US embassy cable - 04ROME2630

UNCLAS SECTION 01 OF 03 ROME 002630 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: PGOV, ECON, IT, ITALIAN POLITICS 
SUBJECT: NIGHT OF THE LONG KNIVES ITALIAN STYLE: FINANCE 
MINISTER OUSTED 
 
REF: A. ROME 2280 
     B. ROME 0791 

SUMMARY 
------- 
 
1. (C)  FINANCE MINISTER GIULIO TREMONTI WAS FORCED OUT OF 
OFFICE JULY 2 BY DEPUTY PM FINI, WHO THREATENED TO QUIT THE 
GOVERNMENT ABSENT TREMONTI'S RESIGNATION.  FINI'S PUSH FOR 
MORE POWER OVER ECONOMIC DECISION MAKING HAD BEEN STYMIED BY 
TREMONTI.  BERLUSCONI, IN A SURPRISE MOVE, NAMED HIMSELF 
ACTING FINANCE MINISTER, A POST HE COULD HOLD UNTIL THE 
FY2005 BUDGET IS PASSED IN DECEMBER.  AT BERLUSCONI'S JULY 5 
ECOFIN DEBUT, ITALY SKIRTED AN "EARLY WARNING" FOR POSSIBLY 
EXCEEDING A KEY RATIO MEASURING THE BUDGET DEFICIT/GDP 
CEILINGS.  THE GOVERNMENT NOW FACES TOUGH INTERNAL 
NEGOTIATIONS OVER ITS ECONOMIC PROGRAM, WITH BERLUSCONI 
RHETORICALLY COMMITTED TO SWEEPING TAX REFORM TO FULFILL HIS 
2001 CAMPAIGN PLEDGE AND FINI'S NATIONAL ALLIANCE AND A 
CENTRIST COALITION ALLY LOOKING FOR AN UP TICK IN SOCIAL 
SPENDING FOR ITALY'S UNDERDEVELOPED SOUTH AND MORE PROGRESS 
TOWARDS FEDERALIZING ITALY'S GOVERNMENT AS CONDITIONS FOR 
CONTINUED SUPPORT OF THE COALITION.  SPARKS WILL FLY AS 
BUDGET SEASON KICKS INTO HIGH GEAR, AND ESPECIALLY AS 
BERLUSCONI MUST REFEREE THE DIFFICULT POLITICAL CHOICES OF 
DECIDING WHICH SPENDING CUTS TO TAKE TO SATISFY COALITION 
PARTIES EAGER TO PROTECT THEIR OWN PORK BARREL INTERESTS. 
BERLUSCONI WILL ALSO PROBABLY NEED TO DODGE THE CRIES OF 
"FOUL!" AS HIS DETRACTORS WILL SEE HIS FINANCE MINISTER 
PORTFOLIO AS ONE MORE WAY TO SOLIDIFY HIS HOLD ON ITALY'S 
TELECOMMUNICATIONS SECTOR.  END SUMMARY. 
 
CENTER-RIGHT COALITION TENSIONS ERUPT; BERLUSCONI STEPS IN. 
    --------------------------------------------- -------------- 
 
2. (SBU) TENSIONS WITHIN THE CENTER-RIGHT COALITION OVER 
ECONOMIC POLICY CAME TO A HEAD JULY 2 WHEN DEPUTY PM FINI 
THREATENED TO WITHDRAW HIS NATIONAL ALLIANCE (AN) PARTY'S 
SUPPORT FOR THE GOVERNMENT UNLESS FM TREMONTI RESIGNED.  PM 
BERLUSCONI, WEAKENED BY FORZA ITALIA'S POOR SHOWING IN LAST 
MONTH'S EURO-PARLIAMENTARY AND LOCAL ELECTIONS (REF A), WAS 
NOT IN A POSITION TO RESCUE TREMONTI, WHO DUTIFULLY SUBMITTED 
A RESIGNATION LETTER.  THE HOSPITALIZATION OF NORTHERN LEAGUE 
LEADER AND STAUNCH TREMONTI ALLY UMBERTO BOSSI--INACTIVE IN 
POLITICS SINCE SUFFERING A STROKE THIS MARCH--CONTRIBUTED TO 
THE EX-FINANCE MINISTER'S VULNERABILITY. 
 
3. (SBU) EC COMMISSIONER MARIO MONTI IMMEDIATELY EMERGED IN 
ITALIAN NEWS REPORTS AS THE FAVORITE TO REPLACE TREMONTI. 
ACCORDING TO ANSA, ITALY'S LEADING WIRE SERVICE, BERLUSCONI 
SOUNDED OUT MONTI ON TAKING OVER THE FINANCE MINISTRY, BUT 
MONTI INDICATED A STRONG PREFERENCE FOR REMAINING IN 
BRUSSELS.  SUBSEQUENTLY, BERLUSCONI SEIZED THE POWER VACUUM 
TO CLAIM THE FINANCE MINISTER POST FOR HIMSELF AD-INTERIM 
(NOTE: BERLUSCONI HAS PREVIOUS "DOUBLE HATTING" EXPERIENCE, 
IN HIS ROLE AS FOREIGN MINISTER FROM JANUARY-NOVEMBER 2002). 
APPEARING AT THE JULY 5 ECOFIN MEETING IN BRUSSELS TO DEFEND 
ITALY'S BUDGET DEFICIT REDUCTION PLAN, A BEAMING BERLUSCONI 
TOLD HIS FELLOW MINISTERS THAT HE LOVED HIS NEW JOB. 
ALTHOUGH PRESIDENT CIAMPI AND THE CENTRIST UNION FOR 
CHRISTIAN DEMOCRATS (UDC) HAVE SIGNALED THEIR PREFERENCE FOR 
A SHORT INTERREGNUM, BERLUSCONI HAS NOT INDICATED HOW LONG HE 
WILL SERVE AS FINANCE MINISTER; PRESS REPORTS SUGGEST HE 
MIGHT HOLD THE POST UNTIL THE NATIONAL BUDGET LAW IS PASSED 
    AT YEAREND. BERLUSCONI HAS AGREED TO THE CENTER-LEFT 
OPPOSITION'S CALL TO APPEAR BEFORE PARLIAMENT (HE IS SLATED 
TO ADDRESS THE SENATE ON JULY 14) TO JUSTIFY HIS DECISIONS 
AND EXPLAIN THE GOVERNMENT'S ECONOMIC PROGRAM. 
 
TREMONTI PERFORMED WELL DURING ECONOMIC STAGNATION, 
BUT NOT SYMPATHETIC TO PORK BARREL REQUESTS. 
--------------------------------------------- ----- 
 
4. (SBU) EVEN ACCORDING TO HIS DETRACTORS (THE PRO-SOCIAL 
SPENDING AN AND THE UDC), TREMONTI HAD COMPETENTLY MANAGED 
THIS PAST YEAR'S DIFFICULT ECONOMIC STAGNATION.  HE ENSURED 
THERE WAS NO MAJOR SPENDING CUT THAT WOULD HAVE AGGRAVATED 
THE SLOWDOWN AND INSTEAD USED CREATIVE WAYS TO RAISE 
ADDITIONAL BUDGETARY REVENUES (I.E., ONE-TIME BUDGETARY 
MEASURES -- TAX AMNESTIES) TO TRY TO KEEP THE BUDGET DEFICIT 
MANAGEABLE.  HOWEVER, THE AN AND UDC COMPLAINED HE DID NOT 
ACCOMMODATE THEIR (PORK BARREL) INTERESTS (MAINLY FOR SOCIAL 
SPENDING IN THE IMPOVERISHED SOUTH), NOR DID HE HELP FINANCE 
THE NORTHERN LEAGUE'S PET PROJECT TO FEDERALIZE ITALY'S 
GOVERNMENT. 
 
BUDGETARY PROBLEMS: POLITICAL PRESSURE FOR TAX CUTS 
--------------------------------------------- ------ 
 
ROME 00002630  002 OF 003 
 
 LEADERSHIP OF THE FORZA 
ITALIA BY PRESSING FOR HIS PET 2001 CAMPAIGN PROMISE -- 
LOWERING PERSONAL INCOME TAXES AND COLLAPSING THE PRESENT 
FIVE BRACKETS. 
 
6. (C) COMMENT: BERLUSCONI MIGHT BE BETTER PLACED TO 
IMPLEMENT TAX CUTS, WITH THE AXING OF BUDGET-HAWK TREMONTI. 
HOWEVER, BERLUSCONI MUST CONSIDER THE EFFECT SUCH REFORM 
WOULD HAVE BOTH IN ITALY, AND WITHIN THE EUROPEAN MONETARY 
UNION (EMU): IN ITALY, LOWER TAXES WOULD MEAN A SHORT-TERM 
REVENUE LOSS TO THE ALREADY-MALIGNED BUDGET -- AND THUS MORE 
PRESSURE ON THE BUDGET.  HE WOULD ALSO HAVE TO DEFEND AGAINST 
POLITICAL CHARGES STEMMING FROM ANY TAX PLAN THAT APPEARED TO 
FAVOR WEALTHY TAXPAYERS. 
 
7. (C) AS FOR THE EMU, THE NEW FINANCE MINISTER MUST CONTINUE 
TO STEER ITALY CLEAR OF A EUROPEAN COMMISSION  "EARLY 
WARNING" ON BUDGETARY EXCESS.  SPECIFICALLY HE MUST STEER 
ITALY'S BUDGET JUST BENEATH THE EU CEILING OF A DEFICIT/GDP 
RATIO OF THREE PERCEN AND SHOW CREDIBLE PROGRESS ON LOWERING 
ITALY'S HOPPING DEBT STOCK (106 PERCENT OF GDP).  HE  MUST 
ALSO MAKE THE DIFFICULT POLITICAL CHOICES TO DECIE WHICH 
SPENDING CUTS TO TAKE TO SATISFY FRACTIOS COALITION PARTIES 
EAGER TO PROTECT THEIR OWN PORK BARREL INTERESTS.  END 
COMMENT. 
 
IMPLICATIONS FOR INTERNATIONAL CREDITWORTHINESS 
--------------------------------------------- -- 
 
8. (SBU) THE INTERNAL COALITION DEBATE ABOUT THE FINANCE 
PORTFOLIO HAS BECOME VERY PUBLIC.  BOTH THE EU COMMISSION AND 
    INTERNATIONAL RATNG AGENCIES WILL CERTAINLY BE MONITORING 
PUBLIC TATEMENTS AS INDICATIVE OF THE GOVERNMENT'S POLITIAL 
WILL TO TAKE THE NECESSARY PAINFUL STEPS.  ITLY CANNOT 
AFFORD A LOWERING OF ITS CREDITWORTHINESS ON INTERNATIONAL 
MARKETS. 
 
IMPLICATIONS FOR ELECOMMUNICATIONS SECTOR 
------------------------------------------ 
 
9. (SBU) AN ADDITIONAL ISSUE SERVED BY THE PM'S ASSUMPTION OF 
THE FINANCE PORTFOLIO CONCERNS THE CONFLICT OF INTEREST 
CHARGES THAT DOG BERLUSCONI IN THE TELECOMMUNICATIONS SECTOR. 
IN HIS PRIVATE LIFE, THE PM IS ALSO OWNER OF THE LARGEST 
PRIVATE-SECTOR MEDIA NETWORK IN ITALY (MEDIASET).  SINCE THE 
BEGINNING OF THIS GOVERNMENT IN 2001, HE HAS BEEN SCATHED IN 
THE PRESS AND BY OTHERS OUTSIDE THE COALITION WITH CHARGES OF 
A CONFLICT OF INTEREST BETWEEN HIS ROLE AS PM AND AS 
MEDIASET'S LARGEST SHAREHOLDER.  HE HAS MANAGED TO DEFLECT 
THESE CHARGES OF CONFLICT OF INTEREST, BUT THEY MAY BE MORE 
DIFFICULT TO REBUT WITH HIS NEW FINANCE MINISTER POWERS. 
SINCE THE GOI OWNS 100 PERCENT OF THE STATE-TELEVISION 
NETWORK (RAI), WHICH IS ALSO UNDER THE CONTROL OF THE FINANCE 
MINISTER, THERE IS ON PAPER AT LEAST STRONGER GROUNDS FOR 
MORE STRIDENT ACCUSATIONS OF CONFLICT OF INTEREST. 
 
NEXT STEPS 
---------- 
 
10. (SBU) WITHIN ABOUT TEN DAYS, THE CABINET MUST APPROVE BY 
DECREE-LAW THE DEFICIT REDUCTION PACKAGE UNDER DISCUSSION. 
THIS WILL BE FOLLOWED BY THE PREPARATION AND APPROVAL OF THE 
    2005-2008 DPEF (DOCUMENTO DI PROGRAMMAZIONE ECONOMICA E 
FINANZIARIA), A FOUR-YEAR ECONOMIC PLAN THAT SETS FORTH 
ECONOMIC/BUDGETARY GOALS FOR EACH YEAR THROUGH 2008. 
 
COMMENT 
------- 
 
11. (C) BY DETHRONING TREMONTI, DPM FINI AND HIS NATIONAL 
ALLIANCE PARTY ACHIEVED AN IMPORTANT SYMBOLIC VICTORY.  FINI 
WANTS THE GOVERNMENT TO DIRECT ADDITIONAL FUNDS FOR PUBLIC 
WORKS TO ITALY'S UNDERDEVELOPED SOUTH, AN IMPORTANT AN 
ELECTORAL BASE, AND HIS LONG-STANDING STRUGGLE TO OBTAIN MORE 
POWER OVER ECONOMIC DECISION MAKING HAD BEEN EFFECTIVELY 
BLOCKED BY TREMONTI.  FINI APPARENTLY WAS TAKEN BY SURPRISE 
BY BERLUSCONI'S DECISION TO REPLACE TREMONTI WITH NONE OTHER 
THAN HIMSELF, BUT HAS ADOPTED A WAIT-AND-SEE APPROACH IN THE 
HOPES THAT HIS STURDY--IF NOT ALWAYS WARM AND 
FUZZY--RELATIONSHIP WITH THE PM WILL FOSTER THE ELUSIVE 
COALITION COLLEGIALITY HE HAS BEEN SEEKING (REF B). 
 
12. (C) FOR BERLUSCONI, REMOVING THE ABRASIVE TREMONTI WAS A 
CALCULATED RISK THAT A MORE PRODUCTIVE POLICY DIALOGUE COULD 
DEVELOP AMONG THE COALITION'S LEADING PROTAGONISTS. 
NEVERTHELESS, IF SPECULATION IN THE ITALIAN PRESS THAT 
 
ROME 00002630  003 OF 003 
 
N THE TELECOMMUNICATIONS 
    SECTOR HE ALREADY DOMINATES TURNS OUT TO BE TRUE, TENSIONS 
COULD BOIL TO THE SURFACE AGAIN THIS YEAR.  BOTH THE AN AND 
THE MODERATE UDC WILL HAVE DIFFICULTY SWALLOWING AN ECONOMIC 
PACKAGE THAT SIMPLY RECAPITULATES INITIATIVES LONG CHAMPIONED 
BY TREMONTI, INCLUDING TAX REFORM THAT FAVORS THE WEALTHY. 
MOREOVER, WHILE FOR NOW THE NORTHERN LEAGUE IS FULLY BACKING 
BERLUSCONI'S INTERIM TERM AS FINANCE MINISTER, IT TOO HAS 
THREATENED--HARDLY FOR THE FIRST TIME--TO BOLT THE GOVERNMENT 
IF COALITION LEADERSHIP DOES NOT RENEW ITS COMMITMENT TO 
DEVOLVE POWERS TO ITALY'S REGIONS. 
 
13. (SBU) IS THIS THE USUAL STUFF OF ITALIAN POLITICAL 
THEATER?  WE CONTINUE TO THINK THE ANSWER IS YES, PRIMARILY 
BECAUSE, AFTER TREMONTI'S DEMISE, WE SEE LITTLE UPSIDE FOR 
ANY OF THE COALITION PARTNERS TO LEAVE A GOVERNMENT THAT 
OFFERS THE ONLY AVAILABLE MECHANISM FOR THEM TO ACHIEVE THEIR 
POLITICAL AND POLICY GOALS. 
 
14. (SBU) IN ALL OF THIS, HOWEVER, THE GOI MUST NOT TREAT 
LIGHTLY THE EMU'S INTENT TO REIN IN ITALY'S BUDGETARY 
EXCESSES.  ECONOMIC OBSERVERS ALSO DO NOT SEE ANY MORE 
OBVIOUS CREATIVE WAYS (I.E., OTHER ONE-TIME MEASURES LIKE 
THIS YEAR'S TAX AMNESTY) THAT THE NEW FINANCE MINISTER COULD 
USE TO SHORE UP THE GOVERNMENT'S BUDGET, WHILE ITALY CROSSES 
ITS FINGERS AND WAITS FOR ECONOMIC GROWTH AND A TURN AROUND 
IN THE ECONOMY.  END COMMENT. 
 

 
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SEMBLER 
 
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 2004ROME02630 - Classification: UNCLASSIFIED