Cablegate: Unions Protest Gos Plan for Saving Failing

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MADRID 003840

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: PGOV ELAB SP
SUBJECT: UNIONS PROTEST GOS PLAN FOR SAVING FAILING
SHIPBUILDING INDUSTRY

REF: MADRID 3105

1. (SBU) Summary. Zapatero's Socialist (PSOE) government is
facing its first labor crisis since taking office in April,
as shipyard workers in five cities stage unruly protests and
block traffic to protest GOS backing of a restructuring plan
that will lead to significant layoffs. The heart of the
issue is the inability of state-owned Izar Shipyards to
compete with Asian shipbuilders and a demand by the European
Commission (EC) that Spain repay at least USDOLS 370 million
-- and possibly over USDOLS 1.35 billion -- in allegedly
illegal subsidies provided to Izar in recent years by the
previous Popular Party (PP) government. Labor frustrations
burst into violent demonstrations in Cadiz and Vizcaya after
Zapatero pledged to help workers, then subsequently announced
his support for a company plan to split and partially
privatize the failing enterprise, a plan that will result in
job losses. A labor representative, who was preparing for a
trip to the U.S. as an International Visitor grantee, told us
the violence was regrettable, but indicative of the fear felt
by Izar's 11,000 workers and 30,000 workers in affiliated
industries. The GOS extracted a temporary reprieve from the
EC regarding repayment of the illegal subsidies, taking the
punch out of opposition arguments that the PSOE was acting on
behalf of Brussels rather than Spanish workers. The GOS also
put on hold its plans to divide the company while talks with
the unions are underway. Unfortunately for Zapatero, there
is no solution that will both save all Izar jobs and satisfy
the EC that the GOS has ceased its illegal subsidies. Any
viable solution is likely to incite another round of labor
unrest. End Summary.

//AN UNWELCOME CONFRONTATION WITH LABOR//

2. (U) The Zapatero administration has attempted to shift the
blame for the crisis to the PP for making the allegedly
illegal payments to Izar, but PSOE remains on the defensive.
All political parties except the PSOE joined a Congressional
resolution calling on Zapatero to set aside the restructuring
plan and demand lenient terms from the EC. Zapatero's
government is attempting to do just that, but in the end the
only question is how, not if, a large number of Izar
employees will be removed from government payrolls.

//LAST GASP OF A DYING INDUSTRY//

3. (U) Over the last two decades, Spain's centuries-old
shipbuilding industry has lost 30,000 jobs in a struggle for
economic survival against Asian competitors, particularly
South Korea. In 2000, the GOS folded its two remaining
shipbuilding companies into a single company known as Izar as
part of an effort to streamline the industry, but Izar has
never shown a profit. Izar's 11,000 employees are now in
danger of losing their jobs.

4. (SBU) It is the misfortune of the Zapatero administration
that the final crisis has come on its watch. The Izar issue
is coming to a head now in part because the opposition
Popular Party (PP) delayed the inevitable by propping up the
company through more than 1 billion euros (USDOLS 1.2
billion) in state funds, funds the European Commission (EC)
has declared to be illegal subsidies and is now demanding
Izar pay back to the GOS and the EU. The GOS estimates that
if the parastatal company that owns Izar, Sociedad Estatal de
Participaciones Industriales (SEPI), is forced to repay the
full amount of illegal subsidies, Izar will go bankrupt
within four months. To avert the total collapse of Izar,
SEPI proposed separating the relatively viable military
construction shipyards from the foundering civilian vessel
shipyards and privatizing the civilian facilities. It is
this SEPI survival strategy that has triggered violent
protests by Izar workers throughout Spain and drawn Zapatero
into an unwelcome conflict with labor.

//BACKGROUND TO THE CRISIS//

5. (U) Thoughout its first term, Aznar's PP government
maintained good working relations with labor unions and
focused economic policy on job creation, dovetailing with
union objectives for dealing with Spain's chronic high
unemployment. After taking office in 1996, Aznar continued
GOS support for a plan by the previous PSOE government to
restructure the publicly owned shipyard industry, an
initiative that had the support of all major Spanish labor
unions. The plan was intended to wean the shipyards away
from state funding and require them to reduce labor and
manufacturing costs.

6. (U) In 1997, the European Commission (EC) approved
restructuring aid for the GOS-owned Spanish military
shipbuilder Astilleros Espanoles, S.A. and the GOS-owned
civilian shipbuilder Empresa Nacional Bazan amounting to EUR
1.38 billion (USDOLS 1.69 billion). EU funds were provided
on the condition that no further subsidies would be provided
to the companies.

7. (U) However, both companies failed to meet the objectives
of the GOS restructuring plan and remained unprofitable. In
1999, Aznar's PP government authorized state-owned SEPI to
grant EUR 500 million (USDOLS 615 million) in further aid to
Bazan, assistance that eventually included SEPI's purchase of
Bazan at allegedly above-market value. SEPI then purchased
Astilleros in December 2000, forming Izar as Spain's last
major civil and military shipbuilding company. Izar employs
11,000 shipbuilders in six cities throughout the country and
36,000 workers in related industries.

8. (U) The European Commission launched an investigation in
2000 to determine whether Aznar's assistance to Bazan and
Astilleros constituted a violation of its 1997 agreement to
provide restructuring aid. While the EC investigation was
underway, the GOS provided another EUR 560 million (USDOLS
688 million) in subsidies to Izar. In May 2004, the EC
determined that Spain's 1999 and 2000 assistance to the
shipbuilders through SEPI and subsequent subsidies to Izar
provided Spanish companies an uncompetitive advantage over
other EU shipbuilders. The EC found that Izar must
immediately repay EUR 308 million (USDOLS 378 million) and
perhaps eventually up to EUR 1.1 billion (USDOLS 1.35
billion) in illegal assistance.

//LAST-DITCH SURVIVAL PLAN//

9. (SBU) In an effort to salvage what it can of the industry,
SEPI has proposed dividing the civilian and military
shipyards into two sets of companies, keeping the military
shipyards (4 out of Izar's 10 facilities) under state
ownership and privatizing the civilian shipyards. The PSOE
government has also ramped up efforts to secure military
sales for the remaining shipyards. SEPI is banking on Izar's
relatively stable orders for military vessels to provide
employment for at least several thousand Izar employees.
(NOTE: One news report suggested that a recent Israeli
decision to withdraw orders from Izar for two naval vessels
was linked to USG displeasure with Zapatero's withdrawal of
Spanish troops from Iraq. END NOTE.) The fate of workers in
civilian shipyards would be far less certain.

10. (U) Shipyard workers met the SEPI plan with hostility
from the outset and have staged sometimes violent strikes to
make their position clear. Workers are against any division
of the company or privatization of either the civilian or
military sector based on their certainty that privatization
will bring layoffs. They want Izar maintained as a single
entity in order to guarantee that all workers will get the
same deal.

11. (SBU) Labor's mood went from anger to outrage after
Zapatero, during a visit to the Basque region, quelled a
demonstration by Izar workers by promising he would stand
with them, only to do an about-face and endorse the SEPI plan
three days later. Workers reacted by announcing increased
walkouts and temporary strikes. In Vizcaya and Cadiz,
workers clashed with police and barricaded roads. Zapatero's
reversal was cast as a major gaffe by opposition parties and
the press and a reflection of inexperience and an inability
to confront difficult issues directly.

12. (SBU) The GOS won a temporary truce with workers on 9/23
by agreeing to put the SEPI plan on hold while negotiations
with labor unions are underway, but both sides appear
entrenched in their positions. The next day, Minister of the
Economy Pedro Solbes announced EC approval for a temporary
reprieve on Izar while the GOS works out a solution with the
unions. SEPI and labor union representatives traveled
together to Brussels on 10/4 for meetings with the EC to
establish the EC's bottom line on the matter. An EC
spokesman suggested there could be "flexibility" on the
schedule of repaying illegal subsidies, but only if SEPI's
plan for separating Izar into military and civilian sectors
were implemented. The EC estimates that splitting the
companies will save 9,000 shipbuilder positions. Labor
unions have continued intermittent work stoppages to keep up
pressure on SEPI and the GOS during the negotiations.

//LABOR'S VIEW//

12. (SBU) Poloff met with Comisiones Obreras (CCOO) Director
for International Relations Javier Doz on 9/24 to discuss
union views on the Izar crisis. (NOTE: Doz was preparing to
depart for the U.S. on 9/25 as an International Visitor
grantee. He is a long-standing and excellent contact on
labor issues. END NOTE.) CCOO, a formerly Communist-aligned
but now independent labor union, represents the largest
number of shipbuilders and has played a leading role in the
negotiations with SEPI and the Zapatero government. He
explained that Izar workers are divided among all the major
Spanish unions, guaranteeing a broad base of support for the
shipbuilders. Doz said the SEPI plan would probably lead to
4,500 layoffs out of the total of 11,000 Izar direct-hires
and to an unknown number of layoffs among the 30,000 workers
in supporting industries. He said the outbreaks of violent
demonstrations were regrettable, but that they reflected the
fears of workers fighting for their economic lives. He
expected Cadiz to be especially restive since a large number
of workers in related industries in that city depend on Izar.

13. (SBU) Doz acknowledged that the long term prospects for
shipbuilders were bleak, lamenting the fact that
state-subsidized companies in Korea made Spanish firms that
played by the rules of international competition unviable.
However, Doz also noted that Korean firms were quicker to
adapt to customer needs and were more technologically
efficient than Spanish shipbuilders. Doz observed that even
Izar's military shipyards suffer from lack of orders and
cannot absorb the excess labor in the civilian shipyards. He
said the CCOO and other unions were focused on getting the
best deal they could for workers who will be forced from the
industry. That could take the form of buyouts or favorable
retirement packages, but SEPI and the unions are far from
reaching any such arrangements. CCOO and the other unions
also want the GOS to demand lenient terms from the EC,
pointing out that larger EU countries don't refrain from
pressuring the EC to bend the rules to protect domestic
labor.

//POLITICAL FALLOUT//

14. (SBU) The demand that the PSOE stand up to the EU is
aimed squarely at Zapatero, whose key policy foreign policy
objective has been to "return Spain to the heart of Europe."
He symbolically achieved this goal in early September,
hosting Chancellor Gerhard Schroder and President Jaques
Chirac for a meeting intended to signal a definitive break
with Aznar's focus on transatlantic relations. The PP and
other parties are now challenging Zapatero to use Spain's
renewed EU credentials to extract favorable terms from
Brussels regarding Izar's repayment of the illegal subsidies.

15. (SBU) The PSOE has blamed the PP for the Izar crisis
because the allegedly illegal subsidies took place on Aznar's
watch. The PP is unapologetic, saying Spanish workers should
have priority over meeting EU agreements. Some observers
have noted that all parties, including the PSOE, knew the PP
subsidies to Izar were illegal and did nothing to stop them
because no party wanted to accept responsibility for dooming
the shipyards. PSOE made a vain appeal for other parties not
to politicize the Izar issue, but on 9/21 all parties except
PSOE supported a congressional resolution calling on the GOS
to shelve the SEPI plan and demand better terms from the EU.
The GOS responded that the only realistic choices were the
SEPI plan or the total dissolution of Izar.

//COMMENT//

16. (SBU) This is not how Zapatero, who is mindful of the
last PSOE administration's strained ties to labor, wanted to
initiate his relationship with Spanish unions. His offer and
subsequent retraction of support for the workers was
especially embarrassing. However, Zapatero's administration,
particularly Minister of the Economy Solbes, appears to have
recovered from that gaffe and regained the initiative. The
ability of the GOS to extract a positive response from the EC
(at least for the moment) took the punch out of opposition
argument that the PSOE was acting on behalf of Brussels
rather than Spanish workers. Unfortunately for Zapatero,
there is no solution that will both save all Izar jobs and
satisfy the EC that the GOS has ceased its illegal subsidies.
Any viable solution is likely to incite another round of
labor unrest.
MANZANARES

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