Intelligence Memorandum
Italy: The Political and Economic Scene in6
The Christian Democratic minority government installed last month symbolizes the political change; that have occurred in Italy since the parliamentary election inlthcugh the Christian Democats againlurality in the election, Ihey have lost their ability to dominate the poliiical scene because of (a) sharp electoral gains by the Communist Party and (b) intransigence of the Christian Democrats' traditionalnotably the Socialists, who cling to their campaign promise not to join any government thai relegates the Communists entirely to the opposition.esult, Prime Minister Giulio Andreottl had to bargain for Communist abstention to*arliamentary vote of confidence for his new government The Communists have parlayed their pivotal position into unprecedented influence but also have incurred some serious risks by diluting their longstanding opposition status.
enchanced role of the Communists further complicates the always difficult task of formulating economic policy In Italy. Prime Minister Andreottl must strive for consensus among parties with diverse economic philosophies, and his program thus gives only broad-brush treatment lo Italy's myriad economic problems. In coming months, specific measures will have to be hammered out in parliament; many, such as an incomes policy, will be hotly contested.
cmorandum wsfs produced jointly by the Office of EconomicRe search nt Intelligence. .Comments and'queries arc wejcome.l
Because of the need to please everyone, the government will probably decide eventuallyildly deflationary stabilization program that will neither bring inflation into line with trends in other European countries nor abort the economic recovery now under way. Although the main outline of the economic program undoubtedly will closely resemble previous center-left programs, the increased influence of the Communists in important parliamentary committees shouldreater degree of foUowthxough than in the past. This is especially true
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for oft-repeated but previously unfilled promises of social improvements andn tax evasion.
In corning months, the Christian Democrats will try to revive ties with the _
smaller parties in an effort to escape dependence on the Communists. At the same time, the Communists will attempt to build on the Andreotti experiment to move closer to actual government membership. Any success in the economic field, and there will be some, will add pressure for expansion of the limited rapprochement between the two largest parties. VVhile"the"'i^meT-ls^not:over^lhi-'c are more factors favoring the realization of Communist party chief rkrlinguer's "Historic Compromise" than at any time since he launched the proposal in
DISCUSSION
politicians are now maneuveringolitical landscapefrom tbe one that existed prior to the sharp Communist electoral gainsBefore the parliamentary election, the basic characteristics of Italianas follows:
the Christian Democrats, Italy's largest partyide margin, played the dominant role in the government.
the Communists, Ihe second largest party, dominated the opposition, and
the remaining parties, except for the neofascists and other fringe groups, alternated as supporters or coalition partners of the Christian Democrats.
Giulio Andreottfs difTicuIties in putting together his Christian Democratic minority government demonstrate how sharply the election outcome has altered *he traditional political picture. Although still the larger party,f the vote, the Christian Democrats no longer dominate the political arena. Because of the poor showing by the smaller parties and the steep gains scored by thef the vote2hiscouldarliamentary confidence vote only with Communist abstention.
Communist abstention, in turn, blurred that party's traditional opposition status, the more so because it allowed Andreotti's installation. With the Communists not voting, the Christian Democrats wou'J haveajority even if aD the other parties had voted against Andreottl Indeed, none of the smaller parties once allied with the Christian Democrats supported them in the confidence vote. The Socialists, Social Democrats, Republicans, and Liberals chose instead to join the Communists in abstaining.
Andreotti's government isransitional experiment thatost of the old rules. Al! Italian politicians, including Andreotti, acknowledge thu government's temporary nature. They nonetheless will differ sharply in the coming weeks over what should replace it.
Most Christian Democrats will try to rebuild ties with former coalition partners in the hope of reviving some semblance of the old order. The Communists, on the other hand, will attempt to use ihc Andreotti experiment to move closer to
actual government membership. What finally happens will depend not only on internal and interparty dynamics but also on how well lhe Andreotti government pcrformi
The Communists
The Communists face unprecedented oppoilunities along with some serious risks. They are the only party to gain substantially from the lengthy maneuvering prior to Andreotti's installation.
When It became apparent that Communisl coopemtion would be esscntiai toovernment, the party wa; *blc to press successfully for key parliamentary posts that bad previously beer, the pre serve of the governing parties. An experienced Communist legislator became president of the Chamber of Deputies. Tlie Communists also obtained the presidenciesfermanent parliamentary committees.
These posts will probably give the Communists more influence in domestic policy tl.anouple of minorlhe latter would cany more symbolic importance By cl*;ilring the Chamber's Finance Committee and the Senate's Budget Committee, for example, the Communists will strongly mfli'encr all economic wid fiscal legislation. There committees have the authority to review and change all bills before they are debated on the floor. Committee presidents, moreover, can slow down or speed up the progress of any bill.
Andreotti will have to take Communist views into account on other matters as welL Parliamentary arithmetic gives the Communists the power to defeat anyeven briny; down theunlesr there is offsetting support from the Christian Democnts' former allies.
LommuiiE,ts haveigh price, however, for theirAlthough the Communists will disclaim respons-bilily for anythingwrong, they cannot credibly assert-as they have frequently in thehands aret is already clear that many militants are uneasy overnew role. Communist chief Berlinguer's most recent major address wasattempt to reassure the rank and file that the party has not abandonedgoals or sold out to the Christian Democrats.
II. Tbe Communists have thus invested considerable political capital in the government and would have little to gain from frustrating Andreotti's program or from bringing him down prematurely. Indeed, it would be in their interest lo ensure that something positive emerges. Andreotti's early failure could damage the party's reputationorce for progress and dampen the enthusiasm of its supporters. Although the Communists will drive hard bargains tn any negotiations with Andreotti, they wil! also look, for points of convergence that would justify more progress toward party chiefistoriceventuii governing alliance with the Giristian Democrats.
The Christian Democrats
he Christian Democrats' dilemma wiil severely test the party's cohesion. On the one hand, the governing party needs Communist cooperation io accomplish anything; on the other hamj, it hopes to lay the groundwork for another coalition that shuts out the Communists.
n the past, the Christian Democrats have consulted the Communists informally to secure cooperation on specific issues. The distribution of parliamentary committee presidencies alone now ensures lhat such consultations will be more overt and formal. Each committee chairedommunist in one house, for example. Is chairedhristian Democrat in the other house, forcing the two patties into closer liaison to secure legislatbn. ibadggtucic-_cUgumaanccsrrtndfeott 19
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TtTw^hjTstian Democrats also have serious internal problems. Pressures are mounting for orgaTT&auUonreforms, leadership changes and new programs to dispel the imageired and corn^rpt^jrjanization and to take the initiative away from the Communists. For the moment, mosTTjrhri^'Jan Democrats seem willing to accept limited cooperation with the Communists to keep>Ai^^cotti afloat. If the Communists seem on the vergearger role, however, some infiuectialOuTstian Democrats mayehind-the-scenes campaign to bring Andreotli down.
The Socialists
hristian Democratic efforts to escape dependence on the Communists will focus on theonly party that can guarantee the Christianun-Communist majority in parliament. The Socialists have been
unable Io capitalize on their ph-otal position, however, and were clearly the major losers in ihe postelection maneuvering. Stung by their failure to advance in "an" elcclion they precipitated, the Socialists were Utile more than passive participants in the bargaining that led to (he Andreotti government.
Theailure In "the election plunged the partyeadcrsnrp struggle. Veteran leader De Martino war quickly replacedraxL who comes from the party's right wing and is inclined towardeal with the Christian Democrats.docs not yettable majority, however, and Is still tied by the party's campaign promises of (a) short-term supportroadly constituted emergency government including the Communists and (b) long-term support for an "alternative' of the left."
The Christian Democratic hope that Craxl will turn his party around and lead it back into coalition will take months to fulfill, if it can be fulfilled at all. TheParty's fundamental task is to maintain viability in the face ofrs* surge toward the Communis Is. Although most members do not want to share cabinet posts with the Communists, the Socialists have concluded that the Communist Party will have an electoral advantage if it remains entirely in opposition.
The Socialists are likely to cling to atestige of their demand for Communist association wilh the government.ondition for renewed participation in the government, for example, they may insist that the Christian Democrats agree to continue formal consultation with the Communists on epvenunent
Changing Rules of the Game for Economic Policy
The Communis! Party's new strength has further complicated the delicate balancing act the Christian Democratic leadership must play in the formulation of economicrocess long hampered by Italian political arvisions.
olid majorirv, Christian Democratic leaden In recent years have had to put together programs that would not only satisfy the major factions of their own heterogeneous party but also command the support of the Socialists, Republicans, and Social Democrats. The Socialists, fearful of vote losses to the Communists, have regularly rejected measures that would check union power or slow the growth of workers* real earnings. They have favored permissive labor
legislation and greater spending for social projects. At the other extreme, the-Republicans, always rigid advocates of free enterprise and fiscal conservatism, have emphasized their opposition to further enlargemente :ate sector. The Social Democrats stand between the Socialists andfor social reform but suspicious of growing government involvement in the economy. The economic programs that have emerged after numberless compromises and trade-offs have lacked the punch needed for effectiveness.
nder the new political circumstances, formulating an economiceven more difficult. Economic policies must now be acceptable todivergent views within the Christian Democratic Party mustand the Kepubljcans, Social Democrats, and Socialists must beCommunist parliamentary strength on the one hand andDemocratic politics, combined with pressure from foreign creditors, ondictate that the government attain Communist compliance on keywithout solicitingommunist support
The Economic Program
he Andreotti economic program, as presented to the Senate and Chamber of Deputies for the confidence vote, aims at political consensus. It is skillfully Uiiored to offer something (or everyone. For the Communists and Socialists, there are curb; on tax evasion, more active employment programs, and greater spending for social investment. Promises of smaller government deficits, more efficiency in the state sector, and modification of wage indexation axe designed to woo the Social Democrats and the Republicans.
Basically, the program seeks to stabilize the economy by reducing, the government deficit,down the wage indexation system, and making Industry moreProgram priorities include the folk) wing:
Reducing the Treasury cash deficitf gross national rjroduct (GNP)S (see%hile increasingublic worksf GNP from tho
presentevel. Andreotti is callingrackdown on tax evasion and
hikes in public service charges. He hopes to slow expenditute growth
limiting new programs, canceling some appropriations previously approved, and freezing hign-lcvcl government salaries.
Cosing the balance-of-payments gap through an energy conservation program, increased value added taxes on imported consumer goods, and renegotiation of existing foreign debt. The profciam will also seek to raise agricultural production to reduce Italian dependence on imported
Modifying the wage indexation system by progressively reducing cost-of-living allowances for medium to high wage earners and temmatlng allowances fot salinesertain level.
Improving the efficiency of state enterprises by establishing company goals, improving management, and diversifying and decentralizing managerial responsibility.
Increasing employment by providing public service jobs and apprenticeships in private industry for youths and nrst-time job seekers, who accountf the unemployed.
Improving industrial competitiveness by restructuring small businesses, curbing worker absenteeism, and rescheduling labor holidays.
Prospects for Enactment
The Andreotti program thus far merely lists economic goals and gives broadbrush treatment to the difficult choices facing Italy. In subsequent months, as parliament hammers the programeries of specific measures, obstacles will appear. Some points of the program-such as the crackdown on taxexpect easy passage.as increases in public service charges and modifications to the wage indexation system-will be hotly contested.
The fiercest conflict wili center around wage indexation. Christian Democratic economists-prompted by Re publicans-now acknowledge the cost-push Impact of the present indexation systemrucial factor in Italy's inflation. Under the present hrrangemcnt, price increases bump up wage ratesag of about three months. This year wages in industry will certainly rise more, mainly because of such cost-of-living Increases; contract settlements will provide baric wage
Increases of. Moreover, the impact ol indexation is increasing. At present,urring sHowances coverf Inflation: and contracts already negotiated guarantee that coverage will riseext year unless the fc.Trula is changed.
The trade unions will bitterly resist any major revision of the indexation machinery. Andreotti's proposed progressiveost-of-lrving aDowances for earners ofo high salariesnion proposal that salaries above StO.OOC beove that would concentrate the burden of inflation onf the work force and do little to slow the rise in unit labor costs. Andreotti's ability tobstantial revision of the wage indexation machinery to the unions will depend largely on whether the Communists are willing to erert their mflueiice with labor on behalf ofroposal. The Communists have long contended, however, that wage restraint must come from the unions themselves and will be reluctant to pressure the unions on this issue. The Socialists, eager to take support away from the Communists, will probably encourage tlie unions in their opposition to changes in the indexation mechanism
Curbs against absenteeism and rescheduling of oublic holidays would be politically more acceptable means of reducing pressure on unit labor costs. Legislation passed2 making it illegal to require medical verification of sick leave has made absenteeism endemic. On an ordinary day, absenteeism, con,pared% in France% in the United States.oliday fallsuesday or Thursday, attempts to ekeong wee'eend drive absenteeism rates up. The Christian Democrats and the Republicans view absenteeism as an obstacle to Italy's competitiveness, while the Communists callign ofnions appear willing to discuss the absenteeism issue if it is linked to government measures to increase employment.
Thanks primarily to slowed expenditures and speeded up tax collections, Rome should be able to meet thi Treasury deficit guidelines imposed by the European Community last April when itI billion credit. During the first five months of this year, the Treasury cash deficit amountedrillionillion at current exchangeelow the same period last year and well within85 billion) ceiling set for6 by the EC. The concur is for next year, when spending already in prospecteturn to normal rates of revenue collection threaten to Increase the deficit sharply.
major parties seem in agreeu.en( on attacking the deficit by focusing
on the revenue rather than the expenditure side.ercentage cf GNP. xpenditures arear with those in other industrial countries; revenues, however, lag far beliind.34 tax reforms, which instituted thevalue added tax and new corporate and persona! income fcxes, have had disappointing results because of widespread evasion.
Of the various fiscal proposals, actiontax evasion will have the broadest support. Tne program promises to cut business tax evasion by close scrutiny of corporate books and by using banks as collection agencies. Income tax evasion is to be fought through selective audits and use if computerized tax rolls. Communists ond trade union leaders have long decried tax evasionource and symbol social -Justice. In the past, the Christian Democrats have also waged campaigns against tax shirkers, albeit with little effect. Because the Communists chair the Finance and Treasury Committee in the Chamber of Deputies and the Budget Committee in the Senate, the present government will be under greater pressure to achieve concrete results.
Proposals to hike tariffs on public services to cover operating costs will be -more dnisive politically. The urban worker long has viewed subsidized transportation, electricity, home heating, and water ratesational right. Risking further wrath, the Andreotti proposal would not allow increases in public service tariffs to boost wages through cost-of-living escalators,
The Communists-who have long asserted that lower income groupst bear the brunt of stabilization-will strongly contest any substantial hikes in public service charges. The Socialists wulimilar position. In contrast, the Christian Democrats and the Republicans support sucharge share of statu expenditure represents subsidies to hoidoliticaln recent years, loans and advances to autonomousthe railroads, post office, and roadbeen among the fastest growing contributors tn the Treasury deficit.
To recoup anillion in revenue that will be lostupreme Court tiecrce declaring joint income tax returns unconstitutional and to satisfy union demands for income equality, Andreotti will probably propose higher tax rates on salariesertain level Thanks to Communist and Socialist
support, (his blowpperroups should pass easily despitebjections from the Republicans and parties further to the right.
Shape and Inplicatibru of the Eventual Stabilization Plan
If the Andreotti government holds out through the lengthy period of bickering and maneuvering, the parties will probably settleild stabilization program. Higher taxes on upper incomes and action against tax evasion will provide the main deflationary elements. Public service tariffs will probably be hiked, though not nearly enough to cover operating expenses. Increased value added taxes on luxuryfavorite issue of the Communists andalso be imposed to alleviate the trade deficit.
Whatever action is finally taken against rising unit labor costsrobably be directed at the productivitycurbs on absenteeism, forthan at wage levels. Given the opposition of the Communists, the Socialists, and the trade unions, no comprehensive incomes policy or major overhaul of the indexation system can be expected. If any limits are imposed on salaries, they probably will apply only to the upper end of the income scale.
ild austerity program, GNP growth-which is expected to slow from% annual rate of first6 to% rate in the second half-would reach roughlyIn the likely event that OPEC raises pr'ceshis December, Italy's growth rate could fall as lowext year unless compensating action can bexports will have to pro-.ide the main stimulus for growth. Export volume already has% (seasonally adjusted) since the endelping to Induceise In industrial output (seehe sharp devaluation of the lira and continuing world recovery now under way should keep export demand strong. Although consumer spending in first6 wasigher than in the corresponding period last year, gainsmaller magnitude can be expected as fiscal measures take hold.
As the Bank of Italy supplements fiscal action with tight monetary policy, investment will remain the softest spot in the economy. High interest rates, low profitability, and political uncertainty already have combined to depress investment; first quarter spending on gross fixed investment was5
Italy: SalectBd Economic Indicators
Industrial Production and Eipott Volumi
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levels. With capacity utilization still low end credit remaining scarce, investment growth should average onlyver the next year orery slow pace compared with past recovery periods.
ore active government employment policy jbvaajpn)iPL"luiujui. the jobless rate willot political ia^ue. Because trade union rtrerigth and labor legislation make it extremely difficult to lay off workers, Italian firms are reluctant to expand employment despite rising demand. If recovery brings any improvement in the labor market this year, it will probably be reflectededuction in the number of workers on reduced work schedules rather than any decrease in the unemployment rate. Accordingurvey byItalian manufacturingemployment levels are expected to remain relatively flat this year and to make only shpht gains next year. With continued labor force growth, unemployment should continue to rise
With the govemmem unable to enact an effective incomes policy or scalehe indexation machinery, inflation will remain troublesome. Sparked by the de facto devaluation of the lira, consumer prices soared at an annual raten the first half compared with the firstlthough the June-and July in creases in the consumer and wholesale price%a moderating trend, cost-push factors assure that price hikes will continue to outstrip those in other major todustrial countries. Upward adjustments in public service charges of the type errvisioned in the Andreotti program would force up consumer prices even more.
Tight credit, the import deposit scheme, and the Christian Democrats' retention of their plurality temporarily reduced foreign exchange pressures. Indeed, tbe lira's firmness after the June election allowed the Bank of Italy to intervene in the market to buy back aboutillion in foreign currency. The Bank repaid its outstanding swap arrangement with the United States and rolled over5 billion ot" the J2 billion credit owed to Bonn. However, in late September the lira once again came under downward pressure, prompting the central bank to sell foreign exchange to prop up the sagging currency and impose additional curbs on bank liquidity. Another lira crisis could easily develop if disagreement over the stabilization program results in AndrvottTs collapse.
MlAl
istian it his
winter. Perhapsof this government's lifespan and the next-one's complexion will be the YeraTtaasbip that develops between the Christian Democrats and Uie Communists asto implement economic program.
the stabilization program itself will probably be mild, therebe greater likelihood of followthrough than in the past With the Communists inposition, some essential economic reforms-such as curbs on taxspending on social priorities, and reform of state-ownedchance of enactment. The Communists may also use their influence toconcessions from labor unions.
rogram succeeds even partially and is viewed mainly asof Christian Democratic-Communist cooperation, pressure will buildrelations between the two parties. Working in the opposite direction.willChristian Democrat's unequivocal campaign pledge not to bring thethe government. The non-Communist majority, however, is dividedand the Christian Democrats will not be able to hold the line forthey can find the basisew rion-Communist alliance.
Original document.
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