Press Release No. 15/321

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Italy

July 7, 2015

On July, 1, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Italy.

The economy is emerging gradually from a prolonged recession. Financial market sentiment and confidence indicators have improved substantially since end-2014. Despite the recent bouts in volatility, sovereign bond yields have fallen to pre-crisis levels buoyed by the European Central Bank’s quantitative easing (QE). Bank and corporate funding costs have declined. Rising business and consumer confidence has stemmed the decline in domestic demand. Against this backdrop, the economy is expected to recover moderately, with real GDP projected to expand by 0.7 percent in 2015, supported by domestic demand and net exports. With the favorable tailwinds from QE continuing and investment gaining further momentum, growth is projected to pick up to 1.2 percent in 2016.

Policies at the European level such as QE and more flexibility in the Stability and Growth Pact have been instrumental to support demand. At the national level, Prime Minister Matteo Renzi’s government has set out an ambitious agenda to overhaul Italy’s political and economic system. The Jobs Act, an overhaul of Italy’s labor market, was approved by Parliament in December and has largely been implemented. A new law to convert Italy’s largest cooperative banks into joint stock companies has spurred expectations of consolidation in the sector. Reforms of product and services markets, public administration, education, judicial, and tax system are also progressing.

There is now a window of opportunity to push ahead with deeper reforms to re-ignite growth. This requires continued actions and strong implementation efforts on multiple fronts, which are mutually reinforcing. A wide-ranging reform to raise the efficiency of public services is envisaged and would help tackle the long standing productivity problem. Product market reforms in sectors that remain highly regulated such as transportation would also improve productivity. A broad-based strategy to strengthen bank and corporate balance sheets, including an enhanced insolvency regime and standard criteria for bank assessments of the viability of small and medium enterprises, will support recovery. Fiscal rebalancing is needed to further reduce the high taxes on labor and capital, through savings from past and ongoing spending reviews.

Executive Board Assessment²

Executive Directors commended the authorities for their bold policy actions, which, together with actions at the European level, have contributed to the turnaround of Italy’s economy from a prolonged recession and have improved confidence. Nevertheless, the recovery is still fragile, and medium term prospects are held back by structural bottlenecks, high unemployment, weak balance sheets, and elevated public debt. Directors emphasized that addressing these challenges requires full implementation of policy efforts and broad-based structural reforms, building on the many achievements over the past year. They agreed with the focus on raising productivity, strengthening the financial health of banks and corporations; and pursuing growth-friendly fiscal consolidation.

Directors welcomed progress on structural reforms to improve productivity and the business climate, notably in the labor market, public administration, governance, and the judicial and tax systems. They encouraged the authorities to press ahead with the various initiatives to improve public sector efficiency, local public services, and competition in the product and service markets. Directors looked forward to prompt adoption of key draft laws in these areas, particularly those on public administration reform and annual competition.

Directors commended the authorities for the enactment of the Jobs Act, noting that its full implementation will help reduce segmentation and duality, and facilitate the reallocation of workers across jobs. They stressed the importance of completing the planned reforms of the wage supplementation scheme and the educational system. Directors also saw scope for decentralizing wage setting to make labor more responsive to economic conditions.

Directors supported the authorities’ comprehensive strategy to strengthen bank and corporate balance sheets, thereby facilitating credit flows to the economy. They considered it a priority to accelerate the reduction of nonperforming loans with decisive actions to improve provisioning, speed up write-offs, revive the market for distressed debt, including through a carefully designed state‐backed asset management company, and streamline insolvency procedures. Directors noted the benefits of complementing these measures with targeted action to tackle small- and medium-size enterprises in distress, by introducing standard criteria for bank assessments of their viability and guidelines for creditor-led restructuring. Directors welcomed ongoing efforts to improve access to finance and to strengthen governance in the banking and corporate sectors more broadly.

Directors agreed that the current fiscal policy stance strikes the right balance between supporting economic growth and reducing the public debt ratio. They supported measures to lower labor and capital taxes, financed by cuts in spending and efficiency savings, informed by expenditure reviews. Directors looked forward to strict implementation of the 2015 budget, and saw merit in targeting a modest structural surplus over the medium term, complemented with ambitious privatization efforts, with a view to advancing debt reduction, building buffers, and ensuring compliance with EU fiscal rules.