Friday, 10 Jan 2014
Business people at table
Overseas Business Risk - Italy
Political and Economic
Brief Political Overview
Founding member of the North Atlantic Treaty Organisation (NATO) in 1949 and of the European Community (precursor of the European Union) in 1957, a member of GATT/WTO, OECD, G7 as well as OSCE and Council of Europe, Italy is a democratic country with a population of about 60.6 million living on a total area of 301,330 km2 (116,344 sq. miles). The Italian Republic came into existence in June 1946 after the end of the Second World War. Under the 1948 Constitution, the Head of State is the President, who is indirectly elected for a 7 year term. The current President Giorgio Napolitano was elected in May 2006 and became the first former Communist to fill the post. He is currently serving his second term after being re-elected in April 2013. Parliament has legislative powers and is composed of a Senate (315 seats) and a Chamber of Deputies (630), both directly elected and with equal authorities.
For the first time since 1947, Italy has a coalition government formed by the left Democratic Party (PD); centrist Civic Choice (SC) and right People of Freedom (PdL). This was the result of an inconclusive general election which took place in February 2013, whereby the centre-left alliance led by the PD obtained a clear majority of seats in the Chamber of Deputies, thanks to a majority bonus that effectively trebled the number of seats assigned to the winning force, while in the popular vote it narrowly defeated the centre-right alliance of former Prime Minister Silvio Berlusconi. Close behind, the new anti-establishment Five Star Movement of comedian Beppe Grillo became the third force, clearly ahead of the centrist coalition of outgoing Prime Minister Mario Monti. In the Senate, no political group or party won an outright majority, resulting in a hung parliament.
In April, the re-election of Giorgio Napolitano as President of the Republic unblocked a two-month political gridlock and led the main parties to coalesce to form the present government, headed by Prime Minister Enrico Letta (PD).
Letta has united his Cabinet around a programme of growth and jobs (over austerity – mainly to tackle youth unemployment currently at 40%); reforming the constitution (including tackling difficult electoral reforms); and reducing taxes (while successfully getting Italy out of the EU’s Excessive Deficit Procedure).
Because of its cross-party majority, there is widespread agreement that this government is unlikely to last the entire legislature. However, Letta has recently said that his Cabinet could defy predictions and see out its five year term, if it managed to push through crucial constitutional reforms within 18 months.
The general political scene remains in flux. Implosion of Letta’s centre left PD now looks less likely, as the recriminations from February’s election failure fade in favour of support for the coalition.
The main opposition parties represented in Parliament are the relatively-recent protest movement Movimento 5 Stelle (M5S) [5 Star Movement], the leftist SEL - Sinistra Ecologia e Libertà [Left, Ecology and Freedom], Lega Nord [Northern League] which gives voice to the interests of the North.
The main targets of Mr Letta’s cabinet are: balancing fiscal austerity and public spending cuts with measures to foster economic growth and reduce unemployment (10.7% in 2012), to reform the electoral law and to tackle with the public debt of 133.3% of GDP (Eurostat figures, October 2013). This will help to restore investors’ confidence and related sovereign debt strains.
One of the long-standing problems for the Italian economy is a high public debt which reached 127% in 2012 and is projected to rise to 132.3% in 2013 (IMF - International Monetary Fund figures, World Economic Outlook, October 2013). This problem has been exasperated by a severe and prolonged recession and the crisis in Europe. This has also effected the Italian financial system which has so far overcome the shocks but remains vulnerable.
According to the IMF projections the structural balance as a percentage of potential GDP is -0.2 for 2013, and 0.0 for 2014. As to the budget deficit, the European Commission forecast in November 2013 that Italy’s deficit will stay below the 3% threshold in 2014 and that the harmonised inflation rate for 2013 will be 1.5%.
The real GDP was $2014bn (current prices) in 2012. Projected growth rates are still negative for 2013 (-1.8%) and only slightly positive for 2014 (+0.7%). A similar trend is expected for real GDP per capita: -2.1% in 2013 and 0.5% in 2014.
Private consumer expenditure should pass from -2.4% in 2013 to 0.2% in 2014. Public consumption is expected to fall in both the two years considered, at -2.0% and -2.9% respectively.
In the international ranking of developed economies, Italy has slipped to 9th position. Exports continue to drive the economy, the value of which reached a record high in 2012 with €389bn, although volumes fell by 0.5% compared with 2011. Thanks to these export figures, Italian export levels were the same in 2012 as in the pre-crisis period. The foreign trade balance recorded a €11bn surplus in 2012 (Italian government figures). The EU is Italy’s largest market and absorbed 54% of Italian exports in 2012.
The country is the also the 2nd largest manufacturer in Europe behind Germany and is a world leader in clothing and textiles. Other commodities which hit a surplus in 2012 are machinery, metals and metal products, plastics and rubber, refined petroleum products, transport equipment and electronics.
These results in the foreign trade balance also reflect the effects of low domestic demand but also represent the increasingly aggressive behaviour of many Italian manufacturers on global markets. In spite of their generally small size, some of these companies have become world leaders in niche sectors. Indeed small and medium enterprises contribute significantly to the economy often organised into industrial “districts”. However the global crisis has considerably affected SMEs, which have suffered from the credit squeeze in recent years. In general the recession has hit the profitability of businesses and their ability to finance their activities. Thanks to the low levels of debt and high savings, the financial situation of Italian families was less affected, although there is a growing divide between the wealthier and poorer classes.
Italy is an important investor in the UK and ranked third for number of projects in FY 2012-13. Overall, Italian investment in foreign countries reached €23.2bn in 2012.
However Italy is lagging behind the largest economies for Foreign Direct Investment attractiveness because of its complex bureaucracy, its slow judicial system, labour market laws, high energy costs, high corporate tax burden and corruption. Nevertheless, many of the largest world groups have subsidiaries in Italy and foreign companies have acquired several famous Italian brands in various sectors in the past few years. FDI in Italy reached a total value of €12.5bn in 2012.
Letta’s government has launched a policy known as Destinazione Italia [Destination Italy] with the objective of increasing foreign investment to drive growth and create new jobs and opportunities.
UK – Italy Trade in Goods
Italy is a key trading partner of the UK and a valued partner in the EU. UK exports in goods to Italy in 2012 were valued at £8.087bn, and Italy was the 9th market for the UK. In the same year Italy was the UK’s 8th largest import market.
The country has a mature and sophisticated market which does not present major challenges to UK companies wishing to develop trade. However there may be some specific issues which should be considered, namely as far as terms of payment are concerned. Payment terms in Italy are generally longer than in the UK and can vary between 60 and 120 days or even longer in the present period of economic uncertainty.
In addition the Italian public administration has accumulated large debts over the past few years. State arrears have provoked several company failures, but recently thanks to new legislation the government has started paying its debts with contractors and this is expected to have positive consequences for the whole economy.
In the unfortunate event of having to pursue a debt claim through the Italian courts, it should be noted that the process is extremely lengthy and expensive and can in extreme cases expire. The British Chamber of Commerce for Italy can provide details of members who offer a credit collection service.
Letters of credit are not normally entered into by Italian companies dealing with EU countries and, as with all contact with new customers, methods of payment and terms of contract should be well defined and agreed in writing.
Appropriate trade and bank references should be sought before consigning goods. In the case of distribution and agency contracts, sound legal advice should be sought on all aspects of the agreement.
Italy is highly active on human rights issues and supports social and economic development in disadvantaged countries through cooperation programs.
Italian action is carried out through a number of bilateral and multilateral instruments. Within the United Nations, Italy participates in the work of the Human Rights Council and the General Assembly’s Third Commission, the Commission on the Status of Women and other UN bodies to protect and promote human rights. The country supports the role and activities of the UN High Commissioner for Human Rights and contributes financially to its programs, providing periodic reports to bodies in charge of the implementation of International Conventions on Human Rights to which Italy is a part of.
Problems still exist for procedures adopted for illegal immigrants and for prisoners who face very difficult conditions in Italian extremely overcrowded prisons.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
As far as Italy is concerned, bribery and corruption represent major problems that cost the country around €60bn a year. Public tenders are generally regarded as the most at risk from corruption, particularly those associated with procurement, waste management, construction, health and defence. To prevent corruption, businesses participating in public tenders are required to produce very detailed information and documentation.
Businessman reading newspaper
The Anti-Corruption Law no. 19 was published in the Italian Official Gazette on 13 November 2012. It has implications both for the public and the private sector, with sentences up to 20 years. The Anti-Corruption Law defines three new corruption and bribery offences that are relevant for the private sector. The three new offences are: “induced bribery”, “dealings in unlawful influences” and “private bribery”.
The anti-corruption law requires each Public Administration to put in place specific preventive measures:
the adoption of an anti-corruption plan
the appointment of a compliance officer
the adoption of a code of conduct for employees.
Furthermore, Italian Law 231/2001 provides that companies acting in Italy may be held liable, fined, subject to restraining orders that prohibit the exercise of business, and/or subject to confiscation orders if certain offences – including corruption, bribery, fraud, money laundering offences – are committed, or attempted, in the interest of the company, by the company’s officers, managers or their subordinates, or by third parties acting on behalf of the company, such as agents, suppliers or other partners. The company’s liability is in addition to the criminal liability of the person who committed the offences.
Law 231/2001 applies to all types of Italian companies and associations and, according to consolidated case law and legal doctrine, also to companies with registered offices abroad, operating in Italy through a branch.
Read the information provided on our Bribery and corruption page.
In Italy there are isolated cases of domestic terrorism. Attacks carried out by the extreme left-wing and secessionist groups have generally been aimed at official Italian targets, mainly in the form of small bombs and incendiary devices.
Protective Security Advice
Crime levels are generally low but there are significant levels of petty crime in big city centres. Take care at railway and bus stations, on public transport and in crowded areas where pickpockets and bag snatchers can operate. Do not leave valuables unattended.
British citizens who lose their passports should contact the nearest British Consulate for advice. They should report the loss of passport to the local police initially and obtain a copy of the police report (denuncia). Other general advice about living and working in Italy can be found on the consular pages of the British Embassy’s website.
Read the information provided on our Protective security advice page
To protect their intellectual property rights (IPR) abroad, exporters should obtain professional advice about protection for patents, designs and trademarks in any country where they have a potential market.
Italy is at the forefront of European IPR developments and has adopted modern and up-to-date intellectual property practices. Recent innovations include introducing new measures to combat counterfeiting, protection for internet-related intellectual property, merging and simplifying patent and trademark rules.
Foreign companies investing in the Italian market can rely on the same legal protection of IPR granted to Italian companies. These rights extend to patents, trademarks, copyright and designs. Italian authorities are also seriously committed to the fight against traders of counterfeited goods.
Read the information provided on our Intellectual Property page.
Organised crime still has a strong foothold in Italian society in spite of the serious and effective commitment of authorities. That said, most organised crime syndicates tend to avoid contact with non-Italian companies.