US embassy cable - 03ROME2429

C O N F I D E N T I A L  ROME 002429 
 
SIPDIS 
 
 
SENSITIVE 
 
STATE FOR EUR/WE, EUR/ERA, EB; 
TREASURY FOR A/S OLSON, OITC-ANGUS; 
USTR FOR NOVELLI AND MOWREY; 
FRANKFURT FOR TREASURY - JWALLER, 
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DEPT PASS TO USDA FAS WASHDC 
USDA FOR FAS - TRADE POLICY 
USDOC FOR 4212/ITA/OEURA/CPD/DDEFALCO 
 
E.O. 12958: DECL: 06/03/2013 
TAGS: ETRD, PGOV, EAGR, EFIN, PREL, ECON, IT, EUN 
SUBJECT: ITALY AND THE EU: WHY DO MILK QUOTAS MATTER? 
 
REF: A. (A) USEU BRUSSELS 1444 
 
     B. (B) USEU 1672 
     C. (C) USEU 671 
     D. (D) USEU 1026 
 
Classified By: Economic Minister-Counselor Scott Kilner 
for reason 1.5 (d) 
 
1. (C) Summary: In an attempt to finally put to rest the 
knotty problem of EU fines for overproducing milk, the 
Berlusconi government has found itself caught between an 
exasperated EU and intransigent Italian milk producers, 
supported by the Northern League (LN).  The GOI has used 
tough tactics in Brussels and in the Italian Parliament in 
hopes of forcing through measures to permit dairy farmers to 
pay back, over 30 years without interest, E 924 million in EU 
fines for excess milk production.  In the EU Council of 
Ministers, Italy is blocking agreement on the EU Tax Package 
until the 14 other member states agree to the deal.  In the 
Italian Chamber of Deputies, on May 21, the GOI forced all 
coalition deputies to approve a decree law, requiring the 
farmers to pay the fines over the next 30 years.  The vote 
had to be made a vote of confidence to ensure approval.  The 
Northern League abstained -- a major concession as most LN 
deputies strongly opposed the measure.  The Senate is 
approved on May 29.  However, for the measure to be 
effective, the GOI will have to persuade the EU to go along 
with it.  Some observers believe the matter will eventually 
go to the European Court of Justice.  The GOI, in trying to 
resolve an increasingly troublesome dispute, has damaged 
itself in the EU on the eve of its presidency and has won 
itself no friends at home.  End Summary. 
 
2. (SBU)  Watching Italy stubbornly stall action within 
Ecofin on the EU Tax Package ) holding it hostage to 
concessions allowing Italian dairy farmers to pay EU fines 
for excessive milk production over 30 years, many observers 
wonder why.   Why is Italy, a country known for compromise 
and flexibility, making such a fuss about milk quotas? 
 
How Craxi,s Government Created the Problem 
 
3.  (SBU) In 1984, the center-left government of Prime 
Minister Bettino Craxi accepted milk production limits 
proposed by the EU Commission that were far below the level 
of domestic milk production at that time.  Opinions differ as 
to whether this was due to Italian incompetence (the Ministry 
of Agriculture not knowing how to get an accurate statistical 
read-out of the true production picture), or simple 
disinterest (the GOI agreeing to an EU proposed quota) or in 
exchange for some other concession from Brussels.  Whatever 
the case, the upshot was that Italian milk producers found 
themselves limited to production levels well below previous 
levels and well below domestic demand. Moreover, according to 
an independent producers association, a significant amount of 
Italy's quota was assigned to farms that did not produce 
milk, but had falsely applied for quotas and subsidies.  This 
left legitimate milk producers with even lower quotas. 
 
4. (SBU) Once the quotas were made public, the GOI found 
itself faced with serious national protests by dairies, milk 
producers and the animal breeder association (AIA). 
Producers blocked motorways and Milan's Linate Airport, 
poured milk onto roads and distributed free milk in town 
squares.   The GOI's response was to reassure producers that 
they didn't need to worry about the quotas, and that 
everything would somehow be worked out. Moreover, they told 
producers that they would never have to pay the EU fines and 
that a way would be found in Brussels to solve the problem. 
The milk producers agreed to suspend their demonstrations, 
but threatened to resume them if ever forced to pay the 
fines. 
 
5. (SBU) Over the nearly 20 years since, dairy farmers have 
continued to resist the quotas.  Unpaid fines for 
overproduction mounted -- in some cases to well over the 
annual income of the producer.  Italian governments initiated 
the practice of paying these fines to Brussels on behalf of 
 
offending milk producers.  Successive center-left governments 
continued to assure producers that they would never have to 
pay the fines.  Any apparent change in policy triggered 
renewed protests ) blocked motorways and gallons of milk 
poured out publicly.  Successive governments ) most recently 
that of Amato in 2000 ) provided renewed assurances. 
Regional disputes within Italy regarding quotas have also 
grown.  The Lombardy region has taken the GOI to court a 
number of times arguing that their producers have received 
too little of the total quota. 
 
Between a Rock and a Hard Place 
 
6.  (SBU) The government of Prime Minister Berlusconi came to 
office in 2001, and found the milk quota issue reaching a 
crisis point.  The GOI decision to pay the fines on behalf of 
its Italian producers was not viable.  The EU Commission had 
confirmed in a ruling that Italian farmers were liable for 
the overproduction fines, and that payment by the GOI 
consitituted an illegal state aid.  The accumulated penalties 
had mounted to E 924 million, far beyond, producers 
contended, their ability to reimburse the government. 
Moreover, these producers remained bitter over the 1984 
imposition of quotas -- seen as an act of betrayal by the 
government.  They refused to be victimized a second time. 
 
7. (SBU) Faced with diametrically opposed forces on both 
sides, the GOI determined to craft a compromise solution -- 
which it calculated that both sides would resist, but might 
eventually accept: The fines would be paid back by the 
farmers (as Brussels required), but over a period of 30 years 
and without interest (to prevent massive bankruptcies among 
milk producers). 
 
Getting to Yes in Parliament 
8. (C) In late March 2003, the GOI introduced a decree law to 
this effect in Parliament, despite having been rebuffed by EU 
member state finance ministers on March 7 in ECOFIN (ref A), 
at a special March 19 ECOFIN session and by heads of state 
and government at the March 20 EU summit (ref B).  Reports 
received by USEU agree that the GOI's strategy of tying 
approval of the unrelated EU Tax Package in the ECOFIN 
Council to a rollback of the Commission ruling on milk 
production fines succeeded only in alienating the other 14 
governments, who regarded the GOI maneuver as "blackmail." 
All had anticipated easy approval of the Tax Package March 7, 
following political agreement in the Council (including 
Italy) on the troublesome savings taxation measure January 21 
after over a year of hard bargaining (Ref C).  The GOI had 
not helped its case by failing to signal its intention at the 
February 18 ECOFIN little more than two weeks earlier (Ref 
B). 
 
9. (SBU) It was immediately clear that the Berlusconi 
government's proposed decree law faced tough opposition even 
within the governing coalition.  Northern League (LN) party 
leader Umberto Bossi (whose northern Italian base includes 
most of Italy's dairy production) had made fair treatment of 
milk producers a key platform in his 2001 campaign.   Other 
LN leaders had pledged to protect producers from having to 
pay "unfair" fines.  The GOI faced the real prospect of 
seeing the legislation defeated. 
 
10. (SBU) The decision was therefore made to make the vote on 
milk quotas a vote of confidence.  This was not an 
unprecedented step.  In fact, since 2001, the Berlusconi 
government had called six votes of confidence -- two in the 
Senate and four in the Chamber of Deputies.   The vote was 
called on May 21, and passed easily.  However, Northern 
League (LN) deputies abstained, and many made clear their 
resentment during the Chamber's debate.   The LN Group 
Leader, Alessandro Ce, declared:  "Today we renew our 
confidence in the Government, but Berlusconi should no longer 
have any illusions."  He went on to argue that legislation 
like the milk quota decree law damaged the Italian people and 
the Italian national interest. 
 
The Decree Law 
 
11.(U) The decree law approved in the Chamber provides for 
monthly installment payments by milk producers of fines for 
overproduction during the period 1995/96 to 2001/2. The 
Ministry of Agriculture will establish special incentives for 
conversion from milk production to other livestock 
production. 
 
Next Steps 
 
12.  (SBU) The decree now must be approved by the Senate, 
where it is expected to pass easily.  EU member state 
representatives in Brussels reached no agreement at its May 
28 COREPER, and discussions are scheduled to continue at the 
COREPER meeting on June 2.  Depending on the results of that 
meeting, finance ministers may consider it again during the 
June 3 ECOFIN council in Luxembourg.  Unanimous approval 
would be necessary for the Council to overrule the Commission 
decision to require milk producers to repay the GOI 
immediately for fines paid on their behalf. 
 
Comment: 
 
13. (C) The Italian Government has struggled mightily to 
solve a longstanding, deeply entrenched problem.  However, no 
one is applauding.  The milk producers are decrying 
unfairness and betrayal.  Northern League politicians are 
complaining that core LN interests are ignored, while LN 
support is taken for granted.  In Italy, the milk quota 
problem is one with no easy solution, which has created 
considerable discomfort within the majority coalition.  As 
evidenced by the confidence vote, however, even on an issue 
this close to its core interests, the Northern League (as do 
other coalition partners) sees its interests better protected 
by being within the government than by leaving it.  While 
there will be no government collapse, this issue may resonate 
within Italy for some time to come.  Within the EU, Italy has 
damaged its standing on the eve of its EU presidency. 
 
14. (U) This message has been coordinated with USEU Brussels. 
 
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 2003ROME02429 - Classification: CONFIDENTIAL