ITALY'S EU PRESIDENCY: ECOFIN DEBATE OVER THE

C O N F I D E N T I A L ROME 003313

SIPDIS


E.O. 12958: DECL: 07/18/2006
TAGS: ECON EFIN IT EUN
SUBJECT: ITALY'S EU PRESIDENCY: ECOFIN DEBATE OVER THE
STABILITY PACT CATCHES GOI BY SURPRISE

REF: A. USEU BRUSSELS 3255


B. ROME 1117

CLASSIFIED BY: ECONOMIC COUNSELOR KAREN MILLIKEN FOR REASONS 1.5 (B)


1. (SBU) FRENCH PRESIDENT CHIRAC'S CALL FOR A SOFTENING OF
THE EU STABILITY AND GROWTH PACT IN A TELEVISED BASTILLE DAY
INTERVIEW THE SAME EVENING AS THE JULY 14 MEETING OF EUROZONE
FINANCE MINISTERS IN BRUSSELS (USEU SEPTEL) TOOK GOI
OFFICIALS BY SURPRISE, CARLO MONTICELLI (PLEASE PROTECT),
SENIOR DIRECTOR FOR G7 AND EU AFFAIRS AT THE FINANCE
MINISTRY, TOLD US ON JULY 17TH. MINISTERS ALSO WERE
UNPREPARED BY THE STRONG REITERATION OF CHIRAC'S CALL BY
FRENCH FINANCE MINISTER FRANCIS MER. THEY WERE EQUALLY TAKEN
ABACK BY THE MOVE BY AUSTRIA'S KARL-HEINZ GRASSER AFTER THE
MEETING TO BREAK THE EUROGROUP "CODE OF SILENCE" AND TALK TO
THE PRESS ABOUT MER'S INTERVENTION. GOING PUBIC ABOUT WHAT
TRANSPIRED IN THE CONFIDENTIAL DISCUSSIONS OF THIS INFORMAL
GROUP IS UNPRECEDENTED.


2. (SBU) GOI OFFICIALS, REMARKED MONTICELLI, BELIEVE EUROPE'S
INTERESTS WERE ILL-SERVED BY WHAT BECAME A PUBLIC SPAT AFTER
FRANCE CRITICIZED AUSTRIA AND MINISTERS FROM SEVERAL OTHER
SMALL COUNTRIES TOOK GRASSER'S OPENING AS AN OPPORTUNITY TO
PILE ON. HOWEVER, THE GOI DID NOT WANT TO EXACERBATE
TENSIONS BY ISSUING A PUBLIC REPRIMAND TO AUSTRIA. IN AN
ASIDE, MONTICELLI SAID THAT THERE WAS SOME CONSTERNATION
AMONG ITALIAN OFFICIALS FOR BEING UNABLE TO MAINTAIN ORDER IN
THE PROCEEDINGS. HE ALSO WRYLY NOTED THAT THE FIRST THREE
WEEKS OF ITALY'S EU PRESIDENCY HAVE BEEN MARKED BY
ATTENTION-GRABBING HEADLINES, AND NOT JUST BY THE ITALIANS.


3. (C) REGARDING THE STABILITY PACT ITSELF, MONTICELLI SAID
THAT FINANCE MINISTER TREMONTI, AS HE INDICATED IN BRUSSELS,
CONTINUES TO STEADFASTLY SUPPORT THE PACT'S REQUIREMENTS.
ITALIAN FINANCE OFFICIALS BELIEVE THAT FRANCE WILL EVENTUALLY
COME BACK INTO THE "FOLD", AND TAKE MEASURES THAT WILL BRING
FRANCE CLOSER TO, OR AT LEAST BE LESS IN BREACH OF, PACT
REQUIREMENTS. THE PEER PRESSURE FROM THE OTHER MINISTERS ON
FRANCE IS AND WILL CONTINUE TO SIGNIFICANT, HE ARGUED.
FRENCH OFFICIALS, HE CONTINUED, THEMSELVES SAID AT THE LAST
ECOFIN THAT FRANCE WOULD STRIVE TO MEET THE THREE PERCENT
DEFICIT TARGET IN 2004 (REFTEL). MONTICELLI ALSO COMMENTED
THAT NOT ONLY SMALL COUNTRIES ARE BECOMING IMPATIENT WITH
FRANCE AND GERMANY. ALTHOUGH THEY ACKNOWLEDGE THAT THE
STABILITY PACT IS A TIGHT STRAIGHT-JACKET, SOME GOVERNMENTS
ARE NOT SYMPATHETIC TO FRANCE AND GERMANY, WHICH CHOOSE NOT
TO PUT THEIR FISCAL ACCOUNTS IN ORDER IN BOOM YEARS AND ARE
NOW ASKING FOR ADDITIONAL BREATHING SPACE, HE SAID.


4. (SBU) THAT SAID, MONTICELLI NOTED, THERE DOES SEEM TO BE
SUBTLE SHIFTS IN THE VIEWS OF SOME MEMBER STATE GOVERNMENTS
REGARDING THE STABILITY PACT AND ITS LIMITATIONS ON DEFICIT
SPENDING. MANY POLITICAL LEADERS ARE LOOKING AT THE
EXPERIENCE OF THE UNITED STATES, WHOSE BUDGET DEFICIT IS
EXCEEDING FOUR PERCENT OF GDP BUT ALSO WHOSE GDP GROWTH RATE
IS EXPECTED TO BE AT LEAST ONE PERCENT HIGHER THAN EUROPE IN

2004. UNFORTUNATELY, WE WILL NOT KNOW WHICH STRATEGY - THE
U.S. OR THE EUROGROUP'S - IS THE RIGHT ONE FOR AT LEAST FIVE
YEARS, HE REMARKED.


5. (C) COMMENT: FINANCE MINISTER TREMONTI NEEDS TO TOE A FINE
LINE IN BOTH PUBLIC AND BACK-DOOR DISCUSSIONS ON THE
STABILITY PACT. TREMONTI HIMSELF HAS BEEN SKEPTICAL ABOUT
THE PACT AND TOLD US, AS RECENTLY AS MARCH, THAT HE WAS
CONCERNED THAT THE STABILITY PACT DID NOT PROMOTE SUFFICIENT
GROWTH (REFTEL B). THE CALL BY SOME ITALIAN OFFICIALS,
INCLUDING THE DEFENSE AND EDUCATION MINISTERS, FOR AN EASING
OF PACT REQUIREMENTS ALSO HAS PRESSURED TREMONTI TO ALLOW FOR
DEBATE ON THE PACT ITSELF IN THE EUROGROUP. NONETHLESS,
DURING ITALY'S EU PRESIDENCY, TREMONTI WILL CONTINUE TO FEEL
RESPONSIBILITY TO DEFEND THE PACT. A WEAKENED OR COLLAPSE OF
THE STABILITY PACT IS NOT THE LEGACY THE GOI WANTS FOR ITS
PRESIDENCY. END COMMENT.


6. (U) THIS MESSAGE WAS COORDINATED WITH USEU.
KILNER

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2003ROME03313 - Classification: CONFIDENTIAL