Statement by Pier Carlo Padoan, Executive Director for Italy

This 2004 Article IV Consultation highlights that a cyclical recovery is under way for Italy, with real GDP having risen by 1.2 percent in the first three quarters of 2004 relative to the same period of the previous year, thanks to the favorable external environment and a recovery of investment. A package of corrective measures adopted in mid-2004 is likely to have proven sufficient to keep the fiscal deficit just below 3 percent of GDP last year. IMF staff forecasts growth of 1.5 percent in 2004 and 1.7 percent in 2005.


This 2004 Article IV Consultation highlights that a cyclical recovery is under way for Italy, with real GDP having risen by 1.2 percent in the first three quarters of 2004 relative to the same period of the previous year, thanks to the favorable external environment and a recovery of investment. A package of corrective measures adopted in mid-2004 is likely to have proven sufficient to keep the fiscal deficit just below 3 percent of GDP last year. IMF staff forecasts growth of 1.5 percent in 2004 and 1.7 percent in 2005.

February 7, 2005

Italy is a high-debt/low-growth country deeply embedded in a low growth region. In such a demanding environment, where room for maneuver is limited and trade-offs are tight, Italian authorities remain fully committed to pursue fiscal consolidation and structural reforms so as to raise the country’s growth potential. Higher, sustained, growth will critically contribute, together with fiscal consolidation, to a sustained reduction of debt.

A number of structural reforms1 have been introduced over the recent past which are beginning to bear fruits.

A pension reform was introduced in 2004. Developments in the labor market are positive mainly due to the implementation of the first segment of the Biagi reform, which is building on previous reforms. A comprehensive reform of the school system is under way and showing positive results. Steps have been taken to stimulate R&D and an institute was created (Italian Institute of Technology) with a mandate to stimulate research and scientific competition. Several measures have been taken to foster entrepreneurship and to improve the business environment, such as the introduction of a new corporate income tax system and improved access to finance for business, as well as simplification in the judicial procedures for company litigation.

In spite of significant results, notably in labor markets, which have led to a substantial increase in employment, growth remains low. As the staff report notes this is largely the result of the disappointing development of TFP. The evolution of TFP can be interpreted in a number of ways. One possible interpretation is that reforms in other areas are needed to complement those already in place before fruits in terms of growth of the reform strategy can be fully reaped. Of course, as elsewhere, this requires time, political capital to overcome resistance to reform, and the need to face short-term costs.

Pension reform

As stressed by the EU Commission2, the 2004 July reform goes in the right direction and is in line with the BEPG recommendations for 2003–2005, which require Italy to reduce the long-term transition period to the new contribution-based system. Its implementation starts in 2008, when the tightening of eligibility criteria is scheduled to take effect. These additional measures will produce substantial savings. The introduction of more stringent measures only in 2008, aimed at addressing long-term sustainability, will not lead to early retirements. The entitlements will remain unchanged for workers that will mature their rights to a seniority pension before January 2008. According to the information available so far, there have been no changes in the projected retirement requests. In the transition phase incentives to increase retirement age will be budget-neutral.

As discussed below, DSA taking into account the 2004 pension reform shows that the debt to GDP ratio declines steadily over the period 2005–2050.

Labor market reforms

Phase one of the Biagi reform is still to be fully implemented. Hence further results should be expected, especially once the employment agency system is fully operational. The second phase covers the reorganization of employment incentives, the reform of the social shock absorber (mainly, the enlargement of the ordinary unemployment benefits), the suspension of Article 18 of the Labor Rights Law, and arbitration in individual labor disputes3. The bill is under discussion in Parliament, and not yet scheduled for the final vote. One major obstacle to its approval is the contentious issue of the experimental suspension of Article 18. Another obstacle is the cost of the reform of the unemployment benefits, which is expected to have a substantial impact on the budget (because of the lengthening of the benefit duration and the increase in its level).

The additional flexibility provided by the Biagi Law already in place might further reduce the cost of labor, providing additional incentive to increase the labor-capital ratio. However additional labor market flexibility in the existing labor pool is not the key problem. The main challenge is to increase participation which is, nonetheless, on the rise. The employment rate is at the low end of EU levels but its growth rate in 1998–03 is among the highest in Europe (4.1 percent versus 1.7 percent in EU 25)4. The low participation rate is largely the result of low women and elderly participation5. However, the rate of growth of women’s employment is above the EU average. It increased by 6 percentage points between 1995 and 2003. Pension reforms have increased the participation rate of over 55 by more than 2 percentage points between 2001 and 2003.

Product market reforms are potentially more important but more difficult to implement.6

A number of draft laws are in Parliament for the reform of professional services. Main common features include: measures to simplify recognition of new professions; setting minimum and maximum fees only for professional activities bearing on the general interest; possibility for new professions to advertise and inform the general public; improvement in pre-professional training. The “simplification law”, to be approved in 2005, will liberalize business activities at all relevant steps. The “decree on competitiveness”, shortly to be presented by the government, will further slim down red tape for business.

The Energy Sector. Supply and demand.

The diversification of supply should lower electricity costs (10000 MW of combined cycle gas turbine power plants are foreseen for the next 3–4 years). At regional and local levels obtaining authorization for new power plants is difficult mainly due to low public acceptance. The law 55/2003, will introduce a top/down process and compensation mechanisms for populations living close to the power plant, and should speed the authorization procedures.

The merger between the company which holds the electricity network (Terna) and the grid management company (GRtn) to be completed in 2005, and the privatization of the resulting company, will be a further step to liberalize the sector.

In order to facilitate entry of new companies and promote further competition the Energy Authority has recently established rules aimed at: reducing market power and preventing increases in wholesale market prices due to strategic behavior; making existing rules consistent with the planned unification of ownership and management of the transmission grid; and harmonizing the several existing rule sets.

Two decrees aimed at reducing consumption and enhancing energy efficiency were approved in July 2004 and the market has been further opened to all non-domestic consumers, consistently with the EU directive. Starting in January 2005 all non-domestic consumers can buy electricity on the wholesale market.

Improving the judicial environment for business

We welcome the selected issues paper, which is in many ways “path breaking” and we encourage staff to apply the same approach to other country cases. We also share the general conclusion that improvement in the “judicial system” could significantly boost growth. A costly and inefficient enforcement system may generate barriers to entry, reducing competition; it might negatively affect the possibility of firms to access financial markets; it may indirectly influence the average size of firms. The excessive length and costs of the Italian bankruptcy procedures also have a negative effect on the turnover of economic activity and hence the re-allocation of resources.

A draft law on bankruptcy reform is under discussion in Parliament, following a major redesign (maxiemendamento) approved by the Government in late December 2004. The draft law significantly simplifies the existing procedures.

The operation of the judicial system has been streamlined and updated in 2003 through the introduction of judicial offices specialized in industrial and property rights related to litigation. A special procedure for company litigation was introduced in 2004 to speed up trials. Available evidence shows that, as a result, time needed to settle controversies in these matters has been significantly reduced.

With respect to the analysis by staff we point out the following aspects.

Cross country correlations between quality indicators and GDP do not help to assess whether there is a causal link from institutions to growth; the regressions on “institutions and growth” where past growth rates (1985–2003) are regressed on current institutional variables are conceptually ambiguous. They are run on the very strong assumption that no relevant changes have occurred in the institutional variables included over the 18-year period. The “long term stability” of some institutional factors should be somehow documented.

The analysis of the determinants of judicial inefficiency as well as the suggested measures take into consideration only the demand-side. They do not fully reflect the breadth of the current debate in Italy on the causes of inefficiencies and on possible reforms. These include supply side issues such us procedural rules and internal organization of courts.

Competitiveness and productive specialization. Escaping path-dependency.

As widely recognized one of the underlying causes of low growth is the persistence of Italy’s specialization pattern which is exposed to major shifts in world demand and supply possibly more than in other large industrial countries. Long lasting rigidities make it more difficult to reallocate resources towards new, more dynamic, sectors. However, recent studies highlight the relationship between increased international competition and an increase in productivity of exporting sectors beginning in the nineties7. Increased labor market flexibility, as generated by labor market reforms, is useful in this respect. At the same time it could, paradoxically, make the situation worse to the extent that more labor market flexibility favors deepening specialization in the traditional sectors (path dependency) rather than reallocation in new sectors/products, where higher human capital intensity is necessary.

Some improvement can be detected however. While Italy’s export market shares in volume terms have declined since 2001, market shares at current prices remained broadly constant (at about 4 percent of world exports), reflecting a higher average unit value of Italian exports. This might signal a quality upgrade in the composition of Italian exports. Exporters of lower quality goods might have suffered from competition from emerging markets while those exporting higher quality goods have kept (or increased) their shares on foreign markets8. My authorities firmly believe that increasing international competition in lower quality segments should not be countered through more protection.

Sustained growth in the South would be a major factor in boosting potential output…

In the context of the recent weak economic activity, the Southern regions have shown a remarkable performance vis-à-vis the Center-North, with the GDP over the last eight years recording on average a higher rate of growth—a result which holds also on per capita terms. It is the first time in the whole post-war period that this occurs.

Growth in the South of Italy since the mid-1990s has been driven by increasing fixed gross investment vis-à-vis the Center-North. Reversing a trend observed in the recent decades, it is the first time since the Sixties that capital accumulation in the South of Italy exhibits a favorable dynamic in comparison to the Center-North.

This performance has been underpinned by a steady increase in the share of public investment out of total capital expenditures. Decisions taken by CIPE (Inter-Ministerial Committee for Economic Planning) in 2003 and 2004 are expected to strengthen this trend by providing further resources available for public investment.

…would wage differentiation help?

As staff reiterates, growth and employment in the South could be further boosted by wage differentiation. While we share this general suggestion we would add a number of caveats.

Wage differentials between North and South have been on the rise since the early 1990s.

There are different opinions on how to achieve a wider regional wage differentiation (which is for social partners to implement). On the one hand, a two-tier system such as the current one might work, while controlling the overall wage growth. On the other hand, a fully decentralized system might be more efficient in setting wages closer to the regional equilibrium level. However, such a system might bring about stronger pay rises in the North, potentially hampering competitiveness.

Staff strongly argues in favor of the public sector “leading by example” in setting wages at different levels in different regions. My authorities believe that the implications for fiscal federalism of such a policy should be carefully spelled out before this proposal is implemented.


Italy. Debt-to GDP ratio: actual data and simulation

Citation: IMF Staff Country Reports 2005, 044; 10.5089/9781451819878.002.A004

Debt and growth

Lower growth over the past few years largely accounts for the slow pace in debt reduction. To assess the effect of this slowdown on the debt dynamics, a simple simulation has been carried out for the period 2001–2004, assuming growth at potential (based on Commission estimates9) and all other variables unchanged, including the stock-flow adjustment, SFA. Higher growth affects the debt-to-GDP ratio through: i) a smaller numerator, given a smaller nominal deficit for a given cyclically-adjusted balance, ii) a higher denominator, given higher GDP growth. As shown in the figure, in the alternative scenario (dotted line), with growth at potential, the debt-to-GDP ratio would have fallen by 0.3 percentage points more than the historical level in 2001, 2 percent more in 2002, 1.8 percent more in 2003 and 0.9 percent more in 2004. In 2003 the debt-to-GDP ratio would have been at 102.1 percent, 4.1 percentage points lower than in the baseline, and at 100.8 in 2004, 5 percentage points lower than the baseline. The average reduction in the debt to GDP ratio in 2001-04 would have been 2.6 percent, against a 2.3 percent average for 1994–2000.

Debt sustainability analysis

We welcome the DSA analysis. Results presented by staff go a long way towards the standard this chair has always advocated for DSA, including the assessment of the impact of structural reforms. We take it as a compliment from staff that the analysis has been specifically applied to Italy. We expect this approach to be extended to other surveillance exercises.

All the same we do not agree with staff on the underlying hypotheses, which are overly pessimistic. Staff assumes: 1) labor productivity will raise gradually to 1.5 percent annually; 2) limited gains in the participation rate (5 percentage points over 20 years); 3) long-run annual growth of about 1 percent.

In our view staff do not adequately take into account the interactions between demographic trends and labor productivity which typically would take place over such a long time horizon: the marked decline in active population will have a positive effect on productivity through the wage mechanism (also given more flexible labor markets) and the adoption of capital-intensive technologies, while the reduced average number of children per family will increase private and public resources available for human capital accumulation.

Staff underestimate gains in the participation rate, which is historically lower in Italy with respect to the EU average, but that—as mentioned above—has shown an upward trend in the last decade (a one percentage point increase per year), especially as a consequence of the higher female activity rate in the new cohorts.

Italy’s Stability Program for 2005 consistently assumes labor productivity growth stable and slightly below 2 percent; participation rate gains by 11 percentage points over the period 2003–2050; and a GDP growth rate above 2 percent between 2005 and 2010 and declining to about 1 percent in the following years.

The 2005 Stability Program sustainability analysis, taking into account the effects of the 2004 pension reform, shows that the debt to GDP ratio declines steadily over the period 2005–2050, drops to below 60 percent in 2018, and turns into a credit in 2042.

According to staff, ageing population is expected to increase Italy’s public spending by about 5 percent of GDP in the coming decades. We reject this conjecture: the Ageing Working Group of the EU Economic Policy Committee in its 2003 final report projects that the ageing population will increase public spending by 1.4 percent of GDP between 2005 and 2050 taking into account 4 components (pensions, health care, education and unemployment benefits). The report stresses that the increase for other EU-15 countries will be much higher, in the range of 3–7 percentage points of GDP in the same period.

Missing targets

The staff report stresses that fiscal targets were missed for four consecutive years. We have assessed the growth impact on fiscal targets in the last four years to see if and to what extent these targets have been missed. To do so we use the methodology, based on the production function10, that the Commission and EU Member States regularly use to carry on the sensitivity analysis to be included in Stability and Growth Programs as required by the related code of conduct (EFC/ECFIN/404/01).

Initial fiscal targets and growth projections are those included in the updated Stability and Growth program presented to the EU Council in year t-1, which is based on the medium-term financial framework (Documento di Programmazione Economica e Finanziaria, DPEF) approved by the Parliament in July of each fiscal year. Outcomes are those reported in the updated Stability and Growth program presented to the EU Council in year t+1, as the final data for the deficit are formally communicated to EUROSTAT on March 1 of the year following the one to which the target deficit is referred. We should keep in mind that over the last couple of years growth projections were revised downward, at least every 6 months, by all international institutions, while budget targets were set assuming growth projections available at the time when the medium-term financial and economic programs were presented to Parliament.

The table below shows the fiscal targets adjusted for growth changes, as well as the difference between the original deficit targets adjusted for the cycle and the final outcomes for the years 2001-04 and its average (-0.4). Growth changes have significantly affected deficit targets. The amount of the difference (the “miss”) has been decreasing over time, positive in 2003, and expected to be close to zero in 2004.

Italy. The impact of growth on fiscal targets

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Stock Flow Adjustment

In the period 1994–2003 the average cumulative value of SFAs for EU countries is 4.2 percent of GDP. At 3.3 percent, Italy stands well below the EU average. As for the period 2000–2003, Italy’s cumulative SFAs is 0.3 percent of GDP, the third smallest value among the EU-15, well below both the EU-15 and EU-25 averages (1.8 and 1.7, respectively)11.

When the SFAs are broken down by component - accumulation of financial assets, valuation effects, and cash-accrual differences - in the period 2000–2003 the average values of the first two components for Italy are negligible. A significant value (1.2 percent of GDP) is instead present for the cash-accrual difference in the recording of revenue and primary expenditure. However, this is largely compensated by the another cash-accrual difference, related to interest payments, which goes in the opposite direction (-0.6 percent of GDP) so that the total of the cash-accrual difference, the third component of the SFAs, stands at 0.5 percent of GDP on average for the period 2000–2003.

Net borrowing and borrowing requirement

A table with the components of the gap between net borrowing and borrowing requirement is reported in Box 6. The Box and the table need some clarifications. They could specify that the borrowing requirement published by the Ministry of Economy and Finance is calculated on the formation side with reference to the Public Sector, while the borrowing requirement published by the Bank of Italy is computed on the financing side with reference to the general government sector. The table could better refer to the sources and methods used to compute the reported figures. In particular it could clarify whether the public sector borrowing requirement series used in the calculations includes the revisions on the post-office accounts which took place in 2004. In this regard, it should be noted that the series regularly published by the Bank of Italy includes such revisions (as well as the usual ordinary statistical revisions), while the Ministry does not publish a complete time series of the borrowing requirement (the Relazione Trimestrale di Cassa reports only the most recent years). We are actively working to reduce these discrepancies and an ad-hoc committee was established to this purpose.

Privatizations will continue

Items for privatization will include possible additional ENEL tranches, Alitalia, and the state broadcasting company RAI. “Second level” privatizations will include Terna and Wind by ENEL and SNAM by ENI. The program will also include other assets in addition to equity shares, such as real estate and securitization operations.

S&P Downgrading

Other credit rating agencies did not follow S&P’s decision. Actually Moody’s reiterated its stable outlook and did not raise any concerns with respect to Italy’s budget position. In addition, after that decision, credit spreads on Italian government bonds showed substantial resilience. As investors continued to show robust appetite for Italian bonds, Italy’s credit spread continued to improve.

Fiscal adjustment

The Italian authorities continue to be committed to fiscal consolidation. The Minister of the Economy has recently reiterated the commitment to maintain the deficit below the 3 percent limit in 2005.

As staff also recognizes, the composition of adjustment goes in the right direction as one-off measures are being reduced. A 2 percent cap has been imposed on nominal spending with the exclusion of pensions. The positive effects of this measure have already materialized in 2004 outturns as a direct consequence of the law decree of July 2004 (“decreto taglia spese”). In the third quarter of 2004, the general government consumption declined by 4.4 percent. In addition, preliminary data on the 2004 budget shows that the trend of some items are outperforming budget forecast, in particular interest expenditures declined and lottery revenue increased.

As for health spending, further controls on spending procedures by regions have been introduced in the 2005 financial bill including:

  • a) regions and public health institutions are obliged to define their budgets in line with central government fiscal objectives.

  • b) throughout the year, if the expenditure profile is not in line with that originally planned, the regions are obliged, according to a strict timeframe included in the aforementioned law, to take additional measures to bring the trend back to its projected path. If the region is reluctant to do so, the central Government can oblige the Governor of the region to take urgently the required measures.

  • c) the latest revision of the domestic stability pact introduced stricter rules for local authorities to monitor expenditure developments. All local entities, with some differences based on the population size, have to report quarterly to the Ministry of Economy cash and accrual accounts. In the case of overruns, the local government is required to reduce payments in the following quarter. In the case of non-compliance, the following year the local government is not allowed: a) to exceed the previous year’s expenditures, b) to recruit new staff, and c) to increase debt.

Tax relief

The Italian government has set as a priority the adoption of tax relief measures, as a way to boost the economy also through a boost to confidence. Tax relief measures included in the 2005 budget, will have an impact on the revenue side of 4261 million euro in 2005, 7186 million for 2006, and 6564 million for 2007. The measures will be fully financed through cuts in expenditures (about 80 percent in 2005, about 50 percent in 2006 and 2007) and increase in revenues, including duties, due to the positive impact of tax relief on disposable income (about 20 percent in 2005 and 50 percent in 2006 and 2007). Even though the share of expenditure cuts tends to decrease in 2006 and 2007, the overall financing is ensured by structural measures.


The ANAS Company was privatized in November 2002. However, according to the European accounting rules (ESA 95), to classify the company as a full commercial entity, the operational costs should be progressively financed through market revenues. This target is expected to be reached by the end of 2005, following which ANAS will be considered by EUROSTAT as a full commercial entity and no longer considered part of the public sector.

Infrastrutture Spa

Infrastrutture Spa is a financial intermediary owned by the Cassa Depositi e Prestiti. It has been designed taking into account the positive experience of similar institutions that have served the same purposes in several other large EU member countries. Its main mission is to co-finance PPP infrastructure projects, including those identified by the European Growth Pact endorsed by the European Council on December 2003.

So far, the activities carried out by Infrastrutture Spa have been limited, also due to the delays in implementing the European Growth Pact, in particular its quick-start list of projects. Being a full commercial company, the company follows the related accounting and reporting standard procedures.

Banking sector

As recognized by the staff, the efficiency of the Italian banking sector, now completely privatized, has improved substantially in the last decade: competition has increased, and the cost-income ratio has declined, allowing banks to maintain interest rates in line or below the average of the other EU countries. The six major banks have a ROE of about 13 percent (11 percent for the whole system, in June 2004). The Italian banking sector is one of the most open for foreign shareholders: in the four major Italian banks the share of capital held by foreign banks as members of shareholder agreements is 19.6 percent, well above major Euro area and Anglo-American banks (statistics based on IBCA data). Regarding the impact of Basel II, the empirical analysis (conducted at the international level and by the Italian authorities) shows that the new regime should not have distortional effects on the credit conditions of different classes of companies, including SMEs.

Corporate Governance

As recognized by staff, the Italian legal, regulatory and institutional framework is, overall, adequate. Staff’s assessment of the Consob’s insufficient independence from the Minister of Finance in imposing penalties is imprecise, since the Minister of Finance has only to check the formal legitimacy of the sanctions. In some areas Italy has one of the most advanced regulations: for instance, that regarding financial reporting and disclosure is one of the most rigorous in Europe; the rotation of the external auditors is compulsory; the recent reform of the Company Law (L.D. 6/2003), in addition to the Italian model (based on the dual system - the Board of Directors and the independent Board of Statutory Auditors), offers companies the possibility to choose between the Anglo-American unitary board and the German “supervisory board”. The Preda Code requires an adequate number of independent Non-Executive Directors on the basis of the “comply or explain” rule, as in other European countries.

Very shortly, possibly by the end of February, a legislative package (the “Law on Saving” and the implementation of the Market Abuse Directive), will provide a strong answer to the recent corporate governance problems. The major provisions are: a) for listed companies that at least one member of the Board of Directors should be elected by the minority shareholders; a provision that will put Italy in a leading position on this issue; b) Consob staff should increase substantially, as well as its enforcement power through higher sanctions in cases of misbehavior; c) new measures, once approved, should further reinforce the procedures aimed at reducing potential conflicts of interest within the financial industry.

Fiscal federalism

Fiscal decentralization is ongoing. It is concentrated on constraints on the spending side while there is little change on the revenue side.


Council of the European Union - Annual Report on Structural Reforms 2005.


December 2004 Update of the Stability Program of Italy - An Assessment, European Commission.


Empirical evidence suggests that the impact of Article 18 on firm size growth is small. See Torrini and Schiavardi “Firm size distribution and employment protection legislation in Italy” Bank of Italy, Temi di Discussione, No. 504.


Employment in Europe 2004: Recent trends and prospects - European Commission.


In 2003 the male participation rate of the 25–54 age cohort is 91.5 percent (EU-15 average is 92.4 percent).


As a forthcoming IMF Working Paper shows, while a piecemeal approach to reforms is possible in labor markets, it is usually not possible in product markets. Product markets have to be liberalized in one shot to avoid the formation of dominant positions. See T. Boeri ‘Reforming Labor and Product Markets: Some Lessons from Two Decades of Experiments in Europe’, 2005.


See M. Bugamelli and A. Rosolia, “Produttivita’ e concorrenza estera”, Bank of Italy, 2004.


See ICE (Istituto Nazionale per il Commercio Estero), “L’Italia nell’economia internazionale - Rapporto ICE 2003–2004”.


Potential growth calculations are based on actual data for 2001-03 (1.9 percent in 2001, 1.7 percent in 2002 and 1.5 percent in 2003 and 2004), and are thus a lower bound estimate.


Decision made by the ECOFIN Council on July 12, 2002.


The stock-flow adjustment in the EU member states - European Commission (ECFIN/2004).