ITALY: COMPETITIVENESS AND GROWTH PROGRAM, PART I

UNCLAS ROME 002002

SIPDIS


SENSITIVE

DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREAS FOR HULL
STATE PASS CEA
FRANKFURT FOR WALLAR
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP
SUBJECT: ITALY: COMPETITIVENESS AND GROWTH PROGRAM, PART I

Ref: A) Rome 1900, B) Rome 1588

This cable is sensitive but unclassified. Please protect
accordingly. Not for Internet publication or distribution.


1. (SBU) Summary and Introduction: The Senate gave final
approval May 12 for the first part of the 2005-2008 four
billion euro plan to improve Italian competitiveness and
implement EU Lisbon agenda reforms. The package will
likely be the government's most significant piece of
economic legislation between now and the next national
elections. The second part of the package is still under
debate in the Chamber of Deputies (septel). The recently
passed law attempts to streamline bureaucratic procedures,
support businesses, invest in infrastructure, combat
counterfeit goods, improve unemployment benefits in some
sectors and geographic regions, and reorganize government
tourism promotion. On the revenue side, the decree
increases liquor taxes, fines for buying knock-off goods,
and penalties for hiring under the table. Unions doubt the
law will spur competitiveness, while the business
association Confindustria approves, but calls for
additional measures. The opposition sees the decree law as
an electoral gambit, void of any real structural adjustment
measures. This message evaluates key measures in the new
law. End Summary and Introduction.

Customs Upgrades; IPR Enforcement; "De-Outsourcing"
-------------- --------------


2. (SBU) The new law seeks to bolster domestic jobs,
protect Italian brands, and modernize borders systems
handling goods and people. Customs/Immigration computer
systems will be upgraded further to the Member State
requirements under the EU Visa Information System (VIS) II,
due to begin operation in 2007. On IPR, the law imposes
administrative fines of up to euro 10,000 for knowingly
purchasing counterfeit goods. Comment: Embassy experience
with other IPR protection measures indicates that Italian
law enforcement authorities are loath to enforce anti-
piracy laws at the retail level. With this in mind, the
new provision may have little impact on piracy violations
(see Ref. A). End Comment.


3. (U) The law also provides tax incentives for companies
that have outsourced activities and now return these
activities to Italy. It withdraws benefits and tax
incentives for companies moving R&D, front-office
activities and a significant part of production offshore.

But No Bankruptcy Reform or Deregulating High-End Services
-------------- --------------


4. (SBU) Italy is renowned for the relatively large size of
its small-enterprise sector. Unfortunately, these
businesses are concentrated in declining industries; their
owners are generally risk-averse; and they invest modestly
in new technologies and innovations. Thus, Italy needs
comprehensive bankruptcy reform to help build a culture of
entrepreneurial risk-taking and create jobs in high-growth
industries. As a first step towards more comprehensive
reform of the bankruptcy code, the draft decree attempted
to lower the maximum sentence for bankruptcy fraud from ten
to six years. This provision raised widespread protest,
was seen as inconsistent with efforts to strengthen
corporate responsibility, and ultimately was dropped from
the law. Separately, lack of open access to enter many
professions and protection from foreign competitors cause
distortions in the Italian labor market. Unfortunately,
however, professional bodies killed a provision that would
have promoted a limited liberalization of professional
services, strengthened competition among service providers,
and allowed professionals to become shareholders of their
own companies.

Administrative Simplification or Abdication?
-------------- 5 . (SBU) One
measure meant to break administrative
bottlenecks in initiating new business activities, provides
for "silent consent" if the responsible public authority
does not act on administrative requests within 30 days.
Critics worry that rather than improving administration of
business licensing requests, "silent consent" could
increase political influence over administrative decisions
affecting business. It is not difficult to envision a
scenario in which insiders could receive "silent consent,"
while other businesses receive endless requests to provide
additional information, obtain additional authorizations,
and the like.

Infrastructure: Tossing a Bone to the South
--------------


6. (SBU) The government will reallocate euro 750 million
from a fund for industrial development to nudge forward
fourteen major infrastructure works in the underdeveloped
south of Italy, an area crucial for Berlusconi's hopes in
2006 national elections. The full cost of these fourteen
projects is euro 43 billion; the euro 750 million allocated
may provide the pre-electoral appearance of progress but is
unlikely to make much of a dent in these projects. No
provision is made in this package for additional,
subsequent funding, although additional funds could in
theory be included in the next budget bill.

Incentives to Merge, but Also Dinosaur Crutches
-------------- --


7. (SBU) Manufacturing still represents about one quarter
of the economy in Italy, higher than in other G7 countries.
This manufacturing is concentrated in areas (textiles,
furniture, appliances, etc.) in which Italy has been
loosing its competitive edge. The new law provides a
thirty-percent tax credit for small-and medium-sized
enterprises (SMEs) to encourage mergers of Italy's many
small companies in sectors that have lost their competitive
position on the world market. The law also earmarks another
euro 310 million to help small clothing manufacturers, as
well as all the suppliers and sub-suppliers of the Fiat
Group. The law adds the home appliance sector to the group
of companies that can draw from the fund for restructuring
distressed companies. This measure is targeted at
Whirlpool and De Longhi, both of which are considering lay-
offs at northern Italian manufacturing facilities.

Stretching the Safety Net
--------------


8. (SBU) The new law seeks to extend the social safety net
to employees of smaller companies and the longer-term
unemployed, increase labor mobility, and decrease reliance
on the government pension system. The measure gives
private-sector employees the option of investing the seven
percent of their salary currently held by their employer
for a lump-sum severance/retirement payout into a self-
directed supplemental pension fund. The law also earmarks
funds to reimburse companies for diminished cash flow
resulting from employees moving these funds from company
control to pension plan managers. In addition, the law
modestly extends the duration of unemployment benefits, but
calculates the payout on a lower percentage of the
beneficiary's final salary. A wage guarantee fund (euro
460 million) is established for SMEs. The law establishes
bonuses for new employees taking jobs more than 100 km from
their residence.

Reshuffling Tourism Promotion
--------------


9. (U) The law identifies cultural tourism as a priority
and authorizes Italian tourism information desks in six
countries. The law establishes a cabinet-level committee
to set national tourism priorities and sets up a 20 million
euro fund for promoting tourism in Southern Italy.

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


10. (SBU) The changes in the new competitiveness package
are, on balance, positive, but insufficient. Given the
extent of the economic challenges confronting Italy, it
would be unreasonable to expect any competitiveness law to
be a panacea. That said, this legislative effort only
nibbles at the edges of Italy's structural problems and is
not expected to have a noteworthy impact on the economy
over the next year. The second part of the package (to be
reported septel) is also expected to include provisions to
improve Italy's competitiveness, but may be shaped even
more by political parties' jostling in the run up to 2006
national election. End Comment.


Sembler


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2005ROME02002 - Classification: UNCLASSIFIED