ITALY: FINANCE MINISTER'S MANEUVERING OPENS MORE

C O N F I D E N T I A L SECTION 01 OF 02 ROME 001194 SIPDIS E.O. 12958: DECL: 10/29/2019 TAGS: ECON IT PREL EFIN PGOV SUBJECT: ITALY: FINANCE MINISTER'S MANEUVERING OPENS MORE TENSIONS IN THE BERLUSCONI CABINET REF: ROME 1187 Classified By: Ambassador David H. Thorne for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. Money quarrels within the GOI, regional tensions between Berlusconi coalition partners, and some preliminary maneuvering for the post-Berlusconi period have led to speculation that Finance Minister Tremonti may resign or be forced out of office. The continued strong of support from Northern League President (and Berlusconi coalition partner) Umberto Bossi, along with the realization that bond markets might react harshly to Tremonti's departure will almost certainly keep the Finance Minister in office, but this latest round of speculation about Tremonti is a further reminder of the tensions that exist in Berlusconi's government. END SUMMARY. ¶2. (C) The Italian press has been filled with speculation about the future of Economy and Finance Minister Giulio Tremonti. While a long-time collaborator of Berlusconi and his Forza Italia movement, Tremonti has very close ties to the important regional party Lega Nord. Some PDL contacts tell us that they regard him as a member of Lega, not Berlusconi's party. A tax lawyer by profession, Tremonti holds the powerful but extremely difficult job of Finance Minister in a country addicted both to profligate social welfare spending and to tax evasion. Italy's debt-to-GDP ratio has long been over 100% (it now approaches 120%). This high debt level made it impossible for Italy to engage in the kind of stimulus spending seen in the U.S. and in other European countries. The constraint is not so much the requirements of the EU Maastricht Treaty, but is instead the huge financing costs that come from this high level of debt. Berlusconi and other Ministers can engage in costly populism, and call for more stimulus spending, but Tremonti frequently has to reject imprudent populist projects; this has earned him enemies in the Berlusconi cabinet. Tremonti is a true believer in fiscal discipline and tries to inject it into Italian public policy. ¶3. (C) The current controversy over Tremonti was sparked on October 20 by his remark about the need for Italians to have ""permanent"" jobs, a comment that has more political than economic sense, and which appears to be part of Tremonti's effort to build his own political base. This provoked criticism from those in favor of liberalization in Italy's labor market. Berlusconi at first seemed to support Tremonti, but this support quickly waned when, on October 23, Tremonti hosted an Aspen Institute event that seemed to have too much of a focus on Italy's future post-Berlusconi. Soon the long knives seemed to be coming out for Tremonti -- a Senator from Berlusconi's party (Baldasari) openly began preparation of an alternative budget. Then -- without consulting Tremonti -- Berlusconi publicly announced plans to cancel an important Italian tax on businesses (the IRAP). Tremonti had previously rejected the cancellation of this tax. At a lunch with the Ambassador on October 27, PDL parliamentary leaders declined to comment on the Tremonti affairQunderscoring the tensions within the governing coalition. ¶4. (C) Tremonti's position as minister is probably safe due to three factors: 1. As Finance Minister, Tremonti now has a high profile that would make it difficult for the weakened Berlusconi to replace him; 2. Tremonti has the backing of Northern League leader Umberto Bossi; and 3. The bond market (upon which the GOI is dependent) could react harshly to Tremonti's departure, especially if he were to be replaced with a someone more amenable to populist projects. ¶5. (C) Regional tensions are playing a role here too. Tremonti does Lega Nord's work on finance issues. He has been resisting calls for a very costly new aid program for Southern Italy, a region seen by Lega Nord as a rat hole down which too much Northern Italian money has already been poured. Tremonti instead set up a new bank for the South: it will operate out of post offices, will be funded by private sector bond issuances, and total government expenditures for it will be a tiny 5 million Euros. Southern politicians were not pleased. ¶6. (C) Pressed by the media to react to all this, Tremonti said he would resign if he believed he had lost Berlusconi's confidence. Berlusconi returned from a short visit with Russian PM Putin to meet privately with Tremonti and party loyalists. Tremonti reportedly asked to be made Vice Premier, but Berlusconi rejected his request. Instead Tremonti was given the leadership of a new Economic Steering Committee within Berlusconi's PDL party. Berlusconi's lieutenants have walked back the tax-cut proposal, claiming the measure was always intended for some undefined moment in the future. (Comment: While Tremonti failed in his bid to become Vice Premier, during this episode he has succeeded in raising his profile as a politician rather than a technocrat, as well as differentiating himself from Berlusconi. However, Tremonti's weakness has also been revealed--he seems to have little political base beyond the Northern League. End Comment.) ¶7. (C) COMMENT: The Ambassador met with Tremonti on October ¶15. While this meeting was shortly before the worst of this episode, tensions were already brewing. The Ambassador found Tremonti to be relaxed and sure of himself; he seemed to be someone who is used to taking the heat that comes with this kind of job. When, one week later, the Ambassador met with Bank of Italy President Mario Draghi (who is not only Tremonti's rival but is also in many ways his polar opposite in terms of his approach to managing the economy),Draghi declined to answer the Ambassador's question about his view of Tremonti. ¶8. (C) The current situation underscores the tensions that exist in the Berlusconi cabinet: Lega vs. PDL, Northerners vs. Southerners, populist spendthrifts vs. the thrifty finance minister... and tensions related to who will take over when Berlusconi departs from the political scene. THORNE "