VZCZCXRO1058
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0717/01 1091749
ZNR UUUUU ZZH
R 191749Z APR 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 2307
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2627

UNCLAS SECTION 01 OF 02 MADRID 000717 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EUR/WE 
 
E.O. 12958: N/A 
TAGS: BEXP EAGR EAIR ECON EFIN EIND ETRD TBIO SP
EINV, UK 
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT 
 
 
MADRID 00000717  001.2 OF 002 
 
 
ECON: State of Economy message - positive spin for Zapatero 
EINV: Manuel Conte Apparently out Soledad Abad probably in at 
the CNMV 
SENV: Spain struggles with Kyoto 
EAGR/EINV: Cotton subsidies and DOHA 
 
ZAPATERO EXTOLS SPANISH ECONOMIC SUCCESS AT MADRID STOCK 
EXCHANGE ON 04/16/07 
 
¶1. (U) In what was billed by the GOS as the first annual 
"State of Economy" message, Zapatero praised the performance 
of the Spanish economy and released a report.  He 
deliberately did not choose parliament as the venue for 
delivering the message as he reportedly wanted to avoid 
criticism from the opposition.  Zapatero's Economic Office 
came up with this idea and based the initiative loosely on 
our annual "Economic Report of the President."  Zapatero's 
Economic Adviser, David Taguas, is coming to the Embassy 
April 23 to brief the Ambassador and Econ Section on the 
report.  Zapatero's speech was criticized widely in the 
Spanish press as too triumphalist and as not focusing on the 
vulnerabilities of the Spanish economy.  The Financial Times 
4/18/07 lead editorial title captures the essence of this 
criticism: "Vulnerable Spain's economy needs reform - It is 
not enough for Zapatero to celebrate economic success."  As 
the FT points out, it is natural that Zapatero is trying to 
make political capital out of the continuing Spanish boom. 
But: "Keeping a lid on spending is a necessary but 
insufficient policy; in reality, the Socialists appear to see 
virtue in doing nothing."  The FT posits that low eurozone 
interest rates, employment creation and the construction 
boom, coupled with very low productivity growth, a weak 
technology/education base, and the second largest current 
account deficit in the world is a dangerous combination. 
(Comment: The critics undoubtedly focus on the right economic 
factors, but, given that the IMF forecasts continued high 
growth in 2007 and 2008, Zapatero the politician is going to 
continue to extol the positive, even though he rejected 
"exaggerated optimism, because self-satisfaction is a 
conservative trait."  The problem for the critics is that 
although they are unquestionably right that Spain's current 
growth model is not sustainable indefinitely, it appears to 
have some life in it yet.  And the debate continues over how 
international events will spill over into Spain.  One analyst 
suggests that in addition to European Central Bank interest 
rate hikes putting a damper on Spanish housing,  the mortgage 
market in Spain will be affected by the fact that lenders are 
taking a second look at the vulnerabilities associated with 
the international securitization of mortgages - this analyst 
says mortgage lending in Spain in recent years has been made 
possible by international securitization - in part because of 
what happened in the American sub-prime market, such 
securitization may be less available in the future.  Again 
though, this risk does not appear to pose an immediate threat 
to the economy.  (Financial Times, 4/18/07; Expansion, 
4/16/07) 
 
NEW NATIONAL SECURITIES MARKET PRESIDENT 
 
¶2. (U) Speculation that Departing National Securities Market 
(CNMV - SEC equivalent) President Manuel Conte to be Replaced 
by Finance Minister Chief of Staff Soledad Abad:  Abad is 
known to the Embassy as a hard-working and highly competent 
official.  She is considered closer to Finance Minister 
Solbes than to President Zapatero.  We have heard speculation 
from other sources as well that Abad might get the job. 
(Expansion, 4/18/07) 
 
GREENHOUSE GAS EMISSIONS MAY HAVE FINALLY STOPPED GROWING 
 
¶3. (SBU) Spain has been the EU's worst offender when it comes 
to compliance with the Kyoto Protocol.  Spain's 2005 
emissions were 52 percent above 1990 levels, while Kyoto 
calls for Spanish emissions to be no more than 15 percent 
over 1990 levels by 2012.  But the steady growth of Spanish 
emissions may have finally peaked.  According to a Spanish 
labor union/NGO study, Spanish greenhouse gas emissions in 
2006 dropped from 52 above 1990 levels to 48 percent above 
1990 levels.  This drop, if confirmed by official Spanish 
Government figures, suggests that Spain's Kyoto compliance 
plan is not as wildly unrealistic as it first appeared. 
Spain's current plan calls for reducing emissions to 37 
percent above 1990 levels by 2012.  The other 22 percent 
reduction (required to reach the Kyoto target of 15 percent 
above 1990 levels by 2012), would come from buying emissions 
credits on the EU carbon market and from gaining carbon 
credits via development projects consistent with Kyoto's 
Clean Development Mechanism.  Reasons for the reduction 
 
MADRID 00000717  002.2 OF 002 
 
 
include: nuclear power plants that suffered fewer service 
interruptions in 2006 versus 2005, higher than average 
rainfall that resulted in a greater contribution of hydro 
generated electricity, and the first indications that Spain's 
heretofore out-of-control electricity use growth rate may 
have finally stabilized.  While there is a case to be made 
that Spain's greenhouse gas emissions are finally stopping to 
grow and leveling out, it is harder to demonstrate that 
serious reductions (e.g., to 37 percent above 1990 levels) 
can be obtained without significant changes to the Spanish 
electricity generation mix.  The continuing move from oil to 
natural gas (combined cycle) plants will help, but will not, 
according to most observers, be enough in and of itself.  The 
GOS is betting on an increased contribution from renewables, 
but its targets, if met, will not result in a significant 
drop in greenhouse gas emissions.  Most observers believe 
that Spain will remain seriously out of compliance with the 
Kyoto unless it opts to construct more nuclear power plants. 
And that remains a political nonstarter, at least for now, 
for the Zapatero Government.  Environment Ministry officials 
privately admit that Spain will never comply with Kyoto but 
underscore their willingness to induce economic pain to get 
Spain as close to compliance as politically possible. 
 
DOHA AFFECTS COTTON EXPORTS 
 
¶4. (U) In recent years, cotton production and export 
subsidies provided by "rich" industrialized countries have 
become the focal point for "us vs. them" negotiations on 
agricultural subsidies in the Doha Development Agenda Round 
of negotiations at the World Trade Organization.  The 
European Union (EU) has effectively dodged the intense 
criticism showered on the United States because Europe was 
reforming its cotton subsidy policies. 
 
¶5. (U) In response to that reform, Spanish cotton farmers 
dramatically cut their production during Marketing Year (MY) 
2006 (the first year of reform).  Farmers reduced their 
plantings by about 25 percent, and harvested even less 
because they chose to minimize variable costs (fertilizer, 
irrigation, and weed control) leaving about 9,000 hectares 
un-harvested.  As a result, during MY 2006 Spanish farmers 
produced and exported about 60 percent less cotton than the 
previous year.  And, while it is too early to provide a 
definitive summation of MY 2007, we do expect that Spanish 
cotton farmers will continue to reduce harvested cotton area, 
resulting in less cotton to export to the world market where 
it would have competed with cotton grown by poor African 
farmers. 
Aguirre