US embassy cable - 03ROME3313

C O N F I D E N T I A L ROME 003313 
 
SIPDIS 
 
 
E.O. 12958: DECL: 07/18/2006 
TAGS: ECON, EFIN, IT, EUN 
SUBJECT: ITALY'S EU PRESIDENCY: ECOFIN DEBATE OVER THE 
STABILITY PACT CATCHES GOI BY SURPRISE 
 
REF: A. USEU BRUSSELS 3255 
 
     B. ROME 1117 

CLASSIFIED BY: ECONOMIC COUNSELOR KAREN MILLIKEN FOR REASONS 1.5 (B) 
 
1. (SBU) FRENCH PRESIDENT CHIRAC'S CALL FOR A SOFTENING OF 
THE EU STABILITY AND GROWTH PACT IN A TELEVISED BASTILLE DAY 
INTERVIEW THE SAME EVENING AS THE JULY 14 MEETING OF EUROZONE 
FINANCE MINISTERS IN BRUSSELS (USEU SEPTEL) TOOK GOI 
OFFICIALS BY SURPRISE, CARLO MONTICELLI (PLEASE PROTECT), 
SENIOR DIRECTOR FOR G7 AND EU AFFAIRS AT THE FINANCE 
MINISTRY, TOLD US ON JULY 17TH.  MINISTERS ALSO WERE 
UNPREPARED BY THE STRONG REITERATION OF CHIRAC'S CALL BY 
FRENCH FINANCE MINISTER FRANCIS MER.  THEY WERE EQUALLY TAKEN 
ABACK BY THE MOVE BY AUSTRIA'S KARL-HEINZ GRASSER AFTER THE 
MEETING TO BREAK THE EUROGROUP "CODE OF SILENCE" AND TALK TO 
THE PRESS ABOUT MER'S INTERVENTION.  GOING PUBIC ABOUT WHAT 
TRANSPIRED IN THE CONFIDENTIAL DISCUSSIONS OF THIS INFORMAL 
GROUP IS UNPRECEDENTED. 
 
2. (SBU) GOI OFFICIALS, REMARKED MONTICELLI, BELIEVE EUROPE'S 
INTERESTS WERE ILL-SERVED BY WHAT BECAME A PUBLIC SPAT AFTER 
FRANCE CRITICIZED AUSTRIA AND MINISTERS FROM SEVERAL OTHER 
SMALL COUNTRIES TOOK GRASSER'S OPENING AS AN OPPORTUNITY TO 
PILE ON.  HOWEVER, THE GOI DID NOT WANT TO EXACERBATE 
TENSIONS BY ISSUING A PUBLIC REPRIMAND TO AUSTRIA.  IN AN 
ASIDE, MONTICELLI SAID THAT THERE WAS SOME CONSTERNATION 
AMONG ITALIAN OFFICIALS FOR BEING UNABLE TO MAINTAIN ORDER IN 
THE PROCEEDINGS.  HE ALSO WRYLY NOTED THAT THE FIRST THREE 
WEEKS OF ITALY'S EU PRESIDENCY HAVE BEEN MARKED BY 
ATTENTION-GRABBING HEADLINES, AND NOT JUST BY THE ITALIANS. 
 
3. (C) REGARDING THE STABILITY PACT ITSELF, MONTICELLI SAID 
    THAT FINANCE MINISTER TREMONTI, AS HE INDICATED IN BRUSSELS, 
CONTINUES TO STEADFASTLY SUPPORT THE PACT'S REQUIREMENTS. 
ITALIAN FINANCE OFFICIALS BELIEVE THAT FRANCE WILL EVENTUALLY 
COME BACK INTO THE "FOLD", AND TAKE MEASURES THAT WILL BRING 
FRANCE CLOSER TO, OR AT LEAST BE LESS IN BREACH OF, PACT 
REQUIREMENTS.  THE PEER PRESSURE FROM THE OTHER MINISTERS ON 
FRANCE IS AND WILL CONTINUE TO SIGNIFICANT, HE ARGUED. 
FRENCH OFFICIALS, HE CONTINUED, THEMSELVES SAID AT THE LAST 
ECOFIN THAT FRANCE WOULD STRIVE TO MEET THE THREE PERCENT 
DEFICIT TARGET IN 2004 (REFTEL). MONTICELLI ALSO COMMENTED 
THAT NOT ONLY SMALL COUNTRIES ARE BECOMING IMPATIENT WITH 
FRANCE AND GERMANY.  ALTHOUGH THEY ACKNOWLEDGE THAT THE 
STABILITY PACT IS A TIGHT STRAIGHT-JACKET, SOME GOVERNMENTS 
ARE NOT SYMPATHETIC TO FRANCE AND GERMANY, WHICH CHOOSE NOT 
TO PUT THEIR FISCAL ACCOUNTS IN ORDER IN BOOM YEARS AND ARE 
NOW ASKING FOR ADDITIONAL BREATHING SPACE, HE SAID. 
 
4. (SBU) THAT SAID, MONTICELLI NOTED, THERE DOES SEEM TO BE 
SUBTLE SHIFTS IN THE VIEWS OF SOME MEMBER STATE GOVERNMENTS 
REGARDING THE STABILITY PACT AND ITS LIMITATIONS ON DEFICIT 
SPENDING. MANY POLITICAL LEADERS ARE LOOKING AT THE 
EXPERIENCE OF THE UNITED STATES, WHOSE BUDGET DEFICIT IS 
EXCEEDING FOUR PERCENT OF GDP BUT ALSO WHOSE GDP GROWTH RATE 
IS EXPECTED TO BE AT LEAST ONE PERCENT HIGHER THAN EUROPE IN 
2004. UNFORTUNATELY, WE WILL NOT KNOW WHICH STRATEGY - THE 
U.S. OR THE EUROGROUP'S - IS THE RIGHT ONE FOR AT LEAST FIVE 
YEARS, HE REMARKED. 
 
5. (C) COMMENT: FINANCE MINISTER TREMONTI NEEDS TO TOE A FINE 
LINE IN BOTH PUBLIC AND BACK-DOOR DISCUSSIONS ON THE 
STABILITY PACT.  TREMONTI HIMSELF HAS BEEN SKEPTICAL ABOUT 
    THE PACT AND TOLD US, AS RECENTLY AS MARCH, THAT HE WAS 
CONCERNED THAT THE STABILITY PACT DID NOT PROMOTE SUFFICIENT 
GROWTH (REFTEL B).  THE CALL BY SOME ITALIAN OFFICIALS, 
INCLUDING THE DEFENSE AND EDUCATION MINISTERS, FOR AN EASING 
OF PACT REQUIREMENTS ALSO HAS PRESSURED TREMONTI TO ALLOW FOR 
DEBATE ON THE PACT ITSELF IN THE EUROGROUP.  NONETHLESS, 
DURING ITALY'S EU PRESIDENCY, TREMONTI WILL CONTINUE TO FEEL 
RESPONSIBILITY TO DEFEND THE PACT.  A WEAKENED OR COLLAPSE OF 
THE STABILITY PACT IS NOT THE LEGACY THE GOI WANTS FOR ITS 
PRESIDENCY.  END COMMENT. 
 
6. (U) THIS MESSAGE WAS COORDINATED WITH USEU. 
KILNER 
 
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 2003ROME03313 - Classification: CONFIDENTIAL