Identifier
Created
Classification
Origin
03ROME4980
2003-10-31 18:03:00
CONFIDENTIAL
Embassy Rome
Cable title:  

ECOFIN TOUR D'HORIZON: FRANCE'S BUDGET, ACCOUNTING

Tags:  EFIN ECON IT EUN 
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C O N F I D E N T I A L ROME 004980 

SIPDIS


E.O. 12958: DECL: 10/31/2008
TAGS: EFIN ECON IT EUN
SUBJECT: ECOFIN TOUR D'HORIZON: FRANCE'S BUDGET, ACCOUNTING
STANDARDS, BASEL II, BALKANS RECONSTRUCTION

REF: A. FRANKFURT 7111


B. ROME 4730

C. MILAN 00562

Classified By: Minister Counselor for Economic Affairs Scott Kilner for
reasons 1.5 (b)

C O N F I D E N T I A L ROME 004980

SIPDIS


E.O. 12958: DECL: 10/31/2008
TAGS: EFIN ECON IT EUN
SUBJECT: ECOFIN TOUR D'HORIZON: FRANCE'S BUDGET, ACCOUNTING
STANDARDS, BASEL II, BALKANS RECONSTRUCTION

REF: A. FRANKFURT 7111


B. ROME 4730

C. MILAN 00562

Classified By: Minister Counselor for Economic Affairs Scott Kilner for
reasons 1.5 (b)


1. (SBU) Summary: France's continued flouting of Stability
and Growth Pact (SGP) rules and possible punitive measures
will dominate discussions at the November 4 ECOFIN Council
meeting in Brussels, Italian Finance Ministry officials told
econoff in meetings this week. However, there is no political
agreement among the Commission and Members States about what
to do with France. Two issues of key importance to the U.S.
- the Takeover Directive and BASEL II - will not be on the
agenda. Commissioner Bolkenstein is expected to give a
positive debrief of recent talks between the Commission and
U.S. officials on accounting rules. End summary.

WHAT TO DO WITH FRANCE?
--------------


2. (SBU) Carlo Baldocci, diplomatic advisor to Finance
Minister Tremonti, and Carlo Monticelli, Senior Director for
G7 and EU Affairs at the Finance Ministry, told econoff that
Italian officials are looking with trepidation at the
November 4 ECOFIN when the standoff with France over its
continued disregard for SGP deficit rules is expected to come
to a head.


3. (C) The French are putting a full court press on large
countries' leaders, specifically Berlusconi, Schroeder, Aznar
and, to a lesser extent, Blair, to back them up in the
expected confrontation with the Commission. Despite Chirac's
pressure, the Italians want to try to remain neutral in this
fight and stand ready to be a broker if needed. The Finance
Ministry's Director General Bini Smaghi and his German
counterpart Caio Wesser have met with French officials and
suggested technical changes to the French budget that would
conceivably bring France's budget closer to SGP deficit
targets. The ability to do so is there, but France's
political will isn't, Baldocci said.


4. (C) During the October 30th EU meeting with Balkan leaders
on reconstruction efforts, Commissioner Solbes, the German
Delegation, Luxembourg's Prime Minister, the Italian
Presidency Delegation and French officials broke off from the
day's proceedings to discuss France's 2004 budget. Everyone

was surprised that the French brought nothing new to the
table. Stymied by the French position, no political
consensus was reached among this group regarding what
punitive actions would be imposed on France. But the frost in
the air between the Commission and the French was palpable,
Baldocci commented.

ACCOUNTING STANDARDS
--------------


5. (SBU) Aside from discussion about France, Commissioner
Bolkenstein will report during the informal lunch proceedings
on recent Commission-U.S. discussions on accounting standards
and Sarbanes-Oxley. Baldocci and Monticelli both commented
that they understood that Bolkenstein will give a positive
reading. They also said that FinMins are eager to reach a
political agreement so that they can delegate to the
Commission the responsibility to work out the technical
aspects of an accord. This political agreement could be
reached at the November 4th ECOFIN.

BASEL II
--------------


6. (C) BASEL II is not on the agenda. If Finance Minister
Tremonti has his way, Baldocci remarked, it will be not
considered again while Italy holds the EU Presidency. The
Italian government itself is bitterly divided about the
application of BASEL II, he noted. Note/Comment: As reported
in ref c, Tremonti has repeatedly said that BASEL II may not
be in the best national interests of Italy and has urged
further revisions to the accord. In particular, Tremonti has
called for corrections in the new risk rating procedures
imposed upon banks. In contrast, Central Bank Governor
Antonio Fazio has come out in favor of BASEL II even as it
stands now. On a broader level, Tremonti and Fazio have been
sparring with each other over such issues as the draft 2004
Italian budget, BASEL II, the Central Bank's supervision of
bond offerings, and more. Relations between the two are at
their worst point and officials from both the Ministry and


the Central Bank have raised concerns that this antagonism
could interfere with the Italian Government's own ability to
reach consensus on certain issues, including BASEL II. End
note/comment.

TAKEOVER DIRECTIVE
--------------


7. (SBU) The Takeover Directive is not scheduled to be
discussed, according to the two Finance Ministry officials.
Although Finance Ministry officials have the lead for the
Italians, the Takeover Directive falls under the competency
of the Competitiveness Council, which will meet on November

10. The Ministry of Productive Activities (Industry) and the
Ministry for EU Integration are part of the GOI's internal
consultative process. Nonetheless, econoff explained U.S.
concerns about reciprocity provisions under the Takeover
Directive to both Baldocci and Monticelli. Both agreed to
give us a head's up should they hear that the reciprocity
issue has re-emerged.

CLEARING UP MISCONCEPTIONS
--------------


8. (SBU) Italian officials want to clear the record straight
on what happened regarding the Investment Services Directive,
remarked Monticelli. Despite press reports and claims by some
Member States, Italy did not force a vote on the ISD over the
U.K.'s objections (ref a, b). The Presidency presented its
compromise proposal and, afterwards, gave the U.K. delegation
the opportunity to present an alternative proposal. The
British did, but their proposal was not supported by the
majority of the Finance Ministers, and thus, was not
considered.


9. (SBU) Another misconception is what occurred at the
October 27th Intergovernmental Conference (IGC),Monticelli
said. The Eurogroup (EU Finance Ministers and Central Bank
Governors) do not have an official role in the IGC. Their
proposal to retain control over certain budgetary powers
rather than relinquishing them to the European Parliament was
informal and should be considered solely as a point of
reference. The Italian Presidency is encouraging the IGC to
consider all points of reference.

BALKAN RECONSTRUCTION
--------------


10. (U) On October 30, the Italian EU Presidency and
Commission held a meeting in Venice on the Balkans: "From
Reconstruction to Economic Integration." At this meeting,
Finance Minister Tremonti presented five initiatives, which
would bring together public and private sector financing and
participation, for the energy and transport sectors in the
Balkan countries. These initiatives will be supported by the
European Bank for Reconstruction and Development, European
Investment Bank and the World Bank. According to Baldocci,
the Commission and the Italian Government will contribute 20
million euros and 15 million euros respectively to this
initiative. The Italian contribution will be in new money,
disbursed in 2004, with 10 million euros coming from the
Finance Ministry and 5 million from the MFA.


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2003ROME04980 - Classification: CONFIDENTIAL