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

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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

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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).




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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

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8. (U) There is no doubt that the South was in deep need of

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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

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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."


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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

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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

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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

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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