U.S.- ITALY DEFENSE TRADE

UNCLAS SECTION 01 OF 02 ROME 000688 SIPDIS SIPDIS E.O. 12958: N/A TAGS: MARR MASS PGOV EFIN ETRD IT SUBJECT: U.S.- ITALY DEFENSE TRADE REF: 2006 ROME 343 Sensitive But Unclassified. Not for Internet distribution. ¶1. (SBU) Summary. Defense trade is a crucial and mutually beneficial component of the U.S.-Italy bilateral relationship, in which both U.S. and Italian firms benefit through collaboration on defense projects and technology transfer. The Italian military is involved in seventeen major weapon system programs and purchases approximately 380 million dollars annually from U.S. defense firms. The Italian military prefers U.S.-made equipment because of its quality, reliability, supportability, and because it ensures Italian interoperability with other NATO forces. Budgetary pressure on the Italian military has resulted in an increased focus by the GOI on industrial participation and a reduction in funds for military investment, procurement, and research and development. End summary. ¶2. (SBU) Italian military spending is hampered by an anemic economy and the domestic political priorities of the center-left governing coalition. (Note. Although the GOI projects two percent GDP growth in 2007, GDP grew at an average of 0.67 percent between 2000 and 2005. End note.) In 2006, the budget for the "defense function" totaled 12.107 billion euros, or 0.82 percent of GDP, and included 1.511 billion euros for procurement, research, and development. In 2007, some recovery is projected, with defense spending at 14.449 billion euros, or 0.96 percent of GDP. The 2007 budget includes 3.272 billion euros for procurement, research, and development, intended to compensate for cuts to the procurement budget in 2006. At 2.391 billion euros, the average of the 2006 and 2007 funding for procurement, research, and development falls below the 2.588 billion euros allotted in 2005. ¶3. (SBU) The Ministry of Defense purchases a wide variety of U.S.-origin defense goods. The MOD is currently leasing or purchasing a number of aircraft, including the F-16, AV-8B, C-130, C-17, 767 Tanker, CH-47 and Joint Strike Fighter aircraft; stinger and TOW missiles; and Predator UAVs. The MOD is also interested in purchasing Tomahawk (T-LAM) missiles. Italy is a seventeen percent partner in the Medium Extended Air Defense System (MEADS) and has committed 595 million dollars to the program. The GOI plans to use the Patriot Advanced Capabilities II system to bridge the gap between the 2008 retirement of its Nike anti-missile defense system and introduction of the MEADS system in 2012-2013. The Italian Navy recently awarded the propulsion contract for the FREMM Euro Frigate to General Electric. In addition to equipment purchases and leases, the GOI spends about 120 million dollars annually to send Italian military personnel to the United States for training. ¶4. (SBU) In the short-term, 2008-2009, Italy intends to purchase Signals Intelligence (SIGINT) and CH-47F aircraft. The SIGINT program will consist of two to three aircraft and two ground stations, valued at approximately 300 million dollars. The CH-47F aircraft program consists of 16-24 replacement aircraft for Italy's aging CH-47 helicopter fleet. In the mid-term, 2009-2011, the GOI may purchase two additional aircraft, the Airborne Early Warning and Command (AEWC) aircraft and Multi-Mission Maritime Aircraft (MMA). The AEWC and MMA programs are a high priority for the GOI. Cuts in the Ministry of Defense's 2006 procurement budget delayed purchase of these aircraft. ¶5. (SBU) Italy is also a Level Two partner in the Joint Strike Fighter (JSF) program, and has invested 1.02 billion dollars in the early stages of JSF. In February, the GOI signed a memorandum of agreement to invest an additional one billion dollars in JSF. Italy plans to purchase 131 JSFs, valued at seven billion dollars. Follow-on logistics and support contracts will raise this value significantly. ¶6. (SBU) In addition to sales to the Italian military, American firms are engaged in sales to Italian security and police forces. Motorola is currently bidding to provide the Italian public safety agencies (Police, Carabinieri, Guardia di Finanza, and Forestry Corps) with a TETRA (Terrestrial Trunked Radio) communications network. In 2003, Motorola and Finmeccanica, the Italian defense industry conglomerate, entered into an agreement to provide a TETRA system to the Italian public safety agencies. Finmeccanica let the agreement lapse in 2005, and has begun exploring the possibility of filling the TETRA contract in cooperation with another European firm. Motorola estimates its share of the ROME 00000688 002 OF 002 TETRA contract to be worth up to 12 million euros, and has asked for USG assistance to counter Finmeccanica's moves to cut Motorola out of the TETRA contract. Embassy and Motorola officials have begun advocacy with high-level GOI and Finmeccanica officials. ¶7. (SBU) Italian defense exports in 2006 totaled 2.2 billion euros, a 61 percent increase from 2005 exports. The top three export markets for Italian defense firms were the United States (exports valued at 350 million euros),the UAE (338 million euros and Poland (227 million euros). Finmeccanica, the Italian defense manufacturing conglomerate, has been especially active in establishing a presence in the United States, including the construction of manufacturing facilities, and is pursuing a number of possible sales to the U.S. military. Agusta Westland, a Finmeccanica subsidiary, partnered with Lockheed Martin to win the competition for the Presidential Helicopter replacement program (VH-71). The VH-71 program consists of 23 helicopters, valued at approximately 7.7 billion dollars over the life of the program. A considerable percentage of the VH-71's components are manufactured in Italy. Alenia, also a Finmeccanica subsidiary, has partnered with L3 and Boeing to bid on the contract for the U.S. Joint Cargo Aircraft (JCA) program. The winner of this competition will be announced in May 2007 and will supply 145 cargo aircraft worth approximately six billion dollars to the U.S. Army and Air Force. ¶6. (SBU) Comment. The Italian military overwhelmingly prefers U.S.-made weapon platforms, due to their quality, reliability, supportability, and interoperability with NATO and U.S. forces. However, as the Motorola case illustrates, pressure to "buy European" has increased since the election of the center-left government last year. Additionally, U.S. defense industry companies have come under pressure to increase Italian "industrial participation" in defense contracts, and have been led to understand that without more Italian industrial participation, Italian parliamentary approval is less likely. Despite increases in the 2007 budget for defense procurement, the pressure for improved industrial participation comes at a time when the Italian defense budget is under parliamentary scrutiny and amidst increased political pressure to maintain high levels of spending on pension and other social programs (reftel). End comment. SPOGLI