ITALY: Concluding Statement of the 2015 Article IV Mission
IMF News, May 18, 2015
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- Published: May 18, 2015
A Window of Opportunity to Revitalize the Economy
- Preliminary finding: Italy’s economy is emerging slowly from a painful recession.
- Recent supportive factors:
- ECB’s quantitative easing (QE) has lowered government bond yields to pre‐crisis lows (despite a recent uptick) and reduced bank and corporate funding costs.
- Lower oil prices, a weaker euro, and recent reform efforts have improved confidence indicators.
- Short‑term growth projections:
- Growth is projected at 0.7 percent this year and 1.2 percent next year.
- Key constraints:
- Persistent structural weaknesses, incomplete implementation of previous reforms, depressed demand, weakened balance sheets, and subdued growth expectations.
- Real activity and investment remain far from pre‑crisis levels.
- Unemployment remains uncomfortably high (over 12 percent), especially among the youth.
- Public debt is at a very high level of over 130 percent of GDP.
- Policy focus recommended:
- (1) Tackle the long‑standing productivity problem.
- (2) Support bank and corporate balance‑sheet repair.
- (3) Rebalance fiscal adjustment and reduce public debt.
Reforms to Revive Productivity
- Public administration reform recommendations:
- Increase autonomy and accountability of public sector managers.
- Strengthen benchmarking and performance‑based budgeting.
- Improve mobility of workers and wage differentiation in line with productivity.
- Local public services:
- Reform and rationalize local public enterprises; note existence of more than 8,000 local public enterprises identified as a source of inefficiency and a burden on public finances.
- Public tenders:
- Increase transparency in tendering procedures and standardize contracts, particularly for local public services.
- Civil justice reform:
- Rationalize cases reaching the Supreme Court (Corte di Cassazione).
- Allow specialization of courts; use ad hoc measures to reduce backlog; develop court performance indicators.
- Product and service market competition:
- Continue liberalization since 2008; swift approval and implementation of the Annual Competition Law recommended.
- Further liberalize highly regulated sectors such as transport.
- Labor market reforms (Jobs Act and beyond):
- New labor contract with gradually increasing protection lowers dismissal costs and should improve worker reallocation.
- Extend coverage of unemployment benefits and link support to job search and training.
- Implement planned reform of the wage supplementation scheme to encourage worker transitions from unprofitable to profitable firms.
- National coordination of ALMPs to reduce regional disparities and improve vacancy filling.
- Encourage firm‑level contract negotiation and greater flexibility in national contracts.
Balance Sheet Repair to Help Investment
- Current situation:
- Profits have declined and debt burdens have increased since 2008 for many firms, particularly SMEs.
- Nonperforming loans (NPLs) have reached a record level of 18 percent of loans, with the vast majority stemming from the corporate sector.
- Loans to SMEs remain scarce and expensive.
- Strategy elements to strengthen bank and corporate balance sheets:
- Accelerate provisioning and write‑offs:
- Supervisory actions introducing time limits for write‑off of vintage NPLs to encourage faster resolution.
- Improve the insolvency regime:
- Rationalize and streamline procedures; address gaps in pre‑insolvency and reorganization (including obstacles to debt/equity swaps); accelerate start of insolvency; increase asset sale flexibility; reduce litigation; establish qualifications for insolvency practitioners.
- Restart the NPL market:
- Encourage private AMCs through regulatory measures and tax incentives.
- A centralized, system‑wide, state‑backed AMC consistent with EU state aid rules could jumpstart the market if properly designed.
- Foster restructuring/resolution of distressed SMEs:
- Establish standard criteria for bank assessments of SME viability and introduce guidelines for creditor‑led restructuring.
- Promote alternative financing sources:
- Fully implement measures to facilitate SME access to capital markets and liberalize the credit market.
- Enhance use and enforcement of collateral:
- Introduce fiduciary arrangement contracts, expand out‑of‑court enforcement, reform secured transactions law, and improve collateral registries.
Fiscal Rebalancing to Support Growth and Reduce Public Debt
- Fiscal context:
- Italy’s primary surplus is among the highest in the euro area after years of adjustment.
- The protracted recession has contributed to a steady rise in the debt‑to‑GDP ratio, limiting fiscal room.
- Policy recommendations:
- Continue fiscal rebalancing through more efficient spending and lower taxes.
- Labor tax cuts in the 2015 budget are welcome, but labor and capital remain heavily taxed.
- Ongoing spending reviews are essential to identify efficiency gains in procurement, transfers to public enterprises, and health.
- Decisive implementation will help meet the deficit target and allow further tax burden reduction.
- Maintain a modest structural surplus over the medium term to reduce debt faster and provide insurance against changes in market sentiment.
- Near‑term stance:
- The planned modest consolidation of ¼ percent of GDP is appropriate, given still‑subdued growth and high debt.
- The re‑indexation of pensions in accordance with the Constitutional Court ruling should not modify the fiscal stance this year and going forward.
- The safeguard clause should be fully offset by spending cuts to avoid damaging tax hikes while building fiscal buffers.
- A modest use of the flexibility under the Stability and Growth Pact could support the structural reform program and create room for further tax cuts.
- Privatization:
- Faster privatization would reduce debt; recent sale of ENEL shares is positive.
- Privatization targets should be more ambitious to take advantage of favorable market conditions.
Mutually Reinforcing Reforms to Lift Italy’s Potential
- Integrated impact:
- 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 facilitate worker transitions to new opportunities created by these reforms.
- Productivity gains from structural reforms will be amplified by a more efficient public sector and more competitive product and service markets.
- Urgent recommendation:
- Maintain reform momentum and press ahead full force with the comprehensive reform agenda to realize the window of opportunity.
Source: ITALY: Concluding Statement of the 2015 Article IV Mission (May 18, 2015).