FINANCE MINISTER TREMONTI SPEAKS HIS MIND ON

C O N F I D E N T I A L SECTION 01 OF 04 ROME 001117

SIPDIS


E.O. 12958: DECL: 03/14/2008
TAGS: ECON PGOV PREL ELAB IT NATO ITALIAN POLITICS EUN
SUBJECT: FINANCE MINISTER TREMONTI SPEAKS HIS MIND ON
ECONOMIC REFORM, THE EU AND ITALY'S PRESIDENCY, DEFENSE
SPENDING, AND IRAQ

REF: ROME 579

CLASSIFIED BY: AMBASSADOR MEL SEMBLER FOR REASONS 1.5 (B) AND (D)


1. (C) SUMMARY: ECONOMIC REFORM, INCLUDING OF THE PENSION
SYSTEM, WILL MOVE FORWARD THIS YEAR, FINANCE MINISTER GIULIO
TREMONTI UNDERSCORED IN A WIDE-RANGING DISCUSSION WITH
AMBASSADOR AND EMBOFFS ON MARCH 13TH. FRUSTRATED WITH
STABILITY PACT CONSTRAINTS IMPOSED BY BRUSSELS, TREMONTI SAID
THAT ITALY, AS EU PRESIDENT, WOULD PROMOTE A "NEW WAY OF
THINKING" ABOUT BUSINESS AND MARKETS. THE GOI IS CONCERNED
ABOUT THE ECONOMIC CONSEQUENCES OF MILITARY ACTION IN IRAQ
AND ALREADY IS DESIGNING AN EMERGENCY ECONOMIC STIMULUS
PACKAGE. ALSO ON IRAQ, TREMONTI NOTED HE HAD PLAYED A
PERSONAL ROLE IN ENSURING FIRM GOI POLITICAL SUPPORT FOR THE
U.S. POSITION. END SUMMARY.


2. (SBU) AT THE INVITATION OF THE AMBASSADOR, MINISTER OF
ECONOMY AND FINANCE TREMONTI AND HIS SENIOR ADVISOR ANTONIO
PETRONE PARTICIPATED IN AN INFORMAL LUNCH AT THE AMBASSADOR'S
RESIDENCE. ECMIN AND ECONOFF (NOTETAKER) ALSO ATTENDED.

ECONOMIC REFORM
--------------


3. (SBU) IN THE SUMMER OF 2001, TREMONTI SAID THAT HE AND HIS
ECONOMIC TEAM HAD BEEN RIDING ON A CREST. PARLIAMENT HAD
RAPIDLY PASSED THE 100-DAY-ECONOMIC PROGRAM, INCLUDING
MEASURES DESIGNED TO JUMP-START THE ECONOMY, SUCH AS TAX
BREAKS FOR BUSINESSES. "THEN SEPTEMBER 11 HAPPENED, AND ALL
OUR PLANS HAD TO BE POSTPONED," TREMONTI ACKNOWLEDGED.
ITALY, LIKE ALL OTHER MAJOR ECONOMIES, CONTINUES TO STRUGGLE
IN RESPONSE TO THE EFFECTS OF THE GLOBAL RECESSION AGGRAVATED
BY THE TERRORIST ATTACKS AND THE UNCERTAINTY ABOUT MILITARY
ACTION IN THE MIDDLE EAST.


4. (SBU) THAT SAID, TREMONTI NOTED PROUDLY, THE GOVERNMENT,
DEFYING ITS CRITICS, HAS INTRODUCED SOME IMPORTANT ECONOMIC
REFORMS, WHICH PARLIAMENT RECENTLY PASSED. (NOTE: TREMONTI
WAS REFERRING PRIMARILY TO THE BIAGI LAW (REFTEL),WHICH
INTRODUCES NEW KINDS OF FLEXIBLE LABOR CONTRACTS, INCLUDING:
"JOB ON CALL," UNDER WHICH THE EMPLOYER PAYS THE WORKER A
RETAINER AND CAN EMPLOY HIM WHENEVER NEEDED; JOB SHARING;
AND "STAFF LEASING," ESSENTIALLY HIRING WORKERS FROM AN
EMPLOYMENT AGENCY. THE LAW ALSO REDUCES BARRIERS TO
PART-TIME HIRING IN ORDER TO ENCOURAGE EMPLOYMENT OF YOUNG
PEOPLE AND WOMEN. COMPANIES WILL RECEIVE MORE FREEDOM TO
"OUTSOURCE" ASPECTS OF THEIR BUSINESS AND WILL BE REQUIRED TO
PROVIDE MORE TRAINING TO APPRENTICESHIP EMPLOYEES. END
NOTE.) TREMONTI ARGUES THAT BECAUSE OF THE BIAGI LAW AND
PREVIOUS MEASURES TAKEN BY THIS GOVERNMENT, ITALIAN LABOR
MARKETS WILL SOON BE AMONG THE MORE FLEXIBLE IN EUROPE.


5. (SBU) PENSION REFORM IS THE TOUGHEST CHALLENGE AHEAD,
TREMONTI ACKNOWLEDGED. NONETHELESS, THE BERLUSCONI
GOVERNMENT IS COMMITTED TO TACKLING THIS PROBLEM HEAD-ON,
INCLUDING BY CREATING "DISINCENTIVES" FOR THOSE WHO RETIRE
EARLY. "WE HAVE TO CONVINCE ITALIANS TO THINK DIFFERENTLY
ABOUT RETIREMENT BENEFITS. A FUNDAMENTAL CREED OF
DEMOCRACIES IS NO TAXATION WITHOUT REPRESENTATION," TREMONTI
MUSED. "WHAT WE HAVE NOW IS REPRESENTATION - I.E., PENSIONS
-- WITHOUT TAXATION. ITALIANS MUST BEAR MORE OF THE
FINANCIAL BURDEN."


6. (C) PENSION REFORM MEASURES WILL BE INTRODUCED IN THE
SUMMER, AFTER LOCAL ELECTIONS AND MILITARY ACTION IN IRAQ.
(NOTE: LOCAL ELECTIONS ARE IN MAY. END NOTE.) AS THE ECMIN
POINTED OUT, SOME OBSERVERS OF ITALY'S ECONOMIC SCENE BELIEVE
THAT THE BERLUSCONI GOVERNMENT HAS ONLY THIS YEAR TO ENACT
FUNDAMENTAL ECONOMIC REFORMS, IN LIGHT OF THE ECONOMIC
CONSEQUENCES OF EU ENLARGEMENT AND OF EUROPEAN PARLIAMENTARY
ELECTIONS IN 2004. TREMONTI DOWNPLAYED THIS POSSIBILITY,
ARGUING THAT SIGNIFICANT REFORMS TAKE TIME AND THE GOI IS
MAKING PROGRESS. NEVERTHELESS, TREMONTI AGAIN REITERATED THAT
THE GOI PLANS TO MOVE AHEAD BOLDLY, ONCE IRAQ-RELATED
UNCERTAINTIES AND ITALIAN LOCAL ELECTIONS ARE NO LONGER
ISSUES.

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CRITICIZED THE STABILITY AND GROWTH PACT. "YOU CAN HAVE
GROWTH WITHOUT STABILITY AND STABILITY WITHOUT GROWTH. THE
PACT AS IT EXISTS NOW PROVIDES NEITHER," HE REMARKED.
DEFICIT SPENDING, EVEN IF ON THE ORDER OF THE UNITED STATES,
IS NECESSARY FOR LONG-TERM GROWTH. ZERO-GROWTH, WHICH IS AN
ALMOST INEVITABLE CONSEQUENCE OF THE PACT AS DESIGNED, IS NOT
TOLERABLE ECONOMICALLY OR POLITICALLY. THE MODEL OF
ONE-SIZE-FOR-ALL FIFTEEN JUST DOES NOT WORK, TREMONTI ARGUED.


8. (C) REGARDING THE COMMISSION, TREMONTI RECALLED THAT ITALY
WAS IN A DIFFICULT SPOT LAST SUMMER. ECONOMIC DATA AND
FORECASTS WERE INDICATING THAT ITALY MIGHT EXCEED 2002
STABILITY PACT TARGETS. THE GOI HAD HEARD INDICATIONS FROM
BRUSSELS THAT IT MIGHT BE THE FIRST TO RECEIVE AN EARLY
WARNING. POLITICALLY, THE GOI DID NOT WANT TO BE AT THE TOP
OF THE LIST NOR EVEN SINGLED OUT FOR "EARLY WARNING." IN A
SELF-CONGRATULATORY TONE, HOWEVER, TREMONTI COMMENTED THAT
HIS ECONOMIC TEAM'S PRESENTATION TO THE COMMISSION WAS A
"MASTERPIECE," WHICH CONVINCED THE COMMISSION THAT ITALY'S
ECONOMIC PERFORMANCE, WHILE SUB-PAR, SHOULD NOT BE
CRITICIZED. WITH GERMANY AND FRANCE'S ECONOMIES PERFORMING
EVEN MORE POORLY, THE COMMISSION COULD NOT RISK CRITICIZING
THE BIG THREE; OTHERWISE THE VIABILITY OF STABILITY PACT
ITSELF WOULD BE JEOPARDIZED.

IRAQ - ITALY'S SUPPORT
--------------


9. (C) TREMONTI CONFIDED TO THE AMBASSADOR THAT HE HAD TO
PERSONALLY CONVINCE NATIONAL LEAGUE CHAIRMAN UMBERTO BOSSI
THAT ITALY HAD TO SUPPORT THE UNITED STATES IN THE WAR
AGAINST GLOBAL TERRORISM AND, SPECIFICALLY, REGARDING IRAQ.
BOSSI, HE SAID, INITIALLY SAW THE CONFLICT AS ONE AGAINST
MUSLIMS GENERALLY AND OPPOSED ITALIAN SUPPORT FOR U.S.
ACTION. TREMONTI SAID HE EVENTUALLY CONVINCED BOSSI OF THE
MERITS OF THE U.S. POSITION AND THE RATIONALE FOR STRONG
ITALIAN SUPPORT. COMMENT: TREMONTI IS A CLOSE PERSONAL
FRIEND OF BOSSI AND IS USED BY THE PRIME MINISTER TO HELP
KEEP THE NORTHERN LEAGUE IN SYNC WITH THE REST OF THE
CENTER-RIGHT COALITION. END COMMENT.


10. (C) NOTE: TREMONTI IS NOT THE ONLY FINANCE MINISTRY
OFFICIAL TO TAKE A STRONG STAND IN FAVOR OF GOI SUPPORT FOR
THE U.S. ON IRAQ. EARLIER IN THE WEEK, FINANCE'S VICE
MINISTER MARIO BALDASSARI TOLD A GROUP OF DIPLOMATS FROM OECD
GOVERNMENTS THAT ITALY, AND EUROPE IN GENERAL, HAD A MORAL
OBLIGATION TO HELP THE UNITED STATES. THE U.S., HE OBSERVED,
HAD COME TO THE ECONOMIC RESCUE OF EUROPE AFTER WORLD WAR II;
AMERICAN TAXPAYERS HAD PAID THE BURDEN SO THAT EUROPEANS
COULD BECOME RICH. NOW, IT IS "OUR TURN," HE ARGUED, TO HELP
BEAR THIS BURDEN. IN ADDITION, EUROPEANS HAD A MORAL
OBLIGATION TO HELP THE PEOPLE OF THE MIDDLE EAST BY
ENCOURAGING DEMOCRACY IN THE REGION. WE HAVE LIVED AND
GOTTEN RICH OFF THEIR NATURAL RESOURCES AND NOW, WE MUST PAY
OUR DEBT, HE ARGUED FERVENTLY. END NOTE.

IRAQ - ECONOMIC CONSEQUENCES FOR ITALY
--------------


11. (C) TREMONTI SAID THE GOI ASSUMES THAT ANY MILITARY
ACTION IN IRAQ WILL DEPRESS, HOPEFULLY ONLY TEMPORARILY, THE
GLOBAL ECONOMY EVEN FURTHER. THE GOI IS, THEREFORE, DESIGNING
AN EMERGENCY ECONOMIC PACKAGE TO STIMULATE ITALY'S NATIONAL
ECONOMY. TREMONTI SAID HE CHAIRED A MARCH 12
INTER-MINISTERIAL MEETING, WHICH IDENTIFIED MEASURES,
INCLUDING A NEW ROUND OF TAX BREAKS FOR BUSINESSES AND
INCENTIVES FOR CONSUMER SPENDING.

DEFENSE SPENDING
--------------


12. (C) TREMONTI RUEFULLY ACKNOWLEDGED THAT HE WAS ON THE

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PENDING IN ALL BUDGETS, THE
PRIME MINISTER AND DEFENSE MINISTER MARTINO PERSUASIVELY
LOBBIED TO MAINTAIN A DEFENSE BUDGET SUFFICIENT FOR ITALY TO
MEET ITS BASIC DEFENSE REQUIREMENTS IN NATO AND UNDER THE
EUROPEAN SECURITY DEFENSE POLICY. WHEN THE AMBASSADOR
POINTED OUT ALL THE BENEFITS TO ITALY FOR ITS PARTICIPATION
IN THE JOINT STRIKE FIGHTER, INCLUDING IN RESEARCH AND
DEVELOPMENT, TREMONTI CONCURRED. BUT, HE SAID, HE HAD
STRESSED WITH MARTINO THE DIFFICULTY FOR ITALY TO PARTICIPATE
FINANCIALLY IN TWO JET FIGHTER PROJECTS, THE EURO-FIGHTER AND
JSF. BOTH TREMONTI AND PETRONE ACKNOWLEDGED THAT THE JSF IS
A FAR SUPERIOR PLANE. THE EURO-FIGHTER, PETRONE, COMMENTED
SARDONICALLY, HAS BEEN ON THE DRAWING BOARD FOR 30 YEARS AND
STILL IS NOT RIGHT. UNFORTUNATELY, HOWEVER, ITALY HAS TO
ABIDE BY ITS CONTRACTUAL COMMITMENTS FOR THE PURCHASE OF 121
EURO-FIGHTERS, THEY NOTED. (COMMENT: WE DO NOT BELIEVE THAT
TREMONTI WILL ATTEMPT TO CUT SPENDING FOR THE JSF. RATHER,
HE WAS AND IS FACING THE CHALLENGE OF RATIONALIZING SPENDING
-- AS ANY GOOD FINANCE MINISTER MUST. END COMMENT.)

EU CONVENTION
--------------


13. (C) WHEN QUERIED BY THE AMBASSADOR ABOUT THE EU
CONVENTION, BOTH TREMONTI AND PETRONE STRONGLY ARGUED THAT
THE CONVENTION PROCEEDINGS ARE A "DISASTER." IDEOLOGICALLY,
THEY OPPOSE THE DIRECTION IN WHICH THE PROCEEDINGS ARE GOING;
THE STRUCTURE BEING CREATED IS TOO STATIST, IF NOT OUTRIGHT,
SOCIALIST, THEY ARGUED. PETRONE WAS THE MOST VOCIFEROUS,
ARGUING THAT THE CONVENTION IS A "CONSTITUTIONAL TAKEOVER OF
EUROPE BY GERMANY." SOME OF THE CONVENTION'S DRAFT ARTICLES,
HE MAINTAINED, MIRROR TO THE WORD ARTICLES IN GERMANY'S BASIC
LAW. WHAT THE CONVENTION IS ATTEMPTING TO DO, TREMONTI
REMARKED, IS ELIMINATE COMPETITION AMONG THE MEMBER STATES
AND RATHER, TRANSFER "NATIONAL CARTELS" TO THE PAN-EUROPEAN
LEVEL. THAT IS NOT WHAT WE WANT TO HAVE DONE, HE SAID.


14. (C) TREMONTI AND PETRONE ACKNOWLEDGED THAT THE PRIME
MINISTER IS EAGER TO HAVE A SECOND "TREATY OF ROME" SIGNED
DURING ITALY'S EU PRESIDENCY. NEITHER IS CONFIDENT, HOWEVER,
THAT THE CONVENTION PROCEEDINGS WILL BE FINISHED BEFORE OR
EVEN DURING ITALY'S PRESIDENCY. THEY HAVE NOT BROACHED THE
SUBJECT WITH THE PM. BOTH BELIEVE A SLOWER PACE WOULD BE
BENEFICIAL, ALLOWING MEMBER STATES SUCH AS THE UK AND ITALY
TO ADDRESS SOME OF THE MORE QUESTIONABLE PROVISIONS.

ITALY'S EU PRESIDENCY
--------------


15. (C) TREMONTI'S FRUSTRATION WITH BRUSSELS WAS CLEAR IN HIS
RESPONSE TO THE AMBASSADOR'S QUERY ABOUT ITALY'S EU
PRESIDENCY PRIORITIES. "WE WANT TO PROPOSE SOME RADICAL
MEASURES, WHICH ECOFIN WILL JUST BLOCK. SO I'LL JUST HAVE TO
GO AROUND ECOFIN AND SPEAK DIRECTLY TO THE PEOPLE AND TO
BUSINESS," TREMONTI REMARKED. WITHOUT GONG INTO THE FINER
ASPECTS OF THESE PROPOSALS, TREMONTI SAID THE GOI WILL FOCUS
ON THREE AREAS: FREE TRADE, KEEPING PRODUCTION IN EUROPE, AND
A "NEW DEAL" FOR MARKETS AND BUSINESSES. HE IS NOT CERTAIN
HIS COUNTERPARTS IN THE EU WILL CONCUR. ONLY THE FRENCH
FINANCE MINISTER IS THINKING ALONG SIMILAR LINES, HE
REMARKED.


16. (SBU) REGARDING FREE TRADE AND PRODUCTION, TREMONTI
SKETCHED, LITERALLY ON A NAPKIN, TWO SEEMINGLY IDENTICAL "CE"
TRADEMARK SYMBOLS - ONE THAT DESIGNATES PRODUCTS MADE IN THE
EUROPEAN UNION, THE OTHER MADE IN CHINA. THAT THE TWO
SYMBOLS ARE IDENTICAL IS NOT JUST A COINCIDENCE. CHINA, HE
SAID, IS TAKING AWAY MUCH OF WESTERN PRODUCTION AND MARKETS.
TRADE MUST BE FREE, TREMONTI STATED, BUT IT MUST ALSO BE
EQUITABLE.
TERRORISM FINANCE
--------------


17. (C) IN RESPONSE TO THE AMBASSADOR'S EXPRESSED
APPRECIATION FOR ITALY'S EFFORTS ON HALTING FINANCIAL SUPPORT
FOR TERRORISM, TREMONTI NOTED THAT WHILE PROGRESS HAS BEEN

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IT WILL NEVER BE TRACED.
TO STAUNCH THE FLOW OF FUNDS, TREMONTI ARGUED VIGOROUSLY THAT
IT WAS ESSENTIAL TO GET THE SWISS TO CHANGE THEIR BANK
SECRECY LAWS.

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


18. (C) WE SAW A RELAXED, CONFIDENT FINANCE MINISTER, WHO
LACED HIS COMMENTS WITH MUCH SARCASM AND WIT. TREMONTI KNOWS
HE HAS THE CONFIDENCE OF THE PRIME MINISTER, A TRUST
CERTAINLY BOLSTERED BY TREMONTI'S ABILITY TO PERSUADE A
SKEPTICAL BOSSI REGARDING IRAQ. HE WAS UNABASHED IN HIS
CRITICISM OF BRUSSELS AND OTHER EU GOVERNMENTS AND FRANK
ABOUT THE CHALLENGES OF ENACTING REFORMS, BOTH WITHIN ITALY
AND IN EUROPE AS A WHOLE. HE ALSO ACKNOWLEDGED THE PROBLEMS
OF DOING BUSINESS IN ITALY AND EXPRESSED HIS COMMITMENT TO
MAKING THE MARKET MORE TRANSPARENT AND FREER. IN THE
EMBASSY'S VIEW, TREMONTI'S LEADERSHIP AND CONTINUED STRONG
PRESENCE IN THE GOVERNMENT REMAINS AN ESSENTIAL PREREQUISITE
FOR FURTHER ECONOMIC REFORM IN ITALY. END COMMENT.

SEMBLER

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2003ROME01117 - Classification: CONFIDENTIAL