MAJOR TRENDS AND OUTLOOK
During most of the 1990’s, Italy’s gross domestic product (GDP) growth was the slowest in what is now the Economic and Monetary Union (EMU) zone. The gap was once attributed to the tough budget discipline of the ‘90s, but now, at the end of the EMU accession process, seems to reflect structural impediments in the Italian economy that discourage investment and job creation. In the period 1995-2002, Italy had an annual growth rate of 1.5 percent compared to a 2.2 percent growth rate in the EMU zone. Excluding Italy and Germany, the EMU zone grew by 2.8 percent annually in the period 1995-2002, compared to a 3.2 percent annual growth registered in the same period by the U.S. In particular, GDP growth decelerated dramatically in Italy from 1.8 percent in 2001 to a modest 0.4 percent and 0.3 percent, respectively, in 2002 and 2003. In 2003 Italy’s modest growth was fairly in line with the growth rate of 0.5 percent registered in the EMU area. Despite modest GDP growth in the last quarter of 2003 and the first quarter of 2004, a recovery driven by consumption is anticipated for the rest of 2004 producing a GDP growth ranging from 1.1 to 1.4 percent, again slightly below the growth rate in the EMU area (1.7 percent).
In 2003, exports dropped by 3.9 percent, which followed a 1.4 decrease in 2002, the first time since the 1950s that exports registered decreases for two years in a row. The deceleration of world growth, the Euro currency's strengthening vis-à-vis the U.S. dollar, and the increase of production costs all contributed to Italy’s weak exports in the last two years Italy suffered from the weak German market (Italy’s largest export market) as well as from the crisis of Italy’s model of specialization, and strong competition from China. Italy’s share of world exports decreased from 4.5 percent in 1995 to 3.6 percent in 2002 and to 3.0 percent in 2003. The value of imports also decreased by 0.6 percent in 2002. The result of these trends was a trade surplus of $898 million in 2003(equal to 0.1 percent of GDP), only about one-eighth of the $7.4 billion (0.8 percent of GDP) trade surplus registered in 2002. Mostly due to the appreciation of the Euro through 2003, Italy increased foreign exchange reserves to $62.5 billion, up from $55.3 billion at the end of 2002.
On inflation, Italy is now firmly within norms specified for the EMU, a major achievement for this historically inflation-prone country. Though still relatively high by European standards, annual consumer inflation stood around two percent from 1997 to 1999. Due to the increase of oil prices and to the strengthening of the dollar vis-à-vis the Euro, and later to the inflationary impact of the introduction of the Euro, consumer inflation measured 2.5 percent in 2000, 2.7 percent in 2001, .5 percent in 2002 and 2.7 percent in 2003. Inflation in 2004 grew by an annual rate of 2.3 percent through June, but despite the inflationary pressures of oil prices, is expected to stabilize around 2.2 percent as the annual average for the year.
The key economic challenges facing Italy and its government continue to be keeping the government deficit under control; reforming pensions, taxation and labor systems; continuing efforts to reduce the high level of government debt; reducing unemployment; addressing structural rigidities of the Italian market; and improving public administration and Italy’s infrastructure.
ECONOMIC TRENDS AND OUTLOOK FOR AGRICULTURE
Italy’s agricultural trade is primarily with other EU Member States. Over 73 percent of total imports (mainly represented by raw materials) come from within the EU, while almost two-thirds of Italian exports (chiefly value-added products) stay within the EU.
U.S. agriculture, fish and forestry exports to Italy suffered from the high dollar for a fourth year and fell to about $700 million in 2003 compared to their peak value of $1 billion in 1997. In 2001, Italy imported $780 million and in 2002 $754 million in U.S. agricultural products. Neither U.S. nor Italian trade statistics reveal the precise level of imported U.S. products, because of the EU open borders. Many U.S. food and agricultural products (i.e., ingredients, frozen foods and beverages, etc.) arrive in Italy via France and Germany. This trend toward regional distribution has consolidated during the last three years and is expected to continue.
According to U.S. trade statistics, the leading U.S. agricultural exports to Italy in 2003 were: forest products ($166 million), grains and feed ($133 million), tree nuts ($90 million), hides and skins ($73 million), and seafood ($50 million). The following product categories also performed well: fruits and vegetables, cotton, soybeans, pet foods, snack foods, dried fruit (prunes), and vegetable seeds.
Italy exported $2.2 billion in agricultural, fish and forestry products to the United States in 2003, including; wine ($927 million), cheese ($209 million) vegetable oils such as olive oil ($382 million), and wood products ($88 million).
National and international developments are expected to shape Italy’s agricultural sector in the near future. At the national level, the main drivers are national budget review and the decentralization of the decision making process, with an increasing number of agricultural competences being transferred from the Rome government to regional administrations.
At the EU level, the implementation of the 2003 Common Agricultural Policy (CAP) reform (i.e. arable crops, tobacco, olive oil, cotton, hop), the planned reforms of other EU Common Market Organizations (i.e. fruit & vegetables, wine), the May 2004 and the future enlargements of the Union, will greatly influence Italian agriculture.
The “decoupling” of CAP farm payments from agricultural production, and the parallel increase of EU budget for rural development, will probably result in a shift in marginal areas from traditional farming activities to other complementary activities (e.g., rural tourism, landscape management, etc.). The completion of the EU farm policy reform will likely result in different land uses (intensive vs. extensive agriculture) and in a new geographic distribution of productions in the country (re-location where more competitive).
The eventual future accession of countries such as Romania, Bulgaria and Turkey to the EU (likely to happen in the next 5-7 years) is creating some concerns to Italian farmers. This event would increase competition in the EU for some products that are key for Italy, especially fruit, vegetables and olive oil. The effects of this second round of enlargement are expected to be much more stronger than those of the May 2004 enlargement.
The EU Commission is in charge of almost all the extra EU agricultural trade issues, including WTO negotiations and bilateral agreements with other countries (or group of countries). Italy for obvious reasons has a special interest in the current negations for the creation of the Mediterranean free trade area (Euromed).
PRINCIPAL GROWTH SECTORS
Italian companies are adjusting to a period of slower growth in both the domestic economy and the euro-zone as a whole. Both inflation and unit labor costs have risen faster in Italy than the euro-area average, eroding Italian exporters’ competitiveness and market shares abroad. Italy is heavily dependent on exports to its largest market, Germany, which has also entered a recessionary period. In addition, Italian exporters are also facing increasing competition from lower cost producers in Eastern Europe and Asia in other large export markets in Europe and the United States. To accommodate these conditions, Italian exporters need to streamline operations to reduce production costs, which likely will entail moderate investment in labor-saving equipment and technology. Given the more favorable dollar-euro exchange rate at present, U.S. firms have a slight pricing advantage vis-à-vis their European competitors, but must be aggressive in identifying opportunities for their products and services.
In general, rationalizing business practices and achieving cost-savings create opportunities for U.S. equipment, technology and expertise in computer software and hardware, management consulting. The full liberalization of the Italian telecommunications market, with a belated but enthusiastic interest in the Internet, is creating substantial business opportunities. Privatization and liberalization in the energy sector following EU directives should also spur future demand for equipment and services in this sector. In addition, the Italian public as well as private sector is looking for ways to improve efficiency while reducing costs, through outsourcing, training programs and better application of new information technologies. U.S. firms with products and services that contribute to the further rationalization and increased competitiveness of the Italian economy will find that Italy offers significant opportunities.
Despite the current economic climate in Italy, the fluctuations in the dollar/euro exchange rate, and the often protectionist regulations of the CAP, there are still many opportunities in the near-to-medium term to both maintain and expand the market for a variety of U.S. agricultural products.
Specific agricultural and non-agricultural products and services which offer good prospects for U.S. firms are described in Chapter V below.
GOVERNMENT ROLE IN THE ECONOMY
In the post World War II period, the Italian state traditionally played a dominant role in the Italian economy. In the early 1990s, the Italian government controlled about a third of all industrial activity and almost two-thirds of banking operations. In many sectors, the state's role was eliminated or vastly reduced. In the last ten years, the GOI raised USD135 billion through privatizations, which helped reduce the debt/GDP ratio from 125 to 106 percent of GDP. Despite substantial sales of state assets in the 1990’s, the GOI still holds substantial stakes in more than 20 Italian companies with a total value of more than USD 80 billion. The most important remaining assets to be sold include a significant portion of ENEL, Italy’s main electricity producer, in which the GOI owns 61 percent of the stock. The other large assets are the GOI’s 30.33 percent share in ENI (Italy’s hydrocarbon conglomerate, and the country’s largest company) and its 32.34 percent share of Finmeccanica (the large aerospace and defense holding company). Despite official statements, the GOI seems reluctant to sell any part of firms in sectors considered critical to national security, such as aerospace and defense, and is committed to keeping a controlling share in these key companies.
Since 1993, four major banks (Credito Italiano, Banca Commerciale Italiana, Istituto Mobiliare Italiano and Banca Nazionale del Lavoro (BNL)) and the country's second largest insurance company, INA, have seen government control transferred to banking foundations, which are non-profit entities with government-approved directors. IRI, once the major government-owned industrial holding company, dismantled itself through sell-offs in the 1990s. Telecom Italia was sold in a stock offering in 1997. There have been five offerings of stakes in oil and gas parastatal ENI. Since 1999 there have been offerings of 39 percent of Enel, the electricity company; 87 percent of Autostrade, which operates highways; 45 percent of Finmeccanica, the defense industries holding company; and 52 percent of the Rome Airport Authority. In 2001, the Treasury Ministry sold five-percent stakes of the energy holding company ENI and the financial holding company COFIRI. The two transactions produced, respectively, $2.5 billion and $500 million. Treasury also sold the rights for third generation wireless telephony for $11 billion in revenues and sold Elettrogen and Interpower, two of the three electricity-generating companies (GenCo) into which ENEL had been spilt. Now the government is proceeding with small-scale privatizations. In December 2002, the GOI sold its last remaining 3.46 percent of Telecom Italia for euro 1.4 billion.
Total privatizations in 2003 were worth about Euro 16.6bn. No figures for 2004 are yet available. The GOI sold its 100 percent stake of ETI (the State Tobacco Company) in July 2003 to British American Tobacco for euro 2.32bn. According to the 2002 Finance Ministry plan, the GOI planned to sell 37.58 percent of ENEL, Italy’s main electrical power producer, in one large offering. While the GOI did sell 6.6 percent of its shares, reducing the state’s stake to 61% of the company, this figure is significantly diminished from the original plan. The GOI wishes to retain a 30 percent share in ENEL, so it can be expected to release additional tranches in the next year or two. In May 2004, PM Berlusconi signed a decree to merge Terna, which owns the Italian electric grid, with GRTN, which manages the electric grid. Subsequently, ENEL (which owns Terna) confirmed its intent to sell approximately 50 percent of its stake in Terna.
In March 2004, ENI, the oil and gas utility, sold a 9.05 percent stake in Snam Rete Gas. There are no current plans to further privatize ENI.
Mediobanca, which bought the Snam Rete Gas shares, also sold its 15 percent stake in Terrenia, the Italian ferry company, back to the state. The GOI holding company Fintecna now holds that stake. A deal to privatize Fincantieri, a ship and ferry building company, fell through in April 2004. Efforts to “split-and-merge” the operations of Finmeccanica (an aerospace and defense company of which the GOI holds 32.34 percent) ran aground for lack of funding. Finmeccanica is expected to sell off part of its stake in ST Microelectronics, in which it is a majority shareholder, but no specifics are yet available.
The GOI has extensive real estate holdings, some of which the GOI plans to sell off. In March 2003, the Carlyle Group (global private equity firm) bought a portfolio of 36 properties in Italy from the country’s Ministry of Economy and Finance for an estimated euro 230mn.
The state retains 100 percent ownership in the following companies, with no immediate plans to privatize: Ente Nazionale di Assistenza al Volo (ENAV, transport), Ferrovie dello Stato (railways), and Poste Italiane (postal services). Ferrovie dello Stato broke even in 2000 for the first time, and posted net profits in both 2001 and 2002, so the GOI may soon decide to sell. Between 2003 and 2005, according to Poste Italiane’s website, “the group will complete its reorganization and restructuring process,” which must be done before the group is put on the auction block. A law signed into effect in June 2004 calls for privatization of state-owned (100 percent) media corporation (TV and radio) RAI by the end of 2005.
No further updates are available on Mediocredito FVG or Coopercredito, in which the GOI has holdings of 34.01% and 14.42%, respectively. The GOI has plans to sell both assets by 2006. SEAT, the producer of telephone yellow pages and directory assistance in Italy, is also slated to be sold by 2006, but, as the GOI only holds a 0.1% interest, this is not an important sale and may not be carried out. The GOI retains its “golden share” in Telecom Italia.
The GOI Treasury still holds a 53 percent stake in Alitalia, the national flag airline. If Alitalia survives its severe financial crisis, through a program of layoffs, new management, and bridge loans, the GOI has vague plans to sell at least some of its share in the distant future.
BALANCE OF PAYMENTS SITUATION
Italy’s current account deficit worsened from $9.5 billion in 2002 (equal to 1.0 percent of GDP) to $20.5 billion in 2003, (equal to 1.8 percent of GDP). This reflects a worsening of the trade surplus FOB/FOB, which fell from $13.3 billion in 2002 to $9.8 billion in 2003, stability in the balance of services and the widening of the national income deficit from a negative $14.6 to negative $19.0 billion and of the deficit on transfers from $5.3 billion to Euro 8.0 billion. Current account surpluses from 1993 to 1997 brought Italy’s net external position into balance and, in 1998-1999, produced a net external credit position equal to 4.8 percent of GDP. Starting from the year 2000, however, a deficit in the current account produced a progressive worsening of Italy’s net external position to reach a current account deficit of 5.8 percent of GDP at end 2003. Net portfolio inflow decreased from $15.2 billion in 2002 (or 1.3 percent of GDP) to $3.8 billion in 2003 (or 0.3 percent of GDP).
There was a $7.3 billion net inflow of direct investment in 2003, following a net $2.5 billion net outflow in 2002. This is the result of $8.9 Italian direct investment abroad (equal to 0.6 percent of GDP), and $16.2 FDI in Italy (equal to 1.1 percent of GDP).
INFRASTRUCTURE SITUATION
To jump-start the ambitious ten year effort to improve and expand the transportation network, the Parliament approved the GOI bill that included measures intended to eliminate bureaucratic obstacles to public works and infrastructure investment.
Railroad--The railroad system is operated by the Italian State Railways (Ferrovie dello Stato, abbreviated FS), a government agency. The railroad provides an efficient and economical method of transportation. More than half of the rail system is electrified.
Highway--The highway system is approximately 197,000 miles long, including over 3,000 miles of superhighways, called “autostrade.” The network connects the major industrial centers and offers easy access to Northern Europe. Mainly private companies under government concession operate trucking services.
Air--Alitalia, a state-owned company is Italy's principal airline, providing both international and domestic service. Additional service is provided by Lauda Air, Itavia, Air Europe and Meridiana airlines. Charter service is offered by SAM, an Alitalia subsidiary, and by Air One, while air-taxi service is available from Unijet Italia in Rome and Agena in Milan. Italy has an extensive airport network consisting of 19 international, 17 domestic, and 59 general aviation airports. Federal Express, UPS, DHL, and other rapid delivery services are also available.
Sea--Italy has eight major seaports: Gioia Tauro, Genoa, La Spezia, Livorno, Naples, Palermo, Trieste, and Venice. In addition, there are 35 smaller ports primarily used for coastal shipping.
Industrial Districts--Small and medium sized enterprises, especially in the North, have increased Italy’s output, exports and job creation. The districts take advantage of areas where many small enterprises operate in the same industry and where the steps of production are divided up among the various enterprises. Over time, cooperation among the firms (and often unions of their workers) has paid off in better exchange of information, group purchases, and market development. The districts have been given legal recognition so that communities have the tools to plan joint activities, tap national and regional financing for projects, establish service contracts (for example, with research institutes and universities), and otherwise maximize public and private resources for the success of their industry and local development.