Cablegate: Italy: Finance Minister's Maneuvering Opens More

VZCZCXRO3701
RR RUEHRN
DE RUEHRO #1194/01 3021551
ZNY CCCCC ZZH
R 291551Z OCT 09
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC 2819
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHFL/AMCONSUL FLORENCE 3869
RUEHMIL/AMCONSUL MILAN 0301
RUEHNP/AMCONSUL NAPLES 4082
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 ROME 001194

SIPDIS

E.O. 12958: DECL: 10/29/2019
TAGS: ECON IT PREL EFIN PGOV
SUBJECT: ITALY: FINANCE MINISTER'S MANEUVERING OPENS MORE
TENSIONS IN THE BERLUSCONI CABINET

REF: ROME 1187

Classified By: Ambassador David H. Thorne for reasons 1.4 (b) and (d).

1. (C) SUMMARY. Money quarrels within the GOI, regional
tensions between Berlusconi coalition partners, and some
preliminary maneuvering for the post-Berlusconi period have
led to speculation that Finance Minister Tremonti may resign
or be forced out of office. The continued strong of support
from Northern League President (and Berlusconi coalition
partner) Umberto Bossi, along with the realization that bond
markets might react harshly to Tremonti's departure will
almost certainly keep the Finance Minister in office, but
this latest round of speculation about Tremonti is a further
reminder of the tensions that exist in Berlusconi's
government. END SUMMARY.

2. (C) The Italian press has been filled with speculation
about the future of Economy and Finance Minister Giulio
Tremonti. While a long-time collaborator of Berlusconi and
his Forza Italia movement, Tremonti has very close ties to
the important regional party Lega Nord. Some PDL contacts
tell us that they regard him as a member of Lega, not
Berlusconi's party. A tax lawyer by profession, Tremonti
holds the powerful but extremely difficult job of Finance
Minister in a country addicted both to profligate social
welfare spending and to tax evasion. Italy's debt-to-GDP
ratio has long been over 100% (it now approaches 120%). This
high debt level made it impossible for Italy to engage in the
kind of stimulus spending seen in the U.S. and in other
European countries. The constraint is not so much the
requirements of the EU Maastricht Treaty, but is instead the
huge financing costs that come from this high level of debt.
Berlusconi and other Ministers can engage in costly populism,
and call for more stimulus spending, but Tremonti frequently
has to reject imprudent populist projects; this has earned
him enemies in the Berlusconi cabinet. Tremonti is a true
believer in fiscal discipline and tries to inject it into
Italian public policy.

3. (C) The current controversy over Tremonti was sparked on
October 20 by his remark about the need for Italians to have
""permanent"" jobs, a comment that has more political than
economic sense, and which appears to be part of Tremonti's
effort to build his own political base. This provoked
criticism from those in favor of liberalization in Italy's
labor market. Berlusconi at first seemed to support
Tremonti, but this support quickly waned when, on October 23,
Tremonti hosted an Aspen Institute event that seemed to have
too much of a focus on Italy's future post-Berlusconi. Soon
the long knives seemed to be coming out for Tremonti -- a
Senator from Berlusconi's party (Baldasari) openly began
preparation of an alternative budget. Then -- without
consulting Tremonti -- Berlusconi publicly announced plans to
cancel an important Italian tax on businesses (the IRAP).
Tremonti had previously rejected the cancellation of this
tax. At a lunch with the Ambassador on October 27, PDL
parliamentary leaders declined to comment on the Tremonti
affairQunderscoring the tensions within the governing
coalition.

4. (C) Tremonti's position as minister is probably safe due
to three factors: 1. As Finance Minister, Tremonti now has
a high profile that would make it difficult for the weakened
Berlusconi to replace him; 2. Tremonti has the backing of
Northern League leader Umberto Bossi; and 3. The bond market
(upon which the GOI is dependent) could react harshly to
Tremonti's departure, especially if he were to be replaced
with a someone more amenable to populist projects.

5. (C) Regional tensions are playing a role here too.
Tremonti does Lega Nord's work on finance issues. He has been
resisting calls for a very costly new aid program for
Southern Italy, a region seen by Lega Nord as a rat hole down
which too much Northern Italian money has already been
poured. Tremonti instead set up a new bank for the South:
it will operate out of post offices, will be funded by
private sector bond issuances, and total government
expenditures for it will be a tiny 5 million Euros. Southern
politicians were not pleased.

6. (C) Pressed by the media to react to all this, Tremonti
said he would resign if he believed he had lost Berlusconi's
confidence. Berlusconi returned from a short visit with
Russian PM Putin to meet privately with Tremonti and party
loyalists. Tremonti reportedly asked to be made Vice
Premier, but Berlusconi rejected his request. Instead
Tremonti was given the leadership of a new Economic Steering
Committee within Berlusconi's PDL party. Berlusconi's
lieutenants have walked back the tax-cut proposal, claiming
the measure was always intended for some undefined moment in
the future. (Comment: While Tremonti failed in his bid to
become Vice Premier, during this episode he has succeeded in
raising his profile as a politician rather than a technocrat,
as well as differentiating himself from Berlusconi. However,
Tremonti's weakness has also been revealed--he seems to have
little political base beyond the Northern League. End
Comment.)

7. (C) COMMENT: The Ambassador met with Tremonti on October
15. While this meeting was shortly before the worst of this
episode, tensions were already brewing. The Ambassador found
Tremonti to be relaxed and sure of himself; he seemed to be
someone who is used to taking the heat that comes with this
kind of job. When, one week later, the Ambassador met with
Bank of Italy President Mario Draghi (who is not only
Tremonti's rival but is also in many ways his polar opposite
in terms of his approach to managing the economy), Draghi
declined to answer the Ambassador's question about his view
of Tremonti.

8. (C) The current situation underscores the tensions that
exist in the Berlusconi cabinet: Lega vs. PDL, Northerners
vs. Southerners, populist spendthrifts vs. the thrifty
finance minister... and tensions related to who will take
over when Berlusconi departs from the political scene.

THORNE
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