## ITALY: Concluding Statement of the 2015 Article IV Mission

_IMF News, May 18, 2015_

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**Canonical URL:** [ITALY: Concluding Statement of the 2015 Article IV Mission](https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs051815a)

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## Bibliographic details
- Published: May 18, 2015

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### 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).*

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## References

- [Italy and the IMF](http://www.imf.org/external/country/ITA/index.htm)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs051815a_