REPORT FROM THE COMMISSION Italy Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Italy, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 535 final  REPORT FROM THE COMMISSION Italy  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Italy 

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

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general  escape  clause  of  the  Stability  and  Growth  Pact.    The  clause,  as  set  out  in  Articles 
5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of 
Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe 
economic downturn. In its Communication, the Commission shared with the Council its view 
that, given the expected severe economic downturn resulting from the COVID-19 outbreak, 
the  current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data  notified  by  the  Italian  authorities  on  22  April  2020  and  subsequently  validated  by 
Eurostat1  show  that  the  general  government  deficit  in  Italy  reached  1.6%  of  GDP  in  2019, 
while  general  government  gross  debt  stood  at  134.8%  of  GDP.  According  to  the  2020 
Stability Programme, Italy plans a deficit of 10.4% of GDP in 2020, while debt is planned at 
155.7% of GDP.  

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Moreover,  the  data  for  2019  imply  insufficient  progress  towards  the  debt  reduction 
benchmark, which also provides evidence of a prima facie existence of an excessive deficit as 
defined by the Stability and Growth Pact. 

Against  this  backtround,  the  Commission  has  therefore  prepared  this  report.  It  analyses 
Italy’s  compliance  with  the  deficit  and  debt  criteria  of  the  Treaty.  It  takes  into  account  all 
relevant  factors  and  gives  due  consideration  to  the  major  economic  shock  linked  to  the 
COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f  

1 

 
 
 
 
                                                           
Table 1. General government deficit and debt (% of GDP)   

2016 

2017 

2018 

2019 

2020 
COM 

-2.4% 

-2.4% 

-2.2% 

-1.6% 

-11.1% 

2021 
COM 

-5.6% 

134.8% 

134.1% 

134.8% 

134.8% 

158.9% 

153.6% 

5.8% 

6.3% 

7.3% 

7.4% 

1290% 

5.7% 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 
Gap to the 
debt 
benchmark 

Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION 

Based  on  the  2020  Stability  Programme,  Italy’s  general  government  deficit  is  expected  to 
reach  10.4%  of  GDP  in  2020,  above  and  not  close  to  the  Treaty  reference  value  of  3%  of 
GDP. The planned excess over the Treaty reference value in 2020 is exceptional, as it results 
from  a  severe  economic  downturn.  Taking  into  account  the  impact  of  the  COVID-19 
pandemic, the Commission 2020 spring forecast projects a contraction of real GDP in 2020 
by  9.5%.  The  drop  in  economic  activity  is  expected  to  reduce  government  revenues,  while 
government expenditure is set to rise due to the cost of automatic stabilisers and the policy 
response.  The  direct  budgetary  impact  of  the  latter  is  estimated  at  around  4.5%  of  GDP  in 
2020. 

The  planned  excess  over  the  Treaty  reference  value  would  not  be  temporary  based  on  the 
Commission 2020 spring forecast, which projects the deficit to remain above 3% of GDP in 
2021.  

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference  value.  The  planned  excess  is  considered  exceptional  but  not  temporary  for  the 
purposes of the Treaty and the Stability and Growth Pact’. Hence, the analysis suggests that 
prima  facie  the  deficit  criterion  for  the  purpose  of  the  Treaty  and  Regulation  (EC)  No 
1467/97 is not fulfilled. 

3. 

DEBT CRITERION  

Italy’s  government  debt-to-GDP ratio stabilised  at  around 134.8% between 2018 and 2019. 
Specifically,  the  debt-increasing  “snowball  effect”  (1.8%  of  GDP  in  2019,  due  to  interest 
expenditure  of  around  3.4%  of  GDP  and  nominal  GDP  growth  at  1.2%)  was  offset  by  the 
headline primary surplus (1.7% of GDP) and the very marginal debt-reducing impact of the 
stock-flow adjustment.  

The notified data show that Italy did not comply with the debt reduction benchmark in 2019 
(see Table 1), as the gap to the benchmark is 7.4% of GDP. The analysis thus suggests that 
prima facie the debt criterion is not fulfilled based on the 2019 outturn data. 

2 

 
 
 
 
 
4. 

RELEVANT FACTORS 

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

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given  due  consideration.  For  the  apparent  breach  of  the  debt  criterion,  the  analysis  of  the 
relevant  factors  is  particularly  warranted,  given  that  debt  dynamics  are  to  a  larger  extent 
influenced  by  factors  outside  the  control  of  the  government  than  is  the  case  for  the  deficit. 
This  is  recognised  in  Article  2(4)  of  Regulation  (EC)  No  1467/97,  which  provides  that  the 
relevant  factors  shall  be  taken  into  account  when  assessing  compliance  on  the  basis  of  the 
debt criterion irrespective of the size of the breach. In that respect, at least the following three 
main aspects need to be considered when assessing compliance with the debt criterion given 
their  impact  on  the  debt  dynamics  and  sustainability:  (i)  adherence  to  the  MTO  or  the 
adjustment  path  towards  it;  (ii)  the  implementation  of  structural  reforms;  and  (iii)  the 
prevailing economic conditions. 

As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance with the 
deficit criterion in 2020, since the government debt-to-GDP ratio exceeds the 60% reference 
value and the double condition is not met - i.e. that the deficit remains close to the reference 
value and that its excess over the reference value is temporary - those relevant factors cannot 
be  taken  into  account  in  the  steps  leading  to  the  decision  on  the  existence  of  an  excessive 
deficit on the basis of the deficit criterion for Italy.  

In the current  situation,  a key  additional factor to  take into consideration regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results in  a highly  uncertain outlook. The pandemic has also  led to 
the activation of the general escape clause. 

4.1. 

 COVID-19 pandemic 

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative impact throughout the Union. The consequences for GDP growth will depend both 
on  the  duration  of  the  pandemic  and  on  the  measures  taken  by  national  authorities  and  at 
European  and  global  level  to  slow  its  spread,  protect  production  capacities  and  support 
aggregate demand. Member States have already adopted or are adopting budgetary measures 
to increase the capacity of health systems and provide relief to those individuals and sectors 
that  are  particularly  affected.  Significant  liquidity  support  measures  and  other  guarantees 
have  also  been  adopted.  Subject  to  more  detailed  information,  the  competent  statistical 
authorities are to examine whether those measures entail an immediate impact on the general 
government balance or not. Together with the fall in economic activity, those measures will 
contribute to substantially higher government deficit and debt positions. 

3 

 
 
4.2 

Medium-term economic position, including structural reforms 

The  COVID-19  pandemic  and  the  related  containment  measures  are  set  to  push  Italy’s 
economy into a deep recession in 2020. This a mitigating factor in the assessment of Italy’s 
compliance  with  the  deficit  criterion  in  2020.  Specifically,  the  Commission  2020  spring 
forecast projects  GDP to decline by 9.5% in the current  year, in particular as the lockdown 
measures put an abrupt break on private consumption and export markets shrink sharply, with 
tourism  among  the  hardest-hit  sectors.  Moreover,  firms  are  expected  to  cut  investment 
spending amid a collapse in demand, draining cash flows and high uncertainty. A technical 
rebound is expected in the second half of 2020, supported by policy measures, and followed 
by  a  partial  recovery  in  2021.  However  the  macroeconomic  outlook  is  marked  by  an 
exceptional  degree  of  uncertainty  related  to  the  duration  of  the  pandemic  and  its  economic 
impact. 

Moreover,  Italy  had  been  experiencing  a  macroeconomic  slowdown  already  before  the 
current  crisis,  with  both  real  GDP  growth  and  the  GDP  deflator  below  1%  since  2018. 
Specifically, real GDP growth decelerated from 1.7% in 2017 to 0.8% in 2018 and to 0.3% in 
2019, thereby falling below potential growth in that year (0.6%), as the impact of a slowdown 
in global trade spread to the economy and was amplified by subdued domestic demand. The 
GDP deflator, in turn, increased from 0.7% in 2017 to 0.9% in 2018 and remained stable in 
2019.  Overall,  Italy’s  long-lasting  macroeconomic  slowdown,  with  nominal  GDP  growth 
below 2% since 2018, can be argued to partly explain the large compliance gap with the debt 
reduction benchmark in 2019. 
In  its  2020  Country  Report2,  the  Commission  assessed  that  Italy  made  some  progress  in 
addressing  the  2019  Country  Specific  Recommendations,  which  can  be  considered  as  a 
further  mitigating  factor.  More  specifically,  Italy  made  substantial  progress  in  fighting  tax 
evasion,  including  by  strengthening  the  compulsory  use  of  electronic  payments.  Italy  made 
some  progress  in  ensuring  that  active  labour  market  and  social  policies  are  effectively 
integrated and reach out  to  vulnerable groups; focusing investment-related economic policy 
on  research  and  innovation  and  quality  of  infrastructure;  making  the  public  administration 
more effective; fostering bank balance sheet restructuring; and improving non-bank financing 
for smaller and innovative firms. On the other hand, Italy made limited progress in shifting 
taxation  away  from  labour,  reducing  tax  expenditure  and  reforming  the  cadastral  system; 
tackling undeclared work; supporting women’s participation in the labour market; improving 
educational  outcomes  including  through  adequate  and  targeted  investment  and  fostering 
upskilling; reducing the length of civil trials by enforcing and streamlining procedural rules; 
and improving the effectiveness of the fight against corruption by reforming procedural rules 
to reduce the length of criminal trials. Moreover, Italy made no progress in reducing the share 
of old-age pensions in public spending to create space for other social and growth-enhancing 
spending;  and  addressing  restrictions  to  competition,  including  by  means  of  a  new  annual 
competition law. 

2  See  Commission  Staff  Working  Document  SWD  (2020)  511  final,  26.2.2020,  "Country  Report  Italy  2020. 

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

4 

 
 
                                                           
4.3 

 Medium-term budgetary position, including government investment 

The headline deficit fell from 2.2% of GDP in 2018 to a historic low of 1.6% in 2019. That 
decrease is related to positive revenue developments, supported by policy measures adopted 
by  the  government,  for  instance  to  fight  tax  evasion,  and  a  resilient  labour  market.  Public 
investment  is  estimated  to  have  slightly  increased  from  around  2.1%  of  GDP  in  2018  to 
around 2.3% in 2019, which is higher than the general government deficit recorded in 2019. 

On 13 July 2018, Italy was recommended to ensure that the nominal growth rate of primary 
government  expenditure,  net  of  discretionary  revenue  measures  and  one-offs,  would  not 
exceed 0.1% (‘the expenditure benchmark’) in 2019, corresponding to a structural adjustment 
of  0.6%  of  GDP3.  Based  on  outturn  data  and  the  Commission  forecast,  expenditure  growth 
exceeded the benchmark. Once the 0.18% of GDP allowance granted under the unusual event 
clause is subtracted from the preventive arm requirement4, this leads to a deviation from the 
recommended  adjustment  path  towards  the  medium-term  budgetary  objective  of  0.4%  of 
GDP, thus pointing to some deviation in 2019 and to a significant deviation over 2018-2019 
taken  together.  The  structural  balance  improved  by  0.8  percentage  points  of  GDP  in  2019, 
thus  pointing  (after  considering  the  unusual  event  clause)  to  compliance  with  the 
recommended  adjustment  towards  the  medium-term  budgetary  objective  both  in  2019  and 
over 2018-2019 taken together. 

The difference between the two indicators is mainly due to revenue windfalls (0.5 percentage 
points of GDP) and the change in interest expenditure (0.3 percentage points of GDP). The 
former  is  related  to  a  strong  increase  in  public  revenues  despite  weak  real  GDP  growth, 
which  is  explained  by  positive  labour  market  developments  largely  related  to  permanent 
contracts5  and,  to  a  lesser  extent,  by  important  policy  measures  to  fight  tax  evasion  (e.g. 
electronic  invoicing,  electronic  transmission  of  receipts,  and  the  revised  methodology  to 
estimate taxpayers’ income), whose exact discretionary impact is still difficult to assess. The 
latter factor is due to lower average sovereign bond yields in 2019 compared to 2018, which 
can  be  considered  also  as  being  the  result  of  the  positive  market  perception  of  budgetary 
measures  adopted  by  Italy  in  December  2018  and  July  2019  following  a  dialogue  with  the 
Commission.  Given  the  structural  nature  of  the  more  positive  revenue  developments  than 
expected on the basis of real GDP dynamics, an overall assessment thus highlights that there 
is  no  robust  evidence  that  Italy  was  in  significant  deviation  from  the  recommended 
adjustment  path  towards  the  medium-term  budgetary  objective  in  2019  and  over  2018  and 
2019 taken together.  

3 See OJ 2019/C 301/12 “Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of 

Italy and delivering a Council opinion on the 2019 Stability Programme of Italy” 

4 In its 2019 Stability Programme, Italy requested an allowance of 0.2% of GDP in 2019 under the unusual event 
clause  for  the  budgetary  impact  of  extraordinary  road  network  maintenance  following  the  collapse  of  the 
Morandi  bridge  in  Genoa  and  a  preventive  plan  to  limit  hydrogeological  risks  following  adverse  weather 
conditions. In its 2020 Draft Budgetary Plan, Italy revised the amount to 0.18% of GDP. The 2020 Stability 
Programme  confirms  the  amount  of  0.18%  of  GDP  for  2019  (of  which  EUR  1.9  billion  for  road  network 
maintenance and EUR 1.3 billion for hydrogeological risk). 

5 In 2019, the total number of employees grew by 0.9%, with around 90% of  this increase related to a rise in 
permanent  contracts.  This  development  is  partly  explained  by  the  government  decree  adopted  in  November 
2018, which enforced stricter conditions for temporary contracts. At the same time, domestic wages grew on 
average by 1.3% in 2019. 

5 

 
 
                                                           
The  Stability  Programme  provides  information  on  substantial  measures  to  contain  the 
pandemic  and  to  support  the  economy.  It  estimates  the  direct  budgetary  impact  of  these 
support measures at around 4.5% of GDP in 2020. Finally, despite the lingering uncertainty 
about the medium-term fiscal outlook, the Stability Programme indicates the main traits of a 
longer-term strategy to reduce public debt, after the historic high of 155.7% of GDP projected 
for 2020. Specifically, it projects the debt-to-GDP ratio to start declining already in 2021, to 
152.7%, as part of a “multiannual effort of preserving fiscal sustainability within a strategy of 
fair  and  sustainable  development  from  the  social  and  environmental  viewpoint”.  In  that 
context, the authorities stress that, following the current shock, the Italian economy will need 
a period in which growth is relaunched without counterproductive fiscal consolidations, while 
basing  a  sustainable  debt-reduction  strategy  on  a  primary  balance  in  surplus  and  on 
strengthening  Italy’s  potential  growth  on  the  back  of  ambitious  public  and  private 
investments. 

4.4.  Medium-term government debt position 

General  government debt remained broadly stable at around 134.8% of GDP between 2016 
and 2019, since the debt-increasing effect  of interest  expenditure (although on a decreasing 
trend) and stock-flow adjustments was largely offset by a consistent track record of headline 
primary surpluses and low yet positive nominal GDP growth. According to the Commission 
2020  spring  forecast,  Italy’s  general  government  debt  is  expected  to  rise  from  134.8%  of 
GDP  in  2019  to  158.9%  in  2020,  mainly  reflecting  GDP  dynamics  and  a  primary  balance 
expected to turn negative for only the second time since the launch of the euro. 

The debt sustainability analysis updated with the Commission 2020 spring forecast confirms 
that, notwithstanding risks,  Italy’s debt  position remains sustainable over the medium-term, 
which takes account of important mitigating factors like the profile of government debt and 
the  external  position6.  In  particular,  while  the  debt  position  deteriorates  as  a  result  of  the 
current  COVID-19  crisis,  the  debt  ratio  in  the  baseline  is  expected  to  be  on  a  sustainable 
(declining) trajectory over the medium term (Graph 1)7. 

6  Namely,  a  large  share  of  Italy’s  debt  is  issued  at  fixed  rates,  and  its  average  maturity  has  risen  over  recent 
years to around 8 years, dampening the effect of potential rises in financing costs and reducing rollover risks. 
The large share of government debt held by residents and a stable evolution of liquidity buffers also contribute 
to the resilience of the debt position to global market fluctuations. Italy’s net international investment position, 
which has moved close to balance over the last few years, also represents a mitigating factor. However, there 
is some degree of uncertainty due to contingent liability risks stemming from the private sector, including the 
possible calling of State guarantees to firms and self-employed during the current COVID-19 crisis. 

7 The baseline is based on the Commission Spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy is assumed, consistent with the EU economic and fiscal coordination and surveillance frameworks. Real 
GDP  growth  is  projected  according  to  the  so-called  EPC/OGWG  T+10  methodology.  In  particular,  (real) 
actual  GDP  growth  is  driven  by  its  potential  growth  and  affected  by  any  additional  fiscal  adjustment 
considered  (through  the  fiscal  multiplier).  Inflation  is  assumed  to  converge  gradually  to  2%.  Interest  rates 
assumptions are set in line with financial market expectations. Under the adverse scenario, higher interest rates 
(by 500 bps.) and lower GDP growth (by -0.5 pp.), with respect to the baseline, are assumed (throughout the 
projection horizon). 

6 

 
 
                                                           
Graph 1:Government debt-to-GDP ratio, Italy, % of GDP 

185

175

165

155

145

135

125

115

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Baseline

Adverse scenario

Source: Commission services 

4.5 

Other factors put forward by the Member State 

On  15  May  2020,  the  Italian  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous  sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities. 
Additional factors not yet mentioned above are: 

(i)  The structural  balance in 2019 improving more than requested by the Council, which 
was  supported  by  policy  measures  against  tax  evasion  and  accompanied  by  major 
progress on social inclusion and rising public investment. The positive fiscal trend was 
continuing in the first two months of 2020. 

(ii)  The  low  nominal  GDP  growth  in  2019,  which  hindered  debt  reduction  efforts. 
According  to  the  authorities,  the  weak  macroeconomic  performance  of  Italy  was  also 
due to external factors and deflationary mechanisms within the euro area.  

(iii)  The  underestimation  of  the  slack  in  Italy’s  economy  based  on  the  commonly  agreed 
methodology, whose results for Italy are argued to be debatable on a comparative basis.  

(iv)  The relatively  high sovereign  yields in  comparison to  other large  euro area countries, 
which according to the authorities are at odds with Italy’s budgetary performance and 
partly  due  to  a  pessimistic  assessment  of  Italy’s  growth  potential  by  international 
organizations. 

(v)  The  priority  given  to  social  inclusion  in  Italy’s  2018-2019  reform  agenda,  also  given 

the risk of productivity-enhancing reforms undermining social cohesion. 

(vi)  The  government’s  plan  to  start  reducing  the  headline  deficit  with  the  2022  budget, 
depending on macroeconomic developments by mid-2021. The debt-reduction strategy 

7 

 
 
 
 
will rest on structural reforms, investment and innovation policies aimed at raising the 
growth potential of the economy coupled with an adequate fiscal stance.  

 5. 

CONCLUSIONS 

According to the Stability Programme, Italy’s general government deficit in 2020 is planned 
to increase to 10.4% of GDP, above and not close to the 3% of GDP Treaty reference value. 
The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  but  not 
temporary.  

Italy’s general government gross debt stood at 134.8% of GDP at the end of 2019, above the 
60% of GDP Treaty reference value. Italy did not comply with the debt reduction benchmark 
in 2019. 

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance 
with the deficit criterion in 2020, since the government debt-to-GDP ratio exceeds the 60% 
reference value and the double condition is not met - i.e. that the deficit remains close to the 
reference  value  and  that  its  excess  over  the  reference  value  is  temporary  -  those  relevant 
factors cannot be taken into account in the steps leading to the decision on the existence of an 
excessive deficit on the basis of the deficit criterion for Italy. Overall, the analysis suggests 
that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not 
fulfilled. 

As regards compliance with the debt criterion in 2019,  the relevant factors considered are: (i) 
the observed macroeconomic conditions, whereby the slowdown recorded since 2018 can be 
argued to partly explain Italy’s large gaps to compliance with the debt reduction benchmark; 
(ii)  some  progress  with  the  implementation  of  growth  enhancing  structural  reforms  in  past 
years;  and  (iii)  the  fact  that  there  is  no  robust  evidence  of  a  significant  deviation  from  the 
preventive arm in 2019 and over 2018 and 2019 taken together.  

Overall, the analysis leads to the conclusion that there is no sufficient evidence that the debt 
criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is or is not complied 
with. 

8