Updated stability programme of Italy, 2007-2011 - Main contents

EN

Official Journal of the European Union

C 49/29

On 12 February 2008, the Council examined the updated stability programme of Italy, which covers the period 2007 to 2011.

Real GDP growth in Italy has been below the euro area average since the 1990s and potential growth is estimated to have fallen from above 2 % in the early 1990s to around 1,5 % over the last 15 years. On the positive side, Italy has enjoyed robust employment growth since the turn of the century and its unemployment rate has fallen substantially, also reflecting the impact of labour market reforms.

But, while there remains a long way to go before Italy catches up with the EU average in terms of employment rates, the combination of dynamic employment growth and sluggish GDP growth highlights Italy's productivity problem. Notwithstanding the recent recovery, medium-term prospects for the Italian economy remain challenging under the strain of major structural weaknesses. These include in particular limited internal competition in services markets, which have started to be addressed in recent years. The structural weaknesses have fed into low productivity growth, a steady loss of external competitiveness and, until recently, a positive inflation differential with the euro area average. A public debt-to-GDP ratio above 100 % and the still relatively high though declining, budgetary deficit, increase economic uncertainty and generate a high cost of debt service, making Italy vulnerable to increases in interest rates. They also prevent more productive uses of public resources and limit the ability of fiscal policy to allow automatic stabilisers to work effectively. Further containing the structural primary expenditure ratio, following its recent stabilisation, and increasing potential growth, also through an improvement of the quality of public finances, are key to rapidly reducing the debt ratio and putting public finances on a sustainable path.

The macroeconomic scenario underlying the programme envisages that real GDP growth slows from 1,9 % in 2007 to 1,5 % in 2008. This would be followed by a mild but steady acceleration throughout the remainder of the programme period, whereby growth is expected to reach 1,8 % in 2011. Taking into account recent developments, the growth assumption for 2008 in the programme appears to be rather favourable (2), as real GDP growth in 2008 is currently expected to be clearly below that of the programme, which may have implications for the level of the economic activity also after 2008. The programme's projections for inflation also appear to be on the low side for 2008 and plausible thereafter. These inflation prospects, and the underlying moderation in unit labour cost growth, appear to be consistent with a containment of the competitiveness losses of the Italian economy.

For 2007, the general government deficit is estimated at 2,4 % of GDP in the 2007 update of the stability programme, against a target of 2,8 % of GDP set in the previous update. In the Commission services' autumn 2007 forecast, the deficit was expected at 2,3 % of GDP. These lower deficit projections benefited from the 1,8 pp. higher nominal GDP growth in 2007 vis-à-vis the 2006 programme and from an effective implementation of...