ITALY: THE POLITICAL AND ECONOMIC SCENE (W/ATTACHMENT)

Created: 11/29/1982

OCR scan of the original document, errors are possible

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DIRECTORATE OF IRTELLIGENCE

Italy: The Political and Economic Scene

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Political Situation

Thi Socialists expect healthy gains In perllaaatntary election!. Tht party's1 congress paved the nay for the next campaign by strengthening the grip of party chief Bettlrto Craxi and byraoautlc platform. While the Socialists (PSI) vent early national elections, they have had to be careful not to push too hard for fear of proving

This would relwate the PSI to the sidelines

electionearly or on schedules unlikely to alter the balance of power enough to end coalition instability and frecjuent policyoi that has plagued the countryhe postwar era. Even If Craxl'a party Increases Us electoral streiwth froa roughlyercento the hoped-forercent, the Socialists will still be dwarfed by the Christianercentnd thenless united with the other lay parties by euans of aaccord, the Socialists would be unable to challenge X Ho such accord now

appears on the horUon. ocialist-led owerreaent ve>.ld fWsamrf rai

DCor perhapsor Its longevity and success.

Institutional reform Is being touted as another way to Improve the government's policymaking capabilities. But here again, change will not come quickly. While til the parties are giving Hp service to various reform proposals, only the Socialists seem serious about securing these refonos. Frequently mentioned reforms include: streamlining the cabinet. Increasing the prime ministerMer-.jod-joce.strictly Uniting parliamentary recourse to secret vote*.

Economic Outlook

All tht Major parties sen! convinced that tht next election villi be hcmt or lost over economic policy. This conviction ltdtsty and time-consuming budgtt battle last year, when early elections wereossibility. Tht tame battle lines have already been drawn3 fiscal policyand contributed to tht resignation of tht second Spadolini government onovember. Tht Christian Democrats continue to press for austerityht font of tax hlkts and limited welfare spending cuts. The Socialists art rebeUinaha cost of austerity In terms of Jobs and

economic growth

If pre-election Jitters prevent adoption of austerity measures, the budget deficit could, according to Spadollnl's budget minister, topercent of GOP It will be aroundercent of GOP this year. Journalists at home and abroad have questioned whether even Italy's extraordinarily elastic system can swallow this Increase. We believe it can, barring another exterrval economic shock to tht system. Our confidence items primarily from tht Bank of Italy's well-deseoetl reputation orlose watch on the country's external

Although later and slower than other Industrialized countries, Italy Is now adjusting to the oil price hikes. Tight monetary policy Is helping narrow the current account deficit, whichigh8 billion Inflation declined throughout mostZ but began to climb again in late summer. As elsewhere, adjustment to higher oil prices hisoll on Jobs and growth. Ue believe the evolution of the economy3 will be similar to this year's record. The dim prospects are conditioned more bv_ the inhospitable International setting than by domestic policy choices.]

Foreign Policy Priorities

Hew activismtalian foreign policy contrasts sharply with inertia In economic policy. Involvement In the Lebanon multinational force, goverresent willingness to deploy GLCHs at Com1so, and stepped-up foreignexpend it--as all attest to the new activism, weariety of factors accounts for this changed attitude to foreign affairs: desire to be Included In high-level Atlantic Summits, fading roersorles of overseas misadventureso the Fasds

era, concerns about the health of the Atlantic alliance,

the desire of the major parties "to^nhanca weir of Third World causes, and thectoenct

n^iutai iuntTTaTiipurn* of the Communists to these foreign policy initiatives

Original document.

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