US embassy cable - 04FRANKFURT8336

UNCLAS SECTION 01 OF 02 FRANKFURT 008336 
 
SIPDIS 
 
SENSATIVE 
 
STATE FOR EUR PDAS RIES, EB, EUR/AGS, AND EUR/ERA 
STATE PASS FEDERAL RESERVE BOARD 
STATE PASS NSC 
TREASURY FOR DAS LEE 
TREASURY ALSO FOR ICN COX, HALL 
PARIS ALSO FOR OECD 
TREASURY FOR OCC RUTLEDGE, MCMAHON 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EUN 
SUBJECT: European Commission Blinks on French and German 
Stability and Growth Pact Cases: A Question of Power 
 
T-IA-F-04-009 
 
This cable is sensitive but unclassified.  Not/not for 
Internet distribution. 
 
1.   (SBU) Summary:  According to European Commission, 
  French and German Finance Ministry officials, the Commission 
  is likely to await the 2005 national budgets for France and 
  Germany at year's end before deciding its next step against 
  the two under the Stability and Growth Pact (SGP).  If true, 
  this would suggest that the Commission would not press its 
  recommendation of last November to take a step toward 
  sanctions, but rather de facto adopt the Council's position 
  of giving both countries an extra year until 2005 to reduce 
  their deficits below the 3% of GDP reference value. 
 
2.   (SBU) French and Commission officials are confident 
  that France's government deficit will fall below 3% next 
  year (the announced budget has the deficit at 2.9%).  The 
  absence of any recovery in domestic demand, depressing tax 
  revenues, makes this a tougher call for Germany, but the 
  Finance Ministry has undertaken "Project 3%" to do the 
  necessary. 
  Why didn't the Commission go along with the Council's 
  position last November?  "It was a question of power," 
  observes one German official.  In this episode, the 
  Commission has slipped a notch.  End Summary. 
 
Waiting Until 2005 Data 
----------------------- 
 
3.   (SBU) According to a top European Commission official 
  as well as French and German Finance Ministry officials, the 
  Commission will not issue immediately a new recommendation 
  on France and Germany under the Excessive Deficit Procedures 
  (EDP) of the SGP.  Both cases had been in abeyance, in part, 
  due to a case the Commission brought against the Council in 
  the European Court of Justice.  The Commission had 
  challenged the Council's right not to accept the 
  Commission's recommendation to proceed under Treaty 
  paragraph 104(9), the last step before considering 
  sanctions.  Instead, the Council wrote its own conclusions 
  under 104(7) arguing that the previous conclusions under 
  this same paragraph had become partially obsolete. 
 
4.   (SBU) In July the Court issued a decision stating that 
  the Council could not issue its own conclusions but must 
  accept or reject recommendations put forward by the 
  Commission.  The Commission claimed this as a victory since 
  it annulled the Council's conclusions.  German members of 
  the Council regarded the outcome as, at best, a split 
  decision.  The Court declared the Commission's argument that 
  the Council had to accept its recommendation as 
  "inadmissible." 
 
5.   (SBU) Now, according to a top European Commission 
  official, the Commission will await the proposed national 
  budgets for 2005 for both France and Germany.  These are 
  scheduled to be submitted to the Commission in early 
  December.  Should either country not have a credible budget 
  that reduces their deficit below the 3% GDP reference value, 
  the Commission would issue a recommendation under paragraph 
  104(9) of the Treaty.  If   the Council were to adopt such a 
  recommendation, failure to comply would lead to the next 
  step in the EDP, i.e. a Commission recommendation for, and 
  Council consideration of, sanctions. 
 
Council Conclusion of November - De Facto Acceptance 
--------------------------------------------- ------- 
 
6.   (SBU) If the above scenario plays out, we will find 
  ourselves essentially where we would have been had the 
  Commission accepted the Council's conclusions of November 
  25, 2003.   The key points in the Council's conclusions of 
  November 25, 2003, were: (1) acceptance of the French and 
  German public commitments to reduce their deficits to below 
  3% in 2005 (an extra year from the Council's earlier 
  conclusions); and (2) willingness to escalate the case under 
  104(9) should either country "fail to act in accordance with 
  its commitments." 
7.   (SBU) Tactically, accepting this position would put the 
  Commission in the strong position of holding both countries 
  to their own commitments.  Such a course of action suggests 
  the Commission is, for the moment, allowing the EDP for both 
  countries hang in limbo.  According to the operative 
  outstanding Council conclusions both countries are required 
  to reduce their deficits by 2004.  Clearly this is not going 
  to happen.  Technically the appropriate action would be for 
  the Commission to issue a new recommendation under 104(7) 
  for the Council's consideration, according to French and 
  Luxembourg Finance Ministry officials. This recommendation 
  should reflect the new situation and, in the view of the 
  Luxembourg official, be accepted by all Council members. 
  This course of action was suggested by the Court. 
  Commission staff, however, relay that their lawyers still 
  believe the only appropriate course would be a 
  recommendation under 104(9), the approach that failed last 
  November. 
 
More Comments 
------------- 
 
8.   (SBU) The Commission's apparent unwillingness to press 
  its cases against France and Germany is, upon reflection, 
  not surprising.  The Commission staff believes it can only 
  proceed under 104(9) which is unacceptable to the Council 
  Revising rules for implementing the SGP, as the Commission 
  has suggested (septel) could provide a way out for the 
  Commission.  The other way would be to use new data to 
  "refresh" the cases. Delays associated with either approach 
  reveal the Commission's relatively weak position. 
 
9.   (SBU) The Court case and Commission's delay have sown 
  acrimony over the SGP.  A European Central Bank official 
  commented that the SGP has been useful but the controversy 
  surrounding it has not been.  "The Commission acted 
  unwisely," in his assessment.  Had the Commission gone along 
  with the majority in the Council last November, perhaps an 
  uproar would have ensued, but the long-running controversy 
  avoided.   A German Finance Ministry official recalled that 
  the then Economics and Finance Commissioner Solbes was 
  willing to go along with the Council's position.  "It was 
  Commission President Prodi" who would not give in, according 
  to this official.  It was "a question of power" between the 
  Commission and Member States.  The stuff of history books. 
 
10.  (U)This message coordinated with Embassies Paris, 
  Berlin, The Hague, Luxembourg and USEU Brussels 
 
11.  (U)POC: James Wallar, Treasury Representative, e-mail 
  wallarjg2@state.gov; tel. 49-(69)-7535-2431, fax 49-(69)- 
  7535-2238 
 
Bodde