ECOFIN CONCLUSIONS - FIGHTING INFLATION,

UNCLAS LJUBLJANA 000159

SIPDIS

SENSITIVE
SIPDIS

C O R R E C T E D COPY CAPTION
DEPT FOR EUR/NCE,
VIENNA FOR CQUINLIVAN,
TREASURY FOR VIMAL ATUKORALA

E.O. 12958: N/A
TAGS: ECON EINV ETRD PREL PGOV EUN SI
SUBJECT: ECOFIN CONCLUSIONS - FIGHTING INFLATION,
STRENGTHENING FISCAL STABILITY


Summary
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1. (SBU) The Informal Meeting of the Ministers for Economic
and Financial Affairs (ECOFIN) held at Brdo April 4-5
produced no surprises as the Minsters for Finance and
European Central Bank (ECB) governors from the 15 eurogroup
members met to discuss "efficient and effective" strategies
for controling inflation and creating cross border strategies
for more fiscal stability. The ECOFIN Council stated that
the eurozone is doing well despite the "turbulence and
volatility" in the global economy. The Council made a strong
call for "fiscal orthodoxy" in combatting rising inflation
and signed a new Memorandum of Understanding deepening cross
border cooperation on promoting financial stability in the
eurozone. Although journalists were very focused on
inflation and wage increases, the main thrust of the press
conference statements were on outlining new cooperative
efforts to fight inflation in the eurozone. ECB President
Jean-Claude Trichet was adamant that the ECB is doing all it
can but exhorted all members to implement national plans to
stay within the guidelines of the Maastricht criteria. (Note.
The inflation ceiling for the eurozone is 2 percent but in
March, the inflation of the eurozone was 3.5 percent. End
Note.) The Council also presented a common position on the
adoption of the International Monetary Fund (IMF) executive
board resolution on the reform of the quota and voting rights
system in the IMF. End Summary.

Fighting Inflation
--------------


2. (U) During the first press conference April 4, European
Commissioner for Economic and Financial Affairs Joaquin
Almunia atrributed rising inflation in the eurozone mainly to
external forces such as increased prices in oil and food,
and the crisis in the U.S. He also identified some internal
factors such as administrative prices and increases in
indirect taxes that the eurogroup must address to lower
inflation. Almunia and Chair of the Eurogroup (the Finance
Ministers of the eurogroup) Jean-Claude Juncker both stressed
that the eurozone is in the midst of a slowdown but not in a
recession. Trichet, Juncker and Almunia each emphasized the
need for member states to show budgetary restraint and
counseled for wage moderation as an essential ingredient to
riding out the financial storm. Juncker opined that
"inflation is the enemy of those that are weaker" and that
the eurozone needed to fight inflation with wage increases
that were in line with productivity. Juncker said that the
ECB is doing all it can within its purview, but that the
members of the eurogroup needed to work together to implement
national instruments to combat inflation. The Council also
made sure to make a clear distinction between the ECB and the
U.S. Federal Reserve Bank. Trichet strongly clarified that
the ECB amd the Federal Reserve have their own
responsibilities, should not be expected to behave in similar
ways, and should not be judged by the other's policy
decisions.

ECB Says IMF Forecast on EU Growth Too Low
--------------


3. (U) Trichet took issue with the leaked IMF report that is
expected to forecast eurozone growth at 1.5 percent, stating
that he believed the projection was too low. He added that
the ECB would put out a report on April 28 that is expected
to estimate a higher percentage. (Note. Trichet did not cite
a number but a Wall Street Journal article on April 1 stated
that the ECB predicted a growth of 1.8 percent. Originally,
the ECB in February had expected growth to be 2.2 percent,
but now is downgrading its expectations. End Note)

Germany is Not a Model for All
--------------


4. (U) Another hot topic during ECOFIN was Germany's
increase in salaries in the public sector by 8 percent over
two years, since this seemed to go against the ECOFIN
Council's recommendation to avoid insupportable wage
increases. Although Trichet, Juncker, and Almunia vehemently
defended Germany's decision stating that the wage increase in
Germany was appropriate since there has been no wage increase
there in three years, they pointed out that Germany is not a
model for other members of the eurogroup. Juncker firmly
asserted that any member that tried to use Germany as a model

would be "way out of line."


Cross-Border MOU for Financial Stability Signed
-------------- --


5. (SBU) A significant achievement of the ECOFIN meeting was
the unanimous support for the new cross-border MOU on
financial cooperation. The new MOU extends the previous MOU
signed in 2005 by including more financial institutions into
the memorandum and common principles on cross-border
financial crisis management. In response to a journalist's
concern that the MOU was not legally binding, Slovene Finance
Minister and ECOFIN Council President Andrej Bajuk explained
that although it is not legally binding, it has strong
political backing. He further stated that "many things have
been achieved in the 50 years of the EU without legally
binding agreements." He pointed to the creation of the
eurozone as one example. When a journalist queried whether
any member state was pressing for one "super supervisory
board" to oversee cross-border financial institutions, Bajuk
said some member states made the suggestion, but that there
was currently no political consensus.

Prep for Spring IMF and WB Meeting
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6. (U) Juncker said that in preparation for the spring
meeting of the IMF and World Bank (WB) in Washington D.C.
April 12-13, the eurogroup would consider the report of the
Financial Stability Forum (FSF) and urge the adoption of
reforms proposed by the IMF executive board. Bajuk reported
that the ECOFIN Council had agreed on a common position on
the IMF quota, stating that the quota represented an
important shift that would give more weight to poor
countries. Juncker commented that the FSF would report on
the recent turmoil in financial markets and recommend
concrete measures to respond to the credit crisis. (Note.
The FSF said its report would set out specific policy
recommendations on prudential oversight of capital, liquidity
and risk management and on transparency, disclosure and
valuation practices. The FSF report is also expected to
cover the role and uses of credit ratings, and the
authorities' responsiveness to risks and their arrangements
to deal with stress in the financial system. End Note.)

GOS Claims ECOFIN a Success, Surprised by Media Focus on
Inflation
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7. (SBU) Katja Bozic, Director General of Financial Systems
at the Slovene Ministry of Finance, told Emboff April 7 that
Slovenia was "very satisfied" with the ECOFIN meeting. Bozic
believed that the ECOFIN Council reached all the proposed
objectives. She explained that, although the press reported
heavily on rising inflation, inflation was not the key issue
debated during ECOFIN. The key issues, according to Bozic,
were financial stability in light of the international
financial crisis and the changes to the supervision of
cross-border financial institutions. Bozic stated that the
real successes of ECOFIN was the MOU agreement on cooperation
among central banks and ministries of finance regarding
international cross border banking cooperation that every
eurogroup member signed. Bozic was surprised that
journalists mostly skipped reporting about the key issues and
complained that the media only focused on inflation.

Comment
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8. (SBU) The ECOFIN Council acknowledged the concerns of the
journalists about inflation at the press conferences, but
actively worked to calm the fears spurred by high inflation.
The eurogroup leaders emphasized the resilience of the
eurozone and highlighted concrete measures taken to protect
the eurozone from more global external shocks. Trichet
reminded the press that over 15.7 million net jobs had been
created in the eurozone in the past nine years and urged
people not to exaggerate the financial crisis. In light of
the first ever EU-wide trade union protests held by the
European Trade Union Confederation (ETUC) in Ljubljana on
April 5, Juncker expressed sympathy for those that were most
adversely effected by the rise in inflation, but pleaded for
all stakeholders to work together to fight inflation in a
sustainable manner and promote national fiscal prudence.
(Note. The protest brought together about 10,000 European

trade union members to Ljubljana to collectively protest for
higher wages across the EU. End Note.) Juncker said that
the next ECOFIN meeting in June would continue to debate best
practices to protect the eurozone from further volatility in
the global economy. End Comment.

COLEMAN