US embassy cable - 03ROME4541

UNCLAS SECTION 01 OF 02 ROME 004541 
 
SIPDIS 
 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, IT, EUN 
SUBJECT: OPPOSITION PARLIAMENTARIAN PAINTS A SOMBER VIEW OF 
    ITALYS ECONOMY 
 
REF: MILAN 00639 
 
1. (SBU) SUMMARY: CENTER-LEFT PARLIAMENTARIAN NICOLA ROSSI 
EXPRESSED DEEP CONCERN ABOUT ITALYS ECONOMY IN A SEPTEMBER 
24TH CONVERSATION WITH ECONOFFS.  CIRCUMSPECT IN HIS 
CRITICISM OF THE CENTER-RIGHT GOVERNMENT, ROSSI ARGUED, 
NONETHELESS, THAT WITHOUT SIGNIFICANT STRUCTURAL REFORMS, 
ECONOMIC GROWTH IN ITALY WILL CONTINUE TO BE WEAK.  HE 
CONTENDED THAT THE GAP IN ECONOMIC POTENTIAL BETWEEN THE 
U.S. AND EUROPE IS WIDENING AND, EVEN AMONG EUROPEAN 
COUNTRIES, ITALY IS FALLING FURTHER BEHIND.  END SUMMARY. 
 
2. (U) ON THE EVE OF THE BERLUSCONI GOVERNMENTS BUDGET 
ET 
PRESENTATION TO PARLIAMENT, WE MET WITH NOTED ECONOMIST AND 
LONG-TIME EMBASSY CONTACT NICOLA ROSSI. ROSSI WAS ELECTED 
TO THE LOWER CHAMBER OF PARLIAMENT IN 2002 ON A DEMOCRATICI 
DI SINISTRA, LULIVIO  DEMOCRATS OF THE LEFT/OLIVE TREE 
COALITION TICKET.  PRIOR TO BEING ELECTED, ROSSI WAS 
ECONOMIC ADVISOR TO THEN-PRIME MINISTER DALEMA; HEADED 
DALEMAS COUNCIL OF ECONOMIC EXPERTS; AND SERVED AS AN 
ADVISOR TO THEN-TREASURY MINISTER VINCENZO VISCO.  ROSSI 
HAS HIS DOCTORATE IN ECONOMICS FROM THE LONDON SCHOOL OF 
ECONOMICS. 
 
3. (U) ITALYS ECONOMIC FOUNDATION IS SHAKY, ROSSI 
COMMENTED. GROWTH IS STAGNANT, JUST 0.4 PERCENT, OR LESS, 
PROJECTED FOR 2003. ITALYS INFLATION RATE OF 2.9 PERCENT 
IN A TWELVE-MONTH PERIOD, JULY 2002-JULY 2003, IS ONE 
    PERCENT HIGHER THAN THE AVERAGE FOR THE EURO-ZONE 
ECONOMIES.  THE TREND IS VERY WORRISOME, HE DECLARED. 
 
4. (SBU) AVOIDING OUTRIGHT PARTISAN CRITICISM OF THE 
BERLUSCONI ADMINISTRATION, ROSSI STATED THAT THE RULING 
RULING 
GOVERNMENT SQUANDERED AN OPPORTUNITY TO TACKLE ITALYS 
ECONOMIC PROBLEMS HEAD ON. COMING INTO OFFICE WITH A STRONG 
MAJORITY, THE GOVERNMENT HAD THE POLITICAL STRENGTH TO 
ADOPT REAL REFORMS.  INSTEAD, HE SAID, THE GOVERNMENT HAS 
RELIED ON ONE-TIME MEASURES TO PROP UP THE ECONOMY AND KEEP 
ITALIAN FINANCES IN LINE WITH STABILITY AND GROWTH PACT 
DEFICIT TARGETS.  ROSSI REMARKED, WRYLY, THAT EVEN WITH 
SUCH MEASURES, "IF THE BLANKET IS SHORT, YOUR FEET STILL 
GET COLD. 
 
5. (SBU) CONTINUING, HE CONTENDED THAT THE BERLUSCONI 
GOVERNMENTS STRATEGY IS TO DO JUST ENOUGH TO STAY WITHIN 
THE STABILITY AND GROWTH PACT DEFICIT GOAL OF 3 PERCENT. 
TO MAKE THE BOOKS LOOK BETTER, THE GOI RECENTLY PRESENTED A 
BILL TO PARLIAMENT TO USE ANTICIPATED REVENUES IN 2004 FOR 
2003 EXPENDITURES. ROSSI ALSO RAISED A RED FLAG ABOUT THE 
PRIMARY SURPLUS, A KEY BUDGETARY INDICATOR (REVENUES MINUS 
THE NET EXPENSE OF INTEREST PAYMENTS).  THE BUDGET SURPLUS 
DECLINED FROM FIVE PERCENT OF GDP IN 1997 TO AN ESTIMATED 
D 
TWO PERCENT OF GDP THIS YEAR. (NOTE: THIS AGGREGATE IS 
CONSIDERED IMPORTANT BECAUSE PRIMARY SURPLUS FUNDS ARE USED 
TO PAY INTEREST ON THE PUBLIC DEBT, AND THE EU WATCHED THIS 
INDICATOR WAS CAREFULLY BEFORE ITALYS ADMISSION INTO THE 
EMU. END NOTE). ROSSI SAID THE GOVERNMENT SHOULD HAVE TAKEN 
    ADVANTAGE OF LOW INTEREST RATES AND IMPLEMENTED MEASURES TO 
REDUCE THE DEBT/GDP RATIO, WHICH CONTINUES TO BE ABOVE 100 
PERCENT -- WELL ABOVE THE 60 PERCENT MAASTRICHT TARGET. 
 
6. (SBU) ROSSI DID MAKE ONE POINTED JAB AT THE RULING 
GOVERNMENT, BY ARGUING THAT THE BERLUSCONI GOVERNMENTS 
LACK OF ACTION INJECTED MASSIVE UNCERTAINTY INTO THE 
ECONOMIC SYSTEM AMONG FIRMS AND HOUSEHOLDS ALIKE. 
 
7. (SBU) BROADENING HIS CRITIQUE, ROSSI COMMENTED THAT 
ITALIAN AND OTHER EUROPEAN LEADERS ARE NOT TACKLING THE 
HARD PROBLEMS THEMSELVES BUT INSTEAD ARE WAITING FOR A 
U.S.-LED RECOVERY TO HELP STIMULATE THEIR ECONOMIES. IN 
ADDITION, IT IS CLEAR THAT THE FRENCH AND GERMANS ALSO WANT 
ANT 
TO ENCOURAGE BRUSSELS TO EASE UP ON STABILITY AND GROWTH 
PACT RULES, HE ARGUED.  HOWEVER, AN EASING OF RULES WOULD 
BE EXACTLY THE WRONG THING FOR ITALY.  A MORE FLEXIBLE PACT 
WOULD LIKELY PUSH UP INTEREST RATES.  ITALY, WITH A HIGHER 
DEBT TO GDP BURDEN THEN EITHER FRANCE OR GERMANY, COULD ILL 
AFFORD HIGHER INTEREST RATES.  ITALY, HE SAID, SHOULD BE 
THE WARDEN DEFENDING THE PACT, NOT AN ADVOCATE FOR 
WEAKENING IT. 
 
8. (U) REGARDING PENSION REFORM, THE DRAFT PROPOSALS ARE 
 
ROME 00004541  002 OF 002 
 
L, WOULD REQUIRE 
ITALIANS FROM 2008 ONWARDS TO PAY 40 RATHER THAN 35 YEARS 
OF CONTRIBUTIONS BEFORE THEY CAN RETIRE. FURTHER DISCUSSION 
OF THE PENSION REFORM MEASURES WILL BE REPORTED SEPTEL. END 
NOTE.) THE PERCENTAGE OF WORKERS COVERED BY THESE NEW 
MEASURES IS SMALL.  IN THE SHORT TERM, SPENDING ON PENSIONS 
IS EXPECTED TO INCREASE. 
 
9. (U) ROSSI PRAISED THE GOVERNMENTS RECENT LABOR REFORM 
MEASURES, WHICH WILL ENCOURAGE, FOR EXAMPLE, THE CREATION 
OF PART-TIME JOBS AND JOB-SHARING.  NONETHELESS, HE QUERIED 
WHETHER THE RIGHT REFORMS WERE PURSUED AND ADOPTED. 
ITALIAN LABOR MARKETS ARE FLEXIBLE IN TERMS OF ENTRY  THE 
FINDING OF A NEW JOB OR HIRING OF NEW EMPLOYEES.  THE 
GREATER DIFFICULTY IS IN TERMS OF EXITING - THE DISMISSAL 
OF EMPLOYEES OR DOWNSIZING OF WORKFORCES, HE REMARKED. 
 
10. (SBU) OVERALL, ROSSI IS PESSIMISTIC ABOUT THE FUTURE 
PERFORMANCE OF THE ITALIAN ECONOMY.  EVEN BEYOND PENSION 
AND LABOR REFORMS, ITALIANS NEED TO RECAPTURE THEIR ABILITY 
TO INNOVATE, HE ARGUED.  WE WILL CONTINUE TO FALL BEHIND 
UNLESS WE KNOW HOW TO INNOVATE AND TO BECOME ENTREPRENEURS. 
EUROPE NEEDS TO CATCH UP WITH THE UNITED STATES; WE NEED TO 
CATCH UP WITH EUROPE. HE ALSO URGED A FASTER PROCESS OF 
LIBERALIZATION OF ENERGY AND OTHER KEY MARKETS, WHICH, HE 
SAID, ITALY AS WELL AS FRANCE AND GERMANY HAVE LARGELY 
STOPPED. 
 
    11. (SBU) COMMENT: THE OPPOSITION, WITH AN EYE TO THE 2004 
04 
PARLIAMENTARY ELECTIONS, WILL USE ITALYS CONTINUED ANEMIC 
ECONOMIC PERFORMANCE TO CHALLENGE THE RULING GOVERNMENT; 
AND ROSSI, AS AN OPPOSITION PARLIAMENTARIAN, CLEARLY HAS A 
VESTEDINTEREST IN CRITICIZING THE RULING GOVERNMENT. THAT 
SAID, EVEN BERLUSCONIS SUPPORTERS ARE ECHOING MANY OF 
ROSSIS COMMENTS, ALTHOUGH COALITION MEMBERS SHARE 
CULPABILITY FOR NOT PURSUING MORE VIGOROUS ECONOMIC REFORM. 
CONCERNED ABOUT LOSING THE SUPPORT OF THEIR ELECTORATE, 
JUNIOR MEMBERS, SUCH AS THE NORTHERN LEAGUE, HAVE 
DELIBERATELY THWARTED GOVERNMENT EFFORTS TO PURSUE MORE 
FUNDAMENTAL PENSION REFORM (REFTEL). 
 
12. (U) IN ADDITION, CONFINDUSTRIA, THE LARGEST EMPLOYERS 
ASSOCIATION, HAS STATED THAT THE PENSION REFORM PROPOSAL IS 
NEITHER BOLD NOR AGGRESSIVE ENOUGH, (ALTHOUGH CONFINDUSTRIA 
IS EXPECTED TO SUPPORT THE PACKAGE IN EXCHANGE FOR LOWER 
PAYROLL TAX RATES FOR SOME EMPLOYEES). CONFINDUSTRIA HAS 
ALSO MADE SIMILAR COMMENTS ABOUT THE GOVERNMENTS OVERALL 
ECONOMIC REFORMS. THE DEBATE OVER THE BUDGET IN THE NEXT 
EXT 
FEW WEEKS WILL SHOW WHETHER, ONCE AGAIN, THE STATUS QUO 
WILL PREVAIL IN ITALY. END COMMENT. 
 
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 2003ROME04541 - Classification: UNCLASSIFIED