IMF Executive Board Concludes 2012 Article IV Consultation with Italy

Public Information Notice (PIN) No. 12/73
July 10, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with Italy is also available.

On July 9, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Italy.1


Italy’s economy entered recession in late 2011. GDP contracted for a third consecutive quarter, by 0.8 percent quarter-on-quarter in Q1 2012, led by sharp falls in consumption and investment. Exports also fell, along with the slowdown in global demand, but net exports contributed positively to growth due to sharp import compression. Household real disposable income continued to decline in 2011, and the unemployment rate reached 10.1 percent in May 2012, with youth unemployment at 36 percent. The external current account deficit narrowed from 3½ percent of GDP in 2010 to around 2¾ percent of GDP in the year to Q1 2012. Inflation increased to 2.9 percent in 2011, and further to 3.6 percent year-on-year in June mainly because of non-core components.

The economy is expected to continue contracting through the year owing to tight financial conditions, the global slowdown, and the needed fiscal consolidation. Absent shocks, the recovery will take hold in early 2013, led by a modest pickup in exports, but will lag the rest of the region. Inflation will ease only gradually, as the impact of weak demand is partly offset by higher indirect taxes. The risks to the outlook are however on the downside, stemming mainly from an intensification of the euro area crisis. Over the medium term, low trend productivity and an aging society are likely to constrain Italy’s growth prospects. The steady loss in competitiveness over the past decade, if remained unaddressed, will remain a drag on growth.

The overall fiscal deficit continued to improve from 4.5 percent of GDP in 2010 to 3.9 percent of GDP in 2011, in line with the authorities’ target. In response to financial pressures in the second half of 2011, the authorities enacted three fiscal consolidation packages, bringing the total adjustment for 2012–14 to around 5 percent of GDP. As part of the consolidation, the pension system was strengthened further. In April, the Parliament approved a structural balanced budget rule in the constitution which is set to take effect in 2014 and legislated the creation of a fiscal council. Also, in April, the government embarked on a new spending review to identify expenditure cuts that would replace the need to increase VAT rates in October.

The financial turmoil has put banks under stress. Credit ratings for several banks were cut in late 2011 and again in 2012, and remain on a negative outlook. With limited access to wholesale markets and higher funding costs, Italian banks have relied heavily on Eurosystem support. Banks have made progress in strengthening their capital positions and raising private capital to meet their EBA targets. Gross impaired loans have risen to 11 percent in 2011, from less than 6 percent before the crisis, and banks’ exposure to the sovereign has also increased. Higher funding costs and tighter lending standards, especially for smaller firms, have pushed up corporate borrowing rates.

The government has embarked on wide-ranging structural reforms to boost productivity and potential growth. Important progress is being made in product market reforms. Parliament in March passed a comprehensive liberalization package that covered key sectors and strengthened the enforcement of competition rules. Administrative simplification reforms, which should lower the cost of doing business, were also approved. Parliament has also passed a labor market reform bill aimed at making the labor market more inclusive and flexible. The bill promotes open-ended and apprenticeship contracts for young workers, makes unemployment insurance more universal, and facilitates hiring by reducing the cost of dismissal. Progress has also been made on strengthening the anti-corruption legal framework.

Executive Board Assessment

Executive Directors commended the Italian authorities for launching an ambitious policy agenda to secure fiscal sustainability and promote growth. The economic and financial situation nevertheless remains challenging, with downside risks to the outlook. Directors emphasized the importance of maintaining strong policies and the momentum for reforms. To revive growth, priority should be given to raising productivity and labor participation, pursuing growth-friendly fiscal consolidation, and promoting a more dynamic and resilient banking system. Sustained implementation of this agenda needs to be supported by continued progress at the European level in strengthening the currency union.

Directors acknowledged the important steps taken towards deregulating the service sector and making the labor market more flexible and inclusive. They welcomed the passage of the labor market reform bill which promotes open-ended contracts and makes unemployment insurance more universal. Further action will be necessary to bridge the gap between permanent and temporary workers, raise female labor participation, and better match wages to productivity via greater wage setting decentralization. In the area of product markets, priority should be given to accelerating reforms in the energy and services sectors. Directors also encouraged the authorities to take steps to improve the investment climate and reduce the cost of doing business. They welcomed efforts to enhance the efficiency of the judicial system.

Directors commended the authorities for initiating a sizeable fiscal adjustment. They welcomed the increased focus on targeting a structural balance to ensure flexibility in fiscal policy. Directors encouraged the authorities to rebalance the adjustment towards expenditure cuts and lower taxes. The recently announced package of spending cuts is a step in the right direction. Directors looked forward to the swift follow-up on the ongoing spending review to help reduce the overall level of government spending and improve its quality. They saw scope for cutting the public sector wage bill, reducing tax expenditures, and stepping up efforts against tax evasion. This would create space for growth-supporting measures to reduce the labor tax wedge and encourage investment.

Directors emphasized that locking in prudent medium-term policies to reduce the high level of public debt would further improve confidence. They welcomed the important progress in the pension reform, the introduction of a new constitutional structural balanced budget rule, and the creation of the fiscal council. Directors saw the recent plan to sell public assets to reduce public debt as a positive first step and stressed the need to pursue more comprehensive privatization.

Directors recognized the strengths of the Italian banking system but concurred that banks need to maintain adequate capital and liquidity buffers to remain resilient to the downturn. They noted that reducing impaired loans would free up resources for new lending and strengthen banks’ balance sheets. In this context, they saw scope for improving the efficiency of bankruptcy proceedings and out-of-court workouts to support corporate restructuring.

Italy: Selected Economic Indicators 1/
  2009 2010 2011 2012 2013

Real Economy (change in percent)


Real GDP

-5.5 1.8 0.4 -1.9 -0.3

Final domestic demand

-3.2 1.0 -0.4 -3.0 -0.7

Exports of goods and services

-17.5 11.6 5.6 0.6 1.9

Imports of goods and services

-13.4 12.7 0.4 -6.3 1.2

Consumer prices

0.8 1.6 2.9 3.0 2.1

Unemployment rate (in percent)

7.8 8.4 8.4 10.3 11.1

Money and Credit (end-period, percent change)


Private sector credit 2/

-0.5 3.6 2.3 ... ...

National contribution to euro area M3 3/

5.5 2.4 -4.4 ... ...

Public Finances


General government balance 4/

-5.4 -4.5 -3.9 -2.6 -1.5

Structural overall balance (percent of potential GDP)

-3.6 -3.3 -3.4 -0.7 0.5

General government debt 4/

116.1 118.7 120.1 125.8 126.4

Interest rates (end-period)


6-month interbank rate

1.0 2.3 2.3 ... ...

10-year government bond yield

4.1 4.8 5.0 ... ...

Balance of Payments (percent of GDP)


Trade balance (goods and services)

0.1 -1.3 -1.1 -0.2 -0.1

Current account

-2.1 -3.6 -3.1 -2.2 -2.0

Exchange Rate


Exchange rate regime

Member of EMU

Euros per US dollar

0.7 0.8 0.7

Nominal effective rate (1999Q1=100)

104.6 101.3 101.6

Real effective rate (1999Q1=100, CPI based)

103.3 99.4 99.4

Sources: National Authorities; and IMF staff calculations.

1/ Staff estimates and projections, unless otherwise noted, based on fiscal consolidation measures included in the government's April 2012 Documento di Economia e Finanza.

2/ Twelve-month credit growth, adjusted for securitizations and excluding operations with central counterparties.

3/ Excludes currency in circulation held by nonbank private sector.

4/ Percent of GDP.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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