This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 04 ROME 005049 
 
SIPDIS 
 
TREASURY FOR CAROL CARNES 
 
E.O. 12958: DECL: 10/17/2012 
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK 
 
 
CLASSIFIED BY: ECONOMIC MINISTER COUNSELOR SCOTT KILNER FOR REASONS 1.5 
 (B) AND (D) 
 
¶1. (U) THIS IS THE FIRST OF A TWO-PART SERIES ON THE ITALIAN 
BUDGET. 
 
¶2. (C) SUMMARY: A DIVIDED ITALIAN CABINET, AFTER AN ALL-NIGHT 
DEBATE, HAS AGREED UPON AND SENT TO PARLIAMENT THE HIGHLY 
CONTROVERSIAL 2003 BUDGET. THE BERLUSCONI GOVERNMENT'S BUDGET 
IS AN ATTEMPT TO PROMOTE ECONOMIC GROWTH AND FULFILL CAMPAIGN 
PROMISES, WHILE CUTTING SPENDING WHEREVER POSSIBLE. THE 
RESULT IS A BUDGET DIVIDED BETWEEN TARGETED TAX CUTS AND 
INFRASTRUCTURE INVESTMENT ON ONE HAND AND SPENDING CUTS AND 
CAPS FOR MINISTRIES, REGIONAL AND MUNICIPAL GOVERNMENTS ON 
THE OTHER. SENIOR GOI OFFICIALS HAVE ASSURED US THAT DEFENSE 
MINISTRY CUTS WILL NOT MEAN CUTS IN PROCUREMENT FROM U.S. 
DEFENSE FIRMS. FINANCE MINISTER TREMONTI WAS THE MAIN 
ARCHITECT OF THE 2003 BUDGET AND WILL BE ITS KEY DEFENDER IN 
PARLIAMENT.  IF THE BUDGET DEFICIT IS HIGHER THAN THE 1.5 
PERCENT PREDICTED, WHICH MANY ECONOMISTS SAY IS LIKELY, THEN 
TREMONTI WILL NEED TO FIND ADDITIONAL RESOURCES OR FURTHER 
SPENDING CUTS. ON THIS TIGHTROPE, THE FINANCE MINISTER'S 
REPUTATION -- AND IN NO SMALL MEASURE THAT OF PRIME MINISTER 
BERLUSCONI -- LIES IN THE BALANCE. 
 
¶3. (SBU) PARLIAMENT MUST PASS THE BUDGET BY THE END OF 
DECEMBER. THE 
CENTER-LEFT IN PARLIAMENT, INDUSTRIALISTS AND UNIONS ARE 
FINDING COMMON GROUND IN THEIR OPPOSITION TO THE 
                       CONFIDENTIAL 
 
PAGE 03        ROME  05049  01 OF 04  170810Z 
BELT-TIGHTENING MEASURES PROPOSED BY THE GOVERNMENT. IN 
CONTRAST, SOME NATIONAL FIGURES ARGUE THAT THE GOVERNMENT 
SHOULD HAVE ENACTED PROMISED STRUCTURAL REFORMS BY NOW AND 
TRIMMED MORE FAT OFF THE BUDGET.  THIS CABLE LOOKS AT THE 
BREWING BUDGET BATTLE, THE POTENTIAL WINNERS AND LOSERS, AND 
THE IMPLICATIONS FOR THE BERLUSCONI GOVERNMENT. (SEPTEL WILL 
PROVIDE SPECIFIC DETAILS ON THE BUDGET.) END SUMMARY. 
 
THE DRAFT 2003 BUDGET 
--------------------- 
 
¶4. (SBU) ON OCTOBER 2, THE GOI PRESENTED ITS 2003 BUDGET TO 
PARLIAMENT, TOTALING E619 BILLION (47.4 PERCENT OF GDP) IN 
SPENDING.  THE PLAN INCLUDES E20 BILLION IN PLANNED SPENDING 
CUTS, PARTIALLY OFFSET BY TAX CUTS OF E7.5 BILLION TO 
ENCOURAGE ECONOMIC GROWTH. AMONG THE REVENUE GENERATING 
MEASURES ARE PLANNED SALES OF STATE ASSETS, WITH A POTENTIAL 
PAYOFF OF E4 BILLION, AS WELL AS A TAX AMNESTY, WHICH COULD 
RAISE AS MUCH AS E8 BILLION. 
 
THE ARCHITECTS 
-------------- 
 
¶5. (SBU) PRIME MINISTER BERLUSCONI AND FINANCE MINISTER 
TREMONTI AGREED ON THE DIFFICULT FRAMEWORK FOR THE BUDGET: 
CUT TAXES AND LAUNCH AN INFRASTRUCTURE INVESTMENT PROGRAM, AS 
PROMISED DURING THE 2001 CAMPAIGN; CUT SPENDING BUT WITHOUT 
ANGERING KEY CONSTITUENCIES; AND AVOID VIOLATING STABILITY 
PACT TARGETS. 
 
¶6. (SBU) ACHIEVING A BALANCE BETWEEN THESE COMPETING AND 
                       CONFIDENTIAL 
 
PAGE 04        ROME  05049  01 OF 04  170810Z 
OFTEN CONFLICTING GOALS PROVED CHALLENGING IN THE EXTREME. 
FINANCE MINISTER TREMONTI AND HIS ECONOMIC TEAM HAVE CHOSEN A 
PATH THAT COMBINES CUTTING AND CAPPING SPENDING, WHERE 
POSSIBLE, WITH TAX AMNESTIES TO BRING IN ONE-TIME REVENUES. 
FINANCE MINISTRY OFFICIALS ARE COUNTING ON A GLOBAL ECONOMIC 
RECOVERY IN LATE 2003 TO RAISE TAX REVENUES, BOLSTER THE 
PRICE OF STATE-OWNED ASSETS, AND ENCOURAGE INVESTMENT. 
 
¶7. (C) COMMENT: WHILE TREMONTI WAS THE ARCHITECT OF THIS 
BUDGET, AND OF THE ENTIRE BERLUSCONI ECONOMIC PLAN, HE HAS 
SURROUNDED HIMSELF WITH A HAND-PICKED CADRE OF LIEUTENANTS, 
MANY OF WHOM REPLACED LONG-TIME SENIOR CIVIL SERVANTS.  AMONG 
THE COTERIE ARE DOMENICO SINISCALCO, FINANCE MINISTRY 
DIRECTOR GENERAL (REPLACED MARIO DRAGHI, WHO HAD HELD THIS 
POSITION FOR NEARLY A DECADE); DEPUTY FINANCE MINISTER 
ANTONIO BALDASSARI; UNDER SECRETARIES VITO TANZI AND GIUSEPPE 
VEGAS; DIRECTOR GENERAL FOR ACCOUNTING VITTORIO GRILLI (THE 
GOI EQUIVALENT OF THE OMB DIRECTOR) AND VINCENZO FORTUNATO, 
CHIEF OF CABINET.  THE SUCCESS OR FAILURE OF THE 2003 BUDGET 
-- ECONOMICALLY AND POLITICALLY WILL REFLECT STRONGLY ON THIS 
TEAM. END COMMENT 
 
THE "LOSING SIDE" 
----------------- 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ8396 
 
PAGE 01        ROME  05049  02 OF 04  170811Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AGRE-00  AID-00   CEA-01   CIAE-00  COME-00 
      CTME-00  DODE-00  DOTE-00  SRPP-00  DS-00    EB-00    EXIM-01 
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      ITC-01   L-00     VCE-00   AC-01    NSAE-00  OMB-01   OPIC-01 
      PA-00    PM-00    PRS-00   ACE-00   P-00     SCT-00   SP-00 
      IRM-00   SSO-00   STR-00   USIE-00  PMB-00   DSCC-00  PRM-00 
      DRL-02   G-00     NFAT-00  SAS-00     /009W 
                  ------------------F8E2B5  170811Z /38 
P 170728Z OCT 02 
FM AMEMBASSY ROME 
TO SECSTATE WASHDC PRIORITY 6349 
INFO EU MEMBER STATES COLLECTIVE PRIORITY 
NATO EU COLLECTIVE PRIORITY 
AMCONSUL FLORENCE PRIORITY 
AMCONSUL FRANKFURT PRIORITY 
AMCONSUL MILAN PRIORITY 
AMCONSUL NAPLES PRIORITY 
DEPT OF TREASURY WASHDC PRIORITY 
NSC WASHDC PRIORITY 
USDAO ROME IT PRIORITY 
 
C O N F I D E N T I A L SECTION 02 OF 04 ROME 005049 
 
SIPDIS 
 
TREASURY FOR CAROL CARNES 
 
E.O. 12958: DECL: 10/17/2012 
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
                       CONFIDENTIAL 
 
PAGE 02        ROME  05049  02 OF 04  170811Z 
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK 
 
¶8. (SBU) TAXPAYERS: ON TAX CUTS, THE BUDGET PROPOSES A 
REDUCTION IN PERSONAL INCOME TAX THAT WILL BENEFIT LOW-INCOME 
FAMILIES. WHILE THIS MAY SATISFY SOME VOTERS, MOST ITALIANS 
WILL NOT BENEFIT. DURING THE 2001 CAMPAIGN, THEN-CANDIDATE 
BERLUSCONI PROMISED FUNDAMENTAL REFORM OF THE TAX SYSTEM, 
INCLUDING ELIMINATION OF THE COMPLEX NETWORK OF OVERLAPPING 
TAX LEVIES. TREMONTI HAS NOW DESIGNED A NEW STRUCTURE: A 
HIGHER MINIMUM INCOME BEFORE TAXES, AND TWO TAX BRACKETS -- 
23 PERCENT BELOW E100,000 INCOME AND 33 PERCENT OVER THAT 
LEVEL.   TOP TAX RATES FOR THE HIGHEST INCOME GROUP WOULD 
HAVE FALLEN FROM 42.5 PERCENT TO 33 PERCENT; FOR 
MIDDLE-INCOME GROUPS, FROM A MAXIMUM RATE OF 39 PERCENT TO 23 
PERCENT. GLOBAL ECONOMIC CONDITIONS FORCED THE GOI TO 
POSTPONE THIS REFORM UNTIL 2003. NOW, IF APPROVED BY 
PARLIAMENT, THE NEW INCOME TAX RATES WILL NOT KICK IN BEFORE 
2004 AT THE EARLIEST. 
 
¶9. (C) THE MINISTRIES: THE 2003 BUDGET PROPOSES A 10 PERCENT 
SPENDING CUT IN DISCRETIONARY FUNDS FOR ALL GOVERNMENT 
MINISTRIES. FINANCE DEPUTY SECRETARY BALDASSARI TOLD US THAT 
THE GOVERNMENT HOPES TO ACHIEVE SUBSTANTIAL SAVINGS POSSIBLE 
BY SWITCHING TO ON-LINE PURCHASING.  FINANCE UNDER SECRETARY 
TANZI TOLD US ON SEPTEMBER 30 THAT A E35 BILLION 
DISCRETIONARY FUND FOR THE NON-BINDING PURCHASE OF CAPITAL 
GOODS AND SERVICES, SUCH AS TELECOMMUNICATIONS UPGRADES, 
WOULD BE CUT. PUBLIC SECTOR HIRING WILL BE FROZEN. NOT 
SURPRISINGLY, MINISTERS ALREADY ARE 
JOCKEYING TO ENSURE THAT THEIR MINISTRIES TAKE LESS OF A HIT, 
                       CONFIDENTIAL 
 
PAGE 03        ROME  05049  02 OF 04  170811Z 
AND THAT FAVORED PROGRAMS ARE PRESERVED AND REMAIN UNDER 
THEIR CONTROL.  IN THE DAYS BEFORE THE CABINET DEBATE ON THE 
BUDGET, MINISTER OF PRODUCTIVE ACTIVITIES (MPA) MARZANO 
THREATENED TO RESIGN IF HIS MINISTRY DID NOT RETAIN CONTROL 
OVER A SPECIAL FUND FOR THE MEZZOGIORNO, ITALY'S SOUTHERN 
REGION.  NEVERTHELESS, UNDER THE 2003 BUDGET, CONTROL OF THIS 
FUND, INTENDED TO PROMOTE INDUSTRIAL DEVELOPMENT IN THE 
SOUTH, WILL BE GIVEN 
TO THE FINANCE MINISTRY, NOT THE MPA.  (COMMENT: MARZANO DID 
NOT RESIGN BUT TOLD US CANDIDLY THAT FUNDING FOR THE 
MEZZOGIORNO WILL FALL SHORT OF WHAT HE WANTED TO SEE.  END 
COMMENT.) 
 
¶10. (SBU) THE DRAFT BUDGET PROPOSES LOWER DEFENSE SPENDING IN 
REAL TERMS. DESPITE A MODEST 0.3 PERCENT NOMINAL INCREASE IN 
DEFENSE 
SPENDING, FROM E19.5 BILLION TO E19.6 BILLION, PREDICTED 2003 
INFLATION OF 1.9 PERCENT WOULD MEAN A CUT OF ALMOST 1.6 
PERCENT IN REAL SPENDING. THE BUDGET FOR "PERSONNEL, 
OPERATIONS AND CAPITAL", FOR THE ARMY, NAVY AND AIR FORCE, IS 
TO BE CUT BY AN ESTIMATED 1.4 PERCENT. DEFENSE MINISTRY 
CONTACTS ARE CONCERNED THAT PERSONNEL COSTS WILL EAT UP A 
LARGE PART OF THE BUDGET, AS THE MILITARY MOVES FROM A 
CONSCRIPT FORCE TO A PROFESSIONAL AND MORE HIGHLY-PAID FORCE. 
DESPITE THE COMPETING DEMANDS, FINANCE UNDER SECRETARY TANZI 
TOLD US THAT DEFENSE PROCUREMENT WITH THE U.S. SHOULD NOT BE 
HARMED.  NOTE: ITALY HAS SIGNED ON FOR A USD ONE BILLION 
INVESTMENT IN THE JOINT STRIKE FIGHTER, AND HAS COMMITTED TO 
SEVERAL OTHER MAJOR PROCUREMENTS FROM THE U.S. END NOTE. 
 
¶11. (C) DESPITE TANZI'S REMARKS, WE HAVE HEARD RAMPANT 
                       CONFIDENTIAL 
 
PAGE 04        ROME  05049  02 OF 04  170811Z 
SPECULATION THAT DEFENSE PROCUREMENT IN FACT WILL BE 
AFFECTED.  ACCORDING TO ITALY'S LEADING DAILY, IL CORRIERE 
DELLA SERA, THERE WAS A HEATED EXCHANGE BETWEEN DEFENSE 
MINISTER MARTINO AND PM BERLUSCONI DURING THE CABINET DEBATE 
ON THE BUDGET. SPECIFICALLY REFERRING TO ITALY'S STANDING 
ORDER OF 121 EUROFIGHTER AIRCRAFT AT AN ESTIMATED COST OF 
E719 MILLION, 
MARTINO REPORTEDLY TOLD THE PM THAT "DEFENSE TODAY MEASURES 
THE INTERNATIONAL CREDIBILITY OF OUR COUNTRY. NATO IS CALLING 
FOR INCREASING INVOLVEMENT AND COMMITMENT. EUROPE IS PRESSING 
FOR THE CREATION OF A TASK FORCE. YOU AND I WILL HAVE TO MEET 
AND FACE OUR ALLIES AT THE PRAGUE NATO SUMMIT."  MARTINO HAS 
PUBLICLY STATED THAT ITALY WILL FULFILL ITS COMMITMENT TO BUY 
THE EUROFIGHTERS, AT THE COST OF ALMOST ONE-QUARTER OF ITS 
DEFENSE BUDGET OVER THE NEXT TEN YEARS. 
 
-- (C) COMMENT: DEFENSE PROCUREMENT IS FUNDED THROUGH 
MULTIPLE APPROPRIATIONS, INCLUDING THOSE FOR THE MINISTRY OF 
PRODUCTIVE ACTIVITIES.  DEFMIN MARTINO IS IN FACT TRYING TO 
SHIFT SOME OF THE EUROFIGHTER COST TO THE MPA, WHICH DOES NOT 
WISH TO FUND THE PROGRAM. THE 2003 BUDGET BELT-TIGHTENING 
WILL LIKELY SLOW ITALY'S PROGRESS TOWARD THE EU DEFENSE 
SPENDING BENCHMARK OF TWO PERCENT OF GDP. OTHER REFORMS WILL, 
HOWEVER, REMAIN ON TRACK. FRANCESCO TRUPIANO, DIPLOMATIC 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ8398 
 
PAGE 01        ROME  05049  03 OF 04  170811Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AGRE-00  AID-00   CEA-01   CIAE-00  COME-00 
      CTME-00  DODE-00  DOTE-00  SRPP-00  DS-00    EB-00    EXIM-01 
      E-00     FAAE-00  VC-00    FRB-00   H-01     TEDE-00  INR-00 
      ITC-01   L-00     VCE-00   AC-01    NSAE-00  OMB-01   OPIC-01 
      PA-00    PM-00    PRS-00   ACE-00   P-00     SCT-00   SP-00 
      IRM-00   SSO-00   STR-00   USIE-00  PMB-00   DSCC-00  PRM-00 
      DRL-02   G-00     NFAT-00  SAS-00     /009W 
                  ------------------F8E2C8  170811Z /38 
P 170728Z OCT 02 
FM AMEMBASSY ROME 
TO SECSTATE WASHDC PRIORITY 6350 
INFO EU MEMBER STATES COLLECTIVE PRIORITY 
NATO EU COLLECTIVE PRIORITY 
AMCONSUL FLORENCE PRIORITY 
AMCONSUL FRANKFURT PRIORITY 
AMCONSUL MILAN PRIORITY 
AMCONSUL NAPLES PRIORITY 
DEPT OF TREASURY WASHDC PRIORITY 
NSC WASHDC PRIORITY 
USDAO ROME IT PRIORITY 
 
C O N F I D E N T I A L SECTION 03 OF 04 ROME 005049 
 
SIPDIS 
 
TREASURY FOR CAROL CARNES 
 
E.O. 12958: DECL: 10/17/2012 
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
                       CONFIDENTIAL 
 
PAGE 02        ROME  05049  03 OF 04  170811Z 
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK 
 
ADVISOR TO THE MINISTER OF DEFENSE, TOLD US THAT REDUCED MOD 
FUNDING WILL NOT SLOW MINISTER MARTINO'S MOVE TOWARD AN 
ALL-VOLUNTEER MILITARY. END COMMENT. 
 
¶12. (SBU) THE UNIONS: THE THREE MAJOR TRADE UNION 
CONFEDERATIONS (CGIL, CISL, AND UIL) SET ASIDE THEIR SUMMER 
DIFFERENCES (OVER THE GOVERNMENT'S INTRODUCTION OF MODEST 
LABOR FLEXIBILITY IN ANNUAL LABOR AGREEMENTS) TO SLAM THE 
DRAFT BUDGET. FOR LABOR, THE BUDGET'S PRIORITIES ARE 
INVERTED.  CAPS ON SPENDING FOR LOCAL SERVICES - WHETHER 
PUBLIC CHILD-CARE, HEALTH CARE OR EDUCATION -- WILL MORE THAN 
OFFSET ANY BENEFITS ORDINARY WORKERS WOULD GLEAN FROM A TAX 
CUT, UNIONS LEADERS ARGUE. IN THEIR EYES, THE 
REVENUE-GENERATING TAX AMNESTY IS ONLY THE LATEST EXAMPLE OF 
A 
FLAWED ECONOMIC POLICY, WHICH EMPHASIZES ACCOUNTING GIMMICKS 
AND COZY BENEFITS FOR THE GOVERNMENT'S BUSINESS CONSTITUENCY 
OVER LONG-TERM INVESTMENT IN RESEARCH, INFRASTRUCTURE AND 
OTHER MEASURES TO DIVERSIFY ITALY'S ECONOMY. CGIL, THE 
LARGEST OF THE THREE CONFEDERATIONS, DECLARED THAT ITS 
OCTOBER 18 NATIONWIDE GENERAL STRIKE WILL BE A PROTEST 
AGAINST THE DRAFT BUDGET AS WELL AS THE LABOR MARKET 
FLEXIBILITY PROVISIONS PROPOSED BY CISL AND UIL. (COMMENT: 
THIS DECLARATION IS A BIT DISINGENUOUS, GIVEN THAT THE 
OCTOBER 18 STRIKE WAS ANNOUNCED LAST SUMMER, BEFORE THE 
BUDGET WAS DRAFTED, BUT IS GOOD POLITICS.  END COMMENT.) THE 
LEADERS OF THE OTHER TWO CONFEDERATIONS, BEYOND ECHOING 
WARNINGS ABOUT WEAK SUPPORT FOR THE SOUTH, WARNED THAT THEY 
WOULD JOIN CGIL IN THE STREETS IF LOWER-THAN-PROJECTED 
                       CONFIDENTIAL 
 
PAGE 03        ROME  05049  03 OF 04  170811Z 
REVENUE PROMPTED THE GOVERNMENT TO CONSIDER REVISING THE 
TERMS OF THE NATIONAL LABOR PACTS NEGOTIATED IN THE SUMMER. 
 
¶13. (SBU) INDUSTRY: ANTONIO D'AMATO, CHAIRMAN OF 
CONFINDUSTRIA, ITALY'S INDUSTRIALIST ASSOCIATION,  BLASTED 
THE BUDGET AS "ONE OF THE WORST LAWS I CAN EVER REMEMBER 
BEING WRITTEN."  HE HAS HARSHLY CRITICIZED THE GOVERNMENT FOR 
NOT TAKING MEASURES TO INCREASE THE COMPETITIVENESS OF THE 
ITALIAN ECONOMY, FOR NOT ADOPTING MEASURES TO INCREASE 
INVESTMENT IN THE MEZZOGIORNO, AND FOR NOT MAKING FURTHER 
CUTS OR REFORMS IN EDUCATION SPENDING .  (COMMENT: D'AMATO 
HAS BEEN A STRONG PUBLIC SUPPORTER OF THE BERLUSCONI 
GOVERNMENT. THIS IS THE FIRST TIME HE HAS OPENLY CRITICIZED 
THE GOVERNMENT, ALTHOUGH HE HAS LONG COMPLAINED PRIVATELY 
THAT PROMISED TAX CUTS WERE TOO LONG IN COMING.  MOREOVER, HE 
TARGETED HIS CRITICISMS NOT AT BERLUSCONI PERSONALLY, BUT AT 
TWO COALITION PARTIES: ALLIANZA NAZIONALE AND LEGA NORD, 
BLAMING THEM FOR THE TIMIDITY AND LACK OF CREATIVITY IN THE 
BUDGET. END COMMENT.) 
 
¶14. (C) THE MEZZOGIORNO: FOR MANY CRITICS, CUTBACKS IN 
SPENDING FOR THE ITALY'S UNDERDEVELOPED MEZZOGIORNO HAVE 
BECOME THE LIGHTENING ROD FOR CRITICISM OF THE BUDGET. EVEN 
ITALIAN PRESIDENT CARLO AZEGLIO CIAMPI, WHO GENERALLY STAYS 
ABOVE SUCH POLITICAL FRAY, HAS REMARKED THAT THE BUDGET DOES 
LITTLE TO ADDRESS THE INEQUALITY BETWEEN NORTH AND SOUTH, AND 
THE UNEMPLOYMENT LEVELS OF 20 PERCENT IN THE MEZZOGIORNO. 
COMMENT: DESPITE THE GENUINE CONCERN ABOUT THE MEZZOGIORNO'S 
CHRONIC UNEMPLOYMENT, CRITICISM OF BUDGET CUTBACKS FOR THE 
REGION SEEMS DISPROPORTIONATELY WIDESPREAD. BY FOCUSING ON 
THE MEZZOGIORNO CUTBACKS, D'AMATO AND OTHER FORZA ITALIA 
                       CONFIDENTIAL 
 
PAGE 04        ROME  05049  03 OF 04  170811Z 
SUPPORTERS CAN GAIN POLITICAL CAPITAL WITHOUT TACKLING THE 
ECONOMIC POLICY OF THE BERLUSCONI GOVERNMENT HEAD ON. END 
COMMENT. MEETING WITH US ON OCTOBER 9, DEPUTY FINANCE 
MINISTER BALDASSARI REJECTED ALLEGATIONS ABOUT BUDGET 
CUTBACKS FOR THE MEZZOGIORNO. HE ARGUED THAT BETWEEN THE 
CENTRAL GOVERNMENT'S CONTRIBUTIONS, THROUGH DIRECT TRANSFERS, 
GRANTS AND LONG-TERM LOANS, AND EU FUNDS, THE MEZZOGIORNO 
WILL RECEIVE A RECORD E9 BILLION THIS YEAR.  BALDASSARI ALSO 
STRESSED THAT THE FUNDING LEVEL IS LESS IMPORTANT THAN THE 
MEZZOGIORNO'S CAPACITY TO ABSORB THAT MONEY. ON AVERAGE, THE 
MEZZOGIORNO ONLY HAS BEEN ABLE TO ABSORB A THIRD OF THE EU 
MONIES EARMARKED FOR IT, HE SAID. 
 
¶15. (SBU) THE REGIONS: THE BERLUSCONI GOVERNMENT CAME INTO 
OFFICE IN JUNE 2001 PROMISING TO DEVOLVE MORE AUTHORITY TO 
THE REGIONAL GOVERNMENTS. DESPITE THIS, BERLUSCONI AND 
TREMONTI WANT TO KEEP A TIGHT-REIN ON THE FINANCES OF OFTEN 
SPENDTHRIFT REGIONAL GOVERNMENTS.  IN THE 2003 BUDGET, THE 
GOI PROPOSED AUTOMATIC TRIGGERS THAT WILL FREEZE SPENDING AND 
HIRING BY REGIONAL GOVERNMENTS IF THEIR SPENDING 2001 LEVELS 
EXCEEDS BY THREE PERCENT. LOCAL GOVERNMENTS ALSO ARE BEING 
ASKED TO FOLLOW MORE VIGOROUSLY THE GUIDELINES OF THE EU 
STABILITY 
PACT. REGIONAL GOVERNMENTS ARE COMPLAINING THAT THE QUALITY 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ8401 
 
PAGE 01        ROME  05049  04 OF 04  170812Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AGRE-00  AID-00   CEA-01   CIAE-00  COME-00 
      CTME-00  DODE-00  DOTE-00  SRPP-00  DS-00    EB-00    EXIM-01 
      E-00     FAAE-00  VC-00    FRB-00   H-01     TEDE-00  INR-00 
      ITC-01   L-00     VCE-00   AC-01    NSAE-00  OMB-01   OPIC-01 
      PA-00    PM-00    PRS-00   ACE-00   P-00     SCT-00   SP-00 
      IRM-00   SSO-00   STR-00   USIE-00  PMB-00   DSCC-00  PRM-00 
      DRL-02   G-00     NFAT-00  SAS-00     /009W 
                  ------------------F8E2DA  170812Z /38 
P 170728Z OCT 02 
FM AMEMBASSY ROME 
TO SECSTATE WASHDC PRIORITY 6351 
INFO EU MEMBER STATES COLLECTVE PRIORITY 
NATO EU COLLECTIVE PRIORITY 
AMCONSUL FLORENCE PRIORITY 
AMCONSUL FRANKFURT PRIORITY 
AMCONSU MILAN PRIORITY 
AMCONSUL NAPLES PRIRITY 
DEPT OF TREASURY WASHDC PRIORITY 
NSC WASHDC PRIORITY 
USDAO ROME IT PRIORITY 
 
C O N F I D E N T I A L SECTION 04 OF 04 ROME 005049 
 
SIPDIS 
 
TREASURY FOR CAROL CARNES 
 
E.O. 12958: DECL: 10/17/2012 
TAGS: ECON EFIN PGOV EFIN PGOV EFIN PGOV EFIN PGOV EUN
                       CONFIDENTIAL 
 
PAGE 02        ROME  05049  04 OF 04  170812Z 
SUBJECT: THE 2003 BUDGET (PART I): A TIGHTROPE WALK 
 
AND DISTRIBUTION OF SERVICES COULD BE AFFECTED, AND HAVE 
THREATENED TO RAISE TARIFFS ON TRANSPORTATION AND OTHER 
SERVICES TO RAISE REVENUE.  COMMENT: FURTHER INCREASES IN 
TARIFFS OF TRANSPORTATION AND OTHER PUBLIC SERVICES COULD 
RAISE THE IRE OF VOTERS, WHO ALREADY ARE COMPLAINING ABOUT 
PRICE INCREASES FOLLOWING THE EURO CONVERSION. HOW REGIONAL 
GOVERNMENTS WILL ALLOCATE THEIR FUNDS IS STILL NOT CERTAIN. 
END COMMENT. 
 
NOT TOUGH ENOUGH 
---------------- 
 
¶16. (SBU) IN CONTRAST TO THE MANY VOICES RALLYING FOR HIGHER 
SPENDING FOR PET PRIORITIES, THE 2003 DRAFT BUDGET ALSO HAS 
BEEN CRITICIZED FOR NOT ENACTING STRUCTURAL REFORMS AND 
CUTTING SPENDING DEEPLY ENOUGH. LEADING THIS CHARGE IS 
CENTRAL BANK GOVERNOR ANTONIO FAZIO, 
WHO HAS WARNED THE GOVERNMENT THAT IT NEEDS TO BRING DOWN 
PUBLIC DEBT LEVELS FROM THE EXPECTED NEAR RECORD HIGH OF 110 
PERCENT OF GDP THIS YEAR. FAZIO HAS MADE A PUBLIC APPEAL FOR 
GOVERNMENT AND PARLIAMENTARY LEADERS TO MODIFY THE DRAFT 
BUDGET TO REDUCE SPENDING MORE AND TO INITIATE NEEDED 
STRUCTURAL REFORMS. JUMPING ON THE MEZZOGIORNO BANDWAGON, AND 
PARTIALLY UNDERCUTTING HIS OWN ARGUMENT FOR DEEPER SPENDING 
CUTS, FAZIO ALSO SUGGESTED A NEED FOR GREATER 
GOVERNMENT-FUNDED. 
 
COMMENT: GLOBAL ENVIRONMENT IS KEY 
---------------------------------- 
                       CONFIDENTIAL 
 
PAGE 03        ROME  05049  04 OF 04  170812Z 
 
¶17. (SBU) AS THE GOVERNMENT'S DRAFT BUDGET IS DEBATED IN 
PARLIAMENT BETWEEN NOW AND THE END OF THE YEAR, IT IS CLEAR 
THAT THE LOSING GROUPS ARE NOT GOING TO ACCEPT THE BUDGET 
WITHOUT A FIGHT. INDEED, AN UNLIKELY ALLIANCE BETWEEN 
BUSINESS LEADERS AND THE UNIONS (AT LOGGERHEADS JUST A FEW 
MONTHS AGO OVER ARTICLE 18 OF THE LABOR CODE) CENTER-LEFT 
PARLIAMENTARY LEADERS, AND EVEN SOME CABINET MINISTERS ARE 
PRESSING FOR SIGNIFICANT CHANGES. PRODUCTIVE ACTIVITIES 
MINISTER MARZANO TOLD A GROUP OF YOUNG ENTREPRENEURS ON 
OCTOBER 6 THAT HE WOULD "SIT AT A TABLE WITH" THEM TO DISCUSS 
POSSIBLE CHANGES TO THE BUDGET.  MOD DIPLOMATIC ADVISOR 
TRUPIANO TOLD US THAT THE FIGHT FOR THE MOD BUDGET "ISN'T 
OVER". 
 
¶18. (SBU) THE FINANCE MINISTER HAS CREATED A BUDGET INTENDED 
TO STIMULATE GROWTH, WHILE NOT INCREASING THE BUDGET DEFICIT. 
 HE HAS LABORED TO STRIKE A PROPER POLICY BALANCE BETWEEN TAX 
CUTS AND SPENDING CUTS, ONE-OFF MEASURES AND LONG TERM 
INVESTMENT PLANS. A BUDGET THAT PLEASES NO ONE MAY, INDEED, 
BE THE RIGHT PRESCRIPTION. 
 
¶19. (C) THE 2003 BUDGET IS, HOWEVER, SOMETHING OF A HIGH-RISK 
GAMBLE.  IF THE GLOBAL ECONOMY RECOVERS IN 2003, THIS POLICY 
MIX MIGHT BE ENOUGH TO REVIVE ITALY'S ECONOMY. THE GOI ALSO 
WOULD BE WELL-POSITIONED TO MEET STABILITY PACT TARGETS FOR A 
BALANCED BUDGET IN 2006. SHOULD ECONOMIC GROWTH IN 2003 PICK 
UP, THE GOI ALSO WOULD BE IN POSITION TO TACKLE THE MORE 
INTRACTABLE, STRUCTURAL PROBLEMS, SUCH AS LABOR MARKET 
INFLEXIBILITY AND A BURDENSOME PENSION SYSTEM, SHOULD IT 
SUMMON THE POLITICAL WILL TO DO SO. 
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PAGE 04        ROME  05049  04 OF 04  170812Z 
 
¶20. (C) HOWEVER, IF THE GLOBAL ECONOMY DOES NOT REVIVE IN 
2003, THEN THE GOVERNMENT COULD BE IN A MUCH-WEAKENED 
POSITION FOR THE FUTURE. 
DEPUTY FINANCE MINISTER BALDASSARI ACKNOWLEDGED THAT THERE 
ARE SOME GREAT UNKNOWNS, INCLUDING THE EFFECTS OF A POSSIBLE 
FIAT COLLAPSE AND THE COST OF THE GENERAL STRIKES. (NOTE: 
ACCORDING TO BALDASSARI, THE FIAT CORPORATE EMPIRE, ALONG 
WITH THE BUSINESSES THAT DEPEND ON IT, ACCOUNT FOR FOUR 
PERCENT OF ITALY'S GDP.  BALDASSARI ALSO CLAIMED THAT ITALY 
LOST NEARLY ONE-HALF OF A PERCENTAGE POINT IN GDP GROWTH 
BECAUSE OF GENERAL STRIKES THIS YEAR. END NOTE.) THE 2003 
BUDGET HAS ANGERED MANY OF THE GOVERNMENT'S MOST STALWART 
SUPPORTERS, WHILE THE PROPOSED TAX CUTS TO LOW-INCOME GROUPS 
HAVE LIMITED POLITICAL PAYOFF. IF THE GOVERNMENT IS FORCED TO 
ENACT EVEN DEEPER SPENDING CUTS DURING 2003, IT WILL FIND FEW 
SUPPORTERS. THIS WOULD ENDANGER THE GOVERNMENT'S MANDATE TO 
PURSUE CRUCIAL STRUCTURAL REFORMS, SUCH AS PENSION AND 
LABOR-MARKET REFORM. 
 
SEMBLER 
 
                       CONFIDENTIAL 
 
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 2002ROME05049 - Classification: CONFIDENTIAL