REPORT FROM THE COMMISSION Italy Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2018-11-21
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Italy, budget deficit, budget policy, budgetary control, budgetary expenditure, gross domestic product, macroeconomics, public debt, stability pact, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 21.11.2018  COM(2018) 809 final  REPORT FROM THE COMMISSION Italy  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
EN 

  EN 

 
 
 
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 in 2017, with due regard to the economic background and other 
relevant  factors.  On  29  October  2018,  the  Commission  addressed  a  letter  to  the  Italian 
authorities  announcing  its  intention  to  reassess  Italy's  compliance  with  the  debt  criterion  in 
autumn 2018, taking into account the material change in the relevant factors represented by 
the 2019 Draft Budgetary Plan. 
On 23 May 2018, the Commission issued a report under Article 126(3) TFEU3, as Italy did 
not make sufficient progress towards compliance with the debt criterion in 2017. The report 
concluded that the criterion should be considered as complied with at the time, having regard 
in  particular to  Italy's  ex-post compliance with the preventive arm in  2017. The report also 
noted  a  risk  of  significant  deviation  from  the  adjustment  path  towards  the  medium-term 
budgetary  objective  recommended  by  the  Council  for  2018,  based  on  both  the  government 
plans and the Commission 2018 spring forecast.  

However,  Italy's  fiscal  plans  for  2019  represent  a  material  change  in  the  relevant  factors 
analysed by the Commission last May. In particular, on 16 October Italy submitted its 2019 

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”,  adopted  by  the  Economic  and  Financial  Committee  on  15  May  2017,  available  at: 
http://data.consilium.europa.eu/doc/document/ST-9344-2017-INIT/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 Commission Report COM(2018) 428 final of 23.5.2018: "Italy - Report prepared in accordance with Article 

126(3) of the Treaty on the Functioning of the European Union". 

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draft  budgetary  plan4,  entailing  a  deterioration  of  the  (recalculated)  structural  balance5  of 
0.9%  of  GDP  in  2019.  On  23  October  2018,  the  Commission  adopted  an  Opinion6  on  the 
2019  draft  budgetary  plan,  identifying  particularly  serious  non-compliance  with  the  fiscal 
recommendation  addressed  to  Italy  by  the  Council  on  13  July  2018  and  requesting  Italy  to 
submit a revised draft budgetary plan. On 13 November 2018, Italy submitted a revised draft 
budgetary  plan  for  2019.  The  changes  in  the  revised  2019  draft  budgetary  plan  were  very 
limited,  mainly  consisting  in  a  higher  privatisation  target  for  2019  (1%  of  GDP  in  lieu  of 
0.3%). On 21 November 2018, the Commission adopted its Opinion on Italy's revised 2019 
draft  budgetary  plan,  confirming  the  particularly  serious  non-compliance  with  the  fiscal 
recommendation  for  2019.  This  justifies  a  new  assessment  of  compliance  with  the  debt 
reduction benchmark in 2017. 
The data notified by the authorities in October 20187 and subsequently validated by Eurostat8 
show that Italy’s general government deficit declined to  2.4%  of GDP in  2017 (down from 
2.5% in 2016), while the debt stabilised at 131.2% of GDP (from 131.4% in 2016), i.e. above 
the 60% of GDP reference value. For 2018, Italy’s revised 2019 draft budgetary plan projects 
the debt-to-GDP ratio to slightly decrease to 130.9%. In 2019, it projects a further decline (of 
1.7  percentage  points)  in  the  debt-to-GDP  ratio  to  129.2%.  Based  on  notified  data  and  the 
Commission 2018 autumn forecast, Italy did not comply with the debt reduction benchmark 
either in 2016 (gap of 5.2% of GDP) or in 2017 (gap of 6.6% of GDP) (see Table 1).  

Overall,  Italy's  lack  of  compliance  with  the  debt  reduction  benchmark  in  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  both  the 
government plans and the Commission 2018 autumn forecast, Italy is not expected to comply 
with  the  debt  reduction  benchmark  either  in  2018  (gap  of  3.7%  and  6.6%  of  GDP, 
respectively) or in 2019 (gap of 3.6% and 6.7% of GDP respectively). 

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  budgetary  objective  (MTO).  The  report 
takes into account the Commission 2018 autumn forecast, released on 8 November 2018. The 
Commission forecast is based on the 2019 draft budgetary plan and not on the revised one, 
but the changes between the two documents are marginal. 

4 https://ec.europa.eu/info/sites/info/files/economy-finance/2019_dbp_it_en_1.pdf  
5 Cyclically adjusted balance net of one-off and temporary measures, recalculated by the Commission using the 

commonly agreed methodology. 

6  Commission  Opinion  C(2018)  7510  final,  23.10.2018,  on  the  Draft  Budgetary  Plan  of  Italy  and  requesting 

Italy to submit a revised Draft Budgetary Plan. 

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

8  Eurostat 

163/2018 

available 

October 

release 

2018, 

No 

22 

at: 

of 

https://ec.europa.eu/eurostat/documents/2995521/9328077/2-22102018-AP-EN.pdf/e1b423ef-a337-42ea-
90cb-4a6775ba4c07   

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Table 1: General government deficit 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 1.4% and the 
headline deficit stabilised at around 2.4% of GDP. Yet, both are set to improve in 2018. In 
2019  and  2020,  both  the  headline  and  the  primary  balance  are  expected  to  substantially 
deteriorate,  mainly  due  to  the  measures  included  in  the  2019  draft  budgetary  plan  and 
confirmed in the revised 2019 draft budgetary plan.  

Italy’s general government deficit was reported at 2.4% of GDP in 2017. According to both 
the revised draft budgetary plan and the Commission 2018 autumn forecast, it is projected to 
respect the Treaty reference value of 3% of GDP during the period 2018-2019. However, the 
reference value will be exceeded in 2020 according to the Commission forecast, under a no-
policy  change  assumption.  The  revised  2019  draft  budgetary  plan  projects  the  general 
government deficit at 1.8% of GDP in 2018 and 2.4% in 2019. Italy's Nota di Aggiornamento 
al  DEF,  updating  the  budgetary  targets  of  Italy's  2018  Stability  Programme,  projects  the 
headline deficit to decline to 2.1% of GDP in 2020. The increase in the general government 
deficit  projected  for  2019  largely  results  from  the  budgetary  measures  envisaged  in  the 
revised  2019  draft  budgetary  plan,  with  a  net  deficit-increasing  impact  of  around  1.2%  of 
GDP in the government projections. The decrease in the general government deficit projected 
in 2020 is largely due to the impact (around 0.7% of GDP) of higher VAT rates legislated for 
2020  as  a  safeguard  clause.  The  Commission  2018  autumn  forecast  projects  that  Italy's 
general  government  deficit  will  be  at  1.9%  of  GDP  in  2018  and  rise  to  2.9%  in  2019.  The 
deficit  forecast  by  the  Commission  for  2018  is  slightly  higher  than  that  projected  by  the 
revised 2019 draft budgetary plan, and that difference is mainly explained by more prudent 
assumptions  on  the  size  of  public  spending,  including  interest  expenditure.  The  deficit 
forecast by the Commission for 2019 is also higher than that projected by the revised 2019 
draft  budgetary  plan,  and  that  difference  is  mainly  due  to  lower  GDP  growth  and  higher 
interest  expenditure  than  in  the  government  projections.  The  Commission  2018  autumn 
forecast  projects  that  Italy's  general  government  deficit  will  reach  3.1%  of  GDP  in  2020, 
under  a  no-policy-change  assumption.  The  higher  deficit  forecast  by  the  Commission  for 
2020  compared  to  the  government's  projections  is  mainly  explained  by  the  fact  that  the 

3 

COMDBPCOMDBPDeficit criterionGeneral government balance-2.6-2.5-2.4-1.9-1.8-2.9-2.4General government gross debt131.6131.4131.2131.1130.9131.0129.2Gap to the debt reduction benchmarkn.r.5.26.66.63.76.73.6Change in structural balance0.1-0.7-0.30.00.2-1.2-0.9Required MLSA3.4n.r.n.rn.r.n.r.n.r.n.r.2018Debt criterion2015201620172019Source: Commission services, Italy's revised 2019 DBP and Commission 2018 autumn forecasta In percent of GDP unless otherwise specified; "n.r." indicates "not relevant"Notes: 
 
 
Commission does not include the higher VAT rates legislated for 2020 as a safeguard clause, 
while the other factors are lower nominal GDP growth and higher interest spending.  

Thus,  Italy  currently  complies  with  the  deficit  criterion  as  defined  in  the  Treaty  and  in 
Regulation  (EC)  No  1467/97,  although  there  is  a  risk  that  the  deficit  criterion  will  not  be 
complied with in 2020 according to the Commission 2018 autumn forecast, under a no-policy 
change assumption. 

3. 

DEBT CRITERION 

After growing by 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  peaking  at  131.4%  in  2016 
and slightly declining to 131.2% in 2017. Based on the revised 2019 draft budgetary plan, the 
debt-to-GDP ratio is expected to progressively decline to 130.9% in 2018, 129.2% in 2019 
and  127.3%  in  2020.  The  Commission  forecasts  projects  the  debt  ratio  to  remain  stable  at 
around  131%  over  2018-2020.  Up  to  2018,  favourable  –  although  worsening  –  financing 
conditions  contributed  to  underpin  the  economic  recovery  and  reduce  the  snowball  effect. 
Thereafter, rising financing costs, a reduced primary surplus and below-target privatisation 
proceeds are expected to hamper debt reduction. While debt refinancing risks are limited in 
the  short  term,  the  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  towards  compliance  with  the  debt  reduction  benchmark,  which  started  in  2013  and 
ended in 2015. After the end of the transition period, the debt reduction benchmark became 
applicable in 2016. Based on notified data and the Commission forecast, the gap to the debt 
benchmark amounted to 5.2% of GDP in 2016 and to 6.6% in 2017. Moreover, based on the 
revised  2019  draft  budgetary  plan,  Italy  is  not  projected  to  comply  with  the  debt  reduction 
benchmark either in 2018 (gap to the debt benchmark of 3.7% of GDP) or in 2019 (gap to the 
debt  benchmark  of  3.6%  of  GDP).  This  conclusion  is  confirmed  based  on  the  Commission 
forecast  (gap  to  the  debt  benchmark  of  6.6%  and  6.7%  of  GDP  in  2018  and  2019 
respectively). 

More specifically, the debt-to-GDP ratio reached 131.2% 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,9  while  gradually  shrinking  (to  2.4%,  from  2.7%  in 
2013),  remained  above  real  GDP  growth  (1.6%).  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 Table 2 and Graph 1. The positive interest rate-growth rate differential (0.9 
percentage points, compared to 0.8 in 2016) implied a still large debt-increasing impact from 
the “snowball” effect (1.1% of GDP, compared to 1.0% in 2016 – see Table 2). On the other 
hand, a broadly stable primary surplus at 1.4% 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 

9 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-
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). 

4 

 
 
                                                 
support  to  the  banking  sector,10  partly  offset  by  the  reduction  in  the  liquidity  buffer,  while 
there were no privatisation proceeds.11 

In 2018, the revised 2019 draft budgetary plan projects the debt-to-GDP ratio to decrease to 
130.9%,  down  by  0.3  percentage  point  from  the  2017  level.  The  projected  dynamics  are 
mainly  the  result  of  a  declining  although  still  debt-increasing  “snowball”  effect  (0.5%  of 
GDP),12  and  a  small  improvement  in  the  primary  surplus  (to  1.8%  of  GDP)  more  than 
offsetting  the  debt-increasing  stock-flow  adjustment  (1.0%  of  GDP).  The  Commission 
forecasts  the  debt  ratio  to  decrease  to  131.1%  of  GDP  in  2018,  slightly  above  the  revised 
2019 draft budgetary plan. The difference is due to a slightly lower projected primary surplus 
and a higher "snowball" effect, related to marginally higher projections for the real implicit 
cost of debt. 

For 2019, the revised 2019 draft budgetary plan projects a large decline in the debt-to-GDP 
ratio by 1.7 percentage point to 129.2%. The latter is mainly due to a debt-decreasing stock-
flow adjustment (-0.1% of GDP),  mainly  explained by large privatisation proceeds  planned 
by  the  government  (1%  of  GDP),  and  a  marginally  debt-decreasing  "snowball"  effect, 
explained by a strong projected increase in nominal growth as compared to 2018, expected to 
offset a shrinking primary surplus (at 1.2% of GDP). The Commission forecasts the debt-to-
GDP  ratio  to  remain  broadly  stable  in  2019,  at  131.0%.  The  difference  is  related  to 
significantly lower projections for nominal growth and a higher forecast for interest spending, 
reflecting in a still sizable debt-increasing "snowball" effect, as well as to a lower projected 
primary surplus (1% of GDP) and lower privatisation proceeds. Risks to the debt projections 
in  both  the Commission  forecast  and  the revised 2019 draft budgetary  plan are related to  a 
worse-than-anticipated growth outlook, stronger deterioration of the primary balance, lower 
inflation or privatisation proceeds, and higher-than-expected interest spending. 

The Commission forecasts the debt-to-GDP ratio to remain broadly stable also in 2020, as a 
further deteriorating primary surplus and increasing interest spending are expected to offset 
nominal GDP growth. 

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 up to 2016 a progressive 
shrinking of their differential (yellow shade), which is set to remain broadly stable over the 
period 2018-2019, and to slightly increase in 2020 due to the rising real implicit cost of debt. 
Overall, 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 partial explanation for Italy's lack of compliance with the debt reduction benchmark in 2017 
and 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 revised 2019 

10  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. 

11 Other minor transactions affecting the stock-flow adjustment are not reported. See also the Italian Ministry of 
Economy 
at: 
http://www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/debito_pubblico/presentazioni_studi_relazion
i/Rapporto_sul_Debito_Pubblico_2017.pdf  

Finance's 

Report 

Public 

2017, 

Debt 

and 

12 In particular, the “snowball” effect is reduced thanks to much higher inflation and marginally lower interest 

spending. 

5 

 
 
                                                 
draft budgetary plan 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 

Source: Commission 2018 autumn forecast 

6 

201520162017COMDBPCOMDBPGovernment gross debt ratio131.6131.4131.2131.1130.9131.0129.2Change in debt ratio b (1 = 2+3+4)-0.2-0.2-0.1-0.1-0.3-0.1-1.7Contributions:• Primary balance (2)-1.5-1.4-1.4-1.7-1.8-1.0-1.2• “Snowball” effect (3)1.71.01.10.60.50.7-0.3of which:Interest expenditure4.13.93.83.73.63.83.6Real GDP growth-1.2-1.5-2.0-1.5-1.5-1.5-1.9Inflation (GDP deflator)-1.2-1.4-0.6-1.6-1.6-1.7-2.0• Stock-flow adjustment (4)-0.40.20.21.11.00.2-0.1of which:Cash/accruals difference0.3-0.81.30.70.50.50.5Net accumulation of financial assets-0.71.0-1.20.40.0-0.3-0.7of which privatisation proceeds-0.4-0.1-0.3-0.2-1.0Valuation effect & residual0.00.00.00.00.50.00.1Source: Commission services, Italy's revised 2019 DBP and Commission 2018 autumn 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  an  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)13 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 

13 See the 126(3) Reports COM(2015) 113 final, 27.2.2015; COM(2016) 305 final, 18.5.2016; and COM(2018) 

428 final, 23.5.2018. 

7 

 
 
                                                 
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, with nominal GDP growth above 2% since 2016 despite recently 
intensified  downside  risks,  cannot  be  argued  to  be  a  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.  While  Italy  had  made  some  progress  in  addressing  the  2017 
Country-Specific Recommendations (CSRs), the measures included in the 2019 revised draft 
budgetary  plan  indicate  a  backtracking  on  the  past  progress  as  well  as  with  regard  to  the 
structural fiscal aspects of the recommendations addressed to Italy by the Council on 13 July 
2018. 

Cyclical conditions, potential growth and inflation 

Italy’s real GDP growth reached 1.6% in 2017. Both the revised 2019 draft budgetary plan 
and the Commission forecast expect it to soften in 2018 (at 1.2% and 1.1% respectively). In 
2019, the revised 2019 draft budgetary plan expects real GDP growth to accelerate to 1.5%, 
while the Commission projects a milder  recovery  both in 2019 (1.2%) and in  2020 (1.3%). 
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 2018-2020, while remaining at very low levels. As a result, 
Italy’s negative output gap is estimated by the Commission to close quickly, from -3.6% of 
potential GDP in 2015 to -0.3% in 2018, before turning positive in 2019 (at 0.3%) and further 
increasing in 2020 (to 0.8%).  

Despite the past 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.14 
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 restrains 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  growth  was supported by labour market reforms and hiring 
incentives, but was largely driven by temporary contracts, while still high levels of long-term 
and  youth  unemployment  weigh  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. Finally, investment, in 
particular in intangible assets, is still low. In that context, it is important for Italy 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 around 0% in 2015 and 2016, 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. Based on 

14  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". 

8 

 
 
                                                 
the Commission forecast, it is expected to remain stable at 1.3% in 2018 and to further rise to 
1.5% in 2019, largely driven by higher oil prices, before slightly moderating to 1.4% in 2020. 
Core inflation is also set to pick up gradually over the coming years – in line with moderate 
wage growth – and reach 1.4% in 2020.  

Until  recently,  the  possibility  for  Italy  to  deliver  large  fiscal  efforts  in  order  to  decisively 
bring down its debt-to-GDP ratio has been hampered by an adverse macroeconomic outlook 
and the related risk that fiscal policies could turn self-defeating, being the debt ratio and the 
primary balance negatively affected by subdued price developments. Moreover, low inflation 
has made it harder for Italy to cut its public spending as a share of GDP by freezing wages 
and pension entitlements in nominal terms, while implying lower-than-normal tax revenues. 
Last,  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.15  Real  GDP  growth  accelerated  to  1.1%  in  2016  and 1.6%  in 
2017,  with  nominal  GDP  growth  above  2%  (2.3%  in  2016  and  2.1%  in  2017)  for  the  first 
time since the global financial crisis. While real GDP growth is forecast by the Commission 
to sharply decelerate again to 1.1% in 2018 and to only very moderately recover to 1.2% in 
2019  and  1.3%  in  2020,  underlying  price  developments  (GDP  deflator)  imply  an  expected 
acceleration  in  nominal  GDP  growth  to  2.4%  in  2018,  2.5%  in  2019,  and  2.7%  in  2020. 
Macroeconomic  conditions  no  longer  appear  to  be  a  mitigating  factor  in  explaining  Italy’s 
large  gaps  to  compliance  with  the  forward-looking  debt  reduction  benchmark,  although 
Italy's growth outlook appears to be subject to intensified downside risks going forward. In 
particular,  a  prolonged  rise  in  sovereign  yields  could  worsen  banks'  funding  conditions  as 
well  as  capital  buffers  and  thereby  negatively  affect  real  GDP  growth  by  hampering  credit 
costs and supply. This, in turn, would amplify Italy’s fiscal sustainability risks. 

Table 3: Macroeconomic and budgetary developments a 

15 See, for instance, Blanchard O. and D. Leigh (2013), at www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf  

9 

201520162017COMDBPCOMDBPReal GDP (% change)0.91.11.61.11.21.21.5GDP deflator (% change)0.91.10.51.31.31.31.6Potential GDP (% change) -0.1-0.20.30.50.70.60.9Output gap (% of potential GDP)-3.6-2.3-1.0-0.3-0.40.30.4General government balance-2.6-2.5-2.4-1.9-1.8-2.9-2.4Primary balance1.51.41.41.71.81.01.2One-off and other temporary measures-0.20.20.00.10.0-0.1-0.1Government gross fixed capital formation2.22.12.01.91.81.92.1Cyclically-adjusted balance-0.7-1.3-1.9-1.8-1.6-3.0-2.6Cyclically-adjusted primary balance3.42.61.91.92.00.81.0Structural balance b-0.5-1.5-1.8-1.8-1.6-3.0-2.6Structural primary balance3.62.42.01.82.00.91.0a In percent of GDP unless otherwise specifiedSource: Commission services, Italy's revised 2019 DBP and Commission 2018 autumn forecast20182019Notes:b Cyclically adjusted balance excluding one-offs and other temporary measures 
 
 
 
                                                 
Structural reforms 
Following  the  general  election  of  4  March  2018,  the  2018  National  Reform  Programme16 
adopted in April 2018 by the caretaker government did not propose new legislative initiatives 
but  listed  the  reforms  already  adopted  at  that  time  in  a  number  of  areas  such  as  public 
administration, judicial system, competition, labour market, education and competitiveness.  

In its 2018 Country Report, the Commission assessed that Italy had made some progress in 
addressing  the  2017  CSRs  but  also  that  the  reform  momentum  had  slowed  down  and  that 
significant challenges persisted in diverse reform areas. Italy's macroeconomic imbalances –
mainly  related  to  a  very  high  public  debt  and  sluggish  productivity  growth  –  had  stopped 
deteriorating but remained elevated.17 As a result, the Commission concluded that Italy still 
displayed excessive macroeconomic imbalances.18 

The revised 2019 draft budgetary plan introduced several new policy initiatives, which were 
further  specified  in  two  legislative  proposals:  the  "fiscal  decree"19  of  23  October  2018,  and 
the draft budget law, submitted to the Parliament on 31 October 2018, both currently under 
discussion.  

The  "fiscal  decree"  includes  measures  aimed  at  encouraging  tax  compliance,  as  well  as 
several measures aimed at collecting past tax liabilities and cleaning tax registers. Concerning 
the first point, the electronic transmission of invoices will be compulsory also for transactions 
with  final  consumers.  At  the  same  time,  the  "fiscal  decree"  introduced  a  new  and  more 
advantageous  possibility  for  taxpayers  to  settle past  tax  liabilities,  by  paying  in  instalments 
over several years, without fines and with advantageous interest rates. An additional measure 
will also allow taxpayers – under specific conditions and limits – to disclose past unreported 
income by paying only 20% of the corresponding tax liability, over several instalments and 
without  interests  and  fines.  The  "fiscal  decree"  also  includes  several  smaller  provisions 
curtailing old pending tax liabilities of limited size and reducing incentives for taxpayers to 
prolong the duration of tax litigations. Overall, the positive impact on revenues is estimated at 
around 0.1% of GDP in 2020.  

The draft budget law includes numerous measures affecting a wide range of areas including 
taxation,  public  investment,  social  security  and  the  pension  system.  Concerning  taxation, 
several  changes  in  tax  regimes,  especially  for  firms  and  the  self-employed,  will  partly 
redistribute  the  tax  burden  across  sectors,  with  an  overall  positive  impact  on  revenues  in 
2019. The measures reducing the tax burden are the following: 

(1)  The  scope  of  the  simplified  tax  regime  for  the  self-employed  will  be  extended,  by 
loosening  access  conditions.  Currently,  self-employed  workers  with  yearly  turnovers  below 
sector-specific thresholds have the option to pay, as a substitute for the personal income tax, a 
forfeit 15% tax rate on their yearly turnover adjusted for specific "profitability coefficients". 
With the new regime, all thresholds for yearly turnover, which currently vary across sectors 
of  activity  and  range  up  to  EUR  55 000,  are  harmonised  and  raised  to  EUR  65 000.  In 

16 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  

17 See “Country Report Italy 2018”. Ibidem. 
18 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". 

19 Decreto Legge, 23 ottobre 2018, n. 119, Disposizioni urgenti in materia fiscale e finanziaria. 

10 

 
 
                                                 
addition, several other access conditions are removed. The measure is expected to structurally 
reduce revenues by 0.1% of GDP.  

(2)  A  similar  provision  is  also  introduced  for  workers  engaged  in  entrepreneurial  activities 
with a yearly turnover between EUR 65 000 and EUR 100 000, whose corresponding income 
will be taxed outside the standard personal income tax regime with a forfeit 20% rate20. The 
expected revenue loss amounts to 0.1% of GDP from 2021. 

(3) The corporate tax rate will be reduced from 24% to 15% on firms' profits used to increase 
investment  or  to  hire  new  employees,  with  an  expected  structural  revenue  loss  of  around 
0.1% of GDP. 

At the same time,  several  other  existing  provisions which lowered the tax burden for firms 
will be abrogated or reduced in scope. Namely, a previously legislated simplified tax regime 
for  personal  income  from  entrepreneurial  activities  ("Imposta  sul  Reddito  Imprenditoriale") 
and  the  existing  tax  incentives  for  firms'  capital  uplifts  ("Aiuto  alla  Crescita  Economica") 
will be abrogated (implying higher revenues 0.1% of GDP in 2019 and 0.2% from 2020). The 
temporary incentives to investment ("Superammortamento") will not be extended, while the 
temporary  tax incentives for innovative investment  ("Iperammortamento")  will be extended 
but reduced in scope. Furthermore, the tax deductibility of specific costs for some categories 
of firms – especially banks – will be limited, with a temporary positive effect on revenues by 
0.2%  of  GDP  in  2019.  More  specifically,  the  tax  deductibility  of  the  goodwill  and  other 
intangible assets related to past operations is lowered by spreading it over 11 years; the tax 
deductibility of credit losses incurred in 2018 is postponed to 2026; the tax deductibility of 
losses due to the implementation of new accounting principles is lowered by spreading it over 
ten years; and the advance payment of the tax on insurances is increased. 

The draft budget law also includes several provisions to support public investment. Budgeted 
resources  for  public  investments  will  be  increased  by  0.2%  of  GDP  in  2019  through  the 
creation  of  two  funds,  for  investments  planned  at  the  central  level  (Fondo  Investimenti 
Amministrazioni  centrali)  and  at  the  local  level  (Fondo  Investimenti  enti  territoriali). 
Furthermore, two institutional bodies will be created to smoothen administrative procedures:  
a  central  office  (InvestItalia)  will  coordinate  the  ministerial  work  in  setting  investment 
strategies at the national level, monitoring the implementation of programmes and addressing 
bottlenecks;  at  the  same  time,  an  independent  office  for  project  planning  (Centrale  per  la 
progettazione  delle  opera  pubbliche)  will  provide  technical  support  to  local  and  central 
administrations throughout the implementation of projects.    

The two main measures included in the revised 2019 draft budgetary plan are the "citizenship 
income" and the "100 threshold" ("Quota 100"), concerning social security and the pension 
system  respectively.  The  draft  budget  law  only  includes  the  funds  allocated  for  these 
measures, which will be designed and implemented with separate laws. However, the revised 
2019 draft budgetary plan mentions their main aspects. 

The  "citizenship  income"  is  a  minimum  income  scheme,  which,  in  the  government  plans, 
would  aim  at  guaranteeing  a  monthly  income  of  EUR  780,  corresponding  to  the  relative 
poverty  threshold.  However,  the  exact  amount  of  the  allowances  and  the  access  conditions 
remain to be legislated at a later stage. The budgeted fund amounts to EUR 9 billion per year 
from 2019, including EUR 1 billion for strengthening employment centres. As the fund will 

20  As  that  measure will  be  implemented  from  2020,  it  is only  included in  the draft budget  law  and not in  the 

revised 2019 draft budgetary plan. 

11 

 
 
                                                 
absorb  around  EUR  2  billion  of  resources  previously  allocated  to  the  anti-poverty  scheme 
(Reddito di inclusione), the net impact on government spending is 0.4% of GDP.  

The "100 threshold" is an early retirement scheme, setting the minimum threshold for early 
retirement  at  62  years  of  age  and  38  years  of  contributions.  The  budgeted  fund  amounts  to 
EUR 6.7 billion in 2019 and EUR 7 billion from 2020 (0.4% of GDP).  

The  measures  included  in  the  revised  2019  draft  budgetary  plan  for  2019  indicate  a 
backtracking  on  reforms  that  Italy  had  adopted  in  line  with  past  Country-Specific 
Recommendations,  as  well  as  with  regard  to  the  structural  fiscal  aspects  of  the 
Recommendation addressed to Italy by the Council on 13 July 2018. In particular, while the 
Council  recommended  that  Italy  should  reduce  the  share  of  old-age  pensions  in  its  public 
spending to create space for other social spending, the newly introduced possibility for early 
retirement backtracks on earlier pension reforms that underpin the long-term sustainability of 
Italy's sizeable public debt. Furthermore, the higher flexibility for retiring early might have a 
negative impact on labour supply, hampering potential growth.  

The  strengthened  provision  for  electronic  invoicing  is  expected  to  help  reducing  the  VAT 
compliance  gap,  by  providing  the  tax  agency  with  more  timely  and  accurate  information, 
which will allow targeted inspections with deterrent effects on taxpayers. However, the new 
possibilities  for  taxpayers  to  settle  past  tax  liabilities  or  report  undeclared  income  at 
advantageous conditions are expected to produce an opposite effect, by implicitly rewarding 
non-compliant behaviours. 

The  planned  changes  in  tax  regimes  for  the  self-employed  and  firms  are  aimed  at  better 
targeting  tax  incentives  to  economic  growth.  However,  this  change  in  strategy  is  subject to 
downward  risks,  as  some  of  the  measures  abrogated  had  proven  successful  in  supporting 
investment  and  firms'  capital  uplifts.  Withdrawing  the  existing  favourable  tax  regime  on 
reinvested earnings under the ‘allowance for corporate equity’ (ACE), which was largely used 
by firms, could worsen the debt bias in corporate taxation, potentially reducing incentives to 
alternative  forms  of  financing  apart  from  bank  lending.  At  the  same  time,  the  reduced 
corporate  tax  rates  on  firms  hiring  or  investing  –  although  better  targeting  incentives  to 
economic  growth  –  may  prove  complex  to  implement  in  practice  and  increase  reporting 
requirements for firms. Furthermore, the reform package overall increases the tax burden on 
firms in 2019, while having only a broadly neutral impact in 2020.  

The  measures  implying  lower  tax  deductibility  of  costs,  by  implicitly  increasing  the  tax 
burden  on  banks,  could  adversely  affect  credit  supply,  thus  risk  worsening  the  possible 
negative impact of higher sovereign yields and bank funding costs. 

The  increased  funds  and  strengthened  administrative  capacity  for  public  investment  is 
expected  to  support  economic  growth,  although  its  impact  risks  being  delayed  by 
implementation lags and administrative bottlenecks.  

Overall,  the  composition  of  the  revised  2019  draft  budgetary  plan  does  not  seem  to  be 
conducive  to  raising  potential  growth,  as  it  backtracks  on  past  structural  reforms,  risks 
discouraging  tax  compliance,  increases  the  tax  burden  on  firms  at  an  aggregate  level  and 
could  lead  to  reduced  credit  supply  via  worse  banks'  funding  conditions  from  higher 
sovereign yields. 

12 

 
 
 
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 2017, after taking into account the 
allowances  granted  under  the  flexibility  clauses  and  for  unusual  events.  By  contrast,  as 
regards  2018,  the  fiscal  adjustment  is  not  expected  to  be  adequate  in  light  of  the 
sustainability challenges that Italy faces. For 2019, the Commission identified in its Opinion 
of 23 October 2018 on the 2019 draft budgetary plan a particularly serious non-compliance 
with  the  fiscal  recommendation  addressed  to  Italy  by  the  Council  on  13  July  2018.  That 
assessment  was  confirmed  in  the  Commission  Opinion  of  21  November  2018  on  Italy's 
revised  2019  draft  budgetary  plan.  The  size  of  the  deviation  from  the  recommended 
adjustment  path  towards  the  MTO  is  expected  to  further  widen  in  2020  based  on  the 
Commission forecast, under a no-policy change assumption. 

Structural balance and adjustment towards the MTO  

Box 1: flexibility under the preventive arm 

After  exiting  the  EDP  in  2013,  Italy  was  broadly  compliant  with  the  provisions  of  the 
preventive  arm  up  to  2017.  However,  over  the  period  2015-2017,  Italy's  broad  compliance 
was  achieved  also  thanks  to  the  flexibility  granted  by  the  Commission,  following  its 
Communication  on  "Making  the  best  use  of  flexibility  within  the  existing  rules  of  the 
Stability  and  Growth  Pact"  of  January  2015,  and  confirmed  by  the  Council's  Country-
Specific Recommendations. Italy has largely benefitted from flexibility within the framework 
of  the  Stability  and  Growth  Pact.  In  2015,  0.03%  of  GDP  of  flexibility  was  granted  for 
unusual  events,  in  connection  with  the  refugee  crisis.  The  same  year,  the  benchmark 
structural requirement of 0.5% of GDP was reduced by half, to 0.25% of GDP as a result of 
the enhanced consideration of prevailing cyclical conditions. In 2016, an overall flexibility of 
0.83%  of  GDP  was  granted  in  connection  with  the  structural  reform  clause,  the investment 
clause  and  the  unusual  event  clause.  The  latter  was  granted  with  reference  to  the  refugee 
crisis and additional security costs due to the terrorist threat. In 2017, an overall flexibility of 
0.35% of GDP was granted under the unusual event clause, due to the refugee crisis and the 
need  to  protect  the  national  territory  against  seismic  risks.  For  2018,  the  Commission 
considered  that  a  fiscal  structural  effort  lower  by  0.3%  of  GDP  than  the  benchmark 
requirement  would  be  adequate  in  order  to  balance  Italy's  stabilisation  needs  and  existing 
sustainability  challenges.  Overall,  over  the  period  2015-2018  Italy  was  allowed  to 
temporarily  deviate  from  the  adjustment  path  towards  the  MTO  by  close  to  1.8  percentage 
points of GDP. 

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  Stability 
Programme confirmed 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 confirmed the allowance preliminarily granted under 

13 

 
 
 
the unusual event clause21. Therefore, the required adjustment towards the MTO for 2017 has 
been reduced to take into account those costs.  

The  overall  assessment  issued  in  spring  2018  on  the  basis  of  the  Commission  2018  spring 
forecast pointed to some deviation from the recommended adjustment path towards the MTO 
in  both  2016  and  2017.  The  same  assessment  is  confirmed  based  on  the  Commission  2018 
autumn forecast.  

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 stated in its Communication 
on the 2017 European Semester of May 201722 that it 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%.  

Based  on  the  revised  2019  draft  budgetary  plan,  the  expenditure  benchmark  points  to  an 
inadequate  fiscal  adjustment  in  2018,  because  the  growth  rate  of  Italy's  government 
expenditure,  net  of  discretionary  revenue  measures  and  one-offs,  will  exceed  that 
recommended  by  the  Council.  In  addition,  the  improvement  in  the  (recalculated)  structural 
balance  planned  by  the  government  for  2018  (0.2%  of  GDP)  departs  from  the  adequate 
structural adjustment of 0.3% of GDP. An overall assessment based on the government plans 
points to  a risk of significant deviation from the adjustment path towards the medium-term 
budgetary objective recommended by the Council for 2018. Based on the Commission 2018 
autumn  forecast,  the  overall  assessment  based  on  the  government  plans  is  confirmed.  The 
Commission  forecast  projects  the  structural  balance  to  remain  stable  in  2018,  at  -1.8%  of 
GDP. Based on the Commission forecast, the expenditure benchmark points to an inadequate 
fiscal adjustment in 2018, and the same indication is provided by the structural balance pillar. 

Concerning 2019, the Commission identified in its Opinion of 23 October 2018 on the 2019 
revised  2019  draft  budgetary  plan  a  particularly  serious  non-compliance  with  the  fiscal 
recommendation  addressed  to  Italy  by  the  Council  on  13  July  2018.  That  assessment  was 
confirmed  by  the  Commission  Opinion  of  21  November  2018  on  Italy's  revised  2019  draft 
budgetary plan. 

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. 

Based on the revised 2019 draft budgetary plan, the expenditure benchmark points to a risk of 
significant  deviation  both  in  2019  (gap  of  1.3%  of  GDP)  and  over  2018  and  2019  taken 
together (gap of 0.9%  of GDP per year, on average, taking into  account  the adjustment  for 
both  years  recommended  by  the  Council),  because  the  growth  rate  of  government 
expenditure,  net  of  discretionary  revenue  measures  and  one-offs,  will  exceed  that 

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

and 0.19% of GDP concerning protection against seismic risks.  

22https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-specific-recommendations-

commission-recommendations-communication.pdf  

14 

 
 
                                                 
recommended  by  the  Council.  The  same  indication  is  provided  by  the  structural  balance 
pillar. The revised 2019 draft budgetary plan projects the (recalculated) structural balance to 
deteriorate  by  0.9%  of  GDP  in  2019.  The  structural  balance  pillar  points  to  a  risk  of 
significant  deviation  both  over  one year (gap  of  1.5%  of  GDP  in  2019)  and  over  2018  and 
2019 taken together (gap of 1.0% per year, on average, taking into account the adjustment for 
both  years  recommended  by  the  Council).  That  finding  would  not  change  after  considering 
the  reduced  requirement  in  2018  following  the  application  of  the  margin  of  discretion.  An 
overall  assessment  based  on  the  government  plans  points  to  a  particularly  serious  non-
compliance  with  the  adjustment  path  towards  the  medium-term  budgetary  objective 
recommended  by  the  Council  for  2019.  That  conclusion  would  not  change  even  if  the 
budgetary impact (around 0.2% of GDP) of the extraordinary maintenance programme for the 
road network and connections following the collapse of the Morandi bridge in Genoa and of a 
preventive  plan  to  limit  hydrogeological  risks  following  adverse  weather  conditions  were 
considered  as  unusual  events  outside  the  control  of  the  Member  State  concerned  for  the 
purposes  of Articles  5(1)  and 6(3)  of Regulation (EC) No 1466/97  and subtracted from the 
requirement of the preventive arm of the Stability and Growth Pact. 

Based  on  the  Commission  2018  autumn  forecast,  the  overall  assessment  based  on  the 
government plans is  confirmed, because the expenditure benchmark also points to a risk of 
significant  deviation  both  in  2019  (gap  of  1.5%  of  GDP)  and  over  2018  and  2019  taken 
together (gap of 1.3%  of GDP per year, on average, taking into account  the adjustment  for 
both years recommended by the Council). The same indication is provided by the structural 
balance  pillar.  The  Commission  2018  autumn  forecast  expects  Italy’s  structural  balance  to 
deteriorate by  1.2%  of GDP  in  2019,  reaching  -3.0%  of  GDP.  The  structural  balance  pillar 
points to a risk of significant deviation both over one year (gap of 1.8% of GDP in 2019) and 
over 2018 and 2019 taken together (gap of 1.2% per year, on average).  

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  (-5.3%  year-on-year  in  nominal  terms).  The  ratio  is  projected  by  the 
revised 2019 draft budgetary plan to decline slightly to 1.9% of GDP in 2018 (-2.2% year-on-
year  in  nominal  terms).  In  2019  and  2020,  the  revised  2019  draft  budgetary  plan  projects 
public investment to  progressively recover,  supported by the additional funds allocated and 
the  measures  taken  to  address  accelerate  administrative  procedures.  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. 

15 

 
 
 
 
 
 
4.3. 

Medium-term government debt position 

Italy's public debt remains a major source of vulnerability for the economy. Newly adopted 
measures,  together  with  adverse  demographic  trends,  will  likely  reverse  the  positive  trend 
achieved  by  past  pensions  reforms  and  weaken  long-term  fiscal  sustainability.  Long-term 
fiscal sustainability was also hampered by the increase in interest rates on government bonds 
observed in 2018, and could further worsen if real interest rates will rise more than currently 
expected. 

After reaching 131.2% in 2017, Italy’s debt-to-GDP ratio is set to broadly stabilise at around 
131%  over  2018-2020  on  the  basis  of  the  Commission  2018  autumn  forecast.  In  2018,  a 
limited  increase  in  the  primary  surplus,  only  marginally  declining  interest  spending  and 
below-target  privatisation  proceeds  are  expected  to  continue  hindering  the  pace  of  debt 
reduction.  In  2019  and  2020,  the  significant  worsening  of  the  primary  surplus  and  rising 
interest spending are expect to further hamper 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  In  fact,  risks  from  the  macro-financial  context  remain  overall 
limited,  also  thanks  to  the  ECB's  still  accommodative  monetary  policy.  However,  Italy  is 
exposed to sudden increases in financial market risk aversion due to improving but still large 
roll-over  needs  (around 17%  of GDP in  2018)  related to its public debt.  As observed since 
May  2018,  such  increases  can  lead  to  high  volatility  in  sovereign  bond  markets  and 
substantially higher debt servicing costs, with the subsequent risk of negative spillovers to the 
banking sector and to financing conditions of firms and households.  

In  the  medium  term,  Italy  faces  marked  sustainability  challenges.  Its  structural  primary 
surplus is forecast to further deteriorate to 0.9% of GDP in 2019 and 0.4% of GDP in 2020, 
down from 3.6% in 2015. This could heighten sustainability risks in the medium term, as a 
weak  fiscal  position  might  further  raise  risk  premia.  This  is  captured  by  the  Commission's 
medium-term debt sustainability analysis (DSA) and fiscal sustainability risk indicator S124, 
which both point to 'high risk'25. The high and increasing projected stock of debt in 2029 in 
the  baseline  scenario  and  its  sensitivity  to  macroeconomic-fiscal  shocks  contribute  to  this 
assessment. Achieving a debt ratio of 60% of GDP by 2033 would thus require Italy to make 
a large cumulative fiscal effort, amounting to 9.4 pps of GDP over 2021-2025. 

In the long-term, Italy is also expected to face marked sustainability challenges, driven both 
by  the  sizeable  fiscal  adjustment  required  to  stabilise  the  debt-to-GDP  ratio,    especially  in 
light of the future ageing costs, and to the vulnerabilities linked to the high debt burden. The 

23 The short-term fiscal sustainability indicator S0 (an  'early-detection'  indicator  of  fiscal  risks  in the short 
term, stemming  from fiscal, macro-financial and competitiveness characteristics  of  the  economy  over  a  
one-year horizon, based  on  a  range  of  twenty-five fiscal and macro-financial variables) is set to be below 
the 'high-risk' threshold in 2018 but, at 0.36, 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. 

24  The  medium-term  fiscal  sustainability  indicator  S1  shows  the  additional    adjustment    effort    required,    in  
terms of  a  cumulated  gradual  improvement  in  the structural   primary   balance   over   five   years (starting  
from  2021),  to  reach  a 60% debt-to-GDP  ratio by 2033, including   paying   for   any   future   additional 
expenditure  arising  from an  ageing  population. 

25  See  forthcoming  European  Commission  Fiscal  Sustainability  Report  2018.  More  explanations  on  the 

methodology can also be found in the European Commission Debt Sustainability Monitor 2017.  

16 

 
 
                                                 
long-term  fiscal  sustainability  risk  indicator  S226  points  to  significant  risks,  as  a  permanent 
increase in the structural primary surplus of around 2.9 percentage points of GDP would be 
needed  to  keep  the  debt-to-GDP  ratio  stable  over  the  long  term,  also  due  to  the  costs  of 
ageing. Given the vulnerabilities linked to the high debt burden – captured by the DSA risk 
assessment  –  that  result  also  points  to  ‘high  risk’  in  the  long-term.  In  fact,  the  long-term 
sustainability  ensured  by  past  pensions  reforms,  by  curbing  implicit  liabilities  arising  from 
population ageing, is deteriorating. This is due to worsening demographic trends projected by 
Eurostat and by recently adopted reforms. In particular, the 2017 and 2018 budgets already 
contained  measures  that  partially  reversed  past  pension  reforms,  contributing  to  increase 
Italy's  old-age  pension  expenditure  over  the  medium  term.  In  this  regard,  the  revised  2019 
draft  budgetary  plan  contains  additional  provisions  that  will  backtrack  on  past  progress, 
substantially increasing public spending  for old-age  pensions. Although  the exact design of 
the reform will be specified in legislative decrees after the adoption of the 2019 budget, based 
on  the  information  included  in  the  revised  2019  draft  budgetary  plan  the  planned  reform 
entails  a  substantial  loosening  of  conditions  for  early  retirement,  by  setting  the  relevant 
threshold at 62 years of age and 38 years of contributions. The additional cost, estimated at 
around  0.4%  of  GDP  in  2019,  would  thus  significantly  increase  Italy's  old  age  pension 
expenditure, which, at around 15% of potential GDP in 2016, is already one of the highest in 
the Union and the OECD. Furthermore, the enhanced flexibility for retiring early might have 
a negative impact on labour supply, in a context where Italy is already lagging behind the EU 
average for the participation of its older workers (55-64) in employment, thereby hampering 
potential  growth.  Overall,  further  backtracking  on  the  implementation  of  past  pension 
reforms, could significantly 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 revised 2019 draft budgetary plan still projects 0.3% of GDP 
privatisation proceeds per year over 2018-2020. As regards 2018, the Commission does not 
incorporate  any  privatisation  proceeds  ex  ante  given  the  track  record  of  privatisations  until 
now  and  the  low  progress  recorded  until  late  in  the  year.  As  regard  2019,  in  light  of  the 
credible  and  well-specified  proposals  currently  under  discussion,  half  of  the  projected 
proceeds are included in the forecast. For 2020, no privatisation proceeds are considered  ex 
ante in the forecast for prudential reasons. 

Against this background, the planned fiscal deterioration and the possible negative impact on 
potential  growth  of  the  planned  pension  reform  could  significantly  worsen  Italy's  fiscal 
sustainability risks in the medium and long term, endangering an appropriate reduction path 
of the large public debt. 

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 

26 The long-term fiscal sustainability indicator S2 shows the upfront adjustment   to   the   current   structural 
primary balance (subsequently kept constant at the  adjusted  value  forever)  that  is  required  to stabilise the 
debt-to-GDP ratio over the infinite horizon,  including  paying  for  any  additional expenditure arising from an 
ageing population. 

17 

 
 
 
 
                                                 
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 1% of 
GDP in 2017 (up from 0.2% at end-2016). That support 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  around  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 deficit for 2019 
and  2020,  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  consider  also  "the 
extent to which the Member State concerned has taken into account the Commission opinion" 
on  the  Member  State's  draft  budgetary  plan,  as  referred  in  Article  7(1)  of  the  same 
Regulation. In 2017, the Commission Opinion on Italy’s 2018 draft budgetary plan27 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,  the  2018  Budget  was 
passed  without  major  changes  compared  to  the  draft  budgetary  plan.  In  2018,  the 
Commission  Opinion  on  Italy's  2019  draft  budgetary  plan  identified  a  serious  non-
compliance with the recommendation addressed to Italy by the Council on 13 July 2018 and 
invited the authorities to submit a revised  draft budgetary plan. However, on 13 November 
2018, Italy submitted a revised draft budgetary plan confirming the fiscal targets planned for 
2019.  

4.5. 

Other factors put forward by the Member State 

On  13  November  2018,  the  Italian  authorities  transmitted  documents  concerning  relevant 
factors  in  accordance  with  Article  2(3)  of  Regulation  (EC)  No  1467/97  (‘the  Italian 
observations’). The analysis presented in the other sections of this report already covers most 
of the factors put forward by the authorities. 

The Italian observations stress Italy’s solid budgetary performance, witnessed by a consistent 
track record of sizable primary surpluses which, however, are still too largely offset by intra-
euro-area bond yield and growth differentials unfavourable to Italy to ensure compliance with 
the debt reduction benchmark. 

The first relevant factor discussed in the Italian observations is the outlook for nominal GDP 
growth, marked by recently heightened downside risks, in the face of which too large fiscal 
efforts  could  turn  self-defeating  and  hinder  compliance  with  the  debt  reduction  benchmark 
through the channel of an adverse denominator effect.  

The second, and related, relevant factor is the underestimation of the degree of slack in Italy's 
economy  even  after  the  revision  in  the  "commonly  agreed  methodology"  to  estimate  the 

27 Commission Opinion C(2017) 8019 final, 22.11.2017, on the Draft Budgetary Plan of Italy. 

18 

 
 
                                                 
output  gap  in  line  with  some  technical  changes  proposed  by  the  Italian  delegation  to  the 
Output  Gap  Working  Group.  While  those  technical  changes  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  2019.  In  that  year,  in  fact,  the  output  gap  is 
estimated  to  turn  positive,  at  +0.3%  of  potential  GDP,  which  is  judged  by  the  Italian 
authorities  not  to  be  in  line  with  economic  intuition,  given  Italy's  still  high  unemployment 
rate  of  11%  and  virtual  stability  in  wages  and  prices.  The  Italian  observations  thus  present 
alternative  estimates,  suggesting  an  output  gap  still  around  -3%  of  potential  GDP  in  2018 
based  on  the  government  projections,  whereby  Italy  would  be  virtually  at  its  MTO  of  a 
balanced  budget  in  structural  terms.  Moreover,  Italy  would  satisfy  the  debt  reduction 
benchmark  in  its  "cyclical-adjusted  configuration"  under  the  additional  assumption  of  a 
"normal" inflation rate (based on the GDP deflator) of 2%. 

The  third  relevant  factor  highlighted  by  the  Italian  observations  is  the  logic  of  supporting 
social  inclusion  and  public  investment  underlying  the  government  fiscal  plans  in  the  2019 
draft  budgetary  plan.  In  particular,  they  regard  the  citizenship  income  featured  in  the  2019 
draft  budgetary  plan as  in  line  with  the  2018  country-specific  recommendations  to  increase 
social spending, reform active labour market policies, and raise labour market participation of 
women  by  rationalising  family-support  policies.  Moreover,  they  consider  the  increase  in 
public  investment  by  0.2%  of  GDP  in  2019  in  line  with  the  2018  country-specific 
recommendation to foster research, innovation, digital skills and infrastructure through better 
targeted investment and increased participation in vocational-oriented tertiary education. 

The  fourth  relevant  factor  covered  in  the  Italian  observations  is  the  wide-range  of  growth-
enhancing  structural  reforms  planned  by  the  government  in  diverse  areas  ranging  from  the 
judicial system to the public sector.  

Other relevant factors put forward by the Italian authorities in relation to Italy's public debt 
include its sustainability, as the Member State 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 private sector debt. 
The Italian observations also stress that risks for Italian public finances, including from the 
recent  rise  in  sovereign  yields,  are  limited,  given  Italy’s  strong  financial  position,  the  long 
maturity  and  fixed-rate  composition  of  its  public  debt,  and  the  recently  restored  banking-
sector profitability. 

19 

 
 
 
 
 
 
 
5. 

CONCLUSIONS 

Italy's  public  debt-to-GDP  ratio,  at  131.2%  in  2017,  is  the  second-largest  in  the  Union  and 
one of the largest in the world. In 2017, it represented an average burden of EUR 37 000 per 
inhabitant,  in  addition  to  an  average  yearly  cost  of  servicing  it  of  around  EUR  1 000  per 
inhabitant. The large stock of public debt deprives Italy of the fiscal space it needs to stabilise 
its economy in case of macroeconomic shocks. It also represents an inter-generational burden 
weighing on the standard of living of future Italian generations. The fact that debt-servicing 
costs absorb a considerably larger amount of public resources in Italy than in the rest of the 
euro area also takes a toll on the country's productive spending: Italy's interest spending stood 
in 2017 at around EUR 65.5 billion or 3.8% of GDP, i.e. broadly the same amount of public 
resources  as  are  devoted  to  education.  Moreover,  a  large  public  debt,  in  the  absence  of 
prudent fiscal policies, exposes the country to market confidence shocks on sovereign yields, 
with  a  negative  impact  on  both  the  interest  bill  paid  by  the  country  as  well  as  the  overall 
financing cost for the real economy, which would, in turn, negatively impact growth. Italy's 
large public debt is a major vulnerability for the Italian economy  and decisively reducing it 
should remain a priority in the best interest of Italy.  
On 23 May 2018, the Commission issued a report under Article 126(3) TFEU28, as Italy did 
not make sufficient progress towards compliance with the debt criterion in 2017. The report 
concluded that the debt criterion should be considered as complied with at the time, having 
regard in particular to Italy's compliance with the preventive arm.  

However,  Italy's  fiscal  plans  for  2019  represent  a  material  change  in  the  relevant  factors 
analysed  by  the  Commission  last  May.  In  particular,  in  its  2019  draft  budgetary  plan  Italy 
planned a large deterioration of the structural balance for 2019, in the order of 0.9% of GDP, 
while  the  Council  had  recommended  that  Italy  should  improve  its  structural  balance  by  at 
least 0.6% of GDP. Therefore, on 23 October 2018 the Commission adopted an Opinion29 on 
Italy's  2019  draft  budgetary  plan,  identifying  particularly  serious  non-compliance  with  the 
fiscal recommendation addressed to Italy by the Council on 13 July 2018 and requesting the 
resubmission  of  a  revised  draft  budgetary  plan.  On  13  November  2018,  Italy  submitted  a 
slightly  revised  draft  budgetary  plan,  whose  fiscal  targets  remained  however  unchanged 
compared  to  the  original  version,  including  the  large  structural  deterioration  planned  for 
2019.  

On  21  November  2018,  the  Commission  adopted  its  Opinion  on  Italy's  revised  2019  draft 
budgetary  plan,30  confirming  the  risk  of  significant  deviation  from  the  adjustment  path 
towards the medium-term budgetary objective recommended by the Council for 2018 and the 
particularly serious non-compliance with the fiscal recommendation for 2019 based on both 
the government plans and the Commission 2018 autumn forecast. That conclusion justifies a 
new assessment by  the Commission of Italy's  prima facie lack of compliance with the debt 
criterion in 2017. 

In  fact, Italy's general government gross debt reached 131.2%  of GDP in  2017, well above 
the  60%  of  GDP  reference  value  of  the  Treaty,  and  Italy  did  not  comply  with  the  debt 
reduction  benchmark  in  2017  based  on  outturn  data.  Moreover,  Italy  is  not  projected  to 

28 Commission Report COM(2018) 428 final of 23.5.2018: "Italy - Report prepared in accordance with Article 

126(3) of the Treaty on the Functioning of the European Union". 

29  Commission  Opinion  C(2018)  7510  final,  23.10.2018,  on  the  Draft  Budgetary  Plan  of  Italy  and  requesting 

Italy to submit a revised Draft Budgetary Plan. 

30 Commission Opinion C(2018) 8030 final, 21.11.2018 on the revised Draft Budgetary Plan of Italy.  

20 

 
 
                                                 
comply  with  the  debt  reduction  benchmark  in  either  2018  or  2019  based  on  both  the 
government plans and the Commission 2018 autumn forecast. Those findings clearly suggest 
that, before consideration is given to all relevant factors, the debt criterion as defined in the 
Treaty does not appear to be fulfilled by Italy prima facie. In line with the Treaty, this report 
examines the relevant factors in turn.  

In  particular,  while  Italy  was  assessed  to  have  made  some  progress  in  addressing  the  2017 
Country-Specific Recommendations addressed to it by the Council, the measures included in 
the revised 2019 draft budgetary plan indicate a risk of backtracking on reforms adopted in 
line  with  past  Country-Specific  Recommendations,  as  well  as  with  regard  to  the  structural 
fiscal aspects of the latest recommendations addressed to Italy by the Council. Among others, 
while the Council recommended that Italy should reduce the share of old-age pensions in its 
public spending to create space for other social spending, the newly introduced possibility for 
early  retirement  backtracks  on  earlier  pension  reforms  that  underpin  the  long-term 
sustainability  of  Italy's  sizeable  public  debt.  Moreover,  the  introduction  of  a  tax  amnesty 
could  discourage  tax  compliance.  Overall,  the  revised  2019  draft  budgetary  plan  does  not 
envisage effective measures to tackle Italy's sluggish potential growth and, in particular, its 
long-lasting stagnation in productivity. In particular, the possibility to retire early may have a 
negative  impact  on  labour  supply.  In  addition,  the  newly  introduced  measures  increasing 
taxation  on  banks,  together  with  the  impact  of  higher  sovereign  yields  could  hinder  the 
supply of credit. On that basis, the growth impact of the policy measures underlying the 2019 
draft budgetary plan may be smaller than projected by the government even in the short term. 

Last,  while  the  ex-post  assessment  of  Italy’s  compliance  with  the  preventive  arm  made  in 
May  2018  indicated  broad  compliance  with  the  recommended  adjustment  path  towards  the 
MTO in 2017, once account is taken of the flexibility granted by the Commission for unusual 
events, an overall assessment based on both the government plans and the Commission 2018 
autumn forecast points to a risk of significant deviation from the adjustment path towards the 
medium-term budgetary objective recommended by the Council for 2018 and to a particularly 
serious  non-compliance  for  2019.  That  conclusion  would  not  change  even  if  the  budgetary 
impact  (around  0.2%  of  GDP)  of  the  extraordinary  maintenance  programme  for  the  road 
network  and  connections  following  the  collapse  of  the  Morandi  bridge  in  Genoa  and  of  a 
preventive  plan  to  limit  hydrogeological  risks  following  adverse  weather  conditions  were 
considered, for the purposes of Article 5(1) and Article 6(3) of Regulation (EC) No 1466/97, 
as unusual events outside the control of the government and subtracted from the requirement 
of the preventive arm of the Stability and Growth Pact. 

The  analysis  presented  in  this  report  includes  the  assessment  of  all  relevant  factors  and 
notably:  (i)  the  fact  that  macroeconomic  conditions,  despite  recently  intensified  downside 
risks, cannot  be  argued to  explain  Italy’s large gaps to  compliance  with the debt  reduction 
benchmark,  given  nominal  GDP  growth  above  2%  since  2016;  (ii)  the  fact  that  the 
government  plans  imply  a  backtracking  on  past  growth-enhancing  structural  reforms,  in 
particular  the  past  pension  reforms;  and  above  all  (iii)  the  identified  risk  of  significant 
deviation  from  the  recommended  adjustment  path  towards  the  medium-term  budgetary 
objective  in  2018  and  the  particularly  serious  non-compliance  for  2019  with  the 
recommendation  addressed  to  Italy  by  the  Council  on  13  July  2018,  based  on  both  the 
government plans and the Commission 2018 autumn forecast. Overall, the analysis suggests 
that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should 
be considered as not complied with, and that a debt-based EDP is thus warranted. 

21