ITALIAN SITUATION

Created: 6/16/1981

OCR scan of the original document, errors are possible

ITALIAN SITUMICH

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major imponderable im tha Italian situation fpbUi tha impact of tha so-called masonic lodge scandal on tha oountry'* Isadsrehip olaa* and dsr^ocratic institutions. Chargaaxmepiraoy tostatstats" already have touched every major party, accept the Comrnciets, and have epread to the businese, academic and prees cammunitlse. It is still likely that the scandal is owrtltw, that it trill run its oouree end fads frompattern followed by most Italian aoandals. saverthslese, fallout from the affair has led to an impaste letueen tha Christian Democrats and Cooialists seer vkich party should provide the next prime minister. Because these new strains in Italy's esntmr-ttft formula probably oannot be vorksd out uHthout an early parliamentary election,*the eountsy vill hove no ohoiceto peetscna major dowwstio and foreign policy decisions. s>

Socialist chief Craxi, seeing tbe scandalhance to further bisrefused to cooperateinor cabinet shuffle af-si the naaeiministers appeared on puported lodge awnbershlp lists. Theunwilling to surrender the syatol of their prinacy in Italianrejected Craxi's deamrfj for the priseas the price for his.-

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The CctuiIsu. eager to renew their omt. bid forrait inhave given tacit support tostson to detach

Craxi'$ party frv the Christian Democrats.

The deadlock probably will continue through the Important local elections nest week. Both -he Christian Democrats and the Socialists are lookingote of confidence to boost their respective claims for the prime ministry. Only lanlikely mat the results are clearcut- -sharp gains for one party and losses by tha other--would the issueovernmental leadership be resolved. It is more likely the cutcorm) will be inconclusive and the parties will opt for aa early parliamentary election--perhaps li. theas last resort.

Aside from the political class, the Italian security services havemost by the scandal. The chiefs of the services, have takenafter being accused of membership In the P2 lodge. Terrorist groups,the Red Brigades, have taken advantage of the situation to step up In the short run, these developments sees to have hampered Italy's efforts but lt Is unlikely tkat there will be anyesult of the scandal. Even if those implicated arc forced to resign, thalevel cadres would remain intact and the security services would beabsorb the

The failure of the panics tooalition has set back efforts to stabiliiv the Italian economy. Key deflationaryreeze on public sector wagesevision of the wane Indexation scheme--triemain on the drawing board. Inflation continues at over twenty percent and there mill stillubftantlal current account deficit. Italy's total reserves appear sufficient to cover any sudden capital outflow resulting from speculative pressures on the lira in the immediate future. Ikwever, without an early improvement in tha current account and inflationurrency crisis similar to that Italy experienced6 cannot be excluded. The Bank of Italy has carried on the burden of adjustment in th- absence of an effective government economic program, but Bank officials contend that monetary policy by itself Is not sufficient to correct Italy's mounting economic woes.

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