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INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3329

UNCLAS SECTION 01 OF 03 MADRID 000218 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR WILLIAM LINDQUIST 
 
E.O. 12958: N/A 
TAGS: EFIN EAID PREL SP
SUBJECT: SCENESETTER FOR DEPUTY SECRETARY KIMMITT VISIT TO 
MADRID 
 
MADRID 00000218  001.2 OF 003 
 
 
¶1. (SBU) Summary. Embassy Madrid warmly welcomes your visit. 
When you arrive, Spain will be 4 short days away from what is 
looking to be a very close March 9 general election. 
President Jose Luis Zapatero and his Socialist Workers party 
are slightly ahead in the polls, although the opposition 
Partido Popular, led by Mariano Rajoy, has gained ground. 
Top electoral issues include a slowing economy, terrorism, 
regional autonomy, and immigration.  Regardless of which 
party wins, we expect continued growth in the U.S 
relationship with Spain.  Since your October 2006 visit, we 
have increased coordination with Spain considerably, 
partnering on issues of counter-terrorism, law enforcement 
and multi-lateral policy.  On Iraq, Spain has fulfilled its 
commitment to contribute $22 million to the Basrah Children's 
hospital and has fulfilled nearly all of its 225 million euro 
Iraq Compact commitment.  We are sure that your visit will 
reinforce our efforts to strengthen bilateral cooperation. 
End Summary. 
 
--------- 
Elections 
--------- 
 
¶2. (SBU) The March 9 general elections will indeed be a tight 
race, and at this point it is too close to call. Various 
surveys suggest that the ruling Spanish Socialist Workers' 
Party (PSOE), led by President Jose Luis Rodriguez Zapatero, 
is slightly in the lead.  The PSOE is campaigning heavily on 
the economy's growth during its government, historic budget 
surpluses, and growth of various social programs.  However, 
voter confidence has been affected by recent signs that the 
Spanish economy is softening.  The PSOE has attempted to 
downplay negative economic indicators, while the PP has 
argued the economy is indeed softening and that the PP is the 
best party to manage the difficult times to come.  Given the 
prominence of the economy as a campaign issue, anything you 
tell the press about Spain's economy may have great political 
implications. 
 
¶3. (SBU) Other major election themes include regional 
autonomy, immigration, and law enforcement.  The PP has 
argued that the PSOE has made too many concessions to Basque 
and Catalan regional governments, is weak on ETA (Basque) 
terrorism, and is soft on illegal immigration. 
 
¶4. (SBU) Foreign Affairs and the U.S. were not expected to be 
key issues in the elections.  However, the PSOE is reminding 
voters it got Spain out of its unpopular Iraq involvement 
while the PP argues that Spain's international prestige and 
influence has slipped as a result of such actions.  Both the 
government and the PP have strongly criticized U.S. and 
German/British/French/Italian support for Kosovo's 
declaration of independence, which they fear will be seen by 
Basque and Catalan separatists as a precedent for their own 
aspirations.  The PP has criticized the GOS for not being 
able to prevent the independence declaration, which the GOS 
doubtless would have preferred to delay until after the 
elections.  We are seeking to avoid being drawn into the 
campaign.  Although they are not a campaign issue here, the 
U.S. primaries have attracted intense interest, and you may 
be asked for your thoughts on them. 
 
----------------- 
Economic Overview 
----------------- 
 
¶5. (SBU) Spain has had one of the fastest growing economies 
in Europe over the last decade, with GDP growth averaging 3.7 
percent since 1998.  The housing boom, which was sparked by 
lower interest rates that resulted from Spanish euro 
membership, contributed greatly to this growth, and an 
economic milestone was reached when Spain's per capita GDP 
(on a PPP basis) passed Italy's in 2006.  U.S. investment has 
long been important to the economy, more so than bilateral 
trade, but the tables have turned.  In 2007, Spain was the 
fourth largest investor in the U.S., with a particular 
emphasis in banking, construction, and renewable energy.  In 
the latter sector, Spain has the world's largest and third 
largest wind power firms, and Spanish firms are active in the 
U.S. solar and biofuels projects. 
 
¶6. (SBU) Although the economy grew by 3.8 percent in 2007 and 
3.5 percent in the fourth quarter, it is showing clear signs 
of a slow-down.  The OECD estimates that Spain's GDP growth 
in 2008 will reach 2.5 percent, somewhat lower than the 
Spanish government's current 2008 estimate of 3.1 percent, 
but still over the eurozone average.  In the fourth quarter 
 
MADRID 00000218  002.2 OF 003 
 
 
of 2007, the unemployment rate increased from 8 percent to 
8.6 percent.  In January 2008, registered unemployment went 
up by 132,000 people, the largest monthly jump in over two 
decades.  However, while unemployment is increasing, the 
number of jobs continues to increase as well. 
 
¶7. (SBU) The housing market slowdown was predicted by 
numerous analysts and began last year.  Housing sales and 
real estate construction in Spain decreased steadily in 2007, 
and this trend continues even more sharply into 2008. 
Decreasing levels of demand, coupled with oversupply and 
tighter credit, have all taken their toll.  Real estate 
developers are taking the brunt of this downturn.  As high 
profile collapses make the news, questions remain about the 
ability of developers to meet their substantial debt 
obligations.  Some local experts estimate that 60 percent of 
Spain's financial sectors (banks and savings banks) go to 
real estate lending, a significant portion of which has gone 
to developers.  Developer's problems have prompted calls for 
government assistance, though Second Vice President and 
Economy and Finance Minister Pedro Solbes has argued against 
this.  Despite these concerns, nearly all Spanish homeowners 
(roughly 80 percent of Spanish households) continue to pay 
their mortgages on time.  Despite a very slight increase in 
nonpayment of all types of loans, default rates remain low by 
European standards at less than 1%. 
 
¶8. (SBU) The Madrid stock market, as measured by the Ibex-35 
blue chip index, has been highly volatile and lost 
considerable value.  At its height last year, the market 
reached 16040.  At its lowest point in January, the market 
plunged below 12,000, a loss of over a fourth of its value in 
just a few months.  Although this has mirrored developments 
in other advanced markets, the market's gyrations after years 
of gains have received a lot of media attention, and 
contributed to a general sense of economic concern. 
 
----------------------------------- 
Diplomatic Cooperation and Security 
----------------------------------- 
 
¶9. (SBU) U.S- Spain relations were seriously damaged by 
President Zapatero's decision soon after his election in 2004 
to abruptly withdraw Spanish forces from Iraq.  However, over 
the last several years, both countries have made a concerted 
and successful effort to rebuild the relationship based on 
strong mutual interests in counter-terrorism, fighting 
narcotics trafficking and organized crime, and rapidly 
expanding economic ties.  The real bilateral story is found 
in novel initiatives such as the HSPD-6 agreement we signed 
last September to facilitate the sharing of information 
between our national counter-terrorism authorities. 
Following the March 11, 2004 train bombings, Spain remains a 
continued target of Islamic extremists. Al-Qaeda recently 
called for attacks to recapture the medieval "Al Andalus", 
and the recent uncovering of an Al-Qaeda cell operating out 
of Barcelona has shown the Spanish that this threat is not a 
idle one.  Neither has the decades long threat of ETA gone 
away.  Two Spanish Civil Guard officers were murdered in 
France in early December by the Basque terrorist group, 
although the government has arrested many of its leaders and 
disrupted several planned bombings. 
 
¶10. (SBU) Narcotics trafficking is another area of common 
concern.  Andean cocaine is a serious problem here, and 
Colombian trafficking organizations are active in Spain. 
Money laundering is another serious issue.  We are eager to 
find ways to increase bilateral cooperation and to encourage 
Spain to engage more aggressively with law enforcement 
authorities in key Latin American countries.  Spain has 
recently taken steps in this direction.  Just a couple weeks 
ago, the Director General of Spain's Police and Civil Guard 
traveled to Colombia to sign a cooperation agreement to fight 
drug trafficking and its related crimes through increased 
personnel and information exchange. 
 
¶11. (SBU) Spain is second only to the U.S. in terms of 
economic and political influence in Latin America.  Spain 
wants strong democratic and free market institutions in the 
region.  Nevertheless, we have sharp differences over Cuba. 
Spain's socialist government has opted for engagement, 
claiming it can encourage regime elements who want change. 
We take every opportunity to remind the Spanish that the 
Cuban regime is only interested in survival and that the 
Cuban dissidents need and deserve the active and visible 
support of democracies everywhere.  The GOS also has been 
more sympathetic than the USG to Venezuela's Hugo Chavez, 
 
MADRID 00000218  003.2 OF 003 
 
 
though it appears to have an increasing understanding of 
Chavez' drawbacks. 
 
¶12. (SBU) Spanish military cooperation matters.  The bases of 
Rota and Moron are strategic hubs, midway between the U.S. 
and Afghanistan and Iraq.  U.S. planes and ships account for 
around 5,000 flights and 250 port calls a year in Spain.  The 
Spanish military is pro-U.S. and pro-NATO. We need to keep 
this relationship strong.  Spain has 750 troops with ISAF in 
Afghanistan and a provincial reconstruction team in Badghis 
province.  Spain has contributed some 150 million Euros in 
Afghan reconstruction funds.  Planning is underway to allow 
the Spanish to train and equip an Afghan Army company, which 
we hope will be a prelude to the training and equipment of a 
full battalion.  Spain has nearly 1,100 troops with UNIFIL in 
Lebanon and about 700 in Kosovo.  On Iraq, Spain has 
contributed $22 million to the Basrah Children's Hospital and 
a further $28 million in development funding for Iraq. 
Spain's total commitment to the Iraq Compact was USD 225 
million euros.  The Spanish Foreign Ministry says that Spain 
has disbursed all of its pledge except for its concessional 
loans, which are pending completion of project proposals.  It 
also has provided through UNHCR over 800,000 euros for 
refugee and displaced persons relief in Jordan and Syria. 
Spain is an active participant in EU-Iraq negotations on an 
economic cooperation agreement that would provide additional 
funding for training and development activities. 
 
---------- 
Conclusion 
---------- 
 
¶13. (SBU) Again, we are looking forward to your visit.  While 
we want to avoid being an issue in the Spanish elections, we 
do need to remind the government and all Spaniards that the 
bilateral relationship is founded on strong mutual interests 
such as counter-terrorism and law enforcement. 
Interestingly, local surveys are revealing that more and more 
Spaniards recognize that it is important to partner with the 
U.S.  Regardless of who wins in March, terrorists, drug 
traffickers, and alien smugglers will continue to see both of 
our countries as targets.  We have much work to do together. 
 
AGUIRRE