VZCZCXYZ0002
RR RUEHWEB

DE RUEHLI #2438/01 2621515
ZNR UUUUU ZZH
R 191515Z SEP 07
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 6273
INFO RUCNMUC/EU CANDIDATE STATES COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHXK/ARAB ISRAELI COLLECTIVE

UNCLAS LISBON 002438 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EUN
SUBJECT: INFORMAL ECOFIN/EUROMED:  EU ECONOMY SOUND, FOCUS 
ON FINANCIAL INNOVATION, STABILITY, AND PUBLIC 
ADMINISTRATION 
 
 
 Summary 
--------- 
¶1.  On September 14-15, EU Finance Ministers, Central Bank 
Governors and Commissioners joined together in an informal 
ECOFIN gathering focused on state of the economy, fiscal 
consolidation and structural reform. Eurozone peer pressure 
would be necessary to keep France on track to reduce its 
deficit. The EU announced its support for Strauss-Kahn as IMF 
Managing Director and for Padoa-Schioppa as IFC Chairman and 
indicated its willingness to discuss amending the IMF 
selection process. There was universal praise for the 
European Central Bank's response to recent market volatility. 
Talks also focused on financial innovation, financial 
stability and modernization of public finances. The informal 
gathering concluded with EUROMED discussions with southern 
Mediterranean officials on how best to create employment and 
stimulate growth. 
 
Eurozone Economy Healthy 
------------------------ 
¶2.  Eurogroup discussions focused on the fundamental sound 
health of the Eurozone economy, with Eurogroup President and 
Luxemburg Finance Minister Juncker welcoming Cyprus and Malta 
to the discussions. Juncker and Economy and Monetary Affairs 
Commissioner Almunia acknowledged that increased risks 
brought about by developments in the financial markets would 
have a slight negative impact on 2007 growth but did not 
foresee any dramatic revision of 2008 growth projections, 
either to the Eurozone or to the EU at large. European 
Central Bank (ECB) President Trichet concurred with this 
assessment. Almunia was optimistic about the future and noted 
it was essential to stick to the principles of structural 
reform and fiscal consolidation ) a strategy which explained 
the zone,s current good figures. In addition, strong 
domestic demand, employment growth, strong EU companies' 
balance sheets, and banking solidity helped Europe weather 
the current financial market volatility. World growth 
remained robust with the increase in developing countries' 
GDP countering the slowdown in the U.S. economy. On 
inflation, Trichet noted projections remained the same while 
Almunia said tightening labor markets and increased food 
prices could produce inflationary tensions. 
 
France's Budget Proposal not as Ambitious as Structural Reform 
--------------------------------------------- --------- 
¶3.  French Finance Minister Lagarde provided a detailed 
readout of France's proposed structural reforms which covered 
an impressive range of sectors. Juncker noted that such 
reforms were part and parcel of the Lisbon Agenda, and if 
applied appropriately, would have a positive effect on the 
country,s growth. However, France's minimal budget ambition 
was another matter and not in line with the Eurogroup,s 
expectations. The Eurogroup underscored to France that fiscal 
consolidation and structural reform go hand in hand, and that 
Growth and Stability Pact commitments made in Berlin still 
applied. They expected France to cut back on public 
expenditure, and if tax revenues were high enough, the 
government would need to reduce debt accordingly. The group 
made it clear that France was expected to lower its deficit 
by 2010, not 2012 as France proposed. Discipline and 
continued Eurogroup peer pressure were key, Almunia noted, He 
had revised 2007 growth projections for France downward. 
There would be a more complete review of France,s proposal 
in October. 
 
IMF ) Changes in Selection Process Possible 
------------------------------------------- 
¶4.  Portuguese Finance Minister Teixeira dos Santos, as EU 
President Chair, announced the Union's support for Dominique 
Strauss-Kahn as IMF Managing Director and for Italian Finance 
Minister Tommaso Padoa-Schioppa as International Finance 
Committee (IFC) Chairman. He confirmed that the informal 
gathering discussed possible changes to the IMF senior 
leadership selection process (post Strauss-Kahn) to enhance 
the role of developing nations. Almunia underscored that such 
changes would be not be done in isolation and that other 
major international organization (i.e. World Bank) would have 
to undertake similar commitments. Teixeira dos Santos also 
noted the EU's proposal to establish a three-year term limit 
for IFC chairmanship and to establish a rotating system. 
 
ECB Praised for Handling of Sub-Prime Crisis 
-------------------------------------------- 
¶5.  Internal Market and Services Commissioner McGreevy noted 
that while poor quality sub-prime mortgage lending had 
originated in the U.S., its effects were being felt 
worldwide, testing the capacity of EU supervisory and 
regulatory authorities. The informal gathering repeatedly 
 
 
expressed satisfaction with the European Central Bank (ECB)'s 
operations over the summer, with Juncker underscoring the 
importance of a single, unified response rather than thirteen 
disparate reactions. Trichet noted that while market 
corrections were still ongoing, the ECB's actions had 
permitted the money market, in particular the short-term 
money market, to function as well as possible. McGreevy also 
noted that there was sufficient core capital to cover the 
current risk which still required close monitoring. 
 
Financial Innovation a Constant Challenge 
----------------------------------------- 
¶6.  Financial innovation presented a constant challenge for 
supervisory authorities, Teixeira dos Santos noted. In this 
context, the gathering a communique calling for increased 
transparency of financial instruments, institutions and 
vehicles and improved valuation processes, risk management 
and liquidity testing. McGreevy noted that while the Economic 
and Financial Committee (EFC) was seeking to promote 
cross-border harmonization, it was not seeking to promote a 
single supervisory authority. He commented that the Solvency 
II Directive could become a template for banking. The EFC 
also planned to look into the role of rating companies and 
their effect on the market. 
 
Financial Stability Report Supported 
------------------------------------ 
¶7.  The informal gathering agreed with the EFC's financial 
stability report conclusions calling for broader risk 
management resources and the elimination of legal and fiscal 
barriers. The gathering also debated extending the 2005 MOU 
on banking supervisory authority to include a common 
analytical framework to evaluate crises and to develop 
specific cross border cooperation mechanisms. Also under 
discussion was the EU securities' clearance and settlement 
system, with particular attention paid to enhancing post 
settlement mechanisms and implementing the code of conduct. 
(Note: The EFC is examining an ECB proposal to establish a 
single settlement platform. End Note.) Burden sharing 
concerns were also put on the table. 
 
Public Finances Need to be Modernized 
------------------------------------- 
¶8.  The informal gathering discussed the importance of 
modernizing public finances, with a specific emphasis on 
efficiency to increase competitiveness. Guest speaker World 
Bank Vice President for Private Sector Development Michael 
Klein illustrated how countries that had modernized public 
finances had experienced real increases in growth and wealth. 
The ministers exchanged best practices on modernizing 
budgetary techniques, planning and performance measurement. 
Almunia noted the discussion would continue well into the 
Slovenian presidency. 
 
EuroMed ) Working Together to improve Growth and Employment 
--------------------------------------------- -------------- 
¶9.  The informal gathering also included a meeting of EuroMed 
officials, with representatives from Egypt, Algeria, Morocco, 
Israel, the Palestinian Authority, Tunisia, and Syria in 
attendance.  Discussions focused on improving the quality of 
public finances, the development of financial markets, and 
priorities for development as outlined in the 2005 Rabat 
Conference. The group also discussed the creation of a 
EuroMed network of financial experts to exchange best 
practices. Almunia underscored the importance of working to 
improve economic growth and employment in southern 
Mediterranean countries, noting that two-thirds of EU 
investment flows to the region, having doubled since 2004. 
 
 
Comment 
------ 
¶10.  Camaraderie among ministers, bank governors and 
commissioners was evident. There was clear praise for the 
Portuguese Presidency and its handling of the meeting and 
issues as well as for the European Central Bank and its 
reaction to the recent market volatility. Teixeira dos 
Santos, in particular, continues to enjoy a strong reputation 
within the EU. 
Hoffman