VZCZCXYZ0014
PP RUEHWEB

DE RUEHRO #2863/01 2851609
ZNR UUUUU ZZH
P 121609Z OCT 06
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC PRIORITY 6234
INFO RUEHVI/AMEMBASSY VIENNA PRIORITY 1305
RUEHVEN/USMISSION USOSCE PRIORITY 0311
RUEHUNV/USMISSION UNVIE VIENNA PRIORITY 0093

UNCLAS ROME 002863 
 
SIPDIS 
 
CODEL 
SIPDIS 
 
VIENNA PLEASE PASS TO CODEL SMITH 
 
E.O. 12958: N/A 
TAGS: OTRA OREP PREL PGOV AMGT IT
SUBJECT: ITALY SCENESETTER FOR CODEL SMITH 
 
REF: STATE 163079 
 
 ¶1. Embassy Rome warmly welcomes the visit of Codel Smith. 
Please find below background information to serve as a 
scenesetter for visit. 
 
Summary: A Traditionally Strong Bilateral Relationship 
--------------------------------------------- --------- 
 
¶2.  U.S. - Italy relations traditionally have been strong 
regardless of the party in power.  The return of center-left 
leader Romano Prodi as Prime Minister has not significantly 
changed the substance of our bilateral relationship, despite 
the new government's well-known opposition to the war in 
Iraq.  Early predictions that Prodi's government was unstable 
and would fall quickly now appear alarmist, though Prodi 
faces a difficult challenge this fall as he must pass a tight 
budget hitting political allies and the opposition alike in 
order to meet EU budget constraints.  The Prodi Government 
has taken a strong international role in resolving the 
Lebanon crisis, first by hosting an international peace 
conference on the conflict and later by committing to send up 
to 3,000 troops to an enhanced UNIFIL force.  The Italians 
will assume operation command of UNIFIL in February 2007.  On 
the economic front Italy pledged 30 million euros for Lebanon 
at the Stockholm donors conference.  In Iraq, PM Prodi has 
announced plans to withdraw all Italian troops by the end of 
¶2006.  However, the Prodi government pledged $30 million for 
civilian reconstruction efforts and the development of a 
democratic and stable Iraqi government, and the Italian 
administration supports increased NATO police training. 
Italy remains one of our top security partners, hosting about 
17,000 U.S. military personnel at Italian bases.  On Iran, 
Italian officials have told us consistently that Italy will 
support a sanctions regime passed by the UN even though 
sanctions would significantly affect Italy's bottom line - 
Italy is Iran's second largest trading partner in the EU. 
 
Prodi Stands Despite Early Predictions 
-------------------------------------- 
 
¶3.  Prodi leads a diverse coalition of allies ranging from 
centrist oriented Catholic parties to radical communists. 
During the election campaign, the center-left coalition was 
often plagued by internal disputes, with the radical-left 
assuming an increasingly high-profile role.  Radical left 
parties scored significant gains, winning roughly 12 percent 
of the vote and capturing 38 of the potential 158 center-left 
seats in the Senate, making them essential to the Prodi 
government.  Prodi has been able to hold his coalition 
together and to pass controversial legislation supporting 
Italy's military commitments to Afghanistan.  After years in 
the political wilderness, fear of losing power has proven 
strong glue for the center left. 
 
Significant Economic Handicaps and a Budget Battle 
--------------------------------------------- ----- 
 
¶4. High public debt and consistent budget deficits, rising 
social welfare costs, persistent unemployment, and a stagnant 
economy all limit Italy's financial ability to increase or 
sustain Italy's overseas missions.  The current budget has 
reduced foreign assistance by 27 percent and defense spending 
by ten percent (to about 0.90 percent of GDP), well below the 
NATO 20 percent benchmark.  Peacekeeping funding, carried as 
a separate line item outside the budget, was cut by 20 
percent for 2006.  These economic handicaps and EU pressure 
have forced Prodi to introduce an austerity budget for 2007 
that has heightened tensions within his coalition.  The 
political battle to pass the budget will be the most 
important test of the strength of Prodi's government. 
 
Taking a High-Profile Role on Lebanon 
------------------------------------- 
 
¶5. Despite public differences with the U.S. on Iraq, Italy 
has played a leading role in Lebanon.  In July, at the 
request of the U.S., Italy hosted an international conference 
attended by Foreign Ministers from 20 nations and 
international organizations to discuss the international 
community's role in resolving the current crisis in Lebanon. 
The discussion focused on support for an international 
stabilization force, the need for an urgent and sustainable 
cease-fire, humanitarian concerns, and the reconstruction of 
Lebanon.  Immediately after the conference, Italy pledged to 
contribute 3,000 soldiers to an enhanced UNIFIL. 
 
Shift to Civilian Cooperation in Iraq and Afghanistan 
E 
--------------------------------------------- -------- 
 
¶6. Italy, with approximately 1,600 troops located in the 
British sector, is the third largest troop contributor in 
Iraq after the U.S. and UK.  Before the April elections, the 
Berlusconi government announced a timetable for the gradual 
drawdown of Italian troops with the aim of repatriating most 
by year end and transforming the mission into a primarily 
civilian one.  Prodi, in an effort to distinguish his 
government's policies from those of the previous government, 
and citing an electoral mandate for complete troop 
withdrawal, has announced he will withdraw all troops by the 
end of 2006. 
 
¶7.  Nevertheless, Italy will continue its reconstruction 
efforts and has pledged to strengthen political, civilian, 
and humanitarian cooperation and support for the Iraqi 
government, including training of security forces under the 
NATO umbrella. Many of these efforts will be coordinated 
through the recently launched Iraq Compact. 
 
¶8.  Italy is among the most active members of the ISAF 
mission in Afghanistan maintaining an average of 2,000 troops 
in Kabul and Herat, where Italy commands the western sector 
of the country.  However, pressure from the far left will 
keep the government resistant to greater engagement in combat 
operations, particularly in the south.  Refunding the Afghan 
mission will be a political challenge for the Prodi 
government again in December. 
 
Seeking a Broader Role in World Affairs 
--------------------------------------- 
 
¶9. Italy is a member of the EU, NATO, G8, and will soon 
rotate onto the UN Security Council.  The GOI under Prodi has 
sought to play a role in many international crises and hopes 
its leadership in Lebanon will help give it a seat at the 
table on other important global issues.  In his recent visit 
to Lebanon, Prodi reiterated his government's belief that the 
key to long-term stability in the region is finding an 
equitable solution to the Israel - Palestinian conflict, as 
solution that is guaranteed by the international community. 
The Italians would like to help make that happen. 
 
Including a Role in Iran 
------------------------ 
 
¶10.  Despite not being a member of the core group of nations 
seeking to resolve the current impasse over Iranian nuclear 
ambitions, Italy has told us repeatedly that it wants to be 
consulted on Iran policy, and that they are grateful that we 
have included them in consultations. 
 
¶11.  Total two-way trade between Italy and Iran reached 5.17 
billion euros in 2005, making Italy Iran's second biggest 
trade partner in the EU.  According to the Italian 
statistical agency, ISTAT, Italian exports to Iran are 
dominated by machinery, manufactured goods, and chemicals, 
while imports are overwhelmingly comprised of oil and related 
products.  Italian companies have an active presence in many 
sectors of the Iranian economy but are concentrated in the 
petroleum sector. 
 
¶12. Italy had at least 433.2 million euros in foreign direct 
investment in Iran as of December 31, 2004.  That figure is 
likely understated because it does not take into account 
foreign direct investment through foreign subsidiaries or 
through service contracts, whereby a firm can invest in, for 
example, the oil sector, but only by relinquishing the title 
to the infrastructure the firm builds in return for the 
promise of a return through downstream oil flow proceeds. 
For example, ENI, Italy's oil and gas parastatal, reports it 
has invested 2.5 billion euros over a period of several 
decades. 
SPOGLI