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Cablegate: Madrid Weekly Econ/Commercial Update April 5-11

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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0407/01 1021404
ZNR UUUUU ZZH
P 111404Z APR 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 4594
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3387

UNCLAS SECTION 01 OF 02 MADRID 000407

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ELTN PGOV SENV SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL UPDATE APRIL 5-11


MADRID 00000407 001.2 OF 002


Table of Contents:

1. ECON/PGOV: Zapatero Announces Economic Measures During
Investiture Debate
3. ECON: IMF, BBVA Revise Growth Projections Down, Economy
Top Concern.
4. ECON/EFIN: Housing Downturn Continues to Hit Construction,
Real Estate
5. ECON: Per Capita GDP Still Below Italy's After All
6. ECON/ELTN: Spain Leads in EU Transportation Project Delays
7. SENV: Rain in Spain not Falling on the Plain -- or
Anywhere Else


ZAPATERO ANNOUNCES ECONOMIC MEASURES DURING INVESTITURE DEBATE

1. (U) The PSOE leader, who was elected President on Friday,
April 11, with the votes of the PSOE's plurality of seats,
discussed the economy in the April 8 investiture debate. He
said the next two years would see lower growth and higher
unemployment, but he added that Spain would return to higher
growth rates in the two years afterwards, i.e. during the
second half of the four-year legislature. He called the
slowdown a "deceleration" and avoided the use of terms
preferred by the opposition conservative PP party such as
"crisis" or "recession." He announced a package of planned
measures to address the economic problems of the next two
years. They include the following actions.

-A euro 400 income tax rebate for workers, retirees, and
self-employed individuals - this was a widely publicized
election promise.
-Value-Added-Tax refunds for companies will be paid more
quickly.
-Additional tax incentives for home improvements.
-Public works contract awards will be expedited.
-Stimulate improvements in buildings (presumably "green"
improvements in many cases).
-Public guarantees to ensure continued bank credits for
low-income housing.
-Programs to create construction jobs for unemployed people.
-Incentives for businesses to employ women between the ages
of 45 and 60.

2. (SBU) Other proposed measures related to the economy
included incentives for immigrants to return to their home
countries and a somewhat more open attitude towards
nuclear-generated electricity. The opposition criticized the
package as too little too late and as not containing
meaningful structural reform. (Comment: The opposition has a
point, although the PP has not offered detailed structural
reform proposals. Spain needs additional labor market
reform, better education, more investment in R&D, more
competition in factor markets such as energy, and probably
lower corporate taxes. Given Zapatero,s promise to continue
to increase spending on social programs during the next four
years, it is difficult to see how all of these different
needs will be met adequately. Moreover, Zapatero,s many
proposals with respect to construction fly in the face of the
widely agreed upon need to wean Spain away from its
overreliance on construction as the engine of economic
growth.)(Expansion, 4/9/08)


IMF, BBVA REVISE GROWTH PROJECTIONS DOWN, ECONOMY TOP CONCERN

3. (U) The IMF revised its 2008 growth forecast for Spain
down to 1.8 percent and now anticipates 1.7 percent growth in
2009. BBVA revised its forecasts down to 1.9 percent for
2008 and 1.4 percent in 2009. The pesimissm may be affecting
public concerns. In the March "Spain Today" poll, 68 percent
of Spaniards thought the economy should be the next
government,s top priority, while terrorism and immigration
were cited by the second and third largest percentages. (El
Mundo, 4/10/08; BBVA report; Expansion, 4/5/08)


HOUSING DOWNTURN CONTINUES TO HIT CONSTRUCTION, REAL ESTATE

4. (U) Real estate and construction companies are continuing
to face difficulties. Contrary to the U.S. situation, it is
not so much that homeowners are defaulting on mortgages, but
rather that construction companies and real estate developers
risk default for billions of euros in loans for unsold
properties. The extent of the problem is not fully known,
and the good news is that many of these troubled companies
appear to be working with their banks to restructure their
loans. However, a recent study produced by a local insurance
firm notes that that 119 real estate and construction
companies filed for bankruptcy in the first quarter of 2008,
compared to 48 in the same period of 2007. This 147 percent

MADRID 00000407 002.2 OF 002


increase in filings was much greater than the 42 percent
increase in filings by companies outside the sector.
(Expansion, 4/9/08)


PER CAPITA GDP STILL BELOW ITALY'S AFTER ALL

5. (U) Revised IMF/World Bank estimates of countries,
purchasing-power-parity (PPP) GDP show that Spain,s per
capita GDP has not passed Italy,s after all. At the end of
last year, EC information based on earlier IMF/WB estimates
indicated that Spain had passed Italy in 2006. President
Zapatero declared this &a unique historic event,8 and
Italian PM Prodi questioned the data. The revised GDP
estimates and new population estimates show Spain's 2007 PPP
per capita GDP as usd 30,120 and Italy's as usd 30,444. With
neither economy expected to grow much this year or next and
Spain,s population continuing to grow faster than Italy,s,
Spain is not expected to pass Italy until 2010. (El Pais,
4/10/08)


SPAIN LEADS IN EU TRANSPORTATION PROJECT DELAYS

6. (U) According to a study commissioned by the European
Parliament, Spain is the EU country that has experienced the
most severe delays in completing major EU transportation
projects. Two major projects in particular have suffered a
10-year delay each: the cargo rail line project to connect
Sines (Portugal), Madrid, and Paris and the high-speed rail
line between France and Spain. These projects are now
scheduled to be completed in 2010. The study futher notes
that implementation has been hindered by insufficient
financing and other administrative reasons. (El Pais, 4/8/08)


RAIN IN SPAIN NOT FALLING ON THE PLAIN -- OR ANYWHERE ELSE

7. (U) Despite some rain this week, Spain is experiencing one
of its worst droughts since the 1940s. For the six-month
period from October 2007 through March 2008, rainfall in
Spain was 40 percent below average. Particularly severe
along the Mediterranean coast, the drought is affecting
farmers, hydropower generators and consumers. The WSJ Europe
reported that the drought could reduce vegetable production
in some areas by as much as 30 to 40 percent. Spain produces
nearly half of the oranges grown in Europe, and Valencia,
Spain,s largest citrus-producing region, expects a
significant reduction in overall production. The region of
Catalonia began imposing water restrictions in February,
prohibiting the use of potable water for washing cars or
filling swimming pools. The Financial Times reports that
Barcelona will begin importing water by ship in May from
southern France. Barcelona,s reservoirs are only at 22
percent of capacity; additional restrictions could be imposed
if they fall below 20 percent. The situation has caused
political trouble, with President Zapatero at odds with Jos
Montilla, the Catalan regional president, over Zapatero,s
decision to prohibit the diversion of water from the Segre
river, a tributary of the Ebro. (WSJ Europe, Financial Times)


AGUIRRE

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