Stability programme of Italy, 2007-2011

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. 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.

In view of this risk assessment, the budgetary stance in the programme is consistent with a correction of the excessive deficit in 2007 as recommended by the Council. However, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations may not be secured before 2010 and the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by the end of the programme period, as envisaged in the programme. Italy is at medium risk with regard to the sustainability of public finances.

Overall conclusions
The overall conclusion is that the programme is consistent with a correction of the excessive deficit in 2007, which should be achieved by a good margin. The 2007 budgetary outturn is likely to outperform expectations due to the favourable cyclical and budgetary developments. This result could have been even better in the absence of the additional expenditure approved during the year. In 2008, the structural balance risks deteriorating substantially, unless the better-than-projected 2007 starting position is carried through. The planned adjustment towards the MTO is back-loaded to the outer years of the programme. The programme provides no information on the composition of the fiscal consolidation strategy after 2008, which hinders its proper assessment. In particular, appropriate measures aimed at curbing expenditure developments remain to be spelled out. In the light of these risks, the MTO may not be achieved by 2011 as planned in the programme and the debt ratio may not be sufficiently diminishing towards the 60 % of GDP reference value over the programme period. With regard to the sustainability of public finances, Italy is at medium risk but this assessment assumes the full implementation of the pension reforms.

Italy is invited to:

  1. Building on the positive results of 2007, strengthen the budgetary target for 2008, so as to secure an ambitious adjustment; and implement the planned fiscal consolidation thereafter, with specified measures to ensure adequate progress towards the MTO, so as to achieve it within the programme period and thus accelerate the pace of debt reduction.
  2. In view of the very high level of government debt, fully implement the pension reforms, notably the planned periodical actuarial adjustment, so as to avoid significant increases in age-related spending; and
  3. Spell out the budgetary strategy within a medium time perspective in line with the SGP and its Code of Conduct, continue the effort to improve the quality of public finances by focussing on their composition, increasing the transparency of the budgetary process and effectively implementing mechanisms to monitor and control expenditure.