Annexes to COM(2017)106 - 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(2017)106 - Italy Report prepared in accordance with Article 126(3) of the Treaty. |
|---|---|
| document | COM(2017)106  |
| date | February 22, 2017 |
adopted over the past 20 years make Italy's debt one of the most sustainable in the Union over the long term. A debt maturity structure among the soundest in the Union also contributes to that.
As regards relevant factor of "unusual events", the Italian authorities' report highlights that, since 2014, Italy has faced an extraordinary influx of refugees and migrants, entailing substantial costs projected at EUR 3.8 billion (or 0.22% of GDP) for 2017. However, if the influx were to sustain the same growth rate as in recent months, expenditure would reach EUR 4.2 billion (or 0.24% of GDP). The difference between the expenditure estimated for 2017 (net of Union contributions) and the one incurred on average in the years 2011-2013, which preceded the current acute phase, is worth up to EUR 3.2 billion (or 0.19% of GDP). Moreover, Italy suffered particularly acute seismic activity in recent months, raising the awareness that systematic risk-mitigation policy is necessary given the human and economic cost of recurrent earthquakes. That situation requires not only appropriate regulations and enforcement but also an additional public expenditure. In addition to one-off expenditures for rescue, assistance and reconstruction amounting to around EUR 3 billion in 2017, the 2017 Budget raised tax incentives for seismic-risk mitigation investments and structural works, targeting mainly private housing. The mechanism envisages a tax allowance that is an increasing function of the seismic risk mitigation category. Additional resources are envisaged for public investment in anti-seismic infrastructure by establishing a special fund targeting schools, public offices and transport infrastructure. Taken together, increased anti-seismic tax incentives and public investment measures are estimated to entail budgetary costs of close to 0.2% of GDP, in addition to the direct costs related to earthquakes, usually classified as one-offs.
5. Conclusions
Italy's general government gross debt reached 132.3% of GDP in 2015, well above the 60% of GDP reference value, and Italy did not make sufficient progress towards compliance with the debt reduction benchmark in 2015. Moreover, the Commission forecast does not expect Italy to comply with the debt rule either in 2016 or in 2017, and the gap is particularly large also due to the significant deterioration of Italy's structural balance from -1.0% of potential GDP in 2015 to -2.5% expected in 2018 based a no-policy change assumption. This suggests that before consideration is given to all relevant factors, the debt criterion as defined in the Treaty does not appear to be fulfilled prima facie. In line with the Treaty, this report also examined the relevant factors.
Macroeconomic conditions, while still unfavourable especially due to low inflation, are projected to have slightly improved as of 2016 and cannot be considered as a mitigating factor in explaining Italy’s lack of fiscal consolidation in 2016 and 2017 and its large gaps with the debt rule, notably in its forward-looking dimension, expected in the coming years.
The assessment of Italy’s compliance with the preventive arm in 2016 crucially hinges upon allowing a temporary deviation from the adjustment path towards the MTO under the investment and structural reforms clause. However, a necessary condition for that assessment, i.e. the resumption of the adjustment path towards the MTO in 2017, does not appear to be fulfilled based on the Commission 2017 winter forecast. On 17 January 2017 the Commission sent a letter informing the Italian government that an additional structural effort of at least 0.2% of GDP would be needed to reduce the gap to broad compliance with the preventive
arm in 2017. Letters submitted and made public by the Italian government on 1 and 7 February 2017 contain a series of commitments to be adopted at the latest in April 2017 in order to achieve an additional structural effort of at least 0.2% of GDP in 2017. The Commission takes positive note of those political commitments. However, the first letter did not provide sufficient details about the actual measures that the government intends to adopt to allow their incorporation in the Commission 2017 winter forecast, so that they will be taken into account as soon as the commitments made in the aforementioned letters are enacted. As a result, based on the Commission 2017 winter forecast Italy is at risk of non-compliance with the required preventive arm adjustment in both 2016 and 2017.
Moreover, since the adoption of the 2016 Country Specific Recommendations, domestic developments have slowed down the adoption of new reforms in Italy. Pushing an ambitious structural reforms agenda could have positively impacted on Italy’s medium-term growth prospects and in turn enhance the sustainability of the country’s public finances.
Finally, the Italian debt remains a major source of vulnerability over the medium term, and recently adopted measures are not in line with the full and forceful implementation of past pensions reforms that would be needed, together with the other structural reforms fostering potential growth in the medium/long term and further fiscal adjustment, to enhance debt sustainability. An additional risk for public finances is related to the possible cost borne by the government for the recapitalisation of weak Italian banks and compensation of retail junior bondholders, as well as the issuance of guarantees for non-performing loans securitisation vehicles.
Overall, the analysis presented in this report includes the assessment of all relevant factors and notably: (i) the currently unfavourable but gradually improving macroeconomic conditions, including low inflation; (ii) the risk of non-compliance with the required adjustment towards the MTO in both 2016 and 2017 based on the Commission 2017 winter forecast; and (iii) the observed marked slowdown in the implementation of growth-enhancing structural reforms in line with the authorities' commitment. Unless the additional structural measures, worth at least 0.2% of GDP, that the government committed to adopt at the latest in April 2017 are credibly enacted by that time in order to reduce the gap to broad compliance with the preventive arm in 2017 (and thus in 2016), the current analysis suggests that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as currently not complied with. However, a decision on whether to recommend opening an EDP would only be taken on the basis of the Commission 2017 spring forecast, taking into account outturn data for 2016 and the implementation of the fiscal commitments made by the Italian authorities in February 2017.