VZCZCXRO3230
RR RUEHRN
DE RUEHMD #1902/01 2741151
ZNR UUUUU ZZH
R 011151Z OCT 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 3534
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3091

UNCLAS SECTION 01 OF 03 MADRID 001902 
 
SIPDIS 
 
SIPDIS 
 
EUR/WE, EEB/EFD/OMA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND ENRG ETRD SP EINV EAGR SOCI
ELAB 
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT - 
SEPTEMBER 24-28 
 
 
MADRID 00001902  001.2 OF 003 
 
 
Table of Contents: 
 
ECON: 2008 budget submitted to parliament 
ECON: OECD's "EU Economic Panorama" report lowranks Spain 
SENV/EAGR: Environment Minister argues for passage of new 
biodiversity law 
ECON/SOCI: Even in wealthy Madrid, 48% of workers gross less 
than a thousand euros a month 
EIND: Telefonica expands coverage in Brazil/Latin America 
KCRM: Corruption and coastal development in Spain's Malaga 
province 
EAGR/TBIO: Abengoa temporarily closes ethanol plant due to 
high cost of wheat and barley 
 
2008 BUDGET SUBMITTED TO PARLIAMENT ON 9/25/07 
 
¶1. (U) The government proposes to spend Euros 289.8 billion 
and collect Euros 301.6 billion in taxes, which represents a 
projected budget surplus of 1.15% of GDP.  The budget surplus 
assumes Spain will grow by 3.3% in 2008, which is still a 
reasonable, albeit somewhat optimistic, forecast given the 
international financial market turbulence and Spain's 
construction slowdown.  The opposition conservative PP party 
has criticized the budget as not being stringent enough, 
although it has not offered proposals leading to an overall 
higher projected budget surplus.  The "political" nature of 
the budget (elections are expected in March 2008) is apparent 
in that social spending will go up, especially for disabled 
people and to help lower-income and/or young people afford 
housing.  The government is also emphasizing social spending 
more in its media strategy. 
 
¶2. (U) Infrastructure investments in the autonomous 
communities (the equivalent of American states) is slated to 
go up by 14.4%.  The PP says the distribution of spending is 
politically skewed because investment in Catalonia (a crucial 
electoral battleground - if usually PSOE voters abstain, the 
government could easily lose the elections) is slated to go 
up by 22.6%; in Andalucia (a PSOE stronghold) by 20.9% and in 
the Balearic Islands (which now has a Socialist president) by 
24.3%.  Infrastructure spending in the Madrid region, a 
virtually impregnable PP fortress, will see spending go up by 
only 0.1%.  The government defends itself, however, noting 
that infrastructure spending in Valencia (another PP bastion) 
will go up by 25%.  In fact, Valencia will see the highest 
increase, largely because of the high-speed train being built 
between Madrid and Valencia. 
 
¶3. (U) Spending on R&D, a government priority, is slated to 
be Euros 7.7 billion, which is a 164% increase from when the 
government took office in 2004.  Defense spending is 
projected to rise 5.9% to euros 8.1 billion, still a little 
less than 1% of GDP, although arguably R&D spending in other 
ministries pushes the amount for defense to over one percent 
of GDP.  Although the government will finance many 
infrastructure projects by acquiring debt, the national debt 
as a percentage of GDP is projected to be 34% of GDP in 2008, 
down from 37.7% in 2007.  The budget still needs to be 
approved by parliament, but presumably the government has 
already gotten pledges of support from the smaller parties to 
obtain passage of the budget.  (El Pais, 9/26/07) 
 
¶4. (U) Comment: Given the current uncertainties in the 
financial markets, most economists would prefer a more 
restrictive fiscal stance.  However, the Spanish fiscal 
picture needs to be seen in the context of the fact that 
Spain is the only big EU economy projected to run a budget 
surplus in 2008.  Moreover, public debt as a percentage of 
GDP has declined from 46.4% of GDP in 2004 to a projected 34% 
in 2008.  Having said that, 2008 is shaping up to be a year 
of uncertainty.  During the last three years, Second Vice 
President and Finance Minister Pedro Solbes has released 
forecasts that wound up on the low side of actual growth.  He 
will be hard pressed to repeat this in 2008.  End Comment. 
 
OECD'S "EU ECONOMIC PANORAMA" REPORT LOWRANKS SPAIN 
 
¶5. (U) Within the Euro zone, only Portugal is further behind 
the U.S. than Spain in terms of GDP per capita.  The same is 
true with respect to productivity.  Spain also has a high 
regulatory burden, and a relatively low percentage of the 
labor force has university training.  University of Chicago 
and London School of Economics Professor Luis Garicano is 
quoted as saying that Spain's economic model has permitted it 
to get to the "first division" but "not to remain in it." 
(Expansion, 9/21/07) 
 
ENVIRONMENT MINISTER NARBONA ARGUES FOR PASSAGE OF 
 
MADRID 00001902  002.2 OF 003 
 
 
BIODIVERSITY LAW 
 
¶6. (U) The new law would enshrine the "precautionary 
principle," which has been used by the EU to prevent, among 
other things, agricultural biotechnology approvals and to 
impose draconian coexistence laws in the agricultural field. 
The opposition conservative PP party criticizes the new law 
as too "interventionist."  (Comment: Despite Minister 
Narbona's well-known opposition to agricultural 
biotechnology, recently the government has been less 
restrictive.) (Expansion, 9/25/07) 
 
EVEN IN WEALTHY MADRID, 48% OF WORKERS GROSS LESS THAN A 
THOUSAND EUROS A MONTH 
 
¶7. (U) Although National Statistics Institute information 
indicates that Madrid workers' average monthly salaries of 
1,908 euros makes Madrid the country's highest-earning 
Autonomous Community, this average includes many lower-paid 
workers.  According to a study by the Workers Commission 
labor body, one in five Madrid workers struggles to survive 
on less than 600 Euros a month.  The Commission says the data 
shows a growing disparity between stable employment and 
precarious or temporary employment.  One out of 5 Madrid 
workers makes less than 513 euros a month, and 13% must 
conform with 256 euros.  Many of the lower-paid are in 
construction or hotel services, while many of the 13% who 
gross more than 2,565 euros a month work in the finance 
sector. (20 Minutos) 
 
TELEFONICA EXPANDS COVERAGE IN BRAZIL/LATIN AMERICA 
 
¶8. (U) Mobile telephone operator Vivo, controlled by 
Telefonica and Portugal's Telecom, will soon have nation-wide 
mobile coverage in Brazil after winning a tender to expand 
its already existing coverage to six Brazilian northeastern 
states.  Vivo, the leading mobile telecommunications operator 
in Latin America, currently enjoys 28.4 percent of the 
Brazilian mobile telecommunications market.  The Telefonica 
group manages one-third of all Latin American 
telecommunications business, including fixed lines and mobile 
telecommunications.  It is the largest foreign investor in 
Latin America of any industry and has a particularly strong 
presence in Brazil, Argentina, Chile, Peru and Colombia. 
 
CORRUPTION AND COASTAL DEVELOPMENT IN SPAIN'S MALAGA PROVINCE 
 
¶9. (U) Documents from the prosecutor's office in the province 
of Malaga reveal that in 2006 the prosecutor's office 
processed more than 243 reports of abuses related to urban 
growth and potential corruption. These and other cases 
relating to illegal construction projects have resulted in 
judicial action against 20 out of 100 mayors in the province 
of Malaga.  Given the burgeoning profitability of the 
construction sector over the past several years, many coastal 
municipalities have turned a blind eye to construction 
projects in areas that are not zoned for such purposes. 
Construction efforts as well as the tourism that is related 
to this industry have been a significant money maker for 
municipalities which otherwise do not receive large amounts 
of funding from the central or provincial governments.  In 
addition to uncontrolled urban growth, this illegal 
construction activity at its worst has been linked to money 
laundering schemes, bribery, and falsification of documents 
on the part of municipal officials. 
 
ABENGOA TEMPORARILY CLOSES ETHANOL PLANT DUE TO HIGH COST OF 
WHEAT AND BARLEY 
 
¶10. (U) Abengoa announced this week the temporary closure 
(second time this year) of one of its Spanish ethanol 
production plants, apparently due to high feed stock (wheat 
and barley) prices and lack of domestic demand for ethanol in 
transport fuels.  The plant, Babilafuente, a joint venture 
with Ebro Puleva, has the yearly capacity to process about 
600,000 tons of feed stock in the production of about 200 
million liters of ethanol.  Abengoa closed the plant last May 
for the same economic difficulties cited in this closure, but 
reopened in July during the domestic wheat and barley harvest. 
 
¶11. (U) The plant owners had intended to sell the local 
ethanol production into the Spanish market, but cannot do so 
because of its limited current acceptance in the domestic 
market.  This is due partly to the fact that the Government 
of Spain delayed the start of mandatory ethanol mixing from 
2007 until 2009.  As a result, Abengoa has been forced to 
sell locally produced ethanol to other European markets, 
adding to logistical costs and increasing operating losses. 
 
MADRID 00001902  003.2 OF 003 
 
 
LLORENS