US embassy cable - 05PARIS3553

UNCLAS SECTION 01 OF 02 PARIS 003553 
 
SIPDIS 
 
SENSITIVE 
 
FROM USOECD PARIS 
 
BRUSSELS FOR USEU 
 
FRANKFURT FOR TREASURY ATTACHE 
 
TREASURY FOR IA -- LESLIE HULL 
 
E.O. 12958: N/A 
TAGS: ECON, XG, XT, ZM, EFIN 
SUBJECT:  OECD SURVEY OF EURO AREA ECONOMY:  FOCUS ON 
          FISCAL OVERRUNS 
 
CONTAINS REPORT OF OECD MEETING -- NOT FOR INTERNET 
DISTRIBUTION 
 
------------------------ 
SUMMARY AND INTRODUCTION 
------------------------ 
 
1.   (U) The Economic and Development Review Committee of 
the OECD conducted an economic review of the euro area on 
May 17, 2005.  The last such review was held in June 2004. 
Mr. Jean Guill, Director of Treasury in the Luxemburg 
Ministry of Finance (Luxemburg currently holds the EU 
presidency); Mr. Klaus Regling, Director General for 
Economic and Financial Affairs at the European Commission 
and Mr. Phillippe Moutot, Deputy Director General for 
Economics at the European Central Bank led the euro area 
team of 13.  Japan and Switzerland were the lead examining 
countries.  The focus of the review was the Stability and 
Growth Program and ECB monetary policy.  The United States 
raised again the APEC/EU level playing field problem.  End 
summary and introduction. 
 
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FISCAL POLICY 
------------- 
 
2.   (U) The euro area delegation objected to the draft 
survey's characterization that the rules under the stability 
and growth pact (SGP) had been loosened in a March 2005 
decision, stressing to the contrary that the rules have been 
strengthened.  Australia said there appeared to be very 
little broad-based commitment to fiscal consolidation in 
Europe, a remark which prompted the EC's Regling to call 
"outrageous".  Regling also objected to the survey's 
observation that the EU Council of Ministers were "party and 
judge" in deciding what action to recommend in correcting 
excessive deficits.  He could not imagine it being any other 
way. 
 
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MONETARY POLICY 
--------------- 
 
3.   (U) On monetary policy, the ECB's Moutot criticized the 
survey's recommendation that the ECB hold its interest rate 
stable as long as indicators stay mixed, but act as soon as 
it tilts the assessment in one or the other direction.  OECD 
chief economist Jean Phillipe Cotis interjected that, 
because of recent bad first quarter growth figures from 
Italy and Portugal as well as continued weakness in consumer 
and business confidence, the OECD is scaling back its 
outlook for the euro area and will assume that the ECB will 
cut its interest rate by 50 basis points.  "This is a very 
disturbing time for the monetary union", he said. 
 
4.   (U) The euro area delegation, supported by Switzerland, 
argued that risks were greater on the inflation side, while 
the Secretariat supported the view that a significant output 
gap had emerged and that core inflation was under control. 
The discussion was frustrating and inconclusive, as the 
Secretariat was weakened by not having its new outlook 
 
SIPDIS 
numbers available (they were announced at a press conference 
on May 24) and that individual EU member nations did not 
speak. 
 
-------------------- 
APEC/EU ISSUE, AGAIN 
-------------------- 
 
5.   (U) On structural policy, the euro area delegation 
appeared much more inclined to accept the Secretariat's 
recommendations that the Commission resist a watering down 
of the services directive, wrap up unfinished business in 
financial and transport sectors and work towards supra- 
national innovation policies.  Reacting to Regling's 
frequent comparisons of the EU with the United States, the 
U.S. delegate noted that the USG found such exercises useful 
and instructive.  The EDRC examines all aspects of U.S. 
economic policy, as well as that of other non-EU countries. 
In this regard, it would be useful for all countries if the 
European Union allowed all of its policies to be examined, 
in a similar manner.  Regling said he understood the problem 
had been raised again at the Ministerial meeting and that 
the EU was working on a response. 
 
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COMMENT 
------- 
 
6.   (SBU) Comment:  The body language of the Europeans 
around the table displayed alternating anxiety and 
disgruntlement, but according to one EU member country with 
whom we spoke on the following day, they had agreed to let 
the euro area delegation speak for the group.  This led 
inevitably to a rather impoverished discussion.  Other EU 
delegates with whom we spoke after the meeting indicated a 
strong preference for an ECB rate cut, even though they were 
not sure it would do much good.  While impressed with 
Regling's defense of the SGP, they left little doubt that 
they, too, looked at the revised version as a weakening. 
They also signaled that this was a political reality, and 
not necessarily a bad thing.  End comment. 
 
MORELLA