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COMMISSION RECOMMENDATION

OF 1 JULY 1981

TO THE GOVERNMENT OF THE ITALIAN REPUBLIC PURSUANT TO ARTICLE 108 ( 1 )

( ONLY THE ITALIAN TEXT IS AUTHENTIC )

( 81/494/EEC )

1 . IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE 108 ( 1 ) OF THE TREATY , AND FOLLOWING THE DECISION TAKEN ON 27 MAY BY THE GOVERNMENT OF THE ITALIAN REPUBLIC TO INTRODUCE A COMPULSORY DEPOSITION-PURCHASES OF CURRENCIES , THE COMMISSION HAS CARRIED OUT AN IN-DEPTH EXAMINATION OF THE ECONOMIC AND FINANCIAL SITUATION IN ITALY .

2 . THE COMMISSION HAS ESTABLISHED THAT THE ITALIAN CURRENT ACCOUNT OF THE BALANCE OF PAYMENTS , AFTER HAVING RECORDED A SUBSTANTIAL DEFICIT - IN THE REGION OF 2.5 % OF EXPENDITURE GDP - IN 1980 , CONTINUED TO DETERIORATE DURING THE FIRST FEW MONTHS OF 1981 . THE COMMISSION HAS ALSO ESTABLISHED THAT DURING THE OPENING MONTHS OF 1981 THE ITALIAN MONETARY AUTHORITIES WERE REQUIRED TO COVER THE DEFICIT MAINLY THROUGH USE OF THE OFFICIAL RESERVES .

THE COMMISSION CONSIDERS THAT THE INCREASE IN THE VALUE OF THE DOLLAR ACCOUNTS PARTLY FOR THE DIFFICULTIES OBSERVED . IT CONSIDERS NEVERTHELESS THAT THE DIFFICULTIES STEM PRIMARILY FROM INSUFFICIENT CONTROL OVER THE DOMESTIC ECONOMY DURING THE OPENING MONTHS OF THIS YEAR . AFTER PICKING UP IN THE CLOSING MONTHS OF 1980 , DOMESTIC DEMAND THEN REMAINED AT A RELATIVELY HIGH LEVEL INSTEAD OF FALLING BACK AS WAS NECESSARY IN ORDER TO STRENGTHEN THE TREND TOWARDS IMPROVEMENT IN THE REAL BALANCE OF FOREIGN TRANSACTIONS .

IT APPEARED THAT THESE DIFFICULTIES WERE MADE APPRECIABLY WORSE BY THE EVOLUTION OF A LARGE TREASURY BUDGETARY DEFICIT FROM THE FINAL MONTHS OF 1980 ONWARDS AND THE STRONG INJECTION OF LIQUIDITY TO WHICH IT GAVE RISE , WHICH WAS DUE IN PARTICULAR TO THE TRANSFER TO THE BANKING SYSTEM BY SEVERAL PUBLIC BODIES OF CREDITS HELD AT THE TREASURY . UNDER THESE CIRCUMSTANCES , THE MEASURES TO RESTRICT CREDIT WHICH WERE INTRODUCED ON 31 JANUARY AND 22 MARCH WERE UNABLE TO PREVENT LIQUIDITY IN THE ECONOMY FROM INCREASING EXCESSIVELY AND FROM REVIVING INFLATIONARY EXPECTATIONS . THE RAISING OF THE LIQUIDITY SITUATION , ALREADY RATHER UNRESTRICTIVE , ENABLED COMPANIES TO ACT ON THEIR EXPECTATIONS , INEVITABLY TO THE DETRIMENT OF THE EXTERNAL BALANCE .

3 . THE COMMISSION OBSERVES THAT THESE DIFFICULTIES WOULD HAVE BEEN LESS ACUTE IF THE ACCOMPANYING BUDGETARY MEASURES , WHICH WERE ENVISAGED AT THE TIME OF THE ADJUSTMENT OF THE CENTRAL RATE OF THE LIRE ON 22 MARCH , HAD BEEN APPLIED QUICKLY , AND IF INTEREST RATES ON PUBLIC SECURITIES , TOGETHER WITH THE DISCOUNT RATE , HAD BEEN SET AT A LEVEL SUFFICIENT TO MAINTAIN MARKET INTEREST IN SUCH INVESTMENT AND THUS REDUCE THE IMPACT ON LIQUIDITY OF THE WIDENING OF THE PUBLIC SECTOR DEFICIT .

THE COMMISSION NOTES THAT THE GOVERNMENT OF THE ITALIAN REPUBLIC CONSIDERED THAT , IN THE SITUATION THUS CREATED , IT WAS OF THE UTMOST IMPORTANCE TO ACT SO AS TO REDUCE THE LIQUIDITY OF COMPANIES AND THEREBY , OR AT LEAST REDUCE , THE RISK OF ADDITIONAL LOSSES OF OFFICIAL RESERVES . IT FURTHER NOTES THAT THE DEVICE ADOPTED BY THE GOVERNMENT OF THE ITALIAN REPUBLIC IS CONSIDERED BY THAT GOVERNMENT TO HAVE BEEN THE ONLY POSSIBILITY OPEN TO IT - TECHNICALLY AND LEGALLY - OF RAPIDLY ATTAINING THE DESIRED OBJECTIVE .

AS REGARDS THE PROCEDURE FOLLOWED , THE COMMISSION REGRETS THAT THERE WAS NO PRIOR CONSULTATION .

4 . ON THE SUBSTANTIVE QUESTION , THE COMMISSION CONSIDERS THAT IT IS ESSENTIAL TO PLACE THE ITALIAN BALANCE OF PAYMENTS DIFFICULTIES AND THE ACTION UNDERTAKEN TO MEET THEM IN THE CONTEXT OF THE CURRENT COMMUNITY AND WORLD SITUATION . THE COMMUNITY ECONOMY IS IN THE MOST DIFFICULT POSITION SINCE 1958 : NEVER HAS THE DEFICIT ON THE CURRENT ACCOUNT OF THE BALANCE OF PAYMENTS BEEN SO HIGH , NOR HAS SO LARGE A PERCENTAGE OF ITS WORKFORCE BEEN UNEMPLOYED . THE GREAT MAJORITY OF MEMBER STATES ARE SHOWING BALANCE OF PAYMENTS POSITIONS COMPARABLE TO THAT OF ITALY , AND IN CERTAIN CASES THE SITUATION IS EVEN MORE SERIOUS . ALL THIS MUST BE SEEN IN A WORLD CONTEXT IN WHICH COMPETITION IN MANUFACTURED GOODS IS BECOMING INCREASING INTENSE , IN WHICH THE WEIGHT OF ECONOMIC AND POLITICAL UNCERTAINTY IN INTERNATIONAL RELATIONS IS UNPRECEDENTED , AND IN WHICH THE WORLD EXCHANGE AND PAYMENTS SYSTEM LACKS A SOUND AND ACCEPTED MONETARY FRAMEWORK .

IN THESE CIRCUMSTANCES , AND IN THE ABSENCE OF SUITABLE ACTION TO OVERCOME THE CRISIS THROUGH AN IMPROVED JOINT EFFORT AND INTERNATIONAL AND COMMUNITY COOPERATION , THERE IS AN INCREASING DANGER THAT COUNTRIES WILL LOOK FOR A SOLUTION TO THEIR ECONOMIC PROBLEMS IN UNILATERAL ACTION , CONTRARY TO THE PRINCIPLES ON WHICH , SINCE THE END OF THE WAR , EXPANSION OF INTERNATIONAL TRADE AND WORLD ECONOMIC GROWTH HAVE BEEN FOUNDED . THE COMMISSION WOULD EXPRESS ITS SERIOUS CONCERN OVER THE RISK OF PROTECTIONIST CHAIN REACTIONS IN OTHER COUNTRIES WHICH COULD BE PROVOKED BY MEASURES RESTRICTING TRADE .

ITALY , AMONG THE MEMBER COUNTRIES OF THE COMMUNITY , IS ONE OF THOSE WHICH HAVE BEST BEEN ABLE TO RESPOND TO THE CHALLENGE OF OPENING ITS BORDERS . ITALIAN INDUSTRY HAS BEEN ABLE TO MAKE ITS PARTICIPATION IN THE COMMON MARKET THE STARTING POINT FOR A REMARKABLE PROCESS OF GROWTH AND MODERNIZATION . THE COMMISSION IS CONVINCED THAT THE ITALIAN ECONOMY HAS THE DYNAMISM , AND CAN REGAIN THE FLEXIBILITY , NECESSARY TO SUCCESSFULLY OVERCOME THE PRESENT DIFFICULTIES AND RESUME THE PATH OF BALANCED GROWTH , WHILE FULLY BENEFITING FROM ITS PARTICIPATION IN ALL ASPECTS OF THE BUILDING OF THE COMMUNITY .

5 . IT IS THE OPINION OF THE COMMISSION THAT BEYOND THE IMMEDIATE CAUSES AND PRESENT CONDITIONS WHICH HAVE LED , FOR THE THIRD TIME IN SEVEN YEARS , TO THE TAKING OF MEASURES WHICH ARE LIKELY TO HINDER TRADE , THE PROBLEMS OF THE ITALIAN ECONOMY ARE DETERMINED BY UNDERLYING FACTORS WHICH IT HAS BECOME URGENT TO TACKLE RESOLUTELY . THESE FACTORS MANIFEST THEMSELVES IN THE LACK OF CONTROL OVER THE PROCESSES OF PUBLIC AND COMPANY SECTOR SPENDING .

IN THE PUBLIC SECTOR , THE SIZE OF THE DEFICIT AND THE ORIENTATION OF SPENDING ARE THE PRIME SOURCE OF ECONOMIC AND FINANCIAL IMBALANCES AND AN OBSTACLE TO THE CHANGING OF ECONOMIC STRUCTURES . PUBLIC-SECTOR DEFICITS EXERT EXCESSIVE PRESSURE ON THE MONEY SUPPLY . TOO LARGE A PROPORTION OF CURRENT PUBLIC EXPENDITURE STIMULATES CONSUMPTION AND IMPEDES THE GROWTH IN PUBLIC INVESTMENT WHICH WOULD BE NECESSARY TO IMPROVE PRODUCTIVITY . DESPITE REFORMS INTRODUCED DURING RECENT YEARS , BUDGETARY PROCEDURES HAVE PROVED TO BE INCAPABLE OF ASSURING A BUDGETARY EVOLUTION WHICH IS COMPATIBLE WITH ECONOMIC AND MONETARY STABILITY . CERTAIN PARTS OF THE TREASURY ARE INSUFFICIENTLY CONTROLLED , AS WITNESS FOR EXAMPLE THE RECENT EVOLUTION OF THE TREASURY BORROWING REQUIREMENT . IN ADDITION , FUNDS TO COVER NEW EXPENDITURE OF A CONTINUING NATURE ARE NOT ASSURED AT THE START OF THE FIRST YEAR OF SUCH EXPENDITURE .

IN THE COMPANY SECTOR , THE CUMULATIVE EFFECT OF INDEXATION AND THE OUTCOME OF WAGE NEGOTIATIONS HAVE , FOR SEVERAL YEARS , BEEN INCOMPATIBLE WITH A RETURN TO A LEVEL OF INFLATION IN LINE WITH THE COMMUNITY AVERAGE . RIGIDITIES IN CONDITIONS OF EMPLOYMENT OBSTRUCT THE GAINS IN PRODUCTIVITY WHICH ARE THE NECESSARY CONDITION FOR A NON-INFLATIONARY AND CONSEQUENTLY LASTING IMPROVEMENT IN REAL WAGES AND EMPLOYMENT . DISTORTIONS IN THE WAGE STRUCTURE CAUSED BY THE PRESENT SYSTEM OF INDEXATION ARE BOTH A SOURCE OF INFLATION AND AN INEFFICIENT MEANS OF ALLOCATING RESOURCES .

IT IS THE OPINION OF THE COMMISSION THAT NO MEASURE OF A PROTECTIONIST NATURE CAN LEAD TO A CORRECTION OF THESE FUNDAMENTAL FACTORS . ON THE CONTRARY , SUCH MEASURES WOULD GIVE RISE TO THE ILLUSION OF BEING ABLE TO PUT OFF FUNDAMENTAL ADJUSTMENTS WHICH MUST BE MADE URGENTLY AND WHICH ARE ESSENTIAL IF INTERNAL STABILITY AND EXTERNAL COMPETITIVITY ARE TO BE REGAINED .

6 . THE COMMISSION IS AWARE THAT CERTAIN CORRECTIVE MEASURES ARE THE RESPONSIBILITY OF THE COMPANY SECTOR AND OTHER ECONOMIC AGENTS , AND DO NOT DEPEND ON GOVERNMENT OR PARLIAMENTARY ACTION . IT IS THEREFORE EVEN MORE NECESSARY THAT THE AUTHORITIES MAKE FULL USE OF THE LEGISLATIVE AND ADMINISTRATIVE INSTRUMENTS AT THEIR DISPOSAL AND THAT THEY USE ALL THEIR INFLUENCE TO GUIDE THE DECISIONS OF OTHER ECONOMIC AGENTS TOWARDS THE OBJECTIVE OF STABILITY .

THE RECOVERY PROCESS CANNOT BE COMPLETED QUICKLY . CONTINUOUS AND PROLONGED ACTION IS NEEDED TO OBTAIN LASTING RESULTS . IMMEDIATE ACTION IS THEREFORE EVEN MORE NECESSARY .

7 . THE COMMISSION RECOMMENDS THAT THE GOVERNMENT OF THE ITALIAN REPUBLIC URGENTLY TAKE THE NECESSARY MEASURES IN ORDER THAT PUBLIC FINANCES CEASE TO CONSTITUTE A PERMANENT THREAT OF DISTURBANCE FOR THE SHORT-TERM ADMINISTRATION OF THE ECONOMY . TO THIS END , IT RECOMMENDS :

- THAT EVERY EFFORT BE MADE TO KEEP NET DOMESTIC BORROWING BY THE PUBLIC SECTOR IN 1981 WITHIN THE LIMIT SET ( LIT 37 500 MRDS ),

- THAT BY WAY OF A FIRST STEP TOWARDS THE DESIRABLE ESTABLISHMENT OF THE UNITY OF THE PUBLIC SECTOR TREASURY , THE PROVISIONS WHICH LIMIT THE ABILITY OF LOCAL AND REGIONAL AUTHORITIES TO HOLD LIQUID ASSETS IN THE BANKING SYSTEM BE APPLIED STRICTLY ,

- THAT THE PRACTICE OF THE BANK OF ITALY OF BUYING AT THE TIME OF ISSUE TREASURY BONDS AND CERTIFICATES NOT TAKEN UP BY THE BANKS OR BY THE PUBLIC BE ENDED . THIS IMPLIES , FIRSTLY , THAT THE LEVEL OF INTEREST RATES APPLICABLE WILL HENCEFORTH BE DETERMINED BY THE MARKET , AND SECONDLY , THAT THE TREASURY SHOULD ENDEAVOUR TO AVOID TOO GREAT AN INSTABILITY IN THESE RATES , REGULARIZING AS FAR AS POSSIBLE ITS CALLS ON THE MARKET AND CONSEQUENTLY THE DEVELOPMENT OF ITS DEFICIT THROUGH THE YEAR .

FURTHER TO THESE URGENT MEASURES , THE COMMISSION RECOMMENDS THAT THE NECESSARY PROVISIONS BE ADOPTED AS QUICKLY AS POSSIBLE TO BRING ABOUT A LASTING IMPROVEMENT ON THOSE REQUIRED TO GUARANTEE FULL COMPLIANCE WITH CONSTITUTIONAL PROVISIONS PROHIBITING APPROVAL OF NEW UNCOVERED EXPENDITURE , A POSSIBLE EXTENSION OF THE ABILITY OF LOCAL AUTHORITIES TO RAISE TAXES , A REDUCTION OF THE UPWARD PRESSURE ON CERTAIN CHARGES BROUGHT ABOUT THROUGH AUTOMATIC MECHANISMS , AN IMPROVEMENT OF ADMINISTRATION AND KNOWLEDGE OF BUDGETARY FLOWS , AND THE ESTABLISHMENT OF A SINGLE TREASURY SERVICE FOR THE PUBLIC SECTOR .

THE COMMISSION RECOMMENDS FURTHERMORE THAT THE GOVERNMENT OF THE ITALIAN REPUBLIC PAY PARTICULAR ATTENTION TO THE RISK THAT INFLATIONARY IMPULSES RESULTING FROM THE PUBLIC SECTOR DEFICIT MAY SET IN MOTION A NEW INTENSIFICATION OF THE PRICE AND COST SPIRAL THROUGH THE MECHANISM OF VARIABLE PAY SCALES AND THE RENEWAL OF A NUMBER OF IMPORTANT COLLECTIVE AGREEMENTS . THE COMMISSION NOTES THAT THE PRESENT FRAMING OF CREDIT POLICY IS IN PRINCIPLE RELATIVELY STRICT . BUT IT CONSIDERS IT A MATTER OF SOME URGENCY THAT THE EFFORTS UNDERTAKEN BY THE GOVERNMENT OF THE ITALIAN REPUBLIC IN ACCORD WITH THE SOCIAL PARTNERS , TO DEFINE AND IMPLEMENT A POLICY OF VOLUNTARY REDUCTION IN THE RATE OF INCREASE IN NOMINAL INCOMES REACH A SATISFACTORY OUTCOME . THE COMMISSION CONSIDERS THAT SUCH A POLICY IS ESSENTIAL IN ORDER TO ENSURE THE COMPETITIVITY OF THE ECONOMY AND IN CONSEQUENCE THE STABILITY OF THE EXCHANGE RATE AND THE DISAPPEARANCE OF THE UNDERLYING PROPENSITY OF EXCHANGE MARKETS TO ANTICIPATE ITS DEPRECIATION .

8 . THE COMMISSION WILL FOLLOW CLOSELY THE DEVELOPMENT OF THE ECONOMIC SITUATION IN ITALY AND CAREFULLY MONITOR THE APPLICATION OF THE MEASURES TAKEN ON 27 MAY 1981 . IT CONSIDERS IN ANY EVENT THAT 1 OCTOBER , THE DATE ON WHICH THESE HOLDING MEASURES ARE TO TERMINATE , CONSTITUTES A MAXIMUM TIME LIMIT AND THAT EFFORTS SHOULD BE MADE TO SHORTEN THIS PERIOD . IT RESERVES THE RIGHT TO INTERVENE AT ANY TIME , IN ACCORDANCE WITH THE PROVISIONS OF THE TREATY , IN ORDER THAT ANY MODIFICATIONS WHICH MAY BE JUDGED NECESSARY MAY BE MADE WITH REGARD TO THE SCOPE AND DURATION OF THE MEASURES .

DONE AT BRUSSELS , 1 JULY 1981 .

FOR THE COMMISSION

FRANCOIS-XAVIER ORTOLI

VICE-PRESIDENT