Created: 1/1/1981

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Italy: Continuing Political Immobility and Probable Economic Doldrum:

An Intelligence Assessmenl

Research for this report was completed

This paper was prepared by Office of Poliiical Analysisbe Office of Economic Roearcnn coordinated with lhc National Intelligence Officer k

rope. Comment* nnd queries are .


continueslock the implementation of medium-range economic and

energy policies and has relegated foreign policy issues to thefforts to strengthen Prime Minister Forlani's four-party. grounded in an alliance of Christian Democrats andbeen

checked by conflicts between the two parties andommunisto drive them apart. The failure of the partners in the coalitioneconcile

these tensions may drive them toward an early naiional

thisar effort io clarify thcit relationships.

The parties'jockeying for position has not markedly affccied theability lo adopt shorl-lerm austerity measures. But competition within thebetween lhc Christian Democrats and Sc-iled to sharp disagreements on medium-term economic and i. energy plans. Until now the resiliency of the economy has compensatedhe government's policy shortcomings. Italy achieved economic growthercent9 and anercentpurred by lhc highly productive, unregulated "submerged" sector of lhc economy.owever, heavy looses in ilie large slale sectorand lhc decliningess of Italy's exports probably will cut economic growth loercent. ! Adding to the gloomy outlook are an overly generous wageeavy dependence on imported oil,assive public-sector 'engines of persistent double-digit inflation and the major unresolved structural problems in the economy. "

.In foreign affairs. Rome's ability to follow the US lead in NATO isonstrained by domestic criticism, particularly from the the past year Ihe government has tried to undercut opposition by j emonstrating that it has parlayed its links lo Washington into full partici-: paiton in Allianceand otherwise. Rome also hassought to placate its critics by balancing its Atlantic liesest Europeanthough its association wjih Paris. Bonn, and London has sometimes resulted in disagreement with lhc United States.


Italy: Continuing Political Immobtlily and Probable Economic Doldrum


Italy's poliiical panics have made little progress during ihe pasi year loward releasing the couniry from the treadmill of unstable and ineffective coalitions lhal has plagued it for most of lhe poslwir period. In April, the formation of ihe second Cossigafirst coalilton tn seven years tolear parliamentarytoajor sicp in this direction. But deep divisions among the coalition pannes, particularly the Christian Democrats and Socialists, and stiff Communist opposition caused the coalition to collapse after barely five months in office

forging the current coalition government. Minuter Forlani sought to protec himself Cossiga's fate by adding lhe Social Democrats lo! predecessor's coalition and securing promises of fVrty backing. Not even this solulion has come grips wilh Ihe underlying impedimentsirm "an Dcmccr^lic-Socialistalliance: .

i' ^Possible between themselves andJ!i: jr^mocraiic governing partners. <dciermination toedge in the

Christian Democraiic-Socialist alliance.

En'iChristian DcmceraU* inability to choosethe Socialists and the Communists as iheir

principal interlocutor.

'I' -ftI'I:';

I Is unlikely the parties will be able to work out|among themselves and probably will resort

.<" loan early national election

The Pivotal Soeia/int. Thethird-ranking party wiihercent of the vole in9 naiionalthe key to any governing coalitionhe Communists. Sccialisl leader Craxi is working to parlay this arithineJie leverage inio something more lasting. In ihe shorte would like lo create the imageohesive, responsible parly, worthy of leading lhe government; over Ihe longer run he wantsransform the parly imo the coremall-party federation capable of competing

on equal terms wiih Ihe Christian Democrats and Communists!

Craxi has pursued this strategy in two distinct phases corresponding roughly to his association with lheCossiga government in the first instance and lhe Forlani governmeni in lhe second:

s used his party's support for the government lo extract from ihe Christian Democrats greaterand responsibility within the coalition and.on this, to weaken opposition lo hb strategy within his own party.

He has tried to unite his parlyolicy of "'differentiation" from the Christian Democrats, in anticipation of an election performance that might boost Craxi's own chances of being appointed prime minister

The Socialists* efforts lo disassociate themselves from the Christian Democratseak recently wiih lhc exposureolitically explosiveallegedly involving hijh-ranking Christian Dcinocr.iticnd governmentdefraud theof petroleum tax revenues. Craxi has led the charge on this issue, claiming that widespreadcorruption is due toears of uninterrupted Christian Democratic poliiical dominance and hinting lhal the only way to reform lhe system would be to establish the principle of alternation ininitiatedocialist-led coalition, Craxi also has sought tu make political capital out ofollowing lhc recent canhqunke, although the Socialisis' Involvement in the governmeni has madeelicate ana risky business ai besi.

For (he near future,Socialisisbe striving to avoid eitherremature governmentalfor which Ihey might be held responsible or being too closely identified with Christian Democraticand squandering the politicalurn al-


f.:ti j

read, generated by Craw's carefplly calculatedUltimatcly, Craxi's future rides on hisability to succeed al ibe polls:Socialist gains in tbe next election would truly makeigure to reckon with. Aof pJ fi'amentary seau. on the other hand, not only would jeopardize his grand designmall-perty federation but also ecu Id threaten his party's governmental role and even his control over the parly.

growing discontent, not only to recoup recent losses but to register the gains necessary lo achieve its objective.

The parly's continued sponsorshiproposal floated in early December that it be allowed iocvern-meni excluding ihe Christian Dcmocrali wilh ato reform Italian politicsactical plo> lo maximize Ihe party's chances in an election by keeping up pressure on ihe government, by setting IhcDemocrats and Socialists at each other's Ihroais. and by ensuring that ihc Socialists do not benefit from Ihe turmoil The Communist initiativearticular dilemma for Craxi and ihc Socialists. Item lo follow iheir "differentiation" policy lo its logical conclusion by totally disassociating ihem-selves from the Christian Democrats or. failing that to make themselves fair game for Communist si treks on the iheme of guilt by association. The Comr-unisls ultimately hope to put Craxiosition where heo chance bui io threaten an election. They would hope thereby io pull the Christian Dnnocrati into their own arms, or al the very least exploit the issue ofaad corruotror in government against both opponenll

The DiriM Christian Democrats The Christiandominant party withercent of the vote in the lastvirtuallyby sharp internal conflicts. The moderate-conservative majorityreferential relationship with ibc Socialists and smaller parties to isolate the Communists. Leftwing Cnrislian Democrats, on ihehand, preferooperative relationship between their party, the governmenthole, and Ihcculminating in theof Communist cabinet ministers. Whatever their preferences, however, all Christian Dernocrais feel ccd to abide by certain traditional pany tenets:

To protect its dominant role in Italian politics.

To unite theonly by papering overit comes under external attack.

To play the Soe>lirts and Communists off as each other to undercut the aspirations of botl

The establishment of ihc Forlani government brought with it new hope i'lal the party's right-lcfi gap might be bridred. Christian Democrats from all party cur-rents labored io conclude an .lgreement thai would

gram the leftreater role boih in the party and government and would rejiggcr the partyfor an opening to the Communists. In return, the left would make the party's support for the coalition unanimous. But the continued obstinacy of bothDemocratic groups and theirthediscredit each other's position with dirt from the petroleum scandal began unraveling theould p. aduce result


The intensity of the Communist and Socialist attacks on this issue and on the earthquake relief question scums to have put this reconciliation process on ice. There is some evidence that the scandals and their aftermath may be forcing the party to think more seriously than it has for some time about how to deal with its internal divisions. For the moment, however, by deciding cue. again to poslpon': the most divisive aspects of their internal debate, the Christianhave freed themselves lo:

ij '* I' U

off their critics" barbs with charges of op-

1 portunism and appeals for poliiical solidarity loith Italy's pressing problems.

j' il; ;'j

Create at least thef cleaning houseto figiittion and clicnlelism injlI '

their opponents off balance by hedgingeaffirmationoalition with lhc Socialists and

. smaller panictatement of theiro ally wi'h the Communists in extraordinaryumstances al theIcvelJ term, the coalition probably will weather ihe current storm of attacks. Thewhose inicrcsto create problems for lhelikely will have difficulty sustaining the current high level of tension. While the Italian public is easily aroused by scandals, traditionally ii has been just as easily distracted. Moreover, the pivotal Socialist* now seen prc.-tared lo allowsucs lo fade from view; they have gained considerably fron. the Christian Democrats' plight, but io push further would threaten Craxi's carefully calculated strategy. The governmeni parties may shuffle lhe Cabinet lo give al least lhc appearanceresh start,

Despite whatever expedients arc employed io keep the Forlani governmeni from collapsing. Ihe center-left formula il represents is unlikely lo take root in the Italian political system. PotentCom-munisisand lhe Christian Democratic leftlarge slakes in seeing lhatoalition fails even if this entails an election. While righiwing Christianand Craxi's Socialisised ell their hopes on an allianceIheir iwu panics, Ihey cannot agree on lhc terms of thehe Socialists obviously will not rest until theebalanced in iheir favor. While some Christian Democrat* mightagree to thb solution. Ihe partyhole would be reluctant to concede unless forcedso by popular mandate. Conteqccnily. it seemsailer afas early as thethe Italians once again make their way lo the polls lo iry to son out conflicts thai lhe panics cannot or will not resolve themselves. Iflhe pail is any indicator, another elccioraj lest will serve only to complicate mailers further.

on the defensive, the Christian Democrais in Ihe short run will continue lo focus iheir energies on propping up the existing government, hoping thaifeelings against ihcm will subside and permit them to tackle internal problems later in relative peace, In lhc meantime, it is virtually -titatn lhal ihepany will approach with utmost caution the question of longer term or oihepaastejuianccd relations with Ihe two leftist pariiej

Outlook for Ihe Governmeni

Given its inherent iniernal contradictions,ittle chance the Forlsni government will be able io cope effectively with substantive problems. In the short

The Economic Selling

The government's Inienwl problems find no dearer expression than in its allcmpis to deal with Iheeconomic woes. Although lhc Forlani governmeni hes pushed shon-ierm austerity measures through Parliament, policies odeal with structural economic problems appear nowhere in sight. Bringingpercent inflation rate inio line wilh other EC countries is especially important, now thai Romeember of the European Community's joint currencyEuropean Monetary System. Howcver.ihc current coalition, created from parlies with diverse economic

is having trouble agreeing on medium-term policies. The polilical fallout from both recent scandals is creating additional obstacles to policyAs has been the case for many years, ihe Bank of Italy will continue lo fill ihe vacuum inpolicymaking created by weak, short-lived gov-ernrnenu

Slower Growth Ahead. Dcspile the lack of acconomk. program. Italy achieved tbe fastest economic growth in the huropcan Community in each of the Last two years. Italyercent real growth of gross domestic product (CDP)nd last yearrowlh was probably closeercent. Highly productive, smallin the "submergedhkh accounts for at leastercent of Cbeen primarilyfor Italy's above-average performance in recent years. By contrast, the massive state enterprise network, which employsillion Ital*ans but is lerriWy inefTicieni In no small part because ofressure to have il act as the caretaker for dying firms, has suffered losses totaling an4 billion luring the past iwo ycai

Italian economic growth1 will fall far short of the rates achieved in the preceding two years, probably rtachingercent. Industrial production and real CDP began slipping in0 arid neither showed any signs of reviving through the third) quarter.inndustrial production should again begin edging upward. By that time,ily's unemployment rate may haveercent.

Export-led growlh. like lhat expertenced6annot be eipected lo pull ihc Italian economy oui of the doldrumsim growth prospects in the traditional export markets of West Germany. France, the United States, and the United Kingdom and the waning competitiveness of Italian goods on international marketi will limit exportcrccni increase in export volume Is likelyI, well below recent performance)

Nor can fixed investment on the same order oflhat spurred growth0 be counted oncar replacement cycle for capital goods.

which boosted investment in plant and equipment starlingppeared to have an its course by ihe summertringent monetary policy, expected to hold ai least through the firs! halflso will contributebablcercent drop in fixed


The big question mark for the economy1 is Ihc direction and Impact or fiscal policy. Concerned more with ihe economy's long-range health lhan with ihc current recession. Budget Minister La Malfa and Treasury Ministernl Rome's fiscal policy1 to be no more expansionary than iiwashe earthquake in the mosl economically depressed region of the country, however, iseassessment of1 budget Within ihc first week after tbcdisaatcr, the government made SU bii'ien available for reliefhe Treasury is now estimating thatillionbe required Totthis year, but tbe final price tag could beS3ercent ofroject on ihis scale would severely strain Italy's bureaucracy- it also would require either an expansionary budget or sharp tax increases. The government has announced plans to use foreign loans to defray around S3 billion of the costs and has hiked gasoline taxes to raise about SIillion in new revenue!

Inflation. Rapidly rising oil prices, increases intaxes and prices for public services, and brisk domestic demand pushed up Italian inflation7 percent9 loercentrodigal wage indexation scheme, heavy reliance on imported energy, and massive government deficits arc mosl lo blame for persistent double-digit Inflation. Italy's wage indexation *cheme {scala mobile) provides workers wilhpercent coverage against ihc costs of inflation Last mmmer tbeied to eliminate value-added taxes and petroleum from ihc basket used to calculate cost-of-living increases- but bad lo withdraw ihc proposal in the face of union opposition. Government deficits, averagingercent r' GDP during ihe, can betially on ihe pervasive patronage und clicntclism of Italian society. Pensions, for example,9 and wee received by one in every three llalians|


oc constraints, lhc medium-termplan presented lo Ihe Cabinet last Tall eon-ccmratcd on improving supply rolhcr than on restrain* ing demand. To bring inflation down loercentudget Minister La Malfa called tor three-year plans to help such troubled industrial sectors asand chemicals, for approval of the energy plan drafted last summer, and for programs io improve the working* of labor and capital markets. To beindustrial restructuring would require layoffs, especially in Ihe south and in slate enterprises. La Malfa argues that this is an acceptable price to pay for lower inflation, but some Cabinet ministers from led-of-center patties disagree.ommon vision ol who should pay for lowering Italy's rale of inflation the poliiical parlies ars unlikely to be able lo devise workable medium-term plans any time aoon. Even if an acceptable plan were drafted, the rapidity with which Italian governments come and go would surely hamper implementation^ And without an effective plan, il isailer of lime before lhe lira must be devalued within lhe Eauopear- Monetary System thus increasingressures^

lulian officials believe lhal inflationary pressures will diminish somewhatven if no new policies are devised. Officials at Italy's government statisticalliiule insist (hat much of Ihe acccleraiion in consumer prices in0 can be attributed toelated increases in gasoline prices and value-added taxes. Although further increases in publicffs are anticipated, official esl'matcs assume (hey will be lower than the ones insliiuledhe Bank of Italy's optimistic goal for inflation1 tsoercent. To reach this goal, monetary authentic- will try lo limit total domestic credii growth toercenttrict limits on bank lending In lire will remain in place at least through March

Balance of Payments. Growth exceeding that of Its trading partners, worsened terms of trade attributable to oil price increases, and diminished exportbegan toeavy loll on Italy's trade balance byrade swungurplus ofillion in lhc final quarter8eficit8ear later. The foreign trade deficit *as probablyillion0 and may beat aboul ihe same levelssuming no dramatic increases in oil prices, lhc current account


23 billion appreciation ofCurrency Unit holdings against ibe dollarmuch of the paradoxical rat in reserves. In addition, net foreign indcbtednesi of Italian banks3 billion ined by Bank of Italy restriction* on "ending in lirej^

Energy Plans and Policies t overnmcni energy planning In recenl years has been almost a* futile as long-term economic planning. Past planning has been most deficient In Ihe production of electricity, where demand has grown rapidly. The amount of electricity generated io oil-fired planlsfromillion kilowatt hours3illion kWhuring the same period. Italy was forced io increase annual ekciricily imports from neighboring countriesillion kWh

Inability to implement plans for building nuclear power plants approved by Parliament57 explains Italy's continued dependence on oil-fired facilities for nearly CO percent of electricityRegional authorities, who are usually moreand in office longer lhan figures in the central government, have blocked siting and construction of theuclear plants originallyew energy pUn for. dressing increased use of coal in electricity production, wai drafted last summer and is slowly moving through Parliament Rome hopes thai coal can meetercent of electrical needs and

Feeling vulnerable lo interruption of energylacking faith in the IEA sharinghas tried lo establish special relationshipsproducers. Before ihe Iran-Iraq war. Italyto develop one with Iraq, while tryingiUeir from Libya. Rome's relations withoil supplier. Saudi Arabia, souredaudisontractallegation* thai massive commiuigni bad beenmembers ofSaudi royal faniM

Despite only limited success oil import!0 wereecent less and personal energy conservation appears lo be responsible for ihe decline. Italy's steel industry, for example, reduced In oil requirements per ton of castarrels3arrelsmong advanced Industrial countries, only Japan uses lesston of cast Iron produced. Italian automob:ie owners also have contributed lo the decline In oil imports; the cost of premium gasoline in0 was five limes greater lhan In March

Italian Foreign Policy

The two roundaiions of Romeoreign policy are NATO and the European Community. Although Italy is committed to full participation in bothits role often ts constrained by domestic facto

In NATO. Italy is imporiant to US interests for its geographiccenterpiece in theouthernthan its military, political, or economic clout. During the post year. Rome hasoncerted effort in NATO to express its solidarity with US foreign policy Initiatives. For example, the Italians have worked hard lo hold economic sanctions against Iran and measures against the Soviet Union resulting from ils invasion of Afghanistan.esult, however. Rome has been subjectedharp domesticlhat ii has risked ihe country's lucrative traJc and financial relations wilh Tehran and Mo-cow and lhat it has acquiesced in US-sponsored actions. The government also has come under attack for allegedly acquiescing in US-dictaled actiontlhai threatenpopular in

The Communist Pirty is al once the main beneficiary of this positive Italian attitude toward deiente and the firstriticize government policies'ihai seem to be running counter lo il. The Communists publicly accpt Rome's participation In NATOefensive and geographically limited alliance. The party has taken great pains to associate ils views on this mailer with those of European socialisis and social democrats who seem to leanore autonomous role for iheir countries in the Alliance structure. At Ihe same lime, the Italian Communists have been determined to establish iheir own West European bona fides by distancing themselves where possible from the Soviet Untold

exclusion would undermine iis effortserisky decisions on such questions as NATO's long-range thea tee nuclear force (TNF) modemiza-tion program J


Rome's involvement in lhc TNF programase study of lhe government's vulnerability in lhe foreign and defense policy fields. Italy's participation in lhc TNF program initially was facilitated by theof lhc Uniied Kingdom and Wesl Germany. This allowed Rome to "lose iisdronsensus and avoid taking lhc lead on (he issue. Rome also was able to portray ihe arms control aspect of the decision as being of equal importance IO lhc modernization clement, placing particular emphasis on Ihe ratification of lhc SALT II treaty. By addressing two concerns shared by

the Communists, the governmenthat party's opposition to the program.

Rome's ability lo follow through on ils TNFo will depend on lhc resolution of lhe "two-key"rote in controlling lhe missiles placed oc iu territory. In the meantime, the recent lulian earthquake has forced Rome to postpone temporarily the announcement of iu TNF siting plans for fear lhat its opponents might charge il wilh diverting scarce funds lo military expenditures instead of using them lo rebuild the devastated i

Italy's membership in lhe EC is much less subject to internal criticism lhan the NATO connection because il does nol raise the same issues about the United Sutes and dovetails with the mood of the country and the Communists, luly perhaps is the leadingof Wesl European economic and political cooperation. Italian participationtrong, more unified Western Europe potentially could enhance Rome's voiceariety of International issues.

of Rome's defenses against charges ofto Ihe United Stales islakeoleull participant in NATO. By ensuring its involvement in NATO poliiical consultations. Rome hopes toto ils domestic critics lhal it has an important and respected role in Alliance councils. The Italians, therefore, are highly sensitive lo any moves thai threaten to exclude ihemest European "directorate" lhal would act as the Alliance's principal interlocutor wiih Washington. In Rome's view, such

In the meantime, Rome's association with other West Europeans on some controversial international issues remains an important factor in limiting domestic atucks on its policies. For insUnce. Italy supports the results of the Camp David Initiative, but itson Arab oil makes Rome share lhc greaterof other West Europeans in dealings with the

Palestine Liberation Omaniralion a* well as theirin involving the PLO in the Middle Easi peace processj

On the Polish question, theother Westabout the possibility of Soviet military intervention, whether direct orAl the same time. Rome is reluctant lo commit itseir to specific NATO rctaliaiory responses before the fact, hoping to salvage whatever is left of ihc tarnished concept of detente. Italy, in conjunction with its West European neighbors, would much prefer toorse-case scenario by joining lo pumpaid into Poland wilh the aim of defusing (he political crisis. Although Italy's Europeanas exemplified by theseseems at odds with US interests, Rome often hasillingness, as when Italy was President of ihc EC for six months last year, to acto-between inrelations with Paris. Bonn, and.-idon

European Allies in ihc international arena. Italy'swill be determined by Ihe quality of its treatment within NATO. If Rome feels it is perceivedajor partner. Ihc Italians probably will work lo minimize difference* between Washington and Wesiern Europe.

by domestic problems, thewillow priority to foreignTheontinue to balanceand European orientation's but theof operation from both within and outsidewill compel il to minimize theof its relationship with the UnitedNATO. On the other hand, in the event ofas Soviet interventionhristian Democrats might seizeUS lies lo draw sharp distinctions beiwcenand the

This tactic also might shore up ihc coalition by convincing thehave gone out of their way to back the government on foreign policy this pastdampen down their newfound enthusiasm for attacking ihctr governing partners on the domestic rront. A: ihc same time, the Christian Democrats will attempt to reduce potential conflicts wilh both leftist parties by tryingssociate ihc government more closely with its West European Alliesonsen-sus exists in foreign policy. It the eventrowing divergence between ihc Ui :cd States and ils West

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