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 -------------- ¶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 -------------- ¶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 -------------- -------------- ¶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 -------------- ¶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