REPORT FROM THE COMMISSION Italy Report prepared in accordance with Article 126(3) of the Treaty
Date: 2015-02-27
Institutions: European Commission
Subjects: Italy, anti-crisis plan, budget deficit, budgetary control, economic disparity, economic stabilisation, gross domestic product, macroeconomics, public debt, public investment, stability pact, structural adjustment













EUR-Lex - 52015DC0113 - EN











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52015DC0113

REPORT FROM THE COMMISSION Italy Report prepared in accordance with Article 126(3) of the Treaty /* COM/2015/0113 final */









REPORT
FROM THE COMMISSION
Italy
Report prepared in accordance with Article 126(3) of the Treaty
1.           Background
Article 126 of the Treaty on the Functioning of the
European Union (TFEU) lays down the excessive deficit procedure (EDP). This
procedure is further specified in Council Regulation (EC) No 1467/97 “on
speeding up and clarifying the implementation of the excessive deficit
procedure”[1],
which is part of the Stability and Growth Pact (SGP). Specific provisions for
euro area Member States under EDP are laid down in Regulation (EU) No 473/2013[2].
According to Article 126(2) TFEU, the Commission has to
monitor compliance with budgetary discipline on the basis of two criteria,
namely: (a) whether the ratio of the planned or actual government deficit to gross
domestic product (GDP) exceeds the reference value of 3% (unless either the
ratio has declined substantially and continuously and reached a level that
comes close to the reference value; or, alternatively, the excess over the
reference value is only exceptional and temporary and the ratio remains close
to the reference value); and (b) whether the ratio of government debt to GDP
exceeds the reference value of 60% (unless the ratio is sufficiently
diminishing and approaching the reference value at a satisfactory pace).
Article 126(3) TFEU stipulates that, if a Member State
does not fulfil the requirements under one or both of the above criteria, the
Commission has to prepare a report. The Commission may
also prepare a report if, notwithstanding the fulfilment of the requirements
under the criteria, it is of the opinion that there is a risk of an excessive
deficit, the latter understood as the situation defined in Article 126(2) TFEU.
This report also has to “take into account whether
the government deficit exceeds government investment expenditure and take into
account all other relevant factors, including the medium-term economic and
budgetary position of the Member State”.
This report, which represents the first step in the EDP,
analyses the question of Italy's compliance with the
debt criterion of the Treaty, with due regard to the economic background and other relevant factors before
drawing a final conclusion on compliance. 
Following the amendments to the SGP in 2011, the debt
requirement has been put on an equal footing with the deficit requirement in
order to ensure that, for countries with a debt-to-GDP ratio above the 60%
reference value, the ratio is brought below (or sufficiently declining towards)
that value. Article 2(1a) of Council Regulation (EC) No 1467/97 stipulates that
Member States that were subject to an excessive deficit procedure on 8 November
2011 benefit from a three-year transition period, starting in the year
following the correction of the excessive deficit, during which they are expected
to make sufficient progress towards compliance with the debt reduction
benchmark. In the case of Italy, the transition period covers the years
2013-2015 (i.e. 3 years after the correction of the excessive deficit[3]). The "Specifications on the implementation of the Stability
and Growth Pact and guidelines on the format and content of stability and
convergence programmes" of 3 September 2012 spell out how the
requirement for the structural balance is defined and assessed. In particular,
they define a minimum linear structural adjustment of the structural balance
(MLSA) ensuring that the debt rule is met by the end of the transition period.
On 13 January 2015 the Commission presented a
Communication on Flexibility, providing new guidance on how to apply the
existing rules of the Stability and Growth Pact, in order to strengthen the
link between effective implementation of structural reforms, investment, and
fiscal responsibility in support of jobs and growth. The Communication does not
amend any provision of the Pact, but aims to further reinforce the
effectiveness and understanding of its rules and to develop a more
growth-friendly fiscal stance in the euro area by ensuring the best use of the
flexibility enshrined within the Pact while preserving its credibility and
effectiveness in upholding fiscal responsibility. In particular, the
Communication clarified that – in line with the provisions of Article 2(3) of
Council Regulation (EC) No 1467/97 - the Commission, when examining whether an
EDP needs to be opened (in the context of a report according to Article 126(3)
TFEU), will analyse carefully all relevant medium-term developments regarding
the economic, budgetary and debt positions. It has also clarified that the
implementation of structural reforms in the context of the European Semester is
to be considered among these relevant factors[4].

Data notified by the authorities on 1 October 2014[5] and subsequently
validated by Eurostat[6]
show that the general government deficit in Italy
reached 2.8% of GDP in 2013, while the debt was at 127.9%
of GDP, above the 60% of GDP reference value. For 2014, both the mentioned
notification and Italy’s 2015
Draft Budgetary Plan (DBP) planned a debt-to-GDP ratio[7] of 131.6%.
In 2015, the debt-to-GDP ratio is planned to further increase to 133.1%.
Overall, on the basis of the planned structural efforts
and debt levels, Italy is not making sufficient progress towards compliance
with the debt reduction benchmark in 2014 and 2015 (see Table 1), since the
change in the structural balance falls short of the required MLSA by a large
extent both in 2014 (‑0.3 percentage points of GDP compared to the
required MLSA of 0.9 percentage points of GDP) and in 2015
(0.3 percentage points of GDP compared to the required MLSA of
2.2 percentage points of GDP).
Table
1. General government deficit or/and debt (% of GDP) a
The planned (recalculated) structural efforts[8] and debt levels for
2014 and 2015 in the Draft Budgetary Plan for 2015 and the projections in the
Commission 2015 winter forecast provides evidence that there appears to be prima
facie a risk of the existence of an excessive deficit in Italy in the sense
of the Stability and Growth Pact before however considering all factors as set
out below. 
The Commission has therefore prepared the following
report to comprehensively assess the departure from the transitional debt rule
in order to examine whether the launch of an Excessive Deficit Procedure is
warranted after all relevant factors have been considered. Section 2 of the report examines the deficit criterion. Section 3
examines the debt criterion. Section 4 deals with public investment and other
relevant factors, including the assessment of compliance with the required
adjustment path towards the Medium
Term budgetary Objective (MTO). The report takes into
account the Commission 2015 winter forecast, released on 5 February 2015, and
the Commission's evaluation of subsequent developments.
2.           Deficit criterion
According to
both the 2015 DBP and the Commission 2015 winter forecast, Italy`s general
government deficit is foreseen to respect the Treaty reference value during the
period 2014-2016. According to the Commission forecast, the deficit is expected
to have reached 3.0% of GDP in 2014 and to decline thereafter to 2.6% of GDP in
2015. The forecast is in line with the planned deficit put forward in the 2015
DBP. The deficit is forecast to be 2.0% of GDP in 2016, on a no-policy change
basis. However, it is worth noting that at the beginning of March 2015 the
Italian Statistical Office (ISTAT) will publish a first release of 2014 outturn
figures, and official notified figures will also be available at the beginning
of April 2015. The forthcoming
publication by Eurostat in April 2015 of notified and validated data on the
2014 outcome may entail a new assessment of the fulfilment of the deficit
criterion.
3.           Debt
criterion
In 2013, the government debt-to-GDP ratio
reached 127.9%, the second-highest level in the Union, also due to insufficient
pace of reduction in the years before the crisis. For 2014, in the 2015 DBP,
the debt-to-GDP ratio is projected at 131.6%, showing an increase of
3.7 percentage points relative to 2013. 
This increase is mainly due to the real GDP
contraction and low inflation, both negatively affecting debt dynamics through
a denominator effect and the budgetary outcome. The decrease in inflation leads
in the short term to a higher real implicit interest rate on the debt[9] despite decreasing
nominal interest rates. This is because, while the impact of lower inflation is
immediate, the lower nominal yields only gradually pass through into the
servicing cost of the outstanding debt stock, i.e. over a horizon of more than
five years given the duration of the Italian debt and the roll-over period (see
also Graph 1). More specifically, the debt-increasing impact of the implicit
real cost of debt increased from 3.1% of GDP over 2011-2013 to 3.7% over
2014-2015. 
In this context, the projected
debt-decreasing primary surplus in 2014 (1.7% of GDP) is more than offset by
the “snowball” effect (see Table 2), which entails an overall debt-increasing
impact (4.1% of GDP). Regarding 2015, the DBP projects a further increase in
the debt-to-GDP ratio to 133.1%. The slightly higher primary surplus than in
2014 (1.9% of GDP) is set to be still insufficient to offset the still large
“snowball" effect (3% of GDP). However, as of 2016, the debt ratio is
planned to gradually decrease and reach 124.3% in 2018, thanks to higher real
growth and inflation accelerating towards the ECB target, an increasing primary
surplus and a privatisation plan projected to yield 0.7% of GDP per year. 
In the Commission forecast, debt
developments are similar to those projected in the DBP, with the debt-to-GDP
ratio also peaking in 2015 at around the same level (133%), although lower
inflation (GDP deflator) is expected in both 2014 (0.5% vs. 0.8%) and 2015
(0.4% vs. 0.6%) and privatisation proceeds slightly below those planned by the
government (0.5% vs. 0.7% of GDP) are included in 2015. Graph 1 shows that the
expected recovery in real GDP growth in 2015 leads to a lower “snowball” effect
but is still insufficient to offset the still large implicit real cost of debt.
Table 2: Debt
dynamics a
Graph 1: Drivers of “snowball effect” on
government debt
Following the abrogation of the EDP in June
2013, Italy benefits from a three-year transition period to comply with the
debt reduction benchmark, starting in 2013. In order to ensure continuous and
effective progress towards compliance during the transition period, Member
States should respect simultaneously the two conditions below:
a.      
First, the annual structural adjustment should
not deviate by more than ¼% of GDP from the minimum linear structural
adjustment (MLSA) ensuring that the debt rule is met by the end of the
transition period.
b.     
Second, at any time during the transition
period, the remaining annual structural adjustment should not exceed ¾% of GDP
(unless the first condition implies an annual effort above ¾% of GDP). However,
this condition does not apply to the case of Italy because the first condition
implies an annual effort above ¾% of GDP.
Based on the 2015 DBP, a surplus in the structural
balance of more than 1% of GDP would be needed to meet the debt reduction
benchmark in 2015, given an annual MLSA of 0.9 percentage points over
2014-2015. The structural effort planned by Italy for
2014 and 2015 is not sufficient to meet the requirements of the transition
period for the debt reduction benchmark (see Table 1). First, Italy’s
structural balance[10]
is planned to worsen by 0.3 percentage points of GDP in 2014, while the
required improvement (MLSA) is 0.9 percentage points of GDP. Second, in 2015
the remaining annual MLSA would amount to 2.2 percentage points of GDP, while
the planned structural adjustment is 0.3 percentage points of GDP. Based on the Commission forecast, which projects lower nominal
growth (mainly due to lower inflation) and privatisation proceeds, these
requirements would be even more stringent (MLSA of 1.2 percentage points in 2014,
which becomes 2.7 percentage points in 2015 following the 2014 outcome, implying a needed structural
surplus of more than 1.5% of GDP in 2015, i.e. well above Italy’s MTO of a
balanced budget in structural terms). 
The overall analysis above thus suggests
that prima facie the debt criterion in the sense of the Treaty and
Council Regulation (EC) No 1467/97 appears not to be fulfilled based on the
2015 DBP as well as the Commission 2015 winter forecast before however
consideration is given to all relevant factors as set out below.
4.           Relevant
factors
Article 126(3) of the TFEU provides that the Commission
report “shall also take into account whether the government deficit exceeds
government investment expenditure and take into account all other relevant factors,
including the medium-term economic and budgetary position of the Member State”.
These factors are further clarified in Article 2(3) of
Council Regulation (EC) No 1467/97, which also specifies that “any other
factors which, in the opinion of the Member State concerned, are relevant in
order to comprehensively assess compliance with deficit and debt criteria and
which the Member State has put forward to the Council and to the Commission”
need to be given due consideration.
In case of apparent breach of the debt criterion, the
analysis of the relevant factors is particularly warranted given that debt
dynamics are influenced by factors outside the control of the government to a
larger extent than in case of the deficit. This is recognised in Article 2(4)
of Council Regulation (EC) No
1467/97, which stipulates that the relevant factors shall be taken into account
when assessing compliance on the basis of the debt criterion irrespective of
the size of the breach.
In this respect, at least the following three main
aspects need to be considered when assessing compliance with the debt criterion
given their impact on the debt dynamics and sustainability.

 Adherence to the MTO or the adjustment path
     towards it: the achievement of the MTO or the
     progress towards it is supposed, under normal macroeconomic circumstances,
     to ensure sustainability or rapid progress to sustainability. By
     construction, the country-specific MTO takes into account the debt level
     and implicit liabilities. Compliance with the MTO or the adjustment path
     towards it should ensure – in the medium term – convergence of the debt
     ratios towards prudent levels. 
 Structural reforms, already
     implemented or detailed in a structural reform plan: the rationale for
     taking into account these reforms is that through their impact on growth
     they are expected to enhance sustainability in the medium term,
     contributing to bring the debt-to-GDP ratio on a satisfactory downward
     path. 

Adherence to the MTO (or the adjustment path towards it)
along with implementation of structural reforms (in the context of the European
Semester) is expected to bring debt dynamics on a sustainable path, through the
combined impact on the debt level itself (through the achievement of a sound
budgetary position at the MTO) and on economic growth (through the reforms).

 Besides these two main factors, the occurrence
     of extraordinary economic conditions, which can hamper the reduction
     of the debt-to-GDP ratios and make compliance with the SGP provisions
     particularly demanding, needs to be taken into account. Specifically, the
     current environment of low inflation – on top of the protracted low growth
     – requires the concerned Member States to achieve very demanding
     structural adjustments to comply with the MLSA under the transitional debt
     rule. Moreover, negative inflation surprises have contributed to the
     upward revisions of the annual required MLSA, namely by around half of the
     difference in the requirement between spring and now[11].
     Under such conditions, adherence to the MTO or the adjustment path towards
     it (as spelled out in point 1) is a key relevant factor in assessing
     compliance with the debt rule. It is worth noting that, while a structural
     balanced budgetary position ensures debt sustainability in principle, in
     the case of Italy attaining the MTO would ensure compliance with the debt
     reduction benchmark in the presence of nominal growth close to 3%[12]. 

In view of the above provisions, the following
subsections consider in turn (1) the medium-term economic position; (2) the
medium-term budgetary position, including an assessment of compliance with the
required adjustment towards the MTO and the development of public investment;
(3) the developments in the medium-term government debt position, its dynamics
and sustainability; (4) other factors considered relevant by the Commission;
and (5) other factors put forward by the Member State.
Based on the Commission 2014 spring
forecast, on which the Council based its fiscal recommendation to Italy, the
required MLSA was estimated at 0.7% of GDP in 2014 and 1.4% of GDP in 2015
(taking into account the 2014 outcome). The required MLSA became substantially
higher, at 1.2% of GDP in 2014 and 2.7% of GDP in 2015, once recomputed on the
basis of the Commission 2015 winter forecast, which forms the basis of the
present assessment. This revision is partly driven by significantly lower
inflation and potential growth estimates. These and other relevant factors will
be discussed in greater detail in the following sections.
4.1.        Medium-term economic
position 
Cyclical conditions, potential growth,
and inflation
Real GDP
growth in Italy has been below the euro area average since the 1990s. More
specifically, Italy’s average GDP growth amounted to 1.5% on average between
1999 and 2007, as compared to 2.3% in the euro area, while between 2008 and
2014, Italy’s GDP contracted by 1.3% on average, as compared to 0.1% in the
euro area. Compared to its pre-crisis peak in 2007, GDP is expected in 2014 to
have contracted by approximately 8.7%. Italy’s 2015 DBP projects GDP to
contract by 0.3% in 2014 and to recover in 2015 by 0.6%. The Commission
forecast expects similar developments over 2014-2015. In particular, the 2015
recovery is still set to be very moderate (0.6%), while the negative estimate
of potential growth (‑0.3%) implies a significant reduction in Italy’s negative
output gap (from ‑4.3% to ‑3.5% of potential GDP). Thanks to some acceleration
in 2016, this slow recovery would however exceed potential growth (still
estimated to be marginally negative for that year), leading to a marked closure
of the negative output gap (to -2.1% of potential GDP in 2016, based on the
Commission 2015 winter forecast). Overall, over the last years, Italy has
experienced negative potential growth (with the exception of 2011) and a negative
output gap.
Price
indicators in Italy have been on a downward path since late-2012 with yearly
HICP inflation at 0.2% in 2014 and at ‑0.4% in January 2015. Low aggregate
demand and more recently the significant fall of energy prices are the main
driving factors. The recent slump in oil prices is set to feed quickly into
lower energy prices, and the Commission forecast expects yearly HICP inflation
to be negative in 2015 (‑0.3%). However, core inflation is expected to
stabilise at low but positive levels. In 2016, inflation is forecast to return
to 1.5% mainly because it factors in the VAT hike enshrined in the 2015
Stability Law to safeguard the achievement of the fiscal targets[13]. 
The
debt-to-GDP ratio and the structural balance indicator are highly affected by
the current moderate GDP deflator, expected to remain at around 0.5% over
2014-2015 before increasing in 2016. In fact, as explained in Section 3, the
current cyclical conditions negatively affect debt dynamics through their
impact on the “snowball” effect and by making it harder to achieve and maintain
higher primary surpluses. In the case of Italy, the achievement of a structural
adjustment of 1.2 percentage points of GDP per year in 2014 and 2015 (i.e. the
MLSA based on the Commission forecast) with a nominal potential growth close to
zero would require ceteris paribus a decrease in nominal primary
expenditure of around 5% over the two years. As an alternative illustration, a
mechanical exercise replicating an inflation environment consistent with ECB
targets has been carried out by assuming an inflation stable at 2% and zero
potential growth over 2014-2016, everything else being equal, in particular
keeping the monetary level of headline deficit and debt unchanged relative to
the Commission 2015 winter forecast. On this basis, the MLSA for Italy would
have been met over the transition period 2013-2015. In summary, negative real
growth developments together with low inflation affect the debt-to-GDP ratio
through a larger “snowball” effect and more negative primary balances. Such
unfavourable economic conditions critically curbed Italy’s structural
adjustments ceteris paribus, also because of the impact of actual growth
on potential growth estimates.
Table 3: Macroeconomic and budgetary developments a
Structural reforms 
In its Communication of 13 January 2015,
the Commission strengthened the link between effective implementation of
structural reforms, investment, and fiscal responsibility in support of jobs
and growth, within the existing rules of the SGP. In this context and following
exchanges with the Ministry of Finance, the
Italian government confirmed on 20 February 2015 its commitment to keep
momentum in the adoption and implementation of an ambitious structural reform
plan covering a number of areas such as public administration and judicial
system, competitiveness and product markets, labour market and education,
as well as taxation.[14]

In 2014, under the Macroeconomic Imbalances
Procedure (MIP), Italy was subject to a specific monitoring by the Commission
as a Member State displaying excessive imbalances. The specific monitoring
assesses the implementation progress for reforms contributing to the unwinding
of such imbalances. The 2015 Country Report acknowledges that Italy is making
some progress, although unevenly, in tackling the 2014 country specific
recommendations (CSRs)[15].
Overall, in light of remaining challenges in diverse reform areas and the fact
that there has been no improvement in Italy’s macroeconomic imbalances,
continued commitment to swift adoption and full implementation of structural
reform covering all country-specific recommendations is essential, which the
Commission will keep on closely monitoring. Therefore, it has been concluded
that Italy still has excessive imbalances which require specific monitoring and
decisive policy action.[16]
Among the reforms with a potential positive
impact on Italy’s medium term growth prospects, the so-called ‘Jobs Act’ law,
enabling the government to thoroughly reform the labour market, has been
adopted. Two legislative decrees, regarding respectively the revision of
dismissal rules for new hires and the new unemployment benefit system, were
adopted on February 20 and will be implemented as of the beginning of March.
Two legislative decrees (rationalisation of labour contracts, female
participation) have been put forward by the government for non-binding
Parliamentary consultation on 20 February. Additional legislative decrees are
expected in the coming months. 
On taxation, a sizeable reduction in the
labour tax wedge has been secured in the 2015 Stability Law[17]. For the time being
its financing is partly on the expenditure side, while an increase in indirect
taxation as of 2016 safeguards the respect of fiscal targets in absence of
further savings. Several long-pending legislative decrees under the February
2014 enabling law on taxation[18]
are still expected to be adopted by end February 2015. An extension of the
latter’s deadline seems needed to allow for a completion of the process,
particularly on the important revision of tax expenditure and environmental
taxation which so far is still missing. Moreover, the measures enshrined in the
2015 Stability Law to improve the collection of VAT based on a reverse charge
system and the cross-check of databases (adempimento volontario / spesometro)
have the potential to address the recommendation to enhance tax compliance and
fight evasion, if results are in line with expectations. 
On the expenditure side, the targeted cuts
foreseen by the 2015 Stability Law to central and local levels of government
could be read in the context of the Council recommendation to pursue higher
efficiency of public spending. However, there is a risk that some of the
savings planned at local level could entail lower capital expenditure and/or
higher local taxation, while additional sizeable savings and expenditure
rationalisation are required in the following years to avoid (at least in part)
the foreseen increases in indirect taxes. In the context of the spending
review, a choice for more political ownership has been made but only some
instruments are already fully operational, and the integration in the yearly
budgetary process lags behind. On privatisations, most of the envisaged sales
are still under preparation. 
The weak institutional and administrative
efficiency weigh on the business environment and thus hamper growth prospects.
In this context, the legislative process on institutional reform is ongoing and
will continue over the period 2015-2016, while the enabling law on public
administration reform has just started its parliamentary adoption process. The
2015-2017 Simplification Agenda was adopted and implementation is underway.
Recent provisions to improve the judicial system’s functioning have been
converted into final law, while other measures are still pending. Also the
legislative process on the long-awaited revision of the statute of limitations
continues to be under preparation. 
On 20 February 2015 the government adopted
the long-awaited draft law on competition, which still has to be approved by
the Parliament. Also announced for end-February 2015 is a decree law entailing
a far-reaching school reform, for which additional funds have been earmarked.
Furthermore, some additional measures to support access to finance and
investment have been adopted. On banks, a promising step to tackle governance
weaknesses in Italy’s largest banche popolari was made. 
In summary, since the adoption of the 2014
CSRs, Italy has made progress with the implementation of an extensive reform
agenda aiming at the transformation of the economy's productive structure in a
still unfavourable economic environment. Strong commitment and full
implementation of structural reforms remains essential.
The measures presented by the Italian
authorities are expected to have a positive impact on growth and therefore on
the sustainability of public finances. The Italian authorities estimate
the overall impact of all reforms, regardless of their state of implementation,
at 3.9%[19]
of GDP by 2020 (+1.1% from product market reforms, +0.9% from the labour market
reforms, +1.4% from the public administration reforms (of which +0.4% from the
measures on justice), +0.3% from education reforms, +0.2% from tax reforms). 
However, these results have not been
endorsed by any national independent institution and seem to over-estimate the
impact of the reforms. First, the estimates include also the quantified
impact of legislation for which the content has not yet been fully defined or
which has not yet been adopted. In those cases, reforms simulated are
potentially larger in scope than those that will be effectively implemented.
There is indeed a risk that the reforms may be adjusted during the legislative
process, which might lead to a lower impact on GDP. This in particular holds
for the yet-to-be-adopted law on competition (which is estimated to have a
positive effect of GDP of 0.8% by 2020). In fact, delayed implementation
already led the authorities to revise their estimates downwards on several
occasions. Second, a number of methodological assumptions taken by the Italian
authorities significantly affect the estimated size of the impact. The
quantification of the shocks is in some cases not sufficiently specified and
seems generous, as evidenced by the large magnitude of the shocks that would be
necessary in the Commission model (QUEST) to produce comparable results,
thereby leading to strong GDP impact. This for instance holds for the public
administration reform (1% of GDP by 2020) and the competition reforms, including
the annual law on competition (1.1% of GDP by 2020). Moreover, while the choice
of the variable to translate the reform into a shock is generally well-founded,
a better justification of the choice of the variables would in some cases be
needed for the Commission to adequately assess the authorities' estimates (e.g.
for the translation of the justice reforms). Similarly, some simulations depend
heavily on the model used, preventing the Commission to replicate and challenge
the authorities' estimates on the basis of QUEST (for instance the simulations
of labour market reforms with IGEM). Finally, some reforms are deemed to have
an acceleration effect on the positive impact of previous ones. Notwithstanding
possible positive confidence effects of a powerful reform momentum (which are
by definition hardly quantifiable) as well as positive synergies between
different measures, such an acceleration pattern is not supported by the
existing literature and, therefore, usually not assumed in the quantification
exercises made by the Commission. On the contrary, a gradual phasing in of
shocks is arguably more realistic given implementation delays and that the
materialisation of effects of structural reforms usually takes place with a
lag.
4.2.        Medium-term budgetary position

Headline, structural balance and
adjustment towards the MTO
The 2015 DBP projects the general
government deficit to increase in 2014 to 3% of GDP, the Treaty reference value
(compared to 2.8% in 2013). The higher deficit in 2014 mainly reflects further
real GDP contraction and low inflation. By contrast, interest expenditure is
projected to decline thanks to lower yields. The Commission forecast also
projects the 2014 deficit at 3% of GDP, based on a strict budgetary execution
in the final months of the year. For 2015, Italy’s 2015 DBP plans the
government deficit to decline to 2.6% of GDP, in line with the Commission
forecast. In particular, further declining interest expenditure helps to
achieve the deficit target. Overall downside risks are associated with possibly
worse-than-expected macroeconomic outcomes, including persistently low
inflation since revenues tend to decline much faster than primary expenditure
and only new debt issuances benefit from lower nominal yields, as well as to a
partial or inadequate implementation of the measures enshrined in the
legislation. 
In structural terms, the government plans
enshrined in the 2015 DBP imply a deterioration of the balance in 2014 (‑0.3 percentage
points of GDP) followed by an equivalent improvement in 2015 (+0.3 percentage
points of GDP), with a (recalculated) structural position still in deficit in
2015 (-0.8% of GDP). According to the Commission 2015 winter forecast, which
takes into account the measures included in the 2015 Stability Law, a structural
deterioration of 0.2 percentage points in 2014 is followed by a structural
adjustment of 0.3 percentage points in 2015.
In accordance with the 2015 Flexibility
Communication on the SGP, the Commission considers that no structural
adjustment towards the MTO is required in 2014 due to exceptionally bad
economic conditions experienced by Italy, namely a real GDP contraction and a
largely negative output gap (below -4% of GDP). However, the Commission 2015
winter forecast projects a deterioration of the structural balance (by
0.2 percentage points of GDP) in 2014, suggesting some deviation from the
requirement (a gap of 0.2 percentage points of GDP) based on the
structural balance pillar over one year. The expenditure benchmark pillar is
forecast to be met. Overall, this marginally negative outcome is markedly
affected by the negative potential growth and low inflation, which play a
crucial role in the estimation of the structural balance. Besides, both pillars
are expected to be met over 2013-2014. Overall, Italy is projected to be
compliant with the required adjustment towards the MTO in 2014.
As for 2015, the Commission 2015 winter
forecast suggests that Italy is experiencing 'very bad times' (output gap is
between -3 and -4% of GDP). Based on the new Flexibility Communication, Member
States in very bad times with a general government debt ratio above 60% of GDP
are expected to deliver a structural adjustment of 0.25% of GDP, so as to make
sufficient progress towards their MTO. For Italy, the Commission 2015 winter
forecast suggests a marginal deviation (a gap of ‑0.1% of GDP) from the
expenditure benchmark in 2015, while the structural effort is set to be
slightly higher than required, calling for an overall assessment. First, the
marginal deviation measured on the basis of the expenditure pillar in 2015 is
explained by the volatility of specific items within this indicator and by the
negative effect of one-off transactions, which makes an assessment of
compliance with the expenditure benchmark pillar based on a two-year horizon
more suited to show whether the government is managing to control expenditure
dynamics despite currently adverse economic conditions. Second, in 2014 and
2015 taken together, the expenditure benchmark is complied with according to the
Commission 2015 winter forecast. Overall, Italy is projected to be compliant
with the required adjustment towards the MTO in 2015.
In summary, based on both the government
plans and the Commission 2015 winter forecast, Italy appears to be compliant
with the above-mentioned requirements under the preventive arm regarding
progress towards the MTO in 2014 and 2015, although rigorous implementation of
the 2015 budget remains crucial in this respect. 
Public investment
Over 1999-2007, gross fixed capital formation
of the general government sector averaged around 3% of GDP and remained at
those levels until 2011. The pressure on fiscal adjustment following the
sovereign debt crisis led to a substantial reduction in public investment, as
government institutions opted to cut capital rather than current expenditure
under those pressing circumstances. In 2013, public investment fell to 2.4% of
GDP and it is forecast to further decline to around 2.2% over 2014-15. The 2015
DBP projects slightly higher public investment in 2015 (at 2.3% of GDP – see
Table 3), also thanks to additional resources earmarked to this aim.
In summary, developments in public
investments, given their broad decline over time, do not seem the main relevant
factor justifying Italy’s lack of compliance with the MLSA required under the
debt rule over the 2013-2015 transition period.
4.3.        Medium-term
government debt position
Over the period 1998-2007, the government
debt only decreased by around 11% of GDP as a result of gradually eroding
primary surpluses from the 6% of GDP peak recorded in 1997 and a deteriorating
competitiveness position in the absence of sufficient structural reforms. At
the end of 2007, Italy's general government debt was significantly higher than
the euro-area average (at around 100% versus 65% of GDP). During the crisis,
the debt-to-GDP ratio increased by around 32% to reach 132% at end-2014,
which is broadly in line with the average increase in the euro-area (around
29%), as a primary surplus (2% of GDP in 2013) was progressively restored but
coupled with large real GDP contractions. At
this juncture, the reduction of Italy’s public debt imbalance is hampered by
protracted negative growth and low inflation. On the back of unfavourable
macroeconomic developments and after incorporating the measures enshrined in
the 2015 Stability Law, the debt is now set to peak at 133% of GDP in 2015 in
both the government projections and the Commission forecast (see Table 2) and
to decline thereafter, mainly thanks to positive real GDP growth and higher
inflation. In this respect, forceful implementation of structural reforms to
foster potential growth in the medium/long term is crucial to achieve a
satisfactory debt reduction path.
In the short-term, Italy remains vulnerable
to any sudden increase in financial market risk aversion due to its high level
of government debt and low potential growth. On the positive side, implicit
liabilities arising from population ageing have been curbed also thanks to the
2012 pension reform, so that Italy scores relatively well in terms of long-term
sustainability risks despite the high current level of pension expenditure.
Namely, the structural primary surplus expected for 2016 would be more than
sufficient to keep the debt-to-GDP ratio stable over the long term. However,
achieving a debt ratio of 60% of GDP by 2030 would require further fiscal
adjustment (in the order of 2.5 percentage points of GDP over 2017-2020). 
The stock-flow adjustment increased the
debt by around 2% and 1% in 2013 and 2014, respectively, mainly due to the
ongoing repayment of trade debt arrears. The overall amount earmarked by the
government to this end is around EUR 56 billion (or 3.5% of GDP) over 2013-15
and, as of end-January 2015, it is estimated that some EUR 36.5 billion (or
2.3% of GDP) of trade debt arrears accumulated up to end-2013 had been paid out
to suppliers. For 2015, the Commission forecast points to a neutral impact of
the stock-flow adjustment on debt developments, as further repayments of trade
debt arrears are broadly compensated by a reduction in the cash buffer
accumulated over the previous years, as well as by some privatisation proceeds
(0.5% of GDP, i.e. slightly below the 0.7% government target).
In fact, Italy launched a privatisation
plan also with the aim to earmark proceeds of 0.7% GDP per year to debt
reduction over the period 2015-2017. In 2015, the government plans the
privatisation of Poste Italiane and ENAV, as well as the sale of Grandi
Stazioni, the company managing Italian large stations, plus a possible
reduction in its stake of ENEL. Another operation expected in the short
term is the sale by the Ministry of Economy and Finance (MEF) to Cassa Depositi
e Prestiti –of which MEF holds 80.1% of shares– of its stake in the holding STH,
which in turn controls STMicroelectronics. Looking forward, the national
railway company Ferrovie dello Stato could also be privatised in 2016.
Other proceeds could come from indirect privatisations through State-controlled
enterprises. Over 2013-15, the government has also planned to sell real assets
worth EUR 1.5 billion (or 0.1% of GDP), of which EUR 0.7 billion already
realised, which are earmarked to debt reduction. 
In summary, Italy's high public debt
increased further during the crisis years, not only as a result of the above-mentioned
macroeconomic conditions, but also because of other factors such as the ongoing
repayment of government trade debt arrears. Over the coming years, enhanced
growth prospects as well as a privatisation plan are set to put the debt-to-GDP
ratio on a declining path as of 2016. Overall, while Italian debt appears to be
a source of vulnerability, the full and forceful implementation of pensions
reforms adopted in the past together with the other announced structural
reforms to foster potential growth in the medium/long term would enhance debt
sustainability, provided that persistently high primary surpluses are ensured
and growth prospect restored.
4.4.        Other factors considered
relevant by the Commission
Among the other factors considered relevant by the
Commission, particular consideration is given to financial contributions to
fostering international solidarity and achieving the policy goals of the Union,
the debt incurred in the form of bilateral and multilateral support between
Member States in the context of safeguarding financial stability, and the debt
related to financial stabilisation operations during major financial
disturbances (Article 2(3) of Regulation (EC) No
1467/97). 
In assessing sufficient progress towards
compliance with the debt reduction benchmark, financial assistance to euro area
Member States with a debt or a deficit-increasing impact has been taken into
account. According to the Commission 2015 winter
forecast, the cumulative impact on debt of the Greek
loan facility, EFSF disbursements, capital contributions to the ESM, and
operations under Greek programme over the period 2010-2014 is around 3.7% of
GDP, of which around 0.3% over 2014.When taking into account the impact of these operations, the
required MLSA for 2014 is marginally lower, at 1.2 percentage points of
GDP for 2014, which becomes 2.6 percentage points of GDP for 2015, but
remains well above the structural effort projected by the government in 2014
and 2015.
Regarding government support to the
financial sector in the course of the financial crisis, contingent liabilities
to support liquidity provisions of financial institutions amounted to around 5%
of GDP at end-2013 (out of a total 6.1% of GDP[20])
but decreased significantly in 2014. The direct capital support to financial
institutions (with an impact on the government debt) amounted to only EUR 4
billion (or 0.25% of GDP) at the end of 2013, out of which EUR 3 billion was
paid back in the course of 2014.
Article 12(1) of Regulation (EU) No 473/2013 requires that this report
considers also "the extent to which the Member State concerned has taken
into account the Commission's opinion" on the country's DBP, as referred
in Article 7(1) of the same Regulation. The 2015 Stability Law, approved by the
Italian Parliament on 22 December 2014, did not substantially modify the 2015
DBP presented by Italy in October 2014[21],
on which the Commission Opinion[22]
pointed to a risk of non-compliance with the provisions of the SGP for
2014-2015. The Commission thus invited the authorities to ensure full
compliance with the SGP within the national budgetary process. In particular,
the effectiveness of some budgetary measures, such as those to fight tax
elusion/evasion, should still be ensured through adequate implementation. In
addition, the implementation of the sizeable planned spending savings (around
0.25% of GDP) at regional level has been delayed. This, together with the need
to find additional resources (around 0.05% of GDP) to offset the budgetary
impact of a recent Constitutional Court ruling[23]
declaring additional corporate income taxes imposed on energy sector companies
unconstitutional, entails some risks to the achievement of the 2015 budgetary
targets. Since the adoption of the Commission
Opinion, the abovementioned Flexibility Communication has clarified that, in
the view of the Commission, the required structural adjustment for Italy in
order to progress towards the MTO is of 0.25% of GDP in 2015, rather than 0.5%
as previously envisaged, in view of very bad economic conditions. Hence, as
mentioned above, Italy is currently projected to be compliant with this
requirement under the preventive arm of the SGP.
4.5.        Other factors put forward
by the Member State 
On 13 February 2015, the Italian authorities transmitted
documents concerning relevant factors in accordance with Article 2(3) of
Council Regulation (EC) No 1467/97[24].
The analysis presented in the other sections of this report already covers most
of the factors put forward by the authorities. 
According to the Italian authorities
unprecedented negative cyclical conditions have made the necessary adjustment
to comply with the debt rule over 2013-15 particularly demanding and likely
self-defeating. The Italian authorities also point to the largely negative
"snowball effect" driven by negative real GDP growth and amplified by
low inflation. Moreover, they point out that, excluding the debt-increasing
impact of contributions to financial assistance to euro-area programme
countries as well as the settlement of trade debt arrears, the increase in the
debt-to-GDP ratio would have been more modest (from 123.2% in 2013 to 126.6% in
2015).
Furthermore, the Italian authorities
highlight the ongoing wide-ranging programme of structural reforms aiming to
"address deeply rooted structural weaknesses and increase growth
potential". The authorities confirm their reform commitments as well as
the quantifications. These reforms, which are expected to have a positive
impact on economic growth and, therefore, the sustainability of public finances,
are discussed in more detail in Section 4.1 of this report.
In addition, the authorities recall that in
2012 Italy managed to exit the excessive deficit procedure as recommended and
that, despite the economic contraction, the headline deficit has remained within
the 3% of GDP Treaty threshold since then. In addition, the primary surplus
averaged 1.9% of GDP over 2012-2014, also thanks to a significant reduction in
public spending, while the fiscal consolidation strategy aims at preserving
growth-enhancing expenditure such as infrastructure, R&D, innovation and
education. The government claims that further fiscal tightening would reduce
the positive impact of reforms.
The authorities also stress that since 2012
risks related to debt sustainability have diminished in the short term and
remained limited over the medium term, while pension reforms adopted over the
past 20 years make Italy's debt the most sustainable in the Union over the long
term. A maturity structure among the highest in the Union also contributes to
these results.
Finally, the relatively low indebtedness of
the private sector, in particular the household sector, is argued to be one of
the main strengths of the Italian economy and to bring its total debt in line
with the euro-area average. In addition, contingent liabilities of the
government are below those recorded in the large majority of Member States.
5.           Conclusions
The general government gross debt in Italy reached
127.9% of GDP in 2013, i.e. well above the 60% of GDP reference value, and is
forecast to further increase to 131.9% in 2014 and 133% in 2015, before
declining as of 2016. Over the 2013-15 transition period, Italy does not plan
to achieve the MLSA required to comply with the debt reduction benchmark. This
suggests that prima facie the debt criterion as defined in the Treaty
appeared to be not fulfilled before consideration was given to all relevant
factors, whereas the 3% deficit criterion appears to be fulfilled. In line with the Treaty, this report also
examined the relevant factors.
Due to currently negative economic
developments, including negative potential growth and a GDP deflator at around
0.5%, respecting over 2014-2015 the MLSA required by the debt rule would imply
a cumulated structural adjustment around 2.5 percentage points of GDP
based on the Commission 2015 winter forecast, i.e. achieving a structural
surplus more than 1.5% of GDP in 2015, well above Italy's MTO. In the current
economic circumstances, the required additional structural effort would be
expected to have negative implications for growth and further aggravate the
deflationary trends of the economy, and thereby would not contribute towards
bringing debt on an appropriate downward path. Moreover, Italy is expected to comply with the required adjustment path towards
the MTO in 2014-2015.
Following previous announcements by the
Ministry of Finance, endorsed by the Italian Government on 20 February, Italy
committed to adopt/implement an ambitious structural reform agenda. The swift implementation of this ongoing agenda is key to enhance
Italy's growth prospects in the medium term, and thus to contribute bringing
the debt-to-GDP ratio on a satisfactory reduction path.
Overall, the analysis presented in this
report including the assessment of all the relevant factors and notably (i) the
currently unfavourable economic conditions - with particularly low inflation –
which make the respect of the debt rule particularly demanding, (ii) the
expectation that compliance with the required adjustment towards the MTO is
broadly ensured, and (iii) the expected implementation of ambitious
growth-enhancing structural reforms in line with the authorities' commitment,
which is expected to contribute to debt reduction in the medium/long term,
suggests that the debt criterion as defined in the Treaty and in Regulation
(EC) No 1467/1997 should be considered as currently complied with.
1  OJ L 209, 2.8.1997, p. 6. The report also
takes into account the “Specifications on the implementation of the Stability
and Growth Pact and guidelines on the format and content of stability and
convergence programmes”, endorsed by the ECOFIN Council of 3 September 2012,
available at:           
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm .
2  Regulation (EU) No 473/2013 of the
European Parliament and of the Council on common provisions for monitoring and
assessing draft budgetary plans and ensuring the correction of excessive deficit
of the Member States in the euro area (OJ L 140, 27.5.2013, p. 11).
[3]  Council Decision (2013/314/EU) of 21 June 2013 abrogating Decision
2010/286/EU on the existence of an excessive deficit in Italy. All EDP-related documents for Italy can be found at the following
website: http://ec.europa.eu/economy_finance/economic_governance/sgp/corrective_arm/index_en.htm

[4]  Article 2 of Regulation (EC) No 1467/97 provides that "
[…] The report shall reflect, as appropriate […] the implementation of
policies in the context of the prevention and correction of excessive
macroeconomic imbalances, the implementation of policies in the context of the
common growth strategy of the Union […]".
[5]  According to Council Regulation (EC) No 479/2009, Member States
have to report to the Commission, twice a year, their planned and actual
government deficit and debt levels. The most recent notification of Italy can
be found at:                
http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/edp_notification_tables.
[6]  Eurostat news release No 158/2014 of 21 October 2014, available
at:                
http://ec.europa.eu/eurostat/documents/2995521/5182258/2-21102014-AP-EN.PDF/497e3b55-dca0-482f-93e0-d82f81bc92d7?version=1.0
[7]  Throughout the report, all figures are expressed in ESA2010.
[8]  Throughout the document, all references to changes in the
structural balance refer to the cyclically adjusted balance net of one-off and
temporary measures, recalculated by the Commission on the basis of the
information provided in the DBP, using the commonly agreed methodology.
[9]  The implicit real cost of debt at time t can be defined as
the nominal yield paid by the government to service the outstanding debt at
time t-1, net of the impact of inflation at time t. In Table 2,
the yearly change in debt-to-GDP ratio due to the implicit real cost of debt
can be obtained by adding the respective contributions from interest
expenditure (debt-increasing) and GDP deflator (debt-decreasing).
[10] Throughout this document, all references to the structural balance
refer to the cyclically adjusted balance net of one-off and temporary measures.
The structural balance planned by the Member State is recalculated by the
Commission services on the basis of the information provided in the Draft
Budgetary Plan, using the commonly agreed methodology.
[11] This is based on a simulation exercise, looking at the difference
between the current MLSA (based on the Commission 2015 winter forecast) and the
one that would apply under the assumption of a level of inflation corresponding
to the Commission 2014 spring forecast.
[12] For comparison, Italy's nominal GDP growth averaged around 4% over
1999-2007, i.e. before the crisis.
[13] This measure may still be replaced by others of an equivalent
budgetary impact. In this case, the inflationary impact of budgetary measures
could change accordingly.
[14] http://www.governo.it/Governo/ConsiglioMinistri/dettaglio.asp?d=77929
http://www.mef.gov.it/inevidenza/article_0079.html
http://www.dt.mef.gov.it/it/analisi_programmazione_economico_finanziaria/strategia_crescita/
[15] For a more extensive overview, please refer to the second MIP
specific monitoring report on Italy and the Country Report 2015, respectively
at: http://ec.europa.eu/economy_finance/eu/countries/italy_en.htm
and http://ec.europa.eu/europe2020/index_en.htm
[16] See Commission Communication COM(2015)85.
[17] These measures include: i) total deductibility of the labour
component from the tax base of the regional tax on businesses (IRAP), with a
net negative impact on revenues of 0.16% of GDP in 2015 and 0.27% in 2016; ii)
a three-year waiver for social security contributions for private employers
hiring new workers under open-ended contracts by end 2015, with net negative
impact on revenues of 0.11% of GDP in 2015 and 0.22% in 2016; iii) a permanent
tax credit (recorded as a social transfer) to low-wage employees, firstly
enacted in April 2014 and financed only for that year, worth 0.6% of GDP as of
2015. An increase in VAT rates and excise duties (0.8% of GDP in 2016, 1.2% of
GDP in 2017, and 1.35% of GDP in 2018) is foreseen to guarantee the achievement
of planned fiscal targets, which may, however, be replaced by others having an
equivalent budgetary impact.
[18] Three enacting decrees have been adopted: a reform of cadastral
committees (a precondition for the reform of cadastral values to be completed
by 2018), a simplification of the tax system, including through the
introduction of pre-filled tax forms, and a revision of taxation on tobacco
production and consumption.
[19] Italian authorities refer to comparable estimates presented in the OECD
Economic Surveys: Italy 2015  (www.oecd.org/italy/italy-institutional-changes-needed-to-ensure-success-of-reforms-to-boost-growth-and-jobs.htm),
which the European Commission is not in a position to assess considering the
absence of a description of the translation of reforms into quantified shocks.
[20] http://ec.europa.eu/eurostat/documents/2995521/6616449/2-10022015-AP-EN.pdf/d75df6fe-100b-4ae7-a09e-00400edb183a  
[21] The Italian DBP submitted on 16 October 2014 planned a structural
effort falling short of the SGP requirements (preventive and corrective arms).
Following exchanges with the Commission, on 27 October 2014 the Italian
authorities publicly announced further measures (worth EUR 4.53 billion or
around 0.3% of GDP) to improve the adjustment path towards the MTO. This "updated
DBP" targets a 2015 deficit of 2.6% of GDP (instead of 2.9% in the
original DBP), with a (recalculated) structural adjustment of 0.3% of GDP. At
that point, the fiscal effort taken at face value was thus considered
sufficient to avoid a DBP rejection.
[22] Commission Opinion C(2014)8806 final, 28.11.2014, on the Draft
Budgetary Plan of Italy. Available at http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/2014/it_2014-11-28_co_en.pdf
[23] “Sentenza No. 10/2015”, published on 11 February 2015.
[24] http://www.mef.gov.it/inevidenza/article_0079.html