COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Italy in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy
Date: 2021-06-02
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, European Semester, Italy, coronavirus disease, economic recovery, epidemic, fiscal policy, investment policy, macroeconomics, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 2.6.2021  SWD(2021) 407 final  COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Italy              in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy {COM(2021) 500 final} - {SWD(2021) 401 final} - {SWD(2021) 402 final} - {SWD(2021) 403 final} - {SWD(2021) 404 final} - {SWD(2021) 405 final} - {SWD(2021) 406 final} - {SWD(2021) 408 final} - {SWD(2021) 409 final} - {SWD(2021) 410 final} - {SWD(2021) 411 final} - {SWD(2021) 412 final}  
 
 
CONTENTS 

Executive summary 

1.  Assessment of Macroeconomic Imbalances 

2.  Thematic Issue: Public Debt 

3.  Thematic Issue: Labour Market 

4.  Thematic Issue: Financial Sector 

LIST OF TABLES 

Table 1.1: 

Outward spillovers heat map, Italy 

Table 1.2: 

Assessment of Macroeconomic Imbalances Matrix - Italy 

Table 1.3: 

Selected economic and financial indicators, Italy 

LIST OF GRAPHS 

Graph 2.1: 

Thematic Graphs: Public debt 

Graph 3.1: 

Thematic graphs: Labour market 

Graph 4.1: 

Thematic Graphs: Financial sector 

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12 

17 

20 

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9 

11 

16 

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EXECUTIVE SUMMARY 

The  2021  Alert  Mechanism  Report  concluded  that  an  in-depth  review  should  be  undertaken  for 
Italy to examine further the persistence of imbalances or their unwinding. In February 2020, under 
the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances  Procedure,  the 
Commission identified “excessive macroeconomic imbalances” in Italy. These imbalances related to high 
government  debt  and  protracted  weak  productivity  dynamics  in  a  context  of  high  unemployment  and  a 
still  high  level  of  non-performing  loans,  albeit  with  a  decreasing  trend.  The  analysis  shows  that  these 
vulnerabilities  remain.  It  should  be  noted  that  the  context  of  the  assessment  of  vulnerabilities  in  this 
year’s  in-depth  review  (IDR)  for  Italy  is  markedly  different  from  last  year.  Also,  the  evolution  of  the 
COVID-19 pandemic, the strength of the recovery, and possible structural implications of the crisis are all 
still surrounded by high  uncertainty, requiring caution in the  assessment. In general, policy action over 
the past year focused on cushioning the impact of the COVID-19 shock and facilitating the recovery. This 
has  added  to  indebtedness  but  should  support  adjustment  in  the  medium-term.  Looking  forward,  the 
Recovery  and  Resilience  Plan  provides  an  opportunity  to  address  imbalances,  investment  and  reforms 
needs.   

Main observations and findings of this IDR analysis are: 

  This IDR is informed by the 2021 spring forecast, which expects a recovery in economic activity 
in Italy with the easing of the COVID-19 crisis. After the steep drop of 8.9% in 2020, real GDP is 
projected  to  increase  by  4.2%  this  year  and  4.4%  next  year,  reaching  the  pre-pandemic  level  of 
economic activity by the end of 2022.  

  Italy’s high government debt-to-GDP ratio sharply increased to 155.8% in 2020 and is projected 
to rise further in 2021, before declining in 2022. The increase in 2020  was driven by the drop in 
GDP and the measures taken to address the COVID-19 crisis and to support the economy. In 2021, the 
prolonged fiscal support needed in light of the duration of the pandemic is expected to cause a further 
increase in government debt to 159.8% of GDP, despite the projected economic growth. In 2022, the 
debt  ratio  is  expected  to  decline  to  156.6%  of  GDP  thanks  to  the  economic  recovery  and  the 
improving primary balance. In the short term, the pace of decline of the debt-to-GDP ratio will depend 
on the strength of the economic recovery and the national fiscal stance. In the longer term, effective 
reforms supporting potential growth as well as prudent fiscal policies will be crucial.   

  Higher potential growth is essential for a faster reduction in the government debt-to-GDP ratio. 
Potential  growth,  historically  low  for  over  a  decade,  is  forecast  to  rise  to  0.9%  by  2022.  Labour 
productivity registered a sizeable increase in 2020, as the drop in hours worked exceeded the fall in 
economic output, but long-term productivity growth remains constrained by barriers to investment in 
the private and public sectors, and a limited reallocation of resources to the most productive firms.  

  While the Italian banking sector has strengthened since the double-dip recession in 2008-2013, 
vulnerabilities  remain.  Italian  banks  further  reduced  their  legacy  stock  of  non-performing  loans 
(NPLs) to a gross ratio of 5.7% in the third quarter of 2020. However, the NPLs ratio still stands well 
above the euro area average of 2.7% and is likely to increase once support measures are phased out. 
Bank  lending  volumes  have  increased  markedly  throughout  the  pandemic,  predominantly  driven  by 
public  guarantees  to  meet  firms’  greater  liquidity  needs,  to  avert  a  credit  crunch  and  corporate 
insolvencies.  The  phasing-out  of  support  measures  can  induce  a  tightening  of  the  credit  conditions, 
restriction of credit supply and deterioration of banks’ asset quality. 

  Employment  dropped  sizeably  since  the  onset  of  the  COVID-19  crisis,  but  the  unemployment 
rate  declined  in  2020,  as  a  large  number  of  persons  exited  the  labour  market.  Employees  on 
fixed-term  contracts  and  the  self-employed  bore  the  brunt  of  the  COVID-19  shock,  even  though 
strong government support mitigated the overall impact of the crisis on the labour market. However, 
the  unemployment  rate  is  forecast  to  increase  in  2021  and  to  stay  at  elevated  levels  in  2022,  as  an 
increasing  labour  force  is  set  to  at  least  partly  offset  employment  gains.  Activity  and  employment 
rates, in particular of women and young people, remain markedly below the EU average. 

1 

 
1.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Introduction  

In  February  2020,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalances Procedure, the Commission identified “excessive macroeconomic imbalances” in Italy. 
These excessive imbalances related to high government debt and protracted weak productivity dynamics, 
which also imply risks  with cross-border relevance, in a context of high unemployment and a still high 
level  of  non-performing  loans.  The  2021  Alert  Mechanism  Report  published  in  November  2020 
concluded  that  a  new  in-depth  review  (IDR)  should  be  undertaken  for  Italy  with  a  view  to  assess  the 
persistence or unwinding of imbalances.  

The  context  of  the  assessment  of  vulnerabilities  this  year  is  markedly  different  from  last  year's 
IDRs, which took place before the COVID-19 pandemic. The evolution of the pandemic, the strength 
of the recovery, and possible structural implications of the crisis are still surrounded by high uncertainty 
requiring caution in the assessment. Policy action over the past year focused on cushioning the impact of 
the COVID-19 shock and on facilitating the recovery. While this supports adjustment in the medium-term 
through  stronger  fundamentals,  it  also  has  added  to  indebtedness.  Follow-up  to  country-specific 
recommendations  from  2019  and  2020,  including  those  that  are  MIP-relevant,  is  taking  place  in  the 
context of the assessment of the Recovery and Resilience Plans (RRPs). The analysis of policies in the 
present  report  was  finalised  before  the  formal  submission  of  RRPs  and  does  not  draw  on  information 
included  in  RRPs.  It  is  therefore  without  prejudice  to  the  Commission’s  assessment  of  RRPs,  which  is 
ongoing at the time of publication of this report. 

The key features of the IDR remain unchanged. The assessment follows a similar structure as the IDRs 
that were included in Country Reports in recent annual cycles. This chapter presents the main findings for 
the assessment of imbalances, also summarised in the MIP assessment matrix. The assessment is backed 
by selected thematic chapters that look more at length at public debt, the labour market and the financial 
sector.  Spillovers  and  systemic  cross-border  implications  of  imbalances  are  also  taken  into  account.  In 
addition,  also  assessments  of  structural  issues  made  in  previous  IDRs  and  in  the  context  of  fiscal 
assessments are considered if relevant.  

Macroeconomic context 

Real GDP growth is forecast to rebound once containment measures are markedly eased, allowing 
the economy to recover its pre-pandemic level by the end of 2022. The vaccination campaign and the 
easing of restrictions are paving the  way  for a  strong rebound of Italy’s economy in the second half of 
2021.  EU-supported  investment  is  set  to  help  lift  the  economy  to  a  sustained  expansion  path,  which  is 
likely  to  allow  output  to  recover  its  pre-pandemic  level  by  end-2022.  After  the  steep  drop  of  8.9%  in 
2020, real GDP is projected to rebound by 4.2% this year on the back of sizeable domestic policy support 
and the first stage of NGEU-financed investment. In 2022, output growth is forecast to increase to 4.4%. 
Potential growth, historically low for over a decade, is forecast to rise to 0.9% by 2022. The output gap is 
set  to  shrink  but  remain  negative,  at  -1.4%  in  2022.  In  view  of  the  projected  domestic  demand-led 
expansion, the current account balance is forecast to gradually decline, to a surplus of about 3% of GDP 
in 2022, somewhat below the surplus registered in 2019 (3.2%). The unemployment rate is projected to 
rise  to  10.2%  in  2021,  before  falling  again  below  10%  in  2022,  as  the  recovery  gains  traction.  Base 
effects related to rising oil prices are likely to push HICP inflation above 1% this year, before consumer 
price inflation moderates to about 1.1% in 2022. 

The economic recovery is expected to be driven by pent-up consumer demand and EU-supported 
investment. Buoyant consumer demand will help the economy bounce back, once containment measures 
are relaxed. However, the household saving rate is unlikely to return to its long-run average by the end of 
the forecast period. Persisting uncertainty and the concentration of forced excess savings among higher-
income households with a relatively low propensity to consume suggests that the additional impulse from 

2 

 
1. Assessment of Macroeconomic Imbalances 

savings-fuelled consumer spending will be limited. Capital spending is forecast to pick up vigorously, as 
RRF-financed  expenditure  is  set  to  spur  corporate  investment  as  well  as  residential  investment.  Goods 
exports continue to benefit from a strong momentum thanks to an improving external outlook, allowing 
exporters to regain some previously lost market share. However, services exports, in particular tourism, 
are  unlikely  to  fully  recover  by  2022.  The  outlook  remains  subject  to  high  uncertainty  and  pandemic-
related  downside  risks,  also  related  to  potential  scarring  effects  due  to  corporate  insolvencies  and 
hysteresis in the labour market. 

Imbalances and their gravity   

The  very  high  government  debt  is  an  important  source  of  vulnerability  for  the  economy.  The 
growing share of government securities held by the Eurosystem, the low interest rate environment and the 
growing average maturity of the outstanding debt substantially reduce financial sustainability risks in the 
short  term.  However,  the  high  financing  requirements  related  to  debt  rollover  needs  increase  Italy’s 
dependency on financial market risk perceptions. The high government debt also reduces margins to take 
support  measures  in  case  of  future  crises,  and  the  sizeable  interest  expenditure  reduces  fiscal  space  for 
growth-enhancing expenditure. The Commission’s debt sustainability analysis points to high risks in the 
medium term, which are mainly related to the high stock of government debt. In the long term, the high 
debt ratio is expected to pose medium fiscal sustainability risks, thanks to projected ageing costs which, 
after increasing in the coming years, are set to progressively decline.  

Insufficient investment, the  high share of low-productivity sectors in the  Italian economy and the 
small  average  firm  size  are  among  the  main  reasons  for  subdued  productivity  growth.  Labour 
productivity growth has remained very low in Italy during the last decade, also on account of the higher 
share  of  activities  with  lower  productivity  levels.  In  2020,  labour  productivity  measured  as  gross  value 
added per hour worked increased, as the GDP contraction exceeded the drop in hours worked. With the 
expected increase in hours worked as the recovery unfolds, labour productivity growth is set to fall back 
to the low rates registered in  the  previous decade. The large share of  small enterprises hampers overall 
higher productivity levels and growth in Italy, particularly for trade activities, food and accommodation 
services.  Italy  is  among  the  lagging  countries  in  terms  of  intangible  investment,  also  explained  by  the 
large  weight  of  industries  with  low  intangible  capital  intensity  like  tourism.  It  has  substantially  lower 
R&D intensity than its peers in the EU. However, ICT services have registered rising productivity over 
time.  Moreover,  pandemic-induced  changes  to  operational  processes  and  further  investment  in  IT 
equipment  and  process  innovation  have  the  potential  to  translate  into  more  sustained  productivity 
improvements going forward. Finally, productivity growth has an important bearing on potential output 
and easing the burden of public debt (debt deleveraging). 

Employment dropped sizeably since the onset of the COVID-19 crisis, but the unemployment rate 
declined  in  2020,  as  a  large  number  of  persons  exited  the  labour  market.  Total  headcount 
employment  shrunk  by  2.8%  in  2020,  with  employees  on  fixed  term  contracts  (-12.1%)  and  the  self-
employed  (-4.1%)  bearing  the  brunt  of  the  COVID-19  pandemic  shock.  However,  the  average 
unemployment  rate  in  2020  dropped  below  the  level  of  2019  (9.2%  vs.  an  average  of  10.0%  in  2019). 
Many job seekers and newly unemployed left the labour force at the peak of the pandemic, while most 
employees were supported by short-time work schemes in combination with a general dismissal ban. By 
contrast,  the  jobless  rate  of  young  people  (15-24  yrs),  who  were  often  employed  in  contact-intensive 
services on short-term contracts and were thus particularly affected by the crisis slightly increased in 2020 
compared to 2019 and stood at 29.5% (vs. 29.2% in 2019), among the highest in the EU. 

While  the  Italian  banking  sector  has  strengthened  since  the  double-dip  recession  in  2008-2013, 
vulnerabilities remain and need close oversight in light of the current developments. Italian banks further 
reduced their legacy stock of non-performing loans (NPLs) to a gross ratio of 5.7 % (1) in the third quarter 
of 2020 compared to a level of 7.4% during the same period of the previous year. However, the NPL ratio 
still stands well above the euro area average of 2.7% and is likely to increase on the back of the economic 
downturn. Throughout the COVID-19 pandemic, bank loans have increased markedly, driven mainly by 
public guarantees to meet firms’ greater liquidity needs but also for precautionary reasons. The phasing-
out  of  support  measures,  such  as  loan  moratoria  and  state-guaranteed  loans,  can  be  expected  to  induce 

(1)  ECB data. 

3 

                                                           
1. Assessment of Macroeconomic Imbalances 

tightening of  the credit conditions, restriction of credit supply and deterioration of banks’ asset quality. 
This  would  in  turn  put  further  strain  on  the  subdued  profitability  of  banks,  impacted  already  by  the 
increase in loan-loss provisions and low interest rates. The sovereign-bank nexus has recently increased in 
Italy and  warrants  further  monitoring once  support and regulatory relief  measures are gradually phased 
out. 

The  Italian  economy  can  have  spill-over  effects  on  other  EU  Member  States.  This  is  due  to  its 
relatively large size and its level of integration with other Member States either via trade links, such as 
Slovenia and financial and/or banking linkages, such as Luxembourg (see Table 1.1). Box 1.1 provides a 
quantitative  assessment  of  cross-border  impact  of  declined  Italian  demand  in  2020.  It  shows  a  rather 
heterogeneous  impact  across  the  Member  States,  with  Slovenia  and  Croatia  being  the  most  adversely 
affected. The most important spillover are indirect ones, i.e. via supply chains.  

Table 1.1: 

Outward spillovers heat map, Italy 

Note: 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 - 2018, Imports (in value added) - 2015, Financial liabilities - 2018, Financial assets - 2018, Liabilities (to banks) - 2020-Q3, 
Bank Claims - 2020-Q3. 
Source: IMF, OECD, TiVa, BIS and Commission services 

Evolution, prospects and policy responses  

Italy’s debt-to-GDP ratio sharply increased to 155.8%  in 2020 and is projected to rise moderately 
further in 2021, before declining in 2022. The increase in 2020 was driven by the drop in GDP and the 
cost of the policy response to the COVID-19 crisis, which caused the primary balance to turn negative for 
the first time since 2009. In 2021, the cost of the prolonged policy support related to the duration of the 
COVID-19 pandemic is expected to cause a further increase of the debt-to-GDP ratio to 159.8% due to 
the sizeable primary deficit, despite the projected GDP growth well above potential growth. In particular, 
two  additional  fiscal  packages,  adopted  in  March  and  May  2021  and  worth  1.8%  and  2.3%  of  GDP 
respectively, further extended emergency wage supplementation schemes and provided additional support 
to  the  corporate  sector.  In  2022,  the  debt  ratio  is  expected  to  decline  to  156.6%  of  GDP  thanks  to  the 
economic recovery, while the debt-increasing impact of the primary deficit is set to become smaller. After 
some volatility observed in March and April 2020, sovereign yields and risk premia declined substantially 
in the course of the year, also supported by the ECB policy. After being on a declining trend for several 
years, expenditure for public investment increased strongly in 2019, albeit from a low base, and continued 
rising  in  2020  despite  the  COVID-19  pandemic,  thanks  to  the  higher  resources  allocated  and  more 
flexible fiscal provisions for local governments. Pension expenditure increased substantially in 2019 and 
2020,  due  to  demographic  developments  and  the  temporary  early  retirement  scheme  implemented  in 
2019, and is projected to continue growing at a significant rate in the coming years based on a no-policy-
change assumption. The tax system remains characterised by several longstanding weaknesses, including 
the high tax burden on labour and tax evasion. The government plans to adopt a comprehensive review of 
personal  income  taxes,  whose  details  are  however  not  yet  known.  Estimated  revenue  losses  from  tax 
evasion remain very high, but they started declining in 2018 and are expected to have remained on this 
trend in 2019 thanks to the important measures taken in that year. (2)  

During  the  period  2010-19,  productivity  growth  averaged  0.4%  per  year  (EU:  1.2%).  In  2019, 
growth  in  gross  value  added  stagnated,  as  a  rising  labour  and  capital  input  was  offset  by  falling  total 

(2)  Official  government  estimates  on  the  revenue  loss  from  tax  evasion  are  published  yearly  in  an  annex  to  the  “Update  of  the 
document of economy and finance” (“Nota di aggiornamento al document di economia e finanza”). As the relevant  data are 
available with a two-year lag, estimates for 2019 will be published in autumn 2021. 

4 

ATBEBGHRCYCZDEDKEEELESFIFRHUIEITLTLULVMTNLPLPTROSESISKImports3.45.14.24.10.13.42.41.20.82.82.40.82.14.52.91.915.21.12.63.92.31.63.71.111.85.5Imports (in value added)1.81.662.22.380.621.651.210.730.581.151.270.531.182.082.721.164.40.61.671.331.370.792.240.744.482.06Financial liabilities8.610.53.32.25.40.77.12.81.75.7152.623.33.250.51.15412.812.717.90.613.51.72.153.1Financial assets8.66.76.611.17.54.84.71.80.510.212.82.811.33.365.80.61088.63.27.818.82.88.471.88.32.9Liabilities (to banks)1.312.53.57.714.20.12.94.80Bank claims24.3248.52.6713.45.90.60.90.57.20.92.6611.34.11.142.71.32.870.83.55.40.412.525.9EU partner  
 
   
 
                                                           
1. Assessment of Macroeconomic Imbalances 

factor productivity (-0.5%). Labour productivity in 2019 shrunk by 0.4%, as parts of the services sector 
(professional services, private education and health services) and the industrial sector registered a decline 
in productivity, the latter reversing for the  first time the positive trend that began in 2010. In 2020, the 
steep fall in hours worked implied a sizeable increase in labour productivity per hour worked, as the drop 
in  hours  worked  exceeded  the  fall  in  economic  output.  Real  labour  productivity  increased  by  an 
exceptionally strong 2.3% compared to 0.2% for the EU on average.  

The  COVID-19  pandemic  and  the  associated  policy  response  is  set  to  influence  both  short-  and 
long-term productivity developments. The pandemic shock and the necessity to reorganise in-company 
and  intercompany  working  arrangements  at  short  notice  is  likely  to  unlock  some  productivity  reserves, 
despite the belowEU-average use of ICT. For example, the share of telework in Italy increased from 2% 
to 33% in 2020 and e-commerce activities rose significantly over the last year, with retail trade (values) 
through  e-commerce  38.4%  higher  in  January  2021  than  one  year  before.  However,  long-term 
productivity  dynamics  remain  subdued,  particularly  in  services  and  in  some  southern  regions.  A  more 
efficient capital allocation, inter alia intermediated through non-bank financial institutions, would support 
this necessary transition. In addition, several policy measures likely to be included in the NRRP have the 
potential  to  spur  productivity,  notably  through  substantial  investment  in  innovation  and  digitalisation. 
Investment  in  infrastructure  could  particularly  improve  the  competitiveness  of  the  South.  Major 
challenges  concern  the  smooth  unwinding  of  emergency  support  measures  that  could  undermine  an 
efficient  capital  allocation  by  keeping  non-viable  companies  afloat  and  postpone  the  necessary 
reallocation of physical and human capital. 

Activity and employment rates, in particular of women and young people, remain markedly below 
the  EU  average.  Policies  to  raise  labour  market  participation,  in  particular  the  reform  of  active  labour 
market policies as part of both the 2015 “Jobs Act” and the recently introduced minimum income scheme 
have been adopted but are still not yet fully implemented. The government took some steps to strengthen 
public  employment  services  (PES),  including  through  staff  reinforcements,  albeit  mostly  on  short-term 
contracts (recently prolonged until end-2021 following the adoption of the Decreto Sostegni) and without 
clear  job  descriptions.  Thus,  PES’  job  placement  capacity  remains  low.  Moreover,  more  measures  to 
increase women’s participation in the labour market are needed, in particular a better and more accessible 
supply of care facilities, not only but especially in the south, and a tax reform that tackles the “welfare 
trap” and the high tax wedge for second earners.  

Banks continued to reduce their stock of legacy NPLs but further structural reforms are needed to 
avoid an accumulation of new NPLs and enable banks to provide credit to the economy. They have 
taken  advantage  of  a  dynamic  secondary  market  for  impaired  assets,  the  provisions  in  the  Cura  Italia 
Decree, that allow banks to convert deferred tax assets into tax credits against NPL sales, and the  state 
supported  NPL  securitisation  scheme  (“Garanzia  sulla  Cartolarizzazione  delle  Sofferenze”  –  GACS). 
Moreover,  banks  have  benefitted  from  government  measures  to  support  credit  and  the  guidance  of  the 
supervisory  authorities on the use of the flexibility allowed under the rules for classifying loans,  which 
aim  to  reduce  the  potentially  pro-cyclical  effects  of  an  increase  in  credit  risk.  Nevertheless,  the 
continuation of structural reforms is a key prerequisite for avoiding a further accumulation of new NPLs 
and  maintaining  the  capacity  of  banks  to  provide  credit  to  the  economy.  In  this  respect,  the  full 
implementation of the 2019 insolvency code, postponed from August 2020 to September 2021, coupled 
with improvements in the digitalisation and efficiency of the court system would be beneficial in order to 
cope with a potential increase in bankruptcies.  

Overall assessment  

Italy’s imbalances are not expected to improve in the near term, while it is not yet possible to assess 
the full impact of the COVID-19 crisis. The increase in the government debt ratio over 2020 and 2021 
is  due  to  the  COVID-19  emergency  and  the  policy  support  needed  for  households  and  firms.  A  fast 
decline  of  the  government  debt  ratio  in  the  coming  years  will  require  effective  policies  and  reforms  to 
support  potential  growth  as  well  as  an  efficient  use  of  available  national  and  European  resources.  The 
announced  reform  of  personal  income  taxes  will  be  an  important  opportunity  to  tackle  longstanding 
weaknesses of Italy’s tax system. The important measures taken against tax evasion are starting to bear 
fruit but it will be key to avoid a weakening of the reform momentum. Pension expenditure is projected to 
grow at a significant pace in the coming years under a no-policy-change assumption, reducing resources 

5 

1. Assessment of Macroeconomic Imbalances 

for  growth-enhancing  expenditure.  Productivity  growth  rose  sizeably  in  2020,  but  the  long-term  trend 
remains subdued. Public investment is on an increasing trend since 2019, albeit from a low level, but a 
higher administrative capacity is required to reap the full benefits of higher public capital spending. The 
unemployment rate continued to fall, partly due to a drop in the labour force, but joblessness continues to 
persist,  especially  among  the  young.  Measures  to  increase  labour  market  participation,  in  particular  of 
women,  tend  to  go  in  the  right  direction.  However,  they  are  not  yet  sufficient,  while  other  challenges, 
notably  the  tax  wedge,  are  not  yet  effectively  addressed.  The  situation  of  banks  has  considerably 
improved,  with a further reduction of NPLs. Still, the stock of NPLs remains high, especially for small 
and medium banks, while firms’ limited recourse to non-bank finance leaves them vulnerable to banking 
shocks.  Significant  investment,  particularly  in  research,  innovation  and  infrastructure,  accompanied  by 
reforms aiming to remove persistent barriers to investment planning, execution and absorption, including 
in the public administration (e.g. efficiency and timeliness of the public procurement system, see Recital 
27 to 2020 CSRs) and the business environment (e.g. regulatory barriers to competition in sectors such as 
business  services  and  retail,  see  CSR  2019.3  and  Recital  26  to 2019  CSRs)  are  needed to  boost  Italy’s 
productivity  dynamics,  employment  and  growth,  supporting  in  turn  the  reduction  of  the  public  debt-to-
GDP ratio.  

6 

 
  
 
 
 
 
 
 
 
 
1. Assessment of Macroeconomic Imbalances 

Box 1.1: Spillovers  Italy 

The pandemic recessions in EU Member States also reflected faltering cross-border demand 
from  trade  partners.  The  drop  in  Italian  aggregate  demand  due  to  the  pandemic  and  the 
containment measures played a significant role in the output declines of its closest partners. In the 
recovery, cross-border spillovers may undo their negative impact of 2020, yet the uncertain timing 
and extent of the recovery  make  a forward-looking assessment difficult.  As a  first step, this box 
thus aims to take stock of the heterogeneous spillovers of Italian demand to other Member States’ 
value  added  in  2020.  It  quantifies  cross-border  effects  applying  latest  production  data  to  input-
output  estimates. (1)  This  allows  for  synthesizing  supply  chain  effects,  e.g.  detailing  how  Italian 
consumption  from  domestic  providers  affected  those  providers’  foreign  suppliers,  and  their 
suppliers  in  turn.  While  these  results  allow  for  country-specific  sectorial  detail,  note  that  they 
reflect partial equilibrium effects in the goods and services market only – they do not include any 
second-round effects on foreign wage income, interest rates, prices etc., which may be stronger.  

Graph 1a shows the overall cross-border impact of the heterogeneous final demand changes 
during  2020,  and  highlights  the  Italian  contribution  therein.  Overall,  1.2  pp  of  the  2020  EU 
output decline can be attributed to cross-border demand effects, with German demand accounting 
for  0.1  pp  thereof.  Yet  small  open  service-intensive  economies  were  hit  more  strongly  than  the 
average,  and  non-negligible  part  of  it  can  be  attributed  also  to  decline  of  Italian  demand.  The 
importance  of  Italian  demand  varies  significantly  across  partners,  with  higher  relevance  in 
neighbouring  countries.  For  instance,  a  quarter  of  the  VA  impact  in  Slovenia  due  to  intra-EU 
demand  changes  is  driven  by  a  reduction  in  Italian  demand.  A  notable  impact  has  been  also 
recorded for Croatia, Bulgaria or Malta. 

Graph 2b highlights the heterogeneous effects of the pandemic by zooming in on the Italian 
contribution  by  sector  (the  dark-blue  bar  in  Graph  1a). (2)  The  most  significant  are  indirect 
spillovers,  which  capture  supply  chain  interlinkages. (3)  Such  indirect  cross-border  spillovers 
account more than demand spillovers for industrial products and services for most trading partners. 
The  decline  in  Italian  tourists  in  turn  accounted  for  the  bulk  of  Italian  demand  spillovers  to 
Slovenia, Croatia and Malta. Demand changes for non-tourist services were again relevant for the 
former three and several others but they seem to have had a positive impact on Luxembourg and 
Romania. Changes in the final demand for industry products had a strong impact on Slovakia in 
particular.  Overall,  2020  Italian  demand  changes  thus  had  a  significant  impact  on  the  RoEU,  in 
particular smaller neighbouring countries with the impact determined by Member States’ tourism 
intensity and/or their degree of integration with Italian supply chains.  

(1)  The  estimates  derive  from  a  two-step  analysis:  1)  Compiling  2020  output  declines  at  the  sector-level  across  the 
globe. For  the  EU  Member  States,  detailed  information  for  2020  is  available  in  Eurostat.  For  non-EU  countries, 
sectoral  output  changes  in  2020  are  approximated  by  IMF  WEO  GDP  changes,  thus  implicitly  abstracting  from 

7 

-3-2.5-2-1.5-1-0.50SVNHRVBGRSVKMLTLUXAUTBELCZEHUNESPGRCPRTROUIRLDEUFRANLDLVACYPPOLFINESTSWELTUDNKEUEAGraph 1a: VA impact (%) of cross-border demand change 2019-2020ITARest EU-0.7-0.6-0.5-0.4-0.3-0.2-0.100.1SVNHRVBGRMLTSVKLUXAUTBELCZEESPHUNPRTGRCROUIRLDEUFRANLDCYPLVAPOLFINESTSWELTUDNKEUEAGraph 1b: VA impact (%) of change in IT demand 2019-2020 by categoryIndustryServicesTourismIndirect 
 
 
  
 
 
  
 
1. Assessment of Macroeconomic Imbalances 

sectoral heterogeneity; 2) Using output changes in all country-sector pairs to trace back changes in final demand, based 
on global supply chain interlinkages as captured by the OECD ICIO tables. The resulting set of final demand changes 
can then be used to simulate the impact of the COVID-19 crisis on each country-sector's value added. Two important 
assumptions are made to allow for such a translation of output changes into demand changes. First, the technological 
coefficient matrix, which captures the required amount of supplies from any sector to produce a given sector's output, 
is assumed to have remained fixed since the latest ICIO data (2016). Second, the country allocation final demand for a 
specific sector is assumed to have remained proportional to 2016.  

(2)  Distinguishing by the source of the demand allows to quantify the impact of demand changes in a certain country on 
VA  production  in  all  its  trading  partners,  by  type  of  good  or  service.  Given  the  particular  nature  of  the  COVID-19 
crisis, with a strong impact on hospitality sectors, the analysis distinguishes between tourism (NACE sector I), all other 
services (G-N excl. I) and industry (A-F). 

(3)  For example, a drop in Italian demand for German cars reduces Slovak production of engines, with a knock-on effect 

on Czech suppliers of engine parts. 

8 

 
 
 
 
Table 1.2: 

Assessment of Macroeconomic Imbalances Matrix - Italy 

1. Assessment of Macroeconomic Imbalances 

Table (continued) 

(Continued on the next page) 

9 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Productivity and competitiveness Productivity growth has been dismal over the last two decades and the gap to the EU average has remained substantial. Weak productivity growth is largely due to low investment and innovation, barriers to competition, weaknesses in the public sector paired with a non-supportive business environment, and a lack of adequately educated people. The investment gap between Italy and the euro area since the 2008 crisis is still considerable. Productivity growth is needed to sustain competitiveness, and, together with higher employment rates, to boost GDP growth and, in turn, reduce the public debt-to-GDP ratio.  During the period 2010-19, productivity growth averaged 0.4% per year (EU: 1.2%). In 2019, growth in gross value added stagnated, as a rising labour and capital input was offset by a falling total factor productivity (-0.5%). Labour productivity in 2019 shrunk by 0.4%, as parts of the services sector and the industrial sector registered a decline in productivity. In 2020, labour productivity increased by an exceptionally strong 2.3% compared to 0.2% for the EU on average, as the drop in hours worked exceeded the fall in economic output. Public schemes supporting innovative investment (such as Transizione 4.0) have been increased in 2020 and have a stronger focus on the digital and green transition, while the number of eligible firms is also expected to increase. Private and public investment remain low, especially in intangibles and education, although a substantial boost in some areas is expected to come from the NRRP. Some of the reforms adopted in the last years in order to address the bottlenecks holding back productivity growth, such as in competition, have not been fully implemented. Additional reforms addressing civil and criminal justice, as well as the fight against corruption, are still pending in the Parliament. In 2020, in line with past efforts, a Simplification decree was adopted to reduce red tape and speed up administrative procedures, particularly for national interest investment project. The decree also contains measures to encourage digitisation. Adequate reforms and investments are needed to strengthen administrative capacity, human capital and innovation. Reducing the infrastructure gap, including in transport would help improving the competitiveness of the South.  Public debt In 2020 Italy’s public debt-to-GDP ratio increased to 155.8%, 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. The debt-to-GDP ratio remained broadly stable in recent years and stood at 134.6% in 2019 before it increased by 21 percentage points in 2020 owing to the COVID-19 pandemic. It is projected to further increase to 159.8% in 2021 before declining to 156.6% in 2022 based on the Commission 2021 spring forecast. The primary balance deteriorated from a surplus of 1.8% of GDP in 2019 to a deficit of -6% of GDP in 2020, and is expected to further deteriorate to -8.4% of GDP in 2021, before improving to -2.8% of GDP in 2022. Sovereign yields declined markedly in 2020 also thanks to the ECB policy support. In 2020, foreign investors decreased their holdings of Italy's sovereign bonds, while the ECB increased its share; the share held by Italian banks remained broadly stable.  Fiscal sustainability risks are high in the short and the medium term, on the basis of the standard fiscal sustainability gap indicators and the Commission's debt sustainability analysis. While the low interest rate environment substantially mitigates financial sustainability risks in the short term, sustained real GDP growth and prudent fiscal policies will be crucial to substantially reduce the debt ratio in the coming years. Policy support to the economy amounted to around 6.5% of GDP in 2020 and included a broad range of measures aimed at supporting households and firms. Additional support amounting to around 4.1% of GDP in 2021 was legislated in March and May 2021 in light of the developments of the pandemic. Government contingent liabilities are expected to have increased substantially in 2020 due to public guarantees issued in response to the crisis. The use of additional funds for firms capitalisation amounting to around 3% of GDP will likely increase government gross debt in the coming years  The important measures taken against tax evasion in recent years  are starting to bear fruits.  The temporary early retirement scheme legislated in 2019 is expected to end in 2021 as originally planned. It will imply higher pension expenditure until 2028, increasing the longstanding bias of public spending towards old-age pensions.   
  
 
 
 
1. Assessment of Macroeconomic Imbalances 

Source: European Commission Services 

10 

Adjustment issues Labour market participation and unemployment The participation rate declined and remained relatively low, particularly for women. The risk of labour market exclusion is particularly high for women and the young: 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 unemployment rate fell following the COVID-19 shock, with employees with fixed-term contracts and the self-employed particularly affected. The low labour market participation has also a bearing on potential economic growth. The unemployment rate temporarily fell in 2020, thanks to policy measures such as short-time working schemes but also due to a drop in activity rates. The unemployment rate averaged 9.2% in 2020 down from 10% in 2019, but has climbed to 10.2 % in February 2021. It is not expected to decline in 2021, partially due to the impact of containment measures. Long-term and youth unemployment increased in the wake of the pandemic shock and the participation rate has not recovered the pre-crisis level.  The reform of active labour market policies and the strengthening of work-based learning and skill formation could help labour market transition and smooth the necessary adjustment of the labour market following the pandemic shock. However, implementation is proving challenging.  Measures to foster labour market participation have been limited. Banks’ asset quality The gross non-performing loan (NPL) ratio has declined from 7.4% in September 2019 to 5.6% in September 2020. Despite the outbreak of the pandemic and the subsequent reduced economic activity, the NPLs ratio has remained low until now, but still above the euro area average of 2.7%. The CET1 ratio further increased to 15.5% in December 2020, albeit benefitting from the capital relief measures (i.e. mainly the Capital Requirement Regulation-CRR “quick fix” as a response to the pandemic). On the back of the increase in loan-loss provisions and pressures on net interest income, profitability remains subdued with the return on equity standing at 1.9% in December 2020. The decline in economic activity, triggered by the COVID-19 crisis, is likely to put strain on borrowers’ ability to repay loans going forward. This may negatively affect the asset quality and the already subdued profitability of the Italian banking sector, notably when support measures, such as guaranteed loans and debt moratoria will be phased out. The disposal of NPLs has been supported by the dynamic secondary market for impaired assets, by the provisions in the Cura Italia Decree, which allow banks to convert deferred tax assets into tax credits against NPL sales and by the NPL securitisation scheme (GACS). Moreover, banks have also benefitted from government measures to support the provision of liquidity to companies and the prudential guidance of the supervisory authorities on the flexibility allowed for the classification of loans, which aim to reduce the potentially pro-cyclical effects of an increase in credit risk. Main takeaways  The public debt-to-GDP ratio, which was already very high in 2019, has increased sharply due to the COVID-19 pandemic, driven by the drop in GDP and the cost of the emergency policy response. Productivity growth has been persistently low and that hampers potential GDP growth, which in turn limits the room for debt deleveraging. Persistently high long-term unemployment holds back future growth. Banks' balance sheet repair has considerably progressed and liquidity support measures significantly increased bank-lending volumes within the corporate sector but asset quality issues have persisted and the sovereign-bank nexus remains sizeable.   Imbalances are not expected to unwind soon or could even deteriorate in the near term. The government debt-to-GDP ratio is expected to further increase to 159.8% in 2021, before declining to 156.6% in 2022, based on the Commission 2021 spring forecast. Not accounting for planned reforms, productivity growth is set to remain subdued and not closing the gap with the EU. The NPLs ratio has further declined but may increase going forward especially when some temporary support measures are phased out.  A sustained reform agenda is crucial to facilitate the unwinding of Italy’s macroeconomic imbalances. While decisive actions have been taken to support the economy amid the COVID-19 shock, the progress with policies concerned with structural issues has been uneven. For instance, the implementation of reforms was particularly slow or limited in the areas of active labour market policies, in strengthening administrative capacity and competition. Despite important progress in fighting tax evasion, some longstanding weaknesses of the tax system persist. Though banks further progressed in repairing their balance sheets, the risks of an increase in NPLs and a deterioration of the profitability needs to be considered once support measures will be phased out in the medium term. A substantial boost in some areas, both in terms of investment and reforms, is expected to come from the NRRP.        
 
 
Table 1.3: 

Selected economic and financial indicators, Italy 

1. Assessment of Macroeconomic Imbalances 

(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 
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash 
benefits, expressed as a percentage of gross wage earnings 
Source: Eurostat and ECB as of 2021-05-05, where available; European Commission for forecast figures (Spring forecast 2021) 

11 

2004-072008-122013-182019202020212022Real GDP (y-o-y)1.4-1.40.10.3-8.94.24.4Potential growth (y-o-y)0.8-0.20.00.6-0.60.70.4Private consumption (y-o-y)1.2-1.10.50.3-10.73.14.9Public consumption (y-o-y)0.3-0.4-0.3-0.81.62.90.1Gross fixed capital formation (y-o-y)1.8-4.90.51.1-9.19.98.4Exports of goods and services (y-o-y)5.9-0.92.81.6-13.810.47.9Imports of goods and services (y-o-y) 5.3-2.93.4-0.7-12.611.58.7Contribution to GDP growth:Domestic demand (y-o-y)1.2-1.7-0.10.2-7.84.24.4Inventories (y-o-y)0.1-0.20.2-0.6-0.30.00.0Net exports (y-o-y)0.10.60.10.7-0.80.10.0Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.3-0.40.10.4-0.50.50.1Capital accumulation (y-o-y)0.60.30.00.0-0.20.00.1Total factor productivity (y-o-y)-0.1-0.1-0.10.10.10.20.2Output gap2.1-1.2-2.30.6-8.6-4.8-1.4Unemployment rate7.28.411.710.09.210.29.9GDP deflator (y-o-y)2.31.51.00.81.20.81.2Harmonised index of consumer prices (HICP, y-o-y)2.22.40.70.6-0.11.31.1Nominal compensation per employee (y-o-y)2.92.00.61.62.60.51.9Labour productivity (real, person employed, y-o-y)0.3-1.00.0-0.2-7.0..Unit labour costs (ULC, whole economy, y-o-y)2.32.40.61.41.01.7-0.2Real unit labour costs (y-o-y)0.00.8-0.40.6-0.20.8-1.4Real effective exchange rate (ULC, y-o-y)1.4-0.1-0.1-2.3...Real effective exchange rate (HICP, y-o-y)0.1-0.80.2-2.21.00.7-0.8Net savings rate of households (net saving as percentage of net disposable income)8.64.63.02.510.3..Private credit flow, consolidated (% of GDP)9.92.90.10.2...Private sector debt, consolidated (% of GDP)99.7121.3114.9106.6...of which household debt, consolidated (% of GDP)34.142.441.841.2...of which non-financial corporate debt, consolidated (% of GDP)65.578.973.165.4...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)4.48.310.75.4...Corporations, net lending (+) or net borrowing (-) (% of GDP)-0.20.62.93.45.711.37.6Corporations, gross operating surplus (% of GDP)23.021.321.221.321.322.022.7Households, net lending (+) or net borrowing (-) (% of GDP)2.40.91.71.37.33.31.3Deflated house price index (y-o-y)3.7-1.6-4.3-0.62.2..Residential investment (% of GDP)5.55.44.34.14.1..Current account balance (% of GDP), balance of payments-1.1-2.22.03.23.62.93.2Trade balance (% of GDP), balance of payments-0.2-0.72.73.33.8..Terms of trade of goods and services (y-o-y)-1.4-1.00.40.73.7-1.3-0.1Capital account balance (% of GDP)0.10.10.0-0.10.0..Net international investment position (% of GDP)-17.9-21.0-14.2-0.91.8..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)-9.4-22.4-14.30.41.2..IIP liabilities excluding non-defaultable instruments (% of GDP) (1)94.5113.9121.2122.8139.6..Export performance vs. advanced countries (% change over 5 years)0.5-12.5-7.9-3.82.4..Export market share, goods and services (y-o-y)-2.6-5.8-0.1-1.4-2.32.32.4Net FDI flows (% of GDP)0.81.00.00.10.6..General government balance (% of GDP)-3.1-3.7-2.6-1.6-9.5-11.7-5.8Structural budget balance (% of GDP)-4.7-3.4-1.5-2.0-4.9-9.3-5.1General government gross debt (% of GDP)105.6117.6134.1134.6155.8159.8156.6Tax-to-GDP ratio (%) (3)40.141.942.742.643.242.141.7Tax rate for a single person earning the average wage (%) (4)28.630.231.131.529.0..Tax rate for a single person earning 50% of the average wage (%) (4)19.321.718.216.414.8..forecast 
      
 
2.  THEMATIC ISSUE: PUBLIC DEBT 

Debt developments 

The  COVID-19  pandemic  caused  a  sharp  increase  of  the  government  debt-to-GDP  ratio  in  2020. 
After  having  remained  broadly  stable  in  recent  years,  Italy’s  debt-to-GDP  ratio  increased  by  21 
percentage  points  in  2020,  from  134.6%  of  GDP  in  2019  to  the  historically  high  level  of  155.8%. The 
main driver was the drop in GDP in real terms (12.9 pps higher debt ratio), which, together with a stable 
contribution from interest expenditure, caused a sizable debt-increasing snowball effect, only marginally 
offset by the positive GDP deflator. The primary balance, whose historical surplus had broadly balanced 
other debt-increasing factors in recent years, turned negative for the first time since 2009 contributing to 
an increase in the debt-to-GDP ratio by 6 pps. Government gross debt increased in 2020 also as a result of 
several  liquidity  operations,  such  as  tax  deferrals,  reflected  in  a  small  debt-increasing  stock-flow 
adjustment. 

The  government  deficit  increased  substantially  in  2020,  mainly  due  to  the  cost  of  the  policy 
response,  and  is  expected  to  further  increase  in  2021  before  declining  in  2022.  The  government 
deficit increased from the historical low of 1.6% of GDP in 2019 to 9.5% of GDP in 2020, mostly due to 
the  cost  of  the  policy  response.  The  government  adopted  a  large  number  of  measures  to  support 
households and firms in light of the COVID-19 emergency and related restrictions to economic activity, 
with  an  overall  budgetary  impact  of  around  6%  of  GDP  in  2020.  These  measures  included  temporary 
extensions  of  the  duration  and  coverage  of  short–time  work  schemes,  allowances  for  self-employed 
workers,  partial  compensation  for  incurred  losses  to  firms  and  additional  funds  for  healthcare  and  civil 
protection. The government also provided a variety of subsidies to the most exposed sectors, implemented 
temporary  income  support  schemes  for  households  and  expanded  budgetary  provisions  for  government 
guarantees.  While  revenues  from  indirect  taxes  declined  substantially,  reflecting  the  drop  in  private 
consumption,  revenues  from  direct  taxes  decreased  only  marginally  thanks  to  the  policy  support  to 
employment. In 2021, the government deficit is expected to further increase to 11.7% of GDP, due to the 
cost of the prolonged policy support. The 2021 budget implies a deficit-increasing impact of around 1.4% 
of GDP. Besides additional economic support to the most exposed sectors, it included several measures 
aimed  at  supporting  the  economic  recovery,  such  as  the  reduction  of  social  contributions  for  new  hires 
and for firms operating in poorer regions, substantial incentives for building renovations and equipment 
investment  as  well  as  a  reform  of  family  benefits. (3)  In  light  of  the  pandemic  developments,  two 
additional fiscal packages were adopted in March and May 2021, worth respectively 1.8% and 2.3% of 
GDP. The package adopted in March provided for the extension of wage  supplementation schemes and 
additional financial support to firms and households. The decree adopted in May further extended support 
to the economy, with a special focus to the corporate sector. In 2022, the government deficit is projected 
to decline to 5.8% of GDP, thanks to the effect of the economic recovery on government revenues and 
lower  public  spending.  Overall,  measures  adopted  in  2020  and  2021  are  expected  to  still  imply  costs 
amounting to around 2% of GDP in 2022. These projections also take into account the cost of measures 
adopted  before  the  beginning  of  the  COVID-19  pandemic  which  have  not  been  offset  by  equivalent 
financing measures. 

The  measures  adopted  to  support  corporate  liquidity  are  expected  to  increase  government 
contingent liabilities as well as gross debt in the coming years. Government contingent liabilities were 
comparatively low at the end of 2019 (5.2% of GDP) but are expected to have increased substantially in 
2020  following  the  extension  of  government  guarantee  schemes  (see  section  3.2.3).  The  duration  of 
government  guarantees  varies  depending  on  the  scheme,  and  will  last  six  years  for  most  guarantees  to 
SMEs.  The  new  guarantee  scheme  for  exporting  firms,  which  is  not  yet  operational,  is  expected  to 
become structural. Budgetary provisions of 0.7% of GDP for standardised guarantees have been included 
in the 2020 government deficit, reducing risks for the government balance. However, the provisions are 

(3)  Some  of  these  measures,  and  in  particular the  reduction  of  social  contributions  for  firms  operating  in  poorer  regions  and the 

incentives for equipment investment and building renovations are expected to be partly financed with NGEU resources. 

12 

 
                                                           
2. Thematic Issue: Public Debt 

not  recorded  into  government  debt,  which  is  thus  subject  to  higher  risks.  In  2020,  the  government  also 
created  a  new  fund  amounting  to  2.7%  of  GDP  for  the  capitalisation  of  strategic  firms  (Patrimonio 
destinato),  and  increased  by  EUR  4  billion  (0.2%  of  GDP)  the  existing  fund  for  the  capitalisation  of 
SMEs (Patrimonio PMI). These funds are meant for government participation in strategic sectors through 
several financial instruments, and will increase government gross debt when the corresponding operations 
will take place. The new fund Patrimonio destinato will be in place for 12 years, although its duration can 
be changed via a decree of the Ministry of Finance. While some sizable operations are being discussed for 
2021, the allocated resources represent a ceiling and there is no legal provision requiring their full use.  

Based  on  the  Commission  2021  spring  forecast,  the  government  debt-to-GDP  ratio  is  expected  to 
further increase in 2021, before declining in 2022. In 2021, the projected rebound in real GDP growth 
is expected to cause a debt-decreasing snowball effect for the first time since the previous financial crisis 
(lowering  the  debt  ratio  by  4.1  pps  everything  else  being  equal).  The  stock-flow  adjustment  is  also 
assumed to reduce the debt ratio by 0.2 pps, thanks to the payment of taxes deferred in 2020 and the pre-
financing of RRF resources, which are expected to more than offset the planned use of funds for firms’ 
capitalisation. At the same time, in light of the cost of the prolonged policy support, the contribution of 
the  primary  balance  is  expected  to  more  than  offset  the  debt-reducing  snowball  effect  and  stock-flow 
adjustment,  leading  to  an  increase  of  the  debt-to-GDP  ratio  by  4  pps,  to  159.8%.  In  2022,  the  debt-
reducing snowball effect is set to further increase thanks to  the accelerating real GDP growth, while the 
primary  deficit  is  projected  to  decline  to  2.8%  of  GDP.  Overall,  the  debt-to  GDP-ratio  is  projected  to 
decrease by 3.2 pps, to 156.6%. 

Fiscal sustainability  

Based  on  the  European  Commission  Debt  Sustainability  Analysis  (2021  spring  forecast),  Italy  is 
deemed to face high fiscal sustainability risks in the short and medium term. (4) At 0.47, the index 
for fiscal risks in the short term (S0) is just above the threshold pointing to high risks (0.46). While the 
financial competitiveness sub-index points to low risks (0.36), the fiscal sub-index remains high (0.40), as 
all  its  components  are  above  the  relevant  threshold.  In  particular,  government  gross  financing  needs, 
which include net borrowing requirements as well as debt rollover needs, have surged in 2020 due to the 
COVID-19 crisis and are expected to remain sizeable from 2021 onwards, although on a declining trend. 
High  risks  in  the  medium  term  reflect  the  fact  that,  under  the  baseline  assumptions,  government  debt 
would remain above 155% of GDP for most of the next decade, peaking at 158.8% in 2024 and declining 
to 153.4% by 2030. Alternative scenarios, both favourable and unfavourable, confirm these risks. At the 
same  time,  the  implementation  of  reforms  and  investments  under  the  Next  Generation  EU,  notably  the 
Recovery and Resilience Facility, is expected to have a substantial positive and persistent impact on GDP 
growth in the coming years, which, ceteris paribus, should contribute to strengthen debt sustainability. 

In the long term, Italy is deemed to face medium fiscal sustainability risks. The fiscal index S2 points 
to  low  risks  in  the  long  term,  mainly  thanks  to  the  limited  increase  in  ageing  costs  in  the  baseline 
scenario, which reduces the fiscal adjustment needed to stabilise the debt ratio over an infinite horizon. 
However,  a  more  comprehensive  debt  sustainability  analysis  taking  into  account  also  the  high  level  of 
government debt points to high risks, resulting in an overall classification of medium fiscal sustainability 
risks in the long term. 

Debt composition and holding sectors 

In 2020, the share of government securities held by European institutions increased, while the share 
of foreign investors declined. The share of government securities held by the Bank of Italy for the ECB 
increased  from  19.9%  in  January  and  February  2020  to  25.8%  in  February  2021.  In  absolute  terms, 
government  securities  held  by  the  central  bank  have  increased  by  EUR  144.8  billion  over  February-
December 2020, i.e. above the total increase in outstanding government securities recorded over the same 
period (EUR 105.4 billion). In 2020, Italy also benefitted from EUR 27.4 billion of European loans under 
the  programme  SURE,  for  financing  the  temporary  extension  of  short-time  work  schemes  and  similar 
measures to address the emergency. Most resources were transferred to Italy between October 2020 and 
April  2021,  with  very  favourable  financial  conditions  and  an  average  maturity  close  to  15  years. 

(4)  See Article 126(3) report (June 2021) and also the Debt Sustainability Monitor 2020 for detailed methodological aspects. 

13 

                                                           
2. Thematic Issue: Public Debt 

Conversely,  the  share  of  government  securities  held  by  foreign  investors  declined  from  36.5%  in 
February 2020 to 32.4% in February 2021. Half of this decline took place in March 2020, when, based on 
balance of payments data, foreign investors disposed of EUR 51.5 billion of Italian government securities, 
above the large divestment observed in June 2018 (EUR 33 billion). The share of government securities 
held  by  domestic  banks  increased  by  around  2  percentage  points  in  March  and  April  2020,  before 
returning  closer  to  18%  by  February  2021.  Conversely,  the  share  held  by  the  retail  domestic  sector 
remained broadly stable until February 2021 at around 7%, recording a small increase of EUR 7 billion in 
absolute terms compared to February 2020 also thanks to the new initiatives to attract these investors. 

Italy’s sovereign yields declined substantially in the course of 2020, reaching historically low levels 
across  the  yield  curve.  After  hovering  around  1%  at  the  beginning  of  2020,  Italy’s  10-year  sovereign 
yields experienced some turbulences in March and April 2020, when they remained above 2% for several 
days.  However,  after  the  end  of  April  2020,  they  remained  on  a  declining  trend,  reaching  0.9%  by  the 
beginning of May 2021. Similarly, the spread vis-à-vis 10-year German bonds declined from around 235 
basis  points  at  the  end  of  April  2020  to  around  110  basis  points  at  the  beginning  of  May  2021.  At  the 
beginning of May 2021, yields on the secondary market were negative for fixed term securities up to a 
maturity of 3 years. These developments, which are also due to support measures such as the Pandemic 
Emergency Purchase Programme of the ECB (see section 3.2.3), allowed interest expenditure to decline 
by 5% in 2020 despite the sizable net borrowing requirements.  

The  average  maturity  of  Italy’s  outstanding  government  securities  marginally  increased  in  2020, 
from  6.9  to  7  years.  Despite  the  large  borrowing  requirements  in  2020,  Italy’s  issuance  strategy  took 
advantage  of  the  favourable  financing  conditions  to  reduce  risks,  leading  to  a  marginal  decline  in  the 
share of short-term securities. The Debt Management Office also took a proactive approach to widen the 
investor  base,  including  by  creating  two  new  government  securities,  BTP  futura  and  BTP  green, 
earmarked for financing the COVID-19 policy response and green expenditure respectively.  

Composition of government expenditure 

The positive trend of public investment was confirmed  in  2020 and is expected to continue in the 
coming years. Government gross fixed capital formation had been on a declining trend for several years 
following the previous crisis, due to several factors including the implementation of new fiscal rules at the 
subnational  level  and  more  complex  provisions  for  tender  procedures.  In  2019,  this  trend  was  reversed 
and  government  gross  fixed  capital  formation  increased  by  9.8%,  mainly  thanks  to  the  increased 
flexibility  in  the  use  of  budgetary  surpluses  from  subnational  governments.  In  addition,  since  2017  the 
government has increased the allocation of national resources for public investment with the creation of 
several medium-term funds. In 2020, despite the slow implementation of projects in the first half of the 
year,  government  gross  fixed  capital  formation  increased  by  6.7%  in  absolute  terms,  reaching  2.7%  of 
GDP from 2.1% of GDP in 2018. In the coming  years,  government investment is expected to continue 
increasing,  thanks  to  the  large  national  funds  allocated  and  the  European  grants  under  the  RRF.  An 
efficient and timely use of resources will require a substantial administrative effort. 

Before  declining  in  the  long  term,  pension  expenditure  is  expected  to  grow  significantly  in  the 
coming  years,  reducing  resources  for  productivity  enhancing  expenditure.  Italy’s  pension 
expenditure  has  been  traditionally  high  in  comparative  terms.  The  2012  pension  reform  revised  access 
criteria and the definition of pension benefits after a transition period, ensuring the sustainability of the 
pension system in the long term. The immediate increase in the statutory and early retirement ages also 
allowed substantial savings in the short term, reducing yearly growth in pension expenditure over 2014-
2018  to  an  average  of  1.1%  compared  to  3.4%  over  2003-2013.  As  an  effect  of  demographic  factors, 
pension  expenditure  was  expected  to  accelerate  its  growth  from  2019,  increasing  substantially  in  the 
medium  term.  The  temporary  early  retirement  scheme  implemented  in  2019  further  increased  pension 
expenditure  over  2019-2028,  by  up  to  0.4%  of  GDP  per  year.  Overall,  based  on  the  projections 
underlying  the  2021  Ageing  Report  and  assuming  no  extension  of  the  new  temporary  early  retirement 
scheme beyond 2021, pension expenditure is expected to increase from 15.4% of GDP in 2019 to 18% of 
GDP in 2036, before slowly declining to 13.6% of GDP by 2070. 

Yearly  spending  reviews  have  so  far  achieved  the  saving  targets,  but  could  benefit  from  a  more 
strategic  approach  and  wider  scope.  In  2018,  the  government  implemented  the  first  yearly  spending 

14 

2. Thematic Issue: Public Debt 

review  as  part  of  the  reformed  budgetary  process.  Reports  on  this  review  concluded  that,  although  the 
target savings of EUR 1 billion had been achieved, ministries tended to reach such targets by cutting or 
postponing  spending  programmes  and  only  partially  through  efficiency  gains.  No  standard  review  was 
implemented  in  2019,  and  in  2020  the  process  has  been  suspended  due  to  the  COVID-19  pandemic.  
Future  spending  reviews  could  benefit  from  a  more  strategic  approach  aimed  at  better  improving 
spending efficiency and prioritisation, as well as from the involvement of subnational governments which 
are responsible for around 30% of total public expenditure. In this regard, the implementation of the fiscal 
federalism reform, which was launched in 2009 also with the aim of encouraging spending efficiency at 
the subnational level, is not yet completed.  

Taxation 

Italy’s tax system suffers from long-standing weaknesses, including a high tax burden on labour. In 
2020,  the  tax  wedge  for  a  single  earner  with  an  average  wage  stood  at  46.4%;  this  remains  among  the 
highest in the EU, especially due to the high social contributions paid by employers. The high tax wedge 
on labour represents an important obstacle to investment in Italy. Conversely, other sources of revenues 
less  detrimental  to  growth,  such  as  VAT  and  property  taxes,  are  underused.  Concerning  VAT,  the 
relatively  low  revenues  are  due  to  the  high  level  of  tax  evasion  and  the  extended  use  of  reduced  rates, 
while the tax base for property taxes is outdated and first residences are exempted also for high-income 
households.  In  addition,  the  practice  of  systematically  extending  concessions  for  public  goods  without 
new tenders, in addition to be against European provisions, generates a significant loss of revenue. There 
are  numerous  tax  expenditures,  which  in  some  cases  provide  weak  incentives  to  energy  efficiency, 
discourage  work  by  second  earners  or  imply  very  high  marginal  tax  rates.  The  government  plans  to 
implement  a  general  reform  of  personal  income  taxes,  for  which  resources  amounting  to  0.1%  of  GDP 
have been budgeted from 2022. However, no details are available yet. 

Important measures against tax evasion have been implemented in recent years, but the tax gap is 
still very high. The revenue loss from tax evasion is estimated by the government at EUR 108.1 billion in 
2017, mainly related to VAT (EUR 33.3 billion) and income taxes paid by self-employed and small firms 
(EUR  31.6  billion).  Preliminary  estimates  indicate  that  evasion  has  declined  in  2018,  with  a  lower 
revenue  loss  from  VAT  by  EUR  3.5  billion,  also  thanks  to  the  implementation  of  the  so-called  “split 
payment”. It is likely that tax evasion further declined in 2019, thanks to important measures such as the 
compulsory  electronic  invoicing  for  all  private  sector  transactions  and  the  revised  methodology  for 
estimating ex ante taxpayers’ income (so-called “ISA-coefficients”). In 2020, the compulsory electronic 
transmission  of  bills  and  receipts  has  also  been  implemented.  In  addition,  in  order  to  discourage  tax 
evasion from omitted billing and invoicing and given the comparatively low share of electronic payments 
in  Italy,  financial  incentives  for  consumers  who  pay  electronically  have  been  implemented  from 
December  2020  until  June  2022.  At  the  same  time,  the  existing  general  obligation  to  accept  electronic 
payments is not enforced due to a lack of controls and effective administrative fines. In March 2021 the 
government  also  adopted  a  general  cancellation  of  past  tax  liabilities  (cartelle  esattoriali)  up  to  EUR 
5 000 related to the period 2000-2010, for taxpayers with yearly income below EUR 30 000. Although the 
measure is aimed at cancelling tax liabilities unlikely to be collected, it includes  no specific provisions 
securing  this purpose and implies a revenue loss estimated at EUR 1.6 billion in 2021 (0.1% of GDP). 
Overall, the measure risks worsening tax compliance by implicitly rewarding non-compliant behaviours. 

15 

 
Graph 2.1: 

Thematic Graphs: Public debt 

2. Thematic Issue: Public Debt 

Source: European Commission Services 

16 

90100110120130140150160-12.0-10.5-9.0-7.5-6.0-4.5-3.0-1.50.01.53.04.56.07.59.020002001200220032004200520062007200820092010201120122013201420152016201720182019202020212022(a) Developments of Italy's selected fiscal variables Gross public debt (rhs)Budget balance (lhs)Primary balance (lhs)Interest expenditure (lhs)% of GDP% of GDPCOM 2021 springFCSource: Eurostat, Commission 2021 spring forecast-15-10-50510152025302019202020212022(b) Drivers of the government debt ratio Stock-flow adjustmentInterestPrimary balanceReal GDPDeflatorDebt change% GDP2021 COM spring FCSource: Eurostat, Commission 2021 spring forecast-10-8-6-4-2024681010111213141516171819202122(c ) Drivers of the "snowball” effect on public debt(Real implicit cost of debt - real GDP growth)Real implicit cost of debtReal GDP growthReal spot yield at issuance (weighted average)COM 2021spring FC%Source: Eurostat, Italy's Treasury, Commission 2021 spring forecast050100150200250300350-1-0.500.511.522.533.54Apr-18Jun-18Aug-18Oct-18Dec-18Feb-19Apr-19Jun-19Aug-19Oct-19Dec-19Feb-20Apr-20Jun-20Aug-20Oct-20Dec-20Feb-21Apr-21(e ) Italy's sovereign yieldsSpread 10-year bonds  IT - DE (rhs)10-year bonds (lhs)2-year bonds (lhs)%2019 DBPECB press conference 30 AprilbpsCouncil conclusionon RRFSource: Bloomberg130140150160170% of GDP(d) Public debt medium-term projectionsBaselineHigher interest rate scenario (1 pp)Lower growth scenario (-0.5 pps)Higher GDP growth scenario (+0.5 pps)Source:Commission Debt Sustainability Analysis (2021 spring forecast)     
3.  THEMATIC ISSUE: LABOUR MARKET 

The  COVID-19  pandemic  laid  bare  the  shortcomings  of  the  Italian  labour  market  and  is  set  to 
accelerate  structural  change  with  profound  effects  on  workers  and  job  seekers.  The  risk  of  labour 
market  exclusion  is  particularly  high  for  women  and  the  young:  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 activity rate, already low by EU standards, declined sharply at the onset of the COVID-19 pandemic 
and only partly recovered by the end of 2020. The COVID-19 pandemic is set to accelerate technological 
change  such  as  automation,  as  firms  turn  to  labour-replacing  technologies  to  respond  to  sanitary 
requirements  and  labour  shortages  resulting  from  containment  measures.  Moreover,  with  workers  and 
consumers  moving  away  from  offline  work,  retail  and  associated  face-to-face  services,  the  COVID-19 
pandemic is likely to have a permanent effect on some sectors and occupations. Hence, the polarisation of 
the  labour  market is set to continue,  where  labour demand is increasingly divided into low-skilled (and 
low-paid) jobs and highly-qualified (and well-remunerated) jobs. While older workers will face particular 
challenges  in  adapting  to  ongoing  structural  changes,  younger  workers  have  been  most  impacted  by 
COVID-19-related job losses. However, it is the low-skilled  who potentially face the largest risks: they 
are more vulnerable to job losses related to both structural changes and the COVID-19 pandemic. 

The design and pace of the policy response is likely to determine the scale of hysteresis (“scarring 
effects”). Amid the expected withdrawal of job support measures and the accelerated structural change of 
the  labour  market,  policies  need  to  ease  and  smooth  labour  market  transitions,  i.e.  prepare  workers  for 
new  tasks and encourage  workers to  move into sectors  with higher productivity and better employment 
prospects  in  the  long  term.  This  would  imply  recalibrating  existing  labour  market  policies  to  protect 
workers and their employability instead of protecting specific jobs, for example by decoupling short-time 
working benefits from staff membership in a specific firm and allowing those workers who are currently 
covered  by  short-time  work  (STW)  schemes  to  take  up  other  work  without  immediately  losing  all 
benefits.  In  general,  actions  could  tackle  disincentives  to  work  (so-called  “benefits  traps”),  possibly 
through the improvement of current subsidy schemes and measures in the area of taxation (e.g. on second 
earners) in the context of a broader tax reform. 

fixed-term  contracts 

Temporary  employees,  the  self-employed  and  job  seekers  bear  the  brunt  of  the  labour  market 
adjustment so far. Between February 2020 and March 2021, 895 600 jobs were lost, largely concerning 
employees  with 
the  self-employed  
(-6.6%). (5) Employers adjusted their workforce by not prolonging the fixed-term contracts of temporary 
employees,  which  are  in  many  cases  women  and  the  young,  reducing  the  number  of  seasonal  workers 
and/or by instituting a hiring freeze. By contrast, STW schemes effectively limited the job losses among 
employees  with  open-ended  contracts  (-1.8%).  The  positive  trend  of  declining  youth  unemployment, 
albeit from a high level, reversed in 2020 and the youth unemployment rate increased to 33% in March 
2021 (up from an average of 29.2% in 2019).    

(-9.4%  since  February  2020)  and 

A strong and swift policy response helped contain the negative immediate impact of the COVID-19 
shock  on  the  labour  market.  The  unemployment  rate  stood  at  10.1%  in  March  2021,  i.e.  recorded 
unemployment was only marginally higher than before the COVID-19 crisis. This favourable outcome is 
owed  largely  to  the  extensive  use  of  STW  schemes,  whose  beneficiaries  continue  to  be  statistically 
counted  as  employed,  and  other  support  measures.  According  to  the  National  Social  Security  Institute 
(INPS  –  Istituto  Nazionale  Previdenza  Sociale),  the  various  forms  of  STW  schemes  supported  about  7 
million  workers  in  2020.  Italy  also  made  a  request  for  temporary  financial  support  under  the  SURE 
instrument  and  was  allocated  a  loan  amounting  to  a  maximum  of  EUR 27.4  billion,  of  which 
EUR 21 billion have been disbursed by February 2021. However, the activity rate – already relatively low 

(5)  In  January  2021  the  Italian  statistical  office  (Istat)  implemented  Regulation  (EU)  2019/1700  and  Commission  Implementing 
Regulation (EU) 2019/2240. As a consequence, employees who are covered by STW schemes for more than three months (and 
are formally still employed) are counted as non-employed in the Labour Force surveys (LFS). The same rule applies to self-
employed who do not work for more than three months, even though their business might formally still exist. 

17 

 
                                                           
3. Thematic Issue: Labour Market 

by EU standards – dropped from 65.4% in Q4 2019 to 63.9% in Q4 2020 and the labour force shrunk by 
2.6%, as in particular women exited the labour market (-4.0% vs. -1.5% for men). 

Policies  such  as  the  general  dismissal  ban  (“blocco  dei  licenziamenti”)  tend  to  influence  the 
composition but not the scale of the labour  market adjustment. Italy  is the only Member State that 
introduced  a  universal  ban  on  layoffs  at  the  beginning  of  the  COVID-19  crisis.  This  measure  has  been 
prolonged  until  June  2021  for  workers  supported  by  STW  schemes  and  until  October  2021  for  other 
categories  of  workers.  In  practice,  this  measure  mostly  benefits  “insiders”,  i.e.  jobholders  with  open-
ended contracts, to the detriment of temporary employees and seasonal workers. Moreover, a comparison 
with labour market developments in other Member States that did not introduce such a measure suggests 
that the dismissal ban was not particularly effective and proved redundant in view of the extended use of 
job  retention  schemes.  The  average  total  employment  elasticity  in  the  EU,  which  measures  the 
responsiveness  of  employment  to  changes  in  economic  activity,  was  0.25  in  2020,  compared  with  an 
elasticity  of  0.24  for  Italy.  For  some  peer  countries  with  a  similar  level  of  STW  schemes,  notably 
Germany and France, the employment elasticity is even lower, i.e. those countries managed to contain the 
labour  market  impact  without  resorting  to  restrictive  measures  such  as  an  outright  ban  on  layoffs.  The 
dismissal ban might even prove counterproductive, the longer it is in place, as it hampers the necessary 
adjustment of the workforce at the firm level. 

The temporary reduction in employers’  social contributions in southern regions is likely to lower 
labour  costs  and  improve  cost-competitiveness  in  the  short  term  but  comes  with  significant  costs.  
With the “August Decree”, the Italian government introduced a 30% cut in social contributions, initially 
valid until end-2020, for firms in regions with a per-capita income in 2018 of less than 75% of the EU27 
average (or alternatively with a per-capita income between 75% and 90% and an employment rate below 
the national average). The measure applies to all private employers, with the exception of the agricultural 
sector and domestic work. In practice, this SSC cut applies mostly to firms in southern Italy. As laid out 
in  the  2021  Budget  Law,  the  government  intends  to  extend  this  measure  until  2023  with  an  estimated 
fiscal cost of some EUR 5.6 billion in 2021 and EUR 4 billion in 2022 and 2023. (6) The measure adopted 
by the government is not restricted to particular segments of the labour market (e.g. young people, long-
term  unemployed),  and  applies  to  both  existing  new  employment  relationships,  which  implies  an 
efficiency loss compared to potentially more targeted measures. 

Effective active labour market policies (ALMP) and a reinforced job placement capacity of Public 
Employment  Services  (PES)  are  key  to  avoid  hysteresis  effects  and  a  widening  of  the  regional 
divide. The PES will not only be facing a significant rise in the number of jobseekers but also the need to 
reallocate many of them across occupations, sectors and regions. This requires providing them with good 
labour market information and support for skills development. Italy is among those Member States that 
spend the least on labour market services including PES (0.02% of GDP in 2018 compared with 0.43% of 
GDP in Germany and 0.24% of GDP in France) and invests significantly less than peer countries in re-
training activities (0.11% of GDP in 2018 compared with 0.18% of GDP in Germany and 0.25% of GDP 
in France), while employment incentives account for a large share of ALMPs. In addition, the system is 
hampered  by  a  high  degree  of  fragmentation,  associated  with  weak  governance  and  widely  diverging 
performance standards across regions.  

Recent  labour  market  measures  and  reforms  to  the  ALMP  framework  have  the  potential  to 
accelerate  labour  market  transitions  and  support  employment.  With  the  2021  Budget  Law, 
beneficiaries  of  unemployment  benefits  (Naspi,  DisColl)  and  workers  covered  by  STW  schemes  have 
become  eligible  for  the  so-called  “assegno  di  ricollocazione”,  alongside  beneficiaries  of  the  minimum 
income  (“Reddito  di  cittadinanza”)  who  were  already  eligible  since  2019.  The  “assegno”  is  a  non-
pecuniary voucher that beneficiaries can use for job search or requalification services. Moreover, the new 
National  Programme  for  the  Guaranteed  Employability  of  Workers  (“Garanzia  di  occupabilità  dei 
lavoratori  –  GOL”)  attempts  to  overcome  the  fragmentation  of  local  employment  services.  The  main 
tasks of the programme include providing specific services (assessment, skills assessments, definition of 

(6)  The  measure  follows  two  other  measures  already  in  force  under  Italian  law.  The  first  is  the  50%  exemption  from  social 
contributions for permanent employees of under 35, introduced by Law n.205/2017, for a maximum of 36 months and with a 
ceiling  of  EUR  3  000  per  year.  The  other  is  the  so-called  ‘Bonus  Sud’,  i.e.  the  total  exemption  from  social  contributions 
introduced by the 2019 Budget Law (n.145/2018) for the recruitment of persons unemployed over 6 months, up to a maximum 
of EUR 8 060 per year. In contrast to the cut in non-labour costs for the under 35, the ‘Bonus Sud’ was only valid for 2020. 

18 

                                                           
3. Thematic Issue: Labour Market 

training  needs, etc.) and  personalised vocational training  for employability. However, it is not  yet clear 
how the new programme will interact with the existing schemes (Reddito di cittadinanza, Naspi, DisColl) 
and how governance problems between the central and the regional level will be solved. 

The  fight  against  undeclared  work  and  labour  exploitation  made  little  progress,  despite  the 
measures implemented by the Italian authorities in recent years. In 2020, 66% of inspections by the 
labour  inspectorate  resulted  in  detected  irregularities,  a  figure  similar  to  previous  years.  Out  of  these 
irregularities 31% were related to undeclared work and labour exploitation. Numbers are particularly high 
in the agricultural sector where undeclared work and labour exploitation account for 62% of irregularities 
detected in 2020. The reform launched in 2020 with the goal to regularise undeclared workers has so far 
yielded  limited  results.  Applications  for  regularisation  were  rather  limited  in  number  (207,542).  As  of 
March 2021, only 5% of the submitted applications were examined and only 1% resulted in the issuance 
of a regularisation certificate. 

Graph 3.1: 

Thematic graphs: Labour market 

Source: Istat. 

19 

25262728293031323334357891011121314Jan-19Mar-19May-19Jul-19Sep-19Nov-19Jan-20Mar-20May-20Jul-20Sep-20Nov-20Jan-21Mar-21PercentPercent(a) Unemployment ratesTotal15-24 (rhs)50556065707580859095100024681012Jan-19Mar-19May-19Jul-19Sep-19Nov-19Jan-20Mar-20May-20Jul-20Sep-20Nov-20Jan-21Mar-21PercentPercent(b) Unemployment and activity ratesActivity rate, menActivity rate, womenUnemployment rate, menUnemployment rate, women8.09.010.011.012.013.014.015.019.020.021.022.023.024.025.026.0101214161820Hours (billion)Persons (million)(c) EmploymentHours worked (rhs)PersonsPersons (Full-time equivalents)-600-400-2000200400600800100014151617181920Cumulative change in thousands(d) Employment typesPermanent contractsTemporary contractsSelf-employed  
4.  THEMATIC ISSUE: FINANCIAL SECTOR 

Asset Quality  

Italian  banks  further  reduced  their  stock  of  non-performing  loans  (NPL)  over  the  last  years,  as 
NPL  disposal  has  been  broadly  maintained  during  the  pandemic  amid  government  support 
measures. The gross NPL ratio at system level decreased from 16.8% in Q3-2015 to 5.6% in Q3-2020. 
However, the  NPL ratio is still above the EA average  of 2.7% and some of the  second-tier banks  have 
NPL  ratios  above  the  system  level,  though  they  represent  a  smaller  part  of  the  overall  NPL  stock.  The 
share  of  NPLs  is  significantly  higher  for  non-financial-companies  (NFCs)  than  for  households  (Graph 
4.1(a)). So far, most of the decrease  in the  legacy NPL stock has been triggered by the disposal of bad 
loans  (sofferenze).  As  a  result,  unlikely-to-pay  (UtP) (7)  loans  represent  an  increasing  share  of  the 
remaining stock of NPLs, reaching 45% as of end-June 2020. As of Q3-2020, the coverage ratio at system 
level reached 52.3%, above the euro-area average of 46.9%. Despite the outbreak of the pandemic and the 
subsequent reduced economic activity, the inflow of new NPLs has remained low until now, measured by 
historical  standards,  which  is  also  due  to  granted  loan  moratoria.  The  disposal  of  NPLs  has  been 
supported mainly by NPL securitisations benefitting from state support (GACS scheme), but also by the 
provisions of the “Cura Italia” Decree of March 2020, which allow banks to convert deferred tax assets 
into tax credits against NPL sales. Moreover, banks also benefitted from government measures to support 
the provision of liquidity to non-financial firms. The prudential guidance of supervisory authorities on the 
flexibility concerning the classification of loans, which aims to reduce the potentially pro-cyclical effects 
of  an  increase  in  credit  risk,  and  the  regulatory  relief  provided  through  the  Capital  Requirement 
Regulation II (CRR II) amendments also helped.  

The Italian government prolonged the loan moratoria (for the second time) in December 2020 until 
June  2021. The  Bank  of  Italy  reported  that,  based  on  data  as  of  9  April  2021,  44%  of  moratoria  have 
expired.  The  total  volume  of  loans  with  non-expired  moratoria  (i.e.  legislative  and  voluntary  moratoria 
granted by banks) amounts to EUR 158 billion. The percentage of loan moratoria still in place is higher 
for  the  legislative  moratoria  (77%  still  non-expired;  EUR  126  billion)  than  for  the  voluntary  moratoria 
granted  by  the  banking  sector  (27%  still  non-expired;  EUR  32  billion).  As  of  9  April  2021,  the  non-
expired moratoria granted to non-financial corporations amount to EUR 123 billion, while the moratoria 
to households still in place amount to EUR 29 billion. Roughly 58% of the total moratoria are also backed 
by  state  guarantees  granted  by  the  Italian  government’s  “Cura  Italia”  Decree.  More  efforts  may  be 
required in 2021, as banks will have to manage effectively the pressure on the quality of their loan book 
caused by the expiry of the moratoria measures and the gradual lifting of the public support measures to 
companies. 

Looking ahead, the pandemic is likely to put strains on borrowers’ ability to repay loans, negatively 
affecting the asset quality and the already subdued profitability of the Italian banking sector. The 
future  level  of  NPLs  will  depend  on  the  efficiency  of  measures  for  containing  the  pandemic,  the 
magnitude  of  the  economic  downturn/recovery  (during  and  post  COVID-19)  and  the  efficiency  of 
measures to support firms in Europe and Italy. Moreover, the performance of the stage 2 loans (according 
to  IFRS  9 (8),  which  increased  above  the  euro  area  average,  also  requires  close  monitoring  in  order  to 
detect signs of further asset quality deterioration. In addition to that, the eventual phasing out of support 
measures, such as loan moratoria and state guaranteed loans, bears the risk of so-called cliff effects. The 
profitability  of  Italian  banks,  measured  by  the  return  on  equity  (ROE),  decreased  over  the  last  years  to 
around  4%  in  2019  (Graph  4.1(b)),  which  was  slightly  below  the  EU  average.  Based  on  data  from  the 
Bank of Italy, the ROE dropped significantly to 1.9% at the end of 2020,  mainly due to an increase in 
loan-loss provisions on the back of the pandemic.  

(7)  In contrast with triggers relating to past-due payments, the triggers relating to unlikeliness to pay (UTP) rely less on quantitative 

criteria but define some events that trigger the non-performing classification. 

(8)  The accounting principle IFRS9 applies a three-stage model (1 indicating best) for loan impairments based on changes in credit 

quality since initial recognition. 

20 

 
                                                           
4. Thematic Issue: Financial Sector 

In  the  current  volatile  economic  environment,  further  monitoring  of  the  vulnerability  linked  to 
weaker banks is warranted. Among individual institutions, Banca Monte dei Paschi di Siena continued 
the  implementation  of  commitments  under  the  2017  restructuring  plan.  The  increase  in  loan-loss 
provisions  due  to  the  pandemic  and  legal  risks  coupled  with  the  decline  in  net  interest  income  has  put 
strain on the bank’s profitability, which was in negative territory in 2020. The bank announced recently 
that in case a structural solution with a third party buyer is not found, a capital strengthening of EUR 2.5 
billion  would  be  envisaged  at  market  conditions  and  with  the  pro-rata  participation  of  the  Italian  state. 
Regarding Banca Popolare di Bari, Italy’s depositor protection fund (FITD) has contributed significantly 
to  the  strengthening  of  the  capital  position  of  this  bank.  As  a  result,  the  bank  exited  the  special 
administration procedure in mid-October 2020 and approved its transformation into joint-stock company. 
Cassa  Centrale  Banca  recently  decided  not  to  exercise  a  call  option  for  acquiring  over  80%  of  Banca 
Carige,  which is currently predominately owned by Italy’s depositor protection fund. This option could 
have been exercised by the end of 2020, by end of June 2021 or by end December 2021.  

Provision of Credit / Access to Finance  

The volume of bank loans has increased markedly since the onset of the pandemic, driven mainly 
by  public  guarantees  to  meet  firms’  greater  liquidity  needs,  while  non-bank  financing  has 
continued to remain rather  subdued. Following the outbreak of the COVID-19 pandemic, the Italian 
authorities  provided  liquidity  support  to  households  and  companies,  which  led  to  an  increase  in  the 
demand  for  credit,  notably  by  non-financial  firms  (see  Graph  4.1(c)).  Among  the  guarantee  schemes 
granted by the government, the largest share of state guaranteed loans stems from the Central Guarantee 
Fund  for  SMEs,  amounting  to  about  €144  billion  as  of  April  2021.  Moreover,  the  guaranteed  loans  to 
corporates  and  SMEs  granted  by  SACE,  the  Italian  export  credit  agency,  reached  almost  €23  billion. 
Lastly, a 33% guarantee  for loans of micro-firms and SMEs that benefited from a payment moratorium 
has also been provided.  As of February 2021, bank lending to the non-financial  private sector grew by 
5.1%  YoY  and  even  by  3.4%  with  respect  to  November  2020.  This  expansion  in  lending  activity  was 
predominately driven by firms’ credit demand and to a lesser extent by households (see Graph 4.1(d)). In 
contrast  to  bank  credit,  non-bank  financing  has  remained  rather  subdued.  Decree  Law  34/2020  (the 
‘Relaunch Decree’) of May 2020 introduced a new category of PIRs (long-term individual savings plans), 
referred  to  as  ‘alternative  PIRs’,  to  encourage  the  growth  of  funds  that  invest  mainly  in  financial 
instruments issued by Italian SMEs. The regulations for the first investment funds that comply with the 
rules  for  alternative  PIRs  have  been  approved,  but  none  of  those  are  in  operation  yet.  Overall,  lending 
volumes  over  the  last  year  have  been  largely  driven  by  the  liquidity  support  measures  that  were 
implemented in response to the pandemic and may decrease once the measures will be phased out. 

Sovereign-Bank Nexus  

The sovereign-bank nexus in Italy has recently increased but significant mitigating effects have to 
be  considered  in  the  short  to  medium  term.  Italy’s  home  bias  regarding  the  sovereign  holdings  by 
banks has increased on the back of the current pandemic (Graph 4.1(e)). As such, the domestic sovereign 
bonds in bank portfolios as a share of total investments increased from 9.5% in February 2020 to 10.4% 
in February 2021, significantly above the Euro area average of 3.3%. The rise of the home bias therefore 
increases the vulnerability of the banking sector with respect to sovereign risk in Italy. Nevertheless, the 
measures included in the Capital Requirement Regulation (CRR “quick fix”) and the measures taken by 
banks have  mitigated the impact of potential increases in  sovereign  yields on bank balance sheets. The 
prudential filter for sovereign bonds implemented under the CRR “quick” fix has decreased the impact of 
sovereign bond price volatility on banks' core equity, albeit tapering until 2023. Moreover, Italian banks 
continued  to  rebalance  their  sovereign  exposures  in  favour  of  the  amortised  cost  portfolio,  thereby 
increasingly  shielding  their  capital  base  from  sovereign  bond  volatility.  Last,  but  not  least,  further 
significant  mitigating  effects  have  to  be  considered  in  the  short  term.  Currently,  yields  for  Italian 
sovereign  bonds  are  standing  close  to  historically  low  levels  also  due  to  support  measures,  such  as  the 
Pandemic Emergency Purchase Programme of the ECB that eased tensions on bond markets. As a result, 
short-term risks stemming from this home bias are lower than during previous periods of market turmoil. 
Nevertheless,  further  monitoring  will  be  warranted,  particularly  once  support  and  regulatory  easing 
measures will be phased out.  

21 

4. Thematic Issue: Financial Sector 

Liquidity and Capital 

Liquidity  conditions  of  Italian  banks  remain  broadly  stable,  while  the  overall  capital  position  of 
banks has improved. The short-term liquidity of Italian banks, as measured by the Liquidity Coverage 
Ratio (LCR), remained comfortable at system level over the last year and equalled to 197% in February 
2021.  It  therefore  stands  markedly  above  the  required  level  of  100% (9).  The  comfortable  liquidity 
position is, inter alia, attributable to the Eurosystem refinancing operations providing abundant liquidity 
and  to  the  increase  in  deposits,  both  by  companies  and  households.  The  capitalisation  of  Italian  banks 
increased over the last years, putting them into a better position to withstand shocks compared to the time 
prior to the double-dip recession (Graph 4.1(f)). According to the Bank of Italy, the common equity tier-1 
(CET1)  ratio  equalled  on  average  to  15.5%  of  risk  weighted  assets  (RWAs)  as  of  December  2020, 
indicating a 160 basis points increase compared to the end of 2019. In this respect, European and Italian 
banks benefitted from supervisory and capital relief measures. These comprise, inter alia, the deactivation 
of  the  Capital  Conservation  Buffer,  the  Pillar  2  Guidance  and  the  recommendation  to  not  distribute 
dividends or buying back shares. Moreover, further flexibility on capital buffers has been granted under 
the  CRR  II  quick  fix.  As  such,  the  SME  supporting  factor,  the  regulatory  treatment  of  software 
investments and the relief measures on loan loss provisions under IFRS9 will temporarily reduce capital 
erosion.  The  future  evolution  of  the  capital  buffers  of  Italian  banks  will  depend  on  both  banks’ 
profitability, which is required for the organic built up of capital, and the degree of deterioration of asset 
quality, which bears the risk of a depletion of capital buffers.  

Insolvency proceedings  

Insolvency  proceedings  in  Italy  remain  lengthy  compared  to  other  EU  economies,  while  the 
implementation  of  the  2019  insolvency  code  has  been  postponed  to  September  2021.  Insolvency 
proceedings in Italy have traditionally been lengthy, costly and have relied on the judicial courts to a large 
extent,  regardless  of  value  size.  Thus,  in  international  comparisons  on  the  efficiency  of  insolvency 
frameworks, Italy ranks below other large EU economies. Italy adopted a major reform of the insolvency 
framework in 2019, but its entry into force was postponed from August 2020 to September 2021 due to 
the impact of the pandemic. In addition to the overhaul of the insolvency framework, alternative in-court 
and out-of-court arrangements have been introduced over the last years, but their impact has been rather 
muted so far. The timely implementation of the 2019 insolvency code coupled with improvements in the 
efficiency of the court system could be beneficial in order to cope with a potential upcoming increase in 
bankruptcies, while at the same time averting the new accumulation of private debt due to the pandemic. 
In  addition  to  that,  a  review  of  the  out-of-court  settlement  arrangements  appears  warranted,  so  as  to 
identify  areas  in  which  further  improvements  may  be  necessary  to  incentivise  the  concerned  parties  to 
make  enhanced  use  of  such  proceedings.  This  could  also  alleviate  the  workload  of  judicial  courts  and 
contribute to an increase in their efficiency.  

(9)  According  to the Bank  of  Italy,  the Net  Stable  Funding  Ratio  (NSFR), which is not  yet  a  binding  requirement  for  European 

banks, stood at an average of 124% for Italian significant banks in December 2020. 

22 

                                                           
Graph 4.1: 

Thematic Graphs: Financial sector 

4. Thematic Issue: Financial Sector 

Source: European Commission Services 

23 

0.05.010.015.020.025.016Q417Q418Q419Q4(a) NPLs Ratio by sectorOverall NPL rateNFCHHOthers% of sectoral loans and advancesSource: EC based on ECB data 02040608010012014016018020016Q116Q216Q316Q417Q117Q217Q317Q418Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q320Q4market value in % of GDP (over preceding 4 quarters)(e) Detailed Holder composition of General Government Debt (market value as % of GDP)Domestic central banksMFIs excl. central banksNon-bank fin. corp.Private sector (NFCs & HH)Unallocated domesticProgrammeLiabilities to rest of EA19International central banksUnallocated foreignTotal domestic-held debtNominal debt (face value)Source: EC based on ECB,Eurostat and IMF024681012141618202010201120122013201420152016201720182019Tier 1 Ratio, %(f) Tier 1 RatioTier 1 ratio (%)EU (changing composition)Euro Area (changing composition)Source: ECB BankLending Survey-4-3-2-1012345609Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q120Q121Q1% of GDP (over last 4 quarters)(d) MFI lending (flows) to the domestic private sector (loans and corporate bonds) domestic corporate bondsdomestic NFC loansdomestic HH loansSource:ECbased on ECB data-80-60-40-2002040608010008Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q220Q221Q2(c) Factors affecting loand demand from NFCsFixed investmentInventory and working capitalAlternative external financingInternal financingInterest rate levelOtherActualexpectationsTighteningEasingSource: ECB Bank lending survey-20-15-10-50510200820092010201120122013201420152016201720182019Return on Equity, %(b) Return on EquityReturn on Equity (%)EU (changing composition)Source: EC based on ECB data