EC Prods Italy Toward Fiscal Restraint

Despite being a European Community founding member, Italy must prove its sincerity over political and economic reforms before EC monetary union. ITALY AND THE EUROPEAN COMMUNITY

WITHIN the European Community's family of countries, Italy is like an older child who is endearing, talented, yet worryingly unruly, who despite his age requires an extra measure of discipline.

And Italy, cognizant as never before of the threats to its future within that family, is showing signs it is finally hearing - and heeding - the reprimands.

The intensifying warnings from EC officials and elsewhere in Europe focus on Italy's economic performance and the threat its high inflation, profligate public spending, and mounting debt pose for participation later in the decade in an EC monetary union and single currency.

But worry extends to the political system as well, since broad economic reforms will not be possible without deep change in a patronage-fed, corruption-laced system that inspires little confidence among the Italian people.

One of the EC's founding members and its third-largest national economy, Italy has long been considered the most pro-European of the 12 EC nations. For most Italians, a European monetary union without Italy's participation remains unthinkable. Message hits home

So as expressions of doubt have multiplied about Italy's ability to discipline itself and meet the criteria for monetary union set in the pending Maastricht Treaty, examples of the message hitting home have begun to surface.

When EC Competition Commissioner Sir Leon Brittan suggested as recently as May that Italy cut its budget deficit by slashing subsidies to industry - which he said account for 28 percent of the deficit - he was largely ignored.

But last month, when the new government of Prime Minister Giuliano Amato announced sweeping privatization plans, Industry Minister Guiseppe Guarino told London's Financial Times, "We ought to be grateful to Mr. Brittan because he has made us realize we have to change."

In a tough and unprecedented upbraiding, the EC's council of finance ministers recently warned Italy that "strong measures cannot be further postponed" to rein in spending and other economic imbalances. Moreover, it said Italy's failure to meet Maasticht's economic convergence criteria by 1996 would cause "significant adverse repercussions throughout the Community" and relegate Italy to second-string status in the EC.

The slap in the face was well received by the country's major business owner and management organization, Confindustria, whose president applauded the Community for "calling Italy to order." The heads of such Italian industrial giants as Fiat and Benetton also welcomed the harsh words. Reforms seen as timid

Mr. Amato's intial "emergency austerity" deficit reduction proposals, approved Friday by the Italian parliament, include new taxes, spending cuts mostly in defense, and the privatization program. The plan has generally been received in Europe as too timid, but the prime minister is offering signs he has just begun.

Last week he announced an agreement to abolish Italy's sacrosanct scala mobile, the 47-year-old system linking most Italian workers' annual wage increase to inflation. As for the message he hoped the decision would send abroad, Amato said, "The most important point for the Italian economy and for those who watch it from the international markets" is that it should allow Italy "to become competitive again."

Italy is also taking steps toward reassuring Europe of its political stability. After two recent Mafia car-bomb assassinations of prominent judges, Rome authorities transferred incarcerated Mafia leaders to an island prison nicknamed "Europe's Alcatraz." That move, and the subsequent deployment of the country's secret police in the "Mafia war," followed demands from the European Parliament that Italy "put a stop to the power of an organized criminality that represents a flagrant violation of the rights a nd freedoms of Italian citizens."

While such signs are important, they constitute little more than a hint of what is needed, most experts agree.

What some of them fear is that even if Italy backs down from promises of far-reaching political and economic reform, it will be indulged by an EC finding it difficult to exclude a founding member from new institutions.

"Italy is not the only country with some distance to go before it qualifies for [monetary union], but it is one of the EC's original six, it is one of the big four [economies], and it's always been the most integrationist of all, so the temptation could be strong to act on emotion, bend the rules and say, `Let them in, we're sure they'll make it,' " says Stanley Crossick, director of the Belmont European Policy Center in Brussels.

Any move to "soften" the criteria for participation in a European monetary union would be dangerous for both Italy and Europe, Mr. Crossick says.

"If Italy can't get its act together under the pressure it faces now from the EC, the fear is it never would," he says. "Any sign of a willingness to overlook indiscipline might doom Italy's best chance of reform."

Crossick says an indulgent attitude toward Italy also would rouse those who fear monetary union would turn into a bailout for Europe's weaker countries. "Getting economic and monetary union wrong risks destroying everything the Community has built up in 40 years," he says. Little room for error

Italian resourcefulness has astounded more than one observer before, and analysts like Crossick say the country has the economic strength to meet the European test. But it will have to show over a period of two to three years that it can impose discipline and is not wavering from the right direction, and that leaves little margin for error.

As Italy's new leadership pursues the road to reform, what the EC and economists will be watching above all is the country's spending and budget deficit.

Last winter Italian officials told EC finance ministers in Brussels that Italy would reduce the deficit, equaling 10 percent of gross domestic product in 1991, to 5.5 percent by 1994. Maastricht's monetary union criteria call for a deficit not higher than 3 percent of GDP.

Instead, this year's deficit will top $140 billion, or 11 percent of GDP, without new cuts. And a recent report from the national treasury warns that without more deep cuts in coming years, the 1991 deficit would double by 1995.

As the EC will no doubt remind Italy, that is hardly the direction to head in if it wants to sit at the Community's head table.