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

VZCZCXRO3230
RR RUEHRN
DE RUEHMD #1902/01 2741151
ZNR UUUUU ZZH
R 011151Z OCT 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 3534
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3091

UNCLAS SECTION 01 OF 03 MADRID 001902

SIPDIS

SIPDIS

EUR/WE, EEB/EFD/OMA

E.O. 12958: N/A
TAGS: ECON EFIN EIND ENRG ETRD SP EINV EAGR SOCI
ELAB
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
SEPTEMBER 24-28


MADRID 00001902 001.2 OF 003


Table of Contents:

ECON: 2008 budget submitted to parliament
ECON: OECD's "EU Economic Panorama" report lowranks Spain
SENV/EAGR: Environment Minister argues for passage of new
biodiversity law
ECON/SOCI: Even in wealthy Madrid, 48% of workers gross less
than a thousand euros a month
EIND: Telefonica expands coverage in Brazil/Latin America
KCRM: Corruption and coastal development in Spain's Malaga
province
EAGR/TBIO: Abengoa temporarily closes ethanol plant due to
high cost of wheat and barley

2008 BUDGET SUBMITTED TO PARLIAMENT ON 9/25/07

1. (U) The government proposes to spend Euros 289.8 billion
and collect Euros 301.6 billion in taxes, which represents a
projected budget surplus of 1.15% of GDP. The budget surplus
assumes Spain will grow by 3.3% in 2008, which is still a
reasonable, albeit somewhat optimistic, forecast given the
international financial market turbulence and Spain's
construction slowdown. The opposition conservative PP party
has criticized the budget as not being stringent enough,
although it has not offered proposals leading to an overall
higher projected budget surplus. The "political" nature of
the budget (elections are expected in March 2008) is apparent
in that social spending will go up, especially for disabled
people and to help lower-income and/or young people afford
housing. The government is also emphasizing social spending
more in its media strategy.

2. (U) Infrastructure investments in the autonomous
communities (the equivalent of American states) is slated to
go up by 14.4%. The PP says the distribution of spending is
politically skewed because investment in Catalonia (a crucial
electoral battleground - if usually PSOE voters abstain, the
government could easily lose the elections) is slated to go
up by 22.6%; in Andalucia (a PSOE stronghold) by 20.9% and in
the Balearic Islands (which now has a Socialist president) by
24.3%. Infrastructure spending in the Madrid region, a
virtually impregnable PP fortress, will see spending go up by
only 0.1%. The government defends itself, however, noting
that infrastructure spending in Valencia (another PP bastion)
will go up by 25%. In fact, Valencia will see the highest
increase, largely because of the high-speed train being built
between Madrid and Valencia.

3. (U) Spending on R&D, a government priority, is slated to
be Euros 7.7 billion, which is a 164% increase from when the
government took office in 2004. Defense spending is
projected to rise 5.9% to euros 8.1 billion, still a little
less than 1% of GDP, although arguably R&D spending in other
ministries pushes the amount for defense to over one percent
of GDP. Although the government will finance many
infrastructure projects by acquiring debt, the national debt
as a percentage of GDP is projected to be 34% of GDP in 2008,
down from 37.7% in 2007. The budget still needs to be
approved by parliament, but presumably the government has
already gotten pledges of support from the smaller parties to
obtain passage of the budget. (El Pais, 9/26/07)

4. (U) Comment: Given the current uncertainties in the
financial markets, most economists would prefer a more
restrictive fiscal stance. However, the Spanish fiscal
picture needs to be seen in the context of the fact that
Spain is the only big EU economy projected to run a budget
surplus in 2008. Moreover, public debt as a percentage of
GDP has declined from 46.4% of GDP in 2004 to a projected 34%
in 2008. Having said that, 2008 is shaping up to be a year
of uncertainty. During the last three years, Second Vice
President and Finance Minister Pedro Solbes has released
forecasts that wound up on the low side of actual growth. He
will be hard pressed to repeat this in 2008. End Comment.

OECD'S "EU ECONOMIC PANORAMA" REPORT LOWRANKS SPAIN

5. (U) Within the Euro zone, only Portugal is further behind
the U.S. than Spain in terms of GDP per capita. The same is
true with respect to productivity. Spain also has a high
regulatory burden, and a relatively low percentage of the
labor force has university training. University of Chicago
and London School of Economics Professor Luis Garicano is
quoted as saying that Spain's economic model has permitted it
to get to the "first division" but "not to remain in it."
(Expansion, 9/21/07)

ENVIRONMENT MINISTER NARBONA ARGUES FOR PASSAGE OF

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BIODIVERSITY LAW

6. (U) The new law would enshrine the "precautionary
principle," which has been used by the EU to prevent, among
other things, agricultural biotechnology approvals and to
impose draconian coexistence laws in the agricultural field.
The opposition conservative PP party criticizes the new law
as too "interventionist." (Comment: Despite Minister
Narbona's well-known opposition to agricultural
biotechnology, recently the government has been less
restrictive.) (Expansion, 9/25/07)

EVEN IN WEALTHY MADRID, 48% OF WORKERS GROSS LESS THAN A
THOUSAND EUROS A MONTH

7. (U) Although National Statistics Institute information
indicates that Madrid workers' average monthly salaries of
1,908 euros makes Madrid the country's highest-earning
Autonomous Community, this average includes many lower-paid
workers. According to a study by the Workers Commission
labor body, one in five Madrid workers struggles to survive
on less than 600 Euros a month. The Commission says the data
shows a growing disparity between stable employment and
precarious or temporary employment. One out of 5 Madrid
workers makes less than 513 euros a month, and 13% must
conform with 256 euros. Many of the lower-paid are in
construction or hotel services, while many of the 13% who
gross more than 2,565 euros a month work in the finance
sector. (20 Minutos)

TELEFONICA EXPANDS COVERAGE IN BRAZIL/LATIN AMERICA

8. (U) Mobile telephone operator Vivo, controlled by
Telefonica and Portugal's Telecom, will soon have nation-wide
mobile coverage in Brazil after winning a tender to expand
its already existing coverage to six Brazilian northeastern
states. Vivo, the leading mobile telecommunications operator
in Latin America, currently enjoys 28.4 percent of the
Brazilian mobile telecommunications market. The Telefonica
group manages one-third of all Latin American
telecommunications business, including fixed lines and mobile
telecommunications. It is the largest foreign investor in
Latin America of any industry and has a particularly strong
presence in Brazil, Argentina, Chile, Peru and Colombia.

CORRUPTION AND COASTAL DEVELOPMENT IN SPAIN'S MALAGA PROVINCE

9. (U) Documents from the prosecutor's office in the province
of Malaga reveal that in 2006 the prosecutor's office
processed more than 243 reports of abuses related to urban
growth and potential corruption. These and other cases
relating to illegal construction projects have resulted in
judicial action against 20 out of 100 mayors in the province
of Malaga. Given the burgeoning profitability of the
construction sector over the past several years, many coastal
municipalities have turned a blind eye to construction
projects in areas that are not zoned for such purposes.
Construction efforts as well as the tourism that is related
to this industry have been a significant money maker for
municipalities which otherwise do not receive large amounts
of funding from the central or provincial governments. In
addition to uncontrolled urban growth, this illegal
construction activity at its worst has been linked to money
laundering schemes, bribery, and falsification of documents
on the part of municipal officials.

ABENGOA TEMPORARILY CLOSES ETHANOL PLANT DUE TO HIGH COST OF
WHEAT AND BARLEY

10. (U) Abengoa announced this week the temporary closure
(second time this year) of one of its Spanish ethanol
production plants, apparently due to high feed stock (wheat
and barley) prices and lack of domestic demand for ethanol in
transport fuels. The plant, Babilafuente, a joint venture
with Ebro Puleva, has the yearly capacity to process about
600,000 tons of feed stock in the production of about 200
million liters of ethanol. Abengoa closed the plant last May
for the same economic difficulties cited in this closure, but
reopened in July during the domestic wheat and barley harvest.

11. (U) The plant owners had intended to sell the local
ethanol production into the Spanish market, but cannot do so
because of its limited current acceptance in the domestic
market. This is due partly to the fact that the Government
of Spain delayed the start of mandatory ethanol mixing from
2007 until 2009. As a result, Abengoa has been forced to
sell locally produced ethanol to other European markets,
adding to logistical costs and increasing operating losses.

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