## 1itaea2026001 ## Source details **Canonical URL:** [1itaea2026001](https://www.imf.org/-/media/files/publications/cr/2026/english/1itaea2026001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1itaea2026001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1itaea2026001.pdf.json) --- ### Context and Structural Constraints - Growth remains below the euro area average amid weak labor productivity and high employment concentration in small/older firms and low value‑added sectors. - Structural constraints cited: - Shrinking working-age population (median age 49). - Limited risk capital, insufficient managerial and human capital, cumbersome regulatory environment. - Low female labor force participation and regional disparities. - High energy dependence: more than 70 percent of energy consumption generated from imported fossil fuels. - Fiscal pressures from aging-related pension and healthcare spending and commitments to increase defense spending. ### Real Economy and Near-Term Developments - Real GDP: - Real GDP expanded by 0.5 percent in 2025. - Growth of 0.8 percent year‑on‑year in Q1 2026. - 2025 growth drivers: construction (including NRRP‑related investment) and services (wholesale and retail trade, transportation); net exports contributed negatively. - Geopolitical shock: March 2026 war in the Middle East caused a sharp rise in global energy prices, heightening inflationary pressures and energy security concerns. ### Inflation, Wages, and Labor Market - Inflation: - 1.6 percent in 2025 (1.1 percent in 2024). - Headline inflation projected to rise to 2.9 percent in 2026 and remain above 2 percent in 2027. - Wages: - Recent collective agreements imply average annual wage increases of just below 3 percent. - Labor market outcomes (2025): - Employment: more than 24 million people employed. - Employment share: 62.6 percent. - Unemployment rate: 6.1 percent. - Youth unemployment: 20.5 percent. - Female labor force participation: about 13.4 percentage points below the euro area average. - Youth NEET rate improved but remains high. ### Financial and Credit Developments - Credit and housing: - Credit expansion remained subdued; private sector credit recovery continued through early 2026, broadening to corporates. - Residential property prices increased around 4 percent year‑on‑year in 2025. - Aggregate household debt and corporate leverage well below the euro area average. - Banking: - Banking sector profitability improved; regulatory Tier 1 capital position high. - Average residual maturity on Italian debt securities: around 7 years in January-May 2026 (euro area average slightly above 8 years). - Sovereign-bank linkages eased as households and non-residents increased holdings of government bonds while banks reduced theirs. ### External Sector - Current account surplus: 1.1 percent of GDP in 2025. - Net international investment position: 15.4 percent of GDP at end-2025 (from 14.9 in 2024). - Trade: export growth concentrated in pharmaceuticals and large-ticket deliveries; 16 percent increase in imports from China in 2025. - Target‑2 liabilities narrowed; non-residents increased holdings of sovereign debt securities. - Staff assessment: external position in 2025 moderately weaker than implied by medium-term fundamentals and desirable policies. ### Box 1 — Drivers of Sovereign Spreads Compression (Key Findings) - Italian 10-year spreads vis-a-vis the German Bund: - Narrowed by 190 basis points since the pandemic peak in September 2022. - Reached a trough of 59.1 basis points. - Since March 2026 geopolitical tensions, spreads partially reversed; by June 2026 spreads hovered between 70 and 80 basis points. - Decomposition: - Domestic (idiosyncratic) and euro-area-wide (common) components each explain about half of the spread compression since September 2022. - Domestic component closely linked to a Fiscal Policy Uncertainty Index; Lasso analysis flags fiscal policy uncertainty as a strong predictor. - Common component captures about 67 percent of co-movements in yields across ten euro area countries and is sensitive to global risk sentiment, euro area monetary policy stance and instruments, and revisions to expected German fiscal deficit. - Risks and implications: - Renewed spread volatility underscores importance of prudent fiscal policy and debt reduction to anchor market confidence. - Increased foreign investor holdings improved market liquidity but may raise sensitivity to global risk sentiment. ### Fiscal Developments and Public Debt Management - 2025 fiscal outcomes: - Headline fiscal deficit: 3.1 percent of GDP in 2025 (0.2 percent of GDP better than the April 2025 target). - Primary surplus: 0.8 percent of GDP in 2025 (euro area primary deficit of 1.0 percent of euro area GDP). - Public debt: 137.1 percent of GDP in 2025, up 2.4 percentage points of GDP from 2024. - Interest expenses: 3.9 percent of GDP in 2025; aided by a 70 basis points drop in the average yield at issuance amid spread compression. - Superbonus tax credit claims surge: €8.4 billion or 0.4 percent of GDP in 2025. - Public-sector guarantees: 13 percent of GDP at end-2025 (13.4 percent at end-2024). - Debt management: - Average residual maturity around 7 years (January-May 2026). - Sovereign-bank linkages reduced as banks lowered holdings and households/non-residents increased holdings. ### NRRP Implementation, Disbursement, and Near-Term Outlook - NRRP progress and absorption: - By end-2025, Italy completed 72 percent of the 575 milestones and targets agreed with the European Commission. - By end-2025, Italy received 85 percent (€166 billion) of allocated NRRP funds. - As of end-March 2026, Italy had spent approximately 60 percent of allocated funds (€116.9 billion). - A residual absorption gap remains; about 1 percent of GDP is expected to be implemented after 2026 due to modified milestones and financial vehicle use. - Near-term: - Average real GDP growth projected to remain at around 0.5 percent in 2026 and 2027 (assumes the war remains limited in duration and scope). - Growth in 2026 expected to benefit from the peak in NRRP-related investment. - Risks: - Downside: larger or more persistent increases in energy prices; intensified trade and geopolitical tensions; financial market volatility; domestic fiscal slippage; inefficient NRRP implementation; extreme weather events. - Upside: renewed global trade progress; stronger spillovers from other EU economies’ stimulus; higher productivity gains from public investment, reforms, digital adoption, and deeper EU integration. - Authorities’ view: - Authorities project real GDP growth of 0.6 percent in both 2026 and 2027 (assuming the energy shock remains contained). - Authorities expect HICP approaching 3 percent in 2026 before easing in 2027. - Authorities emphasize continued strong NRRP implementation and increased market confidence from fiscal consolidation and political stability. ### Policy Discussions: Decisively Reducing Public Debt - Authorities’ Public Finance Document (DFP2026) projections: - Headline deficit projected at 2.9 percent of GDP in 2026 (from 2.8 percent) and 2.8 percent of GDP in 2027 (from 2.6 percent). - DFP2026 aims to bring the headline deficit below 3 percent of GDP to exit the Excessive Deficit Procedure. - Staff projections and recommendations: - Staff projects a cumulative headline deficit reduction of 0.6 percentage points of GDP during 2026–2028, with the primary surplus rising to just below 2 percent of GDP by 2028. - Staff recommends combined additional fiscal efforts of about 1 percentage point of GDP during 2026–2027 (in addition to the cumulative baseline effort of about ½ percentage point of GDP already projected during the two years) to help ensure an earlier decline in the debt ratio. - Prioritize reforms with relatively larger near-term growth impact (e.g., reducing regulatory barriers and streamlining administrative procedures) to limit adverse growth impacts from consolidation. ### 2026 Budget Measures (key features as presented) - Measures include: - IRPEF rate reduction from 35 to 33 percent on the second income bracket (income range figures not specified in source). - Outcome-focused tax incentives: lower substitute taxation for specific wage components (contractual wage increases, productivity bonuses, and night/holiday work). - Increased support for working mothers, targeted transfers to low‑income households, top‑up on minimum pensions. - Support for business investments: reintroduction of enhanced depreciation allowances; extension of selected sectoral tax credits; replacement of Transition 4.0 and 5.0 with a hyper-depreciation regime for eligible capital investments made between January 2026 and end-September 2028. - Temporary energy-price relief measures: fuel excise duty cuts extended until July 3 (partially scaled back); one-off electricity bill top-up targeted to low-income households; business support including tax credits for truck drivers and the fishing industry. - Announced costs described as below 0.1 percent of GDP; intended temporary and budget neutral, financed by expenditure cuts, additional VAT revenues from buoyancy, draw on the FISPE contingency fund, and reallocation of sectoral funds. ### Expenditure- and Revenue-side Recommendations - Expenditure-side: - Strengthen spending efficiency and contain new spending pressures. - Reallocate resources toward early education and skill formation; reduce regional disparities. - Make more effective use of the net expenditure path (NEP): translate NEP into binding annual expenditure ceilings and align local government spending with aggregate constraint. - Replace broad excise duty cuts with targeted cash transfers to vulnerable households to preserve budget neutrality and price signals. - Revenue-side: - Simplify tax system and improve revenue efficiency. - Tax expenditures estimated at 5.7 percent of GDP (about €134 billion) in 2026 across 573 measures. - Recommendations: eliminate preferential flat-tax rate on self-employment income; conduct comprehensive review of tax expenditures with evaluation and sunset clauses; implement cadastral reform to update property values and broaden the property tax base. ### Contingent Liabilities and Public Guarantees - Public guarantees elevated at 13 percent of GDP as of end-2025 (13.4 percent at end-2024). - Staff recommends gradual recalibration of public guarantees to pre‑pandemic levels with stronger risk-based pricing, enhanced stress testing and provisioning, clearer governance, and full integration of contingent liabilities into medium‑term fiscal planning. ### Pensions, Aging, and Long-Term Pressures - Pension spending outlook: - Projected to increase from 15.2 percent of GDP in 2025 to a peak of about 17 percent of GDP around 2040 before a gradual decline. - Pension replacement rate currently exceeds the euro area average; contribution rates around 1/3 of wages. - Auto-enrollment (with opt-out) in second pillar occupational/collective supplementary pensions introduced in the 2026 Budget Law. - Recommendations: - Broaden and stabilize contribution base via higher labor market participation among women and youth. - Structural reforms to boost productivity and support higher wages. - Strengthen institutional safeguards to limit policy reversals. ### Financial Sector Stability and FSAP Findings - Banking sector indicators (selected): - Return on assets: 1.4 in 2024 and 1.4 in 2025. - Return on equity: 13.5 in 2025. - Regulatory Tier 1 capital: 17 percent of risk-weighted assets as of December 2025. - Nonperforming loans: around 2.4 percent in 2025; NPL coverage ratio around 46 percent. - Liquidity: healthy liquidity coverage and net stable funding ratios. - Stress tests: - 2026 FSAP stress tests (over 2026-2028) indicate system-wide risks contained; banks can withstand adverse shocks supported by capital and liquidity buffers and low private sector leverage. - Vulnerabilities concentrated in some LSIs, SMEs (especially in the South), and certain sectors (construction, transport, low-skill services). - Stress tests show larger vulnerability to a geopolitical shock than a recessionary one due to higher short-term interest rates. - Macroprudential and supervisory recommendations: - Maintain a positive Systemic Risk Buffer (SyRB); consider extending SyRB beyond domestic credit and counterparty exposures to cover residual systemic risks. - Deploy Pillar 2 capital add-ons and use borrower-based measures more pre-emptively. - Strengthen governance, credit, and operational risk supervision; accelerate time-bound reduction of public guarantees; integrate insurance supervision (IVASS) into Banca d’Italia; introduce IFRS to all insurers; establish effective resolution framework for insurers. - Improve insolvency and enforcement frameworks to raise recovery rates and support capital reallocation. - Financial safety net: - Recommendation to discontinue recurrent reliance on deposit guarantee schemes (DGS) to fund preventive recapitalizations of non-systemic banks; remove active bankers from DGS governance; formalize inter-agency crisis coordination and transparency around Banca d’Italia’s role as lender of last resort in resolution. ### Sovereign‑Bank Nexus and Vulnerabilities - Bank holdings of government securities: 8.6 percent of total assets as of September 2025 (from 10 percent in 2020)—above the euro area average of 3.2 percent. - Direct lending to the public sector: around 6 percent of total assets. - Stock of publicly guaranteed loans: around 23 percent of performing corporate loans. - Rising default rates on publicly guaranteed loans relative to non-guaranteed ones. - Sizable unresolved NPL stocks persist outside the banking system, limiting capital reallocation. ### Productivity, Innovation, and Labor‑Supply Reforms - Long-term low-productivity drivers: predominance of small mature firms, regulatory barriers, human capital gaps, and limited access to risk capital. - Digital and skills gaps: - Only 45.8 percent of the population has at least basic digital skills. - NRRP allocates 23 percent of resources toward digital transformation. - Venture capital: - VC investment around one‑fifth of the level in France or Germany. - Staff finding: broad-based increase in VC funding equivalent to 0.06 percent of GDP associated with a 17 percent increase in the probability of patenting and a 1 percent rise in sectoral TFP. - Recommended structural priorities: - Streamline regulation, reduce administrative burdens, strengthen judicial and insolvency frameworks, raise female and youth labor force participation, reform education and lifelong learning, and deepen capital markets and VC ecosystems. ### Energy Security and Market Integration - Recent energy price surge underscores urgency to enhance energy security despite progress in diversifying gas supply. - Staff recommends a comprehensive package: faster permitting for renewables, expanded energy storage, and deeper electricity market integration. - Staff analysis: EU electricity grid interconnection investment over past five years reduced electricity prices by about 5 percent on average. - Policy objective: decouple wholesale electricity prices from gas and advance electrification to contain industrial energy prices. ### Risk Assessment and Scenarios (Risk Assessment Matrix highlights) - Global conjunctural risks with relative likelihood and impacts (selected): - Geopolitical tensions and intensification of conflicts: Relative likelihood: High; Impact if realized: High. Policy responses include budget‑neutral targeted support and scaling renewable energy and storage. - Commodity price volatility: Relative likelihood: High; Impact if realized: High. Policy responses include targeted support and investment in innovative energy systems. - Fiscal vulnerabilities and higher interest rates: Relative likelihood: High; Impact if realized: High. Policy responses include credible medium‑term fiscal consolidation and macroprudential vigilance. - Disorderly AI correction: Relative likelihood: High; Impact if realized: Medium. Policy responses include intensified monitoring of household/NBFI exposures and readiness to deploy macroprudential tools. - Domestic risks: - Lack of a post‑NRRP reform strategy: Relative likelihood: Medium; Impact if realized: High. Policy responses include targeted ex‑post evaluations and embedding NRRP lessons in future budgets. - Ineffective tax reform: Relative likelihood: High; Impact if realized: High. Policy responses include broadening the tax base and reducing tax expenditures. - Failure to put public debt on a downward path: Relative likelihood: Medium; Impact if realized: High. Policy responses include continued fiscal overperformance and high‑quality public investment. ### Sovereign Risk and Debt Sustainability (Annex IV) - Overall risk assessment: - Overall risk of sovereign stress: moderate. - Medium-term risks: high. - Long-term risks: high. - Baseline public debt projections (percent of GDP): - Actual 2025: 137.1 - 2026: 138.2 - 2027: 138.2 - 2028: 137.5 - 2029: 136.7 - 2030: 136.3 - 2031: 136.1 - Change in public debt (percent of GDP): 2025: 2.4; 2026: 1.1; 2027: 0.0; 2028: -0.7; 2029: -0.8; 2030: -0.4; 2031: -0.2. - Gross financing needs (GFN, percent of GDP): 2025: 22.5; 2026: 19.6; 2027: 22.3; 2028: 22.7; 2029: 19.8; 2030: 20.1; 2031: 20.5. - Mechanical signals and stress indicators: - Debt fanchart module: Fanchart width: 39.3 0.6; Probability of debt non-stabilization (percent): 48.0 0.4; Debt fanchart index (DFI): 2.2; Debt fanchart module risk signal: High. - GFN financeability index (GFI): 15.8; GFN module risk signal: Moderate. - Final medium-term risk signal: High. - Long-term fiscal pressures driven by rising pension and health spending: - Pension obligations under defined-benefit scheme rise from about 15.3 percent of GDP in 2024 to peak at 16.4–16.6 percent of GDP around 2040. - Healthcare expenditure rises from 6.3 percent of GDP in 2024 to 7.3–7.4 percent of GDP in 2040. ### Progress on Past IMF Recommendations and Authorities’ Views - Progress highlights: - 2025 fiscal deficit narrowed to 3.1 percent of GDP (from inherited 8.1 percent in 2022). - Actions against tax evasion recovered €36.2 billion in 2025 (up 8.2 percent from 2024). - NRRP: by end‑2025, completed about 72 percent of 575 milestones and targets; received €166 billion (85 percent of €195 billion); spent €116.9 billion by end‑March 2026 (about 60 percent of allocated funds). - Authorities’ stance: - Authorities broadly agree with staff’s outlook and risks, but caution against front‑loaded consolidation and dispute some characterizations of medium‑term debt risk as high. - Authorities project headline deficit of 2.9 percent of GDP in 2026 and stress protecting productive investment while consolidating. ### Key Policy Recommendations (condensed) - Fiscal: - Sustain fiscal consolidation and decisively reduce public debt; staff suggests about 1 percentage point of GDP additional effort during 2026–2027. - Strengthen spending efficiency, translate NEP into binding annual expenditure ceilings, and ensure any new spending is fully offset. - Rationalize tax expenditures (5.7 percent of GDP in 2026), broaden the tax base, and pursue cadastral reform. - Financial sector: - Maintain and possibly extend the SyRB to cover residual systemic risks; deploy Pillar 2 add-ons where appropriate. - Time-bound plan to reduce public guarantees and strengthen supervisory resources for LSIs, insurers, and cyber resilience. - Improve insolvency and enforcement frameworks and formalize inter-agency crisis coordination. - Structural reforms: - Prioritize reforms that boost potential growth: regulatory simplification, judicial and insolvency improvements, labor participation (women and youth), education and digital skills, VC market deepening, and energy market integration. - Energy and climate: - Accelerate renewables permitting, energy storage, and electricity market integration to reduce price volatility and enhance security. ### Selected Key Statistics (preserved exactly) - Energy dependency (Energy Dependency Ratio, 2024): France 41.7; EA 61.4; Germany 66.8; Spain 68.9; Italy 73.9. - Real GDP growth: 0.5 percent in 2025; 0.8 percent year‑on‑year in Q1 2026. - Inflation: 1.6 percent in 2025; 1.1 percent in 2024; headline inflation projected 2.9 percent in 2026. - Wage agreements imply average annual wage increases of just below 3 percent. - Italian 10-year spread trough: 59.1 basis points; spread narrowing of 190 basis points since September 2022; spreads between 70 and 80 basis points by June 2026. - Headline deficit: 3.1 percent of GDP in 2025; 0.2 percent of GDP better than April 2025 target. - Superbonus claims: €8.4 billion or 0.4 percent of GDP (2025). - Primary surplus: 0.8 percent of GDP in 2025; euro area primary deficit of 1.0 percent of euro area GDP. - Public debt: 137.1 percent of GDP in 2025; 2.4 percentage points higher than in 2024. - Interest expenses: 3.9 percent of GDP in 2025. - Average yield at issuance: drop of 70 basis points noted in 2025. - Public-sector guarantees: 13 percent of GDP at end-2025 (13.4 percent at end-2024). - Average residual maturity on Italian debt securities: around 7 years in January-May 2026; euro area slightly above 8 years. - Employment: more than 24 million people employed in 2025. - Unemployment rate: 6.1 percent in 2025. - Share employed: 62.6 percent in 2025. - Female participation gap: about 13.4 percentage points below euro area average. - Youth unemployment: 20.5 percent. - Current account surplus: 1.1 percent of GDP in 2025. - Net international investment position: 15.4 percent of GDP at end-2025 (from 14.9 in 2024). - General government gross debt (selected projection): 2025: 137.1; 2026: 138.2; 2027: 138.2; 2028: 137.5; 2029: 136.7; 2030: 136.3; 2031: 136.1. - Gross financing needs (GFN, percent of GDP): 2025: 22.5; 2026: 19.6; 2027: 22.3; 2028: 22.7. - Return on assets (banks): 2024: 1.4; 2025: 1.4. Return on equity: 2025: 13.5. - Nonperforming loans to total gross loans: 2025: 2.4; NPL coverage ratio around 46 percent. *Source: 1itaea2026001 - IMF staff chapter content.* ### 1. Drivers of Sovereign Spreads Compression_____________________________________________________ 9 ### 1. Drivers of Sovereign Spreads Compression ### Context - External shocks are challenging Italy’s already modest growth path; growth remains below the euro area average amid weak labor productivity and high employment. - Italy is highly energy dependent and reliant on imported natural gas, with more than 70 percent of energy consumption generated from imported fossil fuels (euro area average just above 60 percent). - Structural constraints limit long-term growth: shrinking working-age population (median age 49), limited risk capital, insufficient managerial and human capital, a cumbersome regulatory environment, concentration of employment in small/older firms and low value-added sectors, low female labor force participation, and regional disparities. - Aging-related pension and healthcare spending and commitments to increase defense spending add pressure to public finances. ### Recent Developments and Real Sector - Real GDP expanded by 0.5 percent in 2025. - Growth drivers in 2025: construction (including NRRP‑related investment), services (wholesale and retail trade, transportation); net exports contributed negatively to growth. - Early 2026: growth of 0.8 percent year‑on‑year in Q1 2026, supported by continued solid investment activity and the Winter Olympics in Northern Italy. - The war in the Middle East in March 2026 caused a sharp rise in global energy prices, heightening inflationary pressures and concerns about energy security. ### Inflation, Wages, and Labor Market - Inflation: 1.6 percent in 2025 (up from 1.1 percent in 2024), with a surge in energy prices in March 2026. - Recent collective agreements imply average annual wage increases of just below 3 percent. - Employment: historic high in 2025 with more than 24 million people employed; employment growth slowed markedly during 2025. - Labor force outcomes: - Unemployment rate: 6.1 percent in 2025. - Share of people employed: 62.6 percent in 2025. - Female labor force participation rate: about 13.4 percentage points below the euro area average. - Youth unemployment: 20.5 percent. - Youth NEET rate: improved but remains high. ### Financial and Credit Developments - Credit expansion remained subdued though private sector credit recovery continued through early 2026, broadening to corporates. - ECB monetary policy easing in 2025 reduced lending rates; lending to households expanded; corporate credit growth turned positive in June 2025 after over two years of contraction. - Indicators point to a still-negative credit gap and aggregate household debt and corporate leverage well below the euro area average. - Residential property prices increased around 4 percent year-on-year in 2025; price-to-rent ratio broadly unchanged; financial sector risks from real estate remain moderate. ### External Sector - Current account surplus: 1.1 percent of GDP in 2025. - Drivers: return-to-surplus on the primary income account amid lower investment outflows offsetting a slight narrowing of the trade surplus. - Trade dynamics: export growth concentrated in pharmaceuticals and large-ticket deliveries (e.g., aircrafts); 16 percent increase in imports from China in 2025. - Net international investment position: 15.4 percent of GDP at end-2025 (from 14.9 in 2024). - Target-2 liabilities further narrowed; non-residents increased holdings of sovereign debt securities. - Staff assessment: external position in 2025 moderately weaker than implied by medium-term fundamentals and desirable policies. ### Box 1 — Drivers of Sovereign Spreads Compression (Key Findings) - Italian 10-year spreads vis-a-vis the German Bund narrowed by 190 basis points since the pandemic peak in September 2022, reaching a trough of 59.1 basis points. - Since the March 2026 war in the Middle East, spreads partially reversed; by June 2026 spreads hovered between 70 and 80 basis points. - Principal components decomposition indicates both domestic (idiosyncratic) and euro-area-wide (common) components each explain about half of the spread compression since September 2022. - Domestic component: explains about half of the compression; closely linked to a Fiscal Policy Uncertainty Index and other Italy-specific indicators. Lasso analysis identifies fiscal policy uncertainty as a strong predictor of the idiosyncratic component. - Common component: explains the other half; captures about 67 percent of co-movements in yields across ten euro area countries and is sensitive to global risk sentiment, euro area monetary policy stance and instruments, and revisions to expected German fiscal deficit. - The recent widening amid geopolitical tensions highlights the importance of maintaining prudent fiscal policy and the vulnerability of Italian spreads to global risk sentiment. - Increased foreign investor holdings have supported market liquidity but may have increased sensitivity to changes in global risk sentiment, potentially exacerbating spread volatility during risk-off episodes. - Policy implication emphasized: sustaining fiscal consolidation and decisively reducing public debt to anchor market confidence and limit idiosyncratic spread risk. ### Fiscal Developments and Public Debt Management - Headline fiscal deficit narrowed to 3.1 percent of GDP in 2025; outturn was 0.2 percent of GDP better than the authorities’ April 2025 target (April 2025 DFP). - Improvement driven by stronger-than-expected revenue from a strong labor market and improved tax compliance. - Expenditures slightly higher than projected due to higher public sector wages, gross fixed investment, and an unexpected surge in Superbonus tax credit claims of €8.4 billion or 0.4 percent of GDP. - Primary surplus increased to 0.8 percent of GDP in 2025, compared with a euro area primary deficit of 1.0 percent of euro area GDP. - Public debt: 137.1 percent of GDP in 2025, up 2.4 percentage points of GDP from 2024 due to weak nominal GDP growth and stock‑flow adjustments. - Interest expenses: 3.9 percent of GDP in 2025; aided by a 70 basis points drop in the average yield at issuance amid spread compression. - Sovereign-bank linkages eased as households and non-residents increased holdings of government bonds while banks reduced theirs. - Average residual maturity on Italian debt securities: around 7 years in January-May 2026 (euro area average slightly above 8 years). - Public-sector guarantees: exposures elevated at 13 percent of GDP as of end-2025 (13.4 percent of GDP at end-2024). ### Key Statistics (preserved exactly as in source) - Energy dependency: France 41.7; EA 61.4; Germany 66.8; Spain 68.9; Italy 73.9 (Energy Dependency Ratio, 2024). - Working-age population projections (population aged 15-64 as percent of total population): timeline shown 2022–2050 for EA20 and ITA (figure in source). - Real GDP growth: 0.5 percent in 2025; 0.8 percent year‑on‑year in Q1 2026. - Inflation: 1.6 percent in 2025; 1.1 percent in 2024. - Wage agreements imply average annual wage increases of just below 3 percent. - Italian 10-year spread trough: 59.1 basis points; spread narrowing of 190 basis points since September 2022; spreads between 70 and 80 basis points by June 2026. - Headline deficit: 3.1 percent of GDP in 2025; 0.2 percent of GDP better than April 2025 target. - Superbonus claims: €8.4 billion or 0.4 percent of GDP (2025). - Primary surplus: 0.8 percent of GDP in 2025; euro area primary deficit of 1.0 percent of euro area GDP. - Public debt: 137.1 percent of GDP in 2025; 2.4 percentage points higher than in 2024. - Interest expenses: 3.9 percent of GDP in 2025. - Average yield at issuance: drop of 70 basis points noted in 2025. - Public-sector guarantees: 13 percent of GDP at end-2025 (13.4 percent at end-2024). - Average residual maturity on Italian debt securities: around 7 years in January-May 2026; euro area slightly above 8 years. - Employment: more than 24 million people employed in 2025. - Unemployment rate: 6.1 percent in 2025. - Share employed: 62.6 percent in 2025. - Female participation gap: about 13.4 percentage points below euro area average. - Youth unemployment: 20.5 percent. - Current account surplus: 1.1 percent of GDP in 2025. - Net international investment position: 15.4 percent of GDP at end-2025 (from 14.9 in 2024). *Source: 1itaea2026001 - 1. Drivers of Sovereign Spreads Compression.* ### 10. Implementation of NRRP reforms and investments accelerated in 2025 and 2026, ### 1itaea2026001 - 10. Implementation of NRRP reforms and investments accelerated in 2025 and 2026, ### NRRP implementation: progress and gaps - By end-2025, Italy had completed 72 percent of the 575 milestones and targets agreed with the European Commission. - By end-2025, Italy had received 85 percent (€166 billion) of allocated NRRP funds. - As of end-March 2026, Italy had spent approximately 60 percent of allocated funds (€116.9 billion). - A sizable absorption gap remains ahead of the original 2026 deadline; about 1 percent of GDP is now expected to be implemented after 2026 due to modified milestones and use of financial vehicles to extend financing beyond 2026. - Near-term visible gains from the NRRP include a reduction in legacy court backlogs and modernized school infrastructure. - Implementation performance is uneven geographically, with southern regions facing relatively more delays. ### NRRP allocation, disbursement, and spending by mission and region (as of dates in source) - NRRP funds allocation and disbursement figures in charts were reported as of: - Disbursement data as of June 4, 2026. - Expenditure data as of February 26, 2026. - NRRP Allocation and Spending by Mission (Billions of euros, as of December 31, 2025): (figures presented in source charts; spending ratios and allocations by mission and region reported as of December 31, 2025). - NRRP Disbursements from EC to Italy: cumulative grants/loans disbursement data received as of May 18, 2026; "2026 and beyond" estimated as total grants/loans allocation minus cumulative grants/loans disbursement up to 2025. ### Outlook and risks - The war in the Middle East is a headwind to growth via higher energy prices, tighter financial conditions, and renewed global economic uncertainty. - Growth projections and assumptions: - Average real GDP growth is projected to remain at around 0.5 percent in 2026 and 2027 (under the assumption that the war remains limited in duration and scope). - Growth in 2026 is projected to benefit from the peak in NRRP-related investment. - External and inflationary impacts: - Lower exports and higher energy import costs are expected to temporarily reduce the current account surplus in 2026. - Headline inflation is projected to rise to 2.9 percent in 2026 and remain elevated at above 2 percent in 2027. - Pass-through of higher energy prices, especially for gas, is delayed due to multi-year wholesale contracts, gas storage, and regulated retail prices. - Downside risks dominate: - Larger or more persistent increases in energy prices could further lift inflation and weigh on activity. - Risks include intensification of trade and geopolitical tensions, supply-chain effects, financial market volatility (including from AI-related investment exuberance), and domestic fiscal slippage (e.g., additional support measures amid the war or pre-election fiscal easing). - Inefficient NRRP implementation or extreme weather events could lower growth and weaken fiscal stability. - Upside risks include renewed global trade progress, stronger spillovers from other EU economies’ stimulus, and higher-than-expected productivity gains from public investment, reforms, digital adoption, and deeper EU integration. ### Authorities’ view - The authorities broadly agree with staff’s assessment of the outlook and risks and view the economy as resilient. - Authorities’ growth projection: real GDP growth of 0.6 percent in both 2026 and 2027 (assuming the energy shock remains contained). - They cited increased market confidence from ongoing fiscal consolidation and political stability and emphasized continued strong NRRP implementation. - On inflation, the authorities expect higher price pressures in 2026, with HICP approaching 3 percent, before easing back toward the target in 2027. - On the external sector, authorities noted revised demographics reduced the estimated current account gap and viewed the external position as broadly appropriate and resilient. ### Policy discussions: Decisively reducing public debt - Fiscal targets and projections: - The Public Finance Document (DFP2026) projected a headline deficit of 2.9 percent of GDP in 2026 (from 2.8 percent) and 2.8 percent of GDP in 2027 (from 2.6 percent). - The DFP2026 aims to bring the headline deficit below 3 percent of GDP to exit the Excessive Deficit Procedure. - Staff projects a cumulative headline deficit reduction of 0.6 percentage points of GDP during 2026–2028, with the primary surplus rising to just below 2 percent of GDP by 2028. - Key budget measures in the 2026 package include: - A tax cut for middle income earners (IRPEF rate reduction from 35 to 33 percent on the second income bracket covering incomes between € and € ; resulting relief clawed back for taxpayers with total income above € ). - Outcome-focused tax incentives, including lower substitute taxation for specific wage components (contractual wage increases, productivity bonuses, and night/holiday work). - Increased support for working mothers, targeted transfers to low‑income households, and a top‑up on minimum pensions. - Support for business investments through reintroduction of enhanced depreciation allowances and extension of selected sectoral tax credits; replacement of Transition 4.0 and 5.0 with a hyper-depreciation regime for eligible capital investments made between January 2026 and end-September 2028. - Temporary energy-price relief measures (fuel excise duty cuts extended until July 3, partially scaled back) and a one-off electricity bill top-up targeted to low-income households eligible for the social electricity bonus; business support including tax credits for truck drivers and the fishing industry. - These measures were described as having announced costs of below 0.1 percent of GDP and intended to be temporary and budget neutral, financed by expenditure cuts, additional VAT revenues from buoyancy amid higher prices, a draw on the FISPE contingency fund, and reallocation of sectoral funds. - Staff assessment of sovereign risks and fiscal space: - Staff assesses overall sovereign debt risks as moderate; fiscal space is "at risk". - Near-term financing risks are contained, but public debt is very high and vulnerable to growth and interest-rate shocks. - Mechanical indicators signal high medium-term risk driven by the high terminal debt-to-GDP ratio; long-term risks are assessed as high amid aging-related and other spending pressures. - Mitigating factors include sustained retail demand for government securities, a positive net international investment position, a lower share of sovereign debt held by banks, a relatively long average debt maturity, and potential ECB support (e.g., TPI). - Recommended additional fiscal effort: - Staff estimates combined additional fiscal efforts of about 1 percentage point of GDP during 2026–2027, in addition to the cumulative baseline effort of about ½ percentage point of GDP already projected during the two years, would help ensure an earlier decline in the debt ratio. - A third consecutive year of overperformance relative to the authorities’ projection would help bring debt on a downward path, provide a buffer below the 3 percent of GDP deficit threshold, and further support market confidence. - Prioritizing reforms with relatively larger near-term growth impact (e.g., reducing regulatory barriers and streamlining administrative procedures) would help limit adverse growth impacts from consolidation and maximize benefits. *Source: 1itaea2026001 - 10. Implementation of NRRP reforms and investments accelerated in 2025 and 2026,* ### 2041. As the effect of growth-enhancing reforms take hold, the burden on fiscal policy to carry out ### 2041. As the effect of growth-enhancing reforms take hold, the burden on fiscal policy to carry out the debt reduction could ease, or a larger debt reduction could be achieved with the same fiscal effort (as illustrated in the stylized combination of reform and consolidation over the long term for European countries) ### Fiscal consolidation and role of reforms - Growth-enhancing reforms can: - Ease the burden on fiscal policy to carry out the debt reduction. - Allow a larger debt reduction to be achieved with the same fiscal effort. - Complementing national reform efforts with EU single market reforms would further reduce fiscal adjustment needs. - A larger EU Multiannual Financial Framework, focused on European public goods and supported by common borrowing and new EU own resources, would support economic stability. ### Expenditure-side recommendations - Strengthen spending efficiency, contain new spending pressures, and improve targeting of shock-related support. - Enhance spending efficiency: - General government spending is among the highest in the EU, concentrated in pensions and interest payments. - Spending on education, health, and other productivity‑enhancing areas lags peers. - Education: better outcomes could be achieved within existing envelopes by reallocating resources toward early education and skill formation, reducing regional disparities, and strengthening links between vocational training and labor market needs. - Public administration: pursue performance benchmarking, digitalization, and spending reviews. - Improved spending efficiency would help limit the growth impact of adjustment while enhancing market confidence. - Strengthen the fiscal framework: - Make more effective use of the net expenditure path (NEP) as the operational limit of fiscal policy. - Anchor the budget process in a top-down approach. - Priorities: translate the NEP into binding annual expenditure ceilings; align local government spending with the aggregate constraint; improve expenditure baselines; strengthen the framework for discretionary revenue measures. - Energy shock support: - Replace broad excise duty cuts with targeted cash transfers to vulnerable households to preserve budget neutrality and price signals. - Ensure any additional spending (including for defense and clean energy) is fully compensated by lower spending, higher revenue, or both. ### Revenue-side recommendations - Prioritize simplification and revenue efficiency gains in fiscal adjustment. - Ongoing multi-faceted tax reform (Law No. 111/2023) is advancing toward a more modern, transparent, and equitable system; targeted and data-driven tax audits have improved revenue collection. - Further measures: - Expand digital and coordinated reporting to raise efficiency. - Continue reforms to address structural weaknesses: simplify a tax system with numerous special regimes and tax expenditures. - Broaden the tax base by rationalizing tax expenditures and implementing cadastral reform. - Tax expenditures: - Revenue foregone due to tax expenditures are estimated at 5.7 percent of GDP (about €134 billion) in 2026, driven by 573 measures, notably personal income tax deductions and credits, housing incentives, and reduced VAT rates. - Reduced VAT rates tend to benefit higher-income households; generous housing and self-employment incentives can distort behavior. - Recommendation: eliminate the preferential flat-tax rate on self-employment income; conduct comprehensive review with systematic evaluation and sunset clauses; replace less effective incentives with better-targeted spending to broaden the base and enable lower statutory rates while remaining revenue neutral. - Cadastral reform: - Update outdated cadastral values to market-based assessments to broaden the property tax base and improve equity. - Phase-in reforms gradually and initially in a revenue-neutral manner through offsetting rate adjustments; target relief to vulnerable households rather than broad exemptions. ### Contingent liabilities and public guarantees - Public guarantee stock remains elevated due to expansion of targeted schemes (Fondo Centrale di Garanzia, SACE guarantees). - Staff recommends gradual but decisive recalibration of public guarantees to pre‑pandemic levels, accompanied by: - Stronger risk-based pricing. - Enhanced stress testing and provisioning. - Clearer governance arrangements. - Full integration of contingent liabilities into medium‑term fiscal planning. - Such measures would limit moral hazard, reduce sovereign exposure, and strengthen fiscal sustainability while preserving targeted instruments to address market failures. - Industrial policy should be focused on addressing market failures with coordinated EU approaches to enhance gains from European integration. ### Pensions and aging - Prior reforms: shift from defined‑benefit to notional defined‑contribution framework, gradual increase in retirement age, tighter early retirement rules. - Auto-enrollment (with opt-out) in second pillar occupational/collective supplementary pensions introduced in the 2026 Budget Law. - Fiscal and demographic outlook: - Pension spending is projected to increase from 15.2 percent of GDP in 2025 to a peak of about 17 percent of GDP around 2040 before a gradual decline. - Pension replacement rate currently exceeds the euro area average—reflecting in part high contribution rates (around 1/3 of wages). - Workers entering after 1996 are the first to receive fully contributory pensions; fiscal gains materialize gradually. - Recommendations to mitigate fiscal pressures: - Broaden and stabilize the contribution base through higher labor market participation among women and youth. - Implement structural reforms to boost productivity and support higher wages. - Strengthen institutional safeguards to limit policy reversals. ### Fiscal policy under downside scenarios - Given high debt, scope for economic stabilization via fiscal policy is limited; social safety nets should cushion shocks while consolidation and reforms continue to ensure market confidence. - Under a mild growth shortfall: smooth additional consolidation over three years instead of two, provided debt reduction goals remain intact. - Under a severe adverse scenario: continue planned reduction of the headline fiscal deficit to maintain market confidence; allowing sizable deficit deterioration could raise risk premiums and borrowing costs, increasing consolidation needs via adverse feedback loops. - For Europe‑wide shocks: EU-level coordination would help limit adverse spillovers. ### Authorities’ views (as presented) - Authorities commit to fiscal discipline: - Plan to reduce the headline fiscal deficit to 2.9 percent of GDP in 2026 and continue consolidation in 2027, anchored in the Medium-Term Fiscal-Structural Plan and aligned with the EU fiscal framework. - NRRP-related investment spending supports domestic demand and is expected to have positive effects on aggregate supply. - Tax reforms are yielding positive results; improved compliance added to revenues. In 2025, Italy recovered a record-high € illion from combating tax evasion, compliance, and collection activities. - Energy-related measures are designed as temporary and budget neutral; excise duty cuts have been gradually scaled back. - Emphasized need to maintain targeted support while energy prices remain elevated and called for flexibility in the EU fiscal framework. - Agreed with scaling back public guarantees but emphasized prudent provisioning and an ongoing post-pandemic normalization process. - Expect debt-to-GDP ratio to decline more rapidly as the impact of housing-related tax credits dissipates and the primary surplus increases. ### Financial sector stability - Banking system soundness (end‑2025 indicators and recent trends): - Banking sector profitability improved further in 2025 despite moderation in net interest income, driven by strong non-interest income and cost-efficiency gains. - Regulatory Tier 1 capital position remained high at 17 percent of risk-weighted assets as of December 2025. - Liquidity conditions robust with healthy liquidity coverage and net stable funding ratios. - Non-performing loans (NPLs) stayed low at around 2.4 percent. - NPL coverage ratio was high at around 46 percent. - New NPL inflows remain slightly higher in the construction sector. - Italian banks have relatively higher exposure to U.S. tariffs due to stronger export orientation and manufacturing exposure, but credit impact has been limited given firms’ generally strong financial position. - Stress tests and vulnerabilities: - 2026 FSAP stress tests (conducted over 2026-2028) indicate system-wide risks are contained; banks can withstand adverse shocks from geopolitical tensions and a global recession, supported by capital and liquidity buffers and low private sector leverage. - Vulnerabilities noted: - Lower-income households, renters, and borrowers with variable-rate mortgages are more vulnerable despite moderate aggregate household indebtedness. - Corporate vulnerabilities are heterogeneous and higher among SMEs, in Southern Italy, and in construction, transport, and low-skill services. - Stress tests show larger vulnerability to a geopolitical shock than a recessionary one because of associated higher short-term interest rates. - A subset of Less Significant Institutions (LSIs) with specialized business models, higher NPL ratios, or dependence on less stable funding sources exhibit weaker resilience under adverse scenarios. - Climate risks: - Banking system broadly resilient to climate risks from severe flooding with limited effects on aggregate bank capital. - Larger capital impacts concentrated among less significant banks. - Losses in stress tests are initially driven by sovereign valuation losses and then via credit risk channels. - Stronger post-disaster fiscal support can cushion near-term impacts on banks but would raise public debt and sovereign yields, risking adverse feedback loops and reinforcing the need for adaptation, resilience investment, and insurance. *Source: IMF staff chapter content (PDF content unit 1itaea2026001).* ### 30. However, some vulnerabilities remain, including from the sovereign-bank nexus. While ### 1itaea2026001 - 30. However, some vulnerabilities remain, including from the sovereign-bank nexus. While ### Sovereign‑bank nexus and banking vulnerabilities - Italian bank holdings of domestic government securities: 8.6 percent of total assets as of September 2025 (from 10 percent in 2020)—above the euro area average of 3.2 percent. - Direct lending to the public sector: around 6 percent of total assets. - Stock of publicly guaranteed loans: around 23 percent of performing corporate loans. - Rising default rates on publicly guaranteed loans relative to non-guaranteed ones (chart referenced). - Sizable stocks of unresolved NPLs persist outside the banking system, weighing on capital reallocation. - Specific LSI vulnerabilities: NPL‑specialized LSIs; LSIs heavily reliant on public guarantees; online deposit platforms—face longer-term sustainability challenges. - Financial sector exposure to cyber risks, including amid rapidly evolving AI-related technologies. ### Macroprudential stance and supervisory recommendations - Continue a forward-looking and proactive approach given heightened global uncertainty and strong bank profitability. - Maintain a positive Systemic Risk Buffer (SyRB) under current macroeconomic projections, but: - Extend the SyRB beyond domestic credit and counterparty exposures to cover all residual systemic risks. - Ensure timely reassessment to preserve flexibility in a highly uncertain environment. - Proactively deploy policy tools where appropriate (examples cited): Pillar 2 capital add-ons for bank-specific risks; SyRB to tackle system-wide risks from sovereign concentration exposures. - Adopt a more pre-emptive approach to borrower-based measures, including revisiting legal constraints that delay activation and more systematically integrating stress testing and granular data into policy calibration. ### Strengthening financial sector oversight (Annex V referenced) - Banking supervision priorities: - Focus on governance, credit, and operational risks. - Early escalation and timely corrective and sanctioning actions to address business model vulnerabilities. - Time-bound strategy to reduce public sector guarantees (given distortions from extensive use of government guarantees, including zero risk weighting), with clear communication and close monitoring of the impact on the most exposed LSIs. - Insurance supervision and resolution: - Fully integrate the Institute for the Supervision of Insurance (IV) into Banca d’Italia to address structural resource constraints and ensure supervisory effectiveness. - Introduce a floor on capital relief from internal models. - Extend International Financial Reporting Standards (IFRS) to all insurers. - Establish an effective resolution framework for insurers. - Enhancing authority effectiveness: - Full protection for supervisory and resolution authorities, particularly regarding legal defense costs. - Greater use of targeted and thematic on‑site inspections. - Continue to enhance cyber governance and oversight amid rapid digitalization and reliance on third‑party providers. ### Financial safety net and insolvency/enforcement - Recommendation to discontinue recurrent reliance on deposit guarantee schemes (DGS) to fund preventive recapitalization of non-systemic banks because of adverse effects on market discipline and availability of administrative liquidation as a more appropriate alternative. - Remove active bankers from DGS governance. - Formalize inter-agency crisis coordination and increase transparency around Banca d’Italia’s role as lender of last resort in resolution. - Improve insolvency and enforcement frameworks to raise recovery rates, facilitate debt restructuring, and support capital reallocation—complementing broader growth-enhancing reforms. ### AML/CFT progress and priorities - Italy remains exposed to money laundering/terrorist financing (ML/TF) risks partly due to the size and interconnectedness of its financial sector and cross‑border flows. - Continue efforts across several dimensions: - Improving preventive measures: risk‑based supervision; dedicated Ministry of Finance directorate for non-financial obliged entities; licensing and supervisory framework for virtual asset service providers—further development of risk understanding and preventive measures in the virtual assets sector is required. - Strengthening supervisory effectiveness: enhanced domestic and regional coordination (supporting the EU Anti‑Money Laundering Authority); ensure more timely and dissuasive enforcement; maintain adequate resourcing; deepen analysis of financial integrity’s impact on financial stability; address priorities identified in the 2026 FATF Mutual Evaluation Report. ### Authorities’ views (summary) - Broad agreement with FSAP assessment and recommendations; recognition of progress since the last FSAP. - Emphasized banking system resilience per stress tests; noted concentration of vulnerabilities in a few LSIs and limitations of top‑down stress tests for LSI specifics. - Highlighted a gradual shift in the sovereign investor base from banks toward households and foreign investors as strengthening resilience. - Did not support extending the SyRB beyond the current scope, noting sovereign risks are covered under the existing prudential framework. - Defended use of DGS-funded preventive interventions as standard tools under EU and national law and disagreed with recommendation to restrict their use. - Supported recommendations on enhancing legal protection of financial authorities and committed to continue strengthening Italy’s AML/CFT framework. ### Boosting productivity and medium‑term growth prospects - Long‑standing low‑productivity, low‑growth trajectory driven by predominance of small, mature firms, regulatory barriers, human capital gaps (shortages in skills and managerial capacity), and constraints to access to capital—especially risk capital. - Structural priorities to boost productivity: - Streamline regulation, reinforce policy predictability, remove remaining barriers to competition. - Simplify administrative and tax procedures and scale back size‑contingent incentives to lower barriers to entry and support firm growth. - Strengthen civil justice, enforcement, and insolvency frameworks to speed resolution and capital reallocation. - Increase labor force participation, especially among women and younger people, via stronger parental leave systems, expanded access to childcare, and more flexible work arrangements. - Reduce high tax wedges and benefit‑related disincentives to labor market entry (notably for low‑income and second earners); ease school‑to‑work transitions and skill mismatches. - Education and skills: - Italy ranks near the bottom among advanced economies in skill preparedness and demand for emerging occupations; only 45.8 percent of the population has at least basic digital skills (EU Digital Skills and Jobs Platform). - Allocation of 23 percent of NRRP resources toward digital transformation noted as helpful. - Policy actions: raise digital literacy; expand targeted training; strengthen STEM and ICT education; expand apprenticeships; reform curricula for AI‑complementary skills. - Invest strategically in human capital by prioritizing early childhood education, stronger pathways to tertiary education, and vocational/technical training while extending NRRP education reforms beyond 2026. - Strengthen lifelong learning using repurposed existing funds and private sector co‑financing with system-wide coordination for reskilling and upskilling. ### Innovation, venture capital, and capital allocation - Innovation expenditure per employee remains below the EU median despite improvement in 2025. - Staff analysis: a broad‑based increase in VC funding across the economy equivalent to 0.06 percent of GDP is associated with a 17 percent increase in the probability of patenting and a consequent 1 percent rise in sectoral TFP. - Italy’s venture capital (VC) investment remains very low, at around one‑fifth of the level in France or Germany. - Structural impediments limit availability of investable projects and discourage VC investment in Italy. - Policy priorities to deepen VC markets: - Ease administrative burdens and address skill shortages. - Strengthen international visibility and geographic reach of innovation hubs. - Use pan‑European instruments (EIB/EIF funds and co‑investment platforms) to reduce fragmentation, help VC funds reach efficient scale, and diversify risks across member states. *Source: 1itaea2026001* ### 42. Lessons from the NRRP experience should be leveraged in new reform efforts. The ### Lessons from the NRRP experience should be leveraged in new reform efforts. ### NRRP outcomes and lessons - The NRRP aimed to address gaps in the business ecosystem, including human capital, investment and digitalization, and institutional reforms. - IMF staff estimates that the Recovery and Resilience Facility (RRF) has helped lift EU annual GDP growth by 0.3 percentage point in 2025. - Key lessons to embed in future plans: - Assess which instruments delivered measurable gains (such as higher investment uptake, faster project execution, stronger productivity growth). - Place greater emphasis on evaluating policy effectiveness beyond completion through performance-based frameworks. - Continue use of performance-oriented conditionality to inform the reform agenda and the next Multiannual Financial Framework (MFF). - Strengthen coordination across levels of government to enhance project-level execution capacity and ensure timely delivery. - Preserve public investment data and monitoring systems and consider enhancing information sharing across ministries. ### Energy security and electricity market integration - Recent surge in energy prices underscores urgency to enhance energy security despite progress in diversifying gas supply. - Staff recommendation: a comprehensive policy package combining faster permitting for renewables, expanded energy storage, and deeper electricity market integration. - Staff analysis findings: - Investment in EU electricity grid interconnections over the past five years has reduced electricity prices by about 5 percent on average, with consequent significant competitiveness gains, especially in energy intensive industries, everything else equal. - Scenario analysis shows that combining stronger interconnection with greater reliance on low-carbon generation could materially reduce electricity prices. - Policy implications: - Advance electrification and decouple wholesale electricity prices from gas by fostering renewables, storage, and demand flexibility to contain elevated industrial energy prices. - An integrated EU energy market supported by expanded cross-border interconnections, coordinated grid investment, and harmonized market design can reduce price volatility, lower costs, and enhance supply security. - EU-level initiatives such as the proposed Grids Package and scaled-up investment under the next MFF are critical to provide efficient insurance against future shocks while avoiding costly, distortive national responses. ### Authorities’ views - Authorities agreed that boosting growth is a priority alongside fiscal consolidation and emphasized the benefits of the NRRP. - Noted achievements and priorities: - Employment has reached record levels. - Progress in education and skills reforms, including expansion of vocational pathways (including ITS), improved education‑to‑work transition, upskilling of teachers, enhanced student outcomes, and digital competencies. - Introduction of tools expected to address skill mismatches and low labor force participation, including digital platforms such as AppLI. - Efforts to strengthen financial literacy and promote supplementary pensions to support reallocation of household savings toward longer‑term investment. - Improvements in public administration efficiency through digitalization and stronger monitoring. - Progress in the judicial system, including reducing case backlogs and disposition time, to be sustained through NRRP process innovations. - Significant increases in renewable capacity and introduction of mandatory insurance against natural catastrophes for businesses. - Continued commitment to sustaining reform and evaluation efforts in line with MTFSP commitments. - Authorities emphasized leveraging NRRP lessons for ongoing reform and investment agenda, especially benefits from coordination across ministries and levels of government, and viewed further European integration as beneficial for growth prospects. ### Staff appraisal — macroeconomic outlook and external position - The Italian economy is expected to continue to grow at a modest pace, weighed down by external headwinds and structural challenges. - Near-term risks: - Global uncertainty and potential for renewed pressures from energy prices. - Domestic inflation has picked up, reflecting Italy’s relatively high dependence on imported fossil fuels. - Sovereign spreads faced renewed volatility, though the net increase remained moderate. - Medium-term constraints: - Potential growth expected to remain subdued due to persistently weak productivity, an aging population, and relatively low labor force participation, particularly among women and youth. - External position: - The external position in 2025 is assessed as moderately weaker than implied by medium-term fundamentals and desirable policies, reinforcing need for productivity-enhancing structural reforms and continued fiscal consolidation. ### Fiscal policy and debt sustainability - A faster pace of debt reduction would greatly enhance resilience. - Fiscal consolidation has progressed, supported by strong revenues and improved tax compliance, but public debt is projected to remain high over the medium term and vulnerable to growth and interest rate shocks. - Recommendations to support debt reduction while protecting growth: - Enhance spending efficiency, including through digitalization and comprehensive spending review. - Ensure any new spending is fully offset. - Ensure energy-related support remains temporary, targeted, and budget-neutral, including by replacing broad-based price-distortive measures with targeted transfers to vulnerable households. - On revenue side: continue improvements in tax compliance, expand use of digital tools, rationalize tax expenditures, and broaden the tax base—including by eliminating preferential regimes and updating property values. - Further enhance budget transparency and monitoring around the net expenditure path within the medium-term fiscal framework to reinforce fiscal credibility. - Recalibrate public guarantees toward the pre-pandemic level to further enhance resilience. ### Financial stability - The FSAP found Italy’s banking system to be resilient, supported by record profits, strong capital, ample liquidity buffers, and low non-performing loans. - Stress tests indicate the banking system can withstand severe adverse shocks. - Remaining vulnerabilities: - Some LSIs with specialized business models. - Sovereign-bank linkages that can amplify adverse shocks despite declining exposures. - Policy recommendations: - Maintain a sustained and proactive policy approach to preserve resilience. - Further enhance supervisory agility and broaden the use of macroprudential tools. - Strengthen the positive SyRB by extending its scope to better capture residual systemic risks. - Continue monitoring sovereign-banking sector linkages and use targeted policy tools (Pillar II capital add-ons and SyRB) to mitigate risks. - Strengthen supervisory and crisis management frameworks, including enhancing legal protection for supervisory staff, fully integrating the insurance supervisor into Banca d’Italia, and reinforcing cyber resilience. - Continue efforts to strengthen AML/CFT frameworks and reduce remaining structural vulnerabilities. ### Structural reforms to lift productivity and growth - Urgent reforms needed at national and EU levels to revive productivity and medium-term growth and support fiscal consolidation amid successive shocks. - Policy priorities: - Ease regulatory barriers and enhance policy predictability to strengthen the business environment. - Continue improvements in the judicial system, including insolvency procedures, to facilitate capital reallocation. - Deepen and better integrate capital markets to foster innovation and support the supply of risk capital; complement with strengthened financial literacy to improve capital allocation. - Address rapid population aging by raising labor supply and skill levels and supporting adoption of new technologies. - Close labor force participation gaps, particularly for women and youth. - Improve educational outcomes and school-to-work transitions; target investment in education (especially in STEM and digital fields), vocational training, and lifelong learning. - Sustain reform and investment momentum beyond the NRRP, leveraging lessons learned to ensure effective policy design and implementation. - Accelerate the green transition through expansion of renewables, streamlined permitting, and deeper electricity market integration to enhance energy security, reduce price volatility, and support a more resilient and competitive economy. *Source: 1itaea2026001* ### 49. It is recommended that the next Article IV consultation takes place on the standard ### 1itaea2026001 - 49. It is recommended that the next Article IV consultation takes place on the standard ### Recommendation - It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Real sector — key projections and indicators (Table 1) - Real GDP (annual percent change): 2024: 0.8; 2025: 0.5; 2026: 0.5; 2027: 0.5; 2028: 0.8; 2029: 0.7; 2030: 0.7; 2031: 0.7. - Real domestic demand: 2024: 0.7; 2025: 1.2; 2026: 0.6; 2027: 0.4; 2028: 0.7; 2029: 0.6; 2030: 0.6; 2031: 0.6. - Private consumption: 2024: 1.2; 2025: 1.1; 2026: 0.5; 2027: 0.3; 2028: 0.8; 2029: 0.7; 2030: 0.6; 2031: 0.6. - Gross fixed capital formation: 2024: -3.1; 2025: 3.5; 2026: 2.3; 2027: 1.0; 2028: 0.9; 2029: 0.7; 2030: 0.7; 2031: 0.7. - Net exports contributions: 2024: 0.1; 2025: -0.6; 2026: -0.1; 2027: 0.1; 2028: 0.2; 2029: 0.1; 2030: 0.1; 2031: 0.1. - Nominal GDP (billions of euros): 2024: 2,202; 2025: 2,258; 2026: 2,320; 2027: 2,381; 2028: 2,441; 2029: 2,499; 2030: 2,558; 2031: 2,618. - Resource utilization: - Potential GDP (percent): 0.7 for 2024–2029; 0.6 for 2030–2031. - Output gap (percent of potential): 2024: 0.2; 2025: 0.0; 2026: -0.2; 2027: -0.3; 2028: -0.2; 2029: -0.1; 2030: -0.1; 2031: 0.0. - Employment and unemployment: - Employment (annual percent change): 2024: 1.5; 2025: 0.8; 2026: 0.1; 2027: -0.7; 2028: -0.6; 2029: -0.7; 2030: -0.9; 2031: -1.0. - Unemployment rate (percent): 2024: 6.6; 2025: 6.1; 2026: 5.6; 2027–2031: 5.9 (2027: 5.9; 2028: 5.9; 2029: 5.9; 2030: 5.9; 2031: 5.9). ### Prices, labor costs, and productivity (Table 1) - GDP deflator (percent): 2024: 2.0; 2025: 2.0; 2026: 2.2; 2027: 2.1; 2028–2031: 1.7. - Consumer prices (percent): 2024: 1.1; 2025: 1.6; 2026: 2.9; 2027: 2.4; 2028: 2.3; 2029: 2.0; 2030: 2.0; 2031: 2.0. - Consumer prices (core): 2024: 2.2; 2025: 2.0; 2026: 2.2; 2027: 2.2; 2028–2031: 2.0. - Hourly compensation (industry including construction) (percent): 2024: 3.2; 2025: 3.9; 2026: 1.3; 2027: 0.3; 2028: 2.4; 2029: 1.8; 2030: 1.1; 2031: 0.8. - Productivity (industry including construction) (percent): 2024: -1.6; 2025: 1.3; 2026: 0.4; 2027: 0.7; 2028–2031: 0.5 each year. - Unit labor costs (industry including construction) (percent): 2024: 4.8; 2025: 2.6; 2026: 0.9; 2027: -0.4; 2028: 1.9; 2029: 1.3; 2030: 0.6; 2031: 0.3. ### Fiscal outcomes and outlook (Tables 1 and 2) - General government net lending/borrowing (percent of GDP): 2024: -3.4; 2025: -3.1; 2026: -2.9; 2027: -2.8; 2028: -2.5; 2029: -2.5; 2030: -2.5; 2031: -2.7. - General government primary balance (percent of GDP): 2024: 0.5; 2025: 0.8; 2026: 1.2; 2027: 1.3; 2028: 1.8; 2029: 1.9; 2030: 2.0; 2031: 2.0. - Structural overall balance (percent of potential GDP): 2024: -3.7; 2025: -3.2; 2026: -2.8; 2027: -2.7; 2028: -2.3; 2029: -2.5; 2030: -2.5; 2031: -2.7. - Structural primary balance (percent of potential GDP): 2024: 0.2; 2025: 0.7; 2026: 1.3; 2027: 1.5; 2028: 2.0; 2029: 1.9; 2030: 2.1; 2031: 2.0. - General government gross debt (percent of GDP): 2024: 134.7; 2025: 137.1; 2026: 138.2; 2027: 138.2; 2028: 137.5; 2029: 136.7; 2030: 136.3; 2031: 136.1. - Statement of Operations (billions of euros, selected): - Revenue: 2024: 1,036.0; 2025: 1,085.9; 2026: 1,108.1; 2027: 1,136.3; 2028: 1,169.3; 2029: 1,196.7; 2030: 1,226.8; 2031: 1,255.1. - Expenditure: 2024: 1,109.8; 2025: 1,155.3; 2026: 1,176.0; 2027: 1,203.7; 2028: 1,230.3; 2029: 1,259.8; 2030: 1,291.6; 2031: 1,326.4. - Net lending/borrowing (billions of euros): 2024: -73.8; 2025: -69.4; 2026: -67.9; 2027: -67.5; 2028: -61.0; 2029: -63.1; 2030: -64.7; 2031: -71.3. - Fiscal shares (percent of GDP, selected): - Interest (percent of GDP): 2024: 3.9; 2025: 3.9; 2026: 4.1; 2027: 4.1; 2028: 4.3; 2029: 4.4; 2030: 4.6; 2031: 4.7. - Social benefits (percent of GDP): 2024: 22.6; 2025: 22.7; 2026: 22.8; 2027: 23.1; 2028: 23.1; 2029: 23.2; 2030: 23.2; 2031: 23.3. ### Financial sector — indicators and soundness (Figures 4–5; Table 5) - Banks' profitability indicators (percent): Return on assets increased from 0.1 in 2020 to 1.4 in 2024 and 1.4 in 2025 (Table 5 shows Return on assets 2020: 0.1; 2021: 0.4; 2022: 0.7; 2023: 1.2; 2024: 1.4; 2025: 1.4). - Return on equity: 2020: 0.9; 2021: 6.0; 2022: 7.5; 2023: 12.1; 2024: 12.4; 2025: 13.5. - Regulatory capital ratios (percent): Regulatory capital to risk-weighted assets: 2020: 19.3; 2021: 18.8; 2022: 19.2; 2023: 19.4; 2024: 19.7; 2025: 19.4. Regulatory tier 1 capital to risk-weighted assets: 2020: 16.9; 2021: 16.5; 2022: 16.7; 2023: 16.9; 2024: 17.2; 2025: 17.0. - Nonperforming loans: - Nonperforming loans to total gross loans: 2020: 4.4; 2021: 3.3; 2022: 2.8; 2023: 2.7; 2024: 2.8; 2025: 2.4. - Nonperforming loans net of provisions to capital (percent): 2020: 20.2; 2021: 16.5; 2022: 13.8; 2023: 12.7; 2024: 12.9; 2025: 11.8. - Liquidity and funding: - Liquid assets to total assets (percent): 2020: 21.3; 2021: 23.1; 2022: 18.3; 2023: 17.6; 2024: 15.5; 2025: 15.2. - Liquid assets to short-term liabilities (percent): 2020: 97.7; 2021: 96.9; 2022: 86.7; 2023: 107.8; 2024: 124.0; 2025: 127.5. - Bank credit dynamics (Table 5 and Figures): - Growth of bank loans to private non-MFI (percent): 2020: 4.7; 2021: 2.1; 2022: 2.1; 2023: -2.8; 2024: -0.3; 2025: 2.0. - Customer deposits to total (noninterbank) loans (percent): 2020: 68.5; 2021: 90.6; 2022: 78.1; 2023: 80.1; 2024: 85.7; 2025: 86.6. ### External sector — balances, NIIP, and projections (Tables 3, Annex I) - Current account balance (billions of euros): 2024: 24.1; 2025: 25.0; 2026: 10.8; 2027: 25.4; 2028: 37.5; 2029: 44.8; 2030: 53.1; 2031: 61.2. - Current account balance (percent of GDP): 2024: 1.1; 2025: 1.1; 2026: 0.5; 2027: 1.1; 2028: 1.5; 2029: 1.8; 2030: 2.1; 2031: 2.3. - Balance of goods and services (percent of GDP): 2025: 1.9; 2026: 1.3; 2027: 1.9; 2028: 2.2; 2029: 2.4; 2030: 2.6; 2031: 2.8. - Gross external positions (2025, percent of GDP): Gross foreign assets: 193.5; Gross foreign liabilities: 178.0; NIIP: 15.4; Debt assets: 77.3; Debt liabilities: 124.8. - Gross external debt (billions of euros / percent of GDP): gross external debt (Table 3): 2024: 120.3; 2025: 125.1; 2026: 127.8; 2027: 128.4; 2028: 128.7; 2029: 128.1; 2030: 128.1; 2031: 127.6. - External financial flows (Figure 6): Cumulative external financial flows by sector (Billions of euros) show notable contributions from Bank of Italy, MFIs excluding BdI, General government, and other sectors across 2005–2025 (figure data sources provided). - Exchange rates (index 2015=100, 2026Q1): NEER and REER range around 1.0–1.6 on provided figure axes; USD/EUR plot included (data series labeled but numeric values not listed in table). ### External Sector Assessment — Annex I (text and key quantitative assessments) - Overall assessment: The external position in 2025 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - 2025 CA and context: - The CA balance recorded a surplus of 1.1 percent of GDP in 2025 (1.1 in 2024). - The CA averaged a surplus of 1.4 percent of GDP between 2019 and 2024, with surpluses in all years except 2022. - The cyclically adjusted CA is estimated at 1.2 percent of GDP for 2025. - The EBA estimated CA norm is 2.4 percent of GDP. - IMF staff assesses the CA gap to be in the range of –1.7 to –0.7 percent of GDP, with a midpoint of –1.2 percent of GDP. - The total estimated policy gap is +1.0 percent of GDP, partly reflecting a +0.4 percent of GDP positive contribution from a fiscal policy gap. - NIIP and gross positions: - NIIP in 2025: 15.4 percent of GDP (from 14.9 in 2024). - Gross foreign assets: 193.5 percent of GDP; liabilities: 178.0 percent of GDP in 2025. - Bank of Italy’s R liaison to other Eurosystem central banks declined from peak 34 percent of GDP in 2022 to 16 percent of GDP at end-2025. - Public sector external liabilities make up around 50 percent of total external liabilities, corresponding to 66 percent of GDP; 70 percent of public sector external liabilities are long term. - Assessment: Strengthening public sector balance sheets and undertaking structural reforms would lessen vulnerabilities associated with high public debt and reduce risks of negative feedback loops between debt stock and debt-servicing costs. ### Potential policy responses and recommendations (Annex I, extracted text) - Additional comprehensive reforms to boost productivity, competitiveness, and potential growth. - EU single market deepening to raise productivity and resilience through greater scale, internal diversification, and improved risk sharing. - Reforms to boost labor force participation of women and the youth to further boost economic activity and savings. - Strengthening the external position requires an increase in public sector savings, supported by decisive public debt reduction. - Industrial policies should: - Be deployed cautiously, - Remain targeted to specific objectives where externalities or market failures prevent effective market solutions, - Be coordinated at the EU level, - Minimize trade and investment distortions. *Source: IMF staff calculations and national authorities as presented in the provided content unit.* ### 0.5 percent; and (ii) a +0.5 percent of GDP positive contribution from the credit gap, reflecting the still-subdued cred ### ITALY ### Current Account and External Balance - 2025(% GDP): - CA: 1.1 - Cycl. Adj. CA: 1.2 - EBA Norm: 2.4 - EBA Gap: –1.2 - Staff Adj.: 0.0 - Staff Gap: –1.2 - Model results and drivers: - A +0.5 percent of GDP positive contribution from the credit gap, reflecting the still‑subdued credit extension. - Demographics remains a key driver to the norm amid Italy’s aging population. - A sizable unexplained residual of –2.3 percent of GDP suggests the model may not fully capture Italy‑specific characteristics and structural impediments (e.g., labor market rigidities and relatively low labor market participation among some segments). ### Real Exchange Rate (REER) - Background: - During 2019–25, the CPI-based REER appreciated by 1.1 percent, while the ULC-based REER appreciated by 0.5 percent. - During 2025, the CPI-based REER appreciated by 0.6 percent due to the strengthening of the euro. - As of March 2026, the CPI-based REER was 0.2 percent above the 2025 average. - Assessment: - The model-based CA gap implies a REER gap of 4.8 percent in 2025 (with an estimated elasticity of 0.25 applied). - The level and index CPI-based REER models suggest an overvaluation in 2025 of 2.6 percent and 3.3 percent, respectively. - Based on the IMF staff’s gap, the REER gap is in the range of 6 to 6.8 percent, with a midpoint of 4.7 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Capital account: broadly unchanged at around 0.2 in 2025 (0.0 in 2024). - Financial account: net outflows of 1.2 percent of GDP in 2025 (from net outflows of 2.3 percent of GDP in 2024), with a reduction in TARGET2 liabilities and increase in other financial investment inflows. - Assessment: - Large refinancing needs of the sovereign and the banking sector suggest Italy remains vulnerable to market volatility. - The private sector, which is a net creditor, is mainly exposed to equity risk‑rewards. ### FX Intervention and Reserves Level - Background: - The euro has the status of a global reserve currency. - Italy’s reserves increased y percent in , in part owing to valuation effects. (text indicates valuation‑driven increase but numeric placeholders present in source). - Assessment: - Reserves held by the euro area are typically low relative to standard metrics. - The currency is freely floating. ### Progress on Past IMF Recommendations (Annex II) - Fiscal Policy: - Recommendation: Maintain strong fiscal discipline to decisively reduce the public debt ratio, anchored by a credible medium‑term fiscal framework; target rising primary surplus of about 3 percent of GDP over the medium term. - Outcomes: - The 2025 fiscal deficit narrowed to 3.1 percent of GDP, below the original 3.3 percent target. - The headline deficit is expected to narrow to 2.9 percent in 2026. - Yield spreads on 10‑year bonds relative to Bunds narrowed to around 60 bps before the onset of war in the Middle East. - Recommendation: Continue to improve tax compliance, rationalize tax expenditures, and phase out inefficient incentives. - Outcomes: - Improved tax compliance supported revenue overperformance. - Progress made in phasing down housing‑related tax credits, notably the “super bonus”. - Actions against tax evasion recovered €36.2 billion in 2025, up 8.2 percent from 2024. - Recommendation: Streamline pension‑related spending. - Outcomes: - No extension of Quota 103 and Opzione Donna in the 2026 Budget Law, except for individuals already meeting eligibility criteria. - Recommendation: Gradually reduce the stock of public guarantees to pre‑pandemic levels. - Outcomes: - Public guarantees have started to decline but remain high at about 13 percent of GDP as of end‑2025. - Maturing COVID‑related guarantees are offset by new issuances, notably the Export Fund (€116 billion exposure). - Financial Sector Policy: - Recommendation: Closely monitor bank asset quality and sovereign–bank linkages; address vulnerabilities in less significant institutions (LSIs). - Outcomes: - Authorities strengthened asset quality monitoring; low NPL ratios, high coverage, and regular stress tests. - Sovereign–bank nexus closely monitored and stress‑tested; remains a key vulnerability, especially for cooperative banks and LSIs. - LSI risks are actively managed through targeted stress tests, enhanced resolution planning, and preventive safety nets. - Recommendation: Strengthen macroprudential oversight. - Outcomes: - A systemic risk buffer (SyRB) of 1 percent was activated, with phased implementation. - The countercyclical capital buffer remained at zero, reflecting subdued cyclical risks. - Recommendation: Enhance supervision and regulatory oversight of LSIs. - Outcomes: - Supervisory oversight of LSIs was further strengthened and increasingly aligned with ECB methodologies. - Recommendation: Advance insolvency and debt‑workout frameworks. - Outcomes: - Progress continued on insolvency and civil justice reforms under the NRRP. - Recommendation: Continue efforts to enhance AML/CFT effectiveness. - Outcomes: - Authorities updated the national AML/CFT risk assessment, enhanced supervisory coordination, and expanded oversight of non‑financial obliged entities and crypto‑asset service providers. - Structural Reforms: - Recommendation: Ensure full and timely implementation of the NRRP; follow with a credible post‑NRRP reform agenda. - Outcomes: - By end‑2025, Italy completed about 72 percent of 575 agreed milestones and targets and received €166 billion (85 percent of €195 billion), ranking among the EU’s top performers. It submitted 9 of 10 payment requests. - Spending lags disbursements, with €116.9 billion spent by end‑March 2026, about 70 percent of funds received. - Recommendation: Focus reforms on productivity, labor supply, and innovation; advance renewable energy and resilient energy infrastructure. - Outcomes: - Structural reforms progressing; employment reached record highs, supported by policies boosting female labor participation, skills development, and childcare. - Transition 5.0 framework combines productivity and decarbonization incentives. - Resilient energy infrastructure advancing via grid investments, expanded transmission links, and growth in solar and wind deployment. - Recommendation: Address foreign bribery risks under voluntary assessment of transnational aspects of corruption. - Outcomes: - Authorities reported progress on a national strategy to counter foreign bribery, technical assistance to other countries, fostering integrity standards, and training for prosecutorial and judicial officers. ### Risk Assessment Matrix (Annex III) - Notes: - The Risk Assessment Matrix summarizes events that could materially alter the baseline. Relative likelihood categories: “low” (<33 percent), “medium” (33–66 percent), and “high” (≥66 percent). - Global Risks – Conjunctural: - Geopolitical tensions and intensification of conflicts: - Relative likelihood: High - Impact if realized: High (higher energy and food prices; input shortages; financial market volatility; migration pressures; tourism impacts) - Policy responses: - Ensure support is budget neutral, temporary, and well‑targeted. - Scale up renewable energy generation, expanded energy storage, and deepen electricity market integration domestically and at the European level; scale up investment to meet the 2030 electricity integration target. - Increase resilience (inventories, supplier diversification). - Improve labor market integration of foreign workers. - Commodity price volatility: - Relative likelihood: High - Impact if realized: High (significant impact on business profitability, output, real incomes, and current account) - Policy responses: - Allow domestic commodity prices to increase; provide budget neutral, temporary, and well‑targeted support to the most vulnerable. - Encourage inventory accumulation and efficient consumption. - Promote investment in innovative energy systems, including renewables and battery storage. - Trade‑related risks: - Relative likelihood: High - Impact if realized: Medium (higher trade barriers negatively impact exports) - Policy responses: - Continue reducing barriers to trade and enhancing investment within the EU and globally. - Accelerate structural reform agenda to boost productivity and competitiveness. - Facilitate worker reallocation and reskilling/upskilling; provide adequate social safety net. - Fiscal vulnerabilities and higher interest rates: - Relative likelihood: High - Impact if realized: High (repricing of government, bank, and corporate bonds; credit contraction; deterioration in loan quality; insolvencies) - Policy responses: - Commit to a credible medium‑term fiscal consolidation path embedding structural reforms and productivity‑boosting investments. - Stay agile in reassessing the Systemic Risk Buffer; rely on bank resolution systems. - Closely monitor banks’ loan classification practices, including for publicly guaranteed loans. - Policy uncertainty: - Relative likelihood: High - Impact if realized: High (precautionary saving rises; investment and hiring weaken) - Policy responses: - Strengthen policy predictability and communication (medium‑term fiscal/structural plans with clear timelines). - Safeguard independence of economic institutions and preserve transparent, rules‑based decision‑making. - Disorderly AI correction: - Relative likelihood: High - Impact if realized: Medium (household wealth effects; tighter global financial conditions; uncertain overall impact) - Policy responses: - Intensify monitoring of household/NBFI exposures and liquidity risks. - Ensure banks maintain prudent provisioning and capital planning; be ready to deploy macroprudential tools if stress broadens. - Global Risks – Structural: - Labor shortages and remittances: - Relative likelihood: High - Impact if realized: Medium (immigrant labor shortages amplify demographic headwinds; constrain production; add to inflationary pressures) - Policy responses: - Enhance EU coordination on immigration policies. - Ensure faster and more effective labor market integration of immigrants (skills recognition, language training, targeted active labor market policies). - Facilitate labor reallocation across sectors and regions. - Cyberthreats: - Relative likelihood: High - Impact if realized: High/Medium (impair functioning of financial system and public services) - Policy responses: - Raise awareness and enhance monitoring of cyberattacks. - Urge robust cyber defenses and business continuity plans. - Strengthen Bank of Italy’s monitoring and oversight of financial sector IT resilience and cyber risk defenses (FSAP recommendation). - Climate change: - Relative likelihood: Medium - Impact if realized: Medium (reduce real GDP and increase fiscal costs; migration pressures) - Policy responses: - Leverage EU funds to make infrastructure more resilient. - Work with EU partners on region‑wide migration responses. - Scale up renewable energy generation, expanded energy storage, and deeper electricity market integration to meet the 2030 electricity integration target. - AI acceleration: - Relative likelihood: Medium - Impact if realized: Medium (raises productivity and potential growth; gains may be uneven and constrained by energy and skills) - Policy responses: - Accelerate AI diffusion, especially among SMEs. - Address energy and infrastructure constraints. - Support labor market transitions through reskilling and worker reallocation. - Domestic Risks: - Lack of a post‑NRRP reform strategy: - Relative likelihood: Medium - Impact if realized: High (loss of NRRP‑related productivity and growth gains) - Policy responses: - Conduct targeted ex‑post evaluations of NRRP instruments and reforms. - Embed NRRP lessons in the next budgetary cycle; preserve outcome‑based conditionality and align resources with administrative capacity. - Maintain and strengthen NRRP public investment data and monitoring systems. - Ineffective tax reform: - Relative likelihood: High - Impact if realized: High (more regressive system; revenue shortfalls; higher inequality) - Policy responses: - Reduce complexity and broaden the tax base to promote vertical and horizontal equity. - Reduce tax expenditures and continue to strengthen tax compliance. - Failure to put public debt firmly on a downward path: - Relative likelihood: Medium - Impact if realized: High (elevated debt and financing needs; risk of sharp fiscal adjustment; contingent liabilities from guarantees) - Policy responses: - Lean into continued fiscal overperformance. - Promote high‑quality public investment and comprehensive fiscal and structural reforms to secure stable revenues and lift potential growth. - Stronger spillovers from European infrastructure and defense spending: - Relative likelihood: Low - Impact if realized: High (positive spillovers to Italian industrial output, exports, and investment) - Policy responses: - Facilitate firm participation in cross‑border supply chains. - Address domestic bottlenecks (skills, logistics, permitting). - Save revenue windfalls during stronger‑than‑expected growth and avoid procyclical fiscal easing. *Source: IMF staff; IMF Country Report content as provided.* ### Annex IV. Sovereign Risk and Debt Sustainability Analysis ### Annex IV. Sovereign Risk and Debt Sustainability Analysis ### Overall risk assessment - Italy’s overall risk of sovereign stress is assessed as moderate. - Medium-term risks are assessed as high. - Long-term risks are assessed as high. - Mitigating factors cited: - ECB’s tools to counter unwarranted and disorderly market dynamics. - Relatively long average maturity of government debt. - Strong retail demand for government bonds. - Reduced sovereign-bank linkages. ### DSA summary assessment (narrative findings) - Italy’s public debt ratio is high, and gross financing needs remain sizable over the medium term. - Public debt and gross financing needs are expected to rise significantly in the longer term due to: - Increased aging-related and other spending pressures. - A shrinking working-age population. - Less favorable debt dynamics (e.g., rising interest rates and low growth). - The moderate overall risk rating reflects balancing across time horizons and the mitigating factors listed above; these do not eliminate structural fiscal risks. - Unsustainable debt can only be resolved through exceptional measures (such as debt restructuring). Sovereign stress can be addressed through measures not involving debt restructuring, such as fiscal adjustment and new financing. *Commentary excerpt:* Medium-term risk is high, reflecting persistently elevated public debt levels and sizable gross financing needs. Long-term risks are high, driven primarily by rising aging-related expenditures and a shrinking working-age population. The moderate overall risk rating incorporates several mitigating factors, including potential ECB support, reduced bank-sovereign linkages, and improved market confidence in fiscal management. ### Baseline scenario projections and key statistics (percent of GDP unless indicated otherwise) - Public debt: - Actual 2025: 137.1 - 2026: 138.2 - 2027: 138.2 - 2028: 137.5 - 2029: 136.7 - 2030: 136.3 - 2031: 136.1 - 2032: 136.0 - 2033: 136.1 - 2034: 136.2 - 2035: 136.4 - Change in public debt: - 2025: 2.4 - 2026: 1.1 - 2027: 0.0 - 2028: -0.7 - 2029: -0.8 - 2030: -0.4 - 2031: -0.2 - 2032: -0.1 - 2033: 0.0 - 2034: 0.1 - 2035: 0.3 - Contribution of identified flows: - Mirrors Change in public debt series with year-by-year numbers listed above and includes: - Primary deficit (percent of GDP): - 2025: -0.6 - 2026: -0.9 - 2027: -1.1 - 2028: -1.6 - 2029: -1.7 - 2030: -1.8 - 2031: -1.8 - 2032: -1.6 - 2033: -1.6 - 2034: -1.7 - 2035: -1.6 - Noninterest revenues (percent of GDP): - 2025: 47.8 - 2026: 47.5 - 2027: 47.5 - 2028: 47.7 - 2029: 47.7 - 2030: 47.7 - 2031: 47.7 - 2032: 47.7 - 2033: 47.9 - 2034: 48.2 - 2035: 48.3 - Noninterest expenditures (percent of GDP): - 2025: 47.2 - 2026: 46.6 - 2027: 46.4 - 2028: 46.1 - 2029: 46.0 - 2030: 45.9 - 2031: 46.0 - 2032: 46.1 - 2033: 46.3 - 2034: 46.5 - 2035: 46.7 - Automatic debt dynamics (percent): - 2025: 0.5 - 2026: 0.4 - 2027: 0.6 - 2028: 0.9 - 2029: 1.2 - 2030: 1.4 - 2031: 1.5 - 2032: 1.7 - 2033: 1.9 - 2034: 2.0 - 2035: 2.0 - Real interest rate and relative inflation (percent): - 2025: 1.2 - 2026: 1.1 - 2027: 1.3 - 2028: 2.1 - 2029: 2.2 - 2030: 2.4 - 2031: 2.5 - 2032: 2.5 - 2033: 2.7 - 2034: 2.8 - 2035: 2.8 - Real growth rate (percent): - 2025: -0.7 - 2026: -0.7 - 2027: -0.7 - 2028: -1.1 - 2029: -1.0 - 2030: -0.9 - 2031: -0.9 - 2032: not applicable (n.a.) - 2033: -0.9 - 2034: -0.8 - 2035: -0.8 - Other identified flows: - 2025: 2.4 - 2026: 1.6 - 2027: 0.4 - 2028: 0.0 - 2029: -0.3 - 2030: 0.0 - 2031: 0.0 - 2032: -0.2 - 2033: -0.2 - 2034: -0.2 - 2035: -0.2 - Contingent liabilities contribution: 0.00 for projection years listed. - (minus) Interest Revenues: -0.2 each year. - Other transactions: - 2025: 2.6 - 2026: 1.8 - 2027: 0.7 - 2028: 0.2 - 2029: -0.1 - 2030: 0.2 - 2031: 0.2 - 2032: 0.0 - 2033: 0.0 - 2034: 0.0 - 2035: 0.0 - Gross financing needs (GFN, percent of GDP): - 2025: 22.5 - 2026: 19.6 - 2027: 22.3 - 2028: 22.7 - 2029: 19.8 - 2030: 20.1 - 2031: 20.5 - 2032: 21.5 - 2033: 24.1 - 2034: 23.4 - 2035: 17.3 - Of which: debt service (percent of GDP): - 2025: 23.3 - 2026: 20.8 - 2027: 22.3 - 2028: 22.5 - 2029: 21.7 - 2030: 22.1 - 2031: 24.5 - 2032: 23.3 - 2033: 21.5 - 2034: 18.3 - 2035: 19.0 - Memo items: - Real GDP growth (percent): - 2025: 0.5 - 2026: 0.5 - 2027: 0.5 - 2028: 0.8 - 2029: 0.7 - 2030: 0.7 - 2031: 0.7 - 2032: 0.6 - 2033: 0.6 - 2034: 0.6 - 2035: 0.6 - Inflation (GDP deflator; percent): 2025–2035 series begins 2.0, 2.2, 2.1, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7 - Nominal GDP growth (percent): 2.5, 2.7, 2.6, 2.5, 2.4, 2.4, 2.4, 2.3, 2.3, 2.3, 2.3 - Effective interest rate (percent): 2.9, 3.0, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.8 - Commentary: Public debt projected to remain at high levels due to positive interest-growth differentials and stock-flow adjustments, including claims on tax credits already granted. Projected improvements in the primary balance are expected to partially offset these pressures over the medium term. Primary surpluses are anticipated to moderate beyond 2031, driven by rising age-related expenditures, due mainly to an influx of new retirees covered under the legacy defined-benefit pension system. - Note: Other transactions include claims of tax credits that increase borrowing requirements; their impact on the primary balance was recognized in 2023 and earlier years. Estimates are consistent with projections up to 2029 in the Public Finance Document (2026). ### Debt coverage and disclosures - Debt coverage and disclosure are consistent with standard recommendations and remain unchanged from recent Article IVs. - Most debt is issued by the central government. - Debt guaranteed by the government is not included in public debt unless the guarantee is called. - Subsector inclusion in the baseline: - Budgetary central government: Yes - Extra budgetary funds (EBFs): No - Social security funds (SSFs): Yes - State governments: Yes - Local governments: Yes - Public nonfinancial corporations: No - Central bank: No - Other public financial corporations: No - Basis of recording: Not applicable, consolidated as a part of the general government debt. ### Medium-term risk analysis (mechanical indices and stress-test signals) - Debt fanchart module: - Fanchart width: 39.3 0.6 - Probability of debt non-stabilization (percent): 48.0 0.4 - Terminal debt-to-GDP x: 58.3 1.2 - Debt fanchart index (DFI): 2.2 - Debt fanchart module risk signal: High - Gross Financing Needs (GFN) module: - Average baseline GFN (percent of GDP): 20.6 7.0 - Initial banks' claims on the general government (pct bank assets): 15.4 5.0 - Change in banks' claims in stress (pct banks' assets): 11.4 3.8 - GFN financeability index (GFI): 15.8 - GFN module risk signal: Moderate - Medium-term index and final assessment: - Medium-term index (composite): Value and weight combine Debt fanchart index and GFN financeability index. - Final risk signal: High - Prob. of missed crisis, 2026-2031, if stress not predicted: 54.5 pct. - Prob. of false alarms, 2026-2031, if stress predicted: 9.1 pct. - Commentary: Medium-term risk is assessed as high, consistent with the mechanical signal, reflecting elevated public debt level and sizable gross financing needs. The Debt Fanchart module indicates high risk; the GFN module indicates moderate risk given sizable average baseline gross financing needs. ### Long-term risk analysis (pensions and health projections) - Long-term risk is assessed as high. - Pensions: - Under the baseline, pension obligations under the defined-benefit scheme rise from about 15.3 percent of GDP in 2024 to peak at 16.4–16.6 percent of GDP at around 2040 (MEF Medium-Long Term Trends for Pension and Healthcare System). - Health: - Healthcare expenditure increases from 6.3 percent of GDP in 2024 to 7.3–7.4 percent of GDP in 2040 (MEF Medium-Long Term Trends for Pension and Healthcare System). - Commentary: Rising pension obligations and increasing healthcare expenditure driven by demographics are primary drivers of long-term fiscal pressures and debt dynamics. ### Key recommendations from the 2026 FSAP (selected, by theme; authorities and timeline preserved) - Systemic Risk Monitoring and Macroprudential Policies - Extend the Systemic Risk Buffer (SyRB) beyond domestic credit and counterparty risk exposure to cover all residual systemic risks. — BdI, I - Deploy targeted policy tools to address risks from sovereign concentration exposures—such as Pillar 2 capital add-ons for bank-specific risks and SyRB for system-wide risks—while clearly differentiating their objectives to minimize overlap. — BdI, ST - Further strengthen the macroprudential institutional framework through greater formalization of institutional practices, enhanced public communication, and broader external engagement. — CMP/BdI, I/ST - Revise regulations to allow the early deployment of borrower-based measures (BBMs) and adopt a proactive approach to build resilience. — BdI, ST - More actively integrate analytical tools into macroprudential policy calibration and implementation; continue to develop system‑wide stress testing and strengthen data on banks’ market risk sensitivities and hedging strategies. — BdI, ST - Cross-Cutting Issues - Adopt a time-bound plan to significantly reduce the public guarantees on bank lending, while closely monitoring the impact on the most exposed LSIs. — Government, BdI, ST - Amend primary legislation to ensure effective legal protection for supervisory and resolution authorities’ staff, including full coverage of legal costs from the onset. — Government, ST - Prioritize risk-based on-site inspections for LSIs, insurance companies and other NBFIs, expanding targeted inspections and streamlining processes. — BdI, IVASS, CONSOB, I - Banking Sector Regulation and Supervision - Grant BdI the explicit power to require LSIs to adjust their asset risk classification and increase provisioning levels for prudential purposes. — Government, ST - Continue prioritizing corporate governance supervision to strengthen board oversight, independent directors’ role, and risk management and control functions. — BdI, ST - Proactively conduct supervisory work to strengthen LSIs' operational resilience and increase supervisory capacity for IT and cyber risks. — BdI, ST - Further strengthen preventive supervision through earlier and more active use of corrective powers within the escalation ladder, including timely action to address business model-driven vulnerabilities. — BdI, ST - Insurance Sector Regulation and Supervision - Complete the integration of IVASS into BdI to address structural resource constraints and ensure supervisory effectiveness. — Government, ST - Introduce a floor on capital relief from internal models and apply a consistent approach to the risk of sovereign bonds across internal model users. — IVASS, EIOPA, ST - Fully implement the Insurance Recovery and Resolution Directive and extend the Life Insurance Guarantee Scheme to cover all insurers and intermediaries operating in Italy. — Government, IVASS, MT - Extend the use of International Financial Reporting Standards to all insurance companies. — Government, IVASS, MT - Financial Market Infrastructures - Ensure that Euronext Securities Milan (ES-MIL) effectively manage competing priorities within the Euronext group and across CSDs, safeguarding its independence in risk management and maintaining an adequate staff level. — CONSOB, BdI, ST - Strengthen FMI governance by improving board performance evaluations, establishing a direct reporting line from the Chief Risk Officer to a non-executive board director at ES-MIL, and reinforcing conflict-of-interest policies at ES-MIL. — CONSOB, BdI, MT - Cybersecurity Regulation and Supervision - Update the national cybersecurity strategy for the financial sector, explicitly incorporating insurance and pension fund supervisors. — BdI, CONSOB, COVIP, IVASS, ST - Strengthen cyber governance, including board-level oversight and the designation of accountable executives (e.g., CISOs) in proportion to institutional risk profiles. — BdI, CONSOB, COVIP, IVASS, MT - Expand simulations and cyber stress tests to cover payment disruptions, supply chain attacks, and cross-sector scenarios involving energy and telecom infrastructures. — BdI, CONSOB, COVIP, IVASS, C - Financial Integrity - Continue strengthening risk-based AML/CFT supervision, notably through dissuasive enforcement, greater emphasis on preventive measures for certain NBFIs, adequate supervisory resourcing, and assessing financial stability implications of financial integrity failures. — BdI, C - Enhance geographic ML/TF risk analysis to better assess the economic rationale of cross-border flows and maintain support for regional supervisory cooperation efforts. — BdI, ST - Financial Safety Net and Crisis Preparedness - Reinforce the DGS by removing active bankers and considering its eventual transition to the public sector, discontinuing the recurrent reliance on preventive interventions for non-systemic failing banks, and publishing valuation methodologies. — Government, BdI, DGS, ST - Incorporate well-defined indicators to inform BdI’s decision-making on the assessment of failing or likely to fail (FOLTF). — BdI, ST - Strengthen inter‑agency crisis coordination by establishing a forum for coordination on crisis‑management. — BdI, DGS, ST - Improve disclosure of the policy framework on the possible central bank role as lender of last resort for banks that have been stabilized in resolution. — BdI, ST - Continue operationalizing ongoing reforms to enhance the efficiency of insolvency and enforcement procedures. — Government, ST *Source: IMF staff.* ### Annex VI. Transnational Aspects of Corruption ### Annex VI. Transnational Aspects of Corruption ### Overview - Italy volunteered to have its legal and institutional frameworks assessed in the context of bilateral surveillance on the supply and facilitation of corruption. - This annex updates on facilitation-related issues, based on findings from Italy’s 2026 Financial Action Task Force (FATF) assessment against the international Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) standards. ### Facilitation-side findings - Italy’s AML/CFT framework helps mitigate the risk of laundering proceeds of foreign corruption through risk-based preventive measures, financial intelligence, transparency, and international cooperation. - The 2026 mutual evaluation report highlights: - A comprehensive understanding of Italy’s money laundering (ML) risks, including corruption as a key predicate offense. - Proceeds from corruption and tax offenses give rise to cross-border money laundering through complex structures. - Preventive measures include customer due diligence and politically exposed persons (PEP) controls, with effectiveness varying across sectors. - Beneficial ownership arrangements support transparency but are constrained by limitations in access and effectiveness, including the suspension of the central beneficial ownership register. - Extensive use of international cooperation mechanisms, including mutual legal assistance and asset recovery tools, broadly aligned with Italy’s risk profile. - Financial intelligence produced by the Financial Intelligence Unit (Unità di Informazione Finanziaria or UIF), supported by law enforcement analysis, contributes to the detection, investigation, and disruption of complex laundering schemes and the identification and recovery of illicit assets. ### Risks and persisting weaknesses - Efforts should continue to further mitigate the risk that Italy’s financial and non-financial sectors could be misused for the laundering of proceeds of foreign corruption. - Specific weaknesses and limits identified: - Geographic risk understanding needs strengthening to support risk-based prioritization within national assessments and supervisory activity. - Implementation limitations in customer due diligence and PEP frameworks, particularly outside the banking sector, as reflected in supervisory findings. - Effectiveness of beneficial ownership transparency is constrained by limitations in access to information, which may affect the ability to trace assets. - Supervisory effectiveness is uneven across sectors, particularly among Designated Non‑Financial Businesses and Professions (DNFBPs) and Virtual Asset Service Providers (VASPs), with risk-based prioritization not fully consistent. - Weaknesses in monitoring and data—particularly the absence of systematic tracking of mutual legal assistance activity and cross-border asset recovery outcomes—limit the ability to fully assess alignment with Italy’s risk exposure. - Supervisory enforcement measures can be subject to delays, which may affect their overall deterrent impact. ### Notable procedural detail - Although Italy established a beneficial ownership register pursuant to EU requirements, its operation was suspended for a substantial part of the period under review owing to ongoing court proceedings, including proceedings before the Court of Justice of the European Union. *Source: Annex VI. Transnational Aspects of Corruption — 1itaea2026001* ### Annex VII. Table 3. Italy: Table of Common Indicators Required for Surveillance (Concluded) ### Annex VII. Table 3. Italy: Table of Common Indicators Required for Surveillance (Concluded) ### Fund relations and membership status - Membership Status: Joined March 27, 1947; Article VIII. - Quota (General Resources Account): 15,070.00 SDR Million; Percent of Quota: 100.00. - Fund holdings of currency: 11,134.94 SDR Million; Percent of Quota: 73.89. - Reserve Tranche Position: 3,935.07 SDR Million; Percent of Quota: 26.11. - Lending to the Fund: (no entry). - New arrangements to borrow: 13,797.04 SDR Million. ### SDR Department and projected obligations - Net cumulative allocation: 21,020.03 SDR Million; Percent of Allocation: 100.00. - Holdings: 21,696.26 SDR Million; Percent of Allocation: 103.22. - Outstanding Purchases and Loans: None. - Financial Arrangements: None. - Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Charges/Interest forthcoming 2025: 0.10 - Charges/Interest forthcoming 2026: 0.10 - Charges/Interest forthcoming 2027: 0.10 - Charges/Interest forthcoming 2028: 0.10 - Total forthcoming (2025–2028): 0.10 in each year listed ### Exchange rate arrangements - Currency: euro. - Exchange rate arrangement of the euro area: free floating. - Italy participates in a currency union (EMU) with 20 other members of the EU and has no separate legal tender. - The euro floats freely and independently against other currencies. - Italy accepted obligations under Article VIII, Section 2, 3, and 4 of the IMF’s Articles of Agreement. - Italy maintains an exchange system free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions, except exchange restrictions imposed solely for the preservation of national or international security notified pursuant to Executive Board Decision No. 144-(52/51). ### Article IV consultations and timetable - Italy is on the standard 12-month consultation cycle. - Previous consultation discussions: May 14-28, 2025. - Staff report (IMF Country Report No. 25/201) discussed by the Executive Board on July 18, 2025. - FSAP missions in 2026 were held in November 2025 and March 2026; FSAP findings discussed during Article IV consultation in May 2026 and presented to the Executive Board for discussion alongside the Article IV staff report on July 17, 2026. - Previous FSAP discussed by the Executive Board on March 18, 2020 (IMF Country Report No. 20/81). ### ROSCs/FSAP and technical assistance - Selected ROSC/FSAP entries and dates (as listed): - Fiscal Transparency: October 9, 2002 (Country Report No. 02/231) - Data: October 18, 2002 (Country Report No. 02/234) - Fiscal ROSC update: November 2003 (No. 03/353) - Fiscal ROSC update: February 2006 (No. 06/64) - FSAP: September 2013 (No. 13/300) - FSAP: March 2020 (No. 20/81) - FSAP: July 2026 - Technical Assistance: - 2007 FAD: Public Expenditure Management - 2012 FAD: Tax Policy - 2015 FAD: Tax Administration - 2025 FAD: Public Financial Management ### Authorities’ statement — overview - Statement dated: July 17, 2026. - Main message: Authorities welcome staff’s balanced assessment, appreciate Fund engagement, and view the Article IV and FSAP as timely opportunities to assess progress during the final phase of the National Recovery and Resilience Plan (NRRP). - Emphasis: sound public finances and economic resilience can reinforce each other when supported by credible policies and structural reforms. ### Fiscal policy — key findings and metrics - When the current Government took office in 2022, inherited deficit-to-GDP ratio: 8.1 percent. - 2025 deficit: 3.1 percent. - Reported fiscal consolidation: reduction of 5 percentage points of GDP in the deficit-to-GDP ratio between 2022 and 2025. - Authorities’ counterfactual statement: without the NRRP, a simple counterfactual shows real GDP growth would have hovered around zero percent, while the debt-to-GDP ratio would have been nearly 2 percentage points higher by 2026. - Tax recovery and compliance-related revenues: record €36.2 billion in 2025. - Policy stance: pursue consolidation while protecting productive investment and supporting vulnerable households; phase out temporary fuel excise tax relief introduced during the energy crisis. - Authorities’ view on staff recommendation: disagree with a more front-loaded adjustment of 1 percent of GDP in 2026-27, arguing it could weigh on the recovery and that current strategy is delivering meaningful consolidation consistent with the EU fiscal framework. - Authorities’ view on debt risks: concur sovereign debt risks are moderate, but dispute characterization of medium-term debt risks as high; cite mitigating factors: - long maturity profile of public debt, - strength and diversification of the investor base, - reduction in bank-sovereign linkages, - NRRP implementation supporting economic modernization. ### Structural reforms — achievements and outlook - NRRP remains a cornerstone supporting high-impact investments and structural reforms to raise productivity, competitiveness, and potential growth. - General government gross fixed capital formation as a share of GDP: "has not been so high since 2010." - Labour market outcomes highlighted: - Employment reached record levels. - Female labour force participation continued to increase. - Share of young people not in employment, education, or training (NEET) has declined markedly. - Reforms implemented under NRRP include taxation, justice, public administration, education, research, innovation, and measures addressing the business ecosystem. - Authorities stress the NRRP’s performance-based governance improvements and continuation of priorities through the Medium-Term Fiscal-Structural Plan and the next Multiannual Financial Framework. - Remaining challenges: increase labour force participation (especially among women and young people), reduce regional disparities, strengthen skills, and ensure employment gains translate into stronger productivity growth. ### Financial sector and FSAP — findings and authorities’ response - FSAP assessment: Italian banking system remains sound and resilient, even under severe macro-financial stress scenarios. - Progress since previous FSAP includes marked improvements in: - asset quality, - profitability, - capital buffers, - liquidity buffers, - successful restructuring of the banking sector. - Risk concentration: residual risks concentrated in a limited number of less significant institutions (LSIs). - Diversification of sovereign investor base away from banks toward households and foreign investors has reduced concentration risks and weakened bank-sovereign linkages. - Cyber resilience: advances in supervisory capabilities, enhanced inter-agency coordination, and implementation of the Digital Operational Resilience Act (DORA). - Climate resilience: FSAP confirms banking sector broadly resilient to physical climate risks even under extremely severe assumptions regarding climate-related damages. - Authorities’ stance: recognize progress but caution against complacency given rapid financial innovation, new forms of intermediation, and the impact of artificial intelligence; supervisory and regulatory frameworks will be adapted to ensure effective risk management while supporting credit provision. ### Conclusions and forward outlook - Authorities reiterate appreciation for Fund policy advice and engagement. - Note alignment of many reforms and policy actions with Fund recommendations as evidenced in Annex II. - Authorities welcome increased Fund emphasis on structural drivers of productivity and long-term growth and value the Selected Issues Papers (SIPs). - Long-run priorities emphasized: strengthen human capital, foster innovation, raise labour force participation, support investment, and enhance competitiveness. - Authorities look forward to continuing close and constructive engagement with the Fund to pursue stronger, more resilient, and more sustainable growth. *Prepared By European Department — STAFF REPORT FOR THE 2026 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (as contained in the supplied content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1itaea2026001.pdf_