VZCZCXRO5989
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0122/01 0231759
ZNR UUUUU ZZH
R 231759Z JAN 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 1690
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2387

UNCLAS SECTION 01 OF 02 MADRID 000122 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EUR/WE 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EAGR TBIO SP EINV EAIR UK EFIN
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT 
 
 
MADRID 00000122  001.2 OF 002 
 
 
ECON: Spain's industrial economy 
EFIN: Macroeconomics 
EAGR: Spanish Wine sector may lose subsidies 
 
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Spain Surpasses Canada in industry 
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¶1. (U) Standard & Poor says as of 2007 Spain is the eighth 
industrial economy in the world, thereby surpassing Canada: 
The S & P ranking in billions of dollars follows. U.S. 
(13.8), Japan (4.5), Germany (3.1), China (3.0), UK (2.4), 
France (2.4), Italy (2.0), Spain (1.3).  Spain's debt rating 
is at the highest level, reflecting its good public finances. 
 Occasionally, there is talk that Spain should apply for G-8 
membership, but the Zapatero government has not made this a 
priority.  Nor did the predecessor conservative government. 
If the gap between Spain and Canada widens though, there will 
no doubt be more debate on this topic in Spain. 
 
-------------------------- 
Macroeconomic Perspectives 
-------------------------- 
 
¶2. (U) President Zapatero predicted at the 1/17/07 New 
Economy Forum that the Spanish economy in 2007 will grow by 
3.5 percent, that the budget surplus will be over 1 percent 
of GDP, that public debt will be reduced by about three 
points (which would put it 30 points below the Eurozone 
average), that Spain's unemployment rate will be under 8 
percent, that 600,000 new jobs would be created, and that 
500,000 people with temporary job contracts will get 
permanent contracts.  Many observers believe that Spain has a 
better than even chance of meeting these numbers.  Most 
politicians facing an election in 13 months time would find 
these numbers outstanding. 
 
¶3. (U) The economic news is not uniformly good though.  A 
sampling from newspapers follows.  Expansion reported on 
January 16 that inflation in 2006 (roughly 3.5 percent) was 
depleting the real value of nominal wage increases. 
Immigration had been an important factor in keeping wage 
increases down.  In fact, in 2006 employers spent less on 
wages and benefits than in 2005.  The opposition Conservative 
Party (PP) economic spokesman, Miguel Agrias Canete, focused 
on Spain's widening current account deficit, which in 2006 
approached 8 percent of GDP.  Canete said despite being a 
Euro nation, Spain could not expect to finance its current 
account deficit indefinitely.  It could suffer a crisis like 
the one in Portugal. (Expansion, January 17).  One reason for 
the increase in the current account deficit is that as 
Spaniards get richer, they go abroad more so the tourism 
surplus that Spain traditionally relies on declines.  (ABC, 
January 18).  By November 2006, mortgages amounted to roughly 
92 percent of GDP.  (ABC, January 9).  Household savings in 
2006 fell to their lowest level since 1999 (ABC, January 16). 
 Foreign investment in real estate declined by 12.1 percent 
in 2006 compared to 2005, while Spaniards increased their 
real estate purchases overseas.  (ABC, January 16). 
 
¶4. (U) So who is right?  The government or the opposition? 
The number two at the Ministry of Finance, David Vergara, 
conceded to the DCM that about a third of Spain's current 
account deficit reflected a lack of competitiveness.  But 
financing for the foreseeable future would not be a problem, 
among other reasons because Spain, unlike Portugal, continues 
to run a budget surplus.  And yes, mortgage lending is up, 
but most mortgages were generated with a loan to value ratio 
under 80 percent, suggesting that negative equity problems 
stemming from a drop in housing prices is not likely.  The 
opposition PP economic spokesman concedes a soft landing for 
the property market is more, rather than less, likely.  So, 
for 2007, it seems that the government's optimism is 
warranted, although it clearly should be doing a lot more 
structural reform to make Spain more competitive. 
 
¶5. (U) Where does the feel good factor among many Spaniards 
stem from?  There are a variety of explanations but three 
stand out.  First, 80 percent of Spanish households own their 
property, and they have seen their property values rise 
dramatically in recent years.  Even if Spaniards do not 
typically extract equity from their houses and apartments, 
there is a wealth effect in terms of greater willingness to 
spend and borrow.  Second, unemployment, while still high by 
American standards, is considerably lower than by historic 
Spanish standards.  As observers in the U.S. have often 
noted, trends often matter more than the absolute numbers in 
terms of shaping public opinion.  Third, with more women in 
the workforce, households are richer even if real wages are 
 
MADRID 00000122  002.2 OF 002 
 
 
being eroded by inflation. 
 
-------------------------- 
Spanish Wine reform policy 
-------------------------- 
 
¶6. (U) The European Commission (EC) and the Government of 
Spain (GOS) endow Spanish producers and exporters with a 
competitive advantage vis-a-vis U.S. producers/exporters in 
markets of mutual interest via their wine policies.  During 
marketing year (MY) 2006, we estimate that the EC and GOS 
paid Spanish wine producers about 460 million Euros in 
production, stabilization, marketing, and export subsidies. 
Of that total, Spanish producers received 158 million Euros 
in vineyard-restructuring subsidies to replace 
no-longer-desirable grape varieties with in-demand varieties 
such as Tempranilo, which will further enhance Spanish 
long-term competitiveness in the U.S. domestic market, and 
important third-country markets such as the United Kingdom. 
 
¶7. (U) In June of 2006, the EC proposed reform of the wine 
sector with the stated intent of reducing the type and level 
of subsidies and moving the entire sector to a more 
market-oriented structure.  However, Spanish producers, long 
accustomed to this exceptional financial assistance, are 
opposed to a reduction in aid.  Rather, they counter propose 
that the EC and GOS provide even greater market-enhancement 
subsidies to create stronger demand and higher prices for 
their wine, which might then reduce some of the other 
production and stabilization subsidies currently being paid. 
 
Aguirre