SCENESETTER FOR SPEAKER PELOSI'S FEBRUARY 13-22

C O N F I D E N T I A L SECTION 01 OF 04 ROME 000159 SIPDIS E.O. 12958: DECL: 02/06/2018 TAGS: PGOV PREL IT SUBJECT: SCENESETTER FOR SPEAKER PELOSI'S FEBRUARY 13-22 VISIT TO ITALY ROME 00000159 001.2 OF 004 Classified By: Charge d'Affaires a.i. Elizabeth Dibble for reasons 1.4 (b) and (d). ¶1. (C) Madame Speaker, I would like to extend a warm welcome from Team Italy in anticipation of your upcoming visit. Your trip comes at a critical moment as the Berlusconi government seeks to understand how it fits into the new Administration's reengagement with Europe. Berlusconi's close personal ties to President Bush and his position on the right hand side of the POLITICAL spectrum are leading some here to fear that U.S.-Italian RELATIONS have already become cooler. Your visit will serve to reassure the GOI that Italy still remains within the inner circle of Allies that we rely on in the most difficult of moments. But it is also an opportunity to challenge them to do more in Afghanistan, moderate their behavior as a proxy for Russian policies in Europe, be a reliable partner on Iran and work closely with us to address the global financial crisis which is rapidly undermining Italy's already sclerotic economy. Domestic Politics: Berlusconi in Control, but Challenges Emerging - - - - - - - - - - - - - - - - - - - - - ¶2. (C) After two years of a divided and ineffectual center-left government, Italy saw Silvio Berlusconi return to power last year. Berlusconi enjoys a broad base of power that has allowed us to make good progress in continuing to advance our agenda. He used his first months back in office to deliver results on election promises, though long-term solutions to most problems are still needed. The trash problem in Naples is not yet permanently solved, but the streets are cleared and troops are keeping dumps and incinerators open. Public worries about street crime have been addressed by a sweeping new security law. A public finance law has overhauled the annual budget process, which traditionally has eaten up months of Parliament's time, but Italy's faltering economy casts doubt on whether budget targets will be met. Berlusconi's government drafted and passed these laws mostly without consulting the center-left opposition, which has grown more fragmented and less effective. Most foreign policy initiatives are directed by Berlusconi personally without the need of any legislation. ¶3. (C) Berlusconi's honeymoon period now appears to be over as some key initiatives have stalled and intra-coalition squabbling has begun to erupt. Education reform was significantly scaled back after large protests in October, justice reform is stalled, and fiscal federalism is the subject of infighting between the Northern League (LN) and Berlusconi's People of Liberty (PdL) party. In the run-up to the June 2009 European parliament elections, tensions between PdL and LN are sure to grow as LN seeks to differentiate itself from its larger partner. The center left remains deeply divided, and the European elections will be a critical moment for it to evaluate whether it needs new leadership. Organized Crime: Slowing Growth and Fraying the Social Fabric - - - - - - - - - - - - - - - - ¶4. (C) Organized crime remains a serious and pervasive problem throughout the country, particularly in the South. By some estimates, organized crime accounts for nine percent of Italy's GDP. Crime syndicates are engaged in trafficking in drugs, arms and persons; extortion; the production and distribution of pirated and counterfeit products (including American movies, music and software); illegal construction; loan sharking; and illegal dumping of toxic waste. There are some indications that the drug and arms trade have at least indirectly benefited terrorist groups in Colombia and Central Asia. While there are some glimmers of hope (in Sicily, dramatic law enforcement successes and changing public attitudes have created severe problems for the Cosa Nostra's traditional hold on the island),these successes have not been replicated elsewhere. The Camorra remains deeply entrenched in Campania, and Calabria is the base for Western Europe's largest Mafia group, the 'Ndrangheta. There are large swaths of territory in southern Italy where the state is nearly completely absent and the crime syndicates control most facets of society and the economy. These groups create a huge drag on Italy's economic growth and its ability to apply the rule of law. The Berlusconi government has taken a hard line on crime, sending soldiers and more police to patrol cities. Nonetheless, Mafia businesses have not been interrupted. I hope you will mention, both publicly and ROME 00000159 002.2 OF 004 privately, the importance for both Italy and the United States of the fight against organized crime. We need both the public and the politicians to focus on just how damaging the mobs are to Italian society and economic well-being. Financial Crisis: Banks OK, But Economy Suffers - - - - - - - - - - - - - - - - - - - - - - - - ¶5. (SBU) Because of a somewhat conservative banking sector, Italy did not suffer the kind of financial meltdown experienced elsewhere. Italian banks had little reason to engage in sub-prime lending, or buy significant assets derived from sub-prime loans overseas, given their dominance in their own high-margin, low-risk domestic market. All the same, they were caught in the worldwide economic downturn at a time when earnings -- as opposed to asset quality -- were already coming under pressure due to Italy's anemic economic performance the previous 3 years. Italy is now fully into a serious economic slowdown , with some economists predicting a GDP drop of 2 percent in 2009, the largest drop since 1975, when production shrunk by just over 2 percent. The Berlusconi government has managed the public aspects of the crisis fairly well, focusing initially on maintaining the public's confidence in the banking system. Italy has participated fully in the global coordinated response to the crisis, taking limited measures aimed at re-starting interbank lending and strengthening Italian banks' capital. The government is currently considering a modest economic stimulus package, while resisting calls for direct taxpayer assistance to specific industries, such as autos. Italy has a limited ability to respond to this crisis with additional government spending because of its already very high government debt levels (around 104% of GDP). Russia: Indulging Putin's Worst Impulses - - - - - - - - - - - - - - - - - - - - - ¶6. (C) Our cooperation with Berlusconi does not extend to all issues. Energy dependence, close personal RELATIONS between Berlusconi and Putin, and a lack of institutional influence on Berlusconi's crafting of Italy's Russia policy (the MFA's entire Russia Department consists of one person and there is no one devoted exclusively to Russia in the PM's office) have made Italy one of Russia's most reliable partners in the EU in pressing the Kremlin's POLITICAL agenda. Italy's foreign policy with regard to Russia is now driven almost entirely by Berlusconi's desire to appease Putin and guarantee stable supplies of energy. Contrary to the GOI's general positive actions on the ground, Berlusconi personally has been unhelpful, making zinger pronouncements undermining our efforts to bring stability to the Balkans, build closer ties between NATO and Georgia and Ukraine, and hold Russia accountable for its invasion of Georgia last summer. He has publicly announced his intention to try to broker the relationship between President Obama and President Medvedev. You could usefully underline to PM Berlusconi, FM Frattini and Chamber President Fini that Italy's high-profile efforts to champion Putin's initiatives, especially when they appear to support archaic notions of a Russian ""sphere-of-influence"" over sovereign countries, will find no support in Washington, and indeed, may only damage Italy's credibility. Iran: Awaiting Promised New Direction in U.S. Policy - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶7. (C) Berlusconi entered office promising us more cooperation on Iran, and has been better than his predecessor in proffering a tough rhetorical line vis-a-vis Tehran. That said, the GOI is still far from forceful in pushing for Iranian compliance with the demands of the international community, where such demands rub up against Italian commercial interests. Italian diplomats have been obsessed with being included in the P5-plus-1 decision-making body on Iran sanctions, and have in the past dragged their feet on Iran actions due to displeasure about their exclusion. GOI officials are pleased that we now routinely consult with them through the Quint mechanism prior to each P5-plus-1 meeting, but you may hear complaints that Italy is still not ""fully represented."" Nevertheless, Italy has cooperated with us on Iran in a number of ways: it has placed Iranian banking activity in Italy under close supervision, and has recently cooperated on actions against Iran government shipping operations. There is one problematic Iranian bank with ties to the regime still open in Rome: Bank Sepah. The Italians are watching this bank closely, but still have not formally closed it. You might take this opportunity to encourage full ROME 00000159 003.2 OF 004 EU implementation of UNSCR 1803 and the broadest adoption of national measures. You will likely be pressed for insight into the future direction of U.S. Iran policy under the new administration. Afghanistan: Willing to do More, But Wary of the Price Tag - - - - - - - - - - - - - - - - - ¶8. (C) Italy is the sixth largest contributor to ISAF with 2,600 troops and a PRT in Herat. ISAF's Regional Command-West is under Italian command, and the Italian military has pledged to increase the number of training teams (OMLTs) provided for the Afghan Army to a total of seven. Italy's Carabinieri and Financial Police help to train Afghan Police, and Italy has agreed to send additional units to provide security during the August 20 Afghan Presidential Elections. FM Frattini is eager to hold an Afghanistan-Pakistan Conference at the level of Foreign Ministers on the margins of the G8 Foreign Ministerial (Trieste June 26-27). While Italian interlocutors routinely tell us that they cannot do much more in Afghanistan, we believe they are preparing a package of small increases for an eventual request from the Obama Administration. You can remind Italy's leadership that the U.S. is about to almost double its troop commitments to Afghanistan and match that with a powerful package of civilian assistance, and encourage the GOI to overcome budgetary and POLITICAL constraints to make significant new contributions to stabilizing Afghanistan. G8: The Ever-Growing Agenda - - - - - - - - - - - - - - ¶9. (SBU) Italy's ambitious list of priorities for its G8 Presidency include global financial governance, energy and climate change, Afghanistan, peacekeeping and development (particularly in Africa),food security and non-proliferation. Italy will host a record nine G8 Ministerials this year, culminating in the G8 Summit at La Maddalena, Sardinia. Italy plans a greater role for the G8's traditional Outreach session, by seeking greater involvement from the ""Outreach Five"" (China, India, South Africa, Brazil and Mexico) in the final Summit Declaration and by inviting Egypt. By expanding both the scope and the participation in the Summit, Italy runs the risk of diluting the agenda and duplicating efforts in areas like financial governance which are normally the purview of the G7 and G20. Gaza: Eager to Assist - - - - - - - - - - - ¶10. (SBU) While Italy called on Israel to take all measures to avoid civilian casualties, it squarely laid the blame for the recent Gaza crisis at Hamas' feet and reconfirmed that there can only be one Palestinian state. FM Frattini has made several recent trips to the region in an effort to assist resolving the issue. PM Berlusconi will host both Palestinian leader Abbas and Egyptian President Mubarak the week before your visit. Italy fully supports the Egyptian-led effort to create a sustainable ceasefire in Gaza. PM Berlusconi has indicated an Italian willingness to: -- participate in a multilateral effort to interdict the flow of arms to Gaza; -- help reactivate and expand EU Border Assistance Mission Rafah with the deployment of additional resources into an international monitoring force that would include the participation of Egypt, Turkey and the Palestinian Authority to stop the smuggling of weapons to Hamas; -- provide naval assets to patrol the Gaza coastline; -- and otherwise assist in Egyptian and Israeli efforts to prevent the resumption of the arms flow to Gaza. Climate Change: A Bridge Between Europe and the U.S.? - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶11. (SBU) On climate change, Italy sees itself, as it does on a number of other sensitive issues, as a bridge between the U.S. and other states. In this case, the proposed bridge is to the rest of Europe. The Italian Environment Ministry also has longstanding cooperation projects with China and developing countries in the climate and clean energy area, and strongly supports the use of ""carbon credits"" from such projects for meeting EU targets. The Ministry leads the U.S.-Italy climate partnership, which is focused on joint climate research and low-carbon technology development. ROME 00000159 004.2 OF 004 Environment Director General Dr. Corrado Clini and scientist Dr. Antonio Navarra, who will join you in a panel discussion of climate change, are the policy-level and technical leads for this partnership. Dr. Clini has led Italy's climate policy formulation for over 15 years. Two points to watch out for: 1) Italy has offered to host a meeting of the major economies' leaders at the G8 Summit; the Administration is still considering the nature and timing of such a meeting. 2) The European Commission just released a ""communication"" outlining its negotiating goals for the December climate meeting in Copenhagen, which has some problematic elements including a call for binding commitments from all OECD countries and up to $175 billion a year in funding for developing countries, conditional on commitments by those countries. It would be difficult for the USG to address this proposal before our domestic program has taken shape. Conclusion - - - - - - ¶12. (C) Berlusconi's shoot-from-the-hip style and verbal gaffes sometimes create bumps in RELATIONS between Italy and the U.S. Nevertheless, he staunchly supports and admires the U.S. and its people, and presides over a government that is forward-leaning in its desire to connect with and support the new administration as it moves forward on issues ranging from the Middle East peace process, Iran, Afghanistan, and the closure of Guantanamo. Despite its economic malaise, Italy remains a close and influential partner and will continue to be an important ally for the U.S. in NATO, the region and the world. Italians were proud to see you become the first Italian-American Speaker of the House. Your visit will be an important sign of the strength and closeness of the bilateral relationship and I am delighted that you are taking the opportunity to visit Italy. DIBBLE "