P 231916Z MAR 09
FM AMEMBASSY LONDON
TO DEPT OF TREASURY WASHDC PRIORITY
INFO EU MEMBER STATES COLLECTIVE PRIORITY
NSC WASHDC PRIORITY
SECSTATE WASHDC PRIORITY 1796

C O N F I D E N T I A L LONDON 000718

NOFORN

TREASURY FOR SECRETARY GEITHNER TREASURY FOR SOBEL/MURDEN/MOGTADER NSC FOR FROMAN, HENNESSEY-NILAND E.O. 12958: DECL: 03/23/2018

TAGS: ECON EINV PGOV UK

SUBJECT: SCENESETTER FOR THE SECRETARY OF THE 
TREASURY'S VISIT TO LONDON: THE SUMMIT'S HIGH STAKES 

Classified By: Classified by Charge d'Affaires Richard LeBaron for reas ons 1.4 b and d.

1.(C/NF) Summary: The London Economic Summit comes at a critical point for the Prime Minister and his Labour government. Trailing steeply to the Conservative Party in the polls and with economic news increasingly bleak, the Prime Minister and his economic team, particularly Chancellor of the Exchequer Alistair Darling, are on the hook to deliver a Summit that will convince the British population they are able to manage the crisis and get the British economy back on track. The Prime Minister also hopes that a successful meeting will help him regain his stature as a "global fixer," which could also help the UK regain some its footing lost with the EU in the dispute over stimulus and other recovery measures. UK officials will look to their U.S. counterparts to help them deliver a successful Summit. End Summary.

The Economy: No Good News -------------------------

2.(SBU) The UK economy officially entered a recession in the final quarter of 2008 with negative 1.5 percent GDP growth, its second consecutive quarter of negative growth. UK unemployment rose to 2.03 million in the three months to January 2009 and the unemployment rate hit 6.5 percent, the highest since 1997. The employment situation is expected to worsen, with unemployment estimated to exceed 3 million during 2009. Inflation (CPI) is 3 percent, down from a high of 5.2 percent in September 2008. Credit markets are tight even thought the Bank's Monetary Policy Committee has cut the official interest rate from 5.5 percent at the beginning of 2008 to 0.5 percent in March 2009, a record low in the Bank's 315-year history. In March 2009, the Bank of England began a new 75 billion pounds sterling "quantitative easing" effort to try to revive lending to the battered economy. Public finances, however, are deteriorating rapidly as tax receipts are hit by contracting economic activity. Public sector net debt hit a record 49 percent of GDP in February 2009 and the UK public sector showed a 1.8 billion pounds sterling current budget deficit for the month, compared with a surplus of 4.6 billion pounds sterling for the same month of the previous year.

The Summit to the Rescue? -------------------------

3.(C/NF) The multilateral priorities of the UK government for the Summit include: a commitment to stimulus measures; tangible progress on the reform agenda agreed to at the Washington Summit in November; and, a large increase in IMF resources. The U.S. and UK agree on these priorities, but working out the details, getting consensus, and keeping in check demands by other countries to go beyond these priorities have been challenging.

4.(C/NF) As evident in recent meetings with officials with Her Majesty's Treasury, the UK government is looking to the U.S. for leadership on substance, process, and, just as important, on message. While initially frustrated that the U.S. was not as engaged in the process as much as HMG would have liked, UK officials have repeatedly reassured us that they now are pleased with the level of involvement and commitment of U.S. officials.

5.(C/NF) But not to be downplayed is the UK's haunting fear that the U.S. will do something on the eve of the Summit that will undermine chances of success. The Prime Minister, a Ph.D. historian, told Federal Reserve Chair Bernanke in January that he was determined that the London Summit would not go down in history as did the failed 1933 London Economic Conference. Coming 30 months after the stock market crash, the 1933 Conference was intended to demonstrate a collective will to deal with rapidly rising unemployment, collapsing commodity prices, shrinking international trade, and signs of economic nationalism. Newly-elected President Franklin Roosevelt was seen as a critical figure: "Is this at last the Messiah we seek?" H.G. Wells wrote about European expectations of the President. While the 1933 Conference is judged to have failed because of lack of consensus over currency stabilization, Brown and others have said the U.S. was responsible for much of the blame for the failed conference. A few prominent journalists, including Martin Wolf of the Financial Times, have recently pointed out the parallels between the two summits. These observations have fueled the anxiety of the UK officials that the U.S. will have an eleventh-hour change of policy positions. The President's one-on-one meeting with the Prime Minister, and the wider group meeting on April 1, should help assuage those fears.

The Stakes at Home and Abroad -----------------------------

6.(C/NF) Domestically, the stakes are high for Prime Minister Brown; his own political fortunes may be tied to the London Summit. As Prime Minister, Brown is the only person who can call for elections, but he must call them by May 10, 2010, and hold them by June 3, 2010. If the Summit is perceived as a success, Brown may regain some of his stature as a global "fixer" of the world's economic problems, a role which he assumed in the autumn of 2008 and which translated immediately into the sharp up-tick in his poll numbers. Should the Summit be deemed a failure or an expensive and inconvenient waste of government money by the press and the public, the PM will have little opportunity to make another phoenix-like recovery and will increasingly be seen as a lame duck.

7.(C/NF) UK leaders are looking to the Summit to salvage their image in Europe as well. British officials have been bashed by the French and Germans in EU Finance Ministers and European Council meetings over the issue of additional stimulus messages. Earlier in the year, UK officials were pressured by non-G20 members of Europe, who were angling for a seat at the table at the Summit. Many of the smaller states, particularly the newest members of the euro-zone and which have been particularly hard hit by the crisis, are still upset for not being invited. Switzerland too has made its displeasure well-known. A successful Summit should dissipate some of this discontent. A failed Summit would isolate the UK even further, with potentially significant consequences. The UK has been able to exercise a degree of leadership within the EU over the past decade because its strong economic performance was perceived as a model of modern regulation and economic management. Falling from the position of one of the EU's strongest economies to one of its poorest performing, and hosting a Summit perceived as a failure, would further weaken the UK's voice within the EU - which concerns the UK since it fears Brussels, by intent or by deed, will adopt regulations that will undermine London's standing as a global financial center.

April 1 Wider Group Meeting ---------------------------

8.(C) Secretary Geithner will participate in the April 1, wider group meeting with British officials. The agenda for the wider group meeting will include the Summit, as well as discussion about regional issues beyond Europe. We expect that Iran sanctions will be a key topic.

9.(C/NF) The UK government participates in country-specific and terrorist finance-related sanctions programs through the UN, the EU and its own domestic asset-freezing regime. PM Brown and Foreign Secretary Miliband have called for additional pressure in the form of stronger sanctions against Iranian WMD proliferators, such as the Iranian Revolutionary Guard Corps, and their supporters, and they are finalizing additional measures against London-based Iranian banks and insurers, using new legislative powers. HMT modeled its asset-freezing regime on that of our Office of Foreign Asset Control and our staffs work closely at all levels, sharing intelligence and preparing asset-freezing cases. The government's overall commitment to using sanctions as a tool to fight terrorism and Iran's nuclear acquisition program seems to be strengthening. Political and legal pressure in recent months, however, has caused an already cautious British Treasury to require more evidence against potential designees than in the past. This has hampered our ability to move quickly against targets. Because of these pressures, and the desire to protect its own financial sector from being singled out for retribution by designated entities and individuals, the UK prefers to seek cover from multilateral measures rather than to pursue unilateral efforts. We persistently urge the UK to exercise the full range of its sanctions powers, and to interpret its UN, EU and other multilateral commitments and domestic legislation as aggressively as possible. The question remains whether the UK is willing to pull out all the stops against Iranian WMD supporters and terrorist financiers.

10.(SBU) We also expect the PM will raise poverty and development issues during the wider group meeting. Brown is strongly committed to development. Poverty reduction and achieving the Millennium Development Goals (MDGs) remain central to the UK approach, and Brown regularly stresses that the UK will keep its promises on aid levels. Education is an area of particular interest. Brown wants to work with the U.S. on an initiative to give the remaining 75 million children who are currently unable to go to school the chance of an education. Following his March visit to the U.S., Brown has said several times in public that the President had agreed to provide $2 billion to support this goal.

11.(SBU) In preparation for the London Summit, the UK is focused on new measures to "protect the poorest." Brown hosted African leaders at Downing Street on March 16 to get their views. The UK is urging G-20 countries to meet the World Bank's call for $5-6 billion for a Vulnerability Financing Facility, and has committed 200 million pounds sterling ($350 million) toward the rapid social response part of this facility. Brown supports rapid conclusion of an ambitious and development-focused Doha Trade Round, and has called on countries to refrain from raising protectionist barriers to trade and investment. The UK supports increasing IMF and multilateral development bank resources, mobilizing these resources to help emerging and developing economies, and reforming these institutions to reflect changes in the world economy. The U.K. has been less focused than other EU member states on the economic problems of Central and Eastern Europe, in part because London banks have relatively little financial exposure in those countries.