Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Italy and delivering a Council opinion on the 2016 stability programme of Italy
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Italy, administrative reform, competition policy, credit policy, economic policy, economic reform, fiscal policy, labour market, social policy, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 332 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Italy  and delivering a Council opinion on the 2016 stability programme of Italy  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Italy 

and delivering a Council opinion on the 2016 stability programme of Italy 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Italy as one of the Member States for which an in-depth review would be 
carried out. On the same day, the Commission also adopted a recommendation for a 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 332 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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(3) 

(4) 

(5) 

Council  recommendation  on  the  economic  policy  of  the  euro  area7.  That 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 
monetary  union,  Italy  should  ensure  the  full  and  timely  implementation  of  the 
recommendation. 
The  2016  country  report  for  Italy8  was  published  on  26  February  2016.  It  assessed 
Italy’s progress in addressing the country-specific recommendations adopted by the 
Council  on  14  July  2015  and  Italy's  progress  towards  its  national  Europe  2020 
targets. It also included the in-depth review under Article 5 of Regulation (EU) No 
1176/2011. On 8 March 2016, the Commission presented the results of the in-depth 
review.  9  The  Commission’s  analysis  leads  it  to  conclude  that  Italy  is  experiencing 
excessive macroeconomic imbalances. In particular, the sluggish productivity growth 
hampers  the  recovery  of  competitiveness  and  makes  it  more  difficult  to  reduce  the 
high public debt ratio. The risk of adverse effects on the Italian economy and, given 
its  size,  of  negative  spillovers  to  the  economic  and  monetary  union  is  particularly 
important. 

On 28 April 2016, Italy submitted its 2016 national reform programme and its 2016 
stability  programme.  To  take  account  of  their  interlinkages,  the  two  programmes 
have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance10.  

in 

Italy  is  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and  subject  to  the 
transitional  debt  rule  over  2013-15.  According  to  the  stability  programme,  the 
government  debt-to-GDP  ratio  is  projected  to  peak  in  2015  at  132.7  %  and  to 
gradually decline to 123.8 % in 2019. The Commission 2016 spring forecast expects 
the debt-to-GDP ratio to stabilise in 2016 and start a slight decline only as of 2017. 
The  implementation  of  the  substantial  privatisation  programme  presented  by  the 
Italian authorities is a key challenge for Italy, given its expected contribution to the 
debt-reduction effort. While privatisations were implemented in line with the plans in 
2015,  the  target  of  0.5  %  privatisation  proceeds  per  year  over  2016-2018  and  of 
0.3 %  in  2019  seems  very  ambitious,  also  given  the  delays  incurred  by  some 
privatisation  projects.  The  macroeconomic  scenario  underpinning  the  budgetary 
projections is plausible. 

(6) 

On  18  May  2016,  the  Commission  issued  a  Report  under  Article  126(3)  TFEU,  as 
Italy did not make sufficient progress towards compliance with the debt rule in 2015. 

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COM(2015) 692 final. 
SWD(2016) 81 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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(8) 

(9) 

The  analysis  included  all  the  relevant  factors  and  concluded  that  the  debt  criterion 
should be considered as complied with. The Commission will review its assessment 
in  a  new  report  under  Article  126(3)  of  the  Treaty  based  on  the  Commission  2016 
autumn  forecast,  as  further  information  on  the  resumption  of  the  adjustment  path 
towards the medium-term budgetary objective for 2017 becomes available. 

In spring 2015, Italy was granted a temporary deviation of 0.4 percentage points of 
GDP  from  the  required  adjustment  path  towards  the  medium-term  budgetary 
objective in 2016 to take account of major structural reforms with a positive impact 
on the long-term sustainability of public finances. In its 2016 Draft Budgetary Plan, 
Italy  requested  an  additional  deviation  of  0.1  percentage  points  of  GDP  from  the 
required  adjustment  path  towards  the  medium-term  budgetary  objective  in  2016  to 
take  account  of  other  structural  reforms  with  a  positive  impact  on  the  long-term 
sustainability  of  public  finances.  The  details  underpinning  all  these  reforms  have 
been set out in Italy's 2016 National Reform Programme, which broadly confirms the 
reform  agenda.  The  areas  of  reform  put  forward  in  the  programme  as  having  an 
impact  on  public  finance  sustainability  include:  (i)  public  administration  and 
simplification;  (ii)  product  and  service  markets;  (iii)  the  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;  and  (viii)  spending  review  as 
financing measure. The impact of all these reforms on real GDP is estimated by the 
authorities at 2.2 percentage points by 2020, which seems to be plausible. If fully and 
timely implemented, these reforms will have a positive impact on the sustainability 
of public finances. Italy can currently be assessed as qualifying for the full requested 
temporary  deviation  of  0.5  percentage  points  of  GDP  in  2016,  provided  that  it 
adequately  implements  the  agreed  reforms,  which  will  be  monitored  under  the 
European Semester, and subject to the conditions outlined in recital 10. 

In  its  2016  Draft  Budgetary  Plan,  Italy  requested  an  additional  deviation  of  0.3 
percentage  points  of  GDP  from  the  required  adjustment  path  towards  the  medium-
term budgetary objective in 2016 to take account of national investment expenditure 
in  projects  co-financed  by  the  EU.  The  information  provided  by  the  2016  stability 
programme seems to confirm that Italy’s deviation from the adjustment path towards 
the  medium-term  budgetary  objective  in  2016  is  being  effectively  used  for  the 
purposes  of  increasing  investments.  However,  there  are  still  some  doubts  on  the 
feasibility of the whole projected amount of co-financed investment in the course of 
2016. Italy can currently be assessed as qualifying for a temporary deviation of 0.25 
percentage  points  of  GDP  in  2016,  provided  that  it  adequately  carries  out  the 
intended  investments  and  subject  to  the  conditions  outlined  in  recital  10.  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  of  the  related 
allowance to which Italy is eligible under the so-called “investment clause”. 

The 2016 stability programme indicates that the budgetary impact of the exceptional 
inflow of refugees as well as of exceptional security measures is significant and that 
these  should  be  considered  as  an  unusual  event  outside  the  control  of  the 
government, as defined in article 5.1 and article 6.3 of Regulation (EC) No 1466/97. 
According  to  the  Commission,  the  additional  impact  is  in  line  with  the  estimations 
provided  by  the  stability  programme  and  amounts  to  0.03 %  of  GDP  in  2015  and 
0.04 %  in  2016  for  refugee-related  expenditure  and  at  0.06 %  of  GDP  in  2016  for 
security measures. In relation to this, Italy requested a temporary deviation from the 
adjustment  path  towards  the  medium-term  budgetary  objective.  The  provisions 

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(10) 

(11) 

(12) 

(13) 

defined  in  Article  5(1)  and  Article  6(3)  of  Regulation  (EC)  No 1466/97  allow 
catering for this additional expenditure, in that the inflow of refugees as well as the 
severity  of  the  terrorist  threat  are  exceptional  events,  their  impact  on  Italy’s  public 
finances is significant and sustainability would not be compromised by allowing for 
a deviation from the adjustment path towards the medium-term budgetary objective. 
Therefore, the required adjustment towards the medium-term budgetary objective for 
2015  has  been  reduced  to  take  into  account  additional  refugee-related  costs. 
Regarding 2016, a final assessment, including on the eligible amounts, will be made 
in spring 2017 on the basis of observed data as provided by Italian authorities. 
In its opinion on Italy’s 2016 Draft Budgetary Plan11, the Commission indicated that, 
in the context of the 'overall assessment' of a possible deviation from the adjustment 
path towards the medium-term budgetary objective, it would take into account Italy's 
possible  eligibility  for  flexibility  under  the  SGP,  paying  particular  attention  to 
whether  a  deviation  from  the  adjustment  path  would  be  effectively  used  for  the 
purposes  of  increasing  investments;  to  the  existence  of  credible  plans  for  the 
resumption  of  the  adjustment  path  towards  the  MTO;  and  to  progress  with  the 
structural  reform  agenda,  taking  into  account  the  Council  recommendations.  The 
Commission assesses that Italy is eligible for a further allowance of 0.35 percentage 
points of GDP for 2016, taking into account the progress with the structural reform 
agenda,  the  planned  investments,  as  well  as  the  government  commitment  to  ensure 
compliance  with  the  adjustment  path  towards  the  MTO  in  2017,  which  the 
Commission will reassess in the autumn.  

Based on the Commission 2016 spring forecast, the projected structural deterioration 
of -0.7 % of GDP in 2016 points to a risk of some deviation from Italy’s obligations 
under the preventive arm of the Stability and Growth Pact, after taking into account 
the deviation allowed for investments and the implementation of structural reforms. 
In 2017, under the no-policy-change assumption, the Commission's forecast shows a 
zero structural effort in 2017, as a result of which there would be a risk of significant 
deviation from the required 0.6 % of GDP structural adjustment.  

Overall,  based  on  its  assessment  of  the  2016  stability  programme  and  taking  into 
account the Commission 2016 spring forecast, the Council is of the opinion that Italy 
is  at  risk  of  non-compliance  with  the  provisions  of  the  Stability  and  Growth  Pact. 
The  Commission  will  reassess  Italy’s  compliance  with  the  required  adjustment 
towards the medium-term budgetary objective based on its 2016 autumn forecast as 
further  information  on  Italy’s  resumption  of  the  adjustment  path  towards  the  MTO 
for 2017 becomes available, including the 2017 Draft Budgetary Plan.  

Although initiatives to reform the fiscal framework are under way, only limited steps 
have  been  taken  so  far  to  secure  the  contribution  of  the  spending  review  to  fiscal 
consolidation.  In  particular,  the  spending  review  targets  have  been  further  reduced 
and  the  fact  that  the  spending  reviews  are  not  fully  integrated  into  the  budgetary 
process  weighs  on  the  overall  efficiency  of  the  exercise.  The  finalisation  of  the 
comprehensive reform of the budgetary process in the making since 2009 is expected 
to  address  this  shortcoming  and  to  endow  the  budgetary  process  with  a  more 
performance-oriented  approach.  To  improve  public  debt  sustainability,  it  is  also 
important  to  accelerate  the  deployment  of  the  privatisation  plan.  Italy’s  taxation 
system hinders economic efficiency and continues to face several challenges. These 

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are linked to very low tax compliance and an overdue reform of tax expenditures, in 
particular with respect to the reduced value-added tax rates, and of the old system of 
cadastral values. These were all aspects of the enabling law for the reform of the tax 
system that have not been implemented, or have been implemented only partially. In 
addition,  recent  developments  such  as  the  abolition  of  the  property  tax  on  first 
residences, appear at odds with the goal of broadening the tax base and shifting the 
tax burden from productive factors onto property and consumption. 

The  reform  of  the  public  administration  is  an  important  step  which,  if  the  required 
legislative  decrees  are  adopted  and  implemented,  would  allow  Italy  to  grasp  the 
expected  benefits  in  terms  of  increased  efficiency  and  quality  in  the  public  sector. 
The legislative decrees proposed by the government in January 2016 on state-owned 
enterprises  and  local  public  services,  as  well  as  the  forthcoming  decree  on  public 
employment,  are  of  particular  importance  for  addressing  the  root  causes  of 
inefficiencies.  While  recent  measures  have  been  taken  to  step  up  the  fight  against 
corruption,  including  by  raising  penalties  and  prescription  terms  for  specific 
corruption  offences,  the  long-recommended  systematic  revision  of  the  statute  of 
limitations is still on hold. Accounting fraud is also an important issue. In the justice 
system,  lengthy  court  proceedings  and  a  high  number  of  pending  civil  and 
commercial  cases  remain  major  challenges.  Closely  monitoring  the  impact  of  the 
measures  taken  in  recent  years  to  address  these  issues  will  help  the  assessment  of 
whether it is necessary to complement them by additional action. 

Some progress has been made towards improving asset quality in the banking sector. 
Although  the  inflow  of  new  non-performing  loans  has  slowed  down  in  recent 
months,  their  stock  remains  at  a  very  high  level  and  continues  to  put  pressure  on 
profitability  and  banks'  resources.  In  addition,  Italy’s  insolvency  system  and  debt 
collection  frameworks  are  insufficiently  conducive  to  a  swift  work-out  of  impaired 
loans.  Since  mid-2015,  several  laws  were  adopted  to  simplify  and  accelerate 
insolvency  and  foreclosure  procedures,  and  a  draft  enabling  law  for  an  organic 
reform  of  the  bancruptcy  framework  has  been  proposed.  However,  the  effects  of 
these  reforms  on  the  length  of  procedures  and  recovery  values  are  still  to  be  seen. 
Since the beginning of 2015, Italy has adopted several measures to tackle weaknesses 
in  the  corporate  governance  of  its  banks,  particularly  regarding  larger  cooperative 
banks,  banks  with  foundations  as  shareholders  and  small  mutual  banks.  Fully 
implementing these reforms would help to make the sector more resilient and ensure 
a more efficient allocation of credit to the real economy. Whereas low cost efficiency 
in  the  banking  sector  hinders  profitability  and  internal  capital  generation,  the  low-
growth  low-interest  rate  environment  constitutes  an  additional  challenge.  The  new 
EU  bank  resolution  framework  has  changed  the  risk  profile  of  bonds  issued  by 
banks, of which significant amounts are held by Italian retail clients, underlining the 
importance of financial literacy among the general public. 

In  2015,  Italy  deeply  reformed  its  labour  market  institutions  through  the  so-called 
"Jobs act" reform. Implementing the reform of active labour market policies is key to 
activating  those  further  away  from  the  labour  market,  in  particular  the  long-term 
unemployed and young people. There is currently a range of administrative, political 
and resource-related challenges. In particular, this requires a strengthening of public 
employment services and close monitoring  of service delivery.  The apprenticeships 
system has  been  reformed to  include adults  made  redundant,  but  implementation  is 
still  under  way.  Second-level  bargaining  is  not  sufficiently  developed  in  Italy, 
hampering  the  adoption  of  innovative  solutions  at  firm  level  that  could  improve 

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productivity and make wages more responsive to labour market conditions. Action in 
this  area  needs  to  be  taken  in  consultation  with  social  partners  and  in  accordance 
with  national  practices.  Social  partners  have  not  yet  reached  an  agreement  on  the 
reform of collective bargaining. A reform is expected by the end of 2016, according 
to the national reform programme. The labour participation rate of women is one of 
the  lowest  in  the  EU.  Women  are  predominant  in  atypical  and  precarious  jobs, 
constitute the majority of non-standard workers and are particularly affected by the 
informal  economy.  The  tax  and  benefit  system  discourages  second  earners  from 
working  and  the  Jobs  Act  did  not  address  this  issue  effectively.  The  limited 
availability  of  affordable  care  services  also  hampers  participation  in  the  labour 
market by women with children and elderly relatives. Poverty levels are high – more 
than a quarter of Italians are at risk of poverty or social exclusion – and the provision 
of  social  assistance  remains  weak  and  fragmented.  Adopting  and  implementing  the 
national  antipoverty  strategy  and  rationalising  social  spending  could  be  first  steps 
towards  a  gradual  roll-out  of  a  minimum  income  scheme  at  national  level  in  an 
overall budgetary neutral way. Substantial progress has been made on the reform of 
education.  The  school  reform  was  adopted  in  July  2015  and  implementing  decrees 
are to be adopted by January 2017. 

Limited progress has been made towards fostering competition in services. The 2015 
annual  competition  law  is  currently  still  under  discussion  in  the  parliament.  A 
number of provisions, for instance on legal professions, have been weakened during 
the  parliamentary  process.  A  number  of  areas  are  still  over-protected  or  regulated, 
notably the regulated professions, the health sector, local public transport and taxis, 
ports and airports. The retail sector is hampered by a number of inefficiencies caused 
by the strictness of market regulation. The public process of granting rights on public 
domain for economic activities does not promote competition, in particular due to the 
awarding  of  permit  schemes  without  competitive  and  transparent  procedures. 
Market-opening measures need to be supported by a business-friendly environment. 
Some progress has been made on simplification under the 2015-2017 simplification 
agenda,  which  allows  for  easier  and  more  streamlined  cooperation  between  central 
and  regional  governments.  However,  the  Italian  business  environment  is  still  not 
sufficiently conducive to growth and investment and suffers from a fragmented and 
stratified  system  of  laws  and  regulations  emanating  from  different  levels  of 
government.  The  administrative  and  regulatory  burden  still  weighs  on  economic 
operators.  Strengths  in  terms  of  starting  a  company  or  insolvency  resolution  are 
offset  by  weaknesses  in  terms  of  dealing  with  construction  permits,  contract 
enforcement,  tax  payment  or  getting  credit.  The  implementation  of  the  national 
public  procurement  strategy  adopted  in  early  2016  could  also  help  to  tackle  some 
systemic and widespread weaknesses. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Italy’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 
programme  and  the  follow-up  given  to  the  recommendations  addressed  to  Italy  in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socioeconomic policy in Italy but also their compliance with EU rules and 
guidance,  given  the  need  to  strengthen  the  EU’s  overall  economic  governance  by 
providing EU-level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations 1 to 5 below. 

(17) 

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(20) 

In the light of this assessment, the Council has examined the stability programme and 
its opinion12 is reflected in particular in recommendation 1 below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  stability  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 1 to 5 below, 

HEREBY RECOMMENDS that Italy take action in 2016 and 2017 to: 

1. 

2. 

3. 

4. 

5. 

In  2016,  limit  the  temporary  deviation  from  the  required  0.5%  of  GDP  adjustment 
towards  the  medium-term  budgetary  objective  to  the  amount  of  0.75%  of  GDP 
allowed for investments and the implementation of structural reforms, subject to the 
condition  of  resuming  the  adjustment  path  towards  the  medium-term  budgetary 
objective  in  2017.  Achieve  an  annual  fiscal  adjustment  of  at  least  0.6%  of  GDP 
towards 
the 
implementation  of  the  privatisation  programme  and  use  the  windfall  gains  to 
accelerate  the  reduction  of  the  general  government  debt  ratio.  Shift  the  tax  burden 
from  productive  factors  onto  consumption  and  property.  Reduce  the  number  and 
scope of tax expenditures and complete the reform of the cadastral system by mid-
2017.  Take  measures  to  improve  tax  compliance,  including  through  electronic 
invoicing and payments. 

the  medium-term  budgetary  objective 

in  2017.  Accelerate 

Implement the reform of the public administration by adopting and implementing all 
necessary  legislative  decrees,  in  particular  those  reforming  local  public  enterprises, 
local  public  services  and  the  management  of  human  resources.  Step  up  the  fight 
against corruption by revising the statute of limitations by the end of 2016. Reduce 
the  length  of  civil  justice  proceedings  by  enforcing  reforms  and  through  effective 
case-management. 

Accelerate the reduction in  the stock of non-performing  loans,  including by further 
improving  the  framework  for  insolvency  and  debt  collection.  Swiftly  complete  the 
implementation of ongoing corporate governance reforms in the banking sector. 

Implement the reform of active labour market policies, in particular by strengthening 
the effectiveness of employment services. Facilitate the take-up of work for second 
earners.  Adopt  and  implement  the  national  antipoverty  strategy  and  review  and 
rationalise social spending. 

Swiftly adopt and implement the pending law on competition. Take further action to 
increase competition in regulated professions, the transport, health and retail sectors 
and the system of concessions.  

Done at Brussels, 

For the Council 
The President 

12 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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