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U.S. DEPARTMENT OF STATE ITALY: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS ITALY Key Economic Indicators (Millions of U.S. dollars unless otherwise noted) 1992 1993 1994 1/ Income, Production and Employment: Real GDP (1985 prices) 505,520 499,186 508,214 Real GDP Growth (pct.) 0.7 -0.7 1.8 GDP (at current prices) (billions USD) 1,220 992 1,026 By Sector: Agriculture 42,778 32,992 N/A Industry 349,468 269,830 N/A Energy 32,094 26,507 N/A Construction 71,151 55,088 N/A Services 610,418 497,125 N/A Non-Market Services 169,185 137,363 N/A Government 157,127 116,718 N/A Net Exports of Goods and Services -3,564 27,803 35,694 Real GDP Per Capita (USD) (1985 prices) 13,667 10,612 10,615 Labor Force (000s) N/A 22,743 22,453 2/ Unemployment Rate (pct.) N/A 10.4 11.3 2/ Money and Prices: Money Supply (M2) 583,371 543,393 595,791 3/ (annual pct. growth) 4.6 7.9 4.5 3/ Base Interest Rates 15.8 12.0 11.2 3/ Personal Savings Rate 17.2 18.0 18.9 Retail Inflation (COL) 5.4 4.2 3.9 Wholesale Inflation (PPI) 1.9 3.7 3.4 Exchange Rate (lire/USD aver.) 1,233 1,572 1,600 Balance of Payments and Trade: Total Exports (FOB) 177,969 168,630 89,243 4/ Exports to U.S. 12,393 13,034 7,071 4/ Total Imports (CIF) 188,249 147,772 79,978 4/ Imports from U.S. 9,847 7,855 3,913 4/ External Public Debt (USD billions) (year end) 44.0 42.9 48.5 2/ Debt Service Payments (billion USD?) 4.1 4.3 2.7 2/ Gold and Foreign Exch. Reserves (end-period) 45,219 49,221 58,116 3/ Trade Balance -10,780 20,858 265 4/ Trade Balance with U.S. 2,547 2,741 4,543 4/ N/A--Not available. 1/ 1994 data are estimates by Italian Government or U.S. Embassy except where data are followed by a footnote, indicating actual data through that period. 2/ Figure based on January-July data. 3/ Figure based on January-August data. 4/ Figure based on January-June data. 1. General Policy Framework The Italian economy is the industrialized world's fifth largest, having undergone a dramatic transformation into an industrial power in the last 50 years. A member of the Group of Seven (G-7), the OECD, the GATT, the IMF, and the European Union (EU), Italy maintains a relatively open economy. Economic activity in Italy is centered predominantly in the North, resulting in a divergence of wealth between North and South that remains one of Italy's most difficult economic and social problems. The state plays an active role in the economy, not only in the formulation of macroeconomic policy and regulations, but also through state ownership of a number of large industrial and financial concerns. Recent governments, however, have begun a process of privatization that, if continued, should lead to a significant reduction in state ownership. To date, several large financial institutions and a few industrial concerns have been privatized. Key state monopolies in electricity and telecommunications are slated for privatization in 1995. Foreign firms, including U.S. firms, have been active both as purchasers of privatizing companies as well as privatization advisors. There is also a large and dynamic private sector. While a few major conglomerates with extensive overseas operations exist, the private sector is characterized primarily by a large number of small and medium-sized firms which produce for domestic and export markets. Italy's large public sector deficit and growing public debt constitute its most pressing economic problems. The stock of debt is currently estimated to be 123 percent of GDP. The budget deficit is expected to be about 9.6 percent of GDP in 1994. Since 1992, successive governments have implemented deficit reduction policies designed to alter the underlying deficit trend. The 1994 deficit was reduced by about 26 trillion lire ($16 billion). The government budget for 1995, with spending cuts and increased revenues of approximately 47 trillion lire ($29 billion), aims to reduce the deficit to 8 percent of GDP. Deficit reduction in 1995 will be attained primarily by means of spending cuts on pensions and health care, combined with additional revenues from expeditious settlement of outstanding tax disputes and a pardon on building violations. Given Italy's fiscal imbalances, the primary objective of monetary policy is to support financing the budget deficit in the least inflationary manner. The monetary policy objective is to hold the increase in both M-2 (currency plus all bank deposits) and credit to the non-state sector to the expected level of increase of nominal GDP growth. The Bank of Italy has moved away from direct monetary controls in favor of indirect instruments, an essential shift in light of the integration of European capital markets. Its principal policy tool is open market operations exercised through repurchase agreements with commercial banks. The central bank discount window is seldom used, although changes in the discount rate are used to signal policy shifts. In late 1994 the Italian Parliament completed legislation implementing the Uruguay Round Final Act. Italy became a founding member of the World Trade Organization on January 1, 1995. 2. Exchange Rate Policy Italy has a freely floating exchange rate and no exchange controls. Prior to September, 1992, Italy participated in the Exchange Rate Mechanism (ERM) of the European Monetary System, which obligated Italy to maintain fluctuations of the lira against other ERM currencies within a narrow band. In September 1992, due to severe pressures in foreign exchange markets, the Italian Government devalued the lira by seven percent against the other ERM currencies. When this failed to relieve pressure on the lira, Italy withdrew from the ERM. The Bank of Italy continues to monitor exchange rates and to seek lira stability against other EU currencies (especially the deutschemark) in order to avoid tensions with other EU countries regarding the question of competitive devaluations. The Bank of Italy does not intervene in the markets to defend the lira except in exceptional circumstances. The lira devaluation has made Italian exports more competitive and resulted in a substantial trade surplus (estimated at 4 percent of GDP for 1994). Italy's share of global exports increased from 3.5 percent at end-1992 to 3.7 percent at end-1993, and exports are expected to grow by 9 percent in 1994. The lower lira, combined with the recession in 1992-93, has resulted in stagnation in Italian imports, not only from the U.S., but from other suppliers as well. 3. Structural Policies Structural rigidities have hindered Italy's economic growth. Rigid hiring and firing rules, downward wage stiffness and high unemployment benefits for redundant industrial workers have distorted the labor market and have had a negative impact on job creation. On the positive side, two labor cost agreements in the last several years have reduced the cost of labor to less than annual increases in inflation, which has resulted in increased Italian competitiveness in international markets. As part of its effort to create jobs, the Berlusconi government passed tax legislation in July 1994 aimed at encouraging the formation of small businesses (Italy's major employers) and providing incentives to young entrepreneurs. Another major area of structural rigidity in Italy is financial markets, particularly the banking sector, which have been heavily regulated and slow to respond to market needs. The Italian stock market, relatively undeveloped compared to its European counterparts, has undergone a significant transition over the last few years. A 1991 law, designed to make the Italian stock market more modern, efficient, and transparent, established a new type of brokerage company, the Security Intermediation Company, known by its Italian acronym, SIM. SIMs have replaced individual stockbrokers as the primary stock market intermediaries. While supporting reform of the Italian market, U.S. and other foreign firms have objected to a provision of the law requiring all securities firms wishing to do business in Italy or with Italian clients to establish a SIM in Italy. Due to the costs of establishing a SIM, the law disadvantages U.S. and other foreign firms. The SIMs law violates the basic tenets of the OECD Code of Liberalization and has been challenged by the EU Commission because it also violates the Treaty of Rome. It will likely require modification to conform to European Union directives which come into effect in 1996. Government procurement practices are not completely guided by free market principles. Government procurement in some areas (e.g. heavy electrical equipment, telecommunications, and military hardware) is heavily directed toward Italy-based suppliers. Moreover, procurement procedures are not fully transparent. Except for agricultural products, taxes and customs duties do not present serious obstacles to U.S. exports. While Italy remains relatively open to foreign investment, direct foreign investment can become a political issue. The 1990 anti-trust law gives the government the authority to block mergers over a certain size involving foreign companies under certain conditions. Thus far, however, the anti-trust authority has not acted against foreign investment, concentrating instead on promoting increased competition in Italian markets. There are no impediments to foreign investment participation in the privatization process. Legislation to bring Italy into conformity with European Union regulations has begun to eliminate some of these structural barriers. The elimination of foreign exchange controls is one example. Legislation to reform the banking system, which took effect on January 1, 1994, is another. Similar legislation for the securities market is expected in 1995. The degree to which these policies affect demand for U.S. exports will to a large extent be determined by the orientation of the unified EU market. Despite its serious financial problems, Italy is committed to participating in economic and monetary union. As a founding member of the EU, Italy wants to move forward with the first group of countries in economic and monetary union. Nonetheless, due to the high costs associated with the convergence measures, there is strong political opposition to the economic policies necessary for Italy to achieve economic convergence with other members of the EU. 4. Debt Management Policy Although Italy has not had external debt or serious balance of payments difficulties since the mid-1970's, its domestic public debt is extremely large. It is financed principally through domestic capital markets, with various securities ranging in maturity from three months to thirty years. Italy also has a large external debt, though very little of this represents obligations of the Republic of Italy. Italy's foreign assets, primarily in portfolio form, are substantial. Italy's banking system had claims on the so-called debtor countries of 15.1 billion dollars at end-September 1993, more than half of which were accounted for by Russia and Eastern Europe. Italy's banking system is considerably less exposed to the debtor countries than those in other G-7 countries. U.S. and other foreign banks have complained about the handling of the liquidation of EFIM, a large state holding company. Two years after the liquidation was announced in July 1992, some foreign banks and creditors still have not been paid. 5. Significant Barriers to U.S. Exports In Italy highly-fragmented, non-transparent government procurement practices and significant problems with corruption have created obstacles for U.S. firms' seeking to win Italian government procurement contracts. A widening investigation of abuses in this area has created pressure for reform. On January 13, 1994, the Italian Parliament enacted legislation (Merloni law) which should provide more transparent procurement procedures, including establishment of a central body to monitor implementation. However, the reforms envisaged in the legislation will not be fully implemented until 1996 and are under review by the Berlusconi Government. U.S. agricultural exports to Italy compete with products covered under the EU's Common Agricultural Policy (CAP). For this reason, U.S. products such as meat and sugar continue to be subject to quantitative restrictions which are enforced through licenses. Agricultural imports also face sanitary and phytosanitary barriers that result in the exclusion or restriction of certain U.S. products including beef, some seeds for planting, and citrus fruit (other than grapefruit). Additionally, there are restrictions on U.S. bull semen imports into Italy. Telecommunications services are still tightly regulated by the state, which maintains a monopoly on voice telephony and the telecommunications infrastructure, including all switching. Enhanced services must be offered over the public switched network or through dedicated leased circuits. Resale of leased line capacity remains difficult until Italy implements EU directives on telecommunications services. Multi-user networks are officially outlawed, but sometimes tolerated where need is demonstrated. Mobile phone services are no longer the monopoly of the state-owned telephone utility, SIP. On March 28, 1994, a second cellular operating license was awarded to the Omnitel consortium (40 percent U.S. participation). In keeping with the 1989 EU Broadcast Directive, Italy's 1990 Broadcast Law requires that upon conclusion of three years from concession of a national broadcast license, a majority of TV broadcast time for feature films be reserved for EU-origin films. The Italian law also requires that half of the European quota be dedicated to Italian films. The Italian law is more narrowly focused than the Broadcast Directive, since it encompasses only films produced for cinema performance, and excludes TV films and series and other programming. The film sector decree-law enacted on January 18, 1994, calls for application of the Italian broadcast quotas proportionately during evening viewing hours, but its language is strictly hortatory. A separate but related issue concerns films shown in Italian theaters. The film sector law approved by Parliament on February 23, 1994 eliminated obligatory screen quotas for Italian films (heretofore 25 days per quarter subject to closing of the theater, under a 1965 law), and in their place substituted discretionary rebates on Italy's box office tax for theaters that show Italian films. The rebates and eligibility thresholds (percentages of screenings required to qualify) vary according to the category of film. The United States continues its efforts both to obtain elimination of discriminatory laws and regulations in the audiovisual sector and to limit their impact in the interim. In the areas of standards and standards setting, Italy has been slow in accepting test data from foreign sources, but is expected to adopt EU standards in this area. In sectors such as pollution control, the uniformity in application of standards may vary according to region, thus complicating certification requirements for U.S. business. Some professional categories (e.g. engineers, architects, lawyers, accountants) face restrictions that limit their ability to practice in Italy without either possessing Italian nationality or having received an Italian university degree. Rulings by individual local customs authorities can be arbitrary or incorrect, resulting in denial or delays of entry of U.S. exports into the country. Considerable progress has been made in correcting these deficiencies, but problems do arise on a case-by-case basis. Since 1990, the United States/Italy civil aviation relationship has undergone some liberalization, including the entry of new U.S. carriers in 1991 and 1992. However, U.S. carriers have expressed concern over a range of doing-business issues, a number of which relate to the services monopolies at international airports. While official Italian policy is to encourage foreign investment, industrial projects require a multitude of approvals and permits from the many-layered Italian bureaucracy, and foreign investments often receive close scrutiny. These lengthy procedures can present extensive difficulties for the uninitiated foreign investor. There are several industry sectors which are either closely regulated or prohibited outright to foreign investors, including domestic air transport, aircraft manufacturing, and the state monopolies (e.g., railways, tobacco manufacturing and electrical power). Until 1992, meaningful privatization of Italian government parastatals was thought to be unlikely. However, on August 7, 1992 legislation was enacted which began the process of converting major groups such as IRI (the industrial state holding company) and ENI (the state energy company) into joint-stock companies. As of October 1994, several major financial institutions and a few industrial concerns had been privatized. U.S. firms served as advisors in several of these privatizations. The government has announced plans to privatize the electricity and telecommunications sectors in 1995. Foreign firms, including U.S. firms, have expressed interest in upcoming privatizations. The expansion of modern distribution units, such as chain stores, department stores, supermarkets, hypermarkets, and franchises, is severely restricted by local practice and national legislation which subjects applications for large retail units above a certain merchandising surface to a lengthy and cumbersome authorization process. Italy provides a number of investment incentives consisting of tax breaks and other measures to attract industrial investment to depressed areas, especially in the south of Italy. In September, 1990 the Italian Parliament approved an anti- trust law. The law gives the government the right to review mergers and acquisitions over a certain threshold. The government has the authority to block mergers involving foreign firms for "reasons essential in the national economy" if the home government of the foreign firm does not have a similar anti-trust law or applies discriminatory measures against Italian firms. A similar provision in the law applies to purchases by foreign entities of five or more percent of an Italian credit institution's equity. 6. Export Subsidies Policies Italy subscribes to EU directives and Organization for Economic Cooperation and Development agreements on export subsidies. Through the EU, it is a member of the GATT Subsidies Code. Italy also provides extensive export refunds under the Common Agricultural Policy (CAP), which are being scrutinized under CAP reform.. Italy has an extensive array of export promotion programs. Grants range from funding of travel for trade fair participation to funding of export consortia and market penetration programs. Many programs are aimed at small-to-medium size firms. Italy provides direct assistance to industry and business firms to improve their international competitiveness. This assistance includes export insurance through SACE, the state export credit insurance body, as well as direct export credits. While subsidies to the steel and shipbuilding industries were legally terminated in July 1992, some U.S. industries have expressed concern that these export-promoting subsidies continue. 7. Protection of U.S. Intellectual Property The Italian Government is a member of the World Intellectual Property Organization, and a party to the Berne and Universal Copyright conventions, the Paris Industrial Property and Brussels Satellites conventions, the Patent Cooperation Treaty, and the Madrid Agreement on International Registration of Trademarks. Italy since 1989 has been on the intellectual property rights "watch list" under the Special 301 provision of the 1988 trade act, reflecting problems with protection of copyrights for computer software and film videos. Enactment in December 1992 of the EU software directive making software copyright violations a criminal offense was a major step forward. Simultaneously, the GOI substantially increased enforcement actions against both video and software pirates and created an Interministerial Anti-Piracy Committee. Other activity has included specialized training courses for Italy's three law enforcement agencies, and creation by the Judiciary of specialized "pools" of prosecutors to press the fight against piracy in several major municipal centers. U.S. consultations with Italy have contributed to improved enforcement action and are continuing to seek a stronger legal framework. Application of the new software law appears to be making a significant dent in Italy's software piracy problem. Following enactment of the law, Italy's Guardia di Finanza initiated a large number of investigations, seizing 94,000 illegal programs and pressing criminal charges against 60 resellers in 1993. As Italian companies moved to legalize software holdings, U.S. industry reported that the rate of software piracy in Italy declined from an estimated 86 percent in 1992 to 50 percent in 1993 (less than the European average). As a result, the Business Software Alliance reports that sales of packaged personal computer software increased by 331 percent compared to 1992 sales. Film video piracy remains a serious problem. U.S. motion picture distributors estimate that some 40 percent of the video market consists of pirated material. According to U.S. distributors, the television piracy rate ranges from 6-8 percent and unauthorized film screenings account for 15-20 percent of all showings. U.S. industry has noted a significant increase in raids and confiscation of illegal cassettes and equipment. Italian plans to enact by June 1995 the EU Copyright Duration Directive, which would extend the general copyright term to 70 years, should help address a longstanding issue about protection for older classics. 8. Worker Rights a. The Right of Association The Workers' Statute of 1970 provides for the right to establish a trade union, to join a union and to carry out union activities in the workplace. Trade unions are not government controlled, and the Constitution fully protects their right to strike, which is frequently exercised. In the past, the three major labor confederations had strong historical ties to the three major political parties, but now are autonomous of all political parties and continue to administer certain social welfare services for the Government, which compensates them accordingly. Moreover, the Workers' Statute favors the three confederations to the extent that it is difficult for small unions, including the so-called "base committees" (COBAS), to obtain recognition. The election of the new Union Representation Units (RSU) in the workplaces, as stipulated in the July 1993 agreement, has begun. So far, less than one-third of all workplaces have held elections. The three major labor confederations have won most of the elections to date. These unions suffered some loss of active worker membership due to the recession in 1993. Small autonomous unions refuse to participate in the RSU elections, and often try to maintain their local union representation structure. In June 1994, a period of light collective bargaining activity, 170,000 hours were lost due to strikes, one tenth of the total lost in June 1993 (1.7 million hours). In the period January-June 1994, 2.4 million hours were lost because of strikes, almost 80 percent below the time lost in the corresponding period in 1993 (11.6 million hours). The total time lost in 1993 (23.8 million hours), was the highest recorded since the 1990 strike law was enacted. Most of the strikes were motivated by layoffs and downsizing in industry. b. The Right to Organize and Bargain Collectively The right of workers to organize and bargain collectively is protected by the Constitution and is freely practiced throughout the country. Labor-management relations are governed by legislation, custom, collective bargaining agreements, and labor contracts. A new system of collective bargaining was negotiated in July 1993. It provides for wage increases to be limited to programmed inflation in the first two years of four year contracts with a reopener clause after the second year to adjust wages in accordance with actual inflation. It also permits plant level bargaining to take place according to schedules established in national sectoral contracts. The renewal of the major national labor contracts started in early 1994 and is expected to continue into early 1995. More than 10 million workers are covered by these agreements, of which those covering 7 million workers are still pending renewal. Company-level agreements have also been signed in some large and medium-sized enterprises, providing for wage increases tied to productivity and profitability of the firm, introducing more flexibility in the use of the workforce and, in some cases, establishing private pension funds jointly financed by management and labor. National collective bargaining agreements in fact apply to all workers regardless of union membership. The July 1993 accord calls for this to be guaranteed by law. Collective bargaining at the national level (involving the three confederations, the public and private employers' organizations and, where appropriate, the Government) occurs irregularly and deals with issues of universal concern. The EU has recently approved a directive on Work councils in multinational companies which is aimed at permitting unions and workers to establish European-level representation structures. The directive establishes a two year period for the implementation of European Work Councils. Some multinationals operating in Italy have already established such bodies in anticipation of this directive. Italy enacted legislation in 1992 to bring it into compliance with the EU Directive on transfer of ownership. The law provides that the unions of both the former owner and the new owner's respective companies must be consulted in advance of the sale and that no worker's benefits will be lost as a result of the transfer of ownership. Unions have the right to bargain with the employers in case of restructuring processes and workers who are laid off are entitled to receive their wages from the earnings compensation fund (financed by employers and the state). There are no areas of the country, such as export processing zones, where union organizations and collective bargaining are impeded or discouraged. The law prohibits anti- union discrimination by employers against union members and organizers. A 1990 law encourages workers in small enterprises (i.e., fewer than 16 employees) to join unions and requires "just cause" for dismissals from employment. c. Prohibition of Forced or Compulsory Labor Forced or compulsory labor, which is prohibited by law, does not exist in practice. d. Minimum Age for Employment of Children Under current legislation, no child under 15 years of age may be employed (with some specified exceptions). The Ministry of Labor may, as an exception, authorize the employment on specific jobs of children under 15 years of age, for example in artistic presentations or film making, which are not dangerous or harmful to the child's morality and health and do not take place after midnight. The child must have at least 14 consecutive hours of rest between performances. The minimum age is 16 for youth employed in dangerous, fatiguing, and unsanitary work, and 18 for youth employed in a number of occupations including mines, tunnels without mechanical vehicles, and sulfur ovens in Sicily. No worker under 18 years may be employed in driving and pulling trucks and carriages, or in jobs involving explosives. Minimum age and compulsory education laws (currently through age 14, but due to be raised to age 16) are effectively enforced in most areas. According to a research study conducted by sociologists among children attending elementary school, the number of children below 15 years of age who work is estimated at 400,000. According to