CENTRAL BANK GOVERNOR RAISES WARNING SIGNS

UNCLAS ROME 002694

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BRUSSELS ALSO FOR USEU
DEPT FOR EUR/WE, EUR/ERA
DEPT PASS TREAS FOR OASIA HARLOW, JONES
STATE PASS FRB FOR GUST

USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO

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E.O. 12958: N/A
TAGS: ECON EFIN IT EUN
SUBJECT: CENTRAL BANK GOVERNOR RAISES WARNING SIGNS


1. (U) SUMMARY: CENTRAL BANK GOVERNOR ANTONIO FAZIO
HAS HARSHLY CRITICIZED THE GOVERNMENT FOR FAILURE TO
REIN IN THE PUBLIC DEFICIT, WHICH HAS BALLOONED TO
NEAR E41 BILLION. THE CRITICISM, THE FIRST OPENLY SOUR
NOTE BETWEEN THE CENTRAL BANK AND THE GOVERNMENT, WAS
MADE AT THE BANK OF ITALYS ANNUAL MEETING ON MAY 31.
REACTING QUICKLY TO THE CRITICISM, FINANCE MINISTRY
TREMONTI DEFENDED THE GOVERNMENTS ECONOMIC PROGRAM.
DESPITE CONCEDING THAT THE DEFICIT WAS UP AND GROWTH
STAGNATING, TREMONTI SAID THERE WOULD BE NO MID-YEAR
CORRECTIVE BUDGET. END SUMMARY.


2. (U) ON MAY 31, THE BOI GOVERNOR ANTONIO FAZIO, AT
THE PRESENTATION OF THE BANKS ANNUAL REPORT, RAISED
CONCERNS ABOUT THE PUBLIC DEFICIT, WHICH HAS INCREASED
BY E4 BILLION OVER THE SAME TIME PERIOD OF 2001. HE
ARGUED FOR A SUPPLEMENTAL BUDGET PACKAGE TO BRING
PUBLIC FINANCES MORE IN LINE WITH THE STABILITY PACT
TARGETS. WARNING THE GOVERNMENT ABOUT THE FAILING
HEALTH OF THE PENSION SYSTEM, HE UNDERSCORED THE
URGENT NEED FOR REFORM. HE ALSO CALLED FOR
IMPLEMENTATION OF AN AMBITIOUS INFRASTRUCTURE PLAN, A
CORNERSTONE OF THEN-CANDIDATE SILVIO BERLUSCONIS
CAMPAIGN IDEAS TO JUMPSTART THE ECONOMY, AND THE
ACCELERATION OF PRIVATIZATION. FAZIO URGED THE
GOVERNMENT TO MOVE FORWARD ON TAX REFORM. THE BOI
GOVERNOR WAS NOT SANGUINE ABOUT GDP GROWTH, PREDICTING
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A GROWTH RATE OF 1.5 PERCENT IN 2002. HE DID
ACKNOWLEDGE THAT GDP GROWTH COULD EXCEED 1.5 PERCENT,
IF INFRASTRUCTURE SPENDING WENT UP IN THE LATTER HALF
OF THE YEAR.


3. (U) ON JUNE 3, ECONOMY MINISTER TREMONTI REITERATED THAT
THERE WOULD BE NO MID-YEAR CORRECTIVE BUDGET, AND TERSELY
ADDED THAT THE GOVERNMENT HAS ALREADY PASSED NEEDED
STRUCTURAL REFORMS. TREMONTI DID ACKNOWLEDGE THAT GROWTH
PREDICTIONS OF 2.2 PERCENT ARE OPTIMISTIC. HE CONCEDED
THAT IN THE MOST PESSIMISTIC SCENARIO, GDP GROWTH IN 2002
WOULD BE JUST 1.3 PERCENT.


4. (SBU) COMMENT: THE BOI GOVERNORS WARNING FLAGS ABOUT
THE ITALIAN ECONOMY ARE ONES WE SHARE. THE GOVERNMENT HAS
FAILED TO ENACT FUNDAMENTAL ECONOMIC REFORMS AND ITS QUICK
POLICY FIXES HAVE FAILED TO PROVIDE A STRONG ECONOMIC
STIMULUS (TO BE REPORTED SEPTEL.) ALSO IMPORTANT TO NOTE IS
THE HARSHNESS OF THE GOVERNORS CRITICISM. A YEAR AGO,
WHEN THE BERLUSCONI GOVERNMENT TOOK OFFICE, THE GOVERNOR
WAS OPTIMISTIC ABOUT THE NEW GOVERNMENT AND ITS WILL TO
IMPLEMENT ITS AMBITIOUS ECONOMIC PROGRAM. FAZIOS CRITICISM
IS LEGITIMATE IN LIGHT OF ITALYS ECONOMIC PERFORMANCE. BUT
IT ALSO MAY BE A BIT OF POLITICAL MANEUVERING. EARLIER THIS
YEAR, MEMBERS OF THE MAJORITY COALITION PROPOSED TO
PARLIAMENT A BILL THAT WOULD TURN THE BANK OF ITALY INTO A
RESEARCH INSTITUTION AND TRANSFER ITS FUNCTIONS TO
INDEPENDENT AUTHORITIES. FAZIOS STRONG WORDS MAY BE HIS
RESPONSE.

POPE
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2002ROME02694 - Classification: UNCLASSIFIED