Cablegate: Ecb On the Stability and Growth Pact: Results Or

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




E.O. 12958: N/A
SUBJECT: ECB on the Stability and Growth Pact: Results or
Call The Bluff


This cable is sensitive but unclassified. Not/not for
Internet distribution.

1. (SBU) Summary: The European Central Bank (ECB) was
exceptionally, sternly and publicly critical of Ecofin's
decision on Germany and France under the Stability and
Growth Pact (SGP), but has been careful neither to trash the
SGP nor the process. Rather, their message is that the SGP
lives and that they expect Germany, France and Ecofin to
live up to their commitments. In the case of the two
countries, this means that deficits be under 3% in 2005 and,
failing to do so, Ecofin take measures under the procedures
previously recommended by the Commission. Putting a bit of
monetary muscle into the mix, the ECB has listed "fiscal
policies" as one of the various indicators it considers when
assessing future inflation trends, although they are quick
to point out this has always been so. A Council Secretariat
expert points out that, in fact, by "suspending" the
proceedings, Ecofin wanted to be clear that it reserved the
possibility to re-open proceedings and still apply
sanctions, even though the time limit for doing so is to
expire at the end of the year. The question remains whether
and on what evidence the Commission, the only entity that
can recommend re-opening the proceedings, would do so. Once
burned, twice shy. End Summary.

ECB: Not Dead, but Alive

2. (SBU) Senior ECB officials have explained that while
the ECB was very upset with Ecofin's decision under the SGP
on Germany and France, they don't want to give the
impression that the SGP is dead or they want to change it.
Rather, they want the commitments made in the Ecofin
decision to be respected.

3. (SBU) In its December Monthly Bulletin, the ECB's
editorial reported that the Governing Council took note of
the commitments made by France and Germany to "correct their
excessive deficits as rapidly as possible and at the latest
by 2005." The Council also noted that the Ecofin Council
"stands ready to give notice to the two governments to take
measures that would lead to a correction of their excessive
deficits." ECB President Trichet was more direct in his
press conference after the Governing Council's December 4
meeting: the Governing Council "noted that the Ecofin
Council stands ready to take a decision under Article
104(9), on the basis of the Commission recommendation,
should the two government fail to act in accordance with
their own commitments." He went on to declare that the SGP
"remains of central importance and should be fully

Link to Monetary Policy? All Part of the Whole Ball of Wax
_____________________________________________ ______________

4. (SBU) At his December press conference Trichet also
mentioned that the outlook for price stability is
conditional on quite a number of assumptions. Among them he
cited the usual, e.g. oil prices, exchange rates, and wage
developments. He also mentioned "fiscal measures." This
lead to a follow up question, on whether the discussion over
the SGP will have a direct effect on ECB interest rate
policy. Trichet replied that they take in all data to make
such an assessment and they have a "working assumption" that
the "commitments that were made by the countries concerned
and the commitments that were made by the qualified majority
of the Council would be met 100%."

5. (SBU)Some market commentators have speculated that the
ECB Governing Council might use monetary policy to "punish"
Finance Ministers for their decision. ECB officials are
quick to point out that this is not the case. Rather,
fiscal policies are included in the comprehensive array of
data the ECB examines in determining potential inflationary
pressures. (Note: The notion of such retribution is not as
odd as it may sound; the halls of the Bundesbank still echo
with the story of the then-Chancellor Schmidt flying to
Frankfurt to plea for lower interest rates directly with the
Bundesbank Council, only to have the Council raise rates
after he left the room - as if to disabuse anyone that they
were not truly independent.)

Form and Substance: ECB Focuses on Substance

6. (SBU) At the press conference one journalist attempted
to lure Trichet into a debate of the form of Ecofin's
decision over its substantive meaning, e.g. implications for
the euro. Trichet would not take the bait, musing that one
cannot "separate the form, the procedure and the substance."
However, the following week at the Economic and Monetary
Affairs Committee of the European Parliament, Trichet did
seek to clarify the "economic underpinnings" as to why the
SGP is "very important for the function of the single
currency area."

7. (SBU) He explained that the SGP allows him to respond
to two criticisms, "frequently voiced from the other side of
the Atlantic." First, is the criticism about monetary
policy conducted with "random behavior of fiscal policies"
in the absence of an EU federal budget. Second, is the
criticism that the absence of a federal budget does not
allow Europe to cope with asymmetric shocks, when one
country suffers a shock not felt by another. The SGP is the
only means by which Europe can claim to deal with random
fiscal policies and to admonish countries to have a close to
balanced budget to provide room for maneuver to cope with

8. More generally, Trichet said that there is a limit
beyond which increased deficits "hamper growth because you
are creating more lack of confidence than .you can get from
the simple neo-Keynesian effect." According to an ECB
official close to Trichet, this is a very personal view, not
one necessarily blessed by the Governing Council. Trichet
had elaborated that point in his first major policy speech
on November 20 in Frankfurt. He had said that governments
following the SGP "will reduce public spending, which is
conducive to growth through the alleviation of unproductive
spending and reduction of costs in the economy." In his
view, economic growth would be enhanced since lower deficits
would diminish medium and long-term interest rates and
improve households' and business confidence that taxes won't
increase leading to higher consumption and investment.

Ecofin Decision: Trigger Cocked, but Will Commission Pull
_____________________________________________ ____________

9. (SBU) According to an expert in the EU Council, the
Council decision reflected the discretion afforded Ministers
under the SGP, but was firmer than the press or the
Commission made it out to be, in his opinion. He shared the
ECB's view that Ecofin had put itself on the hook to take
action: "The Council stands ready to take a decision under
Article 104(9)" should France or Germany "fail to act in
accordance with the commitments set out in these
Conclusions." Note that Article 104(9) is the step
requiring specific commitments to be fulfilled within a
specific timeframe. Failing that, the next step would be
sanctions under Article 104 (11).

10. (SBU) With respect to sanctions, this Council expert
pointed out that Ecofin's decision to hold the excessive
deficit procedure in "abeyance" was designed to retain the
leverage of possible sanctions. Under Article 7 of Council
Regulation 1467/97, the decision to impose sanctions "shall
be taken within 10 months" of the dates from which the
excessive deficits were reported. For France that would be
at the end of December - one reason the Commission rushed it
treatment for France (reftel). By putting the procedure
into "abeyance" (a measure also provided for in the Council
Regulation), the clock is stopped on the 10 months time
limit for imposing sanctions. In practical terms that would
mean that failure to fulfill these commitments would still
result in sanctions even though the original 10 months time
period had lapsed.
One Observation

11. (SBU) All this is interesting, but the open question is
whether Ecofin would fulfill its own commitment. To do so,
the Commission would have to make another recommendation to
Ecofin for action should France or Germany be straying from
their respective consolidation paths. Having lost this
round, the Commission may feel shy about a second attempt -
once bitten, twice shy. On the other hand, if France and
Germany are clearly off track, it would be interesting for
the Commission to call Ecofin's bluff. If the Commission
had a strong case, it would be difficult for Ecofin to face
it down again - particularly with so many other EU economic
issues, e.g. budget, constitution, at play.

12. (U)This cable coordinated with USEU and Embassy Berlin.

13. (U)POC: James Wallar, Treasury Representative, e-mail; tel. 49-(69)-7535-2431, fax 49-(69)-


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