SPANISH DEPUTY MINISTER OF FINANCE COMMITTED TO

UNCLAS SECTION 01 OF 02 MADRID 001562

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN SP
SUBJECT: SPANISH DEPUTY MINISTER OF FINANCE COMMITTED TO
ECONOMIC REFORM AGENDA



1. (SBU) Summary. Over lunch with the DCM and Economic
Counselor May 3, Secretary of State for Budget and Finance
Miguel Angel Fernandez Ordonez expressed his strong
commitment to continued fiscal restraint and pushing forward
Spain's economic reform agenda to spur competitiveness and
enhance Spanish productivity. He strongly criticized the
previous Aznar government's opacity in handling domestic
budget and other economic policy issues, promising
transparency would be the leitmotif for Pedro Solbes as Vice
President and Minister of Economy and Finance. Fernandez
Ordonez voiced admiration for the transparency of the U.S.
budget process and publication of economic statistics and
expressed his eagerness to learn more about IRS, OMB and
Treasury practices which could be transferable to the Spanish
context. Despite his enthusiasm, we believe Fernandez Ordonez
will face a difficult time maintaining budget discipline as
recently appointed ministers call for new expensive measures
on an almost daily basis. He will need to set the tone early
and firmly if he is to succeed in maintaining fiscal
discipline in the new government. End Summary.

Budget Policy -- A Delicate Balancing Act
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2. (SBU) We met for lunch May 3 with the new number two at
the Ministry of Economy and Finance, Miguel Angel Fernandez
Ordonez. A long time admirer of the US and veteran of
previous Socialist administrations, Fernandez Ordonez
stressed his commitment to pursuing sound fiscal policy as
the senior Ministry official responsible for developing
budget and tax policy. Fernandez Ordonez credited the former
Aznar administration with selling the importance of sound
fiscal policy to the Spanish electorate, which he believed
would not stand for loose budget deficits outside the
framework of EU rules.


3. (SBU) To his dismay, however, Fernandez Ordonez said he
was discovering many "under the table" budget deals had been
struck by the former government, particularly with the
autonomous regions. The deals provided him with less
flexibility to manage budget policy than he had anticipated.
The prior government had been very good at lowering taxes but
not very good about decreasing expenditures. In response to
our questions about how he planned to finance the many
potentially expensive campaign commitments while maintaining
budget discipline, Fernandez Ordonez said some expenditure
cuts would have to be made to finance the new programs -- and
not all of the new programs would be implemented immediately.
He denied the government had plans to cut defence spending
by four billion euros to fund these programs as suggested by
some media reports. The Deputy Minister said he will propose
that the government privatize as soon as possible the
publicly-owned and heavily indebted Spanish Radio and
Television Corporation (RTVE) as a source of revenue for
these projects. He also hoped to cut coal subsidies and
introduce more financial discipline into the national
railroad (RENFE) high speed train plans. Fernandez Ordonez
cited housing, more funding for R&D and an increase in
university scholarships as the programs likely to be funded
first. The first was a key election commitment and the
latter two would help improve Spain's lagging productivity.


4. (SBU) Fernandez Ordonez said he was committed to
transparency in the conduct of budget policy. Toward this
end, the Zapatero government planned to establish a budget
office in Parliament styled on the Congressional Budget
Office. A campaign pledge, this office would help members of
parliament understand the budgets on which they voted,
improving the credibility of the entire process.

Reform: Full Speed Ahead
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5. (SBU) Sharply critical of the Aznar government's
commitment to economic reform during its second term in
office, Fernandez Ordonez claimed the former government's
philosophy was "believe what I say not what I do." For
example, liberalization of the electricity sector was more
words than deeds as two companies continued to dominate the
sector. Privatization became a way to place friends --
witness Cesar Alierta's placement at Telefonica -- rather
than the introduction of true competition. In hindsight, the
opposition should have demanded that the Aznar government set
up independent regulatory frameworks before privatization of
these companies. In the latter years of the Aznar
government, there was no attempt to reform social security,
pensions or labor practices.


6. (SBU) Fernandez Ordonez said the Zapatero government was
committed to pushing ahead with these reforms. Improving
competitiveness and productivity would be essential to
continued strong levels of economic growth. In the past,
Spain had always improved its competitiveness by devaluation.
He attributed the reluctance of small and medium-sized
businesses (SMEs) to invest in new technology to improve
competitiveness to this pattern. Experience showed they
could still sell abroad without such investments. As a
participating country in the euro, this option was no longer
possible. The only answer was reform.


7. (SBU) Fernandez Ordonez seemed confident that the
Socialist government found itself in a better position to
introduce more flexibility in the Spanish labor market than
its predecessor. He pointed to comments by the head of one
of Spain's main unions over the weekend, in which the labor
leader listed his demands of the new government but cautioned
that the government couldn't possibly grant all the union's
wishes without hurting the economy. In response to our
question about a PSOE government's potential squeamishness
about increased unemployment that might come in the wake of
these reforms, Fernandez Ordonez appeared confident the
government would weather any initial deterioration in the
unemployment figures. He compared Spain favorably to Germany
or France in that Spaniards still had a drive to change and
understood further changes would be necessary to keep the
economy growing.
Willing to Learn From US
--------------


8. (U) Fernandez Ordonez said in his previous jobs he tried
to learn from the US and apply those lessons in Spain. He
cited his close relations with the Federal Trade Commission
when he chaired the Spanish competition tribunal as one
example. Fernandez Ordonez said he hoped to travel to the US
within a few months and meet with is counterparts at
Treasury, the IRS and elsewhere. He offered that if we
identified any U.S. budget or tax practices which we thought
could improve transparency and efficiency in Spain we should
feel free to provide him with information.

Comment
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9. (SBU) Despite his optimism and passion when discussing
sound macroeconomic policies, we believe Fernandez Ordonez
faces a tough road ahead. In the few short weeks the
Zapatero government has been in power, many new ministers
have announced potentially expensive and clearly unvetted
policy initiatives -- such as a cut in the VAT for books and
movies or increased subsidies to mothers with young children
-- only to walk these statements back a few days later. We
understand that Solbes will be delegating heavily to
Fernandez Ordonez, whom many have already picked to replace
Solbes (who is rumored to be in poor health and only to have
committed to the job for two years) if he succeeds in his
bold agenda of fiscal discipline and further economic reform.
To do so, Fernandez Ordonez will need to be agressive in
establishing his authority and have the clear backing of
President Zapatero's office.

ARGYROS