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C O N F I D E N T I A L SECTION 01 OF 02 MADRID 000707

SIPDIS

STATE PASS USTR

E.O. 12958: DECL: 06/25/2018
TAGS: ECON EFIN EINV PREL SP
SUBJECT: ZAPATERO ANNOUNCES MEASURES TO ADDRESS ECONOMIC
SITUATION, REACTION SKEPTICAL

REF: MADRID 443

MADRID 00000707 001.2 OF 002


Classified By: DCM Hugo Llorens for E.O. 12958 reasons 1.4(d),(e)

¶1. (C) Summary and Comment: On June 23, President Zapatero
acknowledged the economy's rapid deceleration, said growth in
2008 would be below 2 percent but would start to recover in
the second half of 2009, and announced 21 reforms. The
measures include spending cuts that are being perceived as an
attempt to show that the GOS is sharing the public's pain but
are not likely to have a significant impact. Most of the
other measures are structural reforms that, while they may
have positive effects in the medium term, are not likely to
address the immediate slowdown. Because of a perception that
Zapatero has downplayed the severity of the economic
situation, initial public reaction was skeptical. As the GOS
cannot do much in the short term about high fuel or food
prices or the housing slowdown and is locked in the monetary
straightjacket of the ECB, nothing it does is likely to
satisfy the public. The next year or two could be unpleasant
for the government, as well as for Spaniards. End Summary
and Comment.

¶2. (U) In his an annual state of the economy report on June
23, President Zapatero acknowledged that the Spanish economy
was indeed suffering a rapid de-acceleration, with growth now
expected to be less than 2 percent for 2008 as a whole,
though it would start to recover in the second half of 2009.
Despite this admission, Zapatero assured the public that
Spain was in a strong position to confront the situation and
would overcome this slowdown by the second half of 2009.
Zapatero refrained from using the word "crisis," a term which
has been used frequently by the media and by opposition
Partido Popular leaders to describe the current economic
situation and criticize the government.

¶3. (U) During the speech, Zapatero presented a package of 21
short-, mid-, and long-term measures to improve Spain's
competitiveness and address the economic situation. They
included measures to confront the deceleration, austerity
measures, and structural reforms. A list follows:

Measures to Address the Deceleration
¶1. More credit lines to small businesses and
government-protected housing;
¶2. Encouraging renovation of homes and hotels;
¶3. Establishment of a new framework for home renovation;
¶4. Credit and subsidies for consumers who purchase
fuel-efficient vehicles;

Austerity Measures
¶5. Reduce the number of new government jobs in 2009 from
35,000 to 10,000;
¶6. Reduce current spending by at least 20 million euros
immediately;
¶7. Freeze salaries of high-level officials;

Structural Reforms
¶8. Increase investment in infrastructure and transportation;
¶9. Implement a plan for professional training and development;
¶10. Increase the amount of cargo transported by rail;
¶11. Allowing Autonomous Communities and private capital to
participate in airport management;
¶12. Port law to reduce trade restrictions and facilitate
trade;
¶13. Energy efficiency and renewable energy law;
¶14. Agreement with France to double the electricity
interconnections;
¶15. Increase access to wide-band telecommunications services;
¶16. Improve the quality and reliability of wide-band services;
¶17. Law to improve competition in the service sector;
¶18. New framework for professional services;
¶19. Reduction of business registration and notarial fees;
¶20. Facilitate the creation of businesses within 24 hours;
¶21. Reduce administrative burdens for businesses.

¶4. (U) These 21 measures come on the heels of the June 13
approval by the Council of Ministers of a draft law that
would accelerate value-added tax returns and eliminate wealth
taxes in 2009, with a combined expansionary impact of 7.8
billion euros in 2009. This was the government's second
major stimulus effort since Zapatero's reelection in April.
The first was the April 18 package (reftel) that included the
400 euro refunds promised in the campaign and is expected to

MADRID 00000707 002.2 OF 002


have a combined expansionary impact of 10 billion euros in
2008 and 8 billion in 2009. Assuming the legislature
cooperates as expected, the total stimulus from both sets of
measures will be about 1 percent of GDP in 2008 and 1.6
percent in 2009.

¶5. (C) Comment: Although the structural reforms could
eventually increase productivity, many of the measures
Zapatero announced will have little impact in the short term,
several are far from being implemented, and many were already
planned. In terms of macroeconomic impact, it does not look
very coherent for the government to announce spending cuts
just 10 days after approving an expansionary stimulus
program. However, the spending cuts are expected to save
only 250 million euros in 2008 and 2009 combined, a
contraction dwarfed by the almost 26 billion euro
expansionary impact of the two stimulus packages. Second
Vice President and Finance Minister Solbes (who is reported
to have not been involved in preparation of the package) has
characterized the June 23 austerity measures as
psychological. Initial public reactions suggested that they
are seen as politically rather than economically motivated,
to give an example of the government sharing in the hard
times and taking action. Even the structural reforms do not
address labor laws, which many economists consider an
important target for reform.

¶6. (C) Comment continued: It is not clear that the GOS has
policy options that would enable it to satisfy public wishes.
The budget surplus of previous years that it had said gave
it maneuvering room is gone as a result of lower tax
receipts. Inflation is stubbornly high, and unemployment is
expected to pass 10 percent and continue rising into next
year. There will be no expansionary monetary policy in line
with the GOS, fiscal stimulus as long as the European
Central Bank keeps interest rates high to fight inflation.
The average Spaniard is experiencing the effects of higher
food and fuel prices every day and is well aware of the
collapse in residential construction. Regular news of real
or threatened strikes by various interest groups to protest
rising prices or other economic concerns heightens the
awareness of the economic difficulties faced around the
country.

¶7. (C) Comment continued: If the media and the public
believed Zapatero's statement that the economy will start to
recover in the second half of next year, the mood might be
different. However, at the moment his and the GOS'
credibility on economic issues is low. Over the last several
months, he and his economic team have regularly revised
downward their forecasts, as previous projections -- whether
for how low growth would drop, when it would rebound, how
rapidly unemployment would increase, or when inflation would
start to decline -- proved too optimistic. There is a
widespread perception that Zapatero and the GOS intentionally
downplayed the severity of the situation during the campaign
for the April 9 elections.

¶8. (C) Comment continued: Perhaps because he does not want
to damage already shaky consumer confidence, he and other
officials have refused to use the word "crisis." While the
current situation may not be a crisis in the strictest sense
of the word, it is certainly a difficult period, and
Zapatero's statements have given many the impression that he
is either intentionally downplaying the problem or does not
understand its severity. This speech appears to have been an
attempt to show that he understood the severity of the
situation and was taking action. However, since the GOS
cannot do much in the short term about high fuel or food
prices or the housing slowdown and does not have monetary
levers to stimulate the economy, it is not likely to satisfy
the public. It could be an unpleasant next year or two for
the government, as well as for Spaniards.
AGUIRRE