge for Spanish banks to do as well in
2008 as they did in 2007.) (El Pais, 2/7/08)

ZAPATERO SAYS EDF NEEDS TO NEGOTIATE TO ENTER SPANISH
ELECTRICITY MARKET

3. (U) At a February 6 KPMG event, Zapatero insinuated that
if EDF wants to get into the Spanish energy sector, i.e. buy
Iberdrola with Spanish construction giant ACS, it would have
to do so through a "process of good understanding."
(Comment: There has been lots of local press speculation
about EDF teaming up with ACS to launch a hostile takeover
bid of Iberdrola. Many commentators have noted the
discrepancy inherent in President Sarkozy's insistence that
Societe Generale remain in French hands while French national
champion EDF maneuvers to buy one of Spain's leading
companies, Iberdrola.) (El Pais, 2/7/08)

EU POLICY TO PROPEL SPANISH WINE SHIFT

4. (U) While Spanish wine producers, among the top five in
the world, have for years been shifting to higher-quality
wine production at the expense of table wines and wines for
distillation, the recent agreement to reform the European
Union wine policy will propel them to shift at a much greater
pace. The new EU wine policies maintain the same budget
levels; but shift spending emphasis from propping up
production for distillation, of which Spain has been a major
beneficiary, to promoting higher-quality wine production,
consumption, and marketing. The Spanish Government has said
that Spain, and Spain's producing regions, must invest the
money wisely, because they believe that more competition in
the wine sector is just around the corner when the Doha Round
trade negotiations are concluded. New-world wine producers

MADRID 00000143 002.2 OF 002


have already had tremendous success in the European wine
market, and lower tariffs associated with the conclusion of
the Doha negotiations will make them more price competitive
vis-a-vis Spanish wines.

5. (U) The Spanish government recently launched "Wine
Strategy 2010," which will encourage and help wine producers
become more competitive in European and third-country
markets, while potentially improving the sector's income,
long-term viability, and cachet worldwide. In that regard,
the new marketing emphasis of European wine-sector reform
will likely become a welcome complement to the Spanish
strategy. Recently the Spanish have ramped up marketing
efforts in the United States, Russia, and Asia. The U.S.
market is very attractive right now, because of the surge of
interest in Spanish foods and wines. The strength of the
euro vis-a-vis the dollar may hinder somewhat their efforts,
but they apparently consider the long-term potential gains
for the sector to outweigh the current monetary pressures.
Spanish exporters have more than doubled wine exports to
Russia during the last year, now exceeding French exports in
volume, while still trailing the French in export value.
They are also focusing on Japan, recently taking part in a
five-city tour to enhance the exposure and image of Spain's
diverse selection of wines.

FRENCH PROTEST AGAINST AGRICULTURAL IMPORTS FROM SPAIN

6. (U) French farmers detained, vandalized and destroyed
produce and wine in the South of France in protest of
agricultural imports from Spain. Members of the young
farmers group Jeunes Agriculteurs blocked and overturned
trucks carrying wine and produce at a toll station outside
Montpellier on Tuesday, spilling over 100,000 liters of red
and white wine in the hopes of causing authorities to take
notice of what they say are Spanish agricultural goods
treated with banned pesticides that enter France daily and go
unchecked. (20 minutos 2/7/08)

AVE SET TO COMPETE FOR TRAVELERS ON MADRID-BARCELONA RUN

7. (U) The long-delayed opening of high-speed rail (AVE)
service between Madrid and Barcelona appears likely to take
place in the next few weeks, before the March 9 elections.
The government has not yet announced a date, perhaps hoping
to avoid a repeat of the criticism it has faced for not
meeting previous deadlines, but trains are now making trial
runs. The over 200-mph train will set off a battle for
passengers with airlines; Iberia alone carries 8,000
passengers a day on its 60 shuttle flights between Spain's
two largest cities. Iberia officials have said they expect
to see a decline in volume but that they expect to hold their
own among business passengers, because their flights will
still be shorter than the train trip. Improving railway
infrastructure has been a major effort of the Zapatero
government, which has invested 21 billion euros - 70 percent
of it on the AVE lines - as the first part of a 15-year
project. The Madrid-to-Malaga and Madrid-to-Valladolid AVE
service opened in December have proven to be very successful,
with passenger numbers doubling on the Malaga line and
increasing by 75 percent on the Valladolid line. On the
Madrid-to-Seville route, where AVE service began in 1992, 80
percent of passengers now choose rail over air. Railway
officials say public subsidies will end by 2010.
Environmental benefits - trains produce less CO2 per
passenger-mile than planes - may give them another advantage
as the EU moves towards measures to make polluters pay the
cost of emissions. (El Pais 2/9/08, Guardian 2/2/08)

VARIG OPENS NEW ROUTE TO BRAZIL

8. (U) Brazilian airline Varig hopes to transport 7,000
passengers a month on its new route from Madrid to Sao Paolo
and Rio de Janeiro. The airline, acquired a year ago by
GLAI, added the new route in hopes of opening up a trade and
tourism market with Spain. (Terra 02/01/08)
LLORENS

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