GOI ON EU/USG IMPASSE ON IDA GRANTS NEAR

C O N F I D E N T I A L ROME 001232

SIPDIS

DEPT FOR E, EB/OMA, EUR/ERA; TREASURY FOR OASIA

E.O. 12958: DECL: 03/08/2011
TAGS: EAID ECON ITALY'>IT IDA EUN
SUBJECT: GOI ON EU/USG IMPASSE ON IDA GRANTS NEAR
IMPOSSIBLE TO OVERCOME


CLASSIFIED BY: ECONOMIC MINISTER COUNSELOR MARGARET DEAN FOR REASONS 1.
5 (B).

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1. (C) SUMMARY. THE EU'S POSITION ON AN ENHANCED IDA GRANT
PROGRAM IS CLEAR: SUCH A PROGRAM MUST BE VERY LIMITED IN
SCOPE, TARGETED FOR BASIC NEEDS (E.G. HEALTH AND EDUCATION),
AND TESTED OVER SEVERAL YEARS. LORENZO BINI SMAGHI, DIRECTOR
GENERAL FOR INTERNATIONAL FINANCIAL RELATIONS AT ITALY'S
FINANCE MINISTRY, TOLD ECMIN THAT THE DIVERGENT VIEWS BETWEEN
THE U.S. AND EUROPE MAY NOT BE RECONCILABLE. FURTHER U.S.
INSISTENCE MAY PROMPT SOME MEMBER STATES TO RETRACT THEIR
SUPPORT FOR A BEEFED UP GRANT PROGRAM, AT ANY LEVEL, HE
WARNED. END SUMMARY.


2. (C) POST MET WITH BINI SMAGHI, ITALY'S FINANCIAL SHERPA,
WHO OVERSEES ALL INTERNATIONAL FINANCIAL POLICY, TO DISCUSS
IDA AND OTHER FINANCIAL ISSUES. TREASURY U/S TAYLOR AND HE
HAVE BEEN IN FREQUENT CONTACT ON IDA GRANTS AND OTHER ISSUES.
BINI SMAGHI SAID THE EU, WHICH CONTRIBUTES NEARLY 50 PERCENT
TO IDA, HAS MET THE UNITED STATES PART WAY ON THE ISSUE OF
IDA GRANTS. THERE IS NO WAY THE U.S.- DESIRED TARGET LEVELS
FOR IDA GRANTS CAN BE REACHED IN SUCH A SHORT TIME, BINI
SMAGHI ARGUED. NO CERTAINTY EXISTS THAT AN ENHANCED PROGRAM,
AT THE LEVELS IDENTIFIED BY THE USG, WOULD BE EFFECTIVE,
ESPECIALLY IN THE ABSENCE OF STRONG, WELL-DEFINED AND
ENFORCED CONDITIONALITY. PREVIOUS LENDING POLICIES SHOULD
NOT BE ABANDONED OVERNIGHT, HE CONTENDED.


3. (C) THE EU'S POSITION HAS NOT BEEN STATIC. "WE ARE NOW
WILLING TO CONSIDER FOR CERTAIN GROUPS OF COUNTRIES --
PERHAPS FOR THOSE WITH A PER CAPITA OF US ONE DOLLAR A DAY OR
LESS -- A GRANT PROGRAM OF 50 PERCENT, TARGETED FOR HEALTH
AND EDUCATION. IN POST-CONFLICT AND NATURAL DISASTER CASES, A
GRANT PROGRAM OF 100 PERCENT COULD EVEN BE CONSIDERED,"
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STATED BINI SMAGHI. THIS SHOULD BE THE FRAMEWORK FOR AN
ENHANCED IDA GRANT PROGRAM. IF THE PROGRAM IS SUCCESSFUL, BY
MEASURES STILL TO BE DEFINED, THE LEVEL OF GRANTS COULD BE
INCREASED AT A FUTURE DATE, TO MIRROR THE LEVELS THE USG NOW
PROPOSES. BINI SMAGHI BELIEVES A MINIMUM OF THREE YEARS IS
REQUIRED TO TEST THE EFFECTIVENESS OF A RECONSTITUTED GRANT
PROGRAM.


4. (C) RATHER THAN INSISTING ON GREATER MOVEMENT BY EUROPEAN
GOVERNMENTS, THE USG SHOULD RECOGNIZE AND ACCEPT THE PROGRESS
MADE WITH EU MEMBER STATES. THE USG SHOULD NOT IGNORE THE
CONTENTIOUSNESS OF THIS ISSUE, AND THE SERIOUS OPPOSITION
FROM SEVERAL COUNTRIES, ESPECIALLY IN SCANDINAVIA, TO ANY
INCREASE IN GRANTS, BINI SMAGHI COMMENTED. THE USG'S
RELENTLESS PRESSURE ALMOST CAUSED NORWAY, SWEDEN AND A FEW
OTHERS TO RETRACT THEIR SUPPORT FOR EVEN A LIMITED, TARGETED
50 PERCENT GRANT PROGRAM. BINI SMAGHI ASSERTED THAT IT WAS
ONLY BECAUSE ITALY, AS A G7 MEMBER, EXERTED PRESSURE ON
SEVERAL GOVERNMENTS THAT EU CONSENSUS KEPT FROM BREAKING
DOWN.


5. (C) THERE'S A PERCEPTION AMONG EU MEMBERS THAT THE USG
DOES NOT UNDERSTAND THEIR ASSISTANCE PROGRAMS, BINI SMAGHI
REMARKED. GRANTS ARE THE PREFERRED MECHANISM FOR BILATERAL
ASSISTANCE PROGRAMS, AND EU GOVERNMENT CONTRIBUTIONS TO THE
UNDP. "SO, CLEARLY, WE ARE NOT OPPOSED TO GRANTS IN
PRINCIPLE," HE ARGUED. FOR EU GOVERNMENTS, HOWEVER, IT IS
IMPORTANT TO MAINTAIN THE APPROPRIATE DIVISION OF LABOR
BETWEEN THE WORLD BANK AND THE UNITED NATIONS, BETWEEN THE
INTERNATIONAL FINANCIAL INSTITUTIONS AND BILATERAL ASSISTANCE
PROGRAMS. MOREOVER, THE WORLD BANK DOES NOT HAVE THE
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NECESSARY EXPERTISE TO ESTABLISH AND MONITOR THE IMPOSITION
OF EFFECTIVE CONDITIONALITY. (NOTE: MOST OF ITALY'S BILATERAL
ASSISTANCE ALSO IS IN GRANT FORM. ITALY HAS, HOWEVER, A LOW
LEVEL OF OFFICIAL DEVELOPMENT ASSISTANCE, JUST .14 PERCENT OF
GDP IN 2001. THE GOI HAS MADE SOME NOISE ABOUT UPPING THIS
TO .7 PERCENT OF GDP BY 2006, BUT NO ROAD MAP TO THAT TARGET
YET EXISTS. END NOTE.)


6. (C) COMMENT: BINI SMAGHI IS CLEARLY PESSIMISTIC THAT THE
IMPASSE BETWEEN THE USG AND THE EU WILL BE BROKEN IF WE
CONTINUE HARD OVER ON OUR WAY. HE WAS WILLING TO HEAR OUR
ARGUMENTS, BUT DID NOT DEVIATE FROM THE EU COMMON POSITION.
ITALY WHOLEHEARTEDLY SHARES THE EU CONSENSUS AND A PHASED
APPROACH TO INCREASING THE PROPORTION OF GRANTS. THEY WILL
USE THEIR INFLUENCE, AS THEY HAVE ALREADY DEMONSTRATED, TO
KEEP THE EU CONSENSUS AT 50 PERCENT, WITH CONDITIONS FOR
CERTAIN COUNTRIES. THEY HAVE NO INTEREST IN BROKERING
ANYTHING BEYOND THIS. END COMMENT.

POPE

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2002ROME01232 - Classification: CONFIDENTIAL