CELEX: 51993PC0017
Language: en
Date: 1993-01-15
Title: Proposal for a COUNCIL DECISION concerning a Community loan in favour of the Italian Republic

COMMISSION OF THE EUROPEAN COMMUNITIES
                                         COM(93) 17 final
                                         Brussels, 15 January 1993
                           Proposal for a
                         COUNCIL DECISION
       Concerning a Community loan in favour of the itaiian
                               Repub11c
                   (presented by the Commission)
 ---pagebreak---                                 - 1 -
                         EXPLANATORY MEMORANDUM
               Application by the Italian Government for
                  a Community balance-of-payments loan
1. The Italian Government (through a letter from Mr Barucci, the
   Treasury Minister, to President Delors on 2 October, 1992) has
   applied for a Community loan of ECU 8 000 million according to
   Council Regulation (EEC) N* 1969/88 of 24 June 1988 establishing a
   single facility providing medium-term financial assistance for
   Member States' balances of payments.
2. During the period of currency turbulence which preceded the
   realignment of the Lira within the exchange rate mechanism (ERM) of
   the European Monetary System and, then, the suspension of Lira
   participation in the ERM, there were very substantial capital
   outflows from Italy, a major reduction in official reserves and an
    increase in official short-term indebtedness. Since September a
   reflow of capital       into   Italy has allowed only a partial
   reconstitution of the lost reserves.
3. The application for a Community balance-of-payments loan is an
   element in the Italian Government's strategy to restore credibility
   to its policies and stability to financial markets, thus helping to
   rebuild lost official reserves, prepare for re-entry of the Lira
    into the ERM and achieve more normal levels of interest rates. The
   key to credibility will be successful pursuit of budgetary
   adjustment. After many years during which the budget deficit has
   remained above 10% of GDP and the public debt ratio has been
   steadily rising (to over 100% of GDP), the Italian Government has
    introduced a large budgetary adjustment package for 1993. This is
   the first stage in the Italian Government's medium-term adjustment
   programme for 1993-95, in which it is planned to halve the total
   budget deficit and to stabilize the debt ratio by 1995. An
    important feature of the 1993 budget is that it starts to tackle in
   a durable fashion some of the underlying structural weaknesses of
    the Italian public finances.
4. The Commission proposes that the conditions attached to the
   Community balance-of-payments loan should be designed to reinforce
    the external disciplines (already coming from market pressures) on
    the Italian Government to pursue its planned budgetary adjustment
    in 1993 and subsequent years. To this end the granting of the loan
    in a series of tranches is proposed, closely linked to the Italian
    budgetary timetable and dependent at each stage on the introduction
   of adequate budgetary adjustment measures.
5. The Italian application was discussed by the Monetary Committee on
    14 January 1993; the Committee positively assessed the Italian
    adjustment programme, stressed the need for budgetary targets to be
    respected, and generally supported the approach to the loan
    application proposed by the Commission.
6.  In view of the above, the Commission proposes to the Council to
    adopt the attached Decision granting a loan of ECU 8 000 million to
    the Italian Republic.
 ---pagebreak---                                        - 1a -
                                Proposal for a
                               COUNT-M DECISION
                                [of          1993]
             Concerning a Community loan in favour of the Italian
                                     Republie
                                   (93/.../EEC)
THE COUNCIL OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Economic Community,
Having regard to Council        Regulation    (EEC) N" 1969/88 of 24 June 1988
establishing a single facility providing medium-term financial assistance
for Member States' balances of payments^ 1 ), and in particular Article 1
thereof,
Having regard to the proposal           from  the  Commission, submitted   after
consultation of the Monetary Committee,
Whereas   the   Italian Republic has appSied         for medium-term   financial
assistance to support its balance of payments and its economic programme of
adjustment and reform-,
Whereas the total amount outstanding under previous loans granted to the
Member    States    is   within     the    ceiling   specified   in  Regulation
(EEC) N- 1969/88;
Whereas in addition to the immediate problems in the balance of payments
arising from the substantial capital outflows which occurred during the
recent period of currency turbulence, the consequent reduction in official
reserves and increase in short-term indebtedness, the Italian economy
exhibits serious structural imbalances, in particular in the public finance
domain, affecting the stability of its external position; whereas a balance
of parents loan disbursed in tranches is Justified while measures of
consolidation and adjustment are undertaken; whereas tiio proceeds of the
 ioan will be used to strengthen the Italian official reserves;
   (1)  OJ N* L 178, 8.7.1988, p. 1
 ---pagebreak---                                      - 2 -
Whereas it is the intention of the Italian Government to re-enter the
exchange rate mechanism (ERM) of the European Monetary System; whereas
making such an ERM re-entry sustainable requires the implementation of a
programme which will achieve further progress in reducing inflation and an
improvement in the structure of the public finances; whereas such objectives
of improved convergence with the best-performing Community economies will
only be met by a substantial reduction in public sector deficits leading to
a declining trend in the public debt/GDP ratio, by reforms of the
organisation of the public sector, by a tight monetary policy and by a firm
exchange rate poi icy;
Whereas the Itaiian Government is pursuing a three-year programme of
budgetary adjustment aimed at substantially reducing deficits so that the
public debt rati© is first stabilized and then put on a downward trend, and
has presented this programme on which its application for a loan is based;
whereas the Itaiian Government will implement fully its programme of
budgetary adjustment and reform over a three-year period from 1993 to 1995
so as to achieve the targets and introduce the specific measures indicated
 in its programme agreed as follows:
1. The budgetary targets for 1993, 1994 and 1995 are set in order to achieve
    the stabilization of the public debt ratio by 1995. On the basis of a
    projected GDP growth of 1.5% in 1993, 2.4% in 1994 and 2.6% in 1995 they
    are:
    -  for 1993, LIT 150 trillion for the state sector borrowing requirement,
       with a surplus for the state sector borrowing requirement net of
       interest payments (the primary surplus) of LIT 50 trillion;
    -  for 1994, LIT 125 trillion for the state sector borrowing requirement,
       with a primary surplus of LIT 77 trillion;
    -  for 1995, LIT 85 trillion for the state sector borrowing requirement,
       with a primary surplus of LIT 115 trillion.
2. If the burden of interest payments in 1994 and 1995 is foreseen to exceed
    that projected at present by the Italian authorities (LIT 202 trillion in
    1994 and LIT 200 trillion in 1995), the targets for the primary surplus
    will be revised upwards by the time detailed budget proposals for these
    years are announced, in order to ensure respect of the targets for the
    total borrowing requirement and to stabilize the gross public debt/GDP
    ratio by 199.5. Thereafter the primary surplus will be maintained at a
    sufficiently high level to ensure further reductions in the total deficit
    and a downward trend in the debt ratio.
3. The deficit targets are set in absolute amounts as stated above; on the
    basis of the latest macro-economic projections made by the Italian
    authorities they represent:
    -  for the state sector borrowing requirement, 9,3% of GDP in 1993, 7,3%
        in 1994 and 4,7% in 1995;
    -  for the primary surplus, 3,1% of GDP in 1993, 4,5% in 1994 and 6,4% in
       1995;
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   The corresponding development of the state sector gross debt/GDP ratio is
   110.6% at end 1993, 112.5% at end 1994 and 112.4% at end 1995.
4. The programme of privatization of state-owned assets to be pursued by the
   Italian authorities is intended to provide net proceeds to the state
   sector accounts of LIT 7 trillion in 1993, LIT 15 trillion in 1994 and
   LIT 12 trillion in 1995. Within the framework of legislation already
   passed, the Italian Government will publish a list of public sector
   enterprises and other state-owned assets to be privatized together with
   an indicative timetable for these sales. Any state sector privatization
   receipts in excess of those currently planned will be used to increase
   the state sector primary surplus and hence to reduce the debt ratio, and
   will not be used to substitute for other necessary adjustments of
   expenditure and revenue.
5. Within the framework of the enabling legislation already enacted, the
   Italian Government will continue implementation of detailed measures of
   structural reform in the areas of (i) health care, with the aim of
   reducing inefficiencies and containing expenditure, also by rendering the
   regional level of government fully responsible for expenditure overruns
   incurred in the operations of the decentralized National Health Service;
   (ii) civil service, in order to improve the control on expenditure for
   compensation of employees and the efficiency and productivity of public
   administration, also by having recourse to extended mobility of personnel
   and   increasing managerial responsibility; (iii) pensions, with the
   objective of stabilizing pension expenditure relative to GDP, also by
   raising the retirement age, harmonizing pension schemes and limiting
   indexation to the protection of purchasing power; and (iv) local finance,
   in order to decrease the dependence of local authorities on transfers
   from the central government, also by introducing new forms of local
   taxation.
Whereas it is also the intention of the Italian authorities to continue the
pursuit of policies in the monetary sphere and in the field of incomes
conducive to reducing the rate of inflation, in particular:
-  Geared to the primary objective of containing inflationary pressures, the
   growth of M2 in 1993 will be in the range of 5-7%, which is consistent
   with the 1993 projections for nominal GDP growth. In conjunction with
   this objective, the Banca d'Italia will closely monitor the growth rate
   of domestic credit consistent with the objectives for the rate of
    inflation and expansion of M2. In 1994 and 1995, monetary targets and
   out-turns should continue to be in line with the decline in inflation
   projected in the Italian Government's budgetary adjustment three-year
   programme. It is the intention of the Italian Government to introduce
    legislation designed to abolish the legal possibility of monetary
   financing by the end of 1993, anticipating the objective of Article 104
   of the Treaty on European Union.
 ---pagebreak---                                          4 -
-   The Italian Government will seek to secure wage moderation throughout the
    economy by building on the July 1992 agreement between the Government,
    the trade unions and the industrial employers' association on the reform
    of the wage-setting mechanism and by maintaining the planned wage
    restraint in the public sector.
Whereas it is agreed that in the implementation of this Decision the Italian
authorities will consult closely with the Commission and will make available
all the necessary information for a full and effective monitoring of the
agreed programme of adjustment; whereas, In accordance with this Decision,
developments in the Italian economy and in Italian economic policy will be
reviewed twice a year in the framework of multilateral surveillance or more
frequently if warranted,
HAS ADOPTED THIS DECISION:
                                    Article 1
The    Community    shall   grant  the   Italian  Republic   under  Regulation
 (EEC) No. 1969/88 a loan of ECU 8 000 million or the equivalent amount in
other currencies.
                                    Article 2
The loan shall be made available to the Italian Republic              in four
 instalments. The average life of each instalment shall not exceed six years.
The first two instalments shall be made as follows :
    -   the first instalment amounting to ECU 2 000 million or the equivalent
        in other currencies not earlier than 1 February 1993;
    -   the second instalment amounting to ECU 2 000 million or the equivalent
        amount   in other currencies     to be released     not earlier   than
        1 July 1993, and in any case after the Commission, in consultation
        with the Council and in the light of an examination made in
        collaboration with the Monetary Committee of the progress in the
        execution of the programme, is satisfied that any additional measures
       which may, Jbe necessary have already been taken and that the budgetary
        targets of the programme for 1993, after taking into account weaker
        economic growth or higher interest rates than projected, are likely to
        be achieved.
The third and fourth instalments shall be made as follows :
    -   Before 30 September 1993, the Italian Government, in collaboration
        with the Commission, will reassess the budgetary targets for 1994 so
        as to achieve the key objectives of the medium-term programme and in
        the light of actual and prospective macroeeonomic developments. The
        third instalment amounting to ECU 2 000 million or the equivalent
        amount   in other currencies will be released not earlier than
        1 February 1994 and in any case only after the Commission, in
 ---pagebreak---                                       - 5 -
      consultation with the Council and in the light of an examination made
      in collaboration with the Monetary Committee, is satisfied that the
      measures necessary to achieve the budgetary targets set for 1994 have
      been implemented.
      Before 30 September 1994, the Itaiian Government, in collaboration
      with the Commission, will reassess the budgetary targets for 1995 so
      as to achieve the key objectives of the medium-term programme and in
      the light of actual and prospective macroeconomic developments. The
      fourth Instalment amounting to ECU 2 000 million or the equivalent
      amount   in other currencies will be released not earlier than
      1 February 1995 and in any case only after the Commission, in
      consultation with the Council and in the light of an examination made
      in collaboration with the Monetary Committee, is satisfied that the
      measures necessary to achieve the budgetary targets set for 1995 have
      been implemented.
                                  Article 3
1. The loan shall be granted on the basis of the decision taken by the
   itaiian Republic to implement the budgetary adjustment and reform
   programme which it has presented, the objectives of which are set out in
   the recitals to this Decision.
2. The Commission, in collaboration with the Monetary Committee, shall
   examine at regular intervals the evolution of the economic situation of
   Italy and the execution of the budgetary adjustment and reform programme,
   as implemented. These examinations will continue until the loan is fully
   repaid.
                                   Article 4
This Decision is addressed to the Italian Republic.
Done at Brussels,
                                For the CounciI
                                  The President
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                                                               COM (93) 17 final
                                                      DOCUMENTS
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                                 Catalogue number : CB-CO-93-021-EN-C
                                                             ISBN 92-77-52130-9
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