US embassy cable - 03ROME2853

UNCLAS  ROME 002853 
 
SIPDIS 
 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, CARNES 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, IT, UN 
SUBJECT: ITALIAN EXPORTERS FACE DIFFICULTY WITH STRONGER 
EURO, BUT LONG-TERM EFFECTS MAY BE LIMITED 
 
 
1. (U) Summary: Italian exports, traditionally vulnerable 
to exchange rate fluctuations, are being hit by the 
Euro's appreciation versus the dollar. Exports to Italy's 
third most important market, the United States, are down 
eight percent on a 12-month year to year basis.  In 
addition to the Euro's appreciation versus the dollar, 
two other factors cast a pall over Italian exporters: 
Germany, Italy's largest export market, is in serious 
economic trouble, and SARS has suppressed consumer demand 
in Asia. One positive aspect of a depreciated dollar: the 
price of raw materials and oil, generally dollar- 
denominated, should fall, indirectly affecting the price 
of exports of manufactured goods.   Experts predict that 
long-term effects on Italian exports may be limited, as 
long as the Euro remains stable with regard to other 
major currencies and the dollar does not drop much 
further. End-summary 
 
The Euro's Value 
---------------- 
 
2. (U) The Euro reached its highest level ever against 
the U.S. dollar on May 27, with a rate of USD 1.1935/ 
Euro. Overall, the Euro is up against the dollar by more 
than 13 percent for the year and 30 percent over one year 
ago.  The Euro has strengthened, to a lesser extent, 
against the British pound (11 percent through end-May 
2003 and 14 percent over one year ago), and the Japanese 
yen (11 percent through end-May 2003 and 20 percent over 
one year ago). 
 
Effect on Italian Exports 
------------------------- 
 
3. (U) Italy has an export-led economy, with the United 
States representing the third largest foreign market for 
Italian exports. Italian exports have traditionally been 
highly susceptible to exchange rate fluctuations. Some 
leading Italian economists, including Central Bank 
Governor Antonio Fazio and Enrico Giovannini, an 
economist at the OECD, argue that Italy's exporters are 
even more susceptible than their European counterparts to 
currency fluctuations.  In his annual report on May 31, 
Fazio argued that the composition of Italian exports 
makes them highly vulnerable to import price trends. 
Italian exports, he pointed out, are specialized in 
furniture, leather products and non-mineral metals 
manufacturing. Consumer demand for such high-end consumer 
products, he contended, is particularly influenced by the 
import price. 
 
4. (U) Foreign trade with non-EU countries accounts for 
47 percent of Italy's total foreign trade. Clothing 
exports to non-EU markets represent 53.6 percent of total 
exports of clothing, of which 15.1 percent go to the U.S. 
Separately, footwear exports to non-EU countries account 
for 42.2 percent of overall exports of footwear, of which 
18.5 percent go to the U.S.  Of textile manufacturing 
machinery, 69.9 percent of total exports of this category 
go to non-EU countries, 12 percent of which are to the 
American market.  The U.S. also is the primary export 
market for the furniture sector. 
 
Latest Data 
----------- 
 
5. (U) On May 22, a leading economic think tank, Istat, 
released data through April of Italy's foreign trade with 
non-EU countries.  The data showed an E956 million 
deficit in the first four months of the year. Exports 
grew only 0.2 percent from April 2002 to April 2003, 
while imports grew 2.6 percent. The strengthening of the 
Euro had an immediate impact on Italy's exports to the 
U.S., which decreased 8.8 percent from April 2002 to 
April 2003. 
In contrast, Italian exports to China grew by 23.2 
percent from April 2002 to April 2003 and by 26.1 percent 
from the period January-April 2002 to the same period 
 
 
this year.  SARS, however, may show suppressed consumer 
demand in Asia in later statistics. 
 
Some good may come 
------------------ 
 
6.  (U) According to Antonio Sagnotti, a researcher at 
one of Italy's leading banks, Banca Nazionale di Lavoro, 
Italian exports to the United States will continue to 
fall as a result of the strengthened Euro, but also as a 
result of weak American consumer demands overall. 
Sagnotti is optimistic, however, that the medium-range 
effect of a strengthened Euro will be limited.  In 
contrast to the Central Bank Governor, he does not 
believe Italian exports are particularly vulnerable to 
exchange rate fluctuations. He argued that the demand for 
Italian exports would not shrink significantly as long as 
the Euro/Dollar exchange rate does not exceed .80 
Eurocents/one dollar.  Demand for high-end consumer 
goods, of which many Italian exports are, remains stable 
as long as there is only a 10-20 percent fluctuation in 
exchange rate values, he contended.  Sagnotti expects 
only a modest decline in Italian exports to the U.S. this 
year, predicting that a recovery of U.S. domestic demand 
in the second half of the year will offset some of the 
price increases caused by the Euro's appreciation. 
 
7. (U) Some leading economists see an upside to a 
stronger Euro vis--vis the dollar.  Minister of European 
Union Affairs, Rocco Buttiglione, recently commented that 
a strengthened Euro provides an opportunity for Italian 
companies to buy U.S. companies at a cheaper price.  He 
argued that Italian companies need to expand beyond the 
domestic market to enhance their overall competitiveness. 
Buttiglione also observed that Italian exporters would 
benefit from the lower price, in Euro terms, of raw 
materials.  Arrigo Sadun, Director General of the 
macroeconomic department of the Ministry of Economy and 
Finance, expects the overall effect of a stronger Euro 
will be positive.  Sadun told us that the possible loss 
in export earnings and market share would be offset by 
the positive impact by the lower price of oil imports and 
raw materials. 
 
8. (U) According to Stefano Siviero of the research 
department of the Bank of Italy, the Central Bank 
predicts that a stronger Euro versus the dollar will 
reduce export growth only by an estimated 0.1 percent 
over the period 2003-2005. 
 
The impact on GDP growth 
------------------------ 
 
9. (U) A stronger Euro also is expected to affect GDP 
growth negatively by approximately 0.3 percent in the 
same period.  An anticipated increase in imports accounts 
for most of the negative impact on GDP growth.  If the 
Euro were to appreciate significantly more versus other 
major currencies besides the dollar, the impact would be 
larger.  According to leading economists, if the Euro 
were to strengthen by another 10 percent or more vis-- 
vis the Yen, the British Pound and others, export growth 
could decline by 2.7 percent in the period 2003-2005 and 
GDP growth by 1.3 percent, in the same period. 
 
10. (U) On June 10, Istat released final GDP growth data, 
which showed a 0.1 percent decrease from the fourth 
quarter 2002 to the first quarter 2003, but a 0.8 percent 
increase from the first quarter 2002.  According to ISAE, 
Italian consumer confidence is the lowest in 9 years. 
Inflation fell from April to May, from 2.7 percent to 2.6 
percent. 
 
11. (U) The consensus forecast continues to estimate a 
GDP growth rate of one percent for 2003.  However, a 
contact at the Central Bank mentioned to us that a recent 
Bank of Italy confidential report predicted a GDP growth 
rate of just 0.4 percent, the same as in 2002. 
 
Other concerns 
-------------- 
 
12. (U) The Euro's appreciation versus the dollar is just 
one factor constraining Italian exporters.  Another 
important factor is the weakness of the German economy. 
Germany is Italy's largest trading partner, accounting 
for almost 20 percent of total Italian exports. An 
additional factor is the impact of SARS on consumer 
demand in Asia during the second and likely third quarter 
of this year.  China, Japan and other Asian countries 
account for almost 7 percent of Italian exports.  The 
combination of these factors is likely to reverberate 
negatively on Italian exports and on Italian GDP growth 
this year. 
 
Comment 
------- 
13. (U) Exports account for about 25 percent of GDP and 
are one of the pillars of Italian economic growth. While 
exports have traditionally been vulnerable to exchange 
rate fluctuations, Italian exporters also are losing a 
competitive edge, many economists worry. Italy invests 
only .75 of its GDP percent in R&D, compared to an 
average of 1.75 percent of the EU.  This lack of 
investment in technology, according to economists, has 
reduced the competitiveness of Italy exports and 
aggravated their sensitivity to exchange rate 
fluctuations.  End-comment 
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 2003ROME02853 - Classification: UNCLASSIFIED