This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MADRID 003840 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PGOV ELAB SP
SUBJECT: UNIONS PROTEST GOS PLAN FOR SAVING FAILING 
SHIPBUILDING INDUSTRY 
 
REF: MADRID 3105 
 
¶1. (SBU) Summary.  Zapatero's Socialist (PSOE) government is 
facing its first labor crisis since taking office in April, 
as shipyard workers in five cities stage unruly protests and 
block traffic to protest GOS backing of a restructuring plan 
that will lead to significant layoffs.  The heart of the 
issue is the inability of state-owned Izar Shipyards to 
compete with Asian shipbuilders and a demand by the European 
Commission (EC) that Spain repay at least USDOLS 370 million 
-- and possibly over USDOLS 1.35 billion -- in allegedly 
illegal subsidies provided to Izar in recent years by the 
previous Popular Party (PP) government.  Labor frustrations 
burst into violent demonstrations in Cadiz and Vizcaya after 
Zapatero pledged to help workers, then subsequently announced 
his support for a company plan to split and partially 
privatize the failing enterprise, a plan that will result in 
job losses.  A labor representative, who was preparing for a 
trip to the U.S. as an International Visitor grantee, told us 
the violence was regrettable, but indicative of the fear felt 
by Izar's 11,000 workers and 30,000 workers in affiliated 
industries.  The GOS extracted a temporary reprieve from the 
EC regarding repayment of the illegal subsidies, taking the 
punch out of opposition arguments that the PSOE was acting on 
behalf of Brussels rather than Spanish workers.  The GOS also 
put on hold its plans to divide the company while talks with 
the unions are underway.  Unfortunately for Zapatero, there 
is no solution that will both save all Izar jobs and satisfy 
the EC that the GOS has ceased its illegal subsidies.  Any 
viable solution is likely to incite another round of labor 
unrest.  End Summary. 
 
//AN UNWELCOME CONFRONTATION WITH LABOR// 
 
¶2. (U) The Zapatero administration has attempted to shift the 
blame for the crisis to the PP for making the allegedly 
illegal payments to Izar, but PSOE remains on the defensive. 
All political parties except the PSOE joined a Congressional 
resolution calling on Zapatero to set aside the restructuring 
plan and demand lenient terms from the EC.  Zapatero's 
government is attempting to do just that, but in the end the 
only question is how, not if, a large number of Izar 
employees will be removed from government payrolls. 
 
//LAST GASP OF A DYING INDUSTRY// 
 
¶3. (U) Over the last two decades, Spain's centuries-old 
shipbuilding industry has lost 30,000 jobs in a struggle for 
economic survival against Asian competitors, particularly 
South Korea.  In 2000, the GOS folded its two remaining 
shipbuilding companies into a single company known as Izar as 
part of an effort to streamline the industry, but  Izar has 
never shown a profit.  Izar's 11,000 employees are now in 
danger of losing their jobs. 
 
¶4. (SBU) It is the misfortune of the Zapatero administration 
that the final crisis has come on its watch.  The Izar issue 
is coming to a head now in part because the opposition 
Popular Party (PP) delayed the inevitable by propping up the 
company through more than 1 billion euros (USDOLS 1.2 
billion) in state funds, funds the European Commission (EC) 
has declared to be illegal subsidies and is now demanding 
Izar pay back to the GOS and the EU.  The GOS estimates that 
if the parastatal company that owns Izar, Sociedad Estatal de 
Participaciones Industriales (SEPI), is forced to repay the 
full amount of illegal subsidies, Izar will go bankrupt 
within four months.  To avert the total collapse of Izar, 
SEPI proposed separating the relatively viable military 
construction shipyards from the foundering civilian vessel 
shipyards and privatizing the civilian facilities.  It is 
this SEPI survival strategy that has triggered violent 
protests by Izar workers throughout Spain and drawn Zapatero 
into an unwelcome conflict with labor. 
 
//BACKGROUND TO THE CRISIS// 
 
¶5. (U) Thoughout its first term, Aznar's PP government 
maintained good working relations with labor unions and 
focused economic policy on job creation, dovetailing with 
union objectives for dealing with Spain's chronic high 
unemployment.  After taking office in 1996, Aznar continued 
GOS support for a plan by the previous PSOE government to 
restructure the publicly owned shipyard industry, an 
initiative that had the support of all major Spanish labor 
unions.  The plan was intended to wean the shipyards away 
from state funding and require them to reduce labor and 
manufacturing costs. 
 
¶6. (U) In 1997, the European Commission (EC) approved 
restructuring aid for the GOS-owned Spanish military 
shipbuilder Astilleros Espanoles, S.A. and the GOS-owned 
civilian shipbuilder Empresa Nacional Bazan amounting to EUR 
1.38 billion (USDOLS 1.69 billion).  EU funds were provided 
on the condition that no further subsidies would be provided 
to the companies. 
 
¶7. (U) However, both companies failed to meet the objectives 
of the GOS restructuring plan and remained unprofitable.  In 
1999, Aznar's PP government authorized state-owned SEPI to 
grant EUR 500 million (USDOLS 615 million) in further aid to 
Bazan, assistance that eventually included SEPI's purchase of 
Bazan at allegedly above-market value.  SEPI then purchased 
Astilleros in December 2000, forming Izar as Spain's last 
major civil and military shipbuilding company.  Izar employs 
11,000 shipbuilders in six cities throughout the country and 
36,000 workers in related industries. 
 
¶8. (U) The European Commission launched an investigation in 
2000 to determine whether Aznar's assistance to Bazan and 
Astilleros constituted a violation of its 1997 agreement to 
provide restructuring aid.  While the EC investigation was 
underway, the GOS provided another EUR 560 million (USDOLS 
688 million) in subsidies to Izar.  In May 2004, the EC 
determined that Spain's 1999 and 2000 assistance to the 
shipbuilders through SEPI and subsequent subsidies to Izar 
provided Spanish companies an uncompetitive advantage over 
other EU shipbuilders.  The EC found that Izar must 
immediately repay EUR 308 million (USDOLS 378 million) and 
perhaps eventually up to EUR 1.1 billion (USDOLS 1.35 
billion) in illegal assistance. 
 
//LAST-DITCH SURVIVAL PLAN// 
 
¶9. (SBU) In an effort to salvage what it can of the industry, 
SEPI has proposed dividing the civilian and military 
shipyards into two sets of companies, keeping the military 
shipyards (4 out of Izar's 10 facilities) under state 
ownership and privatizing the civilian shipyards.  The PSOE 
government has also ramped up efforts to secure military 
sales for the remaining shipyards.  SEPI is banking on Izar's 
relatively stable orders for military vessels to provide 
employment for at least several thousand Izar employees. 
(NOTE: One news report suggested that a recent Israeli 
decision to withdraw orders from Izar for two naval vessels 
was linked to USG displeasure with Zapatero's withdrawal of 
Spanish troops from Iraq.  END NOTE.)  The fate of workers in 
civilian shipyards would be far less certain. 
 
 
¶10. (U) Shipyard workers met the SEPI plan with hostility 
from the outset and have staged sometimes violent strikes to 
make their position clear.  Workers are against any division 
of the company or privatization of either the civilian or 
military sector based on their certainty that privatization 
will bring layoffs.  They want Izar maintained as a single 
entity in order to guarantee that all workers will get the 
same deal. 
 
¶11. (SBU) Labor's mood went from anger to outrage after 
Zapatero, during a visit to the Basque region, quelled a 
demonstration by Izar workers by promising he would stand 
with them, only to do an about-face and endorse the SEPI plan 
three days later.  Workers reacted by announcing increased 
walkouts and temporary strikes.  In Vizcaya and Cadiz, 
workers clashed with police and barricaded roads.  Zapatero's 
reversal was cast as a major gaffe by opposition parties and 
the press and a reflection of inexperience and an inability 
to confront difficult issues directly. 
 
¶12. (SBU) The GOS won a temporary truce with workers on 9/23 
by agreeing to put the SEPI plan on hold while negotiations 
with labor unions are underway, but both sides appear 
entrenched in their positions.  The next day, Minister of the 
Economy Pedro Solbes announced EC approval for a temporary 
reprieve on Izar while the GOS works out a solution with the 
unions.  SEPI and labor union representatives traveled 
together to Brussels on 10/4 for meetings with the EC to 
establish the EC's bottom line on the matter.  An EC 
spokesman suggested there could be "flexibility" on the 
schedule of repaying illegal subsidies, but only if SEPI's 
plan for separating Izar into military and civilian sectors 
were implemented.  The EC estimates that splitting the 
companies will save 9,000 shipbuilder positions.  Labor 
unions have continued intermittent work stoppages to keep up 
pressure on SEPI and the GOS during the negotiations. 
 
//LABOR'S VIEW// 
 
¶12. (SBU) Poloff met with Comisiones Obreras (CCOO) Director 
for International Relations Javier Doz on 9/24 to discuss 
union views on the Izar crisis. (NOTE: Doz was preparing to 
depart for the U.S. on 9/25 as an International Visitor 
grantee.  He is a long-standing and excellent contact on 
labor issues.  END NOTE.)  CCOO, a formerly Communist-aligned 
but now independent labor union, represents the largest 
number of shipbuilders and has played a leading role in the 
negotiations with SEPI and the Zapatero government.  He 
explained that Izar workers are divided among all the major 
Spanish unions, guaranteeing a broad base of support for the 
shipbuilders.  Doz said the SEPI plan would probably lead to 
4,500 layoffs out of the total of 11,000 Izar direct-hires 
and to an unknown number of layoffs among the 30,000 workers 
in supporting industries.  He said the outbreaks of violent 
demonstrations were regrettable, but that they reflected the 
fears of workers fighting for their economic lives.  He 
expected Cadiz to be especially restive since a large number 
of workers in related industries in that city depend on Izar. 
 
 
¶13. (SBU) Doz acknowledged that the long term prospects for 
shipbuilders were bleak, lamenting the fact that 
state-subsidized companies in Korea made Spanish firms that 
played by the rules of international competition unviable. 
However, Doz also noted that Korean firms were quicker to 
adapt to customer needs and were more technologically 
efficient than Spanish shipbuilders.  Doz observed that even 
Izar's military shipyards suffer from lack of orders and 
cannot absorb the excess labor in the civilian shipyards.  He 
said the CCOO and other unions were focused on getting the 
best deal they could for workers who will be forced from the 
industry.  That could take the form of buyouts or favorable 
retirement packages, but SEPI and the unions are far from 
reaching any such arrangements. CCOO and the other unions 
also want the GOS to demand lenient terms from the EC, 
pointing out that larger EU countries don't refrain from 
pressuring the EC to bend the rules to protect domestic 
labor. 
 
 
//POLITICAL FALLOUT// 
 
¶14.  (SBU) The demand that the PSOE stand up to the EU is 
aimed squarely at Zapatero, whose key policy foreign policy 
objective has been to "return Spain to the heart of Europe." 
He symbolically achieved this goal in early September, 
hosting Chancellor Gerhard Schroder and President Jaques 
Chirac for a meeting intended to signal a definitive break 
with Aznar's focus on transatlantic relations.  The PP and 
other parties are now challenging Zapatero to use Spain's 
renewed EU credentials to extract favorable terms from 
Brussels regarding Izar's repayment of the illegal subsidies. 
 
¶15. (SBU) The PSOE has blamed the PP for the Izar crisis 
because the allegedly illegal subsidies took place on Aznar's 
watch.  The PP is unapologetic, saying Spanish workers should 
have priority over meeting EU agreements.  Some observers 
have noted that all parties, including the PSOE, knew the PP 
subsidies to Izar were illegal and did nothing to stop them 
because no party wanted to accept responsibility for dooming 
the shipyards.  PSOE made a vain appeal for other parties not 
to politicize the Izar issue, but on 9/21 all parties except 
PSOE supported a congressional resolution calling on the GOS 
to shelve the SEPI plan and demand better terms from the EU. 
The GOS responded that the only realistic choices were the 
SEPI plan or the total dissolution of Izar. 
 
//COMMENT// 
 
¶16. (SBU) This is not how Zapatero, who is mindful of the 
last PSOE administration's strained ties to labor, wanted to 
initiate his relationship with Spanish unions.  His offer and 
subsequent retraction of support for the workers was 
especially embarrassing.  However, Zapatero's administration, 
particularly Minister of the Economy Solbes, appears to have 
recovered from that gaffe and regained the initiative.  The 
ability of the GOS to extract a positive response from the EC 
(at least for the moment) took the punch out of opposition 
argument that the PSOE was acting on behalf of Brussels 
rather than Spanish workers.  Unfortunately for Zapatero, 
there is no solution that will both save all Izar jobs and 
satisfy the EC that the GOS has ceased its illegal subsidies. 
 Any viable solution is likely to incite another round of 
labor unrest. 
MANZANARES