TAKING ADVANTAGE OF EU EXPANSION: SPANISH PRIVATE

UNCLAS SECTION 01 OF 03 MADRID 001550

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD SP
SUBJECT: TAKING ADVANTAGE OF EU EXPANSION: SPANISH PRIVATE
SECTOR MUSING

REF: MADRID 00565


1. SUMMARY. In a recent report, Spain's largest employers'
organization, the Confederacion Espanola de Organizaciones
Empresariales (CEOE),highlighted the challenges and
opportunities for Spain presented by EU enlargement.
Opportunities include potential for increased trade and
investment, while challenges center on strategies to offset
the competitive advantages of candidate countries, ranging
from lower wages to weaker regulations. The CEOE study
proposed an action plan that Spanish businesses from various
sectors of Spain's economy could implement in order to face
these challenges. The report holds that enlargement will
only have a plus or minus 0.3% effect on Spain's GDP.
Whether the impact is positive or negative will depend on
the seriousness of the business community's efforts to
prepare for the challenges of enlargement. END SUMMARY


2. CEOE, Spain's largest employers' organization, recently
published a report that analyzes the implications of
European enlargement for the Spanish private sector. In
addition to touching upon general themes such as what the EU-
15 and candidate countries need to do to guarantee a smooth
and successful integration, the report addresses reforms
that Spanish companies should introduce to take advantage of
enlargement, and makes recommendations for dealing with the
upcoming challenges. Bottom line, CEOE believes that the
Spanish economy could avoid the negative impacts of EU
enlargement if the Spanish business community prepares well.
Contrary to many predictions, the CEOE report puts the
economic effect of expansion at a small plus or minus 0.3%
of Spain's GDP, but whether Spain's economy gains or loses
depends on the efforts of Spanish businesses.

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CHALLENGES
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3. Despite new business opportunities, there are challenges
for the Spanish economy. The competitive advantages of the
acceding countries will attract foreign investment away from
Spain and increase competition with Spanish products.
Competitive advantages are not limited to lower wages, but
also include lower non-tariff trade barriers, higher fiscal
incentives, and, at least temporarily, unfair government
subsidies that are deemed by CEOE contrary to EU
regulations. Lower standards for environmental protection,
food safety, consumer protection, work environment,
intellectual and industrial property protection, and trade
and labor laws also lower business costs.


4. Additionally, Spain will loose EU cohesion funds after
EU expansion. Currently, Spain is the biggest net
beneficiary of EU funds. Spain received in absolute terms
some 8 billion Euros last year ($9.6 billion at a rate of
EUR 1=USD 1.21). As EU funds are directed to new members,
the Spanish government will have to take on the burden of
funding infrastructure improvements.


5. Thanks to rising foreign investment, competitiveness of
the Spanish workforce has increased, yielding a high level
of value-added production and increased automation. As a
result, the risk of withdrawal of businesses and foreign
investments may not be as high as once feared, easing the
worries about negative aggregate effects on Spanish
production and employment.

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OPPORTUNITIES
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6. EU member countries have high expectations for the
growth of their economies as a result of the EU enlargement.
Spain, like its EU-15 counterparts, anticipates that the
induction of the candidate countries will increase trade and
investment. Most significantly, investment in
infrastructure in the candidate countries will offer new
prospects for large construction and high-tech
infrastructure companies of the EU-15. For example, EU-15
companies have already successfully installed mobile phone
networks in candidate states. The International Director of
CEOE told us that Spanish companies are familiar with the EU
contract process from years of completing EU-financed
projects and should therefore have an advantage in bidding
on infrastructure contracts.

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ACTION PLAN
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7. According to the CEOE, as the inauguration date
approaches, current member states should realize that EU
enlargement is not a one-way process. Enlargement will
require changes in both the candidate countries and the EU-

15. If Spanish business leaders want to benefit from the
opportunities while minimizing their exposure to risks, they
need to specialize in products of high technology and value
and focus on international markets. Spanish businesses
should also adopt new technologies, foment Research and
Development (R&D),develop human resources, improve
infrastructure, and shape policies to attract foreign
investment.


8. To reap benefits from enlargement, Spain will need to
improve its business relations with the candidate countries.
Spain's trade with Eastern Europe has increased in recent
years, but business relations are weak compared with other
EU member states. If Spain wants to penetrate these markets
it should increase foreign direct investment in these
countries. While Spanish presence in some sectors (like
fisheries) will come easily, entry into many equally
profitable sectors will require new business strategies.

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SECTORAL ANALYSIS
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9. METAL INDUSTRY. This sector is especially sensitive to
EU enlargement. The main concern is how cheaper imports of
metals from candidate countries will affect the Spanish
metal sector. Further, competition stemming from new
members may affect Spain's share of the EU market. Spanish
producers should focus on increasing their productivity by
investing in R&D, increasing the product quality of their
metals and relocating some production abroad.


10. AUTOMOBILE INDUSTRY. Currently, the majority of
Spanish automobile production is exported to the EU-15.
With a larger internal EU market after enlargement, there
will be more sales prospects. However, Spanish auto
producers will need to reduce costs as other auto-makers
will take advantage of lower labor costs and fiscal
incentives in the new member states while moving closer to
larger markets of Central Europe. The relocation of
production outside of Spain is already happening, as several
car plants have relocated to Slovakia (reftel). However,
high automation of automobile plants in Spain leads CEOE to
predict that only 15% of the automotive workforce will be
affected. At the same time, Spain may counterbalance some
of the relocation of factories with its increasingly skilled
workforce. Eventually, wages will converge, and with the
final elimination of fiscal incentives, competition will be
carried out on a more even playing field.


11. CONSUMER ELECTRONICS. Many multinational electronic
producers have moved production abroad to lower wage
locations to reduce production costs. To maintain its
remaining electronics workforce, Spain will have to turn to
higher value products by investing in R&D and making better
use of its skilled workers-in short, increase productivity
in this sector.


12. CHEMICALS. In the chemical industry, competition may
arise from candidate countries that make primary materials
for pharmaceuticals. Lower wages in candidate countries
could also negatively affect the Spanish pharmaceutical
industry. Spanish pharmaceuticals should venture into
higher-value products by investing in R&D and taking
advantage of the larger market. In regards to chemical
products for industry and consumers, demand in the new
markets will increase, providing prospects for higher-end
Spanish products such as paints, detergents, fragrances and
cosmetics.


13. TOURISM. Due to its strong position in world tourism,
the Spanish tourist industry does not foresee any short-term
adverse affects from EU enlargement. In the medium-term,
candidate countries that have beaches and sun could take
away some of Spain's market. In the long run, higher
incomes of citizens of these countries will only benefit the
Spanish tourism market. To attract these new customers,
Spain will need to improve and diversify its services.


14. AGRICULTURE AND FOOD PRODUCTS. Spain will have to take
into account that after the second phase of the integration
process, the EU agricultural budget will be divided amongst
twenty-five members. In the medium term, as Eastern
European producers incorporate technology in their dairy and
beef production, there will be tougher competition for
Spanish producers. On the other hand, EU enlargement
provides opportunities for the Mediterranean region.
Spanish agricultural producers should take advantage of the
new markets where there is an increasing demand for
processed food products rather than primary agricultural
products.


15. FISHERIES. Spain's fishing industry produces more than
twice the amount of the combined production of the ten
candidate countries. In the short-run the new members will
not be able to export fish products due to non-compliance
with EU sanitary standards. Thus, the enlarged market can
only have a positive impact on the Spanish fishing industry.

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COMMENT
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16. In predicting a minor impact on Spanish GDP of plus or
minus 0.3%, the CEOE is more optimistic about expansion than
many observers. CEOE's report is unique in that it is the
only one we have seen that offers specific advice to
individual sectors on how to deal with the opportunities and
challenges of expansion. Clearly, the degree to which
Spanish businesses heed that advice will largely determine
whether they gain or lose from enlargement.

ARGYROS