AUSTRIAN VIEWS ON THE STABILITY PACT, LISBON

C O N F I D E N T I A L SECTION 01 OF 02 VIENNA 001073

SIPDIS

DEPT FOR EUR/AGS, EUR/ERA AND EB/IFD/OMA
FRANKFURT FOR TREASURY ADVISOR

E.O. 12958: DECL: 04/04/2015
TAGS: ECON EFIN PREL AU EUN
SUBJECT: AUSTRIAN VIEWS ON THE STABILITY PACT, LISBON
AGENDA AND SERVICES DIRECTIVE


Classified By: Economic-Political Counselor Gregory E. Phillips for
reasons 1.5 (b) and (d).

Summary
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1. (C) The GoA understands the political necessity behind
the recent Stability and Growth Pact (SGP) reform and
believes the SGP can still be an effective mechanism to
ensure sound fiscal policies. Nevertheless, the GoA fears
the recent reforms will lead to more "exceptional" spending
by Member States. The GoA believes Member States should take
greater ownership of the Lisbon Agenda, because the success
or failure of the agenda depends on Member States' policies.
A senior MoF official, Thomas Wieser, predicted the SGP
reform would not lead to higher interest rates. He opined
that the ECB is pursuing a relatively loose monetary policy,
despite its rhetoric. Wieser added that low capacity
utilization signified little risk of demand-pull inflation,
and thus no reason for the ECB to raise rates. Wieser
claimed the Council voted down the Services Directive "after
5 minutes of hell from Chirac." End Summary.


Stability Pact: "Still an Effective Tool, But..."
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2. (C) During a recent meeting with Econ Unit Chief, Thomas
Wieser, Director General of the MoF's Economic Policy and
Financial Markets Division, insisted the Stability and Growth
Pact (SGP) remained an effective mechanism to ensure sound
fiscal policies. Wieser noted that there was an implicit,
yet clear, understanding that 3.5% of GDP was now the
reference point. Nevertheless, Wieser lamented that
short-term political considerations -- primarily German --
had been the driving force behind the SGP reform. Wieser
said that Germany could have and should have done more,
especially in 1997-2001, to address economic problems
stemming from German reunification. According to Wieser, the
French and Italians were "all too happy to jump on board" and
support revisions to the SGP.


3. (C) The GoA, in Wieser's opinion, viewed the SGP as a
political commitment to "get your house in order in good
times to weather cyclical downturns." Wieser pointed to the
positive economic benefits the SGP had brought to individual
countries, such as significantly lower debt burdens in
Ireland and Belgium. With the new SGP, Wieser feared many
member states would claim exceptions to allow for looser
fiscal policies. Wieser said Poland may now "write off" the
cost of its pension reform, approximately 1-2% of GDP.
Wieser claimed the Austrian Ministry of Transportation had
already contacted him to ask if the Euro 5-16 billion cost to
complete the controversial Brenner Tunnel could now be "off
the books."


4. (C) Wieser claimed he had expected the ECB and Member
State national banks to criticize the SGP reform publicly.
However, Wieser predicted the SGP reform would not lead to
increased interest rates. Wieser characterized the ECB's
monetary policy as relatively loose, despite its rhetoric.
In Wieser's analysis, capacity utilization is low, so there
is no rsik of demand-pull inflation. Wieser maintained there
is thus no reason for the ECB to raise interest rates at the
moment.


Lisbon Agenda: "Member States Must Take Ownership"
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5. (C) Wieser said there was a clear linkage between the
aims of the SGP -- sound fiscal policies -- and the
consequent achievement of many of the Lisbon Agenda goals,
such as increased investment in R&D and infrastructure.
Wieser noted that "if the Lisbon Agenda fails, the Member
States fail." It is the Member States, not the Commission,
that must take the tough policy decisions to foster increased
growth and competitiveness. The Lisbon Agenda provides the
umbrella under which the member states can initiate reforms
in an atmosphere of positive peer pressure and mutual support.


Services Directive: "French Unyielding"
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6. (C) Wieser admitted that the Services Directive was a
peripheral issue for Austria, although Chancellor Schuessel
publicly voiced his support for the Services Directive on
March 4 and March 22. Wieser opined that the original draft
already contained enough loopholes to prevent "social
dumping." Wieser claimed the vehement opposition to the
Services Directive had surprised the Commission, as
initially, it had elicited scant comment. In contrast,
Wieser claimed French President Chirac had given the other
leaders "5 minutes of hell" during the Council meeting,
lambasting the neo-liberal character of the Directive.
Brown