Public Information Notice: IMF Concludes 2003 Article IV Consultation with Italy

November 13, 2003

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 2003 Article IV consultation with Italy is also available.

On November 7, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Italy.1


Output growth weakened in 2002 and, as elsewhere in the euro area, the economy stagnated in the first half of 2003. The recent weakness in activity followed a decade of relatively slow growth, with GDP expanding at one of the lowest rates among industrial countries. In 2002, GDP growth declined to 0.4 percent, as weakness in export markets and further losses in market shares resulted in a sizable negative contribution from the external sector. Domestic demand remained relatively resilient, partly reflecting the effect of temporary incentives for investment and car purchases. However, as these incentives expired at end-2002, and despite supportive monetary conditions, GDP declined by a cumulative 0.2 percent in the first half of 2003. Notwithstanding the cyclical downturn, employment has continued to grow, supported by the recent labor market reforms, wage moderation, and some employment incentives; and the unemployment rate fell to 8.7 percent in the third quarter of 2003. However, Italy's employment rate remains the lowest in the European Union, reflecting low labor force participation, particularly in the South. Inflation has continued to exceed the euro-area average.

Italy has been the only large euro-area country that has not breached the 3 percent deficit ceiling of the Stability and Growth Pact. However, this has been secured with large revenues from one-off measures and declining interest payments. At the same time, primary spending remains (in relation to GDP) above its level at the beginning of monetary union. In 2003, further expenditure overruns (primarily on health care) and lower revenues on account of the weakening economy are expected to raise the fiscal deficit, with staff expecting the deficit to reach about 2.7 percent of GDP in 2003; the authorities expect a deficit of 2.5 percent of GDP. The decline in the cyclically-adjusted deficit (net of one-off measures) would be smaller than the fall in interest payments and, as a result, the cyclically-adjusted primary balance is expected to worsen further in 2003. The cash-based borrowing requirement is expected to exceed 4 percent of GDP, and its high level has prevented a significant decline in the debt-to-GDP ratio, which remains the highest among euro-area countries.

Near-term growth prospects have strengthened somewhat over the summer with the rebound in business confidence and firmer signs of an external recovery. In all, staff expects GDP growth of 0.4 percent in 2003 and 1.7 percent in 2004. However, concrete signs of an upswing are still few and the outlook is subject to sizable downside risks, including a slower-than-projected recovery in Europe, a further appreciation of the euro, and a delayed recovery in private investment.

Executive Board Assessment

Executive Directors noted that, while the prospects for a gradual recovery in economic activity in the near term have improved, Italy's GDP growth over the past decade has been disappointingly low, whereas inflation has remained above the euro-area average. Accordingly, Directors saw as the key challenge facing the authorities to continue to address the supply-side weaknesses that are at the heart of Italy's slow growth. Deep-rooted structural weaknesses in the labor market have been effectively reduced, but a more determined fiscal consolidation and structural reform strategy will be needed to raise the economy's employment and productivity growth, and strengthen its external competitiveness. This will require continued strong efforts to mobilize public support for the implementation of reforms in a wide range of areas.

Against this backdrop, Directors welcomed the recent pension reform proposals. If adopted, the proposed reform will constitute an important step toward increasing labor force participation by raising the effective retirement age. Together with the attainment of a structural balanced budget position over the next few years, the savings envisaged by the current reform proposal will also help lower and then stabilize the public debt over the coming decades. Directors urged the authorities to work toward expeditious and full implementation of the reform.

Directors underscored the need for a more determined fiscal consolidation effort. Many Directors commended the authorities for being the only large euro-area country that has kept the fiscal deficit below the Stability and Growth Pact's 3 percent of GDP ceiling. However, Directors generally expressed concern about the steady worsening of the primary balance and lack of progress in lowering primary spending ratios, with extensive recourse to one-off measures, including various tax amnesties which put future tax compliance at risk. Directors considered that the government's medium-term targets for reducing the structural deficit and plans for phasing out the reliance on one-off measures are moves in the right direction. However, in light of Italy's high public debt, they felt that a faster adjustment in 2004 than envisaged in the budget, including a swifter replacement of one-off measures with structural expenditure measures, would be desirable.

Directors regretted that persistent difficulties in reining in public spending have precluded faster progress in reducing Italy's high tax burden. To help raise Italy's growth potential, they encouraged the authorities to aim for more ambitious progress through expenditure savings in areas such as public wages and employment, enterprise subsidies, health spending, and public procurement, that would create room for tax cuts. Directors considered that public-private partnerships for infrastructure investment could yield efficiency gains and budgetary expenditure savings, provided they are accompanied by a careful assessment of risks, close monitoring, and full transparency. Regarding fiscal decentralization plans, they underscored the need to clearly delineate tax and spending responsibilities, introduce adequate incentives and constraints for all territorial entities, and ensure the availability of accurate data on sub-national finances.

Directors commended the substantial liberalization of the labor market since the mid-1990s, which, together with wage moderation, has led to strong employment gains also during a period of cyclical weakness. Notwithstanding these successes, Italy's employment rate remains the lowest in the EU, and Directors looked forward to ongoing labor market reforms, as well as increased regional wage differentiation, that will spur a further rise in employment, including through incorporation of the underground economy. They welcomed the implementation of the first part of the reforms agreed with the social partners in 2002, and called for proceeding expeditiously on the second part of the accord. They also encouraged the government and social partners to work together to ensure that wages better reflect productivity differences and labor market conditions across regions, and looked forward to the public sector leading by example with regional cost of living allowances, once regional price level data are published.

Directors welcomed ongoing policy initiatives to help achieve more durable convergence in living standards for the South. While there has been a welcome pick-up in employment, export, and private investment growth, and the creation of new firms, they saw scope for further strengthening local administrations and law enforcement, and for well-planned and executed public infrastructure initiatives.

Directors called for steps to boost productivity, whose growth rate has slowed sharply in recent years. They stressed the importance of raising expenditure on Research and Development, removing impediments to entrepreneurial activity by eliminating bureaucratic hurdles, and rapidly implementing a long overdue reform of the bankruptcy law. To strengthen competition and deregulation in product markets, Directors encouraged the authorities to address the lack of competition in key service sectors where high prices raise the costs for firms, to resist state interference in the operation of the regulatory bodies, and to proceed with privatization, including at the local level, as rapidly as allowed by market conditions. They welcomed recent corporate law reforms affording the potential for an enhanced role of minority shareholders.

Directors welcomed the strengthening of the Italian banking system in recent years. To raise profitability levels, they saw scope for further efficiency gains, including through cost reduction and further consolidation. They also emphasized the importance of maintaining consumer confidence in financial markets by enforcing clear and comprehensive information disclosure requirements for all financial products.

Directors welcomed the turnaround in Italy's Official Development Assistance and the definition of a road map for further increase in ODA from 2002 to 2006; they urged the authorities to continue working toward this goal. They also encouraged them to take advantage of Italy's EU presidency to help advance trade liberalization under the Doha round, with a number of Directors underscoring the importance of further reforms of the Common Agricultural Policy. Directors commended the authorities for their efforts to counter money laundering and the financing of terrorism, and for providing other countries with technical assistance in this area. They welcomed the authorities' decision to include collective action clauses in foreign bond issues.

Directors noted that Italy's statistics are adequate for surveillance, and welcomed the recent publication of quarterly accrual-based general government accounts. They encouraged the authorities to address in a timely fashion the remaining areas of weakness identified by last year's statistical and fiscal Reports on the Observance of Standards and Codes-particularly regarding general government data.

Italy: Selected Economic Indicators





2003 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 5/






Balance of payments (in percent of GDP)


Trade balance





Current account






Fund position (as of September 30, 2003)


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 7, 2003)


per euro

Exchange rate (change in percent)


Nominal effective 6/





Real effective (based on unit labor cost) 6/






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, 2002, and 2003 including estimated receipts from asset sales of 0.2, 0.8, and 0.1 percent of GDP, respectively.

3/ For 2003, year-on-year change for August. Data break in 2002.

4/ For 2003, year-on-year change for April.

5/ For 2003, average up to August.

6/ For 2003, based on monthly average to September.

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.


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