US embassy cable - 03ROME4238

UNCLAS  ROME 004238 
 
SIPDIS 
 
 
SENSITIVE 
 
DEPT FOR EUR/ERA 
TREASURY FOR INTERNATIONAL AFFAIRS 
PARIS FOR USOECD 
FRANKFURT FOR WALLAR 
 
E.O. 12958: N/A 
TAGS: EFIN, IT, EUN 
SUBJECT: ITALY'S EU PRESIDENCY: FRANCE'S CHALLENGE TO THE 
STABILITY AND GROWTH PACT AND ASIAN CURRENCY VALUES TOP 
ECOFIN MEETING 
 
REF: A. A. ROME 4236 
     B. B. ROME 1117 
 
1. (SBU) Summary. France's continued flouting of Stability 
and Growth Pact budgetary guidelines dominated the September 
12-13 informal ECOFIN meetings in Stresa, Italy.  Although 
most delegations, with Holland and Austria being the most 
vocal, called for fines to be imposed on France, the French 
seem to be positioning themselves to dodge sanctions once 
again.  Italian Finance Minister Tremonti's call to review 
the euro's exchange rate with Asian currencies caught most 
delegations by surprise.  While Tremonti initially seemed to 
call for an intervention, he and other Italian finance 
ministry officials, under scrutiny, backtracked quickly and 
pushed instead for a "comprehensive review of the situation." 
 The Italians expect this issue will be discussed during this 
weekend's G7 meeting in Dubai.  Regarding the EU 
Constitutional treaty, Eurogroup Ministers did not call for a 
re-opening of the chapters.  However, they noted that if some 
of the chapters are re-opened during the IGC, the Eurogroup 
will put forward some new ideas. End Summary. 
 
French Budget Deficit 
--------------------- 
 
2. (SBU) Not unexpectedly, France announced at the ECOFIN 
that it would not comply with the SGP's deficit ceiling - 3 
per cent of gross domestic product - for the third 
consecutive year in 2004.  Despite heated criticism and 
impassioned pleas by other finance Ministers, especially the 
Dutch Finance Minister Gerrit Zalm, French Finance Minister 
Francis Mer stated that it is "unrealistic" to expect French 
to get its books in order in 2004. Italian Finance Ministry 
and press sources told econoff that it was clear that 
France's strategy from the start was not to give an inch, 
although Mer later made conciliatory overtures, stating that 
his 2004 budget would pave the way for meeting the deficit 
targets in 2005. 
 
3. (SBU) Also evident, sources stated, was the Eurogroup's 
deep divide over what should be the next step with France. 
Smaller countries lined up strongly in favor of imposing 
sanctions, while larger countries, including Italy, and the 
Commission itself were more willing to give France more time. 
Commissioner Solbes, trying to avoid a true confrontation 
with France, dangled out the possibility that if the October 
7 ECOFIN finds that France's  2004 budget includes measures 
to tackle the deficit, ministers would not need to impose 
disciplinary measures in the short term. "We can not talk 
about sanctions until France's budget is known," he stated at 
Friday's press conference. Solbes also made an oblique 
reference to a provision of the pact that allows a government 
to exceed its fiscal threshold under "special circumstances". 
 This provision has been a topic of discussion since the 
Germans went through the same exercise earlier in the year. 
The "special circumstances" speculated about at that time 
were the floods of 2002 and the Iraq war.  Neither met the 
criteria.  Solbes remarked that interpretation of this EU 
protocol should be as restrictive as possible. 
 
4. (SBU) Comment:  There was much grumbling among the smaller 
delegations, including the soon to be EU members in their 
first official EU meeting, in the hallways following Solbes' 
comments.  An official from Hungary's Embassy to Rome 
commented to econoff that, while not surprising, it is 
remarkable and embarrassing how France and the other big 
countries can dictate the rules.  Press contacts also told 
econoff that Dutch Finance Minister Zelm continued to fume 
during the two-day meeting and underscored with them that the 
Dutch threat to sue the Commission for failure to enforce its 
own rules is not an empty one.  Although Mer later modified 
his aggressive stance, France's perceived intransigence made 
for a tense atmosphere. End Comment. 
 
Asian Currencies 
---------------- 
 
5. (SBU) Italy's preoccupation with the value of Asian 
currencies left various ministries' officials shaking their 
heads in confusion.  During the September 12th press 
conference, Finance Minister Tremonti seemed to call for some 
action to counteract the Euro's climb against Asian 
currencies. Tremonti stated that during the day's sessions, 
Eurogroup ministers had discussed the inequilibrium between 
Europe and Asian currency values, in the context of a 
discussion of the world economic situation in prelude to 
eurozone participation in the G7 meeting in Dubai. Tremonti 
further commented that an "intervento" - literally translated 
as intervention - might be required.  Tremonti's words spun 
up many of the delegations, including those from Belgium and 
Luxembourg, who denied to their national press that the 
ministers had discussed specific actions to address the 
issue. Italian Finance Ministry officials later tried to 
clarify Tremonti's remarks, arguing that what he really meant 
was the need for an urgent and comprehensive review of the 
situation. The Finance Ministry's spokesperson told 
journalists that Italy favors a review of the euro's exchange 
rate not only with China but also India and Japan. 
 
6. (U) Italy expects to issue a statement on behalf of the 
ECOFIN regarding the inequilibrium of the exchange rate this 
week. Italian officials also noted that the IMF's managing 
director will raise the issue of currency valuations in 
emerging markets during the Dubai meetings next weekend. 
 
7. (SBU) Tremonti's diplomatic advisor told econoff that it 
was an unfortunate choice of words given the problem of 
translating its various meanings. (Note: An "intervento" also 
can mean a speech or to participate in something. End Note.) 
The advisor added that Tremonti and other Eurogroup ministers 
understand that they must tread carefully.  But Tremonti and 
a few others agree that this is an urgent matter that needs 
to be reviewed.  A Reuters correspondent told econoff that 
the Dutch strongly echoed Italian concerns about weak Asian 
currencies vis-a-vis the euro.  In contrast, a BBC 
correspondent commented to econoff that although he tried to 
press Chancellor of the Exchequer Gordon Brown on the issue 
of exchange rates, Brown readily dismissed the issue. When 
queried about the exchange rate, European Central Bank 
Governor Wim Duisenberg told journalists that concern is much 
wider than just the situation in China and discussed the 
strong effect on eurozone imports of the appreciating euro 
worldwide.  While the ECB did not take an official position 
on whether exchange rates are satisfactory, Duisenberg warned 
that the decision to float an exchange needs to be carefully 
calibrated since many Asian countries carry a heavy bad-loan 
burden, have weak financial market development and many 
struggling, if not failing, state enterprises. 
 
8. (SBU) Comment: Several journalists were overheard to be 
questioning why Italy raised this issue now.  One British 
journalist asked sardonically of other journalists how much 
they thought the U.S., given Treasury Secretary Snow's recent 
visit to China, was behind Italy's push.  Few seemed to know 
in Stresa that China has been a hot-button political issue in 
Italy for several months.  The euro's strength vis-a-vis the 
Chinese yuan and other Asian currencies are being blamed for 
job losses in Italian export sectors.  (Note: See ref A on 
Italy's debate on the "threat" from China.  End Note) And, as 
early as March, Tremonti raised his concerns with us about 
China, telling the Ambassador that China is taking away much 
of western production and markets. (ref B) 
 
Eurozone Growth 
--------------- 
 
9. (SBU) Regarding economic growth, Finance Ministers, the 
ECB President, and Commission officials agreed that economic 
recovery in Europe will not occur earlier than in mid-2004. 
While officials are encouraged by the positive news coming 
from the United States and Japan, they are not certain that a 
recovery in these regions is fully underway or significant 
 
enough to stimulate growth in Europe.  On the constitutional 
treaty produced by the EU Convention, Tremonti said that the 
Eurogroup has agreed not to ask for a re-opening of the 
chapters.  That said, should the overall text come up for 
debate at the Inter-Governmental Conference, the Eurogroup 
does have some concerns about the budgetary powers given to 
the European parliament and would seek some changes. 
 
10. (U) This cable was cleared by USEU and AMCONGEN Frankfurt. 
SEMBLER 
 
 
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	2003ROME04238 - Classification: UNCLASSIFIED