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Cablegate: Senator Shelby Meets Spanish Economics Officials

This record is a partial extract of the original cable. The full text of the original cable is not available.

061121Z Apr 05

UNCLAS SECTION 01 OF 02 MADRID 001316

SIPDIS

FOR H AND EUR/WE

E.O. 12958: N/A
TAGS: ECON PREL PGOV SP
SUBJECT: SENATOR SHELBY MEETS SPANISH ECONOMICS OFFICIALS


1. Summary: Senator Richard Shelby met separately in Madrid
March 28 with two high-ranking Spanish government officials
in the government,s two ministries dealing with economic and
finance issues. The Senator and his hosts discussed the
current state of the Spanish economy, the impact of EU
enlargement on Spain, the long-term impact of the EU,s
recent agreement to modify its stability pact, how Spain and
the U.S. can remain competitive economically with China and
India, and the relative costs of health care in Spain and the
U.S. End summary.

2. Senator Richard Shelby met separately in Madrid March 28
with two high-ranking Spanish government officials in the
economics and finance arenas: Miguel Angel Fernandez Ordonez,
secretary of state for finance and budget in the Ministry of

SIPDIS
Economy and Finance, and Pedro Mejia Gomez, secretary of
state for tourism and commerce in the Ministry of Industry,
Tourism and Commerce. Senator Shelby was joined in both
meetings by two Banking, Housing and Urban Affairs Committee
staffers, Mrs. Shelby, embassy,s economics counselor, poloff
and military escort.

--------------------------------------------
Fernandez: Stability Pact Least of All Evils
--------------------------------------------

3. Fernandez opened the first meeting by discussing EU
enlargement. He said Spain is facing challenges brought on
by an enlarged market that includes countries with lower
labor costs. In his view, though, this will be good for
Spain and rest of the EU in the end, because open markets and
economies are by their nature good. One clear disadvantage
enlargement brings for Spain, however, relates to EU funds.
In recent years more EU common funds went to Spain for
infrastructure and other improvements than to any other EU
member. Spain had been receiving about 1 percent of its GDP
in EU funds. With enlargement, Spain will go from being a
net recipient of funds to a net donor. Fernandez said Spain
hopes to make the change gradually.

4. Senator Shelby asked Fernandez what the biggest challenge
is facing the Spanish economy. Fernandez replied that it was
not having its own currency to devaluate to remain
competitive. Instead, Spain is focusing on education,
research and development and technology to increase
productivity, which is the only way Spain can stay
competitive. On the EU,s new stability pact agreement,
Fernandez thought the agreement reached was the least of all
evils. In the end, the 3 percent figure is much lower than
in other economies like the U.S. or Japan.

--------------------------------------------- ---
Mejia: EU Monetary Policy Not Designed for Spain
--------------------------------------------- ---

5. Mejia began his meeting with the Senator by explaining
that the Spanish economy is affected by many of the same
forces that impact the U.S. economy, including a substantial
trade deficit. EU monetary policy, said Mejia, is currently
designed for a country like Germany that has low domestic
demand, not Spain, which has high domestic demand. Spiraling
oil prices and a weak U.S. dollar resulted in a trade deficit
in January 2005 that was 50 percent higher than the same
month in 2004.

6. The Senator said that in the U.S. we have a high trade
deficit and budget deficit, and have decided to attack the
latter first by trying to live within our means. The U.S.
economy overall is sound, however, and small and medium
businesses are the growth engine in the U.S.

7. Mejia then commented that the Spanish government wants to
increase exports from Spain to the U.S. Spain has put the
U.S. at the top of a list of nine countries to target for
increased exports. The environment for stable businesses in
the U.S. is excellent right now, and Spain wants to take
advantage.

8. The Senator asked Mejia what he thought of the stability
pact agreement. Mejia did not believe the agreement would
have any long-term negative impact on the EU. In fact, it
was probably a net positive because it showed the EU could
deal with changing circumstances. On the whole, the EU is
doing extremely well economically even given a variety of
challenges like German reunification, and is much better off
than most people would have predicted 20 years ago.

9. Both agreed that China and India will be major
competitors for the U.S. and EU for many years to come.
While neither Spain,s nor the U.S.,s labor market will be
as flexible as China,s or India,s, the EU and U.S. can use
their technological advantage to increase productivity, which
in turn will help them counter China,s and India,s lower
costs of labor.

10. Senator Shelby observed that 56 percent of the U.S.,s
budget goes to public expenditures like Medicaid, and asked
what the comparable number was for Spain. Mejia admitted he
did not know, but explained that in Spain medical costs are
much lower than in the U.S. because the state is the only
purchaser of medical services. The government uses its
purchasing power to get the best possible prices on
medications and medical services for the citizens. The
Senator commented that it is the lack of competition for
medical services in the U.S. that has lead to the enormous
cost of health care. Medical services in the U.S. are not
subject to the laws of supply and demand.

11. Senator Shelby's staff has approved this message.


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