## 1itaea2024002

## Source details

**Canonical URL:** [1itaea2024002](https://www.imf.org/-/media/files/publications/cr/2024/english/1itaea2024002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2024/english/1itaea2024002.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2024/english/1itaea2024002.pdf.json)

---

### Fertility Rate and Female Labor Force Participation: overview and Italy’s standing
- Fertility rates have declined almost universally in recent decades; historical pattern linked higher education to higher FLFP and lower fertility.
- By 2023:
  - Italy’s fertility rate: 1.2 births per woman.
  - Advanced-economy average fertility rate: 1.6.
  - FLFP for Italian women aged 15 to 64 years: 56 percent.
  - Italian FLFP is about 10 percentage points lower than the advanced-economy average.
  - FLFP for Italian women is about 20 percentage points below the participation rate of Italian men.
- Italy displays an uncommon coexistence of low fertility and low FLFP, unlike many advanced economies where higher FLFP accompanies higher fertility.

### Regional divergence and labor market participation
- Two equilibria co-exist:
  - North: fertility and FLFP comparable to other advanced economies, though somewhat below the advanced-economy average.
  - South: FLFP about 30 percentage points lower than the advanced-economy average while fertility is similar to the North.
- Informality may cause official participation statistics to understate true labor market activity, especially in the South.
- Work–family compatibility by region:
  - In both North and South, 70 percent of women of childbearing age have at least one child.
  - North: 65 percent of women combine work (full and part time) with motherhood; nearly 80 percent participate in some form of formal labor market activity.
  - South: 45 percent combine work with motherhood; about 50 percent participate in some form of formal labor market activity.
- Time-use (ISTAT 2013 Time Use Survey):
  - Working couples without a child: women 3 hours/day on housework; men 1½ hours/day.
  - Working couples with at least one child: women 5 hours/day on housework; men 2½ hours/day.
- Paternity leave take-up: only a third of Italian fathers take the compulsory 10-day paternity leave (INPS, 2022).

### Preferences, motherhood penalty, and outcomes
- Survey evidence on preferences:
  - Average ideal number of children among female respondents: two.
  - More than 20 percent of respondents preferred to have three or more children.
- Motherhood penalty and labor outcomes:
  - Mothers’ annual earnings relative to non-mothers declined by 50 percent compared to the pre-birth period, mainly due to reduced working hours (Casarico and Lattanzio, 2023).
  - Italy’s share of involuntary part-time female workers in 2022: around 17 percent (Italy) vs. 4 percent (OECD average).
  - Effective retirement age of women exceeds that of men: 65 versus 64 years in 2023 (INPS).
  - Female students outperform males academically and are more likely to receive tertiary or higher education, but the motherhood penalty constrains translation into labor market outcomes.

### Decline in births and demographic projections
- Live births:
  - From 600,000 in 2008 to 400,000 in 2022 — a shrink of one third over fifteen years.
- Fertility by origin in 2021:
  - Foreign-born mothers: 1.9.
  - Italian-born mothers: 1.2 (ISTAT).
- Mechanisms: declines at both extensive and intensive margins; share of women without children doubled for cohorts born in the early–mid 1980s relative to the 1955 cohort.
- UN baseline projection and alternative scenarios (population in million people):
  - UN Baseline projection: population decline of 15 million by 2070 (equivalent to a quarter of current population).
  - Scenario 1 (Constant from 2023): stabilizing share of women without children at the 2023 ratio → by 2070 the population would have decreased by a further 4 million relative to baseline.
  - Scenario 2 (Steady Decline): continuation of recent downward trend at the extensive margin → additional drop of 7 million relative to baseline (around 12 percent of the current population).
  - Scenario 3 (Double): maintaining current population size would require doubling average number of births per woman from 1.2 to 2.4.

### Constraints reducing work–family compatibility
- Key constraints identified:
  - (i) Flexibility of housework reallocation within the household.
  - (ii) Availability of external childcare services during parents’ working hours (market, public sector, extended family).
  - (iii) Financial cost of child-rearing, including education, motherhood penalty, and additional housing.
- Childbirth and motherhood cited as key reasons women take part-time jobs or leave the workplace.

---

### Shortages of early childcare facilities and opening hours (NRRP context)
- Availability of childcare services for children below age 3 in Italy: around 26 percent (below the 33 percent minimum recommended by the European Commission).
- NRRP commitment: some 150,000 additional childcare places to be built by 2026 to meet the recommended minimum at the national level.
- Regional disparities:
  - Many Northeastern and Central regions already exceed the 33 percent minimum.
  - In the South, no province currently meets the 33 percent recommendation; opening hours are shorter in the South.
  - Shortages in the South are expected to persist even after NRRP completion.
- Full-time primary school classes as a share of state primary schools:
  - Lazio: 54 percent.
  - Sicily and Molise: below 10 percent.

### Government transfers, net costs, and incentives
- Family-support transfers: about 1 percent of GDP annually, including universal child allowances, kindergarten vouchers and parental leave, and full exemption from social security contributions for mothers with at least two children (“Mother’s Bonus”).
- Universal child allowance coverage and amounts:
  - Provided to nearly 6 million households.
  - Coverage: more than 85 percent of children born since 2005; 95 percent for children born since 2020.
  - Average monthly allowance: about 160 euros per child (monthly daycare charge: 300-400 euros).
  - Amount increases to more than 200 euros for lowest-income households (annual income below 16,215 euros).
- Despite relatively low net costs of raising a child compared to OECD peers, household income suffers heavily when previously full-time working women shift to part-time or exit the labor force; motherhood income penalty persists more than 10 years after childbirth.

### Informality, tax-and-benefit disincentives, and welfare traps
- Underground economy: about 10 percent of GDP; more prevalent in the South.
- Informality effects:
  - Lowers tax revenue → constrains municipal provision of childcare services.
  - Vicious cycle: lower tax revenue → lower childcare provision → women reduce hours/accept lower-paid work → households remain in underground economy.
- Tax-and-benefit disincentives:
  - Labor force participation of married women in lower-income households is depressed and positively correlated with husbands’ income.
  - Tax credits and allowances that increase with a dependent (non-earning) spouse can create a work disincentive for the second earner, especially in the South.

### Simulation model: scenarios and quantitative implications
- Stylized model calibrated to Italy (based on Siegel, 2017) components: (i) flexibility of within-household housework allocation; (ii) potential to marketize home production (childcare and labor-saving services).
- Extreme restrictive scenarios:
  - If men do not contribute to home production and marketization is absent: increasing women’s relative wage causes fertility to decline (women increase outside work; men do not increase home production).
  - If men can adjust time to home production but market services absent: closing the gender wage gap yields a pronounced increase in female labor supply, but fertility and women’s labor supply remain negatively related.
- Flexible and marketized scenario:
  - When men adjust home production and home-labor saving services are marketized, both female labor supply and fertility increase as the gender wage gap closes; home production rises via men and external providers and additional household income pays for these services.
  - Even then, a gender imbalance in home production time persists given calibration parameters.
- Model caveats:
  - Excludes role of foreign mothers, household heterogeneity, availability of help from other family members, regional differences, macroeconomic environment, and determinants of the gender wage gap.
  - Ignores potential adverse feedback loops such as elevated informality’s impact on childcare availability.

### Policy conclusions and implications on fertility and FLFP
- Frictions reducing compatibility of work and family drive Italy’s low-and-falling birth rate and low FLFP; interlocking constraints reinforce a poor equilibrium.
  - Insufficient childcare services and low parental-leave take-up push women to leave jobs or cut hours after childbirth.
  - Employer behavior may perpetuate gender pay gap and motherhood penalty via lower hiring/training of childless women and mothers.
- Relaxing constraints can yield superior equilibria:
  - Structural changes in employment and the macroeconomic environment have shifted outcomes; social and cultural norms matter but are not the sole determinants.
  - Calibrated model suggests that relaxing constraints on time allocation, income, and availability of marketized home services can jointly boost FLFP and fertility.
- Policy attention warranted on:
  - Regional disparities and adequacy/opening hours of childcare.
  - Fiscal capacity of municipalities (especially in the South).
  - Informality.
  - Tax-and-benefit design creating work disincentives for second earners.

---

### Italy’s two sequential crises over the past 15 years: macro-financial overview
- Crisis sequence A: Global Financial Crisis (GFC) and Sovereign Debt Crisis
  - GDP: contracted by 6 percent in 2008-09, then fell by almost 5 percent in 2012-13; total GDP declined by 8 percent during 2007-13.
  - Long-run output gap: GDP remained 3¾ percentage points below its pre-GFC level and took 16 years to return to the level of 2007.
  - Unemployment: rose to 12½ percent by 2013 from a pre-GFC record low of 6¼ percent.
  - Real household disposable income: fell by 10½ percent in real terms between 2007 and 2013.
  - Sovereign spreads: Italy’s 10-year spread vs. German bund opened to around 150 basis points in 2009 and widened to about 500 basis points in November 2011.
  - Credit to firms: fell by 4 percent during July 2008–April 2010; in total, credit to firms fell by 30 percent since November 2011 with no recovery until Q1 2020.
  - Bank measures: ECB cut main refinancing rate by 325 bps from September 2008 to May 2009; Bank of Italy balance sheet expanded 2½ times by end-2012 relative to pre-GFC level.
  - NPL dynamics: gross NPL rate rose from around 5 percent pre-GFC to 16½ percent at the peak in 2015, then fell to 6¾ percent in 2019.
  - NPL disposals: GACS-supported activity helped remove around €44 billion of the €70 billion removed in 2018 alone; in total gross NPLs reduced by €300 billion.
  - CET1 ratio: increased from 7 percent in 2008 to 14 percent in 2019.

- Crisis sequence B: Pandemic and Energy Price Shock
  - Timing: Covid pandemic (real supply shock) followed by energy price surge; t0 = Mar 2020 for bank credit index charts.
  - Output: Real GDP fell in 2020 and rebounded from 2021; real GDP marginally exceeded its pre-GFC level by early 2024.
  - Fiscal response: discretionary fiscal response was very large and initially strongly countercyclical relative to 2019.
  - BdI balance sheet: peaked nearly €600 billion higher than pre-COVID in 2021 owing to PEPP and TLTROs; by end-2023 half of the COVID-era expansion had been withdrawn, yet BdI’s balance sheet remained nearly €1 trillion larger than at the previous peak in 2012.
  - Policy sequencing: monetary accommodation began to reverse in mid-2022 due to high inflation; policy interest rate raised to its highest level since the start of the euro by late-2023.
  - Household and firm adjustments:
    - Firms: corporate profits increased strongly during the recovery; net saving of firms rose by 3 percent of GDP relative to 2019.
    - Households: fiscal transfers and mobility restrictions raised household saving strongly during 2020-21; household net saving rate fell by 3 percent of GDP below the pre-Covid rate by 2023.
  - Financial conditions: Italy’s financial conditions deteriorated in 2020 and again in 2023 to levels similar to 2009 and 2012.
  - Bank credit to NFCs: stock declined by around 10 percent since start of monetary tightening in mid-2022 (vs. 6 percent decline over similar period during the first sequential crisis).

### Financial positions, firm vulnerability, and policy implications
- Financial positions:
  - Households: cumulative net increase of around 12 percent of GDP in financial assets during 2020-22, offsetting modest outflow in 2023.
  - Firms: large net financial inflows during 2020-23; in 2021 firms borrowed heavily under covid-era guarantee scheme to build liquidity buffers; in 2023 firms repaid part of their debt as interest rates rose.
- Firms’ profitability and debt service:
  - Interest payments absorbed 13 percent of corporate earnings (EBITDA) during the first sequential crisis.
  - During the current crises, the ratio of interest payments to EBITDA has fallen by 9 percentage points to 4 percent.
- Credit standards and lending:
  - ECB Bank Lending Survey: credit standards less restrictive for all major types of credit; lending standards even loosened during COVID.
- Firm vulnerability (ISTAT 2024 Report on Competitiveness):
  - Healthy firms rose to more than 37 percent of the total in 2022.
  - Combined share of at-risk and highly at-risk firms declined to 20 percent in 2022.
  - Largest single share—42 percent—remains in the fragile category.
  - ISTAT simulation: up to 24 percent of firms that were healthy or fragile in 2022—amounting to 20 percent of all firms—were at risk of downgrade in 2023 due to interest-rate increases.
  - IMF research: share of zombie firms remains much higher than pre-GFC level.
  - BdI calculations: production contracted by more than 5 percent in 2023 in nearly half of all industrial sectors (excluding construction).

### Public versus private debt dynamics and policy guidance
- De-leveraging by private sector versus public indebtedness:
  - Combined debt of firms and households has fallen by more than 19 percentage points of GDP from its pre-GFC level.
  - Over the same period public debt has risen by almost double that amount (33 percent of GDP).
- Stock of public guarantees has increased significantly since pandemic onset; default rate on COVID-era credit guarantees has risen but remains in the low single digits.
- Policy implications:
  - Continue supporting strengthening of private sector balance sheets while addressing public finance sustainability.
  - Monitor firms’ downgrade risk amid higher interest rates and ensure targeted policies to support viable firms through structural transitions (energy security and decarbonization, digitalization, population aging).

*Source: IMF staff.*

### 1. Fertility Rate and Female Labor Force Participation: 1980 vs. 2000 _____________________ 3

### 1. Fertility Rate and Female Labor Force Participation: 1980 vs. 2000

### Overview and evolving relationship between FLFP and fertility
- Fertility rates have declined almost universally in recent decades.
- Historical pattern: as women obtained more education, female labor force participation (FLFP) increased and fertility declined (Becker and Lewis, 1973).
- The negative tradeoff between FLFP and fertility evident until around 1980 had weakened and even reversed by 2000, with advanced economies with higher FLFP also displaying higher fertility (Anh and Mira, 2002; Doepke et al., 2022).

### Italy’s standing versus peers
- In 2023:
  - Italy’s fertility rate: 1.2 births per woman.
  - Advanced-economy average fertility rate: 1.6.
  - FLFP for Italian women aged 15 to 64 years: 56 percent.
  - Italian FLFP is about 10 percentage points lower than the advanced-economy average.
  - FLFP for Italian women is about 20 percentage points below the participation rate of Italian men.
- Italy exhibits the uncommon coexistence of low fertility and low FLFP, contrary to standard theory and recent patterns in other advanced economies where increases in FLFP often accompany higher fertility.

### Regional divergence: North vs. South
- Two equilibria appear to co-exist:
  - North: fertility and FLFP comparable to other advanced economies, though somewhat below the advanced-economy average.
  - South: FLFP about 30 percentage points lower than the advanced-economy average while fertility is similar to the North.
- Informality may cause official participation statistics to understate true labor market activity, especially in the South.

### Preferences versus outcomes
- Survey evidence:
  - Among female respondents, the ideal number of children was two on average.
  - More than 20 percent of respondents preferred to have three or more children.
- Labor market constraints:
  - Childbirth and motherhood cited as key reasons women take part-time jobs or leave the workplace.
  - Italy’s share of involuntary part-time female workers in 2022: around 17 percent (Italy) vs. 4 percent (OECD average).

### The “motherhood penalty”
- Manifestations:
  - Lower wages for women and lower likelihood of full-time employment relative to men.
  - Mothers’ annual earnings relative to non-mothers declined by 50 percent compared to the pre-birth period, mainly due to reduced working hours (Casarico and Lattanzio, 2023).
  - Decline over time in probability of exiting the labor market after childbirth, yet returning to work remains challenging (De Philippis and Lo Bello, 2023).
- Pension consequences:
  - Effective retirement age of women exceeds that of men: 65 versus 64 years in 2023 (INPS).
- Education and early life:
  - Female students perform better than males and are more likely to receive tertiary or higher education, yet the motherhood penalty creates a bottleneck translating academic performance into labor market outcomes (Carta et al., 2023).

### Decline in births and demographic projections
- Number of live births:
  - From 600,000 in 2008 to 400,000 in 2022 — a shrink of one third over fifteen years.
- Fertility by origin:
  - Fertility rates in 2021: foreign-born mothers 1.9 versus Italian-born mothers 1.2 (ISTAT).
- Mechanisms of decline:
  - Declines observed at both margins:
    - Extensive margin: share of women without children has doubled for cohorts born in the early–mid 1980s compared to the 1955 cohort.
    - Intensive margin: those with children have fewer children per woman.
  - Cohort sizes fell in past decades, amplifying drops in total births.
- UN baseline projection and alternative scenarios (population in million people):
  - UN Baseline projection: population decline of 15 million by 2070 (equivalent to a quarter of current population).
  - Scenario 1 (Constant from 2023): assuming share of women without children stabilizes at the 2023 ratio, by 2070 the population would have decreased by a further 4 million relative to baseline.
  - Scenario 2 (Steady Decline): if recent downward trend at the extensive margin continues, the drop in population relative to the baseline would be an additional 7 million (around 12 percent of the current population).
  - Scenario 3 (Double): maintaining current population size would require doubling average number of births per woman from 1.2 to 2.4.

### Work-family outcomes and dynamics over time
- In both North and South, 70 percent of women of childbearing age have at least one child.
- Compatibility of work and family:
  - North: 65 percent of women combine work (full and part time) with motherhood.
  - South: 45 percent combine work with motherhood.
  - Formal labor market participation: nearly 80 percent of women in the North participate in some form of formal labor market activity, about 50 percent in the South.
- Time trends in first births and FLFP:
  - North: over the last thirty years the number of first-child births per 1000 women and FLFP followed an inverted U-shape. Prior to the Global Financial Crisis (GFC), the correlation was strongly positive; around 2008 the correlation turned negative as FLFP continued to rise while first births declined.
  - South: correlations have tended to be consistently negative and since 2010 driven by an increase in FLFP and a decrease in first births.
- Fertility exhibits procyclicality: economic recessions (e.g., GFC around 2007–08) are associated with lower fertility rates.

### Constraints reducing work-family compatibility in Italy
- Key constraints identified:
  - (i) Flexibility of housework reallocation within the household.
  - (ii) Availability of external childcare services during parents’ working hours (market, public sector, extended family).
  - (iii) Financial cost of child-rearing, including education, motherhood penalty, and additional housing.
- Within-household time allocation (ISTAT 2013 Time Use Survey):
  - For working couples without a child:
    - Women: 3 hours per day on housework.
    - Men: 1½ hours per day on housework.
  - For working couples with at least one child:
    - Women: 5 hours per day on housework.
    - Men: 2½ hours per day on housework.
  - Women with children spend fewer hours working than childless counterparts; men with children spend more time in the workplace than men without children.
- Paternity leave take-up: only a third of Italian fathers take the compulsory 10-day paternity leave (INPS, 2022).

*Prepared by Gee Hee Hong; IMF staff calculations and sources include ISTAT, World Bank, INPS, OECD, United Nations, and cited studies.*

### 12.      Shortages of early childcare facilities and limited opening hours for pre-  and school-

### 12.      Shortages of early childcare facilities and limited opening hours for pre- and school-age educational facilities pose significant challenges for full-time working parents

### Availability of childcare and NRRP expansion
- Availability of childcare services for very young children (below the age of 3) in Italy is around 26 percent, below the 33 percent minimum recommended by the European Commission.
- In the context of the National Recovery and Resilience Plan (NRRP), also aided by national resources, some 150,000 additional childcare places are to be built by 2026 in order to meet this recommended minimum at the national level.
- Significant regional disparity:
  - In many Northeastern and Central regions, the density of childcare centers already exceeds the 33 percent minimum.
  - In the South, no province currently meets the 33 percent recommendation.
  - Opening hours of childcare facilities are shorter in the South.
- These shortages of childcare positions in the South are expected to persist even after the NRRP is completed.
- Substantial regional differences also exist in providing full-time classes for primary schools:
  - As a share of the total number of state primary schools, more than half of those in Lazio have full-time classes (54 percent).
  - This share is markedly lower for Southern regions, even below 10 percent in Sicily and Molise.

### Government transfers, net costs, and the motherhood penalty
- The government provides generous subsidies and transfers (about 1 percent of GDP annually) to support families with children, including:
  - universal child allowances (assegno unico e univeresale per i figli a carico),
  - kindergarten vouchers and parental leave,
  - full exemption from social security contributions for mothers with at least two children (“Mother’s Bonus”).
- Universal child allowance coverage and amounts:
  - The universal child allowance is provided to nearly 6 million households, and more than 85 percent of children born since 2005 (with the coverage rising to 95 percent for children born since 2020).
  - The average monthly allowance is about 160 euros per child (compared to the monthly daycare charge of 300-400 euros).
  - The amount increases to more than 200 euros for the lowest-income households (annual income below 16,215 euros).
- Despite relatively low net costs of raising a child compared to OECD peers, household income tends to suffer heavily when previously full-time working women shift to part-time jobs or leave the labor force after childbirth.
  - The motherhood income penalty tends to be persistent, leading to a decline in annual earnings even more than 10 years after childbirth.

### Regional feedbacks, time use, and demand-supply interactions
- Time use:
  - Time spent by women on housework is the same in the North and South when couples do not have children, and marginally higher in the South when they do have children.
  - The gender imbalance on time allocation is wider in the South.
- Supply-side factors:
  - Under-provision of public childcare and after-school care is markedly more pronounced in the South.
  - Shortages may reflect lack of fiscal resources for local governments in the South to provide sufficient public infrastructure and services.
- Demand-side factors:
  - Affordability could be an issue given generally lower household incomes in the South.
- Reinforcing equilibrium:
  - Lack of childcare facilities forces mothers to reduce working hours, leading to lower household incomes that reduce demand for childcare services, reinforcing the shortage.

### Informality, tax-and-benefit disincentives, and welfare traps
- Informality:
  - The underground economy in Italy is sizable (about 10 percent of GDP) and is estimated to be more prevalent in the South.
  - Informality lowers tax revenue due to under-reporting of income and associated tax evasion.
  - Municipal-level decision making on childcare supply means municipalities with larger informal sectors are less able to afford public childcare services.
  - Informality can create a vicious cycle: lower tax revenue → lower provision of childcare → women cut working hours and accept lower-paid part-time jobs → households remain in underground economy to raise take-home income.
- Tax-and-benefit-induced disincentives:
  - Labor force participation of married women in lower-income households is particularly depressed.
  - Participation of married women from lower-income households is positively correlated with their husbands’ income.
  - Tax credits and allowances that are higher for lower-income families and increase with a dependent (non-earning) spouse can create a work disincentive for that spouse.
  - For low-income households, it may be financially advantageous if the second earner does not work.
  - These mechanisms—and associated welfare traps—are likely more powerful in the South given the higher share of lower-income families.

### Simulation model: scenarios and quantitative implications
- Model setup:
  - A stylized model calibrated to Italy (based on Siegel, 2017) analyzes household time use and fertility choice, with components including: (i) flexibility of within-household allocation of housework; and (ii) potential to marketize “home production,” including childcare and parental labor-saving services.
- Extreme restrictive scenarios:
  - Scenario where reallocation of housework within the family is not possible or home production cannot be marketized:
    - Men do not contribute to home production (inelastic male home hours supply): increasing women’s relative wage causes fertility to decline because women increase outside work while men do not increase home production.
    - When men can adjust time to home production but market-provided home labor-saving services are not available, closing the gender wage gap leads to a pronounced increase in female labor supply as men respond by increasing home production, but this is still insufficient to raise fertility; fertility and women’s labor supply remain negatively related.
- Flexible and marketized scenario:
  - When men can adjust time devoted to home production and home-labor saving services are marketized, both female labor supply and fertility increase as the gender wage gap closes.
  - Home production increases due to larger contribution of men and external service providers, more than compensating for women’s reduced contribution.
  - Additional household income is used to pay for market-provided external services.
  - Even in this scenario, a gender imbalance in time spent on home production persists when the wage gap has been eliminated, reflecting calibration parameters (men’s current substantially lower contribution to home production in Italy than in the US).
- Model caveats:
  - The model excludes several factors: role of foreign mothers, various household characteristics such as income and education levels, availability of help from other family members, regional differences, macroeconomic environment, and determinants of the gender wage gap.
  - The model ignores potential adverse feedback loops such as implications of elevated informality on the availability of childcare services.

### Conclusions and policy implications
- Frictions reducing compatibility of work and family drive Italy’s low-and-falling birth rate and low female labor force participation; interlocking constraints reinforce the poor equilibrium.
  - Insufficient childcare services and low take-up of parental leave push women to leave jobs or cut hours after childbirth.
  - Employers may be less likely to hire childless women or invest in training female employees, perpetuating the gender pay gap and motherhood penalty.
- Relaxing constraints can yield superior equilibria:
  - Social and cultural norms are important but Italy’s work-family outcomes have shifted substantially in response to structural changes in employment and the macroeconomic environment.
  - The calibrated model suggests that relaxing constraints on time, income, and availability of marketized home services can jointly boost female labor force participation and fertility.
  - Policy attention is warranted on regional disparities, adequacy and opening hours of childcare, fiscal capacity of municipalities (especially in the South), informality, and tax-and-benefit design that creates work disincentives for second earners.

*Source: IMF staff (chapter on Italy; content unit 12).*

### 1.      Italy has faced two sets of sequential crises over the past 15 years, and while they

### 1itaea2024002 - 1.      Italy has faced two sets of sequential crises over the past 15 years, and while they

### A. The Global Financial Crisis and the Sovereign Debt Crisis
- Nature and timing
  - Crisis sequence: global financial crisis (GFC) followed by the sovereign debt crisis.
  - Initial trigger: financial shocks originating in the US financial sector with spillovers to European banks.
- Macroeconomic outcomes
  - GDP performance: GDP contracted by 6 percent in 2008-09, then fell by almost 5 percent in 2012-13; total GDP declined by 8 percent during 2007-13.
  - Long-run output gap: GDP remained 3¾ percentage points below its pre-GFC level and took 16 years to return to the level of 2007.
  - Unemployment: rose to 12½ percent by 2013 from a pre-GFC record low of 6¼ percent.
  - Real household disposable income: fell by 10½ percent in real terms between 2007 and 2013.
- Financial markets and credit
  - Sovereign spreads: Italy’s 10-year sovereign bond spread vs. the German bund opened to around 150 basis points in 2009 and widened to about 500 basis points in November 2011.
  - Bank lending: banks tightened lending standards; credit to firms fell by 4 percent during July 2008–April 2010 and, in total, credit to firms fell by 30 percent since November 2011 with no recovery until Q1 2020.
  - Bank funding conditions: ECB cut main refinancing rate by 325 bps from September 2008 to May 2009; Bank of Italy balance sheet expanded 2½ times by end-2012 relative to pre-GFC level.
- Corporate and household adjustments
  - Firms: curtailed investment by almost 3 percentage points of GDP; firms raised saving via cost cutting; increased insolvencies with bankruptcies peaking in 2014.
  - Structural shift in firm financing: share of own funding in total liabilities of manufacturing firms increased from 35 percent in 2007 to 48 percent in 2019 (Confindustria data).
  - Households: real gross household disposable income and consumption reduced; households cut both saving and consumption initially and by 2013 returned to pre-GFC net position with higher consumption share offset by lower investment.
- Banking sector repair and resilience
  - NPL dynamics: gross NPL rate rose from around 5 percent pre-GFC to 16½ percent at the peak in 2015, then fell to 6¾ percent in 2019.
  - NPL disposals: GACS-supported activity helped remove around €44 billion of the €70 billion removed in 2018 alone; in total gross NPLs reduced by €300 billion.
  - Capital and consolidation: CET1 ratio increased from 7 percent in 2008 to 14 percent in 2019; significant consolidation including mergers of credit cooperatives.

### B. The Pandemic and the Energy Price Shock
- Nature and timing
  - Crisis sequence: Covid pandemic (real supply shock) followed by the energy price surge; t0 for this sequence = Mar 2020 for bank credit index charts.
  - Output response: Real GDP fell in 2020 due to shutdowns and supply disruptions but rebounded from 2021; real GDP marginally exceeded its pre-GFC level by early 2024.
- Policy responses and macro-financial support
  - Fiscal policy: discretionary fiscal response was very large and initially strongly countercyclical relative to 2019 (Figure 8 reference).
  - Monetary policy and BdI balance sheet: BdI balance sheet peaked nearly €600 billion higher than pre-COVID in 2021 owing to PEPP and TLTROs; by end-2023 half of the COVID-era expansion had been withdrawn, yet BdI’s balance sheet remained nearly €1 trillion larger than at the previous peak in 2012.
  - Other measures: temporary loan moratoria, publicly guaranteed loans on generous terms, NextGenerationEU fund, and ECB’s Transmission Protection Instrument (TPI).
  - Policy sequencing: monetary accommodation began to reverse in mid-2022 due to high inflation; policy interest rate raised to its highest level since the start of the euro by late-2023.
- Firms and households: differing adjustments from the first sequential crisis
  - Firms: corporate profits increased strongly during the recovery; net saving of firms rose by 3 percent of GDP relative to 2019, with investment offsetting some of the net saving increase (possibly due to inventory accumulation and supply-chain responses).
  - Households: pandemic-era fiscal transfers and mobility restrictions raised household saving strongly during 2020-21; as restrictions lifted, consumption rose and saving declined marginally below pre-pandemic level in 2023.
  - Household investment: increased strongly beginning in 2021, likely related to the Superbonus program; household net saving rate fell by 3 percent of GDP below the pre-Covid rate.
- Financial conditions and credit trends
  - Financial conditions deterioration: Italy’s financial conditions deteriorated in 2020 and again in 2023 to levels similar to those in 2009 and 2012 (Figure 1 reference).
  - Bank credit to nonfinancial corporates: the stock of bank credit to NFCs declined by around 10 percent since the start of the monetary tightening cycle in mid-2022, a larger and more rapid reduction than the 6 percent decrease over the same length of time during the first sequential crisis.

*Prepared by Aidyn Bibolov and Yan Chen.*

### 14.      The support measures also bolstered the financial positions of households   and firms.

### 14.      The support measures also bolstered the financial positions of households and firms

### Financial positions of households and firms
- Generous fiscal transfers likely contributed to inflows into households’ financial assets during 2020-22, which saw a cumulative net increase of around 12 percent of GDP, significantly offsetting the modest outflow in 2023.
- Firms saw large net financial inflows during 2020-23, with sizable gross flows. In 2021 firms borrowed heavily under the covid-era guarantee scheme to build liquidity buffers; in 2023 firms repaid part of their debt as interest rates rose.
- These improvements in firms’ and households’ financial positions have helped keep new NPL formation at a low level.

### Firms’ profitability and debt service capacity
- Firms have enjoyed high profitability due to strong pricing power, robust demand, and government support for firms’ labor costs.
- Interest payments absorbed 13 percent of corporate earnings (EBITDA) during the first sequential crisis.
- During the current crises, the ratio of interest payments to EBITDA has fallen by 9 percentage points to 4 percent, driven mainly by lower effective interest rates, higher operating surpluses, and lower indebtedness—even though the majority of bank credit to NFCs is at variable rates.

### Credit standards and bank lending
- Borrowers’ improved balance sheets and liquidity buffers, together with banks’ stronger capital positions, likely contributed to a more muted tightening of banks’ credit standards compared with the first sequential crisis.
- Based on the ECB’s Bank Lending Survey, credit standards have been less restrictive for all major types of credit, including credit to firms, mortgage loans, and consumer credit. Lending standards even loosened during COVID.
- Policies intended to encourage banks to lend (credit guarantees, TLTROs, PEPP) likely contributed to banks' reduced risk aversion.

### Firm vulnerability and sectoral developments
- ISTAT’s 2024 Report on Competitiveness categorizes firms into four groups (healthy to high-risk) based on profitability, solvency, and liquidity:
  - Healthy firms rose to more than 37 percent of the total in 2022.
  - The combined share of at-risk and highly at-risk firms declined to 20 percent in 2022.
  - The largest single share—42 percent—remains in the fragile category (marginally profitable with weaker solvency or liquidity).
- An ISTAT simulation finds that up to 24 percent of the firms that in 2022 were in the healthy or fragile categories—amounting to 20 percent of all firms—were at risk of being downgraded to the bottom two categories in 2023 as a result of the increase in interest rates.
  - This estimate does not account for firms whose profits evolved strongly in 2023 and who may have been upgraded despite higher interest rates.
- Recent IMF research finds that the share of zombie firms in Italy remains much higher than the pre-GFC level.
- BdI calculations based on ISTAT data show production contracted by more than 5 percent in 2023 in nearly half of all industrial sectors (excluding construction)—a similar share as during the sovereign debt crisis in 2012 and during the pandemic in 2020.

### Conclusions and policy implications
- Italy’s two sequential crises over the past 15 years evolved differently; outcomes to date from the recent crises have been much better owing to past deleveraging, exit of weak firms, improved external competitiveness, and extensive countercyclical policies.
- Risks and vulnerabilities highlighted:
  - A sizable share of firms could face difficulties if policy interest rates remain elevated on a sustained basis.
  - Unwinding generous support measures could reveal vulnerabilities with a delay as firms’ and households’ liquidity buffers are depleted and remaining guaranteed loans mature.
  - Large structural transitions are underway—energy security and decarbonization, digitalization, and population aging—requiring dynamic and financially strong private and public sectors.
- Policy guidance implied by the analysis:
  - Continue supporting the strengthening of private sector balance sheets while addressing the sustainability of public finances.
  - Monitor firms’ downgrade risk amid higher interest rates and ensure targeted policies to support viable firms through transitions.

### Public versus private debt dynamics
- De-leveraging and de-risking by the private sector have been accompanied by a larger increase in public sector indebtedness:
  - The combined debt of firms and households has fallen by more than 19 percentage points of GDP from its pre-GFC level.
  - Over the same period public debt has risen by almost double that amount (33 percent of GDP).
- The stock of public guarantees has increased significantly since the onset of the pandemic; the default rate on COVID-era credit guarantees has risen but remains in the low single digits.
- Continuing to reinforce the private sector at the expense of public finances is not sustainable.

*Source: IMF staff analysis contained in the provided content unit.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1itaea2024002.pdf_