MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - DECEMBER

UNCLAS SECTION 01 OF 03 MADRID 002292

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR/WE AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: ECON EFIN EIND ELAB ELTN KIPR PGOV TBIO SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - DECEMBER
17-21

REF: MADRID 2236

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Table of Contents:

ECON: Per capita GDP passes Italy,s
ECON/EFIN: How long can high current account deficit continue?
ECON: Solbes criticized for inflation remarks
ECON/ELAB: Labor, business confederations agree on 2 percent
2008 wage increases
EFIN/PGOV: 2008 budget approved
ELTN/PGOV: Senate censures Public Works Minister
KIPR: "Digital Copying Charge" renewed, modified
EIND/ELTN/EFIN: Four Spanish bids expected on Pennsylvania
Turnpike concession
EFIN/EIND/KIPR: More companies considering IPOs
EIND: Major Galicia companies anticipate creating new jobs in
2008
ETRD/TBIO: Call for EC investigation of U.S. biodiesel exports

PER CAPITA GDP PASSES ITALY'S


1. (U) The PSOE government can point to another piece of good
news on the economic front as the campaign approaches.
Eurostat statistics for 2006 showed Spain's per capita GDP
passing Italy's for the first time. This puts Spain in
eighth place among the 13 Euro countries, with a per capita
income 5 percent below the Eurozone average but 5 percent
above the broader EU average. GDP and GDP per capita have
steadily grown faster than the European average over the last
decade.

HOW LONG CAN HIGH CURRENT ACCOUNT DEFICIT CONTINUE?


2. (U) Observers believe that in 2007, Spain's current
account deficit may reach 10% of GDP. The question that many
analysts have asked for several years is how long can Spain,
a member of the euro currency union, continue to run such
high current account deficits? The Spanish Foreign Trade
Institute commissioned a dozen economists to try to answer
that question. Their essays were recently published by the
Madrid College of Economists. The short answer to the
question, yet again, is that nobody really knows. Before
Spain's adoption of the euro, the economists calculated that
a current account deficit on the order of about 5% of GDP
would produce downward pressure on the former currency, the
peseta. However, well after the current account deficit
passed the 5 percent level, Spain continued to receive
investment and Spanish companies continued to raise money on
international capital markets with ease. So it is not
exactly clear through which mechanism Spain would adjust its
current account deficit downwards. However, the current
account deficit is being financed through massive borrowing
by both consumers and firms. A possible adjustment could
happen at the point when accumulated debt reaches such
dangerous levels that Euro Zone creditors begin to establish
interest rate differentials and credit limits on Spain. The
resulting credit squeeze would force a slowdown in economic
activity and a consequent narrowing of the balance of
payments gap. Another possibility is for FDI and portfolio
investment to decline and Spanish companies to find it more
difficult to issue bonds. Highly qualified commentators and
analysts regularly argue that Spain's current account deficit
is "unsustainable," but nobody has a perfect explanation for
the mechanics of forcing an adjustment. (El Pais, 12/17/07)


SOLBES CRITICIZED FOR INFLATION REMARKS


3. (SBU) The Second Vice President and Finance Minister
suggested on December 17 that one reason inflation is
relatively high is that Spaniards have still not internalized
the value of the euro and, for instance, leave a one-euro tip
for two cups of coffee that cost a euro each. The PP
immediately pounced on Solbes, who attempted to make light of
the remarks a day later. (Comment: Solbes is conceivably on
to something, but he undoubtedly opened himself up to charges
of insensitivity. Inflation is shaping up to be a real
election issue. This was a rare gaffe on Solbes, part.)
(Expansion 12/17-18/07)

LABOR, BUSINESS CONFEDERATIONS AGREE ON 2 PERCENT 2008 WAGE
INCREASES


4. (U) The CCOO and UGT labor confederations and the CEOE
employers' confederation agreed on a 2 percent wage increase
for 2008, matching the government's inflation forecast. The
contracts included clauses guaranteeing maintenance of
employee purchasing power in case inflation is above the

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expected rate. (El Pais 12/17-19)

2008 BUDGET APPROVED


5. (U) On December 21, the Congreso (lower house) approved
the government's 2008 budget, overriding the Senate's earlier
"veto" by a 182-165 total. The governing PSOE was able to
obtain enough votes from smaller parties to reach a majority
despite the impending electoral campaign, which gives the
smaller parties incentives to distance themselves from the
government.

SENATE CENSURES PUBLIC WORKS MINISTER


6. (SBU) The Senate voted on December 18 to approve a
non-binding resolution calling for the resignation of
Minister of Infrastructure and Public Works Magdalena
Alvarez. The Minister has been widely criticized in
Catalonia this year for electricity blackouts, delays in the
completion of the Madrid-to-Barcelona high-speed rail line,
and accidents in the construction of that line that blocked
service on three of Barcelona's seven commuter rail lines for
six weeks. While the resolution has no practical impact, it
is a symbolic victory for the opposition Partido Popular
(PP). The resolution passed because the PP has more seats in
the Senate than the governing PSOE, and all the other parties
abstained. In the more important Congreso, the PSOE has more
seats than the PP and was able to attract the votes of enough
other parties to defeat a similar motion by 3 votes on
November 27. On November 16, the Catalan Autonomous
Community legislature passed a similar motion. Alvarez
became the first minister to be censured by either a regional
legislature or the Senate since the return to democracy. She
is a longtime ally of President Zapatero, who is not expected
to replace her before the election.

"DIGITAL COPYING CHARGE" RENEWED, MODIFIED


7. (U) After a week of controversy, the Congreso approved on
December 20 a revised version of the "canon digital," a
charge on digital copying, storage, and playing devices. The
canon, which dates from 2003, is an attempt to compensate
authors, editors, and distributors for the copies individuals
are allowed by Spanish law to make for their personal and
private use of protected intellectual property. The
government's approved proposal reduced the charges on some
devices, such as CD/DVD recorders, CD-ROMs and DVD-ROMs,
maintained charges on other devices, and imposed new charges
on mobile phones, USB memory and MP3/MP4 players. The
previous week, the Senate had unexpectedly approved an
amendment calling on the government to eliminate the canon
within a year, but the Congreso voted down that amendment.
The canon is not a major issue for the USG, as several U.S.
content providers are among those who benefit, and internet
downloading is a greater concern. However, we are concerned
about claims by some users that having paid the canon gives
them the right to download unlimited copies of intellectual
property.

FOUR SPANISH BIDS EXPECTED ON PENNSYLVANIA TURNPIKE CONCESSION


8. (U) Four Spanish companies or groups of companies have
prequalified to bid on the planned concession of the 532-mile
Pennsylvania Turnpike. One consortium includes ACS
subsidiary Iridium, Isolux, and Banco Santander, along with
Citi and the Swiss bank UBS. Another includes Cintra, a
subsidiary of Ferrovial. The other two are Abertis and
Global Via, a joint venture of FCC and the Caja Madrid
savings bank. The concession, expected to be the largest in
the U.S., is expected to require 18 billion dollars in
investment.

MORE COMPANIES CONSIDERING IPOs


9. (U) Undeterred by the volatility of world stock markets,
several Spanish companies are seeking to emulate last week's
IPO of 18 percent of Iberdrola's renewable energy unit that
valued the full unit at 33 billion dollars. The Eolia wind
and solar power group is expected to offer between 20 and 25
percent of its shares sometime in the first quarter of 2008.
The firm, which is expected to be valued at just under a
billion euros, has 40 projects with a potential generating
capacity of 1,325 megawatts from wind and 64 from solar. A
quarter of the firm's capacity is in Mexico. Separately, as
many as four pharmaceutical biotechnology companies could
issue shares in 2008, some of them on the soon-to-open
Alternative Stock Market aimed at smaller companies.


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MAJOR GALICIA COMPANIES ANTICIPATE CREATING NEW JOBS IN 2008


10. (U) Expansion plans in Galicia are going as planned
despite fear of economic difficulties. The 10 largest
companies with headquarters in Galicia - Inditex, PSA Peugeot
Citroen, Constructora San Jose, Pescanova, Finsa, Coren,
Gadisa, Caixa Galicia, Banco Pastor and Caixanova Galicia -
anticipate creating more than 2,000 jobs next year to
accommodate their expansion plans. Of the companies, the
Inditex clothing firm is programmed to create the most jobs
worldwide at 11,000, of which only 100 will be located in
Galicia. (El Pais 12/17)

CALL FOR EC INVESTIGATION OF U.S. BIODIESEL EXPORTS


11. (U) Why did U.S.-produced biodiesel (B99) exports to
Europe increase tenfold in one year? Because of U.S.
subsidies, according to the European Biodiesel Board (EBB).
Trade Commissioner Peter Mandelson now has 45 days to
consider launching an investigation into U.S. biofuels
subsidies and dumping after receiving a formal complaint from
the EBB. B99 Biodiesel blends classify as "organic
chemicals" in Europe, because they contain from 0.1 to 1
percent petroleum-based diesel. As a result, European
importers do not pay import tariffs. In addition, U.S.
biodiesel producers reap a U.S. subsidy of a dollar per
gallon regardless of where the biodiesel is used. As a
result, the EBB claims that imported U.S.-produced B99 blends
undercut EU producers' prices by up to 150 euros per ton.
The EBB alleges that European B99 imports soared from 100,000
tons in 2006 to one million tons this year. Spanish biofuels
producers have expressed concern that these U.S. exports are
unfair competition.
AGUIRRE