Cablegate: Spain: Galicia's Economy Transformed by 20 Years

VZCZCXRO1780
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHMD #2525/01 2790718
ZNR UUUUU ZZH
R 060718Z OCT 06
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 0951
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2122
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 05 MADRID 002525

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/WE

E.O. 12958: N/A
TAGS: ECON SP
SUBJECT: SPAIN: GALICIA'S ECONOMY TRANSFORMED BY 20 YEARS
OF EU FUNDING

MADRID 00002525 001.2 OF 005

------------------------
SUMMARY AND INTRODUCTION
------------------------

1. Spain's 1986 entry into the European Union turned on a
tap of EU funding which has helped transform the face of
modern Spain. To gain a better understanding of the impact
of European funding on Spain's 16 regions, Embassy Madrid's
Economic section plans to visit many of these regions over
the next year and prepare a series of baseline cables on
Spain's regional economies. We begin this series with this
report on the Galician economy. ECONOFF visited Galicia
September 25-26, meeting with the regional ministers of
economy and education/science, the Director of Caixa Novo
(southern Galicia's largest savings and loan bank), several
officials of Caixa Galicia (northern Galicia's largest
savings and loan bank), 15 businessmen from Vigo representing
the most significant sectors of the Galician economy, the
Director of Galicia's largest business federation, and two
economist/university professors.

2. Twenty years of EU funding has been good for Galicia.
Infrastructure has been modernized; isolation from the rest
of Spain has ended; the negative impact of the decline of
certain key economic sectors has been cushioned; and the rise
of new economic sectors has been facilitated. Galicia has
been transformed and is no longer the isolated backwater most
famous of sending immigrants to the Americas. The public
face of Galicia now resembles that of the rest of Spain. But
true economic "convergence" (i.e., making Galicia as rich as
the rest of Spain) has not been achieved. Galicia's GDP in
1986 lagged well behind that of Spain. In 2006, Galicia
still lags behind. Less behind than 20 years ago, but still
further enough back to continue to qualify for EU convergence
funding through the end of the EU's 2013 budget cycle. But
the chip on Galicia's collective shoulder vis-a-vis the rest
of Spain has been removed with the help of 20 years of EU
subsidies and today Galicians are both confidant about their
economic future and proud to be Galician, Spanish and
European. END SUMMARY AND INTRODUCTION

----------------
A GALICIA PRIMER
----------------

3. Galicia occupies 29,639 square kilometers in the
northwest corner of Spain, above Portugal and to the west of
the Asturias and Castilla and Leon regions. Its territory
encompasses 5.8 percent of Spain. It is one of the
westernmost points in continental Europe, enjoying relatively
close proximity to American markets and sitting astride
important sea lanes of communication. Galicia has 1,300
kilometers of coastline along the Atlantic Ocean and forests
cover 69 percent of its territory. Galicia contains
2,762,000 inhabitants, which represents just under six
percent of the total Spanish population. Galicia's capital
and administrative center is the inland city of Santiago de
Compostela (92,000 inhabitants). Its other major population
centers include Vigo (293,000 inhabitants), La Coruna
(244,000 inhabitants), and Ourense (109,000 inhabitants).

4. Galicia is as one of Spain's historic autonomous
communities, along with Catalonia and the Basque Region. The
official languages of Galicia are Spanish and Gallego, which
is similar to Portuguese. Galicia enjoys close geographic
and cultural ties to northern Portugal and until the advent
of EU funded infrastructure development, Galicia enjoyed
better communication links with the Porto region of Portugal
than it did with the rest of Spain.

-----------------
ECONOMIC SNAPSHOT
-----------------

5. Galicia's 2005 GDP was 47.9 billion euros, which
represents roughly 5.4 percent of Spain's GDP. Galicia's GDP
grew by 3.3 percent in 2005, while Spain as a whole grew by
3.5 percent. Galician imports totaled 13.6 billion euros in
2005, while exports totaled 12.1 billion euros. Over seven
billion of the 13.6 billion in imports came from the EU25,
with France in the lead as the source of 2.6 billion euros in
Galician imports, followed by Portugal with 1.6 billion euros
in Galician imports. Only 321 million euros of Galician
imports came from the U.S. As a result, the U.S. was only
the 8th largest supplier of Galician imports, trailing five
EU member states, Mexico (463 million euros) and China (395
million euros). Of the 12.1 million euros of Galician

MADRID 00002525 002.2 OF 005

exports registered in 2005, 8.8 billion euros worth went to
EU25 nations, with France (3.9 billion euros) and Portugal (2
billion euros) representing the largest EU25 importers of
Galician products. The U.S. imported 222 million euros in
Galician products in 2005, which made the U.S. the seventh
largest importer of Galician products, following six EU25
members.

6. Regarding the nature of the 13.6 billion euros of
Galician imports in 2005, leading import products included
automobiles or automobile parts (2.9 billion euros), coal (2
billion euros), maritime navigation equipment (1.5 billion
euros), milk products (1.4 billion euros), steel (707 million
euros), clothing pieces (589 million euros), and
pharmaceutical products (390 million euros). As for the
nature of the 12.1 billion euros of Galician exports in 2005,
leading export products included automobiles or automobile
parts (4.1 billion euros), finished clothes or clothing
pieces (1.5 billion euros), maritime navigation equipment
(1.3 billion euros), fish and fish products (853 million
euros), wood and cellulose products (530 million euros), coal
(478 million euros), machinery (462 million euros), cement
(315 million euros), and prepared meat or fish products (304
million).

7. Galician origin foreign investment totaled 694 million
euros in 2005, of which 397 million was destined for EU25
nations. Leading destinations of Galician investment
included Italy (112 million euros), France (96 million
euros), Mexico (82 million euros), Portugal (73 million
euros), the United Kingdom (68 million euros). Galician
origin investment in the U.S. in 2005 totaled 45 million
euros. Foreign investment in Galicia totaled 190 million in
2005. Leading foreign investors included Portugal (126
million euros), the U.S. (15 million euros), and the
Netherlands (13 million euros). Most foreign investment in
2005 was directed to the financial services sector (115
million of the 190 million total). Given the low overall
rate of foreign investment, it is clear that an individual
deal (e.g., a Portuguese financial institution buying a
counterpart in Galicia) could skew the statistics in any
given year.

8. Total employment in Galicia has hovered between 1,000,000
and 1,100,000 during the last 20 years, but the sectors
employing these million workers have changed remarkably. In
1986, over 400,000 Gallegos (over 40 percent of total
employed workers) were employed in the agriculture and
fishing sectors. Today, the number working in those sectors
has declined to 115,000. Rural small hold agricultural
workers specializing in milk and beef production bore the
brunt of this decline. Galician agriculture, which was based
in small, atomized land parcels, proved unable to survive in
the larger common agricultural market. More than one
interlocutor told ECONOFF that "French milk devastated
Galicia's agricultural sector." During that same 20 year
period, those working in the service sector increased from
400,000 to 600,000, while those employed in industry grew
from 140,000 to 194,000, and those employed in the
construction sector grew from 75,000 to 127,000. 146,000
Galician workers were unemployed as of August 2006 and the
Galician unemployment rate (9.9 percent as of August 2006)
has generally run significantly above that of the rest of
Spain. The Galician inflation rate has generally tracked
that of Spain.

--------------------
KEY ECONOMIC SECTORS
--------------------

9. Perhaps most important sectors of the Galician economy
are automobiles and automotive parts, fishing and fish
processing, and textiles. Other key sectors include wood and
paper products, agricultural products (produced by large
scale producers which emerged following the death of the
family farm), granite and other non-metals mining, small and
medium naval construction, biotechnology,
construction/property, wind and hydro electricity production,
pharmaceuticals/chemicals, telecommunications/audiovisual
products, tourism, mechanical equipment, and rubber and
plastics. According to the Galician Minister of the Economy,
there are only 59 businesses in the region that employ more
than 500 workers. Of Galicia's 173,000 businesses, roughly
102,000 employ no/no salaried workers, 71,000 employ between
1 and 49 salaried workers, and 1,200 employ between 50 and
499 salaried workers.

MADRID 00002525 003.2 OF 005

-----------------------
GALICIA'S EU EXPERIENCE
-----------------------

10. The entry into the Common Market led to the serious
decline of certain sectors of the Galician economy such as
traditional small scale agriculture/fishing and large naval
construction (e.g., the virtual collapse of the Ferrol
shipyards outside La Coruna), while opening markets for other
sectors like automobiles and auto parts and textiles, and
forcing other sectors to modernize in order to grow (e.g.,
fishing and fish processing). Automobile and automotive
parts production greatly expanded in importance after the
French corporation Peugeot opened a large plant in Vigo and
this plant served as a pole of attraction for other smaller
firms supplying it. Textiles also grew in importance with
the rise of the Inditex corporation outside La Coruna.
Inditex is now Europe's largest clothing retailer (having
recently passed the Swedish Hennes and Mauritz chain). Based
in Arteixo, outside la Coruna, it has 2,800 stores worldwide.
It opened over 500 stores in the past year and plans to have
4,000 stores open the end of 2009. Key brands include Zara,
Massimo Dutti and Bershka. Half of its market is in Spain,
while the rest is abroad, principally in Portugal and France.
Vigo-based Pescanova is a global fishing and fish processing
powerhouse. Spain remains Europe's leading fishing nation.
Galicia leads all other Spanish regions in fishing and
Pescanova leads the sector in Galicia.

11. EU funding allowed Galicia to greatly modernize its
infrastructure, helping to finance highways, international
airports in Vigo, Santiago de Compostela and La Coruna,
several modern port facilities, and numerous high speed rail
links. Galicia went from having 100 kilometers of highways
in 1986 to over 800 kilometers in 2005. When Galicia joined
the EU, traveling by road from La Coruna to Madrid took
between 14 and 18 hours; today it takes less than six hours.
Three high quality universities were also subsidized,
allowing university enrollment to increase from under 40,000
in 1985 to close to 80,000 in 2006.

12. According to Galicia's Economy Minister, from 1989
through 2006, EU structural adjustment (or convergence)
funding to Galicia totaled just over 9 billion euros (which
represented just under 14 percent of total EU convergence
funding provided to Spain). One economist/university
professor told ECONOFF that this 9 billion euros represented
between 2.0 and 2.3 percent of Galicia's GDP between
1994-2006. EU convergence funding for Galicia in the
2006-2013 EU budget cycle is expected to top 3.5 billion
euros. Given Galicia's development, the impact of this
funding will be somewhat less than in earlier periods (under
2.0 percent of total Galician GDP).

13. According to the Galicia's Economy Minister, roughly 70
percent of the EU funding received from 1989 through 2006
paid for what he referred to as Public Capital Formation,
while about 30 percent paid for Private Capital Formation.
The largest line item in Private Capital Formation was
efforts to improve private sector production and the access
to markets of private sector products. The largest line item
in Public Capital Formation was infrastructure works, which
accounted for 41 percent of total EU funding from 1989-2006.
The Economy Minister also stressed the dramatic opening of
Galicia's market during the 20 years of EU membership, noting
that exports as a percentage of GDP increased from 10 percent
to 25 percent between 1989 and 2005. The
economist/university professor had a slightly different take
on how the 9 billion euros has been spent. He said that 37
percent was spent on efforts to ensure the competitiveness of
Galicia's economic base (e.g., mostly the transformation of
agricultural and fishing sectors), while 32 percent was spent
on infrastructure (roads, ports and high speed rail links),
15 percent on health and environmental projects (e.g.,
hospitals and water treatment facilities), 13 percent on
human resources and employment-related projects (e.g.,
building human capital via better education, university
subsidies, etc.), and 3.0 percent on miscellaneous
development projects.

----------------------------
BUT CONVERGENCE NOT ACHIEVED
----------------------------

14. In 2005, average GDP per person in Spain was 20,838
euros. In Galicia it was 16,860 euros. Spanish GDP growth
averaged 3.4 percent per year between 1995 and 2004, while

MADRID 00002525 004.2 OF 005

Galicia's economy grew at an average annual rate of 2.8
percent during that same period. In terms of purchasing
power parity, Galicia's economy grew at an annual rate of
2.23 percent between 1995-2004, while the rate for Spain as a
whole was 2.42 percent and the rate for the EU 25 was 1.83
percent. In terms of convergence, in 1995, Spanish GDP per
person was at 87.5 percent of the EU15 average, while Galicia
was at 71.3 percent of that average. In 2003, Spain was up
to 97.3 percent of the EU25 average, while Galicia lagged
behind at 76.6 percent of the EU25 average. As a result,
Galicia, along with Extremadura, Andalucia and Castilla la
Mancha will continue to access EU convergence funding through
the end of the 2013 EU budget cycle. Galicia's Minister of
Economy told ECONOFF that overcoming this lack of convergence
was his principal economic goal.

-------------------------------------
EU FUNDING PROCESS IMPOSES DISCIPLINE
-------------------------------------

15. Several of ECONOFF's interlocutors in Galicia stressed
the role EU funding played in "forcing" Galicia and Spain as
a whole to modernize and professionalize its central and
regional administrations. EU funding was not direct
transfers to central or regional administrations and was
instead contingent on Galicia and Spain complying with
certain EU regulations. Rather than losing some of the "free
money," (like many recent adherents to the EU), Galicia and
Spain took the decision to modernize and professionalize its
administrations to guarantee the EU funding flow. Compliance
with EU regulations also "forced" Galicia and Spain to forge
a political consensus on integrated and long-term regional
development plans, which in turn helped to ensure that the
funding was spent in a rational fashion. One of ECONOFF's
interlocutors estimated that Galicia had spent 85 percent of
its EU funding in a wise fashion. Asked about "white
elephants," he could only point to: (1) the fact that modern
international airports were constructed with EU funds in
Vigo, La Coruna and Santiago de Compostela, when one major
airport located between the three cities would have sufficed,
and, (2) the fact that modern international ports were
constructed with EU funding in La Coruna and Ferrol, even
though the two cities are only 15 kilometers apart.
Individually, they represent Spain's 8th and 11th largest
ports. If one combined port had been constructed, it would
have been Spain's 4th largest port.

--------------------------------------------- ----
FOCUS ON R&D SPENDING TO HELP ACHIEVE CONVERGENCE
--------------------------------------------- ----

16. Galicia's Economy Minister told ECONOFF that relatively
low levels of spending on R&D has been a leading cause of
Galicia's and Spain's relatively weak productivity growth.
In 2003, the EU15 spent an average just under two percent of
GDP on R&D, while Spain spent just over one percent and
Galicia a mere 0.8 percent. The Economy Minister said
stepped up spending on R&D to achieve a better productivity
growth rate was key to his plan to achieve convergence with
Spain. As part of this strategy, Galicia and the Spanish
national Ministry of Education and Science signed an accord
in September to provide national assistance to Galicia's
plans to develop four "technopoles" throughout the region.

-------
COMMENT
-------

17. Twenty years of EU funding has been good for Galicia.
Infrastructure has been modernized; isolation from the rest
of Spain has ended; the negative impact of the decline of
certain key economic sectors has been cushioned; and the rise
of new economic sectors has been facilitated. Galicia has
been transformed and is no longer the isolated backwater most
famous of sending immigrants to the Americas. The public
face of Galicia now resembles that of the rest of Spain. But
true economic "convergence" (i.e., making Galicia as rich as
the rest of Spain) has not been achieved. Galicia's GDP in
1986 lagged well behind that of Spain. In 2006, Galicia
still lags behind. Less behind than 20 years ago, but still
further enough back to continue to qualify for EU convergence
funding through the end of the EU's 2013 budget cycle. But
the chip on Galicia's collective shoulder vis-a-vis the rest
of Spain has been removed with the help of 20 years of EU
subsidies and today Galicians are both confidant about the
economic future and proud to be Galician, Spanish and

MADRID 00002525 005.2 OF 005

Europeans.

AGUIRRE

© Scoop Media