MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - DECEMBER

UNCLAS SECTION 01 OF 03 MADRID 002250 SIPDIS SENSITIVE SIPDIS DEPARTMENT FOR EUR/WE AND EEB/IFD/OMA E.O. 12958: N/A TAGS: BEXP EAGR ECON EIND EINT EINV ENRG KIPR KNNP SP SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - DECEMBER 10-14 REF: MADRID 2236 MADRID 00002250 001.2 OF 003 Table of Contents: ECON: Ambassador talks with Circulo de Confianza business group ECON: Solbes forecasts 2008 growth around 3 percent ECON: ECB study shows high processed food inflation KNNP/ENRG: Union group suggests reopening nuclear debate EINT: First Vice President, Telefonica CEO praise broadband penetration ECON/ENRG: International press stories suggest varied picture for Spanish companies EINV: FCC buys two U.S. waste treatment firms, becomes 2nd largest in U.S. market EAGR/BEXP: Export subsidies manipulating market signals EINV/EIND: Delphi to close another plant EINV: Las Vegas-style casinos approved for Aragon EIND: Sustainable tourism plan unveiled AMBASSADOR TALKS WITH CIRCULO DE CONFIANZA BUSINESS GROUP ¶1. (SBU) The Ambassador spoke on December 10 to the Circulo de Confianza, a blue-chip collection of important businessmen that also includes a few politicians and government officials. The Circulo meets periodically for off-the-record conversations with prominent individuals. Spaniards have a tradition of the &tertulia,8 which in this case meant a structured way of maintaining a question and answer session. The Ambassador was asked questions on topics ranging from foreign policy to the marketing of Spanish wine in the U.S. Perhaps the biggest benefit of the evening was the opportunity the Ambassador had to put U.S. Iran and Cuba policy in perspective for this audience of movers and shakers. The Ambassador emphasized that U.S. Iran policy was unchanged and highlighted two critically suspicious aspects of Iranian behavior: Iran's continued enrichment of uranium and Iran's continued development of ballistic missiles. Cuba, as is often the case here, came up when a businessman asked why the U.S. maintains the embargo against Cuba while at the same time having normal relations with Vietnam. The Ambassador turned the question around by saying he was surprised that the Spanish government maintains normal relations with a communist dictatorship. He also said that for both the U.S. and Spain, Cuba was more of a domestic than a foreign policy matter. He said that it was unthinkable for the U.S. to have normal relations with Cuba unless democratization and respect for human rights emerges. SOLBES FORECASTS 2008 GROWTH AROUND 3 PERCENT ¶2. (U) The new forecast is down from the Government,s estimate several months ago of 3.3 percent, but may be on the high side as many analysts are leaning towards an estimate closer to 2.5 percent. Solbes also says that despite lower growth, the budget surplus for 2008 will still be about 1.15 percent of GDP. The Second Vice President and Finance Minister says he is considering a reduction in corporate tax rates, although "it is not a priority now." Solbes is also forecasting that there will be less inflationary pressure. (Expansion, 12/12/07) ECB STUDY SHOWS HIGH PROCESSED FOOD INFLATION ¶3. (U) The European Central Bank compared annualized 2007 processed food (the survey also included bread, cereal and dairy) inflation in the eurozone. Average processed food inflation in the Euro area was 4.0 percent. Among the big euro economies, Spain had the highest increase, 6.8 percent and France the lowest, 1.3 percent. (Comment: It is not clear why there is such a big difference. One thing is clear though. Higher food prices are a subject of national debate in Spain and something the government is sensitive about. End comment.) (Financial Times, 12/14/07) UNION GROUP SUGGESTS REOPENING NUCLEAR DEBATE ¶4. (U) The federal secretary of the influential PSOE-allied Union General de Trabajadores (UGT),Ignacio San Miguel, said on 12/11/07 that Spain should have a calm ("sereno") debate about nuclear energy. (Comment: This was an important intervention, as the Socialist government is basically anti-nuclear power, although President Zapatero did say at a recent Economist Intelligence Unit seminar that he was not a "fundamentalist" on the topic.) (Expansion, 12/12/07) FIRST VICE PRESIDENT, TELEFONICA CEO PRAISE BROADBAND MADRID 00002250 002.2 OF 003 PENETRATION ¶5. (SBU) Maria Teresa Fernanda de la Vega and Cesar Alierta presented the eighth Information Society Report on December ¶11. According to the report, 75% of Spanish households with internet access have broadband internet, which is 13 percentage points above the EU average. (Comment: The high-level Spanish government participation was one more indication of the Spanish government's treatment of Telefonica as something of a "national champion." This treatment is a complicating factor in our efforts to get Telefonica, Spain's by far and away most important Internet Service Provider, to crack down on internet piracy. End comment.) (Expansion, 12/12/07) INTERNATIONAL PRESS STORIES SUGGEST VARIED PICTURE FOR SPANISH COMPANIES ¶6. (SBU) International newspaper stories this week painted a mixed picture of Spanish companies, prospects. IHT has a story on the real estate market slowdown called "Spanish real estate: All work but no sales." The IHT also has a story entitled "Inditex profit mirrors consumer slowdown." Inditex owns the well-known Zara clothing brand that has 3500 stores worldwide. The company is underperforming in Spain, and the article suggests a link to the weaker construction sector. Other newspapers reported favorably on Iberdrola,s spinoff of 20 percent of its renewable electricity unit in an IPO (reftel). The Financial Times also reports that "Savings in Endesa greater than Enel expected." (Comment: No doubt about it, Spain's construction- and consumer-led expansion is slowing. Some Spanish companies have been very aggressive in diversifying into other areas, such as construction companies in the renewable electricity sector. Some companies have gone heavily international. Whether these efforts will be enough to compensate for a downturn in housing construction remains an open question. End comment.) (IHT, 12/13/07; FT 12/13/07) FCC BUYS TWO U.S. WASTE TREATMENT FIRMS, BECOMES SECOND LARGEST IN U.S. 7.(U) Spanish construction and services group FCC has bought two U.S. industrial oils and oil residue treatment companies from Siemens Water Technologies for 182.5 million dollars. FCC plans on integrating the companies into its industrial waste division, making it the second largest player in the U.S. market. (Reuters, 12/11/07) EXPORT SUBSIDIES MANIPULATING MARKET SIGNALS ¶8. (SBU) The European Commission (EC) will now reportedly subsidize the export of European-produced pork into the world market. While the practice is permissible under the EU,s obligations under the Uruguay Round Agreement of the World Trade Organization (WTO),it is a practice almost completely abandoned by all other WTO Members, because it is so trade-distorting. In the current round of WTO negotiations, the very first objective of WTO Member negotiators was to agree to a date-certain elimination of export subsidies. ¶9. (SBU) Unfortunately, the Government of Spain voted in favor of these production- and trade-distorting subsidies, ostensibly because Spanish pork producers are struggling economically with historically high grain prices, relatively weak pork prices, and a strong Euro. The EC could have helped hog producers to access competitively-priced feed ingredients by expediting the biotechnology approvals process in Brussels. However, it appears that reigniting export subsidies was more expedient and politically acceptable. DELPHI TO CLOSE ANOTHER PLANT ¶10. (U) Bankrupt auto-parts company Delphi announced this week that it would be closing its plant in Tarazona beginning in January 2008, leaving 320 workers jobless. The company will soon present its contract termination proposal for this closure and for the plant's employees. Also at risk is its plant in Belchite that currently employs 120 people. Earlier this year, Delphi closed its 1,600-employee plant in Cadiz, prompting massive strikes by hundred of thousands of workers in support of their Delphi colleagues. Ultimately, Delphi agreed to a 120 million-euro settlement. (Comment: Given the Cadiz experience, Delphi will presumably approach the Tarazona closure with more caution. We will continue to follow this potentially problematic issue. End comment.) (ABC, 12/11/07) MADRID 00002250 003.2 OF 003 LAS VEGAS-STYLE CASINOS APPROVED FOR ARAGON ¶11. (U) The President of the Autonomous Community of Aragon and a private consortium announced December 13 plans to build a massive casino complex that would be second only to Las Vegas. Construction on this 17 billion-euro development would begin in the second quarter of 2008 with opening of the first phase predicted for 2010. The development would include 232 restaurants, 70 hotels and 32 casinos. (print and TV media 12/13/07) SUSTAINABLE TOURISM PLAN UNVEILED ¶12. (U) Tourism Plan Horizon 2020, an initiative by the GOS to increase demand and spread out the impact of tourism by extending the season and promoting lesser-known areas. The Spanish tourism office expects Spain to receive 60 million visitors by the end of 2007, a 2 percent increase from 2006,s total. Tourism accounts for 10 percent of the country's GDP. (eTN 12/11/07) AGUIRRE