ITALY COUNTRY BRIEFING updated at May 2009

Forecast
May 26th 2009
From the Economist Intelligence Unit
Source: Country Forecast
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Outlook for 2009-10 • Italy's right-of-centre coalition government, led by Silvio Berlusconi, faces a major challenge to limit the impact of the global crisis on Italy's rapidly deteriorating economy and keep its fragile public finances under control. • Government cohesion will be hindered by divisions in the ruling coalition, but the Economist Intelligence Unit expects it to remain in office. Mr Berlusconi has a comfortable parliamentary majority and the centre-left is in disarray. • GDP contracted by 1% in 2008. Our baseline forecast is that it will contract by a further 4.6% in 2009 and by 0.6% in 2010. • The fiscal deficit is forecast to rise from 2.7% of GDP in 2008 to 5-5.5% of GDP in 2009-10. The public debt/GDP ratio is expected to be about 120% by the end of 2010, up from 105.8% in 2008. • Much larger deficits cannot be ruled out as our forecast assumes that the minister of the economy, Giulio Tremonti, will resist pressure for tax cuts to boost the economy and interest rates do not rise sharply. • Inflation (EU harmonised measure) will average 0.6% in 2009 and 0.9% in 2010, well down on 3.5% in 2008, reflecting weak demand and lower commodity prices.

Monthly review • In early May it was announced that Mr Berlusconi's wife was seeking a divorce, following another public spat with her husband. Opinion polls suggest that it has not had an immediate impact on his high approval ratings. • Mr Berlusconi has announced that the G8 summit of leading industrialised nations will be held in the earthquake-devastated city of L'Aquila rather than on the exclusive island of La Maddalena near Sardinia. • Lega Nord objections have forced the government not to hold the electoral law referendum on the same day as the European Parliament elections. The Lega is opposed to the proposed changes, which would be unfavourable to small parties. • Tensions within the ruling coalition have continued over the government’s tough immigration policy, which is being led by the Lega. • New public finance projections published in April showed a sharp deterioration compared with the February Stability Programme, reflecting mostly the impact of the deepening recession rather than a change in fiscal policy. • On a calendar-day adjusted basis industrial output fell by a massive 21% in the first quarter of 2009 following a fall of 10.2% in the fourth quarter of 2008. • In April business and consumer confidence indictors were up, suggesting that the decline in the Italian economy may be starting to bottom out.

Factsheet
May 6th 2009
From the Economist Intelligence Unit
Source: Country ViewsWire

| Annual data | 2008(a) | Historical averages (%) | 2004-08 |
| Population (m) | 58.1 | Population growth | 0.1 |
| GDP (US$ bn; market exchange rate) | 2,311(b) | Real GDP growth | 0.9 |
| GDP (US$ bn; purchasing power parity) | 1,797 | Real domestic demand growth | 0.9 |
| GDP per head | 39,744 | Inflation | 2.3 |
|(US$; market exchange rate) | | | |
| GDP per head | 30,910 | Current-account balance | -2.2 |
|(US$; purchasing power parity) | |(% of GDP) | |
|Exchange rate (av)€:US$ |0.680(b) | FDI inflows (% of GDP) | 1.3 |
| (a) Economist Intelligence Unit estimates. (b) Actual. |

Background. Post-war Italy has been characterised by a weak political structure and a strong, but recently declining economic base. In 1996 Italy moved to a bipolar political system, dominated by a right-of-centre alliance led by Silvio Berlusconi and a broad left-of-centre coalition. Mr Berlusconi won a clear victory in the April 2008 election and the centre-left is now in disarray.
Political structure. Parliament is elected for a maximum of five years. A reform of the electoral system returned Italy to a system based on proportional representation (PR) for the 2006 and 2008 elections. The president, who is elected by parliament for a seven-year term, decides whether to call an election or to nominate a prime minister to try to form a government in the event of a political crisis. He also promulgates laws and may return a law to parliament for reconsideration. Executive power lies with the cabinet, which is nominated by the prime minister and approved by parliament. The prime minister cannot dismiss ministers without forming a new government.
Policy issues. Economic policy, particularly at the present time when other countries are taking fiscal measures to combat recession and recapitalise their banking systems, is constrained by a public debt that remains over 100% of GDP. There was a sharp deterioration in the public accounts in 2001-05, which was temporarily reversed in 2006-07, but a weakening of the economy has brought about a renewed deterioration. Public administration reform and the introduction of a federal fiscal system are the government's main priorities. A referendum to be held in 2009 will keep electoral reform on the agenda. The government has adopted a tough stance on immigration, drawing criticism from the EU and other international bodies.
Taxation: The top rate of personal income tax is 43% and social security contributions are high, especially for employers. The corporation tax rate is 27.5%, but additional regional and municipal taxes are levied, including the regional business tax (IRAP) to fund health services. The basic rate of IRAP is 3.9%, but a higher rate of 5.25% can be applied in regions with large healthcare deficits. There are two tax rates on savings (27% on interest and 12.5% on income from financial investments).
Foreign trade: According to the Banca d'Italia (the central bank), the value of exports of goods (fob) was €366bn (US$502bn) and imports (fob) €364bn in 2007. The current-account balance showed a deficit of €36.6bn (2.4% of GDP).
|Major exports 2008 | % of total | Major imports 2008 % of total |
| Mechanical machinery | 19.3 | Natural gas&oil | 16.6 |
| Metals&metal products | 12.3 | Metals&metal products | 11.7 |
| Textiles, clothing&leather goods | 11.1 | Transport equipment | 11.3 |
| Transport equipment | 10.8 | Computers, electronic | 12.8 |
| | |equipment&electrical machinery | |
| | | | |
| Leading markets 2008 | % of total | Leading suppliers 2008 | % of total |
| Germany | 12.8 | Germany | 16.0 |
| France | 11.2 | France | 8.6 |
| Spain | 6.5 | China | 6.3 |
| US | 6.3 | Netherlands | 5.4 |
| EU27 | 58.5 | EU27 | 54.1 |

Economic data
May 26th 2009
From the Economist Intelligence Unit
Source: Country Data • Italy's right-of-centre coalition government, led by Silvio Berlusconi, faces a major challenge to limit the impact of the global financial crisis on Italy's rapidly deteriorating economy and keep its fragile public finances under control. The government's effectiveness will be hampered by divisions in the ruling coalition, but the Economist Intelligence Unit expects it to remain in office for all or most of the five-year parliamentary term ending in May 2013. Mr Berlusconi has a comfortable majority in parliament and the centre-left opposition is in disarray. • Italy's banks appear to be less exposed to the global financial turmoil than most others in Europe. However, bank lending will be constrained and several banks are availing of state support to boost their capital base. Only a few banks that expanded rapidly outside Italy in recent years are exposed to the crisis in eastern Europe. There is, however, a risk that private-sector debt defaults will rise sharply as a result of the economic slump, with negative consequences for Italy's banks. • The medium-term fiscal outlook remains uncertain owing to already high levels of taxation, a public debt/GDP ratio of over 100%, high debt-servicing costs and political resistance to spending cuts. We expect the fiscal deficit to rise to 5-5.5% of GDP in 2009-10. It is forecast to fall gradually from 2011, but to remain above the 3% ceiling for euro area countries during the entire forecast period. Larger deficits cannot be ruled out if the government starts cutting taxes without reining in spending or has to intervene massively in the banking sector. • Further liberalisation of sheltered services sectors is not on the government's agenda as many of the relevant sectors form part of the ruling coalition's electoral base. However, its hand will, to some extent, be forced by the EU services directive that will take effect from end-2009. The government is overhauling the public administration to improve efficiency and produce savings, but unions will resist the changes. Tight restrictions on dismissals will remain in place. Opposition to more decentralised wage bargaining will continue, but may weaken during the forecast period. • GDP contracted by 1% in 2008 and we expect further contractions of 4.6% in 2009 and of 0.6% in 2010, reflecting the global financial credit squeeze and weak external demand. A modest pick-up is expected from 2011, but this will depend on an improvement in credit conditions and sentiment across the EU. • Helped by lower commodity prices and weak domestic demand, we expect inflation to ease from an annual average of 3.5% (EU harmonised measure) in 2008 to around 0.5-1% in 2009-10 and about 2% in 2011-13.

|Key indicators |2008 |2009 |2010 |2011 |2012 |2013 |
|Real GDP growth (%) |-1.0 |-4.6 |-0.6 |0.6 |0.9 |0.9 |
|Consumer price inflation (av; %) |3.4 |0.5 |0.8 |1.7 |1.9 |1.6 |
|Consumer price inflation (av, %; EU harmonised |3.5 |0.6 |0.9 |1.8 |2.0 |1.7 |
|measure) | | | | | | |
|Budget balance (% of GDP) |-2.7 |-5.3 |-5.5 |-4.1 |-3.5 |-3.5 |
|Current-account balance (% of GDP) |-3.4 |-2.5 |-2.5 |-2.6 |-2.4 |-2.0 |
|Short-term interest rate (av; %) |4.6 |1.5 |1.4 |2.6 |3.5 |4.1 |
|Exchange rate US$:€(av) |1.47 |1.32 |1.39 |1.42 |1.45 |1.47 |

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History in brief
May 31st 2007
From Economist.com

From unification to fascism
Not unified until 1861, Italy came late to the process of state-building in Europe. The social and economic disparity between north and south, which still exists, and the papacy's refusal to recognise the legitimacy of the new state, hindered its early development. A rigid, centralised political system was established, and there emerged a system of shifting political alliances called trasformismo, in which broad coalitions were held together by the distribution of patronage.
After the first world war, successive governments found it increasingly difficult to govern effectively. In 1922 King Victor Emanuel III invited Benito Mussolini to form a government. Within two years he had dismantled the parliamentary system and established a fascist state. Mussolini's decision to side with Germany in the second world war led to a devastating military defeat and left the country profoundly weakened, both internally and internationally.
The legacy of fascism
Post-war political culture was heavily influenced by the desire to prevent a return to authoritarianism. Under the new constitution that came into force in 1948, powers were diffused extensively between the different branches of government to ensure that the executive and its head would be weak compared with other European democracies.

Post-war dominance of the Christian Democrats
Following the second world war, the Partito Socialista Italiano (PSI) and the Partito Comunista Italiano (PCI) joined coalition governments led by Alcide De Gasperi of the Democrazia Cristiana (DC). However, in 1947, as relations between the West and the Soviet Union became fraught, the US and the church intensified their opposition to the presence of the PCI in government. Consequently, the DC dissociated itself from the left, resulting in its exclusion from government. De Gasperi was determined that as Europe divided, Italy would be firmly in the Western, US-led camp, and in the 1948 election, the DC obtained an absolute majority in parliament.
For a quarter of a century, the PCI, the largest communist party in western Europe, was excluded from government. The party gradually distanced itself from the Soviet Union and in 1973 launched its strategy of "historic compromise", designed to allow it a role in government. The PCI joined the DC-led parliamentary majority in 1976, but without obtaining ministerial positions. However, intense political instability, heightened by acts of politically motivated terrorism, contributed to the collapse of the historic compromise in 1979. The continued exclusion of the PCI in effect prevented the emergence of an alternative government, resulting in a monopoly on power for the parties of the centre and centre-right. Combined with a long history of patronage, corrupt practices by the holders of public office reached a zenith in the 1980s.
The collapse of communism in the late 1980s resulted in profound political change. With the threat of a communist overthrow of the institutions of liberal democracy lifted, the judiciary began to assert itself, cracking down on those politicians, businessmen and civil servants who had involved themselves in the dense web of corruption that had enmeshed state institutions. At the peak of the judicial investigation, which became known as "Operation Clean Hands", over one-third of parliamentarians were under scrutiny. No political party was untouched by the revelations, but the pillar of the post-war era, the DC, was most seriously affected and ultimately disbanded as a result.

Political structure
May 26th 2009
From the Economist Intelligence Unit
Source: Country Report

Official name: Italian Republic
Legal system: Based on constitution of 1948
National legislature: Bicameral, Senate of 315 seats; Chamber of Deputies of 630 seats
National elections: April 13th-14th 2008; next election due in April 2013
Head of state: the president, elected for a seven-year term by an electoral college of the Senate, the Chamber of Deputies and regional representatives, has no executive powers. Elected in May 2006, the term of the current president, Giorgio Napolitano, runs until mid-May 2013
National government: Council of Ministers headed by a prime minister, appointed by the president on the basis of ability to form a government with parliamentary support. The present government was formed by Silvio Berlusconi in May 2008
Political coalitions and parties:
The main parties represented in parliament are: Government: the right-of-centre Popolo della Liberta (PDL), comprising Forza Italia (FI), Alleanza Nazionale (AN), Democrazia Cristiana per le Autonomie (DCA) and several other micro parties; the PDL is allied with the regionalist parties Lega Nord in the north and Movimento per l’Autonomia in the south; Opposition: the centre-left Partito Democratico (PD); Italia dei Valori (IDV); the Radicali; and the centrist Unione di Centro (UDC), comprising mainly the Unione dei Democratici Cristiani e Democratici di Centro. The hard-left grouping, Sinistra Arcobaleno (Rainbow Left), failed to win any seats
CABINET MINISTERS
Prime minister: Silvio Berlusconi (PDL)
KEY MINISTERS
Agriculture: Luca Zaia (Lega Nord)
Culture & heritage: Sandro Bondi (PDL, FI)
Defence: Ignazio La Russa (PDL, AN)
Economic development: Claudio Scajola (PDL, FI)
Economy & finance: Giulio Tremonti (PDL, FI)
Education, universities & research: Mariastella Gelmini (PDL, FI)
Employment, health & social affairs: Maurizio Sacconi (PDL, FI)
Environment: Stefania Prestigiacomo (PDL, FI)
Foreign affairs: Franco Frattini (PDL, FI)
Infrastructure & transport: Altero Matteoli (PDL, AN)
Interior: Roberto Maroni (Lega Nord)
Justice: Angelino Alfano (PDL, FI)
NON-CABINET MINISTERS
European affairs: Andrea Ronchi (PDL, AN)
Equal opportunities: Mara Carfagna (PDL, FI)
Federal reform: Umberto Bossi (Lega Nord)
Legislative simplification: Roberto Calderoli (Lega Nord)
Parliamentary relations: Elio Vito (PDL, FI)
Programme implementation: Gianfranco Rotondi (PDL, DCA)
Public administration & innovation: Renato Brunetta (PDL, FI)
Regional affairs: Raffaele Fitto (PDL, FI)
Youth: Giorgia Meloni (PDL, AN)
Central bank governor: Mario Draghi.

Political forces
Oct 15th 2008
From the Economist Intelligence Unit
Source: Country ViewsWire
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Popolo della Liberta In early 2008 Mr Berlusconi hurriedly launched the PDL, to contest the April general election that was called following the collapse of the Prodi government. The PDL comprises Mr Berlusconi's Forza Italia, which he formed when he entered politics in January 1994, and the AN, a rightist party that evolved from the neo-fascist Movimento Sociale Italiano (MSI). The two parties agreed before the election that they would merge to form a single party. Since winning the election the new party has not yet officially been formed, but preparations were under way in late September. Since 2000 Mr Berlusconi's political strategy has largely been built on the preferential axis that he and his party, Forza Italia, formed with the Lega Nord, often at the expense of the AN and his other allies, particularly the centrist UDC, which formally broke away from the right-of-centre alliance shortly before the April 2008 election. The axis with the Lega remains crucial to the survival of the government formed by Mr Berlusconi following his coalition's clear-cut electoral victory.

Lega Nord
The Lega Nord led by Umberto Bossi first formed an alliance with Mr Berlusconi in 1994, but withdrew at the end of the same year, causing the collapse of the first Berlusconi government. In March 2000 the party was persuaded to rejoin the coalition, helping Mr Berlusconi to win the 2001 and 2008 elections. The Lega has, however, been an awkward ally, remaining semi-detached from the rest of the coalition. It contested the last three general elections in 2001, 2006 and 2008 as a separate party and is uninterested in becoming part of the PDL. The Lega originated from the regional autonomy movements formed in the 1980s to protest against political corruption and the channelling of tax revenue from the wealthy, industrialised north of the country to the underdeveloped south. Lurching towards the far right on issues such as immigration and frequently eurosceptic, the Lega renounced its original goal of secession in favour of devolution of greater powers to the regions when it rejoined Mr Berlusconi's coalition in 2000.

Partito Democratico The centre-left Partito Democratico (PD) was formed in October 2007 as a result of a merger between the moderate left Democratici di Sinistra (DS) and the centrist Democrazia e Liberta (DL), the two main parties of the broad left-of centre Unione coalition led by Mr Prodi, which had narrowly won the April 2006 election. The decision to form a single centre-left party arose because of excessive fragmentation of the Unione coalition and the inherent instability of Mr Prodi's second government. The new party and its supporters elected Walter Veltroni, the popular mayor of Rome and former leader of the DS, as its first leader. Hampered by the unpopular legacy of the Prodi government Mr Veltroni lost the general election to Mr Berlusconi. The emergence of the PD led a small group of leftist members of the DS, to break away and form the Sinistra Democratica (SD) in May 2007. The SD subsequently became part of the hard-left alliance, Sinistra Arcobaleno, formed at the beginning of 2008. Besides the SD, Sinistra Arcobaleno comprises the Partito della Rifondazione Comunista (PRC), which was created in 1990 by the far-left minority of the former PCI, the Partito dei Comunisti Italiani (PDCI) a splinter group of the PRC that opposed the PRC's decision to withdraw support from the Prodi government in October 1998, and I Verdi (The Greens). For the April 2008 general election Mr Veltroni refused to form an alliance with the hard left. As a result the Sinistra Arcobaleno won no seats. The PD entered electoral alliances with the centrist Italia dei Valori (IDV) party led by Antonio Di Pietro, a former anti-corruption public prosecutor, and the Partito Radicale headed by a former European commissioner, Emma Bonino. After the general election the IDV, which won about 4.5% of the vote, refused to form a single group with the PD in parliament. Mr Di Pietro's hardline opposition to Mr Berlusconi cast a shadow over Mr Veltroni's role as leader of the opposition.

Unione Democratico-Cristiana e di Centro The UDC, which is led by Pier Ferdinando Casini, was formed in April 2002 by three small parties that place Roman Catholic values at the centre of their programme. They claim to be the true heir of the disbanded and discredited DC, the party that dominated post-war politics between 1948 and the early 1990s. The party joined Mr Berlusconi's right-of-centre alliance when it was formed in 1994. However, while in government in 2001-06 the party became increasingly frustrated with Mr Berlusconi's leadership style and the strong influence of the Lega within the coalition. Following the 2006 electoral defeat, the UDC distanced itself from Mr Berlusconi's coalition and formally left the alliance in early 2008.

The judiciary The independence of the judiciary, including judges and public prosecutors, is guaranteed under the constitution. However, Italian and international observers have frequently criticised the judicial system for the length of the judicial process and the politicisation of the judiciary. An overhaul was an important part of the Berlusconi government's programme in 2001-06. However, the reform process was slow and controversial. Many of Italy's judges and public prosecutors fiercely opposed the changes, which they claimed would undermine their independence. The Prodi government repealed some of Mr Berlusconi's judicial reforms. Just a month after taking office in May 2008 the new Berlusconi government clashed with the judiciary over measures proposing to suspend thousands of trials, including at least two involving Mr Berlusconi.

The legislature Under the existing system, all legislation must pass both the Chamber of Deputies (630 members) and the Senate (315 members), for which elections must take place at least every five years. Italy's electoral system has been based on proportional representation (PR) during most of its post-war history. A system of pure PR was replaced in 1993 by a mixed system, under which about three-quarters of the members of both chambers were elected by a simple majority in a single ballot from constituencies with one seat; whereas the rest were elected by PR. A reform of the electoral system in late 2005 reintroduced a system of PR, but with bonus seats awarded to the winning coalition (on a national basis in the Chamber of Deputies and on a regional basis in the Senate). A referendum aimed at repealing aspects of the current electoral laws to reduce fragmentation and the disproportionate influence of fringe parties may be held in 2009. The president, who is chosen by an electoral college comprising the two houses of parliament plus representatives of the regions, is one of the guardians of the constitution, the other being the Constitutional Court. He also proclaims the election of parliament and plays an important role as a mediator in government crises. After an election or after a government has lost majority support in parliament, the president designates the prime-ministerial candidate that he deems to be in the best position to form a workable majority in both chambers. All government decrees and laws passed by parliament must be promulgated by the president, who can refer laws back to parliament. However, he does not have a full power of veto.

Media services The readership of daily newspapers is low in Italy, with as many as 80% of the population estimated to rely on television for news. The press is mainly owned by business interests or affiliated to political parties. Broadcasting is dominated by the state broadcaster, RAI, and Mediaset, the media company owned by Mr Berlusconi. At the end of 1994 the Constitutional Court declared Mediaset's near-monopoly of private television to be unconstitutional, forcing parliament to reform the Mammi Law. Reforms have so far failed to increase competition in the sector.

Democracy index (for methodology, see Appendix) The Economist Intelligence Unit's 2008 democracy index ranks Italy 29th out of 169 countries, up from 34th place in 2006. Italy is among the 31 countries considered full democracies, but trails all west European countries in the rankings except Turkey and Cyprus. Italy's score for the electoral process is high. There are direct elections at all levels of the administration including for regional and provincial presidents and town and city mayors. Elections are free and fair and the transfer of power is a well-accepted process. The main issue is the dominant position of private-sector media group, Mediaset, which is owned and run by the family of the three-times prime minister, Silvio Berlusconi. There is still, however, an adequate degree of pluralism and strict rules have been in place since the early 1990s to govern media coverage during election campaigns. Italy scores poorly in two categories: government functioning and political participation. The executive is weaker than in other Western polities and there is general public dissatisfaction with the political class and the inefficiency of the state administration, even though voter turnout is high at national and local elections. Party membership levels are comparatively low and public engagement in, and the following of, politics is relatively low for a functioning full democracy. Civil liberties are generally well protected. However, the judicial system is extremely slow and there are frequent complaints about conditions in Italy's overcrowded jails.

Weber Shandwick Italy
Updated on May 2009