Italy : Staff Report for the 2015 Article IV Consultation

KEY ISSUES Seizing the Window of Opportunity for Reform and Growth Context: Euro area-wide policies and national efforts have supported a turnaround in market sentiment and real activity. Italy’s performance since the crisis, however, has been among the weakest in the euro area. Real activity and investment are still far from their precrisis levels; unemployment is high; and public debt, at 130 percent of GDP, is a source of risk. Low productivity and impaired balance sheets continue to weigh on the recovery and cloud medium-term growth prospects. Policies: There is now a window of opportunity to push ahead with deeper reforms to re-ignite growth. This requires actions on multiple fronts, which are mutually reinforcing: • Tackling the long standing productivity problem. A wide-ranging reform to raise the efficiency of public services at all levels of government would not only provide better quality and cheaper services but would also raise private sector productivity. The implementation of the Annual Competition law would further liberalize product and service markets, benefiting producers and consumers. Completing the Jobs Act would create better incentives to hire and train workers, while greater firm-level wage bargaining will make labor more responsive to economic conditions. • Supporting balance sheet repair. A broad-based strategy to strengthen bank and corporate balance sheets will support recovery. More provisioning and write-offs, a revived distressed debt market, and enhanced insolvency regime would accelerate the reduction of NPLs. Establishing standard criteria for bank assessments of the viability of SMEs and introducing guidelines for creditor-led restructuring would accelerate the process of dealing with distressed SMEs. • Rebalancing fiscal adjustment and reducing public debt. Fiscal rebalancing is needed to reduce the high taxes on labor and capital, through savings from past and ongoing spending reviews. The planned small fiscal adjustment is appropriate in the near term, given the still-weak growth and high debt. In the medium term, a modest structural surplus would reduce debt faster, providing valuable insurance against changes in market sentiment, and helping comply with EU fiscal rules. More ambitious privatization targets would also help