COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for ITALY Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Italy’s 2014 national reform programme and delivering a Council opinion on Italy’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Italy, budget deficit, economic convergence, economic disparity, economic growth, economic reform, economic stabilisation, financial control, job creation, macroeconomics, public debt, social situation, stability programme













EUR-Lex - 52014SC0413 - EN











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52014SC0413

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for ITALY Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Italy’s 2014 national reform programme and delivering a Council opinion on Italy’s 2014 stability programme /* SWD/2014/0413 final */









CONTENTS
EXECUTIVE
SUMMARY                                                                                                    3
1.         INTRODUCTION                                                                                                     5
2.         ECONOMIC SITUATION AND OUTLOOK                                                     6
3.         CHALLENGES AND ASSESSMENT OF POLICY AGENDA                            7
3.1.      Fiscal policy and taxation         
                                                                         7
3.2.      Financial sector                       
                                                                       16
3.3.      Labour market, education and
social policies  18
3.4.      Structural measures promoting
sustainable growth and competitiveness              25
3.5.      Modernisation of public
administration                                                               32
4.         CONLCUSIONS                                                                                                   36
Overview table                                                                                                                 38
Annex           
                                                                                                                        45
EXECUTIVE
SUMMARY
The crisis has exposed and intensified the
weaknesses of the Italian economy. Between 2007 and 2013, Italy’s real GDP contracted by 8.7 %, compared to just 1.7 % for the euro area
as a whole. Employment did not fall as much as in some other euro-area Member
States but there was a sharp reduction in working hours and the unemployment
rate doubled from 6.1 % to 12.2 % over that period. According to the
Commission 2014 spring forecast, economic growth is expected to turn positive
with a modest 0.6 % in 2014 and accelerate to 1.2 % in 2015. The labour market
is set to adjust with a lag to the improving economic conditions, starting with
a rise in working hours. As the labour supply slightly increases, the
unemployment rate is expected to reach its peak this year at 12.8 % to then
marginally decline in 2015. The general government debt-to-GDP ratio, after
increasing by over 26 percentage points between 2008 and 2013 - also due to the
financial assistance to euro-area countries (3.6 % of GDP) - is
expected to peak at above 135 % in 2014.
Italy has made
limited progress in addressing the 2013 country-specific recommendations. With
regard to public finances, the stability programme postpones the achievement of
the medium-term objective to 2016, whereas, in July 2013, Italy was recommended to achieve it by 2014. Substantial progress was made in improving the
functioning of the gas market. Some steps were taken to reduce the tax burden
on labour and implement labour market reforms, ease firms’ access to credit, and
address the weaknesses of civil justice. Limited progress was made in the other
areas. The 2014 national reform programme presents a comprehensive, ambitious and
time-bound plan for action over the programme horizon. Implementation of all measures,
also those adopted in previous years, needs to be carefully monitored.
Restoring robust growth and reducing the high level
of government debt-to-GDP ratio remain the key objectives for Italy. The
in-depth review of the Italian economy published in March 2014 highlighted that
  Italy’s low productivity growth over the last fifteen years has contributed
significantly to the emergence of the two identified macroeconomic imbalances:
the high level of public indebtedness and the loss of external competitiveness.
Weak institutional capacity weighs on competitiveness and growth and is
causing delays in the implementation of necessary reforms. Against this
backdrop, the challenges for the country have remained broadly unchanged since
2013 while becoming more pressing on the back of the past implementation record.

·        
Public
finances:
The high government debt-to-GDP ratio remains a major burden and a source of
financial vulnerability for the Italian economy. While low growth makes it more
difficult to put the public finances on a sustainable path, the high public
debt may hamper growth prospects, dampen domestic demand and crowd out
productive public spending. 
·        
Taxation: The
tax burden in Italy weighs heavily on production factors, leaving considerable
scope for improving the efficiency of the tax system by shifting the tax burden
away from labour and capital. Low tax compliance, associated with a strong
presence of underground economy and undeclared work, further exacerbate the
distortive impacts of taxation on the economy.
·        
Financial
sector:
Non-performing loans have increased strongly during the protracted crisis,
eroding banks' profitability and discouraging banks from extending credit,
especially to small and medium-sized enterprises. Capital markets in Italy remain insufficiently developed, rendering it difficult for firms to access
alternative forms of financing, in particular for innovation. Furthermore,
there are concerns for some segments of the banking sector regarding weaknesses
in corporate governance and cost efficiency.
·        
Labour
market.
The employment rate is well below the EU average and is still far from the
national Europe 2020 employment target. Also, labour market participation of
women remains low. Unemployment continued to increase on the back of the
protracted recession and youth unemployment is among the highest in the EU. Sluggish
labour productivity growth sustains unit labour cost growth, thereby weighing
on cost competitiveness. The high tax wedge on labour further adds to labour
costs. 
·        
Education. High
drop-out rates and the low level of tertiary education attainment, indicate
substantial shortcomings in the education system. Skill gaps in the adult
population limit the innovation capacity of the economy. The transition from
education to the labour market remains difficult, including for highly-skilled
people. 
·        
Social
cohesion. Since
the onset of the crisis, Italy has seen one of the largest increases in the share
of people living at risk of poverty and social exclusion in the EU. Due
to the strong bias towards pensions, the fragmentation of non-pension
expenditure and the lack of effective activation and enabling services, the social
protection system is not well equipped at tackling poverty.
·        
Services
and network industries. Italy has substantially improved its
product market regulation over the past 15 years. Acceleration of its effective
implementation would help to ensure the beneficial impact of reforms on the
ground. Furthermore, competition restrictions in important sectors of the
economy remain (including professional services, postal services, insurance,
transport and telecommunication, retail and fuel distribution, and local public
services). There are infrastructure bottlenecks in energy, transport and
telecommunication.
·        
Public
administration and business environment. Weaknesses in
public administration continue to contribute to an unfavourable business
environment, discourage foreign direct investment, and hamper the swift implementation
of reforms and the proper management of EU funds, notably in southern regions.
The main shortcomings include a cumbersome legal framework at various
government levels, long-standing weaknesses in the civil justice system (notwithstanding
recent progress) and inefficiencies in public procurement. High levels of
corruption further weigh on the economy. 

1.     
INTRODUCTION
In
May 2013, the Commission proposed a set of country-specific recommendations for
economic and structural reform policies for Italy. On the basis of these
recommendations, the Council of the European Union adopted six country-specific
recommendations in the form of a Council Recommendation in July 2013. These
country-specific recommendations concerned public finances, the implementation
of past reforms and the public administration, the financial sector, the labour
market, education, social policies, taxation, and market opening in services and
network industries. This staff working document assesses the state of
implementation of these recommendations in Italy.
This
staff working document assesses policy measures in light of the findings of the
Commission's 2014 Annual Growth Survey[1]
and the third annual Alert Mechanism Report[2], which were published in November
2013. The Annual Growth Survey sets out the Commission's proposals for building
the necessary common understanding about the priorities for action at national
and EU level in 2014. It identifies five priorities to guide Member States to
renewed growth: pursuing differentiated, growth-friendly fiscal consolidation,
restoring normal lending to the economy, promoting growth and competitiveness
for today and tomorrow, tackling unemployment and the social consequences of
the crisis, and modernising public administration. The Alert Mechanism Report
serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. The Alert Mechanism Report
found positive signs that macroeconomic imbalances in Europe are being
corrected. To ensure that a complete and durable rebalancing is achieved, Italy and 15 other Member States were selected for a review of developments in the accumulation and
unwinding of imbalances. These in-depth reviews were published on 5 March 2014
along with a Commission communication.[3]

Against
the background of the 2013 Council Recommendations, the Annual Growth Survey,
the Alert Mechanism Report and the in-depth review, Italy submitted updates of
its national reform programme and its stability programme on 22 April 2014.
These programmes provide detailed information on progress made since July 2013
and on the plans of the government for the period 2014-2018. The information contained
in these programmes provides the basis for the assessment made in this staff
working document. The programmes went through a consultation process involving
Italian major stakeholders and regional authorities, and were formally endorsed
by the national parliament before their submission to the European Commission.
2.        
ECONOMIC SITUATION AND OUTLOOK
Economic situation
After a severe recession, Italy’s growth continues
to be sluggish. The protracted contraction in output came to a halt
in the last quarter of 2013, when GDP increased by 0.1 %. However, according
to preliminary estimates, this was followed by a further mild fall in the first
quarter of 2014. Over 2013, real GDP has fallen by 1.9 % (after 2.4% in
2012). The strong fall in domestic demand acted as a drag on the economy due to
persistently tight financing conditions and high uncertainty holding back
consumption and investment. On the back of a stable activity rate, employment
fell in 2013, with the unemployment rate on average reaching 12.2 % of
the labour force in 2013 (40 % for the youth unemployment rate). 
Economic
outlook
A slow recovery is expected in 2014 and 2015, mainly
driven by external demand. The Commission 2014 spring forecast
projects real GDP to grow by 0.6 % in 2014. As external demand
strengthens — including demand from euro-area trade partners — industrial
activity is expected to increase and the service sector is set to follow suit. Due
to persistently difficult labour market conditions, private consumption is
expected to rise only gradually, supported by the cut to the labour tax wedge.
For 2015, the ongoing consolidation of Italian banks’ balance sheets is set to
pave the way for more favourable credit conditions, supporting domestic demand
and ultimately output growth, expected to accelerate to 1.2 %. As both
exports and imports rise, the current-account surplus is forecast to stabilise at
1.5 % of GDP in 2014-2015. Consumer inflation is expected to reach a
historical low in 2014 at 0.7 %, also due to decelerating energy prices, before
recovering to 1.2 % in 2015. 
Headcount employment is forecast to continue falling
in 2014 and then increase slightly in 2015. The labour
market is set to adjust with a lag to the improving economic conditions,
starting with a rise in working hours. Headcount employment is expected to fall
further in 2014, although only marginally, implying a modest increase in labour
productivity. As the labour supply slightly increases, the unemployment rate is
expected to peak this year. The slack in the labour market is expected to
restrain wage growth, resulting in a moderate increase in nominal unit labour
costs. For 2015, as the economy strengthens, employment is set to expand and unemployment
to fall marginally. 
Italy's macro
projections for 2014-2015 in the stability programme and the national reform
programme are broadly in line with the Commission 2014 spring forecast. Italy’s stability programme covers the period 2014-2018. The macroeconomic projections are
marginally above the Commission 2014 spring forecast for 2014 and 2015. They
appear slightly optimistic for the 2016-2018, when real GDP growth is projected
to be supported by the impact of the adopted structural reforms. In line with
the underlying macroeconomic scenario, the programme projects employment to
recover as from next year and the unemployment rate to peak at 12.8 % in 2014
and then to fall progressively. The programme outlook also implies a current
account surplus of around 1.5 % of GDP over the programme’s horizon. HICP inflation
is expected to be at 0.9 % in 2014 and 1.2 % in 2015, before stabilising at 1.5
% until 2018. The national reform programme and the stability programme share
the same macroeconomic outlook. 
The stability programme and the national reform
programme include an estimation of the impact of structural reforms. The
two programmes include an estimation of the impact of selected structural
reform on real GDP, private consumption, fixed investment and employment as
well as on the general government primary balance and debt ratio. The selected
reforms are: (i) the labour market, product market and the business environment
reforms adopted in 2012 (after factoring in their delayed implementation
relative to the impact estimated in the 2013 national reform and stability programmes)
as well as in 2013; (ii) the 10% reduction in the regional tax on economic
activities (IRAP) and its financing through the increase in the withholding tax
on households’ financial income adopted in 2014; and (iii) the announced
spending review and the reduction in the tax burden on low-income employees (so
far adopted only for 2014). The overall impact of those reforms, assuming their
full implementation, on the real GDP level is estimated at 0.3 percentage point
by 2014, 0.8 percentage points by 2015 and 2.2 percentage points by 2018. Only
the impact of the first set of reforms (see point (i) above) is factored in the
macroeconomic scenario of the two programmes (with an impact on the real GDP
level of 0.3 percentage points for 2014, 0.6 percentage points for 2015,
gradually reaching 1.7 percentage points in 2018). With regard to the
additional payment of commercial debt arrears announced for 2014 (EUR 13
billion), only the impact on public debt is factored in. The national reform
programme includes also an estimation of the impact of the payment of
commercial debt arrears and of the measures to prevent their accumulation in
the future on the other variables, which is however not considered in the
macro-scenario of the two programmes. All estimations are carried out using
well-established macroeconomic models.[4]
The modelling choices and assumptions are detailed. 
3.        
CHALLENGES AND ASSESSMENT OF POLICY
AGENDA
3.1.  
Fiscal policy and taxation
Budgetary developments and debt
dynamics
In 2013, despite a sharp economic contraction, the
headline deficit remained stable at 3% of GDP thanks to the fiscal adjustment
enacted over 2011-2012, slightly short of the 2.9% of GDP targeted in the 2013
programme.
The Commission forecast projects the deficit to decline to 2.6% of GDP in 2014
and to 2.2% in 2015. The 2.6% is in line with the stability programme target,
which in turn is 0.1 percentage point of GDP higher than in the 2014 Draft
Budgetary Plan submitted in October 2013. The integration in the forecast of
the impact of the labour tax wedge cut adopted by decree law[5] after the adoption
of the stability programme leads to lower revenue and expenditure projections
for 2014. For 2015, the Commission forecast, based on a no-policy-change
assumption, does not incorporate the tax cut to low‑income employees and
expenditure savings announced in the stability programme, as details have not
been specified yet. A similar approach is used for the additional fiscal
adjustments (0.3 percentage point of GDP) foreseen in the stability programme but
still to be enacted and the € 3 bn fiscal adjustment adopted with the 2014
budget law, which has not yet been detailed. The further improvement in the
general government balance planned in the stability programme over 2016-2018 is
based on an additional 0.3 percentage point of GDP permanent fiscal
adjustment planned as of 2016 (still to be specified), declining interest
expenditure in 2017-2018, as well as a sustained economic growth. 
The expenditure ratio is projected to decline over
the programme period. The stability programme trend
projections (based on unchanged legislation) point to an overall decline in the
expenditure ratio of 3.5 percentage points of GDP over the 2014‑2018
programme period, also thanks to a sustained economic growth. Compensation of
employees displays the largest decline (‑1.4 percentage points of
GDP) also as a result of the unchanged legislation assumption, which implies no
further increases in public sector wages up to 2017.[6] The decline in the
expenditure ratio is supported by lower interest expenditure, following the
assumption of continued decline in spreads between yields on Italian and German
10-year bonds (to 150 bps in 2015 and 100 bps as of end-2016). Over the
programme period, the revenue‑to‑GDP ratio is expected to decline
slightly (by 0.8 percentage point), mainly due to the projected fall in social
contributions and direct taxation. Relative to last year's stability programme,
the fiscal adjustment is backloaded, as the lower deficit reduction projected
in 2014 is only partly explained by lower than expected growth. 
     || Box 1. Main budgetary measures ||   
   || Revenue || Expenditure ||   
   || 2014 ||   
   || ·      Increase in stamp duty on households' financial assets (0.07% of GDP) ·      Increase in taxation on financial sector (0.16% of GDP) ·      Increase in tax allowances on employees' PIT (-0.1% of GDP) ·      Reduction in social contributions for labour accidents and sickness (-0.06% of GDP) ·      Reduction in property taxes (-0.07% of GDP) || ·      De-indexation of higher pensions (‑0.03% of GDP) ·      Additional investment expenditure (0.2% of GDP)   ||   
   || 2015 ||   
   || ·      Increase in tax allowances on employees' PIT (-0.1% of GDP) ·      Reduction in social contributions for labour accidents and sickness (-0.06% of GDP) ·      Reduction in property taxes (-0.07% of GDP) || ·      De-indexation of higher pensions (‑0.12% of GDP)   ||   
   || 2016 ||   
   || ·      Increase in tax-base deductions for financial sector's losses on loans (-0.11% of GDP) ·      Increase in tax allowances on employees' PIT (-0.1% of GDP) ·      Reduction in social contributions for labour accidents and sickness (-0.06% of GDP) ·      Reduction in property taxes (-0.07% of GDP) || ·      De-indexation of higher pensions (‑0.18% of GDP)   ||   
   || Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||   
The objective of the budgetary strategy outlined in
the 2014 stability programme is the achievement of the medium-term objective of
a balanced budgetary position in structural terms by 2016, while complying with
the minimum linear structural adjustment required by the debt reduction
benchmark (forward-looking element) over the 2013-2015 transition period. The
programme confirms the medium-term objective of a balanced budgetary position
in structural terms, which reflects the objectives of the Stability and Growth
Pact. However, the stability programme postpones the achievement of the medium-term
objective to 2016, whereas, in July 2013, the Council recommended Italy to achieve it by 2014. The justification of the postponement is argued on the basis
of Regulation 1175/2011 (Article 5), in particular the severe economic
conditions (i.e. a largely negative output gap, at a level in 2014 still much
worse than the Representative Output Gap – ROG[7]) and unfavourable firms' liquidity
conditions, which have pushed the government to accelerate the settlement of
commercial debt arrears. The latter is resulting in a further increase in the
debt level and, to a lesser extent, in the deficit. The stability programme
also advocates the "structural reform clause", given the government's
intention to implement several structural reforms eventually leading to a
positive impact on potential economic growth and reducing the debt‑to‑GDP
ratio in the coming years. Those reforms would also imply the need of
additional resources (already financed and incorporated in the budgetary
projections). 
The structural balance further improved in 2013 but
the adjustment path towards the medium-term objective is projected to slow down
in 2014. In
2013, the structural balance is estimated to have improved by 0.6 percentage
point, to -0.9% of GDP, although the 2013 stability programme planned a larger
structural adjustment (of 0.9 percentage point, to -0.5% of GDP) against the
background of a projected milder real GDP contraction (‑1.3% vs. ‑1.9%).
For 2014, the (recalculated) structural adjustment planned in the stability
programme  is only 0.2 percentage point of GDP. In
2015, the stability programme plans a 0.4 percentage point of GDP
(recalculated) improvement in the structural balance. This compares with the
0.1 percentage point projected on a no‑policy‑change basis in the
Commission forecast, which highlights the risk of significant deviation from
the required structural adjustment towards the medium-term objective in 2015.
The expenditure benchmark shows a risk of significant deviation in 2015
according to both the stability programme and the Commission forecast. In the
case of the stability programme, this is also explained by the fact that
expenditure figures provided in the programme are trend projections not
consistent with the budgetary targets that include further fiscal adjustment
still to be enacted. 
The stability programme budgetary targets are
subject to downside risks. The main risk comes from the need to
identify and implement through the on-going spending review sizeable and
permanent expenditure savings at all levels of government, which will also be
needed to finance the announced permanent cut to the personal income tax on low‑income
employees. In addition, the macroeconomic scenario underpinning the budgetary
projections in the programme is slightly optimistic, in particular for the
outer years of the programme when growth is projected to be well above the
current estimate of potential growth based on the Commission forecast. It is
however true that a full and fast implementation of the planned structural
reforms could help achieve a real GDP growth close to the projections put
forward in the programme (see also below Box 4
"Potential impact of structural reforms on growth – a benchmarking
exercise"). 
The stability programme projects a further increase
in 2014 in the general government gross debt ratio followed by accelerating
decline to reach 120.5% of GDP in 2018. In 2014, the
debt ratio is projected to reach around 135% of GDP mainly due the on-going
settlement of commercial debt arrears. As of 2015, the stability programme projects
a steadily and accelerating decline in the debt ratio (to 120.5% of GDP in
2018) thanks to
increasing primary surpluses, falling interest expenditure coupled with sustained
nominal growth as well as an ambitious privatisation plan of 0.7% of GDP per
year over 2014-2017. The Commission forecast points to a somewhat higher debt
ratio in 2014, essentially explained by the lower real GDP growth. The lower
decline in the debt ratio forecast in 2015 is mainly explained by higher
interest expenditure and lower primary surplus, based on a no-policy‑change
assumption. In addition, the Commission forecast incorporates lower
privatisations proceeds (only 0.5% of GDP used to reduce the debt in 2015). 
The Commission 2014 spring forecast points to a risk
of non-compliance with the debt rule. The
(recalculated) structural adjustment planned in the programme to comply with the
minimum linear structural adjustment required for the debt reduction benchmark
over the 2013-2015 transition period and based on the stability programme debt‑to‑GDP
projections is around 0.3 percentage point of GDP in 2014 and
0.5 percentage point in 2015. This would allow Italy to comply but only
thanks to the allowed annual deviation of 0.25 percentage point of GDP.
However, the debt projections in stability programme heavily rely on the
implementation of the ambitious privatisation plan and sustained economic
growth.
The
Commission
spring 2014 forecast points to a risk of non‑compliance with the debt
reduction benchmark in 2014. The expected structural adjustment (only 0.1 percentage
point of GDP) falls short of the required minimum linear structural adjustment
that, according to the forecast, would be of around 0.7 percentage point
of GDP. This risk of non-compliance with the debt benchmark was already
highlighted in the Commission's Opinion on Italy's 2014 Draft Budgetary Plan
issued on 15 November 2013.[8]
Risks to the stability programme debt projections (above
those related to possible higher deficits) are mainly related to the implementation
of the ambitious privatisation plan, which remains largely unspecified. 
The exemption requested by Italy to deviate from the required path towards the medium-term objective cannot be granted
because of the risk of non-compliance with the debt-reduction benchmark, as
currently projected in the Commission 2014 spring forecast. The Commission
forecast projects a structural adjustment of only 0.1 percentage point of GDP
in 2014, as it classifies as one-off some of the taxes (mainly from the banking
sector) used by the government to finance the enacted cut to the personal
income tax on employees in 2014. This falls short of the minimum linear
structural adjustment of 0.7 percentage point of GDP in 2014 that, based
on the Commission 2014 spring forecast, is needed to comply with the debt
benchmark.
Fiscal framework
Following
a rapid progress in the development of Italy's fiscal framework, the pace of
reforms has slowed down in the recent past. In particular,
there has been a significant delay in setting up the board of the parliamentary
budget office, which will act as independent Fiscal Council in Italy, a key part in delivering on Italy's commitments in particular in the context of the
"Two-pack" and the Fiscal Compact. The board was appointed by
Parliament only at the end of April 2014 after the stability programme
adoption; therefore, the projections underpinning the programme have not been
endorsed by an independent institution as requested by the two pack. Additional
steps are needed to make the Fiscal Council fully operational by September
2014, i.e. in time for the assessment of the 2015 Draft Budgetary Plan. Meanwhile,
previous reforms notably aiming at improving coordination between levels of
government are yet to fully deliver their expected benefits. 
The
launch of a comprehensive spending review sets high expectations.
With the nomination of a dedicated Commissioner leading the spending review on
a tight schedule, far-reaching scope and aggressive targets, Italy is set to
address head-on the quality and efficiency of its public expenditure; however
the review will have to demonstrate the feasibility of delivering rapid results
in the short term and inscribe them in long-lasting impactful reforms.
Long-term
sustainability
Risks to the sustainability of Italy’s government debt are medium-to-low provided that the current fiscal stance is not
eased.
Government debt (132.6% of GDP in 2013 and forecast to rise to 133.9% in 2015)
is currently above the 60% of GDP Treaty threshold, and projected to fall by
2030 although remaining above the reference value. The full implementation of
the stability programme would accelerate the decreasing path of the debt‑to‑GDP
ratio, although it would remain above the 60% reference value in 2030. In the
medium-term, Italy appears to face medium fiscal sustainability risks. The
medium-term sustainability gap,[9]
showing the adjustment effort up to 2020 required to bring debt ratios to 60 %
of GDP in 2030, is at 1.5 percentage points of GDP, primarily related to
the high level of government debt forecast for 2015. In the long-term, Italy appears to face low fiscal sustainability risks, primarily related to the structural
primary balance forecast in 2015. The long-term sustainability gap[10] shows
the adjustment effort needed to ensure that the debt-to-GDP ratio is not on an
ever-increasing path, is at -1.6 percentage points of GDP. Risks would be
significantly higher in the event of the structural primary balance reverting
to lower values observed in the past, such as the average for the period
2004-2013. It is therefore appropriate for Italy to continue to implement
measures that reduce government debt.
Tax system
The tax burden in Italy weighs heavily on productive
factors and significant less than the EU average on consumption. In
2013, Italy was recommended to shift the tax burden away from labour and
capital onto consumption, property and the environment in a budgetary neutral
manner, also by reviewing VAT and direct tax expenditures and by reforming the
cadastral system. Italy was also recommended to pursue the fight against tax
evasion, shadow economy and undeclared work, and enhance tax compliance. The
analysis in this staff working document leads to the conclusion that Italy has
made limited progress in addressing the 2013 recommendation in these areas (for
the full assessment of Italy’s response to country-specific recommendations see
the overview table in Section 4). Italy continues to face tax-related
challenges, which are relevant for the 2014 Annual Growth Survey priorities of
growth‑friendly fiscal consolidation, tackling unemployment, promoting
growth and competitiveness and modernising public administration. 
Italy has shifted
taxation away from productive factors to a limited extent. This
was done in three steps: first, after the 1 percentage point increase enacted
in September 2011, the standard VAT rate was further increased from 21 %
to 22 % in October 2013, while leaving the scope and level of reduced
rates unchanged; second, a small reduction in taxes on labour was included in
the 2014 budget (amounting to around 0.15 % GDP as from 2015); and third,
a further reduction in the labour tax wedge was enacted in April 2014 in the
form of a cut in the personal income tax for low taxable incomes and a
10 % decrease in the regional tax on economic activities (IRAP). While
the IRAP cut is stipulated to be permanent, the personal income tax cut was
enacted only for 2014 and the national reform programme commits to making it
permanent but not before having identified the financing resources. The
reduction in the personal income tax is intended
primarily to support private consumption, but in the short term its impact on
growth could be offset by the spending savings needed to finance it. The expenditure
savings will instead have no negative impact on long-term growth if the
on-going spending review manages to effectively tackle the inefficiencies of
Italy's public expenditure at all levels of government, preserving
growth-enhancing spending like R&D, innovation, education and essential
infrastructure projects. The cut to the personal income tax could also have a
positive impact on labour demand and competitiveness to the extent that it
translates into lower wage claims. In 2013, the recurrent taxation on
property, considered the least detrimental to medium/long‑term growth,
was reformed again after the increase adopted at in end-2011, with revenue
expected to decline slightly (the share of revenue from recurrent taxes on
immovable property was 1.6 % of GDP in 2012, i.e. broadly in line with
the EU average of 1.5 %). 
High tax evasion, associated with a strong presence
of shadow economy and labour market irregularities, exacerbate the distortive
impact of taxation on the economy. The VAT gap is
estimated at 28% in 2011, among the highest in the EU.[11] The Italian
statistical institute (ISTAT) estimated that in 2008 the non-observed economy
accounted for about 17% of GDP. Italy has taken some additional tax enforcement
measures but decisive action to improve the relationship between taxpayers and
the tax administration and to prevent tax evasion is still needed..The 2014
Stability Law provided for the increase of labour inspectors and raised both
the minimum and maximum amount of fines for employers employing undeclared
workforce. The Italian tax administration has obtained increased access to
information on taxpayers’ bank accounts and assets, even those abroad. However,
processing all this new information is proving difficult.[12] Few measures have
been taken to improve tax compliance, modernise the tax administration or speed
up the recovery of tax debts. One step taken in this direction is a pilot
cooperative compliance programme for high taxpayers. However, tax compliance
costs remain high (tax compliance takes 269 hours versus 178 hours on average
in the EU for mid-sized companies in 2013), mainly because of burdensome tax
obligations and frequent adjustments of tax rules via ministerial decrees
instead of systemic tax reform. The burdensome tax obligations also imply that
assessments often result in contentious cases, which reduces the credibility
and effectiveness of the efforts to fight tax evasion. Uncollected fines, taxes
and social security contributions have accumulated over the years and amount
now to a stock at face value of EUR 600
billion, signalling difficulties with enforced tax debt recovery.[13]
The rate of enforced recovery of tax arrears was put at 1.94% for 2012, showing
a declining trend since 2010.[14]
In 2013, the government released a comprehensive report on tax evasion and
measures taken to address it.[15]
The report confirms the declining trend in enforced tax debt collection.[16]
The enabling law on taxation adopted by the Italian Parliament
in February 2013 could represent a significant step forward, once implemented. The
enabling law mandates the government to review cadastral values according to
current market values, which would increase the fairness of property taxation.
It also foresees a revision of tax expenditures, including VAT reduced rates,
which would help reducing distortions. It further aims at simplifying the tax
system through the use of pre-filled tax returns, modernising tax litigation
and reforming direct tax expenditure. The enabling law also provides for a
rationalisation and increase of environmental and energy taxation, with the
twin aim of better protecting the environment and reducing income taxes. Environmental
taxation increased by 0.3 % of GDP and, at 3 % in 2012, is only
slightly above the EU average. A recent study indicates that there is still
scope for additional revenue from environmental taxes, notably with regard to
pollution and resource taxes (at 0.03 % of GDP in 2012, among the lowest
in the EU ranking), and alignment of fuel taxation according to energy content
of fuels. The study also finds scope for removing environmental harmful
subsidies, in particular: the preferential treatment of company cars; the
reduced rates for gas oil used in agriculture, horticulture, forestry and
aquaculture; and the fuel exemptions for the transportation of goods and
passengers along national waterways and within EU waters.[17] All secondary
legislation implementing the enabling law is to be adopted by end of March
2015.
Box 2:
Conclusions from the March 2014 in-depth review on Italy
The
third in-depth review on Italy under the Macroeconomic Imbalances Procedure was
published on 5 March 2014 along with a Commission communication.[18]
On the basis of the review, the Commission concluded that Italy is experiencing excessive macroeconomic imbalances, which require specific monitoring
and strong policy action. The main observations and findings are:
·        
Persistent
low productivity growth is at the root of the country’s declining
competitiveness and weighs on the sustainability of public debt.
·        
The
very high government debt is a heavy burden for the Italian economy and a major
source of vulnerability.
·        
The
correction of Italy’s current account is mostly driven by falling imports,
while export competitiveness has not improved.
·        
Remaining
barriers to competition, inefficiencies in public administration (including
justice), and governance weaknesses hinder resource reallocation to more
productive firms and sectors. Insufficient development of capital markets holds
back technology absorption and innovation further.
·        
Italy’s
human capital endowment is not adapting to the needs of a modern competitive
economy, partly due to the difficulty of transition from education to work. Its
wage structure favours seniority and thus reduces the return on education for
younger cohorts in Italy compared to the rest of the EU.
·        
The
crisis has eroded the initial resilience of the Italian banking sector and has
weakened its capacity to support the economic recovery. 
·        
Italy’s
macroeconomic imbalances have adverse effects on the rest of the euro area. Italy’s slow growth acts as a drag on the recovery of the euro area as a whole and its high
debt could impact on the euro area by affecting financial market sentiment and
confidence.
The in-depth
review also discusses the policy challenges stemming from these imbalances and
possible avenues for action. In particular, the following points are made:
·        
Italy has
for too long postponed much-needed structural reforms. The decline in financial
market pressures and the gradual improvement of the economic outlook represent
a window of opportunity to accelerate the pace of reforms.
·        
Robust
productivity-enhancing reforms are necessary to ensure sustainable recovery and
unleash Italy’s growth potential. As productivity-enhancing measures take time
to bear fruit, levers to address cost pressures in the economy could be
explored.
·        
Reducing
the high government debt at a satisfactory pace requires sustained fiscal
discipline. Reaching the medium-term objective (MTO) of a structurally balanced
budget and achieving and maintaining sizeable primary surpluses for an extended
period are essential to put Italy’s high government debt on a steadily
declining path while preserving investor confidence.
3.2.   Financial
sector
The capacity of the Italian banking sector to
support the economic recovery and adjustment has been eroded by the protracted
crisis. The long recession has taken its toll on Italian banks'
balance sheets, in particular through a strong increase in non-performing loans
(16.7% of customer loans in December 2013), mainly concentrated in non‑financial
firm exposures. High credit risk and elevated bank funding costs, owing partly
to euro‑area financial market fragmentation, in addition to common
factors such as the phase-in of stricter capital requirements, continue to keep
credit conditions tight, affecting small firms in particular. Furthermore, some
segments of the banking sector still display weaknesses in corporate governance
practices and cost efficiency. Capital markets in Italy, in particular equity
markets, are insufficiently developed, rendering it difficult for firms to find
adequate external financing for innovative activities and maintaining the
dependence of the corporate sector on banks.
The
analysis in this staff working document leads to the conclusion that Italy has
made some progress in addressing the recommendation Italy received in 2013 (for
the full assessment of Italy’s response to country-specific recommendations see
the overview table in Section 4).
Some progress has been made in addressing the
problem of deteriorating asset quality, in line with the priorities set in the
2014 Annual Growth Survey. From the second half of 2012 until
mid-2013, the Bank of Italy conducted a targeted loan-portfolio quality review
of 20 large and medium-sized domestic banking groups with lower non-performing
loan coverage ratios. This exercise led in particular to an increase in
loan-loss provisions. For eight banks, on-site inspections were extended to the
entire loan portfolio. The 2014 Stability Law enhanced the tax deductibility of
loan-loss provisions and loan write-offs. This is likely to foster a further
increase in non-performing loan coverage ratios and limit the impact of
deteriorating asset quality on profits. In addition, some large Italian banks
have recently announced initiatives to repair their balance sheets, mainly by
selling their distressed assets or setting up defeasance structures. Finally,
the ongoing comprehensive assessment by the European Central Bank, which
includes 15 Italian banking groups, is expected to further increase
transparency as to the quality of banks' balance sheets. The assessment has
also triggered the announcement of capital increases by several banks and extra
loan-loss provisioning at the end of 2013.
Progress in tackling relative weaker cost efficiency
has been limited, but some steps has been taken in strengthening corporate
governance. The combination of the Italian banking sector's
relatively lower cost efficiency – linked in particular to high branch density
– and subdued profitability has led the Bank of Italy to call on banks to
increase their internally generated resources by reducing costs, and to limit
dividend payments and executive remuneration. Although banks have made efforts
to reduce operating costs and improve efficiency, further steps may be needed
to support profitability. As to banks' corporate governance, the Bank of Italy
has issued new provisions on the composition and functioning of the banks'
management bodies, the self-evaluation process that must be carried out by
these bodies, the role of the chairman of the board of directors and the
transparency of the procedure to appoint of board members. These provisions are
welcome but their effect will depend on their concrete application by the banks
and enforcement by the supervisor. Furthermore, a legislative proposal which
transposes the new EU Capital Requirements Directive includes provisions aimed
at strengthening the Bank of Italy's supervisory powers and rules applicable to
transactions which may imply a conflict of interest for shareholders or board
members. The proposal also provides for a more thorough and comprehensive framework
for the independence, experience and integrity requirements for board members.
There has been virtually no progress on the role of bank foundations – which
despite their positive role as long-term investors – continue to exert
significant and at times opaque influence on banks, partly because of
shareholder coalitions, voting right ceilings and cross-holdings. Furthermore,
supervision over foundations is also still provisionally in the hands of the Italian
Ministry of Economy and Finance, and the foundations’ self-regulatory charter
could be strengthened. Finally, corporate governance features such as the
one-shareholder-one-vote principle, share ownership ceilings and membership
constraints typical of cooperative banks may not be appropriate in the case of
large (listed) cooperative banks (namely 'banche popolari') as they may
discourage large shareholders from exerting influence and active oversight of
management and also represent obstacles to raising new capital. New corporate
governance principles specifically targeted at 'banche popolari' to ensure
broad shareholder representation have been introduced, but their impact needs
to be closely monitored.
Access to finance
Some steps have been made in diversifying firms'
access to finance and reducing their bias towards debt financing – both
priorities set in the 2014 Annual Growth Survey. Several
measures have been taken to diversify firms' sources of external funding away
from bank loans. The 2014 Stability Law provides for an increase in the
notional return on new equity capital or reinvested earnings (allowance for
corporate equity – ACE), which firms can deduct from taxes from the initial 3%
introduced in 2012 to 4% in 2014, 4.5% in 2015 and 4.75% in 2016. This could
contribute to reducing the relatively high leverage of Italian firms by
strengthening their capital base. While recent surveys indicate that the
take-up of allowance for corporate equity so far has been modest, enhancing
demand prospects and reduced uncertainty are expected to spur equipment
investment in the coming months and thus the need for new capital.
Nevertheless, there still seems to be some scope for further reducing the debt
bias in taxation. The framework for mini-bonds established in 2012 to diversify
access to finance of (small) firms has been finalised with the necessary
implementing decrees. The take-up of mini-bonds – still limited, in particular
by small firms – might benefit from recent measures extending Italy's securitisation framework to bonds and fostering their acquisition by institutional
investors. Other positive steps include the entering into force of tax
incentives for investing in the capital of innovative start-ups, and the
issuing by the Italian financial market regulator (Commissione Nazionale per le
Società e la Borsa - CONSOB) of instructions for using equity crowd-funding and
of a memorandum of understanding with initiatives to foster the further
development of Italian stock markets. As regards funding through traditional
financial intermediaries, several initiatives have been taken to ease (small)
firms' access to finance. The Guarantee Fund for small and medium-sized
enterprises is being further refinanced for the period 2014-2016, while access
conditions for firms have been eased andits functioning has been improved. It
has also been integrated into the new National Guarantee System and has
supported the recapitalisation of Italian collective loan guarantee institution
(confidi). In addition, the publicly-controlled bank Cassa Depositi e
Prestiti (CDP) has made available EUR 5 billion extra resources to support
lending in view of investment by small and medium-sized enterprises, while
eligibility criteria have been broadened. Furthermore, a new debt moratorium
was agreed in 2013, extending previous measures to temporarily suspend loan
payments and lengthen maturities for viable but financially distressed small
and medium-sized enterprises. Other actions include the creation of the 'Fondo
di Valorizzazione' which will temporarily invest in and support viable but financially
distressed firms, and the refinancing of Italy's Fund for Sustainable Growth
for the period 2014-2015. Overall, these measures are helpful but limited in
scope, and most maintain the focus on debt financing. The government has made
some progress with the repayment of commercial debt arrears, providing
liquidity relief to firms (EUR 23.5 billion disbursed at the end-March of 2014
out of EUR 47 billion made available in 2013). The national reform
programme includes plans to disburse an additional EUR 13 billion in 2014 and
accelerate repayments through financial intermediaries.
3.3.           
Labour market, education and social
policies
Labour market
The unemployment rate has doubled since 2007 and
labour market participation remains very low, while still increasing unit
labour costs weigh on competitiveness. The
unemployment rate rose from 6.1 % in 2007 to 12.2 % in 2013. The
situation is particularly worrisome for young people. Youth
unemployment (age 15-24) reached 40 % in 2013, and the proportion of
young people aged 15-29 not in education, employment or training was 24 %
in 2012, among the highest in the EU, reaching 50% in the South and 33.6% for
non-EU born. The employment rate of 20-64 year-olds (59.8 % in 2013) is
well below the EU average and the national Europe 2020 target of 67-69 %.
Labour market participation continues to be low among women and young people,
especially in southern regions, and the number of persons available for work
but not actively seeking it – commonly referred to as 'discouraged workers' thereby
implying a wider measure of under-employment than the measure of unemployment
alone – also increased substantially during the crisis. The gender employment
gap is the second highest in the EU and parenthood still reduces
employment among women, especially after the second child. Finally, Italy’s low productivity growth is sustaining unit labour costs, leading to cost competitiveness
losses. 
In 2013, Italy received a country-specific
recommendation concerning the labour market and education. Italy was recommended to ensure the effective implementation of the labour market and
wage-setting reforms, take further action to foster labour market
participation, especially of women and young people, and improve public
employment services. These actions are also in line with the priorities set out
in the 2014 Annual Growth Survey. Italy was also recommended to strengthen
vocational education and training, improve career and counselling services for
tertiary students, step up efforts to prevent early school leaving and improve
school quality and outcomes. However, the analysis in this staff
working document leads to the conclusion that Italy has made limited progress
on measures taken to address these recommendations (for the full assessment of
Italy’s response to country-specific recommendations, see the overview table in
Section 4). 
Disentangling the impact of the 2012 labour market
reform from that of the crisis is difficult. The 2012 reform
of the labour market aimed to address the rigidities and dualism of the labour
market by enhancing exit flexibility for workers on permanent contracts through
amendments to the rules and procedures regulating dismissals, while regulating
entry flexibility by reducing incentives to hire workers on non-permanent
contracts. It also introduced a more inclusive insurance-based system of income
support for the unemployed, which is gradually entering into force and will be
fully operational as of 2017. Italy produced a first monitoring report on the
impact of the reform at the beginning of 2014. It shows evidence of enhanced
exit flexibility, with reductions in both the length of dismissal procedures
and the number of compulsory reinstatements of dismissed workers in firms.
While economic uncertainty related to the crisis has contributed to a steady
decline in hires on permanent contracts, the use of atypical contracts has also
declined somewhat, in line with the aim of the reform. At the same time, a
substantial increase in fixed-term temporary contracts[19] in combination with
still incomplete access to unemployment benefits, notably for semi-dependent,
own-account workers and the self-employed, suggest that segmentation remains a
challenge for the Italian job market. Furthermore,
the new unemployment benefit system is being put under strain by the increase
in unemployment and is not supported by effective activation policies.
The government intends to introduce additional
measures on contractual simplification, active labour market policies,
unemployment benefits, and disincentives to work. The government
has also put forward a draft enabling law aimed at, inter alia: further
streamlining the existing contractual forms, including by introducing a new
permanent contract with increasing entitlements, extending the coverage and
duration of unemployment benefits, strengthening conditionality and activation
by better linking active and passive labour market policies, preventing moral
hazard in the use of wage supplementation schemes (Cassa Integrazione
Guadagni) by adjusting the contributions paid into such schemes to
companies’ actual use of them (across and within industries). While many of the
proposed actions appear adequate to address Italy's labour market challenges,
their effectiveness will depend greatly on their design and subsequent
implementation. 
Positive steps towards further decentralisation of
wage bargaining could be conducive to greater responsiveness of wages to
productivity developments and local labour market conditions. In
a country like Italy, characterised by great dispersion in productivity and
labour market outcomes across geographical areas and firms, decentralised
bargaining can play an important role in strengthening wage responsiveness to
productivity as well as to local labour market conditions. Important agreements
were signed by the social partners in 2009, 2011 and 2012, the latter with the
support of the government through temporary tax rebates on productivity-related
wage increases. A further important agreement was signed in early 2014 to
define trade unions' representativeness in collective bargaining, at both
sectoral and firm level, but only for the manufacturing sector. The available
evidence shows that firm-level contracts still concern a minority of workers
and firms, with the share being particularly low in southern regions and having
actually decreased during the crisis.[20]
The recent 2014 agreement on trade union representativeness could further bring
stability in industrial relations and foster decentralisation in the industrial
sector. A
close and effective monitoring of the impact is necessary.
Action has been taken to tackle youth unemployment
but its scope is limited and its effectiveness uncertain. In
June 2013, a package of measures was introduced with the aim of fostering
employment, especially among young people, centred on an incentive scheme to
hire disadvantaged young people aged 18-29 on permanent contracts. However, the
measures are fragmented and of limited scope, compared to the size of the
challenge. Six months after the introduction of the schemes, their take-up was
still limited. The government has submitted an implementation plan
for the Youth Guarantee initiative, worth EUR 1.5 billion. Its effectiveness
depends greatly on the employment services and on the coordination of the
various stakeholders.
Box 3: The delivery of a Youth Guarantee
in Italy[21]

The
most important challenges to deliver a Youth Guarantee in Italy are:
-
Lack of sufficient resources in public employment services, foreseen as the
main service provider for the Youth Guarantee, to provide homogeneous service delivery
across the country, coupled with limited use of public employment services in
job search by jobseekers;
-
Unclear structure of incentives for non-registered youth not in education,
employment or training to register for the services and the ensuing need for a
pro-active outreach strategy tailored to the different subgroups;
- Need
for effective and continuous coordination between national and regional levels
in the delivery of Youth Guarantee measures; 
- Necessity
to raise the commitment of the private sector and to step up cooperation with
education institutions in delivering quality apprenticeships and traineeships.
Although
the level of commitment is high, there are substantial concerns that the
sustainability of the Youth Guarantee is compromised by the lack of a long-term
implementation perspective. 
The conditions for the use of temporary contracts
have been partially relaxed. A decree law[22] adopted in March and
transformed into law in May 2014 increases entry flexibility compared to the
2012 labour market reform by allowing temporary contracts to be renewed up to five
times and for a maximum duration of three years, and removing the obligation to
explicit the justification of renewal. At the same time, the decree also
introduces a limit of 20% to the proportion of temporary contracts in the total
number of permanent employees in firms with more than 5 workers[23]. This limit,
however, can be amended under national collective agreements and exceeded upon
the payment of a fine by the employer. [24] A monitoring report by the Ministry
of Labour on employment developments, especially focusing on temporary and
apprenticeship contracts, is foreseen after one year. Overall, these provisions
are intended to respond to the current juncture of labour market weakness and
uncertain economic prospects which do not favour the use of permanent
contracts. However, they have to be followed by other measures to enhance the
take up of permanent contracts to avoid the risk of exacerbating labour market
segmentation. 
The very low take-up of apprenticeship contracts
prompted the government to relax some of its requirements. The
2012 labour market reform included a reform of apprenticeship contracts to increase
youth employability. However, the take-up of this type of contract has been very
low.[25]
To remedy to this, the March 2014 decree law relaxes the
obligation to convert apprenticeship contracts into open-ended contracts before
hiring new ones to 20% of the total number of apprentices in firms with more
than 50 employees. However, this limit can be amended under national collective
agreements. For professional apprenticeships (apprendistato
professionalizzante), the training plan that the employer is required to draft
has been simplified, while for training apprenticeships (apprendistato per
la qualifica e il diploma professionale), the salary paid to the apprentice
for hours spent in off-the-job training can be reduced up to 35 % of the
contractual wage. All these amendments simplify apprenticeship contracts and
make them more flexible. In line with the 2012 labour market reform, in January
2013 a legislative decree set up a national system for the certification of
skills, including the identification and recognition of non-formal and informal
learning. The implementation of this new system requires a nationwide
recognition of the existing regional qualifications. The 2013 decree law on
education provides for a national register of regional qualifications, but this
has not yet been put in place. 
Despite the recently announced measures, policy
action to increase women’s participation in the labour market has been limited
so far.
Affordable childcare is still insufficient and attendance is low among children
under three years old.[26] This
remains an obstacle to labour market participation, especially for low-income
households. Moreover, there has been no significant
improvement in the long-term care system, particularly for those with severe
care needs. The Stability Law 2014 introduced limited measures to reduce fiscal
disincentives for second earners (particularly in ‘disadvantaged’ southern
regions) and the draft enabling law on the reform of the labour market
discussed in the previous paragraph provides for additional measures to further
support working parents and to reduce fiscal disincentives. 
The strengthening of public employment services is
lagging behind. Public employment services in Italy are organised at the regional level. This decentralised system has produced
disparities in the quality of services provided, with some regions representing
best practice and others struggling to fulfil their function of matching supply
and demand for labour. In particular, in regions where labour market conditions
are the most difficult,[27]
the number of competent staff may be inadequate. The online platform
‘Clicklavoro’ and the creation of a comprehensive database of active and
passive labour policy measures are useful tools that may complement public
employment services’ efforts, while the specific division set up in the
Ministry of Labour to coordinate the action of the different bodies managing
employment measures (struttura di missione) may improve overall
governance. The first monitoring report on public employment services,
published in October 2013, is a starting point to identify gaps and take action
to comprehensively address their weaknesses.
Education
Education and human capital endowment are weak. Italy’s
Public expenditure on education as a share of GDP is below EU average (4.2%
vs. 5.3% in 2012), notably at tertiary level. Although moderately declining,
the early school leaving rate (17.0 % in 2013) remains well above the EU
average (11.9% in 2013) and the national Europe 2020 target of 16%. The rate is
especially high in southern regions, and reaches 40% among non-EU born.[28]
Particularly worrying are the low education attainment rates compared to other
EU Member States. Italy has one of the highest shares of population aged 25-34
with low education levels across the EU and the share of population with
tertiary education in the 30-34 year age group (22.4 % in 2013) is among the
lowest in the EU and well below the national Europe 2020 target of 26-27 %.
Adult literacy and numeracy skills also underperform the OECD average across
all age groups.[29]
  Italy has a very low share of young people studying and working at the same
time. [30]
The transition from education to work is particularly difficult for young
graduates. The employment rate of young tertiary graduates (aged 25-29) is well
below the EU average and that of young people with upper secondary education. 
Some progress was made in improving career and
counselling activities and reducing the dropout rate in secondary and tertiary
education.
Starting from 2013–2014, career and counselling guidance for prospective
tertiary students became compulsory from the penultimate year of upper
secondary education, with some additional resources allocated (EUR 7 million in
2013–2014). This is a positive step towards helping students make a more
informed choice and thus contributing to reducing tertiary dropout rates and
increasing Italy’s tertiary attainment rate. Furthermore, in September 2013, a
decree law on education introduced an integrated programme to counter early
school leaving in problematic areas, which also extended schools’ opening hours.[31]
In the medium term, European structural and investment funds are expected to
contribute significantly to the fight against early school leaving in southern
regions in the 2014-2020 programming period.
The initiatives to strengthen the vocational education
and training system are limited in scope. As from August
2013, some limited additional funding (around EUR 14 million) has been provided
for some traineeship schemes. The September 2013 decree law on education
introduced: (i) a pilot project for 2014-2016 allowing students in the last two
years of upper secondary education to participate in on-the-job training
periods in companies, using apprenticeship contracts; (ii) the possibility of
using the higher apprenticeships (apprendistato di alta formazione e ricerca)
in study programmes of universities and higher technical institutes
(tertiary-level vocational education and training institutions). These
measures, however, require implementing acts. Furthermore, their potential
impact in promoting effective work-based learning (i.e. traineeships and
apprenticeships) at upper secondary level and enhancing the higher technical
institutes as an alternative to academic studies at tertiary level is expected
to be small. 
Monitoring of school quality is still at an early
stage and there is no effective progress in diversifying teachers’ careers. In a
medium- to long-term perspective, improving school quality and outcomes may
help reduce early school leaving. In March 2013, Italy established a national
system to evaluate school institutions under the coordination of the school
evaluation agency (INVALSI). The system requires each school to present a
self-evaluation report (using a common framework and quantitative data on
pupils’ performance provided centrally) and a plan for improvement (in
cooperation with local stakeholders), and to publish a report on the outcome.
However, the system is not yet operational. The national reform programme plans
to implement it as from the 2014-2015 school year. With regard to teaching, the
September 2013 decree law on education included a three-year plan for teacher
recruitment but no action has been taken as to teachers’ career development.
The issue of raising the status of the teaching profession thus remains largely
unaddressed.
Action to improve the quality of universities is
hampered by slow implementation. In 2010, a Self-Evaluation,
Evaluation and Accreditation System for universities was introduced with a view
to allocating an increasing share of institutional funding for universities on
the basis of research and teaching performance. In July 2013, the university
and research evaluation agency (ANVUR) published its report on the evaluation
of universities' and public research institutes' research quality covering the
2004-2010 period. The share of institutional funding allocated on the basis of
performance criteria rose from 7 % in 2009 to 13.5 % in 2013 and is
set to increase further in the coming years. However, effective implementation
is very difficult, due to the overall decrease in higher education funding and
the restrictive rules that limit the yearly change in the amount of funds
allocated to each university. In the medium- to long-term, a proper and
adequately funded evaluation system is key to improve the performance of Italy’s tertiary education sector.
Awareness of the digital skills gap is rising, but
no effective action has been taken. A working group
was set up by the Agency for the Italian Digital Agenda (Agenzia per
l’Italia Digitale) composed of all major stakeholders (public
administrations, business and workers’ associations, media) with the task of
drafting a national plan for digital competencies. This was supplemented by the
digital school programme and other initiatives at local level but overall these
efforts are not sufficient to substantially improve digital literacy and
skills.
Social policies
The share of people at risk of poverty and social exclusion
is rising fast and the social protection system is not well equipped to address
this problem. Italy has seen the number of people at risk of
poverty and social exclusion increase from 17.1 million in 2011 to 18.2 million
in 2012, one of the largest increases in the EU, and to a level that is well
above the 12.9 million Europe 2020 target. Also, the level
of gross household disposable income further deteriorated. The share of people
affected by severe material deprivation more than doubled between 2010 and
2012,[32]
particularly affecting children under 16 years. In-work poverty also increased
in recent years.[33]
Social expenditure in Italy is largely oriented towards the elderly and
dominated by pension expenditure, which represented 17% of GDP in 2012, the
highest share in the EU. This leaves little scope for the other functions of
social protection, namely to support families and children and address the risk
of social exclusion and poverty. Social assistance expenditure is fragmented
and there
is no nation-wide minimum income scheme in place. As a result, Italy has the third highest share of people living in poor or jobless households that are
not covered by social transfers, and a large share of the working age
population is dependent on the pension income of a family member.
Following the 2013 country-specific recommendation,
the steps taken towards a strengthened protection against poverty go in the
right direction, but close monitoring is warranted. An updated and
nationally harmonised criterion informing the means-testing system was approved
in December 2013 to improve the selection of those most in need of social
assistance. The government has taken further action to facilitate access to
housing for people in difficult economic conditions.[34]A new measure —
Support for Active Inclusion — was also introduced as a pilot project to
support those in the most disadvantaged situations by means of the ‘new social
card’, already in use in the 12 largest cities and in southern areas. It is
expected to gradually replace the old support (purchase card) in force since
2008 with an approach combining monetary support with compulsory activation and
social services programmes. The new scheme represents a significant step in the
right direction. However, its strict eligibility requirements, which limit it
to households with children and with recent employment spells, and the uneven
quality of services provided by the public employment and social services
across different regions, limit its effectiveness as a social safety net and
activating tool. Given Italy's important budgetary constraints, the extension
of this measure to the entire Italian territory, as announced in the national
reform programme, requires adequate and efficient allocation of the available
financial resources through a recalibration of the social expenditure and
appropriate targeting of the beneficiaries, in particular families with
children. 
3.4.           
Structural measures
promoting sustainable growth and competitiveness
In 2013, Italy received a country-specific
recommendation to improve competition and reduce bottlenecks in services and
network industries. Resource allocation inefficiencies are
at the root of Italy’s growth gap, as shown by the in-depth review of the
Italian economy. While Italy has substantially improved its product market
regulation over the past 15 years, the implementation
of the measures taken is often ineffective, partly due to insufficient coordination
between central and local authorities. In addition, inefficiencies and restrictions to competition remain in important service and
network industries. Infrastructure bottlenecks further hamper the
efficient functioning of the market in telecommunications, transport and
energy. Finally, low research and innovation capability contribute to maintaining
  Italy's specialisation in low-technology products and weigh on growth
potential and external competitiveness. 
The
analysis in this staff working document leads to the conclusion that Italy has
made limited progress in addressing this recommendation (for the full
assessment of Italy’s response to country-specific recommendations, see the
overview table in Section 4).
Market opening in services
The reform of regulated professions is being
implemented but competition-restricting provisions remain, particularly with
regard to the legal profession. The adoption of the implementing
measures required by the 2012 reform of regulated professions was completed in
May 2013. The professional orders concerned are gradually applying them within
their organisations. Competition among pharmacies and notaries is expected to
gradually intensify in 2014 as a result of the easing of quantitative and/or
territorial limits. It is crucial that these processes and their effects are
effectively monitored. In addition, remaining restrictions to competition in
professional services need to be tackled. First, requirements on the minimum
share of capital that professionals must hold in companies offering the
services of regulated professions are still in force. Second, the provisions requiring
that professional pay is commensurate to the work and dignity of the profession
may result in minimum tariffs being reintroduced de facto.[35] Third, there are
serious concerns regarding the 2012 reform of the legal profession,
particularly with regard to the reserves of activity (whereby the exercise of a
specific activity is restricted to specific professionals only, in this case
the lawyers), the stricter conditions for setting up professional law firms
than for other professions, and the parameters set by the Ministry of Justice in
the event of litigation, which could also translate into de facto minimum
tariffs. Finally, a law adopted in January 2013 regulates the formation of
associations on a voluntary basis for non-regulated professions and allows
self-certification of skills based on technical standards set at national
level. This should improve transparency and consumer protection. However, the
development of professional associations and voluntary standards based on
national technical norms could create informal barriers to non-member service
providers, particularly professionals qualified in other Member States.
The potential for further competition-enhancing
measures remains considerable. Since 2009, the
government is required by law to present a draft law to Parliament each year (Legge
annuale per il mercato e la concorrenza) taking into account measures
recommended by the Italian Competition Authority. In its last report of October
2012, the Italian Competition Authority identified important
competition-restricting barriers in important sectors of the economy [36]
The Competition Authority highlighted that the
efficiency of and competition in the Italian postal market are still  hampered
by the remaining exclusive rights of Poste Italiane, the incumbent
national postal operator, and by unclear conditions of access to Poste
Italiane’s network. In the insurance sector, the Authority highlighted the
need to eliminate remaining obstacles to the mobility of customers, including
those clauses that may underpin de facto exclusive relationships between
companies and agents. With regard to fuel distribution, the Authority called
for addressing the restrictions to the opening of fuel stations, in particular
at regional level, and to their automation. The national report programme
foresees the adoption of the Legge Annuale by September 2014. The
adoption of such law (for the first time since 2009) would be an important
step, also setting in motion a positive mechanism for the future. Italy's retail sector warrants close monitoring of the effectiveness of its regulatory
framework, notably at local level. The sector displays the third most
restrictive regulation in the EU, according to the indicator of the OECD
product market regulation for 2013, as well as low productivity growth and
rising unit labour costs. [37]
Limited progress was made in local public services. The
Italian Court of Auditors (Corte dei Conti) reports that in 2010
municipal and provincial governments owned stakes in 4 942 bodies, of which
3 153 limited companies.[38]
The companies supply services of general economic interest (notably waste and water
management, local transportation, energy and gas distribution) and/or services to
the public administration itself (società strumentali) or are active in
other sectors of the economy (from agriculture to construction), often
operating under in-house contracts (78 %). Regional governments own
stakes in a further 403 bodies (including limited companies) which also are
often loss-making and operating under in-house contracts.[39] For the former
group, the Court reports that average wages increased by 13 % from 2010
to 2012 (as compared with 4 % in the economy as a whole) and that around
35 % of the companies recorded losses in at least one financial year over
the period 2008-2010.[40]
Around 60 % of the total losses (EUR 1.4 billion) were borne by
companies that do not provide services of general economic interest.
Furthermore, there is scope for improving the transparency of public service
contracts, notably with regard to the definition of service operators’
responsibilities and their compensation, thereby increasing service operators’
accountability. After legislation passed in 2012 to contain the use of in-house
providing to very specific cases, was repealed by the Constitutional Court in
2012[41],
the current Italian legislation requires that: (i) those local authorities
which have recourse to in-house provision publish a report explaining the
rationale behind their choice and demonstrate that requirements under EU public
procurement law were met; (ii) existing contracts not complying with EU law are
rectified by 31 December 2013 (extended de facto to 31 December 2014 by
the Stability Law 2014); and (iii) the budget of each authority and of the
entities it holds stakes in are consolidated. If concretely applied, these
provisions may significantly contribute not only to ensuring compliance with EU
law, but also to fostering market openness and competition. On a positive note,
the national reform programme foresees the rationalisation of the legislation
on local public services by September 2014, also with the view to improving
efficiency and fostering competition and market access, and the setting up of
instruments for the market valorisation of enterprises controlled by regional
and local governments. 
Inefficiencies are particularly critical in local
and regional transport services. Local public transport services
account for around 28% of companies in local public services. Recent research
show ample evidence of inefficiencies, in terms of substantial oversupply, high
ticket evasion, fragmentation as well as of underinvestment in the fleet.[42] With
regard to road transport alone, data also show that Italian companies have
lower revenues per km than their counterparts in the UK, Germany, France,
Sweden, Belgium and the Netherlands (EUR 1.08 per km versus average of EUR 1.34
per km) and receive higher public subsidies (EUR 2.2 per km versus average of EUR
1.4 per km).[43]
The national reform programme foresees a package of measures to be adopted by
December 2014, which includes the increasing use of open tendering and standard
costs in public procurement and of intelligent transportation systems. If
correctly designed and swiftly implemented, the package could considerably
contribute to address the structural weaknesses of the sector. 
The system of authorisation/concessions, notably for
hydroelectric and maritime activities, hinders domestic market access and
departs from internal market principles. For
hydroelectric activities, current authorisation schemes are not in line with
the rules established by the EU Services Directive. Competitive procedures for
their attribution have not been put in place yet and the impartiality and
transparency of the procedure is hindered by the duration of the concessions.
In maritime concessions, their long duration (also due to repeated extensions)
limit consumer choices and increase the cost of services. Also affecting
tourism, exceptions
to the recent liberalisation of tourist guide services continue to restrict
competition. 
Network industries
In telecommunication, limited progress has been made
in rolling out the fixed high-speed broadband network.
Fixed high-speed broadband coverage, penetration and average speed are among
the lowest in the EU. The limited availability of broadband
contributes to the low take up of e-commerce, with only 20 % of
Italian consumers buying goods or services online in 2013, among the lowest
percentages in the EU.[44]
Following the Commission approval of the framework notification for the
ultra-broadband strategic plan in December 2012, procedures for publicly funded
next-generation access projects have been launched in several regions (mainly
in convergence regions, through structural fund allocations for the 2007-2013
period). Progress is, however, slow due to insufficient political commitment
from regional authorities. So far, only in one major project (Campania),
contracts have been awarded. With regard to private investments, projects
extending optic fibre cable closer to customers are being implemented by the
incumbent and some alternative operators and some legislative and implementing
measures reducing the cost of deployment have been adopted. However,
alternative operators still face difficulties in accessing the existing fixed
infrastructure on the terminating segment in the absence of fully alternative
infrastructure (such as cable) and pending final decisions on access conditions
and functional unbundling of this legacy network from the incumbent operator. Furthermore,
national regulatory requirements are imposed on cross-border information
society service providers, which may limit the freedom of establishment. With
regard to mobile broadband, deployment of 4G mobile networks is progressing
according to plan. 
A fully operational Transport Authority needs to
deliver on its mandate, including the opinion on the unbundling in the railway
sector.
The Transport Authority, legally established in 2011, was set up in September
2013. However, it is not fully operational since a large part of the envisaged
staff has yet to be recruited. It is important that the Transport Authority swiftly
submits its opinion on the separation of infrastructure management and
transport operations (unbundling) in the railway sector, which was expected to
be delivered already in June 2013 and also foreseen in the national reform
programme. The sector still shows important weaknesses. Railway network length
per 1 000 inhabitants is among the lowest in the EU while its utilisation
rate is among the highest. Despite an infrastructure investment rate above the
EU average, bottlenecks remain in some regions, particularly in the south of
the country. Customer satisfaction is among the lowest in the EU.[45] 
Weak management and lack of interconnections at
ports hamper Italy’s trade potential. Italy’s
trade would greatly benefit from better ports. The lack of intermodal
connections with the hinterland remains one of the major causes of
inefficiency. Furthermore, lengthy and costly administrative and customs
procedures, insufficient coordination and strategic planning of port
development also affect their functioning. The processing speed of extra-EU export
by seaports was in 2012 19 days against the EU average of 11.4 days, when the
best performers in the EU (DK, EE) handle export  processing within 5 days. 
Respectively import processing speed was 18 days against the EU average of 10.9
days.
The competition framework for electricity is sound
and substantially improved for gas, but electricity prices remain high. In
the gas sector, the unbundling of the incumbent operator from the network
manager was completed as planned in 2013, which is an important milestone in
the sector’s market opening process. At the same time, since October 2013, the
reference price for gas has been set on the basis of spot-market prices alone
and no longer on oil indexation. According to the Italian Energy Authority,
this has brought about a reduction in gas prices to end users of about
7 %. In electricity, while the competition framework is already well
advanced, end users' prices are, however, among the highest in Europe, which weigh on the cost-competitiveness of Italian firms. The high electricity
prices result primarily from a combination of elevated energy supply costs (due
mainly to heavy reliance on imported gas) and high taxes and levies. The latter
include subsidies for renewables and other unrelated taxes and levies (oneri
impropri) added to the electricity bill. To alleviate cost pressures on
firms', the national reform programme sets the objective of reducing by 10% the
electricity bill for small and medium-sized enterprises through a
budgetary-neutral rationalisation of the charges in the electricity bill, but
details are not specified. 
Infrastructure bottlenecks hamper the proper
functioning of energy market. Insufficient grid capacity
reduces liquidity in the electricity market and contributes to higher wholesale
prices. In the gas sector, security of supply is at risk at certain times due
to insufficient storage capacity. The national strategy for energy adopted in
2013 required the government to approve a list of strategic infrastructures[46],
which is still pending mainly due to the difficulty of coordinating regional
and central governments. Terna, the electricity transmission system
operator, has projects for an amount of EUR 1.4 billion currently awaiting
authorisation, although the situation has somehow improved since 2011, when
pending projects amounted to more than EUR 2 billion. 
Italy aims at over-achieving
the EU 2020 climate and energy targets but the greenhouse gases target will be
missed based only on existing measures. According to
the national energy strategy, the EU 2020 targets are set to be over-achieved.[47] Indeed,
the target for energy efficiency has been achieved and some progress has been
made for renewable energy.[48]
The Fifth Energy Account reached its cap of EUR 6.7 billion for photovoltaic in
June 2013; regarding other renewable sources (cap of EUR 5.8 billion), the
support within this instrument reached EUR 4.6 billion in December 2013. Other
measures included the reinforcement of the white certificate scheme, and new
tax incentives for energy efficiency measures and biogas. Concerning greenhouse
gases, emissions in non-ETS sectors in 2012 were 16.8 % lower than in 2005.
However, national projections foresee that emissions will increase again and
the 2020 target would be missed by about 3.5 % in a scenario with existing
measures only. New actions have been foreseen within the updated national plan
for the reduction of greenhouse gas emissions approved in 2013. Furthermore, waste
management (particularly in southern Italy) and water infrastructure show serious
shortcomings. Similarly, land management and environmental protection remain
challenging, with substantial costs from air pollution and floods. [49] 
Research and innovation
Some recent steps may contribute to a more open and
competitive research system, in line with the objectives of the European
Research Area. Institutional funding is increasingly distributed
on the basis of the results of the quality evaluation of research carried out
by the university and research evaluation agency (ANVUR), although with the
significant limitation discussed under Section 3.2 (education). Moreover,
international peer review was introduced for evaluating open calls for
proposals and is now widespread. A national system for the certification of the
applications to professorship was set up to improve transparency and
merit-based recruitment in universities, an area in which Italy is particularly lagging behind other European Research Area countries. The steady
decrease in funding allocated through open calls and the lack of career
opportunities for young researchers limit, however, the potential beneficial
effects of these reforms.
However, limited progress was made in fostering Italy’s research capacity in the private sector. In 2012,
research and development as a proportion of GDP was 1.27 %, still below
the national Europe 2020 target of 1.53 %, with the largest gap in the
private sector (0.69 % of GDP compared with an EU average of 1.30 %).
Cooperation between private businesses and public institutions is also much lower
than the EU average. Further to the measures discussed in Section 3.2 to
facilitate the financing of innovation, research and development tax credits (EUR
600 million per year for the period 2014-2016) and incentives for hiring highly-
qualified staff were introduced. In addition, eight technological clusters were
identified in key research areas with 30 projects selected through calls for
proposals. These measures go in the right direction, but their potential impact
is limited also due to delays in implementation. For instance, the calls for
proposals for the technological clusters took 2.5 years to be completed and the
definition of smart specialisation strategies needed to implement European
structural and investment funds over the 2014-2020 period is behind schedule. 
Box 4:
Potential impact of structural reforms on growth – a benchmarking exercise
Structural
reforms are crucial for boosting growth. It is therefore important to know the
potential benefits of these reforms. Benefits of structural reforms can be
assessed with the help of economic models. The Commission uses its QUEST model
to determine how structural reforms in a given Member State would affect growth
if the Member State narrowed its gap vis-à-vis the average of the three best EU
performers on key indicators such as tax reform, product market regulation and
labour market participation. Improvements on these indicators could raise Italy's GDP by about 4.2 % in a 10-year period. Some reforms could have an effect even
within a relatively short time horizon. The model simulations corroborate the
analysis of this staff working document, according to which the largest gains
would likely stem from shifting taxation away from labour and increasing
women’s participation in the labour market. The simulations also confirm the
importance of reducing entry costs for businesses and opening markets to
competition, as indicated in Section 3.4. In the very
long run, moreover, improving education could also have a noticeable impact on
GDP, yielding a potential benefit of 11.8% over a 50-year horizon (see
note).
Table: Structural indicators, targets
and potential GDP effects[50]
Source: Commission services. Note: Simulations
assume that all Member States undertake reforms which close their structural
gaps by half. The table shows the contribution of each reform to total GDP
after five and ten years. If the country is above the benchmark for a given
indicator, we do not simulate the impact of reform measures in that area;
however, the Member State in question can still benefit from measures taken by
other Member States.[51] *
The long-run effect of increasing the share of high-skilled labour in the
population could be 4.2% of GDP and of decreasing the share of low-skilled
labour could be 7.6%. ** EU average is set as the benchmark.
3.5.   Modernisation
of public administration
Despite efforts, inefficiencies in the public
administration, including the judicial system, continue to weigh on Italy’s competitiveness and growth and slow down the implementation of reforms. Italy’s performance on the indicators of the World Bank relating to the business
environment, government effectiveness, the quality of regulation and the rule
of law are among the lowest in the EU.[52] Critical issues concern the heavy
backlog of cases and long duration of court proceedings in civil justice,
inefficiencies in public procurement and in the management of EU funds in
southern Italy, as well as the unclear and inefficient coordination and
allocation of competences among the different layers of government. As
discussed in the in-depth review on the Italian economy, these inefficiencies
weigh on cost competitiveness and public finances, thus reinforcing Italy’s imbalances, and slow down the implementation of reforms.
The
analysis in this staff working document leads to the conclusion that Italy has
made limited progress in addressing the 2013 recommendation in these areas (for
the full assessment of Italy’s response to country-specific recommendations,
see the overview table in Section 4).
Efficiency of the public sector and business
environment
Implementation remains challenging, despite recent initiatives. Some
efforts have been made to limit the need for secondary legislation, which slows
down the implementation of provisions. For laws and decrees enacted by the
Letta government, 82 % of provisions were directly applicable.[53] Furthermore,
a law adopted in August 2013 introduced financial penalties for administrations
responsible for delays in administrative procedures and reinforced the use of
digital technologies for administrative acts.[54] Overall, however, implementation
remains challenging. The monitoring report published in December 2013 by the
Italian government shows that, of the 313 implementing acts required by
legislation that entered into force from April to December 2013, only
15 % had already been adopted. One in five had not yet been adopted
despite the terms having expired. Furthermore, as discussed in other parts of
this report, very important pieces of legislation introduced in 2011 and 2012,
for instance to improve the business environment, the labour market, or reform
taxation, have not yet been implemented.
The coordination between the various layers of
government still needs to be clarified. The
implementation of the adopted measures has often been hampered by insufficient
coordination between the central and local levels of government and lack of
clarity on the division of responsibilities among them. Relevant examples are
discussed in other parts of this report with regard to job placement services,
infrastructures in network industries, research and education policies,
implementation of product market reforms, and the management of EU funds. Building
on the 2001 reform of Title V of the Italian Constitution, which governs the
allocation of regulatory and spending powers across government levels, a draft constitutional
amendment bill was adopted by the government in March 2014, with the ambition
of further revising this chapter of the Constitution. In particular, the draft constitutional
amendment bill brings some competences back to the central level and strives to
reduce conflicts over the division of responsibilities. According to the
national reform programme, the bill is expected to be finally approved by the
Italian Parliament by the end of the 2015. 
Limited simplification measures to improve the
business environment were taken and their impact is hampered by slow
implementation and difficult coordination between regional and central
governments. Italy’s business environment remains very
unfavourable. Starting up a business is very costly and getting a construction
permit is cumbersome.[55]
Some simplification measures were taken in two successive packages (June 2013 and
February 2014).[56]
Their scope is, however, rather limited. The government estimates the
cumulative savings of the first package at EUR 500 million per year.[57]
A more comprehensive draft law on simplification was presented in Parliament in
June 2013 but has not yet been adopted. The unclear division of
responsibilities between the central and regional governments continue to hamper
the effectiveness of the simplification measures taken at central level. To
address this issue, the government is working with the regions and other local
entities on an ‘Agenda for simplification’, but this has yet to prove its
effectiveness. Article 1 of Law 24/2012 intended to eliminate all restrictions to
economic activity (permits, authorisations, planning provisions) that were not
justified by the general interest pursued (or were disproportionate) on the
basis of a thorough scrutiny of existing legislation by the government. The
article also included some reward mechanisms for those regional and local
authorities that promptly adapted their legislation and administrative
procedures to the principles of the law. However,  implementing legislation has
not been adopted.
Steps are being taken to reduce the payment delays
of the public administration. In April 2014, the government
adopted a decree law, included in the national reform programme, setting forth measures
to reduce the time delays related to payments by the public administration.[58]
An electronic platform is set up where, starting from July 2014, all public
administrations will be obliged to register any outstanding debt arisen since
January 2014 and to update monthly the payment status (with sanctions in case
of no compliance). The platform also makes possible the introduction of
e-invoicing, which is expected to be fully operational as of March 2015. This
is expected to contribute to reducing payment times and ensuring the
transparency of public accounts. The harmonization of the accounting system
across all layers of public administrations, started in 2009 and expected to be
fully operational in 2015, should increase transparency and certainty on public
expenditure. Until then, however, the existing accounting system of public
administrations will not allow for a detailed and timely recognition of the
current stock of commercial debt and the residual amount of arrears to be paid will
still be unknown.
The reform of public employment and the quality of
regulation have yet to be comprehensively tackled. The number of
public employees has fallen by over 6 % over the period 2007-2012 and is
broadly in line with the OECD average as a percentage of the labour force. The strongest
reduction was in the education sector. The containment of the number of public
employees took place primarily through controlled turn-over, as it happened already
during the run-up to the introduction of the euro. This resulted in an increase
of the average age of civil servants, which is now among the highest across the
OECD countries.[59]
Issues related to geographical distribution of public employees, performance
valuation and accountability persist.[60]
A wide-ranging reform adopted in 2009 is largely unimplemented.[61] The national reform
programme announces an ambitious plan to reduce average age, enhance staff
mobility, introduce a new system of incentives linked to the
appraisal of staff performance, enhance managerial responsibility and
accountability, and contain the pay of top management. The level of detail is,
however, insufficient for a full assessment. As for quality
of regulation,
enhancing the capacity for evidence-based policy-making is crucial. Quantified
impact assessment and other evidence-based approaches such as systemic
evaluations may support an analysis of the root causes of systemic
administrative shortcomings, an assessment of the impact of current reforms
and, on this basis, the design of new schemes. 
Public procurement needs to be improved in a
systemic manner. Enhanced capacity building and further
rationalisation of public procurement, notably through the use of central
purchasing bodies, can improve Italy's public procurement systemic issues and can
generate significant savings in the public sector. The Commission estimated
that e-procurement can generate 5 % to 20 % of savings in total public
procurement expenditure. [62]
The
take-up of e-procurement in Italy in 2011 was estimated between 0% and 5%
(while the EU average is above 10 % and leading countries such as Portugal, United Kingdom or Sweden show take-up of 30 to 50 %).[63] Currently many Italian regions,
counties and towns are building their own e-procurement systems. These are
numerous and often non-interoperable, while there is little coordination at
national level to avoid duplications. The process of transposition of the new
EU public procurement and concessions directives[64] and subsequent
implementation represents an ideal opportunity for a strategic, systemic and
in-depth review of the Italian public procurement system. In April 2014, the
government adopted a decree law with measures that, if correctly implemented,
may contribute to gradually improve the efficiency of public procurement,
including through the use of central purchasing bodies, better control and
reduction of purchasing price differences.[65]
Justice and corruption
Some steps have been taken in civil, commercial and
administrative justice but their impact on the efficiency of the system needs
to be monitored. The reorganisation of courts prompted by
the September 2011 law was completed by the end of 2013, which should optimise
the scale of law courts, allow specialisation and create economies of scale.
Some initial positive impact has been noted. The courts’ capacity to resolve
civil and commercial cases has increased (except for the highest court) but the
number of pending cases remains very high. [66] In late 2013, compulsory mediation
was introduced for some specific matters in both civil and commercial
procedures.[67]
Evidence to date shows, however, that in half of the mediation procedures
started, the respondent did not attend the mediation meeting. Further measures
were included in a draft law in December 2013, which is now being discussed in
Parliament. Overall, the impact of the range of measures taken to improve the
efficiency of the justice system should be felt over time and will need to be
carefully monitored. The national reform programme announces further measures
for improving the functioning of civil as well as administrative justice to be
adopted by June 2014. The level of detail does not allow a proper assessment of
the measures at this stage. 
The anti-corruption law of 2012 is slowly being
deployed. The
government adopted a number of implementing decrees for the 2012
anti-corruption law. The code of ethics for the public administration was also
a relevant step. Other parts of the law are encountering more implementation
difficulties. First, the National Anti-corruption Authority for the Evaluation
and Transparency of Public Administrations (ANAC), in charge of coordinating
preventive anti-corruption policies nation-wide, of which members have been
increased from three to five in 2013[68],
counts only limited staff and lacks sanctioning powers. Second, the obligation
on all administration bodies to submit draft three-year national
anti-corruption plans and integrity action plans, albeit a positive step, runs
the risk of turning into a bureaucratic process focused on stylised documents
and institutional settings rather than on putting targeted measures into action
to address vulnerabilities. 
Italy has not yet
revised the statute of limitations. Lengthy court
proceeding in combination with the Italian statute of limitations (notably the
short prescription period with an absolute time bar that cannot be interrupted
or suspended) can represent a serious problem in the fight against corruption
in Italy, as recognized by the Group of States against Corruption of the
Council of Europe (GRECO).[69]
According to Transparency International’s 2010 study on the impact of
statutes of limitations on prosecution of corruption in the EU, in Italy,
roughly one in ten proceedings in criminal cases had been closed because the
statute of limitations expired over the period 2005-2010. The situation does
not appear to have improved, in spite of the 2013 country-specific
recommendation and of the concerns expressed repeatedly by the GRECO and the
OECD since 2009. The national reform programme foresees a revision of the
statute of limitations by June 2014, without specifying, however, the details
of the measure. 
Structural funds
Limited have been taken to date to improve the management
of EU funds. At the end of 2013, a new Agency for territorial cohesion
with specific powers to manage structural funds was set up. This decision is a welcome
first step. However, operational delays, a lack of clarity about the actual mandate
of the agency in relation to the regional authorities and uncertainties about
its staff cast doubts on the agency’s ability to bring about the change
required. Moreover, the Agency cannot be a substitute for decisive action to
tackle the problem of administrative capacity, primarily at regional level and,
to some extent, within a certain number of national bodies. The national reform
programme and the draft Partnership Agreement for the 2014-2020 period,
officially submitted by Italy on 22 April 2014, both outline a series of
measures aimed at strengthening capacity, including the need for all managing
authorities to prepare an administrative reinforcement plan, endorsed at the
highest administrative and political level, and defining the minimum level of
structure and competences necessary to manage the significant level of
resources entrusted to them. Both documents, however, fail to explain the
concrete steps envisaged at central level to steer and follow the overall
process. Furthermore, lack of human resources in the public administration is
identified as one of the main, though not the only one, reason for the existing
weaknesses with the risk that, at operational level, additional recruitment
might, in the end, be seen as the only and easier solution to the problem.
4.        
CONCLUSIONS
Long-standing weaknesses weigh on the Italian
economy.
The very high public debt represents a heavy burden and a major source of
vulnerability for the Italian economy, particularly in a context of protracted
slow growth and low inflation. Productivity growth is sluggish, rooted in an
inefficient public administration and taxation system, weak human capital
endowment and unfavourable business environment. Labour market participation
continues to be very low among women and young people, especially in southern
regions, which is an important untapped source of growth. Declining cost and
non-cost competitiveness adversely affect Italy’s export performance. The pace
of reform is insufficient to address these challenges and the implementation of
past reforms is lagging in many areas.
The analysis in this staff working document leads to
the conclusion that Italy has made limited progress in addressing the 2013 country-specific
recommendations. The headline deficit remained at 3% of GDP despite
the sharp contraction in output. However, the adjustment path towards the
medium-term objective has slowed down. A new spending review has been launched,
but needs still to be enacted. Substantial progress was made to improve
the functioning of gas market with the unbundling of the incumbent operator
from the network manager. Some steps were taken to reduce the tax burden on labour
and to ease and diversify firm’s access to finance. With regard to civil
justice, the geographical re-organisation of courts was completed, which should
help reaping economies of scale, and a new law on mediation was introduced as
an alternative means of dispute settlement. The labour market and wage-setting
reforms are being implemented at uneven pace, with delays in the area of
activation and some steps were taken to better target social expenditure. Limited
progress was made in all the other areas covered by the 2013 recommendations. 
The priorities presented in the 2014 national reform
programme echo the main challenges identified in the 2014 in-depth review on
Italy and this staff working document. The national
reform programme presents a comprehensive, ambitious and time-bound plan for
action over the programme horizon aimed at: reviewing and enhancing the
efficiency of public expenditure; reviewing the institutional setting in order
to streamline law-making and facilitate implementation; reforming the taxation
system; further improving product and labour markets; improving the education
system; simplifying the regulatory environment; and modernising the public
administration, including justice. The measures envisaged in the plan signal
welcome reform intentions, which could help to effectively tackle the
challenges faced by Italy, if appropriately designed, implemented in a rigorous
manner and in respect of the timetable set in the programme.
The stability programme postpones the achievement of
the medium-term objective to 2016, whereas in July 2013 Italy was recommended to achieve it by 2014. This slower adjustment path is
justified in the programme by the severe economic conditions and the effort
needed to implement an ambitious programme of structural reforms. The stability
programme targets would allow Italy to comply with the debt reduction benchmark
over the 2013-2015 transition period, partly thanks to an ambitious
privatisation plan to be implemented over 2014-2017. Greater details on the further
fiscal consolidation measures required to achieve the targets of the programme
would further enhance the robustness of the document. Broad coherence between
the national reform programme and the stability programme has been ensured.
 

Overview
table[70]
   ||   Commitments   || Summary assessment 
 1 || Ensure that the deficit remains below 3 % of GDP in 2013, by fully implementing the adopted measures. Pursue the structural adjustment at an appropriate pace and through growth-friendly fiscal consolidation so as to achieve and maintain the MTO as from 2014. Achieve the planned structural primary surpluses in order to put the very high debt-to-GDP ratio on a steadily declining path. Continue pursuing a durable improvement of the efficiency and quality of public expenditure by fully implementing the measures adopted in 2012 and taking the effort forward through regular in-depth spending reviews at all levels of government. ||   || Italy has made limited progress in addressing this recommendation: ·         The 2013 deficit remained at 3% of GDP. In the Commission 2014 spring forecast, the headline deficit is projected to decline to 2.6 % of GDP in 2014. However, the achievement of the medium-term objective is now targeted for 2016, as compared with 2014 planned in April 2013 and recommended in July 2013 by the Council. ·         Italy risks non-compliance with the Stability and Growth Pact rules. In particular, the annual structural adjustment of only 0.1 percentage point of GDP forecast for 2014 falls short of the 0.7 percentage point of GDP minimum linear structural adjustment that, according to the Commission forecast, would be required to comply with the debt benchmark in the 2013‑2015 transition period. ·         A spending review has been launched. It now needs to be adopted and implemented also to finance the announce cut to the personal income tax for low-income employees. 
 2 || Ensure timely implementation of on-going reforms by swiftly adopting the necessary enacting legislation, following it up with concrete delivery at all levels of government and with all relevant stakeholders, and monitoring impact. Reinforce the efficiency of public administration and improve coordination between layers of government. Simplify the administrative and regulatory framework for citizens and business and reduce the duration of case-handling and the high levels of litigation in civil justice, including by fostering out-of-court settlement procedures. Strengthen the legal framework for the repression of corruption, including by revising the rules governing limitation periods. Adopt structural measures to improve the management of EU funds in the southern regions with regard to the 2014-2020 programming period. ||   || Italy has made limited progress in addressing this recommendation: ·         Some progress in improving the functioning of civil justice. The geographical re-organisation of courts has been implemented. Other measures were taken including a new law on mediation and a December 2013 bill to improve the functioning of the justice system. Despite these measures problems persist (lengthy duration of proceedings, high number of pending cases). ·         Limited progress in addressing implementation gaps. Measures were taken to contain the need for secondary legislations and monitor implementation of past reform, but implementation gaps remains very important. ·         Limited progress towards administrative simplification. Piecemeal measures with limited impact were taken but a draft law on simplification presented to the parliament in June 2013 has not been adopted yet and major reforms undertaken in 2012 are not being implemented. ·         Limited progress in the fight against corruption. The anti-corruption agency was reformed but remains understaffed and no notable action was taken to revise the statute of limitations. ·         Limited progress was made regarding the upgrading of administrative capacity for the management of EU funds. Italy. A new Agency for territorial cohesion was set up but operational delays and uncertainties about its personnel and competences cast doubts on its capacity to bring about the change required by the challenge. The draft Partnership Agreement for the 2014-2020 programming period outlines a series of measures at national level but does not address the need to improve the administrative capacity of the bodies in charge of funds. 
 3 || Extend good corporate governance practices to the whole banking sector conducive to higher efficiency and profitability to support the flow of credit to productive activities. Take forward the on-going work as regards asset-quality screening across the banking sector and facilitate the resolution of non-performing loans on banks’ balance sheets. Promote further the development of capital markets to diversify and enhance firms’ access to finance, especially into equity, and in turn foster their innovation capacity and growth. ||   || Italy has made some progress in addressing this recommendation: ·         Some progress in easing firms’ access to credit. This includes in particular a strengthened loan guarantee scheme and a renewal of the existing debt moratorium. ·         Some progress in developing non-bank funding. The main measure is the strengthening of the allowance for new corporate equity. Other measures (mini-bonds, tax incentives for investment in innovative start-ups) were taken, but their impact remains to be seen. ·         Some progress on asset quality screening: the Bank of Italy conducted a thorough asset quality review of 20 Italian banks over 2012–13. The 2014 Stability Law enhanced the tax deductibility for banks’ loan-loss provisions, which should contribute to an increase in non-performing loan coverage. ·         Some progress on corporate governance in banks. The Bank of Italy has issued new corporate governance principles for banks, but their impact depends on actual implementation and enforcement.. 
 4 || Ensure the effective implementation of the labour market and wage setting reforms to allow better alignment of wages to productivity. Take further action to foster labour market participation, especially of women and young people, for example through a Youth Guarantee. Strengthen vocational education and training, ensure more efficient public employment services and improve career and counselling services for tertiary students. Reduce financial disincentives for second earners to work and improve the provision of care, especially child- and long-term care, and out-of-school services. Step up efforts to prevent early school leaving. Improve school quality and outcomes, also by enhancing teachers’ professional development and diversifying career development. Ensure effectiveness of social transfers, notably through better targeting of benefits, especially for low-income households with children. ||   || Italy has made limited progress in addressing this recommendation: ·         Some progress in implementing the labour market and wage-setting reforms. Most implementing legislation of the 2012 labour market reforms has been adopted. The March 2014 decree law further simplifies the regulation of fixed-term and apprenticeship contracts. Criteria for representativeness in collective bargaining were set in January 2014, which may foster decentralisation of bargaining. The measures to upgrade public employment services however still need to be implemented and the effectiveness of active labour market policies remains low. The national reform programme announces further measures as regards to contractual simplification, the reform of unemployment benefits and the systematisation of active labour market policy. ·         Limited progress has been made in addressing youth unemployment. Some measures were taken but their scope and the resources allocated are limited. The Youth Guarantee Implementation Plan is being examined by the Commission. ·         Limited progress on women’s labour market participation, with regard to both childcare and long-term care and disincentives to work for second earners. Some measures to reduce disincentives to work for second-earners and foster parenthood are included in an enabling law adopted by the government in April 2014. ·         Some progress on the effectiveness of social transfers. A ‘social inclusion card’ pilot project targeted to low-income households with children is in place and is planned to be extended to the whole territory. ·         Limited progress on education. Measures have been taken on career guidance and early school leaving. Initiatives to strengthen vocational education and training are of limited scope and impact. The issue of enhancing the teaching profession remains largely unaddressed. 
 5 || Shift the tax burden from labour and capital to consumption, property and the environment in a budgetary neutral manner. To this purpose, review the scope of VAT exemptions and reduced rates and of direct tax expenditures, and reform the cadastral system to align the tax base of recurrent immovable property to market values. Pursue the fight against tax evasion, improve tax compliance and take decisive steps against the shadow economy and undeclared work. ||   || Italy has made limited progress in addressing this recommendation: ·         Some progress in shifting the tax burden away from productive factors. The 2014 Stability Law decreased the tax burden on labour and further measures were taken in April 2014 to reduce the tax wedge, but fully financed only for 2014. The standard rate of VAT was raised but VAT exemptions and reduced rates have not been reviewed. Furthermore there has been no structural reform of direct tax expenditure and cadastral values have not been updated to reflect real market values (an enabling law to these purposes was adopted in March 2014). ·         Limited progress to reform taxation, improve tax compliance and reducing tax evasion. The government has undertaken additional enforcement measures but decisive action to improve tax compliance and reduce tax evasion is missing. The March enabling law on taxation includes measures that, once implemented, could represent a significant step forward. Progress on reducing the shadow economy and undeclared work has been limited. 
 6 || Ensure the proper implementation of the measures aiming at market opening in the services sector. Remove remaining restrictions in professional services and foster market access for instance in the provision of local public services where the use of public procurement should be advanced (instead of direct concessions). Pursue deployment of the measures taken to improve market access conditions in network industries, in particular by setting- up the Transport Authority as a priority. Upgrade infrastructure capacity with focus on energy interconnections, intermodal transport and high-speed broadband in telecommunications, also with a view to tackling the North-South disparities. ||   || Italy has made limited progress in addressing this recommendation: ·         Limited progress in fostering market access in services. Some efforts have been made to open up and modernise the services sector, particularly a reform of professional associations (implementation is proceeding, with some challenges for the legal profession). However as stressed by the Italian Competition Authority, the issue of procurement and provision of local public services remains high on the agenda and needs to be addressed. ·         Substantial progress in improving market access conditions in energy; some progress in the transport sector. The Transport Authority has been set up and started work in January 2014 but is not yet fully operational: procedures for staff recruitment are ongoing. Inefficiencies in local transport services remain however to be addressed. In the energy, unbundling in the gas sector is complete and the functioning of gas and electricity markets has improved, although prices remain high. ·         Limited progress in addressing infrastructure gaps. Weaknesses in energy interconnections and intermodal transport, notably at ports, are still a major bottleneck. Gaps remain also in telecommunications: existing investment plans seem insufficient to ensure that Digital Agenda objectives for high-speed broadband coverage are met. 
 Europe 2020 (national targets and progress) 
 Employment rate target set in the 2012 NRP: 67-69 % || The employment rate was 61.2 % in 2011, 61 % in 2012 and 59.8 % in 2013. No progress has been achieved towards meeting the target. 
 research and development target set in the 2012 NRP: 1.53 % of GDP || Gross domestic expenditure on research and development was 1.25 % in 2011 and 1.27 % in 2012 (provisional). Very limited progress has been achieved towards meeting the target. 
 Greenhouse gas emissions target -13 % (compared with 2005 emissions); ETS emissions are not covered by this national target. || Non-ETS greenhouse gas emissions declined by 16.8 % between 2005 and 2012, which thus meets the 2020 target. However, according to the latest national projections submitted to the Commission and taking into account existing measures, emissions will increase again and it is expected that the target will be missed: -9.5 % in 2020 as compared with 2005 (i.e. a projected shortfall of 3.5 percentage points). 
 Renewable energy target: 17 % || Renewables’ share of gross final energy consumption was 12.3 % in 2011 and 13.5 % in 2012. Some progress has been made towards the target. 
 Energy efficiency: absolute level of primary energy consumption of 158 Mtoe || In 2012, primary energy consumption in Italy stood at 155.2 Mtoe, which is within the 2020 target. This progress needs to be sustained over time. 
 Early school leaving target: 16 % || The early school leaving rate (the percentage of the population aged 18-24 with at most lower secondary education and not in further education or training) was 18.2 % in 2011, 17.6 % in 2012 and 17.0 % in 2013. Some progress has been made towards meeting this target. 
 Tertiary education target: 26-27 % || The tertiary educational attainment rate was 20.3 % in 2011, 21.7 % in 2012 and 22.4 % in 2013. Some progress has been made towards meeting this target. 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: -2 200 000 (compared to 2008, thus corresponding to 12 899 0000 people at risk of poverty or social exclusion in 2020) || People at risk of poverty or social exclusion: 17 112 000 in 2011, 18 194 000 in 2012. No progress has been made in meeting this target. 
Annex
Standard tables
Table
I – Macro-economic indicators
Table II – Comparison of macroeconomic
developments and forecasts
Table
III – Composition of the budgetary adjustment
Table
IV – Debt dynamics
Table
V – Sustainability indicators
Table
VI – Taxation indicators
Table
VII – Financial market indicators
Table VIII –
Labour market and social indicators

Table IX – Product market performance and policy indicators
Table
X – Green growth
List of indicators used in Box 4 on the potential impact on growth of structural reforms. 
Final goods
sector mark-ups: Price-cost margin, i.e. the difference
between the selling price of a good or service and its cost. Final goods
mark-ups are proxied by the mark-ups in selected services sectors (transport
and storage, post and telecommunications, electricity, gas and water supply,
hotels and restaurants and financial intermediation but excluding real estate
and renting of machinery and equipment and other business activities[71]).

Source:
Commission services estimation using the methodology of Roeger,
W. (1995). "Can imperfect Competition explain the Difference between
primal and dual Productivity?" Journal of Political Economy Vol.
103(2) pp. 316-30, based on EUKLEMS 1996-2007 data. 
Entry costs: Cost
of starting a business in the intermediate sector as a share of income per
capita. The intermediate sector is proxied by the manufacturing sector in the
model. 
Source: World
Bank, Doing Business Database. www.doingbusiness.org. 2012
data.
Implicit
consumption tax rate: Defined as total taxes on consumption
over the value of private consumption. In the simulations it is used as a proxy
for shifting taxation away from labour to indirect taxes. The implicit
consumption tax-rates are increased (halving the gap vis-à-vis the best
performers) while labour tax-rates are reduced so that the combined impact is
ex-ante budgetary neutral.
Source: European
Commission, Taxation trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of
high-skilled and low-skilled: The share of high skilled workers is
increased, the share of low-skilled workers is reduced (halving the gap
vis-à-vis the best performers). Low-skilled correspond to ISCED 0-2 categories;
high-skilled correspond to scientists (in mathematics and computing,
engineering, manufacturing and construction). The remainder is medium-skilled. 
Source:
EUROSTAT. 2012 data or latest available. 
Female
non-participation rate: Share of women of working age not in
paid work and not looking for paid work in total female working-age population
Source:
EUROSTAT. 2012 data or latest available.
Low-skilled male
non-participation rates: Share of low-skilled men of working age
not in paid work and not looking for paid work in total male working-age
population
Source:
EUROSTAT. 2012 data or latest available.
Elderly
non-participation rates (55‑64 years): Share of the
population aged 55‑64 years not in paid work and not looking for paid
work in total population aged 55‑64 years.
Source:
EUROSTAT. 2012 data or latest available.
ALMP:
Active Labour Market Policy expenditures as a share of GDP over the share of
unemployed in the population. 
Source:
EUROSTAT. 2011 data or latest available.
Benefit
replacement rate:  Share of a worker's pre-unemployment
income that is paid out by the unemployment insurance scheme. Average of net
replacement rates over 60 months of unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1]
COM(2013) 800 final
[2]
COM(2013) 790 final
[3]
Aside from the 16 Member States identified in the Alert Mechanism Report, Ireland was also covered by an in-depth review, following the conclusion by the Council
that it should be fully integrated into the normal surveillance framework after
the successful completion of its financial assistance programme.
[4]
The estimations are carried out using the macro-economic models ITEM, IGEM and
a country-specific version of the European Commission’s QUEST III. 
[5]
Decree law 66/2014
[6]
The programme also presents a no-policy-change projection for some expenditure
items, which shows a smaller decline in the overall expenditure ratio (‑2.8
percentage points of GDP) and in compensation of employees (‑0.9
percentage point of GDP).  
[7]
For an explanation see Public Finance Report 2013 
http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee-2013-4.pdf
[8]
C(2013) 8005 final. http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/it_2013-11-15_co_en.pdf
[9]
See Table V in Annex. The medium-term sustainability gap (S1) indicator shows
the upfront adjustment effort required, in terms of a steady improvement in the
structural primary balance to be introduced until 2020, and then sustained for
a decade, to bring debt ratios back to 60% of GDP in 2030, including financing
for any additional expenditure until the target date, arising from an ageing
population. The following thresholds were used to assess the scale of the
sustainability challenge: (i) if the S1 value is less than zero, the country is
assigned low risk; (ii) if a structural adjustment in the primary balance of up
to 0.5 p.p. of GDP per year until 2020 after the last year covered by the
autumn 2013 forecast (year 2015) is required (indicating an cumulated
adjustment of 2.5 percentage point), it is assigned
medium risk; and, (iii) if it is greater than 2.5 (meaning a structural
adjustment of more than 0.5 p.p. of GDP per year is necessary), it is assigned
high risk.
[10]
See Table V in Annex. The long-term sustainability gap (S2) indicator shows the
immediate and permanent adjustment required to satisfy an inter-temporal
budgetary constraint, including the costs of ageing. The S2 indicator has two
components: i) the initial budgetary position (IBP) which gives the gap to the
debt stabilising primary balance; and ii) the additional adjustment required
due to the costs of ageing. The main assumption used in the derivation of S2 is
that in an infinite horizon, the growth in the debt ratio is bounded by the
interest rate differential (i.e. the difference between the nominal interest
and the real growth rates); thereby not necessarily implying that the debt
ratio will fall below the EU Treaty 60% debt threshold. The following
thresholds for the S2 indicator were used: (i) if the value of S2 is lower than
2, the country is assigned low risk; (ii) if it is between 2 and 6, it is
assigned medium risk; and, (iii) if it is greater than 6, it is assigned high
risk.
[11]
CASE (2013), Study to quantify and analyse the VAT gap in the EU-27 Member
States. Tax gap is defined as the difference between the theoretical tax
liability according to the tax law and the actual revenues collected, as a
share of theoretical tax liability.
[12]
Corte dei Conti (2013), Rapporto 2013 sul coordinamento della finanza pubblica.
[13]
The figure includes all amounts, accumulated over the years that have been
contested by the public administration, including those to companies gone out
of business and those for which an appeal may have been lodged. Data are quoted
in the 2013 annual report of the Court of Auditors on the coordination of
public finances, p. 21:
http://www.corteconti.it/_documenti/controllo/sezioni_riunite/sezioni_riunite_in_sede_di_controllo/2013/28_maggio_2013_rapporto_2013_finanza_pubblica.pdf.
[14]
Ibid. The Italian Court of Auditors argues that there are two main explanations
for the decline in enforced tax recovery yield: on the one hand, tax debt
collection has been affected by the economic crisis, which has made several
taxpayers unable to pay taxes due; on the other hand, the Court points that
that recent changes made to the Italian tax debt collection system have
weakened tax administration’ powers to enforce tax recovery. 
[15]Ministero
Economia e Finanze (2013), Rapporto sui risultati conseguiti in materia di
misure di contrasto dell’evasione fiscale. Allegato alla Nota di Aggiornamento
del Documento di Economia e Finanza 2013. http://www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/analisi_progammazione/documenti_programmatici/Rapporto_evasione.pdf.
[16]
Ibid. p. 37. Enforced tax debt recovery decrease by 7% over the period
2011-2012, from EUR 4.5 billion (2011) to EUR 4.2 billion (2012). According to
the same report, in 2012 Italy recovered in total EUR 12.5 billion from the
fight against tax evasion. This figure covers both enforced tax payments
(“ruoli”) and voluntary payments of overdue tax obligations (“versamenti
diretti”). 
[17]
Eunomia research and consulting and Aarhus University (2014), ‘Study on
environmental tax reform potential in 12 EU Member States. See also: OECD
(2013), OECD Environmental Performance Reviews: Italy 2013 (the study
notes that environmental taxes in Italy do not sufficiently reflect
environmental externalities); Institute for European Environmental Policy
(2013), Steps to greening country report: Italy. Report for the European
Commission, pp. 15-16. 
[18]
EC (2014), Macroeconomic Imbalances. Italy, European Economy, Occasional paper
82, March 2014.
[19]
In 2012, 1.7 million activated fixed-term contracts (17.4 % of the total)
had a duration of 1 to 3 days. The level of short-lived temporary contracts
increased further up to mid-2013. Source: Ministero del
Lavoro e delle Politiche Sociali, ‘Il primo anno di applicazione della legge
92/2012’, Quaderno No 1, January 2014.
[20]
Available evidence from OCSEL-CISL suggests that the number of second-level
agreements has decreased by around 15% from 2011, and 61% of the agreements
reached in 2013 were supported by the tax rebates made available in January
2013. For a more detailed analysis, see Italy's 2014 in-depth review.
[21]
Italy presented a Youth Guarantee Implementation Plan, entitled "Piano di
attuazione italiano della Garanzia per i Giovani" in December 2013:  http://www.lavoro.gov.it/Notizie/Documents/01_08_2014%20%20Piano%20di%20attuazione%20italiano%20della%20Garanzia%20per%20i%20Giovani.pdf 

[22]
Decree law 34/2014
[23]
Administrative sanctions will apply on firms that do not respect the limit.
[24]
Public and private research institutes are exempted from this limit as well as
from the 3-year maximum duration limit.
[25]
The number of apprenticeship contracts has decreased from 528 183 in 2010 to
469 855 in 2012. In particular, the share of young workers aged 15-29 with an
apprenticeship contract has decreased from 14.7% to 13.9% in the same period.
Source: Ministry of Labour – ISFOL – INPS (2013) 14th Monitoring Report on
Apprenticeship.
http://www.isfol.it/highlights/xiv-rapporto-di-monitoraggio-apprendistato/xiv-rapporto-di-monitoaraggio-apprendistato.-3-i-numeri-dell2019apprendistato
[26]
http://www.minori.it/minori/rapporto-di-monitoraggio-del-piano-nidi-al-31-dicembre-2012.
[27]
Indagine sui servizi per l’impiego 2013: rapporto di monitoraggio, Ministry of
Labour, December 2013.
http://www.cliclavoro.gov.it/Barometro-Del-Lavoro/Documents/Rapporto_monitoraggio_SPI_2013.pdf.
[28]
Early school leaving rate is defined as the share of the population aged 18-24
with at most lower secondary education and not in further education or
training.
[29] OECD
Programme for the International Assessment of Adult Competencies (PIAAC)
[30]
3.7% of 15-29 year-olds in 2012 as against an EU average of 12.9%.
[31]
Decree law 104/2013 converted into Law 128/2013
[32]
The percentage increased by over 7 percentage points from 6.9 % in 2010
to 11.2 % in 2011 and 14.5 % in 2012.
[33]
From 2008 to 2012, the percentage of employed people at risk of poverty
increased by 1.1 percentage points, to 11.1 %.
[34]
Decree Law 47/2014 ("Urgent measures for housing emergency")
[35]
Article 9 of decree law 1/2012 and Article 2233 of the Civil Code. See
also: Autorità Garante per la Concorrenza e il Mercato (2012), Proposta di
riforma concorrenziale ai fini della legge annual per il mercato e la
concorrenza 2013.
[36]
AGCM (2012), Proposte di riforma concorrenziale ai fini della legge annuale
per il mercato e la concorrenza, anno 2013. 
[37]
OECD (2014) Going for growth, Interim report 2014. 
[38]
Corte dei Conti (2012), Rapporto 2012 sul coordinamento della finanza
pubblica. The survey covered 7 200 local
authorities out of the more than 8 000. 
[39]
Corte dei Conti (2014), Rapporto 2014 sul coordinamento della finanza
pubblica.
[40]
Autorità Garante per il Mercato e la Concorrenza (2013), Audizione presso la
IX Commissione della Camera dei Deputati — Indagine conoscitiva sul settore del
trasporto pubblico locale.
[41]
Corte Costituzionale (2012), Sentenza 199/2012.
[42]
Cassa Depositi e Prestiti (2013), Mobilità urbana, Studio di Settore 04.
[43]
Autorità Garante per il Mercato e la Concorrenza (2013), Audizione presso la IX
Commissione della Camera dei Deputati - Indagine conoscitiva sul settore del
trasporto pubblico locale.
[44]
Eurostat (2013), Community Survey on ICT usage in
household and by individuals.
[45]
  Italy ranked 3rd lowest EU-wide in an aggregate index of
satisfaction with railway stations and travels. See European Commission (2013),
Flash Eurobarometer 382a, http://ec.europa.eu/public_opinion/flash/fl_382a_en.pdf.
[46]
Decreto Interministeriale 8 Marzo 2013. 
[47]
The national energy strategy sets the following targets: 21% reduction of
greenhouse gas emissions compared to 2005 (original objective set for Italy: 18% for total ETS and non-ETS emissions); 19-20% energy from renewable sources (original
objective set for Italy: 17%) and 24% reduction of primary energy consumption
(original objective: 20% reduction at EU level).
[48]
The share of renewables in gross final energy consumption increased from 12.3%
in 2011 to 13.5 % in 2012 against the Europe 2020 target of 17 %. The level of
primary energy consumption stood at 155.2 Mtoe in 2012, below the Europe 2020
target. 
[49]
For floods: Risk and Policy Analysts (2014), Study on Economic and Social
Benefits of Environmental Protection and Resource Efficiency related to the
European Semester, Report for the European Commission, DG Environment; for air
pollution: Impact Assessment of the Commission Integrated Clean Air Package
(2013), see: http://ec.europa.eu/environment/air/clean_air_policy.htm.
[50]
Final goods sector mark-ups is the difference between the selling price of a
good/service and its cost. Entry cost refers to the cost of starting a business
in the intermediate sector. The implicit consumption tax rate is a proxy for
shifting taxation away from labour to indirect taxes. The benefit replacement
rate is the % of a worker's
pre-unemployment income that is paid out by the unemployment scheme. For a
detailed explanation of indicators see Annex.
[51]
For a detailed explanation of the transmission mechanisms of the reform
scenarios see: European Commission (2013), ‘The growth impact of structural
reforms’, Chapter 2 in QREA No 4. December 2013. Brussels;
http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf.
[52]
World Bank (2013), 2013 Worldwide Governance Indicators; World Bank (2014),
Doing Business 2014. 
[53]
See: http://www.governo.it/Presidenza/UPG/monitoraggio/ReportAttuazione_20131231.pdf.
[54]
Decree law 69/2013 (decreto ‘del Fare’), converted into Law 98/2013
[55]
World Bank (2014), Doing Business 2014, available at
http://www.doingbusiness.org
[56]
Decree law 69/2013, converted into Law 98/2013; Decree law 145/2013, converted
into Law 9/2014.
[57]
http://www.funzionepubblica.gov.it/media/1066528/semplificazione_amministrativa_aprile2013.pdf.
[58]
Decree law 66/2014 (not yet converted into law). 
[59]
OECD (2013), Government at a Glance. 
[60]
Consiglio Nazionale dell'Economia e del Lavoro (2012), Rapporto sul mercato del
lavoro 2011-2012.
[61]
Consiglio Nazionale dell'Economia e del Lavoro (2012), Rapporto sul mercato del
lavoro 2011-2012.
[62]
European Commission (2013), A strategy for e-procurement, COM/2013/0179, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52012DC0179.
E-procurement is defined as the use of electronic
communications and transaction processing by public sector organisations when
buying supplies and services or tendering public works.
[63]
European Commission (2012), End-to-end e-procurement to modernise public
administration, COM/2012/0453, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013DC0453.
Take-up is estimated as the value of public procurement for which companies
submitted offers electronically in the country, divided by the total value of
procurement in the country.
[64]
Directives 2014/23/EU; 2014/24/EU; and 2014/25/EU.
[65]
Decree law 66/2014 (not yet converted into law)
[66]
The clearance rate – the ratio of the number of resolved cases over the number
of incoming cases in a year – for litigious civil and commercial cases at first
instance increased from 118 % in 2010 to 131 % in 2012. The total
number of pending civil and commercial non-litigious cases on 1 January 2012 in
First Instance was 3 796 202. Sources: European Commission, The
2014 EU Justice Scoreboard & Council of Europe (CEPEJ), Study on the
functioning of judicial systems in the EU Member States: Facts and figures from
the CEPEJ 2012-2014 evaluation exercise, prepared for the European
Commission.
[67]
Mandatory mediation was firstly introduced in 2011 but the law was declared
unconstitutional in 2012 (however not for reasons pertinent to the institution
itself), leading to a significant decrease in the number of mediation
decisions. It was then reintroduced in 2013.
[68]
Law 125/2013.
[69]
This has already caused GRECO to issue a relevant recommendation to Italy in the context of the Joint First, Second and Third Round Evaluation Report,
available at http://www.coe.int/t/dghl/monitoring/greco/evaluations/index_en.asp.
[70]
The following categories are used to assess progress in implementing the 2013
country-specific recommendations of the Council Recommendation: No progress:
The Member State has neither announced nor adopted any measures to address the
country-specific recommendation. This category also applies if a Member State has commissioned a study group to evaluate possible measures. Limited
progress: The Member State has announced some measures to address the
country-specific recommendation, but these measures appear insufficient and/or
their adoption/implementation is at risk. Some progress: The Member State has announced or adopted measures to address the country-specific
recommendation. These measures are promising, but not all of them have been
implemented yet and implementation is not certain in all cases. Substantial
progress: The Member State has adopted measures, most of which have been
implemented. These measures go a long way in addressing the country-specific
recommendation. Fully addressed: The Member State has adopted and
implemented measures that address the country-specific recommendation
appropriately.
[71]
The real estate sector is excluded because of statistical difficulties of
estimating a mark-up in this sector. The sector renting of machinery and
equipment and other business activities is conceptually part of intermediate
goods sector.