COMMISSION STAFF WORKING DOCUMENT In-depth review for Italy Accompanying the document 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 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Italy, banking, competitiveness, economic policy, economic recovery, energy policy, indebtedness, labour market, macroeconomics

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 634 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Italy Accompanying the document 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 2023 European Semester – Spring Package         {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Italy 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On the basis of this in-depth review for Italy undertaken under Regulation 
(EU)  No  1176/2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances, the Commission has considered in its Communication “European 
Semester – 2023 Spring Package” (COM(2023) 600 final) that: 

Italy’s 

relevance,  persist. 

Italy  continues  to  experience  excessive  imbalances.  While  there  have  been  some 
improvements, vulnerabilities related to high government debt and weak productivity 
growth,  in  a  context  of  labour  market  fragilities  and  some  weaknesses  in  financial 
markets,  which  carry  cross-border 
long-standing 
vulnerabilities have receded somewhat over recent years but remain significant and 
are not expected to unwind quickly. Persistent low productivity growth has been a key 
factor  behind 
Italy’s  protracted  weak  economic  growth,  which  slows  down 
government debt deleveraging, dents employment opportunities and impacts banks’ 
balance  sheets.  The  government debt  ratio  further declined in  2022  along  with  the 
economic  recovery.  However,  it  remains  high  and  constitutes  a  substantial  fiscal 
sustainability challenge. The public debt ratio is forecast to further decline by 2024 
but to  increase  in the medium  term  in  the  absence  of  consolidation  measures.  The 
government  has  implemented  further  measures  to  support  the  resilience  of  the 
financial sector and non-performing loans have significantly declined, but banks are 
still  significantly  exposed  to  the  sovereign.  Some  progress  has  been  made  with 
policies  to  tackle  imbalances,  but  sustained  efforts  are  warranted  and  the 
implementation  of  the  RRP  remains  the  key  policy  priority  as  it  includes 
comprehensive  reforms  and  significant  investments.  Putting  the  high  government 
debt on a firm downward path, in a context of rising debt servicing costs  and rising 
age-related costs, requires a multipronged approach relying on prudent fiscal policies 
with  adequate  primary  surpluses,  growth-enhancing  investments  and  reforms, 
greater  tax  compliance  as  well  as  an  efficient  use  of  national  and  European 
resources. 
that,  alongside  a  continued  strong 
implementation  of  the  RRP,  would  benefit  from  additional  policy  efforts,  notably  in 
the areas of taxation, fiscal framework and pension systems as well as in the areas 
of demography, labour market, and energy. 

is  facing  challenges 

Italy 

 
 
 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

3.  Thematic chapter: labour market 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 

Selected economic and financial indicators (Part 1), Italy 
Selected economic and financial indicators (Part 2), Italy 

LIST OF GRAPHS 

Graph 2.1:  Selected graphs, Italy 

Graph 2.2:  Components of gross fixed capital formation deflator growth and consumer price inflation 

Graph 2.3: 

Impact of Italian value added inflations on EU partners’ consumer price inflation 

Graph 3.1:  Employment rate, activity rate and unemployment 

Graph 3.2:  Employment rates and labour market slack 

Graph 3.3: 

Job churning and ULC 

Graph 3.4:  Nominal and real wages 

Graph 3.5:  Annex on labour market 

4 

5 

18 

16 
17 

13 

14 

15 

18 

19 

20 

22 

23 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance  Procedure  (MIP),  the  Commission  identified  “excessive  macroeconomic 
imbalances” in Italy. (1) These imbalances were related to the high government debt and weak 
productivity growth, in a context of labour market fragilities and some weaknesses in the financial 
sector,  which  carry  cross-border  relevance.  The  2023  Alert  Mechanism  Report  published  in 
November 2022 concluded that an in-depth review (IDR) should be  undertaken also this year for 
Italy with a view to assess the persistence or unwinding of imbalances. (2) The AMR concluded that 
in  Italy  concerns  related  to  the  high  government  debt-to-GDP  ratio  remain  unchanged.  Labour 
market weaknesses could increase again. Despite improvements in the banking sector, the risk of 
feedback loops is increasing due to the macroeconomic context and warrants close monitoring. 

Italy’s  economic  output  fully  recovered  after  the  pandemic,  then  growth  decelerated. 
GDP growth was 3.7% in 2022, down from 7.0% in 2021, amid the impact of Russia’s aggression 
against  Ukraine,  which  led  to  disruptions  in  the  supply  of  some  key  commodities  and  sharp 
increases  in  their  price.  After  contracting marginally  in  the  final  quarter  of  2022  and  rebounding 
swiftly in the first quarter of 2023, GDP is forecast to return to a more gradual pace of growth in 
the rest of the year, supported by public spending and still robust investment in infrastructure and 
equipment.  While  the  rising  cost  of  funding  starts  weighing  on  investment  prospects,  falling 
inflation is expected to relieve pressure on household consumption. Overall, real GDP is forecast to 
grow by 1.2% in 2023 and 1.1% in 2024. (3) Thanks to a swift reversal of last year’s energy and 
food commodity price hikes, headline inflation is forecast to decrease to 6.1% in 2023 and 2.9% in 
2024, with core inflation projected to remain slightly more elevated. The main downside risk to this 
forecast relates to potential further price shocks and the worsening of supply shortages that might 
delay  the  expected  return  to  moderate  inflation  rates  and  thus  affect  domestic  demand,  with 
possible implications for the fiscal position. 

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities  for  Italy.  The  assessment  is  backed  by  the  findings  in  the  thematic  section  on 
labour market developments. The MIP assessment matrix is published in the 2023 Country Report 
for Italy. (4) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM (2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(4)  European Commission (2023), Country Report Italy 2023, SWD (2023) 612 final. 

4 

 
 
 
 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects  

Italy’s  high  level  of  public  debt  remains  a  major  vulnerability  for  the  economy.  Italy’s 
public debt is characterised by a residual maturity of around 7 years at end-2022, which is below 
the euro area’s 8-year average despite increasing between 2014 and 2021. (5) While this maturity 
has  helped  in  cushioning  the  impact  of  the  recent  increase  in  government  borrowing  costs,  the 
average cost of debt increased noticeably in 2022 and is forecast to remain broadly stable in the 
near  future.  This,  together  with  high  pension  expenditure,  reduces  the  resources  available  for 
countercyclical policies to cushion negative economic shocks as well as for productivity-enhancing 
spending and supporting the green transition to improve competitiveness and resource-efficiency. 
The  Commission’s  assessment  shows  that  Italy  faces  high  fiscal  sustainability  risks  over  the 
medium term and medium risks over the long term. (6) Several reforms and investments included in 
Italy’s  Recovery  and  Resilience  Plan  (RRP)  are  expected  to  strengthen  debt  sustainability  through 
higher  growth  and  fiscal-structural  reforms.  However,  to  further  support  debt  sustainability,  the 
reform  and  investment  agenda  will  have  to  be  accompanied  by  prudent  budgetary  policies  with 
adequate primary surpluses, also in light of a less favourable interest rate-growth differential. 

Italy’s  government  debt  continued  to  decline  in  2022  but  remains  at  a  high  level.  In 
recent years, the government deficits were impacted by a number of policy measures, including the 
higher-than-expected  uptake  of  tax  credits  to  support  energy  efficiency  in  residential  buildings, 
together  with  a  change  in  their  statistical  recording  that  shifted  the  deficit  impact  from  future 
years to primarily 2021-22. Italy’s public debt ratio reached its peak in 2020, at 154.9% of GDP, 
and  started  to  decline  afterwards,  reaching  144.4%  of  GDP  in  2022  (graph  2.1  a).  The  decrease 
was driven by a strong rebound in nominal growth and the phasing-out of pandemic-related fiscal 
measures, which more than compensated the budgetary costs of the fiscal  measures adopted to 
counter  the  economic  and  social  impact  of  the  exceptional  increase  in  energy  prices.  In  the  near 
future,  the  stock-flow  adjustment,  also  related  to  the  statistical  reclassification  of  tax  credits  for 
building  renovation  works,  is  projected  to  provide  a  debt-increasing  contribution.  In  contrast, 
favourable  economic  growth  and  improving  primary  balances,  also  due  to  the  withdrawal  of 
support measures, are expected to reduce the debt. As a result, Italy’s public debt ratio is forecast 
to reach 140.3% of GDP by 2024, which is still above the already high pre-pandemic level.  

Following  weak  growth  over  the  last  two  decades,  productivity  dynamics  have  been 
volatile since the start of the COVID-19 pandemic. Weak labour productivity has been a drag 
for Italy’s economic growth over almost two decades (graphs 2.1 b/c). From 2001 until 2019, GDP 
per hour worked virtually stagnated and GDP per employed  person even fell. In comparison, over 
the  same  period  labour  productivity  in  both  indicators  increased  by  about  20  percentage  points 
more in the EU. Key factors for this structural weakness were predominantly small firm sizes, which 
make  it  difficult  to  take  advantage  of  economies  of  scale,  and  low  investment,  notably  in 

(5)  These maturities refer to securitised debt, which in the case of Italy accounts for more than 80% of total public debt.  

(6)  See the DSA in the Commission Country Report 2023 for the latest risk classification and Debt Sustainability Report 2022 

(April 2023) for methodological details. 

5 

 
                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

intangibles.  In  turn,  private  domestic  and  foreign  investment  is  hampered  by  a  not  particularly 
supportive  business  environment  and  by  low  average  education  levels.  From  2019  until  2022, 
hourly productivity grew by 0.6% per year on average, slightly exceeding its weak average growth 
of  0.4%  during  the  preceding  decade.  However,  strong  fluctuations  in  both  economic  output  and 
labour  input  during  the  pandemic  led  to  a  marked  volatility  in  productivity  data  during  the  past 
three years. The strong increase in hourly productivity by 3.1% in 2020 reflected the effectiveness 
of  government  support measures,  including  through  the  SURE  scheme.  In  response  to  the  abrupt 
drop  in  economic  activity  firms  mostly  opted  to  apply  for  short-time  work  schemes  instead  of 
laying  off  employees.  Consequently,  hours  worked  fell  more  than  output.  In  turn,  in  2021  hours 
worked recovered more strongly than output and thus productivity fell by 1%, followed by a small 
decline in 2022. Productivity is, however, forecast to rebound to a 0.5% average growth in 2023-
24. 

While  financing  conditions  are  tightening,  the  green  transition,  supply  chain 
reorganisations,  and  the  continued  effective  implementation  of  the  Recovery  and 
Resilience Plan constitute an opportunity to raise productivity. The higher funding costs on 
capital  markets  make  investments  in  equipment  or  intangible  assets  less  profitable  for  firms. 
Similarly, also high energy prices and supply chain disruptions, although recently easing, may make 
capital-intensive  production  processes  more  costly.  As  a  consequence,  the  economy’s  capital 
deepening process could be at least temporarily impaired. However, structural adjustments to these 
changing conditions, including market exit of inefficient firms, and the transition towards greener 
energy  sources  could  help  increase  efficiency  in  the  medium  to  long  term.  Italy  already  made 
marked progress in geographically diversifying its sources of fossil fuels and in increasing its stock 
of renewable energy installations over the past years. Apart from reducing the risk of future energy 
price  shocks,  which  makes  capital-intensive  production  processes  more  attractive,  the  changed 
external  environment  and  the  energy  transition  could  trigger  firms  to  rethink  their  production 
processes  more  broadly.  This,  together  with  the  required  reskilling  of  the  labour  force,  could 
eventually  lead  to  structural  improvements  in  the  economy’s  total  factor  productivity.  Policy 
measures included in Italy’s RRP support this transition process. 

The labour market continues to face structural challenges that dampen potential output, 
although  the  low  employment  rate,  in  particular  of  women,  and  the  high  youth 
unemployment are improving. In 2022, women’s employment rate (20-64 years old) was 55%, 
against  men’s  74.7%.  For  both  genders,  the  employment  rates  in  Q4-2022  were  slightly  higher 
than the pre-pandemic Q4-2019 levels (respectively 75.2% vs 73.8% for men and 55.7% vs 53.8% 
for women). Regional employment differences remain substantial, with the rate in the North above 
70% and that in the South below 50%. Among the younger generation (15-34), employment rates 
in the North are in line with the euro-area average (around 75%) while they are below 50% in the 
Southern regions. The youth unemployment rate (15-24) remains above 22%, well above the euro-
area 14% average, although it is on a decreasing trend and lower than before the pandemic. Short-
term indicators of labour market dynamics, such as the net balance between hiring and layoffs by 
private  employers,  continued  to  be  positive  in  2022  and  accelerated  in  the  first  few  months  of 
2023. Even though the recruitment with permanent contracts and the conversion of temporary into 
permanent contracts picked up markedly in 2022 and early 2023, fixed-term contracts remain the 
prevalent  form  of  job  on  offer  for  new  hires  (around  75%  of  total  recruitment). (7)  The  robust 
growth  in  all  employment  indicators  is  not  expected  to  reverse  in  the  near  future,  although  the 
momentum is likely to slow down, in line with the reduced pace of economic expansion (see section 
3 for more details). 

(7)  Ministry of Labour and Social Policies (MLPS), Bank of Italy and National Agency for Active Labour Market Policies (ANPAL), 

The labour market: data and analysis, March 2023 
(https://www.bancaditalia.it/pubblicazioni/index.html?com.dotmarketing.htmlpage.language=1)   

6 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Wage  growth  has  not picked  up  in  line  with  inflation,  supporting price  competitiveness 
but lowering real disposable income. The wage moderation displayed before the pandemic has 
not  diminished  in  the  subsequent  recovery,  with  the  surge  in  inflation  not  having  been  reflected 
much  in  wage  contract  renewals  so  far,  and  thus  entailing  losses  in  real  labour-income  and 
households’ purchasing power. Real wages had fallen by around 5% after the 2008-13 crisis and 
have  stagnated  thereafter:  as  a  result,  they  remain  well  below  their  level  at  the  start  of  the 
millennium,  while  in  the  euro  area  they  rose  by  some  10%  over  that  time  span.  Given  Italy’s 
sluggish  growth  of  labour  productivity,  persistent  wage  moderation  has  allowed  preserving  price 
competitiveness vis-à-vis its European peers. 

The  health  of  the  Italian  banking  sector  has  strengthened  since  the  global  financial 
crisis  and  the  improvement  in  asset  quality  continued  in  2022,  although  challenges 
remain.  The  gross  non-performing  loan  (NPL)  ratio  substantially  decreased  to  2.9%  in  Q3-2022 
(graph 2.1 f) from a peak of 16.5% in 2014 but remains higher for Less Significant Institutions (8) 
and in Southern regions (9). However, roughly half of the stock of NPLs is made of unlikely-to-pay 
loans,  which  warrant  closer  oversight.  Furthermore,  banks  have  maintained  reassuring 
capitalisation  levels  (Common  Equity  Tier  1  ratio  of  14.7%  in  Q3-2022)  and  liquidity  positions 
above  regulatory  requirements (Liquidity  Cover  Ratio  of  190.2%  and Net  Stable  Funding  Ratio  of 
133%, in December 2022) (10).  The normalisation of monetary policy also contributed to a rise in 
bank profitability with Return on Equity reaching 6.5% in Q3-2022. This positive trend was mainly 
driven  by  an  increase  in  net  interest  income  (+9.2%  in  Q2-2022  compared  to  Q2-2021). (11) 
Looking  ahead,  banks  are  expected  to  be  able  to  cope  overall  with  the  challenges  posed  by  the 
phasing out of the Targeted Longer-Term Refinancing Operations (TLTRO) funding, as around half 
of  TLTRO  III (12)  will  expire  by  June  2023.  The  slowdown  in  economic  activity  may  weigh  on 
borrowers’ ability to repay loans and therefore negatively affect asset quality. The increase in the 
cost of lending for both non-financial  corporations and households may weigh on credit demand, 
while the debt servicing cost of loans with variable interest rates has been increasing. However, the 
low  debt  level  of  the  Italian  corporate  sector,  its  abundant  liquidity  and  the  strong  profitability 
performance  after  the  pandemic  mitigate  downside  risks. (13)  Finally,  the  Italian  financial  system 
remains predominantly bank-based and despite some progress in recent years, access to non-bank 
finance remains underdeveloped and concentrated in Northern regions. 

The  public  guarantee  and  liquidity  schemes  were  effective  in  supporting  economic 
activity, but intensified the corporate-sovereign-bank nexus, which remains a challenge 
for the banking sector. While exposure to the domestic government (14) as a ratio of bank total 

(8)  Bank of Italy, Financial Stability Report:  The gross non-performing loan ratio for less significant institutions was 5.9% in 

December 2022. 

(9)  Access to finance is more expensive for companies located in the South where banks report higher levels of NPLs. - Bank of 

Italy, No. 710 - The territorial gaps in the access of Italian firms to credit (26 July 2022).   

(10)  Liquidity ratios (LCR, NSFR) have a regulatory requirement of 100%. The data on liquidity are provided in the Financial 

Stability Report. 

(11)  Bank of Italy, Financial Stability Report. 

(12)  Bank of Italy: The outstanding Targeted Longer-Term Refinancing Operations loans to the Banking System amounted to 

EUR 318 billion in March 2023. 

(13)  ECB Data: Private debt is relatively low in Italy. Household debt amounted to 42.6% of GDP in Q3 2022, and NFC  

consolidated  debt stood at 69% in Q3 2022. In 2022, cost of borrowing increased significantly for both households and 
NFC, moving from 1.7% to 3.8% for households and from 1.4% to 3.7% for non-financial corporations (yoy change).  

(14)  ECB BSI Data: As a benchmark, bank exposure to the domestic government was higher in Italy than in other main euro 
areas economies. In Q4-2022, domestic exposure on total assets was 5.1% in Germany, 5.4% in France, and 11.6% in 
Spain. The domestic government bond holdings on total assets were 1.6% in Germany, 2.6% in France, and 8.4% in Spain. 

7 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

assets slightly decreased to 19.5% in December 2022, from a peak of 22% in September 2021, (15) 
the amount of public-guaranteed loans reached 15.4% of GDP in December 2022 (16). This amount 
may increase even further in view of the new liquidity schemes for energy-intensive industries. In 
addition, the majority of loans with a public guarantee (17) are variable interest rate loans and are 
exposed  to  the  increase  in  financing  costs.  Over  2022,  the  10-year  sovereign  bond  yield  has 
increased by 350 basis points (bps), due to the normalisation of monetary policy. After an increase 
in the first half of 2022 (18) and some episodes of volatility linked to the electoral cycle, the spread 
to  the  German  10-year  bond  has  stabilised  at  the  current  level  of  around  170-195  bps.  The 
increase  in  interest  rates  negatively  affects  the  market  value  of  securities  and  banks’  ability  to 
raise funds using government bonds as collateral. (19) Also, financial institutions have accumulated 
unrealised  losses  on  securities  held  at  amortised  cost,  (20)  which  do  not  directly  affect 
capitalisation.  Bank  of  Italy  estimates  that  the  materialisation  of  unrealised  losses  would  reduce 
the  CET1  ratio  by  around 200  bps.  This  scenario  is mitigated by the  prudent capital  buffers  that 
banks  have  accumulated  in  recent  years  and  remain  very  unlikely  due  to  the  abundant  liquidity 
available to the banking system. 

Assessment of MIP relevant policies  

Public expenditure as a share of GDP is expected to remain above pre-pandemic levels, 
despite  the end  of temporary  support measures  introduced  in  recent  years.  Fiscal  policy 
measures implemented to counteract the economic and social consequences of the COVID-19 crisis 
and  the  subsequent  exceptional  increase  in  energy  prices  have  led  to  a  notable  increase  in  the 
expenditure  ratio.  However,  although  the  economic  rebound  and  the  phasing-out  of  some 
emergency  measures  have  reduced  the  public  expenditure-to-GDP  ratio  already  in  2022,  it  is 
expected to remain above pre-pandemic levels in the short term. This is due to permanent policy 
measures  introduced  in  recent  years,  including  a  more  generous  single  and  universal  allowance, 
and  higher  resources  allocated  to  ministries,  local  public  services  and  public  investment.  Going 
forward, enhancing the efficiency and quality of public spending is crucial to support the decline of 
the public debt ratio.  

Policies of the Recovery and Resilience Plan have been implemented to help reduce the 
debt-to-GDP  ratio  in  the  medium  and  long  term,  and  more  are  in  progress  or  planned. 
Previous  policies  against  tax  evasion  have  contributed  to  significantly  improve  tax  collection  and 

(15)  ECB BSI Data: Domestic exposure is calculated as the sum of the loans to the Government and the government securities 
held by the banking system. Between December 2021 and December 2022, the percentage of government securities on 
total asset decreased from 13% to 11.5%.  

(16)  Documento  Economia  e  Finanza    2023  and  MEF  data.  This  ratio  does  not  include  public  guarantees  deriving  from 
international  obligations.  The  majority  of  loans  with  a  public  guarantee  have  been  granted  under  the  scheme  Garanzia 
Italia by SACE (EUR 42 billion in June 2022) and under the SME Guarantee Fund by Mediocredito Centrale (EUR 252 billion , 
in June 2022). 

(17)  MEF data. Notably, 56% of loans guaranteed by the SMEs Guarantee Fund and 89% of loans guaranteed by SACE. 

(18)  The spread between the Italian and the German 10y bonds reached a peak of 250bps in September 2022 and remained 

above 200bps during the election period.  

(19)  Bank of Italy, Financial Stability Report. According to a Bank of Italy simulation for securities held at fair value, an upward 
shift of 100 basis points for the entire sovereign yield curve would lower the tier 1 ratio by 17 basis points on average (14 
basis points for significant banks and 41 basis points for less significant banks). The amount of assets available for use as 
collateral for Eurosystem refinancing is likely to remain considerable even after an upward shift of 100 basis points in the 
entire sovereign yield curve: the value of the encumbered assets is expected to fall by EUR 27.4 billion (5.7 per cent of the 
total), while that of potentially eligible securities would fall by EUR 8.1 billion (4.0 per cent of the total). 

(20)  Bonds placed into the amortised cost portfolio are not valued with market prices and therefore shielded from market 

volatility. 

8 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

compliance. The RRP measures implemented in 2022, aimed at better targeting audits and controls 
together  with  the  introduction  of  sanctions  for  businesses  that  refuse  electronic  payments,  the 
collection of electronic payment data and the extension of compulsory electronic invoicing also to 
self-employed  currently  exempted,  are  expected  to  have  further  reduced  tax  evasion.  On  the 
expenditure  side,  Italy  reinforced  in  the  context  of  the  RRP  the  spending  review  framework  and 
provided for the launch of an annual spending review, incorporating its saving targets in the 2023 
Budget. Some steps have been taken to define nation-wide reference standards for the provisions 
of certain services and for the related costs, that, once completed, could increase transparency and 
encourage more spending efficiency at the subnational level. 

On the contrary, some policy measures introduced recently risk jeopardising the results 
achieved so far. The temporary early retirement schemes adopted in recent years and prolonged 
to  2023,  although  with  stricter  eligibility  criteria,  are  projected  to  contribute  to  growing  pension 
expenditure  until  2026,  before  the  provisions  of  the  2011  pension  reform  start  to  slow  pension 
spending growth. In their current form, proposals for differentiated regional autonomy may weigh 
on  the  ability  of  the  central  government  to  steer  national  public  finances  and  worsen  regional 
disparities.  The  increase  of  the  legal  threshold  for  cash  payments  and  a  new  set  of  measures 
aimed  at  alleviating  pending  tax  debts  risk  having  a  negative  impact  on  tax  compliance.  Italy’s 
fiscal  sustainability  would  benefit  from  a  growth-friendly  tax  shift  from  labour  to  other  sources 
that are less detrimental to growth. The draft enabling law presented to Parliament in March 2023 
only partly addresses this need while entailing further risks for the equity of the taxation system. 
Finally, the risk of higher public spending in the next years is exacerbated by the large number of 
guarantees granted during the pandemic, which increased the government’s contingent liabilities. 

Already  implemented  and  ongoing  measures  of  the  Recovery  and  Resilience  Plan  have 
the  potential  to  spur  competitiveness  and  productivity.  The  government  is  on  track  in  the 
implementation of the enabling law to reform the judicial system adopted in 2021 to enhance its 
efficiency. Moreover, additional resources have been deployed to clear the backlog of cases before 
courts. The timeliness and greater predictability of legal decisions should make the Italian economy 
more  attractive  for  domestic  and  foreign  investment.  Similarly,  the  measures  on  public 
procurement,  including  the  reform  adopted  in  2021  and  the  2023  revision  of  the  code  of  public 
procurement  are  conducive  to  simpler  and  faster  procedures  for  awarding  public  contracts  and 
ultimately  to  the  improvement  of  the  business  environment.  The  measures  adopted  in  2022 
concerning  the  public  administration,  particularly  on  public  employment  and  administrative 
capacity,  have  the  potential  to  strengthen  administrative  capacity,  especially  at  local  level,  and 
increase the efficiency and effectiveness of the administration. In 2022, the education system has 
been reformed at all levels. Particularly, the reform of the teaching profession has the potential to 
improve  educational  outcomes  in  the  medium  term.  Finally,  through  the  recently  adopted  2022 
annual competition law, the government removed barriers to competition and improved regulations 
in selected sectors, while already in 2021 it had implemented the Transizione 4.0 tax credit, as part 
of RRF-supported measures to favour the digitalisation of business. 

Measures implemented in 2022, many of which included in the Recovery and Resilience 
Plan, are expected to increase skills and participation rates and to ease the transition of 
young  people  from  education  into  the  labour  market.  The  National  Programme  for  the 
Guaranteed Employability of Workers (GOL) and the National Plan for New Skills, adopted in 2021, 
have the potential to raise labour market participation and facilitate job transitions, while reducing 
hysteresis effects, regional disparities and skill mismatches. As of January 2023, according to the 
Italian authorities, more than 800 000 beneficiaries of the GOL programme received personalised 
assistance, more than half of whom receive services of job  reintegration. (21) A three-year plan to 

(21)  ANPAL note monitoring the implementation of the GOL programme: 

https://www.anpal.gov.it/documents/552016/1309678/Nota+GOL_Focus+ANPAL+148_31012023_rev15022023def.pdf/8
bfb501d-3f6a-850d-46ea-730f36e90e95?t=1676635731635 

9 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

strengthen Public Employment Services was also adopted in 2021. Ensuring an equal balance in the 
provision  of  employment services  across  regions  will  be  essential  to  reduce territorial  disparities. 
Adopted  in  2022,  the  reforms  to  enhance  the  vocational  training  system  and  the  technical  and 
professional  institutes  are  expected  to  support  students’  transition  from  education  to  the  labour 
market  and  to  bridge  mismatches  between  supply  and  demand  of  young  workers.  However, 
lowering the entry barriers to the labour market more effectively, particularly for women, requires 
strengthening the provision of affordable quality early childhood education and care. The effective 
implementation  of  the  RRP  investments  in  childcare  and  long-term  care  is  expected  to  support 
women’s labour market participation in the medium term. Regarding the social safety net, the 2023 
Budget tightened the conditions to access the minimum income scheme and abrogated it starting 
from 2024. It will be replaced by an "income top up" for the lowest-earning households to contrast 
poverty  and  support  inclusion,  providing  limited  support  for  a  renewable  18-month-period.  To 
enhance participation rate it will be crucial to ensure a strong link with active labour market policies 
and focus on labour market activation of both the recipients of the new income support and the 
other vulnerable subjects not eligible under the new measure.  

The  reform  of  the  insolvency  framework  as  part  of  the  Recovery  and  Resilience  Plan 
entered into force in July 2022, and the government has implemented further measures 
to  support  the  resilience  of  the  financial  sector.  As  part  of  the  insolvency  framework  the 
early warning procedure and the out-of-court settlement are now operational and are expected to 
facilitate an earlier restructuring of companies under distress, thus preventing the accumulation of 
non-performing loans (NPL). A revision of the state-supported NPL securitisation scheme “Garanzia 
sulla  Cartolarizzazione  delle  Sofferenze”,  which  was  not  renewed  after  June  2022,  is  being 
considered. The government is also taking action to mitigate the impact of rising financing costs on 
vulnerable  households. (22)  In  this  respect,  the  2023  Budget  introduced  the  possibility  for  lower-
income  borrowers  (with  an  annual  income  below  EUR 35 000)  to  renegotiate  at  favourable 
conditions the rate of their mortgages from variable to fixed. In relation to liquidity schemes, the 
capital  endowment  of  the  guarantee  fund  for  small  and  medium-sized  enterprises  and  of  SACE 
Garanzia Italia – Support Italia, seem prudent and has been reinforced by the 2023 Budget.  

the 

increasingly  focus  on 

implementation  efforts  will 

While  the  implementation  of  the  Recovery  and  Resilience  Plan  remains  the  key  policy 
priority  as  it  includes  comprehensive  reforms  and  significant  investments,  Italy  faces 
challenges that call for further policy action. The RRP is entering a crucial phase. With many 
reforms  already  adopted, 
the 
operationalisation  of  the  reforms  and  on  the  significant  investments  envisaged  by  the  plan.  As 
investments often involve subnational bodies and private operators, it will be crucial to ensure an 
effective  governance  and  strong  administrative  capacity,  at  all  levels,  to  avoid  any  delay.  In 
addition, some challenges will require action beyond the measures included in the RRP. Ageing and 
the  surge  in  inflation  are  expected  to  increase  pension  expenditure,  and  a  full  application  of  the 
2011  reform  remains  essential  to  guarantee  the  long-term  sustainability  of  the  pension  system 
and,  hence,  fiscal  sustainability.  The  tax  burden  on  labour  remains  high,  which  hinders  economic 
efficiency  and  growth,  and  a  comprehensive  tax  reform  could  reduce  the  high  tax  wedge. 
Simplifying Italy’s complex fiscal framework would help to foster transparency, accountability and 
fairness. Demographic trends point to a decline in the working-age population and aggravate the 
“brain-drain”,  which  could  be  mitigated  by  measures  to  attract  and  retain  high-skilled  workers, 
further integrate people with a migrant background, as well as support families and young people. 
In  addition  to  the  already  diversified  gas  supply,  which  lowers  impediments  for  investment  and 
capital  deepening,  there  is  potential  to  further  diversify  energy  imports,  speed  up  the  roll  out  of 

(22)  The share of debt held by vulnerable households (households with disposable lower than the median and debt service ratio 
above 30%) may increase from 1.5% to 9% in 2023 due to the increase in interest rates and the erosive effect of inflation 
on households’ disposable income. Bank of Italy, Financial Stability Report, 2022. 

10 

                                                 
renewable energies including by supporting required skills, improve energy efficiency, and promote 
sustainable transport and sustainable soil management. 

2. 

Assessment of macroeconomic vulnerabilities 

Conclusion 

While there  have been some  improvements,  Italy continues to  face  vulnerabilities with 
cross-border  relevance,  relating  to  the  high  government  debt  and  weak  productivity 
growth, in a context of labour market fragilities and some weaknesses in the financial 
sector. The pandemic crisis and its aftermath brought a sizeable increase in public debt. It started 
edging down in 2021 with the economic recovery and is set to decline further over the period to 
2024. However, according to the 2023 Stability programme the public debt ratio would be expected 
to  increase  again  in  subsequent  years  in  the  absence  of  consolidation  measures.  Fiscal 
sustainability  risks  remain  high  over  the  medium  term  and  medium  over  the  long  term.  High 
volatility  in  productivity  growth  since  the  pandemic  crisis  has  masked  the  underlying  persistent 
structural  shortcomings,  and  tightening  financing  conditions  dampen  the  prospects  for  further 
capital deepening. Participation in the labour force is still low, especially among the young, women 
and  residents  in  the  South,  although  there  have  been  visible  improvements  since  pre-pandemic 
times.  Labour  market  conditions  improved  markedly  after  the  crisis,  with  the  initial  recovery  in 
hours worked and temporary jobs gradually extending to permanent positions. Italian banks are still 
significantly  exposed to the  sovereign  and  to  the  performance  of  state-guaranteed loans  in their 
balance  sheets.  Banks’  asset  quality  has  considerably  improved  and  profitability  has  risen  along 
with normalising monetary policy, although banks may face challenges as the economic impact of 
the  energy  crisis  and  of  financial  tightening  unfolds.  A  materialisation  of  risks  stemming  from 
these  vulnerabilities  could  impact  other  EU  Member  States  through  various  channels  so  that  the 
vulnerabilities have cross-border relevance. 

Some  progress  has  been  made  with  policies  to  tackle  imbalances,  though  further 
sustained  efforts are warranted.  Putting  the  high  public  debt  on  a  firm downward  path,  in  a 
context of rising debt servicing costs due to the normalisation of monetary policy and rising age-
related  costs,  requires  a  multipronged  approach  relying  on  prudent  fiscal  policies  with  adequate 
primary surpluses, growth-enhancing investments and reforms, greater tax compliance as well as 
an  efficient  use  of  national  and  European  resources.  Yearly  spending  reviews  as  of  2023  are 
expected  to  improve  the  efficiency  and  quality  of  public  spending.  The  government  kept  up  the 
efforts  to  adopt  and  implement  reforms  that  are  expected  to  spur  competitiveness  and 
productivity.  These  include  measures  to  improve  the  business  environment,  to  enhance  the 
effectiveness of the public administration and the efficiency of the judicial system, and to improve 
educational outcomes, as well as investment, particularly in innovation, digitalisation and transport. 
In addition, structural adjustments related to the green transition and supply chain reorganisations 
open  up  an  opportunity  to  improve  efficiency.  The  effect  of  investments  and  reforms  on  the 
economy can take time to become visible and crucially depends on implementation. The effective 
implementation  of  the  RRP  thus  remains  essential,  with  measures  to  increase  labour  market 
participation, labour market transition of young people as well as workers reskilling and upskilling 
being  expected  to  bring  positive  outcomes  in  the  medium  term.  The  progress  made  in  the 
implementation  of  the  insolvency  reform  is  expected  to  support  a  more  efficient  allocation  of 
financial  resources.  Italy  is  facing  challenges  that  would  benefit  from  additional  policy  efforts, 
notably in the areas of taxation, fiscal framework and pension systems as well as in the areas of 
demography, labour market, and energy. 

11 

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”   sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Italy, in line with Regulation 1176/2011. (23) 

2. 

Assessment of macroeconomic vulnerabilities 

(23)  European Commission (2023), European Semester Spring Package 2022, COM(2023) 600 final. 

12 

 
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Graph 2.1: Selected graphs, Italy 

Source: European Commission services 

13 

 
      
 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Inflation exposures and cross-border pass-through 

This  box  sheds  light  on  the  sources  of  inflation  in  Italy  and  its  spill-overs  with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices triggered by Russia’s war of aggression against Ukraine. As a result, inflation in Italy surged. 
In  response,  wages  and  profits  also  picked  up  across  the  EU.  With  input-output  data,  domestic 
inflation can be decomposed into the contribution from key cost factors. Taking into account some 
data limitations, the framework can be used to attribute consumer and investment price changes to 
i) extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (24) 

Data  suggests  that  much  of  inflation  in  Italy  in  2022  reflected  surging  energy  prices, 
while  the  importance  of  domestic  factors  is  projected  to  increase.  In  2022,  as  shown  in 
Graph 2.2, energy imports were key drivers of both consumption and investment inflation. Extra-EU 
non-energy  imports  also  contributed  to  the  pick-up  in  inflation  in  Italy.  Spill-overs  from  other  EU 
countries remained muted. Namely, import cost pass-through from EU partners increased domestic 
inflation  somewhat,  whereas  value  added  inflation  in  other  EU  countries  had  only  a  negligible 
impact. Unlike investment inflation, consumption inflation was not markedly affected by domestic 
factors,  wages  and  profits.  The  impact  of  energy  inflation  is  set  to  subside  and  to  eventually 
dampen  inflation.  Similarly,  the  impulse  from  extra-EU  non-energy  import  prices  is  expected  to 
fade.  However, the  contribution  from  unit labour  cost  and, particularly,  unit profits is expected  to 
increase in both 2023 and 2024 compared to 2022. Spill-overs from inflation in other EU countries 
is set to remain marginal. 

The impact of wage and profit growth in Italy on other Members States remains limited. 
Although Italy has a non-negligible impact on domestic demand in other Member States, spill-overs 
from value-added inflation are set to remain contained vis-à-vis the significant impact from import 
prices  (see  Graph  2.3).  Overall,  value  added  inflation  in  Italy  has  contributed  little  to  consumer 
inflation in the rest of the EU so far. Luxembourg is the most exposed country in terms of value-
added spillovers with the impact of around 0.2 pps. p.a. over the forecast horizon. 

(24)  The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, which are combined 
through a ‘Ghosh’ matrix based on Eurostat’s Figaro input-output available for 2015-2020. HICP is taken as the measure of 
the price of private consumption, including non-residents. Energy import prices from extra-EU reflect realised median prices 
until  2022,  and  energy  price  assumptions  underlying  the  Spring  forecast  thereafter.  Other  goods  prices  reflect  median 
Eureopan  prices  per  industry  until  2022,  and  forecast  non-energy  goods  and  service  trade  prices  for  2023-2024.  Value 
added  deflators are assumed to  affect  all industries within a country to the same degree. Changes  in import prices and 
value  added  deflators  are  assumed  to  affect  demand  prices  with  a  delay  of  6  and  4  months  for  consumption  and 
investment  inflation,  respectively.  For  a  similar  analysis  using  an  input-output-based  methodology,  see  “Inflation 
Differentials  in  Europe  and  Implications  for  Competitiveness:  Thematic  Note  to  Support  In-Depth  Reviews”  European 
Commission 2023, Institutional paper 198. 

14 

 
                                                 
Graph 2.2: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

2. 

Assessment of macroeconomic vulnerabilities 

Source: European Commission services 

Graph 2.3: Impact of Italian value added inflation on EU partners’ consumer price inflation 

Source: European Commission services 

15 

-2-1012345161718192021222324% change (year-on-year)IT: contribution to domestic GFCF deflator growth-4-20246810161718192021222324% change (year-on-year)IT: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY00.20.40.60.811.219-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-2419-2222-24 .SIMTHRCYFRLUATROBGGRBELVLTPLSKPTEECZFIDEHUESSENLDKRoEApp contribution to average annual change of CPIIT contribution to average annual change of CPI in other MSPassthrough of IT unit labour costPassthrough of IT unit profits (& ind. taxes)Passthrough from IT energy import costPassthrough from other IT G&S imports 
  
 
   
 
 
2. 

Assessment of macroeconomic vulnerabilities 

Table 2.1: Selected economic and financial indicators (Part 1), Italy 

(1) (e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

16 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 1.1-1.40.50.5-9.07.03.71.21.1Potential growth  (1)0.8-0.20.00.0-0.10.10.90.80.9Contribution to GDP growth:Domestic demand 1.0-1.70.30.2-7.66.44.60.70.8Inventories 0.1-0.20.2-0.4-0.50.4-0.40.00.0Net exports 0.00.6-0.10.7-0.80.2-0.50.60.3Contribution to potential GDP growth (1):Total Labour (hours) 0.3-0.30.0-0.4-0.4-0.50.30.10.1Capital accumulation 0.60.3-0.10.0-0.10.20.40.40.4Total factor productivity -0.2-0.10.00.40.40.30.30.30.4Output gap (2)1.9-1.1-2.60.6-8.3-2.00.71.11.3Unemployment rate7.68.511.89.99.39.58.17.87.7Harmonised index of consumer prices (HICP)2.32.40.70.6-0.11.98.76.12.9GDP deflator 2.51.51.40.91.60.63.05.92.7External positionCurrent account balance (% of GDP), balance of payments-1.0-2.22.13.33.93.1-1.30.01.3Trade balance (% of GDP), balance of payments-0.1-0.72.83.43.62.3-1.5..Primary income balance (% of GDP)0.1-0.30.20.81.21.91.2..Secondary income balance (% of GDP)-1.0-1.2-0.9-0.9-1.0-1.1-0.9..Current account explained by fundamentals (CA norm, % of GDP) (3)-0.40.00.81.41.51.31.51.51.4Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-0.3-0.2-0.40.10.20.50.40.50.5Capital account balance (% of GDP)0.10.10.1-0.10.10.10.5..Net international investment position (% of GDP)-16.7-21.0-14.8-1.51.58.33.9..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-9.4-22.4-14.4-0.51.06.21.7..Net FDI flows (% of GDP)0.41.0-0.10.11.11.7-1.1..CompetitivenessUnit labour costs (ULC, whole economy)2.72.11.11.33.1-0.42.83.13.1Nominal compensation per employee 2.71.10.81.3-4.15.94.83.94.1Labour productivity (real, hours worked)0.10.00.20.53.1-1.0-0.30.20.7Real effective exchange rate (ULC)1.40.3-0.6-0.8-2.20.3-0.8-2.7-0.5Real effective exchange rate (HICP)1.6-0.40.5-2.10.3-0.2-1.4..Export performance vs. advanced countries (% change over 5 years)-1.7-12.4-6.9-4.0-2.3-1.6...Private sector debtPrivate sector debt, consolidated (% of GDP)97.0121.3114.5106.0118.4113.5107.1..Household debt, consolidated (% of GDP)32.842.441.741.144.943.342.0..Household  debt, fundamental benchmark (% of GDP) (6)10.311.215.720.923.825.126.3..Household  debt, prudential threshold (% of GDP) (6)35.035.035.534.435.335.536.2..Non-financial corporate debt, consolidated (% of GDP)64.278.972.864.973.570.265.1..Corporate debt, fundamental benchmark (% of GDP) (6)27.324.123.825.827.728.628.8..Corporate debt, prudential threshold (% of GDP) (6)59.558.258.056.259.259.861.3..Private credit flow, consolidated (% of GDP) 9.32.9-0.20.44.03.52.6e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-0.10.62.93.46.26.25.15.45.5Households, net lending (+) or net borrowing (-) (% of GDP)2.40.91.81.47.46.02.1-0.9-0.6Net savings rate of households (% of net disposable income)8.74.63.02.410.27.62.1..forecast 
 
    
 
 
 
 
Table 2.2: Selected economic and financial indicators (Part 2), Italy 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

17 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal6.10.3-2.8-0.11.92.63.8..House price index, deflated3.6-1.6-3.4-0.71.81.0-3.4..Overvaluation gap (%) (7)9.417.1-3.7-9.6-7.8-7.7-9.4..Price-to-income overvaluation gap  (%) (8)6.016.7-0.6-9.1-5.7-6.9-9.3..Residential investment (% of GDP)5.45.44.24.04.05.35.8..Government debtGeneral government balance (% of GDP)-3.1-3.7-2.6-1.5-9.7-9.0-8.0-4.5-3.7General government gross debt (% of GDP)105.6117.6134.4134.1154.9149.9144.4140.4140.3Banking sectorReturn on equity (%)9.7-0.6-1.54.80.85.4...Common Equity Tier 1 ratio6.98.812.515.117.216.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (9)4.48.311.55.43.52.7...Gross non-performing loans (% of gross loans) (9)..13.56.74.53.53.0..Cost of borrowing for corporations (%)4.84.02.51.71.61.33.6..Cost of borrowing for households for house purchase (%)4.33.82.41.41.31.43.3..forecast 
    
 
 
 
3.  THEMATIC CHAPTER: LABOUR MARKET 

Labour supply weaknesses continue to weigh on potential output, but wage moderation 
keeps Italy competitive. Overall, the labour market situation improved significantly in 2022, with 
the  usual  lag  compared  to  the  post-pandemic  output  recovery  that  started  in  2021.  The 
unemployment rate continued its steady decline from the peak of 12.9% in 2014, reaching 8.1% in 
2022  on  average.  The  activity  rate  rose  to  65.5%,  still  slightly  below  the  2019  level  and  9 
percentage  points  lower  than  the  euro-area  average  (graph  3.1).  In  addition,  large  mismatches 
between  local  demand  and  supply  persist,  largely  due  to  an  insufficient  provision  of  suitably 
qualified  workers  in  the  areas  where  they  are  required.  Given  such  persistent  labour  slack,  wage 
growth  has  been  widely  outpaced  by  consumer  price  inflation,  on  the  one  hand  hurting  real 
disposable income, but on the other hand allowing to keep Italy’s goods and services competitive 
vis-à-vis trade partners.  

Graph 3.1: Employment rate, activity rate and unemployment 

Source: European Commission services 

In 2022, the structural challenges of the Italian  labour market in terms of gender, age 
and  territorial  disparities  have  only  slightly  diminished.  The  unemployment  rate  in  2022 
remained  considerably  higher  among  women  (9.4%)  than  men  (7.1%).  Despite  an  overall  robust 
post-pandemic  increase,  women’s  employment  rates,  at  55%  of  the  population  aged  20-64,  are 
around 20 percentage points below those of men and over 14 points below the euro-area female 
employment  rate  (69.1%).  Wide  gender  gaps  also  exist  in  the  employment  rate  of  people  with 
migrant  background  (particularly  from  non-EU  countries).  As  for  regional  imbalances,  in  the  third 
quarter  of  2022  the  unemployment  rate  in  the  South  (14%)  was  more  than  double  that  in  the 
Centre (6.6%) or North (4.9%). Female labour market participation is also much lower in the South, 
where little more than one-third of women are in the workforce, compared to nearly two-thirds in 
the North (for Southern men, the employment rate is just above 60% while it approaches 80% in 
the North). These geographic disparities have diminished only slightly between 2019 and 2021.  

Youth employment rates remain low, particularly in Southern regions. Overall, just 61.9% 
of Italians aged 15-34 are employed, compared to 76.4% in the euro area. After the steep fall in 
the first half of the last decade, this represents a slow improvement, even though the gap with the 
euro  area  has  increased  over  the  last  two  years,  with  Northern  regions  faring  much  better.  In 

18 

67891011126061626364656667Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q420182019202020212022% labour force% population in age groupUnemployment Rate (15-74, rhs)Employment rate (20-64)Activity rate (15-64) 
   
 
3. 

Thematic chapter: labour market 

addition,  the  unemployment  rate  of  young  people  (15-24)  is  almost  three  times  higher  than  the 
one  of  the  total  population,  with  more  than  one  out  of  five  persons  aged  between  15  and  24 
unemployed, and the unemployment rate in this age group in the South is twice that in the North 
(graph  3.2  a).  When  looking  at  educational  attainment,  those  having  achieved  tertiary  degrees 
(academic  or  vocational)  have  as  many  chances  of  finding  employment  in  Italy’s  North  as  on 
average in the euro area; this holds true also for young graduates of upper secondary education, 
particularly  vocational.  In  Italy’s  South,  conversely,  employment  rates  are  much  lower  across  the 
whole  range  of  education  attainments;  this  range  is  however  slightly  broader,  implying  relatively 
higher employment rewards for those achieving tertiary degrees. The share of young people (15-
29)  who  are  not  in  employment,  education  or  training  (NEET)  dropped  to  19%  in  2022,  down  4 
percentage points from the previous year; yet, it remains 7½ points above the euro-area average, 
and is significantly higher for young people with migrant background. 

Graph 3.2: Employment rates and labour market slack 

Source: European Commission services 

A  considerable  temporary  drop  in  the  participation  rate  related  to  the  COVID-19 
pandemic  was  not  accompanied  by  a  comparable  increment  in  the  unemployment  rate. 
The  pandemic  shock  negatively  affected  labour market  participation:  the  activity  rate  (15-64)  hit 
a 61.3% low in Q2-2020, during the first lockdown wave, and did not recover to its pre-pandemic 
level until mid-2022. By contrast, unemployment dynamics reacted more moderately to the Covid-
19 crisis and the unemployment rate was below the 2019 pre-pandemic level already during the 
first half of 2021. The moratorium on job terminations put in place by the Italian government, the 
extended  use  of  existing  wage-supplementation  schemes  and  the  adoption  of  new  short-time 
working schemes to protect employment, also benefitting from support through SURE, limited the 
impact of the pandemic on job losses.  

The  marginal  reduction  in  employment  was  mirrored  by  a  higher  reduction  in  hours 
worked,  in  particular  in  the  service  sector.  As  a  result  of  the  measures  put  in  place  by  the 
Italian government during the initial pandemic months, the employment rate decreased moderately 
while the drop in hours worked was stronger. The considerable decrease in hours worked observed 
in Q2-2020 was mostly driven by a reduction in services, particularly contact-intensive ones such 
as  trade,  tourism,  and  entertainment.  These  are  sectors  where  women  and  young  people  are the 
predominant part of the workforce and that are particularly relevant for the local economy in the 
South.  

In  the  last  three  years  the  Italian  labour  market  presented  substantial  slack,  in  some 
cases higher than that observed for other European peers. While the unemployment rate is 

19 

020406080100EuroArea (20)ItalyN-WItalyN-EItalyCentreItalySouthItalyIslandsa) Employment rates by education attainment (age < 35)Tertiary educationUpper sec. vocationalUpper sec. generalBelow upper secondary% 05101520EA-20GermanySpainFranceItaly% of extended labour forceb) Labour market slack -2022Unemployment rateInvoluntary part-timeSeeking, unavailableNot seeking, available  
3. 

Thematic chapter: labour market 

an  important  indicator  of  labour  market  vigour,  it  can  be  complemented  by  additional  indicators, 
including: (i)  underemployment, i.e. the number of persons involuntarily working part-time; (ii)  the 
number  of  persons  seeking  work  but  not  immediately  available;  and  (iii)  the  number  of  persons 
available to work but not seeking it. Together with the unemployment rate itself, these metrics are 
combined in the ‘Labour market slack’ indicator, measured as a share of the extended labour force, 
which includes groups (ii) and (iii) on top of the employed and unemployed. This indicator dropped 
just below 20% in 2022, from above 22% in 2018-2021. However, Italy  – together with Spain – 
displayed substantially more labour slack than France or Germany, particularly in the younger age 
cohorts (graph 3.2 b). This is essentially due to Italy’s larger number of persons available to work 
but not seeking (9%) than in the three other countries (2.1 to 3.4%). Finally, undeclared work still 
represents  a  sizeable  share  of  the  total,  adding  to  the  officially  measured  slack  and 
disproportionately affecting vulnerable groups such as people with a migrant background. 

The incidence of involuntary part-time work in Italy is high, in particular among men and 
young people. A large proportion of the workers performing part-time work would prefer full-time 
jobs;  although  the  youngest  cohort  has  the  largest  share  of  involuntary  part-timers,  for  older 
workers the share has grown even more in the last decade (graph 3.5 b). The share of involuntary 
part-timers  is  higher  among  men  than  women,  even  though  part-time  in  general  remains  more 
frequent among women due to caring responsibilities. 

Job  creation  and  destruction  have  returned  to  the  pre-pandemic  dynamics,  with  an 
increase  in  the  number  of  permanent  contracts  signed.  The  total  number  of  job  contracts 
activated  and  terminated  in  2022  was  higher  than  in  2019,  highlighting  a  return  to  the  pre-
pandemic  level  of  labour  market  dynamism.  In  2022,  while  the  largest  share  of  newly  signed 
contracts  was  temporary,  an  increasing  number  of  new  permanent  contracts  were  created  or 
converted  from  temporary  ones  (graph  3.3  a).  This  trend  continued  in  early  2023,  reaching  pre-
pandemic  conversion  rates  (around  3%  of  total).  A  strong  recovery  in  the  recruitment  of  women 
occurred  over  2021-22,  compensating  their  relatively  higher  job  loss  during  the  pandemic.  The 
largest number of fixed-term contracts are signed in the services and agriculture sectors, including 
for seasonal work and for very short-time (often daily) jobs in the media, arts and entertainment 
field. Apprenticeship contract openings have also returned to their pre-crisis annual volume of 0.4 
million, around half of which are eventually converted into permanent positions.  

Graph 3.3: Job churning and ULC 

Source: European Commission services 

Firms’ vacancy rates continue to increase. From a low of 0.6% at the depth of the COVID-19 
crisis,  the  total  vacancy  rate  in  firms  with  employees  reached  an  average  of  2.2%  in  2022.  The 
construction  sector  had  relatively  more  open  vacancies  (3.3%)  than  market  services  (2.2%)  or 

20 

-12-10-8-6-4-2024681020122013201420152016201720182019202020212022Million jobsa) Job churningTemporary hiringConversion temp -> perm.Permanent hiringTerminationNet change708090100110120200020022004200620082010201220142016201820202022Index 2015=100b) Unit labour costItalyGermanySpainFranceEA-20  
3. 

Thematic chapter: labour market 

manufacturing  (1.9%).  This  is  likely  related  to  the  public  interventions  (such  as  the  Superbonus) 
directed  towards  the  construction  sector.  Within  the  services  sector,  food  and  accommodation 
services  (3.8%),  and  ICT  services  (2.9%)  also  posted  high  vacancy  rates.  Despite  the  recent 
increase, in 2022 Italy’s total vacancy rate remained well below the euro-area average (3.1%) and 
Germany (4.3%).  

Firms find it ever more difficult to find suitable workers. According to the latest employer 
survey, (25) in 2022 the total number of jobs deemed difficult to fill rose to 2.1 million, compared 
with  1.2  in  2019,  bringing  the  share  of  difficult  hires  to  40%  of  total  hires.  The  increase  was 
particularly strong for technical, but not necessarily high-educated occupations, and for jobs in the 
trade and other services that were most affected by the pandemic. Unskilled jobs in trade, food and 
accommodation  and  other  personal  services  actually  recorded  the  largest  increase,  albeit  from 
a low  base.  In  absolute  terms,  however,  the  higher-skilled  jobs  requiring  tertiary  or  specialised 
education remain in greatest – often unsatisfied – demand. A geographic mismatch between jobs 
and workers also plays a role, with work conditions attached to the jobs offered in the North not 
sufficient to attract suitably skilled workers from the South, taking into account differences in living 
costs. 

The  supply  of  skills  remains  insufficient,  despite  recent  measures  aimed  at  expanding 
vocational  training.  The  share  of  30-34-year-old  people  with  tertiary education  has  decreased 
by one percentage point in 2021, to 26.8%, undoing part of the progress made until 2018 and lying 
more than 15 points below the euro-area average. The share of ICT graduates, at 1.4% in 2021, 
also stood well below the 3.9% EU average. However, considerable efforts, supported by the Italian 
RRP, are ongoing to expand the offer of vocational education and training (VET) where students can 
acquire the digital and green skills projected to be in highest future demand. The 2022 reform of 
tertiary vocational  training provides for a new governance model at national  level  for employers’ 
involvement  in  the  organisation  and  implementation  of  dual  VET  programmes,  a  model  currently 
limited to some geographic areas and sectors. While this can contribute to address the mismatch in 
the  long  term,  other  shorter-term  actions  appear  necessary  to  simultaneously  tackle  firms’ 
recruitment difficulties and entrenched unemployment in the Southern regions and among  young 
people. Adult participation to VET programmes remains low but is expected to increase thanks to 
the additional resources put in place to support adult learning and the dual system in the RRP.  

in  the 

Wage  moderation  persists 
inflationary  environment,  preserving  price 
competitiveness.  The  Italian  wage  bargaining  system,  centred  on  multiannual  (typically  3-year) 
national contracts per industry and anchored to a lagged measure of past inflation, contributes to 
the  moderation.  This  is  compounded  by  the  long  delay  –  over  2  years  on  average  –  with  which 
contracts  are  renewed. (26)  In  fact,  nominal  hourly  contract  wages  only  rose  by  around  6% 
cumulatively between 2015 and 2022 but are thus expected to rise somewhat faster in 2023-24. 
In  subsequent  years,  unless  more  working-age  migrants  are  admitted  in  Italy,  the  much  higher 
projected number of workers reaching pension age than that of new entrants will increase labour 
market  tightness  and  could  hence  push  up  wages.  A  second  tier  of  bargaining  can  complement 
national  contracts  at  the  firm  level,  with  wage  bonuses  linked  to  productivity  growth  or  other 
outcome indicators. However, such second-level bargaining only covers 15% of employees, almost 
entirely  excluding  those  working  in  small-sized  firms,  Southern  regions,  and  specific  industries 
(tourism,  construction).  The  relatively  narrow  diffusion  of  firm-level  wage  incentives  hinders  the 
reallocation of workers to jobs where they could be more productive, within each industry covered 
by  the  same  national  contract.  After  the  COVID-19  peak  due  to  the  sharp  drop  in  hours  worked, 

(25)  Sistema informativo Excelsior, managed by Unioncamere (Federation of chambers of commerce) and ANPAL (national 

agency for active labour market policies), with financial support from the European Social Fund. 

(26)  At the end of 2022, nearly 50% of employees had a contract expired (35% in the private sector and 100% in the public 
sector); the average waiting time before renewal is 24.8 months. Contract renewals usually provide for the retrospective 
payment of arrears. 

21 

                                                 
3. 

Thematic chapter: labour market 

wages  have  recovered  more  rapidly  in  the  export-oriented  manufacturing  sector,  despite  the 
above-mentioned  fewer  relative  vacancies.  Upcoming  contract  renewals  in  key  service  industries, 
such  as  trade,  accommodation  and  public  administrations,  may  however  reverse  the  trend.  Over 
2012-2022,  real  wages  decreased  by  1.1%  in  Italy  while  they  grew  in  France  (2.8%),  Germany 
(8.1%)  and in  the euro  area  as  a  whole  (3.0%).  The  long-term  growth  of  real  wages  in  Italy  has 
been even weaker than that of labour productivity. Consequently, the share of Italian labour income 
in  total  income  has  remained  well  below  the  euro-area  average,  while  nominal  unit  labour  costs 
have grown broadly in line with France but below Germany and Spain (graph 3.4). At the aggregate 
economic  level,  wage  moderation  supported  Italy’s  external  competitiveness,  as  reflected  in  only 
slightly growing unit labour costs and falling real effective exchange rates. 

Graph 3.4: Nominal and real wages 

Source: European Commission services 

22 

60708090100110120200020022004200620082010201220142016201820202022Index 2016=100a) Nominal gross wages ItalyGermanySpainFranceEA-2080859095100105200020022004200620082010201220142016201820202022Index 2015=100b) Real wagesItalyGermanySpainFranceEA-20   
 
 
 
Graph 3.5: Annex on labour market 

3. 

Thematic chapter: labour market 

Source: Istat, quarterly survey on vacancies and hours worked (in red the Covid-19 period) 

23 

0510152025303540455015-2425-5455-74% of extended labour forceAge groupa) Labour market slack -2022EA-20GermanySpainFranceItaly0102030405060708090201020112012201320142015201620172018201920202021b) Share of involuntary part-timers by age group 15-2425-5455 - 64Total-6-4-202462019202220192022201920222019202220192022agriculturemanufacturingconstructionmkt servicesnon-mkt servMillionc) Job churningTemp. hiringPerm. hiringTransformationTotal firingNet change10Q110Q210Q310Q411Q111Q211Q311Q412Q112Q212Q312Q413Q113Q213Q313Q414Q114Q214Q314Q415Q115Q215Q315Q416Q116Q216Q316Q417Q117Q217Q317Q418Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q320Q421Q121Q221Q321Q422Q122Q222Q322Q478910111213140.30.50.70.91.11.31.51.71.9Unemployment rate (%)Job vacancy rate (%)d) Italy's Beveridge curve 2010-22 (firms 10+ employees)