MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 02 MADRID 001199

SIPDIS

SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: EAGR ECON EFIN EIND ELAB ETRD TBIO SP EINV
UK, SMIG
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
JUNE 11

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ECON/ELAB: OECD urges Spain to adjust their pensions
SMIG/SOCI: Spain's population reaches 45 million
EFIN/EINV: Foreign Investors' list of major complaints
EAGR: EU agrees to reform subsidy methodology
ELAB: 2 million pensioners live on less than 469 euros
ELAB: Airline strike in the Canary Islands affects flights
SOCI: Rising unemployment rate for immigrants
ECON/EFIN: Savings banks growing faster than traditional
EIND/ENRG: Increased electricity prices cause complaints

OECD URGES SPAIN TO ADJUST THEIR GENEROUS PENSIONS


1. (U) The OECD indicated this week that Spain needs a
"fundamental and urgent" reform of their pension system,
particularly given Spain's aging population. The OECD says
that Spain is the fourth most generous of its member
countries; a Spaniard with an average salary will receive
approximately 81.2% of his salary compared with the average
rate of 59% for other OECD countries. Given its aging
population, Spain's level of pensions will be difficult if
not impossible to sustain in the long-term.

SPAIN'S POPULATION REACHES 45 MILLION


2. (U) Roughly five million people in Spain are immigrants.
EU-27 immigrants number about 1.7 million; almost 800,000 are
from Africa; and about 1.4 million from South America.
Morocco, Romania, Ecuador, the UK and Colombia have sent the
largest number of immigrants. (Comment: The numbers are
astonishing. After the U.S., Spain is the OECD country that
receives the most immigrants. Spain has been a net recipient
of people for about half a decade. Spaniards are still
getting used to this phenomenon. Good economic times, as
well as the large numbers of culturally and linguistically
very assimilatable South Americans, have made immigration
relatively uncontroversial. However, problems with
integrating more Muslim immigrants, and potentially lower
economic growth in the future, may change this in the next
couple of years. For now though, Spaniards take pride in
having a higher population. With births per woman well below
the replacement rate, a few years ago Spaniards feared
population decline.) (El Pais, June 12, 2007)

SPANISH FOREIGN INVESTMENT ATTRACTION BODY (INTERES) LISTS
FOREIGN INVESTORS' MAJOR COMPLAINTS


3. (U) Foreign investors (foreign investors in general, not
just American firms) complain about the rigid labor market,
uncertain legal framework, overzealous tax inspectors; and
politicized regulators. Net Foreign Direct Investment (FDI)
has declined from Euros 29.4 billion in 2000 to Euros 3.6
billion in 2006. The Spanish government recently created
Interes in order to stimulate additional investment,
particularly in research & development-based industries.
Many American firms share the same concerns. (Comment: With
increasing wage rates, the glory days of major FDI in
factories are over for Spain. Spanish corporations, however,
are much richer and can take up some of the slack. Spanish
companies are now also major investors overseas.
Nevertheless, if Spain is going to transform itself from a
bricks and mortar-based economy to a high tech value added
goods and services producing economy, more foreign investment
is critical.) (Expansion, 6/6/07)

EU AGREES ON SUBSIDY REFORM


4. (U) The European Union has agreed to reform the subsidy
methodology used to support European producers of fruit and
vegetables. Because Spain is the most important producer of
fruit and vegetables in the European Union, reform is of
utmost concern to Spanish producers and Government
representatives. The Spanish Minister of Agriculture went on
the offensive the day of agreement June 12, announcing on
Spanish television that the Government had achieved all of
its goals and had negotiated the ability to pay Spanish
tomato growers 15 million Euros during this year's campaign
to help ease the current economic crises. Other important
features of the reform will include four, and five-year
transitions from payment for production, to payment based on
hectares harvested for tomatoes and citrus fruit,
respectively.


5. (U) At first blush and without full disclosure of all of
the details of the program, it appears to out of step with
the reforms in other sectors, which featured a "single farm
payment," based on historical subsidization. This new
approach appears to be a "Blue Box" program that will require
specific limitations on the number of hectares a farmer can

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produce of any given fruit or vegetable crop. There are
current World Trade Organization (WTO) limits on the amount
of funding the Europeans can spend on "Blue Box" programs,
but because they are transitioning some of their other
previously "Blue Box" programs to the Single Farm Payment,
which have the potential to be notified "Green Box" under
current WTO rules, those "Blue Box" limits were not likely to
have been pertinent in the reform discussions.

2 MILLION PENSIONERS SURVIVE ON 469 EUROS A MONTH


6. (U) Despite the OECD's indications that Spain must reform
their "generous" pension system, the average income of the 8
million pensioners that exist in Spain is 553 euros a month
(according to a local study by UGT). The majority of
pensioners in fact live below poverty levels, and receive
less than 469 euros a month. UGT declared this situation to
be a violation of article 50 of the Spanish Constitution,
which established that authorities would guarantee through
suitable pensions economic sufficiency to citizens during
their senior years. There is also an equality issue at play
given that women receive 30% less than men. On the other
side of the scale, 10% of pensioners receive 1,200 euros a
month.

STRIKE RESULTS IN FLIGHTS CANCELED IN CANARY ISLANDS


7. (U) Over the past two weeks, strikes on the part of pilots
and employees from local airline company "Binter" has
resulted in up to dozens of flights canceled in addition to
delays. The strikes, provoked by employee complaints of job
instability, has affected local flights on the Canary Islands
as well as to Mauritania and to Morocco.

UNEMPLOYMENT RATE FOR IMMIGRANTS INCREASES


8. (U) Though total jobs may be increasing overall, an
increase in unemployment rates for immigrant populations in
Spain has led some to believe that the influx of immigrants
may be reaching a saturation point. 2007 estimates indicate
that one in five unemployed workers is an immigrant worker
compared with a 2005/2006 estimate of one in seven.

THE SAVINGS BANKS PHENOMENON IN SPAIN


9. (U) Recent statistics show that "Savings Banks" are
steadily growing above and beyond the rate of traditional
banks. A summary of 2006 statistics show that more than one
thousand new branches of various savings banks were opened
with an increase in jobs of over 6,000. In contrast, Spanish
traditional banks opened slightly over 500 new offices with a
corresponding 1,229 jobs. Observers say that Spanish savings
banks are positioning themselves to make the foray into the
international economy

MINISTRY OF INDUSTRY TO PROPOSE AN INCREASE IN ELECTRICITY
PRICES


10. (U) The Ministry of Industry's recent announcement that
electricity prices will once again increase in July above
inflation rates have caused some to complain that the
government is reneging on a December 2006 promise to keep
electricity prices consistent with inflation. The Ministry of
Industry, with the support of the National Commission on
Energy, is expected to raise price levels by 1.8% -- an
additional increase above the January 2007 increase of 2.86%.
Others point out that this increase is incongruent with
decreasing energy costs (due to more cost-effective cheaper
sources such as hydraulic and wind energy). However,
industry experts say that this increase is needed in order to
address past and anticipated deficits caused by previous
miscalculations.
Llorens