US embassy cable - 04MADRID1562

UNCLAS SECTION 01 OF 02 MADRID 001562 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, SP, Spanish Election March 2004 
SUBJECT: SPANISH DEPUTY MINISTER OF FINANCE COMMITTED TO 
ECONOMIC REFORM AGENDA 
 
 
1. (SBU) Summary. Over lunch with the DCM and Economic 
Counselor May 3, Secretary of State for Budget and Finance 
Miguel Angel Fernandez Ordonez expressed his strong 
commitment to continued fiscal restraint and pushing forward 
Spain's economic reform agenda to spur competitiveness and 
enhance Spanish productivity.  He strongly criticized the 
previous Aznar government's opacity in handling domestic 
budget and other economic policy issues, promising 
transparency would be the leitmotif for Pedro Solbes as Vice 
President and Minister of Economy and Finance.  Fernandez 
Ordonez voiced admiration for the transparency of the U.S. 
budget process and publication of economic statistics and 
expressed his eagerness to learn more about IRS, OMB and 
Treasury practices which could be transferable to the Spanish 
context. Despite his enthusiasm, we believe Fernandez Ordonez 
will face a difficult time maintaining budget discipline as 
recently appointed ministers call for new expensive measures 
on an almost daily basis.  He will need to set the tone early 
and firmly if he is to succeed in maintaining fiscal 
discipline in the new government.  End Summary. 
 
Budget Policy -- A Delicate Balancing Act 
----------------------------------------- 
 
2.  (SBU) We met for lunch May 3 with the new number two at 
the Ministry of Economy and Finance, Miguel Angel Fernandez 
Ordonez. A long time admirer of the US and veteran of 
previous Socialist administrations, Fernandez Ordonez 
stressed his commitment to pursuing sound fiscal policy as 
the senior Ministry official responsible for developing 
budget and tax policy.  Fernandez Ordonez credited the former 
Aznar administration with selling the importance of sound 
fiscal policy to the Spanish electorate, which he believed 
would not stand for loose budget deficits outside the 
framework of EU rules. 
 
3.  (SBU) To his dismay, however, Fernandez Ordonez said he 
was discovering many "under the table" budget deals had been 
struck by the former government, particularly with the 
autonomous regions.  The deals provided him with less 
flexibility to manage budget policy than he had anticipated. 
The prior government had been very good at lowering taxes but 
not very good about decreasing expenditures.  In response to 
our questions about how he planned to finance the many 
potentially expensive campaign commitments while maintaining 
budget discipline, Fernandez Ordonez said some expenditure 
cuts would have to be made to finance the new programs -- and 
not all of the new programs would be implemented immediately. 
 He denied the government had plans to cut defence spending 
by four billion euros to fund these programs as suggested by 
some media reports.  The Deputy Minister said he will propose 
that the government privatize as soon as possible the 
publicly-owned and heavily indebted Spanish Radio and 
Television Corporation (RTVE) as a source of revenue for 
these projects.  He also hoped to cut coal subsidies and 
introduce more financial discipline into the national 
railroad (RENFE) high speed train plans.  Fernandez Ordonez 
cited housing, more funding for R&D and an increase in 
university scholarships as the programs likely to be funded 
first.  The first was a key election commitment and the 
latter two would help improve Spain's lagging productivity. 
 
4. (SBU) Fernandez Ordonez said he was committed to 
transparency in the conduct of budget policy.  Toward this 
end, the Zapatero government planned to establish a budget 
office in Parliament styled on the Congressional Budget 
Office.  A campaign pledge, this office would help members of 
parliament understand the budgets on which they voted, 
improving the credibility of the entire process. 
 
Reform:  Full Speed Ahead 
------------------------- 
 
5.  (SBU)  Sharply critical of the Aznar government's 
commitment to economic reform during its second term in 
office, Fernandez Ordonez claimed the former government's 
philosophy was "believe what I say not what I do."   For 
example, liberalization of the electricity sector was more 
words than deeds as two companies continued to dominate the 
sector.  Privatization became a way to place friends -- 
witness Cesar Alierta's placement at Telefonica -- rather 
than the introduction of true competition.  In hindsight, the 
opposition should have demanded that the Aznar government set 
up independent regulatory frameworks before privatization of 
these companies.  In the latter years of the Aznar 
government, there was no attempt to reform social security, 
pensions or labor practices. 
 
6.  (SBU) Fernandez Ordonez said the Zapatero government was 
committed to pushing ahead with these reforms.  Improving 
competitiveness and productivity would be essential to 
continued strong levels of economic growth.  In the past, 
Spain had always improved its competitiveness by devaluation. 
 He attributed the reluctance of small and medium-sized 
businesses (SMEs) to invest in new technology to improve 
competitiveness to this pattern.  Experience showed they 
could still sell abroad without such investments.  As a 
participating country in the euro, this option was no longer 
possible.  The only answer was reform. 
 
7.  (SBU)  Fernandez Ordonez seemed confident that the 
Socialist government found itself in a better position to 
introduce more flexibility in the Spanish labor market than 
its predecessor.  He pointed to comments by the head of one 
of Spain's main unions over the weekend, in which the labor 
leader listed his demands of the new government but cautioned 
that the government couldn't possibly grant all the union's 
wishes without hurting the economy.  In response to our 
question about a PSOE government's potential squeamishness 
about increased unemployment that might come in the wake of 
these reforms, Fernandez Ordonez appeared confident the 
government would weather any initial deterioration in the 
unemployment figures.  He compared Spain favorably to Germany 
or France in that Spaniards still had a drive to change and 
understood further changes would be necessary to keep the 
economy growing. 
Willing to Learn From US 
------------------------ 
 
8.  (U) Fernandez Ordonez said in his previous jobs he tried 
to learn from the US and apply those lessons in Spain.  He 
cited his close relations with the Federal Trade Commission 
when he chaired the Spanish competition tribunal as one 
example.  Fernandez Ordonez said he hoped to travel to the US 
within a few months and meet with is counterparts at 
Treasury, the IRS and elsewhere.  He offered that if we 
identified any U.S. budget or tax practices which we thought 
could improve transparency and efficiency in Spain we should 
feel free to provide him with information. 
 
Comment 
------- 
 
9.  (SBU) Despite his optimism and passion when discussing 
sound macroeconomic policies, we believe Fernandez Ordonez 
faces a tough road ahead.  In the few short weeks the 
Zapatero government has been in power, many new ministers 
have announced potentially expensive and clearly unvetted 
policy initiatives -- such as a cut in the VAT for books and 
movies or increased subsidies to mothers with young children 
-- only to walk these statements back a few days later.  We 
understand that Solbes will be delegating heavily to 
Fernandez Ordonez, whom many have already picked to replace 
Solbes (who is rumored to be in poor health and only to have 
committed to the job for two years) if he succeeds in his 
bold agenda of fiscal discipline and further economic reform. 
To do so, Fernandez Ordonez will need to be agressive in 
establishing his authority and have the clear backing of 
President Zapatero's office. 
 
ARGYROS