US embassy cable - 02ROME2694

UNCLAS ROME 002694 
 
SIPDIS 
 
SENSITIVE 
 
BRUSSELS ALSO FOR USEU 
DEPT FOR EUR/WE, EUR/ERA 
DEPT PASS TREAS FOR OASIA HARLOW, JONES 
STATE PASS FRB FOR GUST 
 
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
                       UNCLASSIFIED 
 
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E.O. 12958: N/A 
TAGS: ECON, EFIN, IT, EUN 
SUBJECT: CENTRAL BANK GOVERNOR RAISES WARNING SIGNS 
 
1. (U) SUMMARY: CENTRAL BANK GOVERNOR ANTONIO FAZIO 
HAS HARSHLY CRITICIZED THE GOVERNMENT FOR FAILURE TO 
REIN IN THE PUBLIC DEFICIT, WHICH HAS BALLOONED TO 
NEAR E41 BILLION. THE CRITICISM, THE FIRST OPENLY SOUR 
NOTE BETWEEN THE CENTRAL BANK AND THE GOVERNMENT, WAS 
MADE AT THE BANK OF ITALYS ANNUAL MEETING ON MAY 31. 
REACTING QUICKLY TO THE CRITICISM, FINANCE MINISTRY 
TREMONTI DEFENDED THE GOVERNMENTS ECONOMIC PROGRAM. 
DESPITE CONCEDING THAT THE DEFICIT WAS UP AND GROWTH 
STAGNATING, TREMONTI SAID THERE WOULD BE NO MID-YEAR 
CORRECTIVE BUDGET. END SUMMARY. 
 
2. (U) ON MAY 31, THE BOI GOVERNOR ANTONIO FAZIO, AT 
THE PRESENTATION OF THE BANKS ANNUAL REPORT, RAISED 
CONCERNS ABOUT THE PUBLIC DEFICIT, WHICH HAS INCREASED 
BY E4 BILLION OVER THE SAME TIME PERIOD OF 2001. HE 
ARGUED FOR A SUPPLEMENTAL BUDGET PACKAGE TO BRING 
PUBLIC FINANCES MORE IN LINE WITH THE STABILITY PACT 
TARGETS. WARNING THE GOVERNMENT ABOUT THE FAILING 
HEALTH OF THE PENSION SYSTEM, HE UNDERSCORED THE 
URGENT NEED FOR REFORM. HE ALSO CALLED FOR 
IMPLEMENTATION OF AN AMBITIOUS INFRASTRUCTURE PLAN, A 
CORNERSTONE OF THEN-CANDIDATE SILVIO BERLUSCONIS 
CAMPAIGN IDEAS TO JUMPSTART THE ECONOMY, AND THE 
ACCELERATION OF PRIVATIZATION.  FAZIO URGED THE 
GOVERNMENT TO MOVE FORWARD ON TAX REFORM. THE BOI 
GOVERNOR WAS NOT SANGUINE ABOUT GDP GROWTH, PREDICTING 
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A GROWTH RATE OF 1.5 PERCENT IN 2002.  HE DID 
ACKNOWLEDGE THAT GDP GROWTH COULD EXCEED 1.5 PERCENT, 
IF INFRASTRUCTURE SPENDING WENT UP IN THE LATTER HALF 
OF THE YEAR. 
 
3. (U) ON JUNE 3, ECONOMY MINISTER TREMONTI REITERATED THAT 
THERE WOULD BE NO MID-YEAR CORRECTIVE BUDGET, AND TERSELY 
ADDED THAT THE GOVERNMENT HAS ALREADY PASSED NEEDED 
STRUCTURAL REFORMS. TREMONTI DID ACKNOWLEDGE THAT GROWTH 
PREDICTIONS OF 2.2 PERCENT ARE OPTIMISTIC.  HE CONCEDED 
THAT IN THE MOST PESSIMISTIC SCENARIO, GDP GROWTH IN 2002 
WOULD BE JUST 1.3 PERCENT. 
 
4. (SBU) COMMENT:  THE BOI GOVERNORS WARNING FLAGS ABOUT 
THE ITALIAN ECONOMY ARE ONES WE SHARE.  THE GOVERNMENT HAS 
FAILED TO ENACT FUNDAMENTAL ECONOMIC REFORMS AND ITS QUICK 
POLICY FIXES HAVE FAILED TO PROVIDE A STRONG ECONOMIC 
STIMULUS (TO BE REPORTED SEPTEL.) ALSO IMPORTANT TO NOTE IS 
THE HARSHNESS OF THE GOVERNORS CRITICISM.  A YEAR AGO, 
WHEN THE BERLUSCONI GOVERNMENT TOOK OFFICE, THE GOVERNOR 
WAS OPTIMISTIC ABOUT THE NEW GOVERNMENT AND ITS WILL TO 
IMPLEMENT ITS AMBITIOUS ECONOMIC PROGRAM. FAZIOS CRITICISM 
IS LEGITIMATE IN LIGHT OF ITALYS ECONOMIC PERFORMANCE. BUT 
IT ALSO MAY BE A BIT OF POLITICAL MANEUVERING. EARLIER THIS 
YEAR, MEMBERS OF THE MAJORITY COALITION PROPOSED TO 
PARLIAMENT A BILL THAT WOULD TURN THE BANK OF ITALY INTO A 
RESEARCH INSTITUTION AND TRANSFER ITS FUNCTIONS TO 
INDEPENDENT AUTHORITIES. FAZIOS STRONG WORDS MAY BE HIS 
RESPONSE. 
 
POPE 
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 2002ROME02694 - Classification: UNCLASSIFIED