EUROPEAN COMMISSION Brussels, 22.6.2021 SWD(2021) 165 final COMMISSION STAFF WORKING DOCUMENT Analysis of the recovery and resilience plan of Italy Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION on the approval of the assessment of the recovery and resilience plan for Italy {COM(2021) 344 final}



Table of contents 1. Executive summary 2. Recovery and resilience challenges: scene-setter 2.1. Macroeconomic outlook and developments since the 2020 country report 2.2 Challenges related to sustainable growth, cohesion, resilience and policies for the next generation 2.3 Challenges related to the green and digital transition 2.3.1 Green dimension 2.3.2 Digital dimension 3. Objectives, structure and governance of the plan 3.1. Overall strategy of the plan 3.2. Implementation aspects of the plan 4. Summary of the assessment of the plan 4.1. Comprehensive and adequately balanced response to the economic and social situation 4.2. Link with country-specific recommendations and the European Semester 4.3. Growth potential, job creation, economic, institutional and social resilience, European Pillar of Social Rights, mitigating the impact of the crisis, and social territorial cohesion and convergence 4.4. The principle of ‘do no significant harm’ 4.5. Green transition 4.6. Digital transition

4.7. Lasting impact of the plan 4.8 Milestones, targets, monitoring and implementation 4.9 Costing 4.10 Controls and audit 4.11 Coherence Annex – Tagging Table

1.Executive summary Italy’s economy is set to rebound strongly from the sharp and deep recession triggered by the COVID-19 pandemic. Italy entered the COVID-19 induced slump with an output level that had not yet fully recovered from the post-2009 recession. Real GDP contracted by 8,9% in 2020. The pre-pandemic improvement in labour market conditions came to an abrupt halt and the previously observed jobs growth reversed, even if the impact of the economic shock triggered by the pandemic was considerably mitigated by rapid national and EU policy action. Poverty, which had been declining in 2019, became more widespread. The regional divide was widening already before the COVID-19 crisis, which further exacerbated risks to territorial cohesion. Italy's public finances have been severely hit by the pandemic. The government debt-to-GDP ratio increased from 134,6% in 2019 to 155,8% in 2020 and is expected to increase further in 2021 to 159,8%, before declining to 156,6% in 2022. Looking ahead, falling infection rates associated with an accelerating vaccination campaign that allow for a marked easing of restrictions, are paving the way for a strong rebound over the rest of 2021. Sizeable domestic policy support and of Next Generation EU-financed investment should help real GDP to grow by 4,2% in 2021 and reach 4,4% in 2022, when the investment and reform programme set out in Italy’s Recovery and Resilience Plan will start to take full effect. Italy has requested the maximum amount available under the Recovery and Resilience Facility, corresponding to EUR 191,5 billion, of which EUR 68,9 billion in non-repayable financial support and EUR 122,6 billion in loans. The plan is broad-based and aims at addressing Italy’s main structural challenges, which relate to weaknesses in productivity growth, business environment, the public administration, the justice system and insolvency proceedings as well as in the regional differences, the labour market, and in educational outcomes. The Plan also addresses important investment needs for the twin green-digital transitions, research and innovation, to improve access to essential care in a more resilient healthcare system, including the need to fill the infrastructural gap between regions. It also outlines initiatives for long-standing challenges related to the high level of undeclared work and tax evasion. The Plan includes 16 components and is structured around 6 areas of intervention (“Missions”), focusing on three horizontal priorities: digitalisation and innovation, ecological transition and social inclusion. It includes measures in digitalisation, innovation, culture and tourism; circular economy and waste management; energy, including renewable, energy efficiency, energy infrastructures, hydrogen; mobility; energy efficiency in buildings; sustainable use and protection of land and water resources; rail networks and intermodality; education, research and innovation; policies for employment, social and territorial cohesion; better territorial integration of care and facilitating the uptake of innovation in healthcare, as well as a set of horizontal and enabling reforms related to the public administration, the justice system, the business environment (including on local public services, concessions, market surveillance, late payments and public procurement), tax administration and public financial management. These measures aim at enhancing productivity, competitiveness, sustainability and resilience of the economy, while creating new jobs and fostering economic growth, reducing territorial, social, gender and generational divides and minimising the environmental footprint of production. By addressing the country specific recommendations issued to Italy, the measures included in the Plan appear also consistent with the challenges and priorities identified in the Draft Council Recommendation on economic policy of the euro area. The Plan is balanced in its response to the six policy pillars referred to in Article 3 of the RRF Regulation. Several measures of the Plan contribute to the pillar on green transition, notably the components on circular economy and sustainable agriculture; on renewable energy, hydrogen, grid and sustainable mobility; on energy efficiency and renovations of buildings; on protection of land and water resources; and on the rail network. The pillar on the digital transformation is addressed through measures distributed across the plan and, in particular, by the components on the digitalisation of the public administration and the productive system, as well as by several measures on the digitalisation of the education and health systems. The plan covers the pillar on smart, sustainable and inclusive growth with the dedicated chapter of horizontal and enabling reforms, particularly concerning the public administration and business environment, and with the component on research and innovation. The pillar on social and territorial cohesion is addressed with the dedicated components on employment policies, territorial cohesion and social infrastructure. Territorial cohesion is also addressed by tangible and intangible investments across the Plan. The components on the health sector, its digitalisation and medical research, complemented by the reforms of the justice system and public administration, cover the pillar on health, economic and institutional resilience. Finally, the pillar on the next generation, children and youth is addressed by the component dedicated to education as well as by the component on employment policies, particularly by the measures on skills and employability. With its focus on growth-enhancing reforms and investments, the Plan is set to improve Italy’s growth potential, labour market conditions and social resilience. Investments in digitalisation and the green transition as well as education and research, coupled with reforms improving the overall business environment, such as the reform of public administration, the justice system and of the insolvency proceedings, are set to spur productivity growth in the medium and long term. In addition, targeted labour market reforms and investments to improve the employment prospects, in particular of young people and women, are likely to lift labour supply and provide equal access to skills, thus support potential growth. The measures to strengthen and integrate the provision of social services, provide affordable housing and support urban regeneration, are expected to help bridge the gaps between geographic areas and social groups. A better functioning of the labour market accompanied by other measures such as, inter alia, integrated social services, and measures supporting the healthcare system should increase the economic resilience and social and territorial cohesion, and contribute to the European Pillar of Social Rights.

The Plan is not expected to do significant harm to environmental objectives. This is expected to be achieved by selecting or designing the measures in the plan in line with the do-no-significant-harm (DNSH) principle, and by substantiating DNSH compliance as part of the DNSH assessment. Investments in last-mile road connections are compensated by investments in electric charging stations. Additional guarantees have been provided for vehicles running on biomethane and for hydrogen. Investments in water irrigation provide guarantees that they will not deteriorate the status of existing water bodies and will contribute to improving it. Investments in renovations contains guarantees that demolition waste will be treated according to circular economy principles. Individual project authorisation shall respect EU and national rules and guidelines for impact assessments. The measures included in the Plan related to the green transition account for 37,5% of the total allocation. The measures included in the Plan appear also consistent with the 2020 Commission country specific guidelines on the implementation of the Italian national energy and climate plan.The plan includes a number of measures related to energy efficiency, in particular a scheme for house renovations. It also envisages direct investments to improve the energy efficiency of buildings. Italy also intends to use the Facility to boost the production and use of clean hydrogen in line with the flagship projects Power Up and Refuel and Recharge and to increase the share of renewables in transport and heating, in particular through the development of bio-methane. The Plan also focuses on reducing greenhouse gas emissions from transport, it envisages important investments to boost sustainable urban mobility, including e-mobility, as well as railway infrastructure to support modal shift, and to reduce greenhouse gas emissions in air and maritime transport and in agriculture. In addition, reforms are included to support the green transition, for instance by facilitating the authorisation of renewable power production. The Plan also supports Italy’s climate adaptation efforts, as well as seismic resilience and the quality of infrastructures, and it addresses the existing challenges on circular economy and waste management, water supply and wastewater management and biodiversity protection. The Plan is expected to contribute to Italy’s digital transformation through a wide range of measures amounting to 25,1% of the total allocation. These measures aim, in particular, at (i) improving connectivity, by accelerating the deployment of very-high-capacity networks, in particular 5G and fibre networks; (ii) fostering the digital transformation of the public administration, the justice, health and education systems as well as culture and tourism; (iii) supporting the digitalisation of Italian businesses with a particular focus on industry 4.0 technologies; (iv) strengthening human capital by improving the general population’s basic digital skills and by boosting upskilling and reskilling;; and (v) supporting, although to a more limited extent, the development and deployment of advanced digital technologies. The Plan also includes a set of reforms, notably to improve the effectiveness of public administration and foster the business environment. More specifically, the Plan includes a comprehensive reform of public employment, and measures aiming at reducing red tape and strengthening administrative capacity, especially at local level. In addition, the reform of the justice system aims at strengthening its resilience, reducing the backlog and the length of both civil and criminal proceedings, with expected positive impact on the economic system. The Plan also includes measures to improve regulations in specific sectors and to remove a number of barriers to competition, including a simplification of the public procurement framework and the prioritization of competitive processes to award local public service contracts. Finally, the Plan includes, among others, measures to improve tax compliance, administration efficiency and to step up the fight against tax evasion and undeclared work. The Plan has the potential to bring enduring structural changes and therefore to have a lasting impact on the Italian economy and society. To this end, the effective and swift implementation will be crucial. A wide range of reforms in key policy areas are expected to address long-standing barriers to economic growth. In particular, the Plan contains reforms aimed at bringing structural changes to the functioning of the public administration and justice system and at improving the overall business environment. Planned reforms and investments in the education, skills development, and research and innovation have the potential to enhance human capital and research capacities in the long run. In particular, the Plan include a reform of the teaching profession, focusing particularly on recruitment, selection, mobility and training of teachers. Reforms in sectors like transport and water management are expected to structurally improve economic efficiency, inter alia, through a more systematic use of competitive procedures to assign the services contracts. The estimated total costs of the Plan are reasonable, plausible, in line with the principle of cost-efficiency and commensurate to its expected economic and social impact. Italy has submitted information about the cost estimates for all measures. The volume and quality of information about the cost estimates vary across measures. All measures financed by the recovery and resilience plan for Italy refer to costs undertaken after 1 February 2020. The measures entail non-recurrent costs, except for duly justified exceptions. The cost estimates of the Plan provide an acceptable level of assurance about the risk of double financing. Italy has committed to set a clear demarcation and to ensure complementarity between the Plan and the other European Structural and Investment Funds (ESI) for the period 2021-2027. Italy has created a multi-level governance system to ensure an effective implementation and monitoring of the Plan and established a robust control system. The arrangements related to the governance, which have been enshrined in a legal act (Decree Law of 31 May 2021, n. 77), clearly identify the bodies responsible for the monitoring and implementation of the Plan and define their competences and duties. Relevant actions to strengthen administrative capacity, including at local level, and to simplify administrative procedures are envisaged to ensure an effective implementation and monitoring of the plan, and have also been enshrined in two legal acts (Decree Law of 9 June 2021, n. 80, and Decree Law of 31 May 2021, n. 77, respectively). The monitoring and reporting mechanisms are well defined and in line with the intended purposes. The Plan established an independent Audit Body, as well as an audit strategy, and a robust control system. The set of milestones and targets of the Italian Plan appears to be clear, realistic and with a good degree of ambition and associated to relevant, acceptable and sufficiently robust indicators. Thus, the set of milestones and targets is considered appropriate for monitoring the implementation of the Plan. (1)

Balanced Response (2)

CSRs (3)

Growth, jobs… (4)

DNSH (5)

Green target (6)

Digital target (7)

Lasting impact (8)

M & T (9)

Costing (10)

Control Systems (11)

Coherence A A A A A A A A B A A 2.Recovery and resilience challenges: scene-setter 2.1.Macroeconomic outlook and developments since the 2020 country report An accelerating vaccination campaign and the continuing gradual easing of restrictions are paving the way for a strong rebound in the second half of 2021. The COVID-19 outbreak and the associated confinement measures to manage the pandemic pushed the Italian economy into a sharp and deep recession. Real GDP dropped by 8,9% in 2020 but is projected to rebound by 4,2% this year on the back of sizeable domestic policy support and the first stage of Next Generation EU-financed investment. In 2022, the investment and reform programme set out in Italy’s Recovery and Resilience Plan will take full effect and should help propel output growth to 4,4%. The projected recovery should allow the economy to return to its pre-pandemic level by the last quarter of 2022. Domestic demand should help the economy bounce back, while exports continue to benefit from strong momentum due to an improving external outlook. HICP inflation averaged -0,1% in 2020 and base effects related to rising oil prices are set to push HICP inflation above 1% this year, before it moderates to about 1% in 2022. The improvement in labour market conditions came to an abrupt halt with the onset of the COVID-19 crisis. Total employment shrunk by 2,8% in 2020. However, the unemployment rate dropped below the level of 2019 (9,2% vs 10,0% in 2019). Many employees were supported by policy measures, notably short-time work schemes, while a sizeable share of job seekers and newly unemployed exited the labour market at the peak of the pandemic. By contrast, the jobless rate of young people (15-24 years), who were often employed in contact-intensive services on short-term contracts and were thus particularly affected by the crisis stood at 29,5% in 2020 (vs. 29,2% in 2019), among the highest in the EU.

Poverty declined in 2019 but is likely to have worsened in 2020 because of the COVID-19 pandemic. The share of the population at risk of poverty or social exclusion fell from 27,3% in 2018 to 25,6% in 2019 (EU27: from 21,6% to 20,9%). According to ISTAT data, the percentage of households in absolute poverty increased in 2020 (7,7% in 2020 vs 6,4% in 2019). However, the social situation differs substantially among age groups, gender and nationality. Given that social spending continues to be concentrated on pensions, the poverty risk for the elderly (65+) is sizeably lower than for the average of the total population. By contrast, the young are disproportionally affected by poverty as a direct consequence of the high youth unemployment rate. Women run a somewhat higher poverty risk than men (26,6% vs. 24,5%). Non-Italian citizens face a much higher risk of poverty or exclusion than Italians (38,6% vs 24%). In addition, Roma Sinti and Caminanti face a high risk of social exclusion. The pandemic, which disproportionally affects the job prospects of women and the young, is likely to have exacerbated these divergences. The macroeconomic scenario that underpins Italy’s Recovery and Resilience Plan projects a sizeable rebound of economic growth in 2021 and 2022. Real GDP is set to increase by 4,5%, according to the Stability Programme and output growth is expected to remain strong in 2022 at 4,8% before moderating over the following years. The underlying assumptions of the authorities’ macroeconomic projections are considered to be plausible. The Commission projects a macroeconomic scenario for 2021 and 2022 that is slightly more cautious than the one of the Italian government. As regards domestic demand, the Commission forecasts a more moderate rebound in private consumption, but a more dynamic growth in investment. The macroeconomic and fiscal outlook continues to be affected by high uncertainty related to the COVID-19 pandemic and its economic consequences. Italy's public finances have been severely hit by the COVID-19 crisis. Following a historical low in 2019 (1,6% of GDP), the government headline deficit increased sharply to 9,5% of GDP in 2020, due to the decline in revenues caused by the economic crisis and the cost of the policy response. The high borrowing requirements and the fall in GDP caused a strong increase of the government debt-to-GDP ratio, which rose from 134,6% in 2019 to 155,8% in 2020. In 2021, the government deficit is expected to increase further to 11,7% of GDP based on the Commission 2021 spring forecast, as the cost of the additional policy response is expected to more than offset the increase in revenues related to the projected recovery. The government debt ratio is projected to continue increasing to 159,8% of GDP in 2021, also considering the effect of government capital support to firms, which has an impact on government gross debt but not on the headline deficit. Italy is deemed to face high fiscal sustainability risks in the short and medium term. Short-term risks stem from the sharp deterioration of public finances in 2020 and the resulting surge in financing needs to 33% of GDP. Government financing needs are expected to remain sizeable from 2021 onwards, although on a declining trend. High risks in the medium term reflect the fact that, under the baseline assumptions, the government debt-to-GDP ratio would remain above 155% for most of the 2020s, increasing again to 158,8% in 2024 and declining to 153,4% by 2030. Alternative scenarios, both favourable and unfavourable, confirm these risks. At the same time, the implementation of reforms and investments under the Next Generation EU, notably the Recovery and Resilience Facility, is expected to have a substantial positive and persistent impact on GDP growth in the coming years, which, ceteris paribus, should contribute to strengthen debt sustainability. Ageing costs are projected to increase substantially in the medium term and decline in the long term in the baseline scenario. This contributes to reduce the fiscal adjustment needed to stabilise the debt ratio in the long term. A more comprehensive debt sustainability analysis taking into account also the high level of government debt points to high risks, resulting in an overall classification of medium fiscal sustainability risks in the long term. High-quality investment projects and reforms are crucial to increase the growth potential and reduce the government debt ratio. The additional investments included in the plan are expected to significantly increase GDP, i.e. the denominator of the debt ratio. At the same time, the second-round revenue effects from the additional growth are expected to substantially contribute to increasing the primary balance. Finally, Recovery and Resilience Facility loans included in the plan imply potential savings on interest expenditure. Although no specific figures are reported on the debt trajectory, the plan highlights the importance of implementing investment projects with high growth potential in order to reduce the government debt ratio. Italy continues to experience excessive macroeconomic imbalances, which are not expected to improve in the near term, while it is not yet possible to assess the full impact of the COVID-19 crisis. Following the publication of the 2021 Alert Mechanism Report in November 2020, an in-depth review was carried-out for Italy. Based on its findings, the Commission concluded that Italy is experiencing excessive macroeconomic imbalances. Vulnerabilities relate to high government debt and protracted weak productivity dynamics, which have cross-border relevance in a context of labour market and banking sector fragilities. As mentioned above, the government debt ratio increased sharply in 2020 and is expected to edge down only in 2022. Labour productivity increased in 2020 but long-term productivity growth remains constrained by barriers to private and public investment and by limits to growth of the most productive firms. Activity and employment rates remain below the EU average. The very sluggish productivity growth, together with low employment rates, hamper potential growth, which in turn limits the room for debt deleveraging. While the Italian banking sector became more robust and resilient in the pre-COVID-19 crisis years, challenges remain. Notably, non-performing loans declined in recent years but are still relatively high and risk increasing once temporary support measures are phased out. The regional divide was widening before the COVID-19 crisis and risks persisting in the recovery phase. The ratio of GDP per capita between the South and the Centre-North remains lower than in 2008. This has occurred in the context of an overall loss in relative performance of most Italian regions compared to the EU average. Although GDP per capita decreased in most Italian regions, including in the North (for instance, in Lombardy in 2018 it dropped form 158% of the EU average to 126%), the drop in Southern regions is more worrisome as GDP per capita was already well below the EU average (for instance in Sicily it dropped from 77% of the EU average to 58%) (Svimez, 2020). Although the COVID-19 outbreak and the impact of the lockdown was concentrated in the North, especially in the first phase, the contraction of economic activity in 2020 is estimated to have been only slightly higher than in the South (-9,8% versus 9,0%, respectively). However, the recovery in 2021 and 2022 is expected to be higher in the Centre-North (+4,5% and +5,3% versus +1,2% and +1,4%). On the other hand, exports recorded a larger proportional drop in the South (-15,6% versus -12,2%), although they remain less important than in the North.5 Table 1: Comparison of macroeconomic developments and forecasts 2019 2020 2021 2022 2023 2024 2025 2026 COM COM RRP COM RRP COM RRP Real GDP (% change) 0,3 -8,9 -8,9* 4,2 4,5* 4,4 4,8* 2,6* 1,8* n/a n/a Employment (% change) 0,1 -10,3 -10,3* 5,4 4,9* 2,2 4,7* 2,3* 1,6* n/a n/a Unemployment rate (%) 10,0 9,2 9,3* 10,2 9,6* 9,9 9,2* 8,5* 8,0* n/a n/a HICP inflation (% change) 0,6 -0,1 -0,1* 1,3 1,0* 1,1 1,3* 1,4* 1,4* n/a n/a General Government balance (% of GDP) -1,6 -9,5 -9,5* -11,7 -11,8* -5,8 -5,9* -4,3* -3,4* n/a n/a Gross debt ration (% of GDP) 134,6 155,8 155,8* 159,8 159,8* 156,6 156,3* 155,0* 152,7* n/a n/a Source: Commission Spring Forecast 2021 (COM); * Stability Programme. 2.2 Challenges related to sustainable growth, cohesion, resilience and policies for the next generation Italy entered the pandemic with socio-economic vulnerabilities, which could further aggravate once emergency measures are phased out. Productivity and economic growth were sluggish, constraining the reduction of the high government debt-to-GDP ratio. High structural unemployment and low labour market participation, notably of women and youth, also contribute to constrain growth potential, while social and territorial disparities persist. The financial sector remains subject to some vulnerabilities and inefficiencies.

Productivity growth has stagnated in the last two decades, notably due to a negative contribution of the service sector, small firms and some Southern regions. While labour productivity in manufacturing increased (although less than in peer countries), the rising importance of the service sector was accompanied by poor productivity performance. Moreover, productivity growth was concentrated among bigger exporting firms, while the large share of small enterprises hampers higher productivity levels and growth. Weak productivity growth is also linked to low private and public investment. Investment did not fully catch up yet with the levels preceding the previous crisis and remains below peer countries. Public investment declined mainly at the local level over the last years and particularly in Southern regions. Moreover, the composition of investment is skewed towards manufacturing, while remaining relatively limited for professional services and innovation, especially in the South. Italy is among the lagging countries in terms of intangible investment among EU peers. Furthermore, the largest gap to its peers is in R&D intensity. This discrepancy can be explained by the structure of the economy, namely by the considerable weight of sectors with low intangible intensities such as tourism. Additionally, the discontinuity of policies to support knowledge transfer and innovation ecosystems has so far hampered the innovation performance. The very high level of government debt and the composition of public spending have constrained public investment and hampered growth-enhancing spending. Government spending remains concentrated towards old-age pensions, while expenditure for R&D and tertiary education remains low. Public investment remains below pre-crisis levels creating an infrastructural gap. The fiscal framework is complex, and responsibilities over revenue and expenditure across levels of government remain asymmetrical, creating problems of incentives and monitoring. The high level of public debt requires a particularly prudent and effective management of public finances, both on the expenditure and on the revenue side, also with a view to improve their composition. A number of structural barriers hold back investment and productivity growth. The business environment is not sufficiently supportive while inefficiencies in the public sector, particularly concerning the weak administrative capacity, persist. There is ample margin to improve the innovation performance and digitisation of the productive system. Weak human capital, especially concerning techno-scientific fields and at management level, as well as skills mismatches remain. The high tax wedge and the uncertainty of the policy framework also contribute to holding back investment. The allocation of capital is not fully efficient, constraining access to finance notably for start-ups and small firms, whose use of non-bank financing remains limited. A transformative and forward-looking research, innovation and diffusion policy is crucial to strengthen Italy’s productivity growth and competitiveness. The business environment needs to become more growth-supportive. The incomplete implementation, uncertainty and the complexity of the public procurement and concessions framework undermines the ability of administrations to use tenders efficiently, especially at local level, and weighs on planning decisions of private firms, especially SMEs. Late payments by public administrations, including at local level, and long tendering procedures also discourage businesses to participate in public tenders (some 30% of tenders only receive one bid). The framework for local public services (e.g., transport, utilities) does not always guarantee that competitive tenders are prioritised over direct awarding or in-house solutions, resulting in inefficiencies of the services management. Furthermore, the length, complexity and unpredictability of administrative procedures, remaining restrictions to competition and some sectoral overregulation weigh on firms’ productivity and competitiveness, discouraging investments. This is particularly pronounced for business services, regulated professions, retail, collaborative economy, energy and limited authorisations (“concessions”) for the use of public goods. Italy’s public administration remains subject to structural weaknesses in terms of efficiency and effectiveness. The Italian public sector workforce is one of the oldest and less skilled in EU, with about half of the staff set to retire in the next 15 years. Administrative capacity remains weak, especially at local level, and the level of digitisation is low, both concerning internal procedures and the provision of public services. Better strategic planning capacity, monitoring and evaluation mechanisms, and use of evidence-based policymaking instruments would further enhance the quality of public policies. Italy’s public administration has been subject to numerous reforms, whose implementation was however often incomplete and ineffective. Inefficiencies in the justice system continue to weigh on the business environment. Despite recent improvements, the estimated time needed to resolve civil and commercial litigious cases remain among the highest in the EU, with ample room for more efficient management and limiting unfounded appeals. According to the 2020 EU Justice Scoreboard, the disposition time, which provides an estimate of the duration of the proceedings, in Italy is equal to 2 655 days for civil and commercial litigious cases considering all instances (against a EU median of 549 days) and 1 367 days for criminal cases considering all instances (against a EU median of 340 days); as to administrative cases, the disposition time is equal to 1 679 days considering all instances (against a EU median of 469 days) The anti-corruption framework could be further strengthened, especially considering that the low efficiency of criminal justice at appeals level continues hampering an effective fight against corruption. Insolvency proceedings in Italy are comparatively lengthy and costly. The entry into force of a reformed insolvency framework has been postponed to September 2021. Low education outcomes, not sufficient acquisition of skills and regional gap in educational attainment level remain a major growth impediment. Basic skills proficiency is below the EU average, with marked differences between regions and types of school. Skills and educational attainments show a clear North-South gap. Early school leaving is high, particularly for non-EU born pupils. Inadequate digital equipment and infrastructure and limited digital training for teachers and students hamper innovation in education, especially in rural areas. Tertiary educational attainment is low, and the non-academic tertiary sector is underdeveloped. Increasing the attractiveness of higher education, including in science and technology (STEM) disciplines, particularly for women, could help reduce skills mismatches and increase employment. Limited access to managerial and technical skills is also a major issue for Italian SMEs. More affordable quality early childhood education and care and longer school time could help improve learning outcomes as well as women’s labour market participation. Low rates of lifelong learning both in the private and the public sector make it hard to adapt workers’ skills to labour market evolutions, including the green and digital transitions. Italy’s tax system suffers from long-lasting weaknesses in terms of efficiency and growth-friendliness, further exacerbated by tax evasion. The tax wedge on labour remains among the highest in the EU, while other sources of revenue less detrimental to growth are underused. The high level of tax evasion erodes government revenues and increases the administrative burden on compliant firms and citizens, worsening the distortionary impact of the tax system. As concerns other sources of revenues, the use of public concessions for public goods is suboptimal, generating a significant loss of revenues. The property tax base is outdated, eroding government revenues and hampering proportionality. There are numerous tax expenditures, which in some cases provide weak incentives to energy efficiency, discourage work by second earners or imply very high marginal tax rates. The high complexity and the frequent changes of the tax regime increase compliance costs, resulting in a high number of tax litigations and further complexity of the business environment. Although revenues from environmental taxes are above the EU average, their current incentive structure does not promote transitioning to cleaner technologies. Public investments in clean energy technologies have remained at same level during 2010-2018 period, while private investments in the same area have dropped nearly 50% from 2010 to 2016. Pockets of vulnerability remain in the banking sector, while firms’ limited access to non-bank finance leaves them vulnerable to shocks to the banking sector. The resilience of the Italian banking sector has improved compared to the double-dip recession in 2008-13. The average capitalisation has increased and the stock of non-performing-loans (NPLs) has decreased, albeit remaining above the euro-area average. The liquidity and borrower relief measures granted in response to the pandemic have contributed to an expansion in lending, in particular to corporates, compared to 2019 and have mitigated the impact of the economic downturn on asset quality. However, the risks of a rise in NPLs and a further deterioration of banks’ profitability once these support measures will be phased out need to be considered in order to avoid potential cliff edge effects. The sovereign-bank nexus remains present and banks recently increased the holdings of domestic sovereign debt in their portfolios. Access to finance has been a long-standing barrier to firms’ investment, notably for smaller and innovative firms, which often do not have sufficient collateral. In this context, access to non-bank finance needs improvement as private equity and venture capital are below the EU average and financing for start-ups remains also low. Sustainable finance, which could facilitate private investment and act as a catalyst for economic recovery and the transition to a green model of economic growth, is still under-developed.

The labour market continues to face structural challenges that limit the growth potential of the Italian economy. Prior to the pandemic outbreak, the Italian labour market registered one of the lowest employment rates in the EU (63,5% vs EU average 73,1%) and one of the highest unemployment rates (10% vs EU average 6,7%). Joblessness remains widespread, especially among the young, and the participation rate of women, already among the lowest in the EU inter alia due to an insufficient supply of childcare and long-term care services, dropped further in 2020, from 56,5% to 54,7% (from 67,9% to 67,5% for the EU average). The overall impact of the pandemic shock was cushioned by the measures implemented by the government, but it still put a disproportionally large burden on women and young people, whose employment relationships are often less secure, only temporary and more precarious. Nevertheless, an overall comprehensive strategy on women and young people is still missing while additional reforms remain needed. The risk of in-work poverty remains above the EU average (11,8% vs 9,2%). Thus, Italy forgoes a substantial part of its labour force potential and entrenched youth unemployment (or underemployment) prevents many young people from building up necessary skills and improving their employability. Effective active labour market policies (ALMP) could help address these challenges. However, the activation component of the minimum income scheme, which requires beneficiaries to actively take part in programmes of socio-professional reintegration, was temporarily suspended in 2020. Undeclared work remains a serious concern. The shadow economy is estimated at 11,9% of GDP in 2018, accounting for roughly 3,7 million irregular job positions (-1,3% compared to 2017), with especially critical sector conditions in services to persons, agriculture, construction, trade, transport, housing and food services. Bridging the regional divide is set to support productivity and growth. The recovery phase will be key in this respect, as shown by the previous crisis following which the South was still suffering from the largest drop in economic activity and a weaker recovery (Svimez, 2020). The South lags behind economically, as well as in terms of infrastructure and institutional quality. Productivity and innovation are lower in the South. Competitiveness is also considerably worse in Southern regions, including due to weak transport infrastructure. On a positive note, the large recourse to smart working during the pandemic appears to contribute to a (temporary) re-population of Southern regions especially by young people (“South working”). Moreover, the green transition can be an economic opportunity for the South, which has for instance a relatively high share of organically farmed land and renewable energy production). Promoting social cohesion remains a challenge that might face even more difficulties due to the pandemic. Workers with expiring temporary contracts and to a lesser degree the self-employed and job seekers have so far borne the brunt of the crisis. By contrast, the temporary extension of the eligibility and duration of short-time work schemes (Cassa integrazione guadagni – CIG) as well as the imposition of a general and temporary dismissal ban have shielded most other employees, in particular those with permanent contracts, from job losses. Further measures, including social transfers, also helped support household disposable income. The pre-existing tax-benefit system and the emergency policy measures have cushioned about two thirds of the shock on households’ income, with the short-time work schemes absorbing about 29% of the market income shock. However, the impact of the downturn is starting to be felt. In-work poverty was already high before the crisis and it remains marked by large regional differences. The pandemic has put the healthcare system under substantial stress and revealed its vulnerability to shocks. Prior to the COVID-19 pandemic, the Italian healthcare system was performing better than those in many other Member States (e.g. by avoiding premature deaths or hospital admissions for some chronic diseases and low infant mortality). The good performance was achieved despite years of low levels of investments in physical infrastructures and human resources (with health spending below the EU average, but with a relatively high proportion of expenditure for prevention). Moreover, healthcare investment was unevenly distributed across regions, resulting in disparities of accessibility and the quality of health care provision across regions. The outbreak of the COVID-19 pandemic made clear that further action is needed to improve the resilience of the healthcare system to cope with future potential health crises and to respond to the growing needs of an ageing population with high a prevalence of chronic diseases. Moreover, the COVID-19 pandemic disrupted the provision of care services and hampered the access to healthcare, generating a backlog of care activities. Thus, improving healthcare provision, tackling the backlog of care activities, increasing efficiency and reducing the disparities in health care quality across regions and between rural and urban areas are key objectives. 2.3Challenges related to the green and digital transition 2.3.1 Green dimension The recovery and resilience plan should contribute to the green transition and at least 37% of the financial allocation needs to contribute to climate objectives. The measures in the plan shall contribute to achieving the 2050 climate neutrality objective, and the 2030 energy and climate targets, taking into account the Italian national energy and climate plan. They should also contribute to meeting environmental targets for waste, water, pollution control, sustainable mobility, biodiversity protection and restoration, marine and water resources, and support the transition to sustainable food systems as well as to a circular economy as appropriate, while ensuring that nobody is left behind. GHG emissions Italy still has to reduce its GHG emission by 15 percentage points to meet the 2030 climate and energy targets, which might be further revised according to the new climate objectives defined by the green deal. Since 2005, Italy already reduced its GHG emission by 18%, but needs to meet the 33% binding target by 2030. Italy’s National Energy and Climate Plan (NECP) is in line to achieve this target under the Effort Sharing Regulation. The assessment of planned policies and measures in the NECP point to a reduction of 34,6% by 2030, which should be sufficient to meet the target. The green transition in Italy would have received a further boost from rapid phase-out of the fossil fuel subsidies identified in the NECP. On the basis on the detailed available analysis to existing (fossil) energy subsidies, there is scope to devise specific action to be accompanied by measures mitigating the risk of households’ energy poverty. Renewable energy Measures are needed to meet 2030 target on renewable energy. In 2019, Italy registered a 18.2% share of renewable in gross final energy consumption, with a 9% share in transport (against an obligation of 14%), 35% in energy generation (against a projected share of 55%) and 19,7% in heating and cooling (with an average annual increase in line with Member States’ obligation). While the 2020 target (17%) was met already in 2014, the renewable share in Italy has been substantially stagnating in the last few years (it was 18,3% in 2017). To reach the 30% share of renewables in gross final energy consumption by 2030 as stipulated in the NECP, Italy needs to swiftly adopt additional policies and measures, streamline permitting procedures to reduce administrative burden, revamp and repower existing installations. The planned increase penetration of renewables in the electricity and transport sectors represents an important challenge and should thus be supported by adequate policies. Energy efficiency The building sector has a central role in meeting the energy efficiency targets. Italy sets sufficiently ambitious targets for energy efficiency in the NECP (with a contribution to the 2030 target of 125 Mtoe in primary and 103,8 Mtoe in final energy consumption against current 2019 levels of, respectively, 145 Mtoe and 115 Mtoe). The building sector is responsible for more than one third of total energy consumption in Italy. Most of the 14,5 million Italian buildings (ISTAT) were built before criteria for energy savings and corresponding legislation were adopted. In the context of the 2030 building renovation objectives, Italy aims at an annual deep renovation rate of 2,9% in the non-residential sector, excluding hospitals, and to accelerate by 0,7% for the residential sector. Reducing administrative burden attached to national incentives for energy efficiency renovations can make these more accessible and attractive to citizens and SMEs. Italy has notified its long-term renovation strategy, in line with the Energy Performance of Buildings Directive in April 2021. Sustainable transport Investments to decarbonise transport are key to reducing greenhouse gas emissions. Indeed, transport is responsible for over 30% of total GHG emissions by Italy (above the EU average). Decarbonisation of transport is also important to decreasing dependency on fossil fuels and energy import, and improving air quality and human health. Three infringements of EU Directives on air quality are open against Italy, notably in the Po Valley. In 2018, it is estimated there were 920 years of life lost/105 residents from particulate matter (PM2.5) and 183 years of life lost/105 residents from nitrogen dioxide (NO2). Transport accounts for a very large share of CO2, NO2 and particulates emissions due to high road traffic share (over 80 % of trips made by private car and 37 hours lost per driver per year) and inefficient internal combustion engines. Italy is lagging behind in the roll-out of Zero Emission Vehicles (ZEV) and related infrastructure, that needs a substantial boost to keep pace with the NECP ambition (6 M EV before 2030) and lags also in providing adequate cycling infrastructure in cities. Technologically obsolete and very polluting vehicles make up 59% of the public transport fleets (notably buses) in 2018, specifically in Southern Italy, calling for the deployment of cleaner technologies in line with the ambitions of the NECP). New registrations of electric vehicles (EV) are lower than in peer countries (4% EU average, albeit +180% in 2020). The same applies to alternative vehicles recharging and refueling infrastructure; ZEV only represent 0,1% of the total vehicle fleet. If managed more efficiently, ports can play a key role in making Italy a sustainable logistics hub linked via long distance rail connections and using digital cargo clearance. However, the growth of Italian ports has remained sluggish. The South lags behind in “sustainable infrastructure” with an index of 83% of the national average for electrified railways and 21% for multimodal logistic platforms. The quality of regional and suburban railway infrastructure endowment and services is still lagging behind.

Circular economy and water resources Important regional disparities persist in waste management and the circular economy. Italy does not have yet a national strategy for circular economy. Italy performs above the EU average for resource productivity and investment in the circular economy, although regional disparities are significant. Overall, Italy is not considered at risk of missing the EU 2020 targets for reuse/recycling of waste but could face challenges to meet the 2025-30 objectives. However, some regions in the Centre-South display poor management, low separation and an excessive share of landfilling. A national waste programme is under adoption and complementarity needs to be ensured with regional waste plans. National legislation has set a very ambitious target of achieving 60% sorted waste collection by 2030. Insufficient investment is being made in water infrastructure in the South, while scarcity and drought risks continue. The fragmentation of the sector in terms of different actors (i.e. public administration, the regulator ARERA, concessionaires, public-private operators) represents a barrier to investment. A total of 895 agglomerations have been found to be in breach of the EU Urban Waste Water Treatment Directive affecting a population of over 26.7 million people, and fines are currently being paid for 68 of them. The cost to comply with urban wastewater treatment requirements has been estimated by the OECD at some EUR 34 billion until 2030 for Italy as a whole. Italian water consumption per capita is among the highest in the EU. Italy is also one of the EU countries with the highest recourse to irrigation for agricultural purposes. While agriculture accounts for around 50% of water consumption, charges for the use of water in agriculture are very low, especially in the South. This suggests that there is much scope for using price incentives to better align supply and demand. Governance reforms, including for capacity building projects for municipalities, are needed and public-private partnerships need to be strengthened to attract also private investment, especially in Southern regions. There are important investment needs in waste prevention, public reuse, and separate collection as a precursor to quality recycling and recycling capacity. Biodiversity and climate change mitigation require due attention. Italy is particularly vulnerable to climate change, hydrogeological events and seismic activity. Over 7 000 Italian municipalities are at high risks from landslides and flooding (more than 90% of the total) and in terms of the surface area this covers around 50 000 km2 of the national territory, one sixth of the total. Investment in prevention for hydrogeological risks (in line with EU Flood Risk Plans) is needed to reduce emergency expenditures. 10% of the assessments for habitats and 43% of the assessments for species of EU interest indicate a favorable conservation status. And from 2000 to 2020 the population of farmland birds in Italy has decreased by 28,8%. The categories of habitats that show the worst conservation status are freshwater habitats, grasslands and dunes. These data show an urgent need to invest in the restoration of nature in Italy. To contribute to the fight against biodiversity loss and climate change, investments are also needed to increase the quantity and quality of forests, with appropriate biodiversity-friendly afforestation and reforestation and closer-to-nature management practices. Investment in soil decontamination of former industrial sites and other polluted areas remains necessary inter alia to promote biodiversity and the health of the surrounding communities, in line with EU and national legislation. Furthermore, green infrastructure and other nature-based solutions are to be preferred for flood and drought control before ‘traditional’ hard infrastructure. Restoration of healthy ecosystems is a priority for agriculture, which is the main source of pressure and threats on Italian natural habitats. The share of SMEs offering green products or services, investing in equipment linked to clean technologies pollution control is below EU averages. In 2020, among Italian firms that grew their revenues in the past three years, the share of eco-innovative ones is equal to 10% - considerably lower than the EU average of 30%. This is in line with the lower number of sustainable activities performed, such as resource savings or recycling. However, it contradicts the higher than the EU average values related to green patenting. Despite the low eco-innovative attitude, Italian firms may find particularly convenient to patent their activities in green sectors. Attention to environmental sustainability increases with firm’s size, with, for instance 91% of firms with 50 or more employees separating their waste collection. 71% controlling energy use and 56% water use. ”Transizione 4.0“ offers incentives to support the circular economy investments of firms. The table below gives an overview of Italy objectives, targets and contributions under Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action. National targets and contributions Latest available data 2020 2030 Assessment of 2030 ambition level Binding target for greenhouse gas emissions compared to 2005 under the Effort Sharing Regulation (%) -19 (2019) -13 -33 As in ESR National target/contribution for renewable energy: Share of energy from renewable sources in gross final consumption of energy (%) 18,1 (2019) 17 30 Sufficiently ambitious (29% is the result of RES formula) National contribution for energy efficiency: Primary energy consumption (Mtoe) 145 (2019) 158 125,1 sufficient Final energy consumption (Mtoe) 115 (2019) 124 130,8 sufficient Level of electricity interconnectivity (%) 8,8 8 10 n.a. 2.3.2 Digital dimension The recovery and resilience plan should contribute to the digital transition and at least 20% of the financial allocation needs to contribute to digital objectives. The measures in the plan should, inter alia, contribute to the digital transformation of the economic and social sector (including public administration, public services, and the justice and health systems). The objective of the measures in the plan should be to improve not only the competitiveness, but also the resilience, agility and security of companies and public actors, all while ensuring inclusiveness. Improving the digital skills of the population and workforce is a priority for Italy. In the Digital Economy and Society Index (DESI) 2020, in relation to the human capital dimension, Italy ranked last in the EU. The country is faced with significant shortcomings in both basic and advanced digital skills, which are reflected in an increasing digital divide amongst the population and a low capacity to develop and deploy digital technologies. Only 42% of people aged 16-74 years have at least basic digital skills (56% in the EU-27) and only 22% have above basic digital skills (31% in the EU-27). Only 1,3% of Italian graduates are ICT graduates (the lowest in the EU, with the EU-27 average being 3,8%), while evidence indicates significant skill mismatches, especially in areas such as cloud, cybersecurity and artificial intelligence. Some 48% of the workforce does not have at least basic digital skills, which are needed in the large majority of jobs today and, in 2020, only 15% of Italian enterprises offered training to their employees to develop/upgrade their ICT skills, a figure that decreased by almost 4 percentage points compared to 2019. In order to address the above shortcomings, the education of advanced digital skills at post-graduate level is to be improved. Although Italy holds an above average proportion of postgraduate programmes including, among the others, content on artificial intelligence, cybersecurity or data science, the proportion of university places teaching advanced technologies offered to students is still below the EU average. In terms of policy response, Italy launched its first Digital Skills Strategy in July 2020, completed with an Operational Plan in December 2020. The Plan set some ambitious targets for 2025, such as such: reaching 70% of the population with at least basic digital skills and closing the gender gap, doubling the share of population with advanced digital skills and increasing by 50% in the share of SMEs using ICT specialists. The launch of the strategy and its accompanying plan, building on the pre-existing project “Repubblica Digitale” gave impetus to a number of initiatives for the training, reskilling and upskilling of citizens, students and workers during 2020, by also leveraging on partnerships between schools, universities, technology transfer centers and industry. Measures for the development of digital skills are also part of ‘Transition 4.0’ (Transizione 4.0), which includes the tax credit for ‘Training 4.0’. Despite being one of the largest EU economies and accounting for a significant share of the EU ICT sector, the level of digitisation of businesses remains low. The Italian economy is mostly characterized by small and micro-enterprises, with a significant presence of family-owned businesses, with low levels of digital intensity and of digital knowledge. In DESI 2020, Italy ranked 22nd in the EU (out of 28 countries) in the EU on the Integration of digital technology by businesses. Latest data shows that Italy is catching up when it comes to the digitisation of its enterprises, but the overall picture is scattered. Italy is above the EU average as regards the share of SMEs with at least a basic level of digital intensity (69% versus 60% in the EU-27) and the percentage of businesses using cloud services is relatively high (38% in Italy, 26% in the EU-27). However, gaps remain in other areas, such as the use of big data (9% in Italy versus 14% in the EU-27), and of Artificial Intelligence (18% in Italy versus 25% in the EU-27), while the gap between Italy and the EU average is widening regarding e-commerce (only 11% of Italian SMEs sell online, well below the EU-27 average of 17%). The National Plan ‘Transition 4.0’ has been one of the main instruments used to support the digital transformation of Italian enterprises and has substantially evolved over the years. Tax deductions for investment in capital goods (i.e., super- and hyper-depreciation) have proved to be effective in stimulating digital uptake. However, these measures were mainly used by medium and large enterprises, with an unbalanced uptake in the North of Italy. Among other initiatives, in order to further support SMEs towards the digital transition, the government in collaboration with stakeholders has created and gradually expanded a network composed of Competence Centres, Digital Innovation Hubs and “Punti Impresa Digitale”. A recently launched portal (Atlante 4.0) provides a mapping of the centres that, across the country, provide technology transfer and digital transformation services. Moreover, several initiatives of the Digital Skills Strategy leverage on the network of technology transfer centers to support training. In the DESI 2020, Italy ranked 19th in in the EU on Digital public services. During 2019 and 2020, Italy accelerated the implementation of key e-government projects and made good progress in the offer of digital public services, but the level of online interaction between public authorities and the general public remained very low: in 2020, only 36% of Italian internet users used e-government services (64% in the EU-27). In July 2020, the government adopted the ‘Three-Year Plan for Information Technology in the Public Administration 2020 – 2022’, an update of two previous plans. The plan addresses a range of areas: from the reinforcement of the digital infrastructure, to data interoperability, enabling platforms and cybersecurity. The “Simplification Decree” issued in July 2020 further promoted digitisation process in the public administrations, by mandating the adoption of the main eGovernment platforms by all public administrations by the 1st quarter 2021: this includes the eIDAS-compliant e-identity system as the only access method to eGovernment services, PagoPA for all payments to public sector, and the implementation of mobile version of eGovernment services on the app “IO”. Although the implementation of the Simplification Decree is still ongoing, the take-up of digital identity (SPID) and app “IO” by users has greatly increased during 2020 (to 20 million and 11 million respectively in April 2021), also thanks to their mandatory use in some governmental financial incentives schemes. As an accompanying measure, a “Fund for Innovation and Digitalization” was established to support municipalities and local authorities in creating digital services. Italy should close the gaps in terms of coverage and take up of gigabit connectivity, which undermines digital inclusion and the development of a competitive digital business ecosystem. In DESI 2020, Italy ranked 17th among the EU-28 countries. The pace of fibre deployment decreased between 2019 and 2020. Coverage in fixed Very High-Capacity Networks (VHCNs) was relatively low in July 2020 and below the EU average (with only 34% of households covered, against an EU average of 59%). Broadband take-up is well below the EU average with limited progress in the last years. While Italy performs well above the EU average in terms of 5G readiness (60% vs EU average of 39%), only 8% of populated areas are covered by 5G mobile networks (against 14% at EU level). The Ultra-Broadband (BUL) Plan has been the key instrument to boost connectivity in the country. Phase I is focused on the coverage of Next Generation Access (NGA) white areas; despite an acceleration in 2020, delays - due also to lengthy procedures for obtaining permits for civil works and to the payment of an unusually high first connection fee - still affect the full achievement of the objectives of the Plan. Phase II includes network deployment measures in NGA grey areas, support for demand (in the form of vouchers for families and businesses to acquire new connecting technologies) and Gigabit connectivity to socio-economic drivers (“school plan”). Moreover, in 2020, the “Simplification law” introduced, among others, measures to simplify 5G deployment. Overall, it is important to accelerate the deployment of VHCNs, to address bottlenecks and simplify administrative burden, while strategically associating the National Broadband Plan to the development of over-the-top data-rich services and to industrial recovery, through high-capacity digital connectivity for industrial districts and other socio-economic drivers. It is also essential to support high-capacity digital connectivity and take-up in white areas where, despite the EU 2020 broadband objectives and significant public investment, unsolved last-mile connectivity issues still prevent many residents and scattered houses from having high-capacity digital connectivity. Fiber To The Premises (FTTP) only covers 8,4% of households in rural areas (against an average of 25% at EU level) . Regarding advanced digital technologies, Italy is a key player in the race to EU technological sovereignty and can count on a number of resources and initiatives that should be better exploited and leveraged. The country is one of the eight hosting sites of a pre-exascale class computer funded by the EuroHPC Joint Undertaking. Italy is involved in a number of European initiatives in areas such as cloud and microelectronics and, in 2019, the government launched two new national strategies, one on Artificial Intelligence and another on Blockchain. Italy should build on these strengths to scale-up knowledge-intensive industries, create jobs and raise its competitiveness, also with a view to promote Europe’s open strategic autonomy in key sectors. The highest shares of high-growth enterprises are indeed found in knowledge-intensive and medium-high tech manufacturing industries. The strategy ‘Italy 2025’, launched in December 2019, also announced a number of initiatives to support the development and uptake of key technologies, such as Artificial Intelligence, robotics and cybersecurity. The strategy also indicates environmental sustainability of ICT solutions as one of the guiding principles. The national plan for industry 4.0 offers a range of support instruments to address the increasing digitalisation of the energy sector. Note: EU aggregate corresponds to EU28, based on 2020 DESI report.

Box 2.3.3: Progress towards the Sustainable Development Goals The objectives of the Sustainable Development Goals are integrated in the European Semester since the 2020 cycle. This provides a strong commitment towards sustainability in coordination of economic and employment policies in the EU. In that respect, this section outlines Italy’s performance with respect to SDGs with particular relevance for the four dimensions underpinning the 2021 Annual Sustainable Growth Strategy and of relevance to the recovery and resilience plans (green transition, fairness, digital transition and productivity, and macroeconomic stability), indicating possible areas where investments and reforms in line with the objectives of the Facility could further accelerate the progress on the SDGs. Italy is making progress in achieving the United Nations’ Sustainable Development goals. Over the past five years, progress has been relevant in most of the UN Sustainable Development Goals (SDGs). In this context, Italy’s initiative on well-being indicators (based on the well-being evaluation scale -WES) and on SDGs at national and regional level is a European best practice supported by civil society organisations (Italian Alliance for Sustainable Development – ASVIS). Sustainable Development Goals and the four dimensions underpinning the Annual Sustainable Growth Strategy. Green Transition In recent years, Italy achieved positive results on many of the SDGs related to environmental sustainability. Significant progress was registered in the SDG 13 (Climate Action), particularly concerning Climate Mitigation. Italy also performed well on the SGD 7 (Affordable and Clean energy), in particular under the domain of Energy consumption. Progress has been achieved towards the SDG 12 (Responsible consumption and Production) where Italy scores better than the EU27 average in most of the indicators. Finally, between 2013 and 2018, Italy improved its performance also on SDG 6 (clean water and sanitation) and SDG 11 (sustainable cities and communities). The Plan includes a number of measures that are expected to support Italy in further speeding up the achievement of the green transition related SDGs. To this end, the components related to the green revolution, ecological transition, and sustainable transport are particularly relevant as well as the measures on energy efficiency of private and public building included in other components of the Plan. Fairness Italy has made limited progress towards SDG1 (no poverty) with some indexes worsening between 2013 and 2018. In 2018, Italy scored worse than the EU average in all the indicators concerning multidimensional poverty. Italy underperforms in the dimensions related to SDG 4 (Quality Education) with the educational outcomes achieved by Italian students being below the EU average, and subject to territorial disparities. Italy underperforms also in the dimensions related to SDG 5 (gender equality), scoring worse than the EU average on gender gap in education and employment whereas the gap in leadership position scores better than the EU average. While SDG 10 (Reduce Inequality) presents a mix picture, some progress was made in achieving SDG 3 (good health and well-being) over the last years, with the country scoring better than the EU average on “healthy life”, “life expectancy at birth” and “share of people with good or very good perceived health”. The Plan’s components related to employment policies, social and territorial cohesion, social institutions and the health system are expected to significantly contribute in improving Italy’s performance concerning the SDGs related to fairness. These components are complemented by targeted measures on education and skills focusing on women and gender equality. Digital transition and productivity Italy is underperforming in all targets related to the digital transition and productivity dimension that fall under SDG 8 (decent work and economic growth) and SDG 9 (industry, innovation and infrastructure). Despite some improvements observed since 2013, the investment share of GDP as well as the gross domestic expenditure in R&D remain well below the EU averages. Similarly, Italy slightly increased the share of personnel employed in R&D over the same period, but it is still lagging behind in comparison with other European peers. The Plan is expected to largely contribute to supporting Italy to speed up progress concerning the digital transition and productivity. Particularly, measures to boost the digitalisation of infrastructure and services are present in almost every component of the plan. Significant investments are envisaged to digitalise public administration, the justice and education systems, as well as the touristic and cultural sector. Measures are also envisaged to boost productivity, particularly under the components on the digitalisation and competitiveness of the productive system and on research and innovation. Macroeconomic stability

Italy’s performance under SDG 8 (decent work and economic growth) remains below the EU average. The employment rate remains lower than the EU average and Italy is losing ground on real GDP per capita. The investment share of GDP is still far from the EU average, although some improvements have been recorded in recent years. Concerning SDG 17 (Partnerships for the goals), Italy’s public debt remains an important source of vulnerability for the economy. In addition, the already high public debt stock has significantly increased to mitigate the impact of the COVID-19 pandemic. With regards to SDG 16 (peace, justice and strong institutions), Italy made progress towards ensuring peace and personal security. The current level for the perceived independence of the judiciary remains below the EU average but with a positive trend since 2013. A number of structural horizontal reforms included in the plan are expected to significantly contribute to improve Italy’s performance concerning macroeconomic stability SDGs. The reform of the public administration, the justice system as well as the measures against tax evasion, undeclared work and employment policies reforms are particularly relevant to this end. 3.Objectives, structure and governance of the plan 3.1.Overall strategy of the plan The Italian Plan is expected to address a significant subset of Italy’s structural challenges focusing on three horizontal priorities: digitalisation and innovation, ecological transition and social inclusion. The investments and reforms included in the Plan aim at reducing the Italian digital and innovation gap both among firms and in the public administration so as to enhance productivity, competitiveness and the capacity to adapt to changes. The measures related to the ecological transition are also aimed at enhancing competitiveness, as well as at creating new productive activities and stable jobs, while minimizing the environmental footprint of production. Finally, the measures related to social inclusion aim at reducing territorial, gender and generational divides so as to reduce the inequalities worsened by the pandemic and ultimately support economic growth. The Plan includes 16 components (see Table 3.1) structured around 6 areas of interventions, so-called “Missions”, covering all seven European flagships. A chapter of the Plan is dedicated to horizontal and enabling reforms with the aim of improving the effectiveness of public administration, including for the absorption of the Recovery and Resilience Facility resources, and fostering the business environment. This chapter includes measures improving the management of public employment, reducing red tape and strengthening administrative capacity. A reform of the justice system is also included to reduce the length of civil and criminal proceedings, improve the efficiency of the justice system and reduce the backlog of pending cases. The Plan includes measures to improve regulations in certain specific sectors and remove a number of barriers to competition. More specifically, substantial reforms are envisaged to simplify the public procurement framework, reduce public administration’s late payments, prioritise competitive processes to award local public service contracts and limit authorisations (concessions) over alternative awarding solutions. Some reforms have been included to support the sustainability of public finances, namely by improving the tax administration and enhancing the efficiency of public expenditure. Sectoral reforms are also included, such as the plan to combat undeclared work and to strengthen active labour market policies or the reforms pertaining to the education system. Mission 1 (digitalisation, innovation, competitiveness, culture and tourism) is built around three components related to public administration, innovation, competitiveness and culture and tourism. Component M1C1 includes a balanced mix of reforms and investments to enhance the administrative capacity of the Italian public administrations at central and local levels, both in terms of human capital (selection, competences, and careers) and in terms of simplification of administrative procedures and digitalization. Component M1C2 consists of different types of instruments to support the digital transition and the innovation of the production system. In this respect, Transition 4.0 is a large measure envisaging tax incentives for investment in 4.0 technologies, research, development and innovation as well as training in digital skills. Component M1C2 also envisages a significant investment in digital infrastructure for the deployment of ultra-fast broadband, 5G and satellite connections. This component also includes financial support to promote the development of firms (including SMEs) operating in strategic value chains, and to increase the competitiveness of companies, for instance by supporting internationalisation processes. In combination with these measures, the component supports the development of the strategic value chain of microelectronics by investing in Silicon Carbide substrates, which is a necessary input for the manufacturing of semiconductors. Finally, the component includes a reform of the industrial property system to foster its potential and provides for financial support of industrial property-related projects of companies and research bodies. Component M1C3 includes measures to promote the creative and cultural sector and increase the competitiveness and resilience of the tourism ecosystem, including by enhancing the digital and green transition. Mission 2 (green revolution and ecological transition) includes interventions aimed at promoting the circular economy, renewable energy, sustainable mobility, hydrogen, energy efficiency of private and public buildings; and at tackling hydrogeological risks, and water and waste management. These initiatives are key to support the swift implementation of the Italian climate, renewables and energy efficiency objectives as enshrined in the National Energy and Climate Plan. Component M2C1 is a wide-ranging component, which includes an ambitious and welcome set of interventions that concern waste management, the circular economy in municipalities, as well as support for the competitiveness of the agri-food ecosystem, with the ambition of reducing GHG emissions, developing precision farming and strengthening the bio-economy. Component M2C1 also includes investments in green communities, small non-interconnected maritime islands, which aim at a significant improvement in energy efficiency and environmental sustainability. Component M2C2 envisages investments in renewables, hydrogen and the mobility ecosystem, including significant investments in production chains of the key sectors of the ecological transition (photovoltaic, batteries for the transport sector and for the electricity sector, buses supply chain and hydrogen), aiming at developing industrial and knowledge excellence in these fast-growth industries. Ultimately, these interventions promote Europe’s open strategic autonomy in line with the EU Industrial Strategy. Important investments in the renewal of the local public transport current fleet by clean vehicles and on the development of urban transport modes (e.g. metros, cycles lanes, tramways, etc.) are also envisaged under this component. Component M2C3 has the objective to increase the energy efficiency of both private and some public buildings (e.g. schools, justice), one of the best levers for reducing emissions in a country with more than 60% of the building stock over 45 years old, both in public and in private buildings. Component M2C4 sets out actions to improve the management of water resources and to make the country more resilient to climate change. These measures include a set of reforms in the water sector, the mitigation of hydrogeological and seismic risks, the preservation of green areas and biodiversity, the elimination of water and soil pollution in line with the EU zero pollution ambition, and the sustainable management of water resources. The component also includes completing the national program on air pollution control. Mission 3 (infrastructures for sustainable mobility) aims to develop the high-speed network and its capacity, to strengthen the regional network and to make Italian ports more competitive and environmentally friendly. The Mission consists of two components. Component M3C1 aims at developing the Italian rail system by completing the main high-speed and high-capacity rail lines both in the North and the South of the country, completing the TEN-T Core Network Corridors, integrating them with the regional rail network, enhancing the safety and efficiency of the entire rail network and strengthening the connection of key metropolitan nodes, including the modernisation of a number of rail stations. A very important element of the deployment of 3 600 km of the European Rail Traffic Management System (ERTMS) to ensure full interoperability with the other systems in the EU in line with the ERTMS deployment map. The main objective is to support modal shift from road and air to rail, increasing rail capacity and connectivity and improving the quality of service along key national and regional connections, including by strengthening cross-border connections. Component M3C2 sets a number of reforms to make intermodality and integrated logistics more competitive and simplify the implementation of projects in Italian ports through the updating of port planning and the competitive allocation of concessions. It provides for some investments to make ports more environmentally friendly and resilient to climate change and to support the modernisation and digitalisation of the logistics system. This component also envisages actions for the digitalisation of the air traffic management system and the competitive allocation of concessions. Mission 4 (education and research) aims at the achievement of a knowledge-intensive, competitive and resilient economy. In line with the European Semester, the plan focuses on the continuum between education and research capacities. Component M4C1 includes a comprehensive set of actions, including a reform agenda that concerns the whole education cycle, from early education to higher education, including the teaching profession. It also envisages investments for the upskilling of school staff, upgrading of educational infrastructures and measures to bring PhD skills closer to concrete needs of firms and institutions. Component M4C2 provides support to the public research system, researcher’s skills and mobility, as well as business-academia cooperation at national and EU level and research infrastructures. It is built on three main pillars: (i) improved science base; (ii) strong business-science links (knowledge and technology transfers); (iii) support for R&I ecosystems and business innovation (notably innovative SMEs, start-ups and scale-ups). The proposed reforms concern a) the move to a more systemic approach to R&D activities, through a new simplified model aimed at generating a significant impact through avoiding dispersion and fragmentation of priorities; b) the legislation to increase mobility of high-profile figures (i.e. researchers and managers) among Universities, Research infrastructures and companies; c) the simplification of funds management; d) the career path of non-tenure researchers. Mission 5 (inclusion and cohesion) aims at strengthening employment, social and territorial cohesion. This mission is built around three components. Component M5C1 centers on ALMPs, strengthening of public employment services, upskilling and reskilling initiatives. The envisaged actions mainly focus on gender equality (women’s enterprises and the gender equality certification system) and on young people, (the dual apprenticeship system and the universal civil service). A reform to tackle undeclared work is also outlined. Component M5C2 is aimed at social inclusion with actions targeted towards vulnerable and disadvantaged groups, such as people with disabilities and or the elderly. It addresses major social vulnerabilities in terms of material poverty and housing deprivation, and it acknowledges the importance of urban regeneration and sport to foster social inclusion and integration. Component M5C3 includes interventions for the resilience of internal, peripheral and mountain areas, through the strengthening of Inner Areas and projects for the development of the South, including investment for tackling education poverty, the enhancement of assets confiscated from the organised crime, reform and infrastructural investment in Special Economic Zones. Mission 6 (health) aims at strengthening proximity services and digitalizing the national healthcare system. The aim of measures included in this Mission is to strengthen the response capacity of Italy’s National Health Service, with a view to responding to the country’s demographic and epidemiological trends driving increasing demand for healthcare in an ageing population and to improve therapeutic and technological innovation. A significant amount of resources is allocated to improve infrastructure and technology endowments, promote research and innovation, and develop the technical, professional, digital and managerial skills of the health care staff. This mission is built around two components. Component M6C1 aims at improving the governance of the National Health System and enhancing the access to and support provision of integrated and patient-centered healthcare and continuity of care at territorial level, close to citizens. Component M6C2 focuses on investments in the digitalization of the Health Care Systems (measures to enhance the Electronic Health Record and modernisation of the e-health systems will improve efficiencies in the health sector) and the envisaged reform focuses on the reorganization of the network of Scientific Hospitalization and Care Institutes (IRCCS) by updating the rules in national regulations to review the legal regime of the IRCCS. The investments concern the development, strengthening and modernization of the technological and physical infrastructure of the national healthcare service and the research sector.

Table 3.1 of components (grouped by mission) and associated costs Mission Component Costs (EUR million) Mission 1 (digitalisation, innovation, competitiveness, culture and tourism) M1C1. Digitalisation, innovation and security in the PA 9 722 M1C2. Digitalisation, innovation and competitiveness in the production system 23 895 M1C3. Tourism and culture 4.0 6 675 Mission 2 (green revolution and ecological transition) M2C1. Circular economy and sustainable agriculture 5 265 M2C2. Renewable energy, hydrogen, grid and sustainable mobility 23 778 M2C3. Energy efficiency and renovation of buildings 15 362 M2C4. Protection of land and water resources 15 054 Mission 3 (infrastructures for sustainable mobility M3C1. Investments in the rail network 24 767 M3C2. Intermodality and integrated logistics 630 Mission 4 (education and research) M4C1. Strengthening the provision of education services:from crèches to universities 19 436 M4C2. From research to business 11 440 Mission 5 (inclusion and cohesion) M5C1. Employment policies 6 660 M5C2. Social infrastructure, households, the community and the third sector 11 216 M5C3. Special interventions for territorial cohesion 1 975 Mission 6 (health) M6C1. Local networks, facilities and telemedicine for local health care 7 000 M6C2. Innovation, research and digitalisation of the national health service 8 626 Total 191 499 3.2.Implementation aspects of the plan The Recovery and Resilience Plan provides clear explanation of how it fits within the goals, priorities and policy and reform recommendations of other national broad plans. The Recovery and Resilience Plan is part of a broader development strategy, which is made up of an integrated set of funding sources and policy instruments. For instance, Italy has decided to set up a dedicated budget fund, with a total budget of around EUR 31 billion, to finance specific actions complementing and supplementing the Plan. Through the Additional National Fund, the State supplements the ceiling of resources available to pursue the priorities and objectives of the Plan, taking into account specific parliamentary resolutions. The Recovery and Resilience Plan is linked to the National Energy and Climate Plan, which includes reforms and investments that will facilitate reaching climate and energy targets for 2030 and paving the path towards climate neutrality by 2050. Notably, the “Green Transition” pillar of the Plan supports the transition towards a low-carbon energy system, with increased participation of Renewable Energy Sources in energy consumption, improved energy efficiency of the domestic building stock, and a “greener” and more sustainable transport system. The Plan is consistent with the National Transport Strategic Plan, the Integrated National Transport System and in line with the European Flagship ‘Power Up’ and ‘Recharge and Refuel’, as it acknowledges the importance of developing modern, sustainable, accessible and climate change resilient transport infrastructures. It acknowledges the enhancement of resilience against threats and risks of any kind as a crucial element of economic and societal development and progress. As a result, it incorporates the strategic guidelines, objectives and detailed targets to promote Energy Transition and Sustainable Mobility. The Plan is broadly aligned with the objectives and priorities presented in the draft National and Territorial Just Transition Plan. The “Green Transition” pillar includes investments to improve waste management and reforming the circular economy model. Reforms on waste management and circular economy, if well implemented and accompanied by the strengthening of local capacities for investment, could have a substantial contribution to cohesion and convergence as they aim at establishing national planning tools that would bridge the gap between different regions and improve the national average in achieving national and EU goals for the sector. The reforms and investments in the Plan address the green transition needs, also providing a much-needed boost to innovative elements of the transition, such as hydrogen, offshore renewables, and storage. Synergies with the Just Transition Plan are only broadly explored in the Plan for the case of hydrogen production. Other significant measures well aligned with EU transition’s priorities include: improvement of the agri-food chain sustainability, the creation of green communities, the increase in the share of energy produced by Renewable Energy Sources (RES), the improved performance of the electricity grid, the promotion of alternative fuels and smart mobility, and encouragement of reduction of polluting modes of transport. These actions are expected to create new jobs for the local workforce, as well as a range of novel growth opportunities. The Recovery and Resilience Plan is also expected to operate in consistency, complementarity, and cooperation with the new Italian Partnership Agreement for the 2021-2027 of the European Structural and Investment Funds, and its operational programs. The Plan is expected to be consistent with the objectives and priorities of the new Partnership Agreement, which is still under negotiation with the Italian authorities. Synergies among different instruments are expected to avoid a duplication of effort and lead to a simplification of planning, management and implementation of EU support in Italy. As envisaged under Decree Law of 31 May 2021 n.77, central administrations responsible for the implementation of measures of the Recovery and Resilience Plan can provide support on monitoring and coordination of national and EU programmes, including European Structural and Investment Funds that are implemented mainly through regional programs. Along with the Common Agricultural Policy, Horizon and Connecting European Facility, the three instruments contribute to the bulk of investment funds to be deployed in the Italian economy in the following years. The missions on the ‘Green Revolution and Ecological Transition’, ‘Digitalisation, Innovation of the Public Administration and Business Competitiveness’, and ‘Inclusion and Cohesion’ comprise investments and reforms which contribute directly and indirectly to job creation and to enhancing youth employment. Reforms and investments included in the “employment policy” component, aim at increasing long-term employment, employability and labour productivity through labour market reforms, modernising active labour market policies (including measures targeted to the young unemployed individuals and women), strengthening vocational training, increasing up/re-skilling services, and building capacity for the Public Employment Service. These reforms and investments are related to the goals and priorities of the National Youth Guarantee Implementation Plan, and complement its activities, while they are expected to operate as complements in mitigating the employment and social impact of the COVID-19 pandemic. Overall, the plan is consistent with the main challenges and priorities identified in Draft Council Recommendation on economic policy of the euro area. The Italian NRRP addresses EAR 1 by strengthening the coverage, adequacy, and sustainability of the health system. A number of measures are envisaged to reinforce local health care facilities, fostering the digital transition throughout the health system and use health data to assess the quality of care and support health care decisions and planning for improving the governance of the healthcare system. The Italian NRRP also envisages a set of structural reforms to improve the business environment by simplifying the public procurement system, reforming local public service, and removing barriers to competition. These actions, combined with the efforts to revise public expenditure, would contribute to increase EU funds absorption and improve public financial management, in line with EAR 1. The Italian plan would also address EAR 2 with significant measures that aim at enhancing the green transformations of the Italian economy, by improving energy efficiency and building renovation, promoting renewables and hydrogen production as well as fostering circular economy and better agricultural practices. These measures are also expected to contribute to the achievement of the European Green Deal and to promote the Europe’s economic interests (EAR5). Moreover, a number of measures are also envisaged to contribute to the green and digital transition, to improve labour market participation, particularly for women and young people, and to enhance the quality of the education and training services. A relevant set of reforms and investments would address EAR 3 by increasing the effectiveness of the public administration, the efficiency of the justice system and the resilience of the healthcare system. Moreover, concerning the business environment, the Plan includes measures to remove barriers to competition, improve regulation in certain sectors and streamline the public procurement code. The Plan also includes measures to reinforce the insolvency framework, potentially positively impacting the banking sector balanced sheets (EAR 3 and EAR 4). These measures are expected to contribute to mitigate the effects of the crisis, preventing the accumulation of non-performing loans on bank balance sheets. This is turn will allow banks to continue providing credit to the economy and supporting economic growth. A multi-level governance is envisaged for the implementation and the monitoring of the Plan. This includes in particular: at political level, a steering committee established at the Presidency of the Council of Ministers; at social dialogue level, a consulting body involving representatives of regional and local authorities, social partners and relevant stakeholders; at technical level, notably a central coordination and monitoring structure established at the Ministry of Economy and Finance and a technical secretariat established at the Presidency of the Council of Ministers to support the activities of the steering committee and the consulting body. In addition, technical coordination structures will be identified at the level of central administrations responsible for the measures under their remit. The strengthening of administrative capacity, including through the provision of technical support to administrations and the temporary recruitment of experts, and the simplification of administrative procedures are envisaged with the aim to ensure a timely and effective implementation and monitoring of the plan. The model also provides for the establishment of an independent Audit Body for the implementation of internal control systems. The competences and mandates of the relevant bodies, the simplification of administrative procedures and the strengthening of administrative capacity have been defined in two legal acts adopted by the Italian government (Decree Law of 31 May 2021, n. 77 and Decree Law of 9 June 2021, n. 80). In addition, technical support may be requested under the Technical Support Instrument to assist Member States in the implementation of their plan. With regard to gender equality and equal opportunities for all, the plan has a dual approach of responding to the consequences of the pandemic and addressing structural factors leading to inequalities. The Plan describes how the measures are expected to contribute to overcoming the national challenges identified in terms of gender equality but also in terms of equal opportunities for some groups. This is in particular the case for younger persons, but it also concerns other groups in situation of vulnerability, such as the older people and persons with disabilities. The plan aims at investing in nurseries, preschool and early childhood education and care services to facilitate labour market participation of women. To gear the implementation of the Plan towards its equality objectives, the Italian authorities have introduced anticipating mechanisms, such as equality-driven criteria in calls for tenders and made the funding of projects conditional on the recruitment of young people and women. The development of the Plan included the consultation of a variety of stakeholders, which are set to be involved also in the implementation phase. The Plan went through a process of consultation and interaction with a variety of stakeholders, including regional and local authorities, civil society organizations, social partners and academics and policy experts. Following the opinion of the Italian Parliament on the strategic guidelines proposed by the government for the drafting of the Plan, a first version was approved by the Council of Ministers on 12 January 2021. After the change of government in February 2021, the examination of the draft plan and the consultations with relevant stakeholders continued. The Chamber of Deputies and the Senate held a series of hearings involving a variety of stakeholders such as regional and local authorities, social partners, civil society organisations and institutional bodies and approved ad hoc reports thereon, together with resolutions steering the finalisation of the plan on that basis. Furthermore, the government itself held a dialogue with regional and local authorities within the framework of the State-Regions Conference. As a result of this process, the revised Plan was presented to Parliament, which acknowledged that the government took into account the indications provided by the Chambers and endorsed the transmission to the Commission. With regard to the consultation process in the implementation phase, the Italian Plan envisages to continue regular dialogues with the various administrations involved in the implementation of the plan and with stakeholders. To this effect, the governance model envisages the creation of a consulting body with the participation of economic and social partners and other relevant stakeholders, as defined in a legal act adopted by the government at the end of May 2021 (Decree Law of 31 May 2021, n. 77).

Security self-assessment In accordance with Article 18(4)(g) of the RRF Regulation, the plan includes a security-self assessment for investments related to cloud services and infrastructures for the public administration. As regards connectivity measures, in particular for 5G deployment, Italy confirmed that it will carry out such an assessment at a later stage, taking into account the connectivity scenarios that will result from the mapping and public consultation exercises. In this regard, Italy stated that it will analyse risk scenarios and implement measures to avoid or mitigate any potential security risks. Strategic measures mentioned in the security self-assessment would need to be closely monitored during the implementation of the plan. Cross-border and multi-country projects The Plan includes several cross-border and multi-country projects, notably in the areas of transport, energy and digital. The Plan strengthens Italy’s rail, e-mobility and 5G corridors, reinforcing interconnections with other Member States. By ensuring the deployment of the European Rail Traffic Management System throughout the Italian railway network and removing infrastructure bottlenecks in important nodes, the Plan will enable the development of seamless railway freight connections with other Member States along the TEN-T corridors. The Plan envisages notably to invest in the rail connection between Verona and the Brenner, facilitating railway frei