THE ECB, NATIONAL CENTRAL BANKS AND THE BANK

UNCLAS SECTION 01 OF 05 ROME 003652 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA STATE PASS CEA STATE PASS FRB FOR GUST TREAS FOR OASIA HARLOW, JONES FRANKFURT FOR WALLAR UNCLASSIFIED PAGE 02 ROME 03652 01 OF 05 240942Z SENSITIVE E.O. 12958: N/A TAGS: EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EUN SUBJECT: THE ECB, NATIONAL CENTRAL BANKS AND THE BANK OF ITALY SUMMARY -------------- ¶1. (SBU) THE BANK OF ITALY (BOI),LONG A CORNERSTONE OF THE ITALIAN ECONOMY, FACES CHANGED RESPONSIBILITIES AND ROLES. WITH THE ADVENT OF THE EUROPEAN CENTRAL BANK, THE BOI IS ONE OF THIRTEEN NATIONAL CENTRAL BANKS WITH A VOICE IN THE SINGLE ECB MONETARY POLICY. THE ECB IS ORGANIZED WITH "CENTRALIZED DECISION-MAKING, DECENTRALIZED OPERATIONS." ACTING UNDER ECB DIRECTION, THE BOI RETAINS AN IMPORTANT OPERATIONAL ROLE IN PRINTING CURRENCY AND MINTING COINS, MANAGING FOREIGN RESERVES, CONDUCTING PAYMENT OPERATIONS, MANAGING REPURCHASE AGREEMENTS. THE BOI REMAINS INDEPENDENT IN TWO KEY AREAS: BANK SUPERVISION AND ECONOMIC STUDIES. THE BOI CONTINUES TO HAVE AN AUTHORITATIVE, INDEPENDENT VOICE IN ITALIAN ECONOMIC POLICY. THIS CABLE EXAMINES THE ROLE OF THE BANK OF ITALY, IN PARTICULAR, AND, MORE GENERALLY, THE ROLE OF NATIONAL CENTRAL BANKS OF THE ECB. WE CONCLUDE THAT THE ECB MAY BE ONLY AS STRONG AS ITS KEY NATIONAL CENTRAL BANKS. END SUMMARY. THE BANK OF ITALY -------------- UNCLASSIFIED PAGE 03 ROME 03652 01 OF 05 240942Z ¶2. (U) ITALY'S CENTRAL BANK, THE BANK OF ITALY (BOI), IS ONE OF THE COUNTRY'S MOST HIGHLY RESPECTED ENTITIES. FOUNDED IN 1893, THE BANK HAS ENJOYED A POWERFUL, INFLUENTIAL POSITION IN ITALIAN ECONOMIC AND BUSINESS LIFE. THE BOI IS LARGELY AUTONOMOUS. ITS GOVERNOR IS TRADITIONALLY A TECHNOCRAT, RATHER THAN A POLITICIAN, ALTHOUGH APPOINTED BY THE PRIME MINISTER AND APPROVED BY THE PARLIAMENT. ITALIAN PRESIDENT CARLO CIAMPI WAS THE PREVIOUS CENTRAL BANK GOVERNOR. THE BOI IS EXPECTED TO, AND REGULARLY DOES, VOICE INDEPENDENT AND OFTEN QUITE CRITICAL OPINIONS ON THE GOVERNMENT'S ECONOMIC POLICY. ¶3. (U). BEFORE THE ADVENT OF THE ECB, THE BOI HAD A STAFF OF OVER 9,400 EMPLOYEES. GOVERNOR ANTONIO FAZIO, A WELL-RESPECTED ECONOMIST, WAS APPOINTED IN 1993, AND IS FORMER DEPUTY DIRECTOR GENERAL OF THE BANK. HIS DEPUTY, VINCENZO DESARIO, ALSO STARTED HIS CAREER IN THE BANK AND IS EXPERT OF BANKING SUPERVISION. THE BOI HAD 11 DEPARTMENTS, INCLUDING BANK SUPERVISION, ECONOMIC RESEARCH, INTERNATIONAL AFFAIRS, NOTE ISSUE, CENTRAL BANKING AND MARKETS, PAYMENT SYSTEM AND TREASURY OPERATIONS. ROLE OF THE NATIONAL CENTRAL BANKS (NCBS) -------------- ¶4. (U) WHEN THE EUROPEAN CENTRAL BANK (ECB) WAS ESTABLISHED IN 1998, NATIONAL CENTRAL BANKS (NCBS) FOUND THEMSELVES STRIPPED OF MANY OF THEIR POWERS. THE UNCLASSIFIED PAGE 04 ROME 03652 01 OF 05 240942Z ECB WAS GIVEN AUTHORITY OVER MONETARY POLICY FOR MEMBER STATES. AS SUCH, THE CREATION OF THE EUROPEAN CENTRAL BANK HAS DRAMATICALLY ALTERED THE STRUCTURE AND RESPONSIBILITIES OF THE BOI. WHILE THE BOI RETAINS RESPONSIBILITY FOR BANK SUPERVISION AND FOR INDEPENDENT ECONOMIC ANALYSIS, IT NO LONGER HAS AN INDEPENDENT MONETARY POLICYMAKING ROLE. INSTEAD, THE BOI AND THE OTHER MEMBER STATE NCBS TOGETHER CONTRIBUTE TO EURO- ZONE MONETARY POLICY DECISIONS AND ECONOMIC STABILITY AND GROWTH. WHILE THE GOVERNING COUNCIL OF THE EUROPEAN CENTRAL BANK SETS MONETARY POLICY, NCBS IMPLEMENT THIS POLICY. WHILE THE ECB'S COUNCIL FIXES CRITERIA FOR INVESTMENTS OF FOREIGN CURRENCY RESERVES AND SETS FOREIGN EXCHANGE POLICY (ALONG GUIDELINES APPROVED BY FINANCE MINISTERS) , THE NCBS HOLD AND INVEST A SUBSTANTIAL PART OF THE RESERVES AND THE LARGER NCB'S CONDUCT FOREIGN EXCHANGE OPERATIONS. ¶5. (U) THE ECB HOLDS EURO 46.8 BILLION OF THE EUROSYSTEM'S EURO 386.7 BILLION IN OFFICIAL RESERVE ASSETS. THE REST ARE HELD BY NCBS IN ACCORDANCE WITH ECB GUIDELINES AND INSTRUCTIONS. THE DISTRIBUTION OF RESERVES HAS BEEN SET BY THE GOVERNING COUNCIL AND INCLUDES GOLD, JAPANESE YEN AND U.S. DOLLARS. NCBS MANAGE THEIR OWN FOREIGN CURRENCY RESERVES AS THEY SEE UNCLASSIFIED UNCLASSIFIED PTQ6481 PAGE 01 ROME 03652 02 OF 05 240942Z ACTION EUR-00 INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00 CTME-00 DODE-00 ITCE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXME-00 E-00 FAAE-00 UTED-00 VC-00 FRB-00 H-01 TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 PA-00 PM-00 PRS-00 ACE-00 P-00 SCT-00 SP-00 SSO-00 STR-00 TEST-00 USIE-00 FMP-00 EPAE-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00 SAS-00 /009W -------------- CF8165 240942Z /38 R 240939Z JUL 02 FM AMEMBASSY ROME TO SECSTATE WASHDC 5067 INFO DEPT OF TREASURY WASHDC EU MEMBER STATES COLLECTIVE USEU BRUSSELS 2758 AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 02 OF 05 ROME 003652 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA STATE PASS CEA STATE PASS FRB FOR GUST TREAS FOR OASIA HARLOW, JONES FRANKFURT FOR WALLAR UNCLASSIFIED PAGE 02 ROME 03652 02 OF 05 240942Z SENSITIVE E.O. 12958: N/A TAGS: EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EUN SUBJECT: THE ECB, NATIONAL CENTRAL BANKS AND THE BANK OF ITALY FIT. THEIR OPERATIONS IN FOREIGN CURRENCY RESERVES, ABOVE CERTAIN LIMITS, ARE SUBJECT TO ECB NOTIFICATION OR APPROVAL, IN ORDER TO ENSURE CONSISTENCY WITH THE MONETARY POLICY OF THE ECB. ¶6. (U) NCBS ALSO CONDUCT PAYMENT OPERATIONS. TO ENSURE THE SMOOTH OPERATION OF PAYMENT SYSTEMS, THE TARGET OR TRANS-EUROPEAN AUTOMATED REAL-TIME GROSS SETTLEMENTS EXPRESS TRANSFER SYSTEM IS USED. THIS IS A DECENTRALIZED SYSTEM, CONSISTING OF 15 NATIONAL REAL TIMES GROSS SETTLEMENT (RTGS) SYSTEMS AND THE ECB PAYMENT MECHANISM (EPM). THESE ARE INTERLINKED TO PROVIDE A UNIFORM PLATFORM FOR PROCESSING CROSS BORDER PAYMENTS IN EURO. ¶7. (SBU) CARLO MARTENS, DEPUTY HEAD OF THE PAYMENT SYSTEMS POLICY DIVISION OF THE ECB, NOTED THAT TARGET EVENTUALLY MIGHT BE CENTRALIZED. THIS MAY BE PARTICULARLY DESIRABLE WHEN THE EU IS ENLARGED AND SEVERAL NEW MEMBERS JOIN THE ECB SYSTEM. MARTENS ENVISIONS AN INCREASINGLY STRONG ECB WITHIN AN ENLARGED EU. ACCORDING TO MARTENS, NCBS HAVE CONCEDED THIS UNOFFICIALLY ALREADY, BUT HAVE NOT FIXED A TIME FRAME UNCLASSIFIED PAGE 03 ROME 03652 02 OF 05 240942Z FOR REFORM. (NOTE: SOME NCBS ARE CONCERNED THAT TOO MANY FUNCTIONS ARE BEING TRANSFERRED TO THE ECB AND THAT IT MAY BECOME TOO POWERFUL. GOVERNORS AND STAFF FROM THE BUNDESBANK, THE BANK OF IRELAND AND THE BANK OF FRANCE HAVE VOICED THIS CONCERN.) ¶8. (U) THE BANK OF ITALY, LIKE OTHER EUROSYSTEM NCBS, ISSUES EURO BANKNOTES ACCORDING THE PROCEDURES SET BY THE ECB GOVERNING COUNCIL. ECB OFFICERS TOLD US THAT, FOR THE EURO CHANGEOVER ON JANUARY 1, 2002, THE NCBS WERE RESPONSIBLE FOR PRODUCING EURO BANKNOTES TO MEET THEIR NATIONAL REQUIREMENTS, AS SET BY THE ECB. NCBS HAD PRINTED ALL THE FORMATS OF EURO BANKNOTES FROM 5 TO 500 EUROS (92 PERCENT OF THOSE PRINTED). THE REMAINDER WAS ISSUED BY THE ECB. THE TWELVE NCBS WILL CIRCULATE ALL EURO BANKNOTES, INCLUDING THOSE ISSUED BY OTHER NCBS AND BY THE ECB. ¶9. (U) NCBS WORK CLOSELY WITH THE ECB ON REPURCHASE AGREEMENTS. THE NCBS COLLECT BIDS AND SEND THEM TO ECB. THE ECB MAKES A SINGLE RANKING OF ALL BIDS AND DECIDES ON THE QUANTITY TO ALLOCATE AND THE INTEREST RATE. THIS DECISION IS THEN COMMUNICATED TO THE NBCS FOR COMMUNICATION TO THOSE BANKS THAT PARTICIPATED IN THE TENDER. ¶10. (U) THE BANK OF ITALY IS UNIQUE IN THAT IT IS THE ONLY NCB (AMONG ECB MEMBERS) THAT ACTS AS THE NATIONAL TREASURY. THE BOI COLLECTS PENDING PROCEEDS, EXECUTIVE PAYMENT ORDERS ISSUED BY CENTRAL AND LOCAL PUBLIC ADMINISTRATIONS BASED ON BUDGET AND OFF-BUDGET UNCLASSIFIED PAGE 04 ROME 03652 02 OF 05 240942Z PROCEEDINGS; RECEIVES, HOLDS AND RETURNS BOND AND CASH DEPOSITS; CARRIES OUT OPERATIONS OF PLACING AND REIMBURSING STATE BONDS. ¶11. (SBU) THE ECB HAS VIRTUALLY NO DIRECT ROLE IN BANK SUPERVISION BUT IS A MEMBER OF AND IS THE SECRETARIAT FOR THE BANKING SUPERVISION COMMITTEE. IN MANY MEMBER STATES, INCLUDING ITALY, NCBS RETAIN THIS RESPONSIBILITY. THE BANK OF ITALY IS RESPONSIBLE FOR THE SUPERVISION OF THE ACTIVITIES OF BANKS AND NON- BANKING INTERMEDIARIES, PROMOTION AND CONTROL OF COMPETITION IN THE BANKING SECTOR, MARKET SUPERVISION AND THE SUPERVISION OF THE DIRECT OFFER OF PAYMENT SERVICES. THE BOI ALSO IS RESPONSIBLE FOR PRUDENTIAL SUPERVISION, WHICH INCLUDES FIVE CATEGORIES: SUPERVISION OF BANKS AND THE BANKING SYSTEM, THE CREDIT MARKET, FINANCIAL MARKET INTERMEDIARIES, THE PAYMENT SYSTEM AND WHOLESALE MARKETS FOR GOVERNMENT SECURITIES AND TRADING OF INTER-BANK FUNDS. ¶12. (SBU) A PARLIAMENTARY COMMISSION IS LOOKING AT THE SUPERVISORY RESPONSIBILITIES OF THE BANK OF ITALY. A REPORT, TO BE ISSUED IN SEPTEMBER 2002, IS EXPECTED TO RECOMMEND CHANGING THE DISTRIBUTION OF REGULATORY POWERS BETWEEN THE BANK OF ITALY AND CONSOB, ITALY'S UNCLASSIFIED UNCLASSIFIED PTQ6482 PAGE 01 ROME 03652 03 OF 05 240942Z ACTION EUR-00 INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00 CTME-00 DODE-00 ITCE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXME-00 E-00 FAAE-00 UTED-00 VC-00 FRB-00 H-01 TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 PA-00 PM-00 PRS-00 ACE-00 P-00 SCT-00 SP-00 SSO-00 STR-00 TEST-00 USIE-00 FMP-00 EPAE-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00 SAS-00 /009W -------------- CF8174 240942Z /38 R 240939Z JUL 02 FM AMEMBASSY ROME TO SECSTATE WASHDC 5068 INFO DEPT OF TREASURY WASHDC EU MEMBER STATES COLLECTIVE USEU BRUSSELS 2759 AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 03 OF 05 ROME 003652 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA STATE PASS CEA STATE PASS FRB FOR GUST TREAS FOR OASIA HARLOW, JONES FRANKFURT FOR WALLAR UNCLASSIFIED PAGE 02 ROME 03652 03 OF 05 240942Z SENSITIVE E.O. 12958: N/A TAGS: EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EUN SUBJECT: THE ECB, NATIONAL CENTRAL BANKS AND THE BANK OF ITALY EQUIVALENT OF THE SEC. THE COMMISSION'S CHAIRMAN, GIORGIO LA MALFA, HAS STATED THAT "THE PROGRESSIVE INTEGRATION OF EUROPEAN MARKETS WITHIN THE CENTRAL BANK RAISES THE QUESTION OF WHETHER BANK OVERSIGHT SHOULD TAKE PLACE AT A NATIONAL LEVEL OR BE LODGED WITHIN THE ECB." (WHEN RELEASED, THE COMMISSION'S FINDINGS WILL BE REPORTED SEPTEL.) ¶13. (U) THIS POSITION CONTRASTS WITH RECENT STATEMENTS FROM THE ECB ITSELF. THE GOVERNING COUNCIL STATED FIRMLY IN MARCH 2001 THAT "THERE ARE VALID REASONS ARGUING IN FAVOR OF MAINTAINING A STRONG INVOLVEMENT OF CENTRAL BANKS IN PRUDENTIAL SUPERVISION." THE ECB'S BANK SUPERVISION COMMITTEE PROVIDES ADVISORY SUPPORT TO NATIONAL GOVERNMENTS IN DRAFTING BANK SUPERVISION LEGISLATION. JUKKE VESALA, THE ECB'S SENIOR EXPERT ON PRUDENTIAL SUPERVISION, TOLD US THAT THE COMMITTEE CAN REVIEW ANY PROJECT OF REFORM OF NATIONAL BANK SUPERVISION LEGISLATION AT AN EARLY STAGE. ¶14. (SBU) NCBS STILL CONDUCT THE TRADITIONAL CENTRAL BANK FUNCTIONS OF STATISTICAL SERVICES AND ECONOMIC RESEARCH. THE BANK OF ITALY'S RESEARCH AND STATISTICAL UNCLASSIFIED PAGE 03 ROME 03652 03 OF 05 240942Z SERVICE IS ESSENTIAL, AS IT PROVIDES AN AUTHORITATIVE, YET INDEPENDENT, TOP-LEVEL ADVISORY SERVICE FOR THE CONSTITUTIONAL BODIES (GOVERNMENT AND PARLIAMENT) IN THE FIELD OF ECONOMIC POLICY AND BUDGET AND FINANCIAL ISSUES. LEGAL STATUS OF THE BOI AND NATIONAL CENTRAL BANKS -------------- -------------- ¶15. (U) THE BANK OF ITALY, LIKE EACH OF THE NCBS, IS A SEPARATE LEGAL ENTITY ACCORDING TO ITALIAN LAW. A LEGISLATIVE DECREE OF THE ITALIAN PARLIAMENT STATES: "THE BANK OF ITALY, THE CENTRAL BANK OF THE ITALIAN REPUBLIC, IS AN INTEGRAL PART OF THE ESCB. IT SHALL PERFORM THE TASKS AND FUNCTIONS ATTRIBUTED TO IT IN THAT CAPACITY IN COMPLIANCE WITH THE STATUTE OF THE ESCB. IT SHALL PURSUE THE OBJECTIVES ASSIGNED TO THE ESCB IN CONFORMITY WITH ARTICLE 105 OF THE TREATY AND ACT IN ACCORDANCE WITH THE GUIDELINES AND THE INSTITUTIONS OF THE ECB". ¶16. (U) DESPITE BEING SEPARATE LEGAL ENTITIES, THE NCBS FORM AN INTEGRAL PART OF THE EUROSYSTEM. AS SUCH, THE BANK OF ITALY AND THE OTHER NCBS CARRY OUT THE TASKS ASSIGNED TO THE EUROSYSTEM IN ACCORD WITH ECB RULES. THROUGH THE PARTICIPATION OF THEIR RESPECTIVE REPRESENTATIVES IN THE VARIOUS ESCB COMMITTEES, THE BANK OF ITALY AND THE OTHER NCBS ALSO CONTRIBUTE TO THE WORK OF THE ESCB. THE BANK OF ITALY MAY PERFORM FUNCTIONS DEEMED APPROPRIATE BY THE ITALIAN GOVERNMENT, AS LONG AS THE ECB GOVERNING COUNCIL FINDS THAT SUCH UNCLASSIFIED PAGE 04 ROME 03652 03 OF 05 240942Z FUNCTIONS DO NOT INTERFERE WITH THE OBJECTIVES AND TASKS OF THE EUROSYSTEM. ESCB COMMITTEES -------------- ¶17. (U) ESCB COMMITTEES PLAY AN IMPORTANT ROLE IN THE EUROSYSTEM/ESCB. AT THE REQUEST OF BOTH THE GOVERNING COUNCIL AND THE EXECUTIVE BOARD, THEY PROVIDE EXPERTISE IN THEIR FIELDS OF COMPETENCE AND FACILITATE THE DECISION MAKING PROCESS. ESCB COMMITTEES ARE COMPOSED OF REPRESENTATIVES OF THE NCBS, INCLUDING THE BANK OF ITALY AND, WHERE APPROPRIATE, OTHER COMPETENT BODIES, INCLUDING NATIONAL SUPERVISORY AUTHORITIES IN THE CASE OF THE BANKING SUPERVISION COMMITTEE. THERE ARE THIRTEEN ESCB COMMITTEES: ACCOUNTING AND MONETARY INCOME (AMICO),BANKING SUPERVISION (SBC),BANKNOTE COMMITTEE (BANCO),EXTERNAL COMMUNICATIONS (ECCO), INFORMATION TECHNOLOGY (ITC),INTERNAL AUDITORS (IAC), INTERNATIONAL RELATIONS (IRC),LEGAL (LEGCO),MARKET OPERATIONS (MOC),MONETARY POLICY (MPC),PAYMENT AND SETTLEMENT SYSTEM (PSSC) AND STATISTICAL COMMITTEE (STC). TWO REPRESENTATIVES OF THE BANK OF ITALY PARTICIPATE IN EACH OF THESE COMMITTEES. UNCLASSIFIED UNCLASSIFIED PTQ6483 PAGE 01 ROME 03652 04 OF 05 240943Z ACTION EUR-00 INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00 CTME-00 DODE-00 ITCE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXME-00 E-00 FAAE-00 UTED-00 VC-00 FRB-00 H-01 TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 PA-00 PM-00 PRS-00 ACE-00 P-00 SCT-00 SP-00 SSO-00 STR-00 TEST-00 USIE-00 FMP-00 EPAE-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00 SAS-00 /009W -------------- CF817D 240943Z /38 R 240939Z JUL 02 FM AMEMBASSY ROME TO SECSTATE WASHDC 5069 INFO DEPT OF TREASURY WASHDC EU MEMBER STATES COLLECTIVE USEU BRUSSELS 2760 AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 04 OF 05 ROME 003652 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA STATE PASS CEA STATE PASS FRB FOR GUST TREAS FOR OASIA HARLOW, JONES FRANKFURT FOR WALLAR UNCLASSIFIED PAGE 02 ROME 03652 04 OF 05 240943Z SENSITIVE E.O. 12958: N/A TAGS: EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EUN SUBJECT: THE ECB, NATIONAL CENTRAL BANKS AND THE BANK OF ITALY ECB EMPLOYMENT -------------- ¶18. (U) THE BANK OF ITALY AND THE OTHER ELEVEN MEMBER COUNTRIES HAVE REPRESENTATIVES WITHIN THE ECB. THE GOVERNOR OF THE BANK OF ITALY IS A MEMBER OF THE ECB BOARD. OTHER BANK OF ITALY EMPLOYEES ARE TEMPORARILY TRANSFERRED TO FRANKFURT FOR A THREE-YEAR TERM. THESE PEOPLE REPRESENT THE ECB AS AN INSTITUTION AND NOT THE INTEREST OF THEIR COUNTRY OR THEIR NATIONAL BANK. CERTAIN BANK OF ITALY REPRESENTATIVES PARTICIPATE IN MONTHLY ECB MEETINGS. OTHERS PARTICIPATE IN WORKING GROUPS AS REPRESENTATIVES OF THE BANK OF ITALY. ¶19. (SBU) ACCORDING TO MANFRED KOLBER, ECB COMMUNICATIONS DIRECTOR, THE ECB EMPLOYS ABOUT 1,100 PEOPLE. THE DISTRIBUTION OF ECB EMPLOYMENT BY NATIONALITY IS NOT FULLY IN LINE WITH THE NCB'S CONTRIBUTION TO ECB CAPITAL. KOLBER SAID THAT IN HIS DEPARTMENT, THE CRITERIA FOR RECRUITMENT ARE CANDIDATE'S PROFESSIONAL AND LANGUAGE SKILLS. ONLY IN A CASE OF EQUALLY QUALIFIED CANDIDATES MIGHT NATIONALITY BECOME A CRITERION, TO COMPENSATE UNDER- UNCLASSIFIED PAGE 03 ROME 03652 04 OF 05 240943Z REPRESENTED MEMBER STATES. ACCORDING TO OTHER SOURCES, ECB MANAGEMENT IS SENSITIVE TO AVOIDING A BLOATED BUREAUCRACY, AND IS ATTEMPTING TO KEEP PERSONNEL NUMBERS DOWN. ¶20. (SBU) AS ECB RANKS HAVE GROWN, EMPLOYMENT AT NCBS HAVE FALLEN. THE NUMBER OF JOBS IN THE BOI DECLINED FROM MID-1998 TO MID-2001 BY ABOUT 400 POSITIONS. AT ITS PEAK IN 1995, THE BOI EMPLOYED 9,423 PEOPLE. THE BOI IS PLANNING TO REDUCE EMPLOYMENT BY ANOTHER 20 PERCENT, AROUND 1,500 POSITIONS, PRIMARILY THROUGH ATTRITION. THE REMAINING BOI STAFF WILL, THUS, NUMBER AROUND 7,500 PEOPLE. AMONG NCBS, EMPLOYMENT RANGES FROM THE 16,800 PEOPLE EMPLOYED BY THE BANK OF FRANCE, AND 15,900 EMPLOYED BY THE BUNDESBANK, TO THE 172 EMPLOYEES OF THE CENTRAL BANK OF LUXEMBOURG. ECB SOURCES TELL US THAT THE BANK OF FRANCE HAS CUT AROUND 1,500 POSITIONS, BUT THAT OTHERS -- GERMANY AND PORTUGAL, FOR EXAMPLE -- HAVE KEPT NUMBERS RELATIVELY STABLE, ALTHOUGH THE GERMAN BUNDESBANK RECENTLY ANNOUNCED STAFF REDUCTIONS IN CONJUNCTION WITH ITS REORGANIZATION. NCB CONTRIBUTIONS TO ECB CAPITAL -------------- ¶21. (U) THE ECB HAS A TOTAL CAPITAL OF FOUR BILLION EURO, WHICH IS EXPECTED TO INCREASE TO FIVE BILLION EURO OVER THE NEXT FEW YEARS. THE PRINCIPAL PURPOSE OF ECB CAPITAL IS TO ACT AS A RESERVE FUND, PROVIDING THE BANK WITH SUFFICIENT INCOME WHILE MAINTAINING AN UNCLASSIFIED PAGE 04 ROME 03652 04 OF 05 240943Z APPROPRIATE LEVEL OF FINANCIAL SECURITY. IN ACCORDANCE WITH ARTICLE 29 OF THE STATUTES OF THE ESCB AND THE ECB, EACH NCB CONTRIBUTES TO THE ECB'S CAPITAL ACCORDING TO A WEIGHTING SCHEME. THIS SCHEME IS BASED ON EACH MEMBER STATE'S SHARE OF EU POPULATION AND NOMINAL EU GDP. THE ASSIGNED WEIGHTS ARE TO BE ADJUSTED EVERY FIVE YEARS AND UPON ACCESSION OF ANY NEW EU MEMBER. ¶22. (U) THE GOVERNING COUNCIL OF THE ECB IS AUTHORIZED TO INCREASE THE CAPITAL UP TO A FURTHER E5BN. ON THE BASIS OF ALL FIFTEEN EU MEMBER STATES, THE BUNDESBANK, BANK OF FRANCE AND BANK OF ITALY ARE THE THREE LARGEST CONTRIBUTORS OF ECB'S CAPITAL. HOWEVER, ONLY TWELVE COUNTRIES CURRENTLY PARTICIPATE IN THE EUROSYSTEM, AND ONLY THESE COUNTRIES HAVE FULLY PAID THEIR CORRESPONDING CAPITAL SHARES (81 PERCENT OF FIVE BILLION EURO). THUS, THE GERMAN SHARE IS 30 PERCENT, THE FRENCH SHARE IS 20.8 PERCENT AND THE ITALIAN SHARE IS 18.4 PERCENT. THESE THREE MAKE UP 69.2 PERCENT OF THE ECB'S AGREED FIVE BILLION EURO CAPITAL. THE CENTRAL BANKS OF DENMARK, SWEDEN AND THE UNITED KINGDOM HAVE AGREED TO PAY THE REMAINING NINETEEN PERCENT (950 MILLION EURO) BUT HAVE TO DATE PAID ONLY FIVE PERCENT. ECB SOURCES TELL US THAT THIS FIVE PERCENT IS DESIGNED UNCLASSIFIED UNCLASSIFIED PTQ6484 PAGE 01 ROME 03652 05 OF 05 240943Z ACTION EUR-00 INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 COME-00 CTME-00 DODE-00 ITCE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXME-00 E-00 FAAE-00 UTED-00 VC-00 FRB-00 H-01 TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 PA-00 PM-00 PRS-00 ACE-00 P-00 SCT-00 SP-00 SSO-00 STR-00 TEST-00 USIE-00 FMP-00 EPAE-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00 SAS-00 /009W -------------- CF8182 240943Z /38 R 240939Z JUL 02 FM AMEMBASSY ROME TO SECSTATE WASHDC 5070 INFO DEPT OF TREASURY WASHDC EU MEMBER STATES COLLECTIVE USEU BRUSSELS 2761 AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 05 OF 05 ROME 003652 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA STATE PASS CEA STATE PASS FRB FOR GUST TREAS FOR OASIA HARLOW, JONES FRANKFURT FOR WALLAR UNCLASSIFIED PAGE 02 ROME 03652 05 OF 05 240943Z SENSITIVE E.O. 12958: N/A TAGS: EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EFIN PGOV ECON IT EUN SUBJECT: THE ECB, NATIONAL CENTRAL BANKS AND THE BANK OF ITALY TO PRODUCE AN INCOME COVERING COSTS RELATED TO THE THREE NCBS OUTSIDE THE EUROSYSTEM. COMMENT -------------- ¶23. (SBU) DESPITE THE STRENGTH OF THE ECB, THE EUROSYSTEM IS STILL BASED ON THE BASIC PRINCIPLE OF "CENTRALIZED DECISION-MAKING, DECENTRALIZED OPERATIONS". NATIONAL CENTRAL BANKS, INCLUDING THE BANK OF ITALY, CONTINUE TO PLAY A KEY ROLE. AS THE EUROSYSTEM EXPANDS THROUGH EU ENLARGEMENT, THE INEFFICIENCIES AND COSTS OF DECENTRALIZED OPERATIONS ARE LIKELY TO INCREASE. THIS WILL BE A CHALLENGE FOR THE EUROSYSTEM. THE LARGEST AND MORE EFFICIENT -- SUCH AS THE BANK OF ITALY -- ARE EXPECTED TO HOLD THE SYSTEM TOGETHER. THE EUROSYSTEM MAY ONLY BE AS STRONG AS THESE KEY NATIONAL CENTRAL BANKS. ¶25. THIS MESSAGE WAS COORDINATED WITH TREASURY ATTACHE AT CONGEN FRANKFURT. SEMBLER UNCLASSIFIED PAGE 03 ROME 03652 05 OF 05 240943Z UNCLASSIFIED > 2002ROME03652 - Classification: UNCLASSIFIED