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

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DEPARTMENT FOR EUR/WE AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: ECON EWWT KIPR PARM PGOV SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - DECEMBER
3 - 7

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Table of Contents:

ECON/PGOV: Highlights from EIU conference
EWWT/PARM: GOS to expand Megaports nuclear detection
technology to 28 ports
EWWT: GOS concerned about economic impact of Maersk shipping
reorganization
KIPR: Counterfeiters detained in "Operation Glamour"

HIGHLIGHTS FROM EIU CONFERENCE

1. (U) The Economist Intelligence Unit (EIU) held its 19th
Business Roundtable with the GOS in Madrid on December 4.
The EIU tried with mixed success to get the high-level
participants to talk about the prospects of a hard landing
versus a soft landing scenario for the Spanish economy.
President Jose Luis Rodriguez Zapatero essentially repeated a
previous talk that contained a barrage of positive statistics
for the Spanish economy during his tenure in office. He
emphasized the increased investment in R&D in Spain as a
percentage of GDP and higher levels of spending on capital
goods - the implication being that Spain is changing its
growth model from one based on construction and private
consumption to one based more on innovation and higher
productivity. He announced that if the Socialists won, they
would probably abolish the wealth tax. Zapatero repeated his
opposition to nuclear power but said that "if it (was)
necessary, there will be nuclear power," and surprised his
mostly pro-nuclear audience by saying three times that he was
not a "fundamentalist" on the topic. He denied that he was
in favor of "national champions" but said that the energy
sector presents "singular" characteristics. He extolled his
government,s success in controlling spending and praised the
Minister of Public Administration, Elena Salgado, who was in
the audience, for her success in controlling pharmaceutical
spending when she was Minister of Health.

2. (U) Labor and Social Affairs Minister Jesus Caldera said
that social security finances were in good shape, roughly 20
employer-labor agreements had been concluded during the
Socialist government,s term of office, there were
comparatively few strikes, and, most importantly, 2.9 million
new jobs had been created and the number of unemployed people
had gone down by about 500,000. Economist Europe Editor John
Peet suggested that Spain still had more work to do in terms
of making the labor market more flexible though and cited the
example of Denmark. Caldera responded strongly and said that
Denmark,s reported labor market success was a myth. He
claimed that that Denmark actually had more long-term
unemployed than Spain. Most importantly though, Denmark,s
employment participation rate (the percentage of people
employed) was much better than Spain,s because many women in
Denmark work part-time. He conceded that Spain should do
more to encourage part-time work.

3. (U) Industry, Tourism and Trade Minister Joan Clos
highlighted the higher R&D spending during Zapatero,s
tenure, although he said that Spain was still far from
meeting the Lisbon target and that the private sector needed
to assume a greater share of overall R&D spending relative to
the public sector. In responding to a question about
national champions, he denied that Spain promoted them but
like Zapatero said that the energy sector was special. Clos
emphasized the need for better vocational training in Spain
and decried the cultural bias toward university, rather than
vocational, education.
Conservative opposition Partido Popular (PP) leader Mariano
Rajoy said the PP,s economic stewardship during 1996-2004
had been stellar, especially given the bad economy the PP had
inherited from the Socialists in 1996. He said that if
elected in March 2008, the PP would concentrate on six areas:
1) strengthening the independence of regulatory institutions;
2) improving fiscal policy; 3) increasing R&D spending; 4)
focusing energy policy on conservation and renewables; 5)
more spending on physical infrastructure; and 6) improving
the labor market by, among other things, making the work/life
balance easier and making it possible for people to work
beyond the mandatory retirement age without losing benefits.

4. (U) Bank of Spain Governor Miguel Ferndandez Ordonez gave
a rather standard talk about how Spain was resisting
financial market turbulence because Spanish banks were not
significantly exposed to U.S. sub-prime mortgage backed
instruments. Spain,s budget surplus of 1.8% of GDP also
provided an important buffer. However, he conceded that
there were two big risks that could conceivably lead to a
harder, rather than softer, landing for the Spanish economy.
First, he said that he did not believe that the global

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economy was as "decoupled" from the U.S. economy as some
observers have speculated; hence if there is a bigger than
anticipated sub-prime mortgage driven downturn in the U.S.
economy, that would affect the Spanish economy negatively.
Second, if the price of oil and the euro continued to rise,
that could have also have negative effects for the Spanish
economy. He noted that Spain was relatively more vulnerable
to higher oil prices than other big European economies. The
EIU,s Charles Jenkins said he believed that Spain was more
susceptible to a hard landing than many officials and
analysts posited because Spain,s current account deficit
amounts to about 9% of GDP and housing construction (just
residential building) also accounts for about 9% of GDP.
Fernandez Ordonez disagreed. He said Spain was beginning to
make progress on reducing its current account deficit.
Besides, in a monetary union, financing is easy. Most
importantly, Spain has macroeconomic flexibility because it
has a budget surplus and public sector spending still only
accounts for about 39% of GDP.

5. (SBU) Comment: A couple of things stood out from this
conference. First, with the Socialists promising to abolish
the wealth tax (Zapatero said it mostly affected the middle
class, as the rich could avoid it), the PSOE is indeed
tacking to the center. In fact, the leader of Izquierda
Unida (the successors to the Communist party) said on
December 4: "It is the world in reverse, the PP announcing
tax cuts for salaried workers, and the PSOE tax cuts for the
rich." Actually, the PSOE move reflects the highly
middle-class nature of Spanish society; over 80% of Spanish
households are homeowners. Second, the ostensibly more free
market alternative, the PP, is not aggressive in its economic
proposals. For instance, Rajoy said nothing about nuclear
power or more freedom to hire and fire. Third, Mariano Rajoy
demonstrated once again that his forte is not public
discussion of economics. Fourth, Spaniards of both major
political persuasions appear to think the good times will
continue for Spain, although growth might taper off a little
bit. Fifth, nobody seems to have a good idea of how long a
member of a monetary union can continue to finance high
current account deficits. Many prestigious commentators such
as Charles Jenkins say that it is not sustainable for
countries to run current account deficits on the order of 9%
of GDP indefinitely, even if they are members of a monetary
union. EconOff asked Jenkins how this non-sustainability
might be transmitted to the Spanish economy. He said through
lower investment levels, but he was quite vague as to how or
when this might happen. Moreover, as Jenkins himself
conceded, if investment levels in Spain decline, that will
likely improve the current account deficit. End Comment.

GOS TO EXPAND MEGAPORTS NUCLEAR DETECTION TECHNOLOGY TO 28
PORTS

6. (SBU) The GOS continues to work with DOE/NNSA and the
Embassy to expand the Megaports program to additional ports
in Spain. The Megaports program aims to equip and assist
foreign countries with the technology needed to detect
illicit nuclear or radiological material being shipped or
exported from their ports. This program has been partially
implemented in the port of Algeciras, Spain,s largest port
by volume. In a meeting December 5 with NNSA Megaports and
Embassy representatives, Spanish customs officials explained
that they were planning to expand the technology to 28 of
Spain,s most significant ports. They further noted that
they would pay for all Megaports-type equipment despite prior
offers from NNSA to provide some of this costly equipment.
The GOS officials requested, however, that NNSA Megaports
officials continue to serve as advisors to Spain on the
implementation of this program, specifically in the ports of
Barcelona and Valencia.

7. (SBU) In a related discussion, Spanish customs officials
noted that they were continuing to experience difficulty in
implementing the Megaports program in the Port of Algeciras
due to union resistance and other issues related to scanning
of transshipment cargo. While in most ports of Spain this
problem would be insignificant, the port of Algeciras
experiences an unusually high volume of transshipment cargo
(cargo which is neither exported nor imported, but which is
transferred from an incoming vessel to an outgoing vessel).
Embassy officials will continue to engage with port officials
to determine if this issue can be favorably resolved.

GOS CONCERNED ABOUT ECONOMIC IMPACT OF MAERSK SHIPPING
REORGANIZATION

8. (SBU) According to Spanish customs officials, the Maersk

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company, which operates the port of Algeciras and is a major
shipper to Spain, is undergoing a cost-cutting exercise that
may ultimately result in the transfer of Maersk operations
from Spain to Morocco, China, or the UAE. Spanish customs
said the GOS was very concerned about this possibility, which
would greatly impact Spanish ports and the jobs associated
with Maersk shipments. This movement would likely result in
a significant decrease of transshipments through Spain and
would also impact the Container Security Initiative and
Megaports operations ongoing at the port of Algeciras, where
Spain receives its greatest volume of shipments. Spanish
Customs added that Maersk,s reorganization not only
concerned Spain, but concerned the EU on a broader scale for
its potential impact on other significant ports in Europe.

COUNTERFEITERS DETAINED IN "OPERATION GLAMOUR"

9. (U) In a recent raid, the Civil Guard and the Madrid
Municipal Police confiscated machinery used in falsification
of name-brand clothing. A group of nine Senegalese, Spanish,
Moroccan, and Chinese citizens have been detained for
falsification of goods in the Fuenlabrada and Torrejon
districts of Madrid. The agents have also confiscated
409,000 counterfeit articles with a street value of 15
million euros in "Operation Glamour." The falsification
machinery is capable of producing in an eight-hour workday
21,000 labels for items such as belts, bags and shirts that
are imported from Asia. (20 minutos 11/28/07)
AGUIRRE

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