US embassy cable - 04MADRID1550

UNCLAS SECTION 01 OF 03 MADRID 001550 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, SP, European Union 
SUBJECT: TAKING ADVANTAGE OF EU EXPANSION: SPANISH PRIVATE 
SECTOR MUSING 
 
REF:  MADRID 00565 
 
1.  SUMMARY.  In a recent report, Spain's largest employers' 
organization, the Confederacion Espanola de Organizaciones 
Empresariales (CEOE), highlighted the challenges and 
opportunities for Spain presented by EU enlargement. 
Opportunities include potential for increased trade and 
investment, while challenges center on strategies to offset 
the competitive advantages of candidate countries, ranging 
from lower wages to weaker regulations.  The CEOE study 
proposed an action plan that Spanish businesses from various 
sectors of Spain's economy could implement in order to face 
these challenges.  The report holds that enlargement will 
only have a plus or minus 0.3% effect on Spain's GDP. 
Whether the impact is positive or negative will depend on 
the seriousness of the business community's efforts to 
prepare for the challenges of enlargement.  END SUMMARY 
 
2.  CEOE, Spain's largest employers' organization, recently 
published a report that analyzes the implications of 
European enlargement for the Spanish private sector.  In 
addition to touching upon general themes such as what the EU- 
15 and candidate countries need to do to guarantee a smooth 
and successful integration, the report addresses reforms 
that Spanish companies should introduce to take advantage of 
enlargement, and makes recommendations for dealing with the 
upcoming challenges.  Bottom line, CEOE believes that the 
Spanish economy could avoid the negative impacts of EU 
enlargement if the Spanish business community prepares well. 
Contrary to many predictions, the CEOE report puts the 
economic effect of expansion at a small plus or minus 0.3% 
of Spain's GDP, but whether Spain's economy gains or loses 
depends on the efforts of Spanish businesses. 
 
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CHALLENGES 
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3.  Despite new business opportunities, there are challenges 
for the Spanish economy.  The competitive advantages of the 
acceding countries will attract foreign investment away from 
Spain and increase competition with Spanish products. 
Competitive advantages are not limited to lower wages, but 
also include lower non-tariff trade barriers, higher fiscal 
incentives, and, at least temporarily, unfair government 
subsidies that are deemed by CEOE contrary to EU 
regulations.  Lower standards for environmental protection, 
food safety, consumer protection, work environment, 
intellectual and industrial property protection, and trade 
and labor laws also lower business costs. 
 
4.  Additionally, Spain will loose EU cohesion funds after 
EU expansion.  Currently, Spain is the biggest net 
beneficiary of EU funds.  Spain received in absolute terms 
some 8 billion Euros last year ($9.6 billion at a rate of 
EUR 1=USD 1.21).  As EU funds are directed to new members, 
the Spanish government will have to take on the burden of 
funding infrastructure improvements. 
 
5.  Thanks to rising foreign investment, competitiveness of 
the Spanish workforce has increased, yielding a high level 
of value-added production and increased automation.  As a 
result, the risk of withdrawal of businesses and foreign 
investments may not be as high as once feared, easing the 
worries about negative aggregate effects on Spanish 
production and employment. 
 
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OPPORTUNITIES 
------------- 
 
6.  EU member countries have high expectations for the 
growth of their economies as a result of the EU enlargement. 
Spain, like its EU-15 counterparts, anticipates that the 
induction of the candidate countries will increase trade and 
investment.  Most significantly, investment in 
infrastructure in the candidate countries will offer new 
prospects for large construction and high-tech 
infrastructure companies of the EU-15.  For example, EU-15 
companies have already successfully installed mobile phone 
networks in candidate states.  The International Director of 
CEOE told us that Spanish companies are familiar with the EU 
contract process from years of completing EU-financed 
projects and should therefore have an advantage in bidding 
on infrastructure contracts. 
 
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ACTION PLAN 
----------- 
 
7.  According to the CEOE, as the inauguration date 
approaches, current member states should realize that EU 
enlargement is not a one-way process.  Enlargement will 
require changes in both the candidate countries and the EU- 
15.  If Spanish business leaders want to benefit from the 
opportunities while minimizing their exposure to risks, they 
need to specialize in products of high technology and value 
and focus on international markets.   Spanish businesses 
should also adopt new technologies, foment Research and 
Development (R&D), develop human resources, improve 
infrastructure, and shape policies to attract foreign 
investment. 
 
8.  To reap benefits from enlargement, Spain will need to 
improve its business relations with the candidate countries. 
Spain's trade with Eastern Europe has increased in recent 
years, but business relations are weak compared with other 
EU member states.  If Spain wants to penetrate these markets 
it should increase foreign direct investment in these 
countries.  While Spanish presence in some sectors (like 
fisheries) will come easily, entry into many equally 
profitable sectors will require new business strategies. 
 
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SECTORAL ANALYSIS 
------------------ 
 
9.  METAL INDUSTRY.  This sector is especially sensitive to 
EU enlargement.  The main concern is how cheaper imports of 
metals from candidate countries will affect the Spanish 
metal sector.  Further, competition stemming from new 
members may affect Spain's share of the EU market.  Spanish 
producers should focus on increasing their productivity by 
investing in R&D, increasing the product quality of their 
metals and relocating some production abroad. 
 
10.  AUTOMOBILE INDUSTRY.  Currently, the majority of 
Spanish automobile production is exported to the EU-15. 
With a larger internal EU market after enlargement, there 
will be more sales prospects.  However, Spanish auto 
producers will need to reduce costs as other auto-makers 
will take advantage of lower labor costs and fiscal 
incentives in the new member states while moving closer to 
larger markets of Central Europe.  The relocation of 
production outside of Spain is already happening, as several 
car plants have relocated to Slovakia (reftel).  However, 
high automation of automobile plants in Spain leads CEOE to 
predict that only 15% of the automotive workforce will be 
affected.  At the same time, Spain may counterbalance some 
of the relocation of factories with its increasingly skilled 
workforce.  Eventually, wages will converge, and with the 
final elimination of fiscal incentives, competition will be 
carried out on a more even playing field. 
 
11.  CONSUMER ELECTRONICS.  Many multinational electronic 
producers have moved production abroad to lower wage 
locations to reduce production costs.  To maintain its 
remaining electronics workforce, Spain will have to turn to 
higher value products by investing in R&D and making better 
use of its skilled workers-in short, increase productivity 
in this sector. 
 
12.  CHEMICALS.  In the chemical industry, competition may 
arise from candidate countries that make primary materials 
for pharmaceuticals.  Lower wages in candidate countries 
could also negatively affect the Spanish pharmaceutical 
industry.  Spanish pharmaceuticals should venture into 
higher-value products by investing in R&D and taking 
advantage of the larger market.  In regards to chemical 
products for industry and consumers, demand in the new 
markets will increase, providing prospects for higher-end 
Spanish products such as paints, detergents, fragrances and 
cosmetics. 
 
13.  TOURISM.  Due to its strong position in world tourism, 
the Spanish tourist industry does not foresee any short-term 
adverse affects from EU enlargement.  In the medium-term, 
candidate countries that have beaches and sun could take 
away some of Spain's market.  In the long run, higher 
incomes of citizens of these countries will only benefit the 
Spanish tourism market.  To attract these new customers, 
Spain will need to improve and diversify its services. 
 
14.  AGRICULTURE AND FOOD PRODUCTS.  Spain will have to take 
into account that after the second phase of the integration 
process, the EU agricultural budget will be divided amongst 
twenty-five members.  In the medium term, as Eastern 
European producers incorporate technology in their dairy and 
beef production, there will be tougher competition for 
Spanish producers.  On the other hand, EU enlargement 
provides opportunities for the Mediterranean region. 
Spanish agricultural producers should take advantage of the 
new markets where there is an increasing demand for 
processed food products rather than primary agricultural 
products. 
 
15.  FISHERIES.  Spain's fishing industry produces more than 
twice the amount of the combined production of the ten 
candidate countries.  In the short-run the new members will 
not be able to export fish products due to non-compliance 
with EU sanitary standards.  Thus, the enlarged market can 
only have a positive impact on the Spanish fishing industry. 
 
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COMMENT 
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16.  In predicting a minor impact on Spanish GDP of plus or 
minus 0.3%, the CEOE is more optimistic about expansion than 
many observers.  CEOE's report is unique in that it is the 
only one we have seen that offers specific advice to 
individual sectors on how to deal with the opportunities and 
challenges of expansion.  Clearly, the degree to which 
Spanish businesses heed that advice will largely determine 
whether they gain or lose from enlargement. 
 
ARGYROS