BERLUSCONI'S FIRST YEAR ECONOMIC SCORECARD

UNCLAS SECTION 01 OF 04 ROME 002794

SIPDIS

SENSITIVE

DEPT FOR EUR/WE, EUR/ERA, EB/OMA
TREASURY FOR OASIA - HARLOW, JONES
UNCLASSIFIED

PAGE 02 ROME 02794 01 OF 04 101655Z
STATE PASS FEDERAL RESERVE BANK
FRANKFURT FOR WALLAR

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV IT ITECON ITECON ITECON
SUBJECT: BERLUSCONI'S FIRST YEAR ECONOMIC SCORECARD

REF: A. ROME 02198

B. ROME 01744

C. 2001 ROME 06227


1. (U) SUMMARY. TWELVE MONTHS AGO, PRIME MINISTER BERLUSCONI
TOOK OFFICE WITH A PROMISE TO JUMPSTART THE FALTERING ITALIAN
ECONOMY. A MUCH-HERALDED 100-DAY ECONOMIC PLAN WAS DESIGNED
AS AN INITIAL STIMULUS, TO BE FOLLOWED BY MORE FUNDAMENTAL
ECONOMIC REFORMS. AFTER A YEAR IN OFFICE, THE PRIME MINISTER
AND HIS ECONOMIC TEAM ARE STILL SEEKING TO IMPLEMENT WAYS TO
RESTORE HEALTH TO ITALY'S AILING ECONOMY.


2. (SBU) THE PROLONGED GLOBAL ECONOMIC DOWNTURN, DOMESTIC
POLITICS AND SEPTEMBER 11 HAVE SLOWED PROGRESS. OPPOSITION
FROM TRADE UNIONS, WHICH HAVE PLAYED A KEY ROLE IN SOCIAL AND
ECONOMIC POLICY MAKING, HAS STALLED PROGRESS ON KEY LABOR AND
ECONOMIC REFORMS. SOME UNIONS INTERPRET RECENT GOVERNMENT
ACTIONS AS AN EFFORT BY IT TO ASSUME A DOMINANT POLICY MAKING
ROLE. ALTHOUGH HE ENJOYS A SECURE MAJORITY IN PARLIAMENT, PM
BERLUSCONI SEEKS TO BUILD CONSENSUS RATHER THAN IMPOSE MAJOR
CHANGES. SINCE THIS PROCESS WILL TAKE TIME, THE PROSPECT FOR
SIGNIFICANT ECONOMIC REFORMS IS NOT ROSY. THAT, COMBINED
WITH THE ECONOMIC TEAM'S INABILITY SO FAR TO FIND THE RIGHT
FISCAL FIXES, MEANS THAT THE PROGNOSIS REMAINS UNINSPIRING,
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PAGE 03 ROME 02794 01 OF 04 101655Z
FOR THE NEXT YEAR OR SO, FOR THE ITALIAN ECONOMY. END
SUMMARY.

ECONOMIC SNAPSHOT
--------------


3. (U) ITALY'S STAGNANT PERFORMANCE IN 2001 HAS CONTINUED IN

2002. DURING THE FIRST FOUR MONTHS OF THIS YEAR, ITALY'S
BUDGET DEFICIT BALLOONED TO 41.4 BILLION EUROS, UP FROM 38.7
BILLION EUROS IN THE SAME PERIOD LAST YEAR. CONSUMER
CONFIDENCE IS DOWN. THE GOVERNMENT HAS TWO ECONOMIC
FORECASTS: AN "OPTIMISTIC" FIGURE HAS GROWTH AT 2.3 PERCENT;
THE "PESSIMISTIC" ONE AT 1.2 PERCENT. THE CONSENSUS FORECAST
IS THAT GROWTH IN 2002 WILL BE 1.3 PERCENT. FINANCE MINISTER
TREMONTI INSISTS THAT THERE WOULD BE NO MID-YEAR CORRECTIVE
BUDGET EVEN IF THE LOWER PREDICTION HOLDS. ITALY'S ANEMIC
GROWTH IS A RESULT NOT ONLY OF THE GLOBAL ECONOMIC SLOWDOWN
BUT ALSO OF THE GOI'S DELAY IN CUTTING SPENDING AND ENACTING
KEY REFORMS.

BERLUSCONI'S 100-DAY PLAN: SUCCESSES AND SETBACKS
-------------- --------------


4. (U) THE CENTER-RIGHT GOVERNMENT CAME INTO OFFICE IN JUNE
2001 WITH A 100-DAY ECONOMIC PACKAGE DESIGNED TO TURN ITALY'S
ECONOMY AROUND. KEY ELEMENTS OF THIS PLAN INCLUDED: A "NEW
TREMONTI LAW" (BASED ON ONE FROM THE 1994 BERLUSCONI
GOVERNMENT) PROVIDING TAX EXEMPTIONS FOR REINVESTED PROFITS
AND NEW HIRING; THE ABOLITION OF INHERITANCE TAXES; NEW AND
MORE FLEXIBLE LABOR CONTRACTS; TAX FORGIVENESS FOR
REPATRIATION OF CAPITAL, AND INCENTIVES FOR COMPANIES IN THE
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PAGE 04 ROME 02794 01 OF 04 101655Z
UNDERGROUND ECONOMY TO BECOME LEGAL, TAX-PAYING ENTITIES.


5. (U) IN THE FIRST SIX MONTHS OF THE BERLUSCONI GOVERNMENT,
THE PARLIAMENT PASSED THE TREMONTI LAW AND APPROVED THE
ABOLITION OF INHERITANCE TAXES (WHICH ALREADY WERE BEING
PHASED OUT UNDER PREVIOUS GOVERNMENTS). THE GOI EXPECTED THE
TREMONTI LAW, BASED ON 1994 RESULTS, WOULD ADD ONE-HALF TO
ONE PERCENT OF GDP GROWTH IN A 12-MONTH PERIOD. EVEN UNDER
THE BEST SCENARIO, WE BELIEVED THIS PREDICTION WAS
OPTIMISTIC. THE TREMONTI LAW HAS HAD LITTLE IMMEDIATE
EFFECT, SINCE MOST ITALIAN COMPANIES, IN LIGHT OF THE
CONTINUED ECONOMIC DOWNTURN, HAVE POSTPONED INVESTMENTS.


6. (U) IN CONTRAST, THE TAX AMNESTY FOR CAPITAL ILLEGALLY
EXPATRIATED HAS BEEN A SUCCESS. THE GOVERNMENT OFFERED AN
AMNESTY FOR OFFSHORE, ILLEGALLY EXPORTED CAPITAL WITH A
ONE-TIME TAX PAYMENT OF 2.5 PERCENT. WHEN THE PROGRAM ENDED
IN MID-MAY, MORE THAN 40 BILLION EUROS HAD REPORTEDLY FLOWED
BACK INTO ITALY. THE GOVERNMENT ESTIMATES 360-400 BILLION
EUROS HAVE BEEN MOVED TO OFFSHORE ACCOUNTS SINCE THE END OF
WORLD WAR TWO. THE AMNESTY HAS BEEN A BOON TO ITALIAN BANKS
BUT ALSO WILL LIKELY LEAD TO HIGHER INVESTMENT IN ITALY'S
SMALL AND MEDIUM-SIZED BUSINESSES, THE BACKBONE OF THE
ITALIAN ECONOMY. LONGER-TERM BENEFITS ARE HARDER TO PREDICT.
FINANCE MINISTER TREMONTI, THE ARCHITECT OF THE PLAN, CLAIMS

UNCLASSIFIED

UNCLASSIFIED PTQ8064

PAGE 01 ROME 02794 02 OF 04 101655Z
ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 CTME-00
DODE-00 ITCE-00 DOTE-00 WHA-00 SRPP-00 DS-00 EB-00
EXME-00 E-00 FAAE-00 UTED-00 VC-00 FRB-00 H-01
TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 AC-01
NSAE-00 NSCE-00 OMB-01 OPIC-01 PA-00 PM-00 PRS-00
ACE-00 P-00 SCT-00 SP-00 SSO-00 STR-00 TEST-00
USIE-00 FMP-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00
SAS-00 /009W
-------------- BAD839 101655Z /38
P 101722Z JUN 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 4142
INFO EU MEMBER STATES COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSUL MILAN PRIORITY
AMCONSUL NAPLES PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
USEU BRUSSELS PRIORITY 2699
USDOC WASHDC PRIORITY

UNCLAS SECTION 02 OF 04 ROME 002794

SIPDIS

SENSITIVE

DEPT FOR EUR/WE, EUR/ERA, EB/OMA
TREASURY FOR OASIA - HARLOW, JONES
UNCLASSIFIED

PAGE 02 ROME 02794 02 OF 04 101655Z
STATE PASS FEDERAL RESERVE BANK
FRANKFURT FOR WALLAR

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV IT ITECON ITECON ITECON
SUBJECT: BERLUSCONI'S FIRST YEAR ECONOMIC SCORECARD

THE TAX AMNESTY WILL INCREASE THE TAX BASE AND HELP REDUCE
TAX EVASION. CRITICS SAY THAT THIS ONE-TIME MEASURE WILL NOT
DIMINISH THE PROPENSITY TO DODGE TAXES.


7. (U) COMMENT: ALTHOUGH THESE MEASURES WERE DESIGNED TO GIVE
A SHOT IN THE ARM TO ITALY'S ECONOMY, WE BELIEVE MORE
SIGNIFICANT REFORMS ARE NECESSARY FOR LONG-TERM ECONOMIC
VITALITY.

WHAT IS REALLY NEEDED
--------------


8. (U) TAX REFORM: ONE OF THE TOP PRIORITIES OF THE
BERLUSCONI GOVERNMENT IS TO REDUCE TAXES. CHANGES WILL
INCLUDE A REDUCTION OF PERSONAL INCOME TAX RATE BRACKETS,
FROM FIVE TO TWO (23 PERCENT UP TO 100,000 EUROS OF TAXABLE
INCOME AND 33 PERCENT ABOVE THAT LEVEL); AND REFORM OF
CORPORATE TAXES, WITH A DECREASE FROM A 36 PERCENT TO 33
PERCENT TAX RATE. WHILE THE CHAMBER OF DEPUTIES ALREADY HAS
APPROVED THESE CHANGES, THE SENATE HAS NOT YET DISCUSSED
THEM. EVEN IF THE SENATE MOVES BEFORE THE SUMMER RECESS, THE
REFORMS WILL LIKELY ONLY BE APPROVED IN LATE 2002. THE
GOVERNMENT WOULD THEN HAVE A TWO-YEAR DEADLINE TO PRESENT ALL
THE DETAILS OF THESE REFORMS. AT BEST, THEREFORE, THE
UNCLASSIFIED

PAGE 03 ROME 02794 02 OF 04 101655Z
POSITIVE EFFECTS OF TAX REFORM WILL NOT OCCUR EARLIER THAN

2004. IN ADDITION, THE NEED TO FINANCE A HIGHER THAN
EXPECTED PUBLIC SECTOR DEFICIT -- SOME CAUSES OF WHICH WERE
AN UNEXPECTED INHERITANCE FROM THE PREVIOUS GOVERNMENT -- MAY
ALSO PUSH BACK THE TIMETABLE FOR TAX CUTS. COMMENT: TREMONTI
AND BERLUSCONI BELIEVE THAT LOWER TAXES, MORE EQUITABLY
APPLIED, WILL PRODUCE A GREATER INCOME STREAM. TO DO THAT,
THEY HAVE TO CAPTURE MORE OF THE UNDERGROUND ECONOMY.


9. (U) INCORPORATING THE UNDERGROUND ECONOMY: ACCORDING TO
THE IMF, ITALY'S UNDERGROUND ECONOMY IS EQUAL TO ABOUT 27
PERCENT OF GDP. EMPLOYEES WHO WORK OFF THE BOOKS ACCOUNT FOR
30-48 PERCENT OF THE ENTIRE WORKFORCE. THE GOVERNMENT HAS
PROPOSED THREE YEARS OF TAX BREAKS FOR EMPLOYERS WHO BECOME
LEGAL ENTITIES; SIMILAR INCENTIVES ARE OFFERED TO EMPLOYEES.
THE TAX BREAKS, APPROVED AS PART OF THE 100-DAY PACKAGE,
EXPIRE NOVEMBER 30. THE PACKAGE HAS HAD LIMITED SUCCESS. AS
OF LATE MAY, ONLY 159 EMPLOYERS AND 500 WORKERS HAVE
REPORTEDLY COME FORWARD. COMMENT: WITHOUT CAPTURING MORE OF
THIS ECONOMY, IT IS LIKELY THAT TAX REFORM WILL GENERATE LESS
REVENUE. END COMMENT.


10. (U) PRIVATIZATION: THE BERLUSCONI GOVERNMENT ALSO HAS
PROPOSED THE THE SALE OF STATE-OWNED ENTITIES OR
GOVERNMENT-OWNED SHARES OF MAJOR COMPANIES, INCLUDING THE
ENERGY COMPANY ENEL AND ENTE TABACCI ITALIANI (ITALY'S
NATIONAL TOBACCO COMPANY). KEY CABINET OFFICIALS CONTINUE TO
REITERATE THIS COMMITMENT TO PRIVATIZATION. UNCERTAIN MARKET
CONDITIONS HAVE, HOWEVER, RAISED QUESTIONS ABOUT BOTH THE
TIMING AND THE PRICE. COMMENT: PRIVATIZATION IS CRITICAL TO
BRINGING DOWN THE PUBLIC DEFICIT. IN ADDITION, THE EU
UNCLASSIFIED

PAGE 04 ROME 02794 02 OF 04 101655Z
COMMISSION'S RECENT RULING AGAINST GOVERNMENT OWNED "GOLDEN
SHARES" COULD COMPEL THE GOI TO SELL ITS REMAINING STAKES IN
TELECOM ITALIA. END COMMENT.


11. (U) PENSION REFORM: ANOTHER CRITICAL STEP FOR LONG-TERM
RECOVERY IS PENSION REFORM. ITALY SPENDS NEARLY 15 PERCENT OF
ITS GDP ON PENSIONS, ONE OF THE HIGHEST RATES IN THE WORLD,
AND, WITH THE LOWEST BIRTHRATE IN EUROPE, FACES THE PROSPECT
OF A STAGNANT OR DECLINING ACTIVE WORK FORCE. BY LAW, THE
BERLUSCONI IS REQUIRED TO REVIEW THE EFFECTIVENESS OF THE
1995 PENSION REFORM. THE GOVERNMENT HAS PROPOSED MODEST
REFORMS, WITH TWO KEY ASPECTS: INCREASE IN AVERAGE RETIREMENT
AGE AND INCREASED USE OF PRIVATE PENSION FUNDS. THE
GOVERNMENT HAS PROPOSED INCENTIVES, INCLUDING REDUCED
CONTRIBUTION RATES, THAT WOULD ENCOURAGE EMPLOYEES TO WORK
BEYOND THE CURRENT RETIREMENT AGES OF 60 AND 65,
RESPECTIVELY, FOR WOMEN AND MEN.


12. (SBU) FEARING THE IMPACT ON THE SOCIAL SECURITY SYSTEM'S
VIABILITY, UNIONS OBJECT TO LOWERING EMPLOYER CONTRIBUTIONS.
THE GOVERNMENT HAS INDICATED THAT IT WILL TRY TO ADDRESS
UNION CONCERNS. DEBATE IN THE TWO CHAMBERS HAS BEEN POSTPONED
WHILE THE GOVERNMENT SEARCHES FOR AN AGREEMENT WITH THE
UNIONS. EVEN IF UNIONS AND THE GOVERNMENT AGREE, PENSION
REFORM WILL BE PURSUED BUT CAUTIOUSLY, DELAYING ANY POSITIVE

UNCLASSIFIED

UNCLASSIFIED PTQ8065

PAGE 01 ROME 02794 03 OF 04 101656Z
ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 CTME-00
DODE-00 ITCE-00 DOTE-00 WHA-00 SRPP-00 DS-00 EB-00
EXME-00 E-00 FAAE-00 UTED-00 VC-00 FRB-00 H-01
TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 AC-01
NSAE-00 NSCE-00 OMB-01 OPIC-01 PA-00 PM-00 PRS-00
ACE-00 P-00 SCT-00 SP-00 SSO-00 STR-00 TEST-00
USIE-00 FMP-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00
SAS-00 /009W
-------------- BAD83D 101656Z /38
P 101722Z JUN 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 4143
INFO EU MEMBER STATES COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSUL MILAN PRIORITY
AMCONSUL NAPLES PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
USEU BRUSSELS PRIORITY 2700
USDOC WASHDC PRIORITY

UNCLAS SECTION 03 OF 04 ROME 002794

SIPDIS

SENSITIVE

DEPT FOR EUR/WE, EUR/ERA, EB/OMA
TREASURY FOR OASIA - HARLOW, JONES
UNCLASSIFIED

PAGE 02 ROME 02794 03 OF 04 101656Z
STATE PASS FEDERAL RESERVE BANK
FRANKFURT FOR WALLAR

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV IT ITECON ITECON ITECON
SUBJECT: BERLUSCONI'S FIRST YEAR ECONOMIC SCORECARD

IMPACT ON THE ECONOMY FOR SEVERAL YEARS. INDEPENDENTLY,
RECENT STOCK MARKET BEHAVIOUR HAS ERODED PUBLIC CONFIDENCE IN
MARKET-BASED PRIVATE PENSION FUNDS.

LABOR LAW REFORM
--------------


13. (U) REFORM PROPOSALS ATTRACTING THE GREATEST PUBLIC
ATTENTION AND DEBATE INVOLVE LABOR, WITH THE MOST CONTENTIOUS
ISSUE BEING ARTICLE 18 OF THE 1970 WORKERS' STATUTE. THIS
PROVISION ALLOWS EMPLOYEES FIRED "WITHOUT JUST CAUSE" (AS
DETERMINED BY A MAGISTRATE) TO BE REINSTATED IN THEIR JOBS,
AS OPPOSED TO RECEIVING ONLY MONETARY COMPENSATION. THE
EMPLOYERS' ASSOCIATION "CONFINDUSTRIA" AND THE GOVERNMENT
CONTEND THAT ARTICLE 18 DISCOURAGES COMPANIES FROM FIRING
WORKERS AND, THUS, DISSUADES THEM FROM HIRING NEW EMPLOYEES.
TO ENCOURAGE JOB CREATION, THE GOVERNMENT PROPOSES THAT,
UNDER CERTAIN CONDITIONS, THE RIGHT TO REINSTATEMENT BE
WITHDRAWN FOR A TRIAL PERIOD. (ARTICLE 18 APPLIES ONLY TO
FIRMS WITH MORE THAN 15 WORKERS. EMPLOYEES OF FIRMS WITH
FEWER THAN 15 ON THEIR PAYROLL CAN ONLY ASK FOR COMPENSATION,
NOT REINSTATEMENT.)


14. (SBU) THE UNIONS SEE ARTICLE 18 AS A PROFOUND SYMBOL, A
UNCLASSIFIED

PAGE 03 ROME 02794 03 OF 04 101656Z
"BILL OF RIGHTS" FOR WORKERS, REPRESENTING A SUCCESSFUL FIGHT
FOR DIGNITY AND LEGAL PROTECTION. AS SUCH, IT HAS BECOME A
RALLYING POINT FOR TRADE UNIONS AND A WAY FOR THEM TO UNITE
OTHERWISE FRAGMENTED LEFTIST GROUPS. THE GOVERNMENT'S
PROPOSAL TO ALTER ARTICLE 18 ALSO HAS OTHER ASPECTS. TRADE
UNIONISTS BELIEVE THAT THE GOVERNMENT, PROMPTED BY EMPLOYER
ASSOCIATIONS, IS TRYING TO CHANGE THE "RULES OF THE GAME"
UNILATERALLY. SINCE THE EARLY 1990S, THE THREE SOCIAL
PARTNERS -- GOVERNMENT, EMPLOYERS, AND UNIONS -- HAVE ENGAGED
IN A PROCESS OF "CONCERTAZIONE" -- ROUGHLY TRANSLATED AS
"CONSULTATION" -- TO HAMMER OUT SOCIAL AND ECONOMIC POLICY
THROUGH CONSENSUS. THIS WAS BELIEVED TO BE ESSENTIAL TO
STABILITY DURING A TIME WHEN RULING COALITIONS WERE WEAK. TO
TRADE UNIONISTS, THE GOVERNMENT'S ACTION ON ARTICLE 18 IS AN
ATTEMPT BY IT AND EMPLOYERS TO TILT THE BALANCE OF POWER IN
THEIR FAVOR. (COMMENT: THE UNIONS' FEAR THAT THE GOVERNMENT
AND EMPLOYERS ARE TRYING TO SHIFT THE BALANCE IS NOT FAR OFF
THE MARK. THE EMERGENCE AFTER THE MAY 2001 ELECTIONS OF A
SIZABLE AND CENTER-RIGHT MAJORITY HAS MEANT THAT UNIONS'
PARTICIPATION IN ECONOMIC POLICY-MAKING IS NO LONGER
REQUIRED. END COMMENT) RESPONDING TO THIS PERCEIVED THREAT,
CGIL, JOINED BY UNIONS CISL AND UIL, SUCCESSFULLY ORGANIZED
THE LARGEST ONE-DAY GENERAL STRIKE IN RECENT ITALIAN HISTORY
ON APRIL 16TH.


15. (SBU) DESPITE THE STRIKE'S SUCCESS, THE BERLUSCONI
GOVERNMENT EMERGED LARGELY UNSCATHED. OPINION POLLS STILL
GIVE OVERWHELMING MAJORITY SUPPORT TO THE CENTER-RIGHT
GOVERNMENT. RECENT LOCAL ELECTIONS (WITH NONE OF ITALY'S
MAJOR CITIES OR MORE SIGNIFICANT PROVINCES INVOLVED) SAW NO
LOSS IN CENTER-RIGHT POWER. THE BERLUSCONI GOVERNMENT
UNCLASSIFIED

PAGE 04 ROME 02794 03 OF 04 101656Z
MAINTAINS THAT IT STILL INTENDS TO CONSULT WITH UNIONS OVER
ARTICLE 18.

16. (SBU) INDEED, THE GOVERNMENT IS NOT RUSHING TO ENACT ITS
PROPOSED CHANGES TO ARTICLE 18 AND RECENTLY DROPPED THE
MEASURE OUT OF AN OMNIBUS LABOR REFORM BILL, WHILE
"POSTPONING" ARTICLE 18 CHANGES TO AN UNDEFINED FUTURE
OCCASION. LABOR MINISTER MARONI HAS CALLED FOR A NEW SOCIAL
PACT ON LABOR AND WELFARE, AND OFFERED A SEAT AT THE TABLE TO
ALL UNIONS, WITH A SPECIAL APPEAL TO CGIL. CISL AND UIL
ACCEPTED THE GOVERNMENT'S OFFER; CGIL DID NOT AND HAS CALLED
FOR NEW ROUND OF REGIONAL STRIKES.


17. (SBU) HOW THIS CONFRONTATION WILL ULTIMATELY PLAY OUT IS
STILL UNCERTAIN. UNLIKE 1994, BERLUSCONI DOES NOT FEAR THAT
HIS COALITION WILL BREAK APART BECAUSE OF UNION OPPOSITION.
INDEED, THE NORTHERN LEAGUE, THE WITHDRAWAL OF WHICH FROM THE
GOVERNING COALITION WAS RESPONSIBLE FOR THE DEMISE OF THE
PREVIOUS BERLUSCONI GOVERNMENT, IS SPEARHEADING THE CHARGE
FOR SUCH REFORM. LABOR MINISTER MARONI, A NORTHERN LEAGUE
PARTY MEMBER, IS THE ARCHITECT OF THE LABOR REFORMS.
MAJORITY POPULAR SUPPORT FOR THE BERLUSCONI GOVERNMENT ALSO
STRENGTHENS ITS POSITION.


19. (SBU) WHATEVER THE OUTCOME -- AN OUTRIGHT WIN FOR THE
GOVERNMENT, A WATERED-DOWN COMPROMISE VERSION OF ARTICLE 18

UNCLASSIFIED

UNCLASSIFIED PTQ8066

PAGE 01 ROME 02794 04 OF 04 101656Z
ACTION EUR-00

INFO LOG-00 NP-00 AGRE-00 AID-00 CEA-01 CIAE-00 CTME-00
DODE-00 ITCE-00 DOTE-00 WHA-00 SRPP-00 DS-00 EB-00
EXME-00 E-00 FAAE-00 UTED-00 VC-00 FRB-00 H-01
TEDE-00 INR-00 ITC-01 LAB-01 L-00 VCE-00 AC-01
NSAE-00 NSCE-00 OMB-01 OPIC-01 PA-00 PM-00 PRS-00
ACE-00 P-00 SCT-00 SP-00 SSO-00 STR-00 TEST-00
USIE-00 FMP-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00
SAS-00 /009W
-------------- BAD841 101656Z /38
P 101722Z JUN 02
FM AMEMBASSY ROME
TO SECSTATE WASHDC PRIORITY 4144
INFO EU MEMBER STATES COLLECTIVE PRIORITY
AMCONSUL FLORENCE PRIORITY
AMCONSUL FRANKFURT PRIORITY
AMCONSUL MILAN PRIORITY
AMCONSUL NAPLES PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
USEU BRUSSELS PRIORITY 2701
USDOC WASHDC PRIORITY

UNCLAS SECTION 04 OF 04 ROME 002794

SIPDIS

SENSITIVE

DEPT FOR EUR/WE, EUR/ERA, EB/OMA
TREASURY FOR OASIA - HARLOW, JONES
UNCLASSIFIED

PAGE 02 ROME 02794 04 OF 04 101656Z
STATE PASS FEDERAL RESERVE BANK
FRANKFURT FOR WALLAR

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV EFIN ELAB PGOV IT ITECON ITECON ITECON
SUBJECT: BERLUSCONI'S FIRST YEAR ECONOMIC SCORECARD

REFORM (THE TWO OPTIONS MOST LIKELY),OR A RETREAT BY THE
GOVERNMENT (LEAST LIKELY) -- ONE THING IS CERTAIN:
SIGNIFICANT LABOR REFORM IS YEARS AWAY. ARTICLE 18 REFORM IS
PERIPHERAL TO REFORMS THAT ARE TRULY NEEDED.

COMMENT
--------------


20. (SBU) THE BERLUSCONI GOVERNMENT HAS YET TO FACE STRONG
CRITICISM FOR FAILURE TO REVERSE ITALY'S ECONOMIC SLOWDOWN.
THE EVENTS OF SEPTEMBER 11 AND THE GLOBAL ECONOMIC WOES
CONTINUE TO BUY THE GOVERNMENT TIME. IN ADDITION, THE PUBLIC
AND POLITICAL OBSERVERS SEEM TO UNDERSTAND THAT THE
GOVERNMENT IS SERIOUS ABOUT ECONOMIC REFORM. ITS EXPRESSED
DESIRE TO CONSULT WITH UNIONS ALSO HAS BOUGHT THE GOVERNMENT
PUBLIC GOOD WILL.


21. (SBU) CRITICISM IS, HOWEVER, HEATING UP. THE EUROPEAN
COMMISSION HAS CRITICIZED ITALY FOR ITS BALLOONING BUDGET
DEFICIT. CENTRAL BANK GOVERNOR FAZIO, IN HIS ANNUAL ADDRESS
ON MAY 30, RAISED CONCERNS ABOUT THE INSUSTAINABILITY OF THE
PUBLIC DEFICIT. THE GOVERNMENT CAN NOT DELAY MUCH LONGER ON
BOTH SHORT-TERM AND LONG-TERM MEASURES TO CUT SPENDING, REIN
IN THE DEFICIT, AND STIMULATE GROWTH. THE NEXT MONTHS ARE
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PAGE 03 ROME 02794 04 OF 04 101656Z
CRITICAL. IF THE BELUSCONI GOVERNMENT DOES NOT SOON IMPLEMENT
THE RIGHT MIX OF FISCAL FIXES AND BEGIN TO ENACT SIGNIFICANT
REFORMS, THE ROAD TO A STRONG ECONOMIC RECOVERY WILL BECOME
EVEN LONGER AND HARDER. MOREOVER, THE EFFECTS OF ANY
SUCCESSFUL REFORM WILL NOT BE FELT BEFORE THE NEXT NATIONAL
ELECTION IN 2005.
SEMBLER

UNCLASSIFIED

>
2002ROME02794 - Classification: UNCLASSIFIED