US embassy cable - 05MADRID1316

UNCLAS SECTION 01 OF 02 MADRID 001316 
 
SIPDIS 
 
FOR H AND EUR/WE 
 
E.O. 12958: N/A 
TAGS: ECON, PREL, PGOV, SP, Country Visits 
SUBJECT: SENATOR SHELBY MEETS SPANISH ECONOMICS OFFICIALS 
 
 
1.  Summary:  Senator Richard Shelby met separately in Madrid 
March 28 with two high-ranking Spanish government officials 
in the government,s two ministries dealing with economic and 
finance issues.  The Senator and his hosts discussed the 
current state of the Spanish economy, the impact of EU 
enlargement on Spain, the long-term impact of the EU,s 
recent agreement to modify its stability pact, how Spain and 
the U.S. can remain competitive economically with China and 
India, and the relative costs of health care in Spain and the 
U.S.  End summary. 
 
2.  Senator Richard Shelby met separately in Madrid March 28 
with two high-ranking Spanish government officials in the 
economics and finance arenas: Miguel Angel Fernandez Ordonez, 
secretary of state for finance and budget in the Ministry of 
 
SIPDIS 
Economy and Finance, and Pedro Mejia Gomez, secretary of 
state for tourism and commerce in the Ministry of Industry, 
Tourism and Commerce.  Senator Shelby was joined in both 
meetings by two Banking, Housing and Urban Affairs Committee 
staffers, Mrs. Shelby, embassy,s economics counselor, poloff 
and military escort. 
 
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Fernandez: Stability Pact Least of All Evils 
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3.  Fernandez opened the first meeting by discussing EU 
enlargement.  He said Spain is facing challenges brought on 
by an enlarged market that includes countries with lower 
labor costs.  In his view, though, this will be good for 
Spain and rest of the EU in the end, because open markets and 
economies are by their nature good.  One clear disadvantage 
enlargement brings for Spain, however, relates to EU funds. 
In recent years more EU common funds went to Spain for 
infrastructure and other improvements than to any other EU 
member.  Spain had been receiving about 1 percent of its GDP 
in EU funds.  With enlargement, Spain will go from being a 
net recipient of funds to a net donor.  Fernandez said Spain 
hopes to make the change gradually. 
 
4.  Senator Shelby asked Fernandez what the biggest challenge 
is facing the Spanish economy.  Fernandez replied that it was 
not having its own currency to devaluate to remain 
competitive.  Instead, Spain is focusing on education, 
research and development and technology to increase 
productivity, which is the only way Spain can stay 
competitive.  On the EU,s new stability pact agreement, 
Fernandez thought the agreement reached was the least of all 
evils.  In the end, the 3 percent figure is much lower than 
in other economies like the U.S. or Japan. 
 
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Mejia: EU Monetary Policy Not Designed for Spain 
--------------------------------------------- --- 
 
5.  Mejia began his meeting with the Senator by explaining 
that the Spanish economy is affected by many of the same 
forces that impact the U.S. economy, including a substantial 
trade deficit.  EU monetary policy, said Mejia, is currently 
designed for a country like Germany that has low domestic 
demand, not Spain, which has high domestic demand.  Spiraling 
oil prices and a weak U.S. dollar resulted in a trade deficit 
in January 2005 that was 50 percent higher than the same 
month in 2004. 
 
6.  The Senator said that in the U.S. we have a high trade 
deficit and budget deficit, and have decided to attack the 
latter first by trying to live within our means.  The U.S. 
economy overall is sound, however, and small and medium 
businesses are the growth engine in the U.S. 
 
7.  Mejia then commented that the Spanish government wants to 
increase exports from Spain to the U.S.  Spain has put the 
U.S. at the top of a list of nine countries to target for 
increased exports.  The environment for stable businesses in 
the U.S. is excellent right now, and Spain wants to take 
advantage. 
 
8.  The Senator asked Mejia what he thought of the stability 
pact agreement.  Mejia did not believe the agreement would 
have any long-term negative impact on the EU.  In fact, it 
was probably a net positive because it showed the EU could 
deal with changing circumstances.  On the whole, the EU is 
doing extremely well economically even given a variety of 
challenges like German reunification, and is much better off 
than most people would have predicted 20 years ago. 
 
9.  Both agreed that China and India will be major 
competitors for the U.S. and EU for many years to come. 
While neither Spain,s nor the U.S.,s labor market will be 
as flexible as China,s or India,s, the EU and U.S. can use 
their technological advantage to increase productivity, which 
in turn will help them counter China,s and India,s lower 
costs of labor. 
 
10.  Senator Shelby observed that 56 percent of the U.S.,s 
budget goes to public expenditures like Medicaid, and asked 
what the comparable number was for Spain.  Mejia admitted he 
did not know, but explained that in Spain medical costs are 
much lower than in the U.S. because the state is the only 
purchaser of medical services.  The government uses its 
purchasing power to get the best possible prices on 
medications and medical services for the citizens.  The 
Senator commented that it is the lack of competition for 
medical services in the U.S. that has lead to the enormous 
cost of health care.  Medical services in the U.S. are not 
subject to the laws of supply and demand. 
 
11.  Senator Shelby's staff has approved this message. 
 
 
MANZANARES