## _cr15166 - 0.7 percent in 2015, supported by domestic demand and net exports. With the favorable tailwinds

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### Growth outlook and projections
- Real GDP growth:
  - Contraction of -0.4 percent in 2014.
  - Projected expansion of 0.7 percent in 2015, supported by domestic demand and net exports.
  - Projected pick up to 1.2 percent in 2016 with favorable tailwinds from QE and investment momentum.
  - Medium-term growth projected to hover around 1.1 percent.
- Output gap and labor market:
  - Output gap exceeded 4½ percent in 2014; projected to narrow from 4 percent in 2015 to 0.8 percent in 2020.
  - Unemployment (percent, as reported in table): 10.6 in 2012; 12.2 in 2013; 12.7 in 2014; 12.5 in 2015; 12.2 in 2016.
  - Unemployment exceeds 12 percent; including wage supplementation scheme participants raises the measure further.
  - Roughly 60 percent of unemployed without a job for at least a year.
- Inflation:
  - Consumer prices: 3.3 in 2012; 1.3 in 2013; 0.2 in 2014; 0.2 in 2015; 0.9 in 2016.
  - Core inflation below 1 percent; long-term inflation expectations significantly below the ECB’s objective.
- External sector:
  - Current account balance (percent of GDP): -0.4 in 2012; 0.9 in 2013; 1.9 in 2014; 2.3 in 2015; 2.3 in 2016.
  - Trade balance (percent of GDP): 1.0 in 2012; 2.1 in 2013; 3.1 in 2014; 3.3 in 2015; 3.3 in 2016.

### Policy actions and reform measures
- European-level measures:
  - Quantitative easing (QE) lowered sovereign bond yields and the euro, supported asset prices, and improved funding conditions.
  - TLTROs and the ECB’s Balance Sheet Assessment (BSA) helped resolve bank balance sheet uncertainty.
  - Flexibility in the Stability and Growth Pact allowed Italy’s near-term fiscal stance to be fairly neutral.
- National-level reforms and initiatives:
  - Prime Minister Matteo Renzi’s government launched an ambitious overhaul of political and economic system.
  - The Jobs Act:
    - Approved by Parliament in December; largely implemented.
    - Expected to reduce segmentation and duality, facilitate worker reallocation, and improve incentives to hire and train.
  - Banking sector measures:
    - Law to convert Italy’s largest cooperative banks into joint stock companies (10 largest cooperative banks represent 15 percent of banking system total assets) has spurred expectations of consolidation.
  - Progress on reforms of product and services markets, public administration, education, judicial, and tax systems.
  - Proposed or ongoing measures include implementation of the Annual Competition law and public sector efficiency reforms.

### Structural challenges and diagnosis
- Root causes of persistent growth weakness:
  - Structural bottlenecks: stagnant productivity since the early 2000s; inefficient public sector; high taxation; lengthy judicial process; fragmented labor market; underdeveloped corporate financing markets.
  - Depressed demand: limited fiscal space after the global crisis; financial fragmentation leading to pro-cyclical monetary conditions; nominal wage and price rigidities.
  - Impaired balance sheets: weakened firms and banks, contraction in corporate credit, investment held back by reduced credit supply and demand.
  - Self-fulfilling expectations: subdued growth expectations and policy uncertainty lowering investment.
- Notable magnitudes:
  - Private investment is 30 percent below its 2008 level.
  - Public debt (general government gross debt, percent of GDP): 123.1 in 2012; 128.5 in 2013; 132.1 in 2014; 133.3 in 2015; 132.1 in 2016.

### Financial sector and balance sheet repair
- Banking and corporate sector weaknesses:
  - Credit to the corporate sector continues to contract.
  - Real lending rates to SMEs have decreased but remain relatively high.
  - Nonperforming loans (NPLs) are a key vulnerability.
- Recommended and ongoing measures:
  - Broader strategy to strengthen bank and corporate balance sheets:
    - Increase provisioning and speed up write-offs.
    - Revive distressed debt market, including consideration of a carefully designed state‑backed asset management company.
    - Enhance insolvency regime and streamline insolvency procedures.
    - Establish standard criteria for bank assessments of SME viability.
    - Introduce guidelines for creditor-led restructuring.
  - Targeted support:
    - Measures to tackle SMEs in distress and improve access to finance.
    - Strengthen governance in banking and corporate sectors.

### Fiscal stance and public debt management
- Fiscal position and indicators:
  - General government net lending/borrowing (percent of GDP): -3.0 in 2012; -2.9 in 2013; -3.0 in 2014; -2.7 in 2015; -2.1 in 2016.
  - Structural overall balance (percent of potential GDP): -1.5 in 2012; -0.5 in 2013; -0.8 in 2014; -0.5 in 2015; -0.3 in 2016.
  - General government gross debt (percent of GDP): 123.1 in 2012; 128.5 in 2013; 132.1 in 2014; 133.3 in 2015; 132.1 in 2016.
- Policy guidance and priorities:
  - Current fiscal stance judged to strike the right balance between supporting growth and reducing the public debt ratio.
  - Fiscal rebalancing needed to reduce high taxes on labor and capital, financed by spending cuts and efficiency savings informed by expenditure reviews.
  - Near-term: planned small fiscal adjustment appropriate given weak growth and high debt.
  - Medium-term: target a modest structural surplus to reduce debt, build buffers, and ensure compliance with EU fiscal rules.
  - Ambitious privatization efforts recommended to advance debt reduction.

### Executive Board assessment and implementation priorities
- Board views:
  - Commended bold policy actions and European-level measures for contributing to the turnaround and improved confidence.
  - Noted recovery is fragile; medium-term prospects constrained by structural bottlenecks, high unemployment, weak balance sheets, and elevated public debt.
  - Emphasized full implementation of policy efforts and broad-based structural reforms.
- Priority reform areas endorsed by Directors:
  - Raise productivity via public sector efficiency reforms and implementation of Annual Competition law to liberalize product and service markets.
  - Complete implementation of the Jobs Act and reforms of wage supplementation and the educational system; consider decentralizing wage setting.
  - Strengthen bank and corporate balance sheets with decisive actions to reduce NPLs, improve provisioning and write-offs, revive distressed debt markets, and streamline insolvency procedures.
  - Use spending reviews to finance lower labor and capital taxes; aim for strict implementation of the 2015 budget.
  - Seek a modest structural surplus over the medium term and pursue ambitious privatization targets.

### Potential growth and drivers (longer-term outlook)
- Estimates and decomposition:
  - Potential growth estimates are low, at about ½ percent, reflecting crisis legacies such as the collapse in investment, unfavorable demographics, and the slowdown in productivity that predates the crisis.
  - Under current policies, potential growth is projected to reach 0.4 percent over 2015–20, well below precrisis rates, supported by labor and capital.
  - During the crisis, around ½ of the drop in potential growth comes from lower capital contribution, with the remaining shortfall evenly split between TFP and labor.
  - A drop in TFP growth accounts for most of the decline in potential growth prior to the crisis.
- Competitiveness and external position:
  - In structural terms the current account is still 0–1.5 percent of GDP weaker than justified by fundamentals and appropriate policies.
  - Staff considers that a real effective depreciation of 0–10 percent—supported by structural reforms—would be appropriate to restore competitiveness.
  - Given the 9 percent depreciation of the euro since the end of 2014, Italy’s external position will likely strengthen in 2015.

### Empirical evidence: Impact of public sector inefficiency (Box 2)
- Measurement and data:
  - Firm-level dataset: about 450,000 firms in the Orbis database; government efficiency measured at province level for roughly 100 provinces; data from 2007.
- Key findings:
  - For a firm in a sector above the median in government dependence, being in a province with above median public sector efficiency increases output per euro spent on salaries by 11 percent.
  - Macro-level implications if all provinces rose to the efficiency frontier:
    - Productivity measured as output per euro spent on salaries could increase by up to 22 percent in the sectors that depend the most on the public sector.
    - Gross value added per employee costs could rise from 2 to 10 percent.
    - For the average firm, output would expand by 3 percent.
- Policy recommendations for public administration and local services:
  - Reform recruitment, selection, and evaluation of public employees; introduce performance evaluation for managers and maintain pay to performance.
  - Reorganize public administration, rationalize local governments and enterprises, and deregulate local public service.
  - Simplify and digitize administrative procedures.
  - Streamline legislation governing state-owned and local public enterprises and promote competition.
  - Suggested additions: increase autonomy and accountability of managers; strengthen benchmarking and performance‐based budgeting; improve mobility and wage differentiation; reform local public services and public tenders; increase transparency in tendering procedures.

### Corporate sector health and NPL dynamics (Boxes 3 and 4)
- Stylized facts (2006–13, roughly 200,000 surviving firms):
  - Profitability of Italian firms has fallen dramatically.
  - Deleveraging has been quite slow.
  - Debt overhang has increased.
  - In 2013 about 1/5 of firms had insufficient income to cover interest payments; more than 30 percent had ICR<2.
- Scenario results (2013 baseline):
  - A uniform decline in profits by 10 percent would increase the share of companies with ICR<2 by 2 percentage points and increase the share of debt held by these firms by 3 percentage points.
  - A 10 percent positive shock to profits would lower the share of firms with ICR<2 by about 1 percentage points and lower debt of vulnerable companies held by banks by 2 percentage points.
- NPLs:
  - NPLs more than tripled to 17.7 percent of credit outstanding in 2014:Q4, with the largest increase in “bad debt” (sofferenze).
  - A full write-off of existing sofferenze, under the assumption of adequate provisioning, would increase the banking system’s Tier 1 capital ratio by 1.1 percentage points; or free up capital resources amounting to about €150 billion in new loans to the real economy.
- Balance-sheet cleanup recommendations:
  - Strengthen provisioning; apply the new EU-wide harmonized asset classification framework; strict supervisory enforcement.
  - Accelerate write-offs via supervisory actions and time limits on vintage NPLs.
  - Improve the insolvency regime and enable pre-insolvency and reorganization solutions.
  - Restart the NPL market by encouraging private AMCs and consider a centralized state-backed AMC consistent with EU state aid rules.
  - Provide tax incentives (including shortening the five-year deduction period); consider triage and creditor-led restructuring for SMEs; establish standard SME viability criteria.

### Insolvency system assessment and reforms (Box 5)
- Key problems:
  - Complex, poorly coordinated insolvency regime; significant disincentives for debt restructuring.
  - Liquidation lasts more than 8 years on average.
  - Preferential creditors recover 29 percent of claims; unsecured creditors recover 6 percent.
  - Insolvency cases tend to be initiated too late; courts and insolvency administrators are not specialized; no qualifications for insolvency administrators.
- Staff advice summarized:
  - Adopt proactive measures beyond harmonized asset classification to revive NPL market.
  - Use supervisory actions to speed up write-offs, including time limits on vintage NPLs.
  - Design a state-backed AMC focused on sofferenze loans transferred at fair market value.
  - Reduce period of tax deductibility for NPLs (recognizing initial fiscal cost).
  - Implement systematic overhaul or targeted amendments to insolvency regime to address gaps, delays, and lack of specialization.
  - Encourage creditor-led triage for SME restructuring and standard SME viability assessments.

### Policy sequencing, complementarities, and timing
- Broad-based strategy:
  - Banks: more provisioning and write-offs; revived distressed debt market; enhanced insolvency regime; improved governance.
  - SMEs: triage approach; standard viability criteria; improved collateral enforcement and credit information sharing.
  - Fiscal policy:
    - Near-term: planned consolidation of ¼ percent of GDP in 2015 is appropriate.
    - Medium-term objective: a modest structural surplus of about ½ percent of GDP.
    - Priorities: lower labor and capital taxes financed by spending reviews; ambitious privatization targets.
- Complementarities:
  - Lowering the tax wedge and repairing balance sheets will boost jobs and investment.
  - Jobs Act will facilitate worker reallocation.
  - Productivity gains amplified by more efficient public sector and more competitive product and services markets.
- Risk:
  - A piecemeal approach could undermine the nascent recovery and leave the economy in a low-growth equilibrium.
- Recommended timing for surveillance:
  - Next Article IV consultation in the usual 12-month cycle.

### Public debt projections, stress tests, and scenarios
- Baseline public debt and financing:
  - Gross nominal public debt: 108.2 (2013), 128.6 (2014), 132.1 (2015), 133.3 (2016), 132.1 (2017), 130.5 (2018), 128.4 (2019), 125.8 (2020), 122.9 (projection headings).
  - Public gross financing needs: 23.1 (2013), 22.3 (2014), 32.6 (2015), 19.8 (2016), 16.5 (2017), 18.6 (2018), 16.1 (2019), 14.7 (2020), 14.5 (projection table).
  - Primary balance (baseline): 1.3 (2015), 1.9 (2016), 2.4 (2017), 2.8 (2018), 3.1 (2019), 3.3 (2020).
  - Effective interest rate (baseline): 4/ 4.4 (2013), 3.9 (2014), 3.6 (2015), 3.2 (2016), 3.2 (2017), 3.1 (2018), 2.9 (2019), 2.9-3.0 (2020 range).
- Stress test scenarios and outcomes:
  - Low inflation and prolonged stagnation shock:
    - Inflation lower by 1 standard deviation (0.8 pp) from 2016 onwards; remains at 0.4 percent for three years and reaches 0.6 percent in 2020.
    - Annual GDP growth is 0.6-0.9pp lower than in the baseline.
    - Interest rates increase by 50bps in 2016–20.
    - Debt-ratio increases to 145 percent of GDP in 2020 and fails to stabilize over the projection period.
  - Primary balance shock:
    - Fiscal adjustment plans delayed by one year relative to the baseline.
    - Risk premia increase: 20 bps increase for each 1 percent of GDP slippage.
    - Debt-to-GDP ratio is about 2 percentage points higher than the baseline by 2020.
  - Policy advice (positive scenario):
    - Structural reforms and fiscal rebalancing yield a growth dividend of 1/4 percent in 2017 rising permanently to 1/2 percent of GDP by 2020.
    - Interest rate declines by around 10 bps.
    - Annual privatization receipts of 1 percent of GDP materialize.
    - Structural surplus increases to 1/2 percent of GDP by 2020.
    - Debt-ratio declines to about 112 percent of GDP by 2020 and continues on a declining path.

### Selected numeric indicators and projections (exact values from source)
- Real Economy (change in percent):
  - Real GDP: -2.8 (2012); -1.7 (2013); -0.4 (2014); 0.7 (2015); 1.2 (2016).
  - Final domestic demand: -4.4 (2012); -2.9 (2013); -0.6 (2014); 1.0 (2015); 1.0 (2016).
  - Exports of goods and services: 2.3 (2012); 0.5 (2013); 2.6 (2014); 3.3 (2015); 3.9 (2016).
  - Imports of goods and services: -8.1 (2012); -2.3 (2013); 1.8 (2014); 3.1 (2015); 3.2 (2016).
- Financial sector indicators (percent):
  - Regulatory capital to risk-weighted assets: 2010 12.1; 2011 12.7; 2012 13.4; 2013 13.7; 2014 15.0.
  - Nonperforming loans to total gross loans: 2010 10.0; 2011 11.7; 2012 13.7; 2013 16.5; 2014 17.3.
  - Nonperforming loans net of provisions to capital: 2010 60.2; 2011 64.6; 2012 79.7; 2013 89.9; 2014 88.0.
  - Return on assets: 2010 0.3; 2011 -0.9; 2012 -0.1; 2013 -0.8; 2014 0.1.
  - Return on equity: 2010 3.7; 2011 -13.0; 2012 -0.9; 2013 -11.5; 2014 1.2.
  - Customer deposits to total (noninterbank) loans: 2010 63.2; 2011 58.2; 2012 67.9; 2013 70.5; 2014 69.5.

*International Monetary Fund. Staff report for the 2015 Article IV consultation on Italy (June 16, 2015).*

### 0.7 percent in 2015, supported by domestic demand and net exports. With the favorable tailwinds

### _cr15166 - 0.7 percent in 2015, supported by domestic demand and net exports. With the favorable tailwinds

### Growth outlook and projections
- Real GDP growth:
  - Contraction of -0.4 percent in 2014.
  - Projected expansion of 0.7 percent in 2015, supported by domestic demand and net exports.
  - Projected pick up to 1.2 percent in 2016 with favorable tailwinds from QE and investment momentum.
  - Medium-term growth projected to hover around 1.1 percent.
- Output gap and labor market:
  - Output gap exceeded 4½ percent in 2014; projected to narrow from 4 percent in 2015 to 0.8 percent in 2020.
  - Unemployment:
    - 10.6 in 2012; 12.2 in 2013; 12.7 in 2014; 12.5 in 2015; 12.2 in 2016 (percent, as reported in table).
    - Unemployment exceeds 12 percent; including wage supplementation scheme participants raises the measure further.
    - Roughly 60 percent of unemployed without a job for at least a year.
- Inflation:
  - Consumer prices: 3.3 in 2012; 1.3 in 2013; 0.2 in 2014; 0.2 in 2015; 0.9 in 2016.
  - Core inflation below 1 percent; long-term inflation expectations significantly below the ECB’s objective.
- External sector:
  - Current account balance: -0.4 in 2012; 0.9 in 2013; 1.9 in 2014; 2.3 in 2015; 2.3 in 2016 (percent of GDP).
  - Trade balance: 1.0 in 2012; 2.1 in 2013; 3.1 in 2014; 3.3 in 2015; 3.3 in 2016 (percent of GDP).

### Policy actions and reform measures
- European-level measures:
  - Quantitative easing (QE) has lowered sovereign bond yields and the euro, supported asset prices, and improved funding conditions.
  - TLTROs and the ECB’s Balance Sheet Assessment (BSA) helped resolve bank balance sheet uncertainty.
  - Flexibility in the Stability and Growth Pact allowed Italy’s near-term fiscal stance to be fairly neutral.
- National-level reforms and initiatives:
  - Prime Minister Matteo Renzi’s government launched an ambitious overhaul of political and economic system.
  - The Jobs Act:
    - Approved by Parliament in December; largely implemented.
    - Expected to reduce segmentation and duality, facilitate worker reallocation, and improve incentives to hire and train.
  - Banking sector measures:
    - Law to convert Italy’s largest cooperative banks into joint stock companies (10 largest cooperative banks represent 15 percent of banking system total assets) has spurred expectations of consolidation.
  - Progress on reforms of product and services markets, public administration, education, judicial, and tax systems.
  - Proposed or ongoing measures include implementation of the Annual Competition law and public sector efficiency reforms.

### Structural challenges and diagnosis
- Root causes of persistent growth weakness:
  - Structural bottlenecks: stagnant productivity since the early 2000s; inefficient public sector; high taxation; lengthy judicial process; fragmented labor market; underdeveloped corporate financing markets.
  - Depressed demand: limited fiscal space after the global crisis; financial fragmentation leading to pro-cyclical monetary conditions; nominal wage and price rigidities.
  - Impaired balance sheets: weakened firms and banks, contraction in corporate credit, investment held back by reduced credit supply and demand.
  - Self-fulfilling expectations: subdued growth expectations and policy uncertainty lowering investment.
- Notable levels and magnitudes:
  - Private investment is 30 percent below its 2008 level.
  - Public debt reported as over 130 percent of GDP (table values: 123.1 in 2012; 128.5 in 2013; 132.1 in 2014; 133.3 in 2015; 132.1 in 2016).

### Financial sector and balance sheet repair
- Banking and corporate sector weaknesses:
  - Credit to the corporate sector continues to contract.
  - Real lending rates to SMEs have decreased but remain relatively high.
  - Nonperforming loans (NPLs) are a key vulnerability.
- Recommended and ongoing measures:
  - Broader strategy to strengthen bank and corporate balance sheets:
    - Increase provisioning and speed up write-offs.
    - Revive distressed debt market, including consideration of a carefully designed state‑backed asset management company.
    - Enhance insolvency regime and streamline insolvency procedures.
    - Establish standard criteria for bank assessments of SME viability.
    - Introduce guidelines for creditor-led restructuring.
  - Targeted support:
    - Measures to tackle SMEs in distress and improve access to finance.
    - Strengthen governance in banking and corporate sectors.

### Fiscal stance and public debt management
- Fiscal position and indicators:
  - General government net lending/borrowing (percent of GDP): -3.0 in 2012; -2.9 in 2013; -3.0 in 2014; -2.7 in 2015; -2.1 in 2016.
  - Structural overall balance (percent of potential GDP): -1.5 in 2012; -0.5 in 2013; -0.8 in 2014; -0.5 in 2015; -0.3 in 2016.
  - General government gross debt (percent of GDP): 123.1 in 2012; 128.5 in 2013; 132.1 in 2014; 133.3 in 2015; 132.1 in 2016.
- Policy guidance and priorities:
  - Current fiscal stance judged to strike the right balance between supporting growth and reducing the public debt ratio.
  - Fiscal rebalancing needed to reduce high taxes on labor and capital, financed by spending cuts and efficiency savings informed by expenditure reviews.
  - Near-term: planned small fiscal adjustment appropriate given weak growth and high debt.
  - Medium-term: target a modest structural surplus to reduce debt, build buffers, and ensure compliance with EU fiscal rules.
  - Ambitious privatization efforts recommended to advance debt reduction.

### Executive Board assessment and recommended implementation priorities
- Board views:
  - Commended bold policy actions and European-level measures for contributing to the turnaround and improved confidence.
  - Noted recovery is fragile; medium-term prospects constrained by structural bottlenecks, high unemployment, weak balance sheets, and elevated public debt.
  - Emphasized full implementation of policy efforts and broad-based structural reforms.
- Priority reform areas endorsed by Directors:
  - Raise productivity via public sector efficiency reforms and implementation of Annual Competition law to liberalize product and service markets.
  - Complete implementation of the Jobs Act and reforms of wage supplementation and the educational system; consider decentralizing wage setting.
  - Strengthen bank and corporate balance sheets with decisive actions to reduce NPLs, improve provisioning and write-offs, revive distressed debt markets, and streamline insolvency procedures.
  - Use spending reviews to finance lower labor and capital taxes; aim for strict implementation of the 2015 budget.
  - Seek a modest structural surplus over the medium term and pursue ambitious privatization targets.

### Key statistics excerpt (selected)
- Real Economy (change in percent):
  - Real GDP: -2.8 (2012); -1.7 (2013); -0.4 (2014); 0.7 (2015); 1.2 (2016).
  - Final domestic demand: -4.4 (2012); -2.9 (2013); -0.6 (2014); 1.0 (2015); 1.0 (2016).
  - Exports of goods and services: 2.3 (2012); 0.5 (2013); 2.6 (2014); 3.3 (2015); 3.9 (2016).
  - Imports of goods and services: -8.1 (2012); -2.3 (2013); 1.8 (2014); 3.1 (2015); 3.2 (2016).
- Public finances and balance of payments: see Fiscal stance section and External sector bullets above.
- Exchange rate and effective rate:
  - Exchange rate regime: Member of the EMU.
  - Exchange rate (national currency per U.S. dollar): 0.8 (2012); 0.8 (2013); 0.8 (2014); ...; ...
  - Nominal effective rate: CPI based (2000=100): 97.8 (2012); 100.0 (2013); 100.7 (2014); ...; ...

*International Monetary Fund. Staff report for the 2015 Article IV consultation on Italy (June 16, 2015).*

### 7.      Without the full implementation of deep structural reforms, longer-term growth

### 7.      Without the full implementation of deep structural reforms, longer-term growth prospects remain bleak.

### Potential growth and drivers
- Potential growth estimates are low, at about ½ percent, reflecting crisis legacies such as the collapse in investment, unfavorable demographics, and the slowdown in productivity that predates the crisis.
- The potential growth projections do not incorporate the likely effect of announced structural reforms (consistent with the authorities’ approach).
- Under current policies, potential growth is projected to reach 0.4 percent over 2015–20, well below precrisis rates, supported by labor and capital.
- During the crisis, around ½ of the drop in potential growth comes from lower capital contribution (due to the collapse in investment), with the remaining shortfall evenly split between TFP and labor (due to the increase in structural unemployment).
- A drop in TFP growth accounts for most of the decline in potential growth prior to the crisis.

### Box 1 — Potential Output in Italy (key findings)
- A multivariate filter approach was used to re-estimate potential output for four EA countries (France, Germany, Italy, and Spain), incorporating relationships between actual and potential GDP, unemployment, and inflation, with judgment informed by capacity utilization and labor market information.
- Compared to other large EA countries, Italy’s TFP growth lags behind.
- Structural characteristics cited as explaining lower TFP growth include government inefficiency, the small size of firms, and labor and product market rigidities.
- Analysis suggests slower TFP growth in Italy may be related to lower ICT diffusion in the Italian services sector due to rigid product market regulations.
- Previous studies note Italian SMEs’ inability to respond to competition from China and to take advantage of the ICT revolution—linked to lack of meritocracy in managerial selection and promotion—may explain some of the TFP slowdown.

### Competitiveness and external position
- Italy’s competitiveness has suffered from stagnant productivity and rising labor costs.
- As of 2014, Italy’s external position is broadly consistent but likely still weaker than suggested by medium-term fundamentals and desirable policy settings.
- In structural terms the current account is still 0–1.5 percent of GDP weaker than justified by fundamentals and appropriate policies.
- Staff considers that a real effective depreciation of 0–10 percent—supported by structural reforms—would be appropriate to restore competitiveness.
- Given the 9 percent depreciation of the euro since the end of 2014, Italy’s external position will likely strengthen in 2015.

### Risks to the outlook (RAM summary)
- Downside risks:
  - Stagnation and low inflation that complicate efforts to reduce public debt.
  - Confidence losses if public support for the reform agenda wanes.
  - Adverse developments in Greece could have a substantial impact on Italy via confidence effects, though direct exposures are limited.
- Upside risks:
  - QE, euro depreciation, and lower oil prices could have a larger positive impact than currently expected.
  - Rapid progress on the domestic reform agenda could boost confidence and spur a faster recovery.
  - The authorities estimate that the structural reforms already announced could raise trend growth by about 1/3 percentage point by 2020, if fully implemented.
- Specific quantified policy impacts cited by the authorities:
  - QE estimated cumulative impact of 0.7 (MEF) and 1.4 (BOI) percent in 2015 and 2016.
  - The decline in oil prices could add another 0.3 percentage points cumulatively over 2015 and 2016.
  - MEF incorporated only half of the impact of QE and oil prices, and no impact from structural reforms in its projections.
  - BOI expected QE to push up inflation with an estimated impact of just over 0.5 percent both in 2015 and 2016.

### Authorities’ views and recent developments
- The authorities broadly agreed with the overall assessment of the external sector and concurred that further improvement in competitiveness would be desirable to lift potential growth, while cautioning against relying too much on labor-based indicators of competitiveness.
- Domestic and external risks have receded owing to recent actions at the EU level, domestic political stability, and the strong reform agenda.
- The latest investment survey of Italian firms suggests widespread and growing optimism in the construction and services sectors.
- During the first 13 months of the new government, almost 60 percent of the newly announced reforms and 70 percent of the decrees inherited from previous governments were implemented (as reported in the Economic and Financial Document).

### Seizing the window of opportunity — policy priorities
- Policy efforts should focus on the three root causes of Italy’s growth weakness:
  - (i) tackling the long-standing productivity problem;
  - (ii) supporting bank and corporate balance sheet repair;
  - (iii) rebalancing fiscal adjustment and reducing public debt from its very high level.
- European-level policies should complement national efforts by supporting demand through accommodative monetary conditions and reduced policy uncertainty.

### PM Renzi’s reform agenda (objectives)
- National Reform Program (NRP) aims to revive the Italian economy by:
  - Improving the business environment through an overhaul of public administration, civil justice reform, and further liberalization of product and services markets.
  - Raising labor productivity through wide-ranging reforms of the labor market and education system.
  - Supporting private investment through better access to credit and other funding sources.

### Reviving productivity — public sector efficiency and expected gains
- The Italian public sector is inefficient: World Bank Doing Business Indicators for 2015 report more than 230 days to obtain a construction permit, 120 days to get an electricity connection, and more than 1,100 days to enforce a contract in Italy—substantially longer than the OECD average.
- Perception-based measures place Italy among the worst on measures of government efficiency and public sector corruption; the authorities assess corruption as a criminal phenomenon of great significance.
- Staff analysis exploiting variation across provinces finds that public sector inefficiency has a sizable effect on firm productivity:
  - If public sector efficiency rose to that of the best province in Italy, productivity of the average firm could increase by 5–10 percent, and overall GDP by 2 percent.
- Limited geographical differentiation in public sector wages and downward rigidity in private sector wages (due to competition with the public sector) prevent firms from adjusting wages in line with productivity.

*Source: IMF staff report excerpt (content unit: _cr15166 - 7.      Without the full implementation of deep structural reforms, longer-term growth).*

### Box 2. The Impact of Public Sector Inefficiency on Italian Firms

### Box 2. The Impact of Public Sector Inefficiency on Italian Firms

### Causal evidence on public sector inefficiency and firm productivity
- Italy ranks poorly on measures of public sector efficiency and has fallen behind many advanced economies in labor productivity.
- Within Europe, Italy has the largest variation in the quality of the public sector.
- Example regional contrasts:
  - It takes more than twice the number of days to get a construction permit in Sicily than in Lombardy.
  - The median firm in the North produces 9½ percent more per euro spent on employees than the median firm in the south.
- Identification strategy:
  - A difference-in-difference empirical strategy exploits regional heterogeneity.
  - Key identifying assumption: productivity of firms in sectors more reliant on the government is more affected by government inefficiency.
  - Example comparison: difference in productivity of construction industry firms in Lombardy vs. Sicily versus the same comparison for basic metals industries.
- Data and measures:
  - Firm-level dataset: about 450,000 micro, small, medium, and large firms in the Orbis database.
  - Productivity measured as the ratio of operating revenue (or gross value-added) to costs of employees (or number of workers).
  - Government dependence proxied by frequency of news about a sector mentioning the government (Pellegrino and Zingales, 2014).
  - Government efficiency measured at province level for roughly 100 provinces (Giordano and Tommasino, 2011), covering health care, education, civil justice, child care, and waste collection.
  - Data are from 2007.

### Main empirical findings and magnitude of effects
- Strong evidence that public sector inefficiency holds back firm productivity.
- Key estimates:
  - For a firm in a sector above the median in government dependence, being in a province with above median public sector efficiency increases output per euro spent on salaries by 11 percent.
  - Macro-level implications if all provinces rose to the efficiency frontier:
    - Productivity measured as output per euro spent on salaries could increase by up to 22 percent in the sectors that depend the most on the public sector.
    - Gross value added per employee costs could rise from 2 to 10 percent.
    - For the average firm, output would expand by 3 percent.

### Policy recommendations and reform priorities (public administration and local services)
- Draft enabling law on public administration reform (approved by the Senate and under discussion in the Lower House) outlines ideas to:
  - (i) reform recruitment, selection, and evaluation of public employees by introducing new performance evaluation schemes for managers and maintaining pay to performance;
  - (ii) reorganize the public administration, including substantial rationalization of local governments and enterprises, and deregulation of local public service;
  - (iii) simplify and digitize administrative procedure to make them faster, more efficient, and more business friendly;
  - (iv) streamline legislation governing state-owned and local public enterprises to minimize overlapping regulations from different levels of government and peripheral government bodies, and promote competition.
- Suggested additions to the reform:
  i. Public administration reform: increase autonomy and accountability of public sector managers; strengthen benchmarking and performance‐based budgeting; improve mobility of workers and wage differentiation across regions and in line with productivity.
  ii. Local public services reform: reform local public services and rationalize local public enterprises; note that the existence of more than 8,000 local public enterprises has been highlighted as a source of inefficiency and a burden on public finances.
  iii. Public tenders: increase transparency in tendering procedures and standardization of contracts—particularly for local public services—to improve quality and cost; Competition Authority empowered to question local authority actions but majority of contracts still done through “in-house” awards or similar procedures.

### Judicial reform and anti-corruption measures
- Improving civil justice efficiency would have wide-ranging economic benefits; possible measures include:
  - Rationalizing types of cases that reach the Supreme Court (Corte di Cassazione).
  - Allowing further specialization of courts, including in commercial and insolvency matters.
  - Using ad hoc measures to reduce backlog of pending cases.
  - Developing court performance indicators.
- Anti-corruption measures recommended:
  - Adopt and effectively implement legislative measures to enhance the anti-corruption framework.
  - Increase powers of the Anti-Corruption Authority (ANAC).
  - Criminalize the false accounting offense.
  - Change provisions on statute of limitations for corruption crimes to ensure prosecution despite delays from lengthy appeals.
- Implementation and progress:
  - Judicial measures have contributed to a 15 percent drop in the number of pending civil cases since 2009.
  - Reforms to reduce flow of cases include promotion of arbitration, negotiation assisted by counsel, and mediation.
  - Anti-corruption legislation approved in late May 2015 includes enhanced powers for the Anti-Corruption authority, the criminalization of false accounting, and changes to the statute of limitations for certain crimes.

### Authorities’ actions, implementation progress, and constraints
- Authorities’ commitments and actions:
  - Authorities emphasized commitment to complete the legislative process of the draft enabling law on public administration reform by end-2015.
  - The 2015 Stability Law requires municipalities to submit concrete rationalization plans with implementation timeframes and cost savings estimates.
  - For economically important local public services, incentives were put in place to promote consolidation and pave the way for market deregulation.
  - A technical working table of procurement aggregator bodies is established to specify product categories and spending thresholds.
  - The Anti-Corruption Authority publishes reference prices and is standardizing public contracts.
- Academic caution:
  - Several academics noted that scope for rationalization and raising efficiency may be limited without addressing public sector employment and rethinking the role of the state in providing services more radically.
- Implementation challenges:
  - Implementation has been uneven because measures legislated at the center are implemented by regional governments, often leading to uneven outcomes.
  - Constitutional reform that would give the state exclusive power over matters related to competition could improve consistent implementation.

### Labor market, human capital, and the Jobs Act
- Jobs Act objectives:
  - Improve reallocation of labor across firms and sectors by reducing uncertainty and expected cost of dismissal.
  - Expand social safety net coverage to protect workers from higher labor market flexibility.
  - Enhance job matching to ensure swift return to employment.
  - Tackle labor market duality and raise female labor participation.
- Implementation status and expected effects:
  - Several elements have been fully implemented; legislative process for reforming the wage supplementation scheme and ALMP has begun.
  - If fully implemented, the Jobs Act would create better incentives to hire and train workers through a new open-ended labor contract with gradually increasing protection and extended unemployment benefits.
  - Reform of the wage supplementation scheme and national coordination of ALMPs aim to reduce regional disparities and speed filling vacancies.
  - Authorities stressed the Jobs Act is unlikely to create new jobs in the short run but will increase productivity by changing the composition of the labor force.
  - Recent labor statistics showing an increase in the share of open-ended contracts are cited as encouraging, though ultimate effects will be visible once fiscal incentives expire.
- Human capital concerns:
  - Educational outcomes are poor relative to other advanced economies:
    - Italy has the fifth lowest share of population with upper secondary education among OECD countries.
    - Italian students score below the OECD average in math, reading, and science.
    - Adult population has relatively low literacy and numeracy skills.
  - The Good Schools plan aims to improve outcomes by providing better incentives for teachers (open-ended employment, performance pay, greater school autonomy) and enhancing the curriculum to link education and employment.
  - The school reform was approved by the Senate and expected to complete the legislative process by the end of 2015.

### Banking sector stress and corporate balance sheets
- Context and linkages:
  - SMEs rely predominantly on bank credit; banks focus on traditional lending with bulk of credit to the corporate sector.
  - The shock in the real economy transmitted strongly to banks, reducing profits and willingness to extend credit.
- Nonperforming loans:
  - NPLs in the banking system more than tripled to 17.7 percent of credit outstanding in 2014:Q4, with the largest increase in “bad debt,” loans to insolvent borrowers (sofferenze).
- Macroeconomic effects:
  - Continued rise in NPLs has weighed heavily on banks’ profits, pushed up lending rates, and reduced banks’ willingness to broadly extend credit.
  - The decline in credit supply has further exacerbated the downturn in the real economy.

*Italic: International Monetary Fund staff summary of Box 2, "The Impact of Public Sector Inefficiency on Italian Firms", from the source document.*

### Box 3. The Health of Italy’s Corporate Sector Through the Downturn

### Box 3. The Health of Italy’s Corporate Sector Through the Downturn

### Corporate sector health: stylized facts and indicators
- Analysis of roughly 200,000 surviving Italian companies over 2006–13 reveals three key stylized facts:
  - (i) the profitability of Italian firms has fallen dramatically;
  - (ii) the process of deleveraging has been quite slow;
  - (iii) debt overhang has increased.
- As a result of the fall in profits and slow reduction in debt:
  - the interest coverage ratio (ICR) has fallen;
  - in 2013, about 1/5 of firms had insufficient income to cover their interest payments;
  - more than 30 percent had an ICR<2.
- Time series indicator:
  - Share of vulnerable firms and median ICR tracked for 2006–2013 show rising vulnerability (ICR<1, ICR between 1–1.5, ICR between 1.5–2) alongside a lower median ICR.

### Vulnerabilities and scenario analysis
- The corporate sector remains vulnerable to adverse shocks to profits and interest rates.
- Scenario impacts (uniform shocks to profits and interest rates, 2013 baseline):
  - A uniform decline in profits by 10 percent would:
    - increase the share of companies with ICR<2 by 2 percentage points;
    - increase the share of debt held by these firms by 3 percentage point.
  - A 10 percent positive shock to profits would:
    - lower the share of firms with ICR<2 by about 1 percentage points;
    - lower debt of vulnerable companies held by banks by 2 percentage points.
- Interpretation:
  - A rebound in economic activity may have limited impact on firms in poor financial health; a more active approach to resolving corporate weakness may be needed.

### Investment effects: econometric findings and aggregate impact
- Econometric analysis (firm-level investment model) identifies determinants of investment:
  - firm leverage;
  - debt overhang;
  - firm-specific demand shocks;
  - access to liquid assets.
- Role of financial constraints:
  - The role of these factors has intensified in the post-crisis period, consistent with financial constraints becoming more binding during periods of heightened risk aversion.
- Aggregate implication (back-of-the-envelope calculation):
  - Using estimated sensitivities of investment to net worth, debt overhang, sales and profitability, and the change in these variables between 2006 and 2013:
    - 8–10 percent of the decline in aggregate corporate investment could be due to firms’ deteriorating health.

### Nonperforming loans (Box 4): scale, causes, and system effects
- NPLs in Italy have reached systemic levels, with the vast majority of bad loans relating to the corporate sector, affecting:
  - bank profitability and solvency;
  - banks’ willingness to extend new credit, especially to SMEs.
- Consequences:
  - Despite ample and cheap liquidity, banks have become cautious in extending new credit, constraining investment and undermining the economic recovery.
- Drivers and empirical findings:
  - Dynamic bank-by-bank panel regressions: lower profitability and higher lending in the past are related with higher NPLs.
  - Macro variables associated with higher NPLs include lower growth, exchange rate appreciations, and falling house prices.
  - Corporate and bank default probabilities peaked in mid-2012 and have come down substantially since then, but NPLs have continued to rise.
  - A dynamic macrofinancial state space model suggests:
    - further output losses would fuel credit risk considerably more than in the past;
    - higher interest rates would now have a much more substantial impact on corporates than in the past.
- Potential balance-sheet impact of removing bad debt (staff estimates, hypothetical):
  - A full write-off of existing sofferenze, under the assumption of adequate provisioning, would:
    - increase the banking system’s Tier 1 capital ratio by 1.1 percentage points; or
    - free up capital resources amounting to about €150 billion in new loans to the real economy.

### Balance-sheet cleanup: status and obstacles
- Recent actions:
  - Over the last two years, large banks (Unicredit, Intesa) have taken steps to cleanse their balance sheets, including establishing private Asset Management Companies (AMCs).
  - Smaller banks lack the capacity to do so.
- Main obstacles to cleanup:
  - fragmented banking system;
  - substantive NPL provisioning and pricing gaps;
  - heterogeneity of the NPLs portfolio;
  - widespread reliance on relationship lending;
  - lengthy insolvency process.

### Repairing balance sheets: policy recommendations (a comprehensive “stick-and-carrot” strategy)
- i. Strengthen provisioning
  - Adequate provisioning would help narrow sizable gaps between the book and market value of NPLs.
  - The ECB’s BSA revealed sizeable provisioning gaps and capital shortfalls among the 15 participating banks, which are expected to be filled by July 2015.
  - Apply the new EU-wide harmonized asset classification framework to all banks operating in Italy to resolve remaining asset-quality uncertainty.
  - Strict supervisory enforcement is essential for correct classification and adequate provisioning.
- ii. Accelerate write-offs
  - Supervisory actions that effectively introduce time limits for write-off of vintage NPLs can encourage faster resolution (for example, by raising considerably capital charges for vintage NPLs after a certain period).
  - Imposing macro-prudential limits on the relative size of NPL portfolios and using measurable performance indicators of banks’ restructuring efforts can help limit further NPL buildup.
- iii. Improve the insolvency regime
  - Rationalize and streamline procedures to facilitate swift exit of nonviable firms and restructuring of viable firms.
  - Address remaining gaps in pre-insolvency and reorganization procedures to enable seamless transitions and remove obstacles to advanced restructuring (for example, debt/equity swaps).
  - Aim to accelerate the start and shorten the length of insolvency procedures by increasing effectiveness of asset sales and reducing litigation.
  - Establish qualifications for insolvency practitioners and allow specialization of courts in insolvency law.
- iv. Restart the NPL market
  - Encourage private AMCs through regulatory measures and tax incentives for NPL disposals.
  - A centralized, system-wide, state-backed AMC, consistent with EU state aid rules and within limited fiscal space, could help jumpstart the market if it:
    - purchases assets at market prices;
    - uses transparent and uniform valuation criteria;
    - has strong governance, operational independence and accountability.
- v. Provide tax incentives
  - Tax incentives could motivate provisioning and write-off.
  - Consider shortening the five-year period over which banks can deduct loan-loss provisions from taxable revenues to eliminate the build-up of deferred tax assets.
- vi. Foster restructuring or resolution of distressed SMEs
  - Given the high number of SME NPLs and limited incentives for banks to tackle problem loans (due to close bank–firm relationships), adopt a triage approach to speed up dealing with distressed SMEs.
  - Establish standard criteria for bank assessments of SME viability and introduce guidelines for creditor-led restructuring to separate nonviable firms (liquidation) from viable firms (rehabilitation).

*Source: Box 3 and Box 4, “The Health of Italy’s Corporate Sector Through the Downturn,” IMF staff analysis as presented in the provided content.*

### Box 5. The Insolvency System in Italy

### Box 5. The Insolvency System in Italy

### Key findings on the insolvency regime and NPL resolution
- The insolvency regime is complex, with tools that lack coordination; distressed enterprises can use debt restructuring procedures, formal reorganization or bankruptcy.
- Significant disincentives exist for use of debt restructuring options:
  - Informal or hybrid debt restructuring (piani di risanamento and accordi di ristrutturazione) often aim to achieve full payment to creditors and do not offer flexible solutions to distressed companies.
  - Formal insolvency procedures (concordato preventivo and fallimento) do not set limits to the haircuts creditors can suffer.
  - Informal debt restructuring agreements cannot be easily transformed into a formal reorganization plan in the current system.
  - Obstacles to advanced restructuring solutions, such as debt/equity swaps, include shareholders’ interference and the existence of preemption rights.
- Insolvency procedures suffer long delays:
  - Liquidation lasts more than 8 years on average.
  - Preferential creditors recover 29 percent of claims.
  - Unsecured creditors recover 6 percent of claims.
  - Specific bottlenecks include: (i) litigation within the insolvency process with several rounds of appeals up to the Supreme Court; and (ii) difficulties in collection and sale of assets despite reforms introducing flexibility.
- Insolvency cases tend to be initiated too late, limiting scope for recovery:
  - Incentives for debtors exist (e.g., management can remain in control during reorganization under concordato preventivo).
  - There are no effective disincentives for directors to continue trading when insolvency is imminent (wrongful trading).
- Courts and insolvency administrators are not specialized:
  - In larger towns, civil judges would benefit from specialization in insolvency matters.
  - Recently created enterprise courts do not have competences on insolvency matters.
  - There are no specific qualifications for insolvency administrators and professionalization is limited.
- Footnote: Very large firms (with more than 200 employees) can use special procedures. Small enterprises are not subject to general insolvency law.

### Authorities’ views on asset quality, write-offs, and market measures
- Authorities acknowledged asset quality had deteriorated and write-offs had been limited.
- Adoption of the new asset classification framework by all EU member states in January 2015 should help resolve uncertainties about Italian banks’ asset quality through harmonizing asset classification, but it would not be enough to revive the market for NPLs given still-sizable pricing gaps.
- Advice on potential supervisory actions to speed up the write-off process, such as introducing time limits on vintage NPLs, was received well and could be implemented at the national level within the new SSM framework.
  - Authorities noted such actions would be more palatable if combined with other elements in the strategy to alleviate concerns about pro-cyclical tightening in regulatory requirements.
- Work on the design of a state-backed AMC, consistent with EU state-aid rules, was ongoing:
  - The authorities noted it will focus on sofferenze loans transferred at fair market value.
  - Intention: the state-backed AMC to help jump-start the market while enabling banks to continue supporting customers in temporary difficulty.
- Authorities agreed that reduction in the period of tax deductibility would be useful, although the initial fiscal cost could be significant.

### Views and recommendations on insolvency regime reform and SME restructuring
- Authorities broadly agreed that a more efficient insolvency regime is important to reduce the stock of NPLs, but views varied:
  - Some considered targeted amendments to the existing regime sufficient given recent reforms.
  - Others favored a more systematic overhaul of the insolvency regime—as recommended by staff—which would target remaining gaps in pre-insolvency procedures.
- Wide agreement on the need to:
  - Accelerate the start of insolvency procedures.
  - Reduce delays from litigation.
  - Increase the effectiveness of asset sales.
  - Introduce qualification requirements for insolvency practitioners.
- Views on cleaning up corporate balance sheets were mixed:
  - Some questioned whether there was debt overhang in the corporate sector.
  - Others noted polarization within SMEs: “good” performers ready to lead recovery vs “bad” performers burdened with debt and tying up resources.
  - Authorities found the creditor-led triage approach towards SME restructuring and standard criteria for SME viability assessments and restructuring guidelines intriguing; they acknowledged it is a difficult problem and the case for policy intervention is less compelling than in the financial sector.

### Complementary measures to strengthen banks and revive firms
- Improving corporate governance would complement balance sheet repair:
  - Recent decree law on the largest banche popolari (BP) requires them to transform into joint stock companies, expected to spur consolidation, efficiency gains, improve risk and NPL management, and improve governance.
  - Recent measures to reduce foundations’ stakes in banks by applying diversification thresholds are potentially helpful.
- Diversifying SMEs’ funding to ease credit constraints; recent actions include launching mini-bonds, introducing tax credits for investment in innovation projects, allowing institutional investors to invest directly in SMEs, and creating incentives for listing on stock exchange.
- Further efforts recommended:
  i. Enhance the use and enforcement of collateral:
     - More efficient collateral enforcement mechanisms could expand availability and lower cost of credit.
     - Introducing contracts based on fiduciary arrangements and expanding possibilities for out-of-court enforcement will allow quicker recovery.
     - Reforming secured transactions law and improving the registry for collateral will expand access to finance.
  ii. Greater sharing of credit information:
     - Expanding access to key registries by nonbanks and including other relevant data (e.g., payments on taxes, retail credit, and utility bills) would improve credit monitoring and support shift from collateral-based to risk-based lending.
- Authorities committed to improve governance and enhance competition in the banking sector:
  - Steps to strengthen small cooperative banks included giving them a year to self-reform, with the hope of establishing cooperative banking groups (in the spirit of Crédit Agricole).
- Authorities open to exploring options to improve enforcement of collateral:
  - Interest in fiduciary contracts, out-of-court enforcement, and summary procedures for enforcement in commercial credit relationships.
  - Reforming security interests and registration of movable collateral has been on the agenda since December 2013 but is yet to be completed.

### Staff advice summarized for insolvency and NPL strategy
- Adopt a more proactive approach beyond harmonized asset classification to revive NPL market.
- Use supervisory actions to speed up write-offs, including time limits on vintage NPLs, implemented within the SSM framework and combined with other strategy elements to mitigate pro-cyclicality concerns.
- Design a state-backed AMC consistent with EU state-aid rules focused on sofferenze loans transferred at fair market value to jump-start the NPL market while allowing banks to support temporarily distressed customers.
- Reduce period of tax deductibility for NPLs; recognize potential for significant initial fiscal cost.
- Implement a systematic overhaul of insolvency regime (as recommended by staff) or targeted amendments to address:
  - Gaps in pre-insolvency procedures.
  - Late initiation of insolvency cases.
  - Litigation delays and inefficiencies in asset collection and sales.
  - Lack of specialization and qualifications for judges and insolvency administrators.
- Encourage creditor-led triage approaches for SME restructuring and develop standard SME viability assessment criteria and restructuring guidelines.

*Source: IMF staff boxed analysis titled "Box 5. The Insolvency System in Italy" from the provided IMF country report excerpt.*

### 23.      A broad-based strategy to strengthen bank and corporate balance sheets will support

### 23.      A broad-based strategy to strengthen bank and corporate balance sheets will support

### Banks: measures to accelerate NPL reduction and strengthen market discipline
- More provisioning and write-offs, incentivized by supervisory actions and fiscal measures.
- A revived distressed debt market, including through a properly designed, centralized, system‐wide, state‐backed AMC.
- Enhanced insolvency regime to accelerate the reduction of the stock of NPLs on banks’ balance sheets.
- Further improvements in bank corporate governance to strengthen capital raising and market discipline.

### SMEs: triage and access-to-finance measures
- A triage approach involving:
  - Establishing standard criteria for bank assessments of the viability of SMEs.
  - Introducing guidelines for creditor-led restructuring to accelerate dealing with distressed SMEs.
- Improving access to finance by:
  - Enhancing collateral use and enforcement.
  - Greater credit information sharing to support investment.

### Fiscal policy: balance growth support and debt reduction
- Near-term stance:
  - The planned consolidation of ¼ percent of GDP in 2015 is appropriate—given still‐subdued growth and high debt—and should be maintained.
  - A very modest use of the flexibility under the SGP could support the structural reform program and create room for further tax cuts.
- Medium-term objective:
  - A modest structural surplus of about ½ percent of GDP would reduce debt faster, provide insurance against changes in market sentiment, and help comply with EU fiscal rules.
- Fiscal rebalancing priorities:
  - Continue lowering still-high labor and capital taxes financed by savings from past and ongoing spending reviews.
  - More ambitious privatization targets would also help.

### Complementarities and macroeconomic effects of comprehensive reform
- Comprehensive policy actions on multiple fronts would be mutually reinforcing:
  - Lowering the tax wedge and repairing bank and corporate balance sheets will boost jobs and investment in productive sectors and firms.
  - The Jobs Act will help workers transition more easily to new job opportunities.
  - Resulting productivity gains will be amplified by a more efficient public sector and a more competitive market for products and services.
- Risk of piecemeal approach:
  - A piecemeal approach could undermine the nascent recovery and leave the economy in its low-growth equilibrium.

### Recommended timing for surveillance
- It is recommended that the next Article IV consultation be held in the usual 12-month cycle.

### Selected numeric indicators and projections (exact values from source)
- Planned consolidation in 2015: ¼ percent of GDP.
- Target medium-term structural surplus: about ½ percent of GDP.
- From Table 1 (selected projections, annual percentage change or percent of GDP as shown):
  - Real GDP: 2014 -0.4; 2015 0.7; 2016 1.2; 2017 1.1; 2018 1.1; 2019 1.0; 2020 1.0.
  - Output gap (percent of potential): 2014 -4.6; 2015 -4.0; 2016 -3.2; 2017 -2.5; 2018 -1.8; 2019 -1.3; 2020 -0.8.
  - Unemployment rate (percent): 2014 12.7; 2015 12.5; 2016 12.2; 2017 11.9; 2018 11.5; 2019 11.1; 2020 10.7.
  - General government net lending/borrowing (percent of GDP): 2014 -3.0; 2015 -2.7; 2016 -2.1; 2017 -1.4; 2018 -0.8; 2019 -0.4; 2020 -0.2.
  - General government gross debt (percent of GDP): 2014 132.1; 2015 133.3; 2016 132.1; 2017 130.5; 2018 128.4; 2019 125.8; 2020 122.9.
- From financial sector indicators (Table 4, percent unless noted):
  - Regulatory capital to risk-weighted assets: 2010 12.1; 2011 12.7; 2012 13.4; 2013 13.7; 2014 15.0.
  - Nonperforming loans to total gross loans: 2010 10.0; 2011 11.7; 2012 13.7; 2013 16.5; 2014 17.3.
  - Nonperforming loans net of provisions to capital: 2010 60.2; 2011 64.6; 2012 79.7; 2013 89.9; 2014 88.0.
  - Return on assets: 2010 0.3; 2011 -0.9; 2012 -0.1; 2013 -0.8; 2014 0.1.
  - Return on equity: 2010 3.7; 2011 -13.0; 2012 -0.9; 2013 -11.5; 2014 1.2.
  - Customer deposits to total (noninterbank) loans: 2010 63.2; 2011 58.2; 2012 67.9; 2013 70.5; 2014 69.5.

*Italic: International Monetary Fund, Italy—Staff Report excerpt (figures and tables as provided in source).*

### Annex I. External Sector Report Assessment

### Annex I. External Sector Report Assessment

### Overall assessment: foreign asset and liability position and trajectory
- Background
  - Italy’s net international investment position (NIIP) deteriorated since joining the Euro area, with net liabilities of 28 percent of GDP compared with 7 percent at end 2000.
  - Gross assets reached 136 percent of GDP and gross liabilities reached 164 percent of GDP; these levels are 39 and 60 percent higher than in 2000, respectively.
  - External debt represents about ¾ of gross external liabilities.
  - About half of external debt is owed by the public sector, highlighting vulnerabilities related to the high level of public sector debt.
  - Modest current account surpluses forecast over the medium-term will gradually shrink Italy’s net liability position as a share of GDP.
- Assessment
  - In light of the current account’s shift into a surplus, overall external sustainability is not a major concern.
  - Nevertheless, balance-sheet strengthening is desirable because Italy is vulnerable to financial contagion given its large stock of government debt and sizable holdings of public and private debt by non-residents.
  - The external position in 2014 was broadly consistent (but likely still weaker) than suggested by medium-term fundamentals and desirable policy settings.
  - Developments as of May 2015 point toward some strengthening of the external position due to the depreciation of Italy’s REER.
  - Italy’s weak productivity and competitiveness indicators imply that stronger growth, needed to reduce high unemployment and public debt while strengthening the external balance sheet, would require a modest weakening of the real effective exchange rate from average 2014 levels.
  - Part of the needed adjustment may reflect Italy’s weak competitive position within the Euro area, where the common currency has removed an important adjustment mechanism to differences in relative price changes.
- Potential policy responses
  - Implementation of structural reforms to improve competitiveness and boost potential growth is critical.
  - Continued progress in medium-term fiscal consolidation will help close the competitiveness gap and maintain investor confidence.
  - Combined, these measures will support growth and employment over the medium-term.

### Current account
- Background
  - Italy’s current account (CA) averaged a deficit of 1½ percent of GDP in the decade following the adoption of the euro.
  - Starting in 2012, the CA moved into balance; by 2014 it registered a surplus of 1.9 percent of GDP (up from 1 percent of GDP in 2013).
  - The improvement is accounted for by a growing trade surplus, which reached more than 3 percent of GDP in 2014, owing to higher exports and subdued imports.
  - The current account surplus is projected to rise to 2.3 percent of GDP in 2015, reflecting the lower oil bill and euro depreciation.
  - In terms of saving and investment, declining investment accounted for about 60 percent of the improvement in the current account since 2010, while higher public and private saving contributed the rest.
- Assessment
  - The EBA model suggests the cyclically-adjusted CA level was 0.7 percent of GDP in 2014, about 1.3 percent of GDP below the norm implied by medium-term fundamentals and desirable policy settings.
  - Given these estimates and the need for stronger growth to reduce public debt and unemployment while improving the external balance sheet, staff assesses a gap of -1.5 to 0 percent of GDP for 2014.

### Real exchange rate (REER)
- Background
  - Stagnant productivity and rising labor costs produced a gradual appreciation of the REER since joining the Euro area, both in absolute terms and relative to the Euro area average.
  - Over 2000–2014 the appreciation exceeded the Euro area average by about 0 to 10 percent, with unit labor cost–based indicators showing a wider gap than other price-based measures.
  - The recent strengthening of the U.S. dollar vis-à-vis the euro contributed to a depreciation of the REER relative to the 2014 average of about 5 percent as of May 2015.
- Assessment
  - EBA methodologies give a relatively tight range of REER gap estimates in 2014:
    - EBA Index REER model: overvaluation of 3 percent in 2014.
    - EBA Level REER model: overvaluation of 6½ percent in 2014.
    - CA regression method: overvaluation of about 5 percent in 2014.
  - On balance, and consistent with the staff assessment of the CA in 2014, staff assessed that a real effective depreciation of 0-10 percent would support further adjustment and address economic imbalances over the medium-term.

### Capital and financial accounts: flows and policy measures
- Background
  - Portfolio and other-investment inflows typically financed the current account deficit and a modest net FDI outflow.
  - 2014 saw a strong return of foreign investment in portfolio securities in the first half of the year, led by investment in government securities.
  - TARGET2 liabilities, accumulated by banks over 2011–12, have declined.
- Assessment
  - While supported by the ECB’s QE, Italy remains vulnerable to a loss in market confidence owing to large refinancing needs of the sovereign and banking sectors, and tight credit conditions from financial fragmentation.

### FX intervention and reserves level
- Background
  - The euro has the status of a global reserve currency.
- Assessment
  - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating.

### Technical background notes (selected)
- The weakening of the CA balance relative to the norm in 2014 largely reflected a revision in the EBA methodology, which raised the CA norm for countries with both a relatively rapidly aging population and high dependency ratio, such as Italy.
- Depending on the measure used, Italy’s REER appreciated by -0.4 to 1 percent between 2013 and 2014 (year average on year average).
- The sharp rise in TARGET2 balances in the second half of 2014 reflected Treasury policy to reduce issuance of new debt securities and a temporary spike due to interbank transactions. TARGET2 balances have since declined.

*Source: Annex I. External Sector Report Assessment (Italy), IMF staff document.*

### 1.4 percent of GDP from 2017 onwards. Debt rises to 150 percent of GDP, after which it starts

### _cr15166 - 1.4 percent of GDP from 2017 onwards. Debt rises to 150 percent of GDP, after which it starts

### Public debt projections and baseline scenario
- Gross nominal public debt: 108.2 (2013), 128.6 (2014), 132.1 (2015), 133.3 (2016), 132.1 (2017), 130.5 (2018), 128.4 (2019), 125.8 (2020), 122.9 (projection table headings).
- Public gross financing needs: 23.1 (2013), 22.3 (2014), 32.6 (2015), 19.8 (2016), 16.5 (2017), 18.6 (2018), 16.1 (2019), 14.7 (2020), 14.5 (projection table).
- Real GDP growth (baseline): -0.1 (2013), -1.7 (2014), -0.4 (2015), 0.7 (2016), 1.2 (2017), 1.1 (2018), 1.1 (2019), 1.0 (2020).
- Inflation (GDP deflator, baseline): 1.8 (2013), 1.4 (2014), 0.9 (2015), 0.4 (2016), 1.2 (2017), 1.2 (2018), 1.2 (2019), 1.3 (2020), 1.4 (mentioned).
- Primary balance (baseline): 1.3 (2015), 1.9 (2016), 2.4 (2017), 2.8 (2018), 3.1 (2019), 3.3 (2020).
- Effective interest rate (baseline): 4/ 4.4 (2013), 3.9 (2014), 3.6 (2015), 3.2 (2016), 3.2 (2017), 3.1 (2018), 2.9 (2019), 2.9-3.0 (2020 range).
- Cumulative change in gross public sector debt: 2.5 (2004-2012 actual), 5.4 (2013), 3.4 (2014), 1.2 (2015), -1.2 (2016), -1.6 (2017), -2.1 (2018), -2.6 (2019), -2.8 (2020), cumulative -9.1 (projection).
- Identified debt-creating flows (cumulative): 1.7 (2004-2012 actual), 3.0 (2013), 2.3 (2014), 1.4 (2015), -1.0 (2016), -1.4 (2017), -1.9 (2018), -2.4 (2019), -2.7 (2020), cumulative -8.1.
- Primary deficit (identified flow): -0.9 (2013), -1.7 (2014), -1.4 (2015), -1.3 (2016), -1.9 (2017), -2.4 (2018), -2.8 (2019), -3.1 (2020), cumulative -14.8.
- Automatic debt dynamics (interest rate/growth differential contribution): 2.9 (2013), 5.3 (2014), 4.1 (2015), 2.8 (2016), 0.9 (2017), 1.0 (2018), 0.8 (2019), 0.7 (2020), cumulative 6.8.
- Real interest rate contribution: 2.7 (2013), 3.2 (2014), 3.6 (2015), 3.7 (2016), 2.5 (2017), 2.4 (2018), 2.2 (2019), 2.0 (2020), cumulative 14.7.
- Real GDP growth contribution: 0.2 (2013), 2.1 (2014), 0.5 (2015), -0.9 (2016), -1.6 (2017), -1.4 (2018), -1.4 (2019), -1.3 (2020), cumulative -7.9.
- Other identified debt-creating flows: -0.4 (2013), -0.6 (2014), -0.4 (2015), -0.1 (2016), 0.0 (2017–2020), cumulative -0.1.
- Privatization receipts (negative): -0.2 (2013), -0.1 (2014), -0.2 (2015), -0.1 (2016), 0.0 (2017–2020), cumulative -0.1.
- Residual, including asset changes: 0.9 (2013), 2.4 (2014), 1.2 (2015), -0.2 (2016), -0.2 (2017), -0.2 (2018), -0.2 (2019), -0.2 (2020), cumulative -1.0.
- Debt-stabilizing primary balance: 0.7 (label in figure).

### Stress test scenarios and key outcomes
- Low inflation and prolonged stagnation shock:
  - Inflation lower by 1 standard deviation (0.8 pp) from 2016 onwards; remains at 0.4 percent for three years and reaches 0.6 percent in 2020.
  - Annual GDP growth is 0.6-0.9pp lower than in the baseline.
  - Interest rates increase by 50bps in 2016–20.
  - Debt-ratio increases to 145 percent of GDP in 2020 and fails to stabilize over the projection period.
- Primary balance shock:
  - Fiscal adjustment plans delayed by one year relative to the baseline due to reform fatigue.
  - Risk premia increase slightly: 20 bps increase for each 1 percent of GDP slippage.
  - Debt-to-GDP ratio is about 2 percentage points higher than the baseline by 2020.
- Policy advice scenario:
  - Structural reforms and fiscal rebalancing yield a growth dividend of 1/4 percent in 2017 rising permanently to 1/2 percent of GDP by 2020.
  - Interest rate declines by around 10 bps.
  - Annual privatization receipts of 1 percent of GDP materialize.
  - Structural surplus increases progressively to 1/2 percent of GDP by 2020.
  - Debt-ratio declines to about 112 percent of GDP by 2020 and continues firmly on a declining path.
- Combined and additional shocks (figures list underlying assumptions for multiple scenarios including Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Contingent Liability Shock, Combined Shock, Constant Primary Balance Scenario).

### Vulnerabilities and market-perception indicators (heat map and percentiles)
- Benchmarks for risk assessment highlighted:
  - Bond spreads: 400 and 600 basis points.
  - External financing requirement (public and private): 17 and 25 percent of GDP.
  - Change in share of short-term debt: 1 and 1.5 percent.
  - Public debt held by non-residents: 30 and 45 percent.
- Bond spread over German bonds reported: 116 bp (in figure listings), spread (bp) 132 (table row).
- CDS (bp): 112 (table row).
- Public debt held by non-residents: 48% (figure cell).
- Distribution percentiles shown for gross nominal public debt evolution (10th-25th; 25th-75th; 75th-90th) with baseline and restricted/asymmetric distributions.

### Forecast track record and realism of assumptions
- Real GDP growth forecast error (Italy median): -1.57 (percent, actual-projection) with percentile rank 9%.
- Primary balance forecast error (Italy median): 0.49 (percent of GDP, actual-projection) with percentile rank 74%.
- Inflation (deflator) forecast error (Italy median): -0.17 (percent, actual-projection) with percentile rank 20%.
- Italy 3-year CAPB adjustment percentile rank: 52% (3-year adjustment in cyclically-adjusted primary balance).
- Italy 3-year average level of CAPB percentile rank: 25% (3-year average CAPB level).

### Progress against IMF recommendations (post-2014 Article IV) — selected actions and next steps
- Labor market:
  - New open ended labor contract entered into force in March 2015; a legislative decree (June 2015) reviews temporary contracts.
  - NASPI introduced May 2015; Dis-Col and ASDI introduced experimentally; reform of wage supplementation scheme presented June 2015.
  - Next steps: Monitor take-up of new contract; finalize and implement wage supplementation reform; monitor ANPAL establishment and other measures.
- Product markets and public services:
  - Transportation Authority fully staffed; draft Annual Competition Law (ACL) presented to Parliament in February.
  - 2015 Stability Law requires municipalities to present plans for local public enterprises rationalization by March 2015; public administration reform legislated July 2014.
  - Next steps: Legislate and implement ACL; further reform local public services; rationalize legal framework; improve tendering procedures.
- Fiscal stance and rebalancing the budget:
  - 2015 budget cuts labor taxes; labor tax wedge falls by 24 percentage points for certain workers.
  - 2015 budget contains 0.6 percent of GDP in expenditure cuts.
  - Structural balance target in 2019 is a surplus of 0.2 percent (up from zero).
  - Next steps: Reduce marginal rates further; find permanent financing for tax cuts; continue spending review to identify at least 0.6 percent of GDP in cuts.
- Tax evasion and AML:
  - Law on "voluntary disclosure" (2014) introduced self-money laundering; May 2015 law on corruption and false accounting approved.
  - Next steps: Enhance targeted controls and information sharing while respecting confidentiality.
- Tackling NPLs and banking sector:
  - New asset classification framework harmonized at EU level introduced January 2015.
  - Shortened tax deductibility period for loan loss provisions from 18 to 5 years.
  - Commission set up by Ministry of Justice to study insolvency reforms (February 2015); report due December 2015.
  - Next steps: Enforce loan classification and provisioning; consider shortening deductibility period to one year conditional on fiscal space; expedite judicial processes and insolvency reforms.
- Corporate governance and SME support:
  - Reforms enhance selection criteria for bank board members; CRD IV transposed; reform of cooperative banks forcing largest to convert into joint stock companies.
  - Measures to encourage alternative market funding and support innovative startups expanded.
  - Next steps: Ensure decisive implementation; make governance arrangements binding; streamline insolvency procedures; enhance credit information sharing.

### Fund relations, data, and statistical issues
- Mission: Milan and Rome, May 5–May 18, 2015.
- Membership Status: Joined 3/27/47; Article VIII.
- Quota: 7,882.30 (SDR Million) — 100.00 percent quota.
- Fund holdings of currency: 6,803.64 — 86.32 percent quota.
- Reserve Tranche Position: 1,078.80 — 13.69 percent quota.
- SDR Department net cumulative allocation: 6,576.11 (SDR Million) — 100.00 percent allocation; Holdings: 6,092.21 — 92.64 percent.
- Projected obligations to Fund (Charges/Interest): 0.12 (2015), 0.35 (2016), 0.35 (2017), 0.35 (2018), 0.35 (2019).
- Data adequacy: Data provision is adequate for surveillance; Italy subscribes to SDDS since 1996 and to SDDS Plus in 2015.
- Statistical recommendations: Improve quarterly national accounts measurement of changes in inventories; further progress on reporting frequency of Financial Soundness Indicators; Bank of Italy adopted BPM6 in second half of 2014.

*Source: IMF staff report and associated tables and figures in the provided PDF excerpt.*

### 1.   Probably the most important reform was the enactment of the Jobs Act, which deeply

### _cr15166 - 1.   Probably the most important reform was the enactment of the Jobs Act, which deeply

### Major structural reforms and implementation status
- Jobs Act: core component fully legislated and fully operational; two components still require implementation decrees (reform of the wage supplementation scheme and reform of active labor market policies) but these decrees have already been sent to Parliament (for comments, not for approval).
- Labor taxation:
  - Labor taxes have been cut by close to one per cent of GDP (staff had suggested 0.7).
  - Includes a 3-year reduction of labor taxation for new permanent contracts.
  - Note: the cut of €80 per month for lower income dependent workers is not classified as a tax cut by the Statistical Institute, though economically it has the features of a tax cut.
- Procurement reform:
  - Primary spending cut by about ½ percent of GDP (and more net of spending increases necessary to implement reforms such as strengthening unemployment benefits).
  - Setting up 35 procurement agencies to replace over 30,000 offices; expected completion in July 2015.
- Implementation decrees:
  - Government reduced by 70 percent the backlog of implementation decrees arising from previous legislation.

### Labor market outcomes and indicators
- Initial results after reforms:
  - Permanent hirings increased sharply in the first quarter of this year (+104,000).
  - In April the unemployment rate decreased more than expected, though remaining at high levels also on the back of increased labor supply.
- Tax wedge:
  - Based on the authorities’ estimates, the labor tax cut has almost halved the gap between Italy’s tax wedge and that of the euro area.

### Public administration, justice, and anti-corruption
- Public administration:
  - New rules for mobility of public sector employees legislated and used to reallocate personnel from reformed Provinces to other parts of public administration.
  - 2014 law on public administration introduced simplification and streamlining measures; an enabling law on reform of public administration expected before the summer break (implementation decrees to be issued within a month after approval).
- Civil justice and dispute resolution:
  - Paperless process for civil court cases (processo telematico) introduced.
  - Two new modalities for extra-court resolution of disputes added.
  - Fast-track procedures widened for judges.
  - Backlog of pending cases down by 18 percent from the peak of 2009 (as of June 2014).
- Anti-corruption:
  - New anti-corruption law approved in May 2015: criminalized false accounting, lengthened punishment for corruption cases, changed statute of limitations, increased powers of the Anti-Corruption Authority established in 2014.
  - Crime of self-laundering introduced in January 2015.

### Banking, financial sector, and insolvency
- Cooperative banking sector (banche popolari) reformed to improve corporate governance and access to capital markets; measures on portfolio management and governance arrangements of banking foundations introduced.
- Insolvency and NPLs:
  - June 23 government measures to overhaul insolvency regime, reduce length of recovery procedures, speed up write-off of non-performing loans (NPLs).
  - Loan loss provisions will be immediately deductible for tax purposes.
  - These measures align with staff recommendations and will facilitate development of a market for NPLs in Italy.
- Banking system soundness and indicators:
  - Comprehensive Assessment results generally positive; system resilient to extreme shocks.
  - Two banks with capital shortfalls under the adverse stress test presented recapitalization plans and completed substantial rights issues.
  - At end-2014: common equity tier 1 ratio (CET1) at 11.8 percent (rise from 10.5 percent the year before).
  - Coverage ratio of NPLs increased to 44.4 percent.
  - Banks’ overall profitability in 2014 remained weak but improved relative to 2013; operating profits almost completely absorbed by loan loss provisioning.
  - Corporate debt-to-GDP ratio among the lowest in large euro area countries; corporate financial debt and leverage have decreased; firms’ liquidity is high.
- Credit market outlook:
  - Signs of improvement in the credit market emerging; credit conditions gradually easing.
  - Exposure to interest rate risk limited for banks and insurances; insurers benefit from balanced cash flows and good matching of yields and duration.

### Privatization, capital markets, and corporate finance
- Multi-year privatization program adopted, including listing of Poste, ENAV and Ferrovie; privatization revenues by law earmarked to reduction of public debt.
- Early 2015: government sold a 5 percent stake of ENEL, reducing its stake to 25 percent.
- IPO of Poste Italiane scheduled for the fall (as stated).
- Measures to strengthen firms’ financial structure and diversify financing:
  - Allowance for Corporate Equity (ACE) introduced in 2011 and recently enhanced, virtually canceling tax advantage of debt finance.
  - 2014: gradual strengthening of firms’ risk capital continued; increased foreign capital inflows and a wave of new stock-exchange listings.
  - Greater recourse to bond emissions, including mini-bonds for new issuers and small unlisted firms (provisions adopted in 2012).
  - Tax incentives for venture capital and measures to liberalize credit markets have been introduced.

### Assessment of indicators and competitiveness
- Caveats on Staff Report indicators:
  - Doing Business and WEF indicators may misrepresent Italy due to:
    - Doing Business indicators referring to central Italy, not representative of national average weighted by regional GDP.
    - WEF indexes based on perceptions; for Italy there is a wide gap between perceptions and more objective information (Eurobarometer: 97 percent argue corruption is widespread, yet only 9 percent personally know anyone who takes or has taken bribes).
    - Indicators often provide snapshots and may miss positive trends (e.g., OECD PISA shows marked improvements in mathematics and science; between 2003 and 2012 Italy reduced “low performers” by 7 percentage points and increased “top performers” by 3 percentage points).
- Competitiveness and trade:
  - Italy has the second largest manufacturing industry in Europe and the seventh in the world.
  - Italian tradable sector ranks among the world’s leaders; after 2009 trade collapse, volume of Italian goods exports has kept up with or slightly outpaced potential demand.
  - Unit labor cost–based competitiveness indicators may underestimate Italian firms’ capacity to compete; a broader set of price and non-price indicators recommended.

### Fiscal policy and public debt
- Fiscal stance guided by SGP rules; balances strengthening fiscal accounts while supporting activity.
- Notes omitted in Staff Report:
  - Fund’s structural fiscal indicators: Italy has one of the lowest pension and health care debt among advanced countries (26 percent against an average of almost 134 percent for advanced economies, measured by the NPV of projected increases in pension and health care spending over the next 40 years).
  - Dynamic of the debt ratio in recent years negatively affected by payment of arrears and support to euro-area financial assistance mechanisms (for a total of 6.2 percentage points of GDP).
- Importance of consolidating the recovery to deleverage public and private balance sheets and reduce high unemployment, particularly among the young.

### Outlook and conclusions
- Growth outlook (staff projections):
  - GDP expected to grow by 0.7 percent in 2015 and 1.2 in 2016 (previous January 2015 WEO Update projections were 0.4 and 0.8 respectively).
  - Over the medium term staff somewhat less sanguine than authorities, though authorities adopt a cautious approach not including likely effects of structural reforms in projections.
- Reforms and macro conditions:
  - Improved growth prospects reflect government actions and more favorable external conditions.
  - Reforms have improved companies’ financial structure and diversified access to financing, particularly for SMEs.
- Remaining priorities and planned steps:
  - Further measures planned or in progress include: reducing appeal rate in civil justice and developing court performance indicators; improving provision of public services; strengthening governance and resilience of the mutual bank sector (banche di credito cooperativo); addressing the high stock of NPLs with targeted actions (in addition to June 23 measures).
  - Authorities determined to keep momentum and continue delivering; view further constructive interactions with IMF staff positively.

*Source: _cr15166 - 1.   Probably the most important reform was the enactment of the Jobs Act, which deeply*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15166.pdf_