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1998 Country Report on Economic Policy
and Trade Practices: Italy
ITALY The Department of State submitted this report to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, on January 31, 1999.
Key Economic Indicators
(Billions of U.S. Dollars unless otherwise indicated)
1996 1997 1998 1/ Income, Production and Employment: Nominal GDP 2/ 1,164.5 1,182.0 1,199.9 Real GDP Growth (pct) 3/ 0.7 1.5 1.5 GDP (at current prices) 1,213.6 1,145.4 1,165.3 GDP by Sector: Agriculture 39.8 335.5 N/A Manufacturing 329.3 306.7 N/A Services 634.1 574.5 N/A Government 210.4 228.6 N/A Per Capita GDP (US$) 20,520 20,785 21,213 Labor Force (millions) 22.9 23.0 23.1 Unemployment Rate (pct) 12.1 12.3 12.2 Money and Prices (annual percentage growth): Money Supply (M2) 3.7 9.1 5.0 Consumer Price Inflation 3.9 1.9 1.8 Exchange Rate (Lira/US$ annual average of market rate) 1543 1703 1730 Balance of Payments and Trade: Total Exports FOB 4/ 252.0 238.2 147.9 Exports to U.S. 4/ 18.4 10.9 N/A Total Imports CIF 4/ 208.2 208.1 130.7 Imports from U.S. 4/ 10.2 10.4 N/A Trade Balance 4/ 43.8 30.1 17.2 Balance with U.S. 4/ 8.7 8.5 5.4 External Public Debt 81.9 78.0 76.0 Fiscal Deficit/GDP 6.7 2.7 2.6 Current Account Surplus/GDP (pct) 3.4 3.2 3.0 Debt Service Payments/GDP (pct) 5/ 11.1 9.5 8.0 Gold and Foreign Exchange Reserves 69.7 76.0 62.6 Aid from U.S. 0 0 0 Aid from All Other Sources 0 0 01/ 1998 figures are estimates based on data available through October.
2/ 1990 prices; GDP at factor cost.
3/ Percentage changes calculated in local currency.
4/ Merchandise trade. 1998 data through July.
5/ Represents total debt servicing costs; less than six percent of total debt is foreign debt.1. General Policy Framework
Italy has the world's sixth largest economy, having grown into an industrial power in the last 50 years. Italy maintains an open economy, and is a member of major multilateral economic organizations such as the Group of Seven (G-7) industrialized countries, the Organization for Economic Cooperation and Development, the World Trade Organization, the International Monetary Fund, and the European Union.Italy was selected as one of the 11 founding members of the European Economic and Monetary Union (EMU). Beginning in January 1999, EMU member countries will adopt the "euro" as their currency and the new European Central Bank as their monetary authority. National currencies will be phased out and only euros will be used beginning in 2002. Public opinion polls consistently rank Italy as one of the most "pro-euro" countries in Europe.
Italy has a dynamic private sector characterized primarily by a large number of small and medium-sized firms, although there are some large companies with well-known names such as Fiat, Pirelli and Olivetti. Economic dynamism is concentrated in northern Italy, resulting in a divergence of wealth between north and south that remains one of Italy's most difficult economic and social problems. Traditionally, the government played a dominant role in the economy through regulation and through ownership of several large industrial and financial companies; privatizations and regulatory reform efforts since 1994 have dramatically reduced that presence.
For years, government spending was boosted by generous social welfare programs, inefficiency and projects designed to achieve political objectives. This created large public sector deficits that were financed by incurring debt. Beginning in the early 90's, Italy successfully addressed a number of macroeconomic problems in order to qualify for first-round EMU membership. The public sector deficit, which was 6.76 percent of GDP in 1996, dropped to 2.7 percent in 1997. The level of public debt, highest among the EMU countries as a share of GDP, has gone down slightly and the government has begun a plan to reduce the debt level to the EMU target level.
Interest rates in Italy have come down substantially as the government gets its financial house in order, and as European rates converge in the run-up to monetary union. In October 1998, the Bank of Italy (central bank) reduced the benchmark discount rate to 4.0 percent, the lowest level since 1972.
Price stability is the primary objective of the Bank of Italy's monetary policy; the Bank has carried out a restrictive monetary policy in an effort to defeat Italy's long-term inflation problem. It has worked: consumer inflation increased only 1.9 percent in 1997 and a similar level is expected for 1998. Wholesale inflation is negligible. The Bank of Italy uses indirect instruments, primarily open market operations exercised through repurchase agreements with commercial banks, to implement its monetary policy.2. Exchange Rate Policy
Italy will surrender control over exchange rate policy to the European Central Bank in January 1999. Since 1996, the Italian Lira has been part of the Exchange Rate Mechanism of the European Monetary System (EMS), which obligates Italy to maintain the lira within a 15 percent band of fluctuation vis-à-vis central parities with other EMU currencies until exchange rates versus the euro are fixed.
3. Structural Policies
Italy has not implemented any structural policies over the last two years which directly impede U.S. exports. Certain characteristics of the Italian economy impede growth and reduce import demand. These include rigid labor markets, underdeveloped financial markets, and a continued heavy state role in the production sector. There has been some progress at addressing these structural issues. Privatization is reducing the government's role in the economy. The 1993 "Single Banking Law" removed a number of anachronistic restrictions on banking activity. Italy's implementation of EU financial service and capital market directives has injected further competition into the sector.
U.S. financial service firms are no longer subject to an incorporation requirement to operate in the Italian market, although they must receive permission to operate from the
government's securities regulatory body.U.S. financial service firms and banks are active in Italy, in particular in the wholesale banking and bond markets. In general, U.S. and foreign firms can invest freely in Italy, subject to restrictions in sectors determined to be of national interest, or in cases which create anti-trust concerns.
4. Debt Management Policy
Although the domestic public debt level is high, Italy has not had problems with external debt or balance of payments since the mid 1970's. Public debt is financed primarily through domestic capital markets, with securities ranging from three months to thirty years. Italy's official external debt is relatively low, constituting roughly 5.9 percent of total debt. Italy maintains relatively steady foreign debt targets, and uses issuance of foreign-denominated debt essentially as a source of diversification, rather than because of need.
5. Significant Barriers to U.S. Exports
Import Licensing: With the exception of a small group of largely agricultural items, practically all goods originating in the U.S. and most other free-world countries can be imported without import licenses and free of quantitative restrictions. There are, however, monitoring measures applied to imports of certain sensitive products. The most important of these measures is the automatic import license for textiles. This license is granted to Italian importers when they provide the requisite forms.
Services Barriers: Italy is one of the world's largest markets for all forms of telephony and the largest and fastest-growing European market for mobile telephony. In recent years, the Italian Government has undertaken a liberalization of this sector, including privatization of the former parastatal monopoly Telecom Italia (formerly STET); creation of an independent communications authority; and allowing both fixed-line and mobile competitors to challenge the former monopoly. Following the EU's January 1, 1998 deadline for full liberalization of its telecoms sector, Italy issued more than a dozen fixed-line licenses in 1998, including to new entrants (with U.S. participation) for the establishment of fiber optic networks around Milan. Omnitel Pronto Italia, which is 45 percent U.S.-owned, began offering cellular service in December 1995 after winning the competition for the second cellular operating license -- making it Telecom Italia's first competitor. Italy awarded a third cellular license, for DCS-1800 service, in June 1998 to the WIND consortium that includes the parastatal electricity company ENEL. The government plans to issue a fourth mobile license in the first half of 1999.In 1998, Italy established an independent regulatory authority for all communications, including telecoms and broadcasting; however, the authority was still hiring staff and only partly functional as of late 1998. Concerns remain regarding interconnection fees and conditions, frequency allocation for mobile carriers, regulatory due process, transparency and even-handedness. But the Italian market is much more open to services exports in this sector than it was even one year ago, at the time of the previous report.
In 1998, the Italian Parliament passed government-sponsored legislation including a provision to make Italy's national TV broadcast quota stricter than the EU's 1989 "Broadcast Without Frontiers" Directive. The Italian law exceeds the EU Directive by making 51 percent European content mandatory during prime time, and by excluding talk shows from the programming that may be counted towards fulfilling the quota. Also in 1998, the government issued a regulation requiring all multiplex movie theaters of more than 1300 seats to reserve 15-20 percent of their seats, distributed over no fewer than three screens, to showing EU films on a "stable" basis. Cinema owners argue that "stable" needs to be interpreted flexibly (i.e., the quotas applied on a yearly rather than daily basis) in order to ensure continued profitability. However, it was not clear at press time how flexibly the quotas would be applied.Firms incorporated in EU countries may offer investment services in Italy without establishing a presence. U.S. and other firms which are not from countries that belong to the EU may operate based on authorization from CONSOB, the securities oversight body. CONSOB may deny such authorization to firms from countries which discriminate against Italian firms.
Foreign companies are increasingly active in the Italian insurance market, opening branches or buying shares in Italian firms. Government authorization is required to offer life and property insurance and usually based on reciprocal treatment for Italian insurers. Foreign insurance firms must prove that they have been active in life and property insurance for not less than 10 years and must appoint a general agent domiciled in Italy.
There are some limits regarding foreign private ownership in banks. For instance, according to the Banking Law a foreign institution wanting to increase its stake in a bank above five percent needs authorization by the Bank of Italy.
Some professional categories (e.g. engineers, architects, lawyers, accountants) face restrictions that limit their ability to practice in Italy without either possessing EU/Italian nationality, having received an Italian university degree, or having been authorized to practice by government institutions.
Standards: As a member of the EU, Italy applies the product standards and certification approval process developed by the European Community. Italy is required by the Treaty of Rome to incorporate approved EU directives into its national laws. However, there has frequently been a long lag in implementing these directives at the national level, although Italy has been improving its performance in this regard. In addition, in some sectors such as pollution control, the uniformity in application of standards may vary according to region, further complicating the certification process. Italy has been slow in accepting test data from foreign sources, but is expected to adopt EU standards in this area.
Most standards, labeling requirements, testing and certification for food products have been harmonized within the European Union. However, where EU standards do not exist, Italy can set its own national requirements and some of these have been known to hamper imports of game meat, processed meat products, frozen foods, alcoholic beverages, and snack foods/confectionery products. Import regulations for products containing meat and/or blood products, particularly animal and pet food, have become more stringent in response to concerns over transmission of Bovine Spongiform Encephalopathy (BSE). U.S. exporters of "health" and/or organic foods, weight loss/diet foods, baby foods and vitamins should work closely with an Italian importer, since Italy's labeling laws regarding health claims can be particularly stringent. In the case of food additives, coloring and modified starches, Italy's laws are considered to be close to current U.S. laws, albeit sometimes more restrictive.
U.S. exporters should be aware that any food or agricultural product transshipped through Italian territory must meet Italian requirements, even if the product is transported in a sealed and bonded container and is not expected to enter Italian commerce.
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.
Investment Barriers: While official Italian policy is to encourage foreign investment, industrial projects require a multitude of approvals and permits, 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 and aircraft manufacturing.
Italian anti-trust law gives the government the right to review mergers and acquisitions over a certain threshold value. The government has the authority to block mergers involving foreign firms for "reasons essential to the national economy" or 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 requires government approval for foreign entities' purchases of five or more percent of an Italian credit institution's equity.
Government Procurement: In Italy, fragmented, often non-transparent government procurement practices and previous problems with corruption have created obstacles to U.S. firms' participation in Italian government procurement. Italy has, however, made some progress in making the laws and regulations on government procurement more transparent. Italy has not yet fully updated its government procurement code, nor has it completely implemented EU directives on government procurement. The pressure to reduce government expenditures while increasing efficiency is resulting in increased use of competitive procurement procedures and somewhat greater emphasis on best value rather than automatic reliance on traditional suppliers.
6. Export Subsidies Policies
Italy subscribes to EU directives and Organization for Economic Cooperation and Development (OECD) and World Trade Organization (WTO) agreements on export subsidies. Through the EU, it is a member of the General Agreement on Tariffs and Trade (GATT) Subsidies Agreement, and as a WTO member, is subject to WTO rules. Italy also provides extensive export refunds under the Common Agricultural Policy (CAP), as well as a number 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 some direct assistance to industry and business firms, in accordance with EU rules on support to depressed areas, to improve their international competitiveness. This assistance includes export insurance through the state export credit insurance body, as well as interest rate subsidies under the OECD consensus agreement.
The Italian peach processing sector receives subsidies to compensate it for having to pay the EU minimum grower price for its raw product. It is recognized that this grower price is above the world market price for peaches and a U.S.-EU agreement is in place to monitor the level of subsidies paid. However, there is concern that the processors may receive extra benefits from loopholes in the system.
The Italian wheat processing sector (pasta) in the past received indirect subsidies to build plants and infrastructure. While these plants are still operating, there are no known programs similar to the initial subsidies operating at present.
7. Protection of U.S. Intellectual Property
Italy 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 Satellite conventions, the Patent Cooperation Treaty, and the Madrid Agreement on International Registration of Trademarks.
In 1998, the U.S. Trade Representative placed Italy on the Intellectual Property Rights (IPR) "Priority Watch List" under the Special 301 provision of the United States Trade Act of 1988, due to the aforementioned national TV broadcast quotas in excess of the EU norm, and to a lengthy delay in passage of national legislation to address ongoing serious deficiencies in protection of copyright for sound recordings, computer software and film videos. In October 1996, the government introduced anti-piracy legislation in parliament that would impose administrative penalties and increase criminal sanctions. As of the end of 1998, the bill was still awaiting final parliamentary approval. The U.S. will continue to closely monitor developments in this area.
New Technologies: In the spring of 1997, the Italian Minister of Health signed a decree banning the cultivation of Ciba Geigy's BT Corn in Italy, despite the fact that no BT seed varieties are currently included in Italy's National Seed Register. This decision was taken on the advice of Italy's Interministerial Biotechnology Commission, ostensibly based on its opinion that there was a lack of a proper monitoring program regarding BT corn's effect on the ecosystem. After the Biotech Commission reversed its decision, and following EC pressure to remove the ban, the Minister of Health signed the legislation removing the ban in late September.
Intellectual property protection is generally not a problem for agricultural products with the exception of sluggish approval policies for genetically modified organisms.
8. Worker Rights
a. The Right of Association: The law provides for the right to establish trade unions, join unions, and carry out union activities in any workplace employing more than 15 employees. Trade unions are free of government controls and no longer have formal ties with political parties. Workers are protected from discrimination based on union membership or activity. The right to strike is embodied in the Constitution, and is frequently exercised. Hiring workers to replace strikers is prohibited. A 1990 law restricts strikes affecting essential public services such as transport, sanitation, and health.
The law prohibits discrimination by employers against union members and organizers. It requires employers who have more than 15 employees and are found guilty of anti-union discrimination to reinstate the workers affected. In firms with fewer than 15 workers, an employer must state the grounds for firing a union employee in writing. If a judge deems these grounds spurious, he can order the employer to reinstate or compensate the worker.
b. The Right to Organize and Bargain Collectively: The constitution provides for the right of workers to organize and bargain collectively and these rights are respected in practice. In practice (though not by law), national collective bargaining agreements apply to all workers regardless of union affiliation. There are no export processing zones.
c. Prohibition of Forced or Compulsory Labor: The law prohibits forced or compulsory labor, and it does not occur.
d. Minimum Age for Employment of Children: The law forbids employment of children under 15 years of age (with some exceptions). There are also specific restrictions on employment in hazardous or unhealthy occupations of males under age 18 and females under age 21. Enforcement of the minimum age laws is effective only outside the extensive "underground" economy, which is mainly in southern Italy.
e. Acceptable Conditions of Work: Minimum wages are set not by law but rather by national collective bargaining agreements. These specify minimum standards to which individual employment contracts must conform. In case of disputes, the courts may step in to determine fair wages on the basis of practice in comparable activities or agreements.
A 1997 law reduced the work week from 48 hours to 40. The regular work week should not exceed six days, and the regular work day eight hours, with some exceptions. Most collective agreements provide for a 36- to 38-hour workweek. Overtime may not exceed two hours a day or an average of 12 hours per week.
The law sets basic health and safety standards and guidelines for compensation for on-the-job injuries. European Union directives on health and safety have also been incorporated into domestic law; some have already taken effect and others will be phased in during 1997. Labor inspectors are from local health units or from the Ministry of Labor. They are few, given the scope of their responsibilities. Courts impose fines and sometimes prison terms for violation of health and safety laws. Workers have the right to remove themselves from dangerous work situations without jeopardy to their continued employment. Women are usually forbidden to work at night.
f. Rights in Sectors with U.S. investment: Conditions do not differ from those in other sectors of the economy.
Extent of U.S. Investment in Selected Industries -- U.S. Direct Investment Position Abroad on an Historical Cost Basis -- 1997
(Millions of U.S. Dollars) Category Amount Petroleum (1) Total Manufacturing 12,223 Food & Kindred Products 1,708 Chemicals & Allied Products 2,960 Primary & Fabricated Metals 529 Industrial Machinery and Equipment 2,769 Electric & Electronic Equipment 1,727 Transportation Equipment 390 Other Manufacturing 2,140 Wholesale Trade 2,122 Banking 379 Finance/Insurance/Real Estate 842 Services 1,089 Other Industries (1) TOTAL ALL INDUSTRIES 17,749(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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