Identifier
Created
Classification
Origin
05PARIS771
2005-02-07 17:27:00
UNCLASSIFIED
Embassy Paris
Cable title:  

FRANCE AND GERMANY COORDINATE COMPLAINTS ABOUT THE

Tags:  EFIN ECON PGOV FR PBIO 
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UNCLAS SECTION 01 OF 03 PARIS 000771 

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR PBIO
SUBJECT: FRANCE AND GERMANY COORDINATE COMPLAINTS ABOUT THE
DOLLAR DECLINE


UNCLAS SECTION 01 OF 03 PARIS 000771

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR PBIO
SUBJECT: FRANCE AND GERMANY COORDINATE COMPLAINTS ABOUT THE
DOLLAR DECLINE



1. SUMMARY. Using the semiannual Franco-German Economic and
Finance Committee meeting as a springboard, French and
German Finance Ministers jointly called for coordinated G7
action on the declining U.S. Dollar; reiterated their desire
for reform of the European Stability and Growth Pact; and
discussed tax harmonization, international development aid,
and European industrial strategy. END SUMMARY.

-------------- --------------
New French Finance Minister Conveys Message that Franco-
German Relations are Close
-------------- --------------


2. In another show of Franco-Germanic agreement on economic
policy, French and German Finance Ministers Herve Gaymard
and Hans Eichel convened an Economic and Finance Committee
meeting in Paris on January 24, along with Bank of France
and Bundesbank Governors Christian Noyer and Axel Weber. At
his press conference after the meeting, Gaymard emphasized
his close working ties with his German counterpart.
Regarding the substance, Gaymard said the parties had
engaged in a very broad survey of economic, financial and
budget issues. The discussions will continue when President
Jacques Chirac meets German Chancellor Gerhard Schroeder on
March 7. Gaymard and Eichel will meet again on March 26 in
the fifth Franco-German Ministers' Council in Paris.

-------------- --------------
Call for coordinated G7 action on the Dollar Decline
-------------- --------------


3. France and Germany agreed on the need for coordinated
action by the U.S., Asia and Europe to stem the decline of
the U.S. Dollar. France and Germany called on the U.S. to
have "precise commitments" by reining in its persistent
budget and current account deficits, agreeing with the IMF
that "adjustment for U.S. deficits should not be made
through foreign exchange rates." Gaymard argued that
"Europe has shouldered too big a portion of the burden of
dealing with global economic imbalances." The criticism
reflects European policy makers' concern that the strength
of the euro (a 34% rise against the U.S. Dollar in the past
three years) has restricted economic growth in Europe by

driving up European export prices. Noyer reinforced the
calls for the U.S. to address its deficits, saying "the U.S.
must work towards a rebalancing between savings and the need
for private investment." Nonetheless, he made clear that
each country in the world has to make reforms in its own
economy, stressing that Europe and Japan could do more for
their growth by pursuing structural reforms, while Asia's
emerging economies had to do more for the flexibility of
their currencies, and also for opening their economies.


4. Journalists asked how France and Germany intended to
pressure the U.S. government in the context of the upcoming
G7 meeting. Noyer stated that the intention was "to get a
global and consensual vision. The difficulty is to
implement all this, which is always complicated and takes
time." Eichel shared that view, but added that he did not
expect "any spectacular decision to be made at the G7." "It
is preferable not to cause a sudden change in structures
that will be harmful to all in the current international
context."

-------------- --------------
France and Germany Support Revision of the European
Stability and Growth Pact based on Economic Analysis
-------------- --------------


5. Addressing the budget deficits of some countries in
Europe, Gaymard stressed that "the deterioration in the
eurozone's budget deficits did not reflect anything other
than the impact of economic slowdown. This is a big change
compared to the past, thanks to the European Stability and
Growth Pact." He highlighted that "revising the pact is not
an acknowledgment of failure, but the common desire to
improve it." Both France and Germany agreed it would be
desirable to introduce more economic analysis into the Pact,
including a more qualitative approach to budget spending.
Eichel added that "the point is not to get more flexibility
in the pact, it's to get a reasonable economic approach,"
saying that "interaction between the European Commission and
the Council was necessary, with all this to be coordinated
with the European Central Bank." That said, France and
Germany have not put into question thresholds enshrined in
the pact (budget deficits limited to 3% of GDP and debts to
60% of GDP). The GOF pledges to meet the 3% EU limit in

2005.


6. Quizzed whether there was convergence between the
governments of France, Germany and Italy, Gaymard answered
that French officials were to discuss French-German
proposals to reform the European Stability and Growth Pact
with their Italian counterparts in Rome on January 25.
"Europe is rich with very tight bilateral contacts that
transform later into common action at the European level.
We rely on Jean-Claude Juncker's huge talent to get a text
acceptable to all."

-------------- --------------
Controlling Budget Deficit will Help France to Reduce
Unemployment
-------------- --------------


7. Asked about rising unemployment in France, even though
economic growth is higher than in Germany, Gaymard explained
that the GOF policy is targeted at restoring business and
consumer confidence by mastering budget deficits through
reducing both budget spending, and taxes and contributions.
The second axis of the GOF policy is to take specific
structural measures in favor of employment. Gaymard said
that, in addition to measures taken since 2002, a Council
for Jobs Orientation composed of union representatives and
labor specialists will help to make progress on labor
issues.

-------------- --------------
Petroleum Tax Issue: Germany Approves French Decision
-------------- --------------


8. Eichel agreed that the French decision to transfer a
portion of tax on petroleum products (Taxe Interieure sur
les Produits Petroliers - TIPP) receipts to French local
authorities was not obliged to be strictly in line with
European mechanisms discussed by the 25 European Union
countries members on September 17. Nonetheless, Eichel
reiterated that tax issues required some coordination, and
that "Europeans' interest was to move towards more tax
harmonization of direct and indirect taxes." On the income
tax issue, France and Germany have an initiative to define a
common basis for corporate income taxes in Europe. Hungary
is willing to join the initiative.

-------------- --------------
France and Germany Agree on International Development Aid
-------------- --------------


9. Gaymard said that French and German countries shared the
same philosophy on international development aid including
international financial facility, debt-related issues, and
President Jacques Chirac's proposals to create a new
international contribution to finance development: "Europe
must continue to be a force to help developing countries.
For sure, this policy has to be implemented by various
budget and financial instruments, and must be adapted to the
needs of each developing country." Eichel concurred,
recommending that debt relief be subject to measurable
conditions (effectively reducing poverty, improving sanitary
conditions, providing drinking water, and schooling).
France and Germany agreed to continue to exchange views on
international development aid and to consult with other
European partners throughout 2005.

--------------
GOF for a European Industrial Strategy
--------------


10. Journalists raised questions about the GOF's
intervention in the industrial sector (referring to
injection of capital into Alstom-Sanofi),and about France
and Germany's willingness to have European industrial
champions. On the first issue, Gaymard answered "it is
legitimate that a finance minister has concerns about his
country's industrial sector in an open and global economy -
this is not limited to France, but to all of the EU economic
space." "The GOF," he continued, "is not returning
companies to the public sector; in fact, French finance
ministers have continued privatizing companies or opening
capital of state-owned companies." On the second issue,
Gaymard reminded the audience about Jean-Louis Beffa's
report for a new industrial policy that proposed the
creation of an agency for new industrial strategies. (The
Agency for Industrial Innovation with Beffa as a head should
be created in June 2005). Beffa, who is Chairman of Saint-
Gobain, is also co-chairing a Franco-German group of
industrialists that defines concrete projects. Gaymard did
not get into details, but stated that "Europe must remain a
big agricultural and industrial force; it has no vocation to
be only a museum with services jobs, as respectable and
great as they may be."

--------------
Comment
--------------


11. The event helped to fortify the political message that
France and Germany still are closely allied on economic
policy, a significant achievement in and of itself.
However, the Finance Ministers' concerns about the US
deficits (and its arguable contribution to the appreciation
of the euro) do not translate into any concrete new
proposals about how to address either country's own economic
problems. Higher economic growth may help France to reduce
unemployment (still at 9.9%) and its budget deficit, but the
GOF still needs to lower the tax burden, eliminate labor
market rigidities, and scale back the role of the state in
the economy.
LEACH