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, 2007

SECURITIES REGISTERED*
(As of close of the fiscal year)

	Amounts as to which
	registration is	Names of exchanges on which
Title of Issues	effective	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.

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 92 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 92 to 96 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 92 to 96 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 92 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 92 to 96 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 2009-2013 Program Document,” “— Revenues and Expenditures,” “— Expenditures,” “— Revenues,” “— Government Enterprises,” “— Privatization Program” and “— Government Real Estate Disposal Program” pages 63 to 83 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 2007.

(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 2007.

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 61 to 62 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 58 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 56 of Exhibit (d), which is hereby incorporated by reference herein.

TABLE OF CONTENTS

EX-99.(c)

EX-99.(d)

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 2009-2013 (Documento di Programmazione Economica e Finanziaria per gli anni 2009-2013 — DPEF), dated June 18, 2008, filed in electronic format under this Form 18-K, and in the Update to the Program Document for 2009-2013 (Nota di Aggiornamento al Documento di Programmazione Economico-Finanziaria per gli anni 2009-2013) and the Annual Program Report for 2009 (Relazione Previsionale e Programmatica per il 2009), each dated September 23, 2008 and filed in paper format under cover of Form SE on January 13, 2009.

(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 2009-2013 (Documento di Programmazione Economica e Finanziaria per gli anni 2009-2013 — DPEF), dated June 18, 2008, filed in electronic format under this Form 18-K, and in the Update to the Program Document for 2009-2013 (Nota di Aggiornamento al Documento di Programmazione Economico-Finanziaria per gli anni 2009-2013) and the Annual Program Report for 2009 (Relazione Previsionale e Programmatica per il 2009), each dated September 23, 2008 and filed in paper format under cover of Form SE on January 13, 2009.

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 January 13, 2009.

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 2009-2013 (Documento di Programmazione Economica e Finanziaria per gli anni 2009-2013 — DPEF), dated June 18, 2008, and the Update to the Program Document for 2009-2013 (Nota di Aggiornamento al Documento di Programmazione Economico-Finanziaria per gli anni 2009-2013) and the Annual Program Report for 2009 (Relazione Previsionale e Programmatica per il 2009), each dated September 23, 2008 and filed in paper format under cover of Form SE on January 13, 2009.
(d)	Description, dated December 31, 2007, of the Republic of Italy

EX-99.(C)

Exhibit (c)

The annual budget for the Registrant as set forth in the Program Document for 2009-2013 (Documento di Programmazione Economica e Finanziaria per gli anni 2009-2013 — DPEF), dated June 18, 2008, and the Update to the Program Document for 2009-2013 (Nota di Aggiornamento al Documento di Programmazione Economico-Finanziaria per gli anni 2009-2013) and the Annual Program Report for 2009 (Relazione Previsionale e Programmatica per il 2009), each dated September 23, 2008 and filed in paper format under cover of Form SE on January 13, 2009.

Ministero dell“Economia e Delle Finanze

2009-2013

Economic and Financial

Planning Document

The
2009-2013
ECONOMIC AND FINANCIAL PLANNING DOCUMENT
is available on-line at
the Internet address listed below:

ww.mef.gov.it
www.dt.tesoro.it

2009-2013

Economic and Financial
Planning Document

Submitted by Prime Minister

Silvio Berlusconi

and

the Minister of the Economy and Finance

Giulio Tremonti

Adopted by the Cabinet on June 18, 2008

2009-2013 Economic and Financial Planning Document

TABLE OF CONTENTS

A PLAN FOR ITALY

I.	Summary
II.	The Economy
II.1	International economic situation and outlook
II.2	Risks
II.3	Italy’s economy: the 2009-2013 scenario
II.4	Recent trend in consumer-price inflation
Box	Consumer-price inflation at regional level
III.	Public Finance
III.1	Public finance: the 2009-2013 scenario at unchanged legislation
III.2	Public finance: the 2009-2013 policy framework
Box	Privatisation
III.3	Public debt
Box	Pensions

Ministero dell’Economia e delle Finanze

III

2009-2013 Economic and Financial Planning Document

TABLES
Table I.1	Public finance: policy scenario and scenario based on unchanged legislation
Table II.1	International macroeconomic growth
Table II.2	International prices
Table II.3	Value added
Table II.4	Employment
Table II.5	Difference in forecasts for 2008
Table II.6	The macroeconomic framework
Table III.1	General government accounts at unchanged legislation
Table III.2	Difference in forecasts for 2008, 2009, 2010 and 2011 compared to the Combined Report on the Economy and Public Finance (RUEF)
Table III.3	General Government accounts — policy scenario
Table III.4	Public finance indicators: policy scenario and scenario at unchanged legislation
Table III.5	Change in the General Government cyclically-adjusted net borrowing net of one-off measures
FIGURES
Figure II.1	1998-2008 GDP growth
Figure II.2	Contributions to GDP growth
Figure III.1	General government net borrowing and structural balance (1980-2007)
Figure III.2	Primary balance and interest (1980-2007)
Figure III.3	General government net borrowing and debt (1980-2007)
Figure III.4	Stock-flow adjustment (1985-2007)
Figure III.5	BTP-BUND yield differentials over 10- and 30-year maturities
Figure III.6	Government securities yield curve

Ministero dell’Economia e delle Finanze

IV

2009-2013 Economic and Financial Planning Document

A PLAN FOR ITALY

1.	The general interest is not the arithmetic sum of individual interests, nor is it the sum of individual selfish interests and corporatist blocs pitted against each other.
	The general interest is something different: it both synthesises and supersedes all of the above.
	Serving the general interest is the quintessential task of a government that governs: that listens first and then decides what is right. What is generally right for all people, not for each person considered individually.
	If we remain alone, each man for himself -drivers included- we are not going to get anywhere, in fact we risk sliding back.
	Together, on the contrary, we can ensure that virtue prevails over vice, we can turn pessimism into optimism, mistrust into trust and get back on a hopeful path towards the future.
	This is why we are asking many people to take a small step back — so that we can all take a step forward in the same common direction.
	This is all the more necessary today because we cannot meet our growing external challenges if we remain in a state of permanent internal anarchy.
	Italians have placed and place their trust in us and we must repay them with certainty.
	The certainty that the Government must and can provide is both security ensured by law and order and the rule of law, and security afforded by the order and strength of the social and economic, as well as private and public, elements that make up the country. Without trust and without certainty there is no development and with no development there is no future.
	Leaving things as they are, letting them be relying on sheer chance is certainly easier. But this is not what Italians are asking for and not what Italy needs.
	We know only too well that ruling the country is not an easy task. But we also know that it must be done and there is no other option. At this extraordinary point in time what is necessary is possible and what is possible is necessary.

Ministero dell’Economia e delle Finanze

V

2009-2013 Economic and Financial Planning Document

Be that as it may, we can no longer accept increased borrowing and bickering and no growth in the GDP.

It is on this basis and according to this logic that our action plan unfolds.

If the country, if during the parliamentary debate the opposition puts forwards good ideas and alternative proposals for improvement, we shall evaluate them responsibly and, if possible, we shall embrace them without bias, provided we deem them really viable and compatible with the fiscal commitments made by the opposition parties during the previous government.

Our strategy has four key objectives:

a)	Reducing the overall size of Government, thus reversing what has generally been an increasing trend. Spending cuts will be sustainable— they are expected to average 3 per cent of total public expenditure—and will be achieved through adjustments within the State budget, without digging into taxpayers’ pockets and without reducing the provision of services—especially essential ones (see box: Tax equalization);
b)	Making the action of public administration more effective, by redesigning it through a new business plan. All this is based on the key idea that it is not the citizens who serve the State, but the State that serves its citizens. The result will be a slightly smaller State, that is more cost-effective, also thanks to efforts to reduce squandering of resources and to fight corruption (see box: Business Plan for Public Administration);
c)	Cutting red tape and the burden it puts on citizens’ lives, freeing them from the tangle of useless bureaucracy and allowing them to have more time for leisure and work, thereby increasing citizens’ trust in the State (see box: Simplification);
d)	Driving the economy towards development, removing constraints, focusing and leveraging the force of the public sector on key areas for the production of wealth and combining that force with corporate action (see box: Programmes for development).
	Government action in this area will mainly include: i) nuclear energy production to reduce our energy-related debt; ii) broadband development in order to modernise the country; iii) a reform of the civil litigation system to eliminate such glaring incivility that is hindering our competitiveness, iv) the deregulation of local public services; v) the development of infrastructure, housing plans as well as research efforts and vi) the establishment of a single steering committee for the management of EU funds that are essential for the South.

In a nutshell: fewer costs, more freedom, more development.

Ministero dell’Economia e delle Finanze

VI

2009-2013 Economic and Financial Planning Document

Time is a key factor in this strategy. In a joint endeavour with Parliament, we must be masters rather than victims of time.

This is why we should put an end to this tradition of never-ending debates over the Budget — to prepare it, to draw it up, to evaluate its impact — that on average have taken 9 out of 12 months in a year.

Conversely, our plan will be brought forward and stabilised before the summer break and will be projected over a three-year period.

Only on this basis of certainty can we build the prerequisites to:

e)	Implement a federal reform of the State structure. This is the only reform that can make the whole apparatus of public administration more transparent, accountable and effective in the future;
f)	Lay sound foundations for the economy. Instead of fighting over a cake which is becoming increasingly smaller, we should aim at evenly distributing a larger GDP.

More specifically, in addition to being an economic development plan, ours is a three-year plan to stabilise public accounts and to equalise taxation (acting on corporate taxes of specific economic sectors) which is structured as follows:

First of all, our fiscal policy has been developed:

g)	In line with the political and legal commitments made by Italy at European level in the last few years;
h)	In line with the political commitments undertaken by our coalition during the electoral campaign that led to our coalition’s victory.

	This is how it has been since the meeting of the Council of Minister held in Naples on May 21 last.
	And this is how it will be during this whole Government term, through action that will not be developed erratically, but systematically and progressively.
2.	In the first few days of its term the Government adopted two economic-policy measures to support demand and increase labour productivity.
	They basically consist in:

a)	Scrapping ICI (property tax) on homes used as main residences, while at the same time providing equivalent and timely funding for municipalities;
b)	Scrapping levies on overtime pay and productivity bonuses on a trial basis.

Ministero dell’Economia e delle Finanze

VII

2009-2013 Economic and Financial Planning Document

	Budget funds for these measures have been freed up from an equivalent reduction in non-mandatory items of public expenditure which are not particularly productive. These increases were introduced (i) during the electoral campaign, with the so called ‘Decreto mille proroghe’ and (ii) shortly before the campaign, with the 2008 Budget.
3.	According to the logic of republican responsibility, our Government has the duty to meet the commitments made by Italy at European level.
	More specifically, our Government is fully and promptly implementing the commitments made by the Prodi government and reasserted at the meeting of the Eurogroup held in Berlin on 20 April 2007.
	Given the goal/constraint of a balanced budget by 2011, which was agreed on for Italy and by Italy at European level, these commitments develop as outlined in the Combined Report on the Economy and Public Finance drawn up by the Prodi government and submitted to Parliament on 18 March 2008, which reads inter alia that: “Overall, fiscal policy will have to find resources for an amount estimated at €20-30 billion over the 2009-2011 period”.
	This amount has been increased as a result of the outcome of the ‘due diligence’ exercised by the General Accounting Office (Ragioneria Generale dello Stato) which has revised upwards net borrowing in 2008 to 2.5 per cent of gross domestic product compared to previous forecasts.
	As far as this Government is concerned, i.e. the next Budget, this means that:

a)	A substantive part of the Budget is brought forward: legislative measures will be adopted before the summer break that integrate the Economic and Financial Planning Document and flesh it out;
b)	These measures are not based on the traditional separation between planning, with multi-year projections, and implementation, with the latter being limited only to the following year;
c)	Rather, they are based on the entire convergence of planning and implementation, so as to promptly implement the above-mentioned European commitments fully, responsibly, and entirely.

The resulting effect is that the commitments undertaken by Italy with the EU immediately take the form of a comprehensive three-year plan to consolidate our public finance.

A consistent plan at national level to pursue the objectives of a full-term Government and, internationally, budget structures and standards in line with those of other European countries.

Ministero dell’Economia e delle Finanze

VIII

2009-2013 Economic and Financial Planning Document

4. Hence it is clear that:

a)	Even though there is some leeway to levy additional taxes to equalise the so-called “cycle-related earnings” (Einaudi), as well as to reduce excessive and (symbolically negative) reward mechanisms and special terms; and
b)	Given the goal of fighting tax evasion, which can be achieved even more effectively adding fiscal federalism to the provisions and mechanisms that are already in place (see box: Fiscal federalism).
	Tax evasion in Italy certainly has historical as well as economic causes — which become clear if one looks at the asymmetry between an economy that is diversified by geographic areas and an almost entirely centralised taxation system;
c)	Considering all of the above observations, and also reasserting that increasing an already exorbitant tax burden would be impossible, unfair and self-defeating;
d)	The result is that the mentioned three-year public finance consolidation plan can and must be implemented mainly by cutting public spending.
	Cutting public spending is not merely consistent with the laissez-faire principle of limiting the role of the State in the economy, but also with the above—mentioned Report and with Italy’s EU commitments, which — it bears repeating — we intend to meet and implement really, fully and directly.

5.	Hence there is no question as to: (i) the extent of the programmes needed to stabilise our public finance, in its quite substantial extent as defined and estimated by the Prodi government, to which only the result of the above-mentioned ‘due diligence’ will be added, and (ii) the budget side on which these programmes will mainly be implemented: not the revenue, but the expenditure side.
6.	We do not deny nor do we conceal from ourselves the difficulties and problems involved.
	Today the real economy is growing at a rate only slightly above zero.
	As to the 2008 public accounts, we find the following observation made by the European Commission: “The projected deterioration of the structural position in 2008 compared to 2007 is clearly not in line with the at least 0.5% of GDP annual reduction that is stipulated in the Stability and Growth Pact and recalled in the Council decision under Article 104”.
	We are aware of a present and/or future budget risk, not only on the expenditure side, unless it is rigorously disciplined, but also on the tax revenue side.

Ministero dell’Economia e delle Finanze

IX

2009-2013 Economic and Financial Planning Document

This is a specific risk, which is (will be) caused by both the legal uncertainties already highlighted by the European Commission (concerning the awaited ruling of the Constitutional Court on IRAP and the uncertain funding for the reform of company taxation, etc.) and the substantial problems related to Italy’s poor economic performance.

Given the typical lags in tax collection (production — submission of tax returns -payments) Italy’s poor economic performance will impact tax revenues only at a later stage.

7.	We think we have a cultural and political vision, a vision that is broad and profound enough to see and evaluate what is happening in the global economy, to see and evaluate what changes are occurring and what forces are at work in the world and what will be the impact of the crises that are now affecting Europe and Italy: the food crisis, the energy crisis, and the increasing geopolitical tensions.
	As these crises result from huge stocks and flows of wealth moving around the world and are compounded by financial speculations, they almost always have a regressive and erosive impact on Europe and Italy, that can even potentially disrupt our social structure: from hardship and poverty, to youth unemployment to the impoverishment of the middle class up to the widening gap between the North and the South of the country, that has not been bridged by the budget policies that have been implemented over the past ten years.
8.	We know that if the causes of the crisis are global, national solutions will simply not be enough and we know that especially at this point in time and in Europe — not in other countries of the world — governments no longer have the power needed to shape society or to make decisions on major parts of the economy.
	However, we also know that — despite these constraints — governments still have the power and the duty to mitigate some distortions that arise in society and to contribute to building the tangibile and intangibile, the institutional and functional platform on which the economy is based.

For these reasons:

a)	We are putting in place all possible tools to ensure social cohesion, starting from mitigating the impact of the rising cost of living and housing mortgages;
b)	However, we also know that only if the economy performs well can the State budget be sound, and being sound, it can also provide a basis for just social programmes.
	Specifically, a State budget can be sound and fair if the private sector’s economy performs well, whereas the opposite is difficult.

Ministero dell’Economia e delle Finanze

X

2009-2013 Economic and Financial Planning Document

This is why along with the three-year plan to consolidate our public finance and equalise taxation we are adopting a far-reaching and comprehensive plan to reduce the size of Government and at the same time develop and boost the economy.

The Prime Minister

The Minister of the Economy and Finance

Ministero dell’Economia e delle Finanze

XI

2009-2013 Economic and Financial Planning Document

TAX EQUALIZATION

While reaffirming our civil and political commitment not to dig into taxpayers’ pockets, the tax equalization effect, accounting for about a third of the budget measures at structural level, will be implemented through:

a)	Adjusting the specific tax base of banks and insurance companies;
b)	Adjusting the specific tax base of some companies operating in the energy sector;
c)	Increasing government mining rights;
d)	Introducing a surcharge on the standard corporate income tax rate (IRES) of 27.5% raising the overall rate to 33%;
e)	Establishing a ‘fund’ for the most disadvantaged groups, to be used for purchasing food and paying bills, to be funded through the above-mentioned items b) and c) and through possible voluntary contributions from entities and individuals providing assistance to the above groups;
f)	Harmonising the tax regimes for cooperatives;
g)	Matching social security and tax data of immigrants to check if it is correct;
h)	Eliminating favourable tax regimes for stock options and the general presumption, thereby reversing the burden of the proof, that Italians residing in tax havens are to be considered Italian citizens by the tax authorities;
i)	Other measures to combat tax evasion.

PUBLIC ADMINISTRATION BUSINESS PLAN

There is ample leeway in public administration to achieve appropriate efficiency and effectiveness standards: any step in that direction is bound to cause a substantial impact in terms of both cutting expenditure and boosting the productivity of the whole system; eventually this will improve the general welfare of citizens.

More specifically, as to current expenditure, where most of ‘bad’ expenditure is concentrated, we believe it is possible to achieve improvements amounting to savings of about 1 percentage point of GDP a year in the 2009-2011 period through the measures outlined in the Business Plan developed by the Ministry of Public Administration and Innovation. Since current expenditure now stands at €680 billion, saving 3 per cent of GDP would amount to €20 billion approximately. The three key words of the already-mentioned public administration reorganisation plan are: meritocracy, innovation, transparency. These are the key words in our approach for the action plan to contain current expenditure, as envisaged by the Business Plan, and aimed at both cutting down on the squandering of resources in administration and increasing the efficiency and productivity in the civil service.

These measures will soon lead to a more efficient and streamlined bureaucracy, that is less burdensome and more citizen- and business-friendly, fairer and more motivated, hence less opaque and less corruptible.

A comprehensive reform of collective bargaining and of the provisions governing the employment relations of civil servants — with a view to introducing mechanisms to acknowledge and reward merit and define the rights and duties of civil servants; envisaging sanctions to be imposed on those who debase them — is the first major step to revamp the civil service, to enhance its credibility and to achieve significant improvements in the quality of the services provided. More specifically, this

Ministero dell’Economia e delle Finanze

XII

2009-2013 Economic and Financial Planning Document

entails starting a new policy rewarding merit, pursuing a strategy that assesses the quality of both the supply of public services and of civil servants, thereby valuing commitment and professionalism. The digital revolution and, more generally, the acceleration of innovation processes within and outside of the administration is the second essential basic principle of our strategy to ensure high quality standards for citizens and businesses.

Finally, transparency and accessibility are the third pillar on which the enhancement of the quality of public administration is based. As a matter of fact, if the machinery of Government is established to meet the needs of citizens and enterprises, a process enabling citizens to be ever more aware of the way in which public administration works can no longer be postponed: it will allow them to interact with it directly to improve its quality and efficiency.

More specifically, as to the contribution to growth from cost-cutting measures, EU estimates show that a 25 per cent reduction in administrative costs would enable Italy to achieve a potential increase of 1.7 per cent of GDP¹.

Assuming a trend in the reduction of the administrative burden that by 2012 can achieve the above mentioned 25 per cent cut, its overall potential impact as a proportion of GDP has been estimated at €75 billion approximately.

Impact in terms of GDP growth of a steady-state 25 percent cut in administrative burden

Item	2009			2010			2011			2012 (in force)
% reduction in administrative burden (1)		6.30	%		12.50	%		18.80	%		25.00	%
Contribution to GDP growth		0.40	%		0.90	%		1.30	%		1.70	%
Growth in GDP value (2)		6,981.55			14,456.54			22,459.35			30,967.94

Source: MEF calculations on ISTAT data.
(1)	A linear trend in the reduction of administrative burden has been assumed.
(2)	Millions.

However, in addition to the economic benefits in terms of productivity and efficiency for Italy’s economy, a more intense and fruitful interaction between citizens, households as well as businesses and a more open and flexible administration is essential to increase the general welfare of citizens through services whose quantity and quality standards can meet the different needs of individuals, entities as well as groups and local authorities.

SIMPLIFICATION

The goal of both regulatory and administrative simplification, which EU as well as national and local institutions have been engaged in for over a decade, is to achieve good performance for citizens, households and firms especially from an economic point of view. In addition to economic benefits there is additional added value, which ought to be a feature of every truly democratic legal system: legal certainty. A variety of tools have been identified for regulatory simplification in Italy: they range from codification to the regulation-cutting mechanism; from the Interministerial Committee

¹ See European Commission, COM(2007)23 and SEC(2007)84. Impact Assessment. Commission staff working document accompanying the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions. Action Programme for Reducing Administrative Burdens in the European Union. Brussels, 24.1.2007.

Ministero dell’Economia e delle Finanze

XIII

2009-2013 Economic and Financial Planning Document

which is the steering committee for simplification activities to a standing forum on simplification, which brings together representatives of local authorities, business and government as well as users and consumers’ associations. These tools must be fully implemented and above all action should be taken on the substance of existing norms, not by simply reducing the number of existing regulations, but also acting on their content and the actual implementation of provisions, so as to ensure simple and effective Government action.

There is a close link between economic development and competitiveness: the former can only stumble along without the latter. Competitiveness in turn can only be fostered by regulatory and administrative simplification. Regulatory simplification therefore is one of the prerequisites for regaining competitiveness and development in our country.

The package accompanying the Government’s measures includes a series of major programmes concerning simplification. It is a comprehensive package that will positively affect the substance of provisions and especially the lives of citizens. It includes the so-called regulation-cutting mechanism (repeal of obsolete legislation or provisions of law that have expired or are ineffective), and the time-saving mechanism (certainty as to the timeframe required to complete the administrative process), measuring and cutting administrative burden as well as the dissolution or reorganisation of Government entities, the simplification of administrative requirements which companies have to comply with (setting up a business in one day) as well as an end to resource squandering related to paper-based records. Action aimed at simplification in employment, health and taxation is also part of this endeavour.

Therefore, what George Bernard Shaw used to say “for every complex problem there is a solution that is simple... and wrong” is not true. This pessimism which reflects a reluctance to accept any kind of change should be countered with Tolstoj’s motto: “there can be no greatness without simplicity”. Simplicity is therefore a means to foster change and to make our country stronger and more competitive.

DEVELOPMENT PROGRAMMES

The Government’s strategy consists of strong action to promote lasting development, through a series of innovative strategies, including:

1)	Focusing the programmes of the Fund for Underdeveloped Areas on key sectors with special reference to: infrastructure — including energy infrastructure, telecommunications networks, transport services, security, environmental protection, waste treatment, business internationalisation;
2)	Reforming civil litigation, including through the introduction of IT communication and notice serving;
3)	Nuclear energy production, through the definition of plant design, authorisation procedures, criteria for the selection of suitable locations for nuclear power plants;
4)	Deregulating local public services with a view to fostering the notion of competition, freedom of settlement and free provision of services as widely as possible;
5)	Support to the development of new-generation communication networks with a view to favouring the rapid development of broadband communication infrastructure;
6)	Strengthening of Districts, favouring the integration of small and medium-sized enterprises, supporting the traditional organisation of districts, increasing tax concessions, as well as

Ministero dell’Economia e delle Finanze

XIV

2009-2013 Economic and Financial Planning Document

	financial terms and authorization procedures in favour of districts, also allowing free forms of cooperation without any limitations of a local nature;
7)	Granting Universities the right to turn into membership-based Foundations — with the possibility of transferring to the assets of the Foundations any Government property already used by the Universities that have become Foundations;
8)	Innovation funds, to be used for highly innovative business initiatives, through the establishment of the relevant investment funds with the participation of public and private investors and an integrated system of national funds and local networks of funds;
9)	Tax exemptions and concessions to support start-ups;
10)	A housing plan, to increase the residential housing stock with the involvement of public and private capital to be used mainly to build homes for disadvantaged social groups;
11)	Banca del Mezzogiorno (Bank of the South): a new bank is being established partly owned by the State, local authorities and other public entities to support the development of Southern regions.

FISCAL FEDERALISM

Implementation of Article 119 of the Constitution

A draft statutory instrument will be submitted as an additional package of budget measures to be passed by the end of the budget session, with a view to fully implementing Article 119 of the Constitution (fiscal federalism). More specifically, this piece of legislation will govern the equalization of resources for local authorities with fewer tax-raising powers as well as the basic principles of public finance and taxation coordination, setting the regional and local authorities’ shares of the tax revenues attributable to their areas and ensuring their autonomy both on the spending and the revenue side. The implementation of fiscal federalism should not entail any increase in public spending or in the tax burden on citizens. The independent tax-raising powers exerted by regional and local authorities should also ensure the adequacy of taxation to the benefits resulting from the services provided at local level as well as the utmost transparency and efficiency of decisions relating to expenditure and revenues, so as to enhance democratic control by citizens and the accountability of administrators. In addition, rules and prerequisites shall be defined for the provision of additional Government funds and for the special programmes envisaged in Art. 119 of the Constitution. Finally, general principles shall be laid down concerning the property of regional and local authorities, to which part of the Government property can be transferred.

Code of local government and organisation of Rome the capital of Italy

A special draft statutory instrument will define a ‘code of local government’ which shall identify the basic functions of local authorities, pursuant to Article 117, paragraph 2, subparagraph p) of the Constitution. Existing provisions of the consolidated text on local authorities will be brought into line with the new regulatory framework, so as to actually streamline the existing government tiers and, which is equally significant, reduce costs and the number of facilities. In addition, regulations for the organisation of Rome the capital of Italy will be drafted, thereby implementing Article 114, paragraph 3 of the Constitution.

Ministero dell’Economia e delle Finanze

XV

2009-2013 Economic and Financial Planning Document

I. SUMMARY

     During its term of office the Government intends to develop its action according to three main guiding policies: growth, stability and social cohesion.

     The Italian economy is going through a difficult time from a structural and cyclic point of view. The strategy to boost growth will be based on efforts to simplify taxation and reduce other burdens on companies, enhance the quality of products made in Italy, strengthen the country’s infrastructure, improve the performance of the labour market, increase growth in the least developed areas, promote scientific research and technological innovation and modernise public administration. Deregulation, simplification and privatisation plans will be launched to boost economic growth and the development of society as a whole.

     The Government’s fiscal policy will be developed in line with the legal and political commitments made by Italy at European level. More specifically, the Government intends to meet the goal/constraint of a balanced the budget by 2011 set by the previous Government and reasserted at the meeting of the Eurogroup held in Berlin on 20 April 2007.

     The fiscal strategy developed by the Government is innovative both in terms of content and timeframe. For the first time the key elements of the Budget measures will be brought forwards and approved before the summer break and included in a comprehensive three-year plan to consolidate public finance, in line with the budget standards adopted by other European countries. Alongside this Document the Government is also going to adopt a package of legislative measures which will be based on the complete convergence of planning and implementation, thereby overcoming the traditional separation between the two that until now has limited implementation to the first year of the plan only.

TABLE 1.1: PUBLIC FINANCE: POLICY SCENARIO AND SCENARIO BASED ON UNCHANGED LEGISLATION (as % of GDP)

	2007		2008		2009		2010		2011		2012		2013
SCENARIO AT UNCHANGED LEGISLATION
Net borrowing		-1.9		-2.5		-2.6		-2.1		-2.0		-1.9		-1.8
Net cumulative effect (as % of GDP) (1)						0.6		1.1		1.9		1.9		1.9
UPDATED POLICY SCENARIO
Net borrowing		-1.9		-2.5		-2.0		-1.0		-0.1		0.0		0.1
Structural net borrowing (2)		-1.7		-2.3		-1.7		-0.6		0.3		0.2		0.2
Structural change		-1.2		0.6		-0.6		-1.0		-0.9		0.1		0.0
Public debt		104.0		103.9		102.7		100.4		97.2		93.6		90.1
p.m: 2008 POLICY SCENARIO
Net borrowing		-1.9		-2.4		-1.8		-1.0		-0.2
Structural net borrowing (2)		-1.6		-2.2		-1.5		-0.7		0.0
Structural change		-1.2		0.6		-0.7		-0.7		-0.7
Public debt		104.0		103.0		101.5		98.7		95.0

(1)	Inclusive of lower interest expenditure.
(2)	Cyclically adjusted and net of one-off measures.

Ministero dell’Economia e delle Finanze

1

2009-2013 Economic and Financial Planning Document

     Overall, fiscal policy will have to find resources for an amount slightly above the forecast made in the Combined Report on the Economy and Public Finance — RUEF (about €35 billion) due to a higher deficit resulting from the update of public accounts. This budget correction is necessary if the structural balance as a proportion of GDP is to be reduced by at least 0.5 per cent a year starting from 2009.

     The corrective action will mainly focus on spending, with a view to reducing overspending and containing increasing expenditure through more stable rules, without reducing essential social services.

     Given the already heavy tax burden, targets will be met without levying new taxes, except for some equalisation measures or extraordinary corporate taxes or measures to use a proportion of these revenues for social purposes.

     The goal of fighting tax evasion has also been confirmed: the war on tax evasion can be fought more effectively by adding fiscal federalism to the measures and mechanisms that are already in place.

     Net fiscal measures will be implemented over a three-year period: in 2009 they will amount to about 0.6 per cent of GDP and then increase to about 1.1 per cent of GDP in 2010 reaching about 1.9 per cent in 2011.

     The financial goals set in the past have been basically confirmed: 2008 net borrowing requirements have been set at 2.5 per cent of GDP, then at 2.0 per cent in 2009, at 1.0 per cent in 2010 until the budget is broadly balanced by 2011. The primary surplus will gradually increase reaching 5.0 per cent in 2013.

     Structural adjustment will be resumed as of 2009, ensuring full convergence towards the medium-term objective. Public debt is expected to go down below 100 per cent of GDP in 2011 and then reach 90.1 per cent of GDP in 2013.

     The consolidation of public finance and the simultaneous shift to further fiscal federalism are the key prerequisites to set the stage for a new strategy for far-reaching and comprehensive reform.

Ministero dell’Economia e delle Finanze

2

2009-2013 Economic and Financial Planning Document

II. THE ECONOMY

II.1 INTERNATIONAL ECONOMIC SITUATION AND OUTLOOK

     The world economy

     The world economy has slowed down in the early months of 2008, especially in the US, as a result of the impact of the financial crisis which started last summer. So far, the weakening of the US economy seems to have been offset by the emerging economies of Asia and Latin America. In the euro area growth continued to exceed its potential, even though leading indicators show moderation in the second quarter and in the second half of the year.

     Uncertainty about the actual extent of the losses suffered by financial markets and the strong increases in the prices of raw materials and food products are the main risk factors for the growth of the world economy in the medium term.

     Since the beginning of the year the euro has appreciated as against the dollar reaching almost 1.60. In addition to reflecting the fundamentals of the European economy, the strengthening of the euro reflects the weakening of the US economy, fears generated by financial markets and — in the past — it also reflected the expectations of a reduction in official rates by the Federal Reserve. Since the end of March the euro has also appreciated against the yen.

     According to the latest estimates made by international forecasters, the world economy will grow by 3.9 per cent this year, i.e. 1.1 per cent less compared to 2007. Also world trade is expected to grow by 6.3 per cent, thus recording a slowdown of 0.8 percentage points compared to 2007. In 2009 the global economy and world trade are forecast to grow at rates in line with those of 2008 (3.9 and 6.6 per cent respectively). In the medium term the above-mentioned international institutions expect a growth of 4.4 per cent and 7.2 per cent respectively.

     United States

     Since August 2007 the effects of the subprime mortgage crisis and of credit instruments in general have been felt most acutely in the US economy. The crisis caused a rapid increase in the mortgage insolvency rates and a subsequent loss in mortgage-linked securities. Demand for financial credit instruments decreased, which led to further losses for banks. Tighter credit, which started in the second half of 2007, and moderate growth in bank loans are set to continue in the next few months. Tighter credit has worsened the slump in house prices which, in turn, favoured the increase in foreclosures. Combined with a weakening of financial wealth, the adjustment of house prices is squeezing overall household wealth, thereby weakening private consumption. In addition, residential investment has been declining for two consecutive years.

     All of these factors has contributed to causing a notable slowdown in GDP growth in the past few quarters. Growth in the first quarter of 2008 (0.9 per cent) was the result of a poor performance of fixed investment, while consumption has been declining for a number of quarters. The US economy has been increasingly driven by exports, thanks to the positive impact of a weaker dollar and still buoyant world demand.

Ministero dell’Economia e delle Finanze

3

2009-2013 Economic and Financial Planning Document

     In the face of the financial crisis, in addition to cutting policy rates the Federal Reserve promptly adopted a series of measures to improve short-term funding procedures, to inject liquidity into the market and prevent financial institutions such as Bear Stearns going bankrupt. The probability of further interest rate cuts seems to have declined in the past few weeks. The policy orientation might return to neutral or there might even be an increase in rates to allay fears of inflation.

     In 2008 growth is forecast to stand at 1.0 per cent (1.2 per cent less compared to last year) with a positive contribution from net exports. In 2009 GDP is expected to grow at a rate in line with this year’s rate (0.9 per cent). The US economy is expected to recover in the medium term, growing by 2.8 per cent in 2010-2013.

     Euro Area

     The euro area grew by 2.6 per cent in 2007, 0.5 percentage points more compared to the average performance of the three previous years. Despite the strong appreciation of its currency, the economy of the euro area was driven by domestic demand and net exports. Also fixed investment performed well, while private consumption slowed down, especially in the final quarter. However, the labour market was buoyant and the unemployment rate was at its lowest level in the past fifteen years (7.1 per cent in April).

     Data on the first quarter showed still buoyant growth, with industrial production and construction performing rather well. However, business and household confidence has notably deteriorated since the summer of 2007. So far the financial crisis seems to have had a limited impact on the fundamentals of the economy of the euro area which seem to be sound, even though indicators predict moderate economic growth over the next few months. In 2008 growth forecasts show a slowdown of almost 1 percentage point (1.7 per cent) compared to 2007.

     In 2009 GDP is expected to grow by 1.5 per cent. Increase in investment should continue to support economic growth, given the high capacity utilisation rate and the profitability of non-financial firms. Consumption is forecast to strengthen gradually.

     For about a year the European Central Bank has left the monetary policy rate unchanged at 4.0 per cent, even though at its June meeting the possibility of slight increases was mentioned.

Ministero dell’Economia e delle Finanze

4

2009-2013 Economic and Financial Planning Document

     Japan

     In 2007 the Japanese economy grew by 2.1 per cent, slightly less compared to 2008 (2.4 per cent). Exports made a significant contribution to growth, thank to buoyant demand from Asian countries which offset moderate trade with the US. Even private investment drove economic expansion, despite falling investment in construction in the second half of the year due to the revision of the Building Standard Law concerning provisions for the construction sector. Private consumption slowed down (1.4 per cent) mainly as a result of the poor performance of nominal wages.

     According to estimates Japan’s economy will grow by 1.5 per cent in 2008 and 1.4 per cent in 2009, 0.7 per cent more slowly than in the previous three-year period. The slowdown in the world economy and the past appreciation of the yen are expected to moderate export growth. However, the recovery in residential consumption is projected to be more significant in 2009 and be a stronger driver for the country’s development. Private consumption growth is anticipated to remain contained because of limited wage increases and expectations of higher inflation.

     Since February 2007 the Bank of Japan has left its discount rate unchanged at 0.5 per cent as deflation has not yet been completely defeated.

     The Asian economies

     The emerging Asian economies continue to grow briskly, despite the overall global slowdown.

     In 2007 China grew by 11.9 per cent thanks to strong domestic demand. The contribution made by exports decreased in the last quarter of the year due to fewer incentives to exports and the slowdown in the United States; the latter was crowded out by the European Union as the main outlet market for national products.

Ministero dell’Economia e delle Finanze

5

2009-2013 Economic and Financial Planning Document

     Economic expansion is expected to be robust also in 2008 (10 per cent), with a slight slowdown in 2009 (9.5 per cent). Growth in the medium term is expected to be characterised by a further reduction in the contribution from exports, an increase in imports due to growing domestic demand and the risk of higher inflationary pressures.

     India grew by 8.7 per cent in 2007, with a slowdown in several industrial sectors which was offset by good performance in agriculture. Also investment increased by 15 per cent thus contributing to economic expansion, while private consumption grew more moderately.

     In 2008, GDP is expected to grow by 7.8 per cent, 1 percentage point less than in 2007. The slowdown is believed to be due to long-term interest rates that are expected to be higher than in the past, growing producer prices and weaker investment. In 2009 the Indian economy is expected to grow at roughly the same rate.

TABLE II.1: INTERNATIONAL MACROECONOMIC GROWTH (% change)

	2006		2007		2008		2009		2010		2011		2012		2013
GDP Industrialised countries		3.0		2.7		1.7		1.7		2.4		2.6		2.5		2.5
United States		2.9		2.2		1.0		0.9		2.6		2.9		2.9		2.9
Japan		2.4		2.1		1.5		1.4		1.4		1.1		1.0		1.0
EMU		2.7		2.6		1.7		1.5		1.8		1.9		1.8		1.8
France		2.0		1.9		1.7		1.5		1.8		1.7		1.5		1.5
Germany		2.9		2.5		1.8		1.6		1.5		1.4		1.4		1.5
United Kingdom		2.9		3.1		1.7		1.5		2.6		2.9		2.4		2.1
Spain		3.9		3.8		1.6		1.3		3.0		3.6		3.4		3.3
Whole world excluding EMU		5.7		5.5		4.4		4.3		4.9		5.1		5.1		5.1
World		5.1		5.0		3.9		3.9		4.4		4.5		4.5		4.5
World trade		9.4		7.1		6.3		6.6		7.0		7.2		7.2		7.2

Source: MEF calculations on IMF, OECD, EU data.

TABLE II.2: INTERNATIONAL PRICES (% change)

	2006		2007		2008		2009		2010		2011		2012		2013
Oil (Brent FOB $/barrel)		65.1		72.5		118.0		128.0		128.0		128.0		128.0		128.0
Non-energy commodities		16.5		25.7		33.3		0.0		0.0		0.0		0.0		0.0
Manufactured goods		4.8		15.6		3.5		1.5		1.5		1.5		1.5		1.5

Source: MEF calculations on ISTAT data.

Ministero dell’Economia e delle Finanze

6

2009-2013 Economic and Financial Planning Document

II.2 RISKS

     Medium-term developments in the world economy are uncertain because of three main risk factors.

     First, the possibility of a more marked slowdown in the US could cause a more significant deceleration in the global economy. At present, the weakening of the US economy is offset by the strength of emerging economies that make a significant contribution to the growth of global GDP. However, a contraction of exports to the US, the flight-to-quality phenomenon in financial markets and a further increase in inflation could cause trouble for the emerging countries.

     Another type of risk comes from the uncertainty on the extent and duration of the financial crisis, even though when turbulence started the monetary authorities adopted extraordinary measures to restore orderly market conditions. The latest available data show that in the last quarter of 2007 and in the first one of 2008, some European and US banks recorded negative performance because of losses and write-downs.

     Finally, oil and food prices could generate considerable risks. In early June the price of oil exceeded $135 a barrel due to a number of factors. On the supply side, the failure to invest in infrastructure affects the low margin of idle capacity. On the demand side, the strong growth of the past few years is to be considered a lasting feature. Lingering geopolitical tensions contribute to keeping oil prices high. All these factors are compounded by financial speculation. Food prices have been rising especially since the beginning of 2008 due to structural factors such as strong demand from the emerging economies and smaller stocks. In addition, increased production of bio-fuels, unfavourable climate conditions and the recent restrictions imposed on exports by some countries have increased the pressure on prices. Hence, there is a risk that inflationary pressure may remain high for longer than expected, thereby eroding real economic growth.

II.3 ITALY’S ECONOMY: THE 2009-2013 SCENARIO

     The Economy in 2008

     Over the past few quarters Italy’s economic growth has weakened gradually. The growth gap with the euro area has not shown any signs of improvement: in 2007 it was approximately 1 percent — the same as in 2006.

     However, compared to the previous quarter, GDP growth in the first quarter of 2008 turned out to be higher than expected. GDP grew by 0.5 per cent compared to the previous quarter and by 0.3 per cent compared to the same period last year. The recovery came after the strong contraction in the last three months of last year (-0.4 per cent compared to the previous quarter).

     First quarter data on growth composition recorded the persistence of a difficult situation on the domestic demand side as against a recovery in exports. Household consumption for both durable and non durable goods decreased for the third consecutive quarter.

     Gross fixed investment contracted slightly compared to the previous quarter (-0.2 per cent) as a result of the drop in the more volatile vehicle segment. Investment in

Ministero dell’Economia e delle Finanze

7

2009-2013 Economic and Financial Planning Document

construction showed signs of a slowdown, whereas exports picked up compared to the previous quarter (1.4 per cent).

     As to prices, consumer-price inflation continued to increase gradually due to external pressures. The private consumption deflator increased by 3.2 per cent compared to the same quarter of 2007. A look at the various components reveals a slowdown in domestic inflation compared to imported inflation. The GDP deflator rose by 1.5 per cent year-on-year in the first quarter.

     Confidence indicators predict a weakening in the second and third quarters, even though there are some slightly more positive indicators. In April industrial production recorded an unexpected recovery (0.7 per cent compared to the previous month), thus resulting in a positive estimate for the second quarter (0.4 per cent compared to the previous quarter).

     However, in May business confidence recovered, especially in industry and services where the increase was more marked. Also consumer confidence recovered even though its indicator stood at historically low values. In April, business confidence in the construction sector also edged up.

     Based on the performance of the first quarter and the negative carry-over effect from 2007 (equal to -0.2 percentage points) GDP is estimated to grow by 0.5 per cent in 2008.

     International institutions have revised downwards forecasts for this year. In its latest official documents, the International Monetary Fund estimated Italy’s growth at 0.3 per cent for the current year, whereas the European Commission and the OECD estimates put it at 0.5 per cent.

Ministero dell’Economia e delle Finanze

8

2009-2013 Economic and Financial Planning Document

     Prospects for the Italian economy and the downward revisions of official growth estimates are mainly affected by developments in the international scenario. Last summer’s financial turbulence caused by the subprime mortgage crisis has had a direct negative impact on the growth of the US and - - to a lesser extent — on the EU economy. Oil prices have increased steadily since the second half of 2007, reaching $135 a barrel.

     Recent studies have ruled out the possibility that international financial turbulence may have a notable direct impact on the Italian economy¹. However, economy growth is curbed by other negative effects mainly caused by exogenous factors, such as: (i) the strong increases in the prices of oil and non-energy raw materials have pushed up inflation; and (ii) the appreciation of the euro as against the main currencies.

     These factors have hit Italy harder than other countries in the euro area because they have combined with Italy’s low productivity, poor business competitiveness² and its considerable structural problems.

     In 2008, private consumption is expected to contribute 0.2 percentage points to growth. The contribution from net exports is expected to be positive (0.3 percentage points) even though it would mainly be due to the weakening of domestic demand. Gross fixed investment contribution is expected to be nil.

     Household expenditure is projected to slow down significantly compared to 2007: growth is anticipated to stand at 0.3 per cent. The estimated increase in real disposable income would be softer also as a result of the sharp increase in consumer prices. Consumer credit has already strongly decelerated since the second half of 2007.

     In 2008, investment in machinery and equipment is projected to show negative growth, thus weakening further compared to 2007. The results of a survey of industrial companies and services carried out by the Bank of Italy show that investment plans for 2008 will mainly be implemented by large companies. On the whole, forecasts predict a contraction except for companies with over 200 employees. The results of the survey are also borne out by capacity utilisation, which has been at its lowest levels since the first quarter of 2005.

     Investment in construction is expected to decelerate compared to 2007, putting an end to the long expansionary cycle recorded in this sector over the past ten years. Signs of weakening in residential construction come from the demand rather than the supply side. Mortgage lending has shown a decreasing trend since the second half of 2007. More specifically, in April housing mortgage loans have contracted for the second consecutive month compared to the previous month³. In March the drop was notable — amounting to € 8 billion compared to the previous month. However, production in construction accelerated in the first quarter compared to the fourth quarter of 2007 (3.1 per cent) in line with the results recorded in the euro area, partly attributable to favourable weather conditions.

1	See International Monetary Fund, World Economic Outlook (April 2008).
2	See also Bank of Italy, 2007 Annual Report, pg. 78.
3	Provisional data.

Ministero dell’Economia e delle Finanze

9

2009-2013 Economic and Financial Planning Document

     Exports are estimated to ease compared to the 2006-2007 increases (2.1 per cent as against a yearly average growth of 5.6 per cent). The slowdown is linked to the expected softer growth of world trade and the appreciation of the euro vis-à-vis other main currencies, in addition to the expected moderation in domestic demand in Germany, Italy’s main trading partner. Italy’s share of world exports — calculated at current prices — edged up in the first nine months of 2007 compared to the same period of 2006, from 3.5 per cent to 3.7 per cent⁴.

     Imports increased at a lower rate compared to exports (1.1 per cent) due to the significant slowdown in domestic demand.

     The current account of the balance of payments would still show a deficit of 2.6 per cent of GDP in 2008, showing some deterioration compared to 2007 (2.4 per cent). The trade balance of goods would be in equilibrium and decreasing compared to the previous year. In 2007 the trade balance of goods showed a surplus (0.2 per cent of GDP). The current account balance net of the balance of goods is estimated to stand at 2.5 per cent, which is a slight improvement compared to last year.

     As to the composition of value added, the construction and services sectors are projected to slow down compared to 2007, while industry (excluding construction) is expected to contract.

TABLE II.3: VALUE ADDED

		2006		2007		2008
Agriculture			-1.4		0.0		-2.2
Industry			1.2		1.0		-0.2
Of which	Industry excluding construction		1.2		0.8		-0.3
	Construction		1.5		1.6		0.6
Services			2.1		1.8		1.0
Of which:	Private sector services (1)		2.4		2.2		1.2
	Public sector services (2)		1.3		1.1		0.2
Value added			1.8		1.6		0.5
GDP			1.8		1.5		0.5

(1)	Including retail trade, hotels, transport, communication, credit intermediation, various services to firms and households.
(2)	Including general government, education, health care, other public services and household/domestic services.

⁴ Source: Minister of Foreign Trade, “Scambi con l'estero”, n.l 2008.

Ministero dell’Economia e delle Finanze

10

2009-2013 Economic and Financial Planning Document

     According to national accounts data, employment (measured in full-time equivalent) rose by 0.3 per cent in the first quarter compared to the previous quarter and by 1.0 per cent compared to the same quarter of the previous year. Employment in services grew slightly more briskly compared to the previous quarter, while both in industry excluding construction and in construction the number of employed people declined compared to the fourth quarter of 2007.

     On balance, employment is expected to increase at more moderate rates compared to the past two years (0.7 per cent as against a 1.3 per cent average in the 2006-2007 period), but will continue to show high elasticity to GDP.

TABLE II.4: EMPLOYMENT (full-time equivalent, % change)

		2006		2007		2008
Agriculture			1.2		-2.9		0.6
Industry			1.0		1.4		-1.1
Of which:	Industry excluding construction		1.0		0.9		-0.9
	Construction		0.8		2.4		-1.6
Services			2.1		1.1		1.5
Of which:	Private-sector services (1)		2.3		1.5		2.0
	Public sector services (2)		1.6		0.6		0.7
Whole economy			1.7		1.0		0.7
Of which:	Dependent workers		2.1		1.5		1.0

(1)	Including retail trade, hotels, transport, communications, credit intermediation, various services to firms and households.
(2)	Including general government, education, health, other public services, household/domestic services.

     In light of recent developments and assuming labour supply increases in line with the average of the past five years, the unemployment rate is estimated at 5.9 per cent.

     In 2008, unit labour costs are supposed to increase by 3.9 per cent as a result of the renewal of public and private employment contracts that have expired. Along with a slightly negative growth in productivity, unit labour cost is expected to rise significantly more than in 2007 (4.1 per cent as against 1.5 per cent).

     Domestic inflation measured by the GDP deflator will presumably remain sustained (2.9 per cent). The consumption deflator is expected to record rates exceeding 3.0 per cent also due to external pressures caused by raw material price hikes.

     Macroeconomic forecasts for 2008 have been revised downwards significantly as against the forecasts made in the Economic and Financial Planning Document (DPEF⁵) of last year and by a tenth of a point compared to the Combined Report on the Economy and Public Finance (RUEF) published in March.

     The downward revision of the estimates for 2008 is mainly the result of developments in the international scenario. In the 2008-2011 Economic and Financial Planning Document the price of oil was assumed at $65 a barrel for the year 2008, but it

⁵ Current estimates and those in last year’s Economic and Financial Planning Document cannot be compared directly as different historical series have been used. Current estimates take into account the extraordinary revision of national accounts made by Italy’s National Statistical Office (ISTAT) last March.

Ministero dell’Economia e delle Finanze

11

2009-2013 Economic and Financial Planning Document

has now reached $118 a barrel. World trade was expected to gradually recover compared to 2007, while current forecasts predict a slowdown from 7.1 in 2007 to 6.3 per cent in 2008. The euro appreciated more than expected vis-à-vis other main currencies: the exchange rate versus the US dollar was presumed to stand at 1.34 per cent, whereas it is assumed at 1.54 in current forecasts. The 2008 expected slowdown is also the result of lower-than-expected GDP expansion in 2007, especially in the fourth quarter.

     In line with the cyclical slowdown, also employment is forecast to decelerate this year. The employment rate is actually expected to remain below last year’s estimates⁶. As for prices, forecasts of consumer-price inflation have been pushed up by raw material price hikes.

TABLE II.5. DIFFERENCE IN FORECASTS FOR 2008

	2008-2011 DPEF		2009-2013 DPEF
Growth rate of real GDP		1.9		0.5
Inflation rate (1)		1.7		3.4
Interest rate on 12-month BOTs (2)		4.55		4.31
Employment growth rate (full-time equivalent)		0.8		0.7
Unemployment rate (as % of the workforce)		6.2		5.9
Employment rate (specific rate 15-64 age group)		59.7		59.2

(1)	Planned rate for 2008-2011 DPEF; estimated (FOI index, net of tobacco products) rate for the 2009-2013 DPEF.
(2)	End of year. For the 2009-2013 DPEF, data gathered at the end of May 2008.

     Regional trends

     In the last few years the Italian economy has grown less than the European average. Since 2000 the gap vis-à-vis EU-15 has been about 1 percentage point a year.

     In addition to an overall growth rate below the European average, the divide in economic development amongst the various areas of the country has persisted. The significant moderation in GDP growth at national level since 2000 has hit the South hardest as from 2002. The gaps between the Northern and Central areas and the South are wide in terms of per-capita income and employment rates; potential growth in the South is also hampered by poorer infrastructure and the low quality of public services provided to citizens and firms. However, there have been economic improvements — albeit limited — also in the South, shown by significant increases in the number of employees recorded in certain areas and a recovery in the export flow over the past three years, even excluding oil products.

⁶ The unemployment rate takes into account the update of the working-age population for 2007. Compared to the previous DPEF, there is now an increase in the working-age population of 0.6 per cent as against zero growth for 2007 assumed in the previous document.

Ministero dell’Economia e delle Finanze

12

2009-2013 Economic and Financial Planning Document

     In the South, the new weakening of last year’s already modest recovery has led to lower growth compared to the Centre and the North for the fifth consecutive year, which has widened the gap between the two areas even further.

     The rate of growth has actually been higher in Northern and Central Italy than in the South also in 2007, with GDP growth at 1.6 and 0.9 respectively. More specifically, within the North and Centre regions, growth has been higher in the North-East (1.8 per cent), somewhat smaller in Central Italy (1.7 per cent), whereas GDP growth in the North West was the same as the national average (1.5 per cent).

     The latest cyclical trends in Northern and Central Italy during the early months of 2008 seem to confirm the positive export trends, while only the latest May data show modest improvements in business and consumer confidence. While the positive export trend in the South continued in the early months of 2008, consumer demand remained weak, also because of a weak labour market and uncertain tourism growth. Signs of greater confidence seem to be coming from more recent business and consumer surveys.

     The economy in 2009 and in the following years

     According to the latest projections, the growth rate of GDP is expected to be 0.9 per cent in 2009. Domestic demand is anticipated to make a contribution of 0.8 percentage points (0.2 per cent of which accounted for by investment and 0.5 per cent attributable to household expenditure). Net exports are forecast to make a slightly positive contribution.

     In the following four-year period, the annual growth rate of GDP is expected to stand slightly below 1.5 per cent. At the end of the period considered, net exports are expected to turn slightly negative as a result of the expected recovery of domestic demand.

     Household consumption is expected to grow by 0.9 per cent, thus edging up compared to the previous year. Household expenditure is forecast to reflect the positive evolution of real disposable income resulting from the expected deceleration of consumer-price inflation. In the following years household consumption is projected to increase by 1.5 per cent on average.

     Investment in equipment and machinery, spurred by better demand prospects, is forecast to increase by 1.0 per cent as against the contraction that was estimated for 2008. In the medium term, given the new buoyancy of exports and international trade, investment in equipment and machinery is expected to increase at rates of over 2.0 per cent on average.

Ministero dell’Economia e delle Finanze

13

2009-2013 Economic and Financial Planning Document

     Investment in construction is forecast to slow down over the whole period, due to the end of the current residential construction cycle.

     Next year, growth in export volume is expected to be smaller than that of world trade. However, export firms will gradually regain their competitiveness in the following period, with moderate increases in export prices (2.0 per cent at the end of the period). Imports are expected to show a high elasticity to GDP.

     Compared to 2008 the trade deficit is forecast to decrease by 0.6 percentage points and to account for 2.0 per cent of GDP due to terms of trade improvements. Assuming the other items of the balance of payments will perform in line with the latest trends, the current account deficit is forecast to gradually decline to 1.2 per cent of GDP at the end of the period.

     As to value added, industry excluding construction is forecast to increase by 0.5 per cent compared to 2008. The construction and services sectors are expected to grow at rates in line with last year’s. Against a backdrop of moderate productivity increases, employment growth, in full time equivalent terms, is forecast at 0.5 per cent. Among the various economic sectors, private-sector services are expected to record the highest increases, even though it will slow down compared to 2008.

     After 2008, employment is forecast to grow by 0.6-0.7 per cent a year on average. The unemployment rate is predicted to gradually decrease from 5.8 per cent in 2009 to 5.4 per cent in 2013.

     Estimates for the public sector assuming no changes are made to the existing legislation show wages per employee growing by less than 2 per cent compared to 2008. Together with a small increase in productivity, unit labour cost is expected to increase by 1.3 per cent, slowing down notably compared to the previous year.

     In the medium term the moderate increase in nominal wages, equal to 2.0 per cent approximately, is expected to mitigate the forecast increase in unit labour cost and domestic inflation. In line with moderate external inflationary pressure, inflation as measured by the private consumption deflator is forecast to hover slightly below 2.0 per cent on average.

Ministero dell’Economia e delle Finanze

14

2009-2013 Economic and Financial Planning Document

TABLE II.6. THE MACROECONOMIC FRAMEWORK

	2006		2007		2008		2009		2010		2011		2012		2013
EXTERNAL VARIABLES
International trade		9.4		7.1		6.3		6.6		7.0		7.2		7.2		7.2
Oil price (Brent FOB $/barrel)		65.1		72.5		118.0		128.0		128.0		128.0		128.0		128
Euro/dollar exchange rate		1.255		1.371		1.545		1.558		1.558		1.558		1.558		1.558
ITALY MACRO (VOLUMES)
GDP		1.8		1.5		0.5		0.9		1.2		1.3		1.5		1.5
Imports		5.9		4.4		1.1		3.0		3.8		4.4		4.5		4.7
Final Domestic consumption		1.0		1.4		0.4		0.8		1.1		1.3		1.4		1.5
- Resident household expenditure		1.1		1.4		0.3		0.9		1.2		1.4		1.6		1.7
General government and NPISH expenditure		0.9		1.3		0.7		0.5		0.7		1.0		1.0		1.0
Gross fixed investment		2.5		1.2		0.1		0.8		1.2		1.5		1.9		2.0
- Machinery. equipment and other items		3.5		0.2		-0.5		1.0		1.5		2.0		2.7		2.9
- Construction		1.5		2.2		0.8		0.7		0.8		1.0		1.0		1.0
Exports		6.2		5.0		2.1		3.5		4.1		4.3		4.4		4.5
p.m. Current balance of the balance of payments as % of GDP		-2.6		-2.4		-2.6		-2.0		-1.6		-1.4		-1.3		-1.2
CONTRIBUTIONS TO GDP GROWTH (1)
Net exports		0.1		0.1		0.3		0.1		0.1		0.0		0.0		-0.1
Stocks		0.5		0.0		0.0		0.0		0.0		0.0		0.0		0.0
Domestic demand net of inventories		1.3		1.4		0.3		0.8		1.1		1.3		1.5		1.6
PRICES
Imports deflator		7.6		2.3		6.4		2.2		1.9		1.9		1.8		1.8
Exports deflator		4.5		3.6		4.3		3.3		2.6		2.1		2.0		2.0
GDP deflator		1.7		2.3		2.9		2.1		2.0		1.8		1.7		1.7
Nominal GDP		3.6		3.8		3.5		3.0		3.2		3.1		3.3		3.3
Consumption deflator		2.7		2.2		3.4		2.1		1.9		1.8		1.7		1.7
Inflation (planned)		1.7		2.0		1.7		1.5		1.5		1.5		1.5		1.5
EMPLOYMENT
Labour cost		2.5		1.9		3.9		1.7		2.2		2.1		2.1		2.1
Productivity (measured as % of GDP)		0.1		0.5		-0.2		0.4		0.6		0.7		0.8		0.9
ULC (measured as % of GDP)		2.3		1.5		4.1		1.3		1.6		1.4		1.2		1.2
Employmnent (FTE)		1.7		1.0		0.7		0.5		0.6		0.6		0.7		0.7
Unemployment rate		6.8		6.1		5.9		5.8		5.7		5.6		5.5		5.4
Employment rate (15-64 age group)		58.4		58.7		59.2		59.6		60.0		60.5		61.2		62.0
p.m. nominal GDP (absolute value in Ml)		1,479,981		1,535,541		1,588,803		1,637,199		1,689,202		1,742,139		1,799,075		1,858,870

(1) Figures may not add up due to rounding.

II.4 RECENT TREND IN CONSUMER-PRICE INFLATION

     At the end of 2007 the average inflation rate was not very high (1.8 per cent) and lower than in 2006 (2.1 per cent), thanks to overall moderation in the early months of the year. Following the abatement that started at the end of 2006, the slowdown recorded in the first six months was mainly due to the temporary drop in oil prices in international markets. Conversely, in the second half of the year there were tensions resulting from food and energy prices, whose hikes caused a 1 percentage point increase (from 1.5 in May to 2.6 per cent in December 2007) in the year-on-year rate of consumer prices.

Ministero dell’Economia e delle Finanze

15

2009-2013 Economic and Financial Planning Document

     The other components in the consumer-price index increased moderately. The tariff component, excluding energy products, recorded an average growth of 1.4 per cent in 2007 (1.6 per cent in 2006), which was caused by the hefty increase in rail fares (7.1 per cent compared to 0.2 per cent in 2006, as tariffs had basically remained unchanged since 2003) and local tariffs, partially offset by a reduction in energy prices and in drugs supplied free of charge by the National Health Service (estimated at -7.7 per cent in 2007 compared to -4.4 per cent in 2006). Also the prices of private-sector services on average increased more slowly (2.5 as against 2.7 per cent in 2006), mainly due to insurance services (1.5 compared to 2.3 in 2006) and mobile telephony services (-12.0 per cent due to scrapping of recharging fees on pre-paid cards as against no changes in 2006).

     The acceleration of inflation at the end of 2007 mainly affected the carry-over effect for 2008 (1.3 per cent) rather than the yearly average. Consumer-price inflation then increased more markedly in the early months of 2008, at a rate which reached 3.6 per cent in May, the highest rate since 1996. Imported inflation for 2008 reached 3.0 per cent. The underlying reasons lie in continuing upward pressure in oil and food prices. However, rising prices have now started to affect all components. They are no longer limited to those sub-sectors which tend to be affected by international price increases because of their greater reliance on raw materials. This means that the indirect impact of food and oil prices has begun to take its toll.

     Baseline inflation (NIC — the main domestic index excluding fresh food and energy) went up from 2.2 per cent in December to 2.6 per cent in May, which confirms the rising price trend in processed food and the indirect impact on other components (an acceleration was recorded for example in electric appliances and household services, which reflect the rising prices of oil and some metals). In the first half of 2008, tariffs (net of energy) continued to make a moderate contribution to the yearly growth of consumer prices (0.2 percentage points), showing a growth trend similar to that of 2007, mainly characterised by increases in local tariffs. The yearly contribution from private-sector services can be estimated at 1 percentage point (similar to that of regulated energy prices). However, inflation increased from 2.2 per cent in December 2007 to 2.8 per cent in May.

     Considering that food prices are forecast to continue to rise (also given the increases which are now affecting packaged products) and that no trend reversal is expected in the price of oil, inflation in 2008 is forecast at 3.4 per cent. Forecasts of a moderation in consumer inflation in the second half of the year, both in food and energy prices, should bring the inflation rate down to 2.9 per cent in December compared to the same month of 2007.

     The surge in inflation which has hit the Italian economy since the end of 2007 has affected all other countries in the Euro Area. In the early months of 2007, HICP inflation in Italy was in line with the Euro-Area average and somewhat lower in the second half of the year, also due to the more gradual mechanism through which oil price increases feed through into regulated energy prices.

Ministero dell’Economia e delle Finanze

16

2009-2013 Economic and Financial Planning Document

     Inflation convergence recorded on average in 2007 is the result of a variety of factors. The increase in VAT in Germany definitely played a major role in pushing inflation up in the Euro Area, whereas in Italy some components that used to show much higher growth compared to the Euro Area (such as insurance and other financial services) recorded a slowdown. After accelerating in April (3.6 per cent in Italy, as against a 3.3 per cent average in the Euro Area), the rate of inflation in May is now the same (3.7 per cent both in Italy and in the Euro Area). These trends are based on different increases in the various aggregates. Prices in Italy tend to increase more in sectors such as the garment industry, furniture and other goods and services. Conversely, food, health-care services (due to the drop in the prices of drugs), education and catering recorded lower price increases compared to the Euro-Area average. Prices in the communications sector increased more than the Euro-Area average (as a catch up from more marked drops recorded in other countries in the past few years). Price changes in sectors such as housing and transport were basically similar to those recorded for the same month of the previous year.

     As to planned inflation, it is considered to be appropriate to confirm the forecast rates of 1.7 per cent for 2008 and 1.5 per cent for the following years.

     In addition to a commitment not to exceed the planned inflation rate where possible, the agreements between the Government and social partners — which introduced the mechanism of planned inflation — envisaged that pay raises should not match inflation due to increases in the prices of imported inputs. Their impact is actually a net impoverishment for the whole country, not just for some. In the macroeconomic outlook presented in this Economic and Financial Planning Document, a worsening of the terms of trade is forecast for 2008, mainly due to oil and raw-material price increases. Imported inflation therefore plays a particularly important role in 2008, in which expectations of rising inflation will be mainly due to exogenous phenomena, such as increases in the prices of energy products and their impact on food prices. Price increases based on the FOI index net of imported inflation are expected to remain below the increase of the non-adjusted index, even though above the planned inflation rate for 2008, currently at 1.7 per cent. However, the fact that the phenomenon is caused by imported inflation and the repeated calls by the European Central Bank not to generate second-round effects fuelling wage increases suggest that the planned inflation rate for 2008 should remain unchanged at 1.7 per cent. At the same time, the government has adopted equalization measures to mitigate the adverse effect on lower incomes.

Ministero dell’Economia e delle Finanze

17

2009-2013 Economic and Financial Planning Document

CONSUMER-PRICE INFLATION AT REGIONAL LEVEL

The rapid acceleration of consumer prices in Italy at the end of 2007 and in the early months of 2008 occurred in all regions but at varying degrees of intensity. Inflation differentials between regions and the national average were relatively big in 2007 showing an increasing trend in the first five months of 2008. In Central and North-Western Italy inflation was equal to the national average in 2007 (1.8 per cent). Conversely, in the first five months of 2008, the two above-mentioned areas had an inflation rate of 3.0 per cent, 0.2 percentage points below the national average. In the North-East, as in Central and North-Western Italy, the inflation differential was 0.1 percentage points below the national average, as in 2007. In the South and in Sicily and Sardinia, inflation in 2007 grew more than the national average — by 0.3 and 0.6 percent respectively, while in the first five months of 2008 the differential went down to zero in the South while it decreased to 0.2 percentage points in Sicily and Sardinia. The regions with the highest rates of inflation are all in the South or in Sicily and Sardinia.

Ministero dell’Economia e delle Finanze

18

2009-2013 Economic and Financial Planning Document

III. PUBLIC FINANCE

III.1 PUBLIC FINANCE: THE 2009-2013 SCENARIO AT UNCHANGED LEGISLATION

     A historical overview of budget balances (1980-2007)

     In the past two decades, public finance in Italy has significantly improved. Since the start of the new millennium, consolidation has been hampered by new difficulties, mainly due to the worsening macroeconomic scenario.

     Net borrowing as a percentage of GDP — after reaching 12.4 per cent in 1985 started to decline until it reached a historic low (0.8 per cent) in the year 2000¹. Then the deficit started to grow again reaching 3.4 per cent in 2006² and then decreased to 1.9 per cent of GDP in 2007³.

     The cyclically adjusted budget balance net of temporary and one-off measures⁴, basically showed a trend similar to that of net borrowing and in 2007 it was 1.6 per cent of GDP. On average it remained constantly higher than the actual deficit.

1	The 2000 balance includes the extraordinary income from the sale of UMTS licences amounting to 1.2 per cent of GDP.
2	The 2006 balance includes some outlays due to extraordinary expenditure, i.e. the writing off of Government receivables from TAV (the high-speed-train company) as a result of its taking over of the ISPA debt and the retrocession to the securitization company of social-security contributions receivables of agricultural workers for an overall amount equal to 0.9 per cent.
3	The 2007 balance includes the computation of transfers to concessionaires of the collection amounting to 0.3 per cent of GDP following the abolition of the requirement to advance the sum.
4	The cyclically adjusted budget balance net of temporary and one-off measures is the baseline aggregate used by the UE institutions for calculations in view of achieving a balanced budget in the medium term.
	Data on the structural balance is available as from 1989.

Ministero dell’Economia e delle Finanze

19

2009-2013 Economic and Financial Planning Document

     The primary balance⁵ improved gradually from -5.8 per cent in 1981 to peak at 6.6 per cent in 1997. As of 1998 the primary surplus started to decline until it almost reached zero in 2005. In 2007, Italy was once again running a primary surplus of 3.1 per cent of GDP.

     The structural primary balance⁶ was generally smaller than the actual primary balance. More specifically, in the 2000-2001 period, the gap grew wider mainly as a result of a high cyclical component and substantial one-off measures adopted in the following years. As of 2005 the two balances have shown much more similar trends.

     The positive trend in the primary balance has been accompanied by consistently smaller increases in debt servicing, which declined from 12.7 per cent of 1993 to a historic low of 4.6 per cent in 2005. It subsequently increased to 5.0 per cent in 2007.

     Due to different patterns of increase, the spread between the primary surplus and debt servicing, which declined steadily since 1982, started to increase again between 2001 and 2005 to then decline again in the following two-year period (-1.9 per cent in 2007).

     In the period considered both revenues and expenditure increased as a percentage of GDP. The improvement in the budget balance was mainly the result of the annual average percentage increase in revenues, which was higher than both expenditure and annual nominal GDP growth rates.

     Total revenues as a percentage of GDP increased from 34.4 per cent in 1980 to 47.2 per cent in 2007, after reaching a peak of 47.7 per cent in 1997 and decreasing to

5	The primary balance is a particularly useful indicator for assessing the sustainability of public finance. In a zero-growth scenario the sustainability of public finance requires the primary surplus to at least service the debt.
6	Net of temporary and one-off measures. Data available as of 1990.

Ministero dell’Economia e delle Finanze

20

2009-2013 Economic and Financial Planning Document

44.2 per cent in 2005. Current revenues showed a similar trend, from 34.2 per cent in 1980 to 46.9 per cent in 2007. Larger revenues led to a progressively increasing fiscal burden (especially in terms of taxes) which reached 43.3 per cent in 2007.

     Expenditure as a proportion of GDP increased from 41.4 per cent in 1980 to 49.1 per cent in 2007. Since 1980 expenditure grew constantly until it reached 56.6 per cent in 1993. In 1994 a trend reversal began which lasted until 2000 when a historic low of 46.2 per cent was reached. Since 2001, total expenditure as a percentage of GDP continued to increase reaching 49.3 per cent in 2006.

     Current expenditure showed a similar trend going from 36.9 per cent in 1980 to 44.6 per cent in 2007, reaching a peak of 52.5 per cent in 1993, to decline gradually in later years. Primary current expenditure as a proportion of GDP grew from 32.5 per cent in 1980 to 39.6 per cent in 2007. After reaching 39.8 per cent in 1993 it went down to 36.7 per cent in 1995, and started growing again in later years until it peaked at 41.0 per cent in 2005.

     An analysis of increases in public debt over the 1980-2007 period shows a clear-cut watershed in 1994. During an initial stage, from 1980 to 1994, the debt-to-GDP ratio increased constantly, from 56.9 per cent to 121.8 per cent. Starting from 1995 the ratio began to decrease until it reached 103.8 per cent in 2004. In the following two-year period Italy’s debt started growing again, and then dropped to 104.0 per cent of GDP in 2007.

Ministero dell’Economia e delle Finanze

21

2009-2013 Economic and Financial Planning Document

     The debt and deficit trends can also be assessed by looking at the stock-flow adjustment (SFA) trend⁷. SFA trends have been erratic in time. After reaching a peak in the 1992-1994 period (3.4 per cent in 1993), the trend levelled off at an absolute rate (positive or negative) which was never higher than 2 percentage points of GDP, except in 2002. More specifically, starting from 2004, the absolute value of SFA decreased further to less than one percentage point of GDP, thus bringing the deficit trend and the annual variation in public debt more into line.

     Despite notable progress over the years, the consolidation of Italy’s budget is still far from complete.

     Moreover, a great deal of measures have been adopted on the revenue side in the recent past. A high tax burden, poor cost-effectiveness and a high debt-to-GDP ratio have gradually eroded the dynamism of Italy’s economy.

⁷ The stock-flow adjustment is the difference (in absolute terms or as a ratio to GDP) between the annual change in the debt stock and the annual deficit. SFA is positive or negative depending on whether the annual change in the debt is higher or lower than the annual deficit.

Ministero dell’Economia e delle Finanze

22

2009-2013 Economic and Financial Planning Document

     Public finance in 2008

     The public finance scenario outlined by the previous Government in the Economic and Financial Planning Document of last year set the net borrowing and primary surplus objectives for 2008 at 2.2 per cent and 2.7 percent of GDP respectively assuming a 1.9 per cent rate of economic growth. The Document also envisaged the goal of balancing the budget by 2011, implying further budget measures in the 2009-2011 period. At the same time it identified a series of commitments and initiatives, non yet envisaged by the existing legislation, to ensure the regular carrying out of Government activities.

     In September, the Forecasting and Planning Report and the Update Note to the Economic and Financial Planning Document revised downwards borrowing based on unchanged legislation, even though implying a decrease in the growth estimates of four tenths of a point. A 2.2 per cent of GDP net borrowing target meant that resources amounting to €11 billion approximately were needed to fulfil the commitments undertaken and implement the new programmes that had been announced.

     The Update to the Stability Programme confirmed the growth estimates and the public finance objectives.

     Despite a better performance in 2007 the March Combined Report on the Economy and Public Finance revised net borrowing and primary surplus forecasts to 2.4 per cent and to 2.6 per cent of GDP respectively. The new forecasts took into account the changed growth prospects (1 percentage point lower than expected), changes in the regulatory framework as against the budget measures submitted in September and the postponement of some Government programmes to 2008.

     The worsening balance mainly resulted from a downward revision of current revenues, caused by lower tax revenues as a result of Italy’s worsening economic situation and lower social security contributions, due to a methodological change introduced by ISTAT. On balance, estimates of expenditure contained a modest upward revision, as a net effect of higher capital expenditure, mainly due to the postponement of some expenditure programmes envisaged in Decree Law No. 159/2007 and a heavier burden resulting from the ‘milleproroghe’ decree as well as higher interest expenditure, partly offset by lower current primary expenditure.

     At the end of the assessment process of the Stability Programme in May, the Ecofin Council, following the Commission’s recommendation, repealed the excessive deficit procedure against Italy, while at the same time urging the government to continue on the path of fiscal consolidation after identifying a number of risk factors for the current year.

     When the new Government was sworn in, due diligence of the public accounts for 2008 was performed to reflect the new macroeconomic scenario and the latest developments on the revenue and expenditure side.

Ministero dell’Economia e delle Finanze

23

2009-2013 Economic and Financial Planning Document

TABLE III.1: GENERAL GOVERNMENT ACCOUNTS AT UNCHANGED LEGISLATION (MI)

		2007		2008		2009		2010		2011		2012		2013
EXPENDITURE
Employee compensation			164,645		175,103		175,046		178,001		180,977		184,276		187,351
Intermediate consumption			121,460		127,304		131,485		135,141		140,261		145,800		150,192
Welfare benefits			265,284		278,340		286,270		296,340		306,910		317,030		329,360
Of which Pension benefits			214,991		223,810		232,490		240,880		248,900		257,360		267,150
	Other welfare benefits		50,293		54,530		53,780		55,460		58,010		59,670		62,210
Other current expenditure net of interest payment			56,817		58,398		60,398		60,915		62,090		62,992		63,584
Total current expenditure excluding debt service			608,206		639,145		653,199		670,397		690,238		710,098		730,487
(as % of GDP)			39.6		40.2		39.9		39.7		39.6		39.5		39.3
Interest			76,726		79,802		83,097		85,915		88,656		92,385		95,414
(as % of GDP)			5.0		5.0		5.1		5.1		5.1		5.1		5.1
Total current expenditure			684.932		718.947		736,296		756,312		778,894		802,483		825,901
Of which Health expenditure			102,290		110,626		111,592		116,007		120,656		125,156		129,916
Total capital expenditure			68,493		63,658		67,025		66,834		67,857		68,290		68,498
Of which:  Gross fixed investment			36,134		37,482		39,126		39,534		40,166		40,779		41,138
	Capital account contributions		24,769		23,690		24,818		23,781		24,879		24,570		24,608
Other transfers			7,590		2,486		3,081		3,519		2,812		2,941		2,752
Total final expenditure excluding debt service			676,699		702,803		720,224		737,231		758,095		778,388		798,985
Total final expenditure			753,425		782,605		803,321		823,146		846,751		870,773		894,399
REVENUES
Total tax revenues			459,888		465,814		476,703		495,369		511,263		528,236		545,027
Of which : Direct taxes			233,660		242,690		245,537		258,744		268,935		279,584		289,485
	Indirect taxes		225,928		222,892		230,934		236,393		242,096		248,420		255,310
	Capital account taxes		300		232		232		232		232		232		232
Social contributions			204,772		214,941		221,236		227,765		234,547		240,545		247,400
	Of which: Actual contributions		200,911		210,943		217,192		223,653		230,362		236,290		243,075
	Imputed contributions		3,861		3,998		4,044		4,112		4,185		4,255		4,325
Other current revenues			55,272		56,872		57,917		59,319		60,746		62,302		63,745
Total current revenues			719,632		737,395		755,624		782,221		806,324		830,851		855,940
Capital account non-tax revenues			4,314		5,349		4,685		5,712		5,743		5,286		5,325
Total final revenues			724,246		742,976		760,541		788,165		812,299		836,369		861,497
p.m. Tax burden			43.3		42.8		42.6		42.8		42.8		42.7		42.6
BALANCES
Primary balance			47,547		40,173		40,317		50,934		54,204		57,981		62,512
(as % of GDP)			3.1		2.5		2.5		3.0		3.1		3.2		3.4
Current account balance			34,700		18,448		19,328		25,909		27,430		28,368		30,039
(as % of GDP)			2.3		1.2		1.2		1.5		1.6		1.6		1.6
Net borrowing			-29,179		-39,629		-42,781		-34,981		-34,452		-34,404		-32,902
(as % of GDP)			-1.9		-2.5		-2.6		-2.1		-2.0		-1.9		-1.8
Nominal GDP			1,535.541		1,588,803		1,637,199		1,689,202		1,742,139		1,799,075		1,858,870

     The new estimates also take into account the impact of the new measures the Government adopted at the start of its term to support demand and boost productivity⁸.

⁸ The Decree Law No. 93/ 2008 on ‘Urgent provisions to protect household purchasing power envisaged scrapping ICI (property tax) on homes used as primary residences as of 2008 (loss of yearly revenue amounting to 1,700 million), scrapping taxes on overtime in the private sector on a trial basis for the period starting 1 July 2008 and ending on 31 December 2008 (loss of revenue of 650 million approximately) and outlining new ways to renegotiate mortgage loans taken out for the purchase and renovation of primary residences.

Ministero dell’Economia e delle Finanze

24

2009-2013 Economic and Financial Planning Document

     These measures, which will reduce the tax burden this year, are offset by equivalent spending cuts; therefore the balance will remain unchanged with a shift in aggregates.

     The revision of public finance balances based on unchanged legislation entails an upward adjustment of the deficit-to-GDP ratio to 2.5 per cent — a ratio somewhat higher than the forecast made in the Combined Report on the Economy and Public Finance.

TABLE III.2: DIFFERENCE IN FORECASTS FOR 2008, 2009, 2010 AND 2011 COMPARED TO THE COMBINED REPORT ON THE ECONOMY AND FINANCE)

		2007		2008				2009				2010				2011
		Results		RUEF		DPEF		RUEF		DPEF		RUEF		DPEF		RUEF		DPEF
EXPENDITURE
Employee compensation			164,645		175,050		175,103		174,931		175,046		177,901		178,001		180,877		180,977
Intermediate consumption			121,460		127,744		127,304		131,645		131,485		136,077		135,141		141,226		140,261
Welfare benefits			265,284		278,340		278,340		284,570		286,270		294,640		296,340		305,210		306,910
Of which: Pension benefits			214,991				223,810				232,490				240,880				248,900
	Other welfare benefits		50,293				54,530				53,780				55,460				58,010
Other current expenditure net of interest payment			56,817		58,645		58,398		59,554		60,398		62,483		60,915		63,118		62,090
Total current expenditure excluding debt service			608,206		639,779		639,145		650,700		653,199		671,101		670,397		690,431		690,238
(as % of GDP)			39.6		40.2		40.2		39.6		39.9		39.5		39.7		39.2		39.6
Interest			76,726		79,307		79,802		80,981		83,097		82,489		85,915		84,803		88,656
((as % of GDP)			5.0		5.0		5.0		4.9		5.1		4.9		5.1		4.8		5.1
Total current expenditure			684,932		719,086		718,947		731,681		736,296		753,590		756,312		775,234		778,894
Of which: Heath expenditure			102,290				110,626				111,592				116,007				120,656
Total capital expenditure			68,493		66,095		63,658		70,751		67,025		70,303		66,834		71,396		67,857
Of which:   Gross fixed investment			36,134		39,277		37,482		41,256		39,126		41,595		39,534		42,225		40,166
	Capital account contributions		24,769		24,632		23,690		26,414		24,818		25,189		23,781		26,359		24,879
	Other transfers		7,590		2,186		2,486		3,081		3,081		3,519		3,519		2,812		2,812
Total final expenditure excluding debt service			676,699		705,874		702,803		721,451		720,224		741,404		737,231		761,827		758,095
Total final expenditure			753,425		785,181		782,605		802,432		803,321		823,893		823,146		846,630		846,751
REVENUES
Total tax revenues			459,888		470,810		465,814		484,004		476,703		503,636		495,369		521,389		511,263
Of which:   Direct taxes			233,660		241,102		242,690		245,846		245,537		258,842		258,744		269,752		268,935
	Indirect taxes		225,928		229,476		222,892		237,926		230,934		244,562		236,393		251,405		242,096
	Capital account taxes		300		232		232		232		232		232		232		232		232
Social contributions			204,772		214,141		214,941		220,450		221,236		226,833		227,765		233,790		234,547
Of which:   Actual contributions			200,911		210,143		210,943		216,406		217,192		222,721		223,653		229,605		230,362
	Imputed contributions		3,861		3,998		3,998		4,044		4,044		4,112		4,112		4,185		4,185
Other current revenues			55,272		56,631		56,872		57,782		57,917		59,005		59,319		60,519		60,746
Total current revenues			719,632		741,350		737,395		762,004		755,624		789,242		782,221		815,466		806,324
Capital account non-tax revenues			4,314		4,876		5,349		5,320		4,685		5,363		5,712		5,404		5,743
Total final revenues			724,246		746,458		742,976		767,556		760,541		794,837		788,165		821,102		812,299
Memo item: Tax burden			43.3		43.1		42.8		42.9		42.6		42.9		42.8		42.9		42.8
BALANCES
Primary balance			47,547		40,584		40,173		46,105		40,317		53,433		50,934		59,275		54,204
(as % of GDP)			3.1		2.6		2.5		2.8		2.5		3.1		3.0		3.4		3.1
Current accoutn balance			34,700		22,264		18,448		30,323		19,328		35,652		25,909		40,232		27,430
(as % of GDP)			2.3		1.4		1.2		1.8		1.2		2.1		1.5		2.3		1.6
Net borrowing			-29,179		-38,723		-39,629		-34,876		-42,781		-29,056		-34,981		-25,528		-34,452
(as % of GDP)			-1.9		-2.4		-2.5		-2.1		-2.6		-1.7		-2.1		-1.4		-2.0
Nominal GDP			1,535,541		1,590,366		1,588,803		1,642,717		1,637,199		1,700,769		1,689,202		1,761,518		1,742,139

Ministero dell’Economia e delle Finanze

25

2009-2013 Economic and Financial Planning Document

     The 0.1-per-cent-of-GDP deterioration reflects a net revenue loss of €3.5 billion approximately resulting from a decrease in indirect taxes (€6.6 billion approximately) as a result of the slowdown in VAT revenues, higher direct taxes (€1.6 billion approximately) and higher social security contributions (€0.8 billion). The new estimates that have revised downwards expenditure by €2.6 billion are the result of a substantial levelling off in current expenditure and lower capital expenditure (-€2.4 billion).

     The 2009 — 2013 scenario based on unchanged legislation

     A more substantial deterioration, of about 0.5 percent of GDP, has been estimated for 2009. The new estimate of 2.6 per cent of GDP (as against 2.1 per cent as estimated in the Combined Report on the Economy and Public Finance — RUEF) reflects a more significant decrease, which, due to the time lag involved in the taxation mechanism (production, submission of tax returns, payments) will impact tax revenues at a later stage. Expenditure is expected to edge up, due to an increase in current expenditure (€4.6 billion approximately), partly offset by a more moderate increase in capital expenditure (€3.7 billion approximately) resulting from the impact of Decree Law No. 93/2008 and a revision, based on the monitoring of the degree of utilisation of allotted funds, of the estimates made in the Combined Report on the Economy and Public Finance. Current expenditure is also affected by higher spending on welfare benefits in cash (€1.7 billion a year approximately) due to higher inflation combined with higher debt servicing (€2.1 billion approximately) especially as a result of higher interest rates in financial markets.

     The deterioration of the scenario based on unchanged legislation is only partly reflected in the year 2010 in which net borrowing is estimated to stand at 2.1 per cent of GDP, higher than the forecast in the March Combined Report on the Economy and Public Finance (RUEF), but lower than the estimate for 2009. Net borrowing (at unchanged legislation) is expected to slow down in the following years and to be equal to 2.0 per cent in 2011, 1.9 per cent in 2012 and 1.8 per cent in 2013.

     The scenario based on unchanged legislation outlined here is based on assumptions routinely used to project public finance data⁹.

9
(a)	Compensation of civil servants has been calculated taking into account the impact of the contract renewal for the 2006-2007 period, the payment of salary arrears for a total of €4 billion approximately and the granting of the allowance envisaged for the contract-hiatus period only as of 2008. The number of general-government employees is expected to remain unchanged in the forecast period.
(b)	Expenditure on intermediate consumption, including health expenditure, has been estimated to increase at a rate slightly above that of nominal GDP and subsequently with an average implied elasticity to nominal GDP of about 1.1 per cent.
(c)	Health expenditure has been estimated on the basis of a) an average growth rate for the period of 3.3 per cent which takes into account the forecasting criteria for employee compensation estimated to increase by 1.3 per cent on average over the period, b) an average growth in spending on goods and services of 5.0 per cent and an average increase of 3.6 per cent in spending on services provided by producers in the private market. The estimate implies the impact of the spending-cut plans proposed in previous Budgets as well as the budget measures contained in the spending-cut plans (‘Piani di rientro’). At the end of the period, expenditure is expected to account for 7 per cent of GDP.
(d)	Total welfare expenditure on benefits in cash in the 2009-2013 period is expected to vary by 3.4 per cent on average. More specifically, pension benefits are forecast to increase by 3.6 per cent on average, as a result of additional pension benefits to be paid, pension benefits whose payment is estimated to be discontinued and the existing regulations to revalue pension benefits in line with an indexation mechanism. As of 2008 and especially as of 2009 estimates are also affected by the impact of stricter requirements for entitlement to early retirement envisaged in Law 243/2004, as later modified by Law No. 247/2007.

Ministero dell’Economia e delle Finanze

26

2009-2013 Economic and Financial Planning Document

III.2 PUBLIC FINANCE: THE 2009-2013 POLICY FRAMEWORK

     Government action will be broadly consistent with Italy’s political and legal commitments at EU level. The goal/constraint of a balanced budget by 2011, expressed by the previous Government and reaffirmed at the meeting of the Eurogroup held in Berlin on 20 April 2007 is therefore confirmed.

     In order to hold to this commitment the Government believes a highly innovative strategy is needed, both in terms of timeframe and content.

     The Government intends to address the key elements of the Budget before the summer break and adopt a comprehensive package of legislative measures along with this Document with a view to fleshing it out. These legislative measures will allow the government to achieve full convergence of planning and implementation, thus overcoming the traditional separation whereby implementation is still limited to the first year of the review period. Italy’s EU commitments soon become part of a comprehensive three-year public finance consolidation plan, in line with budget standards used in other European countries.

     This action, which is to be considered as a set of measures linked to the Budget is outlined in four pieces of legislation: (i) a decree law on urgent and necessary measures to be implemented, starting from the second half of the current financial year, to ensure the consolidation of public finance¹⁰; (ii) a Government bill on the provisions needed to complete the programmes in view of the achievement of the targets to be met by 2011; (iii) two additional government bills on the implementation of fiscal federalism and on provisions to draft a code of local government and to implement programmes for Rome, the capital of Italy.

     Adopting these measures before the summer break will create a public finance framework for reform, especially fiscal federalism, whose implementation — together with the steps taken and the mechanisms already in place, will be an effective tool for the fight against tax evasion which the Government intends to pursue.

(e)	Debt servicing has been estimated taking into account forward rates based on the structure of maturities at market-rates at the end of May.
(f)	Capital expenditure has been estimated taking into account the new measures authorised in previous Budgets, their progress and the extent of residual resources.
(g)	Tax revenues have been estimated assuming an annual average increase of 3.2 per cent and an average elasticity to GDP of 1.0 per cent for the period considered.
(h)	Social security contributions are expected to increase by 2.9 per cent over the period considered with a 0.9 percent average elasticity to GDP.
10	Decree Law on ‘Urgent provisions for economic development, simplification, competitiveness, the stabilisation of public finance and tax equalization’ approved by the Council of Ministers on 18 June 2008.

Ministero dell’Economia e delle Finanze

27

2009-2013 Economic and Financial Planning Document

     The scenario has been developed using data available at the end of May when due diligence of the public accounts was performed.

     Some effects of the comprehensive plan to consolidate public finance in the next three-year period will already be felt in 2008 even though the deficit-to-GDP ratio will remain unchanged (2.5 per cent).

     Overall fiscal policy will have to find resources slightly above the forecast made in the Combined Report on the Economy and Public Finance — RUEF (€35 billion approximately) due to a higher deficit resulting from the update of public accounts. The budget correction is necessary to reduce the structural balance by at least 0.5 per cent a year as a proportion of GDP starting from 2009 to meet the target of a balanced budget by 2011.

     The correction will mainly focus on expenditure with a view to reducing overspending and governing its increase through more certain rules, without reducing essential social services. Given the already heavy tax burden, targets will be met without levying new taxes, except some tax equalisation measures or extraordinary corporate taxes or measures to use a proportion of revenues from these taxes for social purposes.

     The spending-cut approach is based on a preventive cap envisaged for missions, programmes and running costs. This tool, generally applied to the whole of public expenditure, is supplemented by additional flexible budget mechanisms that have already been introduced¹¹, aimed at gradually starting a spending review process through possible adjustments of financial resources allotted to programmes included in each spending mission. Over the three-year period this could allow the Central Administration to achieve substantial savings in the order of €14.5 billion, 5 of which could be saved as early as 2009.

     Action to cut spending must be accompanied by increased efficiency and effectiveness of the State, by promoting innovation and using digital technology in public administration while at the same time ensuring citizens/users have greater access, including on-line access, to goods and services.

     Specific measures, which will allow savings in the order of €20 billion over the three-year period, mainly focus on civil servants, decentralised finance, health and welfare.

     An extensive plan for the rationalisation of civil service has been envisaged to promote meritocracy and transparency and reward merit in line with the basic principles underlying a public administration reorganisation project. This reform plan will introduce new rules to assess the work done by civil servants, a redefinition of the rights and duties of employees, a reassessment of the role and tasks of executives, a change in collective and supplementary bargaining also with a view to reorganise the workplace in line with high-performance work organisation practices.

¹¹ Decree Law No. 93/2008 art.5

Ministero dell’Economia e delle Finanze

28

2009-2013 Economic and Financial Planning Document

     Further measures with a financial impact over the three-year period of €1.8 billion approximately, 0.8 of which in 2009 concern the reorganisation of recruitment with the introduction of a stricter limit to new recruitments, the abolition of the change from temporary into permanent employment status envisaged for employees with no job security in previous Budgets as well as the implementation of rationalisation measures in State schools also by reducing the gap in the average teacher/student ratio with other countries.

     Programmes concerning decentralised finance within the framework of a reorganisation of financial relations between the central administration and the peripheral administrative systems envisage savings in the order of €9.2 billion over the tree-year period, a third of which in 2009 through a cut in transfers.

     Health measures will involve savings as of 2010 with an overall impact of €3 billion approximately over the three-year period. The corrective action envisages the start of a digitalisation project, based on the introduction of computer-based prescriptions for specialist examinations and drugs and the dissemination of health information to citizens. The project aims at enhancing monitoring of public spending and measuring the adequacy of treatments prescribed. Its progressive implementation will be helped by the establishment of a ‘permanent forum’ for the harmonisation of e-health, whose purposes will include the creation of the “citizen’s electronic medical record’ while ensuring personal data protection.

     Action on social security includes cutting invalidity benefit expenditure through the introduction of a special plan to verify entitlement to invalidity benefits.

     The tax measures which will contribute €5.7 billion to the whole package over the three-year period is aimed at adjusting the tax base of banks, insurance companies and firms operating in the energy sector, including through the introduction of a surcharge on the standard corporate income tax rate (IRES) of 27.5 per cent raising the overall rate to 33 per cent. Further measures concern the increase in the government mining rights, the harmonisation of tax regimes for cooperatives, the removal of tax concessions that apply to employee stock options. Finally, the package includes measures to strengthen the fight against tax evasion and the shadow economy through changes in the system of income assessment and tax assessment and the strengthening of the financial administration.

Ministero dell’Economia e delle Finanze

29

2009-2013 Economic and Financial Planning Document

TABLE III.3: GENERAL ACCOUNTS — POLICY SCENARIO (MI)

		2007		2008		2009		2010		2011		2012		2013
EXPENDITURE
Employee compensation			164,645		175,082		179,141		181,072		182,948		186,247		189,322
Intermediate consumption			121,460		128,154		127,550		128,018		127,832		133,371		137,763
Welfare benefits			265,284		278,340		286,995		296,761		307,328		317,338		329,669
Of which:	Pension benefits		214,991		223,810		232,795		241,236		249,248		257,738		267,529
	Other welfare benefits		50,293		54,530		54,200		55,525		58,080		59,600		62,140
Other current expenditure net of interest payment			56,817		59,148		59,649		59,341		59,470		60,372		60,964
Total current expenditure excluding debt service			608,206		640,724		653,335		665,192		677,578		697,328		717,718
(as % of GDP)			39.6		40.3		39.9		39.4		38.9		38.8		38.6
Interest			76,726		79,802		82,824		84,777		86,583		88,434		90,638
(as % of GDP)			5.0		5.0		5.1		5.0		5.0		4.9		4.9
Total current expenditure			684,932		720,526		736,159		749,969		764,161		785,762		808,356
Of which:	Health expenditure		102,290		110,626		112,736		115,036		118,685		123,185		127,945
Total capital expenditure			68,493		63,813		63,945		61,763		56,702		57,135		57,343
Of which:	Gross fixed investment		36,134		37,637		36,816		36,218		34,552		35,165		35,524
	Capital account contributions		24,769		23,690		24,248		22,426		20,338		20,029		20,067
	Other transfers		7,590		2,486		2,881		3,119		1,812		1,941		1,752
Total final expenditure excluding debt service			676,699		704,537		717,280		726,955		734,280		754,463		775,061
Total final expenditure			753,425		784,339		800,104		811,732		820,863		842,897		865,699
REVENUES
Total tax revenues			459,888		467,843		482,034		500,902		516,899		533,872		550,663
Of which:	Direct taxes		233,660		244,649		249,904		262,844		272,487		283,136		293,037
	Indirect taxes		225,928		222,962		231,899		237,827		244,180		250,504		257,394
	Capital account taxes		300		232		232		232		232		232		232
Social contributions			204,772		214,941		222,521		228,707		235,208		241,206		248,061
Of which:	Actual contributions		200,911		210,943		218,477		224,595		231,023		236,951		243,736
	Imputed contributions		3,861		3,998		4,044		4,112		4,185		4,255		4,325
Other current revenues			55,272		57,072		58,165		60,020		61,483		62,929		64,373
Total current revenues			719,632		739,623		762,488		789,397		813,358		837,775		862,865
Capital account non-tax revenues			4,314		5,349		4,685		5,712		5,743		5,286		5,325
Total final revenues			724,246		745,204		767,405		795,341		819,333		843,293		868,422
p.m. Tax burden			43.3		43.0		43.0		43.2		43.2		43.1		43.0
BALANCES
Primary balance			47,547		40,667		50,125		68,386		85,053		88,830		93,361
(as % of GDP)			3.1		2.6		3.1		4.0		4.9		4.9		5.0
Current account balance			34,700		19,097		26,329		39,428		49,197		52,013		54,509
(as % of GDP)			2.3		1.2		1.6		2.3		2.8		2.9		2.9
Net borrowing			-29,179		-39,135		-32,699		-16,391		-1,530		396		2,723
(as % of GDP)			-1.9		-2.5		-2.0		-1.0		-0.1		0.0		0.1
Nominal GDP			1,535,541		1,588,803		1,637,199		1,689,202		1,742,139		1,799,075		1,858,870

Note: The decrease in health expenditure as of 2010 compared to the forecasts contained in the year-on-year General Government accounts is the result of the assumption that spending cut plans mainly and exclusively affect spending, since the Regional Authorities could also take action through other measures, by resorting for example to funding through resources other than health funds

Ministero dell’Economia e delle Finanze

30

2009-2013 Economic and Financial Planning Document

TABLE III.4: PUBLIC FINANCE INDICATORS: POLICY SCENARIO AND SCENARIO AT UNCHANGED LEGISLATION (AS % OF GDP)

	2007		2008		2009		2010		2011		2012		2013
SCENARIO AT UNCHANGED LEGISLATION
Net borrowing		-1.9		-2.5		-2.6		-2.1		-2.0		-1.9		-1.8
Interest		5.0		5.0		5.1		5.1		5.1		5.1		5.1
Current balance net of interest		7.3		6.2		6.3		6.6		6.7		6.7		6.7
Primary surplus		3.1		2.5		2.5		3.0		3.1		3.2		3.4
Public debt		104.0		103.9		103.2		101.9		100.4		98.4		96.5
State sector borrowing requirements		-1.9		-3.0		-1.8		-1.3		-1.0		-0.7		-0.7
Public sector borrowing requirements		-2.3		-2.8		-2.1		-1.7		-1.4		-1.0		-1.0
POLICY SCENARIO
Net borrowing		-1.9		-2.5		-2.0		-1.0		-0.1		0.0		0.1
Interest		5.0		5.0		5.1		5.0		5.0		4.9		4.9
Current balance net of interest		7.3		6.2		6.7		7.4		7.8		7.8		7.8
Primary surplus		3.1		2.6		3.1		4.0		4.9		4.9		5.0
Public debt		104.0		103.9		102.7		100.4		97.2		93.6		90.1
State sector borrowing requirements		-1.9		-2.9		-1.3		-0.4		0.7		1.0		1.1
Public sector borrowing requirements		-2.3		-2.8		-1.6		-0.8		0.4		0.7		0.7

     Overall the fiscal package is spread over three years: it accounts for 0.6 per cent of GDP in 2009, it subsequently increases to about 1.1 per cent of GDP in 2010 and finally reaches about 1.9 per cent of GDP in 2011.

     The financial targets set in previous Budgets have been basically confirmed: net borrowing is set at 2.5 per cent of GDP in 2008 and at 2.0 per cent in 2009 at 1.0 per cent in 2010 until the budget is broadly balanced in 2011. The primary surplus will increase progressively until it reaches 5.0 per cent in 2013.

     Structural adjustment will be resumed in 2009 ensuring full convergence towards the medium-term objective.

     As far as the State budget is concerned, the net balance to be funded, net of settlements of past debts, will not exceed €16.6 billion in 2009 and €9.1 billion in 2010, while in 2011 there will be a surplus balance of €0.7 billion.

     Overall, the impact of the budget measures on GDP growth is considered to be modest and substantially neutral; their effects are expected to be more significant in the case of specific components that will be offset by changes in other components.

Ministero dell’Economia e delle Finanze

31

2009-2013 Economic and Financial Planning Document

TABLE III.5: CHANGE IN THE GENERAL GOVERNMENT CYCLICALLY ADJUSTED NET BORROWING NET OF ONE-OFF MEASURES

	2007		2008		2009		2010		2011		2012		2013
GDP growth at constant prices		1.5		0.5		0.9		1.2		1.3		1.5		1.5
Growth rate of potential GDP		1.4		1.0		1.2		1.2		1.3		1.1		1.3
Output gap		0.0		-0.6		-0.8		-0.8		-0.8		-0.4		-0.1
Cyclic component of the budget balance		0.0		-0.3		-0.4		-0.4		-0.4		-0.2		-0.1
Net borrowing		-1.9		-2.5		-2.0		-1.0		-0.1		0.0		0.1
Cyclically-adjusted net borrowing		-1.9		-2.2		-1.6		-0.6		0.3		0.2		0.2
Cyclically adjusted primary surplus		3.1		2.8		3.4		4.4		5.3		5.2		5.1
One-off measures		-0.2		0.1		0.0		0.0		0.0		0.1		0.1
Budget balance net of one-off measures		-1.7		-2.6		-2.0		-1.0		-0.1		0.0		0.1
Net borrowing adjusted for the cycle and net of one-off measures		-1.7		-2.3		-1.7		-0.6		0.3		0.2		0.2
Primary surplus adjusted for the cycle and net of one-off measures		3.3		2.7		3.4		4.4		5.2		5.1		5.0
Change in the budget balance net of one-off measures		-1.3		0.9		-0.5		-1.0		-0.9		-0.1		-0.1
Change in the budget balance adjusted for the cycle and net of one-off measures		-1.2		0.6		-0.6		-1.0		-0.9		0.1		0.0

Note: The potential output gap in the 2011-2012 period is due to the strong downward trend in the working age population which reduces the labour contribution to GDP growth as of 2011. The decline in the working-age population is inferred from population forecasts made available by ISTAT when the 2009-2013 DPEF was submitted.

PRIVATISATION

In 2006 Italy’s privatization process virtually came to a halt due to a number of reasons.

First of all the Ministry of the Economy’s stake in listed state-owned companies (ENI, ENEL and Finmeccanica) is now almost 30 per cent. Any further sale of stakes — which would undoubtedly have the advantage of raising a substantial amount of cash in a relatively short time — would expose the country to the risk of losing control over companies ranking among the top international players in strategic sectors such as energy, gas, the high-tech military sector.

Secondly, after a spate of divestments of partly State-owned companies in the 1990s and in the early years of the new millennium, the Government portfolio — even though still substantial — is characterised by the presence of firms — which owing to their size, type of business, regulatory peculiarities or complex financial and economic problems— are deemed unsuitable for privatisation — even in the medium-term. Other companies that are potentially attractive for the market are still undergoing restructuring or in any case need complex rationalisation processes or a reliable and stable regulatory framework before they may be privatised.

Even though the situation is more complex, the Ministry of the Economy and Finance intends to start a new privatisation process, if possible using any opportunity which the market or the context may offer to privatise State assets, so as to put the State debt on a permanent virtuous downward track.

The Government is first and foremost committed to completing Alitalia’s privatisation. The latest decrees have been adopted to this end and Alitalia’s privatisation will hopefully be completed within the next few months.

Again as to companies directly controlled by the State, in the next few years when certain conditions are in place (overcoming possible regulatory constraints, implementation of industrial restructuring or repositioning plans, identification of an appropriate regulatory framework) also companies such as Poste Italiane and Istituto Poligrafico e Zecca dello Stato — IPZS S.p.A. might be privatised. In addition, especially once the analysis (which is being carried out with the help of a

Ministero dell’Economia e delle Finanze

32

2009-2013 Economic and Financial Planning Document

leading financial institution) of SACE’s market position is complete, it is also possible that a process may be started leading to a strong direct or indirect presence of private entities in SACE.

As regards companies indirectly controlled by the State, the Government confirms its will to soon start procedures leading to the partial or total sale of its stakes in two major State-owned enterprises: Fincantieri and Tirrenia.

As to Fincantieri, the Government intends to proceed to the sale of a stake of Fincantieri‘s capital to enable the company — also by means of a capital increase — to find the necessary resources to finance the urgent and necessary industrial initiatives needed for a strategic strengthening and modernisation of its yards.

As to Tirrenia, the Government’s intention — in line with what was envisaged in the 2007 Budget¹², is to start privatising it as soon as possible

Once the analysis which is being carried out by a leading financial institution is complete and in compliance with the provisions of Article 1 of Law No. 481 of 1995 for the privatisation of companies providing public services, the Government will make arrangements for the sale of Tirrenia submitting them to Parliament so as to enable the relevant Committees to express their opinion as envisaged by law.

III.3 PUBLIC DEBT

     Debt management in 2008

     The impact of the crisis which has rocked international financial markets since the summer of 2007 is still being felt this year. International turbulence once again affected the Euro-Area government securities market and came back with a vengeance in March. The situation is still highly unstable.

     The consequences of the current crisis on the government securities market are mainly attributable to the following phenomena: i) due to the well-know budget problems resulting from the credit and monetary market crisis, banks find it more difficult to buy debt instruments when they are issued and then sell them to national and international investors; ii) lower liquidity in secondary securities markets is caused by the banking crisis but is at the same time a harbinger of further difficulties for banks due to the higher absorption of venture capital that it entails; iii) a financial environment that tends to favour a structurally higher volatility of return spreads between Italian and foreign securities.

     Despite the complex market situation, the Treasury continued to ensure funding of the State Sector Borrowing Requirements also by offering more flexible instruments. In addition to the issuance of short-term instrument to cover temporary cash shortages , the approach to the issuance of medium and long-term securities has been adjusted to market absorption.

¹² Art. 1 paragraphs 998 and 999.

Ministero dell’Economia e delle Finanze

33

2009-2013 Economic and Financial Planning Document

     For example, the new 15-year BTP has been launched for the first time in April, when the Treasury had greater flexibility to sell instruments that were no longer being issued, with the additional advantage of steadying the secondary market, while at the same time lowering costs for the issuer. At the same time the Treasury resorted somewhat more than had been expected to inflation-linked securities — also thanks to the launch of the new 10-year security — as demand for these assets was more stable and less exposed to the volatility that has affected nominal instruments.

     By pursuing this strategy, developed in close and continuous cooperation with market players, the Treasury has succeeded in keeping the average cost of financing below the 2007 average and exposure to interest and refinancing risk under control.

     For the remaining months of the current year the strategy will be pursued on the basis of market conditions so as to ensure regular issuance, the liquidity of instruments provided from time to time and a secondary market with significant efficiency standards. In so doing, the Treasury aims at consolidating the presence of Italian debt instruments in international portfolios, which at the end of 2007 accounted for 51 per cent of total outstanding Government securities¹³.

     Interest

     Against this backdrop forecasts of debt servicing in the next few years have been based on a more comprehensive analysis of the expected performance of the return of Government securities which takes into account the changes that have occurred in the curve shape. Indeed, the extreme volatility now present in bond markets required monitoring of market performance at various points in time of the current phase given the high uncertainty about the future monetary-policy decisions of the European Central

¹³ Bank of Italy data. Annex to the 2008 Annual Report.

Ministero dell’Economia e delle Finanze

34

2009-2013 Economic and Financial Planning Document

Bank in a macroeconomic situation characterised by a notable increase in the Euro-Area inflation rate. To this end a ‘synthetic scenario’ has been developed that takes into account the different trends in the yield curve at the end of May, both in terms of absolute return rates and steepness and curvature.

     Compared to the official forecasts in the Combined Report on the Economy and Public Finance (RUEF), this scenario predicts increasing rates on all maturities and a reduced steepness.

     The results of the scenario based on unchanged legislation, if compared to the RUEF estimates show — as could have been expected — a moderate increase in interest for the year 2008 on an accrual basis according to SEC95 standards, even though interest remains unchanged as a proportion of GDP (5.0 per cent). A more substantial increase in the order of 0.2 — 0.3 percentage points of GDP is forecast in later years (see Table III.2) and is mainly due to higher interest rates expected at issuance, higher inflation (which directly affects the cost of the issuance of real securities) and the larger number of issuances needed to pay for higher debt servicing.

     The improvements in the primary surplus brought about by the Government’s measures will have a positive impact on debt servicing in future years, even though they only partially offset the impact of interest rates that are now increasing compared to when the Combined Report on the Economy and Public Finance (RUEF) was drawn up.

     Trend in the debt-to-GDP ratio

     In the scenario based on unchanged legislation the debt-to-GDP ratio is expected to progressively decrease up until 2013, when it is expected to be 96.5% of GDP. It is expected to go down more slowly in time compared to the forecast in the Combined Report on the Economy and Finance (RUEF) mainly because of two factors: a

Ministero dell’Economia e delle Finanze

35

2009-2013 Economic and Financial Planning Document

slowdown in economic growth compared to the March estimates on the one hand, which affects the ratio by reducing its denominator, and a more marked increase in the Public Sector Borrowing Requirements on the other. The latter is largely due to the increase in cash interest, mainly resulting from rising interest rates.

     Compared to forecasts in the Combined Report on the Economy and Public Finance (RUEF), in the scenario based on unchanged legislation the debt-to-GDP ratio is expected to decrease to below 100 per cent in 2012 instead of 2010.

     The DPEF scenario predicts that the debt-to-GDP ratio will decrease below the 100 per cent threshold (97.2 per cent in 2011) a year earlier and extends forecasts to include the end of the five-year period considered, with a debt-to-GDP ratio which is expected to stand at 90.1 per cent in 2013. The reasons for this rapid progress are due to the Government’s policy measures becoming fully operational, which will result in increasing cash surpluses as of 2011.

PENSIONS

Following is a description of the medium- and long-term trend in pension expenditure as a proportion of GDP resulting from the implementation of provisions in Article 1, paragraph 5 of Law No. 335 of 1995¹⁴.

The forecast at unchanged legislation¹⁵ implies the impact of the revision of transformation coefficients¹⁶. After a period of overall stability between 2010 and 2023, as a result of regulations increasing the minimum requirements envisaged in Law No. 243/2004, as modified by Law No. 247/2007, and the introduction of a pro-rata system to calculate contributions, pension expenditure as a proportion of GDP starts growing again owing to a population ageing, whose financial effects are partly mitigated by stricter requirements for early retirement envisaged by the above-mentioned laws and also applying to the mixed and defined-contribution systems, not just the pay-as-you go system. The curve reaches a peak of 15.3 per cent around 2038 and after decreasing for some time reaches 13.9 per cent in 2050. Towards the end of the forecast period the ratio improves mainly as a result of the shift from a mixed (pay-as-you-go and defined-contribution)

14	The forecast is based on birth-rate, mortality and migration flows assumptions underlying the baseline scenario worked out by ISTAT on 2005 data. The new population forecast being worked out by ISTAT on the basis of updated demographic parameters, with special reference to the estimate of migratory flows, is not available yet. As to the macroeconomic scenario, productivity per employee stands at 1.7 per cent a year on average (1.8 per cent starting from 2026 and gradually decreasing towards that level in the preceding years) whereas the labour market assumptions imply an increase to about 68 per cent in the employment rate for the 15-64 age group in 2050. Endogenous GDP growth as a result of the macroeconomic and demographic assumptions used stands at around 1.4-1.5 per cent a year on average over the whole forecast period. In order to capture the long-term trends in factors affecting the structural balance of the pension system, for the 2009-2013 period the baseline scenario, in line with methodological choices made in previous forecasts, assumes an annual average GDP growth rate of 1.4 per cent, basically consistent with the annual average rate of change of the past 15-20 years.
15	The forecast does not imply the impact of measures relating to the pension system envisaged in the Decree Law adopted by the Council of Ministers on 18 June 2008 (Decree Law on ‘Urgent provisions for economic development, simplification, competitiveness, the stabilisation of public finance and tax equalisation’).
16	Envisaged in Art. 1, paragraph .11 of Law No. 335/95, as later amended and supplemented by Art. 1, paragraphs 14 and 15 of Law No. 247/2007.

Ministero dell’Economia e delle Finanze

36

2009-2013 Economic and Financial Planning Document

calculation system to an entirely defined-contribution system and the gradual decline in the number of pensions paid to baby-boomers because of mortality.

Public expenditure on pension benefits as % of GDP

Note: The forecast does not imply the impact of measures adopted with the Decree Law of the Council of Ministers of 18 June 2008 on the pension system (Decree Law on ‘Urgent provisions for economic development, simplification, competitiveness, the stabilisation of public finance and tax equalisation’).

Ministero dell’Economia e delle Finanze

37

EX-99.(D)

Exhibit (d)

DESCRIPTION OF
THE REPUBLIC OF ITALY

December 31, 2007

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, 2007. 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
2008 Developments	18
Gross Domestic Product	19
Principal Sectors of the Economy	23
Employment and Labor	33
Prices and Wages	35
Monetary System	37
Monetary Policy	37
Exchange Rate Policy	41
Banking Regulation	41
Measures Adopted to Address the 2008 Banking Crisis	48
Credit Allocation	50
Exchange Controls	50
The External Sector of the Economy	52
Foreign Trade	52
Geographic Distribution of Trade	54
Balance of Payments	56
Reserves and Exchange Rates	61

1

Public Finance	63
The Budget Process	63
European Economic and Monetary Union	63
Accounting Methodology	66
Measures of Fiscal Balance	66
The Council Recommendation to Italy Relating to its Excessive Government Deficit	68
The 2007 Stability and Growth Program	68
The 2009-2013 Program Document	70
Revenues and Expenditures	73
Expenditures	75
Revenues	78
Government Enterprises	80
Privatization Program	81
Government Real Estate Disposal Program	83
Public Debt	84
Summary of External Debt	89
Debt Service	90
Debt Record	91
Tables and Supplementary Information	92

                    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;

3

• all rates of growth or percentage changes in financial data in constant prices adjusted for inflation; and

• 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, 2008. 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 2009-2013 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 with regard to the relevant tables included in this document),

4

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 differ from and are not comparable to data published in earlier documents filed by Italy with the SEC prior to March 12, 2007. 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.

                    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 September 2008, the economy of Italy, as measured by 2007 GDP, is the seventh largest in the world. In 2007, Italy’s annual real GDP growth in Italy was 1.5 per cent, compared to 1.8 per cent in 2006 and 0.6 per cent in 2005. 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 infrastructure, the incomplete liberalization process and insufficient flexibility of national markets. The slower growth rate registered in 2007 was primarily due to a slowdown in the growth of the world economy and higher inflation resulting mainly from a rise in the price of food products and energy. Conversely, the higher growth rate recorded in 2006 was principally due to strong world demand and the cyclical upturn in the euro area in that 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.

                    The European Economic and Monetary Union: Italy is a signatory of the Treaty on 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. The number of member countries increased to 12 on January 1, 2001, when Greece joined the EMU. Slovenia became the thirteenth member on January 1, 2007, followed one year later by Cyprus and Malta and by Slovakia on January 1, 2009. 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, reaching a high of €1 for $1.599 on July 15, 2008. The dollar appreciated rapidly against the euro after that date and on January 12, 2009, the ECB exchange rate was €1 for $1.3394. 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’s balance of payments 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 2003-2007 and the rise in price of oil and gas.

6

                    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 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. In 2007, however, Italy’s budget deficit decreased to 1.6 per cent of GDP. Italy’s public debt as a percentage of GDP rose from 103.8 to 105.9 per cent and 106.9 per cent in 2005 and 2006, respectively, due to Italy’s decreasing primary surplus, its low GDP growth and certain non-recurring charges in connection with failed development projects relating to Italy’s railways. Italy’s public debt as a percentage of GDP decreased to 104.1 per cent in 2007 due to an increase in Italy’s primary surplus and GDP and a reduction of the Treasury funds deposited with the Bank of Italy.

                    Privatization Activities: Since 1992, 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 €96.2 billion, which, added to the proceeds generated by the privatization program carried out by the IRI-Fintecna group from July 1, 1992 to December 31, 2007, reaches the total amount of approximately €153.7 billion. 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. 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 that event, Italy’s President, Mr. Giorgio Napolitano, dissolved the Parliament on February 6, 2008. Following the general Parliamentary elections held on April 13 and 14, 2008, the center-right coalition led by Mr. Silvio Berlusconi and formed by Il Popolo delle Libertà, Lega Nord and the Movimento per l’Autonomia obtained a majority in both the Chamber of Deputies and the Senate. As a result, Mr. Berlusconi was appointed to form a new Government, which was sworn in on May 8, 2008.

                    2008 Developments: Based on ISTAT data, Italy’s real GDP growth rate was 0.5 per cent for the first quarter of 2008, compared to the last quarter of 2007, and 0.3 per cent compared to the first quarter of 2007. Italy’s real GDP decreased by 0.3 per cent in the second quarter of 2008 compared to the previous quarter and by 0.1 per cent compared to the same quarter of 2007. In the third quarter of 2008, Italy’s real GDP further decreased by 0.5 per cent

7

compared to the second quarter and by 0.9 per cent compared to the same quarter of 2007. After registering two consecutive quarters of contractions in GDP, therefore, Italy fell into technical recession.

                    Italy’s seasonally adjusted average unemployment rate increased to 6.8 per cent in the second quarter of 2008, from 6.6 per cent recorded during the last quarter of 2007. Consumer prices, as measured by the harmonized EU consumer price index, increased at an annual rate of 3.6 per cent during the twelve months ended October 31, 2008, compared to a 2.8 per cent increase during the twelve months ended December 31, 2007.

                     The following table shows Italy’s key public finance ratio projections for 2008 published in the 2009-2013 Program Document, which was finalized by the government in June 2008 and updated in September 2008. The following projections are presented as percentages of GDP.

Net borrowing	2.5
Primary balance	2.6
Tax burden	42.8
Current revenues	46.3
Total revenues	46.7
Current expenditures	45.2
Total expenditures (net of interest)	44.1
Total expenditures	49.2

Source: Update to the 2009-2013 Program Document.

                     The Update to the 2009-2013 Program Document for the year ended December 31, 2008 projected nominal GDP and debt as a percentage of GDP for 2008 to be €1,594,560 million and 103.7 per cent, respectively.

                     Measures Adopted to Address the 2008 Banking Crisis: Concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. in the second half of 2007 and the first half of 2008, resulted in a severe and sudden deterioration of the global economy and the capital markets and a banking liquidity crisis in the third and fourth quarter of 2008. In order to combat the global financial crisis, international organizations and governments of major countries, including the Italian government enacted legislation providing for measures aimed at ensuring the stability of the banking system. See “Monetary System — Measures Adopted to Address the 2008 Banking Crisis.”

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, 2007, Italy’s resident population was estimated to be approximately 59.1 million, accounting for approximately 11.9 per cent of the European Union, or EU, population, compared to 58.8 million as at January 1, 2006. 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, 2007, 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 26.8 million and 11.5 million, respectively. The breakdown of the resident population by age group, as of January 1, 2007, was as follows:

•     under 20	19.0	%
•     20 to 39	27.3	%
•     40 to 59	28.2	%
•     60 and over	25.5	%

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 196.2 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 2.7 million in 2007. The next largest cities are Milan, with a population of 1.3 million, Naples, with 0.9 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, 2007 there were approximately 2.9 million foreigners holding permits to live in

9

Italy, a 10 per cent increase from January 1, 2006. 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,

10

which consist of magistrates who either act as judges in criminal trials or are responsible for investigating and prosecuting criminal cases.

                    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 center-leftist forces and numerous smaller political parties including center-left and 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, a separate political party allied with Il Popolo delle Libertà, is led by Mr. Umberto Bossi.

                    Elections. Except for a brief period, since Italy became a democratic republic in 1946 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, the electorate votes for lists of candidates presented by the multiparty coalitions and individual parties. Seats in the Chamber of Deputies are awarded based on the number of votes obtained by each list, provided that multiparty coalitions and individual 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” 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.

                    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, as to all areas that are neither subject to exclusive competence of Parliament nor in a regime of shared responsibility between Parliament and the regions, exclusive regional competence is conferred to a region upon its request, subject to Parliamentary approval. In addition, in accordance with this devolution

11

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 annulling legislation to which it relates. Referendum cannot be held on matters relating to taxation, the State budget, the ratification of international treaties or 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, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. The EU had a population of approximately 497.5 million as of January 1, 2008.

                    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.

                    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

12

                    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 a 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;

• 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 per cent 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.

13

• 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

                    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

14

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 September 2008, the economy of Italy, as measured by its 2007 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 2007.

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		1.6		2.8		2.6

(1)	The euro area represents the countries participating in the EMU.
Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

                    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 in 1998, the increasing mobility of capital, the reduction of barriers to international competition and the reduction of subsidies for national industries.

16

                    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 were 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. In 2007, the Italian economy grew by 1.5 per cent, slower than the average in the rest of the euro area as a result of Italy’s inability to address the issues that limited GDP growth throughout the previous decade. Services accounted for almost all of the expansion, while industrial activity contracted from the beginning of the year, contrary to the trend in the other main European countries.

                    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 before 2003, 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. Italy’s net borrowing as a percentage of GDP decreased from 4.3 per cent in 2005 to 3.4 per cent in 2006 and 1.6 per cent in 2007. The result for 2007 was mainly attributable to the increase of 1.2 percentage points in the ratio of tax and social security contribution receipts to GDP, bringing this ratio to a level near its 1997 peak and more than 2 points above the average for the other euro-area countries. See also “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 in 2006, from 105.9 per cent in 2005 to 106.9 per cent. The increase in Italy’s debt-to-GDP ratio reflected Italy’s decreasing primary balance and the absence of extraordinary measures (for example,

17

privatizations and securitization of real estate assets) used to reduce public debt in 2005 and 2006. In 2007 the ratio of public debt to GDP declined by 2.8 percentage points to 104.1 per cent. The decrease reflected the growth in Italy’s primary surplus and a reduction of the Treasury funds deposited with the Bank of Italy.

                    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 28.7 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 1998 to 2007 and 19.4 in the period from 2004 to 2007. 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 significantly higher unemployment in the Mezzogiorno. The differential between unemployment rates in the Mezzogiorno and northern Italy began to narrow during this decade, in part due to an increase in migration from the south to northern and central Italy. In 2007, the unemployment rate in the south fell by 1.2 points to 11.0 per cent and the unemployment rate in northern and central Italy fell by 0.4 points to 4.0 per cent.

                    While Italy’s employment rate grew steadily from 55.9 per cent in 2001 to 58.7 per cent in 2007, it remained well below the average employment rate of countries in the euro area, which grew from 62.3 per cent in 2001 to 65.6 per cent in 2007. The number of employed persons in Italy increased by 1.0 per cent in 2007. 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 1.8 per cent in 2007. See “— Prices and Wages.”

2008 Developments

                    Based on ISTAT data, Italy’s real GDP growth rate was 0.5 per cent for the first quarter of 2008 compared to the last quarter of 2007 and 0.3 per cent compared to the first quarter of 2007. Italy’s real GDP decreased by 0.3 per cent in the second quarter of 2008 compared to the previous quarter and by 0.1 per cent compared to the same quarter of 2007. In the third quarter of 2008, Italy’s real GDP further decreased by 0.5 per cent compared to the second quarter and by 0.9 per cent compared to the same quarter of 2007.

                    Italy’s seasonally adjusted average unemployment rate increased to 6.8 per cent in the second quarter of 2008, from 6.6 per cent recorded during the last quarter of 2007. Consumer prices, as measured by the harmonized EU consumer price index, increased at an annual rate of

18

3.6 per cent during the twelve months ended October 31, 2008, compared to a 2.8 per cent increase during the twelve months ended December 31, 2007.

                     The following table shows Italy’s key public finance ratio projections for 2008 published in the 2009-2013 Program Document, which was finalized by the government in June 2008 and updated in September 2008. The following projections are presented as percentages of GDP.

Net borrowing	2.5
Primary balance	2.6
Tax burden	42.8
Current revenues	46.3
Total revenues	46.7
Current expenditures	45.2
Total expenditures (net of interest)	44.1
Total expenditures	49.2

Source: Update to the 2009-2013 Program Document.

                     The Update to the 2009-2013 Program Document for the year ended December 31, 2008 projected nominal GDP and debt as a percentage of GDP for 2008 to be €1,594,560 million and 103.7 per cent, respectively.

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 from 2001 to 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. From 2004 to 2006, 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, 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. In 2007, Italy recorded real GDP growth of 1.5 per cent, compared to 1.8 per cent in 2006. In addition to the structural factors described above, which continued to affect the Italian economy, the slowdown recorded in 2007 was due to weak domestic demand reflecting declining consumer confidence and purchasing power with the crisis in the international financial markets and arising inflation in the third and forth quarters of 2007.

19

                    The following tables set forth information relating to nominal (unadjusted for changing prices) and real GDP and expenditures for the periods indicated.

GDP Summary

	2003			2004			2005			2006			2007
Nominal GDP (millions of €)		1,335,354			1,391,530			1,428,375			1,479,981			1,535,540
Real GDP(1) (millions of €)		1,218,014			1,236,671			1,243,525			1,266,420			1,284,868
Real GDP % Change		0.0	%		1.5	%		0.6	%		1.8	%		1.5	%
Population (in thousands)		57,478			57,553			58,135			58,435			58,880
Nominal per capita GDP		23,232			24,178			24,570			25,327			26,079
Real per capita GDP(1)		21,191			21,488			21,390			21,672			21,822

(1)	Constant euro with purchasing power equal to the average for 2000.
Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

Real GDP and Expenditures

	2003		2004		2005		2006		2007
			(euro in millions)
Real GDP		1,218,014		1,236,671		1,243,525		1,266,420		1,284,868
Add: Imports of goods and services		321,096		334,493		341,698		362,021		378,003
of which
Goods		255,850		269,190		274,484		292,758		304,428
Services		65,247		65,302		67,214		69,262		73,575
Total supply of goods and services		1,538,966		1,570,405		1,584,074		1,626,677		1,661,092
Less: Exports of goods and services		314,758		330,083		333,470		354,270		372,081
of which
Goods		254,256		266,275		268,986		285,964		303,751
Services		60,502		63,808		64,484		68,305		68,330
Total goods and services available for domestic expenditure(1)		1,224,208		1,240,322		1,250,604		1,272,407		1,289,011
Domestic expenditure
Private sector consumption		722,846		728,265		735,054		743,108		753,824
Public sector consumption		242,690		248,281		253,047		255,336		258,559
Total domestic consumption		965,536		976,546		988,101		998,444		1,012,383
Gross fixed investment		254,632		260,374		262,165		268,757		271,923
Total domestic expenditures(1)		1,220,168		1,236,920		1,250,266		1,267,201		1,284,306

(1)	Total goods and services available for domestic expenditure do not match total domestic expenditure figures mainly due to the use of chain indices in calculating real growth. See also “Public Finance-Accounting Methodology”.
Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

20

Real GDP and Expenditures

	2003			2004			2005			2006			2007
				(As a percentage of GDP)
Real GDP		100	%		100	%		100	%		100	%		100	%
Add: Imports of goods and services		26.4	%		27	%		27.5	%		28.6	%		29.4	%
Total supply of goods and services		126.4	%		127	%		127.5	%		128.6	%		129.4	%
Less: Exports of goods and services		25.8	%		26.7	%		26.8	%		28	%		29	%
Total goods and services available for domestic expenditure(1)		100.5	%		100.4	%		100.7	%		100.6	%		100.5	%
Domestic expenditure
Private sector consumption		59.3	%		58.9	%		59.1	%		58.7	%		58.7	%
Public sector consumption		19.9	%		20.1	%		20.3	%		20.2	%		20.1	%
Total domestic consumption		79.3	%		79	%		79.5	%		78.8	%		78.8	%
Gross fixed investment		20.9	%		21.1	%		21.1	%		21.2	%		21.2	%
Total domestic expenditure(1)		100.2	%		100	%		100.5	%		100.1	%		100	%

(1)	Total goods and services available for domestic expenditure do not match total domestic expenditure figures mainly due to the use of chain indices in calculating real growth. See also “Public Finance-Accounting Methodology”.
Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

                    Private Sector Consumption. In 2004 and 2005, the growth in private sector consumption, comprising the expenditure by households on goods and services other than new housing, decreased to 0.7 per cent and 0.6 per cent, respectively from 1.0 per cent in 2003. Conversely, in 2006 and 2007 it registered a rise of 1.1 and 1.5 per cent, respectively. By comparison, in the euro area, private sector consumption growth rose from 1.0 per cent to 1.8 per cent from 2003 to 2006 and declined to 1.5 per cent in 2007. The growth of private sector consumption in Italy in 2007 reflected an increase in the demand for services (particularly telecommunication, cultural, financial and insurance services) and durable goods (such as transport machinery and hi-tech equipment). In line with the trend recorded in 2005, consumer confidence in Italy remained low in 2006. By the end of 2007, consumer confidence had fallen further due principally to the increasing prices of commodities and the financial crises that began in the third quarter of 2007. Private sector consumption represented 58.7 per cent of GDP in 2007 and its contribution to real GDP growth during the same period was 0.8 per cent, compared to 0.6 per cent in 2006.

                    Public Sector Consumption. Public sector consumption, or the expenditure on goods and services by the general government, increased by 1.3 per cent in 2007, compared to a 0.9 per cent rise in 2006. Public sector consumption represented 20.6 per cent of GDP in 2007 and its contribution to real GDP growth during the same period was 0.3 per cent, compared to 0.2 per cent in 2006.

                    Gross Fixed Investment. Gross fixed investment in Italy, comprising spending on capital equipment and structures, including purchases of new housing, increased by 1.2 per cent in 2007, compared to an increase of 2.5 per cent in 2006. In the euro area gross fixed investment increased by 4.3 per cent in 2007 and by 5.0 per cent in 2006. Italy’s slowdown in the

21

growth of gross fixed investments was principally due to a gradual decrease in the plant capacity utilization rate, which resulted in lower investment in machinery and equipment (falling by 0.3 per cent, compared with an average annual increase of 3.1 per cent in the previous three years). Beginning in the second half of the year, investment was also affected by the deterioration in expectations for demand and higher uncertainty on the global economic outlook, which led to a steep decline in business confidence. Investment in construction increased by 2.2 per cent; the improvement with respect to 2006 was driven by the non-residential sector, which returned to growth (1.5 per cent) after two years of decline. Growth in residential construction slowed to 3.5 per cent, reflecting the weakening of the real estate cycle. Growth in investment in transport machinery slowed to 0.8 per cent (3.4 per cent in 2006), while investment in non-tangible assets slowed to 2.6 per cent (3.9 per cent in 2006). Gross fixed investment contributed 0.3 per cent to real GDP growth during 2007, compared to a contribution of 0.5 per cent in 2006.

                    Net Exports. In 2007, Italy’s exports of goods and services increased by 5.0 per cent, compared to a 6.2 per cent increase in 2006, while imports of goods and services increased by 4.4 per cent, compared to a 5.9 per cent increase in 2006. As in 2006, net exports contributed 0.1 per cent to real GDP growth in 2007.

                    Regional GDP. In the period between 1995 and 2007, average annual real GDP growth in southern Italy was in line with the growth experienced by northern and central Italy (1.3 per cent and 1.4 per cent respectively). In 2007, northern and central Italy real GDP rose by 1.7 per cent, while southern Italy GDP grew by 0.7 per cent. In 2007, per capita GDP in the Mezzogiorno was equal to 57.5 per cent of that of the rest of Italy.

                    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. Export growth declined in 2002 and 2003 due to a fall in worldwide demand and the continuing loss in competitiveness of Italian products. Following a significant increase in exports in 2004 and a slowdown in 2005, in 2006 exports grew by 6.2 per cent, the best result since the peak of the previous cycle in 2000. The growth was primarily due to an increase in exports to Germany, China and Russia. In 2007, exports grew by 5.0 per cent. The growth was primarily due to an increase in exports to Spain, emerging EU countries and countries producing oil.

                    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;

• foster market liberalization and reduce administrative bureaucratic charges and procedures;

22

• 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 Infrastructures Annex to the 2009-2013 Program Document, Italy confirmed its firm intention to pursue a substantial infrastructure program. The government stated that it was necessary to further implement the 10 Year Plan for Strategic Infrastructures provided for by the Strategic Infrastructure Law by focusing on two priority areas: the development of local transport infrastructure in medium and large cities, such as Turin, Milan, Genova, Bologna, Rome, Naples and Palermo, and the optimization of the freight transport system.

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.

Value Added at Market Prices by Sector

	2003					2004					2005					2006					2007
	€ in		% of			€ in		% of			€ in		% of			€ in		% of			€ in		% of
	millions		Total			millions		Total			millions		Total			millions		Total			millions		Total
Agriculture, fishing and forestry		26,756		2.5	%		30,253		2.7	%		28,911		2.6	%		28,508		2.5	%		28,507		2.5	%
Industry
Manufacturing		213,981		19.7	%		215,533		19.5	%		214,590		19.3	%		217,169		19.2	%		219,368		19.1	%
Construction		58,828		5.4	%		59,722		5.4	%		61,098		5.5	%		62,011		5.5	%		63,022		5.5	%
Extractive industries and production and distribution of energy, gas, steam and water		27,309		2.5	%		28,047		2.5	%		28,117		2.5	%		28,364		2.5	%		28,251		2.5	%
Total industry		300,118		27.6	%		303,302		27.4	%		303,805		27.3	%		307,544		27.1	%		310,641		27	%
Market Services
Commerce and repairs		132,304		12.2	%		135,149		12.2	%		135,067		12.1	%		136,708		12.1	%		138,582		12	%
Hotels and restaurants		38,770		3.6	%		39,151		3.5	%		39,325		3.5	%		40,653		3.6	%		41,223		3.6	%
Transport and communications		86,888		8.0	%		88,124		8.0	%		92,066		8.3	%		93,048		8.2	%		96,156		8.4	%
Financial services		48,614		4.5	%		50,378		4.6	%		53,537		4.8	%		56,576		5.0	%		60,298		5.2	%
IT, research and professional activity		111,467		10.3	%		111,880		10.1	%		111,632		10	%		115,996		10.2	%		117,173		10.2	%

23

	2003					2004					2005					2006					2007
	€ in		% of			€ in		% of			€ in		% of			€ in		% of			€ in		% of
	millions		Total			millions		Total			millions		Total			millions		Total			millions		Total
Real estate leases		121,234		11.2	%		121,096		11	%		121,064		10.9	%		123,147		10.9	%		125,155		10.9	%
Total market services		539,277		49.6	%		545,778		49.4	%		552,691		49.7	%		566,128		50	%		578,587		50.3	%
Non-market Services
Public administration		66,233		6.1	%		67,546		6.1	%		68,299		6.1	%		68,364		6.0	%		69,039		6.0	%
Education		54,905		5.1	%		54,468		4.9	%		53,744		4.8	%		54,109		4.8	%		54,679		4.8	%
Public health and social services		60,385		5.6	%		62,185		5.6	%		64,185		5.8	%		65,451		5.8	%		66,005		5.7	%
Household services		9,789		0.9	%		10,210		0.9	%		10,593		1.0	%		10,958		1.0	%		11,395		1.0	%
Other services		29,223		2.7	%		31,362		2.8	%		30,483		2.7	%		31,417		2.8	%		31,624		2.7	%
Total non-market services		220,535		20.3	%		225,771		20.4	%		227,304		20.4	%		230,299		20.3	%		232,472		20.2	%
Value added at market prices		1,086,295		100	%		1,105,064		100	%		1,113,008		100	%		1,133,004		100	%		1,150,884		100	%

(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 2008) for the year ended December 31, 2007.

Value Added Growth by Sector

	Real GDP % Growth by Sector
	2003			2004			2005			2006			2007
Agriculture, fishing and forestry		(4.9	)%		13.1	%		(4.4	)%		(1.4	)%		0.0	%
Industry
Manufacturing		(2.7	)%		(0.7	)%		(0.4	)%		1.2	%		1.0	%
Construction		2.3	%		1.5	%		2.3	%		1.5	%		1.6	%
Extractive industries and production and distribution of energy, gas, steam and water		(2.7	)%		2.7	%		0.2	%		0.9	%		(0.4	)%
Total industry		(1.7	)%		1.1	%		0.2	%		1.2	%		1.0	%
Market Services
Commerce and repairs		(2.2	)%		2.2	%		(0.1	)%		1.2	%		1.4	%
Hotels and restaurants		(1.5	)%		1.0	%		0.4	%		3.4	%		1.4	%
Transport and communications		1.5	%		1.4	%		4.5	%		1.1	%		3.3	%
Financial services		(0.6	)%		3.6	%		6.3	%		5.7	%		6.6	%
IT, research and professional activity		1.5	%		0.4	%		(0.2	)%		3.9	%		1.0	%
Leases		2.4	%		(0.1	)%		0.0	%		1.7	%		1,6	%
Total market services		0.4	%		1.2	%		1.3	%		2.4	%		2,2	%
Non-market Services
Public administration		1.6	%		2.0	%		1.1	%		0.1	%		1.0	%
Education		1.2	%		(0.8	)%		(1.3	)%		0.7	%		1.1	%
Public health and social services		1.2	%		3.0	%		3.2	%		2.0	%		0.8	%
Household services		(0.2	)%		4.3	%		3.8	%		3.4	%		4.0	%
Other services		(4.1	)%		7.3	%		(2.8	)%		3.1	%		0.7	%
Total non-market services		0.5	%		2.4	%		0.7	%		1.3	%		0.9	%
Value added at market prices		(0.3	)%		1.7	%		0.7	%		1.8	%		1.6	%

Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

24

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.”

Services

                    In 2007, services represented 70.5 per cent of GDP and 66.6 per cent of total employment. Among the most important service sectors are:

• transport and communications, which accounted for 8.4 per cent of GDP in 2007;

• commerce, hotels and restaurants, which accounted for 15.6 per cent of GDP in 2007;

• information technology, research and professional services, which accounted for 10.2 per cent of GDP in 2007; and

• real estate leases, which accounted for 10.9 per cent of GDP in 2007.

                    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 6,600 kilometer system of motorways, under several concessions granted by ANAS. Toll motorways represent approximately 86.3 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

25

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 2007, Italian railways carried more than 33 billion tons-km of freight (an increase of 5.0 per cent compared to 2006) and recorded 46 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 2007, the total annual capital expenditure in fixed assets by Ferrovie dello Stato totaled €6,864 million, compared to €2,720 million in 1997. In 2007, Ferrovie dello Stato’s revenues amounted to €7,685 million, compared to €6,706 million in 2006, an annual increase of 14.7 per cent. Operating costs decreased from €7,353 million in 2006 to €7,222 in 2007 mainly as a result of the successful implementation of costs saving policies and the decline in stock spending. As a result, Ferrovie dello Stato recorded a consolidated loss of €409 million in 2007, compared to €2,115 million in 2006.

                    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.

26

                    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. For the year 2007, Alitalia recorded losses of approximately €364 million, compared to losses of approximately €605 million for 2006.

                    In August 2008, Alitalia filed for protection under a newly enacted receivership procedure. As this procedure contemplates the possibility to sell, in private transactions, all or part of the company’s assets or productive activities, in September 2008, Alitalia’s extraordinary administrator invited third parties to submit expressions of interest to purchase Alitalia by September 30, 2008. Several offers by Italian and foreign investors were submitted. The administrator accepted the offer to purchase Alitalia’s air transport activities for €1 billion submitted by Compagnia Aerea Italiana S.r.l., a consortium comprising Intesa San Paolo S.p.A. and various Italian entrepreneurs. The sale and purchase agreement was entered into by the parties on December 12, 2008.

                    Passenger air traffic in Italy is concentrated, with approximately 54 per cent of all air traffic in 2007 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 to promote 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 25.1 million fixed lines as of December 31, 2007. As of December 31, 2007, the Italian telecommunications market had an aggregate of 89.8 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-

27

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 47.8 per cent in 2007 while the proportion of PCs connected to the Internet increased from 2.3 per cent in 1997 to 38.8 per cent in 2007.

                    Tourism. Tourism is an important sector of the Italian economy. In 2007, tourism revenues, net of amounts spent by Italians traveling abroad, were approximately €11.2 billion, representing a 6.7 per cent decrease from net tourism revenues in 2006. This reflected an increase in spending by Italian tourists abroad of 8.4 per cent and an increase of 2.5 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 37.2 per cent in 2007, while the percentage allocated to bonds decreased from 30.6 per cent in 1995 to 16.5 per cent in 2007. This shift generated a substantial increase in fee income for financial institutions.

                    Share prices fell in Italy in 2007. The Italian stock exchange recorded a 15 per cent average decrease in share prices compared with the 19 per cent average increase in 2006.

                    Italian household indebtedness as a percentage of disposable income grew from 25 per cent in 1996 to 50 per cent in 2007. However, it remains lower than in the euro area where household indebtedness as a percentage of disposable income was equal to 90 per cent in 2007. Bank lending to Italian residents generally has increased since 1997, accommodating economic expansion, although the growth in bank lending decreased to 10.1 per cent in 2007 from 11.5 per cent in 2006. For a description of the Italian banking system, see “Monetary System — Banking Regulation.”

Manufacturing

                    In 2007, the manufacturing sector represented 19.1 per cent of GDP and 19.6 per cent of total employment. In 2007, manufacturing output increased by 1.0 per cent, compared to a 1.2 per cent increase registered in 2006.

                    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.

28

                    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.

                    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 1.0 per cent in 1995 to 1.1 per cent in 2005. This compares to total R&D spending as a percentage of GDP in 2005 of 2.48 per cent in Germany, 2.13 per cent in France, 1.74 per cent in the EU, 2.62 per cent in the United States and 3.33 per cent in Japan.

          The following table shows industrial production by sector for the years indicated.

Industrial Production by Sector
(Index: 2000 = 100)

	2003		2004		2005		2006		2007
Energy products		108.3		111		115.2		115.2		115.7
Minerals, ferrous and non-ferrous metals		98.5		99.4		99.1		100.8		99.9
Chemicals and pharmaceutical products		98.3		100.8		99.2		102.6		100.9
Metal products		99.6		101.8		99.3		102.2		103
Agricultural and industrial machinery		97		98.1		98.9		103.2		107.1
Precision instruments and machines		83.8		83.8		75.9		80.8		79.4
Electrical material		84.6		83.1		78.6		83.2		77.9
Transport equipment		84.1		84		78.4		82.3		83.9
Food and tobacco		107		106.6		107.5		108		107.7
Textiles and clothing		88.5		84.8		77.5		77.2		79.3
Wood and wood products		98.3		100.8		98.9		99.3		100.7
Paper and paper products		100.9		107.3		106		104		103.9
Rubber and plastic materials		94.9		94.7		90.3		93.2		97.4
Other industrial products		88.4		88.3		85.3		81.1		81.5
Aggregate Index		96.9		97.8		96		97.9		98.4

Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

29

Energy Consumption

                    The demand for energy, measured in terms of million tons of oil equivalent, or MTOE, decreased by 1.1 per cent in 2007 following a 0.6 per cent decrease in 2006. The decrease in energy demand recorded in 2007 was mainly due to a significant decrease in demand for private consumption (4.2 per cent), partially offset by an increase in transportation (0.2 per cent) and the manufacturing industry (0.2 per cent).

                    In 2007, oil represented 47.6 per cent of Italy’s primary energy consumption, with natural gas accounting for 29.0 per cent, renewable energy resources (which includes solar and wind energy, recyclable material, waste material and biogas) accounting for 1.6 per cent, solid combustibles accounting for 3.3 per cent and net purchased electricity accounting for 18.5 per cent.

                    In 2007, Italy imported 93.7 per cent of its oil requirements and 87.0 per cent of its natural gas requirements. The only other significant imported energy source is coal. Despite the referendum held in 1987, which rejected the use of nuclear power in Italy, according to the 2009-2013 Program Document, the government plans to take steps to encourage the production of nuclear energy in order to reduce the country’s energy-related deficit. See “Public Finance — The 2009-2013 Program Document.”

                    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 10.3 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 66.5 per cent of domestic consumption. In 2003, Italy implemented legislation (Law 290/2003) to partially liberalize the natural gas market. Pursuant to that legislation, after July 1, 2007 no single operator could have a stake higher than 20 per cent in the share capital of companies owning and managing natural networks for the transmission of natural gas and electricity. The deadline for complying with this ownership limitation was postponed several times and was finally set at 24 months from the effectiveness of the Italian Prime Minister’s decree that will implement Law 290/2003. That decree has not yet been issued. ENI sold a 40.2 per cent stake in the share capital of

30

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, 2007, ENI held a 50.04 per cent interest in SNAM Rete Gas.

                    In the period between 1999 and 2002, the Italian electricity sector underwent significant change. 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 accordance with the Bersani Decree, during 2000 ENEL established three new generating companies, representing approximately 25 per cent of ENEL’s generation capacity, and in the following years sold each generating company to third party consortia.

                    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. Pursuant to the Bersani Decree ENEL is not permitted 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 March 2005 through an accelerated bookbuilding process. In September 2005, ENEL sold most of its remaining share in Terna (approximately 30 per cent) to Cassa Depositi e Prestiti S.p.A. for €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 retained the main principles and replaced of the EU electricity directive issued in December 1996. 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, established a regulator in all EU member states with well defined functions and requires legal unbundling of network activities from generation and supply. The Regulation established 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.”

31

                    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, a central purchaser of electricity from producers established under the Bersani Decree, 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.

Construction

                    In 2007, construction represented 5.5 per cent of GDP and 7.8 per cent of total employment. In 2006 and 2007, construction activity grew by 1.5 and 1.6 per cent, respectively. Gross fixed investment in construction, which includes investment for building renovations and by the public administration, increased by 2.2 per cent in 2007, compared to 1.5 per cent in 2006 and 0.5 per cent in 2005.

Agriculture, Fishing and Forestry

                    In 2007, 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.

32

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 3.9 per cent from 2002 to 2007. 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, it increased by 1.7 in 2006 and by 1.0 per cent in 2007 as a result of improving economic conditions.

                    The unemployment rate has decreased every year since 1999 reaching 6.1 per cent for the year ended December 31, 2007, compared to 7.1 per cent in the euro area during the same year.

                    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

	2003			2004			2005			2006			2007
	(Average over the year)
Employment in standard labor units (% change on prior year)		0.6	%		0.4	%		0.2	%		1.7	%		1.0	%
Participation rate (%)(1)		62.9			62.5			62.4			62.7			62.5
Unemployment rate (%)(2)		8.4			8			7.7			6.8			6.1

(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 2008) for the year ended December 31, 2007.

                    Employment by sector. Of the total employed workforce in 2007, approximately 66.6 per cent were employed in the service sector, 20.3 per cent were employed in industry (other than construction), 7.8 per cent worked in the construction sector, and 5.3 per cent worked in agriculture.

                    In 2007, average employment in industry, excluding construction, increased by 0.9 per cent. This increase follows a declining trend of employment levels in the industry sector that began in the 1980s, with employment in industry decreasing from 22.9 per cent of the total workforce in 1995 to 20.3 per cent in 2007.

                    In 2007, average employment in agriculture, forestry and fishing decreased by 2.9 per cent. Average employment in agriculture, forestry and fishing has declined constantly since

33

World War II except in 2001, 2004 and 2006. Employment in the agriculture sector declined from 7.2 per cent in 1997 to 5.3 per cent in 2007.

                    The largest contribution to employment growth in Italy in recent years has come from the services sector, which increased from 63.6 per cent of the total workforce in 1997 to 66.6 per cent in 2007. 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: in 2007 it was 11.0 per cent compared to 5.3 per cent in central Italy and 3.5 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 8.6 per cent from 1999 to 2007.

                    While unemployment for women in Italy historically has been substantially higher than for men, it has decreased at a faster rate (from 12.2 per cent in 2001 to 7.9 per cent in 2007) than for men (from 7.1 per cent in 2001 to 4.9 per cent in 2007). 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 45.6 per cent in 1997 to 50.7 per cent in 2007, while the participation rate of men increased from 72.4 per cent in 1997 to 74.4 per cent in 2007.

                    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 2006 the hidden economy was estimated to equal between 15.3 per cent (equal to €227 billion) and 16.9 per cent (equal to €250 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 2009-2013 Program Document is to reduce unemployment to 5.4 per cent by 2013. 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

34

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 245 million hours in 2005. In 2006 and 2007, the number of hours paid through CIG decreased to approximately 230 and 179 million, respectively.

                    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 1999-2001 and 2002-2007, an average of approximately 6.5 and 11.2 million person-hours per year were lost to strikes, respectively. The rising trend recorded in the last 6 years resulted from a phase of heated protests against Government reforms and international policy. After a peak of 33.5 million in 2002, the average number of person-hours lost per year declined to 13.1 million and 4.8 million in 2003 and 2004, respectively. In the past three years, the average number of person-hours lost fluctuated, increasing to 6.3 million in 2005, hitting a record low of 3.1 million in 2006, and increasing again to 6.3 million in 2007.

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 increased by an average of 2.1 per cent for the entire economy in 2007 compared with an increase of 3.0 per cent in 2006 and 3.4 per cent in 2005. During 2007, the growth in the public sector, the service sector and the private sector was 1.0 per cent, 1.9 per cent and 2.4 per cent, respectively. 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 1.9 per cent in 2007, compared to 2.5 per cent in 2006. Labor costs per product unit, or LCPU, increased by 1.4 per cent in 2007 compared to 2.4 per cent in 2006. Labor productivity grew by 0.6 per cent in 2007, compared to 0.1 per cent in 2006.

                    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 2007, the inflation rate in the euro area as measured by the European Union harmonized consumer price index rose to 4.0 per cent, from 2.0 per cent registered in 2006. 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, fell from an average of 2.2 per cent in 2006 to 2.0 per cent in 2007. For the first time in the decade, the

35

increase in the harmonized consumer price index in Italy was lower than that for the euro area, which was at 2.1 per cent in 2007.

                    In the fourth quarter of 2007, inflation in Italy (as in the rest of the area) increased abruptly, rising to a twelve-month rate of 2.6 per cent in December 2007, from 1.6 per cent in August 2007. The increase, due to the acceleration of energy and food prices, continued in the first two quarters of 2008.

                    The following table illustrates trends in prices and wages for the periods indicated.

Prices and Wages

	2003		2004		2005		2006		2007
	(percentages)
Cost of Living Index(1)		2.5		2		1.7		2		1.7
Harmonized Consumer Price Index (1) (2)		2.8		2.3		2.2		2.2		2
Core Inflation Index(3)		2.6		2.3		2		1.8		1.9
Change in per capita wages		3.8		2.9		3.2		2.5		1.9
Change in unit labor costs(4)		3.9		2.3		2.5		2.4		1.4

(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 2008) for the year ended December 31, 2007.

36

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.

37

                    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 subscribed capital of approximately € 5.8 billion and paid up capital of approximately €4.1 billion at January 1, 2007. As of the same date, the Bank of Italy had subscribed and paid up approximately €721.8 million, or 12.5 per cent of the ECB’s subscribed capital.

                    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, 2007 of €245.7 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

38

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 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 from 2006 through the first quarter of 2008. The Governing Council of the ECB determined that given the euro area’s 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 2007. At its meeting in July 2008, the Governing Council decided a further increase in the minimum bid rate on the main refinancing operations by 25 basis points to 4.25 per cent. Interest rates on the marginal lending facility and the deposit facility were also increased by 25 basis points to 5.25% and 3.25% respectively. The increasing downside risks to growth due to the crisis in the banking system and general weakening of the global economy in September 2008, coupled with diminishing inflation, led the Governing Council of the ECB to reduce interest rates in October, November and December 2008. The minimum bid rate on the main refinancing operations, the interest rate on the marginal lending facility and the interest rate on the deposit facility were reduced by a further 50 basis points in each of October and November 2008 and by 75 basis points in December 2008 to 2.50%, 3.00% and 2.00% respectively.

                    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 November 12, 2008.

			Main Refinancing Operations
					Variable rate	Marginal lending
	Deposit Facility				tenders -	facility
Effective Date	% interst rate		Fixed rate tenders		minimum 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

39

			Main Refinancing Operations
					Variable rate		Marginal lending
	Deposit Facility				tenders -		facility
Effective Date	% interst rate		Fixed rate tenders		minimum bid rate		% interest rate
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
2008
July 9		3.25				4.25		5.25
October 8		2.75						4.75
October 9		3.25						4.25
October 15		3.25		3.75				4.25
November 12		2.75		3.25				3.75
December 10		2.00		2.50				3.00

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 over 8.0 per cent in the first half of 2003. 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 growth of total

40

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 13.0 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.

                    M3 grew to 11.5 per cent at through December 2007, and then declined slightly in the early part of 2008. The slowdown in lending to households, particularly mortgages (which grew by 7.1 per cent in the Euro area), was counterbalanced by the further acceleration in lending to non-financial corporations, which increased by 14.5 per cent.

          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

41

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 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.

42

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. 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 November 1, 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. The MiFID resulted in significant changes to the

43

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.

                    Further to the implementation of the MiFID in Italy, the Italian Stock Exchange Commission (Consob) and the Bank of Italy adopted a joint regulation coordinating their respective supervisory competences with regard to the Italian financial markets and the institutions operating in those markets.

                    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

44

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 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 January 1, 2008, the Italian Foreign Exchange Office (Ufficio Italiano Cambi or U.I.C.) was abolished and its functions, resources and competences were transferred to the Bank of Italy.

                    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

45

due (the average reserve obligation). The compulsory reserves earn an annual rate of interest 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

46

consolidated 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 806 banks at December 31, 2007, compared to 841 at December 31, 2000. Banks ultimately controlled by local public authorities accounted for a substantial portion of total bank assets in 2007. In 2007, joint stock banks accounted for approximately 78.0 per cent of total bank assets and for 79.5 per cent of domestic customer deposits. Cooperative banks collectively represented 14.9 per cent of total bank assets and held 18.0 per cent of such deposits. Italian branches of foreign banks accounted for 7.1 per cent of total bank assets and for 2.6 per cent of deposits.

47

                    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. This process has accelerated in recent years, resulting in the formation of Italian banking groups of international standing, such as Intesa Sanpaolo and UniCredit. 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, Banca Intesa merged with Sanpaolo IMI, creating the Intesa Sanpaolo Group. In the same year, Capitalia merged into UniCredit, creating one of the largest financial services organizations in Europe. More recently, Monte Dei Paschi di Siena completed the acquisition of Banca Antonveneta from Banco Santander in May 2008.

                    The European Union single market for financial services has and is expected to continue to affect the Italian banking system. Between 1980 and 2007, the number of foreign banks with branches in Italy grew from 26 to 79. 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 10.4 per cent in 2007, compared to 10.7 per cent in 2006.

                    Bad Debts. Bad debts increased by 1.8 per cent in 2007 to €60,307 million after increasing 30.7 per cent in 2006. As a percentage of total loans, bad debts decreased from 3.2 per cent in 2006 to 3.1 per cent in 2007.

          Measures Adopted to Address the 2008 Banking Crisis

                    Concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. in the second half of 2007 and the first half of 2008, resulted in a severe and sudden deterioration of the global economy and the capital markets and a banking liquidity crisis in the third and fourth quarter of 2008. Declines in the housing market over the past year in the U.S. and elsewhere, with falling home prices and increasing foreclosures and unemployment, have resulted in significant writedowns of asset values by financial institutions, including government sponsored entities, as well as major commercial and investment banks. These writedowns, initially of mortgage backed securities but spreading to credit default swaps and other derivative securities,

48

in turn have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have refused to provide funding to even creditworthy borrowers or to other financial institutions. During 2008, these factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated a global economic slowdown and fears of a possible recession. In order to combat the global financial crisis, international organizations and governments of major countries, including the Italian government, enacted legislation providing for measures aimed at stabilizing the banking system and potentially rescue companies operating in certain other industries.

                    On October 8, 2008, the Government Council of the ECB announced the decision to cut interest rates on main refinancing operations and on marginal lending and deposit facilities. The minimum bid rate on the main refinancing operations, the interest rate on the marginal lending facility and the interest rate on the deposit facility were reduced by 50 basis points in each of October and November 2008 and by 75 basis points in December 2008 to 2.50%, 3.00% and 2.00% respectively. On October 9, 2008, the Italian Government enacted legislation adopting measures to stabilize the banking system and protect private savings, including the following:

• subject to the previous approval of the Bank of Italy, the Ministry of Economy and Finance may support the recapitalization of Italian banks by subscribing and guaranteeing share capital increases, provided that the relevant banks have in place a program to stabilize their financial condition with a minimal duration of at least 36 months;

• the Ministry of Economy and Finance may provide a state guarantee on funds granted by the Bank of Italy to banks, including Italian banks and Italian branches of foreign banks, which require emergency liquidity; and

• in addition to the existing domestic bank deposit guarantee scheme, which is capped at Euro 103,000 for each deposit, the Ministry of Economy may guarantee in full all Italian bank deposits for a period of 36 months.

                    On October 12, 2008, the Heads of State and Government of the euro zone countries, the President of the European Commission, the Eurogroup President and the President of the European Central Bank met in Paris to adopt a concerted action plan of the euro zone countries to face the financial crisis. In particular, the participants to the summit agreed to (i) ensure appropriate liquidity conditions for financial institutions; (ii) facilitate the funding of banks; (iii) provide financial institutions with additional capital resources so as to continue to ensure the proper financing of the economy; (iv) allow for an efficient recapitalization of distressed banks; and (v) ensure sufficient flexibility in the implementation of accounting rules given the exceptional market circumstances.

                    To implement the resolutions taken at the summit in Paris, the Italian Government approved Law Decree no. 157 of October 13, 2008, which provides for additional measures aimed at facilitating medium term funding of banks and ensuring the stability of the banking

49

system. In particular, pursuant to such law decree the Ministry of Economy and Finance may, subject to the previous approval of the Bank of Italy and only until December 31, 2009:

• provide state guarantees, at market price conditions, on Italian banks’ medium term liabilities (up to five years), as long as they relate to financing transactions occurred before the entry into force of such law decree;

• enter into swap agreements in order to exchange financial instruments issued or possessed by Italian banks for government-issued securities; and

• provide a state guarantee, at market price conditions, in favour of Italian entities which obtained securities on a temporary basis in order to conduct refinancing transactions within the Eurosystem.

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 10.1 per cent in 2007, 1.4 percentage points less than in 2006. The slowdown was mainly attributable to the accounting effect of the assignment of loans and to the slower growth in household lending. The slowdown involved mainly short-term lending activity which increased 8.1 per cent in 2007, compared to 10.5 per cent in 2006; medium and long-term lending activity grew by 11.7 per cent in 2007, compared to 11.6 per cent in 2006. By contrast, loan demand from the business sector remained strong during 2007. The growth rate in lending activity to companies increased by 12.9 per cent during this period, compared to 11.8 per cent in 2006. In particular, lending activities in the manufacturing sector increased by 6.6 per cent in 2007, compared to 6.5 per cent in 2006; lending activities in the construction sector increased by 14.4 per cent in 2007, compared to 15.3 per cent in 2006; lending activity in the service sector increased by 10.9 per cent in 2007, compared to 13.7 per cent in 2006. In 2007, lending activity to the consumer and residential sector grew slower than in the preceding year, although it continued to experience high levels of growth at 8.7 per cent, compared to 10.3 per cent in 2006.

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.

50

                    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 2007 equal to 29.5 per cent and 28.8 per cent of real GDP, respectively. Following the trade surplus recorded in 2003, Italy recorded an increasing trade deficit in each of subsequent years through 2006 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 balance decreased from a surplus of €1.6 billion, or 0.1 per cent of GDP, in 2003 to a deficit of €20.5 billion in 2006. In 2007, the trade deficit decreased to €8.8 billion. This reduction was mainly attributable to the significant increase in exports, especially to Spain, the smaller EU economies and the main energy-exporting countries, whose spending capacity was strengthened by high oil revenues.

                    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.”

Foreign Trade

	2003		2004		2005		2006		2007
	(Millions of euro)
Exports (fob)
Agriculture, forestry and fishing		4,144		3,805		4,130		4,408		4,966
Extractive industries		687		776		1,003		1,090		1,312
Manufactured products		254,541		273,846		288,253		319,771		351,862
Food, beverage and tobacco products		14,904		15,689		16,497		17,876		19,227
Textiles, leather products and clothing		38,945		39,053		38,857		41,323		42,658
Wood and wood products		1,326		1,381		1,364		1,506		1,688
Paper, printing and publishing		6,017		6,203		6,399		6,696		7,110
Refined oil products		5,371		6,282		9,772		11,283		13,055
Chemical and pharmaceutical products		26,059		27,442		30,278		32,708		34,752
Rubber and plastic products		9,845		10,698		11,207		12,167		13,219
Non-metallic minerals and mineral products		8,711		9,042		8,874		9,543		9,949
Metals and metal products		21,894		27,387		30,195		37,888		43,882
Mechanic products and machinery		53,326		57,801		59,690		66,963		75,733
Electric and precision machinery		23,761		25,872		27,571		29,942		31,643
Transport equipment		29,169		31,734		32,433		35,579		41,756
Other manufactured products		15,214		15,262		15,118		16,297		17,190
Energy, gas and water production		20		58		63		155		101
Other		5,224		5,929		6,475		6,588		7,341
Total exports		264,615		284,412		299,923		332,013		365,581
Imports (cif)
Agriculture, forestry and fishing		9,292		9,272		9,321		9,946		10,309

52

	2003		2004			2005			2006			2007
	(Millions of euro)
Extractive industries		27,457		31,611			43,693			55,071			54,376
Manufactured products		218,090		235,869			247,228			277,546			299,804
Food, beverage and tobacco products		18,671		19,594			20,569			22,234			23,421
Textiles, leather products and clothing		20,082		20,683			21,849			24,869			25,505
Wood and wood products		3,390		3,507			3,578			4,074			4,324
Paper, printing and publishing		6,271		6,375			6,664			7,036			7,561
Refined oil products		4,735		4,747			5,593			6,875			6,835
Chemical and pharmaceutical products		35,824		38,664			41,142			45,138			48,205
Rubber and plastic products		5,566		6,022			6,353			6,994			7,612
Non-metallic minerals and mineral products		2,881		3,033			3,182			3,407			3,705
Metals and metal products		24,039		29,706			31,938			43,492			50,154
Mechanic products and machinery		19,902		21,180			21,690			23,703			27,458
Electric and precision machinery		33,600		37,397			38,389			40,594			40,381
Transport equipment		38,935		40,303			41,149			43,396			48,322
Other manufactured products		4,193		4,658			5,133			5,734			6,321
Energy, gas and water production		1,796		1,797			2,175			2,178			2,071
Other		6,363		7,084			6,875			7,723			7,816
Total imports		262,997		285,633			309,292			352,465			374,377
Trade balance		1,618		(1,221	)		(9,369	)		(20,452	)		(8,796	)

Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

                    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, metals and metal products, electric and precision machinery and transport equipment.

                    Of all the major European countries, Italy is one of the most heavily dependent on import of energy, importing 85.3 per cent of its energy requirements in 2007 and 86.9 per cent in 2006. This decrease was mainly due to significant exploitation of the reserves of natural gas, which increased during the previous year. However, Italy’s trade balance remains vulnerable to fluctuations in oil prices, given the high proportion of energy imports.

                    According to national accounts data, exports of goods and services increased by 5.0 per cent in real terms in 2007. Although lower than in 2006 (6.2 per cent), the growth rate remained above the average recorded for the five years to 2005, confirming signs of recovery in Italy’s export capacity. During 2007, the increase in exports was driven by the refined petroleum products, transport equipment, and mechanical machinery and equipment sectors.

                     In 2007, the growth in the volume of exports was principally attributable to an increase in exports to EU countries, particularly Germany, France and Spain, Italy’s largest trading partners. During 2007, exports to the twelve EU member states that joined the EU in May 2004 and January 2007 increased by 10.2 per cent and exports to China and Russia increased by 11.0 per cent and 25.6 per cent, respectively.

                     According to the Bank of Italy, during 2007 Italy’s share of the world economy grew at current prices by 0.1 percentage points to 3.7 per cent, as a result of the large increase in

53

exports denominated in euros (10.1 per cent in 2007) and the appreciation of the euro against the US dollar, which further increased their value with respect to total world exports.

                    During 2007, imports increased by 4.4 per cent at constant prices, compared to a 5.9 per cent increase in 2006. This decrease in imports growth rate was mainly driven by a slight decrease in imports of products and services related to extractive industries, compared to the significant increase recorded in 2006. The overall increase in imports was driven by a significant increase in imports of chemical and pharmaceutical products, metals and metal products, transport equipment and mechanic products and machinery. Imports from China, which became Italy’s principal non-EU supplier in 2004, increased by 17.5 per cent in 2007.

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 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)	2003		2004		2005		2006		2007
	(Millions of euro)
Belgium-Luxembourg		7,609		7,754		8,604		10,142		11,148
France		33,033		35,230		36,845		39,121		41,011
Germany		37,233		38,761		39,493		43,936		46,144
Netherlands		6,387		6,701		7,274		7,986		8,439
United Kingdom		18,686		20,153		19,703		20,171		20,789
Ireland		1,391		1,389		1,452		1,729		1,691
Denmark		1,972		2,147		2,626		2,653		2,793
Greece		5,832		6,486		6,030		6,834		7,367
Spain		18,911		20,727		22,466		24,471		26,487
Portugal		3,303		3,419		3,316		3,736		3,404
Austria		6,199		6,988		7,422		8,251		8,471
Finland		1,311		1,438		1,546		1,608		1,943
Sweden		2,680		2,847		3,077		3,643		3,964
Total EU (excluding EU members that joined in 2004 and 2007)		144,547		154,040		159,854		174,281		183,651
EU members that joined in 2004(1)		15,600		16,462		17,796		21,602		24,530
EU members that joined in 2007(2)		4,802		5,345		5,907		7,096		7,088
EU Stores and Provisions		86		100		102		89		134
Total EU		165,034		175,947		183,661		203,069		215,403
Turkey		4,721		5,687		6,167		6,760		7,207
United States		21,970		22,368		23,960		24,541		24,390
Russia		3,847		4,963		6,075		7,625		9,579
OPEC countries		10,201		11,028		12,126		14,273		17,558
Japan		4,333		4,333		4,537		4,483		4,338

54

Exports (fob)	2003		2004		2005		2006		2007
	(Millions of euro)
China		3,850		4,448		4,603		5,686		6,311
Other		50,660		55,639		58,794		65,576		73,847
Total		264,616		284,413		299,923		332,013		358,633

(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)	Comprises Bulgaria and Romania, which joined the EU in January 2007.
Source: ISTAT.

Distribution of Trade (cif-fob) — Imports

Imports (cif)	2003		2004		2005		2006		2007
	(Millions of euro)
Belgium-Luxembourg		12,374		13,880		15,077		16,111		17,540
France		29,951		31,278		30,849		32,739		33,180
Germany		47,521		51,319		53,646		59,104		62,257
Netherlands		15,362		16,862		17,483		19,729		20,175
United Kingdom		12,708		12,294		12,477		12,633		12,154
Ireland		4,082		4,185		4,076		3,757		3,379
Denmark		1,925		2,109		2,242		2,387		2,285
Greece		1,463		1,503		1,550		1,988		1,918
Spain		12,729		13,317		13,158		15,010		15,626
Portugal		1,321		1,333		1,383		1,584		1,478
Austria		7,545		7,803		7,790		9,232		8,667
Finland		1,813		1,552		1,812		2,234		2,040
Sweden		3,542		3,833		3,701		3,968		4,112
Total EU (excluding EU members that joined in 2004 and 2007)		152,336		161,268		165,244		180,476		184,811
EU members that joined in 2004(1)		9,226		11,184		13,300		16,795		19,658
EU members that joined in 2007(2)		4,930		5,124		5,301		5,587		5,186
Total EU		166,493		177,575		183,847		202,859		209,658
Turkey		3,335		3,971		4,364		5,410		5,344
United States		10,272		9,991		10,719		10,710		11,087
Russia		8,230		9,716		11,704		13,592		14,354
OPEC countries		16,792		19,339		27,291		33,943		34,244
Japan		5,281		5,520		4,977		5,441		5,359
China		9,553		11,828		14,135		17,911		21,764
Other		43,042		47,694		52,255		62,599		66,270
Total		262,998		285,634		309,292		352,465		368,080

(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)	Comprises Bulgaria and Romania, which joined the EU in January 2007.
Source: ISTAT.

                    As in the previous year, during 2007 over half of Italian trade was with other European Union members, with approximately 60.8 per cent of Italian exports and 58.8 per cent of imports attributable to trade with European Union partners. However, Italian exports to non-EU countries have grown faster than exports to EU countries, while imports from EU countries have grown faster than imports from non-EU countries. Germany is Italy’s single most

55

important trading partner and in 2007 supplied 17.5 per cent of Italian imports and purchased 13.0 per cent of Italian exports.

                    In each of the past five years, Italy has recorded a positive trade balance with the rest of the EU area (including its current 27 members). Italy’s trade surplus with EU countries was €5.7 billion in 2007, compared to €0.2 billion in 2006. This significant improvement was mainly driven by the increase in the trade surplus with France, Spain, United Kingdom, Bulgaria and Romania, which offset a decrease in trade deficit with Austria and Finland.

                    During 2007, Italy also recorded a decrease in its trade deficit with non-EU countries, which decreased from €20.7 billion in 2006 to €15.2 billion in 2007. This result was characterized by a decrease in the deficits with oil-producers such as the OPEC countries and Russia (from €19.7 billion and €6 billion in 2006 to €16.7 billion and €4.8 billion in 2006, respectively), partially offset by the increase in deficit with China (from €12.2 billion in 2006 to €15.5 billion in 2007) and a decrease in the trade surplus with the United States (from €13.8 billion in 2006 to €13.3 billion in 2007). OPEC countries benefited from higher revenues from oil in 2007, driven by a sharp increase of price of crude oil during 2007 and the first few months of 2008. This increased their ability to import products and resulted in growing exports of mechanical and electrical machinery from Italy towards these countries. This increase in exports to OPEC countries and the fact that the value of imports of crude oil remained unchanged from 2006 resulted in a decrease in the trade deficit with these countries.

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 the balance of payments of Italy for the periods indicated.

Balance of Payments

	2003			2004			2005			2006			2007
	(Millions of euro)
Current Account		(17,352	)		(13,077	)		(23,628	)		(38,506	)		(37,366	)
Goods		9,922			8,854			536			(10,203	)		2,941
Exports		263,599			283,347			299,400			332,758			366,400
Imports		253,677			274,493			298,864			342,961			363,459
Services		(2,362	)		1,179			(541	)		(1,272	)		(6,978	)
Exports		63,420			68,204			71,897			78,736			81,613
Imports		65,781			67,025			72,438			80,008			88,591

56

	2003			2004			2005			2006			2007
	(Millions of euro)
Income		(17,811	)		(14,817	)		(13,624	)		(13,573	)		(19,675	)
Inflows		43,097			42,748			49,516			57,477			63,989
Outflows		60,908			57,564			63,140			71,050			83,664
Transfers		(7,101	)		(8,293	)		(9,998	)		(13,458	)		(13,653	)
EU Institutions		(6,289	)		(6,537	)		(8,143	)		(8,304	)		(7,955	)
Capital Account		2,251			1,700			998			1,890			2,673
Intangible assets		(86	)		(38	)		69			(100	)		(69	)
Transfers		2,337			1,738			929			1,990			2,742
EU Institutions		3,635			2,814			3,397			3,848			3,674
Financial Account		17,319			9,025			20,900			25,399			26,138
Direct investment		6,507			(1,970	)		(17,571	)		(2,255	)		(36,954	)
Abroad		(8,037	)		(15,512	)		(33,633	)		(33,534	)		(66,327	)
In Italy		14,544			13,542			16,062			31,279			29,373
Portfolio investment		3,369			26,449			43,389			44,340			18,105
Assets		(51,068	)		(21,064	)		(87,035	)		(50,132	)		(658	)
Liabilities		54,437			47,513			130,424			94,472			18,763
Financial Derivatives		(4,827	)		1,834			2,326			(417	)		386
Other investment		13,676			(19,550	)		(8,054	)		(16,711	)		46,125
Change in official reserves		(1,406	)		2,262			810			442			(1,524	)
Errors and omissions		(2,218	)		2,352			1,730			11,217			8,555

Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

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 reflects a deterioration in Italy’s visible and invisible trade balance. Italy’s current account deficit declined slightly in 2007 from the peak recorded in 2006, falling to €37.4 billion (2.4 per cent of GDP), from €38.5 billion (2.6 per cent of GDP) in 2006. This was due to an improvement in the visible trade balance, partially offset by the increase in invisible trade and income deficits.

                    Visible Trade. Italy’s visible trade surplus (on a fob-fob basis) has had a steadily declining trend since 2001. However, in 2007, Italy’s visible trade balance registered a surplus of €2.9 billion, compared to a deficit of €10.2 billion in 2006. This was mainly due to the significant increase in the trade surplus for non-energy products, the increase in exports of refined petroleum products and the appreciation of the euro, which partially offset the effect of the rise in oil prices in the second half of 2007. The balance with Middle Eastern OPEC countries improved, benefiting from the growth in exports of mechanical and electrical machinery, while the average value of imports of crude oil from these countries remained substantially unchanged compared with 2006. The deficit with Russia also decreased mainly as a result of the significant growth in exports, particularly clothing and mechanical machinery. By contrast, the deficit with China increased, due to the faster growth in imports than exports, mainly as a result of the trade balance for metals and metal products, mechanic products and machinery and electric and precision machinery.

                    Invisible Trade. In 2007, the balance on services deteriorated recording a deficit of €7 billion, compared to €1.3 billion in 2006. This result was mainly attributable to an increase

57

in the deficit on technical and professional services, trade-related services and operating leasing, which grew from €4.1 billion in 2006 to €7.4 billion in 2007, and the increase in deficit on transport from €5.2 billion in 2006 to €7 billion in 2007. Additionally, the surplus on travel decreased slightly, from €12 billion in 2006 to €11.2 billion in 2007. This decrease was mainly due to an increase in spending of Italians traveling abroad for business purposes. By contrast, the surplus on tourism increased slightly, due to an increase in spending in Italy of tourists from EU countries, particularly Spain and the twelve countries that most recently acceded to the EU. The overall spending of Italians abroad increased by 8.4 per cent in 2007, mainly driven by spending in non-EU countries.

                    Income. Italy’s income deficit increased by €6.1 billion, to €19.7 billion in 2007, from €13.6 billion in 2006. The increase was primarily due to the growth from €13.3 billion to €19.6 billion in the deficit on investment income. This includes portfolio investment, direct investment and other investment. The increase in income from investment income deficit was driven by the increase from €5.6 billion in 2006 to €11.5 billion in 2007 in outflows from portfolio investment income. Net income from direct investment increased from €0.7 billion in 2006 to €2.6 billion in 2007, partly as a result of an increase in income from shares of non-Italian companies.

                    Current Transfers. Italy’s deficit on current account transfers increased slightly to €13.7 billion in 2007 from €13.5 billion in 2006, reflecting an increase in the deficit on private transfers, from €5.5 billion in 2006 to €6.8 billion in 2007, partially offset by the decrease in deficit on public transfers, from €8 billion in 2006 to €6.9 billion in 2007 (partially due to a slight decrease in the deficit recorded with EU Institutions, from €8.3 billion in 2006 to €8 billion in 2007).

Capital Account

                    The surplus on Italy’s capital account, which accounts for transactions in intangible assets, increased from €1.9 billion in 2006 to €2.7 billion in 2007, principally as a result of higher credits from international organizations.

Financial Account and the Net External Position

                    In 2007, the financial account surplus increased to €26.1 billion, from €25.4 billion in 2006, mainly as a result of the increase in other investment, the effect of which was partially offset by an increase in direct investment deficit and a decrease in net inflow on portfolio investments.

                    Italy’s net external debt position deteriorated from a €67.1 billion deficit, or 4.5 per cent of GDP, in 2006 to an €80 billion deficit, or 5.2 per cent of GDP, in 2007. The net inflow in the financial account, which amounted to €26.1 billion, resulted from an increase in external indebtedness to finance Italy’s current account and capital account deficit.

                    Direct Investment. During 2007, net direct investment outflows increased to €37 billion from €2.3 billion in 2006. This result was due to the combined effects of a significant increase of investment abroad by Italian residents, from €33.5 billion in 2006 to €66.3 billion in

58

2007, and a slight decrease of foreign investment in Italy, from €31.3 billion in 2006 to €29.4 billion in 2007.

                    The large increase in direct investment by Italian companies abroad, net of divestments, was mainly due to two transactions: Enel’s acquisition of Endesa and the corporate reorganization of equity interests held by Unicredit. In 2007, direct investment abroad by Italian companies other than banks amounted to €46 billion. The growth was due entirely to the increase recorded by the energy sector (from €3 billion in 2006 to €27.6 billion in 2007), due principally to acquisitions by ENEL and Eni.

                    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 €16.1 billion in 2005, and almost doubled in 2006, reaching €31.2 billion. During 2007, the decrease in foreign direct investment, net of divestments, was mainly driven by the decrease of foreign investment into the Italian banking and insurance sector and food industry, partially offset by higher investment in the transport and communications industries.

                    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.

Direct Investment by Country⁽¹⁾

	2003		2004		2005		2006		2007
	(Millions of euro)
Direct investment abroad
Netherlands		38,716		47,198		55,124		68,175		80,221
Luxembourg		17,383		19,667		21,306		17,178		17,848
United States		14,718		14,063		16,616		19,824		18,741
United Kingdom		16,196		18,022		19,157		18,859		17,817
France		16,716		18,161		20,215		22,447		24,084
Switzerland		8,753		7,877		8,476		8,661		8,769
Germany		10,439		11,756		12,709		13,758		15,131
Spain		7,887		8,118		8,357		9,374		36,334
Brazil		2,775		2,950		4,180		4,285		4,852
Belgium		3,651		3,960		4,188		4,747		5,057
Argentina		1,700		1,625		1,873		1,752		1,570
Sweden		598		646		756		825		785
Other		27,168		28,287		33,696		42,324		47,126
Total		166,700		182,330		206,653		232,209		278,335
Direct Investment in Italy
Netherlands		21,479		29,101		33,947		41,217		49,457
Luxembourg		14,665		16,663		20,364		21,185		21,799
United States		15,547		16,740		18,169		19,602		20,204
United Kingdom		17,791		19,854		21,543		23,120		24,304
France		17,014		18,358		21,715		28,114		30,196
Switzerland		14,767		16,317		17,038		17,796		17,942
Germany		11,024		10,677		12,967		8,549		7,485

59

	2003		2004		2005		2006		2007
	(Millions of euro)
Spain		1,022		1,448		4,083		8,929		12,304
Brazil		63		96		156		243		255
Belgium		2,368		2,488		1,679		1,786		4,935
Argentina		132		192		209		219		225
Sweden		2,371		2,493		2,570		2,682		2,781
Other		13,445		15,056		16,077		18,117		22,416
Total		131,688		149,483		170,517		191,559		214,303

(1)	Does 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 2008) for the year ended December 31, 2007.

                    Portfolio Investment and Financial Derivatives. Portfolio investment declined to a net surplus of €18.5 billion in 2007 from €43.9 billion in 2006. This decrease was mainly driven by a significant reduction in net inflows of investments in debt securities partially, offset by the decrease in net outflows of investments in equity securities and the slight improvement in the financial derivatives position. In particular, net inflows of investment in debt securities decreased from €53.1 billion in 2006 to €18.4 billion in 2007 and net outflows of investments in equity securities decreased from €8.8 billion in 2006 to €0.3 billion in 2007. During 2007, Italy recorded a €0.4 billion net inflow in investments in financial derivatives, compared to a €0.4 billion net outflow recorded in 2006.

                    The decrease in net inflow of investment in debt securities was due to the significant decrease of non-residents’ investment in Italian debt securities, from €84 billion in 2006 to €30.1 billion in 2007, the effect of which was partially offset by the reduction of Italian investment in foreign debt securities, from €30.8 billion in 2006 to €11.7 billion in 2007.

                    The decrease in net outflow of investment in equity securities recorded during 2007, compared to 2006, was attributable to a €11.4 billion decrease in the portfolio of Italian shares held by foreigners in 2007 (compared to the €10.5 billion increase in 2006) and a €11.0 billion decrease in the portfolio of foreign shares held by Italian investors in 2007 (compared to a €19.3 billion increase in 2006).

                    Other Investment and Official Reserves. In 2007, Italy recorded a €46.1 billion surplus on “other investment”, compared to a €16.7 billion deficit in 2006. The large increase in inflows was primarily due to the increase from €44 billion to €83 billion in bank borrowings, which continued to raise substantial funds abroad until the third quarter of 2007. During 2007, official reserves increased by €1.5 billion. The year-end stock rose from €57.5 billion to €64.1 billion. This increase was mainly due to the €6.7 billion revaluation gain on gold reserves, from €38.1 billion in 2006 to €44.8 billion in 2007.

                    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 €8.6 billion in 2007, compared to a positive €11.2 billion in 2006.

60

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		1.1789		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		1.3507		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.

                    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
	2003		2004		2005		2006		2007
Japanese Yen		131.76		133.91		136.89		146.81		162.11
British Pound		0.6934		0.6793		0.6830		0.6819		0.6873
Swiss Franc		1.5236		1.5436		1.5478		1.5768		1.6459
Nowegian Krone		8.0388		8.3666		8.0063		8.0420		8.0075
Australian Dollar		1.7398		1.6928		1.6269		1.6685		1.6366
Czech Koruna		31.892		31.894		29.795		28.266		27.733

(1) Average of the reference rates for the last business day of each month in the period.

Source: European Central Bank.

                    In 2007, official reserves increased to €64.1 billion from €57.5 billion in 2006. In 2007, the annual contribution of the Bank of Italy to the reserves of the European Central Bank decreased slightly from €7.3 billion in 2006 to €7.2 billion in 2007.

61

                    The following table illustrates the official reserves of Italy as of December 31 in each of the years 2003 through 2007.

Official Reserves

	2003		2004		2005		2006		2007
			(Millions of euro)
Gold		26,042		25,348		34,279		38,050		44,793
SDRs(1)		123		106		194		206		225
Total position with IMF		3.289		2,719		1,490		742		499
Net foreign exchange		20,634		17,628		19,944		18,537		18,557
Total reserves		50,088		45,801		55,907		57,535		64,074

(1) Special Drawing Rights.

Source: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

62

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:

63

• 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

64

• 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.

65

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 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 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:

66

• 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 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.

• 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 2003 through 2007.

Selected Public Finance Indicators 2003 through 2007

	2003			2004			2005			2006			2007
				(Millions of euro, except percentages)
General government expenditure(1)		648,473			667,799			693,347			729,822			748,340
General government expenditure, as a percentage of GDP		48.6	%		48.0	%		48.5	%		49.3	%		48.7	%
General government revenues		601,859			619,227			631,548			679,840			724,246
General government revenues, as a percentage of GDP		45.1	%		44.5	%		44.2	%		45.9	%		47.2	%
Net borrowing		46,614			48,572			61,799			49,982			24,094
Net borrowing, as a percentage of GDP		3.5	%		3.5	%		4.3	%		3.4	%		1.6	%
Primary balance		21,736			17,197			4,272			18,610			52,486
Primary balance, as a percentage of GDP		1.6	%		1.2	%		0.3	%		1.3	%		3.4	%
Public debt		1,392,389			1,444,604			1,512,779			1,582,009			1,598,971
Public debt, as a percentage of GDP		104.3	%		103.8	%		105.9	%		106.9	%		104.1	%

(1) Includes revenues from the disposal of state-owned real estate (deducted from capital expenditures) for the year 2003 (€2,700 million), 2004 (€4,500 million), 2005 (€3,200 million), 2006 (€1,700 million) and 2007 (€1,400 million).

Source: ISTAT data published in October 2008.

                    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 in the late 1990s and the first years of this decade. Net borrowing, was higher than the 3 per cent threshold each year from 2003 through 2006. However, it decreased to 1.6 per

67

cent in 2007, compared to 3.4 per cent in 2006. In July 2008 the EU Council terminated the excessive deficit procedure against Italy initiated in 2005. See also “— The Council Recommendation to Italy Relating to its Excessive Government Deficit” below.

                    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 105.9 per cent in 2005 and 106.9 per cent in 2006. In 2007, it decreased to 104.1 per cent as a result of a mix of factors including, among others, an increase in Italy’s primary surplus and a reduction of Treasury funds deposited with the Bank of Italy. 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).

                    Further to a recommendation from the European Commission to the European Council in May 2008 to terminate the excessive deficit procedure against Italy, on June 2, 2008, following an overall assessment of Italy’s economic situation, the Council concluded that Italy’s deficit had been brought below the three per cent of GDP threshold in a credible and sustainable manner, and that, while its public debt-to-GDP ratio remained high and clearly above the reference value, it could be considered to have diminished in line with the correction of the excessive deficit in 2007. Consequently, the Council resolved to terminate the excessive deficit procedure against Italy.

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

68

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.

69

• 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)	build 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 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.

The 2009-2013 Program Document

                    In June 2008 the Government finalized and presented to Parliament its 2009-2013 Program Document, which was updated by the Government in September 2008. The 2009-2013 Program Document contemplates as its main objective achieving long-term economic growth in a stable economic environment.

                     The 2009-2013 Program Document contemplates several structural reforms over the five-year period aimed at relaunching productivity, reducing the public debt and increasing the efficiency of the public administration. In particular, the Italian government is committed to reducing the overall cost of Italy’s public administration and to relaunching the privatization process. Competitiveness and productivity will be increased through investments in innovation, the modernization of Italy’s administrative system and the improvement of Italy’s infrastructure, particularly its telecommunications networks, energy infrastructure, and transport services. Moreover, the Program Document provides for the adoption of tax measures aimed at pursuing tax equalization and reducing tax evasion.

Modernization of Italy’s administration: The Italian government plans to reduce the administrative burden on businesses and citizens by adopting a series of measures, such as repealing obsolete laws and ineffective regulations, reorganizing government entities and offices and simplifying administrative requirements that private companies have to comply with in order to conduct their business. In general, the Program Document aims

70

at reorganizing the public administration sector in order to increase its efficiency, reduce costs and, as a result, promote the competitiveness of the national economy.

Taxation: The government intends to fully implement article 119 of the Italian Constitution, which provides for fiscal federalism. In particular, the government plans to introduce changes that will allow Regions and public local entities to generate tax revenue, that is directly attributable to their relevant geographic areas of competence, and to achieve a greater autonomy in tax management. These measures aim to guarantee the adequacy of taxes to the public services provided at local level as well as more transparency and efficiency of the taxation system.

Infrastructure and innovation (energy sector): To reduce the country’s energy-related deficit, the government plans to take steps to encourage the production of nuclear energy, such as defining the type of plants to be built, providing for specific authorization procedures and setting criteria for the selection of suitable locations. Furthermore, the government intends to support the development of new-generation communication networks, particularly broadband communication infrastructure. In this respect, innovation funds (involving the participation of both public and private investors) may also be granted in order to promote highly innovative business ventures.

Privatizations: Following a substantial interruption of privatizations in 2006, the government plans to begin a new privatization process, to reduce public debt. In particular, the government intends to start procedures leading to the partial or total sale of its stakes in two companies that are indirectly controlled by the State: Fincantieri — Cantieri Navali S.p.A. and Tirrenia di Navigazione S.p.A. In the long term, subject to the implementation of appropriate restructuring plans and a specifically designed regulatory framework, the government contemplates the privatization of companies directly controlled by the State, such as Poste Italiane S.p.A., Istituto Poligrafico e Zecca dello Stato S.p.A. and SACE S.p.A.

                    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.

71

2009-2013 Program Document Objectives

	2008		2009		2010		2011			2012			2013
GDP (% real growth rate)		0.1		0.5		0.9		1.2			1.5			1.5
Unemployment rate (%)		5.9		5.8		5.7		5.6			5.5			5.4
Net borrowing, as a percentage of GDP		2.5		2.1		1.2		0.3			0.1			0.0
Primary balance, as a percentage of GDP		2.6		3.0		3.9		4.6			4.8			4.9
Public debt, as a percentage of GDP		103.7		102.9		101.3		98.4			95.1			91.9
Structural net borrowing (budget surplus), net of one-off measures, as a percentage of GDP		2.5		1.8		0.7		(0.2	)		(0.2	)		(0.2	)
Structural net borrowing (budget surplus), as a percentage of GDP		2.3		1.7		0.6		(0.2	)		(0.2	)		(0.2	)
Structural primary balance, net of one-off measures, as a percentage of GDP		2.6		3.4		4.4		5.2			5.1			5.0
Structural primary balance, as a percentage of GDP		2.8		3.4		4.4		5.2			5.1			5.0

Source: 2009-2013 Program Document and Update to the 2009-2013 Program Document.

                    The Update to the Program Document targets real GDP growth of 0.1 per cent in 2008 and 0.5 per cent in 2009, compared to a growth of 1.5 per cent and 1.6 per cent, respectively, targeted in the 2007-2011 Program Document.

                    The Program Document also targets annual budget deficit reductions with the budget deficit as a percentage of GDP decreasing progressively from 2.5 per cent in 2008 to nil in 2013. The targeted reductions in budget deficits in the 2009-2013 Program Document are less ambitious than those set forth in the 2008-2011 Program Document, while the estimated growth in Italy’s primary surplus is more ambitious than the one contemplated by the 2008-2011 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 October 8, 2008, the IMF forecasts:

• Italy’s falling into recession during 2008 and 2009, with negative real GDP annual growth rate at (0.1) per cent and (0.2) per cent, respectively;

• Italy’s budget deficit as a percentage of GDP increasing to 2.6 per cent in 2008 and 2.9 per cent in 2009; and

• an increase in Italy’s debt-to-GDP ratio to 104.3 in 2008, followed by a further increase to 105.5 per cent in 2009.

72

                    Moreover, on November 3, 2008, the European Commission published its autumn economic forecast, updating the outlook for the period 2008-2010 for the EU, the Euro area and its members. The European Commission’s forecast differs from the forecast set forth in the Program Document and in the above mentioned IMF report. In particular, the European Commission expects that:

• Italy’s GDP will stagnate with no growth during 2008 and 2009;

• Italy’s net borrowing as a percentage of GDP will increase to 2.1 per cent in 2008 and decrease to 1.8 per cent in 2009;

• Italy’s budget deficit as a percentage of GDP will increase to 2.5 per cent in 2008 and to 2.6 per cent in 2009; and

• Italy’s debt-to-GDP ratio will remain stable at 104.1 per cent in 2008 and increase to 104.3 per cent in 2009.

Revenues and Expenditures

                    The following table sets forth general government revenues and expenditures and certain other key public finance measures for the five years ended December 31, 2007. The table does not include revenues from privatizations, 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

	2003(1)			2004(1)			2005			2006			2007
	(euro in millions)
Expenditures
Current expenditures		590,664			612,820			634,970			655,814			684,786
of which
Total consumption		250,382			262,854			275,365			281,881			286,105
of which
Wages and salaries		144,749			149,866			156,542			162,889			164,645
Cost of goods and services		105,633			112,988			118,823			118,992			121,460
Interest expense		68,350			65,769			66,071			68,592			76,580
Social services		224,485			234,701			242,346			252,119			265,284
Other current expenditures		47,447			49,496			51,188			53,222			56,817
of which
Production grants		14,213			14,328			12,910			13,057			14,198
Capital expenditures(2)		57,809			54,979			58,377			74,008			63,554
of which
Investments		32,778			33,426			33,711			34,792			36,134
Investment grants		23,397			20,071			21,988			22,292			24,769
Other capital expenditures		1,634			1,482			2,678			16,924			2,651
Total Expenditures		648,473			667,799			693,347			729,822			748,340
as a percentage of GDP		48.6	%		48.0	%		48.5	%		49.3	%		48.7	%

73

	2003(1)			2004(1)			2005			2006			2007
	(euro in millions)
Revenues
Current revenues		579,569			607,047			625,596			675,366			719,632
of which
Tax revenues		365,515			380,833			392,551			433,489			459,588
of which
Direct taxes		178,745			185,378			189,815			213,308			233,660
Indirect taxes		186,770			195,455			202,736			220,181			225,928
Social security contributions		168,776			175,968			183,445			189,683			204,772
Revenues from capital		8,078			7,611			7,952			8,805			9,321
Other current revenues		37,200			42,635			41,648			43,389			45,951
Capital revenues		22,290			12,180			5,952			4,474			4,614
Total revenues		601,859			619,227			631,548			679,840			724,246
as a percentage of GDP		45.1	%		44.5	%		44.2	%		45.9	%		47.2	%
Current surplus/(deficit)		(11,095	)		(5,773	)		(9,374	)		19,552			34,846
as a percentage of GDP		(0.8	)%		(0.4	)%		(0.7	)%		1.3	%		2.3	%
Net borrowing		46,614			48,572			61,799			49,982			24,094
as a percentage of GDP		3.5	%		3.5	%		4.3	%		3.4	%		1.6	%
Primary balance		21,736			17,197			4,272			18,610			52,486
as a percentage of GDP		1.6	%		1.2	%		0.3	%		1.3	%		3.4	%
GDP (nominal value)		1,335,354			1,391,530			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 2003 (€2,700 million), 2004 (€4,500 million), 2005 (€3,200 million), 2006 (€1,700 million) and 2007 (€1,400 million).

Source: ISTAT data published in October 2008.

                    General government expenditures and revenues have increased in each of the last five years. General government expenditures rose by 2.5 per cent in 2007, compared to 5.3 per cent in 2006. The increase in total expenditures was mainly driven by the increase in social services and interest expense, the effect of which was partially offset by the decrease in capital expenditures. The slower growth in government expenditures during 2007 is mainly attributable to the absence of extraordinary charges such as the capital expenditures recorded in 2006.

                    General government revenue increased by 6.5 per cent in 2007, compared to 7.6 per cent in 2006. The slower growth in government revenue during 2007 is mainly attributable to the lower growth of current revenue, which increased by 6.6 per cent in 2007, compared to 8.0 per cent in 2006, primarily due to lower growth in tax revenue and social securities contributions.

                    Italy recorded a current account surplus of €34.8 billion in 2007 compared to €19.6 billion in 2006 and a deficit of €9.4 billion in 2005, principally due to the faster growth of tax revenue and social securities contributions than expenditures attributable to wage and salaries and costs of goods and services.

74

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.

                    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 reform Italy’s pension system. The reform, which took effect in 2008, raised the retirement age and increased 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, seeks additional pension benefits through contributions to private funds. The reform aims also at substantially delaying end-of-employment payments.

75

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

• In December 2007, Parliament enacted legislation which partially amended Italy’s pension system. In particular, this legislation provides for a gradual increase of minimum contribution periods required to qualify for early retirement pension. Under the new legislation, during the period January 1, 2008 to June 30, 2009, workers are entitled to early retirement pension if they are at least 58 years of age and have had 35 years of contributions. Following this period, the reform introduces a “quota mechanism” to qualify for early retirement pension. In accordance with this mechanism, workers qualify for early retirement if they reach (i) a certain age and (ii) a certain amount calculated by adding their age to the number of years for which they paid social contributions. The following table shows these requirements for workers, other than the self-employed, to qualify for early retirement pension.

Key 2007 Pension Reforms

	Requirement to Qualify for Early Retirement Pension:
	Minimum amount of (i) years of age
	plus (ii) years of contribution		Minimum years of age
From July 1, 2009 to December 31, 2009		95		59
2010		95		59
2011		96		60
2012		96		60
From 2013		97		61

76

                    Expenditures for social services grew by 5.2 per cent in 2007, compared to 4.0 per cent in 2006 and 3.3 per cent in 2005. As a percentage of GDP, social services expenditures increased to 17.3 per cent in 2007 from 17.0 per cent in 2006.

                    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 monitor budget developments. Public health care expenditures grew by 6.7 per cent in 2007, compared to a growth of 6.8 per cent in 2006. The slowdown was principally due to a decrease 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 1.1 per cent in 2007, compared to 4.1 per cent in 2006. The increase recorded in 2007 was principally due to the renegotiation and subsequent renewal of certain collective bargaining agreements, such as the ones relating to employees of public ministries, public schools and social security services (approximately one third of all public employees).

                    Interest payments. Interest payments by the Government grew by €8.5 billion in 2007, after increasing by €3.6 billion in 2006. 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 and 5.0 per cent in 2007. Interest rate payments increased in 2007 by 12.4 per cent compared to 2006 and by 5.5 per cent in 2006 compared to 2005. The average cost of debt, which increased from 4.4 per cent in 2006 to 4.8 per cent in 2007, was driven up by several factors: the rise in interest rates at issuance since the end of 2005; the effects of swaps, which increased outlays by €0.6 billion (compared to the reduction by €0.5 billion recorded in 2006; and a decrease of €0.7 billion in the cost of indirectly measured financial intermediation services, which the national accounts set off against interest payments and impute to intermediate consumption. Excluding the effects of these last two items, the average interest rate on the debt rose by 0.3 points. The average gross rate on BOTs increased from 3.1 per cent in 2006 to 4.1 per cent in 2007. Similarly, the average gross yield on ten-year domestic bonds increased from 3.9 per cent in 2006 to 4.4 per cent in 2007.

                    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

77

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 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 2009-2011.

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 2007, the maximum individual tax rate and the maximum corporate tax rate remained unchanged from 2006, at 43 per cent and 33 per cent, respectively. However, from January 1, 2008 the maximum corporate rates has decreased to 27.5 per cent. Corporations also pay local taxes, and the deductibility of those taxes for income tax purposes has been gradually eliminated over the last few years.

78

                    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.

                    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 tax revenues and social security contributions as a percentage of GDP, increased from 40.5 per cent in 2005, to 42.1 per cent in 2006 and to 43.3 per cent in 2007. This increase was principally due to improvement in the performance of corporate entities during 2006, a reduction in tax evasion and to higher social security contributions.

                    The following table sets forth the composition of tax revenues for each of the five fiscal years ended December 31, 2007.

Composition of Tax Revenues⁽¹⁾

	2003		2004		2005		2006		2007
	(euro in millions)
Direct taxes
Personal income tax		124,238		127,689		132,663		142,062		150,134
Corporate income tax		29,022		28,073		33,699		39,475		50,520
Investment income tax		8,543		7,914		8,882		12,193		13,693
Other(2)		15,796		18,640		4,368		9,655		4,822
Total direct taxes		177,599		182,316		179,612		203,385		219,169
Indirect taxes
VAT		96,177		100,051		105,008		114,166		119,239
Other transaction-based taxes		15,789		18,176		18,054		20,395		17,304
Production taxes		26,087		24,906		26,615		26,690		25,643
Tax on State monopolies		7,770		8,502		8,511		9,349		9,785
National Lottery		6,839		14,658		12,364		10,191		11,800
Others		5,144		3,167		2,144		2,251		2,045
Total indirect taxes		157,806		169,460		172,696		183,042		185,816
Total taxes		335,405		351,776		352,308		386,427		404,985

79

(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: Annual Report of the Bank of Italy (May 2008) for the year ended December 31, 2007.

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		Total
		Ownership as			Assets		Liabilities		Net profit (loss)
		of December			At December 31,				As of December 31,
Company	Industry Sector	31, 2007			2007		2007		2005			2006			2007
	(Millions of euro)
Alitalia Linee Aeree Italiane S.p.A.	Airline		49.9	%		3,594		3,212		(168	)		(627	)		(495	)
Cassa Depositi e Prestiti S.p.A.	Financial Services		70.0	%		196,094		181,738		1,642			1,876			1,374
ENEL S.p.A.	Electricity/Utility		31.3	%(2)		123,748		99,959		4,164			3,238			4,144
ENI S.p.A.	Energy		30.3	%(2)		101,460		58,593		8,788			9,217			10,011
Ferrovie dello Stato S.p.A.	Railroads		100.0	%		89,030		53,014		(472	)		(2,119	)		(418	)
Poste Italiane S.p.A.	Post		100.0	%(2)		79,810		76,737		349			676			844
Finmeccanica S.p.A.	Aerospace/Defense		33.80	%(3)		24,048		18,616		396			1,146			244
RAI Radiotelevisione Italiana S.p.A.	Broadcasting		99.6	%		2,639		1,938		23			(87	)		(5	)

(1)	Percentages refer to the relevant holding company, 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 then representing 10.16 per cent of ENEL, 9.99 per cent of ENI and 35.0 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.
(3)	In November 2008, Finmeccanica S.p.A. increased its share capital by issuing 152,921,430 new ordinary shares. The Ministry of Economy and Finance subscribed for 31,249,998 new ordinary shares, equivalent to 20.43% of the offer and to 5.41% of the share capital of the company, for an aggregate subscription price of approximately 250 million of euro. Following the capital increase and the completion of the transaction, the Ministry of Economy and Finance will hold approximately 30.20% in Finmeccanica S.p.A.’s share capital.

Source: Ministry of Economy and Finance.

                    Finmeccanica is Italy’s largest manufacturer in the aerospace and defense sector. Due to Finmeccanica’s involvement in the defense sector, the Government has maintained a

80

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 1992, 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 July 1992 to December 2005 the Government raised approximately €153.7 billion (including revenues from the IRI-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 27 services and manufacturing companies operating in the Italian market. 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 2009-2013 Program Document. The table below illustrates the principal Italian privatizations since 1994 that generated proceeds of over €400 million.

Principal Privatizations Managed Directly by the Italian Treasury (from 1994 to 2007)

				Gross
				proceeds in		Percentage of
				millions of		capital
Company Name	Industry Sector	Offer Date	Offering Type	euro		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

81

				Gross
				proceeds in		Percentage of
				millions of		capital
Company Name	Industry Sector	Offer Date	Offering Type	euro		disposed of
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	Manufacturing	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.

                    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 2007, the ratio of overall market capitalization of Italian Stock Exchange listed companies to nominal GDP increased from 12 per cent to 48 per cent, having reached a peak of 70 per cent in

82

2000. Total market capitalization decreased from €779 as of December 31, 2006 to €734 billion as of December 31, 2007.

                    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.

Major Privatizations Managed Directly by IRI in the Period 1999-2001

				Gross revenue		Percentage of
				in millions of		capital disposed
Company Name	Industry Sector	Offer Date	Offer Type	euro		of
Autostrade	Infrastructure	Oct 1999	Private Placement		2,536		30.0
	Infrastructure	Dec 1999	Secondary Public		4,185		52.0
			Offer
Aeroporti di Roma	Infrastructure	Nov 1999/June 2000	Private Placements		1,379		54.2
Finmeccanica	Aerosp./Defense	June 2000	Secondary Public		5,505		43.8
			Offer
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.

83

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,
	2003			2004			2005			2006			2007
				(Millions of euro, except percentages)
Debt incurred by the Treasury:
Short term bonds (BOT)(1)		119,645			118,750			117,806			122,780			128,302
Medium and long term bonds (initially incurred or issued in Italy)		952,084			979,506			1,006,589			1,048,726			1,080,785
External bonds (initially incurred or issued outside Italy)(2)		84,147			85,262			87,799			75,200			69,314
Total Treasury Issues		1,155,876			1,183,518			1,212,193			1,246,706			1,278,401
Postal savings(3)		75,939			74,754			70,578			65,622			37,175
Postal accounts(4)		28,038			46,331			75,638			88,289			102,456
Debt incurred by:
FS bonds and other debt(5)		3,408			1,753			1,744			1,284			1,010
ISPA bonds and other debt(6)		—			7,211			12,976			12,989			13,005
ANAS bonds and other debt(7)		218			52			—			—			—
Other State sector entities(8) (9)		41,695			41,181			40,507			54,218			54,670
Other general government entities(9)		87,215			89,804			99,143			112,901			112,255
Total public debt		1,392,389			1,444,604			1,512,779			1,582,009			1,598,971
as a percentage of GDP		104.3	%		103.8	%		105.9	%		106.9	%		104.1	%
Treasury accounts(10)		(13,048	)		(15,709	)		(14,535	)		(22,778	)		(9,672	)
Total public debt net of Treasury accounts		1,379,341			1,428,895			1,498,244			1,559,231			1,589,301

(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.

84

(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.

                    Based on the Update to the 2009-2013 Economic and Financial Program Document published on September 23, 2008, debt-to-GDP was estimated to decrease from 104.1 per cent registered in 2007 to 103.7 per cent in 2008 and expected to gradually decrease to 91.9 per cent in 2013, 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 105.9 per cent and 106.9 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 2007;

• 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

85

• 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 sector entities” and “other general government entities,” shown in the table above, is largely the result of this recharacterization.

86

                    Public Debt Management. Debt management continues to be geared towards lengthening the average maturity of public debt, which increased from 6.77 years at December 31, 2006 to 6.85 years at December 31, 2007.

                    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 63 per cent, while the short-term and variable-rate component decreased from 35 per cent in 1999 to approximately 25 per cent at the end of 2007. 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 2007.

                    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, 2008		June 30, 2008		September 30, 2008
	(Millions of euro)
Short term bonds (BOT)		150,979		160,952		158,682
Medium and long term bonds (initially issued in Italy)		1,107,564		1,101,824		1,111,698
External bonds (initially issued outside Italy)(1)		70,180		64,408		62,841
Total Treasury issues		1,328,723		1,327,184		1,333,221

(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, 2007” and in the table “External Bonds of the Treasury as of June 30, 2008” 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.

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, 2007 was €1,511,333 million, an increase of €22,804 million from December 31, 2006. The following table summarizes the internal public debt as at December 31 in each of the years 2003 through 2007.

87

Internal Public Debt

	2003			2004			2005			2006			2007
				(Millions of euro)
Debt incurred by the Treasury:
Short Term Bonds (BOT)(1)		119,645			118,750			117,806			122,780			128,302
Medium and Long Term Bonds
CTZ(2)		52,636			45,603			43,184			43,669			43,063
CCT(3)		197,540			197,435			198,663			190,824			190,525
of which:
Floating rate		197,540			197,435			198,663			190,824			190,525
BTP(4)		691,705			707,890			716,708			753,300			768,065
BTP€i(5)		10,203			28,578			48,034			60,933			79,133
Total		1,071,729			1,098,256			1,124,395			1,171,506			1,209,087
Postal bonds(6)		57,522			53,094			45,950			39,648			36,831
Postal accounts(6)		46,455			67,991			100,266			114,262			102,800
FS bonds and loans(7)		1,032			—			—			—			—
ANAS bonds and loans(8)		218			52			—			—			—
Other State sector entities(9)		40,881			40,505			39,861			53,600			54,065
Other general government entities(10)		79,483			85,392			94,206			109,514			108,551
Total internal public debt		1,297,320			1,345,290			1,404,677			1,488,529			1,511,333
Treasury accounts(11)		(13,048	)		(15,709	)		(14,535	)		(22,778	)		(9,671	)
Total internal public debt net of Treasury account		1,284,272			1,329,581			1,390,142			1,465,751			1,501,662

(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.”

88

(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.

                    The following table divides the internal public debt into floating debt and funded debt as at December 31 in each of the years 2003 through 2007. 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.

	2003		2004		2005		2006		2007
	(Millions of euro)
Floating internal debt(1)		95,099		114,741		146,073		160,191		154,603
Funded internal debt		1,202,221		1,230,549		1,258,604		1,327,986		1,356,730
Total internal public debt		1,297,320		1,344,141		1,404,677		1,488,529		1,511,333

(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, 2007.

Summary of External Debt

                    External debt is debt initially incurred or issued outside Italy, regardless of the currency of denomination. Total external public debt as at December 31, 2007 was €87,638 million. The following table summarizes the external public debt as at December 31 in each of the years 2003 through 2007.

	2003		2004		2005		2006		2007
			(Millions of euro)
External Treasury Bonds(1)		84,147		85,262		87,798		75,200		69,314
FS bonds and loans(2)		2,376		1,753		1,744		1,284		1,010
ISPA bonds and loans(3)		—		7,211		12,976		12,989		13,005
Other State sector entities		814		676		646		618		605
Other general government entities		7,723		4,412		4,937		3,387		3,704
Total external public debt		95,060		99,314		108,102		93,478		87,638

(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.

                    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 2003 through 2007. The amounts shown below are nominal values at issuance, before giving effect to currency swaps, and do not

89

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.

	2003		2004		2005		2006		2007
	(Millions)
Euro(1)		21,354		20,328		20,965		21,572		19,720
British Pounds		2,605		2,855		2,750		2,750		2,750
Swiss Francs		8,800		9,800		10,500		9,500		8,500
U.S. Dollars(2)		45,675		49,589		52,489		42,489		39,189
Japanese Yen		1,325,000		1,225,000		1,000,000		825,000		825,000
Norwegian Kroner		4,000		4,000		4,000		4,000		4,000
Australian Dollars		1,000		1,000		1,000		1,000		1,000
Czech Koruna		—		—		—		—		7,470

(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$58 billion by issuing bonds denominated in euro and currencies other than euros during the period 2003 through 2007. As of December 31, 2007, external debt accounted for approximately 5.5 per cent of total public debt, compared to 6.8 per cent at December 31, 2003. As of December 31, 2007, external Treasury bonds denominated in euro and those denominated in currencies other than euro accounted for 6.0 per cent and 0.2 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.

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, 2007 was as follows:

								2016
	2008		2009		2010-2015			and after
	(Millions)
Euro		—		—		5,490	(1)		23,680	(1)
British Pounds		600		—		400			1,750
Swiss Francs		2,000		1,000		4,500			1,000
U.S. Dollars		8,750		2,989		14,950	(2)		12,500
Japanese Yen		150,000		100,000		350,000			225,000

90

							2016
	2008		2009		2010-2015		and after
	(Millions)
Norwegian Kroner		—		—		4,000		—
Australian Dollars		1,000		—		—		—
Czech Koruna		—		—		—		7,470

(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.

91

TABLES AND SUPPLEMENTARY INFORMATION

Floating Internal Debt of the Treasury⁽¹⁾ as of December 31, 2007

			Outstanding
		Maturity	principal
Security	Interest Rate	Date	amount
			(Millions of euro)
BOT (3 months)	various	various		6,000
BOT (6 months)	various	various		45,801
Postal accounts	floating	none		102,800
Total floating internal debt of the Treasury				154,601
Treasury accounts	floating	none		(9,671	)
Total floating internal debt net of Treasury accounts				144,930

Funded Internal Debt of the Treasury⁽¹⁾ as of December 31, 2007

			Outstanding
	Interest	Maturity	principal
Security	Rate (%)	Date	amount
			(Millions of euro)
BOT (12 months)	various	various		76,499
CTZ	various	various		43,063
CCT	various	various		190,525
BTP	various	various		768,065
BTP€I	various	various		79,133
Total funded internal debt of the Treasury				1,157,283

(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.

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.

							Original
		Initial Public					Principal		Principal Amount		Equivalent in
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		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	March 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	March 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	December 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

92

							Original
		Initial Public					Principal		Principal Amount		Equivalent in
Currency / Amount	Interest Rate(%)	Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		euro
$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	%	December 11, 1995	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
€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
€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%		100.00	%	November 9, 2005	November 9, 2025		200,000,000		200,000,000		200,000,000
	(max 10x(cms10-cms2)
€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		99.796065%		January 5, 2007	September 15, 2057		1,026,000,000		1,026,000,000		1,026,000,000
	inflation index
€257,000,000	2.00% linked to EU		99.02385%		March 30, 2007	September 15, 2062		257,000,000		257,000,000		257,000,000
	inflation index
€160,000,000	4.49%		98.86	%	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		250,000,000		250,000,000		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
¥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												60,937,988,718	(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.

93

(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		42.58	%		2.21	%
Euro		32.36	%		97.79	%
Swiss Francs		8.43	%		—
Pounds Sterling		6.15	%		—
Norwegian Kroner		0.82	%		—
Japanese Yen		8.21	%		—
Australian Dollars		0.98	%		—
Czech Koruna		0.46	%		—
Total External Bonds (in millions of Euro)		60,937,988,718			69,313,992,698

Source: Ministry of Economy and Finance.

External Bonds of the Treasury as of September 30, 2008

                    The following table shows the external bonds of the Treasury issued and outstanding as of September 30, 2008.

										Principal
			Initial Public					Original 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		2,447,039,083
$1,500,000,000		6.025%-6.88%		100.000	%	March 5, 1996	March 5, 2004/12		1,500,000,000		1,500,000,000		1,048,731,035
$750,000,000		5.81%-6.70%		100.000	%	March 5, 1996	March 5, 2002/10		750,000,000		750,000,000		524,365,518
$1,500,000,000		5.97%-6.25%		100.000	%	December 20, 1996	December 20, 2004/12		1,500,000,000		1,500,000,000		1,048,731,035
$2,000,000,000		6.00%		99.274	%	February 22, 2001	February 22, 2011		2,000,000,000		2,000,000,000		1,398,308,047
$2,000,000,000		5.625%		99.893	%	March 1, 2002	June 15, 2012		2,000,000,000		2,000,000,000		1,398,308,047
$1,000,000,000		5.625%		99.392	%	May 8, 2002	June 15, 2012		1,000,000,000		1,000,000,000		699,154,024
$2,000,000,000		5.375%		98.436	%	February 27, 2003	June 15, 2033		2,000,000,000		2,000,000,000		1,398,308,047
$2,000,000,000		4.375%		99.694	%	February 27, 2003	June 15, 2013		2,000,000,000		2,000,000,000		1,398,308,047
$100,000,000		4.17%		100.000	%	November 14, 2003	November 15, 2010		100,000,000		100,000,000		69,915,402
$100,000,000		4.06%		100.000	%	December 9, 2003	December 9, 2010		100,000,000		100,000,000		69,915,402
$2,000,000,000		3.25%		99.515	%	March 3, 2004	May 15, 2009		2,000,000,000		2,000,000,000		1,398,308,047
$4,000,000,000		4.50%		99.411	%	January 21, 2005	January 21, 2015		4,000,000,000		4,000,000,000		2,796,616,095
$2,000,000,000		4.75%		99.340	%	January 25, 2006	January 25, 2016		2,000,000,000		2,000,000,000		1,398,308,047
$3,000,000,000		5.25%		99.85	%	September 20, 2006	September 20, 2016		3,000,000,000		3,000,000,000		2,097,462,071
$2,000,000,000		5.375%		99.367	%	June 12, 2007	June 12, 2017		2,000,000,000		2,000,000,000		1,398,308,047
$2,500,000,000		3.50%		99.689	%	June 4, 2008	July 15, 2011		2,500,000,000		2,500,000,000		1,747,885,059
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	%	December 11, 1995	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
€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		4.000%		99.950	%	May 6, 1999	May 6, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€1,000,000,000	frn 30Y			101.600	%	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%			100.750	%	August 30, 1999	August 30, 2019		1,000,000,000		1,000,000,000		1,000,000,000
€150,000,000	Zero Coupon			100.000	%	February 20, 2001	February 20, 2031		150,000,000		150,000,000		150,000,000
€3,000,000,000		5.75%		100.040	%	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%			100.000	%	January 22, 2002	January 22, 2012		400,000,000		400,000,000		400,000,000

94

										Principal
			Initial Public					Original Principal		Amount		Equivalent
Currency / Amount	Interest Rate(%)		Offering Price			Date of Issue	Maturity Date	Amount		Outstanding		in euro
€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%			99.8500	%	March 22, 2006	March 22, 2018		1,000,000,000		1,000,000,000		1,000,000,000
€192,000,000	Zero Coupon			100.000	%	March 28, 2006	March 28, 2036		192,000,000		192,000,000		192,000,000
€300,000,000	6 mth Eubor + 0.075%			100.000	%	March 30, 2006	March 30, 2026		300,000,000		300,000,000		300,000,000
€215,000,000	5.07%/ 10y cms			100.000	%	May 11, 2006	May 11, 2026		215,000,000		215,000,000		215,000,000
€1,000,000,000	1.85% linked to EU inflation index			99.796065	%	January 5, 2007	September 15, 2057		1,000,000,000		1,058,000,000		1,058,000,000
€250,000,000	2.00% linked to EU inflation index			99.02385	%	March 30, 2007	September 15, 2062		250,000,000		265,000,000		265,000,000
€160,000,000	4.49%			98.86	%	April 5, 2007	April 5, 2027		160,000,000		160,000,000		160,000,000
€500,000,000	2.20% linked to EU inflation index			98.862525	%	January 23, 2008	September 15, 2058		500,000,000		520,000,000		520,000,000
Swiss Francs(3)
ChF 1,500,000,000		3.125%		99.825	%	January 15,1999	July 15, 2010		1,500,000,000		1,500,000,000		950,931,913
ChF 1,000,000,000		2.00%		100.470	%	January 30, 2003	April 30, 2009		1,000,000,000		1,000,000,000		633,954,609
ChF 1,000,000,000		2.75%		100.625	%	July 1, 2004	July 1, 2011		1,000,000,000		1,000,000,000		633,954,609
ChF 2,000,000,000		2.50%		100.090	%	February 2, 2005	March 2, 2015		2,000,000,000		2,000,000,000		1,267,909,218
ChF 1,000,000,000		2.50%		99.336	%	January 30, 2006	January 30, 2018		1,000,000,000		1,000,000,000		633,954,609
Pounds Sterling(4)
£400,000,000		10.50%		100.875	%	April 28, 1989	April 30, 2014		400,000,000		400,000,000		506,136,910
£1,500,000,000		6.00%		98.565	%	August 4, 1998	August 4, 2028		1,500,000,000		1,500,000,000		1,898,013,413
£250,000,000		5.25%		99.476	%	July 29, 2004	December 7, 2034		250,000,000		250,000,000		316,335,569
Norwegian Kroners(5)
NOK 2,000,000,000		6.15%		100.000	%	September 25, 2002	September 25, 2012		2,000,000,000		2,000,000,000		240,009,600
NOK 2,000,000,000		4.34%		100.000	%	June 23, 2003	June 23, 2015		2,000,000,000		2,000,000,000		240,009,600
Japanese Yen(6)
¥125,000,000,000		5.50%		100.000	%	December 15, 1994	December 15, 2014		125,000,000,000		125,000,000,000		830,730,378
¥125,000,000,000		4.50%		100.000	%	June 8, 1995	June 8, 2015		125,000,000,000		125,000,000,000		830,730,378
¥100,000,000,000		3.70%		100.000	%	November 14, 1996	November 14, 2016		100,000,000,000		100,000,000,000		664,584,303
¥100,000,000,000		3.45%		99.800	%	March 24, 1997	March 24, 2017		100,000,000,000		100,000,000,000		664,584,303
¥100,000,000,000		1.80%		99.882	%	February 23, 2000	February 23, 2010		100,000,000,000		100,000,000,000		664,584,303
¥100,000,000,000		0.65%		99.995	%	April 14, 2004	March 20, 2009		100,000,000,000		100,000,000,000		664,584,303
¥25,000,000,000		2.87%		100.000	%	May 18, 2006	May 18, 2036		25,000,000,000		25,000,000,000		166,146,076
¥50,000,000,000	3mJpy libor +12b.p.%			100.000	%	April 24, 2008	April 24, 2018		50,000,000,000		50,000,000,000		332,292151
Czech Koruna(7)
Czk 2,490,000,000		4.36%		100.000	%	October 3, 2007	October 3, 2017		2,490,000,000		2,490,000,000		100,973,236
Czk 2,490,000,000		4.40%		100.000	%	October 3, 2007	October 3, 2019		2,490,000,000		2,490,000,000		100,973,236
Czk 2,490,000,000		4.41%		100.000	%	October 3, 2007	October 3, 2019		2,490,000,000		2,490,000,000		100,973,236
TOTAL OUTSTANDING												55,060,145,768(8)

(1)	U.S. dollar amounts have been converted into euro at $1.4303/€1.00, the exchange rate prevailing at September 30, 2008.
(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 ChF1.5774/€1.00, the exchange rate prevailing at September 30, 2008.
(4)	Pounds Sterling amounts have been converted into euro at £0.7903/€1.00, the exchange rate prevailing at September 30, 2008.
(5)	Norwegian Kroner amounts have been converted into euro at NOK8.333/€1.00, the exchange rate prevailing at September 30, 2008.
(6)	Japanese Yen amounts have been converted into euro at ¥150.47/€1.00, the exchange rate prevailing at September 30, 2008.

95

(7)	Czech Koruna amounts have been converted into euro at Czk24.66/€1.00, the exchange rate prevailing at September 30, 2008.
(8)	The amount of external bonds shown above does not take into account (i) approximately €2,776 million outstanding under Italy’s Commercial Paper Program and (ii) 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 September 30, 2008
Currency	Before Swap			After Swap
US Dollars		40.57	%		2.61	%
Euro		36.83	%		97.39	%
Swiss Francs		7.48	%		—
Pounds Sterling		4.94	%		—
Norwegian Kroner		0.87	%		—
Japanese Yen		8.75	%		—
Czech Koruna		0.55	%		—
Total External Bonds (in millions of Euro)		55,060,145,768			60,238,581,961

Source: Ministry of Economy and Finance.

96