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. ROME 00001117 002 OF 004 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 ROME 00001117 003 OF 004 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 ROME 00001117 004 OF 004 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 NNNN 2003ROME01117 - Classification: CONFIDENTIAL