Macroeconomic imbalances, Italy 2013.
Date: 2013-08-13
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: Italy, debt, economic forecasting, economic indicator, labour market, macroeconomics, public finance

ISSN 1725-3209

EUROPEAN 
ECONOMY

Occasional Papers 138 | April 2013

                        Macroeconomic Imbalances 
Italy 2013

Economic and 
Financial Aﬀ airs

Occasional Papers are written by the Staff of the Directorate-General for Economic and 
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Reproduction is authorised provided the source is acknowledged. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Directorate-General for Economic and Financial Affairs 

Macroeconomic Imbalances –  

Italy 2013 

EUROPEAN ECONOMY 

Occasional Papers 138 

 
 
 
 
 
 
 
 
 
 
 
 
 
ACKNOWLEDGEMENTS 

This  report  was  prepared  in  the  Directorate  General  for  Economic  and  Financial  Affairs  under  the 
direction of Servaas Deroose, deputy director-general, István P. Székely and Anne Bucher, directors. 

The main contributors were István P. Székely, Laura Bardone, Albane Demblans, Michiel Humblet, Vito 
Ernesto Reitano and Roberta Torre. Other contributors were Alfonso Arpaia, Jonas Fischer, Jonas Jensen, 
Laura  Rinaldi  and  Alessandro  Turrini.  Statistical  assistance  was  provided  by  Daniela  Porubska  and 
Barbara Secreto.  

Comments on the report would be gratefully received and should be sent, by mail or e-mail to: 

Laura Bardone 
European Commission 
B-1049 Brussels 
e-mail: Laura.Bardone@ec.europa.eu 

The cut-off date for this report was 21 March 2013. 

ii 

 
 
 
 
 
Results  of  in-depth  reviews  under  Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic imbalances 

ITALY  is  experiencing  macroeconomic  imbalances,  which  require  monitoring  and  decisive  policy  action.  In 
particular, export performance and the underlying loss of competitiveness as well as high public indebtedness in 
an environment of subdued growth deserve continued attention in a broad reform agenda in order to reduce the 
risk  of  adverse  effects  on  the  functioning  of  the  Italian  economy  and  of  the  Economic  and  Monetary  Union, 
notably given the size of the Italian economy. 

More specifically, in a context of elevated risk aversion in financial markets, Italy's high public debt weighs on 
the country's growth prospects through several channels, in particular the high tax burden needed to service the 
debt, funding pressures  for Italian banks and thus  for the  private sector, increased  macroeconomic  uncertainty 
and  a  severely  limited  margin  for  countercyclical  fiscal  policies  and  growth-enhancing  public  expenditure.  In 
order to put the high public debt-to-GDP ratio on a steadily declining path, Italy has been pursuing a strategy of 
sizeable fiscal consolidation, but subdued growth prospects make it challenging – but even more essential – to 
achieve  and  sustain  the  necessary  large  primary  surpluses.  Italy's  declining  external  competitiveness  since  the 
late 1990s is reflected in substantial export market share losses. Stagnant productivity, outpaced by labour cost 
growth,  has  implied  increasing  unit  labour  costs  compared  to  peers,  and  the  sizeable  appreciation  of  Italy's 
nominal effective exchange rate between 2003 and 2009 further undermined cost competitiveness. The high tax 
burden, especially on labour and capital, also negatively affects competitiveness. In addition, 
Italy's  export  performance  continues  to  suffer  from  an  unfavourable  product  specialisation,  and  the  country's 
weak human capital endowment hampers a move towards a technologically more advanced specialisation model. 
Institutional and regulatory barriers, an unfriendly business environment and structural firm-level features hinder 
the  ability  of  many  Italian  companies  to  grow,  limiting  productivity  gains  and  international  expansion.  These 
factors also limit the inflow of foreign direct investment, thus missing out on a further important potential source 
of productivity enhancements. Finally, the double-dip recession has seriously weakened the ability of the Italian 
banking sector to support the adjustment needed to address imbalances. 

Excerpt of country-specific findings on Italy, COM(2013) 199 final, 10.4.2013. 

3 

 
 
 
 
 
 
 
 
Executive Summary and Conclusions 

1. 

Introduction 

2.  Macroeconomic Situation and Potential Imbalances 

2.1.  Macroeconomic scene setter 

2.2. 

Sustainability of external positions 

2.3.  Private and public sector indebtedness 

2.4.  Real estate market developments 

3. 

In-Depth Analysis of Selected Topics 

3.1.  Competitiveness developments in Italy 

3.2.  Wage growth, labour market responsiveness and taxation 

3.3.  A closer look at selected drivers of productivity slowdown 

3.3.1.  The business environment and structural features of firms 

3.3.2.  The specialisation of manufacturing exports 

4. 

Policy Challenges 

References 

LIST OF GRAPHS 

2.1.  Decomposition of Italy's GDP growth 

2.2a.  Decomposition of Italy's external accounts 

2.2b.  Italy's goods trade balance, by category of goods 

2.3. 

Italy's saving, investment and current account 

2.4.  Decomposition of Italy's net international investment position 

2.5.  Decomposition of the changes in Italy's net international investment position 

2.6a.  The external financing of Italy's current account in flow terms, January 2000 - October 2012 

2.6b.  Italian government's and MFIs' foreign liabilities and TARGET 2 balance, cumulative changes 

since Q1 2011 

2.7.  Balance sheet of Italian households by instrument 

2.8.  Decomposition of Italy's debt 

2.9.  Decomposition of the changes in Italy's public debt-to-GDP ratio 

3.1.  Net nominal export growth for selected euro-area contries 

3.2. 

Total factor productivity in Italy and the euro area 

3.3a.  Decomposition of the cumulative change in Italy's ULC-based REER since 1998 

7 

11 

13 

13 

13 

19 

21 

23 

23 

26 

30 

30 

33 

35 

37 

13 

14 

14 

14 

15 

15 

16 

16 

19 

20 

20 

23 

23 

24 

5 

 
 
 
3.3b.  Evolution of relative nominal ULC in selected countries 

3.4.  Decomposition of Italy's net nominal export growth according to geographical and 

sectorial composition 

3.5a.  Nominal compensation per employee in selected countries 

3.5b.  Real compensation per employee in selected countries 

3.6.  Wage drift in Italy 

3.7. 

Implicit tax rates on labour, capital and consumption in the euro area 

3.8.  Recurrent taxation on immovable property in the euro area, 2010 

3.9.  Effective marginal tax rates (EMTR) for investment financed by debt and new equity in the 

euro area, 2011 

3.10.  Electricity prices for industrial consumers in the EU, 2011 

3.11.  The most problematic factors for doing business in Italy 

3.12.  Stocks of inward FDI in selected countries, 2010 

3.13.  Net new firm creation in Italy's manufacturing sector 

3.14.  Manufacturing real value added by technological intensity in selected countries, 2009 

3.15.  Share in total exports by technological intensity, Italy and Germany versus China, 2010 

3.16.  Change in Italy's manufacturing real value added by technological intensisty 

LIST OF BOXES 

2.1. 

The role of the Italian financial sector in Italy's adjustment 

3.1. 

The contribution of education to growth 

24 

24 

27 

27 

27 

28 

29 

30 

30 

30 

32 

33 

33 

34 

34 

17 

25 

6 

 
 
 
 
 
 
EXECUTIVE SUMMARY AND CONCLUSIONS 

In May 2012, the Commission concluded that Italy was experiencing serious macroeconomic imbalances, 
in  particular  related  to  the  high  government  debt  and  declining  external  competitiveness.  In  the  Alert 
Mechanism Report (AMR) published on 28 November 2012, the Commission found it useful, also taking 
into account the above conclusions, to examine  further in  a second in-depth analysis the risks  involved 
and progress in the unwinding of imbalances. To this end, this In-Depth Review (IDR) takes a broad view 
of  the  Italian  economy  in  line  with  the  scope  of  the  surveillance  under  the  Macroeconomic  Imbalance 
Procedure  (MIP).  Italy's  high  government  debt,  as  well  as  the  loss  of  external  competitiveness  and  its 
underlying  sluggish  productivity  performance,  continue  to  be  the  main  macroeconomic  imbalances 
identified.  While  some  important  measures  have  been  adopted  over  the  past  year  to  address  these 
imbalances, their full implementation remains a challenge, and there remains scope for further action in 
many areas. Meanwhile, the prolonged crisis has weakened the ability of Italy's banking sector to support 
the required economic adjustment. 

The most important observations and findings from this in-depth analysis are the following: 

•  Long-standing  structural  weaknesses  have  reduced  Italy's  capacity  to  withstand  and  absorb 
economic  shocks.  Compared  to  other  euro-area  countries,  Italy  entered  the  global  crisis  with  fairly 
strong private sector balance sheets and a sound banking sector. The crisis however has highlighted 
the  country's  long-standing  structural  weaknesses.  Real  GDP  contracted  by  more  than  7%  since  the 
onset  of  the  crisis  in  mid-2008.  According  to  the  Commission  services'  Winter  2013  forecast,  the 
protracted  recession  is  set  to  bottom  out  in  mid-2013,  under  the  assumption  of  a  stabilisation  in 
financial markets and restored investor confidence. However, financial conditions remain fragile and 
growth prospects in the medium term remain subdued.  

•  The high government debt remains a heavy burden for the Italian economy, especially against 
the background of persistently slow growth, and is a  major source of vulnerability. During the 
past two years, the negative feedback loop between high debt and low growth has increased concerns 
among  investors  regarding  the  sustainability  of  Italy's  high  debt.  Indeed,  the  sharp  rise  in  the 
sovereign risk premium in 2011-12, which increased the pressure arising from structural weaknesses, 
translated  into  a  higher  cost  of  capital  for  the  private  sector,  hampering  productive  investment. 
Moreover, in the context of banks' high exposure to government debt and a euro-area financial market 
highly  fragmented  across  national  borders,  funding  problems  in  the  banking  sector  worsened.  In 
response, a sizeable consolidation effort was undertaken by the government, which entailed significant 
short-term  economic  costs  as  the  tax  burden  was  raised  and  spending  was  compressed.  This  has 
decisively  helped  to  reduce  the  borrowing  cost  of  the  government  since  the  second  half  of  2012. 
However,  Italy  remains  vulnerable  to  sudden  changes  in  market  sentiment,  highlighting  the  need  to 
maintain  the  budgetary  improvement  in  structural  terms  in  order  to  put  the  debt  ratio  on  a  steadily 
declining  path.  The  potential  economic  and  financial  spillovers  to  the  rest  of  the  euro  area  remain 
sizeable, should financial market turmoil related to the Italian sovereign debt intensify again. 

•  The  loss  of  external  competitiveness  of  the  Italian  economy  highlights  Italy's  productivity 
growth problem. Persistently slow growth of productivity – in particular total factor productivity – is 
the  key  factor  that  has  been  hampering  overall  economic  growth  for  several  years.  As  stagnant 
productivity  growth  has  not  been  fully  reflected  in  wage  dynamics,  Italy's  cost  competitiveness  has 
deteriorated, as reflected in increasing unit labour costs (ULC) compared to peers. The appreciation of 
Italy's nominal effective exchange rate (NEER) between 2003 and 2009 has also played a role. After 
steadily  deteriorating  since  the  adoption  of  the  euro,  the  current  account  balance  improved 
significantly in 2012, as imports collapsed and export growth was sustained by demand from non-EU 
trade partners. From a saving-investment point of view, the recent improvement in the current account 
is mainly driven by a fall in investment, while the national saving rate has stabilised at the low level 
reached  in  2009.  A  recovery  in  investment  would  entail  a  new  worsening  of  the  current  account 
balance if it is not accompanied by a corresponding rise in national saving.  

7 

 
•  Italy's  export  performance  continues  to  suffer  from  an  unfavourable  product  specialisation 
model and the limited ability of Italian firms to grow. Italy's specialisation model is very similar to 
that of emerging markets such as China, with most of the value added in relatively low-tech traditional 
sectors,  mainly  due  to  Italian  firms'  limited  innovation  capacity.  The  predominance  of  micro-  and 
small  enterprises  highlights  the  difficulties  faced  by  Italian  firms  to  grow  and  become  international 
players,  owing  to  institutional  and  regulatory  barriers,  structural  firm  features  and  an  unfriendly 
business  environment.  These  factors  also  limit  the  inflow  of  foreign  direct  investment  (FDI), 
preventing Italy from taking advantage of the direct and indirect benefits that inward FDI entails, such 
as the transfer of capital and knowledge, increased involvement in world trade and the impulse for a 
more competitive business environment and modern corporate management. 

•  The resilience of the Italian banking sector has severely weakened since mid-2011, undermining 
banks' ability to support economic activity and adjustment. The loss of access of Italian banks to 
international wholesale funding following the extension of the euro-area sovereign debt crisis to Italy 
has  significantly  increased  the  sector's  dependence  on  Eurosystem  refinancing.  The  double-dip 
recession in Italy has increased credit risk in the private sector, burdening Italian banks with a large 
stock  of  non-performing  loans  (NPLs),  mainly  to  private  companies.  In  combination  with  subdued 
credit demand, this has led to a protracted contraction in credit, while the average cost of new credit 
remains  elevated  despite  an  accommodative  monetary  policy  at  euro-area  level.  Low  net  interest 
margins,  increased  NPL  provisioning  and  low  cost  efficiency  all  act  as  a  drag  on  Italian  banks' 
profitability.  

•  Italy  is  thus  confronted  with  severe  adjustment  challenges.  The  improving  current  account  does 
not  alter  Italy's  need  to  address  the  serious  productivity  and  competitiveness  challenges  which  the 
country  faces.  However,  a  particularly  unfavourable  environment  –  characterised  by  a  high  cost  of 
capital,  lack  of  support  from  the  financial  sector  and  fiscal  policy,  as  well  as  limited  scope  to  raise 
investment  without  increasing  the  economy's  reliance  on  external  financing  –  constrains  the  needed 
adjustment.  In  this  context,  improving  the  allocation  efficiency  in  the  Italian  economy  becomes 
essential in view of channelling the available resources in both the private and public sector to their 
most growth-enhancing uses. 

•  Key fiscal measures and structural reforms have been adopted over the past months to address 
the main challenges of the Italian economy, which need full implementation to bear fruit. Italy 
has  embarked  on  a  wide-ranging  strategy  to  restore  fiscal  sustainability  and  improve  long-term 
growth.  Together  with  determined  action  at  the  euro-area  level,  this  helped  to  restore  some  market 
confidence.  To  consolidate  these  benefits  and  strengthen  Italy's  resilience  against  possible  renewed 
financial  tensions,  Italy's  public  debt-to-GDP  ratio  needs  to  be  put  on  a  steadily  declining  path.  To 
support  fiscal  consolidation  and  unleash  the  country's  growth  potential,  the  gains  from  structural 
reforms  should  be  secured  by  ensuring  their  full  implementation  and  maintaining  the  reform 
momentum. 

The  IDR  also  discusses  the  policy  challenges  stemming  from  these  developments  and  possible  policy 
responses.  While  acknowledging  the  efforts  which  have  already  been  made  since  the  end  of  2011,  the 
IDR  highlights  a  range  of  domains  in  which  Italy's  policymakers  could  act  further  to  strengthen  the 
adjustment  capacity  of  the  Italian  economy.  These  include  the  strengthening  of  competition  in  some 
product  and  service  markets,  the  development  of  a  more  growth-friendly  tax  system,  the  further 
decentralisation  of  the  wage  bargaining  framework,  the  upgrading  of  the  educational  sector,  and  the 
decisive improvement of public administration efficiency and of the business environment. The IDR also 
highlights the need to improve the capacity of the Italian banking sector to support the adjustment of the 
Italian economy. Finally, regarding Italy's public indebtedness, the IDR confirms the necessity to pursue 
sustained  high  primary  surpluses  in  order  to  put  the  country's  high  public  debt-to-GDP  ratio  on  a 

8 

 
 
downward  path,  in  full  compliance  with  its  budgetary  commitments  and  the  reinforced  Stability  and 
Growth Pact (SGP).  

9 

 
 
 
1. 

INTRODUCTION 

On 28 November 2012, the European Commission presented its second Alert Mechanism Report (AMR), 
prepared  in  accordance  with  Article  3  of  Regulation  (EU)  No.  1176/2011  on  the  prevention  and 
correction  of  macroeconomic  imbalances.  The  AMR  serves  as  an  initial  screening  device  helping  to 
identify Member States that  warrant  further in depth analysis to determine  whether imbalances exist or 
risk  emerging.  According  to  Article  5  of  Regulation  No.  1176/2011,  these  country-specific  “in-depth 
reviews”  (IDR)  should  examine  the  nature,  origin  and  severity  of  macroeconomic  developments  in  the 
Member State concerned, which constitute, or could lead to, imbalances. On the basis of this analysis, the 
Commission will establish whether it considers that an imbalance exists and what type of follow-up it will 
recommend to the Council. 

This is the second IDR for Italy. The previous IDR was published on 30 May 2012 on the basis of which 
the  Commission  concluded  that  Italy  was  experiencing  serious  imbalances,  in  particular  as  regards 
developments related to the export performance, competitiveness and the high government debt. Overall, 
in  the  AMR  the  Commission  found  it  useful,  also  taking  into  account  the  identification  of  serious 
imbalances in May, to examine further the risks involved and progress in the unwinding of imbalances in 
an in-depth analysis. To this end this IDR takes a broad view of the Italian economy in line with the scope 
of the surveillance under the Macroeconomic Imbalance Procedure (MIP). 

11 

 
European Commission 

Macroeconomic Imbalances - Italy 2013 

12 

 
 
 
2.  MACROECONOMIC SITUATION AND POTENTIAL 

IMBALANCES 

2.1.  MACROECONOMIC SCENE SETTER 

Italy's 

constrained 

long-standing 

During  the  decade  leading  up  to  the  current 
structural  weaknesses 
crisis, 
growth 
significantly 
potential.  Between  euro  adoption  and  the  year 
preceding  the  global  financial  crisis,  Italy's  real 
GDP  growth  averaged  1.5%,  around  0.75  pp. 
below the euro-area average. The main reason  for 
the protracted underperformance was weak growth 
in  productivity, 
total  factor 
productivity stagnated (see Section 3.1), indicating 
low  absorption  of  new  technologies  and  limited 
an 
innovation 
unfavourable 
and 
insufficient human capital accumulation. 

capacity  by 
business 

Italian 
environment 

in  particular  as 

firms, 

the 

and 

crisis 

rebuild 

The Italian economy's capacity to withstand the 
negative  economic  shocks  stemming  from  the 
crisis  was  therefore  limited.  Italy's  real  GDP 
contracted  sharply  during  the  2008-09  economic 
and  financial  crisis.  The  recovery  that  followed 
was  modest  and  short-lived:  economic  growth 
started  contracting  again  in  the  second  half  of 
2011,  when  the  euro-area  sovereign  debt  crisis 
spread  to  Italy.  Over  2012  as  a  whole,  real  GDP 
contracted  by  2.4%  owing  to  a  strong  fall  in 
domestic  demand.  Despite  significant  measures  at 
national  and  EU  level  in  2011-12  to  tackle  the 
confidence, 
economic 
uncertainty in financial markets remained elevated 
until 
final  months  of  2012,  affecting 
households' and  firms' confidence. Net exports on 
the other hand have contributed positively to Italy's 
real  GDP  growth  –  mainly  because  of  a  fall  in 
imports, but also thanks to some export dynamism 
–  implying  a  strong  improvement  in  Italy's  trade 
balance since mid-2011. Available indicators point 
to some further contraction in economic activity in 
the first quarter of 2013, before growth is expected 
to gradually resume in the second half of the year 
as  demand  from  non-EU  trade  partners  supports 
exports  and  the  assumed  lower  yields  on  Italian 
government  securities  gradually 
into 
improving  financing  conditions  and  confidence. 
However,  the  negative  carry-over  from  2012 
implies  that  real  GDP  in  2013  as  a  whole  is  still 
projected to decline by 1.0% (Graph 2.1). 

translate 

Graph 2.1:Decomposition of Italy's GDP 
growth

6

4

2

0

s
p
p
,

%

-2

-4

-6

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Investment (inventories)
Investment (gross fixed capital formation)
Consumption
Net exports
Real GDP growth

Source: Commission services
Note: Figures for 2013-14 are forecasts based on the 
Commission services' Winter 2013 forecast.

2.2. 

SUSTAINABILITY OF EXTERNAL POSITIONS 

and 

over 

2002-05 

Italy's  current  account  balance  deteriorated 
steadily  since  the  adoption  of  the  euro  and  up 
until mid-2011. From a surplus of 1.8% of GDP in 
1998,  the  current  account  balance  turned  slightly 
negative 
deteriorated 
financial  crisis, 
the  2008 
significantly  after 
reaching  a  deficit  of  more  than  3%  of  GDP  in 
2010-11  (Graph  2.1a).  Part  of  the  decline  in  the 
current  account  balance  was  driven  by  worsening 
terms  of  trade  as  the  increasing  price  of  imported 
oil  –  on  which  the  Italian  economy  is  structurally 
dependent – negatively affected the goods balance 
(Graph 2.1b). As from 2007, this was compounded 
by a negative services balance. Finally, ever since 
the  late  1990s,  both  the  income  balance  and  the 
transfers balance have recorded a deficit. In 2008-
09,  the  dramatic  drop  of  (mostly  equity)  income 
from  abroad  as  a  consequence  of  the  financial 
crisis opened up the deficit on the income balance. 
The  deficit  on  the  transfers  balance  gradually 
widened over the decade and reached almost 1% of 
GDP  by  2011,  mainly  due 
Italy's  net 
contribution to the EU budget (more than 0.3% of 
GDP) and foreign workers' remittances, which rose 
to around 0.5% of GDP. 

to 

13 

 
 
 
 
Graph 2.2a:Decomposition of Italy's external 
accounts

Graph 2.2b:Italy's goods trade balance, by 
category of goods

European Commission 

Macroeconomic Imbalances - Italy 2013 

P
D
G

f

o
%

4

3

2

1

0

-1

-2

-3

-4

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Capital account
Income balance
Trade balance - goods

Current transfers
Trade balance - services
Trade balance

Source: Commission services 
Note: 2012 figures are estimated using quarterly data.

As  from  mid-2011,  the  Italian  current  account 
balance has improved significantly. In 2012, the 
deficit  narrowed  to  0.6%  of  GDP.  The  lower 
deficit is due to an improving trade balance, which 
in turn  is driven by a decline in imports owing to 
weak domestic demand, but also some recovery in 
exports.  While  demand  from  other  EU  countries 
remains  weak,  exports  to  non-EU  trade  partners 
improved 
the 
in  2011-12,  also  owing 
depreciation of the euro that enabled Italy to regain 
some cost and price competitiveness vis-à-vis non-
EU trade partners. 

to 

From  a  saving-investment  perspective,  the 
recent  improvement  in  the  current  account  is 
mainly  driven  by  the  fall  in  investment,  while 
the  national  saving  rate  has  remained  broadly 
stable at the low levels reached in 2009. The stable 
national  saving  rate  is  the  result  of  an  increase  in 
the government saving rate – as a consequence of 
the  ongoing  fiscal  consolidation  –  offset  by  a 
decrease  in  the  private-sector  saving  rate  (Graph 
2.3).  A  recovery  in  investment  as  the  economic 
outlook improves would entail a new worsening of 
the current account balance if not accompanied by 
a  corresponding  increase  in  the  national  saving 
rate. 

14 

Total goods

Intermediate goods

Fuel

Consumer goods

Capital goods

-4

-2

0

2

4

Balance of  trade in goods, % GDP

2000-2001

2010-2011

Graph 2.3:Italy's saving, investment and 
current account

25

20

15

P
D
G

10

f
o
%

5

0

-5

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Current account balance
Gross saving; private sector
Gross saving; general government
Gross capital formation; total economy

Source: Commission services 

Italy's  net  foreign  financial  liabilities  increased 
between 1999 and 2012, but their level remains 
moderate.  Italy's  net  international  investment 
position (NIIP) deteriorated since euro adoption: it 
stood  at  -9%  of  GDP  at  the  end  of  1998,  but 
declined to -22.5% by the end of the third quarter 
of 2012 (Graph 2.4). This compares with a NIIP at 
around -92% of GDP in Spain and -105% of GDP 
in  Portugal  at  the  end  of  2011.  The  accumulation 
of  current  account  deficits  since  2006  explains 
only  part  of  the  deterioration  of  Italy’s  NIIP.  The 
main drivers were negative valuation effects linked 
to  the  appreciation  of  the  euro  between  2003  and 
2009  (which  reduced  the  value  of  assets  held  in 
foreign  currencies,  mainly  US  dollar)  and  lower 

 
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Graph 2.4:Decomposition of Italy's net international investment position

150

100

50

0

-50

P
D
G

f

o
%

-100

-150

-200

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Assets - Direct investment
Assets - Portfolio investment (debt securities)
Assets - Other investment
Liabilities - Direct investment
Liabilities - Portfolio investment (debt securities)
Liabilities - Other investment

Assets - Portfolio investment (equity capital)
Assets - Derivatives
Assets - Official reserves
Liabilities - Portfolio investment (equity capital)
Liabilities - Derivatives
NIIP

Source: Bank of Italy. Note: Data for 2012 run up to the third quarter only

investment  position 

interest  rates  up  to  2011  (which  implied  an 
increased market value of liabilities in the form of 
debt  securities).  The  negative  valuation  effect  has 
been partially reversed since the financial crisis in 
2008  when  the  US  dollar  appreciated  and  the 
market value of Italian equities fell sharply (Graph 
2.5).  Looking  at  the  composition  of  the  NIIP,  the 
negative  net  portfolio 
is 
related to rising overall indebtedness of the Italian 
economy,  with  foreign  investors  holding  around 
62% of GDP of Italian debt securities at the end of 
the third quarter of 2012, against a stock of foreign 
debt securities  worth 28% of  GDP held by Italian 
residents.  This  is  partially  compensated  by  higher 
holdings  by  Italian  residents  of  portfolio  equity 
capital  (around  23%  of  GDP  versus  8.5%).  By 
contrast, 
investors'  FDI  abroad  has 
consistently  been  higher  than  foreign  investors' 
direct investment in Italy (around 27% versus 17% 
of GDP respectively at the end of the third quarter 
of 2012). Finally, the increase in other investment 
liabilities  in  2011-12  is  mainly  related  to  higher 
liabilities of Italian banks towards the Eurosystem.  

Italian 

Graph 2.5:Decomposition of the changes in 
Italy's net international investment position

10

8

6

4

2

0

-2

-4

-6

-8

-10

)

%

(
e
g
n
a
h
c
P

I
I

N
o

t

s
n
o

i
t

u
b
i
r
t

n
o
C

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Valuation changes
Net transaction effect (rest FA bal.)
Investment income effect
Nominal growth effect
Change in NIIP (annual growth rate (%))

Source: Commission services                                                                
Note: Data for 2012 run up to the third quarter only

aversion 

increased 

towards 
risk 
Amid 
vulnerable  euro-area  economies,  the  negative 
NIIP  has  become  a  source  of  vulnerability  for 
the Italian economy. Capital flows into Italy dried 
up  with  the  global  financial  crisis  in  2008-09.  In 
2010,  Italian  monetary  and  financial  institutions 
(MFIs)  regained  some  access  to  international 
financial  markets,  and  the  net  inflow  of  foreign 
capital  into  Italy  –  measured  by  the  financial 
account in Italy's balance of payments – rebounded 
somewhat (Graph 2.6a). However, as of mid-2011 
the  flow  of  private  net  foreign  claims  started  to 
decline quickly as investor sentiment towards Italy 
deteriorated  and  the  sovereign  debt  crisis  hit  the 
country.  As  a  result,  the  composition  of  the 
Italy's  NIIP  changed 
external 

financing  of 

15 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Italy 2013 

n
o

i
l
l
i

b
R
U
E

250

200

150

100

50

0

-50

-100

-150

-200

-250

Graph 2.6a:The external financing of Italy's 
current account in flow terms, January 2000 -
October 2012

0
0

n
a
J

0
0
t
c
O

1
0

l

u
J

2
0
r
p
A

3
0

n
a
J

3
0
t
c
O

4
0

l

u
J

5
0
r
p
A

6
0

n
a
J

6
0
t
c
O

7
0

l

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8
0
r
p
A

9
0

n
a
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9
0
t
c
O

0
1

l

u
J

1
1
r
p
A

2
1

n
a
J

2
1
t
c
O

Foreign loans and deposits to Italian MFIs
Foreign portfolio investment in Italian debt securities
Foreign loans to Bank of Italy (Eurosystem)

n
o

i
l
l
i

b
R
U
E

50

0

-50

-100

-150

-200

-250

-300

Graph 2.6b:Italian government's and MFIs' 
foreign liabilities and TARGET 2 balance, 
cumulative changes since Q1 2011

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3

Italian MFIs' foreign liabilities (cumulative)
Italian government's foreign liabilities (cumulative)
Italy's TARGET 2 balance

Source: Bank of Italy, Commission services
Note: The graph shows selected monthly flows of external funding of Italy's current account.

Winter  2013  forecast,  will  help  to  improve  the 
NIIP going forward.  

foreign 

dramatically.  First,  private 
investors 
drastically  shed  their  holdings  of  debt  securities 
issued  by  the  Italian  sovereign  and  to  a  lesser 
extent Italian MFIs. The resulting sharp fall in net 
portfolio  investment  in  Italy  was  to  some  extent 
Italian 
offset  by  Eurosystem  purchases  of 
sovereign  bonds  under  the  Securities  Markets 
Programme between August 2011 and March 2012 
(around  EUR  100  billion).  Second,  foreign  loans 
to  Italian  MFIs  also  declined 
and  deposits 
substantially  due  to  the  strong  link  between  the 
(weakening) Italian sovereign and banks (see Box 
1).  Third,  the  net  outflow  of  private  foreign 
funding  was  compensated  by  a  very  strong 
increase in external liabilities held by the Bank of 
Italy,  which  on  behalf  of  Italian  banks  took  in 
ample  Eurosystem  liquidity  under  the  two  3-year 
(LTROs). 
long-term 
Following the collapse of interbank market activity 
between surplus and peripheral euro-area countries 
in  the  course  of  2011, (1)  Italy's  TARGET  2 
liabilities  vis-à-vis  the  Eurosystem  increased ( 2) 
and  stood  at  EUR  256  billion  (or  16%  of  Italy's 
GDP)  at  the  end  of  February  2013.  As  foreign 
private-sector funding of Italy's negative NIIP has 
to  a  significant  extent  been  replaced  by  official-
sector funding in 2011-12, the overall exposure of 
foreign  investors  to  Italy  has  remained  broadly 
stable. The expected surplus in the current account 
in  2013,  as  set  out  in  the  Commission  services' 

refinancing 

operations 

(1)  See for instance De Grauwe, P. and Y. Ji (2012). 
(2)  See for instance Cecioni, M. and G. Ferrero (2012). 

16 

 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

Box 2.1: The role of the Italian financial sector in Italy's adjustment

The longest economic recession since World War II has significantly impaired the Italian financial sector's 
capacity  to  support  the  economic  recovery  and  favour  the  needed  adjustment  towards  more  productive 
activities. 

Compared  to  some  other  euro-area  Member  States,  the  Italian  financial  sector  proved  to  be  relatively 
resilient during the global financial crisis of 2008-09, requiring only marginal public support. Contributing 
factors  included  a  largely  traditional  intermediation-based  business  model,  a  sound  regulatory  and 
supervisory regime, the absence of a real estate bubble in the country and the low level of household debt. 
Since  2011  however,  the  vulnerability  of  Italian  banks  has  increased  significantly,  owing  to  the  negative 
feedback  loops  between  fiscal  sustainability  concerns,  banks’  exposure  to  the  Italian  sovereign  and 
weakening real economic activity, resulting in a loss of access to international wholesale funding markets. 
The risk of a liquidity crunch in Italy and other vulnerable euro-area countries led the Eurosystem to provide 
ample  long-term  funding  through  the  two  3-year  long-term  refinancing  operations  (LTROs)  in  December 
2011  and  February  2012.  The  participation  of  Italian  banks  in  these  operations  corresponded  to  a  net 
increase in Eurosystem funding of EUR 117 billion between November 2011 and March 2012, up to a total 
of around EUR 270 billion. However, the actual uptake of LTRO funding was significantly higher than EUR 
117 billion as almost all outstanding short-term funding under the Eurosystem's main refinancing operations 
was  replaced  by  LTRO  funding.  Banks  invested  a  significant  share  of  the  allotted  LTRO  funds  in  Italian 
sovereign bonds, while foreign investors were reducing their sovereign exposure to Italy (Graph 1). Despite 
the relaxation of liquidity constraints, the average cost of new credit to firms in Italy remained significantly 
higher  than  in  Germany  or  France,  indicating  continued  impairment  of  the  monetary  policy  transmission 
mechanism (Graph 2a). 

Graph 1:Share of Italian government debt held by Italian MFIs and Eurosystem refinancing of 
Italian credit institutions

n
o

i
l
l
i

b
R
U
E

300

250

200

150

100

50

0

20%

18%

16%

14%

12%

10%

1
1

n
a
J

1
1
b
e
F

1
1
r
a
M

1
1
r
p
A

1
1
y
a
M

1
1

n
u
J

1
1

l

u
J

1
1
g
u
A

1
1
p
e
S

1
1

t
c
O

1
1
v
o
N

1
1
c
e
D

2
1

n
a
J

2
1
b
e
F

2
1
r
a
M

2
1
r
p
A

2
1
y
a
M

2
1

n
u
J

2
1

l

u
J

Eurosystem refinancing of Italian credit institutions (outstanding)

Share of Italian government debt held by Italian MFIs (rhs)

Source: Bank of Italy, Commission services

Although  the  liquidity  situation  of  Italian  banks  has  improved  considerably  since  the  LTROs,  other 
weaknesses have emerged which prevent the Italian banking sector from playing its role of supporting the 
real economy adjustment. The double-dip recession has burdened Italian banks' balance sheets with a large 
and  rapidly  increasing  stock  of  non-performing  loans  (NPLs)  (Graph  3),  mainly  to  non-financial 
corporations (NFCs), a problem that is further aggravated by the slowness of credit recovery procedures. In 
response,  credit  supply  conditions  tightened  considerably  over  the  period  bridging  2011  and  2012  (Graph 
2b). SMEs, which for their financing are very dependent on banks, were particularly affected: compared to 
larger companies, they pay significantly higher interest rates on loans and more often face a rejection of their 

(Continued on the next page) 

17 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Italy 2013 

Box (continued) 

loan applications. (1)  Demand for bank loans is also subdued, and this situation is expected to last well into 
2013.  Furthermore,  lending  growth  has  been  held  back  by  the  need  to  maintain  tight  control  over 
capitalisation  in  view  of  increased  credit  risk.  Finally,  the  profitability  outlook  for  Italian  banks  does  not 
look  encouraging.  Net  interest  margins  are  under  pressure  from  low  benchmark  interest  rates  and  still 
elevated funding costs, while the credit contraction causes a decrease in core revenues and slows down the 
re-pricing of banks' assets. The cost efficiency of Italian banks is low in an international context: high cost-
to-income ratios, mainly due to extended branch networks, act as a further drag on profitability. 

4.5

4.0

3.5

3.0

%

2.5

2.0

1.5

1.0

0.5

Graph 2a:Interest rates on new bank loans to 
non-financial corporations in selected 
countries

9
0

n
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9
0
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p
A

9
0

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9
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0
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A

0
1

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J

0
1
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O

1
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1
1
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p
A

1
1

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1
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t
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O

2
1

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2
1
r
p
A

2
1

l

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J

2
1
t
c
O

e
g
n
a
h
c
%

r
a
e
y
-
n
o
-
r
a
e
Y

16

12

8

4

0

-4

-8

Graph 2b:Volume of loans to Italian non-
financial corporations

7
0

n
a
J

7
0
y
a
M

7
0
p
e
S

8
0

n
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8
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8
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S

9
0

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9
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y
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M

9
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p
e
S

0
1

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a
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0
1
y
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0
1
p
e
S

1
1

n
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1
1
y
a
M

1
1
p
e
S

2
1

n
a
J

2
1
y
a
M

2
1
p
e
S

Germany

France

Italy

ECB policy rate

Source: European Central Bank (a) and  Bank of Italy (b)

Graph 3:Evolution of Italian non-performing loans

14

12

10

8

6

4

2

0

s
n
a
o

l

l

a
t
o
t

f
o
%

16

14

12

10

8

6

4

2

0

)

%

(

e
t
a
r

h
t
w
o
r
g
y
l
r
e
t
r
a
u
Q

9
0
r
a
M

9
0

n
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J

9
0
p
e
S

9
0
c
e
D

0
1
r
a
M

0
1

n
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J

0
1
p
e
S

0
1
c
e
D

1
1
r
a
M

1
1

n
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J

1
1
p
e
S

1
1
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e
D

2
1
r
a
M

2
1

n
u
J

2
1
p
e
S

Bad debts

Substandard loans

Restructured loans

Past-due loans

NPL ratio growth rate (rhs)

Source: Bank of Italy
Note: International comparisons of NPL stocks involving Italy should take account of the fact that Italian accounting criteria to 
determine loan quality are stricter than in other countries, resulting in a positive bias in Italian NPL ratios.

(1)  See for instance European Central Bank (2012). 

18 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
2. Macroeconomic Situation and Potential Imbalances 

2.3. 

PRIVATE 
INDEBTEDNESS 

AND 

PUBLIC 

SECTOR 

combined  with 

 This, 
consumption 
smoothing, has implied a decline in the household 
saving rate to historically low levels. 

some 

strong. 

to  be  relatively 

The net financial position of Italian households 
continues 
Italian 
households have continued to accumulate assets as 
they have maintained a positive, though declining, 
saving rate (Graph 2.7). Their net financial wealth 
is  still  above  the  level  estimated  for  France 
(135%),  Germany  (122%),  and  the  euro-area 
average  (128%),  even  though  the  fall  in  market 
prices reduced its value from 177% of GDP at the 
end  of  2010  to  around  165%  at  the  end  of  2011. 
Overall  household  wealth  –  i.e.  including  real 
assets  –  is  estimated  to  be  around  550%  of 
GDP. (3)  The  indebtedness  of  Italian  households 
continues to be among the lowest in the euro area 
and their financial vulnerability – measured as the 
ratio  of  debt  service 
income  –  remains 
low. ( 4)Nevertheless,  the  fall  in  households'  real 
disposable income  since the  onset of the financial 
crisis has been significant due to both a weakening 
labour market and the impact of the sizeable fiscal 
consolidation. 

to 

(3)  Bank of Italy (2012b) 
(4)  According  to  Magri,  S.  and  R.  Pico  (2012),  "The 
percentage of vulnerable households, i.e. those with a high 
debt service to income, remained unchanged from 2008 to 
2010, when the sharp reduction in income was offset by a 
marked  fall  in  interest  rates;  simulations  for  2011-2012 
show  modest  changes  in  this  indicator.  Over-indebted 
households,  i.e.  those  permanently  unable  to  repay  their 
debt, are estimated at 160,000 or 0.6 per cent of the total." 

in 

increasing 

The 
non-financial 
trend 
corporations'  indebtedness  has  come  to  a  halt 
since  2008. 
Indebtedness  of  non-financial 
corporations  (NFCs)  increased  by  around  25  pps. 
of  GDP  over  the  decade  up  to  2008.  As  the  total 
amount of loans to Italian NFCs fell by more than 
2%  year-on-year  in  December  2012,  the  stock  of 
consolidated  debt  of  Italian  NFCs  stabilised  at 
around  80%  of  GDP  and  remains  slightly  below 
the  euro-area  average.  While 
largely 
reflected  in  depressed  investment,  the  corporate 
sector has somewhat increased its reliance on self-
financing.  Taken  together  with  the  low  level  of 
household  indebtedness,  the  overall  indebtedness 
of  the  Italian  private  sector  as  a  share  of  GDP 
remains  nearly  20  pps.  below 
the  euro-area 
average (Graph 2.8). 

this 

is 

The  high  government  debt  represents  a  major 
burden  for  the  Italian  economy,  especially 
against  the  background  of  subdued  growth. 
With  a  general  government  debt  which 
is 
estimated to have reached around 127% of GDP by 
the end of 2012, Italy has by far the highest public 
debt-to-GDP  ratio  among  the  large  euro-area 
countries. After a major fiscal consolidation in the 
run-up  to  euro  adoption,  Italy  did  not  take 
advantage  of  the  lower  interest  expenditure  in  the 
years preceding the global financial crisis to ensure 
sound public finances. On the contrary, the erosion 

Graph 2.7:Balance sheet of Italian households by instrument

P
D
G

f

o
%

300

250

200

150

100

50

0

-50

-100

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

A - securities (other than shares)
L - loans
A - insurance & techn. reserves
L - other accounts

L - securities (other than shares)
A - shares and other equity
L - insurance & techn. reserves
A - currency and deposits

A - loans
L - shares and other equity
A - other accounts
Net financial assets

Source: Commission services
Note: 2012 figures are estimated using quarterly data.

19 

 
                                                           
 
 
 
European Commission 

Macroeconomic Imbalances - Italy 2013 

over  the  years  of  the  primary  surplus  achieved  at 
euro-area entry slowed the pace of reduction of the 
debt-to-GDP ratio (Graph 2.9). While low  growth 
makes it more difficult to achieve and maintain the 
large  primary  surpluses  required  to  put  Italy's 
government  debt-to-GDP  ratio  on  a  steadily 
declining path, a high stock of public debt may in 
turn hamper growth prospects. (5) In particular, the 
present and expected high level of taxation needed 
to service the debt dampens domestic demand and 
may  raise  the  distortionary  costs  of  taxation. 
Indeed, the tax burden in Italy is high and weighs 
heavily  on  labour  and  capital,  to  the  detriment  of 
growth  (see  Section  3.2).  Furthermore,  the  high 
interest expenditure to service the debt may crowd 
out  productive  public  expenditure,  especially  to 
support  human  capital  accumulation  and  physical 
and 
In  2012, 
government  interest  expenditure  was  at  around 
5.5%  of  GDP,  almost  3  pps.  higher  than  in 
Germany  and  France.  By  contrast,  structural 
primary  expenditure,  just  below  43%  of  potential 
GDP,  was  in  line  with  that  in  Germany  and  more 
than 8 pps. lower than in France. 

infrastructures. 

technological 

Graph 2.8:Decomposition of Italy's debt

350

300

250

200

150

100

50

0

P
D
G

f
o
%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Financial corporations
Government
Household
Non financial corporations
Private sector EA17

Source: Commission services
Note: 2012 figures are estimated using quaterly data.

(5)  See also European Commission (2012b). 

20 

Graph 2.9:Decomposition of the changes in 
Italy's public debt-to-GDP ratio

15

10

5

0

-5

P
D
G

f
o
%

-10

-15

1995-1998

1999-2007

2008-2012

Stock-flow adjustment (including support to EA)
Inflation (GDP deflator)
Real GDP growth
Interest expenditure
Primary balance
Average annual change in debt-to-GDP ratio

Source: Commission services

debt 

represents 

largely  explained  by 

The  public 
a  major 
vulnerability  for  Italy,  with  potential  spillovers 
to  the  rest  of  the  euro  area.  The  sovereign  debt 
crisis  has  exacerbated  the  negative  feedback  loop 
between high debt and low growth. Between end-
2007 and end-2012, Italy's  government gross debt 
ratio  increased  by  around  24  pps.  of  GDP.  This 
was 
the  sharp  GDP 
contraction,  while  in  a  context  of  limited  fiscal 
space  the  authorities  maintained  a  prudent  fiscal 
stance.  Meanwhile,  as  Italy's  sovereign  risk 
premium  soared between 2011 and 2012, the cost 
of  capital  for  the  private  sector  also  increased, 
hampering  productive 
investment.  Moreover, 
given  the  considerable  fragmentation  of  the  euro-
area  financial  market  across  national  borders,  the 
exposure  of 
Italy's  high 
government  debt  has  exacerbated  the  funding 
problems of the banking sector (see Box 1). As the 
Italian economy is the third largest in the euro area 
and  Italian  government  debt  at  around  EUR  2 
trillion  the  second  largest,  the  potential  economic 
and 
financial  market 
tensions  to  the  rest  of  the  euro  area  are  sizeable. 
However, thanks to the credible fiscal strategy and 
growth-enhancing reforms at national level as well 
as  progress  towards  more  economic  integration  at 
euro-area  level,  yields  on  government  bonds  have 
declined  significantly  since  the  last  months  of 
2012. 

financial  spillovers  of 

Italian  banks 

to 

 
 
                                                           
 
 
 
 
 
 
2. Macroeconomic Situation and Potential Imbalances 

that 

the  expected  structural 

The debt sustainability analysis presented in the 
Commission's  Fiscal  Sustainability 
report 
2012 (6) underscores the importance of securing 
high primary surpluses to put the Italian public 
debt-to-GDP ratio on a steadily declining path. 
Provided 
fiscal 
adjustment  is  achieved  –  i.e.  that  the  structural 
primary  surplus  is  increased  to  5%  of  GDP  by 
2014  and  is  maintained  at  that  level  afterwards  – 
the downward trajectory of the debt ratio over the 
medium term is preserved under temporary interest 
rate shocks, even if they are rather sizable or result 
in  temporarily  lower  growth.  However,  if  the 
primary balance targets are not achieved, then the 
debt  ratio  remains  vulnerable  to  adverse  interest 
rate  and  growth  developments.  The  negative 
feedback  loops  between  higher  interest  rates  and 
lower growth would exacerbate the vulnerabilities. 
The  reinforced  SGP  provides  the  appropriate 
framework  to  secure  a  steadily  declining  path  of 
the government debt-to-GDP ratio, as the new debt 
rule  requires  that  the  gap  between  the  actual  debt 
ratio  and  the  reference  value  of  60%  of  GDP  is 
reduced  at  an  average  rate  of  one  twentieth  per 
year  as  a  benchmark.  Compliance  with  the  debt 
rule  might  also  help  anchor  market  expectations 
and lower the risk premium on Italy's government 
debt. 

firms' weak turnover and the restricted capacity to 
obtain  financing  in  this  sector  led  to  a  sharp 
contraction  in  construction  activity.  Real  estate 
prices  (in  nominal  terms)  have  declined  modestly 
since  mid-2011,  slightly  more  for  non-residential 
property  than  for  houses.  Real  estate  transaction 
volumes  have  decreased  more  significantly. 
loans  has 
Households'  demand  for  mortgage 
contracted, while the amount of building permits – 
especially  for  housing  –  has  remained  at  a  low 
level.  The 
taxation  on 
immovable  property  ('Imposta  Municipale  Unica') 
from  a  relatively  low  level,  adopted  with  the 
December  2011  economic  and  budgetary  package 
(see  Section  3.2),  may  have  also  affected  the  real 
estate market in 2012.  

in  recurrent 

increase 

The  weakening  of  the  construction  sector 
weighs  on  banks'  balance  sheets.  In  December 
2012,  the  construction  sector  represented  around 
18% of all loans granted by banks to NFCs, while 
the  sector's  share  of  total  NPLs  (related  to  NFCs) 
amounted  to  24%.  On  average  one  third  of  the 
monthly  net  increase  in  NPLs  since  mid-2011  is 
due to the construction sector. 

2.4. 

REAL ESTATE MARKET DEVELOPMENTS 

The risk of a severe downturn in the Italian real 
estate  market,  with  adverse 
effects  on 
household  wealth  and  a  sharp  fall  in  the  value 
of  banks'  collateral,  appears  limited.  Italy  did 
not  experience  a  housing  bubble  during  the  pre-
crisis years. At the end of August 2012, mortgage 
lending  in  Italy  constituted  only  around  18%  of 
total  bank  credit,  which  is  significantly  below  the 
euro-area  average  of  33%.  Two 
thirds  of 
outstanding  mortgages  are  variable-rate  contracts, 
which  limit  banks'  exposure  to  interbank  interest 
rate  changes.  Loan-to-value  ratios  are  relatively 
low in Italy and have decreased considerably since 
the mid-2000s, as banks have applied conservative 
policies when granting mortgage loans. 

The  Italian  real  estate  market  has  weakened 
considerably  against  the  background  of  the 
deep  economic  recession  in  Italy.  Construction 

(6)  European Commission (2012a) 

21 

 
                                                           
 
 
 
 
 
3. 

IN-DEPTH ANALYSIS OF SELECTED TOPICS 

3.1.  COMPETITIVENESS  DEVELOPMENTS 

IN 

ITALY 

nevertheless 

performance 

Italy has been losing export market share since 
euro  adoption,  and  the  pace  of  erosion  has 
accelerated  with  the  eruption  of  the  global 
crisis. Although it is normal for a mature economy 
to lose export market share in the context of strong 
export-led  growth  of  emerging  markets,  Italy’s 
export 
compares 
that  of  other  euro-area 
unfavourably  with 
countries. Graph 3.1 shows nominal export growth 
in value terms for selected euro-area countries net 
of  global  nominal  import  growth,  distinguishing 
(2000-07)  and 
between 
developments  over  the  crisis  period  (2007-10). 
During  the  pre-crisis  years,  Italy  was  already 
losing market share, although at the moderate pace 
of 1.2 pps. per year on average, while the euro area 
as  a  whole  maintained  its  market  share.  France 
experienced  a  more  dramatic 
in 
Germany  and  Spain  exports  grew  faster  than 
global imports. The Italian export market share fell 
dramatically  –  by  a  sizeable  6.3  pps.  on  average 
per  year  –  during  the  crisis  years  2007-10,  i.e. 
more than the euro-area average of -4.2 pps. 

the  pre-crisis  years 

loss  while 

Graph 3.1:Net nominal export growth for 
selected euro-area contries

6

4

2

0

h
t
w
o
r
g
t
r
o
p
m

i

l

a
b
o
g
f
o

l

-2

-4

-6

-8

DE

FR

IT

ES

EA

t
e
n

)

D
S
U
n
i
(

h
t
w
o
r
g

t
r
o
p
x
e

l

i

a
n
m
o
n

l

a
u
n
n
a
f
o
.
s
p
P

2000-07

2007-10

Source: Commission services
Note: A country's net nominal export growth is defined as 
nominal export growth net of global nominal import demand. 
Positive/negative net nominal export growth implies a gain/loss 
of export market share.

The  loss  of  cost  and  non-cost  competitiveness 
vis-à-vis Italy’s trading partners has been a key 
subdued  export 
driver  of 
performance.  The  following  factors  are  relevant 
in this respect: 

the  country’s 

•  Unit  labour  costs  in  Italy  have  increased 
more  rapidly  than  in  the  rest  of  the  euro 
area since 1998. During the period 1999-2012, 
Italian  nominal  unit  labour  costs  (ULC)  grew 
by  2.3%  per  year  on  average,  implying  labour 
cost  pressures  on  prices  above 
the  ECB 
inflation reference value. In France, ULC grew 
by  1.9%  per  year,  while  in  Germany  the 
average annual growth rate, at 0.7%,  was  well 
below the euro-area average of 1.6%.  

•  Persistently weak productivity growth is the 
key  driver  of  increasing  unit  labour  costs. 
Total factor productivity growth came to a halt 
at  the  beginning  of  the  2000s  and  has  been 
subdued  or  even  negative  since  then  (Graph 
3.2).  This  reflects  a  reduced  ability  of  Italian 
firms  to  incorporate  new  technologies  in  their 
production processes and improve labour force 
organisation  consistently  with  a  changing  and 
more  competitive  environment,  as  well  as  the 
scarcity of skilled labour (see Box 3.1). 

Graph 3.2:Total factor productivity in Italy and 
the euro area

)
0
0
1
=
0
9
9
1
(

x
e
d
n
I

115

110

105

100

95

90 92 94 96 98 00 02 04 06 08 10 12

EA-12

IT

Source: Commission services

•  The  negative  impact  on  competitiveness  of 
rapidly  rising  ULC  has  been  amplified  by 
the  sizable  appreciation  of  Italy’s  nominal 
effective  exchange  rate.  A  decomposition  of 
Italy’s  ULC-based 
the 
of 
REER ( 7)  since  1998  into  changes  in  the 
nominal effective exchange rate (NEER) and in 
nominal  ULC  relative  to  trade  partners  shows 

appreciation 

(7)  An alternative measure of price competitiveness would be 
the  Italian  REER  based  on  the  producer  price  index, 
especially for traded goods. 

23 

 
 
 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Italy 2013 

Graph 3.3a:Decomposition of the cumulative 
change in Italy's ULC-based REER since 1998

16

14

12

10

8

6

4

2

0

-2

-4

-6

-8

99 00 01 02 03 04 05 06 07 08 09 10 11 12

)
0
0
1
=
8
9
9
1
(

x
e
d
n
I

115

110

105

100

95

90

85

80

75

Graph 3.3b:Evolution of relative nominal ULC 
in selected countries

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

)

%

(

i

8
9
9
1
e
c
n
s
e
g
n
a
h
c
e
v
i
t
a
u
m
u
C

l

ULC contribution

NEER contribution

REER

DE

ES

FR

IT

Source: Commission services
Note: Performance relative to 36 industrial countries (double export weights)

that  the  appreciation  of  the  former  component 
between  2003  and  2009  is  the  main  driver 
(Graph  3.3a).  Germany  experienced  a  similar 
appreciation of its NEER, but its impact on the 
REER  was  offset  by  declining  relative  ULC, 
driven  by  considerable  wage  restraint  (Graph 
3.3b). According to IMF estimates, Italy’s real 
effective  exchange  rate  (REER)  is  modestly 
overvalued by around 5–10%. 

 Italy's  export  performance  continues  to 
suffer 
from  an  unfavourable  product 
specialisation.  To  identify  the  drivers  of  the 
export  market  share  losses  that  were  shown  in 
Graph  3.1,  Italian  net  nominal  export  growth 
before and during the crisis is decomposed into 
two  structural  indicators  showing  to  what 
extent Italy's exports have been geared towards 
dynamic  geographic  and  product  markets,  and 
two  performance  indicators  capturing  Italy's 
success 
in  achieving  above-market  export 
growth in geographic and product markets due 
to  competitiveness  factors  (Graph  3.4).  At  the 
beginning  of  the  decade,  the  Italian  economy 
presented 
product 
specialisation relative to global export patterns, 
but  its  exports  remained  oriented  towards  still 
dynamic  destination  countries,  which  allowed 
it to take advantage of the distribution of global 
demand.  However,  as  global  export  patterns 
evolved,  Italian  exporters  were  not  able  to 
redirect  their  products  to  the  countries  where 
import demand was most dynamic. Thus, Italy 

unfavourable 

an 

• 

24 

entered the crisis with an unfavourable product 
and geographical specialisation of exports, and 
both 
these  disadvantages  were  aggravated 
during  the  crisis,  as  the  economy  lacked 
sufficient 
the 
dramatically  changed  environment  and  import 
demand in some of Italy’s key trading partners 
– especially in Europe – dropped. 

dynamism 

adapt 

to 

to 

Graph 3.4:Decomposition of Italy's net 
nominal export growth according to 
geographical and sectorial composition

)

%

(
e
t
a
r

h
t
w
o
r
g

l

a
u
n
n
A

2

1

0

-1

-2

-3

-4

-5

-6

-7

2000-2007

2007-2010

Market share gains in product markets
Market share gains in geographical destinations
Initial product specialisation
Intial geographical specialisation

Source: Commission services
Note: more information on the decomposition methodology can 
be found in European Commission (2012c).

In light of the above, the following sections of this 
in-depth  analysis  focus  on  the  main  levers  for 
competitiveness:  wage 
improving 
taxation 
moderation,  a  more  growth-friendly 
structure 
stronger 
importantly, 
productivity growth. 

and,  most 

Italian 

 
 
 
 
 
 
 
 
 
 
 
 
 
3. In-Depth Analysis of Selected Topics 

Box 3.1: The contribution of education to growth

Education  is  key  for  economic  growth.  The  quality  of  labour  is  particularly  important  for  advanced 
economies,  which  compete  in  international  markets  with  goods  and  services  with  a  relatively  high 
technological content. In fact, advanced economies operate close to or at the technological frontier, i.e. the 
maximum output that can be produced for any given amount of capital and labour using the most advanced 
technology available. In order to move closer to the frontier or even push it forward, a high-skilled labour 
force  and  R&D  investment  are  required  (Vandenbussche  et  al.  (2006)).  The  empirical  literature  provides 
evidence that human capital has a positive impact on the macroeconomic performance of a country, notably 
by increasing productivity (Sianesi and Van Reenen, 2002). 

Graph 1 indicates a positive relationship between potential output per capita and the share of the population 
with upper-secondary or tertiary educational attainment for the former EU-15 countries. It shows that Italy is 
outperformed by most other European countries. 

Graph 1:Potential  GDP per capita and educational attainment in the EU, 2011

Source: Commission services

Indeed,  Italy's  human  capital  endowment  remains  weak  compared  to  other  advanced  economies.  The 
proportion of low-skilled people in the population is relatively high: in spite of some significant improvement 
in  recent  years,  completion  of  upper  secondary  education  remains  below  the  EU  average,  and  the  tertiary 
education attainment rate among those aged 30-34 is the lowest in the EU, standing at 21.3% compared to an 
EU  average  of  35.5%  (Graph  2).  Similarly,  Italy  has  a  high  percentage  of  early  school  leavers  (17.7%  in 
2012, compared to an EU average of 12.9%) and high rates of inactivity among its young people: in 2011, 
more than one in five 15-29 year-olds in Italy  were neither in education nor employed. Furthermore, PISA 
test results show that school education produces weak results in terms of basic skills, especially in southern 
regions, and many children of parents with low levels of education are caught in a low-education group. All 
this points to a quality of education that still lags behind the OECD average. The gap with other industrialised 
countries also remains wide in terms of the transition from education to work, and many indicators suggest 
that the labour market for young tertiary graduates has become more difficult over the past decade. 

(Continued on the next page) 

25 

 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Italy 2013 

Box (continued) 

60

50

40

%

30

20

10

0

Graph 2:Share of persons (aged 30-34) with tertiary education attainment, 2011

E

I

U
L

I

E F
S

Y
C

K
U

T
L

R
F

E
B

K
D

L
N

S
E

I

E S
E

L
P

V
L

E
D

L
E

U
H

G
B

T
P

T
A

Z
C

K
S

T
M

T
O I
R

Source: Commission services

2011

2000

7
2
-
U
E

3.2.  WAGE  GROWTH, 

LABOUR  MARKET 

RESPONSIVENESS AND TAXATION 

Since  euro  adoption,  wage  growth  in  Italy  has 
been broadly in line with the euro-area average. 
Nominal  compensation  per  employee  grew  by 
2.5%  on  average  per  year  over  1999-2012,  with 
some  deceleration  after  2008  (Graph  3.5a).  The 
euro area and France recorded similar growth rates 
at  2.4%  and  2.6%  respectively.  By  contrast, 
nominal  compensation  per  employee  rose  much 
more significantly in Ireland, Greece, Portugal and 
Spain  before  the  financial  crisis,  while  afterwards 
it  stabilised  or  fell  sharply  in  the  case  of  Greece. 
Germany is an outlier, with flat nominal wages up 
to 2008 and some acceleration afterwards. Growth 
of nominal compensation per employee is not only 
in  line  with  the  average  growth  in  the  euro  area, 
but it also appeared to be consistent with domestic 
labour market equilibrium up to the financial crisis 
in  2008  and  only  slightly  above  what  is  predicted 
on the basis of fundamentals during the crisis years 
up  to  2011. (8)  Dispersion  in  real  wage  growth 
(Graph 3.5b) has been more contained as inflation 
and  wage  developments  have  been  influencing 
each  other.  More  specifically,  after  euro  adoption 
Italy's  real  compensation  per  employee  increased 
significantly  only  over  2009-10,  as  falling  energy 
prices drove the decline in inflation. This increase 
was  reversed  in  2011-12,  when  higher  indirect 

(8)  Rawdanowicz, L. et al. (2013) 

taxation  and  oil  prices  pushed  inflation  up  while 
wage  growth  was  restrained  by  the  economic 
slump  and  the  enacted  freeze  in  public  sector 
wages.  Over  the  period  1999-2012,  real  wages 
increased  by  only  0.2%  on  average  per  year  in 
Italy.  Real  wage  growth  was  more  sustained  in 
France (1.0%), while it was similar to Italy (0.1%) 
in Germany. 

to  productivity  developments 

The  share  of  wages  negotiated  at  firm  level 
remains  small. (9)  Contractual  wages  set  at 
national sectorial level on the basis of the inflation 
benchmark  for  a  3-year  period  have  been  less 
than 
responsive 
actual  wages.  Actual  wages  rose  as  a  result  of 
some  positive  wage  drift  just  before  the  financial 
crisis, as economic conditions were improving. By 
contrast,  a  negative  wage  drift  has  been  visible 
since  end-2008  and  became  even  more  apparent 
since  the  second  half  of  2011,  following  the 
sovereign-debt  crisis  that  severely  hit  the  Italian 
economy  (Graph  3.6).  Firm-level  bargaining  can 
play  an  important  role  in  strengthening  wage 
responsiveness  to  productivity  as  well  as  to  local 
labour  market  conditions.  However,  the  share  of 
wages  negotiated  at  firm  level  is  still  limited  and 

(9)  The adjustment of labour costs to changes in the economic 
situation can  be  gauged  via different  indicators.  One  such 
indicator  is  the  wage  drift,  which  measures  the  difference 
between  the  growth  in  the  actual  wages  received  by 
workers and that in negotiated wages. 

26 

 
                                                           
                                                           
 
 
 
 
 
 
3. In-Depth Analysis of Selected Topics 

Graph 3.5a:Nominal compensation per 
employee in selected countries

Graph 3.5b:Real compensation per employee 
in selected countries

)
0
0
1
=
8
9
9
1
(

x
e
d
n
I

180

170

160

150

140

130

120

110

100

90

)
0
0
1
=
8
9
9
1
(

x
e
d
n
I

180

170

160

150

140

130

120

110

100

90

00

98
DE
FR

02
IE
IT

04

06

08

10

12

98

00

02

04

06

08

10

12

EL
PT

ES
EA-17

DE
FR

IE
IT

EL
PT

ES
EA-17

Source: Commission services

Note: Based on private consumption deflator

this  hampers  a  better  alignment  of  wages  to 
specific economic and competitiveness conditions 

to 

the 

changes 

framework.  Two 

The  dominant  level  of  collective  bargaining  in 
Italy  remains  the  national  level,  even  though 
bargaining 
important 
framework  since  the  beginning  of  the  1990s 
have  promoted  a  gradual  shift  towards  the 
company  level.  The  most  important  of  these 
changes was the tripartite agreement in July 1993, 
which formalised the company/local level within a 
two-tier  bargaining 
further 
agreements  in  2009  and  2011  and  a  controversial 
legal  provision  adopted  by  parliament 
in 
September 2011 constituted additional attempts to 
further  shift  the  balance  towards  company-level 
bargaining, with the latter even allowing firm-level 
collective agreements to derogate from labour law. 
By allowing to locally negotiate trade-offs between 
job  security  conditions  and  wage  concessions, 
these  agreements  may  allow  for  better  taking  into 
account the needs of specific production activities. 
However, the evidence available so far shows that 
firm-level contracts concern a minority of workers 
and firms, with this share being particularly low in 
southern regions. Large and more productive firms 
the 
still  dominate 
national  sectorial  level,  making  it  difficult  for 
SMEs  to  adjust  wages  to  internal  productivity 
developments and cyclical conditions. In addition, 
the 3-year duration of contracts, while reducing the 
negotiation  effort  of  social  partners,  might  be  too 
long  to  adjust  to  unexpected  changes  in  cyclical 
and competitiveness conditions. Finally, the 3-year 

the  bargaining  process  at 

forecast  excluding 

inflation 
imported  energy 
prices,  which  since  2009  is  used  as  a  benchmark 
for  wage  setting  at  national  level,  does  not  take 
into  account 
regain  cost 
competitiveness relative to trade partners.  

Italy's  need 

to 

Graph 3.6:Wage drift in Italy

120

115

110

105

)
0
0
1
=
1
Q
5
0
(

x
e
d
n
I

100

95

05Q105Q406Q307Q208Q108Q409Q310Q211Q111Q412Q3

Contractual wages
Compensation per hour worked
GVA per hour worked
Wage drift

Source: Commission services

The  new  productivity  agreement  signed  by  the 
social partners at the end of 2012 might further 
level.  The 
facilitate  wage  setting  at  firm 
agreement  was  signed  on  21  November  2012  by 
the  social  partners  with  the  notable  exception  of 
the 
to  further 
strengthen  the  second  level  of  bargaining.  The 
agreement  also  emphasises  the  need  to  better  link 
wages  set  in  national  contracts  not  only  to  the  3-
year  forecast  inflation,  but  also  to  the  economic 

largest  union  CGIL.  It  aims 

27 

 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Macroeconomic Imbalances - Italy 2013 

and competitiveness conditions of the country and 
the  sector  in  question.  While  confirming  the 
traditional  set-up  of  the  collective  bargaining 
regulation  in  Italy,  i.e.  with  legislation  and  the 
government continuing to have a very limited role, 
the  agreement  could  promote  a  more  efficient 
bargaining  framework.  The  social  partners  also 
for 
committed 
representativeness in collective bargaining, in view 
of  establishing  a  more  stable  and  effective 
industrial  relations  system.  The  government  will 
support 
tax  rebates  on 
productivity-related wage increases. 

the  agreement  with 

further 

define 

rules 

to 

Italy’s 

The  high  tax  burden  on  labour  raises  the 
pressure on competitiveness on the cost side and 
unsatisfactory 
to 
contributes 
the  high 
employment  performance,  while 
taxation  of  capital  contributes 
to  weak 
investment  activity.  In  2010,  Italy  displayed  the 
highest  implicit  tax  rate  on  labour  income (10)  in 
the  euro  area,  and  this  rate  has  actually  increased 
considerably since 1995 (Graph 3.7a). High labour 
taxation  raises  labour  costs,  with  negative  impact 
on  cost  competitiveness.  It  also  adversely  affects 
both  labour  demand  and  supply,  especially  of 
women, and can create an incentive to resort to the 
shadow  economy.  Similarly, 
Italy 
displayed  the  fourth-highest  implicit  tax  rate  on 
capital (11)  (Graph  3.7b).  High  corporate  income 
taxation  can  contribute  to  sluggish  investment 
activity and also to the limited attractiveness of the 
Italian  economy  for  FDI.  Consumption  taxes 
finally,  which  are  acknowledged 
less 
distortionary, represent only  a small  share of total 
revenues.  In  2010 
tax  rate  on 
consumption was still among the lowest in the euro 
area,  and  even  declined  somewhat  between  2000 
and 2010 (Graph 3.7c). 

in  2010 

implicit 

to  be 

the 

(10)  The  implicit  tax  rate  (ITR)  on  labour  is  calculated  as  the 
sum of all direct and indirect taxes and social contributions 
levied on employed labour income as a percentage of total 
compensation of employees from national accounts. 

(11)  The  ITR  on  capital  is  calculated  as  the  ratio  between 
revenue  from  all  capital  taxes  and  aggregate  capital  and 
saving  income  in  the  economy.  It  should  be  stressed, 
however, that the analysis  of the  ITR on capital is greatly 
complicated  by  the  fact  that  taxes  on  capital  include  a 
variety of taxes paid by both enterprises and households on 
many  sources  of 
these 
calculations,  receipts  from  taxes  and  social  contributions 
levied  on  the  self-employed,  a  relatively  large  group  in 
Italy, are booked as capital taxes. 

In  particular, 

revenue. 

in 

28 

Graph 3.7:Implicit tax rates on labour, capital and 
consumption in the euro area

A: Labour

%

%

50

45

40

35

30

25

20

15

10

5

0

45

40

35

30

25

20

15

10

5

0

30

25

20

%

15

10

5

0

T

I

E
B

R
F

I

T F
A

E
D

E
E

I

L S
N

S
E

U
L

K
S

L
E

Y
C

E

I

T
P

T
M

B: Capital

R
F

T

I

Y
C

T
P

E
B

I

S F
E

I

T S
A

E
D

L
E

K
S

E

I

L
N

E
E

C: Consumption

7
1
-
A
E

7
1
-
A
E

U
L

L
N

I

E F
E

I

S

E

I

E
B

T
A

E
D

R
F

T
M

Y
C

K
S

T
P

T

I

L
E

S
E

7
1
-
A
E

2010

2000

1995

Source: Commission services

 
                                                           
 
 
3. In-Depth Analysis of Selected Topics 

with  market  values  could  yield  equity  gains  in 
addition  to  bringing  in  additional  revenues  and 
reducing distortions. In addition, the enabling law 
envisaging  a  comprehensive  review  of  Italy's 
outdated  cadastral  values  remains  to  be  adopted. 
Regarding  other  tax  measures,  the  introduction  of 
ACE  can  reduce  the  'debt  bias'  in  corporate 
financing  (Graph  3.9).  As  such,  it  is  expected  to 
encourage  firms, including SMEs, to expand their 
capital  base  to  allow  for  higher  investment,  and 
help  reduce  firms'  leverage  and  reliance  on  bank 
financing  which  has  tightened  considerably.  In 
addition,  own  equity  and  retained  earnings  are 
considered  the  most  important  source  of  funding 
for  investment  in  research  and  innovation,  as 
immaterial  capital  goods  cannot  offer 
the 
guarantees demanded by banks. 

Graph 3.8:Recurrent taxation on immovable 
property in the euro area, 2010

2.5

2.0

1.5

1.0

P
D
G

f
o
%

0.5

0.0

FRBEES IE FI CYPT IT NL SI DESKEEEL ATMT EA

Source: Commission services
Note: This graph does not take into account the increase in 
recurrent taxation on immovable property enacted in Italy in 
December 2011.

the 

fiscal 

burden 

property 

The  fiscal  consolidation  measures  adopted  by 
in  2011  and  2012 
the  Italian  government 
towards 
tax 
rebalanced 
and 
immovable 
consumption, 
financial  wealth.  The 
consolidation 
packages  adopted  since  2011  increased  recurrent 
property  taxation  (including  the  reintroduction  of 
taxation of primary residences), raised the standard 
VAT  rate,  increased  taxation  on  luxury  durable 
goods  and  financial  assets,  and  introduced  higher 
excise duties on transport fuels. At the same time, 
taxation  on  the  labour  income  of  new  hires  was 
lowered  by  allowing  for  the  deductibility  of  the 
labour  component 
Italian  regional 
from 
production tax (IRAP), with greater reductions for 
women,  young  workers  and  southern  regions, 
while  an  allowance  for  corporate  equity  (ACE) 
was 
for  dependent 
children  on  personal  incomes  were  also  increased 
with  the  2013  budget.  Finally,  a  number  of  new 
measures and tools were introduced to improve tax 
compliance, 
inspection 
activities,  the  reduction  of  the  threshold  for  the 
mandatory  use  of  electronic  payments  and  the 
introduction  of  the  so-called  'income-meter'  to 
detect potential tax evaders based on a comparison 
between  income  declared  for  tax  purposes  and 
expenses made. 

introduced.  Allowances 

intensified 

including 

the 

low  growth  combined  with 

While  increasing  the  overall  tax  burden,  the 
recently  adopted  fiscal  measures  have  some 
desirable  properties  in  terms  of  efficiency.  Due 
to the budget constraints, the shift of taxation away 
from labour and capital was relatively modest and, 
despite  some  rebalancing  of  the  fiscal  adjustment 
towards  expenditure  cuts,  the  overall  tax  burden 
increased.  Against 
the  background  of  Italy's 
the 
persistently 
pressing  need  to  bring  the  public  debt  on  a 
declining  path,  higher  taxation  of  immovable 
property  is  preferable  to  other  taxes:  it  is  less 
harmful  to  long-term  growth,  while  appearing 
broadly  consistent  with  equity  objectives 
if 
properly  designed. (12)  This  is  especially  true  for 
Italy  as 
taxation  on 
immovable  property  used  to  be  relatively  low 
(Graph  3.8).  Some  aspects  of 
the  reformed 
property tax could however be further improved in 
order to enhance progressivity. Broadening the tax 
base  by  bringing  real  estate  taxable  values  in  line 

the  country's  recurrent 

(12)  See  for  instance  Johansson,  Å,  C.  Heady,  J.  Arnold,  B. 

Brys and L. Vartia (2008). 

29 

 
                                                           
 
 
 
European Commission 

Macroeconomic Imbalances - Italy 2013 

%
60

50

40

30

20

10

0

-10

-20

-30

Graph 3.9:Effective marginal tax rates (EMTR) 
for investment financed by debt and new 
equity in the euro area, 2011

MT EL LU FR PT IT BE ES DE NL AT FI SI SK EE IE

EA

EMTR new equity

EMTR debt

Debt bias

Source: Commission services

3.3.  A CLOSER LOOK AT SELECTED DRIVERS OF 

PRODUCTIVITY SLOWDOWN 

3.3.1.  The  business  environment  and  structural 

features of firms 

environment 

The  high  cost  of  doing  business  and  the 
unfriendly  business 
further 
undermine  Italy's  external  competitiveness. 
Firms  operating  in  Italy  are  confronted  with  high 
input costs in several areas. The cost of energy in 
Italy  –  in  particular  electricity  prices  –  is  among 
the highest within the EU (Graph 3.10). Rents due 
to  the  lack  of  competition  in  sheltered  sectors 
imply  higher  prices  for  a  range  of  intermediate 
goods  and  services. (13)  As  was  explained  in  Box 
1, Italian companies – especially SMEs – also face 
considerably  higher  interest  rates  on  new  bank 
loans  than  their  peers  in  other  euro-area  countries 
due  to  the  high  cost  of  bank  funding  and  credit 
tightening.  Capital  markets  meanwhile  remain 
underdeveloped  and  difficult  to  access  for  small 
firms, despite recent government initiatives such as 
the possibility for SMEs to issue mini-bonds. With 
regard  to  the  general  business  environment,  an 
inefficient  public  administration,  including  in  the 
area  of  public  procurement  and  the  civil  justice 
system ( 14),  pervasive  bureaucracy, 
restrictive 
insufficient 
labour 

regulations, 

market 

(13)  See for instance Bank of Italy (2012a). 
(14)  According  to  the  World  Bank's  doing-business  indicators, 
contract  enforcement  in  Italy  on  average  takes 1210 days, 
compared  to  an  OECD  high-income  average  of  just  510 
days. 

30 

infrastructure  and  an 
inadequately  educated 
workforce  all  constitute  major  obstacles  to  the 
creation(15)  and  growth  of  Italian  firms,  resulting 
limited  business  dynamism.  Survey-based 
in 
evidence from the World Economic Forum (2012) 
on the most problematic factors for doing business 
in  Italy  (Graph  3.11)  shows  that  Italy  ranks 
particularly low in the domains of institutions and 
goods and labour market efficiency, and to a lesser 
extent  also  financial  market  development  and 
technological readiness. 

Graph 3.10:Electricity prices for industrial 
consumers in the EU, 2011

CY
DK
IT
MT
DE
SK
IE
BE
ES
LV
HU
CZ
LT
EL
UK
NL
PL
SI
PT
LU
RO
SE
FI
EE
FR
BG

0

5

10
15
EUR / 100 KWh

20

25

Source: Commission services

Graph 3.11:The most problematic factors for 
doing business in Italy

17.1
16.3

14.6

10.4

8.8
8.3

7.1

Tax rates
Inefficient government bureacracy
Access to financing
Restrictive labour regulations
Tax regulations
Inadequate supply of infrastructure
Corruption
Insufficient capacity to innovate
Poor work ethic in national labor force
Policy instability
Crime and theft
Inadequately educated workforce
Foreign currency regulations
Government instability/coups
Inflation
Poor public health

4.6
4.2
4.2
4.2

0.4
0
0
0
0

0 2 4 6 8 10 12 14 16 18

Source: World Economic Forum (2012)
Note: From the list of factors above, respondents were asked to 
select the five most problematic for doing business in their 
country and rank them between 1 (most problematic) and 5. The 
bars in the figure show the responses weighted according to their 
rankings.

(15)  Italy ranks only 84th in the World Bank’s ‘doing business’ 

indicator on ease of starting a business. 

 
 
                                                           
 
 
                                                           
in  Germany  and  France 

The  predominance  of  small  firms  could  be 
explained  by  a  failure  of  small  Italian  firms  to 
enter  the  virtuous  circle  of firm  expansion  and 
productivity  growth.  In  2011  the  average  Italian 
firm  employed  4.0  persons,  compared  to  11.8  in 
Germany  and  5.6  in  France.  In  the  same  year, 
micro-firms  (i.e.  employing  less  than  10  people) 
represented almost 95% of all Italian enterprises in 
2011,  whereas 
the 
corresponding  share  amounted  to  83%  and  93%, 
respectively.  Among  Italian  SMEs,  especially 
micro-firms  suffer  from  a  significant  productivity 
gap  vis-à-vis  larger  firms,  but  also  vis-à-vis  their 
European peers: in 2011, the productivity of Italian 
micro-firms  amounted  to  only  63%  of  that  of  the 
domestic  NFC  sector  as  a  whole,  well  below 
Germany  and  France,  where  the  respective  ratios 
were  78%  and  94%.  Furthermore,  in  2011,  the 
ratio  of  Italian  SMEs'  productivity  to  German 
SMEs'  productivity  was  71%,  whereas  for  micro-
firms,  relative  productivity  was  even  lower,  at 
58%. (16) 

in 

largest  firms 

international  activities 

The failure of many Italian small firms to grow 
prevents  them  from  reaping  the  benefits  of 
globalisation.  A  growing  body  of  economic 
research,  based  on  firm-level  data,  suggests  a 
strong  positive  correlation  between  firm  size, 
firms 
productivity  and  export  performance: 
engaged 
such  as 
exporting are typically larger, employ more labour 
and  have  higher  innovation  capacity.  At  the  same 
time,  larger  firms  are  typically  more  productive 
and  the  probability  of  a  firm  to  become  active 
internationally increases with firm size. Moreover, 
the 
the  furthest 
geographical  reach  and  can  pursue  complex 
internationalisation  strategies,  enabling  them  to 
take  advantage  of  the  opportunities  offered  by 
globalisation,  which  in  turn  could  trigger  further 
productivity increases (e.g. through the transfer of 
knowledge  and  technology).  Altomonte  et  al. 
achieve 
(2012) 
to 
in 
that 
internationalisation,  companies  need 
to  move 
beyond a productivity threshold that enables them 
to  absorb  the  high  fixed  (and  often  sunk)  costs 
related  to  internationalisation  and  achieve  the 
necessary 
international 
competition.  

efficiency 

to  have 

order 

show 

tend 

face 

to 

(16)  Calculations  are  based  on  the  database  accompanying  the 
European  Commission's  Annual  report  on  small  and 
medium-sized enterprises in the EU, 2011/12. 

3. In-Depth Analysis of Selected Topics 

Several  institutional  and  firm-level  features 
hamper  the  growth  of  Italian  firms.  Low 
domestic  competition 
in  product  and  service 
markets  shelters  unproductive  companies  which 
would  otherwise  have  to  exit  and  slows  down  the 
reallocation  of  resources  to  the  best  performing 
firms.  Various  regulations,  for  example  with 
regard  to  the  labour  market  (such  as  dismissal 
rules)  and  the  tax  system  (such  as  particular  tax 
expenditure  items),  may  act  as  disincentives  to 
firm  growth  through  the  exemptions  they  provide 
to small firms and thus represent a de facto tax on 
size.  Still  limited  decentralised  wage  bargaining 
continues to prevent employers to set wages in line 
with local productivity developments, which might 
act  as  a  further  obstacle  to  the  efficient  allocation 
of productive resources to the most efficient firms. 
Companies  may  also  be  encouraged  to  stay  small 
by the complex tax regime or even organised crime 
in  some  regions.  Finally,  the  absence  of  specific 
to  productivity 
firm-level  features  conducive 
growth, 
intensity, 
such  as  a  high  R&D 
performance-related incentives and equity funding, 
as  well  as  the  presence  of  firm-level  attributes 
hampering  productivity  growth,  such  as  family 
ownership  and  its  effect  on  risk  aversion  and 
openness  towards  (non-)technological  innovation 
and  ICT,  hamper  Italian  firms'  ability  to  become 
active internationally. (17) 

The  lack  of  a  business-supporting  environment 
is  the  main  reason  for  Italy's  low  inward  FDI. 
All the factors  mentioned above that contribute to 
an  unfriendly business environment hold back the 
inflow  of  internationally  active  companies.  Italy's 
limited  attractiveness  as  a  business 
location 
implies  that  in  2010  the  overall  stock  of  inward 
FDI  as  a  share  of  GDP  was  just  around  16%, 
compared to 27% in Germany and 38% in France 
(Graph  3.12).  This  reflects  significantly  lower 
foreign  investment  in  financial  activities  and 
professional  and  business  services.  Given  FDI's 
positive  external  effects  under  the  form  of  the 
reallocation  of  domestic  productive  resources  to 
tradable  sectors, 
technology  and 
transfers  of 
knowledge  and  exposure  to  alternative  corporate 
cultures, Italy misses out on an important potential 
source of productivity enhancements. 

(17)  See  for  instance  Altomonte,  C.,  T.  Aquilante  and  G.  I.  P. 

Ottaviano (2012). 

31 

 
                                                           
                                                           
to 

response 

authorities 

their  full  implementation  remains  a  challenge 
and  further  effort  is  needed  in  some  areas.  A 
more  detailed  account  of  the  actions  taken  by  the 
the 
in 
Italian 
recommendations  issued  by  the  Council  in  July 
2012, which cover many of the issues discussed in 
this  review  as  underlying  Italy’s  imbalances,  will 
be  undertaken  in  the  context  of  the  third  EU 
semester.  Overall,  it  is  clear  that  the  adopted 
reforms  can  potentially  raise  Italy’s  growth 
potential  and  competitiveness.  Lusinyan  et  al. 
(2013)  estimate  that,  if  fully  implemented,  the 
product market reforms can raise GDP by 1.0% in 
two years, 4.4% in five years, and 8.3% in the long 
term,  whereas  the  recent  labour  market  reform 
could increase GDP by 0.6% after two years, 1.1% 
after five years and 1.8% in the long run. However, 
implementation  remains  challenging  for  some 
measures,  either  owing  to  delays  in  their  concrete 
operationalisation or due to still pending secondary 
legislation.  In  particular,  this  is  the  case  for  the 
envisaged  new  regulatory  authority  in  charge  of 
fostering  competition  in  the  field  of  transport 
which has not yet been set up, as well as for some 
for 
measures  oriented 
which  implementing  provisions  are  still  expected. 
Some  of  the  provisions  of  the  labour  market 
reform,  notably  those  related  to  incentives  for  the 
recruitment  of  women  and  older  workers,  still 
require implementing legislation. 

towards  simplification 

European Commission 

Macroeconomic Imbalances - Italy 2013 

A range of measures was adopted over the past 
months  to  foster  competition  in  product  and 
service  markets  and  improve  the  efficiency  of 
the  business  environment.  First,  progress  was 
made  to  remove  barriers  to  competition  and  open 
important  market  segments  in  the  services  sector, 
in  particular 
the  professional  orders.  Other 
measures  were  aimed  at  enhancing  transparency 
and  improving  market  functioning  in  network 
industries  such  as  energy  and  transport,  notably 
through  the  ongoing  unbundling  between  the 
incumbent operator and the infrastructure manager 
in the  gas  sector and the envisaged empowerment 
of  existing  and  newly  established  regulatory 
authorities.  Second,  a  range  of  measures  was 
adopted  to  achieve  administrative  simplification, 
improve  SMEs'  access  to  finance,  modernise  the 
public administration, promote the digitalisation of 
the  economy  and  improve  civil  justice  efficiency. 
Regarding  the  latter,  the  enacted  revision  of  the 
to 
judicial  geography  represents  a  key  step 
improve 
It  was 
complemented  by  measures  to  accelerate  judicial 
procedures,  foster  the  specialisation  of  courts  and 
judges, reduce litigation and modernise the use of 
the judicial service. 

judicial  organisation. 

the 

could 

to 
while 

The  labour  market  reform  adopted  in  June 
improving 
contribute 
2012 
productivity 
reducing 
growth 
segmentation  in  the  labour  market.  The  reform 
tackles  the  asymmetries  and  segmentation  of  the 
labour market,  with a view to reconciling security 
with  flexibility.  It  strives  to  better  regulate  entry 
flexibility  by  making  apprenticeships  the  main 
point  of  entry  towards  stable  jobs  and  reducing 
incentives  to  the  use  of  temporary  contracts  and 
non-dependent work by firms. It also improves exit 
through  a  revision  of  employment 
flexibility 
protection 
reform 
establishes a more comprehensive insurance-based 
system of unemployment benefits. The revision of 
employment  protection  legislation  can  reduce  the 
uncertainty  and  cost  of  dismissals.  However,  the 
interpretation  by  the  labour  judge  of  the  new 
legislation  will  be  crucial  for  the  success  of  the 
reform,  while  the  new  constraints  on  the  use  of 
non-regular  contracts  could  negatively  affect 
labour demand.  

legislation.  Finally, 

the 

The  adopted  reforms  could  bring  substantial 
benefits 
Italy’s 
competitiveness and potential growth. However, 

raising 

terms 

of 

in 

32 

 
 
 
3. In-Depth Analysis of Selected Topics 

3.3.2.  The 

specialisation  of  manufacturing 

exports 

Graph 3.14:Manufacturing real value added by 
technological intensity in selected countries, 
2009

The  Italian  economy  is  characterised  by  the 
relative importance of its manufacturing sector. 
The  sector  represented  16.7%  of  the  total  gross 
added value of the economy in 2011 (compared to 
22.3%  in  Germany,  11.5%  in  France  and  16.6% 
for the euro area as a whole). However, this share 
has  been  declining  over  time  (it  was  21.5%  in 
1995)  and  the  contraction  has  been  particularly 
marked since the start of the global financial crisis: 
industrial  output  fell  by  more  than  one  fifth 
between  2007  and  2012  and  the  net  amount  of 
manufacturing  firms  created  in  Italy  has  been 
negative throughout the 2000s (Graph 3.13). 

10%

46%

26%

18%

DE

9%

29%

31%

14%

27%

30%

31%

29%

7%

28%

29%

36%

IT

FR

ES

Low-tech Medium low-tech Medium high-tech High-tech

Source: Commission services (Eurostat) 
Note: At factor cost

Graph 3.13:Net new firm creation in Italy's 
manufacturing sector

20,000

15,000

10,000

5,000

0

-5,000

-10,000

-15,000

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

New firm registrations
Net new firm creation

Firm liquidations

Source: Infocamere (Movimprese)
Note: Excluding sole proprietorships

in 

the 

A  significant  share  of  Italy's  manufacturing 
value  added  is  generated  by  traditional  sectors 
characterised  by  low  technological  intensity, 
with  minor  changes  over  time.  The  share  of 
manufacturing  value  added 
low  and 
medium-low technology sectors amounted to 62% 
in  2009,  compared  to  44%  in  Germany,  59%  in 
France  and  64%  in  Spain  (Graph  3.14).  Over  the 
past  two  decades,  Italy's  sectorial  specialisation 
remained  broadly  stable:  the  high  technology 
sector  accounted  for  6.7%  of  total  manufacturing 
gross  value  added  in  2011  compared  to  6.5%  in 
1992,  a  negligible  increase  over  a  time  span  of 
almost 20 years.  

in 

exports 

Italy’s  specialisation  model  has  exposed  the 
economy  to  fierce  competition  from  emerging 
low  and 
economies.  Italy’s  specialisation 
medium-low 
implies  an 
technology  products 
export  product  mix  that  is  very  similar  to  that  of 
China and other emerging markets that can benefit 
from  low  labour  costs.  Indeed,  the  similarity  of 
Italian exports vis-à-vis China is one of the highest 
among EU countries and the overlap of Italian and 
Chinese 
increases  with  decreasing 
technological  intensity,  as  in  high-tech  exports 
China has built a much stronger position than Italy 
(Graph  3.15).  Thus,  the  growing  role  of  China  in 
global  trade  –  in  particular  since  its  accession  to 
the World Trade Organisation at the end of 2001 – 
has  resulted  in  some  displacement  of  Italian 
exports.  By  contrast,  Germany’s  competitive 
advantage over Italy and other southern countries – 
both  in  terms  of  costs  and  non-cost  factors,  also 
thanks 
in  medium-high 
technology exports – resulted in strong demand for 
German goods (mainly machinery and equipment) 
by  China  and  the  oil  producing  countries. ( 18) 
Germany  was  also  better  able  to  exploit  the 
opportunities  created  by  the  EU  enlargement  of 
2004  through  substantial  FDI  into  the  newly 
acceded Central and Eastern European countries in 
view of taking advantage of lower labour costs and 
higher return of capital.  

its  specialisation 

to 

(18)  See  for  instance  Chen,  R.,  G.  M.  Milesi-Ferretti  and  T. 

Tressel (2012). 

33 

 
 
 
 
                                                           
European Commission 

Macroeconomic Imbalances - Italy 2013 

Graph 3.15:Share in total exports by 
technological intensity, Italy and Germany 
versus China, 2010

60

50

40

%

30

20

10

0

High tech Medium-high

tech

Medium-low
tech

Low tech

)

%

(
e

t

a
r

t

h
w
o
r
g

l

a
u
n
n
A

4

3

2

1

0

-1

-2

-3

-4

-5

Graph 3.16:Change in Italy's manufacturing 
real value added by technological intensisty

1993-1998

1999-2007

2008-2011

China

Italy

Germany

Low tech Medium-low tech Medium-high tech High tech

Source: OECD STAN database

Source: ISTAT

As  a  partial  response  to  the  competitive 
pressures  from  low-cost  countries,  there  is 
evidence  of  some  restructuring,  within  sectors 
rather than across  sectors.  The  main  strategy of 
Italian manufacturing companies to face increasing 
competition  from  emerging  markets  since  the 
beginning of 2000s and possibly even more during 
the  current  crisis ( 19)  has  been  to  move  up  the 
quality ladder. These structural shifts, however, do 
not  seem  sufficient  to  warrant  a  full  recovery  of 
the  country’s  competitiveness.  The  impact  of  the 
global  crisis  may  have  accelerated  the  process 
whereby less efficient companies in the traditional 
industries have been forced to exit the market, with 
a  consequent  shift  of  production  towards  higher 
quality segments more sheltered from competition 
from 
low-cost  economies.  In  fact,  evidence 
suggests  that  low  and  medium-low  technology 
sectors have been hit the most by the crisis (Graph 
3.16). 

(19)  See for instance Istituto Nazionale di Statistica (2013). 

34 

 
 
                                                           
 
 
 
 
 
 
4. 

POLICY CHALLENGES 

Italian 

economy 

continues 

The 
to  be 
characterised  by  macroeconomic  imbalances. 
The  analysis  in  Sections  2  and  3  indicates  that 
macroeconomic  developments  in  the  areas  of 
export  performance  and  the  underlying  loss  of 
competitiveness,  as  well  as  the  high  government 
debt, combined with subdued growth potential, are 
the  main  imbalances  which  Italy  is  facing.  In 
particular, the high level of public debt represents 
a  major  vulnerability  for  the  economy  and  raises 
concerns  on  cross-border  spillovers  given  the 
country’s  systemic  economic  role  within  the  euro 
area.  It  should  be  recalled  that  these  challenges 
were identified under the MIP in the first IDR and 
relevant  policy  responses  were  reflected  and 
country-specific 
the 
integrated 
recommendations  (CSRs)  issued  for  Italy  in  July 
2012.  The  assessment  of  progress 
the 
implementation  of  those  recommendations  will 
take  place  in  the  context  of  the  assessment  of 
Italy's  National  Reform  Programme  and  Stability 
programme under the European Semester. Against 
this  background,  this  section  discusses  different 
avenues  that  could  be  envisaged  to  address  the 
challenges identified in this IDR. 

in 

in 

Italy 

The  loss  of  external  competitiveness  highlights 
the  adjustment  challenge  which 
is 
confronted  with.  The  recent  improvement  in  the 
current  account  does  not  alter  Italy's  need  to 
enhance its productivity growth and restructure the 
economy.  Microeconomic  evidence  shows  that 
stagnating  total  factor  productivity  growth,  which 
underlies  Italy's  dismal  productivity  performance, 
is  strongly  related  to  the  failure  of  many  Italian 
firms  to  grow  and  become  international  players. 
Institutional and regulatory barriers to firm growth, 
structural  features  of  Italian  companies,  and  the 
high  cost  of  doing  business  are  at  the  root  of  this 
problem. Removing these barriers and nurturing a 
better business environment would encourage firm 
creation 
external 
competitiveness.  

and  growth 

foster 

and 

to  address  Italy's 

If  fully  implemented,  the  recently  adopted 
measures 
long-standing 
structural  weaknesses  should  help  to  raise 
productivity  growth  and  thus  contribute  to 
regaining  competitiveness.  Since  late  2011,  Italy 
has been pursuing a strategy of fiscal consolidation 
and structural reforms  with the respective aims of 
ratio  on  a 
putting 

its  public  debt-to-GDP 

downward  path  and  lifting  its  economic  growth 
potential.  By  addressing  the  existing  asymmetries 
of employment protection legislation,  while better 
regulating  flexibility at entry  and  moving towards 
a  more integrated  social safety  net, the June 2012 
labour market reform could contribute to reducing 
segmentation  in  the  labour  market  and  improving 
productivity  growth.  The  recent  social  partners' 
agreement could contribute to a better alignment of 
wage  and  productivity  developments  at  sectorial 
and firm level. These challenges  were  highlighted 
in  the  fourth  CSR  to  Italy  as  part  of  the  2012 
European  Semester.  Furthermore, 
Italy  has 
adopted  measures  aimed  at  fostering  competition 
in  product  and  service  markets  and  at  making  the 
tax  system  more  growth-friendly,  as  suggested 
respectively  in  its  sixth  and  fifth  CSR  of  2012. 
While  there  are  signals  that  some  of  these  efforts 
are  starting  to  bear  fruit  in  some  domains  of  the 
economy,  the  impact  of  many  policy  measures  – 
especially the structural ones – is bound to emerge 
only  gradually  over  the  medium  term,  if  fully 
implemented. 

an 

incentives  to  acquire 

Productivity  growth  could  also  be  fostered  by 
that  provides 
creating 
environment 
companies  with 
the 
appropriate set of structural firm-level features, 
in  particular  in  the  fields  of  innovation,  finance, 
human  resources  and  management  practices.  The 
introduction  of  a  tax  allowance  for  corporate 
equity (ACE) in 2012, which encourages the use of 
funding sources other than debt, constitutes a good 
example.  Attracting  FDI  –  best  achieved  through 
significant  improvements  in  the  Italian  business 
environment  –  could  be  an  important  channel  for 
addressing  structural  and  cultural  impediments  to 
firm expansion, productivity growth and ultimately 
external competitiveness. 

responsive 

Measures  to  alleviate  the  pressure  stemming 
from  the  cost  side  could  contribute  to  the 
improvement of the external competitiveness of 
the  Italian  economy.  Wages  in  Italy  are  still  not 
productivity 
sufficiently 
developments.  In  this  area,  further  progress  in 
promoting the shift of wage bargaining towards the 
company  level  would  play  an  important  role.  In 
addition,  the  labour  tax  wedge  in  Italy  is  among 
the  highest  in  the  EU:  a  further  shift  of  taxation 
away  from labour could  help to reduce the labour 
tax  wedge  and  the  cost  of  labour.  Labour  cost 

to 

35 

 
primary  balance  well  beyond  2014  at  the  level 
expected  to  be  reached  in  that  year.  […]  Indeed, 
risks  would  be  much  higher  in  the  event  of  the 
structural  primary  balance  reverting  to  lower 
values observed in the past, such as the average for 
the period 1998-2012. The focus should, therefore, 
implement 
be  on 
resolutely  continuing 
reduce 
sustainability-enhancing  measures  and 
government debt." 

to 

The favourable momentum for reforms in Italy 
must  be  maintained.  Together  with  determined 
action  at  euro-area  level  to  put  in  place  effective 
crisis  resolution  mechanisms,  the  reform  efforts 
undertaken  so  far  by  the  Italian  authorities  have 
helped  to  regain  some  market  confidence.  To 
consolidate  these  benefits  and  strengthen  Italy's 
resilience  against  possible 
financial 
tensions,  Italy  should  maintain  high  primary 
budget  surpluses  to  ensure  that  the  public  debt  is 
put  firmly  on  a  declining  path.  To  support  fiscal 
consolidation  and  unleash  the  country's  growth 
potential, the gains from structural reforms must be 
secured and the reform momentum sustained. 

renewed 

European Commission 

Macroeconomic Imbalances - Italy 2013 

moderation  could  therefore  help  in  the  short  to 
medium  term,  while  being  mindful  of  the  risk  of 
negative  feedback  loops  related  to  deflationary 
pressures.  

Given  the  decreased  national  saving  rate  and 
the  reduced  availability  of  foreign  private 
financing,  growth  prospects  will  necessarily 
depend  more  on  the  quality  rather  than  the 
quantity  of  investment.  Encouraging  investment 
financed  by  equity  rather  than  debt,  as  well  as 
improving  allocation  efficiency  in  the  Italian 
economy  could  be  key  steps  forward  in  this 
respect. The ongoing spending review in the public 
sector  could  contribute 
the 
efficiency  and  effectiveness  of  government 
spending.  Finally,  encouraging  inward  FDI  would 
be  another  channel  to  increase  the  quality  and 
stability of investment in the domestic market. 

to  strengthening 

the 

the 

low 

country's 

supporting 

The potential role of the Italian financial sector 
in 
economic 
adjustment  remains  limited  for  the  time  being. 
The crisis has put Italian banks under severe stress, 
as  reflected  in  their  dependence  on  Eurosystem 
funding,  the  further  deterioration  of  asset  quality 
and 
level  of  profitability.  Lending 
conditions  remain  tight  and  interest  rates  on  new 
loans – in particular to small firms – continue to be 
high despite accommodative monetary policy. The 
ability  of  Italian  banks  to  reassume  their  role  in 
financing the Italian real economy and supporting 
the 
its  adjustment  will  crucially  depend  on 
underlying  macroeconomic 
conditions.  Key 
elements in banks' strategies going forward should 
include 
in  view  of 
strengthening  and  maintaining  the  capital  base, 
while  adequately  provisioning  for  deteriorating 
asset  quality,  reducing  reliance  on  temporary 
Eurosystem funding, and ensuring the allocation of 
savings 
investment 
the  most  productive 
opportunities. 

improving  profitability 

to 

A  high  primary  budget  surplus  is  essential  for 
public  debt  sustainability,  as  recommended  by 
in  July  2012.  The  Fiscal 
the  Council 
Sustainability Report of December 2012 concludes 
that  "Italy  does  not  appear  to  face  a  risk  of  fiscal 
stress in the short term. Sustainability risks appear 
to be medium in the medium run, while becoming 
low  in  a  long-term  perspective,  conditional  upon 
the  full  implementation  of  the  planned  ambitious 
the 
fiscal  consolidation  and  on  maintaining 

36 

 
 
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