Summit Issues for Italy

Analysis

When Romano Prodi travels to the G8 Birmingham Summit in May his government will have been in office for just over two years, which currently ranks as the third longest term in office for any government since the beginning of the Italian Republic. It appears that Prodi is committed to making his government last a full parliamentary term of five years in office. It is unlikely that the Reconstructed Communists, on whom Prodi relies for a majority in Parliament, will force a new crisis after the concessions they received from the government in October 1997.

The Prodi government has been effective in restoring fiscal stability and international credibility in Italy. The government appears determined to press ahead with reforms to improve Italy's competitiveness in lieu of the European Monetary Union, launch date. Since the start of the year, his government has freed the over-regulated retail sector, encouraged consolidation in the banking industry and pressed on with the privatization of enterprises held by Iri, the state holding company. Presently there is a package of constitutional reforms before parliament, which aim to reshape the political system and ensure strong executive government.

Most likely, Italy will be officially accepted as a founder member of Europe's economic and monetary union in early May. When the Prodi government came to power in April 1996, the prospect of Italy being considered in the first wave was unthinkable. Prodi's government has engineered a remarkable economic turnaround. The budget deficit, which stood at almost 7 per cent in 1996, was reduced to 2.7 per cent of GDP in 1997 and is estimated to be 2.6 per cent this year. Annualised Italian inflation in 1997 was 1.7 per cent, less than half the previous year and at a thirty-year low. Italy's economic growth last year was 1.5 per cent up from 0.7 per cent in 1996 and it is predicted to be 2.5 per cent for 1998.

In April 1998 the Italian government sought to seal its bid to join the future single European currency by publishing an outline budget for the years 1999-2001. In an attempt to allay other European Union countries' fears about the state of Italy's public finances, the budget document, known as the Dpef, pledged fiscal tightening to bring the annual budget deficit down from 2.7 per cent in 1997 to 1.0 per cent in 2001. At the same time, the government has promised to bring Italy's overall debt, which currently stands at 121 per cent of GDP, to 107 per cent of GDP in 2001, with a promise of reaching 100 per cent in 2003. The size of the debt, which in value terms makes up at least a quarter of all debt among countries likely to join the first wave of the euro, has been at the centre of EU concerns about whether Italy can sustain euro membership.

Although Italy does not traditionally play a major role in the summit, it does participate actively and cooperatively in all discussions. Some of the issues that Italy will be particularly interested in heading into the G8 Birmingham Summit will be employment, aging populations and UN reform.

Employment

Once it appeared certain that Italy would enter the first wave of the European currency, the focus in the country almost immediately turned to development and employment. The unemployment problem in Italy is almost exclusively restricted to the southern regions. While many areas in the south have unemployment rates above and around 20 per cent, northern Italian companies face an increasing shortage of employees. Of those unemployed in the South 70 per cent are young (between the ages of 18 and 34) and 60 per cent have been looking for work for more than three years.

During the governmental crisis of October 1997, Prodi promised Fausto Bertinotti's Reconstructed Communists, who threatened to topple the government, that his administration would legislate a 35 hour work week by the year 2001. Some business leaders and many economists have warned that Italy will become a less attractive location for investment as a result of the 35 hour work week laws, and that unemployment will rise not fall. Many economists argue that Italy needs to increase labor flexibility and feel that legislation of a 35-hour workweek will only reduce labor market flexibility. In March, Italy's employers' association, Confindustria, threatened to unilaterally abandon the country's landmark 1993 labor accord if the government refused to broaden the talks from a presentation of legislation on the 35 hour work week to include a discussion of all aspects of the Italian economy's competitive position in Europe. Nevertheless, Prodi appears committed to his keep his promise to Bertinotti. In late April Italy's Treasury Minister Carlo Azeglio Ciampi stated that the reduction of the workweek should not be interpreted in a mechanical way and that it must be seen as an instrument for development and not an impediment to growth.

Romano Prodi's claims that the outline budget (Dpef) of April 1998 proves that employment and development are major priorities for the government. The government believes that real GDP growth next year of 2.7 per cent and of 2.9 per cent the following two years will help create 600 to 700 thousand jobs between now and 2001. The budget document estimates that the unemployment rate will fall from the current 12.2 per cent to 11.5 per cent in 1999 and to 10.5 per cent in 2001. Confidustria warned the government that GDP growth alone will not translate into new jobs, especially if fiscal pressure remains at its current high level. The employers' association reiterated the need for greater flexibility and mobility in Italy's labour market. Fortunately, the issue of employment will be at the top of the agenda in Birmingham.

Aging Populations

The problem with Italy's pension liabilities remains largely unresolved. At 14 percent of GDP they allow many Italians to retire in their late 40s or early 50s, and cost taxpayers twice as much as elsewhere in Europe. Under a compromise that saved Prime Minister Prodi's government from falling in October 1997, a deal was done with the Reconstructed Communists that allowed limited pension reform. According to Italian treasury figures, the reforms implemented thus far will contain expenditure on pensions at or below 14.5 percent of GDP until 2007. But that figure is set to rise to 15.8 percent after that. Pensions remain a huge expense and are a major problem for Italy and are directly connected to the persistent doubts over whether or not Italy can sustain its recently acquired fiscal restraint. In April 1998 Antonio Fazio, Italy's Central Bank Governor, warned Prodi's government that more had to be done to reform Italy's pension system due to the aging population problem which is more acute in Italy than in any other industrialized country in the world. The leaders of Italy's three major trade unions view Fazio's warning as alarmist and conclude that all talk about pension reform in Italy should cease to ease the panic among Italian citizens. According to Ciampi all is fine for now in Italy due to the reforms made in 1992, 1995, and 1997. In the budget outline program (Dpef) for the years 1999-2001 the government stated that their would not be any further reforms of the pension system during this time. Italy, therefore, will probably participate in a general discussion on the aging population issue, but obviously it intends to do nothing further about its pension system in the near future.

UN Reform

If discussion about reform of the UN Security Council should arise during the Summit, Italy will certainly be involved. Italy is opposed to the current proposal, backed by the United States, to enlarge the number of permanent members by adding Germany and Japan, plus one country each from Asia, Africa and Latin America. Italy has put forth its own proposal, which would see the number of non-permanent members of the Security Council increase from 10 to 20, while the number of permanent seats would remain the same. Under Italy's proposal, welcomed by more than 80 countries, there would be a more frequent rotation among a broad spectrum of countries that are more representative of the world's population. Italy has made it clear that it is prepared to accept others proposals for reform, provided they are based on a rigorous logic of efficiency, democracy and universality.

In March 1998, Italy's President Oscar Luigi Scalfaro confirmed that Italy's Ambassador to the United Nation, Francesco Paolo Fulci, would continue to be the country's representative. Fulci recently turned 67 years old, the maximum age for diplomats, and at the end of March 1998 he was to leave the Foreign Service. Scalfaro said the confrontation between the American and Italian proposals had reached a critical stage, with phase two of discussion probably to occur in the following autumn and it was essential that Fulci, who first put forth Italy's proposal in 1996, remain as Italy's representative. In an official visit to Japan in April 1998, Scalfaro told Japan's Premier Hashimoto that Italy was preoccupied about a proposal that thought only of the interests of the world's great powers. In 1998 Italy's contribution to the UN Budget will increase to 5.39 percent (approximately $56 million), thereby making it the fifth ranking country in terms of financial support (after the United States, Japan, Germany, France, and before the United Kingdom).

Foreign Policy

Italy's foreign policy over the last year can be defined as autonomous and even somewhat distinctive. The following is a brief clarification of Italy position on some of the recent foreign policy issues.

Iraq: Italy was opposed to any military action against Iraq until all possible diplomatic means were utilized to ensure a peaceful solution. In this context, Italy was one of the very first countries urging the UN Secretary General's mission to Iraq which was subsequently successfully carried out. Prodi's government was able to claim somewhat of a diplomatic victory since it did not automatically acquiesce to the United States' resolve to proceed with military action in Iraq.

Yugoslavia: During a visit to Rome in March 1998 by the Secretary of State Madeline Albright, Italy Foreign Minister Lamberto Dini declared that Serbia should make an initiative to grant autonomy to Kosovo. Italy is particularly concerned with the situation of the Albanians in Kosovo due to its close links with Albania. Italy is the second largest international donor to Albania, immediately after the European Union as a whole.

Bosnia: Italy is a full member of the Groups of Contact on former Yugoslavia (comprising also the United States, Russia, Germany, United Kingdom and France). Italy participates in the Multinational Division Southeast (MND SE) which is the division-level sector under French command. Following the recent meeting between Foreign Minister Dini and Republika Srpska's Prime Minister Dodik, Italy stressed the importance of strengthening the peace process through a balanced international aid package to all Bosnian entities.

Iran: Italy in recent months has made a great effort to increase bi-lateral economic and political relations with Iran. During a visit to Iran in early April 1998, Italy's President of the House of Deputies, Luciano Violante claimed that "Italy will be a bridge between Europe and Iran." (Corriere della Sera, 9 April 1998). During the same visit Violante declared, in an obvious reference to USA sanctions in Iran, that Italy will not allow laws adopted in other countries to penalize Italian businesses.

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Prepared by Ray Claudio Pino and Carla Angelone, University of Toronto G8 Research Group, May 1998.