wikileaks ico  Home papers ico  Cables mirror and Afghan War Diary privacy policy  Privacy
IdentifierCreatedClassificationOrigin
07LISBON2438 2007-09-19 15:15:00 UNCLASSIFIED Embassy Lisbon
Cable title:  

INFORMAL ECOFIN/EUROMED: EU ECONOMY SOUND, FOCUS

Tags:   EFIN ECON EUN 
pdf how-to read a cable
VZCZCXYZ0002
RR RUEHWEB

DE RUEHLI #2438/01 2621515
ZNR UUUUU ZZH
R 191515Z SEP 07
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 6273
INFO RUCNMUC/EU CANDIDATE STATES COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHXK/ARAB ISRAELI COLLECTIVE
					  UNCLAS LISBON 002438 

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EUN
SUBJECT: INFORMAL ECOFIN/EUROMED: EU ECONOMY SOUND, FOCUS
ON FINANCIAL INNOVATION, STABILITY, AND PUBLIC
ADMINISTRATION


Summary
---------


1. On September 14-15, EU Finance Ministers, Central Bank
Governors and Commissioners joined together in an informal
ECOFIN gathering focused on state of the economy, fiscal
consolidation and structural reform. Eurozone peer pressure
would be necessary to keep France on track to reduce its
deficit. The EU announced its support for Strauss-Kahn as IMF
Managing Director and for Padoa-Schioppa as IFC Chairman and
indicated its willingness to discuss amending the IMF
selection process. There was universal praise for the
European Central Bank's response to recent market volatility.
Talks also focused on financial innovation, financial
stability and modernization of public finances. The informal
gathering concluded with EUROMED discussions with southern
Mediterranean officials on how best to create employment and
stimulate growth.

Eurozone Economy Healthy


--------------------------




2. Eurogroup discussions focused on the fundamental sound
health of the Eurozone economy, with Eurogroup President and
Luxemburg Finance Minister Juncker welcoming Cyprus and Malta
to the discussions. Juncker and Economy and Monetary Affairs
Commissioner Almunia acknowledged that increased risks
brought about by developments in the financial markets would
have a slight negative impact on 2007 growth but did not
foresee any dramatic revision of 2008 growth projections,
either to the Eurozone or to the EU at large. European
Central Bank (ECB) President Trichet concurred with this
assessment. Almunia was optimistic about the future and noted
it was essential to stick to the principles of structural
reform and fiscal consolidation ) a strategy which explained
the zone,s current good figures. In addition, strong
domestic demand, employment growth, strong EU companies'
balance sheets, and banking solidity helped Europe weather
the current financial market volatility. World growth
remained robust with the increase in developing countries'
GDP countering the slowdown in the U.S. economy. On
inflation, Trichet noted projections remained the same while
Almunia said tightening labor markets and increased food
prices could produce inflationary tensions.

France's Budget Proposal not as Ambitious as Structural Reform


--------------------------



--------------------------




3. French Finance Minister Lagarde provided a detailed
readout of France's proposed structural reforms which covered
an impressive range of sectors. Juncker noted that such
reforms were part and parcel of the Lisbon Agenda, and if
applied appropriately, would have a positive effect on the
country,s growth. However, France's minimal budget ambition
was another matter and not in line with the Eurogroup,s
expectations. The Eurogroup underscored to France that fiscal
consolidation and structural reform go hand in hand, and that
Growth and Stability Pact commitments made in Berlin still
applied. They expected France to cut back on public
expenditure, and if tax revenues were high enough, the
government would need to reduce debt accordingly. The group
made it clear that France was expected to lower its deficit
by 2010, not 2012 as France proposed. Discipline and
continued Eurogroup peer pressure were key, Almunia noted, He
had revised 2007 growth projections for France downward.
There would be a more complete review of France,s proposal
in October.

IMF ) Changes in Selection Process Possible


--------------------------




4. Portuguese Finance Minister Teixeira dos Santos, as EU
President Chair, announced the Union's support for Dominique
Strauss-Kahn as IMF Managing Director and for Italian Finance
Minister Tommaso Padoa-Schioppa as International Finance
Committee (IFC) Chairman. He confirmed that the informal
gathering discussed possible changes to the IMF senior
leadership selection process (post Strauss-Kahn) to enhance
the role of developing nations. Almunia underscored that such
changes would be not be done in isolation and that other
major international organization (i.e. World Bank) would have
to undertake similar commitments. Teixeira dos Santos also
noted the EU's proposal to establish a three-year term limit
for IFC chairmanship and to establish a rotating system.

ECB Praised for Handling of Sub-Prime Crisis


--------------------------




5. Internal Market and Services Commissioner McGreevy noted
that while poor quality sub-prime mortgage lending had
originated in the U.S., its effects were being felt
worldwide, testing the capacity of EU supervisory and
regulatory authorities. The informal gathering repeatedly


expressed satisfaction with the European Central Bank (ECB)'s
operations over the summer, with Juncker underscoring the
importance of a single, unified response rather than thirteen
disparate reactions. Trichet noted that while market
corrections were still ongoing, the ECB's actions had
permitted the money market, in particular the short-term
money market, to function as well as possible. McGreevy also
noted that there was sufficient core capital to cover the
current risk which still required close monitoring.

Financial Innovation a Constant Challenge


--------------------------




6. Financial innovation presented a constant challenge for
supervisory authorities, Teixeira dos Santos noted. In this
context, the gathering a communique calling for increased
transparency of financial instruments, institutions and
vehicles and improved valuation processes, risk management
and liquidity testing. McGreevy noted that while the Economic
and Financial Committee (EFC) was seeking to promote
cross-border harmonization, it was not seeking to promote a
single supervisory authority. He commented that the Solvency
II Directive could become a template for banking. The EFC
also planned to look into the role of rating companies and
their effect on the market.

Financial Stability Report Supported


--------------------------




7. The informal gathering agreed with the EFC's financial
stability report conclusions calling for broader risk
management resources and the elimination of legal and fiscal
barriers. The gathering also debated extending the 2005 MOU
on banking supervisory authority to include a common
analytical framework to evaluate crises and to develop
specific cross border cooperation mechanisms. Also under
discussion was the EU securities' clearance and settlement
system, with particular attention paid to enhancing post
settlement mechanisms and implementing the code of conduct.
(Note: The EFC is examining an ECB proposal to establish a
single settlement platform. End Note.) Burden sharing
concerns were also put on the table.

Public Finances Need to be Modernized


--------------------------




8. The informal gathering discussed the importance of
modernizing public finances, with a specific emphasis on
efficiency to increase competitiveness. Guest speaker World
Bank Vice President for Private Sector Development Michael
Klein illustrated how countries that had modernized public
finances had experienced real increases in growth and wealth.
The ministers exchanged best practices on modernizing
budgetary techniques, planning and performance measurement.
Almunia noted the discussion would continue well into the
Slovenian presidency.

EuroMed ) Working Together to improve Growth and Employment


--------------------------



--------------------------




9. The informal gathering also included a meeting of EuroMed
officials, with representatives from Egypt, Algeria, Morocco,
Israel, the Palestinian Authority, Tunisia, and Syria in
attendance. Discussions focused on improving the quality of
public finances, the development of financial markets, and
priorities for development as outlined in the 2005 Rabat
Conference. The group also discussed the creation of a
EuroMed network of financial experts to exchange best
practices. Almunia underscored the importance of working to
improve economic growth and employment in southern
Mediterranean countries, noting that two-thirds of EU
investment flows to the region, having doubled since 2004.


Comment


--------------------------




10. Camaraderie among ministers, bank governors and
commissioners was evident. There was clear praise for the
Portuguese Presidency and its handling of the meeting and
issues as well as for the European Central Bank and its
reaction to the recent market volatility. Teixeira dos
Santos, in particular, continues to enjoy a strong reputation
within the EU.
Hoffman