Italy: Staff Report for the 2014 Article IV Consultation
IMF Staff Country Reports, September 18, 2014
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- Published: September 18, 2014
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781498383516.002
Key issues — Unleashing Italy’s Potential
- The economy is struggling to emerge from a prolonged "balance-sheet recession".
- Tight credit conditions, weak corporate balance sheets, and deeply-rooted structural rigidities continue to weigh on domestic demand.
- The high level of public debt and membership in a currency union highlight the importance of tackling these structural weaknesses.
- Without meaningful reforms, potential growth is projected to remain low.
- Deep structural changes are urgently needed to secure a recovery and unleash Italy’s growth potential.
Downside risks
- External risks arise from geopolitical tensions.
- Italy’s high public debt, large public financing needs, and elevated NPLs leave the economy vulnerable to financial contagion and/or low growth and inflation.
- Risks are described as "tilted to the downside".
Labor market and judicial reforms
- Move to a single labor contract with gradually increasing protection to reduce duality.
- Improve judicial efficiency by promoting mediation and enhancing monitoring of court performance.
- Greater efforts to combat corruption to strengthen the business environment.
- Implementing reforms simultaneously could be self-reinforcing and generate significant growth synergies.
Banking sector and nonperforming loans (NPLs)
- A greater push to clean up banks’ bad loans is needed to support lending in the recovery.
- Recommended measures:
- More provisioning and write-offs.
- Development of a private distressed debt market.
- Enhanced insolvency regime to accelerate the reduction of NPLs.
- Improved corporate governance and deeper capital markets would support growth and financial stability.
Strategy for SMEs and alternative financing
- A broad strategy to revive the SME sector should complement efforts to strengthen bank balance sheets.
- Strategy elements:
- Restructuring support for viable, but distressed firms.
- Quick exit for non-viable firms.
- A new fiduciary loan contract and greater sharing of credit information to support alternative financing for new endeavors.
Fiscal policy stance and priorities
- Fiscal policy needs to strike a delicate balance between setting the debt ratio on a downward path while helping the economy recover.
- To support growth, the priority should be to lower marginal tax rates through spending savings and lower tax expenditures.
- Given the low growth and high interest rate environment, stronger fiscal balances are needed to bring down debt faster.
- Conditional on the recovery taking hold, "a modest structural surplus next year" would be appropriate.
Policies at the European level
- European-level policies could support growth by easing further monetary conditions should inflation remain too low.
- Reducing financial fragmentation at the European level would also support growth and stability.
Source: Italy: Staff Report for the 2014 Article IV Consultation — https://www.imf.org/en/publications/cr/issues/2016/12/31/italy-staff-report-for-the-2014-article-iv-consultation-41925