US embassy cable - 03ROME4980

C O N F I D E N T I A L  ROME 004980 
 
SIPDIS 
 
 
E.O. 12958: DECL: 10/31/2008 
TAGS: EFIN, ECON, IT, EUN 
SUBJECT: ECOFIN TOUR D'HORIZON: FRANCE'S BUDGET, ACCOUNTING 
STANDARDS, BASEL II, BALKANS RECONSTRUCTION 
 
REF: A. FRANKFURT 7111 
 
     B. ROME 4730 
     C. MILAN 00562 
 
Classified By: Minister Counselor for Economic Affairs Scott Kilner for 
 reasons 1.5 (b) 
 
1. (SBU) Summary: France's continued flouting of Stability 
and Growth Pact (SGP) rules and possible punitive measures 
will dominate discussions at the November 4 ECOFIN Council 
meeting in Brussels, Italian Finance Ministry officials told 
econoff in meetings this week. However, there is no political 
agreement among the Commission and Members States about what 
to do with France.  Two issues of key importance to the U.S. 
- the Takeover Directive and BASEL II - will not be on the 
agenda.  Commissioner Bolkenstein is expected to give a 
positive debrief of recent talks between the Commission and 
U.S. officials on accounting rules. End summary. 
 
WHAT TO DO WITH FRANCE? 
----------------------- 
 
2. (SBU) Carlo Baldocci, diplomatic advisor to Finance 
Minister Tremonti, and Carlo Monticelli, Senior Director for 
G7 and EU Affairs at the Finance Ministry, told econoff that 
Italian officials are looking with trepidation at the 
November 4 ECOFIN when the standoff with France over its 
continued disregard for SGP deficit rules is expected to come 
to a head. 
 
3. (C) The French are putting a full court press on large 
countries' leaders, specifically Berlusconi, Schroeder, Aznar 
and, to a lesser extent, Blair, to back them up in the 
expected confrontation with the Commission.  Despite Chirac's 
pressure, the Italians want to try to remain neutral in this 
fight and stand ready to be a broker if needed.  The Finance 
Ministry's Director General Bini Smaghi and his German 
counterpart Caio Wesser have met with French officials and 
suggested technical changes to the French budget that would 
conceivably bring France's budget closer to SGP deficit 
targets.  The ability to do so is there, but France's 
political will isn't, Baldocci said. 
 
4. (C) During the October 30th EU meeting with Balkan leaders 
on reconstruction efforts, Commissioner Solbes, the German 
Delegation, Luxembourg's Prime Minister, the Italian 
Presidency Delegation and French officials broke off from the 
day's proceedings to discuss France's 2004 budget.  Everyone 
was surprised that the French brought nothing new to the 
table.  Stymied by the French position, no political 
consensus was reached among this group regarding what 
punitive actions would be imposed on France. But the frost in 
the air between the Commission and the French was palpable, 
Baldocci commented. 
 
ACCOUNTING STANDARDS 
-------------------- 
 
5. (SBU) Aside from discussion about France, Commissioner 
Bolkenstein will report during the informal lunch proceedings 
on recent Commission-U.S. discussions on accounting standards 
and Sarbanes-Oxley.  Baldocci and Monticelli both commented 
that they understood that Bolkenstein will give a positive 
reading.  They also said that FinMins are eager to reach a 
political agreement so that they can delegate to the 
Commission the responsibility to work out the technical 
aspects of an accord.  This political agreement could be 
reached at the November 4th ECOFIN. 
 
BASEL II 
-------- 
 
6. (C) BASEL II is not on the agenda.  If Finance Minister 
Tremonti has his way, Baldocci remarked, it will be not 
considered again while Italy holds the EU Presidency.  The 
Italian government itself is bitterly divided about the 
application of BASEL II, he noted.  Note/Comment: As reported 
in ref c, Tremonti has repeatedly said that BASEL II may not 
be in the best national interests of Italy and has urged 
further revisions to the accord.  In particular, Tremonti has 
called for corrections in the new risk rating procedures 
imposed upon banks.  In contrast, Central Bank Governor 
Antonio Fazio has come out in favor of BASEL II even as it 
stands now.  On a broader level, Tremonti and Fazio have been 
sparring with each other over such issues as the draft 2004 
Italian budget, BASEL II, the Central Bank's supervision of 
bond offerings, and more.  Relations between the two are at 
their worst point and officials from both the Ministry and 
 
 
the Central Bank have raised concerns that this antagonism 
could interfere with the Italian Government's own ability to 
reach consensus on certain issues, including BASEL II.  End 
note/comment. 
 
TAKEOVER DIRECTIVE 
------------------ 
 
7. (SBU) The Takeover Directive is not scheduled to be 
discussed, according to the two Finance Ministry officials. 
Although Finance Ministry officials have the lead for the 
Italians, the Takeover Directive falls under the competency 
of the Competitiveness Council, which will meet on November 
10. The Ministry of Productive Activities (Industry) and the 
Ministry for EU Integration are part of the GOI's internal 
consultative process.  Nonetheless, econoff explained U.S. 
concerns about reciprocity provisions under the Takeover 
Directive to both Baldocci and Monticelli.  Both agreed to 
give us a head's up should they hear that the reciprocity 
issue has re-emerged. 
 
CLEARING UP MISCONCEPTIONS 
-------------------------- 
 
8. (SBU) Italian officials want to clear the record straight 
on what happened regarding the Investment Services Directive, 
remarked Monticelli. Despite press reports and claims by some 
Member States, Italy did not force a vote on the ISD over the 
U.K.'s objections (ref a, b).  The Presidency presented its 
compromise proposal and, afterwards, gave the U.K. delegation 
the opportunity to present an alternative proposal.  The 
British did, but their proposal was not supported by the 
majority of the Finance Ministers, and thus, was not 
considered. 
 
9. (SBU) Another misconception is what occurred at the 
October 27th Intergovernmental Conference (IGC), Monticelli 
said.  The Eurogroup (EU Finance Ministers and Central Bank 
Governors) do not have an official role in the IGC.  Their 
proposal to retain control over certain budgetary powers 
rather than relinquishing them to the European Parliament was 
informal and should be considered solely as a point of 
reference.  The Italian Presidency is encouraging the IGC to 
consider all points of reference. 
 
BALKAN RECONSTRUCTION 
------------------- 
 
10. (U) On October 30, the Italian EU Presidency and 
Commission held a meeting in Venice on the Balkans: "From 
Reconstruction to Economic Integration."  At this meeting, 
Finance Minister Tremonti presented five initiatives, which 
would bring together public and private sector financing and 
participation, for the energy and transport sectors in the 
Balkan countries. These initiatives will be supported by the 
European Bank for Reconstruction and Development, European 
Investment Bank and the World Bank.  According to Baldocci, 
the Commission and the Italian Government will contribute 20 
million euros and 15 million euros respectively to this 
initiative.  The Italian contribution will be in new money, 
disbursed in 2004, with 10 million euros coming from the 
Finance Ministry and 5 million from the MFA. 
 
 
SEMBLER 
 
 
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 2003ROME04980 - Classification: CONFIDENTIAL