OECD SURVEY OF EURO AREA ECONOMY: FOCUS ON

UNCLAS SECTION 01 OF 02 PARIS 003553

SIPDIS

SENSITIVE

FROM USOECD PARIS

BRUSSELS FOR USEU

FRANKFURT FOR TREASURY ATTACHE

TREASURY FOR IA -- LESLIE HULL

E.O. 12958: N/A
TAGS: ECON XG XT ZM EFIN
SUBJECT: OECD SURVEY OF EURO AREA ECONOMY: FOCUS ON
FISCAL OVERRUNS

CONTAINS REPORT OF OECD MEETING -- NOT FOR INTERNET
DISTRIBUTION

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SUMMARY AND INTRODUCTION
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1. (U) The Economic and Development Review Committee of
the OECD conducted an economic review of the euro area on
May 17, 2005. The last such review was held in June 2004.
Mr. Jean Guill, Director of Treasury in the Luxemburg
Ministry of Finance (Luxemburg currently holds the EU
presidency); Mr. Klaus Regling, Director General for
Economic and Financial Affairs at the European Commission
and Mr. Phillippe Moutot, Deputy Director General for
Economics at the European Central Bank led the euro area
team of 13. Japan and Switzerland were the lead examining
countries. The focus of the review was the Stability and
Growth Program and ECB monetary policy. The United States
raised again the APEC/EU level playing field problem. End
summary and introduction.

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FISCAL POLICY
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2. (U) The euro area delegation objected to the draft
survey's characterization that the rules under the stability
and growth pact (SGP) had been loosened in a March 2005
decision, stressing to the contrary that the rules have been
strengthened. Australia said there appeared to be very
little broad-based commitment to fiscal consolidation in
Europe, a remark which prompted the EC's Regling to call
"outrageous". Regling also objected to the survey's
observation that the EU Council of Ministers were "party and
judge" in deciding what action to recommend in correcting
excessive deficits. He could not imagine it being any other
way.

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MONETARY POLICY
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3. (U) On monetary policy, the ECB's Moutot criticized the
survey's recommendation that the ECB hold its interest rate
stable as long as indicators stay mixed, but act as soon as
it tilts the assessment in one or the other direction. OECD
chief economist Jean Phillipe Cotis interjected that,
because of recent bad first quarter growth figures from
Italy and Portugal as well as continued weakness in consumer
and business confidence, the OECD is scaling back its
outlook for the euro area and will assume that the ECB will
cut its interest rate by 50 basis points. "This is a very
disturbing time for the monetary union", he said.


4. (U) The euro area delegation, supported by Switzerland,
argued that risks were greater on the inflation side, while
the Secretariat supported the view that a significant output
gap had emerged and that core inflation was under control.
The discussion was frustrating and inconclusive, as the
Secretariat was weakened by not having its new outlook

SIPDIS
numbers available (they were announced at a press conference
on May 24) and that individual EU member nations did not
speak.

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APEC/EU ISSUE, AGAIN
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5. (U) On structural policy, the euro area delegation
appeared much more inclined to accept the Secretariat's
recommendations that the Commission resist a watering down
of the services directive, wrap up unfinished business in
financial and transport sectors and work towards supra-
national innovation policies. Reacting to Regling's
frequent comparisons of the EU with the United States, the
U.S. delegate noted that the USG found such exercises useful
and instructive. The EDRC examines all aspects of U.S.
economic policy, as well as that of other non-EU countries.
In this regard, it would be useful for all countries if the
European Union allowed all of its policies to be examined,
in a similar manner. Regling said he understood the problem
had been raised again at the Ministerial meeting and that
the EU was working on a response.

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COMMENT
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6. (SBU) Comment: The body language of the Europeans
around the table displayed alternating anxiety and
disgruntlement, but according to one EU member country with
whom we spoke on the following day, they had agreed to let
the euro area delegation speak for the group. This led
inevitably to a rather impoverished discussion. Other EU
delegates with whom we spoke after the meeting indicated a
strong preference for an ECB rate cut, even though they were
not sure it would do much good. While impressed with
Regling's defense of the SGP, they left little doubt that
they, too, looked at the revised version as a weakening.
They also signaled that this was a political reality, and
not necessarily a bad thing. End comment.

MORELLA