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O 231613Z JAN 07
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UNCLAS SECTION 01 OF 06 ROME 000147 
 
SIPDIS 
 
SIPDIS 
 
SECSTATE PLEASE PASS TO EB/IFD/OIA 
SECSTATE PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB OPIC KTDB USTR PGOV IT
SUBJECT: INVESTMENT CLIMATE STATEMENT 2007 - ITALY, PART I 
 
REF: 06 STATE 178303 
 
¶1.  This is part one of a two-part cable on Italy's investment 
climate. 
 
¶2.  SUMMARY:  While the Government of Italy (GOI) continues to court 
foreign investors, the GOI still needs to enact economic reforms and 
take other steps to ensure a more welcoming investment climate. 
Current positives include:  Parliament passed financial market 
oversight reform in 2005, along with a more efficient bankruptcy 
law; also, GOI officials, including Italian Minister for 
International Trade and European Affairs Emma Bonino, have recently 
visited the U.S. to encourage American investment in Italy. 
However, historical stumbling blocks that discourage foreign 
investment persist -- namely, an inefficient delivery of public 
services, a slow judicial system, and bureaucratic red tape.  Since 
Italy's national elections in April 2006 brought to power Prime 
Minister Prodi's center-left coalition, the GOI met EU demands to 
put its fiscal house in order, but has refrained from tackling 
significant economic reform.  However, Italy remains competitive 
with many other developed countries in offering opportunities for 
investment. 
 
¶3.  Italy has a diverse economy, the sixth largest market economy in 
the world.  Small- and medium-sized firms dominate the Italian 
economy.  Germany, France, and the U.S. remain Italy's most 
important export markets.  Industrial activity is concentrated in 
the north -- one of the most industrialized and prosperous areas in 
Europe.  By contrast, the center and the south are less developed, 
with unemployment in some areas three times that of the north and 
per capita incomes substantially lower.  End summary. 
 
 
OPENNESS TO FOREIGN INVESTMENT 
----------------------------- 
 
¶4.  Foreign direct investment in Italy is generally welcomed and 
encouraged.  The previous Berlusconi Government (2000-2005), 
supported by major labor and trade groups, launched initiatives to 
identify and address obstacles to investing in Italy.  While PM 
Prodi has also voiced strong support for attracting foreign 
investment and trimming bureaucratic obstacles to economic activity, 
members of his coalition have so shown little positive action.  For 
example, members of Prodi's coalition have prevented a 25 billion 
euro merger between the Spanish company Abertis and an Italian 
toll-road operator.  The GOI's opposition to the so-called 
"Abertis-autostrade" deal appears to indicate an unwillingness to 
allow foreign investment and/or control in large Italian and 
government-controlled companies.  However, GOI officials, among them 
Italian Minister for International Trade and European Affairs Emma 
Bonino, have recently traveled to the U.S. and made efforts to reach 
out to U.S. investors and discuss the future of foreign investment 
in Italy. 
 
¶5.  As an EU Member State, Italy is bound by EU treaties and 
legislation, some of which have an impact on business investment. 
As specified under the right of establishment set forth in the EU 
treaty (1957 Treaty of Rome), Italy provides national treatment to 
foreign investors established in Italy or in another EU member 
state, except in a few instances.  Exceptions include limited access 
to government subsidies for the film industry, added capital 
requirements for banks domiciled in non-EU member countries, and 
restrictions on non-EU-based airlines operating domestic routes. 
Italy also has restrictions in the shipping sector. 
 
¶6.  The GOI does have the authority to restrict foreign investment 
in some cases.  The government can block mergers involving foreign 
firms for "reasons essential to the national economy" or if the home 
government of the foreign firm applies discriminatory measures 
against Italian firms.  Industrial sectors such as defense and 
aircraft manufacturing, are either closely regulated or are off 
limits to foreign investors.  EU and Italian anti-trust laws give EU 
and Italian authorities the right to review mergers and acquisitions 
over a certain financial threshold. 
 
¶7.  Foreign investors are not prevented from investing in firms to 
be privatized, except in the defense sector.  Privatization 
strategies have often entailed the GOI establishing a core group of 
shareholders who agree to keep their shares for a minimum period or 
retain a "golden share" (a modest government stake, but with 
controlling authority).  Italy is the only EU member country to keep 
wide-ranging "golden share" regimes for privatized companies. 
According to EU data, there are 20 EU-based companies in which 
Member States hold a golden share -- five of these are Italian (Eni, 
 
ROME 00000147  002 OF 006 
 
 
Enel, Finmeccanica, Terna, and Telecom Italia). 
 
¶8.  The Italian Trade Commission (ICE) reported in January 2007 that 
7,200 foreign companies operate in Italy, employing almost one 
million workers, and that the stock of foreign investment in Italy 
equals 12 percent of GDP (far less than many EU nations). 
Approximately 77 percent of foreign companies operating in Italy are 
located in the north, with the Lombardy Region alone hosting 46 
percent.  The ICE study cited as key obstacles to foreign 
investment: labor taxes, lack of labor flexibility, red tape, and 
corporate taxes. 
 
¶9.  The 2006 World Competitive Survey by the World Economic Forum 
ranked Italy 42nd among the 124 countries surveyed; Italy's economy 
was judged only better than those of Poland and Greece among the 25 
EU Member States.  (Note: Italy was also ranked higher than Romania 
and Bulgaria -- two new EU member states as of January 1, 2007.) 
 
 
CONVERSION AND TRANSFER POLICIES 
-------------------------------- 
 
¶10.  In accordance with EU directives, Italy has no foreign exchange 
controls.  There are no restrictions on currency transfers, only 
reporting requirements.  Banks are required to report any 
transaction over 12,500 euro (USD 16,000) due to money laundering 
and terrorism financing concerns.  Profits, transfers, payments, and 
currency transfers may be freely repatriated.  Residents and 
non-residents may hold foreign exchange accounts. 
 
 
EXPROPRIATION AND COMPENSATION 
------------------------------ 
 
¶11.  The Italian constitution permits expropriation of private 
property for "public purposes."  Compensation is guaranteed and must 
adequately compensate the proprietor for losses.  However, lenders 
are not covered by the same constitutional guarantee as proprietors. 
 Italy's Constitution also authorizes the nationalization of 
enterprises that provide essential public services or are deemed 
"indispensable" to the national economy.  There exist a few 
long-standing disputes in Italy involving U.S. citizens who assert 
that municipal governments unjustly expropriated their real property 
or inadequately compensated them.  However, this does not reflect 
any GOI discrimination against U.S. investments, companies, or 
representatives in any specific sector of activity. 
 
 
DISPUTE SETTLEMENT 
------------------ 
 
¶12.  Italy's judicial system may serve as a deterrent to foreign 
investors, since civil trials average seven years in length.  U.S. 
investors in Italy can choose among different means of dispute 
resolution.  The method chosen should be specifically set forth in a 
contract. 
 
¶13.  Though notoriously slow, the Italian legal system is consistent 
with generally recognized principles of international law, with 
provisions for enforcing property and contractual rights.  Italy has 
a written and consistently applied commercial and bankruptcy law. 
While the Italian judiciary is considered independent of the 
government, Italian judges may engage in political partisanship. 
Italian courts accept and enforce foreign judgments only upon 
request. 
 
¶14.  At the end of 2005, the GOI passed a new bankruptcy regulation 
that reforms earlier (1942) bankruptcy regulation.  The new 
regulation -- analogous to U.S. Chapter 11 restructuring -- provides 
more flexibility between parties to reach a solution before 
declaring bankruptcy.  The judicial role in bankruptcy procedures 
has been drastically limited to simplify and speed up the process. 
The new regulation went into effect in 2006. 
 
¶15.  Italy is a member of the World Bank's International Center for 
the Settlement of Investment Disputes (ICSID).  Italy has signed and 
ratified the Convention on the Settlement of Investment Disputes 
Between States and Nationals of Other States, and is a signatory of 
the New York Convention of 1958 on the Recognition and Enforcement 
of Foreign Arbitral Awards. 
 
 
PERFORMANCE REQUIREMENTS/INCENTIVES 
----------------------------------- 
 
ROME 00000147  003 OF 006 
 
 
 
¶16.  The GOI is in compliance with WTO Trade-Related Investment 
Measures (TRIMS) obligations.  Foreign investors face specific 
performance requirements only in the telecommunications sector. 
However, this has not deterred foreign investment in 
telecommunications.  For example, in 2005 Weather Investments, owned 
by an Egyptian financier, bought Wind, Italy's second largest 
telecommunications company; Vodafone, Italy's second largest mobile 
operator, is also foreign-controlled. 
 
¶17.  The GOI offers incentives to encourage private sector 
investment in economically depressed areas, particularly in southern 
Italy.  (For more details, please visit the website: 
www.InvestinItaly.com.)  The Ministry of Universities and Research 
has identified, funded, and signed Framework Program Agreements with 
eleven "Technology Districts" and public-private joint laboratories 
focused on strategic sectors.  Technology Districts, created to 
facilitate cooperation between public and private researchers and 
venture capitalists, serve to support research and development of 
key technology, strengthen industrial research activities, and 
promote innovative behavior in small- and medium-sized enterprises. 
 
¶18.  The Italian tax system does not discriminate between foreign 
and domestic investors.  In 2003, the Italian Parliament passed a 
law to broadly reform the tax system (Legislative Decree No. 344). 
The new tax law entered into force January 1, 2004 and remains 
largely unchanged since the GOI's 2006 budget bill.  For 
corporations, the main 
characteristics of the reformed tax system are: 
 
-- The corporate income tax is 33 percent. 
-- Under certain circumstances, partial tax exemption for capital 
gains and losses from participation in Italian and foreign 
corporations holds (so-called "participation exemption"). 
-- Abolishment of the dividend tax credit, and introduction of a 95 
percent exemption on dividend distributions (provided dividends are 
distributed to corporations). 
-- Introduction of a group taxation regime for Italian/foreign 
corporations belonging to the same group to consolidate their tax 
base at the level of the Italian parent. 
-- Interest due on financing provided by qualified shareholders and 
by controlled companies are not deductible when financing exceeds 
certain limits -- e.g., when financing exceeds four times the share 
of company net assets.  These provisions are labeled "thin 
capitalization," a debt/equity requirement to maintain minimal 
capital requirements for Italian corporations. 
 
 
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
-------------------------------------------- 
 
¶19.  There is no limitation in the Italian constitution or civil law 
on the right to private ownership and establishment. 
 
 
PROTECTION OF PROPERTY RIGHTS 
----------------------------- 
 
¶20.  Enforcement of Intellectual Property Rights (IPR) remains a 
serious problem in Italy and falls below the standards of other 
developed Western European countries.  Relatively few IPR cases are 
brought to trial.  Even when prosecutors win a conviction, judges 
are generally reluctant to sentence offenders to prison.  The 
Customs Police still actively seizes pirated and counterfeit goods 
along the border and Italy's national financial police force, the 
Guardia di Finanza, has grown steadily more effective in IPR 
enforcement.  However, many local governments do little to stop the 
sale of pirated and counterfeit goods by street vendors.  In April 
2005, Italy enacted a new law empowering police to fine consumers of 
pirated and counterfeit items up to 10,000 euro.  In 2006, several 
municipalities, such as Florence, began to undertake aggressive 
publicity campaigns to alert Italians and foreign tourists of the 
new law. 
 
¶21.  Italy is a member of the Paris Union International Convention 
for the Protection of Industrial Property (patents and trademarks) 
to which the United States and about 85 other countries adhere. 
U.S. citizens generally receive national treatment in acquiring and 
maintaining patent and trademark protection in Italy.  After filing 
a patent application in the United States, a U.S. citizen is 
entitled to a 12-month period within which to file a corresponding 
application in Italy and receive rights of priority.  Patents are 
granted for 20 years from the effective filing date of application 
and are transferable.  U.S. authors can obtain copyright protection 
 
ROME 00000147  004 OF 006 
 
 
in Italy for their work first copyrighted in the United States, 
merely by placing on the work, their name, date of first 
publication, and the symbol (c). 
 
¶22.  In 2000, the Italian Parliament enacted a long-awaited 
"anti-piracy" law, providing for higher criminal penalties, 
including prison sentences of up to four years, for copyright (IPR) 
violations.  Largely because of the enactment of this law (thought 
to be among the best in the EU), Italy has since been moved from the 
U.S. Trade Representatives Special 301 IPR "Priority Watch List" to 
the "Watch List."  Italy remains on the Watch List, however, because 
of its continuing failure to enforce this and other IPR protection 
laws. 
 
¶23.  Copyrighted works sold in Italy generally must bear a sticker 
issued by SIAE, a royalty collection agency operating under 
authority from the Ministry of Culture.  While the music and film 
industries have been so far largely satisfied with the stickering 
system, software industry associations have complained the system 
remains overly burdensome and fails to provide adequate protection 
from piracy.  In January 2003, the Italian government approved 
exemptions for business software from the SIAE sticker requirement. 
 
¶24.  In 2005, Italy's Parliament passed legislation that some 
copyright industry associations believe weakens Italy's IPR legal 
framework.  Italy's Internet piracy statute was revised to reduce 
criminal sanctions for on-line piracy conducted without a profit 
motive.  While illegal file sharing technically remains a crime, 
only those who engage in piracy for monetary gain now face jail 
time, while all others face administrative fines only.  Parliament 
also passed a broad legal reform bill in 2005 (known as the 
"ex-Cirielli" law), which shortened the period after which criminal 
cases pending trial are automatically dismissed.  Separately, a 
broad amnesty was passed in 2006, which IP industries believe voided 
many sentences and criminal prosecutions against IPR pirates. 
 
 
TRANSPARENCY OF THE REGULATORY SYSTEM 
------------------------------------- 
 
¶25.  In an effort to improve accountability and competition in the 
wake of the 2003-04 dairy firm Parmalat's collapse and scandal, 
Italy's Parliament approved a law in December 2005 to overhaul the 
Bank of Italy and improve corporate governance and oversight.  Italy 
also is subject to single market directives mandated by the EU, 
which are intended to harmonize regulatory regimes among EU 
countries. 
 
¶26.  The 2007 "Index of Economic Freedom," published by the Wall 
Street Journal and Heritage Foundation, ranked Italy as having "the 
world's 60th freest economy."  The study highlighted government 
interference, corruption, and a slow court system as contributing to 
Italy's ranking below less developed nations such as Uganda, Belize, 
and Jamaica.  (Note: Italy slid from 26th place in 2004, to 42nd in 
2005.) 
 
¶27.  According to a 2004 World Bank study, an entrepreneur wishing 
to start a business in Italy must follow 16 procedures, spend an 
average of 62 days, and pay around USD 5,000.  The study found that 
it costs more to open a business in Italy than anywhere else in 
Europe, with the exceptions of Greece and Austria.  In early 2007, 
PM Prodi announced that the GOI will seek to create a 
business-friendly environment where it would be possible to "open a 
business in a day." 
 
 
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
--------------------------------------------- ----- 
 
¶28.  Financial resources flow relatively freely in Italian financial 
markets and credit is allocated on market terms.  Foreign 
participation in Italian capital markets is not restricted; foreign 
investors are able to get credit on local markets and have access to 
a variety of credit instruments.  The Italian stock exchange ("Borsa 
Italiana") has fewer than 300 companies.  In recent years, Borsa 
Italiana established two new segments of the market devoted to 
smaller companies:  "STAR" and "Mercato Expandi," launched in 2001 
and 2003, respectively.  However, despite this effort, the number of 
listed companies on the Borsa continues to decrease. 
 
¶29.  Financial services companies incorporated in another EU member 
state may offer investment services in Italy without establishing a 
local presence.  U.S. and other firms based in non-EU member states 
may operate under authorization from Italian Companies and Stock 
 
ROME 00000147  005 OF 006 
 
 
Exchange Commission (CONSOB), the oversight authority for securities 
markets, corporate governance, and company audits. 
 
¶30.  Previously, Italian government bonds absorbed a large share of 
available domestic investment.  However, this share declined as 
interest rates on those bonds dropped during Italy's preparation for 
the EU economic and monetary union.  Even with lower yields, Italian 
government bonds are considered a safe haven for domestic investors 
burned by defaults on Argentinean, as well as Parmalat and Cirio, 
bonds. 
 
 
BANKING 
------- 
 
¶31.  The Italian banking sector remains sound, as the improvement in 
the quality of bank lending continued throughout 2006.  The banking 
sector in the last decade has undergone significant consolidation, 
with about 60 percent of total Italian banking assets involved. 
From 1996 to 2006, mergers and acquisitions involved 349 banks. 
Recently, Intesa and San Paolo-IMI boards approved a proposed 
merger.  The new banking group would be Italy's largest bank in 
terms of property and staff, though second to Unicredito in terms of 
assets.  The Intesa and San Paolo-IMI approval follows Central Bank 
Governor Draghi's appeal to speed up bank consolidations. 
Currently, the country's largest banks are: Unicredito Italiano, 
Intesa, San Paolo-IMI, Capitalia, Banca Nazionale del Lavoro (since 
May 2006 fully controlled by the French group BNL Paribas), and 
Monte dei Paschi di Siena.  The total assets of Italy's six largest 
banks are equal to 54.6 percent of total assets. 
 
¶32.  Retail banking fees in Italy are the highest among EU members. 
For example, fees for basic account payment services are eight times 
higher in Italy than in those EU member states with the lowest fees 
for service. 
 
¶33.  Since his appointment as Bank of Italy Governor, Mario Draghi 
has stated a clear preference for increased competition in Italian 
credit and banking markets.  Draghi has urged Italian banks to 
discard their "strategic inertness" and become more competitive by 
cutting exceptionally high transaction charges.  Draghi believes 
that domestic banking consolidation has been too slow and that 
Italian banks should proactively merge among themselves to ward off 
foreign bank acquisition.  Draghi has publicly stated that, while 
"patriotism is a virtue, it must be practiced under set rules, which 
these days are European, and not protectionist." 
 
¶34.  Authorization by the Bank of Italy is required before acquiring 
more than five percent of a financial institution's capital or 
gaining effective control of a financial institution, regardless of 
the amount of capital acquired.  Non-bank companies (either Italian 
or foreign) may not acquire more than 15 percent of a bank's 
capital.  Complex cross-shareholding has often been used to fight 
off takeover attempts in the financial sector.  In late 2005, the 
Dutch Bank ABN-AMRO obtained complete control of an Italian 
medium-sized bank, Banca Antonveneta; while in May 2006, the French 
banking group BNP Paribas acquired full control of Banca Nazionale 
del Lavoro, Italy's fourth largest bank. 
 
 
POLITICAL VIOLENCE 
------------------ 
 
¶35.  Political violence is a low threat to foreign investments in 
Italy. 
 
 
CORRUPTION 
---------- 
 
¶36.  Italy is a signatory to the 1997 OECD Convention on Combating 
Bribery, ratified in September 2000.  Italy has signed, but not 
ratified, the United Nations Convention Against Corruption, which 
was adopted in 2003 and came into force on December 14, 2005. 
 
¶37.  Transparency International's Corruption Perceptions Index 2006 
ranked Italy the 45th least corrupt country in the world, down from 
its 2005 ranking of 40th. 
 
¶38.  In January 2003, Italy enacted a law creating a High 
Commissioner to prevent and combat bribery within public 
administration.  Corruption is punishable under Italian law.  As in 
all judicial processes, much discretion regarding punishment is left 
to the presiding judge.  Most corruption in the recent past has 
 
ROME 00000147  006 OF 006 
 
 
involved government procurement or bribes to tax authorities. 
Bribes are not considered deductible business expenses under Italian 
tax law. 
 
¶39.  END PART ONE OF CABLE.  PART TWO FOLLOWS SEPTEL. 
 
SPOGLI