348. Telegram 8866 From the Embassy in Italy to the Department of State1

8866. Subject: Italy: Political and Economic Trends. Ref: Rome 4065.

1. Summary: Italian political and economic balances are markedly more fragile following the bitterly contested divorce referendum, the regional elections in Sardinia, and the hard-bargained economic accords which have permitted the 5th Rumor government to continue. Although Italian production levels and employment are high, and business is profitable, there are questions as to whether the agreed economic stabilization package will be effective and sufficient. The future of the present government will depend largely upon economic performance between now and autumn. Particularly significant, in the expected governmental review of the situation at the summer’s end, will be the shaken confidence of the DC and the weakened position of Fanfani, the DC leader, as well as the more aggressive position of the Socialists, riding high on the wave of the pro-divorce win and PSI gains in the Sardinian elections. In foreign affairs the Embassy sees some lessening of U.S. problems with Italy in multilateral fora, but a likelihood that difficulties relating to the home porting of the submarine tender at La Maddelena will continue.

End summary.

2. Economic. The overriding question now before the country is whether the economic stabilization package agreed between the coalition parties June 18 will be effective. There are two major elements to be considered:

A. Whether the program as framed is sufficiently rigorous to moderate inflation (now around 20 percent on an annual basis) and eventually reduce the massive and unsustainable balance of payments deficit. No clear answer is available at this point: conservative elements tend [Typeset Page 1065] to describe the program as too lax, while the left believes it will reduce worker consumption too much without halting inflation. One missing element is whether and to what extent the lira will be allowed to depreciate. A depreciation of the order of 10 percent is probably necessary for a workable program, but will be politically unpopular, particularly with the left, and will quickly be translated into a general increase in price.

B. Whether it can be implemented. Although the parties have agreed on the program, and some union leadership is committed to accept it, it is uncertain, particularly if inflation continues at present rates, whether the unions as a whole and especially the union rank and file will do so. Pressures for government spending—to rescue bankrupt municipalities and the hospital system, for example—will be enormous. There are doubts that the government will be resolute enough to reach its revenue targets, while the requirements for and availability of transitional foreign assistance are still an unexplored factor.

Thus while agreement on the program was an essential step to avoid economic collapse (with consequences for Italy’s major economic partners as well as Italy) and is a positive element, many questions remain. Confidence has not yet been restored.

3. On the other hand, inflation aside, Italy is prosperous and growing. Production is at record levels in most industrial sectors, employment is high and business is profitable. If the stabilization program succeeds in maintaining this high level of economic activity and putting it on a sustainable basis, Italy should show good growth—perhaps 5 percent in 1974—with reasonable prospects for continuation in 1975. The gradual reduction in world raw material prices now under way will help, just as the sharp increases in 1973 were severely damaging. The energy deficit will remain a most difficult problem and Italy will need international assistance to finance it.

4. Labor: The federation CGIL, CISL, UIL (CCU) is taking a cautious attitude toward the new government economic accords. Labor fears that major increases in unemployment will result from the measures being instituted. The confederations must feel their way, recognizing that they may continue to experience difficulty in controlling the truculence of their constituent unions, particularly those in the metal trades.

In other labor areas, however, developments have been more clear. These developments are:

A. The unification trend has been slowed, though not reversed, as a result of political divisions induced by the divorce referendum and the instability of the center-left coalition, and by the brief CGIL campaign, now abated, to gain a share of governmental power for the PCI. [Typeset Page 1066] This has led to some second thoughts at CISL, and has given rise to increased internal strains in the UIL.

B. Collective contracts have developed a pattern of incorporating commitments for social ends, such as investments in the south.

C. Additionally, there is a trend toward demanding and receiving flat sum wage increases identical for all, with the consequent tendency toward a lessening of the differences in the income of differing job categories.

5. Political—Internal and foreign affairs: During the second calendar quarter, the divorce referendum and the critical need for economic restraints created exceptional strains within the coalition. The result has been to increase the trend toward erosion of confidence and compactness within the governing majority. The coalition has been pasted together sufficiently to last, with only a modicum of good luck, through the summer, but its future success will depend very much on the economic questions still unresolved.

6. Contrary to the expectations of most, the divorce referendum showed a 3 to 2 margin in favor of divorce. This outcome, and the size of the pro-divorce win, were both a surprise and a blow to DC leader Fanfani and the party. In consequence, ferment, insecurity, and criticism of Fanfani are growing within the party, but given Fanfani’s resilience, he cannot be counted out. DC problems are aggravated by the fact that the Socialists (PSI) were greatly stimulated by the pro-divorce win, and have taken a stance based on the assumption that the referendum results indicate a new basic balance of political forces within the country. The PSI view was reinforced by the results of the recent Sardinian regional elections, in which the PSI was a big winner while the DC suffered significant losses. Socialist bargaining in the intra-governmental negotiation of the credit and fiscal policy agreement of June 18 was without doubt tougher as a result of these two electoral tests. Moreover, it is no secret that the Socialists intend to up their price for participation in the government at the first convenient occasion. The PSI intends to push for one or more of the important ministries previously denied them. These include: Defense, Interior, and Treasury.

7. Both the referendum and the very limited sampling of the electorate involved in the Sardinian regional elections flagged a trend in Italy even more important than the immediate effects on the DC, the PSI, and their cooperation in the current coalition. The referendum result, and its confirmation in Sardinia, indicated clearly that the long term trend in Italy has been away from traditional party loyalties and toward political judgements based on the merits of the issues at hand. Common assumptions have generally held that the Italian people nurtured growing ambitions to become a fully modern 20th centry nation, but these assumptions were kept in question before the referendum [Typeset Page 1067] by the tenacity with which the electorate has clung to its traditional parties and responded to traditional appeals. There is a feeling in the land that all this is changed, and that the political class will have to assume the electorate to be a progressive and awakened body politic which will support political leaders in accordance with what they do rather than in accordance with party or church loyalty.

8. On the external side, circumstances have somewhat slowed the growth of problems between Italy and the United States. The gentlemen’s agreement on US/EC relations, the signing of the new Atlantic document, the long steps toward peace in the Mid-East and the consequently more favorable climate for EC-Arab initiatives, the withdrawal of U.S. objections to the Italian initiative for a separate Mediterranean declaration in CSCE, and finally, a certain mellowing of the Italian hard line on Basket III have all helped push into the background any question of possible incompatibility between Italy’s commitments to the EC and to close Atlantic relations.

9. At the same time the weakness of the government and its growing sensitivity to pressures from the left may presage continuing difficulties for our home porting operations in La Maddelena. These pressures could conceivably also adversely affect our military activities elsewhere in Italy.

While we see no problems on the horizon now that we cannot manage, we note the combination of circumstances, including economic pressures on the defense budget, which seem to flow in a direction compatible with left-wing ambitions for an Italy somewhat less committed to the NATO, EC, and Atlantic ties.

10. Conclusions: Without doubt the diminished cohesion of the governing parties initially, the continuing seriousness of the economic situation, and the increased pressures on Italian institutions to provide security, law and order, reforms, and material well-being, converging as they do at this time, create a more fragile situation which magnifies the importance of the built-in frictions and inefficiencies of the Italian system to which we have long been accustomed. There is a growing acceptance of the need for change, but little evidence that Italian institutions as they are structured will be able to adapt to the conclusions which are being drawn. We accept the assessment made inter-alia by Republican leader Ugo La Malfa, that the present paste-together of the coalition, and the economic accords which permitted it, will inevitably be ripe for critical review by the summer’s end.

Volpe
  1. Summary: The Embassy reported on Italian political and economic trends.

    Source: National Archives, RG 59, Central Foreign Policy Files, 1974. Confidential. Sent for information to Ankara, Athens, Bern, Bonn, Brussels, Canberra, Copenhagen, Dublin, The Hague, Helsinki, Lisbon, London, Luxembourg, Madrid, Oslo, Ottawa, Paris, Reykjavik, Stockholm, Tokyo, Vienna, Wellington, the Mission to the EC, and the Mission in Geneva. In backchannel message 246 to Scowcroft, June 20, Volpe urged an early visit by Kissinger to Rome to demonstrate U.S. “moral and political” support for the Christian Democrats. (Ibid., Nixon Presidential Materials, NSC Files, Box 425, Backchannel, Backchannel Messages, Europe, Vol. II 1974 (2 of 2)) On June 26, while in Brussels to attend a NAC meeting, Nixon met with Rumor, discussing with him the Italian political situation, CSCE, and the Western Alliance. (Memorandum of conversation, June 26; ibid., Box 1029, Presidential/HAK Memoranda of Conversation, Memcons, 1 June 1974–(Aug. 8, 1974) HAK + Presidential (2 of 3))