US embassy cable - 05PARIS771

UNCLAS SECTION 01 OF 03 PARIS 000771 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, FR, PBIO 
SUBJECT: FRANCE AND GERMANY COORDINATE COMPLAINTS ABOUT THE 
DOLLAR DECLINE 
 
 
1. SUMMARY.  Using the semiannual Franco-German Economic and 
Finance Committee meeting as a springboard, French and 
German Finance Ministers jointly called for coordinated G7 
action on the declining U.S. Dollar; reiterated their desire 
for reform of the European Stability and Growth Pact; and 
discussed tax harmonization, international development aid, 
and European industrial strategy.  END SUMMARY. 
 
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New French Finance Minister Conveys Message that Franco- 
German Relations are Close 
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2.  In another show of Franco-Germanic agreement on economic 
policy, French and German Finance Ministers Herve Gaymard 
and Hans Eichel convened an Economic and Finance Committee 
meeting in Paris on January 24, along with Bank of France 
and Bundesbank Governors Christian Noyer and Axel Weber.  At 
his press conference after the meeting, Gaymard emphasized 
his close working ties with his German counterpart. 
Regarding the substance, Gaymard said the parties had 
engaged in a very broad survey of economic, financial and 
budget issues.  The discussions will continue when President 
Jacques Chirac meets German Chancellor Gerhard Schroeder on 
March 7.  Gaymard and Eichel will meet again on March 26 in 
the fifth Franco-German Ministers' Council in Paris. 
 
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Call for coordinated G7 action on the Dollar Decline 
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3.  France and Germany agreed on the need for coordinated 
action by the U.S., Asia and Europe to stem the decline of 
the U.S. Dollar.  France and Germany called on the U.S. to 
have "precise commitments" by reining in its persistent 
budget and current account deficits, agreeing with the IMF 
that "adjustment for U.S. deficits should not be made 
through foreign exchange rates."  Gaymard argued that 
"Europe has shouldered too big a portion of the burden of 
dealing with global economic imbalances."  The criticism 
reflects European policy makers' concern that the strength 
of the euro (a 34% rise against the U.S. Dollar in the past 
three years) has restricted economic growth in Europe by 
driving up European export prices.  Noyer reinforced the 
calls for the U.S. to address its deficits, saying "the U.S. 
must work towards a rebalancing between savings and the need 
for private investment."  Nonetheless, he made clear that 
each country in the world has to make reforms in its own 
economy, stressing that Europe and Japan could do more for 
their growth by pursuing structural reforms, while Asia's 
emerging economies had to do more for the flexibility of 
their currencies, and also for opening their economies. 
 
4.  Journalists asked how France and Germany intended to 
pressure the U.S. government in the context of the upcoming 
G7 meeting.  Noyer stated that the intention was "to get a 
global and consensual vision.  The difficulty is to 
implement all this, which is always complicated and takes 
time."  Eichel shared that view, but added that he did not 
expect "any spectacular decision to be made at the G7."  "It 
is preferable not to cause a sudden change in structures 
that will be harmful to all in the current international 
context." 
 
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France and Germany Support Revision of the European 
Stability and Growth Pact based on Economic Analysis 
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5.  Addressing the budget deficits of some countries in 
Europe, Gaymard stressed that "the deterioration in the 
eurozone's budget deficits did not reflect anything other 
than the impact of economic slowdown.  This is a big change 
compared to the past, thanks to the European Stability and 
Growth Pact."  He highlighted that "revising the pact is not 
an acknowledgment of failure, but the common desire to 
improve it."  Both France and Germany agreed it would be 
desirable to introduce more economic analysis into the Pact, 
including a more qualitative approach to budget spending. 
Eichel added that "the point is not to get more flexibility 
in the pact, it's to get a reasonable economic approach," 
saying that "interaction between the European Commission and 
the Council was necessary, with all this to be coordinated 
with the European Central Bank."  That said, France and 
Germany have not put into question thresholds enshrined in 
the pact (budget deficits limited to 3% of GDP and debts to 
60% of GDP).  The GOF pledges to meet the 3% EU limit in 
2005. 
 
6.  Quizzed whether there was convergence between the 
governments of France, Germany and Italy, Gaymard answered 
that French officials were to discuss French-German 
proposals to reform the European Stability and Growth Pact 
with their Italian counterparts in Rome on January 25. 
"Europe is rich with very tight bilateral contacts that 
transform later into common action at the European level. 
We rely on Jean-Claude Juncker's huge talent to get a text 
acceptable to all." 
 
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Controlling Budget Deficit will Help France to Reduce 
Unemployment 
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7.  Asked about rising unemployment in France, even though 
economic growth is higher than in Germany, Gaymard explained 
that the GOF policy is targeted at restoring business and 
consumer confidence by mastering budget deficits through 
reducing both budget spending, and taxes and contributions. 
The second axis of the GOF policy is to take specific 
structural measures in favor of employment.  Gaymard said 
that, in addition to measures taken since 2002, a Council 
for Jobs Orientation composed of union representatives and 
labor specialists will help to make progress on labor 
issues. 
 
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Petroleum Tax Issue: Germany Approves French Decision 
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8.  Eichel agreed that the French decision to transfer a 
portion of tax on petroleum products (Taxe Interieure sur 
les Produits Petroliers - TIPP) receipts to French local 
authorities was not obliged to be strictly in line with 
European mechanisms discussed by the 25 European Union 
countries members on September 17.  Nonetheless, Eichel 
reiterated that tax issues required some coordination, and 
that "Europeans' interest was to move towards more tax 
harmonization of direct and indirect taxes."  On the income 
tax issue, France and Germany have an initiative to define a 
common basis for corporate income taxes in Europe.  Hungary 
is willing to join the initiative. 
 
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France and Germany Agree on International Development Aid 
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9.  Gaymard said that French and German countries shared the 
same philosophy on international development aid including 
international financial facility, debt-related issues, and 
President Jacques Chirac's proposals to create a new 
international contribution to finance development:   "Europe 
must continue to be a force to help developing countries. 
For sure, this policy has to be implemented by various 
budget and financial instruments, and must be adapted to the 
needs of each developing country."  Eichel concurred, 
recommending that debt relief be subject to measurable 
conditions (effectively reducing poverty, improving sanitary 
conditions, providing drinking water, and schooling). 
France and Germany agreed to continue to exchange views on 
international development aid and to consult with other 
European partners throughout 2005. 
 
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GOF for a European Industrial Strategy 
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10.  Journalists raised questions about the GOF's 
intervention in the industrial sector (referring to 
injection of capital into Alstom-Sanofi), and about France 
and Germany's willingness to have European industrial 
champions.  On the first issue, Gaymard answered "it is 
legitimate that a finance minister has concerns about his 
country's industrial sector in an open and global economy - 
this is not limited to France, but to all of the EU economic 
space."  "The GOF," he continued, "is not returning 
companies to the public sector; in fact, French finance 
ministers have continued privatizing companies or opening 
capital of state-owned companies."  On the second issue, 
Gaymard reminded the audience about Jean-Louis Beffa's 
report for a new industrial policy that proposed the 
creation of an agency for new industrial strategies.  (The 
Agency for Industrial Innovation with Beffa as a head should 
be created in June 2005).  Beffa, who is Chairman of Saint- 
Gobain, is also co-chairing a Franco-German group of 
industrialists that defines concrete projects.  Gaymard did 
not get into details, but stated that "Europe must remain a 
big agricultural and industrial force; it has no vocation to 
be only a museum with services jobs, as respectable and 
great as they may be." 
 
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Comment 
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11.  The event helped to fortify the political message that 
France and Germany still are closely allied on economic 
policy, a significant achievement in and of itself. 
However, the Finance Ministers' concerns about the US 
deficits (and its arguable contribution to the appreciation 
of the euro) do not translate into any concrete new 
proposals about how to address either country's own economic 
problems.  Higher economic growth may help France to reduce 
unemployment (still at 9.9%) and its budget deficit, but the 
GOF still needs to lower the tax burden, eliminate labor 
market rigidities, and scale back the role of the state in 
the economy. 
LEACH