Identifier
Created
Classification
Origin
03ROME4238
2003-09-17 16:46:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Rome
Cable title:  

ITALY'S EU PRESIDENCY: FRANCE'S CHALLENGE TO THE

Tags:  EFIN IT EUN 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS ROME 004238 

SIPDIS


SENSITIVE

DEPT FOR EUR/ERA
TREASURY FOR INTERNATIONAL AFFAIRS
PARIS FOR USOECD
FRANKFURT FOR WALLAR

E.O. 12958: N/A
TAGS: EFIN IT EUN
SUBJECT: ITALY'S EU PRESIDENCY: FRANCE'S CHALLENGE TO THE
STABILITY AND GROWTH PACT AND ASIAN CURRENCY VALUES TOP
ECOFIN MEETING

REF: A. A. ROME 4236

B. B. ROME 1117

UNCLAS ROME 004238

SIPDIS


SENSITIVE

DEPT FOR EUR/ERA
TREASURY FOR INTERNATIONAL AFFAIRS
PARIS FOR USOECD
FRANKFURT FOR WALLAR

E.O. 12958: N/A
TAGS: EFIN IT EUN
SUBJECT: ITALY'S EU PRESIDENCY: FRANCE'S CHALLENGE TO THE
STABILITY AND GROWTH PACT AND ASIAN CURRENCY VALUES TOP
ECOFIN MEETING

REF: A. A. ROME 4236

B. B. ROME 1117


1. (SBU) Summary. France's continued flouting of Stability
and Growth Pact budgetary guidelines dominated the September
12-13 informal ECOFIN meetings in Stresa, Italy. Although
most delegations, with Holland and Austria being the most
vocal, called for fines to be imposed on France, the French
seem to be positioning themselves to dodge sanctions once
again. Italian Finance Minister Tremonti's call to review
the euro's exchange rate with Asian currencies caught most
delegations by surprise. While Tremonti initially seemed to
call for an intervention, he and other Italian finance
ministry officials, under scrutiny, backtracked quickly and
pushed instead for a "comprehensive review of the situation."
The Italians expect this issue will be discussed during this
weekend's G7 meeting in Dubai. Regarding the EU
Constitutional treaty, Eurogroup Ministers did not call for a
re-opening of the chapters. However, they noted that if some
of the chapters are re-opened during the IGC, the Eurogroup
will put forward some new ideas. End Summary.

French Budget Deficit
--------------


2. (SBU) Not unexpectedly, France announced at the ECOFIN
that it would not comply with the SGP's deficit ceiling - 3
per cent of gross domestic product - for the third
consecutive year in 2004. Despite heated criticism and
impassioned pleas by other finance Ministers, especially the
Dutch Finance Minister Gerrit Zalm, French Finance Minister
Francis Mer stated that it is "unrealistic" to expect French
to get its books in order in 2004. Italian Finance Ministry
and press sources told econoff that it was clear that
France's strategy from the start was not to give an inch,
although Mer later made conciliatory overtures, stating that
his 2004 budget would pave the way for meeting the deficit
targets in 2005.


3. (SBU) Also evident, sources stated, was the Eurogroup's
deep divide over what should be the next step with France.
Smaller countries lined up strongly in favor of imposing
sanctions, while larger countries, including Italy, and the
Commission itself were more willing to give France more time.
Commissioner Solbes, trying to avoid a true confrontation

with France, dangled out the possibility that if the October
7 ECOFIN finds that France's 2004 budget includes measures
to tackle the deficit, ministers would not need to impose
disciplinary measures in the short term. "We can not talk
about sanctions until France's budget is known," he stated at
Friday's press conference. Solbes also made an oblique
reference to a provision of the pact that allows a government
to exceed its fiscal threshold under "special circumstances".
This provision has been a topic of discussion since the
Germans went through the same exercise earlier in the year.
The "special circumstances" speculated about at that time
were the floods of 2002 and the Iraq war. Neither met the
criteria. Solbes remarked that interpretation of this EU
protocol should be as restrictive as possible.


4. (SBU) Comment: There was much grumbling among the smaller
delegations, including the soon to be EU members in their
first official EU meeting, in the hallways following Solbes'
comments. An official from Hungary's Embassy to Rome
commented to econoff that, while not surprising, it is
remarkable and embarrassing how France and the other big
countries can dictate the rules. Press contacts also told
econoff that Dutch Finance Minister Zelm continued to fume
during the two-day meeting and underscored with them that the
Dutch threat to sue the Commission for failure to enforce its
own rules is not an empty one. Although Mer later modified
his aggressive stance, France's perceived intransigence made
for a tense atmosphere. End Comment.

Asian Currencies
--------------


5. (SBU) Italy's preoccupation with the value of Asian
currencies left various ministries' officials shaking their
heads in confusion. During the September 12th press
conference, Finance Minister Tremonti seemed to call for some
action to counteract the Euro's climb against Asian
currencies. Tremonti stated that during the day's sessions,
Eurogroup ministers had discussed the inequilibrium between
Europe and Asian currency values, in the context of a
discussion of the world economic situation in prelude to
eurozone participation in the G7 meeting in Dubai. Tremonti
further commented that an "intervento" - literally translated
as intervention - might be required. Tremonti's words spun
up many of the delegations, including those from Belgium and
Luxembourg, who denied to their national press that the
ministers had discussed specific actions to address the
issue. Italian Finance Ministry officials later tried to
clarify Tremonti's remarks, arguing that what he really meant
was the need for an urgent and comprehensive review of the
situation. The Finance Ministry's spokesperson told
journalists that Italy favors a review of the euro's exchange
rate not only with China but also India and Japan.


6. (U) Italy expects to issue a statement on behalf of the
ECOFIN regarding the inequilibrium of the exchange rate this
week. Italian officials also noted that the IMF's managing
director will raise the issue of currency valuations in
emerging markets during the Dubai meetings next weekend.


7. (SBU) Tremonti's diplomatic advisor told econoff that it
was an unfortunate choice of words given the problem of
translating its various meanings. (Note: An "intervento" also
can mean a speech or to participate in something. End Note.)
The advisor added that Tremonti and other Eurogroup ministers
understand that they must tread carefully. But Tremonti and
a few others agree that this is an urgent matter that needs
to be reviewed. A Reuters correspondent told econoff that
the Dutch strongly echoed Italian concerns about weak Asian
currencies vis-a-vis the euro. In contrast, a BBC
correspondent commented to econoff that although he tried to
press Chancellor of the Exchequer Gordon Brown on the issue
of exchange rates, Brown readily dismissed the issue. When
queried about the exchange rate, European Central Bank
Governor Wim Duisenberg told journalists that concern is much
wider than just the situation in China and discussed the
strong effect on eurozone imports of the appreciating euro
worldwide. While the ECB did not take an official position
on whether exchange rates are satisfactory, Duisenberg warned
that the decision to float an exchange needs to be carefully
calibrated since many Asian countries carry a heavy bad-loan
burden, have weak financial market development and many
struggling, if not failing, state enterprises.


8. (SBU) Comment: Several journalists were overheard to be
questioning why Italy raised this issue now. One British
journalist asked sardonically of other journalists how much
they thought the U.S., given Treasury Secretary Snow's recent
visit to China, was behind Italy's push. Few seemed to know
in Stresa that China has been a hot-button political issue in
Italy for several months. The euro's strength vis-a-vis the
Chinese yuan and other Asian currencies are being blamed for
job losses in Italian export sectors. (Note: See ref A on
Italy's debate on the "threat" from China. End Note) And, as
early as March, Tremonti raised his concerns with us about
China, telling the Ambassador that China is taking away much
of western production and markets. (ref B)

Eurozone Growth
--------------


9. (SBU) Regarding economic growth, Finance Ministers, the
ECB President, and Commission officials agreed that economic
recovery in Europe will not occur earlier than in mid-2004.
While officials are encouraged by the positive news coming
from the United States and Japan, they are not certain that a
recovery in these regions is fully underway or significant

enough to stimulate growth in Europe. On the constitutional
treaty produced by the EU Convention, Tremonti said that the
Eurogroup has agreed not to ask for a re-opening of the
chapters. That said, should the overall text come up for
debate at the Inter-Governmental Conference, the Eurogroup
does have some concerns about the budgetary powers given to
the European parliament and would seek some changes.


10. (U) This cable was cleared by USEU and AMCONGEN Frankfurt.
SEMBLER


NNNN
2003ROME04238 - Classification: UNCLASSIFIED