IMF Executive Board Concludes 2011 Article IV Consultation with Italy

Public Information Notice (PIN) No. 11/89
July 12, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Italy is also available.

On July 11, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Italy.1


Italy is experiencing a weak recovery mainly driven by exports. The economy grew by 1.3 percent year-on-year in 2010, less than the euro area average of 1.7 percent. The trend continued in the first quarter of 2011, with growth at 0.1 quarter-on-quarter. Domestic demand was weak. Household spending remained cautious on the back of rising unemployment and declining real disposable income. Investment rebounded significantly in the first half of 2010 but weakened following the termination in June of the tax incentives for investment. Government consumption was flat. The current account deficit worsened despite robust export growth, owing to rising energy prices and high import growth. Inflation increased moderately to 1.6 in 2010 from 0.8 percent in 2009 due to rising energy and commodity prices. Inflation rates are now comparable to those in the euro area, mainly because of non-core components, while the inflation differential on core prices remained relatively stable.

The authorities comfortably achieved the 2010 fiscal target. The overall fiscal balance declined from 5.3 percent of GDP in 2009 to 4.5 percent of GDP in 2010, well below the target of 5.0 percent of GDP. The improvement reflected both good revenue performance and contained budget expenditure. The increase in indirect taxes partly offset the decline in capital revenues. The introduction in 2010 of more stringent VAT refund rules reduced reimbursements by about 0.4 percent of GDP. The phasing out of the 2009 anti-crisis measures and cuts in capital spending and the wage bill contained expenses. Real primary current expenditure grew at the lowest rate since mid-1990s. The structural balance improved by about 1 percentage point of GDP in 2010, among the largest improvements in the euro area. However, payment delays increased. The positive budgetary trends continued in the first months of 2011. The government has recently enacted a fiscal adjustment package identifying the measures to reach a near-balanced budget target by 2014.

Italian banks have been adversely affected by the recession, with their asset quality worsening over the last two years due to the economic slowdown. Earnings were hampered by low net interest income and high loan-loss provisions but banks remained profitable. While the deterioration in credit quality is likely to slow, loan-loss provision costs will remain elevated, given the high level of accumulated non-performing loans. Profitability will also be undermined by rising funding costs. A large and stable retail funding base and ample collateral to access Eurosystem refinancing help Italian banks to face liquidity and funding risks, which have intensified with the euro area sovereign crisis. The ongoing recapitalizations in the amount of about €12 billion are strengthening them.

Executive Board Assessment

Executive Directors noted that Italy is experiencing a modest recovery, mainly driven by exports. While the economy has strengths, the public debt is high and growth is expected to remain constrained because of long-standing structural bottlenecks. The main policy goals should be to continue pursuing fiscal consolidation to reduce the large public debt, maintain financial sector stability, and boost growth potential through structural reforms.

Directors welcomed the authorities’ commitment to reduce the fiscal deficit to below 3 percent of GDP by 2012 and close to zero by 2014. They saw the medium-term fiscal package recently enacted by the government as an important step towards making these goals achievable. Directors stressed that decisive implementation of the package is key, and a number of them felt that more frontloaded spending measures would have a positive effect on market sentiments. They noted that the adjustment appears to rely also on measures at the sub-national level, and that the tax reform envisioned in the package is still to be defined.

Directors emphasized that sustainable fiscal consolidation should rely first and foremost on expenditure rationalization based on clear priorities. In this regard, they were encouraged by the government’s intention to undertake comprehensive public expenditure reviews. They emphasized that such reviews should result in major public expenditure contraction and improve public sector’s efficiency. Containing the public sector wage bill within a broader public administration reform would generate positive spillovers for the private sector. While important pension reforms have already been implemented, Directors saw scope for further measures to boost employment and generate savings. More generally, Directors stressed that the large fiscal retrenchment requires structural changes in public expenditure.

Turning to the revenue side, Directors noted that the tax system should be simplified to support growth and enhance tax compliance. They welcomed the government’s ongoing review of preferential tax regimes. Directors noted that careful execution of fiscal federalism should not undermine fiscal discipline.

Directors commended the authorities’ preemptive call for bank capital increases and the banks’ prompt response. They looked forward to swift completion of the recapitalization plan. Directors noted that bank funding costs and equity prices remain sensitive to market sentiment about the Italian sovereign, underscoring the need for fiscal consolidation. They also saw scope for improving governance and transparency in some local banks.

Directors stressed the need for decisive progress on structural reforms. While the National Reform Program identifies several key priorities, a comprehensive package of reforms is necessary to further raise productivity and enhance growth potential. In the product market, measures should aim at establishing a more efficient regulatory environment, opening up further services and network industries, and reducing public ownership. In the labor market, policies should address duality and the low participation rate. Reducing the labor tax burden, in a fiscally prudent way, could also boost employment. More decentralized bargaining would better align wages with productivity and boost competitiveness and, in this regard, Directors welcomed the flexibility introduced by the recent labor market agreement. Directors concurred that establishing an independent review and advisory body for reforms could foster consensus and focus policies on priority areas, while ensuring the continuity of the reform agenda.

Summary of Economic Indicators
(Annual percentage change, unless noted otherwise)


2005 2006 2007 2008 2009 2010 2011 1/

Real GDP

0.7 2.0 1.5 -1.3 -5.2 1.3 1.0

  Public consumption

1.9 0.5 0.9 0.5 1.0 -0.6 -0.3

  Private consumption

1.1 1.2 1.1 -0.8 -1.8 1.0 1.4

  Gross fixed capital formation

0.8 2.9 1.7 -3.8 -11.9 2.5 2.6

  Final domestic demand

1.2 1.4 1.2 -1.2 -3.4 0.9 1.3

  Stock building 2/

-0.3 0.5 0.1 -0.2 -0.6 0.7 0.1

Net exports 2/

-0.3 0.0 0.2 0.1 -1.3 -0.5 -0.2

  Exports of goods and services

1.1 6.2 4.6 -4.3 -18.4 9.1 4.6

  Imports of goods and services

2.1 5.9 3.8 -4.4 -13.7 10.5 5.0

Money and credit (end of period, percent change)


Private sector credit 3/

7.7 11.0 9.8 4.9 1.7 8.4 ...

National contribution to euro area M3 4/

6.3 7.7 7.6 6.9 5.5 2.4 ...

Interest rates (percent, end of period)


  6-month interbank rate

2.6 3.8 4.9 3.7 1.0 2.3

  Government bond rate, 10-year

3.5 4.2 4.7 4.5 4.1 4.8

Resource utilization


  Potential GDP

1.1 0.9 0.8 0.7 -1.9 0.6 0.7

  Output Gap (percent of potential)

-0.4 0.8 1.5 -0.5 -3.9 -3.3 -3.1

  Natural rate of unemployment

7.7 6.8 6.2 6.7 7.5 8.2 8.4


0.7 1.8 1.0 0.8 -1.6 -0.5 0.2

  Unemployment rate (percent)

7.7 6.8 6.1 6.8 7.8 8.4 8.6



GDP deflator

2.1 1.8 2.6 2.8 2.3 0.6 1.8

Consumer prices

2.2 2.2 2.0 3.5 0.8 1.6 2.5

Hourly compensation

3.0 1.5 3.8 6.0 6.6 -0.8 -0.1


0.6 0.6 0.4 -1.0 -2.4 2.0 0.6

Unit labor costs

2.4 0.9 3.4 7.0 9.0 -2.8 -0.7

Fiscal indicators


  General government net lending/borrowing 5/

-4.4 -3.3 -1.5 -2.7 -5.3 -4.5 -4.1

  Structural overall balance (percent of potential GDP)

-4.5 -3.3 -2.5 -2.6 -3.9 -3.0 -2.6

  Public debt 5/

105.9 106.6 103.6 106.3 116.1 119.0 120.6

Exchange rate regime

    Member of EMU

  Exchange rate (national currency per U.S. dollar)

1.2 1.3 1.4 1.5 1.4 1.3 1.4

  Nominal effective rate: CPI based (2000=100)

100.0 100.0 101.7 103.7 104.6 101.3

  Real effective exchange rate based on







    CPI (2000=100)

112.3 111.9 113.3 115.0 115.8 110.7

    normalized ULC (2000=100)

127.4 129.3 135.1 142.3 142.4 137.2

External sector 5/


  Current account balance

-1.7 -2.6 -2.4 -2.9 -2.1 -3.3 -3.8

  Trade balance

0.0 -0.7 0.2 -0.1 0.1 -1.2 -0.9

Saving investment balance 5/


  Gross national saving

19.0 19.0 19.4 18.3 16.8 16.9 16.3


-0.6 1.4 2.2 0.8 -2.1 -1.6 -1.5


19.7 17.6 17.2 17.5 18.9 18.5 17.7

  Gross domestic investment

20.7 21.6 21.9 21.2 18.9 20.2 20.0

  Gross fixed domestic investment

20.7 21.1 21.2 20.8 19.1 19.5 20.2


2.4 2.3 2.3 2.2 2.5 2.1 1.8


18.4 18.8 18.9 18.5 16.6 17.4 18.4

  Net lending

-1.7 -2.6 -2.4 -2.9 -2.1 -3.3 -3.8

Sources: National Authorities; and IMF staff calculations.

1/ Staff estimates and projections, unless otherwise noted.

2/ Contribution to growth.

3/ Twelve-month credit growth, adjusted for securitizations.

4/ Excludes currency in circulation held by nonbank private sector.

5/ Percent of GDP.

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. An explanation of any qualifiers used in summings up can be found here:


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