FINANCE MINISTER DOWN ON DOHA, IRAN; BULLISH ON

S E C R E T SECTION 01 OF 03 PARIS 005053

SIPDIS

SIPDIS

DEPARTMENT PLEASE PASS TO DEPARTMENT OF AGRICULTURE

STATE FOR E, EB, NEA AND EUR/WE
STATE PASS USTR

E.O. 12958: DECL: 07/25/2016
TAGS: ECON ETRD EFIN PREL FR
SUBJECT: FINANCE MINISTER DOWN ON DOHA, IRAN; BULLISH ON
ECONOMY

REF: A. PARIS 4979

B. PARIS 4980

Classified By: Ambassador Stapleton for reasons 1.4 (b) and (d)

SUMMARY
--------------

1. (C) French Finance Minister Breton told the Ambassador
on July 24 that turmoil in the Mideast resulting from Iran,s
nuclear program and the war in Lebanon are of great concern
to the world economy. Breton said negotiations in the Doha
trade round are not working because the EU can go no farther
on agriculture, citing food security needs in particular. He
urged a greater focus on agreement in areas such as market
access for manufactured goods, services and intellectual
property. Breton thinks the French economy could double its
growth rate in two to three years, but argues this will not
happen if France elects Socialist candidate Segolene Royal in
the 2007 Presidential election. END SUMMARY.

Mideast Turmoil
--------------

2. (U) On 24 July, the Ambassador met with Finance Minister
Thierry Breton. Breton was joined by Gilles Mentre, the new
diplomatic counselor in his cabinet, and by Phillipe Baudry,
Deputy Assistant Secretary for Asia and the Americas in the
Ministry,s Directorate of Treasury and Economic Policy.
Econ M/C and Econoff also attended.


3. (C) Breton highlighted his concern about the turmoil in
the Mideast, which he thinks will strengthen the dollar in
the near term. Longer term, he expressed concerns about
exchange rates -- a weak dollar, an undervalued yuan, and an
undervalued yen. He implied that these would have
long-lasting distortive effects. He asserted that G7 Finance
Ministers are trying to avoid saying anything about the yen
so as not to jeopardize Japan,s recovery.


4. (S) France is very concerned about Iran,s nuclear
program, according to Breton. He welcomed France,s
cooperation with the U.S., but fears that Iran is only one
year to 18 months away from developing nuclear weapon
capability.


5. (SBU) The short term consequence of Mideast turmoil is
the volatility of the price of oil. Breton said he has been
talking about this with the UK Finance Minister, Gordon
Brown, and would like to draw into these discussions the new
US Treasury Secretary, Hank Paulson, whom he says he knows
well. The energy sector needs more investment, greater
transparency in supply and demand, and an increased margin
between production capacity and demand to dampen the impact
of temporary external shocks (namely, armed conflicts,
natural disasters and terror threats).


6. (C) The Ambassador thanked Breton for French willingness
to participate in the Iraq Compact launch. (Deputy Treasury
Secretary Kimmitt met with Finance and Foreign Ministry

SIPDIS
officials last week -- see reftels.) The Ambassador
suggested that if his schedule permits next time, Breton
should meet with Deputy Secretary Kimmitt. Breton stated
that the most important objective now in Iraq is to achieve
political stability. He agreed with the Ambassador that on
issues like Lebanon and Syria, the U.S. and France have
achieved very good working relations, and that we need to
look ahead rather than worry about past differences. He
mentioned his efforts to promote greater American
understanding of France, by his visits to the U.S. and public
appearances there. He plans to continue those efforts.

Doha Doomed
--------------

7. (C) Breton expressed no ambition on the Doha trade
negotiations. He readily agreed with the Ambassador that
negotiations are not moving. Breton argued that WTO DG
Pascal Lamy,s strategy on the multilateral talks is not
working. There is excessive focus on agriculture. Breton
mentioned that his background is in the high-tech sector, and
that is where he sees that progress can be made, especially

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on intellectual property, as well as in trade in services and
manufactured goods. While everyone needs to make an effort,
the EU has gone as far as it can on agriculture. The world
has two very large abnormal agricultural markets: the U.S.
and the EU, both subsidized. For the EU, the question is not
so much one of trade, but of security in the food supply.
Breton said he would never support more cuts in subsidies
because it is a matter of European security, and anyone who
thinks otherwise does not understand the real world.
Subsidies are modern phenomena, in a world that faces
pandemics and other food security threats every month.
Two-thirds of the European countries understand agriculture
that way, in addition to its importance for social stability.
Subsidies are the cost of being able to eat. Therefore, we
need to stop discussing agriculture, and look at other areas
where we can agree.


8. (C) Econ M/C took issue with Breton,s assertions,
pointing out that for development purposes the world needs an
ambitious agreement. Breton wryly noted that he knows why
farmers are subsidized. People are too emotional now. He
argued that we need to cool down a bit, and then start
looking for agreement elsewhere.

Boeing/Airbus Trade Dispute
--------------

9. (SBU) The Ambassador warned about the negative
consequences of European launch aid for the Airbus A350.
Breton was noncommittal, noting simply that he recently had
met with the Boeing CEO, had a good discussion, but it is a
difficult industry.

French Politics Intrude on Economic Plan
--------------

10. (SBU) Breton and the Ambassador traded views on the U.S.
and French economies. Breton expressed satisfaction that
France would achieve its macroeconomic objectives this year.
Domestic consumption and export growth have been good.
Economic growth should be within his predicted range of 2.0
to 2.5 percent for 2006. He thinks that is satisfactory, but
French growth could be much higher.


11. (C) Responding to the Ambassador,s questioning, Breton
said he could get the French economy to GDP growth rates of 3
to 4 percent in two to three years. However, he noted this
will be impossible if Socialist candidate Segolene Royale is
elected President in the 2007 election. Breton said she has
a scary program and no understanding of economics.


12. (SBU) Breton explained the changes (highlighted in the
recent IMF Article 4 annual report on France) that he already
has instituted, such as limiting the wealth tax and the
estate tax, to stimulate investment and promote consumption.
He added that his efforts to improve the French economy were
possible only by making regulatory changes with as little
publicity as possible. This led to a discussion about French
tax levels in general, with Breton claiming that overall
taxes are lower in France than in New York City, if one
factors in all the state and local taxes imposed on residents
of the Big Apple. He promised to provide additional details
to the Ambassador

COMMENT
--------------

13. (C) Breton was at his most &political8 in this
discussion, demonstrating an appetite to think strategically
about regional conflicts and global issues, especially in
terms of the probable economic consequences of undesirable
political developments. His unyielding line on the Doha
trade round comes as no surprise, given the tough line laid
down on agriculture by French President Chirac, as well as
the fact that discussions were breaking down in Geneva as
Breton spoke. As for his economic outlook, Breton,s
extended timeline on doubling French GDP growth suggests that
Breton believes he could continue as Finance Minister in a
French government headed by Nicolas Sarkozy following the
2007 presidential election.

Please visit Paris' Classified Website at:

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http://www.state.sgov.gov/p/eur/paris/index.c fm

STAPLETON