COMMISSION STAFF WORKING DOCUMENT Country Report Italy 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 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 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Italy, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 77 final   COMMISSION STAFF WORKING DOCUMENT Country Report Italy 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP  2017 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  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}    
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Summary of the main findings from the MIP in-depth review 

4. 

Reform priorities 

4.1.  Public finances and taxation 

4.2. 

Financial sector 

4.3. 

Labour market, education and social policies 

4.4. 

Investment 

4.5. 

Sectoral policies 

4.6.  Public administration 

A.  Overview table 

B.  MIP Scoreboard 

C. 

Standard tables 

References 

LIST OF TABLES 

1 

5 

14 

19 

26 

26 

31 

40 

48 

52 

57 

61 

69 

70 

75 

1.1 

Key economic, financial and social indicators for Italy   social indicators for Ital                           13   

2.1         Summary table on 2016 CSR assessment 

3.1.  MIP Assessment Matrix (*) - Italy 

4.2.1. 

Italian banking sector key indicators 

4.2.2.  Key indicators on the Italian banking sector by segment, Q2 2016 

4.2.3.  Bank bonds by seniority, holding sector and size of issuing bank, Q2 2016 

B.1.  MIP scoreboard - Italy 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Labour market and social indicators (continued) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

16 

24 

31 

33 

34 

69 

70 

71 

72 

73 

74 

 
 
 
 
LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

1.4. 

1.5. 

1.6. 

1.7. 

1.8. 

1.9. 

Growth accounting for Italy, by period 

Real GDP and components 

Net capital stock 

Real GDP and domestic demand components at macro-regional level 

GDP deflator growth and contributions 

Real GDP and employment growth 

Employment developments and contributions by age group 

Bank credit to firms by firm size and risk profile 

Italian public finance indicators 

1.10. 

Evolution of Italy’s public debt-to-GDP ratio under different debt sustainability analyses 

3.1. 

3.2. 

3.3. 

Drivers of change in Italy's public debt-to-GDP ratio 

Italy’s export performance, exchange rate and cost competitiveness indicators 

Price competitiveness based on producer prices in manufacturing, 12-month averages 

4.1.1.  Evolution of government real primary expenditure and potential GDP growth 

4.1.2. 

Long-term projections of gross public pensions expenditure 

4.2.1.  Net non-performing debt instruments as % of total own funds for solvency purposes, Q2 

2016 

4.2.2.  Relationship between banks’ loan growth and asset quality 

4.2.3.  Cumulative distribution of the Italian bad-loan stock by loan value and number of 

borrowers, Q3 2016 

4.3.1.  Contribution to annual employment growth by contractual status 

4.3.2.  Public expenditure on labour market policies, 2014 

4.3.3.  Voucher-based workers and average number of paid vouchers per worker, 2008-2015 

4.3.4.  People at risk of poverty or social exclusion by NUTS 2 region, 2015 

4.3.5.  General government nominal expenditure by function, 2007-2014 

4.4.1. 

Investment, current prices 

4.4.2.  Change in investment by type of asset, current prices 

4.4.3. 

Investment by macro-sector, current prices 

4.5.1.  Goods market efficiency, 2016 

4.5.2.  Restrictiveness indicator by profession, 2016 

4.5.3.  Responsiveness of public administration to the needs of SMEs 

4.5.4.  Ease of doing business in 2017 and the number of reforms done in 2010-2016 

4.6.1.  Government effectiveness indicator, 2016 

4.6.2.  Percentage breakdown of the average salary of non-managerial civil servants, 2014 

4.6.3.  Ratio of time-barred criminal cases to total resolved criminal cases per instance 

LIST OF BOXES 

2.1. 

3.1. 

Contribution of the EU budget to structural change in Italy 

Spillovers 

5 

6 

6 

6 

8 

8 

9 

10 

12 

12 

20 

21 

22 

26 

27 

35 

36 

36 

40 

43 

44 

45 

47 

48 

48 

49 

52 

53 

54 

55 

57 

57 

60 

18 

23 

 
 
 
4.1.1.  Distributional effects of a tax shift from labour to consumption 

4.4.1. 

Investment challenges and reforms in Italy 

4.5.1.  Selected highlights: Italy’s Start-up Act & Industry 4.0 strategy 

30 

51 

56 

 
 
 
EXECUTIVE SUMMARY 

This report assesses Italy’s economy in the light of 
the  European  Commission’s  Annual  Growth 
Survey  published  on  16 November 2016.  In  the 
survey,  the  Commission  calls  on  EU  Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy — boosting investment, pursuing structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should 
focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
the 
inclusive  growth.  At 
the 
Commission  published 
the  Alert  Mechanism 
Report (AMR) that initiated the sixth round of the 
macroeconomic  imbalance  procedure.  The  in-
depth  review,  which  the  2017  AMR  concluded 
should  be  undertaken  for  the  Italian  economy,  is 
presented in this report. 

same 

time, 

A  moderate  recovery  continued  in  2016.  Real 
GDP is expected to have grown by 0.9 % in 2016 
after  0.7 %  in  2015  (and  growth  is  set  to  remain 
around 1 % in 2017-2018). However, the projected 
recovery  is  set  to  remain  more  moderate  than  in 
the  euro  area.  Global  demand  dynamics  are 
expected  to  lead  to  stronger  export  growth  albeit 
external  competitiveness  is  not  yet  improving.  In 
the  banking  sector, 
level  of  non-
performing loans compounded by structurally low 
profitability  weakens  banks’  capacity  to  support 
investment  and  economic  recovery.  Headline 
HICP inflation is expected to accelerate to 1.4 % in 
2017  and  1.3 %  in  2018,  from  around  zero  in 
2014-2016, mainly due to higher energy prices. 

the  high 

incentives 

The  labour  market  is  improving  gradually. 
Labour  market  conditions  have  been  improving 
since  2014,  with  headcount  employment  growing 
by  0.8  %  in  2015  and  1.2 %  in  2016,  thanks  to 
labour  market  reforms,  the  abolition  of  regional 
taxes  on  permanent  employment,  and  temporary 
tax 
for  new  permanent  hires. 
Employment  is  expected  to  increase  further  in 
2017-2018, albeit at a more moderate pace. Labour 
market participation is also increasing. The higher 
activity  rate  supports  growth  prospects  in  the 
medium  term,  but  in  the  short  term  it  entails  a 
higher unemployment  rate,  which  is set  to  remain 
above  11 %  in  2017-2018  given  the  modest 
recovery.  

However,  longstanding  structural  weaknesses 
and the legacy of the crisis continue to weigh on 
the  economic  recovery.  Italy’s  real  GDP  growth 

was close to zero over the last 15 years, as against 
average annual growth of around 1.2 % in the rest 
of 
the  euro  area,  as  productivity  dynamics 
diverged.  Due  to  the  crisis,  the  public  debt  ratio 
grew  to  around  133 %  of  GDP  in  2016  from  the 
trough  of  around  100 %  in  2007.  Traditional 
regional divides strengthened while long-term and 
increased  sharply,  with 
youth  unemployment 
possible permanent effects on growth. The at-risk-
of-poverty-or-social-exclusion 
rose,  with 
children  and  people  with  a  migrant  background 
particularly affected. Increasing income inequality 
is above the EU average.  

rate 

2016 

some  progress 

Italy  made 
the 

in 
Overall, 
addressing 
country-specific 
recommendations. Substantial progress was made 
in  reforming  the  budgetary  process  and  ensuring 
that the spending review becomes an integral part 
of it. The reform remains to be fully implemented. 
Some  progress  was  made  to  shift  taxation  away 
from  productive  factors  and  to  implement  civil 
justice  reforms.  In  the  banking  sector,  some 
progress  was  made  with  regard  to  improving 
corporate  governance  and  the  reform  of  the 
insolvency  and  debt  collection  framework.  In  the 
labour  market,  some  progress  was  achieved 
regarding  the  implementation  of  the  reform  of 
active  labour  market  policies  and  a  reform  to 
enhance  anti-poverty  measures  and  rationalise 
social  spending.  The  full  impact  of  these  reforms 
may materialise only over time but early signs are 
reform 
positive.  Despite 
momentum has slowed down since mid-2016 and, 
in  some  key  areas,  reforms  are  still  pending.  In 
particular, 
in 
implementing 
programme, 
reducing  tax  expenditures  in  number  and  scope, 
reforming  the  cadastral  system  and  improving  tax 
limited  progress  was 
compliance.  Similarly, 
achieved 
public 
the 
implementing 
administration  reform,  addressing  non-performing 
loans in the banking sector, facilitating the take-up 
of  work  by  second  earners  and  addressing 
restrictions on competition. No progress was made 
regarding  the  reform  of  the  statute  of  limitations 
and  the  adoption  of  the  2015  annual  competition 
law. 

limited  progress  was  made 
privatisation 

this  progress, 

the 

the 

in 

Regarding progress in reaching the national targets 
under  the  Europe 2020  Strategy,  Italy has already 
achieved  its  targets  related  to  renewable  energy, 
energy  efficiency  and  early  school  leaving,  and 

1 

 
 
Executive summary 

considerably,  in  spite  of  significant  bank-by-
bank  differences.  Following  rapid  growth 
during  the  crisis,  the  sector’s  gross  stock  of 
non-performing  loans  stabilised  only  recently, 
at around EUR 329 billion (16.5 % of customer 
loans).  The  need 
loan-loss 
for 
provisions, low interest rate margins and rather 
high  operation  costs  put  strain  on  banks’ 
profitability  and  ability  to  raise  fresh  capital. 
Therefore,  the  Italian  banking  sector  may  face 
difficulties  in  meeting  any  future  increase  in 
credit  demand.  Financing  conditions  remain 
tight,  particularly  for  small  and  medium-sized 
enterprises and the construction sector.  

further 

  Despite  the  gradual  improvement  of  the 
long-term  and  youth 
labour  market, 
unemployment  remain  high.  The  long-term 
unemployment  rate  was  around  7 %  in  2016. 
The  youth  unemployment  rate  is  around  40 % 
and more than 1.2 million young people are not 
in  education,  employment  or  training.  The 
implementation  of  the  active  labour  market 
policies reform, including the reinforcement of 
public employment services, is still at an early 
stage.  Firm-level  bargaining  is  not  broadly 
used,  hampering  the  efficient  allocation  of 
resources  and  the  responsiveness  of  wages  to 
economic conditions. 

  Given  its  systemic  importance,  the  Italian 
economy is a source of potential spillovers to 
the  rest  of  the  euro  area.  At  the  same  time, 
strong  external  demand  from  euro-area  trade 
partners  and  a  more  supportive 
inflation 
environment are paramount to Italy’s recovery, 
debt-to-GDP  reduction  efforts  and  recovering 
competitiveness.  

Other key economic issues analysed in this report 
that point to particular challenges are as follows: 

  The 

crisis  hit 

investment  dynamics. 
Investment in Italy suffered a sharper fall than 
in most Member States. The decline was broad-
based, but particularly strong in non-residential 
investment  and  services.  The  recovery  of 
investment  is  limited  by  the  current  weak 
demand,  the  general  uncertainty  surrounding 
the  economy,  reduced  profit margins  and  still-
tight  financing  conditions  in  particular  for 
SMEs  and  some  sectors.  A  stronger  recovery, 

appears on track to meet those on greenhouse gas 
emissions.  Some  progress  was  also  made  towards 
achieving the tertiary education target. Conversely, 
progress  is  less  visible  on  the  employment  rate, 
R&D investment and poverty and social exclusion 
targets. 

findings  of 

review 
The  main 
contained  in  this  country  report,  and  the  related 
policy challenges, are as follows:  

in-depth 

the 

  Productivity  growth  remains  weak,  slowing 
the  correction  of  Italy’s  macroeconomic 
imbalances. Some steps were taken to improve 
the  efficient  allocation  of  resources  in  the 
economy. However, productivity developments 
remain  sluggish,  as  total  factor  productivity  is 
stagnant  and  investment  has  not  yet  recovered 
after the sharp fall recorded during the crisis.  

and 

Italy’s 

improved 

  High public debt remains a major source of 
vulnerability for Italy. Public debt is forecast 
to broadly stabilise at around 133 % of GDP in 
2016-2018.  Despite  a  deteriorating  structural 
primary surplus, refinancing risks seem limited 
in the short term thanks to the ECB’s liquidity 
injection 
external 
position.  Medium-term  sustainability  risks  are 
high  as  the  structural  primary  surplus  is 
forecast  at  only  1.3 %  of  GDP  in  2018,  based 
on a no-policy-change assumption. As a result, 
risks  may 
current 
emerge  when 
accommodative  monetary  policy  is  phased  out 
and 
increasing,  unless 
growth-friendly  fiscal  consolidation  measures 
are  adopted  and  bold  structural  reforms  are 
implemented. 

interest  rates  start 

the 

  Despite  recent  gains,  the  competitiveness 
gap  remains.  The  depreciation  of  the  euro 
supported  the  stabilisation  of  Italy’s  export 
performance  in  recent  years,  together  with 
contained increases in producer prices and unit 
labour  costs.  However, 
labour 
productivity and the low-inflation environment 
make  it  more  difficult  to  close  the  cost/price 
competitiveness gap vis-à-vis trade partners, in 
spite of continued wage moderation. 

sluggish 

  Non-performing 

loans  hamper  banks’ 
ability  to  support  investment.  Confidence  in 
the  Italian  banking  sector  as  a  whole  declined 

2 

 
 
Executive summary 

cooperation  between  academia  and  business 
and unfavourable framework conditions. Some 
new  measures  were  introduced  to  strengthen 
Italy’s  innovation  track  record,  notably  the 
‘Industry 4.0’ strategy. 

the 

‘Inclusion 

for  children, 

the  EU  average,  and 

  New social policies have been put forward to 
respond  to  the  rising  poverty  rate.  The  rate 
of people at risk of poverty or social exclusion 
is  well  above 
is 
particularly  high 
temporary 
workers  and 
individuals  with  a  migrant 
background.  To  address  poverty-related  risks, 
the  2016  ‘Support  for  Active  Inclusion’  was 
extended to the whole territory and a draft law 
for 
Income’  scheme  was 
presented  to  Parliament  and  is  to  be  adopted 
and  implemented.  It  is  unclear  whether  the 
financial resources will be sufficient to address 
Italy’s  poverty  challenge.  The  2016  peak 
inflow of  asylum  seekers  is one  of  the highest 
in  Europe  and  creates  considerable  social  and 
budgetary  challenges  for  the  reception  and 
integration  of  those  receiving  protection  and 
for  the  reception  and  return  of  those  not 
receiving  protection,  a  comparatively  large 
share. 

in 

  Barriers  to  competition  remain  significant, 
and 
the  business  environment  remains 
challenging. Significant barriers to competition 
remain 
including 
professional  services,  local  public  services, 
concessions  and  the  transport  sector.  Despite 
progress  achieved 
the 
in 
conditions  for  doing  business  remain  more 
difficult than in peer economies. 

recent  years, 

important 

sectors, 

to  slow  down 

  The public sector is being reformed to tackle 
longstanding  inefficiencies.  The  remaining 
inefficiencies  continue 
the 
implementation  of  reforms,  deter  investment, 
and  create  opportunities  for  rent-seeking.  An 
important reform of the public administration is 
being 
the 
Constitutional  Court  has  recently  declared 
unconstitutional  the  procedure  envisaged  for 
important  implementing  acts  (including  those 
on  human  resources  management,  state-owned 
services). 
local 
enterprises 
Improvements  are  expected  in  the  field  of 
public procurement thanks to the adoption of a 

implemented. 

However, 

public 

and 

in 

investment, 

in  foreign  direct 

including 
is 
hampered  by  structural  weaknesses,  including 
inefficiencies 
the  public  administration, 
justice  system  and  business  environment  and 
the  limited  development  of  capital  markets. 
Most of these barriers are targeted by ongoing 
reforms. 

  The  potential  of  female 

labour  market 
participation  remains  largely  underutilised. 
The  employment  rate  of  women  is  still  13.7 
percentage  points  below  the  EU  average. 
Access  to  affordable  childcare  remains  limited 
with  wide  regional  disparities,  paternity  leave 
is  among 
the 
effectiveness  of  cash  allowances  for  childcare 
tax  system 
has  not  been  assessed.  The 
continues  to  discourage  second  earners  from 
participating in the labour force. 

in  EU  and 

lowest 

the 

  Economic  growth  and 

efficiency  are 
hindered  by  the  tax  system.  Despite  a  recent 
modest reduction, the tax burden on production 
factors  remains  among  the  highest  in  the  EU. 
Low tax compliance and the complex tax code 
increase  the  burden  on  compliant  firms  and 
households,  although  measures  were  taken 
recently  to  tackle  these  problems.  The  long-
awaited  revisions  of  tax  expenditures  and 
cadastral values were further postponed. 

in 

adult 

learning 

  Education  reform  is  ongoing  but  tertiary 
education remains  largely  underfunded  and 
participation 
and 
apprenticeships  is  low.  The  2015  reform,  if 
properly  and  swiftly  implemented,  is  expected 
to  improve  school  outcomes.  In  particular, 
strengthened  apprenticeships  and  work-based 
learning  aim 
labour-market 
raise 
relevance of education. However, participation 
in  adult  learning  remains  a  persistent  concern, 
in particular for those needing it most. In spite 
of recent partial measures, the higher education 
system 
significant 
underinvestment. 

suffers 

from 

the 

to 

  Italy’s  R&D  and  innovation  performance  is 
below  EU  average.  R&D  investment  in  Italy, 
in particular by the private sector, continues to 
be  considerably  lower  than  the  EU  average.  It 
is held back by a range of structural factors like 
limited 
the 

lack  of  high-skilled  people, 

3 

 
 
new  code.  Despite  recent  reforms  of  the  civil 
justice  system,  the  length  of  proceedings  and 
the  very  high  case  backlog  remain  sizeable 
challenges. Corruption is still a major problem, 
and 
the 
fragmented  prevention  framework  continue  to 
hinder its reduction. 

limitations  and 

the  statute  of 

Executive summary 

4 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

in 

by 

2016 

0.9 % 

accommodative  monetary  policy  and  a  more 
accommodative  fiscal  stance.  The  Commission 
forecast  expects  the  Italian  economy  to  have 
(European 
expanded 
Commission,  2017a).  Exports,  which  drove  the 
recovery  in  2014-2015,  slowed  substantially  in 
recent  quarters,  mainly  due 
the  marked 
slowdown in extra-EU trade. Their contribution to 
the  current  recovery  is  thus  more  limited  than  in 
previous  upswings  and  economic  growth  became 
more reliant on domestic demand developments. In 
low  energy  prices  and  sustained 
particular, 
employment  growth  underpin  the  increase  in 
private consumption.  

to 

in  a 

reform 

Looking  ahead,  the  recovery  is  expected  to 
remain modest. The Commission forecast projects 
the recovery to continue at a modest pace in 2017 
and  2018,  underpinned  by  an  accommodative 
monetary  policy  and  a  still-supportive  fiscal 
stance.  However,  following  the  rejection  of  the 
constitutional 
referendum  on 
4 December  2016,  political  uncertainty  remains 
high.  Moreover,  in  a  challenging  context  of  low 
nominal  growth,  low  interest  margins,  regulatory 
changes,  high  non-performing  loan  (NPL)  stocks 
and  structurally  low  profitability  (see  Sections  3 
and 4.2), Italian banks’ credit supply could be held 
back, while credit demand is also still weak. Small 
and medium-sized enterprises (SMEs), which tend 
to  be  more  reliant  on  bank  credit,  might  thus  be 
constrained in expanding their production capacity 
when demand prospects improve. All these aspects 
could  thus  hold  back  a  stronger  recovery  in 
larger  and  healthier 
investment.  Nevertheless, 

Real GDP growth, drivers and risks 

Weak  productivity  dynamics  largely  explain 
slower GDP growth in Italy compared with the 
rest of the euro area. Over the period 2001-2015, 
Italy’s  average  real  GDP  growth  was  zero, 
1.2 percentage points below the average of the rest 
of  the  euro  area.  Low  growth  in  total  factor 
productivity (TFP) compared with euro area peers 
is  the  main  factor  explaining  the  observed  lower 
growth rates (Graph 1.1). Italy’s real GDP growth 
recovered only modestly in 2014 and 2015 (0.1 % 
and 0.7 % respectively), while growth in the rest of 
the  euro  area  was  significantly  more  dynamic 
(1.4 %  and  2.3 %  respectively).  Total  factor 
productivity  growth  turned  slightly  positive  in 
Italy,  possibly 
indicating  a  somewhat  better 
allocation  of  factors  of  production,  though  still 
outpaced  by  the  rest of  the  euro  area. In  addition, 
capital  deepening  developments  were  more 
negative in Italy as the net capital stock contracted 
due to the very low levels of investment. 

The 

lower 

significantly 

Potential  output  growth  turned  negative  after 
2008. 
capital 
accumulation,  higher  unemployment  rates  and 
negative  TFP  trends  contributed  to  the  decline  in 
potential growth (-0.4 % on average in 2009-2016 
the 
from  1.1 % 
Commission  forecast  and  the  commonly  agreed 
methodology).  Potential  growth  is  estimated  to 
turn slightly positive in 2017-2018. 

in  1999-2008;  based  on 

A  tepid  recovery  started  in  2014.  The  gradual 
recovery  of  real  GDP  is  supported  by  the  ECB’s 

Graph 1.1:  Growth accounting for Italy, by period 

Source: European Commission 

5 

-2.0-1.5-1.0-0.50.00.51.01.52.02.5%Average 2001-2007Average 2008-2013Average 2014-2015Average 2001-2015Labour inputLabour productivityItaly-2.0-1.5-1.0-0.50.00.51.01.52.02.5%Average 2001-2007Average 2008-2013Average 2014-2015Average 2001-2015Labour inputLabour productivityRest of the euroarea 
 
 
1. Economic situation and outlook 

firms  have  better  access  to  credit  (see  ‘Financing 
conditions’ in this section). 

especially  for  machinery  and  equipment  that 
undergo  quicker  amortisation  and  obsolescence 
(Graph 1.3). 

Graph 1.2: 

Real GDP and components 

Graph 1.4: 

Real GDP and domestic demand components 
at macro-regional level 

Source: European Commission 

Graph 1.3:  Net capital stock 

Source: Istat 

Investment  dynamics  remain  subdued.  Overall 
sluggish demand, still tight financial conditions, in 
particular  for  small  firms,  and  firms'  reduced 
in 
faster 
a 
profitability  hamper 
investment 
(see  Section  4.4).  The  current 
improvement  in  investment  is  driven  mainly  by 
equipment.  However,  investment  remains  nearly 
30  percentage  points  below  its  pre-crisis  level 
(Graph 1.2) and its growth is still too moderate to 
halt  the  ongoing  depletion  of  the  capital  stock, 

recovery 

6 

Source: Istat 

The  crisis  hit  southern  regions  particularly 
hard  and  regional  disparities  persist  on  many 
fronts.  Between  2007  and  2014,  real  GDP  in 
southern regions fell by 1.9 % on average per year, 
whereas the decline in the centre-north was 1.1 % 
(Graph 1.4). (1)  Investment  in  southern  regions 
dropped by more than 6.5 % per year and in 2014 
its  level  was  around  38 %  lower  than  in  2007  (as 
compared with -27 % in the centre-north). In 2015, 
the  recovery  in  real  GDP  was  slightly  more 
dynamic  in  southern  regions  than  in  the  centre-
(+1.1 %  as  against  +0.6 %),  despite 
north 
less.  The 
household  consumption 
tightening  of  financing  conditions  particularly 
affected  firms  in  the  south,  leading  to  a  more 
significant  deterioration  of  loan  quality.  In  Q2 
2016,  around  40 %  of  loans  to  firms  in  the  south 
were non-performing, compared to less than 30 % 
in  the  centre-north.  In  2015,  compensation  per 
employee  in  the  south  was  18 percentage  points 
lower  than  in  the  centre-north,  but  the  gap  in 
labour  productivity  is  even  larger  (23  percentage 
points).  This  reflects  a  long-term  misalignment 
between  wage  and  productivity  dynamics  in  the 

increasing 

(1)  The  higher  reliance  of  southern  regions'  economies  on 
public  expenditure  persists.  For  instance,  in  2014  public 
consumption  amounted  to  around  32 %  of  GDP  in  the 
south as against 17 % in the centre-north. 

65707580859095100105110070809101112131415162007 = 100GDPGovernment consumptionPrivate consumptionInvestmentExportsImports909510010511011512012513095979901030507091113151999 = 100TotalDwellingsOther buildings and structuresMachinery and equipment60657075808590951001050708091011121314152007 = 100Real GDP (Centre-North)Real GDP (South)Household consumption (Centre-North)Household consumption (South)Gross fixed capital formation (Centre-North)Gross fixed capital formation (South)Government consumption (Centre-North)Government consumption (South) 
 
 
 
 
                                                           
south  compared  to  the  centre-north  (European 
Commission,  2015a,  p.  75).  GDP-per-capita 
divergences  are  substantial  due  to  lower  labour 
market participation and the higher unemployment 
rate in the south (see ‘Labour market situation’ in 
this  section).  These  developments  point  to  a  lack 
of  resilience  and  adjustment  capacity,  particularly 
in southern regions. 

Price and wage developments* (2) 

Wage dynamics remain moderate. After slightly 
exceeding  1 %  per  year  in  2014  and  2015, 
contractual  wage  growth  slowed  in  2016  (to 
around  0.5 %).  Wages  in  the  public  sector  have 
been  frozen  since  2011,  but  will  increase  slightly 
in  2017  following  an  agreement  between  the 
government  and  the  unions.  In  the  private  sector, 
wage  developments  are  expected 
to  remain 
moderate  in  2017  and  2018  following  recent 
agreements  in  the  metal  and  other  sectors.  These 
agreements  provide  for  minor  wage  increases,  de 
facto  discounting  the  previous  bargaining  rounds 
which  were  based  on  excessively  high  inflation 
benchmarks.  Actual  wage  developments  continue 
to  display  a  negative  drift  compared  with 
contractual  wage  agreements,  as 
the  use  of 
overtime  and  bonuses  continue  to  be  rather 
limited. (3) Furthermore, the tax incentives for new 
permanent  hires  in  2015  and  2016  curbed  social 
contributions  and  thus  overall  compensation  per 
hour worked (-0.4 % year-on-year in the first three 
quarters of 2016). 

Unit  labour  cost  dynamics  slowed  significantly 
in  recent  years  despite  negative 
labour 
productivity  growth.  Since  2010,  nominal  unit 
labour  costs  have  slowed  down  in  Italy  and  in 
2014-2016  they  increased  by  less  than  0.4 %  per 
year  on  average  (as  compared  to  2.3 %  in  1999-
2013).  These  developments  helped  to  reduce 
slightly  the  cost  competitiveness  problem  of  the 
Italian  economy  in  recent  years.  In  particular,  the 
increase  in  compensation  per  hour  worked  is 
estimated  to  have  fallen  to  only  0.2 %  per  year 
(from  2.6 %  in  1999-2013)  thanks  to  moderate 
wage developments  after  the  double-dip recession 
and 3-year tax incentives for new permanent hires 

(2)  An  asterisk  indicates  that  the  analysis  in  the  section 

contributes to the in-depth review under the MIP. 

(3)  Actual  hourly  wages  increased  by  around  0.5 %  in  2014-
2015 and only 0.1 % in the first three quarters of 2016. 

1. Economic situation and outlook 

to  historically 

in  2015  and  2016.  However,  labour  productivity 
was  negative  also  due 
low 
investment  levels,  which  turned  capital  deepening 
negative  (see  Section 4.4).  On  top  of  persistently 
sluggish  productivity,  the  adjustment  process  of 
the  Italian  economy  is  hindered  by  the  low 
inflation  environment,  which  makes 
it  more 
difficult to recover cost and price competitiveness 
vis-à-vis  trade  partners.  In  the  euro  area  in 
particular,  nominal  unit  labour  costs  rose  by  only 
0.6 %  per  year  in  2014-2016  (as  against  1.6 %  in 
1999-2013),  as  after  the  crisis  the  slowdown  in 
labour  productivity  was  more  than  offset  by  the 
marked  slowdown  in  compensation  per  hour 
worked  (to  around  1 %  per  year,  from  2.7 %  in 
1999-2013). 

in  2015 

and  +0.2 % 

Moderate  unit  labour  costs  developments  and 
sluggish demand point to subdued core inflation 
and  GDP  deflator  growth.  In  2016,  headline 
HICP (4)  inflation  was  close  to  zero  for  the  third 
year  in  a  row  (i.e.  -0.1 %  in  2016,  following 
+0.1 % 
and  2014 
respectively). HICP  core  inflation  (i.e.  excluding 
energy  and  unprocessed  food)  remained  slightly 
positive (+0.5 % in 2016, following +0.7 % in both 
2014 and 2015). Higher energy prices are expected 
to lead to higher HICP inflation in 2017 and 2018 
1.4 %  and  1.3 %  respectively  in  the  Commission 
forecast,  whereas  core  inflation  is  set  to  stay  at 
around  1 %  on  average).  The  GDP  deflator (5) 
showed a marked slowdown since 2010, driven by 
moderate  increases  in  nominal  unit  labour  costs 
(0.5 %  on  average  in  2010-2015)  and  lower  firm 
profit margins following the crisis (Graph 1.5) due 
to the overall sluggish demand. In 2016-2018, the 
Commission forecast projects the GDP deflator to 
average around 1 % thanks to still-slow unit labour 
costs  developments  (0.7 %  on  average)  and  lower 
taxes  on  production,  while  firms  restore  profit 
margins. (6) 

(4)  Harmonised Index of Consumer Prices 
(5)  The  GDP  deflator  only  includes  prices  of  goods  and 

services produced in the country. 

(6)  In 2010-2015, the increasing impact on the GDP deflator of 
higher  taxes  on  production  was  due  mainly  to  higher 
property  taxes.  The  decreasing  impact  of  lower  taxes  on 
production  expected  in  2016-2018  is  explained  mainly  by 
the  reduction  in  labour  costs  through  the  exemption  of 
permanent  employment  costs  from  the  tax  base  of  the 
regional tax on economic activities (IRAP). 

7 

 
                                                           
                                                           
1. Economic situation and outlook 

Graph 1.5:  GDP deflator growth and contributions 

as  factors  of  production.  On  the  one  hand,  recent 
labour  market  reforms,  wage  moderation  and  the 
reduced  tax  wedge  facilitated  the  use  of  labour, 
while on the other hand, tight financing conditions 
may have delayed gross fixed capital formation. 

Graph 1.6: 

Real GDP and employment growth 

Notes: The contribution of unit labour costs includes imputed 
compensations of self-employed. Taxes on production and 
products are net of subsidies 
Source: European Commission 

Labour market situation* 

improving, 
Labour  market  conditions  are 
supported  by  reforms  and  the  reduction  in  the 
labour tax wedge. Employment growth started to 
recover  in  2014  when  the  economy  was  still 
stagnating,  and  this  trend  continued  in  2015  and 
2016.  The  number  of  employed  people  in  the 
fourth  quarter  of  2016  was  over  620 000  higher 
than  the  trough  in  the  third  quarter  of  2013.  The 
number  of  employees  increased  even  more,  by 
around 680 000, of which 405 000 had permanent 
contracts. 
the  use  of  Cassa 
Integrazione  Guadagni  schemes  notably  fell  by 
around  64.5  %  in  three  years.  The  number  of 
worked hours peaked at more than 10.7 million in 
the  third  quarter  of  2016,  the  highest  value  since 
the second quarter of 2012. 

In  addition, 

Employment  growth  has  slightly  outpaced  real 
in  recent  years.  The  higher 
GDP  growth 
elasticity  of  employment 
to  GDP  could  be 
explained  by  tax  incentives  and  other  factors.  In 
particular, following the crisis, when hours worked 
fell more than headcount employment (Graph 1.6), 
the  share  of  part-time  employment  (including 
involuntary)  has  increased.  These  developments 
have  yet  to  be  reversed,  so  hours  worked  per 
employed person, while recovering, are still below 
the pre-crisis level. Furthermore, there might have 
been some substitution between labour and capital 

Source: European Commission 

Employment  is  increasing  in  private  services, 
manufacturing and agriculture. Since mid-2014, 
employment  has  increased  in  private  services  and 
agriculture,  while  the  recovery  in  manufacturing 
started  mid-2015.  In  contrast,  the  construction 
sector still experiences large negative employment 
readings  as  the  adjustment  to  lower  production 
levels  is  still  ongoing.  Finally,  after  declining  by 
almost  9 %  over  2007-2015,  public  sector 
employment  has  broadly  stabilised.  In  the  first 
three  quarters  of  2016,  overall  employment  (in 
the  national  accounts 
persons,  according 
definition)  rose  by  1.3 %  year-on-year,  with  the 
positive  contributions  coming 
from  private 
services  (+2.4 %),  manufacturing  (+1.3 %)  and 
same  period, 
In 
agriculture 
employment  in  construction  continued  to  fall 
significantly (-4.5 %), while it declined marginally 
in  public  services  (-0.1 %).  Furthermore,  also 
linked  to  the  labour  market  reforms,  employment 
increased only for employees (+2.0 %), while self-
employment continued to shrink (-0.5 %). 

(+4.2 %). 

the 

to 

Employment is improving in all age groups. The 
large  fall  in  employment  observed  during  the 
double-dip  recession  was  particularly  marked  for 
the  younger  cohorts  (Graph 1.7).  In  contrast,  the 

8 

-0.50.00.51.01.52.02.599-0910-1516-18fAverage year-on-year % change, percentage pointsNet taxes on productsNet taxes on productionProfit marginsUnit labour costsGDP deflatorCore inflationforecast-7.5-6.0-4.5-3.0-1.50.01.53.0080910111213141516Year-on-year  % changeReal GDPEmployment (hours)Employment (persons) 
 
 
1. Economic situation and outlook 

Social situation: poverty and inequality  

The  share  of  the  population  at-risk-of-poverty-
or-social-exclusion  (AROPE)  stabilised  close  to 
29 % in 2015, one of the highest rates in the EU. 
Children are particularly affected, with an AROPE 
rate of around 33.5 %, as against 26.5 % in the EU 
as  a  whole.  Poverty  rates  are  also  much  higher 
among  people  with  a  migrant  background  than 
among  the  native-born  (around  48 %  as  against 
26 %).  In  addition,  there  are  substantial  regional 
disparities,  with  very  large  differences  in  AROPE 
rates  between  northern  and  southern  regions.  In-
work  poverty  is  also  high,  exacerbated  by  a  still 
highly segmented labour market (see Section 4.3). 

Income inequality had been growing since 2008 
and  stabilised  slightly  above  the  EU  average. 
Based  on  2015  data,  the  ratio  of  total  income 
received  by  the  richest  20 %  to  total  income 
received by the poorest 20 % was 5.8 (EU average: 
5.2).  The  ratio  grew  by  12 %  from  2008  to  2015. 
This negative development is more related to slow 
income  growth  among  poorer  households  than  to 
fast  growth  among  wealthier  ones. (8)  The  large 
the 
share  of  pension  expenditure  hampers 
effectiveness  of  social 
in  reducing 
inequalities.  However,  when  including  taxation, 
the  overall  impact  of  public  intervention  to  curb 
inequalities  remains  close  to  the  EU  average. 
Moreover,  the  fragmentation  of  the  system  makes 
it  more  difficult  to  arrive  at  a  comprehensive 
assessment  of  the  impact  of  taxes  and  benefits 
(European  Commission,  2016a;  Figari  and  Fiorio, 
2015). 

transfers 

Inequality  based  on  the  distribution  of  net 
wealth (9) is within the range observed in other 
EU  countries  for  which  data  were  collected  in 
2013-2014  (ECB  2016).  Nevertheless  average  net 
wealth  per  household  fell  in  Italy  between  2010 
and  2014  (to  EUR 226 000  from  EUR 275 000), 
mainly due to the fall in house prices. 

The  inflow  of  people  entering  the  country  as 
irregular  migrants,  including  people  seeking 
asylum,  accelerated.  In  2016,  around  181 000 

(8)  Standing  at  0.86  on  the  basis  of  2015  data,  the  ‘S90/S50’ 
indicator, which picks up inequality at the higher end of the 
income  distribution,  was  only  slightly  higher  than  the  EU 
average,  while  the  ‘S50/S10’  indicator,  which  picks  up 
inequality  at  the  bottom  end,  stood  at  13.33  (the  fourth 
highest in the EU). 

(9)  Difference between total assets and total liabilities. 

long-term  trend  of  rising  employment  for  people 
aged  over  55  continued  during  the  crisis,  also 
thanks  to  reforms  needed  to  keep  the  public 
pension system sustainable (see Section 4.1). Total 
employment  growth  turned  positive  in  the  second 
half of 2014, and since mid-2015 employment has 
grown  in  all  age  groups.  However,  the  current 
economic recovery is not strong enough to allow a 
swift  absorption  of  the  sizeable  unemployment  of 
young people. This might have permanent negative 
effects on Italy's growth prospects (see Section 3). 

Graph 1.7: 

Employment developments and contributions 
by age group 

Source: European Commission 

the 

(i.e. 

in  2014, 

than  12.5 % 

the  activity 
rate 

in 
The  unemployment  rate  remains  high, 
particular  in  southern  regions.  After  peaking  at 
more 
Italian 
unemployment  rate  averaged  11.7 %  in  2016,  as 
higher  employment  is  matched  by  higher  labour 
rate 
market  participation 
increased).  The  unemployment 
remains 
particularly  high  in  the  south,  where  it  stood  at 
around  19 %  in  Q3  2016  (as  against  just  above 
7.5 %  and  10.5 %  in  northern  and  central  regions 
respectively). (7)  The  Commission 
forecast 
projects  a  mild  decline  in  the  unemployment  rate 
in  2017  and  2018  due 
in 
employment growth as the impact of tax incentives 
fades  out,  while  labour  market  participation  (i.e. 
the activity rate) is expected to increase further. 

to  a  slowdown 

(7)  Furthermore,  in  the  third  quarter  of 2016,  the  activity  rate 
of the population aged 15-64 was around 54 % in the south 
as  against  more  than  70 %  in  the  centre-north  (41 %  and 
62 % respectively for women). 

9 

-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.008Q208Q409Q209Q410Q210Q411Q211Q412Q212Q413Q213Q414Q214Q415Q215Q416Q2Year-on-year % change in Q4 moving average, percentage pointsAged 15-24Aged 25-34Aged 35-54Aged > 55Total 
 
                                                           
                                                           
1. Economic situation and outlook 

irregular  migrants  were  detected  on  the  Central 
Mediterranean route, an all-time high and nearly a 
fifth  more  than  in  the  same  period  of  2015.  In 
2016,  about  123  000  asylum  applications  were 
recorded in Italy, an increase by 47% compared to 
2015. According to available estimates, a relatively 
large  share  of  the  inflow  is  from  countries  with 
relatively low asylum recognition rates. The inflow 
is  among  the  highest  in  the  EU  in  absolute  terms 
and  creates  marked  budgetary  and 
social 
challenges  for  the  reception  and  integration  of 
those receiving international protection.  

Financing conditions* 

The  significant  decrease  in  the  nominal  cost  of 
lending  is  not  accompanied  by  a  recovery  of 
bank  credit.  Driven  by  the  ECB’s  expansionary 
monetary policy, which led to a strong decrease in 
nominal  interest  rates,  rates  for  new  loans  to 
households  for  house  purchase  and  to  firms 
reached historically  low  levels  in November  2016 
(2.05 % and 1.56 % respectively). However, so far 
there  is  no  broad-based  recovery  of  the  stock  of 
bank  credit.  While  lending  to  households  has 
increased  by  around  1.5 %  year-on-year  in  recent 
months, corporate lending is not recovering yet.  

The  deterioration  in  asset  quality  has  led  to 
more conservative stance towards new lending, 
especially  for  small  firms.  The  weak  lending  to 
firms  appears  to  be  driven  by  both  demand  and 
supply factors. Survey data suggest that low credit 
demand  is  mainly  explained  by  the  tepid  and 
uncertain  economic  outlook.  However,  other 
factors  contribute  to  this  trend,  i.e.  large  firms’ 
increased  self-financing  capacity,  higher  profit 
margins  and  higher  reliance  on  capital  market 
funding  (supported  by  regulatory  incentives  and 
the  ECB’s  Corporate  Sector  Purchase  Programme 
as  of  June  2016),  as  well  as 
remaining 
deleveraging needs in the corporate sector. On the 
credit  supply  side,  banks’  large  stock  of  non-
performing  loans  (see  Sections  3  and  4.2)  may 
inter  alia  have  led  to  more  conservative  lending 
standards for corporates. This has mainly weighed 
on  the  growth  of  bank  credit  to  vulnerable  and 
risky firms – especially when they are small – but 
also 
low-risk  ones 
(Graph  1.8).    Creditworthy  medium-sized  and 
large  firms  however  –  often  active  internationally 
–  are  able 
increased  price 
competition  between  banks,  contributing  to  the 

to  benefit  from 

to  micro-firms, 

including 

compression of banks’ net interest margins. While 
prudent  lending  policies  may  limit  the  emergence 
of  new  problem  loans  in  the  future,  they  could 
become  a  drag  on  Italy’s  economic  recovery, 
especially  when  credit  demand  picks  up. 
Meanwhile,  alternative  non-bank  funding  options 
remain 
Italy 
(European Commission, 2016b). 

underdeveloped 

relatively 

in 

Graph 1.8: 

Bank credit to firms by firm size and risk profile 

Notes: * refers to the period June 2015 - June 2016 
(preliminary data for June 2016). A firm's risk profile is based 
on its estimated one-year probability of default according 
to several balance-sheet indicators. The sample consists of 
ca. 400 000 firms. 
Source: Bank of Italy 

External position* 

Italy's  current  account  surplus  is  approaching 
3 %  of  GDP.  An  improved  export  performance 
coupled with slow nominal import dynamics led to 
a  steady  increase  in  the  current  account  balance. 
Starting  from  a  deficit  position  of  -3.4 %  of  GDP 
in  2010,  the  current  account  turned  positive  in 
2013  and  reached  a  surplus  position  of  2.7 %  of 
GDP in the 12-month period up to November, i.e. 
an  increase  of  more  than  6 percentage  points  of 
GDP.  The  trade  balance  surplus  rose  to  3.5 %  of 
GDP  (from  -1.9 %  in  2010),  owing  to  lower  oil 
prices but also the sharp fall in domestic demand, 
especially  investment  (see  Section  4.4).  Increases 
were also recorded in the primary income balance, 
which  recently  turned  marginally  positive,  inter 
alia thanks to lower interest rates paid on domestic 
debt held by foreign investors. 

10 

-10-5051015141516*141516*141516*Sound firmsVulnerable firmsRisky firmsy-o-y % changeMicro firmsSmall firmsMedium-sized firmsLarge firms 
 
1. Economic situation and outlook 

the ECB's accommodative monetary policy stance, 
interest  expenditure  declined  steadily  (from  the 
recent  peak  of  5.2 %  of  GDP  in  2012  to  3.9 %  in 
2016).  At  the  same  time,  the  primary  surplus  fell 
from 2.3 % of GDP in 2012 to 1.6 % in 2014 and 
has  broadly  stabilised  since  then,  despite  better 
cyclical  conditions.  As  a  result,  the  structural 
primary  balance  is  estimated  to  have  worsened 
significantly (from 3.9 % of GDP in 2013 to 2.3 % 
in 2016), while the structural balance is estimated 
to  have  deteriorated  by  0.7  percentage  points  of 
GDP in 2016 compared to 2015. The Commission 
forecast  projects  that  the  fiscal  stance  would  be 
relaxed further in 2017 as the primary balance and 
the  headline  deficit  are  set  to  worsen  slightly  in 
spite  of  real  GDP  growth  of  0.9 %  (as  against 
potential growth estimated at 0.1 %). In 2017, the 
deficit  will  be  affected  by  the  impact  of  recent 
earthquakes. 
and 
reconstruction  measures  for  new  earthquakes  will 
add  up  to  those  already  earmarked  for  previous 
(2009)  and  Emilia 
earthquakes 
Romagna 
the 
in  2017 
Commission will consider eligible for the ‘unusual 
event clause’ the 0.18 % of GDP earmarked by the 
government for its ‘preventive investment plan for 
the  protection  of  the  national  territory  against 
seismic risks’. 

(2012).  Moreover, 

in  Abruzzi 

emergency 

One-off 

Gross  public  debt  as  a  share  of  GDP  is 
stabilising at a very high level. The public debt-
to-GDP  ratio  is  expected  to  have  increased  to 
132.8 %  in  2016.  Privatisation  proceeds,  at  less 
than 0.1% of GDP, fell short of the 0.5 % planned 
by the government a year before and the Treasury 
increased  its  liquidity  buffer.  In  2017,  the  debt  is 
expected to be slightly higher than in 2016, partly 
for 
due 
which EUR 20 billion (or 1.2 % of GDP) has been 
earmarked (see Section 4.2). 

the  banking  sector 

to  support 

to 

From  a  savings-investment  perspective,  the 
current account  surplus  reflects  a  deleveraging 
process.  Between  2010  and  2016,  gross  capital 
formation as a share of GDP fell by 3.8 percentage 
points,  while  savings  increased  by  2.4 percentage 
points. The position of the corporate sector turned 
from  net  borrower  of  into  net  lender  to  the 
economy,  as  firms’  savings  have  increased  by 
around  1.5 percentage  points  of  GDP  since  2010, 
while  their  investment  fell  by  1.4  percentage 
investment 
points.  Furthermore, 
accounted 
the 
household sectors fell (by -0.7 and -1.7 percentage 
points of GDP respectively), while the government 
sector also increased its savings (by 1.2 percentage 
points of GDP). 

the  government  and 

the  share  of 

for  by 

Estimates  of  the  cyclically  adjusted  current 
account balance show a surplus in the order of 
2.5 % of GDP in 2016. (10) By contrast, a current-
account  deficit of  around 0.5 %  of  GDP  might be 
international 
sufficient 
investment  position  over 
the  next  10  years 
(assuming zero valuation effects). 

to  stabilise  Italy's  net 

Italy's  net  international  investment  position 
remains  slightly  negative.  Over  the  last  two 
years, Italy’s negative net financial position vis-à-
vis the rest of the world oscillated around -20 % of 
GDP  (European  Commission  2015a;  European 
Commission, 2016b). Direct investment and equity 
portfolio  investment  both  display  a  positive  net 
position  (around  +7 %  and  +28 %  of  GDP 
respectively  at  the  end  of  Q2  2016).  In  contrast, 
the  net  position  in  debt  securities  is  significantly 
negative  (around  -37.5 %  of GDP),  mainly due  to 
foreign  investors'  exposure  to  Italian  sovereign 
debt. Finally, the Bank of Italy has a net negative 
financial  position  towards  the  Eurosystem  (see 
Section 3).  

Public finances: public deficit and debt* 

The  headline  government  deficit  broadly 
stabilised  thanks  to  lower  interest  expenditure 
and  improving  cyclical  conditions.  Since  2012 
the government deficit has been slightly below 3 % 
of GDP and is estimated to have declined to 2.3 % 
in 2016 after 2.6 % in 2015 (Graph 1.9). Thanks to 

(10)  For  the  methodology  to  eliminate  the  cyclical  component 
from  the  current  account  balance,  see  Salto  and  Turrini, 
2010. 

11 

 
                                                           
1. Economic situation and outlook 

growth-rate  differential  assumption, 
the  DSA 
shows  that  a  primary  surplus  gradually  increasing 
to  2.4 %  of  GDP  (i.e.  the  average  recorded  in  the 
pre-crisis period) would lead to an only moderately 
declining debt-to-GDP ratio over 10 years. (11) By 
contrast, gradually going back to a primary surplus 
in  the  order  of  4 %  of  GDP  would  allow  putting 
the debt ratio on a more ambitious declining path. 
A  reinforced  sensitivity  analysis,  based  on  a 
stochastic DSA exercise (Berti, 2013) where over a 
period of five years (2017-2021) (random) shocks 
are  applied  to  the  primary  balance,  interest  rates 
and  GDP  growth  based  on  historical  behaviour, 
shows  that  Italy's  public  debt  ratio  could  increase 
further  in  the  medium  term  if  the  fiscal  position 
(i.e. the projected structural primary surplus) is not 
strengthened (Graph 1.10, right-hand side). 

Graph 1.9: 

Italian public finance indicators 

Source: European Commission 

(11)  In  the  rest  of  the  euro  area,  the  interest-rate-growth-rate 
differential was around 0.5 percentage points in 1999-2007. 

Debt sustainability analyses (DSAs) point to the 
risk of still very high debt in the medium term. 
A simple (deterministic) DSA exercise run over 10 
years (Graph 1.10, left-hand side) shows that if the 
1.3 %  of  GDP  structural  primary  surplus  forecast 
for  2018  were  kept  constant  and  the  interest-rate-
growth-rate  differential  gradually 
converged 
towards  the  pre-crisis  (1999-2007)  average  of 
1.2 percentage  points  (from  the  0.6  percentage 
point  trough  forecast  in  2018),  the  debt-to-GDP 
ratio  would  remain  above  130 %  of  GDP  in  the 
interest-rate-
medium 
Graph 1.10:  Evolution of Italy’s public debt-to-GDP ratio under different debt sustainability analyses 

term.  Under 

the  same 

Notes: The left-hand side panel shows the results of a 10-year deterministic DSA starting from 2019 (‘PB’ = primary balance; 
‘r*-g*’ = interest-rate-growth-rate differential). The right-hand side panel shows the results of a 5-year stochastic DSA starting 
from 2017. The ‘p10_p90’ cone covers 80 % of all possible debt paths obtained by simulating random shocks. The lower and 
upper lines delimiting the cone represent the 10th and the 90th distribution percentiles respectively, thus excluding from the 
shaded area simulated debt paths that result from more extreme shocks, or ‘tail events’ (20 % of the whole). For more details: 
European Commission, 2016c; Berti, 2013. 
Source: European Commission 

12 

9095100105110115120125130135-6.0-4.5-3.0-1.50.01.53.04.56.099010305070911131517f% of GDP% of GDPGross public debt (rhs)Budget balance (lhs)Primary balance (lhs)Interest expenditure (lhs)forecast110115120125130135140145141516171819202122232425262728% of GDPPB = 1.3% of GDP; r*-g* = 1.2 pps. by 2028PB = 2.4% of GDP by 2020; r*-g* = 1.2 pps. by 2028PB = 4.0% of GDP by 2023; r*-g* = 1.2 pps. by 2028Scenarios:1101151201251301351401451415161718192021% of GDPp10 - p20p20 - p40p40 - p60p60 - p80p80 - p90p50 (median)Distribution percentileranges: 
 
 
                                                           
 
Table 1.1: 

Key economic, financial and social indicators for Italy 

(1) Sum of portfolio debt instruments, other investment and reserve assets 
(2, 3) Domestic banking groups and stand-alone banks 
(4) Domestic banking groups and stand-alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and 
non-EU) controlled branches 
(*) Indicates BPM5 and/or ESA95 
Source: European Commission, ECB 

13 

 
 
 
 
 
 
2. Progress with country-specific recommendations 

2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

implementation  of 

Progress  with 
the 
recommendations addressed to Italy in 2016 (12)   
has  to  be  seen  in  a  longer  term  perspective, 
since the introduction of the European Semester 
in 2011.  

In  the  area  of  public  finances,  restraints  on 
healthcare  spending  and  the  public  wage  bill 
introduced  since  2011  have  helped  to  contain 
public  expenditure  over  time.  In  2012,  a  pension 
reform,  now  partly  reverted  (see  Section  4.1), 
helped  to  improve  long-term  debt  sustainability, 
while maintaining the adequacy of pensions. Some 
privatisations  contributed  to  a  slight  reduction  of 
public debt. Important taxation reforms have been 
taken  since 2011,  albeit sometimes  inconsistently. 
For  instance,  the  tax  on  immovable  property  was 
increased  in  2011,  but  partly  repealed  in  2015. 
Measures to reduce the tax burden on labour were 
taken in 2014 and 2015, partly financed by shifting 
taxation  to  consumption.  In  2014,  important  tax 
simplification measures were undertaken. 

to 

In  civil  justice,  a  major  reorganisation  of  civil 
in  2013,  and  several 
courts  was  completed 
measures  were 
reform  civil 
introduced 
procedures, strengthen out-of-court settlement and 
reduce  abusive  litigation.  A  comprehensive  anti-
corruption law was adopted in 2012 to step up the 
fight  against  corruption.  The  law  established  an 
anticorruption  agency,  which  was  reinforced  in 
2014, but still  lacks adequate resources. A crucial 
reform  of  the  statute  of  limitations  has  been 
repeatedly  delayed.  In  public  administration, 
measures  to  improve  staff  mobility  and  promote 
digital technology were introduced in 2014. 

several 

the  banking 

corporate 
sector, 
In 
governance reforms have been adopted since early 
2015  and  are  now  implemented.  Measures  were 
also taken to help banks dispose of their impaired 
loans. These measures (e.g. a more favourable tax 
treatment of loan loss provisioning, insolvency and 
collateral  enforcement  reforms  and  an  impaired 
loan  securitisation  mechanism  benefitting  from 
state guarantees) are aimed mainly at supporting  

(12)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular Section 4. 

the development of a private secondary market for 
distressed  assets  in  Italy.  Finally,  since  2012,  the 
authorities  have  passed  several  measures 
to 
support  and  diversify  firms’  access  to  finance, 
notably through an allowance for corporate equity 
(now  partially  reversed),  mini-bonds  and  the 
central  guarantee  fund  for  small-  and  medium-
sized enterprises. 

A wide-ranging reform of the labour market (‘Jobs 
Act’)  was  initiated  at  the  end  of  2014.  Inter  alia, 
the  reform  reduced  the  cost  and  the  uncertainty 
related  to  individual  dismissals  and  rationalised 
contractual  forms  and  passive  policies.  It  also 
foresaw a reform of active labour market policies, 
which is now being implemented. The 2014 reform 
built on and followed the lines of a previous labour 
market reform undertaken in 2012. A reform of the 
collective  bargaining  framework  has  long  been 
discussed,  and  social  partners  signed  important 
agreements  on  the  representativeness  of  trade 
unions  in  2014.  However,  progress  has  been 
limited 
to  date,  while  new  sector-by-sector 
agreements  are  being  reached.  The  2012  pension 
reform increased the labour market participation of 
the elderly. However, the recent backtracking on it 
reinforces  the  unbalanced  composition  of  social 
expenditure  in  favour  of  pensions  (see  Section 
reform  was 
important  education 
4.3.2).  An 
undertaken  in  2015  (‘La  Buona  Scuola’)  and  is 
now  being  implemented.  To  alleviate  poverty 
risks,  several  experimental  measures  have  been 
introduced since 2012. 

In-depth  market  opening  measures  for  regulated 
professions and some measures for the retail sector 
were  introduced  in  2012.  Since  2011,  several 
the 
packages  have  been  adopted 
administrative burden for companies and citizens.  

to  reduce 

Italy  made 
the 

Overall, 
in 
country-specific 
addressing 
2016 
recommendations. (13)  Substantial  progress  was 
made  in  reforming  the  budgetary  process.  Some 

some  progress 

(13)  Information on the progress and action take to address the 
policy  advice  in  each  respective  subpart  of  a  country-
specific recommendation is presented in the overview table 
in  Annex  A.  This  overall  assessment  does  not  include  an 
assessment of Stability and Growth Pact compliance. 

14 

 
 
                                                           
 
                                                           
2. Progress with country-specific recommendations 

progress  was  made  with  regard  to  civil  justice, 
labour market and the banking sector. Conversely, 
progress was limited on taxation, competition and 
public  administration,  and  no  progress  was  made 
in reforming the statute of limitations.  

15 

 
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2016 CSR assessment 

(Continued on the next page) 

16 

Italy  Overall assessment of progress with 2016 CSRs: Some progress CSR 1: 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 0.6 % or more of GDP towards the medium-term budgetary objective in 2017. Finalise the reform of the budgetary process in the course of 2016 and ensure that the spending review is an integral part of it. Ensure the timely 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. (MIP relevant)  Some progress   Substantial progress in reforming the budgetary process and ensuring that the spending review becomes an integral part of it  Limited progress in implementing the privatisation programme  Some progress in shifting taxation away from productive factors  Limited progress in revising tax expenditure and in reforming the cadastral system  Limited progress in improving tax compliance  CSR 2: Implement the reform of the public administration by adopting and implementing all necessary legislative decrees, in particular those reforming publicly-owned enterprises, local public services and the management of human resources. Step up the fight against corruption including 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.  (MIP relevant)  Limited progress  Limited progress in implementing the public administration reform  No progress in revising the statute of limitations  Some progress in enforcing civil justice reforms, although the length of proceeding is not decreasing CSR 3: 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.  (MIP relevant)  Some progress  Limited progress in addressing non-performing loans  Some progress in improving the framework for insolvency and debt collection  Some progress in implementing corporate governance reforms   
 
 
 
 
2. Progress with country-specific recommendations 

Table (continued) 

Source:  European Commission 

17 

CSR 4: 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. (MIP relevant)   Some progress  Some progress in implementing the reform of active labour market policies   Limited progress in facilitating the take-up of work by second earners  Some progress with regard to the national antipoverty strategy CSR 5: 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. (MIP relevant)  Limited progress  No progress with regard to the annual competition law   Limited progress in addressing further restrictions to competition   
 
 
 
 
2. Progress with country-specific recommendations 

18 

Box 2.1: Contribution of the EU budget to structural change in ItalyItaly is the second beneficiary of the European Structural and Investment Funds (ESIF) and will receive up to EUR 42.7 billion by 2020. This is equivalent to around 0.4 % of GDP annually (over 2014-2017) and 10 % of public investment (1). Of the EU financing, EUR 1 860 million is planned to be delivered via financial instruments. By 31 December 2016, an estimated EUR 10.8 billion, which represents about 25 % of the total allocation for ESI Funds, have already been allocated to concrete projects.  Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end-2016, Italy signed agreements for EUR 1.3 billion for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 4.3 billion, which is expected to trigger nearly EUR 28.7 billion in total investments (as of end-2016). ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionalities (2) and targeted investment. Examples include the adoption of the first national broadband and Digital Agenda strategies and the implementation of a national strategic policy framework for poverty reduction. An important contribution was also made on State aid and public procurement by addressing the deficiencies in the cross-regional application of EU State aid rules and by overcoming the difficulties in the transposition of the public procurement acquis. These reforms have prepared the ground for better implementation of public investment projects in general, including those financed from national sources and from the other EU instruments. The fulfilment of ex-ante conditionalities is on track. In addition to that, administrative reforms support is available through targeted financing under the European Social Fund, advice from the Structural Reform Support Service and, indirectly, through technical assistance. The relevant country-specific recommendations (CSRs) focusing on structural issues were taken into account when designing the 2014-2020 programmes. These included: improving the business environment, particularly by contributing to the acceleration of the implementation of the Small Business Act and the facilitation of small and medium-sized firms’ access to finance; supporting the reform of the public administration by enhancing the institutional capacity of public authorities; the setting up of a national system of ports and logistics; sustaining the national anti-poverty strategy through effective social services and active inclusion measures and the implementation of the school reform. Italy has also received support from the Youth Employment Initiative to implement the Youth Guarantee which acted as a driver of structural reforms in the labour market. To date, and according to the latest monitoring of the Youth Employment Initiative, almost 800 000 young people have benefited from it and around 110 000 young people are in employment, education or training after the Youth Employment Initiative support ended. The European Social Fund also contributes to the implementation of the reform of active labour market policies (ALMP) by strengthening public employment services and supporting the strategic plan on active labour market policies (Piano per le Politiche Attive) (see Section 4.3). ESI Funds address wider structural obstacles to growth and competitiveness to overcome the longstanding socio-economic divide between the north and south of Italy, in addition to the challenges specifically identified in past country-specific recommendations. These include: improving the coverage of fast broadband (100 % of households by 2023); addressing bottlenecks in transport infrastructure (270 km of reconstructed railroads by 2023); supporting overall 101 000 enterprises mainly via financial instruments; incentivising innovation and private investments (2020 target of 1.53 % of R&D expenditure in relation to GDP); reducing primary energy consumption of 20 %.  https://cohesiondata.ec.europa.eu/countries/IT                                                            (1) National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries. (2) Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and conditions for the majority of public investments areas. For Member States that did not fulfil all the ex-ante conditionalities by the end of 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments.  
 
 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

The  in-depth  review,  which  the  2017  AMR 
concluded  should  be  undertaken  for  the  Italian 
economy,  is  presented  in  this  report  (European 
Commission,  2016d).  In  spring  2016,  Italy  was 
identified  as  having  excessive  macroeconomic 
imbalances  relating  to  its  high  public  debt  and 
weak  external  competitiveness  in  a  context  of 
weak  productivity  growth,  as  well  as  adjustment 
issues  linked  to  the  high  level  of  non-performing 
loans on banks' balance sheets, the still high level 
of  unemployment  and  significant  increases  in  the 
long-term  and  youth  unemployment  rates.  For 
these  reasons, a  new  in-depth review  is needed  to 
assess how these imbalances evolved. 

in-depth  review  of  how 
identified  have  developed. 

Analyses  integrated  in  this  country  report 
the 
provide  an 
imbalances 
In 
in-depth 
particular,  analyses  relevant  for 
review can be found in this section, Section 1 and 
the entire Section 4. (14) 

the 

Imbalances and their gravity 

Structural  shortcomings  are  at  the  root  of 
Italy's  macroeconomic  imbalances.  The  more 
negative  performance  of  the  Italian  economy 
relative to the rest of the euro area, in particular in 
terms  of  productivity,  is  largely  explained  by  its 
structural  weaknesses.  The  production  structure 
has  not  evolved  and  adapted  sufficiently  to  the 
heightened  global  competition  and  technological 
innovation  characterising  the  last  two  decades 
(Pinelli  et  al.,  2016;  Calligaris  et  al.,  2016). 
Furthermore,  banks  are  currently  burdened  by  a 
large  stock  of  non-performing 
loans  (NPLs) 
following  the  protracted  crisis  and  might  not  be 
able  to  support  fully  an  efficient  allocation  of 
resources. Finally, the high levels of long-term and 
future 
youth  unemployment  also  weigh  on 
economic growth prospects. 

The  high  public  debt-to-GDP  ratio  remains  a 
major macroeconomic imbalance for the Italian 
economy.  The  level  of  public  debt,  at  more  than 
130 %  of  GDP,  means  that  significant  resources 
are earmarked to cover debt servicing costs, to the 
items 
detriment  of  more  growth-enhancing 

(14)  An  asterisk  indicates  that  the  analysis  in  the  section 

contributes to the in-depth review under the MIP. 

including education, innovation, infrastructure and 
a  lower  tax  burden  on  factors  of  production. 
Moreover, the high public debt is coupled with low 
productivity growth, suggesting a weak capacity to 
equip  the  country  with  productivity-enhancing 
physical and digital infrastructure, up-to-date skills 
in the labour force and effective institutions. High 
public  debt  and  low  growth  prospects  limit  the 
possibility  of  using  fiscal  automatic  stabilisers  in 
the  event  of  negative  economic  shocks.  The  high 
public  debt  also  makes  the  country  vulnerable  to 
financial  market  volatility  in  periods  of  increased 
risk  aversion,  with  higher  interest  rates  for  the 
government  that  could  in  turn  tighten  financing 
conditions for the real economy. Italy experienced 
this vicious circle during the 2011-2012 sovereign 
debt crisis, when private investment collapsed. 

remains  biased 

Non-cost  competitiveness  factors  continue  to 
weigh on Italy's external competitiveness. Italy's 
production  structure 
towards 
medium-  and  low-tech  industries.  The  share  of 
high-tech exports has increased only slightly (from 
the recent trough of around 8 % in 2008 to around 
in  2015).  Consistently,  Italy's  revealed 
10 % 
competitive 
be 
concentrated in traditional sectors such as textiles, 
footwear,  leather  and  metal  products  (for  goods) 
and tourism (for services). 

advantage 

continues 

to 

The high  level of  non-performing  loans (NPLs) 
hampers banks' support for investment growth. 
The  protracted  recession  has  burdened  Italian 
banks with a systemic and historically high level of 
non-performing loans that stabilised only recently. 
In the third quarter of 2016, gross NPLs amounted 
to  EUR 329 billion  (or  16.5 %  of  total  customer 
loans).  Gross  bad  loans  –  NPLs  with  the  worst 
recovery prospects – amounted to EUR 198 billion 
(net  of  loan-loss  provisions,  bad  loans  stood  at 
EUR  85  billion).  The  NPL  problem  weighs  on 
banks’  profitability  and  on  the  recovery  of  credit, 
thereby  constituting  a  drag  on  investment  (see 
Sections 1 and 4.2). Under these conditions, banks 
may  find  it  challenging  to  support  any  future 
increase  in  (the  still-depressed)  credit  demand. 
Meanwhile,  credit  conditions  remain  particularly 
tight  for  small  and  medium  enterprises  and  the 
construction sector. 

19 

 
 
                                                           
3. Summary of the main findings from the MIP in-depth review 

Graph 3.1:  Drivers of change in Italy's public debt-to-GDP 

ratio 

resulted 

recovery  have 

The  protracted  recession  and  the  subsequent 
slow 
in  high 
unemployment  –  particularly  for  young  people 
social  cohesion  and  possibly 
–  affecting 
entailing  permanent  effects  on  growth.  The 
unemployment  rate  was  still  12 %  in  December 
2016  (broadly  unchanged  compared  to  2015,  and 
against  9.6 %  in  the  euro  area),  of  which  around 
7 percentage  points  were  unemployed  for  at  least 
12 months. Moreover, after averaging around 40 % 
in  2015,  the  youth  unemployment  rate  (aged  15-
24)  was  still  above  40 %  in  December  2016 
(around 21 % in the euro area). Finally, in Q3 2016 
young  people  aged  15-24  who  were  not  in 
education,  employment  or  training  still  numbered 
over 1.2 million (or 20.9 %, i.e. one of the highest 
shares  in  the  EU),  albeit  around  100 000  fewer 
than a year before (see Sections 1 and 4.3). 

Evolution, prospects, and policy responses 

The public debt is forecast to stabilise at around 
133 %  of  GDP  in  2016-2018.  After  rising  by 
around five percentage points per year on average 
during  the  double-dip  recession  of  2008-2013, 
Italy's government debt-to-GDP ratio continued to 
increase,  but  at  a  significantly  slower  pace  (1.6 
percentage  points  on  average) 
in  2014-2015 
(Graph 3.1). In 2016-2018, a broad stabilisation of 
the  debt  ratio  is  forecast,  mainly  thanks  to  the 
ECB's  accommodative  monetary  policy  which 
decisively  contributes  to  reducing  the  differential 
between the average interest rate paid on debt and 
the  GDP  growth  rate. The  ECB’s  action,  and  in 
particular  its  Public  Sector  Purchase  Programme, 
helped to curb the average interest rate paid on the 
debt  as  new  issuances  of  Italian  government 
securities  benefited  from  historically  low  nominal 
interest  rates  in  2016  (0.55 %  on  average,  from 
0.7 %  in  2015  and  1.35 %  in  2014).  Low  interest 
rates  have  in  turn  supported  the  GDP  growth  rate 
by  underpinning  a  gradual  economic  recovery, 
while  limiting  the  risk  of  outright  deflation.  As  a 
result,  the  interest-rate-growth-rate  differential  is 
expected  to  go  below  the  levels  recorded  before 
the  crisis,  and the  Commission  forecast projects  a 
stabilisation of the debt-to-GDP ratio. 

Notes: The interest rate/growth rate differential is the driver 
of the 'snowball effect’ on the debt-to-GDP ratio. The 
snowball effect includes the debt-increasing impact of 
interest expenditure and the debt-decreasing impact 
resulting from the growth of the denominator (i.e. real GDP 
growth plus inflation). 
Source: European Commission 

A  weak  fiscal  position,  together  with  modest 
growth  prospects,  makes  Italy  vulnerable  to 
increases in risk aversion on financial markets. 
Italy  carried  out  a  sizeable  fiscal  adjustment 
between  2010  and  2013,  with  the  headline  deficit 
below  3 %  of  GDP  as  of  2012  (from  more  than 
5 %  in  2009)  (see  Section  1)  and  the  primary 
surplus increasing to over 2 % of GDP. The Italian 
government  eased  its  fiscal  stance  in  recent  years 
to support economic growth mainly by cutting the 
tax burden (see Sections 1 and 4.1) and by taking 
advantage  of  the  fiscal  space  created  by  lower 
interest  expenditure  (-1.2 percentage  points  of 
GDP  between  2012  and  2016).  The  headline 
deficit is set to decline to just below 2.5 % of GDP 
in 2016-2017, while the primary surplus is forecast 
to  stabilise  at  around  1.5 %  of  GDP.  In  structural 
terms,  the  primary  surplus  is  estimated  to  have 
declined  from  3.9 %  of  GDP  in  2013  to  2.3 %  in 
2016, and is expected to shrink further to 1.9 % in 
2017.  This  relaxation  in  the  fiscal  stance  was 
partially  used  to  support  investment  and  facilitate 
the  adoption  and  implementation  of  structural 
reforms  (for  instance  through  tax  incentives), 
while reducing the risk of entering a low-inflation-
low-growth  trap.  Despite  the  rather  low  primary 
surplus, debt refinancing risks are mitigated in the 
short  term  by  the  ample  liquidity  provided  by  the 

20 

-8-6-4-20246899-0708-1314-1516-18fAverage annual percentage point changeStock-flow adjustmentInterest expenditurePrimary balance contributionInflation contribution (based on GDP deflator)Real GDP growth contributionAverage annual change in debtInterest-rate-growth-rate differentialforecast 
 
3. Summary of the main findings from the MIP in-depth review 

assumption),  would 

ECB and the country's improved external position 
which  makes  it  less  reliant  on  external  capital 
flows.  Looking  forward,  a  structural  primary 
surplus  of  1.3 %  of  GDP,  as  projected  in  the 
Commission  forecast  in  2018  (based  on  a  no-
policy-change 
increase 
sustainability risks in the medium term (European 
Commission,  2016c).  In  particular,  a  weak  fiscal 
position when the accommodative monetary policy 
is  eventually  phased  out  might  raise  risk  premia. 
By  contrast,  a  progressively  improving  fiscal 
position would help to maintain financial markets' 
confidence  and low interest rates, which would in 
turn  support  private 
investment  and  growth 
prospects.  

in  long-term  fixed-rate  bonds  issuances.  As  a 
result,  the  average  maturity  of  government  bonds 
rose  to  6.76  years  in  December  2016  (from  6.52 
and  6.38  years  at  the  end  of  2015  and  2014 
respectively),  while  the  share  of  long-term  fixed-
rate bonds rose to around 70 % (from 68 % at end-
2015). However, after averaging around 130 basis 
points  in  the  first  ten  months  of  2016,  spreads 
between  Italian  and  German  10-year  bond  yields 
widened and stood at more than 170 basis points in 
January 2017, possibly due to political uncertainty. 

Graph 3.2: 

Italy’s export performance, exchange rate 
and cost competitiveness indicators 

The  share  of  government  securities  held  by 
Italian banks has decreased only slightly. Since 
the  start  of  the  ECB’s  Public  Sector  Purchase 
Programme  (PSPP)  at  the  beginning  of  2015,  the 
share  of  public  debt  held  by  the  Bank  of  Italy 
increased  substantially.  However,  only  a  minor 
reduction  was  recorded  in  Italian  banks'  exposure 
to the sovereign (from EUR 398 billion at the end 
of  2015  to  EUR  383  billion,  or  23  %  of  GDP,  at 
the end of 2016). At the same time, foreign private 
investors  remain  rather  reluctant  to  invest  in  Italy 
and  their  share  of  public  debt  declined  slightly 
(from 30 % in June 2015 to 28.4 % in June 2016) 
(15)  (Bank  of  Italy,  2016a).   Furthermore,  due  to 
low  or  negative  interest  rates,  Italian  households 
cut their direct holdings of government bonds and 
investment, 
further  diversified 
increasing  their  exposure  to  foreign  markets.  The 
Public Sector Purchase Programme and favourable 
long-term 
for  banks, 
refinancing  conditions 
together  with  the  lack  of  appetite  for  financial 
continued 
investment 
diversification of residents’ portfolios into foreign 
assets entail increasing TARGET2 liabilities of the 
Bank 
the  Eurosystem 
towards 
(EUR 357 billion or more than 20 % of GDP at the 
end  of  2016,  from  EUR 249 billion  at  the  end  of 
2015).  

their  financial 

Italy 

Italy 

and 

the 

of 

in 

The  average  debt  maturity  increased  slightly 
but  spreads  vis-à-vis  German  sovereign  bond 
yields  have  widened.  Regarding  debt  structure, 
Italy’s  debt  management  office  took  advantage  of 
historically  low  interest rates  through  the  increase 

(15)  Excluding  foreign  mutual  funds  and  other  managed 

investment attributable to Italian investors 

Notes : Indicators are with respect to 36 industrial countries. 
Source: European Commission 

Italy's  export  performance  broadly  stabilised, 
also  supported  by the  depreciation  of the  euro. 
After  sizeable  export  market  share  losses  in  the 
first  decade  of  the  century,  Italian  exports  (in 
volumes) have been growing at a pace more in line 
with external demand since 2010 (Graph 3.2). The 
improved  export  performance  has  been  supported 
by  the  depreciation  of  the  euro,  which  entailed 
some decline in Italy's nominal effective exchange 
rate 
partners.  These 
developments, together with moderate increases in 
unit labour costs, led to a moderate recovery in the 
country's  cost  competitiveness  in  recent  years. 
Still,  despite  the  more  favourable  exchange  rate, 
slight market share losses are expected for 2016. 

vis-à-vis 

trade 

its 

Italy's price competitiveness based on producer 
prices  has  somewhat  improved.  The  producer 
price  gap  accumulated  vis-à-vis  France  and 
Germany  since  euro  adoption  has  stabilised. 

21 

75808590951001051108590951001051101151200001020304050607080910111213141516f2005 = 1002005 = 100Export performance (volume-based)Nominal effective exchange rate (rhs, inverted scale)Real effective exchange rate (based on unit labour costs)(rhs, inverted scale)forecast 
                                                           
 
3. Summary of the main findings from the MIP in-depth review 

address  their  NPL  problem  and  to  increase  the 
efficiency of the banking sector (see Section 4.2).  

The  labour  market  is  improving  gradually. 
Employment  developments  since  2014  have  been 
rather positive in Italy, despite the weak economic 
recovery.  After  increasing  by  0.4 %  in  2014  and 
0.8 % in 2015, employment rose by 1.2 % in 2016. 
The  abolition  of  the  regional  tax  on  economic 
activities  (IRAP)  on  permanent  employment,  the 
labour  market  reform  and  tax  incentives  for  new 
permanent  hires  contributed  to  this  improvement. 
However,  slow  economic  growth  has  not  been 
conducive  to  a  swift  absorption  of  long-term 
unemployment  and  of  youngsters  entering  the 
labour market.  

Overall assessment 

shortcomings  continue 

In  spite  of  a  few  positive  developments, 
macroeconomic  imbalances  are  not  unwinding 
yet.  The  public  debt-to-GDP  ratio  is  expected  to 
have risen further to around 133 %  in 2016 and to 
remain at that level in the coming years. The high 
public  debt  thus  remains  a  major  source  of 
vulnerability for the Italian economy and a source 
of negative spillovers for the euro area. Moreover, 
structural 
to  hamper 
investment,  innovation  and  a  faster  upgrade  of 
Italy's  production  structure.  The  resulting  low 
productivity  growth  suggests  that  further  progress 
with  reforms  is  needed  to  enhance  Italy's  growth 
prospects and facilitate public sector deleveraging. 
External  cost  and  price  competitiveness  stabilised 
thanks  to  the  depreciation  of  the  euro  and  overall 
wage  moderation.  The  adjustment  process  in  the 
labour market is proceeding gradually with labour 
market  participation  and  employment  on  the  rise, 
resulting in a gradual decline in the unemployment 
rate.  Still,  long-term  and  youth  unemployment 
remain  high  and  weigh  on  growth  prospects.  The 
adjustment in the banking sector in response to the 
crisis-driven  deterioration  in  asset  quality  and 
long-standing  structural  weaknesses  continues  to 
face  significant  challenges.  Several  reforms  were 
implemented  to  address  the  2016  country-specific 
recommendations, which in the case of Italy are all 
related  to  its  macroeconomic  imbalances  (see 
Section  2).  However,  most  of  these  reforms,  if 
on 
implemented,  will 
consistently 
significant  stock  imbalances  (e.g.  the  high  public 
debt ratio) only in the medium term. 

impact 

Italian  manufacturing 

to  2013  mainly  due 

However, the rather positive price competitiveness 
performance  of 
firms 
implied  a  steady  reduction  in  their  profit  margins 
to  more  dynamic 
up 
developments  in  nominal  unit  labour  costs.  In 
recent  years,  manufacturing  firms'  profit  margins 
have recovered somewhat thanks to the moderation 
in  nominal  unit  labour  costs  and  lower  energy 
costs 
2016). 
(Centro  Studi  Confindustria, 
Furthermore,  the  growth  of  Italy's  manufacturing 
producer  prices  has  been  significantly  more 
moderate  than  the  one  of  China's  since  2007, 
possibly  due  to  the  upgrade  of  the  global  supply 
chain production of China (Graph 3.3). 

Graph 3.3: 

Price competitiveness based on producer 
prices in manufacturing, 12-month averages 

Notes: Indicators are with respect to 61 competitor 
countries. An increase in an index indicates a loss of 
competitiveness. 
Source: Bank of Italy (based on ECB, CEPII, Eurostat, IMF, 
OECD and UN data and national statistics) 

Progress  in  reducing  the  large  stock  of  non-
performing loans (NPLs) is limited. Compared to 
the end of 2015, the gross stock of NPLs has come 
down  only  marginally.  The  inflow  of  new  NPLs 
has decreased since early 2015, but unlikely-to-pay 
and  to  a  lesser  extent  past-due  loans  are  still 
migrating  to  the  bad  loan  category.  Meanwhile, 
several  factors  still  hold  back  the  pace  at  which 
banks  are  working  out  or  selling  NPLs.  These 
include in particular the considerable gap between 
the  valuation  of  NPLs  by  banks  and  investors 
which  hinders  the  development  of  a  secondary 
market  for  impaired  assets  in  Italy,  as  well  as 
internal  capital  generation  and 
banks’ 
impaired  capacity  to  raise  fresh  capital  so  further 
loan  losses  could  be  absorbed.  Several  measures 
have  been  taken  by  the  authorities  to  help  banks 

low 

22 

8085909510010511011500010203040506070809101112131415Oct-161999 = 100ChinaDEESFRIT 
 
3. Summary of the main findings from the MIP in-depth review 

23 

Box 3.1: SpilloversItaly’s economy is the third largest in the euro area. Accounting for 16 % of the area’s GDP, Italy is a major potential source of economic and financial spillovers for the rest of the euro area.  Direct trade links between Italy and other euro area countries are sizeable. Italy is an important market for Slovenia, Slovakia, Belgium and the Netherlands, which export goods to Italy for over 3 % of their respective GDP, and for Luxembourg, that mainly exports services (for more than 9 % of its GDP). Italy’s exports of goods and services to the rest of the euro area amount to 12 % of its GDP. Italy’s economy is thus subject to large spillovers from demand developments, particularly in Germany and France, but also in Spain, Belgium, the Netherlands and Austria.  Demand from the rest of the euro area improved in recent years. Following the sovereign-debt crisis, the deleveraging stance in the euro area meant that the trade channel could support Italian economic growth. Large and rising current-account surpluses in some euro area trade partners seem to point to weaknesses in investment and consumption levels. Subdued demand from these economies in turn puts a strain on Italy’s exports. However, demand from the rest of the euro area (in particular Spain) has been more dynamic since 2014.  The banking union has only slightly increased the exposure of banks in other euro area countries to the Italian economy. The French banking sector remains the most directly exposed to Italy. French banks’ exposure to the Italian economy amounted to approximately 12 % of French GDP in Q2 2016, albeit 7.9 % consists of claims on the non-bank private sector. For other euro area banks, financial links to the Italian economy relate mainly to the official sector, with a direct exposure of 1-2 % of the GDP of the country in question. Italian banks are strongly exposed to the German and Austrian economies. In Q2 2016, Italian banks’ exposure to Germany and Austria amounted to 10.5 % and 3.1 % of Italy’s GDP respectively, and consisted mainly in claims towards the non-bank private sector. Italian banks’ direct exposure to other euro area countries’ official sectors is relevant only for Germany (2.3 %) and Spain (2 %).  Italy’s high public debt remains a source of possible adverse spillovers for the rest of the euro area. Its public debt-to-GDP ratio is projected to remain very high in the coming years and its reduction may be subject to adverse shocks, particularly if the structural primary surplus worsens further and/or reform action comes to a halt. The euro area’s accommodative monetary policy helped to reduce sovereign spreads and is reassuring financial markets about future nominal growth prospects. Still, a change in the currently favourable risk perception cannot be ruled out, particularly if national policies were to depart from the differentiated adjustment needed for a sustained euro area recovery. It is worth recalling that general risk perception is one of the main determinants of sovereign spreads in the euro area.  A QUEST model simulation shows that an increase of Italy's government risk premium could significantly affect euro area growth. The simulation assumes a 200 basis point increase in Italy’s sovereign risk premium for two years (e.g. if reform setbacks increase risk aversion), which then decays (very) gradually (Kollmann et al., 2016). The increase is assumed to raise other euro area vulnerable countries’ financing costs by 100 basis points. Half of the increase in governments’ risk premiums is assumed to spill over to the private sector's financing costs. The central scenario also assumes a binding zero lower bound on ECB rates for the first two years. Spillovers to the rest of the euro area are driven by the trade channel and the temporary increase in real interest rates (due to a constant policy rate and below-target inflation). The simulation suggests that Italy’s and to a lesser extent other vulnerable countries’ real GDP would quickly go below the baseline and would not recover in the next ten years. The impact would also be negative but smaller and less persistent for the rest of the euro area (Graph 1). The effects may worsen if further fiscal consolidation were needed to stop the risk premium increase and cover the higher debt financing costs (as during the sovereign debt crisis).   -0.8-0.7-0.6-0.5-0.4-0.3-0.2-0.1001234567891011%YearGraph 1: Real GDP impact from a higher government risk premium in ItalyITESPTELRest of the euro area 
 
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.1: 

MIP Assessment Matrix (*) - Italy 

(Continued on the next page) 

24 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks Productivity Italy’s labour productivity growth has been sluggish for almost 20 years, primarily due to total factor productivity dynamics and, more recently, insufficient capital accumulation (see Sections 1 and 4.4). Weak productivity dynamics hamper competitiveness and entail low GDP growth, which in turn affects public debt ratio dynamics. Weak productivity growth is rooted in long-standing weaknesses in the functioning of labour, capital and product markets, compounded by inefficiencies in the public administration and justice system. The crisis has aggravated labour productivity dynamics. In 2008-2013, productivity per hour worked remained broadly stable, while total factor productivity declined by around 5 %.  Labour productivity (based on hours worked) is expected to have declined by 0.5 % in 2014-2016, due to negative capital deepening, while total factor productivity started rising, albeit at a subdued pace. Labour productivity is forecast to grow only moderately in 2017 and 2018, well below the growth rate forecast for the euro area. Italy is implementing significant reforms of the labour market, the banking sector, the education system, publication administration and the justice system, which have been adopted over the last two years. The reforms are aimed at addressing the bottlenecks that hold back productivity growth. Benefits will accrue mostly in the medium term. Positive significant impacts are already evident from the labour market reform, which is helping to reduce labour market duality.  There was some slowdown of the reform process since mid-2016.  Public debt In 2015, Italy’s public debt-to-GDP ratio stood at 132.3 %, up from a pre-crisis level in 2007 of around 100 %. Italy’s high public indebtedness is a major source of vulnerability for the Italian economy. Furthermore, given its size, Italy’s public debt is a potential source of negative spillovers to the euro area. Negative growth and low inflation pushed up the public debt-to-GDP ratio in recent years. The ratio is expected to broadly stabilise in 2016-2018 at around 133 %.  However, the structural primary surplus is expected to have declined significantly since 2013 and is forecast to worsen further in 2017 and 2018.   Measures taken include a review of public expenditure and a privatisation programme. The structural reforms to foster productivity growth are expected to make public debt more sustainable. Past pension reforms should support long-term public debt sustainability, but some measures in the 2017 Budget Law go in the opposite direction. External competitiveness In recent decades, Italy has lost export market share, although losses have stopped since 2013. Deteriorating cost competitiveness has been one of the main factors driving the loss of export market share. Non-cost competitiveness factors, including product specialisation and the high proportion of small firms with a weak competitive position in international markets, remain insufficiently supportive. The current account surplus is approaching 3 % of GDP. Italy’s net international investment position, at around -20 % of GDP in June 2016, does not pose sustainability concerns, though the level of net marketable debt is relatively high. Italy has recorded very small gains in export market share since 2013. The gains are small compared to losses in preceding years and could be partly explained by the mechanical effect of the slowdown of global trade. Moderate wage growth, reflecting the weak labour market, and the depreciation of the euro have allowed a gradual improvement in the real effective exchange rate based on unit labour costs, but not sufficiently to restore past competitiveness losses. Structural reforms to foster productivity growth will help to improve cost and non-cost competitiveness.  Policy gaps include the lack of steps to better align wages with productivity, and of measures to promote firm growth. In particular, the reform of the framework for collective bargaining has incurred a delay. Adjustment issues Labour market participation and unemployment The unemployment rate more than doubled during the crisis to peak at more than 12.5 % in 2014. The long-term unemployment rate increased steadily over the period for all age groups.  The participation rate grew moderately during the crisis but remains the lowest in the EU. The risk of labour market exclusion increased particularly for youngsters: youth unemployment more than doubled during the crisis to peak at 43.1 % in the first quarter of 2014.   Despite the weak economic recovery, employment increased by 0.8 % in 2015 and by 1.2 % in 2016.  As more people entered the labour market, the rate of unemployment averaged 11.7 % in 2016, slightly down from 11.9 % in 2015.  Long-term unemployment is not yet decreasing. Conversely, youth unemployment started to decline, but remained very high at 40 % in December 2016. The proportion of young people not in employment, education or training is among the highest in the EU (about 20 % among those aged 15-24). The labour market reform and hiring incentives are supporting job growth.  The reform of active labour market policies and the strengthening of work-based learning could help to improve labour market matching and support the transition from education to work in the medium term. However, implementation is likely to be challenging.  Measures to foster labour market participation, including among women, are limited.   
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

(*) The first column summarises ‘gravity’ issues which aim at providing an order of magnitude of the level of imbalances. The 
second column reports findings concerning the ‘evolution and prospects’ of imbalances. The third column reports recent and 
planned relevant measures. Findings are reported for each source of imbalance and adjustment issue. The final three 
paragraphs of the matrix summarise the overall challenges, in terms of their gravity, developments and prospects, policy 
response. 
Source: European Commission 

25 

Banks’ asset quality The slow-burning impact of the protracted economic crisis led to a systemic deterioration of Italian banks’ asset quality, triggering significant loan-loss provisions that weigh on banks’ profitability, reducing market confidence in banks and leading to conservative lending policies, in particular vis-à-vis small firms.  In Q3 2016, the gross stock of non-performing loans (NPLs) amounted to EUR 329 billion (16.5 % of customer loans). The average coverage ratio is just above 46 %. Due to their asset quality problem, Italian banks continue to be vulnerable to shocks, and as the support they can give to Italy’s gradual economic recovery appears limited, they risk becoming a potential source of economic spillovers for other euro area countries. Since the end of 2015, the gross stock of NPLs has declined only marginally. Recapitalisation needs may emerge to clean up banks’ balance sheets given banks’ low profitability.  The ongoing recovery and conservative lending policies have significantly reduced the inflow of new problem loans, but unlikely-to-pay loans continue to turn into bad loans. The work-out and disposal of NPLs is proceeding only at a very slow pace, mainly owing to a persistent NPL pricing gap that holds back the development of a secondary market for impaired loans in Italy. Some banks may also prefer to wait for better recovery prospects or be unwilling to terminate client relationships. Regulatory factors may also play a role in holding back NPL disposals. In spring 2016, a bad-loan securitisation scheme supported by state guarantees (GACS) was set up. Furthermore, two private ‘Atlante’ funds have been created to support vulnerable banks’ bad-loan securitisations and recapitalisations.  A further reform of insolvency and collateral enforcement rules was adopted in 2016, in anticipation of a broader overhaul of the framework. At the end of 2016, EUR 20 billion was set aside for liquidity support and precautionary recapitalisations, but it is not clear yet what role this will play in cleaning up Italian banks. Supervisors have become more assertive, e.g. through more demanding reporting requirements and impaired loan reduction targets for the most vulnerable banks. Conclusions from the IDR analysis  Very high government debt represents a major economic burden and vulnerability. Persistently slow productivity growth continues to be the root source of Italy’s macroeconomic imbalances, by reducing the pace of debt reduction and weakening on external competitiveness. The high stock of non-performing loans still weighs on banks’ profits and lending policies. High long-term unemployment holds back future growth  The public debt ratio is expected to stabilise at around 133 % in 2017 and 2018. Wage growth has moderated, but weak labour productivity growth holds back the relative adjustment in unit labour costs, while non-cost aspects remain insufficiently supportive of external competitiveness. Labour participation and employment are rising, but long-term unemployment is not declining yet and youth unemployment remains high. In the banking sector, the gross stock of NPLs has not yet started to decline significantly owing to the slow pace of problem-loan work-out and disposal. Recapitalisation needs may emerge to clean up banks’ balance sheets, given current low profitability in the banking sector.  The reform of the budgetary process might help improve public debt sustainability. To help banks dispose of problem loans, further insolvency and foreclosure reforms have been enacted and a bad loan securitisation scheme with state guarantees has been set up. Supervisors have become more demanding and the government has earmarked funds to conduct precautionary recapitalisations of eligible vulnerable banks. The reform of the education system, public administration and justice are implemented. However, the reform momentum has weakened since mid-2016. Market opening measures are being delayed and policy gaps remain notably with regard to taxation and the fight against corruption. Following the comprehensive labour market reform, the operationalisation of the new setting for active labour market policies may face challenges. Furthermore, there are delays in the reform of the framework for collective bargaining.  
 
 
 
 
 
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

care measures introduced on an experimental basis 
for  workers 
in  need),  and  some  penalties 
previously introduced to offset incentives for early 
retirement  under  the  old  generous  defined-benefit 
system will be repealed as of 2018. Such measures 
(not  reflected  in  Graph 4.1.2)  are  set  to  raise  the 
already-high  pension  expenditure  in  Italy  (at 
15.4 % in 2015, one of the highest in the OECD as 
a  share  of  GDP,  and  over  a  third  of  total  primary 
expenditure  in  Italy),  causing  it  to  grow  above 
potential  growth  (Graph 4.1.1).  As  a  result, 
resources  may  be  taken  away  from  more  growth-
enhancing  measures  to  the  detriment  of  younger 
generations. This has been highlighted also by the 
fully  operational  Parliamentary  Budget 
now 
Office, 
fiscal  monitoring 
institution.  Besides,  the  emphasis  on  the  need  to 
work  longer  and  achieve  higher  labour  market 
participation  could  be  further  weakened,  with 
negative impact on growth prospects.  

independent 

Italy’s 

Graph 4.1.1:  Evolution of government real primary 

expenditure and potential GDP growth 

4.1.1.  FISCAL FRAMEWORK* 

to 

restore 

A  major  challenge  for  Italy  is  to  align  public 
expenditure  dynamics  with  sluggish  potential 
growth.  Real  general  government  primary 
expenditure  has  been  increasing  above  potential 
growth  since  the  end  of  the  1990s  (Graph 4.1.1). 
This  reflects  both  insufficient  containment  of 
specific  spending  items  such  as  pensions  and 
healthcare,  and 
low  potential  growth.  The 
dynamics  of  real  healthcare  expenditure  were 
contained  significantly  after  the  excessive  deficit 
procedure  in  2005-2008  and  entered  negative 
territory  when  the  sovereign  debt  crisis  required 
swift  action 
fiscal  sustainability. 
Moreover, the ‘Fornero’ reform started restraining 
real pension spending in 2012. All this contributed 
to  primary  expenditure  growing  below  (negative) 
potential growth in 2010-2013 and broadly coming 
into  line  thereafter.  However,  expenditure  control 
was  also  pursued  through  cuts  in  investment 
spending 
and 
infrastructure, 
innovation,  which  may  have  further  weighed  on 
the  already  low  potential  economic  growth.  As  a 
result,  unless  the  scope  of  government  action  is 
reduced  or  potential  growth  is  restored,  it  may  be 
difficult to compress further real primary spending 
in  line  with  the  expenditure  benchmark  of  the 
Stability and Growth Pact to fund a cut in the tax 
burden on the factors of production (Lorenzani and 
Reitano, 2015). 

education 

in 

Recent  measures  on  pensions  go  in  the  wrong 
direction.  In  2007-2011,  the  level  of  pension 
spending  as  share  of  GDP  increased  markedly, 
before  the  Fornero  reform  contributed  to  its 
slowdown (Graph 4.1.2). As a result of the pension 
reforms  enacted  as  of  2004,  and  in  particular  the 
Fornero  reform,  the  average  retirement  age  will 
increase  from  60  to  68  years  by  2050,  thus 
resulting in lower cumulative pension expenditure 
by  60 %  of  GDP  in  the  long  term (Ministry  of 
Economy and Finance, 2016a). However, the 2017 
budget involves measures that partially reverse the 
Fornero  reform:  minimum  pensions  are  raised, 
earlier retirement is allowed for specific categories 
of employees (either on a voluntary basis through a 
bank  loan  supported  by  a  tax  credit  or  as  social 

Potential GDP growth is reported as a 10-year average 
(from t-5 to t+4) in line with the reference rate of the 
expenditure benchmark of the Stability and Growth Pact. 
The real growth rates of expenditure components are 
computed using the GDP deflator and are reported as 2-
year moving averages. 
Source: European Commission 

26 

-3.0-1.50.01.53.04.56.07.59.0000204060810121416f18f% changePrimary expenditure excluding one-offsHealthcare consumption expenditurePension expenditurePotential GDP growthforecast 
 
 
 
4.1. Public finances and taxation 

in selecting areas of their own budgets contributing 
to targeted savings; centralised public procurement 
is  being  gradually  extended  to  the  regional  level 
and  36 000  purchasing  bodies  have  been  reduced 
to  33  aggregator  centres,  with  around  EUR  16 
billion  (0.9 %  of  GDP)  of  annual  public  spending 
under  their  remit.  The  government  has  recently 
identified  spending  thresholds  and  34  product 
categories for which administrations should opt for 
centralised  procurement,  and  a  technical  working 
group is proposing further categories. The national 
anti-corruption  authority  has  a  role  in  assessing 
these  categories  and  supervising  centralised 
procurement. 

4.1.2.  TAXATION* 

The  tax  burden  on  production  factors,  one  of 
the  highest  in  the  EU,  has  been  gradually 
reduced. In 2015, Italy’s tax wedges on low-wage 
and average-wage single workers were among the 
highest  in  the  EU,  at  41 %  and  48 % respectively 
(European  Commission,  2016e).  In  2014,  the 
implicit  tax  rate  on  labour  was  the  highest  in  the 
EU (44 %, as against the EU average of 36 %) and 
the tax burden on capital stood well above the EU 
average  (10.6 %  of  GDP,  as  against  8.2 %). 
Moreover, features of Italy’s tax collection system 
might  further  deter  investment,  as  it  takes  much 
longer  than  in  the  rest  of  the  EU  for  a  small 
business to file tax returns (240 hours per year, as 
against  the  EU  average  of  176)  (World  Bank, 
2016).  Therefore,  the  2015  and  2016  budgets 
reduced 
tax  wedge and  corporate 
income taxes (16), and the 2017 budget included a 
new flat-tax regime for small businesses (IRI) and 
incentives for private investment (see Sections 4.4 

labour 

the 

(16)  The  2015  budget  made  permanent  a  tax  credit  of  EUR 80 
per  month  for  low/medium-income  employees  (annual 
impact  of  0.6 %  of  GDP)  and  provided  for  a  permanent 
exemption  of  the  labour  cost  from  the  IRAP  tax  base 
(annual impact of 0.4 % of GDP). The tax wedge on low-
wage earners dropped from 45 % to 41 % over 2013-2015 
(OECD,  2016a).  If  the  permanent  tax  credit  to  low-wage 
employees  recorded  as  social  transfer  (‘monthly  bonus  of 
EUR  80’)  was  taken  into  account,  the  implicit  tax  rate  on 
labour  would  be  43  %.  A  three-year  exemption  of 
employers’ social security contributions for new hires with 
open-ended contracts concluded in 2015 was also adopted 
and extended to new hires in 2016 (with a 40 % exemption) 
through  the  2016  budget  (overall  0.4 %  of  GDP  in  2017). 
The corporate income tax rate was cut from 27.5 % to 24 % 
(annual impact of 0.2 % of GDP).  

Graph 4.1.2:  Long-term projections of gross public pensions 

expenditure 

Source: European Commission, 2009; European Commission, 
2015b. 

The  ongoing  spending  review  also  involves 
revising the budgetary process and centralising 
public  procurement.  Savings  targets  have  been 
gradually  reduced,  partly  because  they  turned  out 
to be ambitious without addressing large spending 
items  such  as  pensions  or  public  transport  and 
given  the  limited  state  leverage  on  regional  and 
local  spending.  However,  further  measures  to 
rationalise public spending were taken in 2016 and 
the  reform  of  the  budgetary  process  (started  in 
2009)  was  finalised.  More  specifically:  (i)  the 
content and function of programmes in the budget 
are  specified  by  emphasising  the  targets  to  be 
achieved;  (ii)  a  reinforced  cash  principle  is  set  to 
improve management and monitoring; (iii) planned 
revenues and expenditure allocations are integrated 
in one act, together with the legislative acts needed 
to  reach  the  target.  If  consistently  implemented, 
these  measures  may  in  the  future  make  the 
spending  review  a  more  structural  feature  of  the 
budgetary process and better align the latter with a 
performance-budgeting  approach.  The  systematic 
implementation  of  each  ministry’s  spending 
review  targets  has  been  de  facto  postponed  to 
2017, however. Frequent updates of the budgetary 
targets  weaken 
the  medium-term  budgetary 
framework,  and  the  recent  practice  of  including 
large  tax  increases  (ʽsafeguard  clauses’)  in  the 
three-year  budget  to  fill  the  gap  between  trends 
and  targets  and  repealing  them  later  made  the 
budget  unreliable  for  medium-term  planning.  On 
the  positive  side,  ministers  were  directly  involved 

27 

1011121314151606091215182124273033363942454851545760% of GDPIT (2009)IT (2015)Euro area (2009)Euro area (2015) 
 
                                                           
4.1. Public finances and taxation 

transparency  provisions  on 

raised. (19)  On  the  other  hand,  tax  collection  was 
streamlined  in  order  to  improve  compliance,  with 
the 
introduction  of  pre-filled  declarations, 
incentives for firms to opt for electronic invoicing 
in  return  for  milder  tax  controls  as  of  2017,  and 
simplified  arrangements  (regime  forfettario)  for 
small  firms,  taken  up  by  many  newly  registered 
VAT  taxpayers. (20)  Moreover,  the  2017  budget 
introduced 
the 
communication  of  invoices  and  VAT  data,  which 
are  expected  to  improve  compliance,  and  a  tax 
administration  reform,  merging  the  tax-recovery 
agency  Equitalia  with  the  revenue  agency  to 
improve tax collection and foregoing sanctions on 
taxpayers  who  voluntarily  regularise  themselves 
for  unpaid  taxes  in  2000-2016.  The  budgetary 
impact  of  the  latter  reform  depends  on  taxpayers’ 
behaviour  and  will  be  mostly  one-off.  The  same 
applies  to  the  extension  until  July  2017  of  the 
voluntary  disclosure  of  assets  held  abroad  or  not 
declared.  

to 

tax 

the 

increase 

ʽcooperative 

The  government  aims 
tax 
compliance  and  reduce  the  ground  for  tax 
compliance’ 
litigation.  New 
arrangements,  whereby 
authorities 
proactively help firms to fulfil their more complex 
tax  obligations,  and  pre-filled  tax  declarations 
addressed  to  specific  taxpayers  categories  might 
help  to  increase  tax  compliance  and  reduce  the 
ground for tax litigation in Italy. Namely, in 2015, 
the  total  inflow  of  cases  to  the  provincial  (first-
(second-instance) 
regional 
instance) 
committees where tax cases are dealt with by part-
time non-professional judges (magistrati tributari) 
was  significant  and  broadly  stable  compared  to 
2012,  despite  the  introduction  of  tax  mediation  in 
that  year.  Moreover,  a  tenth  of  the  backlog  had 
been  pending  for  over  five  years (Ministry  of 
Economy, 2016c). The tax section of the Supreme 
Court  of  Cassation  was  the  one  that  contributed 
most to its inflow (i.e. 38.4 %) and its backlog (i.e. 
32.7 %)  of  civil  cases,  both  among  the  highest  in 
the EU (21) (European Commission, 2017b). It also 

and 

(19)  For  instance,  according  to  the  ECB  payments  statistics, 
card payments per capita in 2015 amounted to around EUR 
2 600, as against the EU average of over EUR 5 000.  
(20)  www.finanze.it/opencms/it/statistiche-fiscali/osservatorio-

sulle-partite-iva-/  

(21)  100 351  civil  and  commercial  cases  were  pending  at  third 
instance in 2014, around twice the number in the Supreme 
Court, with the second highest backlog in the EU. 

and  4.5).  The  ‘Committee  on  Environmental 
Taxation’ has yet to be established. 

A  well-designed  tax  shift  to  consumption  has 
the  potential  to  further  reduce  the  tax  burden 
on  labour  and  tackle  poverty  and  inequality. 
Limited  progress  has  been  made  in  reforming 
cadastral  values  and  revising  tax  expenditures,  in 
line with the objective to shift the tax burden from 
labour  to  consumption  and  property.  Simulations 
carried  out  with  EUROMOD  (Box 4.1.1)  show 
that increasing the reduced VAT rate from 10 % to 
these  revenues  for  a 
13 %  and  fully  using 
refundable  tax  credit  on  employment  income  for 
low-income  workers  would  be  progressive.  It 
would  raise  net  disposable  income  for  the  lowest 
income  deciles  and  result  in  lower  poverty  and 
inequality 
index). 
Moreover,  the  larger  the  tax  shift,  the  higher  the 
probability for the unemployed to enter the labour 
market.  At  the  same  time,  the  generosity  of  the 
new  tax  credit  would  increase  the  incentive  to 
work part-time instead of full-time. However, this 
offsetting  effect,  resulting  in  an  overall  negligible 
impact  on  labour  supply,  could be  avoided by  the 
adequate design of the tax credit. 

(measured  by 

the  Gini 

Despite  some  progress  in  this  area,  the  rather 
limited use of electronic invoicing and payments 
affects  the  fight  against  tax  evasion  In  2014, 
Italy’s VAT gap (17) was among the highest in the 
EU,  at  EUR 36.9 billion  (or  2.3 %  of  GDP),  i.e. 
28 %  of  the  whole  EU  gap. The  total  tax  gap  is 
estimated  at  around  6 %  of  GDP  (or  some 
EUR 99 billion) (Ministry  of  Economy,  2016b). 
Recent measures to increase tax compliance, such 
as  mandatory  electronic  invoicing  together  with 
for  government  bodies’ 
the 
purchases (18),  and  the  reverse  charge  in  specific 
sectors seem to have been effective, with a yearly 
increase  in  gross  VAT  on  internal  transactions  of 
more  than  6 %  between  January  and  November 
2016.  However,  electronic 
is  not 
compulsory  among  privates,  the  use  of  electronic 
payments remains well below the EU average and 
limits  to  the  use  of  cash  have  recently  been 

ʽsplit  payment’ 

invoicing 

(17)  The  VAT  gap  is  the  difference  between  the  actual  VAT 
revenues and those expected by applying the standard rate 
to the potential tax base. 

(18)  With the split payment, public administration payments to 
private  suppliers  of  goods  and  services  do  not  include 
VAT, which is directly paid to the state budget. 

28 

 
                                                           
                                                           
4.1. Public finances and taxation 

tax 

room 

trial’, 

remains 

had  the  lowest  clearance  rate (22)  and  a  50 %  rate 
of  appeals  granted  (Corte  di  Cassazione,  2015). 
While  organisational  measures  to  improve  the 
functioning of the tax section and to speed up tax 
proceedings  have  been  introduced,  such  as  the 
‘digital 
for 
there 
improving  the  effectiveness  of  the  justice  system 
in tax cases (Corte di Cassazione, 2017, p. 80). To 
this  aim,  the  government  set  up  a  high-level 
to  develop  a  proposal 
Technical  Committee 
inspired  by 
international  practices. 
Consistently, a draft enabling law under discussion 
in Parliament aims to empower the government to 
present a proposal to bring all tax cases within the 
competence of civil tribunals, while increasing the 
number of judges by 750. 

the  best 

(22)  The  clearance  rate,  defined  as  the  ratio  of  resolved  to 

incoming cases, stood at 46 %. 

29 

 
                                                           
4.1. Public finances and taxation 

30 

Box 4.1.1: Distributional effects of a tax shift from labour to consumptionIn the case of Italy, simulations of the distributional effects of a tax shift from labour to consumption have been conducted by the Joint Research Centre of the European Commission using EUROMOD (1). The budgetary and distributional effects of two scenarios of a tax shift, based on existing legislation and on an ongoing policy debate in the country, were simulated: (‘Scenario 1’) the VAT reduced rate is increased from 10 % to 13 % and the extra resources are used for either (‘Scenario 1A’) a refundable tax credit for employment income, or (‘Scenario 1B’) a refundable tax credit for employment and self-employment income; (‘Scenario 2’) the VAT reduced rate is increased from 10 % to 13 % and the VAT standard rate from 22 % to 24 % and the extra resources are used for either (‘Scenario 2A’) a refundable tax credit for employment income, or (‘Scenario 2B’) a refundable tax credit for employment and self-employment income. Scenario 2 is based on an already legislated ʽsafeguard clauseʼ and scenario 1 is based on a commitment included in the 2016 Stability Programme (2). The latter is in line with the recommendation to rationalise tax expenditures (including reduced VAT rates) and national legislation requiring an annual revision of tax expenditures. The simulated destination of the related revenues is in line with the governmentʼs repeated announcement to further reduce labour taxation. All four scenarios correspond to revenue-neutral reforms in the first round, as potential beneficial effects on the labour supply and correspondingly on labour taxes due to the new tax credits, are not taken into account. Table 1 shows that the net effect of these reforms is generally progressive: the increase in disposable income due to the new tax credits in fact more than offsets its reduction due to higher VAT rates for most households (the bottom five deciles under scenarios 1A and 1B and the bottom six deciles under scenarios 2A and 2B). These results are confirmed in Table 2 by synthetic indicators on the distributional effect of the reforms: poverty and, to a lesser extent, inequality (measured by the Gini index) are reduced in all four scenarios, with the largest redistributive effect in scenario 2B (i.e. increasing both reduced and standard VAT rates and increasing refundable tax credits for employment and self-employment income). Table 1: Equalised mean disposable income (by decile) after the revenue-neutral tax shift    Table 2: Distributional impact of the revenue-neutral tax shift   Notes: Adjusted disposable income includes payments for indirect taxes.                                                            (1) ‘EUROMOD extension – Indirect Tax Tool’ is the tax-benefit microsimulation model for the EU. It simulates the benefit entitlements and tax liabilities (including social security contributions) of individuals and households according to the tax-benefit rules in place in each Member State. The simulations are based on representative survey data from the European Statistics on Income and Living Conditions (EU-SILC) and cover the main elements of direct taxation, social contributions and non-contributory benefits. (2) Italy’s 2016 budget provided for standard and reduced VAT rate increases as of 2017 (from 22 % to 24 % and from 10 % to 13 % respectively) to ensure the achievement of the planned deficit target (1.4 % of GDP) in 2017. The revenues from the clause’s activation were estimated at 0.9 % of GDP. The 2016 Stability Programme announced the repeal of the VAT hike and a commitment to its partial compensation to reach the new deficit target of 1.8 % of GDP in 2017 through a still-unspecified mix of spending cuts, including tax expenditures and measures to enhance tax compliance. Nevertheless, the 2017 budget repealed the safeguard clause with only minor compensation, leading to a revised deficit target of 2.3 % of GDP in 2017. DecileBaseline scenarioScenario 1AScenario 1BScenario 2AScenario 2BDifference1A (%)Difference1B (%)Difference2A (%)Difference2B (%)1331.28€     341.34€     341.52€     348.61€     352.18€     3.04%3.09%5.23%6.31%2660.44€     665.33€     665.29€     671.22€     671.42€     0.74%0.73%1.63%1.66%3823.84€     825.87€     825.87€     829.21€     829.54€     0.25%0.25%0.65%0.69%4975.61€     977.94€     977.81€     982.89€     982.03€     0.24%0.23%0.75%0.66%51 130.70€  1 130.98€  1 130.92€  1 133.61€  1 133.32€  0.02%0.02%0.26%0.23%61 282.58€  1 282.05€  1 281.96€  1 283.74€  1 282.99€  -0.04%-0.05%0.09%0.03%71 453.67€  1 452.33€  1 452.23€  1 452.96€  1 452.05€  -0.09%-0.10%-0.05%-0.11%81 656.70€  1 653.69€  1 653.61€  1 649.91€  1 649.12€  -0.18%-0.19%-0.41%-0.46%91 969.64€  1 964.25€  1 964.21€  1 957.24€  1 956.83€  -0.27%-0.28%-0.63%-0.65%103 569.60€  3 561.76€  3 561.56€  3 543.53€  3 543.63€  -0.22%-0.23%-0.73%-0.73%Total1 385.28€  1 385.43€  1 385.38€  1 385.17€  1 385.19€  0.01%0.01%-0.01%-0.01%Baseline scenarioScenario 1AScenario 1BScenario 2AScenario 2BGini index - disposable income0.32150.31910.31910.31700.3167Difference from baseline scenario-0.0024-0.0024-0.0045-0.0048Gini index - adjusted disposable income0.32740.32550.32540.32310.3228Difference from baseline scenario-0.0019-0.0019-0.0042-0.0046Poverty (fixed line) - disposable income18.0917.5717.5817.0917.05Difference from baseline scenario-0.51-0.51-1.00-1.03Poverty (fixed line) - adjusted disposable income18.5218.3518.3618.2218.18Difference from baseline scenario-0.16-0.16-0.30-0.34 
 
 
 
 
 
General banking sector developments* 

Confidence  in  the  Italian  banking  sector  has 
fallen in spite of the several measures taken by 
the government. The loss of market confidence is 
reflected  in  the  large  drop  of  Italian  banks'  share 
prices  in  2016,  despite  significant  bank-by-bank 
differences.  There  are  two  main  reasons  behind 
this  development:  (i)  the  persistent  uncertainty 
related to the adequacy of loan loss provisions and 
capital  buffers,  given  the  existing  high  stock  of 
non-performing loans and banks’ limited ability to 
absorb losses in a context of subdued profitability; 
(ii)  the  weak  growth  outlook,  depressing  banks’ 
profitability,  coupled  with  longstanding  structural 
weaknesses,  including  high  operational  costs  and 
corporate governance flaws. The difficulty to find 
a  market  solution  to  address  capital  shortfalls  for 
some  banks,  and  the  widespread  mis-selling  of 
bank  bonds  to  retail  customers,  who  can  claim 

compensation  from  banks,  have  further  added  to 
this  complex  picture.  As  a  result,  and  despite 
policy measures already taken, the Italian banking 
sector  continues  to  be  vulnerable  to  shocks. 
Furthermore,  the  support  it  can  give  to  a  gradual 
economic  recovery  appears  limited  and  it  might 
therefore  become  a  potential  source  of  economic 
spillovers for other euro area countries. 

Banking  sector  capitalisation  has  improved 
marginally,  but  continues  to  lag  behind  that  of 
other  European  peers.  Due  to  retained  earnings 
and private capital increases, the average common 
equity tier 1 and total capital ratio rose to 12.4 % 
and  15.3  %  respectively  in  Q2  2016.  However, 
there are significant bank-by-bank differences. The 
Italian  banking  sector  still  lags  behind  other  euro 
area banking systems and ranks close to the bottom 
with regard to the main solvency indicators (EBA, 
2016).  Low  profitability  and  unfavourable  market 

4.2.  FINANCIAL SECTOR 

Table 4.2.1: 

Italian banking sector key indicators 

Notes: In general, figures are the latest available and are taken at the end of the indicated periods (i.e. December for full 
years, June for Q2), including average interest rates on new loans to firms and households. Average interest rates on new 
loans to households related only to house purchase loans. Gross non-performing loans are gross of loan-loss provisions. Bad 
loans are the worst category of non-performing loans. Domestic sovereign exposure relates only to sovereign debt securities. 
Loan value adjustments as % of operating profit and return on equity (gross and net of goodwill impairments) in the last 
column relate only to the first half of 2016. ‘-‘ indicates that a figure is not available. 
Source: Bank of Italy 

31 

Indicator20082009201020112012201320142015Q2 2016Total assets (EUR billion)3,634.63,690.73,758.94,034.74,211.04,038.34,014.33,914.73,978.4Stock of loans to firms (EUR billion)869.4849.0867.1893.6864.7814.1807.6793.5791.8Stock of loans to households (EUR billion)468.6496.4592.6618.5610.1602.2596.6619.9621.2Average nominal interest rate on new corporate loans4.52%2.17%2.79%4.18%3.64%3.45%2.57%1.91%1.74%Average nominal interest rate on new household loans5.09%2.88%2.97%4.03%3.69%3.50%2.83%2.50%2.20%Gross NPLs (EUR billion)87.1132.8157.5194.8236.9282.5326.6340.9330.5Gross bad loans (EUR billion)41.359.277.8107.2125.0155.9183.7200.9197.9Gross NPL ratio5.1%7.8%8.9%10.8%13.3%16.7%17.1%17.0%16.4%Gross bad loan ratio2.5%3.6%4.5%6.0%7.0%9.2%9.6%10.0%9.8%NPL coverage ratio46.2%40.2%40.4%40.3%38.8%41.8%44.4%45.4%46.4%Bad loan coverage ratio63.1%60.4%58.0%56.3%54.6%56.9%58.7%58.7%59.0%New NPL flow as % of NPL stock4.2%5.1%3.9%3.8%5.4%5.9%5.3%3.3%3.0%New bad loan flow as % of bad loan stock1.6%1.9%1.9%2.0%2.7%2.8%2.8%2.6%2.4%Loan value adjustments as % of operating profit35.1%47.8%49.5%59.8%81.3%107.4%100.0%68.2%75.2%Eurosystem financing (EUR billion)50.327.247.6210.0271.8235.9194.5158.3173.9Domestic sovereign exposure (EUR billion)174.9205.3252.6265.4354.5402.1401.8387.2415.2Core tier 1 capital ratio (pre-Basel 3)7.1%8.2%8.3%9.3%10.6%10.5%---Total capital ratio (pre-Basel 3)10.8%12.0%12.4%13.0%13.8%13.9%---Common equity tier 1 capital ratio (Basel 3)------11.9%12.3%12.4%Total capital ratio (Basel 3)------14.6%15.1%15.3%Cost-to-income ratio64.2%63.0%65.0%67.6%62.6%61.7%62.2%64.1%67.6%Return on equity (net of goodwill impairments)---1.7%1.0%-0.9%-0.3%3.1%2.5%Return on equity4.5%3.8%3.4%-9.3%-0.1%-7.8%-1.8%2.6%2.5%Net profit as % of capital and reserves4.4%2.8%3.0%-6.2%-0.6%-6.0%-2.1%1.0%-Number of banks799788760740706684664643635Number of branches34,13934,03633,66333,60732,88131,76130,74030,25829,511Number of employees-330,512326,367322,345315,238310,258303,595302,885- 
 
 
 
 
4.2. Financial sector 

medium-sized and small banks may be taken over 
by  stronger  entities  or  merge  after  their  balance 
sheets  have  been  cleaned  up.  Finally,  the  2017 
Budget Law extends the financing and scope of the 
sector’s  solidarity  fund  for  the  retraining  and 
requalification  of  bank  employees  and  establishes 
fiscal  incentives  for  staff  reorganisations  in  the 
context of restructuring or mergers.  

their 

the  Bank  of 

supervision),  while 

Medium-sized  and  small  Italian  banks  appear 
more  vulnerable  than  large  credit  institutions. 
‘Less  significant  institutions’  (LSIs,  i.e.  smaller 
Italy’s 
Italian  banks  under 
supervision)  are  on  average  as  profitable  and 
marginally  less  cost  efficient  than  ‘significant 
institutions’  (SIs,  i.e.  the  14  largest  banks  under 
average 
ECB 
capitalisation  is  higher  (Table  4.2.2).  However, 
LSIs  overall  seem  to  exhibit  larger  asset-quality 
issues  (i.e.  higher  impaired-loan  ratios  and  lower 
coverage ratios). This might be explained by LSIs’ 
higher  exposure  to  (riskier)  small  firms  and 
geographical  risk  concentration,  a  lower  ability  to 
work out impaired loans due to the lack of critical 
mass  and  of  specific  expertise,  but  also  by  their 
higher degree of loan collateralisation on average. 
While SIs have been subject to several stress tests 
and  asset-quality  reviews,  LSIs  have  so  far  not 
been covered to the same extent by such exercises. 

conditions  hold  back  the  further  strengthening  of 
capital  buffers,  especially  for  more  vulnerable 
banks. 

Progress in reducing the large stock of problem 
loans  is  limited.  From  the  end  of 2015,  the  stock 
of  non-performing  loans  –  gross  of  loan-loss 
provisions – declined only marginally to EUR 329 
billion in Q3 2016 (16.5% in customer loans, triple 
the  pre-crisis  level).  Bad  loans  stood  at  EUR  198 
billion  (and  EUR  85  billion  net  of  provisions). 
Although  the  ongoing  recovery  has  significantly 
reduced  the  inflow  of  new  problem  loans,  the 
work-out  or  disposal  of  such  loans  has  proceeded 
very 
‘Impaired  asset 
developments’  in  this  section).  The  sector  has 
continued  to raise  coverage ratios, which  are  now 
above 
there  are 
significant bank-by-bank differences. 

the  EU  average,  although 

slowly 

(see 

far 

so 

Banking sector profitability continues to remain 
low. In the first half of 2016, the average return on 
equity stood at 2.5 %, at the bottom of the ranking 
of euro area banking systems. The low profitability 
is  driven  by  several  factors:  (i)  the  low-interest-
rate  environment  and  price  competition  for  the 
most  creditworthy  borrowers,  which  reduce  net 
interest  margins  that  are  key  to  Italian  banks’ 
traditional business models; (ii) the subdued credit 
recovery (see Section 1); (iii) the reduction in non-
interest 
to  unfavourable  market 
developments;  (iv)  the  increase  in  non-recurring 
early-retirement  measures, 
expenses 
resolution fund contributions); (v) significant loan-
loss  provisioning,  albeit  at  a  decreasing  pace 
compared  to  the  recent  past.  The  sector’s  cost-to-
income  ratio  increased  as  modest  cost-cutting 
efforts  may  only  become  visible  over  time  and 
were more than offset by declining revenues. 

income  due 

(e.g. 

The consolidation of the Italian banking system 
is  proceeding  very  slowly.  Consolidation  could 
help  to  improve  cost-efficiency  and  profitability 
and to increase capacity to manage problem loans 
and  invest  in  digital  technologies.  Despite  a 
decline in the number of banks in Italy since 2008, 
the  sector  remains  highly  fragmented.  Since  the 
start  of  the  crisis,  numbers  of  bank  branches  and 
employees  have  declined  by  around  10 %. 
However,  recent  corporate  governance  reforms 
(see  ‘Corporate  governance  reforms’ 
this 
section)  are  supposed  to  foster  consolidation  in 
some  segments.  Furthermore,  some  vulnerable 

in 

32 

 
4.2. Financial sector 

Table 4.2.2:  Key indicators on the Italian banking sector by 

segment, Q2 2016 

Notes: More information on and a list of SIs is available at 
https://www.bankingsupervision.europa.eu/banking/list/wh
o/html/index.en.html. Non-performing and bad-loan ratio 
figures are gross of loan-loss provisions. 
Source: Bank of Italy 

banks 

There are some marked differences between the 
segment  of  small  cooperative  banks  and 
medium-sized  cooperative  banks.  One  the  one 
hand,  compared  to  the  small  cooperative  banks 
the 
(banche  di  credito  cooperativo  (BCCs)), 
(banche 
cooperative 
medium-sized 
popolari) have on average lower capital ratios and 
a higher proportion of impaired loans. On the other 
hand,  BCCs’  revenues  have  been  relatively  more 
affected  by  the  low-interest-rate  environment, 
resulting  in  negative  profitability  on  average 
(Table  4.2.2).  BCCs’  ability  to  raise  new  equity 
from external investors is inter alia constrained by 
their specific cooperative features, which however 
are  supposed  to  be  at  least  partially  addressed  by 
their  ongoing  corporate  governance  reform  (see 
‘Corporate governance reforms’ in this section). 

Several  private  and  public  crisis  management 
interventions  have  taken  place  in  the  Italian 
banking sector since the end of 2015. First, four 
small banks were resolved in November 2015 (23) 
and split into a common ‘bad’ bank and four good 
bridge  banks  owned  by  the  national  resolution 
authority.  In  January  2017,  the  Bank  of  Italy 
approved  the  sale  of  three  of  the  bridge  banks  to 
UBI Banca, whereas the negotiations on the sale of 
the  fourth  bank  to  Banca  Popolare  dell’Emilia 

(23)  For more details, see European Commission, 2016f. 

Romagna are still ongoing. Before being sold, the 
bridge  banks  are  likely  to  be  recapitalised  and 
undergo  a  robust  balance  sheet  clean-up.  Second, 
spring  2016  saw  the  failure  of  the  initial  public 
offering  of  two  medium-sized  popolari  banks 
(Banca  Popolare  di  Vicenza  and  Veneto  Banca). 
As a result, the ‘Atlante I’ fund (a private backstop 
funded  by 
facility  of  EUR  4.25  billion 
contributions  from  other  Italian  banks,  insurers, 
bank  foundations  and  Cassa  Depositi  e  Prestiti) 
underwrote both banks’ equity issuance for a total 
of  EUR  2.5  billion  and  thereby  ended  up  owning 
the  entities  almost  completely.  In  January  2017, 
Atlante I injected another EUR 0.9 billion in these 
banks as part of a further recapitalisation. The two 
banks  were  also  granted  access  to  a  new  public 
liquidity  guarantee  scheme  adopted  in  December 
Commission 
2016 
decisions).  Both  banks  face  at 
the  moment 
significant  legal  claims  for  past  malpractices  and 
have  gross  non-performing  loan  ratios  of  just 
above 30 %.  

(following 

individual 

impaired-loan 

test  (24)  and 

the  non-performing 

Banca  Monte  dei  Paschi  di  Siena  (BMPS) 
announced  in  December  2016  that  its  private 
recapitalisation  plan  had  failed.  The  EUR  5 
billion private recapitalisation coupled with a EUR 
28  billion 
securitisation  was 
triggered  by  the  bank’s  capital  shortfall  under  the 
hypothetical adverse scenario of the 2016 EU-wide 
stress 
loan 
reduction  targets  set  by  the  ECB.  Given  the 
impossibility  to  raise  capital  on  the  market,  the 
bank  applied  for  a  precautionary  recapitalisation 
by  the  Italian  state.  In  anticipation  of  this,  in 
December  2016,  the  government  adopted  the 
framework for setting up a EUR 20 billion fund to 
be used for precautionary recapitalisations. Solvent 
banks  with  a  capital  shortfall  under  the  adverse 
scenario  of  a  stress  test or  equivalent  exercise  are 
eligible 
tool, 
provided  all  relevant  conditions  of  the  Bank 
Recovery  and  Resolution  Directive  are  complied 
with.  Precautionary  recapitalisations  constitute 
State  aid  and  are  available  only  under  specific 
conditions. (25)  Furthermore,  BMPS  was  granted 

this  capital  strengthening 

for 

(24)  http://www.eba.europa.eu/risk-analysis-and-data/eu-wide-

stress-testing/2016 

(25)  The ‘precautionary recapitalisation’ is one exception within 
the  Bank  Resolution  and  Recovery  Directive  (BRRD)  to 
the  principle  that  State  aid  can  be  given  to  a  bank  only  if 
that bank undergoes resolution (Article 32(4)(d)(iii) of the 
BRRD).  It  involves  the  state  injecting  capital  in  a  bank 

33 

IndicatorSIsLSIsLSIs: BCCsLSIs: non-BCCsTotal assets (EUR billion)2,304.0558.0236.0323.0Stock of customer loans (EUR billion)1,517.4314.3133.2181.1Stock of non-performing loans (EUR billion)271.263.426.437.0Stock of bad loans (EUR billion)163.237.014.622.4Non-performing loan ratio17.9%20.2%19.8%20.4%Bad loan ratio10.8%11.8%11.0%12.4%Non-performing loan coverage ratio46.6%43.6%42.3%44.5%Bad loan coverage ratio58.8%57.6%56.1%58.6%Loan value adjustments as % of operating income80.3%70.8%95.5%55.4%CET 1 ratio (Basel 3 phased-in)11.7%15.5%16.3%14.9%Total capital ratio (Basel 3 phased-in)15.1%16.6%16.8%16.5%Return on equity (net of goodwill impairments)2.2%2.2%-0.5%4.6%Cost-to-income ratio67.8%69.9%68.5%70.7% 
 
 
 
                                                           
                                                           
access to a new public liquidity guarantee scheme 
adopted 
(following  an 
individual Commission decision).  

in  December  2016 

through  wholesale  and 

Overall,  the  liquidity  situation  of  the  banking 
sector  has  remained  comfortable.  Banks’ 
funding  costs  have  declined  further.  Resident 
deposits  have  continued  to  grow  –  offsetting  the 
gradual reduction in non-resident deposits – while 
funding 
retail  bond 
issuance  has  decreased  further.  From  mid-2016, 
Italian  banks’  reliance  on  ECB  refinancing  rose 
again  to  EUR  204  billion  (6.5 %  of  liabilities)  in 
December 2016, mainly replacing more expensive 
wholesale  funding  or  due  to  switching  from  the 
first  to  the  second  round  of  the  ECB’s  targeted 
longer-term  refinancing  operations.  In  January 
2017, the Canadian rating agency ‘DBRS’ lowered 
the  Italian  sovereign’s  long-term  credit  rating, 
which led to an increase in the haircuts applied to 
Italian  marketable  securities  posted  as  collateral 
with  the  ECB.  Consequently,  it  has  become  more 
costly  for  Italian  banks  to  obtain  ECB  funding 
secured by domestic marketable securities. 

Despite  the  generally  comfortable  funding 
environment,  some  vulnerable  banks  have 
experienced  liquidity pressures.  These  pressures 
led  to  deposit  outflows  from  those  banks,  while 
residents’  deposits  overall  continued  to  grow.  To 
mitigate  unwarranted  developments  in  the  case  of 
pressure  on  the  liquidity  position  of  banks,  in 
December  2016  the  Italian  government  adopted  a 
scheme 
to  guarantee  new  bank  debt  and 
emergency liquidity assistance by the central bank 
against  a  fee.  The  liquidity  scheme  was  approved 
by the Commission and is valid until mid-2017.  

which  has  a  capital  shortfall  in  the  adverse  scenario  of  a 
stress  test  or  asset-quality  review,  but  which  is  solvent  in 
the  baseline  scenario.  The  aid  must  be  temporary  and 
limited to the shortfall identified under the adverse scenario 
so  that  it  covers  only  unlikely  (not  incurred  or  likely) 
losses. Furthermore, three criteria must be satisfied for the 
Commission to authorise the State aid: (i) the shareholders 
and  subordinated  bondholders  of  an  aid-receiving  bank 
contribute to the cost of the bank’s failure first to minimise 
the  amount  of  taxpayer  money  used  (‘burden-sharing 
principle’);  (ii)  the  bank  is  restructured  to  ensure its  long-
term  viability;  (iii)  proportionate  measures  are  applied  to 
remedy competition distortions. 

4.2. Financial sector 

Table 4.2.3:  Bank bonds by seniority, holding sector and 
size of issuing bank, Q2 2016 

Notes: Seniority refers to the order of payment in the event a 
bank cannot longer service all of its liabilities. Senior bonds 
must be repaid before subordinated bonds. 
Source: Bank of Italy 

the 

have 
to 

banks 
bonds 

stopped 
retail 

The stock of bank bonds held by retail investors 
which  could  be  subject  to  burden-sharing  or 
bail-in  is  expected  to  decline  further.  The 
selling 
of 
majority 
subordinated 
investors. 
Furthermore, targeted information campaigns have 
increased 
risks 
investors’  awareness  of 
associated  with  these  instruments.  In  Q3  2016, 
households’  holdings  of  bank  bonds  had  declined 
to  EUR  154  billion  from  their  peak  of  EUR  393 
billion  in  Q1  2012.  In  most  cases,  retail  investors 
have  switched  to  deposits  or  investment  funds, 
partly  encouraged  by  the  increase  in  the  tax  rate 
applied to bank bond returns compared to the more 
favourable  treatment  until  2012.  In  Q2  2016, 
households  still  held  EUR  25  billion  in (the  more 
risky)  subordinated  bonds  (43 %  of  the  total)  and 
EUR 156 billion in senior bonds (30 % of the total) 
(Table 4.2.3). The five largest banks accounted for 
just  over half of  the  total  amount outstanding. On 
average,  bank  bonds  account  for  around  5  %  of 
households’  total  wealth  and  are  held  by  only 
around  5 %  of  Italian  households,  which  mostly 
belong  to  the  highest  decile  of  the  distribution  of 
financial wealth (Bank of Italy, 2016b). 

Retail  investors  impacted  by  the  mis-selling  of 
bank  bonds  can  claim  damages.  Following  the 
resolution of four small banks in November 2015, 
which involved burden-sharing for retail investors 
holding  subordinated  bonds,  a  solidarity  fund  for 
granting  retail  investors  compensation  was  set  up 
and  is managed  by  the deposit  guarantee  fund for 
credit  institutions  (FITD).  The  decree  law  in 
question established a compensation procedure for 

34 

Senior bank bonds(EUR billion)Top-5 banking groupsOther large banksMedium-sized banksSmall banksTotalHeld by banks156.718.923.67.2206.5Held by households77.213.319.046.3155.7Held by others120.325.212.23.7161.4Total354.257.554.857.2523.6Subordinated bank bonds(EUR billion)Top-5 banking groupsOther large banksMedium-sized banksSmall banksTotalHeld by banks8.90.71.00.911.4Held by households16.33.22.63.025.2Held by others19.00.91.70.722.4Total44.24.85.34.658.9 
                                                                                   
 
 
 
4.2. Financial sector 

Graph 4.2.1:  Net non-performing debt instruments as % of 

total own funds for solvency purposes, Q2 2016 

the mis-selling of subordinated bonds issued by the 
resolved  banks.  Financially  vulnerable 
retail 
investors  who  had  acquired  their  subordinated 
bonds before 12 June 2014 (the publication date of 
the EU’s Bank Recovery and Resolution Directive) 
were given access to an accelerated procedure. An 
alternative  arbitration  procedure  is  also  envisaged 
but  is  not  yet  operational.  Under  the  accelerated 
mechanism,  by  the  end  of  January  2017,  23  %  of 
the some 14 400 claims received by then had been 
settled,  corresponding  to  payments  of  EUR  44 
million.  A  compensation  mechanism  for  retail 
bondholders  that  were  victims  of  mis-selling  is 
also planned as part of the envisaged precautionary 
recapitalisation  of  Banca  Monte  dei  Paschi  di 
Siena. 

Impaired asset developments* 

Source: ECB 

The  banking  sector’s  non-performing 
loan 
problem  is  systemic  and  weighs  on  Italy’s 
economic  recovery.  The  gradual  deterioration  of 
loan quality in recent years has affected all parts of 
the  Italian  banking  sector.  The  largest  banks 
account  for  around  three  quarters  of  total  non-
performing  loans  (NPLs). (26)  Net  of  loan-loss 
provisions,  NPLs  accounted  for  86  %  of  the 
banking sector’s own funds (Graph 4.2.1). A high 
NPL  stock  is  a  drag  on  a  bank’s  profit  as  it 
generates  less  interest  income,  requires  loan-loss 
recognition and increases operating costs related to 
NPLs’ management and work-out. NPLs also hold 
back  the  recovery  of  credit  and  thereby  weigh  on 
investment  as  they  lock  in  a  bank’s  capital 
otherwise  available  for  new  lending,  lead  to  more 
conservative  lending  and  raise  a  bank’s  cost  of 
funding  (IMF,  2015b;  Balgova  and  Plekhanov, 
2016). Regarding  individual  banks,  Graph  4.2.2 
suggests  that  low  average  asset  quality  appears  to 
be  associated  with  subdued  growth  in  gross 
customer 
recovery 
loans.  This  weak  credit 
hampers  the  full  transmission  of  expansionary 
monetary policy measures to the economy. Finally, 
problem loans tend to create uncertainty and weigh 
on  investors’  and  depositors’  confidence  in  the 
banking sector.  

(26)  In  Q2  2016,  among  Italy's  14  largest  banks  of  which  the 
main  activity  is  traditional  deposit-taking  and  lending,  the 
gross  NPL  ratio  ranged  from  6.4  %  to  34.9  %,  with  an 
average of 18.6 % and a median of 23.3 %. Four banks in 
the sample had gross NPL ratios above 30 %. 

the 

impaired 

loans  with 

Some specific features of Italy’s NPL stock may 
reduce recovery prospects. First of all, bad loans 
– 
lowest  recovery 
prospects – represent the bulk of NPLs, i.e. around 
60 %  of  the  gross  total  in  Q3  2016  (EUR  197 
billion).  Unlikely-to-pay  loans  and  past-due  loans 
account for 37 % (EUR 120 billion) and 3 % (EUR 
10  billion)  respectively.  Second,  on  the  sectoral 
distribution  of  impaired  loans,  the  non-financial 
corporate  sector  accounts  for  just  over  70 %  of 
total gross NPLs (in value terms) and also displays 
a  much  higher  gross  incidence  of  NPLs  (30.2  %) 
than households (8.6 %) and other sectors (9.1 %). 
Third,  regarding  their  geographical  distribution, 
gross  corporate  NPL  ratios  in  the  southern  and 
economically more fragile parts of the country are 
a  lot  higher  (around  40 %)  than  in  northern  and 
central  parts  (25 %  to  35 %).  Moreover,  the 
geographical  dispersion  of  NPLs  implies  that 
recovery  prospects  may  vary  widely.  Fourth,  the 
stock  of 
rather 
fragmented: small bad loans of up to EUR 75 000 
account for 74 % of the total number of borrowers 
for  the  entire  bad  loan  stock,  while  representing 
only 6.7 % of the total value of the entire bad loan 
stock  (Graph  4.2.3).  The  recovery  prospects  of 
such  small  corporate  non-performing  exposures  – 
in  most  cases  linked  to  micro-  and  small  firms  – 
may  be  constrained  by  economic  and  social 
considerations.  Finally,  although  corporate  NPLs 
exist  in  all  industries  and  geographical  areas, 
construction features a much higher gross bad-loan 

loans  appears 

Italian  bad 

35 

0255075100125150175200225250275CYGRPTITIEBGSIHUROESLIHRDKCZLVMTATBEFRNLPLDESEFIEELU% 
                                                           
 
4.2. Financial sector 

ratio  (30.3 %)  than  industry  (13.2 %)  or  services 
(16.2 %).  

Graph 4.2.3:  Cumulative distribution of the Italian bad-loan 
stock by loan value and number of borrowers, 
Q3 2016 

Graph 4.2.2:  Relationship between banks’ loan growth and 

asset quality 

Notes: Each dot represents a single bank. The sample 
consists of Italy's 14 largest banks of which the main activity 
is traditional deposit-taking and lending. 
Source: European Commission, banks' financial reports 

the 

The inflow of new NPLs has slowed down since 
the  beginning  of  2015.  Italy’s  gradual  economic 
recovery  contributes 
improvement  of 
to 
borrowers’  financial  situation.  For  firms,  the 
number  of  bankruptcies  and  other  insolvency 
procedures  continued  to  fall  in  2016.  Together 
with  banks’  more  conservative  lending  practices, 
this has reduced the new NPL rate to 2.6 % in Q3 
2016 (from the end-2013 peak of 5.9 %). The new 
bad-loan rate fell to a lesser extent (to 2.3 % in Q3 
2016  from  the  mid-2013  peak  of  3.2 %).  This  is 
because  loans  that  are  already  impaired  (i.e. 
unlikely-to-pay  loans  and  to  a  lesser  extent  past-
due  loans)  still  migrate  to  the  bad  loans  category. 
As  bad  loans  are  characterised  by  a  much  higher 
coverage  rate (59 %  on  average  in  Q2  2016)  than 
unlikely-to-pay  loans  (28.3 %)  and  past-due  loans 
(17.7 %),  this migration  is  a  continuous  source  of 
further provisioning needs. (27) 

(27)  The source for all figures in this paragraph is Bank of Italy. 

Source: Bank of Italy 

Several factors still prevent the development of 
a secondary market for impaired assets in Italy. 
The  pricing  gap  –  defined  as  the  difference 
between  NPLs'  net  book  value  on  banks'  balance 
sheets  and  specialised  investors'  bid  prices  –  is 
currently estimated at around 20 percentage points. 
This  means  that  banks  would  have  to  book 
considerable  losses  when  selling  NPLs  under 
current  market  conditions.  The  pricing  gap  is 
driven by several factors: (i) the difficulties which 
some bank experience in  adequately raising NPL 
coverage  ratios  given  their  low  profitability;  (ii) 
lengthy and cumbersome insolvency and collateral 
enforcement  procedures,  which  lower  recovery 
rates  and  raise  recovery  costs;  (iii)  banks’  and 
specialised  investors’  use  of  different  valuation 
criteria  (e.g.  the  factor  used  to  discount  expected 
cashflows,  the  accounting  method  for  indirect 
costs  of  problem 
(iv) 
information  asymmetries  between  sellers  and 
buyers of impaired loans, often linked to a lack of 
granular data on loan portfolios due to inadequate 
loan  management  and  record-keeping;  (v)  the 
underdevelopment  of  Italy's  NPL  market  itself, 
resulting  in  higher  liquidity  premia  and  lack  of 
competition  which  in  turn  drives  up  investors' 
required return rates. 

loan  management); 

Other  factors  may  also  help  to  explain  the 
modest activity in the Italian secondary market 
for  impaired  loans.  Some  banks  may  prefer  to 
wait with the disposal of their impaired loans until 

36 

0%5%10%15%20%25%30%35%-15%-10%-5%0%5%10%Gross non-performing loan ratio (Q4 2014)Change in gross total customer loans(Q4 2014 -Q2 2016)0%10%20%30%40%50%60%70%80%90%100%< EUR 30 k< EUR 75 k< EUR 125 k< EUR 250 k< EUR 500 k< EUR 1 m< EUR 2.5 m< EUR 5 m< EUR 25 m> EUR 25 mCumulative share of total borrowersCumulative share of total loan value 
 
                                                           
 
4.2. Financial sector 

the  economic  recovery  and  structural  reforms 
improve  the  recovery  prospects  of  such  loans. 
Some banks might be reluctant to terminate  client 
relationships  (‘loan  evergreening’).  Furthermore, 
the sale of large impaired loan portfolios may have 
an  adverse  effect  on  some  parameters  of  banks' 
internal ratings models (e.g. the loss-given-default 
capital 
parameter)  which  determine  banks' 
requirements.  Moreover, 
the  sale  of  highly-
provisioned  NPLs  tends  to  cause  a  fall  in  the 
average  coverage  ratio  which  is  an  element  that 
banks  may  be  reluctant  to  report,  even  though 
average asset quality has improved. Finally, small 
banks'  NPL  portfolios  may  tend  to  lack  critical 
mass  and  be  insufficiently  diversified  to  attract 
investors.  

NPL  market  activity  in  Italy  has  remained 
modest. So far, banks have preferred or have been 
compelled  to  work  out  impaired  loans  internally. 
Although some banks have taken steps to improve 
their  arrears  management  capacity,  considerable 
scope  remains  to  further  upgrade  internal  NPL 
strategies  and  practices.  In  the  meantime,  NPL 
market  activity  in  Italy  continued  to  be  modest. 
The  sale  of  impaired  assets  is  expected  to  have 
reached  almost  EUR  14  billion  in  2016,  which 
means  a  considerable  reduction  from  the  EUR  19 
billion  of  2015  (PwC,  2016).  However,  market 
activity  may  pick  up  in  2017  as  several  large  and 
medium-sized  banks  are  planning  to  dispose  of 
significant  NPL  portfolios, 
through 
securitisation.  Until  now,  the  sale  of  impaired 
loans has mainly been opportunistic and concerned 
highly provisioned unsecured exposures, which are 
relatively easy to work out. 

including 

Several initiatives were taken to address banks' 
NPL problem, but as a comprehensive strategy 
is  still  missing,  short-term  relief  to  the  sector 
has  been  limited  so  far.  Most  of  the  adopted 
measures  aim  to  foster  the  development  of  a 
secondary  market  for  distressed  assets  in  Italy. 
These  include  (European  Commission,  2016f)  the 
removal  of 
loan-loss 
tax  disincentives 
provisioning,  further  reforms  of  insolvency  and 
collateral  enforcement  rules  and  the  setting-up  of 
an  NPL  securitisation  scheme  backed  by  state 
guarantees,  provided  at 
terms 
(GACS)  (28).  The  scheme  –  for  the  time  being 
available  until  October  2017  –  allows  a  bank  (or 

‘no-State-aid’ 

to 

group  of  banks)  to  set  up  a  securitisation  vehicle 
that  issues  senior-,  junior-  and  optionally  also 
mezzanine-ranked notes to acquire bad loans from 
that bank. Some banks are expected to make use of 
the  scheme  in  the  future.  Although  this  scheme 
may  help  to  reduce  the  NPL  pricing  gap  by 
lowering  funding  costs,  its  effectiveness  may  be 
challenged  by  several  factors.  Most  importantly, 
the  appetite  of  private  investors  for  a  vehicle's 
riskier non-senior tranches may be limited if banks 
are unwilling or unable to grant a sufficiently high 
haircut on their bad loan portfolios. However, this 
drawback  may  be  partially  mitigated  by  the 
‘Atlante II’ fund (currently having EUR 1.8 billion 
in  resources),  which  aims  to  support  the  disposal 
of  impaired  loans,  including  by  investing  in  non-
senior tranches of bad loan securitisation vehicles. 
(29) Nevertheless, Atlante II may not have the full 
capacity  needed  to  play  a  systemic  role  in  the 
cleaning  up  of 
Italian  banking  sector. 
Moreover,  similar  to  Atlante  I,  the  financing 
structure  of  Atlante 
source  of 
interdependencies  between  stronger  and  weaker 
entities. This could lead to contagion if unexpected 
losses  arise  from  investments.  Atlante  II  has  not 
yet  made  investments,  but is  expected  to  do  so  in 
the  context  of  some  vulnerable  banks'  bad  loan 
securitisation  operations.  Finally,  the  public  EUR 
20  billion  fund,  created  to  support  vulnerable 
banks  and  protect  savers,  may  facilitate  the 
cleaning up the Italian banking system. 

the 

is 

II 

a 

loans,  collateral  and  ongoing 

Supervisors are becoming more assertive on the 
need  for  banks  to  address  the  NPL  problem. 
Bank of Italy has issued a new reporting template 
requiring  banks  to  provide  detailed  data  on  their 
bad 
recovery 
procedures.  This  could  help  banks  improve  the 
management of impaired loans, reduce information 
asymmetries and better inform supervisory action. 
The  ECB  has  issued  guidance  to  banks  on  NPLs, 
which  the  Bank  of  Italy  intends  to  also  apply  to 
less 
its  own 
supervision.  A  stocktaking  report  accompanying 
the  guidance  suggests  considerable  scope 
to 
expand  supervisory  guidance  at  national  level. 
Finally,  the  ECB  is  raising  pressure  on  more 
vulnerable banks, e.g. with NPL reduction targets. 

institutions  under 

significant 

Inefficiencies in Italy’s insolvency and collateral 
frameworks  have  not  been 
enforcement 

(28)  Garanzia sulla cartolarizzazione delle sofferenze 

(29)  EUR 1 billion of Atlante II's capital comes from Atlante I. 

37 

 
                                                           
                                                           
4.2. Financial sector 

judicial  system.  Meanwhile,  the  ‘Rordorf’  experts 
committee  has  prepared  the  overhaul  of  Italy’s 
insolvency framework, leading to a draft enabling 
law currently under discussion in Parliament. This 
root-and-branch  reform  is  expected  to  streamline 
the insolvency tools and increase specialisation.  

Corporate governance reforms* 

The  implementation  of  the  reforms  of  banche 
popolari  and  bank  foundations is  broadly  on 
track.  The  implementation  of  the  2015  reform  of 
large  cooperative  banks  (banche  popolari)  is 
almost  complete:  all  but  two  large  popolari 
became  joint-stock  companies.  However,  Banca 
Popolare  di  Sondrio  and  Banca  Popolare  di  Bari 
have postponed their conversion in anticipation of 
a  Constitutional  Court  ruling  following  legal 
challenges  against  the  reform’s  restriction  on 
shareholders’  withdrawal  rights.  Furthermore,  a 
first  merger  (between  Banco  Popolare  and  Banca 
Popolare  di  Milano)  became  effective  at  the 
beginning  of  2017,  after  the  former  raised  an 
additional  EUR 1 billion  capital  upon  supervisory 
request.  On  bank  foundations,  the  implementation 
of  the  Memorandum  of  Understanding  with  the 
Ministry  of  Economy  and  Finance  is  ongoing: 
almost  all  foundations  have  complied  with  the 
April 2016 deadline to align their statutes with the 
memorandum,  but  divestments  from  reference 
banks  have  incurred  a  delay  due  to  unfavourable 
market  conditions.  In  October  2016,  one  third  of 
the 
foundations  had  divested 
requirements  of  the  memorandum.  Half  of  the 
remaining 
the 
foundations  were  still  above 
requested thresholds, albeit by small amounts. 

line  with 

in 

The implementation of the  self-reform  of  small 
cooperative banks has started. With the adoption 
of the primary law in April 2016 and the Bank of 
Italy’s  secondary  provisions  in  November  2016, 
the 18-month implementation period for the reform 
of  Italy’s  banche  di  credito  cooperativo  (BCCs) 
has  started.  The  reform  obliges  BCCs  to  join  a 
cooperative  banking  group  (which  can  be  either 
national  or  provincial)  in  order  to  retain  their 
cooperative  status.  The holding of  a  group should 
be a joint-stock company and will have the power 
to  direct  and  coordinate  member  BCCs  on  the 
basis  of  risk-based  ‘cohesion  contracts’.  Holding 
groups  must  meet  certain  minimum  capital 
requirements  and  have  an  internal  safety  net 
provided by a cross-guarantee between cooperative 

overcome yet. Well-designed (pre-)insolvency and 
foreclosure  frameworks  are  of  key  importance  to 
preventing  the  piling  up  and  the  working  out  of 
NPLs,  raising  impaired  loans’  recovery  value, 
developing  a  secondary  market  for  NPLs,  and 
fostering  the  reallocation  of  productive  resources. 
In Italy, however, the multitude and complexity of 
procedures, and capacity constraints caused by the 
crisis-driven surge in cases are proving difficult to 
tackle.  For  instance,  bankruptcy  proceedings  on 
average continue to be excessively long (7.4 years 
over  July 2015-June 2016,  as  against  7.9  years 
over  the  previous  12  months),  with  very  large 
regional disparities. Furthermore, the average time 
needed  to  enforce  real  estate  (3.3  years  over 
July 2015-June 2016, as against 3.7 years over the 
previous 12 months) as well as movable assets (0.5 
years  over  July  2015-June  2016,  unchanged  from 
the  previous  12  months)  remained  very  long. (30) 
Moreover, 
insolvency 
proceedings was still minimal in 2015. At the end 
of  2014,  only  15  %  of  restructuring  procedures 
were  concluded  within  four  years  (Bank  of  Italy, 
2016b).  These  weaknesses  are  highly  relevant 
given Italian NPLs’ significant collateralisation: in 
Q2  2016,  they  were  secured  by  real  and  personal 
guarantees for 67 % of their total gross amount. 

creditors’ 

role 

in 

The  Italian  authorities  took  further  action  in 
2016, but a systemic overhaul of the insolvency 
framework  is  still  under  debate.  In  addition  to 
reforms  enacted  in  2015  (European  Commission, 
2016f),  a  new  law  inter  alia  authorises  private 
enforcement  clauses  in  loan  contracts  with  firms 
allowing  creditors,  in  the  event  of  a  debtor's 
default, to take ownership of collateral out of court 
(pactum  marcianum).  This  could  significantly 
reduce  the  time  needed  to  enforce  collateral,  and 
lenders  may  also  be  able  to  make  use  of  such  a 
clause  when  renegotiating  already  existing  loan 
agreements. The law also enables entrepreneurs to 
pledge  movable  assets  while  continuing  to  use 
them  (a  kind  of  non-possessory  lien).  In  addition, 
an electronic register for insolvency cases is being 
set up, which should enable better monitoring and 
foster  discipline.  Although  most  of  the  measures 
taken  so  far  may  support  a  faster  disposal  of 
impaired assets, their effects may materialise only 
in  the  medium  term  and  in  some  cases  be 
dependent on improvements in the capacity of the 

(30)  The  source  for  all  figures  on  the  length  of  proceedings  is 

the Italian Ministry of Justice. 

38 

 
                                                           
4.2. Financial sector 

banks inside the same group. The Bank of Italy has 
asked entities envisaging to become the holding of 
a  group  to  announce  their  intention  by  the  end  of 
January  2017.  The  BCCs’  shareholders  have  to 
decide  which  group  they  would  like  to  join  when 
they  adopt  their  banks’  2016  financial  statements. 
It is currently expected that up to two national and 
one provincial cooperative banking groups may be 
set  up.  Cooperative  groups  reaching  ‘significant 
institution’ status will be directly supervised by the 
ECB and will therefore be subject to a prior stress 
test  and  asset-quality  review.  If  successfully 
implemented,  the  reform  should  make  the  BCC 
segment  more  resilient  due  to  easier  access  to 
capital markets, cross-guarantees, benefits of scale 
and  cost  synergies.  It  would  also  be  a  big  step 
forward in reducing banking sector fragmentation. 

Reductions  in  the  size  of  banks’  management 
boards  have  been  made  at  a  slow pace. As  part 
of  a  broad  corporate  governance  reform  in  2014, 
the  Bank  of  Italy  set  stricter  requirements  on  the 
composition  and  size  of  bank  boards  and  the  role 
of a board’s chairperson as non-executive director, 
as well as guidance for boards’ self-assessment to 
strengthen  risk  management  and  internal  controls. 
While  banks  have  implemented  most  of  these 
changes,  the  reduction  in  the  number  of  board 
members is proceeding slowly. According to Bank 
of  Italy,  the  average  size  of  managing  boards  for 
listed  banks  is  currently  12.9  (compared  to  14.1 
two years ago). However, Italian banks – including 
those  under  ECB  supervision  –  still  have  larger 
boards  of  directors  as  compared  with  European 
peers. Furthermore, some credit institutions have a 
dual  board  system  and  the  move  towards  a  single 
board system appears to be limited. 

39 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET* 

The Jobs Act and its impact 

Italian  labour  market  institutions  have  been 
deeply  reformed  over  the  last  two  years.  The 
enabling  law  for  the  reform  of  the  labour  market 
(‘Jobs  Act’)  was  adopted  at  the  end  of  2014.  All 
implementing  legislative  decrees  were  adopted  in 
2015.  The  Jobs  Act  reduced  the  cost  and  the 
uncertainty  of  individual  dismissals,  rationalised 
contractual  forms  and  passive  policies  (including 
wage  supplementation  schemes)  and  initiated  a 
broad  reform  of  active  labour  market  policies, 
bringing  the  Italian  labour  market  closer  to  the 
labour 
reduced 
streamlined 
for 
administrative 
inspection  activities  and  included  measures  to 
promote the balance between work and family life. 
The  objective  was  to  improve  the  entry  and  exit 
flexibility,  enhance  labour  reallocation,  reduce 
open-ended 
duality 
employment.  To 
the 
support 
government enacted generous fiscal incentives for 
permanent new hires in 2015 and 2016. For 2017, 
incentives  are  targeted  to  young  people  and 
workers  in  the  south  (European  Commission, 
2015a; European Commission, 2016b).  

flexicurity  model. 
costs 

stable 
the 

It  also 

promote 

reform, 

firms, 

and 

target.  While 

is  growing  and  dualism 

in  2014 
the  main  contributor 

Positive  effects  are  already  emerging,  as 
employment 
is 
reducing.  (31)  Employment  started  to  pick  up  in 
the  second  half  of  2014  and  accelerated  in  2015, 
but  remains  far  from  the  67-69 %  Europe  2020 
temporary 
national 
employment  was 
to 
employment  growth,  since  Q2  2015,  permanent 
employment  has  become  the  main  driver  (Graph 
4.3.1).  In  2016,  in  spite  of  a  substantial  reduction 
in  hiring  subsidies  (from  100 %  of  social  security 
contributions  to  40 %),  dependent  employment 
continued  to  expand.  Administrative  data  from 
INPS and the Ministry of Labour confirm that the 
number  of  new  hires  on  open-ended  contracts 
increased  significantly  in  2015  relative  to  2014. 
However, as fiscal incentives were scaled down, in 
between January and August 2016, the number of 
new  hires  with  open-ended  contracts  was  lower 
than  the  number  of  new  hires  on  fixed-term 

(31)  Labour market ‘dualism’ refers to the division of the labour 
market  into  two  different  segments,  usually  temporary 
contracts and permanent contracts.  

contracts. At the same time, the rate of conversion 
from fixed-term to open-ended contracts remained 
higher in 2016 than in 2013-2014, suggesting that 
the reform is having a lasting impact. 

Graph 4.3.1:  Contribution to annual employment growth by 

contractual status 

Source: Istat, Labour Force Survey 

Remaining challenges 

Collective bargaining 

suffers 

to  economic  conditions, 

from 
Italy’s  collective  bargaining 
several 
contracts 
shortcomings.  Firm-level 
concern  a  minority  of  firms.  This  limited  use  of 
firm-level  bargaining  hampers  the  response  of 
wages 
the  efficient 
allocation  of  resources  and  the  development  of 
innovative  solutions  at  firm  level  that  could 
improve  productivity.  This  is  also  due  to  some 
specific  features  of 
the  collective  bargaining 
framework,  which  entail  uncertainty  in  industrial 
relations  and  reduce  the  scope  for  firm-level 
negotiations.  These  features  were  described  in 
European Commission, 2016b, Box 2.4.1. 

framework.  The 

Contracts are  renewed sector-by-sector, but no 
progress  is  made  in  reforming  the  collective 
rules  currently 
bargaining 
regulating  collective  bargaining  were  agreed  in 
2009  and  formally  expired  in  2013,  but  social 
partners  repeatedly  postponed  an  agreement  on  a 
new  framework.  In  December  2016,  the  largest 
employer  association  and  trade  unions  started 
bargaining 
preliminary 

discussion 

the 

on 

40 

-1.0-0.50.00.51.01.52.02.5Jan 14Apr 14Jul 14Oct 14Jan 15Apr 15Jul 15Oct 15Jan 16Apr 16Jul 16Percentage poinrsPermanentFixed-termSelf-employedTotal employment (year-on-year % change) 
 
                                                           
 
4.3. Labour market, education and social policies 

economic cost, also when considering that women 
have relatively higher educational attainment rates 
than  men.  Available  estimates  suggest 
that 
increasing women’s labour market participation to 
the  level  of  men  would  increase  Italy’s  GDP  by 
15 % (IMF, 2016; Eurofound, 2016). 

The  tax  system  continues  to  discourage  second 
earners  from  participating  in  the  labour  force. 
In  Italy,  the  financial  disincentives  to  move  from 
inactivity  and  social  assistance  to  employment 
(‘inactivity  trap’)  are  above  the  EU  average  and 
growing.  A  second  earner  taking  up  a  job  with  a 
wage  equivalent  to  67 %  of  the  average  wage 
would  find  nearly  31 %  of  this  wage  taxed  away 
through  the  combination  of  taxes,  social  security 
contributions  and  reduced  social  transfers.  This 
compares  with  30.5 %  in  2014  and  30 %  on 
average in the EU. The high inactivity trap can be 
explained  by  the  steep  progressivity  of  income 
taxes,  the  tax credits  for  the not-employed  spouse 
and tax credits and/or cash transfers for dependent 
children (Colonna and Marcassa, 2015).  

include 

and 
labour 

children 
female 

Access  to  affordable  childcare  remains  limited, 
with  wide  regional  disparities.  The  employment 
gender  gap (32)  widens  very  significantly  when 
elderly 
households 
persons. (33)  Besides, 
force 
participation  is  highly  sensitive  to  childcare  costs 
and  the  effects  are  particularly  pronounced  for 
married  and  less-educated  women,  who  are  also 
those  more  likely  to  face  higher  inactivity  traps. 
This  suggests  that  access  to  affordable  care  for 
children and the elderly is essential to raise female 
participation.  Yet,  around  25 %  of  children  are 
covered  by  public  childcare  in  the  north,  where 
there is nevertheless unmet demand, and only 5 % 
in the south.  

have 

allowances  may 

Cash 
negative 
consequences for labour participation. Given the 
shortage  in  the  supply  of  childcare,  childcare 
subsidies  in  cash  may  create  disincentives  for 
women to work. However, policy action has been 
centred on cash allowances. An allowance of EUR 
80  per  month  for  three  years  was  introduced  in 

(32)  The employment gender gap is the difference between the 
employment rate among men and that among women. 
(33)  The  gender  gap  is  over  20  percentage  points  for  women 
with  one  child,  30  percentage  points  for  those  with  two 
children  and  nearly  40  percentage  points  for  those  with 
three children. 

framework.  Negotiations are now taking place on 
a  sector-by-sector  basis.  Current  negotiations 
between trade unions and employers’ organisations 
focus  mainly  on  how  to  adjust  salaries  to  price 
inflation.  Another  aspect  is  the  possibility  to 
(e.g. childcare, 
provisions 
include  welfare 
additional 
second-level 
security) 
social 
bargaining,  possibly  instead  of  wage  increases. 
The metal sector agreement for 2016-2019, signed 
by the social partners in November 2016 after long 
negotiations, includes these elements.  

in 

on 

for 

for 

trade 

agreement 

union 
trade 
The 
representativeness,  a  prerequisite 
the 
decentralisation  of  collective  bargaining,  has 
not  yet  been  implemented.  In  2014,  the  three 
main trade unions and Confindustria agreed on the 
criteria 
union 
measuring 
representativeness,  a  prerequisite  for  having  legal 
certainty  about  the  validity  and  enforceability  of 
level. 
contracts  at  firm, 
Although  similar  agreements  have  been  signed 
with  other  employers’  associations,  none  of  them 
is operational yet but negotiations are progressing. 
The  application  of  the  agreed  criteria  will  resolve 
the  uncertainty  linked  to  workers’  representation 
and  the  relationship  between  different  bargaining 
levels,  which  is  a  major  obstacle  to  establishing 
binding agreements at firm and local level. 

local  and  national 

impact 

tax 
wages 

incentives 
to 

on 
The 
of 
productivity-related 
foster 
second-level  bargaining  has  not  yet  been 
assessed.  To  foster  the  decentralisation  of  wage 
bargaining, the 2017 Budget Law strengthened the 
tax  rebates  on  productivity-related  wage  increases 
introduced  in  2016.  Waived  fiscal  revenues  are 
estimated  to  increase  gradually  to  nearly  EUR  1 
billion  per  year  in  2019.  Effective  monitoring  of 
the  actual  impact  on  firms’  internal  organisation 
and salary policies will be crucial to avoid that the 
scheme  is  used  only  to  benefit  from  lower 
contributions and higher net salaries. 

Labour participation of second earners 

female 

The  potential  of 
labour  market 
participation remains largely underutilised. The 
employment  rate  of  women  remains  very  low 
(50.6 % for those aged 20-64 years, 20 percentage 
points  less  than  for  men),  as  does  the  female 
activity  rate  (54.1 %  in  2015,  as  against  an  EU 
average  of  66.8 %).  This  results  in  a  large 

41 

 
                                                           
4.3. Labour market, education and social policies 

2015  for  children  born  or  adopted  in  2015-2017. 
The  budgetary  impact  is  over  EUR  1  billion  per 
year in 2017 and 2018 but the effectiveness of the 
measure  is  unclear.  Law 92/2012  introduced  the 
possibility  of  exchanging  the  parental  leave  with 
babysitting vouchers, to be re-financed every year. 
Take-up  was  limited  at  first,  but  in  2016  the 
measure  was  very  successful  and  the  budgetary 
allocation was entirely spent by August. The 2017 
Budget  Law  extends  this  possibility  to  2017  and 
2018.  The  law  also  introduces  from  2017  a 
non-means-tested  voucher  of  EUR  1 000  per  year 
to be spent in public or private nurseries. 

Paternity leave is among the shortest in Europe. 
Paternity leave in Italy is two days, one of which is 
paid  in  full.  The  2017  Budget  Law  extends  the 
paternity  leave  to  four  days  from  2018.  This 
limited  paternity  leave  has  effects  on  women’s 
employment  and  on  gender  equality,  both  on  the 
supply  side  (in  terms  of  the  number  of  women 
looking  for  a  job)  and  the  demand  side  (the 
perception  that  the  costs  of  child-caring  are 
associated only with mothers).  

Active labour market policies 

The implementation of the active labour market 
policy (ALMP) reform is still in an early stage. 
The  placement  capacity  of  Italian  employment 
services  and 
the  expenditure  on  activation 
measures  are  well  below  the  OECD  average 
(Graph 4.3.2). The Jobs Act aims to strengthen the 
capacity and effectiveness of employment services 
while tackling the longstanding weaknesses of the 
system 
(e.g. understaffed  public  employment 
services, the lack of an information infrastructure, 
regional  disparities) 
fragmented  monitoring, 
(European  Commission,  2016b).  However,  so  far 
only  the  initial  steps  have  been  taken.  The 
non-adoption  of 
the  envisaged  constitutional 
reform,  which  sought  to  give  central  government 
exclusive  competence  for  ALMPs,  may  represent 
an additional implementation challenge. 

The  reorganisation  of  ALMP  governance  has 
started.  The  new  Agency  for  Active  Labour 
Market  Policies  (ANPAL)  has  been  operational 
since  January  2017. (34)  It 
in  charge  of 

is 

(34)  Staff will be made up of around 200 people, half from the 
Ministry of Labour and half from INAPP, a public research 
centre on labour and social issues. The agency will also be 

in 

Social 

involved 

European 

coordinating  and  monitoring  a  wide  network  of 
institutions  and  agencies 
labour 
policies. (35)  The  objective  is  to  enhance  policy 
consistency  and  improve  the  effectiveness  of 
ALMPs  throughout  the  country.  The  agency  is 
preparing a strategic plan on ALMP (Piano per le 
Politiche Attive), which includes support from the 
Fund 
2014-2020 
(EUR 6.7 billion).  The  plan  aims  to  strengthen 
public  employment  services,  also  through  staff 
hiring and training. A unified information platform 
and a national accreditation system of employment 
services  and  agencies  will  be  created.  This  would 
replace  regional  systems,  which  are  not  yet 
functioning properly everywhere. The agency will 
determine  standard  measures  and  costs  for  all 
for 
indicators  are  envisaged 
regions,  and 
evaluating 
the  performance  of  employment 
agencies.  The  Conference  of  the  State  and  the 
Regions  has  reached  an  agreement  for 
the 
finalisation of the plan.  

the  former 

Support for jobseekers is being modernised and 
an outplacement voucher has been launched on 
an  experimental  basis.  A  customised  service 
agreement  (patto  di  servizio  personalizzato)  is 
envisaged,  to  be  agreed  between  the  employment 
agency  and  the  jobseeker.  The  agreement  will 
to  provide  a  range  of 
commit 
opportunities tailored to her/his specific needs and 
the  latter  to  accept  them,  if  appropriate.  The 
take-up  of  activation  measures  is  needed  for 
receiving  the  benefits  and  penalties  are  applied  if 
the  jobseeker  does  not  comply.  An  outplacement 
voucher  (assegno  di  ricollocazione)  pilot  was 
launched  in  November  2016.  The  voucher  can  be 
used  to  pay  for  public  or  (authorised)  private 
employment services. Its value is proportionate to 
the  person’s  employability,  based  on  observable 
factors (e.g. employment history, gender, age). It is 
paid only upon job placement. 

able  to  coordinate  Italia  Lavoro,  a  state-owned  enterprise 
with some 1 000 staff. 

insurance 

(35)  The  network  includes  the  national  social  security  institute 
(Istituto  Nazionale  per  la  Previdenza  Sociale  (INPS)),  the 
national 
injuries 
(Istituto  Nazionale  Assicurazione  Incidenti  sul  Lavoro 
(INAIL)),  the  national  institute  for  policy  evaluation 
(Istituto  Nazionale  per  l'Analisi  delle  Politiche  Pubbliche 
(INAPP)),  regional  services,  labour agencies,  and  bilateral 
and professional funds. 

institute  for  employment 

42 

 
                                                           
                                                                                   
4.3. Labour market, education and social policies 

Some  challenges  remain  to  ensure  the  full 
implementation  of 
the  Youth  Guarantee 
scheme. The number and quality of offers remain 
low and regional differences in the delivery of the 
guarantee  remain  high.  The  quality  of  vocational 
education, 
is  still 
including  apprenticeships, 
limited  (see  Section  4.3.3).  Regional  and  national 
monitoring  systems  on  the  implementation  of  the 
scheme  are  still  to  be  further  integrated  and 
harmonised.  Engaging  the  most  vulnerable  and 
disengaged  young  people  not  registered  for  the 
programme remains a challenge.  

Refugees  show  relatively  high  employment 
rates, but current high inflows are a challenge. 
In  2014,  the  employment  rate  of  refugees  (aged 
20-64)  was  61.3  %,  exceeding  the  employment 
rate  of  native  born  in  general  (59.7%),  but  below 
the employment rate of native born men (69.3%), a 
more  valid  point  of  comparison  considering  the 
high  share  of  men  among  refugees.  Asylum 
seekers  are  entitled  to  personalised  integration 
support  (e.g. language training, ten hours of adult 
education  per  week  and  civic  integration  classes). 
However,  only  about  a  fourth  of  asylum  seekers 
took  up  integration  support  in  2014  (OECD, 
2016b).  Addressing  the  challenge  will  require 
further social and labour market integration efforts. 

Undeclared work 

to 

in  full-time  equivalents 

Inspection  activity  is  strengthened  but  the 
incidence  of  undeclared  work  remains  high.  In 
2014,  the  irregularity  rate  (the  ratio  of  irregular 
employment 
total 
employment  in  full-time  equivalents)  grew  by 
0.7 percentage  points  compared  to  2013,  reaching 
15.7 %  (Istat,  2016a).  Undeclared  work  continues 
to  show  strong  regional  and  sectoral  differences 
(European  Commission,  2016b).  The  Jobs  Act 
established  a  new  national 
inspection 
agency  (Ispettorato  Nazionale  del  Lavoro  (INL)), 
simplified  inspection  activities  and  strengthened 
monitoring activities, including by rationalising the 
use of technical and financial resources. 

labour 

Voucher-based  work  was  introduced  in  2003 
and  has  been  growing  steadily,  but  the  impact 
on  undeclared  work  seems  uneven  across 
sectors. The aim was to promote the regularisation 
of  occasional  activities  and  to  foster  employment 
opportunities  for  students,  inactive  people  and 
older  people  interested  in  short-term  and  casual 

Graph 4.3.2:  Public expenditure on labour market policies, 

2014 

Source: OECD 

signed 

After  a  slow  start  in  2014,  the  implementation 
of 
the  Youth  Guarantee  has  progressed 
significantly  since  2015.  In  Italy,  the  Youth 
Guarantee  is  funded  mainly  through  the  national 
operational 
Iniziativa  Occupazione  Giovani 
programme (EUR 1.5 billion). In December 2016, 
than  1.1  million  young  people  were 
more 
registered 
an 
and  almost  800 000 
‘activation  pact’.  Over  400 000  measures  have 
been  delivered  to  the  participants,  almost  half 
consisting  of  traineeships  (Ministry  of  Labour, 
2017). (36) Nearly 35 % of those who completed a 
Youth  Employment  Initiative  operation  were 
employed  four  weeks  later  and  the  percentage 
increases to nearly 43 % after six months (INAPP, 
2016). 
two  new  measures  were 
introduced: the ‘Superbonus’ (for employers hiring 
young  people  who  participated  in  a  relevant 
traineeship)  and  the  ‘Selfiemployment’  (micro-
credit  and  subsidised 
to  support  self-
employment).  In  the  first  four  months  of  the 
former,  5 412  job  contracts  were  signed  (2 020 
permanent  contracts  and  3 392  apprenticeship 
contracts)  (Ministry  of  Labour,  2016a).  Further 
improvements  are  the  outreach  to  non-registered 
young  people  neither  in  employment  nor  in 
education  or  training,  the  use  of  standardised 
profiling, individual support for young people and 
the  take-up  of  key  measures  such  as  traineeships 
and specialised training courses. 

In  2015, 

loans 

(36)  Under  Italy’s  Youth  Guarantee  implementation  scheme,  a 

participant can benefit from more than one measure. 

43 

0.00.20.40.60.81.01.2ITFRDEESUKOECD% of GDPStart-up incentivesDirect job creationSheltered and supported employmentEmployment incentivesTrainingPublic employment services and administration 
 
                                                           
4.3. Labour market, education and social policies 

(Ministry  of  Labour,  2016b).  Overall,  while  the 
use  of  vouchers  can  bring  more  people  into  the 
labour  market,  the  impact  of  vouchers  on  actual 
working  conditions  and  social  security  protection 
is yet to be assessed. A comprehensive strategy to 
address the causes of undeclared work is missing. 

4.3.2.  SOCIAL POLICIES 

Poverty  rates  in  Italy  are  high  and  rising, 
especially  for  children.  In  2015,  the  at-risk-of-
poverty-or-social-exclusion  rate  rose  slightly  to 
28.7 %  (17.5 million  people)  and  remains  well 
above  the  EU  average  (23.7 %). The  risk  of 
poverty  for  children  has  been  growing  faster  than 
for the population in general, while it is declining 
in the EU as a whole. A third of Italian children are 
now at risk of poverty or social exclusion, which is 
among  the  highest  rates  in  the  EU.  The  recent 
influx  of  migrants,  including  many  vulnerable 
women  and  minors,  is  likely  to  exacerbate  this 
problem.  As  poverty  is  rising,  people  with  lower 
incomes  face  difficulties  in  accessing  affordable 
houses, in particular in big cities. There were some 
650 000 families on waiting lists for social housing 
and  over  50 000  homeless  people  were  recorded 
(HE, 2015; ISTAT, 2014). 

is  higher  for  temporary 
In-work  poverty 
workers.  In  2015,  16.7 %  of  population 
in 
employment  was  at  risk  of  poverty  or  social 
exclusion  (EU  average:  12.5 %).  Being  employed 
reduces poverty risk by 39 % in Italy (45 % in the 
EU  as  a  whole).  Italian  workers  on  temporary 
contracts faced one of the highest poverty risks in 
the  EU.  This  raises  the  importance  of  improving 
labour  market  functioning  and  reducing  duality, 
the key Jobs Act aims. The skills distribution may 
also play a role. Italy has one of the highest shares 
of low-skilled workers in the EU. 

The risk of poverty or social exclusion is higher 
for people from a migrant background. In 2015, 
47.7 %  of  non-EU-born  people  over  18  were 
assessed to be at risk of poverty or social exclusion 
(25.7 % of native-born people). The share of non-
EU-born  people  over  18  facing  severe  material 
deprivation  was  more 
that  of 
native-born people (23.9 %, as against 10 %). This 
represents one of the highest gaps in the EU. The 
‘in-work  at-risk-of-poverty’  rate  among  non-
EU-born  people  (over  18  years  old)  was  26.7 %, 

than  double 

involved  more 

jobs.  Limits  to  their  use  were  relaxed  in  2012, 
2013 and finally in 2015. The take-up of vouchers 
has  been  increasing  steadily  since  2012.  In  2015, 
than  1.3 
voucher-based  work 
million workers, 136 % more than in 2014 (Graph 
4.3.3),  although  it  still  represents  only  0.23 %  of 
the total cost of labour (INPS, 2016). Vouchers are 
increasingly used by younger workers (the average 
age  declined  from  59.8  to  35.9  years  over  2008-
2015)  and  women  (the  proportion  of  whom 
increased from 21.5 % in 2008 to 51.5 % in 2015). 
Figures  for  2015  show  a  predominant  use  in 
northern  regions  and  in  certain  service  sectors 
(Ministry  of  Labour,  2016b).  Vouchers  are  used 
less  in  agricultural  and  domestic  services,  which 
are  often  characterised  by  a  high  prevalence  of 
issue  of 
undeclared  work.  To  address 
undeclared  work  and  labour  exploitation  in  the 
agricultural sector, a law adopted in October 2016 
strengthens  civil  and  criminal  procedures  and 
monitoring activities.  

the 

Graph 4.3.3:  Voucher-based workers and average number 

of paid vouchers per worker, 2008-2015 

Source: INPS 

Labour market traps are starting to appear as a 
side-effect  of  vouchers.  Some  49 %  of 
voucher-based  workers  employed  in  2015  were 
employed  under  the  same  status  in  the  previous 
year and 25-30 % of those employed in 2012-2013 
were  still  employed  under  the  same  arrangements 
in  2015  (INPS,  2016).  Some  10 %  of  voucher-
based  workers  employed  in  2015  (about  140 000 
workers)  had  previously  had  a  regular  or  atypical 
employment  contract  with  the  same  employer 

44 

01020304050607080 0 200 400 600 8001 0001 2001 4001 6000809101112131415ThousandsVoucher-based workers (lhs)Average number of paid vouchers per worker (rhs) 
 
4.3. Labour market, education and social policies 

conditional  on  participation  in  multidimensional 
activation  programmes  tailored  to  the  specific 
needs  of  the  beneficiaries.  The  scheme  benefits 
from  the  support  of  the  European  Structural  and 
Investment  Funds,  particularly  to  increase  the 
availability  and  efficiency  of  social  services 
involved  in  care  projects.  The  implementation 
started in September 2016 with an initial budget of 
EUR 750 million. 

Graph 4.3.4:  People at risk of poverty or social exclusion by 

NUTS 2 region, 2015 

Source: Eurostat 

The new ‘Inclusion Income’ scheme is a start to 
tackle  the  rise  in  poverty.  Building  on  the  SIA, 
the  new  ‘Inclusion  Income’  scheme  (reddito  di 
inclusione)  will  define  a  basic  level  of  social 
benefits  guaranteed  nationwide.  The  draft 
legislation  is  currently  discussed  in  Senate.  Once 
legislative 
need 
adopted, 
implementing  decrees.  It  is  unclear  whether  the 
financial  resources  (around  EUR  1.7  billion,  after 
the  recent  increase)  will  be  sufficient  to  address 
Italy’s  poverty  challenge.  The  measures  on 
pensions  introduced  in  the  2017  Budget  Law  (see 
Section  4.1)  confirm  the  persistent  bias  of  social 
expenditure towards pensions. 

it  will 

further 

far  as 

The streamlining of social spending does not go 
as 
initially  envisaged.  Two  social 
assistance  schemes  (carta  sociale  and  assegno  di 
disoccupazione  (ASDI))  will  be  absorbed  into  the 
‘Inclusion  Income’.  However,  some  schemes  will 
remain,  notably  those  for  the  elderly  population, 
those in support of parenthood and those linked to 

(9.1 % for native-born people). As the employment 
rate of non-EU-born people is quite high (60.6 %), 
the high in-work poverty rate may be explained by 
the  high  concentration  of  non-EU-born  people  in 
low-skilled  jobs  and  their  over-representation  in 
temporary or informal employment. 

The  increase  of  migrants  entering  the  country 
irregularly  poses  challenges  to  reception  and 
integration. The number of irregular migrants has 
increased,  and  those  coming  from  countries  with 
lower asylum recognition rates are overrepresented 
(see  Section  1).  This  implies  a  need  to  ensure  the 
return for those who did not receive protection and 
to  provide  for  integration  measures  for  those  who 
received  protection.  There  are  challenges 
in 
the  different 
ensuring  cooperation  between 
administrative  levels  involved  in  the  management 
of  reception,  embodied 
the  ‘System  for 
Protection  of  Asylum  Seekers  and  Refugees’ 
(SPRAR).  The  distribution  of  asylum  seekers  and 
refugees  is  a  source  of  discussion  between  the 
National  Association  of  Italian  Municipalities 
(ANCI) 
Italian 
authorities estimate the budgetary costs due to the 
migration influx at around 0.2 % of GDP in 2016. 
A  new  national  ‘reception  plan’  was  introduced. 
To  accompany  the  scheme,  additional  EUR  100 
million were allocated to grant municipalities up to 
EUR  500  for  each  refugee 
to 
accommodate. 

Interior  Ministry. 

they  agree 

and 

the 

in 

The  national  poverty  figures  mask  a  wide 
north-south  divide.  Some  of  the  regions  in  the 
north (Graph 4.3.4) have among the lowest poverty 
rates  in  the  EU  (e.g.  Provincia  Autonoma  di 
Bolzano/Bozen).  Conversely,  poverty  is  high  and 
widespread  in  the  south  (e.g.  Sicily).  The  varying 
quality and adequacy of social services across the 
regions  partly  explain  these  differences.  Italy  is 
one of two Member States which does not have a 
national  minimum  income  system  and  the  social 
policy  framework  is  very  fragmented.  Excluding 
pensions,  social  transfers  reduce  the  number  of 
people  at  risk  of  poverty  and  social  exclusion  by 
21.7 % (33.2 % in the EU as a whole). 

Experimental measures to address poverty were 
reinforced  in  2016.  The  ‘Support  for  Active 
Inclusion’  (SIA)  was  extended  to  the  whole 
national  territory.  This  means-tested  benefit  is 
targeted  at  low-income  households  that  meet 
certain  criteria.  The  economic  support  is  also 

45 

01530456075SiciliaIsolePugliaCampaniaCalabriaBasilicataSardegnaMoliseAbruzzoItalyLazioUmbriaMarcheToscanaLiguriaPiemonteLombardiaValle d'AostaVenetoEmilia-RomagnaF-V GiuliaTrentoBolzano/Bozen%Northern ItalyCentralItalySouthernItaly 
 
4.3. Labour market, education and social policies 

disability  and  invalidity.  This  fragmentation  may 
make the system unclear and harder to access. 

Health  outcomes  and  quality  of  care  are 
generally good. Health outcome indicators such as 
life  expectancy  and  healthy  life  years  have  been 
consistently above the EU average in recent years. 
Overall,  public  health  expenditure,  though  rising, 
is  below  the  EU  average,  which  suggests  that  the 
Italian  healthcare 
cost-effective. 
system 
Expenditure on pharmaceuticals has risen recently 
in  line  with  the  cost  of  medical  innovations, 
though  it  may  be  moderated  by  payback  schemes 
in place. E-health systems are being developed, as 
are information and monitoring systems in support 
of performance assessment. 

is 

However,  interregional  inequities  persist  and 
income-related disparities in access to care seem 
to  be  rising.  The  proportion  of  people  reporting 
that  they  could  not  afford  a  necessary  medical 
examination  increased  from  5.1 %  in  2011  to 
6.2 %  in  2014  and  the  proportion  reporting  that 
they did not take a necessary medical examination 
because of excessive waiting lists is above the EU 
average. Income-related disparities in self-reported 
health  status  are  also  on  the  rise.  Out-of-pocket 
payments on health as a proportion of total health 
expenditure  have  increased  slightly.  The  number 
of  hospital  beds  per  100 000  inhabitants  is  below 
the  EU  average.  While  the  number  of  physicians 
per  100 000  inhabitants  is  above  the  EU  average, 
the  ratio  of  nurses  to  physicians  is  among  the 
lowest  in  the  EU.  Disparities  persist  in  the  extent 
and quality of healthcare provision across regions.  

4.3.3.  EDUCATION AND SKILLS* 

School  education 
in  Italy  produces  mixed 
outcomes in terms of basic skills attainment. In 
2015, Italy again recorded diverging results in the 
OECD  Programme 
International  Student 
for 
Assessment (PISA). Overall, the proportion of low 
achievers  is  close  to  the  EU  average  in  reading 
(21 %) and maths (23 %), and somewhat higher in 
science  (23 %).  However,  performance  is  above 
the  EU  average  in  the  north  and  significantly 
worse 
the  south.  Compared  with  2012, 
performance remained broadly stable in maths and 
reading,  but  worsened  in  science  (OECD,  2016c; 
European Commission, 2016g).  

in 

Non-EU  born  students  are  at  high  risk  of 
leaving school early. The early school leaving rate 
for  non-EU  born  was  33 %  in  2015,  considerably 
above  that  of  native  born  (12.7 %),  among  the 
highest  gap  in  the  EU.  The  2015  school  reform 
included  some  new  measures  to  promote  the 
integration of migrant pupils. They are not tailored 
to  asylum-seekers,  but  cover  non-Italian  students 
in general. The Ministry has provided schools with 
proposals  and  guidelines  on  how  to  deal  with  the 
10  most  common  critical  issues  they  face  as 
regards the inclusion of migrant students. Teachers 
specialised  in  teaching  Italian  to  migrant  students 
are  being  recruited  for  the  first  time  in  the  2016 
open  competition  for  permanent  posts.  This  is 
expected 
in  future  open 
the  practice 
competitions  as  well.  Although  the  performance 
gap  between  the  native  population  and  first-
generation  immigrants  is  quite  large,  second-
generation  immigrants  are  catching  up  (OECD, 
2016b; European Commission, 2016g). 

to  be 

Italy  is  implementing  the  2015  school  reform, 
which  is  expected  to  improve  school  outcomes 
(European  Commission,  2015c).  School  heads 
have  greater  autonomy 
in  managing  human, 
technological  and  financial  resources  and  will  be 
subject  to  external  evaluation  every  year  from 
2016-2017.  The  success  of  this  measure  will 
depend  on  the  proper  implementation  of  this 
evaluation system. Approximately 90 000 teachers 
who  had  been  employed  on  short-term  contracts 
were recruited on a permanent basis in 2015-2016. 
While  around  45 %  filled  existing  positions,  the 
others  took  up  new  posts.  The  recruitment  plan 
was intended to address the longstanding problem 
of  qualified  teachers  on  ‘waiting  lists’  being 
recurrently  recruited  on  a  temporary  basis  and  to 
strengthen  schools’  educational  provision. Overall 
it  is  a  positive  measure.  However,  in  the  initial 
implementation  phase,  the  competences  of  the 
additional  teachers  have  not  always  matched 
individual  schools’  needs  (European  Commission, 
2016h).  A  new  open  competition  to  recruit  up  to 
around  64 000  teachers  on  a  permanent  basis  was 
held  and  a  national  plan  for  teacher  training  and 
professional  development  was  launched  in  2016. 
This  could  lead  to  a  better  matching  of  teacher 
supply and demand. 

The  higher  education  system  is  underfunded. 
Despite  being  close  to  the  national  Europe  2020 
tertiary  educational 
Italy’s 
target 

(26-27 %), 

46 

 
4.3. Labour market, education and social policies 

are  not  sufficient  to  solve  the  issues  of  ageing 
teaching staff and inadequate spending.  

to 

improve 

strengthened 

Apprenticeships  and  work-based  learning  are 
being 
the 
labour-market relevance of education. Measures 
are  being  taken  to  increase  the  learning  and 
qualifications  component  of  apprenticeships,  and 
to  attract  more  youngsters  to  these  paths.  An 
ongoing national pilot initiative for 15-25 year-old 
students  involves  300  vocational  training  centres 
throughout  Italy.  Learning  standards  have  been 
agreed  at  national  level  and  funding  has  been  set 
aside.  To  strengthen  work-based  learning,  all 
students in the last three years of upper secondary 
education  are  now  required  to  do  a  traineeship  or 
apprenticeship.  This  is  an  ambitious  measure  to 
help to equip a new generation with relevant skills. 
the 
The  quality  of  work-based 
learning, 
engagement  of  private  enterprises  and 
the 
monitoring of progress and effects are crucial.  

attainment 

than  double 

in  2015,  more 

Adult learning is not sufficiently developed. The 
unemployment  rate  for  low-skilled  workers  was 
the 
15.3 % 
unemployment  rate  for  the  high-skilled  (7.2 %). 
Educational 
among 
25-64 year-olds are low compared to the European 
average.  They  improved  between  2010  and  2015, 
but  at  a  slightly  slower  rate  than  in  the  rest  of 
Europe.  The  proportion  of  low-qualified  adults  in 
Italy  is  nearly  double  that  in  the  rest  of  Europe. 
The rate of participation in adult learning is one of 
the lowest in Europe (2 % in 2015). 

levels 

a 

comprehensive 

The policy framework for adult learning is not 
yet  complete.  The  fragmentation  of  the  Italian 
system  of  adult  learning  makes  it  difficult  to 
identify 
lifelong-learning 
strategy.  A  decree  laying  down  general  rules  on 
the  national  system  for  competence  certification 
was adopted in 2013, but implementation proceeds 
only  slowly.  The  national  qualification  system, 
including 
apprenticeship 
professional  profiles,  is  not  yet  finalised.  This 
should create the basis for the uniform recognition 
and validation of prior learning across the country, 
thus offering flexible solutions for further training. 
The  systems  for  monitoring  and  evaluating  adult 
learning programmes are underdeveloped and rely 
mainly on ex ante accreditation measures. 

repertoire 

the 

of 

attainment  rate  is  still  the  lowest  in  the  EU,  at 
25.3 %  in  2015  for  30-34  year-olds  (the  rate  is 
38.7 %  for  the  EU  as  a  whole).  At  only  0.3 %  of 
GDP,  general  government  expenditure  on  higher 
education was the lowest in the EU in 2014, partly 
due  to  large  funding  cuts  during  the  economic 
crisis (Graph 4.3.5), which coincided with a partial 
freeze on recruitment. This resulted in an increase 
in the average age of academics (ANVUR, 2016). 
Student  support  is  low.  Only  9 %  of  first-cycle 
students  receive  a  public  grant,  one  of  the  lowest 
proportions  in  the  EU  (European  Commission, 
2016i). A fifth of eligible students do not receive a 
grant  due  to  a  lack  of  funding  (Ministry  of 
Education, 2016). 

Graph 4.3.5:  General government nominal expenditure by 

function, 2007-2014 

Source: Eurostat, COFOG 

for  hiring  new 

Recent  measures  on  higher  education,  albeit 
partial,  are  aimed  at  addressing  staff  and 
student support issues, and rewarding research 
performance.  The  2016 Stability  Law  provided 
funding 
full  and  associate 
professors (Giulio Natta chairs), albeit through an 
ad-hoc  procedure,  and  for  861  young  researchers 
on  ‘tenure-track’  positions  (1.6 %  of  Universities' 
teaching  staff  in  2015).   The  2017  Budget  Law 
increases  public  financial  support  for  tertiary 
students.  Public  funding  for  universities  has 
increased  significantly  and  better 
to 
performance.  All  these  measures  are  positive 
partial  steps,  as  they  signal  an  attempt  to  reverse 
previous staff and funding policies. However, they 

linked 

47 

758085909510010511011512012507080910111213142007 = 100TotalEducation (excluding tertiary)Tertiary educationHealthDefence & public orderSocial protection (excluding pensions)Pensions 
 
4.4. INVESTMENT 

Recent trends*  

During  the  crisis,  investment  in  Italy  fell  more 
rapidly than in most other Member States. Until 
2007,  Italy’s  total  investment  as  a  share  of  GDP 
was  broadly  in  line  with  the  euro  area  average 
(21.6 %  as  against  23.2 %  in  2007).  However,  its 
contribution to total factor productivity growth was 
impaired  by  inefficient  allocation  in  the  economy 
(European  Commission,  2016b).  With  the  crisis, 
investment  as  a  share  of  GDP  fell  to  16.6 %  of 
GDP  in  2015,  around  3  percentage  points  below 
the euro area average (Graph 4.4.1). In real terms, 
this  means  that  total  investment  is  around  30 % 
lower  than  in  2007,  at  its  lowest  level  since  the 
mid-1990s. While allocation has started to improve 
somewhat,  the  low  level  of  investment  is  now 
holding back potential growth (see Section 1).  

The  subdued  investment  dynamics  concern 
both  the  private  and  public  sector.  Private 
investment declined from 18.7 % of GDP in 2007 
to  14.4 %  in  2015,  while  public  investment  fell 
from  3.2 %  of  GDP  on  average  in  2005-2009  to 
2.2 % in 2015. In the private sector, investment by 
non-financial  corporations  as  a  share  of  GDP 
dropped from 10.7 % in 2007 to 8.6 % in 2015. In 
the  same  period, 
investment  by  households 
declined  to  5.5 %  of  GDP  (from  7.7 %).  Foreign 
direct  investment  in  Italy  –  historically  low 
compared  to  peer  countries  –  has  fallen  further 
after  the  crisis.  Foreign  direct  investment  inflows 
in  2015  were  52%  lower  than  in  2007,  while  for 
the EU as a whole they dropped by 42%.  

All 
investment  assets  were  affected,  but 
productive investment fell to a greater extent in 
Italy than in the rest of the euro area. The drop 
in  residential  construction  as  a  share  of  GDP 
between  2008  and  2015  was  broadly  in  line  with 
the  euro  area  average  (Graph  4.4.2).  However,  in 
the  same  period,  non-residential  construction 
investment in Italy fell by 1.9 percentage points of 
GDP (as against 1.2 percentage points in the rest of 
the  euro  area)  and  investment  in  machinery  and 
equipment  by  1.4  percentage  points  of  GDP  (as 
against  1  percentage  point  in  the  rest  of  the  euro 
area).  

intangible  assets (37) showed 
Investment 
greater  resilience,  but  Italy  still  lags  behind 

in 

(37)  Intellectual property products (ESA 2010 definition) 

peer countries. Investment in intellectual property 
products  has  increased  by  0.1  percentage  points 
since  2008,  much  less  than  in  the rest of  the  euro 
area,  where  it  increased  by  0.6  percentage  points. 
(Graph 4.4.2). Furthermore, this type of investment 
represented  only  2.7 %  of  GDP  in  2015  in  Italy, 
around 1.5 percentage points less than in the rest of 
the euro area. 

Graph 4.4.1:  Investment, current prices 

Source: European Commission  

Graph 4.4.2:  Change in investment by type of asset, current 

prices 

Source: European Commission 

Italy's  decline  in  investment  is  broad-based 
across  industries,  but  particularly  strong  in 
services.  Compared  with  2008,  investment  in 
services in 2015 declined by 2.5 percentage points 
of  GDP,  i.e.  more  than  in  France,  while  in 

48 

1517192123252729313300010203040506070809101112131415% of GDPDEESFRITUS-2.0-1.5-1.0-0.50.00.51.000-0708-1500-0708-1500-0708-1500-0708-15DwellingsOtherbuildings andstructuresMachineryandequipmentIntellectualpropertyproductsPercentage points of GDPRest of the euro areaIT 
 
                                                           
 
 
 
Germany  it  was  broadly  stable.  Investment  in 
manufacturing  and  construction  fell  to  a  greater 
extent than in Germany and France (Graph 4.4.3).  

Graph 4.4.3:  Investment by macro-sector, current prices 

4.4. Investment 

to 

the 

Section  4.5.2)  are  among  Italy's  long-standing 
structural  weaknesses.  In  addition,  the  limited 
development of capital markets in comparison with 
financing, 
other  advanced  economies  makes 
particularly for smaller firms, largely dependent on 
bank  lending  (European  Commission,  2016b). 
These  enduring  weaknesses,  of  which  the  impact 
on  businesses  is  difficult  to  assess,  may  have 
contributed 
inefficient  allocation  of 
investment  before  the  crisis  and  may  deter  its 
recovery 
much-needed 
investments  from  the  European  Structural  and 
Investment Funds for 2014-2020 are being carried 
out  only  slowly,  in  particular  in  many  southern 
regions,  with  project  selection  rates  reported  at 
14 % overall at end-October 2016. Certain regions 
could  benefit  significantly  from  structural  funds. 
For example, Sicily is planned to receive EUR 3.4 
billion  from  the  European  Regional  Development 
Fund for the period 2014-2020. 

now.  Moreover, 

Source: European Commission, Istat 

Barriers to investment* 

Weak demand, uncertainty, still-tight financing 
conditions  and  squeezed  profit  margins  are 
among  the  factors  holding  back  a  broad-based 
recovery  of  investment.  As  in  other  countries, 
demand  conditions  and  uncertainty  appear  to  be 
the main drivers of Italy's large decline in private-
sector  non-residential  investment  (Busetti  et  al., 
2015;  IMF,  2015a).  Financing  conditions  seem  to 
have  played  a  larger  role  in  Italy  than  in  other 
countries (IMF, 2015a). Some research shows that 
while  in  Spain  the  restoration  of  healthy  profit 
recovery  of 
margins  underpinned  a 
investment  from  2013,  this  was  not  the  case  in 
Italy  (Fortin  et  al.,  2015).  Looking  forward, 
uncertainty may continue to hold back investment.  
At the same time, the banking sector's weak profit-
generating  capacity  and  high  stock  of  non-
performing  loans  constrain  banks’  capacity  to 
provide  loans,  especially  towards  small  firms  and 
specific  sectors  (see  Section  4.2).  Such  barriers 
also hinder foreign direct investment.  

solid 

Structural  weaknesses,  while  gradually  being 
addressed,  continue  to  hinder  investment.  An 
inefficient  public  administration  (see  Section 
4.6.1),  lengthy  judicial  proceedings  (see  Section 
4.6.2)  and  a  difficult  business  environment  (see 

The government announced several measures to 
support 
investment.  The  2017  Budget  Law 
confirmed  the  possibility  for  companies  to  deduct 
140 %  of  the  amount  spent  on  investment  and 
introduced a new iperammortamento rate of 250 % 
for digital investments as part of the new ‘Industry 
4.0’  strategy  (see  Section  4.5.3).  These  measures 
may  have  a  positive  but  temporary  impact  on 
investment.  At  the  same  time,  the  notional  return 
on  new  equity  or  reinvested  earnings  exempted 
from  the  payment  of  the  corporate  income  tax 
(‘allowance  for  corporate  equity’  (ACE)),  which 
strengthened  firms’  financial  position  (Bank  of 
Italy,  2016a,  p.  18-19),  was  reduced  from  4.75 % 
to  2.3 %.  Despite  the  low  interest  rates,  this 
decision  could  be  premature,  considering  that 
banks’  financing  conditions  remain  difficult,  in 
particular  for  SMEs,  and  that  additional  equity  is 
needed  to  support  investment  in  innovation.  The 
reduction  of  the  corporate  income  tax  rate  (from 
27.5 %  to  24 %  as  of  2017)  could  help  support 
investment in a more structural manner. Initiatives 
to support investment in SMEs were also initiated. 
In September 2016 a multi-pronged ‘Industry 4.0’ 
strategy was presented to modernise the industrial 
sector,  mostly  through  investment  in  innovation 
and  digital  technologies. (38)  The  plan  might  be 
constrained  by  the  current  lack  of  digital  skills: 

(38)  Only  7 %  of  SMEs  were  selling  online  in  2016  (EU 
average:  17 %),  whereas  only  29 %  of  Italian  consumers 
bought online goods or services (EU average: 55 %).  

49 

-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.500-0708-1500-0708-1500-0708-15ManufacturingConstructionServicesPercentage points of GDPDEFRIT 
 
                                                           
4.4. Investment 

Investment  in  energy  efficiency  and  renewable 
energy  underpins  Italy’s  positive  performance 
in  these  areas  and  in  reducing  greenhouse  gas 
emissions. Italy is on track to achieve its target to 
reduce  greenhouse  gas  emissions  in  sectors  not 
covered  by  the  EU  Emissions  Trading  System 
(ETS)  and  to  meet  the  2020  targets  for  energy 
efficiency and renewable energy. The 2017 Budget 
Law  confirmed  the  tax  incentives  for  improving 
the  energy  efficiency  of  buildings.  In  2015,  Italy 
launched 
energetic 
requalification of the national housing stock and a 
plan  for  the  promotion  of  ‘nearly-zero  energy’ 
buildings.  New  guidelines  on  the  white-certificate 
scheme  are  expected  to  be  adopted  in  2017.  Italy 
also has one of the highest installed capacities for 
electricity  production  with  renewables  in  the  EU. 
However,  the  complex  legislative  framework  and 
tax  structure  create  some  barriers  to  the  full 
deployment of Italy’s renewable potential.  

strategy 

the 

for 

a 

to 

this 

facilitate 

Investment in waste and water treatment could 
spur  a  circular  economy.  A  ‘Green  Act’  is 
planned 
transition.  Waste 
management  and  water  infrastructure,  including 
waste  water  treatment,  are  persistent  concerns, 
particularly  in  southern  Italy.  Non-compliance 
with  the  EU’s  Urban  Waste  Water  Treatment 
Directive is extensive. Investment needs for waste 
water  treatment  are  estimated  at  EUR 4.6 billion 
(European  Commission,  2017d).  Improving  land-
use  management  and  reducing  air  pollution  are 
challenges faced by centre and northern regions as 
well. Measures were taken to speed up investment 
in  water  and  flood  protection  and  prevention.  In 
2015,  only  around  41 %  of  Italian  small  and 
medium-sized  enterprises  (SMEs)  invested  up  to 
5 % of their annual turnover in resource efficiency 
actions  (EU  average:  50 %),  and  25 %  of  SMEs 
took  measures  to  recycle  by  reusing  material  or 
waste within a company (EU average: 40 %). 

only  67 %  of  the  population were regular Internet 
users in 2016, well below the EU average of 79 %. 
‘Industry 4.0’ seeks to address this problem among 
young  people,  including  through  new  curricula  in 
post-secondary  and  tertiary  education,  but  the 
digital  skills  gaps  among 
the  middle-aged 
workforce and the elderly remains. 

Infrastructure gaps* 

to  next-generation 

Access 
communication 
networks  is  improving  but  mostly  in  densely 
populated  regions.  Driven  by  private  operators’ 
investments,  the  coverage  of  the  fast  broadband 
network progressed rapidly last year, from 44 % to 
72 %  of  Italian  households.  However,  it  is  still 
slightly below the EU average (76 %). In summer 
2016,  the  Italian  government  launched  two  calls 
for  tender  for  a  total  of  EUR  2.6  billion  for 
providing fast broadband access in white areas (39). 
However,  the  first  call  for  tender  is  subject  to 
lawsuits by some telecom operators. If the lawsuits 
are  successful,  Italy  will  find  it  difficult  to  close 
the  digital  infrastructure  divide  in  these  areas 
(accounting for 25 % of the total population). 

and 

endowment 

infrastructure 

(European  Commission,  2016j). 

Transport  infrastructure  quality  is  below  the 
EU average, with significant regional variation. 
The  2016  EU  Transport  Scoreboard  ranks  Italy’s 
performance  below  the  EU  average  in  all  main 
infrastructure quality indicators, and investment is 
lacking 
In 
railways,  there  is  a  persistent  infrastructure  gap 
between northern and southern regions in terms of 
both 
traffic 
management technology. Besides, recent accidents 
raised interoperability and safety issues in relation 
to certain local and regional railway lines (ferrovie 
ex-concesse)  totalling  about  3 000  km.  In  2015, 
Italy  presented  a  national  strategic  plan  for  ports 
and  logistics  to  increase  efficiency  and  rationalise 
the  port  sector,  but  its  full  implementation  is  still 
(European 
ongoing. 
streamlining 
Commission, 
administrative  procedures, 
the  deployment  of 
electronic solutions, launching key trans-European 
transport  projects  and  ensuring  smooth  permit 
procedures, causing delays in project delivery.  

lags  behind 

forthcoming) 

Italy  also 

in 

(39)  White  areas  are  areas  in  which  fast  broadband  is  not 
available  at  present  and  in  which  no  operator  has  plans  to 
invest in next-generation networks in the coming years. 

50 

 
                                                           
 
4.4. Investment 

51 

 Box 4.4.1: Investment challenges and reforms in ItalySection 1. Macroeconomic perspective  Since the crisis, the decline in investment in Italy has been sharper than the EU average. It has affected both the private and public sector and both residential and non-residential types of investment, with the latter accounting for two thirds of the total drop. The decline was driven mainly by the fall in demand, the squeeze of Italian firms’ profit margins, and tight financing conditions, partly resulting from the banking sector being impaired by the high stock of non-performing loans (see Section 4.2). Italian firms also have relatively more debt than equity, which may limit innovative investment and restrict their access to credit. As demand strengthens and financing conditions improve, private investment is gradually recovering. Public investment is constrained by the reduced fiscal space due to the high public debt (see Section 3). Section 2. Assessment of barriers to investment and ongoing reforms [to be updated]  In addition to macroeconomic constraints, the overall business environment in Italy is not conducive to investment (see Section 4.5.2).  Main barriers to investment and priority actions underway 1. Firms’ access to finance remains heavily biased towards bank loans where some vulnerabilities persist, while capital markets remain underdeveloped. The latter might be a constraint particularly for young innovative firms. The ongoing and planned reform of the Italian insolvency system, the new impaired loan securitisation scheme and other measures taken over the last two years will help banks to clean up their balance sheets. Ongoing policy action in the banking sector – in particular on banks’ corporate governance –  could improve the allocation of capital (see Section 4.2).  2. The regulatory and administrative burden remains high and hampers business activities (see Section 4.5.2). Inefficiencies in the public administration, the low quality of Italian regulation, frequent legislative changes and slow enforcement due to lengthy proceedings weaken the effectiveness of Italy’s legislation and overall legal certainty (see Section 4.6.2). Some reforms have been adopted or are in the pipeline, in particular in the areas of the judicial system, the labour market and the competition framework, but some issues remain to be addressed (see Sections 4.3, 4.5.1 to 4.6.2).  3. The high level of taxation on productive factors reduces firms’ incentives to invest. Some measures have been taken to shift the tax burden away from labour and capital and favour equity financing. However, some recent policy measures partially backtrack on previous reforms, including the reduction of the tax exemption for reinvested earnings or new equity and the abolition of recurrent tax on primary residences (see Section 4.1.2). Regulatory/administrative burdenTaxationCSRPublic administrationCSRAccess to financePublic procurement / public-private partnerships (PPPs)Cooperation between academia, research and businessJudicial systemCSRFinancing of R&D and innovationInsolvency frameworkCSRBusiness services / regulated professionsCSRCompetition and regulatory frameworkCSRRetailCSREmployment protection legislation / framework for labour contractsConstructionWages & wage-settingDigital economy / telecomEducationEnergyTransportCSRLegend:No barrier to investment identifiedCSRInvestment barriers also subject to a country-specific recommendationSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration / business environmentLabour market / educationFinancial sector / taxationR&D and innovationSector-specific regulation 
 
 
 
 
 
 
 
4.5. SECTORAL POLICIES 

4.5.1.  COMPETITION* 

Barriers  to  competition  remain  significant  in 
Italy.  According  to  the  OECD  index  for  product 
market  regulation,  Italy’s  competition  framework 
was substantially converging to the OECD average 
thanks to a wave of reforms up to 2012. However, 
in  recent  years,  no  major  measures  have  been 
adopted  to  open  up  the  Italian  economy  further. 
The  Global  Competitiveness  Report  2016-2017 
confirms  Italy’s  competition  weaknesses  (WEF, 
2016). The goods market efficiency index includes 
measures  of  the  level  of  competition  in  local 
markets,  the  extent  of  market  dominance  and  the 
effectiveness  of  anti-monopoly  policy.  Italy  ranks 
below  all  major  European  peers  and  67th  in  the 
world (Graph 4.5.1). 

Graph 4.5.1:  Goods market efficiency, 2016 

Notes: The goods market efficiency score ranges from 1 
(‘very inefficient’) to 7 (‘very efficient’). 
Source: World Economic Forum (WEF), 2016 

The 2015 annual competition is not yet adopted. 
In  February  2015,  the  government  presented  a 
draft  law  on  competition,  complying  for  the  first 
time  with  the  2009  legislation  that  requires  it  to 
present  such  a  draft  law  every  year  based  on  a 
proposal  from  the  national  competition  authority. 
The draft law for 2015 is still under discussion in 
the Senate, but final adoption is envisaged for Q1 
2017.  The  draft 
law  covers,  among  others, 
regulated  professions,  the  insurance  sector,  the 
telecommunications  industry,  and  the  electricity 
and gas sectors. Other minor measures concern the 
banking 
sectors. 
Parliamentary  discussions  watered  down  several 

distribution 

fuel 

and 

provisions, particularly those concerning regulated 
professions  and  pharmacies,  while  new  restrictive 
provisions for the touristic sector were introduced. 
Reforms  are  also  overdue  in  other  important 
sectors,  with  considerable  potential  economic 
impact  and  representing  a  sizable  share  of  GDP, 
such as the retail sector, the system of concessions, 
the  maritime  and  hydroelectric  sectors 
and 
(European  Commission,  2016b).  Competition  in 
the last two sectors is still subject to authorisation 
schemes  granted  for  a  long  period  and  without 
competitive procedures. 

face 

Regulated  professions  still 
important 
restrictions. The level of regulatory restrictiveness 
in Italy is higher than the EU weighted average for 
all professions, except the legal profession (Graph 
4.5.2)  (European  Commission,  2016k) (40).  In  this 
context,  Italy  has  one  of  the  highest  numbers  of 
lawyers in the EU (European Commission, 2017b). 
Since  2014,  Italy  reviewed  the  need  for  and 
proportionality of restrictions on access to and the 
conduct  of  regulated  professions.  As  a  result  of 
this work, a national action plan was submitted in 
February  2016,  defining  three  cross-cutting  lines 
of action: (i) review of training courses for certain 
technical professions; (ii) adaptation of state exams 
for qualifications; (iii) establishment of a technical 
working  group  to  identify  minimum  national 
standards  (for  regionally  regulated  professions). 
The literature suggests that a decrease in regulation 
has  a  number  of  direct  and  indirect  beneficial 
effects.  Reducing  the  OECD’s  product  market 
regulation  indicator  on  regulated  professions  by  1 
point  is  found  to  increase  allocative  efficiency  by 
5.7  percentage  points  and  decrease  the  concerned 
sectors’  profitability  by  5.4  percentage  points 
(Canton  et  al.,  2014).  The  2006  reform  easing 
entry into the pharmacy sector is estimated to have 
contributed  to  higher  employment  and  higher 
earnings for young professionals (Pagliero, 2015). 
The  positive  effects  of  deregulation  spill  over  to 
the  whole 
services 
represent  10 %  of  EU  market  services’  value 
added, account for 4.7 % of total employment and 
are  mostly  intermediate  factors  (Canton  et  al, 
2014).  Their  level  of  regulation  and  efficiency 
have  a  large  impact  on  the  productivity  and 

economy.  Professional 

(40)  The Commission has developed a new composite indicator 
on the restrictiveness of most existing barriers to access to 
and  exercise  of  regulated  professions.  It  is  based  on  data 
collected  from  Member  States,  complemented  by  desk 
research (European Commission, 2016k). 

52 

05101520253035404550556065707501234567FRDEITESUKGoods market efficiency score (lhs)World rank (rhs) 
 
 
                                                           
 
4.5. Sectoral policies 

competitiveness of downstream industries and thus 
of the whole economy.  

Graph 4.5.2:  Restrictiveness indicator by profession, 2016 

collaborative  platforms,  which  is  roughly  in  line 
with  the  EU  average  (European  Commission, 
2016m).  The  Italian  Parliament 
is  currently 
discussing  a  draft  legislative  initiative  (‘Sharing 
Economy Act’) to set up a cross-sector framework 
for  collaborative  tools.  The  draft  bill  proposes  an 
income  threshold  (EUR 10 000)  to  differentiate 
between professionals and peer activities, with the 
latter  subject  to  a  special  10 %  tax  rate.  The  draft 
law  also  contains  requirements  for  platforms, 
including  registration  in  a  national  registry  and 
increased transparency towards platform users. 

show 

sectors 
significant 
Transport 
inefficiencies. 
Italy’s  Transport  Regulation 
Authority  started  to  pursue  its  mandate  fully  in 
2015  by  adopting  important  regulatory  measures, 
including  on  rail  access  charges,  while  staff 
recruitment is still ongoing. However, weaknesses 
in 
the  regulatory  framework  and  widespread 
inefficiencies remain. Local transport services still 
face  a  number  of  weaknesses  in  terms  of  quality: 
31 % of the users are dissatisfied with the service, 
while only 9 % register a high level of satisfaction. 
The  EU  average  figures  are  17 %  and  19 % 
respectively  (Steer  Davies  Gleave,  2016).  Among 
the  five  largest  economies  in  the  EU,  Italy  shows 
the lowest ratio of operational costs to operational 
revenues  both  in  rural  and  metropolitan  areas: 
33 %  and  41 %  respectively,  as  against  55 %  and 
65 %  on  average  in  France,  Germany,  Spain  and 
In-house  awards  are 
the  United  Kingdom. 
2016b), 
(European  Commission, 
prevailing 
although  local  public  transport  firms  selected 
through competitive tenders show a higher level of 
productivity  (Boitani  et  al,  2014).  This  holds 
regardless  of  the  specific  features  of  the  city  or 
is  operating 
territory  where 
(Associazione  Trasporti, 
2015).  Motorway 
concessions  are  also  a  chronic  issue  in  Italy,  as 
they are often prolonged without a call for tenders. 
the 
This 
concessionaire  and  hinders  competition.  Italian 
authorities announced a pro-market privatisation of 
the  railway  incumbent  company  (Ferrovie  dello 
Stato),  which  has  been  postponed  several  times. 
No  specific  timeline  was  provided  in  the  2016 
national 
reform  programme.  Similarly,  other 
initiatives, such as the direct re-award of the public 
service contract for medium- and long-distance rail 
services  to  the  incumbent  operator  (Trenitalia) 
until 2026, do little to open markets.       

overcompensation 

the  company 

generates 

of 

Notes: The indicator ranges from 0 (‘least regulated’) to 5 
(‘most regulated’). 
Source: European Commission, 2016k 

the 

and 

electricity 

unbundled 

The  competition  framework  in  the  energy 
sectors  is  sound,  but  prices  remain  high.  Italy 
fully 
gas 
transmission system operators. In 2015, the market 
concentration  index  for  power  generation  (815) 
was  significantly  lower  than  the  EU  average 
(3 726). It also remains significantly lower than the 
EU  average  for  wholesale  gas  (2 924,  as  against 
4 771  for  the  EU).  Annual  switching  rates  among 
household  consumers  have  risen  for  electricity 
(from 5.8 % in 2011 to 8 % in 2015) and gas (from 
5.2 %  in  2011  to  6.1 %  in  2015)  and  are  already 
well  above  the  EU  average  (6 %  and  5.3 % 
respectively).  Finally,  the  planned  phasing-out  of 
the  protected  electric  energy  and  gas  market  by 
2018  is  expected  further  to  increase  competition 
and  consumer  choice.  Nevertheless,  wholesale 
large 
prices 
reductions  (-17 %  for  electricity  prices  and  -21 % 
for  gas  prices  over  2013-2015,  respectively 
slightly  more  and  slightly  less  compared  to  price 
reductions  in  other  EU  countries).  Italian  retail 
electricity  prices  for  industry  and  residential  use 
remain among the highest in Europe. 

relatively  high  despite 

remain 

The  Italian  Parliament  is  working  on  a  new 
framework  for  the  collaborative  economy.  A        
survey  from  the  Commissionʼs  Eurobarometer 
finds that 17 % of Italian respondents make use of 

53 

012345AccountantArchitectCivil engineerLawyerPatent agentReal estate agentTourist guideEUIT 
 
4.5. Sectoral policies 

enforcement  and  101st  in  access  to  credit.  The 
average time needed to pay taxes is 269 hours per 
year,  as  compared  with  the  EU  average  of  186. 
Also,  86 %  of  respondents  in  Italy  cited  the 
complexity  of  administrative  procedures  as  a 
problem  for  doing  business  (EU  average:  62 %). 
Also, government regulations are considered more 
burdensome  than  in  the  EU  on  average  (1.9  as 
against  3.24,  on  a 
(‘most 
burdensome’)  to  7  (‘least  burdensome’)).  Finally, 
although  the  time  needed  to  start  a  company  in 
Italy  is  shorter  than  the  EU  average,  the  related 
cost  remains  the  highest  in  the  EU  (Graph  4.5.3) 
(European Commission, 2016l).  

from  1 

scale 

The  difficult  business  environment  hampers 
Italian firms’ growth. Italian firms are on average 
smaller than those in EU peer countries and grow 
more  slowly.  SMEs  play  an  important  role  in  the 
‘non-financial business economy’, as they generate 
68 % of value added (EU average 57 %) and 79 % 
of  all 
jobs  (EU  average:  67 %)  (European 
Commission,  2016b).  Italy  also  differs  from  the 
EU  average  on  the  importance  of  micro-firms, 
which  account  for  47 %  of  employment,  but  with 
value-added  per  capita  10 %  lower  than  the  EU 
average.  The  productivity  of  micro-firms  is  only 
80 % of the corresponding EU average. As in other 
countries, it is lower than that of large  enterprises 
(European Commission, 2016b). 

Graph 4.5.3:  Responsiveness of public administration to the 

needs of SMEs 

Source: European Commission, 2016l 

of 

The public procurement system is affected by a 
number 
structural  weaknesses.  The 
fragmentation  of  the  legal  framework,  the  low 
level  of  administrative  capacity  and  the  lack  of 
institutions  make  Italian 
coordination  among 
public  procurement 
to 
inefficient.  According 
European  Commission  (2016o),  many  procedures 
are  finalised  with  only  one  offer  (31 %  as  against 
the  EU  median  of  17 %)  and  decision  periods  are 
long  (192  days  as  against  the  EU  median  of  79). 
Furthermore, the value of tender calls published in 
the  Official  Journal  of  the  European  Union  as  a 
share of GDP was just above 2 % in 2009-2014 (as 
against the EU average of 4.4 %). 

its 

A  new  public  procurement  and  concessions 
code was adopted. The new code (transposing the 
2014  EU  Directives),  entered  into  force  in  April 
2016,  is  expected  to  make  arrangements  less 
burdensome and more flexible for businesses. The 
implementation  are  being 
guidelines  on 
released.  This  may  have  generated 
some 
uncertainty  and 
slowed  down 
significantly 
procurement  procedures  and  expenditure.  In  the 
the  code’s  adoption, 
three  months  following 
supplies and service contracts dropped respectively 
by about 30 % and over 40 % in value and volume, 
while the decrease for public works contracts was 
about 52 % in value and 62 % in volume (ANAC, 
2016).  This  temporary  effect  is  expected  to 
gradually  fade  away  when  the  code  is  fully 
implemented  and  the  local  authorities  are  more 
familiar with it (ANAC, 2016). 

4.5.2.  BUSINESS ENVIRONMENT*  

is 

in 

Italy 

still  more 
Doing  business 
cumbersome  than  in  peer  economies  and  the 
quality of regulation is worse. Italy ranks 50th out 
of  190  economies  on  the  World  Bank’s  ‘Doing 
Business’  indicators  (World  Bank,  2016a).  Italyʼs 
distance to the best performers is the fourth largest 
among  EU  countries,  and  it  made  less  progress 
over 2010-2015 than several countries performing 
similarly  (Graph  4.5.4).  This  is  confirmed  by  the 
2016-2017  World  Economic  Forum  Global 
Competitiveness  Report.  Despite 
slight 
improvement  in  the  value  of  the  indicator,  Italy’s 
competitiveness  ranking  worsened  compared  with 
the  previous  year,  from  43rd  to  44th  out  of  138 
countries  (WEF,  2016).  In  particular,  Italy  only 
ranks  126th  in  tax  payment,  108th  in  contract 

a 

54 

-4.5-3.5-2.5-1.5-0.50.51.5Competency and effectiveness of governmentstaff in supporting new and growing firmsBurden of government regulationsStart-up proceduresLicenses and permit systemsSMEs interacting online with public authoritiesThe complexity of administrative procedures is aproblem for doing businessFast-changing legislation and policies are aproblem for doing businessCost of enforcing contractsTime it takes to pay taxesNumber of tax payments per yearCost required to transfer propertyTime required to transfer propertyPaid-in minimum capitalCost of starting a businessTime to start a businessStandard deviationsfrom EU average 
 
 
4.5. Sectoral policies 

Graph 4.5.4:  Ease of doing business in 2017 and the number 

of reforms done in 2010-2016 

for R&D expenditure by the private sector (0.74 % 
of  GDP  in  Italy  –  14th  in  the  EU  –  as  against  the 
EU  average  of  1.30 %)  remained  significantly 
larger than for public R&D expenditure (0.56 % of 
GDP in Italy – 17th in the EU – as against the EU 
average  of  0.71 %).  Between  2007  and  2015,  the 
Italian  government’s  budget  allocated  to  R&D 
to 
fell 
activities 
EUR 8.3 billion. 

EUR 9.9 billion 

from 

The  lack  of  highly-skilled  people  holds  back 
Italy’s innovation performance. Italy still has an 
insufficient  number  of  highly-skilled  people,  in 
particular  in  science,  engineering  and  computing. 
This  is  driven  by  the  country’s  low  tertiary 
education  attainment  rate  (see  Section 4.3.3)  and 
the low number of new graduates in relevant study 
domains: 
in  2014,  Italy  counted  12.5  new 
graduates  in  science  and  engineering  and 0.5  new 
graduates  in  computing  per  thousand  inhabitants 
aged 25-34 (as against the EU average of 17.6 and 
2.3, respectively). In addition, a significant number 
of Italian researchers left the country owing to lack 
of career prospects or more attractive salaries, and 
this  brain  drain  has  so  far  not  been  offset  by  the 
arrival of foreign researchers.  

Other  factors  also  explain  Italy’s  innovation 
performance  lag.  Cooperation  between  academia 
and  business  in  Italy  remains  limited,  thereby 
hampering  an  efficient  transfer  of  knowledge  or 
leverage  effect  on  firms’  R&D  investment.  In 
2014,  public-private  scientific  co-publications  per 
million  inhabitants  in  Italy  numbered  18  (as 
against  the  EU  average  of  34).  Furthermore,  in 
2014,  the  volume  of  research  performed  by  the 
public  research  and  innovation  system  funded  by 
businesses amounted to just 0.013 % of GDP (well 
below  the  EU  average  of  0.052 %  of  GDP), 
although Italy performs relatively well in terms of 
the  quality  of  its  scientific  publications  base.  In 
addition,  framework  conditions  for  innovation  in 
Italy  are  unfavourable  to  the  creation  and  growth 
of R&D intensive firms. Italy ranks 21st in the EU 
on  the  proportion  of  employment  in  high-growth 
enterprises  (9.5 %  as  against  the  EU  average  of 
13 %),  and  most  of  those  firms  do  not  operate  in 
knowledge-intensive innovative sectors. Moreover, 
conservative  bank 
the 
underdevelopment  of  capital  markets  hampers 
innovative  start-ups’  access  to  external  funding. 
For  instance,  in  2015,  private  venture  capitalists’ 

lending  policies  and 

Notes: The vertical segment indicates the variation in the 
indicator between 2010 and 2017 with the maximum and 
minimum levels reached during the period. 
Source: World Bank, 2016a 

introduced 

Efforts to improve the business environment of 
firms  are  continuing.  In  line  with  the  previous 
year,  progress  was  made  in  implementing  the 
2015-2017  Simplification  Agenda.  A  new  public 
procurement  code  was 
to  make 
arrangements  less  burdensome  and  more  flexible. 
Measures  were  taken  to  support  e-invoicing,  to 
simplify the procedures for starting a business and 
to streamline decision-making when several public 
administrations are involved (see Sections 4.1 and 
4.6.1).  Efforts  were  also  made  to  reduce  the 
average payment period, but late payments in some 
public  bodies  remain  a  critical  issue.  Besides, 
some  e-government  measures  (Sistema  di  Identità 
Digitale  (SPID))  are  being  implemented,  making 
online  public  services  more  accessible  and 
facilitating  the  use  of  electronic  payments  for  the 
public administration (PagoPA). Other measures to 
boost  investment  and  firms’  growth  are  described 
in Section 4.4. 

4.5.3.  RESEARCH AND INNOVATION* 

Italy’s R&D investment still lags behind that of 
other EU countries. In 2015, Italy’s overall R&D 
intensity 
total  R&D  expenditure  as  a 
proportion  of  GDP)  was  1.33 %,  slightly  lower 
than  in  2014  and  still  significantly  below  the  EU 
average  of  2.03 %.  The  gap  with  the  EU  average 

(i.e. 

55 

0510152025505560657075808590MTELLUITCYHRBEHUBGROSKESSIFRNLCZPTPLLTATIEDELVFIEESEUSUKDKNumber of reformsEase-of-doing business indicator (100 = frontier)Ease-of-doing-business (lhs)Number of reforms (2010-2016) (rhs) 
 
4.5. Sectoral policies 

investments  in  Italy  represented  only  0.003 %  of 
GDP (as against the EU average of 0.024 %).  

In addition to the several incentives introduced 
in  previous  years,  Italy  adopted  new  measures 
to improve its innovation performance. First, in 
May 2016,  the  country  launched (with  a  two-year 
its  new  2015-2020  national  research 
delay) 
programme,  which  is  fully  operational  since  July 
2016.  The  programme  has  a  budget  of 
EUR 2.5 billion  for  the  2015-2017  period  and  is 

research 

structured around six priorities (i.e. human capital, 
internationalisation, 
infrastructures, 
public-private  cooperation,  southern  Italy,  and 
efficiency and quality of public spending). Second, 
in  September  2016,  the  government  presented  its 
new  ‘Industry  4.0’  strategy  (see  Section  4.4  and 
Box 4.5.1.). 

56 

Box 4.5.1: Selected highlights: Italy’s Start-up Act & Industry 4.0 strategyItaly’s Start-up Act (1) defines a strategy aimed at creating favourable conditions for the establishment and development of innovative enterprises. It also fosters knowledge spillovers to the whole economic fabric and supports a new Italian productive system oriented towards high-tech and high-skill sectors.  This strategy puts together different measures adopted since 2012. In fact, the Italian government has worked since then on the creation of coherent legislation aimed at the development of an ecosystem of innovative start-ups with high technological content. Law 221/2012 included many of the policy proposals put forward in the April 2012 ‘Restart, Italia!’ report by the Ministry of Economic Development, as well as suggestions coming from a consultation with the main players in the Italian start-up ecosystem.   The law introduced a definition of innovative start-ups in the Italian legal system. For the first time, this type of enterprise could draw upon an exhaustive set of regulations and new instruments relevant for the whole lifecycle of a company. Thanks to the law, Italian innovative start-ups can enjoy a number of benefits, such as reductions in red tape and fees, various exemptions, tailor-made labour regulation, a flexible remuneration system, tax credits and incentives for investments, and the possibility to collect equity through crowdfunding portals. The Italian start-up ecosystem has been quite responsive to these policies: at the end of 2016, the number of registered innovative start-ups amounted to 6 745, an increase by 382 units (6 %) compared to the end of September 2016. These innovative start-ups represent 0.42 % of the estimated 1.5 million limited companies active in Italy (up from 0.38 % in June 2016). Furthermore, the policy for innovative start-ups is in constant evolution: recent interventions have improved and broadened the range of measures. These include the ‘Smart&Start Italia’ (a subsidised financing scheme for innovative start-ups), the ‘Italia Start-up Visa’ (a centralised and simplified mechanism for granting work visas to applicants intending to set up a new innovative start-up), and some fiscal benefits such as the ‘Patent Box’ (which allows companies to exclude for tax purposes 50 % of their income deriving from the commercial use of intangible assets). At the end of 2016, the ‘Italia Start-up Visa’ programme recorded 161 applications. Finally, in September 2016, the government presented its new ‘Industry 4.0’ strategy (2), which aims at modernising production processes and move Italian firms up in the value chain, primarily through the use of fiscal incentives. The plan includes measures to support innovative investment, SMEs’ equity financing and preferential treatment for innovative start-ups. To recall a few: (i) a 250 % iperammortamento rate to support investment in digitalization; (ii) a 30 % tax deduction for equity investments in start-ups and innovative small and medium-sized enterprises (up to EUR 1 million); (iii) a partial absorption of start-ups’ losses by their sponsoring firms during the first four years; (iv) capital gains de-taxation; (v) venture capital funds; (vi) a renewal of the Nuova Sabatini law for 2017-2018 which partially covers SMEs’ interest expenditure granted on bank loans to invest in new machinery and equipment; (vii) a EUR 1 billion refinancing of the Central Guarantee Fund for SMEs.                                                            (1) http://www.sviluppoeconomico.gov.it/index.php/it/impresa/competitivita-e-nuove-imprese/start-up-innovative  (2) http://www.sviluppoeconomico.gov.it/index.php/it/incentivi/impresa/industria-4-0   
 
 
 
 
 
4.6. PUBLIC ADMINISTRATION 

4.6.1.  PUBLIC ADMINISTRATION* 

Graph 4.6.1:  Government effectiveness indicator, 2016 

Italy’s  public  administration  is  perceived  to  be 
less  efficient  and  effective  than  those  of  its  EU 
peers. Italy scores worse than its EU peers on most 
of  the  World  Bank’s  2016  worldwide  governance 
indicators.  On 
the  government  effectiveness 
indicator,  reflecting  perceptions  of  the  quality  of 
public  services  and  the  capacity  of  the  civil 
service,  Italy  scores  0.45,  while  other  major 
European  countries  score  above  1  (Graph  4.6.1). 
Unlike most other countries, Italy keeps displaying 
a  negative  trend  in  performance.  The  trend  is 
confirmed  also  after  taking  into  account  the 
regulatory  quality  index,  reflecting  perceptions  of 
the  government’s  ability 
formulate  and 
implement  sound  policies  and  regulations.  The 
Commission’s  Eurobarometer  2016  also  ranks 
Italy  as  a  Member  State  with  one  of  the  highest 
proportions  of  citizens  judging  the  public  service 
as  ‘bad’  or  ‘very  bad’  (European  Commission, 
2016p). 

to 

to 

key 

Italy’s 

The  management  and  quality  of  civil  servants 
public 
improving 
are 
administration performance. The average age of 
civil  servants  is  high  in  Italy  (47  years,  4.4  years 
more  than  in  the  private  sector).  Educational 
mismatches  are  also  high,  with  49 %  of  jobs  that 
require  a  university  degree  occupied  by  non-
graduates 
2016b). 
(European  Commission, 
Selection  procedures  are  still  based  mainly  on 
textbook  knowledge  instead  of  applied  problem-
solving  skills.  Moreover,  the  system  of  monetary 
incentives  to  raise  productivity  is  negligible,  and 
incentives  are  not  clearly  related  to  an  effective 
evaluation system and do not reward merit. Graph 
4.6.2  shows  the  breakdown  of  a  civil  servant's 
average  salary  (ARAN,  2015).  The  fixed  portion 
represents  more  than  80 %  of  the  total  wage  in 
most sectors. The portion linked to productivity is 
relevant only for agencies, which account for some 
4 %  of  all  public  employment.  Thus,  improving 
performance  does  not  lead  to  substantial  benefits 
for the employees. Lack of monetary incentives is 
not counterbalanced by career progression. Career 
and  salary  progressions  seem  equally  distributed 
among employees. Managerial and non-managerial 
careers are on separate paths. The attractiveness of 
the public administration is thus very weak among 
highly  skilled  workers,  generating  negative  self-
selection (Bank of Italy, 2016c). 

Notes: Estimate of governance (ranges from approximately -
2.5 (weak) to 2.5 (strong) governance performance 
Source: World Bank, 2016b 

Graph 4.6.2:  Percentage breakdown of the average salary 

of non-managerial civil servants, 2014 

Notes: ‘Agencies’ are all non-economic agencies. ‘Other’ 
refers to the portion of the salary related to special working 
conditions (e.g. night shifts, public holiday shifts). ‘Afam’ 
refers to superior education in music and arts. 
Source: European Commission; ARAN, 2015 

A  reform  of  the  public  administration  is  being 
implemented. In 2015, a comprehensive enabling 
law  was  adopted.  The  law  delegates  to  the 
government  inter  alia  the  reform  of  the  legal 
framework 
for  public  employment  at  both 
managerial  and  non-managerial  level.  Under  the 
enabling law, the government has adopted several 
implementing  decrees, 
the 
simplification  of  the  decision-making  process  and 

including  on: 

i) 

57 

0.00.51.01.52.02.5FRDEITESUK20002005201020150%10%20%30%40%50%60%70%80%90%100%FixedProductivitySeniorityOther 
 
 
 
 
4.6. Public administration 

administrative capacity-building, and are expected 
to contribute to the public administration reform. 

4.6.2.  JUSTICE SYSTEM* 

Despite  some  improvement  in  the  effectiveness 
of  the  justice  system,  the  length  of  proceedings 
remains  a  serious  challenge.  In  2015,  Italy's 
backlog  and  disposition  time  for  civil  litigious 
cases remained one of the highest in the EU at all 
instances  (European  Commission,  2017b). (43)  In 
the past five years, some reforms helped to reduce 
the  pending  cases  at  first  and  second  instance  (44) 
but  the  backlog  still  increased  at  the  Supreme 
Court  of  Cassation (by  4 %  since  2014)  (Corte  di 
Cassazione, 2016). In 2016, the Parliament passed 
a  reform  of  the  rules  on  career,  training  and 
discipline of the honorary magistracy and a law to 
help the Supreme Court reduce its backlog, also by 
creating ʽsupport offices’ to assist cassation judges 
and allowing the assignment of judges from other 
departments  to  work  on  civil  cases.  Resources 
were allocated to digital administrative trials as of 
2017.  However,  the  observed  downward  trend  in 
pending cases started only slowly to translate also 
into  lower  disposition  time  at  first  instance (45). 
Moreover,  this  seems  to  relate  mostly  to  recently 
introduced out-of-court procedures in non-litigious 
cases (46), for which the disposition time decreased 
by  16.5 %  between  2010  and  2015,  whereas  it 
increased  for  litigious  cases  by  6.8 %  over  the 
same period. Trial length for civil and commercial 
proceedings remains a source of concern at higher 
instances and even shows an upward trend. (47) As 
for administrative justice, the backlog continued to 
decrease but the disposition time remains high. (48) 

(43)  Disposition time was 8.22 years in 2015, namely 527 days 
at first instance, 1 005 days at the second and 1 469 days at 
the third. 

(44)  Pending  litigious  cases  at  first  instance  went  from  6.3  to 
4.4  per  100  inhabitants  over  2010-2015,  also  thanks  to 
clearance rates above 100 %.  

(45)  At  first  instance,  disposition  time  decreased  by  1.8 % 
between 2014 and 2015 for other than criminal cases (370 
days  in  2015).  For  civil  and  commercial  litigious  cases,  it 
increased from 493 days in 2010 to 527 days in 2015. 
(46)  Particularly assisted negotiation for separation and divorce 
(47)  The average length of civil and commercial litigious cases 
was 1 026 days at second instance courts and 1 366 days at 
the  Supreme  Court  in  the  first  nine  months  of  2016,  both 
above  the  values  recorded  in  2015  (source:  Ministry  of 
Justice). 

(48)  Disposition time for first instance administrative cases was 
1 008 days in 2015, broadly stable since 2010 (1 037 days). 

level 

In  2016, 

of  citizens’  access  to  public  administrations;  ii) 
iii)  human  resources 
state-owned  enterprises; 
the  health  sector  and 
(management 
in 
a  draft 
disciplinary  dismissal). 
implementing  decree  on  middle  and  senior 
managers  was  presented.  It  introduces  fixed-term 
managerial positions, allowing for more flexibility 
in the administrations. It also increases managers’ 
mobility  and  strengthens  the  link  between  careers 
and  performance.  Yet,  it  keeps  the  managerial 
career on a different path than the non-managerial 
one.  The  decree  on  the  non-managerial  level  has 
not yet been presented. The enabling law envisages 
the  possibility  of  intervening  in  civil  servants’ 
selection and recruitment, evaluation processes and 
promotion and salary progression.  

(regulating 

legislative  decrees 

The  consequences  of  the  Constitutional  Court 
ruling  on  the  content  and  effectiveness  of  the 
reform  of  the  public  administration  are  still  to 
be  seen.  In  November  2016,  the  Constitutional 
Court  ruled  that  the  procedure  followed  for  three 
adopted 
the 
management  in  the  health  sector,  disciplinary 
dismissals  and  state-owned  enterprises)  and  for 
three not yet adopted ones (on local public services 
and  public  employment  at  managerial  and  non-
managerial  level)  was  unconstitutional. (41)  While 
the  first  three  can  be  amended  by  a  corrective 
decree  (within  12  months  given  the  adoption 
deadline),  the  deadlines  for  the  adoption  of  the 
decrees  on 
local  public  services  and  public 
managers have expired and the government has not 
yet clarified how it will address the Constitutional 
Court ruling for those two decrees. The legislative 
decree  on  non-managerial  staff  has  not  been 
published yet and is expected to follow the correct 
procedure.  

to 

adopt 

regional 

Improved  public  administration  will  also 
support  a  more  efficient  use  of  EU  funds.  Italy 
national) 
agreed 
administrative  reinforcement  plans (42)  to  improve 
the  implementation  of  European  Structural  and 
Investment  Funds,  in  line  with  a  2015  country-
specific  recommendation.  The  plans  cover  also 
non-European structural and investment funds and 

(and 

(41)  Ruling 251/2016 states that the government needs to reach 
an  agreement  with  local  administrations  when  intervening 
in  areas  that  directly  affect  the  latter,  and  judged  the  non-
binding opinion foreseen by the law as insufficient. 
(42)  Programma di Rafforzamento Amministrativo (PRA) 

58 

 
                                                           
                                                           
4.6. Public administration 

cases 

effective 

to  monitor 

long-pending 

case-management. 

Effective  case-management,  adequate  staff  and 
simpler  procedures  at  all 
instances  could 
support court efficiency. The share of civil cases 
pending for more than three years remains a major 
problem  of  Italy’s  justice  system,  although  the 
backlog  has  decreased  since  2013  at  all  instances 
except  the  Supreme  Court (Ministry  of  Justice, 
2016).  There  is  ample  scope  to  tackle  this  issue 
through 
The 
‘Strasbourg  2’  project  adopted  at  the  end  of  2014 
aims 
and 
encouraging  judges  to  adopt  a  ʽfirst-in,  first-outʼ 
strategy  in  handling  them.  The  High  Council  for 
the  Judiciary  also  developed  a  handbook  of  best 
practices 
in-court  workflow, 
digitalisation  and  support  offices.  Where  applied, 
in 
these  practices  showed  promising  results 
reducing  the  backlog  and  length  of  proceedings. 
Wider and more homogeneous application of case-
management  could  extend  the  efficiency  gains  to 
all  instances.  The  current  lack  of  1 439  out  of 
around 9 921 judges and of administrative staff (up 
to 30 % in some courts) weighs on the capacity of 
the  judiciary  to  timely  resolve  a  large  number  of 
incoming  cases  (Corte  di  Cassazione,  2016). 
Addressing this shortage, while improving training 
and  equipment  and 
the 
digitalisation  of  proceedings,  could  contribute  to 
support efficiency gains.  

further  extending 

regards 

as 

The  effectiveness  of  reforms  to  avoid  abuses  of 
the  trial  remains  to  be  seen.  In  the  past  years, 
Italy  passed  measures  to  contain  litigation  and 
avoid  abuses  of  the  trial (49),  which  reportedly 
weigh  on  the  efficiency  of  civil  justice  (Corte  di 
Cassazione, 2012; Davigo and Sisti, 2012; Corte di 
Cassazione,  2013;  Corte  di  Cassazione,  2015a; 
Ambrosetti  Club,  2016).  For  instance,  the  legal 
interest  rate  paid  by  the  debtor  in  a  monetary 
dispute was raised as a deterrence to uncooperative 
debtorsʼ  delaying  tactics,  admissibility  rules  for 
including  a 
appeals  were  made  stricter  by 
reasonable likelihood of success, the principle that 
the  losing  party  bears  the  cost  of  the  trial  was 
strengthened,  and  judges'  option  to  fine  vexatious 
litigation  ex  officio  was  extended  to  bad  faith  in 
out-of-court procedures (50). Yet, the still very long 

(49)  Source:  Relazione  Illustrativa  of  Decree  Law  132/2014, 
whereby  the  aim  is  to  introduce  "disincentives  to  civil 
justice litigation". 

(50)  This  includes  parties  deliberately  not  taking  part  in 
mediation or assisted negotiation. Furthermore, a judge can 

that 

trial 

increasing 

length  (51)  suggests 
average 
these 
measures  have  not  fully  delivered,  including  in 
effectively 
procedural  discipline. 
Moreover,  doubts  may  arise  on  the  consistent 
application of the new admissibility rules at second 
instance,  since  only  1.9 %  of  incoming  cases  in 
appeal courts were declared inadmissible. (52) It is 
thus important for the authorities to understand the 
reasons  for  this  and  monitor  the  impact  of  these 
reforms  on  abuses  of  the  trial. (53)  The  current 
compulsory  legal  assistance  in  mediation  appears 
unnecessary  when  the  parties  do  not  aim  to 
immediate 
liable  of 
conclude  an  agreement 
enforcement  without  a 
judgeʼs  approval.  A 
comprehensive  reform  of  civil  procedural  rules 
now under discussion in the Senate would provide 
for a further tightening of admissibility criteria for 
appeals,  streamlined  civil  procedures  at  all 
instances and stronger deterrence against vexatious 
litigation,  which  may  have  a  positive  impact  on 
procedural discipline and trial length. 

4.6.3.  ANTI-CORRUPTION* 

The  statute  of  limitations  hinders  the  fight 
against  corruption.  Italyʼs  challenges  related  to 
high-level  corruption,  conflicts  of  interest,  links 
with organised crime and corruption in the private 
sector  (as  highlighted  by  the  2014  EU  Anti-
Corruption  Report)  are  still  confirmed  by  several 
indicators. Italy ranks 26th in the EU for control of 
corruption,  Transparency  International  gave  Italy 
one of the lowest scores in the EU, and the country 
was  ranked  120th  out  of  138  countries  on 
favouritism  in  public  officialsʼ  decisions  and  87th 
on  diversion  of  public  funds (World  Bank  2016b; 
WEF, 2016). Public procurement is a sector at risk, 
with  29 %  of  all  procedures  having  only  one 

sentence  the  party  unjustifiably  declining  conciliation 
proposals confirmed by final rulings to pay trial costs. 
(51)  The average length of civil and commercial litigious cases 
in  the  first  nine  months  of  2016  was  9.13  years,  namely 
941  days  at  first  instance,  1 026  at  the  second  (together 
with a small share of non-litigious cases) and 1 366 at the 
third (source: Ministry of Justice). 

(52)  In  comparison,  in  2015  the  Supreme  Court  declared  13 % 
of  appeals  inadmissible  (Corte  di  Cassazione,  2015b),  up 
from 8 % in 2005. 

(53)  The issue of incentives to abusive litigation provided by the 
Italian legislation has been raised by the Supreme Court of 
Cassation  in  its  annual  reports.  See  for  instance:  Corte  di 
Cassazione,  2011,  pp.  86-90;  Corte  di  Cassazione,  2015a, 
pp. 132-133. 

59 

 
                                                           
                                                                                   
4.6. Public administration 

may  continue  to  work  to  minimise  procurement 
delays. The authorityʼs tasks include analysing the 
corruption-prevention  plans  of  all  administrative 
bodies  and  state-owned  companies  and  providing 
training to the administrations lacking the capacity 
to develop such plans. However, these powers are 
not  matched  by  sufficient  additional  human  and 
financial  resources (ANAC,  2016).  This  shortage 
compounds Italy’s lack of uniform and systematic 
verification of public officials’ assets and conflicts 
of  interest,  and  a  still-fragmented  whistle-blower 
protection framework. 

Graph 4.6.3:  Ratio of time-barred criminal cases to total 

resolved criminal cases per instance 

Notes: ‘Total in-court cases’ are obtained by the sum of 
those at all instances plus the judges of the peace. 
Investigations are not considered here. 
Source: Ministry of Justice 

to 

gets 

criminal 

bidder  and  with  9 %  having  no  call  for  tenders at 
all 
in  2015  (European  Commission,  2016o). 
Reforms  were  adopted  to  improve  the  repression 
of corruption, but the long-overdue revision of the 
statute  of  limitations  is  still  on  hold.  The  current 
system is a major hindrance to repress corruption, 
not least as it incentivises lawyersʼ delaying tactics 
(European  Commission,  2015b). (54)  The  ratio  of 
time-barred 
cases 
resolved 
(Graph 4.6.3)  shows  that  prescriptions  at  first 
instance  have  risen  since  2013  to  9.5 %  in  2015. 
Those in appeal courts also increased from 12.3 % 
to 22.6 % over 2006-2015. The rate of prescription 
in  the  Supreme  Court  is  lower  but  it  has  been 
rising in recent years. Overall, a high proportion of 
cases 
first-instance 
conviction. A draft law introducing a suspension of 
prescription  terms  for  all  criminal  trials  and  a 
special extension for corruption offences has been 
in  Parliament  for  two  years.  While  the  proposal 
does  not  stop  prescription  terms  after  a  first-
instance  conviction,  (as  suggested  by  the  Council 
of Europeʼs Group of States against Corruption) it 
appears  to  be  a  step  in  the  right  direction. 
increase 
Extending  prescription 
incentives  to  resort  to  expedited  procedures (55) 
and  reduce  abuses  of  the  trial  (GRECO,  2016, 
paragraph  126),  thereby  contributing  to  more 
effective  criminal  justice.  Failure  to  address  this 
issue 
line  with  EU  best  practices  could 
undermine  public  and  investor  confidence  in  the 
rule of law. 

terms  could 

time-barred 

after 

in 

of 

the 

The  national  anti-corruption  authority  has 
limited  means  to  exercise  its  powers,  and  the 
prevention  framework  remains  fragmented. 
The  monitoring 
national 
powers 
anti-corruption  authority  (ANAC)  were  extended, 
in particular to cover larger procurement contracts 
where  monitors  chosen  at  random  from  the 
authoritiesʼ  pool  sit  on  tender  boards.  However, 
this  is  not  the  case  for  contracts  below  EU 
thresholds and those defined (ambiguously) as ʽnot 
particularly  complexʼ.  Acting  through  the  local 
prefect,  ANAC  may  also  remove  contractors 
involved in corruption or mafia cases, while others 

(54)  In  general,  the  practitionersʼ  responsibility  to  contribute, 
is  widely 

to  procedural  discipline 

their  part, 

from 
acknowledged. 

(55)  According  to  the  Code  of  Criminal  Procedure,  ‘special 
procedures’  are  aimed  to  accelerate  proceedings  and 
include  the  defendant's  possibility  to  ask  for  a  settlement 
(patteggiamento) at the stage of the preliminary hearing. 

60 

0481216202406070809101112131415%Supreme CourtAppeal courtsFirst-instance courts'Justice of the peace' officesTotal in-court cases 
                                                           
 
ANNEX A 

Overview table 

Commitments 

Summary assessment (56)  

2016 country-specific recommendations (CSRs) 

Italy  has  made  some  progress  in  addressing  CSR  1  (this 
overall assessment of CSR 1 does not include an assessment 
of compliance with the Stability and Growth Pact): 

to 

towards 

CSR  1:  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 
the 
reforms,  subject 
condition  of  resuming  the  adjustment 
path 
the  medium-term 
budgetary  objective  in  2017.  Achieve 
an annual fiscal adjustment of 0.6 % or 
more  of  GDP  towards  the  medium-
term  budgetary  objective 
in  2017. 
Finalise  the  reform  of  the  budgetary 
process  in  the  course  of  2016  and 
ensure  that  the  spending  review  is  an 
integral  part  of  it.  Ensure  the  timely 
implementation  of 
the  privatisation 
programme  and  use  the  windfall  gains 
to  accelerate 
the 
general  government  debt  ratio.  Shift 
the  tax burden from  productive  factors 
property. 
onto 
Reduce  the  number  and  scope  of  tax 
expenditures  and  complete  the  reform 
of  the  cadastral  system  by  mid-2017. 
tax 
Take  measures 
compliance, 
through 
electronic invoicing and payments 

to 
including 

the  reduction  of 

consumption 

improve 

and 

  In  2016, 

limit 

the 

temporary    The  assessment  of  compliance  with  the  Stability  and 

(56)  The following categories are used to assess progress in implementing the 2016 country-specific recommendations (CSRs): 
No  progress:  The  Member State  has  not  credibly  announced  nor adopted  any  measures  to  address  the  CSR.  Below  a  number  of 
non-exhaustive typical situations that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
no non-legislative acts have been presented by the governing or legislator body;   
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
announced certain measures  but these only address the CSR to a limited extent; and/or 
presented  legislative  acts  in  the  governing  or  legislator  body  but  these  have  not  been  adopted  yet  and  substantial  non-legislative 

further work is needed before the CSR will be implemented;  

presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has:  
adopted measures that partly address the CSR, and/or  
adopted  measures  that  address  the  CSR,  but  a  fair  amount  of  work  is  still  needed  to  fully  address  the  CSR  as  only  a  few  of  the 
adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial  decision;  but  no 
implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

61 

 
 
                                                           
 
A. Overview table 

Growth Pact will be made in Spring.  

of 

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 
structural 
reforms, subject to the condition of 
adjustment  path 
resuming 
medium-term 
the 
towards 
budgetary 
2017. 
objective 
Achieve an annual fiscal adjustment 
of  0.6 %  or  more  of  GDP  towards 
budgetary 
the 
objective in 2017. 

medium-term 

the 

in 

  Finalise the reform of the budgetary 
process  in  the  course  of  2016  and 
ensure  that  the  spending  review  is 
an integral part of it. 

  Substantial  progress  has  been  made  in  reforming  the 
budgetary  process.  A  comprehensive  reform  of  the 
process  was  passed  in  2016.  Its  full  implementation  is 
expected  in  the  2018  Budget  Law,  which  would  make 
the spending review a more integral part of the budgeting 
process. 

  Ensure  the  timely  implementation 
of  the privatisation programme  and 
use the windfall gains to accelerate 
the 
the  general 
government debt ratio. 

reduction  of 

  Limited  progress  has  been  made  in  implementing  the 
privatisation programme and in using the windfall gains 
to  reduce  public  debt.  In  2016,  Italy  has  underachieved 
its privatisation targets (at 0.1 % of GDP in 2016 versus 
the  planned  0.5 %)  and 
rate 
expenditure  was  counterbalanced  by  increased  primary 
expenditure. 

interest 

lower 

the 

  Shift 

tax 

the 
productive 
consumption and property.  

factors 

burden 

from 
onto 

  Some progress has been made in shifting the tax burden 
from productive factors onto consumption and property. 
Italy’s  2017  Budget  Law  contains  several  measures 
affecting  the  tax  wedge  on  labour,  including  lower  tax 
rates  on  productivity  premia  agreed  in  decentralised 
bargaining,  an  exemption  from  the  payment  of  social 
security  contributions  for  certain  new  hires,  and  the 
reduction of the social security contributions rate for the 
self-employed. These measures compound more sizeable 
measures  taken  in  2014  and  2015  to  reduce  the  labour 
tax wedge.  

  Reduce  the  number  and  scope  of    Limited progress has been made in reducing the number 

62 

 
 
 
 
 
 
 
 
 
 
 
 
 
A. Overview table 

tax  expenditures  and  complete  the 
reform  of  the  cadastral  system  by 
mid-2017.  

and  scope  of  tax  expenditures  and  in  completing  the 
reform of the cadastral system. 

  Take  measures 
compliance, 
electronic invoicing and payments. 

to 
including 

tax 
through 

improve 

enterprises, 

CSR  2:  Implement  the  reform  of  the 
public  administration  by  adopting  and 
implementing  all  necessary  legislative 
decrees,  in  particular  those  reforming 
publicly  owned 
local 
public services and the management of 
human  resources.  Step  up  the  fight 
by 
against 
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. 

corruption 

including 

  Implement the reform of the public 
administration  by  adopting  and 
implementing 
necessary 
all 
legislative  decrees, 
in  particular 
those  reforming  publicly  owned 
enterprises,  local  public  services 
and  the  management  of  human 
resources.  

firms  and  corporations. 

  Limited  progress  has  been  made  in  improving  tax 
compliance. The 2017 Budget Law introduces a new tax 
on business income (IRI) to harmonise the tax system of 
small 
introduces 
the  communication  of 
transparency  provisions  on 
invoices  and  VAT  data,  and  a 
tax 
reform  of 
tax-recovery  agency 
administration,  merging 
(Equitalia) with the revenue agency. Sanctions and fines 
related  to  unpaid  taxes  in  2000-2015  are  waived  for 
taxpayers spontaneously regularising their tax position. 

It  also 

the 

Italy has made limited progress in addressing CSR 2: 

have 

been 

adopted.  However, 

  Limited  progress  has  been  made  in  implementing  the 
public  administration  reform.  Several  implementing 
decrees 
on 
25 November 2016,  the  Constitutional  Court  ruled  that 
the  procedure  envisaged  was  unconstitutional  for  the 
decrees  pointed  out  in  the  recommendations,  notably 
those  concerning  human  resource  management,  local 
public services and publicly-owned enterprises. Some of 
them  had  been  already  adopted  (those  regulating  the 
management  level  in  the  health  sector,  disciplinary 
dismissals  and  state-owned  enterprises)  and  have 
therefore  to  be  amended.  For  two  decrees,  (on  local 
public services and public managers), the delegation had 
already expired. The decree on non-managerial staff was 
also  concerned,  but  it  can  still  be  adopted  under  the 
enabling law with the correct procedure. 

  Step up the fight against corruption 
including  by  revising  the  statute  of 
limitations by the end of 2016. 

  No  progress  has  been  made  in  revising  the  statute  of 

limitations. 

63 

 
 
 
  Reduce  the  length  of  civil  justice 
proceedings  by  enforcing  reforms 
and 
case-
management. 

effective 

through 

of 

non-performing 

CSR 3: Accelerate the reduction in the 
stock 
loans, 
including  by  further  improving  the 
framework  for  insolvency  and  debt 
collection.  Swiftly 
the 
implementation  of  ongoing  corporate 
governance  reforms  in  the  banking 
sector. 

complete 

  Accelerate  the  reduction 

in 
stock of non-performing loans, 

the 

A. Overview table 

  Some progress has been made in enforcing civil justice 
reform  and  improving  case-management  but  the  length 
of proceedings is not decreasing. 

Italy has made some progress in addressing CSR 3: 

  Limited  progress  has  been  made  in  reducing  non-
performing  loans  (NPLs).  In  April  2016,  a  law  was 
passed creating an NPL securitisation scheme supported 
by  state  guarantees  (GACS),  which  became  operational 
in  August  2016  with  the  adoption  of  an  implementing 
decree.  Since  April  2016,  two  private-sector  backstop 
funds (Atlante I and II) have been set up to support the 
recapitalisation  and  the  impaired  asset  disposal  of 
vulnerable  banks.  Furthermore,  the  Bank  of  Italy  has 
issued  a  new  reporting  template  requiring  banks  to 
provide  detailed  data  on  their  bad  loans,  collateral  and 
ongoing 
these 
measures — including several reforms of insolvency and 
collateral enforcement rules — are in principle helpful in 
fostering  the  development  of  a  secondary  market  for 
distressed  assets  in  Italy,  they  have  not  yet  resulted  in 
significant  short-term  relief  for  the  banking  sector.  In 
December 2016, the government approved the setup of a 
precautionary 
EUR 
recapitalisation  of  and  liquidity  support  for  vulnerable 
banks,  but  it  is  not  yet  clear  whether  this  will  be  a 
turning-point  in  the  clean-up  of  the  Italian  banking 
sector. 

recovery  procedures.  Although  all 

billion 

fund 

the 

for 

20 

including  by  further  improving  the 
framework  for  insolvency  and  debt 
collection. 

  Some  progress  has  been  made  in  improving  the 
framework  for 
insolvency  and  debt  collection.  In 
June 2016,  further  changes  to  Italy’s  insolvency  and 
collateral  enforcement  rules  were  made.  Inter  alia, 
provisions authorise private enforcement clauses in loan 
contracts  allowing  creditors 
take  ownership  of 
collateral  out-of-court  in  the  event  of  a  debtor’s  default 
(patto  marciano),  and  enable  entrepreneurs  to  pledge 
movable  assets  while  continuing  to  use  them  (a  kind  of 
non-possessory lien). Furthermore, an electronic register 
for insolvency cases will be set up, and hearings can now 
be held electronically. The reforms complement those of 
2015,  but  it  may  take  some  time  before  their  results  in 
terms of shorter proceedings and higher recovery values 

to 

64 

 
 
 
  Swiftly 

complete 

the 
implementation 
ongoing 
corporate governance reforms in the 
banking sector. 

of 

A. Overview table 

—  essential  for  NPL  market  activity  —  materialise.  In 
the  meantime,  a  draft  enabling 
to 
fundamentally overhaul the insolvency and enforcement 
framework is currently under parliamentary discussion. 

law  aiming 

  Some  progress  has  been  made 

in 

the 

Italy 

2016, 

in  November 

implementing 
corporate governance reform. With the adoption of a law 
in April 2016 and implementing provisions by the Bank 
of 
18-month 
implementation  period  started  for  the  self-reform  of  the 
segment  of  small  mutual  banks  (banche  di  credito 
cooperativo  (BCCs)).  BCCs  wishing  to  retain  their 
the 
cooperative  status  will  have 
cooperative banking groups that will be set up, and their 
relationship  with  the  group’s  holding  company  will  be 
determined  by  risk-based  ‘cohesion  contracts’.  The 
implementation of the 2015 reforms of large cooperative 
banks  (banche  popolari)  and  bank  foundations  has 
continued,  although  legal  challenges  and  unfavourable 
market conditions have led to some delays. 

join  one  of 

to 

CSR 4: Implement the reform of active 
labour market policies, in particular by 
the  effectiveness  of 
strengthening 
the 
employment  services.  Facilitate 
take-up  of  work  for  second  earners. 
Adopt  and 
the  national 
implement 
antipoverty  strategy  and  review  and 
rationalise social spending. 

  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. 

Italy has made some progress in addressing CSR 4: 

  Some  progress  has  been  made  in  implementing  the 
reform of ALMPs.  The new Agency in charge of active 
labour  market  policies  (ANPAL)  is  operational  as  of 
January 2017. A pilot outplacement voucher (assegno di 
ricollocazione) scheme was launched in November 2016 
covering a sample of 30 000 beneficiaries. 

  Limited progress has been made in facilitating the take-
up  of  work  by  second  earners.  The  2017  Budget  Law 
extends paternity leave from two to four days as of 2018. 
It  also  extends  to  2017  and  2018  the  possibility,  first 
introduced  in  2012,  to  exchange  parental  leave  with 
babysitting  vouchers  and  introduces  a  non-means-tested 
voucher for EUR 1 000 per year to be spent in public or 
private nurseries. 

  Some  progress  has  been  made  with  regard  to  the 
national  antipoverty  strategy.  The  active 
inclusion 
measure (SIA), which provides economic and social care 
to  disadvantaged  households,  was  rolled  out  at  national 
level.  An  enabling  law  aimed  at  establishing  a  single 
comprehensive  scheme  against  poverty,  replacing  SIA 

65 

 
 
 
A. Overview table 

CSR  5:  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. 

  Swiftly  adopt  and  implement  the 

pending law on competition.  

and  the  unemployment  assistance  scheme  (ASDI),  has 
been approved by the Chamber of Deputies. 

Italy has made limited progress in addressing CSR 5: 

  No  progress has  been  made  with  regard  to  the  pending 
law  on  competition.  The  draft  law  was  presented  to 
Parliament in April 2015 and has not yet been approved 
by the Senate. 

to 

  Take  further  action 

increase 
competition 
regulated 
professions,  the  transport,  health 
and retail sectors and the system of 
concessions. 

in 

to 

  Limited  progress  has  been  made 
competition 

in  addressing 
remaining  barriers 
regulated 
in 
professions,  the  transport,  health  and  retail  sectors  and 
the  system  of  concessions.  The  code  for  public 
procurement  and  concessions  was  revised  in  2016.  No 
further  measures  were  taken  to  remove  remaining 
barriers to competition in the other sectors. 

Europe 2020 (national targets and progress) 

Employment rate target: 67 %-69 % 

R&D target: 1.53 % of GDP 

The  employment  rate  has  shown  some  signs  of 
recovery,  increasing  to  60.5 %  in  2015  (compared 
with 59.9 % in 2014). However, it is still far from the 
target. 

Italy’s  R&D  investment  stood  at  1.33 %  of  GDP  in 
2015.  Therefore,  there  is  only  limited  progress 
towards  the  target.  In  recent  years,  Italy  has  been 
cutting its public research and innovation budget at a 
higher rate than the overall public budget. This trend 
keeps Italy’s public sector R&D intensity — 0.56 % 
of GDP in 2015 — at a significantly lower level than 
the  EU  average  (0.71 %),  while  business  R&D 
intensity stood at 0.74 % of GDP in 2015, also much 
lower than the EU average (1.3 % of GDP). 

Greenhouse  gas  emissions  target:  -13 %  in 
non-ETS sectors (compared with emissions in 

According to the latest national projections submitted 
to the European Commission in 2015 and taking into 
account existing measures, emissions are projected to 

66 

 
 
 
 
 
A. Overview table 

2005) 

Renewable energy target: 17 % 

Energy  efficiency  target:  158 Mtoe  (absolute 
level  of  primary  energy  consumption) 
/ 
124 Mtoe  (absolute  level  of  final  energy 
consumption) 

Early school leaving target: 16 % 

Tertiary education target: 26 %-27 % 

decrease  by  18 %  by  2020  as  compared  with  2005. 
Therefore,  Italy  is  on  track  to  reach  its  2020 
greenhouse gas emission reduction target, with a 5 % 
margin. 

According to approximated data for 2015, emissions 
decreased by 19 % between 2005 and 2015. 

to  33.4 %  and  from  8.2 % 

With  a  renewable  energy  share  of  17.1 %  in  2015, 
Italy  has  already  reached  the  2020  target.  The  share 
of renewable electricity generation in final electricity 
consumption  and  in  heating  and  cooling  more  than 
doubled  between  2005  and  2014,  increasing  from 
16.3 % 
to  18.9 % 
respectively.  However,  past  changes  in  support 
schemes for renewables (e.g. retroactive cuts in feed-
in tariffs for existing projects), the uncertainty about 
the  post-2016  regulatory  framework  for  renewables, 
and persistent burdensome administrative procedures 
limited  market  growth  during  in  the  last  couple  of 
years. (57)  

Italy increased  its  primary  energy consumption  by 4 
% from 143.84 Mtoe in 2014 to 149.56 Mtoe in 2015. 
Final  energy  consumption  increased  by  3  %  from 
113.35 Mtoe in 2014 to 116.44 Mtoe in 2015. Even if 
Italy has already achieved levels of primary and final 
energy  consumption  which  are  below  the  indicative 
national 2020 targets, it would need to make an effort 
to maintain these levels until 2020. 

Italy has met this target. The early school leaving rate 
(the percentage of the population aged 18-24 with at 
most  lower  secondary  education  and  not  in  further 
education  or  training)  fell  from  16.8 %  in  2013  to 
15 % in 2014 and 14.7 % in 2015. 

Italy has made some progress towards achieving this 
target. The tertiary educational attainment rate rose to 
25.3  %  in  2015  from  23.9 %  in  2014  and  22.5 %  in 
2013. 

Risk  of  poverty  or  social  exclusion  target:  - Not only is there no progress towards achieving this 

(57)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (4 October 2016). See 
the  Öko-Institut  Report:  Study  on  Technical  Assistance  in  Realisation  of  the  2016  Report  on  Renewable  Energy,  
http://ec.europa.eu/energy/en/studies 

67 

 
                                                           
A. Overview table 

2.2 million people at risk of poverty or social 
exclusion  (compared  with  the  number  of 
people in 2008, thus corresponding to a target 
of  12.9  million  people  at  risk  of  poverty  or 
social exclusion in 2020) 

target,  but the  situation  has  further  deteriorated.  The 
proportion  of  people  at  risk  of  poverty  of  social 
exclusion was 28.7 % in 2015 (slightly higher than in 
2014, when it was 28.3 %, and still much higher than 
in 2008, when it was 25.5 %). 

68 

 
ANNEX B 

MIP Scoreboard 

Table B.1:  MIP scoreboard - Italy 

Flags: i: see metadata. na: not available.           
(1) Unemployment rate: for 2006 i = Eurostat back-calculation to include 2011 Population Census results.  
(2) Youth unemployment rate: for 2006 i = Eurostat back-calculation to include 2011 Population Census results. 
Source:  European Commission, Eurostat and Directorate-General for Economic and Financial Affairs (for real effective 
exchange rate), and International Monetary Fund 

69 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-2.7-2.8-2.3-0.80.81.5-35 %-20.7-19.2-23.9-25.3-24.5-23.6Real effective exchange rate - 42 trading partners, HICP deflator3-year % change± 5 % & ± 11 % -1.9-3.2-6.20.00.2-2.2Export market share - % of world exports5-year % change-6 %-18.7-18.9-25.1-19.6-14.8-8.9Nominal unit labour cost index (2010 = 100)3-year % change9 % & 12 % 8.95.32.12.92.21.56 %-2.2b-2.1p-5.4p-6.9p-4.5p-2.6p14 %5.03.1-0.8-3.0-0.5-1.7133 %123.3122.7125.1121.9120.1117.060 %115.4116.5123.3129.0131.9132.3Unemployment rate3-year average10 %7.68.29.210.411.812.216.5 %4.24.97.3-2.50.71.7-0.2 %-0.4-0.81.21.41.80.50.5 %1.11.32.22.93.41.32 %7.58.010.012.113.55.0External imbalances and competitivenessNet international investment position (% of GDP)Internal imbalancesDeflated house prices (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPTotal financial sector liabilities (% y-o-y change)New employment indicatorsActivity rate - % of total population aged 15-64 (3-year change in percentage points)Long-term unemployment rate - % of active population aged 15-74 (3-year change in percentage points)Youth unemployment rate - % of active population aged 15-24 (3-year change in percentage points) 
 
 
 
 
 
ANNEX C 

Standard tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q2 2016. 
(2) Quarterly values are not annualised 
* Measured in basis points. 
Source:  European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators) 

70 

201120122013201420152016Total assets of the banking sector (% of GDP)248.1261.6252.3248.2238.6234.9Share of assets of the five largest banks (% of total assets)39.539.739.640.741.1-Foreign ownership of banking system (% of total assets)13.413.412.412.712.7-Financial soundness indicators:(1)              - non-performing loans (% of total loans)9.511.012.915.816.015.6              - capital adequacy ratio (%)12.713.413.714.214.815.0              - return on equity (%)(2)-13.0-1.0-11.5-2.83.11.5Bank loans to the private sector (year-on-year % change)0.91.7-3.5-0.8-0.6-1.1Lending for house purchase (year-on-year % change)4.4-0.5-1.1-0.90.41.5Loan to deposit ratio125.1117.3111.0108.2102.7100.5Central Bank liquidity as % of liabilities6.88.47.76.25.15.9Private debt (% of GDP)122.7125.1121.9120.1117.0-Gross external debt (% of GDP)(1) - public38.241.043.250.351.251.4    - private27.930.631.230.929.931.1Long-term interest rate spread versus Bund (basis points)*281.6399.8274.7172.9121.8137.5Credit default swap spreads for sovereign securities (5-year)*242.6323.2199.7101.692.2107.8 
 
 
 
 
 
C. Standard tables 

Table C.2: 

Labour market and social indicators 

(1) The unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within 2 weeks. 
(2) Long-term unemployed are those who have been unemployed for at least 12 months. 
(3) Not in education employment or training. 
(4) Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.   
Source:  European Commission (EU Labour Force Survey). 

71 

201120122013201420152016 (4)Employment rate(% of population aged 20-64)61.060.959.759.960.561.5Employment growth (% change from previous year)0.3-0.3-1.80.10.61.4Employment rate of women(% of female population aged 20-64)49.950.549.950.350.651.5Employment rate of men (% of male population aged 20-64)72.571.569.769.770.671.6Employment rate of older workers (% of population aged 55-64)37.840.342.746.248.250.1Part-time employment (% of total employment, aged 15-64)15.216.817.618.118.318.5Fixed-term employment (% of employees with a fixed term contract, aged 15-64)13.313.813.213.614.113.9Transitions from temporary to permanent employment21.717.521.218.619.6-Unemployment rate(1) (% active population, age group 15-74)8.410.712.112.711.911.6Long-term unemployment rate(2) (% of labour force)4.35.66.97.76.96.7Youth unemployment rate (% active population aged 15-24)29.235.340.042.740.337.5Youth NEET(3) rate (% of population aged 15-24)19.721.022.222.121.4-Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)17.817.316.815.014.7-Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)20.421.922.523.925.3-Formal childcare (30 hours or over; % of population aged less than 3 years)16.011.014.014.0-- 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.3: 

Labour market and social indicators (continued) 

(1) People at risk of poverty or social exclusion : individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.  
(2) At-risk-of-poverty rate : proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone. 
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
(5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes) 
Source: ESSPROS (for expenditure for social protection benefits), EU-SILC (for social inclusion) 

72 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare7.06.86.86.86.8:Disability1.61.51.71.71.7:Old age and survivors16.316.216.617.016.9:Family/children1.11.21.21.21.6:Unemployment1.51.51.61.71.7:Housing0.00.00.00.00.0:Social exclusion n.e.c.0.20.20.20.20.2:Total27.627.428.028.728.8:of which: means-tested benefits1.61.61.61.62.0:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)25.028.129.928.528.328.7Children at risk of poverty or social exclusion  (% of people aged 0-17)29.531.534.132.032.133.5At-risk-of-poverty  rate2 (% of total population)18.719.819.519.319.419.9Severe material deprivation rate3  (% of total population)7.411.114.512.311.611.5Proportion of people living in low work intensity households4 (% of people aged 0-59)10.610.510.611.312.111.7In-work at-risk-of-poverty rate (% of persons employed)9.511.011.011.011.011.5Impact of social transfers (excluding pensions) on reducing poverty21.119.520.421.521.521.7Poverty thresholds, expressed in national currency at constant prices5900088588611821281188147Gross disposable income (households; growth %)-0.12.6-2.70.40.50.8Inequality of income distribution (S80/S20 income quintile share ratio)5.45.75.65.85.85.8GINI coefficient before taxes and transfers49.650.751.051.651.7:GINI coefficient after taxes and transfers31.231.932.432.832.4: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.4: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail at : 
http://www.doingbusiness.org/methodology.  
(2) Average of the answer to question Q7B_a. '[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?'. Answers were scored as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known. 
(3) Percentage population aged 15-64 having completed tertiary education. 
(4) Percentage population aged 20-24 having attained at least upper secondary education. 
(5) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at :  http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm   
(6) Aggregate OECD indicators of regulation in energy, transport and communications. 
Source:  European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

73 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry8.621.131.620.590.591.15Labour productivity in construction-1.49-3.342.755.53-1.98-0.94Labour productivity in market services2.110.09-1.540.870.73-0.32Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-5.781.681.371.840.841.13ULC in construction2.344.93-0.35-4.450.482.39ULC in market services-0.401.442.021.010.401.84Business environment201020112012201320142015Time needed to enforce contracts(1) (days)1210.01210.01185.01185.01185.01120.0Time needed to start a business(1) (days)7.07.08.08.07.06.5Outcome of applications by SMEs for bank loans(2)0.740.801.080.951.060.58Research and innovation201020112012201320142015R&D intensity1.221.211.271.311.381.33Total public expenditure on education as % of GDP, for all levels of education combined4.504.294.204.28--Number of science & technology people employed as % of total employment313233333334Population having completed tertiary education(3)131314141516Young people with upper secondary education(4)777778788080Trade balance of high technology products as % of GDP-1.15-0.91-0.61-0.43-0.41-0.54Product and service markets and competition200320082013OECD product market regulation (PMR)(5), overallna1.491.26OECD PMR(5), retail3.854.063.15OECD PMR(5), professional services3.553.022.10OECD PMR(5), network industries(6)2.972.452.01 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as a percentage of total value added for the economy 
Environmental taxes over labour taxes and GDP: from European Commission's database, ‘Taxation trends in the European 
Union’ 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on greenhouse gas 
emissions 
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels 
* European Commission and European Environment Agency      
Source:  European Commission (Eurostat) unless indicated otherwise 

74 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0.110.110.110.100.100.10Carbon intensity kg / €0.350.340.330.310.30-Resource intensity (reciprocal of resource productivity)kg / €0.460.450.390.350.360.36Waste intensity kg / €0.11-0.11-0.11-Energy balance of trade % GDP-3.2-3.6-3.8-3.3-2.6-Weighting of energy in HICP%7.548.379.5710.029.119.96Difference between energy price change and inflation %-3.35.09.20.1-3.7-2.8Real unit of energy cost% of value added12.413.814.113.713.7-Ratio of environmental taxes to labour taxesratio0.130.140.160.160.17-Environmental taxes% GDP2.83.03.53.43.6-Sectoral Industry energy intensity kgoe / € 0.130.120.120.110.110.11Real unit energy cost for manufacturing industry excl. refining% of value added18.319.619.318.818.9-Share of energy-intensive industries in the economy% GDP8.638.648.768.678.488.47Electricity prices for medium-sized industrial users€ / kWh0.140.160.170.170.170.16Gas prices for medium-sized industrial users€ / kWh0.030.030.040.040.040.03Public R&D for energy % GDP0.020.020.020.020.020.02Public R&D for environmental protection% GDP0.020.020.020.010.020.01Municipal waste recycling rate%31.035.538.439.445.643.5Share of GHG emissions covered by ETS*%39.440.139.937.636.636.3Transport energy intensitykgoe / €0.610.620.610.610.640.63Transport carbon intensitykg / €1.751.761.641.631.67-Security of energy supplyEnergy import dependency%82.681.479.276.875.977.1Aggregated supplier concentration indexHHI14.412.913.816.013.3-Diversification of energy mixHHI0.320.310.300.290.29- 
 
 
 
 
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