Created: 10/5/1982

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Memorandum for

. hed arc two leans we would be roost appropriate for Attorney General's briefing



Office of European Analyst*

Central Intelligence Agency

central intelligence agency. lofol

deputy directorate of intelligence

3 october2


spadolini iii prom theo pan into the fire


republican la august only to

find thst the press political socialist presiden elections

prime mlnlittr spadolini,ruiv have successfully navigatedhan its

ertini toament snd call netionsl in the spring.

has slready begun to speculate that continuing differences between the christian dernocrsts snd the

a began with th* defeatovernment bin thatd*rs of all of the coal tion supporti thirty christian democratic (ec)ote. although th* press, th* coalition partners alug* that th*

rlbes fromrol*um lobby, thm

wanted to embarrass plnsne* minister -totheir longstsnding stlan deraocrst/sociallst ties. socialist led his ministers out of the government,

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The Socialists soon found, howsver, that they couldPresident Pertlnl or the other coalition partnerswith CfSll or tQ Itnd the country to th-

"Social Democrstrtetro LOnpfo-openly accused SO*f violating the Socialist/Social Democrat eonsultatlon pact| he subsequently lined up with the Christian Democrats In favor of negotiationsecond Spadolini government and against early elections. Tha Social Democrats were JoinedsmaLl Libers! psrty snd Spadollnl's Republ leans.

DC-pci Discussions: Smoke or Fire?

The press and Embassy Rome have reported rumors that the Christian Democrats and the Comrnunlats, shortly after the crisis broke, begsn toour-party governmentDemocrat, Social Democrat, Republican,hat th* Corrmunlsts would support from outsld*. This raised the prospect that the Socialists would be pushed to the margins of the political game. ecision by the DC snd PCIito work together would have made Socialist support for the government superfluous andleverage with the other members of theIon.j


TnaKe ii clear,at onicisii eras* to partytsumber of psrty members about their views on


elievesit If BP off Firs' dan BVj*yernl ng the country effectively without their cooperation!)

According to the press, DeMlta'i soundlnrs ware onnoiad hv the ChrIsn Democrat Ic eht.

I Will* DaMlla might nlfr

survive tne oareenonPlccoll or Fanfanl, the loss of both men simultaneously would havempossible for him to maintain his grip on the party.I

A Scoond-flesl Soluti

return to the premiership, therefore, is disappointing to Christian Democrats end Socialists allk*. It MgnlMe* thnt political leaders In both parties have concluded

that neither party fi strong enough to sssert Its own will that supporting Spadolini Is the best alternative outcome.

our view, the current circumstances are similar to those which gave rise to Spadollnl's first government. The Christian Democrats continue to play for time to revamp their program and rovltallze their party. Despite their misgivingsrolonged Spadolini premiership will cut Into their power and patronage, we believe that theyd government more palatable than either of the most likelylyesational electionocialist Prime Minister.

Craxi still covets the premiership, but he needs an Issue that will (nothim torisisnd new electionsbut will alscT} safeguard the Socialists from public criticismacklash at the polls. Crsxl seei an early electioneans to transfer to the national level the strength that the Socialists have showntring of loeal and regional elections This would strengthen his bargaining positionis the DC, and possibly open tha way for reformsuch as restricting the use of th* secret bellot during parliamentary voting sndrime minister for the length of the legislaturehich would strengthen the premiership. We believe Crsxl hopes by the*eold some of the pitfalls that have snsred his

martenithe party can afford to bide Its time. The other group, led by Pormlci, Insists that the Socialists must move as quickly es possible. Formica claims,

Hal lit inrj minister oi state rinicipai ions

war* instrumental inCraxi that the Socialiststhe cabinet.argued that the

Socialists would nOi oniy gain in nwuvwi, 'but would avoid the risk of sharing blame with the Spadollpl government for the country's economic problems

Further DC-PCl Talkst

If DeMita believes that an arrangement can be reached with the Corrrnunists, he can be expected to work quietly In the months ahead to expand the dialogue and to build support within the DCew look at DC/PCI relations, (fie believe that Corimunist leader Berlinguer still harbors hopes of an eventual return to his "historic compromise" strategy, albeitifferent mime, nnd prolmbly looks upon DeMltaotential ally. Both obviously soo Craxirincipal adversary,isoris firmly oppose an early national election."


After months of press speculation that the Berllnguer era has come to an end end that next February's party congress will see him eased out, Berllnguer suddenly seems to be making; some progress In the struggle to coopt his most prominent critics within the party. Recent verbal attacks on Craxi and the Socialists by Giorgio Napolltano, long viewed as the most important1 st" In the PCI leadership, mayeasure of Berllnguer's success. Napolltano's new taek suggests to us that party officials may put their earlier differences aside and that the PCI will ba mora cohesive In the months ahead than It has been for some time

If press reports are accurate, tha August crisis marks the first time In several yean that the party hasillingness toat least notew government In return for something leas than cabinet posts. It also marlci the first time since the birth of tha new center-left governments enchored by the Socialists that other options have been explored. It could signal the beginning oJL-auqrocess that would lead the Corrrnunlsts back to canter stage.I

econom win broad support

If Berllnguer becomes confident that his Internal opponents are under control, we think discussion! with the Christian Democrats In the coming months could be accompaniedCI return to the practice of the mld-mos of articulating

rams and reform proposals designed to

Implications for Craxi and the Socialists

Craxi's ambitions may have bean derailed, but unless the Christian Democrats and the Conrnunlsts can come to terms, the setback will be only temporary. fAlthough Craxi was forced to

retreat, he was still able to exjrjct Sfiyjral_rjrc>inLaas Iran


tmt im

igh priority to institutional reform, with a

special emphasis on Increasing the powers of the prime minister .3

Formally recognize the Palestinian Liberation Organization.^

price negotiations (or natural gas from Algeria as favored by the Socialistss well as from the Soviet Unlon.j

reorganizeo the influential Craxi supporters

Prime Minister agreed to urge Be net) AOBrnsiano to sell percent share of paperdelta Sera"roup of

the Italian media la convinced that Craxi still believes that he and his party would benefit from early elections. Unless he Is Inhibited by fearapprochement between the Christian Democrats and the Corrmunists, he will slmost certainly keep probingolitically acceptablejsay bring down Spadolini and send the country to the polls.


1 leatIons for Spadolini

press reports suggest Spadolini hoped that hisiiin wvuiu be smaller, free of personal rivalry, snd more Independent, but he too has been blocked. He tried to exercise his constitutional prerogative as Prime Minister tn fhnntm his Ministers without interference from the partles|he wanted to replace

effort came to an abrupt end, however,

when leaders of his ceslltlon hinted to journalistsevlation from normal practice would not be tolerated.

Spadolini was also unable to Include any of the other changes he soughtuch as merging the ministries of budget, finance, snd Industrysuper ministry" headed by an independent technician andpecial minister without portfolio for Institutional reformo make his new government stronger. Despite the renewed commitment to ins11tuttonal reformIndicated by the attention It received in the Prime Minister's speech to Parliament outlining his government's programthe process will be long and tedious and we believe this government will barely be able totart. Moreover, the personality clashes and disagreements that haunted Spadollnl's first government have not only been carried over s second but most likely have been exacerbated by the crisis.[

Spadollnl's tenure Is fragile) since heompromise candidate agreed to by the two largest parties of the coalition only because neither has the strength to force Its preferred solution on the other. The Mafia assassins! Ion of the prefeet of I'nlermo, General Dalla Chiese, snd the arrest of Luclo Cetll, the

Pre! Iinl nary agreement with Algeria Initialed oneptember^

alleged mastermind of the clandestineasonic Lodge, have alreadysubmerge his government In rtcrlmlnatIon and baek-blting.

In the Immediate aftermath of Dalle Chlesa'sDemocrats at tha loeal and national level werepurposely delaying enactment of laws providing specialstrangihar. the flKht against the Mafia.

Similarly, the

PJ Masonic Lodge Maaoal Iouchid iti nan porrrrcTans of nearly all political stripes and actually precipitated the fall of the Forlani government In We believe that If new revelations link leaders of the governing coalition or members of the Cabinet to any of the numerous crimes that Gelll Is accused of, or If charges of DC ties to the Mafia ara proven, Spadolinl would almost certainly ba hardpressed to keep his government afloat. These Issues pose the most Immediate threats to his government's survival, but othersconomic policy In

"icularwill almost certainly surface In the weeks ahead.

Imollent ions for Economic Policy

The second Spadolinl government has set the containment of the budget deficit as Its top economic priority, but there is little reason to believe that Spadolinl II will sueceed where Spadolinlailed. Tha fiscal policy prescriptions of the .DC and PSI remain IncompatIble. The Socialists support supply-side economies andombination of selective tai cutstepped-up fight against widespread tax evasion as the bast hope for curing Italian Inflation. The Christian DemoeratsiecA at tack on Inflation via tax hikes and spending cuts.

On non-budget economic Issues, we believe Spadolinl faees an uphill battle toonsensus among coalition roeffbers. Big fights on several key Issuesforeign natural gas purchases, for cxurrpleare inevitable because the symbolic and financial rewards -- in the form of from interested domestic and foreign groups for the parties that Bwln" are so great. The parties are also split on labor Issues, particularly wage indexation questions, spadolinl hopes to avoid confrontation on these Issues as much as possible, butj friction within the coalitionthese points? wl II jidd to the factors pushing the country toward new elections.]

Out Inok

Tha traditional period of good feelings that follows the


formationrw government Ii likely to be especiallyed this tIme. Even a3 the announcement that the coalition partners had reached agreementew government was being made, the press had begun to speculate that national elections will be held simultaneously with local elections that are scheduled for aometlme between April and June. We anticipate that It will beatter of weeks before tension within the coalition has once againoiling point. The Socialists. In particular, will yet againactivelyay to force the country to the polls*]

raumati in the Labor Seen]

: Transition

Italy's economic troubles have mounted in recent years, the workconsideredbecome increasingly pragmatic and work oriented. Industrial manages ot the local level have begun reasserting themselves andunion concessions on measures to raiseMoping for similar success at the nutional level, ihc private-sector employers" association. Confindustria, now is pushing for changes in the generous national wage indexation system.The industrialists hope their asscrtiveness -ill help end Ihe wage cost spiral that has plagued Italian firmshe issue has become politically charged, and ibc prospects for modification are uncertain!

The Legacy of lh< Hoi Autumn

The labor difficulties ofan be traced tn large measure lo Ihc so-called hot autumnt thai time Ihc triennial national contract nejoti-atwn*marked by an unusual loci of strike actmt) and violence. Workers in manj plants set up "factor) committees" thai pressed ihc three national(associated with the CnmiuA DcmocralSL CO IL (associated -iih the Communistnd UIL laitociatcd with ihe small layto put aside their rivalries and bargain more aggressively. Ties with parent puliikal parties -ce decmphasised. snd2 ihe three unions formed an umbrella organization. Ihc United Federationommon bargaining agent for the SO percent of Ihc work fi*ic llulunion

Workers* Statute, which circumscribedcontrol lo such an extent that trying to fire an employee came to be vie-cd as both expensive and futile. Union clout translated into generous pay hikes. During, real wage increases7 percent each year. The wage bill climbed fromercent of Italian GDP9 toercentqueezing profit* and lessening exr-irl compel itivenew To prevent lulian cxpom from being priced out of Ihc market. Rook lei ihc lira depreciate sharply

Unit Labor COSH and Pieduetitlfy inRO

an Hour* Loit tc

trikes, by Cause

in* To Waaken

even 3sjti_mcmt

The base* ofilium work force, and acquiescent employerbegan to crumble in the*cnes of foreign exchange chic* gave economicertain reipectability. Since then lhe United Federation leadership has been reduced io infighting, and union membenhip has steadily declined. The leaders of the big unions and confederations often have seemed io be out of touch wiih the rank and file The Commun ill-dominatedas hid the worst record in thi* respect,ombative attitude towarde*cnhas become more modera

Signseemerging work ethic have become commonplace since0 Fiji workersc-work" march locek-old strike:

Only A9 million man-hour* were lost to strikesHi i, the leastbsenteeism also has iiluinmcled

imwMe Red Brigades larget. dismissedmployees supccicd of terrorist activities As Ihc ,iuii> market mificncd. ihc fitmf> employee*alc-vublidizcd layoff program for Ihrcc years. Fiat's productivity increaseder-eem between0 andeveral crthcr major Italian companies, playing on layoffave extracted concessions fr. that have led to healthy productivity gair

Wageey Industry Griciance

Wage increases have greatly outpaced productivity gains in recent years. In its quest to control unit labor costs, industry has focused onen-trenched wage indexation system, the scala mobile. Indexation now accounts for overercent of annual wage increases, strictly limiting theof union and management contract negotiators. The IMF. OECD. EC. and Bank of Italy all have criticized ihe scala mobile on economic grounds, citing four key defects:

The existing scala mobile diminishes theability to implement deflationary policies because indirect taxes are included in theof goods and services used lo determine qujrtcrl) cost-of-living increases. this basket includes ilems thai arcimported, the effectiveness of currency depreciation in shifting domestic resources to import substitutes and exports is greatly reduced.

When ihc indexation mechanism was modifiedunitary point" wasne-point increase in ihc scala mobile index boosls each worker's paycheck b> the same amount in lire, narrowing the gap between highest and lowoi Paid workers. While thi* result satisfiestorker's in-ccntivc to improve his skills.

In the springonfindustria began to hint it might not renew5 wage indexation accord. Prime Minister Spadolini. upon assuming office that June, persuaded Confindusiria to putecision on the scala mobile in returnromise to hold discussions among labor, industry, and governmenl leaderso-called social pact. Rome hoped these talks wouldonsensus on how to keep the increase in labor costsovernment's inflation targetowever, it was clear almost from the start thai ihe laborof ihe growingon the shop floor but inicm upon defending ai least the principle of earlier laborunwilling to make meaningful concessions on wages or productivity.r

The employers postponed the scheduled triennial contract negotiations out of dissatisfaction over the lack of progress in the social paein hope of inducing the unions to be morethe cabi.net6 billion income lax cut and dangled ihc possibility of further lai cuts upon conclusionocial pad on wages. To buy induitry good will, (he governmenl earmarkedillion for medium-lerm. low-inieresl loans -nd value-added lax concessions for industry. Thiscoming on the heelsostly new severance pay law. was not enough lo placate industrialists.une of this year Confindustria announced, in intention noi to renew5 agrecmentp

A Mixed Reaction

confindustria realized that the decisionamble. Reactions have underscored theof the situaiiorJThc labor rank and file immediately greeted the announcement wiihprotest strikes. Since then there have been

ih n i- iv ['Nil: 1

bit mimii*

al*o< in relative prices


impact of any change


.ci tin Italian industry during (he pjm fc*mprovedhabili and union concessions have impfotcd the bottom line for many firm* Similar gain* will be nouioic once again afterr Confindustna'% unJlaicnl rcvoca-lion of5 accord dies downJ

Italian industry will, however, continue lo sufferariciv of handicaps unrelated lo laborrenetic political maneuvering led lhe governmentlight several ke> economicin the past, and this paliern iso continue. If energy and government spendingarc allowed to fesicr. an above-averagerate will persist, weakening even the most

. -

halt's industrial competitiveness.

constructive efforts of laboroosi

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