VZCZCXRO1780
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHMD #2525/01 2790718
ZNR UUUUU ZZH
R 060718Z OCT 06
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 0951
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2122
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 05 MADRID 002525 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/WE 
 
E.O. 12958: N/A 
TAGS: ECON SP
SUBJECT: SPAIN:  GALICIA'S ECONOMY TRANSFORMED BY 20 YEARS 
OF EU FUNDING 
 
MADRID 00002525  001.2 OF 005 
 
 
------------------------ 
SUMMARY AND INTRODUCTION 
------------------------ 
 
¶1.  Spain's 1986 entry into the European Union turned on a 
tap of EU funding which has helped transform the face of 
modern Spain.  To gain a better understanding of the impact 
of European funding on Spain's 16 regions, Embassy Madrid's 
Economic section plans to visit many of these regions over 
the next year and prepare a series of baseline cables on 
Spain's regional economies.  We begin this series with this 
report on the Galician economy.  ECONOFF visited Galicia 
September 25-26, meeting with the regional ministers of 
economy and education/science, the Director of Caixa Novo 
(southern Galicia's largest savings and loan bank), several 
officials of Caixa Galicia (northern Galicia's largest 
savings and loan bank), 15 businessmen from Vigo representing 
the most significant sectors of the Galician economy, the 
Director of Galicia's largest business federation, and two 
economist/university professors. 
 
¶2.  Twenty years of EU funding has been good for Galicia. 
Infrastructure has been modernized; isolation from the rest 
of Spain has ended; the negative impact of the decline of 
certain key economic sectors has been cushioned; and the rise 
of new economic sectors has been facilitated.  Galicia has 
been transformed and is no longer the isolated backwater most 
famous of sending immigrants to the Americas.  The public 
face of Galicia now resembles that of the rest of Spain.  But 
true economic "convergence" (i.e., making Galicia as rich as 
the rest of Spain) has not been achieved.  Galicia's GDP in 
1986 lagged well behind that of Spain.  In 2006, Galicia 
still lags behind.  Less behind than 20 years ago, but still 
further enough back to continue to qualify for EU convergence 
funding through the end of the EU's 2013 budget cycle.  But 
the chip on Galicia's collective shoulder vis-a-vis the rest 
of Spain has been removed with the help of 20 years of EU 
subsidies and today Galicians are both confidant about their 
economic future and proud to be Galician, Spanish and 
European.  END SUMMARY AND INTRODUCTION 
 
---------------- 
A GALICIA PRIMER 
---------------- 
 
¶3.  Galicia occupies 29,639 square kilometers in the 
northwest corner of Spain, above Portugal and to the west of 
the Asturias and Castilla and Leon regions.  Its territory 
encompasses 5.8 percent of Spain.  It is one of the 
westernmost points in continental Europe, enjoying relatively 
close proximity to American markets and sitting astride 
important sea lanes of communication.  Galicia has 1,300 
kilometers of coastline along the Atlantic Ocean and forests 
cover 69 percent of its territory.  Galicia contains 
2,762,000 inhabitants, which represents just under six 
percent of the total Spanish population.  Galicia's capital 
and administrative center is the inland city of Santiago de 
Compostela (92,000 inhabitants).  Its other major population 
centers include Vigo (293,000 inhabitants), La Coruna 
(244,000 inhabitants), and Ourense (109,000 inhabitants). 
 
¶4.  Galicia is as one of Spain's historic autonomous 
communities, along with Catalonia and the Basque Region.  The 
official languages of Galicia are Spanish and Gallego, which 
is similar to Portuguese.  Galicia enjoys close geographic 
and cultural ties to northern Portugal and until the advent 
of EU funded infrastructure development, Galicia enjoyed 
better communication links with the Porto region of Portugal 
than it did with the rest of Spain. 
 
----------------- 
ECONOMIC SNAPSHOT 
----------------- 
 
¶5.  Galicia's 2005 GDP was 47.9 billion euros, which 
represents roughly 5.4 percent of Spain's GDP.  Galicia's GDP 
grew by 3.3 percent in 2005, while Spain as a whole grew by 
3.5 percent.  Galician imports totaled 13.6 billion euros in 
2005, while exports totaled 12.1 billion euros.  Over seven 
billion of the 13.6 billion in imports came from the EU25, 
with France in the lead as the source of 2.6 billion euros in 
Galician imports, followed by Portugal with 1.6 billion euros 
in Galician imports.  Only 321 million euros of Galician 
imports came from the U.S.  As a result, the U.S. was only 
the 8th largest supplier of Galician imports, trailing five 
EU member states, Mexico (463 million euros) and China (395 
million euros).  Of the 12.1 million euros of Galician 
 
MADRID 00002525  002.2 OF 005 
 
 
exports registered in 2005, 8.8 billion euros worth went to 
EU25 nations, with France (3.9 billion euros) and Portugal (2 
billion euros) representing the largest EU25 importers of 
Galician products.  The U.S. imported 222 million euros in 
Galician products in 2005, which made the U.S. the seventh 
largest importer of Galician products, following six EU25 
members. 
 
¶6.  Regarding the nature of the 13.6 billion euros of 
Galician imports in 2005, leading import products included 
automobiles or automobile parts (2.9 billion euros), coal (2 
billion euros), maritime navigation equipment (1.5 billion 
euros), milk products (1.4 billion euros), steel (707 million 
euros), clothing pieces (589 million euros), and 
pharmaceutical products (390 million euros).  As for the 
nature of the 12.1 billion euros of Galician exports in 2005, 
leading export products included automobiles or automobile 
parts (4.1 billion euros), finished clothes or clothing 
pieces (1.5 billion euros), maritime navigation equipment 
(1.3 billion euros), fish and fish products (853 million 
euros), wood and cellulose products (530 million euros), coal 
(478 million euros), machinery (462 million euros), cement 
(315 million euros), and prepared meat or fish products (304 
million). 
 
¶7.  Galician origin foreign investment totaled 694 million 
euros in 2005, of which 397 million was destined for EU25 
nations.  Leading destinations of Galician investment 
included Italy (112 million euros), France (96 million 
euros), Mexico (82 million euros), Portugal (73 million 
euros), the United Kingdom (68 million euros).  Galician 
origin investment in the U.S. in 2005 totaled 45 million 
euros.  Foreign investment in Galicia totaled 190 million in 
¶2005.  Leading foreign investors included Portugal (126 
million euros), the U.S. (15 million euros), and the 
Netherlands (13 million euros).  Most foreign investment in 
2005 was directed to the financial services sector (115 
million of the 190 million total).  Given the low overall 
rate of foreign investment, it is clear that an individual 
deal (e.g., a Portuguese financial institution buying a 
counterpart in Galicia) could skew the statistics in any 
given year. 
 
¶8.  Total employment in Galicia has hovered between 1,000,000 
and 1,100,000 during the last 20 years, but the sectors 
employing these million workers have changed remarkably.  In 
1986, over 400,000 Gallegos (over 40 percent of total 
employed workers) were employed in the agriculture and 
fishing sectors.  Today, the number working in those sectors 
has declined to 115,000.  Rural small hold agricultural 
workers specializing in milk and beef production bore the 
brunt of this decline.  Galician agriculture, which was based 
in small, atomized land parcels, proved unable to survive in 
the larger common agricultural market.  More than one 
interlocutor told ECONOFF that "French milk devastated 
Galicia's agricultural sector."   During that same 20 year 
period, those working in the service sector increased from 
400,000 to 600,000, while those employed in industry grew 
from 140,000 to 194,000, and those employed in the 
construction sector grew from 75,000 to 127,000.  146,000 
Galician workers were unemployed as of August 2006 and the 
Galician unemployment rate (9.9 percent as of August 2006) 
has generally run significantly above that of the rest of 
Spain.  The Galician inflation rate has generally tracked 
that of Spain. 
 
-------------------- 
KEY ECONOMIC SECTORS 
-------------------- 
 
¶9.  Perhaps most important sectors of the Galician economy 
are automobiles and automotive parts, fishing and fish 
processing, and textiles.  Other key sectors include wood and 
paper  products, agricultural products (produced by large 
scale producers which emerged following the death of the 
family farm), granite and other non-metals mining, small and 
medium naval construction, biotechnology, 
construction/property, wind and hydro electricity production, 
pharmaceuticals/chemicals,  telecommunications/audiovisual 
products, tourism, mechanical equipment, and rubber and 
plastics.  According to the Galician Minister of the Economy, 
there are only 59 businesses in the region that employ more 
than 500 workers.  Of Galicia's 173,000 businesses, roughly 
102,000 employ no/no salaried workers, 71,000 employ between 
1 and 49 salaried workers, and 1,200 employ between 50 and 
499 salaried workers. 
 
 
MADRID 00002525  003.2 OF 005 
 
 
----------------------- 
GALICIA'S EU EXPERIENCE 
----------------------- 
 
¶10.  The entry into the Common Market led to the serious 
decline of certain sectors of the Galician economy such as 
traditional small scale agriculture/fishing and large naval 
construction (e.g., the virtual collapse of the Ferrol 
shipyards outside La Coruna), while opening markets for other 
sectors like automobiles and auto parts and textiles, and 
forcing other sectors to modernize in order to grow (e.g., 
fishing and fish processing).  Automobile and automotive 
parts production greatly expanded in importance after the 
French corporation Peugeot opened a large plant in Vigo and 
this plant served as a pole of attraction for other smaller 
firms supplying it.  Textiles also grew in importance with 
the rise of the Inditex corporation outside La Coruna. 
Inditex is now Europe's largest clothing retailer (having 
recently passed the Swedish Hennes and Mauritz chain).  Based 
in Arteixo, outside la Coruna, it has 2,800 stores worldwide. 
 It opened over 500 stores in the past year and plans to have 
4,000 stores open the end of 2009.  Key brands include Zara, 
Massimo Dutti and Bershka.  Half of its market is in Spain, 
while the rest is abroad, principally in Portugal and France. 
 Vigo-based Pescanova is a global fishing and fish processing 
powerhouse.  Spain remains Europe's leading fishing nation. 
Galicia leads all other Spanish regions in fishing and 
Pescanova leads the sector in Galicia. 
 
¶11.  EU funding allowed Galicia to greatly modernize its 
infrastructure, helping to finance highways, international 
airports in Vigo, Santiago de Compostela and La Coruna, 
several modern port facilities, and numerous high speed rail 
links.  Galicia went from having 100 kilometers of highways 
in 1986 to over 800 kilometers in 2005.  When Galicia joined 
the EU, traveling by road from La Coruna to Madrid took 
between 14 and 18 hours; today it takes less than six hours. 
Three high quality universities were also subsidized, 
allowing university enrollment to increase from under 40,000 
in 1985 to close to 80,000 in 2006. 
 
¶12.  According to Galicia's Economy Minister, from 1989 
through 2006, EU structural adjustment (or convergence) 
funding to Galicia totaled just over 9 billion euros (which 
represented just under 14 percent of total EU convergence 
funding provided to Spain).  One economist/university 
professor told ECONOFF that this 9 billion euros represented 
between 2.0 and 2.3 percent of Galicia's GDP between 
1994-2006.  EU convergence funding for Galicia in the 
2006-2013 EU budget cycle is expected to top 3.5 billion 
euros.  Given Galicia's development, the impact of this 
funding will be somewhat less than in earlier periods (under 
2.0 percent of total Galician GDP). 
 
¶13.  According to the Galicia's Economy Minister, roughly 70 
percent of the EU funding received from 1989 through 2006 
paid for what he referred to as Public Capital Formation, 
while about 30 percent paid for Private Capital Formation. 
The largest line item in Private Capital Formation was 
efforts to improve private sector production and the access 
to markets of private sector products.  The largest line item 
in Public Capital Formation was infrastructure works, which 
accounted for 41 percent of total EU funding from 1989-2006. 
The Economy Minister also stressed the dramatic opening of 
Galicia's market during the 20 years of EU membership, noting 
that exports as a percentage of GDP increased from 10 percent 
to 25 percent between 1989 and 2005.  The 
economist/university professor had a slightly different take 
on how the 9 billion euros has been spent.  He said that 37 
percent was spent on efforts to ensure the competitiveness of 
Galicia's economic base (e.g., mostly the transformation of 
agricultural and fishing sectors), while 32 percent was spent 
on infrastructure (roads, ports and high speed rail links), 
15 percent on health and environmental projects (e.g., 
hospitals and water treatment facilities), 13 percent on 
human resources and employment-related projects (e.g., 
building human capital via better education, university 
subsidies, etc.), and 3.0 percent on miscellaneous 
development projects. 
 
---------------------------- 
BUT CONVERGENCE NOT ACHIEVED 
---------------------------- 
 
¶14.  In 2005, average GDP per person in Spain was 20,838 
euros.  In Galicia it was 16,860 euros.  Spanish GDP growth 
averaged 3.4 percent per year between 1995 and 2004, while 
 
MADRID 00002525  004.2 OF 005 
 
 
Galicia's economy grew at an average annual rate of 2.8 
percent during that same period.  In terms of purchasing 
power parity, Galicia's economy grew at an annual rate of 
2.23 percent between 1995-2004, while the rate for Spain as a 
whole was 2.42 percent and the rate for the EU 25 was 1.83 
percent.  In terms of convergence, in 1995, Spanish GDP per 
person was at 87.5 percent of the EU15 average, while Galicia 
was at 71.3 percent of that average.  In 2003, Spain was up 
to 97.3 percent of the EU25 average, while Galicia lagged 
behind at 76.6 percent of the EU25 average.  As a result, 
Galicia, along with Extremadura, Andalucia and Castilla la 
Mancha will continue to access EU convergence funding through 
the end of the 2013 EU budget cycle.  Galicia's Minister of 
Economy told ECONOFF that overcoming this lack of convergence 
was his principal economic goal. 
 
------------------------------------- 
EU FUNDING PROCESS IMPOSES DISCIPLINE 
------------------------------------- 
 
¶15.  Several of ECONOFF's interlocutors in Galicia stressed 
the role EU funding played in "forcing" Galicia and Spain as 
a whole to modernize and professionalize its central and 
regional administrations.  EU funding was not direct 
transfers to central or regional administrations and was 
instead contingent on Galicia and Spain complying with 
certain EU regulations.  Rather than losing some of the "free 
money," (like many recent adherents to the EU), Galicia and 
Spain took the decision to modernize and professionalize its 
administrations to guarantee the EU funding flow.  Compliance 
with EU regulations also "forced" Galicia and Spain to forge 
a political consensus on integrated and long-term regional 
development plans, which in turn helped to ensure that the 
funding was spent in a rational fashion.  One of ECONOFF's 
interlocutors estimated that Galicia had spent 85 percent of 
its EU funding in a wise fashion.  Asked about "white 
elephants," he could only point to:  (1) the fact that modern 
international airports were constructed with EU funds in 
Vigo, La Coruna and Santiago de Compostela, when one major 
airport located between the three cities would have sufficed, 
and, (2) the fact that modern international ports were 
constructed with EU funding in La Coruna and Ferrol, even 
though the two cities are only 15 kilometers apart. 
Individually, they represent Spain's 8th and 11th largest 
ports.  If one combined port had been constructed, it would 
have been Spain's 4th largest port. 
 
--------------------------------------------- ---- 
FOCUS ON R&D SPENDING TO HELP ACHIEVE CONVERGENCE 
--------------------------------------------- ---- 
 
¶16.  Galicia's Economy Minister told ECONOFF that relatively 
low levels of spending on R&D has been a leading cause of 
Galicia's and Spain's relatively weak productivity growth. 
In 2003, the EU15 spent an average just under two percent of 
GDP on R&D, while Spain spent just over one percent and 
Galicia a mere 0.8 percent.  The Economy Minister said 
stepped up spending on R&D to achieve a better productivity 
growth rate was key to his plan to achieve convergence with 
Spain.  As part of this strategy, Galicia and the Spanish 
national Ministry of Education and Science signed an accord 
in September to provide national assistance to Galicia's 
plans to develop four "technopoles" throughout the region. 
 
 
------- 
COMMENT 
------- 
 
¶17.  Twenty years of EU funding has been good for Galicia. 
Infrastructure has been modernized; isolation from the rest 
of Spain has ended; the negative impact of the decline of 
certain key economic sectors has been cushioned; and the rise 
of new economic sectors has been facilitated.  Galicia has 
been transformed and is no longer the isolated backwater most 
famous of sending immigrants to the Americas.  The public 
face of Galicia now resembles that of the rest of Spain.  But 
true economic "convergence" (i.e., making Galicia as rich as 
the rest of Spain) has not been achieved.  Galicia's GDP in 
1986 lagged well behind that of Spain.  In 2006, Galicia 
still lags behind.  Less behind than 20 years ago, but still 
further enough back to continue to qualify for EU convergence 
funding through the end of the EU's 2013 budget cycle.  But 
the chip on Galicia's collective shoulder vis-a-vis the rest 
of Spain has been removed with the help of 20 years of EU 
subsidies and today Galicians are both confidant about the 
economic future and proud to be Galician, Spanish and 
 
MADRID 00002525  005.2 OF 005 
 
 
Europeans. 
 
AGUIRRE