SPAIN'S ECONOMY MINISTER LOOKS FOR FISCAL

UNCLAS MADRID 002012

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PTER ETTC SP
SUBJECT: SPAIN'S ECONOMY MINISTER LOOKS FOR FISCAL
DISCIPLINE AND PRODUCTIVITY, PROMISES SUPPORT ON TERRORISM
FINANCE



1. Summary. Second Vice President and Minister of Economy
and Finance Pedro Solbes described to Ambassador May 27 his
role in the Zapatero government as finding a balance between
the "excess enthusiasm" of his fellow ministers and
maintaining the fiscal discipline committed to by President
Zapatero. Calling the recent model of Spanish economic
growth built on domestic demand and construction exhausted,
Solbes foreshadowed more government investment in education
and research and development to improve Spain's productivity
and competitiveness. The Ambassador transmitted the concern
he was hearing from the American business community regarding
recent statements by members of the Zapatero government which
could be interpreted as anti-American, encouraging Solbes to
reach out directly to the U.S. business community. Solbes
signaled Spain's willingness to continue its close
cooperation with the U.S. on terrorism finance, acknowledging
the need for urgent passage of implementing regulations for
Spain's terrorism finance law and better coordination on
designations for terrorist asset freezing. End Summary.

Tone Down the Rhetoric


2. Ambassador opened the May 27 meeting by voicing the
concern he was hearing from the U.S. business community over
the rhetoric used by the Zapatero government in the runup to
the June 13 European Parliament elections. The Ambassador
emphasized that for the past five years, the U.S. had been
Spain's leading foreign direct investor, bringing in over $42
billion in FDI. This important constituency was nervous. The
Ambassador noted U.S.-Spanish bilateral trade and investment
still had much potential and room for growth. The Ambassador
encouraged Solbes to reach out, perhaps speaking to the
American business groups at a luncheon. Solbes concurred,
emphasizing the Zapatero government wanted the best possible
cooperation with the U.S., not just in business but across
the board.

Fiscal Discipline and the Need for Productivity Growth


3. Emphasizing that he had not participated in the
development of the Socialist Party's (PSOE) economic program,
Solbes described his job as a balancing act between the
"excess enthusiasm" of some of his government colleagues and
maintaining the fiscal discipline promised during the
campaign by President Zapatero. Solbes lamented the
perception that the Aznar government had left everything in
the economic sphere in wonderful shape. In reality, there
were still many structural reforms to be made. Spanish
economic growth in recent years was overly dependent on
domestic demand, particularly the construction sector. Spain
needed more investment in education and research and
development to improve productivity. In response to the
Ambassador's query on the vulnerability of the housing
sector, Solbes said the government needed to introduce more
transparency into housing policy. Solbes noted that Spain
spent 40% of GDP on social programs, relatively low compared
to some EU countries, but probably still too high. Health
care costs amounted to 10% of GDP, but were steadily rising.
The Ambassador noted the lack of flexibility of labor markets
remained a major problem, Solbes agreed, but observed that
it had been a problem for years and slowly but surely was
improving. A culture change was needed as well. Judges
always sided with the employee seeing him as poor and
exploited and the employer as wealthy. Still, Solbes said,
compared to France, Germany or Italy, while Spain's standard
of living might be somewhat lower, its economy was much more
flexible.

Terrorism Finance: A Strong Partner


4. The Ambassador noted our strong desire to continue
working closely with Spain in the war against terrorism
finance, and thanked Solbes for Spain's leadership in this
area. Solbes committed that Spain would continue to be a
strong partner on terrorism finance. It would work within
the EU framework and encourage greater US-EU cooperation in
this area. He understood the importance of swift government
approval of implementing regulations for Spain's 2003
terrorist finance law given continued delays and acknowledged
traditional attitudes exhibited by some parts of the
government slowed our ability to work together on jointly
designating and freezing suspect assets.




ARGYROS