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(1) 1990 data are estimates by Italian government or Embassy except where data are followed by a month thereby indicating actual data through that period.

1. General Policy Framework

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The Italian economy is one of the world's largest, having undergone a dramatic transformation into an industrial power in the post-war period. Since 1982, the services sector has led economic growth while the industrial sector retooled. Industrial output returned to 1980 levels in 1987, and has continued to expand. A member of the Group of Seven (G-7), General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF) and the European Communities (EC), Italy maintains a relatively open economy, though its importance as a trading country lags slightly behind its overall economic performance.

The state plays an active role in the economy, not only in the making of macroeconomic policy and rules, but also as an owner of industrial plants and a major source of credit. Nonetheless, the Italian private sector is large and dynamic. While Italy has relatively few internationally known large conglomerates, there are a number of small and medium-sized firms that compete effectively both in domestic and foreign markets. Italy has a number of major population centers, and none is predominant. The northern half of the country is more developed and enjoys higher per capita incomes than the southern half. The divergence in wealth is also reflected in higher unemployment in the south, which constitutes one of Italy's major economic and social problems.

Italy's public debt constitutes its most pressing economic problem. The stock of this debt will approximate the value of the gross domestic product (GDP) in 1990. The budget deficit was 11.1 percent of GDP in 1989, or more than six times the comparable U.S. figure. Despite gains in the ratio of revenues to GDP associated with economic growth and a gradual widening of the tax base, increases in spending in such areas as pensions, health care and public sector salaries as well as for interest have frustrated plans to reduce the deficit and slow the rate of increase of the public debt. Interest payments are becoming an increasingly larger portion of the annual deficit. The government intends to cut the budget deficit/GDP ratio by almost five percentage points from 1990 to 1993 through a combination of increased tax receipts and spending controls. Such policies, in tandem with a slower increase in monetary aggregates, could have a dampening effect on import demand. Experience has shown that fiscal policies

of the type being proposed are difficult to implement in the Italian political system.

Monetary policy is dominated by fiscal policy in that the primary objective of the former is to finance the results of the latter (i.e., the budget deficit) in the least inflationary way. The overall monetary policy objective is to hold the increase in M-2 (currency plus all bank deposits) and the increase in credit to the non-state sector to the increase in the forecast rate of increase of nominal GDP. This forecast assumes a rate of inflation that is usually short of the result. Credit to the state sector is considered an

exogenous variable. Within this policy framework, the Bank of Italy moved away from direct monetary controls in favor of indirect instruments. This is seen as essential in light of the elimination of exchange controls and the integration of European capital markets. The principal monetary policy tool

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of the Bank of Italy is open market operations exercised through repurchase agreements with the banks. The central bank discount window is seldom opened. Italy's commitment to exchange rate stability within the European Monetary System complicates the management of monetary policy.

2. Exchange Rate Policies

Italy is a member of the European Monetary System (EMS) and its exchange rate mechanism. As such, it is committed to maintaining a flexible parity in relation to the currencies of its EMS partners. In January 1990, Italy moved the lira into the narrow band of the EMS, meaning that the lira can fluctuate no more than 2.25 percent up or down from its central rate vis-a-vis other participating currencies. In May 1990, Italy eliminated its remaining foreign exchange controls in order to align its policies with the EC's Directive on Liberalization of Short-term Capital Movements.

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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 created a resource-distorting labor market and have had a negative impact on job creation. Inefficiencies in the delivery of public services also serve as a hindrance to growth and add to the cost of doing business in Italy. The state railway, communications and postal systems are particularly notorious in this regard. A third major area of structural rigidity is financial markets, which traditionally have been heavily regulated and slow to respond to market needs. The above, and other structural problems, have prevented stronger Italian economic growth and limited Italian demand for U.S. exports from reaching its potential. Much of the progress in eliminating structural barriers to higher growth has resulted from movement toward a unified European market. The elimination of foreign exchange controls is one example. Recent and proposed legislation to reform the financial system are another.

Government procurement and pricing practices are not completely guided by free market principles. Government procurement, at least in some areas, is heavily directed toward Italy-based suppliers, e.g. heavy electrical equipment, telecommunications and military hardware. Moreover, procurement procedures are not fully transparent. Except for agricultural products, taxes and customs duties do not present overly onerous obstacles to U.S. exports, other than the usual level of bureaucratic red tape which marks all transactions in Italy. While Italy remains relatively open to foreign investment, the experience of several recent large takeover bids has revealed that direct foreign investment can become a political issue. The recently-passed antitrust law gives the government the authority to block mergers over a certain size involving foreign companies under certain conditions.

Italian structural policies are increasingly being made within the framework of the unification of the European common market in 1992. The degree to which these policies affect

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demand for U.S. exports will to a large extent be determined by the orientation of the unified market after 1992. Italy is committed to achieving economic and monetary union within the EC. The fiscal policy objective and implicit monetary policy objective are set with this in mind.

4. Debt Management Policy

Though Italy has not had external debt or serious balance of payments difficulties since the mid-1970's, its public debt is extremely large. It is financed principally through domestic capital markets, with various securities ranging in maturity from three months to ten years. Italy also has a large external debt, though very little of this represents obligations of the Republic of Italy. While Italy's foreign assets are substantial, its net investment position was negative in the amount of $73.7 billion at the end of 1989. Italy's banking system had claims on the heavily-indebted developing countries amounting to $5.8 billion at the end of 1988. Italy's banking system is considerably less exposed to the debtor countries than those in other Group of Seven countries.

5. Significant Barriers to U.S. Exports

Telecommunications services are still tightly regulated by the state, which maintains a monopoly on voice telephony and the 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 prohibited until 1993, when it should be liberalized in accord with the EC Directive on Telecommunications Services. Multi-user networks are officially outlawed, but sometimes tolerated where need is demonstrated.

U.S. agricultural exports to Italy are covered under the EC's Common Agricultural Policy (CAP). Agricultural imports face numerous health and phytosanitary barriers that result in the exclusion or restriction of certain U.S. products including beef, some seeds for planting, citrus (other than grapefruit), non-citrus fruit including apples and pears, and selected vegetables including tomatoes, eggplants and peppers.

Access to the Italian standards-setting process is limited, and Italy does not accept test data from foreign sources. In sectors such as pollution control, standards vary in each region, creating a labyrinth of certification requirements for U.S. exporters.

The Parliament in August 1990 passed a law which would increase EC-origin TV programming to 51 percent of broadcast time over four years, in keeping with the 1989 EC Broadcast Directive. Another law making its way through the Parliament contains an amendment mandating that movie theaters exhibit EC-origin films a minimum of 30 days per quarter. Present regulations, widely ignored, include a 25 day-per-quarter quota, but the proposed amendment would institute fines for non-compliance.

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Government procurement is fragmented, under-publicized and almost impossible to access by U.S. exporters without a good Italian representative. Through its ownership of holding companies, the Italian government directly or indirectly controls hundreds of enterprises utility and telephone companies.

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including the electrical None of these is required to adhere to the terms of the GATT Government Procurement Code. Tendering procedures do not usually give satisfactory deadlines. Tenders, other than those also published by the EC, are only in Italian, and bids must be in Italian. Implementation of the EC utilities directive will change Italian procurement practices in the telecommunications, transport, water, and energy sectors.

While official Italian policy is to encourage foreign investment, all 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, in and of themselves, 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, banking and the state monopolies (e.g., railways, tobacco manufacturing and electrical power). Investment incentives consisting of tax breaks and other measures were implemented 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 new 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.

A few Italian imports from the United States continue to be subject to quantitative restrictions. Almost all of these are agricultural products. Rulings by local customs authorities, often arbitrary or incorrect, can result in denial or delays of entry of U.S. exports into the country. Considerable progress has been made in correcting these deficiencies, but the problems generally arise on a case-by-case basis.

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Italy subscribes to EC directives and Organization for Economic Cooperation and Development agreements on export subsidies. Italy provides direct assistance transfers to industry and business firms to improve their international competitiveness. This assistance includes export insurance, the state export credit insurance body, as well as export credits. Italy through the EC is a member of the GATT Subsidies Code.

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