US embassy cable - 04MADRID2381

UNCLAS SECTION 01 OF 02 MADRID 002381 
 
SIPDIS 
 
TREASURY PLEASE PASS TO TRACY PHILLIPS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, SP 
SUBJECT: ZAPATERO ECONOMIC ADVISOR OFFERS VIEWS ON 
PRODUCTIVITY AND GROWTH 
 
1. Summary.  Miguel Sebastian, President Zapatero's key 
economic advisor, recently presented his analysis on Spain's 
productivity and economic growth to corporate leaders. 
Sebastian declared that Spain's relatively low labor 
productivity is the most important issue that may hinder 
future economic growth.  He highlighted continued budgetary 
stability, investment in the labor force and infrastructure, 
and labor reform as government priorities that should help 
resolve the productivity problem and promote growth.  On 
budget issues, Sebastian promoted ideas supportive of the 
Ministry of Economy's efforts to move towards pro-cyclical 
budgeting, but questioned attempts to predict the business 
cycle and require governments of autonomous regions to follow 
balanced budget rules.  End Summary. 
 
Productivity and Growth 
----------------------- 
 
2. Miguel Sebastian, President Zapatero's Advisor, spoke June 
22 to an audience of Spain's corporate leaders regarding 
Spain's rate of economic growth.  Spain's productivity has 
fallen or stagnated in comparison to its economic competitors 
in the EU and the U.S. in recent years.  However, economic 
output improved due to the rise in employment and the 
increase in population due to immigration.  Sebastian noted 
that this rise in population is a short to medium term 
condition and will not ensure Spanish economic growth in the 
long run. 
 
3. Sebastian offered Ireland as an example of a country to 
emulate.  Both Ireland and Spain maintained growth rates 
higher than the EU average in the last eight years, with 
Ireland achieving the highest rate of growth in the EU 15. 
Unlike Spain, Ireland's economy witnessed improvement in both 
employment and productivity.  In the past eight years, 
Ireland's employment productivity rose 33% while Spain's 
productivity increased only 5%.  As Ireland pulled ahead on 
the productivity level, it achieved higher economic growth 
rates. 
 
Productivity Policy 
------------------- 
 
4. Budgetary discipline was the first policy issue Sebastian 
discussed regarding the government's role in promoting 
growth.  He argued that maintaining macroeconomic stability 
was important to a good business climate, but supported 
budgets that are balanced over economic cycles rather than 
rigid balanced budget strictures.  He followed his 
pro-cyclical budgeting statement by noting the impossibility 
of accurately predicting business cycles.  Finally, he argued 
that the government should not require autonomous regional 
governments to follow balanced budgets, but allow them to 
balance their budgets over the economic cycle as well.  The 
last two points are positions currently being considered by 
the Ministry of Economy.  Sebastian did not offer suggestions 
to achieve balanced budgets. 
 
5. Sebastian also supported government investment in work 
force development as a key means of promoting growth and 
productivity.  He mentioned the government's commitment to 
investment in education, and increased spending on public 
transportation to improve labor mobility within Spain.  In 
addition, Sebastian acknowledged the need to change the laws 
and regulations that inhibit companies from investing in 
their work force  He foresees an agreement this fall between 
employers' groups, unions and the government that should 
address many of the structural causes of poor labor 
flexibility in Spain. 
 
Comment 
------- 
 
6. Sebastian's message on productivity and government budget 
policy comes when these two subjects are the most discussed 
economic issues in the Spanish press.  Spain's labor 
productivity is well below the EU average, and is a problem 
the government promises to solve.  The mention of pro-worker 
investment initiatives may be an effort to introduce an 
incentive to the unions to support the likely weakening of 
rigid labor benefits that make employers less likely to hire 
and invest in human capital. 
 
7. The budget message is more challenging to decipher.  Vice 
President and Minister of Economy and Finance Pedro Solbes 
has publicly affirmed his support for balancing budgets 
through economic cycles.  Due to strong economic forecasts, 
Spain will run a small surplus this year and probably next. 
Sebastian's comments seem to support the gist of Solbes' 
policy.  His comments in favor of regional budgetary 
independence are interesting in the light of Solbes' need to 
negotiate a new budgetary agreement with the regional 
governments.  Traditionally, Sebastian's position has had 
great influence in setting the overall economic agenda.  His 
relationship vis-a-vis Vice President Solbes, an 
internationally renowned economic heavyweight is still being 
defined. 
ARGYROS