REPORT FROM THE COMMISSION Italy Report prepared in accordance with Article 126(3) of the Treaty
Date: 2016-05-18
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Italy, budget deficit, budget policy, gross domestic product, public debt, public expenditure, public investment, short-term economic prospects, stability pact, structural policy

EUROPEAN 
COMMISSION 

Brussels, 18.5.2016  
COM(2016) 305 final 

REPORT FROM THE COMMISSION 

Italy 

Report prepared in accordance with Article 126(3) of the Treaty 

EN 

   EN 

 
 
 
 
  
 
 
REPORT FROM THE COMMISSION 

Italy 

Report prepared in accordance with Article 126(3) of the Treaty 

1. 

INTRODUCTION 

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 
procedure1, 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 473/20132. 

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. 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 Italy's compliance with the 
debt criterion of the Treaty, with due regard to the economic background and other relevant 
factors.  

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  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 

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). 

2 

 
 
 
                                                 
 
covers  the  years  2013-2015  (i.e.  3  years  after  the  correction  of  the  excessive  deficit3).  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 reduction benchmark is met by the end of the transition period. 

On  13  January  2015  the  Commission  adopted  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 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  Regulation  (EC)  No  1467/97  -  the 
Commission  – 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 factors4.  

On 27 February 2015, the Commission issued a Report under Article 126(3) TFEU, as Italy 
was not expected to make sufficient progress towards compliance with the debt rule in 2014, 
including  the  assessment  of  all  relevant  factors  that  might  justify  the  prima  facie  lack  of 
compliance,  notably:  (i) the  unfavourable  economic  conditions,  and  in  particular  low 
inflation, which made the respect of the debt rule particularly demanding; (ii) the expectation 
that compliance with the required adjustment towards the Medium Term budgetary Objective 
(MTO)  was  broadly  ensured;  and  (iii) the  expected  implementation  of  ambitious  growth-
enhancing structural reforms in line with the authorities' commitment, which was expected to 
contribute  to debt  reduction in the medium/long  term.  Data  notified  by  the  authorities  on  1 
April  20165  and  subsequently  validated  by  Eurostat6  show  that  Italy’s  general  government 
deficit declined to 2.6% of GDP in 2015 (from 3% in 2014), while the debt continued to rise, 
although marginally, to 132.7% of GDP (from 132.5% in 2014), i.e. above the 60% of GDP 
reference value. For 2016, Italy’s 2016 Stability Programme plans a debt-to-GDP ratio start 
declining to 132.4%. In 2017, the debt-to-GDP ratio is planned to decrease further to 130.3%.  

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:  
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_notific
ation_tables. 

6  Eurostat news release No 76/2016 of 21 April 2016, available at: 

http://ec.europa.eu/eurostat/documents/2995521/7235991/2-21042016-AP-EN.pdf/50171b56-3358-4df6-
bb53-a23175d4e2de   

3 

 
 
                                                 
 
 
Based  on  the  notified  data  and  the  Commission  2016  spring  forecast,  Italy  did  not  make 
sufficient progress towards compliance with the debt reduction benchmark in 2015 (see Table 
1),  since  the  change  in  the  structural  balance7  falls  short  of  the  required  MLSA  by  a  large 
extent  in  2015  (0.1 percentage  points  of  GDP  compared  to  the  required  MLSA  of 
2.6 percentage points of GDP). In the 2016 Stability Programme, the Italian authorities do not 
plan to fully comply with the debt rule in 2017 in its forward-looking dimension, although the 
gap  is  small  in  that  year  (i.e.  0.2  percentage  points  of  GDP)  also  thanks  to  an  ambitious 
privatisation  plan.  Projections  based  on  the  Commission  2016  spring  forecast  expect 
compliance with the debt rule only by 2020, under a no-policy-change assumption until 2017 
and assuming thereafter an annual structural effort of 0.6% of GDP until the MTO is attained. 

Table 1: General government deficit or/and debt (% of GDP) a 

Deficit 
criterion

Debt 
criterion

Notes:

General government 
balance
General government 
gross debt
Gap to the debt 
reduction benchmark
Change in structural 
balance
Required MLSA

2013

2014

2015

2016

COM

-2.9

-3.0

-2.6

-2.4

2017

MS

-2.3

COM

-1.9

MS

-1.8

129.0

132.5

132.7

132.7

132.4

131.8

130.3

n.r.

0.4

0.9

n.r.

-0.2

1.2

n.r.

0.1

2.6

5.6

-0.7

n.r.

3.0

-0.6

n.r.

4.7

0.0

n.r.

0.2

0.0

n.r.

a In percent of GDP unless otherwise specified
Source:  Commission services, Italy's 2016 SP and Commission 2016 spring forecast

Overall, Italy’s insufficient progress towards compliance with the debt reduction benchmark 
in 2015 provides evidence of a prima facie existence of an excessive deficit 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 debt rule, while considering all the relevant factors. 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  MTO.  The  report  takes  into  account  the  Commission 
2016  spring  forecast,  released  on  3  May  2016,  and  the  Commission's  evaluation  of 
subsequent developments. 

2. 

DEFICIT CRITERION 

Italy’s general government deficit was reported at 2.6% of GDP in 2015. According to both 
the 2016 Stability Programme and the Commission 2016 spring forecast, it is also foreseen to 
respect  the  3%  of  GDP  Treaty  reference  value  during  the  period  2016-2017.  Namely, 
according to the Commission 2016 spring forecast, the deficit is expected to further decline to 
2.4%  of  GDP  in  2016  and  to  1.9%  in  2017,  on  a  no-policy  change  basis  and  taking  into 

7  Throughout the document, all references to changes in the structural balance refer to the cyclically adjusted 
balance  net  of  one-off  and  temporary  measures,  either  forecast  by  the  Commission  or  recalculated  by  the 
Commission on the basis of the information provided in the Stability Programme, using the commonly agreed 
methodology. 

4 

 
 
 
                                                 
account the government commitment to repeal the VAT hike legislated for 2017 through the 
2016  Stability  Law,  conditional  however  upon  implementing  deficit  reduction  measures  to 
ensure the achievement of the planned 1.8% of GDP deficit target (from a trend of 1.4% that 
includes the full VAT hike). 

The  forecast  decrease  in  the  deficit  in  2016  mainly  reflects  positive  GDP  growth  and 
declining interest expenditure, while low inflation still weighs on the primary surplus; it also 
takes into account the existence of some reserves in the budget (including a so-called “fondo 
per  le  esigenze  indifferibili”,  amounting  to  around  EUR  0.7 bn),  which  the  government 
should,  however,  not  spend  if  it  wants  to  achieve  its  deficit  target.  The  2016  Stability 
Programme projects the general government deficit-to-GDP ratio to decline to 2.3% in 2016 
and  to  1.8%  in  2017.  The  small  difference  with  the  Commission  2016  spring  forecast  is 
mainly explained by lower tax revenues in 2016, also related to slightly weaker nominal GDP 
growth in the Commission 2016 spring forecast (1.9% vs. 2.2%). 

3. 

DEBT CRITERION 

In 2015, the government debt-to-GDP ratio peaked at 132.7%, 0.2 percentage points higher 
than  in  2014.  For  2016,  in  the  Stability  Programme,  the  debt-to-GDP  ratio  is  projected  at 
132.4%, therefore showing a slight decrease of 0.3 percentage points relative to 2015. 

The determinants of the slight increase in the debt-to-GDP ratio in 2015 were the following. 
Despite positive real GDP growth (0.8%) after three years of recession, low inflation (GDP 
deflator growth of 0.8%) led to a real implicit interest rate on the debt8 that, while gradually 
narrowing (to around 2.5%, from 2.8% in 2014), still remained significantly higher than real 
GDP growth. Real spot interest rates on new government securities issuances close to zero in 
2015 are in fact only gradually passing through into the real servicing cost of the outstanding 
debt stock, given the duration of the Italian debt and the roll-over period (see also Graph 1). 
In  this  context,  the  “snowball”  effect  (see  Table  2),  continued  entailing  a  large  debt-
increasing impact (at still 2.2% of GDP, down from 4% in 2014). On the other hand, a stable 
primary  surplus  (1.6%  of  GDP,  the  same  as  in  2014)  and  a  debt-decreasing  stock-flow 
adjustment (-0.4% of GDP) helped curb debt dynamics in 2015. In particular, the stock-flow 
adjustment  benefitted  from  the  debt-decreasing  impact  of  privatisation  proceeds  (0.4%  of 
GDP) and the reduction of the liquidity buffer accumulated in previous years (0.7% of GDP) 
but  was  negatively  affected  by  the  debt-increasing  impact  of  derivative  contracts  (0.4%  of 
GDP)  settled  before  the  crisis,  mainly  in  order  to  fix  interest  rates  on  part  of  the  debt  (at 
around 4.4% on average) and thus limit possible risks related to higher refinancing costs.9 

Regarding 2016, the Stability Programme projects a slight decrease in the debt-to-GDP ratio, 
to 132.4%. The decline would be mainly driven by a marginally higher primary surplus (at 
1.7%)  and  a  lower  debt-increasing  impact  of  the  “snow-ball”  effect  (of  1.2  percentage 

8  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). 

9  See  also  Public  Debt  Report  2014,  Italian  Ministry  of  the  Economy  and  Finance,  retrievable  at 
www.dt.tesoro.it/export/sites/sitodt/modules/documenti_en/debito_pubblico/presentazioni_studi_relazioni/Pub
lic_Debt_Report_2014.pdf and Indagine conoscitiva sugli strumenti finanziari derivati (2015), retrievable at 
www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/debito_pubblico/presentazioni_studi_relazioni/Audi
zione_alla_Camera_dei_Deputati_-_febbraio_2015_-
_Indagine_conoscitiva_sugli_strumenti_finanziari_derivati.pdf   

5 

 
 
                                                 
points).  This  would,  in  particular,  benefit  from  higher  real  GDP  growth  and  a  lower  debt-
increasing impact of implicit real interest rates (by 2.7 percentage points, as indicated by the 
difference  between  interest  expenditure  and  inflation  effect  in  Table  2).  The  stock-flow 
adjustment is projected by the Stability Programme to have a minor debt-increasing impact in 
2016,  as  the  planned  privatisation  proceeds  (0.5%  of  GDP)  are  more  than  offset  by  debt-
increasing  “below-the-line”  transactions,  including  in  derivatives  by  around  0.4%  of  GDP. 
The debt ratio is projected to further decrease in the outer years of the programme and reach 
123.8% of GDP in 2019 thanks to a steadily increasing primary surplus, a “snow-ball” effect 
becoming debt-decreasing as the GDP deflator accelerates towards the ECB inflation target, 
and further privatisation proceeds (0.5% of GDP per year over 2016-2018 and 0.3% in 2019). 
In the 2016 Stability Programme, the debt rule is projected not to be fully complied with in 
2017 (in its forward-looking dimension), although with a small gap in that year.  

In  the  Commission  2016  spring  forecast,  debt  developments  in  2016  and  2017  are  slightly 
less benign than in the Stability Programme. The debt-to-GDP ratio is set to stabilise in 2016, 
mainly  due  to  lower  inflation  (GDP  deflator  growth  of  0.8%)  than  in  the  government 
projections. In 2017, the Commission 2016 spring forecast expects a smaller decrease in the 
debt-to-GDP  ratio  than  the  Stability  Programme  (of  -1.0%,  vs.  -1.5%),  due  to  a  less 
favourable assessment of the stock-flow adjustment (0.4%, vs. -0.1%), also related to lower 
privatisation proceeds (at 0.3%, vs. 0.5%), whose details are not yet available. Overall, based 
on the Commission 2016 spring forecast, the debt rule is not expected to be complied with by 
2017.  Commission  projections  expect  compliance  with  the  debt  rule  only  by  2020  in  its 
forward-looking dimension (i.e. as of 2022), under a no-policy-change assumption until 2017 
and assuming full compliance with the fiscal effort required under the preventive arm of the 
Stability and  Growth Pact as of 2018 (i.e. an annual fiscal effort of  0.6%  of  GDP  until  the 
MTO is achieved). 

Table 2: Debt dynamics a 

Government gross debt ratio
Change in debt ratio b (1 = 2+3+4)
Contributions:

• Primary balance (2)
• “Snowball” effect (3)

of which:
Interest expenditure
Real GDP growth
Inflation (GDP deflator)
• Stock-flow adjustment (4)

of which:
Cash/accruals difference
Net accumulation of financial assets

of which privatisation proceeds

Valuation effect & residual

2013

2014

2015

2016

2017

129.0

5.7

132.5

3.5

132.7

0.2

132.7

0.0

132.4

-0.3

131.8

-1.0

130.9

-1.5

COM

MS

COM

MS

-1.9
5.5

4.8
2.2
-1.5
2.1

1.0
1.1

-0.1

0.0

-1.6
4.0

4.6
0.4
-1.0
1.1

0.1
0.9

-0.2

0.0

-1.6
2.2

4.2
-1.0
-1.0
-0.4

0.1
-0.5

-0.4

0.0

-1.6
1.5

4.0
-1.4
-1.1
0.1

0.4
-0.3

-0.2

0.0

-1.7
1.2

4.0
-1.6
-1.3
0.2

0.4
-0.2

-0.5

-0.1

-1.9
0.5

3.8
-1.7
-1.6
0.4

0.1
0.3

-0.3

0.0

-2.0
0.6

3.8
-1.8
-1.4
-0.1

0.1
-0.2

-0.5

-0.1

Notes:
a In percent of GDP unless otherwise specified
b The change in the gross debt ratio can be decomposed as follows:

D
Y

t

t

−

D
Y

t

−

1

t

−

1

=

PD
Y

t

t

+

⎛
⎜⎜
⎝

D
Y

t

−

1

t

−

1

*

t

i
1

−
+

y
y

t

t

⎞
+⎟⎟
⎠

SF
Y

t

t

where t is a time subscript; D, PD, Y  and SF  are the stock of government debt, the primary deficit, nominal GDP and the stock-flow adjustment respectively, and 
i  and y  represent the average cost of debt and nominal GDP growth. The term in parentheses represents the “snow-ball” effect, measuring the combined effect of 
interest expenditure and economic growth on the debt ratio.

Source : Commission services, Italy's 2016 SP and Commission 2016 spring forecast

6 

 
 
 
As shown in Graph 1, the expected recovery in real GDP growth (see solid blue line) and the 
decrease in implicit real debt servicing costs (see dashed blue line), only gradually reflecting 
the lower real spot yields at issuance (see red line), imply a shrinking “snowball” effect (see 
yellow  shade)  in  2016  and  2017,  compared  to  the  previous  years.  However,  as  the  real 
financing  cost  is  still  higher  than  the  real  GDP  growth,  the  overall  impact  is  still  debt-
increasing. 

Graph 1: Drivers of “snowball effect” on government debt 

Following the abrogation of the EDP in June 2013, Italy is subject to a three-year transition 
period  to  comply  with  the  debt  reduction  benchmark,  which  started  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, which is the case for Italy). 

Based on the Commission 2016 spring forecast, a surplus in the structural balance of around 
1.5% of GDP, i.e. well above Italy’s MTO of a balanced  budget in  structural terms,  would 
have been needed to meet the debt reduction benchmark in 2015, given an annual MLSA of 
2.6 percentage  points  in  201510.  Instead,  Italy’s  structural  balance  is  estimated  to  have 

10  As  indicated  in  Section  4,  based  on  the  Commission  2014  spring  forecast,  on  which  the  Council  based  its 
fiscal recommendation to Italy at that time, the required MLSA was set at 0.7% of GDP in 2014 and 1.4% of 
GDP in 2015 (taking into account the structural adjustment forecast for 2014). Once recomputed on the basis 
of the Commission 2016 spring forecast, the required MLSA becomes substantially higher: 1.2% of GDP in 
2014 and, due to the 0.2 percentage point deterioration occurred in 2014, 2.6% of GDP in 2015. 

7 

 
 
 
                                                 
improved  by  0.1  percentage  points  of  GDP  in  2015,  to  -1%  of  GDP,  therefore  falling 
substantially  short  of  the  requirements  of  the  transition  period  for  the  debt  reduction 
benchmark (see Table 1). In 2016, neither the 2016 Stability Programme nor the Commission 
2016  spring  forecast  expect  compliance  with  the  debt  rule,  given  the  large  gap  to  the  debt 
benchmark (in its forward-looking dimension) of, respectively 3% and 5.6% of GDP. 

The overall analysis above thus suggests that prima facie the debt criterion in the sense of the 
Treaty  and  Regulation  (EC)  No  1467/97  appears  not  to  be  fulfilled  based  on  the  2016 
Stability  Programme  as  well  as  the  Commission  2016  spring  forecast  before,  however, 
consideration is given to all relevant factors as set out below. 

4. 

RELEVANT FACTORS 

Article  126(3)  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 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. 

1.  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 towards sustainability at least 
in the medium term. 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. 

2.  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). 

8 

 
 
3.  Besides these two main factors, the still unfavourable macroeconomic conditions, and 
in particular very low inflation can hamper the reduction of the debt-to-GDP ratio and 
make compliance with the SGP provisions particularly demanding, and thus needs to 
be  taken  into  account.  In  fact,  the  current  low-inflation  environment  requires  the 
concerned  Member  States  to  achieve  more  demanding  structural  adjustments  to 
comply  with  the  MLSA  under  the  transitional  debt  rule  and  negative  inflation 
surprises have contributed to the upward revisions of the required MLSA over time. 
In  addition,  the  transitional  debt  rule  assumes  by  construction  that  GDP  deflator 
growth  only  returns  to  the  long-term  average  value  of  2%  by  2020,  which  makes 
compliance with the forward-looking debt rule particularly demanding.  

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 criterion. 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 only in the presence of nominal growth of around 3%11.  

In view of the above provisions, the following subsections consider in turn: (1) the medium-
term budgetary position, including an assessment of compliance with the required adjustment 
towards the MTO; (2) the medium-term economic position, including public investment and 
the  state  of  play  in  terms  of  implementation  of  structural  reforms;  (3)  other  factors  put 
forward  by  the  Member  State;  (4) the  developments  in  the  medium-term  government  debt 
position,  including  its  sustainability  prospects,  and  other  factors  deemed  relevant  by  the 
Commission. 

4.1.  Medium-term budgetary position 

The assessment of Italy’s compliance with the preventive arm in 2016 hinges crucially upon 
the Commission assessment on whether to allow a temporary deviation from the adjustment 
path  towards  the  MTO.  These  considerations  are  reported  in  the  first  subsection.  On  this 
basis, the following subsection features the overall assessment of Italy’s compliance with the 
required adjustment path towards the MTO. Namely, Italy appears to be broadly compliant 
with  the  required  preventive  arm  adjustment  in  2015  and  2016,  once  all  the  requested 
flexibility is granted. 

Assessment of requests for deviating from SGP requirements 

For 2015, Italy benefitted from a temporary allowance related to the enhanced consideration 
of  relevant  cyclical  conditions  introduced  by  the  2015  Flexibility  Communication.  In  fact, 
Member States considered by the Commission to be in “very bad times” (i.e. with an output 
gap  estimated  to  be  between  -4%  and  -3%  of  potential  GDP),  as  it  was  the  case  for  Italy 
based  on  the  Commission  2015  spring  forecast12,  and  with  a  general  government  debt-to-
GDP ratio above 60% are recommended to deliver a structural adjustment of 0.25% of GDP 
in order to make sufficient progress towards their MTO. 

For  2016,  Italy  requested  additional  admissible  temporary  deviation  pursuant  to  2015 
Flexibility  Communication,  in  addition  to  the  already  granted  allowance  of  0.4 %  of  GDP 

11 For comparison, Italy's nominal GDP growth averaged around 4% over 1999-2007, i.e. before the crisis. 
12 See Commission Opinion C(2015) 8105 final. 

9 

 
 
 
                                                 
from  the  preventive  arm  requirement  under  the  structural  reform  clause13,  whereby  the 
country was recommended in July 2015 to deliver a structural effort of 0.1 percentage points 
of  GDP  in  2016,  in  lieu  of  the  benchmark  adjustment  of  0.5 percentage  points  of  GDP. 
Namely,  Italy’s  2016  Draft  Budgetary  Plan  requested  an  additional  allowance  of  0.4%  of 
GDP  for  2016,  of  which  0.3%  under  the  investment  clause  and  additional  0.1%  under  the 
structural  reform  clause.  Italy  also  invoked  an  allowance  in  relation  to  the  government 
expenditure incurred to face the inflow of refugees over 2015-2016 and included in the 2016 
Stability Law a  package of extraordinary security-related expenditure, amounting to around 
EUR 3 bn or 0.2% of GDP. 
The  Commission  opinion  on  Italy’s  2016  Draft  Budgetary  Plan14  announced  that  it  would 
assess  Italy’s  possible  eligibility  for  admissible  temporary  deviation  under  the  SGP  on  the 
basis of: (i) the existence of credible plans for the resumption of the adjustment path towards 
the MTO; (ii) whether a deviation from the adjustment path is being effectively used for the 
purposes  of  increasing  investments;  and  (iii) progress  with  the  structural  reform  agenda, 
taking into account the Council recommendations. These conditions are discussed in order.  
As  regards  condition (i),  in  a  letter  to  the  Commission15,  the  Italian  government  publicly 
declared  its  intention  to  resume  its  adjustment  path  towards  the  MTO  beyond  2016,  by 
committing  to  repeal  the  legislated  VAT  hike  for  2017  “conditional  upon  implementing 
deficit reduction measures to comply with the preventive arm of the SGP in 2017” (see also 
Section 4.3).  This  public  commitment  was  further  confirmed  by  reassurances  made  by  the 
Italian  government  to  the  Commission  in  a  subsequent  letter16.  This  notwithstanding,  it 
appears  difficult  at  this  stage  to  fully  assess  Italy’s  plans  to  resume  the  adjustment  path 
towards the MTO in 2017, for two reasons. First, the 2017 Stability Law will only be adopted 
in  autumn  2016  and,  in  its  absence,  the  Commission  2016  spring  forecast  for  next  year  is 
based  on  a  no-policy  change  assumption.  Second,  the  2016  Stability  Programme  highlights 
"the criticalities affecting the current methodology for the calculation of the output gap, often 
leading  to  underestimations  or  results  that  are  at  odds  with  macroeconomic  intuitions  and 
provide a biased indication of Italy's actual compliance with the preventive arm of the SGP" 
among  the  relevant  factors  that  explain  why  “the  government  deems  it  inappropriate  and 
counterproductive to achieve the fiscal consolidation” requested by the preventive arm rules, 
whereby the structural balance should improve in 2017 by more than 0.5 percentage points. 
Additional work will be carried out in the EPC-OGWG to analyse the issues raised by Italy 
and other Member States on the agreed methodology. On the basis of the Commission 2016 
spring forecast, the Commission assessment of the planned fiscal effort for 2017 indicates a 
gap of between 0.15% and 0.2% of GDP – depending on the precise parameters used for the 
calculation  of  the  output  gap –  to  ensure  broad  compliance  with  the  preventive  arm  of  the 
SGP  in  2017  based  on  the  expenditure  benchmark.  However,  given  Italy’s  public 

13  For  the  granting  of  the  0.4  percentage  point  allowance  under  the  structural  reform  clause,  please  refer  to 

European Commission (2015), “Assessment of the 2015 Stability Programme for ITALY” -  
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2015/12_it_scp_en.pdf  

14 See: http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/2015/it_2015-11-16_co_en.pdf  
15  See  the  cover  letter  accompanying  the  note  “Relevant  Factors  Influencing  Debt  Developments  in  Italy”  (9 
-  http://www.tesoro.it/inevidenza/documenti/lettera_2840_del_09.05.2016_-_Min_Padoan_-

May  2016) 
_Mr_Dombrovskis_-_Moscovicix1x.pdf 

16 An exchange of letters took place between the European Commission and the Italian government. The letters 
can  be  retrieved  at:  www.mef.gov.it/inevidenza/documenti/20160516Letter_to_Padoan.pdf  (letter  from  the 
Commission  to  Italy)  and  www.mef.gov.it/inevidenza/documenti/Letter_to_Dombrovskis_x_Moscovici_-
_17_May_2016.pdf (Italy’s reply to the Commission). 

10 

 
 
                                                 
 
commitment  to  comply  with  the  preventive  arm  of  the  SGP  in  2017,  condition (i)  can  be 
considered to be complied with, albeit a full assessment of Italy’s plans for 2017 will only be 
possible  in  autumn,  when  the  draft  budget  is  available.  The  Commission  will  reassess  the 
relevant  factors  in  a  new  report  under  Article  126(3)  TFEU  as  further  information  on  the 
credibility and appropriateness of Italy’s resumption of the adjustment path towards the MTO 
for 2017 becomes available.  

As regards condition (ii), Italy’s government gross fixed capital formation is forecast by the 
Commission  to  increase  further  in  nominal  terms  in  2016  and  2017  (by  0.9%  and  0.6%, 
respectively). As a result, public investment is expected to remain broadly stable as a share of 
GDP  (at  around  2.3%).  The  2016  Stability  Programme  projects  similar  developments  for 
public  investment  over  2016-2017.  In  this  context,  the  2016  Stability  Programme  expects 
national expenditure in investment projects co-financed by the EU to reach around EUR 5 bn 
or 0.3% of GDP in 2016, which corresponds to the allowance invoked under the investment 
clause.  While  the  information  provided  seems  to  confirm  that  Italy’s  deviation  from  the 
adjustment  path  towards  the  MTO  is  being  effectively  used  for  the  purposes  of  increasing 
investments, it does not dispel any reasonable doubt on the feasibility of the reported amount 
of  co-financed  investment  for  2016,  which  matters  for  the  magnitude  of  the  requested 
allowance. For instance, as regards the EUR 1 billion projects expected under the Connecting 
Europe Facility (CEF), only around EUR 0.35 billion appear feasible in the course of 2016, 
as some EUR 0.65 billion have not yet been successfully submitted to a CEF call to receive 
EU  funding  and  are  thus  unlikely  to  be  carried  out  in  2016.  On  this  basis,  it  seems  that  an 
allowance of at most 0.25% of GDP could be granted under the investment clause for 2016, 
but with the caveat that significant downside risks exist and that the Commission will carry 
out an ex-post assessment in order to verify the actual amount of the national expenditure in 
co-financed investment projects and the related allowance to which Italy is eligible under the 
so-called “investment clause”. 

As regards condition (iii), the 2016 National Reform Programme broadly confirms the reform 
timetable  put  forward  in  the  2016  Draft  Budgetary  Plan,  where  the  additional  allowance 
under the clause was requested. The ambitious reform agenda includes a new competition law 
for 2016, the completion of the implementation of the labour market reform, as well as the 
long-awaited  revision  of  the  statute  of  limitations  and  measures  concerning  collective 
bargaining. It also encompasses measures to support access to finance, the implementation of 
the education and public administration reforms according to the respective timetables, and a 
systematic  revision  of  tax  expenditures.  As  regards  the  specific  reforms  for  which  the 
additional  allowance  was  requested,  i.e.  measures  to  reduce  the  stock  of  non-performing 
loans and reform insolvency procedures, reasonable progress seems to be confirmed. Overall, 
given the extent of the structural reforms put forward by the government in the 2016 National 
Reform Programme, their state of legislative progress/implementation, as well as the methods 
used  to  simulate  their  effects,  it  seems  that  Italy  could  benefit  in  2016  from  the  maximum 
amount  of  admissible  temporary  deviation  allowed  under  the  structural  reform  clause,  i.e. 
0.5% of GDP.  

Overall,  the  abovementioned  conditions  for  Italy  to  be  allowed  an  additional  temporary 
deviation  from  the  adjustment  path  towards  the  MTO  under  the  structural  reform  and 
investment clause in 2016 appear to be satisfied. The Commission will review its assessment 
of the relevant factors in a new report under Article 126(3) TFEU based on the Commission 
2016 autumn forecast, as further information on the credibility and appropriateness of Italy’s 
resumption of the adjustment path towards the MTO for 2017 becomes available. 

11 

 
 
The  2016  Stability  Programme  also  invokes  an  additional  allowance  in  relation  to  two 
“unusual events”. On the one hand, the Italian government estimates that the net expenditure 
incurred  to  face  the  exceptional  influx  of  refugee,  particularly  in  terms  of  sea  rescue 
operations and hospitality, healthcare and education costs, increased gradually since 2012 and 
amounted to EUR 2 billion (0.13% of GDP) in 2014, and EUR 2.6 billion (0.16% of GDP) in 
2015.  The  refugee-related  expenditure  is  projected  at  EUR  3.3 billion  (0.2%  of  GDP)  in 
2016.  The  Commission  clarified  that,  for  the  purposes  of  fiscal  surveillance  and  on  a 
temporary  basis  (i.e.  solely  for  2015  and  2016),  additional  refugee-related  expenditure 
actually  incurred  by  country  based  on  observed  data,  would  be  taken  into  account  when 
assessing Member States’ fiscal efforts. In fact, as fiscal efforts required under the SGP are 
set in terms  of  change in  the structural balance, allowances  for  “unusual events”, including 
the refugee crisis, should only reflect elements that directly affect the change in the structural 
balance  in  a  certain  year.  In  the  case  of  Italy,  the  refugee-related  expenditure  that  can  be 
taken  into  account  ex  post  for  2015  is  0.03%  of  GDP.  As  for  2016,  0.04%  of  GDP  is  the 
amount  that  is  currently  expected  by  the  Commission  to  affect  Italy’s  structural  effort  this 
year.  A  final  assessment  on  the  2016  amount  will  be  made  on  the  basis  of  observed  data 
provided  by  Italy  in  next  year  Stability  Programme.  Moreover,  Italy’s  2016  Stability  Law 
explicitly mentioned a package of exceptional security measures, adding up to 0.2% of GDP, 
to  be  taken  into  account  by  the  Commission  in  assessing  Italy’s  compliance  with  the 
preventive  arm.  Overall,  it  appears  that  the  link  of  some  of  the  mentioned  provisions  to 
security may only be indirect, as in the case of EUR 1 bn earmarked for the requalification of 
urban  areas  and  incentives  to  young  people  to  attend  cultural  events.  A  preliminary 
assessment  thus  suggests  that  only  0.06%  of  GDP  represents  additional  directly  security-
related expenditure affecting the structural effort in 2016, which could be taken into account 
in the overall assessment of compliance with the preventive arm in 2016 to be made ex-post 
in 2017.  

In  conclusion,  the  Commission  has  assessed  Italy  to  be  eligible,  at  this  stage,  for  the 
following  allowances:  (i)  0.03%  of  GDP  in  2015,  due  to  the  additional  refugee-related 
expenditure incurred in that year, which leads to a corrected requirement of 0.22% of GDP 
for 2015 (instead of the 0.25% recommended in July 2015); (ii) 0.35% of GDP in 2016 under 
the  structural  reform  and  investment  clause  taken  together,  which  leads  to  a  corrected 
requirement of -0.25% of GDP for 2016. The actual additional spending related to the refugee 
crisis  and  to  direct  security  measures  (currently  estimated  at  0.04%  and  0.06%  of  GDP 
respectively) will be taken into account ex-post.   

Adjustment towards the MTO 

The government plans enshrined in the 2016 Stability Programme imply an improvement in 
the recalculated structural balance17 by 0.2 percentage points of GDP in 2015, followed by a 
deterioration  of  0.6  percentage  points  of  GDP  in  2016,  with  a  structural  position  still  in 
deficit  in  2016  (at  1.6 %  of  GDP).  This  is  only  slightly  better  than  the  structural  efforts 
estimated  for  2015  (0.1  percentage  points  of  GDP)  and  expected  for  2016  (-0.7  percentage 
points  of  GDP)  on  the  basis  of  the  Commission  2016  spring  forecast.  For  2017,  both  the 
(recalculated)  government  plans  and  the  Commission  2016  spring  forecast  expect  a  stable 
structural balance. However, the Italian government publicly declared its intention to comply 

17  This  refers  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 Stability Programme, using the commonly agreed 
methodology 

12 

 
 
                                                 
with  the  preventive  arm  of  the  SGP  beyond  2016,  by  committing  (see  above)  to  repeal  a 
previously  legislated  VAT  hike  for  2017  “conditional  upon  implementing  deficit  reduction 
measures  to  comply  with  the  preventive  arm  of  the  SGP  in  2017”.  Beyond  2017,  the 
government  plans  confirm  the  medium-term  objective  of  a  balanced  budgetary  position  in 
structural  terms,  which  reflects  the  objectives  of  the  Stability  and  Growth  Pact,  and  the 
achievement  of  the  MTO  in  2019,  i.e.  one  year  later  than  projected  in  the  2015  Stability 
Programme.  However,  based  on  the  recalculations  by  the  Commission,  Italy’s  budgetary 
position would still indicate a structural deficit of ½% of GDP in 2019.   

For  2015,  Italy  was  recommended  to  deliver  a  structural  adjustment  of  at  least  0.25%  of 
GDP, so as to make sufficient progress towards its MTO. Both for 2015 alone and for 2014 
and 2015 taken together, the Commission 2016 spring forecast suggests some deviation from 
the structural balance pillar (a gap of 0.1 percentage points of GDP), while the expenditure 
benchmark points to compliance. Overall, Italy is thus projected to be broadly compliant with 
the required adjustment towards the MTO in 2015. The consideration of allowance under the 
so-called “refugee clause” (see above) would not change this conclusion. 

For 2016, the corrected preventive arm requirement  of  -0.25%  of  GDP,  i.e.  discounting  for 
the  maximum  flexibility  that  can  be  granted  under  the  structural  reform  and  investment 
clauses  together,  will  be  taken  into  account  in  the  overall  assessment  that  follows,  together 
with the 0.1% of GDP further allowance related to the additional refugee related expenditure 
and  exceptional  security-related  direct  costs  currently  expected  for  this  year.  The 
Commission  2016  spring  forecast  expects  Italy’s  structural  balance  to  deteriorate  by 
0.7 percentage points of GDP. Therefore, on the basis of both the government plans and the 
Commission  2016  spring  forecast  and  taking  into  account  the  corrected  preventive  arm 
requirement,  there  is  a  risk  of  some  deviation  (a  gap  of  -0.3  and  -0.4  percentage  points  of 
GDP,  respectively)  from  the  structural  balance  pillar  over  one  year  in  2016,  while  the 
expenditure benchmark points to compliance based on the Commission 2016 spring forecast. 
Over 2015 and 2016 taken together, based on both the government plans and the Commission 
2016  spring  forecast  and  taking  into  account  the  corrected  preventive  arm  requirement  for 
2015 and 2016, there is a risk of some deviation (a gap of -0.2 percentage points of GDP in 
both  cases)  from  the  structural  balance  pillar,  while  the  expenditure  benchmark  points  to 
compliance  based  on  the  Commission  2016  spring  forecast.  This  calls  for  an  overall 
assessment.  The  discrepancy  between  the  two  indicators  is  mainly  due  to  the  fact  that  the 
expenditure benchmark benefits in 2016 from both significant one-offs, as well as from the 
use  of  a  higher  GDP  deflator  frozen  also  on  the  basis  of  the  2015  Commission  spring 
forecast,  which  incorporated  a  VAT  hike  enacted  by  the  government  as  a  safeguard  clause 
but subsequently repealed. Following an overall assessment, Italy is expected to be at risk of 
some  deviation  from  the  required  adjustment  towards  the  MTO  in  2016.  This  conclusion 
would not change should the budgetary impact (i.e. 0.1% of GDP) of the exceptional inflow 
of refugees as well as the security costs incurred in 2016 be excluded from the assessment. 

In summary, based on both the government plans and the Commission 2016 spring forecast, 
Italy  appears  to  be  broadly  compliant  with  the  preventive  arm  requirements  regarding 
progress towards the MTO in 2015 and 2016, although rigorous implementation of the 2016 
budget remains crucial in this respect and this conclusion crucially hinges upon the allowance 
under the refugee clause in 2015 (which impacts on the two-year average) and the granting of 
the maximum allowance of 0.75% of GDP for the structural reform and investment clause in 
2016.  This  allowance  takes  into  account  Italy’s  public  commitment  to  comply  with  the 
preventive arm of the SGP in 2017 (see above), as well as the actual and expected progress in 

13 

 
 
terms of structural reforms and co-financed investment. Given the uncertainties hindering the 
possibility at this stage to fully assess Italy’s plans to resume of the adjustment path towards 
the MTO beyond 2016, the Commission will review its assessment of the relevant factors in a 
new report under Article 126(3) TFEU based on the Commission 2016  autumn forecast, as 
further information on Italy’s compliance with the preventive arm of the SGP in 2017, in line 
with the government’s public commitment, becomes available. 

4.2.  Medium-term economic position  

Unfavourable  macroeconomic  conditions,  particularly  very  low  inflation,  have  hindered 
Italy’s  fiscal  consolidation  over  the  recent  years  by  making  it  harder  to  maintain  higher 
primary surpluses and by worsening debt dynamics through a large “snowball” effect. This 
notwithstanding,  Italy  has  pursued  some  efforts,  keeping  its  headline  deficit  within  the  3 
percent of GDP threshold since 2012, attaining one of the highest primary surplus in the EU 
over  2011-2015.  Moreover,  since  the  adoption  of  the  2015  CSRs,  Italy  has  made  progress 
with the implementation of an ambitious reform agenda, which should positively impact on 
Italy’s medium term growth prospects and in turn enhance the sustainability of the country’s 
public finances. However, strong commitment to their full implementation remains essential. 

Macroeconomic conditions and public investment 

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  2015,  Italy’s  GDP 
contracted by 1.1% on average, as compared to a 0.1% expansion in the euro area. Compared 
to its pre-crisis peak in 2007, real GDP had contracted in 2015 by more than 8%. Italy’s real 
GDP growth was 0.8% in 2015 and the 2016 Stability Programme projects real GDP to grow 
by 1.2% in 2016, slightly above the Commission 2016 spring forecast (1.1%). The negative 
estimate of potential growth -0.2% in 2016, after -0.3% in 2015, implies a significant closure 
in  Italy’s  negative  output  gap,  from  -3.9%  of  potential  GDP  in  2014  to  -2.9%  in  2015  and 
-1.6% in 2016, based on the Commission 2016 spring forecast (a similar closure is projected 
in  the  Stability  Programme).  The  acceleration  in  real  GDP  growth  in  2017,  well  above  the 
still  sluggish  potential  growth  (estimated  to  be  around  0.1%  that  year),  would  lead  to  an 
almost complete closure of the negative output gap (to -0.4% of potential GDP in 2017, based 
on  the  Commission  2016  spring  forecast).  Overall,  since  2009,  Italy  has  experienced  a 
negative output gap combined with negative potential growth (with the exception of a slightly 
positive one in 2011). 

Price indicators in Italy have been on a downward path since late-2012: yearly HICP inflation 
stood  at  0.1%  in  2015  and  at  -0.3%  in  April  2016.  Low  aggregate  demand,  limited  wage 
pressures and the significant fall of energy prices are the main driving factors. The slump in 
oil  prices  is  set  to  lead  to  negative  annual  energy  prices  also  in  2016.  Overall,  the 
Commission 2016 spring forecast expects yearly HICP inflation to remain broadly stable in 
2016  (0.2%),  and  core  inflation  is  expected  to  stabilise  at  low  levels  (0.5%  after  0.7%  in 
2015). In 2017, HICP inflation is forecast to accelerate to 1.4% mainly because it factors in 
around half of the 0.9% of GDP VAT hike enshrined in the 2016 Stability Law. In fact, in a 
letter  to  the  Commission  (see  Section  4.1),  the  government  publicly  committed  to  repeal  it 
and to make the repeal “conditional upon implementing deficit reduction measures to comply 
with the preventive arm of the SGP in 2017” through the next Stability Law. 

14 

 
 
 
The debt-to-GDP ratio and the structural primary balance are highly affected by the moderate 
GDP deflator growth (0.8% in 2015), forecast to remain stable in 2016 before increasing, to 
1.2%  in  2017.  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.  It  is  worth  noting  that,  based  on  the 
Commission 2014 spring forecast, on which the Council based its fiscal recommendation to 
Italy  at  that  time,  the  required  MLSA  was  estimated  at  0.7%  of  GDP  in  2014  and  1.4%  of 
GDP  in  2015  (taking  into  account  the  structural  adjustment  forecast  for  2014).  Once 
recomputed on the basis of the Commission 2016 spring forecast, which forms the basis of 
the  present  assessment,  the  required  MLSA  becomes  substantially  higher:  1.2%  of  GDP  in 
2014 and, due to the 0.2% deterioration occurred in 2014, 2.6% of GDP in 2015. The upward 
revision  in  the  MLSA  since  2014  has  been  driven  by  significantly  lower  inflation  and 
potential  growth  estimates.  The  achievement  of  a  structural  adjustment  of  around  2.6 
percentage  points  of  GDP  in  2015  (i.e.  the  MLSA  based  on  the  Commission  2016  spring 
forecast) with nominal potential growth at around 0.4% would have required ceteris paribus a 
decrease in nominal primary expenditure of around 5.5% year-on-year in that year.  

In addition, persistently low inflation is making it more difficult to cut public expenditure as a 
share  of  GDP  by  freezing  wages  and  pensions  in  nominal  terms  (instead  of  having  them 
indexed  to  inflation).  This  policy  was  pursued  by  Italy  in  recent  years  and  led  to  a  limited 
increase  in  primary  expenditure  in  both  nominal  and  real  terms.  On  the  revenue  side, 
persistently low inflation implies lower tax revenues than in normal circumstances (including 
inflation around 2%) at the medium-term standard semi-elasticity. Therefore, it can be argued 
that Italy’s possibility to carry out fiscal adjustments is being hampered by macroeconomic 
conditions at this juncture; in turn, as the country seems to be facing a "double-trap" of low 
inflation  and  low  productivity  growth  hindering  wage  and  labour  market  adjustments,  too 
restrictive fiscal policies could worsen the low-inflation problem. 

Lastly, but not the least, unfavourable macroeconomic conditions, particularly low inflation 
and  tight  financing  conditions,  have  further  hindered  Italy’s  fiscal  consolidation  over  the 
recent years through their impact on fiscal multipliers heightened by the limited possibility to 
use economic stabilisers. On the on hand, it could be argued that, in a period of constrained 
monetary  policy  stimulus  due  to  the  zero  lower  bound  limit  and  ongoing  banking  sector 
adjustment hampering its full transmission, Italy’s fiscal multipliers are higher than in normal 
conditions. That is why the use of the flexibility embedded in the SGP could at this stage help 
avoid the risk of persistently low inflation (as highlighted by negative HICP inflation since 
February 2016), which would in turn make the necessary deleveraging of Italy's public sector 
more difficult to be achieved in an orderly fashion. On the other hand, the possibility to use 
economic  stabilisers  has  been  hampered  by  Italy’s  precarious  situation  in  the  financial 
markets following the 2011 sovereign debt crisis, whereby Italy had to adopt a strongly pro-
cyclical restrictive fiscal stance in 2011-2013 in order to regain credibility vis-à-vis financial 
markets  and  other  stakeholders.  While  this  resulted  in  an  increase  of  around  3  percentage 
points in the structural primary surplus over the three years, the large fiscal effort in a period 
of  negative  output  gap,  overall  weak  demand,  and  impaired  monetary  policy  transmission 
affected Italy's short-term economic prospects and at the same time exacerbated the impact of 
the crisis on the labour market and on the resilience of the banking sector.  

Despite all these difficulties, Italy succeeded in achieving and maintaining primary surpluses 
of  1.7%  of  GDP  on  average  over  2011-2015,  the  second  highest  in  the  EU  after  Germany, 

15 

 
 
although  a  clear  deterioration  in  structural  primary  surpluses  from  close  to  4%  of  potential 
GDP over 2012-2013 to around 3.2% in 2015 can be observed.  

As  regards  public  investment,  Italy’s  government  gross  fixed  capital  formation  averaged  at 
around 3% of GDP over 1999-2010 but the need to adjust quickly to respond to the sovereign 
debt  crisis  led  to  a  substantial  reduction  in  public  investment  to  2.3%  of  GDP  over  2011-
2014. In 2015, public investment bottomed out, reaching 2.3% of GDP (+1% year-on-year in 
nominal  terms),  and  is  forecast  by  the  Commission  to  increase  further  in  nominal  terms  in 
2016 and 2017 (by 0.9% and 0.6%, respectively). As a result, public investment is expected 
to remain broadly stable as a share of GDP (at around 2.3%). The 2016 Stability Programme 
projects  similar  developments  for  public  investment  over  2016-2017.  In  summary, 
developments in public investments, given their broad decline over time, do not appear to be 
the main relevant factor justifying Italy’s lack of compliance with the MLSA required under 
the debt rule over the 2013-2015 transition period. 

Table 3: Macroeconomic and budgetary developments a 

2013

2014

2015

2016

2017

COM

MS

COM

MS

0.8
0.8
-0.3
-2.9

-0.3
0.8
-0.7
-3.9
-3.0
1.6
0.2
2.3
-0.9
3.7

-1.7
1.2
-0.8
-4.3
-2.9
1.9
0.3
2.4
-0.6
4.2

Real GDP (% change)
GDP deflator (% change)
Potential GDP (% change) 
Output gap (% of potential GDP)
General government balance
Primary balance
One-off and other temporary measures
Government gross fixed capital formation
Cyclically-adjusted balance
Cyclically-adjusted primary balance
Structural balance b
Structural primary balance
Notes:
a In percent of GDP unless otherwise specified
b Cyclically adjusted balance excluding one-offs and other temporary measures
Source : Commission services, Italy's 2016 SP and Commission 2016 spring forecast

-1.1
3.5

-0.9
4.0

-2.6
1.6
-0.1
2.3

-1.1
3.1

-1.0
3.2

1.1
0.8
-0.2
-1.6

-2.5
1.6
0.1
2.3

-1.6
2.4

-1.7
2.3

1.2
1.0
-0.1
-1.6

-2.4
1.7
0.1
2.3

-1.5
2.5

-1.6
2.4

1.3
1.2
0.1
-0.4

-1.9
1.9
0.0
2.2

-1.7
2.1

-1.7
2.1

1.4
1.1
0.2
-0.4

-1.8
2.0
0.0
2.3

-1.6
2.2

-1.6
2.2

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  2016  National 
Reform  Programme  (NRP),  the  Italian  government  confirmed  its  commitment  to  keep 
momentum  in  the  adoption  and  implementation  of  an  ambitious  structural  reform  plan 
judicial 
covering 
system, competitiveness  and  product  markets,  labour  market  and  education,  as  well 
as taxation. 

a  number  of 

administration 

as  public 

areas 

such 

and 

In  2015,  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 2016 Country Report acknowledges that Italy has made 

16 

 
 
 
 
some progress in tackling the 2015 country specific recommendations (CSRs)18. However, in 
light of remaining challenges in diverse reform areas and the fact that there macroeconomic 
imbalances remain large and have not started to significantly correct, it has been concluded 
that Italy still displays excessive imbalances19. Continued commitment to swift adoption and 
full  implementation  of  structural  reform  covering  all  country-specific  recommendations  is 
essential, which the Commission will keep on monitoring closely. 

Among  the  reforms  with  a  potential  positive  impact  on  Italy’s  medium  term  growth 
prospects,  a  comprehensive  reform  of  the  labour  market  was  undertaken  in  2015  and 
important  measures  were  adopted  to  reform  the  governance  of  the  banking  sector  and  to 
address the stock of non-performing loans; the education sector was reformed with a view to 
better  rewarding  merit  and  strengthening  work-based  learning  and  vocational  training; 
measures  to  reduce  the  administrative  burden  for  citizens  and  businesses  were  taken; 
moreover, the parliament is discussing a law on competition and has passed an enabling law 
for the reform of the public administration. While implementation of some of these reforms is 
still ongoing, they represent important steps to address Italy's long-standing weaknesses. The 
full impact of these reforms may materialise only over time but early signs are positive.  

On the other hand, there is scope for further action in some key areas. Targets for spending 
review savings have been further reduced; the cut to property taxes on first residences from 
2016  is  not  consistent  with  repeated  Council  recommendations  to  shift  taxation  away  from 
productive  factors  onto  property  and  consumption  and  key  elements  of  the  respective 
country-specific recommendations have not been implemented (see below for more details); 
social  partners  have  not  yet  found  an  agreement  on  the  delayed  reform  of  collective 
bargaining;  the  legislative  process  on  the  long-awaited  systematic  revision  of  the  statute  of 
limitations is not completed. 

In  summary,  since  the  adoption  of  the  2015  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. 

In view of the planned implementation of major structural reforms with a positive impact on 
the long-term sustainability of public finances, Italy requested an overall temporary deviation 
of  0.5%  of  GDP  from  the  required  adjustment  path  towards  the  medium-term  objective  in 
2016, of which 0.4% in its 2015 Stability Programme and additional 0.1% in its 2016 DBP. 
The  details  underpinning  these  reforms  have  been  laid  out  in  the  2015  and  2016  National 
Reform  Programmes,  both  broadly  confirming  the  planned  reform  agenda.  The  measures 
presented  by  the  Italian  authorities  are  expected  to  have  a  positive  impact  on  growth  and 
therefore  on  the  sustainability  of  public  finances20.  The  areas  of  reform  put  forward  in  the 

18  For  a  more  extensive  overview, please  refer to  the  Commission  Staff Working  Document  “Country  Report 
Italy 2016 - Including an In-Depth Review on the prevention and correction of macroeconomic imbalances” -  
http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_italy_en.pdf. 

19 See Commission Communication COM(2016) 95 final/2 “2016 European Semester: Assessment of progress 
on  structural  reforms,  prevention  and  correction  of  macroeconomic  imbalances,  and  results  of  in-depth 
reviews under Regulation (EU) No 1176/2011” - 
http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_comm_en.pdf . 

20 See in particular Section 4.2 of the “Assessment of the 2015 Stability Programme for ITALY” (…the positive 
impact on the sustainability of public finances is two-fold: on the one hand an increase in GDP leads to an 
automatic  decrease  in  the debt  ratio  everything  else  being  equal;  on  the  other, higher  GDP growth usually 
leads to a larger tax intake and to a decrease in nominal deficit and debt (respectively by 0.8 and 2 percentage 

17 

 
 
                                                 
 
the  structural  reform  clause 

programme as having an impact on public finance sustainability and being relevant to Italy’s 
application  for 
include:  (i) public  administration  and 
simplification;  (ii) product  and  service  markets;  (iii) labour  market;  (iv) civil  justice; 
(v) education; (vi) a tax shift; (vii) measures to reduce the stock of non-performing loans and 
reform insolvency procedures; (viii) access to finance; and (ix) spending review as financing 
measure. The overall impact of the reforms on real GDP levels is estimated by the authorities, 
regardless  of  their  state  of  implementation,  at  +2.2%  by  2020  (+0.4%  from  public 
administration  and  simplification;  +0.4%  from  the  product  market  reforms,  +0.6%  from 
labour market reforms, +0.1% from the measures on justice, +0.3 % from education reforms, 
+0.2%  from  tax  reforms,  +0.2%  from  measures  to  address  non-performing  loans  and 
insolvency;  +0.2%  from  the  new  measures  for  access  to  finance;  -0.2%  from  spending 
review).  

4.3. 

Other factors put forward by the Member State  

On 9 May 2016, the Italian authorities transmitted documents concerning relevant factors in 
accordance with Article 2(3) of Regulation (EC) No 1467/9721. The analysis presented in the 
other sections of this report covers most of the factors put forward by the authorities.  

According  to  the  Italian  authorities,  Europe  is  currently  facing  a  risk  of  persistently  low 
inflation and stagnation, which is also incorporated in the Commission 2016 spring forecast. 
In this economic environment, restrictive fiscal policy stance may be self-defeating, leading 
among  others  to  cut  growth-enhancing  productive  investment  expenditure,  which  is  further 
aggravated  by  still  unsatisfactory  coordination  of  fiscal  policies  among  euro  area  Member 
States. This applies in particular to the case of Italy, where unprecedented negative cyclical 
conditions  over  2008-2009  and  2011-2014  have  significantly  increased  fiscal  multipliers, 
made  the  necessary  adjustment  to  comply  with  the  debt  rule  particularly  demanding,  and 
aggravated the Italian debt imbalance through a largely negative "snowball effect", amplified 
by  low  inflation.  In  this  spirit,  the  Italian  authorities  report  a  simulation  showing  that  the 
MLSA  under  “higher  real  growth  and  a  normal  times  deflator”  would  have  implied  much 
lower and realistic structural adjustments to be implemented. Namely, assuming higher GDP 
deflator growth of 2% as of 2014 and zero real GDP growth in 2014 (instead of a contraction) 
would have almost halved the structural effort needed for Italy to comply with the debt rule 
over the period 2013-2015. In this case, the structural adjustment achieved by Italy in 2013 
would have been in line with the MLSA “adjusted for low inflation and growth”, while for 
2014  and  2015  the  actual  adjustment  would  have  still  fallen  short  of  the  requirements. 
Moreover,  factoring  in  also  the  alternative  estimation  methodology  for  potential  output  put 
forward by the 2016 Stability Programme, the Italian authorities argue that the gap to the debt 
benchmark  based  on  the  Commission  2016  spring  forecast  would  markedly  shrink  in  2016 
and that the debt rule would be complied with already in 2016, if one assumed in addition a 
normal GDP deflator growth at 2 percent per year since 2014.  

The Italian authorities also stress the ongoing wide-ranging programme of structural reforms 
aiming to address deeply rooted structural weaknesses and increase growth potential at least 

points of GDP by 2020 for the whole reform package with respect to the baseline). The improvement in the Z 
indicator associated with the reforms is estimated at 1.1 percentage points of GDP by 2025…”) -  
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2015/12_it_scp_en.pdf 

21 “Relevant Factors Influencing Debt Developments in Italy”, May 2016 - 

http://www.tesoro.it/inevidenza/documenti/Relevant_Factor_Influencing_Debt_Developments_in_Italy.pdf 

18 

 
 
 
                                                                                                                                                        
 
 
in  the  medium  term.  The  authorities  confirm  their  commitment  to  carry  out  an  ambitious 
reform  agenda,  expected  to  have  a  positive  impact  on  economic  growth  and,  therefore,  the 
sustainability  of  public  finances,  as  discussed  also  in  Section  4.1  of  this  report.  Italy  also 
highlights the need to take into account the short-term costs imposed on the Member States of 
Euro-area reform initiatives, as in the case of the Banking Union.  

Furthermore,  the  Italian  authorities  point  out  a  series  of  shortcomings  of  the  commonly 
agreed  methodology  for  the  estimation  of  the  output-gap  followed  by  the  Commission  to 
compute the structural efforts relevant for the fiscal surveillance. Among these shortcomings, 
the inconsistency of the estimates with macroeconomic intuition is reportedly evidenced by 
the rapid closure of Italy’s output gap over 2016-2017. In this context, alternative estimation 
methods are put forward as a basis to argue that Italy started its latest reform effort from a 
position of balanced budget in structural terms in 2015 and should thus not be requested to 
carry out any adjustment towards its MTO in 2017. However, in an accompanying letter, the 
Italian government publicly declared its intention to comply with the preventive arm of the 
SGP beyond 2016 (see also Section 4.1). 

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. The largest primary surplus 
in  the  EU  over  2012-2015  is  attributed  to  a  an  ambitious  plan  of  growth-friendly  fiscal 
consolidation, complementing significant reduction in the tax wedge on labour with durable 
improvements in the efficiency and quality of public expenditure at all levels of government. 

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 debt maturity structure among the soundest in the Union also contributes to these results. 

4.4.  Medium-term government debt position  

Despite Italy’s projected gradual recovery, the reduction of its public debt imbalance is still 
markedly  hampered  by  low  inflation,  as  mentioned  in  Section  3.  As  a  result,  based  on  the 
Commission  2016  spring forecast, Italy’s debt-to-GDP ratio is set to start declining only in 
2017,  after  the  peak  of  132.7%  reached  in  2015-2016,  mainly  thanks  to  higher  real  GDP 
growth and inflation. The government projections are slightly more optimistic and the 2016 
Stability Programme projects the debt-to-GDP ratio to start declining already from 2016, to 
132.4%. This declining path is expected to accelerate over the 2017-2019 programme period 
thanks to real growth at 1.4-1.5% and inflation progressively increasing towards 2%. 

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-called  “Fornero  reform”),  so  that  Italy  scores  relatively  well  in 
terms of long-term sustainability risks despite the high current level of pension expenditure. 
Namely,  based  on  the  Commission  2016  spring  forecast,  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  4.8 percentage  points  of  GDP  over  2017-2021).  In  this 
context, further fiscal adjustment and forceful implementation of structural reforms to foster 

19 

 
 
 
potential  growth  in  the  medium/long  term  remains  crucial  to  achieve  a  satisfactory  debt 
reduction path. 

The  2016  Stability  Programme  confirms  the  ambitious  privatisation  plan  launched  by  the 
government. In fact, after the 0.4% of GDP privatisation proceeds recorded in 2015, further 
0.5% of GDP per year over 2016-2018, and 0.3% of GDP in 2019 are targeted in the 2016 
Stability Programme, but details are not provided.  There are clear downside risks affecting 
these projections, as important privatisation projects, such as the one involving the national 
railway company Ferrovie dello Stato originally planned for 2016, have been postponed. 

In summary, 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  and  further  fiscal 
adjustment, would crucially help enhance debt sustainability, provided that persistently high 
primary surpluses are ensured and growth prospect restored. 

4.5. 

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).  

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 0.4% of GDP at end-2015 (out of a total of 2.3% of GDP), significantly down from 
around 1.4% of GDP at end-2014. The direct capital support to financial institutions (with an 
impact on the government debt) was close to zero at the end of 2015, as around EUR 1 billion 
was paid back in the course of 2015. 

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  Commission  Opinion  on  Italy’s  2016  Draft  Budgetary  Plan22  pointed  to  a  risk  of  non-
compliance with the provisions of the SGP for 2015-2016 and invites the Italian authorities to 
take  the  necessary  measures  within  the  national  budgetary  process  to  ensure  that  the  2016 
budget would be compliant with the SGP. Since the adoption of the Commission Opinion, the 
Commission  has  positively  assessed  Italy’s  request  to  be  allowed  an  additional  admissible 
deviation  of  0.35%  of  GDP  for  2016  under  the  structural  reform  and  investment  clause,  in 
addition  to  the  0.4%  of  GDP  already  allowed  in  spring  2015.  Moreover,  0.03%  outturn 
refugee  related  additional  expenditure  has  been  discounted  from  the  preventive  arm 
requirement  in  2015.  Hence,  as  mentioned  above,  Italy  is  currently  projected  to  be  broadly 
compliant with the requirement under the preventive arm of the SGP in 2015 and 2016. 

22 Commission Opinion C(2015) 8105 final, 16.11.2015, on the Draft Budgetary Plan of Italy -  

http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/2015/it_2015-11-16_co_en.pdf  

20 

 
 
 
                                                 
 
CONCLUSIONS 

The general government gross debt in Italy reached 132.7% of GDP in 2015, i.e. above the 
60%  of  GDP  reference  value,  and  is  forecast  to  remain  stable  in  2016,  before  declining  to 
131.8 % in 2017. Over the 2013-2015 transition period, Italy’s structural efforts have fallen 
short of minimum linear structural adjustment (MLSA) required to comply with the debt rule. 
As  a  result,  the  Commission  2016  spring  forecast  does  not  expect  Italy  to  comply  with  the 
debt rule either in 2015 or in 2016. This suggests that prima facie the debt criterion as defined 
in the Treaty appeared to be not fulfilled, before consideration is given to all relevant factors, 
whereas the 3% of GDP 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  well  below  2%,  respecting  the  MLSA  required  by  the  debt  rule  would  have 
implied a structural adjustment of more than 2.5 percentage points of GDP in 2015 based on 
the  Commission  2016  spring  forecast,  i.e.  achieving  a  structural  surplus  of  around  1.5%  of 
GDP,  well  above  Italy’s  MTO.  In  the  current  economic  circumstances,  the  required 
additional  structural  effort  could  be  expected  to  have  negative  implications  for  growth  and 
further  aggravate  the  current  low-inflation  environment,  thereby  not  contributing  towards 
bringing debt on an appropriate downward path. Moreover, Italy is estimated to have broadly 
complied with the required adjustment path towards the MTO in 2015. Broad compliance is 
also  expected  in  2016,  once  an  overall  allowance  of  0.75%  of  GDP  for  2016  is  granted  to 
Italy,  taking  into  account  its  progress  with  the  structural  reform  agenda,  the  planned 
investments, as well as the Italian government’s commitment to comply with the preventive 
arm  of  the  SGP  in  2017,  which  was  publicly  confirmed  by  the  authorities.  However,  the 
Commission will be able to better assess this commitment only on the basis of Italy’s 2017 
Draft Budgetary Plan and its 2016 autumn forecast. 

Furthermore, in the 2016 Stability Programme, Italy plans to fully comply with the debt rule 
(in its forward-looking dimension) beyond 2017, although with a small gap in that year (i.e. 
0.2  percentage  points  of  GDP)  also  thanks  to  an  ambitious  privatisation  plan.  The  2016 
National Reform Programme confirms Italy’s commitment to adopt/implement an ambitious 
structural  reform  agenda,  in  addition  to  the  progress  already  acknowledged  by  the  2016 
Country  Report  for  Italy  in  line  with  the  2015  Country  Specific  Recommendations.  In  this 
context,  Italy  requested  to  avail  itself  of  an  overall  temporary  deviation  by  0.5  percentage 
points of GDP from the required preventive arm adjustment towards the MTO under the so-
called structural reform clause. The Commission has positively assessed this request, in view 
of  the  plausible  positive  impact  on  Italy’s  growth  prospects,  and  thus  public  finance 
sustainability, related to the ambitious structural  reforms  put forward  by the  government, if 
fully and timely implemented.  

The  analysis  presented  in  this  report  includes  the  assessment  of  all  the  relevant  factors, 
notably: (i) the currently unfavourable macroeconomic conditions and in particular still very 
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  once  the  fiscal  flexibility  requested  by  Italy  for  this  year  is  granted;  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.  This  suggests  that  the  debt  criterion  as  defined  in  the  Treaty  and  in 
Regulation  (EC)  No  1467/1997  should  be  considered  as  currently  complied  with.  The 

21 

 
 
 
Commission will revise its assessment  of the relevant  factors in a new report under Article 
126(3)  TFEU,  as  further  information  on  the  credibility  and  appropriateness  of  Italy’s 
resumption of the adjustment path towards the MTO for 2017 becomes available. 

22