FIXING ITALY'S SOUTHERN PROBLEM: BERLUSCONI'S "NEW DEAL"

UNCLAS SECTION 01 OF 05 NAPLES 000090 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PGOV ECON EFIN KCOR KCRM IT SUBJECT: FIXING ITALY'S SOUTHERN PROBLEM: BERLUSCONI'S "NEW DEAL" REF: (A) NAPLES 53 (B) 08 NAPLES 73 NAPLES 00000090 001.2 OF 005 SENSITIVE - HANDLE ACCORDINGLY ¶1. (SBU) Summary: Using American comparisons such as "New Deal" and "Marshall Plan," Prime Minister Silvio Berlusconi has outlined his government's new plan for the South, which he intends to supervise personally. The three priority sectors are infrastructure, tourism, and innovation. The Italian Government has released billions of euros of public funding, intended for "under-utilized areas," chiefly for infrastructure development, to make the South more competitive before EU structural funds run out in 2013. Yet at the same time, southern Italy sends millions of euros of those very structural funds back to Brussels each year because it is unable to spend them. All of southern Italy's economic indicators lag significantly behind the rest of Italy and indeed most of the rest of Europe, and have done so for decades. Italy's South remains the only region on which the EU has lavished development funding which has failed to develop. The region's infrastructure is woefully inadequate because projects take decades to complete, thanks to weak political leadership, poor oversight, rampant corruption, and organized crime. Fixing Italy's "southern problem" has become this summer's political sport in Italy, with parties competing to prove to southern voters that they care more about bringing the South out of its spiral of decline, while the Northern League flexes its muscle and proposes two-tier North-South solutions. However, all the money being showered on the South will have limited impact if three conditions are not met: more effective political leadership, capable of ensuring that projected and funded projects are completed on time, within budget, and according to standard; zero tolerance for organized crime and corruption in the public bidding and contracting process; and a fundamental change in culture to create a civil society. The best news in the South this year may actually be the establishment of the first "community foundation" in the South, in Salerno -- a story of a community investing in itself, rather than asking for handouts from anyone. The most important structural changes that need to take place in southern Italy are cultural transformations that even billions of euros cannot buy. End Summary 
AID PLAN FOR THE SOUTH -------------- ¶2. (SBU) In an August 9 interview with Naples daily "Il Mattino," Prime Minister Berlusconi outlined his new plan for the South, which he likened to Roosevelt's "New Deal" or a "Marshall Plan for the South." Already on July 31 the Italian Government had announced the release of 4.3 billion euros of special funding (intended for "under-utilized areas," 85 percent of which are in the South) for Sicily, chiefly for large infrastructure projects, including the bridge over the Strait of Messina -- an important symbol of Italian unity, but which will take decades to construct if it is built at all. Prime Minister Berlusconi's previous refusal to unblock the funds -- on the pretext that the region would not use them wisely -- precipitated a government crisis in Palermo in May in which Regional President Raffaele Lombardo dissolved his cabinet. The central government plans to release similar funds in the coming weeks for Apulia, Molise, and other southern regions, once they have submitted spending plans and those plans have been approved. ¶3. (U) The aid plan for the South is billed as a ten-year project, with its centerpieces a development agency, which Berlusconi will personally oversee, and a Bank of the South, using the existing network of cooperative credit banks, with 600 outlets across the South and holdings of 14.6 billion euros. Berlusconi compared the future development agency to the first "Cassa del Mezzogiorno," which between 1955 and 1976 wiped out malaria, constructed tens of thousands of kilometers of roads, and brought potable water to 12 million people. The Bank, which is to be operational in September, will make credit available for projects to relaunch the southern economy. The element in Berlusconi's proposal which has attracted the most media attention is the idea of tying wages in national labor contracts to the varying cost of living in Italy's regions (see para. 6 below). NAPLES 00000090 002.2 OF 005 ¶4. (SBU) The (Northern League) Minister for Simplification of Legislation Roberto Calderoli called the proposal "positive," but clearly the government will have to convince its coalition partner that this development plan for the South does not walk back the reality of fiscal federalism. The opposition Partito Democratico spokesman for the South called the plan "a smokescreen for the devastating anti-South policy perpetrated over the past year." The opposition claims that the plan is nothing new -- that the FAS funds were already allocated for "under-utilized areas," but that the central government has been diverting them to other purposes, to cover funding gaps in the current budget. Underlying the ongoing political debate over this assistance package is next year's electoral sweepstakes, in which the center-right hopes to win a number of southern governorships, currently held by the center-left. ¶5. (SBU) Berlusconi's timing appears to have been a reaction to plans by Sicilian Governor Lombardo (Movement for Autonomies), Gianfranco Micciche' (PdL),Under Secretary for the South and former President of the Sicilian Regional Assembly, and other southern governors from the center-left, to create a so-called "Partito del Sud" (Party of the South),to counter the increasing influence of the Lega Nord (Northern League) in Berlusconi's current coalition. Berlusconi bluntly termed the Partito del Sud "unacceptable," and in his "Mattino" interview referred to it as "a journalistic representation, rather than a political hypothesis." Micciche' now claims the new party is no longer needed, and it appears it was more of a bluff to get more money. Unlike the Lega, which has a predictable, homogenous platform, the idea of a southern party cobbled together from both left and right, with its only common thread the desire for more attention and funding for the South, was problematic from the start, but is periodically revived and probably will be in the future. Campania Governor Bassolino, who reportedly supported the concept initially, now calls a southern party "a misguided answer to a real problem"; instead of isolating the South, he said, the country needs to unite, hearing the "true arguments" of the Mezzogiorno. Lombardo clearly views himself as the pivotal figure in a continuing southern Italian political identity, a Mezzogiorno counterpart to the Northern League's Bossi; he has also proven himself to be a maverick inclined to do the unpredictable. ¶6. (SBU) The Northern League has struck back by proposing, among other measures, a two-tier North-South salary scheme for Italy, reflecting the results of a recent Bank of Italy study indicating that, on average, the cost of living in southern Italy is 16.5 percent less than in the North, a proposal with which Berlusconi apparently agrees. The IMF, in fact, in a recent analysis of Italy's long-term structural economic problems, recommended that new policies "strengthen the link between wages and productivity, allow wages to better respond to regional differences, and make permanent contracts more flexible." Most economists in Italy agree that wage uniformity cancels out whatever incentive investors may have to locate in less productive, economically difficult areas, like the South. ¶7. (SBU) Not everyone shares this view, however. The entire opposition, as well as the unions, have denounced the regrettably-named "wage cages" as counter-productive. However, some studies reveal that salaries in the South are already up to 20 percent lower than those in the North. And the price comparisons themselves can be misleading; although most of Italy's domestic sources of energy come from the South, energy prices are notably higher there. Southerners also feel it is unfair to compare the prices of services in the North and South when the difference in quality is enormous. Many Southerners choose to have medical procedures performed in Northern hospitals, where they have a much greater probability of getting well; a prominent prosecutor told the CG this past spring that virtually anyone can get a medical license in Calabria, and several cases of patients' dying during routine procedures in Calabria hospitals attracted national attention. THE SOUTHERN ECONOMY: BAD, AND WORSENING -------------- ¶8. (U) There is no doubt that the South was in deep need of NAPLES 00000090 003.2 OF 005 economic assistance even before the current recession. The annual report by SVIMEZ, the Association for the Development of Industry in the Mezzogiorno, issued in mid-July, not surprisingly once again painted a gloomy portrait of the region's economy. Campania's GDP dropped 2.8 percent in 2008. Industrial production in the South fell 3.8 percent in 2008. Although container traffic increased in 2008 by three percent in the Center-North, it decreased by four percent in the South. Investment in the South has fallen an average of 2.1 percent per year since 2001. Agriculture was the only sector that did well in the South in 2008, particularly in Basilicata, Abruzzo, Molise, and Apulia. The South's "real" unemployment rate is estimated at more than 22 percent, higher still among women and young people. One worker in five in the South is "irregular," that is, working in the informal economy, without a contract and benefits. Only 7.8 percent of the country's high-speed train lines are located in the South, although the region has a third of Italy's population. Migration, particularly by university graduates, to the North and abroad continues unabated; last year the South experienced a net loss of over 60,000 people, most of them university graduates. ¶9. (SBU) One major disincentive to investment in the South is environmental degradation, which particularly threatens the tourism sector. Although it would appear that the South could turn this problem into an asset by making reclamation a profitable sector, Legambiente Campania tells us that none of the millions of euros set aside for this activity are being spent. The Naples fifteen-year garbage emergency is officially scheduled to end on December 31, 2009, characterized by what Legambiente, Italy's principal environmental NGO, terms "the four Is: illegality, ineffectiveness, irresponsibility, and indecision." Twenty-seven defendants, including Campania's governor, Antonio Bassolino, have been on trial for over two years for fraud, and another two dozen indictments have been issued in connection with mismanagement of the crisis. The initial incinerator, which took nearly a decade to construct, finally started operation this past spring, although doubts remain that it respects EU norms. (In fact, our environmentalist contacts tell us that monitoring of the incinerator's exhaust has revealed unacceptable levels of dioxins and other toxic by-products.) Four others are scheduled for construction in the coming years, despite environmental concerns. A vast recycling campaign, undertaken in Naples a year ago, was a total flop; although the North recycles 42.4 percent of its waste, the South recycles only 11.6. Many Naples-area beaches remained empty this summer after a labor dispute at a purification plant resulted in coastal pollution. Seven million so-called "ecoballe" (bales of waste of uncertain origin, some of them surely containing toxic waste) litter the countryside and cannot be safely burned. The Consulate has proposed to the region an innovative new American gasification technology which produces nearly no emissions; however, the company's first Italian client will probably be in the province of Cosenza (Calabria). Finally, illegal toxic waste dumping in Campania, which has nearly fifty percent of Italy's contaminated land, continues unabated by organized crime. HOW THE MONEY WILL ACTUALLY BE SPENT -------------- ¶10. (U) The three main priorities of Berlusconi's "New Deal" for the South are infrastructure, tourism, and innovation. Details will not be forthcoming until September. The South's infrastructurelies woefully behind the North because of mismanagement organized crime. By far the most famous example of this ineffectiveness is the Salerno-Reggio Calabria highway, under construction for decades; its completion will surely be one of the highest priorities of the new plan. Construction was further delayed last year when one of the principal contractors lost its anti-Mafia certification. Even the cement has on occasion been found to be substandard, as a result of mafia cost--cutting. Until this major North-South axis is completed, and public contract management procedures are strengthened, it is difficult to imagine other projects succeeding. Likewise, the Naples subway construction is years behind schedule, originally planned for completion before the 1994 G-7 summit, and now forecast for completion twenty years after that target. In his "Mattino" interview Berlusconi acknowledged the need to overcome "the decision-making paralysis determined by too many bureaucratic conditions." NAPLES 00000090 004.2 OF 005 ¶11. (SBU) Tourism is a second priority for the Berlusconi government. Here again, infrastructure is key. The construction of a direct rail link between Naples and Bari, a long-term solution to growing congestion at the Naples airport, and upgrading of southern ports to handle ever-increasing cruise ship traffic will surely be priorities. As we pointed out in an interregional tourism conference the Consulate organized in Vibo Valentia (Calabria) in April, other barriers to further tourism development include the lack of a common tourist identity for southern Italy; an inadequate approach to hospitality, including foreign language competency; and government bureaucracy. The "New Deal" will presumably offer some kind of incentives for investors in the South, but it will need to ensure greater efficiency in the approval process; a major American hotel chain has had a proposal for a luxury property on the economically-depressed Calabrian coast languishing in the Italian bureaucracy for years. The single most effective measure public authorities could take quickly to improve foreign tourists' first impressions would be to set strict standards for the taxi drivers (many of them former convicts) at the region's airports, train stations, and ports, above all those of Naples, where taxi drivers frequently literally "take their fares for a ride," claiming the broken meters, phantom extra charges, or indirect routes that are common in the Third World. The City of Palermo recently took the extraordinary measure of selling taxi tickets at the airport to prevent over-charging. Minimal, or incomprehensible, English on the part of a wide array of southern service-providers in the tourist industry remains a critical shortfall. And the City of Naples' bimonthly bilingual tourist guide recently ceased publication altogether. ¶12. (U) Innovation is the third pillar of the government program for southern development, and one which appropriately parallels the U.S. Mission's Partnership for Growth and Partnership for Entrepreneurial Growth, through which we continue to assist our Italian counterparts in commercializing innovation, protecting intellectual property, and better utilizing venture capital and private equity as a source of finance. One of the first beneficiaries of the newly released funds for Sicily will be the Ri.MED Foundation, a consortium funded by the Italian Government, the Sicily Region, the National Research Council (CNR),and the University of Pittsburgh Medical Center, which already participates in ISMETT, a Palermo-based joint venture which is the leading transplant center in the Mediterranean and also conducts advanced cell research. Ri.MED will operate a biomedical research center in suburban Palermo, which is scheduled to create 600 highly qualified jobs when fully operational, and (it is hoped) will do its part to limit the brain drain. THE THREE BIG CHALLENGES: EFFICIENCY, LEGALITY, CIVIL SOCIETY -------------- -------------- ¶13. (U) The Berlusconi "New Deal," with its billions of euros for the South, will have limited impact if three conditions are not met: more effective political leadership, capable of ensuring that projected and funded projects are completed on time, within budget, and according to standard; zero tolerance for organized crime and corruption in the public bidding and contracting process; and a fundamental change in culture to create a civil society. All of these remain huge challenges, and it is unlikely they will be met in the short term. ¶14. (SBU) The latest Bankitalia study of good governance shows an alarmingly broad disparity between North and South. Over a quarter of southern youth prematurely abandon their education, compared with 16.8 percent in the Center-North (the national target is 10 percent by 2013). Thirty-five percent of southern students have limited competency in reading, compared with less than 15 percent in the Center-North, and nearly half of southern youth (47.5 percent) have limited ability in math, compared with 19.3 in the Center-North. Services to infants and the elderly fare no better. Barely one in five cities in the South offers day care centers, compared to one in two in the Center-North. Only 1.6 percent of senior citizens receive at-home assistance in the South, while their northern counterparts have already reached the 2013 national target of 3.5 percent. For the government's plan to work, the southern civil service, at all NAPLES 00000090 005.2 OF 005 levels, will have to make dramatic progress in improving its efficiency and customer service, and the political class will have to exercise real leadership, which at present is sorely lacking. ¶15. (SBU) The potential for corruption and organized crime infiltration in major infrastructure projects is enormous. Authorities in Calabria assured the CG this past spring that the bidding process for the anticipated bridge over the Strait of Messina would be "armored," but reports of scandals involving government officials involved in kickback schemes in contract awards are a nearly daily feature of the local news; the healthcare industry in Apulia and the highway speed cameras in the province of Caserta are merely the latest examples of illegal collusion between corrupt officials and government contractors or licensees. Berlusconi claims the government will use "all the resources at our disposition, including the armed forces" to oppose organized crime. ¶16. (U) Finally, any plan to improve the South's competitiveness will have a limited impact if there is not a fundamental change in culture to create a civil society. Arguably the most significant development in the South this year is not Berlusconi's multi-billion-euro plan, but rather the establishment of the first community foundation south of Bologna. The foundation was established by 63 small investors in Salerno this past April. Their 531,000 euros were matched by the Fondazione del Sud to create a one-million euro fund to assist residents of the province of Salerno. The foundation's founder, Giovanni Vietri, an international pasta entrepreneur from Salerno and President of the foundation of the local savings bank, went on a Voluntary Visitor Program to the United States earlier this year to learn more about venture philanthropy in the United States, and has already put in practice some of the eye-opening ideas he was exposed to. He told us recently that the provinces of Avellino and Benevento (both Campania) were interested in establishing similar foundations; Naples and Caserta, with their heavy organized crime presence, are clearly not yet ready. But the remarkable lesson of a community investing in itself -- instead of asking for handouts from the federal government or the European Union -- marks a major step in the social and economic evolution of the Mezzogiorno which cannot be underestimated. COMMENT -------------- ¶17. (SBU) While unquestionably the South needs more than just a shot in the arm to make it competitive with the Center-North, many of the structural changes required cannot be purchased, even with billions of euros. Indeed, to some extent the massive sums of government assistance -- while hopefully realizing their goal of improving infrastructure -- will reinforce, rather than remove, the decades-long practice of "assistenzialismo" (welfare-ism) across the South. Civil society is not something that any government can impose; for it to flourish on its own there is a fundamental need for strong leadership, an environment of legality, and a willingness for citizens to take responsibility. All these elements are lacking across the South. There will be continued debate over the coming months about whether to impose an official two-tier wage system, how to finance the infrastructure expenditures, even how to keep organized crime out of the bidding. But the most fundamental -- and least costly -- measures to transform the South are not even under discussion. End Comment. TRUHN