UNCLAS SECTION 01 OF 02 ROME 004651

SIPDIS


PARIS FOR USOECD
FRANKFURT FOR WALLAR

E.O. 12958: N/A
TAGS: ECON EFIN IT EUN
SUBJECT: ITALYS G7 FINANCIAL SHERPA CRITICIZES EU STUDY
ON ECONOMIC GROWTH


1. SUMMARY: A HIGH-LEVEL STUDY GROUPS RECOMMENDATIONS
FOR STIMULATING GROWTH IN EUROPE RECEIVED MUCH CRITICISM
IN ROME, ESPECIALLY FROM LORENZO BINI SMAGHI, ITALYS G7
FINANCIAL SHERPA. IN JULY 2002, THE EUROPEAN COMMISSION
PRESIDENT ESTABLISHED THIS GROUP TO EXPLORE STRATEGIES
FOR ECONOMIC GROWTH IN EUROPE. ANDRE SAPIR, AFFILIATED
WITH THE FREE UNIVERSITY OF BRUSSELS, A MEMBER OF THE
COMMISSIONS GROUP OF POLICY ADVISORS AND CHAIR OF THE
STUDY GROUP, AND FELLOW GROUP MEMBERS RECENTLY CAME TO
ROME TO DISCUSS THEIR JUST-PUBLISHED REPORT, AN AGENDA
FOR GROWING EUROPE. END SUMMARY.


2. ON SEPTEMBER 25, ISAE - ISTITUTO DI STUDI ED ANALISI
ECONOMICA - A SEMI-GOVERNMENTAL ITALIAN RESEARCH
INSTITUTE, HOSTED A ROUNDTABLE TO PRESENT AN AGENDA FOR
GROWING EUROPE. IN HIS REMARKS, SAPIR UNDERSCORED THAT
THE EUS TOP PRIORITY MUST BE ECONOMIC GROWTH. WITHOUT
GROWTH, HE STATED, EUROPES SOCIAL MODEL CANNOT BE
SUSTAINED; AND THE SUCCESS OF ENLARGEMENT WOULD BE
JEOPARDIZED. GROWTH, HE CONTINUED, REQUIRES MASSIVE
REFORMS IN ECONOMIC POLICIES AND DELIVERY MODES. ALSO
NECESSARY ARE INCENTIVES FOR IMPROVED ECONOMIC
PERFORMANCE AND PENALTIES WHEN DEFICIT TARGETS ARE NOT
MET. IN ITS REPORT, THE STUDY GROUP OFFERS SIX
RECOMMENDATIONS FOR INCREASING GROWTH AND JOBS. WE WANT
TO REPLICATE THE U.S. EXPERIENCE IN TERMS OF GROWTH, BUT
ALSO CREATE JOBS, SAPIR REMARKED.

RECOMMENDATIONS FOR THE FUTURE
--------------


3. THE GROUP MADE THE FOLLOWING RECOMMENDATIONS:
-- MAKE THE SINGLE MARKET MORE COMPETITIVE AND DYNAMIC;
-- BOOST INVESTMENT IN KNOWLEDGE I.E., BOTH BY
OTH BY
INCREASING SPENDING ON RESEARCH FROM AN AVERAGE OF 1.9
PERCENT TO 3 PERCENT, AND ALSO ON HIGHER EDUCATION;
-- IMPROVE THE EUS MACROECONOMIC POLICY FRAMEWORK;
-- REDIRECT STRUCTURAL FUNDS TO LOW-INCOME COUNTRIES,
RATHER THAN TO LOW-INCOME REGIONS;
-- ADOPT MORE EFFECTIVE DECISION MAKING AND REGULATION;
AND
-- DIVIDE THE EU BUDGET INTO THREE FUNDS: A GROWTH FUND,
A CONVERGENCE FUND, AND A RESTRUCTURING FUND.

FOLLOWING THE AUTHORS PRESENTATION OF THEIR REPORT,
PANELISTS, INCLUDING THE GOI REPRESENTATIVE, ITALIAN
FINANCE MINISTRY DIRECTOR GENERAL LORENZO BINI SMAGHI,

(WHO IS ALSO ITALYS FINANCIAL SHERPA), RESPONDED.

THE OBJECTIONS
--------------


4. BINI SMAGHI CHALLENGED A KEY RECOMMENDATION OF THE
REPORT THAT THERE SHOULD BE A MORE FLEXIBLE STABILITY
AND GROWTH PACT, ESPECIALLY IN TERMS OF DEFICIT TARGETS
OF 3 PERCENT. HE CONTENDED THAT EASING UP ON THE 3
PERCENT TARGET WOULD BE ILL-ADVISED WHEN EURO-ZONE GDP
GROWTH IS HOVERING AROUND 0.5 PERCENT. DISCIPLINE IS
IS
NEEDED MOST WHEN GROWTH IS STAGNANT, HE STATED. IN A
NEAR-SARDONIC TONE, HE STATED THAT THIS RECOMMENDATION
SEEMED TO HAVE BEEN MADE TO PLEASE THOSE GOVERNMENTS THAT
STRONGLY SUPPORT AN EASING OF RIGID STABILITY PACT RULES.


5. AT THE SAME TIME, AND IN SOMEWHAT OF A CONTRADICTION,
BINI SMAGHI ARGUED THAT THE 3 PERCENT DEFICIT TARGET
MIGHT BE THE WRONG GOAL. IF THE MAASTRICHT CRITERIA WERE
ESTABLISHED TODAY INSTEAD OF IN THE EARLY NINETIES, THE
DEFICIT TARGET WOULD HAVE BEEN LESS THAN THREE PERCENT,
HE STATED. REGARDING THE OVERALL TOTAL DEBT/GDP TARGET,
BINI SMAGHI CONTENDED THAT EVEN THOUGH ITALY AND BELGIUM
HAVE A HIGH DEBT/GDP RATIO, BOTH COUNTRIES SURPRISINGLY
HAVE THE HIGHEST LEVEL OF SUSTAINABILITY THAT IS,
SERVICING THE DEBT PRESENTS NO PROBLEM, HE CLAIMED. HE
MENTIONED THAT IF THE MAASTRICHT TARGETS WERE EVER TO BE
RECONSIDERED, THE FOCUS SHOULD BE ON THE SUSTAINABILITY
OF THE DEBT ITSELF, RATHER THAN THE DEBT/GDP RATIO.


6. THE REPORTS RECOMMENDATIONS TO GIVE STRUCTURAL FUNDS
TO LOW-INCOME COUNTRIES RATHER THAN LOW-INCOME REGIONS
RAISED BINI SMAGHIS CONSTERNATION. NOT SURPRISINGLY, HE

ROME 00004651 002 OF 002

GOVERNMENTS. BINI
SMAGHI ALSO OBJECTED TO THE RECOMMENDATION OF REMOVING
FUNDS MANAGEMENT FROM THE COMMISSION AND GIVING
RESPONSIBILITY TO NATIONAL GOVERNMENTS. HE ARGUED THAT
DESPITE THE SUCCESS THE GOVERNMENTS OF IRELAND, SPAIN AND
PORTUGAL DEMONSTRATED IN INVESTING STRUCTURAL FUNDS
ALLOCATED TO THEM, NATIONAL COMPETENCE SHOULD NOT BE
CONSIDERED A MODEL FOR THE FUTURE.


7. COMMENT: ITALIAN POLITICIANS HAVE BEEN CONCERNED THAT
WITH ENLARGEMENT, ITALYS SOUTH WILL LOSE OUT ON ITS
SHARE OF STRUCTURAL FUNDS. UNDER THE 2000-2004 EU
SPENDING PROGRAM, SOUTHERN ITALY HAS BEEN ELIGIBLE TO
RECEIVE APPROXIMATELY 25 BILLION EUROS FOR DEVELOPMENT OF
INFRASTRUCTURE, COMMUNICATIONS AND HUMAN RESOURCES, AND A
WIDE RANGE OF REGIONAL AND MUNICIPAL PROJECTS. BY THE
E
END OF 2002, HOWEVER, A MERE 8 PERCENT OF THESE FUNDS HAS
BEEN APPROVED FOR DISBURSEMENT BY THE EU. PROBLEMS
INCLUDE RED TAPE, POORLY IDENTIFIED PROJECTS, LACK OF
SKILLED PERSONNEL IN REGIONAL GOVERNMENTS AND IN SOME
CASES, CORRUPTION. END COMMENT.


8. BINI SMAGHI ALSO CRITICIZED THE REPORTS AUTHORS FOR
THEIR FAILURE TO DISCUSS THE EFFECTS OF AN AGING
POPULATION ON THE PENSION AND HEALTH SYSTEMS AND FOR
FAILURE TO PROVIDE SPECIFIC RECOMMENDATIONS FOR PENSION
REFORMS. ITALY SPENDS NEARLY 15 PERCENT OF ITS GDP ON
PENSIONS, HE SAID, AND HIGH PENSION EXPENDITURES LIMIT
THE POTENTIAL FOR ECONOMIC GROWTH. AN EURO-WIDE APPROACH
TO PENSION REFORM IS NEEDED TO HELP BRING COSTS DOWN, HE
CONCLUDED.


9. THE REPORTS AUTHORS CALLED ON THE COMMISSION TO
INCREASE BUDGETARY OVERSIGHT. BINI SMAGHI CONCURRED, BUT
ALSO URGED MORE EFFECTIVE USE OF THE EXISTING EARLY
WARNING PROCEDURE FOR COUNTRIES FAILING TO MEET DEFICIT
TARGETS.


10. IN HIS CONCLUDING REMARKS, BINI SMAGHI SPOKE ABOUT
OUT
THE POTENTIAL IMPACT OF THE SWEDISH VOTE AGAINST THE
EURO. HE ARGUED THAT THE LEGITIMACY OF THE EURO CURRENCY
ITSELF WAS CHALLENGED BY THE REFERENDUMS RESULTS. HOW
CAN GOVERNMENTS DEFEND THE EURO AS A EUROPEAN CURRENCY IF
IT IS NOT EMBRACED BY ALL, HE ASKED.

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


11. PRIOR TO ITALYS EU PRESIDENCY, FINANCE MINISTRY
OFFICIALS EXPRESSED GREAT FRUSTRATION WITH THE STABILITY
AND GROWTH PACT. WHILE ITALY HOLDS THE PRESIDENCY,
HOWEVER, FINANCE MINISTER TREMONTI AND HIS TEAM HAVE FELT
OBLIGED TO DEFEND THE PACT. NOT SURPRISINGLY, THEN, BINI
SMAGHIS STRONG DEFENSE OF THE STABILITY AND GROWTH PACT
DEFICIT TARGET MIRRORS WHAT WE HAVE BEEN HEARING LATELY
FROM TREMONTI. COME JANUARY, HOWEVER, THE STORY MAY WELL
BE DIFFERENT, ESPECIALLY UNDER THE LIKELY SCENARIO THAT
ITALY ITSELF WILL STRUGGLE TO MEET THE 3 PERCENT DEFICIT
TARGET IN 2004. (COMMENT: ITALYS 2004 DRAFT BUDGET
PREDICTS A DEFICIT OF 2.2 PERCENT. NONETHELESS, WE
BELIEVE THIS IS AN OVERLY OPTIMISTIC GIVEN THE BUDGETS
ETQS
LIMITED SPENDING CUTS. BUDGET TO BE REPORTED SEPTEL. END
COMMENT.)


12. SURPRISINGLY, BINI SMAGHI DID NOT PICK UP ON THE MAIN
THEME OF THE REPORT: THE ACUTE NEED FOR ECONOMIC GROWTH.
HE OFFERED NO ALTERNATIVES TO THE GROUPS
RECOMMENDATIONS, AN ESPECIALLY GLARING OMISSION SINCE
ITALY HAS ONE OF THE SLOWEST GDP GROWTH RATES IN EUROPE.
END COMMENT.

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2003ROME04651 - Classification: UNCLASSIFIED