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### Viewing cable 06MONTEVIDEO230, THE VAZQUEZ ADMINISTRATION AT THE ONE-YEAR MARK

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06MONTEVIDEO230 | 2006-03-07 19:06 | 2011-06-15 00:00 | CONFIDENTIAL | Embassy Montevideo

`

    VZCZCXYZ0000
    PP RUEHWEB

    DE RUEHMN #0230/01 0661906
    ZNY CCCCC ZZH
    P 071906Z MAR 06
    FM AMEMBASSY MONTEVIDEO
    TO RUEHC/SECSTATE WASHDC PRIORITY 5498
    INFO RUCNMER/MERCOSUR COLLECTIVE
    RUEHBO/AMEMBASSY BOGOTA 2476
    RUEHCV/AMEMBASSY CARACAS 0380
    RUEHLP/AMEMBASSY LA PAZ MAR SANTIAGO 2797
    RUMIAAA/CDR USSOUTHCOM MIAMI FL//J-5//
    RUEHC/DEPT OF AGRICULTURE WASHDC
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHDC
    RUEAHLC/HOMELAND SECURITY CENTER WASHINGTON DC
    RHEHNSC/NSC WASHDC
    RUEKJCS/SECDEF WASHDC
    RUEHUB/USINT HAVANA 0052

` `

    C O N F I D E N T I A L MONTEVIDEO 000230

    SIPDIS

    SIPDIS

    DEPT FOR WHA/AS TSHANNON AND EB A/S AWAYNE
    DEPT ALSO FOR WHA/BSC DBARNES, CCROFT AND SMURRAY
    DEPT ALSO FOR EB/AS AWAYNE
    DEPT PLEASE PASS USTR
    TREASURY FOR OASIA FOR DDOUGLAS
    COMMERCE FOR ITAITA/MAC/WBASTIAN
    NSC FOR DFISK AND SCRONIN
    SOUTHCOM FOR POLAD

    E.O. 12958: DECL: 03/01/2016
    TAGS: PGOV PREL ECON EINV ETRD SOCI ELAB PINR UY
    SUBJECT: THE VAZQUEZ ADMINISTRATION AT THE ONE-YEAR MARK

    REF: A. 05 MONTEVIDEO 00665
         ¶B. 05 MONTEVIDEO 1429
         ¶C. MONTEVIDEO 0207 AND PREVIOUS
         ¶D. MONTEVIDEO 0175
         ¶E. MONTEVIDEO 0229

    Classified By: Charge D'Affaires James D. Nealon
    for reasons 1.4 (B) and (D)

    ¶1. (C) Summary: The Frente Amplio (FA) Government completed
    its first year in power on March 1 with more achievements
    than setbacks.  In typical fashion, little fanfare marked the
    day as President Vazquez had sent his state-of-the-union
    report to Congress a week earlier.  It is clear that his
    adroit and pragmatic leadership (along with Uruguay's strong
    institutions and the basically conservative nature of its
    society) have prevented the radical tilt some observers had
    predicted during the 2004 electoral campaign.  The President
    seems to prefer the term ""progressive"" rather than ""leftist""
    to describe his administration.  Looking back, Vazquez'
    campaign promise to ""shake the trees to their roots"" has
    meant more in terms of rejecting outdated socialist thinking
    than anything else.  The moderates have the upper hand, and
    Vazquez has been more challenged by the radicals in his FA
    coalition than he has by the two discredited opposition
    parties (Blancos and Colorados) who ruled the country during
    the past century.  In this effort, he relies on a relatively
    small cadre of experienced officials to get things done.  A
    key ally in this regard has been AgMinister and ex-Tupamaro
    guerrilla leader Jose Mujica, who has been useful in
    countering the ideologues on the far-left.  Vazquez was also
    able to appease many radicals by addressing the human rights
    abuses committed during the ""dirty war"" period of the
    military dictatorship and by finding the buried bones of
    disappeared persons.  His leadership style is now
    predictable: he stays above the fray and allows competing
    factions in the FA to debate an issue to exhaustion and then
    weighs in with a final decision.  This method will be sorely
    tested in 2006 as the GOU attempts to reform taxes,
    education, and defense -- and possibly face a showdown with
    powerful labor unions.

    ¶2. (C) Summary Continued:  Foreign policy is another
    formidable challenge, compounded by a stubbornly ideological
    Foreign Minister (Reinaldo Gargano). The most serious problem
    is the dispute with Argentina over the construction of giant
    paper mills on a shared river -- not only because of soured
    bilateral relations with Uruguay's closest neighbor, but also
    because of the implications to foreign investment,
    independent foreign policy, and Mercosur.  After briefly
    flirting with Cuba and Venezuela (to establish his ""leftist""
    credentials), Vazquez has tended to exert a moderating
    influence on his regional counterparts, including Hugo Chavez
    who has twice visited here.  Vazquez appears to model himself
    more after Chile's ex-President Ricardo Lagos, and his mild
    leadership style stands in sharp contrast to Hugo Chavez,
    Nestor Kirchner and Evo Morales.  A well-qualified economic
    team pursues prudent and sensible macroeconomic policies and
    further reflects the administration's pragmatic emphasis.
    While much of the region has lurched to the left, Vazquez has
    gone out of his way to seek good relations with the U.S.  In
    a recent meeting with the Charge on March 7, we heard from
    the President himself that he seeks an FTA with us (ref E).
    Vazquez' efforts to expand trade with the U.S. offer the USG
    a golden opportunity to send a message to the region that we
    favor pragmatic democratic governments, regardless of their
    political label.  Below is an appraisal of the GOU's
    successes and reversals during its first year.  End Summary.

    -------------------------
    Foreign Policy: Positives
    -------------------------

    ¶3. (C) Relations with the U.S. - Early on, Vazquez went out
    of his way to state publicly and privately that he wanted to
    have good relations with the U.S., in spite of ideological
    opposition from the more radical elements of his FA
    coalition.  (Note: More than 30 pct of the FA Government is
    composed of the Popular Participation Movement (MPP) -
    Tupamaro, ex-guerrillas faction. End Note.)  Vazquez took
    several positive steps to translate his statements into
    action.  The Open Skies Agreement, signed under the previous
    administration, was unanimously ratified in July 2005.
    Later, the GOU offered meaningful assistance to the victims
    of Hurricane Katrina and persuaded the radicals to support
    UNITAS naval exercises with the U.S.  After allowing a heated
    debate on the ratification of the Bilateral Investment Treaty
    (BIT) with the U.S. to take its course, Vazquez became
    personally engaged during his trip to the U.S. in September,
    when he proposed that several controversial articles be
    amended.  The ensuing agreement on these cosmetic changes to
    the BIT allowed Vazquez to sign the document in Mar del Plata
    in November and to have it ratified by Congress in December.
    After returning from the U.S. in September, Vazquez sent out
    a trial balloon, saying that the BIT should be followed by
    enhanced commercial talks with the U.S.  This was followed in
    January 2006 by a front-page interview by Economy Minister
    Astori, in which he advocated (on Vazquez's behalf, we
    believe) that Uruguay should negotiate a Free Trade Agreement
    (FTA) with the U.S.  (Note: Uruguayan Ambassador to
    Washington Carlos Gianelli had earlier told Charge that this
    was the direction Vazquez wanted to follow. See ref B.  End
    Note.) On March 7, we also heard from the President himself
    that he seeks an FTA with us.

    ¶4. (C) Vazquez also signaled early on that he wanted to meet
    with POTUS, and a short meeting was arranged on the margins
    of the Summit of the Americas in Mar del Plata.  A POTUS
    meeting is now set for May 4 at the White House. (Note: And
    so is a pull-aside meeting with the Secretary in Chile on
    March 11. End Note.)  Key members of Vazquez's kitchen
    cabinet (Finance Minister Astori, Industry Minister Lepra and
    Agriculture Minister Mujica) have continuously advocated for
    closer relations with the U.S. and pushed for the development
    of a smooth, business-like relationship.  While the MFA was
    pressing to sue the U.S. at the WTO over rice subsidies,
    Lepra and Mujica prevailed in convincing Uruguayan rice
    exporters to hold off and try to resolve the issue
    bilaterally.  Several productive meetings have since taken
    place between GOU and USG delegations on the margins of the
    WTO.  Finally, the GOU has pushed for a resumption of the
    Joint Commission on Trade and Investment (JCTI), a mechanism
    started under the Batlle administration.  The next JCTI
    meeting is set to take place in Washington in early April.
    For two years now, the U.S. is Uruguay's largest export
    market, absorbing some 25% of the country's exports and
    overtaking Mercosur as the prime destination.  Trade has
    clearly become the engine of our bilateral relationship.

    ¶5. (C) Mercosur - After initial signals that strengthening
    Mercosur and developing Latin American integration would be a
    main priority, Vazquez has become seriously disenchanted with
    the trading bloc.  His first foreign policy actions  were to
    renew diplomatic relations with Cuba, sign trade and cultural
    agreements with Venezuela, sign an agreement on human rights
    with Argentina and welcome Brazilian investment into Uruguay.
     However, Uruguay's lackluster pro-tempore Mercosur
    presidency, the increasing tendency of Brazil and Argentina
    to negotiate bilateral agreements without consultations, and
    recurring market access problems for Uruguayan exports with
    both larger countries all contributed to a sense of deep
    frustration with Mercosur.  The nail in the coffin appears to
    have come from Argentina's blockade of the three access
    bridges linking it with Uruguay, because of the paper mills
    dispute (ref C).  Brazil's complete silence on Argentina's
    violation of a basic tenet of Mercosur -- the free movement
    of goods across borders -- seems to have convinced Vazquez
    that Mercosur is of little use to Uruguay.  While the GOU,
    under the influence of ForMin Gargano, pushed for the
    induction of Venezuela into Mercosur, it appears increasingly
    unlikely that this act will bring any benefit to Uruguay.
    The GOU is now looking for relationships outside of Mercosur,
    with Astori stating that the government's main economic
    priority for this year will be to negotiate bilateral FTAs
    with the U.S. and with China.

    ¶6. (C) Argentina and Brazil - Even prior to the conflict with
    Argentina and the estrangement from Mercosur, the GOU was
    already showing a decided trend towards independent action
    from the bloc.  Uruguay did not vote for the Brazilian
    candidate to the IDB (it supported the USG-backed Colombian
    candidate), perhaps in retaliation for the GOB's lack of
    support for Uruguay's candidate to the WTO, Perez de
    Castillo.  Vazquez was incidentally reported to have
    developed an excellent personal relationship with President
    Uribe when he visited Colombia on his return trip from the
    U.S. His public statements in both New York and Bogota were
    moderate and constructive.

    ¶7. (C) Pol/Mil Issues - Vazquez has been able to maintain
    overall good relations with the Uruguayan military despite
    the paltry defense budget and the sensitive investigations
    into the human rights violations committed during the period
    of the military dictatorship (1973-1985).  Embassy believes
    that there is little chance that the GOU will sign an Article
    98 agreement, though some GOU officials might not be quite as
    enthusiastic about the ICC since Argentina is taking Uruguay
    to the International Court in The Hague in the papermill
    dispute. Peace Keeping Operations (PKO) are a source of pride
    (and much-needed revenue) for the Uruguayan armed forces.  On
    a per capita basis, Uruguay maintains the largest number of
    deployed peacekeeping troops in the world.  Of the 3,083 PKO
    troops total, some 1,897 are deployed in Africa (MONUC) and
    965 in Haiti (MINUSTAH).  After much acrimonious debate in
    Congress, Uruguay's navy was authorized to participate in
    UNITAS exercises, though many in the FA have promised not to
    allow it next year until the defense policy is overhauled.
    U.S./Uruguayan mil-to-mil relations remain positive despite
    U.S. cuts in funding.

    ¶8. (C) Mar del Plata - As pro-tempore President of Mercosur,
    Vazquez delivered Mercosur's rejection of the FTAA, but
    presidential advisors told us that Vazquez felt ambushed by
    the Argentines who presented him with the strongly worded
    statement at the last minute, which Uruguay did not have a
    part in elaborating.  Vazquez tempered this rejection by
    adding that conditions for an FTAA were not appropriate at
    the time.  In defiance of Chavez' call to shun President
    Bush, Vazquez chose the Summit as the venue to sign the BIT
    with the U.S. and worked hard to meet with POTUS on the
    sidelines of the Summit.

    ¶9. (C) Paper mills dispute with Argentina - This is the most
    serious foreign policy challenge that the Vazquez
    administration has had to face.  The GOU see the mills as
    vital to investment, jobs and export diversification.
    Vazquez' measured but firm approach is to appeal to the
    international community in the hope that the GOA will
    eventually succumb to outside pressure, and reign in the
    protesters blocking the bridges.  Even after Argentine Entre
    Rios Governor Jorge Busti implied that Vazquez was accepting
    kickbacks from the international firms involved in the
    projects, the President's response has remained calm.
    Vazquez' tactics may prevail in the long run, but no one
    doubts that the controversy has put a severe strain on
    Argentine/Uruguayan bilateral relations.

    -------------------------
    Foreign Policy: Negatives
    -------------------------

    ¶10. (C) Uncertain relationship with Cuba and Venezuela -
    There have been no direct contacts with Castro, but the GOU
    has accepted medical assistance (eye operations, Uruguayan
    doctors trained in Cuba, etc.)  Chavez visited Uruguay twice
    and continues to talk of oil deliveries and investment in
    spite of the fact that he has delivered very little.  The GOU
    asked the Venezuelan television network not to mention
    Uruguayan participation in Telesur until the Congress
    approved the partnership with the Venezuelan initiative.  The
    GOU has also expressed concern about Telesur's coverage of
    FARC guerrillas and the networks association with the Arab
    television station Al Jazeera.

    ¶11. (C) Foreign Ministry - Although both belong to the same
    Socialist Party, ForMin Gargano has publicly disagreed with
    or contradicted Vazquez on several occasions.  Gargano has
    made a series of mistakes (particularly on relations with
    Argentina and the U.S.), which highlight his lack of
    experience in foreign affairs and lack of professionalism.
    There has been talk of a Cabinet shuffle in June or September
    2006, and some observers believe Gargano will be one of the
    first to go. A few believe that Gargano's ineptness serves
    the purpose of discrediting the old socialist hard line,
    while Vazquez uses other emissaries to carry out his foreign
    policies.

    ¶12. (C) Pro-tempore presidency of Mercosur - Little was
    achieved during Uruguay's presidency of Mercosur, except for
    the induction of Venezuela into the bloc, one of ForMin's
    Gargano's pet projects.  So far, Venezuela appears to be more
    a weight than a solid addition to Mercosur, as ForMin
    officials and high-level members of the Mercosur Secretariat
    tell us they strongly doubt that Venezuela will ever
    implement the necessary changes to become a full member.  The
    reading here is that Chavez obtained what he really wanted --
    a forum to promote his cause with more force-- and that he
    never intended to comply with the complex trade and tariff
    structure of Mercosur.  Chavez is said to be content to
    remain a ""member in the preparatory stages of accession"" for
    the foreseeable future.  Uruguay's presidency also saw Brazil
    and Argentina negotiate a bilateral market access mechanism
    (MCA) without consulting their partners.  Insiders have told
    us that Vazquez was incensed by the dismissal and duplicity
    shown by his neighbors.

    ¶13. (C) Relationship with Argentina - Again, ForMin Gargano's
    handling of the paper mills crisis has been criticized.  He
    is seen as having reacted late and incoherently to the issue
    and to have allowed the dispute to spin out of control. The
    GOU believes that President Kirchner's attitude has been
    intractable because he is reluctant to take on part of his
    domestic constituency (Province of Entre Rios, the
    protesters, etc,).  The papermills are a matter of vital
    national interest for Uruguay.

    -------------------------
    Comment on Foreign Policy
    -------------------------

    ¶14. (C) After an initial period of espousing strong linkages
    with other left-of-center governments in the region, the GOU
    appears to have been rudely awakened to the reality that most
    countries in the region act in their own self-interest.  The
    result has been a dramatic shift away from Mercosur, brought
    about by a deep disillusion with the organization and its
    members.  At the same time, the growing importance of the
    U.S. market at the expense of Mercosur (which now  absorbs
    only 20% of Uruguay's exports, compared to 60% in 1998) has
    made closer relations with the U.S. an inescapable necessity.
     The trade relationship has become key.  Stuck between two
    overbearing neighbors, Uruguay needs, in the words of
    Industry Minister Lepra, an ""uncle to protect it against its
    bully brothers.""  Vazquez has favored a pragmatic approach to
    foreign affairs, much more similar to that of Lagos than of
    Kirchner or Chavez.  He is a consensus builder, reasonable
    and unabrasive, who has refused to enter into a verbal fight
    with Kirchner, while not backing down from his firm
    convictions.  He appears to exert a moderating influence on
    Chavez and could possibly exert the same on Evo Morales.  End
    Comment.

    --------------------------
    Economic Policy: Positives
    --------------------------

    ¶15. (C) Relationship with the IFIs - Early on, Finance
    Minister Astori negotiated agreements with the IMF, the IDB,
    and the World Bank, in record time.  This generated
    confidence in the administration's capacity to handle the
    economy and to manage the country's debt burden.  One year
    on, the latest IMF reports indicate a continued positive
    evolution of the economy and note that Uruguay is on track
    with the major elements of its program with the Fund.

    ¶16. (C) Macroeconomic management - Astori continued to
    implement the orthodox macroeconomic policies of the previous
    administration. Debt management has been excellent, with
    sustained, timely payment of obligations.  The GOU placed
    over $1.0 billion of new debt under quite favorable
    conditions, thereby allowing it to retire expensive debt
    contracted at the height of the 2002 crisis.  Uruguay
    currently commands a lower country risk rating than either
    Brazil or Argentina.  Growth in 2005 exceeded 6% and is
    expected to continue at about 4% for 2006.  Inflation was
    contained at 4.9% in 2005 and is expected to climb to a
    manageable 6.5% in 2006.  The first year also saw a
    significant increase in tax collection, due to increased
    compliance and better controls.  Astori resisted MPP Leader
    Mujica's initial calls for price controls and for tampering
    with exchange rates to balance out the declining value of the
    dollar.  He also resisted calls to impose compulsory
    refinancing of debts.

    ¶17. (C) Wage negotiations - While the private sector had
    initial reservations about negotiating wages through
    sectorial wage councils, the initiative worked out
    surprisingly smoothly and the government kept to its role as
    arbiter.  Formalizing of employment has continued apace.

    ¶18. (C) Foreign investment - Forestry has absorbed the major
    part of new investment.  Finland's Botnia and Spain's Ence
    are investing $1.8 billion in giant paper mills, and Sweden's
    Sore Ensa has announced plans to build a $600 million paper
    mill.  Meanwhile, U.S. forestry firm Weyerhaueser, which has
    already invested $300 million in Uruguay, is planning a $500
    million expansion of its activities in pressed wood
    manufacturing.  The strong GOU position to insulate paper
    mill companies from the dispute with Argentina has sent a
    positive signal to investors regarding the importance of the
    rule of law and Uruguay's favorable investment climate.

    ¶19. (C) Financial system - The financial system is still
    under consolidation, but progress was made in cleaning up
    problems left by the 2002 crisis.  The GOU sold Nuevo Banco
    Comercial (NBC), the successor of the failed Banco Comercial,
    to a private investor group under good conditions in a
    transparent process.  The GOU also appropriately handled a
    crisis in the financial cooperative COFAC within the first
    days after it took office, and is currently working out a
    permanent solution to COFAC's problems through the sale of
    the entity to a foreign group.

    --------------------------
    Economic Policy: Negatives
    --------------------------

    ¶20. (C) Unemployment and labor unions - Unemployment still
    remains high at 12%, and labor relations may be the Achilles
    heel of this government.  The GOU may have over-empowered the
    powerful trade unions (in particular the radical PIT-CNT) by
    derogating a decree which enabled police to evict workers
    occupying plants and by passing the Union Protection Law.
    The result has been a rash of plant occupations, some of them
    violent (ref D).  The government is now considering a new law
    which would regulate the conditions under which a plant may
    be occupied.  Still, this may be too little too late.

    --------------------------
    Comment on Economic Policy
    --------------------------

    ¶21. (C) The GOU's excellent overall macroeconomic management
    could be an example of steadfastness for countries in the
    region.  Continued growth, sound public debt management and
    an openness to the outside are all good omens for the future.
     The fact that this left-of-center government basically
    continued the policies started by the preceding government
    may show the beginning of a general public consensus on sound
    economic policy, as is the case in Chile.  The GOU appears to
    have understood that continuity in economic and investment
    policy, coupled with a strict respect for the rule of law
    (historically Uruguay's strong point), are essential for the
    country to attract and retain foreign investment.  The only
    area of concern relates to the GOU's relationship with the
    unions, where demagoguery in catering to its electorate may
    cost the FA dearly in the long-run.  It will be difficult to
    wring back concessions from the unions without a fight, and
    lack of action to restrain union abuses may spoil an
    otherwise good investment climate.  End Comment.

    ---------------------------------------
    Domestic Politics and Policy: Positives
    ---------------------------------------

    ¶22. (C) Leadership and style--Vazquez projects a thoughtful
    impartiality which so far has assuaged the expectations of
    impatient citizens who were promised rapid change.  Vazquez
    popularity remains high, in part because of his soft-spoken,
    hands-off management style. He allows ministers to speak
    freely in public, often disagreeing with one another, and he
    uses the Uruguayans' love of a thorough discussion to clear
    the air.  After stakeholders have expended their passion, a
    process he recently called ""the rhythm"" of Uruguayan
    politics, he weighs in and his policy is quickly accepted.
    Based on our experience with the passage of the BIT, the
    approval of UNITAS exercises, and initial discussions of an
    FTA, we believe that Vazquez to a large degree orchestrates
    the rhythm of these debates in order to harmonize the
    conclusion with his original intent.  A practicing
    oncologist, Dr. Vazquez manages the country with a gentle
    bedside manner and decisive surgical skill. Thus far, this
    approach has made Vazquez a ""Teflon president,"" has allowed
    him to direct the debate, and has given him considerable
    authority when he decides to call for order on an issue.  He
    places pragmatism over personal glory or flashy ideology and
    analytically pursues what he believes to be Uruguay's best
    interests.

    ¶23. (C) The FA Coalition--Under Vazquez' leadership, the
    moderate left now encompasses all parties but the extreme
    radicals (26 de Marzo), the Communists, and a small sector of
    the Socialist Party.  Rather than confront the extreme
    radicals, Vazquez retains them within the FA coalition where
    he can keep an eye on them.  Much of the leadership on the
    left is over 60 years old.  Only a few have the energy and
    experience to follow Vazquez whole-heartedly, but the large
    majority acquiesce to the FA's new direction.  Actual
    leadership of the GOU rests with a pragmatic and moderate
    kitchen cabinet including Finance Minister Astori, Industrial
    Minister Lepra, and Agriculture Minister Mujica.  Astori and
    Lepra hold strongly orthodox views on economic growth and
    development and have extensive experience with international
    institutions, finance, and commerce.  Jose Mujica, a former
    guerrilla, has proven to be pragmatic, responsible, and a
    reliable partner for Vazquez on several critical issues.
    Mujica has kept his MPP in line with the moderate FA course
    and plays a pivotal role in moderating the left.  This has
    given Vazquez significant leeway to steer the Frente Amplio
    coalition without serious political distractions.  We believe
    these developments are creating lasting changes within the
    Uruguayan left.  The MPP quickly fell in line behind Mujica's
    moderate leadership because they found themselves unable to
    organize or govern based purely on ideology, and several
    Socialist leaders told us that the future of their party
    rests with Vazquez rather than with the ideologues of
    previous generations.

    ¶24. (C) Domestic achievements - The GOU was able to smoothly
    pass the public budget because the FA controls Congress, but
    it was also apparent that there was little room for
    discretionary spending.  The GOU managed to make a modest
    increase in educational spending, but the increase cannot
    cover many of the serious needs in the system.  Perhaps the
    GOU's greatest domestic achievement has been its skillful
    handling of the potentially-explosive issue of human rights
    abuses committed during the ""dirty war."" The GOU managed to
    bring an element of closure to the issue without alienating
    the military or provoking a backlash from the right-leaning
    segments of the society.  Vazquez entrusted this sensitive
    portfolio to his closest advisor, Secretary to the Presidency
    Gonzalo Fernandez. He also received excellent cooperation
    from former commander of the Armed Forces General Angel
    Bertolotti. Fears that the GOU might have opened a ""Pandora's
    box"" by dredging up a past that had been largely untouched by
    previous administrations, dissipated when a GOU team located
    the bones of a ""disappeared"" victim in a field in November
    ¶2005. Since then, other forensic evidence has clarified parts
    of this terrible chapter in Uruguay's history.  Vazquez'
    administration is the first to pursue physical remains of the
    victims, and the search produced tangible evidence of the
    GOU's commitment to this issue, comforted families, and
    mollified the left.

    --------------------------
    Domestic Policy: Negatives
    --------------------------

    ¶25. (C) Welfare Plan - The GOU's emergency welfare plan
    (PANES) and other social programs under the FA-created
    Ministry of Social Development have proven ineffective and
    disorganized.  Despite promises of tempering the most extreme
    forms of poverty, the new Ministry can point to no tangible
    results, and some have begun to question the transparency and
    cost of the new programs.  Members of the FA have publicly
    questioned Minister Marina Aresmendi's loyalty to Vazquez and
    her common sense.  She once suggested bringing Cuban reading
    teachers to Uruguay which already has a 98% literacy rate.
    The GOU ignored the proposal, and there are rumors that she
    may be dismissed in a future cabinet reshuffle.

    ¶26. (SBU) Interior Ministry - The press frequently criticizes
    the Interior Ministry for poor law enforcement and portrays
    its minister as out of touch and ""on vacation.""  Theft and
    robbery have increased dramatically in the last few years,
    and citizens protested against crime in one neighborhood of
    the capital.  The Ministry came under extreme criticism after
    it failed to anticipate property damage during several
    downtown demonstrations, and in a separate incident, the
    police watched a violent labor altercation but did not
    intervene.

    ¶27. (SBU) Prisons - Uruguay's prisons remain overcrowded and
    under-funded.  A recent television documentary showed leaking
    roofs, twelve men in a cell designed for two, and unsanitary
    conditions.  Despite a recent early release program, civil
    rights groups estimate that the prisons are overcrowded by
    fifty percent and that none of Uruguay's prisons are in good
    repair.  The GOU did not address penal system reform, prison
    modernization, or prison conditions during the year.

    ¶28. (SBU) Education - As part of a budget reallocation,
    schools in Uruguay reduced their English language instruction
    by twenty-five percent.  The trade off for this reduction was
    unclear.  The average public school student in Uruguay
    receives less than four hours of instruction each week in any
    foreign language.  The education system remains severely
    under-funded, and an extensive child welfare system competes
    for funds with public schools.  Most elementary students
    attend school half day and schools are chronically short of
    books and supplies.

    ¶29. (C) The opposition - The government currently has poor
    relationship with both opposition parties.  Despite the
    positive initial step of signing a joint framework document
    on foreign policy, education and the economy, the
    relationship deteriorated rapidly.  The opposition felt
    short-changed by the government's offer of participation and
    did not join the boards of state-owned enterprises.  Senator
    Larranaga, the leader of the Blanco opposition, told us that
    the government had taken no initiative to consult his party,
    the largest in opposition, on legislation or new initiatives.
     (Note:  Uruguay has a long tradition of cooperation between
    the administration and the opposition, but this is the first
    government in 50 years in which the president also has an
    aboslute majority in Congress.  End Note.)

    --------------------------
    Comment on Domestic Policy
    --------------------------

    ¶30. (C) The GOU's greatest success has been in dealing with
    the human rights abuses of the military dictatorship.  The
    issue has also conveniently served to distract some of the
    far-left from more mundane issues such as jobs and salaries.
    Its greatest challenge continues to be managing the
    heightened expectations of the poor, estimated at about
    one-third of the population.  Less was accomplished than was
    hoped for in terms of jobs, crime, prison overcrowding and
    effective social programs.  Some folks complain that there
    has been little change at all.  Still, the field of moderates
    in the GOU has expanded, while r","adicals have become fewer,
    though some are remain quite vocal.  How Vazquez will deal
    with an emboldened labor sector remains open to question.
    There were fewer strikes in 2005, but increased number of
    cases in which workers occupied factories or businesses.
    Brain drain remains a serious problem and many young
    Uruguayans emigrate abroad in search of jobs.  Drug use is
    another growing problem, particulary ""pasta base"" from
    Bolivia.  End Comment.

    -------------------------
    What Will 2006 Look Like?
    -------------------------

    ¶31. (C) The GOU's stated priorities for this year are to
    introduce structural reforms on tax, education, health and
    defense and to open up trade negotiations with partners
    outside of Mercosur, namely the U.S. and China. Tax reform
    will be the most difficult and there are already rumors that
    the GOU is considering postponing some reforms. While
    economic growth should continue, with inflation under
    control, the country's debt burden will continue to weigh
    heavily on what the government can actually achieve.  There
    are already indications that a reform of the health system,
    estimated to cost upwards of a billion dollars, will be
    postponed until 2007.  The proposed tax reform, which for the
    first time will introduce a personal income tax, is facing
    strong opposition from all quarters and may be debated all
    year-long.  Relations with the military are likely to
    continue to be good, with the GOU pursuing the issue of
    disappeared persons, but postponing an eventual discussion of
    the amnesty law until 2007.

    ¶32. (C) What could go wrong?  This scenario could alter
    drastically if any of the following events were to occur:

    #¿NOMBRE?
    catastrophic for Uruguay.  Beef exports have led the economic
    recovery and represent the country's first export item.  They
    are also the leading Uruguayan export to the U.S.

    #¿NOMBRE?
    Astori-Lepra wing of the GOU is seen as reflecting Vazquez's
    thinking and clearly has the upper hand within the FA.  This
    wing has generated a clear momentum in favor of an FTA with
    the U.S.  A cold shoulder by the U.S. to this initiative
    would certainly strengthen the radicals, whose mantra has
    always been that it is not worth talking to the U.S.

    #¿NOMBRE?
    wholesale retreat by the GOU, or a decision by Botnia or Ence
    to suspend their projects, could have a serious impact on
    growth, the business environment and the overall relationship
    with Argentina.

    #¿NOMBRE?
    the recently strengthened umbrella labor union (PIT-CNT),
    which is likely to fight tooth and nail any rollback of the
    major concessions it was granted.  While unlikely, a battle
    of wills with the unions could get out-of-hand or cause a
    rash of strikes.

    --------------------------------------------- ----
    Comment: A Pragmatic Government Worth Cultivating
    --------------------------------------------- ----

    ¶33. (C) The Embassy has been relieved and impressed by the FA
    administration's balance sheet during its first year in
    power.  Vazquez remains firmly in control and the latest
    polls show he has a 54% approval rating.  Despite the lack of
    experienced personnel (in both the executive branch and
    Congress) and having to clarify or reverse years of populist
    opposition rhetoric, the FA government has clearly moved
    towards the political center.  Barring some unfortunate
    event, we expect it to finish out its term (2009) on a
    moderate course.  In the meantime, the Embassy is greatly
    pleased that the USG has responded favorably to GOU's
    friendly overtures demonstrated over the last year.  While we
    recognize the limited influence of this small country, we
    remain convinced that this bilateral relationship is in the
    U.S. interest and worth cultivating.  Strong ties with
    Uruguay send a powerful signal to the region that we favor
    good relations with sensible, pragmatic governments who
    respect democracy and institutions, regardless of their
    political label.  End Comment.
    Nealon

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