US embassy cable - 05ROME2002

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