COMMISSION STAFF WORKING DOCUMENT Country Report Italy 2019 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2019-02-27
Institutions: European Commission, Secretariat-General
Subjects: Italy, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 27.2.2019  SWD(2019) 1011 final  COMMISSION STAFF WORKING DOCUMENT Country Report Italy 2019     Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Overall findings regarding imbalances, risks and adjustment issues 

4.  Reform priorities 

4.1.  Public finances and taxation 

4.2.  Financial sector 

4.3.  Labour market, education and social policies 

4.4.   Competitiveness and investment 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Italy 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Italy 

Table 2.1: 

Assessment of 2018 CSR implementation 

Table 3.1: 

Outward spill-over heat map for Italy 

Table 3.2: 

MIP assessment matrix 

Table C.1: 

Financial Market Indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

1 

3 

7 

17 

22 

28 

28 

33 

37 

47 

62 

68 

69 

75 

82 

15 

19 

23 

26 

69 

70 

71 

72 

73 

74 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Real GDP and components 

Graph 1.2: 

Productivity and potential growth 

Graph 1.3: 

Composition of employment growth 

Graph 1.4: 

Unemployment and potential labour force 

Graph 1.5: 

Compensation of employees, productivity and nominal unit labour costs 

Graph 1.6: 

Regional dispersion of real GDP and disposable income per-capita 

Graph 1.7: 

Ratings, sovereign spread, policy and lending rates 

Graph 1.8: 

Change in net international investment position (NIIP), 2014Q1-2018Q3 

Graph 1.9: 

Public finances indicators 

Graph 2.1:  Overall multiannual implementation of 2011-2018 CSRs to date 

Graph 4.1.1:  Drivers of "snowball" effect on public debt 

Graph 4.1.2:  Government securities by holding sector 

Graph 4.1.3:  Sovereign yields on the secondary market 

Graph 4.3.1:  Composition of the change of employment 

Graph 4.3.2: 

Transition rates of temporary employees 

Graph 4.3.3:  Motivating Teachers - salary and career progression indicators, 2017 

Graph 4.3.4:  Percentage at risk of poverty or social exclusion by NUTS 2 Region (2017) 

Graph 4.4.1:  Heterogeneity in firm-level productivity in Italy (2001=100) 

Graph 4.4.2:  Estimated contributions to (business and intangibles) investment 

Graph 4.4.3:  Restrictiveness in the retail sector, 2018 

Graph 4.4.4:  Regional dispersion in Italy in selected macroeconomic variables 

Graph 4.4.5:  EQI index and labour productivity, Italy 2016-2017 

Graph 4.4.6:  eGovernment Indicator, 2019 

LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering 

growth and competitiveness in Italy 

Box 3.1: Structural reforms and potential spillovers – the case of Italy 

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

Box 4.4.1: Investment challenges and reforms in Italy 

7 

8 

9 

9 

10 

10 

12 

13 

13 

17 

28 

28 

29 

37 

37 

41 

43 

47 

50 

53 

54 

56 

57 

20 

25 

46 

61 

2 

 
 
 
 
 
EXECUTIVE SUMMARY 

and 

tackling 

the  face  of  a  weakening  macroeconomic 
In 
outlook, 
Italy’s  macroeconomic 
imbalances remains crucial. In particular, reducing 
the  country’s  high  public  debt  ratio  requires 
stability-oriented  macroeconomic 
fiscal 
policies  to  go  together  with  more  and  better 
investments  and  ambitious  structural 
targeted 
its  sluggish  productivity  and 
to 
reforms 
potential growth. These endeavours are also key to 
market  confidence.  As  a  matter  of  priority, 
reviving  the  momentum  for  reform  is  needed  to 
ensure  sound  public  finances,  more  effective 
public  administration  and  justice,  a  more  efficient 
education  system  and  labour  market,  a  friendlier 
business environment and a more resilient banking 
sector (1).  

lift 

After  solid  real  GDP  growth  of  1.6 %  in  2017, 
economic activity slowed down. Exports growth, 
a  main  contributor  to  previous  GDP  expansion 
weakened,  while  household  consumption  was 
subdued. The investment recovery remains uneven 
but is losing momentum overall. This is also partly 
due  to  domestic  policy  uncertainty,  negatively 
real 
affecting  business  confidence  and 
economy  through  higher  risk  premia.  Real  GDP 
grew  by  1.0 %  in  2018  and  is  expected  to 
decelerate  sizeably  in  2019  amid  high  uncertainty 
about  domestic  policies  and  the  global  outlook 
before picking up in 2020. 

the 

the 

The  uneven  and  gradual  improvement  of  the 
labour market continued in 2018. The number of 
people  in  employment  reached  a  record  high  by 
mid-2018.  However, 
rate 
remained  well  below  the  EU  average,  particularly 
for  women 
and  young  people.  Regional 
employment gaps also remain substantial. Over the 
past  two  years,  job  growth  has  been  driven  by 
temporary  contracts.  The  unemployment  rate  has 
been  declining  at  a  slow  pace  also  due  to  rising 

employment 

participation in the labour market. However, youth 
and long-term unemployment remain very high. 

foster 

Investment 

Adequate investments are needed to strengthen 
administrative  capacity,  human  capital  and 
innovation,  as  well  as  to  reduce  regional 
disparities.  Improved  administrative  capacity  is  a 
precondition  for  the  effective  delivery  of  public 
investment  and  better  use  of  EU  Funds  including 
for  active  labour  market  policies  (measures  that 
can 
labour  market  participation)  and 
infrastructures.  Investment  in  human  capital  is  a 
pre-requisite  for  boosting  public  and  private 
investment. 
innovation  would 
improve  productivity  and  growth  prospects  in  the 
medium  and  long  term.  These  investments  would 
increase productivity in southern Italy in particular 
firms' 
and  also  allow 
weaknesses.  Investment, 
in  climate 
change  response,  environmental  sustainability  and 
risk  prevention,  would  also  benefit  from  taking 
regional  disparities.  Annex  D 
into  account 
identifies  key  priorities  for  support  by 
the 
European  Regional  Development  Fund  and  the 
European  Social  Fund  Plus  over  2021-2027, 
building  on  the  investment  needs  and  challenges 
outlined in this report. 

to  address 

including 

smaller 

in 

Italy  has  made  limited  progress  in  addressing 
the 2018 country-specific recommendations (2).  

There has been some progress in:   

 

i)  Fighting  corruption  thanks  to  a  new  anti-
corruption law; ii) the banking sector where the 
reduction of the stock of non-performing loans 
has  continued  and  the  insolvency  reform  is 
the 
iii) 
being 
reform  of  active  labour  market  policies  also 
thanks  to  additional  resources  allocated  to 
public employment services. 

implementing 

implemented; 

(1)  This  report  assesses  Italy’s  economy  in  light  of  the 
Commission’s  Annual  Growth  Survey  published  on  21 
November  2018.  The  Commission  calls  on  the  Member 
States  to  implement  reforms  to  make  the  EU  economy 
more  productive,  resilient  and  inclusive.  Member  States 
should  focus  their  efforts  on  the  virtuous  triangle  of 
economic  policy:  delivering  high-quality 
investment, 
efforts  on  productivity  growth, 
focusing 
reforms 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic  stability  and  sound  public  finance.  The 
Commission  also  published  the  Alert  Mechanism  Report 
that  initiated  the  eighth  round  of  the  macroeconomic 
imbalance  procedure.  It  found  that  Italy  warranted  an  in-
depth review, which is presented in this report. 

There has been limited progress in: 

 

i) Tackling  tax  evasion  where  no  action  has 
been  taken  to  encourage  e-payments  despite 
some  progress  in  e-invoicing;  ii) improving 
market-based  access  to  finance  where  only 
measures  of  narrow  scope  have  been  adopted 

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
country-specific recommendation is presented in Annex A. 

3 

 
 
                                                           
                                                           
Executive summary 

2018  and  will  be  strengthened  in  2019.  Health 
outcomes  are  generally  good  and  self-reported 
unmet  needs  for  medical  care  are  around  the  EU 
average, although with large regional disparities. 

The  main  findings  of  the  in-depth  review  and  the 
related policy challenges are as follows: 

  Italy’s  high  public  debt  remains  a  major 
vulnerability.  The  government  projections 
underlying the 2019 budget expect the debt-to-
GDP ratio to have risen to 131.7% in 2018. The 
debt-to-GDP ratio may further increase in 2019 
due  to  the  weak  macroeconomic  outlook, 
underachievement of privatisation targets and a 
worsening  primary  balance.  Overall  Italy’s 
structural  deficit  is  estimated  to  have  been 
1.8 %  of  GDP  in  2018.  Government  bond 
yields increased markedly in 2018, reflecting a 
higher risk premium and could increase further, 
as  in  the  rest  of  the  euro  area.  In  the  medium 
and long term, the high stock of public debt, its 
sensitivity to macroeconomic shocks and future 
ageing  costs  explain  marked  sustainability 
that  have 
risks.  Moreover,  new  measures 
introduced  the  possibility  for  early  retirement, 
backtracking  on  earlier  pension  reforms,  will 
raise  pension  expenditure  and  are  expected  to 
worsen  debt  sustainability  going  forward,  also 
due  to  possible  negative  effects  on  growth 
potential. 

  Productivity  growth  has  been  sluggish  over 
the  past  two  decades.  The  productivity  gap 
between  Italy  and  the  EU  continues  to  widen. 
In 2018 labour productivity is expected to have 
remained  stable,  while  growth  in  total  factor 
productivity (measuring how efficiently labour 
and capital are used in production) is expected 
to have grown by some 0.5 %, only half as fast 
as  the  EU  average.  This  is  largely  due  to  low 
to 
investment 
competition,  weaknesses  in  the  public  sector 
and a non-supportive business environment. 

innovation,  barriers 

and 

levels, 

  The unemployment rate remains high. Slow 
economic  growth,  low  average  educational 
attainment 
skill  mismatches,  and 
growing  but  still  low  activity  rates  limit 
rates, 
employment 
especially  among  women,  remain  low.  Youth 
unemployment remains extremely high. 

growth.  Participation 

provisions 

past 
reversed; 
and 
some 
iii) enforcing 
the  framework  for  publicly-
owned  enterprises  despite  local  bodies  still 
faced  with  operational  difficulties; 
being 
iv) encouraging  women to  work  mainly due  to 
the  still  inadequate  provision  of  care  facilities 
and  the  parental  leave  system;  v)   fostering 
and 
research, 
infrastructure  and  vocational-oriented  tertiary 
education in particular because the funding for 
innovative 
reduced 
overall,  despite  some  planned  measures  to 
strengthen administrative capacity.  

investment  has  been 

innovation,  digital 

skills 

There has been no progress in: 

 

revising 

expenditures 

taxation  away  from  productive 
i) Shifting 
factors, 
and 
tax 
reforming ‘cadastral values’ used as a basis for 
calculating  property  tax;  ii) reducing  the  share 
of  old-age  pensions  in  public  spending,  where 
there  has  even  been  some  backtracking; 
iii) reducing 
justice; 
length 
iv) addressing restrictions to competition. 

in  civil 

trial 

Regarding  progress  towards  its  national  targets 
under  the  Europe  2020  strategy,  Italy  has  already 
achieved  its  targets  on  renewable  energy,  energy 
leaving  and  higher 
efficiency,  early  school 
education,  and  appears  on 
to  reduce 
greenhouse  gas  emissions.  Limited  progress  has 
been  made  in  meeting  the  targets  on  employment 
rate,  R&D  investment  and  poverty  and  social 
exclusion. 

track 

Italy  faces  several  challenges  with  regards  to  a 
number  of  indicators  of  the  Social  Scoreboard 
supporting the European Pillar of Social Rights. 
Although  slowly on the rise,  the  employment rate 
remains lower than the EU average and the gender 
gap  is  among  the  highest  in  the  EU.  However,  a 
to  promote  women’s 
comprehensive  strategy 
participation  in  the  labour  market  is  missing. 
Long-term  and  youth  unemployment  are  serious 
concerns.  The  share  of  young  people  neither  in 
employment  nor  in  education  and  training  is  still 
the  highest  in  the  EU  after  a  further  increase  in 
2017. Income inequality and the risk of poverty are 
high, with wide regional disparities, and the impact 
of  social  transfers  on  poverty  reduction  is  very 
low. The number of drop-outs from education and 
training  programmes  remains  high.  To  tackle  this 
issue,  an  anti-poverty  scheme  was  introduced  in 

4 

 
 
  The  cleaning-up  of  banks’  balance  sheets 
has  continued  despite  renewed  market 
pressure.  While  Italian  banks  have  continued 
to boost capital buffers and reduce legacy non-
performing loans, they remain largely exposed 
to  their  own  sovereign  bonds.  The  raise  in 
sovereign bond yields in 2018 adversely affects 
banks’  capital  positions,  pushing  up  their 
funding  costs  and  curtailing  their  access  to 
unsecured wholesale funding. While the largest 
banks  appear  resilient,  as  confirmed  by  the 
recent  EU-wide 
significant 
stress 
test, 
remain,  especially  amongst 
vulnerabilities 
medium  and  small  banks.  The  reform  of  the 
insolvency 
to  be 
implemented. Access to finance continues to be 
a challenge for many small Italian firms.    

framework 

still  has 

Other key structural issues analysed in this report, 
which  point  to  particular  challenges  facing  the 
Italian economy, are the following: 

  Taxation of production factors remains high 
and tax compliance low. Italy’s tax burden on 
labour and capital is still among the highest in 
the  EU.  While  a  broader  ‘flat-rate  regime’ 
slightly lowered taxation on the self-employed, 
the  2019  budget  will  raise  the  aggregate  tax 
burden on firms. There has been no shift of the 
tax burden onto property and consumption and 
no  revision  of  tax  expenditures  (like  the 
number and scope of reduced VAT rates) or of 
outdated cadastral values (to bring them closer 
to  market  values).  Tax  evasion,  especially  due 
to  omitted  invoicing,  remains  high  in  Italy, 
which  has one of the highest  VAT gaps in the 
EU.  Measures  were  enacted  to  encourage  tax 
compliance through e-invoicing and the digital 
transmission  of  receipts,  but  also  a  new  set  of 
measures equivalent to a tax amnesty. 

  Labour  market  challenges  persist.  Labour 
market  rules  have  been  tightened  and  hiring 
incentives  extended  to  reduce  the  recourse  to 
temporary  contracts.  Despite  recent  measures, 
active labour market policies remain weak and 
are  poorly  integrated  with  social  policies.  A 
new  reform  of  public  employment  services  is 
meant  to  support  the  integration  in  the  labour 
the  new 
the  beneficiaries  of 
market  of 
citizenship  income  scheme.  Despite  the  new 
labour  inspectorate  agency,  operational  since 

Executive summary 

2017,  undeclared  work  remains  widespread  in 
Italy,  especially  in  the  south.  Second-level 
(decentralised)  bargaining  continues  to  play 
only a limited role, also due to the high share of 
small firms. 

burden 

on 
actual 

the 
impact 

  Social policies remain poorly integrated. The 
citizenship  income  scheme  will  replace  the 
previous  income  support  scheme,  keeping  an 
active  inclusion  approach  subject  to  certain 
conditions.  However,  the  scheme  may  prove 
implement  and  may  put  a 
difficult 
to 
public 
considerable 
administration.  The 
on 
employment  will  depend  on  the  effectiveness 
of  activation  policies  and  controls.  Labour 
market  conditions  are  improving  but  in-work 
poverty 
in 
particular temporary workers and people with a 
migrant  background.  Access  to  affordable  and 
adequate housing is also a challenge. Childcare 
and 
remain 
care 
underdeveloped.  Measures  to  promote  equal 
opportunities  and  a  work-life  balance  are 
fragmented  and  limited  in  scope,  negatively 
affecting  women’s  participation  in  the  labour 
market amid unfavourable demographic trends. 

is  high  and  rising,  affecting 

long-term 

services 

education 

secondary 

leavers  and 

  Education is a major challenge especially in 
southern  Italy,  hindering  the  quality  of 
human  capital.  There  is  a  much  higher 
number  of  early-school 
low 
achievers in the south. Attracting, selecting and 
motivating 
teachers 
remains a challenge. Following recent reforms, 
the 
gaining 
momentum.  The  percentage  of  people  having 
completed  higher  education  remains  low,  and 
the 
appears 
underfinanced and  understaffed.  Despite  better 
employability  rates,  vocational-oriented  higher 
education  remains  limited  in  scope.  Measures 
to boost digital skills and adult learning lack a 
comprehensive approach. 

apprenticeship 

education 

system 

system 

higher 

is 

  Structural factors hold back investment and 
other key productivity drivers. Weak human 
capital  slows  down  Italy’s  transition  to  a 
knowledge-based  economy. 
the  public 
sector,  weak administrative capacity remains  a 
barrier to public investment. Measures to boost 
private  investment  and  innovation  like  the 

In 

5 

 
 
Executive summary 

defers  investment.  Trial  length  in  civil  justice 
remains  worrying,  and  a  reform  to  streamline 
the  civil  procedure  and  limit  the  abuse  of 
litigation is still pending. A new anti-corruption 
law  and  stronger  prevention  ensured  by  the 
national  anti-corruption  authority  can  improve 
the  anti-corruption  framework.  However,  the 
low efficiency of the criminal justice system is 
still  preventing  the  prosecution  of  corruption, 
and a much-needed reform of the criminal trial 
and  appeal  system  is  at  a  very  preliminary 
stage.

face  specific  difficulties 

‘Impresa  4.0’  plan  generally  had  a  positive 
effect,  but  the  most efficient  measures  need to 
be  made  permanent  following  an  in-depth 
assessment.  Furthermore,  micro  and  small 
firms 
to  adopt 
productivity-enhancing  strategies.  Measures  to 
support  knowledge  (such  as 
technological 
clusters)  and  cooperation  among  firms  help 
smaller  firms  in  particular  to  tackle  these 
difficulties and increase their low productivity.    

  Significant  barriers  to  competition  remain. 
Some sectors are still over-regulated, including 
business services and the retail sector. The lack 
of  competitive  processes 
to  award  public 
service  contracts  and  concessions  for  public 
goods  negatively  affects  the  quality  (and  cost) 
of  the  service.  Timely  implementation  of  the 
2015  competition  law  and  the  removal  of 
remaining  restrictions  to  competition  would 
recent 
productivity.  However, 
support 
announcements  seem  to  go  in  the  opposite 
direction 
restricting 
competition in the retail sector. 

instance, 

by, 

for 

  The  regional  divide  remains  acute.  In  the 
south,  productivity  is  particularly  weak  due  to 
structural  factors  such  as  insufficient  and 
ineffective  investment.  Territorial  imbalances 
have risen since the crisis. In southern regions, 
investment  and  productivity  are  hampered  by 
weak  governance  and  low  capacity  to  spend 
and implement policies. Moreover, lower levels 
of  education  and  innovation  limit  the  positive 
impact  of  measures  adopted  to  support  private 
investment.  The  south  lags  behind  mainly  in 
terms  of  intangible  investment,  as  well  as  in 
transport  infrastructure,  waste  management, 
water infrastructure and the prevention of risks 
from  natural  disasters.  In  rural  areas  the 
broadband network is also less advanced. 

  Efforts  are  needed  to  improve  the  public 
administration,  the  judicial  system  and  the 
anti-corruption  framework.  Despite  recent 
reforms,  the  public  administration  and  public-
sector employment perform worse than in peer 
countries,  not  least  in  the  area  of  digitisation 
and  market  surveillance.  Challenges  persist  in 
managing publicly-owned enterprises and local 
public  services,  and  uncertainty  over 
the  
implementation of the public procurement code 

6 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

Real GDP growth, prospects and risks 

and 

industrial 

production 

Amid  a  slowdown  in  the  euro  area,  the  Italian 
economy  slipped  into  a  contraction.  After  solid 
real  GDP  growth  in  2017  at  1.6 %,  economic 
activity  slowed  down  over  2018  (Graph 1.1). 
Exports 
started 
weakening  at  the  beginning  of  the  year,  amid 
concerns  about  global  trade.  Specific  problems  of 
the  automotive  industry  added  to  the  subdued 
picture. (3)  In  the  second  half  of  2018,  real  GDP 
recorded  a  slight  contraction,  as  the  positive 
impact  from  re-strengthening  exports  was  more 
than  offset  by  faltering  domestic  demand.  Helped 
by a  relatively strong carryover from the  previous 
year,  real  GDP  grew  by  1.0%  in  2018  (European 
Commission, 2019a). 

Graph 1.1: 

Real GDP and components 

goods declined in the first nine months of 2018. (4) 
Moreover,  financial  market  tensions  and  negative 
wealth  effects  associated  with  falls  in  asset  prices 
appear to have curbed consumer spending and led 
households to increase savings.  

investment  recovery 

The 
is  vulnerable  to 
worsening  financing  conditions.  Gross  fixed 
capital formation, at 18.1 % of GDP in Q3-2018, is 
still  markedly  below  both  the  latest  peak  of  2007 
(22 %)  and  the  EU  average  (20.6 %).  While 
spending  on  equipment  is  almost  back  to  2007 
levels, investment in construction has only recently 
bottomed out. The share of intangible assets, albeit 
still  low  by  EU  standards,  increased  to  2.9%  of 
GDP  by  2015  but  has  been  stagnating  since  then. 
The  recovery  of  private  investment  is  forecast  to 
slow  down  sizeably  on  the  back  of  a  more 
unsecure 
Furthermore, 
tailwinds  such  as  an  accommodative  monetary 
policy stance and tax incentives wane, while some 
firms  already  face  tighter  financing  conditions, 
also  due  to  the  worsening  of  sovereign  funding 
conditions.  

economic 

outlook. 

Source: Eurostat. 

Household consumption downshifted sizeably in 
2018.  Despite  rising  disposable 
income  and 
relatively  high  consumer  confidence,  consumer 
spending  only  grew  moderately,  as  higher  oil 
prices  dented  private  consumption.  Purchases  of 
passenger  cars  and  other  durable  consumption 

(3)  Car  manufacturers  had  problems  with  the  certification  of 
cars  under  the  new  Worldwide  Harmonised  Light  Vehicle 
Test  Procedure  (WLTP),  compulsory  as  of  1  September 
2018.  In  addition,  car  producers  suffered  from  a  drop  in 
sales of diesel-powered cars, and Fiat Chrysler stopped the 
production of one of their models in August 2018. 

supporting 

The  adopted  budget  emphasises  short-term 
demand  stimulus  over  supply-side  reforms. 
With  the  budget  law  adopted  in  December  2018, 
the  government  primarily  intends  to  increase 
current expenditure (social transfers) and allocates 
only a relatively small amount of extra spending to 
public investment in 2019, even though the latter is 
assumed  to  be  more  effective  in  stimulating 
growth 
economic 
private 
and 
investment 
(Ramey  and  Zubairy,  2018). The 
government  revised  its  fiscal  plans  in  December 
2018 and reduced the deficit target for 2019, which 
eased  uncertainty  and  helped  stabilise  financial 
markets.  However,  sovereign  yields  remain  high 
compared  to  early  2018  and  are  expected  to 
eventually translate into higher borrowing costs for 
firms  and  households. Hence,  tighter  financing 
conditions  risk  diluting  or  even  offsetting  the 
growth  impact  of  budgetary  measures  (Blanchard 
and  Zettelmeyer,  2018).  Significant  supply-side 
reforms  that  would  be  likely  to  have  a  sizeable 
impact on longer-term growth are mostly absent. 

(4)  Car  registrations  rose  temporarily  in  July/August,  as 
manufacturers  offered  high  discounts  for  buying  non-
WLTP  certified  cars  prior  to  the  introduction  of  the  new 
emission standard, but  dropped sharply thereafter.     

7 

-30-20-100102030Q3-08Q1-09Q3-09Q1-10Q3-10Q1-11Q3-11Q1-12Q3-12Q1-13Q3-13Q1-14Q3-14Q1-15Q3-15Q1-16Q3-16Q1-17Q3-17Q1-18Q3-18Cumulative change since Q3 2008 (%)GDPPrivate consumptionInvestmentExports 
 
 
 
                                                           
                                                           
1. Economic situation and outlook 

substantial 
(Graph 1.2).  Labour  productivity 
(measured  as  real  gross  value  added  divided  by 
hours  worked)  increased  on  average  by  0.5 %  per 
year  between  2010  and  2017,  compared  with  an 
EU  average  of  1.3 %.  Labour  productivity  is 
projected to have remained unchanged in 2018.  

Growth  in  total  factor  productivity  (TFP)  is 
lagging  behind  the  EU  average.  In  2010-17, 
annual  TFP  growth  rates  averaged  a  mere  0.3 %, 
which is 0.5 pp. less than the EU average. In 2018, 
TFP  is  expected  to  have  grown  by  0.4 %,  also. 
Despite the recent albeit moderate pick-up in TFP 
growth, helped by the cyclical recovery of business 
investment,  structural  obstacles  remain.  They 
hamper  an  efficient  allocation  of  production 
factors  across  the  economy  and  the  diffusion  of 
innovation and technological change (to use labour 
and capital more efficiently) has been insufficient. 

Labour market 

After  hitting  new  records,  job  growth  slowed 
amid  weak  economic  activity.  Headcount 
employment  reached  a  historical  record  by  mid-
2018  but  dropped  slightly  in  Q3  2018,  the  first 
quarterly decline since 2013. Job growth has been 
driven  by  temporary  contracts  (Graph 1.3).  The 
share of temporary employees has risen to 17.5 % 
in  Q3  2018  and  is  above  the  EU  average.  The 
median duration of temporary contracts is less than 
12 months. Gender and regional employment gaps 

Growth  prospects  are  subdued  and  subject  to 
uncertainty and intensified downside risks. Real 
GDP  growth  is  projected  at  0.2 %  in  2019  and  at 
0.8 % in 2020. Private consumption is expected to 
support growth, also helped by the introduction of 
the  citizenship  income  scheme,  while  business 
investment is forecast to slow down sharply. High 
the 
uncertainty  about 
possible  materialisation  of  external  policy  risks 
and a further rise in Italian sovereign yields could 
curtail  both  external  and  domestic  demand.  In 
particular, 
the  planned  rollback  of  structural 
reforms might have ramifications for medium-term 
growth prospects. 

the  economic  outlook, 

reforms  and 

Potential growth is projected to rise moderately 
but  continues  to  lag  behind  peer  countries.  On 
the back of low investment and weak productivity 
growth,  potential  output  has  been  declining  since 
the  onset  of  the  global  financial  crisis.  Supported 
recovery  of 
by  structural 
investment, growth in potential output is estimated 
to  have  turned  positive  in  2017  and  to  increase 
moderately  in  2018-2020.  Potential  output  is 
mainly  driven  by  rising  labour  input,  followed  by 
capital  accumulation.  Trend  TFP  growth 
is 
estimated to have resumed in 2018 and to make a 
positive  contribution  to  potential  growth  in  2019-
2020 (Graph 1.2). 

the 

Weak productivity growth is a major constraint 
on  economic  expansion.  The  productivity  gap 
between  Italy  and  the  rest  of  the  EU  remains 

Graph 1.2: 

Productivity and potential growth 

Source: European Commission. 

8 

90100110120130140150160959799010305070911131517Index, 1995=100Real labour productivity per person, EUReal labour productivity per person, ITReal labour productivity per hour worked, EUReal labour productivity per hour worked, ITReal gross value added, EUReal gross value added, IT-1.5-1-0.500.511.5208091011121314151617181920pps.Trend TFPCapital AccumulationChanges in Hours (per Empl)Labour (persons)Potential GDP (y-o-y %)Pre-crisis ('02-'07) (y-o-y %)Potential GDP, EA 2017forecast 
 
 
1. Economic situation and outlook 

remain substantial (section 4.3.1). 

worked  per  employee,  which  increased  markedly 
only in the manufacturing sector. (6) 

Graph 1.4: 

Unemployment and potential labour force 

after 

The  unemployment  rate  fell  to  10.3 %  in  the 
third quarter of 2018. As more people are joining 
the  labour  force,  the  unemployment  rate  is  only 
slowly  declining.  As  it  is  more  difficult  to  find 
of 
employment 
an 
is 
unemployment, 
dropping  more  slowly  than  total  unemployment. 
Youth  unemployment  (15-24)  remains  extremely 
high  at  32.0 %.  Moreover,  the  share  of  young 
people  (15-24)  neither  in  employment  nor  in 
education  or  training  increased  to  20.1 %  in  2017 
and remained the highest in the EU. 

stint 
extended 
long-term  unemployment 

Graph 1.3:  Composition of employment growth 

Source: ISTAT. 

Labour  market  conditions  improved  but  the 
slack  remains  substantial.  More  people  have 
started  actively  looking  for  a  job,  whereas  the 
share  of  underemployed  part-time  workers  has 
broadly  stayed  constant  (Graph 1.4).  Involuntary 
part  time  is  widespread  in  Italy.  In  2017,  about 
their 
17 %  of  part-time  workers  declared 
willingness  to  work  more  hours,  with  the  highest 
incidence  in  Trentino,  Veneto  and  Lazio. (5)  The 
recent increase in hours worked was driven by the 
growth  in  positions  filled  rather  than  by  hours 

(5)  Around  one  third  of  involuntary  part-timers  are  on  a 
temporary  contract,  with  ratios  higher  than  40 %  in  Val 
d’Aosta,  Friuli  Venezia  Giulia,  Campania,  Sardegna, 
Molise.  Only  3.3 % hold  a  second job,  while  around 32% 
are searching for a new one. 

(1) 4-quarter moving averages. 
Source: Eurostat. 

Prices, wages and costs 

Weak  wage  growth  reflects  the  labour  market 
slack.  In  2017,  compensation  per  employee  grew 
by 0.3 % in  nominal terms, but dropped by 0.8 % 
when adjusted for inflation. Real compensation per 
employee remains well below the level in 2000, as 
people  on  average  work  fewer  hours,  while  real 
hourly  wages  are  stagnating.  In  addition  to  the 
labour  market  slack,  the  structural  shift  of  jobs 
from  sectors  with  relatively  high  productivity 
growth (industrial sector) to sectors with relatively 
low  productivity  growth  (services)  and  the  shift 
within  the  services  sector  from  higher-paid  jobs 
(e.g. in financial services) to lower-paid ones (e.g. 
in hotel and catering) is softening wage growth. (7)  

Due  to  subdued  wage  growth,  the  increase  in 
unit  labour  costs  remains  contained.  Nominal 
wage  growth  accelerated  in  2018  on  the  back  of 
wage  increases  in  the  public  sector  (which  had 

(6)  In Q3 2018, hours worked were still 5.1 % below the level 

of end-2007. 

(7)  Between 2007 and 2017, real effective wages in the private 
sector, i.e. wages that have been actually paid compared to 
negotiated wages,  increased by 0.4% on average per year. 
While wages in the industrial sector grew by 0.9 %, wages 
in the services sector stagnated, see also Istat (2018), p. 16. 
This  might  also  explain  the  persistent  negative  wage  drift 
despite favourable cyclical conditions. 

9 

-400-200020040060080010001415161718Cumulative change in thousandsPermanent contractsTemporary contractsSelf-employed0.05.010.015.020.025.030.035.008091011121314151617% of labour force, 15-74 yearsSeeking but not immediately availableUnderemployed part-time workersNot seeking but availableUnemployment rate 
 
 
                                                           
 
                                                           
1. Economic situation and outlook 

indicator). (10) Per-capita GDP in the South is only 
two  thirds  of  the  national  average,  while  the 
northern regions exceeded the national average by 
more than 20 %. The ability of the tax-and-transfer 
system  to  mitigate  interregional  inequality  via 
interregional  income  transfers  appears  limited 
(Graph 1.6). 

Graph 1.6: 

Regional dispersion of real GDP and 
disposable income per-capita 

(1) Disposable income deflated by private consumption 
deflator. 
Source: ISTAT 

The risk of poverty remains high. As highlighted 
by the Social Scoreboard, 28.9 % of the population 
were at risk of poverty or social exclusion in 2017. 
This  rate,  albeit  lower  than  in  the  previous  year, 
still  exceeds  both  the  pre-crisis  level  (25.5 %  in 
2008)  and  the  2017  EU  average  (22.4 %).  The 
improving  labour  market  situation  provided  some 
relief,  but  wage  growth  has  so  far  remained 
subdued. Inter-regional income inequality remains 
persistent  and  social  disparities  loom  large.  Italy 
has a progressive personal income tax system, but 
social  benefits  for  people  at  working  age  are 
generally  low  and  are  thus  not  effective  in 
reducing poverty and inequality (section 4.3.3) By 
contrast, wealth is more evenly distributed, due to 
high home ownership rates.  

been frozen since 2010) (8) but wage growth in the 
broader economy is expected to remain  moderate. 
(9)  The  expected  slow  growth  in  productivity 
implies that wage moderation is likely to continue 
as it limits the scope for wage increases that do not 
impair  price 
competitiveness. 
Nominal  unit  labour  costs  fell  in  2017  largely 
because of subdued wage growth (Graph 1.5). 

stability 

and 

Graph 1.5:  Compensation of employees, productivity and 

nominal unit labour costs 

Source: European Commission. 

Consumer prices are set to rise moderately. The 
headline  harmonised  index  of  consumer  prices 
increased by 1.2 % in 2018, but is expected to rise 
by only 1.0% in 2019, before picking up again to 
1.3%  in  2020.  Core  inflation  is  set  to  rise 
gradually, in line with wage growth. 

Income inequality, inter–regional disparity and 
social situation 

Disposable incomes are lower than in 2008 and 
income  inequality  remains  high.  In  2017,  real 
gross disposable income per capita was almost 9 % 
lower  than  in  2008  and  income  growth  continues 
to lag behind the EU average. In 2017, the income 
of the 20 % of households with the highest income 
was almost six times the income of lowest income 
(S80/S20 
households 

(income  quintile 

ratio 

(8)  The wage increase also included the payments of arrears.  
(9)  In 2018, the first wave of permanent contracts agreed under 
the  Jobs  Act  reform  and  supported by  hiring  incentives  is 
losing the exemption from social contributions implying a 
rise in the compensation of employees. 

(10)  The  indicator  is  given  by  the  ratio  of  the  equivalised 
disposable income of the 20 % highest income households 
to the income of the 20 % lowest income households. 

10 

-4-202462007q12008q12009q12010q12011q12012q12013q12014q12015q12016q12017q12017q42018q3Productivity per person (inverted sign)Compensation per employee per personNominal unit labour costs507510012508091011121314151617Percent of national averageCentre, GDPSouth, GDPNorth, GDPSouth, disp. incomeNorth, disp. incomeCentre, disp. income 
 
                                                           
 
                                                           
1. Economic situation and outlook 

remained stable and private sector deposits rose by 
3.3%  in  November,  compared  to  the  same  month 
of  the  previous  year.  Since  May  2018,  deposits 
from  domestic  households  and  non-financial 
corporations  have  remained  broadly  stable,  while 
foreign  banks  increased  their  deposits,  as  they 
appear  to  keep  part  of  the  proceeds  from  recent 
asset sales as deposits in Italy.  

Lending  conditions  to  the  private  sector  face 
first  signs  of  tightening.  Interest  rates  on 
corporate  loans  and  mortgages  appear  so  far  only 
marginally  affected  by  recent  market  turbulences 
and  rising  sovereign  yields  (Graph  1.7).  Bank 
lending  surveys  indicate  a  tightening  of  credit 
conditions,  while  the  cost  of  new  bond  issuances 
has  been  increasing  since  May  2018.  Moreover, 
the  worsening  of  sovereign  funding  conditions 
tends to impact on banks' credit conditions  with a 
time  lag.  Lending  to  firms  is  still  growing  at  a 
moderate pace. Loans to households are driven by 
consumer credit, which is albeit weakening in line 
with the economy. However,  increasing  sovereign 
yields  risk  affecting  banks'  funding  costs (11)  and 
the  deteriorating  macroeconomic  environment 
might  worsen  credit  quality  and  undermine 
ongoing  initiatives  to  reduce  non-performing  loan 
ratios. Consequently, a persistent fall in sovereign 
bond  and  other  asset  prices  would  entail  higher 
borrowing  costs  for  the  private  sector  and  weigh 
on household wealth. (12)  

(11)  The  rise  in  the  yields  on  government  securities  has  also 
been associated in the past with a significant decline in the 
growth  rate  of  business  lending  by  Italian  banks,  see 
Bofondi et al., 2018 and Bocola, 2016. 

(12)  According  to  the  Bank  of  Italy,  households’  financial   
conditions   remain   solid, though the fall in security prices 
has already led to a decline in the value of their wealth. 

Financial developments 

sovereign  debt  markets.  The 

Sovereign  bond  yields  came  under  severe 
pressure  between  May  and  December  2018. 
Market  tensions  owing  to  uncertainties  about  the 
economic  and  fiscal  policy  stance  affected  equity 
and 
ten-year 
sovereign  bond  yield  rose  from  1.8%  at  the 
beginning of May to 3.4 % by the end of October, 
and the spread vis-à-vis German bonds widened by 
180  basis  points  over 
the  same  period.  In 
December,  financial  tensions  eased  and  market 
conditions  progressively  improved,  although  they 
remain  worse  than  at  the  beginning  of  the  year. 
Following  the  agreement  on  the  budget,  the  ten-
year  sovereign  bond  yield  declined  to  3.0 %  by 
early  February  2019,  with  the  spread  vis-à-vis 
German bonds decreasing by 42 basis points.  

Rating  agencies  downgraded  Italy's  credit 
rating  or  worsened  the  outlook.  On  19  October 
2018, Moody’s downgraded Italy’s  rating  to Baa3 
(BBB-),  one  notch  above  investment  grade,  while 
Standard&Poor’s left its rating unchanged at BBB 
but  changed  its    outlook    from    ‘stable’    to  
‘negative’  on  26  October  2018.  Rating  agencies 
stressed the increase in borrowing needs, the  high 
debt-to-GDP  ratio  and  the  worsening  economic 
outlook as main factors behind the negative rating 
action.  Following  the  downgrade  of  sovereign 
debt, rating agencies also started downgrading the 
ratings of resident banks and firms (Bank of Italy, 
2018). 

Amid a global stock  market slide and domestic 
policy  uncertainty,  equity  prices  fell  sharply. 
The  Milan  benchmark  stock  exchange  index  lost 
almost 20 % of its value since early May, with the 
bank  sub-index  falling  by  more  than  37%,  as 
domestic  banks  are  broadly  exposed  to  Italian 
sovereign  debt.  Since  mid-November  2018,  bank 
credit  default  swap  premia  improved,  but  bank 
stocks hardly recovered and price-to-book ratios, a 
common  metric  for  the  valuation  of  banks,  have 
dropped by over 25 % since the beginning of 2018 
(BIS 2018). 

Non-domestic  investors  reduced  their  exposure 
to  Italian  assets.  Between  May  and  November 
2018, non-resident investors reduced their holdings 
of government securities and bank bonds by EUR 
77.3 billion  and  EUR 16  billion  respectively.  By 
contrast,  deposits  placed  with  Italian  banks 

11 

 
                                                           
1. Economic situation and outlook 

Graph 1.7: 

Ratings, sovereign spread, policy and lending 
rates 

The current account surplus reflects saving and 
investment  decisions  by  the  different  sectors  of 
the economy. The corporate sector has assumed a 
net  lending  position  since  2009,  amounting  to 
1.1 %  of  GDP  in  2017.  Households  increased  net 
lending  until  2014  and 
residential 
investment in line with the slowing housing market 
but  net  lending  fell  to  0.9 %  of  GDP  in  2017.  In 
addition,  the  reduction  of  the  government  deficit 
supported the shift to a net lending position of the 
Italian economy. 

reduced 

The cyclically adjusted current account surplus 
is  estimated  at  2.3 %  of  GDP  in  2018.  The 
current  account  surplus  remains  somewhat  above 
the  level  suggested  by  fundamentals,  i.e.  about 
1.5 %  of  GDP.  This  surplus  is  estimated  to  be 
sufficient 
international 
investment  position  stable  and  bring  it  closer  in 
line with fundamentals (in the absence of valuation 
effects). (13) 

Italy's  net 

to  keep 

international 

The  net 
investment  position 
(NIIP)  has  moved  close  to  balance.  Since  the 
beginning  of  2014  when  net  foreign  liabilities 
peaked  at  almost  EUR  400  billion  (or  25 %  of 
GDP),  Italy's  NIIP  has  improved  by  342.5  billion 
(corresponding  to  20 %  of  2017  GDP).  Net 
liabilities  have  fallen  to  54.7  billion  (or  3.1 %  of 
GDP) by Q3 2018 (Graph 1.8) thanks to persistent 
current  account  surpluses  and  supported  by 
valuation  effects.  The  latter  have  been  driven  by 
the rate-of-return differential between Italian assets 
(mostly  government  bonds)  held by  non-residents 
and  foreign  assets  (mostly  equity  and  shares  in 
investment funds) held by residents. (14) The sharp 
increase in government yields since May 2018 and 
the  reciprocal  fall  in  government  bond  prices 
imply  a  fall  in  the  value  of  foreign  liabilities  and 
an improvement of the NIIP. 

(13)  For  details  regarding  the  estimation  of  current  accounts 
based on fundamentals, see Coutinho, L. et al. (2018). 
(14)  For the methodological approach, see Schipper (2017). 

(1) New business. 
Source: Bank of Italy, ECB, Bloomberg. 

Financial risks have increased but some factors 
mitigate  the  impact  of  financial  stress  in  the 
short  term.  Relatively  low  private  sector  debt, 
ample  trade  surpluses  and  an  almost  balanced  net 
international  debt  position  are  able  to  absorb  a 
large part of the financial shock in the short term.  
Moreover, the  high  average  residual  maturity  of  
the  public  debt  slows  down  the  transmission  of  
an  increase  in  government securities yields to the 
average cost of debt. However, a marked economic 
slowdown and higher interest rates in light of high 
public debt could expose financial vulnerabilities.   

External position 

Italy’s  current  account  surplus  remained 
broadly  stable  in  2018.  Amid  a  worsening 
external  environment,  the  current  account  balance 
registered  a  surplus  of  2.7 %  in  the  12-month 
period  up 
to  November  2018.  The  export 
performance  deteriorated  and  Italian  exports  lost 
market shares, due to an appreciation of the euro in 
nominally  effective 
in 
terms, 
particular  export  markets  and  political  uncertainty 
about  global  trade  policy.  By  contrast,  import 
growth  remained  relatively  strong  owing  to  the 
cyclical investment recovery and higher oil import 
prices. Consequently, the trade surplus declined by 
0.2 pps.  to  2.8 %  of  GDP  over  the  same  period. 
The 12-month primary income balance recorded a 
surplus  of  0.8 %  of  GDP  largely  driven  by 
improvements in the balance of investment income 
(which turned positive in September 2016). 

the  slowdown 

12 

0102030405060708090100024681010111213141516171819PercentConsumer loansMortgage loansCorporate loansECB policy rate (MRO)10-year spread DE-IT (pps)Moody's long-term sovereign rating (rhs)Fitch long-term sovereign rating (rhs)S&P long-term sovereign rating (rhs)Aa2/AA-A2/A-Baa2/BBB 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.8:  Change in net international investment 

Graph 1.9: 

Public finances indicators 

position (NIIP), 2014Q1-2018Q3 

Source: European Commission 

(1) Including capital account balance. 
(2) Including conceptual and methodological deviations 
from the balance of payments, write-downs and statistical 
changes. 
(3) Includes loans and trade credits, currency and deposits 
and other accounts receivable/payable. 
(4) Includes financial corporations without monetary 
financial institutions, non-financial corporations and non-
profit institutions serving households. 
Source: Bank of Italy, Commission calculations. 

The TARGET2 balance worsened in the second 
half of 2018. Since May 2018, the Bank of Italy’s 
net  debtor  position  in  the  TARGET2  European 
payment  system  deteriorated  and  net  liabilities 
reached  a  new  peak  at  EUR 492.5  billion  in 
August  2018.  By  the  end  of  the  year,  the  balance 
had  fallen  to  EUR 482  billion,  largely  thanks  to 
inflows in December.  

Public finance: public deficit and debt 

Italy's  headline  and  primary  balance  have 
broadly  stabilised  in  recent  years.  After  the 
sizable  fiscal  effort  carried  out  over  the  period 
2010-2013,  which  raised  the  primary  surplus  to 
above  2%  of  GDP,  Italy's  primary  balance  fell  to 
1.5%  of  GDP 
in  2014  and  progressively 
deteriorated to 1.4% of GDP in 2017. The headline 
deficit  fell  from  3%  of  GDP  in  2014  to  2.6%  in 
2015,  and  gradually  narrowed  to 2.4% of  GDP  in 
2017,  thanks  to  declining  interest  spending.  The 
latter  was  also  the  result  of  historically  low 
nominal interest rates on newly issued government 
securities,  allowed  by  the  ECB's  accommodative 
policy stance.  

that 

Relatively  weak  economic  growth  and  current 
fiscal plans are expected to put pressure on the 
government  deficit  in  the  coming  years.  Based 
on  the  government  projections  underlying  the 
Budget  Law  approved  in  December  2018,  the 
government  headline  deficit  is  expected  to  have 
declined  to  1.9%  of  GDP  in  2018,  supported  by 
economic  growth  and  declining  interest  spending. 
For  2019, 
the 
the  government  projects 
headline  deficit  will  increase  to  2.0%  of  GDP.  
However, the  macroeconomic scenario underlying 
the 2019 deficit target is subject to downside risks, 
considering  that  the  Commission  2019  winter 
lower  economic  growth  as 
forecast  expects 
compared  to  the  government,  both  in  real  and 
nominal  terms.  In  2020,  the  government  headline 
deficit  is  expected  to  decline  to  1.8%  of  GDP 
the  government  projections,  which 
based  on 
assume  additional  revenues  worth  1.2%  of  GDP 
from 
increase  of  VAT  rates 
legislated  as  a  safeguard  clause.  However, 
considering that in recent  years such clauses  were 
systematically 
implementing 
repealed  without 
adequate  alternative  financing  measures,  there  are 
the  headline  deficit  will 
high 
risks 
significantly 
the 
in  2020  based  on 
government plans. 

that 
increase 

the  automatic 

No  reduction  in  government  debt  is  expected 
over  the  coming  years.  The  gross  debt-to-GDP 
ratio  increased  steeply  during  the  double-dip 
recession,  from  102.4%  in  2008  to  131.8%  in 
2014, before slightly declining to 131.2% in 2017. 

13 

Currentaccountexcl.investmentincome1)PortfolioinvestmentFirms andhouseholds4)Central BankValuationeffects2)Otherinvestment3)GovernmentMonetaryFinancialInstitutionsNet errors andomissionsReserve assets-20-10010203040IncomeInstrumentSectorPercent of 2017 GDPFinancialderivativeeffectFinancialderivativesInvestmentincomeEUR 342.5 bnEUR 342.5 bnEUR 342.5 bnForeigndirect investment9095100105110115120125130135-6.0-4.5-3.0-1.50.01.53.04.56.0000102030405060708091011121314151617Gross public debt (rhs)Budget balance (lhs)Primary balance (lhs)Interest expenditure (lhs)% of GDP% of GDP 
 
 
 
1. Economic situation and outlook 

to  1%  of  GDP.  However, 

In  2018,  the  government  projections  underlying 
the  2019  budget  assume  the  debt-to-GDP  ratio  to 
have increased to 131.7% of GDP in 2018, mainly 
due to a large stock-flow adjustment partly related 
to  fluctuations  in  the  Treasury  accounts.  In  2019, 
the  national  authorities  expect  the  government 
debt-to-GDP ratio to decline by 1 percentage point 
to  130.7%,  by  assuming  privatisation  proceeds 
amounting 
this 
assumption  appears  unrealistic,  considering  that 
almost  no  privatisation  proceeds  were  recorded 
over  2016-2018  despite  the  original  targets  of 
0.5%  of  GDP  per  year  (2016  Draft  Budgetary 
Plan).  Without 
assumed 
considering 
privatisation  proceeds,  the  government  debt-to-
GDP ratio is set to remain stable at close to 132% 
based on the government projections. Considering 
the 
government 
macroeconomic and deficit projections for 2019, it 
is  likely  that  the  government  debt-to-GDP  ratio 
will increase up to above 132% this year. In 2020, 
the  government  projections  expect  the  debt-to-
GDP  ratio  to  decline  by  1.5  percentage  points  to 
129.2%,  by  assuming  additional  VAT  revenues 
from  the  activation  of  the  safeguard  clauses 
amounting 
to  1.2%  of  GDP,  as  well  as 
privatisation proceeds amounting to 0.3% of GDP. 
However, 
to 
these  projections  are 
significant  risks,  given  that  in  recent  years  VAT 
safeguard clauses were systematically repealed and 
privatisation targets underachieved. 

downside 

subject 

risks 

the 

the 

to 

14 

 
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators - Italy 

(1) NIIP excluding direct investment and portfolio equity shares 
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3)The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation 
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

15 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)1.5-1.5-0.21.11.61.00.20.8Potential growth (y-o-y)0.9-0.2-0.1-0.20.30.50.60.8Private consumption (y-o-y)1.2-1.10.03.21.5...Public consumption (y-o-y)0.4-0.3-0.50.3-0.1...Gross fixed capital formation (y-o-y)2.1-5.0-3.15.74.3...Exports of goods and services (y-o-y)6.0-0.93.56.65.7...Imports of goods and services (y-o-y) 5.2-2.73.610.75.2...Contribution to GDP growth:Domestic demand (y-o-y)1.2-1.7-0.61.41.6...Inventories (y-o-y)0.1-0.20.30.0-0.4...Net exports (y-o-y)0.20.50.1-0.30.3...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.3-0.40.20.00.30.30.30.4Capital accumulation (y-o-y)0.70.3-0.1-0.10.00.10.10.2Total factor productivity (y-o-y)-0.1-0.1-0.2-0.10.00.00.10.2Output gap1.7-1.8-4.3-2.3-1.0-0.30.30.8Unemployment rate7.28.412.211.711.210.710.410.0GDP deflator (y-o-y)2.21.51.42.10.51.31.31.4Harmonised index of consumer prices (HICP, y-o-y)2.22.40.5-0.11.31.21.01.3Nominal compensation per employee (y-o-y)2.92.00.80.30.21.80.91.0Labour productivity (real, person employed, y-o-y)0.4-1.00.1-0.20.4...Unit labour costs (ULC, whole economy, y-o-y)2.22.40.51.1-0.41.60.80.6Real unit labour costs (y-o-y)0.00.9-0.9-0.9-0.90.4-0.5-0.8Real effective exchange rate (ULC, y-o-y)1.4-0.1-0.6-4.00.01.8-1.9-1.6Real effective exchange rate (HICP, y-o-y)0.1-0.8-0.7-3.40.61.9-1.6-1.0Savings rate of households (net saving as percentage of net disposable income)8.85.03.63.22.3...Private credit flow, consolidated (% of GDP)9.92.9-1.6-0.12.1...Private sector debt, consolidated (% of GDP)99.4121.5118.6111.8110.5...of which household debt, consolidated (% of GDP)34.242.642.741.341.1...of which non-financial corporate debt, consolidated (% of GDP)65.278.975.970.569.3...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)4.48.313.412.49.4...Corporations, net lending (+) or net borrowing (-) (% of GDP)-0.30.42.53.44.13.64.34.6Corporations, gross operating surplus (% of GDP)22.921.120.621.821.621.321.321.3Households, net lending (+) or net borrowing (-) (% of GDP)2.51.11.91.50.90.81.00.9Deflated house price index (y-o-y)3.7-1.6-7.1-3.9-2.3...Residential investment (% of GDP)5.65.54.64.34.4...Current account balance (% of GDP), balance of payments-1.0-2.31.52.52.82.62.52.5Trade balance (% of GDP), balance of payments-0.2-0.82.73.23.0...Terms of trade of goods and services (y-o-y)-1.5-0.92.22.7-1.8-0.4-0.10.1Capital account balance (% of GDP)0.10.10.1-0.2-0.1...Net international investment position (% of GDP)-17.9-20.9-21.1-10.2-6.3...NIIP excluding non-defaultable instruments (% of GDP) (1)-9.5-22.3-20.6-10.1-4.6...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)94.7114.2123.6122.7121.2...Export performance vs. advanced countries (% change over 5 years)0.5-11.7-10.8-5.5-2.6...Export market share, goods and services (y-o-y)..-0.33.0-0.1...Net FDI flows (% of GDP)0.81.10.1-0.20.2...General government balance (% of GDP)-3.1-3.7-2.9-2.5-2.4-1.9-2.9-3.1Structural budget balance (% of GDP)-4.5-3.1-0.6-1.5-1.8-1.8-3.0-3.5General government gross debt (% of GDP)101.1114.0130.8131.4131.2131.1131.0131.1Tax-to-GDP ratio (%) (3)40.242.143.542.542.442.141.941.5Tax rate for a single person earning the average wage (%)28.430.231.131.1....Tax rate for a single person earning 50% of the average wage (%)18.821.618.915.9....forecast 
 
 
 
1. Economic situation and outlook 

16 

 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

57 % 

Since  the  start  of  the  European  Semester  in 
country-specific 
2011, 
recommendations  addressed 
to  Italy  have 
recorded at least ‘some progress”. (15)  43 % of 
these  CSRs  recorded  'limited'  or  'no  progress'  ( 
Graph  2.1).  The  areas  that  registered  the  best 
performance in terms of progress are the measures 
to  fight  corruption  and  to  reform  the  public 
administration  and 
labour  market.  Good 
performances  have  been  registered  also  in  the 
banking  sector  and  in  reducing  restrictions  to 
product and services markets. 

the 

Graph 2.1:  Overall multiannual implementation of 2011-

2018 CSRs to date 

(1) The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact 
(2) The multiannual CSR assessment looks at the 
implementation until 2019 Country Report since the CSRs 
were first adopted. 
Source: European Commission 

finances  and 

Concerning  public 
taxation, 
limited  progress  was  made  to  address  the 
related  CSRs.  Efforts  focused  on  containing 
public  expenditure.  Public  wage  bill  growth  has 
been  moderate,  with  public  wages  rising  in  2017 
for the first time since 2011. Past pension reforms 
contributed  to  curb  liabilities  arising  from  ageing 
long-term 
improve 
population 
sustainability  of  public  finances.  However,  this 
trend  is  being  reversed:  the  share  of  old-age 
pension  in  total  expenditure  is  expected  to  rise, 
mostly  as  a  result  of  the  implementation  of  the  

and 

the 

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

past, see in particular Section 4.   

new early retirement scheme in 2019, backtracking 
on  elements  of  past  pension 
reforms.  No 
privatisations  have  been  undertaken  to  reduce 
public  debt,  so  that  recent  targets  have  been 
systematically  underachieved.  Tax  expenditures 
have  been  reviewed  but  not  yet  streamlined,  Italy 
has not reviewed the outdated cadastral values, and 
taxation on labour has not been shifted to other tax 
bases. The first residence tax was repealed in 2015. 
The  e-invoicing and e-transmission of receipts for 
commercial  transactions,  which  are  compulsory 
since January 2019, are expected to have a positive 
impact  on  tax  compliance.  However,  the  repeated 
tax  amnesties  may  negatively 
tax 
compliance,  while  limited  efforts  were  made  to 
tackle  tax  evasion  with  consent,  for  instance  by 
encouraging e-payments.  

impact 

Some  progress  was  registered  in  addressing 
CSRs  concerning  civil  justice,  the  fight  against 
corruption,  public  administration  and 
the 
reduction  of  barriers  to  competition.  Following 
the  major  reorganisation  of  civil  courts  in  2013, 
some  civil  justice  reforms  have  been  passed, 
increasing  the  specialisation  and  digitalisation  of 
courts,  reinforcing  alternative  dispute  resolution 
and  aiming  to  limit  abuses  of  the  trial  through 
stricter  admissibility  rules  for  appeals.  However, 
an all-encompassing reform of the civil trial is still 
pending.  Overall,  the  length  of  civil  trials  has  not 
been  visibly  reduced  compared  to  past  years.  The 
fight  against  corruption  was  stepped  up  in  2012 
law, 
through  a  comprehensive  anti-corruption 
which  also  established  the  national  anticorruption 
authority.  In  2017,  the  statute  of  limitations  was 
reformed 
protection 
and  whistle-blowers’ 
extended.  A  new  anti-corruption  law  was  adopted 
in December 2018, introducing better investigation 
techniques, 
longer 
prescription  terms  for  corruption  offences.  It  also 
cancels  prescription  terms  after  a  first  instance 
conviction  as  of  2020.  However,  the  effective 
sanctioning of corruption is hindered by the length 
of  criminal  proceedings,  broadly  unchanged  since 
2014 in the absence of a comprehensive reform of 
the  criminal  trial,  including  the  appeal  system.  A 
comprehensive  reform  of  public  administration 
was  adopted  in  2015  and  new  draft  bill  was  put 
forward  in  2018.  The  measures  simplify  and 
clarify  the  decision-making  process,  encourage 
transparency  and  efficiency,  and  improve  the 
management  of  public  employment.  Nevertheless, 

penalties 

stricter 

and 

17 

No Progress2%Limited Progress41%Some Progress31%Substantial Progress21%Full Implementation5% 
 
 
                                                           
2. Progress with country-specific recommendations 

limited  progress 

Italy  made 
the 

in 
Overall, 
addressing 
country-specific 
2018 
recommendations. (16)  No  progress  has  been 
recorded  in  shifting  the  tax  burden  away  from  
labour, despite a minor reduction of the tax burden 
for the self-employed, and in reducing the share of 
old  pensions  in  public  spending,  which  should 
actually increase. Limited progress has been made 
in tackling the shadow economy and strengthening 
the use of e-payments. While the progress was also 
limited concerning publicly-owned enterprises and 
local public services,  some progress was achieved 
in  improving  the  legal  framework  for  fighting 
corruption, mainly thanks to a new anti-corruption 
law.  However,  no  progress  was  recorded  in 
reducing  the  length  trial  in  civil  justice  and  in 
to  competition.  Some 
addressing 
progress  was  also  made 
in  addressing  non-
performing  loans  in  the  banking  sector  and  in 
implementing 
reform  while 
progress  was  limited  in  improving  market  based 
finance.  Progress  was  also  limited  concerning 
women labour market participation and innovation, 
research,  digital  skills  and  infrastructure,  and 
tertiary  education.  Some 
vocational  oriented 
progress was recorded in implementing the reform 
of active labour market policies. 

restrictions 

insolvency 

the 

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

and 

employment 

the  operationalisation  in  specific  areas,  namely 
public 
publicly-owned 
enterprises,  may prove difficult  while local public 
services will need a new legislative initiative to be 
reformed.  In-depth  market  opening  measures  for 
product  and  services  market  were  introduced  in 
2012 and 2017. Since 2011, several packages have 
the  administrative 
to  reduce 
been 
burden  for  companies  and  citizens.  In  2016,  Italy 
has 
the  public  procurement  code. 
However,  newly  announced  or  adopted  measures 
seem to go in the opposite direction, namely in the 
retail  sector  and  in  the  collaborative  transport 
sector. 

introduced 

reformed 

In  the  financial  sector,  some  progress  was 
made. Banks’ balance sheet repair including NPL 
disposals through outright sales and securitisations 
supported  by  the  government  guarantee  scheme 
has 
substantially  progressed.  The  corporate 
governance  reform  of  the  large  cooperative  banks 
has stalled and that of the small mutual banks was 
somewhat  watered  down  and  delayed,  while  the 
insolvency  framework  reform  still  has  to  be 
finalised.  Some  progress  was  achieved  regarding 
market-based  access 
to  finance,  with.  policy 
measures  adopted  in  recent  years    slowly  bearing 
fruits,  though  bank  credit  remains  the  dominant 
source of financing for corporates. However, in the 
last  year  the  reform  efforts  have  lost  momentum. 
The  recent  abrogation  of 
the  allowance  for 
corporate equity appears at odds with the objective 
of strengthening firms' capital. 

the 

than 

after 

reform 

four  years 

On  the  labour  market,  reform  progress  was 
its 
limited.  More 
introduction, 
remains 
jobs  act 
incomplete, since important complements have not 
been  fully  implemented.  Despite  some  recent 
efforts to make active labour market policies more 
effective,  the  placement  capacity  and  overall 
efficiency  of  Public  Employment  Services  remain 
weak, performance  varies  widely between regions 
and employment services are barely integrated and 
coordinated  with  other  social  and  educational 
policies.  The  employment  rate  of  women  remains 
sizeably  below  the  EU  average.  A  comprehensive 
strategy  combining  a  more  efficient  tax  system 
with  measures  helping  to  reconcile  career  and 
to  evaluation  and 
life,  and  subject 
family 
monitoring, is still missing. 

18 

 
 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of 2018 CSR implementation 

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

19 

Italy Overall assessment of progress with 2018 CSRs: XXX progress CSR 1: Ensure that the nominal growth rate of net primary government expenditure does not exceed 0.1 % in 2019, corresponding to an annual structural adjustment of 0.6 % of GDP. Use windfall gains to accelerate the reduction of the general government debt ratio. Shift taxation away from labour, including by reducing tax expenditure and reforming the outdated cadastral values. Step up efforts to tackle the shadow economy, including by strengthening the compulsory use of e-payments through lower legal thresholds for cash payments. Reduce the share of old-age pensions in public spending to create space for other social spending.(MIP relevant) No progress  No progress in shifting taxation away from productive factors, in revising tax expenditure and in reforming the cadastral system   Limited progress in strengthening the compulsory use of electronic invoicing and payments   No progress in reducing the share of old pensions in public spending  CSR 2: Reduce the length of civil trials at all instances by enforcing and streamlining procedural rules, including those under consideration by the legislator. Achieve more effective prevention and repression of corruption by reducing the length of criminal trials and implementing the new anti-corruption framework. Ensure enforcement of the new framework for publicly-owned enterprises and increase the efficiency and quality of local public services. Address restrictions to competition, including in services, also through a new annual competition law. (MIP relevant) Limited progress  No progress in reducing trial length in civil justice   Some progress in stepping up the fight against corruption   Limited Progress in addressing publicly-owned enterprises and local public services  No progress in addressing restrictions to competition   CSR 3: Maintain the pace of reducing the high stock of non-performing loans and support further bank balance sheet restructuring and consolidation, including for small and medium-sized banks, and promptly implement the insolvency reform. Improve market-based access to finance for firms. (MIP relevant) Some progress  Some progress in addressing non-performing loans and bank restructuring   Limited progress in improving market-based access to finance CSR 4: Step up implementation of the reform of active labour market policies to ensure equal access to effective job-search assistance and training. Encourage labour market participation of women through a comprehensive strategy, rationalising family-support policies and increasing the coverage of childcare facilities. Foster research, innovation, digital skills and infrastructure through better-targeted investment and increase participation in vocational-oriented tertiary education. (MIP relevant) Limited progress  Some progress in implementing the reform of active labour market policies   Limited progress in encouraging labour market participation of women  Limited progress in addressing innovation, digital skills and infrastructures, and vocational-oriented tertiary education   
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to 
fostering growth and competitiveness in Italy 

Italy  is  one  of  the  highest  beneficiaries  of  ESI  Funds.  Financial  allocation  from  programmes 
under the European Structural and Investment Funds (ESI Funds) aimed to support Italy in facing 
development  challenges,  amount  to  EUR  44.6  billion  in  the  current  multiannual  financial 
framework (to which should be added EUR 30.5 billion from national contribution). The overall 
allocation is distributed between the ESI funds: 48.5% under the European Regional Development 
Fund  (ERDF),  22.8%  under  the  European  Social  Fund  (ESF),  23.4%  under  the  European 
Agricultural Fund for Rural Development (EARDF), 4.1% under the Youth Employment Initiative 
(YEI), and 1.2% under the European Maritime and Fisheries Fund (EMFF).  
As of the end of 2018, Italy is lagging behind in the implementation of ESI funds if compared to 
the  EU  average.  In  terms  of  selection  rate  (%  of  the  total  allocation  selected  for  the 
implementation of specific projects), the level recorded for Italy is 56% against 63% for the EU. 
Likewise, the payments rate for Italy (20%), remains below the EU average (27%), though it has 
allowed attaining the 2018's end-of-year targets. 

EU funds are being used to address policy challenges identified in the 2018 CSRs. As regards 
labour  market  participation,  the  ESF  supports  the  reform  of  active  labour  market  policies,  in 
particular by strengthening the public employment services, as well as the implementation of the 
youth Guarantee scheme. By November 2018, more than 1.4 million young people had registered 
in  the  programme  and  1.1  million  had  been  taken  in  charge;  about  56%  of  them  have  benefited 
from an active policy measure. In the field of social inclusion, the ESF is contributing to support 
the national anti-poverty strategy (i.e. REI – Reddito di Inclusione), while actions financed under 
the Education programme contributes to implement the "Good School" reform. 

In  the  field  of  infrastructure,  EUR  2.45  billion  of  ESI  funds  are  allocated  to  investments  in 
transport  networks,  EUR  1.4  billion  to  sustainable  urban  transport  infrastructures  and  EUR  889 
million to fast internet networks, of which EUR 577 million for 100 Mbps and beyond. In these 
domains, projects should be finalised by the end of the programming period 2014-20. In particular, 
broadband  infrastructure  is  expected  to  benefit  1  717  646  households,  and  railway  projects  are 
expected to modernise 270 km, located prevalently in the TEN-T core-network section of Southern 
Italy, such as along the Napoli-Bari and Messina-Catania-Palermo railways. The EU spending for 
infrastructure in Italy is reinforced by the Connecting Europe Facility (CEF). Under the 2014-2017 
calls,  Italian  applicants  submitted  164  eligible  proposals.  59  projects  were  selected,  with  Italian 
beneficiaries receiving €1.5 billion of CEF Transport funding, and investing a total of €3.8 billion 
in these projects. This sum covers key cross-border rail projects such as the Brenner base tunnel or 
the new Lyon-Turin Rail link. 

ESI funds are used also to improve the quality of areas, plants and equipment, mainly in Southern 
Italy, for the provision of local public services in the fields of risk prevention (EUR 2.3 billion), 
circular economy and water management  (EUR 1.4 billion). ESI  funds are expected to generate 
benefits related to water supply (1 373 786 persons should benefit from improved service by the 
end  of  the  2014/20  programming  period),  waste  water  treatment  (4  014  540  population 
equivalent), waste recycling (877 800 Tonnes/year), flood protection (196 070 persons), forest fire 
protection (1 693 859 persons), habitats conserved (273 915 hectares).     

EU  programmes  are  also  widely  used  in  Italy  to  foster  research  and  innovation.  ESI  funds 
allocate  EUR  4.2  billion  to  research  and  development  in  the  current  multiannual  financial 
framework.  By  the  end  of  the  programming  period,  programmes  co-financed  under  ESI  Funds 
should  support  6  945  enterprises  in  building  cooperation  with  research  institutions  and  4  528 
enterprises in introducing new products in their markets. Programmes co-financed under ESI funds 
are  also  expected  to  support  3  750  full  time  equivalents  new  researchers  and  4  962  full  time 
equivalents  researchers  working  in  improved  research  infrastructure  facilities.  Furthermore, 

20 

 
2. Progress with country-specific recommendations 

private  investment  matching  public  support  in  innovation  or  R&D  projects  is  expected  to  reach 
EUR  2.18  billion  by  the  end  of  2014/20.  An  additional  boost  to  research  and  innovation  comes 
from Horizon 2020, as participants from Italy received EUR 3.01 billion so far, with a projection 
to  reach  EUR  5.42  billion  by  the  end  of  2014/20,  which  would  be  49.2%  increase  compared  to 
3.63 billion received in FP7. Applicants from Italy were awarded with 1812 Seals of Excellence, 
ranking Italy 2nd in the EU. 

EU  funding  contributes  to  mobilisation  of  private  investment.  In  particular,  ESI  Funds  alone 
mobilise  additional  private  capital  by  allocating  about  EUR  2.6  billion  in  the  form  of  loans, 
guarantees  and  equity.  This  includes  EUR  320  million  for  the  SMEs  Initiative,  which  provides 
securitisation of existing loans allowing enterprises to receive loans, with an expected leverage of 
9.7. Altogether, 8.3% of the ESI Funds is allocated in a form of financial instruments. 

The Commission can provide tailor-made technical support upon a Member State's request 
via the Structural  Reform  Support Programme to  help Member States implement growth-
sustaining  reforms  to  address  challenges  identified  in  the  European  Semester  process  or 
other  national  reforms.  Italy,  for  example,  is  receiving  support  to  design  a  comprehensive 
accrual  accounting  system  across  Italy's  public  administration  (according  to  International  and 
European  Public  Sector  Accounting  Standards  –  IPSAS/EPSAS).  The  Commission  is  also 
continuing  to  assist  the  authorities  in  their  efforts  to  fight  tax  evasion,  notably  by  developing  a 
methodology for estimating the excise tax gap. In addition, in 2018, work has started on enhancing 
the  efficiency  and  effectiveness  of  the  whistleblowing  mechanism  to  fight  corruption  and  on 
support for the implementation of the Italian National Digital Strategy. 

In Italy, the overall volume of approved operations by the  European Investment Bank (EIB) with 
the  European  Fund  for  Strategic  Investments  (EFSI)  backing  amounts  to  EUR  9.6  billion, 
which  is  set  to  trigger  a  total  of  EUR  57  billion  in  additional  private  and  public  investments 
(February  2019).  Italy  ranks  6th  as  to  the  overall  volume  of  approved  operations  as  a  share  of 
GDP.  81  projects  involving  Italy  have  so  far  been  approved  under  the  infrastructure  and 
innovation  window  of  EFSI.  They  amount  to  EUR  7  billion  in  total  financing,  which  should,  in 
turn, generate EUR 30.6 billion in investments. Under the  SME component, 76 agreements with 
intermediary  banks  have  been  approved  for  a  total  of  EUR  2.6  billion,  which  should  mobilise 
around EUR 26.9 billion of total financing. 215 614 SMEs and mid-cap companies are expected to 
benefit  from  this  support.  "Acquedotto  pugliese  water  services"  is  a  notable  example  of  such 
project in Italy. Acquedotto pugliese is the largest integrated water services operator in Southern 
Italy. The EIB is providing EUR 200 million in financing to upgrade the water network, and invest 
in water treatment facilities to increase the availability and quality of the drinking water distributed 
to the local population. 

EU actions strengthen national, regional and local authorities and the civil society.  Italy has 
allocated  EUR  1.2  billion,  the  highest  amount  in  the  EU,  for  reinforcing  the  capacity  of  public 
administrations  at  different  levels  and  prompting  close  cooperation  with  stakeholders.  These 
resources focus on the improvement,  simplification and modernisation of public administration’s 
processes  and  organisation,  with  specific  actions  also  aiming  at  strengthening  the  efficiency  of 
anti-corruption measures and enhancing the justice system. 

21 

 
3.  OVERALL FINDINGS REGARDING IMBALANCES, RISKS AND 

ADJUSTMENT ISSUES 

identified 

as  having 

in-depth  review 

The  2019  Alert  Mechanism  Report  concluded 
should  be 
that  a  new 
undertaken for Italy to assess the persistence or 
unwinding  of  its  imbalances.  In  spring  2018, 
Italy  was 
excessive 
(European 
macroeconomic 
Commission,  2019d).  The  imbalances  identified 
related,  in  particular,  to  high  public  debt,  low 
productivity  growth,  high  unemployment  rate  and 
the  stock  of  non-performing  loans.  This  section 
summarises  the  findings  of  the  analyses  in  the 
context  of  the  MIP  in-depth  review  that  is 
contained in various sections in this report.(17)  

imbalances 

Imbalances and their gravity 

in  public  expenditure 

Italy's high public debt is a major vulnerability 
for  the  economy.  At  131.2 %  of  GDP  in  2017, 
Italy's  public  debt  translates  into  high  servicing 
costs  (3.8 %  of  GDP  in  2017).  The  latter  reduce 
the  resources  available  for  productivity-enhancing 
spending  –  already  limited  by  the  longstanding 
towards  old-age 
bias 
pensions  –  and  for  implementing  countercyclical 
policies  in  case  of  negative  economic  shocks. 
Furthermore, the sizeable rollover needs related to 
the high public debt expose Italy's public finances 
to  sudden  increases  in  financial  market  risk 
aversion.  As  observed 
since  May  2018, 
fluctuations in market perceptions and preferences 
can  result  in  high  volatility  and  marked  increases 
of  sovereign  yields,  with  potential  negative 
spillovers  to  the  banking  sector  and  ultimately  to 
financing conditions for firms and households.  

The  slow  growth  in  productivity  hampers  the 
unwinding  of  macroeconomic 
imbalances. 
Stronger  productivity  dynamics  would  be  a  key 
driver to lift Italy's growth potential and strengthen 
its economic resilience. Despite the recent pick-up 
in  labour  productivity,  overall  productivity  levels 
remain low, and the gap between Italy and the EU 
has continued to widen.  

Labour  market  conditions  are  only  slowly 
In  2018  headcount  employment 
improving. 

(17)  Analyses relevant for the in-depth review can be found in 
the  following  sections:  Public  finances  (Section  4.1); 
Financial sector (Section 4.2), Labour market (Section 4.3); 
and Investment (Section 4.4). 

exceeded  pre-crisis  levels.  However,  since  hiring 
incentives expired at the end of 2016, jobs growth 
has  almost  exclusively  been  driven  by  temporary 
employment.  Women’s  activity  rates  remain  low 
and have dropped below 2016 levels in Q3 2018. 

Despite  the  recent  large  reduction  in  NPLs, 
their  legacy  levels  are  still high.  The  gross  NPL 
ratio declined from 11.5% at end-2017 to 10.2% in 
Q2-2018.  Despite  the  progress  made,  the  legacy 
stock  of  bad  loans  and  unlikely-to-pay  exposures 
remains still high in absolute terms and compared 
to  EU  peers.  Due  to  the  banks'  high  exposure  to 
their  own  sovereign,  higher  sovereign  yields  have 
adversely affected banks' capital positions, pushing 
up their funding costs and curtailing their access to 
unsecured  wholesale  funding.  Italian  banks  have 
recently  tightened  credit  standards  due  to  market 
uncertainty. As a consequence, bank credit to non-
financial  firms,  especially  smaller  ones,  is  still 
subdued and is limiting overall investment growth 
in Italy. 

Italy has strong trade and financial links to the 
Euro area and it accounts for 16 % of euro area 
GDP. Therefore, it remains a major source of trade 
and  financial  spillovers  (tables  3.1  and  3.2). 
Exports  of  goods  and  services  to  the  rest  of  the 
euro area correspond to 13 % of Italy’s GDP. Italy 
is also an important export market for a number of 
euro  area  countries.  Moreover,  Italy's  economy 
maintains  strong  financial  linkages  to  other  euro 
area countries.  

Evolution, prospects and policy responses 

the  government 

Italy's  public  debt  is  not  expected  to  decrease 
substantially  in  the  coming  years.  After  a  slow 
decline  observed  in  recent  years,  the  government 
debt-to-GDP ratio is set to have increased in 2018 
to 131.7% based on the government projections. In 
2019 and 2020, the public debt reduction projected 
by 
to  significant 
downward  risks,  as  it  assumes  high  privatisation 
proceeds  in  2019  (1 %  of  GDP)  and  sizable 
revenues  from  the  activation  of  VAT  safeguard 
clauses in 2020 (1.2 % of GDP). Sovereign yields, 
which increased significantly in 2018 and declined 
only  partially  towards  the  end  of  the  year,  are 
expected  to  increase  further  from  2020  as  in  the 

is  subject 

22 

 
 
                                                           
3. Overall findings regarding imbalances, risks and adjustment issues 

Table 3.1: 

Outward spill-over heat map for Italy 

(1) cross-border figures for Italy, expressed as a % of the GDP of the partner country. The darkest shade of red corresponds to 
percentile 95 and the darkest shade of green to percentile 5. The percentiles were calculated for each variable based on 
the full available sample of bilateral exposures among EU countries. The blank spaces represent missing data. Data refer to: 
Imports - 2016, Imports (in value added) - 2014, Financial liabilities - 2015, Financial assets - 2015, Liabilities (to banks) - 2018-Q2, 
Bank Claims - 2018-Q2. 
Source: UN, OECD, WIOD, BIS and Commission services 

rest  of  the  euro  area.  In  2018,  foreign  investors 
decreased 
their  holdings  of  Italian  sovereign 
bonds,  while  Italian  banks  raised  their  exposure. 
However,  despite  episodes  of  scarce  market 
liquidity  observed  at  the  end  of  May,  which 
temporarily  affected  sovereign  yields  of  other 
Member  States,  negative  spillovers  to  the  rest  of 
the EU have been limited. In the medium and long 
term,  Italy  is  expected  to  face  marked  fiscal 
sustainability  challenges  based  on  standard  fiscal 
sustainability 
the 
Commission  debt  sustainability  analysis.  Its  high 
stock  of  debt,  its  sensitivity  to  macroeconomic-
fiscal shocks and the future ageing costs contribute 
to that assessment. The new measures on pensions 
backtrack on pervious reforms and are expected to 
worsen fiscal sustainability, by increasing pension 
expenditure  in  the  coming  years  and  possibly 
hampering potential growth.  

indicators 

and  on 

risks 

Productivity  has  recently  risen,  but  reforms  to 
strengthen  productivity  are  still  pending, 
insufficiently  implemented  or  limited  in  scope. 
Over  2018-2020  a  moderate  increase  in  labour 
productivity is projected. Yet, the impact of recent 
reforms on productivity is only gradually building 
up  and  is  sometimes  hindered  by  inadequate 
implementation.  The  reform  of  active  labour 
market  policies  aims  to  overcome  labour  market 
to  mitigate  skill 
frictions  and, 
mismatches 
and 
training 
education. Yet, three years after its adoption, those 
measures are not yet fully implemented. Moreover, 
effective  reforms  to  boost  competition  on  product 
markets  and  thereby  increase  innovation  and 
productivity suffer from a piecemeal approach.  

in  particular, 

adequate 

through 

lingering 

Weakening  economic  activity  in  combination 
with 
structural  challenges  puts 
employment  growth  at  risk.  The  unemployment 
rate  declined  to  10.2%  in  Q3  2018,  while  youth 

unemployment  remained  high  at  about  32%.  The 
economic  slowdown,  in  combination  with  low 
levels  of  average  educational  attainment  and 
persistent  skill  mismatches,  is  likely  to  weigh  on 
employment  growth.  On  the  other  hand,  policy 
measures  with  the  potential  to  boost  employment 
dynamic once the economic activity recovers, such 
as increasing the degree of competition in product 
markets, remain ineffectual. 

Banks have adopted several measures to reduce 
their  NPLs  and  address  sovereign  risk.  Besides 
having  improved  their  internal  work-out  capacity, 
banks have also benefitted from public support for 
NPL  disposal,  such  as  aid-free  State-guaranteed 
securitisations,  and  from  a  buoyant  secondary 
market for impaired assets. Although so far market 
uncertainty  has  not  significantly  impaired  NPL 
sales,  including  disposal  price,  downside  risks  for 
NPL disposals prevail in the current fragile market 
environment.  In  order  to  mitigate  the  impact  of 
high sovereign yields on their capital base, several 
banks  have  adopted strategies to rebalance part of 
their  sovereign  bond  portfolios  to  the  held-to-
collect category (not marked-to-market). However, 
especially  smaller banks' capital buffers are likely 
to be further affected by wider sovereign spreads.  

Overall assessment 

Italy’s  remaining  imbalances  are  not  expected 
to  unwind  in  the  near  term  or  could  even 
deteriorate.  Importantly,  the  public  debt-to-GDP 
ratio  remains  very  high,  and  its  reduction  going 
forward  is  hampered  by  current  fiscal  plans, 
weakening  economic  recovery  as  well  as  still 
higher  borrowing  costs.  The  high  debt  level  is  a 
potential source of negative spillovers for the euro 
area,  though  contagion  from  the  higher  market 
volatility  has  been  limited  so  far.  Labour  market 
the 
conditions  are  gradually 

improving,  but 

23 

ATBEBGHRCYCZDKEEFIFRDEELHUIEITLVLTLUMTNLPLPTROSKSIESSEUKImports3,14,7641,14,110,80,71,82,22,34,63,10,8211,86,13,32,41,24,64,88,82,110,8Imports (in value added)2,11,72,93,92,52,11,21,30,91,81,82,12,41,11,51,52,25,61,12,01,52,82,05,51,61,01,1Financial liabilities9,912,10,60,64,71,32,71,23,419,39,36,51,367,10,70,2579,115,720,40,313,50,22,66,312,61,39,8Financial assets12,16,22,73,52,40,81,60,62,911,84,01,81,938,00,80,5906,08,623,50,64,43,85,63,18,42,65,5Liabilities (to banks)1,10,9011,32,30,50,43,62,54,90,11Bank claims17,51,244,54,613,10,70,60,82,251,59,53,110,744,8211,520,310,24,60,31,7EU partner 
 
 
 
3. Overall findings regarding imbalances, risks and adjustment issues 

surpluses  and  a  net 

external  position  is  relatively  strong,  with  current 
account 
international 
investment position moving closer to balance. Still, 
non-cost  factors  continue  to  weigh  on  export 
performance.  Some  structural  reforms  have  been 
implemented  to  address  the  2018  country-specific 
recommendations (Section 2), which in Italy’s case 
are  all  related  to  its  macroeconomic  imbalances. 
However,  the  reform  momentum  has  sizeably 
slowed  down  since  2018  and  elements  of 
backtracking  are  evident  in  some  reform  areas. 
Consistent  implementation  of  those  reforms,  as 
well  as  a  sufficient  degree  of  ambition  in  the 
forthcoming reform effort are crucial to decisively 
tackle Italy’s macroeconomic imbalances. 

the 

unemployment  rate  remains  high  and  is  still  far 
above  pre-crisis  levels,  in  particular  for  young 
people  and 
long-term  unemployed.  The 
economic outlook is subject to amplified downside 
risks,  in  the  context  of  a  policy-induced  rise  in 
sovereign yields and a very high public debt. This 
adds  to  Italy's  structural  weaknesses  such  as 
low 
sluggish  productivity  growth, 
investment  ratio  and  a  shrinking  working  age 
population, which are weighing on Italy's potential 
growth. Banks' balance sheet repair has progressed 
substantially, but significant vulnerabilities remain, 
in  particular  those  related  to  banks'  exposure  to 
their own sovereign and to the weaknesses of small 
and  medium  banks.  On  the  positive  side,  Italy’s 

still 

a 

24 

 
3. Overall findings regarding imbalances, risks and adjustment issues 

Box 3.1: Structural reforms and potential spillovers – the case of Italy 

There is some debate about the size and direction of the cross-border spillovers of structural 
reforms.  While  the  demand  effect  (higher  demand  for  foreign  products)  leads  unequivocally  to 
positive spillovers, reforms typically also improve a country’s competitiveness and this can go at 
the (relative) expense of other countries. Whether the net effect is positive or negative depends on 
the relative strength of these two opposing channels and is likely to be reform-specific. In a model 
simulation  exercise (1)  the  impact  of  a  comprehensive  set  of  reforms  is  quantified  for  all  EU 
Member  States  in  a  harmonised  way  (Varga  and  in  ’t  Veld,  2014).  For  a  large  set  of  structural 
indicators the benchmark is defined as the average of the three best performing counties, and then 
in the simulation these gaps are closed by half for all indicators, for each country separately. An 
update of this exercise for Italy is shown in the table below, based on more recent indicators (but 
not  capturing  the  most  recently  introduced  reform  measures).    As  the  magnitude  of  the  reform 
‘shocks’ simulated here are based on a harmonized benchmarking exercise, they do not necessary 
correspond to past European Semester Country Specific recommendations, but they illustrate the 
potential impact structural reforms can theoretically have on Member States’ economies.  

The  simulated  reforms  cover  the  following  areas:  product  market  regulation  and  entry, 
labour  market  participation,  tax  structure  and  R&D  subsidies.  For  Italy  the  largest  ‘reform 
gaps’ identified are in product market regulation (service sector markups and entry costs), the tax 
structure  (as  captured  by  the  relative  share  of  labour  tax  revenues  compared  to  consumption  tax 
revenues)  and  low  labour  force  participation,  in  particular  of  low  skilled  and  early  retired. 
According  to  this  theoretical  exercise,  this  ambitious  reform  package,  if  adopted  altogether  and 
contemporaneously,  could  boost  GDP  by  7%  after  10  years,  and  14  ¾  %  after  20  years.  The 
reforms would raise competitiveness, boosting both exports and imports. As the terms of trade fall 
by about 3.5% after 10 years, the trade balance to GDP ratio actually falls slightly by 0.8 pps. The 
net spillover to the rest of the EA is very small but positive. 

(1)  Quest  is the  global  macroeconomic model  DG  ECGIN  uses  for  macroeconomic policy  analysis  and  research.  It  is  a 
structural  model  in  the  New-Keynesian  tradition  with  microeconomic  foundations  derived  from  utility  and  profit 
optimisation  and  including  frictions  in  goods,  labour  and  financial  markets.  Detailed  information  on  the  model  and 
applications are available at: http://ec.europea.eu/economy_finance/research/macroeconomic_models_en.htm  

25 

Table 1: Spillover effects of structural reforms – Italy closing half of the structural reform gaps  Years Italy 1 2 3 4 5 6 7 8 9 10 20 GDP 1.37 1.56 1.88 2.41 3.08 3.83 4.67 5.52 6.36 7.19 14.77 REER -2.20 -2.90 -2.53 -1.74 -0.75 0.22 1.07 1.84 2.57 3.30 10.12 Trade balance  (% GDP) -1.2 -1.8 -1.73 -1.50 -1.24 -1.03 -0.92 -0.85 -0.80 -0.75 -0.33 Rest of EA GDP -0.08 -0.02 0.00 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.00 EA GDP 0.00 0.06 0.11 0.15 0.19 0.23 0.27 0.32 0.36 0.41 0.82 Note: increase in REER is a depreciation. Reference: Varga, J, in 't Veld J. (2014), “The potential growth impact of structural reforms in the EU: a benchmarking exercise ", European Economy Economic Papers no. 541: http://ec.europa.eu/economy_finance/publications/economic_paper/2014/pdf/ecp541_en.pdf   
 
 
 
 
 
3. Overall findings regarding imbalances, risks and adjustment issues 

Table 3.2: 

MIP assessment matrix 

(Continued on the next page) 

26 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Productivity and competitiveness Italy’s labour productivity growth has been sluggish for more than 20 years (0.3 % per year over 1995-2017 vs. 1.3 % in the EU). Weak productivity growth makes it difficult to restore and maintain competitiveness, limits the scope for wage rises and entails low GDP growth, which affects public debt ratio dynamics. Weak productivity growth is rooted in long-standing weaknesses in the functioning of labour, capital and product markets, compounded by inefficiencies in the public administration and justice system. Since 2010, labour and total factor productivity have grown moderately but the gap to the EU average has remained substantial.. Labour productivity per hour worked grew moderately in 2017 (0.5 %) but is expected to have stagnated in 2018 and to remain subdued in 2019-20. Weak productivity growth implies either subdued wage growth or rising  unit labour costs, hampering a sizable recovery of cost-competitiveness. It also reflects a relatively slow diffusion of technological progress, which limits competitiveness and potential growth. Recently, structural reforms have been adopted in areas such as labour and product markets, banking, education, public administration and justice but are not yet fully implemented.  Sound and full implementation of adopted reforms is key for overcoming structural weaknesses and boost productivity growth.   Public debt In 2017 Italy’s public debt-to-GDP ratio stood at 131.2 % of GDP, the second highest in the euro area. Italy’s high public debt is a major source of vulnerability for the economy. The high debt servicing costs crowd out productive public expenditure, reduce the fiscal space to respond to economic shocks and may give rise to a harmful snowball effect if interest rates significantly exceed nominal GDP growth. The high rollover needs entail significant refinancing risks and expose Italy's public finances to any sudden increase in financial market risk aversion. Prolonged increases in sovereign yields may have adverse economic effects through the exposure of domestic financial institutions to public debt, with possible negative spillovers to the banking sector and to financing conditions for firms and households. Given its size, Italy’s public debt ratio is a potential source of negative spillovers to the whole euro area. After increasing from 102.4% in 2008 to 131.8% in 2014, the debt-to-GDP ratio slowly declined in recent years to 131.2% of GDP in 2017. The government debt-to-GDP ratio is set to have increased in 2018 to 131.7% based on the government projections. In 2019 and 2020, the public debt reduction projected by the government is subject to significant downward risks, as it assumes high privatisation proceeds in 2019 (1 % of GDP) and sizable revenues from the activation of VAT safeguard clauses in 2020 (1.2 % of GDP). Sovereign yields increased significantly in 2018 also due to uncertainties around the government's economic and fiscal stance, and declined only partially towards the end of the year. Negative spillovers to the rest of the EU were limited. Foreign investors decreased their holdings of Italy's sovereign bonds, while Italian banks increased their exposure. In 2019, sovereign yields are expected to increase further, as in the rest of the euro area. .  Fiscal sustainability risks are high both in the medium and the long term, on the basis of the standard fiscal sustainability gap indicators and the Commission's debt sustainability analysis. The planned fiscal strategy and the weak economic outlook are expected to prevent a substantial reduction of government debt over 2019-2021. Uncertainty related to the government economic and fiscal stance contributed to significantly raise sovereign yields, with a substantial increase in interest spending over the next years and the risk of negative spillovers to the banking sectors. The privatisation targets set for the coming years, particularly ambitious for 2019, are subject to significant downward risks, in light of the poor track record observed in recent years. The provisions broadening possibilities for early retirement will increase the longstanding bias of public spending towards old-age pensions and are expected to worsen fiscal sustainability, by increasing pension expenditure in the coming years and possibly hampering potential growth.   Adjustment issues Labour market participation and unemployment The unemployment rate doubled during the crisis, and the long-term unemployment rate steadily increased over the period for all age groups. The risk of labour market exclusion is particularly high for youngsters: the youth unemployment rate and the share of young people not in employment, education or training (NEET) are among the highest in the EU. The participation rate, particularly of women, is still very low despite recent increases.  The unemployment rate averaged 11.3 % in 2017 down from 12.8 % at the end of 2014, and it is expected to decline gradually in 2018 and 2019, partially helped by continuing employment growth. Long-term and youth unemployment are also slowly declining and the participation rate is increasing moderately.   The reform of active labour market policies and the strengthening of work-based learning could help to improve labour market matching and support the transition from education to work in the medium term. However, implementation is proving challenging.  Measures to foster labour market participation are limited.   
 
 
 
 
3. Overall findings regarding imbalances, risks and adjustment issues 

Table (continued) 

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

27 

Banks’ asset quality On the back of significant NPL sales and securitisations as well as persistent supervisory pressure, the gross NPL ratio declined from 11.5% at end-2017 to 10.2% in Q2-2018. In this regard, the net NPL ratio has halved since 2015 and stood at 5% in Q2 2018. Despite the substantial progress made, the legacy stock of bad loans (sofferenze) and of unlikely-to pay exposures still remains high in absolute terms and compared to EU peers. Any sudden economic downturn would adversely affect credit supply and NPL levels (see Section 4.2).  While Italian banks have continued to repair their balance sheets, headwinds include the impact from the higher sovereign yields on banks' funding costs and capital buffers. Further factors can slow the pace of NPL resolution: They include in particular weaknesses in the insolvency framework, the slow judicial system and constrains related to the servicing of unlikely-to-pay loans, where there are currently only few active market operators. Second-tier banks with their higher NPL ratios are also more challenged in resolving their NPLs and in continuing the balance sheet repair. The NPL disposal has been facilitated by the development of the secondary market for impaired assets including number of players, besides public support for NPL disposal such as State-guaranteed securitisations. Banks have also worked towards improving their internal work-out capacity. The coming into force of the calendar provisioning rules for NPLs will likely compel Italian banks (and EU peers) to accelerate the NPL disposal and work-out for both unsecured and secured NPL exposures amid ongoing supervisory pressure. Conclusions from the IDR analysis  The public debt-to-GDP ratio remains very high, and current fiscal plans, a weakening recovery as well as higher borrowing costs hamper its reduction going forward. Still high long-term unemployment holds back future growth. Banks' balance sheet repair has substantially progressed, but bank credit to non-financial firms, especially smaller ones, is still subdued and is limiting overall investment growth. While the external position is relatively strong, with current account surpluses and a net international investment position moving closer to balance, non-cost factors continue to weigh on export performance.  Remaining imbalances are not expected to unwind in the near term or could even deteriorate over the coming years. The government debt-to-GDP ratio is expected to have increased to close to 132% in 2018 and to remain stable in 2019 and 2020 based on the government projections, without considering the assumed privatisation proceeds and revenues expected from the activation of VAT safeguard clauses. Productivity dynamics are improving very slowly with a weak outlook. This holds back the relative adjustment in unit labour costs, despite wage moderation, while non-cost factors remain insufficiently supportive of external competitiveness. The legacy NPL stock has significantly declined, but vulnerabilities remain, which is in particular related to banks' exposure to the sovereign and to the state of medium and small banks.  Overall, Italy's reform momentum has stalled in 2018. The fiscal expansion planned by the government does not include effective measures to lift Italy's sluggish potential growth and, in particular, to close the persistent productivity gap vis-à-vis the EU average. Some of the envisaged measures in the 2019 budget reverse elements of previous important reforms, in particular in the area of pensions, which can threaten the sustainability of public finances. While progress in reforming the cadastral system, tax expenditures and property taxation is limited, a new spending review has been planned for 2019. The government intends to replace the comprehensive anti-poverty scheme introduced in 2018 by a new income-support scheme with a close link to active labour market policies (ALMP). However, the implementation of the ALMP reform is slow and public employment services, a cornerstone of the new income-support scheme, do not seem adequately equipped. Though banks have come under market pressure from the entrenched sovereign-bank feedback loop and higher market volatility, progress on bank balance sheet repair has continued. The public administration reform has been implemented. Efficiency gains in civil justice remain limited, and a new reform streamlining civil trials is in progress, while a new anti-corruption bill is currently under discussion in parliament. Furthermore, the implementation of the 2015 annual competition law is delayed, with remaining restrictions to competition still to be removed.   
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

in 

increase 

line  with 

2-year  bonds  increased  by  1.4  pps.  over  the  same 
period  in  2018  (from  -0.3%  to  1.1%),  before 
declining  at  the  beginning  of  this  year  (to  0.3%). 
From  2020,  sovereign  yields  are  expected  to 
further 
the  projected 
developments  for  the  euro  area.  Even  considering 
the relatively long average maturity of the stock of 
government  securities  (around  7  years  at  end  of 
2017),  the  implicit  interest  rate  on  government 
debt  is  set  to  progressively  increase  from  2020. 
in  Italian 
Overall, 
sovereign  yields  contributes 
the 
declining  trend  in  interest  spending  observed  in 
recent years. Based on the government projections 
underlying  the  2019  budget,  interest  spending  is 
set  to  increase  from  3.6 %  of  GDP  in  2019  to 
3.8 % in 2020. 

level  shift  observed 

reverse 

the 

to 

Graph 4.1.2:  Government securities by holding sector 

4.1.1.  PUBLIC DEBT* 

A  worsening  primary  surplus  is  expected  to 
hinder the reduction of Italy's public debt over 
the  coming  years.  In  recent  years,  the  difference 
between the real implicit cost of debt and real GDP 
growth, although remaining positive, progressively 
narrowed  also  thanks  to  the  economic  recovery 
and  declining  interest  spending  (Graph  4.1.1).  As 
such,  the  snowball  effect  has  shrunk,  supporting 
the  reduction  of  the  debt-to-GDP  ratio.  However, 
the  deterioration  in  the  primary  surplus  and 
slightly  debt-increasing  stock-flow  adjustments 
partly offset those developments. Overall, the debt-
to-GDP ratio declined only slowly from 131.8% in 
2014  to  131.2%  in  2017.  In  2019,  the  primary 
surplus is expected to slightly deteriorate based on 
the  government  projections  underlying  the  2019 
budget.  In  2020,  the  planned  fiscal  measures  are 
set  to  entail  a  more  marked  deterioration,  without 
considering the additional revenues expected from 
the activation of the VAT safeguard clauses.  

Graph 4.1.1:  Drivers of "snowball" effect on public debt 

Source: Bank of Italy 

in 

Italian banks increased their holdings of Italy's 
sovereign  bonds  in  2018.  After  progressively 
decreasing 
the  amount  of 
recent  years, 
government  securities  held  by  Italian  banks 
increased in the central months of 2018, by around 
EUR  55  billion  between  April  and  October  (of 
which  EUR  28  billion  in  May  according  to  Bank 
of  Italy  data).  The  holdings  of  the  central  bank, 
which  were  already  growing  in  recent  years 
the  quantitative  easing  programme, 
reflecting 
continued  increasing  in  the  course  of  2018  at  a 
moderate  pace.  Overall,  the  share  of  government 
securities  held  by  private  Italian  banks,  after 

Source: European Commission 

Sovereign  yields  increased  in  2018,  leading  to 
higher  debt  servicing  costs.  Yields  on  10-year 
sovereign bonds increased by 1.6 pps between the 
beginning  of  May  and  the  end  of  October  2018 
(reaching 3.4%), before slightly declining to 2.6 at 
the  end of January 2019 also as a  result of Italy’s 
revised fiscal targets in the 2019 budget. Yields on 

28 

-4-3-2-101234561011121314151617(Real implicit cost of debt - real GDP growth)Real implicit cost of debtReal GDP growthReal spot yield at issuance (weighted average)%00102030405060200920102011201220132014201520162017MarAprMayJunJulAugSepOct% of totalCentral bankDomestic monetary financial institutionsNon-residentsOther residents and other domestic financial institutions2018monthly data 
 
 
 
4.1. Public finances and taxation 

large 

increase 

in  perceived 

markets. In particular, the peak in sovereign yields 
recorded  at  the  end  of  May  was  marked  by  a 
substantial flattening of the yield curve (on the 29 
May,  yields  increased  by  0.5  basis  points  on  10-
year  bonds  and  1.9  basis  points  on  2-year  bonds, 
reaching 3.2% and 2.8% respectively), pointing to 
a 
risk.  Those 
developments  temporarily  affected  other  Member 
States’ sovereign yields (for instance, Spanish and 
Portuguese 2-year yields rose, respectively, by 0.4 
and  0.2 basis  points  between  the  24th  and  the  30th 
of May). However, the yields on Italy's short-term 
bonds  soon  normalised  while  remaining  at  a 
relatively  high  level,  and  other  Member  States’ 
sovereign  yields  quickly  decoupled  from  Italy’s 
ones,  showing  little  correlation  with  the  Italian 
sovereign bond market since then (Graph 4.1.3).  

4.1.2.  DEBT SUSTAINABILITY ANALYSIS AND      

FISCAL RISKS* 

Italy  is  expected  to  face  marked  sustainability 
challenges  in  both  the  medium  and  the  long 
term.  Both  the  Commission's  debt  sustainability 
analysis and the  fiscal sustainability risk indicator 
S1(18) point to  high risk in the  medium-term. The 
high and increasing stock of debt projected in 2029 
in  the  baseline  scenario  and  its  sensitivity  to 
macroeconomic-fiscal  shocks  contribute  to  that 
assessment  (Annex  B). In  the  long  term,  the 
assessment  of  fiscal  sustainability 
into 
account  the  sizeable  fiscal  adjustment  required  to 
stabilise  the  debt-to-GDP  ratio,  especially  in  light 
of future ageing costs and the vulnerabilities linked 
to  the  high  debt  burden  (19).  The  long-term  fiscal 
sustainability  risk 
to 
medium risks, also due to the projected increase in 
ageing  costs.  However,  an  overall  analysis  points 
to  high  risk 
the 
vulnerabilities  linked  to  the  high  debt  burden 

indicator  S2(20)  points 

term,  given 

takes 

long 

the 

in 

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

(19)  European  Commission  (2019c).  For  more  explanations  on 
the methodology, see also European Commission (2018e).  
(20)  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,  taking  into  account  future  additional 
expenditure arising from an ageing population. 

progressively  declining  from  23.2%  in  2013  to 
17.6%  in  April  2018,  increased  to  18.9%  in  May 
and reached 20.2% in October (Graph 4.1.2). 

Foreign  investors  decreased  their  exposure  to 
Italy's  public  debt.  The  share  of  government 
securities  held  by  foreign  investors  declined  from 
36.9%  in  April  to  35.4%  in  May  and  32.8%  in 
October. Those developments suggest a change in 
foreign  investors’  preferences,  which  might  have 
led Italian banks to act as a buffer and limit losses 
on  their  portfolio  of  sovereign  bonds.  Italian 
households do not appear ready to compensate for 
the  withdrawal  of  foreign  investors  as  shown  by 
the  weak  result  of  the  November  2018  auction  of 
the “BTP Italia” (EUR 2.1 billion raised against an 
average  of  around  7  billion  per  auction  in  recent 
years), which is a government security specifically 
designed 
the 
subscription  for  syndicated  sovereign  bonds  in 
early  2019  suggests  that  foreign  interest  might 
have increased again following the revision of the 
government’s fiscal plans in December 2018.  

investors.  However, 

retail 

for 

Graph 4.1.3:  Sovereign yields on the secondary market 

Source: Bloomberg 

risks 

limited.  Overall, 

Despite  episodes  of  scarce  market  liquidity, 
negative spillovers to other Member States have 
been 
the 
macroeconomic-financial context appear to be low, 
ensuring  the  possibility  to  refinance  debt  rollover 
needs  at  ease.  However,  the  high  level  of  debt 
increases  investors'  sensitivity  to  potential  risks, 
possibly  causing 
in  market 
sentiment  and  strong  volatility  on  secondary 

rapid  changes 

from 

29 

-1-0.500.511.522.533.54IT 10-yearPT 10-yearES 10-yearIT 2-yearPT 2-yearES 2-year% 
 
 
                                                           
4.1. Public finances and taxation 

in  2018  based  on 

years  total  public  spending  has  progressively 
decreased  as  a  share  of  GDP,  reaching  54.2 %  in 
2017, also thanks to lower interest rates, the freeze 
of  public  wages  and  turnover  limits  for  public 
employees.  Public 
investments  also  dropped 
markedly as a share of GDP from 3.0 % in 2008 to 
2.0 %  in  2017  and  are  expected  to  have  further 
the  government 
declined 
projections.  Social  transfers  in  cash,  after  rising 
significantly  over  2013-2014,  declined  only 
marginally  over  the  last  years  as  a  share  of  GDP, 
thereby  increasing  their  share  over  total  public 
spending.  In  particular,  spending  for  old-age 
pensions,  which  already  in  2008  represented  a 
comparatively  large  share  of  public  expenditure, 
has  further  increased  in  recent  years  and  stood  at 
around  15 %  of  GDP  in  2016,  among  the  highest 
in the EU. The 2019 budget is expected to increase 
total public spending as from 2019. In particular, it 
may support the recovery of public investment by 
allocating  additional  funds  and  strengthening 
administrative  capacity  (Section  4.4).  However, 
such recovery is subject to downward risks, as the 
2019  budget  has  also  temporary  reduced  other 
investment  funds  and  subsidies  to  investment.  In 
addition,,administrative 
and 
implementation  delays  might  further  hamper  the 
recovery.  Social  transfers,  including  spending  for 
old-age  pensions,  are  set  to  rise  more  markedly 
due to the introduction of a minimum income and 
an  early  retirement  schemes,  which  have  been 
allocated two funds worth in total 0.5 % of GDP in 
2019 and 0.8 % of GDP in 2020-2021.  

bottlenecks 

that 

The  assessment  of  the  first  spending  review 
undertaken  under  the  reformed  budgetary 
process is still ongoing. With the 2018 budget, the 
government applied for the first time the reformed 
budgetary  process 
includes  a  systematic 
spending  review  across  all  levels  of  government. 
The assessment of that spending review is ongoing 
under specific agreements between the Ministry of 
Finance and each line Ministry. A similar spending 
review is planned for 2019, with expected savings 
of  around  0.2 %  of  GDP.  At  the  same  time,  the 
budgetary  autonomy  at  the  subnational  level  will 
be  slightly  increased  as  of  January  2019, (21)  by 
allowing 
their 
budgetary surpluses without prior authorisation.    

local  governments 

to  spend 

(21)  The provision applies from January 2019 to municipalities, 
provinces  and  regions  with  a  special  statute,  and  from 
January 2021 to regions with an ordinary statute. 

captured  by  the  debt  sustainability  analysis  risk 
assessment.    

retirement. 

In  particular, 

totally  covered  by 

The new provisions on pensions are expected to 
worsen fiscal sustainability. As regards long-term 
fiscal sustainability, implicit liabilities arising from 
population  ageing  have  been  curbed  by  various 
pension reforms enacted in past years. However, a 
decree  law  of  January  2019  reverses  elements  of 
those  reforms  by  broadening  the  possibility  of 
early 
the  decree 
introduces the possibility to retire with 62 years of 
age  and  38  years  of  contributions  over  the  period 
2019-2021. While no specific reduction in pension 
benefits  is  envisaged,  shorter  contribution  periods 
for the beneficiaries of the scheme (either partially 
the  Notional  Defined 
or 
Contribution  system)  will  automatically  imply 
lower  pension  benefits.  Moreover,  the  indexation 
to  life  expectancy  of  the  minimum  contribution 
requirement  needed  to  retire  under  the  existing 
early  retirement  scheme  (“pensione  anticipata”) 
has  been  removed  up  to  2026.  In  addition,  the 
temporary  early  retirement  scheme  for  women 
(“opzione  donna”)  has  been  extended.  Although 
the  parliament  may  still  amend  details  of  that 
reform and the precise cost will also depend on the 
actual  take-up,  the  new  provisions  will  markedly 
increase  pension  expenditure  over  the  coming 
years.  The  2019 budget  allocated  a  fund  of  0.2 % 
of GDP in 2019, 0.4 % of GDP in 2020 and 0.5 % 
of GDP in 2021. However, the reform will pose a 
burden on public finances also after 2021. In fact, 
even  if  the  new  early  retirement  scheme  is  not 
prolonged,  the  number  of  pensioners  will  have 
increased  during  the  three-year  window,  lifting 
pension  expenditure  for  several  years  after  2021 
compared  to  the  pre-reform  scenario.  Moreover, 
the  lack  of  indexation  to  life  expectancy  of  the 
contribution  period  needed  to  retire  under  the 
existing early retirement  scheme  is set to increase 
pension  expenditure  in  the  medium  term.  Finally, 
those provisions, by broadening the possibility for 
early  retirement,  might  negatively  affect  labour 
supply, thereby hampering potential growth.  

4.1.3.  COMPOSITION OF PUBLIC SPENDING* 

While  supporting  public  investment,  the  2019 
budget  worsens  the  bias  of  Italy’s  public 
spending  towards  old-age  pensions.  After  rising 
during  the  last  double-dip  recession,  in  recent 

30 

 
                                                           
4.1. Public finances and taxation 

4.1.4.  TAXATION* 

Italy's tax system weighs heavily on labour and 
capital,  while  other  sources  of  revenues  are 
underused.  Although  decreasing  for  the  fourth 
year  in  a  row,  the  tax-to-GDP  ratio,  at  42.1 %  in 
2017,  is  still  significantly  above  the  EU  average 
(39.0 %).  Revenues  from  labour  taxes  are  around 
the EU average as a share of total tax revenues but 
remain  comparatively  high  as  a  share  of  GDP 
(20.7 % against an EU average of 19.4 %). In fact, 
the tax wedge on labour (22) is one of the highest in 
the  EU,  at  47.7 %  in  2017  for  a  single  at  the 
average  wage  against  an  EU  average  of  42.8 %, 
and the implicit tax rate on labour stood at 42.4 % 
in  2017,  against  an  EU  average  of  36.3 %. 
Similarly, the tax burden on capital was well above 
the  EU  average  in  2017,  as  indicated  by  high 
revenues  from  capital  taxes  (24.1 %  of  total  tax 
revenues  compared  to  21.9 %).  At  the  same  time, 
(VAT)  are 
revenues 
relatively  low,  at  14.9 %  of  total  tax  revenues  in 
2017  compared  to  18.1 %  for  the  EU.  In  fact, 
although on a declining trend, Italy's VAT gap (23) 
remains among the highest in the EU, at 25.9 % in 
2016  (EU  average  at  12.0 %).  This  is  due,  on  the 
one  hand,  to  relatively 
tax  compliance, 
especially  related  to  omitted  billing  and  invoicing 
(so-called tax evasion "with consent"); on the other 
hand, to the broad use of reduced VAT rates, while 
the  standard  one  (22 %)  is  slightly  above  the  EU 
average  (21.5 %).  The  wide  use  of  reduced  rates 
resulted in a very high VAT rate gap of 14.9 % in 
2016,  well  above  the  EU  average  of  10.3 % 
(CASE, 2018).  

from  value-added 

low 

tax 

Efforts  to  shift  the  burden  to  tax  bases  less 
detrimental  to  growth  and  to  reduce  the 
complexity  of  the  tax  system  remain  limited. 
Despite  the  annual  review  of  tax  expenditures, 
there are still no plans to reduce their number and 
scope.  The  VAT  hike  legislated  as  a  budgetary 
"safeguard  clause",  which  included  an  increase  of 

(22)  The  tax  wedge  on  labour  is  the  proportional  difference 
between  the  total  cost  of  employing  a  worker  and  the 
employee's net earnings. Data are taken from the European 
Commission Tax and Benefit Indicator database (based on 
OECD data and model).  

(23)  The  VAT  gap  is  the  difference  between  theoretical  and 
actually  collected  VAT 
several 
components:  the  VAT  rate  gap  is  one  of  them  and 
measures  the  specific  VAT  revenues  losses  linked  to 
reduced VAT rates, in comparison to a situation where all 
products and services would be taxed at the standard rate.  

revenues. 

It  has 

reduced  VAT 

the  10 % 
rate,  has  been 
systematically postponed so far. Moreover, despite 
the ongoing efforts to set up and improve a digital 
platform  for  immovable  properties,  no  concrete 
steps are planned to reform the outdated cadastral 
system  or  to  reintroduce  a  recurrent  property  tax 
on first residences for high-income households. At 
the  same  time,  the  2019  budget  sligthly  reduced 
the  employers'  contributions 
the  national 
insurance  institute  for  accidents  on  the  workplace 
(INAIL).  Based  on 
latest  Eurobarometer 
the 
(Eurobarometer  2018),  half  of  the  companies 
surveyed  consider  the  lack  of  stability  and  the 
complexity  of  the  tax  legislation  as  a  major 
obstacle 
and  54 %, 
respectively, against 28 % and 32 % in the EU). 

investment 

(50 % 

to 

to 

The  extension  of  flat-rate  regimes  will  lower 
taxes  on  the  self-employed  and 
individual 
entrepreneurs.  Two  provisions  included  in  the 
2019  budget  will  lower  taxes  on  self-employed 
workers  and  individual  entrepreneurs.  First,  the 
scope of the existing simplified tax regime will be 
extended.  The  current  regime  consists  in  an 
optional  forfeit  15 %  tax  rate  for  self-employed 
workers  and  individual  entrepreneurs  with  yearly 
turnover  below  sector-specific  thresholds  up  to  a 
maximum  of  EUR  55 000.  With 
the  new 
provisions,  among  other  changes  to  the  eligibility 
conditions,  the income threshold is raised to EUR 
65 000  irrespective  of  the  sector  of  activity. 
Second,  a  new  20 %  forfeit  tax  rate  will  be 
available  as  of  2020  for  the  same  category  of 
taxpayers  with  yearly  turnover  between  EUR 
65 000  and  EUR  100 000.  Based  on 
the 
government  estimates,  the  two  provisions  will 
correspond,  respectively,  to  a  net  revenue  loss  of 
around EUR 1.4 and 1.1 billion as of 2021. While 
the two measures are relatively small in scope and 
affect  a  limited  number  of  taxpayers,  the  use  of 
flat-rate  regimes  reduces  the  redistributive  power 
of  the  tax  system.  Based  on  a  simulation  by  the 
European  Commission  Joint  Research  Centre 
using  EUROMOD (24),  the  first  reform  would 

(24)  EUROMOD  is  the  tax-benefit  microsimulation  model  for 
the  EU.  It  simulates  individuals'  and  households'  benefit 
entitlements  and  tax  liabilities  according  to  the  rules  in 
place  in  each  Member  State.  Simulations  are  based  on 
representative survey data from the European Statistics on 
Income  and  Living  Conditions  (EU-SILC)  and  cover  the 
main  elements  of  direct  taxation,  social  contributions  and 
non-contributory benefits. The variable for yearly turnover 
is  constructed  by  matching  IT-SILC  2013  data  with 

31 

 
                                                           
                                                           
4.1. Public finances and taxation 

its 

Italy's  budgetary  strategy  strongly  relied  on 
measures  to  combat  tax  fraud,  especially  for 
indirect taxes (26), which contributed to raise VAT 
invoicing  has  become 
revenues.  Electronic 
mandatory  for  all  companies  as  of  January  2019, 
which  might  help  reducing  tax  evasion  “without 
consent”,  i.e.  omitted  declaration  (MEF,  2018). 
should  ensure 
implementation 
However, 
simplification and a  low administrative burden on 
taxpayers  in  order  not  to  encourage  tax  evasion 
“with  consent”  in  the  form  of  omitted  invoicing. 
The  decree 
("fiscal  decree"), 
in  December  2018,  has 
converted 
complemented the electronic invoicing by  making 
the electronic transmission of receipts compulsory 
for  all  commercial 
final 
consumers.(27)  This  provision 
to 
provide  the  tax  agency  with  more  timely  and 
accurate 
targeted 
inspections. The related deterrent effect might help 
reducing  tax  evasion  "with  consent",  particularly 
in the form of omitted billing and invoicing.  

transactions  with 

law  119/2018 

is  expected 

information, 

allowing 

into 

law 

The  new  possibility  to  settle  past  tax  liabilities 
without fines and at advantageous interest rates 
could have a negative impact on tax compliance. 
This provision represents the third initiative of this 
kind in recent years, and is more advantageous for 
taxpayers  compared  to  past  editions,  to  the  extent 
that  payments  can  be  made  in  instalments  over 
several  years.  The  "fiscal  decree"  also  includes 
several  smaller  provisions  curtailing  old  pending 
limited  size  and  reducing 
tax 
incentives for taxpayers to prolong the duration of 
tax 
the  new  provisions 
equivalent  to  a  tax  amnesty  are  expected  to 
discourage  tax  compliance  in  the  future,  by 
rewarding  non-compliant  behaviour 
implicitly 
(Luitel et al. 2007, Jensen and Woehlbier, 2012). 

litigations.  Overall, 

liabilities  of 

(26)  The  main  measures  implemented  in  recent  years  to  fight 
VAT  fraud  are  authorised  derogations  from  the  EU  VAT 
rules.  These  include:  (i)  the  mandatory  e-invoicing  for 
the  electronic 
transactions  among  companies, 
accounting  system,  and  (iii)  the  split  payment  (under  this 
regime public administration payments to private suppliers 
of  goods  and  services  do  not  include  VAT,  which  is 
directly paid to the government budget).  

(ii) 

(27)  The e-transmission of receipts will be mandatory from July 
2019  for  all  subjects  with  a  yearly  turnover  above  EUR 
400 000, and from January 2020 for all taxpayers. 

potentially  benefit  mostly  the  new  eligible  self-
employed  in  the  upper  half  of  the  household 
income distribution 25. 

on 

the 

time, 

taxation 

the  same 

Measures 
have 
corporate 
temporarily  increased  the  tax  burden  on  firms 
at  an  aggregate  level.  After  being  postponed  by 
the  2018  budget,  the  previously  legislated  tax 
regime  for  personal  income  from  entrepreneurial 
activities (“Imposta sul Reddito Imprenditoriale”), 
aimed  at  harmonising  the  tax  treatment  of  small 
firms and corporations, has been abrogated. Only a 
few  of  the  tax  expenditures  to  support  private 
investment and innovation, expiring in 2018, have 
been  extended,  while  also  being  reduced  in  scope 
(Section  4.4).  At 
tax 
deductibility  of  specific  costs  for  some  categories 
of  firms,  especially  banks,  will  be  limited,  with  a 
temporary positive effect on revenues in 2019. The 
2019  budget  also  introduced  a  tax  on  digital 
services and on money transfers.  Furthermore, the 
"allowance 
(ACE), 
corporate 
introduced  in  2011  to  reduce  the  corporate  debt 
bias,  has  been  replaced  by  a  new  tax  rebate  on 
firms'  profits  used  to  increase  investment  or  hire 
new employees, with an overall positive impact on 
tax  revenues  in  the  short  run.  The  tax  rebate 
consists  in  a  reduction  of  the  standard  corporate 
income tax (IRES) rate from 24 % to 15 %. As the 
main  beneficiaries  of  ACE  have  been  de  facto 
financial  institutions,  this  reform  shifts  the  tax 
burden 
financial 
non-financial 
corporations. Although the new tax rebate directly 
targets productive investments, its implementation 
may prove complex. Furthermore, the abolition of 
ACE  will  reduce  firms'  incentives  to  use  equity 
financing,  worsening  the  debt  bias  in  corporate 
taxation (Section 4.4).  

equity" 

from 

for 

to 

The  compulsory  e-transmission  of  receipts  is 
expected  to  encourage  tax  compliance  and 
improve  revenue  collection.  In  recent  years, 

administrative  data,  based  on  the  joint  distribution  of 
income and turnover by classes. 

25  According  to  the  simulations,  most  of  the  new  eligible 
taxpayers and most of those who could potentially benefit 
from  lower  tax  liabilities  are  in  the  bottom  half  of  the 
income distribution. However, among taxpayers becoming 
eligible  for  the  flat-rate  regime  thanks  to  the  reform,  the 
share of those who would pay less taxes under that regime 
increases  across  the  distribution  of  equivalised  disposable 
income.  Such  share  is  particularly  low  in  the  first  decile 
(26%), increases steadily from 42% in the second decile up 
to 71% in the ninth decile, and declines in the tenth decile 
to 54%. 

32 

 
                                                                                   
 
                                                           
4.2.  FINANCIAL SECTOR 

Italian banks have made significant progress on 
balance  sheet  restructuring  despite  renewed 
market  pressure.  However  due  to  the  high  bank 
exposure to the sovereign, higher sovereign yields 
(though  recently  come  down)  have  adversely 
affected  banks'  capital  positions,  pushing  up  their 
funding  costs  and  curtailing  access  to  unsecured 
wholesale  funding.  Nevertheless,  banks  have 
continued  to  boost  capital  buffers  and  reduce 
legacy  non-performing  loans  (NPLs)  to  10.2 %  in 
Q2-2018  amid  positive  profitability  since  2017. 
The recent European Banking Authority stress test 
has  shown  the  resilience  of  the  involved  Italian 
banks  in  the  assumed  adverse  scenario.  Smaller 
banks 
though  are  often  perceived  as  more 
vulnerable. Further balance sheet restructuring and 
consolidation,  as  well  as  improving  banks'  capital 
and  earnings  capacity  should  be  fostered.  While 
access to finance has improved, it continues to be a 
challenge for many small Italian firms.    

Recent developments*  

increased 

Italian  banks  had 

Since  the  market  uncertainty  in  late  spring 
their 
2018, 
exposure  to  their  sovereign.  According  to  Bank 
of  Italy  data,  Italian  banks'  holdings  of  Italian 
sovereign  bonds  have  increased  from  EUR  298 
billion  in  April  2018  to  EUR  328  billion  in 
November, partly compensating for the withdrawal 
of foreign investors since spring. Sovereign debt as 
a  share  of  total  banking  sector  assets  remains 
elevated at 10.5 % in November 2018 (higher than 
many  EU  peers),  reflecting  the  close  sovereign-
bank  feedback  loop  in  Italy,  with  smaller  banks 
often  being  more  exposed  than  larger  ones.  The 
common equity Tier 1 capital for the largest Italian 
banks has declined by up to 80bp in Q2-2018 (less 
so  in  Q3)  due  to  the  sovereign  yield  widening. 
According  to  Bank  of  Italy  (2018),  a  100bps 
upward shift in the government  yield curve  (as of 
end-June  level)  would  reduce  the  common  equity 
Tier  1  ratio  of  banks  by  50bps  (40bps  for 
significant  banks  and  90bps  for  less  significant 
banks).  Assuming  no  substantial  changes  in  the 
cost  of  funding,  most  banks  can  withstand  in  the 
short term a further increase in sovereign spreads. 
Several banks adopted strategies to rebalance part 
of  their  sovereign  bond  portfolios  to  the  held-to-
collect category (valued at amortised cost) to avoid 

a  negative  impact  on  the  capital  base  from  the 
rising sovereign yields. (28) 

reduced 

losses  from 

funding  benefits 

Any persistently high sovereign yields are likely 
to  negatively  impact  banks'  cost  of  funding, 
their market access, and hence credit provision. 
Banks  could  be  adversely  impacted  by  the  higher 
sovereign  risk  through  a  number  of  reinforcing 
channels,  such  as  capital 
their 
sovereign exposures, higher funding costs, limited 
market access, lower collateral valuation and credit 
ratings  or 
from 
government  guarantees.  However,  the  liquidity 
position  of  Italian  banks  has  remained  adequate, 
mainly  supported  by  the  increase  in  domestic 
deposits  and  the  reliance  on  ECB  refinancing 
operations.  Since  May,  many  banks  were 
precluded  from 
issuing  unsecured  senior  or 
subordinated  debt  securities.  A  worsening  of  the 
market  situation  risks  increasing  banks'  funding 
costs  (whilst  impairing  credit  supply)  and  making 
it more difficult for banks to meet the subordinated 
part  of  the  minimum  requirements  for  own  funds 
and eligible liabilities (so-called MREL) targets as 
well as to adjust from the phase out from the ECB 
targeted 
operations 
starting in 2020. 

longer-term 

refinancing 

increasing 

to  13.2 % 

improvements, 

the 
Notwithstanding  recent 
subdued  profitability  continues  to  be  a  major 
challenge  for  the  banking  sector.  Despite  the 
market volatility, banks continued to increase their 
capital  buffers  in  2018  with  the  common  equity 
Tier  1 
in  June  2018, 
compared  to  12.5 %  in  June  2017.  Despite  some 
narrowing,  a  gap  remains  between  the  capital 
buffers  of  Italian  banks  and  the  average  of  EU 
peers.  On  the  back  of  cost  reductions  and  lower 
loan-loss provisions, profitability improved further 
in the  first  half of 2018 for both large groups and 
smaller banks, but remains very low, partly due to 
the  low  interest  rate  environment.  In  spite  of 
efforts  to  further  increase  efficiency,  some  Italian 
banks are still struggling with high cost-to-income 
ratios.  Furthermore,  Italian  banks  have  continued 
to  also  lag  behind  in  terms  of  rationalising  staff 
and branches since the beginning of the crisis. The 
some 
profitability, 
below-average 

with 

(28)  The  impact  of  an increase  in  sovereign  yields  varies  from 
bank  to  bank  depending  on  the  total  sovereign  exposure, 
where the bonds are recorded (i.e. trading and fair value vs 
banking book) and the duration of the portfolio. 

33 

 
 
                                                           
4.2. Financial sector 

heterogeneity  against  EU  peers,  jeopardises  the 
capital  strengthening  process  of  Italian  banks, 
making their generation of capital more difficult.  

adversely affected by NPLs (especially for smaller 
banks). (30) 

Italian banks have made significant progress in 
reducing 
legacy  NPLs  via  disposals  and 
continuing  balance  sheet  repair.  In  2017  and  in 
the  first  half  of  2018,  banks  disposed  of  a 
significant  amount  of  bad  loans  (roughly  EUR  40 
billion),  nearly  two  thirds  of  which  came  through 
securitisations. (29)  Italian  significant  institutions 
are  expected  to  dispose  some  EUR  40  billion  in 
NPL transactions from their balance sheets by end-
2020.  The  secondary  NPL  market  has  further 
developed with NPL pricing improving, supported 
by  better  NPL  data  quality,  and  more  NPL 
servicing  firms  have  entered  the  market.  Banks 
have  also 
internal  work-out 
capacity.  Looking  ahead,  due  to  the  significant 
volume  of  unlikely-to-pay  loans  in  bank  balance 
sheets,  the  secondary  market  offers  the  potential 
for further development. Banks will have to decide 
whether  to  invest  in  the  active  management  of 
these  loans  or  to  de-recognise  them  through 
to  specialised  operators  and 
outright 
securitisation.  Market  operators 
focusing  on 
unlikely-to-pay  loans,  which  are  currently  few  on 
the Italian market, require specific skills, strategies 
logistics  (i.e.  proactive  management  of 
and 
borrowers,  early  warning  indicators,  advanced  IT 
platforms),  and  appropriate  financial  resources  to 
support borrowers.  

improved 

sales 

their 

However,  many  banks  still  exhibit  high  NPL 
levels, especially when compared with EU peers. 
While  market  uncertainty  has 
far  not 
so 
significantly  negatively 
impacted  NPL  sales 
including prices, downside risks for NPL disposals 
prevail  in  the  current  market  environment,  as  the 
State  sponsored  securitisation  scheme  is  also 
becoming  more costly due to higher  fees on  State 
guarantees.  Commission estimates show that NPL 
ratios  would  be  sizeably  impacted  by  any  sudden 
economic downturn,  while banks' credit growth is 

(29)  NPL  disposal  has  been  also  supported  by  the  transitional 
arrangements  related  to  the  implementation  of  IFRS  9, 
which allowed spreading over time the impact on capital of 
additional  loan-loss  provisions  on  NPLs.  Moreover,  the 
aid-free  State  guarantee 
loan 
securitisations (GACS) was recently extended by another 6 
months from September 2018 onwards. The 14 transactions 
completed  with  the  support  of  this  scheme  between 
February 2016 and September 2018, involved a total gross 
NPL volume of EUR 59 billion.   

framework 

for  bad 

and 

though 

significant 

transaction, 

Some  progress  has  been  made  on  State-aided 
banks, 
vulnerabilities 
remain.  Banca  Monte  dei  Paschi  di  Siena  has 
continued to implement its restructuring plan, inter 
alia,  on  NPL  disposals,  mainly  through  a  large 
securitisation 
cost-cutting 
measures.  (31)  However,  recent  efforts  to  further 
increase its subordinated debt (after an issuance in 
early  2018)  have  been  curtailed  by 
the 
unfavourable  market  conditions,  while  the  bank's  
NPL ratio is still above domestic peers. Regarding 
the  2015  resolution  of  four  small  banks  and  the 
2017  liquidation  of  two  Venetian  banks,  no 
significant  public  contingent  liabilities  related  to 
these cases have so far materialised. 

a 

for 

fund 

(Fondo 

scheme 

compensation 

Adding to  previous  schemes, which have led to 
substantial  compensation  payment  to  retail 
investors for misselling, the government has set 
up 
retail 
shareholders  and  subordinated  bondholders  of 
gone-concern  banks.  As  part  of  the  2019  budget 
the  government  has  set  up  a  savers 
law, 
compensation 
indennizzo 
risparimiatori) with an initial envelope of EUR 1.6 
billion  for  the  period  2019-2021.  Beneficiaries 
should  be  bank  shareholders  and  holders  of 
subordinated  bonds  with  a  retail  client  profile, 
individual 
some  micro-
enterprises,  which  suffered  losses  during  the 
compulsory  administrative  liquidation  of  banks 
liquidated  between  16  November  2015  and  end-
2017. However, to what extent the existence of the 
conditions  of  mis-selling  will  be  assessed  by  an 
independent  body  are  still  to  be  seen.  The 
compensation would equal 30 % of the acquisition 
cost,  up  to  a  maximum  of  EUR  100 000  per 
shareholder  and  95 %  of  the  recognised  amount, 
up  to  a  maximum  of  100 000  per  bondholder. 

entrepreneurs 

and 

(30)  The  estimates  are  based  on  panel  regressions,  comprising 
400 Italian banks, for 2006-2017 and data from SNL S&P. 
For  instance,  a  1%  increase  in  the  unemployment  rate, 
ceteris paribus, would lead to 1.4% rise in the NPL ratio of 
Italian banks. In addition, Italian banks with higher capital 
buffers,  NPL  coverage  and  deposit  growth  are  able  to 
sustain  higher  credit  extension,  with  the  economic  cycle 
also playing a significant role in banks' credit growth.  
(31)  In  the  first  half  of  2018,  the  bank  completed  with  the 
support  of  the  State  sponsored  securitisation  scheme  and 
the  Italian  Recovery  Fund  the  securitisation  of  EUR  24.6 
billion of bad loans. 

34 

 
                                                           
                                                           
Compensations  under  this  scheme  will  be  granted 
net  of  any  previously  received  compensation, 
reimbursement  or  refund.  Previous  mis-selling 
compensation  schemes  covered  only  holders  of 
subordinated  debt  subject  to  burden-sharing  and 
compensation were granted only after a court or an 
independent  panel  confirmed  an 
instance  of 
misselling  in  the  specific  case,  in  line  with  EU 
legislation. 

Second-tier banks*  

Second tier banks have also progressed on their 
balance  sheet  de-risking  and  strengthening. 
Notwithstanding 
this  progress,  some  mid-cap 
banks are still perceived as more vulnerable by the 
market. In early January 2019, the ECB put Banca 
Carige  under  temporary  administration,  following 
the  rejection  by  a  shareholders'  meeting  of  a 
capital  increase  of  EUR  400  million  and  the 
subsequent resignation of the majority of the board 
members. (32)  Subsequently, 
the  government 
notified  aid  in  the  form  of  a  State  guarantee  on 
newly-issued  liabilities  and  emergency  liquidity 
assistance,  which  the  Commission  authorised. 
Second-tier  banks  have  been  very  active  on  the 
secondary  market  for  distressed  assets  and  have 
improved their arrears management capacities, also 
due  to  supervisory  pressure.  The  ongoing  balance 
sheet repair  will prepare the  second-tier banks  for 
the new NPL calendar provisioning rules. Despite 
progress with balance sheet de-risking, these banks 
still  have  above-system  average  NPL  ratios  and 
need  further  efforts  to  strengthen  their  capital 
buffers  and  resilience  to  shocks,  including  from 
higher  sovereign  spreads.  In  addition,  whereas 
their  liquidity  position  has  remained  adequate, 
ECB funding constitutes a significant contribution 
to  the  total  funding  of  these  banks,  as  it  exceeds 
10%  of  their  total  assets.  Most  of  these  banks 
though  have  only  a 
track-record  of 
accessing  wholesale  markets,  which  could  make 
funding  after  the  phasing  out  of  the  targeted 
longer-term refinancing operations more expensive 
and difficult. 

limited 

(32)  In  November  2018,  Banca  Carige  benefitted  from  the 
support  of  the  voluntary  scheme  of  the  interbank  deposit 
guarantee  fund,  which  invested  EUR  320  million  into 
subordinated convertible bonds. 

4.2. Financial sector 

Corporate  governance  and 
reforms*  

insolvency 

The  final  part  of  the  2015  reform  of  the  large 
cooperative banks has been recently suspended. 
All large cooperative banks (banche popolari) with 
assets  above  EUR  8  billion  have  already 
transformed themselves into joint-stock companies 
by  the  end-2016  deadline,  with  the  exception  of 
Banca  Popolare  di  Bari  and  Banca  Popolare  di 
Sondrio. Some provisions of the 2015 reform were 
subject  to  a  Constitutional  Court  challenge  with 
the implementation of the reform being suspended 
in  the  meantime.  The  March  2018  ruling  of  the 
Constitutional Court confirmed that the reform did 
not 
constitutional  provisions. 
However,  the  full  implementation  of  the  reform 
was  postponed  again  in  July  2018  until  end-year 
(Mille-Proroghe decree law). Importantly, a recent 
decision  of  the  Italian  State  Council  referred 
several questions related to this reform to the Court 
of Justice of the European Union while suspending 
in  the  meantime  the  transformation  of  Banca 
Popolare  di  Bari  and  Banco  Popolare  di  Sondrio 
into  joint  stock  companies,  with  the  government 
intending  to  delay  the  completion  of  the  reform 
until end-2019. 

infringe 

any 

The  almost  completed  reform  of  small  mutual 
banks  was  recently  further amended.  The  2016 
reform  of  small  mutual  banks  (banche  di  credito 
cooperativo)  was  not  completed  by  July  2018  (as 
originally planned), but was subject to a 3 months 
delay. In December 2018, the Parliament approved 
an  amendment  to  the  Decree  119/2018  (Fiscal 
Decree),  which  allows  the  small  mutual  banks 
operating  in  the  Bolzano  and  Trento  provinces  to 
participate  in  institutional  protection  schemes,  as 
an  alternative  to  setting  up  a  cooperative  banking 
group.  In  the  view  of  the  authorities,  this  would 
reinforce  the  cooperative  features  of  the  small 
links. 
mutual  banks  and  maintain 
Following these amendments, the reform will lead 
to the emergence of only two groups with national 
coverage,  ICCREA  and  Cassa  Centrale  Banca, 
to  a  comprehensive 
which  will  be  subject 
assessment  by  the  Single  Supervisory  Mechanism 
in 2019.   

regional 

The  Government  plans  to  complete  the  reform 
of the insolvency framework in the near future. 
the  parliament  passed  an 
In  October  2017, 
framework, 
the 
law  of 
enabling 

insolvency 

35 

 
                                                           
 
4.2. Financial sector 

in  recent  years,  it  is  still  small  relative  to  bank 
credit  to  firms  (around  EUR  700  billion  in 
September  2018).  Section  4.4.1  provides  further 
details  on  the  relationship  between  access  to 
finance and investment. 

Both demand and supply factors help to explain 
the  low  reliance  on  market-based  financing. 
Demand  factors  include  information  asymmetries 
such  as  SMEs  with  often  a  low  level  of  financial 
education  (e.g.  EIB,  2018),  fear  of  losing  control, 
or  issuance  costs  and  burdensome  administrative 
requirements.  Supply  factors  also  play  a  role,  as 
(innovative) SMEs tend to be smaller or riskier and 
often lack collateral when accessing credit markets 
(see e.g. Thum-Thysen et al., 2017, EIB, 2018). In 
addition,  institutional investors, especially pension 
funds,  but  also  insurance  undertakings,  tend  to 
have  low  expertise  in  evaluating  riskier  firms  (or 
those 
their  early  stages)  or  have  future 
commitments  to  their  clients  (for  instance,  on 
guaranteed products and their rates of return).  

in 

Several policy measures adopted in recent years 
are  slowly  bearing  fruits.  The  SME  Guarantee 
Fund,  by  facilitating  SME  access  to  credit,  has 
overall guaranteed EUR 49 billion of loans during 
2015-17.  Related, 
the  National  Promotional 
Institute  Cassa  Depositi  e  Prestiti,  through  its 
diverse set of instruments, including securitisation 
of  loans,  has  supported  access  to  SME  credit  for 
EUR 7 billion during 2015-17. In terms of access 
to market financing, Minibonds (issued by unlisted 
companies)  have  been  successful  in  raising  EUR 
15.6  billion  for  200  companies  during  January 
2012  -  April  2018.  Meanwhile,  the  alternative 
investment  market,  simplifying  the  Initial  Public 
Offering process for SMEs, has garnered a market 
capitalisation  of  around  EUR  7 billion  by  end-
2017.  Furthermore,  long-term  individual  savings 
plans,  introduced  in  2016  to  encourage  SME 
investments,  have  raised  EUR  16  billion  by  June 
2018,  although  SMEs 
the  Milano 
benchmark  stock  market  index  account  only  for 
40 %  of  total  funds.  The  allowance  for  corporate 
equity  has  been  abolished  as  part  of  the  2019 
budget  (see  section  4.1).  Private  equity,  including 
venture  capital,  plays  only  a  marginal  role  The 
2019  budget  law  introduced  a  fund  for  venture 
capital.  

listed  on 

to  overhaul 

the  government 

authorising 
its 
bankruptcy  legislation  which  dates  back  to  1942. 
The  reform,  inter  alia,  promotes  out-of-court 
agreements  between  debtors  and  creditors, 
simplifies bankruptcy procedures and introduces a 
pre-emptive mechanism for corporate insolvencies. 
A  legislative  decree  to  adopt  the  insolvency  code 
has  been  recently  approved  by  the  Council  of 
Ministers. A timely implementation of the decrees 
is important to accelerate the slow judiciary system 
for 
collateral 
procedures 
enforcement  and  to  further  boost  the  resilience  of 
the banking sector. 

foreclosure 

and 

Measures  to  accelerate  out-of-court  collateral 
enforcement  have  not  progressed  so  far.  The 
Patto  Marciano,  which  is  a  private  enforcement 
clause in credit agreements (adopted in 2016), has 
not  been  de  facto  used  so  far  by  banks  neither  in 
loan contracts with firms nor with households. The 
application  of  the  Patto  Marciano  with  firms  has 
in  a 
been  further  facilitated  and  promoted 
Memorandum  of  Understanding  between 
the 
Italian  Banking  Association    and  Confindustria  in 
February 2018. It will be important to monitor the 
impact  of  this  memorandum  in  practice  and 
remove  any  remaining  legal  uncertainty  and  take 
appropriate corrective action, where needed. 

Access to finance*  

to 

the  back  of  declining 

finance  remains  a  barrier 

Access 
to 
investment  in  Italy.  Firms’  financing  in  Italy 
remains  predominantly  bank-based,  while 
the 
capital market is still underdeveloped if compared 
to  EU  peers.  The  large  share  of  NPLs  (although 
significantly  decreasing)  and  the  traditional  over-
reliance of Italian firms on bank credit represented 
a  drag  on  investment  during  the  crisis.  Though 
access to bank credit has improved in recent years 
on 
interest  rates  and 
improved  credit  conditions,  it  remains  subdued 
amid  downside  risks  (see  Section  1).  At  the  same 
time, since the financial crisis, firms have reduced 
leverage,  boosted  equity  and 
self-financing 
capacity, lowering overall credit demand. Having a 
more  diversified  financial  system  with  deep  and 
developed  capital  markets,  an  objective  of  the 
capital  markets  union,  would  complement  bank 
financing  and  make  Italy's  financial  system  more 
resilient to  shocks, especially in periods  when the 
credit  channel  becomes  impaired.  Overall,  while 
non-bank financing has been substantially boosted 

36 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET* 

Employment growth has been associated with a 
rising  labour  force.  Past  reforms  that  raised  the 
effective  retirement  age  increased  labour  supply, 
which  was  partly  dampened  by  a  shrinking 
working-age  population 
(Graph 4.3.1). Activity 
rates  have  also  been  supported  by  rising  labour 
demand  due  to  the  cyclical  upswing,  in  particular 
following  fiscal  incentives  for  hiring  and  reforms 
that  eased  labour  market  regulations.  The  labour 
force  increased  by  almost  one  million  persons 
between  2008  and  2017,  reflecting  in  particular 
higher  participation  rates  of  older  workers  and 
women. Notwithstanding recent improvements, the 
employment  rate  gap  of  the  South  to  the  national 
average  was  14 pps.  in  Q3 2018. (33)  Inactivity 
remains  pervasive  among  women,  the  low-skilled 
and  the  young. (34)  As  a  result  of  more  people 
entering the labour market, the unemployment rate 
has  fallen  only  slowly  from  its  peak  of  12.8 %  in 
Q4 2014 to 10.3 % in Q3 2018. 

Graph 4.3.1:  Composition of the change of employment 

have  become  the  only  driver  of  jobs  growth. 
Between  Q3 2017  and  Q3 2018, 
temporary 
contracts  grew  by  11.6 %,  while  permanent  jobs 
declined  by  1.0 %.  The  median  duration  of 
temporary contracts is less than 12 months and the 
probability  of  a  transition  to  a  permanent  post 
dropped  substantially  in  2017  after  the  end  of  the 
hiring  incentives  (Graph 4.3.2).  Since  2008,  the 
share  of  temporary  employees  (as  percentage  of 
the  total  number  of  employees,  20-64  years)  has 
risen to 15.1 % in 2017, only briefly interrupted by 
the recession in 2012 and the hiring incentives for 
permanent  jobs  provided  as  part  of  the  Jobs  Act 
reform.  The  rise  in  temporary  contracts  and  the 
associated  higher  job  turnover  reduces  firms' 
incentive  to invest in job specific training and the 
for  workers'  specialisation.  Moreover, 
scope 
involuntary  part-time  remains  widespread  and 
around one  third of involuntary part-timers are on 
a temporary contract.   

Graph 4.3.2:  Transition rates of temporary employees 

Source: Eurostat. 

(1) The participation rate is defined as labour force divided 
by working age population (20-64 years). 
Source: Eurostat. 

Since 2017, employment growth has been based 
on  temporary  contracts.  After  the  expiry  of  the 
hiring incentives at end-2016, temporary contracts 

(33)  Activity  rates  (age  group  15-64)  range  from  75.3% in  the 

Province of Bolzano to 52.0% in Sicily (Q1 2018). 

(34)  Boeri  at  al.  (2016)  find  evidence  that  the  unanticipated 
increase of the retirement age at the end of 2011 (Fornero 
reform) has temporarily curbed youth hirings due to a lock-
in effect of older workers.  

In  recent  years,  jobs  growth  appears  to  have 
become more responsive to output growth. This 
may be the result of recent labour market reforms, 
accompanied  by  generous  fiscal  incentives  (Gorg 
et  al,  2018)  Employment  is  set  to  rise,  once 
economic  growth  exceeds  productivity  growth. 
However,  the  employment  rate  at  63.1 %  in 
Q3 2018  remains  substantially  below  the  EU 
average 
further 
improvements  largely  depend  on  the  reduction  of 
(structural) unemployment and rising activity rates. 
However,  structural  unemployment,  measured  by 

(73.2 %).  Looking 

ahead, 

37 

-3.0-2.0-1.00.01.02.03.01011121314151617Percentage pointsChange in working-age populationChange in participation rateChange in employment-to-labour force ratioResidualChange in employment (yoy % chg)02468101214160510152025303540060708091011121314151617PercentPercentTransition to permanent jobTransition to unemploymentShare of temporary employees (rhs) 
 
 
 
                                                           
 
 
the  non-accelerating  wage  rate  of  unemployment, 
is  projected  to  remain  high,  due  to  the  prevailing 
mismatch between average workers' skills and the 
skills demanded by employers. The skill mismatch 
is  exacerbated  by  the  high  youth  unemployment, 
among  the  highest  in  the  EU,  which  has  a  long-
term  negative  impact  on  skills  formation  and 
future employability of young people. 

tends 

The  gender  employment  gap  in  Italy  remains 
one  of  the  highest  in  the  EU.  The  employment 
rate  of  women  (20-64)  was  substantially  lower 
than  the  EU  average  (52.5 %  against  66.4 %)  in 
2017. A high tax wedge for second earners reduces 
the financial incentive for women to take up work 
(the  marginal  tax  rate  for  a  second  earner  earning 
two  thirds  of  the  average  wage  is  at  29.5 %  in 
2016).  In  addition,  the  lack  of  adequate  measures 
to  reconcile  professional  and  private  life  such  as 
care  facilities 
to  hamper  employment, 
especially  for  women  with  dependent  children  or 
other  family  members  in  need  of  care.  Only 
28.6 %  of  children  under  three  years  of  age  is  in 
formal  early  childhood  education,  well  below  the 
EU  average.  This  situation  is  exacerbated  by  an 
inadequate system of parental leave. For example, 
parents  on  parental  leave  are  only  paid  30 %  of 
their  salary.  However,  the  government  extended 
the  compulsory  paternity  leave  from  4  to  5  days, 
increased the voucher amount for public childcare 
facilities  and  introduced  priority  to  requests  for 
flexible  working  hours  by  women  and  workers 
with  children with disabilities. 

The  employment  rate  for  non-EU  born  is 
around  the  EU  average.  The  employment  gap 
with  respect  to  natives  is  very  small.  However, 
highly  educated  migrants  are  less  likely  to  be 
employed  than  Italian  peers  (the  employment  rate 
is  17.6 pps  lower)  and  almost  three  quarters  of 
non-EU  nationals  (but  less  than  20 %  of  Italians) 
are formally overqualified for their job. 

The government  tightened labour  market rules 
to curb the use of temporary contracts. The Law 
96/2018  ("Decreto  Dignità"),  adopted  in  August 
2018,  has  introduced  regulatory  changes  in  the 
Jobs Act. The law reduces the  maximum duration 
of  temporary  contracts  from  36  months  to  24 
months  and  requires  employers  to  provide  formal 

4.3. Labour market, education and social policies 

reasons to extend contracts beyond 12 months. (35) 
Otherwise, the contract is automatically converted 
into  an  open-ended  one. (36)  The  new  rules  apply 
both to fixed-term and agency-work contracts. (37) 
The  law  also  increases  workers'  compensation  in 
case  of  unfair  dismissals 
for  open-ended 
contracts. (38)  For  the  period  2019-20,  existing 
incentives for hiring people under 30 are extended 
to  persons  aged  35  or  less.  Furthermore,  on 
September 
the  Constitutional  Court 
abrogated  any  automatic  link  between  the  job 
tenure  and  the  indemnity  for  unfair  dismissal, 
giving more leeway to the assessment by judges. 

2018 

Collective  bargaining  at  firm  or  local  level 
continues to play only a limited role. This is also 
due to the prevalence of small firms in Italy. In the 
period 2010-2016, the share of firms (with at least 
20  employees)  that  adopted  firm-level  bargaining 
was stable at around 20 %. Incentives provided in 
the 2017 and 2018 Budget Laws were estimated to 
have a very small impact on net labour income and 
may  be  regressive  in  nature  (Sestito,  2017).  A 
stronger framework for collective bargaining at the 
firm  or  local  level  could  support  the  efficient 
allocation  of  resources  within  and  across  firms, 
strengthen  the  link  between  wages  and  local 
economic conditions, and facilitate the adoption of 
innovative  work  practices  at  firm  level  (e.g. 
flexible  working-time  arrangements  to  support 
work-life balance or vocational training). 

In  February  2018,  the  main  social  partners 
signed  a  new  framework  agreement.  This  so-
called Patto per la Fabbrica is intended to reform 
the  collective  bargaining  framework,  in  particular 
by better measuring representativeness, also on the 
avoid  uncoordinated 
employers' 
decentralisation. (39) Over  the  last  years,  a  rising 

side, 

and 

(35)  For example, significant and unexpected demand increases 

or seasonal peaks. 

(36)  Additional  provisions  include  the  reduction  of  contract 
extensions from 5 to 4, the increase of the additional social 
security contribution paid by employers for the renewal of 
temporary  contracts  from  1.4%  to  1.9%,  and  the  re-
reintroduction of voucher-based work in the agriculture and 
tourism sectors. 

(37)  The  latter  are  now  considered  in  the  quota  of  employees 
under temporary contracts per firm, while the threshold has 
been increased from 20% to 30% of total employees. 
(38)  The  law  raises  the  maximum  indemnity  in  case  of  unfair 

dismissal from 24 to 36 monthly salaries. 

(39)  Agreements  on  rules  and  criteria  to  measure  trade  union 
representativeness, a prerequisite for fostering second-level 
bargaining,  have  been  signed  in  recent  years,  but  are  not 

38 

 
                                                           
4.3. Labour market, education and social policies 

territory.  From  a 

migrants. (41)  With 
the  establishment  of  an 
institutional  group  in  October  2018,  the  actions 
against  this  phenomenon  were  extended  to  the 
regional 
entire  national 
perspective, the Agency imposed most of the fines 
in  Campania,  Puglia  and  Lazio.  Exchanging  data 
between  different  agencies (42)  and  investment  in 
the  overall 
human  resources  would 
performance of the new Agency. The 2019 budget 
law  envisages  a  recruitment  plan  of  almost  1 000 
inspectors for 2019-2021. 

improve 

and 

new 

to 
and 

steps 
services 

The implementation of reforms of active labour 
is  proceeding  only  slowly. 
market  policies 
public 
strengthen 
Despite 
employment 
regional 
reduce 
disparities, active labour market policies are barely 
integrated  and  coordinated  with  related  policies 
(e.g.  social  protection,  social  services,  adult 
learning, 
training).  Major 
competences  lie  with  regional  authorities,  which 
received new resources in 2018 to reinforce public 
employment services. However, the recruitment of 
new  staff  has  not  yet  started.  A 
further 
comprehensive  reform  of  the  system  is  also 
envisaged  to  implement  the  activation  component 
of 
income  scheme,  with  a 
maximum of EUR 1 billion for each year in 2019 
and 2020 allocated by the 2019 Budget Law.  

the  citizenship 

vocational 

Investment  in  staff  is  crucial  to  improve  the 
quality  of  the  public  employment  services. 
Monitoring  indicators  and  minimum  standards 
were set at the national level by Decree in January 
2018,  but  strengthening  coordination  between  the 
national  agency  (ANPAL)  and  regions  remains  a 
major  challenge.  Following  the  2019  budget  law 
and  the  Decree  on  the  Citizen  Income,  public 
employment  services  are  being  linked  through  a 
newly developed national IT system. Beneficiaries 
of the citizenship income scheme will be supported 
staff 
in 
(“navigator”).  Beneficiaries  will  also  receive  the 
re-placement  voucher,  with  the  aim  of  increasing 
its  take  up  that  has  been  very  limited  so  far.  The 

search  by 

specialised 

their 

job 

number of firms and workers have signed contracts 
with  recently  formed  associations.  In  June  2018, 
there  were  871 registered contracts  – representing 
an  increase  of  50 %  since  2013  –  of  which  more 
than 500 are  considered  “irregular” (i.e. including 
economic  and  working  conditions  below 
the 
standards  set  by  the  most  common  contracts). 
According  to  recent  estimates  in  the  services 
sector, 
those  minor  contracts  entail  a  wage 
"penalty"  compared  to  the  most  common  wage 
contracts  between  8 %  and  20 %  (D'Amuri  and 
Nizzi, 
for 
representativeness  still  need  to  be  defined  and 
might  require  legislative  action.  The  agreement 
importance  of  developing 
also  stresses 
collective 
issues 
non-wage 
(including  welfare  benefits,  training  and  skills, 
occupational  safety,  workers` 
in 
firms'  management). (40)  The  new  framework 
agreement offers the possibility to deviate from the 
national or sectorial agreement only to the upside.  

the 
bargaining 

2017).  However, 

involvement 

criteria 

the 

on 

to 

avoid 

overlaps 

Undeclared  work  remains  widespread  in  Italy. 
According  to  ISTAT  estimates,  the  unobserved 
economy  was  worth  about  EUR  210  billion 
(12.4 %  of  GDP)  in  2016.  Around  37.2 %  of  it  is 
attributable  to  undeclared  work.  The  estimated 
share  of  undeclared  work  (as  the  percentage  of 
total  labour  input)  was  15.6 %  in  2016.  This 
mainly  involves  more  vulnerable  groups  such  as 
migrants,  women  and  minors.  The  National 
Inspectorate  Agency,  operational  since  2017  and 
increase 
created 
effectiveness,  registered  an  increase  of  36 %  in 
undeclared  work  in  2017  (253 000,  up  from  187 
000).  Housing  and  food  services,  construction, 
commerce 
are  particularly 
agriculture 
affected.   In  line  with  the  previous  year,  almost 
65 %  of  the  inspected  firms  were  found  to  be 
involved  in  irregular  employment  practices.  The 
inspected  firms  were  selected  among  those  with 
the  highest  risk  of  irregularity.  The  Agency 
focused  particularly  on 
the  phenomenon  of 
"caporalato" in the agriculture sector, characterised 
by a high incidence of irregularity and by a risk of 
irregular 
labour  exploitation,  especially 

and 

and 

for 

operational  yet.  For  more  information,  see  European 
Commission (2018b).  

(40)  The  notion  of  "second-level  agreement" 

to 
agreements signed either at firm- or territorial level (i.e., by 
a  firms  located  in  the  same  territory)  hierarchically 
subordinated  to  a  certain  nationwide  sectoral  agreement 
(which represents the "first level" of bargaining). 

refers 

(41)  According to INPS data, in the agriculture sector one third 
of  workers  hired  in  2016  were  immigrants  and  70%  of 
them  were  employed  less  than  51  working  days  (the 
minimum  number  to  claim  access  to  social  security 
benefits). 

(42)  INPS,  INAIL  -  Istituto  Nazionale  per  l'Assicurazione 
contro  gli  Infortuni  sul  Lavoro  e  le  malattie  professionali, 
and Ministry of Labour. 

39 

 
                                                                                   
                                                           
4.3. Labour market, education and social policies 

information  provided  to  nonregistered  people  has 
been  improved,  as  well  as  the  on-line  registration 
of  jobseekers  and  the  set-up  of  single  points  of 
contact  for  the  long-term  unemployed.  For  the 
latter, a  national strategy for their integration into 
the  labour  market  has  been  adopted  in  December 
2018.  Further  efforts  are    needed  to  improve  the 
case  management  and  the  provision  of  individual 
assessment  plans  based  on  effective  cooperation 
among  relevant  services  (including  social,  health 
and  training).  The  development  of  a  qualitative 
profiling tool, which will complement the existing 
statistical profiling methodology, is a good step in 
this  direction.  Unioncamere  plans  to  conduct 
surveys  and  share  the  results  with  ANPAL,  to 
provide  users  and  operators  with  information  on 
the  forecast  of  companies’  vacancies  and  training 
needs.  But 
the  envisaged  cooperation  with 
employers has not yet started. 

The  Youth  Guarantee  scheme  is  supporting  an 
increasing  number  of  young  people.  Since  its 
launch  in  2014,  1.4  million  young  people  have 
registered,  out  of  which  53%  have  received 
support  through  activation  measures.  However, 
large  discrepancies  persist  across  regions,  with 
45 %  of  the  young  covered  by  the  scheme  in  the 
South  compared  to  71.1 %  in  the  North-West. 
Traineeships are by far the most common provided 
measure.  Their  potential  substitution  effects  and 
their impact on labour market segmentation should 
be  further  monitored.  The  share  of  young  people 
neither  in  employment,  education  or  training 
covered  is  still  low  (14.1 %),  but  new  outreach 
measures  are  being  rolled  out,  including  a  better 
linkage  with  social  assistance  beneficiaries,  e.g. 
people with disabilities. The share of young people 
in the programme who have not received any offer 
for more than 4 months remains high (83 %). The 
European Social Fund supports the roll-out of new 
measures  addressed  to  young  people,  with  a 
particular emphasis on southern regions. (43) 

4.3.2.  EDUCATION AND SKILLS* 

Investment  in  education  and  skills  formation 
are  crucial  to  promote  a  smart,  inclusive  and 

(43)  Axis  1bis  of  the  National  Operational  Programme  for  the 
implementation of the Youth Employment Initiative (YEI) 
in  Italy  is  only  funded  with  ESF  resources  and  it  is 
addressed  to  young  people  other  than  NEETs  in  less 
developed and in transition regions. 

sustainable  growth.  Italy's  sluggish  productivity 
trend  is  partly  due  to  the  ineffective  skills' 
formation system and the related weak demand for 
high  skills.  The  early  school  leaving  rate  remains 
above  EU  average  (14 %  vs  10.6 %  in  2017). 
Despite some timid improvements, Italian students 
and adults are still amongst the worst performer in 
the  EU  in  key  competences  and  basic  skills  (see 
European  Commission  2018b).  Italy  has  also  one 
of  the  lowest  tertiary  educational  attainment  rates 
for  30- 
the  EU  (26.9 % 
compared  to  39.9 %  EU  average  in  2017).  This 
couples with one of the lowest general government 
expenditure  in  the  EU  as  a  proportion  of  GDP 
(3.9 % for Italy and 4.7 % for the EU in 2016). 

to  34-year-olds 

in 

Primary and secondary education 

Despite  recent  improvements  in  the  quality  of 
schooling,  wide  and  persisting  regional  gaps  in 
learning  outcomes  remain  a  major  concern. 
According to 2018 national test results, the number 
of  low  achievers  is  significantly  higher  in  the 
South than the North (in grade 8: 45 % vs 28 % in 
Italian,  67 %  vs  27-30 %  in  English,  54-56 %  vs 
28-32 % in mathematics). Especially in the South, 
the  significant  differences  in  results  between  and 
within  schools  may  indicate  a  tendency  to  group 
students  according  to  their  ability.  The  South  and 
the  Islands  register  also  the  highest  early  school 
leaving  rates  (17.3 %  and  21 %  respectively, 
compared  to  a  national  data:  14 %  and  the  EU 
average: 10.6 %). The early school leaving rate for 
people  with  disabilities  is  higher  than  the  EU 
average (30.2 % vs 23.6 %). 

The  educational  attainment  of  non-Italian 
lags  significantly  behind  that  of 
students’ 
Italians.  Non-Italian  students  made  up  9.4 %  of 
the  school  population  in  the  school  year  2016/17. 
The  majority (61 %)  was born in Italy. Compared 
to  Italian  students,  foreign  students  are  at  higher 
risk of grade repetition (31.3 % vs 10 %) and early 
school leaving (30.1 % vs 12 %). They also show 
lower  enrolment  rates  of  boys  compared  to  girls, 
especially after grade 10 (MIUR 2018). So far, no 
policy  action  has  been  adopted  or  discussed  to 
reduce  differences  of  attainment  with  Italian 
students. 

Attracting, effectively recruiting and motivating 
teachers is  key but  challenging. While the share 
of  funding  allocated  to  primary  and  secondary 

40 

 
                                                           
education  is  broadly  in  line  with  the  EU  average, 
learning outcomes could be negatively affected by 
the  management  of  teachers  and  their  working 
conditions.  Italian  teachers’  salaries  remain  low 
compared to international standards and relative to 
tertiary-educated  workers.  Salary  progressions  are 
also  significantly  slower  than  international  peers 
(maximum salary achieved after 35 years in Italy, 
with  25  years  being  the  OECD  average).  This 
combines with limited career prospects, based on a 
single career pathway, and is exclusively based on 
seniority  rather  than  merit  (Graph  4.3.3).  In 
addition, surveys show that both the general public 
and teachers themselves have a low opinion of the 
status  of  the  teaching  profession. (44)  The  new 
government 
the 
recruitment and training system introduced by the 
(European  Commission 
2015  school 
reform 
2017a).  The  new  system  would 
to 
knowledge-based  open  competitions,  with  the 
training component reduced from three to one-year 
on-the-job  training.  This  might  pose  additional 
challenges  in  selecting  motivated  and  skilled 
teachers.  The  backtracking  of  the  reform  would 
also  limit  the  possibility  for  school  principals  to 
reward  teachers  based  on  merit.  The  dedicated 
fund (Fondo per la valorizzazione del merito) will 
be  merged  into  a  single  fund  (Fondo  per  il 
to  be 
miglioramento  dell’offerta 
disbursed  uniformly  through  negotiations  with 
trade union.  

revision  of 

announced 

formativa) 

return 

a 

is 

apprenticeship 

system 
the 

Following  reforms  adopted  over  recent  years, 
the 
gaining 
momentum.  However, 
recently  adopted 
system  of  work-based  learning  was  significantly 
scaled  down,  both  in  terms  of  mandatory  number 
of hours and of funding (cut by almost 60 %). The 
employability  of  recent  Vocational  Educational 
Training graduates is slowly increasing, to 50.8 % 
in  2017  (below  the  EU  average  of  76.6 %). 
Employers'  involvement  in  work-based  learning 
has  been 
agreements 
between  public  authorities  and  businesses  and 
fiscal incentives. Social Partners remain important 
in 
shaping  occupational  apprenticeships 
for 
manufacturing  by  collectively  agreeing  on  the 
definition of occupational profiles.  

strengthened 

through 

(44)  OECD  2014  -  TALIS  2013  Results:  An  International 
Perspective  on  Teaching  and  Learning,  Paris:  OECD 
Publishing 

4.3. Labour market, education and social policies 

Graph 4.3.3:  Motivating Teachers - salary and career 
progression indicators, 2017 

Source: Education at a Glance 2018, OECD 

Tertiary education 

Tertiary  educational  attainment  rates  remain 
low and the educational outcomes are poor. The 
share of university graduates is slowly but steadily 
increasing,  a  trend  confirmed  by  the  increase  of 
4.3 %  in  enrolments  in  2017.  Tertiary  educational 
attainment  of  people  with  disabilities  is  also  very 
low  (23 %  vs.  the  EU  average  of  30.3 %). 
Moreover,  even  when  graduated,  adults  have 
among  the  lowest  average  literacy  and  numeracy 
scores compared  with peer countries (ranking 26th 
out  of  29  countries  in  both  dimensions) (OECD, 
2016).  As  a  consequence  skills  shortage  and 
mismatches are pervasive. The employment rate of 
recent  graduates  is  increasing  but  remains  well 
below the EU average (in 2017, 54.5 % compared 
to the EU average of 81.5 % for the age group 25-
29).  The  low  demand  for  tertiary  graduates  from 
the  productive 
to  poor 
employment  prospects,  as  companies  tend  to 
previous  work 
privilege 
the  wage 
experience.  Moreover,  on  average, 
premium  for  graduated  students  is  lower  than  in 
peer  countries  (41.2 %  in  Italy  vs  66.3 %  in 
Germany  and  54.4 %  in  France). (45)  This  might 
suggest  a  low  return  on  education  and  may 
discourage tertiary educational attainment.  

sector  contributes 

candidates  with 

(45)  Almalaurea 2018 and OECD data 

41 

0%20%40%60%80%100%120%€0€10,000€20,000€30,000€40,000€50,000€60,000€70,000€80,000€90,000Teachers' salaries relative to tertiary-educated workers (%) (rhs)Starting salarySalary after 15 years of experienceSalary at top of scale 
                                                           
 
                                                           
4.3. Labour market, education and social policies 

education  pathways  (Lauree  Professionalizzanti) 
have been introduced alongside the ITS. 

Adult learning and digital skills 

Adult  participation  in  learning  is  very  limited. 
In  2017  the  participation  rate  in  any  form  of 
training  for  both  adults  and  low-skilled  adults 
decreased  compared  to  2016,  respectively  from 
8.3 % to 7.9 % and from 2.3 % to 2 % (Eurostat). 
The  employment  gap  between  high-  and  low-
skilled  is  among  the  highest  in  the  EU  and 
employment prospects for low-skilled workers are 
deteriorating  further.  Upskilling  is  particularly 
needed  for  digital  skills:  only  44 %  of  the  Italian 
population possessed at least basic digital skills in 
2016  (56 %  in  the  EU).  The  role  of  firms  in 
increasing training participation and digital skills is 
pivotal  but  still  limited.  The  social  partners' 
agreement of March 2018 may contribute to tackle 
this challenge. 

Measures  to  boost  adult  learning  and  digital 
skills are discontinuous and not comprehensive. 
There  are  currently  19  joint  inter-professional 
funds  to  support  the  development  of  continuous 
training.  The  2019  Budget  Law  extended  the  tax 
credit introduced in 2017 for  companies investing 
in  training. (46)  The  ‘Percorsi  di  Garanzia  delle 
Competenze’  (Skills  Guarantee  pathways)  for  low 
skilled  adults  need  enhanced  capacity  building, 
particularly in guidance and validation, to increase 
low-skilled  adults  take  up.  On  digital  skills,  the 
National  Plan  for  Digital  Education  was  launched 
in  2015  with  modest  results. (47)  However,  these 
measures  do  not  target  categories  at  risk  of  social 
exclusion such as elderly and inactive people. 

4.3.3.  SOCIAL POLICIES AND DEMOGRAPHY 

Poverty  risk  and  income  inequality  remain 
high.  In  2017,  the  share  of  people  at  risk  of 
poverty  or  social  exclusion  (AROPE)  declined  to 
28.9 % from 30.0 % in 2016. However, it remains 
well above both pre-crisis levels (25.5 % in 2008) 

(46)  This amounts between 30 % and 50 % (depending on firms' 
size)  of  the  cost  of  employees  for  the  period  of  training 
activities.  Eligible  training  activities  are  those  targeted  in 
the Impresa 4.0 Plan. 

(47)  Only 20 % of teachers has ever followed training on digital 
literacy  and  still  24 %  of  schools  have  not  started  yet  any 
coding courses. 

Despite  better  employability  rates,  the  non-
academic  tertiary  education  remains  limited  in 
scope.  The  Employment  rate  of  graduates  from 
tertiary  vocational  education  institutes  (Istituti 
Tecnici  Superiori)  is  above  80 %  (INDIRE  2018) 
after one year. However, they account for less than 
1 %  of  all  students  in  tertiary  education  (OECD 
(OECD  2017b)  and  are 
average  of  18 % 
concentrated  in  the  most  industrialised  regions  of 
Italy.  Moreover,  according  to  INDIRE  2018, 
female participation is very low (under 25 %).  

The  higher  education  system  is  under-financed 
and  under-staffed,  especially 
in  Southern 
regions.  Total  funding  for  higher  education 
remains one of the lowest in the EU at just 0.3 % 
of  GDP  in  2016  (EU  average  0.7 %).  It  was 
increased by 5 % in 2018 (from EUR 6.981 billion 
in  2017  to  EUR  7.327 billion  in  2018).  However, 
most  of  the  increase  was  devoted  to  specific 
initiatives  (e.g.  “excellent  departments”).  The 
proportion  of  performance-related  funding  (quota 
premiale) rose to 24 % of available resources, but 
it was compensated by a decrease in the allocations 
based  on  standard  costs  (22 %),  while  the  fund 
designed  to  compensate  universities  with  fewer 
resources  remained  unchanged  at  2 %.    Overall, 
the average amount of resources at the disposal of 
universities remained substantially  unchanged and 
subdued.  Consequently,  the  financial  burden  on 
students  and 
increased. 
Enrolment  in  university  remains  relatively  low. 
Tuition  fees  have  steadily  increased  and  are  now 
among  the  highest  in  the  EU  (OECD,  2017c), 
while  student  support  has  remained  limited  (only 
11.6  %  of  students  received  grants  in  2017). 
Limited  funding  also  impacts  directly  on  the 
quality and quantity of the faculties. 

families  has 

their 

limited 

are 
recruitment 

and 
Funding  measures 
discontinuous.  Special 
initiatives 
(“cattedre Natta”) and dedicated funds (“Fondo di 
finanziamento attività base di ricerca”) have been 
abolished  or  discontinuously  activated.  However, 
the  2019  budget  law  provides  funding  for  1 600 
additional  tenure  tracks  for  assistant  professors 
(ricercatore  a  tempo  determinato  di  tipo  B)  and 
900  medical  specialisation  places.  Moreover,  the 
Impresa  4.0  plan  includes  the  objective  of  the 
tertiary  vocational  education 
strengthening  of 
institutes (ITS), but results are still to come. As of 
2018,  new  university-track  tertiary  professional 

42 

 
                                                           
4.3. Labour market, education and social policies 

to  facilitate  early  retirement  for  some  worker 
categories 
(Anticipo 
through  so-called  APE 
finanziario  a  garanzia  pensionistica)  and  raising 
lower  pension  incomes  (European  Commission 
2018c). 

Graph 4.3.4:  Percentage at risk of poverty or social 

exclusion by NUTS 2 Region (2017) 

Source: Eurostat. 

Despite improvements in the labour market, in-
work  poverty  is  rising.  In  2017,  the  number  of 
employed persons facing the risk of poverty rose to 
the  working  poor  on 
12.2 %. The  share  of 
temporary  contracts 
relatively  high  and 
is 
increasing  (22.5%  against  EU  average  of  16.3%). 
Moreover, the rate of in-work poverty for non-EU 
born workers is extremely high (32 % in 2017). 

Access  to  social  protection  for  self-employed 
workers  is  limited.  Italy  has  the  second  highest 
rate of self-employment in the EU (20.8 % in 2017 
against  13.7 %  EU  average).  Yet,  self-employed 
are not formally entitled to unemployment benefits 
and  in  some  cases  are  not  formally  coverage  by 
sickness  benefits.  Overall,  the  self-employed  are 
generally  less  protected  against  social  risks  than 
employees.  Moreover,  self-employed  cannot  opt 
for voluntary schemes for unemployment benefits. 
Additionally,  a  regulatory  framework  for  working 
conditions  and  social  protection  for  platform 
workers is still missing. (50) 

(50)  Platform  work 

in  which 
is  an  employment 
organisations  or  individuals  use  an  online  platform  to 
provide specific services in exchange for payment. 

form 

and the EU average (22.4 %). Children, especially 
with a migrant background, are particularly at risk 
of  poverty  or  social  exclusion  (32.1 %  in  2017 
down from 33.2 % in 2016). Moreover, poverty in 
urban  areas  is  increasing.  Income  inequality  in 
Italy  is  above  the  EU  average  (see  section  1). (48) 
While  the Italian income tax  system  is among the 
most progressive in the EU, the redistributive role 
of  social  transfers  is  weak.  The  impact  of  social 
transfers  (excluding  pensions)  on  poverty  and 
inequality  reduction  was  one  of  the  lowest  in  the 
EU  in  2017.  Social  spending  is  strongly  biased 
towards old-age pensions, which largely depend on 
income.  The  distribution  of  wealth  remains 
relatively even in Italy, due to high rates of  home 
ownership. 

Within the EU, Italy shows the biggest regional 
differences in poverty and social exclusion. The 
social  situation  mirrors  the  divergence  in  per-
capita income across regions. Both the EU regions 
with the lowest and highest rates of AROPE are in 
Italy  (Bolzano  at  8.5 %  and  Sicily  at  52.1 %). 
While  the  main  divide  is  between  the  North  and 
the South, central regions have seen their AROPE 
rates  constantly  rising  from  18.6 %  in  2008  to 
25.3 % in 2017. By contrast, southern regions have 
only seen some minor improvements (from 44.7 % 
to 42.3 %).  

High  average  pension  replacement  rates  mask 
large  differences  at  individual  level.  Adequacy 
measured  by  pensions'  capacity  to  replace  earned 
income  before  retirement  is  generally  high,  but 
their  ability  to  prevent  and  mitigate  the  risk  of 
poverty  is  low. In  2016,  the  ratio  between  the 
median disposable income of people older than 65 
and those  younger than 65 years was 100 percent, 
against  92  percent  for  the  EU  average.  However, 
despite 
the  overall  high  pension  expenditure 
(corresponding  to  16.2 %  of  GDP  (EU:  12.6 %) 
and  one  third  of  primary  public  expenditure  in 
2016) (49), the provision for old age is uneven. The 
pension  system  performs  the  income  maintenance 
function  while  protection  against  poverty 
is 
inadequate, and tight eligibility conditions include 
regressive clauses. The 2016 pension reform aimed 

(48)  Income quintile share ratio (S80/S20), stood at 5.9 in 2017, 
against the EU average of 5.1. The Gini index stood at 32.7 
in 2017 against 30.3 on average in the EU. The higher the 
coefficient is, the less equal is the income distribution.    
(49)  See  Centro  Studi  e  Ricerche  di  Itinerari  Previdenziali 

(2018).  

43 

 
                                                           
 
                                                           
4.3. Labour market, education and social policies 

5.6 %. (53)  The  public  and  social  housing  stock  in 
Italy  is  among  the  lowest  in  the  EU  (only  4 %  of 
the  housing  stock  is  owned  by  the  public  sector). 
Dwellings  are  often  in  a  precarious  condition  and 
declared  unfit  for  habitation.  Housing  needs  were 
exacerbated  by  the  economic  crisis.  Since  2015, 
following  the  depletion  of  the  National  Fund  to 
support  low-income  tenants,  new  funds  were 
introduced, targeted to indebted households. (54)  

The  provision  and  coordination  of  social 
services 
remains  underdeveloped.  Besides 
efforts  to  improve  early  childhood  education  and 
childcare,  Italian  authorities  embraced  an  active 
inclusion  approach,  when  the  REI  was  introduced 
in  2018  (i.e.  linking  employment  services  with 
income  support).  According  to  the  2019  budget 
law,  funds  for  dependent  persons,  persons  with 
severe  disabilities  without  family  support  and  for 
family  caregivers  will  be  increased.  However, 
people  with  disabilities  and  other  disadvantaged 
groups  in  many  cases  do  not  receive  adequate 
support  as  home  and  community-based  care  as 
well  as  long-term  care  services  face  challenges  in 
terms  of  funding,  access  and  quality  (European 
Commission 2018b, p. 40).  

The  outcome  of  the  health  system  is  overall 
good,  despite  below-EU  average  spending. (55) 
In 2017 Italy spent only 8.9 % of GDP on overall 
health care, of which relatively more on prevention 
and  less  on  administrative  costs  than  the  EU 
average  (9.6 %).  Government  spending  is  slightly 
declining  and  remains  biased  towards  hospital 
spending,  at  the  expense  of  primary  care.  Self-
reported  unmet  needs  for  medical  care  decreased 
markedly  from  7.2 %  in  2015  to  1.8 %  in  2017. 
However, out-of-pocket expenditure on health care 
(23.1 %  of  total  health  expenditure)  is  above  the 
EU  average  and  increasing.  Expenditure  on  retail 
pharmaceuticals  per  capita  is  above  the  EU 

(53)  The  severe  housing  deprivation  rate  is  defined  as  the 
percentage of the population living in  a dwelling which is 
considered  as  overcrowded,  while  also  exhibiting  at  least 
one of the housing deprivation measures such as a leaking 
roof,  no  bath/shower  and  no  indoor  toilet,  or  a  dwelling 
considered too dark. 

(54)  Additional  resources  are  also  dedicated 

to  support 
homeless people within the PON Inclusione under the ESF 
(EUR  25  million)  as  well  as  under  the  FEAD  (EUR  25 
million;  nevertheless, 
is 
lack  of 
characterised  by 
coordination between government levels. 

the  social  housing  system 
investment  and 

limited 

Income' 

approach, 

'Citizenship 

The  government  has  introduced  a  reformed 
minimum  income  scheme,  starting  from  April 
(Reddito  di 
2019.  The 
the  REI  (Reddito 
cittadinanza)  will  replace 
d'inclusione).  According  to  the  decree  law,  the 
new  scheme,  provided  for  18  months  with  the 
possibility  of  renewal,  will  target  households 
(including  pensioners)  with  an  Indicator  of  the 
Equivalent  Economic  Situation  lower  than  EUR 
9 360  and  residing  in  Italy  for  at  least  10  years. 
The  Citizenship  Income  will  be  one  of  the  most 
generous  income-support  schemes  in  the  EU. (51) 
The scheme will keep the previous system's active 
inclusion 
by 
conditionality  rules. (52)  According  to  the  budget 
law, a new fund (Fund for the citizenship income), 
with  a  yearly  budget  of  EUR  7.1  billion  for  2019 
and  about  8  billion  as  of  2020,  will  finance  the 
scheme,  partly  strengthen  public  employment 
services  and  implementation  of  the  activation 
component  of  the  reform.  However,  the  scheme 
may  prove  difficult  to  implement  and  may  put  a 
considerable  burden  on  the  public  administration. 
Two  digital  platforms  will  support  the  National 
Institute,  public  employment 
Social  Security 
services  and  municipalities’  social  services  to 
better coordinate and deliver personalised services. 
The actual impact on employment  will depend on 
the  effectiveness  of  activation  policies  and 
controls. 

complemented 

Access  to  affordable  and  adequate  housing 
remains  challenging.  While  only  4 %  of  the 
population  have  access 
to  housing  with  a 
subsidised rent, 28.2 % of tenants who pay rents at 
market prices were overburdened by housing costs 
in 2017 (EU average: 25.2 %). The severe housing 
deprivation rate, albeit on a declining trend, stood 
at 11.1 % in 2016, compared with a EU average of 

(51)  Based on a comparison with the level of benefits across the 
EU  as  a  share  of  the  poverty  threshold,  as  used  in  the 
Minimum  income  benchmarking  framework.  For  details, 
see European Commission (2018d). 

(52)  The  beneficiary  has  to  sign  an  agreement  with  the  public 
employment  services  (Patto  per  il  lavoro)  including 
training  obligations  and  the  acceptance  of  one  of  the  first 
two  suitable  job  offers  not  far  away  from  the  worker’s 
place of residence, while the third offer could be anywhere 
in the national territory. In case the needs of the households 
are  more  complex  and  multidimensional,  the  beneficiaries 
of  the  measure  subscribe  a  social  inclusion  agreement 
(Patto  per  l’Inclusione  Sociale)  involving  territorial  and 
social services. 

(55)  Life  expectancy  at  birth  is  the  second  highest  and  the 

preventable death rate is the lowest in the EU. 

44 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

life balance policies are fragmented and limited in 
scope (see 2018 Country Report). 

The migration balance, although positive, is not 
compensating the natural balance loss. In 2018, 
inflows  amounted  to  around  349 000  (+1.7 % 
compared to 2017), while the number of residents 
leaving  the  country  further  increased  from  very 
high  levels  (around  160  000.  3.1 %  more  than  in 
2017). The latter includes a large number of high-
skilled  young  Italians  moving 
to  other  EU 
countries. In 2016, the number of Italian graduates 
leaving the country increased by 9 % compared to 
2015.  The  draft  budget  Law  2019  focuses  on  re-
attracting emigrated highly skilled students to Italy 
[to  be  updated/integrated  on  brain  drain]. 
structural  challenges  pushing 
However, 
graduates to emigrate remain unaddressed. Finally, 
the  integration  of  migrants,  especially  refugees, 
remains 
applications 
decreased  in  2018  but  no  significant  progress  has 
been made in implementing the first National Plan 
for the Integration of Beneficiaries of International 
Protection  adopted 
the  budget 
allocation for reception facilities of asylum seekers 
has  been  reduced.  Additionally,  the  social  impact 
of  the  recent  Law  on  immigration  and  security 
(Decreto Sicurezza) (57) needs to be monitored. 

challenging.  Asylum 

in  2017  and 

the 

Investment needs 

Increasing  investment  to  foster  labour  market 
participation  and  skills  is  vital  for  raising 
productivity  and  long-term  inclusive  growth. 
Further investment in active labour market policies 
could  promote  labour  market  participation  which 
remains very low, especially for women and young 
people.  Increasing  investment  in  child  and  long 
term  care  is  also  crucial,  paying  attention  to 
geographical  disparities  in  the  availability  of 
services.  Investing  in  active 
inclusion  would 
support the reach out to people at risk of poverty or 
social  exclusion,  including  children  and  working 
poor.  The  education  and 
is 
characterised by wide regional differences in terms 
and  outcomes.  Adequate 
of 
investment  to  foster  quality,  inclusiveness  and 
labour market relevance of education and training, 
as  well  as  upskilling  and  reskilling  for  adults,  is 
crucial  to  promote  equality  of  opportunities  and 
foster long-term growth. 

training  system 

infrastructures 

(57)  Law  n.132/2018 

average  but  the  market  share  of  generics  remains 
one  of  the  lowest  in  EU,  with  no  effective  policy 
action  taken  in  recent  years.  The  number  of 
doctors is slightly above the  EU average  but their 
age is increasing, pointing to potential shortages in 
the  medium-term.  The  nurse-to-doctor 
ratio 
remains below the EU average. Over recent years, 
from 
there  has  been  a  slight  move  away 
institutional long-term care towards home care.  

is 

allocated 

according 

The  uneven  provision  of  healthcare  across 
regions can affect access, equity and efficiency. 
The  number  of  individuals  in  the  South  declaring 
unmet healthcare needs is almost twice as high as 
in  the  North.  In  principle,  the  central  government 
sets  a  list  of  standard  health  care  goods  and 
services available to the population through public 
funding,  which 
to 
demographic  factors,  while  regions  are  free  to 
provide  additional  services.  However,  the  relative 
costs  of  this  extra  provision  must  be  covered 
through  the  regions'  own  financial  resources. Co-
payments  are  commonly  applied  to  citizens  for 
some  health  care  services  and  they  may  vary 
travel 
across 
distances  are  also  higher  in  Southern  regions. 
Patients  are  allowed 
to  obtain  hospital  care 
(specialist  consultation  and  hospital  surgery)  in 
other regions and there is a system of interregional 
expenditure  compensation.  The 
interregional 
mobility is intended to promote the right to choose 
health  care  treatments  and  thus  improve  access. 
However, the  mobility  from less to  more efficient 
regions  may  potentially  entrench  and  aggravate 
disparities. 

regions. (56)  Waiting 

lists  and 

Demographic trends and migration 

Demographic  trends  point  to  a  decline  of 
working-age  population  in  the  medium  term. 
Current policies to sustain demographic trends are 
mainly  based  on  bonus  transfers  and  tax  credits 
and  no  evaluation  or  impact  assessment  has  been 
carried  out  or  is  envisaged.  Investment  in  care 
services,  generally  more  effective  in  supporting 
natality  rates  and  labour  market  participation  of 
women,  remain  subdued.  Similarly,  measures  to 
promote  equal  opportunities  and  adequate  work-

(56)  Co-payments  are  commonly  applied 

to  citizens  for 
outpatient  specialist  visits  with  general  practitioner  (GP) 
referral  diagnostic  services,  reimbursed  medicines  and 
unwarranted  use  of  emergency  services,  whereas  primary 
care and hospital inpatient care are free at the point of use. 

45 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

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

The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence 
towards better working and living conditions in the European Union.1 It sets out twenty essential principles 
and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and 
social protection and inclusion. The analysis in the Country Report has been carried out in light of the Pillar 
principles. 

Italy  faces  challenges  on  many  indicators  of  the 
Social  Scoreboard  supporting  the  European 
Pillar  of  Social  Rights.  Labour  market  conditions 
are only slowly improving  and the persistently high 
unemployment  had  a  strong  impact  on  the  social 
situation.  Youth  unemployment,  as  well  as  the 
NEET rate, remain among the highest in the EU. The 
gender  gap  is  extremely  high,  but  a  comprehensive 
strategy  to  promote  participation  of  women  in  the 
labour  market  is  still  missing.  The  impact  of  social 
transfers  on  poverty  reduction  is  limited  and  the 
share of people at risk of poverty or social exclusion 
remains  very  high.  To  tackle  this  issue,  an  anti-
poverty scheme  was introduced in 2018  and will be 
strengthened in 2019. 

In  addition  to  these  challenges,  access  to  social 
housing  is  extremely  limited.  The  social  housing 
system  is  affected  by  limited  funding,  difficult 
coordination  between  different  government  levels 
and  lack  of  strategic  overview.  Italy  has  one  of  the 
lowest stocks of social and public housing in Europe, 
in  a  context of  growing  housing  needs.  Only  4%  of 
the  population  has  access  to  subsidised  rent  and  all 
increasing 
indicators  reveal  high  and 
available 
housing related hardship. Access to social housing is 
almost  precluded  to  younger  generations,  since 
occupants tend to remain in social housing for their 
entire  lives.  The  situation  is  also  worrying  for 
children (9.4% live in a household with a housing cost overburden). Chronic homelessness is also on the rise. 

Setting  clear  rules  on  the  representativeness  of  social  partners  is  key  to  put  in  place  a  fair  and 
transparent  second  level  bargaining  framework.  The  Patto  per  la  Fabbrica  (March  2018)  is  a  first  but 
important step in that direction (see chapter 4.3.1). In recent months, important collective agreements were 
signed for the chemical and construction sectors, including innovations in line with the principles set in this 
Agreement. Furthermore, in June 2018 INPS and CNEL agreed to create a joint repository of all collective 
contracts signed in Italy. This is another positive step, which could help tackling the phenomenon of minor 
contracts setting wages and working conditions below the standards set by the major contracts.  

 1 The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council and the 
https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
European 
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en  

Commission: 

46 

Early leavers from education and training (% of population aged 18-24)Critical situationGender employment gapCritical situationIncome quintile ratio (S80/S20)Weak but improvingAt risk of poverty or social exclusion (in %)To watchYouth NEET (% of total population aged 15-24)Critical situationEmployment rate (% population aged 20-64)Critical situationUnemployment rate (% population aged 15-74)To watchLong-term unemployment rate (% population aged 15-74)Critical situationGDHI per capita growth To watchNet earnings of a full-time average single worker earning AWOn averageImpact of social transfers (other than pensions) on poverty reductionCritical situationChildren aged less than 3 years in formal childcareOn averageSelf-reported unmet need for medical careBetter than averageIndividuals' level of digital skillsN/ASocial protection and inclusionDynamic labour markets and fair working conditionsEqual opportunities and access to the labour market SOCIAL SCOREBOARD FOR ITALYMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,please consult the draft Joint Employment Report 2019, COM (2018)761 final.NEET:neitherinemploymentnorineducationortraining;GDHI:grossdisposablehousehold income.                       
4.4. COMPETITIVENESS AND INVESTMENT 

4.4.1.  INVESTMENT AND PRODUCTIVITY* 

Structural factors continue to hold back Italy’s 
productivity dynamics, limiting the potential to 
improve  non-price  competitiveness  and  GDP 
growth.  The  productivity  growth  gap  between 
Italy and the rest of the EU remains large (Section 
1),  especially  when  comparing  the  South  (Section 
4.4.3).  The  underperformance  of  Italy's  aggregate 
productivity  hides  a  considerable  heterogeneity 
across  firms.  It  is 
levels  of 
linked 
investment  and  innovation,  as  well  as  weak 
competition  in  several  sectors  (Section  4.4.2), 
weaknesses  in  the  institutional  and  administrative 
framework 
business 
environment  (Section  4.4.4).  Following  the  2016 
Council  Recommendation,  Italy  is  planning  on 
appointing a National Productivity Board. (58) 

challenging 

low 

and 

to 

a 

Aggregate productivity growth is limited by the 
greater  importance  of  smaller  firms  and  their 
lower productivity compared to peer countries. 
In Italy, the lower productivity of micro firms with 
respect  to  larger  ones  (Costa  et  al.,  forthcoming; 
Bugamelli et al, 2018) is amplified by their larger 
contribution  to  value  added  (29 %  with  respect  to 
20.7 % in the EU) and jobs (46 %  with respect to 
29.4 %)  (European  Commission  2018f). Italian 
micro  and  small  firms  are  less  productive  than  in 
peer 
the 
specialisation  in  traditional  sectors.  This  is  also 
due  to  the  quantitative  and  qualitative  shortage  of 
human capital, a vulnerable financial structure and 
the  large  weight  of  firms  mostly  family-managed, 
where  the  recruitment  of  external  managers  is 
limited  (Bugamelli  et  al.,  2018).  The  productivity 
of  medium  and  large  firms  is  in  line  with  peer 
countries, but their weight is smaller (respectively, 
0.5%  and  less  than  0.1 %  compared  to  0.9%  and 
0.2 % in the EU).  

accounting 

countries, 

even 

for 

enhancing 
The  adoption  of  productivity 
strategies  by  smaller  firms  is  limited  in  Italy. 
About  one  out  of  two  Italian  firms  does  not 
innovate (59),  with  only  20%  of  strong  innovators 
in manufacturing and 12% in services. This despite 
the fact that process and organisational innovation, 

(58)  National  Productivity  Boards  are  objective,  neutral  and 
independent 
the 
productivity  challenges,  contributing  to  evidence-based 
policy  making,  boosting  domestic  ownership  of  structural 
reforms. 

institutions 

investigate 

that 

can 

(59)  Based on the 2014 Community Innovation Survey. 

relevant 

for  smaller 

the  value  chain, 

particularly 
firms  and 
traditional sectors (Istat, 2018b), as well as product 
innovation,  enhance  productivity,  even  of  small 
firms. The ability of smaller firms to benefit from 
synergies  along 
following 
innovative  investment,  is  limited  by  the  high 
degree  of  vertical  fragmentation  of  the  Italian 
production  chain  and  the  low  degree  of  formal 
cooperation among firms (Istat, 2018b; Bugamelli 
et al. 2018; Confindustria, 2018a; Del Gatto et al., 
forthcoming).  This 
in  a  polarization 
results 
between many micro and small firms with limited 
resources,  skills,  propensity  to  export  to  foreign 
markets  and  innovation  and  few  larger,  highly 
innovative, productive firms active in international 
markets  (Bugamelli  et  al.,  2018).  Low  innovation 
to  a  green 
also 
economy (60).  These  features  makes  smaller  firms 
particularly  vulnerable  to  external  shocks  and 
contributes 
the  widening  of 
productivity  heterogeneity  across  firms  during  the 
crisis (Graph 4.4.1).  

implies  slower 

to  explaining 

transition 

Graph 4.4.1:  Heterogeneity in firm-level productivity in Italy 

(2001=100) 

Source: CompNET 

The  weak  dynamics  of  knowledge  intensive 
sectors 
in  the 
limit  productivity  prospects 
medium-long  term.  The  share  of  value  added  in 
knowledge intensive sectors is low. Moreover, this 
share  is  stagnant  in  high-tech  and  medium-high 
tech  manufacturing  (the  latter  going  back  to  pre-
crisis  level  only  in  2017)  and  even  declining  in 
intensive  services  (from 
high-tech  knowledge 
  Labour 
in  2007 
4.6% 

in  2016). 

to  4.2% 

(60)  Only 16% of Italian firms offer green products or services 

compared to 25% in the EU. 

47 

507510020012002200320042005200620072008200920102011201220132014LP top decileLP bottom decileTFP top decileTFP bottom decile 
 
                                                           
 
                                                           
4.4. Competitiveness and investment 

waning.  The  capitalisation  of  non-financial 
business  remains  low  and  the  abolition  of  the 
Allowance for Corporate Equity may reduce firms' 
incentives  to  use  equity  financing  (Section  4.1). 
The  over-reliance  of  Italian  firms  on  banks 
coupled with restricted credit due to the large share 
of  NPLs  (Section  4.2),  represents  a  drag  on 
investment,  while  non-bank  access  to  finance  is  a 
key driver, especially for intangibles (Graph 4.4.2). 
Demand side factors also play a role in explaining 
restricted  credit  (Angelini,  2018).  Although  less 
than  20 %  of  small  firms  declared  that  the  SME 
Guarantee  Fund  has  been  effective  in  stimulating 
investment  in  2017  (Istat,  2018b),  the  impact  of 
measures  supporting  both  bank  and  market-based 
finance has been generally positive (Section 4.2). 

4.4.2). 

incentives 

Tax 
lowering  the  corporate  tax 
burden  have  been  conducive  to  investment. 
During  the  crisis,  the  effective  corporate  tax 
burden  contributed  to  slow  private  investments 
super-depreciation 
(Graph 
The 
(Superammortamento) 
capital 
physical 
investment  of  the  Impresa  4.0  Plan,  instead, 
contributed  to  the  recovery  of  investment  in 
machinery and other equipment recorded in 2017. 
This temporary  measure  will  not be  extended, but 
a  new  structural  tax  rebate  on  reinvested  profits 
have been introduced as of 2019 (Section 4.1).  

on 

schemes 

supporting 

technologies 

Public 
innovative 
investment  remain  temporary  and  still  lack  an 
in-depth assessment of their efficiency. R&D tax 
incentives  generally  have  a  positive  but  modest 
effect  on  investment  in  intangibles  (Graph  4.4.2). 
While an evaluation of the Impresa 4.0 package is 
not  available  yet,  provisional  data  suggest  it  has 
been  effective  in  stimulating  investment  decisions 
in 2017. The deduction of 250 % of investment in 
innovative 
(Iperammortamento), 
including  ICT,  and  the  R&D  tax  credit  were 
stimulating 
considered 
investment  decisions  in  2017  by  almost  50 %  of 
firms,  especially  by  larger  ones  (Istat,  2018b). 
According  to  Italian  authorities,  the  R&D  tax 
credit  was  largely  taken  up  by  firms  in  industrial 
sectors and only marginally by firms in the service 
sector,  where  productivity  is  especially  lagging 
behind. Both Iperammortamento and the R&D tax 
credit are extended to 2019, but will be reduced on 
average, particularly for larger investment. Most of 
these measures remain temporary and unstable in a 
context  in  which  84%  of  Italian  firms  consider 

effective 

rather 

in 

productivity  in  market  services  decreased  by  5% 
since 2000, while their contribution to added value 
increased (by 2.5 pps). Labour productivity growth 
remains  concentrated  in  manufacturing  (+20%), 
whose  contribution 
instead, 
declined.  

to  added  value, 

Weak productivity growth is also linked to low 
private  and  public  investments.  The  investment 
gap  between  Italy  and  the  euro  area  has  almost 
doubled since the crisis. The composition remains 
skewed  towards  investments  by  households  and 
manufacturing  at  the  expense  of  businesses  and 
professional 
investment 
represented  15.7 %  of  GDP  in  2017,  still  3  pps. 
below  its  pre-crisis  level  and  2.5  pps.  below  the 
euro area average. However, the slight acceleration 
of private investment in 2017 reduced the gap vis-
à-vis the euro area. Public investment has steadily 
decreased  from  3 %  of  GDP  in  2008  to  2 %  in 
2017. (61) 

services. 

Private 

economy 

interlinked  with 
firms  and 
the 
Italian 

The improvement of structural factors is key to 
increase  investment  and  productivity.  Long-
term barriers to investment are more significant in 
Italy than in peer countries (EIB, 2018; Barbku et 
the 
al.,  2015).  Beyond  and 
low 
importance  of  smaller 
in 
the 
specialisation  of 
knowledge-intensive  sectors,  other  factors  hinder 
investments.  Econometric  analyses  (Briguglio  et 
al,  forthcoming)  show  that  restricted  bank  credit, 
tax  burden  on  corporations  and  under-education 
are  major  barriers  to  investment,  while  increasing 
corporate  self-financing  and  equity,  an  improved 
business  environment  (Section  4.4.4)  and  higher 
education  represent  a  driver  of  investment.  While 
indirectly  worsen 
public 
financing  conditions, 
it  can  crowd-in  private 
investment  (Graph  4.4.2),  by  creating  favourable 
conditions,  for  instance  through  the  promotion  of 
relevant  infrastructure  (e.g.  research,  transport, 
energy).  However,  a  proper  design  and  effective 
delivery  of  public  investment  are  essential  to  this 
aim.  

investment  might 

While  market-based  access  to  finance  is  a  key 
driver of investment, policy support is partially 

(61)  Peer countries like Spain and Germany have a similar level 
(2%  of  GDP  and  2.2%,  respectively),  while  in  France 
public investment is considerably higher (3.4%).  The euro 
area average is 2.6% of GDP. 

48 

 
                                                           
4.4. Competitiveness and investment 

digitalisation, as isolated investment of small firms 
cannot  benefit  from  economies  of  scale  or  a 
coordinated  approach  (Istat,  2018b;  Confindustria 
2018b).  

Policies  supporting  knowledge  and  cooperation 
among  smaller  firms  go  in  the  right  direction. 
technological  clusters  and 
Measures  such  as 
network  contracts,  which  support  cooperation 
among firms and the exploitation of economies of 
scale,  improved  the  performance  of  participating 
firms  (Confindustria,  2017;  Istat,  2018c).  The 
Competence Centres, yet to be activated, are meant 
to  provide  technological  transfer  to  SMEs  on 
industry 4.0 technologies and related ICT training. 
The  Digital  Innovation  Hubs,  21  of  which  are 
already  operational,  accompany  SMEs’  digital 
transformation  and  networking  in  larger  digital 
value-chains.  

in 

Investment 

There  is  a  need  to  raise  the  low  level  of 
investment 
in 
intangibles. 
intangibles  and,  more  specifically, 
in  R&D 
(respectively 2.9 % and 1.4 % of GDP in 2017) has 
been  considerably  below  the  euro  area  average 
(respectively,  4.1 %  and  2.2 %  in  2017)  since  the 
early 2000s. R&D expenditure is also below Italy's 
EU2020  target  of  1.5 %  of  GDP.  Business  R&D 
expenditure  is  particularly  low  compared  to  the 
euro area average (0.8 % of GDP against 1.4 % in 
2017).   Nevertheless,  among  SMEs  it  increased 
from  0.13 %  of  GDP  in  2007  to  0.22 %  in  2015, 
although it is still below the EU average of 0.3 %. 
Public  support  to  business  expenditure  remains 
low but increased from 0.05 % of GDP in 2008 to 
0.12 % in 2016, with an increasing share due to tax 
incentives (0.08 % from 0.02 % in 2008) (OECD, 
2018).  Public  expenditure  in  R&D  is  also  below 
the euro area average (0.5 % of GDP with respect 
to 0.7 %)  and is declining  since 2012, mostly due 
to  the  declining  trend  in  the  higher  education 
sector,  despite  its  potential  to  crowd-in  private 
investment 
(Briguglio  et  al., 
in 
forthcoming).  

intangibles 

There  is  a  need  to  further  invest  in  the 
administrative  capacity  of  the  public  sector, 
especially at local level. Inadequate human capital 
in  the  public  sector  constrains  the  capacity  to 
assess,  select  and  manage  investment  projects, 
including  EU  funded.  Italy's  weak  public  sector's 
administrative  capacity  at  both  national  and  local 
level  (Section  4.4.3)  represents  an  investment 

uncertainty  about  the  future  as  an  obstacle  to 
investment  decisions 
(EIB,  2018).  Making 
permanent some of these measures based on an in-
depth  assessment  would  enhance  their  impact, 
including  by  easing  firms'  investment  planning. 
Targeting investment in specific research areas can 
be more effectively achieved through direct public 
support (Nascia et al., 2018).   

There  is  a  need  for  adequate  investments  in 
human  capital,  innovation  and  strengthened 
administrative  capacity  and  to  reduce  regional 
disparities  across  sectors.  Investment  in  higher 
education  and  skills  (Section  4.3)  is  pre-requisite 
for  boosting  public  and  private 
investment. 
Investing in innovation and supporting small firms' 
efficiency  would  enhance  productivity.  Improving 
the  administrative  capacity  is  a  pre-condition  for 
the effective delivery of public investment and use 
of  EU  funds.  This  could  strengthen  the  impact  of 
transport,  water 
investments 
management  and  in  the  circular  economy,  where 
the  South 
lagging  behind. 
Addressing  the  drivers  of  lower  productivity  of 
laggard  regions  and  integrating  environmental 
considerations 
investments  would 
contribute  to  long-run  growth  in  an  inclusive  and 
sustainable economy. 

is  particularly 

in  broadband, 

in  sectoral 

4.3), 

Investment  in  human  capital  is  needed  also  to 
counter Italy’s slows transition to a knowledge-
based  economy.  While  the  availability  of  human 
capital  is  significantly  and  positively  correlated 
with  the  number  of  innovative  start-ups  (UPM, 
2018), the expenditure for tertiary graduates is low 
(Section 
and 
hampering 
productivity  growth.  The  situation  is  worse  in 
those  fields  relevant  for  innovation,  as  shown  by 
the lower share of graduates with respect to the EU 
in fields such as computing (0.6% against 2.5% in 
2016),  science  and  engineering  (12.2%  against 
15.5%).  There  is  a  need  to  boost  studies  in  these 
fields  and  to  strengthen  specific  skills,  such  as 
financial  skills, 
through  on-the-job 
training.  

innovation 

including 

an 

impact 

A comprehensive support of digital skills in the 
digital  transformation  process  is  necessary  to 
have 
on  productivity.  The 
development of ICT skills, including of managers, 
is  necessary 
in 
to  complement 
broadband  technology.  The  fragmentation  of  the 
productive  system  into  small  firms  slows  down 

investment 

49 

 
4.4. Competitiveness and investment 

Graph 4.4.2:  Estimated contributions to (business and intangibles) investment 

(1) Estimated contributions correspond to the independent impact of each explanatory variables (see legend) to the 
investment trend based on estimated coefficients from an augmented acceletor model. 
(2) Data refer to time series for Italy covering 1999-2018Q1 (business) and 1996-2018Q1 (intangibles). Investment and 
macroeconomic data are from national accounts.  
(3) Banking finance corresponds to the share of NPLs. Non-banking finance corresponds to firms' self-financing and equity 
(4) Education refers to tertiary education (including the impact over-education) 
(5) Business environment is proxied by the world bank doing business index 
(6) Public investment for intangibles refer to R&D 
(7) Economic cycle corresponds to previous GDP  
(8) EPL stands for employment protection legislation (OECD) for temporary employment 
Source: D. Briguglio et al. (forthcoming) 

of 

barrier  across  sectors  and  prevents  effective 
investment  projects.  This  also 
delivery  of 
undermines  the  implementation  of  EU  funds, 
where  Italy  lags  behind  compared  to  the  EU 
average  (Box  2.1).    There  is  a  general  need  to 
provide  technical  support  to  central  and  local 
administrations  in  the  planning,  evaluation  and 
monitoring 
projects,  while 
investment 
guaranteeing operational support to identifying and 
two 
addressing 
centralised  institutional  bodies  (Centrale  per  la 
progettazione 
and 
InvestItalia) planned to be activated in 2019 are a 
positive  step  in  this  direction,  as  well  as  similar 
initiatives  of 
the  Environment  Ministry.  The 
government's intention of creating a task force for 
public investment would go in the same direction. 
Implementing 
the 
professionalization of public buyers (Section 4.4.4) 
would also contribute to this goal. 

bottlenecks.  The 

pubbliche 

possible 

reform 

opera 

delle 

the 

on 

Specific challenges  

Italy  is  lagging  behind  in  promoting  access  to 
ultrafast (100 Mbps) internet for all. Despite this 
objective  of  the  2020  Digital  Agenda,  in  2017 
15.5 %  of  Italian  firms  did  not  have  access  to  an 
adequately  fast  broadband  connection  (10.6 %  on 
average in EU) and only 23.9 % of households are 

covered  by  ultra-fast  broadband  in  2018  (60.0 % 
on  average  in  the  EU).  In  some  areas  ("white 
areas") ultrafast broadband infrastructure is not yet 
available  and  no  operator  has  plans  to  invest  in 
next-generation  networks  (30  Mbps  or  faster)  in 
the  coming  years  (Section  4.4.3),  while  in  others 
only  one  infrastructure  is  present  ("grey  areas"). 
Private  investment  plans  amount  to  only  43 %  of 
the investment needs for meeting the 2020 Digital 
Agenda objectives (MISE, 2015). 

Investments 
in  broadband  are  undergoing 
implementation  delays.  Two  out  of  the  three 
public  tenders  launched  by  the  government  to 
guaranteeing  next-generation  networks 
to  all 
"white  areas",  as  the  first  phase  of  the  Ultra-Fast 
Broadband  strategy,  co-financed  by  EU  funds, 
have been awarded only in the second half of 2017 
and the third are only at the beginning of 2019, all 
after  some  lengthy  law  suits..  This  late  start, 
combined  with  delays  in  operational  planning  of 
works  and  in  the  granting  of  local  permits 
(involving  more  than  6 700  municipalities),  could 
delay the absorption of EU funds and could put at 
risk  the  timely  achievement  of  the  2020  Digital 
Agenda objectives. Moreover, the second phase of 
ultrafast 
the 
connectivity  in  "grey  areas",  is  stalling  as  well, 
pending the Italian government's submission of the 

strategy,  meant 

support 

to 

50 

-17.4%5.4%11.5%22.0%10.1%-7.8%21.4%4.4%-40%-20%0%20%40%60%80%BusinessGrant R&DCorporate tax burdenTax incentives for R&DBusiness environmentEPLUndereducation2.4%1.6%-6.5%-15.3%6.9%9.3%17.3%-11.6%25.1%3.9%-40%-20%0%20%40%60%80%IntangiblesTertiary educationEconomic cyclePrevious capital stockBanking financeNon-baninking financePublic investment 
 
4.4. Competitiveness and investment 

13,2  billion  per  year.  The  information  provided 
will  further  contribute  to  the  identification  and 
assessment 
climate-related 
energy 
investment needs for Italy. 

and 

of 

increase 

to  meet 

the  costs 

There  is  a  need  to  integrate  climate  change 
mitigation  and  adaptation  policies  across  all 
sectors, including transport. Emissions in sectors 
not  covered  by  the  EU  ETS  are  expected  to 
decrease  by  21%  between  2005  and  2020  (with 
respect  to  a  target  of  13%)  and  by  25%  between 
2005  and  2030  (with  respect  to  a  target  of  33%). 
While  prioritising  the  low-carbon  transition  for 
long-term  investments  is  cost  efficient,  delayed 
action  will 
the 
obligations  under  the  Effort  Sharing  Regulation 
and  provide  disincentives  to  a  private  sector 
increasingly  keen  to  make  green  investments. 
Structural  and  cohesion  funds  have  already  been 
used to  support the implementation of  adaptation-
related  actions, (66)  including  in  the  water  sector. 
Yet,  further  efforts  are  needed  in  order  to  finalise 
and  implement  the  National  Adaptation  Plan  in  a 
coordinated manner across sectors and governance 
levels, also supporting the cities signatories of the 
Covenant  of  Mayors.  Investing  in  sustainable 
transport  and  infrastructure  allows  to  tackling  not 
only  environmental  but  also  mobility  challenges, 
considered  by  firms  as  a  major  obstacle  to 
investment  activities,  as  well  as  investment  gaps 
by 50% of municipalities (EIB, 2018). 

in 

its 

investment 

implementing 

infrastructure 

In  the  transport  sector,  Italy  has  not  delivered 
on 
strategy 
(Connettere  l’Italia).  Very  limited  progress  has 
been  made 
the  planned 
investments  in  rail,  road  and  sustainable  urban 
mobility.  This  is  due  to  administrative  delays, 
spending  inefficiencies,  a  lengthy  transposition  of 
the new directives on procurement and concessions 
and  litigation,  although  litigation  for  smaller 
projects  has  been  curbed  by  the  introduction  of  a 
dissuasive fee for initiating administrative appeals. 
The  government  intends  to  reorient  investments 
towards  smaller  projects,  for  example  in  urban 
mobility, which are easier to implement.  

(66)  Under  the  Partnership  Agreement  for  Italy,  2014-2020, 
EUR  2 743  million  have  been  allocated  to  the  thematic 
objective  “Promoting  climate  change  adaptation,  risk 
prevention and management”, including EUR 989 million 
from the European Regional Development Fund and EUR 
1 753  million  from  the  European  Agricultural  Fund  for 
Rural Development. 

plan  to  the  European  Commission  for  State  Aid 
scrutiny. 

The  achievement  of  the  ambitious  2030  EU 
energy  and  climate  targets  calls  for  sustained 
green  investments.  While  Italy  is  currently  on 
track  to  achieve  the  2020  binding  targets  on 
greenhouse  gas  emissions  and  renewable  (with  a 
20% decrease of emissions, with respect to a target 
of 11% for 2017), progress  has been stagnating in 
the 
final  energy 
consumption increased, signalling a downward risk 
in  achieving  of  the  2020  energy  efficiency  target. 
Italy  has  the  second  largest  renewable  sector  in 
Europe  after  Germany  in  terms  of  direct  and 
indirect jobs (179.000 in 2016), further policies in 
line  with  new  2030  objectives  can  boost  growth 
and create up to 115.000 new jobs per year. (62) 

few  years. 

In  2016, 

last 

to  cope  with 

Investments  are  needed  to  improve  the  energy 
infrastructure.  This  can  contribute  to  a  more 
resilient,  secure and flexible  energy  system,  while 
enhancing  market  integration  and  reducing  price 
is  not  yet 
gaps.  The  Italian  electricity  grid 
increased 
sufficiently  equipped 
exchanges  across  borders  and  to  cope  with  the 
magnitude of variable renewables  as projected for 
2030.  It  is  estimated  that  EUR  10  billion  will  be 
needed  in  the  next  10  years  to  modernise  the 
electricity transmission grid (63). A diversified and 
flexible  gas  grid,  including  import  routes,  can 
more  easily  accommodate 
integration  of 
different  demand  sectors  as  well  as  a  fuel  switch. 
The  Italian  gas  Transmission  System  Operator 
foresees EUR 5.7 billion of additional investments 
in the period 2018-2022. (64) 

the 

The  integrated  National  Energy  and  Climate 
Plan  (NECP)  is  the  key  guidance  to  establish 
investment needs in the area of decarbonisation 
and  energy.  The  objectives  of  the  2017  National 
Energy Strategy are being currently revised, also in 
light of the new EU energy targets for 2030. In its 
draft National Energy and Climate Plan adopted on 
31 December 2018 (65), Italy provided an overview 
of the investment needs until 2030 for the different 
dimensions of the Energy Union: those amount to 

(62)  Proposta  di  Piano  Nazionale  Integrato  per  l'Energia  e  il 

Clima, 31/12/2018, p.224.  

(63)  TERNA, Piano di Sviluppo 2018.  
(64)  SNAM, Piano Strategico 2018-2022 
(65)  In  line  with  the  EU  Regulation  2018/1999  on  the 
Governance of the Energy Union and Climate Action. 

51 

 
                                                           
                                                           
4.4. Competitiveness and investment 

that  a  reduction  of 

suggests 
the  regulatory 
restrictions  in  non-manufacturing  sectors  would 
lead  to  a  25-29 %  productivity  gain  in  Italy 
(Bugamelli et al, 2018). 

Business  services  remain  highly  regulated. 
According to the Commission, the overall level of 
restrictiveness  in  Italy  is  higher  than  the  EU 
weighted  average  for  six  out  of  seven  professions 
analysed. (67)  Also,  the  new  intra-EEA  OECD 
STRI (68)  index  for  business  services,  computer 
services,  construction  and  trade  services  is  higher 
than  average  in  Italy.  The  low  dynamism  and 
competition within these sectors is also confirmed 
by  the  low  business  churn  rate  (15.5 %  in  Italy 
against  18.1 %  in  the  EU  in  2015). (69)  Also,  as 
from  2018,  a  range  of  new  professional  orders  in 
the health sector, for example for physiotherapists, 
has been set up with new reserved activities.  

to 

The  retail  sector  is  highly  regulated  and  new 
restrictions  have  been  announced.  Despite  the 
effective  2012  liberalisations,  over-regulation  still 
burdens 
the 
the  retail  sector.  According 
Commission's restrictiveness indicator for retail, in 
2018, Italy  is  among  the  most  restrictive  Member 
States  and  performs  worse  than  peer  economies 
(Graph  4.4.3).  Restrictions  concentrate  especially 
in  the  establishment  of  retail  shops.  According  to 
the  Commission,  strict  conditions  apply  to  the 
authorisation  process  when  opening  a  new  outlet. 
Italy  also  scores  among  the  highest  in  the  EU  on 
the 
the  number  of  permits 
procedure. (70) By discouraging new entrants, these 
to  affect  market  dynamics, 
regulations 
protecting 
negatively 
and 
incumbents 
impacting the already low productivity of the retail 
sector  (European  Commission,  2016a).  As  to  the 
regulation  of  retailers’  daily  operations,  while 
shops'  opening  hours  are 
liberalised, 
restrictions  remain  on  sales  promotions  and  the 
distribution  for  some  products,  including  non-
prescription  drugs.  The  situation  could  worsen  if 
Italy  backtracked  on  earlier  reforms  by  re-

tend 
the 

required 

fully 

in 

(67)  The European commission developed a composite indicato 
based  Member  States's  data  and  complemented  by 
Commission research (European Commission,2017)  

(68)  Service Restrictiveness index, OECD, 2017a 
(69)  The business churn rate is calculated as the ratio of the sum 
of  newly  founded  and  closed  enterprises  to  the  total 
number of enterprises in year t.  

(70)  Requirements  include  the  provision  of  economic  data,  a 
number  of  different  impact  assessments  and  specific 
requirements linked to the location. 

Investments  are  needed  in  order  to  raise  the 
quality  of  transport  infrastructures  toward  the 
EU average. The EU transport scoreboard shows a 
infrastructure, 
below  EU  average  quality  of 
especially  for  ports.  The  state  of  repair  is  a  clear 
source of concern, as shown by the collapse of the 
Morandi  bridge  in  Genoa.  The  government  has 
prioritised  maintenance  and  safety  with  a  plan  to 
monitor 
all 
infrastructures  and  the  set-up  of  a  new  agency  in 
charge of infrastructure safety for rail and road. In 
this  respect,  for  2019  Italy  was  granted  an 
allowance of EUR 1 billion with respect to the EU 
fiscal  rules  in  relation  to  an  investment  plan  to 
secure  road  infrastructure  similar  to  the  Morandi 
Bridge.  

the  maintenance 

status 

of 

Italy  is  not  yet  playing  its  key  role  in  the 
European Transport strategy. Italy is crossed by 
4  TEN-T  core  network  corridors  covering  major 
transport flows in Europe. These transport axes are 
of vital importance for Italy’s export economy and 
especially  for  its  ports.  However,  the  government 
is  currently  reconsidering 
the  socio-economic 
rationale  of  its  engagement  in  major  projects  of 
European  significance,  such  as  the  Brenner  Base 
tunnel  and  Lyon-Turin  Base 
tunnel.  After 
launching  a  new  cost-benefit  analysis  for  four 
major  infrastructure  projects,  in  December  2018 
the  government  announced  that  it  would  further 
delay  tenders  for  the  Lyon-Turin  Base  tunnel 
project.  Long-term 
financial 
commitment at national and regional level is key to 
fulfil 
the  TEN-T 
regulation to complete the core network by 2030. 

Italy’s  obligations  under 

political 

and 

4.4.2.  COMPETITION AND SINGLE MARKET 

INTEGRATION* 

impact  on 

Services  represent  a  high  and  growing  part  of 
the  Italian  economy.  In  2017  market  services 
contributed  to  48.1 %  of  gross  added  value,  up 
these  sectors' 
from  45.6 % 
in  2000.  Thus, 
efficiency  and  competition 
level  have  an 
the  whole  economy 
increasing 
productivity both directly (Section 4.4.1) and as an 
input  to  other  business  activities.  According  to 
some  studies  (UPM,  2018),  a  reduction 
in 
regulatory restrictions in professional services and 
retail  trade  has  a  positive  impact  on  their  total 
factor productivity.  A similar positive  impact also 
concerns the manufacturing sectors. Banca d’Italia 

52 

 
                                                           
4.4. Competitiveness and investment 

regulating  shop  opening  hours,  as  announced. 
Finally,  the  percentage  of  consumers  reporting 
unfair  commercial  practices  and  other 
illicit 
practices from retailers is  now  well above the EU 
average (European Commission, 2019b). 

traditional  tourism  sector.  This  is  a  concern  as 
tourism 
is 
anticyclical  and  geographically  homogeneous 
(Bugamelli et al., 2018). 

represents  5%  of  GDP 

(2017), 

principles. 

transparency 

The  regime  for  the  assignment  of  limited 
authorisations  remains  unclear  and  broadly 
discretionary.  The  actual  grant  of  concessions  of 
use  of  public  areas  for  the  provision  of  a  wide 
range of services, related to trade, tourism, energy 
and industrial activities do not follow competition 
Furthermore, 
and 
reassignments are often subject to repeated ex-lege 
prorogations.  This  negatively  affects  entry  and 
investment 
the 
management  of  scarce  resources.  For  example,  in 
the  street  trade  sector  at  the  end  of  2017  the 
legislator extended again ‘old’ authorisations until 
December  2020. (71)  Recently,  it  also  set  the 
automatic general extensions of beach concessions. 
The recent identification at administrative level of 
transparency principles to be applied to assign the 
rights to use public domain areas within ports  (72) 
might be a step in the right direction, provided it is 
effectively applied.  

these  sectors  as  well  as 

in 

to 

in 

regulations 

Italy.  According 

Collaborative  economy  has  a  strong  growth 
2018 
potential 
Eurobarometer, 18 % of respondents in Italy  have 
used a service offered via collaborative platforms. 
While  only  5 %  of  respondents  have  offered 
services, 24 % of respondents claimed they would 
consider  it  as  private  individuals.  Despite  this 
potential,  a  comprehensive  regulative  approach, 
involving sector-specific elements, is still missing. 
Excessive 
proper 
functioning  of  some  sectors  (for  example  in 
collaborative  transport).  In  others,  levelling  the 
playing field would reduce the disadvantages with 
the 
the 
accommodation/hotel  sector).  Moreover,  some 
features  of  the  2017  obligations  on  platforms  to 
collect 
taxes  on  behalf  on  non-professional 
stakeholders  raise  legal  challenges  and,  thus, 
the  sector 
uncertainty,  slowing  down  further 
development.  The  lack  of  a  clear  strategy,  along 
with  fragmented  and  often  very  restrictive  local 
the 
regulations, 

traditional  players  (for  example 

is  a  burden  especially  on 

threaten 

the 

in 

Graph 4.4.3:  Restrictiveness in the retail sector, 2018 

Source: European Commission, 2018 

Despite  liberalisations,  energy  prices  remain 
high.  According  to  the  Commission,  at  wholesale 
level,  energy  market  concentration  in  Italy  has 
decreased  and  is  below  the  EU  average. (73)  This 
allowed  wholesale  prices  to  decrease  by  14.3 % 
and 28.4 % respectively for the electricity and gas 
sector  between  2005  and  2015.  However,  due  to 
the  energy  mix,  the  network  structure,  and  the 
charges  and  taxation  component,  they  are  still 
among the  highest in the EU. At retail level, high 
market  concentration,  taxes  and  levies  contribute 
to  keep  prices  among  the  highest  in  the  EU  for 
both markets. However, retail electricity prices for 
households  significantly  decreased  between  2016 
and  2017  (-11.2 %)  (ACER/CEER,  2018).  Such  a 
trend has to be read in conjunction with the rise in 
the  annual  switching  rate  among  household 
consumers 
household 
consumers  in  2015,  against  an  EU  average  of 
6.3 %. The  2017  national  strategy  –  currently 
under revision – proposes to narrow the price gap 
between Italy and European peers through, among 
other  measures,  the  full  liberalisation  of  final 
markets  and  the  progressive  reduction  of  system 
charges.  

electricity 

(8 % 

for 

(71)  Law 205/2017 and Resolution n. 87935 of 7 march 2018 by 

Minister for Economic Development. 

(72)  ART delibera n. 57/2018 

(73)  Herfindahl-Hirschmann  Index,  European  Commission  on 

Platts PowerVision data on installed capacity. 

53 

0.00.51.01.52.02.53.03.54.04.55.0Indicator on establishment restrictionsIndicator daily operations restrictionsOverall retail restrictiveness indicator 
                                                           
 
                                                           
Efforts  to  lift  regulatory  barriers  stalled  after 
the adoption of the 2015 annual competition law 
in  2017,  while  new  restrictions  might  be 
introduced.  New  restrictions,  as  the  introduction 
of  equo  compenso (74)  for  regulated  professions, 
were  introduced  shortly  after  the  adoption  of  the 
law.  Moreover,  half  of  the  2015  competition  law 
implementing decrees are still to be adopted, while 
the  phasing  out  of  the  regulated  tariffs  in  the 
energy  sector  has  been  postponed  from  2019  to 
mid-2020.  Implementing  measures  on  the  re-
organisation of taxi and private hire transport were 
not adopted within the timeframe of the delegation 
granted.  While  the  Competition  law  increased  the 
number  and  geographical  scope  of  activities  of 
notaries,  subsequent  amendments  to  the  Notary 
law  suggest  the  possibility  that  local  orders  may 
have  room 
the  competition  among 
providers. (75)  A  new  competition  law  has  been 
announced  by  the  government  but  details  on 
content  and  timeline  have  not  been  provided  yet. 
Restrictions  might 
the  announced 
measures  on  the  retail  sector,  which  aim  to 
backtrack  from  the  2012  liberalisation  of  the 
opening hours (especially during Sunday). 

rise  with 

limit 

to 

4.4.3.  REGIONAL DIMENSION 

The  GDP  and  productivity  gap  with  respect  to 
the  EU  average  is  widening  for  all  Italian 
regions, especially in the South. In 2016, around 
a third of the country's NUTS 2 regions, all located 
in  Southern  Italy,  remain  largely  underdeveloped 
with  a  GDP  per  head  lower  than  75 %  of  the  EU 
average  (lower  than  59 %  in  the  poorest  regions).  
Disparities  among  Italian  regions  remain  high. 
Whereas  labour  productivity  has  decreased  since 
2010  in  all  Italian  regions  with  respect  to  the  EU 
average, it is lower than 80 % of the EU average in 
some  Southern  regions.  In  2016,  apparent  labour 
productivity  (76)  in  the  South  ranged  from  76 % 
(Calabria)  to  89 %  (Abruzzo)  of  the  national 
average.  Between  2010  and  2016  productivity 

(74)  Fairness  assessment  of  tariff.  This  system  may  entail  the 
re-introduction  of  minimum  tariff  thresholds  for  services 
provided 
restricting 
competition on prices 

thus  potentially 

to  business, 

(75)  Art. 93-ter, para 1-bis, law 89/1913. 
(76)  Apparent  labour  productivity  is  defined  as  value  added  at 
factor costs divided by the number of persons employed.  

4.4. Competitiveness and investment 

shrunk  on  average  by  0.5 %  per  year,  i.e.  more 
than in the whole country.  

from 

regions 

structural 
suffer 
Southern 
weaknesses  and  a  decreasing  inflow  of  public 
expenditure. Competitiveness of Southern regions 
the  country  average. (77)  The 
remains  below 
industrial base in the South remains dominated by 
micro-firms, 
lower 
integration  into  the  value  chain,  a  more  limited 
access 
to  finance  (Svimez  2017  and  2018). 
Furthermore,  public  expenditure  per  inhabitant  is 
systematically lower in Southern regions since the 
economic  and  financial  crisis  (Confindustria  and 
SRM, 2018). 

internationalisation, 

lower 

Graph 4.4.4:  Regional dispersion in Italy in selected 

macroeconomic variables 

Source: Eurostat 

Territorial imbalances have increased since the 
investment  has  recently 
crisis,  but  private 
improved  in  the  South.  While  investment  was 
already higher in the North before the crisis, since 
then  it  has  declined  more  in  the  South  (-32 % 
versus  -20 %  in  the  Centre-North)  (Svimez  2018; 
Briguglio  et  al,  forthcoming).  Since  2015,  private 
investment started to recover in the  South of Italy 
and  the  value  added  generated  by  the  southern 
manufacturing  sector  has  grown  cumulatively  by 
more  than  12.4 %  over  2015-2017,  with  a  trend 

(77)  Regional  Competitiveness 

Index 

2016,  European 

Commission 

54 

20406080100120140160GDP per headGDP per headchangeInvestmentratePopulation growthProductivityvalue in % of the Eu averageCapital regions Non-capital regionsItaly averageEU28 
                                                           
 
 
 
                                                           
4.4. Competitiveness and investment 

56 %,  also  due  to  delays  on  ongoing  "next 
generation access" projects. Even after completion 
of  the  ongoing  projects,  there  will  still  be  unmet 
investment needs in order to achieve the European 
Gigabit  Society  strategic  objectives  for  2025, 
especially  in  rural  areas.  Moreover,  only  68 %  of 
southern households had a broadband subscription 
in  2018  compared  to  76 %  in  Northern  Italy  and 
ultra-fast  broadband  subscriptions  are  among  the 
lowest  in  Europe  (8.9 %  of  households  in  2018). 
This 
to  costs  and,  more 
importantly,  to  insufficient  digital  skills,  which 
need to be supported in parallel (Section 4.4.1).  

low  rate 

is  due 

Progress  on  waste  management  is  uneven  with 
insufficient  effective  investment  in  the  South. 
The South performs  worse than the North in most 
sustainable  development  goals.  High  recycling 
rates are common and improving in the North, but 
only  partially  in  the  Centre  and  South.  The 
for  waste 
performance  of  Southern 
management  need  to  be  raised  up  to  the  level  of 
the  North,  while  putting  in  place  a  structural 
mechanism 
landfills  are 
adequately monitored. 

to  ensure 

that  all 

regions 

Insufficient  effective  investment  is  being  made 
in  water  infrastructure  in  the  South,  while 
scarcity  and  drought  risks  continue.  The 
fragmentation of the sector, together with the weak 
credit  profile  of  smaller  operators  (Section  4.2), 
remains a barrier to investment. Despite the efforts 
and  the  appointment  of  a  special  commissioner, 
there  has  been  only  limited  progress  in  reducing 
the number of agglomerations non-compliant with 
the  Urban  Waste  Water  Directive (78), 
corresponding  to  a  population  of  over  28  million 
people  still  affected,  mainly  located  in  the  South. 
Between 2012 and 2018, there has been an overall 
improvement 
in  compliance  of  around  15 % 
nationally,  but  in  the  Southern  regions  the  rate 
varies from 25 % in Puglia to 3 % in Calabria (79).  

in  more 

Investing 
sustainable  modes  of 
transport  is  necessary  to  limit  the  negative 
spillovers  to  economic  activity.  In  2017,  limit 
values  for  EU  air  quality  were  exceeded  in  areas 
inhabited  by  about  25  million  people,  mostly 

(78)  Council Directive 91/271/EEC. 
(79)  Figures  based  on  information  received  in  the  context  of 
cases 2004/2034, 2009/2034, 2014/2059 and 2017/2181. 

more  than  double  that  recorded  in  the  rest  of  the 
country (5.4 %). However, recovery is expected to 
slow  down  and  both  consumption  and  investment 
gaps remain large (Svimez, 2018). 

The  divergence  in  investment  between  the 
North and the South is particularly marked for 
innovation.  The  number  of 
intangibles  and 
employees  employed  in  high-tech  industries  is 
almost  twice  as  big  in  the  North  (3.7 %  versus 
2 %)  and  R&D  expenditure  is  1.5  times  bigger 
(1.4 %  of  regional  GDP,  compared  to  0.9 %  of 
regional GDP in the South). The number of patents 
per inhabitant is 10 times higher in the North than 
in  the  South  (106.8  versus  10.1  per  1 million 
people) (Nascia et al., 2018). 

Weaknesses  in  the  innovation  ecosystem  in  the 
South  constraint  the  impact  of  measures  to 
support  private 
investment.  The  Southern 
manufacturing  industry  has  benefited  from  the 
fiscal incentives of the Impresa 4.0 plan. However, 
its  weaker  pre-existing  conditions,  such  as  the 
local  level  of  education  and  innovation,  limited 
Italian 
their 
authorities, 
tax  credit  was  mostly 
absorbed  by  firms  in  the  North  (70 %  of  the  total 
costs with respect to only 10 % for Southern firms 
in 2017), while 54 % of firms benefitting from the 
Start-ups  Act  are  located  in  Lombardia,  Emilia 
Romagna, Lazio e Veneto (UPM, 2018). 

impact.  According 

to  data  of 

the  R&D 

The  South  is  lagging  behind  in  transport 
infrastructure.  The  South  is  lagging  behind 
particularly  in  terms  of  connections  and  public 
transport services to TEN-T airports, last-mile rail 
freight  links  with  the  TEN-T  ports  and  inland 
regional 
terminals,  and  basic  standards  on 
railways.  Projects  for  realizing  key  rail  projects 
along the TEN-T core network (Napoli  - Bari and 
Messina - Catania - Palermo) are delayed and were 
still  under  preparation  in  2018.  The  South  is 
lagging  behind  also 
terms  of  urban  and 
in 
sustainable  transport.  Targeted  investments  are 
needed, but need to be complemented by improved 
governance of public services. 

The  development  of  advanced  broadband 
networks  in  rural  Southern  Italy  is  limited  by 
insufficient  investment  and  digital  skills.  These 
areas  are  projected  to  have  a  lower  coverage,  by 
2020, of broadband at 100 Mbps or higher speeds 
than  in  the  rest  of  Italy  (36 %  of  buildings  vs. 

55 

 
                                                           
 
4.4. Competitiveness and investment 

corresponding  to  the  Po  Valley  and  larger  cities. 
This  is  due  to  the  high  level  of  road  traffic,  with 
over 80 % of trips made by private car, as well as 
combustion.  Effective 
inefficient 
planning  measures  (such  as  low  emission  zones), 
emergency  bans  on  certain  types  of  vehicles  and 
parity  between  petrol  and  diesel  fuel  prices 
represent other ways to deal with air pollution. 

domestic 

intended to reduce the gap with respect to the rest 
of the country. 

Graph 4.4.5:  EQI index and labour productivity, Italy 2016-

2017 

to  data  collected  by  ISPRA 

Investment  in  prevention  for  hydrogeological 
and seismic risks is needed to reduce emergency 
expenditures.  In  2016,  there  were  31  flood 
incidents  registered  all  over  the  national  territory. 
According 
the 
damages caused by floods (and landslides) were at 
least  EUR  1.96  billion  in  2016  and  EUR  1.31 
billion  in  2017.  In  November  2018,  Italy  was  hit 
again by floods and landslides with EUR 6 million 
made  available  from  all  sources.  Following  these 
events, for 2019 Italy was granted an allowance of 
EUR 2.1 billion with respect to the EU fiscal rules 
to 
major 
hydrogeological  risks.  The  series  of  earthquakes 
that  hit  Italy  in  2016  had  a  direct  physical  cost 
alone  of  around  EUR  22  billion  on  infrastructure, 
businesses,  public  and  residential  buildings.  The 
EU's Solidarity Fund provided EUR 1.2 billion, the 
highest  amount  ever  paid  out  for  an  application. 
However, vulnerability checks were performed for 
only  one  in  three  schools,  with  negative  peaks  in 
regions with high seismic activity such as Calabria 
(2 %),  Campania  (4 %)  and,  especially  recently, 
Sicily (7 %) (Cittadinanzattiva, 2018).  

prevention 

against 

ensure 

The  lower  quality  of  governance  in  the  South 
seriously  limits  these  regions'  spending  and 
policy  making  capacity.  According  to  the  EQI 
indicators institutional quality in Southern regions 
is  below  the  national  and  EU  average  (Section 
4.4.4).  Institutional  quality  is  highly  correlated  to 
the  level  of  regional  productivity  (Graph  4.4.5). 
in  Southern  regions, 
Institutional  weaknesses 
together  with  other  factors,  remain  important 
bottlenecks  for  an  effective  delivery  of  policies. 
For  instance,  they  prevent  Italian  regions  from 
grasping  the  full  benefits  of  Smart  Specialisation 
strategies 
and 
competitiveness (80).  Institutional  weaknesses  also 
negatively  impact  the  ability  of  less  developed 
regions  to  use  the  EU  funds,  which  are  precisely 

innovation 

terms 

of 

in 

(80)  Focused 

investment  on 

research,  development  and 

innovation on selected priorities. 

Source: European Commission 

4.4.4.  INSTITUTIONAL QUALITY* 

Public administration 

of 

Italian 

Quality  of  governance  indicators  confirm  the 
weaknesses 
Public 
the 
Administration. The average performance level is 
among the lowest in the EU with negative impacts 
on  both  business  and  citizens'  activities.  Complex 
procedures, the overlapping of responsibilities and 
poor  management 
employment 
of 
contribute  to  this  result  (European  Commission 
2017a, 2018b). 

public 

The  business  environment  remains  complex 
despite  important  ongoing  progress.  According 
to  the  2018  Doing  Business  Report,  despite  an 
improvement in 2017 (ranking 46 compared to 50 
in  2016),  Italy  still  performs  below  the  EU 
average.  This  is  confirmed  by  several  indicators 
the  Commission (81)  (European 
monitored  by 
Commission  2018b).  This  contributes  to  further 
slow  down  business  investment  (graph  4.4.2). 
However,  a  preliminary  assessment  of  the  2012 
Start-up  Act  is  positive.  According  to  Italian 
authorities, in April 2018 it had facilitated the birth 

(81)  Paying taxes (IT: 238 hours, EU: 171.39); The complexity 
of  administrative  procedures  (considered  as  a  significant 
problem  by  84%  of  respondents  in  IT  and  by  60%  in  the 
EU);  Cost  to  start-up  a  company  (around  EUR  2000  in 
Italy,  EUR  311  in  the  EU);  The  cost  of  procedure  for 
resolving  insolvency  (costs  of  recovering  debt  as  %  of 
debtors’ estate in 2018: 22% in Italy, 10.25% in the EU). 

56 

4045505560657005101520253035404550Labour Productivity by person employed PPP 2016EQI 2017 
                                                           
 
                                                           
4.4. Competitiveness and investment 

of  more  than  9 000  innovative  start-ups  and 
supported  SME's  in  the  integration  in  a  green 
economy.  Moreover,  a  number  of  other  policy 
measures were adopted: more than 30 standardised 
and  simplified  authorisations  templates  between 
2017 and 2018, and a simpler and faster decision-
making process to grant authorisations (conferenza 
servizi).  However,  the  impact  of  the  measures  is 
still  very  limited.  Further  measures  (e.g.  the 
creation  of  special  economic  zones)  are  still  at  an 
early stage of implementation.  

However,  being  the  collection  of  information 
provided  on  a  voluntary  basis,  a  self-selecting 
effect  might  bias  the  results.  Also,  local  bodies 
need  support  to  apply  the  new  provisions.  In  this 
regards,  the  announced  draft  bill  “concretezza” 
establishes a support group to help administrations 
with the actual enforcement of the reforms. 

Graph 4.4.6:  eGovernment Indicator, 2019 

of 

In 

Italy, 

The  provision  of  digital  public  services  is  an 
additional  challenge.  Digitisation  of  processes 
and  services  could  lead  to  sizable  cost  and  time 
savings,  and  services  quality  improvements  for 
both  citizens  and  businesses.  However,  Italy 
performs worse than the EU average, scoring 47.7 
(Graph  4.4.6). 
against  53.87 
the 
implementation 
eGovernment 
advanced 
solutions,  particularly  the  'digital  by  default'  and 
'once  only' (82)  strategies,  is  expected  to 
the 
produce  annual  relevant  benefits  of  around  EUR 
1.3  billion 
(European  Commission,  2014). 
However,  inconsistent  planning,  scarce  financial 
resources  and 
insufficient  coordination,  are 
delaying  key  initiatives  like  the  digital  population 
registry, 
the 
rationalisation of public administrations' databases 
or 
the  single  sign-on  based  on  an  EIDAS 
compliant  eID  (SPID).  (83)  The  high  average  age 
of  public  employees 
(European  Commission 
2018b)  and  average  low  digital  skills  (ISTAT 
2017)  further  slow  the  process  down.  However, 
when  clear  political  priorities  and  effective 
enforcement  are  combined,  results  are  evident  as 
for the rapid development of the electronic market 
for public administrations and e-invoicing.  

the  online  payment 

system, 

implementation  of 

The 
the  2015  Public 
Administration reform is complete but needs to 
be  properly  operationalised.  Preliminary  results 
by  Italian  authorities  suggest  that  the  new  faster 
the 
procedures  (Conferenza  dei  Servizi)  and 
fruits. 
enhanced 

transparency 

bearing 

are 

(82)  'Digital  by  default'  strategies:  the  electronic  channel 
becomes  the  standard  one  in  delivering  services  (other 
channels are exceptional). 'Once only' strategies: users' data 
are asked once and shared at all administrative levels. 
(83)  EIDAS  is  the  EU  interoperable  standard  for  Electronic 
IDentification,  Authentication  and  trust  Services.  SPID  is 
the  acronym  for  Sistema  Pubblico  d'Identità  Digitale 
(digital identity public system) 

(1) The composite index captures the level of development 
of a country’s eGovernment services  by looking at 
availability, user-friendliness, burden reduction, usage and 
open data policies implementation 
Source: European Commission, Digital Scoreboard, 2019 

take 

longer 

The effects of the reform on public employment 
might 
to  be  visible.  The 
implementing  decrees  concerning  the  recruitment 
procedures,  planning  of  competences  needs,  skills 
and performance evaluation have been adopted and 
the  operationalisation 
is  ongoing.  However, 
modifying  long-standing  administrative  practice, 
especially with low generational turnover and high 
number of temporary agents, might prove difficult. 
The  Concretezza  draft  bill  also  envisages  again  a 
complete turnover of public employment (allowing 
the  replacement  of  every  civil  servant  leaving  the 
administration). 
If  coupled  with  a  proper 
enforcement  of  the  new  rules  for  recruitment 
(European  Commission  2018b),  this  could  be 
beneficial  in  terms  of  average  age  of  the  public 
employment  and  skills  (especially  digital)  level. 
However,  no  legislative  initiatives  have  been  put 
forward  to  reform  the  public  management,  which 
the  public 
the  efficiency  of 
is  key 
administration. 

for 

57 

0.0010.0020.0030.0040.0050.0060.0070.00 
                                                           
 
4.4. Competitiveness and investment 

procedure 

legislation 

The  enforcement  of  the  2016  publicly  owned 
enterprises'  single  framework  and  reforming 
local  public  services  are  crucial.  The  new 
framework  integrates  and  streamlines  previous 
fragmented 
to  better  manage  and 
rationalise  publicly  owned  enterprises  (European 
Commission 2016a). Overall, the set of monitoring 
and  sanctioning  tools  seems  effective.  Still,  given 
the  difficulties  of  past  reform  attempts, 
the 
operationalisation  and 
the  enforcement  are 
expected  to  be  challenging.  By  September  2018, 
local  public  administrations  had  to  complete  the 
non-strategic 
divestment 
shareholdings  identified  in  their  ‘extraordinary’ 
rationalisation plan. By end-2018, local bodies are 
expected  to  review  all  their  shareholdings  owned 
at  end-2017  and  present  their  first  ‘periodic’ 
rationalization  plan.  The  authorities  are  currently 
drafting  a  monitoring  report  to  assess  the  actual 
effectiveness  of 
framework.  Preliminary 
information  suggests  some  challenges  concerning 
local  administrations'  ability  to  effectively  and 
timely dismiss the non-strategic shares. Finally, the 
quality  and  efficiency  of  local  public  services 
would  benefit  from  a  reform  initiative  to  increase 
competition  also  by  favouring  public  open  bids 
over in-house assignments. 

the 

for 

the  sought-after 

The  implementation  of  the public  procurement 
code  is  ongoing,  but  delays  create  uncertainty. 
According  to  Anti-corruption  authority,  between 
2015  and  2017, 
increasing 
centralisation  and  professionalization  of  contracts 
is  taking  place.  However,  crucial  implementing 
measures  are  still  missing,  creating  uncertainty  in 
the application and effective  use of the  new code. 
This  is  particularly  true  for  the  qualification  of 
contracting  authorities,  preventing  substantial 
improvements in their administrative  capacity and 
ability  to  use  public  procurement  efficiently.  The 
prolonged  inactivity  of  the  government’s  Cabina 
di regia has translated into lack of coordination in 
the  implementation  of  the  reform,  further  slowing 
down  progress  and  hampering  the  adoption  of  a 
more  coherent  and  more  widespread  plan  for 
tender  procedures.  The  new 
digitalization  of 
government  announced  amendments  to  the  code 
without  providing  further  details,  further  raising 
uncertainty on the overall framework. 

A 
streamlined  administrative  organisation 
would  increase  the  effectiveness  of  market 
surveillance  and  prevent  unfair  competition 

the 

businesses. 

non-compliant 

inspections,  but  cannot 

from 
The 
responsibility  for  market  surveillance  of  non-food 
products is spread over various ministries, creating 
toys  sector)  and 
frequent  overlaps  (e.g. 
difficulties in identifying common priorities. Local 
bodies perform 
take 
enforcement  decisions  and  do  have  market 
surveillance as their core mission. The Ministry of 
Economic  Development 
for 
coordination,  but  the  overall  system  lacks  clear 
guidelines  to  enable  an  efficient  coordination  and 
effective cooperation and does not allow for direct 
contacts  between  the  all  relevant  other  actors 
involved. The complex organisation couples with a 
scarcity  of 
limits 
significantly the number of inspections and tests. 

resources.  This 

responsible 

financial 

is 

Payment delays from the public administration 
are  slowly 
to  Banca 
improving.  According 
d'Italia,  at  the  end  of  2017,  commercial  arrears  in 
the  public  sector  accounted  for  3.3 %  of  GDP, 
down from 3.8 % in 2016 (from EUR 64 billion to 
EUR  57  billion).  However,  over  the  same  period, 
the  estimated  average  payment  time  registered 
only  a  slight  improvement  (from  100  to  95).  The 
ongoing  development  of  Siope+,  the  information 
system for public transactions, should further help 
in  limiting  the  problem.  However,  the  limitations 
to  the  use  of  factoring  in  public  contracts  is 
penalising  particularly  SMEs.  This  is  particularly 
true  for  many  local  authorities,  still  paying  with 
delays of more 200 days with instances of up 340 
in 
days.  Moreover,  despite  consumers’ 
redress  mechanisms  is  now  in  line  with  the  EU 
average, 
retailers’  awareness  of  Alternative 
Dispute  Resolution  is  the  lowest  in  the  EU 
(European Commission, 2019b). 

trust 

Civil justice 

The low efficiency of Italy's civil justice system 
remains  a  source  of  concern.  In  2017,  the  time 
needed  to  resolve  civil  and  commercial  litigious 
cases in Italy was still the highest in the EU at all 
instances 
2019e). 
(European  Commission, 
Between  2016  and  2017  it  decreased  by  around 
10 %  in  second  and  third  instance  (to  around  2.5 
and  3.5  years,  respectively),  but  rose  in  first 
instance  by  around  6 %  (up  to  1.5  years),  thus 
offsetting  past  efficiency  gains.  The  latter  trend 

58 

 
4.4. Competitiveness and investment 

(i) the  still  limited  and  inconsistent  use  of  the 
inadmissibility filter for appeals in second instance 
courts  (only  1.6 %  of  appeals  were  declared 
in  2017  (European  Commission, 
inadmissible 
2018b), with large variation across courts); (ii) the 
for  administrative  staff 
numerous  vacancies 
(around  8 000);  and  (iii) the 
large  remaining 
differences  across  courts  in  the  effectiveness  of 
case  management  despite  the  adoption  of  the 
Strasbourg II best practices. 

Fight against corruption 

index  of 

Progress with improving Italy's anti-corruption 
framework  is  ongoing,  but  gaps  remain.  While 
remaining low, Italy's  score has slightly improved 
compared  to  2017  in  the  World  Bank's  2018 
“control of corruption” index and in the “incidence 
of  corruption” 
the  2018  Global 
Competitiveness Report. That partly reflects recent 
improvements  in  the  anti-corruption  system,  such 
as a new framework to protect whistleblowers and 
the  stronger  role  of  the  National  Anti-corruption 
Authority  in  implementing  it.  However,  some 
criminal offences like the embezzlement of public 
money  are  still  characterised  in  Italy  by  too  mild 
penalties,  which  prevents  the  use  of  effective 
investigation  techniques  (e.g.  tape  recording),  and 
by  exceptions  to  international  standards,  such  as 
the impossibility to seize the embezzler’s property. 
A new anti-corruption law of January 2019 tackles 
some  of  those  gaps.  To  boost  the  detection  and 
repression of corruption, the law introduces stricter 
minimum and maximum penalties, and thus longer 
prescription terms, for corruption cases, extends to 
them  special  investigation  techniques  like  the 
"operations  under  cover",  and  sets  a  leniency 
scheme for those who first denounce corruption. It 
also  strengthens  deterrence  through  a  permanent 
ban  on  parties  of  a  corruptive  act  from  holding 
public  offices  or  doing  business  with  the  public 
to 
administration,  and 
prescription  terms  after  a  first-instance  conviction 
as  of  2020.  A  single  framework  to  regulate 
lobbying  activities  for  all  elected  and  appointed 
officials  is  still  missing  in  Italy,  but  a  draft  bill 
currently  under  discussion  establishes  an  official 
registry  of  lobbyists  to  better  regulate  lobbying 
activities for members of the Senate. (86) 

introduces  a  stop 

it 

(86)  Draft Law No. 484, 14 June 2018. 

reflects inter alia lower clearance rates (84) at first 
instance  (by  around  6 %)  (European  Commission, 
2019e).  The  Court  of  Cassation,  despite  a  2% 
increase  of  incoming  cases,  managed  to  increase 
its  clearance  rate  from  92%  to  100%.  However,  a 
high  number  of  incoming  cases  at  the  Supreme 
Court  of  Cassation,  coupled  with  lower  clearance 
rates  of  its  tax  section, (85)  negatively  affects  the 
overall efficiency of the Court and raises concerns 
about  the  quality  of  Italy’s  tax  justice  system  at 
first and second instance. Overall, past reforms are 
helping  to  reduce  the  backlog  of  pending  civil 
cases  – still  the  highest  in  the  EU  (European 
Commission,  2019e) –  and  are  starting  to  have  a 
positive  impact  on  trial  length  at  higher  instances 
(GRECO,  2018).  Despite  those  small  efficiency 
gains,  however,  there  is  still  room  to  limit  abuses 
of the trial and ensure a more efficient functioning 
of  courts  to  reduce  the  overall  length  of  civil 
proceedings  (European  Commission,  2018b).  In 
the  absence,  Italy’s  lengthy  civil  proceedings  will 
keep hindering entrepreneurial activity and foreign 
direct investment (Lorenzani and Lucidi, 2014). 

the  parliamentary 

A reform of the civil procedure is still pending. 
An  important  enabling  law  streamlining  certain 
aspects  of  the  civil  procedure  and  introducing 
stronger  deterrence  against  abusive 
litigation, 
submitted  to  parliament  in  2015,  failed  to  pass 
within 
term.  The  new 
government,  however,  announced  another  reform 
proposal  to  extend  the  scope  of  a  simplified 
procedure for civil trials. The draft law (still to be 
published) will make the latter the default, with the 
exception  of  the  most  complex  cases.  It  also 
extends the range of cases in which a single judge 
is  competent  in  first  instance  courts,  streamlines 
mandatory  deadlines  during  the  procedure,  and 
extends  the  scope  of  the  "assisted  negotiation"  to 
reduce litigation. Overall, adequate enforcement of 
simpler  procedural  rules  could  contribute 
to 
decisively speeding up civil trials. Other lingering 
challenges  for  Italy's  civil  justice  system  are: 

(84)  The clearance rate, defined as the ratio of resolved cases to 
incoming  cases,  is  a  commonly-used  indicator  to  monitor 
the case flow and assess the ability of a judicial system to 
handle the inflow of judicial cases. 

(85)  In 2017 the tax section of the Supreme Court of Cassation 
received  over  one  third  of  all  of  its  incoming  cases  but 
attained a clearance rate of only 81% (Corte di Cassazione, 
2018), below the average of 100% for all civil sections of 
the  Court.  Tax  cases 
increasing 
percentage of the backlog of the Court, from 44% in 2014 
to 52% in 2017 and 56% in Q3-2018. 

thus  represent  an 

59 

 
                                                           
                                                           
The  low  efficiency  of  criminal  justice  seriously 
hinders  the  prosecution  of  corruption.  The 
disposition time for criminal cases, around 4 years 
overall  in  2017  (Ministry  of  Justice),  is  broadly 
unchanged  since  2014  and  remains  one  of  the 
longest  in  the  EU  at  all  instances  (CEPEJ,  2018). 
At  the  appeal  level,  in  particular,  long  disposition 
time  (2.5  years)  is  explained  mainly  by  the  high 
number of cases pending for over 2 years (48 % of 
all  pending  cases  in  2016)  and  by  the  increasing 
trend  in  litigation  since  2014  also  due  to  rising 
appeal rates (from 40 % to 45 % over 2014-2017). 
Those  factors  remain  a  source  of  concern. 
Moreover,  as  recent  reforms  of  the  statute  of 
limitations do not apply to ongoing trials, the ratio 
of time-barred over resolved criminal cases rose in 
2017  both  during  the  investigation  and  during  the 
trial,  with  a  worrying  peak  of  26 %  in  appeal 
courts.  As  for  corruption  cases  specifically,  5 % 
got time-barred while being investigated and 15 % 
during  the  trial,  with  peaks  for  embezzlement  of 
public  money  (23 %),  corruption  by  breach  of 
official duties (24 %) and active corruption (25 %). 

A  much-needed  reform  of  the  criminal  trial, 
including  the  appeal  system,  is  in  the  pipeline. 
In  2017,  the  Council  of  Europe (87)  invited  the 
Italian authorities to pursue a "reform of the appeal 
system  and  of  the  statute  of  limitations".  Some 
initial  progress  in  that  direction  with  a  positive 
impact  on  disposition  time  at  first  instance  has 
been  acknowledged  (GRECO,  2018),  in  light  of 
the decriminalisation of minor offences, first steps 
to reform the appellate system and the broadening 
of  the  competences  of  the  judges  of  the  peace. 
However, a comprehensive reform of the criminal 
trial  and  the  appeal  system,  announced  by  the 
government,  is  still  under discussion by an expert 
group  of  the  Ministry  of  Justice.  Among  the 
proposals  officially  submitted  to  the  Ministry (88), 
the following in particular could reduce incentives 
to  delaying  tactics  and  speed  up  criminal  trials: 
(i) a reform of the current prohibition of reformatio 
in peius (89) of appealed rulings, in order to allow 

(87)  The  Group  of  States  against  Corruption  (GRECO)  is  the 
Council of Europe’s anti-corruption monitoring body. 
(88)  For  instance,  proposal  3711  of  23  November  2018  for  a 
reform  of  criminal 
the  National  Judges 
trials  by 
Association  (Italy's  representative  organisation  of  judges): 
"Proposte 
dell'Associazione  Nazionale 
Magistrati in materia di diritto e processo penale" – p 23. 
(89)  The  reformatio  in  peius  indicates  the  possibility  that, 
following  an  appeal,  the  appellants  find  themselves  in  a 

riforma 

di 

4.4. Competitiveness and investment 

the  latter  in  more  cases;  (ii) the  possibility  for 
lawyers  to  validly  receive  judicial  notifications  at 
their domicile on behalf of their defendants, which 
prevents  the  courts  from  having  to  look  for 
defendants  who  cannot  be  found;  and  (iii) the 
broadening  of  the  cases  where  the  witnessess  do 
not  have 
(so-called 
"rinnovazione  degli  atti")  if  a  judge  changes, 
unless specific circumanstances require it.   

to  be  haeard 

again 

the  new 

framework 

Italy’s  National  Anti-corruption  Authority 
improved  its  prevention  role,  especially  in  the 
field  of  public  procurement.  The  authority  is 
almost  fully  staffed  (with  320  posts  filled  out  of 
350)  and  was  given  a  stronger  role  to  implement 
the revised anti-corruption framework. In February 
2018,  it  established  an  online  platform  to  report 
illicit  activities  and  misconduct  (ANAC,  2018a). 
As  such,  an  increase  in  whistleblowing  was 
recorded in June 2018 (ANAC, 2018b), mainly in 
the public sector and on part of public employees. 
In  September  2018,  the  authority  adopted  a 
regulation clarifying its powers to impose fines for 
failure  to  protect  whistleblowers  (ANAC,  2018c). 
to  protect 
However, 
whistleblowers  has  a  limited  impact  on  private 
sector  companies,  whose  adherence  to  it  remains 
voluntary  and  subject  to  the  signature  of  a 
compliance  programme.  The  authority  has  also 
clarified  its  supervisory  role  (ANAC,  2018d), 
which  in  the  first  half  of  2018  resulted  in  102 
investigations  and  16  proceedings  against  public 
administrations for failure to adopt their three-year 
corruption  prevention  plans  (ANAC,  2018e).  As 
regards  public  procurement,  ANAC  carried  out 
133  preventive  and  administrative  checks  over 
2015-2018  through  a  special  section  of  Italy's 
financial  police  (Nucleo  Speciale  Anticorruzione 
Guardia  di  Finanza).  Moreover,  since  its  new 
powers were introduced in 2017, it issued 471 non-
binding pre-dispute opinions to solve procurement 
controversies  before  they  are  brought  to  the 
attention  of  the  administrative  judge.  Last,  a 
regulation  (ANAC,  2018f)  has  clarified 
the 
authority’s  power  to  appeal  the  judicial  system  in 
the  public 
case  of 
procurement  code,  but  that  power  has  rarely  been 
used so far. 

serious  violations  of 

worse position than if they had not appealed. In Italy, if the 
appeal is filed only by the appellant (as opposed to appeals 
filed  by  the  public  prosecutor),  a  "reformatio  in  peius"  of 
the first-instance ruling is not allowed. 

60 

 
                                                           
                                                                                   
4.4. Competitiveness and investment 

Box 4.4.1: Investment challenges and reforms in Italy 

Section 1. Macroeconomic perspective  

The  economic  recovery  in  Italy  after  the  crisis  has  been  weaker  than  in  peer  countries. 
The investment rate has been picking up since 2015, mostly for what concerns equipment 
investment,  but  remains  substantially  below  the  pre-crisis  average.  The  persisting 
weakness of investment is mostly related to structural factors. Finally, the high stock of 
general government debt continues to weigh on public investment.  

Section 2. Assessment of barriers to investment and ongoing reforms  

Italy  presents  a  number  of  challenges,  including  regional  disparities  (section  4.4).  The 
public  institutions  are  often  perceived  as  inefficient,  ineffective  and  not  enough 
supportive of business activities (section 4.4). Moreover, firms are affected by financial 
constraints and a  high  tax burden  on  labour inputs (sections  4.1  and  4.2)  while product 
and service market regulation and skills match can be improved to boost investment and 
productivity (sections 4.3 and 4.4).  

Selected barriers to investment and priority actions underway 

1.  Firms’  access  to  finance  remains  heavily  biased  towards  banks  where  pockets  of 
vulnerabilities  persist  (despite  recent  actions  by  the  authorities),  while  capital  markets 
remain underdeveloped (section 4.2). SME and innovative firms are usually constrained 
in obtaining bank loans by the lack of collaterals and by their undercapitalisation, while 
access to the stock market is generally limited to the few larger companies. Impresa 4.0 
plan  addresses  this  issue  with  a  number  of  measures  (section  4.4),  including  a 
strengthened  public  venture  capital, crowdfunding  for  SMEs  and  start-up,  an  allowance 
for corporate equity and mini-bonds.   

2. The Italian public procurement system is inefficient because of the fragmentation of the legal framework 
(section 4.4), the low level of administrative capacity and the lack of coordination among institutions make. 
A Public procurement and concessions code has been adopted. However, the implementation of the code is 
still not complete causing uncertainty and slowing down investment.    

61 

Regulatory/ administrative burdenTaxationCSRPublic administrationCSRAccess to financeCSRPublic procurement /PPPsCooperation btw academia, research and businessJudicial systemCSRFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCSRCompetition and regulatory frameworkCSRRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation, skills, lifelong learning EnergyTransportLegend:No barrier to investment identifiedSome progressCSRInvestment barriers that are also subject to a CSRSubstantial progressNo progressFully addressedLimited progressNot assessed yetFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ EducationPublic administration/ Business environment 
 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment  

2018 country-specific recommendations (CSRs)  

Italy has made No Progress in addressing CSR 1  

CSR  1:  Ensure  that  the  nominal  growth  rate  of  net 
primary government expenditure does not exceed 0.1 
%  in  2019,  corresponding  to  an  annual  structural 
adjustment  of  0.6  %  of  GDP.  Use  windfall  gains  to 
accelerate  the  reduction  of  the  general  government 
debt ratio. Shift taxation away from labour, including 
by  reducing  tax  expenditure  and  reforming  the 
outdated  cadastral  values.  Step  up  efforts  to  tackle 
the shadow economy, including by strengthening the 
compulsory  use  of  e-payments  through  lower  legal 
thresholds  for  cash  payments.  Reduce  the  share  of 
old-age  pensions  in  public  spending  to  create  space 
for other social spending.  

Ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  0.1  %  in 
structural 
2019,  corresponding 
adjustment  of  0.6  %  of  GDP.  Use  windfall  gains  to 
accelerate  the  reduction  of  the  general  government 
debt ratio.  

to  an  annual 

The compliance assessment with the Stability and 
Growth Pact will be included in Spring when final 
data for 2018 will be available.  

Shift  taxation  away  from  labour,  including  by 
reducing tax expenditure and reforming the outdated 
cadastral values.  

No  Progress  No  progress  was  achieved  in  these 
areas,  because:  (i)  tax  expenditures  have  been 
reviewed  but  not  streamlined;  (ii)  cadastral  values 
have not been reformed; and (iii) taxation on labour 
has not been reduced nor shifted to other tax base but 
only a very marginal reduction of taxation on capital 
has been enacted (namely self-employed through the 
extension of the so-called "flat tax regime").  

Step  up  efforts  to  tackle  the  shadow  economy, 
including by strengthening the compulsory  use of e-
payments  through  lower  legal  thresholds  for  cash 
payments.  

has 

the  2018  budget 

Limited  Progress  E-invoicing 
become 
compulsory for the private sector as of 2019 pursuant 
law  of  December  2017. 
to 
Moreover,  electronic  transmission  of  receipts  has 
been  introduced.  Nevertheless,  a  new  tax  amnesty 
could offset the positive impact of those measures on 
tax compliance; no action was taken to encourage e-
payments for instance through lower legal thresholds 
for cash payments.  

Reduce  the  share  of  old-age  pensions  in  public 
spending to create space for other social spending.  

No  Progress  Old-age  pension  expenditure  has 
actually been increased through the introduction of a 
new early-retirement scheme.  

CSR  2:  Reduce  the  length  of  civil  trials  at  all 
instances  by  enforcing  and  streamlining  procedural 
rules,  including  those  under  consideration  by  the 
legislator.  Achieve  more  effective  prevention  and 

Italy has made Limited Progress in addressing CSR 
2  

62 

 
 
A. Overview Table 

repression  of  corruption  by  reducing  the  length  of 
criminal  trials  and  implementing  the  new  anti-
corruption  framework.  Ensure  enforcement  of  the 
new  framework  for  publicly-owned  enterprises  and 
increase  the  efficiency  and  quality  of  local  public 
services.  Address 
to  competition, 
restrictions 
including  in  services,  also  through  a  new  annual 
competition law.  

Reduce  the  length  of  civil  trials  at  all  instances  by 
enforcing 
rules, 
including those under consideration by the legislator.  

streamlining  procedural 

and 

No Progress No new measures have been introduced 
to enforce and streamline procedural rules, including 
those against the misuse of litigation.  

Achieve more effective prevention and repression of 
corruption  by  reducing  the  length  of  criminal  trials 
and 
anti-corruption 
the 
framework.  

implementing 

new 

for  corruption  offences. 

Some  Progress  A  new  anti-corruption  law  was 
passed  by  the  Parliament  in  December  2018.  It 
introduced  stricter  penalties  and  longer  prescription 
It  even  stops 
terms 
prescription terms after a first instance conviction (as 
requested by GRECO) but only as of 2020. However, 
despite the recent reform of the statute of limitations, 
prosecution  of  corruption  remains  ineffective due to 
long trials and the still unmet need of a reform of the 
appeal system to avoid misuse of litigation.  

Ensure  enforcement  of  the  new  framework  for 
publicly-owned 
the 
increase 
enterprises 
efficiency and quality of local public services.  

and 

Limited  Progress  The  enforcement  of  the  the  new 
SOEs  framework  is  ongoing,  although  with  some 
delays.  The  limited  ability  of  local  bodies  to 
effectively  dismiss  non-core  shares  is  delaying  the 
enforcement. No initiatives have been taken on local 
public services.  

Address  restrictions  to  competition,  including  in 
services, also through a new annual competition law.  

No  Progress  No  progress  is  registered  in  reducing 
barriers to competition.  

CSR 3: Maintain the pace of reducing the high stock 
of  non-performing  loans  and  support  further  bank 
restructuring  and  consolidation, 
balance 
including  for  small  and  medium-sized  banks,  and 
promptly implement the insolvency reform. Improve 
market-based access to finance for firms.  

sheet 

Italy has made Some Progress in addressing CSR 3  

Maintain the pace of reducing the high stock of non-
performing  loans  and  support  further  bank  balance 
sheet  restructuring  and  consolidation,  including  for 
small  and  medium-sized  banks,  and  promptly 
implement the insolvency reform.  

sales 

scheme 

and 
guarantee 

securitisations  with 
(GACS) 

repair 
Some  Progress  Banks’  balance  sheet 
including  non-performing  loans  disposals  through 
the 
outright 
government 
has 
substantially  progressed.  Despite  a  number  of 
important  banking  reforms  adopted  in  recent  years, 
the  corporate  governance  reform  of 
large 
cooperative  banks  has  stalled  and  that  of  the  small 
mutual  banks  somewhat  watered  down,  while  the 
insolvency framework reform still has to be finalised. 
Having  said  this,  a  recovering  banking  system,  in 

the 

63 

 
A. Overview Table 

particular  small  and  mid-sized  banks, 
is  now 
suffering  contagion  from  the  increase  in  sovereign 
yields, which has already negatively impacted banks' 
capital positions and jeopardised access to unsecured 
wholesale funding.  

Improve market-based access to finance for firms.   Limited  Progress  In  addition 

to  past  policy 
measures  (the  SME  Guarantee  Fund,  instruments 
through  the  state  lender  Cassa  Depositi  e  Prestiti 
(CDP), Minibonds, the alternative investment market 
(AIM), and long-term individual saving plans (PIR)), 
a new fund for venture capital has been set and PIR 
will  be  extended  to  unlisted  companies.  However, 
the allowance for corporate equity (ACE), conducive 
in lowering leveraging and boosting firm equity  has 
been  abolished  as  part  of  the  2019  Budget  law. 
Although  these  measures  go  in  the  right  direction, 
there 
firms' 
capitalisation by the abrogation of  ACE (which  was 
largely used by corporations).  

is  a  backtracking  on 

increasing 

Italy has made Limited Progress in addressing CSR 
4  

job-search  assistance  and 

CSR  4:  Step  up  implementation  of  the  reform  of 
active  labour  market  policies  to  ensure  equal  access 
to  effective 
training. 
Encourage  labour  market  participation  of  women 
through  a  comprehensive  strategy,  rationalising 
family-support  policies  and  increasing  the  coverage 
of  childcare  facilities.  Foster  research,  innovation, 
through  better-
digital  skills  and 
targeted  investment  and  increase  participation  in 
vocational-oriented tertiary education.  

infrastructure 

Step  up  implementation  of  the  reform  of  active 
labour  market  policies  to  ensure  equal  access  to 
effective job-search assistance and training.  

Some Progress Monitoring indicators and minimum 
standards  for  Public  Employment  Services  (PES) 
staff  were  set  at  the  national  level  by  Decree  in 
January  2018,  but 
strengthening  coordination 
between  the  national  agency  (ANPAL)  and  regions 
remains  a  major  challenge.  PES  are  being  linked 
through  a  newly  developed  national  IT  system.  The 
information  provided  to  non-registered  people  has 
also  been 
the  on-line 
improved,  as  well  as 
registration  of  jobseekers  and  the  set-up  of  single 
points of contact for the long-term unemployed. But 
active  labour  market  policies  (ALMP)  are  barely 
integrated and coordinated with related policies (e.g. 
social protection, social services, adult learning, and 
vocational  training).  Major  competences  lie  with 
regional authorities, which received new resources in 
2018 to reinforce public employment services (PES). 
However,  recruitments  of  new  staff  has  not  yet 
started.  

64 

 
A. Overview Table 

Encourage  labour  market  participation  of  women 
through  a  comprehensive  strategy,  rationalising 
family-support  policies  and  increasing  the  coverage 
of childcare facilities.  

in 

the 

lowest 

labour  participation 
Limited  Progress  Female 
remains  one  of 
the  EU.  The 
employment  rate  of  women  (20-64)  is  substantially 
lower  than  the  EU  average  ([52.5%  vs  66.4%])  in 
2017.  A  high  tax  wedge  for  second  earners  reduces 
the  financial  incentive  for  women  to  take  up  work 
(the  marginal  tax  rate  for  a  second  earner  earning 
two  thirds  of  the  average  wage  is  at  [30.5%]  in 
20XX). In addition, the lack of adequate measures to 
reconcile  professional  and  private  life  such  as  care 
facilities tends to hamper employment, especially for 
women  with  dependent  children  or  other  family 
members in need of care. The share of children under 
three  years  of  age 
in  formal  early  childhood 
education  at  27.3%  is  well  below  the  EU  average. 
This  situation  is  exacerbated  by  an  inadequate 
system of parental leave.  

research, 

Foster 
innovation,  digital  skills  and 
infrastructure through better-targeted investment and 
increase  participation  in  vocational-oriented  tertiary 
education.  

available, 

information 

Limited Progress A fully fledged assessment of the 
R&D incentives contained in Impresa 4.0 is lacking. 
tax 
From  preliminary 
incentives  would  have  had  a  positive  impact  on 
private  investment.  However, the incentives  -  which 
remain of temporary nature - have been substantially 
reduced by the last budget law. The latter introduced 
a new (supposedly structural) system of tax reduction 
on reinvested profit, which however does not seem to 
concern  also  investment  in  R&D.  The  new  budget 
law  confirms  the  tax  credit  on  training  in  skills 
linked to 4.0 technologies for 2019 (with 250 million 
EUR budget, the same amount budgeted the previous 
year);  however  a  comprehensive  strategy  for  digital 
skills  is  still  missing;  the  funding  for  the  National 
Plan  for  Digital  School  is  still  insufficient  for 
reaching 
the  Plan's  objectives  and  competence 
centers  for  the  Industry  4.0  strategy  are  having  a 
slow  start.  The  funding  of  public  research  is 
stagnating  (0.50%  GDP  in  2017,  the  lowest  value 
since  2005).  Public  investment  in  infrastructure 
remains  low,  although  the  government  intends  to 
address  the  issue  of  lack  of  project  management 
skills  within  public  administrations  that  hampers 
ability 
the 
'lauree 
interesting 
professionalizzanti', 
tertiary 
education concern only a few thousand students. The 
2019  Budget  Law  sets  two  institutional  bodies  to 
strengthen  investment  capacity  of  national and local 
authorities (Centrale per la progettazione delle opere 
pubbliche e Investitalia). Moreover, funds to promote 
innovative 
as  Artificial 
Intelligence, Blockchain and Internet of Things were 

investment.  Despite 
on 

and 
vocational-oriented 

to  carry  out 
initiatives 

technologies 

such 

ITS 

65 

 
A. Overview Table 

created.  The  drafting  of  a  standard  contract  for 
Public-Private  Partnership  is  ongoing.  The  PPP  for 
the  creation  of  Competence  centres  were  selected. 
Finally, the 2019 Budget Law provides incentives for 
private employers who hire young graduates or PHD 
holders through a permanent contract (EUR 50 mn in 
2019  and  20  in  2020).  No  progress  is  registered  on 
education, particularly on vocational-oriented tertiary 
education.  

The employment rate has increased to 63.3 % in Q3-
2018,  still  lower  than  the  national 
target  and 
substantially below the EU average (73.2 %). 

Italy  is  not  on  track  to  meet  its  EU2020  target,  as, 
R&D  intensity  would  need  to  grow  at  more  than 
double the growth rate of the current trend. 

In 2017, R&D intensity in Italy was 1.35 % of GDP 
composed  of  61 %  private  investment  (0.83 %  of 
GDP) and 37 % public investment (0.50 % of GDP). 

Europe 2020 (national targets and progress)  

Employment rate target set in the NRP: 67-69 %.  

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

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

According to the projections submitted in 2017, Italy 
is  on  track  to  meet  its  2020  greenhouse  gas  (GHG) 
emission  target,  with  a  8  percentage  points  margin 
(i.e. a reduction of 21%). 

2020 renewable energy target: 17 %  

 In  2017,  according  to  preliminary  data,  emissions 
were reduced by 20 % from 2005. The interim target 
of  11  %  reduction  was  thereby  overachieved  by  9 
percentage points.  

With  a  renewable  energy  share  of  18.3  %  in  2017, 
Italy  is  well  above  the  trajectory  to  reach  its  2020 
renewable  energy  target.  However  compared  to  last 
year,  the  share  of  renewable  electricity  generation 
stalled,  remaining  at  34%,  while  the  share  of 
renewables  in  transport  decreased  of  about  13% 
(from 7,4% in 2016 to 6,5 % in 2017). Only the share 
of  renewables  in  heating  and  cooling  increased 
substantially  over  this  period  (from  18.9  %  to 
20.1%).  Further  efforts  are  therefore  needed  across 
all three sectors in view of ensuring a steady growth 
of  renewables  and  the  achievement  of  the  2020  and 
2030 objectives. 

66 

 
 
 
A. Overview Table 

Energy efficiency, 2020 energy consumption targets:  

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

The target was set at a level that would allow energy 
consumption  to  grow  in  the  coming  years.  After  the 
growth of both primary and final energy consumption 
in  the  period  2013-2014,  energy  consumption  in  the 
country decreased between 2015 and 2016. However 
primary energy consumption registered again a small 
increase, moving from 148.0 Mtoe in 2016 to 148,94 
Mtoe  in  2017.  Final  energy  consumption  decreased 
slightly  from  115.9  Mtoe  in  2016  to  115.2  Mtoe  in 
2017.  In  light  of  the  possible  economic  recovery  in 
Italy  and  of  the  recent  upward  trend  in  primary 
energy  consumption,  further  efforts  are  however 
needed  both  to  remain  within  the  levels  set  for  the 
2020 energy efficiency target and in view of the new 
2030 objectives.   

Early  leavers  from  education  and  training  target: 
16 % 

 (EU target: <10 %)   

Tertiary education attainment (% of population aged 
30-34) target: 26-27 % 

 (EU target: >40 %) 

Italy reached its national target in 2014 (15 %). The 
figure  for  2017  was  14  %,  slightly  up  from  the 
previous year (13.8 % ), and still one of the highest in 
the EU.  

The national target was reached in 2016 (26.2 %and 
the figure further increased in  2017 (to 26.9 %) – but 
is still one of the lowest in the EU and nowhere near 
the EU target of at least 40 %. 

Target  for  reducing  the  number  of  people  at  risk  of 
poverty or social exclusion, expressed as an absolute 
number of people: -2.2 million (base year 2010: 15.1 
million).  

With  an  increase  of  more  than  2  million  people  at 
risk  of  poverty  or  social  exclusion  (AROPE) 
compared  to  2008,  Italy  has  not  met  this  target.  In 
2017,  the  AROPE  rate  declined  to  28.9 %,  down 
from  30.0 %  in  2016.  However,  it  remains  well 
above both pre-crisis levels (25.5 % in 2008) and the 
EU average (22 %). 

67 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

68 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio131.2131.1131.0131.1131.9132.8133.9134.9136.2137.9140.3143.2146.5Changes in the ratio (-1+2+3)-0.1-0.1-0.10.10.71.01.11.01.31.82.32.93.3of which(1) Primary balance (1.1+1.2+1.3)1.41.71.00.80.60.30.1-0.1-0.2-0.3-0.4-0.6-0.7(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)2.01.80.90.40.30.20.1-0.1-0.2-0.3-0.4-0.6-0.7(1.1.1) Structural primary balance (bef. CoA)2.01.80.90.40.40.40.40.40.40.40.40.40.4(1.1.2) Cost of ageing0.10.30.40.60.70.91.01.21.4(1.1.3) Others (taxes and property incomes)0.00.10.10.10.20.20.20.20.3(1.2) Cyclical component-0.5-0.20.20.50.30.20.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.1-0.10.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)1.10.50.70.41.41.31.10.91.11.51.92.32.6(2.1) Interest expenditure3.83.73.83.94.04.14.24.34.64.85.25.55.8(2.2) Growth effect-2.0-1.5-1.5-1.7-0.5-0.4-0.4-0.9-0.8-0.7-0.5-0.5-0.5(2.3) Inflation effect-0.7-1.6-1.7-1.8-2.1-2.3-2.6-2.6-2.6-2.7-2.7-2.8-2.8(3) Stock-flow adjustments0.21.10.20.50.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.IT - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 11012013014015016017020162017201820192020202120222023202420252026202720282029Debt as % of GDP -ITBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario11012013014015016017020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -ITp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline11012013014015016017020162017201820192020202120222023202420252026202720282029Debt as % of GDP -ITBaselineHistorical SPB scenarioSGP scenario11012013014015016017020162017201820192020202120222023202420252026202720282029Debt as % of GDP -ITBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryHIGHHIGHHIGHHIGHHIGHHIGHDebt level (2029)146.5136.0154.7155.9153.5Debt peak year20292029202920292029Percentile rank51.0%30.0%Probability debt higher59.3%Dif. between percentiles25.3HIGHLong termDSAHIGHDebt sustainability analysis (detail)Medium termHIGHHIGHShort termLOW(S0 = 0.4)(S1 = 9.4)S2MEDIUM(S2 = 2.9)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial Market Indicators 

(1)  Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2018. 
(3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

69 

201320142015201620172018Total assets of the banking sector (% of GDP)1)252.3248.0237.2232.3215.5211.9Share of assets of the five largest banks (% of total assets)39.641.041.043.043.4-Foreign ownership of banking system (% of total assets)2)8.68.37.88.68.08.3Financial soundness indicators:2)              - non-performing loans (% of total loans)-16.516.515.011.210.0              - capital adequacy ratio (%)13.714.214.813.916.816.0              - return on equity (%)3)-11.5-2.83.1-7.77.17.4Bank loans to the private sector (year-on-year % change)1)-3.5-0.8-0.6-0.2-1.60.0Lending for house purchase (year-on-year % change)1)-1.1-0.90.41.72.11.9Loan to deposit ratio2)-109.2105.8101.2102.195.8Central Bank liquidity as % of liabilities1)-6.25.16.58.47.9Private debt (% of GDP)121.6119.0115.1111.8110.5-Gross external debt (% of GDP)2) - public43.250.350.947.345.642.0    - private31.230.729.527.225.326.5Long-term interest rate spread versus Bund (basis points)*274.7172.9121.8139.8179.4216.5Credit default swap spreads for sovereign securities (5-year)*199.7101.692.2107.886.887.1 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Long-term unemployed are people who have been unemployed for at least 12 months.       
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
(5) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is seasonally adjusted (annual series, for EE, EL, HU, IT and UK data based on first three 
quarters of 2018). 
Source: Eurostat 

70 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)16.815.014.713.814.0:Gender employment gap (pps)19.819.420.020.119.819.9Income inequality, measured as quintile share ratio (S80/S20)5.85.85.86.35.9:At-risk-of-poverty or social exclusion rate1 (AROPE)28.528.328.730.028.9:Young people neither in employment nor in education and training (% of population aged 15-24)22.222.121.419.920.1:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)59.759.960.561.662.362.9Unemployment rate2 (15-74 years)12.112.711.911.711.210.6Long-term unemployment rate3 (as % of active population)6.97.76.96.76.56.2Gross disposable income of households in real terms per capita4 (Index 2008=100) 88.488.589.690.791.3:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)20408205972076221070::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)-1.3-0.70.10.7::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction521.521.521.721.419.4:Children aged less than 3 years in formal childcare22.022.927.334.428.6:Self-reported unmet need for medical care7.07.07.25.51.8:Individuals who have basic or above basic overall digital skills (% of population aged 16-74)::43.044.0:: 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(2) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
(4) Average of first three quarters of 2018. Data for youth unemployment rate is seasonally adjusted (annual series, for EE, EL, 
HU, IT and UK data based on first three quarters of 2018). 

Source: Eurostat, OECD 

71 

Labour market indicators201320142015201620172018 4Activity rate (15-64)63.463.964.064.965.4:Employment in current job by durationFrom 0 to 11 months8.99.310.010.310.5:From 12 to 23 months5.95.66.17.07.0:From 24 to 59 months13.813.312.412.412.6:60 months or over71.471.871.570.369.8:Employment growth* (% change from previous year)-1.80.10.71.31.20.6Employment rate of women(% of female population aged 20-64)49.950.350.651.652.553.1Employment rate of men (% of male population aged 20-64)69.769.770.671.772.373.0Employment rate of older workers* (% of population aged 55-64)42.746.248.250.352.253.7Part-time employment* (% of total employment, aged 15-64)17.618.118.318.518.518.3Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)13.213.614.114.015.517.1Participation in activation labour market policies(per 100 persons wanting to work)16.715.1::::Transition rate from temporary to permanent employment(3-year average)20.119.119.820.116.3:Youth unemployment rate (% active population aged 15-24)40.042.740.337.834.732.2Gender gap in part-time employment24.324.324.424.524.224.3Gender pay gap1 (in undadjusted form)7.06.15.55.3::Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)6.28.17.38.37.9:Underachievement in education2::23.3:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)22.523.925.326.226.9:Variation in performance explained by students' socio-economic status3::9.6::: 
  
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator       
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.        
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation.       
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
(5) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.       
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.       

Source: Eurostat, OECD 

72 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare6.86.86.86.66.6:Disability1.61.71.71.71.7:Old age and survivors16.717.016.816.816.5:Family/children1.21.21.61.71.8:Unemployment1.61.81.71.71.7:Housing0.00.00.00.00.0:Social exclusion n.e.c.0.20.20.20.20.3:Total28.128.628.828.828.6:of which: means-tested benefits1.61.62.12.22.3:General government expenditure by function (% of GDP, COFOG)Social protection20.521.021.221.321.1:Health7.27.27.27.07.0:Education4.14.14.04.03.9:Out-of-pocket expenditure on healthcare (% of total health expenditure)21.721.822.123.123.1:Children at risk of poverty or social exclusion (% of people aged 0-17)*34.132.032.133.533.232.1At-risk-of-poverty  rate1 (% of total population)19.519.319.419.920.620.3In-work at-risk-of-poverty rate (% of persons employed)11.011.011.011.511.712.2Severe material deprivation rate2  (% of total population)14.512.311.611.512.110.1Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan8.39.18.49.76.55.2Tenant, rent at market price16.816.219.118.614.811.1Proportion of people living in low work intensity households4 (% of people aged 0-59)10.611.312.111.712.811.8Poverty thresholds, expressed in national currency at constant prices*861182128118814783448504Healthy life years (at the age of 65)Females7.17.17.37.510.1:Males7.77.77.87.810.4:Aggregate replacement ratio for pensions5 (at the age of 65)0.60.60.60.70.70.7Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::35.640.243.553.8GINI coefficient before taxes and transfers*51.051.651.751.352.551.8GINI coefficient after taxes and transfers*32.432.832.432.433.132.7 
 
 
 
 
 
 
 
  
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) Value added in constant prices divided by the number of persons employed.       
(2) Compensation of employees in current prices divided by value added in constant prices.       
(3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology .        
(4) Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing 
over the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if 
received 75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the 
application is still pending or don't know.       
(5) Percentage population aged 15-64 having completed tertiary education.       
(6) Percentage population aged 20-24 having attained at least upper secondary education.       
(7) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
(8) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       

Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation 
indicators); SAFE (for outcome of SMEs' applications for bank loans)."       

73 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-1.020.481.431.861.213.01Labour productivity growth in construction-2.262.75-1.760.350.530.73Labour productivity growth in market services-2.83-0.090.44-0.23-0.88-0.14Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry1.381.850.681.17-0.01-1.10ULC growth in construction-0.35-4.350.682.740.970.17ULC growth in market services1.510.720.242.312.841.50Business environment201220132014201520162017Time needed to enforce contracts3 (days)118511851185112011201120Time needed to start a business3 (days)7.57.56.56.06.06.0Outcome of applications by SMEs for bank loans41.080.951.060.580.510.33Research and innovation201220132014201520162017R&D intensity1.271.311.341.341.371.35General government expenditure on education as % of GDP4.104.104.004.003.90:Employed people with tertiary education and/or people employed in science and technology as % of total employment333333343435Population having completed tertiary education5141415161617Young people with upper secondary education6787880808182Trade balance of high technology products as % of GDP-0.61-0.43-0.41-0.56-0.49-0.41Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall1.801.491.26OECD PMR7, retail3.854.063.15OECD PMR7, professional services3.553.022.10OECD PMR7, network industries82.972.452.01 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

(1) All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
  Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions 
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport industry 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

74 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.110.100.100.100.10-Carbon intensity kg / €0.300.290.280.280.27-Resource intensity (reciprocal of resource productivity)kg / €0.360.320.310.320.320.32Waste intensity kg / €0.10-0.10-0.10-Energy balance of trade % GDP-3.8-3.3-2.6-2.0-1.6-1.9Weighting of energy in HICP%9.5710.029.119.969.558.98Difference between energy price change and inflation %9.20.1-3.7-2.8-4.71.4Real unit of energy cost% of value added14.714.012.613.113.8-Ratio of environmental taxes to labour taxesratio0.160.160.170.160.17-Environmental taxes% GDP3.53.53.63.43.5-Sectoral Industry energy intensity kgoe / € 0.110.100.100.100.10-Real unit energy cost for manufacturing industry excl. refining% of value added18.217.516.017.319.0-Share of energy-intensive industries in the economy% GDP8.097.977.887.757.838.01Electricity prices for medium-sized industrial users€ / kWh0.170.170.170.160.150.15Gas prices for medium-sized industrial users€ / kWh0.040.040.040.030.030.03Public R&D for energy % GDP0.020.020.020.020.020.02Public R&D for environmental protection% GDP0.020.010.020.010.010.01Municipal waste recycling rate%38.439.441.643.545.1-Share of GHG emissions covered by ETS*%39.937.636.636.336.4-Transport energy intensitykgoe / €0.530.540.560.570.55-Transport carbon intensitykg / €1.441.441.531.541.47-Security of energy supplyEnergy import dependency%56.455.940.651.247.2-Aggregated supplier concentration indexHHI13.816.013.314.916.1-Diversification of energy mixHHI0.300.290.290.290.30- 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR ITALY 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027  of  2  May  2018  (COM  (2018)  321),  this  Annex  D  presents  the preliminary  Commission 
services views on priority investment areas and framework conditions for effective delivery for the 2021-
2027 Cohesion Policy. These priority investment areas are derived from the broader context of investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis  for  a  dialogue  between  Italy  and  the  Commission  services  in  view  of  the  programming  of  the 
cohesion policy funds (European Regional Development Fund and European Social Fund Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Expenditure  on  research  and  innovation  in  Italy  is  significantly  below  EU  average  and  the 
country is considered a moderate innovator. Italy has room to foster productivity growth by 
enhancing research and innovation capacities and the uptake of advanced technologies, in 
line  with  national  and  regional  smart  specialisation  strategies.  High  priority  investment 
needs(90) are identified to address the technological, economic and societal challenges, while 
tackling strong regional divergences, in particular to: 

increase the number and the scale-up of innovative firms in knowledge-intensive sectors with 
the highest growth potential; 

foster  knowledge  exchanges  between  research  organisations  and  businesses,  especially 
innovative  small  and  medium  sized  enterprises, 
in  particular  through  collaborative 
partnerships and training. 

support  innovative  services  for  research  organisations  and  companies  that  cooperate  with 
the aim of transforming new ideas into commercially viable innovative enterprises. 

Given  the  lack  of  integration  of  digital  technologies  in  the  economy  and  the  low  level  of 
digital  skills,  investment  needs  have  therefore  been  identified  to  promote  digitisation  for 
citizens, companies and governments, and in particular to: 

increase  digital  skills  in  small  and  medium  sized  enterprises  and  their  uptake  of  digital 
technology solutions, including e-commerce, e-payments, cloud-computing services, and also 
internet of things, cybersecurity and artificial intelligence;  

improve  the  deployment  of  digital  public  services  for  both  citizens  and  businesses,  and  e-
procurement, to support the efficiency and transparency of public administrations. 

(90)  The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs. 

75 

 
 
 
                                                           
 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for ITALY 

Italian  small  and  medium  sized  enterprises  perform  below  EU  average  in  terms  of 
productivity  and  growth.  Investment  needs  have  therefore  been  identified  to  enhance 
growth and competitiveness of small and medium sized enterprises, and in particular to: 

foster growth and productivity-enhancing strategies through promotion of entrepreneurship, 
managerial and financial skills, skills related to industrial transition (e.g. energy efficiency and 
circular economy), and value chains integration; 

support internationalisation of small and medium sized enterprises to move up in the global 
value chains, including by joining cooperation networks and inter-regional clusters;  

facilitate access to finance and address regional disparities through a balanced use of grants 
and financial instruments in less-developed regions and a wider use of financial instruments 
in more-developed ones. 

Policy  Objective  2:  A  low  carbon  and  greener  Europe  –  Clean  and  fair  energy  transition, 
green and blue investment, circular economy, climate adaptation and risk prevention 

Italy  scores  well  with  respect  to  the  2020  Climate  and  Energy  targets.  However,  the 
decoupling  between  economic  growth  and  energy  consumption  is  still  weak,  and  recent 
progress in both renewable energy and energy efficiency is modest. High priority  investment 
needs  have  therefore  been  identified  to  promote  energy  efficiency  measures,  as  well  as 
priority investments for renewable energy, and in particular to: 

promote  energy efficiency through renovation of social housing and  public buildings, giving 
priority  to  deep  renovations,  innovative  technologies  and  most  advanced  standards  and 
practices; 

promote  innovative  and  less  mature  renewable  technologies,  particularly  for  heating  and 
cooling, in public buildings, social housing and industrial processes in small and medium sized 
enterprises;  

promote  technologies,  such  as  energy  storage,  to  integrate  more  renewable  energy  in  the 
system  and  increase  flexibility  and  smartening  of  the  grid,  also  increasing  the  coupling  of 
energy sectors.  

Due  to its  geography, Italy is particularly  vulnerable to threats  arising from climate change, 
hydrogeological  events  and  seismic  activity.  High-priority  investment  needs  have  therefore 
been  identified  to  promote  climate  change  adaptation,  risk  prevention  and  disaster 
resilience, and in particular to: 

strengthen  prevention  and  preparedness  measures  increasing  hydrogeological  resilience 
based  on  an  integrated  basin  and  eco-system  restoration  approach,  in  line  with  regional 
floods management plans; 

promote seismic resilience, focusing on public buildings, such as schools and hospitals; 

deploy green infrastructure aimed at ecosystem restoration and climate adaptation in urban 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for ITALY 

areas more vulnerable to climate change, biodiversity loss and air pollution. 

The quality of local water and waste management is greatly uneven across regions. The level 
of infringements with EU water legislation is relatively high in the less developed regions. On 
waste  management,  despite  some  improvements,  more  efforts  are  needed  to  comply  with 
the post-2020 recycling targets, especially in less developed regions. Investment needs have 
therefore  been  identified  to  promote  sustainable  water  and  waste  management,  and 
circular economy, and in particular to: 

address  water  access,  reuse,  treatment,  drinking  water  and  leakage  in  the  less  developed 
regions; 

support waste prevention, reuse and recycling with adequate infrastructure, and target upper 
stages  of  the  waste  hierarchy,  such  as  separate  waste  collection  systems,  in  the  less 
developed regions;  

supporting small and medium sized enterprises in implementing innovative circular economy 
and other green economy solutions. 

Policy  Objective  3:  A  more  connected  Europe  –  Mobility  and  regional  information  and 
communication technology connectivity 

On ultrafast internet connectivity (100 Mbps and above), Italy still lags behind EU average. In 
order  to  enhance  digital  connectivity,  high-priority  investment  needs  have  therefore  been 
identified: 

build very-high capacity broadband networks, starting from the deployment of infrastructure 
networks for ultrafast internet access (100 Mbps or more) in white areas, also with the aim of 
tackling the urban-rural broadband coverage gap. 

The Italian transportation system relies heavily on roads. The sector could contribute more to 
climate change objectives. Moreover, the Italian section of the Scandinavian-Mediterranean 
corridor, eligible for ERDF funding in the less developed regions, is still incomplete. In order to 
develop a sustainable, climate resilient, intelligent, secure and intermodal Trans European 
transport network, investment needs have therefore been identified in the following areas: 

completion of the rail Trans European transport network , also bringing national sections of 
the  network  in  line  with  EU  standards  (including  European  Railway  Traffic  Management 
System, interoperability. accessibility for users with reduced mobility);  

multimodality:  i)  rail-sea  connections  to  Trans  European  transport  network  core  ports  for 
freight transport; ii) rail/public transport links to Trans European transport network airports 
for passengers. 

As for regional railways, which connect  inner areas with urban centres  and Trans European 
transport network nodes, there is a persistent infrastructure gap between the more and the 
in  terms  of  electrification,  single  vs.  double  tracks,  traffic 
less  developed  regions, 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for ITALY 

management  systems  and  intermodality  stations.  In  order  to  develop  sustainable,  climate 
resilient,  intelligent  and  intermodal  regional  mobility,  investment  needs  have  therefore 
been identified in the following areas: 

electrification of regional railways;  

improvement  of  traffic  management  systems,  elimination  of  uncontrolled  and  non-
automated  level  crossings,  and  enhanced  access  for  persons  with  reduced  mobility  to 
railways; 

better  accessibility  and  improved  access  to  urban  centres  and  Trans  European  transport 
network, through intermodal platforms (bikes, car-sharing, etc.) nearby regional rail stations. 

The  efficiency  and  quality  of  local  public  transport  is  generally  lagging  behind  in  the  less 
developed regions, while some Centre-Northern Italy’s urban centres which are affected by 
traffic congestion. In order to promote actions included in sustainable urban mobility plans 
and  enable  the  shift  from  private  cars  towards  cleaner  forms  of  mobility,  high  priority 
investment needs have therefore been identified in order to: 

support intermodal platforms, and promote active and innovative forms of mobility (such as 
bikes); 

support clean transport infrastructure (e.g. metro, tram, light rail); 

promote the expansion of infrastructure for electro-mobility; 

intelligent transport systems solutions for improved infrastructure use and service quality. 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

Italy  faces  important  labour  market  challenges,  notably  the  labour  market  participation  of 
women  and  youth,  with  a  wide  territorial  divide.  High  priority    investment  needs  have 
therefore  been  therefore  identified  to  improve  access  to  employment,  modernise  labour 
market institutions and promote women’s labour market participation, taking into account 
regional disparities, and in particular to: 

improve access to the labour market, in particular for women, youth, third country nationals, 
long-term unemployed and inactive people; 

improve  the  capacity  of  labour  market  institutions  and  services,  and  enhance  cooperation 
with employers and education institutes and between service providers; 

promote  work-life  balance  policies,  including  access  to  affordable  care  services,  greater 
involvement of men in caring duties and support to innovative ways of work organisation;  

fight undeclared work and labour exploitation (e.g. migrants in the agriculture sector). 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for ITALY 

The education and training system is characterised by wide regional differences in terms of 
learning outcomes, school infrastructure and equipment. High priority investment needs have 
therefore  been therefore  identified  to improve the quality,  accessibility,  effectiveness and 
labour  market  relevance  of  education  and  training  and  promote  lifelong  learning,  and  in 
particular to: 

fight early school leaving and improve basic skills levels, with particular attention to the areas 
with the highest drop-out rates; 

widen  access  to  tertiary  education,  in  particular  for  students  from  low  socio-economic 
backgrounds,  including  by  increasing  the  offer  of  student  accommodation,  and  expand  the 
tertiary non-academic sector to increase tertiary educational attainment; 

ensure the quality, accessibility, inclusiveness, effectiveness and labour market relevance of 
education and training, in particular for persons with disabilities and disadvantaged groups, 
to support acquisition of key competences, including digital skills; 

modernise vocational education and training systems, including by strengthening work-based 
learning; 

ensure  lifelong  learning,  upskilling  and  reskilling  for  all,  including  low  skilled  adults,  taking 
into  account  digital  skills  as  well  as  other  specific  sectoral  needs  (e.g.  green  industrial 
transformation),  through  validation  of  prior  learning,  better  anticipation  of  new  skills 
requirements; 

upgrade education equipment and infrastructure in all levels of education, in particular in less 
developed regions. 

The  rate  of  people  at  risk  of  poverty  and  social  exclusion  and  income  inequality  remain 
among the highest in the EU. High priority  investment needs have therefore been therefore 
identified  to  foster  active  inclusion,  promote  the  socio-economic  integration  of  people  at 
risk  of  poverty  or  social  exclusion,  address  material  deprivation,  improve  accessibility, 
effectiveness and resilience of healthcare and long-term care with a view to reducing health 
inequalities, and  in particular to: 

foster  integrated  and  personalised  active  inclusion  measures  to  outreach  people  at  risk  of 
poverty or social exclusion, including children and working poor; 

enhance  high  quality,  accessible  and  affordable  social  services  and  their  infrastructure, 
including  housing,  childcare,  healthcare  and  long-term  care,  taking  into  account  regional 
disparities and the rural/urban divide, also in access to innovative technologies and new care 
models; 

improve accessibility and adequacy of social protection systems as well as independent living 
for  all,  including  persons  with  disabilities,  through  the  development  of  community-based 
services and the integration of health, social and long-term care services; 

ensure  the  re-skilling  and  upskilling  of  healthcare,  long-term  care  and  social  service 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for ITALY 

workforce; 

promote  socio-economic  integration  of  third-country  nationals,  while  also  ensuring  their 
protection  from  violence  and  exploitation,  and  of  marginalised  communities,  also  through 
housing infrastructure; 

address  material  deprivation  through  food  and  basic  material  assistance  to  the  most 
deprived. 

Policy Objective 5 – A Europe closer to citizens by fostering the sustainable and integrated 
development of urban, rural and coastal areas and local initiatives 

Italy  has  a  large  geographical  diversity  of  “territories”  (urban,  metropolitan,  rural  but  also 
coastal,  islands,  mountains)  with  a  high  degree  of  complexity,  potential  and  challenges. 
Territorial strategies need to be implemented in synergy with the other policy objectives with 
the  primary  aim  of  fostering  economic  and  social  development  in  areas  most  affected  by 
poverty.  Investment  needs  have  therefore  been  identified  at  territorial  level,  in  terms  of 
functional areas: 

metropolitan  functional  areas  need  to  address  poverty  challenges,  caused  also  by 
agglomeration effect and population trends; 

medium  urban  areas  need  to  develop  innovative  ways  of  cooperation  in  order  to  enhance 
their economic, social and environmental potential, taking vulnerable groups into account; 

inner areas confronted with demographic challenges and poverty need to improve the quality 
of services of general interests. 

In  the  context  of  territorial  strategies,  investments  needs  are  also  identified  to  promote 
cultural heritage and support to enterprises in the culture and creative sectors, with a focus 
on local production systems and locally rooted jobs, including through territorial cooperation. 

Factors for effective delivery of Cohesion policy 

Italy  is  confronted  with  weak  administrative  capacity  for  the  management  of  European 
Structural and Investment Funds. This is reflected in below-average absorption of European 
Structural  and  Investment  funds  in  some  regions  and  for  some  national  programmes.  To 
improve the administration and implementation of the European Structural and Investment 
Funds, there is a need to: 

ensure proper implementation of administrative strengthening plans (Piani di Rafforzamento 
Amministrativo) based on the experience of the 2014-20 period; 

reinforce partnership and bottom-up policy setting with greater involvement of cities, other 
local  bodies,  and  economic  and  social  partners  to  ensure  a  timely  and  efficient 
implementation of territorial and urban integrated strategies;  

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for ITALY 

enhance capacity and participation of social partners in the delivery of the policy objectives; 

increase  administrative  capacity  of  beneficiaries,  in  particular  at  local  level,  to  prepare  and 
implement projects; 

improve, both in terms of quality and timing, the preparation of key infrastructural projects, 
in particular rail projects on the national network in less developed regions;  

take  into  account  the  lessons  learnt  in  Piemonte  during  the  implementation  of  the 
Commission  pilot  project  on  industrial  transition,  in  particular  about  the  impact  of  new 
technologies, decarbonisation and the promotion of inclusive growth; 

strengthen measures to prevent and combat conflict of interests, fraud and corruption; 

improve  public  procurement  performance,  in  particular  with  regard  to  the  number  of 
contracting  authorities,  their  professional  capacity,    their  ability  to  integrate  sustainability 
and innovation aspects in procurement, single bidding, simplification of procedures, decision 
speed,  small  and  medium  sized  enterprises  contractors,  and  capacity  of  the  authorities  to 
carry out effective verifications; 

broader  use  of  financial  instruments  and  contribution  to  a  compartment  for  Italy  under 
InvestEU for all revenue-generating and cost-saving activities. 

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