REPORT FROM THE COMMISSION Italy Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2018-05-23
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Italy, budget deficit, budget policy, budgetary control, gross domestic product, macroeconomics, public debt, stability pact, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2018  COM(2018) 428 final  REPORT FROM THE COMMISSION Italy  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Italy 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION 

Article 126 of the Treaty on the Functioning of the European Union (TFEU) lays down the 
excessive  deficit  procedure  (EDP).  That  procedure  is  further  set  out  in  Council  Regulation 
(EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit 
procedure1, which is part of the Stability and Growth Pact (SGP). Specific provisions for euro 
area Member States under EDP are laid down in Regulation (EU) No 473/20132. 

According  to  Article  126(2)  TFEU,  the  Commission  has  to  monitor  compliance  with 
budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned 
or actual government deficit to gross domestic product (GDP) exceeds the reference value of 
3%;  and  (b) whether  the  ratio  of  government  debt  to  GDP  exceeds  the  reference  value  of 
60%,  unless  it  is  sufficiently  diminishing  and  approaching  the  reference  value  at  a 
satisfactory pace. 

Article 126(3) TFEU provides that, if a Member State does not fulfil the requirements under 
one or both of the above criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

This report, which represents the first step in the EDP, analyses Italy's compliance with the 
debt criterion of the Treaty, with due regard to the economic background and other relevant 
factors. On 22 November 2017, the Commission addressed a letter3 to the Italian authorities 
announcing its intention to reassess Italy's compliance with the debt criterion in spring 2018, 
based on outturn data for 2017 and the final 2018 budget adopted by the Italian Parliament. 
The  data  notified  by  the  authorities in  April  20184  and  subsequently  validated  by  Eurostat5 
show that Italy’s general government deficit declined to 2.3% of GDP in 2017 (down from 

1  OJ L 209, 2.8.1997, p. 6. This report also takes into account the “Specifications on the implementation of the 
Stability  and  Growth  Pact  and  guidelines  on  the  format  and  content  of  stability  and  convergence 
programmes”, endorsed by the ECOFIN Council of 5 July 2016, available at:   
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/coc/code_of_conduct_en.pdf  

2  Regulation  (EU)  No  473/2013  of  the  European  Parliament  and  of  the  Council  on  common  provisions  for 
monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member 
States in the euro area (OJ L 140, 27.5.2013, p. 11). 

3  See  https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-
governance-monitoring-prevention-correction/stability-and-growth-pact/annual-draft-budgetary-plans-dbps-
euro-area-countries/draft-budgetary-plans-2018_en  

4  According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, twice 
a year, their planned and actual government deficit and debt levels. The most recent notification of Italy can be 
found 
http://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-deficit-procedure/edp-
at: 
notification-tables  

1 

 
 
 
                                                 
2.5% in 2016), while the debt stabilised at 131.8% of GDP (from 132.0% in 2016), i.e. above 
the  60%  of  GDP  reference  value.  For  2018,  Italy’s  2018  Stability  Programme6  (SP),  as 
adopted by the government on 26 April 2018, projects the debt-to-GDP ratio to decrease by 1 
percentage  point  to  130.8%.  In  2019,  the  SP  projects  a  further  decline  (of  2.8  percentage 
points) in the debt-to-GDP ratio to 128.0%. Based on notified data and the Commission 2018 
spring forecast, Italy did not comply with the debt reduction benchmark in either 2016 (gap 
of 5.9% of GDP) or 2017 (gap of 5.1% of GDP) (see Table 1).  

Overall,  Italy's  lack  of  compliance  with  the  debt  reduction  benchmark  in  2016  and  2017 
provides evidence of a prima facie existence of an excessive deficit within the meaning of the 
SGP  before,  however,  considering  all  factors  as  set  out  below.  Moreover,  based  on  the 
Commission 2018 spring forecast, Italy's debt-to-GDP ratio is projected to be above the debt 
reduction benchmark in both 2018 and 2019 (gap of 5.1% of GDP each year). 

The Commission has therefore prepared this report to comprehensively assess the departure 
from the debt reduction benchmark and examine whether the launch of an excessive deficit 
procedure is warranted after all relevant factors have been considered. Section 2 of the report 
examines  the  deficit  criterion.  Section  3  examines  the  debt  criterion.  Section  4  deals  with 
public investment and other relevant factors, including the assessment of compliance with the 
required adjustment path towards the Medium Term Objective (MTO). The report takes into 
account the Commission 2018 spring forecast, released on 3 May 2018. 

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

2. 

DEFICIT CRITERION 

Italy made a sizeable fiscal effort between 2010 and 2013, raising the primary surplus to over 
2% of GDP and exiting the excessive deficit procedure in 2013 by keeping its headline deficit 
at a level not above 3% of GDP as of 2012 (down from more than 5% in 2009). However, the 
fiscal stance eased in recent years. In 2017, the primary surplus decreased to 1.5% and the 

5  Eurostat 

news 

at: 
http://ec.europa.eu/eurostat/documents/2995521/8824490/2-23042018-AP-EN.pdf/6e5b346e-e302-4132-920a-
854b00ac196d     

available 

69/2018 

release 

2018, 

April 

No 

23 

of 

6 https://ec.europa.eu/info/2018-european-semester-national-reform-programmes-and-stability-convergence-

programmes_en  

2 

COMSPCOMSPDeficit criterionGeneral government balance-2.6-2.5-2.3-1.7-1.6-1.7-0.8General government gross debt131.5132.0131.8130.7130.8129.7128.0Gap to the debt reduction benchmarkn.r5.95.15.11.35.10.8Change in structural balance0.2-0.8-0.30.00.1-0.30.7Required MLSA3.4n.rn.rn.r.n.r.n.r.n.r.Source: Commission services, Italy's 2018 SP and Commission 2018 spring forecasta In percent of GDP unless otherwise specified. "N.r." indicates "not relevant"Notes:2018Debt criterion2015201620172019 
 
 
                                                                                                                                                        
 
headline deficit stabilised at around 2.3% of GDP. Yet, both are set to improve in 2018 on 
the  back  of  higher  inflation.  Italy's  structural  primary  balance  is  estimated  to  have  halved 
between  2013  and  2017  (from  4.2%  to  2.1%  of  GDP)  and  is  set  to  shrink  further  in  2018-
2019. Taking advantage also of lower interest expenditure, a fiscal loosening was partly used 
to lower the tax burden and facilitate the adoption/implementation of structural reforms.7 

Italy’s general government deficit was reported at 2.3% of GDP in 2017. According to both 
the 2018  SP and the Commission 2018 spring  forecast, it is projected to respect the Treaty 
reference  value  of  3%  of  GDP  during  the  period  2018-2019.  The  Commission  projects  the 
deficit  to  further  decline  to  1.7%  of  GDP  in  2018  and  remain  stable  in  2019,  under  a  no-
policy-change  assumption.  The  SP  deficit  projections  are  broadly  in  line  with  the 
Commission forecast in 2018 (1.6% of GDP) but markedly lower in 2019 (0.8% compared to 
1.7%) on the back of higher real GDP growth (1.4% compared to 1.2%) and a still legislated 
VAT hike for 2019 worth around EUR 12.5 billion (or 0.7% of GDP), which the Commission 
does  not  to  incorporate  in  its  no-policy-change  forecast  given  the  repeated  repeals  over  the 
past years. In 2020, the SP projects the deficit to further decrease to around zero. 

Italy thus complies with the deficit criterion as defined in the Treaty and in Regulation (EC) 
No 1467/97. 

3. 

DEBT CRITERION 

After  growing  by  some  5  percentage  points  per  year  on  average  during  the  double-dip 
recession of 2008-2013, Italy's government debt-to-GDP ratio continued to increase in 2014-
2015 at a slower pace of 1 percentage point per year on average, before stabilising around 
132%  in  2016-2017.  As  of  2018,  the  debt  ratio  is  set  to  decline  mainly  thanks  to  stronger 
nominal growth, falling below 130% of GDP by 2019. Favourable financing conditions are 
contributing  to  underpin  the  economic  recovery  and  reduce  the  snowball  effect.  However, 
still  low  inflation,  a  limited  increase  in  the  primary  surplus  and  below-target  privatisation 
proceeds continue to limit the pace of debt reduction. While debt refinancing risks are limited 
in  the  short  term,  high  public  debt  remains  an  important  source  of  vulnerability  for  the 
Italian economy. 

Following the abrogation of the EDP in June 2013, Italy was subject to a three-year transition 
period  to  comply  with  the  debt  reduction  benchmark,  which  started  in  2013  and  ended  in 
2015. After the end of the transition period, the standard debt reduction benchmark became 
applicable in 2016. Based on notified data and the Commission forecast, the gap to the debt 
benchmark amounted to 5.9% of GDP in 2016 and to 5.1% in 2017. Moreover, based on both 
the SP for 2018 and the Commission forecast, Italy is not projected to comply with the debt 
reduction benchmark either in 2018 (gap to the debt benchmark of 1.3% and 5.1% of GDP, 
respectively) or in 2019 (gap to the debt benchmark of 0.8% and 5.1% of GDP, respectively). 

More specifically, the debt-to-GDP ratio reached 131.8% in 2017, i.e. 0.2 percentage points 
lower than in 2016. The decrease was limited partly due to a still debt-increasing “snowball” 
effect,  as  the  real  implicit  cost  of  debt,8  while  gradually  shrinking  (to  2.3%,  from  2.7%  in 

7 For instance, the Jobs Act labour market reform as well as innovative investment through tax incentives. For a 

review of those incentives, please refer to Italy's 2018 Country Report. 

8 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 time t-1, net of the impact of inflation at time t. In Table 2, the yearly change in debt-

3 

 
 
                                                 
 
2013),  remained  above  real  GDP  growth  (1.5%).  In  fact,  real  spot  interest  rates  on  new 
government securities issuances, hovering around zero in 2015-2017, only gradually passed 
through  into  the  real  servicing cost of  the  outstanding  debt  stock,  given  the  duration  of  the 
Italian  debt  and  the  roll-over  period  combined  with  low  inflation  (GDP  deflator  growth  of 
0.6%) – see also Box 1 and Graph 1. The positive interest rate-growth rate differential (0.8 
percentage points, compared to 1.3 in 2015-2016) implied a still large debt-increasing impact 
from the “snowball” effect (1.1% of GDP, compared to 1.7% in 2015-2016 – see Table 2). 
On  the  other  hand,  a  broadly  stable  primary  surplus  at  1.5%  of  GDP  helped  to  curb  debt 
dynamics  in  2017.  The  stock-flow  adjustment  was  slightly  debt-increasing  in  2017  (0.2%), 
mainly due to the impact of derivatives and of support to the banking sector,9 partly offset by 
the reduction in the liquidity buffer, while there was no privatisation proceed.10 

In 2018, the SP projects the debt-to-GDP ratio to decrease to 130.8%, down by 1 percentage 
point from the 2017 level. The projected favourable dynamics is mainly the result of a finally 
debt-decreasing “snowball” effect (-0.2% of GDP),11 and a slight improvement in the primary 
surplus  (to  1.9%  of  GDP)  more  than  offsetting  the  debt-increasing  stock-flow  adjustment 
(1.1% of GDP). The Commission forecasts the debt ratio to decrease to 130.7% of GDP in 
2018, broadly in line with the SP. The marginal difference is due to a slightly smaller stock-
flow  adjustment  (0.9%  of  GDP  compared  to  1.1%  in  the  SP)  related  to  the  smaller  cash-
accrual difference, while the net accumulation of financial assets is lower in the government 
projections  also  because  they  include  0.3%  of  GDP  of  privatisations  proceeds  that  the 
Commission  forecast  does  not  incorporate,  given  the  added  uncertainty  related  to  the 
formation of a new government and the recent track record of below-target privatisations. 

For  2019,  the  SP  projects  a  further  significant  decline  in  the  debt-to-GDP  ratio  to  128.0%, 
mainly  triggered  by  a  large  increase  in  the  primary  balance  (to  2.7%  of  GDP)  and  a  debt-
decreasing  "snowball  effect"  (-0.5%  of  GDP)  explained  by  stronger  nominal  GDP  growth 
compared  to  2018,  also  due  to  the  VAT  hike  and  only  partly  offset  by  a  debt-increasing 
stock-flow adjustment (0.6% of GDP). The Commission forecasts a more limited decline in 
the debt-to-GDP ratio in 2019, to 129.7%. The difference is also related to the lack of a VAT 
hike and lower real GDP growth, implying lower primary surplus (1.7% of GDP). Moreover, 
due  to  lower  nominal  GDP  growth  (2.5%  compared  to  3.2%),  the  "snowball"  effect  turns 
slightly  debt-increasing  again  (0.3%)  in  the  Commission  forecast.  Finally,  the  Commission 
incorporates  only  half  of  the  0.3%  of  GDP  privatisation  proceeds  projected  by  the 
government for 2019. Risks to both the Commission and the SP debt projections are related 
to a worse-than-anticipated growth outlook, lower privatisation proceeds, and lower inflation. 

As shown in Graph 1, the gradual decrease in real implicit debt-servicing cost (dashed black 
line) and the recovery in real GDP growth (solid blue line) implied already in 2017 a sizeable 

to-GDP ratio due to the real implicit cost of debt can be obtained by adding the respective contributions from 
interest expenditure (debt-increasing) and GDP deflator (debt-decreasing). 

9 In fact, based on notified data, the bank rescue operations related to Banca Monte Paschi and the two Venetian 

Banks impacted the debt by close to 1% of GDP and the deficit by close to 0.4% of GDP. 

10 Other minor transactions affecting the stock-flow adjustment are not reported. See also the Italian Ministry of 
at: 
Economy 
www.dt.mef.gov.it/export/sites/sitodt/modules/documenti_it/debito_pubblico/presentazioni_studi_relazioni/Ra
pporto_sul_Debito_Pubblico_2016.pdf  

Finance's 

Report 

Public 

2016, 

Debt 

and 

11  In  particular,  the  “snowball”  effect  is  reduced  thanks  to  much  higher  real  GDP  growth,  despite  slightly 

upward-trending real implicit cost of debt due to persistently low inflation in 2017. 

4 

 
 
                                                                                                                                                        
shrinking  of  their  differential  (yellow  shade),  which  is  set  to  turn  even  slightly  negative  in 
2018  for  the  first  time  since  the  onset  of  the  global  financial  crisis.  As  a  result,  the  debt-
increasing “snowball” effect fell in 2017 to 1.1% of GDP, which compares with the pre-crisis 
average  of  1.2%  over  2000-2007.  Hence,  the  "snowball"  effect  offers  only  a  very  partial 
explanation  for  Italy's  lack  of  compliance  with  the  debt  reduction  benchmark  in  2017,  and 
even less in the coming years.  

Overall, this analysis thus suggests that prima facie the debt criterion for the purpose of the 
Treaty and Regulation (EC) No 1467/97 is not fulfilled, whether based on the 2018 SP or the 
Commission forecast, before consideration is given to all relevant factors as set out below. 

Table 2: Debt dynamics a 

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

6

5

4

3

2

1

0

-1

-2

-3

%

forecast 

10

11

12

13

14

15

16

17

18

19

(Real implicit cost of debt - real GDP growth)
Real implicit cost of debt
Real GDP growth
Real spot yield at issuance (weighted average)

5 

201520162017COMSPCOMSPGovernment gross debt ratio131.5132.0131.8130.7130.8129.7128.0Change in debt ratio b (1 = 2+3+4)-0.30.5-0.2-1.1-1.0-1.0-2.8Contributions:• Primary balance (2)-1.5-1.5-1.5-1.9-1.9-1.7-2.7• “Snowball” effect (3)1.71.71.1-0.2-0.20.3-0.5of which:Interest expenditure4.14.03.83.63.53.53.5Real GDP growth-1.2-1.1-2.0-1.9-1.9-1.6-1.8Inflation (GDP deflator)-1.2-1.1-0.8-1.8-1.8-1.6-2.2• Stock-flow adjustment (4)-0.40.30.20.91.10.40.5of which:Cash/accruals difference0.3-0.7-0.10.60.80.50.6Net accumulation of financial assets-0.70.90.40.30.2-0.20.1of which privatisation proceeds-0.4-0.10.00.0-0.3-0.2-0.3Valuation effect & residual0.00.00.00.00.00.00.0Source: Commission services, Italy's 2018 SP and Commission 2018 spring forecast20182019Notes:a In percent of GDP unless otherwise specifiedb The change in the gross debt ratio can be decomposed as follows:where t is a time subscript; D, PD, Y and SF are the stock of government debt, the primary deficit, nominal GDP and the stock-flow adjustment respectively, and i and y represent the average cost of debt and nominal GDP growth. The term in parentheses represents the “snow-ball” effect, measuring the combined effect of interest expenditure and economic growth on the debt ratio.tttttttttttttYSFyyiYDYPDYDYD1*1111 
 
 
 
 
4. 

RELEVANT FACTORS 

Article  126(3)  TFEU  provides  that  the  Commission  report  “shall  also  take  into  account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 
account  all  other  relevant  factors,  including  the  medium-term  economic  and  budgetary 
position of the Member State”. Those factors are further clarified in Article 2(3) of Council 
Regulation  (EC)  No  1467/97,  which  also  provides  that  “any  other  factors  which,  in  the 
opinion  of  the  Member  State  concerned,  are  relevant  in  order  to  comprehensively  assess 
compliance with deficit and debt criteria and which the Member State has put forward to the 
Council and to the Commission” need to be given due consideration. 

In  case  of  apparent  breach  of  the  debt  criterion,  the  analysis  of  the  relevant  factors  is 
particularly warranted, given that debt dynamics are to a larger extent influenced by factors 
outside  the  control  of  the  government  than  is  the  case  for  the  deficit.  This  is  recognised  in 
Article 2(4) of Regulation (EC) No 1467/97, which provides that the relevant factors shall be 
taken into account when assessing compliance on the basis of the debt criterion irrespective 
of the size of the breach. In that respect, at least the following three main aspects need to be 
considered (and have been considered in the past)12 when assessing compliance with the debt 
criterion given their impact on the debt dynamics and sustainability: 

1.  adherence to the MTO or the adjustment path towards it, which is supposed to ensure 
sustainability  or  rapid  progress  towards  sustainability  under  normal  macroeconomic 
circumstances.  As  by  construction  the  country-specific  MTO  takes  into  account  the 
debt  level  and  implicit  liabilities,  compliance  with  the  MTO  or  the  adjustment  path 
towards it should ensure convergence of the debt ratios towards prudent levels at least 
in the medium term; 

2.  structural reforms, already implemented or detailed in a structural reform plan, which 
are  expected  to  enhance  sustainability  in  the  medium  term  through  their  impact  on 
growth,  thereby  contributing  to  bring  the  debt-to-GDP  ratio  on  a  satisfactory 
downward path. Overall, adherence to the MTO (or the adjustment path towards it), 
alongside  with  the  implementation  of  structural  reforms  (in  the  context  of  the 
European  Semester),  is  expected  under  normal  economic  conditions  to  bring  debt 
dynamics on a sustainable path through the combined impact on the debt level itself 
(through  the  achievement  of  a  sound  budgetary  position  at  the  MTO)  and  on 
economic growth (through the reforms); 

3.  unfavourable  macroeconomic  conditions  and,  in  particular,  low  inflation,  which  can 
hamper  the  reduction  of  the  debt-to-GDP  ratio  and  make  compliance  with  the  SGP 
provisions  particularly  demanding.  A  low-inflation  environment  makes  it  more 
demanding for a Member State to comply with the debt reduction benchmark. Under 
such  conditions,  adherence  to  the  MTO  or  the  adjustment  path  towards  it  is  a  key 
relevant factor in assessing compliance with the debt criterion. 

In  view  of  those  provisions,  the  following  subsections  consider:  (1) the  medium-term 
economic  position,  including  the  state  of  play  in  terms  of  implementation  of  structural 
reforms;  (2) the  medium-term  budgetary  position,  including  an  assessment  of  compliance 
with  the  required  adjustment  towards  the  MTO  and  of  public  investment;  (3) the 
developments  in  the  medium-term  government  debt  position,  including  its  sustainability 

12 See the 126(3) Reports COM(2015) 113 final, 27.2.2015, and COM(2016) 305 final, 18.5.2016. 

6 

 
 
                                                 
prospects;  (4) other  factors  deemed  relevant  by  the  Commission;  and  (5) other  factors  put 
forward by the Member State. 

4.1.  Medium-term economic position 

Macroeconomic  conditions  are  improving  and  can  no  longer  be  argued  to  be  a  strong 
mitigating  factor  in  explaining  Italy’s  large  gaps  to  compliance  with  the  forward-looking 
debt reduction benchmark. On the other hand, low productivity growth still constrains Italy's 
potential growth and hampers a faster reduction of the debt ratio. Italy made some progress 
in addressing the 2017 CSRs, but the positive growth impact of these reforms will depend on 
their effective implementation in the medium-term, while in the short term it remains hard to 
disentangle it from the ongoing cyclical recovery. 

Cyclical conditions, potential growth and inflation 

Italy’s  real  GDP  growth  reached  1.5%  in  2017.  Both  the  2018  SP  and  the  Commission 
forecast expected it at the same level in 2018, before softening in 2019. Potential growth is 
estimated  to  have  finally  turned  positive  in  2017,  at  0.3%,  (up  from  -0.2%  in  2016)  and  to 
further  pick  up  in  2018-2019,  while  remaining  at  a  very  low  level.  As  a  result,  Italy’s 
negative output gap is estimated by the Commission to have closed quickly, from  -3.4% of 
potential GDP in 2015 to -0.1% in 2018, before turning positive in 2019 (at 0.5%).  

Despite  the  progress  achieved  in  important  reform  areas  (e.g.  labour  market  and  public 
administration reforms, fight against tax evasion, banks' balance sheet repair),  the legacy of 
the crisis and remaining structural weaknesses continue to weigh on Italy's potential growth.13 
Italy’s GDP is still below the pre-crisis level and has not grown compared to 15 years ago, 
while annual growth has averaged 1.2% in the rest of the euro area. This is also explained by 
structural  factors  that  hamper  the  efficient  allocation  of  resources  and  constitute  a  drag  on 
productivity. A still large share of old-age pensions and debt-servicing costs in Italy's overall 
public spending restrain growth-enhancing spending items like education and infrastructure. 
The high tax burden on production factors and still low tax compliance continue to hold back 
economic growth.  Employment is  growing  also thanks to labour market reforms and hiring 
incentives, but largely driven by temporary contracts and with still high levels of long-term 
and  youth  unemployment  weighing  on  future  economic  growth  prospects.  The  business 
environment continues to hinder entrepreneurship, including due to weak spots in the public 
administration  and  very  lengthy  civil  and  criminal  justice  proceedings.  Investment,  in 
particular in intangible assets, is still low. In that context, Italy’s ongoing recovery offers an 
important  window  of  opportunity  to  pursue  the  reform  effort  in  order  to  improve  medium-
term growth prospects and enhance the sustainability of the country’s public finances. 

After remaining very muted in 2015 and 2016 (0.1% and -0.1% respectively), mainly due to 
low  aggregate  demand,  limited  wage  pressures  and  a  fall  in  energy  prices,  headline 
Harmonised  Index  of  Consumer  Price  (HICP)  inflation  increased  in  2017,  at  1.3%,  mainly 
driven by higher energy prices. However, it is expected to slightly recede to 1.2% in 2018, 
largely due to negative base effects related to unprocessed food, and to rise again to 1.4% in 
2019, on the back of the steady rise of prices for non-energy industrial goods and services. 

13  See  Commission  Staff  Working  Document  SWD(2018) 210  final,  7.3.2018,  "Country  Report  Italy  2018. 

Including an In-Depth Review on the prevention and correction of macroeconomic imbalances". 

7 

 
 
                                                 
Core inflation is also set to pick up gradually over the forecast period – in line with moderate 
wage growth – and reach 1.4% in 2019.  

Until recently, low inflation has made it more difficult for Italy to cut its public expenditure 
as a share of GDP by freezing wages and pensions in nominal terms, while implying lower-
than-normal  tax  revenues.  Moreover,  unfavourable  macroeconomic  conditions,  including 
tight financing conditions, have implied higher-than-average fiscal multipliers, amplified by 
the constrained monetary policy due to the zero lower bound.14 Overall, Italy’s possibility to 
carry out large fiscal adjustments and bring down its debt ratio was somewhat hampered by 
macroeconomic conditions and the risk that fiscal policies could turn self-defeating, with the 
debt  ratio  and  the  primary  balance  being  negatively  impacted  by  subdued  price 
developments.  While  too  large  fiscal  adjustments  could  still  have  a  significant  impact  on 
growth,  the  recent  acceleration  of  GDP  growth  in  both  real  and  nominal  terms  as  of  2017 
suggest  that  macroeconomic  conditions  are  improving  and  can  no longer  be argued  to  be  a 
strong  mitigating  factor  in  explaining  Italy’s  large  gaps  to  compliance  with  the  forward-
looking debt reduction benchmark. In fact, both the Commission and the SP expect nominal 
growth to approach 3% in 2018, and the SP projects it at above 3% in 2019-2020. 

Table 3: Macroeconomic and budgetary developments a 

Structural reforms 

Given the ongoing discussion to form a new government following the general elections of 
March  4th,  the  current  caretaker  government  adopted  in  April  2018  a  National  Reform 
Programme15 which does not propose any new legislative initiative. However, it considers the 
already  adopted  reforms  –covering  a  number  of  areas  such  as  public  administration  and 
judicial  system,  competition,  labour  market,  education  and  competitiveness.  The  impact  of 
these reforms is estimated at 2.9% of GDP over 5 years and 4.7% over 10 years compared to 
the baseline. The long-term impact is projected at as much as 10% of GDP. 

14 See, for instance, Blanchard O. and D. Leigh (2013), at www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf  
15 http://www.dt.mef.gov.it/export/sites/sitodt/modules/documenti_it/analisi_progammazione/documenti_progra

mmatici/def_2018/DEF_2018_-_Sez.3_-_PNR.pdf  

8 

201520162017COMSPCOMSPReal GDP (% change)1.00.91.51.51.51.21.4GDP deflator (% change)0.90.80.61.41.31.31.8Potential GDP (% change) -0.2-0.20.30.40.60.50.8Output gap (% of potential GDP)-3.4-2.4-1.2-0.1-0.30.50.3General government balance-2.6-2.5-2.3-1.7-1.6-1.7-0.8Primary balance1.51.51.51.91.91.72.7One-off and other temporary measures-0.20.20.00.10.1-0.1-0.1Government gross fixed capital formation2.32.12.02.02.02.02.0Cyclically-adjusted balance-0.7-1.2-1.7-1.6-1.4-2.0-0.9Cyclically-adjusted primary balance3.42.72.11.92.11.42.6Structural balance b-0.6-1.4-1.7-1.7-1.5-2.0-0.8Structural primary balance3.52.52.11.92.01.52.7a In percent of GDP unless otherwise specifiedSource: Commission services, Italy's 2018 SP and Commission 2018 spring forecast20182019Notes:b Cyclically adjusted balance excluding one-offs and other temporary measures 
 
 
                                                 
In its 2018 Country Report, the Commission assessed that Italy has made some progress in 
addressing  the  2017  CSRs  but  also  that  the  reform  momentum  has  slowed  down  and  that 
significant  challenges  persist  in  diverse  reform  areas.  More  specifically,  Italy  has  made 
substantial  progress  in  adopting  measures  to  increase  tax  compliance  and  fight  corruption. 
Some  progress  was  made  in  reforming  the  public  administration,  addressing  restrictions  to 
competition,  repairing  the  banking  system  and  rationalising  social  spending.  Only  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.  Italy's 
macroeconomic  imbalances  -mainly  related  to  a  very  high  public  debt  and  sluggish 
productivity  growth-  have  stopped  deteriorating  but  remain  elevated.16  As  a  result,  the 
Commission concluded that Italy still displays excessive macroeconomic imbalances.17 

More specifically, in  the field of public finances,  the government adopted a comprehensive 
reform  of  the  budgetary  process,  which  was  implemented  for  the  first  time  with  the  2018 
budget. It also introduced important measures to fight tax evasion like compulsory electronic 
invoicing. However, progress in shifting the tax burden from production factors to property 
and  consumption  as  well  as  in  incentivising  compulsory  electronic  payments  was  limited, 
past privatisation targets were not met, and provisions in the 2017 and 2018 budgets partially 
reversed past pension reforms aggravating the existing bias of public spending towards old-
age pensions. 

As  regards  the  business  environment,  Italy  made  efforts  in  2017  to  reform  the  public 
administration, judicial system and anti-corruption framework, and finally adopted the 2015 
annual competition law. However, the efficiency of the public administration remains lower 
than in peer countries. Challenges persist in the management and rationalisation of publicly-
owned enterprises. Moreover, the length of civil justice trials remains very high especially at 
higher  instances,  also  due  to  lack  of  adequate  enforcement  of  procedural  rules  against  the 
misuse of litigation in the context of wide access to lawyers. While the revision of the statute 
of limitations  strengthened Italy's anti-corruption framework, persistent inefficiencies in the 
functioning  of  criminal  justice  and  implementation  challenges  hinder  the  prevention  and 
repression of corruption. Finally, significant barriers to competition remain, and some sectors 
are still over-regulated, including professional services, local public services. 

Regarding the banking sector, efforts to tackle acute banking problems and address the high 
level of non-performing loans (NPLs) are bearing fruit. Namely, the total gross stock of NPLs 
declined from its peak of EUR 360 bn (or 18.2% of total customer loans) in 2015 to EUR 285 
bn (or 14.5% of total customer loans) at the end of Q4 2017. Despite this marked decline, the 
stock of NPLs remains high compared to EU peers. The reform of the insolvency framework 
is  yet  to  be  finalised.  Concerning  the  labour  market,  ‘second-level’  wage  bargaining  is  not 
widespread and the implementation of the reform of active labour market policies is delayed. 
Moreover,  the  planned  measures  to  foster  female  labour  market  participation  appear 
insufficient.  On  the  positive  side,  the  setup  of  a  comprehensive  anti-poverty  scheme  was  a 
major step forward although Italy still displays a high risk of poverty and social exclusion. 

16 See “Country Report Italy 2018”. Ibidem. 
17 See Commission Communication COM(2018) 120 final, " 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". 

9 

 
 
                                                 
4.2.  Medium-term budgetary position 

The  ex-post  assessment  of  Italy’s  compliance  with  the  preventive  arm  points  to  some 
deviation from the adjustment path towards the MTO in both 2016 and 2017, once taken into 
account  the  allowances  granted  under  the  flexibility  clauses  and/or  for  unusual  events. 
Instead, as regards 2018, the fiscal adjustment is not expected to be adequate in light of the 
sustainability challenges that Italy faces. The latter takes into account the 2018 Budget Law 
and assumes no further change in policies thereafter. 

Headline, structural balance and adjustment towards the MTO  
As  regards  2016,  the  Commission  concluded  in  May  201718  that  Italy’s  adjustment  path 
towards the MTO was broadly compliant with the requirements of the preventive arm of the 
SGP.  In  fact,  the  0.7%  of  GDP  deterioration  in  its  structural  balance  based  on  the 
Commission 2017 spring forecast was assessed to point to some deviation from the required 
0.5% of GDP adjustment towards the MTO in 2016, once taking into account the following 
allowances: (i) 0.5% of GDP under the structural reform clause; (ii) 0.21% of GDP under the 
investment clause; (iii) 0.06% of GDP due to the additional expenditure for the exceptional 
inflow  of  refugees;  and  (iv) 0.06%  of  GDP  for  security-related  expenditure  related  to  the 
terrorist threat. However, part of the abovementioned allowance, namely 0.1% of GDP under 
the structural reform clause and 0.25% of GDP under the investment clause, was granted in 
July 2016 conditionally, among others, on the existence of credible plans for the resumption 
of the adjustment path towards the MTO as of 2017.  

As regards 2017, Italy was recommended to deliver a structural adjustment of 0.6% of GDP 
or more, so as to make sufficient progress towards its MTO. However, the 2018 SP confirms 
that the outturn budgetary impact of the exceptional inflow of refugees and of a preventive 
investment  plan  for  the  protection  of  the  national  territory  against  seismic  risks  was 
significant in 2017, at around 0.35% of GDP, only slightly higher than the ex-ante estimate. 
On that basis, the Commission considers that the allowance preliminarily granted under the 
under  the  unusual  event  clause19  can  be  confirmed.  Therefore,  the  required  adjustment 
towards the MTO for 2017 has been reduced to take into account these costs.  

The Commission 2018 spring forecast expects Italy’s structural balance to have deteriorated 
by  0.3%  of  GDP  in  2017,20  reaching  -1.7%  of  GDP.  This  new  estimate  of  structural 
deterioration compares  to the 0.4% of GDP expected on the basis of the Commission 2017 
autumn forecast. The main reason for the difference is that wage increases already agreed for 
2017 in specific sectors will have a budgetary impact only as from 2018, while other lower-
than-expected expenditure was offset by lower revenues (see also Box 1). 

Based  on  the  Commission  2018  spring  forecast,  the  expenditure  benchmark  points  to  some 
deviation both over one year (gap of 0.3% of GDP) and over 2016 and 2017 taken together 
(gap of 0.1% of GDP per year, on average), as the growth rate of government expenditure, 
net of discretionary revenue measures and one-offs, has exceeded the applicable expenditure 

18 See COM(2017) 511 final of 22.5.2017, available at: https://ec.europa.eu/info/sites/info/files/2017-european-

semester-country-specific-recommendations-commission-recommendations-italy.pdf  

19 Namely,  the  eligible  expenditure  in  2017  amounts  to  0.16%  of  GDP  for  the  exceptional  inflow  of  refugees 

and 0.18% of GDP concerning protection against seismic risks.  

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

10 

 
 
                                                 
benchmark  rate  (-0.6%  in  real  terms)  in  2017.  The  structural  balance  pillar  points  to  some 
deviation over one year (gap of 0.5% of GDP) and to a significant deviation over 2016 and 
2017 taken together (gap of 0.4% of GDP per year, on average). Both in 2016 and 2017, the 
structural  balance  is  negatively  affected  by  significant  revenue  shortfalls  and  a  lower  GDP 
deflator than that underlying the expenditure benchmark, which are only partly compensated 
by the decline in interest spending. Taking into account those factors, the overall assessment 
points to some deviation in 2017. 

Box 1: The improvement in Italy's expenditure benchmark in 2017  

The Commission 2017 autumn forecast  expected Italy’s structural balance to  deteriorate by 
0.4%  of  GDP  in  2017.  On  that  basis,  the  expenditure  benchmark  pointed  to  a  risk  of 
significant deviation both over one year (gap of 0.9% of GDP) and over 2016 and 2017 taken 
together (gap of 0.4% of GDP per year, on average). The same conclusion could be reached 
on the basis of the structural balance pillar both over one year (gap of 1.0% of GDP) and over 
2016 and 2017 taken together (gap of 0.7% of GDP per year, on average).  

Based on outturn data for 2017 and the Commission 2018 spring forecast, Italy’s structural 
balance is expected to have deteriorated by 0.3% of GDP in 2017. As mentioned, after taking 
into  account  the  0.35%  of  GDP  allowance  for  unusual  events  ex  post,  the  expenditure 
benchmark points now to some deviation both in 2017 (gap of 0.3% of GDP) and over 2016 
and 2017 taken together (gap of 0.1% of GDP per year, on average). 

The main reason for the mentioned improvement compared to the Commission 2017 autumn 
forecast is that the increase in nominal government expenditure net of discretionary revenue 
measures and one-offs in 2017 turned out lower than expected in autumn by around EUR 1.7 
bn  (or  0.1%  of  GDP),  mostly  due  to  lower  compensation  of  employees,  as  wage  increases 
agreed already for 2017 in specific sectors will have a budgetary impact only as of 2018.  

More in detail, on the one hand the increase in the corrected (primary) expenditure aggregate 
was  lower  by  around  0.05%  of  GDP,  mainly  due  to  lower-than-expected  compensation  of 
employees  and  green  energy  production  incentives.  This  deceleration  in  structural 
expenditure  was  partly  compensated  by  an  acceleration  in  one-off  expenditure  (by  around 
0.5% of GDP), largely due to the budgetary impact of bank rescue operations.  On the other 
hand, the change in total discretionary revenue measures net of one-offs worsened by around 
0.45% of GDP, largely due to lower tax receipts to compensate photovoltaic incentives and a 
higher share of discretionary revenues of one-off nature. 

As regards 2018, Italy was recommended to ensure a nominal rate of reduction of net primary 
government  expenditure  of  at  least  0.2%  in  2018,  corresponding  to  an  annual  structural 
adjustment of at least 0.6% of GDP. However, the Commission Communication on the 2017 
European Semester of May 201721 stated that the Commission would stand ready to use its 
margin of appreciation in cases where the impact of a large fiscal adjustment on growth and 
employment  could  be  particularly  significant.  Overall,  in  order  to  balance  Italy's  current 
stabilisation  needs and  existing  sustainability  challenges,  the  Commission  considered  that  a 
fiscal  structural  effort  of  at  least  0.3%  of  GDP  would  be  adequate  in  2018,  without  any 
additional margin of deviation over one year. This corresponds to a nominal rate of growth of 
net primary expenditure not exceeding 0.5%.  

21 https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-specific-recommendations-

commission-recommendations-communication.pdf  

11 

 
 
                                                 
The  Commission  2018  spring  forecast  expects  Italy’s  structural  balance  to  remain  stable 
at  -1.7%  of  GDP,  while  the  government  plans  in  the  2018  SP22  project  a  small  structural 
effort  of  0.1%  of  GDP.  Based  on  the  Commission  2018  spring  forecast,  and  taking  into 
account  the  adjusted  requirement  for  2018,  the  expenditure  benchmark  points  to  an 
inadequate  fiscal  adjustment  (gap  of  0.7%  of  GDP)  in  2018.  The  same  conclusion  can  be 
reached  on  the  basis  of  the  structural  balance  pillar  (gap  of  0.3%  of  GDP).  The  structural 
balance is negatively impacted by revenue shortfalls (0.1% of GDP), which are offset by the 
positive impact of a decline in interest expenditure (0.2% of GDP), and a slightly higher GDP 
deflator  and  point  estimate  for  potential  GDP  growth  compared  to  those  underlying  the 
expenditure  benchmark  (0.3%  of  GDP).  Overall,  Italy's  fiscal  adjustment  cannot  be 
considered  adequate,  in  light  of  the  sustainability  challenges  that  Italy  faces,  based  on  the 
Commission 2018 spring forecast. 

For  2019,  Italy  is  recommended  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  0.1%,  corresponding  to  an  annual  structural 
adjustment of 0.6% of GDP. The Commission 2018 spring forecast expects Italy’s structural 
balance to deteriorate by 0.3% of GDP in 2019, reaching -2.0% of GDP under a no-policy-
change assumption. The expenditure benchmark points to a risk of significant deviation both 
over one year (gap of 1% of GDP) and over 2018 and 2019 taken together (gap of 0.8% of 
GDP  per  year,  on  average),  as  the  growth  rate  of  government  expenditure,  net  of 
discretionary  revenue  measures  and  one-offs,  will  exceed  the  applicable  expenditure 
benchmark rate (0.1% in nominal terms) in 2019. The same conclusion can be reached on the 
basis of the structural balance pillar, which points to a risk of significant deviation both over 
one year (gap of 0.9% of GDP) and over 2018 and 2019 taken together (gap of 0.6% of GDP 
per year, on average). The structural balance is positively impacted by a slightly higher point 
estimate  for  potential  GDP  growth  compared  to  the  medium-term  average  underlying  the 
expenditure  benchmark  (0.2%  of  GDP).  Taking  into  account  those  factors,  the  overall 
assessment points to a risk of significant deviation in 2019. 

The Commission forecast for 2018-2019 is based on the assumption of no further changes in 
policies after the 2018 Budget, given the ongoing formation of a government following the 
national  elections  of  March  4th  and  the  caretaker  government's  adoption  on  April  26th  of  a 
Stability Programme including only a trend scenario based on unchanged legislation. 

Public investment 

As  regards  public  investment,  Italy’s  government  gross  fixed  capital  formation  averaged 
around  3%  of  GDP  over  1999-2010,  but  the  need  to  adjust  quickly  to  respond  to  the 
sovereign  debt  crisis  led  to  a  substantial  reduction  in  public  investment  to  around  2.4%  of 
GDP  on  average  over  2011-2016.  In  2017,  public  investment-to-GDP  ratio  reached  a  new 
low,  at  2%  of  GDP  (-5.6%  year-on-year  in  nominal  terms).  The  ratio  is  forecast  by  the 
Commission to remain roughly constant at 2% of GDP in 2018-2019, as investment recover 
broadly  in  line  with  nominal  GDP  growth.  In  summary,  given  its  broad  decline  over  time, 
public  investment  does  not  appear  to  represent  a  mitigating  factor  justifying  Italy’s  lack  of 
compliance with the debt reduction benchmark. 

22 Recalculated based on the commonly agreed methodology. 

12 

 
 
 
                                                 
4.3.  Medium-term government debt position 

Italy's public debt remains a major source of vulnerability for the economy. Recently-adopted 
measures,  together  with  adverse  demographic  trends,  risk  reversing  the  positive  trend 
achieved by past pensions reforms and weaken long-term fiscal sustainability, even more so if 
real interest rates increased more than currently expected. 

After reaching 131.8% in 2017, Italy’s debt-to-GDP ratio is set to decrease to 130.7% in 2018 
and  129.7%  in  2019  in  the  Commission  2018  spring  forecast.  This  is  also  due  to  stronger 
nominal  GDP  growth  over  the  forecast  horizon.  Yet,  a  limited  increase  in  the  primary 
surplus, still muted inflation dynamics and systematically below-target privatisation proceeds 
continue to hinder the pace of debt reduction. 

According to the European Commission's short-term fiscal sustainability risk indicator "S0", 
Italy  does  not  appear  to  face  short-term  sustainability  challenges,  although  vulnerabilities 
appear on the fiscal side.23 While 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, risks from the macro-financial context remain in fact limited, also 
thanks to the ECB's accommodative monetary policy. 

In  the  medium  term,  Italy  faces  marked  sustainability  challenges.  Its  structural  primary 
surplus  is  forecast to  further deteriorate to  1.5% of GDP in  2019 under a no-policy-change 
assumption, down from 3.5% 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 Commission's 
medium-term fiscal sustainability risk indicator S1, which points to 'high risk'. Achieving a 
debt  ratio  of  60%  of  GDP  by  2032  would  in  fact  require  Italy  to  make  a  large  cumulative 
fiscal effort of 7.5% of GDP over 2020-2024. 

The long-term fiscal sustainability risk indicator S2 still points to 'low risk', as a permanent 
increase in the structural primary surplus of around 1.8 percentage points of GDP would be 
needed to keep the debt-to-GDP ratio stable over the long term, including the cost of ageing. 
However, the long-term sustainability ensured by past pensions reforms, by curbing implicit 
liabilities  arising  from  population  ageing,  is  slowly  deteriorating.  This  is  due  to  worsening 
demographic  trends  projected  by  Eurostat  and  the  fact  that  the  2017  and  2018  budgets 
contained measures that partially reversed past pension reforms and slightly increased Italy's 
old-age  pension  expenditure  over  the  medium  term.  The  latter,  at  around  15%  of  potential 
GDP in 2016, is already one of the highest in the EU/OECD. Overall, further backtracking on 
the implementation of past healthcare and pension reforms, in particular the adjustment of the 
retirement age, could further worsen Italy's long-term sustainability risks.  

Privatisation proceeds underachieved the 0.5% of GDP target projected by the government in 
both  2016  and  2017,  when  they  amounted  to  0.05%  of  GDP  and  below  0.01%  of  GDP, 
respectively.  Going  forward,  the  SP  still  projects  0.3%  of  GDP  privatisation  proceeds  per 
year  over  2018-2020.  As  regards  2018,  the  Commission  does  not  incorporate  any 
privatisation  proceed  ex  ante  given  added  uncertainty  related  to  the  formation  of  a  new 
government and the track record of privatisations until now. As regard 2019, only half of the 
projected proceeds are included in the forecast for prudential reasons. 

23 S0 is set to be below the 'high-risk' threshold in 2017 but, at 0.4, remains among the highest in the EU, mainly 

due to Italy's very high public debt. Furthermore, the fiscal sub-index is above its critical threshold. 

13 

 
 
                                                 
Against  this  background,  further  fiscal  adjustment  and  the  pursuit  of  the  reform  effort  to 
foster potential growth in the medium/long term remains crucial to achieve a satisfactory debt 
reduction path going forward. 

4.4. 

Other factors considered relevant by the Commission 

Among the other factors considered relevant by the Commission, particular consideration is 
given to financial contributions to fostering international solidarity and achieving the policy 
goals of the Union, the debt incurred in the form of bilateral and multilateral support between 
Member  States  in  the  context  of  safeguarding  financial  stability,  and  the  debt  related  to 
financial  stabilisation  operations  during  major  financial  disturbances  (Article  2(3)  of 
Regulation  (EC)  No  1467/97).  Regarding  government  support  to  the  financial  sector  in  the 
course of the financial crisis, contingent liabilities to support liquidity provisions of financial 
institutions  amounted  to  around  1.5%  of  GDP  at  end-2017  (out  of  a  total  amount  of 
contingent liabilities of 3.7% of GDP), up from 0.5% of GDP at end-2016.  

Support to financial institutions with an impact on the government debt amounted to close to 
1% of GDP in 2017 (up from 0.2% at end-2016). This was mainly related to the liquidation 
of  two  Italian  regional  lenders  (Banca  Popolare  di  Vicenza  and  Veneto  Banca)  and  the 
precautionary  recapitalisation  of  Banca  Monte  dei  Paschi  di  Siena.  The  related  impact  on 
deficit  was  close  to  0.4%  of  GDP.  An  additional  risk  for  public  finances  is  related  to  the 
possible (one-off) impact from the support to financial institutions also on the 2018 deficit, as 
well as from the considerable stock of trade debt arrears of the public administration. 

Article  12(1)  of  Regulation  (EU)  No  473/2013  requires  that  this  report  considers  also  "the 
extent to which the Member State concerned has taken into account the Commission opinion" 
on the country's Draft Budgetary Plan, as referred in Article 7(1) of the same Regulation. The 
Commission  Opinion  on  Italy’s  2017  Draft  Budgetary  Plan24  and  2018  Draft  Budgetary 
Plan25 both pointed to a risk of non-compliance with the provisions of the SGP and invited 
the authorities to take the necessary measures within the national budgetary process to ensure 
compliance. However, despite the flagged risks of non-compliance with the SGP, both 2017 
and 2018 Budgets passed without major changes compared to the Draft Budgetary Plans. 

4.5. 

Other factors put forward by the Member State 

On 14 May 2018, the Italian authorities transmitted documents concerning relevant factors in 
accordance with Article 2(3) of Regulation (EC) No 1467/97.26 The analysis presented in the 
other sections of this report already covers most of the factors put forward by the authorities. 

The  first  relevant  factor  discussed  in  the  report  is  Italy’s  track  record  of  fiscal  discipline, 
witnessed  by  the  sizable  primary  surpluses  and  the  moderation  in  nominal  current  primary 
expenditure dynamics in recent years. The second relevant factor raised by the authorities is 
that,  after  taking  into  account  the  significant  flexibility  granted  by  the  Commission  over 
2015-2017, Italy complied with the adjustment path towards the MTO, based in particular on 
the expenditure benchmark in 2017. 

24 Commission Opinion C(2016) 8009 final, 16.11.2016, on the Draft Budgetary Plan of Italy. 
25 Commission Opinion C(2017) 8019 final, 22.11.2017, on the Draft Budgetary Plan of Italy. 
26  See  "Relevant  Factors  Influencing  Debt  Developments  in  Italy",  Ministry  of  Economy  and  Finance,  May 

2018, at: www.mef.gov.it/inevidenza/documenti/Italy_Report_Relevant_Factors_May_2018.pdf  

14 

 
 
                                                 
The  third  relevant  factor  highlighted  by  the  authorities  is  the  persistence  of  deflationary 
pressures, hindering Italy's efforts both to reduce the public debt ratio and to regain wage and 
price  competitiveness  in  a  context  of  slow  wage  growth  in  Europe  and  other  advanced 
economies. 

The  fourth  key  factor  is  the  underestimation  of  the  slack  in  Italy's  economy  even  after  the 
revision in the "commonly agreed methodology" to measure the output gap in line with some 
technical  changes  proposed  by  the  Italian  delegation  to  the  Output  Gap  Working  Group. 
While the latter implied a widening of Italy's output gap for 2017 to -1.2% of potential GDP 
(from  -0.6%  based  on  the  Commission  2017  autumn  forecast),  the  revised  estimates  of  the 
Commission  still  suggest  that  the  country's  economic  activity  should  reach  its  potential  in 
2018. According to the authorities, this estimate is not in line with economic intuition, given 
Italy's sharp output loss compared to 2008, the still high unemployment rate of 11% and the 
virtual stability in wages and prices. The report thus presents alternative estimates, suggesting 
an  output  gap  still  close  to  -3%  of  potential  GDP  in  2018  based  on  the  government 
projections, whereby Italy would have been at its MTO in recent years and would satisfy the 
debt  reduction  benchmark  in  its  "cyclical-adjusted  configuration"  and  under  the  additional 
assumption of a "normal" inflation rate (based on the GDP deflator) of 2%. 

Other relevant factors put forward by the authorities in relation to Italy's public debt include 
its  sustainability,  as  the  country  still  displays  low  long-term  sustainability  risks  despite  the 
worsened  demographic  projections;  its  affordability,  given  the  downward-trending  interest 
expenditure; and the very low level of contingent liabilities and of private sector debt.  

The  report  also  stresses  Italy’s  structural  reform  effort  in  2017,  including  on  healing  and 
restructuring  the  banking  system,  improving  tax  collection  and  enhancing  competition  in 
services.  The  positive  impact  on  real  GDP  growth  of  structural  reforms  carried  out  in  the 
2014-2017 period is estimated by the Italian authorities at 2.2 percentage points of GDP by 
2020, 3.4 percentage points by 2025 and 8.2 percentage points in the long run.  

5. 

CONCLUSIONS 

Italy's general government gross debt reached 131.8% of GDP in 2017, well above the 60% 
of GDP reference value, and Italy did not comply with the debt reduction benchmark either in 
2016 or in 2017. Moreover, the Commission forecast does not expect Italy to comply with the 
debt reduction benchmark in 2018-2019, the gap remaining large also due to the significant 
deterioration of the structural balance from -0.6% of potential GDP in 2015 to -2.0% forecast 
in  2019  under  a  no-policy-change  assumption.  This  suggests  that,  before  consideration  is 
given to all relevant factors, the debt criterion as defined in the Treaty does not appear to be 
fulfilled prima facie. In line with the Treaty, this report examines the relevant factors.  

Macroeconomic conditions improved in 2017 and nominal GDP growth is forecast to further 
pick up to 2.9% in 2018, before slightly receding to 2.5% in 2019. Thus, the macroeconomic 
outlook can no longer be considered as a mitigating factor explaining Italy’s large gaps with 
the debt reduction benchmark, notably in its forward-looking dimension, over 2017-2019.  

The ex-post assessment of Italy’s compliance with the preventive arm in 2017 indicates broad 
compliance with the adjustment path towards the MTO, once taken into account the granted 
allowance for unusual events. As regards 2018, instead, Italy's fiscal adjustment is currently 
inadequate  in  light  of  the  sustainability  challenges  that  Italy  faces.  Hence,  the  necessary 
measures  should  be  taken  as  of  2018  to  comply  with  the  provisions  of  the  Stability  and 

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Growth  Pact.  The  use  of  any  windfall  gains  to  further  reduce  the  general  government  debt 
ratio would be prudent. 

Moreover,  Italy  has  made  some  progress  in  addressing  the  2017  Country  Specific 
Recommendations,  but  the impact of structural reforms on  growth  will crucially depend on 
implementation and remains difficult to disentangle from the ongoing cyclical recovery. 

Finally, the large public debt remains a major source of vulnerability for the Italian economy, 
and  a  careful  balance  between  growth-enhancing  reforms  and  fiscal  responsibility  remains 
key.  Instead,  recently-adopted  measures,  together  with  adverse  demographic  trends,  risk  to 
reverse  the  positive  trend  achieved  by  past  pensions  reforms  and  weaken  long-term  fiscal 
sustainability, even more so if real interest rates increased more than currently expected. 

The  analysis  presented  in  this  report  includes  the  assessment  of  all  relevant  factors  and 
notably: (i) the improving macroeconomic conditions, no longer explaining Italy’s large gaps 
with the debt reduction benchmark; (ii) the ex-post compliance with the required adjustment 
towards  the  MTO  in  2017;  and  (iii)  some  progress  in  adopting  and  implementing  growth-
enhancing structural reforms. Overall, the analysis suggests that the debt criterion as defined 
in  the  Treaty  and  in  Regulation  (EC)  No  1467/1997  should  be  considered  as  currently 
complied  with,  and  that  an  EDP  is  thus  not  warranted  at  this  stage,  having  regard  in 
particular  to  Italy's  ex-post  compliance  with  the  preventive  arm  in  2017.  However,  the 
adjustment  in  2018  appears  inadequate  to  ensure  compliance  with  the  adjustment  path 
towards the MTO in 2018 based on the Commission 2018 spring forecast.  The Commission 
will  reassess  compliance  on  the  basis  of  the  ex-post  data  for  2018  to  be  notified  in  Spring 
2019. 

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