ZAPATERO ECONOMIC ADVISOR OFFERS VIEWS ON

UNCLAS SECTION 01 OF 02 MADRID 002381

SIPDIS

TREASURY PLEASE PASS TO TRACY PHILLIPS

E.O. 12958: N/A
TAGS: ECON EFIN SP
SUBJECT: ZAPATERO ECONOMIC ADVISOR OFFERS VIEWS ON
PRODUCTIVITY AND GROWTH


1. Summary. Miguel Sebastian, President Zapatero's key
economic advisor, recently presented his analysis on Spain's
productivity and economic growth to corporate leaders.
Sebastian declared that Spain's relatively low labor
productivity is the most important issue that may hinder
future economic growth. He highlighted continued budgetary
stability, investment in the labor force and infrastructure,
and labor reform as government priorities that should help
resolve the productivity problem and promote growth. On
budget issues, Sebastian promoted ideas supportive of the
Ministry of Economy's efforts to move towards pro-cyclical
budgeting, but questioned attempts to predict the business
cycle and require governments of autonomous regions to follow
balanced budget rules. End Summary.

Productivity and Growth
--------------


2. Miguel Sebastian, President Zapatero's Advisor, spoke June
22 to an audience of Spain's corporate leaders regarding
Spain's rate of economic growth. Spain's productivity has
fallen or stagnated in comparison to its economic competitors
in the EU and the U.S. in recent years. However, economic
output improved due to the rise in employment and the
increase in population due to immigration. Sebastian noted
that this rise in population is a short to medium term
condition and will not ensure Spanish economic growth in the
long run.


3. Sebastian offered Ireland as an example of a country to
emulate. Both Ireland and Spain maintained growth rates
higher than the EU average in the last eight years, with
Ireland achieving the highest rate of growth in the EU 15.
Unlike Spain, Ireland's economy witnessed improvement in both
employment and productivity. In the past eight years,
Ireland's employment productivity rose 33% while Spain's
productivity increased only 5%. As Ireland pulled ahead on
the productivity level, it achieved higher economic growth
rates.

Productivity Policy
--------------


4. Budgetary discipline was the first policy issue Sebastian
discussed regarding the government's role in promoting
growth. He argued that maintaining macroeconomic stability
was important to a good business climate, but supported
budgets that are balanced over economic cycles rather than
rigid balanced budget strictures. He followed his
pro-cyclical budgeting statement by noting the impossibility
of accurately predicting business cycles. Finally, he argued
that the government should not require autonomous regional
governments to follow balanced budgets, but allow them to
balance their budgets over the economic cycle as well. The
last two points are positions currently being considered by
the Ministry of Economy. Sebastian did not offer suggestions
to achieve balanced budgets.


5. Sebastian also supported government investment in work
force development as a key means of promoting growth and
productivity. He mentioned the government's commitment to
investment in education, and increased spending on public
transportation to improve labor mobility within Spain. In
addition, Sebastian acknowledged the need to change the laws
and regulations that inhibit companies from investing in
their work force He foresees an agreement this fall between
employers' groups, unions and the government that should
address many of the structural causes of poor labor
flexibility in Spain.

Comment
--------------


6. Sebastian's message on productivity and government budget
policy comes when these two subjects are the most discussed
economic issues in the Spanish press. Spain's labor
productivity is well below the EU average, and is a problem
the government promises to solve. The mention of pro-worker
investment initiatives may be an effort to introduce an
incentive to the unions to support the likely weakening of
rigid labor benefits that make employers less likely to hire
and invest in human capital.


7. The budget message is more challenging to decipher. Vice
President and Minister of Economy and Finance Pedro Solbes
has publicly affirmed his support for balancing budgets
through economic cycles. Due to strong economic forecasts,
Spain will run a small surplus this year and probably next.
Sebastian's comments seem to support the gist of Solbes'
policy. His comments in favor of regional budgetary
independence are interesting in the light of Solbes' need to
negotiate a new budgetary agreement with the regional
governments. Traditionally, Sebastian's position has had
great influence in setting the overall economic agenda. His
relationship vis-a-vis Vice President Solbes, an
internationally renowned economic heavyweight is still being
defined.
ARGYROS