THE VAZQUEZ ADMINISTRATION AT THE ONE-YEAR MARK

C O N F I D E N T I A L MONTEVIDEO 000230

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E.O. 12958: DECL: 03/01/2016
TAGS: PGOV PREL ECON EINV ETRD SOCI ELAB PINR UY
SUBJECT: THE VAZQUEZ ADMINISTRATION AT THE ONE-YEAR MARK

REF: A. 05 MONTEVIDEO 00665

B. 05 MONTEVIDEO 1429

C. MONTEVIDEO 0207 AND PREVIOUS

D. MONTEVIDEO 0175

E. MONTEVIDEO 0229

Classified By: Charge D'Affaires James D. Nealon
for reasons 1.4 (B) and (D)


1. (C) Summary: The Frente Amplio (FA) Government completed
its first year in power on March 1 with more achievements
than setbacks. In typical fashion, little fanfare marked the
day as President Vazquez had sent his state-of-the-union
report to Congress a week earlier. It is clear that his
adroit and pragmatic leadership (along with Uruguay's strong
institutions and the basically conservative nature of its
society) have prevented the radical tilt some observers had
predicted during the 2004 electoral campaign. The President
seems to prefer the term ""progressive"" rather than ""leftist""
to describe his administration. Looking back, Vazquez'
campaign promise to ""shake the trees to their roots"" has
meant more in terms of rejecting outdated socialist thinking
than anything else. The moderates have the upper hand, and
Vazquez has been more challenged by the radicals in his FA
coalition than he has by the two discredited opposition
parties (Blancos and Colorados) who ruled the country during
the past century. In this effort, he relies on a relatively
small cadre of experienced officials to get things done. A
key ally in this regard has been AgMinister and ex-Tupamaro
guerrilla leader Jose Mujica, who has been useful in
countering the ideologues on the far-left. Vazquez was also
able to appease many radicals by addressing the human rights
abuses committed during the ""dirty war"" period of the
military dictatorship and by finding the buried bones of
disappeared persons. His leadership style is now
predictable: he stays above the fray and allows competing
factions in the FA to debate an issue to exhaustion and then
weighs in with a final decision. This method will be sorely
tested in 2006 as the GOU attempts to reform taxes,
education, and defense -- and possibly face a showdown with
powerful labor unions.


2. (C) Summary Continued: Foreign policy is another
formidable challenge, compounded by a stubbornly ideological
Foreign Minister (Reinaldo Gargano). The most serious problem
is the dispute with Argentina over the construction of giant
paper mills on a shared river -- not only because of soured
bilateral relations with Uruguay's closest neighbor, but also
because of the implications to foreign investment,
independent foreign policy, and Mercosur. After briefly
flirting with Cuba and Venezuela (to establish his ""leftist""
credentials),Vazquez has tended to exert a moderating
influence on his regional counterparts, including Hugo Chavez
who has twice visited here. Vazquez appears to model himself
more after Chile's ex-President Ricardo Lagos, and his mild
leadership style stands in sharp contrast to Hugo Chavez,
Nestor Kirchner and Evo Morales. A well-qualified economic
team pursues prudent and sensible macroeconomic policies and
further reflects the administration's pragmatic emphasis.
While much of the region has lurched to the left, Vazquez has
gone out of his way to seek good relations with the U.S. In
a recent meeting with the Charge on March 7, we heard from
the President himself that he seeks an FTA with us (ref E).
Vazquez' efforts to expand trade with the U.S. offer the USG
a golden opportunity to send a message to the region that we
favor pragmatic democratic governments, regardless of their
political label. Below is an appraisal of the GOU's
successes and reversals during its first year. End Summary.

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Foreign Policy: Positives
--------------


3. (C) Relations with the U.S. - Early on, Vazquez went out
of his way to state publicly and privately that he wanted to
have good relations with the U.S., in spite of ideological
opposition from the more radical elements of his FA
coalition. (Note: More than 30 pct of the FA Government is
composed of the Popular Participation Movement (MPP) -
Tupamaro, ex-guerrillas faction. End Note.) Vazquez took
several positive steps to translate his statements into
action. The Open Skies Agreement, signed under the previous
administration, was unanimously ratified in July 2005.
Later, the GOU offered meaningful assistance to the victims
of Hurricane Katrina and persuaded the radicals to support
UNITAS naval exercises with the U.S. After allowing a heated
debate on the ratification of the Bilateral Investment Treaty
(BIT) with the U.S. to take its course, Vazquez became
personally engaged during his trip to the U.S. in September,
when he proposed that several controversial articles be
amended. The ensuing agreement on these cosmetic changes to
the BIT allowed Vazquez to sign the document in Mar del Plata
in November and to have it ratified by Congress in December.
After returning from the U.S. in September, Vazquez sent out
a trial balloon, saying that the BIT should be followed by
enhanced commercial talks with the U.S. This was followed in
January 2006 by a front-page interview by Economy Minister
Astori, in which he advocated (on Vazquez's behalf, we
believe) that Uruguay should negotiate a Free Trade Agreement
(FTA) with the U.S. (Note: Uruguayan Ambassador to
Washington Carlos Gianelli had earlier told Charge that this
was the direction Vazquez wanted to follow. See ref B. End
Note.) On March 7, we also heard from the President himself
that he seeks an FTA with us.


4. (C) Vazquez also signaled early on that he wanted to meet
with POTUS, and a short meeting was arranged on the margins
of the Summit of the Americas in Mar del Plata. A POTUS
meeting is now set for May 4 at the White House. (Note: And
so is a pull-aside meeting with the Secretary in Chile on
March 11. End Note.) Key members of Vazquez's kitchen
cabinet (Finance Minister Astori, Industry Minister Lepra and
Agriculture Minister Mujica) have continuously advocated for
closer relations with the U.S. and pushed for the development
of a smooth, business-like relationship. While the MFA was
pressing to sue the U.S. at the WTO over rice subsidies,
Lepra and Mujica prevailed in convincing Uruguayan rice
exporters to hold off and try to resolve the issue
bilaterally. Several productive meetings have since taken
place between GOU and USG delegations on the margins of the
WTO. Finally, the GOU has pushed for a resumption of the
Joint Commission on Trade and Investment (JCTI),a mechanism
started under the Batlle administration. The next JCTI
meeting is set to take place in Washington in early April.
For two years now, the U.S. is Uruguay's largest export
market, absorbing some 25% of the country's exports and
overtaking Mercosur as the prime destination. Trade has
clearly become the engine of our bilateral relationship.


5. (C) Mercosur - After initial signals that strengthening
Mercosur and developing Latin American integration would be a
main priority, Vazquez has become seriously disenchanted with
the trading bloc. His first foreign policy actions were to
renew diplomatic relations with Cuba, sign trade and cultural
agreements with Venezuela, sign an agreement on human rights
with Argentina and welcome Brazilian investment into Uruguay.
However, Uruguay's lackluster pro-tempore Mercosur
presidency, the increasing tendency of Brazil and Argentina
to negotiate bilateral agreements without consultations, and
recurring market access problems for Uruguayan exports with
both larger countries all contributed to a sense of deep
frustration with Mercosur. The nail in the coffin appears to
have come from Argentina's blockade of the three access
bridges linking it with Uruguay, because of the paper mills
dispute (ref C). Brazil's complete silence on Argentina's
violation of a basic tenet of Mercosur -- the free movement
of goods across borders -- seems to have convinced Vazquez
that Mercosur is of little use to Uruguay. While the GOU,
under the influence of ForMin Gargano, pushed for the
induction of Venezuela into Mercosur, it appears increasingly
unlikely that this act will bring any benefit to Uruguay.
The GOU is now looking for relationships outside of Mercosur,
with Astori stating that the government's main economic
priority for this year will be to negotiate bilateral FTAs
with the U.S. and with China.


6. (C) Argentina and Brazil - Even prior to the conflict with
Argentina and the estrangement from Mercosur, the GOU was
already showing a decided trend towards independent action
from the bloc. Uruguay did not vote for the Brazilian
candidate to the IDB (it supported the USG-backed Colombian
candidate),perhaps in retaliation for the GOB's lack of
support for Uruguay's candidate to the WTO, Perez de
Castillo. Vazquez was incidentally reported to have
developed an excellent personal relationship with President
Uribe when he visited Colombia on his return trip from the
U.S. His public statements in both New York and Bogota were
moderate and constructive.


7. (C) Pol/Mil Issues - Vazquez has been able to maintain
overall good relations with the Uruguayan military despite
the paltry defense budget and the sensitive investigations
into the human rights violations committed during the period
of the military dictatorship (1973-1985). Embassy believes
that there is little chance that the GOU will sign an Article
98 agreement, though some GOU officials might not be quite as
enthusiastic about the ICC since Argentina is taking Uruguay
to the International Court in The Hague in the papermill
dispute. Peace Keeping Operations (PKO) are a source of pride
(and much-needed revenue) for the Uruguayan armed forces. On
a per capita basis, Uruguay maintains the largest number of
deployed peacekeeping troops in the world. Of the 3,083 PKO
troops total, some 1,897 are deployed in Africa (MONUC) and
965 in Haiti (MINUSTAH). After much acrimonious debate in
Congress, Uruguay's navy was authorized to participate in
UNITAS exercises, though many in the FA have promised not to
allow it next year until the defense policy is overhauled.
U.S./Uruguayan mil-to-mil relations remain positive despite
U.S. cuts in funding.


8. (C) Mar del Plata - As pro-tempore President of Mercosur,
Vazquez delivered Mercosur's rejection of the FTAA, but
presidential advisors told us that Vazquez felt ambushed by
the Argentines who presented him with the strongly worded
statement at the last minute, which Uruguay did not have a
part in elaborating. Vazquez tempered this rejection by
adding that conditions for an FTAA were not appropriate at
the time. In defiance of Chavez' call to shun President
Bush, Vazquez chose the Summit as the venue to sign the BIT
with the U.S. and worked hard to meet with POTUS on the
sidelines of the Summit.


9. (C) Paper mills dispute with Argentina - This is the most
serious foreign policy challenge that the Vazquez
administration has had to face. The GOU see the mills as
vital to investment, jobs and export diversification.
Vazquez' measured but firm approach is to appeal to the
international community in the hope that the GOA will
eventually succumb to outside pressure, and reign in the
protesters blocking the bridges. Even after Argentine Entre
Rios Governor Jorge Busti implied that Vazquez was accepting
kickbacks from the international firms involved in the
projects, the President's response has remained calm.
Vazquez' tactics may prevail in the long run, but no one
doubts that the controversy has put a severe strain on
Argentine/Uruguayan bilateral relations.

--------------
Foreign Policy: Negatives
--------------


10. (C) Uncertain relationship with Cuba and Venezuela -
There have been no direct contacts with Castro, but the GOU
has accepted medical assistance (eye operations, Uruguayan
doctors trained in Cuba, etc.) Chavez visited Uruguay twice
and continues to talk of oil deliveries and investment in
spite of the fact that he has delivered very little. The GOU
asked the Venezuelan television network not to mention
Uruguayan participation in Telesur until the Congress
approved the partnership with the Venezuelan initiative. The
GOU has also expressed concern about Telesur's coverage of
FARC guerrillas and the networks association with the Arab
television station Al Jazeera.


11. (C) Foreign Ministry - Although both belong to the same
Socialist Party, ForMin Gargano has publicly disagreed with
or contradicted Vazquez on several occasions. Gargano has
made a series of mistakes (particularly on relations with
Argentina and the U.S.),which highlight his lack of
experience in foreign affairs and lack of professionalism.
There has been talk of a Cabinet shuffle in June or September
2006, and some observers believe Gargano will be one of the
first to go. A few believe that Gargano's ineptness serves
the purpose of discrediting the old socialist hard line,
while Vazquez uses other emissaries to carry out his foreign
policies.


12. (C) Pro-tempore presidency of Mercosur - Little was
achieved during Uruguay's presidency of Mercosur, except for
the induction of Venezuela into the bloc, one of ForMin's
Gargano's pet projects. So far, Venezuela appears to be more
a weight than a solid addition to Mercosur, as ForMin
officials and high-level members of the Mercosur Secretariat
tell us they strongly doubt that Venezuela will ever
implement the necessary changes to become a full member. The
reading here is that Chavez obtained what he really wanted --
a forum to promote his cause with more force-- and that he
never intended to comply with the complex trade and tariff
structure of Mercosur. Chavez is said to be content to
remain a ""member in the preparatory stages of accession"" for
the foreseeable future. Uruguay's presidency also saw Brazil
and Argentina negotiate a bilateral market access mechanism
(MCA) without consulting their partners. Insiders have told
us that Vazquez was incensed by the dismissal and duplicity
shown by his neighbors.


13. (C) Relationship with Argentina - Again, ForMin Gargano's
handling of the paper mills crisis has been criticized. He
is seen as having reacted late and incoherently to the issue
and to have allowed the dispute to spin out of control. The
GOU believes that President Kirchner's attitude has been
intractable because he is reluctant to take on part of his
domestic constituency (Province of Entre Rios, the
protesters, etc,). The papermills are a matter of vital
national interest for Uruguay.

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Comment on Foreign Policy
--------------


14. (C) After an initial period of espousing strong linkages
with other left-of-center governments in the region, the GOU
appears to have been rudely awakened to the reality that most
countries in the region act in their own self-interest. The
result has been a dramatic shift away from Mercosur, brought
about by a deep disillusion with the organization and its
members. At the same time, the growing importance of the
U.S. market at the expense of Mercosur (which now absorbs
only 20% of Uruguay's exports, compared to 60% in 1998) has
made closer relations with the U.S. an inescapable necessity.
The trade relationship has become key. Stuck between two
overbearing neighbors, Uruguay needs, in the words of
Industry Minister Lepra, an ""uncle to protect it against its
bully brothers."" Vazquez has favored a pragmatic approach to
foreign affairs, much more similar to that of Lagos than of
Kirchner or Chavez. He is a consensus builder, reasonable
and unabrasive, who has refused to enter into a verbal fight
with Kirchner, while not backing down from his firm
convictions. He appears to exert a moderating influence on
Chavez and could possibly exert the same on Evo Morales. End
Comment.

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Economic Policy: Positives
--------------


15. (C) Relationship with the IFIs - Early on, Finance
Minister Astori negotiated agreements with the IMF, the IDB,
and the World Bank, in record time. This generated
confidence in the administration's capacity to handle the
economy and to manage the country's debt burden. One year
on, the latest IMF reports indicate a continued positive
evolution of the economy and note that Uruguay is on track
with the major elements of its program with the Fund.


16. (C) Macroeconomic management - Astori continued to
implement the orthodox macroeconomic policies of the previous
administration. Debt management has been excellent, with
sustained, timely payment of obligations. The GOU placed
over $1.0 billion of new debt under quite favorable
conditions, thereby allowing it to retire expensive debt
contracted at the height of the 2002 crisis. Uruguay
currently commands a lower country risk rating than either
Brazil or Argentina. Growth in 2005 exceeded 6% and is
expected to continue at about 4% for 2006. Inflation was
contained at 4.9% in 2005 and is expected to climb to a
manageable 6.5% in 2006. The first year also saw a
significant increase in tax collection, due to increased
compliance and better controls. Astori resisted MPP Leader
Mujica's initial calls for price controls and for tampering
with exchange rates to balance out the declining value of the
dollar. He also resisted calls to impose compulsory
refinancing of debts.


17. (C) Wage negotiations - While the private sector had
initial reservations about negotiating wages through
sectorial wage councils, the initiative worked out
surprisingly smoothly and the government kept to its role as
arbiter. Formalizing of employment has continued apace.


18. (C) Foreign investment - Forestry has absorbed the major
part of new investment. Finland's Botnia and Spain's Ence
are investing $1.8 billion in giant paper mills, and Sweden's
Sore Ensa has announced plans to build a $600 million paper
mill. Meanwhile, U.S. forestry firm Weyerhaueser, which has
already invested $300 million in Uruguay, is planning a $500
million expansion of its activities in pressed wood
manufacturing. The strong GOU position to insulate paper
mill companies from the dispute with Argentina has sent a
positive signal to investors regarding the importance of the
rule of law and Uruguay's favorable investment climate.


19. (C) Financial system - The financial system is still
under consolidation, but progress was made in cleaning up
problems left by the 2002 crisis. The GOU sold Nuevo Banco
Comercial (NBC),the successor of the failed Banco Comercial,
to a private investor group under good conditions in a
transparent process. The GOU also appropriately handled a
crisis in the financial cooperative COFAC within the first
days after it took office, and is currently working out a
permanent solution to COFAC's problems through the sale of
the entity to a foreign group.

--------------
Economic Policy: Negatives
--------------


20. (C) Unemployment and labor unions - Unemployment still
remains high at 12%, and labor relations may be the Achilles
heel of this government. The GOU may have over-empowered the
powerful trade unions (in particular the radical PIT-CNT) by
derogating a decree which enabled police to evict workers
occupying plants and by passing the Union Protection Law.
The result has been a rash of plant occupations, some of them
violent (ref D). The government is now considering a new law
which would regulate the conditions under which a plant may
be occupied. Still, this may be too little too late.

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Comment on Economic Policy
--------------


21. (C) The GOU's excellent overall macroeconomic management
could be an example of steadfastness for countries in the
region. Continued growth, sound public debt management and
an openness to the outside are all good omens for the future.
The fact that this left-of-center government basically
continued the policies started by the preceding government
may show the beginning of a general public consensus on sound
economic policy, as is the case in Chile. The GOU appears to
have understood that continuity in economic and investment
policy, coupled with a strict respect for the rule of law
(historically Uruguay's strong point),are essential for the
country to attract and retain foreign investment. The only
area of concern relates to the GOU's relationship with the
unions, where demagoguery in catering to its electorate may
cost the FA dearly in the long-run. It will be difficult to
wring back concessions from the unions without a fight, and
lack of action to restrain union abuses may spoil an
otherwise good investment climate. End Comment.

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Domestic Politics and Policy: Positives
--------------


22. (C) Leadership and style--Vazquez projects a thoughtful
impartiality which so far has assuaged the expectations of
impatient citizens who were promised rapid change. Vazquez
popularity remains high, in part because of his soft-spoken,
hands-off management style. He allows ministers to speak
freely in public, often disagreeing with one another, and he
uses the Uruguayans' love of a thorough discussion to clear
the air. After stakeholders have expended their passion, a
process he recently called ""the rhythm"" of Uruguayan
politics, he weighs in and his policy is quickly accepted.
Based on our experience with the passage of the BIT, the
approval of UNITAS exercises, and initial discussions of an
FTA, we believe that Vazquez to a large degree orchestrates
the rhythm of these debates in order to harmonize the
conclusion with his original intent. A practicing
oncologist, Dr. Vazquez manages the country with a gentle
bedside manner and decisive surgical skill. Thus far, this
approach has made Vazquez a ""Teflon president,"" has allowed
him to direct the debate, and has given him considerable
authority when he decides to call for order on an issue. He
places pragmatism over personal glory or flashy ideology and
analytically pursues what he believes to be Uruguay's best
interests.


23. (C) The FA Coalition--Under Vazquez' leadership, the
moderate left now encompasses all parties but the extreme
radicals (26 de Marzo),the Communists, and a small sector of
the Socialist Party. Rather than confront the extreme
radicals, Vazquez retains them within the FA coalition where
he can keep an eye on them. Much of the leadership on the
left is over 60 years old. Only a few have the energy and
experience to follow Vazquez whole-heartedly, but the large
majority acquiesce to the FA's new direction. Actual
leadership of the GOU rests with a pragmatic and moderate
kitchen cabinet including Finance Minister Astori, Industrial
Minister Lepra, and Agriculture Minister Mujica. Astori and
Lepra hold strongly orthodox views on economic growth and
development and have extensive experience with international
institutions, finance, and commerce. Jose Mujica, a former
guerrilla, has proven to be pragmatic, responsible, and a
reliable partner for Vazquez on several critical issues.
Mujica has kept his MPP in line with the moderate FA course
and plays a pivotal role in moderating the left. This has
given Vazquez significant leeway to steer the Frente Amplio
coalition without serious political distractions. We believe
these developments are creating lasting changes within the
Uruguayan left. The MPP quickly fell in line behind Mujica's
moderate leadership because they found themselves unable to
organize or govern based purely on ideology, and several
Socialist leaders told us that the future of their party
rests with Vazquez rather than with the ideologues of
previous generations.


24. (C) Domestic achievements - The GOU was able to smoothly
pass the public budget because the FA controls Congress, but
it was also apparent that there was little room for
discretionary spending. The GOU managed to make a modest
increase in educational spending, but the increase cannot
cover many of the serious needs in the system. Perhaps the
GOU's greatest domestic achievement has been its skillful
handling of the potentially-explosive issue of human rights
abuses committed during the ""dirty war."" The GOU managed to
bring an element of closure to the issue without alienating
the military or provoking a backlash from the right-leaning
segments of the society. Vazquez entrusted this sensitive
portfolio to his closest advisor, Secretary to the Presidency
Gonzalo Fernandez. He also received excellent cooperation
from former commander of the Armed Forces General Angel
Bertolotti. Fears that the GOU might have opened a ""Pandora's
box"" by dredging up a past that had been largely untouched by
previous administrations, dissipated when a GOU team located
the bones of a ""disappeared"" victim in a field in November

2005. Since then, other forensic evidence has clarified parts
of this terrible chapter in Uruguay's history. Vazquez'
administration is the first to pursue physical remains of the
victims, and the search produced tangible evidence of the
GOU's commitment to this issue, comforted families, and
mollified the left.

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Domestic Policy: Negatives
--------------


25. (C) Welfare Plan - The GOU's emergency welfare plan
(PANES) and other social programs under the FA-created
Ministry of Social Development have proven ineffective and
disorganized. Despite promises of tempering the most extreme
forms of poverty, the new Ministry can point to no tangible
results, and some have begun to question the transparency and
cost of the new programs. Members of the FA have publicly
questioned Minister Marina Aresmendi's loyalty to Vazquez and
her common sense. She once suggested bringing Cuban reading
teachers to Uruguay which already has a 98% literacy rate.
The GOU ignored the proposal, and there are rumors that she
may be dismissed in a future cabinet reshuffle.


26. (SBU) Interior Ministry - The press frequently criticizes
the Interior Ministry for poor law enforcement and portrays
its minister as out of touch and ""on vacation."" Theft and
robbery have increased dramatically in the last few years,
and citizens protested against crime in one neighborhood of
the capital. The Ministry came under extreme criticism after
it failed to anticipate property damage during several
downtown demonstrations, and in a separate incident, the
police watched a violent labor altercation but did not
intervene.


27. (SBU) Prisons - Uruguay's prisons remain overcrowded and
under-funded. A recent television documentary showed leaking
roofs, twelve men in a cell designed for two, and unsanitary
conditions. Despite a recent early release program, civil
rights groups estimate that the prisons are overcrowded by
fifty percent and that none of Uruguay's prisons are in good
repair. The GOU did not address penal system reform, prison
modernization, or prison conditions during the year.


28. (SBU) Education - As part of a budget reallocation,
schools in Uruguay reduced their English language instruction
by twenty-five percent. The trade off for this reduction was
unclear. The average public school student in Uruguay
receives less than four hours of instruction each week in any
foreign language. The education system remains severely
under-funded, and an extensive child welfare system competes
for funds with public schools. Most elementary students
attend school half day and schools are chronically short of
books and supplies.


29. (C) The opposition - The government currently has poor
relationship with both opposition parties. Despite the
positive initial step of signing a joint framework document
on foreign policy, education and the economy, the
relationship deteriorated rapidly. The opposition felt
short-changed by the government's offer of participation and
did not join the boards of state-owned enterprises. Senator
Larranaga, the leader of the Blanco opposition, told us that
the government had taken no initiative to consult his party,
the largest in opposition, on legislation or new initiatives.
(Note: Uruguay has a long tradition of cooperation between
the administration and the opposition, but this is the first
government in 50 years in which the president also has an
aboslute majority in Congress. End Note.)

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Comment on Domestic Policy
--------------


30. (C) The GOU's greatest success has been in dealing with
the human rights abuses of the military dictatorship. The
issue has also conveniently served to distract some of the
far-left from more mundane issues such as jobs and salaries.
Its greatest challenge continues to be managing the
heightened expectations of the poor, estimated at about
one-third of the population. Less was accomplished than was
hoped for in terms of jobs, crime, prison overcrowding and
effective social programs. Some folks complain that there
has been little change at all. Still, the field of moderates
in the GOU has expanded, while r","adicals have become fewer,
though some are remain quite vocal. How Vazquez will deal
with an emboldened labor sector remains open to question.
There were fewer strikes in 2005, but increased number of
cases in which workers occupied factories or businesses.
Brain drain remains a serious problem and many young
Uruguayans emigrate abroad in search of jobs. Drug use is
another growing problem, particulary ""pasta base"" from
Bolivia. End Comment.

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What Will 2006 Look Like?
--------------


31. (C) The GOU's stated priorities for this year are to
introduce structural reforms on tax, education, health and
defense and to open up trade negotiations with partners
outside of Mercosur, namely the U.S. and China. Tax reform
will be the most difficult and there are already rumors that
the GOU is considering postponing some reforms. While
economic growth should continue, with inflation under
control, the country's debt burden will continue to weigh
heavily on what the government can actually achieve. There
are already indications that a reform of the health system,
estimated to cost upwards of a billion dollars, will be
postponed until 2007. The proposed tax reform, which for the
first time will introduce a personal income tax, is facing
strong opposition from all quarters and may be debated all
year-long. Relations with the military are likely to
continue to be good, with the GOU pursuing the issue of
disappeared persons, but postponing an eventual discussion of
the amnesty law until 2007.


32. (C) What could go wrong? This scenario could alter
drastically if any of the following events were to occur:

#¿NOMBRE?
catastrophic for Uruguay. Beef exports have led the economic
recovery and represent the country's first export item. They
are also the leading Uruguayan export to the U.S.

#¿NOMBRE?
Astori-Lepra wing of the GOU is seen as reflecting Vazquez's
thinking and clearly has the upper hand within the FA. This
wing has generated a clear momentum in favor of an FTA with
the U.S. A cold shoulder by the U.S. to this initiative
would certainly strengthen the radicals, whose mantra has
always been that it is not worth talking to the U.S.

#¿NOMBRE?
wholesale retreat by the GOU, or a decision by Botnia or Ence
to suspend their projects, could have a serious impact on
growth, the business environment and the overall relationship
with Argentina.

#¿NOMBRE?
the recently strengthened umbrella labor union (PIT-CNT),
which is likely to fight tooth and nail any rollback of the
major concessions it was granted. While unlikely, a battle
of wills with the unions could get out-of-hand or cause a
rash of strikes.

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Comment: A Pragmatic Government Worth Cultivating
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33. (C) The Embassy has been relieved and impressed by the FA
administration's balance sheet during its first year in
power. Vazquez remains firmly in control and the latest
polls show he has a 54% approval rating. Despite the lack of
experienced personnel (in both the executive branch and
Congress) and having to clarify or reverse years of populist
opposition rhetoric, the FA government has clearly moved
towards the political center. Barring some unfortunate
event, we expect it to finish out its term (2009) on a
moderate course. In the meantime, the Embassy is greatly
pleased that the USG has responded favorably to GOU's
friendly overtures demonstrated over the last year. While we
recognize the limited influence of this small country, we
remain convinced that this bilateral relationship is in the
U.S. interest and worth cultivating. Strong ties with
Uruguay send a powerful signal to the region that we favor
good relations with sensible, pragmatic governments who
respect democracy and institutions, regardless of their
political label. End Comment.
Nealon