SCENESETTER FOR U/S ADAMS' VISIT TO ROME, JULY

UNCLAS ROME 001900

SIPDIS

SIPDIS

TREASURY FOR U/S TIMOTHY ADAMS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN OVIP IT
SUBJECT: SCENESETTER FOR U/S ADAMS' VISIT TO ROME, JULY
5-6, 2006



1. (U) Summary. Embassy Rome warmly welcomes the visit of
Treasury Under Secretary for International Affairs Timothy
Adams at this important juncture in U.S. - Italy relations as
the new center-left government takes hold. Your meetings at
the Ministry of Finance and Bank of Italy will provide us the
opportunity to engage the GOI on issues of mutual concern,
such as revitalizing Italy's stagnant economy, and will
enable us to get a better sense of the center-left
government's economic priorities. End summary.

The Italian Economy: A Tough Road Ahead
--------------


2. (U) Italy's economy is not growing, but its deficit and
public debt are. Modest first quarter 2006 growth of 1.6
percent is cause for joy only when compared with average
annual GDP growth over the last five years of 0.66 percent.
As a Eurozone member, Italy is obliged by the Stability and
Growth Pact to keep its deficit below 3.8 percent of GDP and
debt below 60 percent of GDP. An independent panel of
Italian economists said June 5 that Italy's deficit in 2006
is on trend to end the year between 4.1 - 4.6 percent of GDP.
The Berlusconi government had reached an agreement with
Eurozone members to bring the deficit down to 3.8 percent of
GDP in 2006 and then to 3.0 percent by 2007. Italy's public
debt rose last year for the first time since 1994 and hit
106.4 per cent of GDP. Public debt is on track this year to
rise to 108 percent. Standard & Poor's and Fitch have both
threatened to lower Italy's sovereign debt rating from its
current AA rating. The spread between Italian and German
10-year bonds is up from 0.19 percent to 0.32 percent since
March 2006.


3. (U) The center-left government faces the daunting
challenge of bridging the gap between limited budget
resources and growing social, welfare, and health care costs.
Complicating this task is the governing coalition's
razor-thin majority in both houses of Parliament, a situation
that gives parties on the far left a disproportionate amount
of political clout. The GOI's challenge is to show it is
serious about reducing the deficit and debt, at the same time
finding the money necessary to meet its spending priorities.
During a pull-aside with Secretary Snow at the June 10 G-8
Finance Ministerial in St. Petersburg, Finance Minister
Padoa-Schioppa said he planned to tighten Italy's budget in
2006, but admitted he would not be able to stop the growth of
the debt/GDP ratio.

The Partnership For Growth
--------------


4. (U) The stagnant economy is at the heart of Italy's
economic and budgetary woes. Economic growth would simplify
the job of reducing the deficit and debt, at the same time
enabling Italy to continue to play a leading role on the
world stage. To this end, Ambassador Spogli introduced "the
Partnership for Growth" during a late April speech to Italy's
leading industrialists. The goal of the Partnership for
Growth is to promote economic dynamism in the Italian
economy. The program seeks first to encourage increased
university-private sector collaboration to strengthen
technology transfer and the creation of new companies.
Second, the Partnership seeks to broaden and deepen capital
markets, especially access to risk capital. The third
objective of the initiative is to promote stronger
intellectual property rights protection to encourage
innovation. Finally, we are in the early stages of exploring
ways to create a mechanism to send more Italian science,
engineering, and business/economic graduates to the United
States to study entrepreneurship and gain a first-hand
appreciation for the business culture and practices of
high-growth U.S. enterprises. We hope our activities in
these areas will form a virtuous cycle, such as the one
created between Stanford University, Berkeley, and the
start-ups of Silicon Valley, which has driven tremendous
growth in the American economy in recent decades and which
has been repeated many times in universities around the
United States.


5. (U) The Embassy has been aggressive in reaching out to
GOI officials to engage them on the goals of the Partnership
for Economic Growth. GOI officials have responded positively
to our efforts. Your visit is an opportunity to remain
engaged with the highest levels of the GOI concerning this
important initiative.
SPOGLI