Annexes to COM(2016)305 - Italy Report prepared in accordance with Article 126(3) of the Treaty - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2016)305 - Italy Report prepared in accordance with Article 126(3) of the Treaty. |
|---|---|
| document | COM(2016)305  |
| date | May 18, 2016 |
In summary, since the adoption of the 2015 CSRs, Italy has made progress with the implementation of an extensive reform agenda aiming at the transformation of the economy's productive structure in a still unfavourable economic environment. Strong commitment and full implementation of structural reforms remains essential.
In view of the planned implementation of major structural reforms with a positive impact on the long-term sustainability of public finances, Italy requested an overall temporary deviation of 0.5% of GDP from the required adjustment path towards the medium-term objective in 2016, of which 0.4% in its 2015 Stability Programme and additional 0.1% in its 2016 DBP. The details underpinning these reforms have been laid out in the 2015 and 2016 National Reform Programmes, both broadly confirming the planned reform agenda. The measures presented by the Italian authorities are expected to have a positive impact on growth and therefore on the sustainability of public finances 20 . The areas of reform put forward in the programme as having an impact on public finance sustainability and being relevant to Italy’s application for the structural reform clause include: (i) public administration and simplification; (ii) product and service markets; (iii) labour market; (iv) civil justice; (v) education; (vi) a tax shift; (vii) measures to reduce the stock of non-performing loans and reform insolvency procedures; (viii) access to finance; and (ix) spending review as financing measure. The overall impact of the reforms on real GDP levels is estimated by the authorities, regardless of their state of implementation, at +2.2% by 2020 (+0.4% from public administration and simplification; +0.4% from the product market reforms, +0.6% from labour market reforms, +0.1% from the measures on justice, +0.3 % from education reforms, +0.2% from tax reforms, +0.2% from measures to address non-performing loans and insolvency; +0.2% from the new measures for access to finance; -0.2% from spending review).
4.3.Other factors put forward by the Member State
On 9 May 2016, the Italian authorities transmitted documents concerning relevant factors in accordance with Article 2(3) of Regulation (EC) No 1467/97 21 . The analysis presented in the other sections of this report covers most of the factors put forward by the authorities.
According to the Italian authorities, Europe is currently facing a risk of persistently low inflation and stagnation, which is also incorporated in the Commission 2016 spring forecast. In this economic environment, restrictive fiscal policy stance may be self-defeating, leading among others to cut growth-enhancing productive investment expenditure, which is further aggravated by still unsatisfactory coordination of fiscal policies among euro area Member States. This applies in particular to the case of Italy, where unprecedented negative cyclical conditions over 2008-2009 and 2011-2014 have significantly increased fiscal multipliers, made the necessary adjustment to comply with the debt rule particularly demanding, and aggravated the Italian debt imbalance through a largely negative "snowball effect", amplified by low inflation. In this spirit, the Italian authorities report a simulation showing that the MLSA under “higher real growth and a normal times deflator” would have implied much lower and realistic structural adjustments to be implemented. Namely, assuming higher GDP deflator growth of 2% as of 2014 and zero real GDP growth in 2014 (instead of a contraction) would have almost halved the structural effort needed for Italy to comply with the debt rule over the period 2013-2015. In this case, the structural adjustment achieved by Italy in 2013 would have been in line with the MLSA “adjusted for low inflation and growth”, while for 2014 and 2015 the actual adjustment would have still fallen short of the requirements. Moreover, factoring in also the alternative estimation methodology for potential output put forward by the 2016 Stability Programme, the Italian authorities argue that the gap to the debt benchmark based on the Commission 2016 spring forecast would markedly shrink in 2016 and that the debt rule would be complied with already in 2016, if one assumed in addition a normal GDP deflator growth at 2 percent per year since 2014.
The Italian authorities also stress the ongoing wide-ranging programme of structural reforms aiming to address deeply rooted structural weaknesses and increase growth potential at least in the medium term. The authorities confirm their commitment to carry out an ambitious reform agenda, expected to have a positive impact on economic growth and, therefore, the sustainability of public finances, as discussed also in Section 4.1 of this report. Italy also highlights the need to take into account the short-term costs imposed on the Member States of Euro-area reform initiatives, as in the case of the Banking Union.
Furthermore, the Italian authorities point out a series of shortcomings of the commonly agreed methodology for the estimation of the output-gap followed by the Commission to compute the structural efforts relevant for the fiscal surveillance. Among these shortcomings, the inconsistency of the estimates with macroeconomic intuition is reportedly evidenced by the rapid closure of Italy’s output gap over 2016-2017. In this context, alternative estimation methods are put forward as a basis to argue that Italy started its latest reform effort from a position of balanced budget in structural terms in 2015 and should thus not be requested to carry out any adjustment towards its MTO in 2017. However, in an accompanying letter, the Italian government publicly declared its intention to comply with the preventive arm of the SGP beyond 2016 (see also Section 4.1).
In addition, the authorities recall that in 2012 Italy managed to exit the excessive deficit procedure as recommended and that, despite the economic contraction, the headline deficit has remained within the 3% of GDP Treaty threshold since then. The largest primary surplus in the EU over 2012-2015 is attributed to a an ambitious plan of growth-friendly fiscal consolidation, complementing significant reduction in the tax wedge on labour with durable improvements in the efficiency and quality of public expenditure at all levels of government.
The authorities also stress that since 2012 risks related to debt sustainability have diminished in the short term and remained limited over the medium term, while pension reforms adopted over the past 20 years make Italy's debt the most sustainable in the Union over the long term. A debt maturity structure among the soundest in the Union also contributes to these results.
4.4.Medium-term government debt position
Despite Italy’s projected gradual recovery, the reduction of its public debt imbalance is still markedly hampered by low inflation, as mentioned in Section 3. As a result, based on the Commission 2016 spring forecast, Italy’s debt-to-GDP ratio is set to start declining only in 2017, after the peak of 132.7% reached in 2015-2016, mainly thanks to higher real GDP growth and inflation. The government projections are slightly more optimistic and the 2016 Stability Programme projects the debt-to-GDP ratio to start declining already from 2016, to 132.4%. This declining path is expected to accelerate over the 2017-2019 programme period thanks to real growth at 1.4-1.5% and inflation progressively increasing towards 2%.
In the short-term, Italy remains vulnerable to any sudden increase in financial market risk aversion due to its high level of government debt and low potential growth. On the positive side, implicit liabilities arising from population ageing have been curbed also thanks to the 2012 pension reform (so-called “Fornero reform”), so that Italy scores relatively well in terms of long-term sustainability risks despite the high current level of pension expenditure. Namely, based on the Commission 2016 spring forecast, the structural primary surplus expected for 2016 would be more than sufficient to keep the debt-to-GDP ratio stable over the long term. However, achieving a debt ratio of 60% of GDP by 2030 would require further fiscal adjustment (in the order of 4.8 percentage points of GDP over 2017-2021). In this context, further fiscal adjustment and forceful implementation of structural reforms to foster potential growth in the medium/long term remains crucial to achieve a satisfactory debt reduction path.
The 2016 Stability Programme confirms the ambitious privatisation plan launched by the government. In fact, after the 0.4% of GDP privatisation proceeds recorded in 2015, further 0.5% of GDP per year over 2016-2018, and 0.3% of GDP in 2019 are targeted in the 2016 Stability Programme, but details are not provided. There are clear downside risks affecting these projections, as important privatisation projects, such as the one involving the national railway company Ferrovie dello Stato originally planned for 2016, have been postponed.
In summary, while Italian debt appears to be a source of vulnerability, the full and forceful implementation of pensions reforms adopted in the past, together with the other announced structural reforms to foster potential growth in the medium/long term and further fiscal adjustment, would crucially help enhance debt sustainability, provided that persistently high primary surpluses are ensured and growth prospect restored.
4.5.Other factors considered relevant by the Commission
Among the other factors considered relevant by the Commission, particular consideration is given to financial contributions to fostering international solidarity and achieving the policy goals of the Union, the debt incurred in the form of bilateral and multilateral support between Member States in the context of safeguarding financial stability, and the debt related to financial stabilisation operations during major financial disturbances (Article 2(3) of Regulation (EC) No 1467/97).
Regarding government support to the financial sector in the course of the financial crisis, contingent liabilities to support liquidity provisions of financial institutions amounted to around 0.4% of GDP at end-2015 (out of a total of 2.3% of GDP), significantly down from around 1.4% of GDP at end-2014. The direct capital support to financial institutions (with an impact on the government debt) was close to zero at the end of 2015, as around EUR 1 billion was paid back in the course of 2015.
Article 12(1) of Regulation (EU) No 473/2013 requires that this report considers also "the extent to which the Member State concerned has taken into account the Commission's opinion" on the country's DBP, as referred in Article 7(1) of the same Regulation.
The Commission Opinion on Italy’s 2016 Draft Budgetary Plan 22 pointed to a risk of non-compliance with the provisions of the SGP for 2015-2016 and invites the Italian authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget would be compliant with the SGP. Since the adoption of the Commission Opinion, the Commission has positively assessed Italy’s request to be allowed an additional admissible deviation of 0.35% of GDP for 2016 under the structural reform and investment clause, in addition to the 0.4% of GDP already allowed in spring 2015. Moreover, 0.03% outturn refugee related additional expenditure has been discounted from the preventive arm requirement in 2015. Hence, as mentioned above, Italy is currently projected to be broadly compliant with the requirement under the preventive arm of the SGP in 2015 and 2016.
Conclusions
The general government gross debt in Italy reached 132.7% of GDP in 2015, i.e. above the 60% of GDP reference value, and is forecast to remain stable in 2016, before declining to 131.8 % in 2017. Over the 2013-2015 transition period, Italy’s structural efforts have fallen short of minimum linear structural adjustment (MLSA) required to comply with the debt rule. As a result, the Commission 2016 spring forecast does not expect Italy to comply with the debt rule either in 2015 or in 2016. This suggests that prima facie the debt criterion as defined in the Treaty appeared to be not fulfilled, before consideration is given to all relevant factors, whereas the 3% of GDP deficit criterion appears to be fulfilled. In line with the Treaty, this report also examined the relevant factors.
Due to currently negative economic developments, including negative potential growth and a GDP deflator well below 2%, respecting the MLSA required by the debt rule would have implied a structural adjustment of more than 2.5 percentage points of GDP in 2015 based on the Commission 2016 spring forecast, i.e. achieving a structural surplus of around 1.5% of GDP, well above Italy’s MTO. In the current economic circumstances, the required additional structural effort could be expected to have negative implications for growth and further aggravate the current low-inflation environment, thereby not contributing towards bringing debt on an appropriate downward path. Moreover, Italy is estimated to have broadly complied with the required adjustment path towards the MTO in 2015. Broad compliance is also expected in 2016, once an overall allowance of 0.75% of GDP for 2016 is granted to Italy, taking into account its progress with the structural reform agenda, the planned investments, as well as the Italian government’s commitment to comply with the preventive arm of the SGP in 2017, which was publicly confirmed by the authorities. However, the Commission will be able to better assess this commitment only on the basis of Italy’s 2017 Draft Budgetary Plan and its 2016 autumn forecast.
Furthermore, in the 2016 Stability Programme, Italy plans to fully comply with the debt rule (in its forward-looking dimension) beyond 2017, although with a small gap in that year (i.e. 0.2 percentage points of GDP) also thanks to an ambitious privatisation plan. The 2016 National Reform Programme confirms Italy’s commitment to adopt/implement an ambitious structural reform agenda, in addition to the progress already acknowledged by the 2016 Country Report for Italy in line with the 2015 Country Specific Recommendations. In this context, Italy requested to avail itself of an overall temporary deviation by 0.5 percentage points of GDP from the required preventive arm adjustment towards the MTO under the so-called structural reform clause. The Commission has positively assessed this request, in view of the plausible positive impact on Italy’s growth prospects, and thus public finance sustainability, related to the ambitious structural reforms put forward by the government, if fully and timely implemented.
The analysis presented in this report includes the assessment of all the relevant factors, notably: (i) the currently unfavourable macroeconomic conditions and in particular still very low inflation – which make the respect of the debt rule particularly demanding, (ii) the expectation that compliance with the required adjustment towards the MTO is broadly ensured once the fiscal flexibility requested by Italy for this year is granted; and (iii) the expected implementation of ambitious growth-enhancing structural reforms in line with the authorities' commitment, which is expected to contribute to debt reduction in the medium/long term. This suggests that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as currently complied with. The Commission will revise its assessment of the relevant factors in a new report under Article 126(3) TFEU, as further information on the credibility and appropriateness of Italy’s resumption of the adjustment path towards the MTO for 2017 becomes available.
(1) 1OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes”, endorsed by the ECOFIN Council of 3 September 2012, available at:
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm .
(2) 2Regulation (EU) No 473/2013 of the European Parliament and of the Council on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area (OJ L 140, 27.5.2013, p. 11).
(3) Council Decision 2013/314/EU of 21 June 2013 abrogating Decision 2010/286/EU on the existence of an excessive deficit in Italy. All EDP-related documents for Italy can be found at: http://ec.europa.eu/economy_finance/economic_governance/sgp/corrective_arm/index_en.htm
(4) Article 2 of Regulation (EC) No 1467/97 provides that "[…] The report shall reflect, as appropriate […] the implementation of policies in the context of the prevention and correction of excessive macroeconomic imbalances, the implementation of policies in the context of the common growth strategy of the Union […]".
(5) According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, twice a year, their planned and actual government deficit and debt levels. The most recent notification of Italy can be found at:
http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/edp_notification_tables .
(6) Eurostat news release No 76/2016 of 21 April 2016, available at:
http://ec.europa.eu/eurostat/documents/2995521/7235991/2-21042016-AP-EN.pdf/50171b56-3358-4df6-bb53-a23175d4e2de
(7) Throughout the document, all references to changes in the structural balance refer to the cyclically adjusted balance net of one-off and temporary measures, either forecast by the Commission or recalculated by the Commission on the basis of the information provided in the Stability Programme, using the commonly agreed methodology.
(8) The implicit real cost of debt at time t can be defined as the nominal yield paid by the government to service the outstanding debt at time t-1, net of the impact of inflation at time t. In Table 2 , the yearly change in debt-to-GDP ratio due to the implicit real cost of debt can be obtained by adding the respective contributions from interest expenditure (debt-increasing) and GDP deflator (debt-decreasing).
(9) www.dt.tesoro.it/export/sites/sitodt/modules/documenti_en/debito_pubblico/presentazioni_studi_relazioni/Public_Debt_Report_2014.pdf www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/debito_pubblico/presentazioni_studi_relazioni/Audizione_alla_Camera_dei_Deputati_-_febbraio_2015_-_Indagine_conoscitiva_sugli_strumenti_finanziari_derivati.pdf See also Public Debt Report 2014, Italian Ministry of the Economy and Finance, retrievable at and Indagine conoscitiva sugli strumenti finanziari derivati (2015), retrievable at
(10) As indicated in Section 4, based on the Commission 2014 spring forecast, on which the Council based its fiscal recommendation to Italy at that time, the required MLSA was set at 0.7% of GDP in 2014 and 1.4% of GDP in 2015 (taking into account the structural adjustment forecast for 2014). Once recomputed on the basis of the Commission 2016 spring forecast, the required MLSA becomes substantially higher: 1.2% of GDP in 2014 and, due to the 0.2 percentage point deterioration occurred in 2014, 2.6% of GDP in 2015.
(11) For comparison, Italy's nominal GDP growth averaged around 4% over 1999-2007, i.e. before the crisis.
(12) See Commission Opinion C(2015) 8105 final.
(13) For the granting of the 0.4 percentage point allowance under the structural reform clause, please refer to European Commission (2015), “Assessment of the 2015 Stability Programme for ITALY” - http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2015/12_it_scp_en.pdf
(14) http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/2015/it_2015-11-16_co_en.pdf See:
(15) http://www.tesoro.it/inevidenza/documenti/lettera_2840_del_09.05.2016_-_Min_Padoan_-_Mr_Dombrovskis_-_Moscovicix1x.pdf See the cover letter accompanying the note “Relevant Factors Influencing Debt Developments in Italy” (9 May 2016) -
(16) www.mef.gov.it/inevidenza/documenti/20160516Letter_to_Padoan.pdf www.mef.gov.it/inevidenza/documenti/Letter_to_Dombrovskis_x_Moscovici_-_17_May_2016.pdf An exchange of letters took place between the European Commission and the Italian government. The letters can be retrieved at: (letter from the Commission to Italy) and (Italy’s reply to the Commission).
(17) This refers to the cyclically adjusted balance net of one-off and temporary measures recalculated by the Commission on the basis of the information provided in the Stability Programme, using the commonly agreed methodology
(18) http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_italy_en.pdf For a more extensive overview, please refer to the Commission Staff Working Document “Country Report Italy 2016 - Including an In-Depth Review on the prevention and correction of macroeconomic imbalances” - .
(19) See Commission Communication COM(2016) 95 final/2 “2016 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011” - http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_comm_en.pdf .
(20) See in particular Section 4.2 of the “Assessment of the 2015 Stability Programme for ITALY” (…the positive impact on the sustainability of public finances is two-fold: on the one hand an increase in GDP leads to an automatic decrease in the debt ratio everything else being equal; on the other, higher GDP growth usually leads to a larger tax intake and to a decrease in nominal deficit and debt (respectively by 0.8 and 2 percentage points of GDP by 2020 for the whole reform package with respect to the baseline). The improvement in the Z indicator associated with the reforms is estimated at 1.1 percentage points of GDP by 2025…”) - http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2015/12_it_scp_en.pdf
(21) “Relevant Factors Influencing Debt Developments in Italy”, May 2016 - http://www.tesoro.it/inevidenza/documenti/Relevant_Factor_Influencing_Debt_Developments_in_Italy.pdf
(22) Commission Opinion C(2015) 8105 final, 16.11.2015, on the Draft Budgetary Plan of Italy - http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/2015/it_2015-11-16_co_en.pdf