ITALIAN ECONOMIC PRIORITIES IN RUN-UP TO LONDON

UNCLAS ROME 000320 DEPT FOR EUR/WE TREASURY FOR OIA VIMAL ATUKORALA AND CLAY BERRY DEPT PLEASE PASS TO USTR SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD IT SUBJECT: ITALIAN ECONOMIC PRIORITIES IN RUN-UP TO LONDON ¶1. (SBU) Summary - The Italian economy remains troubled, especially as exports have turned down dramatically. A top Central Bank official expects government instruments to bolster Italian banks' capital to be fully subscribed. The government is shifting its focus to addressing the prospect of higher unemployment and watching out for inflation. Italy looks to the US for leadership at the next G20 meeting, especially on boosting trade and strengthening the IFIs. The official says the press has exaggerated the European East-West economic policy divide. Italy is watching eastern and central European economies closely, given Italian bank exposure, but does not consider that the entire region is in dire straits. End Summary. ¶2. (U) The Charge on March 16 met with the number two official at the Central Bank of Italy, who outlined Italy's economic situation and the government's approach to the ongoing global financial crisis and recession. Director General Fabrizio Saccomanni described an Italian economy that remains troubled, especially as export markets have deteriorated quickly. Italy's export strength has traditionally lain in a diversity of niche markets, especially in manufacturing. All such markets have, improbably, turned down at once. As a result, firms are seeking new loans to finance unsold inventory, causing Italian banks to balk somewhat. ¶3. (U) Saccomanni predicted that the recently unveiled Tremonti instruments for bolstering bank capital will be fully subscribed (10-12 billion euros) and that the press has made too much of banks' alleged reluctance to agree to the government's conditions on executive pay caps and loan monitoring. The Bank's and the government's main economic concern now is the prospect of dramatically higher unemployment among temporary workers - primarily but not exclusively young people shut out of permanent employment by expensive government-mandated employee benefits. The Bank is also alert to inflationary signs, given the dramatic injections of liquidity and increased government spending around the world. ¶4. (SBU) Regarding the global financial crisis, Saccomanni argued that the large economies should allow time for the measures they have taken to date to work. He believes markets and business confidence will be bolstered if the London G20 summit produces agreement on three areas: increased export financing, resumption of trade talks, and strengthening the IFIs' resources and mandates. In this, Italy is looking for US leadership. Saccomanni lamented that the advanced economies recently sent mixed signals by pledging to reject protectionism, but then shelving the Doha round trade agenda. ¶5. (SBU) Saccomanni charged that press misrepresented the events of last month's meeting of western and eastern European economic policymakers in Berlin. The meeting was intended to achieve policy coordination, but several central end eastern officials unexpectedly unveiled a 200 billion euro bailout proposal. While the conferees agreed to a multi-tool coordination and assistance plan (IMF-monitored balance of payments assistance, trade credits, development programs),the press chose to focus on the 'failed' bailout proposal. ¶6. (U) Saccomanni said old Europe leaders see in central and eastern Europe a mixed bag of economic circumstances - not all countries are in same situation. The Bank of Italy is paying especially close attention to countries where Italian banks have ramped up lending in recent years. Some such countries - Slovenia and Slovakia, for example - are doing very well, according to Sacommanni. DIBBLE