Public Information Notice: IMF Concludes 2002 Article IV Consultation with Italy

October 25, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2002 Article IV consultation with Italy is also available.

On October 21, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Italy.1


As elsewhere in the euro area, the economic slowdown in Italy in 2001 has been followed by only a modest resumption of growth in the first half of 2002. As weaker external demand spilled over into domestic demand, economic growth stagnated in the last three quarters of 2001. GDP growth turned marginally positive in the first half of 2002 (0.7 percent annualized), although final domestic demand (notably for consumer durables and investment) remained weak, as did industrial production, notwithstanding a rebound in business confidence from its 2001 trough. Equity prices have fallen by over 20 percent from end-2001 to mid October 2002. Partly in response to this, as well as to concerns regarding employment, consumer confidence fell over recent months. Employment growth has decelerated to 0.4 percent (quarter-on-quarter, annualized) in the third quarter of 2002, following growth of around 2 percent in each of the past two years. Unemployment—though declining—remains high at 9 percent (and is especially high in the South and among women and the young). With steady, albeit moderate, wage growth, and cyclically declining productivity, unit labor costs have accelerated, contributing to underlying inflation above 2.5 percent since late 2001 (somewhat above the euro-area average).

Fiscal consolidation did not progress in 2001, and the sizable cyclically-adjusted deficit is not expected to decline in 2002. In 2001, the deficit widened to 2.2 percent of GDP, well above the target of 0.8 percent, reflecting, in part, weaker-than-anticipated growth and failure to contain spending. While developments in 2002 are clouded by lack of timely data on the deficit, various indicators, including the sizable government borrowing requirement, suggest that the deficit will be above 2 percent of GDP, against an initial target of 0.5 percent. This estimate reflects revenue shortfalls (only partly cyclical), expenditure overruns, and, moreover, includes sizable one-off revenues from asset sales (0.5 percent of GDP). Staff estimates that the 2002 cyclically-adjusted deficit net of asset sales will be 1.7 percent of GDP—around the level of 2001, and above that of 1999. The lack of progress since the outset of monetary union reflects difficulties in containing primary spending, and risks raising the public debt-to-GDP ratio in 2002.

Some rebound of economic growth remains the most likely scenario—with staff expecting growth of 0.5 and 2.0 percent in 2002 and 2003, respectively—however, the outlook is subject to sizable downside risks. Several factors are likely to underpin stronger growth in the period ahead, including supportive monetary conditions and tax incentives for investment (set to expire at end-2002). At the same time, sizable downside risks include weaker-than-projected external demand; additional spillover effects from international equity markets; the oil price persisting at its current high level; and the potential for further euro appreciation. As to domestic risks, the investment response to temporary tax incentives in 2002 remains especially uncertain, also in light of weakening business sentiment over the summer.

Executive Board Assessment

Executive Directors noted that economic growth in Italy has slowed markedly, due to weaker domestic and external demand, and on average has lagged behind that of other euro-area countries. Directors agreed that the policy agenda laid out by the authorities—including labor and product market reforms, tax and spending cuts, and fiscal consolidation—contains critical elements necessary to improve Italy's growth prospects and raise the employment rate, but stressed that it will need to be followed up by bold and timely implementation backed by public support for the measures. They noted the progress in the areas of labor and product market reforms, and welcomed plans to reduce the tax wedge on labor. However, they expressed concern at the lack of fiscal consolidation in recent years and called for significant and steady progress through structural expenditure reforms.

Directors agreed that a rebound in economic growth remains the most likely near-term scenario, but noted the existence of significant downside risks. Recent indicators suggest that the impact of temporary tax incentives for investment (expiring at end-2002) is likely to be muted, given uncertainty about economic prospects domestically and abroad. Directors viewed monetary conditions as supportive of growth in Italy, and believed that growth in 2003 should also benefit from the anticipated economic recovery in partner countries. But external developments, including those affecting oil prices, remain important downside risks to growth in 2003. Over the medium term, Directors considered that strong growth will depend critically upon further structural reforms.

Directors noted that inflationary pressures have not abated as earlier anticipated—with inflation still somewhat above the euro-area average, and unit labor costs rising recently. However, they also observed that price and cost competitiveness had remained broadly stable in the past two years, and that the current account was broadly in balance.

Directors agreed that the recent labor market accord represents an important step toward the broad-based reform that is needed to raise the employment rate from its relatively low level. The strategy behind the accord—of improved job matching and education, cuts in the tax wedge on labor, and increased labor market liberalization—was viewed as broadly appropriate. Directors noted, however, that unemployment is concentrated in the South—notwithstanding higher growth in the South over recent years. Most Directors considered that employment growth would be facilitated by a wage structure that better reflected regional differences in productivity and labor market conditions. They called on social partners to work toward this goal, and on the authorities to consider regional cost-of-living allowances in the public sector (and to collect and publish regional price level data). Directors also noted the importance of further improvements to infrastructure, law enforcement, and judicial and bureaucratic efficiency in the South.

Directors maintained that the fiscal outcome in recent years has been weaker than planned, and that the cyclically adjusted deficit (net of asset sales) has risen as a share of GDP since monetary union. In 2002, the deficit is again likely to exceed the original target by a sizeable margin. This reflects cyclical developments, but also structural revenue shortfalls and overruns on some primary expenditures. Directors regretted delays in introducing timely corrective measures in 2002, but welcomed more recent steps to prevent larger deficit slippages, including the limits on some discretionary spending on goods and services. Turning to the 2003 budget, Directors welcomed the targeted significant reduction in the headline deficit—but they expressed concern about the quality of measures and noted major risks to achieving the envisaged adjustment. Directors observed that the cyclically-adjusted deficit is targeted to decline by at least ½ percent of GDP, consistent with the recent Eurogroup statement. Directors thought that a somewhat faster pace of fiscal consolidation would have been preferable in light of Italy's high debt level. Some Directors were also of the view that the budget made use of accounting changes, which were unlikely to reduce the public sector borrowing requirement, unless accompanied by improved economic performance in the concerned enterprises. Directors noted the undue reliance on one-off measures, as in 2002, including on asset sales and new tax amnesties. The latter put at risk future tax compliance, and Directors urged the authorities to refrain from renewed tax amnesties.

For the medium term, Directors saw the need for sizable budget surpluses—unless further aging-related reforms are implemented. Increased regional devolution presents special challenges toward the achievement of overall fiscal consolidation. Several Directors considered it important to monitor closely the evolution of spending at the sub-national level and reiterated the need to pay attention to accountability of the local authorities. With Italy's public debt (in relation to GDP) the highest in the euro area and pending population aging, further reform of aging-related spending was seen as critical—notwithstanding important progress secured by earlier reforms. Directors welcomed plans to develop a second, fully funded and private pension pillar, but they thought that consideration should also be given to raising the effective retirement age. Expenditure reductions in coming years are also needed to offset the loss of one-off revenue measures. To this end, Directors urged early progress in the areas identified in the government's agenda, including steps to contain the public employment wage bill and health care costs. Directors noted the planned expansion of private-public sector partnerships, but cautioned the authorities to avoid, as planned, related future liabilities for the state.

Directors supported reducing Italy's high tax burden—provided that expenditure reductions are also put in place to secure the needed fiscal consolidation. Directors commended the emphasis in the first phase of the authorities' tax reform on reducing personal income taxes for lower income groups—which should help to spur employment among the most disadvantaged segments of the labor market.

Directors welcomed recent steps to expand product market reform. Progress in this area, and also on privatization and increasing efficiency in the service and energy sectors would play an important role in boosting productivity growth, which had slowed sharply in Italy over recent years. In this regard, Directors considered that the recent temporary freeze of some utility prices runs counter to the government's general agenda of strengthening market-oriented reforms.

Directors welcomed efforts to raise Italian banks' capital ratios so as to align them more closely with those of their international peers. The authorities' efforts to enhance banks' governance through restrictions on the control of financial institutions by foundations were also welcome. Some Directors thought that measures were needed to enhance minority shareholder rights, and that the authorities need to press ahead with bankruptcy law reform. Directors urged Italy to further increase official development assistance from its relatively low level. They welcomed the authorities' support for abolishing trade barriers for exports from least developed countries. They also commended the authorities for adopting additional measures to counter money laundering and the financing of terrorism, and for their continued assistance to international anti-money laundering efforts.

Directors noted that Italy's statistics are adequate for surveillance. Nevertheless, recent statistical and fiscal Report on Standards and Codes identified some areas of weakness—particularly regarding the quality and timeliness of fiscal data. Directors welcomed the authorities' intentions to address these in a timely fashion in order to increase fiscal transparency.

Italy: Selected Economic Indicators





2002 1/

Real economy (change in percent)







Domestic demand










Unemployment rate (in percent)






Public finances (general government; in percent of GDP)


Overall balance 2/





Primary balance 2/





Gross debt






Money and credit (end of year, percent change)


Contribution to euro-area M3 3/





Private sector credit 4/






Interest rates (year average)


Six-month rate on treasury bills 5/





Government bond rate, ten-year






Balance of payments (in percent of GDP)


Trade balance





Current account






Fund position (as of September 31, 2002)

Holdings of currency (in percent of quota)


Holdings of SDRs (in percent of allocation)


Quota (in millions of SDRs)



Exchange rate


Exchange rate regime

Euro-area member

Present rate (October 21, 2002)

US$0.97 per euro

Exchange rate (change in percent)


Nominal effective 6/





Real effective (based on unit labor cost) 7/






Sources: Data provided by the Italian authorities; International Financial Statistics; and IMF staff

estimates and projections.

1/ IMF staff estimates and projections.

2/ For 2000, including UMTS receipts of 1.2 percent of GDP. For 2001 and 2002, including estimated

receipts from asset sales of 0.1 and 0.5 percent of GDP, respectively.

3/ For 2002, year-on-year change for July. Data break in 2002.

4/ For 2002, year-on-year change for March.

5/ For 2002, average up to August.

6/ For 2002, based on monthly average to August.

7/ For 2002, based on monthly average to July.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the October 21, 2002 Executive Board discussion based on the staff report.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100