YOUR PARTICIPATION IN THE MAY 13 TRANSATLANTIC

UNCLAS SECTION 01 OF 10 BRUSSELS 000704

SENSITIVE
SIPDIS

NSC FOR DAN PRICE
WHITE HOUSE PASS USTR FOR USTR SCHWAB
WHITE HOSUE PASS OMB FOR OIRA DIRECTOR DUDLEY
USDA FOR SECRETARY SCHAFER
DEPT OF LABOR FOR SECRETARY CHAO
TREAS FOR DEPUTY SECRETARY KIMMITT
HHS PASS FDA FOR ADMINISTRATOR VON ESCHENBACH
SEC FOR COMMISSIONER ATKINS
STATE FOR U/S JEFFREY, EB A/S SULLIVAN
USMISSION GENEVA FOR AMB. ALLGEIER

E.O. 12958: N/A
TAGS: ETRD ECON EIND EINV EFIN EAGR ENRG WTO EUN
SUBJECT: YOUR PARTICIPATION IN THE MAY 13 TRANSATLANTIC
ECONOMIC COUNCIL, FROM SPECIAL ENVOY GRAY

REF: A. A. 07 USEU BRUSSELS 3488 (EU TREATY CHANGES)


B. B. USEU BRUSSELS 303 (EU TREATY CHANGES)

C. C. USEU BRUSSELS 397 (EU TREATY CHANGES)

D. D. USEU BRUSSELS 464 (EU TREATY CHANGES)

E. E. 07 USEU BRUSSELS 2948 (ENERGY SECTOR
LIBERALIZATION PROPOALS)

F. F. 07 USEU BRUSSELS (TELECOMS LIBERALIZATION
PROPOSAL)

G. G. USEU BRUSSELS 0117 (CLIMATE CHANGE PACKAGE)


1. The U.S. Mission to the European Union and I welcome you
to
Brussels for the May 13 meeting of the Transatlantic Economic
Council. This meeting will help realize President Bush and
Chancellor Merkel's aspiration for greater transatlantic
economic
integration, but much will depend on the approach we bring to
the
event and on the Europeans' ability to deliver.


2. A few key points up front before turning to the political
and
institutional contexts in which your counterparts will be
operating
and the specifics of the meeting:

-- The EU sees transatlantic economic integration as a
strategic
need because they are deeply concerned about the "competitive
threat" from China, India and other emerging economies;
-- Your counterparts want this TEC meeting to be a success.
They
want to build momentum so the TEC process survives changes in
political leadership during 2009 in both the EU and the U.S.
--
That said, the EU sees its market as an instrument of "soft
power,"
and uses its "tougher" regulation in consumer and
environmental
protection to create new global standards (sometimes
consciously at
our expense);
-- For this reason, a key focus of the TEC for us is to help
improve
the way the EU regulates: minimizing unnecessary regulatory
divergences between us depends on the EU using a transparent
regulatory process, science-based risk assessments,
cost-benefit
analysis and thorough impact assessments;
-- The EU sees the same security threat from Russia as we
do, but
geographic proximity and recent experiences make economic,
energy
and political concerns much more tangible here than in the
U.S.

We will get the most mileage out of this meeting if the
discussions,
in plenary as well as lunch, are "informal" and direct.
While this
may expose more differences than a "diplomatic' exchange,
doing so
will also help bring us back to our strategic need to
cooperate. I
look forward to working with you on these issues when you are
here.

Your Counterparts
--------------

BRUSSELS 00000704 002 OF 010




3. We understand that five Commissioners will participate
in the
TEC. In addition to the bios you have, I offer a few quick
observations:

Guenther Verheugen (Germany) - Enterprise: As the EU's TEC
co-chair,
has real equities in having a successful event. Also heads
the
Commission's Competitiveness Council and is concerned the
regulatory
burden on businesses (especially as it affects key German
industries, such as autos). That said, Verheugen shares
responsibility for implementing REACH, one of the most
egregious
examples of over-regulation. Can tend toward reading lengthy
remarks, but has indicated a desire for free-flowing
discussion
during the TEC. As second tour Commissioner from Socialist
party,
Verhuegen is unlikely to be re-appointed to Commission next
year.

Peter Mandelson (UK) - Trade: Consummate political tactician,
credited with engineering election of Tony Blair's "New
labor" in

1997. Wants win for WTO negotiations; has advocated stiffer
line on
trade relations with China, more in line , with the U.S.
approach. As
UK's Minister for Trade and Industry in late 1990s, actively
promoted U.S.-style entrepreneurship. With a history of
contention
with UK Prime Minister Brown, questionable whether he will be
reappointed to Commission next year, but unwise to count him
out.
Generally more sympathetic to U.S. position on trade issues
like
poultry and biotech than his environment and health
commissioner
colleagues.

Charlie McCreevy (Ireland) - Internal Market: Responsible for
removing barriers to flow of goods, services, capital and
people
within EU; as such, watches member state moves that could
create
barriers to investment internally - and externally.
Accountant and
former Finance Minister interested in integrating EU's
financial
markets. Intent on pushing roadmap for better EU access to
U.S.
insurance market.

Meglena Kuneva (Bulgaria) - Consumer Protection: Ms. Kuneva
has
used this small but mighty mini-Directorate since its
inception in
January 2007 to play an activist role in completion of the
internal
market, setting her sights on e-Commerce, collective redress,
IPR,
toy safety, focusing on consumers as the EU engine. She is a
European liberal, a free marketer who led Bulgaria's accession
negotiations as Bulgaria's Minister for European Affairs
2002-2006.
As a post graduate at Georgetown 1995, 1999-2000, her first

BRUSSELS 00000704 003 OF 010


foreign
trip as Commissioner was to the U.S., followed by China. She
actively seeks intensive engagement with both CPSC and FTC to
adopt
their best practices to EU situations. Kuneva has invited
the CPSC
Chair to join her and her Chinese counterpart in Brussels for
product safety discussions and she is sending senior staff to
join
the CPSC Chair's China trip in September.

Laszlo Kovacs (Hungary) - Customs and Taxation: Hungary's
Foreign
Minister 1994-98, 2002-2004; Deputy Foreign Minister 1986-89;
became
Commissioner 2004. Responsible for the implementation of the
Modernized Community Customs Code; which includes security
amendments such as advance cargo manifest requirements and
Authorized Economic Operators (AEO); as well as IPR
enforcement.
Kovacs has been vocal in EU and US forums in support of mutual
recognition of AEOs and strong opposition of the 9/11 Act
requirement of 100% scanning of containerized cargo destined
to the
U.S.

Andrej Vizjak, Slovenia's Minister of Economic Affairs, will
also
attend to represent the EU Council, that is, the 27 EU member
state.
Slovenia is the first of the ten "new" members (mostly
central
European) that joined the EU in 2004 to hold the Presidency;
it will
also host President Bush for the U.S.-EU Summit in Ljubljana
on June

10. But while the Framework was the initiative of the member
states
- Chancellor Merkel, when Germany had the rotating Presidency
the
first half of 2007 - the Commission has largely taken over the
effort and Vizjak, unless encouraged, may tend to be silent.

The EU Political Context: Uncertainty Remains
-------------- -


4. The 2005 French and Dutch rejection of a new EU
"Constitutional Treaty" sent the EU (in particular the
Commission)
into the doldrums. Russia's shut-off of natural gas to
Ukraine in
2006 helped rebuild momentum for strengthening the EU by
underlining
the importance of "solidarity" and highlighting the need for
new EU
powers on energy security. This set the stage for the 2007
agreement on amendments to the Treaty (brokered largely by
Merkel)
that strengthen the EU role in foreign, law enforcement and
energy
policy (Refs A-D). If these amendments come into force early
next year, 2009
will be a watershed for Europe. June brings elections for a
new
European Parliament; this will be followed by appointments of
all
existing and new leadership positions in the EU structure:
the new
position of President of the European Council, a new EU

BRUSSELS 00000704 004 OF 010


Commission
President (quite likely Barroso again),a new team of
Commissioners
(appointed by the Commission President and confirmed by the
Parliament),and a new "High Representative" for foreign and
security policy, who will serve simultaneously in both the
Council
and the Commission. A stronger EU could look to the TEC as a
way to
channel engagement with the United States across a broad
range of
economic issues, but only if the TEC is a viable forum for
transatlantic policy discussion and strategic thinking.


5. Despite these changes, Member States, represented in the
EU
Council, are and will remain decisive in EU decision making.
Although strong Member State leaders often challenge the
Commission,
many in Brussels believe that new power configurations in key
member
states - Merkel, Sarkozy, Berlusconi, Tusk in Poland and even
the
"Euroskeptic" Brown in the UK- help buttress the EU's role in
the
world. The European Parliament will also be a much more
forceful
presence in the near future. The EP gains significant
powers in
the revised treaty, including the right to approve (but not
amend)
trade deals and power over law enforcement issues. It has
just
negotiated a deal with the Commission and Member States to
expand
its in oversight of implementing regulations, including, for
example, with respect to biotech approvals. (The EP will
have the
right to review proposed regulations and reject them if the
proposals exceed the authority in the underlying legislation.)


6. The Barroso Commission, which ends next year, has shot
its last
major legislative bolts: proposals for fundamental reforms to
the
telecommunications and energy sectors (refs E and F),geared
toward
liberalizing industries still dominated by state-owned (or
formerly
state-owned) firms, and a climate change package revising the
EU's
emissions trading scheme and setting targets for renewable
use (ref
G). Each is proving rough sledding for the Commission.
Member
States will reject the Commission's desire for a more
effective
EU-wide telecoms regulator who could enforce third party
access.
They are also fighting hard against the Commission proposal to
"unbundle" electricity and gas generation and distribution.
And the
allocation of pain under the new emissions trading scheme -
both to
energy intensive industries and among Member States - is
welcomed by
none, despite the EU's sanctimonious approach to the climate
change
negotiations.

BRUSSELS 00000704 005 OF 010




7. In this milieu, you can expect your counterparts to lean
toward
a generally cautious approach to difficult issues - including
some
of those in the TEC agenda.

The Bilateral Relationship - Strong, but Diffeences Still
-------------- --------------


8. The mood in Brusels about the United States has changed
dramatically over the last five years, when we were seen as
trying
to divide the Europeans and advocates for the EU as a
"counterweight" to the United States abounded. European
leaders
saw the dangers in that divisiveness, however, and warmly
welcomed
President Bush's 2005 initiative to strengthen the
transatlantic
alliance. This much more constructive attitude still
prevails, and
has been heightened by the concern that the "West" is losing
influence in a globalizing world with new emerging actors.


9. The EU wants to be seen as a major actor on the world
stage. On
critical foreign policy issues (Balkans, Middle East,
Afghanistan,
Iran, Iraq, Russia),EU officials still cooperate closely
with their
Washington counterparts, and official EU statements generally
say
the right things. This will surely be the message during the
June
10 U.S.-EU Summit in Slovenia, and during the President's trip
through Europe after that. But follow-through remains an EU
weakness and public support for U.S. friendly policies
remains thin.
Fissures are appearing as we address details - including, for
instance, about the U.S. participation in the EU's mission to
Kosovo. And EU willingness to strengthen financial sanctions
and
implement U.N. Security Council resolutions against Iran is
flagging
except in a handful of Member States.


10. Climate change continues to divide us. After initial
foot
dragging, the Europeans now support the President's "Major
Economies" process of trying to reach agreement among key
players on
a new greenhouse gas emissions pact to replace the Kyoto
Protocol.
They want an agreement by Copenhagen at the end of 2009 and
acknowledge this cannot be done with over 100 countries in
the room.
But they cannot resist grandstanding, even when they are
unlikely
to meet their Kyoto commitments, never mind their new pledges
of 20
(or even 30) percent below 1990 levels by 2020. And they
still
refuse to work with us to convince China and India to accept
some
form of commitment, even though they should realize the
Senate will
not ratify anything that doesn't commit these countries, and
Senate

BRUSSELS 00000704 006 OF 010


staff have advised them that failure to make progress with us
this
year will seriously jeopardize completion of any agreement by
Copenhagen in 2009.

The Economic Context and the TEC Process
--------------


11. An EU ambivalence to the United States is bound to come
through
during the TEC. The Europeans know at the strategic level
that they
need to work with us, and they strongly support the goal of
the 2007
Framework for Advancing Transatlantic Economic Cooperation.
But
they still often see the EU in apposition to the United
States,
viewing their "stronger" consumer and environmental protection
regulations as setting a "global" standard and as the core of
EU
"soft power." This combined with the Commission's increasing
caution and an awareness that our Administration will soon
change
can make resolving problems difficult.


12. The May 13 Council, and particularly the principals-only
lunch,
is an opportunity to focus on key strategic priorities that
we share
and the need for concrete actions by the EU that can make a
difference in transatlantic integration. USTR Schwab's
discussions
with Trade Commissioner Mandelson before the TEC can help set
the
stage for this. The Europeans, including Mandelson, need a
successful conclusion to the Doha negotiations. They know the
window is closing, and understand they have to work with
rather than
against us on this. The lunch theme of resisting
protectionism also
provides an opportunity to discuss seriously steps all
participants
can take to encourage momentum toward a deal in key third
countries.
Similarly, positive steps we are taking individually and
together
to promote innovation, growth and competitiveness can and
should
come up in the protectionism discussion.


13. The lunch will also turn to the critical issue of our
economic
relations with Russia. In Europe, these two issues are
intertwined:
the concerns about the bear to the East are very real,
especially in
the eight new central European member states, including EU
Council
Presidency Slovenia. The Central Europeans acquire the vast
majority of their energy from Russia; the 2006 cut-off of gas
to
Ukraine spotlighted Russia's willingness to use energy as a
political tool. Gazprom has blatantly tried to acquire
strategic
assets in these countries. Russia's interference with
Estonia's
and Lithuania's electricity and internet grids last year have
fueled

BRUSSELS 00000704 007 OF 010


these fears, as have its interference with gas supplies in
Ukraine.
Deep fear of Russia drove the Commission's proposals last
year to
prohibit third country investors from controlling gas and
electricity transmission networks.


14. Fears regarding expansive engagement by Russian
state-owned
companies in European markets also has a significant impact
on the
sovereign wealth fund (SWF) debate in the EU. We successfully
engaged the EU this year to align their policy priorities
with our
regarding SWF. However, many senior European policymakers
conflate
SWF issues with broader concerns regarding state-owned
enterprises
such as Gazprom. We need to encourage the EU to draw sharp
distinctions between these two types of foreign investors.
We also
need to continue encouraging them to limit investment reviews
to
situations that raise true national security concerns, as we
do with
CFIUS.


15. In discussing Russia, we should also continue to explore
ways
we can constructive engage Moscow to promote market
liberalization
there. We work together closely on Russia's WTO
negotiations, and
have collaborated well on joint IPR efforts; we need to
broaden
this. The EU has an extensive engagement effort with its
neighbor
to the East, and believes these activities will intensify with
Medvedev. We should use the lunch to identify opportunities
to,
including through the Investment Dialogue, to deepen our
engagement,
as we have with China after the last TEC meeting. We need to
find
constructive points of leverage, such as convincing Moscow it
cannot
reverse the slide in oil and gas production without U.S. and
EU
help. (And we need to help the Commission overcome member
state
resistance to the development of a common and coherent
internal and
external energy policy.)


16. We also need to take a strategic view in assessing the
Framework. Our bilateral economic issues with the EU stem
largely
from differing approaches to regulatory processes across
sectors
(e.g., food safety, chemicals, financial services,
competition or
security). Improving the way the EU regulates - the work
that Susan
Dudley (and John Graham before her) and OMB/OIRA staff are
doing on
horizontal regulatory cooperation - is probably the most
important
TEC achievement to date, and still to come. In some ways,
the motto

BRUSSELS 00000704 008 OF 010


for the United States of the TEC should be "no more REACHes."
In
part because of our stepped up cooperation on regulatory
approaches,
the EU in 2006 established the Commission's Impact Assessment
Board
(IAB). The IAB was strengthened in February of this year so
now EU
Directorates cannot submit proposals to the Commission until
IAB
economists have approved the accompanying impact assessments.
Further, at this TEC, OMB's Susan Dudley and the IAB Chair,
Alexander Italianer, will discuss steps they've taken to
ensure we
both consider the external impacts of domestic regulations.
We have
also agreed to intensify discussions on conducting risk
analyses, a
critical underlying aspect of regulation (and where EU
practices are
often questionable). Having just met the head of the new EU
Chemical Agency, I think our efforts over the years to
improve the
transparency of REACH are beginning to take root.


17. Improving the EU's approach to regulation is one of our
top
priorities and should be a constant theme in all TEC
discussions
across economic sectors: transparency, science-based risk
analysis,
thorough impact assessments, respect for a broad range of
public
comment, eliminating unnecessary regulatory burdens. You
can speak
with authority on these issues and I encourage you to do so.
We
cannot make this point too forcefully to the Commission. We
both
need smart regulation to improve our competitiveness and
expand
economic growth opportunities on both sides of the Atlantic.
If we
regulate efficiently, we can also minimize unnecessary
regulatory
divergences and regulatory burdens while promoting
transatlantic
economic integration


18. The EU has not done enough to resolve the sectoral
regulatory
problems that could dminate the TEC, in particular on
poultry and
the EU's chemical regulation, REACH. Failure to find a
solution to
the REACH cosmetics issue will adversely affect the import
of two
billion dollars of U.S. exports of personal care products to
Europe. If we do not leave Tuesday with strong assurances
that
these problems will be resolved before the Summit, we should
be
prepared to go to the WTO. As with EU energy policy with
Russia,
the major stumbling block is the continuing ability of the
stronger
member states to interfere with common EU-wide policy for its
integrated internal market.


BRUSSELS 00000704 009 OF 010



19. In contrast, where the EU has concerns with us -
primarily
suppliers' declarations of conformity for low-voltage
electrical
equipment, 100% scanning of containers and even our
state-based
insurance regulation - we are not breaking international trade
rules. We should be direct in pointing this difference out to
them.


20. TEC debates on these thorny issues should not obscure
either
the other achievements in transatlantic integration that have
taken
place since the signing of the Framework last year. These
include:
the horizontal regulatory issues mentioned above, the ability
of our
food and drug regulators to share confidential information,
new
agreements on cooperation on auto safety and internet
problems, the
joint investment policy statement the TEC will issue, joint
action
against IPR piracy, and a strong roadmap to improve supply
chain
security.

New Priorities - Climate Change
--------------


21. The TEC is also meant to recommend to the Heads new
priorities
for the year ahead. We have much to do on the existing
agenda, but
we should press the EU to add cooperation in energy and
climate
change technologies to the TEC lighthouse projects. Much
work is
already underway in this area: DOE is re-invigorating its
energy R&D
cooperation with the EU and we are implementing strong action
plans
on biofuels and energy efficiency, and hope to have another
in clean
coal technology soon. Adding energy and climate technologies
to the
TEC agenda will ensure cabinet-level attention to these
efforts, a
critical part of our story to a (skeptical) European public
that we
are working together to address climate change. Biofuel
standards
could become a point of dispute as there are signs that the
EU may
be designing sustainability criteria to protect against
biofuels
imports, including even imports of ethanol from the United
States.


22. Promoting growth and competitiveness through integration,
working over the long haul to improve EU regulation, and
cross-cutting policy level discussions that help us approach
strategic economic policy issues are the real rationale for
this
Council meeting, and in that sense it is sure to be a
success. But
we also need serious movement on the most contentious issues -
poultry and cosmetics. With your help in the TEC, I believe

BRUSSELS 00000704 010 OF 010


we can
achieve even this.

I look forward to working with you on all these issues when
you're
here.
Murray
.