18-K

FORM 18-K

For Foreign Governments and Political Subdivisions Thereof

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ANNUAL REPORT
of

THE REPUBLIC OF ITALY

(Name of Registrant)

Date of end of last fiscal year: December 31, 2006

SECURITIES REGISTERED*

(As of close of the fiscal year)

Title of Issues	Amounts as to which registration is effective	Names of exchanges on which registered
N/A*	N/A	N/A

Name and address of Authorized Agent of the Registrant in the United States to receive notices
and communications from the Securities and Exchange Commission:

THE HONORABLE GIOVANNI CASTELLANETA
Italian Ambassador to the United States
3000 Whitehaven Street, N.W.
Washington, D.C. 20008

It is requested that copies of notices and communications from the Securities and Exchange
Commission be sent to:

RICHARD A. ELY, ESQ
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
40 Bank Street,
Canary Wharf
London E14 5DS
England

• The Republic of Italy files Annual Reports on Form 18-K voluntarily in order for The Republic of Italy to incorporate such Annual Reports into its shelf registration statements.

TABLE OF CONTENTS

EX-99.C

EX-99.D

1. In respect of each issue of securities of the registrant registered, a brief statement as to:

(a)	The general effect of any material modifications, not previously reported, of the rights of the holders of such securities.
	There have been no such modifications.
(b)	The title and the material provisions of any law, decree or administrative action, not previously reported, by reason of which the security is not being serviced in accordance with the terms thereof.
	There has been no such law, decree or administrative action.
(c)	The circumstances of any other failure, not previously reported, to pay principal, interest, or any sinking fund or amortization installment.
	There has been no such failure.

2. A statement as of the close of the last fiscal year of the registrant giving the total outstanding of:

(a)	Internal funded debt of the registrant. (Total to be stated in the currency of the registrant. If any internal funded debt is payable in foreign currency it should not be included under this paragraph (a), but under paragraph (b) of this item.)
	See “Tables and Supplementary Information,” page 93 of Exhibit (d), which is hereby incorporated by reference herein.
(b)	External funded debt of the registrant. (Totals to be stated in the respective currencies in which payable. No statement need be furnished as to intergovernmental debt.)

See “Tables and Supplementary Information,” pages 93 to 97 of Exhibit (d), which is hereby incorporated by reference herein.

3. A statement giving the title, date of issue, date of maturity, interest rate and amount outstanding, together with the currency or currencies in which payable, of each issue of funded debt of the registrant outstanding as of the close of the last fiscal year of the registrant.

See “Tables and Supplementary Information,” pages 93 to 97 of Exhibit (d), which is hereby incorporated by reference herein.

4. 

(a) As to each issue of securities of the registrant which is registered, there should be furnished a break-down of the total amount outstanding, as shown in Item 3, into the following:

(1) Total amount held by or for the account of the registrant.

ii

(2)	Total estimated amount held by nationals of the registrant (or if registrant is other than a national government by the nationals of its national government); this estimate needs be furnished only if it is practicable to do so.
(3)	Total amount otherwise outstanding.
	Not applicable. The Republic of Italy files Annual Reports on Form 18-K voluntarily in order to incorporate such Annual Reports into its shelf registration statements.

(b) If a substantial amount is set forth in answer to paragraph (a)(1) above, describe briefly the method employed by the registrant to reacquire such securities.

Not applicable.

5. A statement as of the close of the last fiscal year giving the estimated total of:

(a)	Internal floating indebtedness of the registrant. (Total to be stated in the currency of the registrant.)
	See “Tables and Supplementary Information,” page 93 of Exhibit (d), which is hereby incorporated by reference herein.
(b)	External floating indebtedness of the registrant. (Total to be stated in the respective currencies in which payable.)
	See “Tables and Supplementary Information,” pages 93 to 97 of Exhibit (d), which is hereby incorporated by reference herein.

6. Statements of the receipts, classified by source, and of the expenditures, classified by purpose, of the registrant for each fiscal year of the registrant since the close of the latest fiscal year for which such information was previously reported. These statements should be so itemized as to be reasonably informative and should cover both ordinary and extraordinary receipts and expenditures; there should be indicated separately, if practicable, the amount of receipts pledged or otherwise specifically allocated to any issue registered, indicating the issue.

See “Public Finance — Measures of Fiscal Balance,” “— The Council Recommendation to Italy Relating to its Excessive Government Deficit” “— The 2007 Stability and Growth Program,” “— The 2008-2011 Program Document,” “— Revenues and Expenditures,” “— Expenditures,” “— Revenues,” “— Government Enterprises,” “— Privatization Program” and “— Government Real Estate Disposal Program” pages 64 to 84 of Exhibit (d), which are hereby incorporated by reference herein.

7. 

(a) If any foreign exchange control, not previously reported, has been established by the registrant, briefly describe such foreign exchange control.

iii

No foreign exchange control not previously reported was established by the registrant during 2006.

(b) If any foreign exchange control previously reported has been discontinued or materially modified, briefly describe the effect on any such action, not previously reported.

No foreign exchange control previously reported was discontinued or materially modified by the registrant during 2006.

8. Brief statements as of a date reasonably close to the date of the filing of this report, (indicating such date) in respect of the note issue and gold reserves of the central bank of issue of the registrant, and of any further gold stocks held by the registrant.

See “The External Sector of the Economy — Reserves and Exchange Rates,” pages 62 to 63 of Exhibit (d), which is hereby incorporated by reference herein.

9. Statements of imports and exports of merchandise for each year ended since the close of the latest year for which such information was previously reported. The statement should be reasonably itemized so far as practicable as to commodities and as to countries. They should be set forth in items of value and of weight or quantity; if statistics have been established in terms of value, such will suffice.

See “The External Sector of the Economy — Foreign Trade,” “— Geographic Distribution of Trade,” “— Balance of Payments — Current Account” and “Capital Account” pages 52 to 59 of Exhibit (d), which are hereby incorporated by reference herein.

10. The balances of international payments of the registrant for each year ended since the close of the latest year for which such information was previously reported. The statements of such balances should conform, if possible, to the nomenclature and form used in the “Statistical Handbook of the League of Nations.” (These statements need to be furnished only if the registrant has published balances of international payments.)

See “The External Sector of the Economy — Balance of Payments,” page 57 of Exhibit (d), which is hereby incorporated by reference herein.

EXHIBITS

The following exhibits should be filed as part of the annual report:

(a) Copies of any amendments or modifications, other than such have been previously filed, to all exhibits previously filed other than annual budgets. If such amendments or modifications are not in the English language, there should be furnished in addition a translation into English if the original exhibit was translated into English.

None.

iv

(b) A copy of any law, decree, or administrative document outlined in answer to Item 1(b). If such law, decree or document is not in the English language, there should be furnished in addition thereto a translation thereof into English.

None.

(c) A copy of the latest annual budget of the registrant, if not previously filed, as presented to its legislative body. This document need not be translated into English.

The annual budget for the Registrant as set forth in the Program Document for 2008-2011 (Documento di Programmazione Economica e Finanziaria per gli anni 2008-2011 — DPEF), dated June 28, 2007, filed in electronic format under this Form 18-K, and in the Update to the Program Document for 2008-2011 (Nota di Aggiornamento al Documento di Programmazione Economico-Finanziaria per gli anni 2008-2011) and the Annual Program Report for 2008 (Relazione Previsionale e Programmatica per il 2008), each dated September 28, 2007 and filed in paper format under cover of Form SE on April 23, 2008.

(d) The registrant may file such other exhibits as it may desire, marking them so as to indicate clearly the items to which they refer.

Description of The Republic of Italy.

This annual report comprises:

(a)	Pages numbered i to vi consecutively.
(b)	The following exhibits:

Exhibit (a) — None.

Exhibit (b) — None.

Exhibit (c) — The annual budget for the Registrant as set forth in the Program Document for 2008-2011 (Documento di Programmazione Economica e Finanziaria per gli anni 2008-2011 — DPEF), dated June 28, 2007, filed in electronic format under this Form 18-K, and in the Update to the Program Document for 2008-2011 (Nota di Aggiornamento al Documento di Programmazione Economico-Finanziaria per gli anni 2008-2011) and the Annual Program Report for 2008 (Relazione Previsionale e Programmatica per il 2008), each dated September 28, 2007 and filed in paper format under cover of Form SE on April 23, 2008.

Exhibit (d) — Description of The Republic of Italy.

This annual report is filed subject to the Instructions for Form 18-K for Foreign Governments and Political Subdivisions Thereof.

v

SIGNATURE

     Pursuant to the requirements of the United States Securities Exchange Act of 1934, the registrant Republic of Italy has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rome, Italy on April 23, 2008.

REPUBLIC OF ITALY
By:	/s/ Maria Cannata
	Name:	Dott.ssa Maria Cannata
	Title:	Director General — Treasury Department — Directorate II Ministry of Economy and Finance

vi

EXHIBIT INDEX

Exhibit	Description	Page No.
(c)	The annual budget for the Registrant as set forth in the Program Document for 2008-2011 (Documento di Programmazione Economica e Finanziaria per gli anni 2008-2011 — DPEF), dated June 28, 2007, and the Update to the Program Document for 2008-2011 (Nota di Aggiornamento al Documento di Programmazione Economico-Finanziaria per gli anni 2008-2011) and the Annual Program Report for 2008 (Relazione Previsionale e Programmatica per il 2008), each dated September 28, 2007 and filed in paper format under cover of Form SE on April 23, 2008.
(d)	Description, dated December 31, 2006, of The Republic of Italy

EX-99.C

Exhibit (c)

The annual budget for the Registrant as set forth in the Program Document for 2008-2011
(Documento di Programmazione Economica e Finanziaria per gli anni 2008-2011 — DPEF),
dated June 28, 2007, and the Update to the Program Document for 2008-2011 (Nota di Aggiornamento al
Documento di Programmazione Economico-Finanziaria per gli anni 2008-2011) and the Annual
Program Report for 2008 (Relazione Previsionale e Programmatica per il 2008), each dated
September 28, 2007 and filed in paper format under cover of Form SE on April 23, 2008.

Ministero dell“Economia e Delle Finanze

2008-2011

Economic and Financial

Planning Document

The
2008-2011
ECONOMIC AND FINANCIAL PLANNING DOCUMENT
is available on-line at
the Internet address listed below:

ww.mef.gov.it
www.dt.tesora.it

2008-2011
Economic and Financial
Planning Document

Submitted by Prime Minister

Romano Prodi

and

by Minister of the Economy and Finance

Tommaso Padoa-Schioppa

Adopted by the Cabinet on June 28, 2007

2008-2011 Economic and Financial Planning Document

Rome, 29 June 2007

     Illustre e Caro Presidente

     The Economic and Financial Planning Document approved by the Government one year ago indicated the objective, for the entire political term, of getting the Italian economy back on a sustainable growth track. The dreary state into which the economy had lapsed in the preceding years—low growth, deterioration in public accounts, and growing social concerns—had to be overcome.

     The progress made after just one year is quite clear: employment is up, prices have stabilised to a point not seen in a decade, thereby reinforcing the public’s purchasing power; Italian firms are being restructured, while the reduction of the fiscal wedge will grow their competitiveness. The Government has tackled the most acute issues of social concerns, it has tapped and allocated resources for development and for the southern regions of the country; it has respected the commitments taken with regard to the European Union, and has laid the groundwork for the repeal of the Excessive Deficit Procedure initiated in 2005. For the first time in a long time, the trend of the public accounts is such that there will be no need for corrective measures for the year to come for the purpose of fiscal consolidation. This is a strikingly significant development.

     The rejection of a two-step strategy—first, fiscal consolidation, and then, enhancing growth—has borne fruit: the country is once again on a growth track after years of stagnation, and it has emerged from its fiscal predicament.

     While much has been accomplished, a lot more still needs to be done. The effort of the Government and the country must be concentrated on the objective of transforming the cyclical recovery into long-lasting and sustainable growth. Recent trends confirm that serious shortcomings persist with respect to the rest

Ministero dell’Economia e delle Finanze
	III

2008-2011 Economic and Financial Planning Document

of Europe: weak capacity to innovate and adopt new technologies; insufficient competitive pressure, particularly in the services sector; labour market participation that is well below the European average, especially for women and older workers; low level of education for the work force; shortage of infrastructures; and inefficiency in the public administration.

     These shortcomings are depressing the economy’s potential growth and have left the country unprepared to meet future challenges.

     We can transform shortcomings into opportunities: closing the productivity and labour-participation gap with the rest of Europe would mean growing at a pace of nearly 3 per cent for many years. It is feasible: we need a burst of pride, renewed ambition that can leverage the country’s enormous vital energy. We also need to ensure that the legitimate defence of special interests does not exceed the threshold of reason, and that the voice of a minority does not prevail over the profound, but faint, voice of general interest.

     In addition to illustrating how much has been done in the first year of the political term, this Economic and Financial Planning Document points out economic-policy initiatives to be implemented and to be strengthened such as: to make the actions of the state and local government more effective; to lighten the burden of public administration on the economy by increasing its productivity; to enhance competition in markets for products and services; and to remedy social concerns. The commitments remain firm with respect to: renovating and strengthening the school and university system; removing the bottlenecks within the fixed infrastructures that are impeding economic development; promoting greater equal opportunity; and pursuing energy efficiency and the development of renewable sources. The Document concentrates on policies for the environment, thereby evidencing the central position that the issues of climate change and sustainable development have achieved within modern economies.

     Achieving higher growth is not possible without greater unity and social justice, a guiding principle behind the activity of the Government since it was formed. The time has come for putting the finishing touches on Italy’s welfare state, while also ensuring fiscal sustainability over the long term. The Decree Law approved along with this Document achieves a very important step in this direction: the initiative to sustain small pensions and the programme to aid workers having difficulty in securing full-time employment will alleviate very distressing situations for many of the country’s elderly and young people. At this point, it is possible to complete the pension reform process initiated in the early nineties and finally to provide the protection that workers need, by coming up with a framework that is compatible with the needs for social justice and fiscal sustainability.

     Tax evasion in Italy is at an unacceptable level and has the untenable effects of an unfairly distributed, very high burden for honest taxpayers, and serious distortion of competition. Evasion robs the tax authorities of income equivalent to more than 15 per cent of GDP; getting tax evasion back to a level more in line with the size of the economy would give the Treasury tens of billions of euros of annual revenues, a sum that would allow a significant reduction in

	Ministero dell’Economia e delle Finanze
IV

2008-2011 Economic and Financial Planning Document

the burden for taxpayers by several percentage points across the board. The Government reaffirms the commitment in the most recent Budget Law to reduce taxes as soon as the results from the fight against tax evasion are sounder and provided such reduction is compatible with fiscal consolidation.

     Even though Italy has emerged from its fiscal predicament, this does not mean that the fiscal consolidation process is complete. From this standpoint, there are some concerns about the recent, false perception that there is no longer a need for a balance between ends and means, or between resources available and resources used.

     Struggling to stay within the boundaries set by the past Budget Law, the trend of spending continues to raise some concerns. With the highest public debt in Europe, Italy is more sensitive than other countries to interest-rate fluctuations. Given the effect of the increases that have occurred since the beginning of the year, the most recent estimates indicate interest expenditure will rise by about €2.5 billion. We must never lose sight of a simple fact: if the public debt were to be cut in half, an additional €35 billion per year would be available for development, infrastructure improvement and better social protection. The reduction of the debt must thus be the state’s first investment in favour of young people and future generations.

     The Government reaffirms the commitment made one year ago to balance the budget and to bring the debt below 100 per cent of GDP by the end of the political term.

     Whereas it is true that a net adjustment in the accounts for fiscal consolidation purposes will not be needed in September, it is also true that it will be necessary to tap a sizeable amount of resources, albeit smaller than in the past year, through a series of fiscal measures. Such resources will be needed to cover expenditures for public contracts, service contracts, international commitments and so forth, which, though not included in the forecasts based on unchanged legislation, are based on signed commitments or customary practices and would thus be difficult to ignore. There are also expenditures that will arise from the initiatives that the Government intends to undertake.

     How is it possible to reconcile the need for additional resources with the intention to reduce the tax burden and the constraint of fiscal consolidation? There is only one answer: to spend more intelligently. To recover resources within the general government’s budget, by augmenting the quality and the efficiency of the spending; to re-examine in-depth what the state does and how it does it.

     The absolute value of primary expenditures can and must become a point of reference in Parliament’s review of this Document and in the preparation thereafter of the proposal for the next Budget Law.

     With the previous Budget Law and the initiatives of recent months, the Government has undertaken significant action to control the public accounts. It has implemented a new budget classification system — focused on the clear identification of the state’s main objectives and programmes. As a result of the new system, the public, Parliament and the Government itself will find the

Ministero dell’Economia e delle Finanze
	V

2008-2011 Economic and Financial Planning Document

budget less complicated and easier to understand, while the management of the resources is more flexible and results-oriented. The system also provides a basis for reorganising the structures, responsibilities and incentives within the public administration.

     The Government has also inaugurated a spending review within certain ministries (Education, Home Affairs, Infrastructure, Transport and Justice), with the initiative to be gradually extended to all of the administrations. A procedure that has yielded significant results in other countries, the spending review involves the evaluation of needs in relation to results to be achieved, with the practice of adding resources to existing structures thus being abandoned.

     The strategy of spending more intelligently also embraces the commitment to reduce the costs of the political system and to make its financing clearer and more transparent. It aims to correct practices, behaviour and rules increasingly accepted by holders of public offices—Government, central administrations, local entities, public-sector companies, institutions—that are siphoning off public resources and increasing citizens’ aversion toward public officials.

     The public sector includes administrations that are exemplar for their quality and efficiency, but it also includes those that are overabundant, top-heavy and squandering resources. Effective application of the Productivity Accord signed with the unions with regard to transfers, responsibilities and performance evaluations for employees in the public sector provides a new basis for making the state sector and other sectors more modern. Steering the public sector toward levels of excellence and simultaneously freeing up resources to be channelled into priority initiatives is indeed a feasible undertaking. Bringing the prefectures, courts, hospitals, universities and schools up to the levels of excellence seen in the best cases within the public sector means securing better services and substantial savings at the same time.

     The Planning Act issued jointly with this Document is based precisely on this line of action, as a guide to the preparation of the Budget Law in September. The resources for new initiatives and for reinforcing the most important activities will be sought first within the sector to which the initiatives apply. The Planning Act references this commitment for all administrative responsibility centres.

     With regard to the so-called ‘fiscal federalism’, the Government has achieved historic progress for the country, by fully implementing Title V of the Constitution, in concert with system in place for the regions and local autonomous areas. The bill for the enabling act serves as the basis for a major revision of the system for financing territorial entities, and is inspired by several fundamental principles: achieving balance between public functions and financial responsibility; ensuring territories having different needs and different pools of resources are essentially treated equally; substituting the historical expense criterion; ensuring coordination between levels of government; and respecting the European Stability and Growth Pact.

	Ministero dell’Economia e delle Finanze
VI

2008-2011 Economic and Financial Planning Document

     Improving the spending quality and making the intervention of the public sector more effective are not simply issues of political will; they are likewise questions of how resources are concretely managed by public officials at a central and local level, and issues of the constant commitment within individual offices, entities and public institutions. The Government will do its part, but all of the administrations will need to intensify their effort with renewed enthusiasm and sense of responsibility. It is by acting in this regard that we can ensure a better future for our country.

     The Government is transmitting and publishing this Document with the conviction that it may be useful as the basis for debate and decisions on the part of the Italian Parliament and that it may prompt constructive reflection between those who have the future of Italy at heart.

To the Chairmen
of the Senate of the Republic
and the Chamber of Deputies

Ministero dell’Economia e delle Finanze
	VII

2008-2011 Economic and Financial Planning Document .

“The first difficulty is to realize that the proper object of true
political skill is not the interest of private individuals but the
common good. This is what knits a state together, whereas private
interests make it disintegrate. If the public interest is well served,
rather than the private, then the individual and the community
alike are benefited.”

Plato, Laws (IX, 875a)

	Ministero dell’Economia e delle Finanze
VIII

2008-2011 Economic and Financial Planning Document

TABLE OF CONTENTS

I.	Summary
	Part I
II.	The International Economy
II.1	Economic Trends
II.2	Prospects for 2008 and Beyond
II.3	Risks of the Forecasts
III.	The Economy and Public Finance in Italy
III.1	2007 and Current Trends
III.2	The Framework for 2008-2011
III.3	The Scenario Based on Unchanged Legislation and Additional Expenditures
	Part II
IV.	Strategic choices and sectoral policies
IV.1	Sustainable Growth, Social Justice, Fiscal Consolidation
V.	Policies for sustainable growth
V.1	International Role
V.2	Defence
V.3	Justice, Law Enforcement and Rule of Law
V.4	Consumers, Users, Competition, Transparency
V.5	Administrative and Regulatory Simplification
V.6	Climate and Environment
V.7	Energy
V.8	Labour Policies
V.9	Education
V.10	Higher Education and Research
V.11	Infrastructure
V.12	Mobility
V.13	Telecommunications Network and Digitalization
V.14	Innovation and Competitiveness
V.15	Internationalization of Italy’s Exporting firms

Ministero dell’Economia e delle Finanze
	IX

2008-2011 Economic and Financial Planning Document

V.16	Tourism
V.17	Culture
V.18	Agro-food Sector and Fishing
VI.	Policies for social justice
VI.1	Social Justice
VI.2	Tax Policy between Growth and Social Justice
VI.3	Family Action Plan
VI.4	Equal Opportunities Action Plan
VI.5	Youth Policies
VI.6	Health
VI.7	Development Aid
VII.	Fiscal Sustainability
VII.1	Quality of Public Expenditure and Fiscal Reform
VII.2	Modernising Public Administration
VII.3	Pensions
VII.4	Public Debt
VII.5	Privatisation
VIII.	Southern Italy and Local Government Finance
VIII.1	Economic Trends, Policy Objectives and Local Government Policies
VIII.2	Regional Finance, Rules, Tax Authorities
IX.	Appendices
IX.1	Social Justice
IX.2	Labour Productivity
IX.3	Italian Households’ Financial Wealth
IX.4	Trend of the Property Market in Italy
IX.5	Non-Financial Firms: Balance Sheet Accounts and Sources of Financing
IX.6	Qualitative Upgrading of Italian Exports in Traditional Sectors
IX.7	Impact of Deregulation on Prices
IX.8	Deregulation in 2007
IX.9	Fight Against Tax Evasion
IX.10	Fiscal Rules
IX.11	Kyoto Objectives

	Ministero dell’Economia e delle Finanze
X

2008-2011 Economic and Financial Planning Document

Tables
Table I.1	Public Finance, Policy Scenario and Scenario Based on Unchanged Legislation
Table II.1	International Economic Growth
Table II.2	International Prices
Table III.1	Value Added
Table III.2	Employment
Table III.3	Comparison of Forecasts for 2007
Table III.4	Macroeconomic Scenario Based on Unchanged Legislation
Table III.5	General Government Account Based on Unchanged Legislation
Table III.6	Differences in 2007, 2008 and 2009 Forecasts Versus RUEF
Table III.7	General Government Based on Unchanged Legislation
Table III.8	General Government Account 2006-2011
Table III.9	Macroeconomic Indicators over Medium Term, Policy Scenario
Table III.10	Public Finance, Based on Unchanged Legislation and Policy Scenario
Table lll.11	Public Finance Targets
Table III.12	Change in Debt Adjusted for Cyclical Component and One-Off Measures
Table III.13	Classification of Possible Expenditures
Table V.1	Government Capital Expenditure
Table VI.1	2000-2006 Health Spending
Table VII.1	Percentage Composition of Primary Expenditure in Italy by Function
Table VIII.1	Government Capital Spending
Table VIII.2	Resources of the 2007-2013 National Strategic Framework
Table IX.l	Non-Financiai Firms in Italy, Balance-Sheet Composition, 1995, 2000, 2006
Table IX.2	Composition of Corporate Liabilities, 2005
Charts
Chart II.1	Trend of GDP 1997-2007
Chart III.1	Contribution to GDP Growth
Chart III.2	Growth Assumptions, Alternative Scenarios
Chart V.1	Government Investments per Sectors and Levels of Government
Chart VII.1	Government Spending on Pensions as a Proportion of GDP
Chart VII.2	Trend in Debt-service Costs As a Proportion of GDP and By Average Cost At Issuance
Chart VII.3	Evolution Of Debt Duration and Average Life
Chart VII.4	Evolution of Debt Composition By Instruments
Chart VII.5	Evolution of Debt to GDP Ratio
Chart VIII.1	Business and Consumer Confidence
Chart VIII.2	GDP Growth in the South, Policy Scenario
Chart VIII.3	Breakdown By Priority Of The 2007-2013 National Strategic Framework Funds In The South
Chart IX.1	Relative Poverty by Geographic Area
Chart IX.2	Relative Poverty by Type of Household

Ministero dell’Economia e delle Finanze
	XI

2008-2011 Economic and Financial Planning Document

Chart IX.3	Relative Poverty in 2004
Chart IX.4	Subjective Poverty, Total for Italy
Chart IX.5	Breakdown of GDP Growth Rate
Chart IX.6	Mix of Assets in Households Portfolios for Various European Countries
Chart IX.7	Flow of Mortgage Loans to Italian Households
Chart IX.8	Private Residential Investment in Italy and Stock of Residential Construction
Chart IX.9	Weights of Different Types of Financing 1995-2006
Chart IX.10	Venture Capital Investment, 1995, 2000 and 2005
Chart IX.11	Average Unit Values and Volumes of Exports for Textile/Apparel Sector
Chart IX.12	Average Unit Values and Volumes of Exports for Footwear Sector
Chart IX.13	Absolute Qualitative Change of Italian Exports
Chart IX.14	Relative Qualitative Change of Italian Exports Compared with EU Imports from World
Chart IX.15	Absolute Qualitative Change of Exports in France, Germany, and Spain (Apparel)
Chart IX.16	Absolute Qualitative Change of Exports in France, Germany, and Spain (Footwear)

	Ministero dell’Economia e delle Finanze
XII

2008-2011 Economic and Financial Planning Document

I. SUMMARY

     The Government has made economic development its priority, while continuing fiscal consolidation. Robust, sustainable growth is needed so that the fiscal adjustment resulting from the significant and rigorous measures adopted last year will translate into lasting improvement. In order for growth and fiscal consolidation to have long-term repercussions, they must be socially equitable and environmentally sustainable, as indicated in the specific chapters of this document.

     The 2007-2011 Economic and Financial Planning Document (DPEF) presented last year traced the guidelines of the Government’s actions for the entire political term. This year’s document reports on the state of completion of the projects undertaken and provides indications for those still to be inaugurated. From this perspective, the progress is encouraging: the recovery of the Italian economy continues, and the fiscal consolidation steps undertaken have already shown to be effective. There is, however, still much to be done.

     In line with cyclical developments in Europe, Italy’s GDP expansion is expected to move beyond its potential for the second consecutive year, hitting 2.0 per cent in 2007. Growth will likely be driven by domestic demand, and particularly, private consumption which is poised to benefit from a gradual recovery in confidence. Though still mostly of a cyclical nature, encouraging signs are coming from the positive performance of exports and the recovery in productivity. Such signs could indicate that significant progress has been made in the process of restructuring Italian industry and the economy as a whole.

     Compared with the forecasts contained in the Combined Report on the Economy and Public Finance (RUEF) published in March, the forecasts in this document call for slightly higher growth in 2008 and the years thereafter. The policy scenario’s growth objectives set out in the Economic and Financial Planning Document (DPEF) for the 2008-2011 period take into account the economic-policy measures that the Government intends to adopt in the next few years. The GDP growth indicated in the policy scenario is slightly higher than the forecast for the scenario based on unchanged legislation. This is due to the conservative nature of the projections and to the fact that the policy scenario’s objectives take into account the fiscal consolidation measures needed to achieve a balanced budget in the medium term.

     From this perspective, the potential advantages from implementation of the reforms programme could be underestimated. The more optimistic, though not unrealistic, assumptions regarding the trend of several fundamental economic variables (e.g. the growth in total factor productivity and the rate of participation of the working age population, as indicated in the objectives of the Lisbon process) would yield substantially more favourable performance. Should such circumstances actually be realised by the end of the period, the GDP growth rate could get close to 3 per cent.

     From a public finance perspective, recent developments have been positive and better than expected. Public accounts should continue to move in a favourable direction

Ministero dell’Economia e delle Finanze
	1

2008-2011 Economic and Financial Planning Document

in 2007, following the significant improvement realised during the previous year thanks both to the Government’s commitment to fiscal consolidation and economic recovery.

     Considering the results achieved to date and the updating of current trends in revenues and expenditures, the public accounts projections presented in the Economic and Financial Planning Document show some changes with respect to the Combined Report on the Economy and Public Finance (RUEF). On the revenue side, the tax receipts realised in the first three months of 2007 served as the basis for projecting incremental tax revenues of roughly €3.1 billion for the current year. Although the scenario for expenditures is basically in line with that contemplated by the RUEF, some concerns exist about the trend of some components of healthcare expenditure, as well as some risk factors related to interest and other current expenditures. It should also be noted that the budget consolidation effort—which mobilised more than €45 billion last year alone—is not a single-year initiative, but one that spans three years, and it is over this period that the complete evaluation thereof should be made.

TABLE I.1: PUBLIC FINANCE, POLICY SCENARIO AND SCENARIO BASED ON UNCHANGED LEGISLATION

	2006		2007		2008		2009		2010		2011
NET BORROWING: RESULTS AND ESTIMATES
RUEF (March 2007) based on unchanged legislation		-4.4		-2.3		-2.3		-2.1		—		—
New trend data prior to the Decree Law (June 2007)		-4.4		-2.1		-2.1		-1.8		-1.3		-1.1
2008-2011 DPEF
Decree Law (% of GDP)		—		0.4		0.1		0.1		0.1		0.1
Updated net borrowing based on unchanged legislation		—		-2.5		-2.2		-1.9		-1.4		-1.3
Net borrowing policy scenario		—		-2.5		-2.2		-1.5		-0.7		0.1
Fiscal adjustment per year to be achieved (€ bn)		—		0.0		0.0		-6.3		-6.5		-11.4
Cumulative correction to be achieved (€ bn)		—		0.0		0.0		-6.3		-12.8		-24.2
% of GDP		—		0.0		0.0		-0.4		-0.7		-1.4

     Due to the effectiveness of the Government’s measures, it will be possible, for the first time in many years, to achieve the policy objective without having to rely on additional corrective measures for the year to come. Any future measures that the Government may elect to put into place this year will thus not be based on the need for correcting unexpected developments, but rather on the opportunity for redistributing resources, including for the purpose of meeting essential binding commitments not yet fully included in the projections based on unchanged legislation. Despite the more favourable prospects for public finance, Italy cannot afford to let down its guard. The Government intends to respect the commitments undertaken with Europe with regard to the Excessive Deficit Procedure. At the same time, the Government plans to use the extra tax revenues closely linked to the structural improvement in the economy for initiatives to promote development and for specific measures to sustain the weaker social classes.

	Ministero dell’Economia e delle Finanze
2

2008-2011 Economic and Financial Planning Document

     Within the framework of the policy objectives, 2007 net borrowing should equal 2.5 per cent of GDP, after incorporating the effects of the new measures for an amount of financial resources equal to roughly 0.4 per cent of GDP. The policy scenario fully respects the commitment made to the EU to eliminate the deficit in the 2006-2007 two-year period, the cyclically-adjusted cumulative adjustment, net of one-off measures, is equal to 1.7 per cent of GDP, or 0.1 percentage points more than that required by the July 2005 Ecofin Recommendation. A reversal of the trend in the debt-to-GDP ratio is also expected, with the ratio starting to decline again and getting to 105.1 per cent in 2007.

     Net borrowing should be at 2.2 per cent of GDP in 2008. This objective implies rigorous control over spending. Should this not happen, the Government intends to take the necessary steps during the year to make the achievement of the policy goal possible.

     A further, gradual decline in net borrowing is projected over the 2009-2011 period, with the country achieving a balanced budget in 2011, when the primary surplus should be equal to around 5 per cent of GDP. The structural adjustment to be introduced in order to ensure a balanced budget by 2011 is approximately 1.4 per cent of GDP. Public debt is expected to dip below 100 per cent of GDP, reaching 95.0 per cent in 2011.

     In order to transform the current economic recovery into lasting and sustainable growth from a social, environmental and fiscal perspective, the reference horizon for Government’s action must be extended so as favour greater inter-generational justice, thus reducing the debt burden for future generations. The concrete completion of such a process is not an easy undertaking, but the objective must be pursued with determination nonetheless.

     The fiscal sustainability which has been reinstated during the first year of the political term must be safeguarded. It thus becomes necessary to pinpoint the sources of funding to finance the initiatives that the Government may elect to implement. The Government does not intend to tap any such funding through further increasing the tax burden for individuals who are already paying their fair share of taxes; on the contrary, the Government plans to alleviate the tax burden over time, and as established by the 2007 Budget Law, to fund certain new initiatives with resources recovered through efforts to fight tax evasion. Still, it will be possible to cut the tax burden only if the current trend in public spending develops in line with the forecasts.

     If the raising of tax rates is excluded, then the additional resources can only be found through increasing the quality and efficiency of spending. This is the point of convergence for stronger economic development, greater justice, and fiscal consolidation.

     This document’s analysis is thus not focused on the distribution of additional resources; instead, it focuses on the more effective and efficient use of existing resources. A particular emphasis thus goes to the issue of ‘spending better’. The leeway to secure additional savings and greater effectiveness within the public spending sectors is indeed significant. If every area of the public administration (education, universities, justice, public works, security, etc.) were to be able to achieve the highest levels of efficiency already observed within each of the areas themselves, the achievement would not only

Ministero dell’Economia e delle Finanze
	3

2008-2011 Economic and Financial Planning Document

lead to significant savings on expenditures, but also to improvement in services to the public.

     The emphasis of last year’s DPEF on the need for cutting expenditures in four major areas—the pension system, healthcare, public employment, local government—is still as valid as ever. The actions undertaken to date must therefore be considered only as an initial step of a more general process for urgently improving the quality of public expenditure—a process that must be moved ahead with firm determination in the next few years.

     A pivotal aspect of this project is the text of the draft delegated legislation that the Government passed with regard to the implementation of Title V of the Constitution.

     In accordance therewith, the financing for the policy actions set out in this document must be found within the overall process of making the public sector more effective. The resources recovered through ‘spending better’ will mostly be re-allocated within the same areas. The start-up of both the process of reforming the public budget and the spending review will provide an important contribution in this regard.

     The ultimate goal driving the Government’s action remains that of enhancing sustainable growth, and matching it with greater social justice and fiscal consolidation.

	Ministero dell’Economia e delle Finanze
4

2008-2011 Economic and Financial Planning Document

Part I

Ministero dell’Economia e delle Finanze
	5

2008-2011 Economic and Financial Planning Document

II. THE INTERNATIONAL ECONOMY

II.1 ECONOMIC TRENDS

     Global economy

     The global economy and international trade continued to grow at robust rates in the first few months of 2007, keeping pace with the trend set in 2006. The cyclical strengthening was significant in the Euro Area and Japan, while the U.S. economic expansion gradually lost steam, lingering below potential. The growth of the countries in the rest of Asia and in Latin America was strong.

     Major fluctuations in commodity prices, and particularly energy prices, have continued to influence price trends at a global level, although international inflationary tensions are still modest, partly as a result of cautious monetary policies by the central banks of the most industrialized countries.

     The differential between long-term interest rates in the Euro Area and the United States has gradually narrowed, and this, together with expectations about European growth, has contributed to the euro’s appreciation against the dollar. The European currency has also gained ground against the Japanese yen, while Japan’s interest rates are continuing to hover at low levels.

     On the basis of the most recent figures published by international institutions, global GDP is estimated to expand by 4.9 per cent in 2007, compared with 5.4 per cent in 2006. The pace of growth of international trade also looks poised to slow to around 7.0 per cent, compared with 9.2 per cent in 2006.

     United States

     After having expanded above its potential for three consecutive years, the U.S. economy experienced a slowdown starting in the second quarter of 2006. GDP growth for the full year stood at 3.3 per cent. The weaker momentum can mostly be attributed to a roughly 20 per cent decrease in residential investment in comparison with the previous year. An inventory adjustment in the manufacturing sector also contributed to the slowdown, while private consumption continues to expand at a high rate, fuelled by growing employment and wages.

     The overall growth rate for 2007 is projected to slow further, to around 2.1 per cent. Consumer spending is expected to diminish gradually as a result of subdued employment growth. Net exports should contribute positively to growth in 2007, and then return to having a neutral impact in subsequent years. The most recent indicators point to the possibility that the U.S. economy will gradually begin to move beyond its current weakness as of the second half of this year.

     Despite some price tensions, the expectations of a rise in the inflation rate continue to be modest, while the prospects for the Federal Reserve’s monetary policy remain essentially unchanged.

Ministero dell’Economia e delle Finanze

6

2008-2011 Economic and Financial Planning Document

     Euro Area

     The Euro Area economy logged growth of 2.7 per cent in 2006, the best result since 2000: the average growth for the three previous years stood at 1.4 per cent. The feared slowdown (as a result of high oil prices, the euro’s appreciation, and the difficulties encountered by the U.S. economy) has yet to materialise, partly due to the strength of the global cycle. Investments have led economic growth, along with a still modest contribution on the part of consumer spending. Net exports made a positive contribution, despite the real appreciation of the euro.

     For 2007, the expected growth of 2.6 per cent is slightly below the prior-year level. The growth of consumer spending is poised to strengthen gradually as a result of several factors: the strong rebound of employment in the past two years; improving consumer confidence; and the continuing favourable trend of the financial and property markets. More robust domestic demand, together with a continuing positive contribution of foreign demand, should make for a more balanced and sustainable cyclical recovery.

     Even though the European Central Bank has gradually lifted the reference rate since December 2005, taking it to 4.0 per cent at the start of June, financing conditions remain favourable overall, and the growth of credit continues to be high.

     Japan

     The Japanese economy grew by an average annual rate of 2.2 per cent in 2006, thereby surpassing its potential. The weakness seen in private consumption in mid-year was eventually overcome, partly due to the favourable situation in the labour market. Investments (sustained by strong levels of corporate earnings) and net exports proved to be the main components of growth, particularly in relation to demand coming from

Ministero dell’Economia e delle Finanze

7

2008-2011 Economic and Financial Planning Document

China. The economy can be expected to grow at an even more robust 2.4 per cent rate in 2007, partly due to some rebalancing of growth in favour of domestic demand.

     In terms of monetary policy, the Bank of Japan has committed to a gradual process of normalisation in the level of interest rates. Even though the annual rate of inflation continues to hover around zero, the threat of deflation seems to have been overcome, given the expected strengthening of domestic demand. Hence, the raising of interest rates will probably be done in a very gradual manner.

     Public finance remains a key aspect of the government’s medium-term programme. A primary surplus is needed in order to stabilize the public debt/GDP ratio, and this implies the continuation of the current fiscal-consolidation effort.

     Asian economies

     The rest of Asia continues on its fast-track development, thanks to the strong momentum of both foreign trade and investments.

     China again achieved annual GDP growth in excess of 10 per cent in 2006. Investment activity has continued to be the principal driving force of China’s economy, even though policymakers have adopted restrictive measures (liquidity restraint, control of credit flows, increased borrowing rates, and higher mandatory reserve requirements) in order to slow the pace of capital spending. The growth rate of private consumption continues to remain below the rate of GDP growth.

     The Chinese economy is expected to grow at a strong pace again in 2007 (around 10 per cent). Foreign trade and the current surplus are projected to increase further, as suggested by the figures for the first months of the year.

     In India, economic growth is likely to experience a slight slowdown in 2007 due to the impact of restrictive monetary measures on domestic demand. The rate of growth is forecast at 8.4 per cent, compared with the 9.2 per cent achieved in 2006.

II.2 PROSPECTS FOR 2008 AND BEYOND

     As projected by leading international institutions, the global economy should grow on average by 4.8 per cent per year over the 2008-2011 four-year period, thus decelerating with respect to the 5.1 per cent logged for the 2005-2007 three-year period. In any event, the current phase of expansion of the global economy is poised to continue.

     The growth of industrialised countries during the forecast period should be around 2.6 per cent per year, thus decreasing by 0.2 percentage points with respect to the preceding three-year period. World trade is projected to expand by a stronger 7.4 per cent, though this is slightly below the 7.9 per cent annual growth achieved for the 2005-2007 period.

     The U.S. economy is expected to resume growing at a strong pace (2.7 per cent per year), even though the rate of expansion should be lower than that for the previous three-year period. Unlike the past, foreign trade should make a positive contribution to GDP growth over the entire forecast period, as a result both of the dollar’s prior depreciation and growth of leading trade partners.

Ministero dell’Economia e delle Finanze

8

2008-2011 Economic and Financial Planning Document

TABLE II.1: INTERNATIONAL ECONOMIC GROWTH (% changes in GDP)

	2005		2006		2007		2008		2009		2010		2011
GDP
Industrialised countries		2.5		3.2		2.6		2.7		2.6		2.5		2.5
United States		3.2		3.3		2.1		2.6		2.7		2.7		2.7
Japan		1.9		2.2		2.4		2.1		1.7		1.4		1.3
Euro Area (13 countries)		1.4		2.7		2.6		2.5		2.0		2.0		2.0
Italy		0.1		1.9		2.0		1.9		1.8		1.7		1.7
France		1.2		2.0		2.4		2.2		1.9		2.0		2.2
Germany		0.9		2.7		2.5		2.4		1.6		1.6		1.5
UK		1.9		2.8		2.7		2.5		2.4		2.4		2.4
Spain		3.5		3.9		3.6		3.2		2.5		2.4		2.3
World, excluding EU		5.7		6.0		5.4		5.5		5.4		5.3		5.3
World		4.9		5.4		4.9		4.9		4.8		4.7		4.7
World trade		7.4		-9.2		7.0		7.4		7.4		7.4		7.4

Source Based on IMF OECD, and European Commission data

     Over the medium term, the Euro Area is expected to grow by 2.1 per cent per year, thus close to potential and essentially in line with the 2005-2007 period. Initially driven by exports, the economic expansion should gradually spread out to domestic demand components, and private consumption in particular. The favourable economic growth should have a positive impact on continuing reduction of fiscal deficits in some of the main countries in the Euro Area.

     In Japan, the annual growth rate is forecast to slow to 1.6 per cent during the four-year period considered, thus decreasing by 0.5 percentage points with respect to the prior three years. Should this occur, the economy would be back growing at a rate close to its potential. The deceleration is ascribed to expected moderation of demand from the main outlet markets for Japanese products (China and Southeast Asian countries) and to possible appreciation of the yen.

     Though recently rising, the price of oil should stabilise around $65 per barrel due to some easing of pressure on the demand side. Even so, the market backdrop can be expected to remain highly volatile, given the outlook for delays in the structural adjustment of supply and the continuation of geopolitical instability. As far as prices for non-energy commodities and manufactured goods are concerned, the prevailing estimates point to a gradual slowdown consistent with the trend of the global economy.

     Turning to exchange rates, the forecast calls for the EUR-USD rate to stabilise around 1.34, thereby confirming the weakness of the dollar manifested in 2006 and the first half of 2007. Emerging countries (and China, in particular) do not show any signs of changing the direction of their foreign exchange policies in the near term, despite the recent higher inflation.

Ministero dell’Economia e delle Finanze

9

2008-2011 Economic and Financial Planning Document

TABLE II.2: INTERNATIONAL PRICE (% changes)

	2005		2006		2007		2008		2009		2010		2011
Oil (cif, dollar/barrel)		54.4		65.1		65.0		65.0		65.0		65.0		65.0
Non-energy commodities		-0.8		16.5		6.1		-1.9		1.3		1.3		1.3
Manufactured goods		5.1		4.6		2.8		0.9		0.8		0.8		0.8

Source Our calculations on data supplied by the IMF, OECD, and European Commission

II.3 RISKS OF THE FORECASTS

     It has been many years since the forecasts of global growth have been so favourable, but the positive scenario could be influenced by the risks mentioned below.

     First of all, there are the possible consequences of a further slowing of the U.S. economy. The crisis in the property market has weakened investment in housing, and the question remains as to the possible impact of the crisis on household spending in the U.S. as well as the possible spillover effects on other sectors and markets abroad. Even so, the current rates of expansion of the Chinese and Indian economies and the solid recovery of the European and Japanese economies would seem to validate the argument that the global economy is able to absorb yet another moderation in U.S. economic growth without excessive repercussions.

     Another type of risk concerns the timing and the manner with which the U.S. foreign trade deficit is to be re-absorbed. The deterioration of the current account balance seems to have reached a turning point in the final quarter of 2006. Still, the correction may turn out to be only transitory as two circumstances continue to cause concern: (i) U.S. households have shown no significant tendency to moderate spending or to reduce debt; and (ii) the depreciation of the dollar in real terms is still insufficient and has mainly occurred with regard to the euro only.

     Finally, commodity prices (and oil prices, in particular) pose considerable risks for the growth of inflation.

Ministero dell’Economia e delle Finanze

10

2008-2011 Economic and Financial Planning Document

III. THE ECONOMY AND PUBLIC FINANCE IN ITALY

III.1 2007 AND CURRENT TRENDS

     The economy in 2007

     The Italian economy continued to expand in the first quarter of 2007, albeit at a more moderate pace than that posted in the final three months of 2006. GDP was up by 0.3 per cent in comparison with the previous quarter and by 2.3 per cent year on year. Domestic demand and net exports represented the main factors driving the economy, while inventories dragged on GDP growth by 0.7 percentage points. Industrial production was weaker as well, falling by 0.9 per cent in the first quarter of 2007 compared with the final quarter of 2006. Stripping out quarterly fluctuations, the economy continues to expand at rates above its potential.

     Italian consumer price inflation has continued to ease gradually, and as a result it is now fully in line with the rate of inflation for the Euro Area as a whole. A breakdown of inflation components shows deceleration in imported inflation countered by acceleration in inflation for domestically produced goods and services. The GDP deflator increased by 2.8 per cent year on year in the first quarter, while the private consumption deflator shows a declining trend.

Ministero dell’Economia e delle Finanze

11

2008-2011 Economic and Financial Planning Document

     The latest available indicators project a positive second quarter. Even though industrial production contracted between March and April, business confidence remains at high levels. Taking into account the results of the first quarter and the significant carryover effect into 2007 (equal to 1.2 percentage points), it is estimated that GDP could grow by 2.0 per cent in 2007. The estimate incorporates expectations of more robust growth in the second quarter and some moderation in the second half of the year.

     Growth is seen to be mainly driven by domestic demand. Investments and private consumption are expected to contribute 0.8 and 1.2 percentage points to growth respectively. The contribution of net exports should level off in light of both the euro’s recent appreciation and the expected strengthening of domestic demand.

     Machinery and equipment investment growth is likely to be favoured by the expected positive trend in foreign demand (especially from Germany) and the ongoing recovery of production. Such expectations are confirmed by the current high level of plant capacity utilisation. Despite the outlook for higher interest rates, investments in construction continue to show high rates of growth.

     Consumer spending is forecast to rise by 2.0 per cent versus the previous year. Household consumption is likely to be supported by renewed confidence and continuing employment growth. The estimate incorporates a positive trend in household real disposable income in relation to the moderation in inflation.

     The expected gradual recovery in competitiveness of Italian exports will likely be offset by a slowdown in world trade growth and the high level of the euro versus other leading currencies. Growth in exports should thus be lower than in 2006, at around 4.4 per cent. The trend of imports is expected to be somewhat weaker than exports, with 4.2 per cent growth. Italy’s share of global exports calculated at current prices declined further in 2006, falling to 3.5 per cent from 3.7 per cent in 2005.

     Considering the changes outlined above, the current account of the balance of payments will still be negative at -1.7 per cent of GDP. The goods balance, which moved back into a deficit position in 2006 (-0.6 per cent of GDP) after 15 years of surpluses, is expected to recover slightly as a result of improved terms of trade. The deficit for services and income should stand around 1.6 per cent, slightly improving over the previous-year level.

     The value-added in industry, excluding construction, is expected to continue to grow briskly, albeit slightly below the growth rates recorded in 2006. The construction sector is poised to see some acceleration in comparison with the previous year. Benefiting from the ongoing cyclical recovery, the services sector can be expected to grow by more than 2.0 per cent.

Ministero dell’Economia e delle Finanze

12

2008-2011 Economic and Financial Planning Document

TABLE III.1: VALUE ADDED (Chain-linked volumes, 2000=100, % changes)

	2005		2006		2007
Agriculture		-4.4		-3.1		1.0
Industry		-1.3		2.3		2.3
Excluding construction		-1.8		2.5		2.2
Construction		0.7		1.6		2.9
Services		1.0		1.6		2.0
Private sector*		0.9		1.8		2.4
Public sector **		1.0		1.2		0.6
Value added		0.2		1.7		2.0
GDP		0.1		1.9		2.0

*	Includes retailing, hotels, transport, communications, banking, various services to businesses and consumers.
**	Includes public administration, education, heathcare, other public services, domestic services to families.

     Given the results for the first quarter, the increase in employment (in full-time equivalents) should continue, though at a more moderate pace than in 2006, at 0.8 per cent for the whole year. Construction and private services are poised to remain the most dynamic sectors. In manufacturing, where there is a need to regain productivity, the increase in employment is likely to be less robust than in 2006.

TABLE III.2: EMPLOYMENT (full-time equivalents, % changes)

	2005		2006		2007
Agriculture		-5.6		0.6		-l.0
Industry		-0.6		1.1		0.6
Excluding construction		-2.2		1.3		0.4
Construction		3.7		0.6		1.1
Services		0.5		1.9		1.1
Private sector*		0.5		1.9		1.3
Public Sector**		0.4		1.9		-0.1
Total economy		-0.2		1.6		0.8
Employees		1.5		2.0		1.1

*	Includes retailing, hotels, transport, communications, banking, various services to businesses and consumers.
**	Includes public administration, education, heathcare, other public services, domestic services to families.

     The labour force survey for the first quarter of 2007 indicates that the number of people employed rose by 0.4 per cent year on year to 22.846 million. The moderation in employment growth in the first quarter was due to both a smaller increase in the number of workers on temporary contracts and the phasing out of the amnesty programme for immigrants. The unemployment rate stood at 6.4 per cent in the first quarter.

     Given the trends outlined above and the expected deceleration in labour supply vis-à-vis 2006, the unemployment rate for 2007 is expected to remain broadly unchanged at the first-quarter level.

     Labour cost is projected to rise by 2.3 per cent. Considering the ongoing cyclical recovery in productivity, growth in unit labour costs should be halved in 2007 (1.2 per cent versus 2.3 per cent in 2006).

Ministero dell’Economia e delle Finanze

13

2008-2011 Economic and Financial Planning Document

     Domestic inflation, as measured by the GDP deflator, is expected to equal 2.4 per cent, reflecting the above-mentioned trend in wages and the expected recovery in profit margins in the manufacturing sector and in private services. Measured on the national index NIC, inflation should be 1.8 per cent, below the 2.1 per cent recorded in 2006, partly due to soft inflation at the beginning of 2007. In addition, the inflation rate is also likely to benefit from the effects of Government’s deregulation policies (see Appendix IX. 7 and 8).

     The macroeconomic forecasts for 2007 have been revised upward versus those presented in last year’s Economic and Financial Planning Document (DPEF), while they have remained unchanged with respect to the Combined Report on the Economy and Public Finance (RUEF).

     Much of the improvement in the prospects for the current year can be attributed to the better-than-expected results for the fourth quarter of 2006, which implies a significant carryover into 2007 (1.2 percentage points). In addition, the cyclical recovery in Europe (led by German growth) is expected to provide greater support to Italian exports and investment activity.

TABLE III.3: COMPARISON OF FORECASTS FOR 2007

	2007-2011 DPEF		2008-2011 DPEF
GDP		1.2		2.0
Inflation *		2.0		1.7
Term interest rate on 12-month BOTs **		3.82		4.55
Employment (FTE)		0.4		0.8
Unemployment rate		7.5		6.4
Employment rate (specific rate for 15-64 age bracket)		58.4		59.0

*	Planned for the 2007-2011 DPEF; estimated (FOI index, net of tobacco products) for 2008-2011 DPEF.
**	Year end.

     The economy in 2008 and thereafter

     In 2008, GDP growth is expected to equal 1.9 per cent¹. During the three-year period thereafter, the average annual growth of GDP should be around 1.7 per cent.

     Domestic demand will continue to provide the greatest contribution to growth, which should account for 1.9 percentage points in 2008 (0.6 percentage points for investments and 1.2 percentage points for consumer spending). Instead, the contribution of exports should be flat in 2008 and slightly positive afterwards thanks to a gradual recovery in competitiveness.

     Consumer spending looks poised to increase by 1.9 per cent in 2008, thus keeping pace with the growth anticipated for 2007 and reflecting the positive trend of real disposable income. In the years thereafter, consumer spending is projected to rise steadily at 1.6 per cent.

¹ The forecasts for the Italian economy are based on current trends, the international scenario outlined in the second chapter of this document, and prevailing legislation. The estimates thus include the effects of the 2007 Budget Law.

Ministero dell’Economia e delle Finanze

14

2008-2011 Economic and Financial Planning Document

     Supported by the outlook for external demand, and especially Europe’s demand, investments in machinery and equipment are projected to continue to expand in 2008 and then experience a slight cyclical deceleration from 2009 onwards. Meanwhile, investments in construction should slow down somewhat in 2008.

     Though strengthening moderately versus 2007, growth in export volumes should be outpaced by that in world trade in 2008, thus highlighting ongoing erosion in Italy’s export market share. It is expected that Italian exporters will gradually regain competitiveness in the years thereafter, with export prices rising at a lower pace than in the past (2.8 per cent in 2008 versus 5.2 per cent in 2007). Given such dynamics, the trade deficit should slightly narrow in 2008. Assuming that the other components of the balance of payments move in line with the most recent trends, the balance of the current account would progressively improve to -0.9 per cent of GDP by the end of the period. Lastly, imports should continue to show high elasticity with respect to GDP.

     From a sector perspective, both manufacturing and private services should continue to post strong advances in value added in 2008. Against this backdrop, employment growth, as measured by full-time equivalents, should rise by 0.8 per cent, with most of new jobs coming from private services and construction; employment gains in manufacturing should moderate slightly versus the previous year. Such trends are expected to continue in the following years, with employment growing by an average annual rate of 0.7 per cent. The unemployment rate would thus fall to 6.2 per cent in 2008, and then progressively decrease to 5.7 per cent by 2011.

     Gross wages per employee for the whole economy are expected to show a 3.5 per cent increase in 2008, temporarily skewed by the deferral of several labour contract renewals for employees in the public sector. Labour cost per employee is projected to grow in line with wages, and the trend of unit labour costs for the entire economy should thus accelerate compared with 2007. Unit labour costs in the manufacturing sector are expected to slow down, benefiting from a recovery in productivity (1.8 per cent) higher than that estimated for the economy as a whole (1.0 per cent). In the years thereafter, growth in per-capita wages for the entire economy should be slightly stronger than consumer price inflation. Benefiting from more moderate wage growth and a recovery in productivity, unit labour costs are expected to grow at a decreasing rate.

     Domestic inflation, as measured by the GDP deflator, should remain broadly unchanged. As measured by the consumption deflator, inflation should stabilise at a level slightly below 2.0 per cent, thereby reflecting constant growth of both import prices and prices for domestically produced goods and services. Both measures are forecast to decline slightly thereafter.

Ministero dell’Economia e delle Finanze

15

2008-2011 Economic and Financial Planning Document

TABLE III.4: MACROECONOMIC SCENARIO BASED ON UNCHANGED LEGISLATION

	2005		2006		2007		2008		2009		2010		2011
ITALY VOLUMES
GDP		0.1		1.9		2.0		1.9		1.8		1.7		1.7
Imports		0.5		4.3		4.2		4.4		4.2		4.1		4.1
Household consumption		0.6		1.5		2.0		1.9		1.8		1.6		1.6
Gross fixed capital formation		-0.5		2.3		3.5		2.9		2.7		2.5		2.5
Exports		-0.5		5.3		4.4		4.6		4.5		4.5		4.4
Memo item: Current account of the balance of payments (as % of GDP)		-1.5		-2.4		-1.7		-1.5		-1.2		-1.1		-0.9
CONTRIBUTION TO GDP GROWTH
Net exports		-0.3		0.3		0.0		0.0		0.1		0.1		0.1
Inventories		-0.2		0.3		-0.1		0.0		0.0		0.0		0.0
Domestic demand		0.6		1.3		2.1		1.9		1.7		1.6		1.6
PRICES
Import deflator		7.9		9.1		3.3		2.5		2.2		2.1		1.9
GDP deflator		2.2		1.8		2.4		2.3		1.9		1.8		1.8
Nominal GDP		2.3		3.7		4.5		4.2		3.7		3.5		3.5
Consumption deflator		2.4		2.7		1.9		1.9		1.8		1.8		1.7
LABOUR
Labour cost		3.1		2.5		2.3		3.5		2.2		2.2		2.1
Productivity (calculated on GDP)		0.3		0.2		1.1		1.1		1.0		0.9		0.9
Unit labour costs (calculation GDP)		2.8		2.3		1.2		2.4		1.2		1.2		1.2
Employment (FTE)		-0.2		1.6		0.8		0.8		0.8		0.7		0.7
Unemployment rate		7.7		6.8		6.4		6.2		6.1		5.9		5.7
Employment rate (15-64 age bracket)		57.4		58.4		59.0		59.7		60.3		60.9		61.4
Memo Item: Nominal GDP (in € mn)		1,423,048		1,475,402		1,514,113		1,606,072		1,664,947		1,723,681		1,784,358

     Public finance

     The public finance scenario outlined in the latest Economic and Financial Planning Document (DPEF) indicated a net borrowing target at 2.8 per cent of GDP and a primary surplus at 2.1 per cent in 2007, whereas economic growth for the year was projected at 1.2 per cent. With estimates for net borrowing at 4.1 per cent of GDP and the primary surplus at 0.8 per cent of GDP based on unchanged legislation, a package of corrective measures equivalent to 1.3 per cent of GDP was introduced, in line with the July 2005 Ecofin Recommendation to reduce the excessive deficit

     The Forecast and Planning Report (RPP) and the Update to the DPEF in September 2006 re-affirmed the net borrowing target of 2.8 per cent of GDP. The extra revenues, estimated as a result of higher-than-expected actual tax revenues in 2006 (some of which are structural) and a slightly higher growth profile, made it possible to decrease the size of the fiscal adjustment to around 1 per cent of GDP, while setting aside greater financial resources for growth-enhancing and welfare initiatives. At the same time, the Government introduced measures to compensate for the effects of the European Court of Justice’s ruling on the deductibility of value-added taxes. The impact of the ruling was estimated to be roughly €5.2 billion.

     The Update to the Stability Programme in December re-affirmed the net borrowing target of 2.8 per cent of GDP, and increased the target for the primary surplus

Ministero dell’Economia e delle Finanze

16

2008-2011 Economic and Financial Planning Document

to 2.3 per cent. In March 2007, as a result of the evaluation of the Programme, the Ecofin Council concluded that Italy’s consolidation path was consistent with a correction of the excessive deficit by the end of 2007.

TAVOLA III.5: GENERAL GOVERNMENT ACCOUNT BASED ON UNCHANGED LAGISLATION (in € mn)

	2006		2007		2008		2009		2010		2011
REVENUES
Direct taxes		213,664		226,788		237,544		246,514		255,317		264,042
Indirect taxes		218,250		224,616		230,267		237,188		243,903		250,804
Capital account taxes		222		883		356		33		30		30
Total tax revenues		432,136		452,287		468,167		483,735		499,250		514,876
Social contributions		192,038		206,794		216,214		223,300		230,017		236,936
Cash contributions		188,444		203,197		212,531		219,588		226,268		233,152
Non-cash contributions		3,504		3,597		3,683		3,712		3,749		3,784
Other current revenues		51,630		52,650		54,000		54,843		56,064		57,500
Other capital account revenues		4,250		3,677		4,410		4,835		4,861		4,889
Total revenues		680,054		715,408		742,791		766,713		790,192		814,201
Memo item: Tax burden net of severance pay (%)				42.4		42.2		42.1		42.0		41.8
Memo item: Tax burden (%)		42.3		42.8		42.6		42.5		42.3		42.1
EXPENDITURES
Compensation of employees		162,999		164,475		172,677		174,628		177,207		180,459
Intermediate consumption		119,600		123,015		127,715		131,718		134,082		138,083
Pensions		207,001		215,110		224,020		230,120		237,030		244,630
Other social benefits		45,992		49,040		51,590		51,720		53,400		55,950
Production subsidies		13,539		14,871		14,296		14,217		14,071		14,171
Other current expenditures, net of interest		39,894		42,767		43,708		44,664		45,717		46,424
Current expenditures, net of interest		589,025		609,278		634,006		647,067		661,507		679,717
Interest expenditure		67,552		73,759		78,087		80,920		83,887		86,561
Total current payments		656,577		683,037		712,093		727,987		745,394		766,278
including: healthcare spending		101,429		102,555		108,390		110,756		114,954		119,115
Capital expenditures		88,981		63,988		64,674		68,015		67,773		68,249
including: investments		33,850		39,578		41,216		42,750		42,834		42,797
Total expenditures, net of interest		678,006		673,266		698,680		715,082		729,280		747,966
Total expenditures		745,558		747,025		776,767		796,002		813,167		834,527
Primary balance		2,043		42,142		44,111		51,631		60,912		66,235
		0.1		2.7		2.7		3.1		3.5		3.7
Current account balance		19,005		27,811		25,932		33,858		39,907		43,004
		1.3		1.8		1.6		2.O		2.3		2.4
Net borrowing		-65,504		-31,617		-33,976		-29,289		-22,975		-20,326
		4.4		-2.1		-2.1		-1.8		-1.3		-1.1
State sector’s borrowing requirement		-34,609		-22,900		-32,000		-16,600		-10,000		-7,300
		-2.3		-1.5		-2.0		-1.0		-0.6		-0.4
Debt as a % of GDP		106,8		104,7		102,7		100,9		98,7		96,6
Nominal GDP		1475402		1541113		1606072		1664947		1723681		1784358

Ministero dell’Economia e delle Finanze

17

2008-2011 Economic and Financial Planning Document

     In March, the forecasts were again updated to reflect substantial improvement in public accounts achieved in 2006 and significantly more favourable prospects for growth in 2007 (GDP growth at 2.0 per cent). Such updates were incorporated into the Combined Report on the Economy and Public Finance (RUEF), which put the net borrowing at 2.3 per cent of GDP and the primary surplus at 2.6 per cent.

     The improvement was the result of roughly €9 billion upward revision in total revenues (driven by the solid trend in tax revenues) partly offset by a modest €1.1 billion increase in expenditures (mainly due to higher interest charges). Tax revenues were estimated to be about €6 billion in excess of the figure presented in the Forecast and Planning Report (RPP): the new projection reflected reduced one-offs and tax revenues (for roughly €1.2 billion) as a result of the wiping out of proposed legislation on capital income taxation that had previously been included.

     The revised net borrowing estimate also took into account several risk elements, including: the uncertainty about the composition of extra tax revenues (i.e. how much is to be considered structural and how much cyclical); the possibility of financial needs being higher than planned to cover costs on initiatives already planned and in the process of execution; and additional financial obligations linked to international agreements. At the same time, the forecast also included the expected effects of the measures incorporated into the Budget Law for the purpose of fighting tax avoidance and tax evasion.

     With the new macroeconomic framework and recent data on tax revenues and expenditures, the outlook for Italy’s public finance is slightly more favourable than that outlined in the Combined Report on the Economy and Public Finance (RUEF). Current projections point to a net borrowing reduction to 2.1 per cent of GDP in 2007.

     The improvement—0.2 percentage points of GDP in 2007—reflects the estimate that net extra revenues will be approximately €2.0 billion, the net result of a roughly €3.1 billion increase in tax revenues and a roughly €1 billion decrease in social contributions. The new estimate of expenditures mainly reflects: the deferral to 2008 of several labour contract renewals for non-state public sector employees (with savings of about €1.4 billion in 2007); higher charges for public education workers (about €300 million); and higher intermediate consumption due to incremental healthcare spending related in part to the abolition of certain patient co-payments (about 1 billion), partially offset by savings within central administrations.

     A similar 0.2 percentage-point improvement is estimated with respect to 2008. The revised net borrowing estimate is thus 2.1 per cent of GDP (compared with the 2.3 per cent indicated in the RUEF) and incorporates roughly €6 billion of additional net revenues and roughly €2.8 billion of higher expenditures. The increase in expenditures mainly comes from: additional expenditures for personnel (roughly €1.6 billion, inclusive of the aforementioned deferral of the contract renewals); higher intermediate consumption (roughly €1.5 billion, mainly due to higher healthcare spending which is assumed to be offset by the regions, partly through cost savings); additional interest payments (about €2.4 billion), mostly for the effect of higher market interest rates; and

Ministero dell’Economia e delle Finanze

18

2008-2011 Economic and Financial Planning Document

lower capital account expenditures resulting from the revision of the estimates presented in the RUEF (roughly €2.7 billion).

TABLE III.6: DIFFERENCES IN 2007, 2008 AND 2009 FORECASTS VERSUS RUEF

	2006				2007						2008						2009
	Actual		RUEF		DPEF		D		RUEF		DPEF		D		RUEF		DPEF		D
REVENUES
Tax revenues		432,136		449,120		452,287		3,167		462,212		468,167		5,955		477,593		483,735		6,142
Including: Direct taxes		213,664		225,412		226,788		1,376		233,822		237,544		3,722		242,821		246,514		3.693
Indirect taxes		218,250		222,825		224,616		1,791		228,034		230,267		2,233		234,739		237,188		2.449
Capital account taxes		222		883		883		0		356		356		—		33		33		0
Social contributions		192,038		207,792		206,794		-998		216,604		216,214		-390		223,838		223,300		-538
Including: Cash contributions		188,444		204,168		203,197		-971		212,929		212,531		-398		220,117		219,588		-529
Non-cash contributions		3,594		3,624		3,597		-27		3,675		3,683		8		3,721		3,712		-9
Other current revenues		51,630		52,691		52,650		-41		53,547		54,000		453		53,847		54,843		996
Other capital account revenues		4,250		3,645		3,677		32		4,384		4,410		26		4,817		4,835		18
TOTALE REVENUES		680,054		713,248		715,408		2,160		736,747		742,791		6,044		760,095		766,713		6.618
Memo item: Tax burden (%)		42.3		42,8		42.8				42.7		42.6				42.6		42.5
EXPENDITURES
Compensation of employees		162,999		165,573		164,475		-1,098		171,037		172.677		1,640		174,357		174,628		271
Intermediate consumption		119,600		122,045		123,015		970		126,267		127,715		1,448		129,617		131,718		2,101
Pensions		207,001		215,110		215,110		0		224,020		224,020		0		230,120		230.120		0
Other social benefits		45,992		49,040		49,040		0		51,590		51,590		0		51,720		51,720		0
Production subsidies		13,539		15,507		14,871		-636		14,159		14,296		137		14,552		14,217		-335
Other,current expenditures, net of interest		39,894		42,292		42,767		475		43,838		43,708		-130		44.681		44,664		-17
Current-expenditures, net of interest		589,025		609,567		609,278		-289		630,911		634,006		3,095		645,047		647,067		2,020
Interest expenditure		67,552		73,991		73,759		-232		75,673		78,087		2,414		76,871		80,920		4,049
TOTAL CURRENT EXPENDITURES		656,577		683,558		683,037		-521		706,584		712,093		5,509		721,918		727,987		6,069
Including: Healthcare		101,429		102,333		102, 555		222		106,208		108,390		2,182		109,428		110,756		1, 328
Capital expenditures		88,981		64,272		63,988		-284		67,409		64,674		-2,735		72,070		68,015		-4,055
Including: Investments		33,850		39,032		39,513		481		40,683		41,216		533		42,692		42,750		58
TOTAL EXPENDITURES NET OF INTEREST		678,006		673,839		673,266		-573		698,320		698,680		360		717.117		715,082		-2,035
TOTALE EXPENDITURES		745,558		74 7.330		747,025		-805		773,993		776,767		2,774		793,988		796,002		2,014
BALANCES
Primary balance		2,048		39,409		42,142		2,733		38,427		44,111		5,684		42,978		51.631		8,653
		0.1		2.6		2.7				2.4		2,7				2.6		3.1
Current account balance		19,005		25,162		27,811		2,649		25,423		25,932		509		33,327		33,858		531
		1.3		1.6		1.8				1.6		1.6				2.0		2.0
Net borrowing		-65,504		-34,582		-31,617		2,965		-37,246		33,976		3,270		-33,893		-29,289		4,604
		-4.4		-2.3		-2.1				-2.3		-2.1				-2.1		-1.8
NOMINAL GDP		1,475,402		1,534,196		1,541,113				1,590,892		1,606,072				1,648,305		1,664,947

     The net borrowing based on unchanged legislation improves even further in 2009, when it is estimated to equal 1.8 per cent of GDP, versus the 2.1 per cent presented in the RUEF in March. For the years thereafter, it is expected to contract further to 1.3 per cent of GDP in 2010 and 1.1 per cent in 2011.

     These estimates are based on the typical assumptions used for projecting public finance data.² The forecast contemplates a level of structural tax revenues for 2007 and

² (a)   Wages to public-sector workers have been computed by incorporating the effects of the contract renewals for the 2006-2007 period and the payment of allowances for the period between the expiration of the previous contract and the date on which the new contract becomes effective. The number of full-time workers within the general government is assumed to remain substantially unchanged over the entire forecast period.

Ministero Dell’Economia e delle Finanze

19

2008-2011 Economic and Financial Planning Document

later years that is higher than that presented in the RUEF. The improvement is related to a more favourable outlook for the economy and additional tax revenues projected as a result of the efforts to fight tax evasion.

     While broadly confirming the previous fiscal consolidation path, the Government intends to use part of the aforementioned improvement to finance (i) ongoing welfare spending initiatives to sustain the weaker social categories, via an increase in small pensions, and (ii) non-recurring initiatives to enhance economic growth. The latter concern: railway, road and highway infrastructures; environmental protection; efforts to strengthen research; and programmes to make the public administration more efficient, particular with regard to security, education and the fight against tax evasion. For this purpose, the Government is enacting, along with the preparation of this document, a Decree Law whose impact for the current year and subsequent years is quantified in 0.4 per cent and 0.1 per cent of GDP respectively.

     Taking into account this Decree and the approval of the Economic and Financial Planning Document (DPEF), the updated baseline projections for Italy’s public finances are presented in the table that follows. The net borrowing for 2007 stands at 2.5 per cent of GDP, and then decreases to 2.2 per cent of GDP in 2008.

(b) The expenditure for intermediate consumption, inclusive of healthcare spending, was estimated for 2008 ran the basis of a growth rate that is less than the rate of growth of nominal GDP, and thereafter, with average implicit elasticity with respect to nominal GDP around 0.7 per cent.

(c) Healthcare spending was computed on the basis of an average growth rate of 3.8 per cent for the period. This rate takes into account the forecast criteria concerning personnel expenditure (average annual growth of 3.2 per cent during the period), expenditures for the purchase of goods and services (4.4 per cent), and expenditures for service providers operating in a deregulated market environment (3.7 per cent). The forecast incorporates the effects of measures included in previous Budget Laws to curb healthcare spending as well as the effects of the deficit-reduction measures. The ratio of expenditures to GDP is expected to fall gradually, to reach 6.7 per cent by the end of the period.

(d) The total spending on social benefits paid in cash rises by an average of 3.3 per cent during the period. The outlays for pensions are estimated to rise by an average of 3.3 per cent per year, in relation to the number of new pensions to be paid, estimated rates for the discontinuation of the payments, and prevailing regulations for the indexing of pensions to inflation. The figures as of 2008 reflect the effects of Law 243 of 2004 which provides for increasing the age at which a person is eligible for a retirement pension; such effects become more pronounced as from 2009. The ratio of pension expenditures to GDP is projected to decrease gradually during the period, to reach 13.7 per cent

(e) Interest payments were computed by taking into account the term structure of market interest rates.

(f) Capital account expenditures were estimated in relation to the new authorizations established by previous Budget Laws, the implementation status of such authorisations, and the residual amounts in relation thereto.

(g) Tax revenues were estimated on the basis of an average annual increase of 3.3 per cent and on the basis of average elasticity of 0.9 per cent during the period.

(h) Social contributions were calculated in relation to the trend of employment. The average annual increase for the period is estimated at 3.5 per cent, with elasticity pegged at 1.1 per cent of GDP for 2008 and thereafter at 0.9 per cent.

Ministero dell’Economia e delle Finanze

20

2008-011 Economic and Financial Planning Document

TABLE III.7: GENERAL GOVERNMENT ACCOUNT BASED ON UNCHANGED LEGISLATION
(supplemented by effects of law Decree on expenditures, in € mn )

	2006		2007		2008		2009		2010		2011
REVENUES
Direct taxes		213,664		226,702		237,569		246,514		255,317		264,042
Indirect taxes		218,250		224,616		230,267		237,188		243,903		250,804
Capital account taxes		222		883		356		33		30		30
Total tax revenues		432,136		452,201		468,192		483,735		499,250		514,876
Social contributions		192,038		206,794		216,214		223,300		230,017		236,936
Cash contributions		188,444		203,197		212,531		219,588		226,268		233,152
Non-cash Contributions		3,594		3,597		3,683		3,712		3,749		3,784
Other current revenues		51,630		52,650		54,000		54,843		56,064		57,500
Other capital account revenues		4,250		3,677		4,410		4,835		4,861		4,889
Total revenues		680,054		715,322		742,816		766,713		790,192		814,201
Memo item: Tax burden net of severance pay (%)				42.4		42.2		42.1		42.0		41.8
Memo item: Tax burden (%)		42.3		42.8		42.6		42.5		42.3		42.1
EXPENDITURES
Compensation of employees		162,999		164,689		172,677		174,628		177,207		180,459
Intermediate consumption		119,600		124,955		127,745		131,733		134,082		138,083
Pensions		207,001		215,810		225,520		231,620		238,530		246,130
Other social benefits		45,992		49,1111		51,590		51,720		53,400		55,950
Production subsidies		13,539		5,121		14,296		14,217		14,071		14,171
Other current expenditures, net of interest		39,894		44,446		43,718		44,669		45,717		46,424
Current expenditures, net of interest		589,025		614,132		635,546		648,587		663,007		681,217
Intesrest expenditure		67,552		73,825		78,391		81,310		84,316		87,089
Total current expenditures		656,577		687,957		713,937		729,897		747,323		768,306
Including: healthcare spending		101,429		102,555		108,390		110,756		114,954		119,115
Capital expenditures		88,981		65,667		64,754		68,105		67,773		68,249
Including: investments		33,850		40,306		41,256		42,790		42,834		42,797
Total expenditures, net of interest		678,006		679,779		700,300		716,692		730,780		749,466
Total expenditures		745,558		753,624		778,691		798,002		815,096		836,555
Primary balance		2,048		35,523		42,516		50,021		59,412		64,735
		0.1		2.3		2.6		3.0		3.4		3.6
Current account balance		19,005		22,805		24,113		31,948		32,978		40,976
		1.3		1.5		1.5		1.9		2.2		2.3
Net borrowing		-65,504		-38,302		-35,876		-31,289		-24,904		-22,354
		-4.4		-2.5		-2.2		-1.9		-1.4		-1.3
State sector’s borrowing requirement		-34,609		-28,900		-33,500		-18,100		-11,500		-8,800
		-2.3		-1.9		-2.1		-1.1		-0.7		-0.5
Debt as % of GDP		106.8		-105.1		103.2		10.4		99.3		97.2
GDP		1,475,402		1,541,113		1,606,072		1,664,947		1,723,681		1,784,358

Ministero dell’Economia e delle Finanze

21

2008-2011 Economic and Financial Planning Document

TABLE III.8: GENERAL GOVERNMENT ACCOUNT 2006-2011 (in € mn)

	2006		GDP %		2007		GDP %		% var.		2008		GDP %		% var.		2009		GDP %		% var.		2010		GDP %		% var.		2011		GDP %		% var.
CURRENT EXPENDITURES
Compensation of employees		162,899		11.0		164,689		10.7		1.0		172,677		10.8		4.9		174,628		10.5		1.1		177,207		10.3		1.5		180,459		10.1		1.8
Central government		89,917		6.1		93,684		6.1		4.2		96,339		6.0		2.8		97,298		5.8		1.0		98,592		5.7		1.3		100,629		5.6		2.1
State balance		87,458		5.9		91,374		5.9		4.5		93,920		5.8		2.8		94,871		5.7		1.0		96,130		5.6		1.3		98,133		5.5		2.1
Other institutions		2,459		0.2		2,310		0.1		-6.1		2,419		0.2		4.7		2,427		0.1		0.3		2,462		0.1		1.4		2,496		0.1		1.4
Local government		69,779		4.7		67,634		4.4		-3.1		72,911		4.5		7.8		73,852		4.4		1.3		75,080		4.4		1.7		76,243		4.3		1.5
Social security funds		3,303		0.2		3,371		0.2		2.1		3,427		0.2		1.7		3,478		0.2		1.5		3,535		0.2		1.6		3,587		0.2		1.5
Intermediate consumption		119,600		8.1		124,955		8.1		4.5		127,745		8.0		2.2		131,733		7.9		3.1		134,082		7.8		1.8		138,083		7.7		3.0
Central government		20,919		1.4		23,829		1.5		13.9		23,831		1.5		0.0		24,909		1.5		4.5		23,404		1.4		-6.0		23,453		1.3		0.2
State balance		17,972		1.2		20,699		1.3		15.2		20,722		1.3		0.1		21,885		1.3		5.6		20,268		1.2		-7.4		20,198		1.1		-0.3
Other institutions		2,947		0.2		3,130		0.2		6.2		3,109		0.2		-0.7		3,024		0.2		2.7		3,136		0.2		3.7		3,255		0.2		3.8
Local government		96,043		6.5		98,396		6.4		2.4		101,153		6.3		2.8		103,995		6.2		2.8		107,780		6.3		3.6		111,656		6.3		3.6
Social security funds		2,638		0.2		2,730		0.2		3.5		2,761		0.2		1.1		2,829		0.2		2.5		2,898		0.2		2.4		2,974		0.2		2.6
Social benefits		252,993		17.1		264,921		17.2		4.7		277,110		17.3		4.6		283,340		17.0		2.2		291,930		16.9		3.0		302,080		16.9		3.5
Other current expenditures		53,433		3.6		59,567		3.9		11.5		58,014		3.6		-2.6		58,886		3.5		1.5		59,788		3.5		1.5		60,595		3.4		1.3
Central government		31,604		2.1		38,293		2.5		21.2		36,491		2.3		-4.7		37,115		2.2		1.7		37,749		2.2		1.7		38,310		2.1		1.5
State balance		26,981		1.8		33,427		2.2		23.9		31,653		2.0		-5.3		32,192		1.9		1.7		32,743		1.9		1.7		33,218		1.9		1.5
Other institutions		4,623		0.3		4,866		0.3		5.3		4,838		0.3		0.6		4,923		0.2		1.8		5,006		0.3		1.7		5,072		0.3		1.7
Local government		20,655		1.4		20,061		1.3		-2.9		20,258		1.3		1.0		20,461		1.2		1.0		20,683		1.2		1.1		20,885		1.2		1.0
Social security funds		1,174		0.1		1,213		0.1		3.3		1,265		0.1		4.3		1,310		0.1		3.6		1,356		0.1		3.5		1,400		0.1		3.2
Total current expenditures, net of interest		589,025		39.9		614,132		39.8		4.3		635,546		39.6		3.5		648,587		39.0		2.1		663,007		38.5		2.2		681,217		38.2		2.7
Interest expenditure		67,552		4.6		73,825		4.8		9.3		78,391		4.9		6.2		81,310		4.9		3.7		84,316		4.9		3.7		87,089		4.9		3.3
CAPITAL EXPENDITURES
Divestment		1,386		0.1		1,180		0.1		-14.9		1,000		0.1		-15.3		1,000		0.1		0.0		1,000		0.1		0.0		1,000		0.1		0.0
Gross fixed investments (net of divestment)		35,236		2.4		41,486		2.7		17.7		42,256		2.6		1.9		43,790		2.6		3.6		43,834		2.5		0.1		43,797		2.5		-0.1
Central government		6,638		0.4		11,317		0.7		70.5		10,692		0.7		5.9		10,605		0.6		-0.8		9,003		0.5		-15.1		7,177		0.4		-20.3
State balance		3,956		0.3		6,544		0.4		65.4		6,423		0.4		-1.8		6,228		0.4		-3.0		5,718		0.3		-8.2		5,325		0.3		-6.9
Other institutions		2,682		0.2		4,773		0.3		78.0		4,269		0.3		-10.6		4,377		0.3		2.5		3,285		0.2		-24.9		1,852		0.1		-43.6
Local government		28,387		1.9		29,944		1.9		5.5		31,326		2.0		4.6		32,937		2.0		5.1		34,571		2.0		5.0		36,349		2.0		5.1
Social security funds		211		0.0		225		0.0		6.6		238		0.0		5.8		248		0.0		4.2		260		0.0		4.8		271		0.0		4.2
Other capital expenditures		55,131		3.7		25,361		1.6		-54.0		23,498		1.5		-7.3		25,315		1.5		7.7		24,939		1.4		-1.5		25,452		1.4		2.1
Central government		44,159		3.0		14,570		0.9		67.0		12,380		0.6		-15.0		13,643		0.8		10.2		12,902		0.7		-5.4		13,036		0.7		1.0
State balance		43,589		3.0		13,101		0.9		-69.9		10,910		0.7		-16.7		12,076		0.7		10.7		11,240		0.7		-6.9		11,275		0.6		0.3
Other institutions		570		0.0		1,469		0.1		157.7		1,470		0.1		0.1		1,567		0.1		6.6		1,662		0.1		6.1		1,761		0.1		6.0
Local government		10,972		0.7		10,791		0.7		-1.6		11,118		0.7		3.0		11,672		0.7		5.0		12,037		0.7		3.1		12,416		0.7		3.1
Social security funds		0		0.0		0		0.0				0		0.0				0		0.0				0		0.0				0		0.0
Total capital expenditures (net of divestment)		90,367		6.1		66,847		4.3		-26.0		65,754		4.1		-1.6		69,105		4.2		5.1		68,773		4.0		-0.5		69,249		3.9		0.7
Total expenditures, net of interest		678,006		46.0		679,799		44.1		0.3		700,300		43.6		3.0		716,692		43.0		2.3		730,780		42.4		2.0		749,466		42.0		2.6
Total expenditures		745,558		50.5		753,624		48.9		1.1		778,691		48.5		3.3		798,002		47.9		2.5		851,096		47.3		2.1		836,555		46.9		2.6
Nominal GDP		1,475,402				1,541,113				4.5		1,606,072				4.2		1,654,947				3.7		1,723,681				3.5		1,784,358				3.5

Ministero dell’Economia e delle Finanze

22

2008-2011 Economic and Financial Planning Document

TABLE III.8 (continued): GENERAL GOVERNMENT ACCOUNT 2006 2011 (in mn)

	2006		GDP %		2007		GDP %		% var,		2008		GDP %		% var,		2009		GDP %		% var,		2010		GDP %		% var,		2011		GDP %		% var,
CURRENT REVENUES
Total tax revenues		432,136		29.3		452,201		29.3		4.6		468,192		29.2		3.5		483,735		29.1		3.3		499,250		29.0		3.2		514,876		28.9		3.1
Direct taxes		213,664		14.5		226,702		14.7		6.1		237,569		14.8		4.8		246,514		14.8		3.8		255,317		14.8		3.6		264,042		14.8		3.4
Central government		189,579		12.8		201,247		13.1		6.2		210,734		13.1		4.7		218,832		13.1		3.8		226,823		13.2		3.7		234,719		13.2		3.5
Local government		24,085		1.6		25,455		1.7		5.7		26,835		1.7		5.4		27,682		1.7		3.2		28,494		1.7		2.9		29,323		1.6		2.9
Social security funds		0		0.0		0		0.0				0		0.0				0		0.0				0		0.0				0		0.0
In direct taxes		218,250		14.8		224,616		14.6		2.9		230,267		14.3		2.5		237,188		14.2		3.0		243,903		14.2		2.8		250,804		14.1		2.8
Central government		147,654		10.0		153,278		9.9		3.8		156,352		9.7		2.0		161,813		9.7		3.5		166,510		9.7		2.9		171,296		9.6		2.9
- State balance		147,342		10.0		152,954		9.9		3.8		156,014		9.7		2.0		161,463		9.7		3.5		166,152		9.6		2.9		170,929		9.6		2.9
- Other institutions		312		0.0		324		0.0		3.8		338		0.0		4.3		350		0.0		3.6		358		0.0		2.3		367		0.0		2.5
Local government		70,596		4.8		71,338		4.6		1.1		73,915		4.6		3.6		75,375		4.5		2.0		77,393		4.5		2.7		79,508		4.5		2.7
Social security funds		0		0.0		0		0.0				0		0.0				0		0.0				0		0.0				0		0.0
Capital account taxes		222		0.0		883		0.1		297.7		356		0.0		-59.7		33		0.0		-90.7		30		0.0		-9.1		30		0.0		0.0
Central government		211		0.0		872		0.1		313.3		345		0.0		-60.4		22		0.0		-93.6		19		0.0		-13.6		19		0.0		0.0
Local government		11		0.0		11		0.0		0.0		11		0.0		0.0		11		0.0		0.0		11		0.0		0.0		11		0.0		0.0
Social security funds		0		0.0		0		0.0				0		0.0				0		0.0				0		0.0				0		0.0
Social contributions		192,038		13.0		206,794		13.4		7.7		216,214		13.5		4.6		223,300		13.4		3.3		230,017		13.3		3.0		236,936		13.3		3.0
Other current revenues		51,630		3.5		52,650		3.4		2.0		54,000		3.4		2.6		54,843		3.3		1.6		56,064		3.3		2.2		57,500		3.2		2.6
Central government		23,824		1.6		23,900		1.6		0.3		24,898		1.6		4.2		25,250		1.5		1.4		25,640		1.5		1.5		26,257		1.5		2.4
Local government		25,790		1.7		26,600		1.7		3.1		26,796		1.7		0.7		27,128		1.6		1.2		27,795		1.6		2.5		28,447		1.6		2.3
Social security funds		2,016		0.1		2,150		0.1		6.6		2,306		0.1		7.3		2,465		0.1		6.9		2,629		0.2		6.7		2,796		0.2		6.4
CAPITAL ACCOUNT REVENUES
Capital account revenues		4,250		0.3		3,677		0.2		-13.5		4,410		0.3		19.9		4,835		0.3		9.6		4,861		0.3		0.5		4,889		0.3		0.6
Central government		891		0.1		483		0.0		-45.8		773		0.0		60.0		773		0.0		0.0		773		0.0		0.0		773		0.0		0.0
Local government		3,359		0.2		3,194		0.2		-4.9		3,637		0.2		13.9		4,062		0.2		11.7		4,088		0.2		0.6		4,116		0.2		0.7
Social security funds		0		0.0		0		0.0				0		0.0				0		0.0				0		0.0				0		0.0
Total revenues		680,054		46.1		715,322		46.4		5.2		742,816		46.3		3.8		766,713		46.1		3.2		790,192		45.8		3.1		814,201		45.6		3.0
Primary balance		2,048		0.1		35,523		2.3		1,634.5		42,516		2.6		19.7		50,021		3.0		17.7		59,412		3.4		18.8		64,735		3.6		9.0
Current account balance		19,005		1.3		22,805		1.5		20.0		24,113		1.5		5.7		31,948		1.9		32.5		37,978		2.2		18.9		40,976		2.3		7.9
Net borrowing		-65,504		-4.4		-38,302		-2.5		-41.5		-35,875		-2.2		-6.3		-31,289		-1.9		-12.8		-24,904		-1.4		-20.4		-22,354		-1.3		-10.2

Ministero dell’Economia e delle Finanze

23

2008-2011 Economic and Financial Planning Document

III.2 THE FRAMEWORK FOR 2008-2011

     The economy

     The Italian economy is projected to expand by 1.9 per cent in 2008 and by 1.7 per cent in 2009. The effects of a future reduction in the tax burden are expected to have a positive impact on consumer and business confidence during the 2010-2011 period. Domestic demand should be the driving component of GDP over the entire forecast period.

     Though falling slightly in 2009, employment should grow by an average of 0.8 per cent per year for the next two years. The unemployment rate is projected to decline further, hitting 5.6 per cent in 2011.

     Benefiting from a slight recovery in productivity, unit labour costs should exhibit a slightly decreasing trend, with positive effects on domestic inflation.

TABLE III.9: MACROECONOMIC INDICATORS OVER MEDIUM TERM, POLICY SCENARIO

	2005		2006		2007		2008		2009		2010		2011
ITALY MACRO VOLUMES
GDP		0.1		1.9		2.0		1.9		1.7		1.8		1.8
Imports		0.5		4.3		4.2		4.4		4.2		4.3		4.4
Household consumption		0.6		1.5		2.0		1.9		1.8		1.8		1.8
Gross fixed capital formation		-0.5		2.3		3.5		2.9		2.7		2.6		2.5
Exports		-0.5		5.3		4.4		4.6		4.5		4.6		4.7
Memo item: Current account of the balance of payments (as % of GDP)		1.5		-2.4		-1.7		-1.5		-1.2		-1.1		-1.0
CONTRIBUTION TO GDP GROWTH
Net exports		0.3		0.3		0.0		0.0		0.1		0.1		0.1
Invetories		0.2		0.3		0.1		0.0		0.0		0.1		0.1
Domestic demand		0.6		1.3		2.1		1.9		1.6		1.6		1.6
PRICES
Import deflator		7.9		9.1		3.3		2.5		2.2		2.1		1.9
GDP deflator		2.2		1.8		2.4		2.3		1.8		1.8		1.7
Nominal GDP		2.3		3.7		4.5		4.2		3.6		3.6		3.6
Consumption deflator		2.4		2.7		1.9		1.9		1.8		1.8		1.7
Inflation (planned)		1.6		1.7		2.0		1.7		1.5		1.5		1.5
LABOUR
Labour cost		3.1		2.5		2.3		3.5		2.2		2.1		2.1
Productivity (calculation on GDP)		0.3		0.2		1.1		1.1		0.9		1.0		1.0
Unit labour costs (calcul on GDP)		2.8		2.3		1.2		2.4		1.2		1.1		1.1
Employment (FTE)		0.2		1.6		0.8		0.8		0.7		0.8		0.8
Unemployment Rate		7.7		6.8		6.4		6.2		6.1		5.8		5.6
Employment rate (15-64 age bracket)		57.4		58.4		59.0		59.7		60.3		60.9		61.5
Memo item Nominal GDP (in € mn)		1,423,048		1,475,402		1,541,113		1,606,072		1,663,165		1,723,480		1,785,413

     The policy scenario shows only a modest increase in GDP growth at the end of the forecast period (0.1 percentage points in 2011) versus the scenario based on unchanged legislation. Given that GDP growth in this latter scenario is slightly higher than that presented in the latest DPEF (as a result of the measures already put at work), the shift is modest.

Ministero dell’Economia e delle Finanze

24

2008-2011 Economic and Financial Planning Document

     The potential advantages from implementing the chosen reform programme could be underestimated by the techniques used in preparing the forecasts. For example, the United Kingdom, which undertook significant structural measures before Italy, achieved an annual growth rate that was a good 1.8 percentage points higher than Italy for the 2001-2005 five-year period. Given similar demographic trends, the higher growth rate in the United Kingdom is due primarily to productivity gains.

     By way of illustration, the attached graph shows the impact on Italy’s growth rate of a further increase in productivity (in terms of total factor productivity) vis-à-vis the productivity gains assumed in the Economic and Financial Planning Document (DPEF) for the 2008-2011 four-year period. This analysis assumes that productivity grows at a rate equal to the average achieved by the United Kingdom during the 2001-2005 period, namely, around 1.2 per cent. Another possible source of higher growth is labour market participation. The demographic trends in Italy are rather unfavourable—without additional flows of immigrants, the working age population is set to decline rapidly. In any event, labour market participation—which is well under the European average—could significantly increase. The decline in the unemployment rate in recent years has not been accompanied by favourable changes in the participation rate. Assuming better-than-expected progress—with a further increase of one percentage point in the participation rate by 2011—economic growth would be enhanced as shown in the graph below. Taking the total of these effects, the growth of the Italian economy would approach the threshold of 3 per cent by the end of the period.

     

     The projections of higher growth have been developed by applying the same methodology used in the analysis of growth components (Appendix on productivity).

Ministero dell’Economia e delle Finanze

25

2008-2011 Economic and Financial Planning Document

     Compared with the baseline policy scenario, the change in total factor productivity would rise by one-tenth of one percentage point each year, which would produce an equivalent rise in GDP growth. The increase in the participation rate, carried out by holding constant in the policy scenario all other variables related to the labour market (including the unemployment rate), would cause a further increase in employment and higher GDP growth.

     As highlighted by this purely indicative analysis, the Italian economy’s growth potential would be significantly higher than that in the baseline policy scenario. Achieving higher potential depends on the successful pursuit of the current reform process, while continuing fiscal consolidation.

     Public finance

     In light of the macroeconomic and public finance scenario (inclusive of the effects of the accounting adjustment—Assestamento di Bilancio), the Government has weighed the possibilities for revising the deficit targets for the 2007-2011 period.

     In this regard, it needs to be noted that if Italy were literally to follow the EU’s recent recommendations, it should use all of the improvement in its accounts in 2007 for deficit reduction in the same year and a cyclically-adjusted balance adjustment of around 0.5 per cent of GDP per year from 2008 onwards. The scenario that would emerge (see Table III.10, EU Guidelines) would mean net borrowing at 2.1 per cent of GDP in 2007 and at 1.5 per cent in 2008. Given the scenario based on unchanged legislation, this would require corrective measures of 0.6 per cent of GDP in 2008, i.e. roughly €10 billion. A correction of this magnitude for 2008 would represent almost one-half of the total correction to be made in order to reach the balanced budget objective in 2011.

     The Government is of the opinion that such a scenario cannot be considered realistic, taking into account both economic and social conditions in Italy, and also considering the large structural adjustment already carried out by the country during the current year by means of the 2007 Budget Law. The Government is thus opting for a rigorous although more gradual approach, which reconciles the need for using a large part of the incremental resources surfacing in 2007 for net-borrowing reduction (in order to avoid new corrective measures in 2008) with the need for some urgent infrastructure investments and essential welfare spending. After having succeded in bringing the net borrowing below the 3 per cent threshold, the Government is reaffirming its commitment to achieve and maintain fiscal consolidation and thus plans to achieve a balanced budget and a public debt-to-GDP ratio to less than 100 per cent by 2011. For 2008, the Government thus also confirms the net-borrowing target indicated in the December 2006 Update to the Stability Programme, namely 2.2 per cent of GDP. The reduction of the fiscal deficit with respect to 2007 (equal to 0.3 per cent of GDP) is equivalent to a reduction of the ‘structural’ deficit (cyclically-adjusted, net of one-off measures) equal to 0.2 percentage points.

Ministero dell’Economia e delle Finanze

26

2008-2011 Economic and Financial Planning Document

TABLE III. 10: PUBLIC FINANCE: BASED ON UNCHANGED LEGISLATION AND POLICY SCENARIO

	2006		2007		2008		2009		2010		2011
NET BORROWING: RESULTS AND ESTIMATES
Forecasting & Planning Report (RPP), scenario based on unchanged
lagislation (September 2006)		—		2.8		-2.9		-2.7		—		—
Stability programme (PdS) policy scenario (December 2006)		—		-2.8		-2.2		-1.5		-0.7		0.1
RUEF, based on unchanged legislation (March 2007)		-4.4		-2.3		-2.3		-2.1		—		—
EU Commission (1) (May 2007)		-4.4		-2.1		-2.2		—		—		—
New trend data prior to the Decree Law (June 2007)		-4.4		-2.1		-2.1		-1.8		-1.3		-1.1
EU GUIDELINES: TARGETS AND CORRECTIONS(2)
Net borrowing, policy scenario		—		-2.1		-1.5		-1.0		-0.4		0.0
Fiscal adustment per year to be achieved (€ bn )		—		0.0		-10.1		-3.0		-2.5		5.5
Cumulative correction to be achieved (€ bn)		—		0.0		-10.1		-13.1		-15.6		-21.1
% of GDP		—		0.0		-0.6		-0.8		-0.9		-1.2
2008-2011 DPEF
Decree Law
% of GDP		—		0.4		0.1		0.1		0.1		0.1
Updated net borrowing, basded on unchanged legislation		—		-2.5		-2.2		-1.9		-1.4		-1.3
Net borrowing, policy scenario		—		-2.5		-2.2		-1.5		-0.7		0.1
Fiscal adjustment per year to be achieved (€ bn)		—		0.0		0.0		-6.3		-6.5		-11.4
Cumlative correction to be achieved (€ bn)		—		0.0		0.0		-6.3		-12.8		-24.2
% of GDP		—		0.0		0.0		-0.4		-0.7		-1.4
Policy scenario
Net borrowing, net of one-off measures		-3.3		-2.6		-2.3		-1.6		-0.8		0.0
Net borrowing, net of one off measures and cyclically-adjusted		2.7		-2.3		-2.1		-1.4		-0.7		0.2
Change in cyclically-adjusted net borrowing, net of one-off measures		-1.3		-0.4		-0.2		-0.7		-0.8		-0.8

(1)	Forecasts.
(2)	All no-tax revenues for 2007 will be used for reducing the deficit and the annual structural correction equal to 0.5 per cent of GDP for the subsequent years.

     On the basis of the above policy scenario and the updated scenario based on ucnchanged legislation (which are inclusive of the accounting adjustment — Assestamento di Bilancio —and the Decree Law, approved at the same time), there is no need for futher correcgtive measures in 2008. The scenario based on unchanged legislastion, however, does not accurately define the outlook for public spending, since it does not take into account the resources needed in order to meet the commitments already made (see Section III. 3), though not yet approved by law. The measures that the Government plans to incorporate into the 2008 Budget Law will thus consist of a reprogramming of expenditures, with increases in various sectors to be offset by reductions in others, so as not to increase the overall tax burden.

     The net borrwing targets previously established for 2008 onwards are basically confirmed: 1.5 per cent of GDP in 2009 and 0.7 per cent in 2010. The budget should be balanced by 2011.

     Taking into account trend data, achievement of the targets outlined above will require total corrective measures equivalent to around 1.4 per cent of GDP for the years of 2009-2011.

Ministero dell’ Economia e delle Finanze

27

2008-2011 Economic and Financial Planning Document

TABLE III.11: PUBLIC FINANCE TARGETS (as % of of GDP)

	2007		2008		2009		2010		2011
Net borrowing, at unchanged legislation (including the Decree Law)		-2.5		-2.2		-1.9		-1.4		-1.3
Interest expenditure at unchanged legislation		4.8		4.9		4.9		4.9		4.9
Primary surplus at unchanged legislation (including the Decree Law)		2.3		2.6		3.0		3.4		3.6
Net cumulative correction				0.0		-0.4		-0.7		-1.4
Net borrowing, policy scenario		-2.5		-2.2		-1.5		-0.7		0.1
Interest expenditure, policy scenario		4.8		4.9		4.9		4.9		4.8
Current balance, net of interest, policy scenario		6.3		6.4		7.2		8.0		8.8
Primary surplus, policy scenario		2.3		2.7		3.4		4.2		4.9
Public debt at unchanged legislation (including the with Decree Law)		105.1		103.2		101.4		99.3		97.2
Public debt, policy scenario		105.1		103.2		101.2		98.3		95.0
State sector borrowing requirement at unchanged legislation		1.9		2.1		1.1		0.7		0.5
State sector borrowing requirement, policy scenario		1.9		2.1		0.7		0.0		-0.7
Public sector borrowing requirement at unchanged legislation		2.6		2.3		1.6		1.2		1.0
Public sector borrowing requirement, policy scenario		2.6		2.3		1.3		0.6		-0.1

     The public debt is projected to decrease gradually as a percentage of GDP, reaching around 95 per cent of GDP by the end of the forecast period.

TABLE III.12: CHANGE IN DEBT ADJUSTED FOR CYCLICAL COMPONENT AND ONE-OFF MEASURES

	2006		2007		2008		2009		2010		2011
GDP		1.9		2.0		1.9		1.7		1.8		1.8
Potential GDP		1.5		1.5		1.6		1.6		1.7		1.9
Output gap		-1.1		-0.7		-0.3		-0.3		-0.2		-0.2
Cyclical budgetary component		-0.6		-0.3		-0.2		-0.1		-0.1		-0.1
Net borrowing		-4.4		-2.5		-2.2		-1.5		-0.7		0.1
Cyclically adjusted balance		-3.9		-2.2		-2.1		-1.4		-0.6		0.2
Cyclically-adjusted primary surplus		0.7		2.6		2.8		3.5		4.3		5.0
One-off measures		-1.2		0.1		0.1		0.1		0.1		0.1
Cyclically-adjusted deficit net of one-off measures		-2.7		-2.3		-2.1		-1.4		-0.7		0.2
Cyclically-adjusted primary surplus net of one-off measures		1.9		2.5		2.7		3.4		4.2		5.0
Change in cyclically-adjusted primary balance, net of one-off measures		-1.3		-0.4		-0.2		-0.7		-0.8		-0.8

     As for the policy scenario for the budget, the key revenue and expenditure components will be outlined upon the definition of the initiatives at the time of the preparation of the 2008 Budget Law. The level of the net balance to be financed, net of accounting and debt adjustments, will be no more than €24 billion for 2008, €21.5 billion for 2009 and €18 billion for 2010.

Ministero dell’Economia e delle Finanze

28

2008-2011 Economic and Financial Planning Document

III.3 THE SCENARIO BASED ON UNCHANGED LEGISLATION AND ADDITIONAL EXPENDITURES

     The public finance scenarios outlined in Section III.2 present the policy targets for 2008-2011. Scenarios are developed starting from trend forecasts based on unchanged legislation, as required by the law; therefore, the effects of spending and tax legislation set to expire—even legislative measures reasonably expected to be re-enacted—are excluded. Targets also exclude commitments (whether formal or not) undertaken by the Government with respect to unions, other public-administration entities, and international bodies. Instead, up to 1999 the trend scenario was based on ‘current policies’, even if not formalised by law.

     Both methods are based on conventions, and present advantages and disadvantages. Making forecasts using the ‘current policies’ criterion theoretically provides a more realistic picture of the current trend of public finances, but risks overstating public spending and more importantly, it feeds an inertial mechanism into the spending trend. It is also more arbitrary than the ‘unchanged legislation’ criterion since there is no clear dividing line between what falls within the concept of ‘current policies’ and what does not.

     On the other hand, basing the forecasts on unchanged legislation excludes the effects of events that have a high probability of occurring (and are often even certain) whose financing will be sought at the time of the preparation of the Budget Law. While this method provides greater clarity and transparency in the construction of the forecasts based on trends, it also can understate the trend of future expenditures. It thus creates an illusion that it will not be necessary to tap resources in order to meet the targets.

     The trend and target data on public finance for 2008 are the same. This means that the current state of accounts, as a result of the measures contained in the previous Budget Law, does not require any additional net corrective measure for budget consolidation purposes. There are, however, measures for which there are commitments (even though not legally binding) traditionally undertaken by all of the country’s Governments, or commitments undertaken by the present Government that only need to be enacted into law, or other initiatives that the Government may wish to implement and finance through regulatory changes made upon the preparation of the Budget Law.

     A representation of the policy scenario that includes some of the aforementioned items reconciles the ‘unchanged legislation” criterion with policy initiatives that should already be included into the gross fiscal adjustment envisaged for the next Budget Law. This approach establishes the boundaries for actual new initiatives that the Government and Parliament may wish to propose.

     A conceptual and methodological format is thus needed for drawing the boundary line between what can be considered as a standard expenditure over time and what can instead be considered related to decisions still to be made. The following three categories are currently not included in the forecasts based on unchanged legislation, even though they have consistently emerged in the past. The proposed classification represents the aggregate of measures to be considered in the preparation of the next Budget Law. The categories are presented in decreasing order of their ‘obligatory’ nature.

• Signed commitments. These are initiatives for which a political agreement has already been reached with the parties involved. The expenditures in relation thereto have already been quantified in general terms. First, this

Ministero dell’Economia e delle Finanze

29

2008-2011 Economic and Financial Planning Document

	category includes an agreement signed on 6 April 2007 regarding contracts for employees in the public sector, and another accord executed on 29 May 2007 in which the parties have committed to streamlining the operation of the public administration. Next, the category also covers certain expenditures regarding social security and labour issues that are currently being negotiated and are not yet included in the forecasts based on unchanged legislation; more specifically, these initiatives are aimed at the development and streamlining of support to the unemployed and a system of incentives and protection to employment that will increase the probability of younger people getting jobs and will make for more stable employment over a person’s working life. A third element regards international obligations which, although not covered by laws enacted in Italy, are part of the country’s political commitment with regard to the international community, e.g. supplements to the AIDS Fund as part of cooperation on development, the funding of the world’s poorest countries by the World Bank (IDA XIV), and amounts contributed to other international cooperation organisations. The fact that these expenditures ate not yet authorised by Italian law is due to the regulatory procedures contemplated (as in the case of employees in the public sector) or the timing needed in order to transform the accord into law, as in the case of the current negotiations over social security and labour issues.
•	Customary obligations. The category covers service contracts, public works, tax benefits and future renewals of contracts for employees in the public sector. The state acquires services and ensures the planning and execution of activities of general interest by entering into special contracts with certain public-sector entities, which have been recently transformed into joint-stock companies (including, for example, the National Railways (FS), the National Road Board (ANAS), and the Post Office). The resources for the new labour contracts, net of the allowances for the period between the expiration of a contract and the date on which the new contract becomes effective, are not included in the forecasts based on unchanged legislation since the amounts thereof have not been defined and sanctioned by law. It is evident, however, that the Budget Law will have to ensure the continuation of such essential services. Not executing the contracts would mean opposing a customary practice and creating budget difficulties for the recipients. At the same time, however, the value of the contract (and thus the expenditure that will actually be borne by the state) is not certain and must be negotiated between the Government and entities involved. In comparison with the items in the first category, the uncertainty for this category is a question of ‘how much’ and not ‘what if’. The same can be said for both some public works already financed through a ‘Framework Law’ (Legge Obiettivo) and the tax benefits regularly granted for decades (as in the case of small farm ownership) that have repeatedly been included in the Budget Law.
•	Possible new initiatives. The third category includes initiatives which the Government has debated and is studying further, so as to decide about which ones to adopt and which ones not to adopt, the priorities and the timing. The list of these initiatives is long and is not objectively determined: the most

Ministero dell’Economia e delle Finanze

30

2008-2011 Economic and Financial Planning Document

important issues, in terms of their quantitative impact, are the reduction of the property tax (ICI) on a first home and a tax deduction for renters. This category includes several initiatives for which the Government has given the go-ahead for 2007 via their inclusion in the Decree Law presented with this Economic and Financial Planning Document (DPEF); these initiatives require additional coverage should they be continued in future years.

     Furthermore, the Government remains committed to implementing the measures described in the box below so as to initiate the process of upgrading of the welfare state and to support the competitiveness of the economic system. As an indication only, the spending for all of these additional measures is expected to total roughly €10 billion for 2008 and for the years thereafter.

SMALL PENSIONS, YOUNG PEOPLE AND COMPETITIVENESS:

FINANCIAL RESOURCES

The Government is reaffirming its commitment to set aside €2.5 billion (net) for the planning and implementation of measures in favour of the welfare state and competitiveness; such measures are summarised below. The Government also indicates that it will be possible to make available additional resources for social security only to the extent to which such resources are tapped within the social security system.

The measures include €1,300 million earmarked for increasing small pensions and €600 million for programmes involving young people. Such resources represent more than 75 per cent of the entire sum projected.

Welfare support provisions:

€1,500 million, including:

• €1,300 million for increasing small pensions;

• €200 million for supplementing pension contributions;

Social buffers:

€700 million, including:

• €600 million for cash and non-cash contributions (inclusive of roughly €300 million for young people;

• €100 million for policies aimed at the employment of young people;

Competitiveness and productivity:

€300 million for (i) an increase in the productivity-based element of wages in the decentralised bargaining and (ii) overtime:

• For 2007, the Decree Law passed simultaneously with this document, allocates €900 million for small pensions, with particular reference to the contributions paid and a lump-sum amount of €10 million for the creation of funds to facilitate access to credit for the benefit of young people who are employed on temporary contracts, self-employed individuals and women.

Ministero dell’Economia e delle Finanze

31

2008-2011 Economic and Financial Planning Document

     The elements within the First category need to be considered as priorities within the scope of the next Budget Law since their exclusion would mean breaking the commitments made. The decision not to sustain the expenditures included in the second category would mean abandoning customary practices. For the third category, the issue is different since the items included therein do not represent formal commitment or customary practices.

     Table III. 13 summarises the categories described and the magnitude of the amounts involved. The inclusion of the first and second categories provides an indication of what the forecasts would look like if the current policies criterion were to be used. The amounts shown in the second and third categories in the table are not be to considered as already established amounts or commitments made. The debate that will take place between the presentation of the DPEF and the draft of the Budget Law (which will be organised through a ‘Planning Act’ that sets up procedures and methods for the identification of new proposals) will establish the specific amounts and initiatives to be financed.

     The main task at hand is to reconcile the scenario outlined above with the objectives arising from European commitments, namely, moving toward the achievement of a balanced budget. The government’s priority is to contain the tax burden and then gradually reduce it. As a result, the resources for financing all of the initiatives already quantified in the first category, the initiatives in the second category whose quantification is now the subject of an in-depth review, and those in the third category must be sought within primary expenditure. For 2008, the primary expenditure is roughly €700 billion, or 43. 5 per cent of GDP.

     In consideration of the foregoing, it is to be hoped that the primary expenditure will become a point of reference in Parliament’s discussion of this Economic and Financial Planning Document (DPEF). Should Parliament indicate it will move in this direction, it would represent another important aspect of the strategy employed in recent months for the purpose of improving the quality of public spending and supporting the consolidation efforts. Such an indication would be a strategic element for the Government in its preparation of the draft of the Budget Law and for Parliament, when amendments are being made to such draft. A scenario of this sort would dovetail with the provisions of Law 468 of 1978 on the subject of the budget, and specifically, the provisions of that law which require the DPEF to contain elements related to spending changes needed in order to meet the deficit—to-GDP target³.

     The focus on spending is part of the strategy discussed at length in this DPEF and aimed at a revision of public finance so as to make it possible to guarantee simultaneously fiscal sustainability and the requalification of policy measures. Such focus also responds to the indications provided by various international organisations to European countries which call for flanking the Stability and Growth Pact rules about budget balances with rules about spending. It is noted that the European countries which have adopted this strategy (including Spain, Finland, Netherlands, Sweden and Denmark) have improved the quality of public spending and have got their public accounts under control. The U. S. Budget Enforcement Act, which remained in effect during the nineties, is another valid example thereof (see Section IX. 10).

³ Article 3, Paragraph 2.

Ministero dell’Economia e delle Finanze

32

2008-2011 Economic and Financial Planning Document

TABLE III. 13: CLASSIFICATION OF POSSIBLE EXPENDITURES (in € mn)

	2008		2009		2010
SIGNED COMMITMENTS *
Resources allocated to social security and labour(1)		1,000		1,000		1,000
Contracts for public sectors employees (including school system)		2,354		561		561
Cooperation on development AIDS Fund and IDA XIV		750		150		150
Total Category 1		1,104		1,711		1,711
CUSTOMARY OBLIGATIONS *
National Railways (FF.SS.)		4,000		3,500		3,500
National Road Board (ANAS)		1,000		1,500		1,500
ENAV		30		30		30
Post Office		130		130		130
Reserve to offset commitments overruns		800		1,000		1,000
Resources for next round of collective bargaining with public sector	To be established
employees
Extension of fiscal benefits		1,200		1,500		1,500
Total Category 2		7,160		7,660		7,660
Total ( Categories 1 and 2)		11,264		9,371		9,371
Estimates for new initiatives (Category 3)		10,000		10,000		10,000
Total ( Categories 1, 2 and 3)		21,264		19,371		19,371

(*)	The list is indicative of the main initiatives, showing them by the amount exclusively in order to provide an indication of their magnitude. The figures for Categories 2 and 3 are general estimates only:
(1)	In addition to the 1,500 already considered with the June measures (see box in Section III 3)

Ministero dell’Economia e delle Finanze

33

2008-2011 Economic and Financial Planning Document

Part II

Ministero dell’Economia e delle Finanze

34

2008-2011 Economic and Financial Planning Document

IV. STRATEGIC CHOICES AND SECTORAL POLICIES

IV. 1  SUSTAINABLE GROWTH, SOCIAL JUSTICE, FISCAL CONSOLIDATION

     At the European Council which took place in Lisbon at the start of the decade the European Union set itself the goal of becoming the world’s most competitive and dynamic economy by 2010¹. The 2005 Spring European Council recognised that this decision needed to be accompanied by a common and coordinated political effort. Hence it decided to focus on growth and employment to highlight the tangible benefits of policies aimed at reforming and liberalising the goods and services markets as well as the benefits resulting from more knowledge and innovation². After five years of modest economic growth, in 2006 Italy’s economy began to recover. To ensure that this cyclical recovery becomes sustainable and lasting growth, the Government must continue its reform process with determination, reconciling economic growth and social justice, fiscal consolidation and environmental sustainability.

     Environmental sustainability has become particularly important, especially in the light of the strategic objective that Italy wants to achieve in the energy sector. Building on the Commission strategy set out in the ‘energy package’, the European Council of 27 March 2007 redesigned the energy and environmental policies of the Union. The aim is to rise up to the challenges of sustainability, competitiveness and security of energy supplies. In quantitative terms, and as against 1990 levels, by 2020 the European Union has committed itself to: (i) covering at least 20 per cent of overall EU energy consumption with renewable sources; (ii) increasing energy efficiency by 20 per cent as against projections for 2020; (iii) reduce its greenhouse gas emissions by 20 per cent as against 1990 levels.

     Strategic choices and industrial growth policies are part of the so-called ‘Lisbon process’. In its new formulation envisaging three-year National Reform Programmes and yearly progress reports, the Lisbon Strategy has become the permanent framework for the European Union’s growth policies. It is an important tool that weaves national actions into a consistent whole. Through shared objectives and priorities, the European Union has established convergent tools to increase the competitiveness of Member States.

     The Progress Report on the 2006-2008 National Reform Programme, submitted last October, contains an analytical description of the progress made on projects and an outline of the new tools designed by the Government to meet national targets and European priorities more effectively³. It also embraces the objectives of fiscal stability as well as those relating to the labour market. The financial effort needed to implement actions in the relevant sectors has been estimated to amount to over €60 billion in three years, or 1.3 per cent of GDP a year.

     The new Lisbon Strategy envisages that every year the Council of Ministers of the European Union, at the Commission’s proposal, makes recommendations to Member States, highlighting areas where progress is necessary or attention is required. This year’s

1	European Council, Presidency Conclusions, Lisbon, 24 March 2000, available online: http://www.consilium.europa. eu/ueDocs/cms_Data/docs/pressData/it/ec/00100-rl.i0.htm
2	European Council, Presidency Conclusions, Brussels, 22-23 March, available online: http://www.consilium.europa.eu/ueDocs/newsWord/it/ec/84343.doc
3	http://www.politichecomunitarie.it/file_download/65.

Ministero dell’Economia e delle Finanze

35

2008-2011 Economic and Financial Planning Document

assessment of Italy’s National Reform Plan has been positive. The European Council has recognised that Italy “is making progress” in implementing the Lisbon Strategy and has approved the following recommendations:

• rigorously pursue fiscal consolidation policy so as to put the debt-to-GDP ratio on a declining path and fully implement the pension reforms with a view to improving the long-term sustainability of public finances;

• pursue the implementation of recently announced reforms aiming at increasing competition in products and service markets;

• reduce regional disparities in employment by tackling undeclared work, increasing childcare provision and ensuring the efficient operation of the employment services throughout the country;

• develop a comprehensive life-long learning strategy and improve quality and labour market relevance of education⁴.

     In addition to the above recommendations, the Council added further points for consideration: a strategy for Research & Development (R&D), the sustainability of health spending, a sustainable use of natural resources, infrastructure improvement and an impact assessment of the proposed regulations.

     These suggestions, like the priorities mentioned by the European Council in 2006, are an essential basis for defining Italy’s reform policies and hence for this Economic and Financial Planning Document. Hence, education and life-long learning policies, a strategic and regulatory framework promoting the development of private research and greater interaction of the latter with public research, more open markets and a reduction of administrative costs for firms, closing the existing infrastructural gaps and embracing Europe’s policies on energy and climate change will be of key importance for the country’s growth.

     In less dynamic areas such as the South of Italy, one of the biggest obstacles to growth is the lack of two fundamental public goods: law and order and the rule of law. Also tax evasion, which is quite high in Italy, is a further factor contributing to distorting competition (See. Section VI.2 and Appendix IX.9).

     As the World Bank studies show⁵, high crime rates, organised crime and corruption hamper economic growth and have a discouraging effect on investors. One of the most serious consequences of criminal activity is that the illegal economy pervades the healthy economic fabric thus depressing investment activity.

     In addition, the uncertain enforcement of laws has a negative impact on financial markets, leading investors to apply less favourable financing terms. The malfunctioning of justice discourages industrial investment and makes it more difficult to start up new firms. The synthetic indicators of the quality of the rule of law developed by the World Bank⁶

4	‘Council Recommendation of 27 March 2007 on the 2007 update of the broad guidelines for the economic policies of the Member States and the Community and on the implementation of Member States’ employment policies’, available on line at: http: //eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:092:0023:0042:IT:PDF.
5	World Bank, ‘Doing business 2005’.
6	See the World Bank website: http://info.worldbank.org/governance.

Ministero dell’Economia e delle Finanze

36

2008-2011 Economic and Financial Planning Document

(‘the certainty of the law’⁷ and ‘control of corruption’⁸) show a clear negative trend in Italy since 1998, compared to an EU average which has basically remained stable.

     The Government is still committed to improving the economic context in which business is done, especially in ‘difficult’ areas, by improving the two fundamental goods: law and order and the rule of law.

     There will be no lasting economic growth unless the gaps that still exist in Italy are closed and welfare services are improved. The welfare state provides all those services through which a community helps individuals cope with four types of distress: sickness, old age, unemployment and poverty. Italy’s welfare state is comprehensive in some respects, but it is still lagging behind in terms of unemployment benefits, poverty and marginalisation, as reported in the relevant sections of this Economic and Financial Planning Document.

     Italy now has the opportunity to establish a well-developed welfare state. Its main deficiencies are low pension benefits, often not ensuring economic self-sufficiency, and the lack of social security schemes for some extremely disadvantaged social groups: mainly the young, the elderly and women.

     Young people are disadvantaged on three accounts: (i) they have to allocate too high a portion of their income to supporting pensioners; (ii) they are accumulating pension entitlements, which, by the time they retire, will give them lower benefits than the ones they are contributing to paying to current pensioners; (iii) they basically lack protection against unemployment, as the existing safety nets still work on the basis of labour market practices that promote permanent employment. Disadvantaged young people are one of the main factors preventing economic growth.

     Italy’s female employment rate is one of the lowest in Europe and is one of the most important obstacles to stable growth and gender equality which the European Commission defined as “an essential value” and “a crucial factor of growth and poverty reduction” ⁹.

     It is therefore essential to launch an extraordinary programme for women’s employment and their access to career and business opportunities is essential. This should be done recognising their rights, starting from the right to maternity, especially for women who do not work on a continuous basis and that still lack any form of protection. All this is a major impediment in a country where the female employment rate in the South is below 30 per cent and whose birth rate is the lowest in Europe. As statistics show, there is a positive correlation between the level and quality of women’s employment and birth rates.

     These considerations, and the following ones on sectoral policies, show that there is still a long way to go to achieve more justice. Actions aimed at reaching this goal should

7	The ‘rule of law’ indicator measures the citizens’ trust in the ability of Government administrations to enforce the laws of the State, the perceived incidence of crime, the certainty of punishment, the protection of private property and the ability to enforce contracts.
8	The ‘control of corruption’ indicator measures the ability of the political, legal and judicial systems to prevent and combat corruption phenomena.
9	Commission’s Communication to the European Parliament and the Council “Equal opportunities of women and men and women’s emancipation in development cooperation”, Brussels 8/3/2007.

Ministero dell’Economia e delle Finanze

37

2008-2011 Economic and Financial Planning Document

not undermine fiscal consolidation. Therefore, the issue of justice leads to another fundamental concern set out in this Economic and Financial Planning Document improving the quality of public spending.

     Italy has been lifted out of its fiscal predicament, but consolidation is far from complete. It will be complete when Italy has a balanced budget, a public debt lower than 100 per cent of GDP and a primary surplus equal to 5 per cent of GDP. This Economic and Financial Planning Document confirms these objectives.

     There is no correlation between the level of public spending, economic growth and social justice: the key is not how much, but how you spend. In order to grow more and achieve more social justice, it is necessary to improve spending. The incremental logic, whereby any spending programme is systematically refinanced should be replaced by a periodic critical review of actual needs. Actions taken so far by the Government are only the first steps of a more general improvement of the quality of public spending, which is reported in detail in the section on the spending review process (see Section VII. 1). There is still ample scope in the individual sectors to achieve further savings and more cost-effectiveness.

     This means that actions outlined below can be implemented provided the necessary funding is available to enhance the effectiveness of Government action. This process is instrumental to carry on fiscal consolidation, but it is also the prerequisite for ensuring greater effectiveness of Government action and increasing the overall productivity of the system. The resources freed up through ‘better spending’ will partly be reallocated under the same expenditure category.

     This part of the Economic and Financial Planning Document sets out the policies that have been implemented and what still needs to be done in the various sectors with regard to the policies outlined in last year’s document. It has been drawn up following the same order as last year: growth, social justice and fiscal consolidation.

     In several cases the Government policies embrace all these aspects in a unified whole. However, for the sake of clarity, they have been kept separate in this document.

Ministero dell’Economia e delle Finanze

38

2008-2011 Economic and Financial Planning Document

V. POLICIES FOR SUSTAINABLE GROWTH

V.1  INTERNATIONAL ROLE

     Italy’s active presence on the international political scene—based on sound structures and growing coordination and synergy among all the actors involved in Italy’s engagement abroad—is a key factor driving economic development and fostering trade.

     Investing more in foreign policy and the tools to conduct it thus means laying firm and lasting foundations for a greater international presence of the country’s economy.

     The Government intends to continue building upon what was started in 2007, notably focusing on:

• Strengthening Italy’s role and presence on the European scene and reinforcing transatlantic relations.

• Increasing the effectiveness of Italy’s commitment to peace, security and stability first and foremost in the Mediterranean area, also through the presence of our Armed Forces in international missions.

• Revitalising the relations between Italy and the leading newly industrialised Asian countries.

     In this connection and with a view to favouring Italy’s engagement abroad, a more efficient network of embassies and consulates is a fundamental prerequisite for any active policy promoting Italy’s presence on the international scene. These diplomatic missions should be rearranged to reflect the new geopolitical and socio-economic situations, as well as streamlined and strengthened to respond to the unprecedented tasks to be fulfilled in compliance with the important provisions already envisaged in the last Budget. Within the limits of available resources, investing in this objective shall be placed high on the Government’s agenda, thus reversing the present trend towards a progressive reduction in human and financial resources allocated to this purpose, while at the same time taking concrete steps to increase productivity and effectiveness.

V.2 DEFENCE

     Pursuant to the provisions of the Constitution, Italy’s task is to actively promote peace and the rule of law at international level, by supporting the relevant organisations in accordance with the principles of multilateralism and multi-polarism. In this framework and in compliance with the tasks entrusted to them by law, the Armed Forces must ensure surveillance of the national territory and immediate defence capability against existing threats. In addition, they must contribute to the management of current crises by minimising conflicts through timely intervention and cautious use of force, which should be viewed as a tool in a comprehensive security policy, envisaging diplomatic and economic actions as well as development aid.

Ministero dell’Economia e delle Finanze

39

2008-2011 Economic and Financial Planning Document

     Putting in place the operational capabilities needed to perform the tasks entrusted to the Armed Forces requires careful management of available resources and hence constant development of the organisation of the military forces and the Ministry of Defence as a whole.

     To this end we are carrying out an in-depth factual analysis of the sustainability of the current “Defence Model”—which is 190, 000 strong in addition to the regular Carabinieri officers—with respect to the commitments envisaged in Constitutional provisions and international agreements and within the limits of available resources.

     After the abolition of compulsory military conscription on 30 June, 2005 a ‘professional model’ for the Armed Forces is consistently being implemented, through:

• Adjustment in personnel numbers;

• Promotion of personnel well-being, with particular reference to social security and housing, while underscoring the contribution made by the military establishment;

• Gradual completion of female recruitment in the various military ranks, in all units and with no limits as to the positions women can fill.

     The Government intends to maintain the efficiency and performance levels of assets, systems and infrastructures (included in the stock of capital) used for national defence and security purposes.

     Moreover, an overall review of easements for military purposes is underway in preparation for the next national conference on this issue. Our goal is to harmonise the presence and training activities of the Armed Forces in the community, while at the same time keeping them effective and protecting the legitimate interests of local communities.

     The constant adjustment of our defence capabilities to changing needs is also reflected in the ongoing updating and streamlining processes of military codes and regulations, especially with respect to military and civilian personnel and mainly in the fields of security and health protection.

     All this will be possible only if a ‘culture of defence’ is properly fostered, so that citizens are involved and take part in the formulation of political choices in the fields of security and military defence.

Ministero dell’Economia e delle Finanze

40

2008-2011 Economic and Financial Planning Document

V.3 JUSTICE, LAW ENFORCEMENT AND RULE OF LAW

     The judicial system plays a key role within the State for the country’s economic competitiveness and as a cornerstone of the democratic system in the protection of individual rights and law and order. The actual settings in which justice is administered are varied and therefore targeted action is needed to achieve strategic objectives.

     The prerequisite for achieving the desired results and for adequately meeting society’s needs is the provision of quality services for users.

     As to the judicial system, the goals pursued by the Government, consistently with its agenda, are part of an overall project that aims at positively impacting the critical aspects of the judicial system that are most detrimental to the community. The actions described below aim at reducing the length of proceedings, containing the costs of litigation and ensuring the certainty of the law.

     As far as reducing the length of proceedings is concerned, within the constraints of available financial resources, it is necessary: (i) to establish the judicial proceedings unit, as an administrative structure to support judicial activity; the new organisational practice that has been put forward must meet modernisation requirements by developing cooperation and synergies among human resources, analytical, statistical and IT tools; (ii) to introduce information technology in the justice system, a process which has already been initiated, so as to allow the changeover from paper-based to on-line services and procedures.

     The use of information technology and on-line procedures in all the offices may be a quantum leap for the administration of justice, allowing it to benefit from projects that have already been tested. By 2010 and within the constraints of available resources, the goal is to enable all offices to process injunctions, notices to counsels, appeals filed for social security entitlements and the execution of rulings on line.

     In the last five years the resources for the ordinary administration of justice have substantially decreased, as in all sectors of public spending. Making spending more cost-effective is an essential tool to favour an actual reduction in costs and correct distortions in the current spending mechanisms.

     Within the Extraordinary Development Programme for judicial facilities, jails and juvenile prisons, it is necessary—within the constraints of available financial resources— to make an effort to extend, modernise and upgrade correctional facilities so as to ensure their safety and security. Overcrowded prisons are placing a great deal of pressure on the system.

     Other important initiatives to offer further alternatives to prison sentences are contacts with Agencies and Local Authorities to help inmates find work and the provision of medical care at health centres located outside the prison. In addition, deviant behaviour in minors must be addressed through actions aimed at seeking and enhancing the work of voluntary organisations and promoting cooperation among central and local government. It is necessary to strengthen the educational and social role of sports as a tool for combating youth hardship and favouring the rehabilitation and integration of deviant or socially marginalised individuals.

Ministero dell’Economia e delle Finanze

41

2008-2011 Economic and Financial Planning Document

     The European Union has been proactively engaged in launching and supporting networks of institutions and judicial bodies, such as the network of the Councils of the Judiciary, the European Network of Supreme Courts and the European Judicial Training Network. The Ministry of Justice will make all possible operational and professional contributions to these initiatives and will also strengthen cooperation and sharing of information with the European authorities, especially in order to prevent and combat international terrorism.

     Strengthening the national security system is an important factor for the development of our country, since it improves our citizens’ quality of life and facilitates the establishment and growth of social, cultural, economic and entrepreneurial activities. Therefore, within the framework of broader domestic security and international defence policies, it is necessary to envisage carefully-designed measures for the operation and effectiveness of law-enforcement agencies and the Armed Forces.

     The policies to enforce law and order and ensure the rule of law are intended to combat various types of crime: organised crime including that of economic nature, illegal immigration, domestic and international terrorism, prostitution, predatory crimes, trafficking in human beings, unauthorised street vending, hooliganism. Here law-enforcement agencies — including the Guardia di Finanza (Customs and Finance Police) make a fundamental contribution.

     Different levels of government cooperate on security policies. It is therefore important to enhance the complementarity between primary- and secondary-level security, with a view to increasing the quality of life in cities and suburban areas. The integrated security projects, which have already been started in the last few months, involve Regional and Local Authorities in the development of organisational strategies aimed at providing advanced security solutions.

     Technological innovation is an important element of security policy. The electronic identity card and the sharing of personal data are initiatives to be further developed to improve the relationship between citizens and government.

     Within the limits of available financial resources, the improvement of resource management policies must include the updating of regulations governing law-enforcement agencies and the upgrading of information and communications technologies as well as IT networks.

     From an organisational point of view, coordinated control over the national territory ought to be given strong impetus, using the working methods of neighbourhood police and community police, while at the same time reorganising facilities, closing offices that are no longer necessary and cutting police staff in charge of administrative tasks.

     At domestic level, the national civil defence system plays a particularly important role in safeguarding the security of the State and the safety of people and property. It is a sensitive and vital sector, for which special measures will have to be designed, also with a view to emphasising the contribution made by civil defence agencies; a good starting point could be updating the relevant law. The Government intends to maintain the efficiency and performance levels of assets, systems and infrastructures (included in the stock of capital) used for national defence and security purposes.

Ministero dell’Economia e delle Finanze

42

2008-2011 Economic and Financial Planning Document

     The Government confirms the pledges made to the European Union and international organizations as regards immigration, asylum and refugees, and, within the constraints of available financial resources, will do its utmost to ensure the relevant reception and integration efforts. The aim is to develop the rights of foreign nationals and new Italian citizens, leveraging the acquisition of Italian citizenship and promoting social-inclusion projects. Strengthening cooperation practices among the various levels of local government is crucial for the activities of the Local Immigration Councils. Improving the conditions of the immigrants living in guarded temporary accommodation and assistance centres and in reception and identification centres is a fundamental objective to be pursued.

V.4 CONSUMERS, USERS, COMPETITION, TRANSPARENCY

     Consistently with the guidelines for action set out in the latest Economic and Financial Planning Document (DPEF), the Government engaged in a major effort last year to remove barriers and constraints hampering economic activity, an effort which is bound to improve the well-being of consumers and firms. The various actions were a crucial necessary step for the development of a market-oriented culture in this country and for safeguarding its principles, and ensuring competition is its core principle.

     The efforts Government has made and the results achieved have been welcomed by the European Commission in its assessment of Italy’s National Reform Programme and have given rise to favourable reactions from the OECD and the International Monetary Fund.

     Special focus has been placed on the tertiary sector, which accounts for 70 per cent of added value in Italy and has important spillovers on the whole economy.

     The measures adopted by the Government¹ have removed restrictions on competition, ensured greater transparency on the market and competition among the various players, strengthened the powers of the Competition Authority and Sectoral Regulators. New bills², containing measures streamlining administrative procedures for companies, and bills of a more sectoral nature³ have complemented the Government’s initiative.

     The actions taken last year contribute to strengthening the deregulation process initiated a few years ago in the utilities sector, during which new pricing criteria were developed in order to boost competition and at the same time provide benefits for users/consumers.

     The results achieved so far suggest that the repercussions on the well-being of society will be substantial in the medium and long term. In addition to boosting growth, Government action has contributed to containing inflation, especially in sectors on which

1	Introduced by Laws No. 248/2006 and No. 40/2007.
2	Government bill A. C. 2272, envisaging ‘Measures for consumers and to facilitate production and business activities, as well as actions in nationally important sectors’, currently being considered by the Senate (A. S. 1644).
3	Such as those concerning class compensation action, consumer protection (A. C. 1495), reorganisation of independent authorities (A. S. 1366) and those of the electricity and natural gas sectors (A. S. 691), of local public services (A. S. 772) and the reform bills of intellectual professions (A. C. 2160).

Ministero dell’Economia e delle Finanze

43

2008-2011 Economic and Financial Planning Document

the new regulations have had an immediate impact (mainly pharmaceuticals, banking services and mobile telephony).

     The Regional Authorities have started, and in many cases completed, the legislative proceedings for changing their regulations to bring them into line with the new competition rules. In the regulated professions, professional associations have brought their ethical codes in line with the new principles on pricing, advertising and corporate status. In this respect, a final assessment by the Competition Authority, following the relevant fact-finding investigation started early this year, is still pending. The legislative measures adopted so far affected the banking and insurance sectors, regulated professions, retailing, bread making, local public transport (including taxis), telephony, the sale of pharmaceuticals, air transport, real-estate mortgage loans. In addition, measures have been taken to facilitate the establishment of new companies (see Appendix IX. 8).

     As to the petrol station network, the Government wants to ensure actual competition in the market, by abolishing minimum distances between petrol stations and removing restrictions on the sale of non-oil products.

     In other sectors, where adherence to the Community framework plays a more important role, the Government has developed the necessary measures to comply with EU policies, while at the same time protecting demand during the changeover to a deregulated market. The recently approved Decree Law deregulating energy markets⁴ envisages initial measures to open up the market for domestic customers that will become eligible clients as of July 1st, while maintaining measures to ensure the protection of households and small firms.

     In addition, the Electricity and Gas Authority has fixed new electricity prices effective as of July 1st, which will be further reviewed so as to introduce the so-called ‘social pricing’, to be defined on the basis of the relevant Government policies, to protect weaker consumers⁵.

     These measures, combined with the functional and operational separation of the sale and supply of electricity and together with the confirmation of the regulatory and supervisory functions of the Competition Authority, will open up a deregulated market for non-industrial consumers, without undermining the safeguards put in place for energy security and terms of supply. Equally important are the measures ensuring non-discriminatory access to information, so as to compare prices and ensure transparency of the mix of energy sources used to produce the supplied energy, which is necessary to allow consumers to make an informed choice.

     As to postal services, the introduction of special pricing is being studied for ‘bulk’ mail (characterised by a lot of deliveries), to check if it is actually compatible with competition rules and to identify possible corrections to the existing regulations in preparation for the opening of the market envisaged for 2009 in the European Directive.

4	Decree Law No. 73/2007 of 18 June 2007: ‘Urgent measures for the implementation of Community provisions concerning the deregulation of energy markets’.
5	Deliberation of the Electricity and Gas Authority No. 135/07 of 13 June 2007.

Ministero dell’Economia e delle Finanze

44

2008-2011 Economic and Financial Planning Document

     The envisaged annual Government bill on the promotion of competition and consumer protection⁶ should introduce a structured operational method to ensure continuity with Government action. This will be done by bringing the legal system into line with the reporting activity of the Competition Authority. The Government bill should establish the regulatory framework within which the autonomous Regional and Provincial Authorities can take action.

V.5 ADMINISTRATIVE AND REGULATORY SIMPLIFICATION

     In the last few years several European governments have started a far-reaching regulatory reform process aimed at simplifying the context in which companies and institutions operate.

     Regulatory simplification is a key factor for the country’s competitiveness, but it needs to be part of a consistent action where a reduction in the number of rules is accompanied by measures aimed at improving the existing ones.

     The Conclusions of the Spring European Council remind Member States that the quality of regulation contributes to balanced growth and suggest the need to set stringent targets for cutting red tape and its costs and improving regulation. The objective, shared by the Government, is to reduce administrative costs resulting from Community regulations by 25 per cent by 2012.

     The far-reaching regulatory reform programme—which also includes actions to deregulate markets—has the following distinctive features: administrative simplification, the modernization and efficiency of Public Administration and the reduction of administrative costs for citizens and firms.

     In order to achieve these objectives, the Government has recast roles and responsibilities and has moved away from a planning approach based on annual simplification laws to a strategy consisting in actions and programmes that can be measured, with clear timeframes, converging towards objectives that can be assessed. To this end, an Interministerial Committee has been set up to provide orientation and strategic guidance on simplification policies and the quality of regulation. A few months ago, an Action Plan for regulatory simplification and quality was approved, defining the links among strategic objectives, the actions needed for their achievement and the assessment of outcomes. Finally, an action to simplify regulations and to reduce the number of laws has also been envisaged, aimed at simplifying the regulatory framework so as to boost competitiveness, increase economic growth and improve the relationship between citizens and government.

     The results expected from this new approach are a more rapid growth in competitiveness, better regulation and smoother functioning of Public Administration.

⁶ If the rule envisaged in the Government bill A. C. 2272 is approved.

Ministero dell’Economia e delle Finanze

45

2008-2011 Economic and Financial Planning Document

V.6 CLIMATE AND ENVIRONMENT

     The climate change that we have experienced has contributed to raising the environmental awareness of both society and government and has strengthened the belief that it is necessary to take decisive action on the quantity and type of natural resources and energy sources we use with a view to ensuring a balanced and sustainable development of modern economies.

     Adherence to the Kyoto Protocol⁷ means that over the 2008-2012 period Italy must have emissions that are 6.5 per cent lower on average than its 1990 levels. Recent estimates, however, show higher greenhouse gas emissions on the national territory— about 12.5 per cent higher than expected, which means that the commitment to reduce emissions over the period considered has to go up to 19 per cent.

     This means a commitment to reduce CO₂ emissions by 98 Mt/year between 2008 and 2012. Recent data have shown that the costs resulting from failure to enforce the Kyoto Protocol in Italy risk going up to 2.56 billion euros a year over the 2008-2012 period, unless consistent rigorous action to reduce emissions is taken.

     In order to monitor progress made on the Kyoto targets, a monitoring programme will be put in place by the Ministry of the Economy and Finance and the Ministry of the Environment.

     The “Fourth Assessment Report” of the Intergovernmental Panel on Climate Change (IPCC) shows that global warming is mainly due to the concentration of man-made greenhouse gases in the atmosphere. This has led the European Union to adopt policies clearly aimed at mitigating climate change at global level, in the belief that the benefits for the planet will outweigh the costs of these actions.

     The European Strategy has resolutely addressed one of the key challenges facing industrialised countries: how to reconcile the need to secure the energy supply required to support economic growth with the protection of natural resources and the challenge of climate change. Energy efficiency and the development of clean renewable sources are also a way to reduce our dependence on foreign energy supplies, which is a sensitive issue in our country.

     The European Council has set the target for national governments and EU institutions to reduce greenhouse gas emissions by at least 20 per cent as against 1990 levels by 2020 through energy and environmental policies, especially by increasing energy efficiency and through the introduction of binding targets for renewable energy and bio-fuels.

     The general policies proposed by the European institutions will require Italy to notably increase the amount of energy produced from renewable sources.

     To meet this target, the Italian Government has adopted all the necessary measures to assess the current availability of renewable sources in Italy, to define development prospects and the targets that can realistically be met by 2020, with a view to avoiding overambitious targets that cannot be met, which would result in extra costs for the implementation of policies.

⁷ ‘Protocol to the United Nations Framework Convention on Climate Change’, 11 December 1997, ratified by Law No. 120/2002.

Ministero dell’Economia e delle Finanze

46

2008-2011 Economic and Financial Planning Document

     In addition, the Italian Government has committed itself to promoting the sustainable use of biomass and bio-fuels, by favouring the setting up of national sub-sectors to be established in cooperation with farmers, who may find ample opportunities for growth in the waste-to-energy business. A significant stimulus to energy efficiency and saving has already been given by the Budget Law for 2007; further R&D investment will be made in the fields of energy-saving technologies, the production of renewable energy and in a national co-generation initiative in district-heating.

     Within the constraints of available fiscal resources, the Government is also committed to ensuring the full operation of flexible mechanisms (Clean Development Mechanism and Joint Implementation) and the register of carbon sinks.

     In order to prepare plans and programmes to adjust to ongoing climate change against a backdrop of continuous updating of scientific studies on the subject, the Government has organised the National Conference on Climate Change which will provide clear indications on how to ‘adjust’ to a changing climate.

     Environmental policy may be an effective tool for the implementation of the Lisbon Agenda⁸. In this connection, suitable incentives, and hence a correct use of market-based instruments, would on the one hand make it possible to shift the tax burden from welfare-negative (i.e. taxes on labour) to welfare-positive taxes (i.e. taxing polluting activities), and on the other it would free up resources to encourage environment-friendly behaviour, in addition to promoting innovation and research.

     Market-based instruments and tax policies will play a decisive role in the next few years in meeting the EU environmental and energy targets. The use of economic instruments enables an efficient correction of market failures on the cost side, while at the same time contributing to the security of supply, competitiveness and the sustainability of energy policies and giving a clear signal to industry, investors and consumers.

     Despite the increase in ‘innovative’ tools for environmental regulation, traditional tools, such as taxes, are still one of the main policy methods to implement Kyoto targets; in addition, taxes make up a large proportion of fuel prices. Hence, it will be necessary to identify the elements that are at odds with the tools aimed at reducing emissions responsible for global warming, also considering the need to reduce emissions in sectors that are still unregulated (household/commercial and transport), as recommended by the European Union.

     The challenge of climate change also requires a review of the current economic and financial accounting systems, which should be coupled with fiscal and accounting systems that can assess the environmental impact of public policies.

     To this end, the Government is committed to introducing a green fiscal and accounting system in Government and Regional and Local Authorities, integrating the fiscal plan actions of Government, Regional, Provincial and Municipal Authorities, with a view to ensuring that all levels of Government can make informed and transparent

⁸ As mentioned by the EU Commission in the recent ‘Green Paper on market-based instruments for environmental and energy related policy purposes’.

Ministero dell’Economia e delle Finanze

47

2008-2011 Economic and Financial Planning Document

decisions and their action is accountable to the principles of sustainable development, while ensuring the right to environmental information.

     In particular, the Government believes local public transport plays a key role, because of its strategic importance for sustainable development, environmental protection and competition. By 2007, within the constraints of availble fiscal resources, a coordinated set of financial actions will be taken, including regulatory actions, aimed at launching a reform process which can: (i) give new impetus to socially sustainable deregulation processes and (ii) allow a qualitative and quantitative development of services. The latter will be targeted to maximising benefits for users and citizens, in terms of service efficiency and quality, less congestion in urban areas and air quality.

     Specifically, efficiency and quality in the supply of services will be favoured by the introduction of qualitative standards on the minimum quantity for service agreements, standard costs and performance reserve in the allotment of resources, as well as by protecting transparency and impartiality in tender procedures.

     Envisaging incentives to actions aimed at encouraging the use of public transport and improving pollution and congestion levels, and the extension, in an environment-friendly perspective, of the notion of minimum essential service, will contribute to strengthening environmental protection mechanisms and compliance with the Kyoto Protocol targets.

     The Government’s mobility policy will have to be planned in coordination with Regional Authorities, so as to achieve a significant reduction in emissions of pollutants and greenhouse gases at local level, while at the same time optimising the costs of policies, thus achieving a twofold environmental objective.

     However, with a view to strengthening the regulatory framework, the Government intends to promptly start reviewing the 2002 environmental action strategy for sustainable development in Italy, which is the framework for designing, implementing and assessing public policies predicated on the principles of sustainable development. The reviewed strategy will be consistent with the policies of the new EU Strategy on sustainable development, adopted by the European Council in June 2006.

     Other EU environmental priorities, which in the Italian context present their particular features and difficulties, will also have to be addressed. Hence, in reasserting its commitment to combat environmental crime syndicates, and more generally, environment-related criminal phenomena, the Government reiterates the priority it attaches to policies aimed at managing natural resources, protecting the natural environment and biodiversity, reducing the production of waste and aimed at proper integrated waste management. Therefore, within the constraints of available resources, the Government confirms (in addition to actions implementing the Kyoto Protocol) the five areas of action related to the above-mentioned EU principles:

• Environmental protection actions should no longer be planned in isolation from the context, also because an integrated approach would facilitate and improve Environmental Impact Assessments and/or assessments of impacts on nature and wildlife. As far as industrial contexts are concerned, it is necessary to change the institutional and administrative systems to bring them into line with the new system of rules resulting from the enforcement of the

Ministero dell’Economia e delle Finanze

48

2008-2011 Economic and Financial Planning Document

Integrated Pollution Prevention and Control (IPPC) and the framework regulation known by its acronym REACH (Registration, Evaluation, Authorization and Restriction of Chemicals). The same must be done with regard to high-risk industrial plants falling within the scope of the ‘Seveso Directive’.

• Proper land management is indispensable to develop the ‘adjustment’ measures to be identified at the end of the National Conference on Climate Change in order to remedy emergency situations that are made even worse by ongoing climate change. In this connection, the Government reasserts the central role of the ‘Water Directive’, that affords an integrated vision of water management and whose core objective is improving the quality of water, reducing water consumption, by saving it and preventing pipe leakage. In this framework, it is necessary to implement the guidelines for forest management planning to enhance farming and forestry policies, both for the impact they have on the hydro-geological balance and for the very close correlation with climate change.

• Italy will have to strengthen its activity in the field of biodiversity, both by continuing to strongly support protected areas and through actions aimed at protecting species and habitats, by drawing up the final version of all planning and governance instruments, such as the charter of nature and the green network. Greater environmental awareness and government action as well as specifically designed regulations are needed to protect biodiversity.

• It is necessary to start the clean-up of contaminated sites. In order to make up for the delays accumulated in this sector, it is necessary to give stronger impetus to clean-up operations, by envisaging dear and streamlined procedures, in line with the EU framework, that can boost research and the testing of new technologies, as well as training and skills. To this end, specific agreements between the parties concerned should be favoured. Ever increasing quantities of waste are being produced: it is necessary to reverse this trend and ensure integrated waste management and recycling. We need to identify ways to streamline regulatory requirements, with a view to simplifying rules and hence reducing costs, especially for SMEs. In meeting quality and environmental sustainability objectives, it is also necessary to strike a balance between efficient and cost-effective waste management. A key objective is to put an end to the waste crisis in some regions of the South. Within the limits of available resources, specific tax concessions may be envisaged such as tax breaks, with a view to cleaning up those sites where there is still a strong concentration of high-environmental-impact industrial plants (such as Sicily).

• The protection of the marine environment requires the identification of actions and specific agreements to better protect species most at risk and to rationalise shipping and increasing its safety; and finally at preventing forms of pollution that may increase the impact of man-made activities on coastal areas. In this respect, Italy intends to play a leading role in the implementation of the Barcelona Convention for the protection of the Mediterranean Sea.

Ministero dell’Economia e delle Finanze

49

2008-2011 Economic and Financial Planning Document

V.7 ENERGY

     The ever increasing world population and the need to improve living standards in poorer areas will push up energy demand in the next decades. 80 per cent of the energy currently used in Italy comes from fossil fuels (oil, coal, natural gas); these are depletable sources and are already becoming scarce.

     An integrated approach to climate and energy policy, which is at the heart of the European Energy Policy and the framework for Italy’s future energy decisions, aims at reconciling energy use with environmental protection, in addition to ensuring the country’s competitiveness and securing the supply of energy at accessible prices.

     With this in mind, last year the Government took steps towards a full implementation of EU policies on the opening of the internal electricity and gas market, aware that an actual EU energy policy is only viable in a context of harmonised rules that remove the existing asymmetries in the opening of domestic markets.

     Increasing the security of supply, ensuring the competitiveness of EU firms while at the same time ensuring benefits for consumers are important challenges that can be met in a more interconnected market, with more incentives to investment in networks, thanks to the separation between the ownership and management of networks and the shift to autonomous management systems.

     However, there is still the crucial problem of upgrading energy infrastructures, especially in the sector of natural gas, where increasing domestic demand is compounded by the fact that the capacity of import infrastructure has remained unchanged. The construction of new re-gasification terminals of LNG and pipelines to import gas from abroad, the upgrade of existing pipelines and the rapid realization of new underground gas storage facilities as strategic reserve and to meet market needs are essential conditions to avoid recurring dangerous supply crises and to reduce gas prices and meet our long-term priority needs. Pursuing the diversification of gas supply routes and supplier countries is of strategic importance to increase the security of supplies and the functioning of the whole system.

     As to the reduction of greenhouse gas emissions, further measures will be developed based on the principle of efficiency to be combined with the notions of ‘emissions prevention’ and ‘active protection of the environment’. The notion of ‘emissions prevention’ suggests that policies ought to be developed that reduce the demand for energy without undermining development. The notion of ‘active protection of the environment’ calls for innovation and economic growth and, hence, major advances in technology and the development of renewable sources, including thermodynamic solar plants.

     In this respect, within a specific Action Plan on energy efficiency, within the constraints of available resources and in accordance with the major effort made with the 2007 Budget, we believe it is important to develop efficient production sub-sectors and reduce energy consumption in production processes: this means strengthening the ‘Industry 2015’ initiative, while maintaining and extending the tax measures to promote energy efficiency in buildings and appliances. In this way a double lever will be used: action on the supply of efficient products and action on the demand for efficient products. In addition, there will be a third regulatory lever: monitoring and upgrading of the energy efficiency of appliances, so that incentives to buy a new appliance are temporary and mainly serve the purpose of fostering a different energy culture.

Ministero dell’Economia e delle Finanze

50

2008-2011 Economic and Financial Planning Document

     Mainstream policy tools are effective in providing incentives to encourage the use of renewable sources; however, within the limits of available resources, it is important to support the development of existing technologies and promote new ones. In addition to the above tools, there will be the specific measures envisaged in the 2007-2013 National Strategic Framework (QSN) and in the Industry 2015 programme, again with the aim of establishing production sub-sectors and providing growth and employment opportunities. These are measures that, among other things, increase support for renewable sources, favouring the achievement of the objectives identified in order to implement EU directives on electricity and fuels from renewable sources.

     A structural innovation policy must be based on research that should be relaunched through a medium/long-term programme focused on the development of new technology for energy efficiency, the use of renewable sources, the capture and chemical sequestration of carbon dioxide, the hydrogen cycle and the new technological frontiers of energy production.

V.8 LABOUR POLICIES

     Government action will build upon the strategic lines already outlined in the first Economic and Financial Planning Document covering the five years of this Parliament. In implementing the above strategic lines significant regulatory efforts⁹ have been made and consistent action of all levels of government has been developed.

     The following are the five areas in which further action will be taken:

• Combating illegal and unregistered work.

• Improving the prevention of industrial accidents to ensure compliance with workplace health and safety regulations.

• Promoting employment under permanent contracts as the main type of employment, with measures providing incentives, while combating the improper practice of using non-standard contracts, especially project-related contracts, following the successful practice already adopted for call-centres.

• Re-launching proactive labour policies, through the integrated and coordinated action of employment services, training policies and safety nets;

• Action targeted to the weak brackets of the labour market: women, young people, workers over 50.

     Specifically, it is necessary to insist first and foremost on action to combat work in the shadow economy and to improve the living and working conditions of people, also as far as workplace health and safety is concerned.

⁹ Art. 36-bis Decree Law No. 223/2006, 2007 Budget, etc...

Ministero dell’Economia e delle Finanze

51

2008-2011 Economic and Financial Planning Document

     As to unregistered work or work in the shadow economy, it is necessary to step up the efforts of the various central and local government agencies in cooperation with social partners aimed at combating this phenomenon. Its extent is still cause for concern in Italy: it must be eradicated, since it damages workers’ dignity and rights, in addition to jeopardising their safety, as it is often accompanied by failure to comply with industrial-accident prevention regulations; moreover, it is detrimental to public finances, as no taxes or social security contributions are paid; it is an element of unfair competition among firms.

     As to workplace health and safety, the reorganisation of regulations envisaged in the delegated legislation initiated by the Government, passed last April and which will hopefully be confirmed soon, will allow: initial measures for their direct implementation, such as strengthening the coordination of the various entities responsible for supervision; the adoption of delegated regulations, which, while reorganising and updating provisions that are too fragmented and often based on outdated organisational and production practices, will extend protection, thereby strengthening their effectiveness.

     Red tape and unnecessary form-filling, that is a burden on small firms, will be removed and truly effective prevention measures will be favoured. The whole action will therefore be based on an approach aimed at making the system effective, in a comprehensive and integrated vision of the various measures. To this end, the further increase in supervisory staff numbers envisaged in the delegated legislation on the reorganisation and reform of workplace health and safety regulations¹⁰ will ensure pervasive action throughout the community.

     As to labour policies and safety nets, the measures-foreshadowed during the debate between Government and social partners on the issue of ‘Growth and social justice’—will maintain the existing regulations, developing the potential of some of them, while correcting some provisions that have proved to be ineffective or to cause distorting effects on quality employment.

     As a matter of fact, Government action is aimed at enhancing provisions and measures that can contribute to creating quality employment and are therefore instrumental to the development of an efficient and competitive economy, while at the same time developing, workers’ professional skills. All this ought to be done in a framework where stable employment is considered the main tool as it can offer career paths to workers in a context of safe and secure employment and is thereby instrumental to the development of the country’s economy in terms of knowledge and professional skills. All levels of government will continue their efforts to combat improper recourse to flexible employment contracts, which are not used to meet the actual and legitimate flexibility requirements of industry, but as a mere surrogate for permanent employment.

     The reform of safety nets is a key-element to improve the quality of the labour market and the system of benefits protecting workers against the risk of unemployment. The Government is working with social partners to redesign our outdated system proactively, that is to say not just envisaging mere unemployment benefits, but providing actual opportunities for re-employment.

¹⁰ As approved by the Senate, on first reading on 27 June 2007

Ministero dell’Economia e delle Finanze

52

2008-2011 Economic and Financial Planning Document

     The support of employment services and educational and training institutions is essential to pursue this objective, because only the coordinated and integrated action of the various tools (income protection, jobs on offer, training schemes) can provide true employment opportunities, thereby allowing workers to update their professional skills and avoid marginalisation or the risk of permanent exit from the labour market.

     Special focus should be placed on the weak brackets of the labour market that are an absolute priority:

• Women, on whom targeted action must be taken with a view to increasing their employment rate, especially in the South, as well as the quality of their employment.

• Young people, worst affected by the new types of flexible employment contracts and for whom the so-called Protocollo (agreement) with the social partners identifies new targeted measures to improve protection and pension prospects.

• Finally, workers over 50, the ones who are most vulnerable to the consequences and risks of corporate downsizing and therefore most vulnerable to the risk of not finding new employment, with negative consequences on their living conditions in that they are ‘too old to work, too young to retire’.

     Strong cooperation among the various actors is needed for the initiatives described so far to be successful. Each within their remit, Government, Local Authorities and social partners are all called upon to engage in a major concerted effort within a comprehensive and integrated action plan.

     A successful implementation of the action plan will contribute—on the labour policies side—to ensuring more social justice which is the main goal of Government action.

V.9 EDUCATION

     Government action to support the quality of education is a key factor in any era, in ensuring people’s rights, higher productivity and in promoting social mobility. Nowadays, these aspects are especially important in Italy, where underperformance requires action to use and allocate resources more efficiently, as well as at achieving targets that can be measured and providing incentives.

     In recent years some progress has been made, but Italy’s situation is still unsatisfactory, below the European average and far from the 2010 goals set in the renewed Lisbon Strategy. In particular, the proportion of young people dropping out of school is still high (the proportion of young people aged between 18 and 24 who have completed at most lower secondary education is 20.6 per cent, as against 15.1 per cent of the EU average and the Lisbon goal of 10 per cent). Italian students compare badly with those of other European countries in terms of knowledge and basic skills; as far as the ability to read is concerned, in 2003 20.9 per cent of 15-year old students had only

Ministero dell’Economia e delle Finanze

53

2008-2011 Economic and Financial Planning Document

minimum reading skills compared to 19.8 per cent of the European Union and a Lisbon objective of 15.2 per cent. The situation is even worse in the case of maths¹¹.

     School performance in terms of student achievement varies greatly in the country’s three major areas: it is good in the North, definitely unsatisfactory in the Centre and very poor in the South. An analysis of this underachievement shows that there is room for improving the situation with targeted and concrete action at national level. This is what has been done by raising the compulsory education age, by adopting concrete steps to ensure the independence of schools, by overhauling the training system and recasting the role of INVALSI (National Institute for the assessment of the educational and training system), by improving the quality of technical and vocational schools, through programmes for the construction of new schools, by launching a National Education Programme in the South with additional EU and national funds already appropriated by the Government. Quality of education and continuous assessment of student achievement, long-term planning of educational requirements, enhancement of the work done by teachers through completely new requirements for entry into the teaching profession and career paths: these are the directions needed to give confidence and instil motivation in teachers and students. These are the directions of Government action, foreshadowed in the ‘Agreement’ (Intesa) with the unions, to be pursued with a consistent and steady strategy.

     In order to place the quality of education at the heart of Government action, we must first of all strengthen the systems that measure and assess performance and the various internal and external factors that have an impact on education and on which performance depends. By establishing a national assessment system for Italian schools, integrating it with self-assessment processes, re-launching educational research and assessing the impact of ongoing actions, it will be possible to identify the causes of underperformance and provide individual schools—especially those in challenging circumstances—with continuous support so as to improve student achievement. With a view to meeting these targets, contracts may also be envisaged with incentives for staff, so as to favour in particular the schools that, thanks to their situation at the outset, can make significant progress in terms of student achievement.

     In addition, it is necessary to address the organisational barriers that make the Italian school system more expensive than others—per hour of teaching and per student. A medium and long-term review of the local needs of teachers and the whole staff, and their recruitment procedures, that takes into account how situations may change (birth rate and migration flows, decrease in drop-out rates, raising of compulsory education age) will help remove the risk of school closure and teachers’ job insecurity, introduce changes in the students’ timetables (as has already been done for vocational schools with the provisions of last year’s Budget), make teachers’ timetables more flexible, modify criteria and methods with which classes are formed. The existing regulations envisage a number of students per class which is unbalanced, with classes that are too small also in municipalities that are neither small nor remote; on average, one class out of six in lower secondary schools and one class out of three in primary schools have less than 15

¹¹ OCSE, ‘Education at a Glance’, 2006.

Ministero dell’Economia e delle Finanze

54

2008-2011 Economic and Financial Planning Document

students. These innovations may lead to permanent benefits, both in terms of school organisation and the efficiency and effectiveness with which resources are used.

     In the reallocation of public funds, it is crucial to emphasize the value of teaching and to enhance it through: (i) overhauling recruitment systems and initial training, which the Government will put in place by implementing the 2007 Budget¹²; (ii) strengthening life-long learning—which is at one time a right and a duty for those in the teaching profession—with special focus on teaching methods for scientific and technological subjects; (iii) the introduction of appropriate career development mechanisms, which will have to be accompanied by a review of the regulations on mobility, as envisaged in the Policy statement on negotiations in the education sector. The result of the assessment will then show a greater convergence between teachers’ aspirations and skills and the needs of schools. These are the essential preconditions to restore to the teaching profession the social status and clarity of purpose required to perform the difficult task entrusted to it by society.

     The Ministry of Education and the Ministry of the Economy and Finance will soon submit a White Paper on these aspects.

V.10 HIGHER EDUCATION AND RESEARCH

     Education and research targets must be ambitious yet consistent with available resources. While Italy must commit itself to bridging the gap with other countries as regards international practices for higher education and research, action must be taken within the constraints of available public resources.

     In a knowledge-based economy, a key driver of growth is high technology based on ‘permanent innovation systems’, a sector where Italy’s competitiveness has been declining, compared to both other European countries and the newly industrialised countries. An ever increasing number of countries rely on scientific research to provide sound foundations to their permanent innovation system and hence to their competitiveness. From 1990 to 2003 global investment in research and development (R&D) went up from $377 to $810 billion and in the newly industrialised countries it is growing at an even faster pace. In order to address major global challenges—such as energy, climate change, the fight against old and new diseases, growing migration flows, rapid urbanisation and the problems related to population ageing—scientific and technological advances as well as the development of high-technology firms and services are needed.

     In Italy, investment in R&D accounts for 1.1 per cent of GDP as against 1.81 per cent in EU-25, 2.7 per cent in the US and 3.15 per cent in Japan.

     Our medium-term target is to at least reach the average of OECD countries, that is to say 2.5 per cent, 2/3 of which in the private sectors, where the lack of investment is

¹² Paragraph 604, letter c.

Ministero dell’Economia e delle Finanze

55

2008-2011 Economic And Financial Planning Document

most serious. One should also consider that this objective has been set against a ‘Lisbon target’ for Europe of 3 per cent GDP investment in R&D by 2010.

     In Italy the proportion of R&D funded by the Government as against total R&D investment is larger than that of other countries, while the opposite is true in the case of the share funded by industry.¹³ As a matter of fact, companies show a low propensity to research: they invest 30 per cent less than the European and OECD average. This problem cannot be solved by direct public investment (over two billion have been allotted to R&D by the Ministry of Research in 2002-2006). In addition to private funding, public resources must be earmarked for research infrastructure and for enhancing the status of researchers¹⁴. Compared to Government spending on R&D, the proportion of R&D funded by Italian universities is substantial and has remained stable in time.¹⁵

     Within the limits of available resources and prior to making direct investment in research, it is necessary to increase and improve the quality of investment in university education (from 0.88 per cent now to 1.2 per cent of GDP), by improving quality through reward systems, eliminating inefficiency, promoting rigour, transparency and better management practices. In addition, higher education makes a crucial contribution to high-quality life-long learning and training activities in the private sector and public administration, as well as to professionals and workers seeking to improve their skills.

     Some important innovations have already been put in place, such as: (i) the Agency for the assessment of higher education and research (ANVUR); (ii) the new system to recruit researchers for universities and research centres; (iii) the reorganisation of scientific-research funding, including the 2008-2010 National Research Plan; (iv) the so-called ‘Unified Fund’ (First); (v) a concerted policy for the ‘competitiveness fund’ known as ‘Industry 2015’ jointly designed by the Ministry of Economic Development and the Ministry of Innovation; (vi) CIPE’s (Interministerial Committee on Economic Planning) initiatives; (vii) the framework agreements with the Regional authorities; (viii) the reorganisation of research centres; (ix) the reform of the three university degree courses in accordance with the European space for higher education. Other innovations are needed with respect to human resources and the governance of universities and other institutions. Nonetheless action will be taken within the constraints of available resources.

     In addition, it is necessary to enhance the sector of high-level musical and artistic education, while at the same time implementing the 1999 reform. It is a key area for the promotion of specific aspects of our national tradition and cultural vocation, and for training talents that can innovate the country’s artistic production.

13	More specifically, in Italy the Government funds about 50 per cent of the overall R&D spending, as against 30 per cent in the US and 10 per cent in Japan. In Italy, industry finances 43 per cent of R&D as against approximately 64 per cent in the US and 75 per cent in Japan (data mainly from OECD sources).
14	In Italy, out of 1,000 employees 2.9 are researchers, as against 6 in the European Union and 7 in OECD countries.
15	Of the overall R&D spending funded by Government (about 50 per cent of the total), the proportion funded by Universities is about 67 per cent (Survey on research and development in Italy in 2001-2005 by ISTAT, ‘La ricerca e sviluppo in Italia nel periodo 2001-5’).

Ministero dell’Economia e Delle Finanze

56

2008-2011 Economic and Financial Planning Document

     New public and especially private investment is needed, as well as tax and regulatory measures to be defined in the future. The European context is potentially favourable: the launch of the VII Framework Programme calls for an improvement in the ability of Italian research institutions to draw on EU funds (Italy is a net contributor to the EU budget). Within the constraints of available fiscal resources, funds shall be allotted to major sectoral programmes on networks, human resources, industrial research and the agreements with Regional Authorities.

     In compliance with the VII Framework Programme, a plan for major national research centres of European stature will be designed to support the technological upgrading and updating of research and research training in our country. It is nonetheless necessary to ensure that business-research incentives are not given unconditionally, but made dependent on outcomes that can be ascertained so as to boost innovation.

     Moreover, within the limits of available funds, it is necessary to increase the resources to support the right to study, with grants, exemptions from taxes and social security contributions, student loans with income-contingent repayments and other concessions, as well as through the construction of new halls of residence. It is also important to facilitate the internationalisation of our universities, especially high-level music and arts schools, in accordance with the 1999 reform which has turned art and music schools into university-level institutions. This is a key area for the promotion of specific aspects of the country’s cultural tradition.

     Enhancing higher education and research and supporting its internationalisation, as for all other sectors of Public Administration, must be part of an action aimed at greater efficiency and cost-effectiveness. A proper policy aimed at revitalising higher education and research must therefore also be implemented through rigorous measures financed with funds freed up through ‘better spending’ practices.

     In sectors with a high rate of technological innovation, the Government intends to invest in measures that can help bridge the gap with the most dynamic economies, especially by promoting a higher rate of innovation in the economy and increasing the economy’s competitiveness and productivity, through support to research, development and the production activities of high-tech sectors and the adoption and use of digital technologies, especially in the aerospace, electronic and shipbuilding industries, also in connection with national security. Special attention must be paid to upgrading and enhancing the efficiency of the defence sector’s industrial and logistic support facilities.

V.11 INFRASTRUCTURE

     After increasing up until 2002, when it reached 4.5 per cent of GDP, capital spending has declined, going down to 4.1 per cent of GDP (net of revenues from UMTS licenses and divestments). In particular, after an average annual growth of 7 per cent between 2000 and 2004 (net of divestments) investment showed a trend reversal and its ratio to GDP went back to the 2000 figure.

Ministero dell’Economia e delle Finanze

57

2008-2011 Economic and Financial Planning Document

TABLE V.1: GOVERNMENT CAPTIAL EXPENDITURE (as a proportation of GDP)

	2000		2001		2002		2003		2004		2005		2006
Investment (net of divestments)		2.4		2.5		2.6		2.7		2.7		2.6		2.4
Contributions to investment		1.2		1.4		1.4		1.8		1.4		1.6		1.5
Other capital outlays (net of UMTS)*		0.2		0.4		0.5		0.1		0.1		0.2		0.2
Capital expenditure (net of UMTS and divestments)		3.8		4.3		4.5		4.5		4.2		4.3		4.1

* As of 2001 data do not include contributions to the capital stock of Gruppo Ferrovie dello Stato booked as transfers to firms. The 2006 data do not include the following extraordinary operations: VAT refunds on company cars (15,982 million); writing off of Government receivables from TAV (12,950 million) and transfer of social security contributions receivables from agricultural workers (734 million) to the securization firm:

     Government capital spending is to a large extent decentralised; in particular, 60 per cent of investment is made by Local Authorities and 20 per cent by Regional Authorities. Spending by the various levels of government varies depending on the areas and sectors where action is taken. Local Authorities play a major role in the educational, industrial, tertiary and the integrated water-cycle sectors (see Figure V.1).

     Central Government invests primarily in R&D and transport.

     Regional Authorities, which also play an important role in planning, directly allocate a comparatively smaller proportion of funds to all the sectors shown in the table below, and a proportion of over 25 per cent of investment funds to the environmental protection and waste-management.

     Capital spending as a proportion of GDP is more or less the same as the European average in terms of volume, and the same is true of resources earmarked for public investment only (65 per cent of the total).

     However, Italy still has poor infrastructure in some areas causing bottlenecks and lower quality in the levels of some services, which adversely affects economic activities and hampers growth throughout the country. In the next few years, the need to increase capital endowment can be met through a higher output growth, by cutting spending on business incentives, improving the quality of existing investment programmes and cutting unit costs.

Ministero dell’Economia e delle Finanze

58

2008-2011 Economic and Financial Planning Document

     Investment requirements vary from sector to sector (economic, environmental protection, social and research infrastructure), and involve responsibilities at different levels of government, which must act in compliance with ever tougher social, economic and environmental regulations and the ever more stringent fiscal sustainability constraints.

     Coordination among all levels of government is a prerequisite for complying with constraints and for satisfactorily meeting the expectations of citizens and firms. Government will continue its effort to ensure that, in all the areas directly falling within its remit, investment programmes are adjusted so as to be clearly consistent with the established priorities, thereby ensuring actual cooperation among all levels of government.

     Specifically, the criteria used in the selection of major works must include an assessment of cost-effectiveness and lead-time, with a distinction between works already in progress, contracts that have only been awarded and those for which the tender process has yet to be completed. The adoption of these criteria will make the capital spending review more effective; this effectiveness will be further increased if combined with the right mix of private funds and possible price adjustments.

     A large part of overall capital spending goes to development programmes financed by additional national and EU funds¹⁶ (about 25 per cent overall, over 50 per cent of which in the South where it represents 50 per cent of total investment). In accordance with the 2007-2013 National Strategic Framework—recently approved by the Government—mainstream investment policies and the relevant regulatory framework

¹⁶ At December 2006, 66 per cent of 2000-2006 Structural Funds had been used and 63 per cent of funds for Objective 1 (roughly corresponding to Italy’s South).

Ministero dell’Economia e delle Finanze

59

2008-2011 Economic and Financial Planning Document

will be designed to ensure a more effective use of the opportunities afforded by these additional resources (see Chapter VIII).

     The progress report on the 1st Strategic Infrastructure Programme of the so-called Legge Obiettivo and the relevant financial requirements show that it is necessary to: (i) complete the works that have already been approved as well as those that have to be started or are in progress, addressing the financial and implementation problems identified during the monitoring of the above Programme; (ii) review the priorities for the country’s infrastructure development, by sharing ideas and cooperating with Regional and Local Authorities, before making further financial commitments on new projects.

     The ‘Priority Infrastructure’ Master Plan, developed after consultation with Regional and Local Authorities, identifies works in each Italian region that are considered essential. The above Master Plan identifies priority criteria that shall apply in the proposal for the infrastructure plan for the next few years: agreement among all levels of government (central, regional, local) on the scale of priority; consistency with the general plan for the development of the whole country; progress and overall sustainability of projects, as well as consistency between the selected works and the resources actually available and the timeframe envisaged for their use.

     The development of the ‘Priority Infrastructure’ Master Plan entailed an overall review of the First Strategic Infrastructure Plan, as envisaged in the Legge Obiettivo, and identified projects to be financed in the 2008-2011 period with the relevant resources, bearing in mind the progress made, economic and financial needs, and existing or possible co-financing through local or EU funds. The identified projects, requiring funds amounting to about €32,149 million, aim at reducing the quantitative and qualitative infrastructure gaps typical of the regions in the Centre and in the North, while strengthening the potential of the South.

     The above targets will be met by: (i) building the rail links for the development of the 5th Priority Axis and the Southern sections of the 1st Priority Axis; (ii) putting in place actions to implement the ‘Motorways of the Sea’; (iii) initiating works on a rail link with the Malpensa airport hub to strengthen the Tyrrhenian and Adriatic axis; (iv) upgrading roads running across the peninsula; (v) building works to relieve congestion in urban areas, including the Milan, Turin, Bologna, Rome and Naples underground systems.

     In the upgrade of the Salerno-Reggio Calabria Motorway, included in the Tyrrhenian axis, a specific objective of the action plan provides for complete financing of the upgrade and a commitment by ANAS (Italy’s National Road Board) to significantly reduce the lead time and costs of the sections still in the design stage. The Master Plan has been the basis on which choices have been made at the various sectoral planning levels, in particular for the development of the Road System Plan and the Contratto di Programma between the Government and Rete Ferroviaria Italiana (RFI) for the 2007-2011 period. As to the road network under a concession agreement with ANAS, subject to the provisions of the 2007 Budget and the available resources, ordinary funds for a total of €4,291 million will be made available for appropriations during the programme term, to be

Ministero dell’Economia e delle Finanze

60

2008-2011 Economic and Financial Planning Document

allotted to projects selected consistently with the Master Plan targets and which either complete or supplement existing infrastructure or works under construction.

     Again within the limits of available financial resources, the above Contratto di Programma with RFI envisages investments amounting to €22.165 million over the five-year period, to be allocated to extraordinary maintenance work on the network, infrastructural upgrading of works under construction and building of new works mainly in the South and along the Naples-Bari and Palermo-Messina routes.

     Service contracts with ANAS and RFI will be based on the principle of payment for services rendered, according to efficiency and cost-effectiveness criteria based on quality standards and market benchmarks already developed and adopted at European level.

     Special focus has been placed on the South: a share of at least 30 per cent of national resources has been allotted to the above-mentioned programmes to correct existing weaknesses and preventing future risks of marginalisation. With particular reference to funds for development policies, the 2007-2013 Quadro Strategico Nazionale (QSN) envisages both the Programma Operativo Nazionale Convergenza ‘Reti e mobilità’, for Campania, Calabria, Apulia, and Sicily and the Programma Nazionale Mezzogiorno ‘Reti e mobilità’, for all of the eight regions in the country’s South. Overall, through the two programmes and within the constraints of available financial resources, €6,777 million will be invested in upgrading and strengthening the infrastructure system in the South and on the islands (European Regional Development Fund, Underdevelopment Areas Fund and national co-financing).

     As to housing, it is necessary—within the limits of available financial resources—to develop a regulatory framework in coordination with the regional regulatory framework to launch strategic programmes, mainly aimed at boosting the housing supply, to be built not only with public funds, but also through public-private partnerships. This framework should also be able to meet needs by providing affordable housing and make available an overall amount of funds that can significantly boost the building industry and have a positive impact on the whole economy.

V.12 MOBILITY

     In order to review infrastructure network projects, assessment systems should be used to select priority projects, on the basis of a rigorous cost-benefit analysis in accordance with the assessment procedures required by the European Commission. Economic and financial assessment of investment, that takes environmental externalities into account, already is a prerequisite for obtaining EU contributions from the TEN-T budget and European Regional Development Funds.

     In this light and within the constraints of available financial resources, the Ministry of Transport will make proposals for the 2008 Budget, including regulatory and financial proposals, in order to launch priority policy actions in accordance with the Mobility

Ministero dell’Economia e delle Finanze

61

2008-2011 Economic and Financial Planning Document

Master Plan targets which are aimed at implementing a safe, effective and sustainable transport system by putting in place the following:

• The Mediterranean Sea and the Motorways of the Sea. To ensure our country is part of a global economy, it is necessary to improve international links with Europe, the Mediterranean area and the rest of the world. As far as links with Europe are concerned, it is necessary to consolidate border crossing policies, through joint decision-making, with the countries concerned, on land transport. As to the Mediterranean, it is necessary to implement the proposals made during the Barcelona process and put in place the Sea Highways priority project for efficient transport to and from countries in North Africa, and those bordering the Black Sea and the Eastern Mediterranean Sea. Our overall policy is also aimed at supporting trade with Asian countries. In this connection, there is a need to define the roles and functions of ports in relation to airport hubs and gateways. The South must play a key role in defining gateways, considering that it has already shown some of its dynamism, but has not yet revealed its full potential.

• Intermodality Our target is to integrate and combine different transport modes and different services within the same mode, to optimise the potential use of each mode. Within the limits of available financial resources, a twofold action will be undertaken to support service companies for the rail and sea transport modes (Intermodality support fund—through re-financing of programmes envisaged by Law 166/2002—full implementation of the law on the so-called green bonus for the Motorways of the Sea) and the development of an interport system to serve industrial districts and logistics chains for the transportation of goods from production sites to markets. Forecasts of mobility in the alpine region confirm a high degree of saturation of mountain crossings requiring twofold strategic action: (i) in the short/medium term shifting of freight services from road haulage to a different transport mode (with priority given to hazardous materials); (ii) moving traffic from road to rail along the Modane route of the historic Turin-Lyons line, suitably upgraded along the Italian stretch to become operational in 2008; (iii) shift from road haulage to maritime transport services of the Motorway of the Sea of the Tyrrhenian shores of Spain, France and Italy; (iv) in the long-term, construction of the new AV/AC Lyons-Turin rail link and integration of the Lyons - Turin- Milan- Venice- Triest PP1 route with the system of ports along the Ligurian shore (Genoa, Savona, La Spezia) and development of intermodal centres (a port on the Ligurian shore) in Piedmont (Orbassano, Alessandria and Novata). Strong traffic congestion in the Strait of Messina requires actions to ensure safety and upgrade the capacity of mooring facilities and fleets, so as to improve the quality of services and intermodality. In order to relieve congestion it is necessary to build new berthing facilities, provide equipment to terminals and build new ferry fleets and IT systems.

• Policies to support Italian ports. Improving the efficiency and competitiveness of Italian ports can be achieved through comprehensive action plans envisaging a system of ports connected via rail links to the major national and Trans-European networks. It would therefore be advisable to

Ministero dell’Economia e delle Finanze

62

2008-2011 Economic and Financial Planning Document

	undertake the following strategic initiatives: (i) develop maritime intermodal systems linked to the Motorways of the Sea through integrated logistics platforms to be built within the port facilities and linked with interconnecting railway lines; (ii) further develop the major transhipment ports, by increasing their handling capacity and their links in major terminals and providing logistics platforms and duty-free areas for the large flows of containers coming from the Far East and from countries beyond Suez. Significantly boosting the competitiveness of Italian ports also means making port authorities financially independent, a process started with last year’s Budget and which must be further strengthened and based on the principle of accountability. In addition to mere freight transport, the port logistics platform must also allow partial ‘processing’ of goods so as to provide added value.
•	Sustainable transport. In accordance with EU policies, our target is to develop action to reduce the environmental, economic and social impact of the country’s transport system. More specifically the main concerns are: (i) reliability of services and rights of passengers; (ii) increasing energy efficiency and the use of green fuels; (iii) reducing environmental pollution resulting from the transport system, with special focus on air quality in metropolitan areas.
•	Quality services for commuters. In order to meet the increasing mobility needs of commuters who study and work in areas often far away from home as a result of ever increasing urban sprawl, it is necessary to strengthen public and private transport, while at the same time promoting measures discouraging the use of private cars, so as to partially shift transport demand from private to public transportation. It is necessary to improve the quality and efficiency of mass transit services, by deploying qualified human resources, investment, capital equipment and railway and underground systems. This would ensure continuity with efforts already underway—nonetheless consistent with the available resources—which are aimed at establishing an Investment Fund to purchase trains, underground trains, trams, trolleybuses and cleaner buses as well as rolling stock, so as to increase the provision of local and metropolitan transport services17;
•	Airline services and tourism. The strong growth in air traffic requires a planning policy for the domestic airport network consistent with the deregulation process and the need to improve the quality of services. While ensuring that airlines operating in Italy fully comply with safety regulations, the Government has issued a Policy Paper aimed at laying down definite rules for carriers as well as definite criteria for a suitable pricing policy for baggage handling and other airport services;
•	Safety and security. Safety must mean prevention of accidents in the movement of people and goods resulting in reduced costs for the whole community, and security means protection against criminal acts. For the first time both aspects are viewed not just as a cost, but as an opportunity for technological, industrial and economic growth. Actions to improve road security must be as effective as possible by implementing the following three

¹⁷ Law No. 211/92.

Ministero dell’Economia e delle Finanze

63

2008-2011 Economic and Financial Planning Document

priorities: (i) fostering a new road safety culture among citizens; (ii) strengthening prevention, control, deterrence and law-enforcement measures, also through the use of new technology; (iii) increasing the ability of all levels of government — central, regional, provincial and municipal—to enforce road safety. For the Capitanerie di Porto and Guardia Costiera (Harbour Police and Coast Guard) ensuring safety and security at sea is an area needing suitable recasting of roles and functions in view of the tasks they are called upon to carry out.

•

Innovation and training. Innovation and training are a prerequisite for the country’s structural growth in all fields related to mobility. Therefore, they must be supported by a technological innovation programme, aimed at developing ICT technologies, so as to optimise the performance of means and services safely and in an environment-friendly way. Mobility education should be included as a subject in the curricula of mandatory schooling.

V.13 TELECOMMUNICATIONS NETWORKS AND DIGITALIZATION

     Internet infrastructure is a prerequisite for the country’s modernisation process. There is undoubtedly a close correlation between the development of telecommunications, the whole ICT sector and economic growth.

     At the end of September 2006, there were over 8 million broadband subscriptions in Italy: the market generated by broad-band is estimated at €2.6 billion. Italy’s performance is similar to that of other major European countries in terms of annual growth, whereas the penetration level in terms of access per 100 inhabitants is low (14 as against the top level of 29 in the Netherlands and 19 in the UK).

     The start of a new major development phase requires addressing the structural constraints hampering broadband penetration. In the last few years there have been several Government initiatives for the development of digital networks both at central and local level; however, these have been put in place in an unplanned and uncoordinated fashion.

     There are about 7 million people who are still on the wrong side of the ‘digital divide’. This is a problem affecting all Italian regions, even though situations vary greatly: In some cases the seriousness of the situation is also compounded by the fact that those who are on the wrong side of the digital divide live in small municipalities or deprived areas.

     In these areas, where the market is unable to provide digital services, the Government should undertake a major effort to provide the necessary infrastructure using the tools at its disposal, coordinating initiatives with Regional and Local Authorities, also taking into account new wireless technology. Our aim in this term is to make Internet access universally available.

     For 2008 the resources earmarked under CIPE’s deliberations (CIPE— Interministerial Committee on Economic Planning) concerning the allocation of sums

Ministero dell’Economia e delle Finanze

64

2008-2011 Economic and Financial Planning Document

drawn from the Fund for Underdeveloped Areas and the allocations envisaged in the Budget amount to about 125 million and 60 million for 2009.

     A further major objective to be pursued to encourage widespread adoption and use of broadband is upgrading the telecommunications network. Building Next Generation Networks (NGN) first of all requires a clear regulatory framework (rules governing the access network and for repaying private investment). This regulatory framework will make it possible to build NGNs more rapidly, especially in the least developed areas of the country, also with EU funds.

     Despite the initiatives of the last few years, the shift to digital technology in the field of ICT still seems to be difficult to achieve and therefore requires an investment effort, within the constraints of available fiscal resources. This would allow the whole Italian population to have access to television in the new digital format, with simultaneous analogue and digital delivery so as to comply with the deadlines set by the EU for the final shift to digital delivery.

     Therefore, in the next four years the Government hopes to speed up the adoption and use of digital technology nationwide, without discriminating against any broadcasting technology, thereby complying with the ‘principle of technological neutrality’ stated by the European Commission.

     Within the limits of available resources, the most important action will be to support new investment in digital infrastructure and services by the public concessionary company, both in terms of network development and design of a new schedule, offering new programmes. This project will of course be part of a multi-year programme, in compliance with the European deadline for the final shift to the digital system scheduled for 2012.

     Again within the constraints of available resources, in order to spread the use of digital technology nationwide, these actions will be accompanied by other programmes, such as: (i) incentives for the provision of socially useful interactive services nationwide; (ii) incentives to providers of high digital value content; (iii) assessment and monitoring of hardware upgrading; public information campaigns; granting of one-off benefits to economically and/or socially disadvantaged families to allow them to purchase a digital terrestrial or digital cable or satellite TV set.

     These initiatives will also be supported by efforts aimed at bridging the digital divide, especially in more marginal areas of the country, with provision of technologically advanced public services to simplify the relationship between citizens and Government, also through new procedures to forward and certify information. All this can be done by upgrading the physical and technological infrastructure of the national postal network with its 14,000 offices, that will be technologically upgraded to ensure people’s access to innovative services and solutions having a strong positive impact on citizens and businesses.

Ministero dell’Economia e delle Finanze

65

2008-2011 Economic and Financial Planning Document

V.14    INNOVATION AND COMPETITIVENESS

     The Government will continue its effort to boost the economy’s competitiveness, already set out in the Government bill ‘Actions for industrial innovations’ (the so-called Industry 2015), approved by the Cabinet at its meeting of 22 September 2006, whose main points have already been foreshadowed in Law No. 296 of 27 December 2006 (Budget for the year 2007), while at the same time designing the strategies of the 2007-2013 Community Strategic Guidelines.

     The Government intends to implement industrial policy actions aimed at supporting the development of Italy’s economy, focusing on targets and issues with a high technological content and fostering a culture based on innovation and research. Hence, the State aid regime as a whole must be reformed with these objectives in mind, redesigning its organization and implementation practices, with an approach aimed at streamlining and mainly using flexible tools in a context based on integrated cooperation with the Regional Authorities.

     Here the new system of actions will aim at achieving specific goals, consistent with the industrial policy choices that focus on:

• Increasing the technological level of industrial investment, boosting and supporting a higher rate of research and innovation in the production sectors Italy is specialised in.

• Supporting both productive investment and R&D spending by means of suitable automatic mechanisms.

• Enhancing the quality of the industrial districts system and of local production systems.

• Supporting the financial growth and development of the most dynamic firms, with special focus on SMEs operating in the South, facilitating their access to credit and capital markets.

• Implementing an effective policy to attract investment.

• Promoting the growth and supporting the development of new firms in non traditional sectors.

     Consistently with this approach, the Government’s action to support competitiveness will be based on two main points:

• Strengthening automatic tax mechanisms aimed at ensuring stable and across-the-board aid to firms, with particular reference to aid for mainstream investment programmes in deprived areas and aid for research, technological development and innovation activities (nationwide). These mechanisms will have to be extended to include start-ups, by identifying the tax measures that can facilitate young innovative firms’ access to venture capital.

• Implementation of the industrial innovation projects, already envisaged in the 2007 Budget, that are aimed at supporting the development and adoption of Italian technology in major key sectors for the development of advanced countries. This strategy will have to be linked up with the major technological innovation strands, defined by the European Commission, also with a view to help our economy benefit from EU research and innovation funds.

Ministero dell’Economia e delle Finanze

66

2008-2011 Economic and Financial Planning Document

     Finally, special focus will be placed on the clean-up of industrial sites, with a view to ensuring land protection and the development of production activities. In this perspective, we will address issues relating to the launch of major infrastructure projects to protect the environment, to be financed also with public funds, located in strategically important areas for industrial development.

V.15 INTERNATIONALIZATION OF ITALY’S EXPORTING FIRMS

     The growth rate of international trade (9.2 per cent in 2006) has largely exceeded that of worldwide GDP (5.4 per cent in 2006) for the third consecutive year, which confirms the importance of trade as a driver of economic development. As shown in paragraph III.1, the contribution of net exports to Italy’s economic growth proved to be significant also in the first quarter of last year.

     This increased export propensity must be encouraged and further developed. Italy can and must strengthen its presence in international markets, not only with a view to further increasing its growth rate, but also to support the implementation of structural reforms. It is an important objective for economic policy, given that Italy combines a strong export propensity with an economy made up of small- and medium-sized enterprises that often are not self-sufficient in their approach to the global market. The need to further develop the internationalisation rate of the economy, especially of smaller firms, is a key priority for Italy.

     This year the Ministry of International Trade has designed a policy aimed at supporting the internationalisation of small- and medium-sized firms while at the same time promoting typical Italian products. This policy has already had a major impact on the system: from refocusing the foreign network of ICE (Institute for Foreign Trade) on new or emerging markets, by opening new offices or enlarging new ones in China, India, Russia, Brazil, the US, the Gulf countries and the Caucasus, to the start of the so-called ‘anti-counterfeiting desks’ abroad; from ever greater coordination with the Regional and Local Authorities and more generally all the authorities dealing with internationalisation, to the protection of our trade interests at European level, including the adoption of strong actions, where necessary, to protect our exports.

     In the time that has elapsed since the last Economic and Financial Planning Document the results have been good also in terms of figures: whether in terms of the number of firms participating in missions (over 2,000), or the established business-to-business contacts (about 10,000) or especially growth in exports to countries where economic missions have been carried out—higher on average compared with that of other EU countries (for example, a few percentage points higher as far as China is concerned; nearly double to the so-called neighbourhood area; more than double to India and five times higher to the Gulf).

     As of 2007 and as a result of consultations with stakeholders, Italy’s promotional strategy will be based on three-year guidelines (the first three-year period is 2008-2010), so as to ensure greater continuity and ability to plan in internationalisation actions. The guidelines are based on:

Ministero dell’Economia e delle Finanze

67

2008-2011 Economic and Financial Planning Document

• Established geographic priorities: here the novelty is the identification, on a yearly basis, of Focus Countries representing future markets.

• Strategic promotion also at sectoral level—safeguarding the so-called four ‘As’ of products made in Italy (Automazione, Agroalimentare, Abbigliamento, Arredamento: automation, agro-food, clothing and furniture), but also relying on more innovative sectors.

• The belief that leveraging internationalisation may favour the growth in size of SMEs—hence the opportunity for projects aiming at clustering by district or sub-sector.

• Promotional actions jointly developed by Government and Regional Authorities—so as to maximise impact on foreign markets.

     In July the Ministry of International Trade will draw up, at the same time as the drafting of this Economic and Financial Planning document, a Policy paper for SIMEST to provide further guidance to financial support activities in the internationalisation action, which are sometimes crucial in providing assistance to SMEs in international markets. The same approach shall be followed to review, streamline or, where necessary, strengthen financial concessions granted by the Ministry of International Trade, thereby removing the barriers that still prevent firms from using them more often. The aim is simplification, ensuring an ever greater effectiveness of these tools, also by exploiting the opportunities afforded by the new Community Support Framework.

     Action to promote trade should also use the financial, organisational and human resources needed to adjust to rapidly changing world scenarios and to rise up to the potential challenge posed to typical Italian products by international competitors who have access to greater financial and human resources. Within the limits of available economic and financial resources, it is nonetheless necessary to significantly increase the funds available for these economic policy actions. In this connection and with a view to creating a new generation of experts of internationalisation policies, who can support Italy’s economy in its renewed effort to open up to world markets, we hope to launch a far-reaching programme to train human resources able to rise to the challenges facing Italy as a result of globalisation and the ongoing international geo-economic changes.

V.16 TOURISM

     Tourism has received a major boost since this Government took office. In the past, Government agencies have shown little interest in this sector nor has there been much cooperation with the Regional Authorities: these two factors, combined with a weak economic cycle, have made Italy less competitive at international level.

     The recovery of tourism has been accompanied by a significant improvement of relations between Central Government and the relevant Local Authorities, each acting in their specific responsibilities, in compliance with the Constitution and the case-law of the Constitutional Court.

Ministero dell’Economia e delle Finanze

68

2008-2011 Economic and Financial Planning Document

     The 2007-2011 Economic and Financial Planning Document and the 2007 Budget have adjusted the Government’s strategic approach to tourism policy, which now aims at gaining a new competitive edge as the key driver of the country’s economy.

     The Government intends to pursue the following objectives:

• Define suitable production strategies shifting public resources to improving supply, especially to provide good value for money, and promoting projects leading to firms’ clustering and networking.

• Develop an effective and unitary policy to promote Italy’s tourism in world markets.

• Strengthening local tourism, also by improving the ability to respond to a highly seasonal demand.

     The financial resources that can be earmarked for achieving these objectives are the engine driving tourism and attracting international tourists back to Italy. This will have positive effects on other industries as well, as the tourism industry cuts across all sectors of the economy.

     It is necessary to recast the role and structures of the Government agencies that are involved in the tourist sector. Our aim here is to ensure better dovetailing of government action with market needs so that Italy’s tourism industry can find the place it deserves in the world.

V.17 CULTURE

     The Government is committed to enhancing cultural activities and the cultural heritage. Within the limits of available resources, the Government intends to adjust the funds available for cultural policies proportionally to the budget (currently equal to 0.26 per cent) to bring them more in line with the key target of 1 per cent.

     A progressive adjustment to the target will ensure the presence of human resources with the technical and professional skills needed to ensure effective and efficient government action in protecting, preserving and enhancing the cultural heritage.

     The Government also confirms its commitment to bring the resources of the Fondo Unico dello Spettacolo (Single Entertainment Fund) back to and above the 2001 levels by 2009.

     With a view to improving the quality and the ability to spend, targeted programmes will focus on:

• The film industry, through tax incentives for investment in this sector, subject to financial constraints, aimed at attracting foreign high-level producers to Italy and providing a competitive network of cinemas, especially for young authors and auteur films.

• Live performances, through an increase in the resources to be allotted to co-funding of joint Central and Local Authorities projects, and development of

Ministero dell’Economia e delle Finanze

69

2008-2011 Economic and Financial Planning Document

	new rules to strengthen public policies. Special focus will be placed on policies to promote our products abroad.
•	Museums and other institutions of the Ministry, by identifying new organisational and operational practices to promote understanding of the cultural heritage and ensure better conditions for enjoying cultural assets, bearing in mind that Law 4/1993 has exhausted some of its original thrust.
•	Books and reading, envisaging the financial and economic independence of structures traditionally involved in promotional activities. As to libraries and archives, the main objective will be to increase the number of public and private entities and individuals interested in their activities.
•	Art works, by triggering virtuous circles of automatic incentives for the purchase and sale of modern art works as well as for donations to museums, similarly to what was done with the funds allotted in the 2007 Budget to the completion of the National Museum of Arts of the XXI century (MAXXI).

V.18 AGRO-FOOD SECTOR AND FISHING

     The 2007 Budget establishes a comprehensive framework of action to boost the economic development of this sector. The agro-food business has consolidated the widespread and systematic use of sustainable development practices that have become ever more necessary to effectively meet consumers’ demand for safe, quality food as well as the challenges of climate change and the new energy scenarios. Despite difficulties in the domestic market, the industry is faring well in international markets. Italian agro-food exports have grown for a number of years and at a much faster pace in 2006-2007.

     In order to support this trend, effective responses and targeted actions are needed, such as:

• Promotion of the quality of products and production techniques, in terms of food-territory links (between the characteristics of certain products and their geographical origin) and in terms of organisational skills and market penetration.

• Development of direct promotion tools and services in a perspective encompassing the whole economy, and through tools that can promote outward-looking business investment (including mergers and acquisitions abroad).

• Action on infrastructure and introduction of innovative systems for sustainable development in farms, agro-food cooperatives and associations, such as efficient use of water and energy already introduced in the last few years.

     In order to promote the competitiveness of farming, fishing and the agro-food industry it is important to ensure: (i) stable taxation; (ii) the promotion of clustering and growth of firm size; (iii) the promotion of transparent and efficient relationships with retailing; (iv) a more widespread and systematic use of new financial instruments in

Ministero dell’Economia e delle Finanze

70

farming; (v) the development of new innovative sub-sectors and support for business conversion.

2008-2011 Economic and Financial Planning Document

VI. POLICIES FOR SOCIAL JUSTICE

VI. 1 SOCIAL JUSTICE

     Italy’s social plight situation is well known and has already been described in the Government’s agenda and the latest Economic and Financial Planning Document: it has a poverty rate higher than the European average and overall investment in welfare policies below the European average; non self-sufficient people are often totally dependent on their families, young people have no economic independence and the housing situation is critical, which is a further cause of exclusion and impoverishment.

     Against this backdrop, the 2007 Budget and the other measures adopted by the Government have been the first step in a trend reversal towards bringing our welfare state into line with those of the most advanced EU countries. It is necessary to strengthen our welfare state network, even though it presently allows the fruitful interaction of several players.

     Within the constraints of available financial resources, the Government intends to build upon these past efforts and take action on a number of more critical issues:

• Implementation of income-support and poverty-reduction policies, mainly consisting in the increase of and universal access to child benefits; tax incentives that can favour those who do not earn enough to be entitled to benefits, by reintroducing Supplementary Benefits for poor families.

• Increase in child-care services, especially nurseries;

• Redefinition, on the basis of the revised constitutional provisions, of the professional skills of social-care workers (to include also what are presently called ‘carers’), and the Charter of Services¹.

• Establishment of minimum service levels, starting from those for non self-sufficient people, to be provided on a standard basis nationwide in the form of individual entitlements that can be claimed immediately, subject to a sliding scale according to salary.

• Establishment of a Welfare Services Information System².

• Implementation of a three-year housing plan.

• Strengthening of a three-year action plan on drug-abuse, to be implemented in cooperation with Regional authorities and in line with the National Action Plan on drug-abuse envisaged by the European Union³;

• Development of policies on the rights and opportunities of children and adolescents⁴;

• Promotion of social inclusion policies for immigrants.

     The development of these programmes is the basis underpinning truly universal welfare policies, which ensures that all citizens, regardless of birthplace, economic and

1	Law No. 328/2000.
2	Law No. 328/2000.
3	Law No. 45/1999.
4	Law No. 285/1997.

Ministero dell’Economia e delle Finanze

71

2008-2011 Economic and Financial Planning Document

social status, enjoy the fundamental rights that are the core of democratic legitimization. Furthermore, in a country of ‘structural immigration’ such as Italy, it is particularly important to extend benefits to all, including migrants.

     Implementing these policies requires a strong synergy among all players (with particular reference to the social networking of voluntary workers), an active and fruitful partnership among Central Government, Regional, Provincial and Municipal Authorities, each within their remit pursuant to Title V of the Constitution, and last but not least, the actual implementation of the guidance and monitoring functions typical of Government through the Open method of coordination adopted at EU level.

     The heavier burdens resulting from these Government processes may be partially offset by the savings achieved through an effective and preventive action of social inclusion and increased efficiency, obtained through citizens’ oversight envisaged in the above Charter of services, increasing the opportunities for democratic participation in public administration, and with sound management practices.

     In addition to their inherent constitutional value, effective social policies that promote social justice and inclusion have an immediate impact on social and economic development. They reduce the costs of unsystematic, emergency or belated action, increase the employability of the weak brackets in the labour market (especially women), prevent investment in education and educational assets from being mere hand-outs, and build the overall social security system that is a prerequisite for the development of creativity and active participation in economic activity.

VI.2 TAX POLICY BETWEEN GROWTH AND SOCIAL JUSTICE

     The Government has been engaged in an effort to combat tax evasion, which already showed some results in 2006 with a strong increase in tax revenues. About a third of revenues come from an improvement in taxpayers’ voluntary reporting compliance. In several sectors the growth in tax revenues has exceeded the growth in taxable income, with spontaneous reporting of higher income, for example, in the construction industry and retailing. The Government’s strong effort in this area may be seen in the decision to no longer grant tax amnesties and in a series of specific measures against tax evasion. Robust growth in tax revenues has continued in the early months of 2007, which confirms the fact that a great deal of taxable income, that previously went unreported to the tax authorities, continues to surface.

     Tax evasion in Italy still accounts for roughly 25-30 per cent of estimated taxable value added, a level which is higher than that of most European countries and advanced economies. Hence, the fight against tax evasion will continue to be one of the key priorities of the Government’s tax policy in the next few years.

     By steadily reducing tax evasion the Government will be able to implement its tax policy priorities more efficiently: reducing the burden of taxation and relieving low- and medium-income households and large families; increasing the competitiveness of firms

Ministero dell’Economia e delle Finanze

72

2008-2011 Economic and Financial Planning Document

and boosting economic development; simplifying compliance and reducing costs for taxpayers, strengthening fiscal federalism.

     Within the limits of available resources, the Government’s strategy will hinge on the following actions:

• Income support for citizens and families. The 2007 Budget introduces a series of family-friendly actions⁵ and reduces the burden of taxation on individuals, even though to a small extent Building upon these reforms, and in a system of individual taxation, it is necessary to adjust taxes and deductions so as to reduce the burden of taxation on personal income, support lower incomes, give more support to medium incomes and, as far as possible, extend benefits to medium- and high-income brackets. As far as families are concerned, the starting point will be combining monthly rebates for those whose income did not entitle them to child benefits with a further increase in family allowances; the aim here is to combine child benefits and family allowances into one income-support mechanism for families with children under age, according to the programmes set out in VI.3. This new mechanism will be tantamount to reducing the net tax burden on medium-income families and will introduce a form of negative tax in favour of low-income families and individuals, similarly to what already happens in other European countries, whereby these families’ disposable income will exceed their taxable income.

• Lower property taxes. The way in which the housing and rent market works is still one of our main concerns, especially because of its impact on young people. As of 2008 and within the limits of available resources, the Government intends to reduce taxation on first homes (Imposta Comunale Immobili, ICI-local property tax) also in observance of the principle of the social right to housing. The tax system may help boost the development of a functional market, by reforming taxation on first homes and the tax burden on main residences. At present, the existing housing tax (ICI) deductions on first homes cause strong imbalances between homes in small municipalities, big cities and metropolitan areas. In small municipalities (with less than 5,000 inhabitants), the existing deduction results in exemption for almost 40 per cent of home owners, in big cities with over 500,000 inhabitants, only 8 per cent of home owners are exempt. A reform of deductions is needed to reduce taxation and favour a more even distribution of the tax burden. It is nonetheless necessary to protect the income of those who do not own their home but rent one, by envisaging a system of deductions based on geographical areas in line with the changes that will be adopted for ICI. In this connection, it is also necessary to consider a review of income from leased property as part of the more extensive implementation of delegated powers in the reform of capital income taxation.

⁵ Government action included the joint reform of family allowances, basing entitlements on income and extending them to include previously excluded income brackets, as well as personal income tax deductions for dependent persons so as to reinstate the progression principle.

Ministero dell’Economia e delle Finanze

73

2008-2011 Economic and Financial Planning Document

• Reform of corporate income tax (IRES). Industry is the core of growth and is under growing competitive pressure in an ever more globalised world. In such a world a fair and balanced corporate income tax is a key tool to support the competitiveness of the Italian economy. Bringing our country into line with a tendency that has already been adopted in other countries, it is necessary to reduce corporate taxation and enlarge the taxable base, as well as implement a series of reform proposals developed by the Ministry’s Expert Committee (The Biasco Committee). A review of income-tax self-assessment for self-employed people and the taxation of SMEs is also important for the development and fairness of our taxation system. On this specific issue, the Government believes it is important to pursue concerted action in order to achieve shared objectives. Here priority should be given to identifying marginal firms, whose taxation should be reduced to a minimum, also by envisaging a simplified lump-sum taxation option. More generally, it will be necessary to encourage smooth relations and mutual respect between these taxpayers and the tax authorities;

• Providing incentives for mergers and acquisitions and investment in research. Italy’s economy, with its multitude of small and very small firms, is finding it increasingly difficult to compete in globalised markets, where company size and the ability to innovate are the cornerstones of competition. In order to strengthen the structure of businesses, delegated powers will have to be implemented within the deregulation process, so as to encourage companies to go public and venture capital to open up to private equity, also by envisaging possible tax relief options.

     As to streamlining the tax system, the cost of compliance with tax regulations is a drain on the economy and society as a whole and must be reduced. These compliance costs are particularly regressive and therefore place a relatively heavier burden on SMEs. Hence, simplifying compliance for SMEs and reducing costs for taxpayers are among the key factors of a just and fair taxation system. It is necessary to improve the efficiency of the financial administration, speed up rebate procedures and implement delegated powers in tax collection and assessment to launch a reform process of tax litigation.

     Finally, implementing fiscal federalism pursuant to Article 119 of the Constitution requires a radical overhaul of the system through which local authorities are financed, allowing local authorities to have significant powers to raise their own taxes while, at the same time, providing decentralised tax authorities with a good measure of taxation equalisation among different areas. After years of ad-hoc action plans, the 2007 Budget reintroduces the tax decentralisation process; however, there are still several important issues to be addressed, including: (i) funding investment; (ii) keeping local authorities’ spending under control; (iii) introducing hard budget constraints (deficit rules instead of spending ceilings) for Regional Authorities. The reform process of local public finance requires a review of the Internal Stability Pact with local authorities and a new funding system. In this new system, regional and local taxes and a share of national tax revenues will be the main source of funding for local authority functions, while local authority tax revenues will allow flexibility in the reallocation of funding, and the system of equalisation

Ministero Dell’Economia e delle Finanze

74

2008-2011 Economic and Financial Planning Document

transfers will ensure financing of minimum service levels. Furthermore, additional transfers aimed at meeting special needs will have to be envisaged.

VI.3 FAMILY ACTION PLAN

     The National Family Conference has increased the awareness that families are an asset for Italy and major players in the economic and social development of the country. Also the European Council, on May 30 last, agreed on the establishment of a European Alliance for Families to improve growth and social cohesion in the European Union.

     To pursue these objectives it is necessary to shed the welfare logic that has inspired family policies thus far. New work organisation practices and demographic imbalances have highlighted the shortcomings of our welfare state, where allowing families to act as a substitute for welfare may further increase inactivity and imbalances among different areas.

     It is necessary to develop new social policies that can identify and reconcile the rights and needs of families with those of individuals, also to achieve the quintessential political goals enshrined in the Constitution.

     The Government intends to promote the social citizenship of families by redesigning the National Family Action Plan together with Regional and Local Authorities and Parliament, as well as with social actors and associations and voluntary organisations working for the welfare of families.

     Within the limits of available resources, the Government intends to put in place a project based on a number of priorities: (i) remove barriers (job insecurity, difficulty in finding a home) hampering the independence of young people and preventing them from starting a family; (ii) develop a policy to support families with children to allow a greater presence of women in the labour market; (iii) improve the network of child-care services and family services, including those for non self-sufficient elderly people.

     In terms of economic action, within the limits of available financial resources, it is necessary to develop the policies started with last year’s Budget by: (i) providing income support for poorer families; (ii) making access to services easier for large families also through the review of a means-testing mechanism known as ISEE (Indicatore di Situazione Economica Equivalente); (iii) reconciling work with family, by providing new nurseries. In addition, within the limits of available resources, the Government intends to reduce taxation on first homes starting from 2008 (ICI, see Section VI..2), also in observance of the principle of the social right to housing.

Ministero dell’Economia e delle Finanze

75

2008-2011 Economic and Financial Planning Document

     The 2007 Budget has introduced significant changes to support families, set out in Section VL.2, and as fiscal adjustment frees up the necessary resources, the Government intends to take further steps towards income support to provide assistance to all families, with special focus on low- and medium-income households as well as large families.

     Within the limits of available resources, our aim is to design one benefit to support families with children under age, by combining personal income tax deductions and child benefits into a veritable endowment for children, regardless of their parents’ employment status.

     The provision will translate into an actual allowance, reducing the net tax burden on families and increasing their disposable income which, for low-income families, is tantamount to a negative tax (overall disposable income including the allowance will be higher than taxable income).

     Bearing in mind the findings of the National Family Conference and within the constraints of available resources, the Government intends to make further efforts to provide new social and educational childcare services (in compliance with the Lisbon target of a rate of coverage of at least 30 per cent of population aged between 0 and 3 by 2010), by providing new nurseries and supporting parenthood and social inclusion, as well as correcting existing imbalances among different geographical areas.

     Plans for the construction and operation of new facilities will also include opportunities for initiatives by the third sector and private entities operating in the social-care sector under a special-agreement regime, building upon the experience gained from the study of ‘best practices’ through a rigorous system of regulation, accreditation and quality assessment

     Strengthening policies to reconcile family and work will also include parental leave, through a possible reform of Law No. 53 of 2000 following consultations with social partners.

     The cornerstone of this whole strategy is helping parents meet the costs of bringing up and educating their offspring, so as to give equal opportunities to all children.

     Furthermore, it is also important to update regulations on the protection of children: (i) restore the proactive role of the International Adoption Commission, based on the new regulation; (ii) strengthen the preventive action of the Observatory for the fight against paedophilia and child pornography; (iii) ensuring that the National Family Observatory is fully operational; (iv) setting up special task forces in the administration of justice. One should also consider the possibility of turning family planning centres into centres for family social integration and health.

     It is also necessary to raise people’s awareness of the professional skills of carers, matching demand with supply, and more generally, to emphasise the value of care as part of family responsibilities, bearing in mind that care for non self-sufficient people is a priority of the Government’s social policy.

Ministero Dell’Economia e delle Finanze

76

2008-2011 Economic And Financial Planning Document

VI. 4 EQUAL OPPORTUNITIES ACTION PLAN

     In order to promote Italy’s balanced and lasting growth and boost its competitiveness, the Government shall continue to pursue its action on equal opportunities and citizenship rights. As stated by the EU institutions, the promotion, protection and extension of human rights are the cornerstone of any citizenship and security policy. Hence the Government will continue the programmes envisaged in the last Economic and Financial Planning Document and Budget, gradually bringing them into line with the directives issued during the European Year on Equal Opportunities for All.

     Bearing in mind financial constraints, the Government intends to establish a Fund to finance three main action plans:

     1) An action plan to promote and protect human rights, including specific programmes on women’s safety, harassment and violence against women, as well as sexual orientation. In Italy women aged between 15 and 55 die more as a result of violence than disease or accident. 6 million women, over 30 per cent of those aged between 16 and 70, have suffered harassment or physical or sexual assault.

     Within the limits of available resources, the Government intends to extend the role of the National Family Observatory, to include the monitoring of acts of oppression or violence related to the new forms of fundamentalism, in close cooperation with the Government-Regions Conference as well as centres, associations and other entities concerned. With a view to ensuring that any violence suffered is reported, it is necessary to advertise the 1522 helpline, through public education and awareness campaigns.

     2) An action plan against all forms of discrimination based on gender, age, ethnicity, religion, culture, sexual orientation and disability as envisaged in the relevant European Directives and the delegated powers to the Minister of Equal Rights and Opportunities. In this framework and as part of human rights protection, the several activities of programmes for the protection and rehabilitation of victims of trafficking will be strengthened, including: establishing an observatory on trafficking in human beings, supporting the helpline 800290290, strengthening the existing tools and bodies, including the Human Rights Council, and promoting intercultural dialogue. In addition, plans to prevent and combat female genital mutilation will be supported.

     3) An extraordinary plan for women’s employment and access to career and business opportunities. There will be no economic growth or rise in birth rates unless women’s employment increases. Italy ranks lowest in Europe in the number of female employees, with a female employment rate of about 60 per cent in the North and roughly 30 per cent in the South. Consistently with last year’s Budget a programme should be launched to: favour the increase of female employment, especially in the South; recognise the right to maternity of women who do not work on a permanent basis; promote women’s entrepreneurship. Further action will be taken to promote the adoption and use of legal employment contracts and to recognise carers’ skills, starting from the care work provided by migrant women.

     Policies of life-long learning should also be pursued so as to increase the employability of women belonging to special risk groups, namely migrant women and women who are no longer employed.

Ministero dell’Economia e delle finanze

77

2008-2011 Economic and Financial Planning Document

     A long-overdue investment is necessary in the independence, skills and talents of women so as to reduce the barriers that still prevent women from having access to all areas and sectors of society.

     In addition and also with a view to supporting regulatory action, the Government is committed to the development of a national plan of public education campaigns to foster respect for the dignity of the individual, emphasise the value of cultural differences and extend civil rights to all.

VI. 5 YOUTH POLICIES

     In order to make Italy more competitive it is necessary to invest in the country’s youth. The National Youth Plan (Piano Nazionale Giovani), developed after long consultations with representatives from Youth Organisations and other youth associations, shows that the promotion of the right of young people to cultural and vocational education as well as a more widespread and systematic adoption of the principles of accountability and active citizenship are high on the Government’s agenda. Government action must be further developed in coordination with initiatives undertaken by the relevant Ministries.

     As was done last year, the resources of the National Fund for Youth Policies, will be targeted even more to action aimed at removing the multiple barriers to access that still prevent the implementation of the rights of young generations: from the right to housing and employment to education and culture, as well as access to credit and mobility.

     The Programme Agreements (Accordi di Programma) that have and are still being developed with Regional Authorities, as well as the agreements with local authorities, provide a framework within an institutional partnership that mutually enhances their autonomy, with a view to implementing local policies that effectively meet young people’s strong demand for participation and cater to their desire to be at the forefront of society.

     Public policies will increasingly have to consider young people as a valuable asset and offer more opportunities and acknowledge the talent, merit, creativity and strength of young generations so as to make them the driving force of change in this country. It is necessary to develop their full potential to make the country more dynamic and competitive. The whole of Government action must be predicated on this belief which must pervade all major fiscal reform.

     Within the limits of available financial resources, the Government intends to carry on the development of comprehensive action cutting across all sectors and aiming at: facilitating young people’s access to employment, shoring up insecure jobs; developing and enhancing education and skills; favouring their access to housing with special focus on young low-income workers and out-of-town students; promoting creativity and fostering commendable cultural consumption; favouring and extending participation in public life and representation and bridging the digital divide.

Ministero dell’Economia e delle finanze

78

2008-2011 Economic And Financial Planning Document

     More generally, tax policy must contribute to a fairer relationship among generations, by reducing the size of public debt and the debt-service burden shouldered by young people and future generations, which detract from social balance and solidarity. In the face of population ageing—which appears to be more marked in Italy compared to other industrialised countries—it is necessary to restore stable and lasting conditions for a more balanced deal within the family and society. Ensuring a rapid return to a substantial primary surplus and a downward trend in public debt as well as boosting economic growth are the priorities of the Government’s economic and social policy.

     Within the limits of available financial resources, a more widespread practice of sports and physical exercise at all levels should be promoted, as a major factor of social integration and inclusion, for mental and physical well-being, for the quality of life of citizens, especially young people. In primary and secondary schools physical exercise must be encouraged, also through the policy, which is already being implemented, of upgrading sports facilities. More generally, within the limits of fiscal constraints, a new policy on sports facilities must be developed for the promotion of a more widespread practice of sports, which was initiated with the Sports Facilities Programme.⁶

VI.6 HEALTH

     In the 2000-2006 period, health spending increased by 1.2 GDP percentage points. This increase, which cuts across all health sectors, was particularly marked in staff costs and the procurement of goods and services.

TABLE VI.1: 2000-2006 HEALTH SPENDING (in millions of euros)

	2000		2001		2002		2003		2004		2005		2006
Staff		26,285		28,156		29,367		29,684		32,508		33,803		36,285
Goods and other services		12,988		14,211		15,598		16,825		18,722		20,689		22,059
Service in kind		26,334		30,036		31,263		32,230		35,290		37,427		38,757
Medical services of under special which agreement		4,019		4,505		4,613		4,795		5,020		6,358		6,066
Pharmaceuticals Provided by the NHS		8,743		11,661		11,723		11,096		11,988		11,849		12,333
Other services		13,572		13,870		14,927		16,339		18,282		19,220		20,358
Other expenditure		1,967		2,341		2,878		3,075		3,368		3,908		4,326
SPENDING AS % OF GDP		5.7		6.0		6.1		6.1		6.5		6.7		6.9
OVERALL SPENDING		67,574		74,744		79,106		81,814		89,888		95,827		101,427

Source: Our own calculations on ISTAT data.

     In the 2007-2011 Planning and Financial Document and the Forecasting and Planning Report, health spending was projected to increase in line with GDP nominal growth, both in terms of long-term trend and expected borrowing requirements.

⁶ Art. 11 of the Decree Law No. 8/2007.

Ministero dell’Economia e delle finanze

79

2008-2011 Economic and Financial Planning Document

     This forecast was based on the strengthening of the Spending review tools envisaged in the Budgets of the last few years providing for: (i) recourse to spending cut plans; (ii) administration by an external commissioner (amministrazione ad acta); (iii) the possible application of a penalty envisaging the automatic increase of tax rates to the maximum level in case of ascertained budget overruns. In the 2007 financial year, additional funding measures for 2005 and 2006 were taken by Regional Authorities to avoid the above penalty; additional revenues were also generated by these very penalties in 2007. Most of all, the 2007 financial year is reaping the benefits of the spending cuts introduced by the 2007 Budget and the spending cut plans devised with cash-strapped Regional Authorities.

     The total amount of funds allotted to the National Health Service was set in the New Health Agreement signed by the Government and Regional Authorities in September 2006. Embracing the Agreement’s proposals, the 2007 Budget has adjusted funding, increasing the Government’s yearly health appropriations by €6 billion and securing resources for the 2007-2009 period. The 2007 Budget has increased the funds earmarked for co-financing the Programme Agreements (Accordi di Programma) with the Regional Authorities (for the construction of new health facilities and the upgrade of existing ones) by about €2.6 billion, thereby increasing resources to a total of €20 billion. In addition to these funds, further resources for the so-called ‘health-economic development’ project have been earmarked by the Government and the Regional Authorities within the framework of the European Structural Funds 2007-2013.

     Finally, the Health Agreement and the Budget have established a temporary three-year facility to support the spending cut plans of Regional Authorities that have run high deficits, and have envisaged strong support measures by the Ministry of Health, the Ministry of the Economy and Finance and the Regional Coordination Council. The debt built up before 2005 by these Regional Authorities is being addressed by further debt rescheduling, thereby reducing their debt-servicing burden.

     Within the constraints of the above funds and in agreement with the Regions, the Government intends to strengthen the reorganisation programmes already identified in the previous Economic and Financial Planning Document by: (i) updating minimum health care levels (Livelli Essenziali di Assistenza, LEA), superseding obsolete health services and strengthening services that are beneficial to the community. In this connection the so-called 43 DRG (Diagnosis Related Groups) at high risk of inappropriate prescription or admission are being reviewed; (ii) implementation of a monitoring system by using a suitable ‘package’ of indicators; (iii) modernisation of the health system, focused on emphasising the value of human resources starting with medical and health-care staff, by shoring up insecure jobs, a practice which was initiated with the 2007 Budget; (iv) reorganisation and strengthening of primary health care, by promoting advanced types of medical associations and integration with the activities of health districts; (v) reorganisation of the hospital network and optimisation of goods and services procurement systems; (iv) programme for continuous improvement of the quality of the National Health Service through monitoring of citizens/users’ satisfaction with health services.

     Within the limits of available resources, the Government believes these actions should be accompanied by programmes aimed at increasing their impact, such as:

Ministero dell’Economia e delle Finanze

80

2008-2011 Economic and Financial Planning Document

adjustment of the resources available for co-financing investment in the construction of new health facilities and upgrade of existing ones; (ii) reform of pharmaceutical sector regulations, aiming at ensuring better control of spending on the one hand and providing firms with a new regulatory price framework that is reliable and establishes market conditions more conducive to competition and innovation and more likely to encourage R&D investment in Italy; (iii) review of prescription charges by citizens, with a view to creating a more equitable system that takes into account the economic situation of households through the so-called ISEE means-testing indicator (indicatore sulla situazione economica equivalente—ISEE); (iv) promotion of dental care also by improving regulation and encouraging supplementary health funds; (v) a programme envisaging the gradual shift of penitentiary health care to the national health service to ensure adequate treatment for serious medical conditions.

     Within the limits of available resources, the Government also confirms the need to develop social and health-care integration, starting with the care of non self-sufficient people, for whom integrated home care must be promoted, as it is a service that is more responsive to the needs of disabled people as opposed to care provided in residential facilities. Last but not least, the additional corollary is that it leads to remarkably lower expenditure per patient.

VI.7 DEVELOPMENT AID

     In a globalised world, social justice issues are global. A country like Italy does have instances of hardship and suffering, but their extent in terms of absolute poverty is small compared to those of other countries and continents. Above all, Italy is one of the richest countries in the world and this calls for a commitment on its part to help those in need, considering that that the problem of solidarity with those who suffer has now become a global concern.

     In the last few years Italy has been lagging behind in delivering on its financial commitments to development aid: these lags, that have become evident precisely when the international community has been setting itself ever more ambitious goals, translate into a loss of credibility and an erosion of its negotiating power in international fora. In the future, it will be necessary to remedy this situation with substantial appropriations of additional financial resources.

     At the European Council of June 2005 Italy pledged 0.51 per cent of its GDP to Government development aid by 2010, to be raised to 0.7 per cent by 2015.

     This commitment was reaffirmed at the Gleneagles G8 summit (July 2005) where Italy pledged to double its aid to Africa. In 2006 Italy’s Government aid—based on preliminary OECD data in March 2007—was 0.20 per cent of GDP, quite far from the 0.33 per cent target to be delivered by 2006 that Italy pledged to achieve at the Barcelona Council of May 2002 and at the UN Conference on Development funding in Monterrey (March 2002).

     Furthermore, the forecasts for the 2007-2009 period, if no changes are made to the existing laws, show a declining trend in Government development aid (0.20 per cent in

Ministero dell’Economia e delle Finanze

81

2008-2011 Economic and Financial Planning Document

2008, 0.16 per cent in 2009), in sharp contrasts with our commitments. Hence prompt corrective action must be taken, to reverse the development aid trend, by significantly increasing the relevant appropriations with the aim of achieving the 0.51 per cent target, also in view of Italy’s G8 presidency in 2009, when the Government will be called upon to deliver on its promises.

     To this end, the relevant Ministries (first and foremost the Ministry of Foreign Affairs and the Ministry of the Economy and Finance, that takes care of relationships with multilateral banks and development funds) will define annual objectives for the 2008-2010 period, which will have to aim (net of outstanding sums from previous years, for which the necessary resources will have to be identified) at reaching 0.33 per cent by 2008 (for a total of around 4.7 billion on estimate) and 0.42 per cent by 2009 (for a total of 6.1 billion on estimate), so as to reach 0.51 per cent by 2010 (for a total of 7.5 billion on estimate). Within these appropriations, priority shall be given to Africa, for which Italy has pledged to double its development aid at the Gleneagles summit.

     In a longer-term perspective the Government, in a piece of delegated legislation currently being considered by Parliament, has proposed a reform of development aid with a view to providing greater unity and consistency to Italy’s development cooperation and to designing an organisational structure that is better suited to rise up to the challenges of development and globalisation.

Ministero dell’Economia e delle Finanze

82

2008-2011 Economic and Financial Planning Document

VII. FISCAL SUSTAINABILITY

VII.1 QUALITY OF PUBLIC EXPENDITURE AND FISCAL REFORM

     Italy’s public expenditure tends to grow in size swith only marginal changes in its composition. In the last decade current expenditure, net of interest, has grown on average by 5.1 per cent as against nominal GDP growth of 3.9 per cent, Apart from few exceptions, its composition has basically remained unchanged, reflecting a certain degree of rigidity in the underlying mechanisms.

TABLE VII.1: PERCENTAGE COMPOSITION OF PRIMARY EXPENDITURE IN ITALY BY FUNCTION

	As a proportion of GDP								Percentage composition
	1990		1995		2000		2005		1990		1995		2000		2005
General Services		3.4		3.2		3.7		4.4		7.8		7.6		9.3		10.0
Defence		1.5		1.2		1.2		1.6		3.5		3.0		2.9		3.5
Law and order and security		2.0		2.0		2.0		2.0		4.7		4.9		5.0		4.6
Economic Affairs		6.0		4.6		3.0		4.3		13.9		11.2		7.6		9.7
Environmental Protection		0.4		0.3		0.4		0.4		0.9		0.8		1.0		1.0
Housing and land use		1.3		0.9		1.0		0.8		3.1		2.3		2.4		1.9
Health		6.2		5.2		5.9		6.8		14.5		12.7		14.8		15.5
Recreational cultural and religious activities		0.8		0.8		0.8		0.8		1.7		1.8		1.9		1.8
Education		5.5		4.7		4.5		4.7		12.6		11.3		11.4		10.6
Social security		16.1		18.3		17.4		18.1		37.3		44.4		43.7		41.3
TOTAL		43.2		41.2		39.9		43.9		100.0		100.0		100.0		100.0

Source ISTAT (data published in February 2007)

     Moreover, there are inefficiencies in the way resources are used¹ Some sectoral indicators show that there are some areas of Government action where the amount of inputs used is not necessarily correlated to output and outcome. Two key sectors, such as education and the judicial system, which have been discussed previously — are a typical case in point.

     However, there are hindrances preventing a use of resources more in line with the actual needs of citizens and economic growth, such as: (i) the extreme rigidity of the budget, in which mandatory expenditure and programmes mandated by law account for over 90 per cent of total spending; (if) high staff expenditure as a percentage of total current expenditure of the Ministries (accounting for about 25 per cent of the State budget); (iii) poor effectiveness of Government action; (iv) incomplete implementation of the accountability principle.

¹ In a comparative study of 2002 by the European Commission Italy was ranked the lowest among the EU 15 countries in terms of quality of public spending; the ‘Global Competitiveness Report 2006-2007’ Italy was ranked 71 st in the world in terms of quality of public and private institutions.

Mlnistero dell’Economia e delle Finanze

83

2008-2011 Economic and Financial Planning Document

      With a view to addressing some of the above rigidities, contributing to improving the quality of spending, while at the same time pursuing fiscal objectives more rapidly, the Government has been engaged in a multi-year effort, whose two main cornerstones are the resumption of the budget reform process and the spending review.

      This effort is in accordance with the reformed Stability and Growth Pact, which focuses not only on hard budget constraints (deficit rules as opposed to spending ceilings), but also on the quality of the public finances and is part of a far-reaching process aimed at improving the efficiency and effectiveness of public spending. To this end, the Ecofin Council of April 2007 urged member countries to use performance indicators in the decision-making process on public spending ².

      The budget reform on the one hand responds to the need to make citizens and Government more aware of the amount of resources available to pursue specific Government objectives, and on the other it reduces the incidence of inertial factors on public spending, thus allowing some leeway to reallocate funds across programmes.

      The new budget classification has been designed by the Ministry of the Economy and Finance in agreement with all the relevant Ministries and with the support of the Technical Committee on Public Finance—established in the 2007 Budget—and with the participation of a number of Institutions, including the International Monetary Fund, which carried out a technical mission in Italy in March 2007 ³.

      Parliamentary proceedings on the 2007 Financial Law (usually defined as Budget in this document) were the opportunity to resume a thorough technical and political discussion within the Budget Committees of both Houses of Parliament on the approaches to be used to reform budget tools and procedures.

      A synthesis of the main points of this discussion can be found in the final document of the fact-finding analysis of this crucial issue. The developments of the early months of this year are largely based on the directions set out in the above-mentioned document.

      All this ought to be interpreted in the light of the submission to Parliament of the delegated legislation for the implementation of Art. 119 of the Constitution relating to ‘fiscal federalism’: it is a key problem around which all of Italy’s fiscal issues revolve.

      The text of the delegated legislation opens up a new innovative phase in the architecture of Regional and Local Authorities, which, once completed, will enhance the pivotal role played by the Economic and Financial Planning Document and relieve the Financial Law of its regulatory burden, for the benefit of an institution which is responsible for dynamically updating the funding mechanisms envisaged in Art. 119 of the Constitution (see Section VIII.2).

      The new budget classification envisages breaking down public resources into two categories: missions and programmes. The 34 missions represent the main institutional functions and the strategic objectives pursued through government spending, and may be shared among various Ministries.

      Each mission is concretely implemented through programmes. The 169 programmes identified with the new budget classification represent homogeneous

2	See the Conclusions of the Berlin Ecofin Council (20-21 April 2007).
3	The final report of the IMF mission is available at www.mef.gov.it.

Ministero dell’Economia e delle Finanze

84

2008-2011 Economic And Financial Planning Document

aggregates of activities within each Ministry and set out the outcomes that the Government is supposed to deliver in its area of responsibility or in terms of output.

     Spending programmes, and the ‘macro-aggregates’ which make them up, become politically important aggregates for the purpose of parliamentary debate; they simplify the process of making the budget law and make it more transparent, establishing an immediate link between the Financial Law and the Budget. This new classification, which can certainly undergo further improvements that will be considered in the course of 2008, is the first major step which will allow the Government to be more effective in pursuing its objective of improving the quality of spending, and is instrumental to three goals:

• Allocation. A budget in a more readable format allows Parliament to make decisions on the allocation of funding by comparing different objectives and to focus attention not only on the changes proposed in the Government’s Financial Law but also on the resources already allocated in the existing legislation. The Financial Law will be structured in a way that allows the identification of the missions and programmes the Government intends to act on through changes in regulations.

• Information. As to the procedure for submitting the Budget, more information will be provided on the general purpose of the programme, the description of the underlying activities, the resources specified by individual purposes (operation, programmes and investment); the responsible entities and individuals and quantitative performance indicators. All this will ensure a better assessment of outcomes.

• Management. A more flexible and transparent resource management will be ensured by transferring part of the resources currently allotted to the Ministry of the Economy and Finance to the Ministries responsible for implementing policies. Further changes may concern the identification of a new streamlined unit for the management of spending (superseding expenditure chapters used at present—capitoli) and the adoption of cost accounting and financial statements in addition to financial accounting.

     A budget structure based on functions simplifies the spending review of existing programmes. The spending review—envisaged in the 2007 Budget—is dictated by the need to go beyond a purely incremental approach in decisions on budget allocations, that merely focuses on ‘additional’ resources and neglects to review outstanding expenditure commitments, and hence by the need to regularly review all the spending policies that are in place.

     Other countries use the spending review when they need to introduce fiscal discipline and therefore have to curb spending by optimising it (rather than resorting to across-the-board cuts) as well as to increase the efficiency in resource allocation and improve the performance of Public Administration. Italy has to address both needs at present.

     In April 2007 the Prime Minister listed the first five Ministries that will carry out a spending review (Justice, Home Affairs, Infrastructure, Transport and Education), which will be coordinated by the already mentioned Technical Committee on Public Finance (Commissione Tecnica per la Finanza Pubblica). The spending review will enable the Government to take action on the mechanisms of funding reallocation, so as to save

Ministero Dell’Economia E Delle Finanze

85

2008-2011 Economic and Financial Planning Document

money to be reinvested in priority areas: the Government’s draft budget for 2008 will already show the first results that will enable such funding reallocation.

     This is how an effort at fiscal discipline can be reconciled with the need to strengthen some sectors that are crucial for development and social justice, thus preventing indiscriminate cuts across-the-board.

VII.2 MODERNISING PUBLIC ADMINISTRATION

     With the Memorandum of Understanding on civil service and the reorganisation of Public Administration, signed with the most important unions representing civil servants and with the so-called Intesa sulla conoscenza (schools, universities, excellence centres, research) the Government has linked the modernisation of the public sector with the objectives of higher economic growth and greater customers/users’ satisfaction. Improvements of the quality of services and the productivity of civil servants may be achieved if the organisation of work is reformed by acknowledging individual merit, assessing individual performance and skills, operating Government offices with a view to achieving the objectives of optimising the use of human, financial and capital resources and recognising the key contribution of technological innovation processes.

     To achieve these objectives regulatory efforts should be undertaken involving all levers of Government action. Specifically, the recruitment system for civil servants should be changed, by adopting practices based on disclosure, timely and streamlined procedures and training and mobility across departments (subject to agreements with the social partners). Furthermore, reorganisation measures must encourage the adoption and use of systems to appraise senior civil servants’ performance and outcome. More generally, reliable criteria should be developed for appraising the action of public administration, also through greater involvement of users.

     The directive sent to ARAN on the start of contract renewal rounds has established a framework within which the new contractual terms and conditions of service are to be drawn up. The Government will introduce and strengthen reform principles both during the current round of civil service contract renewal and through new regulatory actions. With a view to assessing progress on its targets of improving services for users and increasing the productivity of civil servants, the Government and the trade unions have been trying to reach a timely agreement so as to tentatively set the duration of the next civil service contracts for the 2008-2010 period, as far as remuneration and conditions of service are concerned.

     The funds appropriated for salaries in the 2006-2007 period in the previous Budget and those which the Government is committed to freeing up, following the agreements of 6 April 2007 and 29 May 2007 for all civil servants and the special agreement for the education sector of 6 April 2007, will contribute to supporting the innovative policies envisaged in the agreement with the civil service trade unions.

     Setting targets in terms of performance and outcomes of senior civil servants and officials will make a significant portion of pay dependent on delivering the targets, thereby

Ministero dell’Economia e delle Finanze

86

2008-2011 Economic and Financial Planning Document

preventing incentives from being given unconditionally. To this end, collective bargaining will have to develop performance-related criteria as well productivity brackets, so as to ensure that incentives are used selectively and not given unconditionally to all employees.

     Civil service contract renewal rounds will therefore provide an opportunity to put in place the innovative policies envisaged in the agreement for the civil service (intesa sul lavoro pubblico) by putting a premium on productivity and merit incentives, including individual quality, and providing the necessary contractual support to labour mobility policies. A further important step will be the establishment of an on-line database of vacancies. Here the Government wants to boost the provision of e-government services to citizens and firms and will focus especially on e-health, e-justice as well as the use of information technology in education⁴, by favouring specific cooperation efforts to ensure the adoption and use, as well as interoperability, of database.

     Finally, the Government is also committed to systematically addressing the issue of the recruitment and training of civil servants, as well as increasing their motivation and the quality of their working conditions. The modernisation of Public Administration requires investment in human capital. Within the overall financial constraints and consistently with the spending priorities identified in the spending review (see Section VII. 1) our aim is: to ensure an inflow—in a medium-term review outlook—of new human resources selected via efficient and rapid competitive examinations that reward skills; emphasise the value of employees already working in the Public Sector and acknowledge individual quality, so as to develop career paths conducive to motivation and accountability; accelerate executive turnover, again on the basis of skills and performance; reduce temporary employment contract in civil service, build upon the effort to shore up insecure jobs, initiated with the 2007 Budget. Specifically, without prejudice to executive employment contracts, new regulations will be devised to correct some aspects governing entry into the civil service and to better define the status of senior civil servants, by reasserting the primacy of performance appraisal, without prejudice to autonomy, whereby negative outcomes may justify removal from an executive position, subject to the relevant legislative and contractual provisions⁵.

     For example, with a view to reorganising its work, the Ministry of the Economy and Finance has overhauled its structure, thereby bringing the reform process started a few years ago to its natural completion. Reorganisation has been based on the principle of enhancement and specialization of the institutional functions of the Ministry’s departments, on the basis of the following criteria:

• Recasting of roles and responsibilities and strengthening of the Ministry’s role as coordinator of public finances along with the integration of the relevant information flows.

• Amalgamation of staff management, logistics and common services into the General Administration Department, which has become a services centre for the Ministry as a whole.

4	In this connection it should be pointed out that in 2008 many of the provisions envisaged in the decree law of 7 March 2005 No.82 will become effective (e-government code).
5	In accordance with the policy recently set by the Constitutional Court with rulings No. 103 and 104 of 23 March 2007.

Ministero Dell’Economia E Delle Finanze

87

2008-2011 Economic and Financial Planning Document

• Review of the local structure made up of Provincial Public Accountancy Offices and the Provincial Head Offices of the various Services, so as to establish a local structure consistent with the institutional structure which is emerging as a result of the country’s evolution, also thanks to the widespread use of IT systems and technological development

• Streamlining and reduction in the number of components making up consultancy and research units.

     In terms of staff numbers, general director positions have been cut by 10 per cent, deputy general director positions by 7.8 per cent, resulting in an overall cut of 87 positions and exceeding the Budget targets of 10 and 5 per cent respectively.

     In addition, consistently with the amalgamation of support functions, following the entry into force of the reorganisation regulations, non-senior staff numbers will be reviewed downwards.

     The reorganisation process will lead to savings in operational costs (rent and operational costs falling within the category of intermediate consumption, which, even though not amounting to a substantial sum, are over half the steady-state target identified in the Budget for all levels of local and central government). Consistently with the forecasts in the 2007 Budget, most Ministries have overhauled their structure by developing regulatory frameworks based on streamlined organisational practices dovetailed to technologies, also with a view to redesigning the relationship between staff performing institutional functions with staff responsible for support functions.

     The fiscal balances for the next few years show very conservative estimates of expected expenditure savings. However, overall medium- and long-term benefits will mainly affect the quality of the services supplied, the streamlining of government action and a prevalent use of information technologies as a tool of communication between government and citizens.

     Adjusting the costs and timeframes of Public Administration to bring them into line with European best practices has become a prerequisite for boosting competitiveness; therefore Government, Regional and Local Authorities will have to cooperate more in an effort to deliver the objectives.

     One of the causes of Italy’s low growth is its Public Administration that is too cumbersome in relation to the services it provides. Italy’s economy is underperforming also because the productivity of services is often poor. The low productivity of Public Administration lies concealed and protected under heavy armour which, like the five-layered shield of Achilles, is too heavy to wield and makes quick corrections difficult. For correction to be successful, it is necessary to cut into the various layers of the armour: regulations envisaged by law, the terms and conditions of civil service contracts, accounting rules and the budget structure, the internal organisation of Ministries and other government agencies, parliamentary procedures, the weakening of a culture of moderation in the administration of the public sector. A thorough understanding of

Ministero dell’Economia e delle Finanze

88

2008-2011 Economic and Financial Planning Document

problems and painstaking patience are needed for the pursuit of excellence in Public Administration.⁶

     In a broader perspective, the Government intends to optimise the costs of politics simplifying the system through which politics is funded, making it clearer and more consistent, thereby allowing true democratic control over politics. To this end, in addition to reorganising government agencies and offices and strengthening monitoring and assessment tools, it is crucially important to eliminate any duplication and overlap between the various levels of government and to introduce incompatibility rules prohibiting a person from holding an elective office at the same time with his/her civil service position.

VII.3 PENSIONS

     The long-term trend of pension spending as a proportion of GDP ⁷ is based on birth-rate, mortality and migration flows assumptions underlying the baseline scenario worked out by ISTAT on 2005 data. As far as the macroeconomic scenario is concerned, productivity by employee on average lies around 1.7 per cent a year (1.8 per cent starting from 2026 and gradually increasing towards that figure in the preceding years), while the labour-market assumptions imply an increase in the employment rate from 58.4 per cent in 2006 to 67.9 per cent in 2050 in the 15-64 age group.

     Endogenous GDP growth, based on our macroeconomic and demographic assumptions, lies around a yearly average of 1.4-1.5 per cent over the whole forecast period. With a view to capturing the long-term trends of factors determining the structural balance of our pension system, the baseline scenario for 2008-2011, in line with the methodological approach already followed in previous forecasts, assumes a GDP growth rate of about 1.5-1.6 per cent a year, basically equivalent to the annual average rate of change of the last 15-20 years.

     Finally, forecasts of pension spending are based on existing regulations and are affected by the ten-year review of transformation coefficients⁸.

     After a slight drop in the 2008-2015 period, as a result of the raising of the minimum eligibility requirements for early retirement⁹, spending as a proportion of GDP starts growing again as a result of worsening demographic trends¹⁰, reaching a maximum of 15.2 per cent by 2038 to then become stable, hovering around 13.8 per cent by 2050.

     An improvement in the ratio towards the end of the forecast period is basically due to the shift from a mixed (pay-as-you-go and fully-funded systems) calculation system to a fully-funded scheme and the gradual decline in the number of pensions paid to baby

6	Address by Minister of the Economy and Finance Tommaso Padoa-Schioppa to the Chamber of Deputies, ‘Economic and financial statement and draft budget statement’ Rome, 3 October 2006.
7	Implementing the provisions of Art. 1, paragraph 5 of Law No. 335 of 1995.
8	Envisaged by Art.l, paragraph 11 of Law No. 335/95.
9	Envisaged by Law No. 243/2004.
10	The impact of the expected deterioration is partly cushioned by the raising of the minimum eligibility requirements for retirement laid down by the above-mentioned law also under the mixed and fully-funded pension regime.

Ministero dell’Economia e delle Finanze

89

2008-2011 Economic and Financial Planning Document

boomers because of mortality. In the absence of a ten-year review of transformation coefficients, pension spending as a proportion of GDP is expected to be about 1.5 per cent higher in 2040 and slightly under 2 per cent at the end of the forecast period. These forecasts will have to be adjusted in the light of the outcomes of negotiations with social partners.

VII.4 PUBLIC DEBT

     Even though in the last few years the downward trend in market interest rates has stopped, in the course of 2006 Government overall spending on debt servicing as a proportion of GDP remained basically unchanged as against 2005, hovering around 4.6 per cent. However, the increase in interest rates has had an impact on the marginal cost of treasury bonds at issuance, which has gone from 2.47 per cent in 2005 to 3.32 per cent and will negatively affect debt-service costs as of 2008. One of the key factors contributing to curbing debt-service costs was an improvement in the public sector borrowing requirements, mainly due to increased tax revenues, which, as of June, has brought about a significant reduction in the issuance of both short-term securities, traditionally used to deal with temporary cash flow imbalances, and other securities, over which the Treasury has greater discretion, such as Euro-Area inflation linked bonds and nominal long-term bonds with over 10- year maturity.

Ministero dell’Economia e delle Finanze

90

2008-2011 Economic and Financial Planning Document

     However, the chosen management policy has been aimed at consolidating the results achieved in terms of debt exposure to financial risks, such as interest rate risk and refinancing risk. At the end of 2006 the duration of debt, as far as treasury bonds are concerned, was equal to 4.40 years, higher than the 2005 level of 0.15 years, while average maturity was equal to 6.77 years as against 6.56 years at the end of 2005. As to the government bonds of the domestic programme, the performance of the average refixing period¹¹ was 5.61 years, therefore growing by 0.10 years as against 2005. Interest-rate risk sensitivity of the public debt, that is to say the impact of an unexpected increase in interest rates on debt-service spending¹², is stable—hovering around the levels predicted in the Stability Programme Update in December 2006.

11	The average refixing period (ARP) measures the average time in which bond coupons are refixed. For zero-coupon bonds and fixed coupon bonds it corresponds to the residual maturity of bonds. For floating coupon bonds it corresponds to the time left until the fixing of the next coupon.
12	It should be noted that forecasts of debt-service spending in official documents are based on forward rates assuming the issuance strategy remains unchanged. Therefore these estimates already include an increasing trend in forward rates.

Ministero dell’Economia e delle Finanze

91

2008-2011 Economic and Financial Planning Document

     Lengthening of debt duration was accompanied by stabilisation in the proportion of fixed-rate securities, 68 per cent as against the total of domestic securities and of index-linked securities which have reached 5 per cent of the total. Short-term or floating-rate securities account for 27 per cent of domestic securities. Foreign currency bonds show a slight drop as against 2005, from 7 per cent to 6 per cent, due to lower borrowing requirements and market conditions more favourable to issuance in euro-denominated bonds.

     Consistently with the policy that has constantly been followed in the last few years, in 2006 the choice of debt instruments supplied to the market from time to time as well as issuing strategies have been aimed at ensuring even deeper penetration into the

Ministero dell’Economia e delle Finanze

92

2008-2011 Economic and Financial Planning Document

portfolios of international investors, with an ever larger number of different types of investors holding them.

     At the end of 2006 the share of non-resident bond holders was about 54 per cent, growing slightly as against the level reached at the end of 2005, while the share of bonds held by individuals and firms other than holdings was 14 per cent, as against 15 per cent, thus confirming the ever more important role played by investments in transferable securities.

     In 2006 the debt-to-GDP ratio was 106.8 per cent, slightly higher than in 2005 when it reached 106.2 per cent. This ratio has been increasing for the second consecutive year, after a progressive downward trend that started in 1994. It should be noted, however, that the growth in the debt-to-GDP ratio between 2005 and 2006 was about a fourth of growth between 2004 and 2005 (which reached 2.4 percentage points of GDP). Furthermore, if one considers the increase in the balance in the liquidity account with the Bank of Italy to pay VAT refunds following the European Court of Justice ruling—amounting to about €8,000 million—the 2006 data are more or less in line with those of 2005.

     An analysis of the debt-to-GDP ratio shows an increase in local government debt from 6.3 per cent in 2005 to 7.3 per cent in 2006. In addition to local governments tapping the bond market more frequently, this growth is also due to the replacement of loans with the Ministry of the Economy and Finance with loans taken with Cassa Depositi e Prestiti, which ceased to be a Government agency in 2003, and to the impact of the securitisation transactions of receivables made by Regional Health Authorities.

Ministero dell’Economia e delle Finanze

93

2008-2011 Economic and Financial Planning Document

VII.5 PRIVATISATION

     As set out in last year’s Economic and Financial Planning Document, the current ‘historical stage’—as opposed to that of the early 1990s—is characterised by a shareholding portfolio managed by the Ministry of the Economy and Finance (MEF) which, even though it has become ‘richer’ over the years as a result of a far-reaching ‘formal privatisation’ process (State-owned enterprises have been turned into public companies) or the purchase of former IRI shareholdings (Alitalia, RAI e Finmeccanica), still includes:

• Stakes in publicly traded companies of substantial value, but with threshold values slightly higher than those necessary to ensure a significant presence in key sectors (energy and defence).

• Stakes which, by size, type of firm, regulatory peculiarities, or due to the presence of serious economic and financial problems cannot be privatised.

• Companies that are potentially attractive for the market, but are still undergoing restructuring or that in any case need painful downsizing as well as the establishment of a clear regulatory framework (Poste Italiane).

     Even though the situation is more complex than it was a few years ago, the Government, in addition to the forthcoming completion of Alitalia’s privatisation, is committed to pursuing a policy of gradual privatisation of the companies controlled by Ministry of the Economy and Finance (MEF) as it believes that these may significantly benefit from it.

     Hence, in the next few years, when certain conditions are in place (for example: removal of any regulatory constraints, implementation of industrial restructuring or shift in product specialisation, establishment of a suitable regulatory framework) the shares of Poste Italiane and Istituto Poligrafico e Zecca dello Stato — IPZS (the Mint) directly held by the Ministry could be floated.

     As to indirect shareholdings, in the next few months part of Fincantieri’s shares could be floated on the stock market. The Government will in any case continue to retain a stake of at least 51 per cent in Fincantieri. Tirrenia could also be privatised, consistently with what has been envisaged in the 2007 Budget¹³.

     The divestment of State Property goes on. The first phase is nearing completion and the first ‘package’ of real-estate assets, identified in the decree of 28 February 2007, is about to be handed over to the State Property Agency. At the same time, a second list is being drafted and an attempt is being made at drawing it up within the timefrarne set by the law envisaging the publication of the decree by 31 July and the handing over of the package to the Agency by 31 December. Due to a number of problems that have arisen recently, also the option of resorting to an exchange or to Programme Agreements (Accordi di Programma) with local authorities and/or private companies is being investigated, as already envisaged in the 2007 Budget. In order to implement the divestment programme in the light of the experience gained so far, the existing terms and conditions need to be reviewed as soon as possible, at no expense to the Government, by

¹³ Art. 1 paragraphs 998 and 999.

Ministero dell’Economia e delle Finanze

94

redrafting the existing provision on the transfer of military real-estate assets to the State Property Agency.

2008-2011 Economic and Financial Planning Document

VIII. SOUTHERN ITALY AND LOCAL GOVERNMENT FINANCE

VIII.1 ECONOMIC TRENDS, POLICY OBJECTIVES AND LOCAL GOVERNMENT POLICIES

     Development differs widely from region to region throughout Italy. Per capita GDP is high in the Centre and in the North, while in the South it is below the national average, there is little in the way of infrastructure and services and the proportion of less dynamic firms operating in traditional sectors is still very high.

     Even though the North and the Centre were affected by the strong downturn that has hit the whole country since the beginning of the new millennium, they have weathered the slowdown better than the South, especially thanks to stronger growth in the Centre. In 2006 economic recovery was stronger in the North, especially in the North East, with a GDP growth of 3.2 per cent, followed by the North West (2 per cent), while GDP growth in the Centre was lower, even though only slightly, than the national average (1.8 per cent).

     The upturn is confirmed in the Centre and the North also by the main 2007 indicators of consumer and business confidence and export trends. However, in the first quarter of 2007 there was a slowdown in the employment rate also due to a reduced participation of immigrants in the labour market. As far as 2007 is concerned, GDP growth in the Centre and the North is expected to be around 2 per cent and close to 2 per cent in the South, even though growth in the South is expected to be even lower than the national average.

     In 2006, also the South benefited from the recovery of the Italian economy: after four years of substantial stagnation, GDP grew again (by 1.4 per cent), even though at a slower pace than in the rest of the country. However, in the first quarter of the year growth did not pick up.

Ministero dell’Economia e delle Finanze

95

2008-2011 Economic and Financial Planning Document

     Against a backdrop of gradual improvement in business confidence and a positive export trend, even though with ups and downs, consumer demand was still weak, consistently with the uncertain evolution of consumer confidence, which, in turn, was linked to a weaker labour market. After declining for three consecutive years, in 2006 employment once again reached and exceeded the 2002 figure, but then remained stable between the end of 2006 and the beginning of 2007.

     In 2008 GDP in the South is already expected to show a faster growth rate thanks to economic policy measures aimed at sustaining competitiveness and relaunching actions to foster local growth (See Figure VIII.2). However, in order to reach higher growth rates, it will be necessary to improve the ability of all levels of government to take action in an effort to implement local development policies.

     More generally, one of the hurdles hampering economic growth in the South is the lack of two fundamental public goods: law and order and the rule of law.¹

     The Government still invests too little in the South to meet the target of bridging the infrastructure and services gap. The share of capital expenditure allocated to the South has actually remained stable in the last few years and has not met the expected growth targets. The share of total capital spending was equal to the 2000-2006 average, around

¹ Even though a disaggregated analysis of crimes committed against 10,000 inhabitants shows ever higher crime rates in the Centre-North in 2005 (in terms of widespread and violent offences) the financial and organised crime rates in the South are even higher (on a scale from 0 to 100 for Italy, the figure for the South is 105 and for the Centre-North 97.2). Conflicts between different mafia groups still cause a high, even though decreasing number of murders (108 mainly in Campania and Calabria). Racketeering and usury, mainly affecting retailers and entrepreneurs in the South, are still widespread. Environment-related crimes (cement and waste cycles) committed by the environmental crime syndicates mainly affect Campania, Calabria, Sicily and Apulia.

Ministero dell’Economia e delle Finanze

96

2008-2011 Economic and Financial Planning Document

37.5 per cent² (see Table VIII.l); furthermore, there are still gaps in per capita expenditure. If one considers the whole of the public sector, about €1,200 per inhabitant have been spent in the South as against 1,270 in the North and Centre, which has further widened the gap between the South and the rest of the country in the last few years.

     One of the most important causes of this divide is the slow increase in investment in the South by major public investors and the insufficient effort at securing the envisaged share of ordinary capital funds for the South (at least 30 per cent)³.

     It is therefore necessary to fully leverage public spending policies in bridging the growth gap between the South and the rest of the country. Given that government capital spending as a proportion of GDP has basically remained unchanged, the target will be to increase the volume of investment in the South, while at the same time improving the quality of spending. The amount of resources that still have to be spent (and therefore the number of projects yet to be completed) under EU⁴ and national programmes already finalised and funded, as well as the new funds allocated in the 2007 Budget for the next 2007-2013 plan of the unified regional policy, will cover the necessary spending increase.

     In the 2007-2011 period the share of capital expenditure allocated to the South can therefore be gradually increased up to 41.4 per cent of the 2010-2011 overall national total (see Table VIII.1).

TABLE VIII. 1: GOVERNMENT CAPITAL SPENDING

			2007-2011
	2000-2006		2007-2009		2010-2011
CAPITAL SPENDING AS A PROPORTION OF GDP
Italy		4.2		4.1		4.1
Centre-North		3.4		3.4		3.2
South		6.5		6.6		7.1
PERCENTAGE COMPOSITION
Italy		100.0		100.0		100.0
Centre-North		62.5		62.1		58.6
South		37.5		37.9		41.4

Source: CPT database, Leading indicator for the 2000-2006 period, Estimates and review figures for the 2007-2011 period, see Yearly Report 2006 of DPS-MISE, Paragraph III. 2, page 196, Quadro Finanziano Unico.

2	The share of the whole of the public sector, which includes other central, regional and sub-regional entities, whose investments contribute to government capital formation, has been declining: in 2005 it was 32.3 per cent.
3	For more information on investment spending trends of some of the major national investors (such as, for example ANAS, Ferrovie dello Stato, ENEL, GRTN, EM, Poste Italiane,) see ‘Yearly Report’ of the Department of Development Policies (DPS) 2006, chapter. III, par. III.1.1 page 166 and National Strategic Framework (QSN) par. V.4.
4	The take-up rate of Structural Funds for the 2000-06 period at December 2006 was 66 per cent, whereas the rate of Objective 1, more or less corresponding to the South, was 63 per cent. According to EU rules, the deadline for spending the funds is the end of 2008.

Ministero dell’Economia e delle Finanze

97

2008-2011 Economic and Financial Planning Document

     In the South, the planned increase in capital expenditure (in volume terms) over the 2007-2013 period, to ensure compliance with the additionality principle governing access to European funds, is estimated to average 37 per cent in nominal terms of what was invested by the Government in the 2000-2006 period.

     Within the limits of available resources, each level of government will make suitable allocations accruing after 2010 with a view to achieving these objectives and ensuring a full take-up of funds for the 2000-2006 plan.

     The cash disbursements for the coming years (especially 2008 and 2009) will be adjusted in the light of the amount of the built-up funds that can be spent. Furthermore, the additionality principle of the EU regional policy envisages that major public investors comply with the ‘regional use constraint’ requiring them to use ordinary funds for local development purposes.

     Regional policy for the promotion of regional development strictly reconciles cohesion objectives with innovation and competitiveness. In the South it is targeted to removing the causes of lagging development and sustaining the convergence process; in the Centre and North it focuses on maintaining and strengthening their more advanced competitive positions on the European and global scene.

     The complex structure of different financial tools and funding sources has so far stifled the potential of regional policy. This has led to a decision to combine the spending review of additional development funding, EU Structural Funds and the Fund for Underutilised Areas into one single 2007-2013 National Strategic Framework (Quadro Strategico Nazionale 2007-2013 QSN), approved by the Government at the end of 2006 and which is now finally being adopted by the European Commission. The National Strategic Framework (QSN⁵ supported by a seven-year commitment envisaged in the Budget to be financed from the Fund for Underutilised Areas) is the first decisive step that has been taken to build a unitary and consistent regional development policy. It establishes a comprehensive framework characterised by clear policies, certainty and clarity of regulatory and financial terms and conditions as well as continuity of action.

     The priorities set in the QSN⁶ introduce corrections and changes to the previously tested strategic framework to enhance its role in support of competition, innovation and improvement of public services. Both corrections and changes are applied with different arrangements and to a different extent in the country’s two macro-regions, the Centre-

5

The National Strategic Framework (Quadro Strategico Nazionale), as envisaged in Art. 27 of the EC General Regulation 1083/2006 on Structural Funds is a strategic policy paper which Member States are supposed to draw up in compliance with the EU cohesion policy for the 2007-2013 period. The National Strategic Framework is part of a comprehensive national development strategy made up of Priorities. The list of operational programmes implementing the strategy with specific funds as well as compliance with the additionality principle for the use of EU funds are the subject of decisions by EU institutions. The 2007- 2013 National Strategic Framework (QSN) for Italy was approved by CIPE on 22 December 2006 and later negotiated with the European Commission with a view to its adoption of the relevant decision, now forthcoming.

6

Priorities by theme are: human resources and education, research and innovation, energy and the environment, social inclusion and quality of life, natural and cultural resources, networks and mobility, economic competitiveness, urban areas, international opening, governance systems. See ‘National Strategic Framework 2007-2013’—chapter III.

Ministero dell’Economia e delle Finanze

98

2008-2011 Economic and Financial Planning Document

North and the South, and across the EU framework objectives for the period 2007-2013, known as ‘Convergence’ and ‘Regional competitiveness and employment⁷’.

     The investment programme to promote development, initiated by the Strategic National Framework, is quite substantial: more than €124 billion, over 100 of which allotted to the Regional Authorities of the South and over 22 billion to those of the Centre-North (see Table VIII.2)

TABLE VIII.2: RESOURCES OF THE 2007-2013 NATIONAL STRATEGIC FRAMEWORK (€ billion)

	Structural		National co-
	funds		funding, tentative1		FAS2		TOTAL
Convergence		21.6		21.8
Regional competitiveness and employment3		6.3		9.6
Cooperation at local level		0.8		0.2
Total QSN 2007-2013		28.7		31.6		64.4		124.7
Of which Centre North4		4.9		7.5		9.7
South		23.0		23.9		54.7

1)	Approximate amounts — The amount will be set on the basis of Cipe’s deliberation concerning co-funding and the participation shares per axis laid down in the EC decision on the adoption of operational programmes.
2)	New resource of the Fund for Underutilised Areas (FAS) allotted by Law No. 296 of 27 December 2006 (2007 Budget).
3)	Objective also include the Regional Authorities receving temporary financial support.
4)	Funds of the Cooperation Objective not included.

Source: 2007-2013 National Strategic Framework.

     The sums allocated give rise to expectations of significant change, especially in terms of the provision of services to citizens. To this end it was agreed with the Regional Authorities to set measurable and assessable targets for essential services (whose level is still unsatisfactory) to be provided in the South for the well-being and development prospects of local communities. These ‘services target’, which, if delivered, would entitle Italy to performance reserve funds of about €3 billion, concern education levels, water and waste management services, the availability of social and health services for children and the elderly.

     In the Centre North, the National Strategic Framework aims at consolidating and innovating the competitiveness of the regions by strengthening the sustainable side of development, thereby encouraging businesses to adopt and use innovation and research application processes and promoting innovative services in urban areas, also by fostering innovative practices for skill acquisition and human resources enhancement.

     The planned allocation envisages a very large share of funding for the South, much larger than in the past, to be used for education, research and innovation programmes (see Figure VIII.3). Funds for the environment, social inclusion, cities and metropolitan areas have also been increased. In a limited number of urban areas, particularly deprived

⁷ The ‘Convergence’ Objective of the Community cohesion policy for 2007-2013 includes the following Italian regions: Campania, Calabria, Apulia, Sicily and Basilicata under a temporary support regime. All the regions not falling within the Convergence Objective, including Sardinia under a temporary support regime, are included in the “Competition and Employment” Objective.

Ministero dell’Economia e delle Finanze

99

2008-2011 Economic and Financial Planning Document

at social level and in terms of employment, development will also be encouraged through suitable long-term tax concessions to be granted on a tentative basis in the so-called Duty-Free Urban Areas (cities offering tax breaks), so as to boost the activities of small firms with growth potential. To this end, laws will be drafted laying down how to use the resources made available in the 2007 Budget. Greater participation of mainstream politics in the ‘horizontal’ support to firms⁸ will allow development programmes to be focused on direct action aimed at promoting competitiveness at regional level.

     The National Strategic Framework targets also require major changes in operational and planning practices. A new unified approach in regional policy lays the groundwork for avoiding inefficient duplication and overlap of heterogeneous rules governing funding sources and procedures. Its effectiveness requires good dovetailing with the overall economic policy, which is the responsibility of Central Government, but which also needs loyal cooperation among many and different government levels.

     Finally, the Government, in reiterating the importance of institutional cooperation and the involvement of the various levels of government in devising policies and socio-economic programmes in complex areas cutting across all sectors, wants to step up and support institutional dialogue and cooperation among different levels of government, building upon the efforts already initiated in 2007: the ‘Institutional Milan Forum’, the ‘special dialogue unit for the economic development of the Naples metropolitan area and Campania’, the ‘Institutional Forum of the Calabrian Regional Authority’, the

⁸   Specifically, the 2007 Budget introduces a tax rebate (as of January 1 2007 and up until 2013) for firms making new investment in the South for the purchase of plant and machinery.

Ministero dell’Economia e delle Finanze

100

2008-2011 Economic and Financial Planning Document

‘Institutional Forum of the Sardinian Regional Authority’, and the ‘Institutional Forum of the City of Taranto’.

VIII.2 REGIONAL FINANCE, RULES, TAX AUTHORITIES

     In the last few years, the reform of Title V of the Constitution and the relevant implementation provisions have speeded up devolution. Hence, the subsidiarity principle has been implemented and the action of Regional and Local Authorities has been brought closer to citizens. The most recent developments in this process consider giving Regional and Local Authorities more fiscal autonomy.

     In this perspective, the funding system of Regional and Local Authorities must be able to pursue a whole series of objectives which are difficult to reconcile. On the one hand Regional and Local Authorities must be given sufficient tax-raising powers to cover a significant proportion of their spending needs and manage resources responsibly, also bearing in mind the international fiscal commitments made by the Central Government; on the other, Government action ought to be tailored to the different needs of regions. At the same time, it is necessary to ensure that decentralised tax authorities have suitable margins of equalisation between Regional and Local Authorities having different financial resources (in terms of potential revenues) and needs, as is the case in a country like Italy with such a marked divide between the Centre-North and the South.

     During the previous Government the process aimed at establishing federalism suffered a heavy setback and more stringent constraints were introduced preventing any initiative in the way of fiscal autonomy that was not agreed through shared procedures. As the Regional and Local Authorities’ powers to change regional tax rates were suspended, the possibility for them to raise their own taxes vanished. With local budgets once again rigid on the revenue side, the focus of the Internal Stability Pact gradually shifted away from hard budget constraints (deficit rules) towards spending increases.

     The 2007 Budget has set the federalism process back into motion. The Regional Authorities have once again been given tax-raising powers; in fact, their autonomy has been extended. The reform of the Internal Stability Pact has been launched as a first step towards the new rules of fiscal federalism. For Local Authorities the introduction of hard budget constraints (deficit rules as opposed to spending ceilings—inclusive of investment spending), in addition to emphasising the combination of autonomy and accountability, which is the mainstay of federalism, brings the Internal Stability Pact closer into line with the rules envisaged by the European Stability and Growth Pact.

     The experience made in 2007 shifts the focus on the most critical aspects in the reformulation of the Pact. Specifically the need has been felt to find a suitable solution to the problem of investment spending in view of the key role that the local authorities have always played in supporting a policy concerned with development. Here a suitable solution will have to be found to the problem of using any surplus in accordance with the targets set every year in the Pact.

     The public finance targets have highlighted the need to agree on rules to manage local authority debt. It appears advisable to build upon and speed up the action already

Ministero dell’Economia e delle Finanze

101

2008-2011 Economic and Financial Planning Document

initiated with the 2007 Budget aimed at introducing hard budget constraints (deficit rules as opposed to spending ceilings) for Regional Authorities, as the baseline for the Internal Stability Pact, also in view of the rules that should be devised in the text of the Decree Law on fiscal federalism, which is currently being drafted.

     The best way to solve these critical issues is to approach the review of the draft Internal Stability Pact as part of a general reorganisation of the way in which financial resources are managed by local authorities, by implementing Art. 119 of the Constitution. This is accomplished with the delegated legislation being drafted which, seven years after the constitutional reform and envisaging far-reaching consultation with the Regional and Local Authorities, lays down the guiding principles and criteria for implementing Title V of the Constitution, together with the delegated legislation on the Code of Autonomy (implementing Art.117, paragraph II letter p) and Art.118 of the Constitution, currently being discussed in Parliament. In the strategic design to recast the roles and funding system of the various levels of government, the two Government bills complement each other and must therefore be mutually consistent.

     Pursuant to the provisions of the Constitution, regional and local taxes and a share of national tax revenues are the primary source of funds to finance local authority functions. Local authority tax revenues will allow flexibility in the reallocation of funding, the tailoring of government programmes to local needs, and local government accountability; whereas the share of national revenues is supposed to ensure the stability of funding in terms of volumes, should more resources at local level be needed. The enjoyment of civil and social rights is ensured nationwide by an equalisation system based on transfers that can provide complete funding of minimum levels of services to guarantee the enjoyment of the above rights and finance the essential functions of local authorities⁹.

     In addition to these resources and pursuant to paragraph V of Art 119, additional transfers are secured for local authorities, aimed at: removing specific economic and social imbalances, promoting economic development, social cohesion and solidarity, supporting the actual exercise of individual rights, subject to the commitments made by the Government at EU and national level for the 2007-2013 period.

     The equalisation of resources, which is partially based on spending needs, requires an accurate definition of these needs. Ultimately they must not simply be equal to historical spending, as is the case now. The delegated legislation drafted by the Government establishes a framework for the financial relationships between the various levels of government and sets general criteria to gradually rationalise the distribution of resources, making it consistent with actual needs and the standard cost of the services provided.

     The reform also defines the general coordination principles of public finance and the tax system with a view to involving all levels of government in the formulation of the planned objectives. The full implementation of Art. 119 puts an end to a phase characterised by fragmented measures and programmes, often dictated by the urgent need to introduce greater fiscal discipline in all public accounts, and provides the stability

⁹ Letters m) and p) Paragraph II Art. 117.

Ministero dell’Economia e delle Finanze

102

2008-2011 Economic and Financial Planning Document

and certainty needed to enable local authorities to plan their activities appropriately. The provisions of the additional budget package affecting regional and local finance (currently included in the Budget Law) will form part of a government bill to be submitted in June, after consultations and joint assessment with Regional, Provincial and Municipal Authorities. Its legal status will be that of an additional budget package and it will have to be approved by October. This additional budget package will achieve our twofold objective: it will relieve congestion during the approval of the budget, while giving local authorities sufficient time to devise their own autonomous fiscal policies. Last but not least, it will actively involve local authorities in the process leading up to the design of fiscal policy since its early stages, when sectoral objectives are set, thus launching a practical discussion and encouraging the sharing of information, effort and responsibility.

     After the start of Parliamentary proceedings on the delegated legislation on Title V of the Constitution, on the basis of consultation and loyal cooperation principles, Regional authorities and the other levels of government will be systematically involved in the definition of sectoral policies (improvement and optimisation of spending; action on housing and infrastructure, tax authorities and the South) building upon the positive experience made with the Health Agreement.

     While waiting for the approval of the delegated legislation on the code of local government and the delegated legislation on fiscal federalism, as well as for the enactment of the relevant legislative decrees, it is necessary to ensure the full implementation of the existing regulations governing the devolution of the government’s administrative functions to the local authorities. For some areas of responsibility which are being devolved to the local authorities, the procedure has not been completed yet, in some cases due to insufficient resources transferred (or yet to be transferred) to Regional and local authorities to fund functions to be brought under or taken away from the purview of central government.

     At local level it is essential to pursue a policy that supports mountain areas and mountain municipalities that is consistent and innovative, capable to enhance their economic potential, based on the principles of local specificities, sustainable development, economic cohesion and subsidiarity. To this end and within the limits of available resources, an increase in the financial endowment of the National Mountain Fund¹⁰ would allow a more extensive programme of special investments for mountain development, also through a new Government bill on the enhancement and protection of mountain regions, possibly turning the fund into an equalisation facility.

     Moreover, in local government, equal importance should be attached to islands, by enhancing and promoting the sustainable development of smaller islands. It is a significant objective, also envisaged by Art 158 of the Amsterdam Treaty, aiming at promoting those areas, by redressing the structural inequalities which mainly affect islands, through a concrete policy aimed at truly ensuring economic and social cohesion. In this connection, specific energy, transport, and competition policies are needed, aimed at improving the conditions and the quality of life in the above-mentioned areas; furthermore, measures are needed to assist firms based on islands, so as to allow them to be equally competitive with those headquartered in mainland Italy.

¹⁰ Envisaged by Law No. 97/94.

Ministero dell’Economia e delle Finanze

103

2008-2011 Economic and Financial Planning Document

     A further goal is improving the systems to assess the quality of the action of all levels of government, with the twofold objective of improving their efficiency and cost-effectiveness and reducing costs and gaps. These objectives may also be pursued by envisaging measures aimed at encouraging joint management of public services by more than one local authority.

     Within the limits of available resources, it is necessary to promote a Fund aimed at enhancing and promoting the socio-economic conditions of the border areas between ordinary Regional Authorities and Special-Status ones to discourage the phenomenon of municipalities seeking autonomy.

     In this connection, we would be remiss if we failed to mention minorities, pursuant to Art. 6 of the Constitution and Art. 22 of the EU Charter of fundamental rights. Within the limits of available resources but through the appropriation of sufficient funds, the protection of historic and linguistic minorities must be ensured, as they are an important factor for the country’s civil development.

Ministero dell’Economia e delle Finanze

104

2008-2011 Economic and Financial Planning Document

IX.	APPENDICES
IX.1	SOCIAL JUSTICE

     Social justice continues to be a priority objective of the Government’s policy strategy. Economic and social changes in Italy in recent years have impacted the income levels of Italian households. The latest available data about the distribution of income, which are comparable to the rest of the European Union, show that the richest 20 per cent of the population in Italy owns 5.6 times the income of the poorest 20 per cent, while the Gini concentration index (which measures inequality) is 0.33; the figures are higher than the European average, among the highest of the EU 15 countries, and significantly lower than Portugal only. Differences among the Italian regions are also significant, with Sicily and Campania having the highest indices, and Tuscany and Friuli-Venezia Giulia having the lowest.

     Social justice can also be measured through the concept of relative poverty, an indicator which is focused on the low end of the income distribution (or of consumption), counting the number of people whose income (consumption) is below a given threshold. Eurostat data—according to which a person with disposable income below 60 per cent of the national median income is at risk of poverty—indicate that 19 per cent of Italy’s population is living in state of relative poverty. The figure is similar to that for the other large Mediterranean countries, but well above the European average (16 per cent) and, in general, one of the highest in the European Union.

     ISTAT (Italian National Statistical Office) uses a different methodology, considering a two-person household as ‘poor’ when that household’s consumption is less than the national per capita average¹. The national data are not comparable with the data from the other countries, but they do allow for making a comparison over time, given the availability of relatively long historical series of data. Though changing in line with economic trends, relative poverty has been basically stable over time. The 2005 data show the number of people living in poor families has remained constant at more than 13 per cent of the population, even though there has been a simultaneous decrease—due to a change in the composition of poor people by household type—in relative poverty among households (a change that is not statistically significant). The geographic distribution of poverty levels is extremely varied, with the rate in southern Italy (24 per cent) being four times higher than the rate for the central areas of the country and more than five times higher than the rate for the northern areas. At regional level, the values range from more than 30 per cent in Sicily to less than 3 per cent in Emilia Romagna.

¹ In other words, ISTAT (The National Statistical Office) calculates the poverty threshold in terms of consumption (instead of income), using the average per-capita figure as a reference (instead of the equivalent median) and a different equivalence scale, the ‘Carbonaro scale’, instead of the ‘modified OECD scale’. ISTAT also publishes the figure almost exclusively in terms of poor households (instead of individuals who live in poor families).

Ministero dell’Economia e delle Finanze

105

2008-2011 Economic and Financial Planning Document

     As to the breakdown by household type, bigger families are at greater risk of poverty, with the rate thereof at just under 25 per cent and growing. Couples with at least one person over the age of 65 have a high rate of relative poverty, though it is declining. The rate of couples with one child is growing.

Ministero dell’Economia e delle Finanze

106

2008-2011 Economic and Financial Planning Document

     Similar indications are derived from the analysis based on the age of the head of the household, with a decrease in relatively poor families headed by an elderly person (though the rate is still the highest) and a parallel increase in relatively poor families headed by a person under the age of 35.

     The absence of a national initiative to combat poverty—at least in its extreme forms—affects the redistributive capacity of Italy’s social-protection system. Eurostat data are useful in this regard since, according to its methodology, they report the rates of relative poverty before and after family transfers. While the reduction of poverty ensured by pensions in Italy is just above the European average (19 points, or two points higher than the EU average), the effect of other social transfers is very limited (reducing the rate of poverty by five points, versus the EU average of ten) and is similar to that for other countries in southern Europe.

     However, the relative poverty figures do not indicate the worst economic situations of privation. Such situations are shown by an indicator of absolute poverty, which is currently not available in Italy².

     Another approach is the so-called ‘subjective poverty’, an index elaborated by the Institute for Studies and Economic Analyses (ISAE) that measures the opinions of households about the extent to which their income is adequate to allow for living a dignified life. During the most recent year, subjective poverty essentially stabilised at the prior-year level, after having increased very dramatically between June 2003 and June 2005, when households noted a strong increase in the cost of living, probably due to the introduction of the euro. Thereafter, this perception gradually disappeared.

² The absolute poverty index has been estimated by ISTAT (Italian National Statistical Office) to be around 4.5 per cent of households for the years from 1997 to 2002. ISTAT has set up a specific Commission for the purpose of reviewing the methodology since the previous absolute-poverty threshold had become obsolete.

Ministero dell’Economia e delle Finanze

107

2008-2011 Economic and Financial Planning Document

     An important aspect of assessing justice is equal opportunity. An individual’s background sharply influences his opportunities, and social mobility needs to be studied in order to measure this phenomenon. Equal opportunity is normally measured through absolute and relative inter-generational mobility indices.

     ISTAT’s most recent data on inter-generational mobility indicate that the percentage of individuals who changed social class in comparison with their parents (absolute mobility rate) was 63.6 per cent in 2003 and that the rate was higher for women than for men³. The data on relative mobility⁴ for the same year point to minimal social inter-generational fluidity, i.e. the limited nature of mobility opportunities from one class to another.

     Changes over time are not very rapid. In the case of absolute mobility, they depend on structural modifications that take place in the job market: as people have left the countryside and the services sector has expanded, the chances for improving social class have got better. Relative mobility, in turn, is linked to the rigidity of the social structure. Education represents an important element for promotion, but the opportunities for certain educational achievements are sharply influenced by family origins. For example, 71 per cent of the children of university graduates finishes secondary school, against 14 per cent of those whose father has only an elementary education. In addition, more than 90 per cent of university graduates’ children enrol at university, versus 42 per cent of the children of parents having completed elementary school only.

     An estimate of inter-generational mobility among job-related classes is represented by the inter-generational mobility of income. The inter-generational elasticity of income has been computed for the world’s leading industrialised countries; the indicator measures the average magnitude of change in children’s income to changes in their parents’ income.

3	ISTAT (Italian National Statistical Office), 2005 Annual report.
4	Relative mobility compares the opportunities to reach a certain objective for persons coming from different classes.

Ministero dell’Economia e delle Finanze

108

2008-2011 Economic and Financial Planning Document

As the value of elasticity increases, the value of the inter-generational mobility of income decreases. According to recent data gathered by the OECD⁵, Italy has inter-generational elasticity of income equal to around 0.5, which is one of the highest levels among the OECD nations and similar to the levels reported for the United States, Great Britain and France. The indicator for Italy thus shows a strong correlation between parents’ income and the income of their children. Countries such as Sweden, Germany and Spain are at an intermediate stage, while Canada, Finland, Norway, Austria and Denmark show stronger inter-generational mobility of income, with the elasticity values falling below 0.2.

IX.2 LABOUR PRODUCTIVITY

     With the recovery currently under way, Italy is moving beyond a period in which GDP growth came to a virtual standstill. The period, which lasted from 2001 to 2005, can be viewed from a historical perspective as part of a longer term period in which Italy’s economic growth has trended downward. The recent slowdown, however, was very intense, particularly with regard to the decline in the level of productivity. Relying on the traditional growth-accounting framework, the components of growth having the greatest impact on the economy’s negative performance over the five-year period are reviewed below. In order to formulate economic policies, it is important to consider the factors discussed here, monitor their performance and take due notice of changes in their behaviour. From this point of view, 2006 yielded some encouraging signs which — if confirmed in coming years — would indicate a turnaround in the trend.

     GDP growth can be achieved by increasing the number of employed or by increasing labour productivity, which is equal to the ratio between GDP (Y) and the number of employed (L). Reviewing the Italian economy’s performance in recent years, it is possible to note that increases in employment were seldom matched by increases in productivity. A growth-accounting analysis supports this argument. Starting from the assumption that GDP is the result of a Cobb-Douglas production function, with constant returns to scale, where A represents total factor productivity, K is the capital stock, H is the number of hours worked per capita and α is a technological parameter⁶, the previous relationship can be expressed as follows:

     

     The other variables introduced into the equation are: WP — the working age population; PART — the participation rate; and UR — the unemployment rate.

5

See d’Addio A.C., “Intergenerational transmission of disadvantage: mobility or immobility across generations? A review of the evidence for OECD countries”, OECD Working Papers n. 52, 2007. The value of the index for Italy is taken from Piraino P., “Comparable estimates of intergenerational income mobility in Italy”, Quaderno dell’Università di Siena, Dipartimento di Economia Politica n. 471, January 2006. The micro data used as the basis for calculating the index were taken from surveys conducted by the Bank of Italy about the wealth of Italian households. The data related to the income of fathers are from 1977, and those related to the children’s’ income are from 2002.

6

Assuming perfect competition, the α parameter is also equal to the share of labour to total GDP; for this analysis, the parameter has been kept constant and is equal to the historical average for the past 15 years.

Ministero dell’Economia e delle Finanze

109

2008-2011 Economic and Financial Planning Document

     Starting from the previous equation, it is possible to come up with a formula that attributes the change in GDP to the variables in the right-hand side of the equation. For example, the contribution of capital deepening (i.e. increase of intensity of the capital factor) is shown by the formula within the first parenthesis.

     The graph below shows a breakdown of GDP growth for the 2001-2005 period, as well as for the two preceding five-year periods. In order to provide an additional time perspective, the breakdown for 2006 has been included as well. The descriptive approach used does not capture the causality relationships between the variables; quite the opposite, in interpreting the evidence, it should be noted that some of the growth components can move in different directions because there are trade-offs between them, at least in the short run.

     The 2001-2005 period stands out for the significant decrease in GDP growth, to be attributed almost exclusively to a decrease in labour productivity. In growth-accounting terms, the latter decrease stems from a change (which is actually negative) in total factor productivity. The latter aims to measure a set of aspects such as technological advancement, the organisation of the factors of the productive process, market regulation, and so forth. The contribution of employment is favourable. The contribution of the participation rate remains positive, even though it does not look that impressive when compared with the 1996-2000 period. In addition, the contribution of the reduction of the unemployment rate dramatically improves, reversing the trend of the early nineties. The contribution of the working age population returns to being slightly positive; a more detailed breakdown thereof shows that this is due to the intensification of the flow of immigrants to Italy. Finally, the contribution in relation to the number of hours worked is clearly negative and getting worse.

Ministero dell’Economia e delle Finanze

110

2008-2011 Economic and Financial Planning Document

     Several summary conclusions can be drawn from the review of the evidence presented above. First, the decreases in total factor productivity and in the number of hours worked are, in part, a reflection of the favourable trend of the labour market The stepped-up use of certain types of contracts (i.e. contracts for part-time employment, and to a lesser extent, for temporary workers) has led to a reduction in the number of hours worked per capita. Given its greater flexibility as a result of the use of new types of contracts, the labour market has been able to accommodate the hiring of a significant number of people, thereby favouring a dramatic decline in the unemployment rate. At the same time, however, businesses have often recruited new workers for positions involving limited professional skills. In addition, the productivity of the ‘marginal worker’ generally tends to be lower than that of the ‘average worker’. This also contributes to explaining the decrease in total factor productivity.

     Several questions that remain open can be clarified, at least partially, by referring to various recent studies. The first question regards whether or not the setbacks in terms of total factor productivity can mostly be attributed to unfavourable sector trends. More detailed sector analyses⁷ (at the industry level) show that, with very few exceptions, the decrease in productivity affected all sectors of the Italian economy. Furthermore, a changing mix of employment, with jobs being shifted out of high productivity sectors to less productive sectors (typically the shifting of jobs from manufacturing to services) had a very limited impact.

     The contribution of capital to growth remained fairly stable during the 2001-2005 period, in comparison with the preceding five years, though it was significantly lower than in the early nineties. The lower cost of using the labour factor merely caused the accumulation process to slow down, even though the relative intensity of capital with respect to labour kept increasing. The higher return on capital—mostly in the service sector—explains why the flow of investments was not interrupted despite the economic stagnation and the greater convenience of the labour factor⁸. On the other hand, the positive contribution of both employment and capital deepening was matched by an abrupt decline in total factor productivity. Other countries (including European nations) have managed to achieve increases in employment and increases in productivity simultaneously. In this regard, authoritative analyses have shown how the problem in Italy is due to structural deficiencies that have afflicted the country’s economy for years⁹.

     This argument needs to be toned down, at least partially. The lower productivity growth can be partly considered a ‘side effect’ of labour market reforms. In addition, regularisation of illegal workers (such as Law 189 of 2002, the so-called Bossi-Fini Law, that concerned immigrants) may have contributed to increasing employment figures (for jobs that had previously not been counted), thus depressing productivity growth-assuming that ISTAT (Italian National Statistical Office) is adequately able to measure the

7	See, for example, Daveri, Jona-Lasinio (2005) “Italy’s decline: getting the facts right” II Giornale degli Economisti e Annali di Economia.
8	Torrini (2005) “Quota dei profitti e redditivita del capitale in Italy: un tentativo di interpretazione”, Temi di Discussione, Bank of Italy, documents this evidence.
9	See, for example: Faini, Gagliarducci (2005) “Competitivita e declino dell’economia italiana: un’anatomia del declino”, Astrid and the recent OECD Economic Survey: Italy (2005, 2007) and OECD Going for Growth (2005) and (2006), European Commission (2006), The EU Economy, 2006 Review.

Ministero dell’Economia e delle Finanze

111

2008-2011 Economic and Financial Planning Document

‘underground economy’. Indeed, a significant correlation has been seen between the increase in employment and the deceleration of productivity since 1997.

     A final note regards the data for 2006. It would obviously be incorrect to draw conclusions about trends in relation to a single year only, and one that ended on a positive note. The breakdown shown in the graph is thus given only for the purpose of hinting at what the future trends might be. In 2006, the decline in total factor productivity was interrupted; this should pave the way for a gradual rebound of the growth rates for the next few years. Such an outcome would mean a change in the framework represented by the 2001-2005 five-year period.

     Accordingly, as of 2007, the decrease in the number of hours worked should come to an end, partly as a result of the Government’s policies and also considering that the increases in atypical employment will not be of the magnitude seen in recent years. The effects of legalising immigrants will also fade away. This means the positive contribution of the change in employment to growth should be slightly smaller. The decrease in the unemployment rate is likely to be less pronounced, while it is reasonable to expect a more significant increase in the work force participation rate also as a result of the policies put into place by the Government. Capital deepening should, on the other hand, continue to provide a slightly positive contribution. The contribution to growth of total factor productivity is computed in growth accounting as a residual with respect to the performance of the other variables (including GDP). In reality, however, there are economic conditions that determine such a pattern. The strategies for economic policy outlined in the Economic and Financial Planning Document (DPEF) and illustrated in greater detail in the National Reforms Plan should, if effectively implemented, allow for a gradual increase in total factor productivity, and in general, the country’s potential growth.

     The exercise above is based on national accounting data, and thus provides indications that are sufficiently reliable. Still, there is an evident limit inasmuch as the level of sector detail is not adequate for carrying out microeconomic analyses about productivity trends. This limit generally becomes even more stringent in the event of international comparisons since the data in this regard — even when they are available — are rarely uniform or reliable.

     With the Lisbon Process aimed at improving the economic performance of the EU through structural reforms, high quality data are essential for monitoring the performance of key aggregates and evaluating the outcome of reforms. In addressing these needs, the European Commission sponsored a project to construct a database (known as EU KLEMS) that involved the input of various research institutes. The version of the database published in March 2007 is actually very detailed in terms of its breakdown of sectors (up to 60) and it covers almost 30 nations.

     At any rate, it should be noted that the data available are through 2004 only, and that the quality thereof is still being examined by the national statistics institutes. A version that is more up to date (with data through 2006), and more importantly, more reliable, is expected to be released during December 2007. The database will likely get its final validation and be made even more reliable in the future via the direct involvement of Eurostat.

Ministero dell’Economia e delle Finanze

112

2008-2011 Economic and Financial Planning Document

IX.3 ITALIAN HOUSEHOLDS’ FINANCIAL WEALTH

     According to the recent estimates published by ISTAT (Italian National Statistical Office) about Italian households’ disposable income, the propensity to consume in 2006 was 1.3 percentage points higher than 2005, with a consequent reversal of the decreasing trend of the previous five-year period.

     It should be noted that the figure for 2006 is not yet considered definitive given revisions being made to income statistics.

     In any event, the apparent turnaround in 2006 can be a starting point to try to explain the contraction in the propensity to consume during the 2001-2005 period. The dynamics of income and wealth can be numbered among the medium-term factors.

     The moderate growth of disposable income seen in the past five years was matched by stagnation in the growth of labour productivity and the economic system as a whole: within a ‘life-cycle income’ framework, this could have limited the growth of ‘permanent income’.

     The fact that households witnessed a decrease in their financial wealth after 2000 (also in relation to disposable income) may have been another factor responsible for depressing the propensity to consume. In other words, individuals may have opted to defer spending so as to rebuild the real value of their financial assets after having sustained huge capital losses. Despite the sharp rebound of stock prices in recent years, the value of net wealth has never climbed back to the pre-2000 level for two reasons.

     The first has to do with the fact that Italian households shifted a significant amount of their assets into liquid and short-term instruments. During the 2000-2006 period, the change in the mix of household financial assets benefited the more traditional instruments¹⁰: liquid assets as a percentage of the portfolio rose by almost 2 percentage points, while investments in securities were 2.5 points higher and the portion of the portfolio invested in insurance products rose by more than 6 percentage points. At the same time, the holdings in mutual funds decreased by 8 points, and the holdings in equities fell by more than 2 points. Today, the average portfolio for an Italian household is once again similar to that in the early nineties, with one important difference: back then, the portfolio was concentrated in government securities, whereas today it is more diversified.

     One can appreciate the peculiar nature of the re-allocation of assets by comparing what happened in the largest European countries. Portfolios for households in Germany, Spain, France and Italy were examined for the December 2003-September 2006 period in order to evaluate the way in which they were re-configured during the recovery of the equity markets. The comparison shows that the reconfiguration of portfolios had very different effects in the four countries, even though there were some similarities.

     In Italy and Germany, there was a general propensity for limited-risk investments. The weight of equities rose in both cases by a few percentage points, a figure well below the percentage gains in share prices. Among the four countries, Italy had the biggest

¹⁰ In addition to the marketing policies of banks and insurance companies, various financial scandals (e.g. Cirio and Parmalat) and the Argentine bond ordeal soured many Italians on the prospect of financial investments and/or higher risk securities. As a result, many households put their money into liquid assets or real estate.

Ministero dell’Economia e delle Finanze

113

2008-2011 Economic and Financial Planning Document

reduction in the weight of the mutual fund component. In Spain and France, the recovery of the equity component was instead more pronounced. In France, assets were shifted out of liquid instruments and into medium- and long-term instruments, mainly due to the widespread use of equity savings plans. The percentage of the portfolio held in liquid assets decreased by 3,3 points in France and around 2 points in Spain.

     The different mix of financial assets within the household portfolios for the various countries had an impact on the growth of the portfolios during the most recent three-year period: in Spain and France, the stock of financial wealth grew by rates of between 25 and 30 per cent, mainly due to the higher holdings of equities at the time of the market’s revaluation, while in Germany and Italy, the growth was around 15 per cent.

     The second reason for the limited growth of the net financial wealth of Italian households is related to the sharp expansion of consumer debt. Given the reduction of interest rates (6 points between 1997 and 2006), and the resulting changes in the credit market and in issuing policies of credit products, the debt of Italian households grew by an average annual rate of 13.4 per cent between 1985 and 2005, or by 9.3 per cent per year in real terms. Consumer debt amounted to 38.2 per cent of GDP at the end of 2005, compared with 11.9 per cent at the end of 1985. Measured against disposable income, consumer debt went from a very low 20 per cent during the eighties to more than 50 per cent in 2005.

     During the most recent four-year period, the trend has significantly accelerated as a result of the growth of the medium-/long-term debt outstanding under residential mortgage loans made available by banks and other lenders.

     If compared with the other countries in Europe, the ratio of consumer debt to disposable income in Italy is still quite low: 43 per cent in 2005 versus 66 per cent and 100 per cent, respectively, for France and Germany. On the other hand, the ratio between financial assets and financial liabilities for Italy is almost double the average for France and Germany, and is showing a decreasing trend versus a stable average for France and Germany.

     In recent months, too, the growth of household indebtedness has been very strong, spurred by financing conditions that are still favourable and by improvement in consumer confidence. The rate of growth of residential mortgage loans has tended to ease, though it is still robust¹¹ and keeping pace with the rate of growth of consumer credit, which is still a very small part of total household debt (12 per cent versus 59 per cent for mortgages). Even though the expansion of consumer credit is marginal compared to the mortgage market, it may still have represented a stimulus to the growth of the market for consumer durable goods, which represent an increasing portion of total expenditures.

     The reduction of interest rates, on the one hand, and capital losses on the wealth invested in equities, on the other hand, have thus facilitated the allocation of savings to real property assets — first and foremost, to housing — and this may have had the effect of crowding out consumption. Unfortunately, data about the real wealth of Italian

¹¹ In March 2007 the respective year-on-year rates stood at 10.6 per cent and 11.6 per cent.

Ministero dell’Economia e delle Finanze

114

2008-2011 Economic and Financial Planning Document

households are not available. Although with some caution (due to imprecision)¹², the residential housing stock (which contains properties owned not only by families, but also, for example, properties owned by the public sector and insurance companies) used as a proxy of property assets would suggest that the stock of real wealth has grown, even though at rates that are not as high as anecdotal evidence might suggest.

     In summary, the stagnation of the economy’s productivity (which also encompasses expectations about the growth of future income), in reducing the life-cycle income, seems to have prompted households to act cautiously. Such caution seems to have been increased by uncertainties about the financial markets (and about the equity markets in particular), and reflected in consumer confidence in Italy. This probably caused a more defensive posture, including via the allocation of savings to liquid (low-risk, low-return) instruments and to the property market. While this may have made it possible to defend the real value of financial wealth and to increase the value of property assets, it nonetheless precluded the possibility of benefiting from the rebound of share prices (which, instead, was not the case in France or Spain) and it limited the possibilities for consumer spending (given the need to pay down the debt contracted).

¹² According to data compiled by the Bank of Italy on Household Income and Wealth, total household wealth (financial and real assets) is around nine times the disposable income, whereas with the available data, the wealth figure would be equal to only about six times.

Ministero dell’Economia e delle Finanze

115

2008-2011 Economic and Financial Planning Document

IX.4 TREND OF THE PROPERTY MARKET IN ITALY

     In general, the real estate market around the world has enjoyed exceptional growth since the nineties. The only two major countries not participating in the recent property boom are Germany and Japan, both of which faced a serious real estate crisis during the nineties.

     The key attributes of the building cycle in recent years can be summarized as follows:

1.	Growth of demand for housing triggered by the fall of interest rates;
2.	Growth of investments in construction, spurred by the higher returns linked to high prices;
3.	Indirect effects of the building boom;
4.	Wealth effects in general. The increased value of housing has positively influenced the level of consumption.

     The aforementioned attributes have been seen in general in all of the economies involved, albeit in varying intensity. The enthusiasm about the sector has generated a heated debate about the possibility of a hidden bubble about to burst that could have adverse consequences on the economic system. Although there is no consensus about the existence of a bubble, the focus on the question has intensified during the past year as a result of the slump in various market indicators in the United States. More recently, signs of a downturn in the property market have also begun to emerge in the countries of Continental Europe. In Spain, Europe’s highest-growth property market by far, various indications of the market settling have caused conspicuous corrections in the share prices of property companies.

     In Italy, the real estate market constitutes traditionally one of the most difficult markets to analyze, especially because the market data are less detailed and not as accessible as they are in the Anglo-Saxon markets. There are big gaps in the data for two types of variables: short-term business indicators (for example, housing starts, building permits, and property sales) and housing prices. In many countries, such data are published monthly. However, the available data make it possible for getting an overview of market conditions. ISTAT (Italian National Statistical Office), for example, gathers and reports information about the activity of construction firms; the Italian Institute for Studies and Economic Analyses (ISAE) surveys of firms in the sector provide feedback about confidence and make it possible to come up with a sector overview at a qualitative level; finally, the Bank of Italy supplies information about the trend of loans made to households for the purchase of housing. Analyzing all of these data, it is possible to try to quantify the real estate boom in Italy.

     The first element is the relationship between highly expansionary monetary conditions of recent years and the propensity of households to incur debt in order to purchase a home. From this standpoint, it should be noted that the effect of structural change in the availability of credit to families has been more pronounced in Italy than anywhere else.

Ministero dell’Economia e delle Finanze

116

2008-2011 Economic and Financial Planning Document

     Indeed, for a long time, Italy had high interest rates that adversely affected the growth of the mortgage loan market¹³. Thus, with Italy’s entry in the Euro Area, it was very clear that Italian market for mortgages would do nothing but expand. Thereafter, exceptionally low interest rates generated a steady increase in the propensity to incur debt, and even though the debt stock of Italian households is still very low (given an extremely low starting point), the magnitude of disbursements each quarter has been constantly rising over the past decade. According to the Bank of Italy’s data, the financing (other than short-term financing) for the purchase of real estate by households amounted to around €16 billion per quarter during the second half of 2006. This is a key indicator, because in equalling more than 4 per cent of GDP, it compares with a value of just over 1 per cent of GDP at the start of 1998. The home mortgage boom has also removed the liquidity limitation that prevented many families from buying a home. This has contributed to raising the percentage of families living in a home which they own (which was already high at the end of the nineties) to more than 80 per cent today.

     Flooding the property market with additional resources (such as what occurred with the mortgage loan boom) could do nothing but prop up housing prices, thereby boosting the profitability of firms active in the sector. As in the case of what happened in other countries, the higher expected earnings fuelled the sector’s investment. An estimate of the intensity of the increase in economic activity can be obtained from the simple representation of the level of residential investment at constant prices. As shown by the graph below, Italy has never been as active in the construction market as it has been in recent years. For example, the cycle in the second half of the eighties palls in comparison with the trend of recent years.

¹³ Even though the real cost of debt is theoretically the most important variable for anyone borrowing money, the availability of credit is linked to the trend of nominal interests. With real rates being equal, it is possible that a higher nominal rate implies non-availability of credit if this makes consumers face liquidity limitations.

Ministero dell’Economia e delle Finanze

117

2008-2011 Economic and Financial Planning Document

     Between 2001 and 2006, the total investments in construction generated a contribution to GDP growth equal to 1.7 percentage points. The demand-driven effects (e.g. effects on consumption from the increase in employment) then need to be added. Considering that the cumulative growth of Italy’s GDP during the period was 7.6 per cent, it is easy to see how building provided important support to the economy during a weak phase in the cycle. As shown by employment data, building activity alone accounted for an increase of roughly 350,000 jobs. Considering that activity in the construction sector influences employment throughout the manufacturing sector (e.g. the non-metalliferous minerals processing industry and the wood processing industry) and the services sector (banks, real estate agents, design studios), it is easy to see how important the property boom has been with regard to employment overall.

     While Italian households modified their behaviour during the real estate boom, acting more like their Anglo-Saxon counterparts in relation to their propensity to borrow via a mortgage in order to finance the purchase of their homes, the same cannot be said with regard to the use of mortgages to borrow against the incremental value of the properties for financing consumer purchases (home-equity withdrawal), but this is probably more related to supply-side factors than to demand. The effect of the real estate boom on consumer spending has thus been restricted to the direct impact via the growth of the sector.

     The borrowing through mortgages in recent years has left Italian households with a higher debt stock. While the numbers are not exceptional (just under 45 per cent of disposable income, which compares with around 135 per cent in the United States), they are nonetheless to be weighted by taking into account the fact that Italy is a country with low private income, but with a high public debt. Thus, it cannot be presumed that the sensitivity of household budgets to changes in interest rates is much lower than in other countries, even through the transmission mechanism is evidently different.

Ministero dell’Economia e delle Finanze

118

2008-2011 Economic and Financial Planning Document

     It is naturally difficult to establish in Italy’s case — as in the case of other countries — if there really has been a ‘property bubble’. In any event, the sector in Italy has also witnessed significant growth of housing prices and of residential investments, led by the expansion of homeowner loans funded by the banking system. Accordingly, the recent growth of interest rates and the prospects for higher rates justify the apprehensions about the staying power of the construction sector. The impact of higher interest rates on the sector’s activity could also turn out to be significant The fact remains, however, that Italy has little exposure to two other risks. First of all, the link between housing prices and consumption is much weaker than in other countries. Secondly, the stock of household debt is much lower, and this minimizes the fears of insolvencies that might condition the future behaviour of banks.

IX.5 NON-FINANCIAL FIRMS: BALANCE SHEET ACCOUNTS AND SOURCES OF FINANCING

     The weight of the public sector within the Italian economy has fallen significantly since the start of the nineties as a result of both the reduction of direct and indirect subsidies to private-sector firms and the privatization of public financial and non-financial companies. At the same time, significant changes to the regulation of the financial services sector occurred, with the objective of promoting the use of stock and bond markets by both firms and investors. Finally, the introduction of the euro led to a decrease in real interest rates that may have favoured long-term borrowing by companies, and a wider market for bond and stock placements, particularly for large companies.

     It is thus interesting to analyze the change in the mix of the liability and equity accounts of Italian firms, and their sources of financing during this period of important changes. There is much literature dedicated to the analysis of the determinants of the corporate balance-sheet structure, and how that structure may influence a number of real variables and, in particular, the level and nature of corporate investments. While such literature is not conclusive about the optimal mix of financial instruments (debt and risk capital) for companies in advanced economies, the study of the mix of the liability and equity accounts allows some inferences about the extent to which the productive system relies on bank credit and the propensity of businesses to tap financing via stocks or bonds. The latter implies more in-depth monitoring of corporate governance by the markets.

     In comparison with the mid-nineties, Italian firms have dramatically restructured the right side of their balance sheet. The weight of shares has increased substantially, while a slight expansion of the weight of bonds has also occurred. The growth of the weight of publicly traded equities is also partially the result of the privatization programme. In the face of such increases, the weight of loans — particularly short-term loans — has declined significantly. As a result, debt/equity ratios have fallen substantially. Italian firms have also leaned towards lengthening the maturities of their debt, as shown by the reduction in the percentage of short-term debt to the total.

Ministero dell’Economia e delle Finanze

119

2008-2011 Economic and Financial Planning Document

TABLE IX.1: NON-FINANCIAL FIRMS IN ITALY — BALANCE-SHEET COMPOSITION, 1995, 2000, 2006 (end-of-period stocks, in %)

% of each component to the total	1995		2000		2006
Bonds		1.4		1.1		2.4
Loans		40.3		29.0		31.5
Shares and equity investments		35.9		54.6		50.1
of which: publicly traded equities		8.9		22.9		15.2
Other liabilities		22.4		15.3		16.0
TOTAL		100.0		100.0		100.0
Other balance-sheet indicators
Debt/equity ratio		116.2		55.1		67.8
Short term over medium to long term debt		137.2		131.0		79.1

Source: Our calculation on the basis of Bank of Italy, Financial accounts.

     In an international comparison, following the changes occurring in recent years, the liability-equity structure of Italian firms looks similar to the average for the Euro Area. In Germany and Italy, in particular, the weight of bank borrowing is still significant, whereas in France, the weight of shares and bonds is more pronounced. Outside of the Euro Area, the United Kingdom shows a predominant weight for shares, even though this has decreased compared to the mid-nineties. Finally, the short-term debt as a ratio of medium- to long-term debt is higher in Italy than on average in the Euro Area, though Italy’s ratio is in line with that observed in the United Kingdom¹⁴.

TABLE IX.2: COMPOSITION OF CORPORATE LIABILITIES, 2005 (end-of periods stocks, in %)

	Bonds		Loans		Shares		Other		Total
Italy		2.4		31.2		49.5		16.9		100.0
Euro Area1		4.2		30.5		50.7		14.7		100.0
Germany		2.9		34.7		47.4		15.0		100.0
France		5.8		19.8		62.4		11.9		100.0
United Kingdom		10.4		28.9		56.0		4.6		100.0

1) 2004.

Source: Bank of Italy, Annual Report, 2007.

     However, banks still represent an important source of financing for Italian firms. Even though the stock of loans has fallen in relation to total liabilities, the percentage of loans to total flows has shown a positive trend over the past 12 years. The percentage of equity financing was instead stable until 2001; thereafter, such percentage decreased in line with the decline in share prices, and then started to increase again in the 2005-2006 period.

¹⁴ According to EUROSTAT data, short-term debt as a ratio of medium-to-long-term debt was just under 80 per cent in Italy and United Kingdom in 2005, and less than 50 per cent in the Euro Area. In particular, in Germany, the ratio was equal to 35 per cent, while in France, it was slightly higher than the average for the Area (53 per cent).

Ministero dell’Economia e delle Finanze

120

2008-2011 Economic and Financial Planning Document

     Finally, alternative sources of financing such as venture capital are still not very important in Italy as in the rest of the Euro Area. Venture-capital investment experienced rather rapid growth in Europe during the late nineties, but then substantially decreased following the economic slowdown. In 2005, the level of venture-capital investment was still low, particularly in Italy and Germany, whereas France had the highest level of such investment than elsewhere. Outside of the Euro Area, venture-capital investments amounted to just under 0.4 per cent of GDP in the UK in 2005, close to the 2000 peak.

Ministero dell’Economia e delle Finanze

121

2008-2011 Economic and Financial Planning Document

     In conclusion, the financial structure of Italian firms is today much different than it was in the mid-nineties and it looks similar to that for the Euro Area, and for Germany, in particular. Still, the percentage of shares to total financial liabilities and equity is still significantly lower than in France and the UK, Furthermore, loans still represented the largest share of corporate financing in Italy during the first half of the present decade, probably helped by low interest rates. Finally, venture capital still accounts for only a marginal percentage of corporate financing in Italy, as it is the case in most of the other Euro Area countries. This may be interpreted both as a cause and a symptom of the limited propensity towards innovation that characterises the Italian productive system.

IX.6 QUALITATIVE UPGRADING OF ITALIAN EXPORTS IN TRADITIONAL SECTORS

     The gradual contraction of Italy’s share of the international export markets over the past 10 years has mainly affected those sectors in which Italy is mostly specialized, especially the traditional Made-in-Italy sectors in which competition from emerging economies has been particularly intense. During the last five years, the decline in market share has speeded up in terms of volumes. Recently, Italy’s share with respect to some important and representative sectors has fallen further. In textiles and footwear, the figures dropped, respectively, from 7.5 per cent and 13.1 per cent in 2005 to 7.1 per cent and 12.1 per cent in 2006, whilst market-share losses have been more limited for apparel. Even in sectors where global demand has been very dynamic (e.g. machinery and equipment and tooling), Italy’s loss of market share has been significant.

     On the other hand, market share in value terms has remained relatively stable in the face of a significant increase in the prices (average unit values or AUV) of exports. Overall, the growth of the AUV for Italian exports has been considerably stronger than in other leading EU countries. In general, the AUVs have increased the most in areas in which Italy has the greatest level of specialization, and it is also in these areas in which the quantities exported have contracted the most, including exports to other leading European partners. Only France seems to show a clearly comparable trend.

Ministero dell’Economia e delle Finanze

122

2008-2011 Economic and Financial Planning Document

     With reference to the debate described below, it is still widely believed that Italy’s current situation can be attributed to the use of the ‘wrong’ productive specialization model. According to this view, the model is too strongly oriented toward traditional non-specialised, labour-intensive sectors in which the size of the average firm is typically smaller relatively to that seen in main competitor countries, with there being thus little incentive for innovation.

     A less pessimistic interpretation comes from recent empirical studies on Italy’s trade patterns,¹⁵ according to which the increase in AUV may not reflect the loss of competitiveness of Italian products in the international markets, but rather the result of strategic decisions made by Italian firms in order to tackle competition from emerging markets. According to this view, Italian firms are reacting to market-share erosion by: (i) transferring offshore the low added-value phases of production, in line with increasing globalisation of productive processes or abandoning lower quality products; and (ii) vertically differentiating the goods produced via qualitative upgrading.

¹⁵ See the Masi Foundation’s forthcoming publication: “L’export italiano alla sfida della qualità”.

Ministero dell’Economia e delle Finanze

123

2008-2011 Economic and Financial Planning Document

     This strategy would allow Italian firms to ensure their market power while dealing with the competition from emerging markets.

     With the transformation under way, Italian exports should again be able to satisfy a greater share of global demand and Italian industry should thus be able to defend its share of world trade more successfully. In this context, the good export performance seen since early 2006, including in traditional sectors, could represent a favourable signal.

     From a theoretical perspective, while economies of scale and horizontal differentiation explain the occurrence of intra-industry trade,¹⁶ with specific factors of production and vertical product differentiation, the increased competition can force firms in advanced economies to upgrade quality¹⁷. More specifically, a country’s productive specialization does not only relate to the quantity and variety of the goods produced. In other words, some countries tend to specialize in high-quality sectors, while others produce (and export) lower quality goods.¹⁸ There is a broad, albeit controversial,¹⁹ range

16	Helpman E. and Krugman P., 1985, “Market structure and foreign trade”, MIT Press.
17	Petrucci A. and Quintieri B., 2001, “Will Italy survive globalisation — A specific factor model with vertical product differentiation”, in “Fragmentation — New product patterns in the world economy” compiled by Arndt S.W. and Kierzkowski H., Oxford University Press.
18	Hallak J., 2005, “Product quality and the direction of trade”, Journal of International Economics 68(1). Hummels D. and Klenow P., 2005, “The variety and quality of a nation’s exports”, American Economic Review, 95. Schott P., 2004, “Across-product versus within-product specialization in international trade, Quarterly Journal of Economics, 119(2).
19	Typically, in absence of information about the quality of traded goods, the empirical literature proxies quality with price indicators. The use of average unit values, i.e. ratios between values and quantities exported, adds another critical element since they reflect both the prices of exports and the mix of goods exported in a sector over a given period of time.

Ministero dell’Economia e delle Finanze

124

2008-2011 Economic and Financial Planning Document

of empirical literature about measuring the quality of goods, in particular, goods traded internationally.²⁰

     Starting from the data in relation to the prices of exported products, the analysis below attempts to quantify a potential qualitative restructuring of Italian exports in traditional sectors (and in particular in the various sectors of the fashion business — textiles, apparel and footwear) on the basis of two indicators (absolute and relative qualitative change). The same exercise will then be carried out for three European competitors (Germany, France and Spain).²¹ According to Borin and Quintieri²², the absolute qualitative change is measured by breaking down, at time (t), the aggregate price-quantity index (PQ_t) into the sum of three effects, ‘internal effect’ (DP^t) ‘composition effect’ (DC^t) and ‘combined effect’ (DCB^t):

     While the first effect captures the AUV change within the various outputs (in other words, it captures the general trend of prices of a country’s exports without taking into account productive specialization), the second effect takes into account the productive specialization and is positive if the country exports a higher percentage of products having an average unit value that is above the international average. The third effect, finally, identifies possible shifts towards outputs when AUV increases above (or below) the sector average.

     The relative qualitative change is instead measured by the price-quality difference index (GPQⁱ) that quantifies, at time (t), the difference in terms of price and quality between exports of country (i) and those of a reference market²³, and it is the sum of an ‘internal difference effect’ (GPⁱ), ‘composition difference effect’ (GCⁱ) and ‘combined difference effect’ (GCBⁱ)

     If the first indicator is positive, it shows that the country exports goods whose AUV is higher than that of the reference market. The difference in composition is instead representative of the type of country’s specialization in a given sector (degree of specialization in goods with higher AUV). A positive value of the combined difference

20	See Borin A. and Lamieri M., 2007, “Misurare la qualita dei beni del commercio internazionale”, in the Masi Foundation’s “L’export italiano alla sfida della qualità, for a detailed review of the issue.
21	For more comprehensive information about all Made-in-Italy sectors, including food products, furniture, crystal and china, and jewellery, see the Masi Foundation’s forthcoming publication, “L’export italiano alla sfida della qualità.
22	Borin A. and Quintieri B., 2006, “Prezzi più alti o qualità migliore? II caso delle exports italiane di calzature”, in ‘Rapporto ICE 2005-2006 L’Italy nell’economia Internazionale’. The authors introduce a methodology based on Aw B. and Roberts M., 1986, “Measuring quality change in quota constrained import markets: The case of U.S. footwear”, Journal of International Economics, 21 and Menzler-Hokkanen I. and Langhammer R., 1994, “Product and country substitution in imports”, Weltwirtschaftliches Archiv, 130(2).
23	The index is computed as the percentage difference between the previous price-quality indicator calculated for a country, and that for a market of reference, e.g. the world.

Ministero dell’Economia e delle Finanze

125

2008-2011 economic and financial planning document

effect is instead suggestive of country’s specialization in outputs whose export AUV is higher than that of competitors.

     The results of the analysis earned out on EUROSTAT data over the 1998-2005 period are shown in Charts 3-6.²⁴

     In the case of Italy and at an aggregate level, the absolute price-quality index for the textile-apparel sector (not reported here) has remained roughly stable, though fluctuating somewhat over time.²⁵ This is the result of the diverging trends of the two sectors.

     In the apparel sector, the overall indicator rises gradually from 1998 to 2005, at a growth rate close to 4 per cent in annual terms. In the footwear sector, the trend of the indicator is particularly pronounced.

     As to the various components, it is noted that the internal effect is dominant in explaining the trend of AUVs in both the textile-apparel and footwear sectors.

24	The analysis confirms, on the basis of the most recent data, the results contained in the various reports included in the Masi Foundation’s publication “L’export italiano alla sfida della qualità”, widening, however, the investigation to France, Germany and Spain.
25	The price-quality indicator seems to accelerate as of 2005, in parallel with the elimination of trade barriers due to ‘Accordo Multifibre’. Provisional 2006 data seem to confirm this trend.

ministero dell’economia e delle finanze

126

2008-2011 economic and financial planning document

     With reference to the first sector, the analysis was carried out by looking separately at the upstream and downstream developments of the production chain. In general, it was found that the export prices of textiles increased to a much lesser extent than those of apparel products. This can be explained by the fact that the textile sector is relatively more capital intensive, and it is thus better able to contain unit production costs. For apparel, the increase in the absolute qualitative change indicator seems to be mostly explained by the internal effect, in line with the aggregate result, while the two other effects have opposite signs and tend to offset one another²⁶. The composition effect, in particular, could suggest the occurrence of a change towards goods with AVU higher than the sector average.

     In the case of footwear, both the composition and the combined effects are negative over almost the entire observed period, with the result that the internal effect indicator exceeds the total effect. Accordingly, the qualitative upgrading, if any, would be in this case within the various outputs, without having caused a change in the type of goods exported²⁷. On the other hand, it should be noted that Italian footwear exports are already concentrated in products with high AUV, and thus the margins for further qualitative upgrading are limited.

     The chart below reports Italy’s relative quality indices vis-à-vis EU imports from the world.

26

Armenise et al. observe that Italian firms show different behaviors in the European and non-European markets, respectively, with the prevalence, in the former, of higher initial export prices. This is likely to reflect, in the foreign market, greater concentration of high quality merchandises. Armenise M., Giovanetti G. e Luchetti F., “Strategie di prezzo e qualità nelle esportazioni italiane: il settore tessile-abbigliamento”, in the Masi Foundation’s “L’export italiano alla sfida della qualita”.

27

See Borin A. and Qiuintieri B, “Prezzi più alti o qualità migliore? Le esportazioni italiane di calzature”, which is part of the Masi Foundation’s forthcoming publication “L’export italiano alla sfida della quaiità”.

ministero dell’economia e delle finanze

127

2008-2011 Economic and Financial Planning Document

     The differential is positive for all sectors analysed and more pronounced in the most recent five-year period. As to various components, the internal difference effect dominates, thus implying that the AVUs of Italian exports are systematically higher than those of the main competitors in the international markets. The negative value observed in the combined difference indicator could infer losses of market share in those sectors where the trend of export prices has been more dynamic than competitors’, or, with market share being held constant, a process of gradual convergence of international prices vis-à-vis those set by Italian exporters.

     The international comparison with France, Germany and Spain shows that the process of qualitative upgrading in the sectors analyzed has mainly occurred in Italy, though traces of repositioning towards goods vertically differentiated upward can also be seen in the case of France, and, even more so, in the case of Spain, in the footwear sector.

     In conclusion, the trend of the prices of Italian exports in the past decade is not necessarily an indication of the inability to hold down production costs, including due to Italy’s productive specialization in traditional, non-capital intensive sectors with a high degree of unskilled labour intensity. Recent empirical literature suggests an additional explanation. Some Italian firms are gradually repositioning their production towards goods with a higher average unit value. This would allow them to gain market power through a strategy of quality upgrading. The analysis presented above provides some indications — albeit limited — that are consistent with this hypothesis. As to Italian main

Ministero dell’Economia e delle Finanze

128

2008-2011 economic and financial planning document

competitors in Europe, the differential in export prices (especially, in apparel) would reflect Italy’s repositioning of its output towards products with AVU higher than the average, instead of reflecting Italian firms’ mere loss of competitiveness in the international markets. On the other hand, there is no clear evidence of quality upgrading in the footwear sector, due to the fact that the Italian footwear industry is already positioned in production with high average unit values.

ministero dell’economia e delle finanze

129

2008-2011 economic and financial planning document

IX.7 IMPACT OF DEREGULATION ON PRICES

     The reform process in Italy has resulted in major revisions to regulations, particularly in the services sector where additional initiatives were needed so that the previous deregulation efforts could wield their full effect. The Government’s action in this area is designed to go hand in hand with the progressive improvement of both economic growth indicators and price trends. In May, the national consumer price index computed by ISTAT (the Italian National Statistical Office) stood at 1.5 per cent, close to the lowest level on record since May 1999.

ministero dell’economia e delle finanze

130

2008-2011 economic and financial planning document

     At present, it is difficult to evaluate even the partial economic impact of the legislative measures already implemented, but in the limited cases in which it is possible to measure the price trends, the first results are encouraging.

     The deregulation of the sale of over-the-counter drugs yielded appreciable results straight away: more than 1,200 retailers announced the start-up of the activity, with immediate positive effects in terms of selling prices. Surveys suggest that the retail prices of many non-prescription drugs have fallen by an average of 25-30 per cent, with some dropping by as much as 40 per cent. Competition at the retail level has mainly intensified as a result of the sales by parapharmacies; as of 31 December, such shops accounted for 85 per cent of the retailers active in the market, with the remaining 15 per cent consisting of large retail chains.

     The data on the number of new bakeries opened since the abolition of the fixed-quota licensing system are also significant: according to the business registers with the Chambers of Commerce some 2,834 new bakeries opened between July 2006 and February 2007.

     Turning to regulated professions, various professionals have started to use direct advertising with respect to their potential customer base. With regard to the deregulation of pricing, fees for some services have descended below the previous regulatory rninimums, particularly for services related to public procurement. Consumers have also taken advantage of regulations eliminating an exclusive previously held by notaries for the authentication of signatures for changes in ownership of registered personal property, and this has yielded savings currently estimated at around €160 million per annum.

     In the market for third-party motor insurance, premiums grew sharply following the deregulation of pricing in 1994. With this type of insurance being mandatory for all drivers, insurance companies have been able to apply higher prices instead of becoming — more efficient and offering a wider range of products. The findings of an investigation conducted by the Antitrust Authority in 1999 showed that various major insurance companies had exchanged significant amounts of strategic data, thereby rigging competition in the market. Insurance premiums thus continued to climb at rates that outpaced both inflation and the average rate of premium increases in Europe: over the 10-year period from 1996 to 2005, the prices for insurance in Italy rose by 112 per cent compared with an average increase of 25 per cent for the Euro Area. Subsequent regulatory provisions attempted to introduce corrective measures aimed at reducing the number of accidents and lowering the overall cost of loss claims. This translated into improved performance in terms of the insurance companies’ management of the third-party motor insurance line, with a positive trend in underwriting results that was followed nonetheless merely by a lower rate of increase in premiums as from 2002 and no signs of a reduction.

     In order to pave the way for greater competition between insurers, the Government introduced regulations to eliminate exclusive ties in contractual relationships between companies and agents. As of 1 February 2007, a new system for the direct settlement of auto-liability loss claims went into effect and some feedback on the first few months of the operation of the new system is aleady available: between February and May 2007, some 658,877 loss claims were opened, with 53 per cent of the total already having been settled.

ministero dell’economia e delle finanze

131

2008-2011 economic and financial planning document

     The deregulation of the petrol-station network passed in 1998, and currently represents the second step of the Government’s policy aimed at opening up the market to competition. With the deregulation being implemented very gradually, and according to different schedules in the various regions, the benefits have been limited so far. The prices of oil products have repeatedly increased above the inflation rate, with the exception of the years of 1998, 2001,2002 and 2003 when the prices of crude oil sharply retreated. The Antitrust Authority has intervened various times with investigations aimed at eliminating behaviour to impede or prevent competition. The impact of the deregulation is expected to be more pronounced in the future as a result of the measures recently introduced by Government aimed at providing the public with more information about the sale prices set by the petrol stations.

     In the banking sector too, price increases over the past decade have been well above the European averages: between 1996 and 2005, prices rose by roughly 82 per cent in Italy versus an average of 37 per cent for the Euro Area. The legislation passed during the past year is designed to make it easier for individuals to change banks, and are thus aimed at eliminating obstacles to the actual workings of competition. A first step in this direction is the abolition of fees for the closing of accounts, a provision that has already had its initial effects on prices. In order to facilitate greater transparency, Law 248 also requires banks to provide at least 30 days’ advance notice to customers of any changes in the contractual conditions to the bank’s favour. Significant, immediate effects were also seen with respect to several measures implemented on 2 February 2007²⁸, including the elimination of penalties and portability for real estate mortgages and measures regarding the rescindability of insurance policies with a term of two or more years.

     The Government has also implemented reform measures to respond directly to the demands of the public presented to the various Government institutions and the Antitrust Authority. One example of such measures is the elimination of the recharge costs for prepaid telephone cards. Over the long term, this might allow for the rebalancing of demand toward more reasonably priced offers, potentially exerting an impact on competition in terms of the costs of the service.

IX.8 DEREGULATION IN 2007

Measures approved with the Decree-Law 7/2007, converted into Law 40/2007²⁹

MOBILE TELEPHONY

Credit recharging for mobile telephony services (Article 1, Paragraphs 1-2): Abolition of the cost of recharging prepaid telephone cards: the price paid must correspond to the telephone traffic acquired. The expiration of the telephone credit has also been abolished. Promotional offers must show all components of the actual cost of the telephone traffic in order to allow consumers to make a suitable comparison.

28	The measures were made definitively operative with the Conforming Bill No. 40.
29	“Urgent measures for consumer protection, the promotion of competition, the development of economic activity, the creation of new businesses, the enhancement of the value of technical/professional education, and the scrapping of auto vehicles.”

ministero dell’economia e delle finanze

132

2008-2011 economic and financial planning document

TELEPHONY, TV AND INTERNET

Transparency of, and freedom to recede from, contracts with telephone, television and Internet service providers (Article 1, Paragraph 3): The contracts coveting services provided by telephone companies, television networks and Internet service providers must include the possibility of the contracting party receding from the contract at any time., without expenses other than those justified by the service provider’s costs. It is not possible to set an advance-notice obligation of more than 30 days. The Communications Authority (AGCOM) has responsibility for overseeing the implementation of the provisions.

FUEL DISTRIBUTION

Fuel price transparency (Article 2, Paragraphs 1 and 3): Information about petrol-station fuel prices must be displayed on signs placed at the entry to the stations and along the roads and toll highways.

TRAVEL

Timely reporting of accidents (Article 2, Paragraphs 2-3): Information about certain limitations to traffic must be posted on signs at the entry to roads and toll highways and along the roads and toll highways, prior to the payment of the tolls.

AIRLINE TICKET PRICES

Airline fare transparency (Article 3): Airlines must indicate the actual price of the service, specifying all additional components, including taxes. Any promotional offers not in compliance with the new regulations will be deemed to be misleading advertising, with the application of penalties. Airlines must also indicate the number of seats available at the price indicated in the promotion and the period of validity of the offer.

PACKAGED FOODS

Expiration dates on food products (Article 4): The expiration dates or the minimum conservation time for food products must be plainly legible and printed indelibly on the package.

INSURANCE

Non-exclusive agents for property-casualty lines (Article 5, Paragraph 1): Insurance companies may not execute contracts with agents incorporating exclusive distribution clauses for property-casualty lines (including fire, theft and accident insurance). The new legislation thus extends to all property-casualty lines the non-exclusivity clause already provided by Law 248/2006 for auto-liability policies, which is to be fully implemented as from 2008.

Abolition of requirement for 10-year property-casualty policies (Article 5, Paragraph 4): Insurance companies may not offer longer term policies that include a requirement for a term of at least ten years, as currently contemplated by the Italian Civil Code. The party taking out the policy will have the possibility to cancel the contract every year, at no cost, thereby being able to take advantage of better conditions, if any, offered by other companies.

Abolition of unjustified downgrading of the bonus-malus class for auto-liability insurance (Article 5, Paragraphs 2, 4 bis, 4 ter and 4 quater): A consumer entering into a new car insurance contract (whether for purchasing a second vehicle or due to an interruption in insurance coverage) shall maintain his/her class of merit, as certified by the most recently certified risk, regardless of the time elapsing in the event of the interruption of coverage. In the event of a loss claim, the insurance company may not downgrade the

ministero dell’economia e delle finanze

133

2008-2011 economic and financial planning document

driver’s class of merit until the driver’s actual responsibility has been ascertained If that responsibility cannot be ascertained, then the responsibility for the accident will be split pro rata among the number of drivers involved.

Insurance companies must promptly advise drivers of any downgrading of the class of merit, in accordance with the principles of disclosure and transparency.

Comparison of auto-liability policies (Article 5, Paragraph 3): Consumers will be able to get up-to-date information about market rates. This responds to the need to “reduce the consumer’s information gap, thereby allowing the consumer to choose the product best corresponding to his/her preferences.” The Ministry of Economic Development will organize an online information service on its Internet site that will be based on data made available by the insurance regulator (ISVAP) so as to make it possible for consumers a comparison between the final prices of the different companies applicable to a person’s individual profile.

REAL ESTATE MORTGAGES

Extinction of mortgages (Article 13, Paragraphs 8 sexies -8 quaterdecies): Consumers having paid out their bank mortgages loans will not have to incur any new expenses in order to secure the cancellation of the mortgage and to regain full title to their property. The authentication of a notary is no longer needed in order to cancel the mortgage; it is now sufficient for the lending bank to advise the public records office within 30 days of the date on which the mortgage loan is repaid, and the public records office proceeds with the cancellation.

Prepayment of mortgage loans and prohibition against penalty clauses (Article 7): Consumers may request the full or partial prepayment of their mortgage loans without paying any penalties. Any clause to the contrary for mortgages executed after new regulations went into effect shall be considered void. With regard to mortgage loans outstanding, the Italian Banking Association and consumer associations signed an agreement on 2 May 2007 that is designed to remove the penalty clauses on mortgage loans taken out prior to 2 February 2007.

Mortgage portability; substitution (Article 8): Anyone who has contracted a mortgage loan can transfer the loan to a bank providing a new financing contract; the transfer can be made through a private contract and without losing the tax benefits contemplated for the first home.

BUSINESSES AND PROFESSIONS

Urgent measures for deregulation of certain business activities (Article 10): In order to start up activity as a hairdresser, beautician, cleaner, sanitation specialist, porter or driving school instructor, a statement of the start-up of activity will be sufficient, as the minimum-distance criteria and pre-established quotas have been eliminated Persons working as hairdressers, barbers and beauticians will still need to meet professional qualification requirements, if any, and ensure that their shop areas comply with urban, health and hygiene requirements. Shops are free to choose the day during the week on which they will close. Administrative and technical supervision of driving schools will continue to the responsibility of the provinces. Anyone wishing to work as a tour guide will need to meet the professional requirements established by regional laws, without any obligation for advance authorization. Persons working as tour guides no longer need to be residents and no quotas may be set in terms of their numbers.

ministero dell’economia e delle finanze

134

2008-2011 economic and financial pianning document

GAS MARKET

Measures for the gas market (Article 11): In order to increase trading of natural gas in the national market and to facilitate market access by small- and medium-sized companies, the Ministry of Economic Development will issue a decree defining the means with which the holders of exploration concessions will transfer to the regulated market the portions of their output due to the state. The Ministry’s decree will need to be issued after consultation with the Electricity and Gas Authority (AEEG). Once the decree goes into effect, a portion of the overall volumes imported on the basis of authorizations issued by the Ministry of Economic Development will need to be offered to the regulated market.

Measures approved with Decree-Law 73/2007³⁰

Protection: The provision provides the initial measures for the start-up of the market for domestic customers of the electric system who will become ‘non-captive’ as of 1 July, while the guarantee measures will also be maintained.

Guarantee system: Guarantee of service delivery, on a basis consistent with the current situation, for domestic customers and small- and medium-sized businesses (less than 50 employees and revenues of #eu#10 million or less), who do not select a new supplier on the free market: the two types of customers will be able to continue to benefit from the current service conditions, and thus from the economies of scale stemming from the supply through the Single Buyer. The Electricity and Gas Authority (AEEG) shall continue to have supervision and ex post intervention powers in order to safeguard the rights of the users, including in cases of unjustified price increases or changes to the service conditions for customers who have not yet exercised their right to choose a services provider.

Protection system: The continuation of supply and service will be ensured for (i) other non-domestic customers (companies with more than 50 employees which effectively have not yet left the restricted market) which have not chosen a new electric energy supplier, and (ii) anyone else remaining without a supplier. This service is to be temporarily provided by distribution companies or by their sales affiliates, but the Ministry of Economic Development will select the suppliers through competitive bidding.

Transparency rules for the start-up of the market for domestic customers: the unbundling of electricity sale from distribution activity and the functional separation of the management of the electricity and natural gas systems infrastructures and the rest of the activities (separation which also extends to the stocking of gas) will ensure correspondence between the opening up of demand and supply sides of the market. The framework created should thus facilitate the development of full-scale competition to the benefit of consumers, while also guaranteeing neutrality in the management of the network infrastructures.

³⁰ “Urgent measures for implementation of EU provisions with regard to the deregulation of the energy markets”.

ministero dell’economia e delle finanze

135

2008-2011 economic and financial planning document

Transparent information about the energy mix: The suppliers of electric energy will be required to inform their final customers about the mix of energy sources used for the production of the energy supplied, and to indicate the information available about the environmental impact of the production, in accordance with the operational guidelines to be defined by the Ministry of Economic Development, after its consultation with the Ministry of the Environment and as proposed by the Electricity and Gas Authority (AEEG).

Measures under discussion before Parliament

FUEL DISTRIBUTION

Elimination of obstacles to sales/marketing activity: The installation and the activity of a petrol station cannot be subordinated to the respect of the minimum-distance criterion or to pre-set parameters. Administrative constraints on the sale of complementary products and services (non-oil activity) will be lifted.

PROPANE GAS DISTRIBUTION

Measures for propane gas distribution: Propane gas tanks will no longer be installed only with the commodatum formula (generally for ten years) and with the limitation of an exclusive for supplying the gas. The tank must be made available under a lease, and the owner will have the option of purchasing the gas through a freely competitive market.

TRANSPORT

Measures regarding rail transport: The measures are based on the following key elements: the separation between the regulatory authority and the entity operating the network; the efficiency of the network’s operation, including through the non-discriminatory attribution of transportation capacity; professional skills and organizational capacity of the service providers; a portion of the revenues of the services contracts for the use of the networks to be used for maintenance of the railroad rolling stock. The measures needed for complete deregulation of the railway service will be adopted by the Minister of Transport after the completion of a sector survey.

Measures regarding innovative transport: In order to promote functional growth and innovation in the local public transport sector, a plan has been developed through which authorizations will be issued for innovative services (including multiple use, car sharing, ecological transport, and transportation for the needy and disabled). Municipalities will be responsible for promoting such services, including through the use of incentives.

FINANCIAL AND BANKING SECTOR

Invalidity of maximum overdraft clause: Contractual clauses referring to the maximum overdraft commissions are invalidated.

Proposal for promoting improvements to payment instruments: Around 90 per cent of business transactions in Italy are currently settled in cash versus an average of 63 per cent for the EU’s leading countries. The situation requires the re-ordering of the payment systems. First of all, the traceability of payments with respect to the public administration needs to be made available, with the public administration required to equip itself with the appropriate technologies therefore. Second, electronic payment systems will receive incentives (including fiscal incentives). Revisions will be made to the rules regarding the stamp tax on banking services for accounts with a limited financial or administrative

ministero dell’economia e delle finanze

136

2008-2011 Economic and Financial Planning Document

impact. Finally, holders of VAT registration numbers will be able to use electronic billing systems, with the consequent easing of requirements for the transmission of customer/supplier lists.

BROKERAGE ACTIVITY

Brokerage activity: In order to streamline bureaucratic formalities, persons interested in exercising brokerage activity (business brokers, real estate agents, business agents, marketing representatives and agents, maritime agents and ship agents) will no longer need to register on the professional register and on the register of businesses maintained by the chamber of commerce. It will be sufficient to advise the chamber of commerce of the start-up of the activity.

IX.9 FIGHT AGAINST TAX EVASION

     Tax evasion represents a critical issue with regard to Italy’s economic development, as it takes away resources from the public budget, has the effect of increasing the fiscal burden for taxpayers who properly fulfil their fiscal obligations, alters the justice of the taxation system, causes bias in normal market competition prompting inefficiency of the economic system, and contributes to blurring the boundaries between legal and criminal activities.

     The level of tax evasion in Italy is generally considered to be very high. The reasons for the high level of evasion can be mainly explained by the characteristics of the country’s economic and productive structure, and by several institutional and organizational factors, such as the system of controls, the level of penalties, and the means for collecting taxes.

     Official national accounting data estimate that the underground economy is worth somewhere between 16.6 and 17.7 per cent of GDP³¹. Other studies carried out by reliable institutions and organizations indicate even higher figures. In any case, the estimates put Italy at the head of the list of EU countries in terms of tax evasion³², at a level much higher than that which could be considered as compatible with the size of the country’s economy. It is thus fundamental to reduce tax evasion in Italy, through adequate policies aiming at fighting and deterring the practice.

     Several studies, which have estimated the amount of income on which taxes are not paid, have shown that evasion is not uniformly distributed at a geographical or sector level. From a sector perspective, tax evasion appears to be more concentrated in the services sector (services to businesses and individuals, and in retailing), whereas from a

³¹ ISTAT, “La misura dell’economia sommersa secondo le statistiche ufficiali — Anni 2000/2004”, December 2006.

³² The methods used for estimating tax evasion are different in each country, and thus the results are not comparable. A study of 21 OECD countries effected by Schneider and Klinglmair in 2004 placed Italy as the second-ranking country (after Greece) in terms of the presence of the underground economy (which is a good approximation of tax evasion) and indicated that Italy’s level of underground economy was much greater than the OECD average.

Ministero dell’Economia e delle Finanze

137

2008-2011 Economic and Financial Planning Document

geographic standpoint, tax evaders are mostly found in the country’s northernmost and southernmost regions³³.

     The actions inaugurated by the Government to fight tax evasion are designed to re-establish a proper relationship between taxpayers and public institutions, so that both parties in that relationship meet their fiscal obligations. The actions include the abandonment of any form of amnesty programme, so as to re-establish the taxpayers’ understanding that paying taxes is an obligation.

     As a result of various measures³⁴, important regulatory changes have been recently adopted for the purpose of increasing the transparency of business transactions, improving the flows of information available to the taxation officials, reducing tax-avoidance practices, and favouring the detection of tax basis.

     The measures with the most significant impact are summarized below:

• The measures applicable to real estate sales were implemented to limit fraud, in particular with regard to sales made by persons required to pay VAT; with only some exceptions, the measures have resulted in the application of VAT being replaced by the application of a registration tax.

• The measures regarding ‘dummy companies’ have modified the criteria for the identification of the same, and likewise increase the presumed income in relation thereto. Some limits on the use of VAT credits by non-operating companies have also been introduced for the purpose of preventing tax evasion.

• Other VAT measures include the introduction of the reverse charge in the construction industry, more careful monitoring of ‘parallel importation’ of vehicles (which has given rise to significant cases of fraud), and the possibility of the advance checking of automatic offsetting (which may entail incorrect refunds and offsetting) for certain specific cases.

• The measures aimed at increasing the availability and quality of information that can be used for tax audits and assessments include: the creation of a general register of current accounts; the re-introduction of the customer/supplier lists; the obligation to use a special account for the receipt of payments; the obligation of electronic transmission of payments.

• The tax authorities’ powers to launch investigations and to impose penalties have been increased, consistent with a strategy to bolster control and assessment procedures.

• The system of sector studies used by the tax authorities for approximating income has also been changed. The changes include: the updating of the studies every three years; the analysis of general and specific consistency; the

³³ Studies conducted by the tax authorities (S.Pisani and C.Polito “Metodologia di integrazione tra data IRAP e di Contabilita Nazionale”, Revenue Authorities, 2006) and analyses carried out by the research and fiscal/economic policy office of the Department of Fiscal Policies.

³⁴ Decree-Law 223/06 “Urgent measures for relaunching the economy and social programmes, for holding down and streamlining public expenditure, and for revenues and the fight against tax evasion” converted, with amendments, by Law No. 248/2006; Decree-Law 262/06 “Urgent taxation and financial measures” converted, with amendments, by Law No. 286 of 24/11/2006; 2007 Budget Law.

Ministero dell’Economia e delle Finanze

138

2008-2011 Economic and Financial Planning Document

updating of the limit of revenues for their application; the re-definition of the causes of exclusion; and penalties for false data. The measures are designed to make the system more up-to-date and more powerful, as it represents a valid tool for checking on a vast mix of small- and medium-sized businesses.

     The policies and actions adopted by the Government to combat tax evasion have yielded positive results in terms of the revenue trend. A portion of the higher-than-forecast revenues for 2006 and 2007 can be attributed not only to a more rigorous programme of tax audits, but also to the measures to prevent tax evasion and tax avoidance that presumably prompted an increase in tax compliance and the revelation of taxable income.

     The effort to fight tax evasion must continue:

• with the expansion of the range of information available and improved use of the same via greater integration of the various databases involved;

• with the reorganization of the general tax records in relation to the individual taxpayers and not the taxes, so as to come up with a functional database that can be used for a comprehensive audit of an individual taxpayer’s earnings;

• with increased actual probability that evaders will be subject to audits and the assessment of additional taxes. The audit activity needs to be intensified with respect to large taxpayers, joint-stock companies and the services sector; the activities to fight cases of fraud with respect to VAT and customs duties also need to be intensified. The time between the filing of tax returns and the use of the same for audit purposes also needs to be reduced.

IX.10 FISCAL RULES

     The growing sensitivity to budget discipline basically stems from the widely shared opinion within the EU and some of the most authoritative international institutions that the adoption of appropriate fiscal rules can constitute an indispensable basis for the sustainability of public finance over the medium/long term³⁵. Such rules do not represent an automatic guarantee of success, as a serious commitment to the pursuit of budget discipline is also necessary. In any event, the presence of control mechanisms meaningfully reduces the risk of uncontrolled growth of expenditures.

     The Organization for Economic Cooperation and Development (OECD) has summarized as follows the arguments in favour of setting term limitations on the growth of public spending:

• It mitigates the risk of getting close to the maximum deficit allowed (3 per cent in the case of the EU) during periods of economic prosperity, inevitably exceeding such limit during periods of recession or stagnation;

³⁵ According to Kopits and Symanski (1998), a fiscal rule is a “permanent constraint on fiscal policy, expressed in terms of a summary indicator of fiscal performance”. Fiscal rules may regard the deficit and the public debt, total revenues and expenditures, as well as individual spending components.

Ministero dell’Economia e delle Finanze

139

2008-2011 Economic and Financial Planning Document

• It reduces the risk of the implementation of expansionary fiscal policy during periods of strong growth;

• It allows automatic stabilisers to operate fully on the revenue side, during both positive and negative phases of the economic cycle;

• It prevents unexpected cuts in public spending when tax revenues are lower than expected, as would occur in the case in which budget rules were to refer to the deficit;

• It makes it possible to maintain public investment spending, establishing separate limits for each category of expenditures;

• It can prompt improvements in the quality of public spending, by promoting a greater focus on the setting of spending priorities;

• It makes the government’s future fiscal policy more predictable. Less uncertainty about the imposition of future taxes improves social well-being by allowing families to have more specific information about the medium-/long-term prospects for jobs, savings and consumption;

• Finland, the Netherlands and Sweden have had positive experience with setting term spending limits. Empirical studies conducted by the European Commission have affirmed that the introduction of rules for public spending improves the ratio between primary expenditure, net of the cyclical component, and GDP.

     Spending rules can regard a range of the general government’s budget aggregates, and they may be defined in real or nominal terms, over a time horizon that can vary. The range of fiscal rules has increased in recent years, involving not only the central administrations and the main public budget aggregates (deficit, debt, total revenues, total expenditures), but also regional and local territorial entities and specific expenditure areas.

     Simplicity and transparency represent the advantages of covering the total spending aggregate. Instead, there are fundamentally two disadvantages: the introduction of an incentive to penalize the less politically sensitive spending categories (e.g. capital expenditures) and an incentive to steer pro-cyclical policies inasmuch as a reduction in interest expenditure or on categories of expenses linked to the trend of the economy (e.g. unemployment subsidies) could be offset by an increase in the categories of discretionary expenditures. Furthermore, defining a rule in nominal terms is advantageous because it implies simplicity and ease of monitoring. It does not, however, allow for taking due account of the impact of inflation on spending. Finally, the time horizon covered by the rule is not irrelevant. A shorter term horizon makes the rule less effective inasmuch as it is easier to postpone the achievement of the objective to a subsequent period, without any offsetting. With a longer term perspective, any deviations in a given year must be offset in subsequent years.

     Several statistical and econometric analyses have shown the existence of a positive link between number-based rules and budget results. Analyses show that the cyclically adjusted budget balance and the structural primary expenditure over the long term tend to improve in the years following the introduction of budget rules. Actual experience

Ministero dell’Economia e delle Finanze

140

2008-2011 Economic and Financial Planning Document

shows that expanding the number of areas covered by budget rules can lead to lower deficits or higher surpluses when all other conditions ate held constant³⁶.

     Studies conducted in recent years in the main OECD countries have shown that fiscal rules based on the imposition of expenditure ceilings (instead of on budget balances) have produced broader budget adjustments in qualitative and quantitative terms. The research has also shown that fiscal rules must be adapted to the specific context in order to have the greatest impact on the budget results. In any event, it seems certain that the presence of several common elements is able to generate more favourable budget results³⁷. More specifically, actual experience shows that positive results can be achieved from the definition of rules that are (i) rigid and based on transparency; (ii) associated with legislative or constitutional provisions; (iii) accompanied by automatic corrective and sanction measures to address cyclical fluctuations; and (iv) monitored by independent authorities.

     The application of fiscal rules has not yet produced any universally favourable outcomes for any national or local entity, but this is mostly to be attributed to the use of sanction mechanisms that are not sufficiently effective in the event of the non-observance of the rules. The experience in several countries (Sweden, Netherlands and the United States, in particular) shows that the imposition of rigid rules has turned out to be rather effective for the purposes of consolidating the public finances, and has not entailed negative economic consequences. In general, in the successful cases, it can be noted that the rules were reinforced by the presence of an ad-hoc structure supported by an adequate information reporting system. Furthermore, in various countries (United Kingdom, Sweden, Belgium, Netherlands, Australia, and New Zealand), the ex-post evaluation of the rules set turned out to be extremely important. Other elements confirming the scenario outlined can be drawn from an examination of the experience of the more virtuous countries (Sweden, Netherlands, Spain, United Kingdom and the United States).

     In Sweden, for example, a fiscal rule was introduced for annually establishing the limits for the next three years on the nominal expenses of the central government in relation to 27 areas. The rule also provides for the achievement of a budget surplus equal to an average of 2 per cent of GDP during the economic cycle. The rule is rounded out by the a-posteriori review of the results achieved versus the pre-set objectives.

     The Netherlands instead tested a term spending agreement which establishes ceilings for the spending by the central government, the healthcare sector and the social security administration, in relation to conservative growth forecasts. The agreement also contemplates an automatic mechanism for cutting taxes (equal to one-half of the incremental revenues collected) should the budget deficit fall below 0.75 per cent of GDP.

     In the United Kingdom, the Code for Fiscal Stability has provided a ‘golden rule’ that allows for the possibility of incurring loans only for the purpose of financing expenditures on investments. In addition, a system for the annual reporting of budget data has been introduced in order to increase transparency.

     In the United States, the Budget Enforcement Act (BEA) passed in 1990 sets ceilings (in nominal terms) on discretionary spending and specific limits for some

³⁶ See “Public Finance in EMU”, 2006.

³⁷ OECD, “Economic Outlook”, 2007.

Ministero dell’Economia e delle Finanze

141

2008-2011 Economic and Financial Planning Document

expenditure categories over a five-year period. In addition, the law provides that any legislative changes having repercussions on revenues or mandatory spending (such as healthcare spending, unemployment subsidies, and pharmaceutical price supports) must be neutral on the budget.

     The situation in Spain merits special attention since it has been cited by the European Commission as an example of reform capable of reducing the potential pro-cyclical effects arising from budget rules set in nominal terms. In 2003, legislation was enacted that imposed a ceiling on total spending and the achievement of a balanced budget or budget surplus at all government levels (central and local) and for all public-sector companies. The legislation also introduced a fund equal to 2 per cent of the spending in order to cover unexpected outlays.

     In 2006, the regulations underwent some changes. The budget objective for all levels of the public sector was defined on the basis of the economic cycle, computed by referring to Spain’s potential GDP growth rate. All public-sector levels are required to generate budget surpluses if economic growth is above 3 per cent, while a balanced budget is sufficient whenever the GDP growth rate is between 2 and 3 per cent. In the event of growth below 2 per cent, deficits are allowed, provided that net borrowing does not exceed 1 per cent of GDP. Another change in the law accommodates the need to relate the public accounts to productivity improvement. Regardless of the economic cycle, a total deficit equal to 0.5 per cent of GDP is allowed for financing investments that increase productivity (e.g. infrastructures and R&D). In any case, the possibility of incurring deficits is not automatic, and is instead evaluated on a case-by-case basis. Notwithstanding the various allowances, the deficit threshold of 1.5 per cent of GDP may not be surpassed.

     Taking into account the actual experience of other countries, the European Commission and leading international institutions have come up with specific recommendations for Italy with regard to the need to revise budgeting procedures so as to improve their efficiency and effectiveness in terms of controlling expenses.

     The final recommendations contained in the International Monetary Fund’s report on Italy (Article 4 of the Statute) include the explicit request for Italy to set term spending objectives as part of a more general recommendation to reform budgeting procedures. Increasing the efficiency of the process — including by planning controls over budget results and not only over formal legitimacy — is considered an absolute priority by the IMF.

     In a recent report on Italy, the OECD also proposed the setting of rigid spending limits via establishment of ceilings covering a period of two or more years. More specifically, the report recommends the central government’s primary spending be set within the limits for inflation growth, thereby impeding growth in real terms, at least until the primary surplus reaches 5 per cent of GDP, the objective which the government intends to achieve by 2011. Since spending by local entities accounts for a big portion of the aggregate growth of the primary expenditure, the internal stability pact needs to be amended in order to involve regions and municipalities in complying with the spending rule; in essence, this means cutting discretionary expenditures.

     As to the European Commission, the introduction of specific rules that reduce risks of senseless policies (particularly during specific periods, such as pre-election periods) has been cited numerous times as the possible solution to the problems of

Ministero dell’Economia e delle Finanze

142

2008-2011 Economic and Financial Planning Document

deferral in the fiscal-consolidation strategy. The Commission’s recommendations for Italy’s Stability Programme (which were later adopted by the Ecofin Council) explicitly request the country to implement expenditure control mechanisms, particularly in the healthcare area, as part of a general reform of budgeting procedures that will include strategic planning for over a period of years.

IX. 11 KYOTO OBJECTIVES

     Ratified by Italy with Law 120 of 2002, the Kyoto Protocol requires a 6.5 per cent reduction of the country’s CO₂ emissions between 1990 and 2012. Considering a roughly 13 per cent increase in the country’s emissions since the law was enacted, Italy will need to cut a total of 98 million tons of emissions per annum over the 2008/2012 period.

     The implementation of the initiatives outlined below (supplemented by the measures already provided in the National Allocation Plan 2, pursuant to the EU Directive 87/2003) is thus absolutely necessary in order for Italy to meet binding international commitments. Moreover these initiatives will make it possible to cut emissions by more than 70 million tons per annum.

     It is important to reiterate that should the total cut foreseen not be achieved, the country will be liable for penalties equal to €100 for each ton of CO₂ emissions counted in the planned reduction and not effectively cut. In addition to the penalty, Italy will also have the cost of acquiring the related CO₂ quotas on the market, which is estimated for the period of reference at least €20 per ton. By way of illustration, if Italy were not to be able to count on forest sinks and purchase credits through the Clean Development Mechanism (CDM) and Joint Implementation (JI) provided by the Kyoto Protocol, the burden on the public accounts would be around €4 billion per annum.

     While these urgent measures are needed in order to meet the imminent objectives set by the Kyoto Protocol, other initiatives to deal with climate change need to be adopted immediately, on the basis of a long-term plan that is compatible with the public finance framework.

Measures to tackle climate change and its effects

TRANSPORT

Preparing a National Plan for Sustainable Mobility with regard to urban areas afflicted by environmental problems, leading to the shoring up of public transport.

Redefining circulation taxes on the basis of CO₂ emissions per kilometre.

Facilitating access to the methane-gas distribution network.

Promoting collective use of vehicles (car-sharing, car-pooling, etc.).

Planning and building infrastructures useful for electrified public transport.

Stimulating the modal shifting of long-distance freight transport from road to rail transport and cabotage, and promoting intermodal transport.

Converting public transport to electric traction or to fuels with low CO₂ emissions (methane, biofuels, GPL, etc.).

Ministero dell’Economia e delle Finanze

143

2008-2011 Economic and Financial Planning Document

Extending, and facilitating access to, pedestrian areas and bicycle lanes in urban settings, while promoting the security thereof.

Providing incentives for converting private transport to electrically powered vehicles and/or vehicles powered by fuels with low CO₂ emissions (methane, biofuels, GPL, etc.).

Providing incentives for converting existing vehicles to the limits contemplated for the Euro 5 standard.

Setting up a regional market for trading of emissions quotas for initiatives in sectors not regulated by EU laws.

Promoting an adequate system of monitoring aimed at supporting the inclusion of aviation in the EU’s emission trading system.

THERMO-ELECTRIC ENERGY

Reformulating fiscal parameters for electricity on the basis of a single emissions benchmark per KWh produced.

Promoting small diffused tri-generation and cogeneration units.

Gradually adjusting the distribution network so as to respond to the need of diffused energy generation.

Gradually planning the substitution of fossil fuels with high rates of CO₂ emissions.

RENEWABLE SOURCES

Revising mechanisms for the production of electricity from renewable sources through green certificates and an energy account.

Stabilizing the energy account incentives in order to support production of photovoltaic and thermal solar energy.

Achieving at least 500 MW of installed power from thermal solar energy.

Stabilizing the incentives aimed at promoting thermal solar energy to be used for heating water, heating and cooling systems.

Promoting thermal-solar district heating for large users.

Supporting entrepreneurial initiatives in developing components and technologies for the production of energy from renewable sources.

Developing the national platform for producing hydrogen from renewable sources.

Developing the potential of eolic energy, wave motion and submarine forces, and defining the responsibilities for off-shore initiatives.

Providing incentives and simplifying the authorizations for use of micro- and small eolic plants and micro-hydroelectric plants.

Promoting the use of low-enthalpy heat technology.

ENERGY EFFICIENCY AND SAVINGS

Planning and implementing a national energy-efficiency plan for government offices.

Simplifying the public administration’s access to financing through third parties, including with the assumption of a guarantee.

Promoting the market for energy services.

Extending white certificates, including for the purpose of making them the source of a guarantee on debtor positions.

Planning and implementing the national public-lighting plan, and promoting highly efficient lighting systems.

Promoting passive systems against network leakage.

Setting up a regional market for trading of emissions quotas for initiatives in sectors not regulated by EU laws.

Ministero dell’Economia e delle Finanze

144

2008-2011 Economic and Financial Planning Document

Building on current policies aimed at renewing the stock of household appliances to the advantage of products that are more efficient and less energy-consuming.

Involving small- and medium-sized businesses in adopting measures to limit demand for primary energy and the efficient use thereof, including through legislation regarding public tenders for goods and services.

WASTE RECYCLING

Defining minimum objectives for recycling materials coming from the separate collection of recyclable materials, for the purpose of the assignment of white certificates.

Providing incentives for the production of bio-gas coming from anaerobic digestion of organic material, including that from solid urban waste.

Reducing the use of primary packaging and promoting packaging that has lower carbon content and can actually be recycled.

CONSTRUCTION

Promoting measures in the construction sector that can reduce demand for primary energy.

Harmonizing building regulations, including for the purpose of the full application of the Decree-Law 311/2006.

Making bio-building techniques tax-exempt for new building and building renovation.

Promoting low energy-intensity heating and cooling systems.

Stabilizing tax measures aimed at the energy improvement of buildings.

Introducing energy and water-savings parameters among priority criteria for the access to public financing and contracts in the building sector.

FARMING AND FORESTRY

Increasing micro co-generation from wood biomasses, scrap materials, farm refuse and food-product transformation.

Promoting renewable energy for heating greenhouses.

Promoting the production of short chain bio-fuels.

Promoting farming practices that allow for increasing the carbon content in the soil.

Setting up and maintaining the register for forest sinks.

DEFENSE AND SOIL CONSUMPTION

Establishing measures for conserving organic soil, including for the purpose of absorbing CO₂.

Reformulating urban-planning regulations with the aim of both reducing land consumption and defending the landscape.

Defining plans to safeguard the coastline, including with a view toward adapting to climate change.

Setting the parameters for suitable land-conservation incentives, to be applied at the time funds are transferred from the central to the local administration.

Completing the clean-up of contaminated sites, as well as promoting incentives and the streamlining of such initiatives so as to set up programme agreements, including for the purpose of reconverting cleaned up sites to sites for the production of energy from renewable sources.

BIO-DIVERSITY AND PROTECTED AREAS

Defining a bio-diversity protection plan aimed at safeguarding the areas most vulnerable to climate-related phenomena.

Completing the Network Nature 2000, the Nature Charter and the Ecological Network.

Ministero dell’Economia e delle Finanze

145

2008-2011 Economic and Financial Planning Document

Harmonizing institutional responsibility for the planning of vast areas, in particular mountainous and river areas.

Commitment to achieving the objectives set at an international level within the Bio-Diversity Safeguarding Convention, known as Countdown 2010.

Reinforcing the network of protected marine areas and geo-mineral parks.

WATER AND WATER CONSERVATION

Refinancing the National Irrigation Plan aimed at the maintenance and modernization of the network and the infrastructures, and at increasing the storage capacity.

Promoting technologies for water savings with regard to irrigation, the farming industry, and industrial and domestic use.

Reformulating concession tariffs for drawing water for food production purposes.

Defining the monitoring plan for artesian wells, also with the aim of repressing unauthorized use of the wells.

Defining an appropriate strategy aimed at reducing and preventing the introduction of pollutants in superficial and subterranean waters.

Relaunching of the EU Water Directive 2000/60/CE, including through the definition of hydrographic districts.

TECHNOLOGICAL INNOVATION

Defining and regulating Strategic Innovation Plans, aimed at boosting research activity not sufficiently profitable, including through the use of public resources and skills (universities, research centres, the Italian National Agency for New Technologies, Energy and the Environment-ENEA, etc.).

Channelling resources that fall within the general system charges managed by the Equalization Fund for the Electric Energy Sector to production of energy from renewable sources.

Setting up of Italian Carbon Fund for the purchase of emissions credits from the CDM and JI mechanisms set up under the Kyoto Protocol.

Ministero dell’Economia e delle Finanze

146

EX-99.D

Exhibit (d)

DESCRIPTION OF
THE REPUBLIC OF ITALY

December 31, 2006

INCORPORATION OF DOCUMENTS BY REFERENCE

     This document is The Republic of Italy’s Annual Report on Form 18-K (“Annual Report”) under the U.S. Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006. All amendments to the Annual Report filed by The Republic of Italy on Form 18-K following the date hereof shall be incorporated by reference into this document. Any statement contained herein, or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this document to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this document.

TABLE OF CONTENTS

Summary Information	6
Republic of Italy	9
Area and Population	9
Government and Political Parties	10
The European Union	12
Membership of International Organizations	15
The Italian Economy	16
General	16
2007 Developments	18
Gross Domestic Product	19
Principal Sectors of the Economy	23
Employment and Labor	34
Prices and Wages	37
Monetary System	39
Monetary Policy	39
Exchange Rate Policy	43
Banking Regulation	43
Credit Allocation	50
Exchange Controls	51
The External Sector of the Economy	52
Foreign Trade	52
Geographic Distribution of Trade	54
Balance of Payments	57
Reserves and Exchange Rates	62
Public Finance	64
The Budget Process	64
European Economic and Monetary Union	64
Accounting Methodology	66
Measures of Fiscal Balance	67
The Council Recommendation to Italy Relating to its Excessive Government Deficit	69
The 2007 Stability and Growth Program	70

1

The 2008-2011 Program Document	71
Revenues and Expenditures	73
Expenditures	75
Revenues	79
Government Enterprises	81
Privatization Program	81
Government Real Estate Disposal Program	84
Public Debt	85
Summary of External Debt	90
Debt Service	92
Debt Record	92
Tables and Supplementary Information	93

     Except as otherwise specified, all amounts are expressed in euro (“euro”). With the implementation of the third stage of European Economic and Monetary Union on January 1, 1999, the exchange rate between the euro and Italian lire (“lira” or “lire”) was irrevocably fixed at Lit. 1,936.27 per €1.00. For convenience, amounts for prior years have been translated at the same rate and depict the same trends as they would had they been presented in lire. Prior to 1999, however, the exchange rate of the lira against other euro constituent currencies was subject to market fluctuation. See “External Sector of the Economy—Reserves and Exchange Rates—U.S. Dollar/Euro Exchange Rate” for certain information concerning the exchange rate of the euro against the U.S. dollar and certain other currencies. We make no representation that the euro amounts referred to in this Annual Report could have been converted into U.S. dollars at any particular rate.

2

Defined terms and conventions

     We use terms in this Annual Report that may not be familiar to you. These terms are commonly used to refer to economic concepts that are discussed in this Annual Report. Set forth below are some of the terms used in this Annual Report.

• Gross domestic product or GDP means the total value of products and services produced inside a country during the relevant period.

• Gross national product or GNP means GDP plus income earned by a country’s nationals from products produced, services rendered and capital invested outside the home country, less income earned inside the home country by non-nationals.

• Imports and Exports. Imports are goods brought into a country from a foreign country for trade or sale. Exports are goods taken out of a country for trade or sale abroad. Data on imports and exports included in this Annual Report are derived from customs documents for non-European Union countries and data supplied by other member states of the European Union.

• The unemployment rate is calculated as the ratio of the members of the labor force who register with local employment agencies as being unemployed to the total labor force. “Labor force” means people employed and people over the age of 15 looking for a job. The reference population used to calculate the Italian labor force in this Annual Report consists of all household members present and resident in Italy and registered with local authorities.

• The inflation rate is measured by the year-on-year percentage change in the general retail price index, unless otherwise specified. The harmonized consumer price index is calculated on the basis of a weighted basket of goods and services taking into account all families resident in a given territory. Year-on-year rates are calculated by comparing the average of the twelve monthly indices for the later period against the average of the twelve monthly indices for the prior period.

• Net borrowing, or budget deficit, is consolidated revenues minus consolidated expenditures of the general government. This is the principal measure of fiscal balance for countries participating in the European Economic and Monetary Union and is calculated in accordance with European Union accounting requirements.

• Primary balance, is net borrowing less interest payments and other borrowing costs of the general government. The primary balance is used to measure the effect of discretionary actions taken to control expenditures and increase revenues.

Unless otherwise indicated, we have expressed:

• all annual rates of growth as average annual compounded rates;

• all rates of growth or percentage changes in financial data in constant prices adjusted for inflation; and

3

• all financial data in current prices.

Information Sources

     The source for most of the financial and demographic statistics for Italy included in this Annual Report is data prepared by Istituto Nazionale di Statistica, or ISTAT, an Italian government entity established to provide comprehensive information used for European comparisons, elaborations on such data and other data published in the Annual Report of the Bank of Italy (Banca d’Italia) dated May 31, 2007. We also include in this Annual Report information published by the Organization for Economic Co-operation and Development, or OECD, and the Statistical Office of the European Communities, or Eurostat, particularly in connection with comparative data.

     Certain other financial and statistical information contained in this Annual Report has been derived from official Italian government sources, including the 2008-2011 Program Document (Documento di Programmazione Economica e Finanziaria) and the November 2007 Update to the Stability and Growth Program (Programma di Stabilitá dell’Italia — Aggiornamento Novembre 2007). In this Annual Report we have substituted statistical data published by ISTAT for equivalent information derived from Bank of Italy sources that was published in earlier filings we have prepared.

Revised National Accounts

     In 1999, ISTAT introduced a new system of national accounts in accordance with the new European System of Accounts (ESA95) as set forth in European Union Regulation 2223/1996. These were intended to contribute to the harmonization of the accounting framework, concepts and definitions within the European Union. Under ESA95, all European Union countries apply a uniform methodology and present their results on a common calendar. Both state sector accounting and public sector accounting transactions are recorded on an accrual basis.

     In December 2005, ISTAT published general revisions to the national system of accounts reflecting amendments to ESA95 set forth in the European Union Regulations 351/2002 and 2103/2005. These revisions include: (i) a new methodology to evaluate the amortization of movable and fixed assets, (ii) a new accounting treatment for financial intermediary services, (iii) revisions to the methodology for calculating general Government and investment expenditure, and (iv) the introduction of a new accounting system for a portion of social security contribution on an accrual basis.

     In connection with revisions to the national accounting system implemented in December 2005, ISTAT replaced its methodology for calculating real growth, which had been based on a fixed base index, with a methodology linking real growth between consecutive time periods, or a chain-linked index. One of the effects of using chain indices is that other than for the first year in the chain (2001 in most tables included in this document) component measures will no longer aggregate to totals. Also, as a result of this change in methodology, all “real” revenue and expenditure figures included in this document from and including 2001 differ from and are not comparable to data published in earlier documents filed by Italy with the SEC. The general

4

government revenues and expenditure figures in this Annual Report reflect consolidated revenues and expenditures for the public sector, which is the broadest aggregate for which data is available.

     All references herein to “Italy” or the “Republic” are to The Republic of Italy, all references herein to the “Government” are to the central Government of The Republic of Italy and all references to the “general government” are collectively to the central Government and local government sectors and social security funds (those institutions whose principal activity is to provide social benefits), but exclude government owned corporations. In addition, all references herein to the “Treasury” or the “Ministry of the Treasury” or the “Ministry of Economy and Finance” or the “Ministry” are interchangeable and refer to the same entity.

5

SUMMARY INFORMATION

     The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this document.

     Gross Domestic Product: According to International Monetary Fund data published in October 2007, the economy of Italy, as measured by 2006 GDP, is the seventh largest in the world. In 2006, Italy’s annual real GDP growth in Italy was 1.8 per cent, compared to 0.6 per cent in 2005 and 1.5 per cent in 2004. Italy’s GDP growth rate has been lower than the average GDP growth rate of the euro area each year in the past decade. The growth gap between other euro area countries and Italy in the past decade reflects the persistence of several medium and long-term factors, including the difficulties in fully integrating southern Italian regions into the more dynamic economy of northern and central Italy, unfavorable export specialization in traditional goods, inadequate infrastructures, the incomplete liberalization process and insufficient flexibility of national markets.

     The European Economic and Monetary Union: Italy is a signatory of the Treaty of European Union of 1992, also known as the “Maastricht Treaty,” which established the European Economic and Monetary Union, or EMU, culminating in the introduction of a single currency. Eleven member countries, including Italy, met the budget deficit, inflation, exchange rate and interest rate requirements of the Maastricht Treaty and were included in the first group of countries to join the EMU on January 1, 1999. On that date conversion from their old national currencies into the euro was irrevocably fixed and the euro became legal tender. On January 4, 1999 the noon buying rate for the euro, as reported by the European Central Bank (the “Noon Buying Rate”) was €1 for US$1.1812. Since that date initially, the euro depreciated against the dollar, reaching a low of €1 for $0.8270 on October 25, 2000 and thereafter progressively appreciated against the dollar. On April 7, 2008, the ECB exchange rate was €1 for $1.5693. The euro was introduced in physical form in the countries participating in the EMU on January 1, 2002 and replaced national notes and coins entirely on February 28, 2002.

     Foreign Trade: Over half of Italy’s exports and imports involve other European Union countries. Italy’s main exports are manufactured goods, including industrial machinery, office machinery, automobiles, clothing, shoes and textiles. Since 2000, Italy has recorded current account deficits each year. This was principally due to increased competition from developing countries in South-East Asia, the depreciation of currencies in Asia, unfavorable exchange rates in the period 2003-2006 and the rise in price of oil and gas.

     Inflation: As measured by the European Union harmonized consumer price index, in 2007 the inflation rate in the euro area and Italy grew by 2.1 per cent and 2.0 per cent, respectively, compared to 2.2 per cent in 2006 and 2005 in both the euro area and Italy.

     Public Finance: Italy historically has experienced substantial budget deficits and high public debt. Countries participating in the EMU are required to reduce “excessive deficits,” adopting budgetary balance as a medium-term objective, and to reduce public debt. Italy,

6

however, recorded budget deficits as a percentage of GDP higher than the 3.0 per cent reference rate imposed by the Maastricht Treaty in 2001 and each year during 2003-2006. For 2007, Italy’s budget deficit is estimated at 1.9 per cent of GDP. Italy’s public debt as a percentage of GDP declined from 105.6 per cent in 2002 to 103.8 per cent in 2004, due primarily to the repayment of debt with proceeds from Italy’s privatization and real-estate disposal programs, and grew back to 106.5 per cent in 2006.

     Privatization Activities: Since 1994, the Treasury has carried out a number of privatizations in the financial institutions sector, the telecommunications sector and the energy sector. From 1994 to December 31, 2007, the Treasury’s privatization program generated proceeds of approximately €153 billion, making the Italian privatization program one of the largest and most successful privatization programs in Europe. Proceeds from privatizations in the four years to December 31, 2007 were very low by comparison to previous years. Italy slowed down the pace of its privatizations due to the volatility of financial markets and the slowdown of the global and U.S. economies.

     The Italian Political System: Italy is a democratic republic. Italy is a civil law jurisdiction, with judicial power vested in ordinary courts, administrative courts and courts of accounts. The Government operates under a Constitution that provides for a division of powers among Parliament, the executive branch and the judiciary. Parliament comprises a Senate and a Chamber of Deputies. The executive branch consists of a Council of Ministers selected and headed by a Prime Minister. The Prime Minister is appointed by the President of the Republic and his government is confirmed by Parliament. Following the general Parliamentary elections held on April 9 and 10, 2006, the Unione, the center-left coalition led by Mr. Romano Prodi, obtained a majority in both the Chamber of Deputies and in the Senate. As a result, President Giorgio Napolitano appointed Mr. Prodi as Prime Minister. On January 24, 2008, Mr. Romano Prodi resigned as Prime Minister after being defeated in a vote of confidence in the upper house of the Parliament, the Senate. Following such event, Italy’s President, Mr. Giorgio Napolitano, dissolved the Parliament on February 6, 2008 and called for legislative elections to be held on April 13 and 14, 2008.

     2007 Developments: Italy’s real GDP grew by 1.5 per cent in 2007, compared to 1.8 per cent in 2006, based on ISTAT data. Italy’s seasonally adjusted average unemployment rate decreased to 6.8 per cent in 2007, from 7.7 per cent recorded during the previous year. Consumer prices, as measured by the harmonized EU consumer price index, increased at an annual rate of 2.0 per cent during the twelve months ended December 31, 2007, compared to an increase of 2.2 per cent during the twelve months ended December 31, 2006.

     On February 29, 2008, ISTAT published updated public finance ratio estimates for 2007, which are set forth below and shown as percentages of GDP in the relevant year, except for tax burden, which is shown in percentage terms.

Net borrowing	1.9
Primary balance	3.1
Tax burden	43.3
Current revenues	46.9
Total revenues	47.2
Current expenditures	44.6
Total expenditures (net of interest)	44.1
Total expenditures	49.1

Source: ISTAT.

7

     Based on the Combined Report on the Economy and Public Finance, published by the Ministry of Economy and Finance in March 2008, for the year ended December 31, 2007, nominal GDP and debt-to-GDP are estimated to be €1,535,540 million and 104 per cent, respectively, and debt-to-GDP is expected to decrease to 103 per cent in 2008.

8

REPUBLIC OF ITALY

Area and Population

     Geography. The Republic of Italy is situated in south central Europe on a peninsula approximately 1,120 kilometers (696 miles) long and includes the islands of Sicily and Sardinia in the Mediterranean Sea and numerous smaller islands. To the north, Italy borders on France, Switzerland, Austria and Slovenia along the Alps, and to the east, west and south it is surrounded by the Mediterranean Sea. Its total area is approximately 301,300 square kilometers (116,336 square miles), and it has 7,375 kilometers (4,582 miles) of coastline. The independent States of San Marino and Vatican City, whose combined area is approximately 61 square kilometers (24 square miles), are located within the same geographic area. The Apennine Mountains running along the peninsula and the Alps north of the peninsula give much of Italy a rugged terrain.

     Population. According to ISTAT data, as of January 1, 2006, Italy’s resident population was estimated to be approximately 58.8 million, accounting for approximately 12.7 per cent of the European Union, or EU, population (including the 10 member states that joined on May 1, 2004) compared to 58.5 million as at January 1, 2005. The growth in Italy’s population was largely due to the increase in foreigners holding permits to live in Italy. Italy is the fourth most populated country in the European Union after Germany, France and the United Kingdom. According to ISTAT data, as of January 1, 2006, the six regions in the southern part of the peninsula together with Sicily and Sardinia, known as the “Mezzogiorno,” had a population of approximately 20.8 million. Northern and central Italy have a population of approximately 26.7 million and 11.3 million, respectively. The breakdown of the resident population by age group, as of January 1, 2006, was as follows:

•	under 20	19.0	%
•	20 to 39	27.9	%
•	40 to 59	28.0	%
•	60 and over	25.1	%

Source: ISTAT

     In 2004, for the first time since 1993, the number of births in Italy exceeded the number of deaths. However, Italy’s fertility rate is still one of the lowest in the world, while life expectancy for Italians is among the highest in the world. Because population growth has been low in recent years, the average age of the population is increasing. Based on 2007 ISTAT data, population density is approximately 196.9 persons per square kilometer.

     Rome, the capital and largest city, is situated near the western coast approximately halfway down the peninsula, and had a population of 2.5 million in 2004. The next largest cities are Milan, with a population of 1.3 million, Naples, with 1.0 million, and Turin, with 0.9 million. According to the 2001 census, approximately 44.2 per cent of Italy’s population lives in urban areas.

     Like other EU countries, Italy has experienced significant immigration in recent years, particularly from North Africa and Eastern European countries. According to ISTAT data, at January 1, 2006 there were approximately 2.7 million foreigners holding permits to live in Italy,

9

a 11.2 per cent increase from January 1, 2005. Immigration legislation has been the subject of intense political debate since the early 1990s. Italy tightened its immigration laws in March 1998 and initiated bilateral agreements with several countries for cooperation in identifying illegal immigrants. Additional measures to further tighten immigration laws were introduced by the Italian government in early 2002 in an attempt to control the increase of illegal immigrants. In addition in 2002, the Italian government introduced measures aimed at regularizing the position of illegal immigrants. While these legislative efforts have resulted in regularization of large numbers of illegal immigrants, Italy continues to have high numbers of foreigners living in Italy illegally.

Government and Political Parties

     Italy was originally a loose-knit collection of city-states, most of which united into one Kingdom in 1861. It has been a democratic republic since 1946. The Government operates under a Constitution, originally adopted in 1948, that provides for a division of powers among the legislative, executive and judicial branches.

     The Legislative Branch. Parliament consists of a Chamber of Deputies, with 630 elected members, and a Senate, with 315 elected members and a small number of life Senators, consisting of former Presidents of the Republic and prominent individuals appointed by the President. The Chamber of Deputies and the Senate equally share and have substantially the same legislative power. Any statute must be approved by both assemblies before being enacted. Except for life Senators, members of Parliament are elected for five years by direct universal adult suffrage, although elections have been held more frequently in the past because the instability of multi-party coalitions has led to premature dissolutions of Parliament.

     The Executive Branch. The head of State is the President, elected for a seven-year term by an electoral college that includes the members of Parliament and 58 regional delegates. The current President, Giorgio Napolitano, was elected in May 2006. The President has the power to appoint the Prime Minister and to dissolve Parliament. The Constitution also grants the President the power to appoint one-third of the members of the Constitutional Court, to call general elections and to command the armed forces. The President nominates and Parliament confirms the Prime Minister, who is the effective head of Government. The Council of Ministers is appointed by the President on the Prime Minister’s advice. The Prime Minister and Council of Ministers are responsible to both houses of Parliament and must resign if Parliament passes a vote of no confidence in the administration.

     The Judicial Branch. Italy is a civil law jurisdiction. Judicial power is vested in ordinary courts, administrative courts and courts of accounts. The highest ordinary court is the Corte di Cassazione in Rome, where judgments of lower courts of local jurisdiction may be appealed. The highest of the administrative courts, which hear claims against the State and local entities, is the Consiglio di Stato in Rome. The Corte dei Conti in Rome supervises the preparation of, and adjudicates, the State budget of Italy. There is also a Constitutional Court (Corte Costituzionale) that does not exercise general judicial powers, but adjudicates conflicts among the other branches of government and determines the constitutionality of statutes. Criminal matters are within the jurisdiction of the criminal law divisions of ordinary courts, which consist of magistrates who

10

either act as judges in criminal trials or are responsible for investigating and prosecuting criminal cases.

     The Annual Financial Law for 2008, enacted in December 2007, introduced into the Italian legal system, with effect as from June 2008, the “class action” for consumers’ protection. In accordance with the relevant provisions of Annual Financial Law for 2008, certain registered consumer associations and other entities will be able to bring a legal action in front of the competent courts (not only for each of themselves but) on behalf of all other individuals standing in the same situation. A class action may be initiated to claim damages in tort or for breach of contract.

     Political Parties. The main political parties are grouped into two opposing coalitions: the Partito Democratico, which is headed by Mr. Walter Veltroni, and the Il Popolo delle Libertà. The Partito Democratico coalition was created in 2008 to combine Italy’s moderate centre-leftist forces. The Il Popolo delle Libertà, which is led by Mr. Silvio Berlusconi, was created in 2008 to combine center-right forces and Alleanza Nazionale, representing the right led by Mr. Gianfranco Fini. The Lega Nord is separate, but allied with, Il Popolo delle Libertà and is led by Mr. Umberto Bossi.

     Elections. Except for a brief period, no one party has been able to command an overall majority in Parliament, and, as a result, Italy has a long history of weak coalition governments. In 1993, Parliament adopted a partial “first past the post” voting system for the election of 75 per cent of the members of both the Senate and the Chamber of Deputies. Under this system, the candidate receiving the largest number of votes in a single district wins. The remaining 25 per cent are elected through a proportional representation system. In the Chamber of Deputies, only parties that receive 4 per cent of the total vote on a nationwide basis are eligible for the seats elected by proportional representation. These modifications of the voting system have resulted in a significantly smaller number of Parliamentary seats held by parties with relatively small shares of the popular vote. Historically, however, government stability has depended on the larger parties’ coalitions with smaller parties.

     In December 2005, a new law was enacted modifying the voting system for the Chamber of Deputies. In the Chamber of Deputies, votes will be given to lists of candidates presented by the single parties. Seats in the Chamber of Deputies will be awarded based on the number of votes obtained by each list, provided that multiparty coalitions and single parties are not eligible for any seat unless they attain at least 10 per cent and 4 per cent of the total votes, respectively. In addition, a “first past the post” type mechanism applies if the winning coalition does not obtain at least 340 seats (out of 630 seats) in the Chamber of Deputies. In order to ensure government stability, if the winning coalition does not obtain at least 340 seats, it is automatically awarded as many seats as it needs to reach 340 seats. This modified voting system was utilized for the first time for the general elections in April 2006.

     On January 24, 2008, Mr. Romano Prodi resigned as Prime Minister after being defeated in a vote of confidence in the upper house of the Parliament, the Senate. Following such event, Italy’s President, Mr. Giorgio Napolitano, dissolved the Parliament on February 6, 2008. National elections were held on April 13 and 14, 2008, following which the centre-right, led by

11

Mr. Silvio Berlusconi, obtained the majority of the votes. As a result, Mr. Berlusconi is expected to form a new government shortly.

     Political Regions. Italy is divided into 20 regions containing 103 provinces. The Italian Constitution reserves certain functions, including police services, education and other local services, to the regional and local governments. Following a Constitutional reform passed by Parliament in 2001, additional legislative and executive powers were transferred to the regions. Legislative competence that historically had belonged exclusively to Parliament was transferred in certain areas (including, foreign trade, health and safety, ports and airports, transport network and energy production and distribution) to a regime of shared responsibility whereby the national government promulgates legislation defining fundamental principles and the regions promulgate implementing legislation. Furthermore, in all areas that are not either subject to exclusive competence of Parliament or in a regime of shared responsibility between Parliament and the regions, exclusive regional competence will be conferred upon request of the relevant region, subject to Parliamentary approval. In addition, in accordance with this devolution program, regions have been granted the right to levy local taxes and collect national taxes referable to their territory. A portion of these national taxes will continue to accrue to a national fund to be divided among regions according to their needs.

     The Italian Constitution grants special status to five regions (Sicily, Sardinia, Trentino-Alto Adige, Friuli-Venezia Giulia and Valle d’Aosta) providing them with additional legislative and executive powers.

     Referenda. An important feature of Italy’s Constitution is the right to hold a referendum to abrogate laws passed by Parliament. Upon approval, a referendum has the legal effect of automatically annulling legislation to which it relates. Exceptions to this right are matters relating to taxation, as well as the State budget, the ratification of international treaties and judicial amnesties. A referendum can be held at the request of 500,000 signatories or five regional councils. In order for a referendum to be approved, a majority of the Italian voting population must vote in the referendum and a majority of such voters must vote in favor of the referendum.

The European Union

     Italy is a founding member of the European Economic Community, which now forms part of the European Union. Italy is one of the 27 current members of the EU together with Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom, together with Bulgaria and Romania, which joined the European Union on January 1, 2007. Together, the European countries had a population of approximately 496 million as of January 1, 2005.

     The European Union is currently negotiating the terms and conditions of accession to the EU of the following candidate countries: Croatia, the Former Yugoslav Republic of Macedonia and Turkey.

12

     EU member states have agreed to delegate sovereignty for certain matters to independent institutions that represent the interests of the union as a whole, its member states and its citizens. Set forth below is a summary description of the main EU institutions and their role in the European Union.

     The Council of the EU. The Council of the EU, or the Council, is the EU’s main decision-making body. It meets in different compositions by bringing together on a regular basis ministers of the member states to decide on matters such as foreign affairs, finance, education and telecommunications. When the Council meets to address economic and financial affairs it is referred to as ECOFIN. The Council mainly exercises, together with the European Parliament, the European Union’s legislative function and promulgates:

• regulations, which are EU laws directly applicable in member states;

• directives, which set forth guidelines that member states are required to enact by promulgating national laws; and

• decisions, through which the Council implements EU policies

     The Council also coordinates the broad economic policies of the member states and concludes, on behalf of the EU, international agreements with one or more States or international organizations. In addition, the Council:

• shares budgetary authority with Parliament;

• takes the decisions necessary for framing and implementing the common foreign and security policy; and

• coordinates the activities of member states and adopts measures in the field of police and judicial cooperation in criminal matters.

     Decisions of the Council are taken by vote. Each Member State’s voting power is largely based on the size of its population. The following are the number of votes each Member State can cast:

• Germany, France, Italy and the United Kingdom each have 29 votes;

• Spain and Poland each have 27 votes;

• Romania has 14 votes;

• the Netherlands has 13 votes;

• Belgium, the Czech Republic, Greece, Hungary and Portugal each have 12 votes;

• Austria, Bulgaria and Sweden each have 10 votes;

• Denmark, Ireland, Lithuania, Slovakia and Finland each have 7 votes;

13

• Cyprus, Estonia, Latvia, Luxembourg and Slovenia each have 4 votes; and

• Malta has 3 votes.

     Generally decisions of the Council are taken by qualified majority, which is achieved if:

• a majority of member states (in certain cases, a two-thirds majority of member states) approve the decision; and

• a number of votes representing at least 73.9% of all votes is cast in favor of the decision.

     The European Parliament. The European Parliament is elected every five years by direct universal suffrage. The European Parliament has three essential functions:

• it shares with the Council the power to adopt directives, regulations and decisions.

• it shares budgetary authority with the Council, and can therefore influence EU spending.

• it approves the nomination of EU Commissioners, has the right to censure the EU Commission and exercises political supervision over all the EU institutions.

     Each member state is allocated the following number of seats in Parliament:

	2007-2009
Austria		18
Belgium		24
Bulgaria		18
Cyprus		6
Czech Republic		24
Denmark		14
Estonia		6
Finland		14
France		78
Germany		99
Greece		24
Hungary		24
Ireland		13
Italy		78
Latvia		9
Lithuania		13
Luxembourg		6
Malta		5
Netherlands		27
Poland		54
Portugal		24
Romania		35
Slovakia		14
Slovenia		7
Spain		54
Sweden		19
United Kingdom		78
Total		785

14

     The European Commission. The European Commission traditionally upholds the interests of the EU as a whole and has the right to initiate draft legislation by presenting legislative proposals to the European Parliament and Council. Currently, the European Commission consists of 27 members, one appointed by each member state for five year terms.

     Court of Justice. The Court of Justice ensures that Community law is uniformly interpreted and effectively applied. It has jurisdiction in disputes involving member states, EU institutions, businesses and individuals. A Court of First Instance has been attached to it since 1989.

     Other Institutions. Other institutions that play a significant role in the European Union are:

• the European Central Bank, which is responsible for defining and implementing a single monetary policy in the euro area;

• the Court of Auditors, which checks that all the Union’s revenue has been received and that all its expenditures have been incurred in a lawful and regular manner and oversees the financial management of the EU budget; and

• the European Investment Bank, which is the European Union’s financial institution, supporting the EU objectives by providing long-term finance for specific capital projects.

Membership of International Organizations

Italy is also a member of the North Atlantic Treaty Organization (NATO), as well as many other regional and international organizations, including the United Nations and many of its affiliated agencies. Italy is one of the Group of Eight (G-8) industrialized nations, together with the United States, Japan, Germany, France, the United Kingdom, Canada and Russia and a member of the Organization for Economic Co-operation and Development (OECD), the World Trade Organization (WTO), the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), the European Bank for Reconstruction and Development (EBRD) and other regional development banks.

15

THE ITALIAN ECONOMY

General

     According to IMF data published in October 2007, the economy of Italy, as measured by its 2006 GDP, is the seventh largest in the world, after the United States, Japan, Germany, the People’s Republic of China, the United Kingdom and France.

     The Italian economy developed rapidly in the period following World War II as large-scale, technologically advanced industries flourished along with more traditional agricultural and industrial enterprises. Between 1960 and 1974, Italian GDP, adjusted for changes in prices, or “real GDP,” grew by an average of 5.2 per cent per year. As a result of the 1973-74 oil price shocks and the accompanying worldwide recession, output declined by 2.1 per cent in 1975, but between 1976 and 1980 real GDP again grew by an average rate of approximately 4 per cent per year. During this period, however, the economy experienced higher inflation, driven in part by wage inflation and high levels of borrowing by the Government. For the 1980s as a whole, real GDP growth in Italy averaged 2.4 per cent per year.

     Italy’s economic growth slowed down substantially in the 1990s. Tighter fiscal policy, which followed the lira’s suspension from the Exchange Rate Mechanism in September 1992, led Italy’s economy into recession and, in 1993, real GDP decreased by 0.9 per cent. The economy recovered in 1994 primarily as a result of an increase in exports resulting largely from the depreciation of the lira. The recovery continued in 1995, fueled by additional investment in the manufacturing sector. Expansion after 1995 continued at a more modest pace, with Italy’s GDP growth rate lagging behind those of other major European countries. Italy’s GDP grew by an average of 1.6 per cent per year from 1996 through 1999.

     The table below shows the annual percentage change in real GDP growth for Italy and the countries participating in the EMU, including Italy, for the period 1996 through 2006.

Annual Per Cent Change in Real GDP

	1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
Italy		1.4		1.9		3.6		1.8		0.5		0.0		1.5		0.6		1.8		1.5
Euro area(1)		2.9		2.9		3.8		1.9		0.9		0.7		2.0		1.4		2.7		2.6

(1)	The euro area represents the countries participating in the EMU.
Source:	Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006 and Combined Report on the Economy and Public Finance for 2008, published on March 12, 2008.

     The growth gap between other EMU countries and Italy since the mid 1990s reflects the persistence of several medium and long-term factors, including the difficulties in fully integrating southern Italian regions into the more dynamic economy of northern and central Italy, unfavorable export specialization in traditional goods, inadequate infrastructure, the incomplete liberalization process and insufficient flexibility of national markets. The effects of these factors were aggravated by the crisis in the emerging markets of South-East Asia, the increasing

16

mobility of capital, the reduction of barriers to international competition and the reduction of subsidies for national industries.

     Italy’s real GDP growth rate increased in the second half of 1999 and in 2000 due to improving exports, industrial production and growing domestic demand. The rapid decrease in real GDP growth recorded in 2001 and 2002 and the absence of GDP growth in 2003 was due to the general factors adversely affecting the Italian economy described above as well as a decrease in world trade resulting from the slowdown in the global and U.S. economies, the volatility of global financial markets and a rise in crude oil prices in 2000, which in turn resulted in a slowdown in domestic private sector consumption and investments and a decrease in net exports. In 2004, Italy recorded a recovery in real GDP growth, although at a rate lower than the average recorded in the euro area, largely as a result of a slowdown in internal consumption and fixed investment and the decrease in exports recorded during the second half of the year. The Italian economy slowed down again in 2005, as a result of Italy’s continuing inability to introduce structural reforms necessary to address its unfavorable specialization in export goods, its lack of adequate infrastructure and inflexible labor market. Low growth prospects also resulted in a significant reduction in internal private consumption and fixed investments, which remained substantially unchanged compared to 2004. In 2006, Italy’s real GDP grew faster than expected (1.8 per cent) as a result of strong world demand and the cyclical upturn in the euro area. The expansion began in the second half of 2005 and was driven by exports and investment, which were facilitated by favorable conditions in the credit market and rising business confidence.

     The Italian Government historically has experienced substantial budget deficits. Among other factors, this is largely attributable to high levels of social spending and the fact that social services and other non-market activities of the central and local governments account for a relatively significant percentage of total employment as well as high interest expense resulting from the size of Italy’s public debt. Countries participating in the European Economic and Monetary Union are required to reduce “excessive deficits” and adopt budgetary balance as a medium-term objective. General government net borrowing was reduced to 2.8 per cent of GDP in 1998, mainly due to an increase in general government revenues resulting from the improving economy. Since 1998, Italy failed in 2001 and from 2003 to and including 2006 to maintain general government net borrowing as a percentage of GDP under the 3 per cent reference value set by the Maastricht Treaty. In the remaining years it satisfied the Maastricht criteria, largely as a result of extraordinary one-off measures, such as the sale of UMTS licenses in 2000 and the disposal of state-owned real estate in 2002. In 2006, net borrowing as a percentage of GDP decreased in the euro area, falling to 1.6 per cent. During the same period, Italy’s net borrowing as a percentage of GDP decreased from 4.2 per cent in 2005 to 3.4 per cent. The 2006 result was affected by a number of extraordinary transactions that have had both positive and negative impacts. For more information on these transactions, see “Public Finance — Measures of Fiscal Balance” and “Public Finance — Revenues and Expenditures.”

     A longstanding objective of the Government has been to control Italy’s debt-to-GDP ratio. Government debt relative to GDP fell from 121.5 per cent in 1994 to 103.8 per cent of GDP in 2004, largely as a result of receipts from privatizations of State-owned assets; however, it remains above the 60 per cent debt ceiling required under the Maastricht Treaty. The ratio of Government debt-to-GDP rose for the second consecutive year, from 105.8 in 2005 to 106.5 in 2006. The increase in Italy’s debt-to-GDP ratio reflects Italy’s decreasing primary balance and

17

the absence of extraordinary measures (for example, privatizations, securitization of real estate assets) to reduce public debt in 2005 and 2006. The slower increase in the debt-to-GDP ratio in 2006 compared to 2005 resulted from faster GDP growth in 2006. Based on Italy’s Combined Report on the Economy and Public Finance published in March 2008, debt-to-GDP is estimated to decrease to 104.0 per cent in 2007.

     Historically, Italy has had a high but declining savings rate. As a percentage of gross national disposable income, which measures aggregate income of a country’s nationals after providing for capital consumption (the replacement value of capital used up in the process of production), private sector saving averaged 28.3 per cent in the period from 1981 to 1990 and 24.5 per cent in the period from 1991 to 2000. Private sector saving as a percentage of gross national disposable income averaged 20 per cent in the period from 2003 to 2006. Because of the high savings rate, the Government has been able to raise large amounts of funds through issuances of Treasury securities in the domestic market, with limited recourse to external financing.

     The Italian economy is characterized by significant regional disparities, with the level of economic development of southern Italy well below that of northern and central Italy. According to the Bank of Italy, the per capita GDP of southern Italy, also known as the Mezzogiorno, was 57.8 per cent of the per capita GDP of northern Italy in 1989 and declined progressively to 57.0 per cent in 2000. The marked regional divide in Italy is also evidenced by a difference in unemployment rates. While unemployment in the north of Italy was 4.4 per cent in 2006, well below the average unemployment rate of countries in the euro area of 7.9 per cent in 2006, the unemployment rate in the Mezzogiorno was significantly higher at 12.2 per cent in 2006, having decreased from 14.2 per cent in 2005.

     While the employment rate grew steadily from 55.6 per cent in 2001 to 58.4 per cent in 2006, it remained well below the average employment rate of countries in the euro area, which grew from 62.3 per cent in 2001 to 64.4 per cent in 2006. The number of employed persons in Italy increased by 1.7 per cent in 2006, one of the largest increases in the last thirty years. See “— Employment and Labor.”

     Inflation, as measured by the harmonized consumer price index, has declined from rates exceeding 20 per cent in the early 1980s to 2.1 per cent in 2006. See “— Prices and Wages.”

2007 Developments

     Italy’s real GDP growth rate is estimated at 1.5 per cent during 2007, compared to 1.8 per cent in 2006, based on ISTAT data. This growth was mainly driven by private sector consumption. Italy’s seasonally adjusted average unemployment rate decreased to 5.9 per cent in 2007, from 6.8 per cent recorded during the previous year. Consumer prices, as measured by the harmonized EU consumer price index, increased at an annual rate of 2.0 per cent during the twelve months ended December 31, 2007, compared to a 2.2 per cent increase during the twelve months ended December 31, 2006.

18

     On February 29, 2008, ISTAT published updated public finance estimates for 2007, which are set forth below and shown as percentages of the estimated GDP for the same period, except for tax burden, which is shown in percentage terms.

	2007
Net borrowing		1.9
Primary balance		3.1
Tax burden		43.3
Current revenues		46.9
Total revenues		47.2
Current expenditures		44.6
Current expenditures (net of interest)		44.1
Total expenditures		49.1

Gross Domestic Product

     From 1996 to 1999, average annual real GDP growth in Italy was 1.5 per cent, compared to 2.5 per cent in the euro area, reflecting a range of factors including weak demand in key European export markets, the effects of the Asian crisis in 1998, declining private consumption and weak disposable income growth. During this period Italy also suffered the lagged effects of fiscal tightening and reform of its social security and welfare systems. In 2000, Italy’s GDP growth rose to 3.6 per cent, compared to 3.8 per cent in the 13 country euro area, as the declining exchange rate of the euro and improved economies outside the EU contributed to a significant increase in incoming orders for manufacturing goods and also due to sustained internal demand and investment. The rapid decline in Italy’s GDP growth rate in 2001, 2002 and 2003 was due to the decrease in world trade resulting from the slowdown in the global and U.S. economies, the volatility of financial markets, a slowdown in domestic private sector consumption and investments and a decrease in exports. In 2004, Italy recorded a recovery in real GDP growth as the world economy began expanding following the slowdown in the three prior years. However, GDP grew at a slower rate than the average recorded in the euro area, largely as a result of a slowdown in internal consumption and fixed investment and the decrease in exports recorded during the second half of the year. The slow growth recorded in 2005 was mainly due to Italy’s continuing inability to introduce structural reforms necessary to address its unfavorable specialization in export goods, its lack of adequate infrastructure and inflexible labor market. Low growth prospects also resulted in a significant reduction in internal private consumption and fixed investments, which remained substantially unchanged compared to 2004. In 2006, Italy recorded real GDP growth of 1.8 per cent, compared to 0.6 per cent in 2005. This increase was principally due to strong world demand and the cyclical upturn in the euro area.

     The following tables set forth information relating to nominal (unadjusted for changing prices) and real GDP and expenditures for the periods indicated.

19

GDP Summary

	2002		2003		2004		2005		2006
Nominal GDP (millions of €)		1,295,226		1,335,354		1,390,539		1,428,375		1,479,981
Real GDP(1) (millions of €)		1,216,589		1,217,041		1,231,689		1,232,773		1,255,848
Real GDP % Change		0.3%		—		1.5%		0.6%		1.8%
Population (in thousands)		57,321		57,888		58,462		58,751		59,131
Nominal per capita GDP		22,596		23,068		23,785		24,312		25,028
Real per capita GDP(1)		21,224		21,024		21,068		20,983		21,238

⁽¹⁾ Constant euro with purchasing power equal to the average for 2000.

Source: Bank of Italy, ISTAT and Ministry of Economy.

Real GDP and Expenditures

	2002		2003		2004		2005		2006
Real GDP		1,216,589		1,217,041		1,231,689		1,232,773		1,255,848
Add: Imports of goods and services		309,145		311,589		319,906		321,541		335,294
of which
Goods		245,793		248,275		257,417		258,344		270,499
Services		63,353		63,315		62,488		63,198		64,795
Total supply of goods and services		1,525,726		1,528,574		1,551,308		1,553,972		1,590,801
Less: Exports of goods and services		310,783		303,219		313,270		311,694		328,106
of which
Goods		251,172		244,935		252,672		251,461		264,796
Services		59,611		58,284		60,597		60,232		63,311
Total goods and services available for domestic expenditure		1,214,943		1,225,355		1,238,038		1,242,278		1,262,695
Domestic expenditure
Private sector consumption		715,871		722,865		727,751		732,064		742,743
Public sector consumption		236,795		241,662		245,627		249,418		248,771
Total domestic consumption		952,666		964,527		973,378		981,482		991,514
Gross fixed investment		257,969		253,576		257,766		256,468		262,462
Total domestic expenditures(1)		1,210,635		1,218,103		1,231,144		1,237,950		1,253,976

⁽¹⁾ Total goods and services available for domestic expenditure do not match total domestic expenditure figures due to the effects of rounding.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

20

Real GDP and Expenditures

	2002			2003			2004			2005			2006
				(As a percentage of GDP)
Real GDP		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Add: Imports of goods and services		25.4	%		25.6	%		26.0	%		26.1	%		26.7	%
Total supply of goods and services		125.4	%		125.6	%		126.0	%		126.1	%		126.7	%
Less: Exports of goods and services		25.5	%		24.9	%		25.4	%		25.3	%		26.1	%
Total goods and services available for domestic expenditure		99.9	%		100.7	%		100.5	%		100.8	%		100.6	%
Domestic expenditure
Private sector consumption		58.8	%		59.4	%		59.1	%		59.4	%		59.1	%
Public sector consumption		19.5	%		19.9	%		19.9	%		20.2	%		19.8	%
Total domestic consumption		78.3	%		79.3	%		79.0	%		79.6	%		79.0	%
Gross fixed investment		21.2	%		20.8	%		20.9	%		20.8	%		20.9	%
Total domestic expenditure		99.5	%		100.1	%		100.0	%		100.4	%		99.9	%

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

     Private Sector Consumption. The growth of private sector consumption, comprising the expenditure by households on goods and services other than new housing, dropped to 0.2 per cent in 2002 followed by an increase to 1.0 per cent in 2003. In 2004 and 2005, private sector consumption growth decreased to 0.7 per cent and 0.6 per cent, respectively. Conversely, in 2006, it registered a rise of 1.5 per cent. By comparison, in the euro area, private sector consumption growth rose from 1.0 per cent to 1.5 per cent in 2003, 2004 and 2005, respectively and increased further to 1.7 per cent in 2006. The growth of private sector consumption in Italy in 2006 reflected an increase in the demand for semi-durable goods (such as clothing), durable goods (principally transport, white goods and furniture) and services (particularly entertainment and cultural services). In line with the trend recorded in 2005, consumer confidence in Italy remained low in 2006 due to uncertainties regarding Italy’s persistent economic slowdown. Private sector consumption represented 59.1 per cent of GDP in 2006 and its contribution to real GDP growth during the same period was 0.9 per cent, compared to 0.4 per cent in 2005.

     Public Sector Consumption. Public sector consumption, or the expenditure on goods and services by the general government, decreased by 0.3 per cent in 2006, compared to a 1.5 per cent rise in 2005. Public sector consumption represented 19.8 per cent of GDP in 2006 and it contributed negatively to the real GDP growth by 0.1 per cent during the same period, compared to a positive contribution of 0.3 per cent in 2005.

     Gross Fixed Investment. Gross fixed investment in Italy, comprising spending on capital equipment and structures, including purchases of new housing, increased by 2.3 per cent in 2006, compared to 0.5 per cent decrease in 2005. In the euro area gross fixed investment increased by 4.7 per cent in 2006 and by 2.5 per cent in 2005. Italy’s increase in gross fixed investments was principally due to a significant rise in operational revenue growth in the industry sector. The most significant rises were recorded in capital spending on transport machinery (3.7 per cent in 2006 compared to a 3.5 per cent decrease in 2005), non-tangible assets (7 per cent in 2006 compared to a 2.9 decrease in 2005) and residential buildings. Investment in transport machinery increased by 3.7 per cent, compared to a 3.5 per cent decrease in 2005. Investment in

21

construction grew by 2.1 per cent in 2006, compared to 0.3 per cent in 2005, mainly due to the rise of residential construction activity, which was equal to 4 per cent, almost twice as large as for the sector as a whole. Gross fixed investment contributed to real GDP growth by 0.5 per cent during 2006, compared to a negative contribution of 0.1 per cent in 2005.

     Net Exports. In 2006, Italy’s exports of goods and services increased by 5.3 per cent, compared to a 0.5 per cent decrease in 2005, while imports of goods and services increased by 4.3 per cent, compared to a 0.5 per cent increase in 2005. The growth rate in Italian exports registered in 2006 was the best result since the peak of the cycle in 2000. In 2006, net exports contributed by 1.4 per cent to real GDP growth.

     Regional GDP. In the period between 1996 and 2006, average annual GDP growth in southern Italy was in line with the growth experienced by northern and central Italy. Northern and central Italy GDP growth was 0.3, 1.4 and 0 per cent in 2003, 2004 and 2005, respectively, while southern Italy GDP growth was 0.4, 0.7 and 0.3 per cent, respectively, in those years. In 2006, northern and central Italy GDP rose by 2.0 per cent, while in southern Italy it grew by 1.5 per cent.

     In 2006, per capita GDP in the Mezzogiorno was 58 per cent of that of the rest of Italy. Irregular workers (unregistered workers and registered workers with unregistered second jobs) in the Mezzogiorno were estimated to constitute a significant proportion of the overall workforce in industry and services available in that region.

     GDP Growth. Structural shortcomings have hindered Italy’s productivity. Italy’s share of goods with low value added and high price elasticity is higher than that of any other large industrialized country. As a result, it is more exposed to competition from emerging economies. This was particularly evident in 1997 and 1998 when world prices for goods produced in Asia fell sharply. In addition, most output is produced by small firms that cannot achieve economies of scale in production. During late 1999 and 2000, however, the declining exchange rate of the euro and improved economies outside the EU contributed to a significant increase in incoming orders for manufactured goods. Exports growth declined in 2002 and 2003 due to the fall in worldwide demand and the continuing loss in competitiveness of Italian products, while in 2004 exports grew at a rate of 3.3 per cent, mainly as a result of an increase in worldwide demand. In 2005, Italy recorded a 0.5 per cent decrease in exports and this largely resulted from the inadequacy of a production model that, on the one hand, prevented Italy from taking advantage of the increasing world demand for high technology items and, on the other hand, relegated it to the exports of goods with low value added where the competition of emerging economies was stronger. In 2006, exports grew by 5.3 per cent, the best result since the peak of the previous cycle in 2000. This growth was primarily due to an increase in exports to Germany, China and Russia. Based on ISTAT data published in February 2008, GDP grew at a rate of 1.5 per cent in 2007, compared to 1.9 per cent estimated in Italy’s Update to the Stability Program published in November 2007.

     An improvement in the outlook for recovery in GDP growth depends on the successful adoption of Government designed policies to:

• promote investments in infrastructure and strategic areas;

22

• foster market liberalization and reduce administrative bureaucratic charges and procedures;

• reduce the tax burden;

• preserve the private sector purchasing power; and

• undertake structural measures to contain the growth of government expenditure.

     Strategic Infrastructure Projects. Italy’s economic infrastructure is still significantly underdeveloped compared to other major European countries.

     Law No. 443/2001 (the “Strategic Infrastructure Law”), as subsequently amended, provides the government with special powers for the planning and realization of those infrastructure projects considered to be of strategic importance for the growth and modernization of the country, particularly the Mezzogiorno. The Strategic Infrastructure Law aims at simplifying the administrative process necessary to award contracts in connection with strategic infrastructure projects and increase the proportion of privately financed projects.

     In the 2008-2011 Program Document, Italy confirmed its firm intention to pursue a substantial infrastructure program. However, the government stated that it was necessary to prioritize certain projects and delay others in light of Italy’s slow economic growth. On this new basis, priority was given to those projects which are already under development and, secondly, to those in respect of which engineering and building concessions have been awarded already. New projects will be commenced only to the extent they prove essential for improving the efficiency of the transport system as a whole and, provided adequate financial cover is available.

     The government identified those infrastructures that require development or redevelopment between 2008 and 2011 and the economic resources for these projects in a “Priority Infrastructure Master Plan.” This plan includes projects for the construction of new railways along the Naples-Bari and Palermo-Messina routes and a rail link with Malpensa airport, an upgrade of the main motorways connecting North and Southern Italy and the implementation of projects aimed at relieving congestion in urban areas, including the Milan, Turin, Bologna, Rome and Naples underground systems. The cost of such projects amounts to approximately €32,150 million and will be financed by national and EU funds.

Principal Sectors of the Economy

     The following tables sets forth value added at market prices by sector and the proportion of such sector on the total value added at market prices.

23

Value Added at Market Prices by Sector

	2002					2003					2004					2005					2006
	€ in		% of			€ in		% of			€ in		% of			€ in		% of			€ in		% of
	millions		Total			millions		Total			millions		Total			millions		Total			millions		Total
Agriculture, fishing and forestry		28,130		2.6	%		26,754		2.5	%		30,253		2.8	%		28,915		2.6	%		28,007		2.5	%
Industry
Manufacturing		218,202		20.0	%		212,974		19.6	%		210,275		19.2	%		205,007		18.7	%		212,499		19.0	%
Construction		58,638		5.4	%		60,262		5.5	%		60,813		5.5	%		61,259		5.6	%		62,248		5.6	%
Extractive industries and production and distribution of energy, gas, steam and water		27,295		2.5	%		26,964		2.5	%		27,680		2.5	%		28,686		2.6	%		27,002		2.4	%
Total industry		304,135		27.9	%		300,200		27.6	%		298,768		27.2	%		301,749		27.5	%		301,749		27.0	%
Market Services
Commerce and repairs		135,323		12.4	%		131,629		12.1	%		136,114		12.4	%		138,995		12.6	%		142,097		12.7	%
Hotels and restaurants		39,290		3.6	%		38,428		3.5	%		38,529		3.5	%		39,553		3.6	%		41,088		3.7	%
Transport and communications		86,017		7.9	%		87,519		8.1	%		89,719		8.2	%		90,439		8.2	%		92,571		8.3	%
Financial services		48,595		4.5	%		48,773		4.5	%		49,718		4.5	%		50,238		4.6	%		51,410		8.3	%
IT, research and professional activity		109,273		10.0	%		110,807		10.2	%		109,256		10.0	%		107,565		9.8	%		108,675		4.6	%
Real estate leases		118,305		10.9	%		121,151		11.2	%		120,122		11.0	%		121,348		11.0	%		121,929		9.7	%
Total market services		536,803		49.3	%		538,307		49.6	%		543,458		49.6	%		548,138		49.9	%		557,770		10.9	%
Non-market Services
Public administration		65,340		6.0	%		66,532		6.1	%		67,799		6.2	%		68,910		6.3	%		70,426		6.3	%
Education		54,408		5.0	%		55,114		5.1	%		55,111		5.0	%		55,216		5.0	%		55,466		5.0	%
Public health and social services		60,282		5.5	%		60,597		5.6	%		62,015		5.7	%		63,064		5.7	%		63,024		5.6	%
Household services		9,811		0.9	%		9,789		0.9	%		10,211		0.9	%		10,591		1.0	%		10,754		1.0	%
Other services		30,468		2.8	%		29,230		2.7	%		29,259		2.7	%		29,386		2.7	%		30,258		2.7	%
Total non-market services		220,309		20.2	%		221,262		20.4	%		224,395		20.5	%		227,167		20.7	%		229,928		20.6	%
Value added at market prices		1,089,008		100.0	%		1,086,032		100.0	%		1,096,576		100.0	%		1,099,043		100.0	%		1,117,610		100.0	%

(1) Value added in this table is calculated by reference to market prices of products and services, excluding any taxes on any such products.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

24

Value Added Growth by Sector

	Real GDP % Growth by Sector
	2002			2003			2004			2005			2006
Agriculture, fishing and forestry		(3.1	)%		(4.9	)%		13.1	%		(4.4	)%		(3.1	)%
Industry
Manufacturing		(1.3	)%		(2.4	)%		(1.3	)%		(2.5	)%		3.7	%
Construction		2.4	%		2.8	%		0.9	%		0.7	%		1.6	%
Extractive industries and production and distribution of energy, gas, steam and water		3.2	%		(1.2	)%		2.7	%		3.4	%		(5.7	)%
Total industry		(0.2	)%		(1.3	)%		(0.5	)%		1.0	%		0.0	%
Market Services
Commerce and repairs		(2.2	)%		(2.7	)%		3.4	%		2.1	%		2.2	%
Hotels and restaurants		(4.9	)%		(2.2	)%		0.3	%		2.7	%		3.9	%
Transport and communications		4.3	%		1.7	%		2.5	%		0.8	%		2.4	%
Financial services		(4.1	)%		0.4	%		1.9	%		1.0	%		2.3	%
IT, research and professional activity		5.9	%		1.4	%		(1.4	)%		(1.5	)%		1.0	%
Leases		2.3	%		2.4	%		(0.8	)%		1.0	%		0.5	%
Total market services		1.0	%		0.3	%		1.0	%		0.9	%		1.8	%
Non-market Services
Public administration		1.6	%		1.8	%		1.9	%		1.6	%		2.2	%
Education		3.0	%		1.3	%		0.0	%		0.2	%		0.5	%
Public health and social services		1.2	%		0.5	%		2.3	%		1.7	%		(0.1	)%
Household services		1.8	%		(0.2	)%		4.3	%		3.7	%		1.5	%
Other services		(3.8	)%		(4.1	)%		0.1	%		0.4	%		3.0	%
Total non-market services		1.0	%		0.4	%		1.4	%		1.2	%		1.2	%
Value added at market prices		3.3	%		(0.3	)%		1.0	%		0.2	%		1.7	%

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Role of the Government in the Economy

     Until the early 1990’s State-owned enterprises played a significant role in the Italian economy. The State participated in the energy, banking, shipping, transportation and communications industries, among others, and owned or controlled approximately 45 per cent of the Italian industrial and services sector and 80 per cent of the banking sector. As a result of the implementation of its privatization program, which started in 1994 and is ongoing, the State exited completely the insurance, banking, telecommunications and tobacco sectors and reduced significantly its interest in the energy sector (principally through sales of shareholdings in ENI S.p.A. (“ENI”) and ENEL S.p.A. (“ENEL”)) and in the defense sector (principally through sales of shareholdings in Finmeccanica S.p.A.). See “Monetary System — Banking Regulation — Structure of the Banking Industry” and “Public Finance — Government Enterprises and— Privatization Program.”

25

Services

     In 2006, services represented 70.5 per cent of GDP and 66.8 per cent of total employment. Among the most important service sectors are:

• transport and communications, which accounted for 8.3 per cent of GDP in 2006;

• commerce, hotels and restaurants, which accounted for 16.4 per cent of GDP in 2006;

• information technology, research and professional services, which accounted for 12.9 per cent of GDP in 2006; and

• real estate leases, which accounted for 9.7 per cent of GDP in 2006.

     Transport. Italy’s transport sector has been relatively fast-growing and, during the period from 1980 to 1996, grew at more than twice the rate of industrial production growth. The expansion of the transport sector was largely the result of trade integration with European markets. Historically, motorways and railways have been controlled, directly and indirectly, by the Government and railways in particular have posted large financial losses. In recent years many of these enterprises have been restructured in order to place them on a sounder financial footing and/or privatized.

     Roadways are the dominant mode of transportation in Italy. The road network includes, among others, municipal roads that are managed and maintained by local authorities, roads outside municipal areas that are managed and maintained by the State Road Board (ANAS) and a system of toll highways that in part are managed and maintained by several concessionaries, the largest of which is controlled by Autostrade S.p.A. (“Autostrade”), which was privatized in 1999. Autostrade manages approximately 3,400 kilometers, of the approximately 6,500 kilometer system of motorways, under several concessions granted by ANAS. Toll motorways represent approximately 84.6 per cent of the total motorway network.

     Italy’s railway network is small in relation to its population and land area. Approximately 30 per cent of the network carries 80 per cent of the traffic, resulting in congestion and under-utilization of large parts of the network. There are approximately 22,200 kilometers of railroad track, of which a large majority are controlled by State-owned railways, with the remainder controlled by private firms operating under concession from the Government. In 2006, Italian railways carried approximately 22.2 billion tons-km of freight and recorded 46.1 billion passengers-km. The Government historically has provided substantial operating subsidies to the State-owned railroads, making passenger tickets less expensive than for most European railroads. In addition, the railway system historically has suffered from overstaffing, high costs and inadequate infrastructure. However, the Government has been restructuring the Italian railway system to improve its efficiency, expand the network and upgrade existing infrastructure.

     In 1992, the Italian State railway company was converted from a public law entity into a commercial State-owned corporation, Ferrovie dello Stato S.p.A. or FS, with greater autonomy over investment, decision-making and management. In 2006, the total annual capital expenditure in fixed assets by Ferrovie dello Stato totaled €7,263 million, compared to €2,720 million in 1997. In 2006, Ferrovie dello Stato’s revenues amounted to €6,706 million compared to €6,875

26

million in 2005. Operating costs increased from €6,747 million in 2005 to €7,356 in 2006 mainly as a result of extraordinary repair and maintenance work, an increase in passenger services provided on trains and the implementation of a new collective bargaining agreement which resulted in a rise in wages and salaries. Due to the increase in operating costs and the decrease of the Italian State’s subsidies to Ferrovie dello Stato, Ferrovie dello Stato recorded a consolidated loss of €2,115 million in 2006, compared to a €465 million loss in 2005.

     In response to EU directives and intervention by the Italian Antitrust Authority (Autorità Garante della Concorrenza e del Mercato), since March 1999 Italy has been implementing a plan aimed at preparing Italy’s railways for competition. Italy liberalized railway transportation by creating two separate legal entities wholly owned by Ferrovie dello Stato: Trenitalia S.p.A., managing the transportation services business and Rete Ferroviaria Italiana S.p.A. (“RFI”) managing railway infrastructure components and the efficiency, safety and technological development of the network.

     The Government plans to privatize the freight and intercity businesses, while the local transport and infrastructure divisions will continue to be Government-operated. The Government’s objective is to devolve to the regions a significant part of the State responsibilities for local railways. Under the planned decentralization process, regions will become responsible for the whole range of local transportation services through contracts entered into with the State. The international segment of railway transport was liberalized in 2000 and as of May 20, 2007, 40 licenses had been granted to international operators.

     Projects for new high-speed train systems (Treno ad alta velocità, or TAV) linking the principal urban centers of Italy with one another and with neighboring European countries, as well as other infrastructure projects designed to upgrade the railway network, are under way or, in some cases, have been completed.

     Gioia Tauro (in the proximity of Reggio Calabria) is the largest Mediterranean port for container shipping. During the late 1990s, Istituto per la Ricostruzione Industriale or IRI, a State holding company, completed the privatization of its international maritime companies. Tirrenia, a state-owned company, operates ferry operations and regional maritime activities.

     Alitalia, Italy’s national airline was partially privatized in 1998 and re-capitalized in early 2002. Currently, 51.1 per cent is owned by the public with the remainder held by the Ministry of Economy and Finance. In January 2007, the Government announced its intention to sell a shareholding of not less than 30.1% in the company, subsequently increased to 39.9% and all the Alitalia convertible bonds owned by the Ministry of Economy and Finance. However, the competitive bid process for the sale of the Government stake in Alitalia failed and during 2007, following the Government’s confirmation of its intention to transfer the control of Alitalia to private investors, Alitalia received three non binding offers for the purchase of a controlling stake in the company. In December 2007, Alitalia selected one of the bidders, Air France-KLM, as the entity with whom the company would hold negotiations on an exclusive basis. In 2006, Alitalia recorded losses of approximately €626 million, compared to losses of approximately €168 million in 2005.

27

     Passenger air traffic in Italy is concentrated, with approximately 57 per cent of all air traffic in 2005 attributable to Fiumicino and Ciampino airports in Rome and Linate and Malpensa airports in Milan.

     Communications. In 1997, Parliament enacted legislation to reform the telecommunications market with the aim of promoting competition in accordance with EU directives. This legislation permits companies to operate in all sectors of the telecommunications market, including radio, television and telephone, subject to certain antitrust limitations and provided for the appointment of a supervisory authority. The Italian Telecommunication Authority (Autorità per le Garanzie nelle Comunicazioni, or AGCOM), consists of eight members appointed by Parliament and a president appointed by the Government. It is responsible for issuing licenses and has the power to regulate tariffs and impose fines and other sanctions. Each fixed and mobile telephony operator must obtain an individual license, which is valid for 15 years and renewable.

     Italy’s telecommunications market is one of the largest in Europe, utilizing an aggregate of approximately 27.4 million fixed lines as of December 31, 2005. As of December 31, 2006, the Italian telecommunications market had an aggregate of 80.4 million mobile telephone lines. The market was deregulated in January 1998 and while Telecom Italia, which was privatized in 1997, remains the largest operator, it is facing increasing competition from new operators that have been granted licenses for national and local telephone services. Competition among telecommunications operators has resulted in lower charges and a wider range of services offered. In January 2000, access to local loop telephony was liberalized.

     In 1995, following the adoption of legislation aimed at developing competition in the mobile telephone business, Telecom Italia Mobile (TIM) was spun-off from Telecom Italia and publicly listed; however, in 2004, in furtherance of a restructuring plan aimed, inter alia, at strengthening its position in the market, TIM merged into Telecom Italia. The Government also granted mobile licenses to other mobile operators. TIM remains the largest mobile operator, followed by Vodafone Italia (controlled by the Vodafone Group) and Wind.

     In 1998, the European Parliament authorized EU member countries to grant a limited number of Universal Mobile Telecommunication System, or UMTS, licenses for third-generation, or 3G, mobile telephony services, through which companies intend to provide additional and enhanced services including high-speed wireless internet access. The allocation process of UMTS licenses in Italy was implemented by an auction among pre-qualified applicants. In 2000, five UMTS licenses were granted for terms of fifteen years. Italy raised €13,815 million through the UMTS license auction.

     Internet and personal computer penetration rates in Italy have grown substantially in recent years. The ratio of personal computers per household increased from 16.7 per cent in 1997 to 29.7 in 2000 and 46.1 per cent in 2006 while the proportion of PCs connected to the Internet increased to 35.6 per cent in 2006 from 2.3 per cent in 1997 and.

     Tourism. Tourism is an important sector of the Italian economy. In 2006, tourism revenues, net of amounts spent by Italians traveling abroad, were approximately €12 billion, representing a 14.5 per cent increase from net tourism revenues in 2005. This reflected an increase in spending

28

by Italian tourists abroad of 2.2 per cent and an increase of 13.5 per cent in spending by foreign visitors in Italy. See “The External Sector of the Economy — Current Account.”

     Financial Services. Historically, a significant proportion of Italy’s domestic investment has been in public debt. However, the percentage of domestic investment allocated to holdings of foreign assets, investment fund units and shares, increased from 18.5 per cent in 1995 to 37.7 per cent in 2006, while the percentage allocated to bonds decreased from 30.6 per cent in 1995 to 16.1 per cent in 2006. This shift generated a substantial increase in fee income for financial institutions.

     Share prices rose in Italy in 2006. The Italian stock exchange recorded a 19 per cent average increase in share prices, in line with the Euro Stoxx index.

     Italian household indebtedness as a percentage of disposable income grew from 25 per cent in 1996 to 47 per cent in 2006. However, it remains lower than in the euro area where household indebtedness as a percentage of disposable income was equal to 97 per cent in 2006. Bank lending to Italian residents generally has increased since 1997, accommodating economic expansion. The rate of growth in bank lending rose to 11.5 per cent in 2006 from 8.7 per cent in 2005. For a description of the Italian banking system, see “Monetary System — Banking Regulation.”

Manufacturing

     In 2006, the manufacturing sector represented 19 per cent of GDP and 19.5 per cent of total employment. In 2006, manufacturing output increased by 3.7 per cent, compared to a 2.5 per cent decrease registered in 2005.

     Italy has compensated for its lack of natural resources by specializing in transformational and processing industries. Italy’s principal manufacturing industries include metal products, precision instruments and machinery, textiles, leather products and clothing, wood and wood products, paper and paper products, food and tobacco, chemical and pharmaceutical products and transport equipment, including motor vehicles.

     The number of large manufacturing companies in Italy is relatively small in comparison to other European Union countries. The most significant include Fiat (automobiles and other transportation equipment), Pirelli (tires, cables and industrial rubber products), Finmeccanica (aeronautics, helicopters, space and defense), Barilla (food), Luxottica (glasses) and Giorgio Armani (clothing). These companies export a significant share of their output and have significant market shares in their respective product markets in Europe.

     Much of Italy’s industrial output is produced by small and medium-sized firms, which also account for much of the economic growth over the past 20 years. These firms are active especially in light industry (including the manufacture of textiles, clothing, food, shoes and paper), where they have been innovators, and export a significant share of their production. The profit margins of large manufacturing firms, however, generally, have been higher than those of their smaller counterparts. Various Government programs to support small firms provide, among other things, for loans, grants, tax allowances and support to venture capital entities.

29

     Traditionally, investments in research and development (R&D) activities have been very limited in Italy. Total and corporate R&D spending has continued to be proportionally lower in Italy than in other industrial countries, reflecting Italian industry’s persistent difficulty in closing the technology gap with other advanced economies. Total R&D spending in Italy rose from 1.00 percent in 1995 to 1.10 per cent in 2004. This compares to total R&D spending as a percentage of GDP in 2004 of 2.50 per cent in Germany, 2.14 per cent in France, 1.77 per cent in the EU (including the ten EU member states which joined in May, 2004), 2.68 per cent in the United States and 3.18 per cent in Japan.

The following table shows industrial production by sector for the years indicated.

Industrial Production by Sector
(Index: 2000 = 100)

	2002		2003		2004		2005		2006
Energy products		103.8		108.3		111		115.2		115.2
Minerals, ferrous and non-ferrous metals		98.1		98.5		99.4		99.2		100.6
Chemicals and pharmaceutical products		100.7		98.3		100.8		99.1		102.7
Metal products		97.6		99.6		101.8		99.4		102.9
Agricultural and industrial machinery		101.4		97		98.1		98.9		103.2
Precision instruments and machines		91.7		83.8		83.8		75.9		80.8
Transport equipment		89		84.1		84		77.6		82.6
Food and tobacco		104.9		107		106.6		107.5		108
Textiles and clothing		91.8		88.5		84.8		77.5		77.2
Wood and wood products		100.1		98.3		100.8		98.7		99.4
Paper and paper products		99.1		100.9		107.3		106.2		104
Rubber and plastic materials		94.9		94.9		94.7		90.8		93.2
Other industrial products		98.4		88.4		88.3		85.3		81
Aggregate Index		97.8		96.8		97.4		95.7		96.2

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Energy Consumption

     The demand for energy, measured in terms of million tons of oil equivalent, or MTOE, decreased by 2 per cent in 2006, compared to a 1.5 per cent increase in 2005. The decrease of energy demand was due to a decrease in demand for private consumption (2.7 per cent) and industry (0.5 per cent), partially offset by an increase in transportation (0.3 per cent) and “other uses” (0.4 per cent).

     In 2006, oil represented 43.3 per cent of Italy’s primary energy consumption, with natural gas accounting for 35.6 per cent, renewable energy resources (which includes solar and wind energy, recyclable material, waste material and biogas) accounting for 7.2 per cent, solid combustibles accounting for 8.9 per cent and net purchased electricity accounting for 5 per cent.

     In 2006, Italy imported 93.9 per cent of its oil requirements and 91.2 per cent of its natural gas requirements. The only other significant imported energy source is coal. A referendum held in 1987 rejected the use of nuclear power in Italy.

30

     The domestic energy industry consists primarily of ENI, ENEL and Edison. ENI, approximately 20 per cent owned by the Government, is engaged in the exploration, development and production of oil and natural gas in Italy and abroad, the refining and distribution of petroleum products, petrochemical products, the supply, transmission and distribution of natural gas and oil field services contracting and engineering.

     ENEL is the largest electricity company in Italy and is engaged principally in the generation, importation and distribution of electricity. The Government owns approximately 22 per cent of the share capital of ENEL directly and 10.35 per cent through Cassa Depositi e Prestiti S.p.A., which is 70 per cent owned by the Government. Domestic capacity is insufficient to meet current demand, and Italy imports a significant share of its electricity requirements.

     The Electricity and Gas Authority (Autorità per l’Energia Elettrica e il Gas) regulates electricity activities and natural gas distribution in Italy with the aim of promoting competition while ensuring adequate levels of service quality. The Authority is led by a board of three members appointed by Parliament and has a large degree of independence and significant powers, including the power to establish base tariffs and the criteria for tariff adjustments and to issue fines and other sanctions. While several companies operate in the gas distribution market, during 2005 natural gas sales by ENI accounted for about 67.6 per cent of domestic consumption. Law 290/2003, in line with European Directives, provided for a partial liberalization of the natural gas market. Pursuant to that law, after July 1, 2007 no single operator could have a stake higher than 20% in the share capital of companies owning and managing natural networks for the transmission of natural gas and electricity. However, the Italian Budget Law for 2007 established that the term for the disposal envisaged by Law 290/2003 — which was extended to December 31, 2008 in the course of 2006 — would be 24 months from the effectiveness of the Italian Prime Minister’s decree which will implement Law 290/2003. Following the determination of gas transportation tariffs by the Authority, ENI sold a 40.2 per cent stake in the share capital of its distribution subsidiary, SNAM Rete Gas, through an initial public offering in December 2001 and a further 9.1 per cent interest in March 2004. As of December 31, 2006, ENI held a 50.04 per cent interest in SNAM Rete Gas.

     In recent years, the Italian electricity sector has undergone significant changes. A Government decree issued in 1999, known as the Bersani Decree, established a general regulatory framework for the Italian electricity industry that has gradually introduced free competition in power generation and sales to consumers meeting certain consumption thresholds while maintaining a regulated monopoly structure for power transmission, distribution and sales to other consumers. In particular, the Bersani Decree and the subsequent implementing regulations:

• liberalized, as of April 1, 1999, the generation, import and export of electricity;

• liberalized the sale of electricity to consumers meeting certain consumption thresholds, or “Eligible Customers,” who may negotiate supply agreements directly with any domestic or foreign producer, wholesaler or distributor of electricity, and provided that other consumers, or “Non-Eligible Customers,” would have to purchase electricity from the distributor serving the area in which they are located and pay tariffs determined by the Electricity and Gas Authority;

31

• provided that after January 1, 2003, no electricity company is allowed to produce or import more than 50% of the total of imported and domestically produced electricity in Italy in order to increase competition in power generation;

• provided for the establishment of the Single Buyer, a central purchaser of electricity from producers on behalf of all Non-Eligible Customers;

• provided for the creation of the Borsa dell’Energia Elettrica, or pool market for electricity, in which producers, importers, wholesalers, distributors, the Gestore della Rete, other Eligible Customers and the Single Buyer participate, with prices being determined through a competitive bidding process;

• provided for the creation of the Gestore del Mercato, or Market Operator, charged with managing the pool market;

• provided that the transmission and distribution of electricity are reserved to the Italian government and performed by licensed operators, and in this respect:

• provided that management and operation of the national transmission grid is licensed to an independent system operator, the Gestore della Rete or System Operator, with owners of the transmission grid such as Terna S.p.A. (formerly owned by ENEL) retaining ownership of the grid assets; and

• established a new licensing regime for electricity distribution and provided incentives for the consolidation of electricity distribution networks within each municipality.

     In accordance with the Bersani Decree, during 2000 ENEL established three new generating companies (Eurogen, Elettrogen and Interpower or, collectively, Gencos); representing approximately 25 per cent of ENEL’s generation capacity. In September 2001 a consortium led by Endesa, a Spanish utility, acquired Elettrogen, the second largest Genco, with a total generation capacity of 5,400 MW. In May 2002 Edipower S.p.A., a consortium led by Edison S.p.A. acquired Eurogen, the largest Genco with a total generation capacity of 7,000 MW. In November 2002, a consortium comprising Acea S.p.A., Electrobel S.p.A. and Energia Italiana acquired Interpower, the third Genco, with a total generation capacity of 2,611 MW.

     Effective January 1, 2000, a new tariff regime, subsequently amended, significantly lowered fixed tariff rates for the generation, transmission and distribution of electricity.

     Terna S.p.A., formerly controlled by ENEL, owns and operates approximately 94 per cent of the transmission assets of Italy’s national electricity grid, which was operated by the System Operator until October 31, 2005. In accordance with a governmental decree, enacted on May 11, 2004, and pursuant to an agreement entered into in February 2005, the System Operator transferred to Terna the responsibility to manage the national transmission grid and the related assets with effect from November 1, 2005. In addition, following the effectiveness of this transfer, ENEL is no longer entitled to control more than 5 per cent of the voting rights for the appointment of Terna’s directors. ENEL has complied with its obligation to reduce its holding in Terna to no more than 20 per cent by July 1, 2007. In June 2004, ENEL sold a 50 per cent interest in Terna through an initial public offering. A further 13.86 per cent interest was sold in

32

March 2005 through an accelerated bookbuilding process. In May 2005, ENEL entered into an agreement with Cassa Depositi e Prestiti S.p.A. for the sale of most of its remaining share in Terna (approximately 30 per cent). The agreement was executed in September 2005 for a consideration of €1.3 billion. As a result, ENEL reduced its shareholding in Terna to 6.1% per cent, which was further reduced to 5.0 per cent upon allocation of the bonus share granted to those who subscribed Terna’s shares in the IPO completed in June 2004.

     In 2003, the EU adopted a new Directive and a Regulation to further liberalize the electricity market. The new Electricity Directive retains the main principles of the EU directive issued in December 1996, commonly referred to as the Electricity Directive, which it replaces. It enables all consumers to freely choose their electricity supplier by 2007, irrespective of consumption levels, with all non-household consumers enjoying this right of choice from 2004. Further, the new Electricity Directive introduced new definitions of public service obligations and security of supply, establishes a regulator in all EU member states with well defined functions and requires legal unbundling of network activities from generation and supply. The Regulation establishes common rules for cross-border trade in electricity and lays down principles on charges to be paid as a result of transit flows and access to networks as well as on congestion management. EU member states were required to implement the new Directive by July 1, 2004. Italy implemented part of the Directive in August 2004 through the “Marzano Law.”

     The Marzano Law is aimed at reorganizing the existing energy market regulation and further liberalizing the natural gas and electricity markets. One of the purposes of the Marzano Law is to clarify the respective roles of the Italian central government, regional and local authorities, and the Electricity and Gas Authority. The Marzano Law also seeks to facilitate investment in the energy sector. To further liberalize the market, and consistent with the new Electricity Directive, the Marzano Law provides that all customers will be eligible to purchase electricity on the free market from July 1, 2007, although the law provides that the Single Buyer will nonetheless continue to supply electricity to customers who choose not to leave the regulated market.

     The Marzano Law also authorizes the Italian government to limit the ability of companies based in other EU member states to invest in the Italian energy sector if their home country does not adequately guarantee a reciprocal ability for Italian companies to invest in its energy market.

     On June 13, 2005, the EU Commission launched an inquiry into the functioning of the EU’s energy markets. This inquiry responded to concerns voiced by customers and new entrants in the sector about the development of wholesale gas and electricity markets and the limited choice available to customers. The Commission adopted its final report on January 10, 2007, concluding that customers and businesses are being adversely affected by inefficient and expensive gas and electricity markets. Specifically, the EU Commission noted the existence of high levels of market concentration, vertical integration of supply, generation and infrastructure resulting in a lack of equal access to the energy resources and possible collusion among incumbent operators to share markets. In order to tackle these problems, the Commission will pursue follow up actions in individual cases under applicable competition rules and acts to improve the regulatory framework for energy liberalization.

33

Construction

     In 2006, construction represented 5.6 per cent of GDP and 7.7 per cent of total employment. In 2005 and 2006 construction activity grew by 0.7 and 1.6 per cent, respectively. Gross fixed investment in construction, which includes investment for building renovations and by the public administration, increased by 2.1 per cent in 2006, compared to 0.3 per cent in 2005 and 1.5 per cent in 2004.

Agriculture, Fishing and Forestry

     In 2006, agriculture, fishing and forestry accounted for 2.5 per cent of GDP and 5.3 per cent of total employment. Agriculture’s share of Italian GDP has generally declined with the growth of industrial output since the 1960s. Italy’s average farm size remains less than half the European Union average. Italy is a net importer of all categories of food except fruits and vegetables. The principal crops are wheat (including the durum wheat used to make pasta), maize, olives, grapes and tomatoes. Cereals are grown principally in the Po valley in the north and in the southeast plains, olives are grown principally in central and southern Italy and grapes are grown throughout the country.

Employment and Labor

     General. Job creation has been and continues to be a key objective of the Government. Employment as measured by the average number of standard labor units employed during the year increased cumulatively by approximately 3.8 per cent from 2001 to 2006. A standard labor unit is the amount of work undertaken by a full-time employee over the year and is used to measure the amount of work employed to produce goods and services. This increase was largely attributable to increases in part-time and temporary employment contracts entered into in the period from 2000 to 2003. While average employment remained substantially unchanged in 2005, as a result of improving economic conditions, it increased by 1.7 per cent in 2006, one of the largest rises in the last thirty years.

     The unemployment rate has decreased every year since 1999 reaching 6.8 per cent for the year ended December 31, 2006, compared to 7.9 per cent in the euro area during the same year.

34

     The following table shows the change in total employment, the official participation rate and the official unemployment rate for each of the last five years.

Employment

	2002			2003			2004			2005			2006
				(Average over the year)
Employment in standard labor units (% change on prior year)		1.27	%		0.63	%		0.37	%		(0.2	)%		1.63	%
Participation rate (%)(1)		62.1			62.9			62.5			62.4			62.7
Unemployment rate (%)(2)		8.6			8.4			8			7.7			6.8

(1)	Participation rate of population aged 15-64.
(2)	Does not include workers paid by Cassa Integrazione Guadagni or Wage Supplementation Fund, which compensates workers who are temporarily laid off or who have had their hours cut.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

     Employment by sector. Of the total employed workforce in 2006, approximately 66.8 per cent were employed in the service sector, 20.2 per cent were employed in industry (other than construction), 7.7 per cent worked in the construction sector, and 5.3 per cent worked in agriculture.

     In 2006, average employment in industry, excluding construction, increased by 1.3 per cent as a result of growth in the manufacturing sector. This increase follows a declining trend of employment levels in the industry sector began in the 1980s, with employment in industry decreasing from 22.9 per cent of the total workforce in 1995 to 20.4 per cent in 2005.

     In 2006, average employment in agriculture, forestry and fishing increased by 0.6 per cent. Average employment in agriculture, forestry and fishing has declined constantly since World War II except in 2001, 2004 and 2006. Employment in the agriculture sector declined from 7.3 per cent in 1996 to 5.3 per cent in 2006.

     The largest contribution to employment growth in Italy in recent years has come from the services sector, which increased from 63.5 per cent of the total workforce in 1996 to 66.8 per cent in 2006. The growth was mainly attributable to business and household services, with all service sectors other than public administration, financial services and education experiencing employment growth.

     Employment by geographic area and gender. Unemployment in southern Italy has been persistently higher than in northern and central Italy, and in 2006 was 12.2 per cent compared to 6.1 per cent in central Italy and 3.8 per cent in northern Italy. The unemployment rate in central and northern Italy declined steadily between 1996 and 2002, remaining substantially stable thereafter, while unemployment in southern Italy has fluctuated, increasing from 1996 to 1999 and decreasing by 7.4 per cent from 1999 to 2006.

     While unemployment for women in Italy historically has been substantially higher than for men, it has decreased at a faster rate (from 13.6 per cent in 2000 to 8.8 per cent in 2006) than for

35

men (from 7.8 per cent in 2000 to 5.4 per cent in 2006). This is in part attributable to the substantial growth in female participation in the labor force, particularly among women aged 25-54. The proportion of economically active women increased from 45.1 per cent in 1996 to 50.8 per cent in 2006, while the participation rate of men increased from 72.6 per cent in 1996 to 74.6 per cent in 2006. Participation rates for women over age 40 and for women in southern Italy are significantly below European averages.

     The Government believes that a substantial “hidden economy” exists in Italy, consisting of persons who claim, for tax and other purposes, to be unemployed but actually hold a job, or who claim to hold a job but also perform other income-earning activities. The hidden economy is believed to be particularly persistent in areas of high official unemployment and among immigrant workers. The increase in employment in 2001 and 2002 may partly be attributable to the “emergence” of workers that were not previously accounted for in national statistics. According to ISTAT data, in 2004 the hidden economy was estimated to equal between 16.6 per cent (equal to €231 billion) and 17.7 per cent (equal to €246 billion) of GDP. The hidden economy includes illegal activities and unreported income from the production of legal products and services.

     Government programs and regulatory framework. The Government has adopted a number of programs aimed at correcting the imbalances in employment, including programs that provide money for job training, particularly in southern Italy, and certain incentives to companies that hire young workers. The Government’s target set forth in the 2008-2011 Program Document is to reduce unemployment to 5.7 per cent by 2011. During the period 2001-2005, the Government introduced tax incentives for employers in order to promote full-time permanent employment. Collective bargaining of industry-wide labor contracts is the principal means of determining working hour limitations.

     Through the Cassa Integrazione Guadagni (“CIG”), or Wage Supplementation Fund, the Government guarantees a portion of the wages of workers in the industrial sector who are temporarily laid off or who have had their working hours reduced. Workers laid off permanently as a consequence of restructuring or other collective redundancies are entitled to receive unemployment compensation for a period of 12 months, which is extendable for up to three years for workers nearing retirement age. The number of hours of work paid through CIG declined steadily from 299.9 million hours in 1995 to 147.2 million hours in 2000 before increasing to approximately 230 million hours in 2005.

     Italy’s labor market historically has been slow to respond to cyclical trends, contributing to a high unemployment rate. This has been attributed to the bargaining power of labor unions and a regulatory framework that makes dismissal of workers difficult. The persistence of high unemployment has contributed to a less confrontational stance on the part of the unions, leading to significant declines in the average number of person-hours lost per year in strikes and industrial actions, from 116.6 million in the period 1978-82 to 43.6 million in the period 1983-90 and 50.2 million in the period from 1991-1997. In the periods 1998-2001 and 2002-2006, an average of approximately 6 and 12.3 million person-hours per year were lost to strikes, respectively. The rising trend recorded in the last 5 years resulted from a phase of heated protests against Government reforms and international policy. After a peak of 34 million in 2002, the average number of person-hours lost per year declined to 13.1 million and 4.8 million in 2003

36

and 2004, respectively, increased to 6.3 million at the end of 2005 and finally decreased to 3.2 million at the end of 2006.

Prices and Wages

     Wages. Unit labor costs historically have been lower in Italy, on average, than in most other European countries. This is due to lower average earnings per employee, combined with higher productivity levels.

     Wages, as measured by gross earnings per standard labor unit decreased by an average of 2.8 per cent for the entire economy in 2006 compared with an increase of 3.3 per cent in 2005 and 3.4 per cent in 2004. During 2006, the growth in each of the public service sector and the private sector was 2.8 per cent. Labor costs per standard labor unit, measured in terms of unit remuneration (i.e. the total of gross wages and social security charges) increased by 2.5 per cent in 2006, compared to 3.1 per cent in 2005. Labor costs per product unit, or LCPU, decreased by 2.3 per cent in 2006 compared to 2.8 per cent in 2005, due to a weaker labor productivity, which grew by only 0.2 per cent in 2006, compared to 0.3 per cent in 2005.

     Prices. The European Union harmonized consumer price index reflects the change in price of a basket of goods and services taking into account all families resident in a given territory. In 2006, the inflation rate in the euro area as measured by the European Union harmonized consumer price index fell to 1.9 per cent, from 2.2 per cent registered in 2005. Since Italy’s entry into the EMU in 1999, monetary policy decisions are made for all euro zone countries by the European Central Bank. See “Monetary System — Monetary Policy.”

     Inflation in Italy, as measured by the harmonized consumer price index was 2.2 per cent in 2005 and in 2006, compared to 2.3 per cent in 2004. The 2006 figure was principally attributable to an increase in the prices of unprocessed and processed foods, partially offset by a slower growth of the core inflation index (which is the harmonized consumer price index net of energy, unprocessed food, alcohol and tobacco products) and in the prices of services and energy.

37

     The following table illustrates trends in prices and wages for the periods indicated.

Prices and Wages

	2002		2003		2004		2005		2006
			(percentages)
Cost of Living Index(1)		2.4		2.5		2		1.7		2
Harmonized Consumer Price Index(1) (2)		2.6		2.8		2.3		2.2		2.2
Core Inflation Index(3)		2.8		2.7		2.3		2		1.8
Change in per capita wages		2.7		3.7		3.3		3.1		2.5
Change in unit labor costs(4)		3.7		5.0		2.4		2.8		2.3

(1)	The cost of living index reflects the change in price of a basket of goods and services (net of tobacco) typically purchased by non-farming families headed by an employee. It differs from the harmonized consumer price index in that the cost of living index is smaller in scope.
(2)	In accordance with European Commission regulations, since January 2002 the harmonized consumer price index reflects reductions in prices (e.g. seasonal sales and promotional offers) taking place for a minimum period of 15 days (formerly 30 days). As a consequence, figures for 2002 are not directly comparable to previous data.
(3)	The basket of goods and services used to measure the core inflation index is equivalent to the harmonized consumer price index basket less energy, unprocessed food, alcohol and tobacco products.
(4)	Unit labor costs are per capita wages reduced by productivity gains.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

38

MONETARY SYSTEM

     The Italian financial system consists of banking institutions such as commercial banks, leasing companies, factoring companies and household finance companies, as well as non-bank financial intermediaries such as investment funds, portfolio management companies, securities investment firms, insurance companies and pension funds.

Monetary Policy

     The Eurosystem and the European System of Central Banks. As of January 1, 1999, which marked the beginning of Stage III of European Economic and Monetary Union, the 11 countries joining the EMU officially adopted the euro, and the Eurosystem became responsible for conducting a single monetary policy. Greece and Slovenia joined the EMU on January 1, 2001 and on January 1, 2007, respectively. Cyprus and Malta joined the EMU on January 1, 2008.

     The European System of Central Banks (ESCB) consists of the European Central Bank (ECB), established on June 1, 1998 and the national central banks of the EU member states. The Eurosystem is formed by the 15 national central banks in the euro area and the ECB. So long as there are EU member states that have not yet adopted the euro (currently Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Sweden and the United Kingdom), there will be a distinction between the 15-country Eurosystem and the 27-country ESCB. The twelve national central banks of non-participating countries do not take part in the decision-making of the single monetary policy, they maintain their own national currencies and conduct their own monetary policies. The Bank of Italy, as a member of the Eurosystem, participates in Eurosystem decision-making.

     The Eurosystem is principally responsible for:

• defining and implementing the monetary policy of the euro area, including fixing rates on the main refinancing lending facility (regular liquidity-providing reverse transactions with a weekly frequency and a maturity of two weeks, executed by the national central banks on the basis of standard tenders), the marginal lending facility (overnight liquidity facility provided to members of the Eurosystem by the national central banks against eligible assets, usually with no credit limits or other restrictions on access to credit) and the deposit facility (overnight deposit facility with the national central banks available to members of the Eurosystem, usually with no deposit limits or other restrictions);

• conducting foreign exchange operations and holding and managing the official foreign reserves of the euro area countries;

• issuing banknotes in the euro area;

• promoting the smooth operation of payment systems; and

• cooperating in the supervision of credit institutions and the stability of the financial system.

39

     The ESCB is governed by the decision-making bodies of the ECB which are:

• the Executive Board, composed of the President, Vice-President and four other members, responsible for implementing the monetary policy formulated by the Governing Council;

• the Governing Council, composed of the six members of the Executive Board and the governors of the 15 national central banks, in charge of implementing the tasks assigned to the Eurosystem and formulating the euro area’s monetary policy; and

• the General Council, composed of the President and the Vice-President of the ECB and the governors of the 27 national central banks of the EU member states. The General Council contributes to the advisory functions of the ECB and will remain in existence as long as there are EU member states that have not adopted the euro.

     The ECB is independent of the national central banks and the Governments of the member states and has its own budget, independent of that of the European Community; its capital is not funded by the European Community but has been subscribed and paid up by the national central banks of the member states that have adopted the euro, pro-rated to the GDP and population of each such member state. The ECB has exclusive authority for the issuance of currency within the euro area. The ECB had paid up capital of approximately €4 billion at December 31, 2006, of which approximately €726.3 million, or 13 per cent, was subscribed by the Bank of Italy.

     The Bank of Italy. The Bank of Italy, founded in 1893, is the lender of last resort for Italian banks and banker to the Treasury. It supervises and regulates the Italian banking industry and operates services for the banking industry as a whole. It also supervises and regulates non-bank financial intermediaries. The Bank of Italy had assets at December 31, 2006 of €221.8 billion.

     The ECB’s Monetary Policy. The primary objective of the ESCB is to preserve the euro’s purchasing power and consequently to maintain price stability in the euro area. In October 1998 the Governing Council announced the ECB monetary strategy and provided a quantitative definition of price stability, which has been defined as an annual increase in the Harmonized Index of Consumer Prices for the euro area of below 2 per cent. Despite short-term volatility, price stability is to be maintained over the medium term. Moreover, in order to assess the outlook for price developments and the risks for future price stability, a two-pillar approach was adopted by the ECB.

     The first pillar assigns a prominent role to money supply, the growth rate of which is measured through a broad monetary aggregate called M3. This monetary reference aggregate consists of currency in circulation, overnight deposits, deposits with an agreed maturity up to two years, deposits redeemable at a period of notice up to three months, repurchase agreements, debt securities of up to two years, money market fund shares and money market paper. In December 1998, the Governing Council set the first quantitative reference value for M3 growth, at an annual growth rate of 4.5 per cent. This reference value was confirmed by the Governing Council in 1999, 2000, 2001 and 2002. On May 8, 2003 the Governing Council decided to stop its practice of reviewing the reference value annually, given its long-term nature.

     The second pillar consists of a broad assessment of the outlook for price developments and the risks to price stability in the euro area and is made in parallel with the analysis of M3 growth

40

in relation to its reference value. This assessment encompasses a wide range of financial market and other economic indicators, including macroeconomic projections. Based on a thorough analysis of the information provided by the two pillars of its strategy, the Governing Council determines monetary policy aiming at price stability over the medium term.

     The ECB’s monetary and exchange rate policy is aimed at supporting general and economic policies in order to achieve the economic objectives of the EU, including sustainable growth and a high level of employment without prejudice to the objective of price stability.

     ECB Interest Rates. As a result of the global economic slowdown in 2001 and the weakness of the economy in the euro area in 2002 and the first half of 2003, the Governing Council progressively lowered interest rates by a total of 275 basis points, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities reaching 2.00 per cent, 3.00 per cent and 1.00 per cent, respectively in June 2003. These rates remained unchanged until December 2005.

     The euro area experienced sustained economic growth in 2006 and the first half of 2007. The Governing Council determined that given the euro area’s actual and expected monetary and credit growth, upside risks to price stability over the medium term prevailed. Accordingly, the Governing Council raised interest rates on several occasions during 2006 and the first half of 2007, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities progressively increasing by a total of 200 basis points over this period, reaching 4.00 per cent, 5.00 per cent and 3.00 per cent, respectively in June 2007.

41

     The following table shows the movement in the interest rate on main refinancing operations and on marginal lending and deposit facilities from February 4, 2000 to June 13, 2007.

			Main Refinancing Operations
					Variable rate		Marginal lending
	Deposit Facility				tenders — minimum		facility
Effective Date	% interst rate		Fixed rate tenders		bid rate		% interest rate
2000
Feb 4		2.25		3.25				4.25
Mar 17		2.50		3.50				4.50
Apr 28		2.75		3.75				4.75
Jun 9		3.25		4.25				5.25
Jun 28		3.25				4.25		5.25
Sep 1		3.50				4.50		5.50
Oct 6		3.75				4.75		5.75
2001
May 11		3.50				4.50		5.50
Aug 31		3.25				4.25		5.25
Sep 18		2.75				3.75		4.75
Nov 9		2.25				3.25		4.25
2002
Dec 6		1.75				2.75		3.75
2003
Mar 7		1.50				2.50		3.50
June 6		1.00				2.00		3.00
2005
Dec 6		1.25				2.25		3.25
2006
Mar 8		1.50				2.50		3.50
June 15		1.75				2.75		3.75
August 9		2.00				3.00		4.00
October 11		2.25				3.25		4.25
December 13		2.50				3.50		4.50
2007
March 14		2.75				3.75		4.75
June 13		3.00				4.00		5.00

Source: European Central Bank

     ECB Money Supply and Credit. The three-month moving average of twelve-month euro money supply growth, or M3, a measure that is used to evaluate the divergence from the ECB’s 4.5 per cent reference growth rate, remained under the reference rate prior to May 2001 and since then has remained above the reference rate. It grew to 7.6 per cent through December 2001, declined slightly to 6.9 per cent through December 2002 and grew sharply in the first half of 2003 to over 8.0 per cent. The growth of M3 through the first half of 2003 was mainly due to shifts in portfolios to more liquid assets resulting from continued uncertainty in the financial markets, international political tensions and low long-term and short-term interest rates. In addition, the high growth rate of M3 was attributable to the introduction of the euro in physical form in the countries participating in the EMU on January 1, 2002 and to the decline in the

42

growth of total lending to the private sector, which decreased to a twelve month growth of 4.7 per cent in 2002, compared to 6.7 per cent in 2001.

     M3 subsequently declined to 7.5 per cent through December 2003 and 6.6 per cent through December 2004. This slowdown was mainly attributable to the increased stability of the financial markets, with a resulting decrease in the proportion of liquid assets in investor portfolios and increasing investment in the equity markets and long-term debt investments. The effects of this trend were partially offset by higher investment in money market fund shares. The slowdown in M3 growth during this period was partially offset by a reduction in the spread between long and short term interest rates, which resulted in a growth in the proportion of short term deposits and repurchase agreements.

     M3 grew to 7.4 per cent through December 2005, principally due to higher lending to the private sector, which grew by 9.2 per cent in 2005, and lending to the corporate sector, which grew by 8.3 per cent in 2005 reflecting higher investment by companies and growing demand for loans to support corporate operations such as mergers and acquisitions.

     M3 grew to 9.8 per cent through December 2006, the highest rate since the launch of the common monetary policy. This growth was due mainly to higher lending to the private sector, which grew by 10.8 per cent in 2006, and lending to the corporate sector, which grew by 13 per cent during the same year. This steady growth was partially offset by a slowdown in lending to households, particularly mortgages, which increased by 8.2 per cent in 2006, compared to an increase of 11.5 per cent in 2005.

Exchange Rate Policy

     Under the Maastricht Treaty, the ECB and ECOFIN are responsible for foreign exchange rate policy. The European Council formulates the general orientation of exchange rate policy, either on the recommendation of the Commission, following consultation with the ECB, or on the recommendation of the ECB. However, the Council’s general orientation cannot conflict with the ECB’s primary objective of maintaining price stability. The ECB has exclusive authority for effecting transactions in foreign exchange markets.

Banking Regulation

Regulatory Framework. Italian banks fall into one of the following categories:

• joint stock banks; or

• co-operative banks.

     Pursuant to the principle of “home country control,” non-Italian EU banks may carry out banking activities and activities subject to “mutual recognition” in Italy within the framework set out by Directive No. 2006/48/EC and Directive No. 2006/49/EC. Under the principle of “home country control,” a non-Italian EU bank remains subject to the regulation of its home-country supervisory authorities. It may carry out in Italy those activities described in the aforesaid Directives that it is permitted to carry out in its home country, provided the Bank of Italy is

43

informed by the entity supervising the non-Italian EU bank. Subject to certain authorization requirements, also non-EU banks may carry out banking activities in Italy.

     Deregulation and Rationalization of the Italian Banking Industry. Historically, the Italian banking industry was highly fragmented and characterized by high levels of State ownership and influence. During the 1980s, Italian banking and European Community authorities began a process of substantial deregulation. The principal components of this deregulation in Italy were the Amato Law, the Consolidated Banking Law, the Dini Directive, the Ciampi Law, certain fiscal changes and the implementation of EU Directives. The principal components of deregulation at the European level are set forth in EU Directives and provide for:

• the free movement of capital among member countries;

• the easing of restrictions on new branch openings;

• the range of domestic and international services that banks are able to offer throughout the European Union; and

• the elimination of limitations on annual lending volumes and loan maturities.

     The effect of the aforesaid deregulation, in the context of the implementation of the EU Directives has been a significant increase in competition in the Italian banking industry in virtually all bank and bank-related services.

     The Amato Law. The Amato Law was enacted in July 1990 to strengthen the capital base of the Italian banking system by creating incentives for consolidation, and permitting greater private investment. The restructuring process under the Amato Law was intended to create larger and more efficient institutions capable of providing better services and competing more effectively in Italy and abroad. The Amato Law contains two principal provisions:

• Banks organized as public law entities were allowed to convert into, or to transfer their assets to, one or more joint-stock companies. Banks were also permitted to be members of a holding company structure; and

• Consolidations were encouraged through tax incentives.

     The Consolidated Banking Law. In 1993, the Consolidated Banking Law consolidated most Italian banking legislation into one statute. Provisions in the Consolidated Banking Law relate, inter alia, to the role of supervisory authorities, the definition of banking and related activities, the authorization of banking activities, the scope of banking supervision, special bankruptcy procedures for banks and the supervision of financial companies. Banking activities may be performed by banks, without any restriction as to the type of bank . Furthermore, subject to their respective by-laws and applicable regulations, banks may engage in all the business activities that are integral to banking as described in the EU Banking Directive.

     The Dini Directive. Historically, a large number of Italian banks were owned by public law banking foundations, which in turn were controlled principally by local government authorities.

44

The Dini Directive, enacted in November 1994, provided tax incentives for Italian banking foundations to either:

• reduce to below 50 per cent their equity participation in certain public banks originally organized as foundations through either public offerings or sales to certain specified entities including, for example, banking groups, certain financial institutions and insurance companies, or

• cover more than 50 per cent of the foundations’ expenses from income derived from sources other than such banks.

     The Ciampi Law. The Ciampi Law, enacted on December 23, 1998, and Legislative Decree No. 153 of May 17, 1999, collectively referred to herein as the Ciampi Law, provide for, inter alia, the:

• transformation of public law banking foundations into non-profit private institutions with the exclusive purpose of pursuing projects of social importance in the area of scientific research, education or healthcare;

• divestiture of any remaining controlling participation in banks or financial institutions by 2006; and

• application of the tax regime for non-profit private institutions (50 per cent reduction in income tax and regional tax on production activities (Imposta Regionale sulle Attività Produttive, or IRAP)) to those foundations that disposed of their controlling stakes in banks by May 2003.

     The Draghi Law. The Draghi Law (Legislative Decree No. 58 of February 24, 1998) became effective in July 1998 and aimed at reorganizing laws governing the investment services, securities markets and publicly traded companies. While the Draghi Law did not significantly amend Italian legislation governing the banking industry, it is generally applicable to Italian publicly traded companies. In particular, the Draghi Law introduced a comprehensive framework for the provision of investment services and collective investments (which applies to investment firms, banks and asset managers) new provisions regulating tender offers of securities, savings shares, the solicitation of proxies and the duration of shareholder agreements, with the objective of protecting minority shareholders in general.

Directive 2004/39/EC — The Markets in Financial Instruments EU Directive (MiFID).

     The MiFID came into force on 1 November 2007, replacing the existing Investment Services Directive (Directive 93/22/EEC). The purpose of the MiFID is to harmonize rules governing the operation of regulated markets. In Italy, its implementation has resulted in significant changes to the Draghi Law and Consob regulations. In addition, Consob and Banca d’Italia, will adopt a joint regulation coordinating their respective supervisory competences of the financial market and institutions operating in those markets.

45

     The MiFID resulted in significant changes to the regulation of financial instruments and widened the range of investment services and activities that firms can offer in EU Member States other than their home state. In addition, the MiFID:

• provides for tailored disclosure requirements, depending on the level of sophistication of investors;

• establishes detailed standards for fair dealings and fair negotiations between investment firms and investors;

• introduces the operation of multilateral trading facilities (MTF) as a new “core” investment service; and

• extends the scope of the definition of financial instruments to include commodity derivatives, credit derivatives and swap agreements.

     The MiFID also sets out detailed requirements governing the organization of investment firms and their conduct of business.

     Supervision. Supervisory Authorities, in accordance with the Consolidated Banking Law, include the Inter-Ministerial Committee for Credit and Savings (Comitato Interministeriale per il Credito e il Risparmio, or CICR), the Ministry of Economy and Finance and the Bank of Italy. The principal objectives of supervision are to ensure the sound and prudent management of the institutions subject to supervision and the overall stability, efficiency and competitiveness of the financial system.

     The CICR. The CICR is composed of the Economy and Finance Minister, who acts as chairman, and certain other economic ministers of the Italian government. The Governor of the Bank of Italy, although not a member of the CICR, attends all meetings of the CICR but does not have the right to vote at such meetings. Where provided for by the law, the CICR establishes general guidelines that the Bank of Italy must follow when adopting regulations applicable to supervised entities.

     The Ministry of Economy and Finance. The Ministry has certain powers in relation to banking and financial activities. It sets eligibility standards to be met by holders of equity interests in the share-capital of a bank and the level of professional experience required of directors and executives of banks and other financial intermediaries. The Ministry may, in cases of urgency, adopt measures that are generally within the sphere of CICR’s powers and may also issue decrees that subject banks and other supervised entities to mandatory liquidation (liquidazione coatta amministrativa) or extraordinary management (amministrazione straordinaria), upon the proposal of the Bank of Italy.

     The Bank of Italy. The Bank of Italy supervises banks and certain other intermediaries through its regulatory powers (in accordance with the guidelines issued by the CICR). The Consolidated Banking Law identifies four main areas of intervention subject to the regulatory power of the Bank of Italy: capital requirements, risk management, the taking of participations, administrative and accounting organization and internal controls and public disclosure requirements. The Bank of Italy also issues regulations in other fields, such as transparency in

46

banking and financial operations of banks and financial intermediaries. The Bank of Italy supervises banks and other supervised entities by, inter alia, authorizing the acquisition of shareholdings in banks in excess of certain thresholds and exercising off-site and on-site supervision. Certain acquisitions by non-EU entities based in jurisdictions that do not contemplate reciprocal rights by Italian banks to purchase banks based in those jurisdictions, may be denied by the President of the Council of Ministers, upon prior notice to the Bank of Italy.

     On-site visits carried out by the Bank of Italy may be “general” or “special” (which are directed toward specific aspects of banking activity). Matters covered by an on-site visit include the accuracy of reported data, compliance with banking laws and regulations, organizational aspects and conformity with a bank’s own by-laws.

     The Bank of Italy requires all banks to report periodic statistical information related to all components of their non-consolidated balance sheet and consolidated accounts. Other data reviewed by the Bank of Italy include minutes of meetings of each bank’s board of directors. Banks are also required to submit any other data or documentation that the Bank of Italy may request.

     In addition to its supervisory role, the Bank of Italy — as the Italian Central Bank — performs monetary policy functions by participating in the European System of Central Banks, and acts as treasurer to the Italian Ministry of Economy and Finance. It also operates services for the banking industry as a whole, most notably the Credit Register (Centrale dei Rischi), a central information database on credit risk.

     On December 28, 2005, a new law was introduced to modify the competences and organization of the Bank of Italy. In particular, while prior to the reform the Governor was appointed for an indefinite term, in accordance with the new legal framework, the Governor of the Bank of Italy is now appointed for a 6 year term, and may be reelected only once. In addition, the new law transferred most of the competences of the Bank of Italy regarding competition in the banking sector to the Antitrust Authority, although joint clearance of the Bank of Italy and the Antitrust Authority is required in case of mergers and acquisitions.

     On February 2, 2007, the Government approved a draft law aimed at reforming the Italian regulatory authorities’ system. Pursuant to the bill, the authorities currently supervising the insurance and the pension funds sectors would be suppressed and their competences transferred, respectively, to the Bank of Italy and to Consob, the Italian Stock Exchange Commission. In addition, according to the draft law, the CICR would be replaced by a special committee for the financial stability, composed by representatives of Ministry of Economy and Finance.

     Reserve Requirements. Pursuant to ECB, ESCB and EU regulations, each Italian bank must deposit with the Bank of Italy an interest-bearing reserve expressed as a percentage of its total overnight deposits, deposits with original maturities up to two years or redeemable upon prior demand up to two years and debt securities with original maturities up to two years. A bank’s reserve requirements are deemed satisfied if, during each one-month maintenance period, the average amount of the daily balances of the reserve accounts is not lower than the reserve due (the average reserve obligation). The compulsory reserves earn an annual rate of interest

47

determined by the average, over the monthly maintenance period, of the ESCB’s rate for its main refinancing operations. Failure to comply in full or in part with the reserve obligations may cause the ECB to apply sanctions on the noncompliant bank.

     Risk-Based Capital Requirements and Solvency Ratios. Capital adequacy requirements are mainly regulated by Directives No. 2006/48/EC and No. 2006/49/EC or, together, the Capital Requirements Directive, the Consolidated Banking Law, CICR Regulation of December 27, 2006, and by the regulations issued by the Bank of Italy on the same date (Nuove disposizioni di vigilanza prudenziale per le banche). Italian banks are generally required to have ratios of regulatory capital to risk-weighted assets specified in the relevant regulations. At least half of the required regulatory capital must consist of Tier I capital (“core capital”), and the rest may consist of Tier II capital (“supplementary capital”). Core capital includes paid-in share capital, capital reserves, retained earning reserves and a special reserve denominated “fondo per rischi bancari generali” less own shares owned by the bank, goodwill, intangible assets and losses carried forward and incurred in the fiscal year. Supplementary capital includes asset revaluation reserves, subordinated debt and other quasi-equity instruments (such as non-redeemable loans). There are also limitations on the maximum amount of supplementary capital. To calculate risk-weighted assets, the aforesaid provisions have now implemented in Italy the framework commonly known as the “Basel II Accord.”

     Loan Exposure Limitations. The purpose of the provisions of the EU Banking Directive on the monitoring and control of large exposures of credit institutions is to limit a bank’s exposure to any single borrower or group of related borrowers. In compliance with the criteria specified by the Ministry of Economy and Finance, the Bank of Italy has issued supervisory regulations on the concentration of risk that implement these provisions. These regulations require stand-alone banks or banking groups to limit their largest loans (i.e., loans exceeding 10 per cent of their regulatory capital) to any single customer or group of related customers to 25 per cent of a bank’s regulatory capital and the aggregate of large exposures to not more than 800 per cent of a bank’s regulatory capital. A more stringent limit (20 per cent of regulatory capital) applies to all persons or entities affiliated with the bank, which is defined to include (1) shareholders that, directly or indirectly, control, or own at least 15 per cent of the share capital in, the bank or the parent company of a banking group and (2) companies controlled by the bank or in which the bank owns at least 20 per cent of share capital, excluding subsidiaries which are included in the banking group or that are consolidated in accordance with the relevant criteria specified by the regulations.

Banks belonging to banking groups must, on an individual basis, limit their largest loan exposures to any single customer or group or related customers to 40 per cent of the bank’s regulatory capital.

     Equity Participations by Banks. Prior approval of the Bank of Italy is required for any equity investments by a bank in other banks or financial or insurance companies: (1) exceeding 10 per cent of the consolidated regulatory capital of the acquiring bank; (2) exceeding 10 per cent or 20 per cent of the share capital of the bank or financial or insurance company being acquired; or (3) resulting in the control of the share capital of the bank or financial or insurance company being acquired. Investments by stand-alone banks or by banking groups into insurance companies exceeding in the aggregate 40 per cent of the acquiror stand-alone or consolidated

48

regulatory capital, as the case may be, (and 60 per cent of the regulatory capital, in case of the single bank included in the banking group) are not permitted.

     The acquisition by banks and banking groups of shareholdings in non-financial companies is subject to certain limitations. Aggregate shareholdings in non-financial companies purchased by banks and banking groups must be lower than a certain pre-determined percentage of the acquiring bank’s regulatory capital. Moreover, banks and banking groups may only acquire up to a certain percentage shareholding in any single non-financial company and must diversify their investments in non-financial companies in order to avoid undue exposure to any single non-financial sector. Certain banks may be authorized to effect such investments in accordance with less stringent limitations, provided that they meet specific criteria set forth by the relevant regulations.

     Finally, prior approval of the Bank of Italy is required for any acquisition by banks of control of companies that carry out activities instrumental to banking activities, such as bank information processing activities.

     As a general limit, equity investment by banks and banking groups in all types of companies may not exceed in aggregate, together with real estate investments, 100 per cent of a bank’s “available margin,” calculated as the positive difference, if any, between the bank’s regulatory capital and the aggregate of the shareholdings and the real estate assets owned by it.

     Deposit Insurance. The Interbank Fund (Fondo Interbancario di Tutela dei Depositi) was established in 1987 by a group consisting of the principal Italian banks to protect depositors against the risk of bank insolvency and the loss of deposited funds. The Interbank Fund assists banks that are declared insolvent or are subject to temporary financial difficulties.

     Participation to the Interbank Fund is compulsory for all Italian banks and intervenes when a bank is either in administrative management or mandatory liquidation. In the event of administrative management, the Interbank Fund may make payments to support the business of the bank, which may take the form of debt financing or taking an equity stake in the bank. In the case of mandatory liquidation, the Interbank Fund guarantees the refund of deposits to banking customers up to a maximum of €103.3 thousand per depositor per bank. The guarantee does not cover the following: customer deposit instruments in bearer form, deposits by financial and insurance companies and by collective investment vehicles and deposits by bank managers and executives with the bank that employs them.

     Structure of the Banking Industry. Italy had 793 banks at December 31, 2006, compared to 841 at December 31, 2000. Banks ultimately controlled by local public authorities accounted for a substantial portion of total bank assets in 2006. In 2006, joint stock banks accounted for approximately 78.3 per cent of total bank assets and for 77.4 per cent of domestic customer deposits. Cooperative banks collectively represented 14.9 per cent of total bank assets and held 20.0 per cent of such deposits. Italian branches of foreign banks accounted for 6.8 per cent of total bank assets and for 2.6 per cent of deposits.

49

     The ownership structure of the banking sector has undergone substantial change since 1992, reflecting significant privatizations through 1998. See “Public Finance — Privatization Program.”

     In addition, since 1999 the Italian banking sector has experienced significant consolidation, which has resulted in the formation of relatively large banking groups such as Intesa Sanpaolo and UniCredit. Nevertheless, the principal Italian banking groups remain small in terms of size relative to their competitors in the other large economies in the euro area. As a result, the Italian banking sector consolidation may continue through combinations among Italian financial institutions as well as with non-Italian financial institutions. In 2005, Dutch bank ABN Amro acquired Banca Antonveneta, which was the first successful takeover of a listed Italian bank by a non-Italian bank. In 2006, French bank BNP Paribas acquired Banca Nazionale del Lavoro, the sixth largest Italian bank by deposits at the time of the acquisition. In 2007, Capitalia merged into Unicredito, creating one of the largest financial services organizations in Europe.

     The European Union single market for financial services has and is expected to continue to affect the Italian banking system. Between 1980 and 2006, the number of foreign banks with branches in Italy grew from 26 to 74. These foreign banks principally specialize in wholesale corporate and interbank operations as well as retail banking, and few have branch networks.

     Nevertheless, Italian banks have two competitive disadvantages relative to banks in other European Union countries. First, their operating costs are relatively high, principally as a result of high labor costs. Second, the contribution of services to net income is relatively low because Italian banks have not specialized in services to the same extent as banks in other countries. Many Italian banks are now seeking to increase their non-interest income as a proportion of total income by increasing the range of managed services offered.

     Capitalization. According to the Bank of Italy, Italian banks are adequately capitalized. The ratio of total capital to risk-adjusted assets (the risk-asset ratio) as defined by the Basle Accord of 1988 was 10.7 per cent in 2005, compared to 10.6 per cent in 2005.

     Bad Debts. Bad debts increased by 30.7 per cent in 2006 to €59,361 million after decreasing 16.4 per cent in 2005. As a percentage of total loans, bad debts decreased from 3.4 per cent in 2005 to 3.1 per cent in 2006.

Credit Allocation

     The Italian credit system has changed substantially during the past decade. Banking institutions have faced increased competition from other forms of intermediation, principally securities markets. Lending activity growth increased by 11.5 per cent in 2006, almost three percentage points more than in the previous year. The growth in Italian lending activity was attributable to medium- and long-term lending activity, which grew 11.6 per cent in 2006, compared to 13.0 per cent in 2005 and to short-term lending activity, which increased 10.5 per cent in 2006, compared to 2.0 per cent in 2005. The growth rate in lending activity to companies increased to 11.8 per cent in 2006, compared to 6.3 per cent in 2005, due principally to a 6.5 per cent increase in lending activities in the manufacturing sector, compared to a 2.2 per cent increase in 2005, to the growth of lending activities in the construction sector, from 13.1 per cent

50

in 2005 to 15.3 per cent in 2006 and to a significant increase of lending activity in the service sector, from 7.7 per cent in 2005 to 13.7 per cent in 2006. Lending activities to the consumer and residential sector continued to experience high levels of growth at 10.3 per cent in 2006, compared to 13.2 per cent in 2005.

Exchange Controls

     Following the complete liberalization of capital movements in the European Union in 1990, all exchange controls in Italy were abolished. Residents and non-residents of Italy may make any investments, divestments and other transactions that entail a transfer of assets to or from Italy, subject only to limited reporting, record-keeping and disclosure requirements referred to below. In particular, residents of Italy may hold foreign currency and foreign securities of any kind, within and outside Italy, while non-residents may invest in Italian securities without restriction and may export from Italy cash, instruments of credit or payment and securities, whether in foreign currency or euro, representing interest, dividends, other asset distributions and the proceeds of dispositions.

     Italian legislation contains certain requirements regarding the reporting and record-keeping of movements of capital and the declaration in annual tax returns of investments or financial assets held or transferred abroad. Breach of certain requirements may result in the imposition of administrative fines or criminal penalties.

51

THE EXTERNAL SECTOR OF THE ECONOMY

Foreign Trade

     Italy is fully integrated into the European and world economies, with imports and exports in 2006 equal to 26.7 per cent and 26.9 per cent of real GDP, respectively. During 2003, Italy recorded a lower trade surplus than in 2002, and from 2004 it recorded a trade deficit which in subsequent years increased due to higher increases in imports than exports. In particular, Italy’s merchandise exports have suffered from competition with Asian products, reflecting higher prices of Italian products, the improving quality of non-Italian products and the increased commercial presence and improved services offered by non-Italian companies in EU countries. Moreover, Italy’s specialization in more traditional merchandise is unable to meet the increased demand for high-technology products characterizing the expansion of world trade. Italy’s trade surplus declined from €7.8 billion, or 0.6 per cent GDP, in 2002 to €1.6 billion, or 0.1 per cent of GDP, in 2003. Notwithstanding the expansion of world trade, Italy registered a trade deficit of €1.2 billion in 2004, of €9.4 billion in 2005 and of €19.8 billion in 2006, reflecting the gradual decline in competitiveness of Italian products and a strengthening of the euro in relation to other currencies.

     The following table illustrates Italy’s exports and imports for the periods indicated. Export amounts do not include insurance and freight costs and only include the costs associated with delivering and loading the goods for delivery. This is frequently referred to as “free on board” or “fob.” Import amounts include all costs, insurance and freight, frequently referred to as “charged in full” or “cif.”

52

Foreign Trade

	2002		2003		2004			2005			2006
			(Millions of euro)
Exports (fob)
Agriculture, forestry and fishing		4,171		4,144		3,805			4,130			4,374
Extractive industries		683		687		776			1,003			1,092
Manufactured products		261,520		254,541		273,846			288,253			319,549
Food, beverage and tobacco products		15,010		14,904		15,689			16,497			17,870
Textiles, leather products and clothing		41,207		38,945		39,053			38,857			41,143
Wood and wood products		1,471		1,326		1,381			1,364			1,500
Paper, printing and publishing		6,156		6,017		6,203			6,399			6,745
Refined oil products		4,454		5,371		6,282			9,772			10,866
Chemical and pharmaceutical products		26,906		26,059		27,442			30,278			32,964
Rubber and plastic products		9,853		9,845		10,698			11,207			12,152
Non-metallic minerals and mineral products		9,232		8,711		9,042			8,874			9,553
Metals and metal products		21,627		21,894		27,387			30,195			37,960
Mechanic products and machinery		53,126		53,326		57,801			59,690			66,906
Electric and precision machinery		25,007		23,761		25,872			27,571			30,092
Transport equipment		30,520		29,169		31,734			32,433			35,748
Other manufactured products		16,951		15,214		15,262			15,118			16,051
Energy, gas and water production		35		20		58			63			153
Other		2,654		5,224		5,929			6,475			6,039
Total exports		269,064		264,615		284,412			299,923			331,206
Imports (cif)
Agriculture, forestry and fishing		9,047		9,292		9,272			9,321			9,730
Extractive industries		26,282		27,457		31,611			43,693			55,303
Manufactured products		220,441		218,090		235,869			247,228			276,744
Food, beverage and tobacco products		18,450		18,671		19,594			20,569			22,082
Textiles, leather products and clothing		20,266		20,082		20,683			21,849			24,754
Wood and wood products		3,356		3,390		3,507			3,578			3,985
Paper, printing and publishing		6,556		6,271		6,375			6,664			6,958
Refined oil products		5,045		4,735		4,747			5,593			6,912
Chemical and pharmaceutical products		35,279		35,824		38,664			41,142			44,905
Rubber and plastic products		5,509		5,566		6,022			6,353			6,930
Non-metallic minerals and mineral products		2,956		2,881		3,033			3,182			3,384
Metals and metal products		24,288		24,039		29,706			31,938			43,363
Mechanic products and machinery		20,720		19,902		21,180			21,690			23,651
Electric and precision machinery		34,748		33,600		37,397			38,389			40,313
Transport equipment		39,129		38,935		40,303			41,149			43,809
Other manufactured products		4,140		4,193		4,658			5,133			5,696
Energy, gas and water production		1,879		1,796		1,797			2,175			2,158
Other		3,577		6,363		7,084			6,875			7,101
Total imports		261,226		262,997		285,633			309,292			351,034
Trade balance		7,838		1,618		(1,221	)		(9,369	)		(19,828	)

 Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

     The Italian economy relies heavily on foreign sources for energy and other natural resources, and Italy is a net importer of chemical and pharmaceutical products, agricultural and food industry products, paper, printing and publishing products, wood and wood products, minerals, metals and metal products, electric and precision machinery and transport equipment.

53

     Of all the major European countries, Italy is one of the most heavily dependent on import of energy, importing 87.1 per cent of its energy requirements in 2006 and 85.8 per cent in 2005. As a result, Italy’s trade balance is vulnerable to fluctuations in oil prices.

     Following a recovery in exports registered in 2004, growth slowed down to 0.3 per cent in 2005. This was followed in 2006 by an increase of 5.3 per cent, the largest increase in exports registered since 2000, due primarily to a growth in the volume of exports of mechanical machinery and equipment, electrical equipment and precision instruments, metal products and transport equipment. The growth in the volume of exports in 2006 was principally attributable to an increase in exports to EU countries, particularly Germany and France, Italy’s largest trading partners. During the same period, exports to the ten EU member states that joined the EU in May 2004 increased by 10.0 per cent and exports to China and Russia increased by 10.3 per cent and 17.7 per cent, respectively.

     According to the Bank of Italy, during 2006, in connection with a strong expansion of world demand and the appreciation of the euro by more than 1 per cent in real terms, Italy’s share of the world economy declined further at both current and constant prices. According to preliminary data analyzed by the Bank of Italy, Italy’s share fell from 3.7 per cent in 2005 to 3.5 per cent in 2006 at current prices and exchange rates, and from 2.7 in 2005 to 2.5 per cent in 2006 at constant 1995 prices and exchange rates.

     Imports of goods increased by 4.3 per cent at constant prices in 2006, compared to a 0.5 per cent increase in 2005. This increase was principally due to a recovery in domestic demand and was driven by increases in imports of manufactured products, which grew by 11.9 per cent, and products and services related to extractive industries, which increased by 26.6 per cent. In particular, the increase in imports of manufactured products was characterized by a significant increase in imports of metals and metal, chemical and pharmaceutical products. Imports from China, which became Italy’s principal non-EU supplier in 2004, increased by 15.1 per cent in 2006.

Geographic Distribution of Trade

     As a member of the European Union, Italy enjoys free access to the markets of the other EU member states and applies the external tariff common to all European Union countries. During the past several years, the European Union countries have made significant progress in reducing non-tariff barriers, such as technical standards and other administrative barriers, to trade amongst themselves, and Italy has incorporated into national law most of the European Union directives on trade and other matters. With the accession of ten new members in 2004, and two new

54

members in 2007, the EU has come to encompass many of Italy’s most important central and eastern European trading partners. The following tables show the distribution of Italy’s trade for the periods indicated.

Distribution of Trade (cif-fob) — Exports

Exports (fob)	2002		2003		2004		2005		2006
			(Millions of euro)
Belgium-Luxembourg		8,710		7,609		7,754		8,604		9,972
France		33,069		33,033		35,230		36,845		38,211
Germany		37,256		37,233		38,761		39,493		42,964
Netherlands		6,960		6,387		6,701		7,274		7,800
United Kingdom		18,780		18,686		20,153		19,703		19,758
Ireland		1,464		1,391		1,389		1,452		1,687
Denmark		2,090		1,972		2,147		2,626		2,574
Greece		5,721		5,832		6,486		6,030		6,507
Spain		17,354		18,911		20,727		22,466		23,631
Portugal		3,384		3,303		3,419		3,316		3,601
Austria		6,004		6,199		6,988		7,422		7,996
Finland		1,424		1,311		1,438		1,546		1,588
Sweden		2,600		2,680		2,847		3,077		3,495
Total EU (excluding EU members that joined in 2004 and 2007)		144,814		144,547		154,040		159,854		169,784
EU members that joined in 2004(1)		14,542		15,600		16,462		17,796		20,451
Total EU (excluding EU members that joined in 2007)(2)		159,356		160,147		170,502		177,650		190,235
Turkey		N.A.		4,721		5,687		6,167		6,780
United States		25,802		21,970		22,368		23,960		24,678
Russia		N.A.		3,847		4,963		6,075		7,639
OPEC countries		10,937		10,201		11,028		12,126		14,335
Japan		4,495		4,333		4,333		4,537		4,483
China		4,017		3,850		4,448		4,603		5,703
Other Asia		N.A.		8,596		8,979		9,085		9,789
Other		N.A.		46,951		52,105		55,720		63,350
Total		269,064		264,616		284,413		299,923		326,992

(1)	Comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, Slovenia, Cyprus and Malta, which joined the EU in May 2004.
(2)	Bulgaria and Romania joined the EU in January 2007.

Source: ISTAT.

55

Distribution of Trade (cif-fob) — Imports

Imports (cif)	2002		2003		2004		2005		2006
			(Millions of euro)
Belgium-Luxembourg		12,283		12,374		13,880		15,077		15,776
France		29,895		29,951		31,278		30,849		31,913
Germany		46,837		47,521		51,319		53,646		58,133
Netherlands		15,433		15,362		16,862		17,483		19,316
United Kingdom		13,390		12,708		12,294		12,477		12,333
Ireland		3,635		4,082		4,185		4,076		3,750
Denmark		1,821		1,925		2,109		2,242		2,299
Greece		1,269		1,463		1,503		1,550		1,799
Spain		12,102		12,729		13,317		13,158		14,336
Portugal		1,389		1,321		1,333		1,383		1,538
Austria		7,216		7,545		7,803		7,790		8,659
Finland		1,667		1,813		1,552		1,812		2,258
Sweden		3,528		3,542		3,833		3,701		3,949
Total EU (excluding EU members that joined in 2004 and 2007)		150,464		152,336		161,268		165,244		176,059
EU members that joined in 2004(1)		8,906		9,226		11,184		13,300		16,504
Total EU (excluding EU members that joined in 2007)(2)		159,370		161,562		172,452		178,544		192,563
Turkey		N.A.		3,335		3,971		4,364		5,433
United States		12,548		10,272		9,991		10,719		10,764
Russia		N.A.		8,230		9,716		11,704		13,592
OPEC countries		15,822		16,792		19,339		27,291		33,954
Japan		5,321		5,281		5,520		4,977		5,452
China		8,307		9,553		11,828		14,135		17,962
Other Asia		N.A.		6,395		7,427		8,212		8,640
Other		N.A.		41,578		45,390		49,346		59,988
Total		261,226		262,998		285,634		309,292		348,348

(1)	Comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, Slovenia, Cyprus and Malta, which joined the EU in May 2004.
(2)	Bulgaria and Romania joined the EU in January 2007.

Source: ISTAT.

     As in the previous year, during 2006 over half of Italian trade was with other European Union members, with approximately 58.7 per cent of Italian exports and 55.6 per cent of imports attributable to trade with European Union partners (other than Bulgaria and Romania, which joined the EU in January 2007). However, Italian trade with non-EU countries has grown faster than trade with EU countries. Germany is Italy’s single most important trading partner and in 2006 supplied 16.8 per cent of Italian imports and purchased 13.3 per cent of Italian exports.

     Since 2002, Italy has recorded a negative trade balance with other EU countries (including the ten member states that joined the EU in 2004, but excluding Bulgaria and Romania, which joined the EU in January 2007). Italy’s trade deficit with EU countries was €2.3 billion in 2006, compared to €0.9 billion in 2005. This increase was driven by the significant increase in the trade deficit with the Netherlands and Germany, which was only partially offset by the increase in trade surplus with other EU countries.

56

     During 2006, Italy also recorded an increase in its trade deficit with non-EU countries, which grew from €8.5 billion in 2005 to €19 billion in 2006. This result reflected a significant increase in the deficits with oil-producers such as the OPEC countries and Russia (from €15.2 billion and €5.6 billion in 2005 to €19.6 billion and €6.0 billion in 2006, respectively), an increase in the deficit with China (from €9.5 billion in 2005 to €12.3 billion in 2006) offset in part by an increase in the trade surplus with the United States (from €13.2 billion in 2005 to €13.9 billion in 2006). In particular, the increase in the trade deficit with OPEC countries was driven by a sharp increase in the price of crude oil (average of the prices for the three main grades), which rose by 20 per cent on average, from $53.4 a barrel in 2005 to $64.3 in 2006.

Balance of Payments

     The balance of payments tabulates the credit and debit transactions of a country with foreign countries and international institutions for a specific period. Transactions are divided into three broad groups: current account, capital account and financial account. The current account is made up of: (1) trade in goods (visible trade) and (2) invisible trade, which consists of trade in services, income from profits and interest earned on overseas assets, net of those paid abroad, and net capital transfers to international institutions, principally the European Union. The capital account primarily comprises net capital transfers from international institutions, principally the European Union. The financial account is made up of items such as the inward and outward flow of money for direct investment, investment in debt and equity portfolios, international grants and loans and changes in the official reserves.

     The following table illustrates Italy’s balance of payments for the periods indicated.

57

Balance of Payments

	Year Ended December 31,
	2002			2003			2004			2005			2006
				(Millions of euro)
Current Account		(10,014	)		(17,351	)		(13,057	)		(23,403	)		(37,869	)
Goods		14,049			9,922			8,854			536			(9,532	)
Exports		267,582			263,599			283,347			299,402			331,930
Imports		253,533			253,677			274,493			298,866			341,462
Services		(3,043	)		(2,362	)		1,179			(523	)		(1,474	)
Exports		63,760			63,420			68,204			71,887			78,420
Imports		66,803			65,781			67,025			72,410			79,894
Income		(15,396	)		(17,811	)		(14,817	)		(13,643	)		(13,607	)
Inflows		45,782			43,097			42,748			49,488			57,480
Outflows		61,178			60,908			57,564			63,131			71,087
Transfers		(5,624	)		(7,101	)		(8,273	)		(9,773	)		(13,256	)
EU Institutions		(5,727	)		(6,289	)		(6,537	)		(8,143	)		(8,304	)
Capital Account		(67	)		2,251			1,700			998			1,891
Intangible assets		(206	)		(86	)		(38	)		69			(100	)
Transfers		139			2,337			1,738			929			1,991
EU Institutions		1,626			3,635			2,814			3,397			3,847
Financial Account		8,532			17,319			9,025			20,773			35,526
Direct investment		(2,739	)		6,507			(1,970	)		(17,555	)		(2,296	)
Abroad		(18,194	)		(8,037	)		(15,512	)		(33,575	)		(33,475	)
In Italy		15,455			14,544			13,542			16,020			31,179
Portfolio investment		16,107			3,369			26,449			43,398			54,829
Assets		(16,968	)		(51,068	)		(21,064	)		(87,025	)		(39,656	)
Liabilities		33,075			54,437			47,513			130,423			94,485
Financial Derivatives		(2,710	)		(4,827	)		1,834			2,332			(416	)
Other investment		985			13,676			(19,550	)		(8,212	)		(17,034	)
Change in official reserves		(3,111	)		(1,406	)		2,262			810			443
Errors and omissions		1,549			(2,218	)		2,332			1,632			452

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

Current Account

     Italy had a current account surplus in each year from 1992 to 1999. Following decreases in the current account surplus from 1997 to 1999, Italy has registered a current account deficit since 2000. This was due to a deterioration in Italy’s visible and invisible trade balance. During 2005 and 2006, Italy’s current account deficit increased sharply mainly as a result of the significant increase in prices of energy products. In particular, in 2006 the deficit rose to €37.9 billion (2.6 per cent of GDP) from € 23.4 billion (1.6 per cent of GDP) in 2005.

     Visible Trade. Italy’s visible trade surplus (on a fob-fob basis) has had a steadily declining trend since 2001. In 2006, Italy’s visible trade balance registered a deficit of €9.5 billion or 0.6 per cent of GDP. This was mainly due to a significant increase in imports (14.3 per cent), which was only partially offset by an increase in exports. The increase in imports was driven by the rise in the price of energy products. Italy’s merchandise exports rose by 10.9 per cent in 2006, reflecting an increase in export volumes and prices. Italy’s visible trade deficit with China, the OPEC countries and Russia significantly increased in 2006, due principally to increases in prices of oil, textiles,

58

metals and machinery. Italy’s visible trade surplus with EU countries was equal to €1.3 billion in 2006, recording a slight decrease compared to 2005.

     Invisible trade. In 2006, the balance on services deteriorated recording a deficit of €1.5 billion, compared to €0.5 billion in 2005. This result was mainly attributable to an increase in the deficit on technical and professional services, trade-related services and operating leasing, which grew from €2.1 billion in 2005 to €4 billion in 2006, and the increase in deficit on transport from €5.2 billion in 2005 to €5.5 billion in 2006. The effect of these increases was only partially offset by an increase in surplus on travel, which grew from €10.5 billion in 2005 to € 12 billion in 2006, due to an increase in spending by Italians abroad and significantly higher spending by foreigners in Italy. In particular, spending by Italians abroad increased by 9.7 per cent in 2006, compared to a 9.0 per cent decrease in 2005, and spending by foreigners in Italy grew by 13.5 per cent in 2006, compared to a 0.7 per cent increase in 2005.

     Income. Italy’s income deficit remained unchanged at €13.6 billion in 2006. This result was mainly attributable to the decrease of income deficit from portfolio investment, from €9.1 billion in 2005 to €5.6 billion in 2006, and the positive balance on income from direct investment of €0.7 billion in 2006, compared to a negative balance in 2005. These results were offset by the increase in deficit on other investment income, which grew from €3.3 billion to €8.4 billion.

     Current Transfers. Italy’s deficit on current account transfers increased to €13.3 billion in 2006 from €9.8 billion in 2005, reflecting an increase in the deficit on private transfers. The deficit on public transfers decreased from €8.3 billion in 2005 to €8 billion in 2006, notwithstanding the increase registered in the deficit with EU Institutions (from €8.1 billion in 2005 to €8.3 billion in 2006).

Capital Account

     The surplus on Italy’s capital account, which accounts for transactions in intangible assets, increased from €1.0 billion in 2005 to €1.9 billion in 2006, principally as a result of higher credits from international organizations, including EU institutions.

Financial Account and the Net External Position

     In 2006, the financial account surplus increased to €35.5 billion, from €20.8 billion in 2005, mainly as a result of the increase in portfolio investment surplus, which grew from €43.4 billion in 2005 to €54.8 billion in 2006, and the decrease in deficit on direct investments from €17.6 billion in 2005 to €2.3 billion 2006, the effects of which were partially offset by the increase in deficit on “other investments” from €8.2 billion in 2005 to €17.0 billion in 2006.

     Italy’s net external debt position deteriorated from a €52.1 billion deficit, or 3.7 per cent of GDP, in 2005 to a €72.5 billion deficit, or 4.9 per cent of GDP, registered in 2006. This was mainly attributable to positive adjustments of €15.1 billion in exchange rates and in the value of securities (particularly equity securities), which offset an increase in net outflows recorded on the financial account.

59

     Direct Investment. In 2006, Italy’s net direct investment outflows decreased to €2.3 billion, from €17.6 billion in 2005, due to a sharp rise in net inflows. The decrease in deficit on direct investment was mainly due to the increase of foreign investment in Italy, which almost doubled, from €16 billion in 2005 to €31.2 billion in 2006, while Italian investment abroad remained substantially unchanged at €33.5 billion in 2006. The substantial net direct investment inflows and outflows recorded in 2006 were almost entirely due to the high number of acquisitions of equity interests and merger transactions concluded during the same year.

     Foreign direct investment in Italy, net of divestment, remained substantially stable at low levels during the 1990s, recording an average of 0.4 per cent of GDP for the years 1990-1999 and a peak of €16.6 billion or 1.4 per cent of GDP in 2001. After four years of steady decrease, foreign direct investment in Italy, net of divestments, grew by €2.5 billion, from €13.5 billion in 2004, to €16.0 billion in 2005, primarily due to higher investment in the Italian industrial and energy sectors. In 2006, foreign direct investment almost doubled in Italy, reaching €31.2 billion. This increase was principally due to the investments made by other EU countries, especially France and the Netherlands, in the banking sector, insurance services, production of machinery and equipment and transport and communication services.

     Italian investment abroad, net of divestment, remained substantially unchanged in 2006 compared to 2005, at €33.5 billion. The high volumes registered in 2005 and 2006 are principally due to Italian investment in the banking sector, credit and insurance services and production of machinery.

     The following table shows total direct investment abroad by Italian entities and total direct investment in Italy by foreign entities as of the dates indicated.

60

Direct Investment by Country⁽¹⁾

	2002		2030		2004		2005		2006
	(Millions of euro)
Direct investment abroad
Netherlands		30,740		38,716		47,198		55,124		68,175
Luxembourg		23,211		17,383		19,667		21,306		17,178
United States		16,660		14,718		14,063		16,616		19,824
United Kingdom		17,929		16,196		18,022		19,157		18,859
France		15,454		16,716		18,161		20,215		22,447
Switzerland		8,930		8,753		7,877		8,476		8,661
Germany		8,883		10,439		11,756		12,709		13,758
Spain		6,826		7,887		8,118		8,357		9,374
Brazil		2,382		2,775		2,950		4,180		4,285
Belgium		3,228		3,651		3,960		4,188		4,747
Argentina		1,565		1,700		1,625		1,873		1,752
Sweden		575		598		646		756		825
Other		26,163		27,168		28,287		33,696		42,324
Total		162,546		166,700		182,330		206,653		232,209
Direct Investment in Italy
Netherlands		16,712		21,479		29,101		33,947		41,217
Luxembourg		12,618		14,665		16,663		20,364		21,185
United States		14,728		15,547		16,740		18,169		19,602
United Kingdom		14,075		17,791		19,854		21,543		23,120
France		16,354		17,014		18,358		21,715		28,114
Switzerland		14,730		14,767		16,317		17,038		17,796
Germany		9,541		11,024		10,677		12,967		8,549
Spain		897		1,022		1,448		4,083		8,929
Brazil		56		63		96		156		243
Belgium		2,211		2,368		2,488		1,679		1,786
Argentina		124		132		192		209		219
Sweden		2,329		2,371		2,493		2,570		2,682
Other		11,765		13,445		15,056		16,077		18,117
Total		116,140		131,688		149,483		170,517		191,559

(1) Do not include real estate investment, investments made by Italian banks abroad and investments made by foreign entities in Italian banks.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

     Portfolio Investment. Portfolio investment rose to a net surplus of €54.4 billion in 2006 from €45.7 billion in 2005. This increase was mainly the result of a reduction in portfolio outflows from €87 billion to €39.7 billion, the effect of which was partially offset by a reduction in inflows from €130.4 billion in 2005 to €94.5 billion in 2006. The decline mainly involved debt securities.

     During 2006, net foreign portfolio investment by Italians decreased to €38.1 billion, mainly as a result of lower investment in foreign debt securities, which decreased from €67.0 billion in 2005 to €20.3 billion in 2006, while net investment in Italian securities by foreign investors decreased from €79.3 billion to €48.1 billion, mainly due to lower investment

61

in Italian debt securities, particularly public debt securities, which decreased from €90.7 billion in 2005 to €36.7 billion in 2006.

     Other Investment and Official Reserves. In 2006, Italy recorded an increase in the deficit on “other investment”. Transactions during the year reduced the official reserves by €0.4 billion in 2006, but the year-end stock rose from €55.9 billion to €57.5 billion, due to value adjustments. The €3.8 billion revaluation gain on gold reserves, which grew from €34.3 billion to €38.1 billion, more than offset the effect of the losses attributable to exchange rate adjustments reflecting the appreciation of the euro against the main reserve currencies (the dollar, yen and Swiss franc).

     Errors and Omissions. The amount recorded in the residual “Errors and Omissions” account is a common area of concern for all leading countries in the European Union. The Government believes that this account is largely the result of exporters not reporting payments by non-residents to accounts abroad. Errors and omissions amounted to a positive €0.5 billion in 2006, compared to a positive €1.6 billion in 2005.

Reserves and Exchange Rates

     When on January 1, 1999, eleven European countries, including Italy, adopted the euro as their new national currency, the conversion rate between the lira and the euro was irrevocably fixed at Lit. 1,936.27 per euro. The euro was introduced as a physical currency on January 1, 2002. On February 28, 2002, the lira ceased to be legal tender in Italy and was withdrawn from the financial system.

     The following table sets forth, for the periods indicated, certain information regarding the US Dollar/Euro reference rate, as reported by the European Central Bank, expressed in U.S. dollar per euro.

US Dollar/Euro Exchange Rate

			Yearly Average
Period	Period End		Rate(1)		High		Low
			(U.S.$ per €1.00)
1999		1.0046		1.0588		1.1790		1.0015
2000		0.9305		0.9194		1.0388		0.8252
2001		0.8813		0.8917		0.9545		0.8384
2002		1.0487		0.9511		1.0487		0.8578
2003		1.2630		1.1418		1.2630		1.0377
2004		1.3621		1.2462		1.3633		1.1802
2005		1.1797		1.2490		1.3077		1.1667
2006		1.317		1.2630		1.3331		1.1826
2007		1.4721		1.3797		1.4874		1.2893

(1) Average of the reference rates for the last business day of each month in the period.

Source: European Central Bank.

62

     The following table sets forth information relating to euro exchange rates for certain other major currencies for the periods indicated.

Euro Exchange Rates

	Yearly Average Rate(1) per €1.00
	2002		2003		2004		2005		2006		2007
Japanese Yen		118.0825		131.7558		134.44		136.85		146.02		161.25
British Pound		0.6298		0.6934		0.6786		0.6838		0.6817		0.6843
Swiss Franc		1.4660		1.5236		1.5438		1.5483		1.5729		1.6427

(1) Average of the reference rates for the last business day of each month in the period.

Source: European Central Bank.

     In 2006, official reserves increased to €57.5 billion from €55.9 billion in 2005. In 2006, the annual contribution of the Bank of Italy to the reserves of the European Central Bank remained unchanged from 2005, at €7.3 billion.

     The following table illustrates the official reserves of Italy as of December 31 in each of the years 2001 through 2006.

Official Reserves

	2002		2003		2004		2005		2006
			(Millions of euro)
Gold		25,764		26,042		25,348		34,279		38,050
SDRs(1)		103		123		106		194		206
Total position with IMF		3,726		3.289		2,719		1,490		742
Net foreign exchange		23,447		20,634		17,628		19,944		18,537
Total reserves		53,040		50,088		45,801		55,907		57,535

(1) Special Drawing Rights.

Source: Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

63

PUBLIC FINANCE

The Budget Process

     The Government’s fiscal year is the calendar year. The budget process begins in March of each year, when the General Accounting Office (Ragioneria Generale dello Stato), a department of the Ministry of Economy and Finance, sends a directive to each Ministry and Government agency to prepare a detailed budget for the next fiscal year and a summary forecast budget for the next three years. Other public sector entities also report to the Ministry of Economy and Finance in March on their cash resources and needs for the following fiscal year.

     In June or July of each year the Ministry of Economy and Finance presents to Parliament a planning document called the Documento di Programmazione Economica e Finanziaria (Economic and Financial Program Document, or “Program Document”). The Program Document sets forth Government programs, reforms and public finance targets for the next four to five years. It describes the macroeconomic framework of the current year and sets forth two sets of forecast general government revenues and expenditures. The first forecast assumes no change from current policy and the second assumes the adoption of the programs contemplated by the Program Document. The Program Document is usually approved by Parliament by mid-August of each year.

     By September 30 of each year the Ministry of Economy and Finance presents to Parliament its revisions, if any, to the Program Document, and the Relazione Previsionale e Programmatica (Forecast and Planning Report, or “RPP”) a document that shows programs, reforms and public finance targets for the next calendar year.

     In the fourth quarter of each year the Government presents to Parliament its final budgetary package, which consists of the Legge di Bilancio (Budget Law) and the Legge Finanziaria (Annual Financial Law). The Budget Law formally authorizes general government revenues and expenditures for the upcoming calendar year. General government entities may not make payments unless they are provided for in the Budget Law. The Annual Financial Law sets forth the financial framework for the upcoming calendar year within the parameters set by the Program Document. It allocates financial resources to general government entities and amends laws in order to reflect these allocations.

     The Ministry of Economy and Finance and, in particular, the General Accounting Office, is responsible for the management of Government expenditures. The Ministry of Economy and Finance submits to the Government and to Parliament a quarterly cash-flow report (Relazione Trimestrale di Cassa) that indicates year-to-date revenues and expenditures and divergence from the budget. If this divergence is significant, the Government may submit a supplemental budget to Parliament that, if approved, amends the Annual Financial Law for the then-current fiscal year.

European Economic and Monetary Union

     Under the terms of the Maastricht Treaty, member states participating in the EMU, or Participating States, are required to avoid excessive government deficits. In particular, they are required to maintain:

64

• a budget deficit, or net borrowing, that does not exceed three per cent of GDP, unless the excess is exceptional and temporary and the actual deficit remains close to the three per cent ceiling. The Commission and the Council may consider an excess budget deficit resulting from a severe economic downturn to be exceptional if the excess results from a decrease in annual GDP or from an accumulated loss of output during a protracted period of very low annual GDP growth relative to its potential, taking into account all relevant factors including cyclical conditions, social and investment policies, fiscal consolidation efforts in “good times,” debt sustainability, public investment, the overall quality of public finances and the implementation of structural pension reforms (and their cost); and

• a gross accumulated public debt that does not exceed 60 per cent of GDP or is declining at a satisfactory pace toward this reference value.

     Although Italy’s public debt exceeded 60 per cent of GDP in 1998, Italy was included in the first group of countries to join the EMU on January 1, 1999 on the basis that public debt was declining at a satisfactory pace toward the 60 per cent reference value.

     In order to ensure the ongoing convergence of the economies participating in the EMU, to consolidate the single market and maintain price stability, effective on July 1, 1998, the Participating States agreed to a Stability and Growth Pact (SGP). The SGP is an agreement among the Participating States aimed at clarifying the Maastricht Treaty’s provisions for an excessive deficit procedure and strengthening the surveillance and co-ordination of economic policies. The SGP also calls on Participating States to target budgetary positions aimed at a balance or surplus in order to adjust for potential adverse fluctuations, while keeping the overall budget deficit below a reference value of 3 per cent of GDP.

     Under SGP regulations, Participating States are required to submit a stability and growth program (each such program a “Stability and Growth Program”), and non-participating member states are required to submit revised convergence programs every year. These programs, which cover a three to four-year period, are required to set forth:

• projections for a medium-term budgetary objective (a country-specific target which, for Participating States having adopted the euro, must fall within one per cent of GDP and balance or surplus, net of one-off and temporary measures), and the adjustment path towards this objective;

• the main assumptions about expected economic developments and the variables (and related assumptions) that are relevant to the realization of the stability program such as government investment expenditure, real GDP growth, employment and inflation;

• the budgetary strategy and other economic policy measures to achieve the medium-term budgetary objective comprising detailed cost-benefit analysis of major structural reforms having direct cost-saving effects;

• an analysis of how changes in the main economic assumptions would affect the budgetary and debt position; and

65

• if applicable, the reasons for a deviation from the adjustment path towards the budgetary objective.

     Based on assessments by the EU Commission and the Economic and Financial Committee, the Council of the EU delivers an opinion on whether:

• the economic assumptions on which the program is based are plausible;

• the adjustment path toward the budgetary objective is appropriate; and

• the measures being taken and/or proposed are sufficient to achieve the medium-term budgetary objective.

     The Council of the EU can issue recommendations to the Participating State to take the necessary adjustment measures to reduce an excessive deficit. When assessing the adjustment path taken by Participating States, the Council will examine whether the concerned Participating State pursues the annual improvement of its cyclically adjusted balance, net of one-off and other temporary measures, with 0.5 per cent of GDP as a benchmark. When defining the adjustment path for those Participating States that have not yet reached the respective budgetary objective or in allowing those that have already reached it to temporarily depart from it, the Council will take into account structural reforms which have long-term cost-saving effects, implementation of certain pension reforms, and whether higher adjustment effort is made in economic good times. If the Participating State repeatedly fails to comply with the Council of the EU’s recommendations, the Council may require the Participating State to make a non-interest-bearing deposit equal to the sum of:

• 0.2 per cent of the Participating State’s GDP, and

• one tenth of the difference between the budget deficit as a percentage of GDP in the preceding year and the reference value of 3 per cent of GDP.

     This deposit may be increased in succeeding years if the Participating State fails to comply with the Council’s recommendations, up to a maximum of 0.5 per cent of GDP, and may be converted into a fine if the excessive deficit has not been corrected within two years after the decision to require the Participating State to make the deposit. In addition to requiring a non-interest-bearing deposit, in the event of repeated non-compliance with its recommendations, the Council may require the Participating State to publish additional information, to be specified by the Council, before issuing bonds and securities and invite the European Investment Bank to reconsider its lending policy towards the Participating State. If the Participating State has taken effective action in compliance with the recommendation, but unexpected adverse economic events with major unfavorable consequences for government finances occur after the adoption of that recommendation, the Council may adopt a revised recommendation, which may extend the deadline for correction of the excessive deficit by one year.

Accounting Methodology

     Italy historically has used two systems of accounting: state sector and public sector. State sector accounting includes the revenues and expenditures of the Government and certain

66

agencies and entities whose budgets must be approved by Parliament. Public sector accounting includes the Government, agencies and entities comprising the state sector, as well as entities with budgets not subject to Parliamentary approval (including autonomous agencies, regional and local governments and authorities and the national social security agencies) to the extent the Government receives and transfers funds to those entities. Parliament may review the use of funds transferred by the Government to public sector entities and the financial results of those entities. Both state sector accounting and public sector accounting transactions are recorded on an accrual basis.

     Transactions between state-owned joint stock companies and the Government are only included in state sector accounting or public sector accounting to the extent the Government is acting in its capacity as shareholder, for example through the receipt of dividends or the contribution of capital. See “— Government Enterprises.”

     Although Italy continues to use public sector and State sector accounting for most internal budgeting and certain other purposes, it also utilizes general government accounting. General government accounting includes revenues and expenditures from both central and local government and from social security funds, or those institutions whose principal activity is to provide social benefits. European Union countries are generally required to use general government accounting for purposes of financial reporting in accordance with European Union requirements. EUROSTAT is the European Union entity responsible for decisions with respect to the application of such general government accounting criteria.

     ESA 95 National Accounts. In 1999, ISTAT introduced a new system of national accounts in accordance with the new European System of Accounts (ESA95) as set forth in European Union Regulation 2223/1996. These were intended to contribute to the harmonization of the accounting framework, concepts and definitions within the European Union. Under ESA95, all European Union countries apply a uniform methodology and present their results on a common calendar. In connection with revisions to the national accounting system implemented in December 2005, ISTAT replaced its methodology for calculating real growth, which had been based on a fixed base index, with a methodology linking real growth between consecutive time periods, or a chain-linked index. One of the effects of using chain indices is that other than for the first year in the chain (which for most tables included in this document is 2001) component measures will no longer aggregate to totals. Also, as a result of this change in methodology, all “real” revenue and expenditure figures included in this document from and including 2001 differ from and are not comparable to data published in earlier documents filed by Italy with the SEC. The general government revenues and expenditure figures in this annual report reflect consolidated revenues and expenditures for the public sector, which is the broadest aggregate for which data is available.

Measures of Fiscal Balance

     Italy reports its fiscal balance using two principal methods:

• Net borrowing, or budget deficit, which is consolidated revenues less consolidated expenditures of the general government. This is the principal measure of fiscal balance, and is calculated in accordance with European Union accounting requirements. Italy also

67

reports its structural net borrowing, which is a measure, calculated in accordance with methods adopted by the EU Commission, of the level of net borrowing after the effects of the business cycle have been taken into account. Structural net borrowing assumes that the output gap, which measures how much the economy is outperforming or underperforming its actual capacity, is zero. As there can be no precise measure of the output gap, there can be no precise measure of the structural budget deficit. Accordingly, the structural net borrowing figures shown in this document are necessarily estimates. In 2003, the EU Commission changed the methods to be used to calculate structural net borrowing. Accordingly, 2002 structural net borrowing data is not directly comparable with that provided for subsequent years.

• Primary balance, which is consolidated revenues less consolidated expenditures of the general government excluding interest payments and other borrowing costs of the general government. The primary balance is used to measure the effect of discretionary actions taken to control expenditures and increase revenues.

     The table below shows selected public finance indicators for the period from 2002 through 2006.

Selected Public Finance Indicators 2002 through 2006

	2002			2003			2004			2005			2006
				(Millions of euro, except percentages)
General government expenditure(1)		613,983			648,473			667,190			691,976			729,474
General government expenditure, as a percentage of GDP		47.4	%		48.6	%		48.0	%		48.4	%		49.3	%
General government revenues		576,898			601,859			619,124			631,548			679,840
General government revenues, as a percentage of GDP		44.5	%		45.1	%		44.5	%		44.2	%		45.9	%
Net borrowing		37,085			46,614			48,066			60,428			49,634
Net borrowing, as a percentage of GDP		2.9	%		3.5	%		3.5	%		4.2	%		3.4	%
Primary balance		34,434			21,736			17,628			4,272			18,610
Primary balance, as a percentage of GDP		2.7	%		1.6	%		1.3	%		0.3	%		1.3	%
Public debt		1,367,169			1,392,389			1,443,395			1,511,198			1,575,636
Public debt, as a percentage of GDP		105.6	%		104.3	%		103.8	%		105.8	%		106.5	%

(1)	Includes revenues from the disposal of state-owned real estate (deducted from capital expenditures) for the year 2002 (€10,800 million), 2003 (€2,700 million), 2004 (€4,500 million), 2005 (€3,200 million) and 2006 (€1,400 million).
Source:	For 2005 and 2006 data, Combined Report on the Economy and Public Finance, published in March 2008, and, for the remaining data, Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006.

     On March 11, 2008, the Bank of Italy issued a supplement to its statistical bulletin providing for revised public debt estimate for 2007, which amounted to €1,596,762 million.

     Large net borrowing requirements and high levels of public debt were features of the Italian economy until the early 1990s. In accordance with the Maastricht Treaty, the reduction of net borrowing and public debt became a national priority for Italy. Italy gradually reduced its net borrowing as a percentage of GDP to below the 3 per cent threshold set by the Maastricht Treaty

68

in the late 1990s and the first years of this decade. Net borrowing, however, was higher than the 3 per cent threshold each year from 2003 through 2006 and was estimated to decrease to 1.9 per cent in 2007, compared to 3.4 per cent in 2006.

     Following ten years of year on year reductions of public debt as a percentage of GDP, public debt increased from 103.8 per cent of GDP in 2004 to 105.8 per cent in 2005 and 106.5 per cent in 2006. The increase resulted from a mix of factors including, among others, Italy’s decreasing primary surplus and the low growth rate of its GDP, lower receipts from privatizations and the absence of extraordinary transactions aimed at reducing Italy’s public debt. In addition, Italy incurred non-recurring charges in connection with the State’s assumption of debt incurred by Rete Ferroviaria Italiana S.p.A. (“RFI”) and its wholly-owned subsidiary, Treno Alta Velocità S.p.A. (“TAV”) to finance the high-speed railway link between Turin, Milan, Rome and Naples. See also “Public Debt — General.” Since 1999 the Government has taken steps to lengthen the average maturity of debt and reduce the variable rate portion that, together with the introduction of the single currency, made Government debt less sensitive to variations in short-term interest rates and exchange rates.

The Council Recommendation to Italy Relating to its Excessive Government Deficit

     On July 12, 2005, the Council performed an overall assessment of Italy’s economic situation pursuant to the Maastricht Treaty. The Council concluded that Italy’s exceeding of the 3 per cent reference value for budget deficit as a percentage of GDP in 2003 and 2004 was not due to unusual events beyond the control of Italian authorities, nor due to a severe and unpredictable economic downturn. Accordingly, the Council adopted a recommendation requiring that Italy’s excessive budget deficit be brought within the 3 per cent reference value.

     Subsequently, the Council noted that, given Italy’s high debt-to-GDP ratio, high level of structural deficit and continuing economic slowdown, the adjustment path Italy was called to undertake would require a longer time than would otherwise be imposed under the terms of the Maastricht Treaty in order to ensure the adjustment did not prove economically counter-productive. Accordingly, the Council granted Italy an extension to 2007 to correct its budget deficit and set January 12, 2006 as the time limit for the necessary measures to be implemented, provided these resulted in a cumulative reduction in the structural budget deficit of at least 1.6 per cent of GDP over 2006 and 2007 relative to its level in 2005 (with at least half of this correction occurring in 2006).

     On February 24, 2006, the Council performed an assessment of the actions taken by Italy in response to the above mentioned recommendation. Among other things, the Council acknowledged that Italy had set a budget deficit target of less than 3% and adopted corrective measures in the 2006 Budget Law that would ensure adequate progress towards correcting Italy’s excessive budget deficit within the time limits set by the Council. The Council noted, however, that the correction of Italy’s excessive budget deficit by the 2007 deadline and the reduction in Italy’s public debt-to-GDP ratio were subject to significant uncertainties as they assumed a full implementation of the measures in the 2006 Budget Law and favorable economic conditions. Accordingly, the Council concluded that no further steps in the excessive deficit procedure were needed at the time, even though the Commission would continue to closely monitor Italy’s

69

budgetary developments in accordance with the Maastricht Treaty and the Stability and Growth Pact.

The 2007 Stability and Growth Program

     In November 2007, Italy presented the update to its stability and growth program for the period 2007-2011 (“2007 Stability Program”) to the Council of the EU and the EU Commission. The 2007 Stability Program is based on the 2008-2011 Program Document approved by Parliament in July 2007, the RPP for 2008 presented to Parliament on September 27, 2007 and Annual Financial Law approved in December 2006. The following table compares the principal finance indicators included in the stability and growth program for the period 2006-2011 (“2006 Stability Program”) and the 2007 Stability Program:

Comparative Table
2006 Stability Program and 2007 Stability Program Targets

	2006			2007			2008			2009			2010			2011
Real GDP growth rate
2006 Stability Program		1.6			1.3			1.5			1.6			1.7			1.7
2007 Stability Program		1.9			1.9			1.5			1.6			1.7			1.8
Difference		0.3			0.6			0.0			0.0			0.0			0.1
Net Borrowing, as a % of GDP
2006 Stability Program		(4.8	)		(2.8	)		(2.2	)		(1.5	)		(0.7	)		0.1
2007 Stability Program		(4.4	)		(2.4	)		(2.2	)		(1.5	)		(0.7	)		0.0
Difference		0.4			0.4			0.0			0.0			0.0			0.0
Public Debt, as a % of GDP
2006 Stability Program		107.6			106.9			105.4			103.5			100.7			97.8
2007 Stability Program		106.8			105.0			103.5			101.5			98.5			95.1
Difference		(0.8	)		(1.9	)		(1.9	)		(2.0	)		(2.2	)		(2.7	)

Source: 2006 and 2007 Stability Programs.

          On February 12, 2008, the Council of the EU issued an opinion setting forth, among others, the following considerations with regard to the achievement of the budgetary targets set forth in Italy’s updated 2007 Stability Program:

•  The Council noted that the growth assumption for 2008 in Italy’s updated 2007 Stability Program appeared rather favorable, as real GDP growth in 2008 was expected to be clearly below that of the Program. The Council also noted that the Program’s projections for inflation appeared to be on the low side for 2008 and plausible thereafter.

•  The adjustments made to the budget set out in the updated 2007 Stability Program for achieving the medium-term objective of a balanced budget are inadequate and need to be strengthened to be in line with the Stability and Growth Pact.

•  The Council noted that there were risks attached to lower GDP growth and the lack of information in the Program on the planned fiscal consolidation. In particular, the Council noted that appropriate measures aimed at curbing expenditure developments remained to be spelled out.

•  The Council noted that the budgetary implementation in 2007 was in line with the invitation in the Council opinion on the previous update of the stability program related to the correction of the excessive deficit and that the deficit targets for 2008-2011 were likely to remain unchanged from the previous Program. The Council also noted that Italy continues to be at medium risk with respect to sustainability of its public finances.

•  The long-term budgetary impact of ageing in Italy is lower than the EU average, with pension expenditure showing a more limited increase than on average in the EU, thanks to the pension reforms adopted, assuming they are fully implemented. However, the Council noted that the budgetary position in 2007, which is better than the starting position of the previous Program, contributes to offsetting the projected long-term budgetary impact of ageing but is still insufficient to fully cover future spending pressures.

          In its opinion the EU Council invited Italy to:

(i)	building on the positive results of 2007, strengthen the budgetary target for 2008, so as to secure an ambitious adjustment; and implement the planned fiscal consolidation thereafter, with specified measures to ensure adequate progress towards the medium term objective of a balanced budget, so as to achieve it within the Program period and thus accelerate the pace of debt reduction;
(ii)	in view of the very high level of government debt, fully implement the pension reforms, notably the planned periodical actuarial adjustment, so as to avoid significant increases in age-related spending; and
(iii)	spell out the budgetary strategy for the medium term in line with the Stability and Growth Pact and its Code of Conduct, continue the effort to improve the quality of public finances by focusing on their composition, increasing the transparency of the budgetary process and effectively implementing mechanisms to monitor and control expenditure.

70

The 2008-2011 Program Document

     In July 2007 the Government finalized and presented to Parliament its 2008-2011 Program Document, which contemplates as its main objective achieving long-term economic growth in a stable economic environment.

     Italy’s budget deficit was in excess of the three per cent threshold established by the Maastricht Treaty for each year from 2003 through 2006, notwithstanding Italy’s recourse to extraordinary one-off measures aimed at containing its net borrowing increase through 2005. These measures included disposals of state-owned real-estate assets beginning 2001 and a tax amnesty implemented in 2003. One-off measures reduced Italy’s budget deficit by 1.5 per cent in 2002, 2.0 per cent in 2003, 1.5 per cent in 2004 and 1.3 per cent in 2005. Such measures, however, were entirely phased-out in 2006.

71

     The 2008—2011 Program Document contemplates several structural reforms over the five year period aimed at relaunching productivity and increasing employment levels. In particular, the Italian government is committed to implementing a special plan to increase employment of young persons and women. Competitiveness and productivity will be increased through investment in innovation and research and through the modernization of Italy’s administrative system, the improvement of its infrastructure and the adoption of tax measures aimed at reducing tax evasion.

• Innovation and research (energy sector): To guarantee the security of energy supply, the government intends to encourage the diversification of primary energy sources and create new natural gas supply infrastructure facilities, such as gas pipelines and underground storage. To reduce dependency on foreign suppliers, the government will take steps to better exploit domestic resources and promote renewable energy sources on an industrial scale.

• Modernisation of Italy’s administration: The Italian government intends to reduce the administrative burden on businesses and citizens by increasing cooperation among the central government, the regions and other local authorities. In particular, the Program Document provides for the reorganization of public administration offices in order to increase their efficiency and reduce costs.

• Infrastructure: The Government plans to improve Italy’s existing infrastructure by connecting Italy to the Trans-European Network for Transport or TEN-T and by guaranteeing horizontal and vertical links between different parts of the country. Moreover, the Government will take steps to modernize Italy’s existing telecommunication networks and further expand their coverage of the national territory by providing economic incentives and improving regulation of this sector.

     The following table shows Italy’s principal public finance targets for the years indicated, as well as the gross domestic product, inflation and unemployment assumptions underlying the Program Document, as updated in November 2007.

72

2008-2011 Program Document Objectives

	2008			2009			2010			2011
GDP (% real growth rate)		1.5			1.6			1.7			1.8
Unemployment rate (%)		6.2			6.1			5.8			5.6
Net borrowing (budget surplus), as a percentage of GDP		2.2			1.5			0.7			—
Primary balance, as a percentage of GDP		2.6			3.4			4.2			4.9
Public debt, as a percentage of GDP		103.5			101.5			98.5			95.1
Structural net borrowing (budget surplus), net of one-off measures, as a percentage of GDP		(2.1	)		(1.3	)		(0.6	)		0.1
Structural net borrowing (budget surplus), as a percentage of GDP		(2.0	)		(1.3	)		(0.5	)		0.2
Structural primary balance, as a percentage of GDP		2.9			3.6			4.4			5.0
Structural primary balance, net of one-off measures, as a percentage of GDP		2.8			3.6			4.3			4.9

Source: 2008-2011 Program Document and update to 2008-2011 Program Document.

     The Program Document targets real GDP growth of 1.5 per cent in 2008, which is unchanged from the growth percentage targeted in the 2007-2011 Program Document. It also targets annual budget deficit reductions with the budget deficit as a percentage of GDP decreasing progressively from 2.2 per cent in 2008 to 0.7 per cent and 0.0 per cent in 2010 and 2011, respectively. The targeted reductions in budget deficits in the 2008-2011 Program Document are slightly more ambitious than those set forth in the 2007-2011 Program Document. This reflects substantially similar targets for primary surplus as a percentage of GDP, increasing from 2.6 per cent in 2008 to 4.9 per cent in 2011, in the 2008-2011 Program Document, compared to targets of 2.7 per cent for 2008 and 4.9 per cent in 2011 in the 2007-2011 Program Document.

     The objectives and forecasts set forth in the Program Document are based on assumptions relating to future economic developments, including international economic trends, and may therefore not be realized. In addition, the forecasts set forth in the Program Document differ from the most recent forecasts of the IMF. In particular, according to its World Economic Outlook Report published on April 9, 2008, the IMF forecasts:

• Italy’s real GDP annual growth rate at 0.3 per cent for 2008 and 2009;

• its budget deficit as a percentage of GDP to increase to 2.5 per cent in 2008 and 2009, reaching 2.2 per cent in 2013; and

• a decrease in its debt-to-GDP ratio to 103.6 in 2008, followed by an increase to 104 per cent in 2009, reaching 102.6 per cent in 2013.

Revenues and Expenditures

     The following table sets forth general government revenues and expenditures and certain other key public finance measures for the six years ended December 31, 2007, including preliminary estimates for the year 2007. The table does not include revenues from privatizations,

73

which are deposited into a special fund for the repayment of Treasury outstanding securities and cannot be used to finance current expenditures. While proceeds from privatizations do not affect the primary balance, they contribute to a decrease in the public debt and consequently the ratio of public debt-to-GDP. See “— Privatization Program.”

General Government Revenues and Expenditures

	2002(1)			2003(1)			2004(1)			2005			2006			2007
	(Millions of euro, except percentages)
Expenditures
Current expenditures		567,051			590,664			612,741			633,599			655,466			684,932
of which
Total consumption		238,456			250,382			262,846			275,365			281,881			286,105
of which
Wages and salaries		137,621			144,749			149,861			156,542			162,889			164,645
Cost of goods and services		100,835			105,633			112,985			118,823			118,992			121,460
Interest expense		71,519			68,350			65,694			64,700			68,244			76,726
Social services		214,078			224,485			234,701			242,346			252,119			265,284
Other current expenditures		42,998			47,447			49,500			51,188			53,222			56,817
of which
Production grants		14,450			14,213			14,328			N/A			N/A			N/A
Capital expenditures(2)		46,932			57,809			54,449			58,377			74,008			68,493
of which
Investments		22,468			32,778			33,142			33,711			34,792			36,134
Investment grants		18,440			23,397			19,825			21,988			22,292			24,769
Other capital expenditures		6,024			1,634			1,482			2,678			16,924			7,590
Total Expenditures		613,983			648,473			667,190			691,976			729,474			753,425
as a percentage of GDP		47.4	%		48.6	%		48.0	%		48.4	%		49.3	%		49.1	%
Revenues
Current revenues		571,231			579,569			606,944			625,596			675,366			719,632
of which
Tax revenues		364,728			365,515			380,732			394,422			433,714			459,888
of which
Direct taxes		179,554			178,745			185,331			189,815			213,308			233,660
Indirect taxes		185,174			186,770			195,401			202,736			220,181			225,928
Social security contributions		161,275			168,776			175,965			183,445			189,683			204,772
Revenues from capital		8,249			8,094			7,609			1,871			225			300
Other current revenues		36,979			37,184			42,638			49,600			52,194			55,272
Capital revenues		5,667			22,290			12,180			4,081			4,249			4,314
Total revenues		576,898			601,859			619,124			631,548			679,840			724,246
as a percentage of GDP		44.5	%		45.1	%		44.5	%		44.2	%		45.9	%		47.2	%
Current surplus/(deficit)		4,180			(11,095	)		(5,797	)		(8,003	)		19,900			34,700
as a percentage of GDP		0.3	%		(0.8	)%		(0.4	)%		(0.6	)%		1.3	%		2.3	%
Net borrowing		37,085			46,614			48,066			60,428			49,634			29,179
as a percentage of GDP		2.9	%		3.5	%		3.5	%		4.2	%		3.4	%		1.9	%
Primary balance		34,434			21,736			17,628			4,272			18,610			47,547
as a percentage of GDP		2.7	%		1.6	%		1.3	%		0.3	%		1.3	%		3.1	%
GDP (nominal value)		1,295,226			1,335,354			1,390,539			1,428,375			1,479,981			1,535,540

(1)

The Statistical Office of the European Communities, or Eurostat, published in July 2002 a decision relating to the methods of accounting for securitizations. Pursuant to the Eurostat decision, Italy is required to account for receipts, aggregating approximately €6.7 billion, from certain real estate and state lottery proceeds securitizations transactions, which took place in 2001, in the three-year period 2002-2004 and not in 2001. The general government revenues and expenditures figures presented in the table above take into account the effects of the Eurostat decision.

(2)

Includes revenues from the disposal of state-owned real estate (deducted from capital expenditures) for the year 2002 (€10,800 million), 2003 (€2,700 million), 2004 (€4,500 million), 2005 (€3,200 million) and 2006 (€1,400 million).

Source: For 2002, 2003 and 2004 data, Annual Report of the Bank of Italy (May 2007) for the year ended December 31, 2006 and, for 2005, 2006 and 2007 data, Italy’s Combined Report on the Economy and Public Finance published in March 2008.

74

     General government expenditures and revenues have increased in each of the years 2002-2006 and are expected to increase in 2007. General government expenditures rose by 5.4 per cent in 2006, compared to 3.7 per cent in 2005. Higher expenditure growth in 2006 was principally due to higher capital expenditures, which accounted for 5.0 per cent of GDP in 2006, compared to 4.1 per cent in 2005, and higher social services expenditures, which accounted for 17.1 per cent of GDP in 2006 compared to 17.0 per cent in 2005.

     Capital expenditure increased by 26.8 per cent in 2006, compared to 7.2 per cent in 2005. The sharp increase in capital expenditure is principally due to extraordinary charges resulting from the Government decision in December 2006 to recognize as State debt, with effect as from 2004, approximately €13 billion of State-guaranteed debt incurred by ISPA. ISPA had incurred this debt in connection with the financing of the high-speed railway network. The increase in capital expenditure in 2006 is also due to extraordinary charges relating to the sale by Italy of receipts relating to social contributions due by agricultural workers (€0.7 billion) and the reimbursement of taxes paid by providers of telecommunications services (€0.7 billion).

     General government revenue increased by 7.6 per cent in 2006, compared to 2.0 per cent in 2005. The faster general government revenue growth was due to current revenues, which increased by 8.0 per cent in 2006, compared to 3.1 per cent in 2005, primarily due to higher growth in tax revenues and social security contributions.

     Italy recorded a current account surplus of €19.9 billion in 2006 compared to a deficit of €8 billion in 2005 and of €5.8 billion in 2004, principally due to an acceleration in the growth of direct and indirect tax receipts compared to expenditures attributable to wage and salaries and costs of goods and services. Italy registered a current account deficit from 2003 to 2005, following four years of steadily declining current account surplus, principally due to faster growth of wage and salaries, costs of goods and services and expenditures from social security services, compared to receipts from taxes and social security contributions.

Expenditures

     Italy has a comprehensive system of social services, including public health, public education and pension, disability and unemployment benefits programs, most of which are administered by the Government or by local authorities receiving Government funding. These social services are funded in part by contributions from employers and employees and in part from general tax revenues.

75

     Social Services. Social Services includes expenditures for pensions, disability and unemployment benefits. The two principal social security agencies for private sector employees, the Istituto Nazionale Previdenza Sociale (“INPS”) and the Istituto Nazionale Assicurazioni e Infortuni sul Lavoro (“INAIL”), provide old-age pensions and temporary and permanent disability compensation for all the employees of the private sector and their qualified dependents and coverage for accidents in the workplace or permanent disability as a consequence of employment for workers of the industrial and agricultural sectors and for certain service sector employees. The social security entity for government employees, the Istituto Nazionale di Previdenza per i Dipendenti dell’Amministrazione Pubblica (“INPDAP”), provides similar services.

     Old-age pensions in Italy, as in much of the developed world, continue to present a significant structural fiscal problem. Controlling pension spending is a particularly important Government objective given Italy’s aging population. The following are the principal reforms to the Italian pension system since 1992:

• Beginning in 1992, the Government adopted several measures designed to control the growth of pension expenditures. Among other measures, the Government abolished the indexation of pensions to reflect wage increases and froze or delayed early retirement pensions for certain categories of workers, raised the retirement age and increased the minimum contribution period for early retirement pensions.

• In 1995, Parliament enacted legislation to reform the pension system. Under these reforms, each individual’s pension is determined on the basis of the contributions, adjusted for GDP growth, made to the system by the individual or by his employer on his behalf. No additional contributions are made by the Government. The Government, however, continues to provide welfare and disability pensions. Individuals with lower levels of contribution to the public pension system are encouraged to seek additional pension benefits through voluntary contributions to private funds.

• In July 2004, Parliament enacted legislation to further reform Italy’s pension system. The reform, which will take effect in 2008, will further raise the retirement age and increase minimum contribution periods required to qualify for early retirement pension and old age pension, as shown in the table below. In addition, the reform includes incentives to employees to delay retirement and, as with the 1995 reforms, seek additional pension benefits through contributions to private funds. The reform also will substantially delay end-of-employment payments.

76

Key 2004 Pension Reforms

	Requirement to Qualify for:
	Early Retirement Pension	Old-Age Pension
2004	(a) 57 years of age and 35 years of contributions; or	(a) 57 to 65 years of age and 5 years of contributions; or
	(b) 38 years of contributions, regardless of age	(b) 40 years of contributions, regardless of age
2005-2007	(a) 57 years of age and 35 years of contributions; or	Unchanged
	(b) 38 years of contributions, regardless of age, increasing to 39 years of contributions in 2006 and 2007
2008-2009	(a) 60 years of age and 35 years of contributions; or	(a) 65 years of age for men (60 for women) and 5 years of contributions; or
	(b) 40 years of contributions, regardless of age	(b) 60 years of age and 35 years of contributions; or
		(c) 40 years of contributions, regardless of age
2010-2013	(a) 61 years of age and 35 years of contributions; or	(a) 65 years of age for men (60 for women) and 5 years of contributions; or
	(b) 40 years of contributions, regardless of age	(b) 61 years of age and 35 years of contributions; or
		(c) 40 years of contributions, regardless of age
From 2014	(a) 62 years of age and 35 years of contributions; or	(a) 65 years of age for men (60 for women) and 5 years of contributions; or
	(b) 40 years of contributions, regardless of age	(b) 62 years of age and 35 years of contributions; or
		(c) 40 years of contributions, regardless of age

     Expenditures for social services grew by 4.4 per cent in 2006, compared to 3.3 per cent in 2005 and 4.5 per cent in 2004. As a percentage of GDP, social services expenditures increased to 17.1 per cent in 2006 from 17.0 per cent in 2005 and 16.9 per cent in 2004.

     Expenditures for public health and public education. Expenditures for public health and education are accounted for under wages and salaries, cost of goods and services and production grants. Italy has a public health service run principally by regional governments with funds provided by the Government. Local health units adopt their own budgets, establish targets and

77

monitor budget developments. Public health care expenditures grew by 5.7 per cent in 2006, compared to a growth of 6.4 per cent in 2005, principally due to an increase in expenditures for pharmaceutical products.

     Italy has a public education system consisting of elementary, middle and high schools and universities. Attendance at public elementary, middle and high schools is generally without charge to students, while tuition payments based on income level are required to attend public universities. Public schools generally follow a standard curriculum, and nationwide testing is used for graduation purposes. In March 2003, the Government implemented a major reform of the education system (referred to as “Riforma Moratti”), which, among other things, increased the number of years of compulsory education from ten to twelve and created a tutoring program in order to provide additional assistance to students during the entire course of their scholastic career.

     Compensation of public employees. Compensation of public employees increased by 4.0 per cent in 2006 compared to 4.4 per cent in 2005, due to the renegotiation and subsequent renewal of certain collective bargaining agreements, such as the ones relating to employees of the national health service (approximately 680,000 units) and of local public administrative offices (approximately 560,000 units). The number of public employees remained substantially unchanged in 2005 and 2006.

     Interest payments. Interest payments by the Government increased by €3.3 billion in 2006, after declining by €1.5 billion in 2005. The ratio of interest payments to GDP, after falling from 12.1 per cent in 1993 to 4.5 per cent in 2005, rose to 4.6 per cent in 2006. Average interest rates, which had fallen from 5.2 per cent in 2002 to 4.6 per cent in 2005, increased to 5.2 per cent in 2006. This growth was curbed by net receipts from swap agreements amounting to €0.6 billion, down from €2.4 billion in 2005. Excluding the effect of these transactions, the average cost of debt declined from 4.4 per cent in 2005 to 4.3 per cent in 2006 as the redemption of high-yield medium and long-term securities more than offset the rise in yields. The average gross rate on BOTs fell from 5.1 per cent in October 2000 to 1.9 per cent in June 2003, and rose to 2.1 per cent at the end of 2003 and 2004. It remained substantially stable at 2.1 per cent throughout the first ten months of 2005, rising to 2.5 per cent at the end of that year. In 2006, the average gross rate on BOTs further increased to 3.3 per cent. Similarly, the gross yield on ten-year domestic bonds fell from 5.7 per cent in September 2000 to 3.7 per cent at June 2003 and rose to 4.4 per cent at the end of 2003. It remained stable at 4.4 per cent until June 2004, then fell to 3.5 per cent at the end of 2005. In 2006, it rose again to 4.0 per cent.

     VAT Deductibility Dispute. On March 21, 2005, the Tax Court of First Instance of Trento (Commissione Tributaria di Primo Grado di Trento) instituted a proceeding before the ECJ, requesting a preliminary ruling in the proceedings between Stradasfalti Srl and Agenzia Entrate Ufficio Trento clarifying within which limits and under what conditions member states may introduce exceptions to the right of persons conducting certain economic activities (e.g. freelance professionals) to deduct VAT on transactions relating to specific goods and services, as provided by the EU Sixth Directive on the harmonization of the laws of the member states relating to turnover taxes. Article 17(7) of the Sixth Directive provides that member states may — subject to a previous consultation of a specific EU advisory committee, the “VAT Committee” — totally or

78

partially exclude certain goods from the system of VAT deductions for “cyclical economic reasons.”

     On September 14, 2006, the ECJ ruled that Italy’s law on the non-deductibility of VAT on acquisitions of goods and services related to motor vehicles and on the acquisition of fuel and lubricants, which has been in force since 1979, violated the Sixth Directive’s provisions. In the Court’s opinion, this limitation was implemented by Italy without previously consulting the above mentioned VAT Committee and cannot be viewed as a measure introduced for cyclical economic reasons due to its existence since 1979.

     Immediately following this decision, Law Decree no. 258/2006 was implemented by the Italian Government on September 15, 2006, entitling people who purchased and imported motor vehicles, fuel and lubricants until September 13, 2006 to present a request to the Italian Revenue Agency for the reimbursement of the relevant amounts paid as VAT in connection with such transactions. On September 30, 2006, the Italian Ministry of Economy and Finance presented an update to its 2007-2011 Program Document, estimating that the ECJ’s judgment will cause a decrease in public tax returns of approximately €3.7 billion in 2006 and a tax burden of approximately €13.4 billion for the VAT reimbursements relating to the period 2003-2005. Following the enactment of certain legal measures and the limited number of VAT reimbursement claims proposed during the year 2007, in agreement with Eurostat, the Government subsequently revised its estimates. In particular, the Government did not account for the effects of the ECJ ruling with effect on the results of the period 2003-2006, contrary to what was anticipated in the update to the 2007-2011 Program Document. Instead, it accounted for the effects of the first VAT reimbursement claims recording reimbursements for approximately €0.8 billion for the year 2007. On the basis of the total number of claims expected, the Government estimates further reimbursements for approximately €0.4 billion per year during the period 2008-2011.

Revenues

     Taxes. Italy’s tax structure includes taxes imposed at the State and local levels and provides for both direct taxation through income taxes and indirect taxation through a value added tax (“VAT”) and other transaction-based taxes. Income taxes consist of an individual tax levied at progressive rates and a corporate tax levied at a flat rate. In 2006, the maximum individual tax rate and the maximum corporate tax rate remained unchanged from 2005, at 43 per cent and 33 per cent, respectively. Corporations also pay local taxes, and the deductibility of those taxes for income tax purposes has been gradually eliminated over the last few years.

     VAT is imposed on the sale of goods and the rendering of services performed for consideration in connection with business or professions and on all imports of goods or services. Italy has issued legislation to harmonize its VAT with applicable European Union directives. The basic VAT rate is 20 per cent, although certain goods and services qualify for an exemption from VAT or a reduced rate. In addition to VAT, indirect taxes include customs duties, taxes on real estate and certain personal property, stamp taxes and excise taxes on energy consumption, tobacco and alcoholic beverages.

79

     Italy has negotiated bilateral treaties for the avoidance of double taxation with virtually all industrialized countries.

     Low taxpayer compliance has been a longstanding concern for the Government, which has adopted measures to increase compliance. Some of these measures are aimed at identifying tax evasion and include systems of cross-checks between the tax authorities and social security agencies, public utilities and others. One of the areas of greatest concern to the Government has been under-reporting of income by self employed persons and small enterprises. The Government’s efforts to increase tax compliance since 2001 have led to an increase in the general tax base and to an improvement in compliance.

     Italy’s fiscal burden, which is the aggregate of direct and indirect taxes and social security contributions as a percentage of GDP, remained substantially unchanged in 2004 and 2005, at 40.0 per cent and 40.5 per cent, respectively, and increased to 42.3 per cent in 2006, principally due to a steady increase in direct and indirect taxes.

     The following table sets forth the composition of tax revenues for each of the five fiscal years ended December 31, 2006.

Composition of Tax Revenues⁽¹⁾

	2002		2003		2004		2005		2006
	(Millions of euro)
Direct taxes(1)
Personal income tax		120,204		124,238		127,689		132,663		142,061
Corporate income tax		29,651		29,022		28,073		33,699		39,475
Investment income tax		10,598		8,543		7,914		8,882		12,193
Other(2)		9,860		15,796		18,640		4,368		9,656
Total direct taxes		170,313		177,599		182,316		179,612		203,385
Indirect taxes(1)
VAT		93,881		96,177		100,051		105,008		114,166
Other transaction-based taxes		16,499		15,789		18,176		18,054		20,395
Production taxes		24,667		26,087		24,906		26,615		26,690
Tax on State monopolies		7,685		7,770		8,502		8,511		9,349
National Lottery		8,858		6,839		14,658		12,364		10,191
Others		2,003		5,144		3,167		2,144		2,251
Total indirect taxes		153,593		157,806		169,460		172,696		183,042
Total taxes		323,906		335,405		351,776		352,308		386,427

(1)

The data presented in this table does not correspond to the general Government direct and indirect tax revenue figures contained in the preceding table entitled “General Government Revenues and Expenditures,” primarily because the “Composition of Tax revenues” table is prepared on a cash basis while the “General Government Revenues and Expenditures” table is prepared on an accrual basis in accordance with ESA95. Generally, State sector accounting does not include indirect taxes levied by, and certain amounts allocable to, regional and other local governments and entities. However, because this table is prepared on a cash basis, it reflects tax receipts of entities that are excluded from State sector accounting (such as local government entities) that are collected on their behalf by the State (and subsequently transferred by the State to those entities).

(2)

The taxes classified as “other” are non-recurring and, accordingly, this item is highly variable.

Source: Bank of Italy and Ministry of Economy.

80

Government Enterprises

     The following chart summarizes certain key data for each of the principal state-owned enterprises for the periods indicated. The Government currently continues to participate in the election of the respective boards of directors but does not directly participate in the management of these companies.

Principal Government Enterprises⁽¹⁾

		Per cent of
		Government	Total Assets		Total Liabilities		Net profit (loss)
		Ownership as of	At December 31,				As of December 31,
Company	Industry Sector	December 31, 2006	2006		2006		2004			2005			2006
	(Millions of euro)
Alitalia Linee Aeree Italiane S.p.A.	Airline Banking/	49.9%		4,184		3,298		(812	)		(168	)		(626	)
Cassa Depositi e Prestiti	Financial Services	70.0%		180,692		167,409		286			1,642			2,053
ENEL S.p.A.	Electricity/Utility	31.3%(2)		54,500		35,475		2,706			4,398			3,335
ENI S.p.A.	Energy	30.3%(2)		88,312		47,113		7,274			9,247			9,823
Ferrovie dello Stato S.p.A.	Railroads	100.0%		73,610		18,414		(125	)		(465	)		(2,119	)
Poste Italiane S.p.A.	Post	100.0%(2)		26,861		30,544		292			349			676
Finmeccanica S.p.A.	Aerospace/Defense	33.80%		23,381		18,024		526			396			1,020
RAI Holding S.p.A.	Broadcasting	99.6%		1,584		1,036		82			23			(87	)

(1)

Percentages refer to the holding company (S.p.A.), while financial data is presented on a consolidated basis.

(2)

Including shares indirectly owned by the Government through Cassa Depositi e Prestiti S.p.A. In December 2003 the Treasury transferred shares representing 10.16 per cent of ENEL, 9.99 per cent of ENI and 35 per cent of Poste Italiane to Cassa Depositi e Prestiti (“CDP”), a wholly owned entity with historical responsibility for promoting local development and managing postal savings instruments, in exchange for the transfer by CDP to the Treasury of approximately €11 billion. These transfers were part of a series of transactions that included the conversion of CDP into a joint stock company, the further assumption by the Treasury of a portion of CDP’s assets and liabilities, and the subsequent sale by the Treasury of a 30 per cent minority stake in CDP to 65 Italian banking foundations for an aggregate consideration of €1.1 billion.

Source: Ministry of Economy and Finance.

     Finmeccanica is Italy’s second largest manufacturer in the aerospace and defense sector. Due to Finmeccanica’s involvement in the defense sector, the Government has maintained a significant interest in the share capital of the company through the Ministry of Economy and Finance, has retained a golden share, and has limited the maximum ownership of any other shareholder to 3 per cent.

     Alitalia, Italy’s national airline, was partially privatized in 1998 and re-capitalized in early 2002. Following a capital increase in December 2005, the Ministry of Economy and Finance’s stake decreased to 49.9 per cent. For more information on Alitalia, see “Italian Economy — Principals sectors of the Economy.”

Privatization Program

     Privatizations managed by the Italian Treasury. Since 1994, the Treasury has carried out a number of privatizations in the financial institution and telecommunications sector and of integrated oil companies and electricity utilities. Based on Treasury data, from February 1994 to

81

December 2005 the Government raised approximately €153 billion (including revenues from the IR-Fintecna disposal program), making the Italian privatization program one of the largest privatization programs in Europe. In 2006 and 2007, the Ministry of Economy and Finance did not carry out any sales of shareholdings directly owned by it.

     The Italian Treasury currently holds majority or controlling interests in 28 public companies. Italy will continue to rely on proceeds from privatizations, state-owned real estate disposals and securitizations to reduce public debt as a percentage of GDP and achieve the targets set out in its 2008-2011 Program Document. The table below illustrates the principal Italian privatizations since 1994 that generated proceeds of over €96 billion.

Principal Privatizations Managed Directly by the Italian Treasury (from 1994 to 2007)

				Gross proceeds in		Percentage of
Company Name	Industry Sector	Offer Date	Offering Type	millions of euro		capital disposed of
IMI	Banking	Feb 1994	Public Offering		927	27.90		(1)
INA	Insurance	June 1994	Public Offering		2,343	47.45		(1)
IMI	Banking	July 1995	Private Placement		472		14.48
INA	Insurance	Oct 1995	Private Placement		871		18.37
ENI	Oil	Nov 1995	Public Offering		3,254	15.05		(1)
INA	Insurance	June 1996	Exchangeable		1,684		31.08
ENI	Oil	Nov 1996	Public Offer		4,586	16.19		(1)
ENI	Oil	July 1997	Public Offering		6,833	18.21		(1)
Telecom Italia	Telecom	Nov 1997	Public Offer /Private Placement		11,818		29.18
Seat	Publishing	Nov 1997	Competitive Bidding		854		44.74
ENI	Oil	July 1998	Public Offer		6,712	15.20		(1)
BNL	Banking	Sept/Dec 1998	Public Offer /Private Placement		3,464		68.25
ENEL	Utility	Nov 1999	Public Offer		16,550		32.42
Mediocredito Centrale	Banking	Dec 1999	Trade Sale		2,037		100.00
Banco di Napoli	Banking	Nov 2000	Government Tender in Public Offer		494		16.16
ENI	Oil	Feb 2001	Competitive Bidding		2,721		5.00
Telecom Italia	Telecom	Dec 2002	Private Placement /Trade Sale		1,434		2.67
ENEL	Electricity	Nov 2003	Private Placement		2,173		6.60
Cassa Depositi e Prestiti	Banking/Financial Service	Dec 2003	Private Placement		1,050		30.00
Ente Tabacchi Italiani	Manifacturing	Dec 2003	Public Offer		2,325		100.00
ENEL	Electricity	Oct 2004	Public Offer		7,636		19.31
ENEL	Electricity	July 2005	Public Offer		4,101		9.42

(1) Inclusive of bonus shares which were allocated to Italian retail investors who retained the shares sold for a specified period.

Source: Ministry of Economy and Finance.

     Italy’s legislation governing privatizations contemplates a variety of methods of sale, including public offerings (including employee offerings), public auctions, private placements and trade sales, and also allows the creation of stable core shareholder groups. In addition, this legislation grants the State certain special powers in connection with any transfer of a controlling interest in certain state-owned companies operating in public service sectors.

82

     Under Italian law, and in order to achieve the public finance objectives established with the Maastricht Treaty, all proceeds of the privatization of entities directly owned by the Treasury are deposited into a fund established in 1993 (Fondo per l’ammortamento dei titoli di Stato), prior to their use for the purchase or repayment of outstanding Treasury securities.

     The original purpose of the privatization program was to reduce the level of direct Government ownership; thereby lowering the level of State subsidy and improving industrial efficiency. The privatization program has resulted in a major structural change in the Italian industrial and financial markets, with a significant decrease in direct Government involvement in the management of industrial and financial companies.

     The success of the privatization program is largely attributable to capital market reforms, to the implementation of a clear regulatory framework and to the increased interest by Italian retail investors in the equity market. The Italian Stock Exchange was privatized in 1997 and initiatives have been introduced to protect minority shareholders, promote transparent corporate governance and eliminate barriers to changes in corporate control. Increased participation by retail investors in domestic capital markets has been a leading contributor to the success of Italy’s privatization program. Prior to the commencement of Italy’s privatization program in 1993, Italy’s domestic retail investors historically had demonstrated a strong preference for investing in Government bonds and other fixed income securities rather than equities. As Italy has historically benefited from one of the highest domestic saving rates in Western Europe, the success of Italy’s privatization program has been largely attributable to the Government’s ability to attract domestic savings and promote the growth of equity investment. The Government has attained this goal through a combination of innovative offer structures, attractive retail incentive packages and widespread marketing campaigns. Between 1991 and 2006, the ratio of overall market capitalization of Italian Stock Exchange listed companies to nominal GDP increased from 12 per cent to 53 per cent, having reached a peak of 70 per cent in 2000. At December 31, 2006 total market capitalization was €779 billion, up from €677 and €569 billion as of December 31, 2005 and 2004, respectively.

     Privatizations managed by IRI. IRI has played a major role in the Italian privatization program. Proceeds from the privatization activities of the IRI group were €56.6 billion for the period from July 1992 to December 2001. During the three years ended December 31, 2002, IRI paid to the Ministry of Economy and Finance, its shareholder, dividends totaling €6.2 billion. On June 27, 2000 IRI was put into liquidation proceedings having completed its mandate. In connection with its liquidation IRI made advance payments to the Ministry of Economy and Finance amounting to €8.0 billion in 2000 and €3.0 billion in 2001. On November 30, 2002, IRI merged into Fintecna S.p.A.

83

Major Privatizations Managed Directly by IRI in the Period 1999-2001

				Gross revenue in		Percentage of
Company Name	Industry Sector	Offer Date	Offer Type	millions of euro		capital disposed of
Autostrade	Infrastructure	Oct 1999	Private Placement		2,536		30.0
	Infrastructure	Dec 1999	Secondary Public Offer		4,185		52.0
Aeroporti di Roma	Infrastructure	Nov 1999/June 2000	Private Placements		1,379		54.2
Finmeccanica	Aerosp./Defense	June 2000	Secondary Public Offer		5,505		43.8
Cofiri	Financial services	Feb 2001	Private Placement		508		100.0

Source: Treasury’s evaluations based on IRI data.

Government Real Estate Disposal Program

The Government plans to dispose of real estate assets to reduce costs associated with owning those assets and to further reduce State debt. In September 2001, the Government approved new legislation to accelerate its real estate disposal program. The program was extended to all of the State’s real estate assets, including real estate assets owned by social security entities, and includes a securitization program. The Government completed its first real estate securitization transaction in December 2001. Pursuant to Eurostat methodology, the €2.1 million in proceeds received at that time have been amortized in Italy’s ESA 95 National Accounts over the three-year period 2002-2004. The Government completed its second real estate securitization transaction in December 2002, raising proceeds of €6.6 billion. In December 2004 and December 2005 the Government disposed of additional real estate assets through sales to two real estate investment funds, raising proceeds of €3.3 billion and €600 million in 2004 and 2005, respectively.

84

PUBLIC DEBT

General

     The Annual Financial Law and the Budget Law authorize the incurrence of debt by the Government. See “Public Finance — The Budget Process.” The Annual Financial Law sets a gross limit on issuances of Treasury securities other than Buoni Ordinari del Tesoro or BOTs, which are zero-coupon notes with a three-, six-, or twelve-month maturity. The Budget Law sets a net limit on all issuances of Treasury securities, excluding issuances to refinance outstanding Treasury securities. In addition to Treasury securities and borrowings, Italy’s public debt includes debt incurred by public social security agencies, regional and local governments and other authorities.

     The Treasury administers the public debt and the financial assets of Italy. The Bank of Italy provides technical assistance to the Treasury in connection with auctions for domestic bonds and acts as paying agent for Treasury securities.

     The following table summarizes Italy’s public debt as of the dates indicated, including debt represented by Treasury securities and liabilities to holders of postal savings.

Public Debt

							December 31,
	2002			2003			2004			2005			2006
	(Millions of euro, except percentages)
Debt incurred by the Treasury:
Short term bonds (BOT)(1)		113,740			119,645			118,750			117,806			122,780
Medium and long term bonds (initially incurred or issued in Italy)		946,535			952,084			979,506			1,006,589			1,048,726
External bonds (initially incurred or issued outside Italy)(2)		81,201			84,147			85,262			87,799			75,200
Total Treasury Issues		1,141,476			1,155,876			1,183,518			1,212,193			1,246,706
Postal savings(3)		138,301			75,939			74,754			70,578			65,622
Postal accounts(4)		15,614			28,038			46,331			75,638			87,937
Debt incurred by:
FS bonds and other debt(5)		4,889			3,408			1,753			1,744			1,284
ISPA bonds and other debt(6)		—			—			7,211			12,976			12,989
ANAS bonds and other debt(7)		384			218			52			—			—
Other State sector entities(8) (9)		9,503			41,695			41,181			38,702			44,603
Other general government entities(9)		57,002			87,215			88,595			99,367			116,300
Total public debt		1,367,169			1,392,389			1,443,395			1,511,198			1,575,441
as a percentage of GDP		105.6	%		104.3	%		103.8	%		105.8	%		106.5	%
Treasury accounts(10)		(21,185	)		(13,048	)		(15,709	)		(14,535	)		(22,778	)
Total public debt net of Treasury accounts		1,345,984			1,379,341			1,427,686			1,496,663			1,552,663

(1)	BOTs (Buoni Ordinari del Tesoro) are short-term, zero-coupon notes with a maturity of three, six or twelve months.
(2)	Italy often enters into currency swap agreements in the ordinary course of the management of its debt. The total amount of external bonds shown above takes into account the effect of these arrangements.
(3)	Postal savings are demand, short- and medium-term deposit accounts, as well as long-term certificates that may be withdrawn by the account owner prior to maturity with nominal penalties. As of the date of conversion of Cassa Depositi e Prestiti (“CDP”) into a joint stock company in 2003 (Cassa Depositi e Prestiti S.p.A.), the Ministry of Economy and Finance assumed certain postal savings liabilities as described in greater detail below.
(4)	Postal accounts are demand, short- and medium-term deposit accounts held by the private sector and by the Treasury on behalf of public companies, such as Fintecna S.p.A. and companies formed in connection with securitization transactions carried out by the Treasury.
(5)	Includes debt securities issued by Ferrovie dello Stato S.p.A., or FS, the State railway entity and other debt incurred by FS and assumed by the Treasury by law in 1996.
(6)	The indebtedness of Infrastrutture S.p.A., or ISPA, in relation to the TAV project (high-speed railroad infrastructure), is included since 2004, as it is recorded as government debt. For more information, see below.
(7)	Includes ANAS (Azienda Nazionale Autonoma delle Strade) bonds, which are securities issued by ANAS S.p.A. (the state owned entity in charge of road maintenance and construction), the State Road Board and other debt incurred by ANAS.
(8)	Includes loans and securities issued by certain entities, loans refunded by the central Government and loans granted by CDP to the local governments. All indebtedness included in this line item is net of Treasury securities owned by such entities.
(9)	The increase in debt of “other State sector entities” and “other general government entities” in 2003 was largely due to the conversion of CDP into a joint stock company in 2003, as described in greater detail below.
(10)	The line item “Treasury accounts” includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, supplied by privatizations. See “Monetary System — Monetary Policy.”

Source: Ministry of Economy and Finance.

85

     On March 11, 2008, the Bank of Italy issued a supplement to the statistical bulletin publishing a revised public debt figure for 2006 and public debt estimate for 2007, which amounted to €1,575,636 million and €1,596,762 million, respectively. Based on the Combined Report on the Economy and Public Finance published on March 12, 2008 by the Ministry of Economy and Finance, debt-to-GDP was estimated to decrease to 104 per cent in 2007 and expected to gradually decrease to 95 per cent in 2011, principally as a result of the expected improvement in Italy’s primary balance.

     Italy’s debt-to-GDP ratio decreased from 121.5 per cent in 1994 to 103.8 per cent in 2004 and increased to 105.8 per cent and 106.5 per cent in 2005 and 2006, respectively. The overall decrease in public debt recorded since 1994 was principally due to the following factors:

• Italy’s privatization program, through which, based on Treasury data, from February 1994 to December 2005, the Government raised approximately €94,5 billion (including revenues from the IRI disposal program), making the Italian privatization program one of the largest in Europe (privatization receipts were insignificant in 2006 and 2007);

• in the second half of the 1990s, the growth of Italy’s primary balance and a reduction in Italy’s interest expense;

• certain securitization transactions, which resulted in receipts of €44.7 billion in the period from 1999 to 2006;

86

• the conversion of Cassa Depositi e Prestiti into a joint stock company in 2003 described below, which at the time reduced Italy’s debt-to-GDP ratio by 0.8 per cent; and

• the exchange of BTPs between the Ministry of Economy and Finance and the Bank of Italy in 2002 described below, which at the time resulted in a 1.8 per cent reduction of Italy’s debt-to-GDP ratio.

     The increase recorded in 2005 and 2006 was attributable to a mix of factors including, among others, Italy’s decreasing primary surplus and the low growth rate of its GDP, recorded in 2005, lower receipts from privatizations and the absence of extraordinary transactions aimed at reducing Italy’s public debt. This increase also reflected the effects of non-recurring charges related to the decision taken by the Government in December 2006, with effect as from 2004, to classify as State debt certain debt, guaranteed by the Government, incurred by Rete Ferroviaria Italiana S.p.A. (“RFI”) and its wholly-owned subsidiary, Treno Alta Velocità S.p.A. (“TAV”) to finance the high-speed railway link between Turin, Milan, Rome and Naples; the majority of such debt is represented by the amount outstanding under a loan provided by Infrastrutture S.p.A. (“ISPA”), a company indirectly controlled by the Government, to RFI and TAV following a bond issuance by ISPA, the proceeds of which were lent to RFI and TAV. The Government decision followed the ruling by Eurostat on this matter in May 2005. The amount of debt of RFI and TAV, guaranteed by the Government and outstanding as of December 31, 2006, was approximately €13 billion.

     Conversion of Cassa Depositi e Prestiti. On December 5, 2003, the Ministry of Economy and Finance issued a Decree pursuant to which Cassa Depositi e Prestiti (“CDP”), an administrative entity with historical responsibility for promoting local development, including lending to local government entities, and managing postal savings instruments, was converted into a joint stock company, wholly owned by the Italian Treasury. Subsequently, in December 2003, the Treasury sold a 30% stake in CDP to 65 Italian banking foundations.

     From December 12, 2003, the date of its conversion into a joint stock company, CDP is no longer considered part of the general government and its liabilities are no longer accounted for as public debt. In connection with the conversion of CDP into a joint stock company:

• the Ministry of Economy and Finance assumed €101 billion of CDP’s postal bonds and accounts, shown in the table above as “Postal Savings.” Prior to December 2003, Italy accounted for CDP’s entire postal savings liabilities under “Postal Savings”;

• the remaining CDP obligations in respect of postal savings (amounting approximately to €73 billion) ceased to be accounted for as a portion of public debt; and

• loans totaling €28 billion, granted by CDP to local government entities, which previously had not been accounted for as public debt as they were loans made from one general government entity to another, were thenceforth included in public debt of local government entities (shown in the table above under “other general government entities”) or in the debt of central government, when it was fully committed to the refunding (“other State sector entities” in the table above). The increase in debt of “other State

87

sector entities” and “other general government entities,” shown in the table above, is largely the result of this recharacterization.

     Exchange of BTPs with the Bank of Italy. In 2002, the Ministry of Economy and Finance issued to the Bank of Italy €15.4 billion of BTPs with interest rates ranging from 5.0 per cent to 6.5 per cent and maturing between 2012 and 2031 in exchange for €39.4 billion of outstanding 1.0 per cent BTPs maturing between 2014 and 2044 issued in 1993. The average maturity of public debt decreased to 5.56 years at December 31, 2002 due principally to this bond exchange with the Bank of Italy on December 31, 2002.

     Public Debt Management. Debt management continues to be geared towards lengthening the average maturity of public debt, which increased from 6.56 years at December 31, 2005 to 6.77 years at December 31, 2006.

     The Government’s objectives with respect to the management of public debt are to minimize the cost of borrowing in the medium-term and to reduce the volatility of interest payments. In accordance with these objectives, the Treasury has, in the past, gradually increased the proportion of total Government bonds in circulation represented by fixed-rate securities and inflation indexed securities, which hedge exposure to movements in nominal interest rates, while reducing the proportion represented by floating rate and short-term securities, from approximately two-thirds to less than one third. The ratio of fixed-rate instruments to total government securities in the domestic market has stabilized to approximately 68 per cent, while the short-term and variable-rate component decreased from 35 per cent in 1999 to 27 per cent at the end of 2006. Italian government securities indexed to the Euro Area inflation rate (BTP€i) increased from 2003 to reach more than 5 per cent of the total Government bonds at the end of 2006.

     The following table shows the total of debt securities issued by the Treasury and outstanding as of the dates indicated. Total Treasury issues differ from Italy’s total public debt as the former do not include liabilities to holders of postal savings accounts, debt incurred by Ferrovie dello Stato S.p.A. and ANAS S.p.A. (Azienda Nazionale Autonoma delle Strade) and debt incurred by other state sector entities, other general government entities and other liabilities reclassified as general Government debt pursuant to Eurostat rulings.

Total Treasury Issues

	March 30, 2007		June 30, 2007		September 30, 2007		December 31, 2007
	(Millions of euro)
Short term bonds (BOT)		143,250		142,750		146,150		128,302
Medium and long term bonds (initially issued in Italy)		1,057,735		1,086,771		1,089,725		1,080,785
External bonds (initially issued outside Italy)(1)		74,920		77,404		71,394		69,314
Total Treasury issues		1,275,905		1,306,925		1,307,269		1,278,401

(1) Italy often enters into currency swap agreements in the ordinary course of the management of its debt. The total amount of external bonds shown above takes into account the effect of these arrangements and is not directly comparable to the total amounts of external bonds indicated in the table “External Bonds of the Treasury as of December 31, 2006” and in the table “External Bonds of the Treasury as of December 31, 2007” below, which do not take into account: (i) the effect of currency swaps and (ii) the amount of bonds outstanding under Italy’s Commercial Paper Program.

Source: Ministry of Economy and Finance.

88

Summary of Internal Debt

     Internal debt is debt initially incurred or issued in Italy, regardless of the currency of denomination. Italy’s total internal public debt as at December 31, 2006 was €1,483,023 million, an increase of €79.94 million from December 31, 2005. The following table summarizes the internal public debt as at December 31 in each of the years 2002 through 2006.

Internal Public Debt

	2002			2003			2004			2005			2006
	(Millions of euro)
Debt incurred by the Treasury:
Short Term Bonds (BOT)(1)		113,740			119,645			118,750			117,806			122,780
Medium and Long Term Bonds
CTZ(2)		59,193			52,636			45,603			43,184			43,669
CCT(3)		215,470			197,540			197,435			198,663			190,824
of which:
Floating rate		215,470			197,540			197,435			198,663			190,824
BTP(4)		671,872			691,705			707,890			716,708			753,300
BTP€i(5)		10,203			28,578			48,034			60,933
Total		1,060,275			1,071,729			1,098,256			1,124,395			1,171,506
Postal bonds(6)		77,250			57,522			53,094			45,950			39,648
Postal accounts(6)		76,665			46,455			67,991			100,266			113,910
FS bonds and loans(7)		1,032			1,032			—			—			—
ANAS bonds and loans(8)		384			218			52			—			—
Other State sector entities(9)		8,485			40,881			40,505			38,056			43,985
Other general government entities(10)		49,458			79,483			84,243			94,419			113,974
Total internal public debt		1,273,549			1,297,320			1,344,141			1,403,085			1,483,023
Treasury accounts(11)		(21,185	)		(13,048	)		(15,709	)		(14,535	)		(22,778	)
Total internal public debt net of Treasury account		1,252,364			1,284,272			1,328,432			1,388,550			1,460,245

(1)	BOTs (Buoni Ordinari del Tesoro) are short-term, zero-coupon notes with a maturity of three, six or 12 months.
(2)	CTZs (Certificati del Tesoro Zero-Coupon), introduced in 1995, are zero-coupon notes with maturities of eighteen or twenty-four months.
(3)	CCTs (Certificati di Credito del Tesoro) are medium- and long-term notes at a variable interest rate with a semiannual coupon.
(4)	BTPs (Buoni del Tesoro Poliennali) are medium- and long-term notes that pay a fixed rate of interest, with a semiannual coupon.
(5)	BTP€is (inflation-linked BTPs) are medium- and long-term notes with a semiannual coupon. Both the principal amount under the notes and the coupon are indexed to the euro-zone harmonized index of consumer prices, excluding tobacco.
(6)	“Postal Bonds” are long-term certificates that may be withdrawn by the account owner prior to maturity with nominal penalties, and “Postal Accounts,” are demand, short- and medium-term deposit accounts held by the private sector and by the Treasury on behalf of public companies, such as Fintecna S.p.A. and companies formed in connection with securitization transactions carried out by the Treasury. As of the date of conversion of CDP into a joint stock company in 2003, the Ministry of Economy and Finance assumed certain postal savings liabilities as described in greater detail above under “Debt — General.”
(7)	Includes FS bonds and other debt incurred by FS and assumed by the Treasury by law in 1996.
(8)	Includes ANAS bonds and other debt incurred by ANAS.
(9)	Includes loans and securities issued by the Institute of Credit for Public Works (CREDIOP) and certain other entities. All indebtedness included in this line item is net of Treasury securities owned by such entities.
(10)	All indebtedness included in this line has been treated as funded debt in this “Public Debt” section. A small portion, however, may have had a maturity at issuance of less than one year or may have been incurred or issued abroad. The increase in debt of “other general government entities” in 2003 was largely due to the conversion of CDP into a joint stock company in 2003, as described in greater detail above under “Debt — General.”
(11)	The line item “Treasury accounts” includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, supplied by privatizations. See “Monetary System — Monetary Policy.”

Source: Ministry of Economy and Finance.

89

     The following table divides the internal public debt into floating debt and funded debt as at December 31 in each of the years 2002 through 2006. Floating debt is debt that has a maturity at issuance of less than one year. Funded debt is debt that has a maturity at issuance of one year or more.

	2002		2003		2004		2005		2006
	(Millions of euro)
Floating internal debt(1)		121,656		95,099		114,741		146,073		160,191
Funded internal debt		1,151,893		1,202,221		1,229,400		1,257,012		1,322,832
Total internal public debt		1,273,549		1,297,320		1,344,141		1,403,085		1,483,023

(1) Includes BOTs with a maturity at issuance of three and six months and postal accounts.

Source: Ministry of Economy and Finance.

     Italy reduced the ratio of short-term bonds to total debt issued from 23.2 per cent in 1994 to 9.16 per cent in 2000. This ratio has remained stable at approximately 10 per cent in the five years to December 31, 2006.

Summary of External Debt

     Eternal debt is debt initially incurred or issued outside Italy, regardless of the currency of denomination. Total external public debt as at December 31, 2006 was €92,417 million. The following table summarizes the external public debt as at December 31 in each of the years 2002 through 2006.

	2002		2003		2004		2005		2006
	(Millions of euro)
External Treasury Bonds(1)		81,201		84,147		85,262		87,798		75,200
FS bonds and loans(2)		3,857		2,376		1,753		1,744		1,284
ISPA bonds and loans(3)		—		—		7,211		12,976		12,989
Other State sector entities		1,018		814		676		646		618
Other general government entities		7,544		7,723		4,352		4,948		2,326
Total external public debt		93,620		95,060		99,254		108,113		92,417

(1)	Italy often enters into currency swap agreements in the ordinary course of the management of its debt. The total amount of external bonds shown above takes into account the effect of these arrangements. All amounts of debt outstanding under Italy’s $10 billion Commercial Paper program are repaid in full every year by year-end.
(2)	Includes FS bonds and other debt incurred by FS outside Italy and assumed by the Treasury by law in 1996.
(3)	Includes ISPA’s bonds and other debt, guaranteed by the State, in connection with the financing of the high-speed railway link between Turin, Milan, Rome and Naples. For more information, see above under “—General.”

Source: Ministry of Economy and Finance.

90

     The following table sets forth a breakdown of the external public debt of the Treasury, by currency, as at December 31 in each of the years 2002 through 2006. The amounts shown below are nominal values at issuance, before giving effect to currency swaps, and do not include external public debt of other state sector entities and other general government entities. Italy often enters into currency swap agreements in the ordinary course of the management of its debt.

	2002		2003		2004		2005		2006
	(Millions)
Euro(1)		21,753		21,354		20,328		20,965		21,572
British Pounds		2,005		2,605		2,855		2,750		2,750
Swiss Francs		7,800		8,800		9,800		10,500		9,500
U.S. Dollars(2)		38,591		45,675		49,589		52,489		42,489
Japanese Yen		1,475,000		1,325,000		1,225,000		1,000,000		825,000
Norwegian Kroner		2,000		4,000		4,000		4,000		4,000
Australian Dollars		—		1,000		1,000		1,000

(1)	Does not include the amount of debt incurred in euros by ISPA and guaranteed by the State, which is shown in the previous table.
(2)	Includes US$989 million of debt originally incurred by FS.

Source: Ministry of Economy and Finance.

     Although historically Italy has not relied heavily on external debt, the Treasury raised approximately US$68 billion by issuing bonds denominated in euro and currencies other than euros during the period 2002 through 2006. As of December 31, 2006, external debt accounted for approximately 5.9 per cent of total public debt, compared to 6.8 per cent at December 31, 2002. As of December 31, 2006, external Treasury bonds denominated in euro and those denominated in currencies other than euro accounted for 6.1 per cent and 0.7 per cent of total Treasury bonds, respectively.

     Italy accesses the international capital market through a Global Bond Program registered under the United States Securities Act of 1933, a US$40 billion Medium-Term Note Program established in 1998 and a $10 billion Commercial Paper Program established in 1999. The Global Bond Program has been Italy’s principal source of funding from the international capital markets since 2001. Italy introduced collective action clauses (CACs) in the documentation of all New York law governed bonds issued after June 16, 2003.

91

Debt Service

     The aggregate nominal amount, before giving effect to currency swaps, of scheduled repayments in respect of the principal amount on Treasury securities constituting external debt outstanding as at December 31, 2006 was as follows:

								2015
	2007		2008		2009-2014			and after
	(Millions)
Euro		3,296		—		5,490	1		22,276	(1)
British Pounds		—		600		400			1,750
Swiss Francs		1,000		2,000		3,500			3,000
U.S. Dollars		5,300		8,750		13,939	2		14,500
Japanese Yen		—		150,000		325,000			350,000
Norwegian Kroner		—		—		2,000			2,000
Australian Dollars		—		1,000		—			—

(1)	Includes part of the amount of debt incurred by ISPA and guaranteed by the State.
(2)	Includes US$989 million of debt originally incurred by FS.

Source: Ministry of Economy and Finance.

Debt Record

     Since its founding in 1946, the Republic of Italy has never defaulted in the payment of principal or interest on any of its internal or external indebtedness.

92

TABLES AND SUPPLEMENTARY INFORMATION

Floating Internal Debt of the Treasury⁽¹⁾ as of December 31, 2006

			Outstanding
Security	Interest Rate	Maturity Date	principal amount
			(Millions of euro)
BOT (3 months)	various	various		2,500
BOT (6 months)	various	various		43,779
Postal accounts	floating	none		113,910
Total floating internal debt of the Treasury				160,189
Treasury accounts	floating	none		(22,778	)
Total floating internal debt net of Treasury accounts				137,411

Funded Internal Debt of the Treasury⁽¹⁾ as of December 31, 2006

	Interest		Outstanding
Security	Rate (%)	Maturity Date	principal amount
			(Millions of euro)
BOT (12 months)	various	various		76,499
CTZ	various	various		43,669
CCT	various	various		190,824
BTP	various	various		753,300
BTP€I	various	various		60,933
Total funded internal debt of the Treasury				1,125,225

(1) Floating debt is debt that has a maturity at issuance of less than one year. Funded debt is debt that has a maturity at issuance of one year or more.

Source: Ministry of Economy and Finance.

93

External Bonds of the Treasury as of December 31, 2006

     The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2006.

		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
US$(1)
$3,500,000,000	6.875%		98.725	%	September 27, 1993	September 27, 2023		3,500,000,000		3,500,000,000		2,657,555,049
$1,500,000,000	6.025%-6.88 %		100.00	%	March 5, 1996	Mar 5, 2004/12		1,500,000,000		1,500,000,000		1,138,952,164
$750,000,000	5.81%-6,70%		100.00	%	March 5, 1996	Mar 5, 2002/10		750,000,000		750,000,000		569,476,082
$1,500,000,000	5.97% -6.25%		100.00	%	December 20, 1996	Dec 20, 2004/12		1,500,000,000		1,500,000,000		1,138,952,164
$2,500,000,000	6.00%		99.755	%	May 29, 1998	May 29, 2008		2,500,000,000		2,500,000,000		1,898,253,607
$2,000,000,000	6.00%		99.274	%	February 22, 2001	February 22, 2011		2,000,000,000		2,000,000,000		1,518,602,885
$2,000,000,000	5.625%		99.893	%	March 1, 2002	June 15, 2012		2,000,000,000		2,000,000,000		1,518,602,885
$1,000,000,000	5.625%		99.392	%	May 8, 2002	June 15, 2012		1,000,000,000		1,000,000,000		759,301,443
$300,000,000	3 mth libor - 0.065%		100.00	%	August 1, 2002	August 1, 2007		300,000,000		300,000,000		227,790,433
$3,000,000,000	3.625%		99.721	%	September 4, 2002	September 4, 2007		3,000,000,000		3,000,000,000		2,277,904,328
$2,000,000,000	5.375%		98.436	%	February 27, 2003	June 15, 2033		2,000,000,000		2,000,000,000		1,518,602,885
$2,000,000,000	4.375%		99.694	%	February 27, 2003	June 15, 2013		2,000,000,000		2,000,000,000		1,518,602,885
$1,250,000,000	3.25%		99.949	%	May 6, 2003	May 6, 2008		1,250,000,000		1,250,000,000		949,126,803
$2,000,000,000	2.50%		99.521	%	July 3, 2003	July 15, 2008		2,000,000,000		2,000,000,000		1,518,602,885
$100,000,000	4.17%		100.00	%	November 14, 2003	November 15, 2010		100,000,000		100,000,000		75,930,144
$100,000,000	4.06%		100.00	%	December 9, 2003	December 9, 2010		100,000,000		100,000,000		75,930,144
$2,000,000,000	3.25%		99.515	%	March 3, 2004	May 15, 2009		2,000,000,000		2,000,000,000		1,518,602,885
$2,000,000,000	3.75%		99.783	%	June 30, 2004	December 14, 2007		2,000,000,000		2,000,000,000		1,518,602,885
$4,000,000,000	4.50%		99.411	%	January 21, 2005	January 21, 2015		4,000,000,000		4,000,000,000		3,037,205,771
$3,000,000,000	4.00%		99.932	%	May 9, 2005	June 16, 2008		3,000,000,000		3,000,000,000		2,277,904,328
$2,000,000,000	4.75%		99.34	%	January 25, 2006	January 25, 2016		2,000,000,000		2,000,000,000		1,518,602,885
$3,000,000,000	5.25%		99.85	%	September 20, 2006	September 20, 2016		3,000,000,000		3,000,000,000		2,277,904,328
Euro(2)
€2,500,000,000	9.25%		98.160	%	March 7, 1991	March 7, 2011		2,500,000,000		2,500,000,000		2,500,000,000
€1,022,583,762	3 mth libor+ 0.0625%		99.89	%	11-Dec-95	December 20, 2002/10		1,022,583,762		1,022,583,762		1,022,583,762
€567,225,000	6.125%		100.790	%	May 29, 1997	May 29, 2012		567,225,000		567,225,000		567,225,000
€762,245,000	5.875%		101.594	%	July 2, 1997	July 2, 2007		762,245,000		762,245,000		762,245,000
€1,533,870,000	5.750%		101.663	%	July 3,1997	July 10, 2007		1,534,000,000		1,534,000,000		1,534,000,000
€60,000,000	3 mth libor -16 b.p.		99.610	%	October 8, 1998	October 8, 2018		60,000,000		60,000,000		60,000,000
€300,000,000	Index linked		101.425	%	October 15, 1998	October 15, 2018		300,000,000		300,000,000		300,000,000
€1,000,000,000	4.00%		99.95	%	May 6, 1999	May 6, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€1,000,000,000	frn 30Y		101.60	%	June 28, 1999	June 28, 2029		1,000,000,000		905,000,000		905,000,000
€1,000,000,000	t.swap 30 – 0.91%		100.75	%	August 30, 1999	August 30, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€150,000,000	Zero Coupon		100.00	%	February 20, 2001	February 20, 2031		150,000,000		150,000,000		150,000,000
€3,000,000,000	5.75%		100.04	%	July 25, 2001	July 25, 2016		3,000,000,000		3,000,000,000		3,000,000,000
€400,000,000	3 mth libor - 0.06%		100.00	%	January 22, 2002	January 22, 2012		400,000,000		400,000,000		400,000,000
€1,000,000,000	3 mth eubor - 0.06%		100.00	%	July 24, 2003	January 24, 2007		1,000,000,000		1,000,000,000		1,000,000,000
€150,000,000	84.5% cms 10Y		100.00	%	April 26, 2004	April 26, 2019		150,000,000		150,000,000		150,000,000
€300,000,000	12 mth eubor + 0.10%		100.00	%	May 31, 2005	May 31, 2035		300,000,000		300,000,000		300,000,000
€720,000,000	3.546% until 2009		100.00	%	June 2, 2005	June 2, 2029		720,000,000		720,000,000		720,000,000
€395,000,000	3.523% until 2010		100.00	%	June 2, 2005	June 2, 2030		395,000,000		395,000,000		395,000,000
€200,000,000	85% * 10y Eurswap		100.00	%	June 8, 2005	June 8, 2020		200,000,000		200,000,000		200,000,000
€2,500,000,000	85% * 10y swap rate		100.00	%	June 15, 2005	June 15, 2020		2,500,000,000		2,500,000,000		2,500,000,000
€300,000,000	85.5% * 10y swap rate		100.00	%	June 28, 2005	June 28, 2021		300,000,000		300,000,000		300,000,000
€200,000,000	6 mth Eubor + 1.5% (max 10x(cms10-cms2)		100.00	%	November 9, 2005	November 9, 2025		200,000,000		200,000,000		200,000,000
€900,000,000	6 mth Eubor + 0.04%		99.38357	%	March 17, 2006	March 17, 2021		900,000,000		900,000,000		900,000,000
€1,000,000,000	6 mth Eubor + 0.60%		99.85	%	March 22, 2006	March 22, 2018		1,000,000,000		1,000,000,000		1,000,000,000
€192,000,000	Zero Coupon		100.00	%	March 28, 2006	March 28, 2036		192,000,000		192,000,000		192,000,000
€300,000,000	6 mth Eubor + 0.075%		100.00	%	March 30, 2006	March 30, 2026		300,000,000		300,000,000		300,000,000
€215,000,000	5.07%/ 10y cms		100.00	%	May 11, 2006	May 11, 2026		215,000,000		215,000,000		215,000,000
Swiss Francs(3)
ChF1,000,000,000	3.50%		102.90	%	September 25, 1998	September 25, 2008		1,000,000,000		1,000,000,000		622,316,261
ChF1,500,000,000	3.125%		99.825	%	Jan 15,1999	July 15, 2010		1,500,000,000		1,500,000,000		933,474,392
ChF1,000,000,000	2.00%		100.47	%	January 30, 2003	April 30, 2009		1,000,000,000		1,000,000,000		622,316,261
ChF1,000,000,000	2.00%		99.775	%	August 11, 2003	February 9, 2007		1,000,000,000		1,000,000,000		622,316,261
ChF1,000,000,000	1.75%		100.09	%	February 3, 2004	March 3, 2008		1,000,000,000		1,000,000,000		622,316,261
ChF1,000,000,000	2.75%		100.625	%	July 1, 2004	July 1, 2011		1,000,000,000		1,000,000,000		622,316,261
ChF2,000,000,000	2.50%		100.09	%	February 2, 2005	March 2, 2015		2,000,000,000		2,000,000,000		1,244,632,522
ChF1,000,000,000	2.50%		99.336	%	January 30, 2006	January 30, 2018		1,000,000,000		1,000,000,000		622,316,261
Pounds Sterling(4)
£400,000,000	10.50%		100.875	%	April 28, 1989	April 30, 2014		400,000,000		400,000,000		595,681,310
£1,500,000,000	6.00%		98.565	%	August 4, 1998	August 4, 2028		1,500,000,000		1,500,000,000		2,233,804,914
£600,000,000	3mth libor - 0.15%		100.00	%	March 5, 2003	March 5, 2008		600,000,000		600,000,000		893,521,966
£250,000,000	5.25%		99.476	%	July 29, 2004	December 7, 2034		250000000		250000000		372,300,819
Norwegian Kroners(5)
NOK 2,000,000,000	6.15%		100.00	%	September 25, 2002	September 25, 2012		2,000,000,000		2,000,000,000		242,777,373
NOK 2,000,000,000	4.34%		100.00	%	June 23, 2003	June 23, 2015		2,000,000,000		2,000,000,000		242,777,373
Japanese Yen(6)
¥125,000,000,000	5.50%		100.00	%	December 15, 1994	December 15, 2014		125,000,000,000		125,000,000,000		796,533,486
¥125,000,000,000	4.50%		100.00	%	June 8, 1995	June 8, 2015		125,000,000,000		125,000,000,000		796,533,486
¥150,000,000,000	3.80%		100.00	%	April 4, 1996	March 27, 2008		150,000,000,000		150,000,000,000		955,840,184

94

		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
US$(1)
¥100,000,000,000	3.70%		100.00	%	November 14, 1996	November 14, 2016		100,000,000,000		100,000,000,000		637,226,789
¥100,000,000,000	3.450%		99.80	%	March 24, 1997	March 24, 2017		100,000,000,000		100,000,000,000		637,226,789
¥100,000,000,000	1.80%		99.882	%	February 23, 2000	February 23, 2010		100,000,000,000		100,000,000,000		637,226,789
¥100,000,000,000	0.65%		99.995	%	April 14, 2004	March 20, 2009		100,000,000,000		100,000,000,000		637,226,789
¥25,000,000,000	2.87%		100.00	%	May 18, 2006	May 18, 2036		25,000,000,000		25,000,000,000		159,306,697
Australian $
A$1,000,000,000	5.88%		99.803	%	February 27, 2004	August 14, 2008		1,000,000,000		1,000,000,000		599,125,277
TOTAL OUTSTANDING												69,433,178,156	(8)

(1)	U.S. dollar amounts have been converted into euro at $1.317/€1.00, the exchange rate prevailing at December 29, 2006.
(2)	External debt denominated in currencies of countries that have adopted the euro have been converted into euro at the fixed rate at which those currencies where converted into euro upon their issuing countries becoming members of the European Monetary Union.
(3)	Swiss Franc amounts have been converted into euro at ChF1.6069/€1.00, the exchange rate prevailing at December 29, 2006.
(4)	Pounds Sterling amounts have been converted into euro at £0.6715/€1.00, the exchange rate prevailing at December 29, 2006.
(5)	Norwegian Kroner amounts have been converted into euro at NOK8.238/€1.00, the exchange rate prevailing at December 29, 2006.
(6)	Japanese Yen amounts have been converted into euro at ¥156.93/€1.00, the exchange rate prevailing at December 29, 2006.
(7)	Australian Dollar amounts have been converted into euro at A$1.6691/€1.00, the exchange rate prevailing at December 29, 2006.
(8)	The amount of external bonds shown above does not take into account the effect of currency swaps that Italy often enters into in the ordinary course of the management of its debt. The following table summarizes the effects on the Treasury’s external bonds after giving effect to currency swaps.

	As of December 31, 2006
Currency	Before Swap			After Swap
US Dollars		45.38	%		3.79	%
Euro		31.07	%		88.72	%
Swiss Francs		8.51	%		3.00	%
Pounds Sterling		5.90	%		2.38	%
Norwegian Kroner		0.70	%		—
Japanese Yen		7.57	%		2.12	%
Australian Dollars		0.86	%		—
Total External Bonds (in millions of Euro)		69,433,178,156			75,199,901,712

Source: Ministry of Economy and Finance.

95

External Bonds of the Treasury as of December 31, 2007

     The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2007.

		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
US$(1)
$3,500,000,000	6.875%		98.725	%	September 27, 1993	September 27, 2023		3,500,000,000		3,500,000,000		2,377,555,873
$1,500,000,000	6.025%-6.88 %		100.00	%	March 5, 1996	Mar 5, 2004/12		1,500,000,000		1,500,000,000		1,018,952,517
$750,000,000	5.81%-6,70%		100.00	%	March 5, 1996	Mar 5, 2002/10		750,000,000		750,000,000		509,476,258
$1,500,000,000	5.97% -6.25%		100.00	%	December 20, 1996	Dec 20, 2004/12		1,500,000,000		1,500,000,000		1,018,952,517
$2,500,000,000	6.00%		99.755	%	May 29, 1998	May 29, 2008		2,500,000,000		2,500,000,000		1,698,254,195
$2,000,000,000	6.00%		99.274	%	February 22, 2001	February 22, 2011		2,000,000,000		2,000,000,000		1,358,603,356
$2,000,000,000	5.625%		99.893	%	March 1, 2002	June 15, 2012		2,000,000,000		2,000,000,000		1,358,603,356
$1,000,000,000	5.625%		99.392	%	May 8, 2002	June 15, 2012		1,000,000,000		1,000,000,000		679,301,678
$2,000,000,000	5.375%		98.436	%	February 27, 2003	June 15, 2033		2,000,000,000		2,000,000,000		1,358,603,356
$2,000,000,000	4.375%		99.694	%	February 27, 2003	June 15, 2013		2,000,000,000		2,000,000,000		1,358,603,356
$1,250,000,000	3.25%		99.949	%	May 6, 2003	May 6, 2008		1,250,000,000		1,250,000,000		849,127,097
$2,000,000,000	2.50%		99.521	%	July 3, 2003	July 15, 2008		2,000,000,000		2,000,000,000		1,358,603,356
$100,000,000	4.17%		100.00	%	November 14, 2003	November 15, 2010		100,000,000		100,000,000		67,930,168
$100,000,000	4.06%		100.00	%	December 9, 2003	December 9, 2010		100,000,000		100,000,000		67,930,168
$2,000,000,000	3.25%		99.515	%	March 3, 2004	May 15, 2009		2,000,000,000		2,000,000,000		1,358,603,356
$4,000,000,000	4.50%		99.411	%	January 21, 2005	January 21, 2015		4,000,000,000		4,000,000,000		2,717,206,712
$3,000,000,000	4.00%		99.932	%	May 9, 2005	June 16, 2008		3,000,000,000		3,000,000,000		2,037,905,034
$2,000,000,000	4.75%		99.34	%	January 25, 2006	January 25, 2016		2,000,000,000		2,000,000,000		1,358,603,356
$3,000,000,000	5.25%		99.85	%	September 20, 2006	September 20, 2016		3,000,000,000		3,000,000,000		2,037,905,034
$2,000,000,000	5.375%		99.367	%	June 12, 2007	June 12, 2017		2,000,000,000		2,000,000,000		1,358,603,356
Euro(2)
€2,500,000,000	9.25%		98.160	%	March 7, 1991	March 7, 2011		2,500,000,000		2,500,000,000		2,500,000,000
€1,022,583,762	3 mth libor+ 0.0625%		99.89	%	11-Dec-95	December 20, 2002/10		1,022,583,762		1,022,583,762		1,022,583,762
€567,225,000	6.25%		100.790	%	May 29, 1997	May 29, 2012		567,225,000		567,225,000		567,225,000
€60,000,000	libor 3m – 16 b.p.		99.610	%	October 8, 1998	October 8, 2018		60,000,000		60,000,000		60,000,000
€300,000,000	Index linked		101.425	%	October 15, 1998	October 15, 2018		300,000,000		300,000,000		300,000,000
€1,000,000,000	4.00%		99.95	%	May 6, 1999	May 6, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€1,000,000,000	frn 30Y		101.60	%	June 28, 1999	June 28, 2029		1,000,000,000		905,000,000		905,000,000
€1,000,000,000	t.swap 30 – 0.91%		100.75	%	August 30, 1999	August 30, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€150,000,000	Zero Coupon		100.00	%	February 20, 2001	February 20, 2031		150,000,000		150,000,000		150,000,000
€3,000,000,000	5.75%		100.04	%	July 25, 2001	July 25, 2016		3,000,000,000		3,000,000,000		3,000,000,000
€400,000,000	3 mth libor - 0.06%		100.00	%	January 22, 2002	January 22, 2012		400,000,000		400,000,000		400,000,000
€150,000,000	84.5% cms 10Y		100.00	%	April 26, 2004	April 26, 2019		150,000,000		150,000,000		150,000,000
€300,000,000	12 mth eubor + 0.10%		100.00	%	May 31, 2005	May 31, 2035		300,000,000		300,000,000		300,000,000
€720,000,000	3.546% until 2009		100.00	%	June 2, 2005	June 2, 2029		720,000,000		720,000,000		720,000,000
€395,000,000	3.523% until 2010		100.00	%	June 2, 2005	June 2, 2030		395,000,000		395,000,000		395,000,000
€200,000,000	85% * 10y Eurswap		100.00	%	June 8, 2005	June 8, 2020		200,000,000		200,000,000		200,000,000
€2,500,000,000	85% * 10y swap rate		100.00	%	June 15, 2005	June 15, 2020		2,500,000,000		2,500,000,000		2,500,000,000
€300,000,000	85.5% * 10y swap rate		100.00	%	June 28, 2005	June 28, 2021		300,000,000		300,000,000		300,000,000
€200,000,000	6 mth Eubor + 1.5% (max 10x(cms10-cms2)		100.00	%	November 9, 2005	November 9, 2025		200,000,000		200,000,000		200,000,000
€900,000,000	6 mth Eubor + 0.04%		99.38357	%	March 17, 2006	March 17, 2021		900,000,000		900,000,000		900,000,000
€1,000,000,000	6 mth Eubor + 0.60%		99.85	%	March 22, 2006	March 22, 2018		1,000,000,000		1,000,000,000		1,000,000,000
€192,000,000	Zero Coupon		100.00	%	March 28, 2006	March 28, 2036		192,000,000		192,000,000		192,000,000
€300,000,000	6 mth Eubor + 0.075%		100.00	%	March 30, 2006	March 30, 2026		300,000,000		300,000,000		300,000,000
€215,000,000	5.07%/ 10y cms		100.00	%	May 11, 2006	May 11, 2026		215,000,000		215,000,000		215,000,000
€1,026,000,000	1.85% linked to EU inflation index		99.796065	%	January 5, 2007	September 15, 2057		1,026,000,000		1,026,000,000		1,026,000,000
€257,000,000	2.00% linked to EU inflation index		99.02385	%	March 30, 2007	September 15, 2062		257,000,000		257,000,000		257,000,000
€160,000,000	4.49%		%99.86	%	April 5, 2007	April 5, 2027		160,000,000		160,000,000		160,000,000
Swiss Francs(3)
ChF 1,000,000,000	3.50%		102.90	%	September 25, 1998	September 25, 2008		1,000,000,000		1,000,000,000		604,339,155
ChF 1,500,000,000	3.125%		99.825	%	January 15,1999	July 15, 2010		1,500,000,000		1,500,000,000		906,508,733
ChF 1,000,000,000	2.00%		100.47	%	January 30, 2003	April 30, 2009		1,000,000,000		1,000,000,000		604,339,155
ChF 1,000,000,000	1.75%		100.09	%	February 3, 2004	March 3, 2008		1,000,000,000		1,000,000,000		604,339,155
ChF 1,000,000,000	2.75%		100.625	%	July 1, 2004	July 1, 2011		1,000,000,000		1,000,000,000		604,339,155
ChF 2,000,000,000	2.50%		100.09	%	February 2, 2005	March 2, 2015		2,000,000,000		2,000,000,000		1,208,678,310
ChF 1,000,000,000	2.50%		99.336	%	January 30, 2006	January 30, 2018		1,000,000,000		1,000,000,000		604,339,155
Pounds Sterling(4)
£400,000,000	10.50%		100.875	%	April 28, 1989	April 30, 2014		400,000,000		400,000,000		545,442,149
£1,500,000,000	6.00%		98.565	%	August 4, 1998	August 4, 2028		1,500,000,000		1,500,000,000		2,045,408,059
£600,000,000	3mth libor - 0.15%		100.00	%	March 5, 2003	March 5, 2008		600,000,000		600,000,000		818,163,224
£250,000,000	5.25%		99.476	%	July 29, 2004	December 7, 2034		250000000		250000000		340,901,343
Norwegian Kroners(5)
NOK 2,000,000,000	6.15%		100.00	%	September 25, 2002	September 25, 2012		2,000,000,000		2,000,000,000		251,319,427
NOK 2,000,000,000	4.34%		100.00	%	June 23, 2003	June 23, 2015		2,000,000,000		2,000,000,000		251,319,427
Japanese Yen(6)
¥125,000,000,000	5.50%		100.00	%	December 15, 1994	December 15, 2014		125,000,000,000		125,000,000,000		757,897,290
¥125,000,000,000	4.50%		100.00	%	June 8, 1995	June 8, 2015		125,000,000,000		125,000,000,000		757,897,290
¥150,000,000,000	3.80%		100.00	%	April 4, 1996	March 27, 2008		150,000,000,000		150,000,000,000		909,476,748
¥100,000,000,000	3.70%		100.00	%	November 14, 1996	November 14, 2016		100,000,000,000		100,000,000,000		606,317,832
¥100,000,000,000	3.450%		99.80	%	March 24, 1997	March 24, 2017		100,000,000,000		100,000,000,000		606,317,832
¥100,000,000,000	1.80%		99.882	%	February 23, 2000	February 23, 2010		100,000,000,000		100,000,000,000		606,317,832

96

		Initial Public					Original Principal		Principal Amount		Equivalent
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
¥100,000,000,000	0.65%		99.995	%	April 14, 2004	March 20, 2009		100,000,000,000		100,000,000,000		606,317,832
¥25,000,000,000	2.87%		100.00	%	May 18, 2006	May 18, 2036		25,000,000,000		25,000,000,000		151,579,458
Australian $(7)
A$1,000,000,000	5.88%		99.803	%	February 27, 2004	August 14, 2008		1,000,000,000		1,000,000,000		596,765,531
Czech Koruna(8) CZK2,490,000,000	4.36%		100.00	%	October 3, 2007	October 3, 2017		2,490,000,000		2,490,000,000		93,510,590
CZK2,490,000,000	4.40%		100.00	%	October 3, 2007	October 3, 2019		2,490,000,000		2,490,000,000		93,510,590
CZK2,490,000,000	4.41%		100.00	%	October 3, 2007	October 3, 2019		2,490,000,000		2,490,000,000		93,510,590
TOTAL OUTSTANDING												60,904,988,718	(9)

(1)	U.S. dollar amounts have been converted into euro at $1.4721/€1.00, the exchange rate prevailing at December 31, 2007.
(2)	External debt denominated in currencies of countries that have adopted the euro have been converted into euro at the fixed rate at which those currencies where converted into euro upon their issuing countries becoming members of the European Monetary Union.
(3)	Swiss Franc amounts have been converted into euro at ChF1.6547/€1.00, the exchange rate prevailing at December 31, 2007.
(4)	Pounds Sterling amounts have been converted into euro at £0.73335/€1.00, the exchange rate prevailing at December 31, 2007.
(5)	Norwegian Kroner amounts have been converted into euro at NOK7.958/€1.00, the exchange rate prevailing at December 31, 2007.
(6)	Japanese Yen amounts have been converted into euro at ¥164.93/€1.00, the exchange rate prevailing at December 31, 2007.
(7)	Australian Dollar amounts have been converted into euro at A$1.6757/€1.00, the exchange rate prevailing at December 31, 2007.
(8)	Czech Koruna amounts have been converted into euro at CZK26.628/€1.00, the exchange rate prevailing at December 31, 2007.
(9)	The amount of external bonds shown above does not take into account the effect of currency swaps that Italy often enters into in the ordinary course of the management of its debt. The following table summarizes the effects on the Treasury’s external bonds after giving effect to currency swaps.

	As of December 31, 2007
Currency	Before Swap			After Swap
US Dollars		42.61	%		2.21	%
Euro		32.32	%		97.79
Swiss Francs		8.43	%		—
Pounds Sterling		6.16	%		—
Norwegian Kroner		0.83	%		—
Japanese Yen		8.21	%		—
Australian Dollars		0.98	%		—
Czech Koruna		0.45	%		—
Total External Bonds (in millions of Euro)		60,904,988,718			69,313,992,698

Source: Ministry of Economy and Finance.

97