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Public external debt 3/
(trillions of lire)
(year end)




1/ 1991 data are estimates by Italian Government or U.S. Embassy except where data are followed by a month thereby indicating actual data through that period. 27 "Services not for sale" is defined as services provided by the Government which have no comparable market price. This figure is an Italian Government estimate of "market value" for these services based on "production cost". 3/ This figure does not include foreign purchases of treasury securities issued domestically.

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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 expanded through 1990, but has turned negative in 1991 as a consequence of the general economic downturn. A member of the Group of Seven (G-7), General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF) and the European Community (EC), Italy maintains a relatively open economy.

The state plays an active role in the economy, not only in the making of macroeconomic policy and rules, but also through control of industrial parastatals and major financial institutions. Nonetheless, the Italian private sector is large and dynamic. 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 income 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 large and growing public debt constitutes its most pressing economic problem. The stock of this debt exceeded the value of the gross domestic product (GDP) in 1990. The budget deficit was 10.9 percent of GDP in 1990. Despite gains in revenues 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 two percentage points from 1991 to 1992 through a combination of increased tax receipts and spending controls.

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 usually assumes a lower-than-actual rate of inflation. 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 integration of European capital markets. The principal monetary policy tool 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.

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Italy is a member of the European Monetary System (EMS) as well as 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. Italian residents are now completely free to engage in all manner of foreign financial transactions, so that the Italian economy is now participating in the international integration underway in financial markets.

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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. A third major area of structural rigidity is financial markets, which traditionally have been heavily regulated and slow to respond to market needs. The Italian stock market is currently depressed with low prices and modest volume of transactions. This has discouraged many businesses from raising new capital. Government financial support for maintaining existing economic activity, often through state ownership, also limits flexibility in the economy. The above, and other structural problems, have prevented stronger Italian economic growth. 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 is another.

Government procurement and pricing practices ar

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. Procurement procedures are not fully transparent. Taxes and customs duties do not present serious obstacles to U.S. exports (except for agricultural products), other than the usual level of bureaucratic red tape which marks all transactions in Italy.


While Italy remains relatively open to foreign investment, acquisition of existing entities by foreign investors can become a political issue and produce national solutions. 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.

Italian structural policies are increasingly being made within the framework of the unification of the European market in 1993. 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 market after 1993. Italy is committed to achieving economic and monetary union within the EC. The fiscal and monetary policy objectives are set with this in mind. Even so, there is still strong political opposition to the economic policies necessary for Italy to converge its economy with the other members of the EC as required by the European Monetary Union (EMU) process.

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Though 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 ten years. Major U.S. credit rating agencies downgraded Italy from their top category during 1991. Italy's foreign assets and liabiilities are substantial. Its net external position was negative in the amount of $111.2 billion at the end of 1990. Italy's banking system had claims on the heavily indebted developing countries amounting to $5.6 billion at the end of 1990. Italy's banking system is considerably less exposed to the debtor countries than those in other Group of Seven countries.


Significant Barriers to u.s. Exports and Investment

Government procurement is fragmented, under-publicized and almost impossible to access by U.S. exporters without a good Italian representative. In May 1991, Italy was singled out for early review under the 1988 Trade Act's Title VII procedure. Through its ownership of holding companies the Italian Government directly or indirectly controls hundreds of enterprises, including the electrical, water and gas utilities, and telephone companies. 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. Although not officially stated, there is a strong "Buy Italy" pressure from the electronics industry to increase the percentage of Italian-made electronic and computer equipment in the lucrative Central Government modernization plan. On large automation contracts, there have been examples of tenders awarded to the bidder offering the highest price but not the best technical qualification. Implementation of the EC utilities directive


will change Italian procurement practices in the telecommunications, transport, water, and energy sectors, but may not improve treatment of u.s. suppliers.

U.S. agricultural exports to Italy are covered under the EC's Common Agricultural Policy (CAP). In addition, some Italian imports from the United States continue to be subject to quantitative restrictions or variable levies. Agricultural imports face numerous health and phytosanitary barriers, either at the EC or the national level, 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.

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. Mobile phone services are at present the monopoly of the state-owned telephone utility, SIP. The granting of a second operating license has been discussed but, as of October 1991, neither a specification

a process for awarding a license has been set.


The Parliament in August 1990 passed a law which would require that a majority of TV broadcast time for feature films be reserved for EC-origin films, in keeping with the 1989 EC Broadcast Directive. Another law making its way through the Parliament contains regulations requiring movie theaters to exhibit EC-origin films a minimum number of days per quarter. Present regulations, widely ignored, include a 25 day-per-quarter quota.

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.

Some professional categories (eg. architects, lawyers, accountants) are restricted from practicing in Italy because of the requirement to either possess Italian nationality or to have received an Italian university degree. This should change as Italy adopts new EC guidelines.

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.

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,

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