MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - FEBRUARY

UNCLAS SECTION 01 OF 02 MADRID 000143 SIPDIS SIPDIS DEPARTMENT FOR EUR/WE AND EEB/IFD/OMA E.O. 12958: N/A TAGS: EAGR EAIR ECON EFIN EINV ELAB ELTN ENRG ETRD SP SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - FEBRUARY 4-8 MADRID 00000143 001.2 OF 002 Table of Contents: ECON/ELAB: Record one-month jump in unemployment ECON/EFIN: Banks report healthy profits EINV/ENRG: Zapatero says EDF needs to negotiate to enter Spanish electricity market EAGR: EU policy to propel Spanish wine shift EAGR/ETRD: French protest against agricultural imports from Spain ELTN/EAIR: AVE set to compete for travelers on Madrid-Barcelona run EAIR: Varig opens new route to Brazil RECORD ONE-MONTH JUMP IN UNEMPLOYMENT ¶1. (U) Registered unemployment rose by 132,000, or 6.2 percent, in January, the largest one-month increase in the 21 years that records have been kept in their current form. The month's increase was primarily concentrated in temporary employment, but the permanent sector is likely to be affected too; unemployment is predicted to worsen during 2008 as a result of the slump in the construction and real estate sectors. The deceleration of the economy appears to be somewhat worse than had been expected a few months ago, and some analysts now predict 2008 GDP growth of only 2.5 percent. Despite the recent increase, the unemployment rate - 8.6 percent in the fourth quarter of 2007 - remains well below the 11.5 percent rate when Socialists came to power in ¶2004. However, the number of registered unemployed has increased to 2.26 million because of growth in the labor force, including the arrival of approximately 2.5 million immigrants. Opposition PP presidential candidate Mariano Rajoy is using this decline to sway Spanish voters against the present government by calling unemployment reports, "a real drama." Others argue that despite slow employment growth the economy is far from a recession or a "drama," but that spurring growth and employment will require quick government action, such as encouraging more public investment. (EL PAIS, 2/5/08 and 2/6/08) BANKS REPORT HEALTHY PROFITS ¶2. (U) Santander reported a 9 billion euro profit and BBVA a 6.1 billion euro profit for 2007. Out of 15 banks listed in El Pais, only two reported losses: La Caixa and Banco Sabadell. This is of course in stark contrast to some of the big losses racked up elsewhere by Citigroup, Merrill Lynch, UBS, Morgan Stanley, Bank of America, JPMorgan, HSBC, Barclays and Societe Generale. (Comment: It appears to be true that the Spanish banks were less exposed to U.S. sub-prime related instruments in 2007 than many of their foreign counterparts. However, given that most observers believe that housing will face a tough 2008 in Spain, it will be a distinct challenge for Spanish banks to do as well in 2008 as they did in 2007.) (El Pais, 2/7/08) ZAPATERO SAYS EDF NEEDS TO NEGOTIATE TO ENTER SPANISH ELECTRICITY MARKET ¶3. (U) At a February 6 KPMG event, Zapatero insinuated that if EDF wants to get into the Spanish energy sector, i.e. buy Iberdrola with Spanish construction giant ACS, it would have to do so through a "process of good understanding." (Comment: There has been lots of local press speculation about EDF teaming up with ACS to launch a hostile takeover bid of Iberdrola. Many commentators have noted the discrepancy inherent in President Sarkozy's insistence that Societe Generale remain in French hands while French national champion EDF maneuvers to buy one of Spain's leading companies, Iberdrola.) (El Pais, 2/7/08) EU POLICY TO PROPEL SPANISH WINE SHIFT ¶4. (U) While Spanish wine producers, among the top five in the world, have for years been shifting to higher-quality wine production at the expense of table wines and wines for distillation, the recent agreement to reform the European Union wine policy will propel them to shift at a much greater pace. The new EU wine policies maintain the same budget levels; but shift spending emphasis from propping up production for distillation, of which Spain has been a major beneficiary, to promoting higher-quality wine production, consumption, and marketing. The Spanish Government has said that Spain, and Spain's producing regions, must invest the money wisely, because they believe that more competition in the wine sector is just around the corner when the Doha Round trade negotiations are concluded. New-world wine producers MADRID 00000143 002.2 OF 002 have already had tremendous success in the European wine market, and lower tariffs associated with the conclusion of the Doha negotiations will make them more price competitive vis-a-vis Spanish wines. ¶5. (U) The Spanish government recently launched "Wine Strategy 2010," which will encourage and help wine producers become more competitive in European and third-country markets, while potentially improving the sector's income, long-term viability, and cachet worldwide. In that regard, the new marketing emphasis of European wine-sector reform will likely become a welcome complement to the Spanish strategy. Recently the Spanish have ramped up marketing efforts in the United States, Russia, and Asia. The U.S. market is very attractive right now, because of the surge of interest in Spanish foods and wines. The strength of the euro vis-a-vis the dollar may hinder somewhat their efforts, but they apparently consider the long-term potential gains for the sector to outweigh the current monetary pressures. Spanish exporters have more than doubled wine exports to Russia during the last year, now exceeding French exports in volume, while still trailing the French in export value. They are also focusing on Japan, recently taking part in a five-city tour to enhance the exposure and image of Spain's diverse selection of wines. FRENCH PROTEST AGAINST AGRICULTURAL IMPORTS FROM SPAIN ¶6. (U) French farmers detained, vandalized and destroyed produce and wine in the South of France in protest of agricultural imports from Spain. Members of the young farmers group Jeunes Agriculteurs blocked and overturned trucks carrying wine and produce at a toll station outside Montpellier on Tuesday, spilling over 100,000 liters of red and white wine in the hopes of causing authorities to take notice of what they say are Spanish agricultural goods treated with banned pesticides that enter France daily and go unchecked. (20 minutos 2/7/08) AVE SET TO COMPETE FOR TRAVELERS ON MADRID-BARCELONA RUN ¶7. (U) The long-delayed opening of high-speed rail (AVE) service between Madrid and Barcelona appears likely to take place in the next few weeks, before the March 9 elections. The government has not yet announced a date, perhaps hoping to avoid a repeat of the criticism it has faced for not meeting previous deadlines, but trains are now making trial runs. The over 200-mph train will set off a battle for passengers with airlines; Iberia alone carries 8,000 passengers a day on its 60 shuttle flights between Spain's two largest cities. Iberia officials have said they expect to see a decline in volume but that they expect to hold their own among business passengers, because their flights will still be shorter than the train trip. Improving railway infrastructure has been a major effort of the Zapatero government, which has invested 21 billion euros - 70 percent of it on the AVE lines - as the first part of a 15-year project. The Madrid-to-Malaga and Madrid-to-Valladolid AVE service opened in December have proven to be very successful, with passenger numbers doubling on the Malaga line and increasing by 75 percent on the Valladolid line. On the Madrid-to-Seville route, where AVE service began in 1992, 80 percent of passengers now choose rail over air. Railway officials say public subsidies will end by 2010. Environmental benefits - trains produce less CO2 per passenger-mile than planes - may give them another advantage as the EU moves towards measures to make polluters pay the cost of emissions. (El Pais 2/9/08, Guardian 2/2/08) VARIG OPENS NEW ROUTE TO BRAZIL ¶8. (U) Brazilian airline Varig hopes to transport 7,000 passengers a month on its new route from Madrid to Sao Paolo and Rio de Janeiro. The airline, acquired a year ago by GLAI, added the new route in hopes of opening up a trade and tourism market with Spain. (Terra 02/01/08) LLORENS