Identifier
Created
Classification
Origin
07MADRID122
2007-01-23 17:59:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Madrid
Cable title:  

MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT

Tags:  ECON ETRD EAGR TBIO SP EINV EAIR UK EFIN 
pdf how-to read a cable
VZCZCXRO5989
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0122/01 0231759
ZNR UUUUU ZZH
R 231759Z JAN 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 1690
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2387
UNCLAS SECTION 01 OF 02 MADRID 000122 

SIPDIS

SENSITIVE
SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: ECON ETRD EAGR TBIO SP EINV EAIR UK EFIN
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT


MADRID 00000122 001.2 OF 002


ECON: Spain's industrial economy
EFIN: Macroeconomics
EAGR: Spanish Wine sector may lose subsidies

----------------------------------
Spain Surpasses Canada in industry
----------------------------------

UNCLAS SECTION 01 OF 02 MADRID 000122

SIPDIS

SENSITIVE
SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: ECON ETRD EAGR TBIO SP EINV EAIR UK EFIN
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT


MADRID 00000122 001.2 OF 002


ECON: Spain's industrial economy
EFIN: Macroeconomics
EAGR: Spanish Wine sector may lose subsidies

--------------
Spain Surpasses Canada in industry
--------------


1. (U) Standard & Poor says as of 2007 Spain is the eighth
industrial economy in the world, thereby surpassing Canada:
The S & P ranking in billions of dollars follows. U.S.
(13.8),Japan (4.5),Germany (3.1),China (3.0),UK (2.4),
France (2.4),Italy (2.0),Spain (1.3). Spain's debt rating
is at the highest level, reflecting its good public finances.
Occasionally, there is talk that Spain should apply for G-8
membership, but the Zapatero government has not made this a
priority. Nor did the predecessor conservative government.
If the gap between Spain and Canada widens though, there will
no doubt be more debate on this topic in Spain.

--------------
Macroeconomic Perspectives
--------------


2. (U) President Zapatero predicted at the 1/17/07 New
Economy Forum that the Spanish economy in 2007 will grow by
3.5 percent, that the budget surplus will be over 1 percent
of GDP, that public debt will be reduced by about three
points (which would put it 30 points below the Eurozone
average),that Spain's unemployment rate will be under 8
percent, that 600,000 new jobs would be created, and that
500,000 people with temporary job contracts will get
permanent contracts. Many observers believe that Spain has a
better than even chance of meeting these numbers. Most
politicians facing an election in 13 months time would find
these numbers outstanding.


3. (U) The economic news is not uniformly good though. A
sampling from newspapers follows. Expansion reported on
January 16 that inflation in 2006 (roughly 3.5 percent) was
depleting the real value of nominal wage increases.
Immigration had been an important factor in keeping wage

increases down. In fact, in 2006 employers spent less on
wages and benefits than in 2005. The opposition Conservative
Party (PP) economic spokesman, Miguel Agrias Canete, focused
on Spain's widening current account deficit, which in 2006
approached 8 percent of GDP. Canete said despite being a
Euro nation, Spain could not expect to finance its current
account deficit indefinitely. It could suffer a crisis like
the one in Portugal. (Expansion, January 17). One reason for
the increase in the current account deficit is that as
Spaniards get richer, they go abroad more so the tourism
surplus that Spain traditionally relies on declines. (ABC,
January 18). By November 2006, mortgages amounted to roughly
92 percent of GDP. (ABC, January 9). Household savings in
2006 fell to their lowest level since 1999 (ABC, January 16).
Foreign investment in real estate declined by 12.1 percent
in 2006 compared to 2005, while Spaniards increased their
real estate purchases overseas. (ABC, January 16).


4. (U) So who is right? The government or the opposition?
The number two at the Ministry of Finance, David Vergara,
conceded to the DCM that about a third of Spain's current
account deficit reflected a lack of competitiveness. But
financing for the foreseeable future would not be a problem,
among other reasons because Spain, unlike Portugal, continues
to run a budget surplus. And yes, mortgage lending is up,
but most mortgages were generated with a loan to value ratio
under 80 percent, suggesting that negative equity problems
stemming from a drop in housing prices is not likely. The
opposition PP economic spokesman concedes a soft landing for
the property market is more, rather than less, likely. So,
for 2007, it seems that the government's optimism is
warranted, although it clearly should be doing a lot more
structural reform to make Spain more competitive.


5. (U) Where does the feel good factor among many Spaniards
stem from? There are a variety of explanations but three
stand out. First, 80 percent of Spanish households own their
property, and they have seen their property values rise
dramatically in recent years. Even if Spaniards do not
typically extract equity from their houses and apartments,
there is a wealth effect in terms of greater willingness to
spend and borrow. Second, unemployment, while still high by
American standards, is considerably lower than by historic
Spanish standards. As observers in the U.S. have often
noted, trends often matter more than the absolute numbers in
terms of shaping public opinion. Third, with more women in
the workforce, households are richer even if real wages are

MADRID 00000122 002.2 OF 002


being eroded by inflation.

--------------
Spanish Wine reform policy
--------------


6. (U) The European Commission (EC) and the Government of
Spain (GOS) endow Spanish producers and exporters with a
competitive advantage vis-a-vis U.S. producers/exporters in
markets of mutual interest via their wine policies. During
marketing year (MY) 2006, we estimate that the EC and GOS
paid Spanish wine producers about 460 million Euros in
production, stabilization, marketing, and export subsidies.
Of that total, Spanish producers received 158 million Euros
in vineyard-restructuring subsidies to replace
no-longer-desirable grape varieties with in-demand varieties
such as Tempranilo, which will further enhance Spanish
long-term competitiveness in the U.S. domestic market, and
important third-country markets such as the United Kingdom.


7. (U) In June of 2006, the EC proposed reform of the wine
sector with the stated intent of reducing the type and level
of subsidies and moving the entire sector to a more
market-oriented structure. However, Spanish producers, long
accustomed to this exceptional financial assistance, are
opposed to a reduction in aid. Rather, they counter propose
that the EC and GOS provide even greater market-enhancement
subsidies to create stronger demand and higher prices for
their wine, which might then reduce some of the other
production and stabilization subsidies currently being paid.

Aguirre