Identifier
Created
Classification
Origin
03ROME2429
2003-06-03 10:26:00
CONFIDENTIAL//NOFORN
Embassy Rome
Cable title:  

ITALY AND THE EU: WHY DO MILK QUOTAS MATTER?

Tags:  ETRD PGOV EAGR EFIN PREL ECON IT EUN 
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C O N F I D E N T I A L ROME 002429 

SIPDIS


SENSITIVE

STATE FOR EUR/WE, EUR/ERA, EB;
TREASURY FOR A/S OLSON, OITC-ANGUS;
USTR FOR NOVELLI AND MOWREY;
FRANKFURT FOR TREASURY - JWALLER,
USEU FOR DBROWN
DEPT PASS TO USDA FAS WASHDC
USDA FOR FAS - TRADE POLICY
USDOC FOR 4212/ITA/OEURA/CPD/DDEFALCO

E.O. 12958: DECL: 06/03/2013
TAGS: ETRD PGOV EAGR EFIN PREL ECON IT EUN
SUBJECT: ITALY AND THE EU: WHY DO MILK QUOTAS MATTER?

REF: A. (A) USEU BRUSSELS 1444


B. (B) USEU 1672

C. (C) USEU 671

D. (D) USEU 1026

Classified By: Economic Minister-Counselor Scott Kilner
for reason 1.5 (d)

C O N F I D E N T I A L ROME 002429

SIPDIS


SENSITIVE

STATE FOR EUR/WE, EUR/ERA, EB;
TREASURY FOR A/S OLSON, OITC-ANGUS;
USTR FOR NOVELLI AND MOWREY;
FRANKFURT FOR TREASURY - JWALLER,
USEU FOR DBROWN
DEPT PASS TO USDA FAS WASHDC
USDA FOR FAS - TRADE POLICY
USDOC FOR 4212/ITA/OEURA/CPD/DDEFALCO

E.O. 12958: DECL: 06/03/2013
TAGS: ETRD PGOV EAGR EFIN PREL ECON IT EUN
SUBJECT: ITALY AND THE EU: WHY DO MILK QUOTAS MATTER?

REF: A. (A) USEU BRUSSELS 1444


B. (B) USEU 1672

C. (C) USEU 671

D. (D) USEU 1026

Classified By: Economic Minister-Counselor Scott Kilner
for reason 1.5 (d)


1. (C) Summary: In an attempt to finally put to rest the
knotty problem of EU fines for overproducing milk, the
Berlusconi government has found itself caught between an
exasperated EU and intransigent Italian milk producers,
supported by the Northern League (LN). The GOI has used
tough tactics in Brussels and in the Italian Parliament in
hopes of forcing through measures to permit dairy farmers to
pay back, over 30 years without interest, E 924 million in EU
fines for excess milk production. In the EU Council of
Ministers, Italy is blocking agreement on the EU Tax Package
until the 14 other member states agree to the deal. In the
Italian Chamber of Deputies, on May 21, the GOI forced all
coalition deputies to approve a decree law, requiring the
farmers to pay the fines over the next 30 years. The vote
had to be made a vote of confidence to ensure approval. The
Northern League abstained -- a major concession as most LN
deputies strongly opposed the measure. The Senate is
approved on May 29. However, for the measure to be
effective, the GOI will have to persuade the EU to go along
with it. Some observers believe the matter will eventually
go to the European Court of Justice. The GOI, in trying to
resolve an increasingly troublesome dispute, has damaged
itself in the EU on the eve of its presidency and has won
itself no friends at home. End Summary.


2. (SBU) Watching Italy stubbornly stall action within
Ecofin on the EU Tax Package ) holding it hostage to

concessions allowing Italian dairy farmers to pay EU fines
for excessive milk production over 30 years, many observers
wonder why. Why is Italy, a country known for compromise
and flexibility, making such a fuss about milk quotas?

How Craxi,s Government Created the Problem


3. (SBU) In 1984, the center-left government of Prime
Minister Bettino Craxi accepted milk production limits
proposed by the EU Commission that were far below the level
of domestic milk production at that time. Opinions differ as
to whether this was due to Italian incompetence (the Ministry
of Agriculture not knowing how to get an accurate statistical
read-out of the true production picture),or simple
disinterest (the GOI agreeing to an EU proposed quota) or in
exchange for some other concession from Brussels. Whatever
the case, the upshot was that Italian milk producers found
themselves limited to production levels well below previous
levels and well below domestic demand. Moreover, according to
an independent producers association, a significant amount of
Italy's quota was assigned to farms that did not produce
milk, but had falsely applied for quotas and subsidies. This
left legitimate milk producers with even lower quotas.


4. (SBU) Once the quotas were made public, the GOI found
itself faced with serious national protests by dairies, milk
producers and the animal breeder association (AIA).
Producers blocked motorways and Milan's Linate Airport,
poured milk onto roads and distributed free milk in town
squares. The GOI's response was to reassure producers that
they didn't need to worry about the quotas, and that
everything would somehow be worked out. Moreover, they told
producers that they would never have to pay the EU fines and
that a way would be found in Brussels to solve the problem.
The milk producers agreed to suspend their demonstrations,
but threatened to resume them if ever forced to pay the
fines.


5. (SBU) Over the nearly 20 years since, dairy farmers have
continued to resist the quotas. Unpaid fines for
overproduction mounted -- in some cases to well over the
annual income of the producer. Italian governments initiated
the practice of paying these fines to Brussels on behalf of

offending milk producers. Successive center-left governments
continued to assure producers that they would never have to
pay the fines. Any apparent change in policy triggered
renewed protests ) blocked motorways and gallons of milk
poured out publicly. Successive governments ) most recently
that of Amato in 2000 ) provided renewed assurances.
Regional disputes within Italy regarding quotas have also
grown. The Lombardy region has taken the GOI to court a
number of times arguing that their producers have received
too little of the total quota.

Between a Rock and a Hard Place


6. (SBU) The government of Prime Minister Berlusconi came to
office in 2001, and found the milk quota issue reaching a
crisis point. The GOI decision to pay the fines on behalf of
its Italian producers was not viable. The EU Commission had
confirmed in a ruling that Italian farmers were liable for
the overproduction fines, and that payment by the GOI
consitituted an illegal state aid. The accumulated penalties
had mounted to E 924 million, far beyond, producers
contended, their ability to reimburse the government.
Moreover, these producers remained bitter over the 1984
imposition of quotas -- seen as an act of betrayal by the
government. They refused to be victimized a second time.


7. (SBU) Faced with diametrically opposed forces on both
sides, the GOI determined to craft a compromise solution --
which it calculated that both sides would resist, but might
eventually accept: The fines would be paid back by the
farmers (as Brussels required),but over a period of 30 years
and without interest (to prevent massive bankruptcies among
milk producers).

Getting to Yes in Parliament

8. (C) In late March 2003, the GOI introduced a decree law to
this effect in Parliament, despite having been rebuffed by EU
member state finance ministers on March 7 in ECOFIN (ref A),
at a special March 19 ECOFIN session and by heads of state
and government at the March 20 EU summit (ref B). Reports
received by USEU agree that the GOI's strategy of tying
approval of the unrelated EU Tax Package in the ECOFIN
Council to a rollback of the Commission ruling on milk
production fines succeeded only in alienating the other 14
governments, who regarded the GOI maneuver as "blackmail."
All had anticipated easy approval of the Tax Package March 7,
following political agreement in the Council (including
Italy) on the troublesome savings taxation measure January 21
after over a year of hard bargaining (Ref C). The GOI had
not helped its case by failing to signal its intention at the
February 18 ECOFIN little more than two weeks earlier (Ref
B).


9. (SBU) It was immediately clear that the Berlusconi
government's proposed decree law faced tough opposition even
within the governing coalition. Northern League (LN) party
leader Umberto Bossi (whose northern Italian base includes
most of Italy's dairy production) had made fair treatment of
milk producers a key platform in his 2001 campaign. Other
LN leaders had pledged to protect producers from having to
pay "unfair" fines. The GOI faced the real prospect of
seeing the legislation defeated.


10. (SBU) The decision was therefore made to make the vote on
milk quotas a vote of confidence. This was not an
unprecedented step. In fact, since 2001, the Berlusconi
government had called six votes of confidence -- two in the
Senate and four in the Chamber of Deputies. The vote was
called on May 21, and passed easily. However, Northern
League (LN) deputies abstained, and many made clear their
resentment during the Chamber's debate. The LN Group
Leader, Alessandro Ce, declared: "Today we renew our
confidence in the Government, but Berlusconi should no longer
have any illusions." He went on to argue that legislation
like the milk quota decree law damaged the Italian people and
the Italian national interest.

The Decree Law

11.(U) The decree law approved in the Chamber provides for
monthly installment payments by milk producers of fines for
overproduction during the period 1995/96 to 2001/2. The
Ministry of Agriculture will establish special incentives for
conversion from milk production to other livestock
production.

Next Steps


12. (SBU) The decree now must be approved by the Senate,
where it is expected to pass easily. EU member state
representatives in Brussels reached no agreement at its May
28 COREPER, and discussions are scheduled to continue at the
COREPER meeting on June 2. Depending on the results of that
meeting, finance ministers may consider it again during the
June 3 ECOFIN council in Luxembourg. Unanimous approval
would be necessary for the Council to overrule the Commission
decision to require milk producers to repay the GOI
immediately for fines paid on their behalf.

Comment:


13. (C) The Italian Government has struggled mightily to
solve a longstanding, deeply entrenched problem. However, no
one is applauding. The milk producers are decrying
unfairness and betrayal. Northern League politicians are
complaining that core LN interests are ignored, while LN
support is taken for granted. In Italy, the milk quota
problem is one with no easy solution, which has created
considerable discomfort within the majority coalition. As
evidenced by the confidence vote, however, even on an issue
this close to its core interests, the Northern League (as do
other coalition partners) sees its interests better protected
by being within the government than by leaving it. While
there will be no government collapse, this issue may resonate
within Italy for some time to come. Within the EU, Italy has
damaged its standing on the eve of its EU presidency.


14. (U) This message has been coordinated with USEU Brussels.

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2003ROME02429 - Classification: CONFIDENTIAL