European Commission Blinks on French and German

UNCLAS SECTION 01 OF 02 FRANKFURT 008336

SIPDIS

SENSATIVE

STATE FOR EUR PDAS RIES, EB, EUR/AGS, AND EUR/ERA
STATE PASS FEDERAL RESERVE BOARD
STATE PASS NSC
TREASURY FOR DAS LEE
TREASURY ALSO FOR ICN COX, HALL
PARIS ALSO FOR OECD
TREASURY FOR OCC RUTLEDGE, MCMAHON

E.O. 12958: N/A
TAGS: ECON EFIN EUN
SUBJECT: European Commission Blinks on French and German
Stability and Growth Pact Cases: A Question of Power

T-IA-F-04-009

This cable is sensitive but unclassified. Not/not for
Internet distribution.


1. (SBU) Summary: According to European Commission,
French and German Finance Ministry officials, the Commission
is likely to await the 2005 national budgets for France and
Germany at year's end before deciding its next step against
the two under the Stability and Growth Pact (SGP). If true,
this would suggest that the Commission would not press its
recommendation of last November to take a step toward
sanctions, but rather de facto adopt the Council's position
of giving both countries an extra year until 2005 to reduce
their deficits below the 3% of GDP reference value.


2. (SBU) French and Commission officials are confident
that France's government deficit will fall below 3% next
year (the announced budget has the deficit at 2.9%). The
absence of any recovery in domestic demand, depressing tax
revenues, makes this a tougher call for Germany, but the
Finance Ministry has undertaken "Project 3%" to do the
necessary.
Why didn't the Commission go along with the Council's
position last November? "It was a question of power,"
observes one German official. In this episode, the
Commission has slipped a notch. End Summary.

Waiting Until 2005 Data
--------------


3. (SBU) According to a top European Commission official
as well as French and German Finance Ministry officials, the
Commission will not issue immediately a new recommendation
on France and Germany under the Excessive Deficit Procedures
(EDP) of the SGP. Both cases had been in abeyance, in part,
due to a case the Commission brought against the Council in
the European Court of Justice. The Commission had
challenged the Council's right not to accept the
Commission's recommendation to proceed under Treaty
paragraph 104(9),the last step before considering
sanctions. Instead, the Council wrote its own conclusions
under 104(7) arguing that the previous conclusions under
this same paragraph had become partially obsolete.


4. (SBU) In July the Court issued a decision stating that
the Council could not issue its own conclusions but must
accept or reject recommendations put forward by the
Commission. The Commission claimed this as a victory since
it annulled the Council's conclusions. German members of
the Council regarded the outcome as, at best, a split
decision. The Court declared the Commission's argument that
the Council had to accept its recommendation as
"inadmissible."


5. (SBU) Now, according to a top European Commission
official, the Commission will await the proposed national
budgets for 2005 for both France and Germany. These are
scheduled to be submitted to the Commission in early
December. Should either country not have a credible budget
that reduces their deficit below the 3% GDP reference value,
the Commission would issue a recommendation under paragraph
104(9) of the Treaty. If the Council were to adopt such a
recommendation, failure to comply would lead to the next
step in the EDP, i.e. a Commission recommendation for, and
Council consideration of, sanctions.

Council Conclusion of November - De Facto Acceptance
-------------- --------------


6. (SBU) If the above scenario plays out, we will find
ourselves essentially where we would have been had the
Commission accepted the Council's conclusions of November
25, 2003. The key points in the Council's conclusions of
November 25, 2003, were: (1) acceptance of the French and
German public commitments to reduce their deficits to below
3% in 2005 (an extra year from the Council's earlier
conclusions); and (2) willingness to escalate the case under
104(9) should either country "fail to act in accordance with
its commitments."

7. (SBU) Tactically, accepting this position would put the
Commission in the strong position of holding both countries
to their own commitments. Such a course of action suggests
the Commission is, for the moment, allowing the EDP for both
countries hang in limbo. According to the operative
outstanding Council conclusions both countries are required
to reduce their deficits by 2004. Clearly this is not going
to happen. Technically the appropriate action would be for
the Commission to issue a new recommendation under 104(7)
for the Council's consideration, according to French and
Luxembourg Finance Ministry officials. This recommendation
should reflect the new situation and, in the view of the
Luxembourg official, be accepted by all Council members.
This course of action was suggested by the Court.
Commission staff, however, relay that their lawyers still
believe the only appropriate course would be a
recommendation under 104(9),the approach that failed last
November.

More Comments
--------------


8. (SBU) The Commission's apparent unwillingness to press
its cases against France and Germany is, upon reflection,
not surprising. The Commission staff believes it can only
proceed under 104(9) which is unacceptable to the Council
Revising rules for implementing the SGP, as the Commission
has suggested (septel) could provide a way out for the
Commission. The other way would be to use new data to
"refresh" the cases. Delays associated with either approach
reveal the Commission's relatively weak position.


9. (SBU) The Court case and Commission's delay have sown
acrimony over the SGP. A European Central Bank official
commented that the SGP has been useful but the controversy
surrounding it has not been. "The Commission acted
unwisely," in his assessment. Had the Commission gone along
with the majority in the Council last November, perhaps an
uproar would have ensued, but the long-running controversy
avoided. A German Finance Ministry official recalled that
the then Economics and Finance Commissioner Solbes was
willing to go along with the Council's position. "It was
Commission President Prodi" who would not give in, according
to this official. It was "a question of power" between the
Commission and Member States. The stuff of history books.


10. (U)This message coordinated with Embassies Paris,
Berlin, The Hague, Luxembourg and USEU Brussels


11. (U)POC: James Wallar, Treasury Representative, e-mail
wallarjg2@state.gov; tel. 49-(69)-7535-2431, fax 49-(69)-
7535-2238

Bodde