US embassy cable - 03ROME4651

UNCLAS SECTION 01 OF 02 ROME 004651 
 
SIPDIS 
 
 
PARIS FOR USOECD 
FRANKFURT FOR WALLAR 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, IT, EUN 
SUBJECT: ITALYS G7 FINANCIAL SHERPA CRITICIZES EU STUDY 
ON ECONOMIC GROWTH 
 
1.  SUMMARY: A HIGH-LEVEL STUDY GROUPS RECOMMENDATIONS 
FOR STIMULATING GROWTH IN EUROPE RECEIVED MUCH CRITICISM 
IN ROME, ESPECIALLY FROM LORENZO BINI SMAGHI, ITALYS G7 
FINANCIAL SHERPA. IN JULY 2002, THE EUROPEAN COMMISSION 
PRESIDENT ESTABLISHED THIS GROUP TO EXPLORE STRATEGIES 
FOR ECONOMIC GROWTH IN EUROPE. ANDRE SAPIR, AFFILIATED 
WITH THE FREE UNIVERSITY OF BRUSSELS, A MEMBER OF THE 
COMMISSIONS GROUP OF POLICY ADVISORS AND CHAIR OF THE 
STUDY GROUP, AND FELLOW GROUP MEMBERS RECENTLY CAME TO 
ROME TO DISCUSS THEIR JUST-PUBLISHED REPORT, AN AGENDA 
FOR GROWING EUROPE. END SUMMARY. 
 
2. ON SEPTEMBER 25, ISAE - ISTITUTO DI STUDI ED ANALISI 
ECONOMICA - A SEMI-GOVERNMENTAL ITALIAN RESEARCH 
INSTITUTE, HOSTED A ROUNDTABLE TO PRESENT AN AGENDA FOR 
GROWING EUROPE.  IN HIS REMARKS, SAPIR UNDERSCORED THAT 
THE EUS TOP PRIORITY MUST BE ECONOMIC GROWTH.  WITHOUT 
GROWTH, HE STATED, EUROPES SOCIAL MODEL CANNOT BE 
SUSTAINED; AND THE SUCCESS OF ENLARGEMENT WOULD BE 
JEOPARDIZED.  GROWTH, HE CONTINUED, REQUIRES MASSIVE 
REFORMS IN ECONOMIC POLICIES AND DELIVERY MODES.  ALSO 
NECESSARY ARE INCENTIVES FOR IMPROVED ECONOMIC 
PERFORMANCE AND PENALTIES WHEN DEFICIT TARGETS ARE NOT 
MET. IN ITS REPORT, THE STUDY GROUP OFFERS SIX 
RECOMMENDATIONS FOR INCREASING GROWTH AND JOBS. WE WANT 
TO REPLICATE THE U.S. EXPERIENCE IN TERMS OF GROWTH, BUT 
ALSO CREATE JOBS, SAPIR REMARKED. 
 
RECOMMENDATIONS FOR THE FUTURE 
------------------------------ 
 
3. THE GROUP MADE THE FOLLOWING RECOMMENDATIONS: 
-- MAKE THE SINGLE MARKET MORE COMPETITIVE AND DYNAMIC; 
-- BOOST INVESTMENT IN KNOWLEDGE  I.E., BOTH BY 
OTH BY 
INCREASING SPENDING ON RESEARCH FROM AN AVERAGE OF 1.9 
PERCENT TO 3 PERCENT, AND ALSO ON HIGHER EDUCATION; 
-- IMPROVE THE EUS MACROECONOMIC POLICY FRAMEWORK; 
-- REDIRECT STRUCTURAL FUNDS TO LOW-INCOME COUNTRIES, 
RATHER THAN TO LOW-INCOME REGIONS; 
-- ADOPT MORE EFFECTIVE DECISION MAKING AND REGULATION; 
AND 
-- DIVIDE THE EU BUDGET INTO THREE FUNDS: A GROWTH FUND, 
A CONVERGENCE FUND, AND A RESTRUCTURING FUND. 
 
FOLLOWING THE AUTHORS PRESENTATION OF THEIR REPORT, 
PANELISTS, INCLUDING THE GOI REPRESENTATIVE, ITALIAN 
FINANCE MINISTRY DIRECTOR GENERAL LORENZO BINI SMAGHI, 
(WHO IS ALSO ITALYS FINANCIAL SHERPA), RESPONDED. 
 
THE OBJECTIONS 
-------------- 
 
4. BINI SMAGHI CHALLENGED A KEY RECOMMENDATION OF THE 
REPORT  THAT THERE SHOULD BE A MORE FLEXIBLE STABILITY 
AND GROWTH PACT, ESPECIALLY IN TERMS OF DEFICIT TARGETS 
OF 3 PERCENT.  HE CONTENDED THAT EASING UP ON THE 3 
PERCENT TARGET WOULD BE ILL-ADVISED WHEN EURO-ZONE GDP 
GROWTH IS HOVERING AROUND 0.5 PERCENT.  DISCIPLINE IS 
IS 
NEEDED MOST WHEN GROWTH IS STAGNANT, HE STATED.  IN A 
NEAR-SARDONIC TONE, HE STATED THAT THIS RECOMMENDATION 
SEEMED TO HAVE BEEN MADE TO PLEASE THOSE GOVERNMENTS THAT 
STRONGLY SUPPORT AN EASING OF RIGID STABILITY PACT RULES. 
 
5. AT THE SAME TIME, AND IN SOMEWHAT OF A CONTRADICTION, 
BINI SMAGHI ARGUED THAT THE 3 PERCENT DEFICIT TARGET 
MIGHT BE THE WRONG GOAL. IF THE MAASTRICHT CRITERIA WERE 
ESTABLISHED TODAY INSTEAD OF IN THE EARLY NINETIES, THE 
DEFICIT TARGET WOULD HAVE BEEN LESS THAN THREE PERCENT, 
HE STATED.  REGARDING THE OVERALL TOTAL DEBT/GDP TARGET, 
BINI SMAGHI CONTENDED THAT EVEN THOUGH ITALY AND BELGIUM 
HAVE A HIGH DEBT/GDP RATIO, BOTH COUNTRIES SURPRISINGLY 
HAVE THE HIGHEST LEVEL OF SUSTAINABILITY THAT IS, 
SERVICING THE DEBT PRESENTS NO PROBLEM, HE CLAIMED.  HE 
MENTIONED THAT IF THE MAASTRICHT TARGETS WERE EVER TO BE 
RECONSIDERED, THE FOCUS SHOULD BE ON THE SUSTAINABILITY 
OF THE DEBT ITSELF, RATHER THAN THE DEBT/GDP RATIO. 
 
6. THE REPORTS RECOMMENDATIONS TO GIVE STRUCTURAL FUNDS 
TO LOW-INCOME COUNTRIES RATHER THAN LOW-INCOME REGIONS 
RAISED BINI SMAGHIS CONSTERNATION.  NOT SURPRISINGLY, HE 
 
ROME 00004651  002 OF 002 
 
GOVERNMENTS.  BINI 
SMAGHI ALSO OBJECTED TO THE RECOMMENDATION OF REMOVING 
FUNDS MANAGEMENT FROM THE COMMISSION AND GIVING 
RESPONSIBILITY TO NATIONAL GOVERNMENTS. HE ARGUED THAT 
DESPITE THE SUCCESS THE GOVERNMENTS OF IRELAND, SPAIN AND 
PORTUGAL DEMONSTRATED IN INVESTING STRUCTURAL FUNDS 
ALLOCATED TO THEM, NATIONAL COMPETENCE SHOULD NOT BE 
CONSIDERED A MODEL FOR THE FUTURE. 
 
7. COMMENT: ITALIAN POLITICIANS HAVE BEEN CONCERNED THAT 
WITH ENLARGEMENT, ITALYS SOUTH WILL LOSE OUT ON ITS 
SHARE OF STRUCTURAL FUNDS. UNDER THE 2000-2004 EU 
SPENDING PROGRAM, SOUTHERN ITALY HAS BEEN ELIGIBLE TO 
RECEIVE APPROXIMATELY 25 BILLION EUROS FOR DEVELOPMENT OF 
INFRASTRUCTURE, COMMUNICATIONS AND HUMAN RESOURCES, AND A 
WIDE RANGE OF REGIONAL AND MUNICIPAL PROJECTS.  BY THE 
E 
END OF 2002, HOWEVER, A MERE 8 PERCENT OF THESE FUNDS HAS 
BEEN APPROVED FOR DISBURSEMENT BY THE EU. PROBLEMS 
INCLUDE RED TAPE, POORLY IDENTIFIED PROJECTS, LACK OF 
SKILLED PERSONNEL IN REGIONAL GOVERNMENTS AND IN SOME 
CASES, CORRUPTION. END COMMENT. 
 
8.  BINI SMAGHI ALSO CRITICIZED THE REPORTS AUTHORS FOR 
THEIR FAILURE TO DISCUSS THE EFFECTS OF AN AGING 
POPULATION ON THE PENSION AND HEALTH SYSTEMS AND FOR 
FAILURE TO PROVIDE SPECIFIC RECOMMENDATIONS FOR PENSION 
REFORMS. ITALY SPENDS NEARLY 15 PERCENT OF ITS GDP ON 
PENSIONS, HE SAID, AND HIGH PENSION EXPENDITURES LIMIT 
THE POTENTIAL FOR ECONOMIC GROWTH.  AN EURO-WIDE APPROACH 
TO PENSION REFORM IS NEEDED TO HELP BRING COSTS DOWN, HE 
CONCLUDED. 
 
9. THE REPORTS AUTHORS CALLED ON THE COMMISSION TO 
INCREASE BUDGETARY OVERSIGHT. BINI SMAGHI CONCURRED, BUT 
ALSO URGED MORE EFFECTIVE USE OF THE EXISTING EARLY 
WARNING PROCEDURE FOR COUNTRIES FAILING TO MEET DEFICIT 
TARGETS. 
 
10. IN HIS CONCLUDING REMARKS, BINI SMAGHI SPOKE ABOUT 
OUT 
THE POTENTIAL IMPACT OF THE SWEDISH VOTE AGAINST THE 
EURO.  HE ARGUED THAT THE LEGITIMACY OF THE EURO CURRENCY 
ITSELF WAS CHALLENGED BY THE REFERENDUMS RESULTS. HOW 
CAN GOVERNMENTS DEFEND THE EURO AS A EUROPEAN CURRENCY IF 
IT IS NOT EMBRACED BY ALL, HE ASKED. 
 
COMMENT 
------- 
 
11. PRIOR TO ITALYS EU PRESIDENCY, FINANCE MINISTRY 
OFFICIALS EXPRESSED GREAT FRUSTRATION WITH THE STABILITY 
AND GROWTH PACT. WHILE ITALY HOLDS THE PRESIDENCY, 
HOWEVER, FINANCE MINISTER TREMONTI AND HIS TEAM HAVE FELT 
OBLIGED TO DEFEND THE PACT.  NOT SURPRISINGLY, THEN, BINI 
SMAGHIS STRONG DEFENSE OF THE STABILITY AND GROWTH PACT 
DEFICIT TARGET MIRRORS WHAT WE HAVE BEEN HEARING LATELY 
FROM TREMONTI.  COME JANUARY, HOWEVER, THE STORY MAY WELL 
BE DIFFERENT, ESPECIALLY UNDER THE LIKELY SCENARIO THAT 
ITALY ITSELF WILL STRUGGLE TO MEET THE 3 PERCENT DEFICIT 
TARGET IN 2004. (COMMENT: ITALYS 2004 DRAFT BUDGET 
PREDICTS A DEFICIT OF 2.2 PERCENT.  NONETHELESS, WE 
BELIEVE THIS IS AN OVERLY OPTIMISTIC GIVEN THE BUDGETS 
ETQS 
LIMITED SPENDING CUTS.  BUDGET TO BE REPORTED SEPTEL. END 
COMMENT.) 
 
12. SURPRISINGLY, BINI SMAGHI DID NOT PICK UP ON THE MAIN 
THEME OF THE REPORT: THE ACUTE NEED FOR ECONOMIC GROWTH. 
HE OFFERED NO ALTERNATIVES TO THE GROUPS 
RECOMMENDATIONS, AN ESPECIALLY GLARING OMISSION SINCE 
ITALY HAS ONE OF THE SLOWEST GDP GROWTH RATES IN EUROPE. 
END COMMENT. 
 
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2003ROME04651 - Classification: UNCLASSIFIED