COMMISSION STAFF WORKING DOCUMENT Country Report Italy 2018 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 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Italy, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 210 final  COMMISSION STAFF WORKING DOCUMENT Country Report Italy 2018 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 2018 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(2018) 120 final}   
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Summary of the main findings from the Macroeconomic Imbalance Procedure 

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 and competitiveness 

4.5.   Sectoral policies 

Annex A: Overview table 

Annex B: Macroeconomic Imbalance Procedure Scoreboard 

Annex C: Standard tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic, financial and social indicators - Italy 

Table 2.1: 

Summary table on 2017 CSR assessment 

Table 3: 

Macroeconomic Imbalance Procedure Assessment Matrix (*) - Italy 

Table 4.2.1: 

Italian banking system key indicators  

Table B.1: 

The MIP scoreboard for Italy (AMR 2018) 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

1 

4 

12 

16 

24 

24 

28 

33 

42 

50 

55 

61 

62 

68 

11 

14 

21 

28 

61 

62 

63 

64 

65 

66 

67 

 
 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Real GDP and components 

Graph 1.2: 

Real investment and components 

Graph 1.3: 

Regional contributions to national GDP growth (left-hand side) and potential growth 

and contributions (right-hand side) 

Graph 1.4: 

Labour market indicators: Employment (left-hand side) and unemployment (right-

hand side) 

Graph 1.5: 

Price and wage dynamics 

Graph 1.6: 

Credit growth and lending rates 

Graph 1.7: 

Current account balance 

Graph 1.8: 

Italy's public finance indicators 

Graph 2.1:  Overall multiannual implementation of 2011-2017 CSRs to date 

Graph 3.1: 

Drivers of 'snowball effect' on public debt 

Graph 3.2: 

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

Graph 3.3: 

Productivity growth and gross value added 

Graph 4.1.1:  Evolution of real general government primary expenditure (left-hand side) and 

composition of primary expenditure by COFOG functions (right-hand side) 

Graph 4.2.1:  Benchmarking the Italian Banking System 

Graph 4.3.1:  Permanent, temporary and self-employed, cumulative change 2014-2017 

Graph 4.4.1: 

Italy’s export market shares, exchange rate and cost competitiveness indicators 

Graph 4.4.2:  Non-residential tangible and intangible investment in Italy and the rest of the euro 

area, constant prices 

Graph 4.4.3:  Share of debt in companies facing financial stress 

Graph 4.4.4:  Return to skills (numeracy) 

Graph 4.4.5: 

Time needed to solve civil and commercial litigious cases 

Graph 4.5.1:  Overall restrictiveness of business services, 2016 

Graph 4.5.2:  European quality of government index - best and worst performing regions per 

country 

Graph 4.5.3:  Ultra-fast Broadband coverage and penetration in 2017 (% of households) 

LIST OF BOXES 

Box 2.1: Tangible results delivered through EU support to structural change in Italy 

Box 3.1: Euro area spillovers 

Box 4.1.1: Effects on labour supply from rationalising childcare benefits 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 4.4.1: Investment challenges and reforms in Italy 

Box 4.5.1: Policy highlights: Equitable and Sustainable Well-being indicator system 

4 

4 

5 

6 

7 

8 

9 

10 

12 

17 

18 

19 

24 

30 

33 

42 

43 

44 

45 

47 

50 

52 

53 

15 

23 

27 

34 

49 

54 

 
 
 
 
EXECUTIVE SUMMARY 

Italy’s  ongoing  recovery  offers  a  window  of 
opportunity to boost the reform momentum. By 
fully  implementing  already  adopted  measures  and 
completing key reforms in the pipeline, Italy could 
lift  its  sluggish  potential  growth,  rooted  in  weak 
productivity.  This  would  reduce  the  risk  of  a 
slowdown,  should  the  external  environment  and 
financial  conditions  become  less  supportive.  In 
particular,  Italy's  resilience  could  be  helped  by 
improving the business environment — notably by 
reforming  the  judicial  process  and  the  insolvency 
and taxation frameworks — and strengthening the 
banking system and the labour market. (1) 

Italy's  recovery  has  strengthened.  Supported  by 
the  accommodative  monetary  policy  stance  of  the 
European  Central  Bank  (ECB)  and  buoyant 
external  demand,  Italy’s  real  GDP  growth  is 
projected  at  1.5 %  in  both  2017  and  2018.  It  is 
expected to slow to 1.2 % in 2019. Rising demand 
and favourable financing conditions have started to 
support  investment  again  after  the  sharp  fall  it 
suffered during the global financial crisis. 

Labour market conditions continue to improve. 
Headcount  employment  (15-74  years)  rose  by 
1.0 % in 2017 to over 23 million people, taking it 
back to pre-crisis levels. The employment rate (20-
64  years)  rose  to  62.7 %  last  year,  largely  driven 
by  temporary  employment,  after  a  sharp  increase 
in permanent contracts in 2015-2016. Employment 
is  set  to  increase  further  in  2018-2019,  albeit  at  a 
more  moderate  pace  of  0.8 %.  As  inactive  people 
join  the  labour  force,  higher  activity  rates  will 
support  medium  term  growth  prospects.    In  the 
short 
the 
unemployment rate only gradually. 

term,  however, 

this  will 

reduce 

Given its systemic importance, Italy is a source 
of potentially significant spillovers to the rest of 
the  euro  area.  Italy  is  also  an  important  export 

(1)  This  report  assesses  Italy’s  economy  in  the  light  of  the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
resilient  and 
European  economy  more  productive, 
inclusive.  In  so  doing,  Member  States  are  encouraged  to 
focus  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms  and ensuring responsible fiscal policies. 
At  the  same  time,  the  Commission  published  the  Alert 
Mechanism Report (AMR) that initiated the seventh round 
of  the  macroeconomic  imbalance  procedure.  The  AMR 
found  that  Italy  warranted  an  in-depth  review,  which  is 
presented in this report. 

market  for  a  number  of  euro  area  countries  and 
maintains  strong  financial  linkages  to  other  euro 
area countries.  

Long-standing 
structural  weaknesses  and 
regional disparities continue to weigh on Italy’s 
growth  potential.  Despite  the  recent  recovery, 
Italy’s  real  GDP  is  still  below  its  pre-crisis  peak 
and  growing  at  a  slower  pace  than  in  peer  euro 
area  economies.  Regional  differences  persist  both 
in  economic  prospects  and  employment  growth. 
Long-term  and  youth  unemployment  remain  very 
high.  While  the  recovery  has  slightly  reduced  the 
headline  deficit,  Italy’s  public  debt  has  continued 
to  grow  and  is  set  to  have  peaked  at  132.1 %  of 
GDP  in  2017.  Despite  historically  low  financing 
costs, private sector credit growth is still muted. 

Italy has made some progress in addressing the 
2017  country-specific  recommendations.  Italy 
made substantial progress in adopting measures to 
increase  tax  compliance  and  fight  corruption. 
Some  progress  was  made  in  reforming  the  public 
administration, 
to 
addressing 
competition,  repairing  the  banking  system  and 
rationalising 
limited 
progress  was  made  in  shifting  the  tax  burden, 
reducing trial length in civil justice and reforming 
the  insolvency  framework.  Gaps  also  remain  in 
reforming  collective  bargaining,  active  labour 
market  policies,  and  in  enhancing  access  to  work 
for second earners.  

spending.  Only 

restrictions 

social 

Regarding the Europe 2020 Strategy, Italy already 
achieved  its  targets  on  renewable  energy,  energy 
efficiency,  early  school 
tertiary 
education, and appears on track on greenhouse gas 
emissions  reduction.  Limited  progress  has  been 
made  in  meeting  the  targets  on  employment  rate, 
R&D investment and poverty and social exclusion. 

leaving  and 

indicators  of 

Italy  faces  challenges  with  regard  to  a  number 
of 
the  Social  Scoreboard 
supporting the European Pillar of Social Rights. 
In  particular,  Italy  has  a  very  high  gender 
employment gap, low overall employment rate and 
high and increasing income inequality. The impact 
of  social  transfers  is  low,  but  policy  action  has 
been taken recently. The share of young people not 
in employment, education or training is very high, 
although  declining.  While  health  outcomes  are 
overall good, the high proportion of the population 
with  self-reported  unmet  needs  for  medical  care 

1 

 
 
                                                           
Executive summary 

continues  to  be  a  challenge.  Italy  also  has  a  high 
and increasing risk of poverty or social exclusion, 
a high number of early leavers from education and 
training and a low level of digital skills. 

findings  of 

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

in-depth 

the 

  Italy’s  high  public  debt  remains  a  major 
vulnerability. The public debt-to-GDP ratio is 
forecast  to  stabilise  at  around  130 %  of  GDP 
over  2017-2019.  Still  low  but  rising  inflation, 
limited  increase  in  the  primary  surplus  and 
below-target privatisation proceeds continue to 
hinder  debt-reduction  efforts.  Yet,  refinancing 
risks  seem  limited  in  the  short  term  mainly 
thanks to ample liquidity in the market and an 
improved  external  position.  Medium-term 
sustainability risks remain high as the structural 
primary  surplus,  at  1.6 %  of  GDP  in  2018,  is 
insufficient  to  bring  about  a  rapid  decrease  in 
public debt. The long-term fiscal sustainability 
secured by past pension and healthcare reforms 
is weakening too due to recent policy measures 
and adverse demographic trends. Overall, risks 
may  emerge  if  the  current  accommodative 
monetary policy stance were to be reversed. 

in 

including 

education 

  Productivity  growth  still  remains  weak. 
Italy’s  productivity  growth  has  been  sluggish 
over  the  past  two  decades  due  to  persistently 
stagnant  total  factor  productivity  and  low 
investment 
and 
intangibles.  Neither  has  regained  its  pre-crisis 
level  yet.  Certain  features  of  the  managerial 
practices in the numerous small businesses, the 
misallocation  of  resources  among  sectors  and 
firms,  and  public  expenditure  that  is  biased 
towards  old-age  pensions  constitute  a  further 
drag  on  productivity.  In  turn,  the  sluggish 
productivity growth has also contributed to past 
losses  in  competitiveness,  although  Italy  has 
started regaining export market shares in 2013.  

  Efforts  to  address  the  high  levels  of  non-
performing  loans  are  bearing  fruit,  and 
acute  banking  problems  have  been  tackled. 
The  number  of  new  non-performing  loans  has 
declined  to  pre-crisis  levels  and  the  stock  has 
decreased  markedly  over  the  recent  period. 
Yet, it remains high compared to EU peers and 

2 

continues  to  weigh  on  banks’  profitability  and 
on their ability to raise capital internally and to 
efficiently (re)allocate it to the most productive 
firms.  Building  on  adopted  measures  — like 
the  guarantee 
support  NPL 
securitisations —  the  pursuit  of  further  efforts 
could  help 
remaining 
address 
vulnerabilities.  The  reform  of  the  insolvency 
framework, in particular, is yet to be finalised. 

scheme 

the 

to 

to 

  Long-term  and  youth  unemployment  pose 
risks to social cohesion and growth. Although 
declining, both remain among the highest in the 
EU, also as a consequence of Italy's protracted 
recession.  The  low  overall  activity  rate  is 
constraining  potential  output  growth.  At  the 
level  of  youth 
same 
unemployment  can  hinder  young  people's 
acquisition of skills and future employability. 

the  high 

time, 

Other key economic issues analysed in this report 
that point to challenges for Italy are the following: 

still 

  A  high  tax  burden  and  low  tax  compliance 
continue  to  hold  back  economic  growth. 
Despite  extended  tax  incentives  to  promote 
employment and investment, Italy’s tax burden 
on  labour  and  capital  remains  among  the 
highest in the EU. Efforts to shift it to property 
and  consumption  are 
limited.  The 
complexity of the tax code increases the burden 
on compliant firms and households and reduces 
tax  compliance.  Recent  measures  to  tackle 
these  problems,  including  broader  compulsory 
electronic  invoicing,  are  promising.  Yet,  the 
long-awaited  revision  of  tax  expenditures  and 
cadastral  values  has  been  further  postponed. 
The  abolition  of  job  vouchers  has  not  given 
way  to  alternative  strategic  approaches  to 
combat undeclared work. 

  Investment  is  still  subdued,  in  particular  in 
intangible  assets.  Since  the  crisis,  investment 
declined sharply and has not yet returned to its 
2007 level. Despite the adoption in 2017 of an 
ambitious  investment  plan  in  infrastructure, 
notably  in  transport,  investment  is  still  held 
back  by  structural  factors.  These 
include 
financial  constraints  related  to  underdeveloped 
capital  markets,  impaired  bank-lending  and 
lack  of  high-skilled  people  also  due  to  brain 
learning.  The 
drain  and 

lifelong 

limited 

 
 
Executive summary 

bonuses  to  support  families  appears  to  be 
ineffective in addressing these challenges. 

  The education system is underfunded. Italy’s 
early school leaving rate remains above the EU 
average and wide regional disparities persist in 
educational  attainment  despite  an  overall 
improvement in the quality of schooling. High 
dropout 
long 
duration  of  studies  contribute  to  low  tertiary 
education  attainment 
these 
challenges,  the  share  of  public  expenditure  in 
education continued its downward trend. 

rates  and  a  comparatively 

rates.  Despite 

framework.  Yet, 

  Efforts  were  made  in  2017  to  reform  the 
public  administration,  judicial  system  and 
the 
anti-corruption 
functioning of the public administration and the 
management  of  public  employment  are  still 
less efficient than in peer countries. Challenges 
persist  in  the  management  and  rationalisation 
of  publicly-owned  enterprises.  The  length  of 
civil  justice  proceedings  remains  worrying 
especially  at  higher 
the 
effectiveness of past reforms to prevent abuses 
of 
trial  remains  uncertain  and  case 
management  can  still  be  improved.  Moreover, 
while 
regulatory 
strengthened 
framework  to  fight  corruption,  challenges  still 
remain in terms of its implementation.  

instances,  where 

Italy 

the 

its 

  The  business  environment  continues  to 
hinder  entrepreneurship,  and  significant 
barriers to competition remain. Some sectors 
are  still  over-regulated,  including  professional 
services,  local  public  services  and  transport. 
The  lack  of  competitive  processes  to  award 
public  service  contracts  and  concessions  for 
access  to  public  goods  negatively  impact 
service  quality,  especially  in  the  transport 
sector.    Timely  implementation  of  the  2015 
the 
competition 
remaining  restrictions  to  competition  could 
help  a  more  efficient  allocation  of  resources 
and  improve  productivity.  The  low  quality  of 
public  administrations  and  the  great  regional 
variation  in  their  responsiveness  to  business 
needs  have  a  negative  impact  on  the  business 
environment  and  limit  firms'  ability  to  exploit 
innovation  opportunities.  The  benefits  of  the 
public  procurement  reform  will  depend  on  its 
timely completion and consistent application. 

the  removal  of 

law  and 

business  environment  is  still  unfavourable  to 
investment despite ongoing policies such as the 
‘Industria 4.0’ to promote business investment.  
Investment in ‘intangible’ assets such as R&D, 
innovation  and  training  of  workers  remains 
below the EU average due to the large number 
of  micro-firms,  Italy's  lack  of  specialisation  in 
limited 
knowledge-intensive 
digitisation and digital skills. Moreover, public 
spending in R&D has been reduced. 

sectors, 

 

‘Second-level’  wage  bargaining 
is  not 
widespread  and  the  implementation  of  the 
active 
labour  market  policies  (ALMPs) 
reform  is  delayed.  Despite  recent  labour 
market  reforms,  limited  use  of  ‘second-level’ 
wage  bargaining  — at  regional,  sectoral  or 
level  —  may  weaken 
company 
link 
the 
between  wage 
local  economic 
levels  and 
conditions,  thereby  reducing  competitiveness. 
Moreover, while a  dedicated agency  to  reform 
ALMPs was set up in 2017, the governance of 
the system remains weak and no strategic plan 
has been adopted yet. The annual reports on the 
implementation  of  the  Jobs  Act  provisions  on 
ALMPs,  envisaged  by  the  law,  have  not  been 
published yet. 

  New social policies are being implemented to 
tackle  rising  poverty,  while  demographic 
challenges  remain.  The  rate  of  people  at  risk 
of  poverty  or  social  exclusion  in  Italy  is  high, 
especially for children, temporary workers and 
migrants.  In  response,  the  design  of  a  new 
permanent scheme to tackle poverty represents 
a  major  breakthrough,  which  could  also  help 
reinforce  so  far  understaffed  social  services. 
Moreover,  Italy’s  low  fertility  rate,  ageing 
population  and  worsened  migration  balance 
raise  medium-term  challenges.  These  require 
the development of long term strategies such as 
better  targeted  family-support  policies.  The 
proportion of women participating in the labour 
market remains in fact one of the lowest in the 
EU. The main reasons include the difficulty of 
reconciling  work  with  family  care  due  to  the 
limited  availability of  affordable  childcare  and 
long-term care services, low take-up of parental 
leave  by  men  and  the  weak  incentives  offered 
by  certain  aspects  of  the  tax  and  benefits 
system.  The  currently  fragmented  system  of 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

Real GDP growth, risks and challenges 

The  recovery  strengthened  in  2017,  supported 
by the global cyclical upswing. After emerging in 
mid-2014  from  a  protracted  double-dip  recession, 
Italy saw its real GDP grow by a cumulative 4.2 % 
up  to  the  fourth  quarter  of  2017.  However,  the 
recovery set in later and is proceeding more slowly 
than in other euro area countries, and real GDP is 
still considerably below its pre-crisis peak in 2007. 
Supported by the ECB’s accommodative monetary 
policy  and  buoyant  external  demand,  real  GDP  is 
expected 
in  2017 
to  have  grown  by  1.5 % 
(European  Commission,  2018f).  Exports  of  goods 
and  services  picked  up  markedly.  However,  since 
imports  grew  equally  strongly,  partly  due  to  the 
relatively  high  import  content  of  exports  and 
equipment  investment,  net  trade  made  a  slightly 
negative  contribution  to  GDP  growth.  Despite 
subdued  real  wage  growth  consumer  spending 
increased,  as  stable  growth 
in  employment 
underpinned private consumption (Graph 1.1). 

Graph 1.1: 

Real GDP and components 

Source: Eurostat 

Favourable  financing  conditions  and  rising 
demand  are  supporting  investment.  Aggregate 
investment  started  recovering  in  2014,  supported 
by  increasingly  favourable  financing  conditions 
and fiscal incentives but also by the need to renew 
an  ageing  and  declining  capital  stock.  Equipment 
investment has been the major driver of the recent 
investment  recovery  (Graph 1.2).  By  contrast, 
construction,  accounting  for  roughly  half  of  total 

to 

largely  due 

investment,  has  barely  recovered  from  its  deep 
slump.  This  applies  particularly  to  non-residential 
investment, 
falling  public 
investment  (see  Section 4.4.2).  Lending  to  non-
financial corporations is still subdued and the pace 
of  the  recovery  in  capital  spending  is  still  too 
moderate  to  quickly  recoup  the  large  drop  in 
investment  during  the  crisis.  The  total  net  capital 
stock further declined in 2016. 

Graph 1.2: 

Real investment and components 

Source: Eurostat 

in 

are 

also 

Economic  prospects 
gradually 
improving in the southern regions. In 2016, real 
the  Mezzogiorno  (southern  regions) 
GDP 
increased by 0.8 %, after 1.5 % a year before when 
it recorded its first GDP rise since 2007. Southern 
Italy  accounts  for  22.6 %  of  the  country's  total 
output and grew on average slightly faster than the 
north  in  2015-16  (Graph 1.3,  left-hand  side). 
Private consumption grew by an average 1.4 % in 
line  with 
income,  while 
investment rebounded in 2015 after dropping by a 
cumulative  62 %  in  2007-2014.  However,  the 
lower  industrial  base  in  the  southern  regions  is 
limiting  the  positive  impact  of  the  rebound  in 
manufacturing.  In  the  economy  of  the  southern 
regions the public sector and services have a more 
prominent  role  —  and  these  sectors  normally 
register  lower  average  productivity  growth  than 
manufacturing industry. 

rising  disposable 

Maintaining  the  current  momentum  of  growth 
remains challenging. Looking ahead, the recovery 

4 

60708090100110120130070809101112131415161718192007 = 100GDPPrivate consumptionPublic consumptionInvestmentExportsImportsforecast-12-7-23812Q112Q313Q113Q314Q114Q315Q115Q316Q116Q317Q117Q3Year-on-year % change, percentage pointsintellectual property productsother assetsmachinery and equipmentnon-residential constructiondwellingsTotal, Rest of the euro areaTotal 
 
 
 
1. Economic situation and outlook 

Graph 1.3: 

Regional contributions to national GDP growth (left-hand side) and potential growth and contributions (right-
hand side) 

Notes: South includes Extra-Regio. Potential growth estimates are after 2016. 
Source: ISTAT, European Commission 

is  set  to  become  more  self-sustained,  but  growth 
prospects remain moderate. Real output is forecast 
to expand at a modest and declining pace, reaching 
1.2 % in 2019. The expected slowdown reflects an 
external environment which is projected to become 
less  supportive,  an  expected  gradual  tightening  of 
the  monetary  and  fiscal  policy  stance  and  the 
Italian economy's low growth potential. The latter 
is 
factor 
productivity,  rooted  in  long-standing  deficiencies 
in  the  functioning  of  Italy's  labour,  capital  and 
product markets (see Section 3). 

to  weak  growth 

related 

total 

in 

to 

growth 

is  projected 

Potential 
rise 
moderately,  driven  largely  by  rising  labour 
input.  Potential  output  has  been  declining  since 
the onset of the global financial crisis. The reasons 
for  this  have  been  low  investment  and  weak 
productivity  growth.  However,  helped  by 
structural reforms and the recovery of investment, 
growth  in  potential  output  is  forecast  to  turn 
slightly  positive 
increase 
moderately in 2018-2019 (based on the commonly 
agreed  methodology).(2)  Potential  output  is  being 
mainly  driven by  rising  labour  input,  in  particular 
higher employment due to increasing activity rates 
(Graph 1.3, 
rising 
labour  input  offsetting  falling  or  low  productivity 
does  not  bode  well  for  medium-term  growth 
prospects,  given  Italy’s  shrinking  working-age 

right-hand side).  However, 

in  2017  and 

to 

(2)  Potential growth was -0.4% on average over 2009-2016. 

5 

is 

to 

population. In line with investment growth, capital 
accumulation 
a 
expected 
complementary  driver  of  potential  growth.  By 
total  factor  productivity 
contrast,  growth 
contributed  negatively  to  potential  growth  until 
2017  and  is  estimated  to  make  only  a  very  small 
positive contribution in 2019. 

become 

in 

Labour market performance 

Employment  is  rising  broadly  in  line  with 
output growth. In Q3 2017 the number of workers 
(15-74  years)  increased  by  1.0%  y-o-y  and  hit  a 
record  of  over  23 million.  As 
the 
employment  rate  (20-64  years)  rose  to  62.7 %. 
Since  2013  employment  growth  has  been  mainly 
driven by pension reforms that gradually lifted the 
statutory retirement age. By contrast, employment 
on 
in 
2017(3), becoming the main driver of jobs growth 
(See Section 4.3.1). 

temporary  contracts 

increased  sharply 

such, 

Gender  and  regional  differences  remain 
persistent.  The  activity  rate  remains  well  below 
the  EU  average,  especially  for  women.  The 
employment  rate  of  women,  though  increasing,  is 
far below that of men. The gender gap is one of the 
highest  in  the  EU  (52.6 %  employment  rate  for 

(3)  Temporary  employment  in  Italy  accounted  for  15.6%  of 
total  employees  in  Q3-2017,  exceeding  the  EU  average 
(14.2%). 

-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.0080910111213141516Percentage pointsNordSouthCentreReal GDP growth (% ch)-2.5-2.0-1.5-1.0-0.50.00.51.00708091011121314151617f18f19fPercentage pointsCapitalLabourTFPPotential growth (% change)forecast 
                                                           
                                                           
 
1. Economic situation and outlook 

Graph 1.4: 

Labour market indicators: Employment (left-hand side) and unemployment (right-hand side) 

Source: Eurostat 

women  vs  73.0 %  for  men  in  Q3 2017).  Regional 
divergences  in  overall  employment  rates,  albeit 
narrowing  since  2013,  remain  considerable.  They 
currently  range  between  71.9 %  in  Trentino-Alto 
Adige and 40.6 % in Calabria. 

The number of employed persons has returned 
to  pre-crisis  levels  but  hours  worked  still  lag 
behind.  The  number  of  employed  people 
continued to increase and is now around pre-crisis  
levels.  By  contrast,  total  hours  worked,  which 
started  to  recover  in  2015,  are  still  considerably 
lower  than  before  the  recession  (Graph 1.4).  This 
is also reflected in the lower level of employment 
expressed 
in  full-time  equivalents.  The  still 
relatively subdued level of hours worked is mostly 
due  to  the  two  sharp  drops  during  the  double-dip 
recession. (4)  Since  2013,  headcount  employment, 
employment  in  full-time  equivalents  and  hours 
worked have grown at roughly the same rate, albeit 
from different levels. 

(those  available  to  work  but  not  formally  seeking 
jobs).  Long-term  unemployment  has  also  been 
slowly  declining  from  its  7.7 %  peak  in  2014  to 
6.2 %  in  the  third  quarter  of  2017  (Graph 1.4).  In 
the  first  quarter  of  2017,  the  average  length  of 
unemployment was 15 months, 2 months less than 
before  the  crisis.  The  number  of  ‘discouraged’ 
workers  remains  high  but  is  receding  (from 
3.6 million  in  2015  to  3.3 million  in  2016).  In 
2016,  unemployment  among  the  low-skilled  was 
19.2 %  but  less  than  7 %  among  the  highly 
educated.  Youth  unemployment  is still among  the 
highest in Europe despite decreasing from its peak 
of  43.6 %  in  2014  to  32.2 %  in  December 2017. 
The  number  of  young  people  not  in  employment, 
education  or  training  (NEET)  fell  from  22.2 %  in 
2012 to below 20 % in 2016, but is still the highest 
in  the  EU  and  subject  to  wide  and  persistent 
regional differences. 

Price and wage developments 

as 

labour 

gradually, 

Despite  strong  job  creation,  unemployment  is 
declining 
force 
participation is rising. The unemployment rate, at 
10.8 %  in  December  2017,  has  been  declining 
gradually from its 13.0 % peak in November 2014. 
The pace of decline is slowed by the return to the 
labour  force  of  previously  ‘discouraged’  workers 

(4)  During this period working time has fallen twice as fast as 
headcount  employment,  partly  due  to  the  ample  use  of 
wage 
(CIG  —  Cassa 
supplementation 
Integrazione Guadagni). 

schemes 

6 

Wage growth remains moderate, as slack in the 
labour  market  persists.  Contractual  wages  grew 
by  0.7 %  in  the  year  to  December  2017,  which  is 
inflation  and 
broadly  consistent  with  current 
productivity developments as well as the still high 
level  of  unemployment.  Since  2009,  constrained 
nominal  wage  growth  has  helped  stem  the  loss  in 
cost  competitiveness.  Recent  contract  renewals 
have been characterised by modest wage increases 
and 
adopted  wage-setting 
mechanisms  based  on  past,  instead  of  expected, 

some  of 

them 

10.010.511.011.512.012.513.013.514.014.515.022.022.523.023.524.024.525.025.526.0070911131517Hours (billions)Persons (millions)Hours worked (rhs)PersonsFull-time equivalents6162636465666768697005101520253035404504050607080910111213141516%%Activity rate 15-64 (rhs)NEET rateYouth unemployment rate 15-24Long-term unemployment rate 15-74Unemployment rate 15-74 
                                                           
 
1. Economic situation and outlook 

inflation.  Public  wages,  effectively  frozen  since 
2010,  are  set  to  increase  modestly  following  the 
renewal  of  labour  contracts  in  the  public  sector 
which  will  affect  about  3.4 million  employees. 
Compensation per hour worked and per employee 
increased  in  2017  on  the  back  of  rising  social 
contributions after the end of hiring incentives. 

energy) stood at 0.8 % in 2017 and is set to pick up 
gradually  —  in  line  with  moderate  wage  growth 
and  the  recovery  of  profit  margins  —  to  1.6 %  in 
2019.  The  growth  rate  of  the  GDP  deflator,  on  a 
downward  trend  since  2010  due  to  subdued 
demand  and  only  moderate  growth  in  unit  labour 
costs, is projected to have fallen to 0.6 % in 2017 
but is forecast to rise to 1.4 % by 2019. 

Graph 1.5: 

Price and wage dynamics 

Social situation 

is 

Labour  market 
improving. 
situation 
However,  the  proportion  of  the  population  at  risk 
of poverty or social exclusion was 29.9 % in 2016, 
an increase of 1.2 percentage points from 2015. It 
remains above the EU average (23.5 %) which by 
contrast  is  decreasing.  Similarly,  per-capita  GDP, 
which  fell  in  both  real  and  nominal  terms  until 
2013,  remains  below  the  EU  average.  These 
figures  mask  relatively  wide  variations  between 
age  groups,  with  older  people,  especially 
pensioners,  less  affected  by  poverty  than  the 
young. The impact of social transfers on reducing 
poverty  was 
in  2016 
(20.3 %). (5)  The  share  of 
the  working-age 
population  with  a  low  level  of  education,  a 
significant  risk  factor  for  poverty,  was  39.9 %, 
well above the EU average (23 %). 

low  and  decreased 

Income  inequality  is  high  and  rising  in  Italy, 
while marginally falling in the EU. According to 
data  for  2016,  the  income  of  the  top  20 %  of 
households  was  6.3  times  higher  than  that  of  the 
poorest  20 %  (S80/S20  indicator).  This  ratio  has 
increased compared to the previous 3 years and is 
even  higher  for  people  of  working-age,  as  the 
redistributive  impact  of  pensions  is  excluded. 
Unemployment remains a key driver of inequality, 
as shown by the significant difference between the 
median income of people who are employed (EUR 
19 028  per  year  in  2015)  and  the  unemployed 
(EUR  9 926  per  year).  By  contrast,  net  wealth  is 
more  equally  distributed 
(also 
compared  to  the  euro  area  average).  Likewise, 
inequality  of  opportunities  appears  to  be  less  of  a 

income 

than 

(5)  The  pension  reform  of  2012  and  the  introduction  of  the 
anti-poverty  scheme  Reddito  di  inclusione  (REI)  in  2018 
might  help  reduce  the  bias  in  social  spending  towards 
pensions in the future. However, based on the forthcoming 
Pension  Adequacy  Report,  the  current  pension  system, 
despite  high  expenditure,  does  not  provide  strong 
protection  against  poverty  and  has  limited  redistributive 
capacity. 

7 

Notes: Nominal wage growth based on gross hourly wages 
of the total economy; core inflation defined as HICP inflation 
excluding energy and unprocessed food. 
Source: ISTAT, Eurostat 

Due  to  subdued  wage  growth,  the  rise  in  unit 
labour  costs  remains  limited  despite  weak 
productivity  growth.  In  contrast  to  the  years 
before  2009,  unit  labour  costs  have  been  growing 
broadly in line with those of the euro area, on the 
back  of  moderate  wage  increases  and  declining 
labour  productivity.  Real  compensation  per 
employee grew by only 0.3 % in 2016 and was still 
below  the  level  of  1999.  By  contrast,  labour 
productivity  declined  by  0.6 %.  The  sharp 
reduction  in  social  contributions  for  new  hires  on 
permanent  contracts  and  the  reduction  in  the 
regional tax on productive activities helped contain 
gross wage growth. 

Strengthening  domestic  demand  and  moderate 
wage  growth  suggest  a  gradual  rise  in  core 
inflation  and  the  GDP  deflator.  The  headline 
annual  harmonised  index  of  consumer  prices 
(HICP)  inflation  averaged  1.3 %  in  2017,  after  3 
years  near  zero  (Graph 1.5).  It  is  expected  to 
increase  to  1.5 %  by  2019.  Annual  HICP  core 
inflation  (i.e.  excluding  unprocessed  food  and 

-2.0-1.00.01.02.03.04.05.06.07.00708091011121314151617Year-on-year % changeCore inflationGDP deflatorUnit labour costsNominal wage growth 
 
                                                           
a  weak 

concern.  For  example,  social  status  tends  to  be 
only 
educational 
predictor 
achievements.  However,  rising  child  poverty 
among disadvantaged families and unequal access 
to healthcare, together with regional disparities, are 
reasons for concern (see Section 4.3.3). 

of 

Financing conditions 

Despite financing costs being at historically low 
levels,  private  sector  credit  growth  is  still 
muted. Interest rates on new mortgage loans have 
halved  since  early  2012  and  stood  at  1.9 %  in 
December  2017.  Rates  for  new  company  loans 
dropped  from  about  4 %  to  1.5 %.  Although  the 
ECB’s  supportive  monetary  policy  has  reduced 
nominal  interest  rates  sharply,  lending  activity 
remains  subdued.  Lending  to  the  non-financial 
private sector is supported by loans to households 
(adjusted 
loan 
disposals) which show average monthly growth of 
around  2.5 %  year-on-year  since  the  beginning  of 
2017  (Graph 1.6).  Growth  in  mortgage  loans  and 
consumer  credit  is  benefiting  from  the  recovering 
housing  market,  low  interest  rates  and  improved 
consumer confidence.. 

for  securitisations  and  other 

Corporate loans have stabilised since 2016. With 
the debt-reduction process still under way, overall 
lending 
to  non-financial  corporations  remains 
weak.  Credit  supply  standards  are  easing  but  are 
still  tighter  than  before  the  crisis.  However, 
lending  to  non-financial  firms  varies  widely  by 
sector  and  firm  size.  Credit  to  the  industrial  and 
service  sectors  increased  but  was  mostly  targeted 
to  larger  and  more  productive  firms.  In  line  with 
the  pick-up  in  fixed  investment,  non-financial 
increasing  capital 
corporations  are  gradually 
spending  financed  by  new  loans.  By  contrast, 
lending  to  the  building  sector  contracted  sizeably 
over  the  12-month  period  due  to  low  activity  and 
higher risks. (6) 

include 

large  firms’ 

(6)  Other  factors  potentially  contributing  to  the  subdued 
lending 
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),  and  remaining  debt  reduction  needs  in  the 
corporate sector. 

1. Economic situation and outlook 

Graph 1.6:  Credit growth and lending rates 

Notes: Loans adjusted for effect of securitisation and other 
loans transferred and derecognised from banks' balance 
sheets. 
Source: Bank of Italy 

legacy 

ratio  of  new  non-performing 

Growth in credit supply is helped by structural 
improvements.  The 
stock  of  non-
performing loans (NPLs) on banks’ balance sheets 
is  declining.  Moreover,  the  NPL  inflow  rate,  i.e. 
the 
to 
outstanding  loans,  has  fallen  to  a  level  last  seen 
before the global financial crisis (see Section 4.2). 
Despite  some  improvements  in  the  first  half  of 
2017,  the  profitability  of  Italian  banks  is  still 
among  the  lowest  in  the  EU,  due  to  both  cyclical 
factors  and  structural  problems.  Overall,  credit 
growth, especially to small and risky firms remains 
subdued. 

loans 

External position 

Italy’s  current  account  surplus  is  approaching 
3 %  of  GDP.  An  improved  export  performance 
and  compressed  domestic  demand  during  the 
double-dip  recession  have  gradually  shifted  the 
current account balance from a deficit of 3.5 % of 
GDP  in  2010  to  a  surplus  of  2.9 %  in  2017.  The 
trade balance recorded a surplus of 3.2 % of GDP, 
benefiting  from  favourable  terms  of  trade  partly 
linked  to  a  lower  oil  import  bill  and  healthy 
external demand. In September 2016 the 12-month 
primary  income  balance  turned  positive,  largely 
the  balance  of 
driven  by 

improvements 

in 

8 

-7-238130123456708091011121314151617Year-on-year % change%Stock of NFC loans (rhs)Stock of loans to households (rhs)Interest rate on new loans to NFCs (lhs)Interest rate on new loans to households (lhs) 
                                                           
 
1. Economic situation and outlook 

recorded  a  negative  balance  of  7.8 %  of  GDP  at 
the  end  of  the  third  quarter  of  2017.  This  level  is 
close  to  the  NIIP  suggested  by  fundamentals 
(about  0%  of  GDP),  and  considerably  above  the 
prudential  threshold  that  indicates  external  crisis 
risk  (-63%  of  GDP  for  2016)  (see  European 
Commission,  2016).  This  improvement  is  largely 
due  to  the  trade  surplus,  but  is  also  linked  to 
valuation  effects.  The  latter  is  reflected  in  the 
sizeable  improvement  in  the  investment  income 
balance  which  shifted  into  surplus  in  early  2017. 
The net liabilities of the Bank of Italy towards the 
Eurosystem,  reflected  by  the  negative  TARGET2 
balances,  are  at  least  partly  linked  to  the  ECB’s 
decentralised  asset  purchasing  programme.  The 
programme  gives  rise  to  substantial  cross-border 
flows of reserves. (10) 

Public finance: public deficit and debt 

Italy’s  fiscal  stance  has  eased  in  recent  years. 
Italy carried out a sizeable fiscal effort over 2010-
2013,  raising  its  primary  surplus  to  over  2 %  of 
GDP  and  reducing  its  headline  deficit  from  the 
peak  of  5.3 %  in  2009  to  a  level  no  higher  than 
3 % of GDP from 2012 (Graph 1.8). However, the 
fiscal stance has eased in recent years, partly to cut 
the tax burden and support private investment and 
structural  reforms  (e.g.  the  Jobs  Act  with  fiscal 
incentives).  This  was  allowed  also  by  the  ECB’s 
accommodative  monetary  policy  stance,  whereby 
newly  issued  government  securities  benefitted 
interest  rates 
from  historically 
(0.55 % on average in 2016, down from more than 
3 %  in  2012).  As  such,  interest  expenditure  fell 
from the peak of 5.2 % of GDP in 2012 to 4 % in 
2016. In turn, Italy's primary surplus fell to 1.5 % 
and the headline deficit stabilised at around 2.5 % 
of  GDP  in  2016.  Overall,  over  2013-2016  Italy’s 
structural  balance  is  estimated  to  have  markedly 
worsened from -0.8 % to -1.7 % of potential GDP. 
larger 
This  was  accompanied  by  an  even 
deterioration  in  the  structural  primary  balance 
(from  4.0 %  to  2.3 %)  in  the  context  of  falling 
interest expenditure. 

low  nominal 

on financial stocks held by non-financial corporations and 
the  revision  of  the  estimate  of  foreign  investment  fund 
shares deposited abroad. 

(10)  The  Bank  of  Italy's  TARGET2  liabilities  towards  the 
Eurosystem  rose  to  EUR 412 billion  (23.5 %  of  GDP)  in 
October  2017,  up  from  EUR 357 billion  (21.2 %  of  GDP) 
at the end of 2016 

investment  income  that  turned  into  a  surplus  in 
2017(7) (Graph 1.7). 

Estimates indicate a cyclically-adjusted current 
account  surplus  of  1.8 %  of  GDP  in  2017.  The 
current  account  surplus  remains  above  the  level 
suggested by fundamentals (+0.5% of GDP). This 
contrasts with a 0.2 % of GDP deficit which would 
be 
international 
investment  position  stable  (in  the  absence  of 
valuation effects). (8) 

to  keep 

sufficient 

Italy's 

Graph 1.7:  Current account balance 

Source: Bank of Italy 

The current account surplus results from saving 
and  investment  decisions  at  the  sectoral  level. 
The  corporate sector,  traditionally  a  net  borrower, 
has  increasingly  assumed  a  net  lending  position 
since 2009. Households increased net lending until 
2014  and  reduced  residential  investment  in  line 
with the slowing housing market. The government 
reduced the deficit, among other things by cutting 
nominal investment by 35 % over 2009-2016. 

The  net 
investment  position 
(NIIP)  is  still  slightly  negative. (9)  The  position 

international 

(7)  The  reversal  of  the  income  balance  is  largely  due  to  the 
ECB’s  asset  purchase  programme,  which  reduced  the 
volume of Italian government bonds held by non-residents. 
(8)  The  cyclically  adjusted  (or  underlying)  current  account 
balance  in  percent  of  GDP  is  the  current  account  balance 
that  would  prevail  if  the  domestic  economy  and  its  42 
biggest  trade  partners  were  at  potential  output,  see  also 
Salto and Turrini, 2010 and European Commission, 2017a. 
(9)  In  September  2017,  Italy’s  net  international  investment 
position  at  end-2016  was  markedly  revised  from  EUR -
251 billion to EUR -165 billion. This is due to updated data 

9 

-5-4-3-2-10123451011121314151617% of GDP (12-month moving sum)Secondary income balancePrimary income balanceBalance of servicesBalance of goodsCurrent account balance 
 
                                                           
                                                                                   
1. Economic situation and outlook 

from  worse-than-anticipated 

Risks to the debt forecast remain high. Risks to 
the  European  Commission’s  debt  projections  are 
related  to  a  larger-than-anticipated  impact  of  the 
bank  resolutions  in  2017.  Beyond  2017,  the  risks 
come 
nominal 
growth,  the  public  administration’s  large  stock  of 
trade  debt  arrears  (see  Section  4.1.1)  and  below-
target  revenues  from  privatisations.  On  this  last, 
after  missing  its  2016  and  2017  targets, (11)  the 
government  projects  privatisation  proceeds  of 
0.3 % of GDP for 2018. 

Italy’s  public  debt  maturity  is  increasing  and 
bond spreads are narrowing. Since spring 2017, 
spreads  vis-à-vis  German  sovereign  bond  yields 
have  gradually  shrunk,  to  below  140  basis  points 
for  10-year  bonds  at  the  end  of  2017.  In  spite  of 
the  risks  still  weighing  on  Italy’s  public  finances, 
this  trend  possibly  reflects  reduced  uncertainty 
about  economic  policy  prospects  following  some 
large  Member  States’  electoral  cycles  and  the 
ECB’s  decision  not  to  discontinue  the  Public 
Sector  Purchase  Programme  (Bank  of  Italy, 
2017a).  In  addition,  Italy’s  debt  management 
office  continued  to  take  advantage  of  low  interest 
rates  to  raise  the  share  of  long-term  fixed-rate 
bonds  issuances  (to  71 %  in  September  2017,  up 
from  70 %  in  December  2016).  Consequently, 
average life-to-maturity rose further to 6.9 years. 

Banks'  exposure  to  Italian  sovereign  debt  has 
decreased.  The  share  of  public  debt  held  by  the 
Bank  of  Italy  continued  to  increase  under  the 
Public  Sector  Purchasing  Programme.  It  reached 
EUR 319 billion  (19 %  of  GDP)  in  November 
2017,  up  from  EUR 200 billion  a  year  before. 
Meanwhile, 
the  share  held  by  Italian  banks 
decreased  to  EUR 344 billion  (20 %  of  GDP)  in 
November  2017,  down  by  12.7 %  a  year  earlier 
(Bank  of  Italy,  2018).  The  proportion  of  foreign 
private investors, while increasing from 28.4 % in 
2016 to 32 % in 2017, remained low. This reflects 
persistent  reluctance  to  invest  in  Italy,  especially 
by 
(European 
Commission,  2017i).  Moreover,  still  low  interest 
rates induced Italian households to further cut their 
direct holding of public debt and to diversify their 
investment portfolios into foreign assets. 

non-euro 

investors 

area 

(11)  The government failed to transfer further stakes in ENAV 
and  ENI  to  the  National  Promotional  Institution  Cassa 
Depositi e Prestiti by end-2017, as originally planned. 

Graph 1.8: 

Italy's public finance indicators 

Source: European Commission 

economic  growth, 

The  headline  deficit  is  set  to  decrease  further 
also  thanks  to  a  positive  outlook.  The  headline 
deficit  is  forecast  to  have  decreased  to  2.1 %  of 
GDP  in  2017.  This  was  due  to  higher-than-
expected 
a  better-than-
anticipated  primary  surplus  of  1.7 %  of  GDP  and 
interest  expenditure  further  shrinking  to  3.8 %  of 
GDP. Looking ahead, the headline deficit is set to 
further decrease  to 1.8 % of GDP  in 2018, thanks 
to  a  stronger  forecast  for  nominal  GDP  growth 
(2.6 %)  and  a  slightly  larger  primary  surplus 
(1.8 %  of  GDP)  than  in  2017.  However,  Italy’s 
fiscal  stance,  after  a  deterioration  in  2017,  is 
expected to be broadly neutral in 2018. Given the 
further  reduction  in  interest  expenditure  to  3.6 % 
of  GDP, 
to  a  slight 
worsening in the structural primary balance. 

this  also  corresponds 

recession  of  2008-2013, 

Italy’s gross public debt is expected to stabilise 
at around 130 % of GDP. The gross public debt 
ratio increased by 5 pps per year on average during 
It 
the  double-dip 
continued  to  increase  in  2014-2016,  though  at  a 
slower  average  pace  of  1  pp.  per  year  to  132.0 % 
of  GDP.  Very  low  interest  rates  are  currently 
limiting  debt  growth  (see  Section  3).  However, 
public debt is forecast to remain stable at 132.1 % 
in 2017, partly due to the resources earmarked for 
public  support  to  the  banking  sector  and  retail 
investors. Thereafter, higher nominal GDP growth 
is  set to  allow a  slight decline  in  the  debt ratio  to 
130.8 % in 2018 and 130.0 % in 2019. 

10 

9095100105110115120125130135-6.0-4.5-3.0-1.50.01.53.04.56.0000102030405060708091011121314151617f18f19f% of GDP% of GDPGross public debt (rhs)Budget balance (lhs)Primary balance (lhs)Interest expenditure (lhs)forecast 
 
                                                           
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators - Italy 

Notes: (1) NIIP excluding direct investment and portfolio equity shares. (2) Domestic banking groups and stand-alone banks, 
EU and non-EU foreign-controlled subsidiaries and EU and non-EU foreign-controlled branches.   
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

11 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)1,5-1,5-0,81,00,91,51,51,2Potential growth (y-o-y)0,9-0,4-0,4-0,2-0,30,20,40,5Private consumption (y-o-y)1,2-1,1-1,12,01,5...Public consumption (y-o-y)0,4-0,3-0,5-0,60,5...Gross fixed capital formation (y-o-y)2,1-5,0-4,51,92,8...Exports of goods and services (y-o-y)6,0-0,91,74,42,4...Imports of goods and services (y-o-y) 5,2-2,70,46,73,1...Contribution to GDP growth:Domestic demand (y-o-y)1,2-1,7-1,61,41,5...Inventories (y-o-y)0,1-0,20,40,0-0,4...Net exports (y-o-y)0,20,50,4-0,5-0,1...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0,4-0,50,00,10,00,30,30,4Capital accumulation (y-o-y)0,70,3-0,1-0,1-0,10,00,00,1Total factor productivity (y-o-y)-0,1-0,2-0,2-0,2-0,2-0,10,00,0Output gap1,4-1,9-4,3-3,0-1,9-0,60,30,8Unemployment rate7,28,412,411,911,711,310,910,5GDP deflator (y-o-y)2,21,51,10,90,80,61,31,4Harmonised index of consumer prices (HICP, y-o-y)2,22,40,70,1-0,11,31,31,5Nominal compensation per employee (y-o-y)2,92,00,61,00,50,51,51,3Labour productivity (real, person employed, y-o-y)0,4-1,00,00,3-0,3...Unit labour costs (ULC, whole economy, y-o-y)2,22,40,30,70,90,11,10,9Real unit labour costs (y-o-y)0,00,9-0,8-0,20,1-0,5-0,1-0,5Real effective exchange rate (ULC, y-o-y)1,4-0,11,1-3,90,30,51,9-1,0Real effective exchange rate (HICP, y-o-y)0,1-0,71,0-4,10,80,31,8.Savings rate of households (net saving as percentage of net disposable income)8,85,03,73,13,2...Private credit flow, consolidated (% of GDP)9,92,9-1,7-1,30,6...Private sector debt, consolidated (% of GDP)99,4121,5120,3115,3113,6...of which household debt, consolidated (% of GDP)34,242,643,141,941,5...of which non-financial corporate debt, consolidated (% of GDP)65,278,977,373,472,0...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)4,48,313,313,612,4...Corporations, net lending (+) or net borrowing (-) (% of GDP)-0,20,52,62,43,63,43,43,5Corporations, gross operating surplus (% of GDP)22,921,120,420,821,221,021,321,6Households, net lending (+) or net borrowing (-) (% of GDP)2,51,11,91,91,31,10,80,7Deflated house price index (y-o-y)3,7-2,1-5,8-2,7-0,8...Residential investment (% of GDP)5,65,54,74,34,4...Current account balance (% of GDP), balance of payments-1,0-2,31,51,52,72,52,52,3Trade balance (% of GDP), balance of payments-0,2-0,82,62,93,4...Terms of trade of goods and services (y-o-y)-1,5-0,92,12,22,5-1,30,80,1Capital account balance (% of GDP)0,10,10,10,2-0,2...Net international investment position (% of GDP)-17,9-20,9-21,9-19,7-9,8...Net marketable external debt (% of GDP) (1)-9,5-22,3-22,3-17,6-10,4...Gross marketable external debt (% of GDP) (1)94,7114,2122,6125,9123,7...Export performance vs. advanced countries (% change over 5 years)0,5-11,7-11,6-7,5-5,5...Export market share, goods and services (y-o-y)-2,7-5,70,6-2,13,0...Net FDI flows (% of GDP)0,81,10,10,1-0,2...General government balance (% of GDP)-3,2-3,8-3,0-2,6-2,5-2,1-1,8-2,0Structural budget balance (% of GDP)-4,4-3,1-0,9-0,8-1,7-2,1-2,0-2,4General government gross debt (% of GDP)101,1114,0130,4131,5132,0132,1130,8130,0Tax-to-GDP ratio (%)40,242,143,643,342,942,842,542,0Tax rate for a single person earning the average wage (%)28,430,231,131,131,1...Tax rate for a single person earning 50% of the average wage (%)18,821,620,415,915,9...forecast 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

implementation  of 

Progress  with 
the 
recommendations addressed to Italy in 2017 (12) 
has  to  be  seen  in  a  longer  term  perspective, 
since the introduction of the European Semester 
in 2011. Looking at the multi-annual assessment of 
the  implementation  of  the  CSRs  since  these  were 
first  adopted,  60 %  of  all  the  CSRs  addressed  to 
Italy have recorded at least  'some progress', while 
40%  of  these  CSRs  recorded  'limited'  or  'no 
progress' (see Graph 2.1). The areas that registered 
the  best  performance  in  terms  of  progress  are  the 
adoption  of  measures  to  fight  corruption  and  to 
reform 
administration.  Good 
performances  are  registered  also  in  the  banking 
sector,  in  the  labour  market  and  in  reducing 
restrictions to product and services markets. 

public 

the 

Graph 2.1:  Overall multiannual implementation of 2011-

2017 CSRs to date 

Notes: The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact. 2011-2012: 
Different CSR assessment categories. The multiannual CSR 
assessment looks at the implementation since the CSRs were 
first adopted until the 2018 Country Report. 
Source: European Commission 

Concerning  public  finances  and  taxation,  some 
progress was made to address the related CSRs. 
Efforts  focused  in  containing  public  expenditure. 
Public  wage  bill  growth  has  been  moderate,  with 
public wages rising in 2017 for the first time since 
2011.  Past  pension  reforms  contributed  to  curb 
liabilities  arising  from  ageing  population  and 

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

past, see in particular Section 4.  

in 

the 

improve  the  long-term  sustainability  of  public 
finances.  However,  this  effort  has  partly  been 
reversed 
latest  budgets,  and  pension 
expenditure  is  expected  to  start  rising  again  as  of 
2017  (see  Section  4.1).  Some  privatisations  have 
been implemented to reduce public debt, but recent 
targets  have  been  systematically  underachieved. 
Several  taxation  reforms  have  been  implemented, 
especially  to  reduce  the  tax  burden  on  labour  and 
capital,  which  still  remains  comparatively  high. 
Tax  expenditures  have  been  reviewed  but  not  yet 
streamlined.  The  tax  on  immovable  property  was 
increased in 2011 but partly repealed in 2015, and 
a  reform  of  cadastral  values  is  still  pending.  To 
step  up  the  fight  against  tax  evasion,  the  'split 
payment'  system  for  VAT  and  the  use  of  e-
invoicing 
the  public 
transactions  with 
administration were introduced in 2015. The latter 
will  be  progressively  extended  to  private  sector 
transactions over 2018-2019.  

in 

those 

reforms.  The 

Some  progress  was  registered  in  addressing 
CSRs  concerning  civil  justice,  the  fight  against 
the 
corruption,  public  administration  and 
reduction  of  barriers  to  competition.  Following 
the  major  reorganisation  of  civil  courts  in  2013, 
several  measures  were  implemented  to  accelerate 
civil  procedures,  including  by  increasing  the 
specialisation  and  digitalisation  of  courts  and 
trying  to  avoid  abuses  of  the  trial  through  stricter 
admissibility rules for appeals. Yet, still very long 
trial  length  puts  into  question  the  effectiveness  of 
fight  against 
some  of 
corruption  was  stepped  up  in  2012  through  a 
comprehensive  anti-corruption  law,  which  also 
established the national anticorruption authority. In 
2017,  the  statute  of  limitations  was  reformed  and 
whistle-blowers’ 
A 
protection 
comprehensive  reform  of  public  administration 
was  adopted  in  2015,  simplifying  and  clarifying 
encouraging 
the 
transparency 
efficiency. 
Nevertheless,  the  operationalisation  in  specific 
areas,  namely  public  employment  and  publicly-
owned enterprises, may prove difficult while local 
public  services  will  need  a  new 
legislative 
initiative to be reformed. In-depth market opening 
measures  for  product  and  services  market  were 
introduced  in  2012  and  2017.  Since  2011,  several 
packages  have  been  introduced  to  reduce  the 
administrative  burden  for  companies  and  citizens. 

process, 
increasing 

decision-making 

extended. 

and 

12 

No Progress0%Limited Progress40%Some Progress35%Substantial Progress20%Full Implementation5% 
 
 
                                                           
 
2. Progress with country-specific recommendations 

and 

case  management 

recommendations (13).  Limited  progress  was 
made with regards to the privatisation programme 
and  shifting  the  tax  burden  away  from  the 
production  factors,  while  substantial  progress  has 
been  made  concerning  mandatory  e-invoicing. 
While  the  progress  was  limited  also  concerning 
reducing  the  trial  length  in  civil  justice  by 
ensuring 
improving 
procedural  discipline,  substantial  progress  was 
achieved  in  improving  the  legal  framework  for 
fighting corruption, although challenges remain in 
terms  of  implementation.  Some  progress  was 
recorded  on  competition  with  the  adoption  of  the 
2015  annual  competition  law  and  in  reforming 
public  employment  and  improving  the  efficiency 
of publicly-owned enterprises. Some progress was 
also  made  with  regard  to  the  banking  sector  and 
the  insolvency  framework.  With  the  exception  of 
the  anti-poverty  scheme,  progress  on 
labour 
market and social policies was limited.  

In 2016, Italy has reformed the public procurement 
code.  

In  the  banking  sector  some  efforts  were  made. 
The  authorities'  clean-up  of  some  of  the  weakest 
banks  in  mid-2017  has  reduced  acute  financial 
stability  risks.  The  high  legacy  stock  of  NPLs  is 
declining  on  the  back  of  NPL  disposals  including 
via  the  State  guarantee  scheme  to  support  NPL 
securitisations 
supervisor  has 
(GACS).  The 
enhanced  oversight  of  less  significant  institutions 
including  by  announcing  a  guidance  on  NPL 
provisioning.  The  various  corporate  governance 
reforms  are  broadly  on  track.  Consolidation  and 
restructuring in the banking sector have continued. 
Regarding 
insolvency 
framework,  the  enabling  law  has  been  adopted, 
and  relevant  implementing  decrees  have  to  be 
passed  within  a  year.  The  Patto  Marciano,  an 
adopted measure to shorten the period of collateral 
enforcement, is not yet used by banks for firms. 

the  overhaul  of 

the 

(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.  

Reforms  such  as  the  Jobs  Act  have  helped 
increase labour market flexibility. But important 
complements  to  the  jobs  act  reforms  aiming  at 
greater  wage  differentiation 
through  a  more 
efficient collective wage bargaining system and at 
enhancing  job  match  through  effective  active 
labour  market  policies  are  lagging  behind.  The 
reform of collective bargaining is proceeding only 
very  slowly.  Social  partners  have  signed  a  new 
agreement  on  rules  and  criteria  on  trade  union 
representativeness,  a  prerequisite  for  fostering 
second-level bargaining. But this agreement is not 
expected  to  become  operational  before  mid-2019. 
Hardly  any  progress  can  be witnessed  in  the  field 
of  active  labour  market  policies.  The  placement 
capacity  and  overall  efficiency  of  Public 
Employment  Services  (PES)  remain  weak  and 
performance  varies  widely  between  regions.  Even 
though female employment increased recently, it is 
the  EU  average  and  a 
still  sizeably  below 
comprehensive  strategy,  coupled  with  adequate 
evaluation  and  monitoring,  to  increase  female 
labour market participation is still missing. On the 
positive  side,  the  anti-poverty  scheme  has  been 
adopted.  This  scheme  is  funded  through  the  2018 
Budget Law and subject to sound means-testing. 

Overall, 
addressing 

Italy  made 
the 

2017 

some  progress 

in 
country-specific 

13 

 
 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2017 CSR assessment 

Source: European Commission. The overall assessment of CSR 1 does not include an assessment of compliance with the 
Stability and Growth Pact. 

can 

from 

request 

the 
Member  States 
Commission  technical  support  to  prepare, 
design,  and 
implement  growth-enhancing 
structural  reforms.  The  Structural  Reform 
Support  Service  (SRSS)  provides,  in  cooperation 
with  the  relevant  Commission  services,  tailor-
made technical support, which does not require co-
financing  and  is  provided  at  a  Member  State's 
request. The support addresses priorities identified 
in  the  context  of  the  EU  economic  governance 
process  (i.e.,  implementation  of  country-specific 
recommendations),  but  the  scope  of  the  SRSS 
support is wider as it can also cover reforms linked 
to  other  Commission  priorities,  or 
reforms 
undertaken at the initiative of Member States.  

as: 

and 

such 

growth 

Italy  has  requested  technical  support  from  the 
SRSS  to  help  implement  reforms  in  various 
areas 
business 
environment,  public  financial  management, 
taxation,  and  the  financial  sector.  In  particular, 
the  SRSS  provides  support  to  fight  tax  evasion, 
enhance  transparency  and  growth.  It  is  also 
providing  support  to  design  a  comprehensive 
accrual  accounting  system  across  Italy's  public 
administration  (according  to  International  and 
European  Public  Sector  Accounting  Standards  – 
IPSAS/EPSAS).  

14 

Italy  Overall assessment of progress with 2017 CSRs: Some progress CSR 1: Pursue a substantial fiscal effort in 2018, in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Italy’s public finances. Ensure timely implementation of the privatisation programme and use windfall gains to accelerate the reduction of the general government debt-to-GDP ratio. Shift the tax burden from the factors of production onto taxes less detrimental to growth in a budget-neutral way by taking decisive action to reduce the number and scope of tax expenditures, reforming the outdated cadastral system and reintroducing the first residence tax for high-income households. Broaden the compulsory use of electronic invoicing and payments. (MIP relevant)  Limited progress  Limited progress in implementing the privatisation programme  Limited progress in shifting taxation away from productive factors, in revising tax expenditure and in reforming the cadastral system  Substantial progress in broadening the compulsory use of electronic invoicing and payments CSR 2: Reduce the trial length in civil justice through effective case management and rules ensuring procedural discipline. Step up the fight against corruption, in particular by revising the statute of limitations. Complete reforms of public employment and improve the efficiency of publicly-owned enterprises. Promptly adopt and implement the pending law on competition and address the remaining restrictions to competition. (MIP relevant)  Some progress  Limited progress in reducing trial length in civil justice  Substantial progress in stepping up the fight against corruption  Some progress in completing reforms of public employment and improving the efficiency of publicly-owned enterprises  Some progress with regard to the annual competition law and in addressing further restrictions to competition CSR 3: Accelerate the reduction in the stock of non-performing loans and step up incentives for balance-sheet clean-up and restructuring, in particular in the segment of banks under national supervision. Adopt a comprehensive overhaul of the regulatory framework for insolvency and collateral enforcement. (MIP relevant)  Some progress  Some progress in addressing non-performing loans and bank restructuring  Limited progress in improving the framework for insolvency and collateral framework CSR 4: With the involvement of social partners, strengthen the collective bargaining framework to allow collective agreements to better take into account local conditions. Ensure effective active labour market policies. Facilitate the take-up of work for second earners. Rationalise social spending and improve its composition. (MIP relevant)   Limited progress  Limited progress in strengthening the collective bargaining framework  Limited progress in implementing the reform of active labour market policies   Limited progress in facilitating the take-up of work by second earners  Some progress in rationalising social spending and improving its composition   
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in Italy 

Italy is a beneficiary of significant European Structural and Investment Funds (ESI Funds) support 
and can receive up to EUR 44.4 billion until 2020. This represents around 11% of public investment (1) 
annually  over  the  period  2014-2018.  By  31  December  2017,  an  estimated  EUR  18.7  billion  (42%  of  the 
total)  was  allocated  to  projects  on  the  ground.  This  has  resulted  in  5 000  enterprises  receiving  support, 
around 600 of new researchers financed in supported entities, around EUR 92 million private investments 
matching public support to enterprises and 900 000  people had taken part in training or other active labour 
market measures until 2016. In addition, 6 026 farm holdings received support for investments through the 
EARDF.  An  additional  5 500  households  have  broadband  access  of  at  least  30  Mbps.  Out  of  the  EU 
financing, EUR 1.8 billion is to be delivered via financial instruments. 

implement  country-specific 
structural  policy  challenges  and 
ESI  Funds  help  address 
recommendations. Actions financed cover, among others, improving the business environment, particularly 
by contributing to the acceleration of the implementation of the Small Business Act and the facilitation of 
SME  access  to  finance;  supporting  the  reform  of  the  public  administration  by  enhancing  the  institutional 
capacity  of  public  authorities  and  stakeholders  and  implementing  the  National  Digital  Agenda,  improving 
the effectiveness of the justice system, supporting the national anti-poverty strategy and the "Good School" 
reform  and  improving  labour  market  access.  Italy  has  also  received  support  from  the  Youth  Employment 
Initiative  to  combat  youth  unemployment.  In  June  2017,  almost  1.4  million  young  people  were  registered 
and  around  400 000  young  people  completed  training  or  apprenticeships;  about  46%  of  them  were  in 
employment  after  the  YEI  support  had  ended.  The  ESF  contributes  to  supporting  the  current  reform  of 
Active  Labour  Market  Policies  by  strengthening  the  public  employment  services  and  by  supporting  the 
"Piano per le Politiche attive" to better coordinate ESF interventions at national and regional level.  

Various reforms were undertaken already as precondition for ESI Funds support (2). These include the 
adoption of the first national broadband and Digital Agenda strategies, the setting up of a national system of 
ports  and  logistics  and  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  cross-
regional application of the EU State aid rules and by overcoming the shortcomings 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  mentioned  above.  Efforts  are  made  to  complete  the  only  remaining  outstanding  ex-ante 
conditionality as soon as possible. 

Italy is advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 
2017, overall financing volume of operations approved under the EFSI amounted to EUR 6.5 billion, which 
is expected to trigger total private and public investment of EUR 36.7 billion. More specifically, 54 projects 
involving  Italy  have  been  approved  so  far  under  the  Infrastructure  and  Innovation  Window  (including  13 
multi-country projects), amounting to EUR 4.6 billion in EIB financing under the EFSI. This is expected to 
trigger  about  EUR 14  billion  in  investments.  Under  the  SME  Window,  59  agreements  with  financial 
intermediaries  have  been  approved  so  far.  European  Investment  Fund  financing  enabled  by  the  EFSI 
amounts  to  EUR 1.9  billion,  which  is  expected  to  mobilise  approximatively  EUR 22.4  billion  in  total 
investment. Over 206 200 smaller companies or start-ups will benefit from this support. SMEs rank first in 
terms of operations and volume approved, followed by RDI, energy and transport.  

Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is 
additional  to  the  ESI  Funds.  By  the  end  of  2017,  Italy  has  signed  agreements  for  EUR 1.4  billion  for 
projects under the Connecting Europe Facility. 

https://cohesiondata.ec.europa.eu/countries/IT 

(1)  Public investment is defined as gross fixed 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  so-called  ex-ante 

conditionalities, which aim at improving conditions for the majority of public investments areas. 

15 

 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE 

MACROECONOMIC IMBALANCE PROCEDURE IN-DEPTH 
REVIEW 

The  in-depth  review  for  the  Italian  economy  is 
presented in this report. In spring 2017, Italy was 
identified  as  having  excessive  macroeconomic 
imbalances, in particular relating to its high public 
debt and protracted weak productivity growth in a 
context  of  high, 
though  decreasing,  non-
performing loans (NPLs) and unemployment. The 
2018  Alert  Mechanism  Report 
(European 
Commission,  2017b)  concluded  that  a  new  in-
depth  review  should  be  undertaken  for  Italy  to 
assess  developments 
identified 
imbalances.  Analyses  relevant  for  the  in-depth 
review can be found in this section, Section 1 and 
in Sections 4.1 to 4.5. (14) 

relating 

to 

Imbalances and their gravity 

Italy's  high  public  debt  remains  a  major  drag 
on  growth.  The  public  debt-to-GDP  ratio  is 
expected to broadly stabilise at around 130 % over 
2017-2019.  In  particular,  still  low  but  rising 
inflation, a limited increase in the primary surplus 
and privatisations falling short of the government's 
plans  keep  hindering  debt-reduction  efforts.  The 
high level of public debt remains a major source of 
vulnerability  for  Italy's  economy.  Despite  the 
current  downward  trend  in  interest  expenditure, 
considerable public resources, around 4 % of GDP, 
are  still  earmarked  to  cover  debt  servicing  costs. 
This,  coupled  with  a  long-standing  bias  in  the 
composition  of  public  spending  towards  old-age 
pensions,  could  crowd  out  more  productivity-
enhancing  spending  like  education,  infrastructure 
and  innovation  and  limit  the  possibility  to  lower 
the tax burden on the factors of production. 

The high level of public debt makes the country 
more  vulnerable  to  shocks.  The  combination  of 
high  public  debt  and  low  growth  prospects,  also 
related  to  sluggish  productivity  growth,  may 
prevent  fiscal  automatic  stabilisers  from  being 
used  effectively  in  case  of  negative  economic 
shocks.  A  country  with  high  public  debt  is  also 
more  exposed  to  financial  market  volatility  in 
periods  of  increased  risk  aversion,  when  higher 
interest  rates  on  government  securities  issuances 

(14)  An  asterisk  next  to  the  subsection  title  indicates  that  the 
analysis  in  that  section  contributes  to  the  in-depth  review 
under the MIP. 

could  tighten  financing  conditions  for  the  real 
economy. This was seen in the collapse in private 
investment witnessed in 2011-2012. 

in-work 

Low  productivity  growth  lies  at  the  heart  of 
Italy's lacklustre growth performance. Over the 
past  two  decades  productivity  growth  has  been 
generally  weak,  with  labour  productivity  growth 
hovering  around  zero  since  2011.  Long-standing 
shortcomings  in  the  functioning  of  labour  and 
capital  markets  have  hampered  the  acquisition  of 
necessary 
innovation. 
Remaining  restrictions  to  product  market  leading 
to  inefficiencies  and  distortionary  elements  of  the 
tax  system  have  also  weighed  on  the  business 
environment. 
affects 
competitiveness  and  GDP  growth,  which  in  turn 
will  make  it  more  difficult  to  reduce  Italy's  still 
high  public  debt  ratio.  Medium-term  growth 
prospects are closely related to productivity growth 
given the shrinking working age population. 

negatively 

skills 

This 

and 

Still high levels of non-performing loans (NPLs) 
hamper  efficient  capital  allocation.  While  the 
protracted  recession  had  drastically  worsened 
Italian  banks'  asset  quality,  the  situation  has 
stabilised  on  the  back  of  the  economic  recovery. 
The  stock  of  gross  NPLs  declined  to  EUR 324 
billion in Q2 2017, though the NPL ratio at 16.4% 
was  still  higher  than  in  EU  peer  countries.  The 
NPL  problem  is  weighing  on  banks’  profitability 
and  their  ability  to  internally  raise  capital.  Banks 
have  tightened  credit  standards  since  the financial 
crisis,  extending  credit  mainly  to  larger,  well-
established  firms.  Therefore,  banks'  intermediary 
function of facilitating the (re)allocation of capital 
to  firms  has  been  constrained.  Credit  to  non-
financial  firms,  especially  smaller  ones,  is  still 
subdued and is limiting investment growth. 

The labour market is still marked by the legacy 
of  the  recession.  Despite  recent  labour  market 
reforms, unemployment is receding only slowly in 
Italy.  This  is  due  to  both  hitherto  rather  moderate 
recovery and increasing labour force participation. 
Unemployment  has  dropped,  from  13.0 %  at  its 
peak  in  November  2014  to  10.8 %  in  December 
2017,  while  participation  rates  have  been  rising, 
albeit  from  low  levels.  Youth  unemployment  is 

16 

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

declining but the rate remains one of the highest in 
the  EU.  Low  activity  rates  are  constraining 
potential  growth  whereas  entrenched  joblessness 
among  young  people  is  likely  to  impede  their 
acquisition of skills and their future employability. 

As  the  third  largest  economy  in  the  euro  area, 
Italy  is  a  major  source  of  trade  and  financial 
spillovers.  Italy  accounts  for  16  %  of  euro  area 
GDP  and  has  strong  trade  linkages.  Exports  of 
goods  and  services  to  the  rest  of  the  euro  area 
correspond  to  12 %  of  its  GDP.  Italy  is  also  an 
important export market for a number of euro area 
countries.  Moreover,  Italy's  economy  maintains 
strong  financial 
to  other  euro  area 
countries. In particular, French banks remain in the 
lead  with  an  exposure  to  the  Italian  economy  of 
12.3 %  (of  French  GDP)  in  Q3 2017.  Meanwhile, 
Italian banks remain strongly exposed to Germany 
and  Austria,  respectively  by  10.9 %  and  4.7 %  of 
Italy’s  GDP  in  Q3 2017.  Box  3.1  illustrates  how 
structural reforms in Italy can have both a positive 
domestic  and  cross  border  effect,  in  line  with  the 
euro  area  recommendation  on  increasing  growth 
potential and access to the labour market. 

linkages 

The projected reduction in public debt is below 
the  improvement  in  the  interest-rate-growth-
rate differential. The 'snowball' effect is expected 
to  shrink  from  2017  due  to  a  gradual  decrease  in 
the  real  implicit  cost  of  debt  (Graph  3.1,  dashed 
blue  line)  and  the  recovery  in  real  GDP  growth 
(Graph  3.1,  solid  blue  line).  However,  it  is  set  to 
remain slightly debt-increasing (Graph 3.1, yellow 
shade) due to the still positive interest-rate-growth-
rate differential (0.9 % in 2017 and 0.3 % in 2018, 
below  the  pre-crisis  average  of  1.2 %  over  1999-
2007). The debt ratio is thus forecast to marginally 
increase  to  132.1 %  of  GDP  in  2017.  This  is  also 
due 
stock-flow 
large  debt-increasing 
adjustment (0.7 % of GDP) driven by the impact of 
two  recent  bank  resolution  and  liquidation  cases 
(around EUR 15.6 billion or 0.9 % of GDP), in the 
absence of privatisation proceeds. The debt ratio is 
forecast  to  slightly  decrease  to  130.8 %  in  2018. 
This  is  thanks  to  a  marginal  improvement  in  the 
primary  surplus  (1.8 %  of  GDP)  and  small  debt-
increasing  impacts  from  the 
'snowball'  effect 
(0.4 %) and stock-flow adjustment (0.1 %). 

to  a 

Graph 3.1:  Drivers of 'snowball effect' on public debt 

Evolution, prospects and policy responses 

Large  interest  rate-growth  rate  differentials 
contributed to past increases in public debt. The 
debt  ratio  reached  132.0 %  in  2016,  i.e.  0.5  pps 
higher than in 2015. The increase was partly due to 
a  'snowball'  effect,  as  the  real  implicit  cost  of 
debt, (15)  while  gradually  decreasing  (to  below 
2.3 %,  from  2.7 %  in  2013),  remained  above  real 
GDP growth (0.9 %). This was mainly due to still 
low  inflation  (GDP  deflator  growth  of  0.8 %). 
Slightly  negative  real  spot  interest  rates  on  new 
government  securities  issuances  only  gradually 
passed  through  into  the  real  servicing  cost  of  the 
outstanding  stock  of  debt,  given  its  duration  and 
roll-over  period  (Graph  3.1).  As  such,  a  still 
positive 
differential 
(1.3 %,  vs.  2.5 %  in  2014)  implied  a  large  debt-
increasing  impact.  On  the  other  hand,  a  broadly 
stable  primary  surplus  (1.5 %  of  GDP)  helped  to 
curb debt dynamics  in  2016,  while  the  stock-flow 
adjustment (0.2 %) was debt-increasing. 

interest-rate-growth-rate 

(15)  The real implicit cost of debt at time t can be defined as the 
nominal  yield  paid  by  the  government  to  service  the 
outstanding debt at t-1, net of the impact of inflation at t. 

Source: European Commission 

The  improving  macroeconomic  environment 
helps  short-term  fiscal  sustainability.  Italy  is 
exposed  to  sudden  increases  in  financial  market 
risk aversion due to improving but still large roll-
over needs (around 20 % of GDP in 2017) related 
to  its  public  debt.  At  the  moment,  however,  Italy 
does  not  seem  to  face  sustainability  challenges  in 
the short-term, mainly thanks to limited risks from 
the  macro-financial  context.  This  is  partly  related 

17 

-3-2-1012345610111213141516171819%(Real implicit cost of debt - real GDP growth)Real implicit cost of debtReal GDP growthReal spot yield at issuance (weighted average)forecast 
                                                           
 
3. Summary of the main findings from the MIP in-depth review 

shows that Italy's debt-to-GDP ratio would remain 
above  130 %  by  2029  if:  the  interest  rate-growth 
rate differential converged by 2024 to its pre-crisis 
(1999-2007)  average  of  1.2 pps  (up  from  the  0.3 
trough  in  2018)  in  line  with  the  gradual  phasing 
out of the ECB's accommodative monetary policy; 
and  Italy  kept  constant  its  structural  primary 
surplus  of  1.1 %  of  GDP  expected  for  2019 
(Graph 3.2, left-hand side, blue line).  

Long-term  projections  confirm  the  importance 
of growth-friendly fiscal consolidation to reduce 
public  debt.  Under  the  hypothesis  of  increasing 
interest-rate-growth-rate  differentials, 
the  DSA 
suggests that a structural primary surplus gradually 
returning to a level of 4 % of GDP by 2024 would 
make the debt-to-GDP ratio decline in line with the 
debt  rule  over  10  years  and  approach  107 %  by 
2029  (Graph 3.2, 
line). 
Instead,  if  the  structural  primary  balance  were 
worsened by further pension expenditure due non-
adjustment  of  the  retirement  age  under  past 
pension  reforms,  the  debt-to-GDP  ratio  would 
increase  to  more  than 136 %  by 2029 (Graph 3.2, 
left-hand side, red line). In a reinforced sensitivity 
the 
analysis  based  on  a 

left-hand  side,  green 

stochastic  DSA, 

Commission's 

to the ECB's accommodative monetary policy. The 
European 
fiscal 
sustainability  risk  indicator  S0  is  thus  set  to  be 
below  the  'high-risk'  threshold  in  2017.  However, 
at  0.36,  it  remains  among  the  highest  in  the  EU, 
mainly due to high public debt. 

short-term 

In  the  medium  term,  Italy  faces  marked 
sustainability  challenges.  The  structural  primary 
surplus is projected to deteriorate to 1.6 % of GDP 
in  2018,  down  from  3.3 %  in  2015.  This  could 
heighten  sustainability  risks  in  the  medium  term, 
as  a  weak  fiscal  position  might  raise  risk  premia. 
This  is  captured  by  the  European  Commission's 
medium-term fiscal sustainability risk indicator S1, 
which  points  to  'high  risk'.  It  reflects  the  fact  that 
achieving  a  debt  ratio  of  60 %  of  GDP  by  2032 
would  require  Italy  to  make  a  large  cumulative 
fiscal effort of 8.1 pps of GDP over 2020-2024. 

A  debt  sustainability  analysis  (DSA)  confirms 
high  sustainability  risks  if  the  accommodative 
monetary policy were phased out. The European 
Commission's  DSA  points  to  'high  risk'  in  the 
medium-term  (European  Commission,  2018a).  A 
deterministic DSA exercise run over 10 years also 

Graph 3.2: 

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

Notes: The left-hand side panel shows a 10-year deterministic DSA starting from 2019 (last year of the Commission forecast) 
under different hypotheses on the structural primary balance (SPB), with r*-g* (interest-rate-growth-rate differential) 
converging in all scenarios to 1.2 % by 2024.  The costs related to lack of adjustment of the retirement age are estimated by 
the authorities to gradually approach 1 % of GDP by 2030 (MEF, 2017). The right-hand side panel shows a 5-year stochastic 
DSA starting from 2017. The ‘p10_p90’ cone, whose lower and upper line represent the 10th and 90th distribution percentiles, 
respectively, covers 80 % of all possible debt paths obtained by simulating random shocks (i.e. those resulting from more 
extreme shocks, or tail events, are excluded). (European Commission, 2018a) 
Source: Commission Services 

18 

105110115120125130135140145151617181920212223242526272829% of GDPSPB constant and  r*-g* = 1.2% as of 2024SPB at 4% of GDPSPB with extra ageing costs1051101151201251301351401451516171819202122p10_p20p20_p40p40_p60p60_p80p80_p90p50Distribution percentileranges:%of GDP 
 
3. Summary of the main findings from the MIP in-depth review 

recent  rebound,  productivity  growth  is  set  to  be 
below the EU average. 

Graph 3.3: 

Productivity growth and gross value added 

Source: European Commission. 

Aggregate  productivity  developments  vary 
markedly across firms, sectors and  regions. On 
average, small firms fare worse than larger ones on 
productivity  growth.  As  such,  the  high  share  of 
small firms in Italy has a bearing on the economy's 
aggregate  productivity.  The  productivity  gap  with 
peer  countries  concerns  almost  all  sectors  but  is 
most  pronounced  in  services.  Labour  productivity 
in  the  manufacturing  sector  is  increasing  since 
2003,  thus  gradually  closing  the  gap  with  peer 
countries.  By  contrast,  productivity  in  the  service 
sector has been stagnating or slightly falling since 
the  1990s  without  any  sign  of  recovery.  Wide 
regional  disparities 
in  productivity  dynamics 
persist.  These  contributed  significantly to  the  past 
loss  in  competitiveness  as  wage  increases  did  not 
reflect the regional differences in productivity. 

Productivity trends also hint at inefficiencies in 
managerial  practices  and  investment  spending. 
While  total  factor  productivity  has  returned  to  a 
moderately  positive  trend  since  the  start  of  the 
recovery  in  2014,  the  capital  stock  has  not  fully 
overcome  the  legacy  of  the  crisis.  Italian  firms 
tend 
little  productivity-
enhancing  information  technology  compared  to 
companies in EU peer countries, largely because of 
less efficient management practices. This is partly 
linked  to  the  close  family  orientation  of  many 
family-owned  firms,  especially  SMEs,  which 

to  employ  relatively 

Commission applied random shocks to the primary 
balance over 2018-2022, whereas interest rates and 
GDP growth follow their historical path (European 
Commission,  2018a).  This  analysis  also  confirms 
that Italy's public debt ratio could further increase 
in  the  medium  term  if  the  fiscal  position  is  not 
adequately  strengthened  (Graph 3.2,  right-hand 
panel).  As  such,  further  fiscal  effort  and  full 
implementation  of  reforms  to  foster  productivity 
and  potential  growth  in  the  medium  to  long  term 
remain key to creating a satisfactory debt reduction 
path. This is especially the case in the event of the 
accommodative monetary policy being reversed. 

The  long-term  sustainability  ensured  by  past 
pension reforms is slowly deteriorating. Pension 
expenditure  as  a  share  of  GDP  rose  by  around  2 
pps  as  a  result  of  the  crisis  and  the  related  fall  in 
nominal GDP (European Commission, 2017a). It is 
now  the  second  highest  in  the  EU/OECD  after 
Greece. Implicit liabilities arising from population 
ageing were curbed by past pension and healthcare 
reforms, improving Italy's long-term sustainability. 
However,  the  2017  and  2018  budgets  contained 
measures  that  partially  reversed  past  pension 
reforms and slightly increased pension expenditure 
over  the  medium  term  (Section  4.1).  As  such,  the 
long-term  fiscal  sustainability  risk  indicator  S2 
points  now  to  'medium  risk'.  In  fact,  a  permanent 
increase in the structural primary surplus of around 
2.2 pps of GDP would be needed to keep the debt-
to-GDP  ratio  stable  over  the  long  term,  including 
the cost of ageing (European Commission, 2018b; 
2017c). Together with the worsening demographic 
trends projected by Eurostat, and the related risk of 
an  increase  in  healthcare  spending,  a  substantial 
backtracking  on 
implementation  of  past 
pension reforms, in particular the adjustment of the 
retirement  age,  could  further  worsen  Italy's  long-
term sustainability risks and the S2 indicator.  

the 

Italy  suffers  from  a  long-term  productivity 
slump. Total factor productivity (TFP), a measure 
of  how  efficiently  capital  and  labour  are  being 
used  in  production,  remained  broadly  flat  0.1  % 
over  1999-2007.  After  a  sharp  fall  in  2008-2009 
during the protracted crisis, labour and TFP growth 
returned  to  a  moderately  positive  trend,  briefly 
interrupted  in  2012  (Graph 3.3).  TFP  grew  by 
0.8 %  in  2017  and  is  set  to  rise  by  0.6  %  on 
average over 2018-2019. Labour productivity grew 
moderately  in  2017  (0.4  %)  and  is  set  to  remain 
broadly  on  this  path  in  2018-2019.  Despite  the 

19 

-9-7-5-3-1135050607080910111213141516Annual percentage changeLabour productivityCapital productivityTotal factor productivityGross value added 
 
3. Summary of the main findings from the MIP in-depth review 

to  drop  only  to  10.5 %  by  2019,  with  long-term 
unemployed and young out of work still numerous. 

further 

continued 

Italian  banks  have 

Some  progress  has  been  made  in  reducing 
the 
NPLs. 
restructuring  process  by 
increasing 
provisioning  and  accelerating  NPL  disposal,  also 
through State-guaranteed securitisations. This is in 
line with euro area recommendation to lower NPL 
levels.  In  addition,  the  authorities  have  taken  a 
number of measures to foster the development of a 
secondary  market  for  NPL  sales  (Section  4.2). 
Helped by the ongoing recovery and the structural 
reforms  in  the  banking  sector,  the  inflow  of  new 
NPLs  has  returned  to  pre-crisis  levels.  However, 
several  factors  are  still  preventing  a  faster  NPL 
resolution.  They  include  in  particular  weaknesses 
in  the  insolvency  framework,  the  slow  judicial 
system and challenges related to NPL servicing.  

Overall assessment 

Despite  encouraging  recent  developments, 
macroeconomic  imbalances  remain  significant. 
Italy's public debt-to-GDP ratio is expected to have 
risen  further  to  132.1 %  in  2017  and  to  remain 
above  130 %  in  the  coming  years.  The  high  debt 
ratio  thus  remains  a  major  source  of  vulnerability 
for the economy, a drag on growth and a source of 
negative spillovers for the euro area, despite recent 
positive developments in debt management such as 
increasing  maturity  (Section  1).  Moreover,  long-
term  and  youth  unemployment  remain  high  and 
weigh on growth prospects. Investment, innovation 
and a rapid upgrade of Italy's production structure 
are also still hampered by structural shortcomings. 
Overall, the resulting sluggish productivity growth 
suggests  that  more  progress  is  needed  to  improve 
Italy's  growth  prospects  and  to  facilitate  public 
sector  debt  reduction.  However,  the  erosion  of 
price competitiveness has stopped mainly thanks to 
contained wage growth and the depreciation of the 
euro.  The  adjustment  in  the  labour  market  is 
continuing,  resulting  in  a  gradual  decline  in  the 
unemployment rate. Efforts to tackle the high stock 
of  NPLs  are  starting  to  bear  fruit  but  challenges 
remain.  Several  reforms  were  implemented  to 
address 
country-specific 
2017 
recommendations (Section 2), which in Italy’s case 
are  all  related  to  its  macroeconomic  imbalances. 
Consistent  implementation  of  those  reforms  is 
crucial to address large stock imbalances (e.g. the 
high public debt) in the medium term. 

the 

drastically  constrains  the  pool  from  which  they 
recruit future managers. In addition, weaknesses in 
innovation  and  R&D  as  well  as  the  misallocation 
of  resources  across  firms  and  sectors  have 
hampered  aggregate  productivity  growth.  In  this 
respect,  the  low  share  of  intangible  investment 
does not bode well. In addition, companies facing 
financial  stress  are  generally  smaller  and  less 
productive.  Hence,  the  large  share  of  financially-
constrained 
an 
improvement in overall productivity. 

hampering 

companies 

is 

Weak  productivity  growth  prevents  a  speedy 
recovery of cost competitiveness. The erosion of 
price  competitiveness  has  stopped,  mainly  thanks 
to  limited  wage  growth  and  nominal  depreciation 
of  the  euro.  Italy  has  indeed  recorded  small  gains 
in export market share since 2013. Given subdued 
wage  growth,  unit 
labour  costs  grew  only 
moderately  despite  declining  productivity.  Yet,  a 
sizeable rebound in productivity remains the most 
effective way to restore competitiveness. Subdued 
productivity  growth  also  reflects  the  relatively 
slow  pace  of  technological  change,  which  is  also 
weighing on non-cost competitiveness. 

the 

reform 

Jobs  Act 

The impact of recent reforms on productivity is 
the 
only  gradually  building  up.  Following 
labour 
adoption  of 
productivity declined by 0.4 % in 2016 as the rise 
in  employment  outpaced  the  expansion  of  gross 
value  added.  Until  2016,  the  sizable  rise  in 
employment  was  to  a  large  extent  supported  by 
hiring  incentives  which  might  have  induced  firms 
to  substitute  capital  with  labour.  In  addition,  the 
rise in temporary contracts could reduce incentives 
for human capital formation. For the period 2017-
2019  a  moderate  rise  in  labour  productivity  is 
projected. However, reforms can only achieve their 
full  potential  in  addressing  the  bottlenecks  that 
hold back productivity growth, if they are properly 
and  fully  implemented.  The  strengthening  of  the 
framework  for  collective  bargaining  which  would 
allow  wages  to  be  set  more  in  line  with  local 
economic conditions made only limited progress. 

Employment  has  returned  to  pre-crisis  levels 
thanks to a modest recovery and labour market 
reforms.  Employment  grew  by  1.0 %  in  2017, 
after  1.4 %  in  2016,  largely  helped  by  generous 
hiring  incentives.  Yet,  total  hours  worked  remain 
below pre-crisis levels. Employment growth is set 
to continue, but the unemployment rate is forecast 

20 

 
Table 3: 

 Macroeconomic Imbalance Procedure Assessment Matrix (*) - Italy 

(Continued on the next page) 

21 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Productivity and competitiveness Italy’s labour productivity growth has been sluggish for more than 20 years (0.3 % per year over 1995-2016 vs. 1.3 % in the euro area). Weak productivity dynamics hamper competitiveness and entail low GDP growth, which 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. After a sharp fall in 2008-2009, labour and total factor productivity growth returned to a moderately positive trend  Labour productivity grew moderately in 2017 ([0.4 %]) and is expected to remain broadly on this path in 2018 and 2019. Weak productivity dynamics continue to sustain unit labour costs, hampering a speedy recovery of cost-competitiveness. It also reflects a relatively low pace of technological change, which weighs on non-cost competitiveness. Italy has indeed recorded small gains in export market share since 2013.    Important structural reforms are being implemented in the labour and product markets, banking, education, public administration and justice.  The reforms could help address the bottlenecks that hold back productivity growth, if properly and fully implemented.  The strengthening of framework for collective bargaining is only slowly proceeding.   Public debt In 2016 Italy’s public debt-to-GDP ratio stood around 132 %, up from around 100 % in 2007. Italy’s high public indebtedness is a major source of vulnerability for the economy. It holds back growth, crowds out productive public expenditure, reduces the fiscal space to respond to shocks, entails significant refinancing risk and may give rise to a harmful snowball effect if interest rates significantly exceed real GDP growth. It may also have adverse effects and feedback loops through the exposure of domestic financial institutions to public debt, and may induce vulnerability in case of shocks to interest rates spreads. Fiscal sustainability risks remain high, especially in the medium term. Furthermore, given its size, Italy’s public debt ratio is a potential source of negative spillovers to the whole euro area. Low growth and low inflation, coupled with a worsening in the primary surplus, have pushed up the public debt-to-GDP ratio in past years. The debt ratio is expected to slightly rise in 2017 also due the impact of two bank resolution cases and to only marginally decrease in 2018, given a limited improvement in the primary surplus and a shrinking impact from the interest rate-growth differential. Yet, adverse shocks could further delay an adequate reduction of the debt ratio. Past pension reforms, if fully implemented, should support the long-term sustainability of Italy’s public debt. However, due to measures in the 2017 and 2018 Budget as well as worsening demographic projections, pension spending is set to increase as of 2017, raising long-term sustainability risks. The reform of the budgetary process, operational as of 2018, will allow better top-down resource allocation. More growth-friendly public spending, together with other structural reforms to foster productivity growth, could make Italy's public debt more sustainable over time, even more so if coupled with a gradual but persistent reduction in the general government deficit. The government scaled down its privatisation programme to 0.05 % of GDP in 2016 (down from 0.5 % targeted) and has missed the 0.3 % of GDP proceeds targeted for 2017. In 2018, it plans again to attain 0.3 % of GDP of privatisation proceeds. Adjustment issues Labour market participation and unemployment The unemployment rate doubled during the crisis, and the long-term unemployment rate steadily increased over the period for all age groups.  The risk of labour market exclusion is particularly high for youngsters: the youth unemployment rate and the share of young people not in employment, education or training (NEET) are among the highest in the EU.  The participation rate, particularly of women, is very low.  The unemployment rate averaged [11.3 %] in 2017 down from 13 % at the end of 2014, and it is expected to decline gradually in 2018 and 2019, partially driven by dynamic employment growth.  Long-term and youth unemployment are also slowly declining and the participation rate is increasing moderately.   The reform of active labour market policies and the strengthening of work-based learning could help to improve labour market matching and aid the transition from education to work in the medium term. However, implementation is proving challenging.  Measures to foster labour market participation are limited.   Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Productivity and competitiveness Italy’s labour productivity growth has been sluggish for more than 20 years (0.3 % per year over 1995-2016 vs. 1.3 % in the euro area). Weak productivity dynamics hamper competitiveness and entail low GDP growth, which 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. After a sharp fall in 2008-2009, labour and total factor productivity growth returned to a moderately positive trend  Labour productivity grew moderately in 2017 (0.4 %) and is expected to remain broadly on this path in 2018 and 2019. Weak productivity dynamics continue to sustain unit labour costs, hampering a speedy recovery of cost-competitiveness. It also reflects a relatively low pace of technological change, which weighs on non-cost competitiveness. Italy has indeed recorded small gains in export market share since 2013.   Important structural reforms are being implemented in the labour and product markets, banking, education, public administration and justice.  The reforms could help address the bottlenecks that hold back productivity growth, if properly and fully implemented.  The strengthening of framework for collective bargaining is only slowly proceeding.   Public debt In 2016 Italy’s public debt-to-GDP ratio stood around 132 %, up from around 100 % in 2007. Italy’s high public indebtedness is a major source of vulnerability for the economy. It holds back growth, crowds out productive public expenditure, reduces the fiscal space to respond to shocks, entails significant refinancing risk and may give rise to a harmful snowball effect if interest rates significantly exceed real GDP growth. It may also have adverse effects and feedback loops through the exposure of domestic financial institutions to public debt, and may induce vulnerability in case of shocks to interest rates spreads. Fiscal sustainability risks remain high, especially in the medium term. Furthermore, given its size, Italy’s public debt ratio is a potential source of negative spillovers to the whole euro area. Low growth and low inflation, coupled with a worsening in the primary surplus, have pushed up the public debt-to-GDP ratio in past years. The debt ratio is expected to slightly rise in 2017 also due the impact of two bank resolution cases and to only marginally decrease in 2018, given a limited improvement in the primary surplus and a shrinking impact from the interest rate-growth differential. Yet, adverse shocks could further delay an adequate reduction of the debt ratio. Past pension reforms, if fully implemented, should support the long-term sustainability of Italy’s public debt. However, due to measures in the 2017 and 2018 Budget as well as worsening demographic projections, pension spending is set to increase as of 2017, raising long-term sustainability risks.  The reform of the budgetary process, operational as of 2018, will allow better top-down resource allocation. More growth-friendly public spending, together with other structural reforms to foster productivity growth, could make Italy's public debt more sustainable over time, even more so if coupled with a gradual but persistent reduction in the general government deficit. The government scaled down its privatisation programme to 0.05 % of GDP in 2016 (down from 0.5 % targeted) and has missed the 0.3 % of GDP proceeds targeted for 2017. In 2018, it plans again to attain 0.3 % of GDP of privatisation proceeds. Adjustment issues Labour market participation and unemployment The unemployment rate doubled during the crisis, and the long-term unemployment rate steadily increased over the period for all age groups.  The risk of labour market exclusion is particularly high for youngsters: the youth unemployment rate and the share of young people not in employment, education or training (NEET) are among the highest in the EU.  The participation rate, particularly of women, is very low.  The unemployment rate averaged 11.3 % in 2017 down from 13 % at the end of 2014, and it is expected to decline gradually in 2018 and 2019, partially driven by dynamic employment growth.  Long-term and youth unemployment are also slowly declining and the participation rate is increasing moderately.   The reform of active labour market policies and the strengthening of work-based learning could help to improve labour market matching and aid the transition from education to work in the medium term. However, implementation is proving challenging.  Measures to foster labour market participation are limited. Banks’ asset quality The crisis has drastically worsened Italian banks’ asset quality, leading to significant loan-loss provisions that have reduced capital and profitability. It has also adversely impacted demand and the provision of credit to the real economy. As a consequence, some of the weakest banks in the system had been resolved (or recapitalised) by mid-2017, while other banks commenced comprehensive balance sheet repair.  While the inflow of new NPLs has returned to pre-crisis level on the back of the economic recovery, the legacy stock of NPLs remains high. Italian banks have continued the restructuring process by further increasing provisioning and accelerating the disposal of their high stock of NPLs, including through State-guaranteed securitisation transactions. High NPLs continue to constrain banks’  Italy has taken several initiatives, including the Salva Risparmio decree law, which enabled the precautionary recapitalisation of Banca Monte dei Paschi di Siena (BMPS). Furthermore, Banca Popolare di Vicenza (BPVi) and Veneto Banca (VB) were put in liquidation under national insolvency law in mid-2017, thus alleviating the most acute risks in the banking sector. The aid-free    
 
 
 
 
 
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 

22 

Banks’ asset quality The crisis has drastically worsened Italian banks’ asset quality, leading to significant loan-loss provisions that have reduced capital and profitability. It has also adversely impacted demand and the provision of credit to the real economy.As a consequence, some of the weakest banks in the system had been resolved (or recapitalised) by mid-2017, while other banks commenced comprehensive balance sheet repair.  The stock of non-performing loans (NPLs) amounted to EUR 324 billion in Q2 2017 (16.4 % of total customer loans) with bad debts (sofferenze) constituting around 62% of those. Tackling the legacy NPL problem would become more urgent under monetary policy normalization or in an adverse scenario. While the inflow of new NPLs has returned to pre-crisis level on the back of the economic recovery, the legacy stock of NPLs remains high. Italian banks have continued the restructuring process by further increasing provisioning and accelerating the disposal of their high stock of NPLs, including through State-guaranteed securitisation transactions. High NPLs continue to constrain banks’ weak profitability and their ability to internally generate capital, also in light of tighter regulatory requirements. Notwithstanding some progress, challenges to comprehensively address the legacy NPL problem (and to lower the bid-ask spreads for NPLs) include: (i) the slow judiciary system for foreclosure procedures and collateral enforcement; (ii) NPL servicing remains a significant constraint; or (iii) banks might be cautious on a faster pace of NPL reduction given the adverse effects on provisioning and capital buffers as well as NPL pricing;  Other challenges related to long standing structural weaknesses (such weak profitability, overbanking, or the business model) remain. Italy has taken several initiatives, including the Salva Risparmio decree law, which enabled the precautionary recapitalisation of Banca Monte dei Paschi di Siena (BMPS). Furthermore, Banca Popolare di Vicenza (BPVi) and Veneto Banca (VB) were put in liquidation under national insolvency law in mid-2017, thus alleviating the most acute risks in the banking sector. The aid-free State guarantee scheme (GACS) to support NPL securitisations, has been prolonged. The various corporate governance reforms in the banking sector seem broadly on track.  However, the legacy NPL stock remains high despite the progress and policy initiatives taken. Although the enabling law for the bankruptcy legislation was passed in October 2017, the insolvency and collateral enforcement framework continues to be insufficiently supportive of a swift NPL work-out and restructuring. Continued efforts are necessary to tackle the large NPL legacy stock, such as completing the insolvency reforms as well as improving NPL servicing and data quality that could contribute to a deeper secondary market for distressed debt. Conclusions from the IDR analysis  Very high government debt represents a major economic burden and vulnerability and sustainability risks remain high in the medium term and are on the rise in the long term. Productivity dynamics remain weak, holding back the reduction of the debt ratio and external competitiveness. The still high stock of NPLs continues weighs on banks’ balance sheets. High long-term unemployment holds back future growth.  Italy’s imbalances are no longer deteriorating. The public debt ratio is expected to broadly stabilise, yet at a level not below 130 % of GDP, over the forecast horizon. Productivity dynamics are improving very slowly with a weak outlook. This holds back the relative adjustment in unit labour costs, despite wage moderation, while non-cost factors remain insufficiently supportive of external competitiveness. The legacy NPL stock is declining slowly.  The reform of labour market institutions has been implemented, with the exception of active labour market policies. Progress in strengthening collective bargaining framework is slow. Important NPL measures have been taken but continued efforts are necessary to reduce the legacy NPL stock. Reforms of the education system, public administration and justice are being implemented, although with delays and difficulties. Measures to fight against tax evasion and to open product and service market have been enacted. The spending review is now an integral part of the budgetary process, which could the efficiency of public expenditure.  Banks’ asset quality (continued) The stock of non-performing loans (NPLs) amounted to EUR 324 billion in Q2 2017 (16.4 % of total customer loans) with bad debts (sofferenze) constituting around 63% of those. Tackling the legacy NPL problem would become more urgent under monetary policy normalization or in an adverse scenario. weak profitability and their ability to internally generate capital, also in light of tighter regulatory requirements. Notwithstanding some progress, challenges to comprehensively address the legacy NPL problem (and to lower the bid-ask spreads for NPLs) include: (i) the slow judiciary system for foreclosure procedures and collateral enforcement; (ii) NPL servicing remains a significant constraint; or (iii) banks might be cautious on a faster pace of NPL reduction given the adverse effects on provisioning and capital buffers as well as NPL pricing;  Other challenges related to long standing structural weaknesses (such weak profitability, overbanking, or the business model) remain.  State guarantee scheme (GACS) to support NPL securitisations, has been prolonged. The various corporate governance reforms in the banking sector seem broadly on track.  However, the legacy NPL stock remains high despite the progress and policy initiatives taken. Although the enabling law for the bankruptcy legislation was passed in October 2017, the insolvency and collateral enforcement framework continues to be insufficiently supportive of a swift NPL work-out and restructuring. Continued efforts are necessary to tackle the large NPL legacy stock, such as completing the insolvency reforms as well as improving NPL servicing and data quality that could contribute to a deeper secondary market for distressed debt. Conclusions from the IDR analysis  Very high government debt represents a major economic burden and vulnerability and sustainability risks remain high in the medium term and are on the rise in the long term. Productivity dynamics remain weak, holding back the reduction of the debt ratio and external competitiveness. The still high stock of NPLs continues weighs on banks’ balance sheets. High long-term unemployment holds back future growth.  Italy’s imbalances are no longer deteriorating. The public debt ratio is expected to broadly stabilise, yet at a level not below 130 % of GDP, over the forecast horizon. Productivity dynamics are improving very slowly with a weak outlook. This holds back the relative adjustment in unit labour costs, despite wage moderation, while non-cost factors remain insufficiently supportive of external competitiveness. The legacy NPL stock is declining slowly.  The reform of labour market institutions has been implemented, with the exception of active labour market policies. Progress in strengthening collective bargaining framework is slow. Important NPL measures have been taken but continued efforts are necessary to reduce the legacy NPL stock. Reforms of the education system, public administration and justice are being implemented, although with delays and difficulties. Measures to fight against tax evasion and to open product and service market have been enacted. The spending review is now an integral part of the budgetary process, which could the efficiency of public expenditure.   
 
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

(1)  Detailed  information  on  the  QUEST  model  and 
applications 
at: 
http://ec.europa.eu/economy_finance/research/mac
roeconomic_models_en.htm 

available 

is 

Box 3.1: Euro area spillovers 

Spillovers can affect partner economies either positively or negatively, depending on the nature of the 
shock.  Italy’s  high  public  debt  remains  a  source  of  risk  and  potential  adverse  spillovers to  the  rest  of  the 
euro area. For example, negative spillovers may arise from an abrupt change in the currently favourable risk 
perception,  including  a  faster-than-expected  rise  in  long-term  interest  rates.  On  a  more  positive  note,  the 
continuation  of  economic  reforms,  which  are  partly  linked  to  previous  reform  efforts,  can  be  expected  to 
stimulate economic activity in Italy. Spillover effects of supply-side reforms tend to be small or ambiguous 
due to the combination of income (more net imports) and competitiveness (more net exports) effects. At the 
same  time,  reforms  may  be  associated  with  stronger  private-sector 
demand reflecting an improvement in economic confidence. 
The European Commission's QUEST (1) model has been used to 
simulate  a  stylized  scenario  that  combines  a  labour  market 
reform  and  improving  economic  confidence.  In  particular,  the 
scenario  includes  an  increase  in  labour  market  participation 
(especially via higher female labour market participation) in which 
the  8-percentage-point  gap  between  Italy  and  the  EU-average  is 
halved,  i.e.  an  increase  in  labour  force  participation  in  Italy  by  4 
pps.  The  simulation  assumes  the  increase  in  the  activity  rate  to  be 
spread over 16 years, in line with the observation of slow movement 
in labour participation trends. It is assumed that the average entrant 
is as productive as the average current worker (no skill bias). 

Improving  confidence  is  captured  by  an  improvement  in 
financial  market  conditions  for  Italy.  In  particular,  the  spread  between  Italian  and  German  sovereign 
bonds (currently around 150 bps.) is eliminated. In line with analysis by Zoli (2013), it is assumed that half 
of the decline in sovereign spreads is transmitted to firm lending rates, amounting to a decline in corporate 
financing costs by more than 70 bps in annualized terms (see Zoli, 2013). GDP spillover to the rest of the 
euro area mainly occurs via the trade channel. The scenario does not include a rise in economic confidence 
in other EA countries and monetary policy rates in the EA are assumed to remain unchanged during the first 
two years. 

The  simulation  highlights  the  significant  potential  domestic  benefits  from  higher  labour  market 
participation  and  improving  confidence.  A  rising  activity  rate  translates  into  higher  employment  and 
private consumption  demand, whereas  lower  financing costs  imply a  strengthening  of  capital  spending, in 
particular corporate investment. This reform scenario points to a rise in real GDP in Italy by 1.8 % after 5 
years and 3.2 % after 10 years. In reality, participation gaps may actually differ across skill groups with new 
entrants to the labour market having a lower skill level. Hence, results on the positive GDP effect in Italy 
should be interpreted with caution and rather be regarded as an upper bound. 

The  assumed  scenario  suggests  non-negligible  spillovers.  The  spillovers  from  growing  labour  force 
participation  is  small  as  the  (income-induced)  increase  in  Italian  demand  for  imported  goods  is 
counterbalanced by a boost to exports in response to improving price competitiveness. The spillovers from 
improving confidence are unambiguously positive as higher investment demand in Italy translates into higher 
imports from other EA Member States. The later effect drives the rise in real GDP in the rest of the Euro area 
(REA) by 0.4 % after 10 years (Graph 1).  

23 

 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  FISCAL FRAMEWORK* 

Italy’s public spending remains biased towards 
old-age  pensions.  In  2016  Italy’s  real  public 
primary  expenditure  continued  to  increase  above 
potential  growth,  confirming  a  long-term  trend 
prevailing since the end of the 1990s (Graph 4.1.1, 
left-hand side). This reflects not only the country’s 
sluggish  growth  potential,  hovering  around  zero 
since  2011,  but  also  the  dynamics  of  spending 
items  like  pensions,  which  are  expected  to  have 
resumed  their  upward  trend  from  2017.  In  fact, 
both  the  2017  and  the  2018  budgets  contained 
provisions  that  partially  reverse  past  pension 
reforms  aimed  to  curb  implicit  liabilities  arising 
from  population  ageing,  not  least  by  gradually 
life  expectancy. 
adjusting  retirement  age 
Moreover,  not  only  does  Italy  have  a  larger  share 
of  population  above  65  years  old  than  the  EU 
average (see Section 4.3) but the share is projected 
to reach 24.9 % by 2025, above the EU average of 
22.2 %. As  such, Italy’s  old-age dependency ratio 
is expected at 39.6 % by 2025, compared to an EU 
average of 35.5 %. Pension expenditure is thus set 
to  increase  over  the  medium  term,  compounding 
Italy’s  long-term  fiscal  sustainability  challenges 
(see  Section  3)  and  long-standing  bias  in  the 

to 

composition  of  public  spending  (Lorenzani  and 
Reitano,  2015).  Looking  at  the  shares  of  primary 
expenditure  by  functions  between  2013  and  2016 
(Graph  4.1.1,  right-hand  side),  pensions  are  still 
the largest item, at around 15 % of potential GDP. 
They are followed by health (stable at around 7 %) 
and slightly rising ‘other social spending’ (5.8 %). 
Education,  at  8.6 %  of  primary  spending  in  2016 
(3.8 % of potential GDP), continued its decreasing 
path started in the early 2000s when it was 11.2 %. 

Systematic spending reviews and broader use of 
centralised  procurement  may  help  to  contain 
public  expenditure  growth.  The  2018  budget 
implemented  the  reformed  budgetary  process  for 
the  first  time.  In  particular,  line  ministers  were 
directly  involved  in  selecting  areas  within  their 
own  budgets  where  targeted  savings  could  be 
realised.  These  will  be  monitored  under  specific 
agreements  with  the  Ministry  of  Finance  to  be 
made  public  by  March  each  year.  Overall,  the 
spending  review  is  set  to  yield  additional  gross 
savings  of  around  EUR 3.2  billion  (0.18 %  of 
GDP)  in  2018,  also  by  rationalising  ministries’ 
expenditure  and  planning  lower  transfers  to  local 
public bodies, which might however lead to lower 
public investment as in the recent past. Centralised 
procurement is also being used more broadly, and 

Graph 4.1.1:  Evolution of real general government primary expenditure (left-hand side) and composition of primary 

expenditure by COFOG functions (right-hand side) 

Notes: 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 reported as 2-year moving averages. 
Source: Commission Services, ISTAT, and European Commission 2018b for pension expenditure 

24 

-3.0-1.50.01.53.04.56.07.59.0000102030405060708091011121314151617f18f19fPrimary expenditure excluding one-offsHealthcare consumption expenditurePension expenditurePotential GDP growthforecast%14.914.95.25.86.96.84.13.93.93.83.93.95.35.50510152025303540451316% of potential GDPPensionsOther social spendingHealthGeneral public servicesEducationEconomic affairsOther 
 
 
4.1. Public finances and taxation 

debt at the end of 2016 was around EUR 64 billion 
or  3.8 %  of  GDP.  Of  this,  a  significant  2 %  of 
GDP  consisted in  arrears beyond normal  payment 
deadlines  (Bank  of  Italy,  2017b).  A  considerable 
share  of  public  bodies  still  fails  to  communicate 
data on actual payments despite e-invoicing being 
mandatory.  The  new  ‘SIOPE  Plus’  platform  has 
been in a pilot phase since July 2017 and is set to 
gradually  involve  all  regions,  local  governments 
and  health  service  bodies  from  2018.  It  aims  to 
improve  monitoring  of  payments  and  acquire  all 
information on trade debt in real time. 

4.1.2.  TAXATION* 

The tax burden on factors of production is still 
among the highest in the EU, and efforts to shift 
it to property and consumption remain limited. 
The  tax  wedge  on  labour  (17)  was  one  of  the 
highest  in  the  EU  in  2016  (47.8 %  at  the  average 
wage, compared to the EU average of 40.6 %). In 
2016,  the  implicit  tax  rate  on  labour  stood  at 
42.6 %, among the highest in the EU, and in 2015 
the  tax  burden  on  capital  reached  one  of  the 
highest level in the EU (10.9 % of GDP, compared 
to the EU average of 8.4 %). Yet, measures to shift 
the tax burden to other tax bases have been limited. 
Namely,  there  have  been  delays  in  reforming  the 
outdated  cadastral  system,  reintroducing  first 
property  taxation  on  high-income  households, 
setting  up  a  digital  platform  for  immovable 
properties,  and  reducing  the  number  and  scope  of 
tax  expenditures.  While 
latter  are  now 
reviewed  annually,  the  government  has  recently 
increased  the  number  of  tax  credits  rather  than 
rationalising them. 

the 

Tax  incentives  to  support  employment  and 
investment  have  been  extended.  Past  provisions 
to  reduce  the  tax  wedge  on  labour  through  fiscal 
incentives were, with a few exceptions, temporary 
and  due  to  expire  in  2018.  Yet,  the  2018  budget 
extended  some  of  them  permanently  (see  Section 
4.3).  The  budget  also  extended  the  possibility  for 
firms to deduct from the tax base more than 100 % 
of  the  amount  spent  in  certain  types  of  new 
investment in 2018 and 2019 (‘super-’ and ‘hyper- 
amortisation’ for software, instrumental and digital 
equipment). This was accompanied by a reduction 

the  new  Code  of  Public  Procurement  has  the 
potential  to  increase  it  further.  Around  EUR  50 
billion of public expenditure is already covered by 
the  national  central  purchasing  body  Consip  (out 
of EUR 89 billion for public procurement overall) 
and estimated average savings amount to 14 % on 
observed  unit  prices (Consip,  2016).  A  permanent 
‘technical  working  table’  completed  the  list  of 
goods  and  services 
that  all  administrations, 
including local authorities,  must purchase through 
the  32  procurement  aggregator  centres.  However, 
the  decrees  needed 
this  provision 
operational  and  to  complete  Consip’s  benchmark 
for goods and services are still pending. 

to  make 

Medium-term  budgetary  planning  remains 
weak,  hampering  predictability.  The  2018 
budget confirmed the chronic practice of including 
large  VAT  rate  increases  (now  worth  0.7 %  of 
GDP  in  2019  and  1 %  in  2020)  as  ‘safeguard 
clauses’. These ensure the attainment of the fiscal 
targets  in  the  outer  years  but  are  systematically 
deferred  at  the  time  of  budget  preparation.  The 
budgetary  process  has  also  been 
recently 
in  budget 
characterised  by  frequent  changes 
composition and in the fiscal targets, mostly in the 
direction  of 
less  ambitious  deficit  reduction 
objectives.  For  instance,  the  fiscal  effort  targeted 
for  2018  by  the  2017  Stability  Programme  was 
revised downward; the simplified tax regime (IRI) 
originally  planned  for  2017  by  the  2017  budget 
was  postponed  to  2018;  and  the  spending  cuts  to 
be  attained  by  the  regions  under  past  provisions 
were systematically revised (UPB, 2017). 

commercial 

transactions  with 

Late  payments  by  the  public  administration 
remain a problem but monitoring is improving. 
The extension of mandatory electronic invoicing to 
all 
public 
administrations in 2015 has provided them with an 
incentive  to  improve  their  payable  accounts  and 
better  monitor  and  reduce  the  average  payment 
period.  The  latter  has  continued  to decrease  but it 
still  amounted  to  100  days  at  the  beginning  of 
2017 (16)  (Bank  of  Italy,  2017b).  The  European 
Commission  referred  Italy  to  the  Court  of  Justice 
of  the  EU  under  an  infringement  procedure 
initiated  in  2014  for  lack  of  compliance  with  the 
limits  prescribed  by  the  Late  Payment  Directive. 
Overall,  the  stock of  public  administrations’  trade 

(16)  Based only on recorded payments, the authorities estimate 

(17)  The tax wedge on labour is the difference between the total 

an average payment period of 58 days in 2016. 

cost of employing a worker and the worker’s net earnings. 

25 

 
                                                           
                                                           
4.1. Public finances and taxation 

in the level of tax relief on instrumental equipment 
(from  140 %  to  130 %).  Instead,  the  government 
postponed to 2018 the entry into force of the new 
tax on corporate income (at 24 %, in line with the 
statutory  corporate  tax  rate  enacted  in  2017), 
originally meant to harmonise the tax treatment of 
small firms and corporations from 2017. The debt 
bias  in  corporate  taxation  has  also  been  widened 
by  reducing  the  notional  return  on  new  equity 
capital  or  reinvested  earnings  exempted  from  the 
corporate  income  tax  under  the  ‘allowance  for 
corporate  equity’  (ACE)  (from  2.3 %  to  1.6 %  in 
2017 and from 2.7 % to 1.5 % in 2018).  

Rationalising  aspects  of  the  tax-benefit  system 
to encourage more women to work would boost 
growth. The take-up of work by second earners is 
still limited in Italy and support measures to tackle 
this  issue  remain  fragmented  (see  Section  4.3). 
Namely,  the  major  four  existing  childcare-related 
bonuses  are  characterised  by  temporary  nature, 
overlapping  eligibility conditions  and  unclear  link 
to the working mothers’ needs. Simulations carried 
out  with  EUROMOD  (Box  4.1.1)  suggest  that 
mothers would increase labour supply substantially 
if  those  four  existing  bonuses  were  replaced  by  a 
single  permanent  in-work  benefit  targeting  only 
lower-income working mothers with children aged 
is 
under 
estimated  to  increase  aggregate  labour  supply  by 
around 2.3 %, corresponding to an impact of 0.4 % 
of GDP over five years relative to the baseline. 

three.  This  budget-neutral 

reform 

The VAT gap remains high but measures have 
been  taken  to  fight  tax  fraud,  notably  for 
indirect  taxes.  In  2015,  Italy’s  VAT  gap (18),  at 
25.8 %  of  the  total  tax  liability,  was  among  the 
highest  in  the  EU  (CASE  et  al.,  2017)  despite  a 
decrease  compared  to  2014.  Measures  to  combat 
tax fraud were a pillar of Italy’s budgetary strategy 
for  2017  and  2018.  Namely,  in  2017  the  ‘split 
payment’ (19)  was  extended  to  all  transactions  by 
public  administrations,  by  companies  under  direct 
or indirect public control, by professionals dealing 
with  the  public  administration,  and  by  listed 
companies  included  in  the  main  stock  market 
index. Moreover, the existing mandatory electronic 
the  public 
invoicing 

transactions  with 

for 

(18)  The  VAT  gap  is  the  difference  between  expected  and 

actual VAT revenues. 

(19)  Under  the  ‘split  payment’  system,  payments  by  public 
administrations  to  private  suppliers  do  not  include  VAT, 
and the latter is directly paid to the state budget. 

to 

further 

already 

equipped 

e-invoice 

administration  has  been  extended  to  all  private 
sector transactions from 2019, except for taxpayers 
subject  to  a  simplified  tax  regime.  The  extension 
applies  from  2018  in  the  fuels  sectors  and  for 
subcontractors  in  public  procurement.  If  properly 
implemented, this could ensure better control over 
commercial  transactions,  encourage  e-payment  of 
invoices  and,  in  turn,  increase  tax  compliance 
without  imposing  a  large  additional  burden  on 
firms 
the 
administrations. Other provisions to fight tax fraud 
included 
automatic 
compensation  of  tax  credits  with  tax  dues;  lower 
thresholds  for  enhanced  tax  checks  by  the  public 
administration  before  proceeding  to  a  payment; 
and  a  new  system  of  preventive  fulfilment  of  tax 
obligations  in  the  case of  intra-EU  transactions  in 
mineral oils. However, especially in the absence of 
strict limits on cash payments, the ability of those 
provisions  to  reduce  ‘tax  evasion  with  consent’ 
remains  to  be  seen.  Moreover,  the  repeatedly 
extended  possibility 
to  avoid 
for 
sanctions  by  spontaneously  regularising  their  tax 
position  could  discourage  future  compliance  by 
becoming an implicit reward to non-compliance. 

limits  on 

taxpayers 

the 

A  reform  of  the  tax  system  and  tax  trial  could 
improve  tax  collection  and  reduce  litigation. 
Some  features  of  the  tax  administration  remain 
burdensome  for  businesses.  For  instance,  it  takes 
longer  in  Italy  for  a  small  firm  to  file  tax  returns 
than  in  the  rest  of  the  EU  (World  Bank,  2017). 
Moreover,  among  all  sections  of  the  Court  of 
Cassation,  the  tax  section  continued  having  in 
2017  the  longest  disposition  time  (5.3  years),  the 
lowest clearance rate (68 %) and the highest share 
in  overall  civil  cases  incoming  (38.1 %)  and 
pending  (48.4 %)  at  the  Supreme  Court  (Corte  di 
Cassazione,  2017).  Yet,  a  slight  reduction  in  tax 
litigation in regional and provincial tax committees 
was possibly due to the broader use of alternative 
dispute  resolution  tools.  A  few  measures  were 
taken  to  improve  tax  collection  and  reduce  tax 
litigation, although a comprehensive reform of the 
tax administration and tax trial is still pending. For 
instance, digitalisation of tax trials was extended to 
the whole country in July 2017, helping to reduce 
formalities  and  delays.  The  2018  budget 
implemented  mutual  agreement  procedures  for 
international  tax  disputes  and  provided  for  hiring 
for three years up to 50 additional auxiliary judges 
currently  retired  to  help  the  Court  of  Cassation 
manage its pending tax trials. 

26 

 
                                                           
4.1. Public finances and taxation 

Box 4.1.1: Effects on labour supply from rationalising childcare benefits 

Simulations  of  the  effects  on  labour  supply  and  growth  of  a  rationalisation  of  existing  family  support 
policies  in  Italy  have  been  conducted  by  the  Joint  Research  Centre  of  the  European  Commission  using 
EUROMOD. (1) The introduction of a more targeted in-work benefit to raise low female participation in the 
labour market has been part of a long-standing policy debate in Italy and was also proposed by the president 
of  the  National Social  Security  Institute  (INPS).  Numerous  measures,  mostly  of  a  temporary  nature,  were 
enacted  in  past  years,  coupling  the  objectives  of  supporting  fertility  rates  and  addressing  the  childcare-
related needs of working mothers often in an unclear way and with overlapping beneficiaries.  

As a first step, EU-SILC data for Italy and EUROMOD (policy year 2017) were used to simulate the fiscal 
impact  of  repealing  the  four  largest  family  bonuses  currently  in  place  (INPS,  2016):  (a) "Voucher  baby-
sitting"  (in  2017-2018  working  mothers  can  request,  within  11  months  of  the  end  of  parental  leave,  a 
voucher to cover baby-sitting or crèche costs for a maximum period of 6 months); (b) "Bonus bebè" (a 3-
year monthly bonus of EUR 80 to families with a child born or adopted over 2015-2017 and an Equivalent 
Financial Position Indicator –ISEE– of at most EUR 25 000); (c) "Bonus mamma" (a one-off premium of 
EUR 800 in case of a child born or adopted as of 2017); and (d) "Assegno di maternità" (support provided 
by Municipalities to mothers below a specific income threshold for children born or adopted). Following the 
repeal of the four bonuses, the available fiscal resources are estimated at EUR 2.3 billion. As a second step, 
the effect of using the freed resources to introduce a single permanent in-work benefit for working women 
with  children  was  simulated.  In  order  to  ensure  budgetary  neutrality,  the  new  bonus  has  the  following 
features: (a) it is only given to wage-employed women with an ISEE lower than EUR 50 000 not receiving 
any  disability  benefits  and  living  with  partners  working  full-time  (the  last  condition  in  order  to  allow  the 
assessment  of  their  labour  supply  behaviour);  (b)  their  children  are  younger  than  3  years  old  and  attend 
childcare services; (c) the benefit corresponds to actually incurred childcare costs up to a cap of EUR 600 
per month; and (d) the benefit has a default duration of 12 months, unless the eligible child reaches the age 
of 3 by September 2015 (year of EUSILC data), in which case the entitlement is only for 8 months, or is 
younger than 12 months by September 2015, in which case the entitlement corresponds to the duration of 
childcare after the maternity leave. 

The  results  (Graph  1)  indicate  that  the  average 
benefit  amounts  to  around  265  EUR  per  month  and 
involves  approximately  700 000  working  women  in 
Italy.  The  estimated  impact  on  the  labour  supply  of 
the  eligible  women  is  significant  and  consists  in  an 
increase  in  labour  market  participation  by  around 
17 %  (i.e.  around  113 000  working  women)  and  of 
average  weekly  working  hours  by  around  20 % 
(namely,  full-time  work  would  increase  by  around 
24 %, long part-time by around 13 % and short part-
time  by  around  7 %  compared  to  the  baseline).  This 
corresponds to an overall impact on aggregate labour 
supply of around 0.8 %. While the working mothers' 
disposable  income  slightly  increases,  the impact of  
the reform on income distribution, as measured by the Gini index of inequality, is very marginal. Including 
the mentioned labour supply shock in QUEST III (the European Commission's dynamic general stochastic 
equilibrium model), the overall estimated impact amounts to around 0.4 % of GDP over five years relative 
to the baseline, mainly through the channel of an increase in employment by 0.5 %. 

(1)  EUROMOD  is  the  tax-benefit  microsimulation  model  for  the  EU.  It  simulates  individuals'  and  households'  benefit 
entitlements and tax liabilities (including social security contributions) according to the rules in place in each Member 
State.  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. 

27 

0.78%1.10%0.15%0.68%0%5%10%15%20%25%Graph 1: Labour supply responseEligible mothersWhole population 
 
 
4.2.  FINANCIAL SECTOR 

Market  confidence 
in  Italian  banks  has 
increased  as a  result  of  long-awaited  actions  to 
deal with some of the weakest banks. The Italian 
several  measures 
adopted 
authorities  have 
including  the  Salva  Risparmio  decree  law,  which 
enabled the precautionary recapitalisation of Banca 
Monte  dei  Paschi  di  Siena  (BMPS).  Furthermore, 
Banca  Popolare  di  Vicenza  (BPVi)  and  Veneto 
Banca  (VB)  were  put  into  liquidation  under 
national insolvency proceedings in mid-2017. This 
alleviated  the  most  acute  risks  in  the  banking 
sector.  On  the  back  of  the  economic  recovery, 
Italian  banks  have  continued  the  restructuring 
process  by  further  increasing  provisioning  and 
accelerating  the  disposal  of  their  high  stock  of 
NPLs, 
State-guaranteed 
transactions.  Consolidation  has 
securitisation 
further progressed due to bank restructuring, while 
some  banks  plan  to  significantly  reduce  branches 
and staff. 

including 

through 

of 

system 

opportunity 

the  banking 

narrow  window 

However, 
remains 
vulnerable. The current economic recovery offers 
a 
to 
comprehensively  address  the  remaining  structural 
weaknesses.  High  NPLs  continue  to  constrain 
banks’  weak  profitability  and  their  ability  to 
internally  generate  capital,  also  in  light  of  tighter 
regulatory  requirements.  Although  the  level  of 
NPLs  is  expected  to  significantly  decline  in  the 
near  future  thanks  to  the  planned  NPL  disposals, 
continued  efforts  are  necessary  to  tackle  the  large 
stock  of  legacy  NPL.  This  includes  completing 
reforms  on 
framework  and 
insolvency 
collateral  enforcement  as  well  as  improving  NPL 

the 

servicing and data quality that could contribute to a 
deeper secondary market for distressed debt. With 
the economic tailwinds, banks are able to seize the 
opportunity  to  address  their  structurally  weak 
profitability  through  comprehensive  cost-cutting, 
restructuring  and  by  adapting  business  models. 
Swift  and  full  implementation  of  the  corporate 
governance reforms, in particular the consolidation 
of the small cooperative banks, is key to increasing 
the  resilience  of  the  banking  system.  Overall, 
fixing  structural  weaknesses  would  help 
the 
banking  system  enhance  its  intermediary  role  for 
an  efficient  allocation  of  capital  and  would 
strengthen the economic recovery. 

Progress  is  being  made  with  reducing  NPLs, 
but  the  legacy  NPL  stock  remains  high.  The 
total  stock  of  gross  NPLs  continues  to  decline, 
amounting  to around  EUR 324 billion in Q2 2017 
(implying  a  16.4  %  NPL  ratio),  down  from  the 
crisis peak of EUR 360 billion. In this regard, bad 
debts (sofferenze), i.e. debt with the worst recovery 
prospects, have also dropped on the back of banks’ 
NPL  disposals.  The  bad  debt  coverage  ratio  has 
further  improved  (Table  4.2.1).  Importantly,  the 
inflow of new NPLs relative to the loan stock has 
returned  to  pre-crisis  levels.  Meanwhile,  banks’ 
capitalization levels have remained stable.  

Low  profitability  continues  to  be  a  major 
challenge,  while  liquidity  remains  comfortable. 
Several  factors  are  straining  banks'  profitability: 
the low interest rate environment; the still subdued 
credit  recovery  amid  the  ongoing  deleveraging 
process  (see  Section  1);  the  elevated  loan-loss 

Table 4.2.1: 

Italian banking system key indicators  

Notes: In general, figures are the latest available and are taken at the end of the indicated periods with the exception of 
2017. Gross non-performing loans (NPLs) are gross of loan loss provisions. Bad loans are the worst category of NPLs. Domestic 
sovereign exposure relates only to sovereign debt securities. Data on banks' capital prior to 2014 are the pre-Basel 3 
indicators with common equity tier 1 as core tier 1. ‘-‘ indicates that a figure is not available. 
Source: Bank of Italy 

28 

Indicator2008200920102011201220132014201520162017Total assets (EUR billion)3,634.63,690.73,758.94,034.74,211.04,038.34,014.33,913.53,919.73,920.0Gross NPLs (EUR billion)87.1132.8157.5194.8236.9282.5326.6340.9349.0324.0Gross bad loans (EUR billion)41.359.277.8107.2125.0155.9183.7200.9215.0205.0Gross NPL ratio5.1%7.8%8.9%10.8%13.3%16.7%17.1%17.0%17.3%16.4%Gross bad loan ratio2.5%3.6%4.5%6.0%7.0%9.2%9.6%10.0%10.7%10.4%NPL coverage ratio46.2%40.2%40.4%40.3%38.8%41.8%44.4%45.4%46.4%53.5%Bad loan coverage ratio63.1%60.4%58.0%56.3%54.6%56.9%58.7%58.7%59.0%65.6%New NPL flow as % of NPL stock4.2%5.1%3.9%3.8%5.4%5.9%5.3%3.3%2.3%1.7%New bad loan flow as % of bad loan stock1.6%1.9%1.9%2.0%2.8%2.8%2.8%2.6%2.4%1.8%Eurosystem financing (EUR billion)50.327.247.6210.0271.8235.9194.5158.3204.2251.6Domestic sovereign exposure (EUR billion)174.9205.3252.6265.4354.5402.1401.8387.2375.0355.7Common equity tier 1 capital ratio 7.1%8.2%8.3%9.3%10.6%10.5%11.9%12.3%11.5%12.5%Total capital ratio 10.8%12.0%12.4%13.0%13.8%13.9%14.6%15.1%14.2%15.5%Cost-to-income ratio64.2%63.0%65.0%67.6%62.6%61.7%62.2%64.1%67.6%64.5%Return on equity4.5%3.8%3.4%-9.3%-0.1%-7.8%-1.8%2.6%-5.7%4.8%Number of banks799788760740706684664643604-Number of branches34,13934,03633,66333,60732,88131,76130,74030,25829,027-Number of employees-330,512326,367322,345315,238310,258303,595302,728299,645- 
 
 
 
 
4.2. Financial sector 

their  financial  situation, 

Atlante  I's  total  capital  injection  to  EUR 3.5 
billion).  However,  as  a  result  of  both  banks' 
significant losses in recent years and the continued 
the 
deterioration  of 
conditions for a precautionary recapitalisation, (20) 
which  the  banks  requested  in  March  2017-  were 
not  met,  and  the  ECB  declared  them  failing  or 
likely to fail on 23 June 2017. Following this, the 
Single  Resolution  Board  (SRB)  —  the  competent 
resolution  authority  —  decided  that  a  resolution 
action was not in the public interest in either case. 
This  meant  that  both  banks  had  to  be  liquidated 
under national insolvency proceedings. On 25 June 
2017,  following  the  ECB  and  SRB  decisions,  the 
European  Commission  approved,  under  EU  State 
aid  rules,  the  measures  proposed  by  Italy  to 
facilitate  the  liquidation  of  BPVi  and  VB.  These 
measures  included  inter  alia  the  partial  sale  of 
their good assets and liabilities to Intesa Sanpaolo, 
while  the  NPLs  remained  in  the  entities  for 
liquidation.  The  sale  of  the  good  assets  of  both 
banks  was  supported  by  the  Italian  government 
through  cash  injections  (EUR 4.8  billion)  and  a 
maximum  of  about  EUR 12  billion  in  State 
guarantees.  In  line  with  EU  State  aid  rules,  to 
reduce  the  cost  for  taxpayers,  burden-sharing  was 
applied  to  the  shareholders  and  subordinated 
bondholders of the two Venetian banks.(21) 

The  precautionary  recapitalisation  of  Banca 
Monte  dei  Paschi  di  Siena  (BMPS)  alleviated 
the  bank’s  acute  vulnerabilities.  BMPS  applied 
for  a  precautionary  recapitalisation  by  the  Italian 
State in December 2016. (22) It had failed to raise 
capital  from  private  investors  that  month  and  had 
been  in  trouble  since  2009,  benefiting  from 
previous  recapitalisations  (which  had  been  repaid 
in  2015).  On  4  July  2017,  the  Commission 

failing-or-likely-to-fail  by 

(20)  Precautionary  recapitalisation  is  an  exception  under  the 
Bank  Recovery  and  Resolution  Directive  (BRRD)  to  the 
principle that the granting of State aid to a bank triggers the 
the 
bank  being  deemed 
competent authority (Article 32(4)(d)(iii) of the BRRD).   
(21)  Vulnerable retail junior bondholders subject to mis-selling 
by  the  liquidated  banks  are  entitled  to  compensation  
through  the  same  mechanism  used  to  compensate  junior 
retail  investors  in  the  four  small  banks  resolved  in  2015 
(via the bank-funded solidarity fund, which is managed by 
the Italian deposit guarantee scheme of credit institutions).  
(22)  This  followed  the adoption of  the  Salva  Risparmio  decree 
law by the government with measures to protect vulnerable 
banks.  The  decree  law  established  a  liquidity  guarantee 
scheme  and  a  precautionary  recapitalisation  mechanism 
(backed  by  EUR 20  billion  in  funds),  a  burden-sharing 
approach and a compensation mechanism for selected retail 
subordinated bondholders (used by BMPS). 

provisioning;  and  the  high  cost-to-income  ratios 
for  several  banks. 
In  contrast,  system-wide 
liquidity  has  remained  comfortable  amid  overall 
low  bank  funding  costs.  The  largest  banks  have 
boosted  their  deposit  funding  as  a  result  of  the 
recent restructuring and consolidation of the Italian 
banking  system.  Meanwhile,  the  issuance  of  debt 
instruments  by  banks  has  declined,  mainly  due  to 
the  decrease  in  issuances  of  retail  bonds.  In 
addition,  banks’  reliance  on  ECB  financing 
including 
long-term 
the 
refinancing  operations  (TLTROs)  has  remained 
substantial  at  EUR 252  billion  (6.5 %  of  banks’ 
liabilities)  in  November 2017.  Banks  continue  to 
be  important  holders  of  domestic  sovereign  debt 
with  17.2  %  of  outstanding  public  debt  in  Q3 
2017,  which  shows  the  persistence  of  the  bank-
sovereign  nexus.  Subordinated  bank  debt  held  by 
retail  investors  continues  to  decline  (in  line  with 
the maturing outstanding stock).  

targeted 

through 

Italian 

banks). 

Italian  banks  underperform  their  European 
peers on several indicators. Despite the progress 
made,  a  simple  benchmarking  exercise  (Graph 
4.2.1) for the banking system as a whole illustrates 
that Italian  banks  continue  to  lag behind  their  EU 
peers  (with  arguably  some  differences  between 
individual 
Below-average 
profitability  and  capitalisation  make  the  Italian 
banking  system  more  vulnerable  to  downside 
shocks. In spite of the progress, Italy still exhibits 
very  high  NPL  ratios  relative  to  EU  peers.  In 
addition,  their  low  operational  efficiency  (as 
proxied  by  cost-to-income)  has  hindered  a  more 
rapid  increase  in  NPL  provisioning  coverage, 
which  could  have  accelerated  NPL  disposals. 
Despite  the  positive  developments,  Italian  banks 
still lag behind some of their peers in rationalising  
branches and staff since the beginning of the crisis. 
This highlights that Italian banks still have a long 
way to go in improving their operational efficiency 
towards the best performers in the EU.  

Recent bank cases* 

In  the  first  half  of  2017,  government  actions 
were  taken  to  address  some  of  the  weakest 
Italian  banks.  The  process  that  led  to  the 
liquidation  of  Banco  Popolare  di  Vicenza  (BPVi) 
and  Veneto  Banca  (VB)  was  protracted:  The 
Atlante  I  fund  acquired  both  banks  following  two 
unsuccessful  IPOs  in  May  and  June  2016.  It  then 
injected  further  capital  in  January  2017  (bringing 

29 

 
                                                           
4.2. Financial sector 

Graph 4.2.1:  Benchmarking the Italian Banking System 

Notes: The averages for return on equity and the cost-to-income ratios are based on Q4 2016 - Q3 2017.  The left graph 
excludes Luxembourg and the right graph excludes Cyprus and Greece. 
Source: ECB, European Commission calculations 

authorised  the  Italian  authorities  to  conduct  the 
precautionary  recapitalisation  of  BMPS  under  EU 
rules, on the basis of a thorough restructuring plan 
including  disposal  of  a  significant  portfolio  of 
impaired assets. The precautionary recapitalisation 
entails  State  aid  of  EUR 5.4  billion,  whereas  the 
shareholders  and  subordinated  debtholders  of 
BMPS  contributed  EUR 4.3  billion,  thus  limiting 
the  cost  for  taxpayers.  The  bank  will  dispose  of 
EUR 26.1  billion  of  gross  NPLs  through  a  NPL 
securitisation  transaction,  which  is  expected  to 
(Garanzia 
benefit 
Cartolarizzazione Sofferenze -GACS) and funding 
from  the  Atlante  II  fund  (recently  renamed  the 
Italian Recovery Fund). The Italian Recovery Fund 
will  invest  in  the  mezzanine  and  junior  tranches 
issued  by  the  special  purpose  vehicle  (SPV)  at  a 
disposal price of 21 % of the gross book value.  

from  State 

guarantees 

Asset quality* 

rather  subdued,  as 

NPL  securitisation  has  developed 
into  an 
important  strategy  for  banks  to  clean  up  their 
balance  sheets.  Banks'  take-up  of  the  GACS  was 
initially 
first  State 
guarantees  on  the  senior  tranche  of  an  NPL 
securitisation  vehicle  were  granted  only  in  early 
2017.  However  since  then,  especially  large  and 
medium-sized  banks  have  expressed  interest  in  or 
taken  first  steps  towards  using  GACS.  Several 
securitisation transactions have been completed or 

the 

and 

vehicles 

launched,  including  the  BMPS  securitisation,  the 
biggest  NPL  securitisation  ever  on  the  Italian 
market.  The  securitisation  rules  were  amended  in 
2017  to  facilitate  the  securitisation  of  some 
categories  of  NPLs  (in  particular  unlikely-to-pay 
loans), increase the room for manoeuvre of special 
encourage 
(SPVs) 
purpose 
participation  in  foreclosure auctions.(23) However, 
the  GACS  has  not  been  the  one-size-fits-all 
solution  to  address  the  legacy  NPL  problem  for  a 
number of reasons: (i) the absence of detailed loan 
portfolio  data,  especially  for  smaller  banks,  has 
slowed  down  GACS  transactions,  including  the 
rating  process  by  credit  rating  agencies;  (ii)  some 
banks  hesitate  to  take  on  the  upfront  costs  of 
improving  NPL  data  quality  and  NPL  servicing 
arrangements in order to participate in the GACS; 
(iii) some loan portfolios that are of poor quality or 
older NPL vintages are often not securitised with a 
view of applying for GACS. 

(23)  The  main  novelties  of  the  amendments  to  Law  130/1999 
are the following: i) SPVs that acquire and securitise NPLs 
are  allowed  to  grant  new  loans  to  certain  categories  of 
borrowers  where  this  facilitates  the  restructuring  of  the 
financial  position  of  borrowers  and  the  repayment  of 
outstanding debt; ii) SPVs are allowed to buy assets placed 
as  collateral  for  secured  loans.;  iii)  the  simplification  of 
to  SPVs  by 
loan 
exempting these transfers from the obligation to notify the 
borrowers, as provided by the Italian Civil Code. 

transfers  from  originating  banks 

30 

ATEUBEBGCZDEDKEEESFIFRGBGRHRHUIEITLTLVMTNLPLPTROSESISK-5-3-11357911131510121416182022Return on equity (%, average)Tier 1 ratio (%, Q3 2017) ATEUBEBGCZDEDKEEESFIFRGBHUIEITLTLULVMTNLPLPTROSESISK4045505560657075051015cost-to-income ratio (%, average)NPL ratio (%, Q3 2017) 
                                                           
 
4.2. Financial sector 

A number of significant challenges remain for a 
faster NPL resolution. These include: (i) the slow 
judiciary  system  for  foreclosure  procedures  and 
collateral  enforcement  (see  below);  (ii)  NPL 
servicing  remains  a  significant  constraint  for  a 
faster  NPL  disposal  and  internal  work-out  due  to 
the  limited  number  of  servicing  companies  and 
human capital; (iii) banks might be cautious about 
a  faster  pace  of  NPL  reduction  given  the  adverse 
effects on provisioning and capital buffers as well 
as NPL pricing; (IV) the NPL data quality problem 
especially for smaller banks. These factors help to 
explain  why  the  bid-ask  spread  for  NPLs  is  still 
hovering 
competent 
around  15-20 %.  The 
supervisors should continue to encourage banks to 
have  credible  NPL  reduction  plans  to  further 
reduce their legacy NPL stock in a timely manner. 

Less significant institutions*  

While less significant institutions have a higher 
capitalisation  on  average,  their  asset  quality  is 
weaker  than  larger  banks.  Less  significant 
institutions  (LSIs)  -  smaller  banks  under  Bank  of 
Italy  supervision  -  are  typically  more  exposed  to 
struggling SMEs. They also have a lower capacity 
to work out impaired assets compared to the larger 
SSM-supervised  banks.  In  June  2017,  LSIs 
continued to have higher NPL ratios (19.5 %) than 
the  large  banks  and  the  average  NPL  ratio  at 
system  level  (16.4 %).  Despite  the  asset  quality 
challenges, LSIs were on average as profitable and 
liquid  as  the  large  banks  in  2016,  but  they  are 
faced  with  more  pressure  to  generate  interest 
income 
rate 
environment.  However,  LSIs  continue  to  be  on 
average better capitalised than the large banks.  

the  current 

interest 

low 

in 

The  supervisor  has  stepped  up  the  prudential 
oversight of LSIs. In October 2017, Bank of Italy 
launched a public consultation on the guidance on 
NPLs for LSIs, issued in January 2018. This draws 
upon  the  ECB  guidance  to  banks  on  NPLs  issued 
in  March  2017.  The  Bank  of  Italy  guidance 
touches upon operational issues but also provisions 
adapted to the specific situation of LSIs. The Bank 
of  Italy  plans  to  exercise  enhanced  supervisory 
scrutiny of the NPL plans of LSIs with higher NPL 
levels, which could include a request for corrective 
measures  such  as  higher  coverage  ratios.  Related, 
the  Bank  of  Italy  has  started  to  capture  LSIs  in 
stress  testing  exercises  and  has  the  power  to 
request  banks  to  increase  capital  buffers  in  the 

The  Italian  Recovery  Fund  has  become  the 
main  NPL  investor  in  Italy.  With  an  NPL 
securitisation investment of EUR 2.5 billion so far 
(involving roughly EUR 31 billion of gross NPLs), 
the  Italian  Recovery  Fund  has  supported  the  NPL 
disposal by four vulnerable banks. Disposal prices 
in  the  NPL  securitisation  transactions  ranged 
between  19 %  and  32 %  of  the  gross  book  value, 
which  reflects  the  different  composition,  data 
quality  and  impairment  degree  of  securitised 
assets. The Fund has also contributed to the further 
development  of  the  asset  servicing  market,  as  it 
entered into several agreements with CERVED on 
the servicing of securitised portfolios.  

reflects 

NPL disposal gained momentum in 2017. Banks 
have  continued  to  upgrade  their  capacity  to 
manage  arrears.  While  some  of  them  are  still 
considering  the  NPL  internal  work-out  as  their 
main  priority,  they  have  also  made  increased  use 
of  outright  NPL  sales.  The  secondary  market  for 
impaired assets has become more dynamic than in 
the  economic 
previous  years.  This 
recovery,  supervisory  pressure  for  banks 
to 
accelerate the pace of NPL resolution (via the ECB 
NPL  guidance  and  bank-specific  quantitative 
targets  set  by  the  supervisor)  and  also  the  GACS 
guarantee scheme. Both domestic and foreign NPL 
buyers  have  been  very  active.  For  instance, 
Unicredit  has  sold  a  mainly  unsecured  NPL 
portfolio  of  EUR 17.7  billion  to  two  foreign 
private  equity  firms  in  July  2017.  The  EUR 26.1 
billion  BMPS  NPL  securitisation  transaction  is 
also  in  the  pipeline,  while  EUR 17.8  billion  of 
NPLs have been removed from the banking system 
by the liquidation of the two Venetian banks. The 
completed  NPL  disposals 
in  2017  until  Q3 
amounted to EUR 26 billion. Despite the increased 
volume,  NPL  prices  for  unsecured  and  secured 
loan portfolios have remained relatively stable.(24) 
Outright  NPL  sales  are  expected 
to  further 
increase, as banks are continuing to optimise their 
NPL management and disposal strategies inter alia 
supervisory 
to 
requirements.  For 
the  ECB  draft 
instance, 
addendum (pillar 2) as well as the EC proposal on 
a  prudential  (pillar  1)  backstop 
to  address 
underprovisioning for new NPLs might incentivise 
Italian banks to accelerate their NPL clean-up. 

comply  with 

additional 

(24)  In  2016,  the  average  recovery  rate  of  disposed  NPLs  was 
23.5 % (compared with 43.5 % for NPLs that were worked 
out internally) (Conti et al, 2017).  

31 

 
                                                           
4.2. Financial sector 

institutions, 

strengthen  the  corporate  governance  of  the  Italian 
credit 
the  Ministry  of  Finance 
finalised  a  public  consultation  on  a  draft 
ministerial decree law on fit and proper provisions 
for bank directors. While being consistent with the 
EBA  guidelines  on  fit  and  proper,  the  draft 
ministerial  decree  law  introduces  a  new  approach 
to  the  rules  for  bank  directors        and  expands  the 
scope  for  the  suitability  assessment.  The  new 
framework  will  allow  the  competent  supervisory 
authority to carry out more effective enforcement.  

Insolvency reforms*  

in 

the 

insolvency 

Weaknesses 
framework 
remain  with  a  comprehensive  reform  still 
pending.  The  Italian  Parliament  has  empowered 
the  government  to  adopt  within  12  months  the 
necessary legislative decrees, aimed at introducing 
an  organic  reform  of  the  1942  bankruptcy  code, 
the  over-indebtedness  legislation  from  2012  and 
the  system  of  privileges  and  guarantees.  Despite 
the  declining  number  of  insolvency  proceedings, 
weaknesses  in  the  insolvency  framework  persist. 
The  impact  of  the  insolvency  reforms  is  expected 
to  only  materialise  in  the  medium  term.  In 
addition, the overhaul of the insolvency legislation 
is  still  ongoing,  which  contributes  to  the  still 
lengthy process for enforcing property collateral (4 
years 
in  2016)  and  completing  bankruptcy 
proceedings  (6.8  years).  Moreover,  the  creditors’ 
role  in  insolvency  proceedings  is  still  minimal. 
Meanwhile,  the  number  of  companies  initiating 
insolvency  proceedings  or  voluntary  liquidation 
declined  5.3 %  year-on-year  in  the  first  half  of 
2017.  

in  2016 

to  accelerate 
Measures  adopted 
collateral enforcement are not being used yet by 
banks. The Patto Marciano (adopted in 2016) is a 
private  enforcement  clause  in  credit  agreements, 
which  allows  creditors  to  take  ownership  of  the 
collateral  out-of-court  in  case  of  the  borrowers' 
default. Whereas the Patto Marciano could help to 
significantly  reduce  the  time  needed  to  enforce 
collateral,  it  is  not  currently  used  by  credit 
institutions  for  firms  and  households.  The  recent 
agreement 
Italian  Banking 
Association  and  Confindustria  to  promote  the  use 
of the Patto Marciano for firms is a welcome step. 
Operational  guidelines  on  best  practices  and 
clearer  rules  on  the  valuation  of  collateral  would 
help to alleviate any remaining uncertainty.  

between 

the 

event  of  a  potential  capital  shortfall  as  a  result  of 
stress tests. 

Corporate governance reforms*  

The  completion  of  the  reform  of  the  large 
cooperative banks (banche popolari) is ongoing. 
With the exception of two banche popolari (Banca 
Popolare  di  Bari  and  Banca Popolare  di  Sondrio), 
all  banche  popolari  with  assets  above  EUR  8 
billion  transformed  themselves  into  joint-stock 
companies before the end of 2016. The two banche 
their 
popolari  mentioned 
transformation,  as  the  2015  reform  of  large 
cooperative  banks  has  been  subject  to  legal 
challenges 
the  Constitutional  Court. 
Nonetheless,  the  reform  has  already  led  to  the 
emergence  of  the  third-largest  banking  group, 
Banco BPM, following the merger between Banco 
Popolare  and  Banca  Popolare  di  Milano  at  the 
beginning of 2017.  

above  postponed 

in 

The  reform  of  small  mutual  banks  is  being 
implemented  as  planned.  After  the  18-month 
period started in November 2016 for implementing 
the  reform  of  the  small  mutual  banks  (banche  di 
credito  cooperativo  -  BCCs),  three  main  holding 
groups (majority-owned by the member BCCs) are 
expected  to  emerge.  BCCs  are  currently  deciding 
which  holding  group  to  join:  ICCREA,  Cassa 
Centrale  Banca  (CCB)  or  the  provincial  group  of 
Bolzano.  The  holding  group  will  coordinate  the 
BCCs based on "cohesion contracts". ICCREA and 
CCB,  which  will be  both supervised  by  the  SSM, 
will  have  to  undergo  an  asset  quality  review  and 
stress test. The BCCs should step up their efforts to 
clean  up  their  balance  sheets  ahead  of  the  asset 
quality  review  and  stress  test.  The  parent  holding 
groups  will  undergo  a  transformation  process  to 
strengthen  their  capacity  to  manage  the  member 
BCCs. This aims to strengthen their organisational 
the 
and 
professionalism  of  senior  management  and  the 
integration  of 
successfully 
completed, this reform would be a big step forward 
in reducing fragmentation and reshaping the Italian 
banking  sector.  The  BCC  segment  would  become 
more  resilient  due  to  easier  access  to  capital 
markets,  cross-guarantees,  scale  benefits  and  cost 
synergies. 

decision-making 

mechanisms, 

systems. 

IT 

If 

fit  and  proper  provisions 

The 
for  bank 
managers  are  currently  being  overhauled.  To 

32 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET* 

Graph 4.3.1:  Permanent, temporary and self-employed, 
cumulative change 2014-2017 

and 

flexible 

Italian  labour  market  institutions  have  been 
deeply  reformed  in  recent  years.  The  objective 
of  the  reform  was  to  improve  labour  reallocation, 
reduce  labour  market  duality (25)  and  promote 
stable  open-ended  employment,  among  other 
reliable 
things  by  designing 
contractual  arrangements  (European  Commission, 
2015;  European  Commission,  2016b).  To  support 
the reform, the government enacted generous fiscal 
incentives  for  permanent  new  hires  in  2015  and 
2016.  For  2017,  incentives  targeted  young  people 
and  workers  in  the  south.  The  number  of  people 
employed  on  permanent  contracts  increased  by 
more  than  470 000 persons from  the  beginning  of 
2015  to  the  end  of  2016.  Self-employment  has 
continued  to  decrease,  possibly  partly  due  to  the 
abolition  of  some  forms  of  atypical  contracts 
(collaborazioni  coordinate  e  continuative  a 
progetto)  and  to  the  restrictions  imposed  on 
outsourcing. 

Since  January  2017  temporary  contracts  have 
become the main contributor to net new hirings. 
In  2017,  temporary  employment  increased  by  an 
average  295 000  while  permanent  employment 
continued  to  increase  at  a  much  slower  pace  (by 
66 000). The share of fixed-term work contracts is 
particular high among young people (54.7 % vs an 
EU  average  of  43.8 %).  The  sharp  increase  in 
temporary employment may be partly explained by 
cyclical factors but also by the shrinking of the 35-
44  age  cohort  (which  is  more  likely  to  move  into 
permanent  contracts  than  older  workers)  and  the 
fact  that  the  more  highly  skilled  workers  had 
already been recruited on permanent contracts. The 
timing  of  the  incentives  may  also  have  played  a 
role:  recruiting  on  permanent  contracts  may  have 
been  brought  forward  due  to  the  hiring  incentives 
and uncertainty about their prolongation, and then 
delayed  in  2017  due  to  the  expectation  of  their 
renewal  for  certain  permanent  contracts  in  2018 
(Graph 4.3.1). 

(25)  Duality refers to the division of the labour market into two 
temporary  contracts  and 

different  segments,  usually 
permanent contracts. 

Notes: XXXX 
Source: Istat, Labour force survey, headcount, seasonally 
adjusted data 

almost 

The  new  legislation  and  hiring  incentives  were 
introduced 
simultaneously  which 
complicates  the  reform  assessment.  Evidence 
shows  that  hiring  on  permanent  contracts  and  a 
shift  from  temporary  to  permanent  contracts, 
increased significantly in firms with more than 15 
employees  in  comparison  to  smaller  firms,  which 
were  affected  by  the  incentives  but  not  by  the 
reform.  Moreover,  job  reallocation  as  well  as  the 
number  of  firms  moving  across  the  15-employees 
threshold  appear  to  have  increased  (Boeri  and 
Garibaldi,  2017).  The  number  of  subcontractors 
and  other  freelance  professionals  has  declined 
following  the  reform  (INPS,  2017).  The  survival 
rates  of  employment  contracts  have  increased  for 
those concluded in 2015 (the latest data available), 
but  these  positive  findings  might  also  have  been 
influenced  by  the  temporary  hiring  incentives. 
Dismissal  rates  fell  in  2015-2016  compared  to 
2014 and the years after 2008. (26) 

(26)  According  to  data  from  the  Istituto  Nazionale  della 
Previdenza  Sociale,  the  dismissal  rate  increased  again  in 
2016.  The  rise  mostly  concerned  very  small  firms  (which 
were  not  targeted  by  the  Jobs  Act  reform)  and  foreign 
nationals  from  outside  the  EU-15.  The  obligation  since 
March  2015  to  report  dismissals  electronically  might  also 
have contributed by increasing data coverage. 

33 

-300-200-1000100200300400500600700Jan-14Mar-14May-14Jul-14Sep-14Nov-14Jan-15Mar-15May-15Jul-15Sep-15Nov-15Jan-16Mar-16May-16Jul-16Sep-16Nov-16Jan-17Mar-17May-17Jul-17Sep-17ThousandsPermanentTemporarySelf-employed 
 
                                                           
 
                                                           
4.3. Labour market, education and social policies 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by  the  European  Parliament,  the 
Council and the European Commission, sets out 20 key principles and rights to benefit citizens in the EU. In 
light of the legacy of the crisis and changes in our societies driven by population ageing, technological change 
and new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better 
working and living conditions. 

of 

rate, 

Social 

Italy  has 

indicators 

Italy faces challenges with regard to a number 
of 
Scoreboard 
(1)   supporting  the  European  Pillar  of  Social 
Rights,  in  particular  related  to  labour  market 
performance.  In  addition  to  a  very  low  overall 
employment 
large  gender 
employment  gaps  and  high  rates  of  youth 
unemployment  and  youth  not  in  employment, 
education  or  training  (NEET).  The  impact  of 
social transfers on poverty reduction is relatively 
low  and  decreasing,  and  income  inequality  and 
the  self-reported  unmet  need  for  medical  care 
(even if health outcomes remain overall good) are 
relatively high.  

Italy  is  characterised  by  a  very  high  gender 
gap in employment and by a low participation 
of  women  in  the  labour  market.  Some  steps 
have  been  taken,  including  cash-transfers  to 
families with new-born babies and an initiative to 
facilitate 
arrangements. 
However,  in  the  absence  of  an  overall  strategy, 
the  effectiveness  of 
these  policies  remains 
limited. On a more positive note, the gender pay 
gap is relatively low. 

flexible  working 

in  March  2017  of  a 
minimum  income  protection  scheme  (REI  —  Reddito  di  inclusione)  may  help  increase  the  impact  of 
social transfers on reducing poverty. This scheme will become operational in 2018 and aims to become a 
universalistic measure in the medium term. While the previous scheme was mainly focused on child poverty, 
the 2018 Budget Law allocates funding to extend the REI to all individuals in the same condition of poverty, 
regardless of family status. This is a significant step towards ensuring ‘minimum income protection’. 

introduction 

The 

(1)  The  Social  Scoreboard  includes  14  headline  indicators,  of  which  12  are  currently  used  to  compare  Member  States 
performance.  The  indicators  "participants  in  active  labour  market  policies  per  100  persons  wanting  to  work"  and 
"compensation  of  employees  per  hour  worked  (in  EUR)"  are  not  used  due  to  technical  concerns  by  Member  States. 
Possible alternatives will be discussed in the relevant Committees. Abbreviation: GDHI – gross disposable household 
income 

to 

tax 

support 

incentives 

New 
youth 
employment on permanent contracts have been 
introduced  for  2018.  The  2018  Budget  Law 
includes the reduction of the tax wedge on labour 
for targeted categories of workers through: 

 

the  permanent  halving  of  social  contributions 
(up  to  a  cap  of  EUR  3 000  per  year)  paid  by 
private  employers  on  new  hires  below  the  age 
of  30  (below  35  in  2018)  for  the  first  three 
years of an open-ended contract; 

34 

Early leavers from education and training (% of population aged 18-24)To watchGender employment gapCritical situationIncome quintile ratio (S80/S20)Critical situationAt risk of poverty or social exclusion (in %)To watchYouth NEET (% of total population aged 15-24)Weak but improvingEmployment rate (% population aged 20-64)Critical situationUnemployment rate (% population aged 15-74)To watchGDHI per capita growth To watchImpact of social transfers (other than pensions) on poverty reductionCritical situationChildren aged less than 3 years in formal childcareOn averageSelf-reported unmet need for medical careCritical situationIndividuals' level of digital skillsN/ASocial protection and inclusionDynamic labour markets and fair working conditionsEqual opportunities and access to the labour marketITALYMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaveragebutitisimprovingfast.Formethodologicaldetails,please consult the draft Joint Employment Report 2018, COM (2017) 674 final. 
 
4.3. Labour market, education and social policies 

subcontractor  contracts 

certain 
(contratti  di 
collaborazione).  The  use  of  jobs-on-call  —  a 
contract  featuring  a  marked  cyclical  component 
and  a  low  labour  intensity  (less  than  10  days  per 
month)  —  also  gained  momentum,  particularly 
following  the  abolition  of  mini-job  vouchers. 
Moreover, part-time work is increasing faster than 
full-time employment (2.6 % versus 1.0 % for full 
time employment in 2016). 

Self-employment 

the 

share  of 

in  May  2017  containing  norms 

self-
Although  declining, 
employment  remains  high.  At  4.6 million,  the 
self-employed  accounted  for  20.5 %  of 
total 
employment  in  Q3-2017,  down  from  22.9 %  in 
2008.  The  proportion  of  people  in  employment 
who  are  at  risk  of  not  being  entitled  to  sickness 
benefits 
(20 %)  and  unemployment  benefits 
(almost 25 %) remains high. The Law 81/2017 was 
to 
adopted 
strengthen  protection  measures  for  self-employed 
to  dependent  self-
workers.  It  also  extends 
employed  workers 
for 
achieving  a  better  work/life  balance,  such  as 
parental leave. These measures are a step towards 
greater  protection  for  all  workers,  though  some 
norms  may  turn  out  to  be  ineffective  in  practice. 
(One  potential  example  is  the  norm  protecting 
workers on sick leave from being left without a job 
except in case of ‘ceased need by the employer’). 

some  opportunities 

illegal 

amounted 

activities) 

is 
No  further  action  on  undeclared  work 
planned  despite  its  very  significant  dimension. 
According to ISTAT, in 2015 the shadow economy 
(including 
to 
EUR 208 billion, 
i.e.  12.9 %  of  GDP.  The 
‘irregular’ work rate (the proportion of total labour 
units that were partially or completely undeclared) 
was  at  15.9 %,  with  a  record  of  47.6 %  in  the 
‘other  personal  services’  sector.  According  to 
Istituto  Nazionale  della  Previdenza  Sociale 
(INPS), about half of irregular work is carried out 
by  completely  undeclared  workers.  The  National 
Inspectorate  Agency,  established  by  the  Jobs  Act, 
is  operational  since  January  2017  but  is  still  in  a 
phase  of  consolidation. 
the  old 
inspectorate  issued  more  than  43 000  fines.  INPS 
inspections  found  in  2017  that  about  54  %  of  the 
employment  in  agriculture  is  carried  out  by 
completely undeclared workers. 

In  2016, 

the  first  year 

  and a full exemption (up to a cap of EUR 3 000 
per  year)  for 
in  case  of 
transformation  of  apprenticeship  into  open-
ended  contract  and  for  the  first  three  years  in 
case  of  students  after  their  apprenticeship  or 
traineeship. 

The  measure  is  likely  to  facilitate  the  transition 
from  education  to  employment  and  help  reduce 
youth  unemployment,  but  it  may  also  limit  job 
opportunities for workers above the age threshold. 

Additional  indicators  suggest  that  the  slack  in 
the  labour  market  is  higher  than  what  the 
unemployment rate may suggest. Between 2008 
and 2016, the number of full-time jobs declined by 
1  million  while  the  number  of  part-time  jobs 
increased  by  780 000.  Involuntary  part-time  work 
is only slowly decreasing and still represents more 
than 60 % of total part-time workers. The number 
of  discouraged  workers  (people  who  are  formally 
inactive  and,  though  available  to  work,  are  not 
seeking to do so) is decreasing faster though from 
very high levels. It fell from 3.6 million in 2015 to 
3.3 million in 2016. 

Job  vouchers  were  replaced  by  a  more 
restrictive  typology  (lavoro  accessorio).  Job 
vouchers  were  introduced  in  2003  and  later 
extended  to  all  economic  sectors,  with  their  use 
dramatically  increasing  by  1 949 000  between 
2008  and  2016  (European  Commission,  2017d), 
They  were  finally  repealed  in  April  2017.  A  new 
form  of  non-standard 
(lavoro 
occasionale)  was 
the  Law 
96/2017. (27) 

introduced  by 

employment 

Agency  work  (lavoro  somministrato)  and  jobs-
on-call  are  increasing.  The  number  of  workers 
employed  by  temporary  employment  agencies 
increased  by  23 %  year-on-year  in  the  second 
quarter of 2017. In October 2017 (Ebitemp, 2017), 
the  share  of  agency  work  in  total  employment 
grew  to  1.9 %  from  1.7 %  in  October  2016.  This 
increase  is  also  linked  to  the  repeal  in  2016  of 

(27)  The  new  contracts  take  the  form  of:  a)  a  pre-paid  family 
booklet  of  vouchers  in  the  sector  of  family  assistance, 
house  help  and  home  care;  or  b)  a  specific  contract  of 
occasional  performance  (on  an  hourly-fee  basis) 
in 
companies  with  less  than  5  employees  with  open-ended 
labour contracts (excluding some sectors) and in the public 
administration.  The  total  yearly  amount  cannot  exceed 
EUR 5 000 per worker and per firm. 

35 

 
                                                           
4.3. Labour market, education and social policies 

the  situation  has  improved,  with  discussions  now 
under way on the labour market, pensions and the 
future of work. 

Labour participation and female employment 

In  the  absence  of  an  integrated  strategy  to 
support women and families, the low number of 
women  in  jobs  or  seeking  work  remains  a  key 
concern.  Even  though  at  an  historical  peak,  the 
female  employment  rate  is  still  the  second  lowest 
in  the  EU  and  there  are  considerable  regional 
disparities.  The  gender  gap  in  employment  is  at 
around 20 pps. The gap extends to the duration of 
working  life  (women  in  Italy  work  9.5  years  less 
than  men,  a  difference  almost  twice  the  EU 
average  of  4.9  years)  and  the  share  of  part-time 
work  (32.7 %  for  women,  against  8 %  for  men). 
Activity rates vary according to levels of education 
attainment,  with  highly  educated  women  in  their 
50s and early 60s showing very high activity rates 
(81.1 %). 

The  need  to  care  for  children  and  the  elderly 
seems  to  be  a  major  reason  for  the  low  rate  of 
women in employment. According to the Labour  
inspectorate  data,  in  2016  almost  80 %  of  women 
resigning  from  work  were  aged  26-45  with 
children. 40 % of them declared they had taken the 
decision because of difficulties in reconciling work 
and family care. This may particularly affect less-
educated  women  (Carta  and  Rizzica,  2015),  who 
seem  more  sensitive  to  childcare  costs  and  to 
disincentives  in  the  tax  and  benefits  system (28). 
The  provision  of  childcare  services  varies  widely 
across  Italy  (see  European  Commission,  2016b). 
The  proportion  of  children  aged  under  3  years  in 
formal  childcare  was  34.4 %  in  2015,  a  marked 
increase  compared  to  2014  (22.9 %).  In  addition, 
an  ageing  population  implies  a  stronger  demand 
for  care.  The  limited  availability  of  quality  care 
services  for  the  elderly  and  for  people  with 
disabilities  may  heavily  weigh  on 
female 
employment  

Measures  introduced  so  far  to  address  the  low 
proportion of women in work and the low birth 
rate lack strategic planning and evaluation. The 
impact  of  ‘baby  bonus’  vouchers  has  never  been 
assessed.  Nevertheless  the  vouchers  have  been 

(28)  The  disincentives  are  greatest  for  women  married  to  men 
with low incomes (Colonna and Marcassa , 2013, 2015). 

Collective bargaining and social dialogue 

Collective  bargaining 
is  widespread,  but 
‘second-level’  contracts  are  not.  The  reference 
intersectoral  agreement  setting  out  the  bargaining 
framework  expired  in  2013  and  has  not  been 
renegotiated yet. In November 2016, however, two 
important agreements were signed by trade unions 
and  employers’  organisations  representing  SMEs 
and the commerce sector which give more leeway 
to  negotiation  at  company  level.  An  important 
agreement  setting  out  rules  and  procedures  for 
measuring  unions’  representativeness  was  signed 
by  the  main  social  partners  in  January  2014  and 
will  be  applied  for  the  first  time  in  2019.  The 
distribution of ‘minor’ national contracts has led to 
an  increase  in  the  number  of  national  collective 
labour  agreements  (Contratto  collettivo  nazionale 
di  lavoro  —  CCNL),  from  398  in  2008  to  809  in 
2017.  This  has  resulted  in  greater  fragmentation 
and  uncertainty.  Opting-out  of  national  contracts 
(as  provided  for  by  Law  138/2011)  is  seldom 
applied  and  bargaining  at  firm-  or  territorial  level 
remains 
the 
prevalence  of  small  firms  in  Italy.  This  may 
prevent  wages  from  adapting  swiftly  to  local 
economic conditions. 

limited,  which 

is  also  due 

to 

released  by 

Tax  rebates  on  productivity-related  wage 
increases  set  by  second-level  agreements  were 
introduced  in  2016  and  strengthened  in  2017. 
More 
than  25 000  company-level  agreements 
and/or  local  agreements  were  negotiated  and 
executed  in  2016-2017,  covering  an  average  of 
around  2.2  million  workers  per  year  according  to 
provisional  data 
INAPP.  The 
effectiveness of tax incentives is hard to evaluate, 
as  the  recorded  increase  could  be  influenced  by 
companies formalising pre-existing agreements, so 
as  to  qualify  for  rebates.  Their  estimated  cost 
should gradually increase to nearly EUR 1 billion 
per  year  in  2019.  According  to  the  Bank  of  Italy, 
the  percentage  of  firms  (with  more  than  20 
employees) with second-level agreements is stable 
at around 20 % and did not increase between 2015 
and 2016 (Bank of Italy, 2017b). 

Social  dialogue  and  the  consultation  of  social 
partners  have  a  long  tradition  in  Italy.  The 
involvement  of 
in  policy 
formulation is not formalised through institutional 
settings.  Social  partners  were  barely  involved  in 
the drafting of the 2014-2015 reforms. Since 2016 

social  partners 

36 

 
                                                           
4.3. Labour market, education and social policies 

with  a  few  exceptions.  The  ALMP  reform 
envisages  that  ANPAL  will  determine  national 
standards for the provision of services and evaluate 
the  performance  of  employment  agencies  through 
set  indicators.  At  the  moment,  however,  quality 
standards  for  service  delivery  are  still  set  at 
regional level and vary widely across the country. 
In the absence of a common methodology for data 
collection, monitoring and performance evaluation 
are  also  weak.  The  annual  reports  on 
the 
implementation  of  the  ALMPs  provisions  of  the 
Jobs  Act,  envisaged  by  the  law,  have  not  been 
published.  These  shortcomings  affect  the  correct 
implementation  of  some  recent  labour  and  social 
reforms, i.e. the delivery of activation measures as 
a 
unemployment 
benefits (29) and the new Reddito di Inclusione. 

condition 

receiving 

for 

Despite  difficulties,  the  Youth  Guarantee  has 
delivered some results. The Programme acted as a 
driver  of  reform  and  innovation  in  policy  design, 
contributing  to  the  establishment  of  supporting 
systems  at  national  level.  The  number  of  young 
people registered with the scheme since its launch 
in  January  2018 
reached  about  1.5  million 
(ANPAL  internal  reporting,  2017).  More  than 
1 million  have  been  taken  in  charge  by  PES  or 
private  operators  and  more 
than  520 000 
completed an active labour market policy measure. 
However,  the  proportion  of  young  people  still  in 
the  programme  who  have  not  received  any  offer 
for  more  than  4  months  remains  high  (75.2 %). 
The  share  of  young  people  not  in  education, 
employment  or  training  (NEET)  covered  by  the 
Youth  Guarantee  scheme,  while  increasing,  is  ill 
low (14.1 %). Further efforts are needed to ensure 
that young people, including those facing multiple 
barriers, receive timely high-quality offers adapted 
to their needs. Additional resources deriving from 
EU funds will be available from 2018. 

(29)  The  Jobs  Act  extended  the  coverage  and  duration  of 
previous unemployment benefits and revised the criteria for 
eligibility (see European Commission 2016b). For a 1-year 
work  record  the  maximum  period  when  unemployment 
benefits can be received amounts to 26 weeks, in line with 
the  EU  average,  while 
the  coverage  of  short-term 
unemployed, at 15.1 %, is still below the EU average. For 
further comparative details, see the draft Joint Employment 
Report 2018, which relies on the benchmarking exercise in 
the  area  of  unemployment  benefits  and  active  labour 
the  Employment 
market  policies  conducted  within 
Committee. 

extended  by  the  2018  Budget  Law.  Additional 
non-means 
tested  cash  benefits  have  been 
introduced,  such  as  the  ‘birth  bonus’  (a  bonus  of 
EUR 800  per  newborn)  and  a  benefit  voucher 
(EUR 1 000  per  year)  to  be  spent  in  public  and 
private nurseries (Box 4.1.1). Some other measures 
include  the  exchange  of  parental  leave  with 
babysitting  vouchers  and  provisions  for  flexible 
working  arrangements.  Paternity 
leave  was 
extended  from  two  to  four  days  but  remains 
extremely  limited;  parental  leave  is  unlikely  to 
have  an  impact  without  sufficient  action  to  foster 
first  earners.  A 
leave  by 
the 
comprehensive  approach 
female 
employment  and  the  birth  rate  encompassing 
financial  incentives  and  support,  flexible  working 
the  provision  of  quality  care 
arrangements, 
services, and an evaluation of existing and planned 
measures, is missing. 

take-up  of 

support 

to 

Active labour market policies 

the 

the 

However, 

in  January  2017  with 

The  reform  of  active  labour  market  policies 
(ALMPs)  remains  incomplete.  The  new  Agency 
for  Active  Labour  Market  Policies  (Agenzia 
Nazionale Politiche Attive Lavoro – ANPAL) was 
set  up 
task  of 
coordinating  and  monitoring  a  wide  range  of 
envisaged 
stakeholders. 
recentralisation of ALMPs failed as a result of the 
2016  constitutional  referendum.  This  left  the 
competences  for  ALMPs  with  the  regions,  while 
raising  issues  in  the  governance  of  the  system.  In 
particular,  long  negotiations  between  the  regions 
and the central government concerning the budget 
for the public employment services (PES) delayed 
the full implementation of the envisaged reform. A 
solution  was  found  through  the  2018  Budget  law, 
which  makes  funding  available  to  ensure  job 
continuity  for  PES  staff.  This  has  also  unblocked 
the  adoption  of  a  strategic  plan  on  ALMP  (Piano 
per  le  Politiche  Attive)  which  included  support 
from  the  2014-2020  European  Social  Fund  (EUR 
6.7 billion). 

In  this  context,  there  are  no  substantial 
improvements in the delivery of ALMPs. A pilot 
project  on  the  outplacement  voucher  (Assegno  di 
ricollocazione, see European Commission, 2017e) 
was  launched  in  2017,  but  the  uptake  has  been 
much  lower  than  expected,  with  only  10 %  of  the 
selected sample applying to the measure. The PES 
placement  capacity  remains  extremely  limited, 

37 

 
                                                           
4.3. Labour market, education and social policies 

to 

secondary 

from 
tertiary 
transition 
rates 
education  seem 
to  have  stabilised  at  50 % 
(Ministero  dell’Istruzione,  dell’Università  e  della 
Ricerca,  2016).  Italian  graduates  earn  less  than 
their European counterparts and take longer to find 
a job (OECD, 2016a). This reduces the incentives 
for secondary school graduates to go on to higher 
education  and  contributes  to  brain  drain.  On  a 
more positive note, the decline in higher education 
funding is being reversed. New financial measures 
have  been  introduced  to  improve  access  to  higher 
education and support for students (e.g. exemption 
from tuition fees). 

Steps are being taken to expand Italy’s tertiary 
non-academic education. The Education Ministry 
has  envisaged  a  co-ordinated  tertiary  professional 
education  system.  This  would  be  based  on  the 
existing  Istituti  Tecnici  Superiori  (ITS)  and  the 
introduction  of  professional  degrees  granting 
access  to  regulated  professions.  The  2018  Budget 
Law  earmarks  additional  funding  of  EUR  65 
million  over  3  years  to  gradually  increase  the 
number  of  ITS  students  (from  9 000  to  15 000 by 
2020). 

to 

increase 

A  legislative  decree  adopted  in  April  2017  has 
revised the framework for vocational education 
and  training  (VET)  at  regional  and  national 
level,  creating  greater 
synergies  between 
different  systems.  Additional  funding  has  been 
made available to implement the new measures, in 
staff.  School-to-work 
particular 
transition  is  also  being  fostered  by  compulsory 
work-based  learning  in  secondary  schools  (both 
VET and general education). The participation rate 
in adult learning is increasing but the proportion of 
low-skilled adults who participate in adult learning 
compared  to  other  categories  is  among  the  lowest 
in the EU. Boosting the skills of low-skilled adults 
is part of the comprehensive ‘Skills Strategy Italy’ 
launched  in  October  2017  in  cooperation  with 
OECD  and  the  European  Commission.  The  study 
highlights  that  Italy  is  struggling  more  than  other 
advanced  economies  to  make  the  transition  to  a 
thriving  and  dynamic  skills-based  society  and 
needs  to  bring  skills  demand  and  supply  into 
balance  (OECD,  2017a).  Implementation  of  this 
strategy will be crucial. Efforts need to be stepped 
up  to  achieve  a  systemic  impact  through  an 
integrated approach to upskilling and validation in 
line  with  the  Council  of  the  EU’s  Upskilling 
Pathways  Recommendation  of  December  2016. 

4.3.2.  EDUCATION AND SKILLS* 

The  overall  quality  of  schooling  in  Italy  has 
in  recent  years,  but  wide  and 
improved 
persistent regional disparities persist. According 
to  the  2015  OECD  PISA  survey  (OECD,  2016a), 
the proportion of low achievers in science (23.2 %) 
and reading (21 %) increased in Italy compared to 
2012.  The  proportion  of  low  achievers  in  maths 
declined further (from 24.9 % in 2009 and 24.7 % 
in 2012 to 23.3 % in 2015), but remains above the 
EU  average.  Pupils  from  north-eastern  regions  of 
Italy were among the top OECD performers, while 
pupils  from  the  south  were  among  the  worst 
(OECD,  2016b).  Although  steadily  declining, 
Italy’s early school leaving rate remains above the 
EU average (13.8 % versus 10.7 % in 2016) and is 
particularly  high  among  foreign-born  students 
(30 %, compared with the EU average of 19.7 %). 

include 

implemented  measures 

The  implementation  of  the  school  reform  La 
buona  scuola  is  broadly  on  track,  but  some 
measures  have  not  been  fully  implemented. 
Partially 
the 
geographical  mobility  of  teachers  (leading  to 
shortages  in  the  north),  the  possibility  for  school 
leaders  to  directly  hire  teachers  to  address  the 
school’s  needs  and  the  evaluation  of  teachers  and 
school  leaders.  The  new  recruitment  and  training 
system  for  secondary  school  teachers  is  now  in 
place  and  is  expected  to  improve  quality.  It 
combines 1 year of formal learning with 2 years of 
remunerated  teaching  apprenticeship,  eventually 
leading  to  a  permanent  contract.  This  will  put  an 
end to long waiting lists for teachers. 

Testing  of  students  now  covers  their  entire 
career  and  allows  for  adequate  monitoring  of 
their  achievements.  At  primary  and  secondary 
levels,  assessment  has  mainly  formative  purposes 
and 
exceptionally. 
Participation  in  work-based  learning  (alternanza 
scuola-lavoro) is mandatory. 

repetition 

occurs 

only 

Higher education continues to be characterised 
by  high  drop-out  rates  and  the  comparatively 
long duration of studies. In addition, the sector is 
underfunded with public spending below 0.4 % of 
GDP.  The  tertiary  educational  attainment  rate  for 
people  aged  30-34,  at  26.2 %  in  2016,  remains 
well  below  the  EU  average  of  39.1 %.  There  is  a 
large  gender  gap  (19.9 %  for  men  against  32.5 % 
in  2012-2015, 
for  women).  After  a  decline 

38 

 
4.3. Labour market, education and social policies 

income 

increase 

income  and  a  net 

and  will  progressively 

family 
threshold. 
Funding  was  increased from  the original  EUR 1.7 
billion  to  EUR 2 billion  in  2018  (around  0.1 %  of 
to 
GDP) 
EUR 2.7 billion in 2020. According to government 
estimates,  2 500 000  people  (including  700 000 
children)  may  potentially  be  covered  by  the 
scheme.  REI  also  incorporates  the  unemployment 
assistance  scheme  (ASDI)  —  a  first  step  towards 
the rationalising of social spending. Other positive 
innovations 
facilitate 
include  mechanisms 
application  procedures  and  a  strong  governance 
and  evaluation.  Beside  national  measures,  several 
regional minimum income schemes were launched 
which  in  some  cases  increase  the  number  of 
recipients. 

to 

for 

standards 

services  and 

A key aspect of implementing the reform will be 
reinforcing 
activation 
services  providing 
measures.  The  government  and  the  regions  have 
for 
established 
personalised  activation  projects  which  set  out  the 
conditions  for  receiving  the  benefits.  Families  are 
supported  by  a  multidisciplinary  team,  composed 
of  at  least  a  social  assistant  and  an  employment 
service  operator.  Given 
the  current  difficult 
situation  of  social  services,  which  are  often 
understaffed,  the  success  of  the  scheme  largely 
depends  on  the  allocation  of  sufficient  resources. 
This  is  why  part  of  the  REI  funding  will  be 
dedicated  to  supporting  these  services.  While  the 
reinforcement  of 
is  being 
social 
implemented,  however,  it  remains  challenging  for 
the  employment  services 
the 
personalised  projects.  The  European  Social  Fund 
has  allocated  funds  for  hiring  600  additional 
operators across the country. 

implement 

services 

to 

Health, long-term care and disabilities 

Italy’s health outcomes are generally above the 
EU  average  and  the  healthcare  system appears 
cost-effective.  Life  expectancy  in  Italy  has  been 
consistently  above  the  EU  average  and  amenable 
mortality  rates  are  among  the  lowest  in  the  EU 
/  European  Observatory  on  Health 
(OECD 
Systems and Policies, 2017). E-health systems and 
information  systems  in  support  of  performance 
assessment are being implemented. While Italy has 
a  lower  ratio  of  nurses  per  doctor  compared  to 
most EU countries (1.5 versus EU average of 2.3), 
in  recent  years  a  considerable  number  of  nurses 
have  been  trained  and  paid  carers  are  being 

The  creation  of  a  national  database  with  the 
qualifications  issued  in  the  different  areas  of  the 
lifelong learning system is currently underway. 

4.3.3.  SOCIAL POLICIES* 

system 

The  long-standing  structural  weaknesses  of  the 
economy  contribute  to  high  levels  of  poverty 
and  income  inequality.  (see  also  Section 1). 
Equality of opportunity in Italy is enhanced by the 
education 
(see  Section  4.3.2)  but 
undermined by child poverty and unequal access to 
healthcare. Access to healthcare is more dependent 
on income than in most EU countries. The share of 
children  at  risk  of  poverty  or  social  exclusion  is 
32.8 %, above the EU average of 26.4 %. In-work 
poverty  (11.8 %  in  2016)  is  one  of  the  highest  in 
EU and increasing. 

the 

into 

anti-poverty 

transformation  of 
scheme 

A  major  breakthrough  in  the  design  of  social 
the 
policies  was 
transitional 
a 
permanent measure. The new scheme (Reddito di 
inclusione  -  REI)  was  introduced  in  September 
2017.  This  scheme  eventually  implements  the 
reform  of  social  policies  set  out  in  2000  (by  Law 
328/2000)  and  it  is  also  the  result  of  synergies 
between  national  and  EU  policies  and  funds.  Its 
design  was  marked  by  wide  consultation  and  a 
strong  participatory  approach,  which  led  to  the 
signature  in  April  2017  of  a  memorandum  with  a 
platform  of  civil  society  organisations  (Alleanza 
contro  la  povertà).  While  the  previous  scheme 
(Sostegno  per  l’Inclusione  Attiva  —  SIA)  was 
mainly focused on child poverty, REI aspires — in 
the medium term — to be a universalistic measure. 
The 2018 Budget Law allocates funding to extend 
the  measure 
the  same 
condition  of  poverty,  regardless  of  family  status. 
This  is  expected  to  substantially  increase  the 
impact  of  social  benefits  on  poverty,  which  was 
still critical in 2016 (Box 4.3.1). (30) 

individuals 

to  all 

in 

The  new  scheme  has  become  operational  in 
January 2018. Compared to the previous scheme, 
the  REI  presents  some  important  novelties.  The 
benefit is calculated according to new rules and it 
is  proportional  to  the  gap  between  the  actual 

(30)  The adequacy of the scheme could not yet be modelled by 
the  Social  Protection 

the  benchmarking  exercise 
Committee, but it will be followed up in the future. 

in 

39 

 
                                                           
4.3. Labour market, education and social policies 

4.3.4.  DEMOGRAPHIC CHALLENGES AND 

MIGRATION 

its 

and 

size 

Italy’s  population  dynamics  pose  challenges  in 
the  medium  term.  The  combination  of  two  main 
factors is crucial  to  determine  the  socio-economic 
impact  of  demographic  trends:  the  change  in  the 
structure.  Both 
population 
determinants  depend  on  the  trend  in  the  fertility 
rate  and  the  migration  flows.  Between  2005  and 
2015,  the  working-age  population  increased  by 
around 770 000 thanks to a positive net migration 
effect of around 1 610 000. However, the working-
age population (15-64 years) is projected to shrink 
by  19 %  by  2050.  In  a  no-migration  scenario,  the 
drop  is  projected  to  be  almost  double.  Moreover, 
the  proportion  of  Italy’s  population  aged  over  65 
years  (22 %)  was  above  the  EU  average  in  2016 
(19.2 %). As a result, the old-age dependency ratio 
stood  at  34.3 %  (EU:  29.3 %).  It  is  forecast  to 
exceed  60 %  by  2045  (European  Commission, 
2017e) (see Section 4.1). 

Fertility and demographic structure 

Italy’s  fertility  rate  is  set  to  remain  low.  From 
1996  to  2015,  it  has  held  at  around  the  1.3 
threshold  indicated  as  the  ‘low-lowest  fertility 
rate’. (31)  Since  1994  the  trend  in  the  natural 
balance is negative. Until 2014 the negative natural 
balance  was  offset  by 
largely  positive 
migration balance (Graph 4.3.2). However, in 2015 
the  net  balance  turned  negative,  resulting  in  a  net 
population loss. 

the 

Family support policies are fragmented and not 
properly  targeted.  People’s  decision  whether  to 
have  children  is  likely  to  depend  on  a  number  of 
issues.  These  include  their  level  of  education,  the 
level of uncertainty of the socio-economic context, 
the design of the welfare state design and the level 
of gender equity. There is evidence that the Italian 
low fertility rate is due to the steep decrease in the 
propensity  of  having  the  second  and  subsequent 
children  (Rondinelli  et  al.,  2006)  while 
the 
probability  of  having  the  first  child  has  not 
changed  (Dalla  Zuanna,  2004).  This  suggests  a 
pure cash payment per birth event might not be an 

(31)  ‘Low-lowest  fertility  rate’ refers  to  countries  experiencing 
a total fertility rate (TFR) below the threshold of 1.3. If the 
TFR remains under 1.3 for a long time, this implies a 50 % 
reduction in annual births and a consequent halving of the 
population in less than 45 years (Billari, 2008). 

regulated  to  address  the  needs  of  an  ageing 
population. Public health expenditure is still below 
the  EU  average.  Potential  savings  could  result 
from centralising procurement and a greater use of 
generic drugs. 

vulnerable 

However,  unmet  needs  for  medical  care  are 
increasing.  The  share  of  Italians 
high  and 
reporting  unmet  needs  for  medical  care  has 
increased  significantly  in  recent  years,  especially 
among  the  poorest  income  groups  (from  5.0 %  in 
2010 to 7.2 % in 2015, more than double the 3.2 % 
EU  average).  This  suggests  an  increasingly  high 
degree  of  difficulty  of  access  to  healthcare  faced 
by  Italian  citizens,  mainly  driven  by  financial 
reasons,  which  represent  a  significant  obstacle. 
This is nevertheless partially offset by exemptions 
from  cost-sharing  arrangements  put  in  place  for 
various 
parallel 
public/private  system  pushes  patients  to  resort  to 
private  healthcare,  partly  because  of  long  waiting 
times  in  the  public  system,  especially  in  the 
southern  regions.  In  addition,  equal  access  to 
healthcare is compromised by regional differences 
in  the  quality  and  organisation  of  healthcare, 
including  the  level  of  co-payments  for  specialists. 
While  the  government  has  recently  addressed  the 
challenge  of  low  vaccination  coverage  rates  of 
to 
children,  few  measures  have  been 
effectively  equalise  access  to  healthcare  for  all. 
Following deficit reduction plans, co-payments for 
medicines and the undue use of emergency wards 
have increased in most regions. 

groups.  A 

taken 

with 

Social expenditure for people with disabilities is 
high  but  shows  only  mixed  results.  The  main 
instrument to support people with disabilities is the 
‘Companion  Allowance’,  a  non-contributory  and 
non-means  tested  cash  transfer.  In  2016,  the 
measure  cost  around  EUR 12.1 billion,  covering 
around  2  million  beneficiaries  (78 %  are  over  65 
years  old).  Care  services  are  however  often 
inadequate, 
between 
municipalities.  As  the  allowance  is  not  sufficient, 
it  often  ends  up  paying  for  cheaper  but  unskilled 
care  providers  or  encouraging  women  to  stay  at 
home to care for family members. This situation is 
confirmed by the low proportion of elderly people 
(5-6 %)  receiving  public  care  services.  A  recent 
comparative  research  (Albertini  and  Pavolini, 
2017)  shows  that  care  systems  based  on  service 
provision lead to higher access to formal care and 
lower inequalities. 

disparities 

40 

 
                                                           
4.3. Labour market, education and social policies 

higher  among  the  former  (a  gap  of  19.2  pps.). 
Improving 
the 
integration  challenges.  Those  not  born  in  the  EU 
are at greater risk of in-work poverty. 

skills  would  mitigate 

their 

Graph 4.3.2:  Decomposition of changes in population  

(baseline projections) 

Source: Eurostat 

In  addition  to  economic  immigration,  a  major 
challenge  is  the  inflow  of  asylum  seekers. 
Between  January  2016  and  July  2017,  Italy 
received  204 290  asylum  applications  and  issued 
51 765  positive  decisions.  Law  47/2017,  setting 
for  unaccompanied 
out  protective  measures 
migrant  children (32),  and 
the  new  national 
integration  plan,  adopted  in  September  2017, 
provide  a  more 
for 
integration policies. However, the plan targets only 
beneficiaries  of  international  protection,  with  no 
focus  on  economic  migrants.  The  implementation 
of  the  plan,  as  well  as  the  adequacy  of  funding, 
should  be  monitored,  with  a  focus  on 
the 
involvement of all relevant actors, including those 
at regional and local level. 

framework 

systematic 

(32)  Law 47/2017 was adopted in March 2017. It provides new 
funds 
for  municipalities  welcoming  unaccompanied 
children, promotes trained guardianship and fosters the use 
of families to care for and host these children, harmonises 
age-assessment  procedures,  and  establishes  minimum 
standards for dedicated reception centres. 

effective  policy  to  increase  fertility.  Policies  to 
boost  nurse  and  child  facilities,  adequate  and 
trustable  institutions  (see  Section  4.4)  and  the 
promotion of gender-equality, both in working and 
private  life,  are  indicated  to  be  more  effective 
(Billari  and  Galasso,  2009;  Aasve  et  al.,  2015, 
2016; Rindfuss et al., 2003). 

Migration flows 

Migration  will  no  longer  compensate  for  the 
negative  natural  balance.  Until  2014  the  high 
level  of  immigration  has  kept  the  migration 
balance  positive  and  this  largely  compensated  for 
the negative natural balance. However, in 2015 the 
population shrunk for the first time. From 2010 to  
2015,  the  migration  balance  has  been  constantly 
decreasing. This was due to both the lower number 
of  immigrants  (2014  and  2015  registered  the 
lowest  number  of  entries  since  2002)  and  the 
higher number of emigrants (2015 saw the highest 
number  of  exits  since  1990).  In  2016,  net 
migration  started  to  increase  again  and  is  set  to 
stabilise above 200 000 people per year. 

An increasing number of Italians are moving to 
other EU countries. The number of emigrants has 
increased  by  60 %  since  2006 
(Fondazione 
Migrantes, 2017). In January 2017 about 5 million 
Italians  were  officially  registered  abroad  (about 
8.2 % of the total population) but the total number 
of  emigrants  is  likely  to  be  higher.  In  2015  the 
number  of  graduates  and  high-skilled  workers 
leaving  the  country  rose  by  13 %  from  the 
previous  year.  In  addition,  40 %  of  the  emigrants 
are  young  people  (18-34  years).  It  is  noteworthy 
that 
is 
emigration  of  high-skilled  people 
particularly  strong  in  the  southern  regions,  where 
since  2014  the  net  migration  balance  has  turned 
negative.  If  the  increasing  internal  migration 
towards  the  richer  northern  regions  is  also  taken 
into  account,  the  brain  drain  could  result  in  a 
permanent loss of highly qualified people from the 
south. 

Integrating  people  with  a  migrant  background 
is also a long-term challenge. In 2016, 3.5 million 
non-EU  nationals  (5.8 %  of  the  total  population) 
lived in Italy. On average immigrants are younger 
than  Italians  and  they  have  a  higher  fertility  rate. 
However,  while  the  employment  rate  of  non-EU 
born 
the 
to 
proportion  of  low-skilled  people  is  significantly 

that  of  Italians, 

is  comparable 

41 

545556575859606162-0.5-0.4-0.3-0.2-0.10.00.10.20.30.40.50.6909500051015202530354045505560MillionsMillionsMigration balanceNatural balanceNet balancePopulation 
 
                                                           
4.4.   INVESTMENT AND COMPETITIVENESS 

4.4.1.  EXPORT PERFORMANCE AND 

COMPETITIVENESS*  

The erosion of Italy's export market shares has 
been  stopped.  Since  2010,  Italy's  export  volumes 
have  been  growing  broadly  in  line  with  world 
exports  after  sizeable  losses  of  export  market 
shares  in  the  previous  decade.  Market  share 
developments  based  on  export  values  stabilised 
only  in  2013,  followed  by  a  marginal  recovery. 
This  improvement  has  been  helped  by  the  past 
depreciation  of  the  euro,  which  has  favoured 
Italy’s  exports  to  countries  outside  the  euro  area 
since  2015  (Graph  4.4.1).  Italy's  average  export 
quality  has  slightly  worsened  between  2011  and 
2016  (European  Commission,  2017f),  despite  the 
very  gradual  shift  towards  more  technology-
intensive products. 

Graph 4.4.1:  Italy’s export market shares, exchange rate 

and cost competitiveness indicators 

Notes: Export market shares based on values are with 
reference to all countries. Export market shares based on 
volumes are with reference to 36 industrial markets. 
Source: European Commission 

External  cost  competitiveness  has  improved, 
largely  thanks  to  contained  wage  growth.  After 
sizable losses in the 2000s, driven by a significant 
appreciation of its nominal effective exchange rate 
as  well  as  the  rapid  increase  in  unit  labour  cost, 
Italy's  cost  competitiveness  has  improved  on  the 
back  of  contained  growth  in  nominal  unit  labour 
costs  (0.5 %  on  average  over  2013-2017  versus 
labour 
the  euro  area).  Growth 
0.8 % 
productivity  (expected  to  have  risen  by  0.4 %  in 
2017,  after  a  fall  of  0.6 %  in  2016)  is  slow.  This, 

in 

in 

together with long-term structural weaknesses such 
as the small average firm size, limits the potential 
to fully restore the competitiveness lost in the past. 

However,  non-price  competitiveness  factors 
continue  to  weigh  on  Italy's  export  prospects. 
An unfavourable export specialisation, the average 
small  firm  size  and  a  limited  capacity  to  innovate 
remain key challenges. Firstly, Italy's geographical 
and  product  specialisation  contributed  negatively 
to  export  growth,  particularly  during  the  crisis, 
although  the  situation  has  slightly  improved  since 
2013  (European  Commission,  2017f).  Secondly, 
Italy  has  a  large  share  of  small  and  micro  firms 
which  are  not  active  on  international  markets. 
However,  Italy's  small  firms  with  more  than  ten 
employees  exhibit  a  better  export  performance 
than comparable firms in European peer countries. 
Econometric  analysis  emphasises  the  importance 
of  both  structural  characteristics  and  strategic 
behaviours  in  determining  firms’  international 
performance 
forthcoming). 
(Brancati  et  al., 
Specifically, investment in innovation and R&D is 
likely  to  raise  both  the  extensive  and  intensive 
margins  of  export (33)  and  enable  previously  non-
exporting firms to enter (extra-EU) export markets. 
Product  innovations  appear  to  be  the  dominant 
factor  to  improve  export  performance,  while 
improving organisational processes within the firm 
is expected to have an additional indirect effect on 
exports by boosting productivity. 

4.4.2.  INVESTMENT AND INNOVATION* 

Despite the recent modest recovery, investment 
levels are still low compared EU peers. In 2016, 
investment  accounted  for  17.1 %  of  GDP,  more 
than  3  pps  below  the  euro  area  average.  Private 
investment only represented 15 % of GDP in 2016 
(euro  area  average:  17.7 %)  with  investment  by 
non-financial corporations down to 9.2 % of GDP, 
from  10.7 %  in  2007.  Public  investment  stands  at 
2.1 % of GDP, down from 3.1 % on average over 
the  period  2005-2009,  and  below  the  euro  area 
average of 2.5 %. 

(33)  The  extensive  margin  of  export  refers  to  the  number  of 
exporting  firms  (as  well  as  new  destinations  or  new 
products for existing firms). The intensive margin of export 
refers to the volume exported by an exporting firm. 

42 

75808590951001051107075808590951001051101151209900010203040506070809101112131415162005 = 1002005 = 100Export market shares (value-based)Export market shares (volume-based)Nominal effective exchange rate (rhs, inverted scale)Real effective exchange rate (based on unit labour costs)(rhs, inverted scale) 
 
 
                                                           
4.4. Investment and competitiveness 

Intangible investment  has been  less affected  by 
the crisis, but remains low compared to the rest 
of the euro area. Intangible assets (34) are vital for 
productivity  and  economic  growth  and  can  help 
explain productivity differences between countries 
(Thum-Thysen  et  al.,  2017). 
in 
intangibles  in  Italy  has  been  growing  in  line  with 
the rest of the euro area until the early 2000s, when 
a  gap  has  started  to  open  up  (Graph 4.4.2). 
Investment  in  intangibles  represented  2.8 %  of 
Italy's GDP in 2016 (euro area average: 4.2 %). 

Investment 

may  affect  the  ability  of  public  research  to  keep 
high-skilled  researchers  in  the  country.  Business 
expenditure  on  R&D  (BERD)  amounted  to  0.8 % 
in  2016,  well  below  the  EU  average  of  1.3 %. 
Three  main  factors  help  to  explain  Italy’s  low 
levels  of  R&D  and  intangible  investment  and  its 
weak innovation performance: the large number of 
the 
micro-firms; 
economy,  with  relatively  low  specialisation  in 
knowledge-intensive  sectors;  and  the  low  rate  of 
digitalisation.  

the  sectoral  composition  of 

Graph 4.4.2:  Non-residential tangible and intangible 

investment in Italy and the rest of the euro 
area, constant prices 

Source: Eurostat 

ones 

R&D  investment  in  Italy  remains  low,  while 
regional  disparities  persist.  Total  R&D 
expenditure  in  2016  amounted  to  1.3 %  of  GDP, 
below  the  country's  Europe2020  target  of  1.5 % 
and the EU average of 2.0 %. Moreover, Northern 
regions  invest  systematically  more  in  R&D  than 
southern 
Better 
(ISTAT, 
implementation  of  regional  smart  specialisation 
strategies  could  improve  the  efficiency  of  such 
expenditure.  Public  R&D  expenditure  has  been 
stagnating  since  2013  and  represents  0.5 %  of 
GDP  compared  to  0.7 %  in  the  EU  as  a  whole. 
Between  2008  and  2016  the  Italian  government's 
budget  allocation  to  R&D  activities  fell  from 
EUR 10  billion  to  EUR  8.7 billion.  The  reduction 

2016). 

(34)  Intangible assets comprise investment in R&D, innovation 
and  technology,  training/education  of  workers,  internal 
organisation 
institutional 
networks,  market 
development 
(marketing), and software and information technology. 

exploration 

structures, 

customer 

and 

and 

and 

innovative 

communication 

investment.  The 

Some  fiscal  measures  have  been  introduced  to 
boost business innovative investment. While the 
reduction  in  the  corporate  income  tax  rate  (from 
27.5 % to 24 % from 2017) is expected to support 
all  types  of  capital  spending,  the  Impresa  4.0 
strategy  (previously  called  Industria  4.0) 
is 
targeting 
latter 
includes fiscal incentives such as the extension of 
tax  credits  for  investments  in  R&D  up  to  2020, 
which  has  been  raised  to  50 %  for  all  R&D 
activities,  and  the  possibility  for  companies  to 
deduct 140 % of the amount spent on investments 
and of 250 % of the amount spent on investment in 
information 
technology 
('Iperammortamento')  (see  Section  4.1).  A  new 
provision in the Budget Law introduces tax credits 
in 2018 for incremental expenditures on training in 
Impresa  4.0  topics  which  may  help  address 
existing  weaknesses  in  the  digital  skills  of  the 
labour 
important  measures 
the  process  of  digitalising  SMEs 
facilitating 
(Competence Centres and Punti Impresa Digitale) 
have  not  been  activated  yet,  which  could  impair 
the long-term effectiveness of tax credits. Since the 
launch  of 
in  2012,  8 581 
innovative  start-ups  have  been  created.  They 
represent  0.54  %  of  the  estimated  1.6  million 
limited  companies  active  in  Italy.  75.8  %  of 
innovative  start-ups  and  77.4  %  of  innovative 
SMEs  are  located  in  central  and  northern  regions 
(Ministry of Economic Development, 2018).. 

the  Start-up  Act 

force.  However, 

Innovation  policy  has  been  shifted  towards 
indirect support schemes. While indirect funding 
may  reduce  the  administrative  costs  for  firms,  it 
may be less effective than direct funding schemes 
in  promoting  strategic  research  programmes  or 
focusing on new areas of research and innovation. 
The  effectiveness  of  all  measures  needs  to  be 
evaluated  promptly,  not  least  to  address  regional 
disparities.  

43 

80100120140160180200220240959697989900010203040506070809101112131415161995 = 100IT, intangiblesRest of the euro area, intangiblesIT, non-residential tangiblesRest of the euro area, non-residential tangibles 
 
                                                           
4.4. Investment and competitiveness 

et 

credit 

demand 

(Brancati 

oriented  towards  innovation  and  R&D,  due  to  the 
significant market and technological risk as well as 
higher 
al., 
forthcoming).  The  recovery  in  loan  volumes  is 
much  more  evident  for  medium  and 
large 
companies than for small ones (+0.6 % and -1.0 % 
y-o-y  respectively) (November  data  from  Bank  of 
Italy,  2018x).  Moreover,  the  high  stock  of  NPLs 
continues to pose a challenge in accessing funds by 
creating  further  constraints  on  banks'  ability  to 
provide credit (see Section 4.2). 

Graph 4.4.3:  Share of debt in companies facing financial 

stress 

Notes: Zombies are defined as companies that are less than 
10-years old and for which the interest coverage ratio has 
been below one for more than 3 years in a row (only 
available from 2014 onwards). The analysis does not include 
firms in agriculture, finance and insurance, public 
administration, arts and households as employers. 
Source: ECFIN calculations based on Orbis data 

Companies facing financial stress are generally 
smaller  and  considerably  less  productive  than 
others.  Financial  distress 
for  non-financial 
corporations has not diminished significantly over 
2013-2015  (Graph  4.4.3).  Financially  stressed 
firms  are  significantly 
less  productive,  and 
represent  on  average  20 %  of  employment.  They 
also  invest  less  as  they  have  to  reduce  their  debt 
level. As not only their productivity but also their 
productivity  growth  is  lower,  the  high  proportion 
of  financially  stressed  firms  may  be  hampering 
improvement in Italy's aggregate productivity (see 
Section 4.3). 

reasons 

complex.  The  main 

The  business  environment  has  not  been 
favourable to entrepreneurship and investment. 
Despite  recent  reforms,  doing  business  in  Italy 
are 
remains 
inefficiency  in  the  public  administration,  slow 
judicial  procedures  and  weak  competition  in  key 
services  sectors  which  hinders  investment  and 
productivity  (IMF,  2017;  OECD,  2017).  These 
aspects  are  further  discussed  in  section  4.5.1. 
Access  to  finance,  labour  market  and  business 
regulations, high energy costs and the lack of staff 
with the right skills are cited as long-term barriers 
to investment in recent surveys (EIB, 2016). Such 
structural  features  may  also  discourage  foreign 
direct  investment  –  historically  low  compared  to 
peer countries – which has fallen further since the 
crisis.  Foreign  direct  investment  inflows  in  2016, 
albeit  increasing  on  a  yearly  basis,  were  65 % 
lower  than  in  2007.  During  the  same  period  such 
inflows decreased less sharply in France and Spain 
(by 38 % and 45 % respectively), while they have 
increased remarkably in Germany (by 22 %). 

Corporate  profits  are 
slipping.  Corporate 
profitability  in  Italy  has  been  declining  since  the 
late  1990s.  The  gross  profit  share (35)  of  non-
financial  corporations  declined  from  nearly  50 % 
of  GDP  in  1999  to  just  over  42.2 %  in  2016 
(broadly  in  line  with  the  euro-area  average).  In 
terms of profitability, firms in non-tradable sectors 
lag behind the ones in manufacturing (Amici et al., 
2017).  Decreasing  profits  limit  the  scope  for 
repaying debt and self-finance investment. 

Financing  of  Italian  SMEs  continues  to  be 
highly  dependent  on  the  banking  sector,  but 
lending remains subdued. The three main sources 
of financing remain credit lines (relevant for 56 % 
of  SMEs),  bank  loans  (49 %)  and  grants  (50 %). 
Only  2 %  of  SMEs  in  Italy  are  funded  by  equity, 
compared  to  an  EU  average  of  12 %  European 
Commission  (2017l).  Despite  improvements  in 
access to finance for SMEs over the last years (36), 
financial  constraints  still  constitute  an  important 
limitation to firm growth, especially for companies 

(35)  Defined by Eurostat as gross operating surplus divided by 

gross value added.  

the 

Funds, 

(36)  Measures  include  public  venture  capital,  SMEs'  access  to 
Structural 
e 
competitività"  and  "Iniziativa  PMI"  to  support  access  to 
finance  for  new,  innovative  and  competitive  SMEs  in 
southern  regions,  access  to  crowdfunding  for  innovative 
start-ups  and  SMEs,  and  access  to  the  Central  Guarantee 
Fund for SMEs (European Commission, 2018d). 

programmes 

"Imprese 

44 

0%10%20%30%40%50%60%70%80%90%100%12131415Interest coverage ratio > 1Interest coverage ratio < 1ZombiesNon-performing loans (%) 
                                                           
 
4.4. Investment and competitiveness 

4.4.3.  PUBLIC ADMINISTRATION* 

Graph 4.4.4:  Return to skills (numeracy) 

Public administration in Italy is perceived to be 
less  efficient  and  effective  than  in  EU  peers. 
Italy scores worse than other EU major economies 
on  most  World  Bank’s  2017  worldwide 
governance  indicators  (World  Bank,  2016a).  On 
the  government  effectiveness  indicator,  reflecting 
perceptions  of  the  quality  of  public  services  and 
the capacity of the civil service, Italy improved its 
score to 0.52 from 0.45 in 2016 but it still performs 
significantly  worse  than  European  peers.  Italy  is 
also  one  of  the  Member  States  with  the  highest 
proportion  of  citizens  not 
trusting  public 
administrations,  both  at  national  and  local  level. 
Public offices are perceived as a burden more than 
a reliable partner (European Commission, 2017g). 
The  same  holds  for  firms.  Despite  some  progress 
in  the  administrations'  responsiveness  to  SMEs' 
needs  (European  Commission,  2017i,  k),  poor 
for  government 
registered 
performance 
regulations, 
the  complexity  of  administrative 
procedures and government staff's competences in 
supporting  new  and  growing  firms  (GEM  2016). 
Moreover,  the  public  administration  efficiency 
markedly differs across regions, which contributes 
to  making  the  business  environment  in  southern 
regions less favourable (see Section 4.5). 

is 

Efficient  management  of  public  employment  is 
crucial  for  the  improvement  of  the  Italian 
public administration. Italy's public sector suffers 
from  low  attractiveness  among  highly  skilled 
workers  (European  Commission,  2017d).  The 
returns  to  skills  for  civil  servants  are  lower  than 
private  sector  peers.  This  is  a  common  pattern 
among major economies. However Italy shows the 
lowest  returns  on  skills  both  in  the  private  and 
public  sector,  with  the  latter  being  less  than  half 
than  in  EU  peers  (graph  4.4.4).  Moreover,  the 
negative difference between the returns to skills of 
young  workers  (25-34)  and  exit-age  workers  (55-
64)  is  three  times  larger  than  in  comparable 
economies  (Pinelli  et  al.  2016).  This  combines 
with  an  inefficient  selection  process,  more  based 
on  academic  knowledge  than  skills,  and  with  the 
lack  of  an  appropriate  set  of  monetary  and  career 
incentives. As a result, a high level of educational 
mismatch  and  a  negative  auto-selection 
for 
recruitment  burden  the  public  administrations' 
performance (ARAN, 2014).  

Notes: Huneshek et al estimates on PIAAC data (2012). 
Percentage increase in income associated with a one 
standard deviation increase in measures skills. 
Source: Bank of Italy, 2016 

of 

the 

implementation 

The 
public 
administration  reform  is  almost  complete.  In 
August  2015  a  comprehensive  enabling  law  to 
reform  the  public  administration  was  adopted.  In 
2016  the  government  adopted  a  number  of  very 
legislative  decrees  simplifying  and 
effective 
speeding 
and 
the  decision-making  process 
increasing  transparency  and  digitalisation  of  the 
administrations  (European  Commission,  2017d; 
2016b). In 2017, the implementing activity mostly 
focused  on  public  employment  and  publicly-
owned  enterprises. (37)  The  legislative  decrees 
implementing  the  reform  have  all  been  adopted. 
However,  local  public  services  still  need  to  be 
comprehensively reformed (see Section 4.5.1).  

The  operationalisation  of  the  reform  of  public 
employment  will  be  challenging.  The  reform 
touches  upon  the  needed  level  of  workforce,  the 
the  evaluation  of 
recruitment  process  and 
performance.  The  new  provisions  allow  public 
administration  to  set  and  plan  the  staff  size  and 
allocation according to actual needs, both in terms 
of number and competences. In the current system, 

(37)  The  legislative  decree  on  SOEs  was  adopted  in  2016. 
However, in November 2016 the Constitutional Court ruled 
it  (along  with  a  legislative  decree  on  local  public  services 
and  on  public  employment  at  managerial 
level)  as 
unconstitutional.  A  corrective  decree  was  then  adopted  in 
June  2017  for  SOEs,  while  the  delegation  for  the  local 
public services and public employment at managerial level 
was expired. 

45 

0%5%10%15%20%25%30%35%USESDEUKNLFRITPublic sectorPrivate sector 
 
                                                           
4.4. Investment and competitiveness 

on 

available 

to 
through 

each 
the  number  of  posts 
administration 
the 
is  set  centrally 
definition  of  "dotazione  organica". (38)  Moreover, 
the  reform  goes  in  the  right  direction  on  civil 
servants'  selection  and  recruitment.  It  introduces 
more skills-oriented elements for the selection, like 
a  higher  focus  on  PhD  degrees, 
languages 
management  and  previous  work  experiences. 
However,  the  system  still  remains  excessively 
reliant 
recruitment 
knowledge-based 
competitions  rather  than  on  the  assessment  of 
skills/competences.  The  public  administration 
department,  though  without  a  specific  timeline,  is 
currently revising the general competition rules to 
introduce further skill-based elements. The lack of 
relationship  between  the  evaluation  processes  and 
promotion  and  salary  progression  is  addressed. 
The  new  evaluation  system,  while  being  more 
goal-oriented, 
incentives  with 
individual  and  team  performance.  However,  its 
operationalisation  might  prove  challenging,  as  it 
entails changing established practices at all levels. 

links  monetary 

Enforcing the new single framework to manage 
and  rationalise  SOEs  is  crucial.  The  new  rules 
put  SOEs  on  an  equal  footing  with  private 
companies  and  introduce  criteria  to  establish, 
acquire  and  keep  the  shareholding  in  SOEs.  The 
rules  strengthen  ex-ante  and  ex-post  oversight 
mechanisms  and  establish  annual  reviews  backed 
by sanctions. Administrations that fail to adhere to 
the  SOE  criteria  or  not  presenting  the  annual 
review  of  their  shareholdings  can  be  financially 
sanctioned or have their voting rights frozen in the 
SOE's  board  of  directors.  Still,  given 
the 
difficulties  of  past  reform  attempts,  making  the 
new  rules  operational  and  enforcing  them  is 
expected to be challenging. The recognition of all 
publicly-owned  enterprises  was  completed 
in 
November 2017 

4.4.4.  JUSTICE SYSTEM* 

The  efficiency  of  the  justice  system  improved 
only  slightly  and  the  length  of  proceedings 
remains  a  source  of  concern,  especially  at 
higher instances. An efficient justice system, able 

(38)  "Dotazioni  organiche"  indicates  the  number  of  civil 
servants  each  administration  can  employ  (by  role  and 
salary). It is updated every three years (art. 6, Testo Unico 
del Pubblico Impiego, TUPI). 

and 

activity 

to cut the disposition time and backlog of cases by 
rationalising 
the  organisation  of  courts  and 
reducing  excessive  litigation  rates  could  increase 
foreign  direct 
entrepreneurial 
investment (Lorenzani and Lucidi, 2014). In 2016, 
the  time  needed  to  resolve  civil  and  commercial 
litigious cases in Italy was still one of the highest 
in  the  EU  at  all  instances  (Graph  4.4.5), which 
remains a source of concern. Namely, it amounted 
to  1.4  years  in  first  instance,  2.7  years  in  second 
instance  and  4  years  in  the  third  (European 
Commission,  2018c).  The  time  needed  to  resolve 
administrative  cases,  at  925 days  in  first  instance, 
also  remains  worrying,  although  lower  than  in 
2010. Past reforms are helping to reduce the stock 
of pending civil cases in first and second instance, 
but  the  backlog  is  still  substantial. (39)  Moreover, 
the backlog at the Supreme Court of Cassation has 
continued to increase, by 4 % since 2014 (Corte di 
Cassazione, 2017a) and is one of the highest in the 
EU  per  capita.  This  suggests  that  past  measures 
have yet to bring the expected improvement at the 
highest  court.  More  generally,  efficiency  gains 
from past reform efforts seem to be limited, which 
is  further  exacerbated  by  the  lack  of  progress  in 
revising the civil procedural rules. In fact, while a 
few  civil  justice  reforms  of  limited  scope  have 
recently  been  passed, (40)  an  important  enabling 
law streamlining civil proceedings and introducing 
stronger deterrence against vexatious litigation has 
been pending in parliament for 2 years now.  

Streamlined  case  management  and  adequate 
human  resources  remain  essential  for  ensuring 
that  courts  can  function  efficiently.  Measures 
tackling  the  backlog  of  old  cases,  including 
through  principles  of  efficient  case  management 
under  the  ‘Strasbourg  2’  project,  are  showing 
encouraging initial results. Since 2014, the number 
of  cases  pending  for  more  than  3  years  in  first 
instance  and  for  more  than  2  years  in  second 
instance has dropped by over 20 %. The difference 
between courts remains significant, however, with 
peaks  of  60 %  in  the  proportion  of  total  cases 
pending  for  more  than  3  years.  Moreover,  at  the 

(39)  Since 2010 pending civil cases have  dropped by 17.6% at 
first  instance  and  by  24.8%  at  second  instance.  However, 
around 4 million civil cases were still pending at the end of 
2016, compared to more than 5 in 2010 (CEPEJ, 2017). 
(40)  Law  46/2017  subjects  international  protection  procedures 
to  two  jurisdictional  levels  instead  of  three;  Law  24/2017 
amends the procedural rules to favour amicable solutions in 
case  of  medical  liability  and  malpractice;  Law  47/2017 
streamlines procedures to nominate tutors for the underage. 

46 

 
                                                           
                                                           
4.4. Investment and competitiveness 

thereby  failing  to  bring  the  expected  reduction  in 
incoming cases. Furthermore, mediation and other 
forms  of  out-of-court  settlement  seem  to  have 
brought only modest results (Corte di Cassazione, 
2017b).  In  2016,  the  overall  number  of  incoming 
civil  cases  increased  by  5 %  in  first  instance  and 
6 %  in  second  instance.  This  reversed  the  slight 
downward trend recorded since 2010, partly due to 
steadily increasing appeal rates (to 22 % in 2016 at 
second instance up from 18 % in 2014). Incoming 
civil  litigious  cases  at  the  Supreme  Court  of 
Cassation  have  also  remained  stable  since  2012, 
and  13 %  of  Cassation  appeals  were  declared 
inadmissible  in  2016,  up  from  8 %  in  2005, 
confirming  the  recent  upward  trend  (Corte  di 
Cassazione, 2017c). Overall, the Supreme  Court’s 
ability to deal with its case inflow has decreased in 
the context of a marked rise (by 40 %) in its non-
criminal incoming cases (including tax cases) since 
2012.  This  could  undermine  the  Supreme  Court’s 
role  in  ensuring  the  uniformity  of  case-law, 
rectifying  inconsistencies  and  maintaining  public 
confidence  in  the  judiciary  (Consultative  Council 
of  European  Judges,  CCJE,  2017).  Furthermore, 
the  available  literature  (Bielen  and  Marneffe, 
2017;  Mora-Sanguinetti  and  Garoupa,  2015; 
Buonanno  and  Galizzi,  2014;  Carmignani  and 
Giacomelli,  2010)  suggests  that,  despite  past 
reforms,  a  hindrance  to  effectively  containing 
litigation  could  be  related  to  the  absence  of 
adequate  enforcement  of  procedural  discipline,  in 
the context of wide access to lawyers. 

4.4.5.  FIGHTING CORRUPTION* 

Corruption  remains  a  major  challenge  for 
environment  and  public 
Italy's  business 
procurement.  In  2017  Italy  slightly  improved  its 
score on  the World  Bank's  ‘control  of  corruption’ 
indicator  as  well  as  its  performance  on  irregular 
payments and bribes and diversion of public funds 
(WEF, 2017). Still, Italy continues to score poorly 
in terms of favouritism in decisions by government 
officials,  and  survey  data (Flash  Eurobarometer 
457)  suggest  that  Italy  has  the  highest  proportion 
of  firms  in  the  EU  that  perceive  favouritism  and 
corruption  as  hindrances  to  competition  (95 %, 
compared  to  the  EU  average  of  74 %).  Public 
intolerance to corruption seems to have increased: 

Supreme  Court  of  Cassation  the  number  of  old 
cases  as  well  as  the  proportion  of  total  pending 
cases  has  further  increased  since  2014.  In  some 
instances, the difficulty of coping with the backlog 
can  be  explained  by  the  still  high  rate  of  vacant 
posts for judges (around 13 % on average) and for 
court  staff  (around  23 %  on  average).  However, 
the  filling  of  2 441  lay  judge  posts  in  September 
2017  and  ongoing  competitions  to  fill  most 
vacancies  for  ordinary  judges  and  administrative 
staff may help speed up efficiency gains from past 
civil  justice  reforms,  which  are  only  timidly 
showing in the data on efficiency. A reform of the 
honorary  magistracy,  completed  in  July  2017, 
merges  the  different  statutes  of  honorary  judges, 
expands  their  responsibilities  and  underlines  the 
temporary nature of their service by limiting it to 2 
days a week and two terms of 4 years each. On this 
issue,  concern  is  being  voiced  by  ordinary  and 
honorary  magistrates  over  the  risk  of  temporary 
disruptions  due  to  lack  of  resources  at  the  end  of 
the temporary period. 

Graph 4.4.5:  Time needed to solve civil and commercial 

litigious cases 

Source: European Commission, 2018c 

The latest evidence does not show that reforms 
intended  to  avoid  abuses  of  the  trial  are  being 
effective  yet.  Among  the  measures  introduced  to 
contain 
litigation  and  strengthen  procedural 
discipline,  for  instance,  the  simplified  proceeding 
(‘rito  sommario’)  has  not  become  the  default  in 
appeal courts as the legislator intended; use of the 
‘inadmissibility 
remains 
inconsistent  and  limited  in  second  instance, (41) 

appeals 

filter’ 

for 

(41)  Only 1.6% of appeals were declared inadmissible under the 
filter  in  2016  (source:  Ministry  of  Justice),  which  may 

relate also to the extra duties of imposed on judges who are 
already overloaded at an early stage of the procedure. 

47 

00.511.522.533.54NLATBGIEDESKEELTSECZROPTBEHUPLLVDKSIFIHRLUESFRMTELITCYUKyears1st instance2nd instance3rd instanceNODATA 
 
                                                           
                                                                                   
4.4. Investment and competitiveness 

incoming  and  pending  criminal  cases  at  second 
and third instance (CEPEJ, 2016), also due to one 
of  the  highest  rates  of  cassation  appeals  (52 %). 
This resulted in one of the longest disposition time 
in the EU, of 0.9 years in first instance, 2.4 years 
in  second  instance  and  0.5  years  in  third  instance 
in  2016 
Incentivising 
expedited  procedures  and  discouraging  abuses  of 
the  trial  system  could  thus  help  make  Italy’s 
criminal justice  (GRECO,  2016)  and  fight  against 
corruption  more  effective,  to the  benefit  of public 
and investor confidence in the rule of law.  

(Ministry  of  Justice). 

the 

crimes 

against 

including 

embezzlement 

The  National  Anti-Corruption  Authority  has  a 
key  role  in  the  implementation  of  the  new 
enhanced anti-corruption framework. To further 
strengthen its anti-corruption framework, Italy has 
extended  protection  of  whistleblowers  to  private 
sector  workers  and  better  aligned  the  offence  of 
corruption among private parties with international 
standards.  The  ‘Antimafia’  Code  has  also  been 
strengthened  through  additional  powers  to  seize 
and  confiscate  the  assets  of  mafia  members 
public 
perpetrating 
and 
administration, 
corruption. Moreover, the new Public Procurement 
Code  aims  to  prevent  cartels  in  public  tenders, 
strengthen competition in private negotiations and 
establish  a  ceiling  on  subcontracting.  ANAC  has 
been  given  a  more  prominent  role  in  monitoring 
the 
this  new  framework. 
Specifically, while its powers to suspend irregular 
procurement  procedures  have  been  curtailed,  the 
authority  can  now  issue  pre-dispute  opinions  to 
solve  controversies  before  they  are  brought  to 
court  and  to  appeal  to  the  administrative  judge 
against  any  act  seriously  breaching  the  new  code. 
Its  responsibilities  have  also been  extended  to  the 
protection  of  whistleblowers  against  retaliation. 
However, most of the new powers still need to be 
made  operational  through  a  regulation  by  ANAC, 
and  the  authority  can  only  issue  non-binding  pre-
dispute opinions  if  there  is no  advance  agreement 
between  the  parties.  While  ANAC’s  staff  and 
funding have recently been increased, carrying out 
its new responsibilities may again entail a shortage 
of  resources.  Finally,  Italy  still  lacks  a  unified 
framework to regulate lobbying. 

implementation  of 

survey  data  indicate  that  79 %  of  the  population 
considers  corruption  unacceptable,  compared  to 
in  2013  (Special  Eurobarometer  470). 
68 % 
is  still  a 
in  public  procurement 
Corruption 
particularly  serious  risk  too.  In  2016,  31 %  of  all 
procedures  above  EU  threshold  had  only  one 
bidder  and  9 %  were  not  preceded  by  a  call  for 
tenders  (Single  Market  Scoreboard,  2017).  An 
increasing  proportion  of  firms  seems  to  consider 
corruption  and  risks  of  tailor-made  specifications 
in  public  procurement  managed  by  national 
authorities  as  widespread 
(80 %  and  67 %, 
respectively, compared to 76 % and 61 % in 2015).  

Italy  improved  its  anti-corruption  framework 
also  by  revising  the  statute  of  limitations,  but 
inefficient  criminal  justice  still  hinders  the 
prosecution  of  corruption.  In  June  2017  the 
government amended the criminal code, including 
by revising the statute of limitations (42), which has 
repression  of 
the  effective 
long  hindered 
corruption. The reform provides for the suspension 
of  prescription  terms  (up  to  a  maximum  of  1.5 
years,  until  the  filing  of  the  next  ruling)  for  all 
criminal  offences  after  a  conviction  in  first  and 
second  instance.  It  also  increases  the  terms  by  up 
to  50 %  for  specific  corruption  offences.  While  it 
does  not  stop  prescription  terms  after  a  first-
the 
instance  conviction  as  recommended  by 
Council  of  Europe’s  Group  of  Countries  Against 
Corruption  (GRECO),  the  reform  may  reduce  the 
scope for abusive criminal litigation as a delaying 
tactic at higher instances. As such, it may alleviate 
a  long-standing  concern  that  corruption  cases  get 
time-barred  after  first-instance  conviction.  In  fact, 
the ratio of time-barred to resolved criminal cases, 
which  does  not  reflect  the  new  law  yet,  remained 
high  in  2016  (8 %  at  first  instance,  23.4 %  at  the 
third).  Moreover, 
second  at  1.3 %  at 
inefficiencies  of 
justice  system 
the  criminal 
continue to hinder the repression of corruption. For 
example,  in  2014  Italy  had  the  largest  number  of 

the 

(42)  A  country’s  statute  of  limitations  is  the  set  of  provisions 
establishing  ‘prescription  terms’  for  civil  or  criminal 
offences,  i.e.  the  maximum  period  of  time  after  a  crime, 
during which a legal proceeding against that crime may be 
initiated.  If  a  trial  is  ongoing  when  the  prescription  term 
expires, the trial is ‘time-barred’ and stops.  

48 

 
                                                           
4.4. Investment and competitiveness 

Box 4.4.1: Investment challenges and reforms in Italy 

Section 1. Macroeconomic perspective  

Since the crisis, the decline in investment has been sharper in Italy than in the EU on average. The fall in 
investment spending concerned both private and public and residential and non-residential investment, with 
the  latter  accounting  for  two  thirds  of  the  total  drop.  Investment  in  intangible  assets  showed  greater 
resilience,  but  Italy  still  lags  behind  other  euro  area  countries.  The  recent  recovery,  associated  with 
strengthening  demand  in  2016  and  2017,  has  also  been  weaker  than  in  peer  countries.  The  investment 
decline  in  Italy  was  mainly  driven  by  the  fall  in  domestic  demand,  declining  corporate  profits,  and  tight 
financing  conditions,  in  particular  due  to  the  vulnerable  banking  sector  with  its  very  high  stock  of  non-
performing  loans  (NPLs).  Italian  firms  have  also  relatively  more  debt  than  equity-financed,  which 
contributes to their limited access to further credit. Finally, the fiscal deficit and high general government 
debt continue to constrain public investment. As far as the Investment Plan is concerned, by September 2017 
91  projects  were  approved  for  EFSI  financing  in  Italy,  with  a  total  EFSI-related  investment  of  EUR 33 
billion. 

Section 2. Assessment of barriers to investment and ongoing reforms  

In  addition  to  macroeconomic  constraints,  the  overall  business  environment  in  Italy  is  not  conducive  to 
investment, especially in southern regions, as confirmed by the European Commission assessment. (1) The 
overlapping responsibilities between local and central governments and relatively poor institutional quality, 
implying e.g. slow contract enforcement, are weighing on investment. Some reforms have been adopted or 
are  in  the  pipeline,  in  particular  in  the  areas  of  the  judicial  system,  labour  legislation  and  competition 
framework, but implementation is far from being complete and other barriers remain to be addressed. 

Main barriers to investment 

1. Firms’ access to finance remains heavily biased towards banks where pockets of vulnerabilities persist, 
while capital markets remain underdeveloped (see section 4.2 and 4.4). In particular, young innovative firms 
are hampered by the lack of alternative sources of financing.  

2.  In  addition,  the  regulatory  framework  remains  burdensome  and  unpredictable,  which  hampers  business 
activities.  Inefficiencies  both  in  the  public  administration  and  the  justice  system,  frequent  and  often 
unpredictable  changes  to  the  legislation  and  slow  enforcement  due  to  lengthy  proceedings  weaken  the 
effectiveness of Italy’s legislation and undermine legal certainty (see section 4.4).  

3. The high level of taxation on productive factors reduces firms’ incentives to invest (see section 4.1).  

(1)  See ‘Challenges to Member States’ Investment Environments’, SWD (2015) 400 final  
http://ec.europa.eu/europe2020/challenges-to-member-states-investment-environments/index_en.htm 

49 

Regulatory/ administrative burdenTaxationCSRPublic administrationCSRAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemCSRFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCompetition and regulatory frameworkCSRRetailEPL & framework for labour contracts ConstructionWages & wage settingCSRDigital Economy / TelecomEducation EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedNot assessed yetPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
4.5.   SECTORAL POLICIES 

4.5.1.  COMPETITION IN PRODUCT AND SERVICE 
MARKETS AND BUSINESS ENVIRONMENT* 

Graph 4.5.1:  Overall restrictiveness of business services, 

2016 

Competition 

Several  Italian  sectors  are  still  over-regulated 
and  protected  from  competition.  They  include 
professional  services,  the  health  sector,  local 
public  transport,  rail  transport  and  the  system  of 
awarding  concessions  for  managing  publicly-
owned  goods.  Italian  law  envisages  an  annual 
exercise to further liberalise the national economy. 
The first annual competition law was presented in 
2015  and  adopted  in  August  2017.  Although  the 
final  text  is  less  ambitious  than  the  original  draft 
(European  Commission,  2017d)  the  adoption  of 
the competition law represents an important step in 
the right direction. A new annual competition law 
2018, 
is 
new 
expected 
recommendation  by 
the  national  competition 
authority. 

based 

on 

in 

More  competition  in  the  Italian  service  sector 
would translate into a sizeable productivity gain 
for the manufacturing sector. Easing the market 
entry  of  new  competitors  would  improve  the 
allocative efficiency of markets for services. These 
positive effects are not limited to the service sector 
but  would  benefit  the  broader  economy  and 
particularly 
the  manufacturing  sector  where 
services  are  an  important  input  factor.  Academic 
studies  suggest  that  deregulation  in  ‘upstream’ 
in 
service  sectors  entail  productivity  gains 
‘downstream’ manufacturing sectors (Arnold et al., 
2011; Duggan et al., 2013; Bas, 2014;) but depend 
among  other  things  on  the  institutional  setting 
(Rodriguez  &  Rodrik,  1999)  (43).  Reducing 
barriers is more effective if the institutional setting 
is  supportive  (see  Sections  4.4.3-4.4.5).  Greater 
competition and efficiency in the service sector is 
expected  to  remarkably  lift  productivity  in  Italy’s 
and  Muir, 
manufacturing 
2013) (44). 

(Lusinyan 

sector 

(43)  Arnold  et  al.,  2011;  Duggan  et  al.,  2013;  Bas,  2014; 

Arnold, J. M., Javorcik, B. S., & Mattoo, A., 2011. 

(44)  Forthcoming background paper by European Commission, 
DG  GROW.  See  also  Lusine  Lusinyan  and  Dirk  Muir, 
Assessing 
Impact  of  Structural 
Reforms:  The  Case  of  Italy,  IMF  Working  Paper 
WP/13/22. 

the  Macroeconomic 

Source: European Commission 

is 

their 

in  markets 

for 
The  competitive  pressure 
business services in Italy remains low. The level 
of restrictiveness on competition in Italy is among 
the  highest  in  the  EU  (Graph  4.5.1).  The  2015 
annual  competition  law  aims  to  reduce  regulatory 
barriers  for  certain  professions.  On  legal  services, 
the obligation for lawyers to belong to one specific 
professional  association 
removed.  Multi-
professional companies are allowed and law firms 
opened  up 
to  non-lawyer  partners,  both  for 
shareholdings (up to 33 % of the capital) and non-
executive  management  functions.  In  addition,  the 
law increases the number of licensed notaries and 
territorial  scope  while  aligning 
extends 
advertising 
those  of  other 
professions. The monopoly of Poste Italiane on the 
delivery  of  legal  notifications  was  also  abolished. 
The  competition  law  allows  non-pharmacists,  , 
with  a  regional  threshold  of  20%  of  the  total 
number  of  pharmacies,  albeit  under 
strict 
conditions,  to  acquire  pharmacies  and  liberalises 
opening hours. If properly and promptly enforced, 
these  measures  have  the  potential  to  increase 
productivity  in  downstream  sectors. However,  in 
December  2017  the  government  re-introduced  the 
competition  on 
limiting 
‘equo 
prices/fees  for  all  professionals  in  contractual 
relationship  with  parties  having  strong  bargaining 
power, such as banks and insurance. 

limitations  with 

compenso’ 

The  sharing  economy  has  boosted  demand  for 
services. 
transport 

accommodation 

and 

50 

00.511.522.533.5DEITFRESEUUKAccountantArchitectEngineerLegal professions 
 
                                                           
 
for 

the 

the  restrictions  on 

law  prompts 
the  sector  of 

the  government 
innovative 

the  number  of 
However, 
authorisations 
rented  cars  with  drivers 
(Noleggio con Conducente, NCC) and the possible 
entry into force of the ‘return to garage’ regulation 
are  limiting  the  supply  of  innovative  transport 
services.  Based  on  a  recommendation  by  the 
2015 
Italian  Competition  Authority, 
to 
competition 
reorganise 
transport 
services within 12 months to promote competition, 
establish common standards across the country and 
ensure  the  provision  of  transport  services  through 
interconnected  platforms.  However,  the  relevant 
decree  law  has  not  been  implemented  yet.  As 
regards 
the  accommodation  sector,  currently 
different  approaches  have  been  experimented  by 
the  government 
different 
adopted a new law in June 2017 defining the fiscal 
obligations  for  intermediaries,  including  digital 
platforms.  The  law  requires  the  intermediary  to 
withhold the flat tax on rent income (together with 
any  applicable  local  tourist  taxes).  It  also  obliges 
platforms  established  outside  Italy  to  appoint  a 
fiscal representative in Italy. 

regions.  However, 

by 

has 

been 

enhanced 

At  wholesale  level,  market  concentration  in 
Italy’s  electricity  sector  has  decreased  as 
competition 
the 
development  of  the  electricity  network  and  the 
excess  of  supply.  However,  wholesale  electricity 
prices  remain  amongst  the  highest  in  Europe.  In 
the  wholesale  gas  sector,  prices  remain  overall 
aligned with EU28 average. Despite the rather low 
market  liquidity,  the  level  of  competition  was 
somewhat  improved  by  the  early  introduction  of 
congestion  management  rules  at  the  northern 
border.  At  retail  level,  both  electricity  and  gas 
prices in Italy remain among the highest in Europe, 
notably  due  to  the  high  share  of  taxes  and  levies. 
Italy  has  adopted  in  2014  some  measures  (so-
called  "Taglia  bollette")  to  reduce  the  burden  of 
the 
renewable  energy  support  schemes  on 
electricity  bills  of  consumers  and  Small  and 
medium-sized enterprises. Both electricity and gas 
retail  markets  remain  concentrated  even  if  the 
annual switching rate among household consumers 
has  risen  (45).  Both  for  retail  electricity  and  gas 
markets,  the  standard  (monitored)  offer  market 

(45)  The  electricity  market  worsened  by  4.1  percentage  points 
and  now  ranks  among  the  lowest  in  the  EU.  The 
assessment for the gas sector remains among the lowest in 
the EU; upcoming Consumer Markets Scoreboard (2018). 

4.5. Sectoral policies 

(‘mercato  tutelato’,  for  households  only)  will  be 
phased  out  as  of  1  July  2019  bringing  more 
competition in the Italian market. 

is 

likely 

limited 

to  benefit 

The  quality  and  efficiency  of  the  transport 
sector 
from  greater 
competition via the tendering of public services 
contracts.  Competitive  call  for  tenders  for  public 
(European 
transport 
are 
services 
Commission,  2016b).  Despite 
the  positive 
experience  in  the  high-speed  railway  sector,  the 
direct  awarding  of  contracts  to  the  incumbent  are 
still  prevalent  in  other  parts  of  the  sector  and 
regards 
barriers 
issue  of 
motorways,  beyond 
concessions  being  directly  awarded 
the 
incumbent,  there  is  still  no  competition  in  the 
market 
Italy’s 
Transport  Regulation  Authority  has  become  fully 
operational and is using its wide-ranging powers to 
reform  the  regulatory  environment.  It  is  focusing 
particularly  on  railways,  ports,  passenger  rights, 
the  scope  of  public  service  contracts  and  quality 
requirements. 

remain.  As 
chronic 

for  newcomers 

for  electronic 

systems. 

toll 

the 

to 

transport 

Local  public 
in  Italy  remains 
inefficient,  with  a  low  costs-to-revenues  ratio.  In 
addition,  one  third  of  users  are  dissatisfied  with 
service  quality  (versus  a  EU  average  of  17 %) 
(Steer  Davies  Gleave,  2016).  The  government 
adopted new measures in 2017 (46), linking access 
to financing for local transport to efficiency targets 
including  revenue  growth  and  the  quality  of 
service  as  well  as  the  use  of  competitive  tenders. 
Stringent 
incentives, 
together  with  the  delivery  of  the  infrastructure 
investment 
needed 
improvements. 

implementation  of 

drive 

plan, 

can 

the 

the 

Business environment 

Doing  business  in  Italy  is  significantly  more 
difficult  than  in  peer  countries.  Carrying  out 
tasks  requiring  the  involvement  of  the  public 
administration  implies  comparatively  higher  costs 
and less efficient procedures than in other big EU 
countries  (World  Bank,  2016  and  2018).  Italy 
performs  still  poorly 
terms  government 
regulations  and  complexity  of  the  administrative 
by 
situation 
procedures, 
(European 
continuously  changing 

exacerbated 

legislation 

in 

a 

(46)  Decree Law 50/2017. 

51 

 
                                                           
                                                           
Commission, 2017h). Further complicating factors 
are  the  administrative  burden  associated  with  tax 
payments;  the  high  cost  of  enforcing  contracts 
(which  on  average  amounts  to  23%  of  the 
claim) (47).  However,  performance 
indicators 
suggest  that  the  administration  has  become  more 
responsiveness  to  the  needs  of  SMEs  in  specific 
areas  (European  Commission,  2017i,  k):  policy 
measures have been effective in reducing the time 
needed  to  start  a  business  (although  overall  costs 
are still very high) (48), lowering paid-in minimum 
capital  requirements  and  reducing  the  time  and 
cost required to transfer property.  

The  public  administration’s  responsiveness  to 
business  needs  varies  significantly  between 
regions.  The  European  Quality  of  Governance 
Index  shows  that  Italy  is  the  EU  country  where 
these  differences  are  widest  (Graph  4.5.2).  This 
results 
environments 
depending on where entrepreneurs are located and 
has an impact on their ability to invest and engage 
in innovative activities. It also affects their ability 
to  take  advantage  of  the  opportunities offered  by 
the European Structural and Investment Funds. 

in  different  business 

Italy’s  public  procurement  system  has  been 
reformed.  However  missing  elements  for  the 
implementation  include  the adoption of  a national 
plan  for  ‘end-to-end’  public  procurement,  the 
aggregation  of  public  procurement  and 
the 
required qualifications of economic operators. The 
creation of a central coordination body (Cabina di 
regia per gli appalti pubblici) aims to address the 
inefficiency  of  the  system  and  the  traditional  lack 
of  coordination  between  different  government 
services.  These  reforms,  if  fully  implemented,  are 
expected  to  improve  the  business  environment, 
competition and transparency. However, the actual 
activation  of  the  coordination  body  is  uncertain 
which  also  risks  slowing  down  Italy’s  efforts 
towards  a  modern  and  digitalised  procurement 
system (e-procurement). 

(47)  Three types of costs are recorded: court costs, enforcement 

costs and average attorney fees. 

(48)  These amounted to EUR 2 000 in 2016 while EU average 
is  EUR  360.  More  than  half  of  the  costs  are  notary  fees. 
(SME  Performance  Review  2017  –  SBA  fact  sheet  on 
Italy). 

4.5. Sectoral policies 

Graph 4.5.2:  European quality of government index - best 

and worst performing regions per country 

Notes: France's overseas territories are excluded 
Source: European Commission, 2018e 

4.5.2.  NETWORK INDUSTRIES, ENERGY, CLIMATE 

AND ENVIRONMENT 

latest 

Italy  is  lagging  behind  in  the  development  of 
broadband  networks.  The  government  has 
launched  a  call  for  tender  to  provide  all  ‘white’ 
areas (49)  with  ‘next-generation  access’  (NGA) 
networks with a speed above 30Mbps (High-speed 
broadband).  The 
revision  of  private 
operators’ plans for NGA investment has led to the 
emergence  of  a  further  8 %  of  white  areas  which 
still  need  to  be  addressed.  Meanwhile,  NGA 
subscriptions  increased  by  94 %  between  June 
2016  and  June  2017,  compared  with  just  5.7 % 
growth  in  broadband  subscriptions  over  the  same 
period. (50)  The  second  phase  of  Italy’s  fast 
broadband  strategy  includes  demand-supporting 
measures  of  EUR  1.3  billion  (e.g.  vouchers)  to 
boost 100Mpbs broadband. The penetration of this 
type of broadband was only 4.8 % in 2017, below 
the  level  in  peer  economies  and  far  short  of  the 
50 %  goal  indicated  by  the  EU’s  Digital  Agenda 
(51).  

(49)  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)  However,  according  to  the  telecommunications  regulator 
Agenzie per le Garanzie delle Communicazioni (AGCOM), 
private  operators’  most  recent  plans  for  NGA  investment 
imply a further 8 % increase of white areas. 
(51)  Upcoming Consumer Markets Scoreboard (2018). 

52 

-2.5-2-1.5-1-0.500.511.522.53FIDKSENLLUDEUKIEATFRBEEEPTESMTCYLTSICZPLLVSKHUITHRELROChart TitleBest perf.Worst perf.Average perf. 
                                                           
 
                                                           
4.5. Sectoral policies 

Graph 4.5.3:  Ultra-fast Broadband coverage and 

penetration in 2017 (% of households) 

significant energy imports with the risk of serious 
congestion  problems.  In  2015  Italy’s  renewable 
energy  sector  accounted  for  97 100  employees 
(well  above  the  EU  average)  with  a  turnover 
estimated 
EUR 18.7 billion 
around 
(EurObserv’ER, 2017). 

at 

Italy  has  already  reached  its  national  2020 
renewable  energy  target.  Italy  is  among  the 
biggest  European  producers  of  energy  from 
geothermal,  solar  and  hydrodynamic  power.  Italy 
is  also  the  leading  country  in  the  use  of  heat 
pumps.  However,  uncertainty  over  the  regulatory 
framework,  past  changes  to  the  schemes  for 
supporting  renewables  (e.g.  retroactive  cuts  in 
feed-in 
and 
administrative  procedures  have 
burdensome 
limited market growth in recent years. Progress in 
energy  efficiency  is  registered  mainly  in  the 
manufacturing and transport sectors. 

existing  projects) 

tariffs 

for 

incentives 

to  promote 

in 
investment 

Italy uses a variety of regulatory measures and 
economic 
energy 
efficiency.  Tax  credits  for  energy  efficiency 
residential  buildings  has 
improvements 
triggered 
billion 
associated  with  a  tax  expenditure  of  around 
EUR 18.2 billion between 2007 and 2016 (ENEA, 
2017). (53) In November 2017, Italy adopted a new 
national  energy  strategy  (Strategia  Energetica 
Nazionale) including:  

of  EUR 31.2 

  a  national  renewable  energy  objective  of  28% 

of gross energy consumption for 2030; 

  a  reduction  target  of  10  Mtoe/year  in  2030  in 

final energy consumption; 

 

the full phase out of coal-fired power plants by 
2025; 

  a  goal  of  doubling 

in  clean 
technologies from EUR 222 million in 2013 to 
EUR 444 million in 2021.  

investments 

  The strategy also includes measures to improve 
the  adequacy,  flexibility  and  resilience  of  the 
electricity and gas systems. 

(53)  Rapporto  Annuale  Detrazioni  fiscali  del  65 %  per  la 
riqualificazione 
edilizio 
esistente, 2017, ENEA —  Agenzia nazionale per le nuove 
tecnologie, l'energia e lo sviluppo economico sostenibile. 

energetica  del  patrimonio 

Source: European Commission 

to 

the  2016  EU  Transport 
According 
Scoreboard, 
Italy's  main 
the  quality  of 
infrastructure  remains  below  the  EU  average 
(52).  The  rail  sector  is  still  characterised  by  a 
sizeable  gap  between  north  and  south  in  terms  of 
infrastructure  endowment  and  traffic  management 
technology.  Railways  are  expected  to  be  a  major 
beneficiary  of  the  new  National  Investment  Fund 
(receiving 39.1 % of the EUR 46 billion earmarked 
until  2020).  The  new  strategy  aims  to  improve 
planning,  prioritise 
focus  on 
sustainable  urban  mobility,  foster  multimodality 
and  introduce  project  reviews.  The  spending, 
monitored by ANAC, is expected to focus on local 
transport  (improvement  of  metro  networks),  the 
safety  of  local  and  regional  railways  (ferrovie  ex-
concesse). 

investments, 

The  ongoing  transition  towards  renewable 
energy  sources  requires  significant  investment 
and  changes  to  the  structure  of  Italy’s  energy 
markets.  Italy  remains  insufficiently  connected 
with  the  EU  electricity  market  and  the  available 
interconnection  capacity 
is  not  always  fully 
exploited. Further capacity on the national network 
would  improve  the  security  and  flexibility  of  the 
system.  In  particular,  the  country  still  relies  on 

(52)  Despite an improvement since 2015, consumers assessment 
on  local  transport  (worst  in  the  EU)  and  on  train  services 
(4th  worst  position  in  the  EU)  is  well  below  the  EU28 
average. Source: upcoming Consumer Markets Scoreboard 
(2018). 

53 

0%10%20%30%40%50%60%70%80%90%ESDEEUUKFRITUltra-fast Broadband coverage (>100Mbps)Ultra-fastBroadband penetration (>100Mbps 
 
                                                           
                                                           
4.5. Sectoral policies 

Box 4.5.1: Policy highlights: Equitable and Sustainable Well-being indicator system 

Italy  has  taken  significant  steps  towards  the  inclusion  of  the  sustainable  development  dimension  into 
budgetary  and  financial  issues  with  the  creation  of  the  BES  (Benessere  equo  e  sostenibile)  Equitable  and 
Sustainable  Well-being  indicator  system.  The  BES  indicators  are  organised  in  129  indicators  in  12  fields. 
The law (1) establishing BES also creates an ad hoc Committee made of representatives from the Ministry of 
Economy and Finance (MEF), Bank of Italy, the National Institute of Statistics (ISTAT, Istituto nazionale di 
statistica)  and  high-level  experts  from  the  academic  and  research  field  to  identify  the  indicators  that  are 
attached  to  the  Annual  Financial  Law  (Documento  di  Economia  e  Finanza).  Furthermore,  MEF  is  tasked 
with  the  production  of  an  annual  analysis  reporting  back  to  the  parliament  by  15  February  each  year  as 
regards progress and trends of the indicators. 

The 12 dimensions of well-being 

Health 

Economic well-being 

Security 

Environment 

Education and 
Training 

Work and life 
balance 

Social relationship 

Subjective well-being 

Politics and 
Institutions 

Landscape and 
cultural heritage 

Research, innovation 
and creativity 

Quality of services 

www.istat.it/en/well-being-and-sustainability  

(1)  Law No. 163 of 4 August 2016 n° 163, Art 1.6 & Art.14 G.U. 25/08/2016 

Italy is on track to achieve its 2020  greenhouse 
gases  emissions  reduction  target.  According  to 
the  latest  national  projections  based  on  existing 
measures,  emissions in sectors not covered by the 
EU ETS are expected to decrease by 21% between 
2005  and  2020,  with  respect  to  a  target  of  13%. 
Approximated data for 2016 show a 17% decrease 
of emissions, with respect to a 10% decrease target 
for the same year.  

a 

of 

an 

annual 

adopted 

national 

implementation 

review 
this  end, 

Italy 
sustainable 
development  strategy  (NSDS)  in  2017  to  guide 
the 
the  Sustainable 
Development  Goals  (SDGs).  The  Presidency  of 
the  Council  of  Ministers  will  coordinate  and 
manage  the  Strategy  and  the  Government  will 
about  NSDS 
provide 
implementation.  To 
in  2017  Italy 
pioneered the development of the Benessere, Equo 
e  Sostenibile  (BES)  indicators  to  accompany  the 
annual  budget law  and  to  contribute  to  the  NSDS 
monitoring  process.  The  government  also  devised 
a  catalogue  of  environment-friendly  and  -harmful 
subsidies (in the first estimate of 2016, EHSs and 
EFSs amount respectively to 16.2 and 15.7 billion 
EUR) 
a  Natural  Capital 
Committee.  However,  the  Green  Act  to  promote 
the  transition  to  a  circular  economy  is  still  in  the 
pipeline. 

established 

and 

Waste  management  and  water  infrastructure 
need  a  substantial  upgrade  particularly  in  the 
southern  regions.  The  necessary  investment  in 
urban wastewater treatment is estimated to amount 
to EUR 4.6 billion (European Commission, 2017j), 
the highest in the EU in absolute terms. Recycling 
of  municipal waste  is  increasing,  reaching  45.1 % 
in  2016, 
the  EU  average 
(45.6 %) (Eurostat,  2017).  However,  bringing  the 
southern  regions  up  to  the  performances  of  the 
north  of  the  country  and  putting  in  place  a 
structural mechanism to ensure that all landfills are 
adequately  monitored  remains  the  key  challenge 
for waste management. 

slightly  below 

Air  pollution  in  Italy  continues  to  give  rise  to 
serious  human health  concerns.  Despite a  slight 
reduction  in  premature  deaths  from  air  pollution 
between  2013  and  2014,  Italy  still  registers  the 
second  worst  figures 
the  EU  (European 
Environment  Agency,  2017).  The  problem  is 
particularly  severe  in  the  central  and  northern 
regions.

in 

54 

 
 
 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (54)  

2017 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. 

CSR 1: Pursue a substantial fiscal effort in 2018, in 
line  with  the  requirements  of  the  preventive  arm  of 
the Stability and Growth Pact, taking into account the 
need  to  strengthen  the  ongoing  recovery  and  to 
ensure  the  sustainability  of  Italy’s  public  finances. 
Ensure  timely  implementation  of  the  privatisation 
programme  and  use  windfall  gains  to  accelerate  the 
reduction  of  the  general  government  debt-to-GDP 
ratio.  Shift  the  tax  burden  from  the  factors  of 
production onto taxes less detrimental to growth in a 
budget-neutral  way  by  taking  decisive  action  to 
reduce  the  number  and  scope  of  tax  expenditures, 
reforming 
the  outdated  cadastral  system  and 
reintroducing the first residence tax for high-income 
households.  Broaden 
the  compulsory  use  of 
electronic invoicing and payments.  

Pursue a substantial fiscal effort in 2018, in line with 
the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  taking  into  account  the 
need  to  strengthen  the  ongoing  recovery  and  to 
ensure the sustainability of Italy’s public finances.  

The  compliance  assessment  with  the  Stability  and 
Growth  Pact  will  be  carried  out  in  spring  when 
final data for 2017 is available. 

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

Limited  Progress  Since  the  issuance  of  the  2017 
CSRs,  and  despite  the  confirmation  of  ambitious 
privatisation  targets  for  both  2017  (0.2%  of  GDP) 
and  2018  (0.3%  of  GDP),  no  new  privatisations 
have  been  carried  out.  Italy's  debt-to-GDP  ratio  is 
forecast  by  the  COM  to  only  stabilise  in  2017  (at 

(54)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 

no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  national  reform  programme  or  in  any  other  official 
communication to the national Parliament/relevant parliamentary committees or the European Commission, or publicly (e.g. in 
a press statement or on the government's website);  

no non-legislative acts have been presented by the governing or legislative 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 to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

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

legislative work is needed before the CSR is implemented;  

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is  still needed to address the CSR fully as only a few of the measures have been 
implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision, but 
no implementing decisions are in place. 

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

have been implemented. 

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

55 

 
 
 
                                                           
A. Overview table 

132.1%) and slightly decrease in 2018 (to 130.8%).  

Shift  the  tax  burden  from  the  factors  of  production 
onto  taxes  less  detrimental  to  growth  in  a  budget-
neutral  way  by  taking  decisive  action  to  reduce  the 
number and scope of tax expenditures, reforming the 
outdated cadastral system and reintroducing the first 
residence tax for high-income households.  

Limited Progress While measures have been taken 
to  reduce  the  tax  burden  on  labour  and  capital,  no 
shift to property and consumption can be recorded. 
Tax  expenditures  haves  been  reviewed  but  not 
streamlined;  no  changes  have  been  made  to  the 
property  tax;  the  reform  of  cadastral  values  is  still 
pending.  

Broaden  the  compulsory  use  of  electronic  invoicing 
and payments.  

Substantial  Progress  Mandatory  e-invoicing  has 
been  extended  to  the  private  sector  as  of  2019 
(2018 for fuels and public procurement). No action 
has been made to further electronic payments.  

Italy has made Some Progress in addressing CSR 2  

CSR  2:  Reduce  the  trial  length  in  civil  justice 
rules 
through  effective  case  management  and 
ensuring  procedural  discipline.  Step  up  the  fight 
against  corruption,  in  particular  by  revising  the 
statute  of  limitations.  Complete  reforms  of  public 
employment and improve the efficiency of publicly-
owned  enterprises.  Promptly  adopt  and  implement 
the  pending  law  on  competition  and  address  the 
remaining restrictions to competition.  

Reduce  the  trial  length  in  civil  justice  through 
effective  case  management  and  rules  ensuring 
procedural discipline.  

Limited  Progress  A  few  civil  justice  reforms  of 
limited  scope  have  been  passed,  but  an  all-
encompassing  reform  of  the  civil  trial  is  still 
pending  and  evidence  does  not  support  yet  the 
effectiveness of reforms to avoid abuses of the trial. 
Overall,  disposition  time  does  not  show  a  clear 
downward trend compared to past years.  

Step up the fight against corruption, in particular by 
revising the statute of limitations.  

Italy's 

Substantial  Progress  Overall, 
anti-
corruption  framework  has  been  improved  in  the 
past  year  by  revising  the  statute  of  limitations  and 
extending  whistle-blowers'  protection  to  private 
sector  workers.  While  some  powers  of  ANAC  in 
the  area  of  procurement  were  curtailed, 
the 
Authority  was  given  a  more  prominent  role  in 
monitoring 
the  new 
framework.  However,  these  new  competencies 
remain to be operationalised through a regulation.  

implementation  of 

the 

Complete 
reforms  of  public  employment  and 
improve the efficiency of publicly-owned enterprises.  

Some  Progress  The  implementation  of  the  Public 
administration  reform  is  almost  complete.  The 
relevant 
to  reform  public 
employment  have  been  adopted  and  need  to  be 
operationalised. The new framework for SOEs is in 
place and needs to be implemented.  

legislative  decrees 

Promptly  adopt  and  implement  the  pending  law  on Some  Progress  The  2015  annual  competition  law 

56 

 
A. Overview table 

competition and address the remaining restrictions to 
competition.  

was  adopted  and  it  needs  to  be  implemented.  No 
actions  have  been  taken  to  remove  remaining 
restrictions to competition. 

CSR 3: Accelerate the reduction in the stock of non-
performing loans and step up incentives for balance-
sheet  clean-up  and  restructuring,  in  particular  in  the 
segment  of  banks  under  national  supervision.  Adopt 
regulatory 
a  comprehensive  overhaul  of 
framework 
collateral 
for 
enforcement.  

insolvency 

the 
and 

Italy has made Some Progress in addressing CSR 3  

Accelerate  the  reduction  in  the  stock  of  non-
performing loans and step up incentives for balance-
sheet  clean-up  and  restructuring,  in  particular  in  the 
segment of banks under national supervision.  

In 

the  banking  sector, 

Some  Progress 
the 
authorities' clean-up of some of the weakest banks 
in  mid-2017  has  reduced  acute  financial  stability 
risks.  The  high  legacy  stock  of  NPLs  is  declining 
on  the  back  of  NPL  disposals  including  via  the 
securitisation scheme supported by state guarantees 
(GACS). The supervisor has enhanced oversight of 
less 
by 
institutions 
announcing a NPL guidance. The various corporate 
governance 
track. 
Consolidation  and  restructuring  in  the  banking 
sector have continued.  

reforms  are  broadly  on 

significant 

including 

Adopt  a  comprehensive  overhaul  of  the  regulatory 
framework 
collateral 
insolvency 
enforcement.  

and 

for 

Limited  Progress  Regarding  the  overhaul  of  the 
insolvency  framework,  the  enabling  law  has  been 
adopted, and relevant implementing decrees have to 
be  passed  within  a  year.  The  Patto  Marciano,  an 
adopted measure to shorten the period of collateral 
enforcement, is not yet used by banks for firms.  

CSR  4:  With  the  involvement  of  social  partners, 
strengthen  the  collective  bargaining  framework  to 
allow  collective  agreements  to  better  take  into 
account  local  conditions.  Ensure  effective  active 
labour market policies. Facilitate the take-up of work 
for  second  earners.  Rationalise  social  spending  and 
improve its composition.  

Italy  has  made  Limited  Progress  in  addressing 
CSR 4  

With  the  involvement  of  social  partners,  strengthen 
to  allow 
the  collective  bargaining 
collective agreements to better take into account local 
conditions.  

framework 

the 
agreement 

taken  before 
relevant  CSR,  while 

Limited  Progress  The  use  of  second-level 
contracts  is  very  limited.  Most  actions  relating  to 
the 
collective  bargaining  were 
the 
adoption  of 
intersectoral 
bargaining 
framework  has  not  been  renegotiated  yet.  Social 
the 
partners 
representativeness  of 
is 
expected  to  become  only  operational  in  2019.  The 
tax  rebates  on  productivity-related  wage  increases 
set  by  second-level  agreements  were  strengthened 

trade  unions,  which 

agreement 

updated 

the 

the 

on 

on 

57 

 
Ensure effective active labour market policies.  

Facilitate the take-up of work for second earners.  

Rationalise 
composition.  

social 

spending  and 

improve 

A. Overview table 

in 2017. 

Limited  Progress  The  reform  of  ALMPs  is  still 
incomplete.  The  new  Agency  for  Active  Labour 
Market Policies was set up in January 2017, but the 
governance of the system is still into jeopardy.  The 
adoption by the Ministry of Labour of the strategic 
plan  on  ALMP  has  been  delayed.  In  this  context, 
the  PES  placement  capacity  remains  extremely 
limited,  with  a  few  exceptions.  A  pilot  project  on 
the  outplacement  voucher  was  launched  in  2017, 
but the uptake has been lower than expected. In the 
absence  of  a  common  methodology  for  data 
collection,  monitoring  and  performance  evaluation 
remain  weak.  The  annual 
the 
implementation of the provisions of the Jobs Act on 
ALMPs, foreseen by the Decree 150/2015, have not 
been published. 

reports  on 

in 

the  Budget 

Limited  Progress  Some  measures  have  been 
the 
introduced 
extension  of  paternity  leave.  However,  policy 
actions  remain  fragmented  and  a  comprehensive 
strategy is still lacking. 

including 

law, 

its 

also 

(REI),  which 

Some  Progress  To  fight  poverty  and  social 
exclusion,  a  new  permanent  measure  has  been 
adopted 
incorporates 
unemployment  assistance  and  partly  rationalises 
social spending. However, the latter remains biased 
towards  old-age  expenditure.  In  fact,  the  2018 
Budget further extends some provisions of the 2017 
Budget  partially  reversing  past  pension  reforms, 
which  increase  the  already  high  pension  share  in 
overall social spending.  

Europe 2020 (national targets and progress)  

Employment rate target: 67-69 %.  

R&D target set in the NRP: 1.53 % of GDP  

The employment rate has substantially increased to 
61.6 in2016 and 62.7 % in the third quarter of 2017 
(compared with 60.5 % in 2015). 

Italy has achieved limited progress in the last years, 
and it is not on track to meet its target of spending 
1.53% GDP on R&D by 2020. 

58 

 
 
 
 
A. Overview table 

R&D intensity in 2016 is equal to 1.29%, up from 
1.13% in 2007, with an average annual growth rate 
of  1.4%  in  the  period  2007-2016.  R&D  intensity 
has been declining since 2014. 

-  Public  R&D  intensity  has  been  on  a  downward 
path  since  2013,  and  its  value  in  2016  (0.50%)  is 
lower than the pre-crisis value in 2007 (0.51%). 

- Private R&D intensity has experienced an increase 
since 2007, and it stood at 0.75% of GDP in 2016, 
much below the EU average of 1.32%. 

National  greenhouse  gas  (GHG)  emissions  target:  
-  13  %  in  2020  compared  with  2005  (in  sectors  not 
included in the EU emissions trading scheme)  

to 

the 

According 
latest  national  projections 
submitted to the European Commission in 2017 and 
taking  into  account  existing  measures,  Greenhouse 
gas  emissions  are  projected  to  decrease  by  21% 
between 2005 and 2020. Therefore Italy is on track 
to reach its 2020 greenhouse gas emission reduction 
target  

2020 renewable energy target: 17 %  

renewable  electricity  generation 

With a renewable energy share of 17.5 % in 2016, 
Italy has already reached the 2020 target. The share 
of 
final 
electricity  consumption  and  in  heating  and  cooling 
more 
than  doubled  between  2005  and  2016, 
increasing from 16.3 % to 34 % and from 8.2 % to 
18.8 % respectively.  

in 

Energy efficiency, 2020 energy consumption targets:  

Italy's  2020  energy  efficiency  target  is  158  Mtoe 
expressed in primary energy consumption (124 Mtoe 
expressed in final energy consumption)  

The  target  was  set  at  a  level  that  would  allow 
energy  consumption  to  grow  in  the  coming  years. 
After  the  growth  of  both  primary  and  final  energy 
consumption  in  the  period  2013-2014,  energy 
consumption  in  the  country  is  now  decreasing 
again,  in  line  with  the  decreasing  trend  registered 
since  2010.  Italy  decreased  its  primary  energy 
consumption  from  149,56  Mtoe  in  2015  to  148.44 
Mtoe in 2016. Final energy consumption decreased 
from 116.23 Mtoe in 2015 to 116.44 Mtoe in 2016. 
In  light  of  the  recent  economic  recovery  in  Italy, 
further  efforts  are  however  still  needed  to  confirm 
these levels until 2020. 

Early school/training leaving target: 16 %.  

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)  was  13.8  %  in  2016, 
still  higher  than  the  EU  average  but  signalling  a 
considerable  and  consistent  decrease  over  the  past 
five years. 

Tertiary  education  target:  26-27  %  of  population Italy  has  made  significant  progress 

towards 

59 

 
A. Overview table 

aged 30-34.  

achieving  this  target.  The  tertiary  educational 
attainment  rate  rose  to  26.2  %  in  2016  but  it  still 
consistently below the EU average  

Target  for  reducing  the  number  of  people  at  risk  of 
poverty or social exclusion, expressed as an absolute 
number of people: -2.2 million (base year 2008: 15.1 
million).  

The percentage of the population at-risk-of-poverty-
or-social-exclusion  was 
2016, 
in 
deteriorating by 1.2 pps compared to 2015. 

29.9% 

60 

 
ANNEX B: MACROECONOMIC IMBALANCE PROCEDURE 

SCOREBOARD 

Table B.1: 

The MIP scoreboard for Italy (AMR 2018) 

Flags: p: Provisional. (1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as 
of 24 Oct 2017. Please note that figures reported in this table may therefore differ from more recent data elsewhere in this 
document.(2) Figures highlighted are those falling outside the threshold established in the European Commission's Alert 
Mechanism Report. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

61 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%-2.8 -2.2 -0.8 0.9 1.5 2.1 Net international investment position% of GDP-35%-18.3 -22.2 -22.7 -21.2 -19.7 -9.8 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-3.2 -6.2 0.1 0.2 -2.4 -3.4 Export market share - % of world exports5 year % change-6%-19.2 -25.3 -19.9 -14.9 -8.9 -2.8 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)5.3 2.1 2.9 2.3 1.6 1.9 House price index (2015=100), deflated 1 year % change6%-2.1p-5.4p-6.9p-4.6p-2.7p-0.8pPrivate sector credit flow, consolidated% of GDP14%3.1 -0.8 -3.0 -0.5 -1.3 0.6 Private sector debt, consolidated% of GDP133%122.7 125.1 121.6 119.0 115.3 113.6 General government gross debt% of GDP60%116.5 123.4 129.0 131.8 131.5 132.0 Unemployment rate3 year average10%8.2 9.2 10.4 11.8 12.2 12.1 Total financial sector liabilities, non-consolidated1 year % change16.5%5.0 7.3 -2.6 0.5 1.5 3.2 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp-0.8 1.2 1.4 1.8 0.5 1.5 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp1.3 2.2 2.9 3.4 1.3 -0.2 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp8.0 10.0 12.1 13.5 5.0 -2.2 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2017. (2) Latest data Q2 2017. (3) As per ECB definition of gross non-performing debt instruments (4) 
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) 

62 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)261.6252.3248.0237.2233.5226.3Share of assets of the five largest banks (% of total assets)39.739.641.041.043.0-Foreign ownership of banking system (% of total assets)(2)8.88.68.37.88.67.5Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)11.012.913.613.612.410.1              - capital adequacy ratio (%)13.413.714.214.813.915.3              - return on equity (%)(4)-1.0-11.5-2.83.1-7.74.6Bank loans to the private sector (year-on-year % change)(1)1.7-3.5-0.8-0.6-0.2-2.5Lending for house purchase (year-on-year % change)(1)-0.5-1.1-0.90.41.72.2Loan to deposit ratio(1)117.3111.0108.2102.797.695.0Central Bank liquidity as % of liabilities--6.25.16.58.0Private debt (% of GDP)125.1121.6119.0115.3113.6-Gross external debt (% of GDP)(2) - public41.043.250.350.947.545.6    - private30.631.230.929.627.627.1Long-term interest rate spread versus Bund (basis points)*399.8274.7172.9121.8139.8182.2Credit default swap spreads for sovereign securities (5-year)*323.2199.7101.692.2107.886.8 
 
 
 
 
C. Standard tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). 
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks. 
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018. 
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
(5) Average of first three quarters of 2017, except for the indicator "individual who have basic or above basic digital skills" 
(annual data). Data for unemployment rate is seasonally adjusted. 
"Sources: Eurostat" 

63 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)17.316.815.014.713.8:Gender employment gap (pps)21.019.819.420.020.120.0Income inequality, measured as quintile share ratio (S80/S20)5.65.85.85.86.3:At-risk-of-poverty or social exclusion rate1 (AROPE)29.928.528.328.730.0:Young people neither in employment nor in education and training (% of population aged 15-24)21.022.222.121.419.9:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)60.959.759.960.561.662.3Unemployment rate2 (15-74 years)10.712.112.711.911.711.3Gross disposable income of households in real terms per capita3 (Index 2008=100) ::88.489.691.0:Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction420.421.521.521.721.4:Children aged less than 3 years in formal childcare21.022.022.927.334.4:Self-reported unmet need for medical care5.77.07.07.25.5:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::43.044.0: 
 
 
 
 
 
C. Standard tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is Defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of genDer inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are incluDed.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores.  Values for 2012 and 2015 refer respectively to 
mathematics and science.      
(5) Average of first three quarters of 2017. Data for youth unemployment rate is seasonally adjusted. 
Source:  Eurostat, OECD 

64 

Labour market indicators201220132014201520162017 5Activity rate (15-64)63.563.463.964.064.9:Employment in current job by durationFrom 0 to 11 months9.48.99.310.010.3:From 12 to 23 months6.55.95.66.17.0:From 24 to 59 months14.513.813.312.412.4:60 months or over69.671.471.871.570.3:Employment growth* (% change from previous year)-0.3-1.80.10.71.31.4Employment rate of women(% of female population aged 20-64)50.549.950.350.651.652.4Employment rate of men (% of male population aged 20-64)71.569.769.770.671.772.3Employment rate of older workers* (% of population aged 55-64)40.342.746.248.250.351.9Part-time employment* (% of total employment, aged 15-64)16.817.618.118.318.518.7Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)13.813.213.614.114.015.2Transition rate from temporary to permanent employment(3-year average)21.420.119.119.8::Long-term unemployment rate1 (% of labour force)5.66.97.76.96.76.5Youth unemployment rate (% active population aged 15-24)35.340.042.740.337.835.4Gender gap in part-time employment24.324.324.324.424.524.4Gender pay gap2 (in undadjusted form)6.57.06.15.5::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)6.66.28.17.38.3:Underachievement in education324.7::23.3::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)21.922.523.925.326.2:Variation in performance explained by students' socio-economic status410.1::9.6:: 
 
 
 
 
C. Standard tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Sources: Eurostat, OECD 

65 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare6.86.86.86.6::Disability1.61.71.71.7::Old age and survivors16.717.016.816.8::Family/children1.21.21.61.7::Unemployment1.61.81.71.7::Housing0.00.00.00.0::Social exclusion n.e.c.0.20.20.20.2::Total28.128.628.828.8::of which: means-tested benefits1.61.62.12.2::General government expenditure by function (% of GDP, COFOG)Social protection20.521.021.221.321.1:Health7.27.27.27.07.0:Education4.14.14.04.03.9:Out-of-pocket expenditure on healthcare (% of total health expenditure)21.721.822.122.8::Children at risk of poverty or social exclusion (% of people aged 0-17)*34.132.032.133.533.2:At-risk-of-poverty  rate1 (% of total population)19.519.319.419.920.6:In-work at-risk-of-poverty rate (% of persons employed)11.011.011.011.511.7:Severe material deprivation rate2  (% of total population)14.512.311.611.512.1:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan8.39.18.49.76.5:Tenant, rent at market price16.816.219.118.614.8:Proportion of people living in low work intensity households4 (% of people aged 0-59)10.611.312.111.712.8:Poverty thresholds, expressed in national currency at constant prices*86118212811881478344:Healthy life years (at the age of 65)Females7.17.17.37.5::Males7.77.77.87.8::Aggregate replacement ratio for pensions5 (at the age of 65)0.60.60.60.70.7:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::35.640.243.553.8GINI coefficient before taxes and transfers*51.051.651.751.3::GINI coefficient after taxes and transfers*32.432.832.432.4:: 
 
 
 
 
 
C. Standard tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
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 codified 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 don't know. (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 here: 
http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm (6) Aggregate OECD 
indicators of regulation in energy, transport and communications (ETCR). 
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). 

66 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry8.621.131.620.590.891.54-0.29Labour productivity in Construction-1.49-3.342.755.53-2.06-0.042.18Labour productivity in Market Services2.110.09-1.540.871.07-0.10-1.59Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-5.781.681.371.840.680.730.26ULC in Construction2.344.93-0.35-4.450.682.570.90ULC in Market Services-0.401.442.021.010.202.533.44Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)1210.01210.01185.01185.01185.01120.01120.0Time needed to start a business(1) (days)7.07.08.08.07.06.56.5Outcome of applications by SMEs for bank loans(2)0.740.801.080.951.060.580.51Research and innovation2010201120122013201420152016R&D intensity1.221.211.271.311.341.341.29General government expenditure on education as % of GDP4.404.104.104.104.004.00naPersons with tertiary education and/or employed in science and technology as % of total employment31323333333434Population having completed tertiary education(3)13131414151616Young people with upper secondary level education(4)77777878808081Trade balance of high technology products as % of GDP-1.15-0.91-0.61-0.43-0.41-0.54naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overall1.801.491.26OECD PMR5, retail3.854.063.15OECD PMR5, professional services3.553.022.10OECD PMR5, network industries(6)2.972.452.01 
 
 
 
 
 
 
 
C. Standard tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 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 % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 GHG 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 2010 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 covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source:  European  Commission  and  European  Environment  Agency  (Share  of  GHG  emissions  covered  by  ETS);  European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

67 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.110.110.100.100.100.10Carbon intensity kg / €0.300.300.290.270.28-Resource intensity (reciprocal of resource productivity)kg / €0.410.360.320.270.270.27Waste intensity kg / €-0.10-0.10--Energy balance of trade % GDP-3.6-3.8-3.3-2.6-2.0-1.6Weighting of energy in HICP%8.379.5710.029.119.969.55Difference between energy price change and inflation %5.09.20.1-3.7-2.8-4.7Real unit of energy cost% of value added13.814.113.713.7--Ratio of environmental taxes to labour taxesratio0.140.160.160.170.16-Environmental taxes% GDP3.13.53.53.63.43.5Sectoral Industry energy intensity kgoe / € 0.110.110.100.100.100.10Real unit energy cost for manufacturing industry excl. refining% of value added19.619.318.818.9--Share of energy-intensive industries in the economy% GDP8.578.718.618.518.448.60Electricity prices for medium-sized industrial users€ / kWh0.160.170.170.170.160.15Gas prices for medium-sized industrial users€ / kWh0.030.040.040.040.030.03Public R&D for energy % GDP0.020.020.020.020.020.02Public R&D for environmental protection% GDP0.020.020.010.020.010.01Municipal waste recycling rate%35.538.439.441.643.545.3Share of GHG emissions covered by ETS*%40.139.937.636.636.335.7Transport energy intensitykgoe / €0.540.530.540.560.570.57Transport carbon intensitykg / €1.481.441.441.531.53-Security of energy supplyEnergy import dependency%81.479.276.875.977.177.5Aggregated supplier concentration indexHHI12.913.816.013.314.9-Diversification of energy mixHHI0.310.300.290.290.290.30 
 
 
 
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