Identifier
Created
Classification
Origin
08ROME126
2008-01-29 10:20:00
UNCLASSIFIED
Embassy Rome
Cable title:  

INVESTMENT CLIMATE STATEMENT 2008 - ITALY

Tags:  EINV EFIN ETRD ELAB OPIC KTDB USTR PGOV IT 
pdf how-to read a cable
VZCZCXRO3742
OO RUEHFL RUEHNP
DE RUEHRO #0126/01 0291020
ZNR UUUUU ZZH
O 291020Z JAN 08
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9755
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCPCIM/CIMS NTDB WASHDC IMMEDIATE
INFO RUEHMIL/AMCONSUL MILAN PRIORITY 9215
RUEHNP/AMCONSUL NAPLES PRIORITY 3024
RUEHFL/AMCONSUL FLORENCE PRIORITY 2874
UNCLAS SECTION 01 OF 13 ROME 000126 

SIPDIS

SIPDIS

SECSTATE PLEASE PASS TO EB/IFD/OIA
SECSTATE PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB OPIC KTDB USTR PGOV IT
SUBJECT: INVESTMENT CLIMATE STATEMENT 2008 - ITALY

REF: A) 07 STATE 158802, B) 07 ROME 147, C) 07 ROME 149

UNCLAS SECTION 01 OF 13 ROME 000126

SIPDIS

SIPDIS

SECSTATE PLEASE PASS TO EB/IFD/OIA
SECSTATE PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB OPIC KTDB USTR PGOV IT
SUBJECT: INVESTMENT CLIMATE STATEMENT 2008 - ITALY

REF: A) 07 STATE 158802, B) 07 ROME 147, C) 07 ROME 149


1. SUMMARY: While the Government of Italy (GOI) continues to court
foreign investors, economic reforms or other steps to ensure a more
welcoming investment climate have been modest. Recent positive
developments include passage of a more efficient bankruptcy law and
the incorporation of the EU Takeover Directive into Italian law.


2. Despite public statements and visits to the U.S. of high level
government officials to encourage American investment in Italy,
historical stumbling blocks to investment remain unaddressed. The
inefficient delivery of public services, a slow judicial system, and
bureaucratic red tape all discourage Foreign Direct Investment
(FDI). Although Prime Minister Prodi's government has worked to
meet EU demands that Italy put its fiscal house in order, the
government has refrained from undertaking wide-ranging economic
reform, choosing instead to focus on limited liberalization measures
in selected sectors.


3. Italy's economy, the sixth largest market economy in the world,
is fully diversified. Small- and medium-sized firms dominate the
Italian economy. Family-owned companies account for 93 percent all
Italian companies and 85 percent of GDP. In the U.S., family-owned
companies represent 96 percent of companies, but account for only 40
percent of GDP. Germany, France, and the U.S. remain Italy's most
important export markets. Industrial activity is concentrated in
the north -- one of the most industrialized and prosperous areas in
Europe. By contrast, the center and the south in particular are
less developed. Unemployment in some areas is three times that of
the north and per capita incomes are substantially lower. End
summary.

OPENNESS TO FOREIGN INVESTMENT
--------------


4. Foreign direct investment in Italy is generally welcomed and

encouraged. The current government, headed by Prime Minister Romano
Prodi, offers strong rhetorical support for foreign investment and
trimming bureaucratic obstacles to economic activity, but has been
able to accomplish little in the way of substantive reform due to
the fragility of the eight party center-left coalition. For
example, members of Prodi's coalition prevented a 25 billion euro
merger between the Spanish company Abertis and an Italian toll-road
operator. GOI opposition to the so-called "Abertis-Autostrade" deal
illustrates an unwillingness to allow foreign investment in large,
high-profile Italian companies. Similarly, in April 2007, AT&T
withdrew its bid for Telecom Italia, Italy's telecom company. AT&T
did not specify the reason for its withdrawal, but may have been
dissuaded by political opposition to the sale of Telecom Italian to
a foreign company. Although Prime Minister Romano Prodi said he
would not block the sale, he and several of his ministers said they
hoped an "Italian solution" could be found. AT&T's decision
reflects a widespread opinion that it is becoming harder to do
business in Italy. GOI efforts to sell its 49.9 percent share of
Alitalia, Italian flag carrier, have also been hampered by concerns
about regulatory transparency, hostile labor unions, and the
possibility of government intervention. In this case as well, an
American-led group walked away when the opacity of the process was
revealed and labor and political hostility emerged.


5. As an EU Member State, Italy is bound by EU treaties and
legislation, some of which have an impact on business investment.
As specified under the right of establishment set forth in the EU
treaty (1957 Treaty of Rome),Italy provides national treatment to
foreign investors established in Italy or in another EU member
state, except in a few instances. Exceptions include limited access
to government subsidies for the film industry, added capital
requirements for banks domiciled in non-EU member countries, and
restrictions on non-EU-based airlines operating domestic routes.
Italy also has restrictions in the shipping sector.


6. The GOI does have the authority to restrict foreign investment
in some cases. The government can block mergers involving foreign
firms for "reasons essential to the national economy" or if the home
government of the foreign firm applies discriminatory measures
against Italian firms. Industrial sectors such as defense and
aircraft manufacturing are either closely regulated or are
off-limits to foreign investors. EU and Italian anti-trust laws
give EU and Italian authorities the right to review mergers and
acquisitions over a certain financial threshold.


7. Foreign investors are not prevented from investing in the
privatization of government-owned companies, except in the defense
sector. Privatization strategies often entail the GOI retaining a

ROME 00000126 002 OF 013


"golden share" (a government stake with controlling authority) in
the company or establishing a core group of Italian of shareholders
who agree to keep their shares for a minimum period. Italy is the
only EU member country to keep wide-ranging "golden share" regimes
for privatized companies. According to EU data, there are 20
EU-based companies in which Member States hold a golden share --
five of these are Italian (Eni, Enel, Finmeccanica, Terna, and
Telecom Italia).


8. The Italian Trade Commission (ICE) reported in January 2007 that
7,200 foreign companies operate in Italy, employing almost one
million workers. According to ICE, the stock of foreign investment
in Italy equals 12 percent of GDP, far less than many EU nations.
Approximately 77 percent of foreign companies operating in Italy are
located in the north, with the Lombardy Region alone hosting 46
percent. The ICE study cited as key obstacles to foreign
investment: labor taxes, lack of labor flexibility, red tape, and
high corporate taxes.


9. The World Economic Forum's 2007-2008 World Competitive Survey
ranked Italy 46th among the 122 countries surveyed; this is a slight
improvement from Italy's ranking in 2006 of 47th, but does not
reflect a substantial improvement in terms of performance. Italy's
weak points are macroeconomic fragility (related to the level of
public debt),inefficiency in the labor market, lack of
infrastructure, and institutional and bureaucratic inefficiencies.
Italy's strong points are the quality of health care and the primary
education system, the diffusion of technologies, and the level of
sophistication of the internal systems of Italian companies. Press
reports also cite difficulties in obtaining Italian visas to work in
certain sectors (the fashion industry, for example).


10. A measure passed as part of the 2008 budget will allow Italian
consumers to file class action lawsuits against corporations. The
measure goes into force in July 2008. Some observers predict class
action lawsuits will become a powerful tool for consumers' rights,
pointing to planned class action suits against a water company for
water shortages and another against the President of the Campania
Region for failure to resolve the region's waste emergency. The
Italian industrialist's association, Confindustria, opposed the
legislation, arguing it will threaten the competitiveness of Italian
manufacturing. Some observers have warned this legislation may have
unexpected consequences, but at this point it is too early to gauge
its impact.


CONVERSION AND TRANSFER POLICIES
--------------


11. In accordance with EU directives, Italy has no foreign exchange
controls. There are no restrictions on currency transfers, only
reporting requirements. Banks are required to report any
transaction over 5,000 euro (USD7,500) due to money laundering and
terrorism financing concerns. Profits, transfers, payments, and
currency transfers may be freely repatriated. Residents and
non-residents may hold foreign exchange accounts.


EXPROPRIATION AND COMPENSATION
--------------


12. The Italian constitution permits expropriation of private
property for "public purposes," defined as essential services or
indispensable for the national economy. In fact, compensation is
guaranteed and must adequately compensate the proprietor for losses.
There are a few long-standing disputes in Italy involving U.S.
citizens who assert that municipal governments unjustly expropriated
their real property or inadequately compensated them. These
disputes do not reflect any GOI discrimination against U.S.
investments, companies, or representatives in any specific sector of
activity.


DISPUTE SETTLEMENT
--------------


13. Italy's inefficient judicial system is frequently cited as a
deterrent to foreign Investors. Civil trials average seven years in
length. U.S. investors in Italy can choose among different means of
dispute resolution. The method chosen should be specifically set
forth in a contract.


14. Though notoriously slow, the Italian legal system is consistent
with generally recognized principles of international law, with

ROME 00000126 003 OF 013


provisions for enforcing property and contractual rights. Italy has
a written and consistently applied commercial and bankruptcy law.
While the Italian judiciary is considered independent of the
government, Italian judges may engage in political partisanship.
Italian courts accept and enforce foreign judgments only upon
request.


15. At the end 2007, the GOI approved new bankruptcy regulations
which went into effect on January, 1, 2008. The new regulations --
analogous to U.S. Chapter 11 restructuring -- provide more
flexibility between parties to reach a solution before declaring
bankruptcy. The judicial role in bankruptcy procedures has been
drastically limited to simplify and speed up the process. The new
regulations change the requirements for declaring a company
insolvent, and they encourage corporate reorganization or debt
restructuring as an alternative to liquidation.


16. Italy is a member of the World Bank's International Center for
the Settlement of Investment Disputes (ICSID). Italy has signed and
ratified the Convention on the Settlement of Investment Disputes
Between States and Nationals of Other States, and is a signatory of
the New York Convention of 1958 on the Recognition and Enforcement
of Foreign Arbitral Awards.


PERFORMANCE REQUIREMENTS/INCENTIVES
--------------


17. The GOI is in compliance with WTO Trade-Related Investment
Measures (TRIMS) obligations. Foreign investors face specific
performance requirements only in the telecommunications sector.
However, this has not deterred foreign investment in
telecommunications. For example, in 2005, Weather Investments,
owned by an Egyptian financier, bought Wind, Italy's second largest
telecommunications company; Vodafone, Italy's second largest mobile
operator, is also foreign-controlled.


18. The GOI offers incentives to encourage private sector
investment in economically depressed regions, particularly southern
Italy. (For more details, please visit the website:
www.InvestinItaly.com.) The Ministry of Universities and Research
has identified, funded, and signed Framework Program Agreements with
eleven "Technology Districts" and public-private joint laboratories
focused on strategic sectors. Technology Districts, created to
facilitate cooperation between public and private researchers and
venture capitalists, support the research and development of key
technologies, strengthen industrial research activities, and promote
innovative behavior in small- and medium-sized enterprises.


19. The Italian tax system does not discriminate between foreign
and domestic investors. The 2008 budget reformed the structure of
the tax system (Legislative Decree No. 344/2003),reducing corporate
income tax (IRES) rates by 5.5 nominal points from 33 to 27.5
percent, and trimming the regional business tax (IRAP) from 4.35 to
3.9 percent. These tax cuts are in response to increased
competition for investment, particularly as the enlargement of the
EU to 27 members brought Italy into competition with low cost, low
tax East European states. In addition, Germany's decision to cut
its corporate tax rates by ten points made Italy's corporate tax
rate the highest in the EU.


20. The GOI has tried to off-set the effect of corporate tax cuts
on public finances by introducing compensatory measures. They
include:

-- setting new limits to the deductibility of interest;

-- abolishing accelerated depreciation;

-- revising the tax treatment of consolidated reporting; and

-- increased enforcement of existing tax laws (cracking down on tax
evasion).


RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
--------------


21. There is no limitation in the Italian constitution or civil law
on the right to private ownership and establishment.


PROTECTION OF PROPERTY RIGHTS
--------------

ROME 00000126 004 OF 013




22. Enforcement of Intellectual Property Rights (IPR) remains a
serious problem in Italy. It does not meet standards of other
developed Western European countries in IPR enforcement. Relatively
few IPR cases are brought to trial, and judges are generally
reluctant to sentence offenders to prison. The Customs Police
actively seizes pirated and counterfeit goods along the border.
Italy's national financial police force, the Guardia di Finanza, has
grown more effective in IPR enforcement. However, many local
governments do little to stop the sale of pirated and counterfeit
goods by street vendors.


23. In April 2005, Italy enacted a new law empowering police to
fine consumers of pirated and counterfeit items up to 10,000 euro.
In 2006, several municipalities, such as Florence, began to
undertake aggressive publicity campaigns to alert Italians and
foreign tourists of the new law.


24. Italy is a member of the Paris Union International Convention
for the Protection of Industrial Property (patents and trademarks)
to which the United States and about 85 other countries adhere.
U.S. citizens generally receive national treatment in acquiring and
maintaining patent and trademark protection in Italy. After filing
a patent application in the United States, a U.S. citizen is
entitled to a 12-month period within which to file a corresponding
application in Italy and receive rights of priority. Patents are
granted for 20 years from the effective filing date of application
and are transferable. U.S. authors can obtain copyright protection
in Italy for their work first copyrighted in the United States,
merely by placing on the work, their name, date of first
publication, and the symbol (c).


25. In 2000, the Italian Parliament enacted a long-awaited
"anti-piracy" law, providing for higher criminal penalties,
including prison sentences of up to four years, for copyright (IPR)
violations. Largely because of the enactment of this law (thought
to be among the best in the EU),Italy has since been removed from
the U.S. Trade Representatives Special 301 IPR "Priority Watch
List." Italy remains on the Special 301 Watch List, however,
because of its continuing failure to enforce this and other IPR
protection laws.


26. Copyrighted works sold in Italy generally must bear a sticker
issued by SIAE, a royalty collection agency operating under
authority from the Ministry of Culture. While the music and film
industries are largely satisfied with the stickering system,
software industry associations have complained the system remains
overly burdensome and fails to provide adequate protection from
piracy. In January 2001, the Italian government approved exemptions
for software purchased for business use from the SIAE sticker
requirement.


27. In 2005, Italy's Parliament passed legislation that some
copyright industry associations believe weakens Italy's IPR legal
framework. Italy's Internet piracy statute was revised to reduce
criminal sanctions for on-line piracy conducted without a profit
motive. While illegal file sharing technically remains a crime,
only those who engage in piracy for monetary gain now face jail
time, while all others face administrative fines only. In 2005,
Parliament passed the "ex-Cirielli" law which shortened the period
after which criminal cases pending trial are automatically
dismissed. Separately, a broad amnesty was passed in 2006, which IP
industries believe voided many sentences and criminal prosecutions
against IPR pirates.


TRANSPARENCY OF THE REGULATORY SYSTEM
--------------


28. In an effort to improve accountability and competition in the
wake of the 2003-04 collapse of the dairy firm Parmalat and the
scandal which ensued, Italy's Parliament approved a law in December
2005 to overhaul the Bank of Italy and improve corporate governance
and oversight. Italy also is subject to single market directives
mandated by the EU, which are intended to harmonize regulatory
regimes among EU countries.


29. The 2008 "Index of Economic Freedom," published by the Wall
Street Journal and Heritage Foundation, ranked Italy as having "the
world's 64th freest economy." The study highlighted government
interference in the economy, corruption, and a slow court system as
contributing to Italy's ranking below less developed nations such as
Uganda, Belize, and Jamaica.


ROME 00000126 005 OF 013



30. According to a 2004 World Bank study, an entrepreneur wishing
to start a business in Italy must follow 16 procedures, spend an
average of 62 days, and pay around USD 5,000 in fees. The study
found that it costs more to open a business in Italy than anywhere
else in Europe, with the exceptions of Greece and Austria.
Government efforts to enable entrepreneurs to "open a business in a
day" have not been successful.


EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
-------------- --------------


31. Financial resources flow relatively freely in Italian financial
markets and credit is allocated on market terms. Foreign
participation in Italian capital markets is not restricted; foreign
investors are able to get credit on local markets and have access to
a variety of credit instruments. The Italian stock exchange ("Borsa
Italiana") has fewer than 300 companies. In recent years, Borsa
Italiana established two new segments of the market devoted to
smaller companies: "STAR" and "Mercato Expandi," launched in 2001
and 2003, respectively. In 2007, the Borsa merged with the London
Stock Exchange. There is some expectation that governance standards
of the Milan market will improve as a result.


32. Financial services companies incorporated in another EU member
state may offer investment services in Italy without establishing a
local presence. U.S. and other firms based in non-EU member states
may operate under authorization from Italian Companies and Stock
Exchange Commission (CONSOB),the oversight authority for securities
markets, corporate governance, and company audits.


33. Previously, Italian government bonds absorbed a large share of
available domestic investment. This share has declined as interest
rates on government bonds dropped during Italy's preparation for the
EU economic and monetary union. Even with lower yields, Italian
government bonds are considered a safe haven for domestic investors
burned by defaults on Argentinean, as well as Parmalat and Cirio
bonds.

BANKING
--------------


34. The banking sector has undergone significant consolidation in
the last decade, with about 60 percent of total Italian banking
assets involved. Following the appointment of Marco Draghi as Bank
of Italy Governor, Mario Draghi, the process of consolidation picked
up sharply. The top five banks' market share is larger than in
Germany, but smaller than in France. Two major mergers have been
implemented in 2007 involving Intesa and San Paolo-IMI, Unicredit
Group and Capitalia. These transactions created Italy's two largest
banking groups. These groups are now major players in the European
market. Other transactions involved cooperative banks. In April
2007, Banche Popolari Unite and Banca Lombarda e Piemontese created
a new cooperative bank group named Unione di Banche Italiane (UBI
Banca),Italy's fifth largest bank. In July 2007, the merger
between Banco Popolare di Verona e Novara and Banca Popolare
Italiana created Italy's largest cooperative banking group, Banco
Popolare. In November 2007, Monte dei Paschi di Siena (MPS) bought
Banca Antonveneta from Spain's Banco Santander. MPS was the last of
the large Italian banks not to merge or be acquired. This purchase,
in a rapidly consolidating market, will make the Tuscan-based bank
Italy's third largest lender with around 3,000 branches and a strong
presence in the prosperous north-east of Italy. Currently, the
country's largest banks are: Unicredit Group, Intesa San Paolo,
Monte dei Paschi di Siena, Banco Popolare, and UBI Banca. The total
assets of Italy's five largest banks are equal to 53.5 percent of
total banking assets.


35. Efficiencies obtained from mergers and the entry of foreign
banks are expected to have an impact on retail banking fees,
currently among the highest in Europe. Bank of Italy Governor
Draghi has stated a clear preference for increased competition in
Italian credit and banking markets and has urged Italian banks to
become more competitive by cutting high transaction charges. Draghi
believes that domestic banking consolidation has been too slow and
that Italian banks should proactively merge among themselves to be
more competitive against foreign banks. Draghi has publicly stated
that, while "patriotism is a virtue, it must be practiced under set
rules, which these days are European, and not protectionist."


36. Non-bank companies (either Italian or foreign) are not allowed
to acquire more than 15 percent of a bank's capital. Complex
cross-shareholding has often been used to fight off takeover
attempts in the financial sector. The presence of foreign

ROME 00000126 006 OF 013


intermediaries on the Italian market expanded in the last several
years. In late 2005, the Dutch Bank ABN-AMRO obtained complete
control of an Italian medium-sized bank, Banca Antonveneta, recently
sold to Monte Dei Paschi di Siena; while in May 2006, the French
banking group BNP Paribas acquired full control of Banca Nazionale
del Lavoro, one of Italy's primary banks. Credit Agricole acquired
a controlling interest in Cassa di Risparmio di Firenze, di Parma e
Piacenza and Banca Popolare Friuladria.

POLITICAL VIOLENCE
--------------


37. Political violence is a low threat to foreign investments in
Italy.

CORRUPTION
--------------


38. Italy ratified the 1997 OECD Convention on Combating Bribery in
September 2000. Italy has signed, but not ratified, the United
Nations Convention Against Corruption, which was adopted in 2003 and
came into force on December 14, 2005. Anecdotal evidence strongly
suggests that corruption remains a serious problem, especially in
southern Italy. For example, in the city of Taranto, corruption and
the serious mismanagement of public funds resulted in the city's
"bankruptcy," with 700 million euro of debt.


39. Transparency International's Corruption Perceptions Index 2007
ranked Italy the 4lst least corrupt country in the world, up from
its 2006 ranking of 45th. Italy is mentioned among the countries
that have significantly improved their rating since the 2006 index.
Nevertheless, it trails all West European states with the exception
of Greece.


40. Corruption is punishable under Italian law. In January 2003,
Italy enacted a law creating a High Commissioner to prevent and
combat bribery within public administration. As in all judicial
processes, much discretion regarding punishment is left to the
presiding judge. Most corruption in the recent past has involved
government procurement or bribes to tax authorities. Bribes are not
considered deductible business expenses under Italian tax law.


41. Organized crime is present throughout Italy, but is
concentrated in four regions of the south (Sicily, Calabria,
Campania, and Puglia). In September 2007, the Italian confederation
of trade, tourism, and service company operators released a report
estimating that organized crime (Mafia, Camorra, 'Ndrangheta and
Sacra Corona Unita) is Italy's largest "company" with sales of 90
billion euro, or seven percent of GDP. Organized crime is involved
in racketeering, loan sharking, drug smuggling, and prostitution.


42. Researchers estimate Italy's underground economy may be
equivalent to between 17 and 27 percent of GDP. A great deal of
economic activity is kept "underground" to avoid taxation.


BILATERAL INVESTMENT AGREEMENTS
--------------


43. As of December 2007, Italy has bilateral investment agreements
with the following countries:

Albania
Algeria
Angola (signed, not enforced)
Argentina
Armenia
Azerbaijan
Bangladesh
Barbados
Belarus
Belize (signed, not enforced)
Bolivia
Bosnia and Herzegovina
Brazil (signed, not enforced)
Bulgaria
Cape Verde (signed, not enforced)
Chad
Chile
China
Colombia (signed, not enforced)
Congo
Cote d'Ivoire (signed, not enforced)
Croatia

ROME 00000126 007 OF 013


Cuba
Czech Republic
Democratic Republic of Congo (signed, not enforced)
Dominican Republic (signed, not enforced)
Ecuador (signed, not enforced)
Egypt
Eritrea
Estonia
Ethiopia
Gabon
Georgia
Ghana (signed, not enforced)
Guatemala (signed, not enforced)
Guinea
Hong Kong, China
Hungary
India
Indonesia
Iran, Islamic Republic of
Jamaica
Jordan
Kazakhstan
Kenya
Korea, DPR of (signed, not enforced)
Korea, Republic of
Kuwait
Latvia
Lebanon
Libya
Lithuania
Macedonia, Republic of
Malawi (signed, not enforced)
Malaysia
Malta
Mauritania (signed, not enforced)
Mexico
Moldova, Republic of
Mongolia
Morocco
Mozambique
Nicaragua
Nigeria
Oman
Pakistan
Paraguay (signed, not enforced)
Peru
Philippines
Poland
Qatar
Romania
Russian Federation
Saudi Arabia
Slovakia
Slovenia
South Africa
Sri Lanka
Sudan (signed, not enforced)
Syrian Arab Republic
Tunisia
Turkey
Uganda
Ukraine
United Arab Emirates
Tanzania, United Republic of
Uruguay
Uzbekistan
Venezuela
Vietnam
Yemen (signed, not enforced)
Zambia (signed, not enforced)
Zimbabwe (signed, not enforced)

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
--------------


44. The U.S. Overseas Private Investment Corporation (OPIC) does
not operate in Italy. However, in March 2003, OPIC signed a
Memorandum of Understanding with its Italian counterpart, SIMEST
(Societa Italiana per le Imprese all'Estero),to expand
cooperation, particularly on projects in third countries. Italy,
through its Export Credit Agency, SACE, has signed a memorandum of
understanding with the World Bank's Multilateral Investment
Guarantee Agency (MIGA).


ROME 00000126 008 OF 013


LABOR
--------------


45. Unemployment in Italy is moderate at 5.6 percent (third quarter
2007),below the average of 7.3 percent among euro zone countries
(September 2007). Italy's unemployment rate is currently at the
lowest level since 1992. This reflects liberalized temporary labor
regulations, legalization of some underground employment, and
Italy's slight economic recovery. Traditional regional disparities
remain unchanged, with the southern third of the country posting a
10.3 percent unemployment rate -- compared to 3.3 percent in
northern and 4.7 percent in central Italy. Despite these
differences, internal migration within Italy remains modest. Labor
shortages in the North are often filled by unskilled and
semi-skilled immigrants from Eastern Europe or North Africa.


46. Italy's labor force is fairly well-educated. According to a
2006 national survey, 9.7 percent of people aged 15 and older held
university degrees and 42 percent completed upper secondary
education. According to the OECD 2005 Economic Review of Italy, the
private internal rate of return -- which measures incentives to
invest in human capital -- is much lower for higher education than
the OECD average, indicating there may be limited incentive for
Italians to pursue higher education. This is due to the fact that
persons with higher educations do not earn substantially more than
persons with upper secondary educations. Therefore, firms
interested in investing in Italy may have difficulties finding
highly specialized Italian employees.


47. There are legal obstacles to hiring and firing workers.
Companies may bring in a non-EU employee only after the
government-run employment office has certified that no qualified,
unemployed Italian is available to fill the position. Work visas
are subject to annual quotas, although intra-company transfers are
exempt from quota limitations.


48. In recent years, the Italian labor market has become somewhat
more flexible. A series of legal reforms has encouraged the hiring
of part-time employees by reducing employer social security
contributions for these workers. New laws have also created
opportunities for outsourcing, job-sharing, and use of private
employment services. New types of contracts now exist that allow
for reduced labor costs. However, high costs and legal obstacles
associated with laying-off workers still remain a disincentive to
adding employees.


49. Italy is an International Labor Organization (ILO) member
country. Terms and conditions of employment are periodically fixed
by collective labor agreements in different professions. Most
Italian unions are grouped into four major national confederations:
the General Italian Confederation of Labor (CGIL),the Italian
Confederation of Workers' Unions (CISL),the Italian Union of Labor
(UIL),and the General Union of Labor (UGL). The first three
organizations are affiliated with the International Confederation of
Free Trade Unions (ICFTU),while the UGL has been associated with
the World Confederation of Labor (WCL). The confederations
negotiate national level collective bargaining agreements with
employer associations, which are binding on all employers in a
sector or industry.

FOREIGN TRADE ZONES/FREE PORTS
--------------


50. There are two free trade zones in Italy, located in Trieste and
Venice, both in the northeast. Goods of foreign origin may be
brought in without payment of taxes or duties, as long as the
material is to be used in the production or assembly of a product
that will be exported. The free-trade zone law also allows a
company of any nationality to employ workers of the same nationality
under that country's labor laws and social security systems.

Benefits of the free-trade zones include:

-- Customs duties deferred for 180 days from the time the goods
leave the free trade zone to enter another EU country.

-- The goods may undergo transformation free of any customs
restraints.

-- Absolute exemption from any duties on products coming from a
third country.

U.S. Companies in Italy
--------------

ROME 00000126 009 OF 013




51. The largest U.S. companies in Italy, based on number of
employees, are: IBM, General Electric, Pfizer, Whirlpool,
Electronic Data Systems (EDS),Accenture, Lear, and United
Technologies.

FOREIGN DIRECT INVESTMENT STATISTICS
--------------


52. Italy lags behind many of its fellow EU member states in
attracting and maintaining foreign investment. According to Bank of
Italy figures, net foreign investment into Italy in 2006 totaled USD
29.9 billion (equal to 1.0 percent of GDP),well below its euro zone
counterparts. Notably, inflows were exceeded by outflows - USD 34.1
billion in 2006.

Table 1: Italian Foreign Direct Investment Inflows by Economic
Sector (Net) 2003-2006 (USD Millions) (1) (*)

2003 2004 2005 2006

Agriculture 108.5 234.8 511.8 -662.1

Energy 1993.8 4463.3 10057.1 4104.3

Industry 5933.1 2016.2 6996.3 7549.0
of which:
Machine 2023.9 3690.7 1314.3 4871.9
Chemical 1066.8 -3535.4 441.0 168.3
Food 2483.5 362.7 2388.8 1839.2
Textiles 353.4 513.0 544.1 810.3
Mineral/Metal 468.5 687.0 1315.5 143.2
Other -463.0 298.2 992.6 -283.9

Building and
Public Works 363.0 125.7 205.0 283.9

Services 6634.2 9576.4 925.5 18639.5
of which:
Banking/
Insurance 2972.2 5749.1 1207.5 8810.3
Trade 410.4 36.0 653.4 3570.4
Transportation/
Communication -412.6 516.8 -11468.3 2027.6
Other Services
(Not For Sale)3664.4 3274.5 10532.9 4231.2

T O T A L 15031.9 16416.2 18695.7 29914.6


Table 2: Italian Direct Investment Outflows by Economic Sector (Net)
2003-2006 (USD Millions) (1) (*)

2003 2004 2005 2006

Agriculture 38.0 21.1 70.8 42.7

Energy 3450.7 5336.7 2675.8 3775.1

Industry 1332.9 7573.9 7629.8 13501.3
of which:
Machine -1393.3 4234.8 3684.5 9218.6
Chemical 721.2 1730.4 1730.4 2267.6
Food 295.2 151.6 206.2 623.1
Textiles 336.6 287.0 411.2 275.1
Mineral/Metal 274.0 246.0 600.0 -224.9
Other 1099.2 924.1 997.5 1341.8

Building And
Public Works 223.6 85.7 159.0 -113.1

Services 1935.7 5037.3 7444.7 16881.9
of which:
Banking/
Insurance 5492.6 2636.0 5164.6 10797.7
Trade 485.3 1060.9 923.0 1075.4
Transportation/
Communication-8217.6 -923.0 110.6 2069.1
Other Services
(Not For Sale)4175.4 2263.4 1264.6 2939.7

T O T A L 6980.9 18054.7 17980.1 34087.9



ROME 00000126 010 OF 013


Table 3a: Stock of Foreign Direct Investment in Italy by Major
Investors; Year End 2003-2006 (USD Millions) (1)

2003 2004 2005 2006

United States 19458.1 22448.3 21451.0 25826.1

EU (3) 114010.0 140651.5 145179.5 185773.4
of which:
France 21294.1 24608.6 25637.5 37040.8
Netherlands 26882.4 39009.4 40079.1 54304.3
United Kingdom 22266.6 26613.9 25434.5 30461.1
Germany 13797.2 14312.3 15309.3 11263.5
Luxembourg 18354.2 22336.5 24042.5 27911.7
Sweden 2967.5 3341.8 3034.2 3533.6
Belgium 2963.7 3335.1 1982.3 2353.1
Spain 1279.1 1941.0 4820.5 11764.2
Other EU (4) 4205.3 5286.9 4839.4 7141.0

Switzerland 18481.9 21872.7 20115.7 23446.6
Liechtenstein 1824.8 2105.9 1975.2 2330.7
Japan 2991.2 3595.2 3419.1 3967.1
Argentina 165.2 257.4 246.8 288.5
Brazil 78.8 128.7 184.2 320.2
Other 7806.0 9328.5 8747.3 10430.8

T O T A L 164,816.0 200,379.4 201,318.8 252,383.4


Table 3b: Stock Of Foreign Direct Investment In Italy by Major
Investors; Year End 2003-2006 (Percentage of Total)

2003 2004 2005 2006

United States 11.8 11.2 10.7 10.2

EU 69.2 70.2 72.1 73.6
France 12.9 12.3 12.7 14.7
Netherlands 16.3 19.5 19.9 21.5
United Kingdom 13.5 13.3 12.6 12.1
Germany 8.4 7.1 7.6 4.5
Luxembourg 11.1 11.1 11.9 11.1
Sweden 1.8 1.7 1.5 1.4
Belgium 1.8 1.7 1.0 0.9
Spain 0.8 1.0 2.4 4.7
Other EU (3) 2.6 2.6 2.4 2.7

Switzerland 11.2 10.9 10.0 9.3
Liechtenstein 1.1 1.1 1.0 0.9
Japan 1.8 1.8 1.7 1.6
Argentina 0.1 0.1 0.1 0.1
Brazil 0.0 0.1 0.1 0.1
Other 4.8 4.6 4.3 4.2

T O T A L 100.0 100.0 100.0 100.0


Table 4a: Stock Of Italian Direct Investment Abroad by Major
Recipient; Year End 2003-2006 (USD Millions) (2)

2003 2004 2005 2006

United States 18420.5 18851.2 19617.5 26118.6

EU 150010.0 182521.4 178145.2 217375.5
Netherlands 48455.6 63268.1 65081.5 89822.1
Luxembourg 21755.9 26363.3 25154.7 22632.4
France 20921.2 24344.5 23866.6 29574.4
United Kingdom 20270.3 24158.2 22617.5 24847.2
Germany 13065.1 15758.7 15004.7 18126.5
Spain 9871.1 10882.0 9866.6 12350.5
Belgium 4569.5 5308.3 4944.5 6254.3
Sweden 748.4 866.3 892.6 1087.0
Other EU (3) 10352.9 11572.4 10716.6 12681.1

Switzerland 10954.9 10559.0 10007.1 11411.1
Brazil 3473.1 3954.4 4935.1 5645.6
Argentina 2127.7 2178.3 2211.3 2308.3
Japan 1137.7 1249.9 1164.1 1196.2
Liechtenstein 169.0 194.4 175.9 200.3
Other 22342.9 24901.6 26460.5 41685.1

T O T A L 208635.8 244410.2 243982.3 305940.7


ROME 00000126 011 OF 013



Table 4b: Stock of Italian Direct Investment Abroad by Major
Recipient; Year End 2003-2006 (Percentage of Total)

2003 2004 2005 2006

United States 8.8 7.7 8.0 8.5

EU 71.9 74.7 73.0 71.1
of which:
Luxembourg 10.4 10.8 10.3 7.4
Netherlands 23.2 25.9 26.7 29.4
France 10.0 10.0 9.8 9.7
Germany 6.3 6.4 6.1 5.9
United Kingdom 9.7 9.9 9.3 8.1
Spain 4.7 4.5 4.0 4.0

Belgium 2.2 2.2 2.0 2.0
Sweden 0.4 0.4 0.4 0.4
Other EU (3) 5.0 4.7 4.4 4.2

Switzerland 5.4 4.3 4.1 3.7
Brazil 1.7 1.6 2.0 1.8
Argentina 1.0 0.9 0.9 0.8
Japan 0.5 0.5 0.5 0.4
Liechtenstein 0.1 0.1 0.1 0.1
Other 10.6 10.2 11.4 13.6

T O T A L 100.0 100.0 100.0 100.0


Table 5a: U.S. Investment in Italy by Economic Sector End-Year
2003-2006 (USD Millions) (2)

2003 2004 2005 2006


Agriculture 36.3 40.2 41.3 46.1

Energy 545.7 627.6 576.2 678.5

Industry 11812.3 13607.1 12958.7 15080.4
of which:
Machine 2635.8 2979.7 2792.2 3205.5
Transportation
Equipment 782.2 902.5 830.0 971.0
Chemical 3162.7 3689.1 3447.5 4031.6
Food 1667.1 1920.3 2003.5 2321.5
Textiles 230.3 273.6 260.9 304.3
Minerals/Metals 395.5 451.9 433.3 502.0
Other 2938.7 3390.0 3191.3 3744.4

Services 7063.8 8173.4 7874.8 10021.1
of which:
Trade 853.6 987.0 933.9 1097.5
Banking/
Insurance 3505.6 4008.2 3771.0 4789.2
Transportation/
Communication 582.0 666.5 636.4 1055.3
Other Services 2122.7 2511.7 2533.5 3079.1

T O T A L 19458.1 22448.3 21451.0 25826.1


Table 5b: U.S. Investment in Italy by Economic Sector End-Year
2003-2006 (Percentage of Total)

2003 2004 2005 2006

Agriculture 0.2 0.2 0.2 0.2

Energy 2.8 2.8 2.7 2.6

Industry 60.7 60.6 60.4 58.4
of which:
Machine 13.6 13.3 13.0 12.4
Transportation
Equipment 4.0 4.0 3.9 3.8
Chemical 16.3 16.4 16.1 15.6
Food 8.6 8.6 9.3 9.0
Textiles 1.2 1.2 1.2 1.2
Minerals/
Metals 2.0 2.0 2.0 1.9
Other 15.0 15.1 14.9 14.5

ROME 00000126 012 OF 013



Services 36.3 36.4 36.7 38.8
of which:
Trade 4.4 4.4 4.3 4.2
Banking/
Insurance 18.0 17.9 17.6 18.5
Transportation/
Communication 3.0 3.0 3.0 4.1
Other Services 10.9 11.1 11.8 12.0

T O T A L 100.0 100.0 100.0 100.0


Table 6a: Italian Investment in the U.S. by Economic Sector --
End-Year 2003-2006 (USD Millions) (2)

2003 2004 2005 2006

Agriculture 51.3 52.3 62.6 71.1

Energy 1816.0 1831.8 1877.2 2075.1


Industry 7061.3 7254.8 7589.1 13080.4
of which:
Machine 2732.2 2777.2 2850.1 7910.4
Transportation
Equipment 863.6 950.8 966.9 1001.3
Chemical 261.6 205.2 212.5 332.0
Food 264.1 273.6 289.3 304.3
Textiles 724.7 741.6 813.5 851.1
Minerals/
Metals 1541.9 1589.1 1637.5 1724.6
Other 673.3 717.3 819.4 956.7

Services 9491.9 9719.6 10088.5 10892.0
of which:
Trade 1142.7 1177.4 1201.9 1241.1
Banking/
Insurance 4434.3 4615.7 4796.9 5035.6
Transportation/
Communication 274.1 232.0 242.0 278.0
Other 3640.8 3694.5 3847.7 4337.3

T O T A L 18420.5 18858.5 19617.5 26118.6


Table 6b: Italian Investment in the U.S. by Economic Sector --
End-Year 2003-2006 (Percentage of Total)

2003 2004 2005 2006

Agriculture 0.3 0.3 0.3 0.3

Energy 9.9 9.9 9.6 7.9

Industry 38.8 38.3 38.7 50.1
of which:
Machine 14.3 14.8 14.5 30.3
Transportation
Equipment 4.5 4.7 4.9 3.8
Chemical 2.9 1.4 1.1 1.3
Food 1.4 1.4 1.5 1.2
Textiles 3.8 3.9 4.2 3.3
Minerals/
Metals 8.3 8.4 8.3 6.6
Other 3.6 3.7 4.2 3.6


Services 51.0 51.5 51.4 41.7
of which:
Trade 4.0 6.2 6.1 4.8
Banking/
Insurance 24.0 24.1 24.5 19.3
Transportation/
Communication 2.6 1.5 1.2 1.1
Other 20.4 19.7 19.6 16.5

T O T A L 100.0 100.0 100.0 100.0


Table 7: Direct Investment by Origin and Destination End-Year 2006
(USD Millions) (4)


ROME 00000126 013 OF 013


Foreign Italian Net
Investment Investment Italian
in Italy Abroad Position

EU 185773.4 217375.5 31602.1
of which:
United Kingdom 30461.1 24847.2 -5614.0
Netherlands 54304.3 89822.1 35517.8
Germany 11263.5 18126.5 6863.0
France 37040.8 29574.4 -7466.4
Spain 11764.2 12350.5 586.3
Luxembourg 27911.7 22632.4 -5279.3
Belgium 2353.1 6254.3 3901.2
Sweden 3533.6 1087.0 -2446.6
Other (3) 7141.0 12681.2 5540.2

Non-EU 66610.0 88565.2 21955.2
of which:
USA 25826.1 26118.6 292.5
Switzerland 23446.6 11411.1 -12035.6
Liechtenstein 2330.7 200.3 -2130.4
Japan 3967.1 1196.3 -2770.8
Canada 940.7 1370.2 429.5
Argentina 288.5 2308.3 2019.8
Brazil 320.2 5645.6 5325.4
Other 9490.1 40314.9 30824.8

T O T A L 252383.4 305940.7 53557.3


(1) Annual net investment flow data compiled by Embassy Economic
Section, based on Bank of Italy data and converted at the following
end-year exchange rates:

2003 2004 2005 2006

Euro/Dollar 0.894 0.805 0.805 0.796

Net = New Investment Less Disinvestment. The volatility and huge
changes from year to year in some sections can be explained in part
by the fact that listed data are "Net": New Investment Minus
Disinvestment.

(2) Compiled by the Economic Section of the Embassy based on Bank of
Italy data and converted at the following end year exchange rates:

2003 2004 2005 2006


Euro/Dollar 0.799 0.746 0.847 0.759

(3) Austria, Denmark, Finland, Portugal, Greece, Ireland (other EU
25 countries),plus Cyprus, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.

(4) Original data in euro and converted at the end-2006 exchange
rate of one dollar = 0.759 euro.

Sources: Bank Of Italy Annual Report 2006.

SPOGLI