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