IMF 2012 Article IV Consultation with ItalyPress Conference of the IMF mission
Remarks by Reza Moghadam
Director, European Department, IMF
Rome, May 16, 2012
Let me begin with a few words of thanks. First of all, thank you, Prime Minister Monti, for the courtesy that you have extended to the mission and for your engagement with us this morning. And I would also like to thank Deputy Minister Vittorio Grilli and Director General Vincenzo La Via who have coordinated our visit.
We have had many meetings with both the private and public sector. I would like to thank many who have met with the mission and have helped us over the last two weeks to formulate our conclusions in this annual consultation to help us make an assessment of the Italian economy.
Let me make the first point. I think Italy is on the right track and has made remarkable progress in the last six months. Prime Minister Monti reminded us that today is exactly the six-month anniversary that this government has been in place and there has been remarkable progress. It is to easy to remember that Italy faced a very difficult, very dangerous situation at the end of last year, and the policies that have been put in place by the government, have created a degree of stability that is really remarkable against the background that we saw at the end of last year.
The policies have been ambitious, they have been wide ranging, they have helped on fiscal stabilization, and progress has also been made on structural reforms. The progress over the last six months is really a model that one needs to look at when considering progress across Europe.
Italy has come a long way and the stabilization policies that have been put in place are also essential to create the conditions for a revival of growth. But of course, the job is not yet done, there is good progress, but more needs to be done to revive growth. The focus of the mission has been how to build on the progress that has been done to enhance and revive growth.
The energy and the effort of the last six months need to now focus on reviving growth and that has indeed been a theme of our discussions, as reflected in our concluding statement.
As I said, the elements have been put in place over the last six months. The stabilization has been essential to form the basis for growth, but there are areas where continuous progress will indeed be essential to ensure that the growth does indeed pick up. There are three areas that we focused on in this year’s consultation.
First of all, structural reforms to jumpstart growth, secondly, making fiscal consolidation more growth-friendly, and, finally, ensuring that the Italian banking sector supports the growth in the economy.
Let me briefly go through each of those areas. On structural reform, there we believe there is considerable room to build on the reforms that have been taking place or are in train in order to help the Italian economy to grow more strongly.
There are many known facts: youth and female participation rates in Italy are low compared to other countries in Europe. Foreign direct investment in Italy is lower than other countries in comparable situations. Efficiency of the legal system can be improved. The quality of public services can be improved. Very importantly, taxation of labor and capital in Italy are higher than comparable countries. Energy prices are higher than average in Europe, but there is a lot of progress to be achieved by addressing those issues to improve the growth prospects of the Italian economy.
Let me quote a figure, our team has done analysis that if the Italian reforms bring the indicators of structural reforms to the median of OECD countries, then the level of output in Italy could be six percentage points higher. That is a large payoff to structural reforms.
And the good news is that many of these reforms are in train. Let me mention some of the elements. Labor reform bill: this is an important reform. Our recommendation is to move expeditiously with approving the labor reform bill. It will help to create jobs and the sooner it is implemented, the quicker that process can start.
But our view is that more can also be done along the same lines. Let me mention in terms of labor reforms three areas where we think that more progress is possible in the direction that the government is currently going. One, progress is already being made in terms of making sure that labor protection or permanent contracts are not an impediment to job creation.
Our recommendation is to increase that protection over time so that firms’ cost of hiring, particularly the youth, particularly women, is lower at the beginning of the employment contract.
Another recommendation we have is to reduce the marginal tax rate on the second person in a working couple. The marginal tax rate on the second working person in a family is very high in Italy.
Another recommendation we have is to move more towards wage setting at a decentral level so that the individual conditions of firms can be taken into account.
Second area of structural reform, product market reforms, an area that I know the Prime Minister has been advocating at the European level, there are a number of initiatives already in the pipeline. For example, the gas reform bill. Again, our recommendation is to move ahead quickly with approval, but there are also areas where more can be done to help job creation. For example, the efficiency of the judiciary system to enable better operation of the Italian labor markets.
A lot has also been said about privatization. The scope in Italy, particularly at the local level is very high. Liberalization of professional orders-- many of these issues are on the agenda. And it is important to accelerate addressing these issues, very important for small and medium-sized enterprises (SMEs). They are the backbone of the Italian society and the Italian economy. Streamlining regulations and taxation that will help reducing start-up costs, and reform to enable injection of capital and investment into the SMEs, in our view, would be very important.
Let me quickly turn to the second area, fiscal consolidation to support growth. Again, this is an area where enormous progress has been made over the last six months. If the plans that are currently in the pipeline are implemented by next year, Italy will have the highest primary surplus in the Euro Zone. That is important, it is necessary given the level of indebtedness, but it is also an impressive achievement. And the fiscal stance for this year and for next year is one that the IMF fully supports.
Now, within that stance, within the current fiscal policy, we think there is room to make the implementation of fiscal policy more growth friendly. There is an important review of expenditure currently underway. We believe that it would be important to identify permanent, large savings on the expenditure side in order to address what I mentioned as a problem here, the taxation on both labor and capital. Reducing expenditures in a permanent way and using those savings to reduce labor taxes and increase corporate allowances would help Italy create jobs.
Let me finally turn to the banking system. The Italian banking system has many positive features. It has a large and stable funding base. It has low leverage relative to other banking systems particularly in Europe. But there are also pressure points. Non-performing loans (NPLs) are high. They have been rising, and that is a vulnerability. We have had very good discussions of this issue with the Bank of Italy and our recommendation is to provide the basis to write down NPLs, to reduce impaired assets as quickly as possible so that the banks would have room for lending, and in the same vein, our recommendation is to continue with the plans to increase capitalization, again, precisely to make sure that banks have enough capital to support lending activities in Italy.
Let me conclude on an optimistic note. During the last two weeks, our mission has had extensive discussions here. We have met, of course, with many government officials, with the Bank of Italy, with the banking sector, with trade unions, with many businesses, many academics and opinion makers, and I think our sense from those discussions is that there is an understanding that Italy has been going in the right direction, that it is important to maintain that momentum, but we also sense that there is a consensus and a commitment to reform, particularly on structural reform. I think that commitment, that sense of consensus -- people may differ precisely on the exact formulation of reforms, but they do not differ about the direction forward to ensure that Italy’s growth is revised and is strong.