Identifier
Created
Classification
Origin
03ROME2853
2003-06-24 10:19:00
UNCLASSIFIED
Embassy Rome
Cable title:  

ITALIAN EXPORTERS FACE DIFFICULTY WITH STRONGER

Tags:  ECON EFIN IT UN 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS ROME 002853 

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREAS FOR OASIA HARLOW, CARNES
FRANKFURT FOR WALLAR
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND
4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN IT UN
SUBJECT: ITALIAN EXPORTERS FACE DIFFICULTY WITH STRONGER
EURO, BUT LONG-TERM EFFECTS MAY BE LIMITED


UNCLAS ROME 002853

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREAS FOR OASIA HARLOW, CARNES
FRANKFURT FOR WALLAR
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND
4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN IT UN
SUBJECT: ITALIAN EXPORTERS FACE DIFFICULTY WITH STRONGER
EURO, BUT LONG-TERM EFFECTS MAY BE LIMITED



1. (U) Summary: Italian exports, traditionally vulnerable
to exchange rate fluctuations, are being hit by the
Euro's appreciation versus the dollar. Exports to Italy's
third most important market, the United States, are down
eight percent on a 12-month year to year basis. In
addition to the Euro's appreciation versus the dollar,
two other factors cast a pall over Italian exporters:
Germany, Italy's largest export market, is in serious
economic trouble, and SARS has suppressed consumer demand
in Asia. One positive aspect of a depreciated dollar: the
price of raw materials and oil, generally dollar-
denominated, should fall, indirectly affecting the price
of exports of manufactured goods. Experts predict that
long-term effects on Italian exports may be limited, as
long as the Euro remains stable with regard to other
major currencies and the dollar does not drop much
further. End-summary

The Euro's Value
--------------


2. (U) The Euro reached its highest level ever against
the U.S. dollar on May 27, with a rate of USD 1.1935/
Euro. Overall, the Euro is up against the dollar by more
than 13 percent for the year and 30 percent over one year
ago. The Euro has strengthened, to a lesser extent,
against the British pound (11 percent through end-May
2003 and 14 percent over one year ago),and the Japanese
yen (11 percent through end-May 2003 and 20 percent over
one year ago).

Effect on Italian Exports
--------------


3. (U) Italy has an export-led economy, with the United
States representing the third largest foreign market for
Italian exports. Italian exports have traditionally been
highly susceptible to exchange rate fluctuations. Some
leading Italian economists, including Central Bank
Governor Antonio Fazio and Enrico Giovannini, an
economist at the OECD, argue that Italy's exporters are
even more susceptible than their European counterparts to
currency fluctuations. In his annual report on May 31,
Fazio argued that the composition of Italian exports
makes them highly vulnerable to import price trends.
Italian exports, he pointed out, are specialized in
furniture, leather products and non-mineral metals

manufacturing. Consumer demand for such high-end consumer
products, he contended, is particularly influenced by the
import price.


4. (U) Foreign trade with non-EU countries accounts for
47 percent of Italy's total foreign trade. Clothing
exports to non-EU markets represent 53.6 percent of total
exports of clothing, of which 15.1 percent go to the U.S.
Separately, footwear exports to non-EU countries account
for 42.2 percent of overall exports of footwear, of which
18.5 percent go to the U.S. Of textile manufacturing
machinery, 69.9 percent of total exports of this category
go to non-EU countries, 12 percent of which are to the
American market. The U.S. also is the primary export
market for the furniture sector.

Latest Data
--------------


5. (U) On May 22, a leading economic think tank, Istat,
released data through April of Italy's foreign trade with
non-EU countries. The data showed an E956 million
deficit in the first four months of the year. Exports
grew only 0.2 percent from April 2002 to April 2003,
while imports grew 2.6 percent. The strengthening of the
Euro had an immediate impact on Italy's exports to the
U.S., which decreased 8.8 percent from April 2002 to
April 2003.
In contrast, Italian exports to China grew by 23.2
percent from April 2002 to April 2003 and by 26.1 percent
from the period January-April 2002 to the same period


this year. SARS, however, may show suppressed consumer
demand in Asia in later statistics.

Some good may come
--------------


6. (U) According to Antonio Sagnotti, a researcher at
one of Italy's leading banks, Banca Nazionale di Lavoro,
Italian exports to the United States will continue to
fall as a result of the strengthened Euro, but also as a
result of weak American consumer demands overall.
Sagnotti is optimistic, however, that the medium-range
effect of a strengthened Euro will be limited. In
contrast to the Central Bank Governor, he does not
believe Italian exports are particularly vulnerable to
exchange rate fluctuations. He argued that the demand for
Italian exports would not shrink significantly as long as
the Euro/Dollar exchange rate does not exceed .80
Eurocents/one dollar. Demand for high-end consumer
goods, of which many Italian exports are, remains stable
as long as there is only a 10-20 percent fluctuation in
exchange rate values, he contended. Sagnotti expects
only a modest decline in Italian exports to the U.S. this
year, predicting that a recovery of U.S. domestic demand
in the second half of the year will offset some of the
price increases caused by the Euro's appreciation.


7. (U) Some leading economists see an upside to a
stronger Euro vis--vis the dollar. Minister of European
Union Affairs, Rocco Buttiglione, recently commented that
a strengthened Euro provides an opportunity for Italian
companies to buy U.S. companies at a cheaper price. He
argued that Italian companies need to expand beyond the
domestic market to enhance their overall competitiveness.
Buttiglione also observed that Italian exporters would
benefit from the lower price, in Euro terms, of raw
materials. Arrigo Sadun, Director General of the
macroeconomic department of the Ministry of Economy and
Finance, expects the overall effect of a stronger Euro
will be positive. Sadun told us that the possible loss
in export earnings and market share would be offset by
the positive impact by the lower price of oil imports and
raw materials.


8. (U) According to Stefano Siviero of the research
department of the Bank of Italy, the Central Bank
predicts that a stronger Euro versus the dollar will
reduce export growth only by an estimated 0.1 percent
over the period 2003-2005.

The impact on GDP growth
--------------


9. (U) A stronger Euro also is expected to affect GDP
growth negatively by approximately 0.3 percent in the
same period. An anticipated increase in imports accounts
for most of the negative impact on GDP growth. If the
Euro were to appreciate significantly more versus other
major currencies besides the dollar, the impact would be
larger. According to leading economists, if the Euro
were to strengthen by another 10 percent or more vis--
vis the Yen, the British Pound and others, export growth
could decline by 2.7 percent in the period 2003-2005 and
GDP growth by 1.3 percent, in the same period.


10. (U) On June 10, Istat released final GDP growth data,
which showed a 0.1 percent decrease from the fourth
quarter 2002 to the first quarter 2003, but a 0.8 percent
increase from the first quarter 2002. According to ISAE,
Italian consumer confidence is the lowest in 9 years.
Inflation fell from April to May, from 2.7 percent to 2.6
percent.


11. (U) The consensus forecast continues to estimate a
GDP growth rate of one percent for 2003. However, a
contact at the Central Bank mentioned to us that a recent
Bank of Italy confidential report predicted a GDP growth
rate of just 0.4 percent, the same as in 2002.

Other concerns
--------------


12. (U) The Euro's appreciation versus the dollar is just
one factor constraining Italian exporters. Another
important factor is the weakness of the German economy.
Germany is Italy's largest trading partner, accounting
for almost 20 percent of total Italian exports. An
additional factor is the impact of SARS on consumer
demand in Asia during the second and likely third quarter
of this year. China, Japan and other Asian countries
account for almost 7 percent of Italian exports. The
combination of these factors is likely to reverberate
negatively on Italian exports and on Italian GDP growth
this year.

Comment
--------------

13. (U) Exports account for about 25 percent of GDP and
are one of the pillars of Italian economic growth. While
exports have traditionally been vulnerable to exchange
rate fluctuations, Italian exporters also are losing a
competitive edge, many economists worry. Italy invests
only .75 of its GDP percent in R&D, compared to an
average of 1.75 percent of the EU. This lack of
investment in technology, according to economists, has
reduced the competitiveness of Italy exports and
aggravated their sensitivity to exchange rate
fluctuations. End-comment
SEMBLER
NNNN
2003ROME02853 - Classification: UNCLASSIFIED