Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Italyand delivering a Council opinionon the updated Stability Programme of Italy, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: Italy, budget deficit, economic and social cohesion, economic policy, employment policy, innovation, pay, social rights

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 810 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Italy 

and delivering a Council opinion 

on the updated Stability Programme of Italy, 2011-2014 

{SEC(2011) 720 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Italy 

and delivering a Council opinion 

on the updated Stability Programme of Italy, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission’s 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and, on 21 
October  2010,  adopted  a  decision  on  guidelines  for  the  employment  policies  of  the 
Member States3, which together form the ‘integrated guidelines’. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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3 

OJ L 209, 2.8.1997, p. 1. 
OJ C , , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete  measures  to  be  included  in  their  Stability  or  Convergence  Programme 
and National Reform Programmes. 

On 25 March 2011, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  to  be  included  in  their 
Stability or Convergence Programmes and their National Reform Programmes. 

On  6  May  2011,  Italy  submitted  its  2011  Stability  Programme  update  covering  the 
period 2011-2014 and its 2011 National Reform Programme. In order to take account 
of the interlinkages, the two programmes have been assessed at the same time.  

The  Italian  economy  had  been  affected  by  structural  weaknesses  long  before  the 
current  global  economic  and  financial  crisis.  Between  2001  and  2007,  average  real 
GDP  growth  was  around  1%,  i.e.  only  half  the  euro-area  average,  due  mainly  to 
sluggish productivity growth. As these developments affected the whole country, the 
large regional economic disparities were not reduced. Although the economy was not 
marked  by  large  private  sector  internal  imbalances,  it  was  seriously  affected  by  the 
global crisis. A collapse in exports, and subsequently in investment, produced a sharp 
contraction  of  around  7%  in  real  GDP  between  the  second  quarter  of  2008  and  the 
second  quarter  of  2009.  After  having  steadily  fallen  in  the  previous  decade, 
government  gross  debt  increased  to  119%  by  end-2010,  also  reflecting  the  sharp 
decline  in  GDP.  Employment  declined  much  less,  supported  by  a  government-
sponsored  scheme  to  reduce  hours  worked,  and  therefore  the  unemployment  rate 
increased  only  moderately  over  2008-09.  Led  by  exports,  the  economy  started  to 
recover in the second half of 2009, albeit at a slow pace. The labour market situation 
remained  fragile  in  2010,  with  the  unemployment  rate  stabilising  at  around  8.5%  by 
the  end  of  the  year.  Given  the  very  high  government  debt  ratio,  Italy  kept  an 
appropriately  prudent  fiscal  stance  during  the  crisis,  refraining  from  undertaking  a 
large  fiscal  stimulus,  and  thus  keeping  the  government  deficit  below  the  euro-area 
average in 2009-10.  

(8) 

Based  on  the  assessment  of  the  updated  stability  programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underlying  the  programme  is  plausible.  The  programme  plans  to  bring  the 
general government deficit below 3% of the GDP reference value by 2012, based on 
further  expenditure  restraint  and  additional  revenues  from  improved  tax  compliance. 
Following the correction of the excessive deficit, the programme plans to achieve the 
medium-term objective (MTO) of a balanced budgetary position in structural terms by 
the end of the programme period (2014), backed by a commitment to further restrain 
primary  expenditure.  The  programme  projects  the  government  debt  ratio  to  peak  in 

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(9) 

2011 and to decline at an increasing pace thereafter, as the primary surplus increases. 
The planned average annual fiscal effort over the period 2010-2012 is above the 0.5% 
of  GDP  recommended  by  the  Council  under  the  EDP,  and  the  envisaged  pace  of 
adjustment  after  2012  is  well  above  the  provisions  in  the  Stability  and  Growth  Pact. 
Reaching  the  above  deficit  and  debt  outcomes  will  require  a  strict  budgetary 
implementation,  while  more  information  on  the  planned  consolidation  measures  is 
needed to increase the credibility of the programme.  

Given the very high government debt, which stands at around 120% of GDP in 2011, 
the  pursuit  of  a  durable  and  credible  consolidation  and  the  adoption  of  structural 
measures to enhance growth are key priorities for Italy. For the period until 2012, the 
achievement  of  the  targets  for  the  general  government  deficit  set  in  the  stability 
programme, and thus the correction of the excessive deficit by 2012, relies on the full 
implementation of the measures already adopted. Additional action would be required 
if, for instance, revenues from improved tax compliance are lower than budgeted or if 
difficulties arise in achieving the planned restraint in capital expenditure. For 2013-14, 
the  new  three-year  budgetary  framework  prescribes  that  the  concrete  measures 
underpinning  the  consolidation  effort  be  adopted  by  October  2011.  Although  the 
budgetary  framework  has  been  strengthened  considerably  in  recent  years,  the 
introduction  of  binding  expenditure  ceilings  and  further  improvements  to  budgetary 
monitoring  across  all  government  sub-sectors  would  foster  fiscal  discipline  and 
strengthen the credibility of the medium-term budgetary strategy. 

(10)  Despite  relatively  strong  job  creation  in  the  years  preceding  the  crisis,  Italy’s  labour 
market  exhibits  some structural  weaknesses.  Workers  on  open-ended contracts  enjoy 
more  protection  than  workers  with  little  work  tenure  or  on  temporary  contracts, 
especially  when  they  are  officially  registered  as  self-employed,  but  are  actually  in  a 
standard  subordinate  working  relationship.  For  the  former,  labour  legislation  allows 
collective dismissals and dismissals for economic reasons in a very limited number of 
cases. At the same time, not all workers who lose their job receive adequate income 
support,  as  labour  market  segmentation  is  accompanied  by  a  fragmented  system  of 
unemployment benefits. The level of unemployment among workers below 25 years of 
age reached 27.8% in 2010, with an uneven distribution across the country, and youth 
unemployment  in  southern  regions  was  double  that  in  northern  regions.  The  role  of 
apprenticeships and vocational training is not sufficiently emphasised. Although very 
useful  and  necessary,  there  is  currently  no  single  system  of  skill  certification  and 
recognition  of  vocational  and  training  standards  that  is  acknowledged  across  the 
country,  thus  hampering  labour  mobility  and  employment  opportunities  throughout 
Italy. There is room to strengthen the effectiveness of employment services, especially 
in  regions  with  high  unemployment.  Finally,  undeclared  work  remains  an  important 
phenomenon in Italy.  

(11)  Aligning wage developments with productivity growth is important in view of Italy’s 
constant loss of competitiveness since the late 1990s; in this regard, bargaining at firm 
level  can  play  a  significant  role,  which  may  also  help  to  address  regional  labour 
market disparities. The 2009 reform of the bargaining framework introduced, among 
other things, the possibility of opening clauses (i.e. derogations from the sectoral wage 
agreed at national level), but they have not yet been widely used. 

(12)  The employment rate of women lags behind that of men by over 20 percentage points 
across  the  whole  territory.  Barely  one  third  of  women  between  20  and  64  were 

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employed in the southern regions in 2009, due to both relatively lower activity rates 
and higher unemployment. Italy’s relatively high taxation of labour reduces incentives 
to  labour  supply,  especially  for  dependent  spouses,  and  adversely  affects  labour 
demand by firms. To help boost female employment, the National Reform Programme 
looks to the plan adopted in 2010 to coordinate efforts across the layers of government 
to  promote  the  reconciliation  of  work  and  family  life.  The  government  recently 
introduced  a  tax  incentive  for  companies  hiring  disadvantaged  workers,  including 
those who work in a sector or occupation where the gender imbalance is particularly 
pronounced,  in  regions  with  high  unemployment.  The  Programme  also  announces  a 
reform  of  the  taxation  system  with  a  view  to  gradually  shifting  the  tax  burden  from 
labour to consumption, which might help increase employment. 

(13)  Compared  to  EU  standards,  the  cost  of  doing  business  in  Italy  remains  high,  in 
particular  in  southern  regions,  despite  recent  measures  to  improve  the  business 
environment  and  to  enhance  the  performance-orientation  and  accountability  of  the 
public  administration.  There  is  still  ample  scope  for  removing  regulatory  and 
administrative  barriers  in  product  and  services  markets,  particularly  in  professional 
services. An Annual Law on Competition was introduced in 2009 as a legislative tool 
to  enhance  the  competitive  environment  and  consumer  protection,  but  it  has  not  yet 
been  adopted.  Lengthy  contract  enforcement  procedures  are  a  further  weakness  of 
Italy’s business environment. Non-banking channels for financing the growth of firms 
are still comparatively rare in Italy, especially for SMEs. Equity financing and venture 
capital,  in  particular,  continue  to  play  only  a  limited  role,  despite  their  potential  for 
promoting  growth  in  firm  size,  outreach  to  new  global  markets  and  improved 
corporate governance.  

(14)  R&D expenditure posted only a modest increase over the past ten years. Consequently, 
R&D intensity remains low, at around 1.27% of GDP, and well below the EU average 
(1.90%). This gap is mainly due to a low level of industrial research, as business R&D 
intensity stands at 0.64% of GDP compared to an EU-27 average of 1.23%. Venture 
capital intensity also remains very low. A number of measures, including time-limited 
tax breaks for companies investing in research projects carried out by universities or 
public-sector entities, are presented in the NRP, but the target of 1.53% of GDP set for 
R&D intensity is barely above current levels.  

(15) 

(16) 

Italy  is  the  third-largest  beneficiary  of  EU  cohesion  policy  funds,  having  received 
around  8%  of  the  total  EU  cohesion  policy  budget  during  the  period  2007-2013. 
Halfway through the programming period, the share of EU funds actually mobilised is 
only 16.8% and it is much lower in the southern Convergence regions.  

Italy  has  made  a  number  of  commitments  under  the  Euro  Plus  Pact4.  The  National 
Reform  Programme  mentions  some  recently  adopted  measures  and  broadly  outlines 
plans for future reform to address public finance sustainability and financial stability, 
foster  competitiveness  and  increase  employment,  in  line  with  the  principles  of  the 
Euro  Plus  Pact.  A  new  major  commitment  specifically  undertaken  to  respond  to  the 
Pact  is  the  government’s  intention  to  amend  the  Constitution  in  order  to  reinforce 
budgetary discipline. These elements have been assessed and taken into account in the 
recommendations. 

4 

More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 720. 

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(17)  The  Commission  has  assessed  the  Stability  Programme  and  National  Reform 
Programme,  including  the  Euro  Plus  Pact  commitments  for  Italy5.  It  has  taken  into 
account  not  only  their  relevance  for  sustainable  fiscal  and  socio-economic  policy  in 
Italy, but also their conformity with EU rules and guidance, given the need to reinforce 
the overall economic governance of the European Union by providing EU level input 
into  future  national  decisions.  In  this  light,  the  Commission  considers  that  Italy’s 
consolidation  plan  for  2011-14  is  credible  until  2012,  whereas  it  should  be 
underpinned by concrete measures for 2013-14, so as to put the very high government 
debt on a steadily declining path. The NRP outlines a comprehensive set of initiatives 
across  all  dimensions  of  the  Europe  2020  Strategy,  but  further  measures  are 
considered  necessary  in  order  to  address  long-standing  structural  weaknesses 
exacerbated  by  the  crisis.  To  enhance  Italy’s  growth  and  job-creation  potential,  and 
promote  the  catching-up  of  southern  regions,  further  steps  should  be  taken  in  2011-
2012  to  improve  the  functioning  of  the  labour  market,  open  up  services  and  product 
markets to greater competition, improve the business environment, strengthen research 
and innovation policy and promote faster and better use of EU cohesion funds. 

(18) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under Article 126(7) Treaty on the Functioning of the European Union of 2 December 
2009, the Council has examined the 2011 update of the Stability Programme of Italy 
and  its  opinion6  is  reflected  in  particular  in  its  recommendation  under  (1)  set  out 
below. Taking into account the European Council conclusions of 25 March 2011, the 
Council has examined the National Reform Programme of Italy, 

HEREBY RECOMMENDS that Italy should take action within the period 2011-2012 to: 

(1) 

(2) 

(3) 

Implement the planned fiscal consolidation in 2011 and 2012 to ensure correction of 
the excessive deficit. Fully exploit any better-than-expected budgetary developments 
for faster deficit and debt reduction and stand ready to prevent slippages in budgetary 
implementation. Back up the targets for 2013-14 with concrete measures by October 
2011 as provided for in the new multi-annual budgetary framework. Strengthen the 
framework by introducing binding ceilings on expenditure and improving monitoring 
across all government sub-sectors. 

Take measures to combat segmentation in the labour market, by reviewing selected 
aspects  of  employment  protection  legislation  and  reforming  in  a  comprehensive 
manner  the  currently  fragmented  unemployment  benefit  system.  Step  up  efforts  to 
fight  undeclared  work.  In  addition,  take  steps  to  promote  greater  participation  of 
women  in  the  labour  market,  by  increasing  the  availability  of  care  facilities 
throughout the country and providing financial incentives to second earners to take 
up work in a budgetary neutral way.  

Take  steps,  based  on  the  2009  law  reforming  the  collective  bargaining  framework 
and in consultation with the social partners in accordance with national practices, to 
ensure  that  wage  growth  better  reflects  productivity  developments  as  well  as  local 
and firm level conditions.  

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SEC(2011) 720. 
Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

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(4) 

(5) 

(6) 

Introduce measures to open up the services sector to further competition, in particular 
in the field of professional services. Adopt in 2011 the Annual Law on Competition, 
taking  into  account  the  recommendations  presented  by  the  Anti-trust  Authority. 
Reduce the length of contract law enforcement procedures. Take steps to promote the 
access  of  SMEs  to  capital  markets  by  removing  regulatory  obstacles  and  reducing 
costs. 

Improve the framework for private sector investment in research and innovation by 
extending  current  fiscal  incentives,  improving  conditions  for  venture  capital  and 
supporting innovative procurement schemes.  

Take  steps  to  accelerate  growth-enhancing  expenditure  co-financed  by  cohesion 
policy  funds  in  order  to  reduce  the  persistent  disparities  between  regions,  by 
improving  administrative  capacity  and  political  governance.  Respect 
the 
commitments  made  in  the  national  Strategic  Reference  Framework  in  terms  of  the 
amount of resources and quality of expenditure. 

Done at Brussels, 

For the Council 
The President 

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