C O N F I D E N T I A L SECTION 01 OF 03 DUBLIN 001717

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E.O. 12958: DECL: 11/23/2014
TAGS: OVIP ECON PREL ETRD EINV PGOV EU
SUBJECT: SECRETARY SNOW,S MEETING WITH PRIME MINISTER AHERN

Classified By: Ambassador James C. Kenny for reasons 1.4 (b) and (d)


1. (C) Summary: On November 15, U.S. Treasury Secretary John
Snow met with Irish Prime Minister (Taoiseach) Bertie Ahern.
PM Ahern:

-- Urged U.S. reengagement in the Middle East Peace Process,
which Europe viewed as the world,s most pressing issue;

-- Expressed concern about the ability of the new Palestinian
leadership to deal with Hamas;

-- Noted that the Irish Government had &moved beyond Iraq8
and recognized the necessity of U.S. actions in Falluja; and

-- Cited Ireland,s sensitivity to dollar movements, given
the importance of U.S. trade and investment to the Irish
economy.


2. (C) Secretary Snow:

-- Noted that President Bush would be active in Middle East
peace efforts during his second term;

-- Observed that Arafat,s passing presented opportunities
for a new, more moderate Palestinian leadership to emerge;

-- Cited President Bush,s intention to pursue broad-based
tax reform and the reduction of the fiscal deficit, working
closely with the Treasury Department;

-- Explained that the U.S. trade deficit and pressures on the
dollar had linkages to the yuan-dollar peg and to the
sluggishness of euro-zone economic growth; and

-- Said that the USG believed in a strong dollar and that the
dollar,s value would continue to be set in open, competitive
currency markets. End summary.

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The Middle East
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3. (C) Re-engagement in the Middle East Peace Process would
be the most effective U.S. measure to strengthen the
trans-Atlantic relationship, Irish Prime Minister (Taoiseach)
Bertie Ahern told visiting Treasury Secretary John W. Snow on
November 15. According to Ahern, Europe viewed the
Israeli-Palestinian conflict as the world,s most pressing
issue and would support President Bush,s efforts to

re-energize U.S. leadership of the Quartet. Ahern said that
he shared the European public,s empathy for the
Palestinians, which was shaped by media images of Israeli
attacks against Palestinian neighborhoods and also by the
EU,s growing Muslim population. Secretary Snow responded
that President Bush would be active in Middle East peace
efforts in his second Administration. The Secretary
expressed regret that Europeans tended to regard the United
States as one-sided in its support for Israel, despite U.S.
efforts to act as an even-handed broker in the peace process.
He recalled that he had visited previously with Israeli and
Palestinian leaders at President Bush,s request, only to
find a &poisonous atmosphere8 that was not conducive to
progress.


4. (C) Ahern and Secretary Snow concurred that Arafat,s
passing presented an opportunity for a new, more moderate
Palestinian leadership to emerge. Secretary Snow observed
that the first Bush Administration had been unable to work
with Arafat, who had denied other Palestinian interlocutors,
such as Mahmoud Abbas, the authority to move the peace
process forward. Ahern replied that President Bush made the
same points to him and Prime Minister Tony Blair in
discussions earlier this year. Ahern expected that a group
of leaders, whom he described as highly intelligent and
business-savvy, would take up Arafat,s mantle collectively.
The test of the new Palestinian leadership would be its
approach to Hamas, which had planted strong roots in the
Palestinian community while continuing to use violence.
Ahern noted that the Middle East could find lessons in
Northern Ireland, where inclusive dialogue over time had led
paramilitary groups to see the value of political engagement
over violence.

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Iraq
--------------


5. (C) &Iraq is Iraq, and Ireland has moved on,8 Ahern
told Secretary Snow. Ahern said that he and most European
leaders recognized the necessity of U.S. actions in Falluja,
and he expressed regret for U.S. military deaths and
casualties in that offensive. He observed that the majority
of EU Member States were pro-American, as demonstrated by
accession states, contributions of personnel and assets to
the Coalition. He also noted that Iraqi interim Prime
Minister Allawi had been impressive during his November 5
discussions with EU Member State leaders in Brussels. Ahern
believed that the media had made too much of President
Chirac,s absence from the gathering, and he noted that
Foreign Minister Barnier had been very positive about
prospects for EU-Iraq cooperation in his contribution to the
discussions.

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Tax Reform
--------------

6. (C) President Bush intended to pursue broad-based tax
reform and the reduction of the fiscal deficit in his second
term, working closely with the Treasury Department, said
Secretary Snow. The Secretary noted that President Bush,s

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strong electoral mandate gave him political capital to reach
across party lines to achieve these goals. Halving the
fiscal deficit would depend on a strong U.S. economy that
could generate growth in government receipts, and, in fact,
receipts were now growing at 7-8 percent per year. Secretary
Snow noted that the 1990s, government surplus derived from a
jump in receipts from 18 percent to 21 percent of GDP, while
a drop in receipts to 15 percent of GDP following the 2000-1
recession largely accounted for the current deficit. To
shrink the deficit, he added, it would also be necessary to
control government spending, though not at the expense of
outlays for defense and homeland security. The Secretary
said that the Bush Administration would have to demonstrate
its seriousness on spending controls to bond traders, who
were jittery about the deficit with Republican control of the
White House and Congress.


7. (C) Ahern acknowledged the challenges with tax reform in
the United States, saying that tax cuts in a small country
like Ireland had been difficult enough. He commented that
reductions in Ireland,s corporate tax rates from 40 percent
to roughly 10 percent in the late 1980s generated so much
economic activity and employment that government receipts
increased. When economic growth and receipts faltered in
2001-2 with the global economic slowdown, Ireland was forced
to ratchet back sharply on government expenditures. Ahern
said that the fiscal situation had recently returned to
normal, with a year-on-year 9 percent rise in government
spending in 2004. He noted that Ireland,s uniform,
transparent tax system created confidence among foreign
multinationals, as opposed to systems in some countries that
allowed for separate tax deals with individual foreign firms.
Financial regulation that was independent of government
influence was another confidence-building measure, Ahern
added.

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The Dollar
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8. (C) The U.S. trade deficit and accompanying pressure on
the dollar had linkages to the yuan-dollar peg and to the
sluggishness of euro-zone economic growth, said Secretary
Snow. He cited continued dissatisfaction with the
yuan-dollar peg among U.S. manufacturers, and he recounted
Chinese commitments to pursue more exchange rate flexibility,
though with no clear timetable. A more flexible rate for the
yuan, he observed, would help to reduce pressure on the
dollar and euro and also ease inflationary stresses in China.
A pick-up in the German and French economies, said Secretary
Snow, would spur growth and buying power within the EU, which
would also benefit U.S. exporters and help to reduce the U.S.
trade deficit. Ahern remarked that Chancellor Schroeder had
pursued reforms to Germany,s pension and welfare systems,
although the results of these initiatives remained unclear
for an economy still burdened by the costs of the One-for-One
reunification policy. He added that France was also trying
to address its economic problems, which were proving more
intractable than expected.


9. (C) Ahern asked about the dollar,s prospects, and
Secretary Snow replied that the USG believed in a strong

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dollar and that the dollar,s value would continue to be set
in open, competitive currency markets. Ahern noted that
Ireland was sensitive to developments with the dollar and the
U.S. economy generally, given the importance that investment
and exports by U.S.-owned firms held for the local economy.
He remarked that 14 major U.S. pharmaceutical firms and 18
top U.S. ICT firms had subsidiaries in Ireland; most major
U.S. financial companies had also established offices in
Dublin,s International Financial Services Center. The
employment opportunities that U.S.-owned firms had created
were part of the reason that Ireland had reversed decades of
net emigration from the country. Secretary Snow responded
that members of the American Chamber of Commerce whom he had
met earlier on November 15 were bullish on Ireland because of
the country,s openness, legal framework, common-sense
approach to business, and strong educational system.


10. (U) This cable has been cleared by Treasury DAS Nancy
Lee.
KENNY