This record is a partial extract of the original cable. The full text of the original cable is not available.

201755Z Dec 04

C O N F I D E N T I A L SECTION 01 OF 02 MADRID 004777

SIPDIS

TREASURY PASS TRACI PHILLIPS

E.O. 12958: DECL: 12/19/2012
TAGS: ECON EFIN EAGR ETRD TBIO SP
SUBJECT: POPULAR PARTY FORESEES ECONOMIC CHALLENGES AHEAD
FOR SPAIN


Classified By: Economic Counselor Whitney Baird for reasons 1.4 (b) and
(d).

¶1. (C) Summary: The opposition Popular Party's Economic
Spokesperson in Parliament Miguel Arias Canete predicted 2005
would be a good year for Spain, but that beginning in 2006
Spain's economy would sour and imperil Spain's Socialist
government. He declared strong respect for Minister of
Economy and Finance Pedro Solbes and the economic team, but
noted that Solbes faces strong challenges in shepherding
Spain's budget and economy in a cabinet of more radical
political heavyweights. Arias Canete expressed sympathy with
respect to our biotech position, noting that he was a strong
proponent of biotechnology during his previous position as
Minister of Agriculture. He offered assistance with biotech
issues with Spanish deputies in the European Parliament. End
Summary.


Economic Outlook
----------------

¶2. (U) Arias Canete characterized Spain's 2005 economic
outlook as solid. He stated that the fiscal environment of
stable spending growth and balanced budget was a gift to the
Socialists (PSOE) from the previous Popular Party (PP)
government. However, he noted Spain's inflation rate of
about 1.3 percent higher than the EU average as an area of
concern. He also noted that since Spain was an EU member and
EU monetary policy was predicated on the sluggish German
economy, Spain would not be able to use monetary policy to
curb its inflation. Cheap interest rates have contributed to
the steep rise in Spanish housing prices in the past few
years.

¶3. (C) According to PP economic projections, although the
outlook for 2005 is "solid", Spain's economy will slow
significantly in 2006. Arias Canete believes a recession is
probable and that the PSOE government will be forced to call
early elections due to the resulting economic stress.

Minister Solbes and the Economic Team
-------------------------------------

¶4. (U) Arias Canete offered high praise for PSOE Minister of
Economy and Finance Pedro Solbes. He noted Solbes' personal
professional stature as a guardian of the European Monetary
Union treaties in Brussels and for bringing France and
Germany to court for breaking budget deficit rules. Arias
Canete believes Solbes, with his EU experience, is truly
committed to ensuring budgetary stability during his tenure.

¶5. (C) He was less certain, however, whether Minister Solbes
would be able to maintain the support of President Zapatero
and keep future efforts at increasing spending in line with
his budgetary standards. According to Arias Canete's
sources, Solbes is regularly opposed by the President's
economic policy advisor Miguel Sebastian. Sebastian
regularly announces new economic policy changes without
Solbes' comment. Solbes also faces challenges in Zapatero's
Cabinet. In the Spanish system, there are multiple cabinet
levels. The first meeting each week the Secretary of State's
meeting (note: equivalent to Deputies' Committee). According
to Arias Canete, Miguel Angel Fernandez Ordonez, the
Secretary of State for Economy and Budget is often

SIPDIS
outmaneuvered by Economic Advisor Miguel Sebastian at these
meetings. Minister Solbes is then forced to try to overcome
the decision of the Secretaries of State in the Council of
Ministers. Arias Canete is not sure Solbes will continue to
prevail in these battles, or that he will want to keep
fighting if the economy sours.

¶6. (C) Regarding rumors that Solbes might not finish his
entire term, Arias Canete noted that Solbes is a man of his
word and that he is likely to keep his promise and serve
throughout this government. However, if in future budgets
the government pushes spending to a deficit level beyond 3
percent, breaking the EMU standards, Mr. Solbes might
consider resignation. Arias Canete noted (somewhat jokingly)
that he would do everything he could to push Solbes out of
office, because any PSOE replacement would be a much easier
political target for the PP.

Economic Reform on Hold
-----------------------

¶7. (C) Arias Canete mentioned several areas where economic
reform was necessary, but is convinced that the Socialist
government is unable or unwilling to carry through. The key
area for reform is the labor market. Arias Canete argued
that the link between inflation and wages in Spain without
any correlation to productivity needs to be broken. He also
mentioned the need to improve competition in the marketplace,
especially in telecoms and energy. Though the economic team
may well support many of these changes, Arias Canete does not
believe they will get much traction in the current
government. He noted that most of the PSOE ministers are far
more left-wing in their economic philosophy than the economic
team and that President Zapatero is not a strong leader, but
a compromiser unwilling to push a policy unpopular in his own
party.

Biotech
-------

¶8. (U) Arias Canete sympathized with the U.S. position on
biotech issues. He mentioned that he approved several seed
varieties during his tenure as Minister of Agriculture. He
also noted that he is being taken to court along with the
succeeding PP Minister of Agriculture for approving biotech
strains that could allegedly threaten the environment. Arias
Canete believes that biotech crops are very important for
Spain, noting that new strains of cotton are greatly desired
by farmers in the south. He asked us to inform him of any
biotech legislation of importance that passes through the
European Parliament. He is willing to assist us by lobbying
PP members in the European Parliament.

Comment
-------

¶9. (C) Arias Canete is clearly interested in maintaining
close ties with the United States. He is a well-informed,
articulate spokesperson for PP policies. He provided us with
a number of concise, cogent PP position papers on economic
issues. They show this group is serious, and views itself as
only temporarily in opposition.
MANZANARES