18-K

FORM 18-K

For Foreign Governments and Political Subdivisions Thereof

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ANNUAL REPORT

of

REPUBLIC OF ITALY

(Name of Registrant)

Date of end of last fiscal year: December 31, 2012

SECURITIES REGISTERED*

(As of close of the fiscal year)

Title of Issues	Amounts as to which registration is effective	Names of exchanges on which registered
N/A*	N/A	N/A

Name and address of Authorized Agent of the Registrant in the United States to

receive notices and communications from the Securities and Exchange Commission:

THE HONORABLE CLAUDIO BISOGNIERO

Italian Ambassador to the United States

3000 Whitehaven Street, N.W.

Washington, D.C. 20008

United States of America

It is requested that copies of notices and communications from the Securities and Exchange Commission be sent to:

Michael S. Immordino

White & Case LLP

5 Old Broad Street

London EC2N 1DW

United Kingdom

* The Republic of Italy files Annual Reports on Form 18-K voluntarily in order for the Republic of Italy to incorporate such Annual Reports into its shelf registration statements.

1.	In respect of each issue of securities of the registrant registered, a brief statement as to:
	(a)	The general effect of any material modifications, not previously reported, of the rights of the holders of such securities.
			There have been no such modifications.
	(b)	The title and the material provisions of any law, decree or administrative action, not previously reported, by reason of which the security is not being serviced in accordance with the terms thereof.
			There has been no such law, decree or administrative action.
	(c)	The circumstances of any other failure, not previously reported, to pay principal, interest, or any sinking fund or amortization installment.
			There has been no such failure.
2.	A statement as of the close of the last fiscal year of the registrant giving the total outstanding of:
	(a)	Internal funded debt of the registrant. (Total to be stated in the currency of the registrant. If any internal funded debt is payable in foreign currency it should not be included under this paragraph (a), but under paragraph (b) of this item.)
			See “Tables and Supplementary Information,” pages 67 to 71 of Exhibit (1), which is hereby incorporated by reference herein.
	(b)	External funded debt of the registrant (Totals to be stated in the respective currencies in which payable. No statement need be furnished as to intergovernmental debt.)
			See “Tables and Supplementary Information,” pages 67 to 71 of Exhibit (1), which is hereby incorporated by reference herein.
3.	A statement giving the title, date of issue, date of maturity, interest rate and amount outstanding, together with the currency or currencies in which payable, of each issue of funded debt of the registrant outstanding as of the close of the last fiscal year of the registrant.
			See “Tables and Supplementary Information,” pages 67 to 71 of Exhibit (1), which is hereby incorporated by reference herein.
4.	(a)	As to each issue of securities of the registrant which is registered, there should be furnished a break-down of the total amount outstanding, as shown in Item 3, into the following:
		(1)	Total amount held by or for the account of the registrant.
		(2)	Total estimated amount held by nationals of the registrant (or if registrant is other than a national government by the nationals of its national government); this estimate needs be furnished only if it is practicable to do so.
		(3)	Total amount otherwise outstanding.
			Not applicable. The Republic of Italy files Annual Reports on Form 18-K voluntarily in order to incorporate such Annual Reports into its shelf registration statements.
	(b)	If a substantial amount is set forth in answer to paragraph (a)(1) above, describe briefly the method employed by the registrant to reacquire such securities.
			Not applicable.
5.	A statement as of the close of the last fiscal year giving the estimated total of:
	(a)	Internal floating indebtedness of the registrant (total to be stated in the currency of the registrant).
			See “Tables and Supplementary Information,” pages 67 to 71 of Exhibit (1), which is hereby incorporated by reference herein.

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	(b)	External floating indebtedness of the registrant. (Total to be stated in the respective currencies in which payable.)
			See “Tables and Supplementary Information,” pages 67 to 71 of Exhibit (1), which is hereby incorporated by reference herein.
6.	Statements of the receipts, classified by source, and of the expenditures, classified by purpose, of the registrant for each fiscal year of the registrant since the close of the latest fiscal year for which such information was previously reported. These statements should be so itemized as to be reasonably informative and should cover both ordinary and extraordinary receipts and expenditures; there should be indicated separately, if practicable, the amount of receipts pledged or otherwise specifically allocated to any issue registered, indicating the issue.
			See “Public Finance—Measures of Fiscal Balance”, “—The 2012 Economic and Financial Document”, “—The Update of the 2013 Economic and Financial Document”, “—Revenues and Expenditures,” “—Expenditures”, “—Revenues”, “—Government Enterprises” and “Public Debt”, pages 45 to 66 of Exhibit (1), which are hereby incorporated by reference herein.
7.	(a)	If any foreign exchange control, not previously reported, has been established by the registrant, briefly describe such foreign exchange control.
			No foreign exchange control not previously reported was established by the registrant during 2012.
	(b)	If any foreign exchange control previously reported has been discontinued or materially modified, briefly describe the effect on any such action, not previously reported.
			No foreign exchange control previously reported was discontinued or materially modified by the registrant during 2012.
8.	Brief statements as of a date reasonably close to the date of the filing of this report, (indicating such date) in respect of the note issue and gold reserves of the central bank of issue of the registrant, and of any further gold stocks held by the registrant.
			See “The External Sector of the Economy—Reserves and Exchange Rates,” pages 43 to 44 of Exhibit (1), which is hereby incorporated by reference herein.
9.	Statements of imports and exports of merchandise for each year ended since the close of the latest year for which such information was previously reported. The statement should be reasonably itemized so far as practicable as to commodities and as to countries. They should be set forth in items of value and of weight or quantity; if statistics have been established in terms of value, such will suffice.
			See “The External Sector of the Economy—Foreign Trade”, “—Geographic Distribution of Trade”, “—Balance of Payments—Current Account” and “—Balance of Payments—Capital Account”, pages 37 to 43 of Exhibit (1), which are hereby incorporated by reference herein.
10.	The balances of international payments of the registrant for each year ended since the close of the latest year for which such information was previously reported. The statements of such balances should conform, if possible, to the nomenclature and form used in the “Statistical Handbook of the League of Nations”. (These statements need to be furnished only if the registrant has published balances of international payments.)
			See “The External Sector of the Economy—Balance of Payments,” pages 40 to 43 of Exhibit (1), which is hereby incorporated by reference herein.

EXHIBITS

This annual report comprises:

(a) Pages numbered (i) to (ix) consecutively.

(b) The following exhibits:

Exhibit (1) — Description of the Republic of Italy.

Exhibit (2) — 2013 Stability Programme (Section I of the Economic and Financial Document of 2013, dated April 10, 2013).

Exhibit (3) — 2013 National Reform Programme (Section III of the Economic and Financial Document of 2013, dated April 10, 2013).

Exhibit (4) — Update of the Economic and Financial Document of 2013, dated September 20, 2013.

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This annual report is filed subject to the Instructions for Form 18-K for Foreign Governments and Political Subdivisions Thereof.

SIGNATURE

Pursuant to the requirements of the United States Securities Exchange Act of 1934, the registrant Republic of Italy has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rome, Italy on November 25, 2013.

REPUBLIC OF ITALY
By:	/s/ Maria Cannata
Name:	Dott.ssa Maria Cannata
Title:	Director General – Treasury
	Department – Directorate II
	Ministry of Economy and Finance

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EXHIBIT INDEX

Exhibit	Description
(1)	Description of the Republic of Italy.
(2)	2013 Stability Programme (Section I of the Economic and Financial Document of 2013, dated April 10, 2013).
(3)	2013 National Reform Programme (Section III of the Economic and Financial Document of 2013, dated April 10, 2013).
(4)	Update of the Economic and Financial Document of 2013, dated September 20, 2013.

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EX-1

Exhibit 1

INCORPORATION OF DOCUMENTS BY REFERENCE

This document is the Republic of Italy’s Annual Report on Form 18-K (“Annual Report”) under the U.S. Securities Exchange Act of 1934 for the fiscal year ended December 31, 2012. All amendments to the Annual Report filed by the Republic of Italy on Form 18-K following the date hereof shall be incorporated by reference into this document. Any statement contained herein, or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this document to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this document.

FORWARD-LOOKING STATEMENTS

As required by Form 18-K, the Republic of Italy’s most recent budget is filed as an exhibit to this Annual Report. In addition, other Italian Government budgetary papers may from time to time be filed as exhibits to amendments to this Annual Report. This Annual Report, any amendments hereto and exhibits hereto contain or may contain budgetary papers or other forward-looking statements that are not historical facts, including statements about the Italian Government’s beliefs and expectations for the forthcoming budget period. Forward-looking statements can generally be identified by the use of terms such as “will”, “may”, “could”, “should”, “would”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “continue”, “project” or other similar terms. Those statements are or will be based on plans, estimates and projections that are current only as of the original date of release by the Italian Government of those budgetary papers and speak only as of the date they are so made. The information included in those budgetary papers may also have changed since that date. In addition, these budgets are prepared for government planning purposes, not as future predictions, and actual results may differ and have in fact differed, in some cases materially, from results contemplated by the budgets or other forward-looking statements. Therefore, you should not rely on the information in those budgetary papers or forward-looking statements. If the information included or incorporated by reference in this Annual Report differs from the information in those budgetary papers or forward-looking statements, you should consider only the most current information included in this Annual Report, any amendments hereto and exhibits hereto. Certain figures regarding prior fiscal years have been updated to reflect more recent data that were not previously available. You should read all the information in this Annual Report.

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TABLE OF CONTENTS

Summary Information	1
Republic of Italy	4
Area and Population	4
Government and Political Parties	6
The European Union	7
Membership of International Organizations	9
The Italian Economy	10
General	10
Measures to Address the Global Financial and Economic Crisis	12
EU Measures to Address the Eurocrisis	14
Gross Domestic Product	17
Principal Sectors of the Economy	19
Role of the Government in the Economy	19
Services	19
Employment and Labor	23
Prices and Wages	24
Monetary System	27
Monetary Policy	27
Exchange Rate Policy	30
Banking Regulation	30
Measures to assess the robustness of Italian Banking System	35
Credit Allocation	35
Exchange Controls	35
The External Sector of the Economy	37
Foreign Trade	37
Geographic Distribution of Trade	39
Balance of Payments	40
Reserves and Exchange Rates	43
Public Finance	45
The Budget Process	45
European Economic and Monetary Union	45
Accounting Methodology	47
Measures of Fiscal Balance	47
The 2012 Economic and Financial Document	49
The Update of the 2012 Economic and Financial Document	51
The 2013 Economic and Financial Document	53
The Update of the 2013 Economic and Financial Document	55
Revenues and Expenditures	56
Expenditures	58
Revenues	58
Government Enterprises	60
Public Debt	61
General	61
Summary of Internal Debt	64
Summary of External Debt	65
Debt Record	66
Tables and Supplementary Information	67

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Except as otherwise specified, all amounts are expressed in euro (“euro” or “€”). With the implementation of the third stage of European Economic and Monetary Union on January 1, 1999, the exchange rate between the euro and Italian lire (“lira” or “lire”) was irrevocably fixed at Lit. 1,936.27 per €1.00. The euro was introduced as a physical currency on January 1, 2002 and on February 28, 2002 the lira ceased to be legal tender in Italy and was withdrawn from the financial system. For additional information concerning the exchange rate of the euro against the U.S. dollar and certain other currencies, see “External Sector of the Economy—Reserves and Exchange Rates—U.S. Dollar/Euro Exchange Rate”. We make no representation that the euro amounts referred to in this Annual Report could have been converted into U.S. dollars at any particular rate.

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Defined Terms and Conventions

We use terms in this Annual Report that may not be familiar to you. These terms are commonly used to refer to economic concepts that are discussed in this Annual Report. Set forth below are some of the terms used in this Annual Report.

• Gross domestic product, or GDP, means the total value of products and services produced inside a country during the relevant period.

• Gross national product, or GNP, means GDP plus income earned by a country’s nationals from products produced, services rendered and capital invested outside the home country, less income earned inside the home country by non-nationals.

• Imports and Exports. Imports are goods brought into a country from a foreign country for trade or sale. Exports are goods taken out of a country for trade or sale abroad. Data on imports and exports included in this Annual Report are derived from customs documents for non-European Union countries and data supplied by other Member States of the European Union.

• The unemployment rate is calculated as the ratio of the members of the labor force who register with local employment agencies as being unemployed to the total labor force. “Labor force” means people employed and people over the age of 15 looking for a job. The reference population used to calculate the Italian labor force in this Annual Report consists of all household members present and resident in Italy and registered with local authorities.

• The inflation rate is measured by the year-on-year percentage change in the general retail price index, unless otherwise specified. The European Union harmonized consumer price index (“HICP”) is calculated on the basis of a weighted basket of goods and services taking into account all families resident in a given territory. Year-on-year rates are calculated by comparing the average of the twelve monthly indices for the later period against the average of the twelve monthly indices for the prior period.

• Net borrowing, or government deficit, is consolidated revenues minus consolidated expenditures of the general government. This is the principal measure of fiscal balance for countries participating in the European Economic and Monetary Union and is calculated in accordance with the EU Protocol on Excessive Deficit Procedure, which implements the European System of Accounts (“ESA95”).

• Net borrowing-to-GDP or deficit-to-GDP means the ratio of net borrowing or government deficit to nominal GDP.

• Debt-to-GDP means the ratio of public debt to nominal GDP. Public debt includes debt incurred by the central government (including Treasury securities and borrowings), regional and other local government, public social security agencies and other public agencies.

• Primary balance is net borrowing less interest payments and other borrowing costs of the general government. The primary balance is used to measure the effect of discretionary actions taken to control expenditures and increase revenues.

Unless otherwise indicated, we have expressed:

• all annual rates of growth as average annual compounded rates;

• all rates of growth or percentage changes in financial data in constant prices adjusted for inflation; and

• all financial data in current prices.

Amounts included in this Annual Report are normally rounded. In particular, amounts stated as a percentage are normally rounded to the first decimal place. Totals in certain tables in this Annual Report may differ from the sum of the individual items in such tables due to rounding.

Information Sources

The source for most of the financial and demographic statistics for Italy included in this Annual Report is data prepared by Istituto Nazionale di Statistica, or ISTAT, an independent Italian public agency that produces statistical information regarding Italy (including GDP data), in particular financial and demographic statistics for Italy published in the Annual Report of ISTAT dated May 22, 2013 and appendices thereto (together the “2013 ISTAT Annual Report”) and elaborations on such data and other data published in the Annual Report of the Bank of Italy (Banca d’Italia, Italy’s central bank) dated May 31, 2013 and appendices thereto (together the “2013 Bank of Italy Annual Report”). We also include in this Annual Report information published by the Statistical Office of the European Communities or Eurostat.

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Certain other financial and statistical information contained in this Annual Report has been derived from other Italian Government sources, including the economic and financial document of 2013 (Documento di Economia e Finanza 2012), dated April 10, 2013 (the “2013 Economic and Financial Document”), which includes the 2013 stability programme (the “2013 Stability Programme”) attached as Exhibit 2 to this Annual Report and the 2013 national reform programme (the “2013 National Reform Programme”) attached as Exhibit 3 to this Annual Report, and the update of the economic and financial document of 2013 (Nota di Aggiornamento del Documento di Economia e Finanza 2013), dated September 20, 2013 (the “Update of the 2013 Economic and Financial Document”) attached as Exhibit 4 to this Annual Report.

Revised National Accounts

In 1999, ISTAT introduced a new system of national accounts in accordance with the new European System of Accounts (ESA95) as set forth in European Union Regulation 2223/1996. This system was intended to contribute to the harmonization of the accounting framework, concepts and definitions within the European Union. Under ESA95, all European Union countries apply a uniform methodology and present their results on a common calendar. Both state sector accounting and public sector accounting transactions are recorded on an accrual basis. Since introducing the ESA95 accounting system, ISTAT has published revisions to the national system of accounts, including replacing its methodology for calculating real growth, which had been based on a fixed base index, with a methodology linking real growth between consecutive time periods, or a chain-linked index. As a result of this change in methodology, all “real” revenue and expenditure figures included in this document differ from and are not comparable to data published in earlier documents filed by Italy with the United States Securities and Exchange Commission, or SEC, prior to March 12, 2007. In addition, certain data relating to the years 2000-2010 which was previously presented at purchasing power parity with 2000 prices have been restated and are now presented at purchasing power parity with 2005 prices. For additional information regarding the restatement of data from previous fiscal years, see “Public Finance—Accounting Methodology”.

The general government revenues and expenditure figures in this Annual Report reflect consolidated revenues and expenditures for the public sector, which is the broadest aggregate for which data is available.

All references herein to “Italy,” the “State” or the “Republic” are to the Republic of Italy, all references herein to the “Government” are to the central government of the Republic of Italy and all references to the “general government” are collectively to the central government and local government sectors and social security funds (those institutions whose principal activity is to provide social benefits), but exclude government owned corporations. In addition, all references herein to the “Ministry of Economy and Finance”, to the “MEF” and to the “Treasury” are interchangeable and refer to the Ministry of Economy and Finance.

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SUMMARY INFORMATION

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this Annual Report, any amendments hereto and annexes hereto.

Gross Domestic Product: According to International Monetary Fund estimates, the economy of Italy, as measured by 2012 GDP (at current prices in U.S. dollars), is the eighth largest in the world. In 2012, Italy’s real GDP decreased by 2.4 per cent, compared to a 0.4 per cent increase in 2011. In the last ten years, Italy’s GDP growth rate has generally been lower than the average GDP growth rate of the euro area. The growth gap between other euro area countries and Italy in the past decade reflects the persistence of several medium and long-term factors, including the difficulties in fully integrating southern Italian regions into the more dynamic economy of northern and central Italy, unfavorable export specialization in traditional goods, inadequate infrastructure, the incomplete liberalization process and insufficient flexibility of national markets. For additional information with respect to Italy’s GDP, see “The Italian Economy—Gross Domestic Product”. In order to address the financial and economic crisis, from 2008 up to 2013, the Government enacted legislation providing for measures aimed at stimulating the economy and stabilizing the Italian financial system. For additional information on the measures enacted by the Government to stimulate the economy and stabilize the Italian financial system, see “The Italian Economy”, Exhibit 2—2013 Stability Programme and Exhibit 4—Update of the 2013 Economic and Financial Document.

The European Economic and Monetary Union: Italy is a signatory of the Treaty on European Union of 1992, also known as the “Maastricht Treaty,” which established the European Economic and Monetary Union, or EMU, culminating in the introduction of a single currency. Eleven member countries, including Italy, met the government deficit, inflation, exchange rate and interest rate requirements of the Maastricht Treaty and were included in the first group of countries to join the EMU on January 1, 1999. On that date, conversion from each EMU member’s old national currency into the euro was irrevocably fixed and the euro became legal tender. The euro was introduced in physical form in the countries participating in the EMU on January 1, 2002 and replaced national notes and coins entirely on February 28, 2002. On January 4, 1999, the noon buying rate for the euro as reported by the European Central Bank (the “Noon Buying Rate”) was €1 for US$1.1812. On September 30, 2013, the European Central Bank (“ECB”) exchange reference rate was €1 for $1.3505. For additional information regarding the historic dollar/euro exchange rate, see “The External Sector of the Economy—Reserves and Exchange Rates”.

Foreign Trade: Over half of Italy’s exports and imports involve other European Union countries. Italy’s main exports are manufactured goods, including industrial machinery, office machinery, automobiles, clothing, shoes and textiles. Since 2004, Italy’s balance of payments has recorded current account deficits. The deficit on Italy’s external current account in 2012 was €8.4 billion or 0.5 per cent of GDP, the lowest level since 2004, compared to €48.3 billion or 3.1 per cent of GDP in 2011.

Inflation: In 2012, consumer prices in Italy increased at an annual rate of 3.3 per cent measured by the harmonized EU consumer price index (HICP), compared to 2.9 per cent in 2011.

Public Finance: Italy has historically experienced substantial government deficits and high public debt. Countries participating in the EMU are required to reduce “excessive deficits”, adopting budgetary balance as a medium-term objective, and to reduce public debt. Italy recorded net borrowing amounts as a percentage of GDP higher than the 3.0 per cent ratio imposed by the Maastricht Treaty in 2001 and each year during 2003-2006 and 2009-2011. As set out in the Update of the 2013 Economic and Financial Document, Italy’s deficit-to-GDP ratio was 3.0 per cent in 2012 and its debt-to-GDP ratio (gross of euro area financial support) was 127.0 per cent in 2012. For additional information with respect to Italy’s debt-to-GDP, see “The Italian Economy”, “Public Finance”, Exhibit 2—2013 Stability Programme and Exhibit 4—Update of the 2013 Economic and Financial Document.

Eurocrisis: The global financial system began showing signs of disruption in the summer of 2007 and its condition quickly deteriorated following the bankruptcies of several major international financial institutions in the summer of 2008. Its condition continued to deteriorate and caused major disruptions in global financial markets, including unsustainably low levels of liquidity and funding sources (which resulted in high funding costs, historically high credit spreads, volatile and unsustainable capital markets and declining asset values). Many countries acted to combat deteriorating economic conditions, including borrowing in order to support troubled financial and other institutions and adopting other measures to stimulate their economies, which actions led to the credit ratings of various countries to be reduced. The first to be directly affected was Iceland in 2008, followed by Greece, Ireland and Portugal in 2010 and Spain and Italy in 2011. Such reductions to sovereign credit ratings, compounded by the existing recessionary global economy, made it difficult, or in

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certain instances impossible, for many European countries to access the capital markets to satisfy their funding needs. Such difficulties led to further reductions in sovereign credit ratings and the need for such countries to receive financial support from third parties, including from other countries and the financial support mechanisms adopted by the European Union. In particular, beginning in 2010, Greece, Ireland and Portugal began receiving financial assistance in the form of direct and indirect loans from EU member states. Such conditions have persisted through the date of this Annual Report. For additional information on the measures that the European Union and Italy have taken to address the Eurocrisis, see “The Italian Economy”, Exhibit 2—2013 Stability Programme and Exhibit 3—2013 National Reform Programme.

During 2012, several measures have been adopted to relieve the eurocrisis. In February 2012, EU Member States established the European Stability Mechanism (ESM), which has a large lending capacity, to help preserve the financial stability of Europe’s Monetary Union by providing assistance to Eurozone countries. See “The Italian Economy—EU Measures to Address the Eurocrisis—The ESM”. In September 2012, the ECB stated that investors’ fears over the reversibility of the Euro are unfounded because the ECB is strongly committed to maintaining the singleness of the monetary policy among Eurozone countries, including through Outright Monetary Transactions, in order to address severe distortions in government bond markets. The ECB stated that these steps have been and will continue to be taken within the ECB mandate to maintain price stability over the medium term.

If the eurocrisis were to deepen or extend, the EU Member States may determine further reforms in order to manage the crisis. A prolonged crisis in Europe or a new crisis in Italy could make the refinancing of debt by Italy more expensive.

The Italian Political System: Italy is a democratic republic. Italy is a civil law jurisdiction, with judicial power vested in ordinary courts, administrative courts and courts of accounts. The Government operates under a Constitution that provides for a division of powers among Parliament, the executive branch and the judiciary. Parliament comprises a Senate and a Chamber of Deputies. The executive branch consists of a Council of Ministers selected and headed by a Prime Minister. The Prime Minister is appointed by the President of the Republic and the Prime Minister’s government is confirmed by Parliament. The general Parliamentary elections held on February 24 and 25, 2013 resulted in no party or coalition having a majority of both the Chamber of Deputies and the Senate. The center-left coalition, led by Mr. Pier Luigi Bersani, obtained the highest number of votes on a national level for the elections of the Chamber of Deputies and therefore was awarded with the majority of seats in the Chamber of Deputies. No political party or coalition obtained an absolute majority of seats in the Senate. On April 24, 2013, Mr. Enrico Letta, a representative of the center-left coalition, was appointed to form a new government, which was sworn in on April 28, 2013. On April 29 and 30, 2013, Prime Minister Letta’s government received the confidence vote of the Parliament.

2013 Developments: Law decree n. 35/2013 (converted into law on June 6, 2013) enacted a series of measures aimed at allowing the public administration to accelerate the payments of certain trade payables (overdue as of December 31, 2012) in order to stimulate economic growth. The decree authorized payments due to enterprises, cooperatives and professionals for a total of up to €40 billion, which has been subsequently increased by additional €7.2 billion through Law decree 102/2013. The injection of liquidity achieved through such acceleration is intended to have a positive effect on GDP growth, consumption and investments. For additional information on these measures, see Exhibit 2—2013 Stability Programme, Exhibit 3—2013 National Reform Programme and Exhibit 4—Update of the 2013 Economic and Financial Document.

Law decree n. 69/2013 (Decreto del Fare) (converted into law on August 9, 2013) enacted a new package of urgent measures aimed at stimulating the Italian economy, including, among other things, provisions aimed at facilitating access to credit by small and medium sized companies, measures aimed at developing infrastructure (such as the “European corridors” and certain railway services for approximately €2 billion), rules aimed at bureaucracy and tax simplification, rules aimed at enhancing the efficiency of the justice system, rules aimed at enhancing the digitalization of the public administration (the “Italian Digital Agenda”) and measures concerning education.

In October 2013, the Government approved the draft stability law for 2014 and the draft budget law for 2014/2016. These bills (disegni di legge) have been submitted to the Italian Parliament for discussion and approval. In particular, the draft stability law for 2014 includes measures aimed at sustaining economic growth and increasing employment through, inter alia, a decrease of taxes applicable to individuals and enterprises (including taxes on labor cost), the allocation of financial resources for certain strategic investments (mainly infrastructural) and the reduction of public expenditure.

In addition, the draft stability law for 2014 proposes the introduction of a new service tax to cover costs of services provided by local administrations (including waste management) to be levied by municipalities against real estate properties located in Italy which, with respect to primary residences (prima casa), shall replace the current real property tax (Imposta Municipale Unitaria or IMU)

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Ratings of the Republic of Italy’s Indebtedness: As of the date hereof, the Republic of Italy’s long-term credit is rated BBB with negative outlook by Standard & Poor’s, BBB+ with negative outlook by Fitch Ratings and Baa2 with negative outlook by Moody’s.

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REPUBLIC OF ITALY

Area and Population

Geography. The Republic of Italy is situated in south central Europe on a peninsula approximately 1,120 kilometers (696 miles) long and includes the islands of Sicily and Sardinia in the Mediterranean Sea and numerous smaller islands. To the north, Italy borders on France, Switzerland, Austria and Slovenia along the Alps, and to the east, west and south it is surrounded by the Mediterranean Sea. Italy’s total area is approximately 301,300 square kilometers (116,336 square miles), and it has 7,375 kilometers (4,582 miles) of coastline. The independent States of San Marino and Vatican City, whose combined area is approximately 61 square kilometers (24 square miles), are located within the same geographic area. The Apennine Mountains running along the peninsula and the Alps north of the peninsula give much of Italy a rugged terrain.

The following is a map of the European Union and the countries, including Italy, within the Euro area.

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The following is a map of Italy.

Population. According to ISTAT data, as of December 31, 2012, Italy’s resident population was estimated to be approximately 59.685 million, accounting for approximately 12.1 per cent of the EU population. Italy is the fourth most populated country in the EU after Germany, France and the United Kingdom. According to ISTAT data, as of December 31, 2012, the six regions in the southern part of the peninsula together with Sicily and Sardinia, known as the Mezzogiorno, had a population of approximately 20.6 million. As of the same date, northern and central Italy had a population of approximately 27.3 million and 11.6 million, respectively.

As of January 1, 2012, the breakdown of the resident population by age group was as follows:

•	under 20	17.9	%
•	20 to 39	24.9	%
•	40 to 59	29.4	%
•	60 and over	27.8	%

Source: ISTAT

Italy’s fertility rate is one of the lowest in the world, while life expectancy for Italians is among the highest in the world. Because population growth has been low in recent years, the average age of the population is increasing.

Rome, the capital of Italy and its largest city, is situated near the western coast approximately halfway down the peninsula, and had a population of approximately 2.6 million as of December 31, 2011. The next largest cities are Milan, with a population of approximately 1.2 million, Naples, with approximately 0.95 million, and Turin, with approximately 0.9 million. In 2011, approximately 68.0 per cent of Italy’s population lived in urban areas. Based on ISTAT data, as of December 31, 2011, population density is approximately 197.4 persons per square kilometer.

Like other EU countries, Italy has experienced significant immigration in recent years, particularly from North Africa and Eastern European countries. According to ISTAT data, in 2012, there were approximately 4.3 million foreigners holding permits to live in Italy, an 8.3 per cent increase from the previous year. Immigration legislation has been the subject of intense political debate since the early 1990s. Italy has tightened its immigration laws in the past decade and initiated bilateral agreements with several countries for

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cooperation in identifying illegal immigrants. In addition to measures aimed at controlling illegal immigration, the Government has also introduced measures aimed at regularizing the position of illegal immigrants. While these legislative efforts have resulted in the regularization of large numbers of illegal immigrants, Italy continues to have high numbers of foreigners living in Italy illegally.

Government and Political Parties

Italy was originally a loose-knit collection of city-states, most of which united into one kingdom in 1861. It has been a democratic republic since 1946. The Government operates under a Constitution, originally adopted in 1948, that provides for a division of powers among the legislative, executive and judicial branches.

The Legislative Branch. Parliament consists of a Chamber of Deputies, with 630 elected members, and a Senate, with 315 elected members and a small number of life Senators, consisting of former Presidents of the Republic and prominent individuals appointed by the President. The Chamber of Deputies and the Senate share equally and have substantially the same legislative power. Any statute must be approved by both assemblies before being enacted. Except for life Senators, members of Parliament are elected for five years by direct universal adult suffrage, although elections have been held more frequently in the past because the instability of multi-party coalitions has led to premature dissolutions of Parliament.

The Executive Branch. The head of State is the President, elected for a seven-year term by an electoral college that includes the members of Parliament and 58 regional delegates. The current President, Giorgio Napolitano, was originally elected in 2006 and re-elected for a second term. The next presidential election will occur in the spring of 2020. The President has the power to appoint the Prime Minister and to dissolve Parliament. The Constitution also grants the President the power to appoint one-third of the members of the Constitutional Court, to call general elections and to command the armed forces. The President nominates and Parliament confirms the Prime Minister, who is the effective head of Government. The Council of Ministers is appointed by the President on the Prime Minister’s advice. The Prime Minister and Council of Ministers answer to both houses of Parliament and must resign if one of the houses of Parliament passes a vote of no confidence in the administration.

The Judicial Branch. Italy is a civil law jurisdiction. Judicial power is vested in ordinary courts, administrative courts and courts of accounts. The highest ordinary court is the Corte di Cassazione in Rome, where judgments of lower courts of local jurisdiction may be appealed. The highest of the administrative courts, which hear claims against the State and local entities, is the Consiglio di Stato in Rome. The Corte dei Conti in Rome supervises the preparation of, and adjudicates, the State budget of Italy. There is also a Constitutional Court (Corte Costituzionale) that does not exercise general judicial powers, but adjudicates conflicts among the other branches of government and determines the constitutionality of statutes. Criminal matters are within the jurisdiction of the criminal law divisions of ordinary courts, which consist of magistrates who either act as judges in criminal trials or are responsible for investigating and prosecuting criminal cases.

Political Parties. The main political parties are grouped into four coalitions: (i) a center-right coalition led by Il Popolo delle Libertá (in the person of Mr. Silvio Berlusconi), (ii) a center-left coalition led by the Partito Democratico (in the person of Mr. Guglielmo Epifani), (iii) a center coalition led by Scelta Civica con Monti per l’Italia (in the person of Mr. Mario Monti) and (iv) the non-aligned party named Movimento 5 Stelle Beppegrillo.It (in the person of Mr. Giuseppe Piero Grillo).

The general Parliamentary elections held in February 2013 resulted in no party or coalition having a majority of both the Chamber of Deputies and the Senate. The center-left coalition, led by Mr. Pier Luigi Bersani, obtained the highest number of votes on a national level for the elections of the Chamber of Deputies and therefore was awarded the majority of seats in the Chamber of Deputies. No political party or coalition obtained an absolute majority of seats in the Senate.

On April 24, 2013, President Napolitano appointed Mr. Enrico Letta, a member of the center-left coalition, to form a new government and Mr. Letta was sworn in as Prime Minister on April 28, 2013. The new government is composed of members from and supported by the center-left coalition, the center-right coalition and the center coalition. On April 29 and 30, 2013, Prime Minister Letta’s government received the confidence vote of the Parliament

Elections. Except for a brief period, since Italy became a democratic republic in 1946 no one party has been able to command an overall majority in Parliament, and, as a result, Italy has a long history of weak coalition governments. In 1993, Parliament adopted a partial “first past the post” voting system for the election of 75 per cent of the members of both the Senate and the Chamber of Deputies. Under this system, the candidate receiving the largest number of votes in a single district wins. The remaining 25 per cent are elected through a proportional representation system. In the Chamber of Deputies, only parties that receive 4 per cent

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of the total vote on a nationwide basis are eligible for the seats elected by proportional representation. These modifications of the voting system have resulted in a significantly smaller number of Parliamentary seats held by parties with relatively small shares of the popular vote. Historically, however, government stability has depended on the larger parties’ coalitions with smaller parties.

In December 2005, a new law was enacted modifying the voting system for the Chamber of Deputies and the Senate. In the Chamber of Deputies and in the Senate, the electorate votes for lists of candidates presented by the multiparty coalitions and individual parties. Seats in the Chamber of Deputies are awarded based on the number of votes obtained by each list, provided that multiparty coalitions and individual parties are not eligible for any seat unless they attain at least 10 per cent and 4 per cent of the total votes, respectively. Seats in the Senate are also awarded based on the number of votes obtained by each list, but the minimum per cent of the total votes to be attained by multiparty coalitions and individual parties are determined on a regional basis. In order to ensure government stability, if the winning coalition does not obtain at least 340 seats in the Chamber of Deputies, it is automatically awarded as many seats as it needs to reach 340 seats. In the Senate, the award for the winning coalition is determined on a regional basis. This modified voting system was utilized for the first time in the general elections in April 2006.

Regional and Local Governments. Italy is divided into 20 regions containing 110 provinces. The Italian Constitution reserves certain functions, including police services, education and other local services, for the regional and local governments. Following a Constitutional reform passed by Parliament in 2001, additional legislative and executive powers were transferred to the regions. Legislative competence that historically had belonged exclusively to Parliament was transferred in certain areas (including foreign trade, health and safety, ports and airports, transport network and energy production and distribution) to a regime of shared responsibility whereby the national government promulgates legislation defining fundamental principles and the regions promulgate implementing legislation. Furthermore, as to all areas that are neither subject to the exclusive competence of Parliament nor in a regime of shared responsibility between Parliament and the regions, exclusive regional competence is conferred to a region upon its request, subject to Parliamentary approval. In 2009, Italy adopted legislation that is designed to increase the fiscal autonomy of regional and local governments. The reform is expected to come fully into effect by 2016. Under the new system, lower levels of government will be able to levy their own taxes and will have a share in central tax revenues, including income tax and value added tax. Under the new system, a “standard cost” for public services such as health, education, welfare and public transport will be determined to set budgets for local governments. A fund will be made available to local governments that incur government deficits and convergence plans will be set up for local governments that record significant government deficits in consecutive years.

The Italian Constitution grants special status to five regions (Sicily, Sardinia, Trentino-Alto Adige, Friuli-Venezia Giulia and Valle d’Aosta) providing them with additional legislative and executive powers.

Referenda. An important feature of Italy’s Constitution is the right to hold a referendum to abrogate laws passed by Parliament. Upon approval, a referendum has the legal effect of annulling legislation to which it relates. A referendum can be held at the request of 500,000 signatories or five regional councils but cannot be held on matters relating to taxation, the State budget, the ratification of international treaties or judicial amnesties. In order for a referendum to be approved, a majority of the Italian voting population must vote in the referendum and a majority of such voters must vote in favor of the referendum.

The European Union

Italy is a founding member of the European Economic Community, which now forms part of the European Union. Italy is one of the 28 current members of the EU together with Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. The EU had an estimated population of approximately 506.8 million as of January 1, 2012.

The European Union is currently negotiating the terms and conditions of accession to the EU of the following candidate countries: the Former Yugoslav Republic of Macedonia, Montenegro, Iceland and Turkey.

The EU Member States have agreed to delegate sovereignty for certain matters to independent institutions that represent the interests of the union as a whole, its Member States and its citizens. Set forth below is a summary description of the main EU institutions and their role in the European Union.

The Council of the EU. The Council of the EU (the “EU Council”), is the EU’s main decision-making body. It meets in different compositions by bringing together, on a regular basis, ministers of

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the Member States to decide on matters such as foreign affairs, finance, education and telecommunications. When the EU Council meets to address economic and financial affairs, it is referred to as ECOFIN (“ECOFIN”). The EU Council mainly exercises, together with the European Parliament, the European Union’s legislative function and promulgates:

• regulations, which are EU laws directly applicable in Member States;

• directives, which set forth guidelines that Member States are required to enact by promulgating national laws; and

• decisions, through which the EU Council implements EU policies.

The EU Council also coordinates the broad economic policies of the Member States and concludes, on behalf of the EU, international agreements with one or more Member States or international organizations. In addition, the EU Council:

• shares budgetary authority with the European Parliament;

• makes the decisions necessary for framing and implementing a common foreign and security policy; and

• coordinates the activities of Member States and adopts measures in the field of police and judicial cooperation in criminal matters.

Decisions of the EU Council are made by vote. Each Member State’s voting power is largely based on the size of its population. The following are the number of votes each Member State can cast:

• Germany, France, Italy and the United Kingdom each have 29 votes;

• Spain and Poland each have 27 votes;

• Romania has 14 votes;

• the Netherlands has 13 votes;

• Belgium, the Czech Republic, Greece, Hungary and Portugal each have 12 votes;

• Austria, Bulgaria and Sweden each have 10 votes;

• Denmark, Croatia, Ireland, Lithuania, Slovakia and Finland each have 7 votes;

• Cyprus, Estonia, Latvia, Luxembourg and Slovenia each have 4 votes; and

• Malta has 3 votes.

Generally, decisions of the EU Council are made by qualified majority, which is achieved if:

• a majority of Member States (in certain cases, a two-thirds majority of Member States) approves the decision;

• a number of votes representing at least 73.9 per cent of all votes is cast in favor of the decision; and

• a Member State may ask for confirmation that the votes in favor represent at least 62 per cent of the total population of the European Union.

Commencing on October 1, 2014, pursuant to changes enacted by the Treaty of Lisbon, the voting rules for the EU Council will change, increasing the required majority to 55 per cent of Member States (72 per cent in certain cases) and 65 per cent of the population, and permitting four Member States to block a proposal.

The European Parliament. The European Parliament is elected every five years by direct universal suffrage. The European Parliament has three essential functions:

• it shares with the EU Council the power to adopt directives, regulations and decisions;

• it shares budgetary authority with the EU Council and can therefore influence EU spending; and

• it approves the nomination of Commissioners, has the right to censure the Commission and exercises political supervision over all the EU institutions.

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Following the election held in 2009 and the accession of Croatia in July 2013, each Member State was allocated the following number of seats in Parliament:

Austria	19
Belgium	22
Bulgaria	18
Croatia	12
Cyprus	6
Czech Republic	22
Denmark	13
Estonia	6
Finland	13
France	74
Germany	99
Greece	22
Hungary	22
Ireland	12

Italy	73
Latvia	9
Lithuania	12
Luxembourg	6
Malta	6
Netherlands	26
Poland	51
Portugal	22
Romania	32
Slovakia	13
Slovenia	8
Spain	54
Sweden	20
United Kingdom	73
Total	765

The European Commission. The European Commission (the “Commission”), upholds the interests of the EU as a whole and has the right to initiate draft legislation by presenting legislative proposals to the European Parliament and Council. Currently, the European Commission consists of 28 members, one appointed by each Member State for five-year terms.

Court of Justice. The Court of Justice ensures that community law is uniformly interpreted and effectively applied. It has jurisdiction in disputes involving Member States, EU institutions, businesses and individuals. A Court of First Instance has been attached to it since 1989.

Other Institutions. Other institutions that play a significant role in the European Union are:

• the European Central Bank, which is responsible for defining and implementing a single monetary policy in the euro area;

• the Court of Auditors, which checks that all the European Union’s revenue has been received and that all its expenditures have been incurred in a lawful and regular manner and oversees the financial management of the EU budget; and

• the European Investment Bank, which is the European Union’s financial institution, supporting EU objectives by providing long-term financing for specific capital projects.

Membership of International Organizations

Italy is also a member of the North Atlantic Treaty Organization (NATO), as well as many other regional and international organizations, including the United Nations and many of its affiliated agencies. Italy is one of the Group of Eight (G-8) industrialized nations, together with the United States, Japan, Germany, France, the United Kingdom, Canada and Russia, and a member of the Organization for Economic Co-operation and Development (OECD), the World Trade Organization (WTO), the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), the European Bank for Reconstruction and Development (EBRD) and other regional development banks.

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THE ITALIAN ECONOMY

General

According to IMF data, the Italian economy, as measured by 2012 GDP (at current prices in U.S. dollars), is the eighth largest in the world after the United States, Japan, Germany, the People’s Republic of China, the United Kingdom, France and Brazil.

The Italian economy developed rapidly in the period following World War II as large-scale, technologically advanced industries flourished along with more traditional agricultural and industrial enterprises. Between 1960 and 1974, Italian GDP, adjusted for changes in prices, or “real GDP,” grew by an average of 5.2 per cent per year. As a result of the 1973-74 oil price shocks and the accompanying worldwide recession, output declined by 2.1 per cent in 1975, but between 1976 and 1980 real GDP again grew by an average rate of approximately 4 per cent per year. During this period, however, the economy experienced higher inflation, driven in part by wage inflation and high levels of borrowing by the Government. For the 1980s as a whole, real GDP growth in Italy averaged 2.4 per cent per year.

Italy’s economic growth slowed down substantially in the 1990s. Tighter fiscal policy, which followed the lira’s suspension from the Exchange Rate Mechanism in September 1992, led Italy’s economy into recession in 1993. The economy recovered in 1994; however, Italy’s GDP grew at a modest pace, an average of 1.6 per cent per year from 1996 through 1999, lagging behind those of other major European countries. The growth gap between other EMU countries and Italy since the mid-1990s reflects the persistence of several medium and long-term factors, including the difficulties in fully integrating southern Italian regions into the more dynamic economy of northern and central Italy, unfavorable export specialization in traditional goods, inadequate infrastructure, the incomplete liberalization process and insufficient flexibility of national markets, the slowness of the recovery in economic activity is due to shortcomings in the Italian productive economy that make it fragile in the new competitive environment. These deficiencies depend both on factors internal to firms, such as small size and the limitations of exclusive family control and on external factors, such as insufficient infrastructure, high tax rates combined with widespread tax evasion, an uncertain and complex regulatory framework and long administrative procedures. Some lack of competition is adversely affecting the service sector in particular.

Over the seven-year period from 2000 to 2007, average annual GDP growth in Italy equaled 1.5 per cent compared to the average annual GDP growth of the euro area of 2.5 per cent.

The table below shows the annual percentage change in real GDP growth for Italy and the EU, including Italy, for the period 2000 through 2007.

Annual Per Cent Change in Real GDP (2000-2007)

	2000		2001		2002		2003		2004		2005		2006		2007
Italy		3.7		1.9		0.5		0.0		1.7		0.9		2.2		1.7
EU area(1)		3.9		2.1		1.3		1.5		2.6		2.2		3.4		3.2

⁽¹⁾  The EU area represents the 28 countries participating in the European Union.

Source: Eurostat.

The table below shows the annual percentage change in real GDP growth for Italy and the countries participating in the EU and in the EMU, including Italy, for the period 2008 through 2011.

Annual Per Cent Change in Real GDP (2008-2012)

	2008			2009			2010		2011		2012
Italy		(1.2	)		(5.5	)		1.7		0.4		(2.4	)
EU area(1)		0.4			(4.5	)		2.1		1.6		(0.4	)
Euro area(2)		0.4			(4.4	)		2.0		1.4		(0.6	)

⁽¹⁾  The EU area represents the 28 countries participating in the European Union.

⁽²⁾  The Euro area represents the 17 countries participating in the European Monetary Union.

Source: Bank of Italy and Eurostat.

In 2008, as a result of the global financial and economic crisis, Italy’s real GDP decreased by 1.2 per cent mainly as a result of a steep decline in exports. Italy also recorded a decrease in domestic private consumption, largely attributable to the stagnation of Italian families’ purchasing power (the rise in nominal salaries was offset by inflation) and increasing propensity to save, and a decrease in gross fixed investments, especially in machinery and equipment and real estate. The uncertainty resulting from the financial crisis and its long-term effects seriously affected consumer and business confidence and played a major role in the reduction of spending and investment.

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In 2009, Italy’s real GDP decreased by 5.5 per cent. A moderate recovery began in the second half of the year, mainly because of improved exports. In the same period, the industrial sector returned to moderate growth and the decline in the services sector came to a halt, but the decline in the construction sector continued. Domestic demand remained weak. Spending on capital goods, although increasing slightly in the second half of 2009 in response to tax incentives for purchases of machinery and equipment, was dampened by spare capacity and uncertainty about growth. The decline in consumer spending generally worsened, despite the measures introduced to support purchases of certain durable goods. Signs of an easing in the decline of the real property market appeared towards the end of 2009.

In 2010, the Italian economy grew and real GDP increased by 1.7 per cent compared to 2009. Domestic demand sustained the recovery. Private consumption contributed to the GDP growth by approximately 0.6 per cent, fixed investment contributed to the GDP growth by approximately 0.5 per cent and an increase in inventories contributed to the GDP growth by approximately 0.7 per cent. Net exports provided a negative contribution to GDP growth by approximately 0.4 per cent. The deterioration reflects the position on merchandise trade, which turned negative last year after being broadly in balance in 2009. It was largely due to only two sectors: energy raw materials, whose deficit grew mainly because of the rise in oil prices, and electronic apparatus, where the major factor was the significant increase in imports of photovoltaic cells.

In 2011, Italy’s real GDP grew by 0.4 per cent compared to 2010. Private consumption contributed to GDP growth by 0.1 per cent and net exports contributed to GDP growth by 1.4 per cent while fixed investment negatively contributed to GDP growth by 0.4 per cent. The growth in merchandise exports in 2011 was mainly due to sales to non-EU countries, particularly sales of machinery and equipment, basic metals and other metal products. Good export performances were also recorded by traditional products, pharmaceuticals and electronic products.

In 2012, Italy’s GDP decreased by 2.4 per cent compared to 2011. The decrease in real GDP in 2012 was due to an 8.0 per cent decrease in gross fixed investment, a 3.9 per cent decrease in total consumption and a 7.7 per cent decrease in imports, partly offset by a 2.3 per cent increase in exports.

The Government has historically experienced substantial government deficits. Among other factors, this is largely attributable to high levels of social spending and the fact that social services and other non-market activities of the central and local governments account for a relatively significant percentage of total employment as well as high interest expense resulting from the size of Italy’s public debt. Countries participating in the European Economic and Monetary Union are required to reduce “excessive deficits” and adopt budgetary balance as a medium-term objective. For additional information on the budget and financial planning process, see “Public Finance—Measures of Fiscal Balance” and “Public Finance—Revenues and Expenditures”.

A longstanding objective of the Government has been to control Italy’s debt-to-GDP ratio. Italy’s debt-to-GDP ratio increased in 2012 to 124.3 per cent net of euro area financial support and 127.0 per cent gross of euro area financial support, reflecting the gap of 6.5 per cent between the average cost of debt and the expansion of nominal GDP and to the financial support provided to EMU countries, only partly offset by the primary surplus of 2.5 per cent. The debt-to-GDP ratio in 2012 was above the forecasts indicated in the September 20, 2012 update of the 2012 Economic and Financial Document. Compared to the forecast, the negative difference of 0.6 per cent was mainly due to an increased public sector borrowing requirement, which was €12 billion higher than the forecast made in September. According to Italy’s most recent projections, Italy’s debt-to-GDP ratio (gross of euro area financial support and of the effects of the acceleration of payments due by the public administration) is expected to be 133.0 per cent in 2013, 133.2 per cent in 2014, 130.5 per cent in 2015 and 127.1 per cent in 2016. For additional information on Italy’s forecasts for its debt-to-GDP ratio, see “Public Finance—The 2013 Economic and Financial Document”, Exhibit 2—2013 Stability Programme and Exhibit 4—Update of the 2013 Economic and Financial Document.

Historically, Italy has had a high but declining savings rate, calculated as a percentage of gross national disposable income, which measures aggregate income of a country’s citizens after providing for capital consumption (the replacement value of capital used up in the process of production). Private sector savings as a percentage of gross national disposable income averaged 19.6 per cent in the period from 1999 to 2008. Private sector savings as a percentage of gross national disposable income was 12.0 per cent in 2011 and decreased to 11.4 per cent in 2012. Because of the historically high savings rate, the Government has been able to raise large amounts of funds through issuances of Treasury securities in the domestic market, with limited recourse to external financing. As at December 31, 2012, the internal debt and the external debt were 96.32 per cent and 3.68 per cent, respectively, of the total debt.

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The Italian economy is characterized by significant regional disparities, with the level of economic development of southern Italy well below that of northern and central Italy. The per capita GDP of southern Italy, also known as the Mezzogiorno, is significantly lower than that of the rest of Italy. The marked regional divide in Italy is also evidenced by significantly higher unemployment in the Mezzogiorno. For additional information on Italian employment, see “—Employment and Labor”.

Inflation, as measured by the European Union harmonized consumer price index (HICP) was 3.3 per cent in 2012. For additional information on inflation, see “—Prices and Wages”.

Measures to Address the Global Financial and Economic Crisis

In each of 2009, 2010, 2011 and 2012, the Government acted to limit the effects of the global crisis, support the economy and facilitate its recovery. The Government also injected significant liquidity into the financial system by accelerating payment of past debts and reducing the accrual of tax refunds.

Measures adopted in 2009, 2010 and 2011

During the years 2009, 2010 and 2011, the Government adopted a series of measures aimed at increasing Government revenues, reducing Government spending, fighting tax evasion, sustaining the economic and financial growth of Italy, achieving the financing targets adopted by the EU and balancing the general government’s budget. The main reforms adopted by the Government in those years were introduced by (i) Law No. 102 of August 3, 2009, (ii) Law No. 122 of July 31, 2010, (iii) Law No. 111 of July 15, 2011 and (iv) Law No. 148 of September 14, 2011. For additional information on these measures, see Exhibit 2—2013 Stability Programme and Exhibit 3—2013 National Reform Programme.

The measures adopted by the Government in 2009, 2010 and 2011 consisted of, inter alia:

• tax measures, including an increase of the ordinary value-added tax (“VAT”) rate from 20 per cent to 21 per cent, an increase of the capital gains tax rate on financial instruments from 12.5 per cent to 20 per cent, with the exception of public debt instruments, which remain subject to a capital gains tax of 12.5 per cent and an additional 3 per cent tax on income exceeding €300,000;

• reforms intended to reduce government spending, including Government expenditure cuts, simplifying general governmental structures, implementing a public spending review, reforming the tax and welfare systems and commencing the process to amend the Constitution to introduce a balanced budget rule;

• measures to fight tax evasion, including a limit to the permissible amount of cash transactions to €2,500 or less and imposing harsher penalties for the payment of professional services without proper invoicing; and

• reforms to enhance potential growth, including a reduction of bureaucratic obstacles for business organizations and the allowance of more flexible labor contracts.

In November 2011, the Italian Parliament adopted the stability law for 2012 through Law No. 183 of November 12, 2011 and the budget law for 2012/2014 through Law No. 184 of November 12, 2011. These laws implemented several of the austerity measures previously adopted, including, among other things, reduced funding for Ministries, rules for disposing of public real estate and other measures to incentivize financial and economic growth and public deficit reduction. For additional information on the Italian budget and financial planning process, see “Public Finance—The Budget Process”.

In December 2011, the Government enacted additional measures through Law No. 214 of December 22, 2011, which consisted of, inter alia:

• tax measures, including a new real property tax (Imposta Municipale Unitaria or IMU) on real estate located in Italy, which will also be levied against primary residences (prima casa), further increases and adjustments to VAT rates and an increase of excise taxes on fuels;

• reforms intended to reduce government spending, including changes to retirement eligibility requirements intended to align the retirement eligibility age with the average projected life span of the population and gradually equalize the retirement eligibility ages of both males and females;

• measures to fight tax evasion, including strengthened investigative powers of tax authorities, new rules requiring financial intermediaries to transmit certain information with respect to customer accounts to the tax authorities and a further reduction of the permissible amount of cash transactions to €1,000 or less; and

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• reforms to enhance potential growth, including the introduction of new incentives such as an economic growth aid (ACE) that provides for a reduction of income taxes that is proportionate to the notional yield of new capital invested in a business, a reduction of labor taxes (particularly with respect to women and young workers), the establishment of policies intended to increase the employment of women and young workers and the introduction of regulations aimed at liberalizing commerce.

Measures adopted in 2012

The Government continued adopting measures to address the global financial and economic crisis in 2012. In April 2012, Italy amended its Constitution to include a balanced budget requirement, pursuant to which the general government will be required to operate under balanced budgets beginning in fiscal year 2014. In addition, in September 2012, Italy announced its commitment to reach, within 2013, a balanced budget and reduce its public debt by increasing the primary surplus.

The main measures adopted by the Government in 2012 were introduced through (i) Law No. 27 of March 24, 2012; (ii) Law No. 35 of April 4, 2012; (iii) Law No. 92 of June 28, 2012; (iv) Law No. 134 of August 7, 2012; (v) Law No. 135 of August 7, 2012 and (vi) Law Decree No. 179 of October 18, 2012, the latter of which has been submitted to the Italian Parliament for conversion into law. For additional information on these reforms, see Exhibit 2—2013 Stability Programme and Exhibit 3—2013 National Reform Programme.

The measures adopted by the Government in 2012 consisted of, inter alia:

• tax measures, including a deferral of the scheduled increase of the VAT rate;

• reforms intended to reduce government spending, including reduced funding to political groups and political appointees at the regional level, a reduction of the number of regional counselors, increased financial controls, various measures intended to rationalize and streamline bureaucratic processes and administrative structures and the strengthening of centralized purchasing systems; and

• reforms to enhance potential growth, including measures to foster the development and growth of companies engaged in the construction and management of infrastructure and other public works, eliminate bureaucratic obstacles for professionals and entrepreneurs, facilitate access to capital markets for non-listed companies, amendments to bankruptcy laws and civil procedure, new rules and incentives for start-up companies and measures aimed at reducing labor costs and attracting increased foreign direct investment.

On December 24, 2012, the Italian Parliament approved the stability law for 2013 through Law No. 228 of December 24, 2012 and approved the budget law for 2013/2015 through Law No. 229 of December 24, 2012, which includes measures aimed at achieving a structurally balanced budget in 2013 while increasing productivity, reducing public expenditure and intervening on certain tax regimes applicable to personal income and financial instruments. In addition, on the same date, the Italian Parliament enacted a law to implement the Constitutional balanced budget requirement through Law No. 243 of December 24, 2012 (“Law No. 243”). Law No. 243 will enter into force starting from fiscal year 2014.

Measures adopted in 2013

Law decree n. 35/2013 (converted into law on June 6, 2013) enacted a series of measures aimed at allowing the public administration to accelerate the payments of certain trade payables (overdue as of December 31, 2012) in order to stimulate economic growth. The decree authorized payments due to enterprises, cooperatives and professionals for a total of up to €40 billion, which has been subsequently increased by additional €7.2 billion through Law decree 102/2013. The injection of liquidity achieved through such acceleration is intended to have a positive effect on GDP growth, consumption and investments. For additional information on these measures, see Exhibit 2—2013 Stability Programme, Exhibit 3—2013 National Reform Programme and Exhibit 4—Update of the 2013 Economic and Financial Document.

Law decree n. 69/2013 (Decreto del Fare) (converted into law on August 9, 2013) enacted a new package of urgent measures aimed at stimulating the Italian economy, including, among other things, provisions aimed at facilitating access to credit by small and medium sized companies, measures aimed at developing infrastructure (such as the “European corridors” and certain railway services for approximately €2 billion), rules aimed at bureaucracy and tax simplification, rules aimed at enhancing the efficiency of the justice system, rules aimed at enhancing the digitalization of the public administration (the “Italian Digital Agenda”) and measures concerning education.

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As a consequence of the fiscal measures adopted in 2012, on October 1, 2013, the VAT rate increased from 21 per cent to 22 per cent.

In October 2013, the Government approved the draft stability law for 2014 and the draft budget law for 2014/2016. These bills (disegni di legge) have been submitted to the Italian Parliament for discussion and approval. In particular, the draft stability law for 2014 includes measures aimed at sustaining economic growth and increasing employment through, inter alia, a decrease of taxes applicable to individuals and enterprises (including taxes on labor cost), the allocation of financial resources for certain strategic investments (mainly infrastructural) and the reduction of public expenditure.

In addition, the draft stability law for 2014 proposes the introduction of a new service tax to cover costs of services provided by local administrations (including waste management) to be levied by municipalities against real estate properties located in Italy which, with respect to primary residences (prima casa), shall replace the current real property tax (Imposta Municipale Unitaria or IMU).

EU Measures to Address the Eurocrisis

The global financial system began showing signs of disruption in the summer of 2007 and its condition quickly deteriorated following the bankruptcies of several major international financial institutions in the summer of 2008. Its condition continued to deteriorate and caused major disruptions in global financial markets, including unsustainably low levels of liquidity and funding sources (which resulted in high funding costs, historically high credit spreads, volatile and unsustainable capital markets and declining asset values). Many countries acted to combat deteriorating economic conditions, including borrowing in order to support troubled financial and other institutions and adopting other measures to stimulate their economies, which actions led to the credit ratings of various countries to be reduced. The first to be directly affected was Iceland in 2008 followed by Greece, Ireland and Portugal in 2010 and Spain and Italy in 2011. Such reductions to sovereign credit ratings, compounded by the existing recessionary global economy, made it difficult, or in certain instances impossible, for many European countries to access the capital markets to satisfy their funding needs. Such difficulties led to further reductions in sovereign credit ratings and the need for such countries to receive financial support from third parties, including from other countries and the financial support mechanisms adopted by the European Union. In particular, beginning in 2010, Greece, Ireland and Portugal began receiving financial assistance in the form of direct and indirect loans from EU member states. Such conditions have persisted through the date of this Annual Report. For additional information on the measures that the European Union have taken to address the Eurocrisis, see Exhibit 2—2013 Stability Programme.

The Stability and Growth Pact and the Euro Plus Pact. In March 2011, the EU Council adopted measures to respond to the economic crisis, requiring all Member States to include a multi-annual consolidation plan including specific deficit, revenue and expenditure targets and an implementation strategy and timeline in their stability or convergence programmes prepared pursuant to their existing responsibilities under the Stability and Growth Pact of 1998. For additional information on the Stability and Growth Pact of 1998, see “Public Finance—European Economic and Monetary Union”. Member States were also required to include structural reforms in their national reform programmes prepared in connection with the European Semester. For additional information on national reform programmes and the European Semester, see “Public Finance—The Budget Process”.

In addition, an agreement named the Euro Plus Pact (the “Pact”) was agreed to by the heads of government of the euro area and joined by Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania (and remains open for other EU Member States to join). The Pact aimed at a closer coordination of policies for economic convergence and requires the heads of government to set common objectives in each chosen policy area and to make annual concrete national commitments. More specific objectives of the Pact are to stimulate competitiveness and employment, to enhance the sustainability of public finances and to reinforce financial stability. Italy has committed together with the other EU Member States to confirm and develop its economic policy based on the Pact and to conform and articulate its national political documentation and process based on the Pact. For additional information on Italy’s budget and financial planning process, see “Public Finance—The Budget Process”.

Financial Assistance to EU Member States. In early 2010, the EU member states began to take steps to provide financial assistance to troubled European Member States. As Greece slipped into a deep recession and came close to defaulting on financial obligations, in May of 2010 the EU provided, on a coordinated bilateral basis, a first round of loans to Greece through a three-year plan (2010 to 2013) for a total commitment of €80 billion. Italy’s portion of the total commitment equaled €14.7 billion. Of the €80 billion, €21 billion was disbursed in 2010 and €31.9 billion in 2011. At the same time the International Monetary Fund (the “IMF”) undertook to provide Greece with an additional €30 billion in loans, €10.5 billion of which was lent in 2010 and €9.6 billion in 2011. As of December 31, 2011, Italy’s exposure to Greece through direct loans was just over €10 billion.

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The EFSF. In June 2010, the EU member states created the European Financial Stability Facility (the “EFSF”) whose objective is to “preserve financial stability of Europe’s monetary union by providing temporary assistance to euro area Member States”. In order to fund any such assistance the EFSF has the capacity to issue bonds or other debt instruments in the financial markets. Such debt is guaranteed by each Member State on a several basis based on each Member State’s participation in the ECB’s share capital. Initially the extent of the guarantees (and therefore of the facility itself) was capped at €440 billion. Italy’s participation in the EFSF is approximately 18 per cent. Pursuant to a ruling of Eurostat, financings granted by the EFSF cause an increase of public debt of the countries participating in the financing, based on their participation in the ECB’s share capital.

The EFSF financings are combined with those from the European Financial Stabilization Mechanism (the “EFSM”), a €60 billion facility organized by the European Commission, and additional financings from the IMF. The EFSM allows the European Commission to borrow in financial markets on behalf of the Union and then lend the proceeds to the beneficiary Member State. All interest and loan principal is repaid by the beneficiary Member State via the European Commission. The EU budget guarantees the repayment of the bonds in case of the default by the borrower. The EFSF, EFSM and IMF can only act after a request for support is made by a euro area Member State and a country program has been negotiated with the European Commission and the IMF. As a result, any financial assistance by the EFSF, EFSM and IMF to a country in need is linked to strict policy conditions. The EFSF and EFSM may only grant new financings until June 2013; after this date, only existing financings may be administered. During 2011, the EFSM began issuing bonds backed by EU budgetary resources in order to finance the loan package agreed in November 2010 in favor of Ireland and the loan package agreed in May 2011 in favor of Portugal. The EFSM issued approximately €28 billion in bonds in 2011 in order to provide loans of 13.9 billion to Ireland and €14.1 billion to Portugal. Also during 2011, the EFSF issued approximately €18 billion of securities in order to grant loans of €7.6 billion to Ireland and €6.9 billion to Portugal. In addition to the loans provided by the EFSM and the EFSF, the IMF made loans of €12.5 billion to Ireland and €13 billion to Portugal.

A set of measures designed to increase the EFSF’s capacity were approved during the course of 2011: (a) the guarantees provided by the euro area countries were raised from €440 billion to €780 billion; (b) the facility was authorized to make purchases of Member States’ government bonds in the primary and secondary markets; (c) it was authorized to take action under precautionary programmes and to finance the recapitalization of financial institutions; and (d) it will be allowed to use the leverage options offered by granting partial risk protection on new government bond issues by euro area countries and/or by setting up one or more vehicles to raise funds from investors and financial institutions. In early 2012, Greece, having enacted the budget and other reform measures required by the EU, reached a further agreement with the European Commission, the ECB and IMF for a second round of financial support, which consisted of €138 billion in loans from the IMF and the EFSF over the period 2012 to 2016. This second round of financial support differed from the package Greece received in May 2010, in that it received loans directly from the EFSF rather than directly from Member States. In May 2012, Greece had received approximately €72.9 billion from the EFSF. Greece also received an additional €1.7 billion from the IMF.

Also in 2012, the EFSF provided financial support for Ireland and Portugal. Ireland received €13.8 billion, of which €4.6 billion came from the EFSF while the EFSM provided €4.5 billion and the IMF provided €3.6 billion. Ireland also received bilateral loans directly from the United Kingdom and Denmark for a further €1 billion. Portugal received €14.3 billion, of which €6 billion came from the EFSM, €2.7 billion from the EFSF and €5.6 billion from the IMF.

The ESM. From July 2013, the European Stability Mechanism (“ESM”), a facility with lending capacity of €500 billion, will assume the role of the EFSF and the EFSM. The ESM will have a subscribed capital of €700 billion, of which €80 billion will be paid-in capital provided by the euro area Member States and €620 billion will be committed callable capital and guarantees from euro area Member States, who will commit to maintain a minimum 15 per cent ratio of paid-in capital to outstanding amount of ESM issuances in the transitional phase from 2013 to 2017. Italy’s maximum commitment to the ESM will be approximately €125.3 billion. The ESM will grant financings to requesting countries in the euro area under strict conditions and following a debt sustainability analysis.

On February 2, 2012, a number of revisions were made to the treaty instituting the ESM. Its entry into force was brought forward by one year, to July 2012, and the voting rules were amended to allow decisions to be taken by a qualified majority of 85 per cent in certain circumstances. This majority rule can be invoked in

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place of the requirement of unanimous decisions if the European Commission and the ECB determine that financial assistance measures need to be taken urgently and in the interests of the euro area’s financial and economic stability. Furthermore, as in the case of the EFSF, the ESM has additional means available to it to support countries in difficulty: it can purchase member countries’ government bonds, both directly or on the secondary market, and is allowed greater flexibility in its direct purchases of government bonds; it can take action under precautionary programmes; and it can finance the recapitalization of financial institutions. Finally, in order to strengthen investors’ confidence in the new arrangements, on March 30, 2012 the EU announced that the ESM’s endowment capital would be paid up by 2014 instead of 2017 as originally planned. Payment will be made in five installments, two in 2012, two in 2013 and the last in the first half of 2014. It was also agreed that as of July 2012 the ESM will become the main instrument for financing new support packages. The EFSF will continue to operate until existing financing arrangements terminate and it will be allowed to finance new projects until halfway through next year. From the middle of 2014, the ESM will have a total lending capacity of €500 billion. While the EU had anticipated that the ESM would be operational in July 2012, complications in the ratification of the treaty establishing the ESM led to delays. In particular, Germany’s Federal Constitutional Court took into consideration whether Germany could ratify the treaty in compliance with its constitution. On September 12, 2012, the German Federal Constitutional Court ruled that Germany could ratify the treaty, so long as the treaty was amended slightly to make it clear that the contribution of a Member State could not be increased “without the prior agreement of each Member State and with due regard to national procedures”. The EU finance ministers agreed to an “interpretive declaration” to this effect on September 27, 2012. The Board of Governors of the ESM met for the first time on October 8, 2012 and has become the main European instrument for financing new support programmes.

Collective Action Clauses. Following recommendations of the International Monetary Fund and the release of a draft model form of collective action clause, Italy introduced a form of collective action clause into the documentation of all of its New York law governed bonds issued since June 16, 2003.

The rights of bondholders have generally been individual rather than collective. As a result of each bondholder having individual rights, the restructuring or amending of a bond would legally have to be negotiated with each bondholder individually and any one bondholder that did not agree with restructuring or amendment terms could refuse to accept such terms or “hold out” for better terms thereby delaying the restructuring or amendment process and potentially forcing an issuer into costly litigation. These risks increase as the bondholder base is more geographically dispersed or is comprised of both individual and institutional investors.

In an effort to minimize these risks, issuers began including so-called collective action clauses into their bond documentation. These collective action clauses are intended to minimize the risk that one or a few “hold out” bondholders delay a restructuring or amendment where a majority of the other bondholders favor the terms of the restructuring or amendment, by permitting a qualified majority of the bondholders to accept the terms and bind the entire bondholder base to such terms.

The treaty instituting the ESM, as revised on February 2, 2012 (and ratified by Italy through Law No. 116 of July 23, 2012), required that all new government debt securities with a maturity of more than one year, issued on or after January 1, 2013, include the same collective action clauses as other countries in the Eurozone (the “EU Collective Action Clauses”). These standardized clauses for all euro area Member States, as set out in the document “Common Terms of Reference” dated February 17, 2012 developed and agreed by the European Economic and Financial Committee (EFC) and published on the EU Commissions website, allow a qualified majority of creditors to agree on certain “reserved matter modifications” to the most important terms and conditions of the bonds of a single series (including the financial terms) that are binding for all the holders of the bonds of that series with either (i) the affirmative vote of the holders of at least 75 per cent represented at a meeting or (ii) a written resolution signed by or on behalf of holders of at least 66 2/3 per cent of the aggregate principal amount of the outstanding bonds of that series and the consent of the Issuer. The EU Collective Action Clauses also include an aggregation clause enabling a majority of bondholders across multiple bond issues to agree on certain “reserved matter modifications” to the most important terms and conditions of all outstanding series of bonds (including the financial terms) that are binding for the holders of all outstanding series of bonds with (1) either (i) the affirmative vote of all holders of at least 75 per cent represented at separate meetings or (ii) a written resolution signed by or on behalf of all holders of at least 66 2/3 per cent of the aggregate principal amount of all outstanding series of bonds (taken in the aggregate) and (2) either (i) the affirmative vote of the holders of more than 66 2/3 per cent represented at a meeting or (ii) a written resolution signed by or on behalf of holders of more than 50 per cent of the aggregate principal amount of each outstanding series of bonds (taken individually) and the consent of the Issuer (so called “Cross Series Modification Clauses”). Italy, as all EU member states, has included the EU Collective Action Clauses and the Cross Series

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Modification Clauses in the documentation of all new bonds issued since January 1, 2013. For additional information regarding Italy’s implementation of EU Collective Action Clauses, see “Public Debt—Summary of External Debt”.

Gross Domestic Product

In 2008, Italy’s real GDP decreased by 1.2 per cent. The fall in real GDP recorded in 2008 was driven by a significant decline in exports coupled with a contraction in domestic demand and gross fixed investment reflecting weakening consumer and business confidence resulting from the global financial and economic crisis.

In 2009, Italy’s real GDP decreased by 5.5 per cent. A moderate recovery began in the second half of the year, mainly because of improved exports. In the same period, the industrial sector returned to moderate growth, the decline in the services sector came to a halt, but the decline in the construction sector continued.

In 2010, Italy’s real GDP increased by 1.7 per cent (mainly due to the severely weakened international macro economy resulting from a combination of external forces), which was 0.1 per cent better than the official forecast.

In 2011, Italy’s GDP grew by 0.4 per cent compared to 2010 (mainly due to the increase recorded in net exports).

In 2012, Italy’s GDP decreased by 2.4 per cent compared to 2011. Private consumption negatively contributed to the GDP growth by 2.6 per cent and net exports contributed to GDP growth by 3.0 per cent while fixed investment negatively contributed to GDP growth by 1.5 per cent.

An improvement in the long-term outlook for recovery in GDP growth depends on the successful adoption of government-designed policies to:

• promote investment in infrastructure and strategic geographic areas;

• foster market liberalization and reduce administrative bureaucratic charges and procedures;

• reduce the tax burden;

• preserve the private sector purchasing power; and

• undertake structural measures to contain the growth of government expenditure.

The following table sets forth information relating to nominal (unadjusted for changing prices) GDP and real GDP and expenditures for the periods indicated.

GDP Summary

	2008			2009			2010		2011		2012
Nominal GDP (€ in millions)		1,575,144			1,519,695			1,551,886		1,578,497		1,565,916
Real GDP (€ in millions)(1)		1,475,412			1,394,347			1,418,376		1,423,674		1,389,948
Real GDP % change		(1.2	)		(5.5	)		1.7		0.4		(2.4	)
Population (in thousands)		60,045			60,340			60,626		59,394		59,685

⁽¹⁾  Constant euro with purchasing power equal to the average for 2005.

Source: Bank of Italy and ISTAT.

Private Sector Consumption. Consumer households’ contraction in spending reflected the weakness of real disposable income, down by 4.8 per cent in 2012. In nominal terms, the income of consumer households decreased by 2.2 per cent, mainly due to the drop in self-employment income net of social contributions (decreased by 8.2 per cent), which was in turn due to the 6.1 per cent decrease in income per standard self-employed labor unit.

After stagnating on average for three years, household spending decreased by 4.3 per cent in 2012; more than half of such decrease was due to the impact on disposable income of the budget adjustment measures, the unfavorable trend in employment, and the deterioration of the economic situation. All the main expenditure components decreased; purchases of durable goods decreased by 12.7 per cent, in particular spending on furniture and transport equipment. New car registrations decreased for the fifth consecutive year, falling 20 per cent to 1.4 million, being a 30-year low. Purchases of semi-durable goods, mainly clothing and footwear, also decreased by 9.4 per cent, after stagnating in 2011. Consumption of non-durables declined by 4.5 per cent (of which spending on food by 3.0 per cent). Purchases of services slightly decreased by 1.4 per cent, after an increase of 1.6 per cent in 2011, as spending on housing and healthcare held up relatively well.

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Private sector consumption represented 60 per cent of GDP in 2012 and 60.1 per cent of GDP in 2011. In 2012, it accounted for a 4.3 per cent decrease, compared to a 0.1 per cent increase in 2011. Private sector consumption, in the euro area, decreased by 1.3 per cent in 2012. The contribution to GDP growth in Italy was negative for 2.6 per cent in 2012, compared to a positive contribution of 0.1 per cent in 2011.

Public Sector Consumption. Public sector consumption, or the expenditure on goods and services by the general government, decreased by 2.9 per cent in 2012, compared to a 1.2 per cent decrease in 2011. In 2012, public sector consumption represented 20.7 per cent of real GDP and 21.5 per cent in 2011. The contribution to GDP growth was negative of 0.6 per cent in 2012 compared to a negative contribution of 0.1 per cent in 2011.

Gross Fixed Investment. Gross fixed investment decreased by 8 per cent in 2012, compared to a 1.8 per cent decrease in 2011. The decrease in gross fixed investment in 2012 was significant for machinery, equipment, transport equipment and intangibles (decreased by 9.9 per cent), while construction investment decreased by 6.2 per cent. The fall in investment reflected the unfavorable conditions of finance, ample unutilized capacity and uncertain demand prospects. In 2012, the investment rate declined to 18.3 per cent of GDP. Net of depreciation and amortization, investment spending was virtually nil in 2012, falling to 0.2 per cent of GDP, more than five percentage points lower than the average for the five years preceding the 2008-09 recession. The contraction in construction investment in 2012 had the same impact on residential and non-residential building (6.8 and 6.4 per cent respectively), and in both segments the decline eased in the second half. In 2012, the number of house sales recorded a significant decrease of 25.8 per cent. House prices decreased by 2.7 per cent (5.5 per cent in real terms), bringing the total downward correction from the 2007 peak to 11.0 per cent. In 2012, gross fixed investment represented 18.3 per cent of real GDP and its decrease negatively contributed to real GDP growth by1.5 per cent compared to a negative contribution of 0.4 per cent in 2011.

Net Exports. Exports of goods and services grew by 2.3 per cent in volume in 2012, with merchandise exports growing by 2.4 per cent; this was a much slower rate of increase than in 2011 (5.9 per cent). The slowdown reflected the easing of world trade growth from 6.0 to 2.5 per cent. Italy’s world market share decreased to 2.7 per cent at current prices and exchange rates. Even though structural factors limited the competitiveness of domestic Italian firms, between 2011 and 2012, the competitiveness of Italian goods, measured on the basis of manufacturing producer prices, improved by more than 2 percentage points. In 2012, imports of goods and services decreased by 7.7 per cent in volume terms, mainly due to the contraction of investment and the slowdown in exports, which are the demand components with the most substantial input of imports. For additional information on Italy’s exports and imports, see “The External Sector of the Economy—Foreign Trade”.

Strategic Infrastructure Projects. Italy’s economic infrastructure is still significantly underdeveloped compared to other major European countries.

Italy adopted legislation in 2001 (the “Strategic Infrastructure Law”) providing the Government with special powers to plan and realize those infrastructure projects considered to be of strategic importance for the growth and modernization of the country, particularly the Mezzogiorno. The Strategic Infrastructure Law is aimed at simplifying the administrative process necessary to award contracts in connection with strategic infrastructure projects and increase the proportion of privately financed projects.

Consistent with the existing policies and in furtherance of the Pact, Italy’s 2012 Economic and Financial Document confirms the Government’s commitment to implement several structural reforms and pursue a substantial infrastructure program. In the last decade, beginning with the Strategic Infrastructure Law, progress was made in the planning of public works, starting to overcome historical weakness linked to long procedures due to overlapping powers and responsibilities among different levels of government. From 1990 through 2010, general government investment expenditure averaged 2.4 per cent of GDP in Italy, just below the euro area average of 2.5 per cent. Italy’s outlay was less than that of France (3.2 per cent) but more than that of Germany (1.9 per cent) and the United Kingdom (1.8 per cent).

General government expenditure for investments between 2000 and 2009 was, on average, equal to 2.3 per cent of GDP, and in 2011 and 2012 it was equal to 2.0 per cent and 1.9 per cent of GDP, respectively.

In addition, Law decree n. 69/2013 (Decreto del Fare) (converted into law on August 9, 2013) enacted a new package of measures aimed at, inter alia, developing infrastructure (such as the European corridors and certain railway services) for approximately €2 billion.

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Principal Sectors of the Economy

In 2012, value added in real terms decreased by 2.0 per cent as compared to 2011. The decrease was mainly driven by decreases in construction of 6.3 per cent, in agriculture, fishing and forestry of 4.4 per cent, in industry of 3.5 per cent (of which manufacturing decreased by 3.9 per cent) and in services of 1.2 per cent, in each case, in real terms. The decrease in services was driven by a decrease of 2.0 per cent in commerce, transport, storage and hotels and restaurants, of 1.9 per cent in information and communication services, of 1.7 per cent in professional, scientific and technical services and public administration and support services and of 1.7 per cent in defense, education, healthcare and other social services, slightly offset by increases of 1.2 per cent in arts, entertainment and recreation and repairs of household goods and other services and of 0.3 per cent in financial and monetary intermediation services, in each case, in real terms.

The following table sets forth value added by sector and the percentage of such sector of the total value added at purchasing power parity with 2005 prices.

Value Added by Sector

	2008				2009				2010				2011				2012
	€ in millions		% of Total		€ in millions		% of Total		€ in millions		% of Total		€ in millions		% of Total		€ in millions		% of Total
Agriculture, fishing and forestry		28,729		2.2		28,007		2.2		27,952		2.2		28,006		2.2		26,760		2.1
Industry		271,375		20.4		230,422		18.4		244,266		19.1		247,120		19.3		238,536		19.0
of which: manufacturing		238,470		17.9		198,986		15.9		214,249		16.8		216,430		16.9		207,914		16.5
Construction		80,021		6.0		73,300		5.8		71,018		5.6		68,585		5.3		64,261		5.1
Services		948,978		71.4		923,239		73.6		933,527		73.1		939,761		73.2		928,306		73.8
Commerce, repairs and goods for the home		149,964		11.3		132,276		10.5		139,370		10.9		141,048		11.0		138,788		11.0
Hotels and restaurants		54,889		4.1		53,867		4.3		54,228		4.2		55,573		4.3		55,809		4.4
Transport, storage and communications		133,668		10.1		130,844		10.4		132,089		10.3		130,820		10.2		126,260		10.0
Financial and monetary intermediation		72,842		5.5		75,759		6.0		79,027		6.2		79,393		6.2		79,666		6.3
Various services to families and businesses		276,659		20.8		268,457		21.4		267,105		20.9		270,214		21.1		268,287		21.3
Public administration		83,998		6.3		84,381		6.7		83,984		6.6		83,598		6.5		82,042		6.5
Education		61,524		4.6		61,258		4.9		60,941		4.8		60,862		4.7		60,806		4.8
Healthcare and other social services		71,869		5.4		72,721		5.8		72,768		5.7		73,059		5.7		70,966		5.6
Other public, social and personal services		30,735		2.3		3 0,182		2.4		30,792		2.4		31,887		2.5		32,085		2.6
Domestic services to families and civil unions		13,082		1.0		13,330		1.1		13,451		1.1		13,470		1.0		13,788		1.1
Value added at market prices		1,329,002		100.0		1,254,718		100.0		1,276,477		100.0		1,282,962		100.0		1,257,144		100.0

⁽¹⁾  Value added in this table is calculated by reference to prices of products and services, excluding any taxes on any such products.

Source: Bank of Italy.

Role of the Government in the Economy

Until the early 1990’s, State-owned enterprises played a significant role in the Italian economy. The State participated in the energy, banking, shipping, transportation and communications industries, among others, and owned or controlled approximately 45 per cent of the Italian industrial and services sector and 80 per cent of the banking sector. As a result of the implementation of its privatization program, which started in 1992 and was completed in 2009, the State exited completely the insurance, banking, telecommunications and tobacco sectors and significantly reduced its interest in the energy sector (principally through sales of shareholdings in ENI S.p.A. (“ENI”) and ENEL S.p.A. (“ENEL”) and in the defense sector (principally through sales of shareholdings in Finmeccanica S.p.A.). For additional information on the role of the Government in the Italian economy, see “Monetary System—Banking Regulation—Structure of the Banking Industry” and “Public Finance—Government Enterprises”.

Services

Transport. Italy’s transport sector has been relatively fast-growing and, during the period from 1980 to 1996, grew at more than twice the rate of industrial production growth. The expansion of the transport sector was largely the result of trade integration with European markets. Historically, motorways and railways have been controlled, directly and indirectly, by the Government, and railways in particular have posted large financial losses. In recent years, many of these enterprises have been restructured in order to place them on a sounder financial footing and/or have been privatized.

Roadways are the dominant mode of transportation in Italy. The road network includes, among others, municipal roads that are managed and maintained by local authorities, roads outside municipal areas that are managed and maintained by the State Road Board (“ANAS”) and a system of toll highways that in part are managed and maintained by several concessionaries, the largest of which is controlled by Autostrade S.p.A. (“Autostrade”), which was privatized in 1999.

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Italy’s railway network is small in relation to its population and land area. Approximately 30 per cent of the network carries 80 per cent of the traffic, resulting in congestion and under-utilization of large parts of the network. At December 31, 2012, there were 24,277 kilometers of railroad track, of which a large majority are controlled by State-owned railways, with the remainder controlled by private firms operating under concession from the Government. In 2011 (date for which data are available), Italian railways carried 19.7 billion tons-km of freight, compared to 18.6 in 2010 and recorded 45.9 billion passengers-km, to 43.3 in 2010.

In response to EU directives and the intervention by the Italian Antitrust Authority (Autorità Garante della Concorrenza e del Mercato), since March 1999 Italy has been implementing a plan aimed at preparing Italy’s railways for competition. Italy liberalized railway transportation by creating two separate legal entities wholly owned by Ferrovie dello Stato Italiane S.p.A. (“FS”): Trenitalia S.p.A., managing the transportation services business, and Rete Ferroviaria Italiana S.p.A. (“RFI”), managing railway infrastructure components and the efficiency, safety and technological development of the network.

In 1992, the Italian State railway company was converted from a public law entity into a commercial State-owned corporation, FS, with greater autonomy over investment, decision-making and management. In 2012, FS’s revenues amounted to €8,228 million compared to €8,264 million in 2011 and its net profit equaled €381 million compared to €285 million in 2011.

Projects for the construction of new high-speed train systems (Treno ad alta velocità or “TAV”) linking the principal urban centers of Italy with one another and with neighboring European countries, as well as other infrastructure projects designed to upgrade the railway network, are under way or, in some cases, have been completed. The corridors of Milano-Bologna-Rome-Naples and Milano-Novara have been completed. Starting from the end of April 2012, Nuovo Trasporto Viaggiatori S.p.A. brought competition to FS through “Italo”, another high-speed train that started serving the Milano-Bologna-Rome-Naples corridor.

Alitalia, which used to be Italy’s national airline, was sold in 2008 and as a result Italy no longer owns an interest in any air carrier.

Communications. In 1997, the Italian Parliament enacted legislation to reform the telecommunications market to promote competition in accordance with EU directives. This legislation permits companies to operate in all sectors of the telecommunications market, including radio, television and telephone, subject to certain antitrust limitations, and provides for the appointment of a supervisory authority. The Italian Telecommunication Authority (Autorità per le Garanzie nelle Comunicazioni, or “AGCOM”), consists of eight members appointed by the Italian Parliament and a president appointed by the Government. It is responsible for issuing licenses and has the power to regulate tariffs and impose fines and other sanctions. Each fixed and mobile telephony operator must obtain an individual license, which is valid for 15 years and is renewable.

Italy’s telecommunications market is one of the largest in Europe. At December 31, 2011, the ratio of total active mobile telephone lines to Italy’s population was approximately 195 per cent. The telecommunications market was deregulated in January 1998 and while Telecom Italia, which was privatized in 1997, remains the largest operator, it is facing increasing competition from new operators that have been granted licenses for national and local telephone services. Competition among telecommunications operators has resulted in lower charges and a wider range of services offered. In January 2000, access to local loop telephony was liberalized. Telecom Italia Mobile (“TIM”) remains the largest mobile operator, followed by Vodafone Italia (controlled by the Vodafone Group), Wind, Fastweb, H3G and BT Italia.

Internet and personal computer penetration rates in Italy have grown substantially in recent years. The ratio of personal computers to households increased from 58.8 per cent in 2011 to 59.3 per cent in 2012, while the percentage of households having an internet connection increased from 54.5 per cent in 2011 to 55.5 per cent in 2012 and the percentage of households having a broadband connection increased from 45.8 per cent in 2011 to 48.6 per cent in 2012.

Tourism. Tourism is an important sector of the Italian economy. In 2012, tourism revenues, net of amounts spent by Italians traveling abroad, were approximately €11.5 billion. Spending by Italian tourists abroad in 2012 decreased by 0.3 per cent, compared to an increase of 0.8 per cent in 2011.

Financial Services. The percentage of domestic investment of households allocated to Italian shares and investment fund units amounted to approximately 23.4 per cent at the end of 2012, compared to 22.4 per cent in 2011. Historically, a significant portion of Italy’s domestic investment has been in public debt.

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The general Italian share price index increased by 10 per cent in 2012 compared with an average increase of 15 per cent in the main euro-area index. The pattern over the year paralleled the sovereign debt crisis. After rising in the early part of the year, share prices turned down in March and then rose again from the end of July onwards following the announcement by the President of the ECB that European authorities were determined to dispel fears about the reversibility of the monetary union.

Italian household indebtedness as a percentage of disposable income rose slightly from 65 per cent at the end of 2011 to 66 per cent at the end of 2012, which is a fairly low level by international standards. Lending to residents by banks operating in Italy, decreased by 0.5 per cent in 2012 compared with an increase of 3.4 per cent in 2011. For additional information on the Italian banking system, see “Monetary System—Banking Regulation”.

Manufacturing

In 2012, the manufacturing sector represented 15.5 per cent of GDP and 17.7 per cent of total employment. In 2012, manufacturing output decreased by 3.9 per cent from 2011, compared to a 1.0 per cent increase in 2011 from 2010.

Italy has compensated for its lack of natural resources by specializing in transformation and processing industries. Italy’s principal manufacturing industries include metal products, precision instruments and machinery, textiles, leather products and clothing, wood and wood products, paper and paper products, food and tobacco, chemical and pharmaceutical products and transport equipment, including motor vehicles.

The number of large manufacturing companies in Italy is small in comparison to other European Union countries. The most significant include Fiat (automobiles and other transportation equipment), Finmeccanica (defense, aeronautics, helicopters and space), Riva (Steel), Luxottica (eyeglasses), Pirelli (tires and industrial rubber products) and Barilla (food). These companies export a large proportion of their output and have significant market shares in their respective product markets in Europe.

Much of Italy’s industrial output is produced by small and medium-sized firms, which also account for much of the economic growth over the past 20 years. These firms are especially active in light industries (including the manufacture of textiles, clothing, food, shoes and paper), where they have been innovators, and export a significant share of their production. The profit margins of large manufacturing firms, however, have generally been higher than those of their smaller counterparts. Various government programs (in addition to EU programs) to support small firms provide, among other things, for loans, grants, tax allowances and support to venture capital entities.

Traditionally, investments in research and development (“R&D”) have been very limited in Italy. Total and corporate R&D spending has continued to be proportionally lower in Italy than in other industrialized countries, reflecting the Italian industry’s persistent difficulty in closing the technology gap with other advanced economies. Total R&D spending in Italy was 1.3 per cent of GDP in 2011 (the most recent year for which data is available), compared to 2.8 per cent in Germany and 1.9 per cent in the EU.

The following table shows the growth by sector of indexed industrial production for the years indicated.

Industrial Production by Sector (Index: 2010 = 100)

	2008		2009		2010		2011		2012
Food and tobacco		99.1		98.1		100.0		98.1		97.5
Textiles, clothing and leather		106.2		94.3		100.0		96.4		89.3
Wood, paper and printing		114.9		98.4		100.0		97.9		89.1
Coke and refinery		106.9		96.7		100.0		96.1		90.4
Chemical products		106.8		92.8		100.0		96.1		91.3
Pharmaceutical products		98.9		98.8		100.0		100.6		99.8
Rubber, plastic materials and non-ferrous minerals		123.1		97.7		100.0		100.1		91.3
Metals and ferrous products		129.0		91.0		100.0		104.5		96.6
Electronic and optic materials		103.2		92.6		100.0		96.6		87.6
Electric appliances for households		122.2		87.5		100.0		94.4		83.3
Machinery and equipment		128.2		85.6		100.0		108.0		104.0
Transport means		126.8		94.5		100.0		98.3		87.9
Other industrial products		107.9		91.2		100.0		102.4		93.1
Aggregate Index		115		93.5		100.0		100.3		94.2

Source: Bank of Italy.

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Energy Consumption

Energy consumption, measured in terms of millions of tons of oil equivalent, or “MTOE”, decreased by 3.5 per cent in 2012 compared to a decrease of approximately 2 per cent in 2011. In 2012 (in MTOE), oil represented 35.8 per cent of Italy’s energy consumption compared to 37.5 per cent in 2011, natural gas represented 34.5 per cent of Italy’s energy consumption compared to 34.6 per cent in 2011, renewable energy resources represented 15.1 per cent of Italy’s energy consumption compared to 13.3 per cent in 2011, solid combustibles represented 9.3 per cent of Italy’s energy consumption compared to 9 per cent in 2011, and net imported electricity represented 5.3 per cent of Italy’s energy consumption compared to 5.5 per cent in 2011. In 2012, Italy’s production (in MTOE) of oil, natural gas, renewable energy and solid combustibles represented over 20 per cent of the national energy consumption; the remaining approximately 80 per cent was represented by imports, mainly of oil and natural gas. (Source: Terna S.p.A. and Autorita per l’Energia Elettrica e il Gas.)

The Italian energy sector is governed by regulations that aim to promote competition at the production, transport and sales level. The Electricity and Gas Authority (Autorità per l’Energia Elettrica e il Gas) regulates electricity and natural gas activities, with the aim of promoting competition and service quality; it has significant powers, including the power to establish tariffs. Italy’s domestic energy industry includes several major companies in which the Government holds an interest.

ENI is the largest oil and gas company in Italy and is engaged in the exploration, development and production of oil and natural gas in Italy and abroad, the refining and distribution of petroleum products, petrochemical products, the supply, transmission and distribution of natural gas and oil field services contracting and engineering. As of December 2012, the Ministry of Economy and Finance held approximately 4.34 per cent of the share capital of ENI directly and 25.76 per cent through Cassa Depositi e Prestiti S.p.A. (“CDP”). ENI is a profitable public company and pays dividends regularly. While several companies operate in the gas distribution market, during 2009 natural gas sales by ENI accounted for approximately 51 per cent of domestic consumption.

ENEL is the largest electricity company in Italy and is engaged principally in the generation, importation and distribution of electricity. As of December 2012, the Ministry of Economy and Finance held approximately 31.24 per cent of ENEL’s share capital directly. ENEL is a profitable public company and pays dividends regularly.

CDP is a privately held corporation in which the Ministry of Economy and Finance owns approximately 80.1 per cent of the share capital. CDP is engaged in the financing of investments in the public sector, i.e., of the state, the regions, the provinces and the city administrations and other public bodies. For additional information regarding CDP, see “Public Debt—Public Debt Management”. CDP also holds approximately 30 per cent of the share capital of Terna S.p.A. (“Terna”). Formerly owned by ENEL, Terna is a profitable public company that pays dividends regularly, which owns and operates a major portion of the transmission assets of Italy’s national electricity grid.

Construction

In 2012, construction represented 9.8 per cent of GDP and 7.2 per cent of total employment. Investment in construction (characterized, as in the past, by more persistent cyclical fluctuation), continued to contract in all sectors of the economy. Housing transactions, which had declined by over 25 per cent during the recession, dropped by 25.8 per cent, continuing the downward trend that began after the peak in 2006. House prices decreased by 2.7 per cent; in real terms the decline was 5.5 per cent, bringing the total downward correction from the 2007 peak to 11.0 per cent. Investment in non-residential construction decreased by 8.8 per cent in 2012, continuing the downtrend under way since 2007, partly due to the poor performance of public works as a result of tight budget constraints.

Agriculture, Fishing and Forestry

In 2012, agriculture, fishing and forestry decreased by 4.4 per cent compared to 2011 and accounted for 2.0 per cent of GDP and 3.8 per cent of total employment. Agriculture’s share of Italian GDP has generally declined with the growth of industrial output since the 1960s. Italy’s average farm size remains less than half the European Union average. Italy is a net importer of all categories of food except fruits and vegetables. The principal crops are wheat (including the durum wheat used to make pasta), maize, olives, grapes and tomatoes. Cereals are grown principally in the Po valley in the north and in the southeastern plains, olives are grown principally in central and southern Italy and grapes are grown throughout the country.

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Employment and Labor

General. Job creation has been and continues to be a key objective of the Government. Employment, as measured by the average number of standard labor units employed during the year, decreased by approximately 1.1 per cent in 2012 after increasing 0.1 per cent in 2011. A standard labor unit is the amount of work undertaken by a full-time employee over the year and is used to measure the amount of work employed to produce goods and services.

The unemployment rate in Italy was 10.7 per cent in 2012, an increase of 2.3 per cent compared to 8.4 per cent 2011. In the euro area, the average unemployment rate was 11.4 per cent in 2012 compared to 10.2 per cent in 2011. The participation rate (i.e. the rate of employment for the Italian population between the ages of 15 and 64) was 63.7 per cent in 2012 compared to 62.2 per cent in 2011.

The following table shows the change in total employment, labor market participation rate and unemployment rate for each of the periods indicated.

Employment

	2008			2009			2010			2011		2012
Employment in standard labor units (% change on prior year)		(0.3	)		(2.9	)		(0.7	)		0.1		(1.1	)
Participation rate (%)(1)		63.0			62.4			62.2			62.2		63.7
Unemployment rate (%)(2)		6.7			7.8			8.4			8.4		10.7

⁽¹⁾  Participation rate is the rate of employment for the population between the ages of 15 and 64.

⁽²⁾  Unemployment rate does not include workers paid by Cassa Integrazione Guadagni, or Wage Supplementation Fund, which compensates workers who are temporarily laid off or who have had their hours cut.

Source: Bank of Italy.

Employment by sector. In 2012, approximately 70.1 per cent were employed in the service sector, 19 per cent were employed in the industrial sector (excluding construction), 7.2 per cent were employed in the construction sector and 3.8 per cent were employed in the agriculture, fishing and forestry sector.

Employment by geographic area and gender. Unemployment in southern Italy has been persistently higher than in northern and central Italy. The unemployment rate in northern and central Italy was 8 per cent, evidencing an increase of 1.7 percentage points compared to 2011. In southern Italy, unemployment increased from 13.6 per cent in 2011 to 17.2 in 2012. In 2012, the unemployment rate of females in Italy was 11.9 per cent, an increase of 2.3 percentage points compared to 2011. In 2012, the unemployment rate of males in Italy was 9.9 per cent, an increase of 2.3 percentage points compared to 2011. The participation rate of women increased from 48.5 per cent in 2000 to 53.5 per cent in 2012, while the participation rate of men increased from 73.6 per cent in 2000 to 73.9 per cent in 2012.

Employment of the population between the ages 15-24. The unemployment rate of the population in Italy between ages of 15-24 increased steadily from 21.3 per cent in 2008 to 35.3 per cent in 2012 (an increase of 6.2 per cent compared to 2011). The unemployment rate of the population between ages of 15-24 in the euro area increased from 16.0 per cent in 2008 to 23.1 per cent in 2012.

The following table shows the unemployment rate of the population between ages of 15-24 in Italy and the euro area for the periods provided.

Unemployment of the Population aged 15-24 (2008-2012)

	2008		2009		2010		2011		2012
Italy		21.3		25.4		27.8		29.1		35.3
Euro area(1)		16.0		20.3		20.9		20.8		23.1

⁽¹⁾  The euro area represents the countries participating in the EMU, including Italy.

Source: Eurostat and Istat.

Government programs and regulatory framework. The Government has adopted a number of programs aimed at correcting the imbalances in employment, particularly between southern Italy and the rest of the country, and reducing unemployment. Recently, as part of the stimulus packages for the economy, during 2008-2012, additional measures and incentives were adopted. For additional information on these measures and incentives, see “—Measures to Address the Global Financial and Economic Crisis”, Exhibit 2—2013 Stability Programme and Exhibit 3—2013 National Reform Programme.

Through the Cassa Integrazione Guadagni (“CIG”), or Wage Supplementation Fund, the Government guarantees a portion of the wages of workers in the industrial sector that are temporarily laid off or who have had their working hours reduced. Workers laid off permanently as a consequence of restructuring or

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other collective redundancies are entitled to receive unemployment compensation for a period of 24 months, which is extendable for up to three years for workers nearing retirement age. The number of hours of work paid through CIG increased from 974 million in 2011 to approximately 1,090 million in 2012. As in previous years, protracted uncertainty prompted firms to take the precaution of applying for more hours than they actually used. Nevertheless, firms actually used less than half of the total benefit hours authorized by the Istituto Nazionale Previdenza Sociale (“INPS”) (in line with the 49 per cent recorded in 2011).

Prices and Wages

Wages. Unit labor costs have historically been lower in Italy, on average, than in most other European countries. This is due to lower average earnings per employee, combined with lower productivity levels.

Actual earnings per full-time equivalent employee slowed for the second year running, from 1.3 to 1.0 per cent in nominal terms for the entire economy, the lowest rate since 1993. The slowdown was accounted for by the private sector (where gains decreased from 2.0 per cent to 1.6 per cent), with wage growth in industry excluding construction (decreasing from 2.6 per cent to 2.1 per cent), private services (decreasing from 1.4 per cent to 1.1 per cent) and in construction (decreasing from 2.9 per cent to 2.1 per cent). Wage growth mandated by industry-wide collective bargaining agreements signed in 2011 were generally in line, adjusted for the recouping of inflation during previous contracts, with the rise in the price index. Unit labor costs increased by 20 per cent in 2012 after increasing by 0.9 per cent in 2011. In 2012, unit labor costs rose by 3.6 per cent in industry excluding construction and rose by 2.4 per cent in the private sector.

Prices. The European Union harmonized consumer price index (HICP) reflects the change in price of a basket of goods and services taking into account all families resident in a given territory. In 2012, the inflation rate in the euro area as measured by the European Union harmonized consumer price index (HICP) was 3.3 per cent, compared to 2.9 per cent in 2010. Since Italy’s entry into the EMU in 1999, monetary policy decisions are made for all euro zone countries by the European Central Bank. For additional information on monetary policy in the euro zone, see “Monetary System—Monetary Policy”.

Inflation in Italy, as measured by the index of consumer prices for the entire resident population, increased from an average of 2.8 per cent in 2011 to 3.0 per cent in 2012, owing entirely to higher indirect taxes. Energy goods registered the largest price increases, averaging 13.9 per cent for the year compared with 11.3 per cent in 2011. The acceleration was due entirely to the increases in indirect taxes on fuels enacted in 2011. Italian inflation, net of this component, due to energy costs and measured by the GDP deflator, increased from 1.3 per cent in 2011 to 1.6 per cent in 2012.

The following table illustrates trends in prices and wages for the periods indicated.

Prices and Wages (in %)

	2008		2009		2010			2011		2012
Cost of Living Index(1)		3.2		0.7		1.6			2.7		3.0
EU Harmonized Consumer Price Index(1)		3.5		0.8		1.6			2.9		3.3
Core Inflation Index(2)		2.8		1.6		1.5			1.9		1.7
Change in unit labor costs(3)		4.9		5.7		(0.7	)		0.8		1.8

⁽¹⁾  The cost of living index reflects the change in price of a basket of goods and services (net of tobacco) typically purchased by non-farming families headed by an employee. It differs from the harmonized consumer price index in that the cost of living index is smaller in scope.

⁽²⁾  The basket of goods and services used to measure the core inflation index is equivalent to the harmonized consumer price index basket less energy, unprocessed food, alcohol and tobacco products.

⁽³⁾  Unit labor costs are per capita wages reduced by productivity gains.

Source: Bank of Italy.

Social Welfare System

Italy has a comprehensive social welfare system, including public health, public education and pension, disability and unemployment benefits programs, most of which are administered by the Government or by local authorities receiving Government funding. These social services are funded in part by contributions from employers and employees and in part from general tax revenues. They represent the largest single government expenditure. For additional information on Government revenues and expenditures, see “Public Finance—Revenues and Expenditures”.

Social benefits in cash include expenditures for pensions, disability and unemployment benefits. The two principal social security agencies for private sector employees, INPS and the Istituto Nazionale

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Assicurazioni e Infortuni sul Lavoro (“INAIL”), provide old-age pensions and temporary and permanent disability compensation for all the employees of the private sector and their qualified dependents and coverage for accidents in the workplace or permanent disability as a consequence of employment for workers of the industrial and agricultural sectors and for certain service sector employees. The social security entity for government employees, the Istituto Nazionale di Previdenza per i Dipendenti dell’Amministrazione Pubblica (“INPDAP”), provides similar services.

Old-age pensions in Italy, as in much of the developed world, continue to present a significant structural fiscal problem. Controlling pension spending is a particularly important Government objective given Italy’s aging population. Beginning in 1992, the Government adopted several measures designed to control the growth of pension expenditures. The Government adopted additional pension reforms in 1995, 2004 and 2007. Then in each of 2009, 2010 and 2011, the Government adopted further reforms of the pension system. For additional information on these pension reforms, see Exhibit 2—2013 Stability Programme and Exhibit 3—2013 National Reform Programme. The new rules introduced by these reforms significantly change the pension system, contributing to improving the pension system’s sustainability in the medium to long-term and guaranteeing greater equity among generations.

• In July 2009, the Italian Parliament adopted a law to equalize the pension age of men and women in the public sector. This law gradually raised the retirement age of women employed in the public sector from 60 to 65. From 2010, the retirement age of women would increase to 61, and then it would increase by one year every two years until 2018 when the retirement age of both men and women working for the public sector would be 65. Until the end of 2009, women were able to retire at 60 and men at 65. The law also contemplated a revision every five years with effect from 2015 to the retirement age of men and women in both the public and private sectors, in order to reflect any increase in the average length of life expectancy as certified by ISTAT.

• Law Decree No. 78 of 2010 increased the age requirement for women working in the public sector from 60 in 2009 to 61 years for 2010-2011 and set 2012 as the year that the retirement age for men and women working in the public sector will converge at 65. Law Decree No. 78 of 2010 also provides that pension benefits for all new retirees will be deferred 12 months for employees and 18 months for self-employed individuals. Law Decree No. 78 of 2010 permits early retirement when (i) a person has made pension contributions for at least 40 years (without regard to the person’s age) or (ii) when a person has made pension contributions for at least 35 years and is at least 60 years old as of 2010 or 62 years old as of 2013 in the case of employees, or 61 years old as of 2010 or 63 years old as of 2013 in the case of self-employed individuals. The age requirement is reduced by one year if the worker has made contributions for at least 36 years. Law Decree No. 78 of 2010 requires that age requirements be adjusted every three years consistent with changes to the average life expectancy at the age of 65 as determined by ISTAT.

• Law Decree No. 98 of 2011 and Law Decree No. 138 of 2011 further increased age requirements. From 2014, the age requirement of women working in the private sector will be gradually increased from 60 to 65 so as to align it with that of men by 2026. For pensioners seeking early retirement that have made 40 years of pension contributions, regardless of age requirements, new measures establish a further postponement of receiving early retirement benefits.

On June 28, 2012, the Government approved Law No. 92 of June 28, 2012, which included reforms aimed at reducing labor costs. In particular, the reforms aim to create a dynamic, flexible and inclusive labor market, i.e. one that is able to contribute to the economic and social development of Italy and stimulate competitiveness and job creation. The most significant of these reforms include:

• the reform of employment termination programs (ammortizzatori sociali). Starting from January 1, 2013, the Social Insurance for Labor (Assicurazione Sociale per l’Impiego) will begin to provide, under certain conditions, workers that have lost their jobs with unemployment benefits (indennità di disoccupazione);

• the promotion of increased labor flexibility with amendments to article 18 of Law No. 300 of May 20, 1970, as subsequently amended, which would increase the circumstances under which employers could lay off employees for economic reasons;

• amendments to certain types of employment contracts (e.g., fixed duration and apprenticeship/training employment contracts) in order to contribute to increased job creation, particularly in the case of young people, and to eliminate the diversity among such kinds of employment contracts; and

• the reorganization of labor court procedures, in order to reduce the duration of trials.

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These reforms aim to create an inclusive and dynamic labor market that can support high levels of employment and high quality jobs through, inter alia, encouraging more stable employment relationships and reaffirming the importance of permanent employment contracts (contratti a tempo indeterminato) as the common form of employment relationship.

The following table shows the public expenditure for pensions as a percentage of GDP based upon the implementation of the various reforms mentioned above.

Pension Expenditure (as a % of GDP)

	2010		2015		2020		2025		2030		2035		2040		2045		2050		2055		2060
Current Legislation		15.3		16.1		15.6		15.2		15.2		15.8		16.1		16.3		15.9		15.1		14.6

Source: Ministry of Economy and Finance

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MONETARY SYSTEM

The Italian financial system consists of banking institutions such as commercial banks, leasing companies, factoring companies and household finance companies, as well as non-bank financial intermediaries such as investment funds, portfolio management companies, securities investment firms, insurance companies and pension funds.

Monetary Policy

The Eurosystem and the European System of Central Banks. As of January 1, 1999, which marked the beginning of Stage III of the European Economic and Monetary Union, the 11 countries joining the EMU officially adopted the euro, and the Eurosystem became responsible for conducting a single monetary policy. Greece and Slovenia joined the EMU on January 1, 2001 and January 1, 2007, respectively. Cyprus and Malta joined the EMU on January 1, 2008 and Slovakia on January 1, 2009. Estonia adopted the euro beginning on January 1, 2011.

The European System of Central Banks (“ESCB”) consists of the ECB, established on June 1, 1998, and the national central banks of the EU Member States. The Eurosystem consists of the 17 national central banks in the euro area and the ECB. So long as there are EU Member States that have not yet adopted the euro (currently Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden and the United Kingdom), there will be a distinction between the 17-country Eurosystem and the 28-country ESCB. The ten national central banks of non-participating countries do not take part in the decision-making of the single monetary policy; they maintain their own national currencies and conduct their own monetary policies. The Bank of Italy, as a member of the Eurosystem, participates in Eurosystem decision-making.

The Eurosystem is principally responsible for:

• defining and implementing the monetary policy of the euro area, including fixing rates on the main refinancing lending facility (regular liquidity-providing reverse transactions with a weekly frequency and a maturity of two weeks, executed by the national central banks on the basis of standard tenders), the marginal lending facility (overnight liquidity facility provided to members of the Eurosystem by the national central banks against eligible assets, usually with no credit limits or other restrictions on access to credit) and the deposit facility (overnight deposit facility with the national central banks available to members of the Eurosystem, usually with no deposit limits or other restrictions);

• conducting foreign exchange operations and holding and managing the official foreign reserves of the euro area countries;

• issuing banknotes in the euro area;

• promoting the smooth operation of payment systems; and

• cooperating in the supervision of credit institutions and the stability of the financial system.

The ESCB is governed by the decision-making bodies of the ECB which are:

• the Executive Board, composed of the President, Vice-President and four other members, responsible for implementing the monetary policy formulated by the Governing Council;

• the Governing Council, composed of the six members of the Executive Board and the governors of the 17 national central banks, in charge of implementing the tasks assigned to the Eurosystem and formulating the euro area’s monetary policy; and

• the General Council, composed of the President and the Vice-President of the ECB and the governors of the 28 national central banks of the EU Member States. The General Council contributes to the advisory functions of the ECB and will remain in existence as long as there are EU Member States that have not adopted the euro.

The ECB is independent of the national central banks and the governments of the Member States and has its own budget, independent of that of the EU; its capital is not funded by the EU but has been subscribed and paid up by the national central banks of the Member States that have adopted the euro, pro-rated to the GDP and population of each such Member State. The ECB has exclusive authority for the issuance of currency within the euro area. As of July 1, 2013, the ECB had subscribed capital of approximately €10.8 billion and paid up capital of approximately €7.5 billion.

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On December 16, 2010, the ECB decided to increase its subscribed capital to the current amount, following an assessment of the adequacy of statutory capital conducted in 2009. The capital increase was deemed appropriate by the ECB in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk. At December 31, 2012, the Bank of Italy had subscribed for approximately €1.3 billion, fully paid up, based on the capital key used to calculate each of the euro area national central banks’ subscription to the capital of the ECB, which in the case of Italy is equal to 12.5 per cent.

The Bank of Italy. The Bank of Italy, founded in 1893, is the banker to the Treasury and had historically been the lender of last resort for Italian banks prior to the onset of the European sovereign debt crisis. It supervises and regulates the Italian banking industry and operates services for the banking industry as a whole. It also supervises and regulates non-bank financial intermediaries. At December 31, 2012, the Bank of Italy had assets of approximately €609 billion, held gold in the amount of approximately €99.4 billion (including gold receivables) and reserves of approximately €22.5 billion.

The ECB’s Monetary Policy. The primary objective of the ESCB is to preserve the euro’s purchasing power and consequently to maintain price stability in the euro area. In October 1998, the Governing Council announced the ECB monetary strategy and provided a quantitative definition of price stability, which has been defined as an annual increase in the European Union harmonized consumer price index (HICP) for the euro area of below 2 per cent. Despite short-term volatility, price stability is to be maintained over the medium term. Moreover, in order to assess the outlook for price developments and the risks for future price stability, a two-pillar approach was adopted by the ECB: monetary analysis and economic analysis.

The first pillar, monetary analysis, focuses on a longer term horizon than the economic analysis. It mainly serves as a means of cross-checking, from a medium to long-term perspective, the short to medium-term indications for monetary policy coming from the economic analysis. Monetary analysis assigns a prominent role to money supply, the growth rate of which is measured through three monetary aggregates, a narrow monetary aggregate (M1), an intermediate monetary aggregate (M2) and a broad monetary aggregate (M3). These aggregates differ with regard to the degree of liquidity of the assets they include. M1 comprises currency (banknotes and coins) and overnight deposits, which can immediately be converted into currency or used for cashless payments. M2 comprises M1 and deposits with an agreed maturity of up to and including two years or redeemable at a period of notice of up to and including three months. These deposits can be converted into M1 components, subject to certain restrictions such as the need for advance notice, penalties and fees. M3 comprises M2 as well as repurchase agreements, debt securities of up to two years, money market fund shares and money market paper. These additional instruments have a higher degree of liquidity and price certainty, which make them close substitutes for deposits. As a result, M3 is less affected by substitution between various liquid asset categories and is more stable than narrower (M1 and M2) money.

In December 1998, the Governing Council set the first quantitative reference value for M3 growth, at an annual growth rate of 4.5 per cent. This reference value was confirmed by the Governing Council in 1999, 2000, 2001 and 2002. On May 8, 2003, the Governing Council decided to stop its practice of reviewing the reference value annually, given its long-term nature.

The second pillar consists of a broad assessment of the outlook for price developments and the risks to price stability in the euro area and is made in parallel with the analysis of M3 growth in relation to its reference value. This assessment encompasses a wide range of financial market and other economic indicators, including developments in overall output, demand and labor market conditions, a broad range of price and cost indicators, fiscal policy and the balance of payments for the euro area as well as the production and review of macroeconomic projections.

Based on a thorough analysis of the information provided by the two pillars of its strategy, the Governing Council determines monetary policy aiming at price stability over the medium term.

The ECB’s monetary and exchange rate policy is aimed at supporting general and economic policies in order to achieve the economic objectives of the EU, including sustainable growth and a high level of employment without prejudice to the objective of price stability.

ECB Money Supply and Credit. In 2008, as a result of lower interest rates and investor preference for liquid assets, the growth in the M3 money supply in the euro area diminished steadily to a twelve-month rate of 5.1 per cent in March 2009. In 2009, the twelve-month rate of growth in the M3 monetary aggregate diminished steadily and from the final part of the year was negative for the first time since the launch of the third phase of European Monetary Union (-0.3 per cent in December and -0.1 per cent in March 2010, compared with 7.6 per cent growth at the end of 2008). The slowdown reflected reallocation from the less liquid monetary assets included in M3 towards long-term securities in a context characterized by a steep yield

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curve. Households gradually reduced the rate at which they were accumulating deposits included in M3, while non-financial companies began rebuilding reserves of liquidity from the second half onwards, in concomitance with the gradual improvement in the economic outlook. The M3 growth rate declined to 1.7 per cent in December 2010. The twelve-month rate of growth of bank loans to the private sector, which held steady at around 2.8 per cent through October 2011, fell rapidly in the last two months of the year to 1.3 per cent in December 2011 and remained at that level in the first quarter of 2012 (1.2 per cent in March 2012). This pattern reflects the trend in lending to households and above all to non-financial corporations, whose three-month growth rate began declining rapidly in the third quarter of 2011 and turned negative in December 2011 (-2.5 per cent on a seasonally adjusted annual basis) before recovering in March 2012. The three-month rate of growth of loans to households also diminished in the course of 2011 but remained positive (1.3 per cent in December 2011).

The twelve-month rate of growth in the M3 money was very modest throughout 2011, falling to 1.5 per cent in December 2011. The persistently slow expansion of the money supply reflects the contraction in the countries that were most severely affected by financial tensions, with declining bank deposits of firms as credit conditions tightened, a reduction in collateralized interbank transactions through central counterparties and, in some countries, a shift of funds from monetary to other financial assets. In those countries least affected by the financial crisis, however, M3 expanded.

The behavior of the broad monetary aggregate M3 and of its components during 2012 was affected by the weakness of economic activity and by portfolio shifts in response to the decline in yields. M3’s rate of expansion rose, though remaining moderate (3.5 per cent in December, as against 1.6 per cent at the end of 2011). The acceleration chiefly involved very-short-term deposits, whose growth was sustained by a strong preference for liquidity on the part of all money-holding sectors in a setting of low interest rates and acute uncertainty on the financial markets. The disparity of national contributions to the growth of euro-area M3 diminished markedly in the final part of 2012, due to the gradual recovery in the money supply in the countries most exposed to the crisis, where it had contracted sharply in the preceding months.

ECB Interest Rates. As a result of the global economic slowdown in 2001 and the weakness of the economy in the euro area in 2002 and the first half of 2003, the Governing Council progressively lowered interest rates by a total of 275 basis points, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities reaching 2.00 per cent, 3.00 per cent and 1.00 per cent, respectively, in June 2003. These rates remained unchanged until December 2005. The Governing Council of the ECB determined that given the euro area’s monetary and credit growth, upside risks to price stability over the medium term prevailed. The euro area experienced sustained economic growth from 2006 through the first quarter of 2008 and the Governing Council raised interest rates on several occasions during 2006, 2007 and 2008, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities reaching 4.25 per cent, 5.25 per cent and 3.25 per cent, respectively, in July 2008. During the last quarter of 2008 and the first half of 2009, as a result of the crisis in the banking system, the recession in the global economy and diminishing inflation, the Governing Council reduced interest rates on several occasions, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities reaching 1.00 per cent, 1.75 per cent and 0.25 per cent, respectively, in May 2009. In April 2011 and again in July 2011, the Governing Council, having considered that the pace of monetary expansion was gradually recovering, while monetary liquidity remained ample and could accommodate price pressures, lowered the interest rates, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities reaching 1.50 per cent, 2.25 per cent and 0.75 per cent, respectively. In November 2011, December 2011, July 2012 and again in May 2013, the Governing Council lowered the interest rates, with interest rates on minimum bid rate on main refinancing operations, marginal lending and deposit facilities reaching 0.50 per cent, 1.00 per cent and 0.00 per cent, respectively. The Governing Council explained that these reductions in key ECB interest rates were the result of inflationary pressures dampening further as several of the previously identified downside risks to the euro area growth outlook materialized.

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The following table shows the movement in the interest rate on main refinancing operations and on marginal lending and deposit facilities from 2008 to the date of this Annual Report.

			Main Refinancing Operations
Effective date	Deposit Facility % interest rate		Fixed rate tenders		Variable rate tenders  – minimum bid rate		Marginal lending facility % interest rate
2008
July 9		3.25		—		4.25		5.25
October 8		2.75		—		—		4.75
October 9		3.25		—		—		4.25
October 15		3.25		3.75		—		4.25
November 12		2.75		3.25		—		3.75
December 10		2.00		2.50		—		3.00
2009
January 21		1.00		2.00		—		3.00
March 11		0.50		1.50		—		2.50
April 8		0.25		1.25		—		2.25
May 13		0.25		1.00		—		1.75
2010
—		—		—		—		—
2011
April 13		0.50		1.25		—		2.00
July 13		0.75		1.50		—		2.25
November 9		0.50		1.25		—		2.00
December 14		0.25		1.00				1.75
2012
July 11		0.00		0.75		—		1.50
2013
May 8		0.00		0.50		—		1.00

Source: European Central Bank

Exchange Rate Policy

Under the Maastricht Treaty, the ECB and ECOFIN are responsible for foreign exchange rate policy. The EU Council formulates the general orientation of exchange rate policy, either on the recommendation of the Commission, following consultation with the ECB, or on the recommendation of the ECB. However, the EU Council’s general orientation cannot conflict with the ECB’s primary objective of maintaining price stability. The ECB has exclusive authority for effecting transactions in foreign exchange markets.

Banking Regulation

Regulatory Framework. Italian banks fall into one of the following categories:

• joint stock banks; or

• co-operative banks.

Pursuant to the principle of “home country control”, non-Italian EU banks may carry out banking activities and activities subject to “mutual recognition” in Italy within the framework set out by EU Directive No. 2006/48/EC and Directive No. 2006/49/EC (collectively known as Capital Requirements Directive, or CRD 1), as amended by Directive 2009/27/EC, Directive 2009/83/EC and Directive 2009/111/EC (collectively known as CRD 2), and by Directive 2010/76/EU (known as CRD 3). Under the principle of “home country control”, a non-Italian EU bank remains subject to the regulation of its home-country supervisory authorities. It may carry out in Italy those activities described in the aforesaid directives that it is permitted to carry out in its home country, provided the Bank of Italy is informed by the entity supervising the non-Italian EU bank. Subject to certain authorization requirements, non-EU banks may also carry out banking activities in Italy.

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Deregulation and Rationalization of the Italian Banking Industry. Historically, the Italian banking industry was highly fragmented and characterized by high levels of State ownership and influence. During the 1980s, Italian banking and European Community authorities began a process of deregulation. The principal components of deregulation at the European level are set forth in EU Directives and provide for:

• the free movement of capital among member countries;

• the easing of restrictions on new branch openings;

• the range of domestic and international services that banks are able to offer throughout the European Union; and

• the elimination of limitations on annual lending volumes and loan maturities.

The effect of the deregulation, in the context of the implementation of the EU Directives, has been a significant increase in competition in the Italian banking industry in virtually all bank and bank-related services.

The Consolidated Banking Law. In 1993, the Consolidated Banking Law consolidated most Italian banking legislation into one statute. Provisions in the Consolidated Banking Law relate, inter alia, to the role of supervisory authorities, the definition of banking and related activities, the authorization of banking activities, the scope of banking supervision, special bankruptcy procedures for banks and the supervision of financial companies. Banking activities may be performed by banks, without any restriction as to the type of bank. Furthermore, subject to their respective bylaws and applicable regulations, banks may engage in all the business activities that are integral to banking.

The Draghi Law. The Draghi Law (Legislative Decree No. 58 of February 24, 1998) entered into force in 1998 and introduced a comprehensive regulation of investment services, securities markets and publicly traded companies. While the Draghi Law did not significantly amend Italian legislation governing the banking industry, it is generally applicable to Italian publicly traded companies and it has implemented the EU directives on securities. In particular, the Draghi Law introduced a comprehensive regulation of investment services and collective investment management which applies to banks, investment firms and asset managers.

Directive 2004/39/EC - The Markets in Financial Instruments EU Directive (MiFID). The MiFID came into force on November 1, 2007, replacing the existing Investment Services Directive (Directive 93/22/EEC). The purpose of the MiFID is to harmonize rules governing the operation of regulated markets. The MiFID resulted in significant changes to the regulation of financial instruments and widened the range of investment services and activities that firms can offer in EU Member States other than their home state. In addition, the MiFID:

• provides for tailored disclosure requirements, depending on the level of sophistication of investors;

• establishes detailed standards for fair dealings and fair negotiations between investment firms and investors;

• introduces the operation of multilateral trading facilities as a new core investment service; and

• extends the scope of the definition of financial instruments to include commodity derivatives, credit derivatives and swap agreements.

The MiFID also sets out detailed requirements governing the organization of investment firms and their conduct of business.

Further to the implementation of the MiFID in Italy, the Italian Stock Exchange Commission (“Consob”) and the Bank of Italy adopted a joint regulation coordinating their respective supervisory competences with regard to the Italian financial markets and the institutions operating in those markets.

Supervision. Supervisory authorities, in accordance with the Consolidated Banking Law, include the Inter-Ministerial Committee for Credit and Savings (Comitato Interministeriale per il Credito e il Risparmio, or “CICR”), the Ministry of Economy and Finance and the Bank of Italy. The principal objectives of supervision are to ensure the sound and prudent management of the institutions subject to supervision and the overall stability, efficiency and competitiveness of the financial system.

The CICR. The CICR is composed of the Minister of Economy and Finance who acts as chairman, the Minister of International Trade, the Minister of Agriculture and Forest Policies, the Minister of Economic Development, the Minister of Infrastructure, the Minister of Transportation and the Minister of EU Policies. The Governor of the Bank of Italy, although not a member of the CICR, attends all meetings of the CICR but does not have the right to vote at such meetings. Where provided for by the law, the CICR establishes general guidelines that the Bank of Italy must follow when adopting regulations applicable to supervised entities.

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The Ministry of Economy and Finance. The Ministry of Economy and Finance has certain powers in relation to banking and financial activities. It sets eligibility standards to be met by holders of equity interests in the share capital of a bank and the level of professional experience required of directors and executives of banks and other financial intermediaries. The Ministry of Economy and Finance may, in cases of urgency, adopt measures that are generally within the sphere of CICR’s powers and may also issue decrees that subject banks and other supervised entities to mandatory liquidation (liquidazione coatta amministrativa) or extraordinary management (amministrazione straordinaria), upon the proposal of the Bank of Italy.

The Bank of Italy. The Bank of Italy supervises banks and certain other financial intermediaries through its regulatory powers (in accordance with the guidelines issued by the CICR). The Consolidated Banking Law identifies four main areas of oversight: capital requirements, risk management, acquisitions of participations, administrative and accounting organization and internal controls, and public disclosure requirements. The Bank of Italy also regulates other fields, such as transparency in banking and financial transactions of banks and financial intermediaries, international payments, money laundering and terrorism financing. The Bank of Italy supervises banks and other supervised entities by, inter alia, authorizing the acquisition of shareholdings in banks in excess of certain thresholds and exercising off-site and on-site supervision. Certain acquisitions by non-EU entities based in jurisdictions that do not contemplate reciprocal rights by Italian banks to purchase banks based in those jurisdictions, may be denied by the President of the Council of Ministers, upon prior notice to the Bank of Italy.

On-site visits carried out by the Bank of Italy may be either “general” or “special” (directed toward specific aspects of banking activity). Matters covered by an on-site visit include the accuracy of reported data, compliance with banking laws and regulations, organizational aspects and conformity with a bank’s own bylaws.

The Bank of Italy requires all banks to report periodic statistical information related to all components of their non-consolidated balance sheet and consolidated accounts. Other data reviewed by the Bank of Italy include minutes of meetings of each bank’s board of directors. Banks are also required to submit any other data or documentation that the Bank of Italy may request.

In addition to its supervisory role, the Bank of Italy – as the Italian Central Bank – performs monetary policy functions by participating in the ESCB, and acts as treasurer to the Ministry of Economy and Finance. It also operates services for the banking industry as a whole, most notably the Credit Register (Centrale dei Rischi), a central information database on credit risk.

On December 28, 2005, a new law was introduced to modify the competences and organization of the Bank of Italy. In particular, while prior to the reform the Governor was appointed for an indefinite term, in accordance with the new legal framework, the Governor of the Bank of Italy is now appointed for a 6 year term, and may be reappointed only once. In addition, the new law transferred most of the competences of the Bank of Italy regarding competition in the banking sector to the Antitrust Authority, although joint clearance of the Bank of Italy and the Antitrust Authority is required in cases of mergers and acquisitions.

Reserve Requirements. Pursuant to ECB, ESCB and EU regulations, each Italian bank must deposit with the Bank of Italy an interest-bearing reserve expressed as a percentage of its total overnight deposits, deposits with an agreed maturity of up to and including two years, deposits redeemable at notice of up to and including two years and debt securities with an original maturity of up to and including two years.

Risk-Based Capital Requirements and Solvency Ratios. Capital adequacy requirements are mainly governed by CRD 1, as amended by CRD 2 and CRD 3, the Consolidated Banking Law, CICR Regulations and other implementing regulations issued by the Bank of Italy (Nuove disposizioni di vigilanza prudenziale per le banche). CRD 1 aligns European legislation with international standards on capital by implementing the international framework commonly known as the Basel II Accord. CRD 2 updates and refines CRD 1 by strengthening the EU regulatory framework and introducing rules on large exposures, derogations from prudential requirements, treatment of hybrid capital instruments, capital requirements and risk management for securitization positions, and new rules clarifying the supervisory framework for crisis management and establishing colleges for enhancing supervision. CRD 3 introduces rules on capital requirements for the trading book and for re-securitizations, and the supervisory review of remuneration policies.

Under the implementing regulations of the Bank of Italy, Italian banks are required to maintain certain ratios of regulatory capital to risk-weighted assets. Italian banks’ capital consists of Tier I capital and

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Tier II capital. Tier I capital includes a) paid up share capital; b) reserves, including the share premium account; c) innovative and non-innovative capital instruments; d) net income for the period; and e) positive Tier I capital prudential filters, less f) own shares; g) goodwill; h) intangible assets; i) value adjustments of accounts receivable; j) losses carried forward and losses for the current financial year; k) regulatory value adjustments of the trading book; l) other negative items; and m) negative Tier I capital prudential filters. Tier II capital includes a) tangible asset valuation reserves; b) innovative and non-innovative capital instruments not eligible for inclusion in Tier I capital; c) hybrid capital instruments and Tier II subordinated liabilities; d) net gains on equity investment; e) any excess of value adjustments and provisions over expected loss amounts (for banks using internal ratings-based systems), f) other positive items; and g) positive Tier II capital prudential filters, less h) net losses on equity investment; i) other negative items; and j) negative Tier II capital prudential filters.

A new set of rules governing supervision and risk management of the banking sector, commonly referred to as Basel III, has been developed and is expected to gradually enter into force beginning in 2013. These measures aim at improving the banking sector’s ability to absorb shocks arising from financial and economic stress, improving risk management and governance and strengthening banks’ transparency and disclosure and will generally have the effect of limiting the instruments that will qualify as regulatory capital and increasing the amount of capital required. The Basel III rules will be implemented gradually with full enforcement by 2019. Basel III will require banks to meet certain minimum capital ratios, which will be phased in starting in 2013. In addition, Basel III provides additional rules on liquidity by requiring that banks meet a liquidity coverage ratio and a net stable funding ratio and rules on leverage by requiring that banks meet a leverage ratio. In January 2013, the original proposal with respect to the liquidity requirements was reviewed; the phasing-in of the liquidity coverage ratio will take place in a gradual manner (with an annual increase of 10 per cent), starting in 2015; and the definition of high quality liquid assets was expanded to include lower quality corporate securities, equities and residential mortgage backed securities.

The Basel III framework will be implemented in the EU through the Capital Requirements Directive (“CRD IV”) and the Capital Requirements Regulation (“CRR”). The CRD IV and the CRR were formally adopted by the European Council on 20 June 2013 and published in the Official Journal on 27 June 2013. They are expected to enter into force by 1 January 2014.

Risk Concentration Limitations. The provisions of CRD1, as amended by CRD 2, on the monitoring and control of exposures of credit institutions, limit a bank’s exposure to any single risk. The Bank of Italy has issued implementing regulations which require stand-alone banks and banking groups to limit each risk position to no more than 25 per cent of supervisory capital and their exposures to any single customer or group of related customers to 25 per cent of the bank’s regulatory capital. Under specific conditions, for exposures to related or connected parties, the credit risk position may overcome the 25 per cent of supervisory capital limit.

Banks belonging to banking groups shall be subject to an individual limit of 40 per cent of their supervisory capital provided that the group to which they belong complies with the above limits at the consolidated level. The exception is therefore not applicable to Italian banks that do not belong to a banking group and are reference undertakings.

Equity Participations by Banks. Prior approval of the Bank of Italy is required for any equity investments by a bank in other banks or financial or insurance companies: (1) exceeding 10 per cent of the regulatory capital of the acquiring bank; (2) exceeding 10 per cent or 20 per cent of the share capital of the bank or financial or insurance company being acquired; or (3) resulting in the control of the share capital of the bank or financial or insurance company being acquired. Investments by stand-alone banks or by banking groups in insurance companies exceeding in the aggregate 40 per cent of the acquiror’s regulatory capital (and 60 per cent of the regulatory capital, in case of the single bank included in the banking group) are not permitted.

The acquisition by banks and banking groups of shareholdings in non-financial companies is subject to certain limitations. Aggregate shareholdings in non-financial companies purchased by banks and banking groups cannot exceed 15 per cent of the acquiring bank’s regulatory capital. Banks and banking groups may not acquire shareholdings in any single non-financial company exceeding 3 per cent of the acquiring bank’s regulatory capital; they may be authorized to effect such investments in accordance with less stringent limitations, provided that they meet specific criteria. Pursuant to the principle of separation of the banking sector from the industrial sector, investments in non-financial companies cannot exceed 15 per cent of the share capital of the acquired company. Acquisitions of shareholdings exceeding such limit may be authorized provided the value of the shareholding does not exceed 1 per cent of the regulatory capital of the acquirer. The excess above 15% limit must not exceed 1 per cent of the regulatory capital of the acquirer.

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Deposit Insurance. The Interbank Fund (Fondo Interbancario di Tutela dei Depositi) was established in 1987 by a group consisting of the principal Italian banks to protect depositors against the risk of bank insolvency and the loss of deposited funds. The Interbank Fund assists banks that are declared insolvent or are subject to temporary financial difficulties.

Participation in the Interbank Fund is compulsory for all Italian banks. The Interbank Fund intervenes when a bank is either in administrative management or mandatory liquidation. In the event of administrative management, the Interbank Fund may make payments to support the business of the bank, which may take the form of debt financing or taking an equity stake in the bank. In the case of mandatory liquidation, the Interbank Fund guarantees the refund of deposits to banking customers up to a maximum of €100,000 per depositor per bank. The guarantee does not cover customer deposit instruments in bearer form, deposits by financial and insurance companies and by collective investment vehicles and deposits by bank managers and executives with the bank that employs them.

Structure of the Banking Industry. Italy had 706 banks at December 31, 2012, compared to 740 at December 31, 2011. Italian banks’ presence abroad is significant, especially of the two largest banking groups in euro area countries. At the end of 2012, there were 24 subsidiaries of foreign companies and banks operating in Italy, two of which appear among the top 10 banking groups, with a market share of 8.4 per cent of total assets. At the end of 2012, the 78 branches of foreign banks not included in Italian banking groups held 7.7 per cent of system assets, compared with 8.2 per cent in 2011; 37 foreign investors – mainly from EU countries – had shareholdings of over 5 per cent in 48 banks. During 2012, seven new banks began to operate (two limited company banks, one mutual bank and four branches of foreign banks). Forty-one banks closed as a result of 35 mergers, takeovers or asset transfers (largely due to reorganization within banking groups), five liquidations and the conversion of a bank into a financial company. The number of banking groups fell by two to 75.

According to the Bank of Italy, in 2012, the five largest groups (UniCredit, Intesa Sanpaolo, MPS, Banco Popolare and Unione di Banche Italiane) held 49.4 per cent of the assets of the banks and financial companies operating in Italy. Another 15 large groups and banks held 24.2 per cent. The 78 branches of foreign banks accounted for 7.7 per cent, as did the 31 small banks; the 482 minor banks held 11.0 per cent.

The ownership structure of the banking sector has undergone substantial change since 1992, reflecting significant privatizations through 1998. Since 1999, the Italian banking sector has experienced significant consolidation. This process has accelerated in recent years, resulting in the formation of Italian banking groups of international standing, such as Intesa Sanpaolo and UniCredit. In 2005, Dutch bank ABN Amro acquired Banca Antonveneta, which was the first successful takeover of a listed Italian bank by a non-Italian bank. In 2006, French bank BNP Paribas acquired Banca Nazionale del Lavoro, the sixth largest Italian bank by deposits at the time of the acquisition. In 2007, Banca Intesa merged with Sanpaolo IMI, creating the Intesa Sanpaolo Group. In the same year, Capitalia merged into UniCredit, creating one of the largest financial services organizations in Europe. In May 2008, Monte Dei Paschi di Siena completed the acquisition of Banca Antonveneta from Banco Santander.

Capitalization. In 2012, the Italian banking system’s capital position improved. At the end of the year, consolidated regulatory capital amounted to €235 billion, a 1.3 per cent decrease compared to the end of 2011. In 2012, Tier 1 capital rose by €5 billion to €189 billion, mainly as a result of the capital increase carried out by one of the five largest banking groups. Supplementary capital decreased by 13.4 per cent to €51 billion, due to the non-renewal and buy-backs of hybrid instruments by the largest banking groups. The increase in core Tier I capital offset the impact of the stricter capital definition introduced by CRD 2 and the guidelines of the Committee of European Banking Supervisors, which entered into force in December 2010. Under the new rules, core Tier I capital may no longer include shares bearing privileges in loss sharing and dividend distribution, such as preferred shares (they may still be included in Tier I capital as hybrid instruments). The contribution of new resources more than offset the losses incurred in 2012. The risk-weighted assets decreased by more than 7 per cent due to the introduction of internal models for calculating capital requirements by some large groups and the gradual extension of their perimeter as well as to the shift in the composition of portfolios to assets attracting lower capital charges; those of the first five banking groups decreased by 11.3 per cent compared to 2011.

Capital strengthening and the reduction of risk-weighted assets led to an increase in capital ratios compared with the end of 2011. Taking into account the issue by Banca Monte dei Paschi di Siena of €4.071 billion in securities subscribed by the Ministry for the Economy and Finance in February 2013, the core Tier 1 ratio rose by a 1.4 per cent to 10.7 per cent and the Tier I ratio rose by 1.1 per cent to 11.1 per cent. The total capital ratio gained 0.8 points to 13.8 per cent. The capital ratios of the two largest Italian banking groups

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continue to converge with those of a sample of eleven large European banks comparable in terms of business model and size. At the end of 2012, the Tier 1 ratio of the European sample averaged 13.3 per cent compared with 11.7 per cent for the two largest Italian banking groups.

In 2012 Italian banks continued to adapt to the new capital adequacy requirements envisaged by the Basel III rules, though their progress was slower than in 2011.

Bad Debts. Bad debts increased by 14.9 per cent in 2012 to €152,590 million, compared to €132,788 million in 2011. As a percentage of total loans, bad debts increased from 6.2 per cent in 2011 to 7.2 per cent in 2012.

Measures to assess the robustness of Italian Banking System

In order to stabilize the banking system and protect private savings, the Government has enacted measures, which, among other things, allow the Ministry of Economy and Finance to support the recapitalization of Italian banks by subscribing financial instruments and guaranteeing share capital increases, to provide a state guarantee on funds granted by the Bank of Italy to banks needing emergency liquidity and, in addition to the existing domestic bank deposit guaranty, to guarantee in full all Italian bank deposits. The measures adopted in Italy to preserve the stability of the financial system are aimed at protecting savers and maintaining adequate levels of bank liquidity and capitalization.

The Bank of Italy periodically conducts stress tests to assess the banking system’s ability to operate in adverse situations. The test conducted in May of 2010 for the whole Italian banking system analyzed the evolution of credit quality in the two years 2010-11 assuming worsened macroeconomic conditions (the adverse scenario hypothesizes that the Italian economy is hit by shocks to world trade that restrict exports; further, the risk premium on the interbank market increases with a tightening of credit supply policies, leading to a weakening of domestic demand; the macroeconomic effects are amplified by an increase in precautionary saving, exacerbating the decline in household spending; real GDP growth in the two years 2010-11 is lower by a total of 3 percentage points than the forecasts compiled by Consensus Economics). The stress tests showed that capital ratios of all banking groups considered (the largest five groups) would remain well above the minimal regulatory requirements under the adverse macroeconomic conditions. A similar stress test was conducted in July 2011, whose results were scrutinized by the Bank of Italy before a peer review and quality assurance process was conducted by EBA staff with a team of experts from national supervisory authorities, the ECB and the European Systemic Risk Board. The 2011 stress tests showed that capital ratios of all Italian banking groups considered (the largest five groups) would remain well above the minimal regulatory requirements under the adverse macroeconomic conditions.

An IMF mission visited Italy during 14-31 January and 12-26 March 2013, to conduct an assessment under the IMF’s Financial Sector Assessment Program (“FSAP”). The FSAP’s results suggested that the Italian banking system as a whole appeared to be well capitalized and that it should be able to withstand both a scenario of concentrated shocks and one of protracted slow growth, thanks to the banks’ strong capital position and ECB liquidity support. In its statement the IMF stated that the substantial capital buffers over regulatory minima built in recent years would offset most of the losses generated by an adverse macroeconomic scenario, even taking into account the phase-in of Basel III requirements, but that under such scenarios, the system would find its buffers depleted, and that market liquidity shocks can be absorbed by the substantial amounts of available collateral.

Credit Allocation

The Italian credit system has changed substantially during the past decade. Banking institutions have faced increased competition from other forms of intermediation, principally securities markets.

During 2012, lending activity, including repos and bad debts, decreased by 0.2 per cent, compared to a 1.9 per cent increase in 2011. The decrease in the Mezzogiorno was equal to 1.4 per cent compared to a 3.4 per cent increase in 2011, whereas in the central and northern regions the growth rate was equal to zero compared to a 1.7 per cent increase in 2011.

Exchange Controls

Following the complete liberalization of capital movements in the European Union in 1990, all exchange controls in Italy were abolished. Residents and non-residents of Italy may make any investments, divestments and other transactions that entail a transfer of assets to or from Italy, subject only to limited reporting, record-keeping and disclosure requirements referred to below. In particular, residents of Italy may hold foreign currency and foreign securities of any kind, within and outside Italy, while non-residents may invest in Italian securities without restriction and may export from Italy cash, instruments of credit or payment and securities, whether in foreign currency or euro, representing interest, dividends, other asset distributions and the proceeds of dispositions.

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Italian legislation contains certain requirements regarding the reporting and record-keeping of movements of capital and the declaration in annual tax returns of investments or financial assets held or transferred abroad. Breach of certain requirements may result in the imposition of administrative fines or criminal penalties. In recent years, Italy allowed illegal holdings of foreign assets to be disclosed against payment of a (less burdensome) fine; this is commonly known as Tax Shield (Scudo Fiscale).

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THE EXTERNAL SECTOR OF THE ECONOMY

Foreign Trade

Italy is fully integrated into the European and world economies, with imports and exports in 2012 equal to 28.6 and 30.2 per cent of real GDP, respectively. Since the trade surplus recorded in 2003, Italy has recorded trade deficits from 2004 until 2011. Italy’s merchandise exports have suffered from competition with Asian products, reflecting higher prices of Italian products, the improving quality of non-Italian products and the increased commercial presence and improved services offered by non-Italian companies in EU countries. Moreover, Italy’s specialization in more traditional merchandise is unable to meet the increased demand for high-technology products characterizing the expansion of world trade. In 2012, Italy’s trade balance was a surplus of approximately €11 billion, evidencing a significant increase over the deficit of €25.5 billion in 2011.

The following table illustrates Italy’s exports and imports for the periods indicated. Export amounts do not include insurance and freight costs and only include the costs associated with delivering and loading the goods for delivery. This is frequently referred to as “free on board” or “fob”. Import amounts include all costs, insurance and freight, frequently referred to as “cif”. A fob valuation includes the transaction value of the goods and the value of services performed to deliver the goods to the border of the exporting country; in a cif valuation, the value of the services performed to deliver the goods from the border of the exporting country to the border of the importing country is also included.

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Foreign Trade (cif-fob)

	2008			2009			2010			2011			2012
	(€ in millions)
Exports (fob)(1)
Agriculture, forestry and fishing		5,354			4,614			5,614			5,800			5,791
Extractive industries		1,707			1,024			1,165			1,276			1,451
Manufactured products		350,599			277,069			322,685			360,102			373,228
Food, beverage and tobacco products		20,907			20,031			22,179			24,419			26,059
Textiles, leather products, clothing, accessories		40,912			33,093			37,339			41,979			43,064
Wood, wood products, paper, printing		7,136			6,157			7,151			7,503			7,628
Coke and refined oil products		15,440			9,301			14,794			16,845			20,513
Chemical substances and products		22,217			17,856			22,575			24,925			25,331
Pharmaceutical, chemical-medical, botanical products		11,938			12,151			13,973			15,314			17,227
Rubber, plastic, non-metallic mineral products		22,435			18,208			20,854			22,516			22,574
Base metal, metal (non-machine) products		45,342			32,273			39,350			48,386			50,779
Computers, electronic and optical devices		11,355			9,650			11,604			12,935			12,599
Electrical equipment		21,839			17,261			19,380			20,309			19,936
Machines and other non-classified products		71,024			55,014			60,061			68,447			70,483
Transportation means		39,422			29,501			34,507			36,518			36,142
Products from other manufacturing activities		20,633			16,572			18,918			20,006			20,893
Electrical energy, gas, steam, air conditioning		366			433			277			276			255
Products from waste treatment and recycling		1,134			874			1,395			1,488			1,740
Other products		9,856			7,719			6,211			6,962			7,260
Total exports		369,016			291,733			337,346			375,904			389,725
Imports (cif)(1)
Agriculture, forestry and fishing		10,874			9,706			11,123			13,013			12,291
Extractive industries		68,882			44,951			59,005			69,151			74,111
Manufactured products		287,887			230,989			284,833			305,410			279,056
Food, beverage and tobacco products		24,343			22,653			25,320			27,497			27,242
Textiles, leather products, clothing, accessories		24,718			21,842			25,960			28,876			26,478
Wood, wood products, paper, printing		9,897			7,952			9,991			10,158			9,220
Coke and refined oil products		8,442			5,841			8,550			10,077			10,577
Chemical substances and products		32,196			25,807			32,122			36,476			35,627
Pharmaceutical, chemical-medical, botanical products		14,666			16,185			17,344			19,187			19,737
Rubber, plastic, non-metallic mineral products		10,999			9,367			11,312			12,404			11,490
Base metal, metal (non-machine) products		44,407			24,704			36,107			42,468			37,753
Computers, electronic and optical devices		24,648			22,853			33,871			30,904			24,667
Electrical equipment		12,689			10,495			13,292			13,839			13,291
Machines and other non-classified products		26,806			18,866			22,416			24,138			22,502
Transportation means		44,316			35,464			37,901			38,334			30,213
Products from other manufacturing activities		9,762			8,960			10,647			11,051			10,260
Electrical energy, gas, steam, air conditioning		2,284			2,876			2,659			2,980			2,613
Products from waste treatment and recycling		4,056			2,052			3,902			5,254			5,006
Other products		8,067			7,034			5,868			5,622			5,684
Total imports		382,050			297,609			367,390			401,428			378,759
Trade balance		(13,034	)		(5,876	)		(30,044	)		(25,524	)		10,966

⁽¹⁾  At current prices.

Source: ISTAT.

The Italian economy relies heavily on foreign sources for energy and other natural resources and Italy is a net importer of chemical and pharmaceutical products, agricultural and food industry products, paper, printing and publishing products, wood and wood products, metals and metal products, electric and precision machinery and transport equipment, food, beverage and tobacco products.

Of all the major European countries, Italy is one of the most heavily dependent on imports of energy. Italy’s trade balance remains vulnerable to fluctuations in oil prices, given the high proportion of energy imports. The energy deficit increased again, rising to a new historical peak of 3.9 per cent of GDP, due to the rise in oil prices.

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In 2012, exports of goods and services increased by 2.3 per cent in real terms compared to a 5.9 per cent increase in 2011, reflecting the easing of world trade growth from 6.0 to 2.5 per cent. Exports of goods, which account for more than 80 per cent of Italy’s total exports, increased by 1.9 per cent in 2012, compared to a 6.8 per cent increase recorded in 2011. The main factor in the slowdown was the drop in sales to euro-area countries (which account for 40.5 per cent of the total), where demand declined. However, exports benefited from the recovery in international trade outside the euro area, where Italy’s sales growth outpaced potential demand in the three years 2010-12.

During 2012, imports of goods and services in real terms decreased by 7.7 per cent (8.3 per cent for goods) compared to 2011, mainly due to the contraction of investment and the slowdown in exports, which are the demand components with the most substantial input of imports. At nominal values, Italy’s imports decreased by 5.6 per cent.

Geographic Distribution of Trade

As a member of the European Union, Italy enjoys free access to the markets of the other EU Member States and applies the external tariff common to all EU countries. During the past several years, EU countries have made significant progress in reducing non-tariff barriers such as technical standards and other administrative barriers to trade amongst themselves, and Italy has incorporated into its national law most of the EU directives on trade and other matters. With the accession of new members, the EU has come to encompass many of Italy’s most important central and eastern European trading partners. The following tables show the distribution of Italy’s trade for the periods indicated.

Distribution of Trade (cif-fob) - Exports

	2008		2009		2010		2011		2012
	(€ in millions)
Exports (fob)(1)
Total EU		217,210		168,064		193,389		210,666		209,214
of which
EMU		163,848		128,738		147,365		160,214		157,785
of which
Austria		8,803		6,961		8,002		8,724		8,630
Belgium		9,931		8,032		8,678		9,633		10,300
France		41,459		33,984		39,237		43,593		43,169
Germany		47,110		36,942		43,867		49,267		48,713
Netherlands		8,678		7,111		8,368		9,119		9,269
Spain		24,123		16,680		19,595		19,890		18,291
Poland		9,774		7,922		8,553		9,418		9,213
United Kingdom		19,327		14,953		17,576		17,542		18,964
China		6,432		6,629		8,609		9,996		9,003
Japan		4,251		3,714		4,011		4,732		5,637
OPEC countries		21,380		17,816		17,949		17,724		22,079
Russia		10,468		6,432		7,906		9,305		9,993
Switzerland		14,425		13,563		15,823		20,640		22,878
Turkey		7,502		5,652		8,029		9,634		10,618
United States		23,028		17,099		20,329		22,831		26,656
Other(2)		64,320		52,764		61,301		70,376		73,647
Total		369,016		291,733		337,346		375,904		389,725

⁽¹⁾  At current prices.

⁽²⁾  Other represents all other countries and/or regions with whom Italy trades; none of such countries or regions accounts for a material amount.

Source: ISTAT.

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Distribution of Trade (cif-fob) - Imports

	2008		2009		2010		2011		2012
	(€ in millions)
Imports (fob)(1)
Total EU		208,784		170,868		201,364		215,728		200,314
of which
EMU		169,840		137,807		163,797		174,070		161,727
of which
Austria		8,999		7,189		8,452		9,439		8,839
Belgium		14,201		11,955		13,359		14,568		14,381
France		32,873		26,353		32,171		33,603		31,318
Germany		61,186		49,701		58,986		62,388		55,219
Netherlands		20,519		16,918		19,965		21,037		20,388
Spain		16,633		13,141		16,737		18,111		16,848
Poland		6,708		6,638		7,222		7,518		7,125
United Kingdom		11,897		9,817		10,012		10,943		9,554
China		23,606		19,334		28,789		29,574		24,695
Japan		5,018		3,899		4,288		4,218		3,191
OPEC countries		42,679		24,943		34,957		34,317		41,082
Russia		16,089		12,142		14,633		16,904		18,331
Switzerland		11,256		10,427		10,203		11,294		11,018
Turkey		5,583		4,423		5,158		5,979		5,257
United States		11,683		9,463		11,139		13,026		12,666
Other(2)		57,532		42,110		56,859		70,388		62,205
Total		382,050		297,609		367,390		401,428		378,759

⁽¹⁾  At current prices.

⁽²⁾  Other represents all other countries and/or regions with whom Italy trades; none of which country or region represents a material amount.

Source: ISTAT.

As in the previous year, during 2012 over half of Italian trade was with other EU countries, with approximately 53.7 per cent of Italian exports and 52.8 per cent of imports attributable to trade with EU countries. Germany remains Italy’s single most important trade partner and in 2012 supplied 14.57 per cent of Italian imports and purchased 12.49 per cent of Italian exports.

In 2012, Italy’s trade balance with EU countries was positive, with a surplus of approximately €8.9 billion. This result was due to a decrease in imports larger than the decrease in exports. The deficit with Germany was halved in 2012 owing to the drop in imports of motor vehicles, photovoltaic cells and machinery and equipment, decreasing to €6.5 billion, and the surplus with France increased to €11.85 billion.

The improvement in the trade balance was the result of surpluses both with the other EU countries (€10.4 billion compared with a deficit of €2.7 billion in 2011) and with non-EU countries (€7.5 billion against a deficit of €14.7 billion).

However, Italian exports to non-EU countries increased while exports to EU countries decreased and imports from EU countries decreased more than imports from non-EU countries.

With respect to non-EU countries, the increase in the trade surplus with the United States was fostered by the euro’s depreciation against the dollar and the growth in US domestic demand. The trade balance with China, with which Italy has its widest bilateral deficit, also improved.

In 2012, Italy recorded an increase in exports of 3.7 per cent over 2011, even though it recorded a decrease in Italian exports to Eurozone countries of 1.5 per cent compared to 2011; in particular, exports to Italy’s three largest Eurozone trading partners Germany, France and Spain decreased by 1.1 per cent, 1.0 per cent and 8.1 per cent, respectively in 2012. The increase in Italian exports resulted from a sharp increase in exports to non-EU countries of 9.2 per cent in 2012 compared to 2011 (an increase of 7.8 per cent net of energy exports compared to 2011), in part due to a 24.6 per cent increase in exports to OPEC countries, a 16.8 per cent increase in exports to the United States and a 19.1 per cent increase in exports to Japan.

Balance of Payments

The balance of payments tabulates the credit and debit transactions of a country with foreign countries and international institutions for a specific period. Transactions are divided into three broad groups: current account, capital account and financial account. The current account is made up of: (1) trade in goods (visible trade) and (2) invisible trade, which consists of trade in services, income from profits and interest earned

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on overseas assets, net of those paid abroad, and net capital transfers to international institutions, principally the European Union. The capital account primarily comprises net capital transfers from international institutions, principally the European Union. The financial account is made up of items such as the inward and outward flow of money for direct investment, investment in debt and equity portfolios, international grants and loans and changes in the official reserves.

In 2010, the gathering and compilation system of the balance of payments and foreign financial position of Italy was deeply innovated with the abandonment of bank settlement reporting. The integration of international markets increased the complexity of transactions, which affected the reliability of gathering systems based on bank payments. Models of data collection based on direct gathering with entities involved in international exchanges are now preferred, the use of sample analysis was extended and the banks’ obligation of statistical reporting on behalf of clients was almost entirely eliminated. The new system is based on various sources: (a) census-based collections, such as statistical reports of entities subject to oversight by the Bank of Italy; (b) administrative data collected by other institutions for compliance purposes; and (c) sample-based investigations, in particular with non-financial and insurance businesses. Reports of flux and amount are required for financial transactions.

The following table illustrates the balance of payments of Italy for the periods indicated.

Balance of Payments

	2009			2010			2011			2012
	(€ in millions)
Current Account(1)		(30,173	)		(54,516	)		(48,259	)		(8,428	)
Goods		823			(20,918	)		(17,377	)		17,835
Exports		292,335			337,920			376,566			390,392
Imports		291,512			358,838			393,943			372,557
Services		(8,435	)		(9,218	)		(5,671	)		(741	)
Exports		67,798			73,967			77,378			81,829
Imports		76,233			83,184			83,049			82,570
Income		(10,406	)		(8,289	)		(9,376	)		(10,065	)
Inflows		57,729			55,885			61,051			52,574
Outflows		68,135			64,174			70,427			62,639
Transfers		(12,155	)		(16,091	)		(15,836	)		(15,456	)
EU Institutions		(6,982	)		(10,109	)		(10,448	)		(9,623	)
Capital Account(1)		(89	)		(556	)		648			3,839
Intangible assets		(578	)		(706	)		(407	)		1,723
Transfers		489			150			1,055			2,116
EU Institutions		1,627			1,486			2,741			3,167
Financial Account(1)		37,335			86,749			72,845			7,678
Direct investment		(863	)		(17,726	)		(13,887	)		(10,691	)
Abroad		(15,315	)		(24,656	)		(38,578	)		(23,159	)
In Italy		14,452			6,930			24,691			12,468
Portfolio investment		28,061			38,468			(34,361	)		29,234
Assets		(38,541	)		(31,285	)		35,630			61,504
Liabilities		66,602			69,753			(69,991	)		(32,270	)
Financial Derivatives		4,332			(4,734	)		7,493			(424	)
Other investment		5,725			71,775			114,541			(8,980	)
Change in official reserves		80			(1,034	)		(941	)		(1,461	)
Errors and omissions		(7,073	)		(31,678	)		(25,233	)		(3,088	)

⁽¹⁾  At current prices.

Source: Bank of Italy.

Current Account

Italy has had a current account deficit since 2000, which in 2012 amounted to €8.4 billion or 0.5 per cent of GDP, evidencing a significant improvement compared to €48.3 billion or 3.1 per cent of GDP in 2011. The improvement, which was achieved despite the slight deterioration in the energy balance, reflected the resilience of exports and the reduction in imports due to weak domestic demand.

Visible Trade. Italy’s fob-fob trade deficit increased to 1.1 per cent of GDP in 2012 from a deficit of the same level in 2011. The improvement was attributable to the non-energy component, the surplus on which almost doubled to 5.1 per cent of GDP. By contrast, the increase in the euro prices of oil caused a further slight deterioration in the energy deficit, which reached 3.9 per cent of GDP.

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Invisible Trade. The deficit in services decreased to €0.7 billion in 2012, compared to €5.7 billion in 2011. The surplus on travel increased further, to €11.5 billion, benefiting as in the previous year from increased receipts and substantially stationary outlays. The deficit in transport services in 2012 decreased to €8.1 billion due to the decline in merchandise imports.

Income. In 2012, the deficit on the income account was basically unchanged at €10.1 billion, against €9.4 billion in 2011. For portfolio investment, which accounted for almost all of the deficit on investment income, there was a reduction in both inflows and outflows, reflecting the decrease in foreign assets and liabilities in the last two years. Direct investment income also declined owing to the contraction in firms’ profits. By contrast, the surplus on labor income increased by €1.1 billion thanks to the larger receipts of cross-border workers and a reduction in outflows to non-resident workers.

Current Transfers. The deficit recorded in current transfers as virtually stationary with respect to 2011 at €15.5 billion. Workers’ remittances abroad, which almost doubled between 2005 and 2011 with the large rise in the number of foreigners, fell to €6.8 billion, compared with €7.4 billion in the previous year. Contributory factors were the decline in the employment rate among foreign workers and the recession in Italy.

Capital Account

Italy’s capital account, which accounts for transactions in intangible assets, recorded a surplus of €3.8 billion (compared €0.6 billion in 2011), mainly due to the improvement in the balance on intangible assets, which benefited from the export of carbon emission rights. In 2012, the surplus on capital account vis-à-vis the EU institutions amounted to €3.2 billion.

Financial Account and the Net External Position

In 2012, the financial account surplus decreased to €7.7 billion from €72.8 billion in 2011. The financial account showed that, at the end of 2012, Italy’s net external debtor position amounted to €387.8 billion, or 24.8 per cent of GDP, compared with €326.2 billion in 201. The increase, only a small part of which was attributable to the modest inflows in the financial account (€7.7 billion), reflects above all the negative contribution of valuation adjustments (€53.9 billion).

Direct Investment. After picking up in the previous two years, Italian direct investment abroad declined to €23.2 billion, compared with €38.6 billion in 2011. The contraction was sharpest in the category of non-bank intra-group loans, which had recorded particularly large outflows the year before. Inward direct investment also decreased, from €24.7 billion to €12.5 billion, reflecting market uncertainty; signs of a recovery only appeared towards the end of the year. Overall, the balance of direct investment recorded net outflows of €10.7 billion in 2012.

The following table shows total direct investment abroad by Italian entities and total direct investment in Italy by foreign entities for the periods indicated.

Direct Investment by Country⁽¹⁾

	2008			2009			2010			2011			2012
	(€ in millions)
Direct investment abroad
Netherlands		(1,454	)		3,760			756			1,127			4,976
Luxembourg		(25,348	)		(14,519	)		14,227			14,376			(986	)
United States		1,598			5,204			1,230			1,945			737
United Kingdom		2,177			3,094			(213	)		1,967			413
France		38,820			3,705			597			(451	)		(182	)
Switzerland		(2,679	)		707			1,317			(309	)		127
Germany		3,537			992			(1,692	)		1,509			(358	)
Spain		1,724			6,958			(11,076	)		570			3,246
Brazil		894			351			(71	)		141			365
Belgium		1,335			5,674			(506	)		1,874			765
Argentina		106			68			26			259			149
Sweden		(1,067	)		82			196			168			293
Other		26,097			(759	)		19,861			15,400			13,611
Total		45,740			15,317			24,652			38,576			23,156

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	2008			2009			2010			2011			2012
	(€ in millions)
Direct investment in Italy
Netherlands		(3,377	)		3,634			(7,952	)		4,251			2,782
Luxembourg		9,979			1,276			634			(1,369	)		2,077
United States		2,139			270			2,180			896			181
United Kingdom		1,610			2,526			3,067			4,309			275
France		(31,477	)		5,652			3,271			13,519			1,753
Switzerland		1,523			(389	)		1,564			3			323
Germany		3,340			2,365			(114	)		(99	)		754
Spain		818			(325	)		728			910			572
Brazil		248			113			99			42			42
Belgium		465			4,534			(973	)		2,525			2,295
Argentina		53			60			28			30			38
Sweden		990			(1,521	)		117			(1,030	)		(129	)
Other		6,285			(3,744	)		4,282			705			1,505
Total		(7,404	)		14,451			6,931			24,692			12,468

⁽¹⁾  Figures do not include real estate investment, investments made by Italian banks abroad and investments made by foreign entities in Italian banks.

Source: ISTAT and National Institute for International Trade.

Portfolio Investment. In 2012, the balance of portfolio investment returned to register net inflows of €29.2 billion. Large disposals of foreign securities by Italian residents amounting to €61.5 billion more than offset those of Italian securities by international investors of €32.3 billion. Continuing the trend that began in 2011 with the worsening of the sovereign debt crisis, residents (mainly households, banks and insurance companies) greatly scaled back their exposure in foreign debt instruments, reflecting the shift of portfolio composition towards Italian securities and, in the case of households, the reduction in holdings of debt securities. Disposals (for the greater part consisting of the non-renewal of securities maturing during the year) were mainly of bonds issued by banks and other financial intermediaries and of government securities of the leading Euro area countries. There was an increase in purchases of equities and investment fund units, partly due to households’ growing preference for foreign funds over Italian ones.

The large disposals of Italian government securities by non-residents that had begun in the middle of 2011 continued through the first quarter of 2012. Purchases of government securities picked up from the summer onwards, including for medium and long-term maturities, as financial market conditions slowly improved in response to the measures taken by the Eurosystem and to the narrowing of interest rate spreads on Italian government securities. Foreign investors showed renewed interest also in equities and corporate bonds. In 2012, net investments in equities amounted to €16.1 billion; net disposals of debt instruments totaled €48.4 billion but, excluding the first quarter of the year, there were net purchases for €12.3 billion.

Other investment. The “other investment” relating to the banking sector saw a net outflow of €58.7 billion, largely due to the decrease in foreign liabilities. Contributory factors were the funding difficulties on the international interbank market and the reduction in intra-group loans to Italian branches of foreign banks in connection with the policies enacted to balance assets and liabilities on a national basis. Under “other investment”, attributable to the Bank of Italy, there was a net inflow of €62.6 billion, compared with €194.8 billion in 2011, in relation to the Trans-European Automated Real-Time Gross Settlement Express Transfer (“TARGET2”) payments system balance (the euro-area central banks’ positions in the TARGET2 payment system).

Errors and Omissions. In 2012, the item “errors and omissions” amounted to -€3.1 billion which is a value extremely low compared to historical standards. The amount recorded in the errors and omissions account typically reflects unreported international transactions, such as unreported funds transferred abroad by Italian residents and exporters’ unreported payments by non-residents to accounts held abroad.

Reserves and Exchange Rates

On January 1, 1999, eleven European countries, including Italy, adopted the euro as their new national currency. At that time, the conversion rate between the lira and the euro was irrevocably fixed at Lit. 1,936.27 per euro. Prior to 1999, the exchange rate of the lira against other euro constituent currencies was subject to market fluctuation. The euro was introduced as a physical currency on January 1, 2002. On February 28, 2002, the lira ceased to be legal tender in Italy and was withdrawn from the financial system.

43

The following table sets forth, for the periods indicated, certain information regarding the U.S. Dollar/Euro reference rate, as reported by the European Central Bank, expressed in U.S. dollar per euro.

US Dollar/Euro Exchange Rate

Period	Period End		Yearly Average Rate(1)		High		Low
	(U.S.$ per €1.00)
1999		1.0046		1.0588		1.1789		1.0015
2000		0.9305		0.9194		1.0388		0.8252
2001		0.8813		0.8917		0.9545		0.8384
2002		1.0487		0.9511		1.0487		0.8578
2003		1.2630		1.1418		1.2630		1.0377
2004		1.3621		1.2462		1.3633		1.1802
2005		1.1797		1.2490		1.3507		1.1667
2006		1.317		1.2630		1.3331		1.1826
2007		1.4721		1.3797		1.4874		1.2893
2008		1.3917		1.4726		1.599		1.246
2009		1.4406		1.3963		1.5074		1.2591
2010		1.3362		1.3207		1.4563		1.1942
2011		1.2939		1.3920		1.4882		1.2889
2012		1.3194		1.2848		1.3453		1.2088

⁽¹⁾  Average of the reference rates for the last business day of each month in the period.

Source: European Central Bank.

The following table sets forth information relating to euro exchange rates for certain other major currencies for the periods indicated.

Euro Exchange Rates

	Yearly Average Rate(1) per €1.00
	2008		2009		2010		2011		2012
Japanese Yen		151.53		130.63		115.26		110.96		102.49
British Pound		0.8026		0.8810		0.8560		0.86788		0.81087
Swiss Franc		1.5786		1.5076		1.3700		1.2326		1.2053
Norwegian Kroner		8.2858		8.6892		8.0034		7.7934		7.4751
Czech Koruna		25.039		26.495		25.263		24.590		25.149

⁽¹⁾  Average of the reference rates for the last business day of each month in the period.

Source: European Central Bank

In 2012, official reserves increased to €137.7 billion from €133.9 billion in 2011. At the end of 2012, the contribution of the Bank of Italy to the reserves of the European Central Bank was stable at approximately €7.2 billion.

At December 31, 2012, gold and net foreign currency assets were worth €132.6 billion, compared with €128.5 billion a year earlier. The increase mainly reflected the rise in the price of gold (up by 3.64 per cent, leading to an increase of €3.5 billion in the value of the stock, which was stationary in volume).

The following table illustrates the official reserves of Italy as at the end of each of the periods indicated.

Official Reserves

	2008		2009		2010		2011		2012
	(€ in billion)
Gold(1)		49.0		60.4		83.2		95.9		99.4
Special Drawing Rights		0.2		6.5		7.2		7.1		7.2
Total position with IMF		1.1		1.3		1.9		4.5		4.7
Net foreign exchange		25.4		24.0		26.7		26.4		26.4
Total reserves		75.6		92.2		118.9		133.9		137.7

⁽¹⁾  Valued at market exchange rates and prices.

Source: Bank of Italy.

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PUBLIC FINANCE

The Budget Process

The Government’s fiscal year is the calendar year. The budget and financial planning process of the Government is governed by Law No. 196 of 2009, as amended by Law No. 39 of 2011.

Budget Process. The budget process complies with European requirements, whose principal aim is to allow the EU to review all Member States’ budgetary policies and reform strategies simultaneously. The first “European Semester” begins in January, when the Commission prepares its annual report on economic development, containing strategic proposals for the EU economy. In March, the EU Council, based on the Commission’s report (after consulting the Economic and Financial Committee), identifies the main economic targets and strategies of the EU and the euro area and provides strategic guidance on policies. In April, the Member States, taking the EU Council’s guidelines into account, provide to the Commission their medium-term budgetary strategies and reforms by submitting their updated stability programmes and national reform programmes. In June or July, the EU Council, on a recommendation from the Commission, delivers an opinion on each of the updated programs and, if it considers that their objectives and contents should be strengthened, invites the Member State concerned to adjust its program. In the following months, each Member State, taking into account the decisions and requests of the Commission and the EU Council, adopts its new budget and measures to meet said requests.

Consistent with the European Semester, the Government submits to the Parliament, by April 10th, the Economic and Financial Document (Documento di economia e Finanza or “EFD”), which consists of three sections: (i) the stability programme, which establishes public finance targets; (ii) the analysis and tendencies in public finance, which contains data and information regarding the prior fiscal year, any discrepancies from previous program documents, and projections for at least the three following years; and (iii) the national reform programme, which sets forth the country’s priorities and main structural reforms to be effected. Following Parliament’s approval of the EFD, the stability programme and the national reform programme are submitted to the EU Council and the Commission by April 30th. Following the EU Council’s review, by September 20th, the Government submits to Parliament an update note to the EFD, which provides updates to the macroeconomic and financial projections and program targets contained in an EFD and incorporates any requests of the EU Council.

Subsequently, the Government submits to the Parliament, by October 15th, the final budgetary package, which consists of the Legge di Bilancio (“Budget Law”) and the Legge di Stabilità (“Stability Law”). The Budget Law authorizes general government revenues and expenditures for the upcoming three-year period. The Stability Law includes legal and financial measures for the three-year period covered by the Budget Law, implementing the budget and the targets contemplated in an EFD. The Ministry of Economy and Finance (“MEF”) submits to the Parliament by April of the subsequent year the Report on the General Economic Situation of the Country, which details the performance of the Italian economy of the previous year.

Approval of financial year. In addition, by May 31st of the subsequent year, the MEF is required to submit the “Rendiconto Generale dello Stato” (the “Rendiconto”) to the Court of Auditors (Corte dei Conti). The Rendiconto contains the statement of income and the balance sheet of the Republic of Italy for the previous fiscal year. The Corte dei Conti verifies that the Rendiconto is consistent with the budget provisions contained in the Budget Law of the previous year. Upon completion of the Corte dei Conti’s review, the MEF submits the Rendiconto to the Parliament by June 30th for approval.

European Economic and Monetary Union

Under the terms of the Maastricht Treaty, Member States participating in the EMU, or “Participating States”, are required to avoid excessive government deficits. In particular, they are required to maintain:

• a government deficit, or net borrowing, that does not exceed three per cent of GDP, unless the excess is exceptional and temporary and the actual deficit remains close to the three per cent ceiling; and

• a gross accumulated public debt that does not exceed 60 per cent of GDP or is declining at a satisfactory pace toward this reference value.

For additional information on Italy’s status under these covenants, see “The Italian Economy—Measures to Address the Global Financial and Economic Crisis” and “—The 2012 Economic and Financial Document”.

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Although Italy’s public debt exceeded 60 per cent of GDP in 1998, Italy was included in the first group of countries to join the EMU on January 1, 1999 on the basis that public debt was declining at a satisfactory pace toward the 60 per cent reference value.

In order to ensure the ongoing convergence of the economies participating in the EMU, to consolidate the single market and maintain price stability, effective on July 1, 1998, the Participating States agreed to a Stability and Growth Pact (the “SGP”). The SGP is an agreement among the Participating States aimed at clarifying the Maastricht Treaty’s provisions for an excessive deficit procedure and strengthening the surveillance and co-ordination of economic policies. The SGP also calls on Participating States to target budgetary positions aimed at a balance or surplus in order to adjust for potential adverse fluctuations, while keeping the overall government deficit below a reference value of 3 per cent of GDP.

Under SGP regulations, Participating States are required to submit each year a stability programme and non-participating Member States are required to submit a convergence programme. These programs cover the current year, the preceding year and as at least the three following years and are required to set forth:

• projections for a medium-term budgetary objective (a country-specific target which, for Participating States having adopted the euro, must fall within one per cent of GDP and balance or surplus, net of one-off and temporary measures) and the adjustment path towards this objective, including information on expenditure and revenue ratios and on their main components;

• the main assumptions about expected economic developments and the variables (and related assumptions) that are relevant to the realization of the stability programme such as government investment expenditure, real GDP growth, employment and inflation;

• the budgetary strategy and other economic policy measures to achieve the medium-term budgetary objective comprising detailed cost-benefit analysis of major structural reforms having direct cost-saving effects and concrete indications on the budgetary strategy for the following year;

• an analysis of how changes in the main economic assumptions would affect the budgetary and debt position, indicating the underlying assumptions about how revenues and expenditures are projected to react to variations in economic variables; and

• if applicable, the reasons for a deviation from the adjustment path towards the budgetary objective.

Based on assessments by the Commission and the Economic and Financial Committee, the EU Council delivers an opinion on whether:

• the economic assumptions on which the program is based are plausible;

• the adjustment path toward the budgetary objective is appropriate; and

• the measures being taken and/or proposed are sufficient to achieve the medium-term budgetary objective.

The EU Council can issue recommendations to the Participating State to take the necessary adjustment measures to reduce an excessive deficit. When assessing the adjustment path taken by Participating States, the EU Council will examine whether the Participating State concerned pursued the annual improvement of its cyclically adjusted balance, net of one-off and other temporary measures, with 0.5 per cent of GDP as a benchmark. When defining the adjustment path for those Participating States that have not yet reached the respective budgetary objective, or in allowing those that have already reached it to temporarily depart from it, the EU Council will take into account structural reforms which have long-term cost-saving effects, implementation of certain pension reforms and whether higher adjustment effort is made in economic “good times”. If the Participating State repeatedly fails to comply with the EU Council’s recommendations, the EU Council may require the Participating State to make a non-interest-bearing deposit equal to the sum of:

• 0.2 per cent of the Participating State’s GDP, and

• one tenth of the difference between the government deficit as a percentage of GDP in the preceding year and the reference value of 3 per cent of GDP.

This deposit may be increased in subsequent years if the Participating State fails to comply with the EU Council’s recommendations, up to a maximum of 0.5 per cent of GDP, and may be converted into a fine if the excessive deficit has not been corrected within two years after the decision to require the Participating State to make the deposit. In addition to requiring a non-interest-bearing deposit, in the event of repeated non-compliance with its recommendations, the EU Council may require the Participating State to publish

46

additional information, to be specified by the EU Council, before issuing bonds and securities and invite the European Investment Bank to reconsider its lending policy towards the Participating State. If the Participating State has taken effective action in compliance with the recommendation, but unexpected adverse economic events with major unfavorable consequences for government finances occur after the adoption of that recommendation, the EU Council may adopt a revised recommendation, which may extend the deadline for correction of the excessive deficit by one year.

Accounting Methodology

Pursuant to Law No. 196 of 2009, Italy utilizes the system of “general government accounting”. European Union countries are required to use general government accounting for purposes of financial reporting. EUROSTAT is the European Union entity responsible for decisions with respect to the application of such general government accounting criteria. General government accounting includes revenues and expenditures from both central and local government and from social security funds, or those institutions whose principal activity is to provide social benefits. Italy utilizes general government accounting on both an accrual and cash-basis.

ESA 95 National Accounts. In 1999, ISTAT introduced a new system of national accounts in accordance with the new European System of Accounts (ESA95) as set forth in European Union Regulation 2223/1996. This system was intended to contribute to the harmonization of the accounting framework, concepts and definitions within the European Union. Under ESA95, all European Union countries apply a uniform methodology and present their results on a common calendar.

In December 2005, ISTAT published general revisions to the national system of accounts reflecting amendments to ESA95 set forth in the European Union Regulations 351/2002 and 2103/2005. These revisions included: (i) a new methodology to evaluate the amortization of movable and fixed assets, (ii) a new accounting treatment for financial intermediary services, (iii) revisions to the methodology for calculating general government and investment expenditure, and (iv) the introduction of a new accounting system for a portion of social security contribution on an accrual basis.

In connection with the revisions to the national accounting system of December 2005, ISTAT replaced its methodology for calculating real growth, which had been based on a fixed base index, with a methodology linking real growth between consecutive time periods, or a chain-linked index. One of the effects of using chain indices is that other than for the first year in the chain, component measures will no longer aggregate to totals. Also, as a result of this change in methodology, all “real” revenue and expenditure figures included in this document differ from and are not comparable to data published in earlier documents filed by Italy with the SEC prior to March 12, 2007. The general government revenues and expenditure figures in this Annual Report reflect consolidated revenues and expenditures for the public sector, which is the broadest aggregate for which data is available.

On March 2, 2012, ISTAT published ordinary revisions to date for the years 2009 to 2011 along with the publication of the estimates for the 2011 accounts. These estimates, among other things, include the downward revision of GDP for 2009 due to a sharper decrease in investments in machinery and equipment with respect to the previously published estimate. Economic growth for 2010 was revised upward resulting in a more positive variation in investment in machinery and equipment against a downward revision in the construction sector. For additional information on the National Accounts, see Exhibit 2—2013 Stability Programme.

On October 4, 2012, ISTAT published ordinary revisions to date for the years 2010 to 2011 along with the publication of the revised estimates for the 2011 accounts. These revised estimates, among other things, included a marginal downward revision of GDP for 2011 and 2010 of €561 million and €83 million, respectively, with respect to the previously published estimate. In each year revisions had no effect on the GDP growth rate previously published.

Measures of Fiscal Balance

Italy reports its fiscal balance using two principal methods:

• Net borrowing, or government deficit, which is consolidated revenues less consolidated expenditures of the general government. This is the principal measure of fiscal balance, and is calculated in accordance with European Union accounting requirements. Italy also reports its structural net borrowing, which is a measure, calculated in accordance with methods adopted by the Commission, of the level of net borrowing after the effects of the business cycle have been taken into account. Structural net borrowing assumes that the output gap, which measures how much the economy is outperforming or underperforming its actual capacity, is zero. As there can be no precise measure of the output gap, there can be no precise measure of the structural government deficit. Accordingly, the structural net borrowing figures shown in this document are necessarily estimates.

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• Primary balance, which is consolidated revenues less consolidated expenditures of the general government excluding interest payments and other borrowing costs of the general government. The primary balance is used to measure the effect of discretionary actions taken to control expenditures and increase revenues.

The table below shows selected public finance indicators for the periods indicated.

Selected Public Finance Indicators^(*)

	2008			2009			2010			2011			2012
	(€ in millions, except percentages)
General government expenditure(1)		774,596			798,436			792,884			796,080			801,082
General government expenditure, as a percentage of GDP		49.2			52.5			51.1			50.4			51.2
General government revenues		731,896			714,833			723,617			736,064			753,449
General government revenues, as a percentage of GDP		46.5			47.0			46.6			46.6			48.1
Net borrowing		(42,700	)		(83,603	)		(69,267	)		(60,016	)		(47,633	)
Net borrowing, as a percentage of GDP		(2.7	)		(5.5	)		(4.5	)		(3.8	)		(3.0	)
Primary balance		38,612			(12,740	)		1,886			18,335			39,084
Primary balance, as a percentage of GDP		2.5			(0.8	)		0.1			1.2			2.5
Public debt(2)		1,671,001			1,769,254			1,851,252			1,907,392			1,988,629
Public debt as a percentage of GDP(2)		106.1			116.4			119.3			120.8			127.0
GDP (nominal value)		1,575,144			1,519,695			1,551,886			1,578,497			1,565,916

(*) Figures have been restated on the basis of data published in the 2013 Bank of Italy Annual Report and the 2013 ISTAT Annual Report. For additional information on restating data from Italy’s national accounts, see “—ESA 95 National Accounts”.

(1) Includes revenues from the divestiture of state-owned real estate (deducted from capital expenditures).

(2) Figures for 2010, 2011 and 2012 are gross of euro area financial support.

Source: ISTAT and Bank of Italy.

Large net borrowing requirements and high levels of public debt were features of the Italian economy until the early 1990s. In accordance with the Maastricht Treaty, the reduction of net borrowing and public debt became a national priority for Italy. Italy gradually reduced its net borrowing as a percentage of GDP below the three per cent threshold set by the Maastricht Treaty; Italy’s net borrowing as a percentage of GDP was 2.7 per cent in 2008 and increased to 5.5 per cent in 2009 mainly as a result of the slowdown in growth of current revenues and in the second half of 2009 the EU started an excessive deficit procedure against Italy. In 2010, 2011 and 2012, net borrowing as a percentage of GDP decreased to 4.5 per cent and 3.8 per cent and 3.0 per cent, respectively, due to lower expenditure relative to the GDP and higher tax revenues relative to the GDP.

The debt-to-GDP ratio increased to 106.1 per cent in 2008, mainly due to the slowdown in growth of nominal GDP, an increase in the valuation of securities indexed to inflation and an increase in public debt issues the proceeds of which were used to fund measures taken by the Government to address the global economic crisis of 2008. The ratio of debt-to-GDP in 2009 was 116.4 per cent, mainly due to a large decrease in GDP. In 2010, the debt-to-GDP ratio increased to 119 per cent net of euro area financial support and 119.3 per cent gross of euro area financial support; this was mainly due to upward revisions to the borrowing requirement made during 2010 although the final borrowing requirement for 2010 was 20 per cent lower than forecasted. In 2011, the debt-to-GDP ratio increased to 120 per cent net of euro area financial support and 120.8 per cent gross of euro area financial support; this was mainly due to the gap between the average cost of debt and the expansion of nominal GDP, only partly offset by the primary surplus of 1 percentage point and the factors that affect net borrowing but not debt. Italy’s debt-to-GDP ratio increased in 2012 to 124.3 per cent net of euro area financial support and 127.0 per cent gross of euro area financial support, reflecting the gap of 6.5 per cent between the average cost of debt and the expansion of nominal GDP and to the financial support provided to EMU countries, only partly offset by the primary surplus of 2.5 per cent. The debt-to-GDP ratio in 2012 was above the forecasts indicated in the September 20, 2012 update of the 2012 Economic and Financial Document. Compared to the forecast, the negative difference of 0.6 per cent was mainly due to an increased public sector borrowing requirement, which was €12 billion higher than the forecast made in September 2012.

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Since 1999, the Government has taken steps to lengthen the average maturity of debt and reduce the variable rate portion that, together with the introduction of the single currency, made Government debt less sensitive to variations in short-term interest rates and exchange rates. Consistent with the past, the Government’s debt management policy in 2012 was to limit exposure to market risks, mainly interest rate and refinancing risks. For additional information on Italy’s debt-to-GDP ratio, see “Public Debt” and Exhibit 2—2013 Stability Programme.

The 2012 Economic and Financial Document

In April 2012, Italy submitted to the EU its 2012 Economic and Financial Document, which included the 2012 Stability Programme and the 2012 National Reform Programme. The 2012 Economic and Financial Document was updated on September 20, 2012.

The 2012 Stability Programme. The 2012 Stability Programme confirmed Italy’s commitment to introduce a binding budget discipline into its Constitution, to reach within 2014 a level close to a balanced budget and to reduce the public debt by increasing the primary surplus.

The table below presents the main public finance objectives included in the 2012 Stability Programme.

Public Finance Objectives (in % of GDP)

2012 Stability Programme	2011(1)			2012			2013			2014			2015
Net Borrowing		(3.9	)		(1.7	)		(0.5	)		(0.1	)		0.0
Net Structural Borrowing		(3.6	)		(0.4	)		0.6			0.6			0.4
Structural Change		0.0			(3.2	)		(1.0	)		0.0			0.2
Public Debt, gross of euro area financial support		120.1			123.4			121.5			118.2			114.4
Public Debt, net of euro area financial support		119.2			120.3			117.9			114.5			110.8
Primary Balance		1.0			3.6			4.9			5.5			5.7

⁽¹⁾  Preliminary year-end data for 2011 presented in the 2012 Stability Programme.

Source: Ministry of Economy and Finance.

The table below sets out the macroeconomic forecasts prepared by the Republic of Italy through 2015 in connection with the 2012 Stability Programme.

Macroeconomic Forecasts (in %)

2012 Stability Programme	2011			2012			2013			2014			2015
Real GDP		0.4			(1.2	)		0.5			1.0			1.2
Nominal GDP		1.7			0.5			2.4			2.8			3.2
Private consumption		0.2			(1.7	)		0.2			0.5			0.7
Public consumption		(0.9	)		(0.8	)		(1.1	)		(0.3	)		0.2
Gross fixed investment		(1.9	)		(3.5	)		1.7			2.5			2.8
Inventories (% of GDP)		(0.5	)		(0.3	)		0.1			0.0			0.0
Exports of goods and services		5.6			1.2			2.6			4.2			4.6
Imports of goods and services		0.4			(2.3	)		2.2			3.6			3.9
Domestic demand		(0.4	)		(1.8	)		0.2			0.7			1.0
Change in inventories		(0.5	)		(0.3	)		0.1			0.0			0.0
Net exports		1.4			1.0			0.1			0.2			0.3

Source: Ministry of Economy and Finance.

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The 2012 National Reform Programme. As part of the 2012 National Reform Programme, the Government confirmed its existing policies and objectives set out in its 2011 National Reform Programme and identified eight policy areas where structural reform is necessary and as well as the measures that have been taken in order to achieve the objectives of Euro 2020. These areas are (i) Containment of Public Expenditure, (ii) Fiscal Federalism, (iii) Product Market, Competition and Administrative Efficiency, (iv) Labor and Pensions, (v) Innovation and Human Capital, (vi) Support to Businesses, (vii) Energy and Environment and (viii) Financial System. For additional information on the reform measures adopted in connection with the 2012 National Reform Programme, see “The Italian Economy—Measures to Address the Global Financial and Economic Crisis”.

The table below shows the impact of the measures contained in the 2012 National Reform Programme in terms of expenditure cuts/additions or revenue decreases/additions for each of the eight policy areas described above for the years 2011 to 2014.

Financial Impact of the 2012 National Reform Programme

2012 National Reform Programme	2011		2012		2013		2014
	(€ in millions)
Containment of Public Expenditure
Additional revenues		700.0		21,467.6		33,224.6		35,181.9
Expenditure cuts		26.2		7,537.0		8,535.9		10,459.7
Additional expenditure		107.0		104.5		2.5		2.5
Fiscal Federalism
Additional revenues		0.0		9,032.4		9,167.4		9,167.4
Expenditure cuts		0.0		1,627.4		2,762.4		3,162.4
Decrease in revenues		5.0		5.0		5.0		0.0
Product Market, Competition and Administrative Efficiency
Additional revenues		0.0		0.0		68.0		0.0
Expenditure cuts		0.0		0.0		16.2		16.2
Decrease in revenues		45.0		90.0		90.0		34.0
Additional expenditure		636.1		648.1		637.1		401.1
Labor and Pensions
Additional revenues		0.0		1,471.0		1,830.0		2,110.0
Expenditure cuts		0.0		2,643.0		8,433.0		10,432.0
Decrease in revenues		0.0		3,333.2		5,939.1		5,055.5
Additional expenditure		1,053.0		1,260.0		300.0		300.0
Innovation and Human Capital
Additional revenues		0.0		285.4		285.4		285.4
Decrease in revenues		90.0		90.0		90.0		0.0
Additional expenditure		110.0		991.8		560.2		404.0
Support to Businesses
Additional revenues		0.0		0.0		82.8		100.1
Decrease in revenues		14.0		985.7		1,487.3		2,944.0
Additional expenditure		0.0		3,935.0		235.0		235.0
Energy and Environment
Additional revenues		0.0		125.6		411.5		8.2
Additional expenditure		18.7		4.0		15.8		20.9
Financial System
Decrease in revenues		0.0		14.3		26.5		21.3
Additional expenditure		0.0		287.6		325.1		321.7

Source: Ministry of Economy and Finance

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The table below shows the anticipated impact of the recent measures taken by the Government in connection with the 2012 National Reform Programme on key economic indicators of the Republic of Italy’s growth through 2020.

2012 National Reform Programme’s Impact on the Republic of Italy’s Growth

2012 National Reform Programme	2012		2013		2014		2015		2020
GDP		0.2		0.4		0.7		0.9		2.4
Consumption expenditure		0.1		0.1		0.2		0.3		1.1
Gross capital formation		0.5		1.1		1.6		2.0		3.9
Employment		0.2		0.2		0.2		0.1		0.1

Source: Ministry of Economy and Finance.

The Balanced Budget Constitutional Amendment. In April 2012, Italy amended its Constitution to include a binding budget discipline, pursuant to which the general government will be required to operate under balanced budgets beginning in fiscal year 2014.

The Update of the 2012 Economic and Financial Document. In September 2012, Italy published its Update of the 2012 Economic and Financial Document, which included revised projections and forecasts given the continued worsening of the economic situation and the increased tensions resulting from the European sovereign debt crisis.

The table below presents the main public finance objectives included in the Update of the 2012 Economic and Financial Document.

Public Finance Objectives (in % of GDP)

Update of the 2012 Economic and Financial Document	2011(1)			2012			2013			2014			2015
Net Borrowing		(3.9	)		(2.6	)		(1.8	)		(1.5	)		(1.3	)
Net Structural Borrowing		(3.6	)		(0.9	)		0.0			(0.2	)		(0.4	)
Structural Change		0.0			(2.8	)		(0.9	)		0.3			0.2
Public Debt, gross of euro area financial support		120.7			126.4			126.1			123.1			119.9
Public Debt, net of euro area financial support		119.9			123.3			122.3			119.3			116.1
Primary Balance		1.0			2.9			3.8			4.4			4.8

⁽¹⁾  Preliminary year-end data for 2011 presented in the Update of the 2012 Economic and Financial Document.

Source: Ministry of Economy and Finance.

The table below presents macroeconomic forecasts prepared by the Republic of Italy through 2015 in connection with the Update of the 2012 Economic and Financial Document.

Macroeconomic Forecasts (in %)

Update of the 2012 Economic and Financial Document	2011			2012			2013			2014			2015
Real GDP		0.4			(2.4	)		(0.2	)		1.1			1.3
Nominal GDP		1.7			(1.0	)		1.2			3.0			3.2
Private consumption		0.2			(3.3	)		(0.5	)		0.6			0.8
Public consumption		(0.9	)		(0.6	)		(1.4	)		(0.5	)		0.2
Gross fixed investment		(1.9	)		(8.3	)		0.1			2.6			2.8
Exports of goods and services		5.6			1.2			2.4			3.9			4.2
Imports of goods and services		0.4			(6.9	)		1.7			3.5			3.9
Domestic demand		(0.4	)		(3.6	)		(0.6	)		0.7			1
Change in inventories		(0.5	)		(0.9	)		0.1			0.1			0
Net exports		1.4			2.3			0.2			0.2			0.2

Source: Ministry of Economy and Finance.

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The following table compares the main finance indicators included in the 2012 Stability Programme and the Update of the 2012 Economic and Financial Document.

Main Finance Indicators - 2012 Economic and Financial Document

v. Update of the 2012 Economic and Financial Document

	2011			2012			2013			2014			2015
GDP growth rate
2012 Economic and Financial Document(1)		0.4			(1.2	)		0.5			1.0			1.2
Update of the 2012 Economic and Financial Document(2)		0.4			(2.4	)		(0.2	)		1.1			1.3
Difference		0.0			(1.2	)		(0.7	)		0.1			0.1
Net Borrowing, as a % of GDP
2012 Economic and Financial Document(1)		(3.9	)		(1.7	)		(0.5	)		(0.1	)		0.0
Update of the 2012 Economic and Financial Document(2)		(3.9	)		(2.6	)		(1.8	)		(1.5	)		(1.3	)
Difference		0.0			(0.9	)		(1.3	)		(1.4	)		(1.3	)
Public Debt, as a % of GDP
2012 Economic and Financial Document, gross of euro area financial support(1)		120.1			123.4			121.5			118.2			114.4
Update of the 2012 Economic and Financial Document, gross of euro area financial support(2)		120.7			126.4			126.1			123.1			119.9
Difference		0.6			3.0			4.6			4.9			5.5

⁽¹⁾  Preliminary year-end data for 2011 presented in the 2012 Economic and Financial Document.

⁽²⁾  Preliminary year-end data for 2011 presented in the Update of the 2012 Economic and Financial Document.

Source: Ministry of Economy and Finance.

The EU Council’s policy recommendations to Italy for the period 2012-2013.

As part of the European semester process, in July 2012, the EU Council, acting through ECOFIN, issued specific recommendations to Italy, based on assessments of Italy’s macroeconomic and fiscal situation as outlined in the 2012 Stability Programme and the 2012 National Reform Programme. ECOFIN recommended that Italy take action over the period 2012-2013 to:

• Implement the budgetary strategy as planned, and ensure that the excessive deficit is corrected in 2012. Ensure the planned structural primary surpluses so as to put the debt-to-GDP ratio on a declining path by 2013. Ensure adequate progress towards the medium-term objective, while meeting the expenditure benchmark and making sufficient progress towards compliance with the debt reduction benchmark;

• Ensure that the specification in the implementing legislation of the key features of the balanced budget rule set out in the Constitution, including appropriate coordination across levels of government, is consistent with the EU framework. Pursue a durable improvement of the efficiency and quality of public expenditure through the planned spending review and the implementation of the 2011 Cohesion Action Plan leading to improving the absorption and management of EU funds, in particular in the South of Italy;

• Take further action to address youth unemployment, including by improving the labor-market relevance of education and facilitating transition to work, also through incentives for business start-ups and for hiring employees. Enforce nation-wide recognition of skills and qualifications to promote labor mobility. Take measures to reduce tertiary education dropout rates and fight early school leaving;

• Adopt the labor market reform as a priority to tackle the segmentation of the labor market and establish an integrated unemployment benefit scheme. Take further action to incentivize labor market participation of women, in particular through the provision of childcare and elderly care. Monitor and if needed reinforce the implementation of the new wage setting framework in order to contribute to the alignment of wage growth and productivity at sector and company level;

• Pursue the fight against tax evasion. Pursue the shadow economy and undeclared work, for instance by stepping up checks and controls. Take measures to reduce the scope of tax exemptions, allowances and reduced VAT rates and simplify the tax code. Take further action to shift the tax burden away from capital and labor to property and consumption as well as environment;

• Take further measures to improve market access in network industries, as well as infrastructure capacity and interconnections. Simplify further the regulatory framework for businesses and enhance administrative capacity. Improve access to financial instruments, in particular equity, to finance growing businesses and innovation. Implement the planned reorganization of the civil justice system, and promote the use of alternative dispute settlement mechanisms.

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The 2013 Economic and Financial Document

In April 2013, Italy submitted to the EU its 2013 Economic and Financial Document, which included the 2013 Stability Programme and the 2013 National Reform Programme.

The 2013 Stability Programme. The 2013 Stability Programme confirmed Italy’s commitment reach a balanced budget in structural terms in 2013 and to reduce the public debt by increasing the primary surplus. The table below presents the main public finance objectives included in the 2013 Stability Programme

Public Finance Objectives (in % of GDP)

2013 Stability Programme	2011			2012			2013			2014			2015			2016			2017
Net Borrowing		(3.8	)		(3.0	)		(2.9	)		(1.8	)		(1.5	)		(0.9	)		(0.4	)
Net Structural Borrowing		(3.5	)		(1.2	)		0.0			0.4			0.0			0.0			0.0
Structural Change		(0.2	)		(2.3	)		(1.1	)		(0.4	)		0.4			0.0			0.0
Public Debt, gross of euro area financial support		120.8			127.0			130.4			129.0			125.5			121.4			117.3
Public Debt, net of euro area financial support		120.0			124.3			126.9			125.2			121.8			117.8			113.8
Primary Balance		1.2			2.5			2.4			3.8			4.3			5.1			5.7

Source: Ministry of Economy and Finance.

The table below sets out the macroeconomic forecasts prepared by the Republic of Italy through 2017 in connection with the 2013 Stability Programme.

Macroeconomic Forecasts (in %)

2013 Stability Programme	2012			2013			2014			2015		2016		2017
Real GDP		(2.4	)		(1.3	)		1.3			1.5		1.3		1.4
Nominal GDP		(0.8	)		0.5			3.2			3.3		3.2		3.2
Private consumption		(4.3	)		(1.7	)		1.4			1.1		1.1		1.2
Public consumption		(2.9	)		(1.7	)		(0.4	)		0.7		0.3		0.1
Gross fixed investment		(8.0	)		(2.6	)		4.1			3.2		2.6		2.4
Inventories (% of GDP)		(0.6	)		(0.1	)		0.1			0.1		0.0		0.0
Exports of goods and services		2.3			2.2			3.3			4.1		4.0		3.9
Imports of goods and services		(7.7	)		(0.3	)		4.7			4.4		4.1		3.8
Domestic demand		(4.8	)		(1.9	)		1.4			1.3		1.2		1.2
Change in inventories		(0.6	)		(0.1	)		0.1			0.1		0.0		0.0
Net exports		3.0			0.7			(0.2	)		0.1		0.1		0.1

Source: Ministry of Economy and Finance.

The 2013 National Reform Programme. As part of the 2013 National Reform Programme, the Government identified nine policy areas where structural reform is necessary and as well as the measures that have been taken in order to achieve the objectives of Euro 2020. These areas are (i) Containment of Public Expenditure, (ii) Administrative Efficiency, (iii) Infrastructure and Development, (iv) Product Market, Competition and Administrative Efficiency, (v) Labor and Pensions, (vi) Innovation and Human Capital, (vii) Support to Businesses, (viii) Energy and Environment and (ix) Financial System.

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The table below shows the impact of the measures contained in the 2013 National Reform Programme in terms of expenditure cuts/additions or revenue decreases/additions for each of the nine policy areas described above for the years 2012 to 2017.

Financial Impact of the 2013 National Reform Programme

2013 National Reform Programme	2012		2013		2014		2015		2016		2017
	(€ in millions)
Containment of Public Expenditure
Additional revenues		30.0		1,971.7		2,250.9		2,325.9		1,988.2		1,988.2
Decrease in revenues		0.0		562.4		586.4		568.4		568.4		562.4
Expenditure cuts		0.0		7,391.3		7,906.1		8,098.1		7,135.8		7,100.8
Additional expenditure		0.0		588.0		0.0		0.0		0.0		0.0
Administrative Efficiency
Additional expenditure		0.0		10.0		0.0		0.0		0.0		0.0
Infrastructure and Development
Decrease in revenues		4.2		4.2		4.2		4.2		4.2		4.2
Additional expenditure		70.0		320.0		70.0		70.0		70.0		70.0
Product Market, Competition and Administrative Efficiency
Decrease in revenues		0.0		8.8		8.8		8.8		8.8		8.8
Labor and Pensions
Additional revenues		0.0		988.0		1,554.0		1,800.0		1,800.0		1,400.0
Decrease in revenues		0.0		940.8		1,349.1		1,205.7		0.0		0.0
Additional expenditure		0.0		3492.0		4,266.0		3,877.0		3,831.0		3,422.0
Innovation and Human Capital
Additional expenditure		0.0		278.6		169.4		109.4		108.1		108.1
Support to Businesses
Additional revenues		0.0		0.0		0.0		32.8		0.0		28.4
Decrease in revenues		0.0		77.3		149.5		120.7		120.7		111.6
Additional expenditure		0.0		667.3		453.0		506.9		496.7		496.7
Energy and Environment
Additional expenditure		0.0		0.2		5.2		10.2		10.0		10.0
Financial System
Decrease in revenues		0.0		10.8		7.9		9.4		11.0		12.6
Additional expenditure		0.0		1,617.0		0.0		0.0		0.0		0.0

Source: Ministry of Economy and Finance

The following table compares the main finance indicators included in the 2012 Stability Programme and the 2013 Stability Programme.

Main Finance Indicators - 2012 Stability Programme v. 2013 Stability Programme

	2012			2013			2014			2015
GDP growth rate
2012 Stability Programme		(1.2	)		0.5			1.0			1.2
2013 Stability Programme		(2.4	)		(1.3	)		1.3			1.5
Difference		(1.2	)		(1.8	)		0.3			0.3
Net Borrowing, as a % of GDP
2012 Stability Programme		(1.7	)		(0.5	)		(0.1	)		0.0
2013 Stability Programme		(3.0	)		(2.9	)		(1.8	)		(1.5	)
Difference		(1.3	)		(2.4	)		(1.7	)		(1.5	)
Public Debt, as a % of GDP
2012 Stability Programme		123.4			121.5			118.2			114.4
2013 Stability Programme, gross of euro area financial support		127.0			130.4			129.0			125.5
Difference		3.6			8.9			10.8			11.1

Source: Ministry of Economy and Finance.

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The Update of the 2013 Economic and Financial Document. In September 2013, Italy published its Update of the 2013 Economic and Financial Document, which included revised projections and forecasts given the continued worsening of the economic situation in Italy and the increased tensions resulting from the European sovereign debt crisis.

The table below presents the main public finance objectives included in the Update of the 2013 Economic and Financial Document.

Public Finance Objectives (in % of GDP)

Update of the 2013 Economic and Financial Document	2012(1)			2013			2014			2015			2016
Net Borrowing		(3.0	)		(3.1	)		(2.3	)		(1.8	)		(1.2	)
Net Structural Borrowing		(1.3	)		(0.5	)		(0.1	)		(0.2	)		(0.5	)
Structural Change		(2.3	)		(0.7	)		(0.4	)		0.1			0.2
Public Debt, gross of euro area financial support and acceleration of payments due by the public administration		127.0			133.0			133.2			130.5			127.1
Public Debt, net of euro area financial support		124.3			129.5			129.4			126.8			123.5
Public Debt, net of euro area financial support and acceleration of payments due by the public administration		124.3			127.7			126.3			123.8			120.6
Primary Balance		2.5			2.3			3.0			3.5			4.1

⁽¹⁾  Preliminary year-end data for 2012 presented in the Update of the 2013 Economic and Financial Document.

Source: Ministry of Economy and Finance.

The table below presents macroeconomic forecasts prepared by the Republic of Italy through 2016 in connection with the Update of the 2013 Economic and Financial Document.

Macroeconomic Forecasts (in %)

Update of the 2013 Economic and Financial Document	2012			2013			2014			2015		2016
Real GDP		(2.4	)		(1.7	)		1.0			1.7		1.8
Nominal GDP		(0.8	)		(0.5	)		2.9			3.6		3.5
Private consumption		(4.3	)		(2.5	)		0.5			1.1		1.5
Public consumption		(2.9	)		(0.3	)		(0.1	)		0.7		0.3
Gross fixed investment		(8.0	)		(5.3	)		2.0			3.6		3.8
Exports of goods and services		2.3			0.2			4.2			4.5		4.4
Imports of goods and services		(7.7	)		(2.9	)		4.2			4.8		4.5
Domestic demand		(4.8	)		(2.5	)		0.6			1.4		1.6
Change in inventories		(0.6	)		0.0			0.2			0.2		0.0
Net exports		3.0			0.9			0.2			0.1		0.1

Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2013 Stability Programme and the Update of the 2013 Economic and Financial Document.

Main Finance Indicators - 2013 Economic and Financial Document

v. Update of the 2013 Economic and Financial Document

	2012			2013			2014			2015			2016
GDP growth rate
2013 Economic and Financial Document(1)		(2.4	)		(1.3	)		1.3			1.5			1.3
Update of the 2013 Economic and Financial Document(2)		(2.4	)		(1.7	)		1.0			1.7			1.8
Difference		0.0			(0.4	)		(0.3	)		0.2			0.5
Net Borrowing (updated policy scenario), as a % of GDP
2013 Economic and Financial Document(1)		(3.0	)		(2.9	)		(1.8	)		(1.5	)		(0.9	)
Update of the 2013 Economic and Financial Document(2)		(3.0	)		(3.0	)		(2.5	)		(1.6	)		(0.8	)
Difference		0.0			(0.1	)		(0.7	)		(0.1	)		0.1
Public Debt (updated policy scenario), as a % of GDP
2013 Economic and Financial Document, gross of euro area financial support and acceleration of payments due by the public administration(1)		127.0			130.4			129.0			125.5			121.4
Update of the 2013 Economic and Financial Document, gross of euro area financial support and acceleration of payments due by the public administration(2)		127.0			132.9			132.8			129.4			125.0
Difference		0.0			2.5			3.8			3.9			3.6

⁽¹⁾  Preliminary year-end data for 2012 presented in the 2013 Economic and Financial Document.

⁽²⁾  Preliminary year-end data for 2012 presented in the Update of the 2013 Economic and Financial Document.

Source: Ministry of Economy and Finance.

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The EU Council’s policy recommendations to Italy for the period 2013-2014.

As part of the European semester process, in July 2013, the EU Council, acting through ECOFIN, issued specific recommendations to Italy, based on assessments of Italy’s macroeconomic and fiscal situation as outlined in the 2013 Stability Programme and the 2013 National Reform Programme. ECOFIN recommended that Italy take action over the period 2013-2014 to:

• Ensure that the deficit remains below 3% of GDP in 2013, by fully implementing the measures adopted by the Italian government. Pursue the structural adjustment at an appropriate pace and through growth-friendly fiscal consolidation so as to achieve and maintain the medium-term objective as from 2014. Achieve the planned structural primary surpluses in order to put the very high debt-to-GDP ratio on a steadily declining path. Continue pursuing a durable improvement of the efficiency and quality of public expenditure by fully implementing the measures adopted in 2012 and taking the effort forward through regular in depth spending reviews at all levels of government;

• Ensure timely implementation of on-going reforms by swiftly adopting the necessary enacting legislation, following it up with concrete delivery at all levels of government and with all relevant stakeholders, and monitoring impact. Reinforce the efficiency of public administration and improve coordination between layers of government. Simplify the administrative and regulatory framework for citizens and business and reduce the duration of case-handling and the high levels of litigation in civil justice, including by fostering out-of-court settlement procedures. Strengthen the legal framework for the repression of corruption, including by revising the rules governing limitation periods. Adopt structural measures to improve the management of EU funds in the southern regions with regard to the 2014-2020 programming period;

• Extend good corporate governance practices to the whole banking sector conducive to higher efficiency and profitability to support the flow of credit to productive activities. Take forward the on-going work as regards asset-quality screening across the banking sector and facilitate the resolution of non-performing loans on banks’ balance sheets. Promote further the development of capital markets to diversify and enhance firms’ access to finance, especially into equity, and in turn foster their innovation capacity and growth;

• Ensure the effective implementation of the labor market and wage setting reforms to allow better alignment of wages to productivity. Take further action to foster labor market participation, especially of women and young people. Strengthen vocational education and training, ensure more efficient public employment services and improve career and counseling services for tertiary students. Reduce financial disincentives for second earners to work and improve the provision of care, especially child and long-term care, and out-of-school services. Step up efforts to prevent early school leaving. Improve school quality and outcomes, also by enhancing teachers’ professional development and diversifying career development. Ensure effectiveness of social transfers, notably through better targeting of benefits, especially for low-income households with children;

• Shift the tax burden from labor and capital to consumption, property and the environment in a budgetary neutral manner. To this purpose, review the scope of VAT exemptions and reduced rates and of direct tax expenditures, and reform the cadastral system to align the tax base of recurrent immovable property to market values. Pursue the fight against tax evasion, improve tax compliance and take decisive steps against the shadow economy and undeclared work; and

• Ensure the proper implementation of the measures aiming at market opening in the services sector. Remove remaining restrictions in professional services and foster market access for instance in the provision of local public services where the use of public procurement should be advanced (instead of direct concessions). Pursue deployment of the measures taken to improve market access conditions in network industries, in particular by setting- up the Transport Authority as a priority. Upgrade infrastructure capacity with focus on energy interconnections, intermodal transport and high-speed broadband in telecommunications, also with a view to tackling the North-South disparities.

Revenues and Expenditures

The following table sets forth general government revenues and expenditures and certain other key public finance measures for the periods indicated. This data is prepared on an accrual basis. The table does not include revenues from privatizations, which are deposited into a special fund for the repayment of Treasury

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outstanding securities and cannot be used to finance current expenditures. While proceeds from privatizations do not affect the primary balance, they contribute to a decrease in the public debt and consequently the debt-to-GDP ratio.

General Government Revenues and Expenditures

	2008			2009			2010			2011			2012
	(€ in millions)
Expenditures
Compensation of employees		169,666			171,050			172,002			169,209			165,366
Intermediate consumption		84,287			89,676			90,177			91,222			89,068
Market purchases of social benefits in kind		42,780			44,716			45,549			44,657			43,211
Social benefits in cash		277,183			291,495			298,418			304,262			311,413
Subsidies to firms		16,107			16,743			17,412			16,461			15,842
Interest payments		81,312			70,863			71,153			78,351			86,717
Other expenditures		44,052			46,959			46,390			43,802			41,638
Total current expenditure		715,387			731,502			741,101			747,964			753,255
Gross fixed investment		35,316			38,404			32,509			31,175			29,199
Investment grants		22,338			24,310			17,850			18,507			17,487
Other capital expenditures		1,555			4,220			1,424			(1,566	)		1,141
Total capital account expenditure		59,209			66,934			51,783			48,116			47,827
Total expenditure		774,596			798,436			792,884			796,080			801,082
as a percentage of GDP		49.2			52.5			51.1			50.4			51.2
Deficit on current account (surplus -)		(12,537	)		32,303			24,619			23,234			6,148
Net borrowing		(42,700	)		(83,603	)		(69,267	)		(60,016	)		(47,633	)
as a percentage of GDP		(2.7	)		(5.5	)		(4.5	)		(3.8	)		(3.0	)
Revenues
Direct taxes		239,644			221,995			226,076			225,926			237,235
Indirect taxes		215,842			206,403			217,883			222,080			233,554
Actual social security contributions		211,931			208,373			209,266			212,701			212,422
Imputed social security contributions		3,878			4,182			4,135			4,262			4,247
Income from capital		9,742			8,607			8,585			10,542			9,328
Other revenue		46,887			49,639			50,537			49,219			50,321
Total current revenue		727,924			699,199			716,482			724,730			747,107
Capital taxes		488			12,256			3,497			6,981			1,375
Other capital revenue		3,484			3,378			3,638			4,353			4,967
Total capital revenue		3,972			15,634			7,135			11,334			6,342
Total revenue		731,896			714,833			723,617			736,064			753,449
as a percentage of GDP		46.5			47.0			46.6			46.6			48.1
Primary balance		38,612			(12,740	)		1,886			18,335			39,084
as a percentage of GDP		2.5			(0.8	)		0.1			1.2			2.5

Source: ISTAT and Bank of Italy

General government revenue increased by 2.4 per cent or €17.4 billion in 2012, buoyed by the effects of the 2011 and 2012 budgets. Without taking into account the additional revenue attributable to these measures (about €31 billion), revenue diminished by approximately 2 per cent, whereas nominal GDP contracted by 0.8 per cent. The measures introduced in 2011 and 2012 were officially estimated to increase revenue between 2011 and 2012 by approximately €34 billion, of which nearly one third was to come from the early entry into force of the new municipal property tax (IMU) and about €11 billion from the broadening of the property tax base. Tax revenue and social security contributions rose from 42.6 to 44.0 per cent of GDP.

General government expenditures increased by 0.6 per cent in 2012, rising from 50.4 to 51.2 per cent of GDP. The increase was due to the further rapid growth in interest payments, while primary expenditure declined for the third successive year (falling by 0.5 per cent to a level 1.8 per cent below that recorded in 2009).

Italy recorded a current account deficit of approximately €6.1 billion in 2012, compared to a deficit of approximately €23.2 billion in 2011. The decrease in the current account deficit was mainly due to an increase in current revenues of approximately €22.4 billion in 2012, while current expenditure remained relatively stable with an increase of approximately €5 billion.

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Expenditures

Compensation of employees. Compensation of employees decreased by 2.3 per cent in 2012 compared to a 1.2 per cent decrease in 2011, due to a decrease in the number of employees. Pursuant to Law Decree No. 78 of 2010, wages of public employees for the 2011-2013 three-year period have been frozen at the 2010 level of total compensation, realizing a reduction of expenditure for employee compensation in the public sector by €1.7 billion in 2011, €2.7 billion in 2012 and €3.3 billion in 2013.

Intermediate consumption. Intermediate consumption, which measures the value of the goods and services consumed as inputs by a process of production, decreased by 2.4 per cent in 2012 compared to a 1.2 per cent increase in 2011.

Market purchases of social benefits in kind. Expenditure on social benefits in kind decreased for the second successive year, contracting by 3.2 per cent in 2012 and by 2.0 per cent in 2011. In 2012, expenditure on social benefits in kind was equal to 2.8 per cent of GDP.

Expenditures for public health and education are accounted for under wages and salaries, cost of goods and services and production grants.

Italy has a public health service managed principally by regional governments with funds provided by the Government. Local health units adopt their own budgets, establish targets and monitor budget developments. Ninety per cent of expenditure on social benefits in kind in 2012 related to health care outlays.

Italy has a public education system consisting of elementary, middle and high schools and universities. Attendance at public elementary, middle and high schools is generally without charge to students, while tuition payments based on income level are required to attend public universities.

Social benefits in cash. Social benefits in cash include expenditures for pensions, disability and unemployment benefits. Social benefits in cash increased by 2.4 per cent in 2012 compared to an increase of 2.2 per cent in 2011. The increase in pension expenditure was due to the adjustment for inflation (3.0 per cent, of which 0.4 points was a previous-year balancing item); in 2012, as provided for by the December 2011 package, the adjustment was not applied to pensions more than three times the minimum benefit (about €1,450 per month). On the basis of the data currently available the number of pensions appears to have decreased slightly. The reform of the pension system enacted in December 2011 did not affect the number of new pensions paid because, owing to the retirement interval mechanism, the workers who retired in 2012 had qualified in the previous year and were therefore not subject to the more stringent requirements introduced in December 2011. For additional information relating to government expenditure in connection with the national pension system, see “The Italian Economy—Social Welfare System”, Exhibit 2—2013 Stability Programme and Exhibit 3—2013 National Reform Programme.

Subsidies to firms. Subsidies to firms, which are current payments by the general government to resident producers that are not required to be reimbursed, decreased by 3.8 per cent in 2012 compared to a 5.5 per cent decrease in 2011.

Interest payments. Interest payments by the government increased by €8.4 billion or 10.7 per cent in 2012 as compared to an increase of €0.86 billion or 9.7 per cent in 2011. The ratio of interest payments to nominal GDP was 5.5 per cent and 5.0 per cent in 2012 and 2011, respectively. The weighted average cost of debt, calculated as the ratio of expenditure for interest payments to average amount of debt, was stable at 3.11 per cent in 2012. The average yield on 12-month BOTs (short-term zero-coupon notes) in 2012 was 2.30 per cent, compared to 3.17 per cent in 2011, compared to 1.3 per cent in 2010. The average interest rate on ten-year BTPs (fixed-rate notes) in 2012 was 5.65 per cent, compared to 5.25 per cent in 2011. For additional information on Italy’s public debt, see “Public Debt”.

Other Expenditures. Other expenditures decreased by 2.6 in 2012 compared to a 2.9 per cent decrease in 2011.

Revenues

Taxes. Italy’s tax structure includes taxes imposed at the state and local levels and provides for both direct taxation through income taxes and indirect taxation through a VAT and other transaction-based taxes. Indirect taxes include VAT, excise duties, stamp duties and other taxes levied on expenditures. Income taxes consist of an individual tax levied at progressive rates and a corporate tax levied at a flat rate. Corporations also pay local taxes, and the deductibility of those taxes for income tax purposes has been gradually eliminated over the last years.

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VAT is imposed on the sale of goods, the rendering of services performed for consideration in connection with business or professions and on all imports of goods or services. In addition to VAT, indirect taxes include customs duties, taxes on real estate and certain personal property, stamp taxes and excise taxes on energy consumption, tobacco and alcoholic beverages.

Italy has entered into bilateral treaties for the avoidance of double taxation with virtually all industrialized countries.

Low taxpayer compliance has been a longstanding concern for the Government, which has adopted measures to increase compliance. Some of these measures are aimed at identifying tax evasion and include systems of cross-checks between the tax authorities and social security agencies, public utilities and others. One of the areas of greatest concern to the Government has been under-reporting of income by self-employed persons and small enterprises. The Government’s efforts to increase tax compliance since 2001 have led to an increase in the general tax base and to an improvement in compliance.

Italy’s fiscal burden, which is the aggregate of direct and indirect tax revenues and social security contributions as a percentage of GDP, rose from 42.6 per cent in 2011 to 44.0 per cent in 2012. This increase was mainly due to the increase in tax revenues, which grew from 28.8 per cent of GDP in 2011 to 30.2 per cent in 2012.

This data is prepared on a cash basis. The following table sets forth the composition of tax revenues for the periods indicated.

Composition of Tax Revenues⁽¹⁾

	2008		2009		2010		2011		2012
	(€ in millions)
Direct taxes
Personal income tax		158,263		153,508		159,939		159,076		158,894
Corporate income tax		47,438		37,678		37,731		36,971		37.555
Investment income taxes		14,257		13,215		7,598		7,269		10,156
Other(2)		6,183		15,963		8,556		11,313		16,321
Total direct taxes		226,140		220,364		213,823		214,628		222,926
Indirect taxes
VAT		117,444		108,727		112,891		115,608		113,023
Other transaction-based taxes		21,396		21,054		20,846		21,328		19,381
Taxes on production of mineral oil		20,291		20,818		19,765		20,254		24,170
Taxes on production of methane gas		2,469		4,360		4,169		4,604		3,799
Tax on electricity consumption		1,326		1,286		1,244		1,236		2,525
Tax on tobacco consumption		9,904		10,070		10,241		10,398		10,400
Taxes on lotto and lotteries		11,315		12,826		11,743		12,770		11,575
Other(2)		2,033		1,947		1,957		1,959		1,931
Total indirect taxes		186,178		181,089		182,856		188,157		186,805
Total taxes		412,318		401,453		396,679		402,785		409,730

⁽¹⁾  The data presented in this “Composition of Tax Revenues” table does not correspond to the general government direct and indirect tax revenue figures contained in the preceding table entitled “General Government Revenues and Expenditures,” primarily because the “Composition of Tax Revenues” table is prepared on a cash basis while the “General Government Revenues and Expenditures” table is prepared on an accrual basis in accordance with ESA95. Generally, State sector accounting does not include indirect taxes levied by, and certain amounts allocable to, regional and other local governments and entities. However, because this “Composition of Tax Revenues” table is prepared on a cash basis, it reflects tax receipts of entities that are excluded from State sector accounting (such as local government entities) that are collected on their behalf by the State (and subsequently transferred by the State to those entities).

⁽²⁾  Taxes classified as “other” are non-recurring, therefore highly variable.

Source: Bank of Italy.

In 2012, direct tax receipts (as reported in the “General Government Revenues and Expenditures” table on a cash basis) increased by 5.6 per cent compared to 2011. General government revenue increased by 2.4 per cent or €17.4 billion in 2012, buoyed by the effects of the 2011 and 2012 budgets. Not counting the additional revenue attributable to these measures (about €31 billion), revenue diminished by about 2 per cent, whereas nominal GDP contracted by 0.8 per cent. The measures introduced in 2011 and 2012 were officially estimated to increase revenue between 2011 and 2012 by about €34 billion, of which nearly one third was to come from the early entry into force of the new municipal property tax (IMU) and about €11 billion from the broadening of the property tax base. The effect of the municipal property tax measures was about €2 billion more than originally estimated, primarily owing to the discretionary rate increases that were made by municipalities but had not been included in the original estimates. By contrast, the revenue produced by the

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stamp duty measures was about €2.5 billion less than expected (considering both the stamp duty on financial assets reported under the foreign asset disclosure scheme and that connected with financial intermediaries’ periodic notifications to customers). Lastly, the loss of revenue connected with the possibility for firms, subject to some conditions, to convert a part of their accrued tax assets into tax credits was larger than originally expected (more than €2.5 billion, compared with an original estimate of next to nothing).

Actual social security contributions. Actual social security contributions, which consist of payments made for the benefit of employees to insurers, increased by 0.1 per cent in 2012 compared to an increase of 1.3 per cent in 2011.

Imputed social security contributions. Imputed social security contributions, which represent the counterpart to unfunded social benefits paid directly to employees and former employees and other eligible persons without involving an insurance company or autonomous pension fund, and without creating a special fund or segregated reserve for the purpose, decreased by 0.4 per cent in 2012 compared to an increase of 2.6 per cent in 2011.

Income from capital. Income from capital decreased by 11.5 per cent in 2012 compared to an increase of 12.2 per cent in 2011.

Other Revenue. Other revenue increased by 2.2 per cent in 2012 compared to a 1.4 per cent increase in 2011.

Government Enterprises

The following chart summarizes certain basic data regarding the largest companies in which the Government holds an interest, for the periods indicated. The Government currently continues to participate in the election of the respective boards of directors but does not directly participate in the management of these companies.

Largest Government Companies⁽¹⁾⁽²⁾

Company	Industry Sector	Per cent of Government Ownership as of December 31, 2012			Total Assets		Total Liabilities		Net profit (loss)
					At December 31,				For the year ended December 31,
					2012		2012		2010			2011			2012
		(€ in millions, except percentages)
Cassa Depositi e Prestiti S.p.A(3).	Financial Services		70.0	(4)		328,551		307,494		2,344			2,167			2,924
ENEL S.p.A.	Electricity		31.2			171,656		118,498		5,673			5,323			2,075
ENI S.p.A.	Oil and Gas		30.10			139,641		76,928		7,383			7,803			8,673
Ferrovie dello Stato Italiane S.p.A.	Railroads		100			64,158		27,757		129			285			381
Finmeccanica S.p.A.	Defense/Aerospace		30.2			30,433		26,730		557			(2,306	)		(786	)
Fintecna S.p.A.	Financial Services		100			6,323		3,510		(418	)		76.5			99.2
Poste Italiane S.p.A.	Post/Financial Services		100			120,570		114,920		1,017			846			1,032

⁽¹⁾  Percentages refer to the relevant holding company, while financial data is presented on a consolidated basis.

⁽²⁾  Including shares indirectly owned by the Government through CDP.

⁽³⁾  The remaining 30% of CDP was owned by various banking foundations.

⁽⁴⁾  Ownership subsequently increased to 80.1 per cent.

Source: Ministry of Economy and Finance.

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PUBLIC DEBT

General

Italy’s public debt includes debt incurred by the central Government (including Treasury securities and borrowings), regional and other local government, public social security agencies and other public agencies.

The Treasury manages the public debt and the financial assets of Italy. The Bank of Italy provides technical assistance to the Treasury in connection with auctions for domestic bonds and acts as paying agent for Treasury securities. The Stability Law and the Budget Law authorize the incurrence of debt by the government. For additional information on Italy’s budget and financial planning process and the Stability Law and the Budget Law, see “Public Finance—The Budget Process”.

The following table summarizes Italy’s public debt as of the dates indicated, including debt represented by Treasury securities and liabilities to holders of postal savings.

Total Public Debt^(*)

	December 31,
	2008		2009		2010		2011		2012
	(€ in millions)
Debt incurred by the Treasury:
Internal bonds:
Short term bonds (BOT)(1)		147,752		140,096		130,054		131,693		151,119
Medium- and long-term bonds (initially incurred or issued in Italy)		1,137,870		1,236,446		1,324,754		1,386,937		1,427,338
Total internal bonds		1,285,622		1,376,542		1,454,808		1,518,630		1,578,457
Total external bonds (initially incurred or issued outside Italy)(2)		60,342		60,058		61,978		58,541		60,267
Total Treasury Issues		1,345,964		1,436,600		1,516,786		1,577,171		1,638,724
Postal savings(3)		31,492		30,004		25,196		22,079		20,932
Treasury accounts(4)		112,925		123,518		127,485		127,840		136,627
Other debt incurred by:
FS (bonds and other debt)(5)		935		111		15		—		—
ISPA (bonds and other debt)(6)		11,542		11,034		11,048		11,070		11,100
State sector entities(7)		54,841		51,151		50,227		49,502		73,115
Other general government entities		108,884		111,211		112,069		119,076		118,635
Total public debt		1,666,583		1,763,629		1,842,826		1,906,738		1,999,136
as a percentage of GDP		105.8		115.5		118.4		120.7		127.0
Liquidity buffer(8)		-19,072		-29,711		-42,310		-23,361		-33,501
Total public debt net of liquidity buffer		1,647,511		1,733,918		1,800,516		1,883,367		1,965,632

⁽¹⁾  BOTs (Buoni Ordinari del Tesoro) are short-term, zero-coupon notes with a maturity up to twelve months.

⁽²⁾  Italy ordinarily enters into currency swap agreements for hedging purposes. The total amount of external bonds shown above takes into account the effect of these arrangements.

⁽³⁾  Postal savings are demand, short- and medium-term deposit accounts, as well as long-term certificates issued by CDP that may be withdrawn by the account owner prior to maturity with nominal penalties. As of the date of conversion of CDP into a joint stock company in 2003, the Ministry of Economy and Finance has assumed part of the postal savings liabilities as described in detail below.

⁽⁴⁾  Treasury accounts are demand, short- and medium-term deposit accounts held by the private sector and by the Treasury on behalf of public companies, such as Fintecna S.p.A. and by companies set up in connection with securitization transactions carried out by the Treasury.

⁽⁵⁾  The item includes debt securities issued by Ferrovie dello Stato Italiane S.p.A., or “FS,” the state railway entity and other debt incurred by FS and assumed by the Treasury according to the law in 1996.

⁽⁶⁾  The indebtedness of Infrastrutture S.p.A., or “ISPA,” in relation to the TAV project (high-speed railroad infrastructure), is included since 2004, as it is recorded as government debt. More information is provided below.

⁽⁷⁾  The item includes all the liabilities incurred by other state sector entities and all the remaining liabilities incurred by the state sector.

⁽⁸⁾  The line item “Liquidity buffer” includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, funded by privatization proceeds. For additional information on the “Liquidity Buffer”, see “Monetary System—Monetary Policy”.

(*) Figures in this table and in the paragraph “Public Debt— Discussion of debt-to-GDP ratio” below have not been restated and therefore are not comparable to the figures in the table entitled “Selected Public Finance Indicators” in “Public Finance” and to the figures presented in the paragraphs “The Italian Economy” and “Public Debt”.

Source: Ministry of Economy and Finance.

Discussion of debt-to-GDP ratio. Since 2008 there has been a gradual increase in Italy’s debt-to-GDP ratio from 105.8 per cent in 2008 to 127.0 per cent in 2012.

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In 2009, Italy’s debt-to-GDP ratio increased to 115.5 per cent, compared to 105.8 per cent in 2008. Of the total increase of 9.7 per cent, approximately 8.0 per cent reflected the difference between the average cost of the debt (4.3 per cent, calculated as the ratio of interest payments to the size of the debt at the end of the year) and the nominal GDP growth rate (a negative 3 per cent), 0.6 per cent reflected the primary deficit and 1.1 per cent reflected the residual component due to the difference between net borrowing and the change in the debt.

In 2010, the debt-to-GDP ratio was 118.4 per cent compared to 115.5 per cent in 2009. Of the total increase of 2.9 per cent in 2010, 2.3 per cent reflected the difference between the average cost of the debt and the nominal GDP growth rate, 0.1 per cent reflected the primary deficit and 0.5 per cent reflected the residual component due to the difference between net borrowing and the change in the debt.

In 2011, Italy’s debt-to-GDP was 120.7 per cent, compared to 118.4 per cent in 2010. The increase reflected the gap between the average cost of the debt and the expansion of nominal GDP (2.9 per cent), only partly offset by the primary surplus of 1.0 per cent and the factors that affect net borrowing but not debt.

In 2012, Italy’s debt-to-GDP was 127.0 per cent, compared to 120.7 per cent in 2011. The increase reflected the decrease in nominal GDP and the increase in total public debt in 2012. For additional information on the drivers of the decrease in GDP growth, see “Italian Economy—Update for the fiscal year ended December 31, 2012”.

The Government’s latest forecasts of the debt-to-GDP ratio are included in the Update of the 2013 Economic and Financial Document. The table below shows the Government’s forecasts of the debt-to-GDP ratio for the period 2013-2017. For additional information on the Government’s forecasts of the debt-to-GDP ratio, see “Public Finance—The 2013 Economic and Financial Document”, “The Italian Economy”, “Public Debt”, Exhibit 2—2013 Stability Programme and Exhibit 4—Update of the 2013 Economic and Financial Document.

Forecasted Debt-to-GDP Ratios

Update of the 2013 Economic and Financial Document	2013		2014		2015		2016		2017
Public Debt, gross of euro area financial support and acceleration of payments due by the public administration		133		133.2		130.5		127.1		123.2
Public Debt, net of euro area financial support		129.5		129.4		126.8		123.5		119.7
Public Debt, net of euro area financial support and acceleration of payments due by the public administration		127.7		126.3		123.8		120.6		116.9

Source: Ministry of Economy and Finance.

Public Debt Management. Although debt management continues to be geared towards lengthening the average residual maturity of public debt, the average maturity of government debt slightly decreased from 6.99 years at the end of 2011 to 6.62 years at the end of 2012.

The Government’s objectives with respect to the management of public debt are to minimize the cost of borrowing in the medium-term and to reduce the volatility of interest payments. In accordance with these objectives, the Treasury has, in the past, gradually increased the proportion of total outstanding Government bonds represented by fixed rate securities, while reducing the proportion of total outstanding Government bonds represented by floating rate and short-term securities to less than one-third.

The table below presents the percentage of total outstanding Government bonds represented by fixed rate securities, the securities indexed to the euro area inflation rate (BTP€i) and floating rate securities as at December 31, 2010, 2011 and 2012.

Breakdown of Total Outstanding Government Bonds (in %)

	December 31,
	2010		2011		2012
Fixed rate securities		73.18		73.89		73.20
Securities indexed to the inflation rate (BTP€i+BTP Italia)		7.11		7.97		8.30
Floating rate securities		19.70		18.14		18.50
Total Outstanding Government Bonds		100		100		100

Source: Ministry of Economy and Finance.

In 2012, as in 2011, the management of public debt was made more difficult both by extreme volatility in financial markets (especially the segment of government securities of the euro area) and the economic downturn. The market performance of Treasury securities during the year was impacted by the second Long Term Refinancing Operation in February for an additional €530 billion, with the participation of 800

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banks; Italian banks used part of the liquidity to buy government securities, thereby contributing to the reduction of rates and the return to satisfactory liquidity conditions in the secondary market. From early January to early March, rates for one-year maturity securities declined by 260 basis points while interest rates on ten-year-maturity securities went down by about 230 basis points. The return differential with the German Bund declined notably as well, from 530 basis points in early January to 290 basis points in early March for 10-year maturity securities. This trend was strengthened by further fiscal consolidation measures adopted by the Government at the end of 2011 and by the approval at the EU level of the Fiscal Compact.

Market volatility was more intense in March and at the end of July as the impact of the two ECB extraordinary operations abated, and was caused by the problems linked to debt restructuring in Greece and its complex situation of political instability, as well as by Spain’s worsening fiscal scenario and the need for recapitalization programs for the Spanish banking sector. The prices of government bonds fell further, leading to a more costly debt servicing: over the period from early March to mid-July, interest rates went up by about 10 basis points for one-year maturity securities, while for ten-year maturity securities the increase was equal to 90 basis points.

In July, following the commitment by the ECB to secure the survival of the euro and the presentation in early August of the new plan for the purchase of securities (OMT, Outright Monetary Transactions), the government securities of the whole euro area stabilized. In Italy, the spread over the German Bund declined from over 530 basis points at the end of July 2012 to about 235 basis points in November 2013.

Despite this difficult situation in the year, the Treasury succeeded in ensuring a regular and predictable policy in terms of issuance and management of the circulating debt, thereby ensuring an efficient allocation of debt both in terms of costs and consolidation of the risk minimization results at the end of 2011. Italy’s government securities have been placed satisfactorily, both in terms of demand for them and in terms of costs, considering that a large part of placements was done at prices that were basically in line with those of the secondary market.

During the 2013 the primary market of the Italian government debt has been characterised by further improvements in terms of stability, regularity and efficiency in the issuance process, even if in the same period several international and domestic events have been taking place.

The 10 year rate fell from 4,70 % down to below 4%, while rates on 1-year Treasury Bills almost halved from 1,3% to 0,7%, a minimum touched in the very first days of May. The general good market momentum was reflected also in the 4th BTP ITALIA issuance, that was launched during the third week of April. The bond – which is indexed to Italian inflation and has a 4 year maturity— collected more than 17 billion euros in just 2 days, with a wide participation of retail investors to whom it is tailored to.

From early June to mid-July the picture changed quite dramatically, mainly because of the global repricing of risky assets following the decision of the Fed to potentially start tapering its QE activity on Treasury bonds and MBS. In Italy the impact was significant.

After the summer break the market for Italian government bonds found new source of volatility because of potential renovated political instability. The 10 years rate continued to trade around 4,5%, all along the month of September. This also despite some relevant reduction in volatility in the secondary market and the presence of good liquidity conditions.

Only after the positive outcome of the parliamentary confidence vote, the situation on the market improved quite remarkably: absolute level of yield all along the curve start dropping gradually but continuously with the 3 year and the 10 year at 2% and 4.1% respectively.

Against this backdrop the Treasury provided the market with the most important innovation of the year: the new 7 year BTP. The idea of bringing a new liquid point on the curve relied on the three main factors: the ever growing demand for that part of the curve from a wide array of domestic and international investors, the need to reduce the dislocation of the BTP curve due to the pressure on existing bonds with that residual maturity, the goal of being endowed with a more effective tool to manage the debt average life.

In November the Treasury opened the month with the launch of the fifth BTP ITALIA, whose final size got to more than 22 billion euros, representing the high record as ever.

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The table below shows the yields on 3-year and 10-year BTPs issued by the Treasury for each quarter of 2011 and 2012 and the first three quarters of 2013.

Quarterly Yields on 3-Year and 10-Year BTPs

	2011								2012								2013
	Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4		Q1		Q2		Q3
BTP 3-year		3.16		3.36		4.16		6.06		3.84		4.36		3.73		2.66		2.22		2.21		2.56
BTP 10-year		4.79		4.79		5.27		6.57		6.05		5.68		5.97		4.88		4.54		4.23		4.48

Source: Ministry of Economy and Finance

The Government also intends to reduce the public debt through a program of privatization of public real estate assets and companies in which the government holds interests. In November 2012, CDP exercised its option to acquire at market conditions the interests held by the government in SACE, Fintecna and Simest. From December 12, 2003, the date of its conversion from an administrative entity into a joint stock company, CDP is no longer considered part of the general government and its liabilities are no longer accounted for as public debt.

The Government also expects that the envisaged public real estate assets privatization program will result in additional revenues equal to approximately 1.0 per cent of GDP per year. As set out in the Update of the 2013 Economic and Financial Document, the estimated value of all real estate assets of the general government (including land) is currently of approximately €350 billion.

Summary of Internal Debt

Internal debt is debt initially incurred or issued in Italy, regardless of the currency of denomination. Italy’s total internal public debt as at December 31, 2012 was €1,927,148 million, an increase of € 94,992 million from December 31, 2011. The following table summarizes the internal public debt as at December 31 of each of the years indicated.

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Internal Public Debt

	December 31,
	2008		2009		2010		2011		2012
	(€ in millions)
Debt incurred by the Treasury:
Short-Term Bonds (BOT)(1)		147,753		140,096		130,054		131,693		151,119
Medium- and Long-Term Bonds
CTZ(2)		46,772		64,748		71,989		67,425		61,312
CCT(3)		182,733		163,599		156,584		143,727		122,590
BTP(4)		823,706		906,302		992,692		1,054,675		1,094,496
BTP€i(5)		84,659		101,797		103,489		121,110		121,829
BTP Italia(6)		—		—		—		—		27,111
Total		1,285,622		1,376,542		1,454,808		1,518,630		1,578,457
Postal savings		31,492		30,004		25,196		22,079		20,932
Treasury accounts(7)		112.925		123.518		127.485		127,840		136,627
State sector entities		52,182		48,631		47,788		46,341		71,615
Other general government entities(8)		105,519		108,886		110,836		117,766		118,516
Total internal public debt		1,587,740		1,687,581		1,766,113		1,832,656		1,926,148
Liquidity buffer(9)		-19,072		-29,711		-42,310		-23,361		-33,501
Total internal public debt net of liquidity buffer		1,568,668		1,657,870		1,723,802		1,809,215		1,892,647

⁽¹⁾  BOTs (Buoni Ordinari del Tesoro) are short-term, zero-coupon notes with a maturity up to twelve months.

⁽²⁾  CTZs (Certificati del Tesoro Zero-Coupon), introduced in 1995, are zero-coupon notes with maturities of eighteen or twenty-four months.

⁽³⁾  CCTs (Certificati di Credito del Tesoro) are medium- and long-term notes at a variable interest rate with a semiannual coupon.

⁽⁴⁾  BTPs (Buoni del Tesoro Poliennali) are medium- and long-term notes that pay a fixed rate of interest, with a semiannual coupon.

⁽⁵⁾  BTP€is (inflation-linked BTPs) are medium- and long-term notes with a semiannual coupon. Both the principal amount under the notes and the coupon are indexed to the euro-zone harmonized index of consumer prices, excluding tobacco.

⁽⁶⁾  BTPItalia (Italian inflation-linked BTPs) are medium- and long-term notes with a semiannual coupon. Both the principal amount under the notes and the coupon are indexed to the Italian inflation rate, excluding tobacco. These notes were first issued by the Treasury in March 2012.

⁽⁷⁾  The line item “Treasury accounts” includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, supplied by privatizations. For additional information, see “Monetary System—Monetary Policy”.

⁽⁸⁾  Includes loans and securities issued by local authorities.

⁽⁹⁾  All indebtedness included in this line has been treated as funded debt in this “Public Debt” section. A small portion, however, may have had a maturity at issuance of less than one year or may have been incurred or issued abroad.

Source: Ministry of Economy and Finance.

The following table divides the internal public debt into floating debt and funded debt as at December 31st of each of the years indicated. Floating debt is debt that has a maturity at issuance of less than one year. Funded debt is debt that has a maturity at issuance of one year or more.

Summary of Floating and Funded Internal Debt

	December 31,
	2008		2009		2010		2011		2012
	(€ in millions)
Floating internal debt(1)		182,488		176,575		174,256		171,643		187,760
Funded internal debt		1,405,252		1,511,006		1,591,857		1,661,013		1,738,388
Total internal public debt		1,587,740		1,687,581		1,766,113		1,832,656		1,926,148

⁽¹⁾  Includes BOTs with a maturity at issuance of three and six months and postal accounts.

Source: Ministry of Economy and Finance.

In 2011 and 2012, the ratio of short-term bonds to total debt issued was approximately 6.91 per cent and approximately 7.84 per cent, respectively.

Summary of External Debt

External debt is debt initially incurred or issued outside Italy, regardless of the currency of denomination. Total external public debt as at December 31, 2012 was €73,509 million. Historically Italy has not relied heavily on external debt. The following table summarizes the external public debt as at December 31st of each of the years indicated.

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Summary of External Debt

	December 31,
	2008		2009		2010		2011		2012
	(€ in millions)
External Treasury Bonds(1)		60,342		60,058		61,978		58,541		60,267
FS bonds and loans(2)		935		111		15		0		0
ISPA bonds and loans(3)		11,033		10,534		11,048		11,070		9,600
State sector entities		2,659		2,520		2,439		3,161		1,500
Other general government entities		3,365		2,325		1,233		1,310		2,143
Total external public debt		78,334		75,547		76,713		74,082		73,509

⁽¹⁾  Italy often enters into currency swap agreements in the ordinary course of the management of its debt. The total amount of external bonds shown above takes into account the effect of these arrangements.

⁽²⁾  Includes FS bonds and other debt incurred by FS outside Italy and assumed by the Treasury by law in 1996.

⁽³⁾  Includes ISPA’s bonds and other debt, guaranteed by the state, in connection with the financing of the high-speed railway link between Turin, Milan, Rome and Naples. For additional information on ISPA bonds and other debt used to finance high-speed rails, see “—General”.

Source: Ministry of Economy and Finance.

The following table sets forth a breakdown of the external public debt of the Treasury, by currency, as at December 31 of each of the years indicated. The amounts shown below are nominal values at issuance, before giving effect to currency swaps, and do not include external public debt of other state sector entities and other general government entities. Italy often enters into currency swap agreements in the ordinary course of the management of its debt.

External Debt by Currency

	December 31,
	2008		2009		2010		2011		2012
	(in millions)
Euro(1)		20,281		20,833		21,394		22,323		21,946
British Pounds		2,150		2,150		2,450		2,450		2,450
Swiss Francs		6,500		5,500		4,000		3,000		3,000
U.S. Dollars(2)		32,939		32,450		36,000		31,500		23,000
Japanese Yen		725,000		685,000		585,000		585,000		585,000
Norwegian Kroner		4,000		4,000		4,000		4,000		2,000
Australian Dollars		—		—		—		—		—
Czech Koruna		7,470		7,470		7,470		7,470		7,470

⁽¹⁾  The item does not include the amount of debt incurred in euros by ISPA and guaranteed by the state, which is shown in the previous table.

⁽²⁾  Until 2008, the item includes US$989 million of debt originally incurred by FS. By the end of 2009 that debt was redeemed.

Source: Ministry of Economy and Finance.

Italy accesses the international capital markets through a global bond program registered under the United States Securities Act of 1933 on Schedule B (the “Global Bond Programme”), a US$72 billion medium-term note program established in 1998 and a US$15 billion commercial paper program established in 1999 and updated in December of 2011. Italy introduced collective action clauses (CACs) in the documentation of all New York law governed bonds issued after June 16, 2003, including the Global Bond Programme. Italy will include the EU Collective Action Clauses, including Cross Series Modification Clauses, in the documentation of all bonds it issues after January 1, 2013. For additional information regarding Italy’s implementation of EU Collective Action Clauses, see “The Italian Economy—EU Measures to Address the Eurocrisis”.

Debt Record

Since its founding in 1946, the Republic of Italy has never defaulted in the payment of principal or interest on any of its internal or external indebtedness.

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TABLES AND SUPPLEMENTARY INFORMATION

Floating Internal Debt of the Treasury⁽¹⁾ as of December 31, 2012

Security	Interest Rate		Maturity Date		Outstanding principal amount
	(€ in millions)
BOT (3 months)		various		various		3,000
BOT (6 months)		various		various		48,133
Postal savings		floating		none		20,932
Total floating internal debt of the Treasury						187,760
Treasury accounts		floating		none		136,627
Total floating internal debt net of Treasury accounts						1,892,647

⁽¹⁾  Floating debt is debt that has a maturity at issuance of less than one year. Funded debt is debt that has a maturity at issuance of one year or more.

Source: Ministry of Economy and Finance

Funded Internal Debt of the Treasury⁽¹⁾ as of December 31, 2012

Security	Interest Rate		Maturity Date		Outstanding principal amount
	(€ in millions)
BOT (12 months)		various		various		99,986
CTZ		various		various		61,312
CCT		various		various		122,590
BTP		various		various		1,094,496
BTP€I		various		various		121,829
BTP Italia		various		various		27,111
Total funded internal debt of the Treasury						1,527,324

⁽¹⁾  Floating debt is debt that has a maturity at issuance of less than one year. Funded debt is debt that has a maturity at issuance of one year or more.

Source: Ministry of Economy and Finance.

External Bonds of the Treasury as of December 31, 2012

The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2012.

Original Currency Nominal Amount	Interest Rate		Initial Public Offering Price (%)		Date of Issue	Maturity Date	Amount Outstanding		Equivalent in Euro
United States Dollar(1)(*)
$3,500,000,000		6.875%		98.73	September 27, 1993	September 27, 2023	$	3,500,000,000	€	2,652,720,934
$2,000,000,000		4.375%		99.69	February 27, 2003	June 15, 2013	$	2,000,000,000	€	1,515,840,534
$2,000,000,000		5.375%		98.44	February 27, 2003	June 15, 2033	$	2,000,000,000	€	1,515,840,534
$4,000,000,000		4.50%		99.41	January 21, 2005	January 21, 2015	$	4,000,000,000	€	3,031,681,067
$2,000,000,000		4.75%		99.34	January 25, 2006	January 25, 2016	$	2,000,000,000	€	1,515,840,534
$3,000,000,000		5.25%		99.85	September 20, 2006	September 20, 2016	$	3,000,000,000	€	2,273,760,800
$2,000,000,000		5.38%		99.37	June 12, 2007	June 12, 2017	$	2,000,000,000	€	1,515,840,534
$2,500,000,000		3.13%		99.672	January 26, 2010	January 26, 2015	$	2,500,000,000	€	1,894,800,667
$2,000,000,000		2.13%		99.74	September 16, 2010	September 16, 2013	$	2,000,000,000	€	1,515,840,534
							$	24,500,000,000	€	17,432,166,136
Euro(2)
€60,000,000		libor 3m -16 b.p.		99.61	October 8, 1998	October 8, 2018	€	60,000,000	€	60,000,000
€300,000,000		((1+0.86*TEC10)^0.25)- 1;floor3%su86(3) %*TEC10		101.43	October 15, 1998	October 15, 2018	€	300,000,000	€	300,000,000
€1,000,000,000		4.00%		99.95	May 6, 1999	May 6, 2019	€	1,000,000,000	€	1,000,000,000
€1,000,000,000		80%*CMS30Y; floor:4.25%		101.60	June 28, 1999	June 28, 2029	€	905,000,000	€	905,000,000
€1,000,000,000		CMS30Y- 0.91%;Floor:0.00%		100.75	August 30, 1999	August 30, 2019	€	1,000,000,000	€	1,000,000,000

67

Original Currency Nominal Amount	Interest Rate			Initial Public Offering Price (%)		Date of Issue	Maturity Date	Amount Outstanding		Equivalent in Euro
€150,000,000		Zero Coupon			100.00	February 20, 2001	February 19, 2031		€150,000,000		€150,000,000
€3,000,000,000		5.750%			100.04	July 25, 2001	July 25, 2016		€3,000,000,000		€3,000,000,000
€150,000,000		84.5% CMS 10Y			100.00	April 26, 2004	April 26, 2019		€150,000,000		€150,000,000
€300,000,000		CMS10Y ;cap:6%	(4)		100.00	May 31, 2005	May 31, 2035		€300,000,000		€300,000,000
€720,000,000		3.83%			100.00	June 2, 2005	June 2, 2029		€720,000,000		€720,000,000
€395,000,000		3.523% (until 2010)	(5)		100.00	June 2, 2005	June 2, 2030		€395,000,000		€395,000,000
€200,000,000		85% *CMS10Y; cap:7,45%			100.00	June 8, 2005	June 8, 2020		€200,000,000		€200,000,000
€2,500,000,000		85% *CMS 10Y; floor 2%; cap 7%			100.00	June 15, 2005	June 15, 2020		€2,500,000,000		€2,500,000,000
€300,000,000		85.5% *CMS 10Y; floor 2%; cap 7%			100.00	June 28, 2005	June 28, 2021		€300,000,000		€300,000,000
€200,000,000		Max {0, Min [10*(CMS10 – CMS2), 6mEuribor + 1.50%)]}			100.00	November 9, 2005	November 9, 2025		€200,000,000		€200,000,000
€900,000,000		6m Euribor + 0.04%			99.38	March 17, 2006	March 17, 2021		€900,000,000		€900,000,000
€1,000,000,000		6m Euribor + 0.60%			99.85	March 22, 2006	March 22, 2018		€1,000,000,000		€1,000,000,000
€192,000,000		Zero Coupon			100.00	March 28, 2006	March 28, 2036		€192,000,000		€192,000,000
€300,000,000		6m Euribor + 0.075%			100.00	March 30, 2006	March 29, 2026		€300,000,000		€300,000,000
€215,000,000		5.07% / 10y CMS			100.00	May 11, 2006	May 11, 2026		€215,000,000		€215,000,000
€1,000,000,000		1.85% Inflation Indexed			99.80	January 5, 2007	September 15, 2057		€1,107,000,000		€1,107,000,000
€250,000,000		2.00% Inflation Indexed			99.02	March 30, 2007	September 15, 2062		€277,000,000		€277,000,000
€160,000,000		4.49%			99.86	April 5, 2007	April 5, 2027		€160,000,000		€160,000,000
€500,000,000		2.20% Inflation Indexed			98.86	January 23, 2008	September 15, 2058		€544,220,000		€544,220,000
€258,000,000		5.26%			99.79	March 16, 2009	March 16, 2026		€258,000,000		€258,000,000
€300,000,000		3.00%			99,733	May 29, 2009	November 29, 2013		€300,000,000		€300,000,000
€250,000,000		4.85%			98.50	June 11, 2010	June 11, 2060		€250,000,000		€250,000,000
€125,000,000		4.10%			99.46	September 6, 2010	November 1, 2023		€125,000,000		€125,000,000
€125,000,000		4.20%			99.38	September 6, 2010	March 3, 2025		€125,000,000		€125,000,000
€250,000,000		2.75%			99.85	November 11, 2010	November 11, 2018		€250,000,000		€250,000,000
€125,000,000		2.85%			99.90	November 22, 2010	November 22, 2014		€125,000,000		€125,000,000
€250,000,000		3.70%			99.66	November 22, 2010	May 22, 2018		€250,000,000		€250,000,000
€125,000,000		3.75%			99.89	November 22, 2010	September 1, 2018		€125,000,000		€125,000,000
€150,000,000		3.80%			99.65	December 23, 2010	January 23, 2017		€150,000,000		€150,000,000
€150,000,000		4.45%			99.40	December 23, 2010	December 12, 2021		€150,000,000		€150,000,000
€517,000,000		2.85% Inflation Indexed			99.482	January 4, 2011	September 1, 2022		€517,000,000		€517,000,000
€450,000,000		4.45%			99.59	February 26, 2011	August 24, 2020		€450,000,000		€450,000,000
€2,156,000,000		6.58%			100	July 1, 2011	December 31, 2027		€2,156,000,000		€2,156,000,000
€250,000,000		5.00%			99.196	September 22, 2011	September 22, 2017		€250,000,000		€250,000,000
€230,000,000		4.20% Inflation Indexed			100	February 1, 2012	July 25, 2042		€230,000,000		€230,000,000
€437,500,000		3.66%			100	February 13, 2012	December 31, 2026		€437,500,000		€437,500,000
€300,000,000		Zero Coupon			99.78	September 25, 2012	January 25, 2013		€300,000,000		€300,000,000
€300,000,000		Zero Coupon			99.78	September 25, 2012	January 25, 2013		€300,000,000		€300,000,000
€100,000,000		Zero Coupon			99.71	October 10, 2012	February 21, 2013		€100,000,000		€100,000,000
									€22,723,720,000		€22,723,720,000
Euro Ispa Bonds(6)
€1,000,000,000		4.50%			99.387	February 6, 2004	July 31, 2014		€1,000,000,000		€1,000,000,000
€750,000,000		2.25% Inflation Indexed			99.368	February 6, 2004	July 31, 2019		€900,000,000		€900,000,000
€3,250,000,000		5.13%			98.934	February 6, 2004	July 31, 2024		€3,250,000,000		€3,250,000,000
€2,200,000,000		5.20%			105.125	February 6, 2004	July 31, 2034		€2,200,000,000		€2,200,000,000
€850,000,000		Euribor 12 M + spread 0.23% (amortizing)			100	March 4, 2005	July 31, 2045		€850,000,000		€850,000,000
€1,000,000,000		Euribor 12 M + spread 0.235% (amortizing)			100	April 25, 2005	July 31, 2045		€1,000,000,000		€1,000,000,000
€300,000,000		3.5% (cap at 6.0%)			100	June 30, 2005	July 31, 2035		€300,000,000		€300,000,000
€100,000,000		3.5% (cap at 6.1%)			100	June 30, 2005	July 31, 2035		€100,000,000		€100,000,000
									€9,600,000,000		€9,600,000,000
Swiss Franc(7)(*)
ChF 2,000,000,000		2.50%			100.09	February 2, 2005	March 2, 2015		ChF 2,000,000,000		€1,656,726,309
ChF 1,000,000,000		2.50%			99.336	January 30, 2006	January 30, 2018		ChF 1,000,000,000		€828,363,154.4
									ChF 3,000,000,000		€2,485,089,463

68

Original Currency Nominal Amount	Interest Rate		Initial Public Offering Price (%)		Date of Issue	Maturity Date	Amount Outstanding		Equivalent in Euro
Pound Sterling(8)(*)
£400,000,000		10.50%		100.875	April 28, 1989	April 28, 2014		£400,000,000		€490,136,012.7
£1,500,000,000		6.00%		98.565	August 4, 1998	August 4, 2028		£1,500,000,000		€1,838,010,048
£250,000,000		5.25%		99.476	July 29, 2004	December 7, 2034		£250,000,000		€306,335,008
£300,000,000		3m Gbp Libor + 0,45 bp %		100.00	April 28, 2010	April 28, 2015		£300,000,000		€367,602,009.6
								£2,450,000,000		€3,002,083,078
Norwegian Kroner(9)(*)
NOK 2,000,000,000		4.34%		100.00	June 23, 2003	June 23, 2015		NOK 2,000,000,000		€272,171,794.8
								NOK 2,000,000,000		€272,171,794.8
Japanese Yen(10)(*)
¥125,000,000,000		5.50%		100.00	December 15, 1994	December 15, 2014		¥125,000,000,000		€1,100,255,259
¥125,000,000,000		4.50%		100.00	June 8, 1995	June 8, 2015		¥125,000,000,000		€1,100,255,259
¥100,000,000,000		3.70%		100.00	November 14, 1996	November 14, 2016		¥100,000,000,000		€880,204,207.4
¥100,000,000,000		3.45%		99.80	March 24, 1997	March 24, 2017		¥100,000,000,000		€880,204,207.4
¥25,000,000,000		2.87%		100.00	May 18, 2006	May 18, 2036		¥25,000,000,000		€220,051,051.8
¥50,000,000,000		3mJpy libor +12 bp%		100.00	April 24, 2008	April 24, 2018		¥50,000,000,000		€440,102,103.7
¥30,000,000,000		3m Jpy libor +40 bp%		100.00	July 8, 2009	July 8, 2019		¥30,000,000,000		€264,061,262.2
¥30,000,000,000		3m Jpy libor +37 bp%		100.00	September 18, 2009	September 18, 2019		¥30,000,000,000		€264,061,262.2
								¥585,000,000,000		€5,149,194,613
Czech Koruna(11)(*)
CZK 2,490,000,000		4.36%		100.00	October 3, 2007	October 3, 2017		CZK 2,490,000,000		€99,002,027.75
CZK 2,490,000,000		4.40%		100.00	October 3, 2007	October 3, 2019		CZK 2,490,000,000		€99,002,027.75
CZK 2,490,000,000		4.41%		100.00	October 3, 2007	October 3, 2019		CZK 2,490,000,000		€99,002,027.75
								CZK 7,470,000,000		€297,006,083.3
TOTAL OUTSTANDING										€60,961,431,169

⁽¹⁾  U.S. dollar amounts have been converted into euro at $1.3194/€1.00, the exchange rate prevailing at Dec. 31, 2012.

⁽²⁾  External debt denominated in currencies of countries that have adopted the euro have been converted into euro at the fixed rate at which those currencies were converted into euro upon their issuing countries becoming members of the European Monetary Union.

⁽³⁾  Starting from 2004 the bonds pay interest at the fixed rate of 3.965%.

⁽⁴⁾  12mEuribor+0.10% from May 2005 to May 2007; CMS10Y from June 2007 to 2035.

⁽⁵⁾  After 2010, the bonds will yield a floating rate calculated as follows: 3.523% + 3 * Min [ Max (3.50%—rate swap 20Y; 0.0%); 1.50%]

⁽⁶⁾  Bonds issued by Infrastrutture S.p.A.

⁽⁷⁾  Swiss Franc amounts have been converted into euro at ChF1.2072/€1.00, the exchange rate prevailing at Dec. 31, 2012.

⁽⁸⁾  Pounds Sterling amounts have been converted into euro at £0.81610/€1.00, the exchange rate prevailing at Dec. 31, 2012.

⁽⁹⁾  Norwegian Kroner amounts have been converted into euro at NOK7.3483/€1.00, the exchange rate prevailing at Dec. 31, 2012.

⁽¹⁰⁾  Japanese Yen amounts have been converted into euro at ¥113.61/€1.00, the exchange rate prevailing at Dec. 31, 2012.

⁽¹¹⁾  Czech Koruna amounts have been converted into euro at C25.151/€1.00, the exchange rate prevailing at Dec. 31, 2012.

^(*)  The above exchange rates are based on the official exchange rates of the Bank of Italy.

Source: Ministry of Economy and Finance

	As of December 31, 2012
Currency	Before Swap			After Swap
US Dollars		34.46	%		2.87	%
Euro(1)		43.39	%		97.13	%
Swiss Francs		4.91	%		—
Pounds Sterling		5.93	%		—
Norwegian Kroner		0.54	%		—
Japanese Yen		10.18	%		—
Czech Koruna		0.59	%		—
Total External Bonds (€ in million)		50,583			49,903

⁽¹⁾  Excluding Euro ISPA Bonds.

Source: Ministry of Economy and Finance

69

External Bonds of the Treasury as of September 30, 2013

The following table shows the external bonds of the Treasury issued and outstanding as of September 30, 2013.

Original Currency Nominal Amount	Interest Rate		Initial Public Offering Price (%)		Date of Issue	Maturity Date	Amount Outstanding		Equivalent in Euro
United States Dollar(1)(*)
$3,500,000,000		6.875%		98.73	September 27, 1993	September 27, 2023		$3,500,000,000		€2,591,632,729
$2,000,000,000		5.375%		98.44	February 27, 2003	June 15, 2033		$2,000,000,000		€1,480,932,988
$4,000,000,000		4.50%		99.41	January 21, 2005	January 21, 2015		$4,000,000,000		€2,961,865,976
$2,000,000,000		4.75%		99.34	January 25, 2006	January 25, 2016		$2,000,000,000		€1,480,932,988
$3,000,000,000		5.25%		99.85	September 20, 2006	September 20, 2016		$3,000,000,000		€2,221,399,482
$2,000,000,000		5.38%		99.37	June 12, 2007	June 12, 2017		$2,000,000,000		€1,480,932,988
$2,500,000,000		3.13%		99.672	January 26, 2010	January 26, 2015		$2,500,000,000		€1,851,166,235
								$19,000,000,000		€14,068,863,384
Euro(2)
€60,000,000		Floating		99.61	October 8, 1998	October 8, 2018		€60,000,000		€60,000,000
€300,000,000		Floating		101.43	October 15, 1998	October 15, 2018		€300,000,000		€300,000,000
€1,000,000,000		Floating		99.95	May 6, 1999	May 6, 2019		€1,000,000,000		€1,000,000,000
€1,000,000,000		Floating		101.60	June 28, 1999	June 28, 2029		€905,000,000		€905,000,000
€1,000,000,000		Floating		100.75	August 30, 1999	August 30, 2019		€1,000,000,000		€1,000,000,000
€150,000,000		Zero Coupon		100.00	February 20, 2001	February 19, 2031		€150,000,000		€150,000,000
€3,000,000,000		5.750%		100.04	July 25, 2001	July 25, 2016		€3,000,000,000		€3,000,000,000
€150,000,000		Floating		100.00	April 26, 2004	April 26, 2019		€150,000,000		€150,000,000
€300,000,000		Floating		100.00	May 31, 2005	May 31, 2035		€300,000,000		€300,000,000
€720,000,000		3.83%		100.00	June 2, 2005	June 2, 2029		€720,000,000		€720,000,000
€395,000,000		3.75%		100.00	June 2, 2005	June 2, 2030		€395,000,000		€395,000,000
€200,000,000		Floating		100.00	June 8, 2005	June 8, 2020		€200,000,000		€200,000,000
€2,500,000,000		Floating		100.00	June 15, 2005	June 15, 2020		€2,500,000,000		€2,500,000,000
€300,000,000		Floating		100.00	June 28, 2005	June 28, 2021		€300,000,000		€300,000,000
€200,000,000		Floating		100.00	November 9, 2005	November 9, 2025		€200,000,000		€200,000,000
€900,000,000		Floating		99.38	March 17, 2006	March 17, 2021		€900,000,000		€900,000,000
€1,000,000,000		Floating		99.85	March 22, 2006	March 22, 2018		€1,000,000,000		€1,000,000,000
€192,000,000		4.425%		100.00	March 28, 2006	March 28, 2036		€192,000,000		€192,000,000
€300,000,000		Floating		100.00	March 30, 2006	March 29, 2026		€300,000,000		€300,000,000
€215,000,000		Floating		100.00	May 11, 2006	May 11, 2026		€215,000,000		€215,000,000
€1,000,000,000		1.85% Inflation Indexed		99.80	January 5, 2007	September 15, 2057		€1,136,000,000		€1,136,000,000
€250,000,000		2.00% Inflation Indexed		99.02	March 30, 2007	September 15, 2062		€284,000,000		€284,000,000
€160,000,000		4.49%		99.86	April 5, 2007	April 5, 2027		€160,000,000		€160,000,000
€500,000,000		2.20% Inflation Indexed		98.86	January 23, 2008	September 15, 2058		€558,000,000		€558,000,000
€258,000,000		5.26%		99.79	March 16, 2009	March 16, 2026		€258,000,000		€258,000,000
€300,000,000		3.00%		99,733	May 29, 2009	November 29, 2013		€300,000,000		€300,000,000
€250,000,000		4.85%		98.50	June 11, 2010	June 11, 2060		€250,000,000		€250,000,000
€125,000,000		4.10%		99.46	September 6, 2010	November 1, 2023		€125,000,000		€125,000,000
€125,000,000		4.20%		99.38	September 6, 2010	March 3, 2025		€125,000,000		€125,000,000
€250,000,000		Floating		99.85	November 11, 2010	November 11, 2018		€250,000,000		€250,000,000
€125,000,000		2.85%		99.90	November 22, 2010	November 22, 2014		€125,000,000		€125,000,000
€250,000,000		3.70%		99.66	November 22, 2010	May 22, 2018		€250,000,000		€250,000,000
€125,000,000		3.75%		99.89	November 22, 2010	September 1, 2018		€125,000,000		€125,000,000
€150,000,000		3.80%		99.65	December 23, 2010	January 23, 2017		€150,000,000		€150,000,000
€150,000,000		4.45%		99.40	December 23, 2010	December 12, 2021		€150,000,000		€150,000,000
€517,000,000		2.85% Inflation Indexed		99.482	January 4, 2011	September 1, 2022		€531,000,000		€531,000,000
€450,000,000		4.45%		99.59	February 26, 2011	August 24, 2020		€450,000,000		€450,000,000
€2,156,000,000		6.51%		100	July 1, 2011	December 31, 2027		€2,091,000,000		€2,091,000,000
€250,000,000		5.00%		99.196	September 22, 2011	September 22, 2017		€250,000,000		€250,000,000
€230,000,000		4.20% Inflation Indexed		100	February 1, 2012	July 25, 2042		€237,000,000		€237,000,000
€437,500,000		3.444%		100	February 13, 2012	December 31, 2026		€322,000,000		€322,000,000
€500,000,000		4.75%		99.854	May 28, 2013	May 28, 2063		€500,000,000		€500,000,000
€500,000,000		5.050%		99.526	September 11, 2013	September 11, 2053		€500,000,000		€500,000,000
								€22,915,000,000		€22,915,000,000
Euro Ispa Bonds(3)
€1,000,000,000		4.50%		99.387	February 6, 2004	July 31, 2014		€1,000,000,000		€1,000,000,000
€750,000,000		2.25% Inflation Indexed		99.368	February 6, 2004	July 31, 2019		€906,000,000		€906,000,000
€3,250,000,000		5.13%		98.934	February 6, 2004	July 31, 2024		€3,250,000,000		€3,250,000,000
€2,200,000,000		5.20%		105.125	February 6, 2004	July 31, 2034		€2,200,000,000		€2,200,000,000
€850,000,000		Floating		100	March 4, 2005	July 31, 2045		€850,000,000		€850,000,000
€1,000,000,000		Floating		100	April 25, 2005	July 31, 2045		€1,000,000,000		€1,000,000,000
€300,000,000		Floating		100	June 30, 2005	July 31, 2035		€300,000,000		€300,000,000
€100,000,000		Floating		100	June 30, 2005	July 31, 2035		€100,000,000		€100,000,000
								€9,606,000,000		€9,606,000,000

70

Original Currency Nominal Amount	Interest Rate		Initial Public Offering Price (%)		Date of Issue	Maturity Date	Amount Outstanding		Equivalent in Euro
Swiss Franc(4)(*)
ChF 2,000,000,000		2.50%		100.09	February 2, 2005	March 2, 2015		ChF 2,000,000,000		€1,635,991,820
ChF 1,000,000,000		2.50%		99.336	January 30, 2006	January 30, 2018		ChF 1,000,000,000		€817,995,910
								ChF 3,000,000,000	€	2,453,987,730
Pound Sterling(5)(*)
£400,000,000		10.50%		100.875	April 28, 1989	April 28, 2014		£400,000,000		€478,440,285
£1,500,000,000		6.00%		98.565	August 4, 1998	August 4, 2028		£1,500,000,000		€1,794,151,068
£250,000,000		5.25%		99.476	July 29, 2004	December 7, 2034		£250,000,000		€299,025,178
£300,000,000		Floating		100.00	April 28, 2010	April 28, 2015		£300,000,000		€358,830,214
								£2,450,000,000	€	2,930,446,744
Norwegian Kroner(6)(*)
NOK 2,000,000,000		4.34%		100.00	June 23, 2003	June 23, 2015		NOK 2,000,000,000		€246,487,552
								NOK 2,000,000,000	€	246,487,552
Japanese Yen(7)(*)
¥125,000,000,000		5.50%		100.00	December 15, 1994	December 15, 2014		¥125,000,000,000		€948,550,615
¥125,000,000,000		4.50%		100.00	June 8, 1995	June 8, 2015		¥125,000,000,000		€948,550,615
¥100,000,000,000		3.70%		100.00	November 14, 1996	November 14, 2016		¥100,000,000,000		€758,840,492
¥100,000,000,000		3.45%		99.80	March 24, 1997	March 24, 2017		¥100,000,000,000		€758,840,492
¥25,000,000,000		2.87%		100.00	May 18, 2006	May 18, 2036		¥25,000,000,000		€189,710,123
¥50,000,000,000		Floating		100.00	April 24, 2008	April 24, 2018		¥50,000,000,000		€379,420,246
¥30,000,000,000		Floating		100.00	July 8, 2009	July 8, 2019		¥30,000,000,000		€227,652,148
¥30,000,000,000		Floating		100.00	September 18, 2009	September 18, 2019		¥30,000,000,000		€227,652,148
								¥585,000,000,000	€	4,439,216,879
Czech Koruna(8)(*)
CZK 2,490,000,000		4.36%		100.00	October 3, 2007	October 3, 2017		CZK 2,490,000,000		€96,774,194
CZK 2,490,000,000		4.40%		100.00	October 3, 2007	October 3, 2019		CZK 2,490,000,000		€96,774,194
CZK 2,490,000,000		4.41%		100.00	October 3, 2007	October 3, 2019		CZK 2,490,000,000		€96,774,194
								CZK 7,470,000,000	€	290,322,582
TOTAL OUTSTANDING										€56,950,324,871

(1) U.S. dollar amounts have been converted into euro at $1.3505/€1.00, the exchange rate prevailing at September 30, 2013.

(2) External debt denominated in currencies of countries that have adopted the euro have been converted into euro at the fixed rate at which those currencies were converted into euro upon their issuing countries becoming members of the European Monetary Union.

(3) Bonds issued by Infrastrutture S.p.A.

(4) Swiss Franc amounts have been converted into euro at ChF1.2225/€1.00, the exchange rate prevailing at September 30, 2013.

(5) Pounds Sterling amounts have been converted into euro at £0.83605/€1.00, the exchange rate prevailing at September 30, 2013.

(6) Norwegian Kroner amounts have been converted into euro at NOK8.1140/€1.00, the exchange rate prevailing at September 30, 2013.

(7) Japanese Yen amounts have been converted into euro at ¥131.78/€1.00, the exchange rate prevailing at September 30, 2013.

(8) Czech Koruna amounts have been converted into euro at C25.730/€1.00, the exchange rate prevailing at September 30, 2013.

(*) The above exchange rates are based on the official exchange rates of the Bank of Italy.

71

EX-2

Exhibit 2

The Economic and Financial Document (EFD) is a key step of the economic-financial and budget planning cycle. It represents an opportunity to look to the past, but more importantly, to imagine the future of the country’s economic and budget policies from a European perspective.

This year, however, the preparation of the EFD comes at a particular time with reference to the political and institutional structure of our country. Following the general elections of 24 and 25 February, procedures are now under way for the formation of a new government. As provided by the Constitution and also recalled by the President of the Republic, Giorgio Napolitano, until a new government is appointed, the outgoing Government remains in office for current affairs and for the adoption of urgent economic measures.

The presentation of the Economic and Financial Document represents a requirement of Law 196 of 2009 (as amended by Law 39 of 2011), which the Government is required to fulfil for the country and for ensuring the compliance with the European Semester deadlines. In line with the ‘prorogatio’ phase, the outgoing Government cannot come up with future scenarios that imply legislative/policy decisions or the introduction of new, broad-based policies that have not already been agreed by Parliament. From an economic-financial perspective, the 2013 EFD assumes the objective of maintaining the balanced budget in structural terms during the reference period, as provided by the rules of the EU Stability and Growth Pact, as amended in November 2011, and confirmed by the Fiscal Compact, and as sanctioned by our Constitution. From the standpoint of structural reforms, the EFD summarises what has been done in the preceding months, and where appropriate, lists the initiatives still necessary for implementing the reforms already approved by Parliament.

The new government, once formed, will be able to integrate this framework by presenting an agenda of reforms, if considered appropriate, along with the related financial compatibility, so as to continue progressing toward the achievement of the Europe 2020 Strategy objectives.

Even in respecting these limits, the presentation of the EFD is a fundamental step, which allows for objectively reviewing the path of the reforms completed and for coming up with some indications about what is ahead.

First of all, the Stability Programme and the National Reform Programme provide a snapshot of the structural reforms and transformation that have had an intensity and a reach not always fully grasped in the day-to-day news.

MINISTERO DELL’ECONOMIA E OF THE FINANZE I

ECONOMIC AND FINANCIAL DOCUMENT

At the end of 2011, Italy became vulnerable to international market tensions due to its public finances and the conditions of the real economy. For over a decade, the economic and productive system had been experiencing a slow, but steady, decline, with flat growth rates and a progressive loss of competitiveness, due to the stagnation of productivity, an unfavourable business environment, and other structural weaknesses that hindered the adjustment to a more dynamic and competitive economic framework overall.

The experience of the so called ‘national solidarity Government’, supported in Parliament by a broad majority of the leading political parties, made it possible to move beyond an impasse that had lasted for years, and to undertake, in a relatively short time period, a programme of initiatives that led Italy out of the financial emergency and impacted all the key sectors of economic and social life of the country.

As proof thereof, the Government approved 45 laws and decree-laws converted by Parliament and 24 delegated decrees coming from delegated laws adopted by this Government or by preceding governments, as well as hundreds of implementation measures that have been adopted or are in the process of being finalised, as described in the various chapters of the National Reform Programme.

This action has above all led to the rebalancing of the public finances. In 2012, Italy brought its public deficit substantially back in line with the EU’s recommended level of 3 per cent or less of GDP. In addition, in 2013, Italy will achieve a balanced budget in structural terms, fulfilling a commitment undertaken in mid-2011 by the Italian government at the time. On this basis, the EU ECOFIN Council is poised to authorise, in the month of May, Italy’s exit from the excessive deficit procedure that was opened at the end of 2009. Italy achieved this result without having to ask for a delay in the deadline, as other countries have done. Nor did Italy have to ask for external financial assistance, conceivably from a group of three international authorities, with the consequence of losing a part of its sovereignty and its autonomy in deciding on the measures needed for emerging from the crisis.

The solidity of the adjustment achieved by Italy is reflected in the attitude of the international markets. The spread between interest rates on Italian government securities and German government securities is now around 300 basis points, after a peak of 574 reached in November 2011. In 2014, the primary surplus will be equal to approximately 4 per cent of GDP, thus ranking amongst the highest in the Euro Area. The fiscal consolidation has also been reinforced by rigorous action to contain and to rebalance public expenditure. The two phases of spending review will lead to savings of approximately €11.6 billion once the planned actions are implemented. After years of delays, the EU structural funds were utilised in line with the plans agreed with the Commission, thanks to targeted reshuffling within the Cohesion Action Plan and to careful management to speed up and achieve greater effectiveness of spending. Macroeconomic imbalances are being absorbed, while measures for ensuring a steady reduction of public debt have been put into place.

II MINISTERO DELL’ECONOMIA E DELLE FINANZE

ECONOMIC AND FINANCIAL DOCUMENT

An adjustment of this magnitude, realised in a short time, and within a context of economic weakness and recurring tensions on international markets, cannot occur without significant sacrifices and short-term economic and social consequences. Recent data show a contraction in the economy, a rise in unemployment, and social hardships. The recession that started in the second half of 2011 looks poised to continue in the first half of the current year. Without firm and credible reforms, it would have been impossible to stave off the spectre of financial collapse that was apparent in November 2011. And had action not been taken to tackle the structural weaknesses dragging the country down, the country would have been condemned to flat or negative growth again for many years to come.

The 2013 EFD shows that reforms can really change the course of the country’s economic development. EFD estimates indicate that the competitiveness and labour market reform already implemented will lead to additional cumulative GDP growth on the order of 1.6 and 3.9 percentage points in 2015 and 2020 respectively, and up to 6.9 percentage points with respect to the long-term baseline scenario. This will translate into potential growth for the country that is approximately one percentage point of GDP greater than what would have been possible without reforms. Such a change is the thrust that the country needs in order to accelerate its exit from a crisis that has lasted too long.

Data on future growth presented in the EFD were based on prudent assumptions. But the OECD’s and IMF’s quantitative studies on the macroeconomic effects of the reforms implemented in Italy indicate that such effects could be even greater than those estimated by the Government.

MINISTERO DELL’ECONOMIA E DELLE FINANZE III

ECONOMIC AND FINANCIAL DOCUMENT

Several conditions are nevertheless necessary in order to reap the benefits of the reforms and the sacrifices. First of all, there is a need to exploit the opportunities offered by a European framework that is currently more favourable to investments for growth and employment. In addressing the pressure exerted at European level, with the Government and Parliament on a united front, in March 2013, the European Council acknowledged the need for using all of the existing margins within the Stability and Growth Pact for making it possible to stimulate productive public investments in Member States with sound public finances. European Commission’s willingness to consider Italy’s one-off transaction to repay past-due commercial debts of the public administration is a step in this direction.

Compared with the most acute phase of the financial crisis in late 2011 and early 2012, when decisions had to be made without delay, it is now possible to lay out a more detailed strategy that combines sustainable reduction of excessive debt with reforms for removing structural barriers, stimulating productivity, and reinstating productive public investments. In this regard, in recent days, the Government has been able to authorise the payment of public administrations’ past-due commercial debts due to businesses. This measure will contribute not only to easing pre-existing critical situations, but also to injecting more than €40 billion into the economy, thus reducing the pressure on firms in difficulty due to the credit crunch.

While capitalising on these opportunities, it will be nonetheless crucial to keep the guard up on the public-finance front. On the one hand, being part of the group of ‘virtuous’ countries is the necessary premise for making use of the leeway that is becoming available at a European level. On the other hand, the reduction of the debt, which is at an excessively high level, is the only road toward reducing interest costs and avoiding pressure from financial markets.

Only by staying in the preventive arm of the Stability and Growth Pact will it be possible to obtain the margins for completing the payment of PA’s past-due commercial debts beyond the resources already mobilised, and to introduce other initiatives, such as reducing taxation on earned income, providing incentives for stable and high-quality employment, or investing in education, research and innovation.

Finally, it is essential to confirm the reforms already in place. Italy is still far away from the objectives set within the framework of the Europe 2020 Strategy, especially with regard to employment, the support of research and development, and the reduction of poverty. Productivity trends are unacceptable. It is thus not the time to loosen the grip. If anything, it is necessary to speed up actions to avoid losing ground. There are no other recipes but reforms in order to get Italy back to growing competitiveness and productivity.

The National Reform Programme does not contain, and could not contain this year, an agenda of priorities for the future. Instead, it provides an analysis of

IV MINISTERO DELL’ECONOMIA E DELLE FINANZE

ECONOMIC AND FINANCIAL DOCUMENT

what has been done and of the preliminary results, indicating the areas of greatest need for future intervention. There is a need to continue with spending reviews, fight against tax evasion, and sell off public sector real estate, the last of which can ensure margins for high-priority policy measures while steadily reducing debt. The fiscal system needs to be reformed in order to make it less complicated and more growth-oriented, initiating as soon as possible a gradual reduction in fiscal pressure. Much remains to be done in the labour market in order to strengthen active labour policies, increase the participation rate of women and young people in the labour market, promote wage bargaining decentralisation, and reduce the burden of taxation. Training, research and innovation are the areas of weakness on which the efforts should be concentrated. The fight against poverty requires a specific effort and priority attention, albeit in view of limited resources. It is necessary to improve the regulatory environment for businesses, and thus, Italy’s attractiveness for investments from abroad, and the access to credit. In many areas, continuing and completing reforms already introduced is of essence so as to allow them to fully wield their economic effects. This is the case of the civil justice system, deregulation, the digital agenda, and the new system for start-ups. In other sectors, such as export subsidies, energy policy, and airport and tourism structures, the general strategies already approved will need to be translated into concrete actions.

Closing of the gap versus the Europe 2020 Strategy objectives is even more important at a time of political debate about the programme for the new legislature. The Stability and Growth Pact rules, the Europe 2020 Strategy objectives, and the Annual Growth Survey priorities are a reference framework that puts aside ideological options in favour of concrete actions that will make the difference for Italy’s economic growth, employment and stability. It is with this spirit that we present the Economic and Financial Document for 2013 to Parliament, the independent local entities, and social partners.

Mario Monti

President of the Council of Ministers

MINISTERO DELL’ECONOMIA E DELLE FINANZE V

ECONOMIC AND FINANCIAL DOCUMENT

VI MINISTERO DELL’ECONOMIA E DELLE FINANZE

TABLE OF CONTENTS

I.	OVERALL FRAMEWORK AND ECONOMIC-POLICY OBJECTIVES	1
II.	MACROECONOMIC SCENARIO	3
II.1	International scenario	3
II.2	Italy’s economy	4
III.	NET BORROWING AND PUBLIC DEBT	17
III.1	The path to a turnaround – Excessive deficit procedure	17
III.2	Financial impact of key reforms	24
III.3	The cyclically adjusted budget balance	26
III.4	Public debt	28
III.5	Trend of debt-to-GDP ratio	32
III.6	The debt rule and other relevant factors	34
IV.	SENSITIVITY ANALYSIS	39
IV.1	Sensitivity to economic growth	39
IV.2	Sensitivity to interest rates	42
V.	SUSTAINABILITY OF PUBLIC FINANCES	47
V.1	The impact of population ageing on fiscal sustainability	47
V.2	Debt sustainability	53
V.3	Analysis of sensitivity of public-debt dynamics over the long term	56
V.4	The impact of pension reforms on sustainability	60
VI.	QUALITY OF PUBLIC FINANCES	63
VI.1	Actions taken and indications for future years	63
VII	INSTITUTIONAL ASPECTS OF PUBLIC FINANCE	81
VII.1	Balanced budget implementation rule
VII.2	Fiscal rules	82

MINISTERO DELL’ECONOMIA E DELLE FINANZE VII

ECONOMIC AND FINANCIAL DOCUMENT - SECTION I STABILITY PROGRAMME

TABLES

Table I.1	Public finance indicators (% of GDP)
Table II.1	Base assumptions
Table II.2a	Macroeconomic prospects
Table II.2b	Prices
Table II.2c	Labour market
Table II.2d	Sector accounts (% of GDP)
Table III.1	Differences with respect to previous Stability Programme
Table III.2	General government budgetary prospects
Table III.3	The path to a turnaround (% of GDP)
Table III.4	Expenditures to be excluded by expenditure rule
Table III.5	General government account based on unchanged policies
Table III.6	State sector – Public sector – Cash balances (in € mn and % of GDP)
Table III.7	Financial impact of the new 2013 NRP measures (in million of euro)
Table III.8	Cyclical developments (% of GDP)
Table III.9	Public debt determinants (% of GDP)
Table III.10	General government debt by sub-sector (in € mn and % of GDP)
Table IV.1	Sensitivity to growth
Table V.1	Public expenditure for pensions, healthcare, long-term care, education, and unemployment compensation (2010-2060)
Table V.2	Long-term sustainability indicators
Table VI.1	Cumulative impact of 2012 legislation on General Government’s net borrowing (before netting out induced effects; in € mn)
Table VI.2	Cumulative impact of 2012 budget packages on General Government’s net borrowing (before netting out induced effects; in € mn)
Table VI.3	Cumulative impact of 2012 budget packages on General Government’s net borrowing by sub-sector (before netting out induced effects; in € mn)
Table VI.4	Impact of Decree-Law no. 95/2012 on General Government’s net borrowing (before netting out induced effects; in € mn)
Table VI.5	Impact of 2013 Stability Law on General Government’s net borrowing (before netting out induced effects; in € mn)
Table VI.6a	Impact of Decree-Law no.35/2013 (before netting out induced effects; in € mn)
Table VI.6b	Impact of Decree-Law no. 35/2013 on General Government’s net borrowing (before netting out induced effects; in € mn)
Table VI.6c	Impact of Decree-Law no. 35/2013 on General Government’s net borrowing by sub-sector (before netting out induced effects; in € mn)
Table VI.6d	Impact of key measures of Decree-Law no. 35/2013 on General Government’s net borrowing (before netting out induced effects; in € mn)

VIII MINISTERO DELL’ECONOMIA E DELLE FINANZE

TABLE OF CONTENTS

FIGURE

Figure II.1	Real GDP, potential GDP and closure of output gap
Figure II.2	Exports and imports volumes by geographic area - 2012
Figure II.3	Export and import volumes by sector - 2012
Figure III.1	Italian government securities yield curve
Figure III.2	10-year BTP-BUND-benchmark yield differential
Figure III.3	Yield differential between 10- and 2-year Italian government securities
Figure III.4	Debt-to-GDP ratio (inclusive and net of support to Euro Area countries)
Figure III.5	Combinations of primary surplus, growth rate and nominal interest rates that allow for meeting the debt benchmark in 2015 and 2017
Figure IV.1	Sensitivity of net borrowing to growth
Figure IV.2	Sensitivity of public debt to growth
Figure IV.3	Mix of domestic government securities outstanding
Figure IV.4	Average life and financial duration of government securities
Figure IV.5	Ratio of interest expenditure to GDP and weighted average cost at issuance
Figure V.1	Public debt projection compared with previous Stability Programme (% of GDP)
Figure V.2	Sensitivity of public debt to reduction of the net flow of immigrants and a 1-year increase in life expectancy (% of GDP)
Figure V.3	Sensitivity of public debt to macroeconomic assumptions. Higher and lower growth of productivity (% of GDP)
Figure V.4	Sensitivity of public debt to macroeconomic assumptions. Rates of employment and rates of activity of the elderly and women (% of GDP)
Figure V.5	Sensitivity of public debt to assumptions on healthcare and LTC expenditures in the risk scenario (% of GDP)
Figure V.6	Sensitivity of public debt to the primary surplus (% of GDP)
Figure V.7	The impact of the reforms on the debt-to-GDP ratio (% of GDP)

MINISTERO DELL’ECONOMIA E DELLE FINANZE IX

ECONOMIC AND FINANCIAL DOCUMENT – SECTION I STABILITY PROGRAMME

FOCUS TOPICS

Chap. II	The effects of accelerating the payment of PA’s commercial debts 2012 structural measures: the overall impact on growth The performance of the Italian manufacturing companies during the crisis Recent performance of spreads between yields on Italian debt securities and yields on German bunds
Chap. III	The expenditure rule
Chap. V	The pension reform State guarantees
Chap. VI	Macroeconomic impact of fiscal consolidation measures adopted in 2012 The fight against tax evasion Italian public development aid
Chap. VII	The governance of the healthcare expenditure system

X MINISTERO DELL’ECONOMIA E DELLE FINANZE

2013 STABILITY PROGRAMME

I. OVERALL FRAMEWORK AND ECONOMIC POLICY OBJECTIVES

The gradual improvement in the Euro Area’s financial market situation during 2012 has not yet been fully transmitted to the real economy, delaying economic recovery. The recession began in Italy in the second half of 2011 and continued throughout 2012. Average annual GDP has decreased by 2.4% in real terms, confirming estimates published in the September’s Updated to the 2012 DEF (Nota di Aggiornamento del DEF).

TABLE I.1 : PUBLIC FINANCE INDICATORS (% of GDP)
	2011		2012		2013		2014		2015		2016		2017
UPDATED TREND SCENARIO (1)
Net borrowing		-3.8		-3.0		-2.9		-1.8		-1.7		-1.3		-1.0
Cumulated change in net borrowing 2015-2017										0.2		0.4		0.6
UPDATED POLICY SCENARIO
Net borrowing		-3.8		-3.0		-2.9		-1.8		-1.5		-0.9		-0.4
Primary balance		1.2		2.5		2.4		3.8		4.3		5.1		5.7
Interest		5.0		5.5		5.3		5.6		5.8		6.0		6.1
Structural net borrowing (2)		-3.5		-1.2		0.0		0.4		0.0		0.0		0.0
Change in structural balance		-0.2		-2.3		-1.1		-0.4		0.4		0.0		0.0
Public Debt (including aid) (3)		120.8		127.0		130.4		129.0		125.5		121.4		117.3
Public Debt (net of aid) (3)		120.0		124.3		126.9		125.2		121.8		117.8		113.8
MEMO: Report to the Parliament (March 2013)
Trend net borrowing (4)		-3.8		-3.0		-2.9		-1.8
MEMO: Updated note on 2012 DEF 2012 (September 2012)
Net borrowing		-3.9		-2.6		-1.8		-1.5		-1.3
Primary balance		1.0		2.9		3.8		4.4		4.8
Interest		4.9		5.5		5.6		5.9		6.1
Structural net borrowing (2)		-3.6		-0.9		0.0		-0.2		-0.4
Change in structural balance		0.0		-2.8		-0.9		0.3		0.2
Public Debt (including aid) (5)		120.7		126.4		126.1		123.1		119.9
Public Debt (net of aid) (5)		119.9		123.3		122.3		119.3		116.1
Nominal GDP (absolute values x 1.000) (6)		1,578.5		1,565.9		1,573.2		1,624.0		1,677.7		1,731.3		1,785.9

1) On the assumption that the tax regime on real estate property (IMU) is renewed in line with Decree Law n. 201/2011 from 2015 onwards. In case of non-renewal, the General Government Net Borrowing would increase to -2.5, -2.1 and -1.8 per cent of GDP respectively in 2015, 2016 and 2017.

2) Structural means net of one-off measures and the cyclical component.

3) Inclusive or net of Italy’s share in EFSF loans to Greece and in the ESM programme. For 2011 and 2012 the total of such loans to EMU State Members (bilateral or through EFSF) amounts to 13.118 and 36.932 billion respectively. Estimates for 2013-2017 include revenues from privatisation of state owned assets for about 1 percentage point of GDP per year.

4) Inclusive of effects on net borrowing stemming from the speeding up of payments of arrears owed by the public administration, valued to be in the order of 0.5 per cent of GDP.

5) Inclusive or net of Italy’s share in EFSF loans to Greece (projected aid for recapitalisation of Spanish banking sector not included) and in the ESM programme from 2010 to 2015.

6) Estimates of GDP in the short run take the impact of structural reforms only partly into account.

MINISTERO DELL’ECONOMIA E DELLE FINANZE 1

DOCUMENTO DI ECONOMIA E FINANZA - SEZ. III PROGRAMMA NAZIONALE DI RIFORMA

Government policy actions aimed at maintaining financial stability while enhancing potential growth through major structural reforms. Despite unfavourable economic developments, fiscal consolidation was pursued with determination to achieve a balanced budget in structural terms in 2013. In 2012, the deficit was at 3.0 per cent of GDP in nominal terms, already broadly in line with EU recommendations.

Fiscal consolidation was accompanied by changes to the national fiscal framework, first by introducing the principle of balanced budget through the cycle in the Italian Constitution and then by making it operational. This followed a series of reforms in European governance and commitments by the Italian government as early as March 2011 in the context of the Euro Plus Pact and the more stringent requirements of the Six Pact. These changes have laid the foundation of a durable fiscal adjustment.

The current economic climate, still unfavourable, calls for fiscal consolidation and financial stability to be accompanied by measures to support and enhance growth and employment.

Following EU Council conclusions of June and December 2012, the European Council of 14 March 2013 recognised the need for a differentiated approach to fiscal consolidation, using the space available within the EU’s existing fiscal framework for actions in support of growth and employment.

In line with this approach, the Italian Government has recently adopted a Decree Law to inject liquidity in the economic system by unblocking payment in arrears accumulated by the public administration toward its suppliers. This measure is expected to boost demand already in the second half of this year. Spread over a two year period (2013-2014), it is a one-off measure that will not affect the fiscal consolidation process to which Italy remains firmly committed. Taking into consideration that the budget deficit must remain below 3.0 per cent of GDP in all years following the repeal of the excessive deficit procedure and with a sufficient margin, the Government estimates that the fiscal leeway to speed up payment of arrears by the public administration is approximately 0.5 per cent of GDP.

The structural deficit is estimated to decline from 1.2 per cent in 2012 to zero in 2013, and then turn into a slight surplus in 2014. In the following years, projections show net borrowing to be sufficiently close to balance on the assumption that the tax regime on real estate property (IMU) is renewed in line with Decree Law n. 201/2011 from 2015 onwards. The full achievement of a balanced budget in 2015-2017 would require some additional measures to close the residual gap. Based on current projections, the primary surplus in nominal terms should gradually increase, reaching 5.7 per cent of GDP in 2017, while the debt/GDP ratio should start declining rapidly as early as 2014.

2 MINISTERO DELL’ECONOMIA E DELLE FINANZE

II. MACROECONOMIC SCENARIO

II.1 INTERNATIONAL SCENARIO

In 2012, the global economy experienced a slowdown with respect to 2011. The estimates indicate a GDP increase of 3.1 per cent and trade growth of 2.4 per cent.

In the Euro Area, the financial markets’ gradual improvement has not yet been fully transmitted to the real economy, especially in the ‘peripheral’ countries; growth decelerated as the year progressed, so much so that GDP contracted by 0.6 per cent, while the unemployment rate rose to 11.4 per cent. These results were partially influenced by the weakness of domestic demand within the countries that have undertaken fiscal consolidation policies; the slowdown also affected Germany in the final quarter of the year. In the United States, the economy performed positively, with GDP growing by 2.2 per cent and the unemployment rate falling to 8.1 per cent. The Federal Reserve’s maintenance of accommodating monetary policy along with its Operation Twist allowed for improvement in the real-estate and stock markets. In Japan, GDP rose by 2.0 per cent, but the economic recovery has lost its momentum over time, prompting the government to adopt an ambitious plan in order to get the country out of the deflationary phase that has dragged on for more than a decade. Emerging and more recently industrialised countries witnessed a confirmation of their economic trends of recent years, with their economies continuing to react better to the current cycle, and growth rates well above those reported by the world’s most developed nations. In 2012, China grew by 7.8 per cent, while India reported growth of 4.9 per cent, with favourable prospects for 2013.

Global economic growth forecasts for 2013 have been revised downward, partly due to the deterioration (albeit temporary) witnessed in the final months of 2012. The estimates confirm a GDP increase of 3.2 per cent and global trade growth of 3.5 per cent. More specifically, the Euro Area’s GDP is projected to decline by 0.3 per cent, while its unemployment rate should grow to 12.2 per cent. In the United States, GDP is forecast to grow by 1.9 per cent; unemployment is pegged at 7.6 per cent. Finally, the estimates for Japan contemplate GDP growth of 1.0 per cent, while China’s economy should be back to expanding at a rate of around 8.0 per cent.

The forecasts for 2014 indicate that the GDP growth of the global economy should stabilise at 3.9 per cent.

Various indications coming from the international scenario are the basis for moderate optimism. More specifically, the growth prospects for the economies of emerging nations may represent an important thrust for accelerating the recovery of developed countries. Added to this is the expected decline in the prices of energy, food and industrial commodities, with positive repercussions on inflation.

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Nonetheless, elements of uncertainty remain for the future. In the Euro Area, the position taken by the European Central Bank (‘whatever it takes’) eased the financial market tensions that had been evident through the summer months of 2012. Even so, tensions remain, as shown by the recent banking crisis in Cyprus. In the United States, the Federal Reserve continues to maintain an accommodating policy, but the recovery could risk losing its momentum as a result of fiscal issues, namely, the combination of spending cuts and revenue increases (Fiscal Cliff), the permanent spending cuts of USD 85 billion (Sequester), and the question of the debt ceiling. Instead, in Japan, the need to get back to solid rates of growth can also be seen through the changes to monetary policy made by the new governor of the central bank.

II.2 ITALY’S ECONOMY

The recession that began in the second half of 2011 dragged on for the entire year of 2012, producing a 2.4 per cent contraction of GDP, in line with the estimates published in September in the Update of the DEF. The trend of the economy was very weak in the final quarter of the year.

The significant reduction in the autumn of 2012 in the spread between yields on Italian government securities and the yields on German securities has not yet fully wielded its beneficial effects on the credit system. In Italy and in other peripheral countries, significant differences continue to exist in the cost of financing on new business loans with respect to the Euro Area’s core countries. The spread between the average cost of the new business loans in Italy and that in Germany was equal to 1.5 percentage points in January. In addition, the difficult cyclical conditions and the consequent increase in non-performing loans have prompted a very conservative stance by banks in granting loans to the economy (which have been declining in recent months).

The tightening of conditions for accessing credit, accompanied by the inevitable fiscal adjustment, had an impact on domestic demand whose contribution to GDP growth was equal to -4.8 percentage points. The staying power of exports, accompanied by a reduction of imports, translated into a strong positive contribution of net demand from abroad (3 percentage points). In the meantime, the stocks of inventories continued to decline.

In 2012, the drop in investment in machinery grew more pronounced due to uncertainties about demand and the low level of plant capacity utilisation. Industrial production conspicuously decreased, in particular in consumer durable goods and intermediate goods. Investments in construction experienced a fifth consecutive year of decline.

During the first three quarters, household disposable income fell by 4.1 per cent compared with the same period of the preceding year. The ongoing reduction of real disposable income since 2008 has affected spending decisions by households. The contraction of consumption was very pronounced (- 4.3 per cent) and mainly referred to durable and semi-durable goods. The savings rate stood at 8.9 per cent in the third quarter.

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As a result of the fiscal consolidation measures, the Public Administration’s real expenditure (including both employee compensation and intermediate consumption) was reduced by 2.9 per cent.

While the trend of exports proved reassuring (+2.3 per cent), the weakness of domestic demand was reflected in a pronounced decrease in imports. The resulting trade surplus (+1.3 per cent of GDP) led to important improvement in the current balance of the balance of payments, which is now near to balance (-0.6 per cent of GDP).

The recession has also had significant repercussions on the labour market. Employment as measured in full-time equivalents (FTE) decreased by 1.1 per cent. The number of employed reported by the Labour Force Survey experienced a smaller decrease due to greater reliance on wage-supplementation schemes (CIG) and an increase in part-time workers¹. Indeed, the hours worked actually fell by 1.4 per cent. The hours authorised for CIG were more than 1.0 billion, getting close to the historical high recorded in 2010. The so-called ‘tiraggio’ (number of hours of temporary lay-off benefits actually received) was equal to approximately 50 per cent. The drop in employment was nonetheless smaller than the contraction in GDP, and thus reflected a productivity decline.

Unlike what has occurred in other periods of recession, the labour force participation rate increased in 2012. The increase is linked to a higher labour force: more women and young people, but also more individuals between the ages of 55 and 64 because of the most recently adopted pension reforms. The average unemployment rate for the year rose to 10.7 per cent, reflecting strong growth in the final months of the year.

Wage moderation continued. Wages per employee rose by 1.0 per cent, with the stronger trend for contractual wages (1.5 per cent) and a negative wage-drift. Despite the containment of wage increases, the unit labour cost increased due to deterioration of productivity.

The harmonised index of consumer prices (HICP) rose by 3.3 per cent, also reflecting the higher value-added-tax rates and excise tax rates introduced in the second half of 2011. The easing of external inflationary pressure and the waning of the effects of higher rates for VAT and some excise taxes produced a conspicuous slowdown in inflation in the second part of 2012.

Prospects for the Italian economy

The prospects for the Italian economy will be influenced by the external macroeconomic framework and by the developments in the crisis in Europe. After the slowdown seen in the second half of 2012, international demand is expected to recover gradually, thereby favouring growth of exports.

The latest indicators available are evidencing a less encouraging trend of domestic demand, which should still be weak in early 2013. On the basis of available information, a new decrease in GDP is expected in the first half of 2013 (albeit of a lesser magnitude than in the final quarter of 2012); this will likely be

¹ Within the Labour Force Survey, workers on the wage-supplementation schemes (CIG) are classified as employed.

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followed by a gradual recovery in the second half of the year. When also considering the negative carry-over effect on 2013 (equal to-1.0 per cent), the GDP growth estimates for the current year have been revised downwards to-1.3 per cent from -0.2 per cent indicated in the DEF Update of September 2012 and is in line with the figures set out in the Report to Parliament dated 21 March 2013.

The forecast incorporates the effects of the measures providing for payment of the commercial debts owed by the Public Administration (PA). The injection of liquidity into the economy achieved via the acceleration of such payment should favour more rapid economic recovery as early as the second half of 2013. The recovery should be more pronounced in 2014, with a growth rate equal to 1.3 per cent. The effects of the aforementioned transaction should be even more visible in 2014, including the positive impact of the carry-over effect. If the transaction were not to be effected, it is estimated that growth could be just over 0.5 per cent. The positive effects of paying the PA’s commercial debts will also influence growth in 2015, which is estimated to increase by 1.5 per cent.

FOCUS

The effects of accelerating the payment of PA’s commercial debts

In the past two years, the rebalancing of the public accounts has moved forward with determination, with a view toward the achievement of a balanced budget. In 2012, Italy realised substantial structural improvement in public finance accounts, and further fiscal consolidation is planned for 2013. Furthermore, in 2012, the ratio of net borrowing to GDP (not cyclically adjusted) was substantially in line with EU recommendations.

With the cyclical phase still unfavourable, the achievement of the budget balance and the respect of financial stability will need to be rounded out by measures to support and relaunch growth and employment.

In evaluating the effects of a similar initiative on the real economy, it was noted that a portion of the payments to the PA suppliers will go to the credit sector, since a portion of the suppliers’ receivables (i.e. the PA’s commercial debts) has been transferred to banks (with or without recourse). If on the one hand, this flow of funds will reduce the direct impact on the economic system, on the other hand, it will contribute to reducing the tensions within the credit system; it can thus be expected that the result will be a decrease in customer borrowing rates and some easing of the credit crunch.

The portion of the liquidity injection that remains within businesses is likely to be used mostly for revising investment plans or for improving working capital management (including, for example, possible payments of amounts due in arrears to employees). The plan to accelerate the settlement of the PA’s commercial debts should also help to reduce the number of businesses being closed (a phenomenon that has grown more pronounced in recent months). As a result, considerable improvement in the trend of domestic demand and employment can be expected vis-à-vis what would have occurred without the initiative.

The stimulus to the economy should also lead to a partial change in the mix of demand. Even though the components of domestic demand should improve, the balance of goods in the balance of payments is expected to remain in a surplus position, while the current balance could approach to balance. The unemployment rate is projected to peak in 2013, before gradually beginning to decline in subsequent years.

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MACROECONOMIC SCENARIO – SUMMARIES AND COMPARISONS

	2012		2013						2014
	Final data		Before payments of PA trade debt		Delta		Stability Programme (1)		Before payments of PA trade debt		Delta		Stability Programme (1)
GDP		-2.4		-1.5		0.2		-1.3		0.6		0.7		1.3
Imports		-7.7		-1.3		1.0		-0.3		2.9		1.8		4.7
Final national consumption		-3.9		-2.0		0.3		-1.7		0.3		0.6		0.9
Household consumption		-4.3		-2.1		0.4		-1.7		0.5		0.9		1.4
Investments		-8.0		-3.3		0.7		-2.6		1.3		2.8		4.1
- Machinery, equipment & other		-9.9		-3.9		0.9		-3.0		1.8		3.3		5.1
- Construction		-6.2		-2.8		0.5		-2.2		0.8		2.3		3.1
Exports		2.3		2.1		0.1		2.2		3.1		0.2		3.3
GDP deflator		1.6		1.7		0.1		1.8		1.6		0.3		1.9
Consumption deflator		2.8		1.9		0.2		2.0		1.7		0.3		2.0
Memo item: planned inflation		1.5		1.5		0.0		1.5		1.5		0.0		1.5
Employment (FTE)		-1.1		-0.8		0.5		-0.3		-0.2		0.8		0.6
Unemployment rate		10.7		11.7		-0.1		11.6		12.1		-0.3		11.8

1) The data correspond with those in the report presented to Parliament on 21 March 2013.

The principal components of domestic demand are likely to contract markedly with respect to 2012. Thereafter, the forecast calls for growth of consumption that is almost in line with GDP and a more pronounced acceleration of investment (following a cumulative contraction of an estimated 15 per cent between 2011 and 2013).

The recovery of employment is also not expected to occur before 2014, and its scale should be more limited with respect to the growth of GDP. The unit labour cost is projected to decline, while the reduction of the unemployment rate will start to be more evident only near the end of the forecast period when it should fall below 11 per cent. This last scenario incorporates a progressive increase of the participation rate.

The specific circumstances in which the liquidity injection is occurring will ensure that the initiative can have long-term effects on the economic system, with a reduction of the risk of permanent loss of productive capacity. Nevertheless, in the years immediately following 2013, the recovery of the growth process can be explained by the gradual closing of the output gap as favoured by improvement in demand. In the medium term, the contribution related to structural factors (potential GDP growth) becomes prevalent; Chart II.1 shows the breakdown estimated with the use of methodology

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agreed at European level. Potential GDP growth (which corresponds with actual GDP growth in the long-term projections) is significantly influenced by the reforms put into effect in recent years.

It is mostly for the effect of such reforms that GDP growth will remain above 1.0 per cent. It is estimated that the total impact of the reforms on potential GDP will get to 6.8 percentage points of GDP in the long term, thus ensuring incremental GDP growth of approximately one-half percentage point per year. The official growth forecasts are dependent on the methodologies developed at European level, particularly for the long term, and they do not fully incorporate the effects of the reforms.

FOCUS

2012 structural measures: the overall impact on growth

The table below shows the overall impact of the growth-stimulus reforms that were introduced in 2012. The NRP contains detail of the new measures introduced as of mid-2012, along with a precise evaluation thereof. Some of the simplification and deregulation measures were evaluated previously in the 2012 EFD. According to the estimates done, the total effect of the measures on GDP can be quantified as an additional 1.6 percentage points of growth in 2015. By 2020, the increment rises to 3.9 percentage points, and then rises to 6.9 in the long term. The data supplied indicate the change in GDP versus the level of GDP without the reforms.

MACROECONOMIC EFFECTS OF THE 2012 REFORMS

(GDP - percentage shifts compared to the baseline simulation)

	2015		2020		Long term
Deregulation and simplification measures		0.9		2.4		4.8
Growth Decrees 1 and 2		0.3		0.5		0.7
Labour reform		0.4		1.0		1.4
Total		1.6		3.9		6.9

Source: MEF analyses using the ITEM, QUEST III - Italy (European Commission) and IGEM models.

The impact of the structural reforms on the potential growth rate over the medium term (until 2025) is evidenced through a counterfactual analysis.

First, the production function methodology agreed at a European level was applied to the macroeconomic framework assumed as the reference. A potential GDP growth rate was derived from this scenario for the 2012-2017 period. For the years from 2018 to 2025, the potential growth rate was extrapolated on the basis of convergence assumptions (agreed at a European level) for certain variables that are part of the determination of potential GDP (such as the unemployment rate structural (NAWRU), capital stock, and the rate of participation). It is noted that the methodology agreed at a European level could only incorporate part of the impact of the reforms on potential growth since such methodology projects the underlying components through statistical techniques that are based primarily on values of the variables of reference observed in recent years².

² The level of convergence for the NAWRU was derived through a panel estimation over a sample of the leading EU countries on the basis of data that include the main structural determinants of the labour market, such as: the substitution rate of unemployment subsidies, an indicator for active labour policies, a tax-wedge indicator and an indicator of the rate of unionisation. For the baseline scenario, it is assumed that the structural NAWRU converges at a level even higher than 9 per cent. For the capital stock, it is assumed that convergence at the stationary state level occurs in 2030. Finally, the baseline scenario incorporates the favourable effects on the rate of participation in the labour market that are derived from pension reform as simulated through the Cohort

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In order to keep the analysis conservative, the macro framework (and thus the underlying potential output) incorporates only part of the impact of the reforms estimated in the table above. It can be assumed, in order to maintain consistency in the means of representing the scenarios, that the projections of potential GDP after 2017 done with the EU methodology, will underestimate the effect of the reforms by an equal amount.

In order to evidence the full effect of the reforms on potential growth, two alternative scenarios were defined. The first, unlike the reference scenario, includes the entire impact of the reforms, whereas the second excludes any structural reform introduced in 2012. In cumulative terms, the shift between the two alternatives scenarios coincides with the values set out in table above.

The analysis presented is useful in showing that the GDP growth rates could be higher than those set out in the baseline scenario.

TABLE II.1 BASE ASSUMPTIONS

	2012		2013		2014		2015		2016		2017
Short-term interest rate (1)		0.8		1.2		2.7		3.7		4.4		4.9
Long-term interest rate		5.7		4.8		5.3		5.7		6.0		6.2
USD/EUR exchange rate		1.29		1.35		1.35		1.35		1.35		1.35
Change of the nominal effective exchange rate		-5.4		2.6		0.0		0.0		0.0		0.0
World GDP, excluding EU		4.0		4.1		4.6		5.1		5.2		5.3
EU GDP growth		-0.3		0.1		1.6		2.0		2.0		2.2
Growth in Italy’s key foreign markets		1.4		3.2		5.6		5.9		5.9		5.9
World import volumes, excluding EU		3.8		4.4		6.1		6.7		6.9		6.9
Oil price (Brent, USD/barrel)		111.6		113.5		106.4		106.4		106.4		106.4

1) Short-term interest rate: the average of the forecast rates on 3-month government securities issued during the year; long-term interest rate: the average of the forecast rates on 10-year government securities issued during the year.

Simulation Model (CSM). The scenario presents an uptick in the growth rate in 2018. This is due to the means of inclusion of such effects that occurs, starting in 2017, by increasing the growth of the rate of participation by a coefficient estimated by European Commission on the basis of the CSM, and that reflects the employment impact of pension reform.

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TABLE II.2A. MACROECONOMIC PROSPECTS

	2012				2013		2014		2015		2016		2017
	Level (1)		% Chg.
Real GDP		1,389,948		-2.4		-1.3		1.3		1.5		1.3		1.4
Nominal GDP		1,565,916		-0.8		0.5		3.2		3.3		3.2		3.2
COMPONENTS OF REAL GDP
Private consumption		819,812		-4.3		-1.7		1.4		1.1		1.1		1.2
Public consumption (2)		290,171		-2.9		-1.7		-0.4		0.7		0.3		0.1
Gross fixed investment		244,483		-8.0		-2.6		4.1		3.2		2.6		2.4
Inventories (% of GDP)				-0.6		-0.1		0.1		0.1		0.0		0.0
Exports of goods and services		414,120		2.3		2.2		3.3		4.1		4.0		3.9
Imports of goods and services		370,977		-7.7		-0.3		4.7		4.4		4.1		3.8
CONTRIBUTION TO REAL GDP GROWTH (3)
Domestic demand		—		-4.8		-1.9		1.4		1.3		1.2		1.2
Change in inventories		—		-0.6		-0.1		0.1		0.1		0.0		0.0
Net exports		—		3.0		0.7		-0.2		0.1		0.1		0.1

1) In € mn

2) General government and NPISH

3) Slight discrepancies, if any, are due to rounding.

TABLE II.2 B PRICES

	2012				2013		2014		2015		2016		2017
	Level		% Chg.
GDP deflator		112.7		1.6		1.8		1.9		1.8		1.8		1.8
Private consumption deflator		115.9		2.8		2.0		2.0		1.9		1.8		1.8
HICP		117.5		3.3		2.0		2.0		1.9		1.8		1.8
Public consumption deflator		110.6		0.4		-0.5		0.3		0.9		1.0		0.9
Investment deflator		116.6		1.3		1.5		2.3		2.1		1.7		1.8
Export deflator		114.5		1.9		1.2		2.1		2.1		1.9		1.9
Import deflator		122.6		3.1		0.7		1.7		1.8		1.7		1.9

TABLE II.2 C LABOUR MARKET

	2012				2013		2014		2015		2016		2017
	Level1		% Chg.
Employment, persons (national accounts)		24,661		-0.3		-0.4		0.4		0.7		0.6		0.8
Employment, hours worked		43,212,145		-1.4		-0.3		0.6		0.8		0.6		0.9
Unemployment rate				10.7		11.6		11.8		11.6		11.4		10.9
Labour productivity, persons		58,534		-1.3		-1.0		0.7		0.7		0.6		0.5
Labour productivity, hours worked		32.2		-1.0		-1.0		0.7		0.7		0.7		0.4
Compensation of employees		668,859		-0.2		0.6		1.9		2.3		2.5		2.6
Compensation per employee		39,268		1.0		1.0		1.2		1.5		1.6		1.6

1) Units of measure: employment (persons and hours worked) in thousands of units; labour productivity in euro at constant values; total employee compensation in millions of euros; compensation per employee in euros.

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TABLE II.2 D SECTOR ACCOUNTS (% OF GDP)

	2012		2013		2014		2015		2016		2017
Net lending/borrowing with the rest of the world		-0.4		0.2		-0.2		-0.1		-0.1		0.0
Balance of goods and services		1.2		2.1		1.9		1.9		2.0		2.1
Balance of primary income and transfers		-1.8		-2.0		-2.1		-2.1		-2.1		-2.2
Capital account		0.1		0.1		0.1		0.1		0.1		0.1
Net lending/borrowing of private sector		2.7		3.0		1.6		1.4		0.8		0.4
Net lending/borrowing of the Public Administrations1		-2.9		n.a.		n.a.		n.a.		n.a.		n.a.
Net lending/borrowing of the Public Administrations2		-3.0		-2.9		-1.8		-1.5		-0.9		-0.4
Statistical discrepancies

1) ESA95 series. Most recent historical data available: 2012.

2) EDP series.

Foreign trade

In 2012, Italy’s foreign trade reflected a slowdown with respect to the previous year, in line with the trend of global industrial production and trade. The overall trade balance was a surplus of approximately €11 billion (0.8 per cent of GDP), thus significantly improving over the deficit of €25.5 billion for the preceding year. The change is due to the growth of exports (3.7 per cent) and the reduction of imports (-5.6 per cent). From a geographic perspective, both the export and import flows were more robust with respect to non-EU markets.

In 2012, the total exports of goods in volume terms were slightly lower year on year (-0.5 per cent), although having expanded with respect to non-EU markets. Imports experienced a much larger decline (-9.4 per cent), which refers to all geographic areas. More specifically, exports rose mainly to the OPEC countries (18.0 per cent), Japan (11.3 per cent) and the United States (8.2 per cent). Among the European countries, exports increased only with respect to the UK (2.5 per cent). Imports in volume rose only from the OPEC countries (4.2 per cent).

In the European area, imports from the UK reflected the biggest decline (-15.2 per cent). At a sector level, the highest increases in exports were reported for pharmaceutical products (7.1 per cent), petroleum products (5.8 per cent), metal products (4.0 per cent) and the food sector (2.5 per cent). Imports decreased for all sectors, especially for transport vehicles (-23.1 per cent) and textiles and apparel (-14.3 per cent).

The 2012 trend of average unit values (AUV) shows a similar increase for total exports and imports, rising by 4.3 per cent and 4.1 per cent, respectively. At a geographic level, the highest AUV increases for both exports and imports were seen with respect to non-EU markets. For exports, the increase extended to all countries, but was lower (from 8.2 per cent for the United States to 3.8 per cent for Russia) than the most important increases reported for imports (14.6 per cent from OPEC, 10.5 per cent from Russia, 6.8 per cent from non-EU countries, 6.0 per cent from Japan and 3.3 per cent for China). From a sector perspective, the same sectors (petroleum products, textiles and apparel, pharmaceutical products and machinery) reported the largest increases in exports (from 15.1 per cent for petroleum products to approximately 6.0 per cent for pharmaceutical products and machinery) and in imports (from 9.9 per cent for petroleum products to 6.1 per cent for machinery).

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According to provisional data for 2012, the inward foreign direct investment (FDI) in Italy amounted to approximately €6.8 billion, a major decline when compared with the roughly €17.8 billion reported for 2011 (€24.7 billion)³. This trend was rather widespread also in the Euro Area, where France, Ireland and the UK were the only countries to record an increase in incoming flows⁴.

FOCUS

The performance of the Italian manufacturing companies during the crisis⁵

Considering Italy’s exports represent an important driver of the recovery in the current economic cycle, an analysis of several aspects of Italy’s entrepreneurial system can provide some insight about the prospects for exports. The analysis first examines the exports growth of manufacturing companies present in foreign markets for the entire 2010-2012 two-year period, and then looks at the expansion strategies implemented by such companies in 2012 and those planned for 2013, along with what are considered the main obstacles and the possible policy measures deemed most useful by businesses. The Italian exporters (about 45,000) had positive performance overall during the 2010-2012 period, despite the economic crisis. In 2012, these companies exported goods and services with a value of more than €260 billion, with sales abroad for the January-November 2012 period rising by 10.9 per cent over the same period of 2010. Such companies can be subdivided into two very different groups: the more competitive companies (35.7 per cent of the total, or approximately 16,000 companies) which increased exports to both European and non-European countries; and the companies (16 per cent of the total, or approximately 7,200 companies) that had fewer sales abroad in both macro market areas.

This performance was considerably influenced by the company size. Indeed, the large- and medium-sized companies appear more capable of capturing global market share, and are more oriented toward non-European countries, whereas the smaller companies find it easier to expand within the European market. One critical aspect is the large number of companies that increased sales abroad, thereby consolidating their position in the EU, though seeing their positions eroded in non-European markets. This points to a potential setback with respect to the main competitors from emerging markets. In November 2012, ISTAT conducted an ad hoc survey⁶ with regard to the strategies adopted by the companies in order to deal with the difficulties of the current economic crisis. In the past two years, the companies have focused on both (i) strategies to improve quality or to increase the range and technological content of the products, and (ii) measures to hold down selling prices. Some 75 per cent of the companies employed the first type of strategies (with the figure being no less than 70 per cent in any given sector). The sectors where the percentages were particularly high were electronics, mechanical and traditional Made-in-Italy goods (textiles, apparel, leather and accessories). The strategies to hold down prices have instead been used as a tool for defending competitive positioning for approximately 80 per cent of the companies, particularly in the electronics sector and in transport vehicles. It is noted that the companies intend to implement the same strategies in 2013. Indeed, more than 75 per cent of the manufacturing companies plan to improve product quality or to expand the product line, while more than 60 per cent of them are aimed at holding down selling prices.

³ Bank of Italy, ‘Balance of payments and International Investment Position’, Supplements to the Statistical Bulletin, Monetary and Financial Indicators, n. 15, New series, Year XXIII, 25 March 2013.

⁴ UNCTAD, ‘Global Investment Trends Monitor’, n. 11, 23 January 2013.

⁵ The text is a summary extracted from ISTAT’s ‘Report on the competitiveness of productive sectors’, published in February 2013.

⁶ In this survey, some 50 per cent of the sample companies indicated they were exporters.

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ECONOMIC AND FINANCIAL DOCUMENT – SECTION I STABILITY PROGRAMME

Finally, it is noted that the sectors in which the average size of the business is larger have a more detailed strategic plan. In the past two years and in the months to come, this group of companies has combined initiatives to support a business presence abroad and to reinforce supply capacity abroad with price- and product-quality-related measures. In essence, during the 2010-2012 period, the manufacturing companies have used a combination of ‘traditional’ tools based on competing in terms of price and product differentiation both vertically (improvement of quality and more technology) and horizontally (expansion of product range). The employment of more complex strategies (that might also include organisational initiatives and/or changes in the production/distribution chain) appears to be more limited.

According to the companies participating in the survey, there are numerous obstacles to increasing exports (distinguished between internal or external constraints). The principal element slowing expansion is the difficulty in squeezing production costs (according to 75 per cent of the total companies). This factor is significant not only because it affects the entire manufacturing sector, but also because, if associated with the use of price-containment strategies, it presents a risk of structural contraction of profit margins. Contrary to what is generally affirmed, the companies do not believe they have organisational/managerial difficulties, and size is not perceived as an impediment (according to approximately one in five companies). The absence of such internal obstacles stands out mostly in the sectors marked by a strong presence in foreign markets (both through exports and in terms of production), such as pharmaceuticals, transport vehicles, and electrical equipment. Another important, but external, factor regards the limitations on accessing credit (40 per cent of the companies). Such difficulty is mostly seen in the traditional sectors and in sectors with large economies of scale (such as transport vehicles, chemicals, wood, machinery and rubber and plastic materials). Finally, with respect to the intervention of economic-policy authorities, about 50 per cent of the manufacturing companies believes that additional export credit or guarantee measures are needed. This is evident particularly in the sectors experiencing greater difficulty in accessing credit (such as coke, transport vehicles, chemicals, machinery, and textiles).

Roughly one in ten manufacturing companies is looking for measures to support network solutions, but the figure doubles for companies in the food, beverage and tobacco sector. The demand for support in offering services in Italy and abroad is much less important (indicated by an average of 20 per cent of the manufacturing sector); partial exceptions are the pharmaceutical sector with respect to services in Italy and the electrical equipment sector with respect to service abroad.

FOCUS

Recent performance of spreads between yields on Italian debt securities and yields on German bunds

In Italy, the tensions on the government securities market intensified in mid-2011, prompting an expansion of the spread between the yields on Italian government securities and the yields on German securities.

In December 2011, the Governing Council of the European Central Bank (ECB) launched two long-term refinancing operations (LTRO). Such operations were implemented to respond to the funding difficulties that banks in several European nations were experiencing due to the sovereign debt crisis. In the first LTRO carried out on 21 December, the ECB provided gross financing of approximately €489 billion. The second LTRO took place on 29 February 2012, and provided funding of €530 billion. The actions undertaken contributed to reinstating market confidence, leading to a reduction in the spread between the yields on Italian government securities and the yields on German securities. The decrease in yields was also made possible by Italy’s financial rebalancing and its adoption of structural reforms. In the spring of 2012, however, the tensions flared again. At this point, the inevitable fiscal consolidation initiatives already put into place by national governments, and in particular, by Italy, were rounded out with an additional crucial lever of actions agreed at the level of the main European institutions.

14 MINISTERO DELL’ECONOMIA E DELLE FINANZE

II. MACROECONOMIC SCENARIO

On 28 and 29 June 2012, the summit of the heads of state and of government of the Euro Area and the European Council announced important measures aimed at easing the financial markets tensions and reinstating investor confidence. The European summit called for the institution of a single bank oversight system. The summit also came to a decision about greater flexibility and efficiency in the use of the financial support mechanisms (European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM)) in order to stabilise the conditions for the financing of the nations most exposed to the market tensions, subordinating such action to the respect of the commitments undertaken at a European level.

In order to ensure that the transmission of monetary policy would be working properly within the Euro Area, on 6 September 2012, the Governing Council of the ECB established the means for implementing Outright Monetary Transactions (OMT) which consist of purchasing government securities on the secondary market. Such purchases are subordinated to the respect of rigorous conditions linked to the implementation of a financial aid programme on the part of the EFSF or the ESM for the Member State making a formal request therefore. With this initiative, the markets’ response was more decisive and longer lasting.

The spread between the yields on 10-year Italian government securities and the yields on German securities contracted markedly following: i) the announcement of the OMT; ii) the fiscal consolidation measures undertaken by the member states most exposed to the sovereign debt crisis; and iii) the progress made toward the realisation of the banking union.

The reduction of the tensions on government securities had an important impact on Italy’s public accounts, favouring, albeit with the usual delay, a reduction in the average rate of interest paid on the public debt. When compared with the projections presented in the DEF Update in September, the interest expenditure for the public administration would be about €7.7 billion lower in 2015. This improvement could not have occurred, had it not been for the Government’s firm action in terms of the rebalancing the public finances and the structural reforms for growth.

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ECONOMIC AND FINANCIAL DOCUMENT – SECTION I STABILITY PROGRAMME

16 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. NET INDEBTEDNESS AND PUBLIC DEBT

III.1 THE PATH TO A TURNROUND – EXCESSIVE DEFICIT PROCEDURE

The fiscal objectives presented in the Stability Programme for 2012 in April last year were revised downwards in the course of 2012 due to a worsening of the economic cycle, partly caused by a sharpening of tensions in the sovereign debt market.

TABLE III.1: DIFFERENCES COMPARED TO THE PREVIOUS STABILITY PROGRAMME
		2012		2013		2014		2015
GDP GROWTH RATE
	Stability Programme 2012		-1.2		0.5		1.0		1.2
	Stability Programma 2013		-2.4		-1.3		1.3		1.5
	Difference		-1.2		-0.8		0.3		0.3
NET INDEBTEDNESS (% of GDP)
	Stability Programme 2012		-1.7		-0.5		-0.1		0.0
	Stability Programme 2013		-3.0		-2.9		-1.8		-1.5
	Difference		-1.3		-2.4		-1.7		-1.5
PUBLIC DEBT (% of GDP)
	Stability Programme 2012		123.4		121.5		118.2		114.4
	Stability Programme 2013		127.0		130.4		129.0		125.5
	Difference		3.6		8.9		10.8		11.1

In July 2012, on the basis of the European Commission’s evalutations of the macroeconomic and fiscal situation outlined in the previous Stability Programme, the Ecofin Council recommended Italy to implement the budget consolidation plan to secure a correction of the excessive deficit by 2012, appropriate progress toward the medium-term objective (MTO) and debt reduction, while complying with the expenditure benchmark.

In September, with the Update Note of the Economic and Financial Document, budget forecasts were updated to take into account the weakening of the macroeconomic scenario for the 2012-2015 period (about 1.8 cumulative percentage points), the reports on the performance of macroeconomic aggregates as well as the impact of the three-year corrective measures introduced in the summer by two legislative packages. These two packages were meant to introduce a comprehensive revision of public spending (spending review), by the measn of the achievement of structural savings and selective cuts¹, as well as take care of enhancing the value of and selling government real estate throughout investment funds as a means to reduce the stock of public debt².

¹  Decree Law No. 95/2012 converted by Law No. 135/2012.

²  Decree Law No. 87/2012 which was incorporated and converted by Law No. 35/2012.

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New estimates placed the general government net borrowing at 2.6 per cent of GDP in 2012, exceeding the April figure by 0.9 percentage points, as a result of revenues performance that was less favourable than expected and of a higher cost of debt servicing, which was more than offset by a more moderate increase in other current expenditure items. The deficit was expected to gradually decline over the 2013-2015 period, in line with previous forecasts. In structural terms, the fiscal consolidation effort was confirmed, as a balanced budget was achieved in 2013 and substantially maintained in the following years. The Stability Law, adopted in October, identified the measures to achieve the policy objectives.

In December, a reinforced law implementing the structural balanced budget rule, now enshrined in the Constitution, was adopted in line with the commitments undertaken in the Euro Plus Pact, the Six Pack and the Fiscal Compact.

Finally, in March 2013 and ahead of the deadline for submitting The Economic and Financial Document, the Government informed the Parliament of the new growth prospects for the economy and fiscal performance for the years 2013 and 2014. This was done because of the urgent need for measures to inject liquidity into the economy to support growth and employment by speeding up the settlement of general government payables to suppliers. The new estimates of public finance, developed on the basis of data relating to the new macroeconomic scenario and incorporating the impact of the measures introduced to speed up the settlement of general government payables to suppliers³, showed a net borrowing of 2.9 per cent of GDP in 2013 and 1.8 per cent in 2014, with a worsening equal to 0.6 and 0.3 percentage points over the estimates in the Update Note of the Economic and Financial Document.

More specifically, the end of 2012 showed a 1.3 percentage point deviation from the net borrowing objective set in the previous Economic and Financial Document. The greatest deviation is on total revenues, whose percentage on GDP has declined by about 1.0 GDP percentage points, entirely due to less tax revenues (about 1.0 percentage points). Less important seems to be the deviation on the expenditure side (about 0.3 percentage points) whose greater incidence as a proportion to GDP, solely as a result of a smaller denominator, is to be attributed to increasing welfare benefits (about 0.3 percentage points) and to debt servicing (about 0.2 percentage points), while the other expenditure items are either in line with forecasts (such as employees’ compensation and intermediate consumption) or edging down (such as social transfers in kind and other current expenditure equal to 0.1 percentage points).

Therefore, with regard to results achieved last year, general government net borrowing declined by about 12.4 billion in 2012, to 47.6 billion. As a proportion of GDP it was -3.0 per cent, improving by 0.8 percentage points over the value recorded in 2011 (-3.8 per cent)⁴. The primary surplus doubled from 1.2 per cent of GDP in 2011 to 2.5 per cent in 2012.

³ Decree Law No. 35/2013.Under the existing accounting and public finance law a similar measure requires the updating of the previously set fiscal policy objectives, by submitting a specific Report to Parliament.

⁴ According to SEC 95 version, which is not valid for EDP purposes that considers swaps, the ratio of net borrowing to GDP was 2.9 per cent, thus showing a 0.8 per cent improvement over 2011 (revised downwards from 3.8 per cent to 3.7 per cent.

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III. NET INDEBTEDNESS AND PUBLIC DEBT

TABLE III.2: GENERAL GOVERNMENT BUDGETARY PROSPECTS 1
	2012		2012		2013		2014		2015		2016		2017
	Level (2)		% of GCP		% of GDP		% of GDP		% of FDP		% of GDP		% of GDP
Net lending (EDPB.9) by sector
1. General government		-47,633		-3.0		-2.9		-1.8		-1.5		-0.9		-0.4
Cumulated change in net borrowing 2015-2017										0.2		0.4		0.6
2. Central government		-53,660		-3.4		-2.4		-1.7		-1.6		-1.2		-0.9
3. State government		-52,612		-3.4		-2.2		-1.5		-1.6		-1.1		-0.8
4. Local government		2,724		0.2		-0.7		-0.2		-0.3		-0.3		-0.4
5. Social security funds		3,303		0.2		0.2		0.2		0.2		0.2		0.2
General government (S13)
6. Total revenue		746,879		47.7		48.2		48.0		47.7		47.5		47.3
7. Total expenditure		794,512		50.7		51.1		49.8		49.4		48.8		48.3
8. Net lending/borrowing		-47,633		-3.0		-2.9		-1.8		-1.7		-1.3		-1.0
9. Interest expenditure		86,717		5.5		5.3		5.6		5.8		6.0		6.1
10. Primary balance		39,084		2.5		2.4		3.8		4.1		4.7		5.1
11. One-off and other temporary measures (3)		1,512		0.1		-0.2		-0.1		-0.1		0.0		0.0
Selected components of revenue
12. Total taxes		472,164		30.2		30.4		30.4		30.3		30.2		30.1
12a. Taxes on production and imports		233,554		14.9		15.3		15.4		15.5		15.4		15.3
12b. Current taxes on income, wealth, etc.		237,235		15.1		15.0		15.0		14.7		14.7		14.8
12c. Capital taxes		1,375		0.1		0.1		0.1		0.0		0.0		0.0
13. Social contributions		216,669		13.8		14.0		13.9		13.8		13.7		13.6
14. Property income		8,631		0.6		0.6		0.6		0.6		0.6		0.6
15. Other		49,415		3.2		3.3		3.1		3.1		3.0		3.0
15a. Other current revenue		44,448		2.8		2.8		2.8		2.8		2.7		2.7
15b. Other capital revenue		4,967		0.3		0.4		0.3		0.3		0.3		0.3
16=6. Total revenue		746,879		47.7		48.2		48.0		47.7		47.5		47.3
p.m. : tax burden				44.0		44.4		44.3		44.1		43.9		43.8
Selected components of expenditure
17. Compensation of employees+		254,434		16.2		15.8		15.2		14.9		14.6		14.3
intermediate consumption
17a. Compensation of employees		165,366		10.6		10.4		10.0		9.8		9.5		9.2
17b. Intermediate consumption		89,068		5.7		5.4		5.3		5.2		5.2		5.1
18. Social payments		354,624		22.6		23.1		23.0		22.9		22.7		22.6
of which: Unemployment benefits		12,967		0.8		0.9		1.0		0.9		0.9		0.8
18a. Social transfers in kind supplied via market producers		43,211		2.8		2.8		2.7		2.7		2.7		2.6
18b. Social transfers other than in kind		311,413		19.9		20.3		20.3		20.2		20.1		20.0
19=9.Interest expenditure		86,717		5.5		5.3		5.6		5.8		6.0		6.1
20. Subsidies		15,842		1.0		1.0		0.9		0.9		0.8		0.8
21. Gross fixed capital formation		29,224		1.9		1.8		1.7		1.7		1.7		1.6
22. Capital transfers		18,374		1.2		1.7		1.0		1.0		0.8		0.8
23. Other		35,297		2.3		2.4		2.2		2.2		2.2		2.1
22a. Other current expenditure		35,068		2.2		2.4		2.2		2.2		2.1		2.1
22b.Other capital expenditure		229		0.0		0.0		0.0		0.0		0.0		0.0
24=7. Total expenditure		794,512		50.7		51.1		49.8		49.4		48.8		48.3
p.m. : Goverment consumption (nominal)		314,200		20.1		19.6		19.0		18.7		18.3		17.9

1) Rounding of the first decimal figure may cause differences between the sum of the various expenditure and revenues items and the total expenditure and total revenues, respectively.

2) Figures in millions

3) The plus sign shows one-off measures to reduce the deficit.

Note: The first line of the table shows policy scenario targets, the remaining figures show performance at unchanged legislation. As of 2015, the indicator figures shown in the table are calculated considering that real-estate taxation regime introduced by Decree Law No. 201 of 2011 will remain unchanged. Data concerning total revenues and total expenditure differ from those of the general government accounts published in Section II of the Economic and Financial Document due to a different method of presenting the accounts: under EC Regulation No.1500/2000 in Section I, while under the traditional version in Section II. A connection between the two versions is published by Istat annually at intervals of a few months. Data relating to 2011 and 2012 are ISTAT pre-end-of -year and end-of- year data that have not been published yet. For the years 2013-2017 data are forecasts by the Ministry of the Economy and Finance.

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DOCUMENTO DI ECONOMIA E FINANZA – SEZ. III PROGRAMMA NAZIONALE DI RIFORMA

Total revenues have increased by 2.5 per cent over the previous year. Current revenues increased by 2.6 per cent: in particular, indirect taxes went up by 5.2 per cent, mainly driven by revenues from the property tax (Imposta Municipale Unica -IMU) and the increase in excise duties on mineral oils. A similar increase (5.0 %) was recorded by direct taxation, essentially due to the increase of personal income tax (IRPEF), the IRPEF regional surcharge and the withholding tax interest and other capital incomes, which reflects changes in the taxation regime of financial rents. Social security contributions remained substantially stable (-0.1 per cent). There was a clear contraction of capital revenues due to the lack of one–off payments of the substitute tax on the realignment of accounting values to the international IAS standards that had sustained revenues in 2011. Overall, total revenues reached 47.7 per cent of GDP in 2012. The tax burden was 44.0 per cent, on the increase compared to 42.6 per cent in 2011.

On the expenditure side total outlays recorded a moderate increase compared to 2011 (0.7 per cent) showing an increase similar to that of current outlays (0.8 per cent). In particular, employees’ compensation declined by 2.3 per cent, following the cut in general government employees and the freeze on contract renewals; after measures to cut public expenditure were introduced, intermediate consumption went down by 2.4 per cent; welfare benefits in cash increased by 2.4 per cent, in line with growth in pension and annuity expenditure. Interest paid stood at about 86.7 billion in 2012, with a 10.7 per cent increase over 2011. As regards capital expenditure, declining by 0.6 per cent, gross fixed investment decreased by 6.0 per cent.

In 2012 the deficit reduction path was marked by a clear worsening of the economic cyclical phase and a resumption of tensions in financial markets, leading to an increase in interest rates. Measures to contain expenditure, on which Government action was focused, was accompanied by a corresponding revenue reduction in order to support economic growth.

Two years after the start of the excessive deficit procedure (EDP)⁵, the level of net borrowing achieved in 2012 and forecasts of its further reduction for the following years show fiscal consolidation in line with the Recommendations of the European Union. The changes made to the national regulatory framework have laid the foundations to achieve a balanced budget that will last in time.

⁵ With the start of the excessive deficit procedure against almost all European countries at the end of 2009, Italy was asked to bring the deficit below 3.0 per cent of GDP by 2012 and to ensure an average yearly fiscal effort of at least 0.5 GDP percentage points over the 2010-2012 period.

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III. NET INDEBTEDNESS AND PUBLIC DEBT

TABLE III.3: FISCAL CONSOLIDATION PATH (as a percentage of GDP)1
	2011		2012		2013		2014		2015
Economic and financial document (April 2012)
Net indebtedness		-3.9		-1.7		-0.5		-0.1		0.0
Structural net indebtedness		-3.6		-0.4		0.6		0.6		0.4
Primary surplus		1.0		3.6		4.9		5.5		5.7
Interest		4.9		5.3		5.4		5.6		5.8
Public debt (including loans to euro area)		120.1		123.4		121.5		118.2		114.4
Public debt (excluding loans to euro area)		119.2		120.3		117.9		114.5		110.8
1) Decree Law no. 95 (July 2012)
Impact on net indebtedness				0.04		0.00		0.00		0.04
Higher net revenues				-0.21		-0.42		-0.61		-0.60
Lower net revenues				-0.25		-0.42		-0.61		-0.63
2) Stability Law (October 2012)
Impact on net indebtedness						-0.15		0.01		0.02
Higher net revenues						-0.12		-0.05		-0.02
Lower net revenues						0.03		-0.06		-0.04
Impact of macroeconomic forecast revision				-0.81		-1.02		-1.24		-1.08
Impact of debt servicing revision				-0.12		-0.05		-0.19		-0.37
Update of DEF (September 2012)
Net borrowing		-3.9		-2.6		-1.8		-1.5		-1.3
Structural net borrowing		-3.3		-2.8		-0.6		0.6		0.5
Primary surplus		1.0		2.9		3.8		4.4		4.8
Interest		4.9		5.5		5.6		5.9		6.1
Public debt (including loans to eu area)		120.7		126.4		126.1		123.1		119.9
Public debt (excluding loans to euro area)		119.9		123.3		122.3		119.3		116.1

1) Rounding of the first decimal figure may cause differences between the values shown in the table.

For 2013 and 2014, net borrowing is expected to remain respectively at 2.9 and 1.8 per cent of GDP in line with forecasts made in the March Report to Parliament.

In the following years, fiscal performance, discounting the IMU experimental tax regime that will be maintained, shows a net borrowing profile close to the level needed to achieve a structurally balanced budget. However, achieving a balanced budget in the years 2015-2017 could require measures to bridge the residual gap.

Based on policy scenario trends, the primary surplus in nominal terms is expected to increase gradually, reaching 5.7 per cent in 2017.

Any additional measures will be fine-tuned to ensure that expenditure increases remain in line with the provisions of the expenditure rule set at European level.

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DOCUMENTO DI ECONOMIA E FINANZA – SEZ. III PROGRAMMA NAZIONALE DI RIFORMA

TABLE III.4: EXPENDITURE TO BE EXCLUDED FROM THE EXPENDITURE RULE
	2012				2013		2014		2015		2016		2017
	Level (1)		% of GDP		% of GDP
Expenditure on EU programmes fully matched by EU funds		4,499		0.3		0.3		0.3		0.3		0.3		0.3
Cyclic component of expenditure on unemployment benefits (2)		3,777		0.2		0.3		0.3		0.2		0.2		0.2
Discretionary expenditure adopted in 2012 (3)		20,380		1.3		1.8		1.6		1.6		1.6		1.5
Revenue increases already laid down by law		0.0		0.0		0.0		0.0		0.0		0.0		0.0

1) In millions of euros.

2) As a first application, over the (2013-2017) forecasting period the cyclical component was identified as the gap between the forecast figure and the average value of expenditure over the years 2008-2012. increased by 2 per cent for each of the forecast years. For 2012 the gap was calculated on the average figure of the 2007-2011 period. increased by 2 per cent. The expenditure variable considered is the ‘expenditure for safety-net benefits in cash’. which is a subset of category D62 of SEC95.

3) Discretionary revenues include the net impact of revenue reduction resulting from budget package measures (Decree Law No. 95/2012 and Stability Law No. 2013-2015) and revenue increases ordered with previous decrees (Decree Laws No. 201/2011. No. 70/2011. No. 98/2011 and No. 138/2011, net of the safeguarding clause on tax expenditures).

FOCUS

The expenditure rule

The expenditure rule introduced by the New Stability and Growth Pact in 2011 strengthens the commitments relating to fiscal rules, further qualifying convergence towards the medium term objective. This rule has been applied since 2012 and has already been transposed into Italian legislation with law No. 243/2012.

More specifically, every year the reference expenditure aggregate is the sum of total general government expenditure, net of debt servicing, of expenditure in European programmes fully matched by EU funds, and the non discretionary component (i.e. linked to the economic cycle) of expenditure on unemployment benefits. In addition, the aggregate expenditure considered should be adjusted for the intrinsic volatility in the investment series, substituting for the annual figures of investment series their average calculated between the t year and the previous three years. According to the recent changes made to the calculation method, the expenditure aggregate is also adjusted by the impact of discretionary revenues. which, based on the previous method, were considered as a component for offsetting any overshooting of the expenditure aggregate with respect to the benchmark rate.

For countries that have achieved their MTO, the expenditure aggregate . expressed in real terms, may change in line with the medium-term growth rate of potential GDP. For those far from achieving their MTO, increase in the expenditure aggregate should be smaller than the potential GDP rate of growth over the medium term by a shortfall that secures a cut in the structural budget balance of at least 0.5 percentage points every year.

The maximum limit to growth in the expenditure aggregate set at European level and applied to Italy for the 2012-2013 period is -0.8 per cent a year in case of failure to achieve the MTO and 0.3 if the MTO is achieved. In the next three–year period (2014-2016) the benchmark has been updated and is equal to -1.1 per cent a year if the MTO is not achieved and 0.0 per cent if the MTO is achieved. When the benchmark was updated the growth rate of the GDP deflator for each country was also indicated in line with the European Commission’s forecasts, so that it could be considered in assessing compliance with the rule over the 2011-2013 period, in line with the European Commission’s forecasts. The benchmark rates for Italy are 1.90 per cent in 2011, 1.87 per cent in 2012 and 1.88 per cent in 2013.

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Based on these criteria and considering that the figures in general government accounts are based on the unchanged policy scenario and do not include the impact of any further budget packages that may be introduced by the Government, the fiscal framework appears to be in line with the rule for the whole period (2011-2017) that has been considered, except for the years 2015 and 2017.

APPLICATION OF THE EXPENDITURE RULE ¹

	2011		2012		2013		2014		2015		2016		2017
	millions of euros
1.Total expenditure		788.894		794.512		804.087		808.264		829.391		845.137		862.595
2.Higher expenditure at unchanged policy		0.0		0.0		0.0		0.0		2.061		4.441		7.073
3.Expenditure funded by the EU		3.508		4.499		4.499		4.499		4.499		4499		4499
4. Cyclic component of unemployment benefits		2.828		3.777		3.961		4.493		3.811		3.560		3.335
5.Interest		78.351		86.717		83.892		90.377		97.465		104.387		109.289
6.Gross fixed investment		31.097		29.224		28.257		28.156		28.289		28.669		28.761
7.Gross fixed investment–average on the last four years		34.260		32.760		30.240		29.184		28.482		28.343		28.469
8.Step 1: Expenditure aggregate benchmark (1+2-3-4-5-6+7)		707.370		703.054		713.717		709.923		725.869		736.806		752.252
9.Discretionary revenues (2)		5.036		20.380		27.624		26.784		27.668		27.722		27.188
10.Step 2: Expenditure aggregate benchmark (8-9)		702.334		682.675		686.093		683.138		699.201		709.084		725.064
11.Step 3: Growth rate of the expenditure aggregate in nominal terms		-1,3		-2,8		0,5		-0,4		2,2		1,6		2,3
12.Step 4: Growth rate of the expenditure aggregate in real terms		-3,2		-4,7		-1,4		-2,3		0,4		-0,2		0,5
13. Benchmark (maximum limit to the growth of the expenditure aggregate)		-0,8		-0,8		-0,8		0,0		0,0		0,0		0,0

1) The benchmark used is consistent with meeting the medium-term objective by 2013 and maintaining it in the following years. The aggregate expenditure benchmark is consistent with figures presented in the general government accounts (Table III.2), by subtracting from total expenditure at unchanged policies the amount for debt servicing, expenditure matched by EU funds, the cyclic component of unemployment benefits and considering the average expenditure for investment (calculated on the years from t to t-3 . Discretionary measures on expenditure have also been subtracted (Table III.5). the benchmark growth rate for expenditure was deflated through the rates provided by the Commission during the years 2011-2013, while in the following years the growth rate of the GDP deflator shown in Table II.2b was used.

2) In line with the definition agreed in the Output Gap Working Group, the discretionary measures on revenues correspond to measures that have already been adopted and to other measures planned with a margin of certainty (European Commission, Methodological requirements for the reporting of discretionary revenues measures, Note for the OGWG, 3 October 2012.). See also (European Commission, Complementary information on the functioning of the expenditure and debt benchmarks, Note for the Alternates of the Economic and Financial Committee, 27 June 2012.). The figure for 2011 shows the expected increase in total tax revenues , compared to 2010 end-of-year data, from the main measures introduced during the 2010-2011 two-year period.

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TABLE III.5: SCENARIO AT UNCHANGED POLICIES
	2012				2013		2014		2015		2016		2017
	Level (1)		As % of GDP		As % of GDP
Total revenues at unchanged policies		746,879		47.7		48.2		48.0		47.0		46.8		46.6
Total expenditure at unchanged policies		794,512		50.7		51.1		49.8		49.6		49.1		48.8
Detailed expenditure items (2)
Current expenditure		753,255		48.1
Employees’ compensation		165,366		10.6		10.4		10.0		9.8		9.6		9.3
Intermediate consumption		132,279		8. 5		8.2		8.0		7.9		7.9		7.9
Other current expenditure		57,480		3. 7		3.7		3.5		3.5		3.5		3.4
(net of interest and welfare benefits)
Current account expenditure		46,617		3.0
(net of property sale)
Gross fixed investment		29,199		1.9		1.8		1.8		1.7		1.7		1.6
(net of property sale)
Contributions to investment		17,487		1.1		1.2		1.0		1.0		0.7		0.7

1). In millions of euro.

2) Detailed expenditure data are consistent with the general government accounts published in Section II of the Economic and Financial Document .

TABLE III.6: STATE SECTOR – PUBLIC SECTOR – CASH BALANCES (in millions of euro and as a percentage of GDP)
	2012		2013		2014		2015		2016		2017
State Sector Balance		-49,500		-53,674		-31,387		-37,044		-29,422		-28,580
As a % of GDP		-3.2		-3.4		-1.9		-2.2		-1.7		-1.6
Central Government Balance		-49,397		-53,404		-30,791		-36,344		-28,769		-27,924
As a percentage of GDP		-3.2		-3.4		-1.9		-2.2		-1.7		-1.6
Local Government Balance		-1,505		-1,229		-979		-729		-430		-292
As % of GDP		-0.1		-0.1		-0.1		0.0		0.0		0.0
Social Security and Welfare Institutions Balance		0.0		0.0		0.0		0.0		0.0		0.0
As % of GDP		0.0		0.0		0.0		0.0		0.0		0.0
Public Sector Balance		-50,903		-54,635		-31,770		-37,073		-29,200		-28,217
As % of GDP		-3.3		-3.5		-2.0		-2.2		-1.7		-1.6

III.2 FINANCIAL IMPACT OF THE MAIN REFORMS

In the National Reform Programme for 2013, ten policy areas have been identified (public expenditure containment and efficiency, federalism, administrative efficiency, product market and competition, employment and pensions, innovation and human capital, business support, support to the financial system, energy and the environment, infrastructure and development) shown in a Table annexed to the document⁶.

These areas include the new action measures introduced by the new regulations that have become effective since April 2012⁷.

⁶ For a description of the table layout and its contents, see the guide on “ How to read the tables annexed to the National Reform Programme’ in the Appendix to the National Reform Programme 2013 in a Table attached to the document.

⁷ Even if these measures also include provisions concerning the measures that had already been introduced in previous years, referred to as update of the regulatory and financial aspects of the National Reform Programmes for 2012 and 2011, this subsection does not analyse the impact resulting from updating the measures of the National Reform Programmes published in the last two years and contained in the Table attached to the National Reform Programme for 2012.

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TABLE III.7: FINANCIAL IMPACT OF THE NEW MEASURES OF THE NRP 2013

	2012		2013		2014		2015		2016		2017
	millions of euros
Public expenditure reduction
Higher expenditure		0.0		588		0.0		0.0		0.0		0.0
Higher revenues		30		1,972		2,251		2,326		1,988		1,988
Expenditure cuts		0.0		7,391		7,906		8,098		7,136		7,101
Decrese in revenues		0.0		562		586		568		568		562
Administrative efficiency
Higher expenditure		0.0		10		0.0		0.0		0.0		0.0
Infrastructure and development
Higher expenditure		70		320		70		70		70		70
Decrese in revenues		4		4		4		4		4		4
Product market. competition and administrative efficiency
Decrese in revenues		0.0		9		9		9		9		9
Employment and pensions
Higher expenditure		0.0		3,492		4,266		3,877		3,831		3,422
Higher revenues		0.0		988		1,554		1,800		1,800		1,400
Decrese in revenues		0.0		941		1,349		1,206		0.0		0.0
Innovation and human capital
Higher expenditure		0.0		279		169		109		108		108
Business support
Higher expenditure		0.0		667		453		507		497		497
Decrese in revenues		0.0		77		150		121		121		112
Higher revenues		0.0		0.0		0.0		33		0.0		28
Energy and the environment
Higher expenditure		0.0		0.0		5		10		10		10
Financial system
Higher expenditure		0.0		1,617		0.0		0.0		0.0		0.0
Decrese in revenues		0.0		11		8		9		11		13

1) Data do not include the financial updates of measures in the NRP for 2011 and 2012.

Source: MEF-RGS calculations on data from Annexes 3, Technical Reports and Information provided by the relevant Ministries.

For each macroarea of action the impact on the State budget has been assessed in terms of higher or lower expenditure and higher or lower revenues from the measures affecting them (Table III.7)⁸; however, there are measures that have no impact because it cannot be quantified when the measure concerned is adopted or because they do not entail any additional or higher costs for the government budget.

For more details on these measures see Chapter II .4 of the National Reform Programme (which is part of the Economic and Financial Document).

⁸ The table does not contain the area relating to federalism, as the new measures concern legislative bills that are still being considered by Parliament (XVI legislature). The update of the regulatory and financial aspects concerning progress on the implementation of the decrees implementing the enabling act No. 42/2009 is contained in the table annexed to the National Reform Programme 2012 (measures 19-24).

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III.3 CYCLICALLY ADJUSTED BUDGET BALANCE

In the course of 2012 Parliament adopted a series of legislative measures⁹ that, in compliance with the European legislation, firstly introduced in the Constitution and then implementated, the balanced budget principle. Under the new national legislation, a balanced budget is achieved when the structural balance stands at the level of the Medium-Term Objective (MTO)¹⁰.

In the case of Italy, the Medium-Term Objective coincides with a structural balanced budget. This shifts the focus of fiscal surveillance on the assessments made in structural terms, that is net of the economic cycleand of other temporary measures.

Estimates carried out on the baseline macroeconomic scenario (Chapter II) show the performance of potential growth¹¹ for 2013 which stands at around zero, after the 0.5 percentage point contraction in 2012. This performance is mainly due to the contribution, which was already negative in the past, of total factor productivity, offset by the positive contribution of the labour factor¹². Forecasts for the 2014–2017 period point to a gradual recovery. As early as 2014 potential GDP is expected to start growing again at a rate of 0.2 per cent, while in 2017 growth is expected to reach 0.5 per cent.

The labour and capital factors are forecast to make a positive contribution to potential growth, while only by 2016 would total-factor productivity go back to making a marginally positive contribution. It should be noted that the growth rate estimate presented in this Section is based on a conservative and prudential assessment of the impact of structural reforms (see Chapter II).

The output gap, that is to say the variable that measures, in relative terms, the distance between the level of potential vis-à-vis that of actual output, is forecast to widen further compared to previous years and to reach -4.8 per cent of potential GDP in 2013. Future performance, i.e. between 2014 and 2017, should enable a gradual closing of the gap; indeed, output gap is forecast to record negative values, which will be ever less negative and finally reach -0.8 per cent by 2017.

⁹ These measures are the Constitutional Law No. 1 of 20 April 2012, on the “Introduction of the balanced budget principle in the Constitution” and Law No. 243 of 24 December 2012 on “ “Provisions for the implementation of the balanced budget principle under Article 81. paragraph 6, of the Constitution”

¹⁰ The Medium-Term Objective is defined in structural terms (net of the economic cycle and other temporary factors) on the basis of specific indicators for each country such as the long-term potential growth rate, the current debt-to-GDP ratio and the amount of implicit costs related to the ageing population

¹¹ Estimates of potential output and the output gap of the Italian economy are based on the use of the production function method shared by all EU countries and approved by ECOFIN. This method is regularly discussed and reviewed within the Economic Policy Committee of the Output Gap Working Group (EPC-OGWG). For further information see: D’auria et al. 2010. The production function methodology for calculating potential growth rates and output gaps, European Economy, Economic Paper, No. 420.

¹² As regards the labour factor, it should be noted that estimates of the participation rate used to derive the potential growth rate and output gaps are based on a definition of the active population that considers 15-74 cohorts instead of the 15-64 age group. This change, agreed at European level, became necessary to include the employment impact of the recent pension system reform, which contributed to notably raising the retirement age and the length of working lives in Italy and elsewhere.

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TABLE III.8: CYCLICALLY-ADJUSTED BUDGET (as a percentage of GDP) ¹

	2011		2012		2013		2014		2015		2016		2017
GDP growth rate at constant prices		0.4		-2.4		-1.3		1.3		1.5		1.3		1.4
Net borrowing		-3.8		-3.0		-2.9		-1.8		-1.5		-0.9		-0.4
Interest paid		5.0		5.5		5.3		5.6		5.8		6.0		6.1
Potential GDP growth rate		0.4		-0.5		0.0		0.2		0.3		0.3		0.5
Factor contribution to potential growth:
labour		0.3		-0.4		0.2		0.3		0.3		0.2		0.2
capital		0.2		0.0		0.0		0.1		0.1		0.2		0.2
Total factor productivity		-0.1		-0.2		-0.2		-0.1		-0.1		0.0		0.1
Output gap		-1.8		-3.6		-4.8		-3.8		-2.6		-1.7		-0.8
Cyclic component of the budget balance		-1.0		-2.0		-2.7		-2.1		-1.5		-0.9		-0.5
Cyclically adjusted budget balance		-2.8		-1.1		-0.2		0.3		-0.1		0.0		0.0
Cyclically adjusted primary surplus		2.2		4.5		5.1		5.9		5.7		6.1		6.1
One-off measures		0.7		0.1		-0.2		-0.1		-0.1		0.0		0.0
Budget balance net of one-off measures		-4.5		-3.1		-2.7		-1.7		-1.5		-0.9		-0.5
Cyclically adjusted budget balance net of one-off measures		-3.5		-1.2		0.0		0.4		0.0		0.0		0.0
Cyclically adjusted budget balance net of one-off measures		1.5		4.4		5.3		6.0		5.8		6.0		6.1
Budget balance change net of one-off measures		-0.2		-1.3		-0.4		-1.0		-0.2		-0.5		-0.5
Cyclically adjusted budget balance net of one-off measures		-0.2		-2.3		-1.1		-0.4		0.4		0.0		0.0

1) Rounding of the first decimal figure may cause inconsistencies between the values shown in the table.

The cyclical component, which provides an approximate measure of the impact of cyclic fluctuations on the government budget, is defined as the product between output gap and the elasticity of the budget balance to economic growth. The EU Economic Policy Committee adopted the semi-elasticity concept, with effect from this year¹³. Therefore, instead of measuring the impact of changes in economic growth on the absolute level of the budget balance, the change in the budget balance as a percentage of GDP with respect to changes in economic growth is considered. Unlike the previous indicator, this determines elasticity to be equal to about zero with respect to the ratio of tax revenues and GDP and brings it close to 0.5 with respect to the ratio of expenditure and GDP. Overall, the parameter of semi-elasticity is equal to about 0.55 in the case of Italy¹⁴. With these innovations, the cyclical component is expected to reach -2.7 per cent in 2013 and then progressively decline, reaching -0.5 per cent by 2017.

In line with the government’s medium-term objective, the structural balance, which considers the ratio of borrowing to GDP net of the cycle and one-off measures, is forecast to be balanced by 2013 without any need for further corrective measures. In 2014 the structural balance is expected to stand well above the medium-term objective, reaching a surplus of 0.4 per cent of GDP. Conversely, over the 2015-2017 period, the next Government should implement additional budget measures, with overall effects of 0.6 per cent of GDP in order to secure a structural balanced budget.

¹³ Mourre, G., Isbasoiu, G.M., Paternoster, D., Salto, M., 2013, The cyclically adjusted budget balance in the EU fiscal framework: an update; European Economy, European Commission, Directorate- General for Economic and Financial Affairs; Economic Paper No. 478.

¹⁴ Moreover, for each individual countries the specific weights representing the structure of revenues and expenditure and the relative shares of the individual items as a percentage of the total amount have been updated, i.e the structure of revenues and expenditure and the relative quotas of the individual categories they are composed of. Both the change to semi-elasticity and that concerning the relative weights have no major effect on the calculation of the cyclical component, while they have a significant impact on the separate calculation of structural revenues and expenditure.

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III.4 PUBLIC DEBT

In 2012, as in 2011, public debt was managed in a situation made more difficult both by extreme volatility in financial markets (especially the segment of government securities of the euro area) and the economic downturn. However, market performance during the year was far from even. The lingering effects of the extraordinary measures taken by the European Central Bank to inject liquidity at three-year interval were still being felt during he first months of the year. More specifically, in February the second Long Term Refinancing Operation was made for an additional € 530 billion with the participation of 800 banks. The market for Italian government securities benefitted significantly from these operations, also thanks to the role played by Italian banks, which used part of the liquidity thus received to buy government securities, thereby making more than a mere marginal contribution to the reduction of rates and the return to satisfactory liquidity conditions in the secondary market. From early January to early March rates for one-year maturity securities declined by 260 basis points while interest rates on ten-year-maturity securities went down by about 230 basis points.

At the same time, also the return differential with the German Bund declined notably from 530 basis points in early January to 290 in early March for 10-year maturity securities. This trend was strengthened on the one hand by further fiscal consolidation measures adopted by the Government at the end of 2011, in addition to those that had already been implemented in earlier months, and on the other by the approval at EU level of the Fiscal Compact, aimed at ensuring more effective fiscal surveillance of Member States and closer monitoring of the sources of potential macroeconomic risk.

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In March, and at the end of July, market volatility raised its head again and was more intense, at the same time as the impact of the two extraordinary liquidity operations by the ECB abated. This new bout of market turbulence was caused on the one hand by the problems linked to debt restructuring in Greece, which were compounded by its complex situation of political instability, also triggered by negotiations on aid tranches, and, on the other, by Spain’s worsening fiscal scenario, as well as by the need to proceed with major recapitalization programmes for the Spanish banking sector. Against this backdrop the prices of government bonds worsened further, which, in turn translated into a more costly debt servicing: over the whole period from early March to mid July, interest rates went up by about 130 basis points for one-year maturity securities, while for ten-year maturity securities the increase was equal to 90 basis points, causing a noticeable flattening of the return curve, a new alarm symptom on the credit risk front.

In June, important agreements were reached at EU level for the Spanish banking sector, with an aid plan of up to €100 billion from the European vehicles EFSF/ESM, and with regard to the roles to be played by these funds to support government securities of countries experiencing stress. However, the market situation has not shown signs of a significant improvement, which is also partly due to Italy’s downgrading by Moody’s in July.

What radically changed the context at the end of July was the firm commitment by the ECB to start considering every option in order to secure the single currency’s survival. This was followed, in early August, by the presentation of the new plan for the purchase of securities (OMT Outright Monetary Transactions), whose operational details were set out in early September. With these market initiatives the government securities market of the whole Euro Area stabilized, with strongly declining returns in all the so-called peripheral countries, a sharp reduction in the volatility of security prices and a notable increase in

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traded volumes, with a non-negligible return of investors from both Northern Europe and other areas such as the U.S.A and Asia. In the case of Italy, all of the above resulted in a notable decline, that lasted until mid February last year, of the spread with the German Bund, which from being above 530 basis points at the end of July 2012 reached about 255 basis points in Febraury 2013. Conversely, the shape of the return curve normalized quite rapidly; as early as September the curve became a slope again, in line with that of early March, declining further until it reached rates similar to those of the first half of July 2011. What stopped this trend, without actually reversing it, was only the looming general election of late February, whose outcome appeared ever more uncertain.

Despite such a difficult situation, the Treasury succeeded in ensuring a rather regular and predictable policy in terms of issuance and management of the circulating debt, thereby ensuring an efficient allocation of debt both in terms of costs and consolidation of the risk-minimization results at the end of 2011. Italy’s government securities have been placed satisfactorily, both in terms of demand for them and in terms of costs, considering that a large part of placements was done at prices that were basically in line with those of the secondary market.

In the most favourable months, the Treasury succeeded in refinancing securities reaching maturity, speeding up the pace of issuance of all securities with maturity up to ten years and especially of BOTs. Improved conditions during the last few months of 2011 enabled the issuance in March of BTP Italia, a type of securities with four-year maturity indexed to the FOI inflation index (FOI Indice delle famiglie italiane di operai ed impiegati) intended for retail investors and listed on the MOT (Mercato Telematico delle Obbligazioni). This bond was issued again in June and October, and was quite successful especially in October, also due to particularly favourable market conditions.

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TABLE III.9: FACTORS DETERMINING PUBLIC DEBT (% of GDP)¹

	2011		2012		2013		2014		2015		2016		2017
Level (net of aid) (2)		120.0		124.3		126.9		125.2		121.8		117.8		113.8
Impact of aid (3)		0.8		2.7		3.5		3.8		3.7		3.6		3.5
Level (including loans) (2)		120.8		127.0		130.4		129.0		125.5		121.4		117.3
Changes over the previous year		1.5		6.2		3.4		-1.4		-3.5		-4.1		-4.1
Factors determining changes in public debt (as a percentage of GDP)
Primary Surplus (on a cash basis)		-1.2		-2.5		-2.4		-3.8		-4.3		-5.1		-5.7
Snow-ball effect		3.0		6.5		4.7		1.5		1.7		2.1		2.4
Of which interest (on a cash basis)		5.0		5.5		5.3		5.6		5.8		6.0		6.1
Stock-Flow adjustment		-0.3		2.2		1.1		0.9		-0.9		-1.1		-0.8
Of which: difference between cash-basis and accruals basis		-0.4		0.0		-0.3		-0.1		-0.8		-0.8		-0.4
Net accumulation of financial assets (4)		0.6		-0.4		-0.2		-0.6		-0.5		-0.7		-0.8
Of which: Proceeds from privatization operations		0.0		-0.5		-1.0		-1.0		-1.0		-1.0		-1.0
Impact of Debt evaluation		0.5		0.5		0.3		0.3		0.4		0.3		0.3
Other (5)		-1.0		2.1		1.3		1.4		0.0		0.1		0.1
p. m. Implicit interest rate on Debt		4.2		4.5		4.2		4.4		4.7		4.9		5.2

1) Rounding of the first decimal figure may cause inconsistencies between the figures presented in the Table.

2) Including and excluding Italy’s share of EFSF loans to Greece and the ESM programme. For the years 2011 -2012 the amount of these loans to EMU Member States (bilateral or through the EFSF)) is equal to € 13,118 and 36,932 billion respectively. Estimates for the years 2013-2017 include proceeds from privatization operations for an amount equal to about 1 percentage point of GDP a year.

3) It includes the impact of Italy’s contribution to support the euro area: contributions to the Greek Loan Facility (GLF), EFSF and ESM.

4) It includes the impact of contributions to GLF and the ESM.

5) the item ‘Other’, a residual item compared to the previous ones, includes: changes of active deposits of the Ministry of the Economy and Finance with the Bank of Italy; statistical discrepancies; contributions to support the euro area envisaged by the EFSF programme; effects of Decree Law No.35/2013.

At times of great turbulence, the Treasury never resorted to sudden changes in strategy: it resorted to a gradual rescheduling of the issuances of securities with 2-10 year maturity, favouring those at three—and ten—year maturity, as against a reduction in the number of securities with 15-30 year maturity, on the variable—rate component (CCTeu) or the euro-area-inflation indexed bonds (BTP€i). Conversely at these times the supply of off-the-run securities has been stepped up, while in one case a share swap transaction was made, with the aim of supporting Euro-Area inflation linked BTPs, which under certain market conditions have shown a very negative performance also in terms of secondary market liquidity.

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TABLE III.10: GENERAL GOVERNMENT DEBT BY SUBSECTORS ¹

(in millions of euro and as a percentage of GDP)

		2011		2012		2013		2014		2015		2016		2017
Level net of financial aid to euro area countries (2)
General government bodies			1,894,275		1,945,993		1,995,916		2,032,816		2,043,870		2,040,114		2,032,295
as % of GDP			120,0		124,3		126,9		125,2		121,8		117,8		113,8
	Central government (3)		1,785,363		1,838,855		1,887,547		1,923,468		1,933,793		1,929,606		1,921,854
	Local government (3)		135,159		131,810		133,039		134,018		134,747		135,177		135,469
	Social security and welfare agencies (3)		135		149		149		149		149		149		149
Level including loans to euro area countries (2)
General government			1,907,392		1,988,658		2,051,352		2,094,275		2,105,502		2,101,937		2,094,348
as % of GDP			120,8		127,0		130,4		129,0		125,5		121,4		117,3
	Central Government (3)		1,798,480		1,881,520		1,942,983		1,984,927		1,995,425		1,991,429		1,983,908
	Local government (3)		135,159		131,810		133,039		134,018		134,747		135,177		135,469
	Social security and welfare agencies (3)		135		149		149		149		149		149		149

1) Rounding of the first decimal figure may cause inconsistencies between the figures among the various figures presented in the Table.

2) Including and excluding Italy’s share of EFSF loans to Greece and the ESM programme. For the years 2011-2012 the amount of these loans to EMU Member States (bilateral or through the EFSF)) is equal to € 13,118 and 36,932 billion respectively. Estimates for the years 2013-2017 include proceeds from privatization operations for an amount equal to about 1 percentage point of GDP a year.

3) Including non-consolidated interest.

Source: Bank of Italy, Supplement to the statistical bulletin ‘Finanza pubblica, fabbisogno e debito’ of 15 March 2013.

III.5 EVOLUTION OF THE DEBT- TO- GDP RATIO

While in 2011 the debt-to-GDP ratio was only marginally revised upward, from 120.7 per cent, reported in last Semptember’s Update Note of the Economic and Financial Document, to 120.8 per cent, the figure for 2012 now stands at a level which is higher than that forecast in the DEF Update, as it has now reached 127 per cent. While in the first case the revision was due to standard statistical revisions relating to both the aggregate stock of public debt (by the Bank of Italy) and GDP (by ISTAT), what caused the increase over the forecasts for 2012 was mainly the performance of the debt volume, which was €12 billion higher than the September estimates 2012¹⁵. This evolution is partly accounted for by a higher-than-expected increase in the public sector borrowing requirement and partly by an accelerated pace of bond issuance, which contributed to consolidating the Treasury’s cash position at the end of the year .

For 2013 the debt-to-GDP ratio is forecast to increase further by over 3 GDP percentage points compared to 2012, thus reaching 130.4 per cent, a figure which is about 4.3 percentage points of GDP higher than the estimate made in the DEF

¹⁵ In line with forecasts, the 2012 debt stock was affected by the privatization operations of Fintecna, Sace and Siemest, for a total amount of about € 7.8 billion; the operation will be completed in the course of the year and will involve another 0.9 billion.

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Update of 2012. This evolution has different causes: a smaller role is played by the ‘carry-over’ effect from 2012 (about 0.7 points of GDP) and a GDP level for the year estimated to be slightly smaller (by about 0.5 percentage points), while the most significant factor is a substantial upward revision of the public sector borrowing requirement (by about 3.3 points of GDP), also due to the measure to unfreeze the payment of general government payables to suppliers¹⁶. Compared to the DEF Update, no major changes result from the impact of loans granted to Euro Area countries, whose overall effect on debt, in terms of GDP for the years 2012 and 2013, remains basically unchanged; however, the impact of the rescheduling of the loan to Greece was taken into account.

In 2014 we witness a first, albeit moderate, reduction of the debt-to-GDP ratio, which is forecast to stand at 129 per cent, slightly less than 6 percentage points of GDP and above the September forecast. In addition to the obvious reason, i.e. the higher level of the previous year, in this case this figure is also due to a much higher (by about two GDP points) level of the public sector borrowing requirement compared to that predicted in the DEF Update estimates, mainly because of the impact of the above-mentioned Decree Law.

From 2015 onwards the pace at which the ratio declines appears to be quite sustained, about 4 GDP percentage points a year. The dwindling financial impact of the mentioned Decree Law, combined with its positive impact on the real economy are certainly the key factors underlying this decline, which is also clearly favoured by the virtuous performance of the borrowing requirement from 2016 onwards and the prospect of proceeds from the sale of real estate properties, constantly fetching amounts equal to about 1 GDP percentage point a year also after 2015.

In 2017 the ratio will reach 117.3 per cent, which, net of loans to Euro Area countries, corresponds to about 113.8 per cent. Although this is still a high figure, if one compares it to the 126.9 per cent forecast for this year, it is evidence of a constant and sustained consolidation effort.

¹⁶ Decree Law No. 35/2013.

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III.6 THE DEBT RULE AND OTHER RELEVANT FACTORS

In order to promote economic stability, restore business confidence and prevent future crises in the Euro Area and in the European Union, the European Parliament and the Council adopted in October 2011 a package of six new legislative acts, the so-called Six Pack. The latter changes the regulation (UE 1467/97) governing the excessive deficit procedure. The main novelties are the introduction of a numerical criterion to assess the reduction of the debt-to-GDP ratio and convergence towards the 60 per cent threshold as well as the identification of a series of important factors to be considered in assessing compliance with that criterion.

The debt rule

The criterion introduced with the so-called Six Pack envisages that Member States, whose debt exceeds 60 per cent of GDP, should reduce that ratio at an appropriate pace and converge towards the benchmark. For the reduction to be considered adequate the distance of the debt-to-GDP ratio from the 60 per cent threshold should be reduced at a pace of a twentieth a year, calculated on the basis of the average of the three years before the assessment.

At operational level, failure to comply with the debt rule is assessed on the basis of three successive quantitative conditions. If none of these conditions are met, an excessive deficit procedure is triggered. More specifically, in case the debt is higher than 60 per cent of GDP and moves away from the benchmark developed on the basis of the average of the last three years, two further criteria must be taken into account, that is to say: a) if, based on forecasts at unchanged policies, a debt correction is expected in the two years following the first year when the assessment is made; b) if there are significant effects that are due to the impact of the economic cycle that explain the gap with the benchmark. Only if both (a-b) conditions are not met, the excessive deficit procedure is triggered and a report is drafted under Article 126(3) of TFUE.

For Member States currently undergoing the excessive deficit procedure a transition period is envisaged for the application of the debt rule. As of the year of the abrogation of the excessive deficit procedure and for the following three years, the States concerned must envisage a structural fiscal adjustment of such an extent as to secure realistic and continuous progress towards the debt benchmark. The fiscal adjustment must in any case be designed in a way that meets the following conditions:

• Yearly structural adjustment must not vary from the minimum linear structural adjustment required by over 0.25 per cent of GDP;

• At any time during the transition period, the remaining yearly structural adjustment should not exceed 0.75 per cent of GDP.

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The first assessment by the Commission and the European Council of Italy’s compliance with the debt rule will be made in 2015, that is to say at the end of the three-year transition period after the excessive deficit procedure was closed.

Against this backdrop, the debt benchmark has been obtained on the series of the planned debt including EFSF/ESM contributions, bilateral loans to Greece and the other stock-flow adjustment factors, observed during the 2012-2014 period. Based on these assumptions, in 2015 the benchmark would be 122.2 per cent of GDP vis-à-vis the ratio planned by the Government equal to 125.5 per cent of GDP, thereby signaling a possible a non-compliance with the debt criteria. However, considering adjustment for the cycle and debt development in the years after 2015 (the forward-looking benchmark calculated at t+2) the above criterion does not seem to be violated.

In order to measure the quality of adjustment towards the benchmark, a simulation exercise has been developed. The figures below present the isoquants relating to the possible combinations between primary surplus (on the y axis) and the differential between GDP growth and implicit interest rate (on the x axis ) that guarantee that debt-to-GDP ratio is equal to the benchmark. The exercise has been made with reference to 2015, the first year when the debt rule shall be applied (figure above), and to 2017 corresponding to the forward-looking benchmark (figure below).

The points shown in the two figures portray the different combinations between the primary surplus and the differentia between GDP growth and the implicit interest rate corresponding, in the figure above, to the debt-to-GDP ratio of 2012, 2013 and 2015 (with and without the impact of the economic cycle), and, in the figure below, to 2017. As is clearly shown, the improvement in the primary surplus achieved between 2012 and 2013 and planned for 2015 would allow to get close to the benchmark and to overcome it if the debt in 2015 was adjusted for the effects of the cycle in the three previous years. Moreover, despite the presence of relevant factors, any gap in the debt reduction as against the benchmark that might arise will be bridged by accelerating the privatization process, that will be set out more clearly by the next Government. In the following years, maintaining a structurally balanced budget seems to be the necessary prerequisite for complying with the debt rule by 2017 by an ample safety margin.

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The role of relevant factors in measuring debt

When, on the basis of the analysis of the previous section, the debt-to-GDP ratio deviates from the benchmark and does not meet any of the additional quantitative criteria described above, before opening an excessive deficit procedure, the Commission is called upon to draw up a report ¹⁷, in which qualitative assessments of a certain number of “other relevant factors” are carried out. An analysis of these factors is therefore a requirement in the assessment leading to the launching of an excessive deficit procedure due to failure to reduce the debt by an “appropriate rate”.

¹⁷ Under Article 126(3) TFUE.

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In this regard, regulation 1467/97 as modified by the Six Pack has extended the list of the relevant factors to be considered in assessing compliance with the debt criterion.

These factors are important in assessing the overall fiscal sustainability of a country and include: i) the developments of the debt over the medium terms, in addition to risk factors such as maturity structure and the currency denomination of the debt; ii) the stock-flow adjustment and its composition; iii) the accumulated reserves and other financial assets; iv) the guarantees, in particular those linked to the financial sector; v) the liabilities, both explicit and implicit, related to ageing; vi) the level of private debt, to the extent that it may represent a contingent implicit liability for the government.

Among these factors, the new provisions on the application of the debt criterion attribute particular importance to financial aid to support the financial stability of the euro area (EFSF and ESM and bilateral contributions to Greece) as well as to the composition of the stock-flow adjustments.

If the non-compliance with the debt criterion is only due to the to the above-mentioned relevant factors (also during the so-called transition period) the excessive deficit procedure shall not be trigger against the State that does not comply with the quantitative benchmarks.

With specific reference to Italy, some relevant factors that have an impact on the debt level between 2012 and 2014 are: aid programmes to other European countries (capital accounts contributions to ESM, payments into EFSF and bilateral loans to Greece) and the settlement of general government payables (under Decree Law No. 35 of April 8, 2013). Overall, these factors account for 1,9 per cent of GDP in 2012, while their impact has been estimated at 2,1 per cent of GDP in 2013 and finally at 1,6 per cent of GDP in 2014.

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IV. SENSITIVITY ANALYSIS

IV.1 SENSITIVITY TO ECONOMIC GROWTH

The sensitivity of Italy’s public finance to economic growth for the 2013-2017 period is assessed by generating two alternative macroeconomic scenarios which respectively provide for higher and lower growth vis-à-vis the baseline scenario, and which, among other things, allow for simulating the pattern of net borrowing and public debt in the event of improvement or deterioration of the underlying macroeconomic conditions. The higher and lower growth scenarios assume that real GDP growth is 0.5 percentage points per year above or below the forecast of the baseline scenario¹.

The different GDP growth dynamics of the two alternative scenarios change the pattern of potential output and, therefore, of the output gap. The primary surplus is adjusted in both its structural and cyclical components. The total cyclical component is obtained by multiplying the output gap by the elasticity of the budget balance to economic growth, while the calculation of structural revenues and expenditures, which is needed for deriving the overall structural component, requires the application of a correction coefficient to baseline revenues and expenditures². The change in the pattern of the primary surpluses influences the trend of the debt-to-GDP ratio and, consequently, interest expenditure. In deriving the debt-to-GDP ratio, it is assumed that the implicit interest rate and the stock-flow adjustment in the alternative scenarios are identical to those projected in the baseline scenario (Chapter III, Table III.9).

In the lower growth scenario, the net borrowing in 2013 would be equal to -3.1 per cent of GDP, or 0.2 percentage points higher than in the baseline scenario.

¹ The higher growth scenario assumes stronger growth of the global economy, both for developed and emerging countries, more robust international trade, and the absence of tensions on prices of oil and other commodities. The euro would I appreciate more than in the baseline scenario, whereas the spread between yields on sovereign debt among euro area countries would reduce compared to the assumption carried out in the baseline scenario. Italy’s economy would witness stronger growth of exports and investments, while the unemployment rate would be lower due to better job market prospects. Instead, in the lower growth scenario, it is assumed that, vis-à-vis the baseline framework, global economic growth would be more contained, the trend of international trade would be unfavourable, and further tensions would appear on the sovereign debt market. The prices of oil and other commodities would increase and the euro would depreciate. The weakening of domestic and foreign demand would cause more modest growth and the labour market would remain limp.

² In order to obtain the structural revenues and expenditure in the higher (lower) growth scenario it is necessary to add to the corresponding variable a component given by the product between revenue or expenditure elasticity to economic growth and the relative difference between the potential GDP in the alternative scenario and that of the baseline scenario. .

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TABLE IV.1: SENSITIVITY TO GROWTH¹ (percentage value)

		2012		2013		2014		2015		2016		2017
	Higher growth scenario		-0.8		1.0		3.8		3.9		3.7		3.9
Nominal GDP growth rate	Baseline scenario		-0.8		0.5		3.2		3.3		3.2		3.2
	Lower growth scenario		-0.8		-0.1		2.6		2.6		2.5		2.6
	Higher growth scenario		-2.4		-0.8		1.8		2.0		1.8		1.9
Real GDP growth rate	Baseline scenario		-2.4		-1.3		1.3		1.5		1.3		1.4
	Lower growth scenario		-2.4		-1.8		0.8		1.0		0.8		0.9
	Higher growth scenario		-0.4		0.2		0.5		0.6		0.7		0.8
Potential GDP growth rate	Baseline scenario		-0.5		0.0		0.2		0.3		0.3		0.5
	Lower growth scenario		-0.6		-0.2		0.0		0.0		0.0		0.1
	Higher growth scenario		-3.6		-4.6		-3.4		-2.0		-0.9		0.2
Output gap	Baseline scenario		-3.6		-4.8		-3.8		-2.6		-1.7		-0.8
	Lower growth scenario		-3.6		-5.1		-4.3		-3.4		-2.6		-1.8
	Higher growth scenario		-3.0		-2.6		-1.3		-0.9		0.1		0.8
Net borrowing	Baseline scenario		-3.0		-2.9		-1.8		-1.5		-0.9		-0.4
	Lower growth scenario		-3.0		-3.1		-2.2		-2.3		-1.7		-1.5
	Higher growth scenario		-1.1		-0.1		0.5		0.2		0.6		0.7
Cyclically adjusted budget balance	Baseline scenario		-1.1		-0.2		0.3		-0.1		0.0		0.0
	Lower growth scenario		-1.1		-0.3		0.2		-0.4		-0.3		-0.5
	Higher growth scenario		2.5		2.6		4.2		4.8		5.9		6.6
Primary surplus	Baseline scenario		2.5		2.4		3.8		4.3		5.1		5.7
	Lower growth scenario		2.5		2.3		3.4		3.7		4.5		4.9
	Higher growth scenario		4.5		5.1		6.0		5.9		6.4		6.5
Cyclically adjusted primary surplus	Baseline scenario		4.5		5.1		5.9		5.7		6.1		6.1
	Lower growth scenario		4.5		5.0		5.8		5.6		5.9		5.9
	Higher growth scenario		127.0		129.5		126.9		122.1		116.5		110.5
Public debt	Baseline scenario		127.0		130.4		129.0		125.5		121.4		117.3
	Lower growth scenario		127.0		131.3		131.0		129.0		126.5		124.0

1) The rounding to the first decimal point may cause the lack of consistency between the variables.

Note: The cyclically adjusted balances for the alternative scenarios were calculated by using the semi-elasticity of revenues (equal to 0.04) and expenditures (equal to -0.5) to economic growth, while the total cyclical component was calculated using the semi-elasticity of the net borrowing to economic growth (equal to 0.55). In addition, for technical reasons, it is assumed that the total amount of the future fiscal interventions (equal to 0.6 per cent of GDP during the 2015-2017 period) is entirely realized through expenditure cuts.

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In the years thereafter, the declining trend of net borrowing would be maintained, albeit at a slower pace. For example, the net borrowing for 2014 would stand at around -2.2 per cent of GDP, or 0.4 percentage points above the level projected in the baseline scenario. In 2017, the final year of the forecast horizon, the net borrowing in the lower growth scenario would be -1.5 per cent of GDP versus -0.4 per cent for the baseline scenario.

In the higher growth case, the net borrowing in 2013 would amount to -2.6 per cent of GDP vis-à-vis -2.9 per cent for the baseline scenario, and it would then contract more rapidly than what projected in the baseline scenario. In particular, it would go from -1.3 per cent in 2014 and -0.9 per cent in 2015 to a net surplus equal to 0.1 per cent and 0.8 per cent of GDP for 2016 and 2017, respectively.

In the lower growth scenario, the debt-to-GDP ratio for 2013 would be above the level planned in the baseline scenario by 0.9 percentage points of GDP (Figure IV.2). The ratio would continue declining through 2017, albeit at a slower pace than in baseline scenario. In 2017, the debt-to-GDP ratio would reach 124.0 per cent vis-à-vis the 117.3 per cent planned in the baseline scenario. Instead, in the higher growth scenario, the debt-to-GDP ratio would fall more rapidly, starting from 129.5 per cent of GDP in 2013 and reaching 110.5 per cent of GDP at the end of the forecast time horizon.

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IV.2 SENSITIVITY TO INTEREST RATES

The sensitivity of the public debt to the trend of market interest rates is analyzed by examining the level of interest expenditure in relation to the stock of government securities outstanding and by estimating the impact of potential shocks on the yield curve, with consequent sudden, permanent increases in the cost of issuing public debt securities on the primary market.

The results of the analysis depend on the current and future mix of the stock of negotiable government securities which, at the end of December 2012, consisted of domestic issues (96.32 per cent), and securities issued on foreign markets either in euros or another currency (3.68 per cent).

When considering all government securities outstanding at the end of 2012, including both domestic and foreign issues, the mix of the debt by type of instrument was essentially in line with that at the end of 2011, and therefore, the trend of the outstanding replicates that of the more recent years, except for the shorter term component (which includes BOTs) which slightly differentiated with respect to the previous trend. The debt structure as of 31 December 2012 compared with that as of December 2011 indicates growth in the BTP stock at nominal value (from 66.47 per cent to 66.79 per cent)³, and thus a continuation of what occurred in the past few years, but there is also a simultaneous increase in the BOT stock (from 8.30 per cent for 2011 to 9.22 per cent for 2012) which reflects a difference with respect to the recent past. Such dynamics were however offset by another reduction of the floating-rate component (CCTs and CCTeu), which went from 9.06 per cent in December 2011 to 7.48 per cent at the end of 2012.

³ It should nonetheless be noted that the weight of BTP securities with residual life of five years or less has increased, even though only slightly.

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Despite the market difficulties, especially in the March-July 2012 period, the Treasury nonetheless managed to move in step with the policy adopted in recent years in terms of reducing, or at least containing, the portion of the debt exposed to rate fluctuations. The increased issues in the BOT segment, which were partly needed to contribute to the refinancing of huge volumes of securities coming due in the first four months of the year, were more than offset by the decrease in CCT/CCTeu issues, which was moreover due to specific conditions of reduced market liquidity and depth manifested in some parts of the year, which caused a drastic reduction in the quantities offered (just over €5 billion versus €21 billion for the preceding year). The reduction of the CCT share was also affected by several buy-back transactions effected through the Amortization Fund for a total nominal volume of approximately €650 million.

The issues of 15-/30-year BTPs were conspicuously lower with respect to 2011, partly due to the high volatility of the segment, which made it quite difficult to place securities in this segment of the yield curve. Such situation led to a significant rebalancing of issues with 7-/10-year maturities, including through relying on off-the-run securities, and issues with 3-year maturities, even though the total volume of BTPs placed during the year was inevitably slightly lower than in 2011.

The ratio of foreign securities to the total debt also declined, going from 4.29 per cent in 2011 to 3.68 per cent in 2012, with part of the reduction reflecting fewer opportunities to issue at advantageous conditions.

The component of the debt indexed to the European HICP⁴ (BTP€i) experienced only a slight decrease (from 7.63 per cent in 2011 to 7.43 per cent in 2012), despite the significant market difficulties. The market for these Italian securities was adversely impacted by the downgrade of their rating by the rating agencies⁵, which automatically knocked the BTP€i out of important European bond indices. This especially penalised the issues with 10-, 15- and 30-year maturities, while the medium-term maturities, namely, those coming due in 5 and 10 years, experienced a reduction in volume, but not significantly if compared with the preceding year.

On the other hand, a sizeable increase was seen in the securities indexed to the national rate of inflation, partly due to the introduction of the BTP Italia, the new 4-year security dedicated to retail investors and indexed to Italian inflation⁶. This security was issued three times during 2012 for a total volume of more than €27 billion (equal to 1.65 per cent of the debt). The Treasury has used this instrument for consolidating its direct issuance to this type of clientele (which has historically been a crucial investor base for Italian public debt), making highly innovative use of MOT screen-based market, the bond market regulated and operated by Borsa Italiana.

Figure IV.3 illustrates the trends described thus far, with reference to the aggregate of domestic government securities only: stability of the fixed-rate component, the reduction of floating-rate component, the slight contraction of

⁴ Harmonised Index of Consumer Prices.

⁵ Reference is made to downgrade of Italy by the rating agency, Moody’s, in July, which was followed in January by downgrades made by Fitch (to A-) and of Standard & Poor’s (from A3 to Baa2).

⁶ Consumer Price Index for Households Headed by Manual Labourers and Clerical Employees (FOI).

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the issues indexed to the European HICP which is more than offset by the increase in the securities indexed to Italian inflation, for the effect of the introduction of the BTP Italia.

Evaluating the exposure of the debt to interest-rate and refinancing risks on the basis of summary measures that reflect the debt-management policy decisions made in 2012, it is possible to see that the magnitude of such risks, though slightly increasing over 2011, is still in line with recent years (Figure IV.4): the total average life of all government securities was 6.62 years as of 31 December 2012, decreasing with respect to the 6.99 years as of 31 December 2011, although such decline is modest if evaluated from an historical perspective. A similar trend was seen with the average refixing period which is also calculated with respect to the domestic government securities only; such period went from 5.81 years at the end of 2011 to 5.51 years at the end of 2012, thus attesting to a modest increase in variable-rate risk⁷.

Financial duration moved in the opposite direction, rising to 4.74 years as of 31 December 2012, compared with 4.66 at the end of 2011, with part of the change due to the trend of market rates and the scaling down of the floating-rate component of the debt.

The reductions in the average life and in the average refixing period can be explained by market conditions in 2012 that made the placements of 15- and 30-year BTPs less efficient and more risky, and that, to a lesser extent, limited the issues of 10-year BTPs when compared with 2011: the ratio of 15- and 30-year issues to total domestic securities issues went from 3.20 per cent in 2011 to 0.82 per cent in 2012, while the comparable ratio for 10-year securities went from

⁷ The downsizing of the CCT/CCTeu issues outstanding and the simultaneous increase in BOTs outstanding will obviously tend to reduce the average life of the debt, but the same will increase the debt’s financial duration when considering that the exposure to rate risk on the CCT/CCTeu is on average higher than that for the BOTs (with the former, the coupon is reset every six months, whereas it is done annually for the latter).

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13.21 per cent in 2011 to 10.21 per cent in 2012; on the other hand, the 3- and 5- year issues, including HICP-linked securities⁸, rose from 21.04 per cent of the total in 2011 to 22.08 per cent in 2012. If the BTP Italia securities are added, the ratio goes up to 27.80 per cent.

Finally, the total inflation-linked issues went from 7.63 per cent of the debt in 2011 to 9.09 per cent in 2012, if the BTP Italia is included, and thus entails only a very marginal increase in exposure to inflation; such increase appears amply offset by the benefits coming from greater diversification of supply obtained through the introduction of the new instrument dedicated to retail investors.

When considering sensitivity to interest rates, the trend of the debt structure in the first months of 2013 and that projected for the next few years will partially counterbalance the modest increase in exposure to interest-rate risks. According to forecasts done in April 2013, an instantaneous, permanent upward shift of one percentage point on the yields on government securities would translate into an additional debt burden equal to 0.15 points of GDP in the first year, 0.33 points of GDP in the second year and 0.46 points in the third year. This increase would be transferred entirely to the cost of the debt after 5.51 years. Such values, which are lower in the first two years than the comparable values set out in the 2012 EFD, are explained by an estimated lower reliance on floating-rate issues (BOTs and CCTeu), and by the reduction of the total borrowing per year, which would be stabilized via fewer maturities or through an expected reduced level of the State’s borrowing requirement to be covered.

⁸ The securities indexed to Consumer Price Index for Households Headed by Manual Labourers and Clerical Employees (FOI) were not included since the figure would not be comparable with 2011, since such securities were issued for the first time in 2012.

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The PA’s interest expenditure for 2012 reflected an increase of approximately €8 billion year on year, going from 5.0 per cent of GP to 5.5 per cent. The increase is mostly attributable to the central administrations and in particular, to the main categories of domestic government securities, with the most significant increases being those for BOTs and BTPs/BTPs€i: in the case of BOTs, the increase stems from a higher quantity of securities issued year on year and from historically high rates on these securities near the end of 2011 and in the June-July 2012 period; instead, for the BTPs/BTPs€i, the change comes from the historically high rates at issuance (in particular, those at the end of 2011 and in the March-July 2012 period) and, to a much lesser extent, the increase in the absolute value of the stock with respect to 2011. The weighted average cost on the new issues was nonetheless once again falling in 2012, getting down to 3.11 per cent versus 3.61 per cent for 2011 (Figure IV.5), thus demonstrating how the increase in interest expenditure is mostly to be attributed to spillover effects on 2012 of the cost of the issues placed in the final months of 2011.

The interest expenditure estimates for 2013-2017 were developed by using the Italian yield curve’s implicit rates as of mid-March 2013; the estimates project that the ratio of interest expenditure to GDP will fall in 2013 to 5.3 per cent (versus 5.5 per cent for 2012) and will then increase modestly each year to get to 6.1 per cent in 2017. Even though the current shape of the yield curve suggests rising rates, particular for short- and medium-term maturities, and notwithstanding a slower rate at which the ratio of interest expenditure to GDP declines, the rather slow rate of increase in interest expenditure is mainly attributable to the debt structure and to absolute volumes to be issued in the next few years that should remain stable at the 2013 levels.

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V.1 THE IMPACT OF POPULATION AGEING ON FISCAL SUSTAINABILITY

The assessment of fiscal sustainability is a fundamental part of budgetary surveillance within the European Union. Although an there is not an unambiguous definition, the sustainability of public finances is normally described as a government’s ability to meet the future financial charges on the debt. The capacity of repaying high levels of debt is dependent, amongst other things, on the degree of development of the financial markets, on perceived risks, on the capacity of policymakers to implement credible economic policies and, last but not least, on projected demographic trends over the medium/long term.

The deterioration of budget balances due to the 2009 financial crisis has contributed to generating additional risks for the sustainability of public budgets. Indeed, such risks are added to those already due to the process of population ageing. As widely acknowledged, the European population is likely to experience significant demographic changes in the next few decades, as a result of low fertility rates, a gradual increase in life expectancy and the retirement of the baby-boom generation¹.

According to the projections of the 2012 Ageing Report², the report jointly prepared by the European Commission and the Economic and Policy Committee, Working Group on Ageing (EPC-WGA), it is likely that the maintenance of sound and sustainable public finances in the medium/long term in some EU Member States could be jeopardized by the growing weight of population ageing with a negative impact on both economic growth and public expenditure³.

According to the European Commission’s recent projections⁴, the fiscal risks generated by population ageing are relatively lower in Italy than in the other leading European countries thanks to the pension and healthcare reforms implemented by Italy in recent years. On the other hand, when considering Italy’s high level of public debt, the sustainability of public finances in the medium/long term is subordinated to rigid control over public finance and the maintenance of high primary surpluses.

Consistent with the methodological indications agreed at a European level as part of the EPC-WGA, Italy traditionally runs medium/long-term projections in

¹ In this regard, see the EUROPOP2010 projections published by Eurostat.

² European Commission-Economic Policy Committee, (2012), The 2012-Ageing Report: Economic and Budgetary Projections for the EU-27 member States (2010-2060). http://ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-2_en.pdf.

³ For instance, the ratio between the inactive population of age 65 or older and the employed (20-64 age bracket) is expected to rise from 40 in 2010 to 74 per cent in 2060 in the EU-27.

⁴  European Commission, (2012), Fiscal Sustainability Report 2012, European Economy n.8. http://ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-8_en.pdf.

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relation to four components of age-related expenditure: public expenditure for pensions, healthcare and long-term care (LTC) expenditures for the elderly and disabled, education expenditure and expenditure for social safety nets⁵.

The projections are based on the demographic assumptions of the Eurostat baseline scenario⁶, while the macroeconomic assumptions are those of the scenario agreed by the EPC-WGA for the 2012 Ageing Report (EPC-WGA baseline scenario). In addition, from 2011 to 2017, the projections incorporate national accounting data and the short-term macroeconomic framework outlined in the 2013 DEF (Chapter II)⁷. The interaction of the aforementioned assumptions determines a real GDP growth rate around 1.4 per cent per year on average for the 2013-2060 period. Starting from 2018, the GDP deflator and the inflation rate are assumed to be equal to 2 per cent.

The age-related expenditure projections reported in Table V.1 have been updated on the basis of the regulatory framework in place as of April 2013.

The pension expenditure projections are mainly based on the provisions established in the ‘Fornero Reform’
(Law no. 214/2011)⁸. More specifically, for 2012 and 2013, the projections incorporate the effects of the indexing of pensions to the cost of living only for pensions that are no more than three times the minimum state pension. In addition, the forecast takes into account the provisions aimed at increasing the number of workers “safeguarded” from the increase in pension eligibility requirements provided in the most recent reform with reference to the specific cases defined by law during 2012. Finally, the projections take into account the measures to facilitate the accumulation of pension eligibility periods with various pension funds.

⁵ The projections have been carried out using the long-term forecasting model of the State General Accounting Office (Ragioneria Generale dello Stato).

⁶ The demographic assumptions are those related to the Eurostat baseline , with the base year of 2010 (EUROPOP 2010). This scenario contemplates the following for Italy: i) a net annual flow of immigrants equal, on average, to 310,000, with a diminishing trend; ii) life expectancy at 2060 of 85.5 years for men and 89.7 years for women; and iii) a total fertility rate of 1.57 as of 2060.

⁷ The projections have been revised to include adjustments needed for reconciling the short-term macroeconomic data with the medium/long term structural values defined in the EPC-WGA baseline scenario. Such reconciliation concerned only the employment variables since the trend of productivity was left unchanged as from 2018. More specifically, the employment differences seen in 2017, in the comparison between the short-term forecasts of the and updated long-term baseline scenarios, are gradually zeroed out over a 5-year period, in the case of rates of activity, and over a 12-year period, in the case of the unemployment rate. Turning to the medium/long-term structural trends of the macroeconomic variables, the assumptions of the EPC-WGA baseline scenario call for an annual rate of change in real productivity that rises during the first part of the forecast period, before converging at 1.54 per cent as of 2030. The rate of employment (15-64 age bracket) is projected to rise from 56.8 per cent in 2012 to 60.3 per cent of the 2060. It is furthermore useful to note how the 2012 EPC-WGA baseline macroeconomic scenario combines the European Commission’s employment projections produced in the 2011 spring forecasts (for the 2011-2012 period) and extrapolated to 2015, with the forecasts obtained with the cohort simulation model that were developed by the EPC-AWG. The combination of the two sets of forecasts that respectively cover the short term and the medium/long term was carried out using a method that creates discontinuity in the transition from 2015 to 2016. In Italy’s case, this discontinuity translates into a 2.3 per cent reduction of the employment levels used for projecting GDP, when compared with the forecasts obtained with the cohort simulation model. In order to supply a representation of employment variables consistent with the employment trends actually incorporated into the growth assumptions defined in the scenario, the projected values of the rates of activity were recomputed to a corresponding extent. Accordingly, they are structurally 2.3 per cent below those published by the EPC-WGA in the 2012 Ageing Report.

⁸ The pension expenditure projections incorporate the financial effects of the measures contained in reforms adopted in 2011 and 2012 , namely, those of Decree-Law no. 98/2011 (converted with amendments by Law no. 111/2011), Decree-Law no. 138/2011 (converted with amendments by Law no. 148/2011), Decree-Law no. 201/2011 (converted with Law no. 214/2011), Decree-Law no. 95/2012 (converted with Law no. 135/2012) and Law no. 228/2012 (Stability Law 2013).

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The projections for healthcare expenditure for 2013-2017 include the cost-containment measures adopted since 2010 and already incorporated in the projections last year⁹. However, as a result of the recent ruling of the Constitutional Court¹⁰ which restricted the central government’s regulatory power in matters for which is not exclusively responsible, the projections also take into account, for an amount equal to €2.0 billion, the additional financial effects due to the non-applicability some provisions establishing the cost-sharing of the private sectors in healthcare expenditure. In addition, the projection includes the additional cost-containment effects as provided by the measures contained in Decree-Law no. 95/2012¹¹ and in the 2013 Stability Law¹².

Finally, the projections of the age-related expenditure incorporate the most recent regulatory changes with regard to the expenditure for social safety nets¹³ and education¹⁴.

Overall, the age-related expenditure for the 2010-2060 period remains stable at around 28 per cent of GDP (Table V.1). However, the expenditure falls slightly in the years after 2015, before climbing again as of 2035, thus reflecting the retirement of the baby-boom generation, to reach 29.3 per cent of GDP in 2050. In the outer years of the projections horizon, the age-related expenditure falls significantly, converging to the same level reported for 2010 as a percentage of GDP.

The examination of the individual expenditure items shows that pension expenditure as a share of GDP initially grows exclusively as a result of the economic recession (which is projected to continue again in 2013) and the consequent contraction in the output levels, and then declines to reach approximately 15.2 per cent of GDP between 2025 and 2030. Thereafter, the ratio starts to rise again, hitting a high of 16.3 per cent of GDP in 2040-2045. In the final years of the projections horizon, the ratio of pension expenditure to GDP rapidly declines to reach the level of 14.6 per cent in 2060.

The projection of healthcare expenditure is carried out on the basis of the methodology used for the so-called “reference scenario” developed by the EPC-WGA which takes into account not only the effects of population ageing, but also the consequences of other explicative factors¹⁵. Consequently, after initially

⁹ Decree-Law no. 78/2010, converted into Law no. 122/2010 and Decree-Law no. 98/2011 converted into Law no. 111/2011.

¹⁰ Constitutional Court, Ruling no. 187/2012 about the provisions of Article 17, Paragraph 1, letter d) of Decree-Law no. 98/2011.

¹¹ Converted with Law no. 135/2012

¹² For additional information, see the detailed analysis contained in Section II of the 2013 EFD.

¹³ The projections of social safety nets incorporate the measures provided by Law no. 92/2012 covering labour market reform and Law no. 228/2012 (2013 Stability Law), among which, the refunding over what had already been provided by Law no. 92/2012 of special wage supplementations schemes (ammortizzatori sociali in deroga) .

¹⁴ The education expenditure projections incorporate the effects of cost containment coming from the process of streamlining public school staffing, including through the reduction of the gap in the student/teacher ratio vis-à-vis other countries (Decree-Law no. 112/2008 converted in the Law no. 133/2008). In addition, through 2017, the forecast takes into account the application of current law with respect to compensation trends, including therein the effects of the containment measures provided by Decree-Law no. 78/2010 (converted in Law no. 122/2010) and Decree-Law no. 98/2011 (converted in Law no. 111/2011), as well as the effects of Law no. 240/2010, Law no. 183/2011 (2012 Stability Law), Decree-Law no. 95/2012 (converted with Law no. 135/2012) and Law no. 228/2012 (2013 Stability Law).

¹⁵ The baseline scenario provides that: i) 50 per cent of the increases in life expectancy are considered as years spent in good health; ii) the trend of the unit cost moves in line with GDP per capita; and iii) the elasticity

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decreasing for the effect of the measures to curb the trend of spending, the ratio between healthcare expenditure and GDP is expected to rise starting from 2020 and stands at approximately 8.0 per cent during the last decade of the projection period.

In terms of GDP, the long-term care expenditure for the elderly and disabled¹⁶ is projected to be stable for the initial years of the projection horizon, and then presents an increasing profile which continues over the entire period, reaching 1.6 per cent in 2060.

The forecast expenditure for social safety nets as a percentage of GDP goes instead from 0.7 per cent in 2010 to approximately 1.0 per cent in 2015, and then peters out gradually to reach a value of just over 0.6 per cent as from 2030.

Finally, the projection of education expenditure as a share of GDP¹⁷ shows a reduction in the initial years and up to 2017, mostly for the effect of the measures to contain spending on staff as envisaged by laws and regulations currently in force. The ratio then gradually declines further for 15 years for due to the decrease in the number of students, as caused by demographic trends. The ratio starts to grow again slightly during the final part of the projection period, standing at around 3.4 per cent of GDP in 2060.

of the unit cost with respect to GDP per capita is above 1.0 (it falls on a linear basis during the forecast period, going from the initial level of 1.1 to 1.0 in 2060). For the long-term care (LTC) component of healthcare expenditure, the “reference scenario” provides for the partial application of the increase of the life expectancy in line with what envisaged for the acute component of healthcare expenditure; the trend of the unit cost is pegged to GDP divided the total hours worked, and the elasticity of unit cost to GDP per worker is equal to 1.0 for the entire forecast period.

¹⁶ The public expenditure for Long-term Care consists of cash benefits for old or disabled people (80 per cent of the total amount) and social-assistance services supplied at a local level (20%). With reference to the latter, the projection of the ratio between the expenditure and GDP was carried out in accordance with the assumptions of the so-called “reference scenario”. Instead, with reference to monetary allowances, the amount of the benefits is tied to the trend in GDP per capita starting in 2018, in line with the methodology agreed at by EPC-WGA. The projections presented in the EDF differentiates from those prepared by the EPC-WGA for the fact of taking into account the structure by age of the persons receiving the benefits which, if ignored, would entail an underestimation of the trend of the expenditure.

¹⁷ The definition of education expenditure agreed at the level of the EPC-WGA includes the International Standard Classification of Education (ISCED) levels of education 1-6. Pre-primary school (ISCED 0 level) and life-long learning are thus excluded from the aggregate (See European Commission, Special Report n°1/2006). The total expenditure is quantified based on source data from UNESCO/OECD/EUROSTAT (UOE) (See European Commission, The 2012-Ageing Report: Underlying Assumptions and Projecting Methodologies, 2011). The forecast incorporates the updating of the UOE data in relation to the financial year of 2010.

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TABLE V.1: PUBLIC EXPENDITURE FOR PENSIONS, HEALTHCARE, LONG-TERM CARE, EDUCATION AND UNEMPLOYMENT COMPENSATION (2010-2060)

	2010		2015		2020		2025		2030		2035		2040		2045		2050		2055		2060
											in % GDP
Total expenditure		50.5		49.3		53.3		51.5		50.0		49.3		48.5		47.6		46.0		43.8		41.3
Including: age-related expenditure		28.3		28.4		27.6		27.3		27.4		28.2		28.9		29.4		29.3		28.7		28.2
Pension expenditure		15.3		16.1		15.6		15.2		15.2		15.8		16.1		16.3		15.9		15.1		14.6
Healthcare expenditure		7.3		6.9		6.8		7.0		7.2		7.4		7.6		7.8		7.9		8.0		8.0
Including: long-term care		0.9		0.9		0.8		0.8		0.9		0.9		1.0		1.1		1.2		1.2		1.2
Expenditure for assistance to the elderly		1.0		1.0		1.0		1.0		1.1		1.2		1.2		1.3		1.4		1.5		1.6
Education expenditure		4.0		3.6		3.4		3.4		3.3		3.3		3.3		3.4		3.4		3.4		3.4
Expenditure for unemployment compensation		0.7		0.9		0.8		0.7		0.6		0.6		0.6		0.6		0.6		0.6		0.6
Interest expenditure		4.6		5.8		4.6		3.2		1.7		0.2		-1.2		-2.5		-3.8		-5.3		-7.0
Total revenues		46.1		49.4		49.5		49.5		49.4		49.4		49.4		49.4		49.4		49.4		49.4
Including: property income		0.6		0.6		0.6		0.6		0.6		0.5		0.5		0.5		0.5		0.5		0.5
ASSUMPTIONS												%
Labour productivity growth rate		2.8		0.7		0.9		1.5		1.5		1.5		1.5		1.5		1.5		1.5		1.5
Real GDP growth rate		1.7		1.5		1.8		2.1		1.4		1.2		1.2		1.3		1.4		1.5		1.4
Male participation rate (20-64)		78.5		79.8		79.2		78.7		78.4		78.4		78.7		79.1		79.2		79.2		79.2
Female participation rate (20-64)		54.6		57.7		59.0		58.9		59.1		59.4		59.8		60.0		60.2		60.2		60.2
Total participation rate (20-64)		66.5		68.7		69.1		68.8		68.9		69.0		69.4		69.8		69.9		70.0		70.0
Unemployment rate		8.4		11.6		9.3		7.3		6.9		6.9		6.9		6.9		6.9		6.9		6.8
Population of age 65 and over/total population		20.2		21.4		22.3		23.5		25.5		27.8		29.8		31.1		31.5		31.6		31.7
Old-age dependency ratio (65 and over/[20-64])		33.3		35.7		37.6		40.1		44.5		50.3		56.0		59.8		61.2		61.5		61.6

Notes: The forecast of the various expenditure components incorporates the financial effects of the reform measures adopted in 2011 and 2012 as reported in the text. For the 2013-2017 period, the forecast incorporates the estimated healthcare expenditure underlying the public-finance forecast.

Source: MEF analyses developed using the long-term forecast model of the General State Accounting Office, with the use of Eurostat data.

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FOCUS

The Pension reform

The new rules introduced by the reform adopted with Law no. 214/2011 have significantly changed the pension system, improving its sustainability in the medium/long term and ensuring greater fairness between generations.

As of 2012, the reform establishes the extension of the contribution-based regime to all workers, including the those who, on the basis of preceding legislation, would have received a pension calculated according to the earnings-related regime (namely, all individuals who had accrued more than 18 years of contributions as of 31 December 1995). In line with the regulatory frameworks of most European countries, the reform confirms two types of retirement: a) old age retirement which can allowed with at least 20 years of contributions and a statutory age requirement pre-defined by the law; and b) early retirement allowed at an age below that for old age retirement but requiring a longer period of contributions¹⁸.

As of 2013, all age requirements (including those for obtaining social allowances) and the contribution requirements for being entitled to early retirement regardless of age are indexed to changes in life expectancy as measured by ISTAT with reference to the three preceding years. The adjustment of the eligibility requirements to changes in life expectancy will occur every three years and, starting from the adjustment subsequent to 2019, every two years, on the basis of an entirely administrative procedure¹⁹. In addition, starting from 2013, the calculation of the transformation coefficients²⁰ at the time of retirement is extended up to the age of 70. Similarly, by subsequent legislative interventions, some safeguard measures have been provided in order to guarantee a more gradual application of the reform for well identified categories of workers which are in the proximity to retirement and that present difficult situations related to the permanence in the labour market.²¹.

As a result of all of the reforms implemented since 2004, the average retirement age (taking into consideration both the statutory retirement age and the requirements for early retirement) rises from 60-61 during the 2006-2010 period to approximately 64 in 2020, 67 in 2040 and then around 68 in 2050. Cumulatively, the savings derived from the overall reform process started in 2004 amount to around 60 percentage points of GDP until 2050. One-third of those savings is due to the reform introduced with Law no. 214/2011 and two-thirds to previous measures.

¹⁸ For detail on the age and contribution requirements needed to be entitled for an old-age pension, early retirement, and social allowances, see the box on the reform of the pension system included in the Update to the 2012 Stability Programme.

¹⁹ The adjustment of the requisites taking effect as of 2013, in accordance with the law (Article 12, Paragraph 12-bis of Decree-Law no. 78 of 31 May 2010, converted with amendments into Law no. 122 of 30 July 2010) has been set in three months. As a matter of facts, subsequent adjustments will be those estimated ex-post by ISTAT, according to the proceedings provided by current laws and regulations. It is worth noting that Law no. 214/2011 contains a safeguard clause on the basis of which the minimum age requirement for old-age pensions cannot be less than 67 for anyone becoming eligible for retirement as from 2021. However, on the basis of the latest ISTAT demographic projections, the statutory retirement age for old age pension is projected to be 67 as early as 2019.

²⁰ The transformation coefficient is also to be updated with the same calendar used for adjusting the eligibility requirements. The adjustment taking effect on 1 January 2013 was adopted by a decree of 15 May 2012, published in the Official Journal of the Republic of Italy on 24 May 2012.

²¹ The total amount of workers entitled to such safeguard measures is approximately 130,000 . The safeguard is applied to workers who will be entitled to a pension after 31 December 2011 (all people who have met the pension eligibility requirements by such date are expressly exempted from the application of the changes established by Law no. 214/2011) and that have difficulty of remaining in the labour market. Such workers must also fall within the categories expressly pre-defined by the law and, starting from 2013, may retire in the next few years on the basis of the rules previously in force. .

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V.2 DEBT SUSTAINABILITY

On the basis of the assumptions about the long-term demographic and macroeconomic trends and taking into consideration the projections for the ageing-related expenditures described in the previous section (Table V.1), the sustainability of the public finances in the baseline scenario is analyzed both through the projection of the debt-to-GDP ratio over the years 2018-2060 and through the calculation of several sustainability indicators consistent with the methodology used by the European Commission²².

The projection of the debt-to-GDP ratio

The debt-to-GDP ratio and the structural primary surplus, net of the one-off measures indicated for 2017, represent the starting point for the exercise. Starting from 2018, the structural primary surplus is adjusted according to the pattern in the output gap (which is assumed to close on a linear basis during the 2018-2020 period), age-related expenditures, and property income²³. It is also assumed that the real rate of interest (3.0 per cent per year) is kept constant over the 2018-2060 period, while the GDP deflator converges at 2.0 per cent in the three years after 2017. It follows that the nominal interest rate converges at 5.0 per cent in 2020.

The comparison between the trend of the debt-to-GDP ratio in the baseline scenario of this document and that presented in the preceding Stability

²² European Commission, 2012, Fiscal Sustainability Report 2012, European Economy n.8.

²³ Property income corresponds to capital income (debt and equity securities) and annuities from the ownership of natural resources. The long-term trend thereof (2018-2060) is projected on the basis of the methodology agreed at the level of the EPC-WGA.

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Programme shows a higher starting point for the debt-to-GDP ratio; this is due to low GDP growth, but also and more importantly, to Italy’s contributions to financial programs in support of Greece and the EFSF and the ESM as well as the payment of the public administration debts and arrears. However, on the basis of a structural primary surplus which, in 2017, is expected to be in line with the starting point planned in last year’s document (6.1 per cent of GDP), the debt-to-GDP ratio falls below the threshold of 60 per cent of GDP in 2027, with a couple of years of delay compared with the projection presented in the 2012 Stability Programme (Figure V.1)

The sustainability indicators

On the basis of the European Commission’s methodology, the sustainability gaps (S1 and S2) and the required primary balance (RPB)²⁴ are calculated as summary measures of the degree of the medium/long-term sustainability of the public finances. However, in comparison with the previous Stability Programme, a new method has been introduced for calculating S1, which differs from previous method in two aspects: the debt target of 60 per cent of GDP is brought to 2030 rather than 2060 and it is possible to assume a gradual cumulative fiscal effort through 2020 which then has to be kept constant for the subsequent 10 years . Accordingly, the new S1 measures the permanent adjustment of the structural primary balance (in percentage of GDP) needed to reach a debt level of 60 per cent of GDP in 2030, assuming linear improvement in the structural primary surplus from 2018 to 2020, and then maintaining the level of 2020 until 2030. Instead, the S2 indicator continues to measure the permanent adjustment of the

²⁴ For a detailed description of the indicators, see Chapter 8 of the Fiscal Sustainability Report 2012, European Economy n.8/2012.

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structural primary balance needed so that the trend of the public debt will comply with the inter-temporal budget constraint over an infinite time horizon. Finally, the required primary balance (RPB) measures the average structural primary surplus in the first 5 years of the projection period (namely, from 2018 to 2022) consistent with the adjustment suggested by the value of S2. All of the indicators are based on growth forecasts and budget balances that are extrapolated by incorporating the medium/long-term projections of age-related expenditures. The higher and more positive the values of the S1 and S2 sustainability indicators, the greater will be the need for fiscal adjustment and thus, the greater the sustainability risk will be.

In turn, the S1 and S2 indicators may be broken down into components that provide useful information about the origin and the timing of the fiscal adjustments needed to guarantee the sustainability of the debt over the long term horizon (Table V.2).

The first component, the initial budgetary position, is common to both indicators, and measures the distance between the structural primary surplus as of 2017 (equal to 6.1 per cent of GDP) and the structural primary surplus that would keep the debt-to-GDP ratio constant at the initial level (117.3 per cent of GDP) ceteris paribus. With reference to S1, this component includes the cost of delaying the fiscal adjustment since it is assumed that the effort needed will not completely occur immediately, but is to be reached on a linear basis between 2018 and 2020, before staying constant for the decade thereafter. A second component, which is specific to S1, is the debt requirement in 2030; this shows the adjustment needed for bringing the debt from the initial level to 60 per cent of GDP in 2030. Finally, a third component, common to both indicators, measures the additional adjustment for covering the increase in age-related expenditures. In the case of S1, the adjustment is moved forward to 2030.

The results show a negative value for both the S1 and S2 indicators. It follows that the planned fiscal consolidation is shown to be sufficient for ensuring the long-term sustainability of the public finances. This conclusion is confirmed by the required primary balance which, with a value of 2.3 per cent, is below the primary surplus projected for 2017.

Despite the deterioration of the initial conditions due to a higher debt level forecast from 2013 to 2017, the significant increase of the structural primary balance projected over the time horizon covered by this Stability Programme will allow a convergence toward a debt level equal to 60 per cent of GDP, when moving that target forward to 2030, and will counterbalance the emergence of fiscal costs related to population ageing. Indeed, for both the S1 and S2 indicators, the value of the initial budgetary position remains negative (-4.9 per cent and -4.8 per cent, respectively), signalling the capacity of Italy’s public finances, given the budget conditions planned for 2017, to cover the mounting interest-to-GDP ratio (snow ball effect) expected over the medium/long term.

On the other hand, considering the greater effort needed to achieve the debt-to-GDP ratio of 60 per cent in 2030 rather than in 2060 as previously envisaged, the components of S1 related to the debt requirement and the cost of ageing are higher than the values set out in the previous Stability Programme.

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TABLE V.2: LONG-TERM SUSTAINABILITY INDICATORS

	Sustainability Indicators
	S1		S2		RPB
Value		-1.7		-4.5		2.3
including:
Initial budgetary position		-4.9		-4.8		—
Debt requirement in 2030		4.1		—		—
Long-term changes in the primary balance		0.9		0.3		—
Source: MEF analyses

V.3 ANALYSIS OF SENSITIVITY OF PUBLIC-DEBT DYNAMICS OVER THE LONG TERM

The sensitivity analysis carried out in this section is aimed at (i) testing the robustness of the results in view of their intrinsic uncertainty and (ii) verifying under which reform assumptions and on the basis of which budget conditions, the sustainability of the debt can either be guaranteed or is at risk.

Accordingly, the discussion below refers to different alternative scenarios that replicate the assumptions underlying the sensitivity analyses included in the European Commission’s 2012 Sustainability Report. Such scenario are set imposing permanent changes to the assumptions used for the baseline as far as demographic, macroeconomic and fiscal are concerned (for instance, the impact of the change in the initial level of the primary surplus on debt dynamic is simulated). In addition, the results are presented in relation to a so-called risk scenario in which the impact of non-demographic factors exerts additional pressure on the expected trend of healthcare expenditure and expenditure for long-term care of the elderly and disabled.

The sensitivity analysis with respect to demographic variables

Population ageing represents one of the most critical aspects that Italy will need to tackle in the coming decades. In this regard, it is particularly important to evaluate properly, through various simulations, both the impact of migratory flows expected in coming decades, and the consequences of an increase in total life expectancy on Italy’s public finances over the medium and long term.

With reference to the impact of immigration, the simulation, in line with what agreed at the level of the EPC-WGA and on the basis of an ad-hoc demographic scenario developed by EUROSTAT, assumes the average net flow per year of immigrants decreases by 10 per cent with respect to the baseline assumption for the 2018-2060 period.

With regard to the simulation of the impact of the increase in life expectancy, it is assumed that the probabilities of death of both genders are adjusted downward so as to determine, as of 2060, a one-year increase in life expectancy vis-à-vis the assumption of the baseline scenario.

The trend of the public debt in the two alternative scenarios is compared with the baseline in Chart V.2. Given the values of the public debt and the structural primary balance projected by the Government as of 2017, the

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consequences of a smaller immigration flow on debt sustainability appear negligible. Even the possible consequences of an increase in life expectancy appear barely relevant, mainly due to the introduction of the mechanisms to adjust the eligibility requirements for being entitled to a pensions and linking them to changes in life expectancy. In both cases, the debt-to-GDP ratio falls rapidly, and dips below 60 per cent around 2030.

The sensitivity analysis with respect to macroeconomic variables

The sensitivity analysis with respect to macroeconomic variables aims at testing the robustness of the projections of the debt-to-GDP ratio vis-à-vis alternative scenarios that assume more favourable or less favourable trends for labour productivity, the employment rate, and the activity rate of elderly and female workers.

With reference to productivity, the simulation exercise calls for two alternative scenarios in which the growth rate of labour productivity is permanently increased or decreased by 0.1 percentage points with respect to the baseline scenario starting in 2025. The convergence to the new level is to be achieved gradually during the 2018-2025 period and remains constant in the years thereafter. The impact on sustainability of a better (worse) trend of productivity appears only marginally significant in the short term and long term (Figure V.3).

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Another simulation assumes that the rate of employment, calculated over the population aged 15-64, is increased gradually through 2060 with its value being one percentage point higher than that assumed under the baseline framework. In this scenario, obtained by assuming a lower unemployment rate, the impact on the trend of debt-to-GDP ratio appears marginal during the first years of the simulation.

Instead, when considering a gradual increase in the activity rate of the population in the 55-64 age bracket by 5 percentage points in 2060 vis-à-vis the level projected in the baseline scenario, resulting in an overal increase of, the resulting pattern of the debt-to-GDP ratio experiences a significant downward shift starting in 2020 (Figure V.4).

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Finally, assuming a gradual increase in the female participation rate that will put the rate in 2060 at 5.0 percentage points above that for the baseline scenario, the effects on the decreasing trend of the debt-to-GDP ratio are evident only in the medium/long term (Figure V.4).

The sensitivity analysis of a risk scenario for healthcare expenditure

Relying on the European Commission’s risk scenario methodology, it is possible to evaluate the effects on the debt of the application of alternative assumptions about healthcare expenditure and long-term care expenditure for the elderly and disabled. Such scenario is different from the baseline scenario due to several more stringent assumptions about the so-called non-demographic factors²⁵.

According to the results of the analysis, the medium-term risk scenario entails only slight deterioration of the trend of the debt-to-GDP ratio, which remains under 60 per cent as from 2027 (Figure V.5).

The sensitivity analysis with respect to the primary surplus

With this simulation, the robustness of the results of sustainability of the public finances is tested in view of a deterioration of the primary surplus as of 2017. For this purpose, the value of the nominal primary surplus in the baseline scenario (equal to 5.7 per cent of GDP in 2017) is reduced by 1.0 percentage point, falling respectively to 4.7 per cent, 3.7 per cent and 2.7 per cent (Figure V.6).

²⁵  More specifically:, i) it is assumed that, in the case of acute care, the elasticity of the unit cost vis-à-vis GDP per capita is equal to 1.3 (instead of 1.1 as in the baseline scenario) at the start of the forecast period and converges to 1.0 in 2060; and ii) in the case of long-term care, with the exclusion of the cash allowances components, the cost per recipient by age is assumed to converge to the EU-27 average, only when its starting point is lower.

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The trend of the public debt changes significantly following the deterioration of the primary surplus as of 2017, and in particular for the levels below 4 per cent of GDP. More specifically, for an initial level of 3.7 per cent, the debt continues to decrease, but does not hit the threshold of 60 per cent until 2035 (Figure V.6). Instead, for a primary surplus of 2.7 per cent, it appears the debt-to-GDP ratio would stabilize at around 60 per cent. It is evident from these simulations that the sustainability of the public finances can be guaranteed by the baseline scenario and by the public-finance targets described in this Stability Programme, which require the maintenance of large primary surpluses.

V.4 THE IMPACT OF PENSION REFORMS ON SUSTAINABILITY

On the basis of the Government’s programmed budget targets as of 2017 (namely, the achievement and maintenance of the medium-term objective), the sensitivity tests presented in the previous section show that the long-term trend of age-related expenditures should not put the sustainability of Italy’s public debt at risk, even if macroeconomic, demographic or fiscal conditions were to be different. It should be noted, nonetheless, that this conclusion stems also from of a series of pension reforms over the past 20 years that have significantly contributed to reducing age-related expenditure.

Figure V.7 illustrates the implications on the debt-to-GDP ratio of the various measures adopted from 2004 to 2011 on the basis of a counterfactual analysis, which recomputes the initial levels of the debt and the primary surplus assuming the absence of the pension reforms considered. All of the reform measures considered, from 2004 to the most recent, have entailed structural effects, overall determining a reduction in the ratio of pension expenditure to GDP vis-à-

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vis the projections based on legislation previously in effect, thereby impacting the present value of the expected expenditure flows (see Focus: The Pension reform).

The results show that the debt-to-GDP ratio would continue to decline under the scenario that excludes the reforms adopted since 2004, but that the ratio would be at levels that are permanently higher than those reflected in the baseline scenario which instead incorporates the financial effects of the reform adopted with Law no. 214/2011.

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FOCUS

State guarantees

As of 31 December 2012, the guarantees granted by the State amounted to approximately €100 billion, or 6.4 per cent of GDP; the guarantees granted to credit institutions following the recent financial crisis account for €85.7 billion of the total, or 5.5 per cent of GDP.

PUBLIC GUARANTEES (in € mn)

	2012
	Level		in % of GDP
Stock guarantees		100,025		6.4
including: to the financial sector		85,679		5.5

Following are comments on the components of the aggregate:

- Central guarantee fund for small- and medium-sized enterprise (SME). The fund is an industrial policy instrument of the Ministry for Economic Development which operates through three distinct vehicles: direct guarantees, granted to banks and financial intermediaries; counter guarantees against guarantees granted by the collective-loan guarantee consortiums (Confidi) and other guarantee funds; and co-guarantees granted directly in favour of the financing parties and jointly to collective-loan guarantee consortiums (Confidi) and other guarantee funds or to guarantee funds set up by the EU or co-financed by the EU. As of 31 December 2011, the residual debt guaranteed amounted to approximately €8,318 million.

- TAV S.p.A.. The Ministry of Economy and Finance guarantees the fulfilment of the Ferrovie dello Stato S.p.A.’s obligations with respect to TAV S.p.A., in relation to the concession, construction and operation of the high-speed train system. This is a surety bond designed to facilitate transactions to raise the funds on the financial markets that are needed for the design and construction of the high-speed network. As of 31 December 2012, the residual debt guaranteed amounted to approximately €2,278 million.

- Aid to the bailout of businesses. Such aid includes guarantees given by the State to companies to cover debt contracted with credit institutions for the financing of current operations and for the reactivation and completion of plant facilities, buildings and industrial equipment. As of 31 December 2012, the residual debt guaranteed amounted to approximately €64.7 million.

- Guarantees assumed by local government. The data related to the guarantees given by local governments are supplied by the Bank of Italy, which gathers the data through the information submitted directly the beneficiary institutions as part of their regulatory reporting. As of 31 December 2012, the residual debt guaranteed amounted to approximately €3,687 million.

- Italian banks. Such guarantees are granted by the State to cover liabilities of Italian banks in relation to debt securities issued by the banks. As of 31 December 2012, the residual debt guaranteed amounted to approximately €85,679 million.

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VI.1 ACTIONS TAKEN AND INDICATIONS FOR FUTURE YEARS

Actions taken

The actions taken by the Government with a decree-law in July¹ and the 2013 Stability Law² are part of a framework to maintain the stability of the public accounts. Altogether, the revenue and spending measures approved in 2012 provide for a significant reallocation of budget resources so as to achieve a reduction in fiscal pressure and a structural correction of the year-on-year trends of public expenditure.

The measures adopted to reduce fiscal burden are aimed at favouring the equity of the taxation system and supporting the development of the productive system.

On the spending side the measures reinforce, first with the provisions of the Decree-Law and then with those of the 2013 Stability Law, the spending-review process inaugurated in previous years. The measures adopted affect all levels of Government and provide for interventions which, on the basis of a comparative analysis, are aimed at the recovery of efficiency margins in the production of public goods and services and in public procurement procedures. More specifically, with regard to the General Government the request to formulate precise corrective measures in relation to specific savings targets assigned to each Ministry (according to a method already tested with the budgeting process in 2011), it will help to overcome the previous approach of linear cuts and of replanning initiatives/resources according to predetermined expenditure amount. The Local Government contribution to public finance measures is mainly made through the revision of the targets assigned to them within the Domestic Stability Pact and the reduction of treasury resources due to them. Additional savings come from healthcare initiatives, with spending measures provided in areas where operating inefficiencies or inappropriate use of resources have been detected.

In terms of net borrowing, the 2012 revenue and spending measures meet the targets set out in the Update to the 2012 DEF. In absolute terms, the planned correction amounts to approximately €600 million in 2012, €160 million in 2014 and €1 billion in 2015. The measures for 2013 provide for the use of the resources exceeding the structural balanced-budget objective for an amount of approximately €2.3 billion.

¹  Decree-Law no.95/2012, converted by Law no.135/2012.

²  Law no. 228/2012.

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TABLE VI.1: CUMULATIVE IMPACT OF 2012 LEGISLATION ON GENERAL GOVERNMENT’S NET BORROWING (before netting out induced effects; in € mn)

	2012		2013		2014		2015
Decree-Law no. 95/2012		602		16		27		627
2013-2015 Stability Law				-2,319		137		379
TOTAL		602		-2,303		165		1,006
% of GDP		0.0		-0.1		0.0		0.1

The gross budget packages are worth €4.6 billion in 2012, €21.1 billion in 2013 and approximately €22.5 billion in the years thereafter. The total use of resources amounts to €4 billion in 2012, €23.4 billion in 2013, €22.4 billion in 2014 and €21.6 billion in 2015.

TABLE VI.2: CUMULATIVE IMPACT OF 2012 BUDGET PACKAGES ON GENERAL GOVERNMENT’S NET BORROWING (before netting out induced effects; in € mn)

	2012		2013		2014		2015
FREEING OF FUNDS		4,568		21,129		22,539		22,620
Incremental revenues		0		4,577		5,425		4,955
Expenditure cuts		4,568		16,552		17,114		17,665
- current expenditure		3,050		11,684		12,350		12,757
- capital expenditure		1,518		4,869		4,763		4,908
USE OF RESOURCES		3,966		23,432		22,374		21,614
Decrease in revenues		3,392		13,234		16,539		15,538
Incremental expenditure		574		10,198		5,836		6,076
- current expenditure		574		7,481		3,919		3,549
- capital expenditure		0		2,717		1,917		2,527
Effect on net borrowing		602		-2,303		165		1,006
Net change in revenues		-3,392		-8,658		-11,113		-10,583
Net change in expenditure		-3,994		-6,355		-11,278		-11,589
- current expenditure		-2,476		-4,203		-8,431		-9,209
- capital expenditure		-1,518		-2,151		-2,847		-2,381

Among the different budget aggregates, the measures adopted entail a net reduction of expenditure growing over time and equal to approximately €4 billion in 2012, €6.3 billion in 2013, €11.3 billion in 2014, and €11.6 billion in 2015. In qualitative terms, the reduction mostly effects current expenditure, accounting on average for 70 per cent of the net correction.

The net reduction contemplated for revenues is equal to €3.4 billion in 2012, €8.7 billion in 2013, €11.1 billion in 2014 and 10.6 billion in 2015.

The 2012 measures referring to the sub-sectors of General Government are designed to rebalance the contribution (which was particularly significant for the General Government) made by various sub-sectors to ensure it is in line with the measures provided in previous years. The following table illustrates the financial effects of the 2012 budget packages, broken down between revenues and expenditures and by sub-sector.

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TABLE VI.3: CUMULATIVE IMPACT OF 2012 BUDGET PACKAGES ON GENERAL GOVERNMENT’S NET BORROWING, BY SUB-SECTOR (before netting out induced effects; in € mn)

	2012		2013		2014		2015
GENERAL GOVERNMENT		-1,990		-9,431		-9,317		-7,860
- net change in revenues		-3,304		-8,723		-10,020		-9,140
- net change in expenditure		-1,314		708		-703		-1,280
LOCAL GOVERNMENT		2,670		7,257		9,382		9,337
- net change in revenues		-10		21		-943		-1,242
- net change in expenditure		-2,680		-7,236		-10,325		-10,579
SOCIAL SECURITY FUNDS		-78		-128		100		-471
- net change in revenues		-78		45		-150		-201
- net change in expenditure		0		173		-250		270
TOTAL		602		-2,303		165		1,006

Revenue measures

The 2012 measures incorporate a total net reduction of the revenue in each year of the forecast period. The change mostly reflects the effects of the measures outlined in the Decree-Law approved prior to the summer, which accounts for €3.4 billion in 2012, €6.8 billion in 2013, €10.2 billion in 2014 and €10.3 billion in 2015, and to a lesser extent, the provisions of the 2013 Stability Law which determine approximate net reductions of €1.9 billion in 2013, €880 million in 2014 and €280 million in 2015.

The measures for reducing fiscal pressure are specifically aimed at supporting consumption and household disposable income, supplying incentives to the productive system, and favouring employment, in particular with respect to young people and smaller companies, and even more so, if the companies are operating in the Regions of southern Italy.

With reference to consumption, the Decree-Law defers the two-percentage-point increase in ordinary and reduced value-added-tax (VAT) rates to 1 July 2013 and through 31 December 2013, with a net effect of €3.3 billion in 2012, €6.6 billion in 2013 and €9.8 billion per year for 2014 and 2015. The measure is strengthened by a provision in the 2013 Stability Law that eliminates a one-percentage-point increase in the ordinary VAT rate for 2013 and completely eliminates the increase planned for reduced VAT starting from 2014 (with a revenue decrease equal to approximately €4.4 billion in 2013 and €2.3 billion per year for 2014 and 2015). In favour of households, the 2013 Stability Law increases deductions for dependent children, with the beneficial effects thereof equal to approximately €900 million in 2013, €1.3 billion in 2014 and €1.2 billion in 2015; the law also provides an incentive for productivity in businesses, by allowing the extension of the tax relief on productivity contracts (for an amount equal to €950 million in 2013, €1 billion in 2014 and €200 million in 2015). In order to encourage employment, IRAP deductions are to be raised for (i) workers hired on permanent contracts in the southern Regions (with an additional increase if used for workers under the age of 35) and (ii) companies classified as ‘small’ in relation to the value of the taxable base. The total reduction of revenue arising from the relief measures is €860 million in 2014 and just over €1 billion in 2015.

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Among measures providing for revenue increases (almost all of which are contained in the Stability Law), roughly one-half of the revenue comes from the introduction of stamp duties on financial transactions (Tobin tax) and from the stabilization of the increase in fuel excise taxes. The total effect of the two measures is equal to €2.1 billion in 2013 and €2.3 billion per year in 2014 and 2015. Another €800 million in 2013, €1.2 billion in 2014 and €800 million in 2015 will come from the increase in technical reserves for insurance companies, and from the non-deferral (five years) of the recognition of incremental values consequent to the realignment of the tax and book values of goodwill and other intangible assets derived from business combinations, mergers and divestitures.

Spending measures

The measures contained in the 2012 budget packages will determine net total structural expenditure reduction that increases over the forecast period and is equal to more than €11 billion in 2015. The corrective measures impact all sectors of the public administration, and are based on an approach, already used with resolve by the Government in previous years, which aims to reinforce the effectiveness and efficiency of public expenditure.

In this regard, the Decree-Law, in referring to the public administrations’ purchases of goods and services, has provided for reinforcing the centralized procurement system for several categories of goods, as well as the nullification of the contracts signed in violation thereof. The projected reduction of expenditure from these measures is calculated on the basis of the statistical comparison of the operating costs sustained by various administrations. In order to support the reorganization of administrative units, the measures call for the downsizing of both managerial resources and the General Government work force (by a minimum of 20 per cent and 10 per cent, respectively), while a limitation on personnel turnover has been renewed for fire-fighters, the police force, universities and research entities (these measures should produce total savings that increase over time to get to more than €700 million in 2015). Specific parameters of reference have been defined in terms of floor space/employee in order to promote better use of public housing and to reduce the rental costs.

The targeted savings for General Government (equal to €1.5 billion for 2013 and 2014 and €1.6 billion starting in 2015) were assigned through the Decree-Law enacted in mid-2012, and are pursued through the measures that each Ministry indicated for the draft of the 2013 Stability Law or, alternately, via linear reduction of the appropriations capable of being reshaped.

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TABLE VI.4: IMPACT OF DECREE-LAW NO. 95/2012 ON GENERAL GOVERNMENT’S NET BORROWING (before netting out induced effects; in € mn)

	2012		2013		2014		2015
FREEING OF FUNDS		4,568		10,839		11,559		12,073
Incremental revenues		0		72		0		0
Expenditure cuts		4,568		10,767		11,559		12,073
Expenditure cuts by Ministries		0		1,528		1,574		1,649
Contribution of Regions, Provinces and Municipalities		2,300		5,200		5,500		5,775
Reduction of financing to National Healthcare System		900		1,800		2,000		2,100
Expenditure cuts in public procurement		141		615		615		615
Reduction of long-term contributions fund		500		500		400		400
Reduction of financing to entities and research entities		153		410		410		410
Measures affecting public employment
(including turnover for fire-fighters and police force)		107		319		665		730
Other		467		394		394		393
USE OF RESOURCES		3,966		10,823		11,532		11,445
Decrease in revenues		3,392		6,837		10,237		10,300
Reduction of VAT rates		3,280		6,560		9,840		9,840
Other		112		277		397		460
Incremental expenditure		574		3,986		1,295		1,145
Tax credits on mortgage amortisation for reconstruction in Emilia Romagna		0		450		450		450
Earthquakes		0		550		550		0
Measures to support road haulage		0		400		0		0
International peacekeeping missions		0		1,000		0		0
Protected workers within pension reform		0		0		190		590
Fund for urgent and non-deferrable initiatives		0		658		0		0
North Africa emergency requirement		495		0		0		0
Taxpayer-designated charitable donations deducted from taxes paid (.005)		0		400		0		0
Other		79		528		105		105
IMPACT ON NET BORROWING		602		16		27		627

Additional savings are expected from the provisions for local governments and the healthcare sector. The revision of the targets assigned to Local Governments with the Domestic Stability Pact and the reduction of Treasury resources accruing to them as initially provided by the Decree-Law (€2.3 billion in 2012 and more than €5 billion starting in 2013) has been rounded out by the Stability Law’s measures (€2.2 billion per year for the 2013-2015 period). Amongst other things, the latter measures stipulate a rebalancing of the burden between Regions and Municipalities, providing for a reduction of the percentage applied for the purpose of calculating financial balance targets to be achieved for 2013 for those Municipalities with a population of less than 5,000.

In the healthcare sector, the measures adopted aim to ensure more efficient resource management, especially for pharmaceutical expenditure, where the mandatory discount applied to the National Healthcare Service (NHS) has been increased, the ceiling for Regional pharmaceutical assistance has been cut, and the ceiling for hospital pharmaceutical expenditure has been redetermined. More specifically, a 10-per-cent price reduction for the purchase of goods and services is provided for the entire duration of the contracts (with pharmaceuticals and

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medical devices excluded), while the expenditure ceiling for medical devices has been cut with respect to the previously set levels. These provisions should lead to total savings of €900 million in 2012, €2.4 billion in 2013 and approximately €3 billion per year for 2013 and 2014.

Part of the savings obtained will be used for financing investments that principally regard initiatives to support healthcare infrastructure, certain non-deferrable expenditures related to reconstruction efforts in areas affected by recent natural disasters, and the expansion of the number of persons classified as ‘protected’ within the most recent pension reform.

Key initiatives include the financing of reconstruction efforts related to the earthquakes in Emilia Romagna (€550 million per year for 2013 and 2014), international peacekeeping missions in 2013 (€1 billion), and the expansion of number of persons classified as ‘protected’ within the most recent pension reform for an amount of €190 million in 2014 and €590 million in 2015. Investiments are planned for ensuring the continuity of extraordinary maintenance work and other works in process for the railway and road networks, the continuation of the construction of the MO.S.E Project to protect Venice from floods, and the design, construction and operation of the new Turin-Lyon rail link, to a total amount of just over €500 million in 2013, €740 million in 2014 and €1.1 billion in 2015. The use of resources (a total of €800 million in 2013, €1.1 billion in 2014 and approximately €890 million in 2015) has also been authorised for: setting up a fund to pay lease payments for public buildings transferred to real estate funds; increasing of the fund for social-policy initiatives, for persons who are not self-sufficient, for scholarships and waste disposal services for the City of Aquila; and the financing of the funds related to international aid initiatives underwritten by Italy.

Finally, the incremental expenditure covers the creation of a fund for financing charges for local public transportation. The resources for the fund will come from excise taxes on gasoline and diesel fuel, which will be subdivided among the Regions based on efficiency-related criteria. All financial resources previously earmarked by the State for this purpose (with the elimination of the related funds counted as part of expenditure cuts) will flow into the new fund, with a net increase per year of approximately €450 million compared with the resources appropriated before the reorganisation.

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TABLE VI.5: IMPACT OF 2013 STABILITY LAW ON GENERAL GOVERNMENT’S NET BORROWING (before netting out induced effects; in € mn)

	2013		2014		2015
FREEING OF FUNDS		10,290		10,980		10,547
Incremental revenues		4,505		5,425		4,955
Stamp duties on financial transactions		1,004		1,215		1,202
Stabilisation of increase in fuel excise taxes		1,107		1,107		1,107
Increase in technical reserve provisions for insurance companies		623		374		374
Reduction in tax relief on purchase of company cars		412		549		532
Non-deferral of the substitute tax system		200		846		423
Increase in single state tax - elimination of stamp-duty exemption on penal certificates - VAT on cooperative services		305		458		458
Reduction in tax benefits on diesel fuel for farmers		154		100		100
Other		700		777		759
Expenditure cuts		5,785		5,555		5,592
Streamlining of healthcare expenditure		600		1,000		1,000
Spending cuts for Regions, Provinces and Municipalities		2,200		2,200		2,200
TPL Fund - abolition of Chapter 2817 and 2802 MEF		1,135		1,157		1,093
Current expenditure cuts by Ministries (Decree Law no 95/2012)		16		-1		-1
Other		1,834		1,199		1,300
USE OF RESOURCES		12,609		10,843		10,168
Decrease in revenues		6,397		6,302		5,238
Deferral of increase in VAT rates		4,442		2,324		2,324
Extension of tax relief for labour productivity		950		1,000		200
Increase in tax deductions for dependent children		939		1,341		1,206
Reduction of regional tax on productive activity (IRAP) via lump-sum deductions for hiring of permanent workers		0		862		1,014
Fund for exclusion of IRAP for persons without a business organisation		0		188		252
Other		66		586		242
Incremental expenditure		6,212		4,541		4,931
Fund for building rents		249		847		590
Tax credit for road haulage contractors		159		212		212
Fund for financing TPL		1,600		1,600		1,600
Fund for social-policy initiatives, for persons not self-sufficient and City of Aquila - waste disposal		260		0		0
Smaller budget contribution by Local Government, incentive-based stability pact, and municipal solidarity fund		600		0		0
Extraordinary maintenance of rail network		250		300		300
Extraordinary maintenance of road network		200		100		0
Construction of MOSE system		45		200		253
Turin - Lyon rail line		20		140		550
Multilateral development funds and global fund for the environment		295		295		295
Other		2,534		847		1,131
IMPACT ON NET BORROWING		-2,319		137		379
- Total expenditure cuts by Ministries (Decree Law no 95/2012)		16		-1		-1
- Total effects of 2013 Stability Law		-2,335		139		380

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INDICATIONS FOR FUTURE YEARS

With the cyclical phase still unfavourable, the achievement of the budget balance and the respect of financial stability will need to be rounded out by measures to support and relaunch growth and employment.

In moving in this direction, in April 2013, the Government approved an urgent provision capable of injecting liquidity into the economic system, through authorising the payments of the Public Administration’s commercial debts as of 31 December 2012³.

The Government’s action draws on the recent acknowledgement by European leaders of the need for differentiated fiscal consolidation that permits some controlled flexibility in actions to favour growth and employment. The measure is acknowledged as extraordinary, and does not alter the substantial stability and sustainability of the financial framework.

The measures adopted allow for injecting a total of approximately €40 billion of new liquidity into the economic system over the 2013-2014 two-year period, which will cause the borrowing requirement to increase by approximately €20 billion in each of the two years (Table VI.6A). In terms of net borrowing, the impact is more modest because of the different ways in which the planned initiatives are implemented. More specifically, the €7.5 billion deficit increase in 2013 (0.5 per cent of GDP) refers to the payment of debts for capital expenditures.

The measures implemented regard the General Government, Regions, Provinces and Municipalities, and NHS Entities, and apply differently depending on the segment and the type of debt to which they refer.

The 2014 Stability Law could further reinforce the measures provided in the decree-law, with the assignment of Government securities to settle the PA’s trade debts in case the creditors have transferred their receivables to banks or financial intermediaries. Any such initiative would be planned in respect of public finance objectives established in the planning documents, and would be subject to agreement of the European authorities and deliberation in Parliament.

As far as the borrowing requirement of the public administrations is concerned, the most significant part of the urgent provision adopted in April regards Local Government. The Regions, Provinces and Municipalities will be able to order incremental payments, for sums not related to healthcare, in the amount of €12.2 billion in 2013 and €7 billion in 2014. The NHS entities will instead be able to make use of incremental resources totalling €5 billion in 2013 and another €9 billion in 2014 for the payment of their commercial debts. For the General Government, some €2.5 billion in 2013 and €4 billion in 2014 will be made available for accelerating the payment of past tax refunds, and another €500 million in 2013 for the payment of debts related to supplies and public tenders.

In terms of net borrowing, the Local Government accounts for €7.2 billion of the increased deficit, with the General Government accounting for €300 million.

With reference to the Regions, Provinces and Municipalities, the provision allows for some easing of the constraints within the Domestic Stability Pact, allowing the exclusion from the target balance of Municipalities’ and Provinces’

³  Decree-Law no.35/2013.

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certain and liquid capital account payments collectible as of 31 December 2012 (€5 billion in 2013). For this purpose, such entities may use resources already available in the budget (prior-year surpluses). The Regions’ payments of the same type of debts are excluded from the Domestic Stability Pact (€1.4 billion in 2013).

In order to favour the transfer of liquidity to the Provinces and Municipalities, the Regions’ payments of residual current liabilities due to the Provinces and Municipalities will be excluded from the constraints of the Domestic Stability Pact.

In the case of Regions, Provinces and Municipalities that do not have sufficient liquidity to make the payments (whether capital account payments arising from the easing of the Domestic Stability Pact’s constraints or past debts for current expenditure), the Decree provides for the creation of a special fund for the General Government’s granting of loans. For the 2013-2014 period, such advances can be for up to €4 billion for Provinces and Municipalities and up to €8 billion for the Regions and Autonomous Provinces.

The aforementioned fund will also provide advances to NHS entities for accelerating the payments of the past-due debts as of 31 December 2012, in relation to current expenditure, for a total of €14 billion (€5 billion in 2013 and €9 billion in 2014). The rules also provide for certain structural measures for defining direct mechanisms to prevent future delays within the payments system, with the setting of strict constraints on the Regions’ management of the liquidity earmarked for financing the NHS.

The advances made to the Regions, Provinces and Municipalities, inclusive of those in favour of the NHS, are to be repaid, with interest thereon, over a 30-year period. The principal amounts repaid by the entities are to be earmarked for the amortization of the incremental debt coming from the collecting of the necessary resources to finance the fund.

Finally, payments made by the Regions as part of national co-financing of initiatives realized with the contribution of European structural funds will also be excluded from the Domestic Stability Pact’s constraints for an amount of €800 million in 2013. This will facilitate the achievement of the spending objectives outlined by regional programmes co-financed by the European Union for 2007-2013, guaranteeing significant improvement of the capacity to draw on the structural funds available for the 2012-2014 three-year period.

Additional resources (€500 million in 2013) have also been provided for General Government to cover payment of commercial debts contracted by the Ministries for trade accounts due as of 31 December 2012 in relation to supplies and public tenders. For any portion of the debts that is not settled and with a view toward preventing the accrual of more debts, the General Government will be required to come up with special measures for reorganizing and streamlining expenditure.

The Government has also reprogrammed fiscal reimbursements, with acceleration of payment of tax refunds and increased offsetting regarding tax credits earned in prior years (due to an increase in the offsetting limits). Incremental payments of €6.5 billion have been provided for this purpose, including €2.5 billion in 2013 and €4 billion in 2014. Finally, it will be possible for taxpayers to offset certain, liquid, and enforceable receivables that have not legally expired as of 31 December 2012 due from the public administrations in

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relation to supplies and tenders, with the sums due following insolvency proceedings arising from tax disputes.

TABLE. VI.6A: IMPACT OF DECREE-LAW NO.35/2013

(before netting out induced effects; in € mn)

	2013		2014		2015
Borrowing requirement		-20,000		-19,400		190
% of GDP		-1.27		-1.19		0.01
Net borrowing		-7,500		600		570
% of GDP		-0.48		0.04		0.03

TABLE. VI.6B: IMPACT OF DECREE-LAW NO. 35/2013 ON GENERAL GOVERNMENT’S NET BORROWING

(before netting out induced effects; in € mn)

	2013		2014		2015
Gross budget measures		207		607		577
Incremental revenues		200		600		0
Expenditure cuts		7		7		577
- current expenditure		7		7		321
- capital expenditure		0		0		256
Measures		7,707		7		7
Decrease in revenues		7		7		7
Incremental expenditure		7,701		1		0
- current expenditure		1,901		1		0
- capital expenditure		5,800		0		0
Impact on net borrowing		-7,500		600		570
Net change in revenues		194		594		-7
Net change in expenditure		7,694		-7		-577
- current expenditure		1,894		-7		-321
- capital expenditure		5,800		0		-256

TABLE. VI.6C: IMPACT OF DECREE-LAW NO.35/2013 ON GENERAL GOVERNMENT’S NET BORROWING BY

SUB-SECTOR (before netting out induced effects; in € mn)

	2013		2014		2015
GENERAL GOVERNMENT		-300		600		570
- net change in revenues		194		594		-7
- net change in expenditure		494		-7		-577
LOCAL GOVERNMENT		-7,200		0		0
- net change in revenues		0		0		0
- net change in expenditure		7,200		0		0
SOCIAL SECURITY FUNDS		0		0		0
- net change in revenues		0		0		0
- net change in expenditure		0		0		0
TOTAL		-7,500		600		570

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TABLE. VI.6D: IMPACT OF KEY MEASURES OF DECREE-LAW NO. 35/2013 2012 ON GENERAL

GOVERNMENT’S NET BORROWING (before netting out induced effects; in € mn)

	2013		2014		2015
INCREMENTAL RESOURCES		207		607		577
Incremental revenues		200		600		0
including:
Increase in value-added taxes		0		600		0
Expenditure cuts		7		7		577
including:
Reduction in spending appropriations that can be reshaped		0		0		570
USE OF RESOURCES		7,707		7		7
Decrease in revenues		7		7		7
Incremental expenditure		7,701		1		0
including:
Easing of Domestic Stability Pact for Provinces and Municipalities		5,000		0		0
Domestic Stability Pact: Regions and Autonomous Provinces:
Acceleration of transfers to Provinces and Municipalities and payments to suppliers		1,400		0		0
National co-financing of EU structural funds – exception to Domestic
Stability Pact		800		0		0
Payment of General Government debts – increase in fund for settlement of General Government’s trade debts		500		0		0
IMPACT ON NET BORROWING		-7,500		600		570

FOCUS

Macroeconomic impact of fiscal consolidation measures adopted in 2012

The starting point for an analysis of the macroeconomic impact of fiscal consolidation measures adopted in 2012⁴ is a basic simulation that generates a profile for the various aggregates based on unchanged legislation⁵. The framework of the exogenous variables for public finance is then modified by incorporating the measures adopted into the model and simulating this new scenario. The comparison between the results of the two simulations makes it possible to estimate the impact of the measures on GDP and other aggregates.

Based on the simulations done, the overall macroeconomic impact of the two budget laws is reported in the table. The difference between the rates of the annual percentage change obtained by taking into account the budget packages and the base simulation rates is reported for each aggregate. The simulations done show that the approved measures produce practically no effect on the level of economic activity and employment.

However, the impact is not neutral with respect to the mix of domestic demand. On the one hand, domestic demand is directly impacted by reduction of public expenditure (both in terms of public consumption and in terms of investment); on the other hand, it benefits from the positive effects on consumption of the increase in tax deductions for dependent children and the easing of the planned VAT rate increase. When compared with the base scenario, the lower increase in VAT rates will also cause a decrease in inflation for the period considered.

⁴ In 2012, the main fiscal consolidation measures are those approved with Decree-Law no. 95/2012, converted into Law no.135/2012 (Spending review) and with the 2013 Stability Law (Law no.228/2012).

⁵ The simulation was done with the Department of Treasury’s econometric model (ITEM).

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The simulations do not incorporate any possible increase in tax rates as provided by the Stability Law⁶. The impact on economic activity would certainly be negative, and the magnitude of the increase would depend on decisions by the individual municipalities, that would be difficult to project.

The macroeconomic effects are based on unchanged legislation; any deferral of the planned increase in VAT rates and/or the introduction of municipal tax on garbage and services (TARES), planned for July 2013, could generate expansive effects on the level of economic activity in 2013.

MACROECONOMIC IMPACT OF FISCAL CONSOLIDATION MEASURES

Differences in the percentage rate of change	2013		2014		2015
GDP		0.0		-0.1		0.1
Private consumption		0.2		0.3		0.2
Public consumption		-0.5		-0.5		-0.2
Investment		-1.1		-1.2		-0.3
Exports		0.0		0.1		0.1
Imports		-0.2		0.0		-0.1
Employment		0.0		0.0		0.0
Private consumption deflator		-0.5		-0.2		-0.1

Finally, it should be emphasised that improving the efficiency of public expenditure will probably have positive long-term growth effects that are not captured by econometric models and extend well beyond the models’ projection horizon.

⁶ The 2013 Stability Law provides that Municipalities may increase the property-tax (IMU) rates on buildings for productive use by 0.3 percentage points.

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FOCUS

The fight against tax evasion

In recent years, tax authorities have achieved encouraging results in their efforts to fight tax evasion and tax fraud: more than €32.0 billion of incremental tax revenues were ensured to the Treasury during the 2009-2011 three-year period and, on the basis of initial indications, another €12.5 billion were collected in 2012.

In order to provide another impulse to the fight against tax evasion, and to round out the measures already outlined in 2011⁷, the ‘Task Force for the Fight Against Tax Evasion’ set up by Prime Minister Monti carried out its activity in 2012. Additional directives that were issued in March 2012 not only simplified tax laws, but they also made the fight against evasion even more prominent⁸.

In April 2012, the Cabinet approved a legislative bill containing a mandate for revision of the tax system. The bill is aimed at continuing the activity to fight tax evasion and tax avoidance, and at reordering tax erosion⁹.

For this purpose, the bill has provided for defining the methods for estimating tax evasion and for monitoring the results of the fight against evasion. The reporting refers to all major taxes, and is based on comparisons between national accounting data and data acquired through the tax registry. The results are calculated and published on an annual basis. As part of the budget process, the Government prepares an annual report on the strategy followed and the results achieved¹⁰.

⁷ In 2011, measures to fight tax evasion were initially outlined in the financial package approved during the summer (Decree-Law no. 98/2011, converted by Law no. 111/2011 and Decree-Law no. 138/2011, converted by Law no. 148/2011) and later, in the month of December (Decree-Law no.201 converted by Law no.214/2011).

⁸ Decree-Law no. 16/2012 referring to ‘Urgent measures on the subject of taxation simplification, making taxation more efficient, and strengthening tax audit procedures’

⁹ The bill was presented to the Lower House (A.C. 5291) on 15 June 2012, and was examined from 11 September to 9 October 2012 by the Commission VI, where numerous parts of the original text consisting of 17 articles were amended, and the bill ended up with 4 articles. The bill was then approved by the Lower House with a confidence vote on 12 October 2012, and was sent to the Senate on 16 October 2012 (A.S. 3519).

¹⁰ Article 2, Paragraph 4,5 A.S. 3519.

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The legislative bill also contemplates the building of better relationships between the tax authorities and taxpayers. Forms of increased communication and cooperation between firms and tax authorities are to be defined. In the case of large business, structured corporate systems are to be delineated for management and control of taxation risk, with clear assignment of responsibility within the overall internal controls system. Incentives, including the relaxation of certain formalities and the reduction of possible penalties, will be provided for the taxpayers who elect to use such tools. In the case of smaller businesses and self-employed individuals, taxpayer assistance services (including, for example, tax return preparation and computation of taxes) will be reviewed and expanded in order to ensure better compliance with tax law¹¹. Finally, the bill calls for defining principles and criteria to be pursued in order to reinforce audit initiatives, in particular through targeted audits carried out with the participation of other public authorities. The revision of the laws and regulations should also result in more widespread use of electronic invoicing and payment systems subject to tracking, and reinforced international cooperation¹².

As provided by the Stability Law for 2013-2015¹³, starting in 2013, the Economic and Financial Document will report the value, in relation to the previous year, of the incremental structural revenues actually collected from the activity to fight tax evasion, while the Update to the Economic and Financial Document will include a report about the results of the tax-evasion prevention measures¹⁴.

With reference to international cooperation, Italy, France, Germany, the UK, Spain and the United States have defined the Model Intergovernmental Agreement with the common objective of intensifying the fight against international tax evasion and adopting an intergovernmental approach for the application of the. Foreign Account Tax Compliance Act (FACTA). The Model Agreement represents an important step in the effort to fight international tax evasion through the automated exchange of information. Indeed, with the bilateral agreements that are to be signed on the basis of the Model Agreement, specific data that financial institutions report to their respective tax authorities will be automatically exchanged in both directions between the United States and the other countries, in accordance with existing agreements against double taxation. This will eliminate the need for the financial institutions involved to enter into separate contractual agreements with the U.S. tax authorities. The aforementioned countries will continue, in close cooperation with other countries, the OECD and the European Union, to promote the automated exchange of data and to work on common reporting principles and the application of due diligence standards as tools for coming up with a broad-based, global approach to the effective fight against international tax evasion, while keeping the burden of compliance to a minimum level. In May 2012, a bilateral working group was set up between the Ministries of Finance of Italy and Switzerland with the objective of studying financial and taxation matters.

¹¹ Article 3, Paragraphs 2,3,4,and 5 A.S. 3519.

¹² Article 3, Paragraph 11, A.S. 3519.

¹³ Article 1, Paragraphs 299 and 300, Law no. 228/2012

¹⁴ Such report will need to indicate the strategies for fighting evasion and the comparison of the results with the planned objectives.

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FOCUS

Italian public development aid

Over the next four years (2014-2017), the Government plans to consolidate the actions needed for gradually realigning Italy to the international standards for development cooperation (OECD average), with the objective of improving the quality and quantity of public development aid (PDA). This will allow Italy to raise its international profile, to establish a presence in strategic areas, to meet standards of excellence, and to enjoy comparative advantages.

Based on unchanged legislation, the estimates for 2013 provide for PDA equal to 0.15-0.16 per cent of gross national income, with an upturn with respect to 2012 (0.13 per cent). The following schedule has been outlined for 2014-2017: 2014 PDA (0.18-0.20 per cent); 2015 PDA (0.21-0.24 per cent); 2016 PDA (0.23-0.27 per cent), and 2017 PDA (0.28-0.31 per cent).

In order to achieve such targets, government measures will need to concentrate on the quantity and quality of the annual appropriations, and in particular, through:

• Ongoing reorganisation and streamlining of expenditure for development cooperation, including through action designed to reform legislative provisions that govern cooperation, based on principles of unity of action and operation together with Parliament;

• Confirming a gradual annual increase of at least 10 per cent in the appropriations provided by Law no. 49 of 1987, on the basis of the amounts available for 2013;

• Refinancing of development funds (in particular, the IDA and African Development Fund), whose negotiations terminate at the end of 2013.

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VII.1 BALANCED BUDGET IMPLEMENTATION RULE

During the 2012 the process of bringing the national legislative framework in line with the most recent EU policies and the relevant regulations on fiscal and budgetary rules continued, consistently with the provisions of the Fiscal Compact (the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union), required the introduction of the balanced budget rule as a national legal provision.

The introduction of this rule follows up on the commitment undertaken by the Italian Government in March 2001 as part of the Euro Plus Pact and the more stringent budgetary constraints introduced by the Six Pack in October 2011.

With a view to transposing EU regulations, in addition to the ratification of the Fiscal Compact, Parliament also adopted two specific legislative measures. The first one is a Constitutional law adopted in April 2012, which introduced a balanced budget rule in the Constitution, in compliance with EU legislation which the constitutional provision clearly refers to, according to the State ensures that the revenues and expenditure of its budget are balanced, allowing for the upturns and the downturns of the cycle¹, and that its debt is sustainable. Moreover, additional provisions have been adopted for both central and decentralised levels of government to facilitate the achievement of the fiscal objectives. More specifically, as regards the fiscal discipline of local authorities, the constitutional reform explicitely mentions that reliance on borrowing is allowed only if needed to finance investment expenditure, at the same time amortization plans are envisaged and the balanced budget rule for the overall local authorities (taken together) of each Region is complied with.

The second measure, introduced through a law adopted by an absolute majority of the members of each House of Parliament in December 2012², lays down the implementation of the principles adopted in the constitutional reform and has envisaged regulations to strengthen the framework of fiscal and budgetary rules, explicitely mentioning, among other things, the ways in which fiscal performance is to be monitored, how the correction mechanism has to work in case of variance from the structural balanced budget target, and the definition of exceptional events which allow variance from the policy objective.

In the new regulatory framework, the balanced budget rule is in line with EU legislation provisions in structural terms and requires the Government to secure the achievement of at least the medium-term objective (MTO), and in any case

¹ L. Cost. No. 1/2012.

² L. No. 243/2012.

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compliance with the path to progressively move towards that objective as of 2014. Forecast values are therefore ex ante values in the planning documents and actual compliance with them is assessed ex post.

Among the fiscal objectives special attention is paid to the public debt criterion, which is explicitely emphasized among the objectives set out in the planning documents. More specifically it has been envisaged that in case of under performance with respect to the European benchmark (60 per cent of GDP), when budgetary objectives are setting, allowance should be made for the need to secure that any variation with respect to benchmark figures should be reduced as envisaged by European regulations.

The fiscal rule framework is further strengthened by a rule on general government expenditure. More specifically, the forecasted yearly rate of expenditure growth cannot exceed that envisaged for complying with European rules (expenditure benchmark) and the financial planning and budgetary documents must state the level of general government expenditure that is compatible with this constraint for the three-year period considered³.

Exceptions to the balanced budget rule are explicitely envisaged by the relevant regulations as the possibility of temporary variance from the structural policy objectives only in cases of : i) serious economic recession ; ii) extraordinary situations, beyond the government’s control, including serious natural disasters, with significant repercussions on the country’s the general economic situation. With a view to avoiding a discretional use of this exception, it has been envisaged that any temporary variance from objectives, due to efforts to cope with the above-mentioned situations, may be allowed upon the Government’s request, after consulting the European Commission, and subjected to authorization given by an absolute majority vote of the two Houses of Parliament. As Government submits a request to that effect, the fiscal objectives shall be revised and a plan to cut expenditure to achieve the policy objective shall be set out in a report to be submitted to Parliament.

Greater focus is given to fiscal monitoring and surveillance: the Government is now required to inform Parliament of any risk of variance from the policy objectives with respect to the general government consolidated account or the structural balance, and at the end of the year the Court of Auditors audits the financial statements of Regions and local authorities, as well as general government bodies other than regional or local authorities.

Finally, specific mechanisms defined at EU level have been envisaged if significant variances of fiscal performance from the policy objectives, which may undermine efforts to achieve the medium-term objective in the following financial years, are found ex post. In this case, the Government has to state the causes as well as the corrective measures it intends to adopt to bring the structural balance back in line with the MTO figure. Measures will have to be developed for the various levels of general government, also with regard to the margin for overshooting that they may be allowed.

With a view to outlining the special provisions of each level of government and the tasks they are responsible for as part of the Italian institutions, the

³  For a thorough analysis of the implementation of the rules see Chapter 3.

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balanced budget rule and the sistem of fiscal rules is set out in further detail. Similarly to what has been envisaged for all general government bodies, the balanced budget rule for the State is set in structural terms and envisages that the figure of the net balance to be financed or used (referred to as the difference between final revenues and expenditure) each year, must be in line with the policy objectives set in the planning documents. Conversely, the balanced budget rule is applied to regional and local authorities in nominal terms. For these bodies a budget is considered in equilibrium when it is balanced, both on a cash and an accrual basis, according to two parametres: i) the balance between the final revenues and final expenditure; ii) the balance between current revenues and current expenditure, including the capital share of amortisation of loan instalments. These bodies can still resort to borrowing for investment spending, provided that an amortization plan is drawn up and the overall total of budgets of the local authorities in each Region is balanced.

In order to ensure the necessary coordination among the various government tiers and to achieve the debt and borrowing reduction targets assigned , it has been envisaged, with criteria similar to those for the State, that additional contributions may be asked of the regional and local authorities, on top of those envisaged for compliance with the balanced budget rule. In addition, during downturns and in exceptional cases, the State may contribute to funding essential services and basic benefits relating to civic and social rights provided by other levels of government as a proportion of decentralised agencies’ own revenues affected by the economic cycle. In exchange, these bodies that had to resort to borrowing, will be asked to contribute to the reduction of public debt during upturns, to an extent that will depend on their share of revenues that is sensitive to the cycle.

As regards the Government budget, the reform, (which will have to be further detailed with the relevant changes to be made to ordinary accounting and fiscal laws) is aimed at strengthening its allocative and planning function. To this end, the budget law has now substantial nature (while earlier it could not order changes to the existing legislation) and the contents of the current Stability Law has become a part of the budget law. This facilitates a more thorough analysis of the whole extent of the government budget, instead of only the measures introduced by the package adopted at the end of the year; it also highlights alternative uses of public funds that may be ordered within the limits of the budgetary constraints and in line with the broader net borrowing targets. To ensure the necessary level of transparency about the innovations that have been introduced, the law shall be made up of two parts: one showing year-on-year forecasts and the other containing the new legislative measures and their financial impact. The rules concerning the Regions and local authorities and the provisions concerning the Government budget shall come into force as of 2016.

Pursuant to EU provisions, a Parliamentary Budget Office has been set up within the two Houses of Parliament, a body functioning in complete independence in terms of the functions it performs and the opinions it expresses. It has its own budget and own resources which will be allocated under the relevant law with effect as of 2014. It conducts analyses, audits and assessments on: i) macroeconomic and fiscal forecasts, ii) the macroeconomic impact of the most important laws, iii) fiscal performance, also by subsectors and compliance with the budgetary rules, iv) long-term fiscal sustainability, v) the roll-out and use of corrective mechanisms and on slippages in case of exceptional situations.

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VII.2 FISCAL RULES

The new rules called for at European level and transposed into the national legislation are accompanied by other fiscal rules securing budget discipline, that already exist within the Italian fiscal governance framework; they are: the Domestic Stability Pact that defines how Regions and Local Government authorities shall contribute to achieving the fiscal objectives, and the Healthcare Pactand pharmaceutical expenditure ceilings.

The Domestic Stability Pact⁴ defines specific constraints that the Local Government authorities must comply with, together with information, communication and certification requirements vis-à-vis the Ministry of the Economy and Finance, and a system of sanctions in case of failure to comply. The Pact envisages a clear rule in terms of budget balance⁵ for Municipalities and Provinces and a constraint on the nominal growth of final expenditure for Regions.

With the Stability Law for the 2013-2015 period ⁶ the objectives of the Domestic Stability Pact and the transfers to Local Government authorities, as envisaged by the spending review measures, remain unchanged. A significant novelty is represented by the update of the baseline figure to calculate the objective, obtained by calculating the average of current expenditure commitments recorded over the 2007-2009 period. By updating the above baseline figure another element to assess the virtuosity of Local Government authorities has been introduced: the Local Government authorities that cut current expenditure commitments in financial year 2009 were assigned a less stringent objective compared to that of other Local Government authorities, which, instead, recorded an increase in current expenditure for that year. The Stability Law 2013 has confirmed that, starting from 2013, the Domestic Stability Pact also applies to Provinces and Municipalities with a population of more than 5,000 inhabitants, as well as Municipalities with a number of residents ranging between 1,001 and 5,000. As from 2014 the Domestic Stability Pact shall also apply to the

⁴. The Domestic Stability Pact was introduced by Art. 28 of the additional package of the Financial Law 1999. The Pact underwent a series of reforms over the years until the redrafting of its rules in 2008 as the 2009-2011 three-year plan to balance the budget was introduced (Decree Law No.112/2008, confirmed as converted by Law No. 133/2008, Article 77-bis). On that occasion various mechanisms were introduced to reward ‘virtuous’ entities: these mechanisms were based on two economic indicators relating to the degree of structural rigidity and financial independence, as well as more effective sanctions in case of failure to comply.

⁵. For the purpose of determining the specific programmed target, the financial balance between final revenues and final expenditures (net of revenues from credit collections and expenditure for granting of loans) is again proposed as the Domestic Stability Pact’s parameter of reference. Such balance is computed on a mixed-accrual basis (i.e. assuming ascertained revenues and spending commitments for the current part, and collected revenue and payments for the capital account). For 2012, 2013 and the years thereafter, the target financial balance is obtained by multiplying average current expenditure for the 2006-2008 three-year period, reported in terms of commitments as stated in the final accounts, for a fixed percentage. More recent amendments have essentially provided for exclusion of revenue and expenditure items from the computation of the targets, mostly to facilitate the realisation of public investment at a local level and to cover extraordinary events.

⁶ Law No. 228/2012.

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Unions of Municipalities with up to 1,000 inhabitants and, as soon as the relevant provisions are implemented through a inter-ministerial decree, it shall also apply to special enterprises, institutions and and in-house companies directly entrusted with the management of local public services.

As regards the regime of exceptions, the provisions of the Domestic Stability Pact 2013 introduced some changes to the previously existing framework, envisaging further exeptions for the funds coming from the special accounting of the Regions hit by the earthquake of 20 and 29 May 2012 and the costs paid through their own resources, coming from voluntary contributions and donations from private individuals and Local Government authorities affected by the same earthquake. Still excluded from the calculation of the financial balance are: i) items concerning resources coming directly or indirectly from the European Union, related to the call for emergency status, II) items relating to the expenditure sustained by the State for the management and maintenance of assets transferred by federal State property allocation and III) part of the expenditure for the infrastructure investment of Local Government entities, limited to 2013 and 2014.

To strengthen the consolidation process and to reduce the debt-to-GDP ratio, as already provided for by budgetary rules already in force⁷, the mechanism to curb the nominal rate of growth of local authorities’ debt has been confirmed. Local authorities may take on new long-term secured loans and may source other forms of financing through the market only if their annual debt-servicing expenditure, when summed with the charges for other financial obligations outstanding⁸ , does not exceed the limit of 6 per cent in 2013 and the 4 per cent from 2014, with respect to the first three revenue items in accounting statements made two years prior to the year in which loans are expected to be taken out . Furthermore, as from 2013, Local Government entities will have to reduce the magnitude of the public debt. The procedures for reaching the debt reduction target are to be outlined by decree of the Ministry of the Economy and Finance, following consultation with the Joint Conference. Some of the sanctions foreseen in the case of non-compliance with the Domestic Stability Pact will be applied to entities failing to reduce their debt, including, for example, limitation on current expenditure and personnel hiring. In order to meet the saving targets of ordinary statute Regions, the rule of checking final expenditure, introduced as of 2002, will continue to be applied. In line with the previous three-year period, distinct targets have been set with regard to the financial accruals basis and the euro-compatible accruals basis; the latter was introduced in 2013 with a view to bringing the definition of objectives into line with the ESA95 methodology. Healthcare expenditure, which is governed by specific regulations, is not included in the calculation nor is expenditure for granting loans; similarly, current and capital expenditure for programmes co-funded by the European Union, for the part related to EU funds, are excluded from the calculation. A substantial part of the exclusions envisaged by the Stability Law 2012 remains unchanged ⁹.

⁷ Law No. 183/2011, Article 8

⁸ Charges for previously contracted long-term secured loans, previously issued bond loans, credit lines and guarantees granted pursuant to Article 207 of the Consolidated Act for Local Entities, net of the state and regional interest subsidies.

⁹ Art. 32, paragraph 4, of Law No. 183 of 2011.

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In addition to the Domestic Stability Pact, among the rules concerning Regions those pertinent to the “Healthcare Pact” are emphasized as they aim at achieving proper planning of public health spending, not covered by the Domestic Stability Pact budgetary rules.

The Healthcare Pact fixes the amount of resources to be allotted to the National Health Service and is aimed at improving the quality of services by ensuring uniformity throughout the system. As part of the spending review measures, programmes have been envisaged in expenditure areas in which management inefficiencies and inadequacies in the use of resources have been found. These measures have been further strengthened by the Stability Law 2013 . With regard to expenditure for goods and services procurement, as of 2013 the following rules shall apply: (i) ten per cent cut of the amounts and corresponding volumes of the procurement of goods and services, with the possibility for Regions to achieve the expected economic and financial measures also through alternative measures, ensuring in any case a balanced health budget; (ii) a new expenditure ceiling for the purchase of medical equipment set at 4.8 per cent by 2013 and 4.4 per cent starting from 2014. Rationalisation measures of health expenditure also include a reduction in procurement from private providers for specialised outpatient and in-patient care so as to reduce spending by 0.5 per cent over 2011, by 0.5 per cent for 2012, by 1.0 per cent by 2013 and by 2.0 per cent as of 2014.

As regards pharmaceutical expenditure, the spending review measures introduced a lower ceiling for local pharmaceutical expenditure, bringing it from 13.3 per cent to 13.1 per cent in 2012. As from 2013, the ceiling has been set at 11.35 per cent. The same decree introduced – with effect from 2013 – the payback mechanism in the event that in-patient pharmaceutical costs should overshoot the expenditure ceiling.

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FOCUS

Governance of the health expenditure system

Under the Constitution, the State protects health as a fundamental right of the individual and in the intesrest of society and provide free health care to the poor ¹⁰. Under the governance system envisaged by the existing legal framework:

• the State sets minimum service levels for health care and provides the necessary funds for their delivery in conditions of efficiency and adequacy within the limits of fiscal contraints;

• the Regions organize their own health services and ensure the provision of health care.

The basis for developing the system’s governance has been provided by the State-Regions agreements since 2000 ¹¹.

In the last few years a series of regulations have been implemented in the health sector which have brought about a paradigm shift, thereby creating a system which is no longer based on the ‘so-called’ “regional expectation of deficit bridging” by the State, but on the principle of stronger accountability of both ‘virtuous’ Regions and Regions running high deficits.

As part of the 2007-2009 and 2010-2012 Healthcare Pacts, specific spendig cut plans have been envisaged for Regions with high deficits, which, under the existing regulations, shall also apply for the 2013-2015 period. With reference to the complex governance architecture that has been put in place, the following should be briefly mentioned:

• the mechanism of automatic tax rate increase in the event of a deficit arising which cannot be covered. This is in line with the principle whereby the Regions should be made accountable for complying with the balanced budget rule;

• strengthening the tools for encouraging a more responsible use of health funds by the Regions;

• the requirement envisaged by the Agreement between the Regions with high structural deficits and the State, which includes a spending cut plan for achieving an economic and financial balance and a provisional support fund to sustain those Regions implementing structural spending cut plans to cover their deficits. Individual spending cut plans identify and selectively address the causes that have brought about significant deficits, thereby working as veritable industrial restructuring plans and taking action on expenditure items that have gotten out of the Regions’ control.

The governance that has been implemented in the health sector has enabled increases in expenditure to slow down significantly in the last few years. Indeed, as against an average annual change in health expenditure equal to 7% in the 2000-2006 period, in the following period (2006-2012) the average annual change was equal to 1.4%; more specifically, both in 2011 and in 2012 a decrease in expenditure was recorded over the previous year.

HEALTH EXPENDITURE 2006 – 2012 (figures in millions of euro)

	2006		2007		2008		2009		2010		2011		2012
Health expenditure		101,754		102,220		108,891		110,474		112,526		111,593		110,842
% changes				0.5		6.5		1.5		1.9		-0.8		-0.7

This decreasing trend is expected to continue over the next few years, also as a result of the measures that are expected to be taken in this sector ¹² including, among other things, a reorganisation of the health sector also resulting from the rationalisation of hospitals .

¹⁰ Art 32 of the Constitution.

¹¹ Law No. 131/2003 Art. 8, paragraph 6, implementing Art. 120 of the Constitution.

¹² Introduced by Decree Law No. 98/2011, Decree Law no. 95/2012 (spending review) and by Law No. 228/2012.

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It should also be noted that, as of this year, the method of standard costs shall be applied in setting health spending requirements¹³. It is a method which, in confirming the current financial planning and the relevant expenditure containment, improves the institutional setup, allowing comparison between Regions, both in terms of allocation of funds and in terms of analysing existing inefficiencies or inadequacies, thereby providing an additional institutional foundation to the planning effort which is being made.

Again, with regard to the implementation of fiscal federalism, the regulations concerning the harmonisations of budgets¹⁴, represent a further improvement of the existing accounting procedures in the health sector: particularly important are provisions intended to ensure that the area of health financing can be easily identified in the regional budget, and to regulate the accounting procedured of the so-called health management centres within the Regions (shares of funding for the national health service not attributed to health authorities, but directly managed by the Regions) regional consolidation of health-care accounts, specific exemptions to exixting civil-code provisions in order to take into account the specific concerns and issues of these authorities, as well as the transparency of cash flow relating to the funding of health care.

¹³ Implementing legislative decree No.68/2011 on fiscal federalism.

¹⁴  Legislative Decree No.118/2011.

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In a nutshell, the design of expenditure and quality benchmarks, the standardisation of acconting documents, the sanctions that may be imposed in the event of a deficit, have created a system based on a correct principle of full accountability of the Regions. The complex architecture described above has been further consolidated by strengthening the quarterly monitoring system of expenditure factors, done centrally while analyzing the details of each individual health authority. Strengthening the analytical and monitoring capabilities of health expenditure also means strengthening forecasting tools that are becoming ever more effective in financial planning. Indeed, with reference to fiscal documents at least in the last five years the expenditure levels that have actually been recorded have not exceeded forecast levels, thereby contributing, also in this sector which is being discussed, to a general gradual fiscal stabilisation process and especially to containing public expenditure increases.

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The

2013 ECONOMIC AND FINANCIAL DOCUMENT

is available on-line

at the internet address listed below:

www.mef.gov.it • www.dt.tesoro.it • www.rgs.it

ISSN: 2239-5539

EX-3

Exhibit 3

Submitted by Prime Minister

Mario Monti

and Minister of the Economy and Finance

Vittorio Grilli

in agreement with the Minister for European Affairs

Enzo Moavero Milanesi

Adopted by the Cabinet on 10 April 2013

The Economic and Financial Document (EFD) is a key step of the economic-financial and budget planning cycle. It represents an opportunity to look to the past, but more importantly, to imagine the future of the country’s and economic budget policies from a European perspective.

This year, however, the preparation of the EFD comes at a particular time with reference to the political and institutional structure of our country. Following the general elections of 24 and 25 February, procedures are now under way for the formation of a new government. As provided by the Constitution and also recalled by the President of the Republic, Giorgio Napolitano, until a new government is appointed, the outgoing Government remains in office for current affairs and for the adoption of urgent economic measures.

The presentation of the Economic and Financial Document represents a requirement of Law 196 of 2009 (as amended by Law 39 of 2011), which the Government is required to fulfil for the country and for ensuring the compliance with the European Semester deadlines. In line with the ‘prorogatio’ phase, the outgoing Government cannot come up with future scenarios that imply legislative/policy decisions or the introduction of new, broad-based policies that have not already been agreed by Parliament. From an economic-financial perspective, the 2013 EFD assumes the objective of maintaining the balanced budget in structural terms during the reference period, as provided by the rules of the EU Stability and Growth Pact, as amended in November 2011, and confirmed by the Fiscal Compact, and as sanctioned by our Constitution. From the standpoint of structural reforms, the EFD summarises what has been done in the preceding months, and where appropriate, lists the initiatives still necessary for implementing the reforms already approved by Parliament.

The new government, once formed, will be able to integrate this framework by presenting an agenda of reforms, if considered appropriate, along with the related financial compatibility, so as to continue progressing toward the achievement of the Europe 2020 Strategy objectives.

Even in respecting these limits, the presentation of the EFD is a fundamental step, which allows for objectively reviewing the path of the reforms completed and for coming up with some indications about what is ahead.

First of all, the Stability Programme and the National Reform Programme provide a snapshot of the structural reforms and transformation that have had an intensity and a reach not always fully grasped in the day-to-day news.

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ECONOMIC AND FINANCIAL DOCUMENT

At the end of 2011, Italy became vulnerable to international market tensions due to its public finances and the conditions of the real economy. For over a decade, the economic and productive system had been experiencing a slow, but steady, decline, with flat growth rates and a progressive loss of competitiveness, due to the stagnation of productivity, an unfavourable business environment, and other structural weaknesses that hindered the adjustment to a more dynamic and competitive economic framework overall.

The experience of the so called ‘national solidarity Government’, supported in Parliament by a broad majority of the leading political parties, made it possible to move beyond an impasse that had lasted for years, and to undertake, in a relatively short time period, a programme of initiatives that led Italy out of the financial emergency and impacted all the key sectors of economic and social life of the country.

As proof thereof, the Government approved 45 laws and decree-laws converted by Parliament and 24 delegated decrees coming from delegated laws adopted by this Government or by preceding governments, as well as hundreds of implementation measures that have been adopted or are in the process of being finalised, as described in the various chapters of the National Reform Programme.

This action has above all led to the rebalancing of the public finances. In 2012, Italy brought its public deficit substantially back in line with the EU’s recommended level of 3 per cent or less of GDP. In addition, in 2013, Italy will achieve a balanced budget in structural terms, fulfilling a commitment undertaken in mid-2011 by the Italian government at the time. On this basis, the EU ECOFIN Council is poised to authorise, in the month of May, Italy’s exit from the excessive deficit procedure that was opened at the end of 2009. Italy achieved this result without having to ask for a delay in the deadline, as other countries have done. Nor did Italy have to ask for external financial assistance, conceivably from a group of three international authorities, with the consequence of losing a part of its sovereignty and its autonomy in deciding on the measures needed for emerging from the crisis.

The solidity of the adjustment achieved by Italy is reflected in the attitude of the international markets. The spread between interest rates on Italian government securities and German government securities is now around 300 basis points, after a peak of 574 reached in November 2011. In 2014, the primary surplus will be equal to approximately 4 per cent of GDP, thus ranking amongst the highest in the Euro Area. The fiscal consolidation has also been reinforced by rigorous action to contain and to rebalance public expenditure. The two phases of spending review will lead to savings of approximately €11.6 billion once the planned actions are implemented. After years of delays, the EU structural funds were utilised in line with the plans agreed with the Commission, thanks to targeted reshuffling within the Cohesion Action Plan and to careful management to speed up and achieve greater effectiveness of spending. Macroeconomic imbalances are being absorbed, while measures for ensuring a steady reduction of public debt have been put into place.

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An adjustment of this magnitude, realised in a short time, and within a context of economic weakness and recurring tensions on international markets, cannot occur without significant sacrifices and short-term economic and social consequences. Recent data show a contraction in the economy, a rise in unemployment, and social hardships. The recession that started in the second half of 2011 looks poised to continue in the first half of the current year. Without firm and credible reforms, it would have been impossible to stave off the spectre of financial collapse that was apparent in November 2011. And had action not been taken to tackle the structural weaknesses dragging the country down, the country would have been condemned to flat or negative growth again for many years to come.

The 2013 EFD shows that reforms can really change the course of the country’s economic development. EFD estimates indicate that the competitiveness and labour market reform already implemented will lead to additional cumulative GDP growth on the order of 1.6 and 3.9 percentage points in 2015 and 2020 respectively, and up to 6.9 percentage points with respect to the long-term baseline scenario. This will translate into potential growth for the country that is approximately one percentage point of GDP greater than what would have been possible without reforms. Such a change is the thrust that the country needs in order to accelerate its exit from a crisis that has lasted too long.

Data on future growth presented in the EFD were based on prudent assumptions. But the OECD’s and IMF’s quantitative studies on the macroeconomic effects of the reforms implemented in Italy indicate that such effects could be even greater than those estimated by the Government.

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Several conditions are nevertheless necessary in order to reap the benefits of the reforms and the sacrifices. First of all, there is a need to exploit the opportunities offered by a European framework that is currently more favourable to investments for growth and employment. In addressing the pressure exerted at European level, with the Government and Parliament on a united front, in March 2013, the European Council acknowledged the need for using all of the existing margins within the Stability and Growth Pact for making it possible to stimulate productive public investments in Member States with sound public finances. European Commission’s willingness to consider Italy’s one-off transaction to repay past-due commercial debts of the public administration is a step in this direction.

Compared with the most acute phase of the financial crisis in late 2011 and early 2012, when decisions had to be made without delay, it is now possible to lay out a more detailed strategy that combines sustainable reduction of excessive debt with reforms for removing structural barriers, stimulating productivity, and reinstating productive public investments. In this regard, in recent days, the Government has been able to authorise the payment of public administrations’ past-due commercial debts due to businesses. This measure will contribute not only to easing pre-existing critical situations, but also to injecting more than € 40 billion into the economy, thus reducing the pressure on firms in difficulty due to the credit crunch.

While capitalising on these opportunities, it will be nonetheless crucial to keep the guard up on the public-finance front. On the one hand, being part of the group of ‘virtuous’ countries is the necessary premise for making use of the leeway that is becoming available at a European level. On the other hand, the reduction of the debt, which is at an excessively high level, is the only road toward reducing interest costs and avoiding pressure from financial markets.

Only by staying in the preventive arm of the Stability and Growth Pact will it be possible to obtain the margins for completing the payment of PA’s past-due commercial debts beyond the resources already mobilised, and to introduce other initiatives, such as reducing taxation on earned income, providing incentives for stable and high-quality employment, or investing in education, research and innovation.

Finally, it is essential to confirm the reforms already in place. Italy is still far away from the objectives set within the framework of the Europe 2020 Strategy, especially with regard to employment, the support of research and development, and the reduction of poverty. Productivity trends are unacceptable. It is thus not the time to loosen the grip. If anything, it is necessary to speed up actions to avoid losing ground. There are no other recipes but reforms in order to get Italy back to growing competitiveness and productivity.

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The National Reform Programme does not contain, and could not contain this year, an agenda of priorities for the future. Instead, it provides an analysis of what has been done and of the preliminary results, indicating the areas of greatest need for future intervention. There is a need to continue with spending reviews, fight against tax evasion, and sell off public sector real estate, the last of which can ensure margins for high-priority policy measures while steadily reducing debt. The fiscal system needs to be reformed in order to make it less complicated and more growth-oriented, initiating as soon as possible a gradual reduction in fiscal pressure. Much remains to be done in the labour market in order to strengthen active labour policies, increase the participation rate of women and young people in the labour market, promote wage bargaining decentralisation, and reduce the burden of taxation. Training, research and innovation are the areas of weakness on which the efforts should be concentrated. The fight against poverty requires a specific effort and priority attention, albeit in view of limited resources. It is necessary to improve the regulatory environment for businesses, and thus, Italy’s attractiveness for investments from abroad, and the access to credit. In many areas, continuing and completing reforms already introduced is of essence so as to allow them to fully wield their economic effects. This is the case of the civil justice system, deregulation, the digital agenda, and the new system for start-ups. In other sectors, such as export subsidies, energy policy, and airport and tourism structures, the general strategies already approved will need to be translated into concrete actions.

Closing of the gap versus the Europe 2020 Strategy objectives is even more important at a time of political debate about the programme for the new legislature. The Stability and Growth Pact rules, the Europe 2020 Strategy objectives, and the Annual Growth Survey priorities are a reference framework that puts aside ideological options in favour of concrete actions that will make the difference for Italy’s economic growth, employment and stability. It is with this spirit that we present the Economic and Financial Document for 2013 to Parliament, the independent local entities, and social partners.

Mario Monti

President of the Council of Ministers

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TABLE OF CONTENTS

FOREWORD

I.	INTRODUCTION: A YEAR OF REFORMS	3
I.1	Italy and Europe along the same path	3
I.2	The crisis as an opportunity	4
I.3	Balance of the public accounts	4
I.4	A Public Administration closer to businesses and citizens	5
I.5	More support to businesses and a more favourable entrepreneurial environment	6
I.6	Southern Italy: an occasion for relaunching the economy	8
I.7	A grater impulse to the market	8
I.8	Research and innovation: businesses and digital households	9
I.9	More quality in the educational system	9
I.10	Legality and certainty of the law	10
I.11	A modern and competitive fiscal system	11
I.12	A more flexible and inclusive labour market	11
I.13	Keeping up the guard: monitoring	12
II.	MACROECONOMIC SCENARIO AND IMPACT OF REFORMS	13
II.1	Macroeconomic scenario	13
II.2	Growth and competitiveness in Europe and in Italy	17
II.3	The macroeconomic impact of the reforms	20
II.4	The financial impact of the 2013 NRP measures	27
III.	ITALY WITHIN THE EUROPEAN SEMESTER FRAMEWORK: SUMMARY OF ACTIONS	33
III.1	Responses to Council Recommendations	33
III.2	National targets for the Europe 2020 Strategy	62
III.3	Use of structural funds	78
IV.	ANALYSIS OF MACROECONOMIC IMBALANCES	83
IV.1	Italy’s status based on the Scoreboard indicators	83
IV.2	Analysis of macroeconomic imbalances and prospects	86

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FOREWORD

DESCRIPTION OF THE NRP’S NEW STRUCTURE

The structure of the National Reform Programme (NRP) has been significantly changed.

The first chapter provides a brief description of the reforms that the country adopted during the period of reference as provided by the European Semester. It represents an executive summary of the Government’s actions, and offers an overview of the reforms implemented, broken down by policy area.

The second chapter consists of two parts. The first part describes the macroeconomic framework outlined in greater detail in the Stability Programme; the second part contains an assessment of the macroeconomic impact of the reforms implemented.

The third chapter, divided into three sections, deals with the European Semester. It provides comments on the Country Specific Recommendations (CSR) and the Europe 2020 Strategy Targets, and it summarizes the results of the use of EU funds as well as the guidelines for the new planning phase.

The fourth chapter tackles the recent European procedure for the surveillance of macroeconomic imbalances (In-Depth Review) as defined by the European Commission in the Six-Pack.

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I. INTRODUCTION: A YEAR OF REFORMS

I.1 ITALY AND EUROPE ALONG THE SAME PATH

Italy has gone through a complex and decisive year. The many actions undertaken during this period are consistent with the country’s commitments at an international level: Euro Plus Pact, Europe 2020 Strategy, and the priorities set in the Annual Growth Survey.

Euro Plus Pact

The Euro Plus Pact (EPP) provides for stronger coordination of economic policies in order to improve competitiveness and augment the level of European convergence. The Member States have been called to undertake precise, binding commitments aimed at the achievement of four priority objectives:

• n.1: Fostering competitiveness.

• n.2: Fostering employment.

• n.3: Improving the sustainability of the public finances.

• n.4: Reinforcing financial stability.

Annual Growth Survey

The Annual Growth Survey (AGS) opens the European Semester and represents the starting point for the definition of the action priorities at a national and European level. The priorities set for 2013 as identified by the European Commission are the same as those for 2012, namely:

• n.1: Pursuing differentiated, growth-friendly fiscal consolidation.

• n.2: Restoring normal lending to the economy.

• n.3: Promoting growth and competitiveness for today and tomorrow.

• n.4: Tackling unemployment and the social consequences of the crisis.

• n.5: Modernising Public Administration.

EU 2020 Targets

Furthermore, with a view toward smart, sustainable and inclusive growth, the Member States have committed to realising the Europe 2020 Strategy objectives as expressed in terms of European targets, stated at the national level.

Flagship Initiatives

Finally, in order to stimulate growth and employment and make it possible for the EU and Member States to achieve high levels of employment, productivity and social cohesion, the Strategy also entails seven Flagship Initiatives (FI) that outline a framework within which the EU and the national governments have to coordinate their efforts for achieving the Europe 2020 priorities. The seven initiatives are:

• n.1: A digital agenda for Europe.

• n.2: Innovation Union.

• n.3: Youth on the move.

• n.4: A resource-efficient Europe.

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• n.5: An industrial policy for the globalisation era.

• n.6: An agenda for new skills and jobs.

• n.7: European platform against poverty.

I.2 THE CRISIS AS AN OPPORTUNITY

The Italian Government has dedicated an unparalleled effort with respect to the past, in tackling the urgent short-term problems caused by the crisis, and also in addressing the structural issues that drive the country’s economic well-being over the long term. Many structural reforms were put into place in order to stimulate competitiveness and growth, without losing sight of the objective of financial stability.

From emergency to change

The policy of fiscal rigour and reform has also yielded its fruits in terms of international credibility. On 14 March 2013, the European Council acknowledged the need for differentiated budget consolidation that will allow Italy to make use of limited manoeuvring room for actions to support growth and employment, in respect of financial stability, emphasising the urgency of settling the Public Administration’s past-due payables.

The main measures have regarded:

• A plan for achieving structural budget balance moved up to 2013 and the introduction of the balanced-budget constraint in the Constitution.

• A strategy for public-debt reduction to be implemented through the sale and value-enhancement of public assets.

• A modern, comprehensive reform of the pension system that made Italy’s system one of the most sustainable in Europe.

• Extraordinary measures for reducing both public expenditure and the administrative burden for businesses, thereby improving the entrepreneurial environment.

• Urgent measures for the payment of the Public Administration (PA)’s past-due payables.

• Reform of the labour market aimed at increasing flexibility and reducing segmentation.

• A national development policy for entrepreneurship in favour of innovation and international expansion.

• An efficient healthcare system closer to the needs of the public.

• Better use of EU resources.

I.3 BALANCE OF THE PUBLIC ACCOUNTS

The Government’s primary objective has been that of guaranteeing the security of the public accounts in order to preserve financial stability.

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Sustainability of public finances EPP n.3

Reinforced budget law EPP n. 3

In order to ensure the irreversibility of the actions undertaken, the constraint of the structural balanced budget has been made part of the Constitution in line with the commitments undertaken with the Euro Plus Pact and the Fiscal Compact. In December 2012, Parliament also approved the ‘reinforced’ law, defining the rules for implementing the balanced budget. The Government then introduced a plan for steadily reducing the public debt through the maintenance of a primary surplus of 4 per cent of GDP from 2014 and thereafter.

Spending review AGS n. 1

As part of the fiscal consolidation programme, the Government enacted measures addressing on both the expenditure side (via the spending review), and the revenue side (through reform of taxation, real estate sales and the value-enhancement of public assets). The spending review took place in two phases and involved changes in the award of public contracts, the reduction of employees and senior managers in the public sector, the reorganisation of local government entities, and the rationalisation of expenditure in the education and healthcare sectors. The reduction of outlays was mainly focused on current expenditure, with an attempt made to keep the quality of the public services the same for citizens.

Even though the resources for the fiscal adjustment initially were derived from revenues, the measures implemented later considered the need for sustaining growth, on a basis compatible with the difficult budget situation. This entailed a shift in taxation to consumption and capital, to the advantage of business income and income from employment. Over time, such measures to increase revenues were replaced by lower public expenditure. In addition, the Government was significantly involved in reducing the unacceptable levels of tax avoidance and tax evasion.

Pension reform EPP n. 3 AGS n. 1

The pension reform entailed an increase in the eligible retirement age, in line with the other European Member States, putting Italy’s actual retirement age at the highest level in Europe.

I.4 A PUBLIC ADMINISTRATION CLOSER TO BUSINESSES AND CITIZENS

Transparency of the PA EPP n. 1 AGS n. 5

The Government’s actions were aimed at getting the Public Administration closer to the citizens, reinforcing the channels of communication, simplifying procedures, and accelerating timing. Thanks to digital technologies, the PA will involve citizens, civil society, and the productive system in a more effective and efficient public sector. More specifically, new measures aim to facilitate the public access to online services supplied by the PA, to make administrative data available in digital format, and to expand the use of dedicated, certified electronic mail. In the near future, communications between the different Public Administrations, as well as the PA and individuals, will occur exclusively through electronic means.

In order to ensure greater transparency and more timeliness, all procedures for the PA’s purchasing of goods and services, including the PA’s payments and the payments of public sector firms will have to occur exclusively through electronic means in the future.

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As evidence of the transparency of public management, the Government stepped in to reduce the costs of the political system at both a national and regional level. Various regulatory measures were also introduced against the corruption within the PA.

I.5 MORE SUPPORT TO BUSINESSES AND A MORE FAVOURABLE ENTREPRENEURIAL ENVIRONMENT

The Government has sought to inaugurate a new phase of growth, focusing attention on the entrepreneurial system and on the productive environment.

Productivity in Italy

Small- and medium-sized enterprises (SME) represent the backbone of Italy’s productive system, providing that system with dynamism and organisational flexibility. In order to strengthen this important pillar, the Government has enacted measures to facilitate the access to credit. The principal measures in this regard include: the refinancing of the Central Guarantee Fund for the next three years; the tax credit for investment in venture capital; and the ‘ Start-Up Fund’ and the ‘ National Fund for Innovation’, in support of innovative projects, including for internationalisation.

ACE EPP n. 1 AGS n. 3

The introduction of new instruments for companies without a financial rating is also an important development, as the instruments can be sold to qualified investors. The Government has also worked to encourage the recapitalisation of firms through the Aid to Economic Growth (ACE) initiatives, a tax break in favour of corporate recapitalisation.

The system of collective-loan guarantee consortiums (Confidi) has also been strengthened in order to improve the financial position of the SMEs, thus integrating the supporting activity of the State, Regions and other public entities.

Administrative charges EPP n. 1 AGS n. 3 FI n. 6

Administrative charges for businesses have been reduced with the elimination of ex-ante controls, limits, permits and licenses for innovative companies (start-up), and with the simplification of administrative charges for the SMEs.

The procedures for designing and building infrastructures have also been streamlined, while the incorporation of a limited liability company with reduced capital has been facilitated for young people under the age of 35.

Among the tax-related measures, it is worth noting both the tax-debt amortisation plan with increasing instalments and the introduction of the principle of paying value-added tax only upon its collection. Both of these actions have reduced businesses’ needs for liquidity.

Strategic infrastructures EPP n. 1 AGS n. 3 FI n. 5

Procedures for the approval of strategic infrastructure projects have also been accelerated and simplified, with the extension of the existing laws and regulations in relation to project financing. More specifically, it is now possible to finance the infrastructures through project bonds with favourable tax treatment. Infrastructures may also be financed through tax credits and value-added-tax exemptions.

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Initiatives for the building industry EPP n. 1 AGS n. 3 FI n. 5

Much has also been done for the building sector, which was hit the hardest by the current crisis. Construction firms may benefit from the offsetting of value-added-taxes payable with value-added-taxes receivable in the case of buildings remaining unsold. Households can deduct 50 per cent of the expenditures sustained for building restructuring work and 55 per cent of the expenditures for energy efficiency. In addition, a one-stop shop dedicated to the administrative practices for building was created.

PA payments AGS n. 5

As of January 2013, the payments between firms and the PA occur within 30 days (60 days in exceptional cases only), with Italy moving ahead of the deadline set by the European directive on the subject. At the start of April, the Government approved a decree-law that immediately allows the Public Administration (PA) to begin the payment of its past-due trade accounts. The measures, considered to be exceptional and urgent, are added to the actions already inaugurated in 2012, which are confirmed, in order to accelerate the payments and favour economic recovery. The decree approved has authorised immediately the payments of the Public Administration’s commercial transaction due to businesses, cooperatives and professionals for a total of € 40 billion, that will be paid out over the next 12 months, thereby favouring a rapid solution to the issue of past-due payments, through clear, simple and fast mechanisms.

National Energy Strategy AGS n. 3 FI n. 4

Italy’s high costs for energy are due to a particular energy mix. The ‘National Energy Strategy’ (NES), submitted for public consultation, plays a primary role in the development of the renewable sources in the country. The implementation of the NES will entail benefits in terms of economic growth and employment, primarily due to the recovery of competitiveness in those sectors with the highest intensity of electricity and gas. With regard to energy infrastructures, measures have been taken to simplify procedures for securing environmental permits in drilling and refining activities, and the clean-up of the contaminated sites, with the introduction of substitutive powers conferred to the Central Government in the case the Regions involved fail to come up with a shared decision.

Businesses internationalisation EPP n. 1 AGS n. 2 FI n. 5

In support of the business internationalisation, the Government has reorganised the Institute for Foreign Trade (ICE), making it into an agency for promoting and expanding the presence of Italian companies abroad. Moreover, the new contact point for attracting investment (Italy Desk) will act as a link between Italian businesses and potential foreign investors. Efficiency improvements have been made thanks to a unique customs information point so to allow for the book entry of all administrative formalities.

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I.6 SOUTHERN ITALY: AN OCCASION FOR RELAUNCHING THE ECONOMY

Measures to reduce disparity North-South FI n. 6

Southern Italy requires comprehensive actions in order to remove economic and social hurdles and to free up its productive force. For this reason, the Government has paid special attention to Southern Italy. The Government has introduced many policies in the area in order to stimulate employment, including, but not limited to, fiscal relief in favour of disadvantaged workers and incentives for the start-up of new businesses owned by young people.

Other funds have been set aside in order to stimulate research, especially to favour greater interaction between universities and businesses in southern Italy, and to encourage innovation.

Cohesion Action Plan FI n. 7 FI n. 5

Finally, the Cohesion Action Plan was successfully concluded with a total commitment of € 12 billion. At the end of 2012, the commitments taken for the use of European funds exceeded the national target by 5.5 per cent (37 per cent of the available resources). The financing for small and medium-sized businesses of the urban tax-free zones within the Convergence Objective Regions is provided through these funds.

I.7 A GREATER IMPULSE TO THE MARKET

Many measures have been undertaken to remove the obstacles to the opening of the market.

Transport Authority

A new independent authority was set up in the transport sector in order to ensure competition, to regulate market access and to monitor tariffs and quality standards.

Professional services AGS n. 3

Minimum tariffs for professional services were abolished. An increase was made in the number of pharmacies operating in Italy (an additional 5,000) and in the number of authorised notaries. Opening hours for retail shops and newsstands were deregulated.

In order to improve the efficiency and the transparency of the public healthcare system, the territorial assistance was reorganised, and new rules were introduced regarding the careers and professional status of physicians.

The governance for banks and insurance companies was reformed in order to ensure greater competition in the sector.

Energy sector AGS n.3 FI n. 5

With regard to competition in the energy sector, the Government enacted laws for a more open market through the separation of ownership between the gas transmission network operator, SNAM Rete Gas, and the energy supplier, ENI. In addition, more efficient rules were established for the allocation of natural gas storage services through a competitive auction scheme over the total available capacity. The fuel distribution service sector also saw an increase in competition, with petrol station owners allowed to purchase up to 50 per cent of their fuel freely from any producer or supplier.

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Water services sector

With reference to the water services sector, the Authority for Electricity and Gas was vested with regulatory powers, with particular reference to the definition of minimum service levels and the tariff-setting mechanism consistent with the rules set by EU laws and regulations on the subject.

I.8 RESEARCH AND INNOVATION: BUSINESSES AND DIGITAL HOUSEHOLDS

Digital Agenda EPP n. 1 AGS n. 3 FI n. 1

Public sector intervention can often favour economic growth. To ensure that such growth is long-lasting, it is important to invest in research and innovation. The Government committed to strengthening the tasks of the Italian Digital Agency in order to promote important strategic projects in relation to the implementation of Italian Digital Agenda. With a view toward reducing the digital divide, the preference has been given to investment in the creation of the broadband and ultra-broadband communications networks.

R&D FI n. 2

The Government has acted to promote research and development (R&D) and the innovation within Italian firms. In this regard, a Fund for Sustainable Growth was established, and is addressed to three main initiatives: (1) promotion of R&D and innovation projects, including through joint research centres; (2) reinforcement of the productive structure, especially in southern Italy; (3) promotion of the internationalisation of Italian firms and attraction of direct investment from abroad (including with the ICE’s support). With further regard to the aim of improving R&D, a total of 10 per cent of the Fund for Investments in the Scientific and Technological Research (FIRST) has been earmarked for researchers under the age of 40, and a tax credit has been established for the hiring of highly qualified workers to be kept employed for at least three years.

With the objective of encouraging innovation in healthcare, a healthcare documenting electronic file was instituted, while the process of substituting paper prescriptions with electronic ones has also been accelerated.

Finally, in line with the European ‘Horizon 2020’ programme, a plan is under discussion where research and innovation projects related to strategic issues are contemplated, with the aim of encouraging synergies between firms and research entities.

I.9 MORE QUALITY IN THE EDUCATIONAL SYSTEM

Youth unemployment in Italy

Looking ahead, young people play a crucial role for the country. Italy needs to invest in its talented young people, and thus, social and geographic mobility become the best allies, not only within the country, but also and more importantly, over the broader horizon of the labour market in Europe and worldwide. Whatever limits opportunities for young people translates into fewer social-mobility and growth opportunities for the entire country.

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Young people have been impacted by the more recent legislative initiatives aimed at improving the efficiency in teaching. The Government has put much effort into reinforcing the grading systems, launching a programme to modernise the entire educational system. An incentive scheme has been created for sustaining excellence in instruction at the secondary and post-secondary levels.

Educational system FI n. 3

Within the university system, the valuation-based incentive mechanism provided by the reform approved in 2011 was rigorously implemented. A website common to all universities was created in which exam results can be registered on a national basis. New funds were established for contributing to certain goals: increasing students’ basic skills and levels of knowledge; reducing dropout rates in areas with serious problems of social and cultural exclusion; and improving the knowledge of foreign languages. Finally, significant investments were made to improve school infrastructures.

I.10 LEGALITY AND CERTAINTY OF THE LAW

Communication between tax authorities and financial operators EPP n. 3 AGS n. 1

The fight against tax evasion has been a primary target of the Government’s action, which has mostly focused on increasing the level of spontaneous compliance with fiscal obligations. The initiatives have aimed at reducing the number of tax audits for those taxpayers complying with the law, at encouraging the use of debit/credit cards and accelerating the sharing of information among the various administrations, thus also improving the quality of the audits. Administrative formalities - a burden for individuals and businesses - have been seriously reduced, and communications sent to taxpayers have been simplified.

Based on a newly introduced obligation, banks and financial intermediaries are responsible for the periodical transmission to fiscal authorities of documentation pertaining to transactions through current accounts, including transactions of amounts above € 500 involving economic agents in tax havens (listed on the so-called ‘black list’). In addition, coordination has been increased among the operational units within the tax assessment and tax collection process, with the cross-checking of data included in various databases both at a national and regional level.

The civil justice reform AGS n. 5

The civil justice system has been reorganised. Special courts devoted to business affairs have been introduced in order to accelerate legal cases involving firms and business operators. New bankruptcy proceedings were designed in order to allow for better protection of businesses facing temporary insolvency, and for the resolution of cases of excessive indebtedness.

Measures were also introduced to reduce the time required for legal proceedings, including through the reorganisation of judicial districts and the introduction of sanctions and criteria for inadmissible appeals. With the aim of accelerating the proceedings, all administrative communications must be sent through certified electronic mail.

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I.11 A MODERN AND COMPETITIVE FISCAL SYSTEM

The Government began the reform of the fiscal system by shifting taxation from employment and income to consumption and real estate.

In order to cut taxation on income from employment, the ‘tax wedge’ was reduced through increasing deductions on the regional tax on productive activity (IRAP) starting in 2014. The deductions have been further increased for southern Italy. The tax deductions on income from employment for households have also been augmented as of 2013.

A fund for granting a tax credit for R&D was set up and is mainly addressed to SMEs; the fund is financed by resources earmarked for transfers and subsidies to businesses.

Firms and professionals with no employees and that have only a limited number of assets will be exempt from paying IRAP as from 2014.

Finally, the Government has introduced the Fund for Tax Reduction and the Fund for Productivity. The former fund aims to reduce fiscal pressure on income from employment and on households, and is functional to the relaunching of the country’s competitiveness and to the creation of new jobs. The latter fund has the purpose of encouraging higher productivity of businesses through measures such as the tax reduction on corporate income.

I.12 A MORE FLEXIBLE AND INCLUSIVE LABOUR MARKET

Labour market reform EPP n. 2 AGS n. 4 FI n. 6

Labour market mechanisms have been modernised, with a special focus on reducing the differences between those (the so called ‘insiders’) who get ample benefits in terms of job security, leave time, and unemployment insurance, and those (the so called ‘outsiders’) who have other forms of employment where such benefits are limited. The implementation of the reforms in this area had two objectives: (i) making the labour and social security system more efficient and more equitable, and (ii) sustaining the growth of productivity and overcoming the risks and uncertainties that discourage businesses from hiring.

The reform of the labour and social security system has been developed by considering budget constraints. On one hand, this reform expands the sphere of application of employment benefits to include younger workers, and on the other hand, it enhances the value of apprenticeships as the mechanism for entering the labour market. In so doing, the reform aims to facilitate the transition from education and training to work, laying out apprenticeship programmes that satisfy entrepreneurs and businesses in terms of qualifications and skills.

The labour market reform will be even more effective if the initiatives in terms of active policies (training, orientation, job services) and passive policies (social safety nets and various types of benefits) can be fully implemented.

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Specific measures have been planned for tackling the dualism of the labour market from a geographic perspective (segmentation between the northern and southern Regions). These include, for example, fiscal measures to support hiring (tax credits), with greater benefits for the Regions of southern Italy.

With the intention of augmenting flexibility, the Government has established, amongst other measures, greater safeguards for maternity and paternity leave, and new public services (such as professional training and orientation services) to help the unemployed get back to work.

Intergenerational Pact EPP n. 2 AGS n. 4 FI n. 3

An Intergenerational Pact was instituted so that companies can simultaneously offer part-time contracts to older workers, and apprenticeship or full-time contracts to younger people.

I.13 KEEPING UP THE GUARD: MONITORING

Implementation decrees monitoring

The Government has approved 45 laws and decree-laws converted into law and 24 delegated decrees derived from delegated law of the present or preceding governments (including the corruption-prevention law). Around one-third of the provisions contained in such laws (832) necessitates the adoption of implementation decrees by Public Administration: 227 have been adopted, 56 are subordinated to conditions or have been superseded by subsequent primary or secondary legislation, and 82 have already been defined in terms of their substantive content and are now at the Ministries that must express their consent thereto, or external institutions that must express an opinion thereon, or are awaiting transmittal to Parliament for the procurement of the related opinion. There are 84 decrees under development that have no expiration date provided by the law. Finally there are decrees that will be left to the next Government.

The eight main economic-financial reform laws of 2012 on which the Government’s activity was concentrated (‘Salva Italia’, ‘Cresci Italia’, ‘Semplifica Italia’, ‘Fiscal Simplification’, labour reform, ‘Development‘ 2.0’ decree, spending review I and spending review II) require 451 implementation decrees to be adopted by the Public Administration as secondary legislation. As of 15 February 2013, some 168 had been adopted, leaving another 283 to be adopted. The decrees not yet adopted can be subdivided as follows: 157 without a term set for adoption; 56 which, although not yet adopted, have nonetheless been defined by the appropriate administration; and 98 whose term for adoption has expired.

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II. MACROECONOMIC SCENARIO AND IMPACT OF THE REFORMS

II.1 MACROECONOMIC SCENARIO

The recession that began in the second half of 2011 dragged on for the entire year of 2012, producing a 2.4 per cent contraction of GDP, in line with the estimates published in September in the Update of the EFD. The trend of the economy was very weak in the final quarter of the year.

The tightening of conditions for accessing credit, accompanied by the inevitable fiscal adjustment, had an impact on domestic demand whose contribution to GDP growth was equal to -4.8 percentage points. The staying power of exports, accompanied by a reduction of imports, translated into a strong positive contribution of net demand from abroad (3 percentage points). In the meantime, the stocks of inventories continued to decline.

Based on the trend of the most recent year-on-year indicators, a new decrease in GDP is expected in the first half of 2013 (albeit of a lesser magnitude than in the final quarter of 2012); this will likely to be followed by a gradual recovery in the second half of the year. When also considering the dragging effect on the economy in 2013 (equal to -1.0 per cent), the growth estimates for the current year show a reduction of 1.3 per cent, differently from the 0.2 per cent reduction reported in the EFD Update of September 2012, but in line with the figures set out in the Report to Parliament dated 21 March 2013.

The forecast incorporates the effects of the measures providing for payment of the trade accounts of the Public Administration (PA). The injection of liquidity achieved via the acceleration of such payment should stimulate a more rapid recovery of GDP growth as early as the second half of 2013. The recovery should be more pronounced in 2014, with a growth rate equal to 1.3 per cent. The positive effects of paying the PA’s trade debts will also influence growth in 2015, which is estimated to increase by 1.5 per cent.

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TABLE II.1: MACROECONOMIC FRAMEWORK

	2012		2013		2014		2015		2016		2017
EXOGENOUS INTERNATIONAL VARIABLES
International trade		2.8		3.6		5.5		6.1		6.3		6.3
Oil price (FOB, Brent)		111.6		113.5		106.4		106.4		106.4		106.4
USD/EUR exchange rate		1.3		1.4		1.4		1.4		1.4		1.4
ITALY’S MACRO VARIABLES (VOLUMES)
GDP		-2.4		-1.3		1.3		1.5		1.3		1.4
Imports		-7.7		-0.3		4.7		4.4		4.1		3.8
Final national consumption		-3.9		-1.7		0.9		1.0		0.9		1.0
Household consumption		-4.3		-1.7		1.4		1.1		1.1		1.2
General government expenditure and NPISH		-2.9		-1.7		-0.4		0.7		0.3		0.1
Investment		-8.0		-2.6		4.1		3.2		2.6		2.4
- Machinery, equipment and other		-9.9		-3.0		5.1		4.4		3.8		3.4
- Construction		-6.2		-2.2		3.1		2.0		1.5		1.4
Exports		2.3		2.2		3.3		4.1		4.0		3.9
Memo item: current account balance, % of GDP		-0.6		0.1		-0.2		-0.1		-0.1		-0.1
CONTRIBUTION TO GDP GROWTH*
Net exports		3.0		0.7		-0.2		0.1		0.1		0.1
Inventories		-0.6		-0.1		0.1		0.1		0.0		0.0
Domestic demand, net of inventories		-4.8		-1.9		1.4		1.3		1.2		1.2
PRICES
Import deflator		3.1		0.7		1.7		1.8		1.7		1.9
Export deflator		1.9		1.2		2.1		2.1		1.9		1.9
GDP deflator		1.6		1.8		1.9		1.8		1.8		1.8
Nominal GDP		-0.8		0.5		3.2		3.3		3.2		3.2
Consumption deflator		2.8		2.0		2.0		1.9		1.8		1.8
Memo item: planned inflation		1.5		1.5		1.5		1.5
Memo item: HICP inflation, net of imported energy, % change**		3.0		2.0		1.8		2.1
LABOUR
Labour cost		1.0		1.0		1.2		1.5		1.6		1.6
Productivity (measured on GDP)		-1.3		-1.0		0.7		0.7		0.6		0.5
Unit labour cost (measured on GDP)		2.3		2.0		0.5		0.8		1.1		1.1
Employment (FTE)		-1.1		-0.3		0.6		0.8		0.7		0.8
Unemployment rate		10.7		11.6		11.8		11.6		11.4		10.9
Employment rate (15-64 years)		56.7		56.5		56.8		57.2		57.6		58.1
Memo item: nominal GDP
(in € mn)		1565916		1573233		1624012		1677735		1731311		1785918

* Any inaccuracies are due to rounding.

** Source: ISTAT.

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FOCUS

In the shadow of GDP: an evaluation of equitable and sustainable well-being

In recent years, there has been a pressing need for identifying a more comprehensive measure of well-being, in other words, a measure inclusive of more dimensions (not only economic and material factors, but also social and environmental factors)¹. Italy has promoted an initiative for the measurement of ‘equitable and sustainable well-being’ (BES) which was inaugurated by ISTAT and the National Economic and Labour Council (CNEL) in 2010, whose first report was published in March 2013².

The project is aimed at developing a multi-dimensional approach to well-being, capable of integrating (i) the factors of inequality and disparity in the access to resources and (ii) the sustainability. The project identified 12 domains that contribute the most to characterizing the progress of Italian society: i) healthcare; ii) education and training; iii) reconciliation of work and family life; iv) economic well-being; v) social relations; vi) policy and institutions; vii) security; viii) subjective well-being; ix) landscapes and cultural heritage; x) environment; xi) research and innovation; xii) quality of services. In order to provide an idea of the complexity of each domain, the table below shows a selection of indicators among the most innovative or comprehensive for the 2010-2012 period, while reference should be made to the BES 2013 Report for a complete picture of the 12 domains.

Healthcare is an essential factor of individual well-being. It has consequences that impact all of the other domains of life over a person’s entire lifespan, changing prospects for individuals and often for their families. One summary indicator that allows for detecting important differences between genders is life expectancy at birth: even though women live longer than men, the quality of women’s lives diminishes first, as shown by the health-adjusted life expectancy indicator. Education and training have a fundamental role in supplying individuals with the knowledge, abilities and skills needed for actively participating in the life of society, but they are still excessively undervalued, particularly in the case of older people.

The labour domain also incorporates reconciliation with family life. Work is indeed the source of material support, but also of personal realization. Italy has a very high number of individuals who would willingly work, but who are no longer actively seeking employment or are discouraged, including in comparison with other European countries. Income and material resources are, for the most part, the instruments with which the individual manages to support his standard of living. An analysis of material well-being must take into account the value of the services supplied by public institutions which, in Italy, have aided the beneficiaries in coping with decreases in individual income.

The outfitting of infrastructures and the services available to the public are elements that concretely affect the quality of life and the opportunities offered by the community. In Italy, the households stating that they have great difficulty in accessing essential services are still numerous, with large differences seen from region to region. With reference to public utility services, the number of electric power interruptions without advance notice has remained stable on average in recent years. Given the infrastructure supply and notwithstanding the negative economic cycle, companies continue to innovate, contributing with research and technology to the well-being of the public at large.

The intensity of relationships and the social network of which the relationships are part are elements that influence individual well-being and form the human and social capital of a community. Looking at the dynamics of interpersonal commitment in recent years, it is possible to see a disconcerting decrease in the level of solidarity and cohesion, including with respect to national and local institutions. The reduced sense of solidarity and the economic and employment crisis have led to an increase in the rate of pick pocketing reported by the public.

¹  Various initiatives have been launched at an international level, including the OECD’s Global Project, the Stiglitz, Sen, Fitoussi Commission’s report on the ‘Measurement of Economic Performance and Social Progress’, the European Commission’s ‘GDP and beyond’ initiative.

²  For additional information, see the initiative’s web site: http://www.misuredelbenessere.it/

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SELECTION OF 2013 BES INDICATORS

Domain	Indicator	2010		2011		2012
Healthcare	Life expectancy at birth
	Women, average number of years		84.3		84.5		—
	Men, average number of years		79.1		79.4		—
Education and training	Persons skilled in information technologies Percentage of persons skilled in information technologies		—		22.2		21.7
Work and reconciliation of work with family life	Rate of non-participation in the labour market Percentage of individuals unemployed and persons not active in the labour force		17.6		17.9		—
	Rate of employment of women with children Percentage of women employed with at least one child to the total of women employed		71.4		72.0		—
Material well-being	Adjusted average disposable income per capita Euros, per capita		20,970		21,207		—
Research and innovation	Rate of innovation of the productive system Percentage of firms that have innovated to total medium-/large-sized firms		50.3		—		—
Social relations	General level of trust Percentage of individuals who believe people are trustworthy		21.7		21.1		20.0
Policy and institutions	Confidence in local institutions Average rating for confidence in local government, 0-10 scale		—		—		4.0
Quality of services	Irregularities of electricity service
	Average number of interruptions per customer		2.4		2.4		2.3
Security	Rate of pick pocketing
	Number of pick pocketing incidents per 1,000 inhabitants		5.1		5.1		6.0
Environment	Important ecological sites
	Areas included in the Nature 2000 Network as a percentage of total national territory		20.6		21.0		21.2
Landscapes and cultural heritage	Public expenditure of municipalities for cultural heritage
	Euros, per inhabitant		10.5		—		—
Subjective well-being	Satisfaction with one’s own life Average rating of satisfaction with life, 0-10 scale		43.4		45.8		35.2

Source: ISTAT, BES 2013 Report

Description of the indicators. Life expectancy at birth: average number of years that a new-born can expect to live; Persons skilled in information technologies: Percentage of people who are at least 16 years old who know how to perform at least five transactions on a computer. Rate of non-participation in the labour market: the unemployed between the ages of 15 and 74 years (plus inactive individuals) who have not looked for work in the four preceding weeks, but who are available to work, as a percentage of the total potential and inactive work force between the ages of 15-74. Rate of employment of the women with children: rate of employment of women between the ages of 25 and 49 with at least one child between the ages of 0 and 5 measured against the rate of employment of women without children between the ages of 25 and 49 years. Adjusted average disposable income per capita: ratio between household disposable income (adjusted for the value of services in kind provided by public and non-profit institutions) and the total number of residents (in €). Rate of innovation of the productive system: the number of firms that have introduced technological (product and process), organisational and marketing innovations in the three-year period of reference as a percentage of the total number of the firms with at least 10 employees. General level of trust: percentage of people of at least 14 years old that believes that most people of age 14 or older are trustworthy. Confidence in local institutions: average rating of confidence in regional, provincial and municipal government, on a scale of 0-10, indicated by people of at least. Irregularities of electricity service: average number of electricity service interruptions (without advance notice and lasting for more than three minutes). Rate of pick pocketing: number of pick pocketing incidents per 1,000 inhabitants. Important ecological sites: sites included in the Nature 2000 Network (EU policy tool for conservation of biodiversity) as a percentage of total national territory. Public expenditure of municipalities for cultural heritage: current municipal public expenditure per capita in euros earmarked for the management of cultural heritage (museums, libraries and galleries). Satisfaction with one’s own life: percentage of people of at least 14 years old who have ranked their satisfaction with life at 8, 9 or 10 (on a scale of 0-10) to total number people of at least 14 years old.

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Human beings cannot be separated from the environment and its resources. In Italy, the areas of outstanding natural beauty and biodiversity conservation have increased to cover a total of 21 per cent of the national territory. On the other hand, Italy also stands out for the wealth and quality of its artistic, archaeological and architectural heritage. The safeguarding of the landscape is therefore a duty to which municipalities are dedicating increasing resources.

Finally, subjective well-being is a concept spanning all of the domains. In recent years, the number of people who declare that they are very satisfied with their life has diminished, but the balance of their lives continues to be generally positive on average.

II.2 GROWTH AND COMPETITIVENESS IN EUROPE AND IN ITALY

The medium-/long-term dynamics of the nation’s economic growth are analysed in reference to the indicators used in growth accounting which are prepared in accordance with the European methodology from the Lisbon Assessment Framework (LAF)³.

In terms of GDP per capita, Italy’s gap with the EU-15 countries in 2012 was almost nine percentage points. In comparison with other European countries, Italy’s lower level of labour productivity was not sufficiently offset by higher growth of the labour-market or demographic components. Italy continues to have an average number of hours worked per employee that is above the European average, whereas the participation of young people, women and older workers in the labour market is markedly lower than the European average. The gap with the EU-15 countries is also evident with respect to innovation factors, labour quality and specialization, the capital available per worker and, more in general, the efficiency of production. The low level of labour productivity represents a good summary measure of this gap.

The trend, however, does not seem to be improving. In the 2001-2012 period, Italy’s GDP growth continued to move away from the European average, with average annual growth almost one percentage point below the EU-15 average. The observed disparity is related to the negative trend of the rate of growth of labour productivity in Italy. The breakdown of the rate of growth of labour productivity shows that the contribution of technological progress to total factor productivity (TFP) decreased by almost one percentage point per year during the last decade, thereby constantly widening the gap with the EU-15 average. The reduction of total factor productivity partially reflects Italy’s specialization in low-/medium-technology products. On the positive side, Italy has aligned itself with the European average in the rate of annual growth of work quality.

³  The Lisbon Assessment Framework (LAF) methodology helps to identify the economic-policy priorities and the critical policy areas of the Member States, contributing to the definition of the ‘bottlenecks’ to be addressed in order to improve the position of each country within the EU-15 (Belgium, Denmark, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, Netherlands, Austria, Portugal, Finland, United Kingdom and Sweden).

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TABLE II.2: RELATIVE PERFORMANCE OF GDP COMPONENTS (VERSUS EU-15 AVERAGE) 2001 – 2012

	GDP breakdown scores				Absolute contribution
	Level		Growth		to annual growth
Demographic component		-6.0		-1.0		0.4
Fertility / native population		-10.0		-8.0		-0.1
Share of foreign population / net migration		-3.0		9.0		0.7
Share of working age population		-4.0		-10.0		-0.2
Labour market component		3.0		5.0		-0.2
Youth participation		-15.0		-21.0		-0.5
25-54 male participation		-17.0		-2.0		-0.2
25-54 female participation		-21.0		2.0		0.2
55-64 participation		-14.0		5.0		0.5
Unemployment rate		4.0		9.0		0.1
Average hours worked		12.0		3.0		-0.3
Labour productivity component		-8.0		-19.0		-0.1
Capital deepening		-3.0		-9.0		0.5
Total factor productivity		-5.0		-18.0		-1.0
Initial level of education of the workers (work quality)		-14.0		2.0		0.4
GDP per capita (level) / GDP (growth)		-8.0		-15.0		0.1

Note: The scores of each component are calculated as follows: 10 * (average benchmark indicator)/ standard deviation of the benchmark. The results indicate the level for the last year available and progress (changes). Therefore, a score of 10 means that the value of the indicator is one standard deviation higher than the average standard deviation of the benchmark. The indicator is considered underperforming if the aggregate score is less than -4. The benchmark is the EU-15.

Source: European Commission, LAF Database.

Looking at the demographic component, it is possible to note a contraction in the native population over the decade that is more than offset by the rate of growth of immigrant population. The rate of participation of young people in the labour market has declined annually by almost one-half percentage point, which is more than double European average. The limited presence of young people in the labour market is nonetheless flanked by growth in number of women and people of age 55 or over participating in the labour market.

The picture delineated by the LAF structural indicators suggests some policy areas that could be the focus of priority initiatives in order to revive growth. The analysis also allows for monitoring the impact of the policies put in place. In the area of labour policies, there continues to be significant room for action. The improvement seen in some areas (active policies, employment of women and the matching of labour demand and supply) is countered by other areas where there are still pronounced failings (wage bargaining and taxation). The effects of the recent labour reform are not yet incorporated in the indicators and will be evident only over time.

Instead, the measures introduced for making the product and capital markets more streamlined and more competitive will be more rapidly reflected in the policy indicators. Training, research and innovation remain areas of weakness for Italy, and require greater efforts for their improvement.

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TABLE II.3: ANALYSIS OF THE PERFORMANCE OF POLICY AREAS – 2012

Policy areas	Assessment based on LAF indicators with respect to EU-15
	Levels		Change
Labour market
Active labour policies		-4.0		2.0
Making work pay: interplay between tax and benefits systems		5.0		-3.0
Labour taxation to stimulate labour demand		-9.0		-8.0
Job protection and labour market segmentation		-2.0		0.0
Policies increasing working time		1.0		1.0
Specific labour supply measures for women		-6.0		5.0
Specific labour supply measures for older workers		-1.0		-4.0
Wage bargaining and wage setting policies		-12.0		-8.0
Immigration and integration policies		5.0		-7.0
Labour market mismatch and labour mobility		9.0		1.0
Product and capital market regulation
Policies for promoting competition		1.0		1.0
Sector specific regulation (telecommunications and energy)		1.0		4.0
Competitive environment - Regulatory barriers to entrepreneurship		-9.0		1.0
Business dynamics - Startup conditions		-4.0		-2.0
Financial markets and access to financing
Market integration - openness to trade and investment		-3.0		-1.0
Innovation and knowledge
R&D and innovation		-8.0		0.0
ICT		-3.0		-2.0
Education and lifelong learning		-3.0		-14.0

Note: The scores of each component are calculated as follows: 10 * (average benchmark indicator)/ standard deviation of the benchmark. The results indicate the level for the last year available and progress (changes). Therefore, a score of 10 means that the value of the indicator is one standard deviation higher than the average standard deviation of the benchmark. The indicator is considered underperforming if the aggregate score is less than -4. The benchmark is the EU-15.

Source: European Commission, LAF Database.

II.3 THE MACROECONOMIC IMPACT OF THE REFORMS

This chapter focuses on all of the measures approved after the enactment of the 2012 National Reform Programme, with the emphasis placed on their macroeconomic impact as estimated through quantitative models used at the Ministry of Economy and Finance (MEF).

The macroeconomic impact of the growth decrees⁴

The packet of measures contained in Decree-Law no. 83/2012 and Decree-Law no. 179/2012 includes various initiatives aimed at relaunching the growth and the efficiency of the economic system. More specifically, the assessment of the first decree’s macroeconomic impact on growth has been done with reference to a subset of the measures enacted⁵. For some measures, it was

⁴  The two decrees are respectively Decree-Law no. 83/2012 converted into Law no. 134/2012 and Decree-Law 179/2012 converted into Law no. 221/2012.

⁵  The assessment of the measures considered was done by jointly using the ITEM econometrics model and the QUEST III model developed by the European Commission and adapted specifically to the Italian economy’s characteristics.

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possible to use, for the purposes of the simulation, the impact on the public budget estimated by the technical report provided as an attachment to the decree, whereas for other measures, several technical assumptions were introduced⁶.

The measures for growth contained in the second decree in October and considered in the simulations include numerous initiatives aimed at making the Public Administration more efficient and at facilitating the access of individuals and businesses to administrative procedures. These are primarily measures oriented toward digitalization and innovation of the PA that will significantly change the way in which public services are supplied⁷.

The assessment of the impact of the measures was done with reference to the European Commission’s estimates of possible savings in relation to the EU’s introduction of electronic administrative procedures similar to those contemplated by the Italian legislation⁸. More specifically, in the simulation regarding the second decree, the variable used in the model for implementing the measures is represented by the firms’ overhead labour cost referring to time spent on administrative issues. Consistent with the assessments of the European Commission’s study, it was estimated that all of the measures adopted would lead to a 9.8 per cent reduction in overhead labour cost over a 5-year period.

When compared with the baseline scenario, all of the measures in both decrees would translate into a GDP increase of 0.3 per cent and 0.5 per cent in 2015 and 2020, respectively, and an increase in the long term that could reach 0.7 per cent (see Table II.4). The short-term impact of the measures on consumption and on investments is even greater, at 0.4 per cent and 0.6 per cent, respectively, in 2015, whereas over the medium term (2020), the impact would essentially be in line with that on GDP.

TABLE II.4: MACROECONOMIC EFFECTS of the ‘growth’ DECREES

(PERCENTAGE CHANGES WITH RESPECT TO THE BASELINE simulation)

	2015		2020		Long term
GDP		0.3		0.5		0.7
Consumption		0.4		0.5		0.5
Investments		0.6		0.5		0.6

Source: Analyses using ITEM and QUEST III - Italy (European Commission).

The macroeconomic impact of labour market reform

The labour market reform that became effect in July 2012 contemplates various measures that will affect flexibility in hiring and dismissal, promoting steps to stabilize employment relationships and the transition toward full-time employment contracts without expiration dates (i.e. permanent workers). In addition, the law provides for the reform of the social security system, in combination with the reinforcement of active labour policy measures.

⁶  More specifically, it was assumed that firms had easier access to credit, thereby reducing the value of the user’s cost of capital. An estimation of this reduction was preliminarily obtained with the ITEM model and corresponds to a decrease in the interest rate of approximately 10 basis points over a 7-year period (2013-2019). This interest rate reduction was then introduced into the QUEST III simulation.

⁷  The analysis of the macroeconomic impact of the reforms connected with this decree was done with the QUEST III model adapted to the Italian economy.

⁸  See European Commission, 2006, ‘i2010 eGovernment Action Plan: Accelerating eGovernment in Europe for the Benefit of All (Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Region)’, COM(2006) 173 final.

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Albeit with the caution needed due to the complexity of the reform and the difficulties in translating the reform measures into specific assumptions for a macroeconomic model, an effort was made to assess the reform’s impact on key economic variables through several simulation exercises⁹. It is worth noting that the analysis proposed here is consistent with the changes to the prevailing regulatory framework, and does not imply any assessment whatsoever about the efficiency or effectiveness of the measures contained in the reform which will be instead determined through monitoring.

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Methodology for simulating the impact of labour reform

Three distinct transmission channels were considered through the IGEM model.

The first regards the measures for growing the flexibility of the labour market. The estimates of a recent European Commission study¹⁰ were used for translating the measures into specific assumptions within the model; such study evaluates the effects on employment of labour market reform designed to provide greater flexibility, along with policies to favour the segments of the work force penalized (young people, women and unskilled workers). On the basis of the results of the aforementioned study, the measures promoting flexibility in the labour market were incorporated into the IGEM simulations, with the projection of a 14-percentage point reduction in the wage mark-up to be realized over 10 years¹¹.

The second transmission channel used regards the gradual increase in the rates of social-welfare contributions for more flexible types of employment contracts¹², whose aim is not only to guarantee broader insurance coverage, but also to orient firms more toward the choice of stable contracts when hiring workers. Thus, an increase in the rates of social-welfare contributions was input to the model for apprentices, project workers and workers with fixed-term contracts. The new law provides for the following increases in social-welfare contributions: from 26 per cent to 33 per cent for project workers; an increase of 1.4 per cent workers with fixed-term contracts, and an increase of 1.3 per cent for apprentices. Such increases have been applied within the model by using a different weighting for project workers, workers with fixed-term contracts, and apprentices, against the total temporary workers, thereby giving rise to a weighted average increase of 1.9 percentage points.

⁹  The Italian General Equilibrium Model (IGEM) model was used for the simulations. This is a general economic equilibrium model developed by the Italian Department of the Treasury. (http://www.dt.mef.gov.it/it/analisi_planning_economic_financial/modellistica/igem.html).

¹⁰  Arpaia and Mourre, 2012. ‘Institutions and Performance in European Labour Markets: Taking a Fresh Look at Evidence’, Journal of Economic Surveys, vol. 26(1), 1-41.

¹¹  The wage mark-up is a theoretical measure of the degree of labour market inefficiency. More specifically, it represents a sort of base salary annuity (competitive) in favour of workers, due to the imperfect competition of the market in which they work.

¹²  It is worth noting that the distinction between the various types of workers (in particular, that between temporary and stable workers) represents simplifying assumptions with respect to the much more complex mix of the employed provided by prevailing laws and regulations. This simplification is functional to the economic peculiarities of the macroeconomic model used. Indeed, in such model, the ‘temporary’ component is identified entirely as the workers not working full time, thus including all workers who have an employment relationship not governed by a full-time contract without expiration date (permanent workers).

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The structural changes brought about through these two channels will generate not only a change in employment in the long run (as shown by the number of hours worked overall), but also a change in the long run in the distribution of the hours worked by each type of worker category, with greater use of permanent work contracts. This change generated within the model was incorporated into a second stage of the simulation, with the structural parameter reflecting the ratio of temporary workers to total workers being reduced by one-half of one percentage point (in the model the shift in labour demand toward more stable contracts generates an increase in average labour productivity)¹³. Such reduction is applied gradually in the model over three years. When compared with the baseline scenario prior to the reform, these measures would generate additional GDP growth of 0.2 per cent in 2015, and a 0.1 per cent increase in employment. In the long term, the effects on GDP and employment would be equal to 0.8 per cent.

In order to capture the degree of uncertainty connected with such a broad and detailed structural reform, another simulation was done in which the third transmission channel, namely, the shift from the temporary to permanent labour component, was estimated on the basis of alternative criteria, while the two other channels used in the first simulation (i.e. the reduction of the wage mark-up and the increase in social-welfare contributions) were left unchanged. This alternative estimate of the shift of the temporary component of labour was obtained by using micro-data from ISTAT’s labour force survey and by assuming the percentage of workers having fixed-term contracts would fall by a percentage equal to that at which it had grown over the 2004-2012 period. The reduction is also partially due to the assumption of a decrease in the number of people who are working as alleged free-lance professionals or self-employed, a phenomenon that has become much more pronounced in the past 10 years¹⁴. Based on these assumptions, the number of permanent workers would increase by 2.5 percentage points, with a corresponding reduction of the number of temporary workers (workers employed with fixed-term contracts, project workers, apprentices, and pseudo-free lancers)¹⁵. This change in the mix of employment has been input to the model gradually over three years.

All of these measures would have a positive impact on GDP equal to 0.4 per cent in 2015, whereas employment would remain substantially unchanged over the same period. The more pronounced effects of the reform would be seen in 2020 when the shift with respect to GDP would average 1.0 per cent, while employment would rise by 0.9 per cent¹⁶. In the long term the shift with respect to the baseline scenario would be 1.4 per cent and 1.2 per cent, respectively, for GDP and employment.

Finally, a third criterion was considered in order to quantify the magnitude of the shift from the temporary component to the permanent component. More specifically, an initial estimate was made of the ratio between temporary workers to permanent workers, as considered ‘optimal’ by Italian firms¹⁷.

¹³  This assumption comes from the results of numerous empirical analyses (see, in particular, Boeri and Garibaldi, 2007, Two Tier Reforms of Employment Protection: A Honeymoon Effect? , ‘Economic Journal, vol. 117(521), 357-385.

¹⁴  This is an issue of workers who are formally “free-lance” but who are in reality subject to the conditions of subordinate workers with respect to their employers and are often denied basic employment rights.

¹⁵  Such increase was obtained by assuming that 50 per cent of the workers with fixed-term contracts would become unemployed at the contract expiration date, and that the remaining 50 per cent of the workers would be re-employed at the contract expiration date, however on the basis of permanent contracts.

¹⁶  It is worth noting that the results obtained are in line with the international experience of countries that have undertaken significant labour reforms (such as Germany in 2002), showing that rather lengthy periods of time are needed before the reforms manifest their full effects on GDP and on employment.

¹⁷  This ratio was estimated in a recent study by Caggese and Cuñat (2008) and adapted to the IGEM model’s calibrations (see Caggese-Cuñat, (2008). Financing Constraints ‘ and Fixed-term Employment Contracts‘ Economic Journal, vol. 118(533), 2013-2046.

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It was assumed that the labour market reform can push the firms to reach this optimal ratio, through the reduction of the weight of temporary workers and a parallel increase of the weight of permanent workers. This reduction, equal to seven percentage points, was gradually applied within the model over three years. In this case, too, the two other channels used in the first simulation (the reduction of the wage mark-up and the increase in social-welfare contributions) were left unchanged. Using this assumption, the total impact as of 2020 is equal to a 1.7 per cent increase in GDP and 1.4 per cent increase in employment, whereas the comparable figures for the long term are 2.5 per cent and 1.9 per cent, respectively.

In rounding out the analysis, a sensitivity test was done with respect to the magnitude of the change in the wage mark-up, with all of the other simulation assumptions being left unchanged. In this test, which is useful for checking the robustness of the estimates, it was assumed that the mark-up falls by more or less than 50 per cent of the reduction assumed in the simulations. When assuming a mark-up reduction of 7.0 percentage points, GDP increases by 0.3 per cent in 2015, while employment remains unchanged with respect to the baseline scenario. In 2020, the increase in GDP could reach 0.8 per cent, while employment could rise by 0.6 per cent. Instead, when assuming a mark-up reduction of 21.0 percentage points, the positive changes in GDP and employment in 2015 would be 0.4 per cent and 0.2 per cent, respectively, when compared with the baseline scenario; in 2020, GDP would be 1.2 per cent higher and employment, 1.1 per cent higher, when compared with the baseline scenario

Table II.5 shows the magnitude of the changes in relation to each of the transmission channels used in the simulations of the model.

TABLE II.5: ASSUMPTIONS OF REFORM SCENARIOS IN IGEM AND THE MAGNITUDE OF CHANGES

	IGEM	Assumptions
Change	Variable	1	2	3	4	5
Reduction of the portion of the temporary workers with respect to permanent workers	Shift in percentages	0.5 p.p.	2.5 p.p.	7.0 p.p.	2.5 p.p.
Reduction of the wage mark-up of permanent workers	Wage mark- up		14.0 p.p.		7.0 p.p.	21 p.p.
Increase weighted average rate of social-welfare contributions for temporary workers (workers with fixed-term contracts, project workers and apprentices)	Social- welfare contributions for temporary employees			1.9 p.p.

Source: MEF analyses with the IGEM model.

Considering the scenarios described above, the table below shows a possible range of values of the impact of the labour market reform with respect to the macroeconomic variables.

TABLE II.6: EFFECTS OF LABOUR MARKET REFORM

(AVERAGE PERCENTAGE SHIFTS WITH RESPECT TO BASELINE simulation)

	2015		2020		Long term
GDP		0.2 -0.6		0.5 -1.7		0.8 -2.5
Consumption		0.5 -1.8		0.7 -2.0		1.1 -3.1
Investments		-0.3 -0.0		0.2 -1.4		0.7 -2.1
Employment		-0.2 -0.1		0.6 -1.4		0.8 -1.9

Source: MEF analyses with the IGEM model.

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As shown by Table II.6, the labour reform measures, when considered altogether, have a positive impact on GDP from the first years of the simulation. This short-term effect is the consequence of increased consumption and increased productivity attributable to the increase in permanent workers. Such workers, in going from a condition of temporary to permanent employment, increase their consumption, taking advantage of the positive change in their income and generating an average increase in labour productivity. It is actually as a consequence of this last effect and of the increased costs of employment sustained by firms as a result of the stabilization of temporary workers that employment shows a rather flat trend in the near term. However, in the medium/long term, the impact on GDP and employment is of a similar magnitude.

2012 structural measures: total impact on growth

Table II.7 summarizes the macroeconomic impact of all of the structural reforms undertaken by Government in 2012 in order to promote growth. Their overall effect on GDP comes from the results of the simulations illustrated previously along with the simulations documented in the previous NRP¹⁸. In 2015, the GDP would be 1.6 percentage points higher than in the baseline scenario. This shift would be equal to 3.9 percentage points in 2020, and would then climb to 6.9 percentage points in the long term.

TABLE II.7: MACROECONOMIC EFFECTS of the 2012 REFORMS

(GDP - AVERAGE PERCENTAGE SHIFTS WITH RESPECT TO BASELINE simulation)

	2015		2020		Long term
Deregulation and simplification		0.9		2.4		4.8
Growth Decrees 1 and 2		0.3		0.5		0.7
Labour reform		0.4		1.0		1.4
Total		1.6		3.9		6.9

Source: MEF analyses using the ITEM, QUEST III - Italy (European Commission) and IGEM models.

¹⁸  In the case of labour reform, the central value of the range of the estimated effects in the three different scenarios has been reported for each aggregate.

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2012 structural measures: impact on potential GDP

The impact of the structural reforms on the rate of potential growth over the medium term (until 2025) is evidenced through a counterfactual analysis.

First, the production function methodology agreed at a European level was applied to the macroeconomic framework assumed as the reference. A potential GDP growth rate was derived from this scenario for the 2012-2017 period ¹⁹.

The rate of potential GDP growth of the base scenario is approximately 0.1 per cent for the 2012-2017 period, and thus reflects the low levels registered in recent years (the value estimated for 2012 is actually negative). In the long term, the values approach 1.0 per cent, partly due to greater participation in the labour market. It is noted that the GDP long-term growth rate corresponds to its potential value.

In order to make the analysis conservative, the macro framework (and thus the underlying potential GDP) incorporates only part of the impact of the reforms estimated in the table above. It can be assumed, in order to maintain consistency in the means of representing the scenarios, that the projections of potential GDP after 2017 done with the EU methodology, will underestimate the effect of the reforms by an equal amount.

In order to evidence the full effect of the reforms on potential growth, two alternative scenarios were defined. The first, unlike the reference scenario, includes the entire impact of the reforms, whereas the second excludes any structural reform introduced in 2012. In cumulative terms, the shift between the two alternatives scenarios coincides with the values set out in Table II.7.

The analysis presented is useful in showing that the GDP growth rates could be higher than those set out in the reference scenario.

RATE OF POTENTIAL GROWTH AND IMPACT OF THE STRUCTURAL REFORMS (in %)

¹⁹  For the years from 2018 to 2025, the potential growth rate for the two scenarios was derived based on the convergence assumptions (agreed at a European level) for several variables that are part of the calculation of potential GDP (rate of structural unemployment (NAWRU), capital stock and participation rate). See the Stability Programme for details.

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An evaluation of Italy’s reforms by the OECD and the International Monetary Fund

The OECD the International Monetary Fund (IMF) recently conducted quantitative studies about the macroeconomic effects of Italy’s structural reforms²⁰.

In a first recent study, the OECD evaluates the progress of the Italian economy on the basis of updates of the Product Market Regulation (PMR) Index, referring to the competitiveness of the product market, and the Employment Legislation Protection (EPL) Index referring to the competitiveness of the labour market. The results of this analysis suggest that the reforms implemented from 2008 to 2012 could grow GDP by 5.5 per cent after 10 years. In a second study, which examines the potential of the structural reforms implemented in Italy in the last two years, the OECD shows that such initiatives could generate GDP growth of up to 4.0 percentage points in 10 years.

The IMF quantifies the potential effects of structural reforms with a high degree of intensity, assuming the closure of one-half of the competitiveness gap between Italy and the more virtuous European countries with respect to both the product and labour markets²¹. If a reform of this scope were to be activated in the product market, GDP could rise by 4.4 per cent after five years and by 8.3 per cent in the long term. In the labour market, instead, the growth of GDP could reach 1.1 per cent after five years and 1.8 per cent in the long term. Altogether, the aggregate of the measures considered would put GDP above the baseline scenario by 5.7 per cent after five years and by 10.5 per cent in the long term.

II.4 THE FINANCIAL IMPACT OF THE 2013 NRP MEASURES

The 2013 National Reform Programme identifies 10 policy areas for the aggregation of new initiatives²² developed from measures in effect as of April 2012. Such measures also include provisions referring to measures already implemented in previous years, reported as a regulatory or financial update of the 2012 NRP and/or the 2011 NRP²³. The financial effects are evaluated in terms of higher/lower revenues and higher/lower expenditures for both the State Budget and the Public Administrations, and are quantified with reference to the related balances.

As in the case of preceding publications, the results of the 2013 analysis of impact on the State Budget are reported by macro area²⁴.

²⁰  For the OECD, see: ‘2013 Economic Survey – Italy, Economic Department, Economic and Development Review Committee’ and ‘2012, Better Policies Series – Italy – Reviving growth and productivity’. For the IMF, see: Lusine Lusinyan and Dirk Muir, 2013. ‘Assessing the Macroeconomic Impact of Structural Reforms. The case of Italy’, IMF Working Paper, 13/22.

²¹  A similar analysis was presented in the 2012 NRP with reference to the reforms related to the product market. The estimates indicated a potential GDP growth rate of 1.9 per cent in the first four years, and 5 per cent in 2020.

²²  More specifically: public-expenditure containment and efficiency; federalism; administrative efficiency; the product market and competition; employment and pensions; innovation and human capital; business support; financial system; energy and environment; and infrastructure and development.

²³  This section does not include any analysis of the regulatory and financial updates of measures related to the 2012 and 2011 NRPs.

²⁴  This is basically due to the importance of the central administrations in the definition and implementation of the measures. In addition, Table II.8 does not include ‘federalism’ since the new measures regard legislative bills whose legislative process was not concluded in the XVI legislature.

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The effort begun in 2011 to contain the expenditure of the central administrations (the Ministries, in particular) was continued in 2012, with approximately €5.5 billion of cuts in terms of net balance to be financed over the 2013-2015 period, as identified in the Spending Review Decree and 2013 Stability Law²⁵. Added to such cuts are various measures providing for the reduction of expenditure ordered with respect to: territorial entities (part of which will be achieved through the reorganization of entities, agencies and various organizational units); non-territorial public entities (in particular, pension and social service entities); the healthcare sector; the PA work force; and the procurement of goods and services. Altogether, these measures provide for lowering the expenditures of the State Budget by approximately €23.4 billion in 2013-2015 and by more than €7.1 billion per year, starting in 2016 (Table II.8). Most of the expenditure reduction comes from the territorial entities (more than 50 per cent) and from the streamlining and reduction of healthcare expenditure (more than 36 per cent). In terms of the PA’s net borrowing, the impact will be more than €30 billion overall for the 2013-2015 period, especially due to the different means for booking the financial effects of some measures²⁶.

In addition to the substantial savings required of them, the public administrations have undertaken significant innovative activity²⁷ designed to reduce the weight of the bureaucracy and to increase efficiency. For example, it is worth noting the strong emphasis placed on digitalization in certain key areas, such as the healthcare, justice, and educational systems. Most of the measures have no public finance effect, others contemplate work on innovation and IT infrastructure, and entail charges: for example, the implementation of the provisions planned for the digital justice system will entail higher expenditures of approximately €10 million in 2013 and €5 million as from 2014²⁸.

The agenda of reforms in relation to ‘product market and competition’ is linked to administrative efficiency: the reform activity inaugurated with the ‘Cresci Italia’ and ‘Semplifica Italia’ decrees was continued in 2012, with another two decrees referring to the nation’s growth²⁹ that were more focused in defining the simplification and deregulation measures. This is the case, for example, with the simplification measures provided for the construction sector, the pharmaceutical sector, network contracts, and the deregulation of the natural gas market. Other measures will encourage competition in various spheres, including the wholesale supply of petroleum products for haulage (fuel exchange) and the exercise of unregulated professions. These are regulatory provisions without any public-finance effects, with the sole exception of the new rules for managing business crises (€8.8 million in terms of lower revenues, starting from 2013).

²⁵ As from 2016, more than €1.8 billion.

²⁶ This explanation applies to most of the differences detected in the assessment of the impact of the measures on the two public finance balances.

²⁷ Through the numerous provisions contained in Decree-Laws no. 83, 95, 158 and 179 of 2012 and the 2013 Stability Law. In this policy area, measures are also in favour of human capital: more specifically, the resources provided by the Stability Law for university scholarships.

²⁸ Administrative efficiency is also being addressed through other significant measures without any impact on public finance, especially with regard to the prevention and suppression of corruption and misconduct, and the full transparency of administrative actions (including appointments to executive positions and related powers, as well as the means for using specific public resources).

²⁹ Decree-Law no. 83 and Decree-Law no. 179 of 2012.

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TABLE II.8: FINANCIAL IMPACT FINANCIAL OF THE 2013 NRP MEASURES (in € mn)*

	2012		2013		2014		2015		2016		2017
Public expenditure containment
Higher expenditures		0.0		588.0		0.0		0.0		0.0		0.0
Higher revenues		30.0		1,971.7		2,250.9		2,325.9		1,988.2		1,988.2
Lower expenditures		0.0		7,391.3		7,906.1		8,098.1		7,135.8		7,100.8
Lower revenues		0.0		562.4		586.4		568.4		568.4		562.4
Administrative efficiency
Higher expenditures		0.0		10.0		0.0		0.0		0.0		0.0
Infrastructure and development
Higher expenditures		70.0		320.0		70.0		70.0		70.0		70.0
Lower revenues		4.2		4.2		4.2		4.2		4.2		4.2
Product market, competition and administrative efficiency
Lower revenues		0.0		8.8		8.8		8.8		8.8		8.8
Work and pensions
Higher expenditures		0.0		3,492.0		4,266.0		3,877.0		3,831.0		3,422.0
Higher revenues		0.0		988.0		1,554.0		1,800.0		1,800.0		1,400.0
Lower revenues		0.0		940.8		1,349.1		1,205.7		0.0		0.0
Innovation and human capital
Higher expenditures		0.0		278.6		169.4		109.4		108.1		108.1
Business support
Higher expenditures		0.0		667.3		453.0		506.9		496.7		496.7
Lower revenues		0.0		77.3		149.5		120.7		120.7		111.6
Higher revenues		0.0		0.0		0.0		32.8		0.0		28.4
Energy and environment
Higher expenditures		0.0		0.2		5.2		10.2		10.0		10.0
Financial system
Higher expenditures		0.0		1,617.0		0.0		0.0		0.0		0.0
Lower revenues		0.0		10.8		7.9		9.4		11.0		12.6

* The financial updates of the 2011 NRP and 2012 NRP measures are excluded.

Source: State General Accounting Department analyses of technical reports and of information supplied by the ministries involved.

Some 11 of the 23 measures in the area of ‘employment and pensions’ are contained in the ‘Fornero Law’ (Law no. 92/2012): the regulatory measures that govern contracts, simplify labour disputes and promote professional training do not entail any financial effects. The most significant effects come from the provisions for the new social safety nets referring to cases of involuntary unemployment. In addition to the ‘Fornero Law’, two other measures should be noted, neither of which entails charges to the public budgets: the first relates to the fight against undeclared work, while the second concerns the blue card to facilitate the entry of highly qualified foreign workers³⁰.

Unlike the 2012 NRP and the 2011 NRP, the ‘work and pensions’ policy area includes measures this year with reference to (i) welfare (in favour of the households, the promotion of the socio-educational services, the destitute and the homeless) entailing lesser revenues of approximately €3.5 billion over the three-year period of reference and increases of €575 million in appropriations to funds for social policies and the non-self-sufficient for 2013; and (ii) the promotion of equal opportunities, both in terms of rebalancing representation by gender and supporting parental leave; these measures entail higher services charges and non-cash contributions in the amount of €78 million per year for the 2013-2015 period.

The recovery from the recession at the end of 2011 has helped to make ‘business support’ a central part of the reform agenda, with measures aimed at: curbing the credit crunch³¹; reordering the rules for the reconversion and

³⁰  Legislative Decree no. 109 and Legislative Decree no. 108 of 2012, respectively.

³¹  Decree-Law 29/2012.

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requalification of industrial areas stricken by crisis; encouraging development of direct investment from abroad³²; revising and implementing rules regarding the certification and offsetting of the receivables claimed by suppliers of goods and services to the public administrations, under supply contracts and tenders; and promoting sustainable growth within the framework of development of a new vision of entrepreneurship³³. While such measures have no impact on the public finances, there are other business-support measures in different sectors (in particular, tourism, farming, haulage, publishing and construction) concentrated in 2013 that will entail more than €676 million between higher expenditures and lower revenues. Similarly, the measures in favour of innovative startups, a key part of the ‘Growth 2.0’ Decree³⁴, will entail lost revenues³⁵ (approximately €339 million in the 2013-2017 period), and higher expenditures (€38/40 million per year starting from 2013). The fiscal measures (for digital intellectual property, for merchants, artists and professionals, and for tax-free urban zones) and the related charges round out the range of business support measures.

The ‘financial system’ area includes significant initiatives: specific measures, such as the MEF’s underwriting of the new financial instruments issued by Banca Monte dei Paschi di Siena S.p.A.³⁶; and broader measures, such as the recapitalization of the collective-loan guarantee consortiums (Confidi), the rules for penalties for short-selling and credit default swaps, the new provisions amending the Consolidated Public Debt Act. Most of the measures in this macro area do not entail charges, except for the loss of revenue (approximately €52 million in the 2013-2017 period) resulting from new financing instruments for businesses (commercial paper) and for Italy’s participation in the EIB share capital increase (€1,617 million of higher expenditures in the capital account for 2013).

The measures for ‘energy and environment’ are quite varied, ranging from the National Energy Strategy, to integrated waste management, and urban park space. The most significant charges are those associated with the appointment of the regulatory body for implementing urgent redevelopment measures for the City of Taranto (Decree-Law no. 207/2012) and for the implementation of programmes for the continuous monitoring of the environmental status of marine waters. The activity of implementing measures undertaken by the Government in past years in relation to the trading of greenhouse gas emissions and their reduction also continued in 2012.

The Government’s action in support of the development of the country’s infrastructure has also continued, particularly in order to encourage the involvement of private capital, for example with measures on tax exemptions and on project bonds. Alongside these measures are new initiatives aimed at favouring ports, transportation services and the national plan for cities.

The national plan for cities is aimed at the redevelopment of rundown urban areas, and provides for possible investment of resources of more than €3.7 billion, or 11 per cent of the total value of the financing of the planned

³² Most of the measures included in this macro area are provided in the decrees law on growth (Decree-Law no. 83 and Decree-Law no. 179 of 2012) and in the Stability Law.

³³ Fund for Sustainable Growth referenced in Article 23 of Decree-Law no. 83/2012.

³⁴ Decree-Law 179/2012.

³⁵ Arising, for example, from the 12-month extension of the so-call ‘carryover’ period for losses, as well as from various investment incentives for startups.

³⁶ With a net impact of €2 billion on the State Sector borrowing requirement.

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measures (more than €34.3 billion for the 2009-2017 period) as summarized in Table II.9. In comparison with last year, the resources available (approved by the Interministerial Economic Planning Committee (CIPE)³⁷, Trans-European transport networks (TEN-T) funds and private resources) reflect an increase of approximately 35 per cent.

Most of the resources are assigned to road- and highway-connection works (approximately €13 billion, or 37.6 per cent of the total during the period of reference). The second axis of infrastructure development is represented by cross-border rail links, which mainly benefit from TEN-T resources and require a financial commitment of approximately €8.5 billion from 2009 to 2017.

TABLE II.9: CHARGES FOR INFRASTRUCTURE AND TRANSPORT (in € mn)

PROJECTS	2009- 2012-		2013		2014		2015		2016		2017		Total		Other public resources *		Private resources		TOTAL		Weight of invest- ments (in %)
Public works		0.0		0.0		114.0		616.0		528.0		544.5		1,802.5		0.0		0.0		1,802.5		5.2
Local public transport		1,240.3		219.0		167.0		7.3		35.3		0.0		1,668.9		196.0		700.0		2,564.9		7.5
Southern Italy plan		2,523.0		0.0		0.0		0.0		0.0		0.0		2,523.0		0.0		0.0		2,523.0		7.3
Plan for cities		10.0		24.0		40.0		50.0		50.0		50.0		224.0		1,625.5		1,898.0		3,747.5		10.9
Road and highway connections		3,097.8		120.0		129.1		80.0		45.3		0.0		3,472.2		7,420.0		2,030.0		12,922.2		37.6
Port hubs and other		624.2		11.1		0.0		0.0		48.9		0.0		684.2		0.0		77.0		761.2		2.2
Railway sector		2,194.6		742.5		730.3		1,118.0		633.5		150.0		5,568.9		2,588.4		338.0		8,495.2		24.7
Cross-border links		2,139.0		742.5		730.3		1,118.0		633.5		150.0		5,513.2		2,588.4		338.0		8,439.6		—
Railways		55.6		0.0		0.0		0.0		0.0		0.0		55.6		—		—		—		—
Other projects		1,524.9		0.0		0.0		0.0		0.0		0.0		1,524.9		0.0		0.0		1,524.9		4.4
Public construction		417.3		0.0		0.0		0.0		0.0		0.0		417.3		—		—		—		—
Regional water supply network		297.6		0.0		0.0		0.0		0.0		0.0		297.6		—		—		—		—
Access to airport hubs		210.0		0.0		0.0		0.0		0.0		0.0		210.0		—		—		—		—
MOSE (9th tranche)		600.0		0.0		0.0		0.0		0.0		0.0		600.0		—		—		—		—
TOTAL		11,214.9		2,641.5		1,180.4		1,871.3		1,341.0		744.5		17,468.6		11,829.9		5,043.0		34,341.5		100.0

* Funds for the TransEuropean Transport Network (TEN-T) programme and other public resources.

Source: State General Accounting Department analyses using data compiled by the Infrastructure and Transport Ministry.

³⁷  The reference is to CIPE resolutions published in the Official Gazette of the Republic of Italy.

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III. ITALY WITHIN THE EUROPEAN SEMESTER FRAMEWORK: SUMMARY OF ACTIONS

III.1 RESPONSES TO RECOMMENDATIONS

This chapter outlines the measures that have been adopted in Italy to respond to the European Council’s recommendations.

DEBT REDUCTION

RECOMMENDATION 1. Implement the budgetary strategy as planned, and ensure that the excessive deficit is corrected in 2012. Ensure the planned structural primary surpluses so as to put the debt-to-GDP ratio on a declining path by 2013. Ensure adequate progress towards the MTO, while meeting the expenditure benchmark and making sufficient progress towards compliance with the debt reduction benchmark.

In 2012, the Government committed itself to pursuing a public-spending reduction and fiscal consolidation strategy. This commitment will allow Italy to achieve a balanced budget in structural terms by 2013 and run a surplus of over 4 per cent of GDP starting in 2015¹. The debt reduction measures include:

• Enhancing the value of and divesting State assets. In July 2012, the Government submitted a plan to enhance the value of and divest state-owned real estate and privatise state-owned companies. Once it becomes fully operational, this extraordinary multy-year plan will raise resources equal to at least 1 percentage point of GDP a year over the next five years, to be mainly allocated to the Fund for the amortization of public debt. The rest will be used to finance public investment and to reduce the stock of Public Administration arrears in commercial transactions between businesses.

• Sale of shareholdings. The Fund also benefitted from revenues from sales of state shareholdings in FINTECNA, SACE and SIMEST, sold to CDP (for a total of €7.9 billion already paid to CDP in 2012). Other receipts for reducing the debt are expected to flow in as of 2016 from a share of proceeds from CO2 emission permits auctions and from private donations.

• Mutual funds. It has been envisaged that the Ministry of the Economy and Finance shall set up an asset management company whose task will be to set up mutual funds for the following purposes: i) participating in closed real-estate funds (so-called ‘fund of funds’) promoted by government agencies or local authorities or in which government agencies or local authorities have a stake; ii) enhancing the value of and selling state-owned real estate that is

¹  For more on this topic, see the Stability Programme.

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not used for institutional purposes, or property owned by local authorities (also coming from transfers of ownership under the so-called federalism related to state – owned property), by companies controlled by the State or owned by public bodies and by the State; iii) enhancing the value of and divesting real estate currently used by the Ministry of Defense that is no longer necessary to perform institutional functions. After consulting Agenzia del Demanio (the State Property Office ) a first ministerial decree concerning 20 buildings has been issued to that effect.

• The digital platform. The State Property Office has set up a digital platform used to manage all the stages of competitive sale procedures (from the notification of public auction to awarding)². This platform offers a whole series of advantages as it simplifies the ways in which auctions are managed, making sale procedures more transparent and efficient.

• Redevelopment of state property. As part of this plan, the State Property Office, together with the Ministry for Cultural Heritage and Activities, has started the ‘Valore Paese’ project for finding new uses for unused buildings owned by the state or by general government bodies (also including local authorities). The project was designed bearing in mind the nature and value of real estate, as well as its potential for development, and identifies possibilities to increase the economic and social value of state property, through its redevelopment for tourism, accomodation, business as well as residential purposes. The first operational projects called ‘Valore Paese-Affidiamo Valore’ and ‘Valore Paese-Dimore’ have been started.

• Cassa Depositi e Prestiti. CDP also plays an active consultative role providing support to local authorities in their efforts to enhance the value of state-owned real estate. In addition to helping individual authorities in taking a census and appraising real estate, CDP also participates in enhancing the value of property. The tools at its disposal are the FIV Plus - Fondo Investimenti per la Valorizzazione (Investment Fund for Value Enhancement), and VOL – Valorizzazione On Line (On Line Value Enhancement).

• Issuance of state bonds. The Ministry of the Economy and Finance has extended the range of bonds it issues, by introducing the new ‘BTP Italia’ in March 2012. As of 2013, new issuances of state bonds will be subject to the collective action clause (CAC), as required by the Treaty on the European Stability Mechanism.

²  It may be accessed from the following link http://demanio.asteimmobili.it or from Agenzia del Demanio’s home page www.agenziademanio.it

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THE NEXT STEPS

• The census of state-owned property will be completed by 2013 as part of the plan to enhance the value of and sell state-owned property, most of which is owned by local authorities, and to privatise state-owned companies; and the Società di Gestione del Risparmio (Asset Management Company) will be set up to take care of the value-enhancement and sale transactions.

• In addition, the ‘Valore Paese’ project shall be extended to the whole national territory with a view to enhancing the value of unused buildings owned by the government and government agencies, while the sale of armed forces barracks shall be continued.

EFFICIENCY AND QUALITY OF PUBLIC SPENDING AND USE OF STRUCTURAL FUNDS

Recommendation 2. Ensure that the specification in the implementing legislation of the key features of the balanced budget rule set out in the Constitution, including appropriate coordination across levels of government, is consistent with the EU framework. Pursue a durable improvement of the efficiency and quality of public expenditure through the planned spending review and the implementation of the 2011 Cohesion Action Plan leading to improving the absorption and management of EU funds, in particular in the South of Italy.

In 2012 the balanced budget rule was introduced in the Constitution, while efforts to contain public spending in relation to civil servants, health, education and social security, as well as Public Administration current expenditure continued. The use of EU funds will be dealt with in greater detail in Chapter V and in section III.3. The following are the most important public expenditure containment measures:

• Achieving a balanced budget has been made a constitutional requirement. In April 2012 Parliament adopted a law introducing the principle of a structurally balanced budget in the Constitution which will become effective as of 2014³. The principle of a balanced structural budget shall apply to ministries as well as to regional and local authorities - albeit considering their specific concerns - and is part of the new European provisions on budget discipline. The establishment of an independent body has also been envisaged, whose task will be to analyse, review and assess public finance performance and compliance with the budget rules.

• Approval of the strengthened law implementing a balanced budget. In December 2012 the law implementing the principle of a structurally balanced budget was adopted by an absolute majority in both Houses of Parliament (standards and criteria to ensure a balance between revenues and expenditure and the sustainability of the whole general government debt).

• The special spending review commissioner. In May 2012 the office of the special spending review commissioner was created. The criteria followed in reviewing expenditure programmes were: i) preventing overlap or duplication

³  For more details on this topic, see the Stability Programme.

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of efforts within one and the same ministry or between different ministries; ii) rationalisation of employee distribution and concentration of peripheral offices; iii) rationalisation of goods and services procurement with greater use of procedures carried out by central purchasing bodies and e-procurement procedures; iv) greater efficiency in buildings used by general government agencies; v) reduction of expenditure on rented premises used by ministries by reducing rents by 15 per cent.

• The first two stages of the Spending Review. The first stage of the structural cuts, which began in July 2012, affected current expenditure. The measures adopted include: i) cost-efficiency and containment of public procurement; ii) cut in staff numbers and spending on consultants, the regulation of meal vouchers, holidays entitlements, staff off days, in addition to the payslip payment system; iii) closure of some government agencies and more efficient use of public buildings; iv) ban on the purchase of new buildings by central government agencies and local authorities. The second stage started in October 2012 and became part of the 2013 Stability Law. The new provisions mainly relate to the spending review of the purchase of new real estate by regional and local authorities and national health service authorities, by reviewing price adequacy. Taken together, these two stages will lead to lower net expenditure of €4 billion in 2012, €6.3 billion in 2013, €11.3 billion in 2014 and €11.6 billion in 2015. Consequently, in the period 2012-2015, the total amount of lower net expenditure is estimated at €33.3 billion. Once the scheme is fully operational, the structural reduction of expenditure will amount to €11.6 billion.

• The third stage of the Spending Review. The Government then started to set out the third stage of the spending review, mainly aimed at reducing costs in regional and local offices of government ministries and rationalising small and medium-sized agencies and companies owned by regional and local authorities, including through a redistribution of employees. Going ahead with this stage is crucial, as it would further strengthen control over spending on intermediate consumption of government agencies and the national health service.

• Containing government employee expenditure. With regard to ministries, agencies, non - economic government agencies and research institutions, a staff cut of at least 20 per cent of existing staff has been envisaged in the case of managers and of at least 10 per cent of total expenditure relating to non-management level positions. Ministries that failed to issue the implementation measures by October 2012 shall not be allowed to hire new staff, regardless of employment contracts. Should there be any surplus staff, a series of possibilies have been envisaged, including retirement under given conditions and the start of guided mobility procedures.

• Turn-over and state employee compensation. Staff turnover has been halted for a further year. For the 2012-2014 three year period, the spending review envisages the possibility to hire new staff up to 20 per cent of the staff who retired the previous year, 50 per cent in 2015 and 100 percent as of 2016. A regulatory procedure has also been initiated to extend the pay freeze and contract renewals for civil servants to 2014.

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• Staff cuts in local authorities. The Government has entered into talks with the regional authorites to establish virtuous criteria on how it can proceed to cut staff levels. Indeed, the law envisages that criteria for setting the staff levels needed in local authorities should first and foremost bear in mind the ratio of employees (including those of state shareholdings) to the resident population.

• Streamlining government agencies and other government bodies. The whole machinery of general government will be made more efficient through: i) a general reorganisation of government functions in the community; ii) a transfer of tasks performed by peripheral offices of government ministries to prefectures; iii) a reorganisation of the distribution of judicial offices in the community.

• Containing Public Administration expenditure. Moreover, provisions concerning the reduction of rents paid by Government Ministries for the use of buildings owned by government agencies have been adopted. The State Property Office is preparing the notice for the exchange of real estate owned by the state and buildings owned by private individuals rented by the State, with a view to reducing rent expenditure. Further provisions envisage a ceiling, applicable to all Ministries, on the purchase, rental and maintenance of official cars.

• Strengthening the role of CONSIP as a Central purchasing body. Government Ministries and social security and welfare institutions should use Consip S.p.A, in its capacity as central purchasing body for the purchase of goods and services exceeding the EU threshold. Contracts entered into that fail to comply with the above requirement are null and void, involve a tort and imply administrative responsibility. Agreements entered into through another purchase exchange at more favourable economic conditions shall not be considered null and void. Criteria for participation in the tender cannot envisage any access limits relating to the company’s turnover unless adequate reasons are provided.

• The reform of the National Health System (NHS). The overhaul of the healthcare system includes: i) a reorganisation of community – based health facilities; ii) the introduction of more transparent procedures for choosing managers and heads of hospital departments; iii) the growth in private investment in cooperation with the public sector; iv) new rules on the professional status and career advancement of physicians; v) a review of the national pharmaceutical handbook as well as deletion of obsolete drugs.

• Containing pension expenditure. The reform of the national pension system came into force on January 1st, 2012. Expected cumulative savings, net of fiscal effects on public finance, have been estimated at €7.6 billion in 2014 and almost €22 billion for the period up to 2020.

• Strengthening control over the spending powers of regional and local authorities. Italy’s Court of Auditors has been given powers to control budgets and balance sheets of regional and local authorities; the aim is to ensure that they are consistent with the objectives of the Internal Stability Pact.

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• Cost of politics and local government. First, payment of an 80 per cent share of tax revenues to regional authorities (other than those to be used for funding the national health system and local public transport) has been made dependent on the adoption by regional authorities of a series of savings measures, including: i) a cut in the number of council members and councillors proportional to the number of residents; ii) overall compensation being set in relation to the electoral mandate of the President and council members at a level that does not exceed the compensation paid by the most virtuous regional authority; iii) definition of further actions to contain expenditure caused by cumulative emoluments and pension benefits, in addition to the financial disclosure and transparency requirement. As to regional and local councils, regulations now envisage a cut in contributions. In order for these regulations to be implemented, the relevant regional provisions must be changed to ensure that these contributions do not exceed 50 per cent of the level of contributions paid by the most virtuous regional authority, without prejudice to electoral expenses refund envisaged by national law. No contributions shall be paid to councils made up of one member only, except to those that were set up as one-member councils before the election.

• Funds for multi-year financial rebalancing of local authorities. To ensure the financial stability of local authorities that have structural budget imbalances, a Revolving Fund has been set up with a €30 million endowment for 2012, 230 million for 2013 and 200 million for each year from 2014 to 2020. With regard to cash advances, a €50 million fund has been set up under the 2013 Stability Law, which can be drawn on by local authorities with a financial imbalance that have already agreed to the multi-year financial rebalancing procedure.

• Extending the Internal Stability Pact. As of 2013, in addition to provinces and municipalities with more than 5,000 inhabitants, also municipalities whose population ranges between 1,001 and 5,000 inhabitants have to comply with the Stability Pact. Moreover, the Internal Stability Pact also applies to local authorities that have been placed under the administration of an external commissioner on grounds of mafia infiltration. In addition, an implementation decree is currently being drafted to extend the fiscal constraints envisaged by the Internal Stability Pact to in-house companies of local authorities, special purpose enterprises and institutions.

• Private capital incentives in the field of cultural heritage. The Government has adopted a series of measures to promote donations and other forms of support for the cultural heritage and the environment. In addition, private investment in this sector has now been made tax-exempt.

• Implementing the Cohesion Action Plan. With a total endowment of €11.9 billion so far, the Cohesion Action Plan is well on track. Thanks to this measure and to other steps aimed at speeding up procedures, EU funding expiring on December 31 has been fully used. In 14 months (October 2011 – December 2012) certified expenditure reached €9.2 billion, more than had been spent in the previous five years.

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• 2014-20 planning cycle. The rescheduling of operational programmes co-financed through Structural Funds has provided an opportunity to introduce new methods to improve the quality of spending that are also inspiring the development of a new planning cycle for the 2014-2020 period. These methodological innovations support the objective of a structural strengthening of the Ministries involved in planning and managing programmes, as required in the European Council’s recommendations, to be achieved also through strong national control over the whole planning and implementation cycle of programmes. For more details on the use of EU Structural Funds, please see section III.3.

THE NEXT STEPS

• The spending review approach to contain and improve the quality of spending shall be continued, especially with regard to the peripheral offices of ministries.

• In line with the 2013 Stability Law, new legislative measures shall be adopted by 31 December 2013 to reorganise provinces and set up metropolitan cities.

• In the course of next year, besides continuing with the implementation of the Cohesion Action Plan, a swifter implementation of operational programmes is needed through an increase in domestic intermediate expenditure targets to avoid an unsustainable concentration of expenditure in the years 2014-2015, when the new cycle starts.

• On the basis of the debate among the institutions and with the economic and social partners, and of talks with the European Commission, action plans shall be developed for the 2014-2020 planning period (Partnership Agreement and Operational Programmes) ensuring full transposition of the necessary methodological innovations to improve spending efficiency.

• In line with what was reported in the Council’s Recommendation and with regard to the European Commission’s position, the structural improvement of the abilities of Ministries and agencies to participate in planning and managing funds becomes a top priority.

• At the same time, under the new EU provisions, the most appropriate ex-ante conditionalities shall be identified at the start of the planning cycle, so as to ensure that the efficacy requirements of programmes are fully operational.

YOUTH UNEMPLOYMENT, EDUCATION AND SCHOOL DROPOUTS

RACCOMANDAZIONE 3. Take further action to address youth unemployment, including by improving the labour- market relevance of education and facilitating transition to work, also through incentives for business start-ups and for hiring employees. Enforce nation-wide recognition of skills and qualifications to promote labour mobility. Take measures to reduce tertiary education dropout rates and fight early school leaving.

The Government has made the fight against youth unemployment a priority, including by improving education and vocational training. The measures adopted aim at favouring the establishment of more stable employment relationships, by raising the value of apprenticeship as the preferred gateway to the labour market for young people and as a means for countering the improper use of certain types of employment contracts.

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The most effective action programmes include:

• Strengthening apprenticeship. Under the labour market reform introduced by the Government, apprenticeship becomes the preferred gateway to the labour market for young people. Apprenticeship is actually a dependent employment contract whose aim is to provide training and employment to young people. The consolidated text on apprenticeship envisages three different employment contract types: i) apprenticeship to acquire skills and a professional diploma; ii) apprenticeship to acquire skills or a skill-perfecting contract; iii) higher-education and research apprenticeship.

• The educational value of apprenticeship: The reform: i) introduces a mechanism whereby the hiring of new apprentices is allowed when at least 50 per cent of the existing ones have been given a permanent employment contract in the last three years; ii) a minimum six-month length is established for apprenticeship, without prejudice to contracts entered into for seasonal activities; iii) raises the maximum number of apprentices that can be hired, on the basis of the number of skilled workers (from the current ratio of one apprentice to each worker to three apprentices to every two workers).

• Action plan on apprenticeship. In February 2013 a ‘Protocol for the promotion and wide use of the new apprenticeship tool’ was signed with regional authorities and autonomous provinces, whose purpose is to consolidate an information network among stakeholders and to ensure maximum information symmetry across the national and local levels. A national portal on apprenticeship has also been set up, with the aim of favouring the widest possible dissemination of information and an understanding of this type of contract among all citizens and especially young people. In October 2012 a MoU was signed by Italy and Germany to initiate a dual apprenticeship programme called ‘Job of my life’.

• Apprenticeship, trades and artisan professions (AMVA). AMVA is a Programme promoted by the Ministry for Employment and Social Policies, implemented by Italia Lavoro, with the contributions of the National Operational Programmes of the European Social Fund for 2007-2013 ‘System Action’ and ‘Governance and system actions’. The Programme is intended to promote labour market entry for young people.

• Apprenticeship. In line with what was set out in the reform law of January 2013, “guidelines on apprenticeship” have been issued. The aim of an apprenticeship is to acquire professional skills and to facilitate labour market re-entry; the agreement sets minimum standars applicable throughout the national territory. All apprentices are entitled to an allowance of no less than €300. The length of the training and orientation period is: i) four months for high-school students; ii) six months for unemployed workers; iii) twelve months for university students or disadvataged people; iv) twenty-four months for disabled people. Training programmes may be run by firms with up to 5 employees through the involvement of a trainee, while firms with a number of employees ranging from 6 to 20 may involve two trainees, while in a company

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with over twenty employees, the ratio of trainees to workers under a permanent employment contract shall not exceed 10 per cent. Enterprises that have made workers redundant in the previous 12 months or that have initiated the CIG procedure (CIG Cassa Integrazione Guadagni – Short term pay supplementation fund, i.e. Italy’s redundancy scheme) cannot run training programmes.

• Technical institutes (ITS). These institutes have been strengthened through the introduction of two- and three-year courses strictly linked to the actual needs for development and internationalisation of firms, especially SMEs. Technical Institutes are ‘special schools of technology’, an alternative to university, focussed on training and labour-market entry.

• Active labour-market policies. Through a Memorandum of Understanding (MoU) signed at the Unified Conference and in agreement with social partners, the Government issued guidelines for setting up local networks including education, training and employment services directly linked to strategies for economic growth (youth access to work, welfare reform, active aging and the excercise of active citizenship, including by immigrants). In this connection, priority will be given to action aimed at: supporting people’s own efforts to attend formal and informal education; ii) recognition of educational credits and certification of acquired knowledge; iii) lifelong use of orientation services.

• Monitoring. The reform has introduced a permanent monitoring and assessment system at the Ministry of Employment. The system is based on two pillars: i) an effective and fast updating system on the main labour market developments; ii) a scientific programme to assess the main impact of the reform.

• Funds for strengthening the pathways to open-ended contracts. The Government has set up a Fund for financing programmes aimed at increasing youth and women’s employment both quantitatively and qualitatively, allocating €196.1 million approximately for the year 2012 and €36 million for the year 2013. While incentives are aimed at favouring the transformation of fixed-term contracts of young and female workers into open-ended contracts, they also aim at favouring the stable employment of young and female workers that have been hired under fixed-term contracts or have joined a partnership contributing work to it. Under this incentive INPS pays €12.000 for each fixed-term contract turned into an open-ended contract and for each stable position up to a maximum of ten employment contracts for each employer and up to the limits of funds made available for contracts entered into with young people under 29 and women .

• Fund for young employment in the green economy sectors. The re-allocation of the Fund (that has been operational since March 2012 with €470 residual funds) is intended to increase youth employment by granting concessionary loans (0.5 per cent) to firms operating in key sectors, provided that new permanent employment contracts are given to workers under 35 years of age (if more than three workers are hired, at least a third of jobs has to be given to young graduates under 28 years of age).

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• Concessions envisaged for firms hiring highly-skilled young workers on a permanent basis. Companies hiring graduates from a technical and scientific background to be employed in R&D activities or individuals who hold a PhD shall benefit from a contribution equal to 35 per cent of costs incurred in hiring them (up to a ceiling of €200,000 for each company). This tax contribution is granted on condition that companies keep the newly hired employees for a period of at least three years. To this end, €25 million have been allocated for 2012 and €50 million as of 2013.

• The Social Plan for the South. As part of the measures to promote youth employment particularly important is The Social Plan for the South, launched as part of the rescheduling of EU funds.

• The intergenerational Pact. In implementing the Productivity Agreement, signed by the social partners at the end of November 2012, the Government has drafted a decree envisaging the possibility for an elderly worker to move from full time to part time, thus enabling the hiring of a young worker under an apprenticeship contract or under a permanent employment contract. The Regions and Provinces will pay the social security contribution supplement for the elderly worker into INPS, as voluntary contributions for which they will provide the social security agency with a quarterly report.

• New funds for labour-market entry of young people. Regional agreements have been signed to finance initiatives aimed at strengthening relations between universities and firms and the transfer of knowledge. €110 million have been earmarked for this purpose. More specifically, €40 million have been set aside for the ‘social innovation’ competition for innovative projects of a social nature for young people under 32 years of age residing in the South of Italy.

• Innovative Startups. Great momentum has been generated for the creation of new qualified jobs, especially for young people, by the new regulations governing innovative startups (see CSR No.6).

• The mobility of highly skilled workers in Italy. The so-called ‘EU blue card’ has been introduced for highly skilled immigrants through the implementation of the EU Directive on entry and stay conditions of citizens who wish to work in highly skilled jobs.

• The reform of the national education and training assessment system. The reform envisages self-assessment by schools, on the basis of data provided by the information system of the Ministry of Education, Universities and Research (MIUR), by INVALSI and by schools.

• The national system of skills certification. A whole series of new innovative arrangements have been regulated, such as lifelong learning and the validation and certification of skills acquired in informal educational pathways, with the aim of bringing the central and local educational, training and employment services into line with EU policies and guidelines.

• The right to study. In the sharing out of funds among universities (through the Standard Financing Fund) the Ministry for Education and Research (MIUR) rewards those institutions that invest more funds in the right to study. MIUR has also committed itself to stabilising the Supplementary Fund for the Right to Study around approximately €130 – 150 a year that will supplement the funds made available by the Regions (granting of scholarships).

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• The National Longlife Career Guidance has been renewed. The Plan is intended for all schools and its aim is to reduce dropout rates. In lower high school, the Plan specifically addressed the issue of on-the-job training of teaching staff in relation to teaching guidance. In addition, Projects for socially endangered areas with high dropout rates and for those with strong immigration have been funded with €53 million a year. A total of 7,497 educational institutions have implemented these Projects.

• Measures to combat dropout rates in Convergence Objective Regions. In the current planning cycle, the Structural Funds for reducing dropout rates, and more generally, for improving education, envisage about €4.4 billion. Co-funded programmes were mainly concentrated in the South of Italy. Up until now these measures have involved 1.2 million young people in activities to improve their basic skills and and about 450,000 youths in activities to counter dropout rates. About 3,500 schools could set up 12,500 laboratories.

• Support and guidance. MIUR has appropriated €103 million to be shared out among the Regions for free provision of textbooks to disadvantaged students in compulsory education and upper secondary school for the current school year 2012-2013. S.OR.PRENDO and ALMAORIENTATI guidance software has been made available free of charge to students: S.OR.PRENDO allows eighth grade (terza media) students to follow a guidance pathway and explore the various professions according to their personal preferences and traits; ALMAORIENTATI helps secondary school students to choose the right university.

• University guidance. Refinancing the Scientific Degree Courses Plan has enabled the continuation of projects and programmes through which secondary school students and their teachers interact with university professors. Cooperation is aimed at setting up laboratories to improve technical and scientific skills and to increase the number of students enrolling in scientific courses. Educational pathways and work/study pathways are being designed to help part-time students, who already have a job, to graduate.

• The ‘Universitaly’ portal. Set up with the cooperation of all Italian universities, Universitaly will provide a thorough description of all the components of the Italian university system to both Italian and foreign students who wish to find information and will allow them to compare courses offered by different universities.

THE NEXT STEPS

• In the course of 2013 activites to disseminate information on and incentivise apprenticeship contracts will be carried on in agreement with the Regions. Red tape reduction and services to firms will be strengthened, together with the provision of an appropriate range of courses.

• Measures will be adopted to strengthen the placement capabilities of authorised public and private employment services to improve the match between labour demand and supply, as well as between the educational system and the needs of the labour market. To this end, priority must be given to the interoperability of all components of the educational system and to the monitoring of action taken by employment services.

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• Monitoring of the impact of the labour reform shall continue, with a view to gathering sufficient data on the way the reform is working and taking note of any problems as a basis for further review efforts. Special attention shall be paid to aspects relating to flexible entry into the labour market.

• Measures to counter school dropout will continue and be strengthened, including by promoting lifelong learning and strengthening the relationship between education and the needs of the labour market.

• Educational failure, especially in the Regions of the South, shall also be countered through a better use of EU funds as well as with renewed attention to the quality of teaching.

• In the course of the year measures will be adopted to promote lifelong learning among teachers and generational turnover.

LABOUR MARKET AND PRODUCTIVITY

RACCOMANDAZIONE 4. Adopt the labour market reform as a priority to tackle the segmentation of the labour market and establish an integrated unemployment benefit scheme. Take further action to incentivise labour market participation of women, in particular through the provision of childcare and elderly care. Monitor and if needed reinforce the implementation of the new wage setting framework in order to contribute to the alignment of wage growth and productivity at sector and company level.

In January 2012 Law n.92 ‘Provisions relating to labour market reform in a growth perspective’ was adopted. The reform of the labour market, which is linked to welfare reform, intends to create a more inclusive and dynamic labour market to overcome its current segmentation and rigidities and to structurally contribute to increasing employment as well as labour productivity.

The following is a list of specific measures:

• Streamlining existing contractual arrangements. The first reform area is the streamlining of existing contract types: the reform keeps virtuous contracts while limiting improper ones. More flexible contracts or the so-called quasi-subordinate contracts are maintained in their variations that are more favourable to both workers and employers and in those sectors needing flexibility and professionalism (see CSR No.3).

• A review of workers’ protection against unlawful dismissal. With regard to discriminatory dismissal, the consequences in terms of sanctions are the same as those provided in the previous version of Art.18. As regards unlawful dismissal, whether individual dismissal or dismissal on disciplinary grounds, if the grounds for the decision to dismiss were not founded or the worker may be punished only with sanctions other than dismissal, the dismissal is revoked and the worker is reinstated and paid compensation amounting to up to 12 months’ salary. On the contrary, if the dismissal was merely unlawful, the worker is not entitled to be reinstated, but only to be paid compensation ranging between 12 and 24 months’ salary. With regard to unlawful dismissal

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on economic grounds, the consequences of a court reversal may vary. Generally speaking, the worker is entitled to compensation for damages ranging between 15 and 24 months’ salary. On the contrary, if the reason why the worker was dismissed is clearly groundless, he or she must be reinstated in his/her post, unless he/she chooses to be compensated with 15 months’ salary. In addition, the reform introduced the limit of 12 months’ salary for damages, regardless of the length of proceedings, thereby reducing the uncertainty linked to the cost of dismissal incurred by employers.

• New employment trial. The reform has introduced major procedural changes with regard to employment proceedings. More specifically, a requirement has been introduced for employers to report to the local Labour Office Directorate their intention to proceed to dismissing a worker on justified grounds, providing the reason for firing. Subsequently, a mandatory conciliation stage is initiated –lasting up to a maximum of 20 days since notification. At the end of this procedure, the employer may proceed to the dismissal of the employee and judicial proceedings are initiated, during which the overall conduct of the parties will be judged.

• Undated resignation letter. The reform law also introduced more efficient provisions to counter the phenomenon of ‘undated resignation letters’ that enable firms to lay off workers – often female workers - through resignations that are redundancies in disguise.

• Overhaul of safety nets. The main novelty in the system of social safety nets is the Employment Social Insurance (Assicurazione Sociale per l’Impiego - ASpI). It came into force on 1 January 2013 and envisages the payment of a monthly allowance to private sector employees, including apprentices and members of employment cooperatives and general government employees under a temporary employment contract who have been made redundant. The employment Social Insurance - ASpI –once it becomes fully operational - shall replace the mobility allowance, the non-agricultural unemployment benefit (normal and reduced) and the unemployment benefit for construction workers. Workers who are no longer in employment as a result of resignation or consensual termination of the employment relationship, do not qualify for employment social insurance. ASpI basically strengthens the unemployment insurance benefit, extending it to younger people, to those who have recently entered the labour market and to categories of workers that so far have not benefitted from it, such as apprentices. Regulations concerning the Wage Guarantee Fund (CIG, Cassa Integrazione Ordinaria) remain in place; CIG is a redundancy scheme providing firms with options to manage temporary and occasional situations requiring a cutback or suspension of employment. Conversely, regulations concerning extraordinary wage guarantee fund (CIGS, Cassa Integrazione Straordinaria) have been changed with the aim of securing its protection purposes for workers likely to be re-hired. CIGS shall be abolished with effect as of January 1, 2016 in cases of bankruptcy, compulsory winding up and receivership. ‘Bilateral solidarity funds’ have been established for those sectors not governed by regulations on ordinary or extraordinary wage guarantee funds.

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• Safeguard rules. Safeguard measures have been adopted for employees close to retirement who have been or are in distress (due to mobility, voluntary payment of contributions, termination of an employment relationship etc.) that entail the application of the retirement requirements that were applicable before the reform. The number of workers protected by the full and immediate implementation of the 2011 pension reform can therefore be estimated at 130,000, on top of which 10,000 more should be added following the implementation of previous safeguard measures. A dedicated Fund has also been established.

• Labour productivity agreement. In November 2012 the social partners signed an agreement establishing ‘policy guidelines for productivity growth and competitiveness in Italy’. This agreement: i) recognises the national wage setting systems as the framework to protect the purchasing power of wages (thereby superseding any form of automatic indexation); ii) raises the value of second level bargaining, entrusting to it a share of the pay rises that may be agreed when contracts are renewed at national level, with the aim of supporting effective and targeted measures to increase productivity in various specific production sectors; iii) it brings the regulation of employment contracts into line with the needs of the relevant production sectors, such as the regulation of work performance, working hours and work organisation; iv) enables second level bargaining to raise workers’ net wages by triggering off tax-exemption measures for wage percentages directly linked to productivity-related pay increases in the specific production sectors; v) it supports the ‘intergenerational solidarity’ approach, by envisaging measures that promote the changeover from work to retirement; vi) it contains the parties’ commitment to negotiate the issues of equal work, work organisation, working hours and their flexible distribution as well as the use of new technology; vii) it contains the social partners’ commitment to complete the framework of new rules governing representation.

• The new funds for exempting from taxation productivity-related pay increases. In 2013 €950 million have been earmarked for exempting from taxation productivity-related pay increases, and additional €400 million for 2014 (to allow for any delay due to accruals-bases accounting); €600 million have been earmarked for 2014 ???and €200 million for 2015. For income from dependent work up to €40,000 before taxes, the personal income substitute tax and income-tax surcharges have been set at 10 per cent of amounts paid as productivity-related pay. Yearly productivity-related pay increases benefitting from the substitute tax cannot exceed €2,500 before taxes.

• Productivity. Productivity-related pay increases are amounts paid in relation to quantitative indicators of productivity, profitability, efficiency and innovation, clearly stated in the employment contract signed at firm or local level. Alternatively, the employment contract must contain at least one measure for three of the four action areas: i) re-definition of working hours and their distribution according to flexible patterns, also in relation to investment, innovation and market conditions; ii) introduction of a flexible distribution of paid holidays; iii) adoption of measures to make the use of new technology compatible with the protection of the fundamental rights of workers and facilitating the introduction of IT tools; iv) action concerning the fungibility of tasks and skills integration.

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• Reconciling work and family. New measures have been envisaged for women, who wish to go back to work at the end of their maternity leave. To this end, €78 million funds a year have been appropriated for the 2013-2015 period. The measures that have been financed include the introduction of a mandatory paternity leave (in addition to maternity leave) and the provision of economic benefits for women such as baby-sitting vouchers or contributions toward nursery tuition fees. Parental leave shall be paid by INPS, at 100 percent of regular pay and the relevant full social security contributions. A national list of applications shall be drawn up that will take into account the ISEE indicator (ISEE – ‘Indicatore della Sitazione Economica Equivalente’ is Italy’s means-testing indicator); INPS shall also be responsible for monitoring expenditure performance over the three -year period during which the system will be tested.

• The Agreement between the State, Regions, Autonomous Provinces and local authorities on policies for reconciling work and family. At the end of October 2012 an agreement was signed to improve work-life balance, including caring for family members. The agreement envisages: the provision of 60 additional educational home services to 2,500 new recipients (under three years of age); financial support to be provided to 1,200 additional individual and network projects that can help women re-enter the labour market; increase in the number of recipients of incentives for the purchase of care services, with 2,300 additional families benefitting from them.

• Support for female employment. The labour reform has introduced a concession in terms of social security contributions to be paid by employers who hire women in disadvantaged areas. As of January 1, 2013, employers may benefit from a 50 per cent reduction in social security contributions for a period of time that varies depending on the type contract.

• Gender parity in access to corporate boards. The EU regulation governing parity in access to boards of listed companies and unlisted state-owned companies has entered into force.

THE NEXT STEPS

• The existing protection rules by ASpI must be strengthened and monitored.

• With a view to favouring women’s participation in the labour market, the life-work balance measures that have already been introduced must be strengthened or supplemented by other measures.

• In order to protect women and young people, the provision envisaging that workers have to pay for the totalization of benefits ought to be abolished, as it penalises workers who are forced to change jobs ever more often.

• The path to recovery must be accompanied by policies that are mindful of social investment. In particular, the new Government will have to address the issue of how to finance spending on the network of local social services and programmes. More specifically, it must favour social and educational services for babies and toddlers, care services for disabled and non-self-sufficient elderly people, and local programmes to fight against poverty as well as residential services for frail elderly people.

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• With regard to policies to fight poverty, and following the experience made with the new social card, new ways must be found to extend this provisional measure, including with the support of structural funds, at the local level and depending on the type of recipients.

FIGHT AGAINST TAX EVASION AND TAX REFORM

RECOMMENDATION 5. Pursue the fight against tax evasion. Pursue the shadow economy and undeclared work, for instance by stepping up checks and controls. Take measures to reduce the scope of tax exemptions, allowances and reduced VAT rates and simplify the tax code. Take further action to shift the tax burden away from capital and labour to property and consumption as well as environment.

In the course of 2012 the fight against tax evasion and tax avoidance has been stepped up, including through greater reliance on financial investigations conducted by the Customs Police and the Revenue Agency. The decree on the simplification of the tax code has introduced measures aimed at simplifying tax regulations and countering tax evasion, through targeted checks on offences. At the same time, the Government’s strategy has involved a shift of the tax burden away from labour and income to capital and consumption.

The following is a list of steps that have been taken in this area:

• Tax checks. In 2012 the Customs Police uncovered 8,617 tax evaders that have hidden income for a total of €22.7 billion that went untaxed. In addition to this, further €16.3 billion result from other forms of tax evasion. As regards international tax evasion, undeclared revenues and undeductible costs that have been uncovered amount to €17.1 billion. Crackdown on VAT fraud has uncovered €4.8 billion of unreported VAT, 1.7 billion of which resulting from the so-called tax carousel (or missing trader fraud) based on sham foreign transactions. Of over 447,000 checks on sale and tax receipts, 32 per cent were found to be irregular. As regards welfare benefits, unwarranted applications have been uncovered worth €6.4 billion.

• Investigation into the shadow economy. Strong synergies have been created between the Custums Police and INPS to uncover unregistered work. Heavier penalties have been introduced for employers hiring irregular immigrants. In general, social security frauds (against INPS) uncovered in 2012 involved €177 million.

• Fight against tax evasion. As regards direct tax, VAT and stamp duty assessment activites, the operational units of the Revenue Agency have conducted over 741,000 investigations resulting in higher taxes due, amounting to €28.6 billion. With regard to external investigations, about 10,000 operations have been carried out (audits and targeted checks) as a result of which about €805 million worth of VAT revenues have been collected and over €15 billion worth of higher tax bases have been identified for direct taxation and IRAP (regional tax on productive activities). Finally, as regards revenues, pre – end-of–year data show that in 2012 tax and non-tax revenues

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amounted to €12.5 billion approximately following crackdown on tax evasion (assessment, formal checks, computerized checks of tax returns). More specifically, tax collections from direct payments following assessments after which tax payers chose settlement options (such as acceptance, compliance or judicial conciliation) amounted to €5,4 billion.

• Relations with tax-haven countries. A minimum amount has been identified (€500) above which any sale of goods and services to businesses located in tax-haven countries (on the so-called black list) must be reported to the Revenue Agency.

• Notices to the tax authorities (for businesses and individuals). For transactions subject to VAT made as of January 1, 2012, the new regulations envisage that the requirement to issue an invoice is complied with when the amounts – for each client and supplier – of all passive and active transactions have been paid. For transactions for which no invoice has to be issued, a notice has to be sent for all those equal to or exceeding €3,600 (including VAT).

• Anti-abuse regulations. As to VAT credit offsets, a reduction (from 10,000 to 5,000 euros a year) has been introduced of the limit below which tax payers can directly offset VAT credits.

• Tax advice to citizens and firms. A tutor shall be available to help taxpayers (especially smaller firms), and procedural benefits are available to those who receive advice.

• Small tax credits. The threshold for tax enrolment, at national regional and local levels has been raised from €16.53 to €30.

• Collection of tax credits. In order to streamline procedures, tax credits involving sums up to €2,000, assessed and enforced up to 1999, shall be cancelled automatically by 1 July 2013.

• Payment by instalments of tax debts. If the tax payer fails to pay an instalment, payments may still be deferred. It is also possible to resort to flexible amortisation plans for the amounts due. Taxpayers who are allowed to pay their tax debts by instalments are no longer considered in default and may therefore participate in tenders for the award of contracts for concessions, works and the provision of services.

• Increased threshold for lien guarantees. The tax debt threshold, below which tax collectors are not authorized to attach a lien on taxpayers’ property to secure the tax debt, has been raised from €8,000 to €20,000. This lien threshhold has been brought into line with that authorizing the tax collection agency to proceed to dispossession.

• Tax simplification. In October 2012, the Revenue Agency set up a working group to map all tax requirements to be complied with. The aim of the map is to reduce administrative burdens for firms and taxpayers. The list includes 108 requirements for which possible simplification options are currently being studied, also by tracing them back to tax returns.

• Tax mediation. Tax mediation came into force in April 2012; under this system a tax payer that intends to start a dispute worth less than €20,000 first has to submit a mediation/complaint request relating to all documents issued by the Revenue Agency and notified as of April 1, 2012. The investigation

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relating to the mediation procedure is entrusted to the relevant special offices, that are different and independent from those in charge of investigating appealable orders. Mediation offers taxpayers the advantage of automatically reducing administrative sanctions by 60 per cent. The mediation agreement is completed when the taxpayer pays – within twenty days—the entire amount due or the first instalment due, if the payment has to be made by instalments, with a maximum of eight quarterly equal instalments. Failure to pay the following instalments results in the mediation being considered as an authorisation to proceed to forced collection.

• Extraordinary tax on capital and assets held offshore. A special stamp duty was introduced for capital and assets held offshore. Payment of the duty gave holders the guarantee of anonymity vis-à-vis the tax authorities. The tax rate was set at 0.10 per cent for 2012, 0.135 percent for 2013 and 0.4 per cent as of 2014. The tax rate is levied only on capital and assets that have been repatriated or declared for tax purposes.

• Electronic money. To ensure traceability, as of 2014 all general government bodies shall settle transactions with private firms and individuals via electronic money transfers. At the same time, entrepreneurs, retailers and professionals will be required to accept payments from their clients via electronic money for purchases of all sizes.

• Checks on reported income. The system to assess the overall personal income of individuals has been innovated; it is now possible to calculate taxpayers’ income through checks starting from fiscal year 2009. For assessment purposes eleven expenditure categories have been considered, that will be matched with eleven types of households, which, in turn, have been divided into five geographical areas. Reported income will be checked against costs incurred in the year considered, and any variance of more than 20 per cent will trigger audits, as required by the law. Under this procedure cross-examination of taxpayers is mandatory. Since November 2011 citizens and firms have been able to measure the adequacy of their income against their costs, simply by downloading a programme developed for this purpose by the Revenue Agency (called redditest).

• Review of the equivalent economic situation indicator (Indicatore della Situazione Economica Equivalente - ISEE). The Government submitted a proposal to review the ISEE indicator which assesses the economic conditions that are considered necessary to qualify for welfare benefits. The proposal is aimed at improving the equity and selective capacity of this means-testing system by taking better account of situations of actual need –such as that of large families or families where a member is disabled or non self-sufficient. It is also intended to ensure a more accurate assessment of overall wealth and all income.

• Increase in tax credits for children. The Government has raised the amount of personal income tax credits for children. In particular, the tax credit for children older than three years has been increased from €800 to €950, from €900 to 1,220 for children aged under three years, and from €220 to €400 for each disabled child.

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• Real-estate taxation. Imposta Municipale Propria (IMU) has been introduced experimentally up to 2014. The entry into force of IMU has been brought forward to 2012. Compared to the previous tax - called ICI – the most important novelties are the abolition of exemption on first homes, and the scaling up of cadastral values. The ordinary rate has been fixed at 0.76 per cent of cadastral rent, while the concessional rate on primary residences stands at 0.4 per cent. Municipalities may vary both the amount of the tax credit granted by the Government on primary residences (€200, raised by €50 for every child living at home) and the rates (+/-0.3 per cent on the standard rate and +/-0.2 per cent on the concessional rate). Revisiting cadastral rents was a first step towards reducing the inadequacy of rents with respect to their real-estate market value. As of 2013 all revenues from the tax are devolved to municipalities, while the State keeps a share of the tax calculated at the standard rate of 0.76 per cent on industrial buildings or buildings used for commercial or business purposes. Municipalities may, if they so wish, apply a 0.3 per cent surcharge on these rents.

• Stamp duty on financial instruments. The Government has changed the stamp duty on financial instruments. More specifically, statements of accounts sent by banks to clients, as well as postal statements of accounts and statements of savings accounts (including postal savings accounts) are now levied a fixed tax as follows : i) €34.20 if the client is a natural person (with an exemption if the average bank deposit does not exceed €5,000); ii) €100 for clients other than natural persons. In addition, notices to clients relating to financial instruments, even those for which there is no deposit requirement, except pension funds and health funds, are subject to a proportional tax equal to 0.1 per cent for 2012 and 0.15 per cent as of 2013.

• Tax on real estate abroad. As of 2012, a new tax (IVIE) shall be levied on the value of real estate abroad. More specifically, IVIE is levied at 0.76 per cent (0.4 in the case of primary residences) of the real estate value, but is not due if the amount is lower than €200.

• Tax on capital and assets held abroad. IVAFE is levied on the market value of capital and assets as follows: i) a fixed stamp duty, as with assets held in Italy (equal to €34.20 on current accounts or savings accounts held in EU and extra EU countries); ii) as a proportion of the share and period during which assets have been held equal to 0.1 per cent a year in 2012 and 0.15 per cent a year starting from 2013. To avoid double taxation, a tax credit has been envisaged for any wealth tax due in the country where property or assets are held.

• Municipal waste and services tax. As of 2013 TARES - the municipal waste and services tax shall be levied. This new service tax covers two types of municipal services: i) municipal waste management services and ii) indivisibile services (such as: road network, security, urban design etc.). All previous taxes on municipal waste have been abolished.

• Value added tax. VAT increases envisaged by the ‘Salva Italia’ decree law, which came into force in October 2012, have been deferred to July 2013 and reduced as follows: i) the 10 per cent VAT rate will remain unchanged (and will not be increased to 11 per cent); ii) the 21 per cent VAT rate will be increased by one percentage point only (instead of two). On December 1,

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2012 the new cash-basis VAT accounting came into force, repealing the previous VAT regime. Payment of VAT payables, deferred to the time when the invoice is cashed, has been extended to all companies with a turnover not exceeding €2 billion (the previous threshold was €200,000).

• Excise duties on energy products. In January 2012 the ordinary-status Regions were ordered to abolish the municipal and provincial surcharges on electricity excise duties; at the same time, the revenue excise on electricity was raised to ensure that tax revenues would not decline and budget balance targets would be met. Provinces receive revenues which are not lower than those generated by the provincial electricity surcharge that has been abolished. The new flat tax rate on electricity used in homes has been set at €0.0127 for every kWh of energy used, while for electricity use on premises and in places other than homes it has been set at 0.0121. In addition, as of January 1, 2013, the Stability Law 2013 has stabilised the increase of the excise duty⁴, bringing the excise on petrol (whether leaded or unleaded) to €728.40 for one thousand liters and on diesel oil used as fuel to €617,40 for one thousand liters.

• Labour cost cut for enterprises. IRAP regulations have been changed with a view to reducing corporate and labour taxes. IRAP direct taxes, calculated on the cost of labour in relation to employees are now entirely deductible. The Stability Law 2013 has further reduced the ‘tax wedge’ by increasing lump-sum deductions from salaries of employees working under an open-ended contract. In particular, as of the fiscal year 2014 the following deductions will be allowed: 7,500 (previously 4,600) for each dependent worker under an open-ended contract and €13,500 (previously €10,600) for a female worker or a worker under 35. In the Southern Regions these figures increase up to €15,000 (previously 9,200) for every employee under a permanent employment contract and up to €21,000 (previously 15,200) if these workers are women or young people (under 35).

• Lower taxation on small enterprises. The Stability Law 2013 has also increased the lump-sum deduction for all small taxpayers, which will come into force in 2014. In principle, lump-sum deductions for small taxpayers vary from 8,000 (previously 7,359) to 2,000 (previously 1,850), inversely proportional to the value of production up to 180,999.91 euro. Partnerships, proprietorships and professionals benefit from higher deductions (from €10,500 to €2,625). Self-employed workers and small entrepreneurs with no significant organizational structure shall not be subject to IRAP taxation. Exemption has been envisaged as of 2014. To this end, an Irap – exemption fund shall be set up within the Ministry of the economy, endowed with €188 million for 2014, €252 million for 2015 and €242 million as of 2016.

• Taxation of company cars. Deductibility of costs of company cars or performing arts professions has been further reduced from 27.5 to 20 per cent.

⁴  Introduced by an order of the Head of the Customs Agency on August 9, 2012 – Order No. 88789.

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• Financial transaction tax (Tobin Tax). The Stability Law 2013 has introduced a tax on the sale of shares (as a proportion of gains) and on financial instruments and derivatives (a fixed amount). The tax shall be levied to transactions starting as of March 1, 2013 and July 1, 2012 respectively.

• Taxation of life insurance premiums. As of 2012, taxes due by insurance companies for life premiums have increased from 0.35 to 0.5 per cent (0.45 per cent as of 2013).

THE NEXT STEPS

• Pursue the fight against tax evasion and tax avoidance, by using and making fully operational the new assessment systems that have been introduced and the new databases, thereby increasing taxpayers’ compliance. Similarly important will be the continuation of this effort with measures to facilitate payment traceability.

• The fight against the shadow economy must be continued by integrating supervision and favouring the uncovering of unreported income, by protecting more exposed individuals such as immigrants and female workers.

• Completing the review of ISEE (Italy’s means-testing indicator), in agreement with the Regions, with a view to achieving greater equity and meeting the needs of households.

• Building upon the principles set out in the ‘delega fiscale’ (i.e. enabling bill on taxation) and completing the reform of the land registry office. The taxation simplification process must continue in line with EU recommendations.

• With regard to the tax burden on companies, a contribution to reducing it can be made by gradually taking out the cost of labour from the IRAP tax base, especially for small and medium-sized enterprises. Efforts to promote employment must continue, by incentivising firms and favouring re-investment of corporate profits.

• Without prejudice to budgetary constraints, corrective measures must be introduced, especially to protect weaker groups and large families.

• Strengthening employment incentives for young people and women, bearing in mind regional specificities, will be of the utmost importance.

COMPETITION, INFRASTRUCTURE AND ENTREPRENEURIAL ENVIRONMENT

RECOMMENDATION 6. Implement the adopted liberalisation and simplification measures in the services sector. Take further measures to improve market access in network industries, as well as infrastructure capacity and interconnections. Simplify further the regulatory framework for businesses and enhance administrative capacity. Improve access to financial instruments, in particular equity, to finance growing businesses and innovation. Implement the planned reorganisation of the civil justice system, and promote the use of alternative dispute settlement mechanisms.

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The Government has paid special attention to greater market liberalisation and strengthening competition trying to foster a more open and dynamic environment. To this end, tax simplification and red tape reduction have been encouraged, transparency and the rule of law have been promoted, and the internationalisation of companies has been supported. The Government has recently approved a report to Parliament on competition, the development of infrastructure and competitiveness, which will lead to the adoption of several liberalisation and simplification programmes for economic activities, as envisaged in Article 41 of the Constitution.

The measures relating to this recommendation include:

• State shareholdings with majority stakes in key sectors. With a view to ensuring more open markets to foreign investment, while at the same time maintaining a surveillance and supervision mechanism for key sectors that are important for our national interests, the Government has reviewed decision-making powers over state-owned companies by reforming the golden share.

Therefore, regulations governing companies operating in the defense, national security, energy, transport, communications and essential public services sectors have been changed.

• Participation of general government in the capital of public services companies. Ministries and general government bodies cannot have shareholdings, whether direct or indirect, in companies 90 per cent of whose proceeds are derived from the provision of services to Ministries or general government bodies. The board of directors of companies controlled by the State cannot be made up by more than three or five members, depending on the importance and complexity of the activities carried out.

• The database for public contracts. The new national database on public contracts (AVCpass), envisaged by the e-government code and run by the Public Contract Authority has been working on an experimental basis since January 2013. The experimental stage will last three months, then, as of April 2013, using the system will become mandatory for contracts exceeding €1 billion. As of the third quarter, the database will become binding for all tenders involving sums exceeding €150,000 and since October 2013 it will be mandatory for all tenders involving sums exceeding €40,000; failure to use the database will result in contracts being declared invalid.

• General goverment payables to suppliers are being settled. In 2012 the certification of payables of central and local government was initiated, in order to offset taxes due or obtain a bank advance. Suppliers may also be paid with the issue of government bonds for a total amount of €2 billion. The process was slowed down mainly because of delays in registration operations on the electronic platform by central and local governments and firms. Completing the information flows to the banking system was also one of the reasons for the delay. As of January 2013, commercial transactions between businesses and general government shall be settled within 30 days of receiving the invoice or the merchandise (60 days in exceptional cases). After this term has elapsed, interest on arrears shall be charged (at a rate equal to the reference rate charged by the ECB for refinancing operations, increased by eight percentage points).

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• Urgent measures for the payment of general government arrears in commercial transactions. In April 2013 the Government approved a decree law that immediately gave the green light to the payment of general government payables to suppliers. The adoption of the decree unfreezes the settlement of general government payables to firms, cooperatives and professionals for an amount equal to €40 billion, that will be disbursed over the next twelve months, thereby favouring a rapid solution to the problems of payment of arrears through clear, simple and quick mechanisms. Everything will be done in compliance with the 3 per cent budgetary contraint imposed by the Stability and Growth Pact. In September 2013 precautionary monitoring of the deficit is envisaged which, if the limit is exceeded, enables the timely adoption of the measures needed to reschedule expenditure so as to avoid undergoing the excessive deficit procedure again, thereby losing the flexibility margins linked to ‘significant factors’ when compliance of the budget with EU constraints is examined by the EU Commission.

• The reform of professional associations. The principles of free access to regulated professions have been strengthened and regulatory bodies have been reformed with a view to ensuring independence. Minimum tariffs have been abolished and a quotation of expenses has been made a requirement, if requested by the client. The establishment of special registers is allowed only if clearly envisaged by law. No limits shall be imposed on the number of people certified to practice the profession, subject to expressed exceptions based on reasons of public interest. There can be no direct or indirect discrimination based on the nationality of a) professionals or b) registered offices of partnerships. Disclosure of information may be ensured with all means, provided it is functional to the activity and not defamatory and/or misleading and does not in any way violate professional secrecy requirements. Compulsory insurance has been introduced to protect professionals. Apprenticeship and the obligation to lifelong learning of professionals have been regulated. A reform of the legal profession has been enacted. It does not set fee ceilings; however, for assignments without an initial agreement or ex officio assignments, reference is made to a tariff scale that is updated by the Ministry of Justice every two years. Specialisations have also been envisaged, with the new specialized lawyers. As regards non regulated professions, regulations have been passed allowing certification of skills with a view to ensuring the free circulation of labour and providing guarantees to clients.

• The insurance sector. IVASS (Istituto per la vigilanza sulle assicurazioni private e d’interesse collettivo - Authority for the supervision of Private Insurance) is responsible for taking care of prevention of administrative frauds in this sector, including through the use of a new integrated database of the various insurance companies. Tacit renewal of insurance contracts is not allowed. A standard contract for car insurance has been envisaged. Finally, insurance companies are required to submit three different car insurance quotations, at least two of which from competitors. With a view to reducing fraud and thereby reducing insurance policy premiums, regulations concerning the black box have been adopted.

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• Poste Italiane. The regulations governing Poste Italiane has been brought into line with those on banks, with the possibility of having off-premises financial promoters for services relating to investment, financing, sale of current accounts and pre-paid cards for individuals and firms . Poste Italiane may open branches in other EU and non-EU countries.

• Telecommunications. In February 2013, the Communications Authority set the prices that alternative operators (OLO) shall pay to use Telecom Italia’s fiber network, thereby completing the regulatory framework - a year after the Authority had adopted the rules on NGAN networks. The changeover to digital television throughout the national territory was completed within the deadline set by the EU (first half of 2012).

• Liberalisation of the gas market. The following measures have been adopted for the gas market: i) the creation of a futures market for natural gas; ii) the adoption of rules to increase the idle capacity of the Tag gas pipeline (with Austria) and the Transitgas pipeline (with Sitzerland); iii) the completion of the unbundling plan of the gas network operator (SNAM Rete Gas) and the gas supplier (ENI); iv) more efficient rules for allocating natural gas storage services through a competitive auction system for the whole available capacity; v) three new regasification plants have been authorized. In 2013 distribution services will start to be tendered; only operators not linked to companies, to which services have been directly outsourced, will be allowed to partecipate in the tender. For clients bound by a contract, the Energy and Gas Autohority (AEEG) will set benchmark prices on the basis of the criterion whereby the supply price must be in line with the spot price quoted on European markets and the gas exchange. The regulatory authority expects a 6-7 per cent cut in gas bill prices during 2013 following these measures.

• The electricity market. The following measures have been adopted: i) competitive tenders for hydroelectric plants - the length of the concession has been envisaged to last between twenty and thirty years (currently thirty years) on grounds of the size of the investment required; ii) changes to the system of incentives for photovoltaic energy and non photovoltaic electricity renewables and strengthening of white certificate schemes; iii) acceleration of procedures for dismantling nuclear power plants on the national territory; iv) re-definition of tax and taxlike components (such as taxes on renewables) for energy-intensive companies; v) speeding up energy requalification projects of buildings owned by the State and extension to June 2013 of tax credits granted for renovation of buildings, including projects to increase their energy efficiency.

• Competition in the fuel industry. A fuel stock exchange and an oil logistics market are being established, managed by the Electricity Market Operator (Gestore del Mercato Elettrico - GME). In transposing the European Directive on storage requirements, the management of specific oil products stocks has been centralized with the establishment and start of activities of OCSIT (Organismo Centrale di Stoccaggio Italiano - the Italian Central Storage Office). Regulations on improving information on fuel prices have been adopted, both with a view to calculating the average price to be reported to the EU Commission and to showing the prices charged by each plant.

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• The Green economy. Concessional loans shall be provided from the Kyoto Fund (currently €470 million are available) for public and private entities operating in the various sectors of the green economy, with the aim of favouring the creation of permanent employment for young people.

• Streamlining of procedures for energy infrastructure. As regards energy infrastructure, environmental impact assessment procedures have been streamlined for the mining, refining and clean-up of sites through the introduction of state substitute powers in case of failure to act by the Regions.

• Adoption of the Single Environmental Protection Authorisation (Autorizzazione Unica Ambientale - AUA). AUA is aimed to reduce the burden of environmental requirements to be complied with under the existing environmental regulations, while at the same time ensuring maximum environmental protection. A single permit shall supersede a whole series of communications and notices. The measures will affect microfirms, SMEs as well as plants not subject to regulations governing the Integrated Environmental Authorisation.

• Tax breaks for large strategic infrastructure. A tax credit - to be calculated on IRES and IRAP - and equal to up to 50 per cent of the investment cost, will be granted for the construction of new large strategic infrastructure works, whose public-private partnership contracts exceed €500 million. The bonds issued by the company will be subject to the same taxes levied on government bonds (at a rate of 12.5 per cent).

• The national plan for airport development. The comprehensive plan for the reorganisation of the airport sector has been presented, identifying the most important national airports. It envisages: i) the gradual sale of shares by public entities so as to favour the entry of private capital; ii) the setting up of ‘airport networks’ that can specialise in serving the same area with dedicated infrastructure according to the type of traffic; iii) streamlining air navigation services and general services to clients. The Plan has been submitted to the Permanent State- Regions Conference for agreement.

• New funds for ACE, Aiuto alla Crescita Economica (aid to economic growth - allowance for corporate equity). Incentives for corporate equity have been changed with the aim of easing the tax bias existing between firms that use debt rather than equity finance.

• Innovative Startups. New regulations have been introduced envisaging fewer administrative requirements to be complied with and tax breaks for firms that have been operating for less than 48 months, mainly in the production, development and marketing of innovative high-tech products and services. Approximately €200 million have already been made available to start-ups; when the measure becomes fully operational, €110 million a year will be available to support these firms.

• Enterprises network. Enterprises network can participate in tenders, since it is now possible for them to acquire the status of legal persons by registering with the Registrar of Companies.

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• Strengthening the loan guarantees of Confidi (collective-loan guarantee consortiums). Confidi’s loan guarantee scheme has been strengthened through the possibility of assigning to Confidi’s fund or its equity the risk funds or the capital reserves set up with contributions by the State, the Regions and other public entities, even when meant for other purposes. This measure is intended to make Confidi’s role more effective in ensuring SMEs’ access to credit.

• New funds for small and medium-sized enterprises (SMEs). The SMEs Guarantee Fund has been extended with €400 million a year over the next three years. The fund provides lending, especially to companies located in the South, enterprises run by women and those linked to areas in distress.

• The construction industry. The functioning of the one-stop shop for construction (Sportello Unico per l’edilizia - SUE) is being improved; from being an investigation one-stop shop it has been turned into a decision-making shop and it is the single access point for dealing with all the administrative requirements concerning a construction project. The procedure for submitting the Certified Start Date of Construction Report (Segnalazione Certificata d’inizio attività, SCIA) has been further simplified.

• Italian Agency for the Digital Agenda. The agency responsible for meeting the targets of the digital agenda has been set up. It coordinates the activities of central, regional and local government relating to: i) spreading broadband and ultrabroadband connections; ii) funding for technological platforms needed for urban community life; iii) free online access to general government information; iv) sharing of information coming from different institutions; v) use of digital technologies in administrative procedures, including the mandatory use of certified electronic mailboxes.

• Implementation of the transparency of general government. The Government has presented regulations concerning the principles of disclosure, transparency and dissemination of information by general government bodies. The regulations have been modelled on the US Freedom of Information Act.

• Prohibition to run for office. Criteria for the prohibition to run for the European Parliament, for a seat in the Chamber of Deputies, in the Senate or in a regional, provincial or municipal council: generally speaking, people who have been convicted with a final sentence and condemned to more than two years’ imprisonment cannot run or hold office. The provision also lays down the impediments to holding government offices or the office of president or member of regional, provincial and municipal councils.

• Implementation of legislation of the Internal Market. With a view to speeding up the procedures for bringing national regulations into line with the requirements of European law, the Community law has been divided into two different parts. By February 28 each year the Government must submit the European enabling act, containing delegated powers for implementing European directives and framework decisions that must be transposed in the national legislation. If necessary, the Prime Minister’s Office may submit, in addition to the enabling act, the European law containing provisions to ensure that the national legislation is brought into line with European legislation.

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• The reorganisation of the Agency for promotion abroad and the internationalisation of Italian companies. The new Agency was born of the reorganisation of the Istituto per il Commercio Estero (ICE, Foreign Trade Institute). The Agency is directed by a new board and works in close cooperation with the Regions, Chambers of Industry, Commerce, Crafts and Agriculture, as well as with business associations and other public and private entities. A finance centre for business internationalisation has been set up within Cassa Depositi e Prestiti, which unites the responsibilities of SACE and SIMEST. Chambers of Commerce have launched a new IT desk, called world pass, where all the information concerning the different aspects concerning trade are available on line: marketing, fairs and promotional initiatives, information concerning contracts, tax regulations and customs operations.

• The ‘Italy Desk’. A new one-stop shop has been set up for all investors who wish to make strategic investment. The powers of this one-stop shop include the possibility of convening special conferences on services and to facilitate business activities.

• The single customs desk. The digitalisation of customs procedures has flown into the new e-customs.it portal. Other measures have also been introduced to reduce customs clearance time and costs as well as to improve the quality of checks on goods in transit.

• The National Exports Plan for 2013-2015. The Plan - rolled out in January 2013 identifies some key strategic measures including: i) increase in promotion funds; ii) incentives for business mergers (networks); iii) stepping up of training activities for exporting companies; iv) strengthening of programmes for spreading e-commerce and large-scale organised distribution as well as efforts to attract FDI; v) strengthening of the integrated action of Cassa Depositi e Prestiti, SIMEST and SACE; vi) more effective action against counterfeiting and for the protection of brands. Building upon the priorities identified by the Plan will be crucial to increase business size and competitiveness.

• The National Tourism Plan. To respond to the challenges posed by tourism, about 60 concrete measures have been identified based on the following guidelines: i) strengthen central support and coordination; ii) revitalise the Agenzia Nazionale del Turismo (ENIT), the national tourism agency; iii) focus on 30-40 priority centres; iv) upgrade and consolidate hotels and accomodation; v) develop of transport systems and infrustructure in line with the needs of the tourism industry; vi) upgrade the skills of staff working in the tourism industry; vii) attract investment through specific incentives and reduce red tape.

• Anti-corruption and transparency measures in government. The ‘Commission on assessment, accountability and integrity of general government’ - (Commissione per la valutazione, la trasparenza e l’integrità delle amministrazioni pubbliche’, CIVIT) is the national authority responsible for coordinating activities to fight corruption in government. Penalties have been tightened for the crimes of embezzlement, misappropriation of funds, misuse of public funds, illicit acceptance of funds disbursed by the State, abuse of power. A new aggravating circumstance concerning fraud against the government, committed by those who hold public offices has been added to the criminal code. In March 2013, the new code of ethics of civil servants was adopted, envisaged by the anti-corruption law, which spells out the duties of

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civil servants. Any violation involves disciplinary responsibility to be ascertained at the outcome of procedures, without prejudice to cases giving rise to criminal, civil, administrative or accounting responsibility. The Government has drafted a consolidated text on disclosure, accountability and the dissemination of information by general government bodies, that implements the anti-corruption law. The measure is intended to enforce the transparency principle understood as total disclosure, i.e. total access to information concerning administrative organisation and activity.

• The reform of civil justice. A review of the areas of jurisdiction is envisaged, with the abolition of all attached offices, the unification of 31 courts and 31 public prosecutor’s offices, as well as the abolition of all offices of justices of the peace. Proceedings may have a maximum length of six years, three of which in the first level of judgement, two in the appeal stage and one at supreme court stage. Every extra year carries a sanction for the State. All judicial communications and notices must be made through electronic forms of communications. Online real-time consultation of clerk of court records, electronic documents and electronic notices has been envisaged. Trial records of civil proceedings and cases are required to be kept in electronic records.

• The reform of bankruptcy regulations. New regulations governing bankruptcy in Itay have been adopted, especially the preventive arrangement, which bring the Italian system closer to that envisaged by ‘Chapter 11’ of the US Bankruptcy Code. Other measures enable reconciling the need for appropriate creditors’ satisfaction with those of residual development of distressed companies. Regulations governing the execution of contracts as well as red tape have been reduced to speed up procedures of bankrupcty cases.

• Settlement of crisis-related lawsuits due to overindebtedness. The operational ability of the trial for the settlement of a crisis-related lawsuit due to overindebtedness is aimed at settling the lawsuits filed by consumers and companies that cannot fail. The law envisages the possibility for the debtor to put forward a plan for rescheduling loans and paying debts. Provision has been made for the setting up of bodies responsible for the settlement of crisis-related lawsuits.

• The costs of civil and administrative justice. With a view to reducing pressure on courts and relieving the burden of cases, the Government has increased taxation on second degree and supreme court proceedings and on administrative proceedings. Since January 2013 the unified contribution for rejected appeals has doubled. A preliminary scrutiny of the admissibility of appeal cases has been introduced. If the claim is inadmissible, a sanction is imposed on the petitioner, and the counsel’s fee shall be reduced by 50 per cent.

THE NEXT STEPS

• Critical environmental and energy infrastructure, such as waste processing plants, water pipelines and smart grids must be strengthened. Ensuring the safety of the territory is essential for revitalising effective sustainable development.

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• Tax credit for infrastructure constructed under project financing together with tax breaks to individuals are the two key elements for construction programmes. In particular, the tax credit shall be revisited to overcome the bias in favour of ‘major works’ and to extend it to works involving amounts below €500 million.

• A key contribution to speed up the construction of infrastructure projects will also be made by continuing the programme for simplifying procedures. The most important infrastructure works include the Plan against hydrogeological disruption, the Plan on purification plants and the School Plan. The constitutional reform bill to reform Title V, submitted in 2012 and still pending, is a step in the direction of the simplification of decision-making levels of government (State,Regions and local authorities) whose overlapping responsibilities translate into constraints and ultimately into a drag on growth and on the construction of works.

• In addition to the effort of general government to provide liquidity to firms, it is important to strengthen business access to financial instruments. To this end, measures shall be adopted to improve the role of the SMEs guarantee Fund and to act on the relations between banks and businesses.

• General government plays a key role in business growth and development, but often entails excessive costs and procedures that hinder entrepreneurial initiative while facilitating corruption. To avoid this situation from becoming stagnant, administrative simplification must be strengthened with a major cut in useless procedures, while constantly reviewing actual implementation of the agreed measures.

• In line with the recent guidelines issued by the EU Commission, after electronic consultation and after agreement with the Regions and the local authorities, a new programme will be adopted to measure and cut regulatory costs and the length of procedures. In every simplification programme, expected outcomes must be identified, along with timeframes, the officials responsible for them and review mechanisms that are to be linked to the performance assessment system.

• In an economic situation in which competitiveness cannot be sustained through public spending and across-the-board subsidies, the following objectives appear to be of key importance: simplifying procedures for businesses and for obtaining environmental permits, greater reliance on electronic procedures, streamlining of procedures to obtain permits as well as the full implementation of the business charter.

• The contribution of private capital to research and innovation is a driver of growth that must be supported through appropriate incentives. Therefore, the fund for financing research and enterprises, that was set up by the Stability Law 2013, will be implemented. An option to be considered for the future is granting on a permanent basis the tax credit envisaged for firms that invest.

• Incentives for entrepreneurial dynamism must always include support for innovative startups and young entrepreneurs.

• Action taken in various sectors has improved competitiveness, paving the way to ever more effective action, as in the case of water services, where the setting up of a regulatory authority was the first step towards the streamlining of regulations, which shall be completed once tariffs are set.

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• Even more important and complex is the sector of local public services, given how important firms providing public services are for households and local authorities, the reform of this sector can no longer be postponed and the current legal uncertainty, which is the main obstacle to development and investment must be removed.

• Particular attention must be paid to the provisions of the liberalisation decree that have not been implemented yet, especially those relating to the Transport Authority, which is not operational yet, and to car civil liability insurance and the taxi industry. The impact of new regulations on pharmacies will also have to be carefully examined.

• Continuing the liberalisation effort also means constantly checking what has already been done. To this end, monitoring of reforms will have to be continued and liberalisation policies are to be coordinated in order to assess sectors with problems relating to competition in a clear and timely fashion.

• The drafting and implementation of the annual law on competition and the implementation of its provisions will have to be monitored, so that it may become a consolidated starting point for government action to progressively extend liberalisation efforts and perfecting deregulation efforts that are already under way.

• Building upon the initiatives already undertaken, streamlining of the judicial system will have to be continued by:

o Reducing the caseload by revisiting provisions on mediation;

o Ensuring ever greater effectiveness and efficiency of judicial offices by: completing the reform of the geographical distribution of judicial offices; continuing the computerisation of offices; relying more on organisational best practices; monitoring the functioning of the ‘Companies Tribunal’ to assess the organisational fallout and the usefulness of possible successive enlargements of its specialisation areas.

o Examining measures, even extraordinary measures, to deal with pending cases, especially in courts of appeal. An effective reduction in the number of cases pending would also have a positive impact on the length of proceedings, which is one of the main problems of the judicial system.

o Establishing an observatory to analyse the impact of reforms, by completing the creation of an automated and integrated database to monitor the impact of reform, identifying problems and deriving best practices.

III.2 NATIONAL TARGETS FOR THE EUROPE 2020 STRATEGY

This chapter sets out the most important initiatives taken to meet the national targets of the Europe 2020 Strategy.

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Target No. 1 – Employment rate

Europe 2020 Strategy Target: increase to 75 per cent the share of employment in population aged 20 -64 .

TABLE III. 1: LEVEL OF TARGET ‘EMPLOYMENT RATE 20-64’

INDICATOR	CURRENT LEVEL	OBJECTIVE BY 2020	MEDIUM TERM
	61.2% (2011)
Total employment rate		67-69%	63%
	61.0% (2012)

In 2012 the figure for Italy shown by the indicator was 61.0 per cent: 14 percentage points below the European target and 6-8 percentage points less than the national objective. Regional and gender imbalances sharpened.

The drop recorded in 2012, after moderate growth in 2011, only affects male workers (from 72.6 to 71.6 per cent), while the indicator for women continued to grow (from 49.9 to 50.5 per cent), in all areas considered and especially in the South.

The employment rate for the 20-64 age group in the South stands at 47.6 per cent, about 22 percentage points below the figure shown for the North. In this area of the country, the situation of women appears to be especially critical, with an employment rate of 34.3 per cent. Conversely, in the North the incidence of male employment on the population of the 20-64 age group exceeds 75 per cent.

For a descriptions of the measures implemented by Italy to meet the objective, see actions taken in response to Recommendations No. 3 and No. 4 (par. III.1).

Target No. 2 – Research and Development

Europe 2020 Strategy Target: improve R&D conditions with the aim of raising public and private investment to 3 per cent of GDP.

TABLE III.2: TARGET LEVEL FOR ‘RESEARCH AND DEVELOPMENT EXPENDITURE’

INDICATOR	CURRENT LEVEL	2020 OBJECTIVE	MEDIUM TERM
	1.26% (2010)
R&D expenditure as a % of GDP		1.53%	1.40%
	1.25% (2011)*

* ISTAT estimates on forecast data provided byfirms, government institutions and non profit public and private institutions.

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Forecast data for 2011 processed by ISTAT, show a moderate growth of R&D expenditure at current values (+0.7 per cent, compared to +2.2 per cent recorded between 2010 and 2009), due to increasing expenditure in firms (+1.1 per cent) and in public institutions (+0.9 per cent). These increases are believed to have offset the expected drop in expenditure by universities (-0.1 per cent). However, if one considers R&D expenditure in real terms, a drop of 0.6 per cent is expected in 2011, compared to an average annual increase of 0.8 per cent over the 2007-2010. A European comparison on still provisional data relating to 2011 shows Italy ranking 18th for R&D expenditure, with a 0.8 percentage point gap compared to the EU27 average (which recorded 2.05 per cent). Italy’s position has not changed compared to 2010, but the gap is somewhat wider.

Final data for 2010 show that the incidence of private expenditure over the total increased from 56.6 per cent to 57.5 per cent, thanks to the growth of expenditure in companies and a parallel drop at universities. Compared to 2009, expenditure in large companies (with more than 500 employees) is edging up, even though their contribution to the sector’s overall expenditure is smaller (from 70.4 down to 69.0 per cent). Expenditure in medium-sized enterprises also increased, while that in small enterprises declined (-1.8 per cent).

At regional level, expenditure remains concentrated in 4 Regions (Lombardy, Latium, Piedmont, Emilia-Romagna), which accounted for 59 per cent of total expenditure (see Table.III.3).

TABLE III.3 INTRA-MUROS R&D EXPENDITURE BY REGIONS – 2010

REGIONS	Percentage		Percentage change 2010/2009
Piedmont		11.5		1.5
Aosta Valley		0.1		-10.4
Lombardy		22.4		9.0
Autonomous Province of Trento		1.7		-3.1
Autonomous Province of Bolzano		0.5		5.0
Veneto		7.7		-1.8
Friuli-Venezia Giulia		2.6		-0.7
Liguria		3.3		8.3
Emilia-Romagna		10.2		7.5
Tuscany		6.5		0.2
Umbria		1.0		-8.5
Marche		1.5		6.8
Latium		15.2		-1.0
Abruzzo		1.4		-0.7
Molise		0.2		-0.6
Campania		5.9		-5.7
Apulia		2.7		-0.9
Basilicata		0.4		3.7
Calabria		0.8		-0.5
Sicily		3.5		-4.8
Sardinia		1.1		2.7
North West		37.3		6.3
North-East		22.6		2.4
Central Italy		24.2		0.5
South		15.9		3.2
ITALY		100.0		2.2

Source: ISTAT.

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The following is a list of measures that have been taken at national level to stimulate growth in research and development :

• Facilitations in the form of tax credits granted to companies hiring highly skilled workers.

• The reform of the ‘Special revolving fund for technological innovation’, which flowed into the new ‘Fund for sustainable growth (FSC)⁵, earmarked, among other things, for the promotion of research, development and innovation projects that are strategically important for the country.

• The reform of PHD courses to incentivise PHDs in industrial sectors, in cooperation between universities / research institutions and companies.

• €70 million earmarked for Italian research and projects to support young researchers, through the new FIRB tenders (FIRB - Fondo per investimenti nella ricerca di base, Basic Research Investment Fund) and PRIN projects (PRIN Research projects of national interest).

• Regional agreements to strengthen the relationship between universities and the business sector and innovative projects of a social nature for young people in the South.

• Funds earmarked for technological development and innovation as part of the regional cohesion policy 2007-2013, for a total amount of € 17.6 billion 6, 11.2 billion of which allocated to Convergence Objective Regions. In the South, about two thirds of overall spending come from initiatives of the National Operational Progamme ‘Research and Competitiveness’ (PON R&C).

• The cohesion policy contributes €2.8 billion, 2.1 billion of which for Convergence areas, in the field of the information society with programmes for the construction of infrastructure to extend broadband and ultrabroadband to the national territory, innovative services provided by public administration to citizens and firms, support to firms in their innovation efforts through ICT.

• Programmes for the development of human capital with funds amounting to € 2.2 billion for actions to support advanced learning.

• The ‘Smart cities e communities’ project, with industrial research projects for a total amount of about € 900 million, to be financed through EU funds relating to the ‘Horizon 2020’ programme.

• € 408 million earmarked for the birth of ‘cluster hi-tech’, big national aggregates in key industrial sectors.

• The ‘Horizon 2020 Italia’ Programme, which gives Italy a national framework programme in line with Europe.

• The ‘Messaggeri’ project, a tender procedure for the selection of researchers coming from leading research and university education centres abroad, that will work in teaching activities in universities of the South.

⁵  Established under Art. 23 of Decree Law of June 22, 2012, No. 83, confirmed into law with Law No. 134 of 7 August 2012.

⁶  Also including measures to enhance human capital, the development of innovative entrepreneurship and those earmarked for the information society.

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• The programme ‘Rita Levi Montalcini’ for recruiting young researchers was launched in 2013, to attract back young scholars now working abroad.

For more details on measures adopted by Italy to meet this objective, see the outline of actions taken in response to Recommendations No. 3 and No. 6.

Target No. 3 – Greenhouse gas emissions

Europe 2020 Strategy Target: 20 per cent cut in greenhouse gas emissions

TABLE III.4: TARGET LEVEL ‘GREENHOUSE GAS EMISSIONS’⁷

INDICATOR	CURRENT LEVEL	2020 OBJECTIVE
Total domestic GHG emissions	516.9 (1990) 484.4 (2012) preliminary	Reduction over the 2008- 2012 period by 6.5 per cent over the 1990 level (483.3 MtCO2/year)
GHG emissions for non ETS sectors	348.7 (2005) 293.9 (2013) preliminary	REduction by 13 per cent by 2020 of the 2005 level (296.3 MtCO2eq)

To meet the target assigned to Italy (13 per cent cut in grenhouse gas emissions for industries not regulated by EU Directive 2003/87/EC (so-called ‘emissions trading’ Directive) a new ‘National Plan for the reduction of greenhouse gas emissions’ has been developed to comply with the legally binding commitments undertaken at EU and international level for the per 2008-2012 and 2013-2020 periods, as well as to continue progressing toward a low-carbon economy⁸.

To this end Italy has implemented the following measures:

• The ‘Kyoto Fund’ has been re-oriented, with the twofold objective of reducing employment and reducing greenhouse gas emissions through the development of ‘green economy’ sectors.

• The ‘national system for the certification of sustainability of biofuels and liquid biofuels’ was made operational in early 2012.

• The 55 per cent tax credits for programmes for energy upgrading in buildings will be extended to June 30 2013. As of July 1 2013, these facilitations shall be replaced by the 36 per cent tax credit which has now been turned into a final and permanent provision.

⁷ The progress made on achieving the objectives in the above Table are shown in greater detail in the Relazione del Ministro dell’ambiente e della tutela del territorio e del mare sullo stato di attuazione degli impegni per la riduzione delle emissioni di gas ad effetto serra, in coerenza con gli obblighi internazionali assunti dall’Italia in sede europea e internazionale, e sui relativi indirizzi- Report of the Minister of the Environment , drawn up under Art. 2, paragraph 9 of Law No. 39 of 7 April 2011 and annexed to the DEF (Economic and Financial Document).

⁸ Adopted by CIPE on 8 March 2013.

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• About 500 measures will be taken over the first six months of 2012, for an estimated amount of about € 50 million, to be financed by the Fund for the promotion of renewable energy and energy efficiency, for the reduction of fossil fuel use

• Continuation of activities and Policy Agreements relating to the Fund for sustainable mobility, concerning 187 measures for 106 Municipalities, co-funded for a total amount of about € 195 million.

• The MoU on sustainable mobility has been signed with the aim of increasing rail freight transport from the current 6 to 24 per cent, thereby reducing the environmental impact caused by the circulation of trucks.

• New regulations for the construction of infrastructure networks for recharging electric vehicles and incentivising the purchase of low – emission vehicles. €420 million are expected to be earmarked for this purpose.

• Approval of new rules for the running and maintenance of winter and summer air conditioning. The new rules include a maximum heating temperature in the winter and a minimum cooling temperature in the summer.

• Close of the procedure for the adoption of the legislative decree implementing the Emission Trading Scheme (ETS).

• Allocation of 50 per cent of proceeds from the ETS auctions to activities aimed at reducing GHG emissions, thereby ‘substantiating’ the National Plan for the reduction of GHG emissions⁹.

• The ‘Strategic guidelines for adaptation to climate change, sustainable management and safety of the territory’, presented to CIPE in December 2012 envisaging measures which, besides contributing to the safety of the territory, also absorb greenhouse gases.

• Implementation of Directive 2003/87/EC will continue.

• Contribution to the cohesion policy 2007-2013 to the reduction of GHG which prevented emissions in amounts ranging from 8.0 and 9.9 MtCO2/year. A bigger contribution is expected from programmes for renewable energy and energy efficiency (between 6.15 and 8.0 million tons); 0.57 million are expected from investment in the waste cycle; 1.28 million tons are expected from measures concerning networks and mobility links.

For more details on the measures adopted by Italy in order to meet this target, see the description of the actions taken in response to Recommendation No. 3.

⁹  The legislative decree - implementing Directive 2009/29/EC of the European Parliament and the Council, amending Directive 2003/87/EC to perfect and extend the EU emission trading scheme - was adopted On 22 December 2012.

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Target No. 4 – Renewable sources

Europe 2020 Strategy Target: meeting the 20 per cent share target for renewable sources in the final consumption of energy.

TABLE III.5: TARGET LEVEL FOR ‘RENEWABLE SOURCES’

INDICATOR	CURRENT LEVEL	2020 OBJECTIVE
Share of renewable energy	10,11% (2010)
in gross final energy		17%
consumption	11,5% (2011)

According to the objective set in the 2009/28/EC Directive, by 2020 Italy will have to cover 17 per cent of final energy consumption through renewable sources¹⁰. At the end of 2011, renewable sources met 11.5 per cent of gross final energy consumption, overshooting the objective for 2015 set in the National Action Plan on renewables (PAN), designed to implement the above directive and sent to the Commission in July 2010. In the last three years, energy generated from renewable sources has grown rapidly, also thanks to stimulus policies.

Objectives relating to renewable sources have been divided among the Regions and Autonomous Provinces with the same approach used at European level, therefore assigning to each Region or Autonomous Province an objective in terms of percentages of consumption to be met by renewable sources¹¹. This approach leaves each Region and Autonomous Province the possibility to work considering its own context, ‘pressing for’ energy efficiency and renewable sources also through statistical transfers from other Regions or other foreign local authority or agreements with other Member States. A methodology is currently being developed to measure to what extent objectives have been met, along with procedures to follow in case of failure to meet them.

Measures adopted to achieve the European objective related to:

• New incentives for photovoltaic energy (so-called Fifth Energy Account) and for non – photovoltaic electric renewables (hydroelectric, geothermal, wind, biomass, biogas, liquid biofuels, exhaust gas, residual gas from purification

¹⁰ The strategy to meet the domestic target is set out in the National Action Plan (PAN), which is the main domestic policy document concerning renewable energies in Italy.

¹¹  In assigning the targets, only electricity renewables and heat renewables have been considered, because the physical imports of renewables and the support mechanisms for the use of renewables in transport depend on equipment made available by the State. In the case of physical energy imports, agreements between States are needed and the construction and / or use of transport networks that require the involvement of network operators, to whom concessions are granted by the State and the relevant development plans of networks, are again, adopted by the State. As regards the use of renewable sources in trasport, companies that distribute petrol and diesel oil for consumption are required to mix these fuels with a minimum percentage of biofules. The minimum share, the relative compliance mechanism and technical characteristics of biofules have been set with Government measures.

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processes, waves). The main aim of these measures¹² is to plan a more balanced growth of renewable energy which, in addition to ensuring that the EU objectives are met by 2020 (from 26 per cent to about 35 per cent in the electricity sector), stabilises the incidence of incentives on electricity prices. Moreover, by 2016 the system of green certificates will be replaced by a mechanism based on incentivising tariffs, fixed prices or bonus prices, reverse auctions and the introduction of a governance and monitoring system of incentives.

• The so-called ‘Thermal account’, incentivising energy production from renewable sources (biomass heating, heat pumps, thermal solar and solar cooling), and speeding up energy upgrade projects for public buildings, through a simple and effective system of incentives for citizens and general government bodies. The new incentive measure, in line with the National Energy Strategy, will more than meet the energy and environmental targets set for 2020 by the European Union.

• Update of the National Action Plan for the reduction of GHG emissions, adopted by CIPE, with the new measures to promote electric and thermal renewable energy sources.

• Rationalisation of the production chain of biofuels to be used for transport, easing the bias in favour of EU products compared to non- EU products.

• Entry into force, as of March 31, of the requirement for producers/importers or installers of photovoltaic panels to join a disposal consortium.

Objective No. 4 relating to renewable sources is also affected by provisions concerning sustainable mobility, that was commented on in the remarks about Target No. 3 - GHG emission reduction.

FOCUS

A detailed look at the wider use of renewables

According to data developed by the Energy Services Operator (Gestore Servizi Energetici (GSE)) , installed electric capacity from renewable sources grew from 18.3 GW in 2000 to 24 GW in 2008, and beyond 41 GW in 2011 (+37 per cent compared to 2010).

The number of plants powered by renewable sources has more than doubled compared to 2010 going from 159, 895 up to 335,151. The change over 2010 figures is mainly due to the strong growth in photovoltaic plants from 155,977 to 330,196 ; a strong growth in installed power compared to 2010 – from 3 GW to 13 GW—has also been witnessed in relation to these plants. In 2011, photovoltaic plant capacity accounted for 31 per cent of total capacity of plants powered by renewable sources, second only to hydraulic plants (which accounts for about 44 per cent).

Compared to 2010, the contribution from wind and bioenergy also increased: especially for the first type of plants there were increases in the number and capacity by 65.7 per cent and 19.3 per cent respectively. The number of plants powered by bioenergy increased by 81 per cent while their installed capacity increased by 20 per cent; however, these are mainly small plants.

¹²  Decrees of the Ministry of Economic Development in agreement with the Ministry of the Environment of 5 and 6 July 2012.

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As regards electricity generation, the total production from renewable sources increased over the last decade from 51 TWh in 2000 to 83 TWh in 2011, with different contributions from individual sources: hydropower went down from 86 per cent to 55 per cent, geothermal from 9 per cent to 7 per cent, wind from 1 per cent to 12 per cent, photovoltaic from 0.01 per cent to 13 per cent and finally bioenergy from 4 per cent to 13 per cent. In the case of photovoltaic, actual production went up from 39 GWh in 2007 to almost 11 TWh in 2011; in the case of wind, whose growth was more gradual, production went from 563 GWh in 2000 up to 4 TWh in 2007, reaching little less than 10 TWh in 2011. In both cases there was a considerable increase in the average size of plants.

As to bioenergy, production went from 1,9 TWh in 2000 up to 5 TWh in 2007 and to about 11 TWh in 2011.

Finally in the case of hydro and geothermal sources, already widely used, progress was much slower.

Compared to other European countries with regard to electricity production from renewable sources, Italy ranks fourth after Germany, Spain and Sweden and before France. Moreover, as regards the objective to be reached by 2020 relating to electricity only (percentage of gross domestic electricity consumption met by renewable sources), it should be noted that in 2011 Italy reached 24 per cent (as against the 2020 objective of 26.4 per cent); this figure is above the EU27 average – of 20.4 per cent. Compared to bigger countries, Italy ranks after Spain and before Germany, France and the United Kingdom.

Target No 5 – Energy efficiency

Europe 2020 Strategy Target: 20 per cent cut in energy consumption.

TABLE III.6: TARGET LEVEL FOR ‘ENERGY EFFICIENCY’

INDICATOR	CURRENT LEVEL*	2020 OBJECTIVE **		2016 OBJECTIVE
Energy efficiency (Yearly saving on final uses )	5.12 Mtoe/year (2011)		20 Mtoe/year		11.6 Mtoe/year

* The energy efficiency objective is calculated as savings on final uses as envisaged by the Energy end-use efficiency directive (32/2006/EC).

** Efficiency target set by the National Energy Strategy.

In 2011 energy consumption (final uses) in Italy was 1,568 TWh with a 2.6 per cent reduction compared to 2010. Consumption declined because of the lingering crisis and because of the impact of policies for the promotion of energy efficiency. More specifically, energy saving achieved by energy efficiency measures was estimated at 5,12 mtoe/year, on the increase compared to 2010.

The National Energy Strategy (SEN), adopted in March 2013, set as the energy efficiency objective to be reached by 2020 a cut in energy consumption of 231,7 TWh . To meet this target, the National Energy Strategy sets out the policy measures that have already been adopted and those that have been envisaged to promote energy efficiency in the residential, general government, industry and transport sectors; the following is a summary of envisaged policy measures:

• Strengthening and enforcement of the rules on minimum energy performance standards, especially with regard to construction (new buildings or major renovations), the transport sector and the whole range of products falling under the scope of the Ecodesign directive (also with a view to transposing European regulations).

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• Extension to 2020 of tax credits for energy efficiency in buildings, which were introduced in 2007.

• Introduction of direct incentives for general government interventions such as the so-called ‘Thermal Account’ (‘Conto Termico’)¹³. Contractual standards shall be developed for general government bodies based on increased energy efficiency, by strengthening the Energy Service Contract .

• Strengthening of the so called White Certificates system mainly targeted to bigger energy efficiency projects in the industrial and services sector and to the promotion of infrastructure projects (ICT, water distribution, trasport).

• Strengthening of the ESCO model (Energy Service Company), through the introduction of qualification criteria, the development and wide use of innovative contract models for funding by third parties and the establishment of special revolving funds for bigger projects, with the possible participation of public financial institutions.

• Consolidation of the role of Structural Funds through which energy efficiency promotion programmes have been implemented (POIN) and which can be an important opportunity for future actions, especially energy upgrade of public buildings.

• Support research and innovation with the aim of further developing material, construction and plant technology, which are all sectors in which Italy holds a strong global competitive advantage.

• Promotion of information and awareness-raising campaigns to increase citizens’ awareness of the opportunities offered by energy efficiency.

The cohesion policy 2007-2013 contributes €2.9 billion to energy efficiency and renewable energy projects (1.8 billion in the Convergence Regions) for a total expenditure by the end of December 2012 of about €22.8 of the total amount planned (14.1 per cent in the Convergence Regions)¹⁴.

A substantial part of the programmes was started with funds from Interregional Renewable Energy and Energy Saving Programme (POIN) as part of the ERDF 2007-2013, designed to create the supraregional sinergies needed to strengthen the spreading of renewable sources and energy saving as a competitive driver of regions. The Operational Interregional Renewable Energy and Energy Efficiency Programme also supports energy upgrade projects in public buildings identified in the Convergence Regions through two conventions agreed to by the relevant ministries and authorities for a total amount of €50 million.

Target No. 6 – Early School leavers

Europe 2020 Strategy Objective: reducing school dropout rates below 10 per cent by 2020.

¹³  Already included in the measures to achieve Objective No. 4.

¹⁴  Measures adopted maily concern energy efficiency in public buildings, energy efficiency of public lighting systems, strengthening of distribution networks, and on the production side, integrated plants on public building that mainly use the sun as a source of energy, but also, albeit in a very small percentage, energy from biomass.

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TABLE III.7: TARGET LEVEL FOR ‘SCHOOL DROPOUT RATES’

INDICATOR	CURRENT LEVEL (2012)	2020 OBJECTIVE	MEDIUM TERM
	17.6% (Italy)		17.9% by 2013
Early leavers from education		16%
	21.7% (Convergence area)		17.3% by 2015

In 2011, the highest qualification achieved by 44 per cent of the population in the 25-64 age group was a lower-high school diploma, a figure that is quite far from the EU27 average (26.6 per cent). More recent data on the 2012 average show that young people aged 18-24 experiencing school dropout (Early school leavers – ESL) dropped to 758,000 (29,000 less than in 20011); 59.6 per cent of them are male. In the same age group, the incidence of school dropout is 17.6 per cent (18.2 per cent in 2011) against a EU average of 13.5 per cent (however these data refer to 2011). As regards young foreigners, the indicator reached 41.3 per cent (15.0 per cent for Italians).

FIGURE III.1: EARLY SCHOOL LEAVERS (ESL) BY GENDER, REGION AND AREA - 2012 (PERCENTAGE VALUES)

At regional level the situation is uneven: Molise is the only region to have met the European target, with the indicator showing 10.0 per cent. The phenomenon of school dropout continues to plague mainly the South, with peaks of 25.5 per cent in Sardinia, 24.8 per cent in Sicily and 21.8 per cent in Campania. Compared to 2011, the Marches, the Autonomous Province of Trento, Liguria and Umbria recorded a significant increase in the indicator values (+3.0, +2.4, +2.2, and +2.1 percentage points respectively). Molise, Latium, Veneto and Lombardy show the strongest declines (-3.1, -2.7, -2.6, -2.0 percentage points).

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Italy ranks fourth from the bottom, immediately after Portugal in the EU27 league table. The gap with the European average is more marked in the male population (21.0 against 15.3 per cent), compared to the female population (15.2 and 11.6 per cent, respectively).

Programmes co-funded by Structural Funds help to reduce school dropout rates and, more generally, to improve attendance with € 4.4 billion in the current planning cycle, with expenditure at 31 December 2012 equal to 54 per cent of the planned value. Programmes are concentrated in the South, implemented by PORs and by the two PONs being implemented in the Convergence Regions enacted by the Ministry of Education, University and Research (the total of funds earmarked to Convergence amount to €3.2 planned with an expenditure advancement of 52.3 per cent).

For more details on the measures taken to achieve the European objective, see the outline of actions taken to respond to Recommendations No.3 and No.4.

Target No.7 – Tertiary education attainment

Europe 2020 Strategy Objective: increase the percentage of people aged 30-34 completing third level education.

TABLE III.8: TARGET LEVEL FOR‘UNIVERSITY EDUCATION ‘

INDICATOR	CURRENT LEVEL	2020 OBJECTIVE	MEDIUM TERM
Tertiary education	21.7%		22.3% by 2013
		26-27%
Attainment	(Istat, year 2012)		23.6% by 2015

In Italy, average figures for 2012 showed 30-34 year olds having completed third level education to be 21.7 per cent (17.2 per cent of men and 26.3 per cent of women). The indicator shows a significant increase (+1.4 percentage points) referring both to women and men. However, despite the increase recorded in the 2004-2012 period, the percentage is still quite modest against the 40.0 per cent objective set by the Europe 2020 Strategy. In the EU average, the indicator shows an annual increase of one percentage point and stood at 34.6 per cent in 2011, with thirteen countries that have already reached and overshot the 40.0 per cent objective

At regional level, increases of more than two percentage points are found in in Emilia Romagna, Liguria, Basilicata, Apulia and Friuli Venezia Giulia. Emilia Romagna is the region with the highest percentage of graduates among 30- 34 year olds (28.6 per cent). Conversely, declines are shown by the indicator in Abruzzi, Sardinia, the Marches, Trentino Alto Adige and the Autonomous Provinces of Trento and Bolzano. These data must be carefully assessed considering that in some Regions (Emilia Romagna, Liguria, the Autonomous Province of Trento) the percentage of 30-34 year olds with a third-level education diploma is already above the 2020 target assigned to Italy.

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In the last few years, Universities have had difficulty in attracting young people. The university enrolment rate (percentage ratio of students enrolling at universities to upper secondary school graduates of the previous year), that had gradually been edging up reaching 73 per cent in the 2003/2004 academic year, gradually declined and stood at 61.3 per cent in 2010/2011.

In 2011, 71.5 per cent of young people who had graduated from university in 2007 were in employment (73.2 per cent of people who had graduated in 2004 and interviewed in 2007). Among three-year degree courses, the best employment outcomes were registered for courses leading to professions in healthcare (nursing and obstetrics, with approximately 95 per cent of people in employment); for two – year master courses, high employment levels were found among those who completed engineering, architecture and business and economics courses.

Particular problems have been identified in relation to graduates living in the South and women. In particular, the female disadvantage is associated with all types of degree courses, with a differential in the unemployment rates of women and men of about 8 points¹⁵.

¹⁵  Data taken from ISTAT publication ‘Rapporto sulla coesione sociale – anno ‘ 2012’, downloadable from: http://www.istat.it/it/archivio/77697

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As the arguments set out are the same, for a description of the measures implemented to achieve the European objective, see the outline of the actions adopted to respond to Recommendation No. 3 and No. 4.

Target No. 8 – Fight against poverty

Europe 2020 Strategy Target: at least 20 million fewer people in or at risk of poverty and social exclusion

TABLE III.9: TARGET LEVEL ‘FIGHT AGAINST POVERTY’

INDICATOR	CURRENT LEVEL	2020 OBJECTIVE
Number of poor people, experiencing material deprivation or living in very low work intensity households	14,757,000 (2010) 17,126,000 (2011)	Reducing by 2,200,000 the number of poor, materially deprived or members of low intensity work households.

The synthetic indicator of poverty or social exclusion risk records the percentage of people (on the total population) who experience at least one of the following conditions: serious material deprivation; risk of poverty after social transfers; living in a low work intensity household¹⁶.

This indicator went up in Italy from 26.3 per cent of 2010 to 28.2 per cent in 2011, a percentage that is above the euro area (22.6 per cent), and above the EU27 (24.2 per cent).

Compared to 2010, the synthetic indicator goes up by 3.7 percentage points, because of the increase in the percentage of people at risk of poverty and those suffering serious deprivation. After an increase between 2009 and 2010, the percentage of people who are members of low work intensity households has basically remained stable (at 10.4 per cent).

If one considers the single indicators that make up the synthetic index:

• in 2011 the share of people at risk of poverty after social transfers (which in Italy mainly consist in pension benefits), accounts for almost a fifth of the resident population (19.6 per cent compared 18.2 per cent in 2010). This figure is above the European average, whether against euro area countries or EU 27 (16.9 per cent in both cases); people experiencing serious deprivation are 11.2 per cent (they were 6.9 per cent in 2010), above both the euro area countries (6.5 per cent) and EU 27 (8.8 per cent);

¹⁶  Situation of serious material deprivation: people living in households claiming that they experience at least four out of the nine following deprivations: 1) not being able to afford unexpected expenses; 2) being in arrears with payments (mortgage, rent, utility bills, debt other than mortgage); not being able to afford: 3) a week’s holiday away from home once a year 4) an adequate (protein) meal at least every other day, 5) sufficient home heating; not being able to buy: 6) a washing mashine, 7) a colour TV set, 8) a phone or 9) a car; risk of poverty after social trasfers: people who live in families with an income equal to or below 60 per cent of equivalent median income, after social transfers; being a member of a very low work intensity household: people under 60 living in families where adults, during the previous year, worked less than 20 per cent of their potential.

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• the labour market exclusion indicator shows that in Italy in 2011 10.4 per cent of people under the age of 60 were living in a very low work intensity household; the figure is close to both European averages (10.0 for EU27 and 10.5 for the 17 countries of the euro area).

• Compared to 2010, individuals who are members of households who claim they cannot afford a week’s holidays away from home increased (from 39.8 per cent to 46.6 per cent), who could not afford sufficient home heating also increased (from 11. 2 per cent to 17. 9 per cent), who cannot afford unexpected expenses of € 800 (from 33.3 per cent to 38.5 per cent) or who, if they wanted to, could not afford an adequate protein meal every other day (from 6.7 per cent to 12.3 per cent).

The South is the area of the country with the highest poverty and exclusion rates; in Sicily all three indicators show the highest figures: 44.3 per cent of residents are at risk of poverty, 25.3 per cent experience serious deprivation and 19.9 per cent live in low work intensity households. Figures for Campania and Basilicata are also high. Worth noting are the situations in Apulia – with the figure for serious deprivation (21.5 per cent) – and Sardinia, for the figure relating to low work intensity (17.5 per cent).

At the other estreme is the North, especially the North- East, the area least exposed to the risk of poverty; the best conditions are those in Alto Adige, Valle d’Aosta and Emilia Romagna, where the percentage of the population at risk of poverty or exclusion is below 15 per cent.

The measures described below have been implemented in the last twelve months with the aim of improving this indicator (for further details see subsection III.1, CSR 4):

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• The ‘Semplifica Italia’¹⁷ decree law has changed the approach on which the purchase card for the fight against absolute poverty was based: while the areas chosen for testing this measure (the 12 cities with a population of more than 250,000 inhabitants) and the total amount of funds allocated have remained unchanged (€ 50 million to be drawn from the Purchase Card Fund), with the new approach municipalities are entrusted with distributing the so-called ‘social cards’, as part of the integrated system of social programme and services they provide.

The new ‘social card’¹⁸ is intended for families with children in absolute poverty, starting with households who are more marginalised from the labour market. The number of recipient families will be greater (the previous card required households to have a child under three years of age or an elderly member over 65). In order to qualify for access to this programme the ISEE (means-testing) indicator must not exceed € 3,000 – in additon other means-testing methods are used, such as home ownership. With the resources that are available 15 thousand households will benefit from this experimental project.

The new purchase card provides a cash benefit that is higher than the previous monthly benefit (€ 40) plus care services to the individual (social, educational and training services). The amount of the benefit is not the same for all recipients, but scaled up or down depending on the size of the household and the cost of living in the municipalities where the scheme is being tested. The monthly benefit will be € 231 for households with two persons, € 281 for those with three persons, € 331 for four persons and € 404 for households with five or more members.

Unlike the old purchase card, which only Italian citizens were entitled to claim, the new social card is a benefit that also EU and non EU citizens that are long – term residents can claim.

• Monitoring of the use of the existing purchase card shows that in the period from December 1 2008 to 31 December 2012, the € 80 benefit was paid to 935,000 people living in absolute economic distress. Of these, 493,000 are children under 3 and 442,000 are over 65. 70 per cent of recipients live in the South (including Sicily and Sardinia) , 13 per cent in the Centre and about 17 per cent in the North. A total of € 945 million have been paid to recipients.

• The Structural Funds earmark about €3.1 billion for social inclusion (1.7 billion for the Convergence Regions) as part of a wider set of funds earmarked for social inclusion and services for the quality of life and territorial attactiveness, €1.5 billion from PON ‘Sicurezza’ (Safety National Orientation Plan). As regards implementation, programmes rolled out through EFRD mainly concentrate in the South, where investment in social infrastructure prevail, while measures rolled out through the European Social Fund tend to concentrate in the regions of Central and Northern Italy, where there are a higher number of instances of action taken for the social and labour market inclusion of disadvantaged people and for action to promote acceptance of diversity. Expenditure on this priority issue at 31 December 2012 stood at 41.5 per cent (36.8 per cent in the Convergence Regions).

¹⁷  Art. 60, Decree Law No.5/12.

¹⁸  It should be noted that the standard social card benefit will continue to exist and has been refinanced. The new card has been introduced on an experimental basis.

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• In addition to programmes envisaged by the Action and Coesion Plan (III re-planning stage, for a total of €143 million), the Government has envisaged social inclusion programmes to be funded with national resources, for a total of €117 million earmarked for family policies.

• With the labour reform, the Government has reviewed provisions on the Solidarity Fund for mortgages to buy first homes and established CONSAP. The Fund allows borrowers, in case of mortgage agreements for the purchase of a house to be used as primary residence, to apply for a suspension of the instalment payments in given cases. For each of the years 2012 and 2013, the Fund’s endowment has been increased by €10 million.

• The National residential housing plan is a set of government residential housing programmes, project financing, facilitations for construction cooperatives, in addition to an integrated system of real-estate funds. It envisages concessions for construction developers who set aside a share of dwellings to be leased or sold to young couples (aged 35/40 who have been married for at least two/three years). A second programme to support young couples envisages action on rents, with measures aimed at ensuring affordable rents.

• The integrated system of real-estate funds is linked to the National Housing Plan. The Fondo Investire per l’Abitare (FIA – home investment fund)19, which is a closed real-estate fund managed by Cassa Depositi e Prestiti (CDP) is an integral part of the National Housing Plan. The Fund20 can finance selected urban upgrade projects for about €1.5 billion, while the value of investment can reach € 4.4 billion between public and private funds. On top of this investment channel there are the regional policy agreements for a total of €490 million, in addition to public residential housing schemes worth €200 million. With a first endowment of €377.8 million, programmes have started for 17,101 dwellings (13, 737 new dwellings, 3,168 renovations and 196 are purchases from existing buildings). An additonal €112 million have been added to this investment. The funded programmes will enable, inter alia, the provision of dwellings to be leased at affordable rent.

III.3. USE OF STRUCTURAL FUNDS

Programmes co-financed by Structural Funds and Cohesion Action Plan

In line with the specific European Council Recommendation of July 2012, the rescheduling of Structural Funds through the Cohesion Action Plan (first, second and third phase) together with the adoption of measures to speed up expenditure enabled the total use of EU funding whose deadline expired on 31 December 2012.

¹⁹  Envisaged by the ‘Housing Plan’, under Decree Law No.1/2012 and Decree Law No. 83/2012.

²⁰  The Government established the Fund with a Ministerial Decree of the Ministry of Infrastructure and Transport – Min. Decree No. 1105 of 2013.

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In the 14 months between October 2011 and 31 December 2012 certified expenditure amounted to €9.2 billion, more than had been spent in the previous five years, reaching 37 per cent of available amounts thereby exceeding the national target by 5.5 points²¹. It was a major improvement that affected the whole Country, although differences in performance among Regions remain. Of the 52 Italian operational Programmes, only the ‘Attrattori culturali, naturali e turismo’ Programme (on tourism, cultural and natural attractions) did not reach the set expenditure target, with a loss of 0.1 per cent of the planned amount.

The first rescheduling of Structural Funds (December 2011) concerned the regional operational programmes in the South for a total of €3 billion, earmarking funds for measures for education, railways, employment and the implementation of the digital agenda. All the planned actions resulted in significant progress: expenditure on school programmes was equal to 36 per cent of planned expenditure at 31 December 2012; applications for using the tax credit for hiring disadvantaged and very disadvantaged workers went well above the funds available; four Institutional Development Contracts have been signed for strengthening the railway and road network in the South; agreements have been entered into with the Regions for promoting the use of basic and new generation digital technology.

The second rescheduling of Structural Funds (May 2012) concerned operational programmes run by Ministries and involved funds for a total of €3.4 billion for social inclusion and growth objectives with special attention to programmes for young people. In the field of child-care services and services for non-self-sufficient elderly people (€730 million) a comprehensive national programme has been prepared, made up of action plans for each Convergence Region, aimed at providing more nurseries and supplementary services and to strengthen integrated home care. The first tranche of funds has been shared out. To improve the condition of young people, actions have been developed for inclusion and growth (€672 million, including the funds for the extraordinary plan to reform vocational training in Sicily), intended to reduce drop-out rates, incentivise non-profit activities in the South, promoting apprenticeship and breaking the NEET cycle through 6-month apprenticeships, with the participation of Employment Services; in addition, measures have been envisaged a) to favour the participation of students in the South in international research networks through the involvement of Italian researchers abroad and b) to support youth entrepreneurship. These measures are flanked by those designed to support enterprises research, through strengthening the Central Guarantee Fund, also for small and medium-sized enterprises; supporting particularly important investment programmes (Development contracts); incentivising internationalisation and the use of pre-commercial contracts (€700 million). Finally, measures have been envisaged for enhancing the value of sites of cultural interest (€130 million), to cut the length of civil proceedings (€4,4 million) and to promote energy efficiency.

²¹ On the implementation of programmes co-funded by Structural Funds see also the National Strategic Report drawn up by Italy in December 2012, downloadable from:

http://ec.europa.eu/regional_policy/how/policy/doc/strategic_report/2012/it_strat_report_2012.pdf

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The third rescheduling of Structural Funds (December 2012) involved €5.4 billion funds. The programmes thus funded are intended to dampen the impact of the economic cycle on enterprises, workers and households in economic distress, with action that has been identified through dialogue among government and social partners (€2.4 billion)²²; to safeguard particularly significant projects that need longer than expected implementation times (€1.9 billion); new interventions to be implemented when the next (2014-2020) during the next planning period (€1.05 billion).

An online portal called ‘Open Coesione’, the only one of its kind in Italy and abroad, has been set up. It gives users the possibility to download data in an open and re-usable format (open data) on each intervention of the cohesion policy (about 700,000 projects realised with EU and national funding) through an interactive platform encouraging users’ interaction it provides citizens with information on monitored interventions.

A recent Government initiative has integrated the reserve envisaged under Article 3 of Decree Law 201/2011, ruling out national co-funding from the Internal Stability Pact, for a share equal to €800 million for 2013 alone. The aim is to ensure that expenditure targets are met by 31 December 2013 and support the further acceleration needed for a complete use of EU funds by the end of the period.

Work to prepare the 2014-2020 planning has started with the presentation of the document that identifies innovations in terms of approach as well as some operational action proposals²³. A technical institutional debate has begun, coordinated by the Department of cohesion and development within four technical forums convened to discuss the major issues in the new planning period: employment, competitiveness and innovation, value-enhancement, protection and management of the environment; quality of life and social inclusion; education, training and skills. The outcome of the debate is the foundation on the basis of which the partnership agreement and the operational programmes are being developed. Compared to 2007-2013, the new planning effort envisages greater concentration of funds and more explicit compliance with the priorities of the Europe 2020 Strategy. In order to meet these commitments, the temptation to extend the range of actions that can be funded must be resisted and effective measures must be envisaged that can respond to the three strategic objectives identified in the document which started the public debate: i) bridge the gap between citizens and institutions and the production gap in the South of Italy; ii) give cities a central role in the new planning cycle, so as to revitalise production

²² Direct measures for business and employment in the South (22 October 2011), downloadable from:

http://www.dps.tesoro.it/documentazione/comunicati/2012/Nota_Tecnica_Finale_Tavolo_SUD_Impresa_Lavoro.pdf

²³ ‘Metodi e Obiettivi per un uso efficace dei Fondi Comunitari’ (Methods and Objectives for an Effective Use of EU Funds) submitted to Italy’s Council of Ministers on 17 December 2012, by the Minister for Territorial Cohesion, in agreement with the Minister of Labour and Social Policies and with the Minister of Agricultural, Food and Forestry Policies.

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innovation and improve the quality of services in these areas; iii) protect, ensure the growth and safety of the hinterland that may provide significant business and employment opportunities (in tourism, social services, farming, the rediscovery of old trades and professions). In order to ensure that the new planning cycle and its action on cities and hinterland areas are effective, the contribution of national sectoral policies in the areas for which EU funds are used is crucial.

With a view to ensuring coordination and monitoring of co-financed programmes and ensuring a systematic review of their implementation, the role of central government must be strengthened in: i) designing and reviewing rules and general policies, ii) monitoring and assisting implementation and iii) co-designing regional prototype projects, iv) complying with the subsidiarity principle. To these ends, it is essential for the organisational approach of the Ministry for Territorial Cohesion to be redesigned.

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IV. ANALYSIS OF MACROECONOMIC IMBALANCES

IV.1 ITALY’S STATUS BASED ON THE SCOREBOARD INDICATORS

The process of overseeing macroeconomic imbalances

The supervision of macroeconomic imbalances of the Euro Area countries (Macroeconomic Imbalances Procedure (MIP)) is part of the European Semester annual cycle. The MIP involves two possible procedures: the first, preventive and the second corrective. The latter is applied only when the in-depth review of any single country evidences imbalances that may be considered excessive. The MIP was first applied in February 2012, when the Commission published the first Alert Mechanism Report in which it indicated that 12 countries, including Italy, needed an in-depth review in order to evaluate possible excessive imbalances. The publication of the in-depth reviews occurred May 2012. At such time, Italy’s imbalances (loss of competitiveness and high public debt) were deemed ‘serious’ but not excessive, and Italy was included in the preventive procedure. In July 2012, the European Council took decisions on the subject.

The European Commission’s assessment for 2013

The economic assessment of the indicators for the Alert Mechanism Report for 2013 also prompted the European Commission to identify Italy among the countries that present ‘ serious imbalances’ and for which a more in-depth review is needed. Italy reflects values above the alert threshold for its public debt and its exports market share. More specifically, the report links the contraction of export market share to the loss of competitiveness occurring since the introduction of the euro.

Low productivity is the main obstacle to regaining competitiveness and to improving economic growth prospects. Based on the Commission’s assessments, the unit labour cost remains too high with respect to the Euro Area average, including as a result of a wage/salary trend which does not mirror the trend of productivity.

With reference to financial markets, the high cost of financing businesses is a concern. The gap with respect to other core Euro Area countries is likely to reflect tensions on sovereign debt and the consequent variation of monetary-policy transmission in the Euro Area’s various economies. On the other hand, the Commission acknowledges that private-sector debt is lower than the Euro Area average.

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TABLE IV.1: EU-15 - SCOREBOARD INDICATORS FOR MACROECONOMIC IMBALANCES

	External Imbalances										Internal Imbalances
	Current account balance		Net International Investment Position		Real Exchange Rate		% of World Exports		Nominal Unit Labour Cost		House price index		Private credit flow		Private Debt		Public Debt		Unemployment Rate		Total Financial Sector Liabilities
	Chg. 3 years				To HICP		Chg. 5 years		Chg. 3 years		Chg. year/ year								Level 3 years		Chg. year/ year
	% of GDP		% of GDP		% of GDP								% of GDP		% of GDP		% of GDP
	-4/+6 per cent		-35 per cent		+/-5 (EA); +/- 11 per cent (Non EA)		-6 per cent		+9 (EA); +12 per cent (Non EA)		6 per cent		15 per cent		160 per cent		60 per cent		10 per cent
BE		-0.3		65.7		-0.5		-10.2		6.2		-0.1		11.6		236.0		98.0		7.8		4.7
DE		5.9		32.6		-3.9		-8.4		5.9		1.4		4.8		128.0		81.0		6.9		2.1
IE		0.0		-96.0		-9.1		-12.2		-12.8		-15.2		4.0		310.0		106.0		13.3		-0.6
EL		-10.4		-86.1		3.1		-18.7		4.1		-5.1		-5.5		125.0		171.0		13.2		-3.4
ES		-4.3		-91.7		-1.3		-7.6		-2.1		-10.0		-4.1		218.0		69.0		19.9		3.7
FR		-1.6		-15.9		-3.2		-11.2		6.0		3.8		4.0		160.0		86.0		9.6		7.3
IT		-2.9		-20.6		-2.1		-18.4		4.4		-2.0		2.6		129.0		121.0		8.2		3.8
LU		7.5		107.8		0.8		-10.1		12.5		1.5		2.5		326.0		18.0		4.8		11.3
NL		7.5		35.5		-1.6		-8.2		5.8		-4.0		0.7		225.0		66.0		4.2		7.2
AT		2.2		-2.3		-1.0		-12.7		5.9		-8.0		4.1		161.0		72.0		4.4		-0.3
PT		-9.1		-105.0		-1.9		-9.5		0.9		-3.6		-3.2		249.0		108.0		11.9		-0.7
FI		0.6		13.1		-1.3		-22.9		9.1		-0.3		4.6		179.0		49.0		8.1		30.8
DK		5.0		24.5		-1.7		-16.9		4.7		-4.9		-2.2		238.0		47.0		7.0		4.7
SE		6.6		-8.3		3.9		-11.6		1.2		1.0		6.3		232.0		38.0		8.1		3.6
UK		-2.2		-17.3		-7.1		-24.2		8.1		-5.4		1.0		205.0		85.0		7.8		8.5

Source: Analysis of data from the ‘Alert Mechanism Report’, published in November 2012 by the European Commission. 2011 data.

TABLE IV.2: ITALY - SCOREBOARD INDICATORS FOR MACROECONOMIC IMBALANCES

	Current account balance		Net International Investment Position		Real Exchange Rate		% of World Export		Unit Labour Cost		House price index		Private credit flow		Private Debt		Public Debt		Unemployment Rate		Total Financial Sector Liabilities
2001		0.4		-5.8		-5.7		-18.5		4.8		5.4		8.4		87.0		108.0		10.0		-3.0
2002		-0.1		-12.4		-2.0		-14.2		7.0		6.5		6.4		90.0		105.0		9.2		3.9
2003		-0.3		-13.6		8.8		-13.4		10.7		7.4		7.0		93.0		104.0		8.6		11.6
2004		-0.5		-15.8		9.9		-7.4		9.8		7.1		8.3		98.0		103.0		8.3		7.2
2005		-0.7		-16.8		6.9		-5.2		8.7		5.2		9.4		104.0		106.0		8.1		12.1
2006		-0.9		-22.2		1.1		-12.5		6.5		3.2		10.9		110.0		106.0		7.5		10.5
2007		-1.2		-24.5		0.7		-9.3		6.1		2.6		13.1		118.0		103.0		6.9		0.5
2008		-1.9		-24.1		3.2		-16.3		8.3		-0.4		6.7		122.0		106.0		6.5		-2.7
2009		-2.0		-25.3		3.9		-17.9		10.5		-0.3		1.3		128.0		116.0		6.9		5.7
2010		-2.8		-24.0		-0.9		-19.2		8.1		-1.5		3.8		129.0		119.0		7.6		1.7
2011		-2.9		-20.6		-2.1		-18.4		4.4		-2.0		2.6		129.0		121.0		8.2		3.8
Threshold		+6 per cent; -4 per cent		-35 per cent		+/-5 per cent Euro Area; +/- 11 per cent non Euro Area		-6 per cent		+/-9 per cent Euro Area; +/-12 per cent non Euro Area		6 per cent		15 per cent		160 per cent		60 per cent		10 per cent		16.5 per cent

Source: Analysis of the European Commission for preparation of the ‘Scoreboard’ – 2000-2010; updating with the data of the ‘Alert Mechanism Report’, published in November 2012 by the European Commission.

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Macroeconomic scenario

The Italian economy’s current difficulty dates back to the second half of 2011 when the sovereign debt crisis started. Whereas the previous decline in GDP, culminating in 2010, was marked by a conspicuous decrease in exports, during 2012, the main recessionary impulse came from the negative repercussions of the financial crisis on the economy.

The opening of a very large spread between interest rates on Italian government securities and those on German securities and tensions on the European interbank market spilled over to private-sector financing. The adverse implications were both in terms of higher interest rates and in terms of a contraction in the total credit to the economy. The broad fiscal consolidation, which was necessary for stabilising market expectations and for complying with domestic and international commitments to bring forward the achievement of the structural budget balance to 2013, provided a negative impulse to the economy. Moreover, a drastic drop in consumer and business confidence also contributed to the unfavourable economic trend.

The outturn was a new, significant decrease in GDP generated by the contraction of all components of domestic demand. Given the still stagnant productivity, the gradual deceleration of the wage/salary growth failed to translate into improvement of price competitiveness. However, the trend of productivity is also to be interpreted in light of the greater staying power of the labour market vis-à-vis other European countries affected by recession. Indeed, during 2012, Italy witnessed a rebound in the labour participation rate, which contributed to significantly increasing the unemployment rate.

The negative cyclical phase put businesses in difficulty; as they witnessed their profit margins (mark-ups) decline, they also had to deal with an unfavourable situation in terms of the sources of financing. The situation for households also deteriorated, with disposable income contracting under the thrust of increased fiscal pressure and declines in employment.

The fiscal consolidation policies and the reforms implemented have led to overall structural improvement from the standpoint of the macroeconomic imbalances, even though the current unfavourable cyclical phase has made the results achieved less visible. In any event, several favourable signals can already be detected. On the competitiveness front, encouraging results have been reported with regard to: the trend of foreign trade, with marked improvement in the current account balance; the positive performance of exports; and virtual stabilisation of the quotas of Italian products in the international markets. The analyses effected show that these results are largely structural. Another very positive development is the pronounced drop in the BTP-Bund spread in comparison with the peaks posted during the most acute phases of the crisis. Such drop will contribute to the gradual waning of tensions on the credit market and, in general, on all of the financial indicators monitored at European level. A programme for the public administration’s payment of past debts will also contribute to encouraging a more rapid recovery of domestic demand, with the resulting significant injection of liquidity into private-sector businesses (for additional details, see Chapter V and the Stability Programme).

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IV.2 ANALYSIS OF MACROECONOMIC IMBALANCES AND PROSPECTS

The indicators at the basis of the macroeconomic supervision procedure will be examined below, with an analysis of both their fundamental and more recent trends. The approach adopted at European level makes a distinction within the scoreboard of the indicators that point to external imbalances and those linked to internal imbalances. In any event, the interpretation of the data does not end with a mechanical analysis of the indicators individually considered, but supplies a joint assessment of their trends, including in light of the analysis of other variables.

Current accounts, exports and the net foreign position

Starting in 2011, Italy witnessed gradual improvement in its current account which is by now balanced (-0.6 per cent of GDP in 2012), due to the return of a surplus in the balance of goods (+1.3 per cent of GDP in 2012) and general equilibrium in services. The sovereign debt crisis affected the capital income component leading to deterioration of net income flows – due mostly to higher spending for interest on the public debt. The account covering net unilateral transfers abroad has been in a deficit position for some time, due to international remittances and transfers to the EU institutions.

The foreign trade surplus was achieved even though Italy has a sizeable structural deficit in the energy sector (4.5 per cent of GDP in 2012). Instead, surpluses are normally reported for the consumer goods component and the investment goods component, the latter of which has shown relevant improvement in recent years. The foreign trade surplus is the result of a major contraction in imports and an increase in exports which, in nominal terms, have achieved values in excess of the levels prior to the economic-financial crisis of 2008-2009.

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The trend of exports is dictated by the pattern of global demand and by the capacity to compete on international markets. A summary measure of export performance is given by market share in the international trade. Italy’s share fell by 18.4 per cent over the 5-year period ending in 2011 (the 2012 data are not yet available). This is therefore a critical factor. Between 2000 and 2011, Italy’s share of total world trade descended from 3.8 per cent to 3.3 per cent¹. After a recovery during the 2001-2004 period, the trend turned negative and remained that way until 2010. In any event, the most recent data suggest a pronounced deceleration of the speed of the decline in share, with the ratio basically stabilising as from 2011.

The analysis of international trade shows a loss of market share for the advanced economies when considered as a whole. In order to interpret the change in Italy’s share, the most significant comparison is that with the Euro Area; choosing this basis for comparison is based on the fact that the Euro Area is an area with a level of development that is comparable on average, within which the relative competitiveness is not influenced by exchange-rate fluctuations. In order to eliminate effects that could have influenced exports for a specific year, a three-year moving average was calculated.

At the start of the sample period (2000-2002), Italy’s market share of global trade stood at an average of 4.3 per cent, whereas at the end of sample period (2009-2011), such share had fallen to 3.4 per cent. Over the same period, the comparable market share of the Euro Area as a whole went from 31.5 per cent to 28.3 per cent. The change in Italy’s share shows a similar profile, even though it is worse in percentage terms when compared with the average of the Euro Area countries (Figure IV.3). Despite this, it is worth noting (Figure IV.4) that the figure which stands out the most is Germany’s, whose exports significantly influence the aggregate figure for the Euro Area. The performance of all other main European countries is not substantially different from Italy’s.

¹  The data used in the analysis below were sourced from Comtrade, a United Nations statistical database. Italy’s market share is computed as the ratio between national exports and global exports, valued at current prices.

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FOCUS

Share of international trade by product category, end market and production specialisation

During the period considered (2000-2011), the negative trend in Italy’s share of international trade regarded all major export sectors² as shown by the aggregate data by product. More specifically, the loss was particularly significant in textiles (from 7.3 per cent to 5.3 per cent), rubber and plastic (from 4.8 per cent in 2000 to 3.7 per cent in 2011) and the production of vehicles (from 3.8 per cent to 3.0 per cent). One possible explanation of the loss of share in such important sectors is related to a mix of export products similar to that for some emerging economies, as reported by recent studies³. The decade ending with 2010 saw the complete opening up of trade in numerous product categories. External competitive pressures have consequently increased with the less competitive Italian businesses being crowded out of the market. The data in relation to 2011 indicate that the decline in Italy’s share of world trade in key export sectors was essentially interrupted. More specifically, the figures show the staying power of electrical machinery (3.4 per cent from 3.2 per cent in 2010), the production of vehicles (3.1 per cent from 3.0 per cent in 2010), metal products (4.4 per cent from 4.3 per cent in 2010) and textiles (5.3 per cent from 5.2 per cent in 2010). The data on exports by sector in relation to 2012 indicate the strong performance of exports in the petrochemical industry, chemicals and pharmaceuticals, metal products and the food sector.

Another explanation for the decline in Italy’s market share lies in its specialisation in sectors marked by relatively unfavourable global demand dynamics. If the market shares of the global exports of products to total international trade are considered, it is possible to see during the period a significant increase in the share (in value terms) of the energy and non-energy commodities. With regard to the industrial transformation segment, the important increases in the chemical and metal products sectors were countered by sizeable drops in the market share held in textiles, vehicle production and electrical machinery.

The Balassa index⁴ was calculated at the start and end of the time period considered in order to supply a more technical indication about Italy’s productive specialisation. High comparative advantages are reported for leather goods, apparel, non-metallic mineral products, furnishings, textiles and metal products. During the period considered, the changes in specialisation model were relatively limited. Between 2002 and 2011, an increase in specialisation is noted for leather and metal products, while the Italian economy’s productive orientation in non-metal mineral products diminished.

The graph comparing sectors in Italy for which there is a greater productive specialisation and the sectors that have seen their weight increase or decrease in relation to international trade is not favourable to Italy. In any event, the contraction of market share for such sectors is rather limited, with the exception of textiles.

It is possible to do a more rigorous analysis by separately measuring the contribution of the productive specialisation and geographic specialisation in relation to the trend of Italian exports. The Shift and Share⁵ methodology allows for breaking down into four components the differential between the rate of growth of Italian exports and the rate of growth of global demand: initial productive specialisation, change in productive specialisation, initial geographic localisation, and change in geographic localisation.

²  Reference is made to the sectors that account for an average of 5 per cent or more of Italy’s total exports over the 2000-2011 period.

³  For additional details, see the following document: European Commission, EUROPEAN ECONOMY, Occasional Papers No. 107, July 2012, Macroeconomic imbalances – Italy.

⁴  The Balassa index of the country “i” in sector “j” measures the degree of specialisation in country “i” in the production of the “j-th” product and is defined as the ratio between country “i” share of exports in sector “j” and the similar share calculated at a global level. An index greater than 1 indicates specialisation, whereas an index below 1 indicates the absence of specialisation.

⁵  See European Commission (2012), Macroeconomic Imbalances – Italy, European Economy, Occasional Papers n. 107.

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The analysis shows that Italy’s productive specialisation did not play the most important role in the reduction of market share during the 2003-2011 period; even the initial positioning on the markets is not particularly significant. Instead, the effects due to the losses of quota on individual product categories and within end markets (considering Italy’s initial positioning) are quantitatively more important. The erosion of the shares reflects the issue of the partial displacement of Italian production by emerging economies.

During 2011, a change was seen in the productive and geographic orientation of Italian exports, and this made it possible to halt the negative trend of the market share. The improvement seems confirmed by the 2012 data, even though it is not yet possible to produce Shift and Share analysis for such year. The shift of Italian exports to areas with higher economic growth was, for example, intensified. The last figure shows the annual trend of exports to Italy’s main export markets.

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The position abroad

The current account balance, which has been negative without interruption since 2008, did not cause any substantial deterioration of the net foreign position.

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The net foreign position actually deteriorated by a lesser amount than the cumulative balance of the balance of payments, whose current account balance is the main component (the capital account items have only a minimal impact). The revaluation effects of the stock of foreign receivables and payables, which were unfavourable in the 2000-2006 period, turned to positive in recent years. This is particularly evident between 2010 and 2011. Other effects were exerted by a moderate depreciation of the euro – which would have led to a revaluation of the foreign securities held by Italians – and a relatively less favourable trend of Italian securities with respect to foreign securities. The revaluation effect was once again negative in 2012 because of the year-end rise in the market value of the public debt securities held by non-residents.

The value of the net foreign position at the end of 2012 was equivalent to -22.1 per cent of GDP. Such figure is not extremely critical, and is quite distant from the scoreboard threshold considered as an indicator of a country’s situation of fundamental imbalance (-35 per cent).

The current account deficit in relation to GDP significantly improved in 2012, amounting to 0.6 per cent versus the 3.1 per cent for 2011; such ratio is projected to be near breakeven in the next few years. Some estimates developed in conformity with the method adopted by the European Commission make it also possible to affirm that the adjustment occurring in 2012 has a predominantly structural, and thus permanent, nature (Figure IV.7). Finally, it is noted that the projected values for the current account balance are close to the level that stabilises the ratio between net foreign position and GDP, considering the expected future economic growth trend. In order to achieve this level, a very limited change in the real effective exchange rate would be needed⁶ (see Figure IV.8).

⁶  Figures IV.7 and IV.8 have been prepared by applying the European Commission’s methodology, with reference to be made to the contribution of M. Salto and A. Turrini, ‘Comparing alternative methodologies for real exchange rate assessment’, European Economy – Economic Papers 427, European Commission, 2010. Figure IV.8 shows the change required in the real effective exchange rate (REER) in order to close the gap between the value of the underlying current account (the current account net of the effects of the economic cycle and of the delay in the adjustment of trade volumes to changes in the REER) and a desired value, equal to that which stabilises the net position abroad. Figure IV.7 shows the underlying current account. The data used for the calculations were sourced from AMECO for the variables included in the definition of the current account, while the net position abroad is calculated using data from the Bank of Italy.

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In essence, the methodologies used, which consider both the current account balance and the current net foreign position, show that the status of the country’s foreign accounts is reassuring from the standpoint of sustainability.

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Italy’s net foreign position: sustainability over the short term

There is another aspect to the analysis of foreign debt⁷ and this regards the capacity of the country to deal with situations, in the event of market tensions, when foreign creditors might not reinvest in debt coming due, or when, if reducing their portfolio of Italian securities, they would put Italian securities under pressure in the financial markets.

A first element to be considered in assessing the sustainability of Italy’s foreign debt can be taken from the analysis of the foreign debt mix by maturity of the financial instruments. From this standpoint, it is noted that a short maturity schedule for foreign debt exposes the country to significant refinancing commitments, thereby making the foreign debt less sustainable⁸. On this matter, there are no particular critical elements emerging for Italy. On the basis of the most recent foreign debt statistics published by the Bank of Italy, the percentage of short-term foreign debt (with maturity of less than one year) increased in 2011, and then stabilised at around 33 per cent starting from the second half of that year. As reported by the European Commission (see note 11), non-resident investors typically have a more pronounced reaction than domestic investors to the economic framework of the country where they invest. They also demand higher risk premiums and react more abruptly to changes in both the economic outlook and the legislative-institutional framework. From this perspective, the situation of the Italian public administration appears relatively favourable: the percentage of the debt of the public administration held by non-residents (with respect to the total debt) has fallen from a level of more than 45 per cent to a level close to 35 per cent as of the end of 2011. Another element of the evaluation can be taken from the analysis of the characteristics of the foreign debt holders. A recent IMF study⁹ considers the issue of the vulnerability of the world’s most industrialised countries to an unexpected flight of international investors, starting from the characteristics of the holders of the debt.

⁷  The data on the foreign debt represent, as an initial approximation, the non-equity liabilities of residents to the rest of the world, and they are published quarterly by the IMF and the Bank of Italy.

⁸  ‘Some issues on external sustainability’, European Commission.

⁹  S. Arslanalp, T. Tsuda (2012), ‘Tracking Global Demand for Advanced Economy Sovereign Debt’, IMF Working Paper 12/284.

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With regard to Italy, the analysis shows that, despite a relatively high public debt, the rate of resilience of the base of investors at the end of 2011 was down to a level in line with the median calculated across 24 of the world’s most developed economies. In other words, the refinancing risk linked to possible shifts in investor preferences would be relatively limited, in line with that experienced in the rest of the world. Another element that prompts a positive evaluation of Italy’s position in terms of its vulnerability to changes in demand is the reduced percentage of Italian public debt within international investors’ portfolios, a percentage that is well below that for the portfolio calculated as a reference for the Euro Area.

The trend of the current accounts in relation to savings flows

The sustainability of the current account balance represents only a first level of analysis that does not consider the overall macroeconomic balances and the consumption and savings decisions of domestic economic agents. In national accounting terms, the flows of the current accounts, inasmuch as they are the sum of the trade balance, net capital income and income from employment, are equivalent to the mismatch between the gross national savings and gross investment. In essence, if the national savings are not sufficient to finance investment, the Italian economy will borrow abroad, giving rise to a current account deficit. National savings, just like the total of investments, can be broken down into different components of the institutional sectors: households, businesses and the public sector.

The current account deficit produced in recent years can be interpreted as a greater volume of investments with respect to savings produced by the economy, with the shortfall financed by foreign capital inflows (Figure IV.9). The imbalance of the current accounts is due to excessive absorption of domestic demand in relation to GDP (Absorption Approach). From this perspective, the trend of consumption also becomes important, in addition to the trend of investments.

Current account deficits stemming from high levels of investment (or of consumption) are not necessarily to be considered as symptoms of macroeconomic imbalances. Indeed, the pattern of domestic demand is for the most part (with the exception of the public component) the by-product of the decisions of private economic agents who, for different reasons, may consider it efficient and rational to take on debt. However, one generally agreed conclusion is that the decisions of the private sector can be distorted by capital

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movements of a speculative nature that lead to excessively low levels of interest rates and/or to speculative bubbles in the financial and property markets. In such cases, the domestic demand of the countries affected will grow at excessively slow rates, distant from economic fundamentals, thus leading to unwarranted foreign deficits whose sustainability would be difficult. Imbalances in the current accounts may also be caused by excessive public finance deficits. In economic literature, the simultaneous presence of public deficit and current account deficit is identified by the term ‘twin deficits’.

During the years preceding the financial crisis, there were no speculative bubbles of significance in Italy’s property market or its credit/financial market; in addition, the public finance deficit was modest. In effect, consumption and private investment were sustained by favourable levels of interest rates, and domestic demand grew on average at a rate slightly above GDP. Still, it is possible to affirm that there were no significant imbalances. With the onset of the crisis, the current account deficit widened temporarily. The worsening of the budget deficit, linked to cyclical factors, entailed a reduction of public savings that, when using the interpretative methods proposed herein, was countered by an increase of the foreign deficit. The ongoing reduction in the current account deficit, in a mirror-like manner, is also linked to the drastic correction of the public accounts that took shape starting at the end of 2011. At present, the correction is mostly reflected in the compression of the private component of domestic demand, investments and private consumption, and partly in the increase of private savings. Over the medium term, there will be a rebalancing when, with the improvement of the cycle, public savings will increase to a greater extent than at present (thanks to higher tax revenues). This will allow for a recovery of private demand, while also preserving the renewed equilibrium of the current accounts.

Price competitiveness and the real effective exchange rate

The European Commission evaluates the price competitiveness of the EU countries on the basis of the real effective exchange rate based on the harmonised index of consumer prices (HICP). Such indicator, in addition to not signalling any critical elements for Italy, has shown improvement in recent years. The real effective exchange rate can also be calculated on the basis of the unit labour cost, producer prices for manufactured goods, or the GDP deflator. Figure IV.10 shows the appreciation of the real exchange rate from 1996 onward. During the pre-crisis period, the real effective exchange rate calculated on the unit labour cost rose to a greater extent

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than that calculated on the GDP deflator or producer prices for manufactured goods. All of the indicators considered showed a protracted phase of improvement following the crisis. It is important to note that the growth rate of the GDP deflator is also influenced by changes in the mark-up which, starting in 2005, shows a downward trend at an aggregate level. This trend is verified regardless of cyclical factors, and represents an indication of greater competition within the domestic market.

Productivity, wage growth, unemployment and labour market

The unit labour cost is one of the scoreboard indicators taken into consideration for assessment of external imbalances because it significantly affects price competitiveness. Considering the threshold value identified by the Commission, Italy’s unit labour cost is not currently a critical factor. In any event, Italy’s loss of competitiveness, which affects market share, is strictly dependent on the unit labour cost. Indeed, since the year of 2000, Italy’s unit labour cost has been on an upward trend, with the differential with respect to Italy’s main trade partners thus widening (Figure IV.11). The increase in the unit labour cost is mainly linked to the stagnating productivity. The almost nil growth of the productivity of labour in Italy began in the nineties, and has affected all sectors of the economy. During the period following the crisis, the unit labour cost for the entire economy continued to rise, also in real terms. Indeed, the trend of per capita income, though decelerating in the most recent quarters, was greater than the trend of productivity. One cause of the still unsatisfactory trend of the indicator is attributable to cyclical factors, and to different behaviour of the labour market vis-à-vis the market for goods. The employment contraction has been much less pronounced than the decrease in GDP.

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Looking ahead, a rebalancing of these two components is expected; with the recovery of the economy, the increases in employment will probably be less than proportional with respect to the changes in GDP. Looking forward, achieving greater increases in productivity that are not to the detriment of employment increases remains crucial. Last year’s National Reform Programme pointed out the main causes of the reduction of Italy’s productivity, including lesser skilled human capital and a growth model based on small- and medium-sized firms that are less capable of absorbing new technologies and penetrating international markets. The nominal wages growth, the other component that determines unit labour cost, has been substantially in line with the European average. In terms of the overall picture, one can easily argue that the nominal wage variable did not (unlike low productivity) play a significant role in the loss of competitiveness. In view of the need to pursue greater alignment between the trend of salaries and changes in productivity, second-level wage bargaining has been reinforced through the recent accord on productivity.

Public sector nominal wages have been frozen and will remain unchanged until 2015. Significant wage moderation has also been seen in the private sector, excluding some factors that have slowed the decelerating wage trend. At the same time, it is important to consider that Italy’s need to regain price competitiveness is countered by the need not to depress domestic demand any further, a particularly important issue during a very delicate economic cycle such as that at present.

It is important also to note that the wage development represents a link between the country’s external and internal balances. It is no coincidence that the change in wages is also examined in relation to the trend of the unemployment rate, one of the indicators used for evaluating internal imbalances.

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Trend of wages in relation to internal balance

Wage growth can contribute to either the correction or amplification of a country’s macroeconomic imbalances. For the purpose of evaluating the macroeconomic imbalances of the individual countries, the European Commission recently conducted a study¹⁰ in which it compares the ‘actual’ growth of wages in European countries with a benchmark wage estimated through macroeconomic fundamentals (labour productivity, unemployment and inflation), which represents the internal balance of the labour market.

The results of this study show that the ‘actual’ wage growth in Italy was below the benchmark considered until 2008. Instead, after 2008, the growth was above that for the benchmark. Indeed, following the crisis, the growth of the benchmark wage decreased for the effect of the decrease in productivity and the increase in the unemployment rate.

¹⁰  A. Turrini, ‘Wage benchmarks’ (Note for the EPC LIME working group, Brussels/2012).

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Since the start of the crisis, Italy’s unemployment rate has gradually increased, although without ever reaching the average levels within the Euro Area. The conspicuous increase starting at the end of 2011 is mainly attributable to an increase in the labour force. Unlike what occurred during the crisis of 2008-2009, job searching intensified in 2012. The deferral of retirement of a significant number of workers (as a result of recent reforms) was also a factor contributing to the increase in the rate of participation in the labour market (thus also aiding potential growth over the medium/long term). Based on ISTAT’s data from the labour force survey, the rate of participation (15-64 age bracket) rose by approximately 1.5 percentage points in 2012, reaching 63.7 per cent.

The unemployment rate indicator does not currently constitute a source of concern for internal imbalances. In any event, the labour market, not only in Italy, is particularly fragile due to the weakness of business activity. Indeed, from an historical perspective, the rate of unemployment has risen to high levels. The labour market indicators point to highly vulnerable conditions for the 15-24 age bracket.

Financial variables and the credit market

As part of the analysis of internal imbalances, the scoreboard is based on four financial indicators: the change in liabilities in the financial sector (year-on-year growth rates), the flow of credit to the private sector, private sector debt, and public debt (all of which are measured as a percentage of GDP).

Excessive levels of private sector indebtedness (households and non-financial businesses) could give rise to macroeconomic instability if the private sector were to be forced to reduce its debt rapidly. Italy does not have any critical values in this regard; the credit flows are fully within the norm, and the level of private sector indebtedness is very limited in size when compared with the European average. Finally, no excessive changes in the liabilities in the financial sector were detected.

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The financial solidity of Italy’s private sector is also confirmed by considering variables that are not part of the scoreboard.

The portfolio of Italian households has a balanced structure which is marked by a high level of assets (compared with disposable income), with high-risk assets representing only a limited portion thereof¹¹. On the liabilities side, the financial deregulation processes starting in the nineties, and the low level of bank lending rates offered to customers through 2008, are factors that led to a gradual reduction in the savings rate and to an increase in exposure toward the credit sector. As in other European countries, the financing has basically consisted of mortgages for the purpose of financing home purchases. In any event, in Italy’s case, the additional loans did

¹¹ The financial assets of the households include deposits, insurance and retirement reserves (50 per cent) and bonds, mostly public and bank bonds (20 per cent). The remaining percentage consists almost entirely of amounts invested in equities, shareholdings and mutual funds. In addition, the financial debt of households in relation to disposable income remained stable at 65 per cent in the third quarter of 2012 (against a Euro Area average of near 100 per cent). Source: Report on Financial Stability, November 2012, Bank of Italy.

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not result in a real estate bubble; during the financial crisis, the reduction of housing prices and the consequent losses of principal have been limited. The overall situation of the real and financial wealth of households is to be considered among the most solid in Europe.

As in all highly industrialised economies, the sector of non-financial businesses is structurally in a borrowing position. The level of indebtedness is substantially in line with the European average, although bank loans represent a percentage higher than the European benchmark. This fact is partly the result of the sizeable presence of small- and medium-sized firms in Italy which find it difficult to access the capital market directly. The pronounced exposure to banks creates earnings problems in some cases, and during the current cyclical phase, it has made the firms more vulnerable to credit restrictions. Notwithstanding this, the changes in indebtedness in recent years have been limited, and during 2012, against a negative economic trend, the firms reported positive savings.

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As a response to the crisis, and also following the recommendations of regulatory authorities, financial firms went through a process of requalifying their balance-sheet assets in favour of less risky credits. At the same time, the main banks recapitalised, following up on the December 2011 recommendation of the European Banking Authority. Altogether, in line with the traditional prudent orientation of the national banking system, certain significant deleveraging transactions were also effected. Based on the financial leverage figures resulting from the most recent data comparing Europe’s main banking systems, Italy’s position is much more reassuring than that of the other countries. This is the case both when examining the figures for Italy’s leading banks individually, and for the data at an aggregate level.

In effect, the Italian banking system has been more resilient during the crisis than the banking systems in other highly industrialised countries. The public aid to banks in Italy has been of a smaller magnitude than that in other countries (0.3 per cent of GDP). Based on the European Commission’s latest survey, as of June 2012, the comparable figures for other EU countries were 1.8 per cent for Germany, 2.0 per cent for Spain, 4.3 per cent for Belgium, 5.2 per cent for the Netherlands and more than 40 per cent in Ireland. In July 2012, a recapitalisation of Spanish banks with European funds was authorised for up to €100 billion, with €41 billion (3.9 per cent of GDP) already disbursed.¹²

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The case of Monte dei Paschi di Siena

The case of Monte dei Paschi di Siena (MPS) does not change the assessment about the condition of the Italian banking system. Investigations are currently in process about the means through which the senior management of Banca MPS managed various financial transactions. The difficulties of the MPS Group originated from ambitious acquisitions right before the crisis struck, as well as from very poor management of financial risks, the repercussions of which were exacerbated by the sovereign debt crisis. The Bank of Italy’s audits in these past few years have been regular, with increasing intensity, and have focused on key operational issues: capital adequacy; prudent management of the liquidity, financial risks and, in particular, interest-rate risk; credit quality; verification of the internal models for measurement of credit and operational risk; and adequacy of the management and the system of internal controls. The support supplied to MPS does not figure as a bailout of a bank in difficulty, but rather as a loan, admissible according to banking regulations, granted by the government at an interest rate that is particularly high and increasing over time. The intervention was decided last summer so as to allow MPS to comply with the recommendations of the European Banking Authority and to constitute an exceptional, temporary capital buffer that is well above the minimum capital requirement.

It is furthermore opportune to note that the total public support to Italian banks is very limited in an international comparison, even when incorporating the funding already decided for MPS¹³.

¹² Source: Bank of Italy, ASSIOM Forex, Presentation of the Governor of the Bank of Italy Ignazio Visco, 9 February 2013.

¹³  The government intervention in favour of MPS was authorised in July 2012 (Decree-Law no. 95/2012) in order to allow MPS to reach the minimum level of capital set by the European Banking Authority (EBA). The maximum net outlay permitted, consistent with that provided in the declaration of the heads of state of the European Union on 26 October 2011, is equal to €2 billion (approximately 0.1 per cent of GDP). In December 2012, the European Commission authorised the aid measures. The Bank of Italy’s legal opinion supplied to the Ministry of the Economy and Finance in relation to MPS’ current and expected capitalisation is positive.

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During 2012, the banks also managed (partly due to an increase in domestic deposits) to reduce the funding gap¹⁴, which had reached a high of approximately 20 per cent of loans in the third quarter of 2011. The decrease to 16 per cent in the third quarter of 2012, albeit in a market where lending was weak, signals an improvement in the operating conditions of the banking sector.

The new Basel III directives will go into effect on 1 January 2015, but with coverage of 60 per cent that will gradually rise to 100 per cent in 2019. In addition, some initially stringent criteria are to be relaxed. Banks will be given the possibility of tapping a stock of liquid assets at times of greater market tensions, including, at pre-set conditions, equity securities and mortgage-backed securities in the additional liquidity cushion. This approach tends to assure that the liquid coverage ratio (LCR) will be gradually introduced without the banks having to limit their capacity of financing to the economy.

In essence, the Italian banking sector is solid because it presents limited exposure to risky assets and reduced financial leverage vis-à-vis the European average. Confusing a cyclical problem (that was grafted on a crisis situation) with a system problem is not necessary. The structural solidity of the financial system, as proven by the analyses done by regulators and confirmed by the IMF at the end of the mission carried out in March 2013¹⁵, implies that the banking sector could once again starting expanding credit to the economy just as soon as the conditions warrant.

This does not mean that there are no structural problems linked, for example, to cost excesses that limit bank profitability or to loans that do not meet their optimal profit potential, the latter of which could suggest the need for improving the decision mechanisms at the basis of the credit allocation process. Italian legislation provides a series of recommendations so as to facilitate efficient credit allocation; these indications are contained in the articles of the Civil Code, the Consolidated Banking Act, the Consolidated Financial Act, and finally, the directives of the bank regulatory authorities. Evaluating the efficiency of credit allocation and possible distortions due to discretionary concessions is an arduous undertaking, although several recent studies show that the probability of a firm obtaining credit during the crisis was essentially linked to the fundamentals of the firm’s financial statements¹⁶.

Italy’s public debt is the only variable that is above the threshold values used for pointing out critical situations. The MIP takes into account the debt-to-GDP ratio, also contemplated within other supervision processes, because high ratio values can become a factor of instability at a macroeconomic level. In actual fact, the sovereign debt crisis that afflicted the highly indebted Euro Area countries forced such countries, including Italy, to accelerate deficit reduction, putting the debt-to-GDP ratio on a more steeply declining trajectory. The consequences in the near term have been pressure on the credit sector for deleveraging, an accentuation of the unfavourable cyclical phase and indirectly, through a decline in GDP and tax revenues, a temporary worsening in the public finance nominal balances.

¹⁴  The funding gap is defined as the difference between bank loans and retail funding, generally expressed as a percentage of total loans.

¹⁵  IMF, ‘Statement at the End of the IMF Financial Sector Assessment Program (FSAP) Mission to Italy’, Press Release No. 13/94, 26 March 2013 (http://www.imf.org/external/np/sec/pr/2013/pr1394.htm).

¹⁶  See, for example, Albareto G. and P. Finaldi Russo (2012), ‘Financial Fragility and growth prospects; credit rationing during the crisis’ (in Italian), Bank of Italy, Occasional Papers, n. 127.

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The financial crisis

As widely known, the crisis started in the second half of 2011, taking the form of a rapid run-up in the spread between the yields on Italy’s government securities (as well as those of the other ‘peripheral’ countries) and the yields on German government securities. The first level of transmission of the crisis involved the financial channels, as seen from the data related to the financial account of the balance of payments. The positive aggregate balance (occurring as from 2006), and equal to 4.6 per cent of GDP in 2011 and 0.9 per cent of GDP in 2012, is interpreted as foreign financing of the current account deficit. In any event, a better understanding of what happened can only be obtained by an analysis of the individual sub-accounts of the financial account. The confidence crisis had as its consequence an outflow of foreign capital from Italy because international investors reduced their exposure to Italy’s public debt securities and the deposits placed with Italian banks, while also further cutting the flow of direct investments. With reference to portfolio investments, foreign investors withdrew some €24.8 billion from Italy in 2012 (compared with €70 billion in 2011). Between mid-2011 and mid-2012, the net divestitures of Italian government securities by non-residents and the contraction of foreign funding placed on deposit with Italian banks were reflected in the Bank of Italy’s net position in TARGET2 ¹⁷. At the same time, in an effort to revise portfolio structure but also to meet liquidity needs, Italian investors also sold off investments.

¹⁷ Source: Bank of Italy, ‘Report on Financial Stability’, no. 4, November 2012.

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After becoming negative in 2011, net portfolio investments were once again positive in 2012. The balance of the ‘ other investments’ variable remained positive until 2011, and was slightly negative in 2012, though a radical change occurred in its internal mix. Indeed, this residual account includes financing received by Italian banks both through flows of capital received on the euro market from private-sector parties abroad (other banks) and funds received from the euro system.

Starting from the crisis of 2011 and until mid-2012, Italian banks could not manage to finance themselves on the European market, and a significant spread developed between funding rates and lending rates. The decision of the European Central Bank’s Governing Council to implement an exceptional government securities purchase programme (OMT) with the objective of reinstating the proper functioning of monetary-policy transmission contributed to placating the tensions in the financial markets and made it possible for the Italian banks to close the funding gap.

Although a part of the funds obtained from the open market transactions was used for acquiring government securities, because they were deemed to be a more secure investment during the unfavourable cyclical phase, a massive credit crunch was avoided. The outflow of capital from Italy was concentrated in the first four months of 2012; starting in the second half of the year, it was possible to witness a stabilisation in terms of outflows, and thereafter, a gradual reversal of the phenomenon. The difficulties in tapping funds initially and the bank recapitalisations led to tightening of the conditions for lending to customers. In essence, the perception of increased risk on Italy’s public debt was transmitted to the banking sector, increasing the cost of bank funding. Loans to the private sector, which slightly grew in the first half of 2011, started to contract year on year, and were still contracting in the final half of 2012.

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The difficult situation for lending created an unfavourable interaction with the cyclical trend of the economy. The credit constraints on the supply side coming from the need to recapitalise affected the spending decisions of households and firms, thereby compressing domestic demand. The difficulties faced by some firms were transferred to their suppliers, thus creating liquidity problems, and in the some cases of non-performing bank loans, with a negative chain effect. The quality of bank assets worsened, causing, in turn, more selectivity in lending. The Bank of Italy’s survey on bank credit has summarised this phenomenon, showing that the criteria for bank lending to businesses became more rigid after the summer months¹⁸.

In 2012, the Bank of Italy inaugurated a broad programme for the audit of medium- and large-sized banking groups. The programme is aimed at evaluating: i) how the banks have reacted to the increase in non-performing loans, ii) how banks have applied provisioning and review policies, and iii) the adequacy of reserves for loan losses. The results of the audits, which are expected in the second quarter of 2013, will indicate any corrective actions needed, that might include, amongst other things, an increase in the reserves through bank income statements, the request for specific operational and/or organisational measures, and the capital injections.

In any case, by the end of 2012, the market saw signs of a turnaround, favoured by the gradual revival of confidence in the financial markets, and in particular, greater credit demand from businesses.

¹⁸  In addition, the Italian Banking Association’s forecast report (2012-2014 Forecast Report, December 2012) underscores how the capital reinforcement requested by EBA in December 2011 of the banks (which recapitalised due to excessive exposure to public debt securities) had a negative impact on credit availability to the economy, so much so that the banks involved, as identified by the study as those with capital deficits, had loan growth in the six months thereafter that was some 4-5 percentage points below the growth of the other banks.

104 MINISTERO DELL’ECONOMIA E DELLE FINANZE

IV. ANALYSIS OF MACROECONOMIC IMBALANCES

The building sector

In Europe, low interest rates have for years favoured the building sectors, particularly in some ‘peripheral’ countries; the financial crisis later led to a significant contraction of activity in this sector.

Italy has seen a similar development, but the fluctuations have been much less pronounced than in other countries. The ratio of housing investments to GDP went from 5.0 per cent in 2000 to 5.6 per cent in 2007 (compared with 6.6 per cent for the Euro Area, 6.3 per cent for France, 11.7 per cent for Ireland and 12.0 per cent for Spain) before declining to 5.1 per cent in 2011 (compared with 5.4 per cent for the Euro Area, 5.7 per cent for France, 3.9 per cent for Ireland, and 7.2 per cent for Spain). Developments similar to the changes in investments can be seen in the indicators related to building permits.

Even the evolution of housing prices in Italy has been absent of any significant imbalances in the past 10 years. Until 2007, housing price appreciation in nominal and real terms was by far more modest in Italy than in the main European economies which experienced a strong expansion in building (France, Spain, UK and Ireland), where bubbles burst and led to a marked decrease in prices. In Italy, the adjustment occurred more gradually and was less pronounced (Figure IV.20).

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106 MINISTERO DELL’ECONOMIA E DELLE FINANZE

IV. ANALYSIS OF MACROECONOMIC IMBALANCES

In order to evaluate the evolution of the real estate sector, it is also possible to refer to affordability indicators that summarise the capacity of households to meet mortgage instalment payments. The ratio between nominal prices and nominal disposable income per capita can supply signs of over- and under-valuation, depending on whether or not there are rapid and continuing increases in such ratio or deviations from the average over the long term. In Italy, this ratio rose through 2009 by a more limited extent than the rises seen in Spain, Ireland, France and the UK, and then it gradually started to fall. Except for Germany, in 2011, the other countries show a value above the average of the past 10 years. This ratio should nonetheless be interpreted with caution, including in light of the weakness of domestic demand that contributed to reducing disposable income.

It is possible to consider another indicator that takes into account decisions alternative to the purchase of a home. In equilibrium, economic agents should be indifferent as to whether they purchase a home or rent one. The movements with respect to the ratio between nominal prices and rent can thus be interpreted as signs of downward or upward pressure. The increase observed in Italy is more modest than that in France, Spain and the UK.

MINISTERO DELL’ECONOMIA E DELLE FINANZE 107

The

2013 ECONOMIC AND FINANCIAL DOCUMENT

is available on-line

at the internet address listed below:

www.mef.gov.it • www.dt.tesoro.it • www.rgs.it

ISSN: 2239-5539

EX-4

Exhibit 4

Submitted by the Prime Minister

Enrico Letta

and the Minister of the Economy and Finance

Fabrizio Saccomanni

on 20 September 2013

TABLE OF CONTENTS

I.	SUMMARY	1
II.	MACROECONOMIC SCENARIO	5
	[Focus] Validation of macroeconomic forecasts, as provided by the Two Pack	8
	[Focus] Trend of the credit market and the effects on businesses	10
	[Focus] Impact of the legislation to accelerate settlement of the PA’s debts	11
	[Focus] Macroeconomic impact of certain measures of 2013 for relaunching the economy	12
III.	EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY	13
	[Focus] Status of implementation of the measures and automatic applicability	25
IV.	PUBLIC FINANCE	27
IV.1	Public finance framework	27
	[Focus] The debt rule	36
	[Focus] Medium-/long-term trends in Italy’s pension system	38
IV.2	Main public finance initiatives adopted in 2013	39
	[Focus] Measures adopted in the past four months	43
	[Focus] Implications of the Two Pack on the planning documents provided by the law	44
IV.3	Multi-year evaluation plan for public property	45
IV.4	State budget under policy scenario	47
IV.5	Content of the Domestic Stability Pact	48
V.	REFORMS UPDATE	49
V.1	Institutional reforms	50
V.2	Structural rebalancing of the public accounts	52
V.3	A modern and competitive tax system	53
V.4	A more efficient and inclusive labour market	56
V.5	A more efficient and modern public administration	58
V.6	Support to businesses, industrial policies and stimulus to competition	59
V.7	The strategic role of infrastructures and transport	62
V.8	Priority actions for southern Italy	64
V.9	University and research	65
V.10	Education and human capital	67
V.11	More effective and efficient justice system	68
V.12	Responding to the grand challenges of healthcare and assistance	70
V.13	Greater attention to the farming sector	72
V.14	Getting back on the path of long-lasting development	73
V.15	Cultural heritage, a common good to be exploited	75
V.16	Growth diplomacy	76

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

VI.	REPORT ON THE ARREARS OF PUBLIC ADMINISTRATIONS	79
VI.1	Introduction	79
VI.2	Payments made by public administrations	79
VI.3	Acknowledgement of the public sector arrears	80
VI.4	Measures for completing the settlement of the public sector arrears	80
ANNEXES
Reports on investment expenditures and relevant multi-year laws (Volume I)
Reports on investment expenditures and relevant multi-year laws (Volume II)
Report on results achieved through measures to counter tax evasion

II MINISTERO DELL’ECONOMIA E DELLE FINANZE

TABLE OF CONTENTS

TABLES
Table I.1	Public finance indicators (% of GDP)
Table II.1	Macroeconomic framework (% change, unless otherwise indicated)
Table IV.1a	General government account at unchanged legislation (in € mn)
Table IV.1b	General government account at unchanged legislation (% of GDP)
Table IV. 1c	General government account at unchanged legislation (% changes)
Table IV.2a	Public finance aggregates – based on policy scenario (% of GDP)
Table IV.2b	Cash balances based on policy scenario (% of GDP)
Table IV.3	Cyclically adjusted public finance (% of GDP)
Table IV.4	One-off measures (in € mn)
Table IV.5	General government debt by sub-sector (in € mn and % of GDP)
Table IV.6	Cumulative impact of the measures enacted in 2013 on general government net borrowing (in € mn; including induced effects)
Table IV.7	Cumulative impact of the 2013 budget measures on general government net borrowing (in € mn; including induced effects)
Table IV.8	Cumulative impact of the 2013 budget measures on general government net borrowing, by sub-sector (in € mn; including induced effects)
Table IV.9	State budget for 2014-2016 under policy scenario (in € bn and net of accounting, settlements payable and VAT refunds)
Table VI.1	Payments made by the public administrations as of September 2013 (in € mn)
FIGURES
Figure II.1	Economic indicators regarding businesses
APPENDIX
Table A.1	Impact of Decree-Law No. 35/2013 on general government net borrowing
Table A.2	Impact of Decree-Law No. 54/2013 on general government net borrowing
Table A.3	Impact of Decree-Law No. 63/2013 on general government net borrowing
Table A.4	Impact of Decree-Law No. 69/2013 on general government net borrowing
Table A.5	Impact of Decree-Law No. 76/2013 on general government net borrowing
Table A.6	Impact of Decree-Law No. 91/2013 on general government net borrowing
Table A.7	Impact of Decree-Law No. 101/2013 on general government net borrowing
Table A.8	Impact of Decree-Law No. 102/2013 on general government net borrowing
Table A.9	Impact of Decree-Law No. 104/2013 on general government net borrowing

MINISTERO DELL’ECONOMIA E DELLE FINANZE III

I. SUMMARY

After eight quarters of contraction, the Italian economy appears to be finally on the verge of a recovery. During a recession without precedent in its history, Italy has lost more than 8 percentage points of GDP. Economic policy now has two priorities: to reinforce the recovery underway and to address the factors that limit competitiveness and productivity in order to increase economic growth and employment. Short-term economic policy and structural reforms must be closely coordinated.

GDP is expected to stabilise in the third quarter of this year, and should reflect a moderate increase in the fourth quarter. In 2013, GDP is forecast to contract by 1.7 per cent, incorporating the negative carryover of one percentage point from 2012. In recent months, the Government has supported the recovery of economic activity through various initiatives: the acceleration of the payments of the Public Administrations (PA), aimed at injecting liquidity into the economy and alleviating the difficulties of businesses in accessing credit; the incentives to reduce the labour costs for young workers; the various programmes to support the construction and infrastructure sectors, which, in recent years, have witnessed a drastic decline in output; and important programmes for improving the quality of public expenditure and providing support to domestic demand.

These initiatives should fully show their effects in the coming months. In 2014, the growth of GDP should be equal to 1.0 per cent. The forecast also reflects the strengthening of the global economy and the gradual waning of specific factors that adversely impacted the economy’s performance in 2013. The growth of GDP should increasingly strengthen in future years, until reaching 1.9 per cent in 2017. The scenario presented in this note is based on the continuation of the Government’s reform efforts.

For a country with a high public debt, the process of fiscal consolidation is an essential part of a growth-oriented economic policy. In past years, the increase in the PA’s net borrowing has been limited, despite the sharp drop in GDP, and in 2012, the deficit was kept below the threshold of 3.0 per cent of GDP.

In 2013, the net borrowing based on unchanged legislation could reach 3.1 per cent of GDP absent additional policy measures, exceeding the forecast indicated in the Economic and Financial Document (EFD) by 0.2 percentage points. The increase in the deficit stems from the trend of revenues, which reflects less favourable growth than that forecast in the EFD. Conversely, the trend of expenditure is essentially in line with the April estimates. The Government intends to adopt timely initiatives in order to keep the deficit within the 3.0 per cent threshold.

Associated with this figure is a structural deficit equal to 0.4 per cent of GDP in 2013. The improvements in the structural balance in 2013 and in the average obtained over the 2012-2013 two-year period (equal to 0.9 and 1.6 percentage points of GDP, respectively) are well above those required of the countries still far

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from the Medium Term Objective (0.5 percentage points of GDP per year). Finally, it should be noted that the payments of the PA’s past-due debts due to capital expenditure, as agreed with the European Union, will account for approximately 0.5 percentage points of GDP in 2013.

TABLE I.1: PUBLIC FINANCE INDICATORS (% of GDP)¹

	2011		2012		2013		2014			2015		2016		2017
UPDATED SCENARIO BASED ON UNCHANGED LEGISLATION
Net borrowing		-3.8		-3.0		-3.1		-2.3			-1.8		-1.2		-0.7
Primary balance		1.2		2.5		2.3		3.0			3.5		4.1		4.5
Interest		5.0		5.5		5.4		5.4			5.3		5.3		5.2
Net structural borrowing (2)		-3.6		-1.3		-0.5		-0.1			-0.2		-0.5		-0.6
Change in structural balance		-0.2		-2.3		-0.7		-0.4			0.1		0.2		0.2
Public debt (including Euro Area aid and PA payables) (3)		120.8		127.0		133.0		133.2			130.5		127.1		123.2
Public debt (net of Euro Area aid) (3)		120.0		124.3		129.5		129.4			126.8		123.5		119.7
Public debt (net of Euro Area aid and PA payables) (3)		120.0		124.3		127.7		126.3			123.8		120.6		116.9
Fiscal adjustment on the primary balance						0.1		-0.3			0.4		0.2		0.2
Annual reduction in public debt stock								0.5			0.5		0.5		0.5
HYPOTHESIS OF POLICY SCENARIO FRAMEWORK
Net borrowing		-3.8		-3.0		-3.0		-2.5	(5)		-1.6		-0.8		-0.1
Primary balance		1.2		2.5		2.4		2.9			3.7		4.5		5.1
Interest		5.0		5.5		5.4		5.4			5.3		5.3		5.1
Net structural borrowing (2)		-3.6		-1.3		-0.4		-0.3			0.0		0.0		0.0
Change in structural balance		-0.2		-2.3		-0.9		-0.1			-0.3		0.0		0.0
Public debt (including Euro Area aid and PA payables) (3)		120.8		127.0		132.9		132.8			129.4		125.0		120.1
Public debt (net of Euro Area aid) (3)		120.0		124.3		129.3		129.0			125.7		121.4		116.6
Public debt (net of Euro Area aid and PA payables) (3)		120.0		124.3		127.6		125.8			122.7		118.5		113.8
Memo: Economic and Financial Document (April 2013)
Net borrowing		-3.8		-3.0		-2.9		-1.8			-1.5		-0.9		-0.4
Primary balance		1.2		2.5		2.4		3.8			4.3		5.1		5.7
Interest		5.0		5.5		5.3		5.6			5.8		6.0		6.1
Net structural borrowing (2)		-3.5		-1.2		0.0		0.4			0.0		0.0		0.0
Change in structural balance		-0.2		-2.3		-1.1		-0.4			0.4		0.0		0.0
Public debt (including Euro Area aid) (4)		120.8		127.0		130.4		129.0			125.5		121.4		117.3
Public debt (net of Euro Area aid) (4)		120.0		124.3		126.9		125.2			121.8		117.8		113.8
Nominal GDP (absolute value x 1,000)		1,578.5		1,565.9		1,557.3		1,602.9			1,660.7		1,718.4		1,779.6

1) Slight discrepancies, if any, are due to rounding.

2) Net of one-off measures and cyclical component.

3) Inclusive or net of Italy’s portion of the EFSF loans to Greece and the ESM programme. For the years of 2011 and 2012, the amounts of such loans to Member States of the EMU (bilateral or through the EFSF) were respectively €13.118 million and €36.932 million. The values, net of the amounts to cover the PA’s past-due trade payables, incorporate fewer issues for €27.2 million in 2013 and €20 million in 2014. The estimates for 2014-2017 based on the policy scenario include the proceeds from privatisations and real property sales amounting to approximately 0.5 percentage points of GDP per year. The current scenario assumes that spreads between the yields on 10-year Italian government securities and those on comparable German securities will gradually contract to 200 basis points in 2014, 150 in 2015, and 100 in 2016 and 2017.

4) Inclusive or net of Italy’s portion of the EFSF loans to Greece and the ESM programme. For the years of 2011 and 2012, the amounts of such loans to Member States of the EMU (bilateral or through the EFSF) were respectively €13.118 million and €36.932 million. The estimates for the years 2013-2017 include the proceeds from privatizations and real property sales amounting to approximately 1.0 percentage points of GDP per year.

5) The use of 0.2 percentage points of the fiscal balance in 2014 (difference between the balance on unchanged legislation and the balance based on the policy scenario) is explained by the intention to finance several capital expenditure items not included in the balance on unchanged legislation.

Note: The revenue forecasts consider the continuation of the experimental taxation of real property instituted by Decree-Law No. 201/2011 over the entire forecast period.

2 MINISTERO DELL’ECONOMIA E DELLE FINANZE

I. SUMMARY

In later years, the net borrowing based on the policy scenario is expected to fall gradually, from 2.5 per cent of GDP in 2014 (corresponding to a structural deficit of 0.3 percentage points) to 0.1 per cent in 2017, a figure that is lower than that indicated in the EFD.

As shown by the public finance outcomes for 2012, as well as the estimated trends for 2013 and subsequent years, the fiscal consolidation process made it possible to close out the Excessive Deficit Procedure initiated with respect to Italy. It is an important result, but Italy still needs to maintain a rigorous approach. The Government believes that the achievement of a balanced budget in structural terms remains an essential condition for ensuring sustainability of the public debt and maintaining the confidence of both businesses and the financial markets. The policy scenario outlines a convergence path towards this target, with a balanced position achieved as from 2015, in line with national and European rules.

While acknowledging the binding nature of these constraints, the Government is committed to promoting a review of national and European economic policies in order to place even greater priority on economic growth and employment.

In the future, the definition of a target for the PA’s primary expenditure could increase the effectiveness of the spending review processes and contribute to paving the way for a reduction of the tax burden. The corrective measures outlined in 2015 and beyond will need to revolve around a reduction of public expenditure, with intense spending review activity to be inaugurated in 2014 in order to reduce the tax burden.

The policy scenario debt-to-GDP ratio (inclusive of the financial aid to other Member States of the Euro Area and the settlement of the PA’s past-due debts) increases from 127.0 per cent in 2012 to 132.9 per cent in 2013 and to 132.8 per cent in 2014. With the gradual settlement of the PA’s payables (forecast to equal 1.2 points of GDP in 2014), the reduction of the debt-to-GDP ratio becomes more evident, falling to 120.1 per cent in 2017. Net of the aid to European financial support programmes, the public debt is equal to 124.3 per cent of GDP in 2012, rises to 129.3 per cent in 2013 and descends to 116.6 per cent in 2017. The decline is also affected by the estimated proceeds from privatisations (0.5 percentage points of GDP per year), which take into account the instruments already operational for proceeding with the valuation and subsequent sale of State property, including both buildings and shareholdings.

This path ensures the compliance with the new debt rule introduced by the European Union (translated into the Minimum Linear Structural Adjustment). The substitution of measures currently incorporated into the scenario on unchanged legislation with non-structural measures would make it more difficult to comply with the rule, and would introduce the risk of the opening of another Excessive Deficit Procedure.

In addition to its usual content, this EFD Update provides an update of the reform actions in process and those to be introduced in the future, in response to the EU Council Recommendations, and more in general, in response to the need to increase the country’s competitiveness and economic growth. Finally, as provided by the first decree for the acceleration of the payments in arrears of the PA to its suppliers, this document incorporates a Report containing information related to the status of the PA’s payments, as well as the initiatives to be undertaken in order to complete the payment of the PA’s debts accrued as of 31 December 2012.

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To complete the 2014-2016 fiscal package, the Government will introduce legislative bills on the following subjects:

i. Development and simplifications;

ii. Labour and social equality;

iii. Civil justice;

iv. Green economy and the fight against environmental waste (‘Provisions aimed at promoting green economy measures and at containing excessive consumption of environmental resources’);

v. Local government bodies;

vi. Measures for relaunching the farming and agro-food sector.

4 MINISTERO DELL’ECONOMIA E DELLE FINANZE

II. MACROECONOMIC SCENARIO

The international macroeconomic scenario is marked by a gradual recovery, with mixed performance among the various geographic areas. During the second quarter of 2013, international trade and global production decelerated slightly with respect to the pace of expansion during the preceding quarter. In August, the global Purchasing Managers Index (PMI) for the manufacturing sector was once again above the expansion threshold, as occurred during the first part of 2013.

According to main international financial institutions, the slow recovery of the world’s most industrialised economies in the near term can be attributed to the deleveraging still occurring within the banking system and among corporations, and to the continuation of fiscal consolidation. The forecasts for global demand anticipate a more pronounced recovery in the medium term.

In the Euro Area, the economy is once again growing after six quarters of contraction. In the second quarter of 2013, the Euro Area GDP rose by 0.3 per cent with respect to the preceding quarter, after having declined by 0.2 per cent in the first quarter. In its September forecasts, the European Central Bank estimated that the Euro Area GDP would contract by 0.4 per cent in 2013 and expand by 1.0 per cent in 2014, thus revising its June forecast upward by 0.2 percentage points and downward by 0.1 percentage points, respectively. Even so, the scenario is marked by a continuation of weak domestic demand and high unemployment, aggravated by fears of reduced demand from emerging markets. Credit institutions have already repaid a part of the funds obtained from the ECB refinancing transactions, thereby suggesting a gradual return to normal conditions in the financial market. However credit market rigidities are still evident. Alongside a decrease in the supply of credit, the drop in loan demand from households and businesses, due principally to uncertain prospects about the future, is a cause for concern. Against this backdrop, the European Parliament’s recent approval of the single supervisory system for the banking sector represents an important step toward European banking union which should become a reality within another year.

The main risks to the international framework concern: the geo-political tensions in Middle East, with possible repercussions on commodity prices; the possibility of a shift in the direction of monetary policy with the rise of interest rates and a further slowdown in the rates of growth in emerging nations; and new tensions in the financial and credit markets.

The recession in Italy reached its peak in the final months of 2012, followed by a gradual reduction in the rate of contraction of GDP. In the first and second quarters of 2013, the quarter-on-quarter decrease in GDP amounted to 0.6 per cent and 0.3 per cent, respectively.

The negative contribution of domestic demand to growth was less pronounced in the case of both private consumption and investment. The trend of investments incorporates mixed results: spending on machinery, equipment and transportation was slightly higher starting from the second quarter, while investment in

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

construction continued to fall. Over the first six months of the year, the flow of exports remained essentially stable, while imports again decreased. In the second quarter, inventories once again made a significant negative contribution to growth (equal to -0.4 percentage points), thereby largely explaining the contraction of GDP.

All of the main leading indicators have been providing favourable signs for several months. The data on manufacturing businesses published in September show further increases in both business confidence and the PMI. In particular, the indications related to orders are positive, including those coming from the domestic market.

The improvement of consumer confidence indicators suggests a gradual recovery of domestic demand in the next few quarters, with beneficial effects on the services sector.

The still slightly negative trend of lending to the private sector is likely to continue to impede growth for some months, thus softening the expansionist effects of the Government’s latest measures.

The expected gradual strengthening of industrial production in the next few months is likely to lead to a full recovery of the country’s economic activity by year end. However, the most recent figure (a month-on-month decrease of 1.1 per cent in July) has prompted some caution with respect to the growth estimates for the third quarter. Moreover, a negative trend in July was also seen in other European countries, and particularly in Germany.

Accordingly, considering that the contraction of GDP in the first part of 2013 was slightly higher than contemplated in the macroeconomic projections contained in the Economic and Financial Document (EFD), the estimate of GDP growth is now -1.7 per cent. The figure incorporates a very significant negative carryover effect of 1.0 percentage point from the year 2012.

6 MINISTERO DELL’ECONOMIA E DELLE FINANZE

II. MACROECONOMIC SCENARIO

The prospects of recovery in economic activity in 2014 are fully confirmed, including in light of the legislation to accelerate the payment of the arrears of the Public Administrations (PA); however, in relation to a reduced positive statistical carryover effect from 2013, the 2014 annual change in GDP is now estimated to be 1.0 per cent. The growth of Italy’s economy should climb above 1.0 per cent starting in 2015, with the negative output gap (currently equal to more than 4 percentage points of GDP) expected to gradually close.

The upward revision of the medium-term forecasts has been done on the basis of a careful evaluation of the reforms introduced to date. The EFD presented in April only partially incorporated the effect of the reforms that were enacted during the previous legislature and examined within the National Reform Programme. The conservative evaluation stemmed from the methodological premise that the estimates of the impact of the reforms incorporated a still-incomplete process of implementation (for example, through the approval of the necessary secondary legislation). The Government is committed to making the reforms already enacted fully effective, and where opportune, to reviewing certain elements in order to improve their scope and effectiveness. This approach has been appropriately reflected in the impact estimates. In addition, the Government has put in place the conditions for greater use of structural and convergence funds, which will also support the recovery. Chapter III of this report contains a focus topic on the “Status of implementation of the reforms” which provides an account of the progress made thus far.

Added to this are important structural reform measures introduced in recent months that are discussed in a focus topic in this chapter. These measures, for example, include: various initiatives to improve the quality of public expenditure (spending reviews) that should gradually pave the way to a reduction of taxation; the fiscal initiatives that have actually accelerated some of the measures of the enabling act; the privatisation process initiated; and additional institutional reforms in process. More specifically, the Interministerial Committee for Economic Programming (CIPE) recently approved measures for EXPO 2015, and efforts are now under way to define initiatives in relation to the ‘Destinazione Italia’ programme. It is therefore possible to reflect a greater effect of the past measures within the GDP growth estimates.

The impact of the various measures that are to be introduced as part of, or in conjunction with, the Stability Law will be assessed as soon as the details are available. The next commitment in this regard is the preparation of the Draft Budgetary Plan (DBP) that will estimate the effects on the budget balances and on the economy of the main measures to be included in the Stability Law. The DBP is to be drafted and sent to the European Commission by 15 October.

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TABLE II.1: MACROECONOMIC FRAMEWORK (% change, unless otherwise indicated)

	2012		2013		2014		2015		2016		2017
EXOGENOUS INTERNATIONAL VARIABLES
International trade		2.5		3.0		4.9		6.0		6.1		6.2
Oil price (FOB Brent US$/barrel)		111.6		109.9		113.6		113.6		113.6		113.6
USD/EUR exchange rate		1.286		1.317		1.322		1.322		1.322		1.322
ITALY'S MACRO VARIABLES (VOLUMES)
GDP		-2.4		-1.7		1.0		1.7		1.8		1.9
Imports		-7.7		-2.9		4.2		4.8		4.5		4.5
Final national consumption		-3.9		-1.9		0.3		1.0		1.2		1.4
- Household consumption (residents)		-4.3		-2.5		0.5		1.1		1.5		1.8
- General government expenditure and NPISH		-2.9		-0.3		-0.1		0.7		0.3		0.1
Gross fixed investment		-8.0		-5.3		2.0		3.6		3.8		3.5
- Machinery, equipment and other		-9.9		-3.5		3.4		4.7		5.1		4.6
- Construction		-6.2		-7.0		0.6		2.5		2.4		2.4
Exports		2.3		0.2		4.2		4.5		4.4		4.3
Memo item: current account balance (% of GDP)		-0.5		0.3		0.4		0.4		0.5		0.3
CONTRIBUTION TO GDP GROWTH (1)
Net exports		3.0		0.9		0.2		0.1		0.1		0.1
Inventories		-0.6		0.0		0.2		0.2		0.0		0.0
Domestic demand, net of inventories		-4.8		-2.5		0.6		1.4		1.6		1.7
PRICES
Import deflator		3.1		-1.4		1.1		1.8		1.7		1.9
Export deflator		1.9		0.0		1.6		2.1		1.9		1.8
GDP deflator		1.6		1.2		1.9		1.9		1.7		1.7
Nominal GDP		-0.8		-0.5		2.9		3.6		3.5		3.6
Consumption deflator		2.8		1.5		2.1		1.9		1.7		1.7
Inflation (planned)		1.5		1.5		1.5		1.5
HICP, net of imported energy (2)		3.0		2.0		1.8		2.1
LABOUR
Labour cost		1.0		1.4		1.0		1.4		1.3		1.3
Productivity (measured on GDP)		-1.3		0.1		1.0		0.8		0.9		0.9
Unit labour cost (measured on GDP)		2.3		1.3		-0.1		0.5		0.4		0.5
Employment (FTE)		-1.1		-1.8		-0.1		0.9		0.9		1.0
Unemployment rate		10.7		12.2		12.4		12.1		11.8		11.4
Employment rate (15-64 years)		56.7		55.9		55.8		56.3		56.8		57.4
Memo item: Nominal GDP (in € mn)		1565916		1557307		1602937		1660701		1718365		1779568

1) Slight discrepancies, if any, are due to rounding.

2) Source: ISTAT.

Note: The macroeconomic framework has been prepared based on information available as of 12 September 2013.

GDP and components in volume (concatenated prices, base year of 2005), data not adjusted for number of business days.

FOCUS

Validation of macroeconomic forecasts, as provided by the Two Pack

The Two Pack refers to two regulations of the European Parliament and European Council (no. 472 and no. 473) in effect as of 30 May 2013 and aimed at reinforcing the monitoring of public finance aggregates for the Euro Area countries. A more detailed description of the effects of the regulations on Italy’s budgeting process is illustrated in Chapter IV of this Update (“Implications of the Two Pack on the programming documents cycle provided by law”). Europe’s new governance system requires the use of independent macroeconomic forecasts (prepared or certified by institutions independent of the Government) for the preparation of each country’s programming documents.

8 MINISTERO DELL’ECONOMIA E DELLE FINANZE

II. MACROECONOMIC SCENARIO

More specifically, the Two Pack provides that Member States must: i) explicitly state in the document if the macroeconomic forecasts are prepared or certified (endorsed) by the independent entity; and ii) define and adopt transparent procedures for the validation of the macroeconomic forecasts on the part of the independent entity.

The regulations suggest that specific reconcilement mechanisms be provided should the assessments about growth prospects differ between the Ministry of the Economy and Finance and the independent entity.

Exhibit II of the Code of Conduct defines the contents of the Draft Budgetary Plan and supplies some suggestions for defining procedures that could be followed by the parties involved in the forecast process, such as the adoption of a Code of Practice to be publicly disclosed.

In Italy, in line with the Two Pack requirements, the independent entity was instituted with the implementation of Constitutional Law no. 1 of 2012, will be attached to parliament and named Parliamentary Budget Office (PBO. The PBO will be operational as of 2014, following the appointment of its directors. Italy has elected a model that provides for the PBO’s validation (certification) of the macroeconomic forecasts. The law ensures that the PBO will have full autonomy and independence of judgement and evaluation. With reference to the procedures for the forecasting process, the law establishes that “should the PBO come up with valuations that are significantly different from those of the Government, upon the request of at least one-third of the members of a parliamentary commission responsible for public finance, the Government will either illustrate the reasons for which it believes its assessments are to be confirmed, or the reasons for which it elects to align its forecasts to PBO’s”. ¹

In absence of the validation of the forecasts by the newly created PBO, the growth forecasts contained in the Update to the 2013 EFD are to be compared with the consensus forecasts and the most recent forecasts published by national and international entities.

The year-on-year growth estimates of the macroeconomic framework are substantially in line with the forecasting entities’ average for 2013. With regard to 2014, it is believed that the consensus forecasts of the entities surveyed do not yet incorporate fully the updating of the estimates. The forecasting entities will have to take into account both the additional measures adopted by the Government in recent months and the recent confirmations of improvement of the overall macroeconomic framework.

GROWTH FORECASTS FOR ITALY

Real GDP (% change y/y)	Forecast Date		2013		2014		2015
Update to EFD (y/y)		09/2013		-1.7		1.0		1.7
Prometeia (Forecast Report) (*)		09/2013		-1.6		0.8		n.a.
Confindustria (Economic Scenarios no. 18)		09/2013		-1.6		0.7		n.a.
REF		08/2013		-1.6		1.0		n.a.
Bank of Italy (Economic Bulletin no. 73)		07/2013		-1.9		0.7		n.a.
IMF (Update WEO)		07/2013		-1.8		0.7		n.a.
OECD (Economic Outlook n. 93)		05/2013		-1.8		0.4		n.a.
ISTAT		05/2013		-1.4		0.7		n.a.
European Commission (Spring Forecast)		05/2013		-1.3		0.7		n.a.
Forecasting entities averages				-1.6		0.7		n.a.
Consensus forecasts		09/2013		-1.7		0.5		n.a.
Euro Zone Barometer		09/2013		-1.7		0.4		n.a.

¹  Law no. 243/2012, Article 18, Paragraph 3.

MINISTERO DELL’ECONOMIA E DELLE FINANZE 9

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

FOCUS

Trend of the credit market and the effects on businesses

The tensions in the financial markets manifested near the end of 2011 have mostly abated as a result of the ECB Governing Council’s decision to initiate Outright Monetary Transactions (OMT), extraordinary transactions for the purchasing of government securities. On the other hand, the significant reduction in the spreads between yields on Italian and German government securities occurring as from autumn 2012 has not yet fully realized its beneficial effects on Italy’s credit system.

An increase in non-performing loans and growing risk aversion on the part of banks, combined with the need for bank recapitalization as dictated by financial authorities and new international regulations, have created a substantial stall in the credit market in Italy and in other countries.

Significant differences continue to exist in the average cost of financing new loans to businesses, due both to the need for recovering profit margins, and to the fragmentation still present in the euro money market. In June, the cost of lending in Italy was 1.3 percentage points higher than in Germany). The spreads are even higher in the case of small- and medium-sized businesses (SMEs) which represent the backbone of Italy’s economy.

On the basis of data published by the Bank of Italy in its latest Report on Financial Stability, the reduction of bank credit has started to influence not only firms in precarious financial conditions, but also those with solid balance sheets. Larger companies have partially avoided the problem by financing themselves through bond issues, leaving smaller companies more strongly impacted by the effects of the credit crunch. According to the Bank Lending Survey, credit conditions continued to deteriorate in the second quarter of 2013, especially in the case of long-term financing.

The credit market is still fragile, although the foundations for its gradual return to normal do seem to exist. With the improvement of the prospects for the economy, corporate loan demand should gradually increase, while credit conditions will likely be eased due to a reduction in the perception of risk associated with business activity. Total funding is still contracting, although a rebound in funding from abroad is discernible. In addition, when compared year on year, the funding gap in May 2013 had fallen by 3.6 percentage points; this trend appears likely to continue in the next few months. 2 Therefore, as the economy recovers, banks should be ready to satisfy credit demand.

The Government has played an active role in creating conditions conducive to well-functioning markets, facilitating the access to credit by businesses and generally favouring an improvement in the liquidity of the financial system. Several measures for improving businesses’ access to the credit market have already been implemented, and are explained in Chapter III of this Update.

The trend of the spread between yields on 10-year Italian government securities and comparable German securities remains nonetheless anomalous. In essence, following an initial contraction due to the policies of the previous Government, the spread stabilised around 250 basis points. This was offset by the narrowing and virtual disappearance of a similar sized spread between Spanish and Italian securities. These movements thus suggest that political uncertainty and hesitations about the stability of Italy’s Government are continuing to affect investor perceptions somewhat. With the reform process and the successes in fiscal consolidation, the conditions are in place for a significant reduction of the yield spread in the next few years.

²  Italian Banking Association Forecast Report, July 2013.

10 MINISTERO DELL’ECONOMIA E DELLE FINANZE

II. MACROECONOMIC SCENARIO

FOCUS

Impact of the legislation to accelerate settlement of the PA’s debts

With the Decree-Law no. 102/2013, the Government authorised a €7.2 billion increase in allocations to settle the past-due debts of territorial entities, in addition to the €20 billion of payments authorised by Decree-Law no. 35/2013, with the former amount representing an advance of the tranche planned for 2014. Note that a payment of up to €20 billion has also been provided for 2014. The Government’s commitment is to reach a total of €50 billion, although the need for identifying subsequent allocations can only be fully evaluated after a determination of the amount of the debt still outstanding covered by the existing measures.

The impact of the additional €7.2 billion on the economy was evaluated in a report to Parliament, prepared in accordance with Article 10-bis, Paragraph 6 of Law no. 196/2009, submitted to the Council of Ministers on 28 August and subsequently transmitted to both chambers of Parliament.

The estimation of the impact on GDP growth of the measure authorising the additional debt settlements was prepared using the same criteria employed for evaluating the effects of the allocation approved during the spring months. The table below shows the additional impact due exclusively to the increased payments; additional details are outlined in the aforementioned report. The greater injection of liquidity in 2013, if done quickly enough, will provide more intense and immediate benefits to businesses in terms of greater investments and production, and should consequently provide positive effects on consumption.

IMPACT ON THE ECONOMY OF THE INCREMENTAL PAYMENTS (% shift compared with baseline simulation)

	2013		2014		2015
GDP		0.1		0.3		0.0
Consumption		0.2		0.4		0.1
Investments		0.4		0.7		0.1

The policy scenario presented in this Update incorporates these effects. The expansionist effects corresponding to another €2.8 million (whose expenditure still needs to be authorised) are instead not included.

The payments made by the PA to date are summarised in the following table (see Chapter VI for additional information).

PAYMENTS MADE BY THE PUBLIC ADMINISTRATIONS AS OF SEPTEMBER 2013 (in €mn)

Debtor entities	Resources appropriated by Decree-Law  35/2013		Resources actually made available to the debtor entities			Payments made
Central Government		3,000		3,000			2,613
Payment of off-balance sheet debt of Ministries		500		500			113
Increase in tax refunds		2,500		2,500			2,500
Regions and autonomous Provinces		10,200		8,301			5,350
Liquidity advances		8,000		6,101			5,350
Credit lines		2,200		2,200
Provinces and Municipalities		6,800		6,606			3,341
Liquidity advances		1,800		1,606			1,506
Credit lines		5,000		5,000			1,835
Total amounts (absolute values)		20,000		17,907			11,304
Total amounts (% of allocated resources)				90	%		57	%

MINISTERO DELL’ECONOMIA E DELLE FINANZE 11

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

FOCUS

Macroeconomic impact of certain measures of 2013 for relaunching the economy

The Government’s main measures for relaunching the economy as introduced following the approval of the 2013 EFD have been evaluated with respect to their macroeconomic impact³. The measures considered are the following:

1) Decree-Law no. 54/2013 incorporating measures for the financing of social safety nets and the suspension of the single municipal property tax (IMU);

2) Decree-Law no. 63/2013 incorporating measures regarding the energy performance of buildings and tax relief for the recovery of the housing stock;

3) Decree-Law no. 69/2013 incorporating “Urgent provisions for relaunching the economy” (“Decreto Fare”);

4) Legislation containing simplification measures;

5) Decree-Law no. 76/2013 incorporating measures for employment (in particular, the employment of young people), and value-added taxes;

6) Decree-Law no. 102/2013 incorporating measures regarding IMU, other taxation of real property, support to housing policies and local finance, as well as long-term wage supplementation and pension schemes.

In comparison with the baseline scenario, all of the measures contained in the legislation examined would translate into a 0.1 per cent increase of GDP starting in 2013 (see table below). For 2013, this increase is almost exclusively attributable to energy-savings and building-renovation incentives (Decree-Law no. 63/2013) that should contribute to boosting investments. Instead, from 2014 and thereafter, the greatest impact comes from the simplification measures that contribute to growing both household consumption and investments. The stimulus to aggregate demand is accompanied by a slight increase in prices, with the exception of 2013, when the increase in value-added tax (deferred to 1 October) will cause a reduction in prices vis-à-vis the baseline scenario.

THE MACROECONOMIC IMPACT OF SEVERAL MEASURES ADOPTED IN 2013 FOR RELAUNCHING

THE ECONOMY (% shift compared with baseline simulation)

	2013		2014		2015
GDP		0.1		0.1		0.1
Consumption		0.1		0.1		0.1
Investments		0.6		0.0		0.0
Employment		0.0		0.1		0.0
Prices		-0.1		0.1		0.1

³  The macroeconomic impact of the measures considered has been evaluated with the ITEM model, with the exception of the simplification measures that were simulated with the QUEST III mode for Italy.

12 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY

In July, following the end of the 2013 European Semester, the EU Council made specific recommendations to Italy on the basis of the European Commission's assessments of the country’s macroeconomic and budget situation, as outlined in the Stability Programme and the National Reform Programme.

Amongst other things, these recommendations stress that the macroeconomic imbalances linked to problems of competitiveness and high public debt will require very strong, clear and effective economic-policy actions, particularly in view of the sluggish growth in recent years.

Following is a brief summary of the actions already taken by the Government in response to these recommendations, whereas reference should be made to Chapter V of this document for indications about the reform efforts in process and/or those to be introduced in the future.

DEBT REDUCTION

RECOMMENDATION 1. Ensure that the deficit remains below 3% of GDP in 2013, by fully implementing the adopted measures. Pursue the structural adjustment at an appropriate pace and through growth-friendly fiscal consolidation so as to achieve and maintain the MTO as from 2014. Achieve the planned structural primary surpluses in order to put the very high debt-to-GDP ratio on a steadily declining path. Continue pursuing a durable improvement of the efficiency and quality of public expenditure by fully implementing the measures adopted in 2012 and taking the effort forward through regular in-depth spending reviews at all levels of government.

• Ensured convergence of the public finance balances toward the agreed European thresholds through: i) public finance balances that are under control and ii) the budget strategy indicated in this Update.

• Used safeguard clauses to guarantee financial coverage of the legislation enacted.

• Adopted measures, mostly with no impact on public finance balances.

• Implemented provisions for containing expenditures related to the exercise of political activity, including the elimination of separate compensation to Government ministers who already draw a salary as members of Parliament.

• Adopted provisions to pursue the streamlining of the expenditure of the Public Administrations (PA) (e.g., freeze on the purchase of official cars, reduction of spending on consulting services, simplification of procedures for hiring and internal transfers within the PA).

• Passed legislation to abolish public financing of political parties, and to regulate voluntary contributions to the same. The measures take a completely new approach to governing contributions and financing to political parties, by eliminating direct public financing and introducing a new system for private contributions and indirect public contributions.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

• Passed a constitutional law bill to abolish the Provinces. The bill calls for the elimination of the Provinces from Article 114 of the Constitution, leaving the Regions and Municipalities intact.

• Approved a decree-law restructuring the functions of the Provinces. In advance of, and consistent with, the related constitutional reform, the decree-law contains measures about Large Cities, Provinces and unions of Municipalities, for the purpose of adjusting their administration.

• Introduced simplified procedures to transfer buildings to territorial entities, as part of the implementation of the federal state property system. As of 1 September 2013 and until 30 November 2013, Municipalities, Provinces, Large Cities and Regions may submit applications to acquire the State’s real property assets.

• The funds management company, Investimenti Immobiliari Italiani (Invimit) SGR, was set up by the Ministry of Economy and Finance (MEF) with the objective of enhancing the value of public property assets and providing for the disposal thereof. The new company’s three-year business plan has been submitted for the approval of the Bank of Italy and the Italian securities market regulator (CONSOB). Invimit is to receive initial funding of approximately €450 million for 2013 from the National Insurance Institute for Industrial Accidents (INAIL), with most of the funding to be dedicated to enhancing the value of public services. Before the end of 2013, the State Property Office will transfer a total of 350 properties to Invimit.

• Reinforced the role of the Concessionaria Servizi Informativi Pubblici (CONSIP) purchasing centre, with the unit presiding over some €35 billion of expenditures for goods and services in 2013, with the comparable total for 2014 expected to rise to more than €40 billion.

• Approved a plan for reducing the work force of Italy’s Army, Navy and Air Force to a total of 150,000 by 2024. The total work force of civilian personnel employed by the Ministry of Defence is to be reduced to 20,000 by 2024.

EFFICIENCY AND QUALITY OF THE PUBLIC ADMINISTRATION

RECOMMENDATION 2. Ensure timely implementation of on-going reforms by swiftly adopting the necessary enacting legislation, following it up with concrete delivery at all levels of government and with all relevant stakeholders, and monitoring impact. Reinforce the efficiency of public administration and improve coordination between layers of government. Simplify the administrative and regulatory framework for citizens and business and reduce the duration of case-handling and the high levels of litigation in civil justice, including by fostering out-of-court settlement procedures. Strengthen the legal framework for the repression of corruption, including by revising the rules governing limitation periods. Adopt structural measures to improve the management of EU funds in the southern regions with regard to the 2014-2020 programming period.

• Accelerated the settlement of the past-due payables of the PA, with the payment of €40 billion for 2013-2014 (inclusive of €17.9 billion already made available to public debtor entities in 2013). In September, a total of €11.3 billion was settled, including approximately €3.9 billion for the healthcare sector, in particular, for the account of hospitals and local healthcare units. Another reinforcement of the financial commitment is planned, up to an amount of €10 billion (including €7.2 billion already authorised).

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III. EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY

• Inaugurated the process of constitutional and electoral reforms: the Commission for Constitutional Reforms was appointed and presented its final report in September 2013. Parliament is debating the legislative bill presented by the Government that calls for setting up a Parliamentary Committee for Constitutional Reforms. Public consultation about the constitutional reforms was also undertaken (from July to October 2013).

• Adopted a new Digital Administration Code, with additional measures approved for the digitalisation of the PA (mandatory use of certified electronic mail between the PA and companies, with the use of faxing abolished).

• Simplified the governance of the Digital Agenda, and the tasks of the Steering Committee have been redefined. The Committee, which is headed by the Prime Minister or one of his delegates, is scheduled to present to Parliament an overview of prevailing regulations, the programmes inaugurated, and their status of completion.

• The National Corruption Prevention Plan has been approved by the National Corruption Prevention Authority.

• Guidelines have been adopted by the Independent Commission for the Valuation, Transparency and Integrity (CIVIT) of the PA, for the updating of the 2014-2016 three-year programmes for transparency and integrity within the PA. The jurisdiction over the subject of the prevention of corruption is being transferred to the Public Function Department.

• The commission set up at the Ministry of Justice to study possible reform of the law of prescription (i.e., statute of limitations) has concluded its work.

• Presented a legislative bill to simplify compliance matters for individuals and businesses, and to re-order regulations, with measures regarding: abolition of certificates; the issuance of academic diplomas in the English language; the digitalisation of the procedures for the Public Automobile Register; and the creation of a position known as ‘business tutor’ staffed by the manager of the one-stop shop (Sportello Unico per Attività Produttiva (SUAP)) or a person delegated by such manager. The bill also contains: the authorisation to reduce the regulatory charges paid by citizens that will allow for some €9 billion of savings for businesses; the authorisation to re-order and codify matters concerning education, research, the environment, fiduciary companies, etc.; fiscal simplification measures regarding inheritance and reduction of the terms for the disbursement of tax refunds (starting in 2014).

• Adopted other simplification measures through the ‘Decreto Fare’ (Decree- Law no. 69/2013 converted by Law no. 98/2013) for the purpose of overcoming Italy’s competitive disadvantage and freeing up resources for the country’s growth and development. The measures refer to bureaucratic compliance matters that have an estimated cost (based on the computation of the charges done by the Public Function Department with the technical assistance of ISTAT) of approximately €7.7 billion per year for small and medium-sized enterprise (SMEs). The estimated savings have already been

MINISTERO DELL’ECONOMIA E DELLE FINANZE 15

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

quantified at approximately €500 million per year. In addition to the general initiatives that are essential for providing certainty about the timing for concluding the procedures, such as the automatic and lump-sum indemnity, there are numerous measures that will allow for reducing the costs of bureaucracy and will contribute to triggering investments and to facilitating the recovery in key sectors (such as the building sector). The other simplification measures affect several matters particularly burdensome for businesses, such as the compliance formalities for labour and the single insurance contribution payment certificate (DURC), the environment and taxation. The legislative bill on the subject of simplification currently under review by the Senate (A.S. 958) provides not only for relaunching the codification, but also other important measures for matters that are fundamental to running businesses and to the everyday life of individuals (e.g., timing for building permits, environmental clean-ups and other environmental measures, the Automotive Public Register (PRA), the agenda for simplification, etc.).

• On the subject of construction, the timing for the issuance of building permits is to be reduced for municipalities with more than 100,000 inhabitants, except in the case of particularly complex projects. The process for authorising changes to building permits has also been simplified for non-essential modifications, with those changes to be handled through the so-called Reporting of Initiation of Activity ‘Segnalazione certificata di inzio attività’ (SCIA).

• The ‘Decreto Fare’ also includes the following provisions pertaining to the judicial system: the reduction of the number of new lawsuits through mandatory mediation for various types of proceedings; the institution of law clerk apprenticeships at the courts for the purposes of training and support to the case load; and the creation of a task force of 400 honorary magistrates for settling cases pending with the Courts of Appeal. In addition, the timing for settling disputes concerning the recovery of receivables has been reduced, while the so-called ‘Blank Pre-Bankruptcy Agreement’ has been amended, through the institution of a court-appointed administrator who will monitor the integrity of the debtor’s conduct.

• The Agency for Cohesion was established to ensure more efficient use of European structural funds, and to strengthen the technical and administrative capacity of the Regions and Central Administrations.

FINANCIAL SYSTEM

RECOMMENDATION 3. Extend good corporate governance practices to the whole banking sector conducive to higher efficiency and profitability to support the flow of credit to productive activities. Take forward the on-going work as regards asset-quality screening across the banking sector and facilitate the resolution of non-performing loans on banks’ balance sheets. Promote further the development of capital markets to diversify and enhance firms' access to finance, especially into equity, and in turn foster their innovation capacity and growth.

16 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY

• CONSOB has published guidelines for the use of equity crowd-funding, namely, the tapping of capital through online portals in order to support newly created, innovative businesses.

• The Bank of Italy has updated provisions regarding the prudential oversight of banks with reference to internal controls systems, information systems and operating continuity. The new regulations, in line with the best international practices and the recommendations of leading international organisations, are based on several fundamental principles: the involvement of top management; the integrated vision of risks; the efficiency, effectiveness and independence of the controls; and the application of the regulations in relation to the size and operational complexity of the banks.

• The Cassa Depositi e Prestiti has made a credit line (€2 billion) available to banks for the disbursement of new mortgages for the purchase of the main dwelling, and for the acquisition of bank bonds as part of credit securitisation transactions arising from mortgages guaranteed by liens on residential properties, with the aim of facilitating the banks’ disbursement of new mortgages to individuals for the purchase of their main dwelling.

• Simplified the means of accessing the Central Guarantee Fund and enhanced the instruments available to the Fund.

• Adopted the decrees providing for the implementation of the use of mini-bonds by SMEs.

• Made operational the financing of start-ups with the ‘Start and Smart’ project through the National Agency for the Attraction of Investments and Development of Business (INVITALIA), and subsidies have been paid into a sinking fund to cover the costs of running the businesses during their first years of activity.

• The ‘2013 Credit Agreement’ consummated between the Italian Banking Association (ABI) and business trade associations has provided for the suspension of payment of loan instalments and the lengthening of maturities for financing granted to SMEs, while also includes provisions to promote the recovery and development of SME business activities.

• ABI has also set up a Business Enhancement Fund (FVI). The Fund is a new intermediary created and managed by a management company for the purpose of relaunching and enhancing the value of otherwise healthy firms that are experiencing financial stress. The Fund is authorised to acquire credits from banks and financial resources from investors, stepping in to strengthen the business enough to the point of divestiture.

• The Cassa Depositi e Prestiti has made €2.5 billion available for subsidised financing to SMEs, to be used for productive investments (purchase of plant, machinery and equipment, and other capital goods, such as computer hardware and software). The financing, for up to €2 million per firm, will be granted through 31 December 2016 by banks that are partners to the initiative, and will have a maximum term of five years.

• Refinanced with €150 million, through the Fund for Sustainable Growth, the development programmes in the industrial sector for regional areas currently lacking resources to provide subsidised credit.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

• Activated the risk-capital line of the National Fund for Innovation (FNI) to facilitate the financing of innovative projects based on the industrial application of intellectual property assets (patents, designs and models). A special closed-end fund, IPGEST, with resources of €40.9 million (€20 million of which are public) has been set up for investing SMEs that are carrying out investment programmes for the development and use of patents. The portion of investment available to each SME is up to €1.5 million over a 12-month period.

LABOUR MARKET

RECOMMENDATION 4. Ensure the effective implementation of the labour market and wage setting reforms to allow better alignment of wages to productivity. Take further action to foster labour market participation, especially of women and young people, for example through a Youth Guarantee. Strengthen vocational education and training, ensure more efficient public employment services and improve career and counselling services for tertiary students. Reduce financial disincentives for second earners to work and improve the provision of care, especially child- and long-term care, and out-of-school services. Step up efforts to prevent early school leaving. Improve school quality and outcomes, also by enhancing teachers’ professional development and diversifying career development. Ensure effectiveness of social transfers, notably through better targeting of benefits, especially for low-income households with children.

• Introduced incentives amounting to €794 million over the 2013-2016 period (€500 million for the Southern Regions and €294 million for the rest of the country) for the hiring of employees under open-ended contract. The incentives are targeted to the hiring, by 30 June 2015, of workers between the ages of 18 and 29 who fall within the category of underprivileged workers, namely, young people who (i) have not had a regularly paying job for at least six months, or (ii) do not have a secondary school or professional diploma. The incentive to the employer is equal to one-third of the total gross taxable wage for a period of 18 months and cannot exceed more than €650 per worker per month. For an employer that converts an existing fixed term contract into an open-ended contract, the incentive period is equal to 12 months. The hiring activity must lead to a net occupational increase.

• Instituted a new incentive for the hiring on a full-time basis with an open-ended contract of unemployed workers who receive Social Insurance for Employment (ASpI) equals to 50 per cent of the residual monthly indemnity.

• Began the dialogue within the State-Regions Conference in order to guarantee national standards of hiring under the professional training contract.

• Approved several additions to the regulations provided by Law 92/2012. Such integrations aim at eliminating several constraints related to ‘atypical’ fixed term contracts (e.g., derogation enabling fixed term contracts and delegation to collective agreements for establishing the reasons to derogate from the reasons validating the fixed term contract), and reducing the minimum period elapsing between two successive term contracts with the same employer. The procedures have been simplified for individual dismissals due to just cause and for on-call work.

• Reinforced worker protections and improved transparency. In particular, in case of attempted settlement, the absence of one of the parties will be taken into consideration by the judge in the final ruling; extension of norms preventing the so-called ‘blank resignations’ to workers hired for specific

18 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY

projects; a revaluation of 9.6% of the fines, with a reallocation of one-half of this amount to the reinforcement of oversight and prevention measures relating to security and safety in the work place; and mandatory communications in relation to hiring, termination, transformation and extension of contracts fully display their effects.

• Introduced provisions to facilitate the early retirement of older workers, namely, those who are close to meeting the requisites for retiring, so as to facilitate their retirement from firms with excess personnel.

• Planned an expansion of the measures to safeguard former workers whose employment terminated before the entering into force of the last pension reform and who ended up without either a wage or a pension. The benefit will be granted to 6,500 individuals, for a maximum amount of €151 million for 2014, of €164 million for 2015, €124 million for 2016, €85 million for 2017, €47 million for 2018 and €12 million for 2019.

• Refinanced the exceptional wage supplementation scheme (Cassa Integrazione in Deroga) for 2013 with a total appropriation of €2.5 billion.

• Set up a fund at the Labour Ministry with annual resources of €2 million in order to allow the State Administrations to pay allowances for participation in training apprenticeships during the 2013-2015 period.

• Authorized an expenditure of €10.6 million to promote vocational apprenticeship for students enrolled in university degree programmes over the 2013-2014 academic year.

• Instituted a special mission at the Labour Ministry in view of the inauguration of the ‘Youth Employment Initiative’. The unit will collaborate at different government levels for the implementation of employment policies and the planning of active labour policies initiatives. In addition, a database of active and passive labour policies will be created in order to collect data about individuals seeking job and the demand for labour.

• Areas of Southern Italy received the following financing: i) €80 million for self-employment and entrepreneurial measures; ii) €80 million for projects promoted by young people and underprivileged individuals for the social infrastructure and value enhancement of public assets; and iii) €168 million for training scholarships for unemployed young people who are neither enrolled in school nor participating in any training activity.

• Allocated a total of €100 million for increasing the Fund for Scholarships for University Studies. Scholarships are also planned for assisting worthy students who wish to study in areas outside of their Regions of residence.

• Enhanced the courses for students of the upper secondary school. The courses offered in technical and professional institutes have also been enriched, as have those for artistic, musical and choral studies.

• In order to facilitate a better balance between school and the labour market, a three-year plan is currently being prepared for extracurricular training assignments for students in level four of upper secondary school, with the priority going to students enrolled in technical and professional institutes. The students will be assigned to businesses or public entities.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

• Increased the flexibility of the annual hourly schedule for professional institutes by up to 25%. By guaranteeing greater flexibility of lesson times, the initiative favours a natural link between professional institute programmes and the regional professional training and education programmes, thereby specifically responding to the needs to train young people and make access to the labour market easier.

• Extended the Social Inclusion Programme to all areas of Southern Italy, with the adoption of the purchases card on an experimental basis. A total of €167 million has been allocated to the initiative.

• The report entitled ‘Proposals for New Measures to Fight Poverty’ developed by a work group set up at the Labour Ministry has been presented in its final form, and outlines measures for supporting active inclusion.

• Allocated funds totalling €200 million for making the burden of home mortgage or rental payments more sustainable. More specifically, the following are provided: i) €40 million to a fund for suspension of mortgage instalments up to 18 months; ii) €60 million to the Guarantee Fund (Decree- Law no. 112/2008) for mortgages granted to young people (couples, single-parent households with children, and people employed under atypical contracts); iii) €60 million to the fund that disburses additional subsidies for the payment of property rents; iv) €40 million to a new fund set up to cover unintentional arrearage; and v) a reduction to 15 per cent of the lump-sum tax payable on rent income from the contracts with rents set at controlled prices.

• Appropriated funds totalling €420 million for scholastic publishing. In addition, the Regions that are building new school facilities may obtain subsidised-rate mortgages from the European Investment Bank, the European Council Development Bank, the Cassa Depositi e Prestiti or other banking institutions. The State will shoulder the amortisation charges.

• Actions planned for improving the educational aids and environment include: i) greater availability of textbooks; ii) improved canteen services at schools; iii) public transport subsidies; and iv) wireless Internet in secondary school buildings.

• New measures have been introduced in the fight against school dropouts, with the financing of a programme specifically aimed at supplemental assistance to reinforce core skills, with €15 million appropriated therefor during 2013- 2014.

• The hiring of full-time employees with open-ended contracts for the 2013- 2014 academic year provides for: 672 school managers and 11,268 teachers and other educational personnel.

• New rules have been approved for the hiring of personnel employed by universities and research entities. As of 2014, the turnover (hiring of replacement personnel) is to be raised to 50 per cent of departing personnel, versus the 20 per cent ratio previously.

• Approved a disability plan, while the fund for hiring the disabled has been refinanced. The PA are also authorised to hire the disabled, as an exception to the hiring limitations currently in effect.

20 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY

TAXATION SYSTEM

RECOMMENDATION 5. Shift the tax burden from labour and capital to consumption, property and the environment in a budgetary neutral manner. To this purpose, review the scope of vat exemptions and reduced rates and of direct tax expenditures, and reform the cadastral system to align the tax base of recurrent immovable property to market values. Pursue the fight against tax evasion, improve tax compliance and take decisive steps against the shadow economy and undeclared work.

• The Government has committed to a review of property taxes, from the standpoint of ensuring greater equity and eliminating the burden for the weakest sectors of society. The municipal property tax (IMU) is to be replaced with a service tax that will foster the fiscal federalism. The part of the tax on the property has been maintained, while a direct component for taxing shared services and waste management has been introduced. The service tax shifts the taxation base to consumption as well as possession, and thus it will be applied not only to owners but also to renters. In addition, the Government intends to re-assign to Municipalities their territorial real property base and the full power to reconfigure tax exemptions and tax rates, within the framework of a national ceiling. As part of this review, the first instalment of IMU was cancelled for 2013 in relation to the properties that had benefited from the suspension provided by Decree-Law no. 54 of 2013: main dwellings (with the exception of the A1-A8-A9 categories, such as villas, castles, and luxury properties) land, and farm buildings.

• Increased the value-added tax rate from 21 per cent to 22 per cent starting in October 2013.

• The delegated tax law is under debate at the Parliament. Among its most main objectives, the law aims to provide stability and certainty to the taxation system. With the aim of simplifying and streamlining corporate income taxes, the legislation will eliminate or correct distortionary taxation measures containing loopholes or measures that generate uncertainty and complexity in terms of application, in particular with the objective of favouring the development of cross-border activity through the elimination of certain limitations on the international expansion of businesses.

• The operating plans of the Italian tax police have been ratified for the fight against undeclared labour and the prevention of money laundering.

• The new system for income assessment and bank account records has become fully operational. The Italian tax agency has also finalized a strategy for the constant monitoring of the fiscal conduct of 3,200 large taxpayers subjected to agency oversight in 2013.

• Implemented new rules governing the tax authorities’ seizure of assets and tax collection. The minimum tax debt for which the tax collector can take a lien on real property has been raised from €20,000 to €120,000. In addition, the tax collecting entity, Equitalia, can grant the tax debtor an instalment plan of up to 120 months for the extinction of the debt. If the only real property owned by the debtor is the debtor’s main dwelling, it cannot be seized, except in cases in which the dwelling classifies as luxury property. In the case of businesses, the limits on the ability to seize assets have been extended.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

• Renewed the concession to Equitalia for the collection of taxes for local entities.

• Several measures to simplify fiscal compliance have also been ratified at the administrative and legislative levels.

• Abolished joint fiscal responsibility of contractors and sub-contractors for the payment of value-added tax.

• Approved incentives for infrastructure projects worth more than €200 million designed and constructed under public-private partnership that do not benefit from public sinking-funds. The contracting party is granted a tax credit that can be used for corporate income taxes and regional tax on productive activity; in addition, an exemption has been granted for the payment of the concession fee to the extent necessary to reach the break-even point.

• Financed development contracts with programmes in the manufacturing and agro-industrial sector for an amount of €150 million.

COMPETITION

RECOMMENDATION 6. Ensure the proper implementation of the measures aiming at market opening in the services sector. Remove remaining restrictions in professional services and foster market access for instance in the provision of local public services where the use of public procurement should be advanced (instead of direct concessions). Pursue deployment of the measures taken to improve market access conditions in network industries, in particular by setting- up the Transport Authority as a priority. Upgrade infrastructure capacity with focus on energy interconnections, intermodal transport and high-speed broadband in telecommunications, also with a view to tackling the North-South disparities.

• Appropriated a total of €5 million for the functioning of the Transport Authority. As is the case with the oversight authorities in other sectors, the operators of the infrastructures and regulated services will be required to pay an annual fee of up to one-thousandth of revenues. The new authority, which will be headquartered in Turin, will have as many as 80 employees, one-half of whom will come from other PAs.

• Launched a plan known as ‘Destinazione Italia’ in order to eliminate bureaucratic obstacles and foster inward investment by foreign investors. The plan contains regulatory and technical changes that will be implemented once the public consultation is complete.

• Approved a legislative bill for the ratification and execution of an agreement between Italy and France for the design, construction and operation of the new Turin-Lyon high-speed rail line.

• Approved the Infrastructure Plan containing measures for more than €3 billion. With the ‘Work Site Release’ regulations, the Ministry of Infrastructure and Transportation has set up a €2 billion fund (to be utilised over the 2013-2017 four-year period) to allow for carrying on operations of work sites for projects already underway and/or the finalization of contracts for designing new projects.

22 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY

• Made operational the ‘6,000 Bell-Towers’ project, regarding infrastructure projects involving the renovation and building of public offices, including the adoption of measures to fix damages from earthquakes, as well as improvements to roads and telecommunications networks.

• Completed the separation of Terna (the company operating the nation’s electricity network) and Snam (the natural gas network).

• The communications authority has given its preliminary approval to the spin-off from Telecom Italia of the telecommunications network. The approval will be followed by market analysis that will involve all telecommunications providers. The plan for setting up a separate company for the network is designed to ensure equal treatment to all telecommunications providers in the use of the fixed telecommunications infrastructure.

• Introduced in September the forward market for natural gas (MTGAS), which operates alongside the balancing and trading platforms, and the spot market (day-ahead and infraday markets). Such markets facilitate the purchase and sale of quantities of natural gas at competitive and transparent prices.

• Charged the Energy Markets Manager (GME) with the development of (i) an oil logistics market platform to facilitate the trading of logistic capacities in the near, medium and long term, and (ii) a wholesale market platform for petroleum products to favour the trading of liquid petroleum products used for automotive vehicles. The measure is aimed at reinforcing national legislation on the subject of emergency oil stocks, and at promoting the level of competition in the petroleum industry, thus broadening the opportunities for offering and procuring logistics services and petroleum products.

• Published the fifth tender for the continuation of the National Broadband Plan in the Regions of Abruzzo, Emilia-Romagna, Lazio, Lombardia, Marche, Piemonte, Puglia, Toscana, Umbria and Veneto. The plan is co-financed by the Ministry of Economic Development and the Regions involved, including through the use of EU funds. Altogether, the works are worth more than €95 million and call for investment of more than €122 million, including the costs of passage through existing infrastructures, for enabling the supply of broadband services. The project contemplates the construction of approximately 4,000 kilometres of fibre optic network in more than 500 municipal and suburban areas, mostly in very rural areas and productive districts.

• Initiated tenders worth more than €900 million (inclusive of €237 million of private tenders) for projects to contribute to eliminating the digital divide (at least 2 mbps for every citizen) and to accelerate development of the ultra-fast broadband (from 30 mbps to 100 mbps) for around 40 per cent of the population of Basilicata, Calabria, Campania, Molise and Sicily. More than €347 million has flowed into the project as a result of the reconfiguring of programmes co-financed through the Cohesion Action Plan.

• Approved a legislative bill for the ratification and execution of an agreement among Albania, Greece and Italy regarding the new Trans-Adriatic Pipeline (TAP). The TAP will make it possible to increase the security of supply, as well as to diversify the sources and routes through which gas is obtained. In addition, it will lead to increases in gas supply and the number of suppliers competing on the Italian and European markets, with benefits to consumers and businesses.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

• Finalized a €570 million financing contract in July 2013 between the European Investment Bank and Terna, the company operating the nation’s electricity network. The financing will contribute to Terna’s 2012-2016 five-year business plan (valued in excess of €1.0 billion) for reinforcing the electricity transmission network in Italy.

• Enacted the ‘Value of Culture’ decree to facilitate the renewal of artistic and cultural heritage sites, including with private-sector involvement.

• Ratified the decree reforming the traffic laws.

24 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. EUROPEAN COUNCIL RECOMMENDATIONS TO ITALY

FOCUS

Status of implementation of the measures and automatic applicability

The Government has continued the work of implementing the legislation passed by preceding administrations. More specifically, from 27 April 2013 (the date on which the previous Government’s mandate ended) to 15 September 2013, the percentage of implementation of the previous Government’s programmes rose by 18.6 per cent (from 32 per cent to 37.9 per cent). The number of the initiatives adopted rose by 53 (from 282 to 335).

As of 15 September 2013, based on consultations of the Official Gazette of the Republic of Italy and the responses supplied by the administrations involved, 335 measures had been implemented by the administrations involved (217 already published in the Official Gazette, 6 whose publication is forthcoming, and 112 whose publication in the Official Gazette is not required); which equals 38 per cent of the foreseen implementing provisions.

Of the remaining 548 measures, around 60 per cent (324 measures) do not have a deadline for adoption, and 35 per cent (189 measures) expired the deadline for their implementation (as of 15 September 2013). It is nonetheless worth noting that, of the 189 measures that expired, some 25 were contingent or otherwise rendered irrelevant by subsequent legislation that incorporated them into primary laws and regulations certain stipulations that had been secondary laws and regulations in their original form; and 35 were defined in their essential contents by the proposing ministry and are currently under consideration by the ministries that must express their agreement or by external institutions that must express their opinion or pending in Parliament for the supporting judgement.

From 28 April 2013, the date on which the current Government took up its mandate, to 15 September 2013, the following were published in the Official Gazette of the Republic of Italy:

• 6 laws converting 6 decree-laws approved by the Council of Ministers;

• 6 decree-laws, including 5 to be converted into law and 1 that expired (Decree-Law no. 72/2013 whose provisions were incorporated in full into Decree-Law 69/2013 converted into Law no. 98/2013);

• 10 legislative orders already initiated by the previous Government: 3 laws converting decree-laws, 6 laws (inclusive of 4 ratifications) and 1 legislative decree;

• 1 law drafted by Parliament.

According to the analyses, the aforementioned legislation considered as a whole will require 265 second-level implementation decrees to be issued by the central administrations. Such decrees are inclusive of measures that have an express term for their adoption, measures without a deadline, and potential measures (measures whose adoption is left up to the discretion of the administrations or subordinated to the manifestation of specific conditions).

From the analysis of the measures by individual law, it is noted that about one-third of measures came from: the ‘Decreto Fare’, Law No. 98/2013 converting Decree-Law No. 69/2013 (89 measures, or 34 per cent of the total of 265 contemplated); Decree-Law No. 101/2013 outlining urgent measures for streamlining the PA (31 measures, or 12 per cent); Law No. 64/2013 of conversion of the Decree-Law No. 35/2013 outlining urgent measures for the payment of the past-due commercial debts of the PA (24 measures, or 8 per cent); Decree-Law No. 104/2013 outlining urgent measures for education, universities and research (22 measures, or 8 per cent); and ‘Labour Decree’, Law No. 99/2013 converting Decree-Law No. 76/2013 (21 measures, or 9 per cent).

The remaining legislation provides for less than 20 implementation decrees. As of 15 September, based on consultation of the Official Gazette, the following have been adopted: 6 decrees related to Law No. 64/2013; 4 decrees implementing Law no. 98/2013; 2 decrees to implement each of the following: Laws No. 71/2013, No. 89/2013 and No. 99/2013; and 1 decree related to Law No. 85/2013.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

For the aforementioned legislation, the percentages of adoption are therefore equal to 50 per cent for Law No. 85/2013; 25 per cent for Law No. 64/2013 and Law No. 89/2013, respectively; 12.5 per cent for Law No. 71/2013; 9.5 per cent for Law No. 99/2013; and 4.5 per cent of the Law No. 98/2013.

For the remaining legislation, the status of implementation remains zero; at present, 19 pieces of legislation have expired and not been adopted: 5 contemplated by Law No. 64/2013 and Law No. 98/2013, respectively; 4 related to Law No. 71/2013; 3 related to Law No. 99/2013; and 1 each related to Law No. 85/2013 and Law No. 89/2013, respectively.

Automatic applicability

For a complete evaluation of the degree of implementation of legislation approved by the Government, it is useful to distinguish between laws whose application is automatic, which thus do not require any implementation provisions on the part of the ministries, and laws that require acts of secondary legislation for displaying their effects.

The automatically applicable laws generally cover the broadest segment of all of the legislation, compared with those requiring implementation decrees.

In this regard, the Government’s Programme Office, which is a unit of the Office of the Prime Minister, has analysed all decree-laws adopted and converted into law by the current Government which, with their definitive nature, allow for estimating the extent of certain and definite automatic application.

The most substantial legislation, among the laws examined for this purpose, is Law No. 98/2013, which represents the conversion of Decree-Law No. 69/2013, the ‘Decreto Fare’, of which Title III (measures for improving the efficiency of the justice system) has 6 of 9 chapters that have a 100 per cent rate of automatic applicability.

For the purpose of properly identifying the laws whose effectiveness is conditioned on an implementation decree at the administrative level, it is worth emphasising that it is not sufficient to use the criterion of the mere reference to the adoption of a secondary level implementation decree, or in any event, to an administrative act not having any legally binding nature, but it is necessary to identify the relationship of presupposition between the measure formally provided and the law to which this type of measure makes reference, so as to exclude, without uncertainty, their status as automatically applicable measures.

The percentage estimated for each single law is thus the following:

• Law No. 85/2013: 5 articles, 19 paragraphs, including 17 with automatic application (89 per cent);

• Law No. 89/2013: 3 articles, 27 paragraphs, including 16 with automatic application (59 per cent);

• Law No. 90/2013: 22 articles, 47 paragraphs, including 42 with automatic application (89 per cent);

• Law No. 98/2013: 123 articles (subdivided into 3 titles and 16 chapters), 483 paragraphs, including 374 with automatic application (77 per cent);

• Law No. 99/2013 – 15 articles (subdivided into 3 titles), 151 paragraphs, including 124 with automatic application (82 per cent).

Hence, on average, 79 per cent of the laws examined are automatically applicable measures.

26 MINISTERO DELL’ECONOMIA E DELLE FINANZE

IV. PUBLIC FINANCE

IV.1 PUBLIC FINANCE FRAMEWORK

Since its formation, the Government has taken action to counter the effects of the crisis and favour economic recovery, acknowledging the problems connected with the structural gaps in competitiveness, the lack of liquidity, and the weakness of domestic demand.

The public finance estimates presented in the Economic and Financial Document (EFD) in April already included the impact of the measures to accelerate the payment of the Public Administration’s (PA) arrears to its suppliers as legislated through an urgent decree enacted before the publication of the EFD¹.

The measures taken since the publication of the EFD have been designed so as to have a substantially neutral impact on the budget, with the financial coverage originating in the legislation itself or coming from the restructuring of resources to make them more efficient and growth-oriented (see section 2 of this chapter for an analysis of the legislation enacted in 2013).

Measures to support the purchasing power and income of households include the refinancing of exceptional social safety nets and, in anticipation of the overall reform of taxation on real property, the suspension and subsequent cancellation of the first instalment of the single municipal tax (IMU) on the primary dwelling (excluding luxury properties), farmland and rural buildings².

To focus on relaunching the economy and employment, and in view of the ratification of the EU Directive on the Energy Performance of Buildings³, the Government introduced tax breaks to favour upgrades and improvements to the energy efficiency of real estate, measures to enhance the value of buildings and promote the integration of renewable energy sources, as well as initiatives to relaunch the competitiveness of national industry through the technological development⁴, and projects for infrastructure and the construction sector.

Numerous measures, adopted in response to the EU Council’s Recommendations, have been finalised to streamline the ways individuals and businesses comply with administrative requirements, shorten the term of civil court proceedings, and support the flow of credit to productive activity⁵.

Additional initiatives have been adopted to promote employment (especially for young people) and social cohesion, and to ensure resources, through value-added taxes (VAT)⁶, for the country’s cultural and artistic heritage⁷, and the system of schools, universities and research facilities⁸.

¹  Decree-Law No. 35/2013 converted by Law No. 64/2013. Details of this decree are provided in the Report presented to Parliament in March 2013.

²  Decree-Law No. 54/2013 converted by Law No. 85/2013 and Decree-Law No. 102/2013.

³  EU Directive 2010/31/EU.

⁴  Decree-Law No. 63/2013, converted by Law No. 90/2013.

⁵  Decree-Law No. 68/2013, converted by Law No. 98/2013.

⁶  Decree-Law No. 76/2013 converted by Law No. 99/2013.

⁷  Decree-Law No. 91/2013.

⁸  Decree-Law No. 104/2013.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

Alongside the aforementioned measures, the Government has undertaken other legislative action to streamline the PA’s spending⁹.

All of these initiatives and actions are reflected in the development of public finance framework presented herein. The general government account based on unchanged policies for the years of 2013-2107 is thus updated to reflect: the most recent economic trends and, growth prospects, the legislation enacted; and the results of monitoring activity.

In 2013, the net borrowing based on unchanged legislation could reach 3.1 per cent of GDP without any intervention, which would exceed the figure indicated in the EFD by 0.2 percentage points. The increase in the deficit results from the trend of revenues, which reflect a less favourable GDP growth than that forecast in the EFD. Because of their intensity and their joint adoption in a number of highly interdependent countries, fiscal consolidation policies have contributed to reducing economic activity in Italy to a level far below expectations; the fiscal multipliers proved to be much more reactive than initially estimated by leading international institutions.

Conversely, the trend of expenditure is essentially in line with the April estimates.

The ratio of final revenues to GDP decreases from 48.1 per cent in 2012 to 47.3 per cent in 2017. Final expenditures, net of interest, benefit from: i) the rebalancing of the accounts, carried out in previous years, with increasing effects of containment, and ii) the streamlining of spending over the long-term as a result of the inauguration of the spending review. Thanks to these measures, final primary expenditure as a share of GDP falls by 2.8 percentage points, from 45.6 per cent in 2012 to 42.8 per cent in 2017; in particular, current expenditure as a share of GDP, net of interest, fall by 2.2 percentage points. Interest expenditure falls from 5.5 per cent of GDP in 2012 to 5.2 per cent in 2017. This scenario assumes that spreads between the yields on 10-year Italian government securities and those on comparable German securities will gradually contract to 200 basis points in 2014, 150 basis points in 2015, and 100 basis points in 2016 and 2017¹⁰.

The Government intends to adopt timely initiatives in order to keep the deficit-to-GDP ratio within the 3.0 per cent threshold in 2013.

In the following years, the net borrowing based on the policy scenario is expected to fall gradually, from 2.5 per cent of GDP in 2014 to 0.1 per cent in 2017, a figure that is lower than the EFD estimate.

⁹  Decree-Law No. 101/2013.

¹⁰  The computation of interest expenditure takes into account the fact that State properties have not been transferred to real estate funds, and subsequently re-leased in 2013.

28 MINISTERO DELL’ECONOMIA E DELLE FINANZE

IV. PUBLIC FINANCE

TABLE IV.1a: GENERAL GOVERNMENT ACCOUNT AT UNCHANGED LEGISLATION (in € mn)

	2012		2013		2014		2015		2016		2017
EXPENDITURE
Compensation for employees		165,366		164,172		161,948		163,666		163,908		163,929
Intermediate consumption		132,279		129,580		129,730		132,263		135,752		138,659
Welfare benefits		311,413		320,549		330,128		338,871		347,564		356,435
Pensions		249,471		255,200		262,671		269,764		277,104		284,785
Other welfare benefits		61,942		65,349		67,457		69,107		70,460		71,650
Other current expenditure		57,480		58,451		58,806		59,040		58,738		59,401
Total current expenditure, net of interest		666,538		672,752		680,612		693,840		705,962		718,424
Interest expenditure		86,717		83,949		86,087		88,827		91,858		92,500
Total current expenditure		753,255		756,701		766,699		782,667		797,819		810,924
of which:         Healthcare expenditure		110,842		111,108		113,029		115,424		117,616		119,789
Total capital expenditure		47,827		50,918		45,411		45,639		42,637		43,147
Gross fixed investments		29,224		28,194		28,884		29,274		29,219		28,957
Capital account contributions		17,487		21,670		14,746		14,709		12,349		13,112
Other transfers		1,116		1,054		1,782		1,656		1,069		1,078
Total final expenditure, net of interest		714,365		723,670		726,023		739,479		748,599		761,571
Total final expenditure		801,082		807,618		812,110		828,306		840,457		854,071
REVENUES
Total tax revenues		472,164		472,313		487,439		501,887		515,679		530,845
Direct taxes		237,235		233,827		239,951		243,503		250,229		257,809
Indirect taxes		233,554		235,287		246,560		257,646		264,701		272,275
Capital account taxes		1,375		3,199		928		738		749		761
Social security contributions		216,669		218,167		221,149		228,017		234,394		240,505
Actual contributions		212,422		213,853		216,775		223,557		229,874		235,926
Deemed contributions		4,247		4,314		4,374		4,460		4,520		4,579
Other current revenues		59,649		61,536		61,147		62,723		64,018		65,424
Total current revenues		747,107		748,816		768,807		791,888		813,341		836,013
Non-tax capital account revenues		4,967		6,880		5,098		5,189		5,068		5,097
Total final revenues		753,449		758,895		774,833		797,815		819,158		841,871
Memo item: Tax burden		44.0		44.3		44.2		44.0		43.7		43.3
BALANCES
Primary balance		39,084		35,226		48,810		58,336		70,560		80,300
(% of GDP)		2.5		2.3		3.0		3.5		4.1		4.5
Current account balance		-6,148		-7,885		2,108		9,221		15,522		25,089
(% of GDP)		-0.4		-0.5		0.1		0.6		0.9		1.4
Net borrowing		-47,633		-48,723		-37,277		-30,491		-21,298		-12,200
(% of GDP)		-3.0		-3.1		-2.3		-1.8		-1.2		-0.7
Nominal GDP (x 1.000)		1,565.9		1,557.3		1,602.9		1,660.7		1,718.4		1,fs779.6

Note: Revenues forecasts consider the continuation of the experimental taxation of real property instituted by Decree-Law No. 201/2011 over the entire forecast period.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

TABLE IV.1b: GENERAL GOVERNMENT ACCOUNT AT UNCHANGED LEGISLATION (% of GDP)

	2012		2013		2014		2015		2016		2017
EXPENDITURE
Compensation for employees		10.6		10.5		10.1		9.9		9.5		9.2
Intermediate consumption		8.4		8.3		8.1		8.0		7.9		7.8
Welfare benefits		19.9		20.6		20.6		20.4		20.2		20.0
Pensions		15.9		16.4		16.4		16.2		16.1		16.0
Other welfare benefits		4.0		4.2		4.2		4.2		4.1		4.0
Other current expenditure		3.7		3.8		3.7		3.6		3.4		3.3
Total current expenditure, net of interest		42.6		43.2		42.5		41.8		41.1		40.4
Interest expenditure		5.5		5.4		5.4		5.3		5.3		5.2
Total current expenditure		48.1		48.6		47.8		47.1		46.4		45.6
of which:         Healthcare expenditure		7.1		7.1		7.1		7.0		6.8		6.7
Total capital expenditure		3.1		3.3		2.8		2.7		2.5		2.4
Gross fixed investments		1.9		1.8		1.8		1.8		1.7		1.6
Capital account contributions		1.1		1.4		0.9		0.9		0.7		0.7
Other transfers		0.1		0.1		0.1		0.1		0.1		0.1
Total final expenditure, net of interest		45.6		46.5		45.3		44.5		43.6		42.8
Total final expenditure		51.2		51.9		50.7		49.9		48.9		48.0
REVENUES
Total tax revenues		30.2		30.3		30.4		30.2		30.0		29.8
Direct taxes		15.1		15.0		15.0		14.7		14.6		14.5
Indirect taxes		14.9		15.1		15.4		15.5		15.4		15.3
Capital taxes		0.1		0.2		0.1		0.0		0.0		0.0
Social security contributions		13.8		14.0		13.8		13.7		13.6		13.5
Actual contributions		13.6		13.7		13.5		13.5		13.4		13.3
Deemed contributions		0.3		0.3		0.3		0.3		0.3		0.3
Other current revenues		3.8		4.0		3.8		3.8		3.7		3.7
Total current revenues		47.7		48.1		48.0		47.7		47.3		47.0
Non-tax capital account revenues		0.3		0.4		0.3		0.3		0.3		0.3
Total final revenues		48.1		48.7		48.3		48.0		47.7		47.3
Memo item: Tax burden		44.0		44.3		44.2		44.0		43.7		43.3
BALANCES
Primary balance		2.5		2.3		3.0		3.5		4.1		4.5
Current account balance		-0.4		-0.5		0.1		0.6		0.9		1.4
Net borrowing		-3.0		-3.1		-2.3		-1.8		-1.2		-0.7

30 MINISTERO DELL’ECONOMIA E DELLE FINANZE

IV. PUBLIC FINANCE

TABLE IV.1c: GENERAL GOVERNMENT ACCOUNT AT UNCHANGED LEGISLATION (% change)

	2013		2014		2015		2016		2017
EXPENDITURE
Compensation for employees		-0.7		-1.4		1.1		0.1		0.0
Intermediate consumption		-2.0		0.1		2.0		2.6		2.1
Welfare benefits		2.9		3.0		2.6		2.6		2.6
Pensions		2.3		2.9		2.7		2.7		2.8
Other welfare benefits		5.5		3.2		2.4		2.0		1.7
Other current expenditure		1.7		0.6		0.4		-0.5		1.1
Total current expenditure, net of interest		0.9		1.2		1.9		1.7		1.8
Interest expenditure		-3.2		2.5		3.2		3.4		0.7
Total current expenditure		0.5		1.3		2.1		1.9		1.6
of which:         Healthcare expenditure		0.2		1.7		2.1		1.9		1.8
Total capital expenditure		6.5		-10.8		0.5		-6.6		1.2
Gross fixed investments		-3.5		2.4		1.4		-0.2		-0.9
Capital account contributions		23.9		-32.0		-0.2		-16.0		6.2
Other transfers		-5.6		69.0		-7.0		-35.4		0.8
Total final expenditure, net of interest		1.3		0.3		1.9		1.2		1.7
Total final expenditure		0.8		0.6		2.0		1.5		1.6
REVENUES
Total tax revenues		0.0		3.2		3.0		2.7		2.9
Direct taxes		-1.4		2.6		1.5		2.8		3.0
Indirect taxes		0.7		4.8		4.5		2.7		2.9
Capital account taxes		132.7		-71.0		-20.5		1.5		1.6
Social security contributions		0.7		1.4		3.1		2.8		2.6
Actual contributions		0.7		1.4		3.1		2.8		2.6
Deemed contributions		1.6		1.4		2.0		1.3		1.3
Other current revenues		3.2		-0.6		2.6		2.1		2.2
Total current revenues		0.2		2.7		3.0		2.7		2.8
Non-tax capital account revenues		38.5		-25.9		1.8		-2.3		0.6
Total final revenues		0.7		2.1		3.0		2.7		2.8

The fiscal consolidation process undertaken, as shown by the public finance outcomes for 2012, and the estimated trends for 2013 and subsequent years, has made it possible to close out the Excessive Deficit Procedure initiated with respect to Italy. It is an important result, but Italy still must maintain a rigorous approach. The Government believes that the achievement of a balanced budget in structural terms remains an essential condition for ensuring sustainability of the public debt and maintaining the confidence of both businesses and the financial markets. The policy scenario outlines a convergence path towards this target, with the balanced position achieved as from 2015, in line with the new Constitutional requirement and European rules.

MINISTERO DELL’ECONOMIA E DELLE FINANZE 31

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

TABLE IV.2a: PUBLIC FINANCE AGGREGATES BASED ON POLICY SCENARIO (% of GDP)

		2012		2013		2014			2015		2016		2017
NET BORROWING	(EFD Update)		-3.0		-3.0		-2.5	(3)		-1.6		-0.8		-0.1
	(2013 EFD)		-3.0		-2.9		-1.8			-1.5		-0.9		-0.4
INTEREST	(EFD Update)		5.5		5.4		5.4			5.3		5.3		5.1
	(2013 EFD)		5.5		5.3		5.6			5.8		6.0		6.1
PRIMARY BALANCE	(EFD Update)		2.5		2.4		2.9			3.7		4.5		5.1
	(2013 EFD)		2.5		2.4		3.8			4.3		5.1		5.7
STRUCTURAL NET	(EFD Update)		-1.3		-0.4		-0.3			0.0		0.0		0.0
BORROWING (1)	(2013 EFD)		-1.2		0.0		0.4			0.0		0.0		0.0
DEBT (incl. Euro Area aid and	(EFD Update)		127.0		132.9		132.8			129.4		125.0		120.1
PA’s past-due payables) (2)	(2013 EFD)		127.0		130.4		129.0			125.5		121.4		117.3
DEBT (net of Euro Area aid) (2)	(EFD Update)		124.3		129.3		129.0			125.7		121.4		116.6
	(2013 EFD)		124.3		126.9		125.2			121.8		117.8		113.8

(1) Cyclically adjusted and net of one-off measures.

(2) Inclusive or net of Italy’s portion of the EFSF loans to Greece and the ESM programme. For the year of 2012, the amount of such loans to Member States of the EMU (bilateral or through the EFSF) was €36.932 million. The estimates for 2014-2017 include the proceeds from privatisations and real property sales amounting to approximately 0.5 percentage points of GDP per year. The current scenario assumes that spreads between the yields on 10-year Italian government securities and those on comparable German securities will gradually contract to 200 basis points in 2014, 150 basis points in 2015, and 100 basis points in 2016 and 2017.

(3) The use of 0.2 percentage points of the fiscal balance in 2014 (difference between the balance at unchanged legislation and the balance based on the policy scenario) is explained by the intention to finance several capital expenditure items not included in the balance at unchanged legislation.

TABLE IV.2b: CASH BALANCES BASED ON POLICY SCENARIO (% of GDP)

	2013		2014		2015		2016		2017
STATE SECTOR BALANCE		-5.3		-3.6		-1.5		-0.3		0.4
PUBLIC SECTOR BALANCE		-5.5		-3.5		-1.7		-0.8		-0.2

The deterioration of economic growth in 2013 compared with the April EFD forecasts has a significant impact on potential growth. Based on the estimation methodology agreed at the European level, potential GDP is projected to contract by 0.3 per cent in 2013, especially due to the negative contribution of the productive factors, labour and capital.

In spite of this, the Government is committed to maintaining the deficit-to-GDP ratio at 3.0 per cent for 2013, in line with the European commitments. Associated with this figure is a structural deficit equal to 0.4 per cent of GDP in 2013. The improvements in the structural balance in 2013 (equal to 0.9 percentage points of GDP) and in the average obtained over the 2012-2013 two-year period (1.6 percentage points of GDP) are well above those required of the countries that remain far from the Medium Term Objective (MTO) (0.5 percentage points of GDP per year). Finally, it should be noted that the payments of the PA’s past-due debts due to capital expenditure as agreed with the European Union, will account for approximately 0.5 percentage points of GDP for 2013.

32 MINISTERO DELL’ECONOMIA E DELLE FINANZE

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TABLE IV.3: CYCLICALLY ADJUSTED PUBLIC FINANCE (% of GDP)

	2011		2012		2013		2014		2015		2016		2017
GDP growth rate at constant prices		0.4		-2.4		-1.7		1.0		1.7		1.8		1.9
Net borrowing		-3.8		-3.0		-3.0		-2.5		-1.6		-0.8		-0.1
Interest expenditure		5.0		5.5		5.4		5.4		5.3		5.3		5.1
Potential GDP growth		0.3		-0.6		-0.3		0.1		0.3		0.4		0.6
Contribution of factors to potential growth:
Labour		0.2		-0.5		-0.2		0.1		0.1		0.1		0.2
Capital		0.2		0.0		-0.1		0.0		0.0		0.1		0.2
Total Factor Productivity		-0.1		-0.1		0.0		0.1		0.1		0.2		0.3
Output gap		-1.7		-3.4		-4.8		-4.0		-2.7		-1.4		-0.2
Cyclical component of the budget balance		-0.9		-1.9		-2.6		-2.2		-1.5		-0.8		-0.1
Cyclically adjusted budget balance		-2.9		-1.2		-0.4		-0.3		-0.1		0.0		0.0
Cyclically adjusted primary surplus		2.1		4.4		5.0		5.1		5.2		5.3		5.2
One-off measures		0.7		0.1		0.0		0.0		-0.1		0.0		0.0
Budget balance net of one-off measures		-4.5		-3.1		-3.0		-2.5		-1.5		-0.8		-0.1
Cyclically adjusted budget balance net of one-off measures		-3.6		-1.3		-0.4		-0.3		0.0		0.0		0.0
Cyclically adjusted primary surplus net of one-off measures		1.4		4.3		5.0		5.1		5.3		5.3		5.2
Change in budget balance net of one-off measures		-0.2		-1.3		-0.9		-0.1		-0.3		0.0		0.0
Change in cyclically corrected budget balance net of one-off measures		-0.2		-2.3		-0.9		-0.1		-0.3		0.0		0.0

Note: Slight discrepancies, if any, are due to rounding.

TABLE IV.4: ONE-OFF MEASURES (in € mn)

			FORECASTS
	2012		2013		2014		2015		2016		2017
Total one-off measures		1,511		403		-244		-2,288		-239		536
% of GDP		0.1		0.0		0.0		-0.1		0.0		0.0
- a ) Revenues		2,122		390		275		10		0		0
% of GDP		0.1		0.0		0.0		0.0		0.0		0.0
Various substitutive taxes		770		360		255		0		0		0
Alignment of book values to IAS		643		0		0		0		0		0
EU subsidies for earthquakes in Abruzzo and Emilia		670		0		0		0		0		0
Amnesty for illegal building: State		39		30		20		10		0		0
- b) Expenditure		-1,820		-1,487		-1,969		-3,748		-1,289		-364
% of GDP		-0.1		-0.1		-0.1		-0.2		-0.1		0.0
Dividends to be paid		-133		-140		-70		0		0		0
Interventions due to national disasters		-1,585		-1,285		-1,899		-3,748		-1,289		-364
Tax offsets for local broadcasters		-103		-62		0		0		0		0
- c ) Disposal of real property assets		1,210		1,500		1,450		1,450		1,050		900
% of GDP		0.1		0.1		0.1		0.1		0.1		0.1
Breakdown of one-off measures by sub-sector
Central Government		244		-847		-1,494		-3,438		-1,139		-264
Social-Security Funds		372		450		450		450		300		300
Local Government		895		800		800		700		600		500
GDP (x 1,000)		1,565.9		1,557.3		1,602.9		1,660.7		1,718.4		1,779.6

Note: Slight discrepancies, if any, are due to rounding.

MINISTERO DELL’ECONOMIA E DELLE FINANZE 33

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

Turning to 2014, the budget balance will be kept below 3.0 per cent of GDP, even when considering the expansionist effects of the Government’s planned measures (equal to approximately 0.3 per cent of GDP). In structural terms, the budget balance should improve from the 2013 figure by approximately 0.1 percentage points. In the period 2015-2017, as a result of other consolidation measures planned by the Government, the structural balance should be in line with the MTO, and should thus arrive at a balanced position.

The debt-to-GDP ratio based on the policy scenario is projected to equal 132.9 per cent at the end of 2013, a level that is approximately 2.5 percentage points higher than the EFD forecast. Nonetheless, the policy scenario confirms the declining trend in the debt-to-GDP ratio starting in 2014, with an increasing rate of reduction each year, until falling to 120.1 per cent in 2017 (approximately 2.8 percentage points higher than forecasted in the EFD). These estimates remain in line with those in the EFD, at least with reference to the profile of the series, although the overall level of the debt-to-GDP ratio is between 2.5 percentage points (in 2013) and 3.9 percentage points (in 2014 and 2015) higher. The new forecast also incorporates a lower estimate of the annual proceeds from privatisations (0.5 per cent of GDP) that considers the instruments created for proceeding with the valuation and subsequent sale of State property, including both buildings and shareholdings.

More specifically, the increase contemplated for 2013 is attributable almost equally to a lower estimate of nominal GDP growth for the year (-1.3 percentage points) and a higher-than-expected level of debt (+1.2 percentage points), the latter of which is partially due to a higher volume of payments of the PA’s past-due debts, and partially due to the combination of lower revenues from privatisations and a trend of the state-sector borrowing requirement (net of the payments of the PA's debt) that is slightly higher than that assumed in April.

For 2014, the 3.9 percentage point increase from the EFD estimates is primarily due to an increase in the debt (an impact on the forecast of approximately 2.2 percentage points) rather than the lower growth estimates (an impact of approximately 1.7 points). In addition to the effect of the carryover from the previous year, the debt is impacted, amongst other things, by the aforementioned downward revision of the revenues from privatisations and a borrowing requirement that is higher than the EFD estimate by approximately 0.6 percentage points. A similar increase from the EFD estimate is predicted for 2015, which in this case as well, is primarily attributable to the forecast level of the debt rather than the more modest forecast of economic growth, even though the impact of the carryover from the preceding years becomes increasingly significant. For 2016 and 2017, the increases from the EFD forecasts become gradually more modest, while the factors to which the increases can be attributed remain essentially unchanged.

Separating the effects of the financial support (already disbursed or to be disbursed) to the Euro Area countries, the debt-to-GDP ratio should remain below 130 per cent for 2013, before declining to 116.6 per cent in 2017, with a rather significant trend of reduction in line with that estimated in the EFD in April.

34 MINISTERO DELL’ECONOMIA E DELLE FINANZE

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TABLE IV.5: GENERAL GOVERNMENT DEBT BY SUB-SECTOR

(in € mn and % of GDP)

	2012		2013		2014		2015		2016		2017
Level net of Euro Area financial support (1)
General government		1,945,964		2,014,034		2,067,341		2,087,083		2,086,855		2,075,371
in %GDP		124.3		129.3		129.0		125.7		121.4		116.6
Central Government (2)		1,838,856		1,905,697		1,958,025		1,977,038		1,976,380		1,964,605
Local Government (2)		131,780		133,009		133,988		134,717		135,147		135,439
Social Security Funds(2)		149		149		149		149		149		149
Level including Euro Area financial support (1)
General government		1,988,629		2,069,470		2,128,800		2,148,715		2,148,678		2,137,425
in %GDP		127.0		132.9		132.8		129.4		125.0		120.1
Central Government (2)		1,881,521		1,961,133		2,019,484		2,038,670		2,038,203		2,026,658
Local Government (2)		131,780		133,009		133,988		134,717		135,147		135,439
Social-Security Funds (2)		149		149		149		149		149		149

¹⁾ Inclusive or net of Italy’s portion of the EFSF loans to Greece and the ESM programme. For the year of 2012, the amount of such loans to Member States of the EMU (bilateral or through the EFSF) was €36.932 million. The estimates for 2014-2017 include the proceeds from privatisations and real property sales amounting to approximately 0.5 percentage points of GDP per year. The current scenario assumes that spreads between the yields on 10-year Italian government securities and those on comparable German securities will gradually contract to 200 basis points in 2014, 150 basis points in 2015, and 100 basis points in 2016 and 2017.

²⁾ Inclusive of non-consolidated interest.

MINISTERO DELL’ECONOMIA E DELLE FINANZE 35

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

FOCUS

The debt rule

The debt rule introduced into the Stability and Growth Pact with the Six Pack and ratified by Law no. 243/2012 which implemented the constraint of a balanced budget in structural terms as sanctioned by the Constitution, provides that the debt-to-GDP ratio is to decrease each year by at least one-twentieth of the difference with respect to 60 per cent of GDP calculated on the average for the preceding three years.

The application of this criterion makes it possible to identify unequivocally a debt benchmark level (backward-looking benchmark). However, the Stability Pact also states that observance of the rule must be evaluated by taking into account the impact of the economic cycle. Accordingly, the cyclically adjusted debt of the three preceding years must be compared with the backward-looking benchmark (cyclically adjusted criterion). Finally, the Stability Pact also considers the debt rule to be respected when fiscal forecasts indicate that, in the two years after the year in which the rule is to be applied, the differential of the debt with respect to 60 per cent of GDP is decreased by an average of one-twentieth against the three preceding years (forward-looking debt benchmark).

The violation of the debt rule is thus evaluated by considering the benchmark from the standpoint of three different criteria: backward-looking benchmark, the impact of the economic cycle, and forward-looking benchmark. The proceedings for a breach of the rule will be opened only if all three criteria are violated.

In the case of the Member States recently subject to the Excessive Deficit Procedure, a three-year transition period has been established for the application of the debt rule, starting from the date of the cancellation of the excess deficit condition. Therefore, for Italy, which was released from the Excessive Deficit Procedure on the basis of 2012 data, the first assessment of the debt rule will be carried out in 2015.

In any event, convergence toward the more favourable benchmark must still be guaranteed during the three-year transition period. In this regard, the Stability Pact requires that the identification of a Minimum Linear Structural Adjustment (MLSA) for each year of the three-year transition period, which, if followed, will allow for respecting the debt rule as of the end of the transition period, thus closing any positive gap between the debt level and the more favourable benchmark. The MLSA derived from these criteria must be compared with the change in the structural balance (fiscal effort) programmed by the Government in each year of the transition period. Should the change in the structural balance exceed the MLSA’s positive value, there is no need for any additional adjustment.

For Italy, the debt-to-GDP ratio based on the policy scenario, inclusive of the sums involved to support Greece, the contributions to the EFSF and ESM and the amount of the portions of the payments of the PA’s past-due debt, increases from 127.0 per cent in 2012 to 129.4 per cent of GDP in 2015 and decreases to 120.1 per cent of GDP in 2017.

Based on the application of the formula agreed at a European level, the debt benchmark in the backward-looking configuration is 124.1 per cent of GDP, or 5.1 percentage points below the debt level forecast for 2015. In the forward-looking configuration, the benchmark is 122.3 per cent of GDP, or 2.2 percentage points above the debt level forecast for 2017. Finally, in correcting the years of 2013-2015 for effects of the economic cycle, the debt as of 2015 is 124.1 per cent of GDP, or practically in line with the level of the backward-looking benchmark. Italy thus complies with the debt rule, both in the forward-looking configuration and when considering the correction for the economic cycle.

On the basis of these projections, the MLSA is positive and equal to 0.1 percentage points of GDP only in 2013. However, the fiscal correction undertaken by the Government in 2013 (equal to 0.9 percentage points of GDP) is far above that required to respect the debt rule. In 2014 and 2015, the fiscal correction in structural terms, as planned by the Government, will be sufficient to guarantee the convergence of the debt’s trajectory toward the more favourable benchmark.

In order to measure the quality of the adjustment toward the benchmark, the chart below presents the isoquant of the possible combinations between the primary surplus (Y axis) and the differential between nominal GDP growth and the implicit interest rate (X axis) that allow for obtaining a debt-to-GDP ratio equal to the benchmark (124.1 per cent of GDP) in 2015 (i.e., the first year of the application of the debt rule), and n 2017 (forward-looking debt criterion).

36 MINISTERO DELL’ECONOMIA E DELLE FINANZE

IV. PUBLIC FINANCE

The charts show the points that identify the combination between primary surplus and the growth/interest differential in 2012, 2013, 2015 (with and without the correction for the economic cycle) and 2017. The charts confirm that the Government’s budget targets of the policy scenario will fully comply with the debt rule.

MINISTERO DELL’ECONOMIA E DELLE FINANZE 37

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

FOCUS

Medium/long-term trends in Italy’s pension system

The medium/long-term forecast of the pension expenditure-to-GDP ratio¹¹ takes into account assumptions on fertility, mortality, and net migration flows as derived from the scenario calculated by ISTAT with reference to 2011¹². For the 2013-2017 period, growth assumptions are consistent with those outlined in this document¹³.

The forecast, based on unchanged legislation, incorporates the effects of the measures contained in the reforms adopted in 2011¹⁴, as well as a three-year period adjustment (two-year period from 2021) of the transformation coefficients, and, with the same frequency, pension eligibility requirements as a function of life expectancy. Such adjustments take place through an administrative procedure that guarantees certainty for future revisions.

After growing over the 2008-2010 three-year period, attributable exclusively to the acute phase of the recession, the pension expenditure-to-GDP ratio is negatively impacted in subsequent years by the continuing recession, especially for 2012 and that expected for 2013, although mostly offset by more stringent requirements for pension eligibility in 2014-2015.

Starting in 2015-2016, in light of more favourable economic growth, the pension expenditure-to-GDP ratio is expected to decelerate significantly for a period of approximately 15 years, falling to 14.9 per cent around 2030. The decelerating trend reflects both the raising of minimum eligibility requirements for retirement and the introduction of the contributions system for calculating pensions.

In the 15 years thereafter, the impact of more pronounced negative demographic trends and the effects on pension amounts following the deferral of retirement will outweigh that of the legislated measures to contain pension expenditure. The growth of the pension expenditure-to-GDP ratio can thus be expected to continue until 2045, reaching a peak of 15.6 per cent. In the final part of the forecast period, the ratio decreases significantly to 13.9 per cent in 2060, following the completion of the shift from a mixed calculation system to a fully contributory system, as well as the progressive dwindling of pensions for those born in the baby boom.

¹¹ The medium/long-term trend of the pension expenditure-to-GDP ratio is presented pursuant to the implementation of the provisions of Article 1, Paragraph 5 of Law No. 35 of 1995.

¹² More specifically, the following are assumed: i) an increase in life expectancy between 2011 and 2060 of 6.7 years for men and 6.5 years for women, ii) a fertility rate that gradually converges to 1.6, and iii) a net flow of immigrants that goes from an annual average of approximately 280,000, during the first decade of the forecast, to an annual average of approximately 180,000 at the end of the forecast period. See, however, Istat (2011), http://demo.istat.it.

¹³ The average real growth rate of GDP is forecast to be around 1.5 per cent in the long term, whereas the employment rate increases by 9-10 percentage points for the 15-to-64-year age bracket compared with the figure as of 2010.

¹⁴ Including the reforms provided by Decree-Law No. 201/2011, converted with amendments by Law No. 214/2011 and the initiatives adopted thereafter in 2012 and 2013 aimed at further increasing the number of workers protected from the increase of the retirement requirements established by the aforementioned Decree-Law No. 201/2011.

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Estimates show how pension reforms undertaken in the past two decades can counterbalance the potential medium/long-term effects of demographic transition on public expenditure for pensions. Indeed, as highlighted in international surveys¹⁵, Italy, despite its less favourable demographics, presents an evolution in pension expenditure relative to GDP that is exactly the opposite of that forecasted for most European countries.

IV.2 MAIN PUBLIC FINANCE INITIATIVES ADOPTED IN 2013

In a context characterized by the July closure of the Excessive Deficit Procedure (opened in 2009), and the structural improvement of the public accounts, the Government has provided for the adoption of several urgent measures in 2013.

While the measures are mainly aimed at supporting the economy, employment and household income, the government adopted provisions that focus on the education system and the nation’s artistic and cultural heritage. In addition, other measures have been undertaken in continuity with the actions already undertaken in preceding years to streamline public expenditure.

Overall, the initiatives result in a change of approximately €7.3 billion in the PA’s net borrowing in 2013, entirely due to the settlement of the PA’s past-due debts, as provided by the decree-law adopted early this year¹⁶. For the following years, the initiatives bring about an improvement in net borrowing of approximately €1 billion per year in 2014 and 2015 and an improvement of approximately €700 million per year in the years thereafter (the impact of the individual measures is reported in the tables of the Appendix).

¹⁵  Economic Policy Committee-European Commission (2012), The 2012 Ageing Report: Economic and Budgetary Projections for the EU-27 Member States, 2010-2060. In this regard, note that the pension expenditure-to-GDP ratio for all of the EU countries grows on average by 1.6 percentage points during the 2010-2060 period, while, in Italy’s case, the ratio declines by 0.9 percentage points. This denotes, by this measure, a contained risk in terms of the impact of an ageing population on the sustainability of the public finances.

¹⁶  Decree-Law No. 35/2013, converted with amendments by Law No. 64/2013.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

As indicated in the Reports to Parliament in March and early September 2013, the borrowing requirement increases by approximately €26.4 billion in 2013 and €17.5 billion in 2014¹⁷ due to the settlement of the PA’s past-due debts as provided by the two subsequent decree-laws.

TABLE IV.6: CUMULATIVE IMPACT OF THE MEASURES ENACTED IN 2013 ON GENERAL GOVERNMENT NET

BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
Decree-Law No. 35/2013 (converted by Law No. 64/2013)		-7,370		670		571		567		570
Decree-Law No. 54/2013 (converted by Law No. 85/2013)		11		87		37		0		0
Decree-Law No. 63/2013 (converted by Law No. 90/2013)		19		26		0		0		0
Decree-Law No. 69/2013 (converted by Law No. 98/2013)		27		30		33		29		27
Decree-Law No. 76/2013 (converted by Law No. 99/2013)		0		0		5		66		116
Decree-Law No. 91/2013		0		6		1		4		4
Decree-Law No. 101/2013		0		3		3		3		3
Decree-Law No. 102/2013		11		98		264		64		-14
Decree-Law No. 104/2013		0		73		39		30		31
NET BORROWING		-7,302		994		953		764		738
% of GDP		-0.5		0.1		0.1		0.0		0.0
BORROWING REQUIREMENT		-26,351		-17,534		573		514		738
% of GDP		-1.7		-1.1		0.0		0.0		0.0

The total amount of the initiatives financed, as reported in the general government account, is equal to approximately €12.5 billion in 2013, more than €3 billion per year in 2014 and 2015, €2.5 billion in 2016 and €2 billion in 2017. Almost one-half of the resources to finance these measures stems from expenditure cuts during the planning period. Specifically, the resources are derived from: the spending rationalisation measures, with the careful reduction of the appropriations for several spending laws and the reduction of the funding earmarked for contracts to outsource services; the replanning of structural funds and certain infrastructure projects, in relation to their state of completion. Additional savings come from the revision of spending appropriations that can be redirected within the State budget. The streamlining of expenditures also includes measures to reduce outlays for official cars and for advisory services within the PA, and the optimisation of spending on public sector employment.

Additional revenues will be generated through: an increase in the excise taxes on alcoholic beverages, tobacco products, and mineral oils; measures regarding gaming; the revision of the maximum personal income tax deduction for expenditures on insurance premiums; an increase in VAT rates on food and beverage items sold through vending machines; and the abolition of lower VAT rates for the publishing industry. Additional resources come from the incremental VAT revenues connected to the payment of the PA’s past-due debts.

¹⁷  The payments were initially financed through Decree-Law No. 35/2013 and later, reinforced for the territorial entities, through Decree-Law No. 102/2013.

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TABLE IV.7: CUMULATIVE IMPACT OF THE 2013 BUDGET MEASURES ON GENERAL

GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
Gross budget (freeing up of resources)		5,240		4,162		4,333		3,259		2,808
Higher revenues		3,504		2,378		2,050		1,675		1,742
Lower expenditures		1,736		1,784		2,282		1,584		1,066
- current expenditures		760		683		889		624		567
- capital expenditures		976		1,101		1,393		960		499
Measures financed (use of funds)		12,541		3,168		3,379		2,495		2,070
Lower revenues		3,784		1,115		1,245		704		610
Higher expenditures		8,757		2,054		2,134		1,791		1,459
- current expenditures		1,320		1,256		1,184		970		998
- capital expenditures		7,437		798		950		820		461
Impact on net borrowing		-7,302		994		953		764		738
Net change in revenues		-280		1,263		805		971		1,131
Net change in expenditures		7,021		270		-148		207		393
- current expenditures		560		573		295		346		431
- capital expenditures		6,461		-303		-444		-139		-38

TABLE IV.8: CUMULATIVE IMPACT OF THE 2013 BUDGET MEASURES ON GENERAL

GOVERNMENT NET BORROWING, BY SUB-SECTOR (in € mn; including induced effects)

	2013		2014		2015		2016		2017
CENTRAL GOVERNMENT		2,144		1,630		1,191		1,152		986
- net change in revenues		1,615		1,511		944		1,095		1,103
- net change in expenditures		-529		-119		-248		-57		117
LOCAL GOVERNMENT		-9,109		-206		80		-238		-287
- net change in revenues		-2,198		-35		45		-51		-50
- net change in expenditures		6,911		-172		-35		186		237
SOCIAL-WELFARE ENTITIES		-337		-430		-318		-151		39
- net change in revenues		302		-213		-184		-72		78
- net change in expenditures		639		217		134		78		39
Impact on net borrowing		-7,302		994		953		764		738

The payment of the past-due debts and the abolition of the first IMU instalment, when broken down by sub-sector of the government, result in an increase in the local government balance, partially offset by the provisions that affect the central government.

The Government’s planned action to support economic recovery includes not only the settlement of the PA’s past-due debts, but also the resources allocated to restart or continue projects already underway and to finalize contracts for new public works¹⁸.

¹⁸  Decree-Law No. 69/2013 converted by Law No. 98/2013.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

Measures to support employment include: the refinancing of exceptional social safety nets¹⁹; the extension of fixed-term labour contracts so as to ensure continuity in the delivery of essential public services; and tax incentives for the hiring of young workers under full-time contracts²⁰.

In addition, a new safeguard measure has been adopted for workers who, in having lost their jobs prior to the most recent pension reform, have ended up without either a wage or a pension²¹.

To relaunch the economy and provide support to household purchasing power, the Government has enacted: tax breaks to favour upgrades and improvements to the energy efficiency of Italy’s housing stock, and measures to enhance the value of buildings and to promote the integration of renewable energy²²; incentives for building renovation²³; measures to reduce fiscal pressure, including the deferral to October 1 of the one percentage point increase in VAT (from 21 per cent to 22 per cent)²⁴ and the suspension and subsequent cancellation of the first IMU instalment for 2013 with regard to principal residences and farmland²⁵. Lastly, with regard to real estate, funds have been allocated for making the burden of home mortgage or rental payments more sustainable, while access to credit for the purchase of a first home has been made easier for various categories of home buyers²⁶.

With regard to education, measures have been adopted in favour of students, families and schools in order to alleviate the difficult situation resulting from spending reductions in recent years. Specific plans provide for: allocating resources for scholarships and reducing the costs of purchasing secondary school textbooks; initiatives aimed at curbing the number of school dropouts and expanding the courses offered in schools; programs aimed at guaranteeing continuity and planning in the selection of school personnel; and provisions designed to immediately improve the qualifications of school personnel, particularly for those working with students with disabilities²⁷. Resources have also been allocated for financing extraordinary works to renovate and secure school buildings, and for the construction of new public school buildings²⁸.

With reference to the nation’s artistic and cultural heritage, a tax credit has been provided for reviving the film and music sectors, while other measures have been adopted to guarantee the public access of cultural institutions and landmarks²⁹.

¹⁹  Decree-Law No. 54/2013 converted by Law No. 85/2013, Decree-Law No. 63/2013 converted by Law No. 90/2013 and Decree-Law No. 102/2013.

²⁰  Decree-Law No. 76/2013 converted by Law No. 99/2013.

²¹  Decree-Law No. 102/2013.

²²  Tax deductions for improving the energy efficiency of buildings have been raised to 65 per cent. The incentive is valid for expenditures made until 31 December 2013 or up to 30 June 2014 for restructuring undertaken by condominiums.

²³  The personal income tax deductions for up to 50 per cent of building renovation expenditures up to a total amount of €96,000 have been extended to 31 December 2013. The deductions have also been extended to cover the purchase of furnishings to be used for furnishing the renovated building.

²⁴  Decree-Law No. 76/2013 converted by Law No. 99/2013.

²⁵  Decree-Law No. 54/2013 converted by Law No. 85/2013 and Decree-Law No. 102/2013.

²⁶  Decree-Law No. 102/2013.

²⁷  Decree-Law No. 104/2013.

²⁸  Decree-Law No. 104/2013 and Decree-Law No. 69/2013 converted by Law No. 98/2013.

²⁹  Decree-Law No. 91/2013.

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FOCUS

Measures adopted in the past four months

The Government has adopted a series of measures to contend with the difficult economic trend (GDP has declined for 8 consecutive quarters), several social and environmental emergencies, as well as natural disasters. In addition, various measures have been adopted with a view toward launching economic recovery.

The measures amount to approximately €5 billion in 2013 and €3.3-3.5 billion starting in 2014 (€11.9 billion over a three-year period). The resources to cover the measures slightly exceed total cost of the measures. During the period in which the decree-laws outlined hereunder will produce their effects (2013-2023), approximately €24 billion of measures will be financed, covered by €20 billion through tax increases and approximately €7.5 billion through spending reductions or reconfigurations.

MEASURES ENACTED IN THE PAST FOUR MONTHS (in € mn)

	2013		2014		2015
Measures		5,045		3,305		3,547
Coverage		5,113		3,626		3,926
including:
Higher revenues		3,402		1,957		2,224
Lower expenditures		1,711		1,669		1,702
Impact on net borrowing		68		320		379

1) Decree-Law No. 43/2013, adopted to tackle various environmental emergencies and to refinance initiatives to aid areas hit by earthquakes, has allocated total resources of approximately €1.4 billion for the 2013-2018 period, of which approximately €1 billion will fund the recovery from the earthquake in the Abruzzo Region. The funding was obtained through an increase in stamp duties and other measures to cut spending.

2) Decree-Law No. 54/2013 (deferral of IMU and social safety nets) has allocated €360 million over the 2013-2015 period, of which €250 million to increase the resources in the Social Fund for Employment and Training, to be used for financing exceptional social safety nets for 2013. The coverage of the appropriation came from the use of the Fund for Social-Welfare Contributions Relief for Second-Level Salaries, and the reduction of certain capital expenditures.

3) Among its provisions, Decree-Law No. 63/2013 continues of the 10-year tax incentives in favour of building-renovation and energy-qualification initiatives, for approximately €4 billion over the 2014-2023 period; the resources to cover the benefits will be derived from the elimination of several tax breaks in the publishing industry, and from selected spending cuts.

4) Decree-Law No. 69/2013 (‘Decreto del Fare’) has allocated €1.9 billion over the 2013-2015 period, most of which goes to financing the Fund for the start-up of shovel-ready construction projects, the continuation of projects already in process, and the financing of school construction projects. This sum will be covered in part through the reallocation of resources already allocated for capital expenditures with longer time horizons; other sources of funding include the Robin Tax, an increase in fuel excise taxes and other spending cuts.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

5) Decree-Law No. 76/2013 has allocated €3 billion over 2013-2015 period to defer the one percentage point increase in ordinary VAT (from 21 per cent to 22 per cent) until October 2013, and for measures to favour youth employment. These initiatives will be covered by a 1-percentage point increase in the November 2013 prepayments of personal income tax (IRPEF), corporate income tax (IRES) and the regional tax on productive activities (IRAP); a 10-percentage point increase in the prepayment of taxes withheld on interest earned on deposits and current accounts with banks, as well as the introduction of a consumption tax on electronic cigarettes.

6) Decree-Law No. 91/2013 (Culture Decree) has allocated €230 million over 2013-2015 period, most of which is to be used for the permanent refinancing of the tax credit in favour of the film industry; other measures in favour of artistic and cultural heritage are also covered by the decree. The coverage of the funding will mainly come from an increase in excise taxes on various products (lubricating oil, processed tobacco, etc.). In addition, funds (approximately €100 million) were allocated to restore the financial balance of certain opera/symphonic foundations. This is covered by the use of funds set aside for paying the past-due debts of local entities.

7) Decree-Law No. 102/2013 provided for: the cancellation of the first IMU instalment for 2013 with regard to primary dwellings and farmland and other minor exemptions (€2.5 billion in 2013); the refinancing of both long-term wage supplementation schemes and resources available to the so-called “protected” workers (approximately €900 million over 2013-2018), and other housing-related initiatives. The decree provides for measures worth more than €5.5 billion over 2013-2018 to be financed partially through higher revenues, 50 per cent of which relate the payment of the PA’s past-due debts (additional outlays for €7.2 billion) and partially through selective spending cuts in relation to the central government.

8) The recently enacted Decree-Law No. 104/2013 regarding education, universities and research has outlined measures for improving the welfare of university students, through the assignment of resources for scholarships and reducing the costs of purchasing secondary school textbooks, and initiatives aimed at curbing the number of school dropouts and expanding the courses offered in schools. Resources have also been allocated for financing extraordinary works to renovate and secure school buildings, and for the construction of new public school buildings. Finally, the decree contains provisions aimed at guaranteeing continuity of instruction to students with disabilities, and other provisions regarding unqualified teachers. The measures amount to approximately €2.7 billion over 2013-2018, most of which are financed through revenue increases (€2.5 billion) and the remainder through spending cuts (approximately €250 million).

FOCUS

Implications of the Two Pack on the planning documents provided by the law

The reinforcement of the tools to coordinate and evaluate the economic and budget policies of the EU Member States constitutes one of the fundamental aspects of the reform of European governance inaugurated in recent years with the introduction of the European Semester, the Six Pack (which includes a revision of the Stability and Growth Pact), and the signing of the Treaty on Coordination, Stability and Governance of the Economic and Monetary Union (Fiscal Compact).

In a move to reinforce these tools further (in particular for the assessment of: i) the actions to implement the Country Specific Recommendations, to respect the Stability and Growth Pact, as well as to prevent (and correct, if applicable) macroeconomic balances, and ii) the planning indications defined within the framework of the European Semester), two regulations (Two Pack) were approved in May 2013 for the countries in the Euro Area: EU regulation No. 472/2013 and EU regulation No. 473/2013, which will become operative in the next budget session.

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The measures of the EU regulation No. 473/2013 influence the national economic and financial planning cycle, with reference to the “common provisions for the monitoring and evaluation of the budget planning documents and for the correction of excessive deficits of the Member States of the Euro Area.” This regulation introduces a new process of evaluating national budgets, establishing a common deadline (15 October) by which the Euro Area countries must send their Draft Budgetary Plan (DBP) to the designated European institutions³⁰. The DBP contains an update of the estimates indicated in the previous Stability Programme, with a particular focus on the first year of the forecast. The DBP, which takes into account any revisions of final data introduced by the national statistical offices (e.g., ISTAT) as of its reporting by October 1, outlines: the reasons for any differences with respect to the estimates contained in the Stability Programme drawn up in April; the public finance measures proposed by the Government for achieving the programmed targets; and the impact on public accounts and economic growth.

The data needed for the preparation of the DBP, which are indicated in a specific code of conduct according to a European agreed format, are mostly already available in national planning documents. Even though it is thus possible to meet the requirements set by European procedures and to prepare the DBP by the deadline for 2013, in the near future it will be necessary to consider revising the national planning documents to align them, bringing them into with the European cycle. This should include outlining a schedule consistent with the new deadline, as occurred with the recent reform of the law on public finance and accounting, to be consistent with the European Semester.

This new process also envisions the involvement of independent entities for evaluating the macroeconomic and public finance forecasts³¹.

By 30 November, the European Commission will adopt and present to the Eurogroup an opinion on each DBP that will contain an evaluation of the conformity of the budget programs to the recommendations formulated as part of the European Semester, and an evaluation of the consistency of the budget with respect to the programmed targets of the Member State. The opinion for each individual country and for the Euro Area as a whole will be made public, thereby ensuring a high degree of transparency. In the event of any country’s significant non-compliance with the obligations of the Stability and Growth Pact, the country may be requested to revise its budget planning document in order to take into account the Commission’s observations.

IV.3 MULTI-YEAR EVALUATION PLAN FOR PUBLIC PROPERTY

In order to reduce the public debt, an extraordinary plan has recently been inaugurated for increasing the value and selling the PA’s real estate assets, with a view toward ensuring significant resources will be primarily earmarked for the debt amortisation fund.

The initiatives undertaken to increase the value of public properties are based on an information platform constructed through the digitisation of data, which was begun in February 2010 in accordance with the Financial Law for the same year. On the basis of the most recent reports, the value of public property, inclusive of land, is estimated in the range of €350 billion.

In May, the Ministry of the Economy and Finance set up a wholly-owned company, ‘Investimenti Immobiliari Italiani- Società di Gestione del Risparmio, Società per Azioni’ (INVIMIT SGR)³² which will establish one or more investment funds for the purpose of:

³⁰  Commission and Eurogroup (Ministers of Finance of the Euro Area countries).

³¹  According to the European definition, independent forecasts are those that are prepared or endorsed by structurally independent entities, or entities with functional autonomy, vis-à-vis the budget authority. See Focus Topic in Chapter II for additional information.

³²  As part of the implementation of Article 33 of Decree-Law No. 98/2011, converted by Law No. 111/2011.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

• Contributing to closed-end real estate investment funds promoted by or held by territorial and other public entities, or in companies wholly owned by such entities, for the purpose of increasing the value or selling their available property assets;

• Enhancing both the value of State-owned properties not used for institutional purposes (“Direct fund”) and properties no longer used by the Defence Ministry for institutional purposes (“Defence fund”), as well as properties belonging to territorial entities, including those coming from acts of transfer pursuant to the State federal property system, and companies controlled by the State or public entities.

To increase the value of State properties, there are plans to allow contributions to these Funds by institutional investors, and in particular, Social welfare funds, through the injection of liquidity.

In 2012, a first series of privatisations of shareholdings held by the State advanced the strategy of selling off public properties³³. These privatisations were concluded in 2013, through the sale of holdings in SACE, Fintecna and Simest to the Cassa Depositi e Prestiti (CDP). The value of the transactions, finalized in tranches, amounted to €8,831 million.

The first tranche of approximately €5,423 million (including €109 million for Simest, €3,721 million for SACE and €1,592 million for Fintecna) was paid by CDP in November 2012 for an amount equal to 60 per cent of the net book value of the three companies as reflected in their respective financial statements as of 31 December 2011. The sale proceeds were entirely credited to the Fund for the amortisation of government securities, thereby reducing the public debt. The second tranche, approximately €2,500 million, was paid at the end of December 2012 for the balance of the purchase of SACE and SIMEST, in consideration of the final transfer values as determined on the basis of court-approved appraisals (prepared by independent advisors for each company and deemed consistent by CDP). The final tranche, amounting to approximately €908 million, was paid in April 2013 for the balance of the acquisition of Fintecna. Thirty per cent of the resources of the second and third tranches was allocated to the Fund for the amortisation of government securities, and the remainder went to the settlement of the PA’s trade payables.

In addition to benefiting the State budget, these sales have a significant industrial value, in consideration of the synergies already existing between CDP and the three companies; more specifically, the expertise of SACE can be harnessed to assess creditworthiness in insurance services and in international finance, while SIMEST can guarantee further backing with respect to export support activities. Finally, with the acquisition of Fintecna, CDP can reinforce its knowledge and expertise in the valuation, sale and value enhancement of real properties owned by public entities.

Consistent with the actions already taken, a programme for the sale of shareholdings held directly or indirectly by the State will be outlined by the end of 2013. Though remaining committed to pursuing the path to privatisation, the Government has deemed it appropriate to reduce by half the ambitious objective of realising privatisation proceeds equivalent to 1.0 percentage point of annual GDP. The revised target of 0.5 percentage points of GDP is more realistic and feasible, given the still difficult conditions of the property and financial markets.

³³  Decree-Law No. 87/2012, incorporated into Decree-Law No. 95/2012 (Spending Review) converted into Law No. 135/2012.

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IV.4 STATE BUDGET UNDER POLICY SCENARIO

TABLE IV.9: STATE BUDGET FOR 2014-2016 UNDER POLICY SCENARIO (in € bn and net of accounting settlements, payable and VAT refunds)

		2012 Balance sheet Assessments/ Commitments		2013 Budget Law		2013 Statement Budget Law		2014		2015		2016		Average change rates
Tax revenues			442.9		452.6		438.3		449.1		463.1		474.2		2.8
	% of GDP		28.3		29.1		28.1		28.0		27.9		27.6
Other revenues			75.9		67.4		70.9		64.6		61.8		61.7		-2.2
	% of GDP		4.8		4.3		4.6		4.0		3.7		3.6
FINAL REVENUES			518.7		520.0		509.2		513.7		524.9		535.9		2.1
	% of GDP		33.1		33.4		32.7		32.0		31.6		31.2
Current expenditures, net of interest			371.6		392.8		393.8		406.5		403.1		397.6		-1.1
	% of GDP		23.7		25.2		25.3		25.4		24.3		23.1
Interest			81.4		89.7		89.2		91.5		97.5		101.5		5.3
	% of GDP		5.2		5.8		5.7		5.7		5.9		5.9
Capital expenditures			44.8		43.7		57.4		54.7		42.5		38.0		-16.4
	% of GDP		2.9		2.8		3.7		3.4		2.6		2.2
FINAL EXPENDITURES			497.8		526.2		540.3		552.7		543.1		537.1		-1.4
	% of GDP		31.8		33.8		34.7		34.5		32.7		31.3
PUBLIC SAVING			63.9		36.2		24.3		14.5		21.9		35.0
	% of GDP		4.1		2.3		1.6		0.9		1.3		2.0
NET BALANCE TO BE FINANCED			20.9		-6.2		-31.1		-39.1		-18.2		-1.2
	% of GDP		1.3		-0.4		-2.0		-2.4		-1.1		-0.1
PRIMARY SURPLUS			102.3		83.5		58.1		52.4		79.3		100.3
	% of GDP		6.5		5.4		3.7		3.3		4.8		5.8
BUDGET BALANCE EXCL. FINANCIAL ITEMS			27.4		-6.2		-19.1		-24.3		-18.2		-1.1
	% of GDP		1.7		-0.4		-1.2		-1.5		-1.1		-0.1
GDP (x 1,000)			1,565.9		1,557.3		1,557.3		1,602.9		1,660.7		1,718.4

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

IV.5 CONTENT OF THE DOMESTIC STABILITY PACT

Following the presentation of the regulatory framework that governs, through the Domestic Stability Pact, the contribution of local entities to the public finance measures for the 2013-2015 three-year period, the Government adopted several regulatory provisions that have partially modified the applicable rules.

With the aim of facilitating the payment of local entities’ debts, the Government, with the adoption of the first decree for accelerating the payment of the PA’s past-due debt³⁴, not only eased the constraints of the Domestic Stability Pact by €6.4 billion, but it also provided incentives for the so-called Vertical Pact³⁵, by increasing (by up to approximately €1,272 million per year for the years of 2013 and 2014) the contribution attributed to the Regions who grant financial leeway to local entities in their territories.

For 2013, the distribution of the contribution of the Regions and local entities to the budget is confirmed, based on a merit system using specific parameters that consider socio-economic indicators³⁶. Instead, for 2014, the rules have been modified³⁷, providing that the merit-related benefit be allocated to entities participating in experimentation for the harmonisation of local government accounting systems³⁸. As of 2015, the Government intends to introduce a new accounting system for territorial entities, following up on the provisions contained in the public finance and accounting law, as well as the implementation of fiscal federalism, with respect to the harmonisation of budgets of Public Administrations. In 2014, the experimentation of the new accounting system will be accelerated, with all benefits related to the Domestic Stability Pact accruing to the entities involved.

Finally, a later measure³⁹ reduced the array of institutions subject to the Domestic Stability Pact, to exclude special companies and the entities that manage scholastic services and infancy services.

³⁴  Decree-Law No. 35/2013 converted by Law No. 64/2013.

³⁵  Through the Vertical Pact, introduced by Law No. 220/2010, Article 1, Paragraph 138, the Regions with ordinary statutes, Sicily and Sardinia may grant financial leeway to the municipalities in their territory, with consequent deterioration of their target, in respect of the equilibrium of the public finance balances.

³⁶  The parameters are the following: a) compliance with the Domestic Stability Pact; b) financial autonomy; c) current account equilibrium; and d) the ratio between current revenues, collected and assessed.

³⁷  Article 31 of Law No. 183/2011, as amended by Article 9 of Decree-Law No. 102/2013.

³⁸  Referenced in Article 36 of Legislative Decree No. 118/2011.

³⁹  Decree-Law No. 101/2013 which amended Article 114 of Legislative Decree No. 267/ 2000.

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While 2013 started off with a pronounced contraction of economic growth, the data for the second quarter suggest the economic cycle is gradually stabilising. It is the time to continue the efforts to ensure the turnaround of the recession gains new momentum in the coming quarters, and lays the foundation for solid and sustainable growth in the future.

The measures undertaken by the Government will influence the timing and the intensity of the recovery. In particular, the settlement of Public Administrations (PA) trade accounts payable, the capacity of attracting investments and the definition of a stable economic-policy framework will play a key role. The continuation of actions to improve the environment in which Italian businesses operate will also have an impact, particularly considering how the deterioration of the business environment slowed the growth of the economy in the 20 years before the crisis.

In less than one year, Italy will take over the Presidency of the Council of the European Union. It is an important event for the country, and the Government will take up this mandate with the awareness that the structural reforms undertaken in recent years represent an important accomplishment for Italy and for Europe.

In view of this commitment, future initiatives can be viable only if they are part of a framework of public finance sustainability. In order to avoid a return to the Excessive Deficit Procedure, the Government’s policies in the coming months and years must be carried out within the boundaries of a structural balanced budget and in full respect of European commitments.

The Government’s strategy for growth will need to unfold by focusing on labour and on the role of the businesses, as recently evidenced in a joint document signed by representatives of industry and labour. Against this backdrop, fiscal and industrial policies, institutional reforms, the efficiency of the PA, and the streamlining of public expenditure will all play a key role.

In order to stimulate private investment, the Government has inaugurated ‘Destinazione Italia’, an extensive plan for attracting investment from the domestic and international markets. The plan is a standardised, structured programme framework (which, starting from this Update, will be described in detail in future economic and financial planning documents) that identifies policies and reforms for improving the business environment in Italy, increasing the attractiveness of the country, and enhancing the value of public assets; all of these efforts are a part of a comprehensive branding policy.

The plan entails numerous measures across a wide range of areas - which span from taxation to labour, from civil justice to research - to be translated into concrete regulatory and non-regulatory actions, whose implementation will be carefully monitored.

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Many of the reforms discussed herein have been requested through the European Council’s country-specific recommendations published in June. For additional detail about the country-specific recommendations and the national measures in relation thereto, see Chapter III of this Update.

V.1 INSTITUTIONAL REFORMS

The initiatives in the months ahead cannot overlook the implementation of a comprehensive reform of the political-institutional and administrative system, mainly by revising the legislative system and the electoral law, aimed at guaranteeing greater stability of government, reinforcing the efficiency of the public decision-making processes, and thus elevating the quality of democratic life and the public’s confidence in government institutions.

The definition of a new institutional architecture is one of the central points of the Government’s political agenda and a strategic pillar that will also serve as the foundation for relaunching the competitiveness of the economic system - a necessary condition for overcoming the current recession and its severe effects on social cohesion.

For this purpose, Parliament approved, with its first vote, a constitutional legislative bill presented by the Government that establishes an ad-hoc bicameral committee to examine constitutional reforms with deadlines for securing approval of comprehensive initiatives to amend the Constitution within a pre-set timeframe (by mid-2015). The initiatives under consideration involve the government’s form, the state’s form, the elimination of perfect bicameralism, and reform of the electoral system.

The revision of the government’s form should focus on advancing the stability of the political system and making the decision-making processes of a multi-level, complex and detailed government system more rapid and efficient. Indeed, the current government system has often generated overlapping responsibilities, excess expenditures and conflict (including of a legal nature), making the implementation of public policies more difficult and disorganised. It will be necessary to reorganise the functions assigned to different government levels, getting beyond excessive fragmentation in the distribution of responsibility, in favour of legislative and administrative decentralisation that is more balanced and suitable to socio-economic development. Change to the current system of bicameral parity is also needed, with the vesting of responsibility for affirming or revoking confidence in the government to only one chamber of Parliament. This also involves differentiating the duties and powers of the Senate and enhancing its role in representing the territorial autonomies.

To complement the reform process, it will be necessary to define an electoral system consistent with the new structure of government. Regardless of its final form, the electoral system will need to ensure that voters can choose their own representatives, and that clear-cut (and possibly, broad-based and binding) majorities can be formed.

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The findings of the Commission of Experts appointed by the Government and the results of wide-ranging public consultation on the subject of institutional reforms should facilitate the reform processes. The Commission, in particular, has suggested: i) reinforcing Parliament through reducing the number of its members, the elimination of bicameral parity, more comprehensive governance of the legislative processes, and above all, more rigorous discipline of the use of urgent decrees; ii) strengthening the Government’s privileges in Parliament through vesting the confidence process with a single chamber, simplifying the decision-making process, and introducing set dates for voting on legislative bills; iii) reforming the constitutional system of Regions and Local Autonomous Entities in order to significantly reduce the overlap of responsibilities and to achieve greater collaboration and less conflict; and iv) three reform alternatives for the system of government.

The system through which administrative functions are allocated to and exercised by the State, Regions, and Local Autonomous Entities needs significant streamlining, given the currently poor distribution of these functions.

In July, the Council of Ministers approved a constitutional legislative bill that provides for the abolition of Provinces, assigning to the State the task of defining the general criteria on which the State and the Regions, within the sphere of their respective responsibilities, will outline the forms and means for exercising the functions for which the Provinces are currently responsible.

While awaiting approval of the aforementioned constitutional reform (including in light of the Constitutional Court’s ruling that declared the previous initiative to streamline the Provinces as unconstitutional because it was legislated through urgent measures), the Government has adopted an ordinary legislative bill calling for the reorganisation of the Provinces. Currently classified as second-level territorial entities, the Provinces are responsible for directing and coordinating the activities of the Municipalities, which, in turn, direct a limited number of their own administrative functions. The ordinary legislative bill also provides for the institution and governance of Large Cities, as well as important measures to promote the merger and unification of Municipalities.

With the approval of this legislative bill, those Provinces with legislative terms that finish in 2014 and the commissioners in place would not have to be renewed or replaced beyond their natural termination dates. In addition, the bill will transform the current Provinces as provided by the Constitution into entities covering large areas to be administered by bodies comprised of area-mayors and aimed at ensuring a few operating functions (common to all) and significant coordination powers. With their institution, the Large Cities will be able to count on a strong network of entities vested with the powers and responsibilities for operating and managing a vast area.

The continuing unification of Municipalities will make it possible to initiate a beneficial process of reorganising the municipality network, respecting the traditions and identity of small Municipalities, while also meeting the needs for scale and population size for the effective and efficient exercise of the core functions.

These reform actions represent a crucial element for recovering the efficiency of the overall structure of public powers at different levels of government, including for the purpose of updating and bringing to completion the system of fiscal federalism. The reforms take into consideration that the constitutional amendment introducing the principles of a balanced budget and the sustainability of the debt of all of the Public Administrations will go into effect on 1 January 2014.

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V.2 STRUCTURAL REBALANCING OF THE PUBLIC ACCOUNTS

In recent years, the needed rebalancing of the public accounts has had evident effects on the real economy. However, the large debt stock that Italy has accumulated over the years means that debt reduction remains a priority, to be promoted first and foremost through rapid recovery of the real economy.

Italy’s movement toward fiscal consolidation in line with European objectives, as shown by the results obtained in 2012 and the public finance forecasts for 2013 and 2014, has resulted in the abrogation of the Excessive Deficit Procedure (EDP) inaugurated with respect to Italy in 2009. This important sign for the markets and for Italy’s European partners provides additional flexibility in the deficit- and debt-reduction processes, but it must not lead to a less rigorous or less attentive approach: the country will not retrace its steps to the EDP.

Italy has already been able to benefit from its expanded manoeuvring room with the urgent measures for accelerating the settlement of the PA’s trade accounts payable. These measures are capable of exerting a positive impact on various aspects of the recovery of economic activity in the very near term, with a resulting expansionary effect on GDP, as outlined in the Report to Parliament.

The containment of the deficit and the debt will be able to benefit from the public property federalism, with processes under way to enhance the value of and/or to sell off public assets (buildings and equity investments) held by the State and by local entities.

An inventory of public properties was initiated, and a new funds management company (Investimenti Immobiliari Italiani - Invimit SGR) set up by the Ministry of the Economy and Finance (MEF) began operations, with both initiatives aimed at the value enhancement or sale of public property assets. At the same time, the Social Security Administration (INPS) and the National Institute for Insurance Against Industrial Injuries (INAIL) have both requested involvement in the creation of real estate funds. Sizeable benefits may also be derived from the divestiture of the territorial entities’ assets and equity investments, with some sales already at an advanced stage of negotiation. Following the introduction of simplified procedures for the territorial entities’ acquisition of the State’s real properties (‘Decreto Fare’), the Government will be responsible for monitoring and promoting the full implementation at every level of the laws in effect pertaining to the disposal of companies owned by local entities. In order to accelerate the implementation of the public property federalism, a technical committee was recently established to ensure the implementation procedures are consistent with the focus on simplification and acceleration. The committee is staffed by representatives of the State Property Agency, the MEF, the Ministry for Regional Affairs and Autonomies, and the National Association of Italian Municipalities (ANCI).

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The advantages of value enhancement with regard to the State’s shareholdings are numerous and include: a) the opportunity for opening a part of the national economy (which has to date been the prerogative of the public sector) to private capital, both foreign and domestic; and b) the possibility of expanding the shareholder base through stock-market listings, thereby allowing for expanding the base of risk capital among investors and growing the overall capitalisation of the Italian Stock Exchange.

The MEF will identify the shareholdings that are divestiture candidates. The divestitures may be achieved through: a) competitive bidding; and/or b) large-scale market transactions involving institutional and retail investors. The Permanent Global Advisory and Underwriting Committee (also known as the Privatisations Committee) will also be renewed for this purpose.

In the case of companies fully or partly owned by the public sector, the sale process will be carried out on the basis of valuations that consider numerous factors, including the strategic nature of the shareholdings for the national economy (such as, for example, the energy and defence sectors) and the economic advantages of the sale. For this purpose, it will be necessary to compare the savings (in terms of interest related to the reduction of the debt) with the annual flow of dividends distributed by the companies in which the investments are held.

Other efforts will go to the reduction of public expenditure. After a long period of growth, public expenditure has fallen decidedly in the past three years. In particular, the cumulative reduction of primary expenditure amounts to 1.8 per cent. Although the Government is aware of the need to continue in this direction, it should be stressed that the possibilities for achieving new savings on public expenditure are strictly linked to the restructuring of the administrations and to the revision of the institutional framework.

Cuts to public disbursements, in particular for transfers to the private sector, require tough choices in relation to the State’s role in public utility services and to the sectors that should be considered as strategic for the future.

Operational manoeuvring room can nonetheless be recovered through the consolidation and reinforcement of the spending reviews. After the past measures with a horizontal reach, it is now necessary to move on to the implementation of the principles that were introduced with the spending reviews, so as to modify permanently the criteria and the procedures for budget decisions and the use of public resources.

Through the extensive revision of such criteria and the substantial recovery of public revenue lost through tax evasion, it will be possible to balance the supply of high-quality public services with the reallocation of fiscal pressure necessary to improve the competitiveness of the productive system. The Regions, Provinces, Municipalities and all other entities that manage resources and programmes, and contribute to setting tax rates will need to actively support this commitment.

V.3 A MODERN AND COMPETITIVE TAX SYSTEM

In order to create conditions favourable to economic growth, it is essential to support demand, revise the mix of taxation, and redistribute the tax burden. The reduction of the taxes on business and labour (and a change in the mix of those taxes) is an objective to be firmly pursued over the long term.

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With reference to the taxation of labour, the initial steps toward a reduction of the so-called ‘tax wedge’ have been taken in favour of those workers who are most disadvantaged and who have suffered the most during the crisis. The Government intends to pursue this initiative through: the use of resources that gradually become available with the recovery of tax revenue through an intensified fight against tax evasion; the streamlining of incentives to businesses; and the increased efficiency in public expenditures.

The change made to the single municipal property tax (IMU), with the elimination of the first instalment for 2013, is an indication of the Government’s intention to revise the tax in order to make it more equitable by eliminating the penalties on taxpayers at risk of not paying a tax designed during an emergency.

The political agreement reached for substituting IMU with a service tax will make it possible to reinforce this approach and to move toward fiscal federalism. Part of the property tax has been maintained within the new service tax, while introducing a direct component for taxing shared services and waste management. The service tax shifts the taxation base to consumption as well as possession, and thus it will be applied not only to property owners but also to renters. In addition, the Government intends to re-assign to the Municipalities their territorial real property base and the full power to reconfigure subsidies and tax rates within the framework of a national ceiling. International organisations have also recommended that the real property tax be revised so as to make it more equitable.

Amidst frequent and pervasive changes to the taxation system (that have generated additional compliance costs and more importantly, uncertainty), a comprehensive revision of taxation is still lacking. The proposal for an enabling act on the subject of taxation (approved at the end of the last legislature and taken up again for review by Parliament) is a priority for the Government, since it anticipates important initiatives for improving Italy’s taxation system.

First and foremost, the enabling act strives to make the fiscal system more stable and more certain. Working from the standpoint of the simplification and streamlining of corporate income taxes, the legislation will be aimed at the elimination or correction of distortionary tax measures or measures that generate uncertainty and complexity in their application, with the particular objective of favouring the development of cross-border activity through the elimination of certain limitations to the internationalisation of businesses.

The revision of taxation on the income of sole proprietorships and income from professional activity, in order to provide for more uniformity with respect to the taxation of joint-stock companies, will tend to make the taxation system more neutral, especially with respect to legal form, and to favour the capitalisation of businesses, in continuity with the Aid for Economic Growth (ACE) model.

The revision of the property register, as contained in the proposal for the enabling act, aims to ensure more equity in the determination of the property subject to taxation, leaving unchanged the total revenue coming from property taxation.

The Government is committed to the consistent and transparent pursuit of strategies that will not only ensure the exposure of income of tax evaders, but will also encourage spontaneous compliance with tax obligations.

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Monitoring the results achieved in the fight against evasion is essential for drawing attention to the subject and for refining the strategies to counter evasion. For this purpose, the measurement of tax evasion (and evasion of the payment of social-welfare contributions) must be regularly and officially analysed and documented, including through an annual report that illustrates the performance of the underground economy and estimates annually the tax gap for each tax. The methods used should be made public and transparent, and the report should be included as part of the budgeting process.

No less important is the launch of a process to improve the relationships between the tax authorities and taxpayers, particularly in the medium term, following along the lines of the OECD’s cooperative compliance framework.

The proposal for the enabling act contains measures aimed at furthering the communication and cooperation between taxpayers and the tax authorities, through the revision and the expansion of the existing instruments (for example, providing guidance about application of tax laws and offering advisory services). Other similar measures include: the revision of the penal and administrative sanctions, based on criteria of proportionality with respect to the seriousness of the conduct; better handling of disputes (through acceleration and streamlining of the backlog of cases); and the increased efficiency of the tax courts.

Finally, the continuing, structural revision of tax expenditures, and their systematic inclusion in the budgeting process will allow for lowering, eliminating or reformulating those expenditures deemed inadequate as inefficient, unjustified or redundant in light of altered socio-economic needs.

The Government’s action will need to be focused on leveraging the progress made in identifying taxable income on which taxes have not been paid (legally or illegally), in order to finance tax relief for all taxpayers, and especially, for the taxpayers that are fully meeting their obligations. This would be a significant step forward for improving the equity of the system and achieving major efficiency gains.

Tax evasion and tax avoidance have an increasingly international dimension. The widespread availability of both electronic financial systems and instruments that allow for cross-border transfers of profits and financial assets makes the use of foreign channels for the purposes of evasion an option available to an increasingly broader universe of taxpayers. In addition, certain multinational businesses use aggressive tax-planning models, capitalising on the existence of tax havens and/or the lack of coordination among national tax regimes, thereby resulting in erosion of the tax base.

Against this backdrop, recent initiatives undertaken at an international level and within the EU are aimed at supplying an effective, coordinated response to counter tax avoidance and tax evasion. More specifically, with regard to transparency, Italy (together with France, Germany, the UK and Spain) rolled out a pilot project in April 2013 to promote and achieve the automatic exchange of tax information as a new global standard, inviting all countries to participate. As advocated by the G8 and G20, and in collaboration with the OECD, a new bilateral agreement is now being developed on the basis of the accord which the aforementioned countries signed with the United States for the application of the Foreign Account Tax Compliance Act (FATCA). The European Commission has also weighed in with its own proposal in June for the revision of the Directive on Administrative Cooperation on the subject of taxation, with the aim of extending the automatic exchange of tax information to include all financial income. Both the OECD and European Union have the objective of implementing the automatic exchange of information by the end of 2015.

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Efforts to counter erosion of the tax base include the June 2013 adoption of an action plan for the implementation of the OECD/G20 project about Base Erosion and Profit Shifting (BEPS), which has received the support of the G20. The action plan, which will unfold over two years, consists of 15 key initiatives entailing appropriate revisions to international tax laws, so as to counter aggressive practices that cause the erosion of the taxable income base and the transfer of profits to tax havens. The programme mainly emphasises measures to prevent abuses of the law, consistent treatment of entities and hybrid instruments, efforts to counter abusive practices related to bilateral tax treaties, and taxation of the digital economy.

The European Commission also presented its own action plan in December 2012, providing recommendations to Member States and legislative initiatives aimed at improving existing European Union legislation in order to prevent abuses and/or situations of non-taxable income.

V.4 A MORE EFFICIENT AND INCLUSIVE LABOUR MARKET

First and foremost the by-product of macroeconomic trends, the dramatic conditions in Italy’s labour market have contributed to fuelling the continuation of the crisis. Despite the intensity and the extensiveness of the Government’s employment-related initiatives, the labour market remains one of Italy’s weaknesses.

The economy recovery that started in mid-2013 will not be sufficient in the near term to absorb the unemployment, underemployment and inactivity that the crisis of the past five years has generated. It is for this reason that the Government has refinanced income-support instruments such as the exceptional social safety nets (approximately €2.5 billion).

From a structural perspective, Decree-Law 76/2013 modified several problematic aspects of the labour market reform approved in 2012 (simplification of the apprenticeship contract, increased flexibility in hiring, introduction of hiring by networks of small businesses, etc.) and has provided for issuance of the implementation decrees for the 2012 reform, including with respect to the bonuses for the hiring of women and individuals over 50 years old.

In accordance with the recommendations of the European Council, the Government has promoted the use of work vouchers, including for the underprivileged (a tool to supplement the main source of income, including for older workers), and initiated reform of employment offices and preparations for the implementation of the ‘Youth Guarantee’ programme as of January 2014. At the same time, financing has been made available to fund training apprenticeships at businesses and the PA (including in the field of artistic and cultural heritage), thereby providing an incentive for work-study programs at the university level. Finally, financing has been provided for start-up businesses and non-profit projects managed by young people, with the introduction of tax breaks for innovative new businesses. Measures have also made it possible for individuals over the age of 35 to start-up businesses at reduced costs.

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In addition, a disability plan has been approved. The fund for hiring the disabled has been refinanced. The PA are also authorised to hire the disabled, as an exception to the hiring limitations currently in effect. The fund for the right to education has also been refinanced, while the course offerings in the secondary school have been strengthened, with measures also provided for the lower secondary schools. Funds for reducing taxation on productivity-related wages have also been confirmed.

Measures have also been approved to favour the hiring of young people on the basis of open-ended contracts, with social-welfare charges zeroed out for 18 months for additional personnel with respect to the previous staff levels. A bonus has been introduced for hiring the unemployed of any age, at no cost to the public budget. With reference to public sector employment, the recent provisions (which are aimed at stabilising, via a special competitive examination, the most merit worthy temporary employees, and reinforcing school personnel) move towards a necessary generational renewal.

The initiatives outlined above represent only the initial chapter of the Government’s strategy which aims not only to influence debt reduction, but also the rate of GDP growth (due to the labour-related measures). A second group of initiatives will be defined after the European institutions approve the rules for the use of structural funds for 2014-2020, and the funds for the ‘Youth Guarantee’ programme. The reform of employment offices and stronger working relationships with private-sector employment agencies are likely to significantly improve the workings of the labour market, reducing demand-supply mismatches.

Another priority issue in coming months is the effort to facilitate a healthy work-life balance; this issue affects not only women, but individuals working from home, part-time employees, and so forth. Therefore, it involves every instrument that can aid many families in better managing their family commitments and resource allocation. A think tank is charged with drawing up proposals on this subject by the end of 2013.

Alongside the employment emergency, a special focus will be placed on the data indicating an increase in poverty in Italy - data which reveals a country with increasing cases of socio-economic distress. More specifically, there are increasing cases of families with minor children that have encountered difficulty, particularly large families or those households headed by a single parent.

The Government has recently dedicated an ambitious pilot programme to fighting extreme poverty. The programme transfers resources to households through a new social-inclusion card, while also providing for a personalised plan for procuring employment and, more generally, for the social inclusion of the entire family unit. The pilot was launched with the identification of beneficiaries in Italy’s 12 largest cities, although Decree-Law 76/2013 extends the programme to all areas of southern Italy, where poverty levels are highest. The original funding of €50 million provided for the programme in major cities has thus been supplemented by an appropriation of €167 million for southern Italy. In 2014, this programme will allow for support to approximately 220,000 people.

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This pilot programme may pave the way for the definition of a national programme to fight extreme poverty, similar to the programmes already in place in other European countries. On the basis of the final report ‘Proposals for new measures to fight poverty’, drawn up by a study group set up at the Ministry of Labour and Social Policies for the purpose of analysing poverty, the Government is considering the drafting of an Active Inclusion Support (AIS) programme for fighting extreme poverty and social exclusion. This programme, which is still not in existence in Italy and represents the natural by-product of the pilot programmes already undertaken with the purchases card, is distinguished by its universal nature, the reference to household economic resources, and the prospect of a socio-economic rehabilitation for the beneficiaries.

After a temporary halt, the reform of the Equivalent Economic Situation Indicator (ISEE) is moving ahead. This reform aims to eliminating the distortions of the current system and at making it more difficult to defraud the system to the detriment of the individuals legitimately entitled to social benefits.

Finally, the Government intends to relaunch social housing initiatives, together with support to aid the purchase of main dwellings for the most fragile segments of the population. Part of this effort is the Government’s recent initiative to direct €200 million to finance four specific funds whose beneficiaries include lessees experiencing involuntary difficulty, young couples, and individuals employed under atypical contracts.

With reference to the transition to the new pension system, and the related problem of the so-called ‘exiled/protected’ retirees, measures to provide pensions for approximately 130,000 individuals are now being implemented, while another approximately 6,500 individuals that terminated their employment before the application of the pension reform and ended up without a wage or a pension have been added to the system.

The initiatives in the labour market have spill over effects as well, contributing to making the country more attractive to foreign investors by improving business conditions for all market participants. In order for the country to be able to attract capital, business owners must be able to understand the laws and regulations that govern employment relationships. Equally important, business owners must have contractual instruments available that encourage talented individuals and young people to enter the workforce. In view of these requisites, labour market reform will be supplemented so as to simplify and consolidate laws and regulations, and to strengthen the institutions supporting initial access to the workforce and those involved in the placement of laid-off workers.

V.5 A MORE EFFICIENT AND MODERN PUBLIC ADMINISTRATION

The Public Administrations need substantial restructuring, consistent with the revision of the government structure and shared policy objectives. The fight against corruption must be reinforced and continued with decisiveness, making the National Corruption Prevention Plan fully effective so as to ensure that it achieves its full potential.

At the same time, plans call for strengthening the instruments that improve transparency, an indispensable element in preventing corruption and holding individuals who carry out institutional functions responsible for the use of public resources. The training of PA personnel should be supported for this purpose, in order to promote the observance of conduct ethically appropriate for their role.

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Managing public sector personnel is an issue to be tackled from different perspectives, in order to seek solutions to numerous problems, including contractual matters, staff cuts, staff mobility, and spending reviews. The decree-law just approved for continuing the efforts to streamline the PA has provided many responses to still-unresolved problems in the public sector. It identifies mobility procedures or contracts suitable for surplus staff, and more importantly, it outlines appropriate, long-term measures for eliminating temporary personnel within the PA, through duly authorised and stable recruitment programmes.

However, the issue of public sector employment is not resolved with sector-specific and emergency measures. It needs to be tackled at its core, with considerations about the harmonisation between public- and private-sector work, with appropriate investments in training and the full implementation of the new system for recruiting senior managers and officials for the public sector.

Finally, a specific emphasis will be placed on innovation and on the strengthening of e-government projects, considering their strategic role in making the public sector more efficient and more up-to-date.

The introduction and the implementation of the new Digital Administration Code (DAC) has significantly upgraded and simplified communications between schools and families, and between universities in Italy. Numerous advantages stem from the implementation of the new DAC, and as a result, from the use of ICT, including for the central government, Regions, Municipalities, and the healthcare and justice sectors.

The monitoring of the status of implementation of Legislative Decree no. 235/2010 (which has involved some 1,497 administrations) is testimony to the broad dissemination of digital technologies within the PA, and in particular, the almost complete digitalisation of schools and universities, followed by the central government and local entities. In order to ensure continuing momentum to the digitalisation process, it will be necessary to promptly adopt the various decrees for the DAC implementation, and in particular, those regarding training and the conservation of electronic documents.

Added to the above are initiatives aimed at putting into effect some of the innovation-related provisions contained in the ‘Growth 2’ decree-law. It is important to note that the failure to adopt measures related to the Digital Agenda would entail very high costs that the country cannot afford in terms of modernisation of vital sectors (such as the PA and education).

V.6 SUPPORT TO BUSINESSES, INDUSTRIAL POLICIES AND STIMULUS TO COMPETITION

Despite the difficult economic conditions, the Government has tried to enact measures that favour the start of a new growth phase for businesses and the productive environment. The recovery of the country’s economy and employment depends on these measures, which are complementary to the on-going efforts to correct the course of the Euro Area’s economic policy. It should not go unnoticed

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that Italy has today a favourable tax break for hiring young people, which is unparalleled in Europe, and a suitable environment thus needs to be created so that businesses will capitalise on this very positive condition, investing anew in their activity. For this purpose, it will be essential to provide for the possibility of extending tax breaks to other spheres, using the ACE model.

The Government envisions that the settlement of the PA’s trade accounts payable will also have a meaningful impact on the financial liquidity of the Italian entrepreneurial system, which has suffered significantly in recent years from the continuing scarcity of the flow of bank credit.

Much has been done for improving the effectiveness of the Guarantee Fund for small- and medium-term enterprise (SME), in terms of a greater focus on smaller sized businesses and a recovery of the role of the credit guarantee consortiums (Confidi). These measures need to be paired with a continuing commitment to promote alternatives to bank financing, and the opening to the capital market, further encouraging the issuance of corporate bonds. The objective is to provide market access to small-cap companies which, in acting alone, cannot tap the market directly. The support to the creation and development of micro companies can furthermore be realised through zero-interest loans for investments.

The relaunching of investments has been on this Government’s agenda from its very first pronouncements, both with the tax deductions for building restructuring initiatives, and with the support to outlays for renewing productive processes. The extension of the ‘Sabatini Law’ to investments in digital technologies is a sign of the attention toward the numerous needs of the productive world - a sign to be encouraged and reinforced. Future measures should allow SMEs to tap sinking-fund financing for the purchase of computer software and hardware and/or services that make it possible to improve business efficiency.

The Government may well activate an investment fund for venture capital transactions in order to support SME development and innovation strategies and programmes.

The extraordinary ‘eco bonus’ is part of an overall strategy to provide tax incentives so as to fuel the recovery of economic activity. Indeed, the tax incentives for improving energy efficiency (65 per cent deductible), the recovery of the building stock (50 per cent) and projects to prevent damage from earthquakes (65 per cent) have been extended to be made available until the end of 2013. Such incentives are designed to put businesses back to work, to stimulate the building sector, to encourage energy savings and the security of buildings, and to trigger the emergence of part of the revenue base for which tax liabilities have been intentionally evaded.

An important industrial policy strategy has been implemented in order to support and augment Italy’s productive specialisation and the consolidation of Italy’s presence in sectors key for the quality of development: from energy to defence, from space to steel, from sustainable mobility to biotechnologies. Instruments suitable for promoting the revitalisation of businesses should be evaluated for this purpose.

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The next step is the reinforcement of large infrastructural investments through tax-relief measures applicable to large projects, and expansion of the range of eligible projects through the lowering of the qualification threshold to a value below €500 million. In such manner, it will be possible to mobilise private resources for smaller sized projects and works that can nonetheless rapidly translate into spending and new employment.

The support to the productive world and to the public at large continues through acceleration of the initiatives to simplify administrative compliance, with increasingly comprehensive and innovative actions. In this regard, a critical contribution can be made by: the full implementation of the Digital Agenda; the intensification of the efforts for the digital literacy of SMEs; and the increasingly widespread use of e-commerce and electronic payments.

Against this backdrop, the digital-dividend auction (that will assign new rights of use for national television frequencies) is also a priority for ensuring efficient use and economic exploitation of the radio spectrum, and for opening the market for digital terrestrial television broadcasting to new market participants.

The simplification effort will also need to address the difficult issue of the productive reconversion of polluted industrial areas. By accelerating environmental authorisation procedures, it will be possible to give the go-ahead to investments in many areas where manufacturing has historically had an important role, and thus to create new employment. The clean-up and recovery of these areas is a Government priority. Following the publication of the implementation decree regarding complex industrial crises, a large industrial clean-up programme will be initiated in collaboration with the administrations responsible and the Regions involved with the aim of re-using the areas for productive purposes.

The policies for competition constitute a powerful stimulus to the national economic system’s innovation and competitiveness. Within this framework, a new impetus is needed for the implementation of the standards of principle approved by Parliament regarding the protection of the freedom of economic initiative and the related pilot programmes inaugurated in various Regions.

A special emphasis should be placed on: the electricity and gas sectors, which require measures to round out the massive process in recent years to open up the markets; the insurance sector, where recent provisions of law need to be concretely implemented in order to increase competition in the auto-liability and insurance brokerage businesses; and the real estate sector, where it is necessary to increase supply and encourage new investments through: eliminating several limitations on the rental of property for non-residential use; aligning Italy’s regulations with European regulations; and allowing for greater contractual freedom between the parties.

The revival of Italian enterprise also entails meeting the objective of allowing Italian businesses to operate under the same conditions as their European competitors with respect to energy costs. At the same time, initiatives in the field of energy have concrete repercussions on the country’s attractiveness to foreign investors, who attentively look at energy costs as a hurdle to business activity.

The direction to be taken is mostly outlined in the National Energy Strategy which has set clear priorities and objectives. It is now a question of accelerating the concrete measures so as to reach the pre-set objectives and thus to reduce Italy’s cost gap. More specifically, in the electricity sector, Italy will need to plan and carry out: complete coupling with the European market; reinforcement of the national network to eliminate numerous bottlenecks; design of a market capacity

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system that minimises costs and is aligned with European standards (avoiding cross subsidies); adjudication of the hydroelectric concessions through competitive tenders; and on-going streamlining of the electricity distribution network and the revision of the pricing framework for industrial customers.

Concrete progress in reducing the current costs of electricity can also be achieved from the revision of the system of subsidies for the ‘para-fiscal’ charges and from the redistribution of the total expenditure for renewable energy incentives over a longer period (from the current 9 years to 12 years) so as to reduce the cost of electricity over the near term. The Government is committed to verifying the feasibility of these solutions and their implementation. In addition, it is possible to contemplate the issuance of bonds by the Electricity Services Manager (GSE) in order to reduce the electricity bill charges related to incentives for photovoltaic energy and energy from other renewable sources.

In the gas sector, Italy is already witnessing the alignment of its prices with those in Europe, and actions are needed to ensure this shift will be structural: acceleration of the forward market, so as to make the entire gas market fully efficient and competitive and to offer up-to-date hedging instruments to market participants; integration with the European markets; the fortification and/or new building of strategic infrastructures (pipelines, terminals and storage facilities); and the implementation of competitive tenders for the distribution service.

With the ratification of the third European directive, it has also become obvious that the postal market needs to meet the challenges of the effects of deregulation. The development of competition within this sphere must nevertheless be balanced by the pursuit of social-cohesion objectives. In respect of the powers of the sector’s regulatory authority, it will be necessary to proceed with the renewal of the Programme Contract with Poste Italiane, the universal service provider.

The contract renewal should provide the occasion for reforming the universal service, and for gradually introducing measures capable of promoting the growth of the market for postal products and services, favouring the competitiveness of the businesses operating in the sector.

Finally, the support to the international image of Italian production remains crucial, with the concrete implementation of the National Export Plan representing a fundamental aspect thereof. Equally important is further streamlining and concentrating promotional activity and resources within the Italian Trade Promotion Agency.

There are still various non-tariff constraints that make many customs clearance procedures overly complicated, lengthy and taxing. In this regard, the country needs a single access ‘window’ to international markets, capable of simplifying and more importantly, accelerating the timing and reducing the costs for import and export procedures.

V.7 THE STRATEGIC ROLE OF INFRASTRUCTURES AND TRANSPORT

Infrastructures are strategic for Italy’s recovery and growth, and their development constitutes an opportunity to be exploited for reversing the gap that Italy has accumulated in these years of crisis. Infrastructure development can represent a leading factor in triggering an end to the economic crisis.

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The new challenge which the country faces, in particular with the local entities, is that of the changeover from a series of stand-alone networks to joined networks. Italy has networks of ports, airports, interports, highways, railroads, high-speed trains, and large urban systems. It is now necessary to invest so that these networks can interconnect with one another.

Increased attention on hubs and integrated transport will allow for making significant progress unifying the country’s infrastructure and reinforcing the links with the rest of Europe and the Mediterranean Basin. A vital aspect of achieving this is dialogue with the Regions and local entities, with a focus on federalism and the principle of subsidiarity, and not only on local interests. One development in this direction is the approximately €2 billion appropriation contained in the ‘Decreto Fare’ to be used for completion of infrastructures, strengthening of the European corridors and improvement in railway service in certain areas of Italy, all of which presuppose the involvement of the territorial entities.

In addition to focusing on the quality of the interconnections, it is also necessary to tackle emergencies through: i) the immediate start-up of work sites and acceleration of the state of completion for works approved by the Interministerial Committee for Economic Programming (CIPE); ii) the involvement of the private-sector capital, and in this regard, the regulations on tax breaks for the bankable and non-bankable projects will need to become operational, in order to allow for mobilising private funds for necessary and strategic projects; iii) the maintenance of the public property and the networks, which is essential for public security and safety and the efficiency of economic activity; and iv) the restructuring of local public transportation.

The last point is a general programme in a sector that is critical to the public at large and the country’s economy, and includes not only deregulation, but also the upgrade of transportation means, improvement of transport links, and the optimisation of tariffs. Considering these needs, the most urgent measures in the near term will have to contemplate: regulatory revisions to elevate the level of competition within the sector; the definition of standard costs in order to introduce rewards-based criteria and to make the system more efficient; and the analysis of possible tax incentives for households in relation to the use of local public transportation.

At the same time, it will be possible to give a greater impetus to raising the security and safety of all transportation means.

Investing in roads and road security is another priority, especially considering the accident rate is still too high. In this regard, the Government is awaiting the conversion into law of the decree for reforming the National Road Code.

Finally, it will be necessary to exploit the strategic role of Italy’s ports and related services (interports and logistics platforms), through which some 85 per cent of the country’s imports/exports flows. In order to reinforce the competitiveness of Italy’s ports, comprehensive reform of the port system is needed as soon as possible, thereby allowing for the revival of the sector, the recovery of efficiency, the simplification of port procedures, and the improvement of security standards.

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The pivotal instrument within the country’s complex growth and infrastructure strategy is the 2007-2013 National Operating Programme. The programme provides the guidelines for modernising the railway network, promoting modal trade, and managing traffic with intelligent transport systems. As part of this programme, the recent ‘6,000 Towers’ project aims at the full-scale implementation of the projects for urban renewal and for the nation’s security.

Italy faces an infrastructural gap with respect to its European partners. The gap is not limited to transport infrastructures alone, but also refers to school buildings, prisons and healthcare facilities, the energy efficiency of the PA properties and the cultural monuments and landmarks. These are all strategic sectors, to which the economic recovery is linked, and they demand sizeable investments. Considering the limits of public finance, alternatives must be found to traditional public contracting for the completion of projects, starting from public-/private-sector partnerships (PPP) that, in attracting international capital, make it possible to maximise the efficiency and the effectiveness of the planning, construction and operation of the infrastructures.

For this reason, all of the procedures and regulations governing the financing of infrastructure should be reviewed so as to facilitate the use of project financing and to favour the participation of foreign investors in PPP transactions.

V.8 PRIORITY ACTIONS FOR SOUTHERN ITALY

The promotion of the cohesion as a development opportunity can ensure solid growth for the entire country, thanks to the leverage of European regional funds and the national fund for development and cohesion. In May 2013, with 2 1/2 years left until the final deadline for certification of the expenditures to the European Commission, the total usage of European funds in Italy amounted to €19 billion, or 40 per cent of the resources programmed. This level, though reflecting an increase, merits the maximum attention so as to be able to estimate the portion of resources at risk of being lost unless there is further reprogramming.

The reprogramming of the resources at risk will be aimed at concentrating the funds made available on a limited number of measures with anti-cyclical effect. The measures will be constructed so as to respond, on the one hand, to the growing deterioration of the employment situation for young people and the gradual impoverishment of households, particularly in southern Italy. On the other hand, they will be addressed to supporting businesses and favouring investments capable of stimulating local economies.

The reprogramming will need to prioritize instruments to promote youth employment and to fight poverty. It should regard only national programmes, and should be based on the reduction of national co-financing, to be modulated on a case-by-case basis in relation to actual possibilities and needs.

A subsequent planning phase (and specifically, with respect to the Regional Operating Programmes for Sicily, Calabria, and Campania) will instead be focused on supporting businesses and on the promotion of investments that are more capable of stimulating local economies.

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These measures are preliminary to getting off to a good start for the 2014-2020 planning cycle, which is one of the most important events in the coming months for development and cohesion policy. For this reason, it will be necessary to get started with a rapid and qualified assessment not only of the issues of the expenditure of resources, but also of the quality of the results achieved; this assessment will then serve as the foundation for the change needed for the new cycle.

The Government has already made an important stride in this regard with the very recently approved decree for streamlining the PA. The decree provides for the creation of an Agency for Territorial Cohesion charged with making more effective use of European funds, and upgrading the technical/administrative capacities of the Regions, the central administrations and the local administrations. It is now necessary to continue along this path, including in view of the European Council’s Recommendations requiring Italy ‘to adopt structural measures for improving the management of EU funds in the southern Italian Regions, in view of the 2014-2020 planning cycle. This means it will be necessary to reinforce the national role and to step up the concentration of the resources on a limited number of priority objectives.

In a situation such as Italy’s where there are organisational and administrative shortcomings, concentrating resources on a limited number of well-defined objectives could make it simpler to strengthen administrative capacities and to monitor the implementation of the programmes.

The Development and Cohesion Fund represents an additional lever to be used together with, and as a complement to, the use of the European funds. Considering the start of the new long-term planning cycle, the forthcoming Stability Law will need to pinpoint the financial resources for the aforementioned fund and the diachronic distribution thereof, on the basis of the quantification proposed by the designated minister. It should be noted that the fund is to be used for financing strategic projects of national, inter-regional and regional importance, with regard to development of infrastructures or intangibles.

V.9 UNIVERSITY AND RESEARCH

Public initiatives can often promote a country’s growth. In order to ensure that such growth is long term, it is important to invest in research and higher education. Although initiatives using funds earmarked for universities are necessary (starting with the Ordinary Operating Fund (OOF)), it is also important to provide instruments, rules and incentives that will stimulate universities to generate their own cash flows and that will trigger the creation of working relationships between public institutions (including research entities and territorial administrations) and private-sector counterparties in order to promote and support continuous training of teachers and adults. Such themes are addressed by a specific resolution of the European Parliament on the modernisation of Europe’s higher education systems. In this regard, it is important to create increasingly stronger links between the basic research system and the productive system, extracting value, for example, through numerous companies that are offshoots of university research.

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Support to research and industrial innovation takes on a fundamental role within the logic of a structural revival of growth. Such support is strategic key in recovering competitiveness, creating new highly qualified jobs, and triggering the formation of a virtuous circuit between the university system, public research entities and businesses.

Accordingly, a priority must be placed on coming up with tax incentives to support research and development activity done by businesses, either on a stand-alone basis or in collaboration with universities and public research entities. The Government is evaluating the possibility of introducing a permanent, stable, and automatic tax credit with respect to the year-on-year increase in corporate expenditures on research and development. The goal is to ensure stability and certainty to businesses over the long term, in order to promote the strategic planning of investments in research.

At the same time, it will be necessary to continue to support the international expansion of Italy’s universities, which must become an integral part of the European higher education system and must be equipped to compete and work with their counterparts. Adequately financed universities must be empowered to exercise and, in many cases, to recover, a sense of responsible autonomy.

With reference to the initiatives for university research and teaching personnel, the fundamental objective is to successfully free up the talent being developed within Italy’s universities and research centres. An extraordinary national plan for recruiting researchers will follow and is an increasingly strategic priority, including for the purpose of promoting and stabilising the repatriation of young scientists. The refinancing of the second three-year period of the extraordinary plan for recruiting full professors is also a priority. In addition, instruments such as the Fund for Investment in Basic Research and challenge prizes will be employed for stimulating the planning autonomy of young researchers, involved in public (universities and research entities) and private research. All of these actions are to unfold with a view toward effective procedural simplification and adjustment to European standards, consistent with what has been planned for other initiatives within the PA.

Turning to the issues of course programmes and the right to education, actions are needed to allow for developing curricula and diplomas that combine specific knowledge in the field of study with acquisition of less sector-specific skills, tools, and methods, and the capacity to apply the same across various lines of work. As such, an in-depth analysis is needed of the initial results of the Higher Technical Education program and its relationship with the first-level university studies.

The situation with regard to the right to education is critical and accentuated by differences from region to region. Italy must go back to financing the right to education in order to offer real opportunities to deserving but underprivileged students, including by augmenting the available of university services and residences. The recent decree-law on universities and education is a move in this direction, as it ensures the continuity of the resources for the right to education and provides incentives for deserving students to pursue their course programmes.

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From the standpoint of research, the primary objective is to create a national research system, which is a strategic need for the country’s economy and a driver of national competitiveness and development. It is thus necessary to guarantee singular governance of the process and therefore, cohesion of the policies about research, and at the same time, to provide adequate responses to the demands of stakeholders in relation to the timing of administrative procedures, with particular reference to the disbursement of the resources to the beneficiaries, and the transparency of the same.

A starting point in this regard will be the revision of the process for defining the National Research Plan (NRP), instilling principles for the maximum inclusion of the players and the rigorous identification of timing and milestones, that will guarantee the quality, completeness, feasibility and prompt implementation of the 2014-2016 NRP, and that will make Italy’s research system more competitive in securing European funds, in particular, within the Horizon 2020 Programme. A mechanism also needs to be put into place for monitoring the NRP, so as to provide for on-going periodic verification of its fulfilment in terms of results.

This process needs to be activated, including on the basis of monitoring and mapping of existing territorial responsibilities related to the assessment of the impact of the initiatives already undertaken in the preceding 2011/2013 NRP, so as not to overlook any of the projects already covered by specific financial initiatives.

V.10 EDUCATION AND HUMAN CAPITAL

High rates of school enrolment, more secondary school graduates and university graduates. This is the human capital needed to stimulate growth for a country that needs to emerge from a crisis. This objective can only be reached with a qualitatively better education system, with constant attention to curbing school dropouts, with the promotion of life-long learning and the strengthening of the relationship between education and the needs of the labour market.

The decisions that can positively affect the quality of education include: system-wide actions in relation to school books and the autonomy of schools; initiatives to enhance the value of school personnel; measures to guarantee a quality learning experience for all students, including through the introduction of structured work/study programmes, and a perceptive, aware and inclusive use of digital technologies to support instructional activity.

The school building plan is dealing with an extremely difficult situation, partly due to an ineffective system of financing that has drawn out the timing for obtaining the permits and wasted resources. Although the creation of a single fund for scholastic publishing is a positive development, it is now necessary to come up with an adequate mechanism that will allow local entities to use the fund’s resources, with exceptions made to public-finance limitations. Given this situation, new national and international channels of financing scholastic publishing should be identified (EIB and the European Council Development Bank) to as to allow for increasing the resources to levels above those available from the State.

Although much has been said on the subject, school autonomy is still not sufficiently developed. Progress in this regard will require: providing the impetus to create a functional staff structure, which is a tool for flexibility that the school

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system cannot do without; formulating a new education pact for redefining the work flow of school personnel in relation to improvement in the quality of education; and financially supporting school autonomy and the planning skills of school managers in the measures concerning the adoption of innovative technologies and tools.

Enhancing the value of the teaching personnel also means defining new rules for career developments, with the introduction of a professional performance evaluation system related to career advancement, without respect to seniority only. In addition, it is necessary to start thinking about future recruitment of school managers and teachers in order to ensure high-profile selection and greater quality to scholastic institutions. These teachers must be ensured adequate training, for which stable, periodic funding should be identified. More specifically, it is necessary to promote and to accompany a transformation in the teacher’s role, from a source of contents (which, by now, are widely available, especially on the Internet) to a mentor, both in the classroom and during work/study programmes.

The Government’s role has been significant in sending a message to temporary personnel with the start-up of an important recruitment project. Together with this, the work of the National Agency for Evaluation of the University and Research System (ANVUR) will need to be used for strengthening the relationship between the quality of the outcome and public investment. ANVUR’s work amounts to essential benchmarking for evaluation activity that involves the entire education system at all levels, from the standpoint of their ongoing integration.

The country must provide the younger generations with the possibility of reaching the highest levels of education, regardless of the economic means and cultural ties of the student’s family. The focus on accessing quality education must also involve the lower levels of the education system: preschools and day-care centres. The efforts in this area need to go to reinforcing and consolidating the appropriations for opening day-care facilities, and to allowing for more full-time classes in cases where demand has remained unsatisfied for some time. This means not only responding to the needs of civil society, but also using an effective tool to discourage school leaving.

The implementation of the provisions contained in the recent law on labour market reform is a strategic priority even for the education system. Consequently, it is fundamental to strengthen technical/vocational education, to link the education, training and work, and, above all, to reinforce the Higher Technical Education across a multi-regional area.

V.11 MORE EFFECTIVE AND EFFICIENT JUSTICE SYSTEM

The efficiency and the capacity of making the administrative mechanisms of the justice system work are key aspects of the process of modernising the country and recovering its competitiveness, moving in the direction of adjusting to the standards of the more developed countries. Much has already been done, including through the first measures adopted by the current Government, to concretely implement the reform of the justice system approved during the previous legislature.

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Noteworthy in this regard is the ‘Judicial Geography’ reform whose implementation is expected to result not only in efficiency gains, but also in significant cost containment. With this reform as a springboard, it will be possible to start tackling the issue of the scarcity of human resources within the administrative segment of the justice system. In addition to the overall plan for the administrative work force, it will be necessary to embark upon the reconfiguration of the judiciary work force for all of the courts and law offices nationwide.

With its ‘Decreto Fare’, the Government has already given its priority attention to addressing the serious problem of the lengthy time periods required for civil justice proceedings. While such decree provides for making more personnel available and reintroducing mediation, there is still much to be done. More streamlined work procedures suitable for working off the case load need to be bolstered and made permanent, without affecting the quality of the rulings.

The time required for court proceedings in Italy is undoubtedly one of the main reasons why businesses decide not to invest in the country. It has been reported on various occasions (including through comparative international analysis) that reshaping the justice system so as to ensure certain and prompt proceedings would have significant positive repercussions on the country’s attractiveness. The multiple instruments available in this regard need to be fortified and made fully operational. One example is the companies’ tribunal, an important, yet underutilised tool, for providing investors with an adequate forum for resolving disputes. In order to accelerate the timing for civil justice proceedings and the process of innovating and modernising the justice system, a strong impetus is needed for the full operability of the civil process online, and for the construction of an information system to allow the public to have online access to the judicial systems, so as to better organise and accelerate delivery of the services to the users.

A positive contribution in this regard could come from the plan for further limits in the appeals process, the expansion of the powers of the justices of the peace, and additional incentives for mediation.

The Government has given an initial response to the particularly delicate issue of the situation in prisons, with a decree related to measures for alternatives to incarceration; the decree strives to allow for the co-existence and constant equilibrium between security needs, the needs for detainees to serve out their sentences, prisoner rehabilitation, and the guarantee of the rights of human dignity.

Given the complexities of the issue, a detailed, step-by-step response is needed on various fronts, starting from a new state of mind in which incarceration is no longer the only option possible, only because the system is not capable of identifying alternative solutions. A programme to make prison life less harsh also appears inevitable, so as to fully apply the constitutional principle of the rehabilitational role of incarceration.

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Among the initiatives recently carried out in this regard, the penal justice system has allowed for sentencing without imprisonment and other alternative solutions. Incarceration has been limited to the more serious crimes only, with the introduction, as independent sanctions, of house arrest and public service work, the latter of which is to be done for the benefit of the community.

The prison building programme needs to be brought to completion, including through innovative financing, such as the possibility of swapping rundown prison facilities (that are nonetheless still appealing from a construction standpoint), with new buildings having structural and security characteristics in line with the most modern standards.

V.12 RESPONDING TO THE MAIN CHALLENGES OF HEALTHCARE AND ASSISTANCE

Though maintaining the characteristics which have placed it in the top rankings in Europe, the National Health Service (NHS) is dealing with formidable challenges as a care provider in the presence of limited levels of financing due to the streamlining of public healthcare expenditure in recent years.

The primary commitment must be to maintain and consolidate the results for which the NHS is recognised in the international field. From this standpoint, it is essential to develop the current model for the governance of the healthcare sector. This model is an effective tool for containing the trend of expenditure (including in relation to demographic trends), and it favours the NHS’ financial sustainability over the medium/long term. At the same time, it is necessary to reevaluate a healthcare model aimed at ensuring that services are not unrestricted and are instead rendered principally to whoever actually needs them.

Preventive measures play a key role in relation to the changes in society and lifestyles. Investments in prevention (including in sectors other than the healthcare sector, according to the health-in-all principle, based on scientific evidence and an evaluation of cost/effectiveness) will substantially contribute to the medium-/long-term sustainability of the NHS, since they reduce the need for care (both in terms of access to care and the level of care required). At the same time, investments in prevention ensure a higher level of well-being and health of the population, and in so doing, contribute to a general improvement of the country’s economic well-being. For this reason, the National Prevention Plan (NPP) needs to be amended and updated, with the attention focused on preventing all of the activities at risk (sedentary lifestyles, overeating, smoking, addiction to gambling, and consumption of alcohol, with a special focus on young people), and substance addiction.

In addition to these specific actions, the new NPP plan will also serve as a general framework for incorporating broad-based projects and healthcare sector planning, including, for example, the national vaccination plan and initiatives for security and safety in the workplace. A special emphasis needs to go to the development of information systems dedicated to prevention, so as to ensure a regular flow of data useful for the evaluations of decision makers. The regular gathering of data that will lead to the definitive implementation of online healthcare files also falls under the umbrella of prevention policies.

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A new Healthcare Pact is also needed in the near term, as part of the healthcare planning measures. The new pact will not only allow the Government and the Regions to define the NHS financing and programming, but it will also represent the instrument for improving service quality, promoting services suitability, and guaranteeing governance of the system as a single unit.

Turning to local healthcare service, the completion of the complex process of transferring resources from hospitals to local healthcare units will make it possible for effectively tackling the issues of ageing and chronic illnesses, reinforcing the foundation for the NHS’ future sustainability. The absence of networks integrating hospital care with local healthcare services is another reason for the significant waste of resources nationwide, which often translates into improper care or even a failure to provide care, with consequences on the effectiveness of treatments and the availability of resources. This framework suggests the need for a reorganisation of hospital care, based on the premise of an adequate transfer of activity to the local level and thus the reconfiguration and strengthening of the local services network. In this scenario, hospitals need increasingly to become places for providing acute and highly specialised care. Along the same vein, it will be necessary to enhance the role of NHS partner pharmacies and especially the so called ‘service pharmacies’ concentrating in them new socio-healthcare services. This approach is likely to yield positive effects in terms of financial savings where it contributes to limiting hospital admissions.

The NHS will need to continue its on-going streamlining of expenditure, by considering the overall economic-financial compatibility thereof, so as to guarantee more efficient use of resources and simultaneously to ensure an adequate service quality to the public. The elimination of waste and inefficiencies is another of the main goals to be achieved so as to guarantee in the years ahead the delivery of healthcare services through a healthcare system recognised to be one of the best in the world. In order to do this, the Regions will contribute to stepping up the monitoring of the suitability of healthcare services and Essential Levels of Assistance (ELA), and transparency will be promoted across the board as a tool for not only improving communications with the public but also for controlling the legitimacy of the services. The healthcare system must, in other words, become increasingly more ‘selective’, it being necessary to redesign the ELA boundaries, and to adopt the approach of the Health Technology Assessment (HTA), so as to identify the treatment options not only proving more cost effective, but also preferable to patients. Accordingly, it will be possible to ensure, when available resources are held constant, the maximum possible value in terms of health. National direction of this process is necessary in order to maintain the governance of the NHS as a single unit, and to guarantee equity of access across the nation, namely, regardless of the patient’s region of residence, age, and/or socio-economic conditions.

From another perspective, technological innovation can make a decisive contribution to the aforementioned reorganisation of healthcare. A particular emphasis needs to be addressed to converting all healthcare processes to computer formats, the development and broad-based application of e-health services at a national level, and ultimately, ensuring online healthcare becomes a structural aspect of the NHS, with the awareness that technological and operational innovation of the supply network, whether at hospitals or local healthcare units, will be a driving force in increasing efficiency and productivity, and thus, the sustainability of the NHS.

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Finally, professional responsibility and the lack of job security within the healthcare professions represent issues that require a strong commitment. With reference to the former, the decisions of the previous legislature will need to be brought to successful conclusion and further improved. With regard to the lack of job security, several initial measures have recently been approved as part of the decree law to streamline the PA, whereas the measures that might still be adopted include the institution of specific professional registers for NHS researchers, without any additional charges to the public budget.

V.13 GREATER ATTENTION TO THE FARMING SECTOR

The agri-food system is a vital part of Italy’s economy, in which various elements interact. Farming and fishing represent the key link in a chain which, from beginning to end, encompasses other economic sectors that together account for almost 17 per cent of the nation’s GDP.

As shown by the initiatives in the ‘Decreto Fare’ and the recent IMU exemption for farmland, the Government and Parliament have focused considerable attention on the farming sector, with important measures for simplification and concrete actions to increase the competitiveness of individual farming businesses; these instruments are immediately operative for business owners and the needs of the productive world.

In this sector, too, the difficulties in accessing credit and financial incentives, along with bureaucratic and regulatory hurdles, represent an unacceptable obstacle to growth potential. This situation demands a valid response. The credit granted to the farming sector has contracted sharply in the past five years: the €2.1 billion of farm credit disbursed in Italy in 2012 represents the lowest level for the period. The instruments in existence must therefore be revised (in particular, the Guarantee Fund, which did not produce the expected results due to both high costs and the difficulties of the banking system working with the farming sector).

The acceleration of the spending of EU funds at risk of release and the activation of the previously suspended Rural Development Programmes payments offer a tangible solution to the liquidity problems in the sector. For the funds still to be made available (more than €250 million) a dedicated service centre will be opened to finalize financing investments for improving the agro-food chain.

The agro-food sector offers concrete future prospects to young people, although the difficulty in securing financing is having a negative impact on exploiting the sector’s business opportunities. A concrete and coordinated series of initiatives needs to be urgently developed so as to allow for removing the existing barriers, including a rigid land market (sharp segmentation of the market and of the prices). The prospect of the sale of state-owned land (Law no. 27/2012) is an important development in this regard, with an inventory now being conducted of the properties that could be made available to young people and the identification (together with the Cassa Depositi e Prestiti) of measures that could be immediately applied.

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Functional to these objectives is the development of services to support agro-food firms, which will be done with the backing of the new planning of EU funds. This will allow for improving transport services, healthcare services, and services to aid farm workers in better managing work/leisure time commitments. Business advisory services and applied research are also to be made available in order to promote productive and technological innovation.

Another vital issue for reviving the sector is the protection of Italian agro-food production, an irrefutable part of national agriculture policy. In this regard, the recent changes to EU regulations on designation of origin will need to be tracked carefully in order to effectively protect national products.

Expo 2015, which will be concentrated on the quality and security of the food chain, will represent an excellent opportunity for talking about and promoting Italy’s agri-food system. This opportunity will need to be appropriately exploited through the sponsorship of special initiatives.

Negotiation over the reform of the EU Agriculture Policy represents an important event in the months ahead. Considering such reform holds the promise of some €52 billion of EU funding to Italy for the 2014-2020 period (€7.4 billion per year), it will be crucial for Italy to fully exploit its potential during the negotiations.

This reform may lead to considerable results in terms of the effectiveness of the policies and guarantees for a sector that needs certainty and long-term growth prospects.

V.14 GETTING BACK ON THE PATH OF LONG-LASTING DEVELOPMENT

The policies for improving the quality of the environment will need to become a strategic horizon for the Government’s key decisions, so as to position the country to meet the increasingly pressing international challenges to the environment.

Italy must bolster its role in international cooperation, and following the Rio +20 Conference on Development, the country must increasingly affirm its commitment to the development of clean technologies, also creating opportunities for Italian companies operating in this business on the international markets. At the European level, Italy needs to continue to pursue actions to allow for reaching the ‘Plan 20-20-20’ targets for greenhouse gas emissions, renewable energy, and energy efficiency.

On the domestic scene, the possibility of Italy becoming an exemplary case in defining and implementing European policies depends on integrating sustainability decisions at all levels of government, and an in-depth review of the system for the governance of sustainable development.

In the upgrading the system of governance of environmental policies, more emphasis needs to be placed on consistency between the actions of the central government and those of the Regions. Regional strategies must be able to ensure a regional contribution to national objectives, and to outline clearly the planned instruments, priorities and actions, thereby ensuring that the planning activity can be completed for the country as a single unit.

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Italy’s strategic options within this revised development route can be summarised as: expansion of the green economy, energy conversion, and protection of biodiversity.

With reference to the green economy, the most urgent initiative for improving the relationship between production needs and environmental protection is undoubtedly the reform of environment-related taxation provisions, in order to ensure, with revenues remaining equal, a transfer of the labour and investment costs to the production and consumption of the goods and services damaging to the environment.

In the energy field, the priority is to develop renewable sources, avoiding the inefficiencies that materialised in the past due to the types of incentives offered. In addition to reinforcing the productive capacity of companies, a special focus should go to pursuing energy autonomy, partly due to the development of an intelligent distribution network and inducements for new energy-related research.

Regulatory and legislative measures need to be established for making the development of renewable energy possible, without any distortions. It is thus essential to proceed with the administrative simplifications needed to create a framework of uniform rules applicable nationwide and stable over time.

Reducing the cost of energy remains a vast strategic objective, including as a factor in allowing businesses to be competitive. The debate about fossil fuels and alternative forms of energy production has certainly impacted this issue. Making energy more efficient is an argument that can be postponed no longer; the more efficient use of energy will not only contribute to reducing consumption, but it can positively influence the recovery of certain sectors (including construction) that have been very adversely affected by the crisis. Thus, even the basic and effective tax breaks on restructuring should be made permanent for this reason.

The protection of biodiversity is another important strategic option for Italy. Parks and protected marine areas must increasingly be involved in the implementation of policies to care for and maintain resources such as air, water and soil, consistent with the European objective of halting the loss of biodiversity and the degradation of the ecosystem services by 2020.

A national plan for protecting and managing water resources needs to be developed for: safeguarding and enhancing the value of water resources; introducing criteria and limitations for efficient, effective and economically sustainable management of water resources; and unleashing new investment in infrastructures and innovative technologies. The Government’s recently approved measures are a step in this direction.

The second priority is to define limits on soil consumption nationwide, focusing on the transformation of the existing urban fabric and not on the planning and construction of new buildings. The law currently under review by Parliament introduces initial actions in this regard.

Finally, laws and regulations regarding environmental crimes and environmental administrative offences need comprehensive reform, with a revision of the entire structure of fines, including with the objective of expanding the sphere of criminal acts harming the environment, natural resources and the landscape.

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These strategic, structural reforms must be rounded out by direct actions to deal with the country’s numerous and dramatic environmental emergencies, with a supply of support and effective emergency-management tools. This is the case of waste management, which is not only an emergency, but a situation requiring planning with immediate and effective measures (in several Regions, in particular). This effort is also designed to reinstate, over a reasonable time period, a service to manage the waste cycle that is in line with European standards and capable of responding to the demands of businesses and the public. The system for controlling the traceability of waste materials (SISTRI) is one of the measures already implemented.

At the same time, a focus on prevention, recycling and re-use is also needed. The formalities for developing and approving the National Plan for Integrated Waste Management need to be concluded, so as to yield a tool that, in simplifying the sector’s regulations, will support the transition from an industrial system based on the front end of production (disposal sites and incinerators) to a system based on the back end of production that constructs mechanisms for recovering and re-using resources, moving toward the prospect of a zero-waste environment.

The reduction of hydrogeological risk and the defence of the soil constitute another major national emergency. A project is needed to address these issues, including with the involvement of the Regions. The project should offer the possibility of gradually securing the territory in order to prevent the effects of various risks (including hydraulic and hydrogeological risks) and actions to deal with climate change. A standardised, structural plan for the short and medium term should allow for adaptation, with the simplification of the managing entities, and a focus on involving communities with the planning and realisation of various projects. Agricultural and forestry concerns will also need to be involved.

An important step in simplifying regulations and involving the public in environmental matters could be the consolidation of all environmental regulations into an Environmental Code, with the introduction of a public debate for the approval of projects having an important impact on the environmental quality of a specific area.

V.15 CULTURAL HERITAGE, A COMMON GOOD TO BE EXPLOITED

The policies for tourism and Italy’s cultural heritage should persuasively move toward affirming the peculiarity of the nation’s ‘cultural values’. Efforts at a national level must begin with the premise that the protection and promotion of Italy’s cultural heritage can only be effectively achieved through broad and responsible coordination with regional policies and with the functions performed by local entities. The policies for cultural heritage require an approach to solving varying problems: on the one hand, action is needed to enhance the value of the nation’s cultural heritage, while, on the other hand, protective and emergency measures must also be put into place. Much has already been done in past years in this regard, especially with several important national landmarks (Pompei). The Government’s ‘Cultural Values’ Decree is expected to provide an even longer lasting contribution.

Concrete support will be required in the future for the implementation and improvement of the Cultural Heritage and Landscape Code, with the careful monitoring of its actual application during recent years. The code has defined the

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effective levels of protection of cultural monuments and landmarks, and the ways in which their value can be enhanced, but it still needs to be revised by simplifying some of procedures not suited for achieving specific objectives to protect cultural interests.

Protection and emergency measures need to tackle the issue of preventing and reducing risks of earthquake damage to landmarks and monuments, including by considering the ongoing reduction of maintenance work in recent years as a result of the continuing reduction of resources, thus making those buildings more exposed to natural disasters.

Laws and regulations covering criminal acts against cultural and artistic heritage, landmarks and monuments need to be revised in order to effectively combat the illegal trafficking of artwork. This subject was addressed in the previous legislature with an enabling act introduced by the Government, with a provision for escalating the sanctions for these types of crimes.

The issues of architectural quality and the protection of contemporary architecture must be addressed and analysed anew. These issues are currently excluded from the sector code and protected only on the basis of copyright law, making it impossible to provide any effective protection of the same.

Tourism is culture. The first change needed in reviving the tourism sector is one of mind-set. Tourism must be considered as a major opportunity for the country, with coordination of the efforts necessary to flesh out its unexpressed potential through organisation of the supply of tourism activities and services. The Strategic Plan for Tourism, approved by the previous Government, is an excellent point of departure for consolidating Italy’s competitive advantage and contributing to economic growth and job creation.

Sport is also culture, and is synonymous with health, social inclusion, integration, tradition, and the opportunity for participation for all members of society without discrimination. Sport must be able to be increasingly part of the country’s social and civil progress. It is thus necessary to continue pursuing the initiatives outlined in the National Plan for Promotion of Sports Activity, developed last year for the first time. The plan aims to consolidate and expand active policies for the participation of young people, students, the disabled, and elderly in sporting activities, while it also addresses the expansion of basic sports facilities.

V.16 GROWTH DIPLOMACY

Italy is increasingly looking at emerging centres of development within the international arena. Now more than ever, national political, strategic, economic and cultural interests must be projected onto the global stage. Expo 2015 will be a unique opportunity for verifying the results of the initiatives undertaken, and a platform that should give a new stimulus to Italy’s image internationally. Italy thus needs to be fully prepared for this event.

Growth diplomacy has two major priorities: i) supporting exports to the emerging markets with the greatest growth potential; and ii) promoting investments abroad and productive integration with the economies complementary to Italy’s.

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Every year, Italy’s embassies prepare a promotion plan for each country that is commensurate with the actual situation, integrating political action, economy, culture and science. With the contribution of Cultural Institutes, the new Italian Trade Promotion Agency, the National Tourism Agency and all of the entities abroad representing Italy’s economic system, the promotional plans focus on concrete levers: organisation of trade missions, improvement of the legal framework, on-site promotional initiatives, and country presentations. The strategy has three cornerstones: i) identifying potential investors, stimulating their interest in Italy, and emphasising the provisions adopted by the Government in order to improve the business climate; ii) expanding the target geographic areas and priority sectors (real estate, large-scale retailing, infrastructures and transport, tourism, fashion, agro-food, renewable energies, waste management, water resources and high technologies); and iii) coordinating all of the public- and private-sector players in a single effort, thanks to the steering committee and the task force for coordinating the international activity of the Regions.

The Government has therefore unveiled an ambitious plan to re-orient the diplomatic network in various geographic areas, closing some consulates (particularly in Europe) and beefing up the presence in areas outside of Europe. The human and financial resources freed up will be redeployed in promoting Italy in new emerging markets through public-private partnerships (PPP) in cooperation with the development and renewal of subsidised credits for businesses in developing countries.

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VI. REPORT ON THE ARREARS OF PUBLIC ADMINISTRATIONS

VI.1 INTRODUCTION

Decree-Law No. 35 adopted in April 2013 provided that a report on the status of the decree’s implementation be made available as an attachment to the Update to the 2013 EFD, and that the report would contain information about the status of the payments made by Public Administrations (PA), the acknowledgement of the stock of public sector debts still outstanding, as well as the initiatives necessary to complete the settlement of the PA debts accrued as of 31 December 2012¹.

VI.2 PAYMENTS MADE BY PUBLIC ADMINISTRATIONS

An update providing information about the payments made by the PA is regularly published in a special section of the Ministry of the Economy and Finance (MEF) web site. The table below illustrates the situation (updated as of 18 September), categorized by type of debtor entity and the nature of the transactions².

TABLE VI.1: PAYMENTS MADE BY THE PUBLIC ADMINISTRATIONS AS OF SEPTEMBER 2013(in € mn)

	Resources		Resources actually
	allocated by		made available to			Payments
Debtor entities	D.L. 35/2013		debtor entities			made
Central Government		3,000		3,000			2,613
Payment of off-balance sheet debts		500		500			113
Increase in tax refunds		2,500		2,500			2,500
Regions and autonomous Provinces		10,200		8,301			5,350
Liquidity advances		8,000		6,101			5,350
Credit lines		2,200		2,200
Provinces and Municipalities		6,800		6,606			3,341
Liquidity advances		1,800		1,606			1,506
Credit lines		5,000		5,000			1,835
Total amounts (absolute values)		20,000		17,907			11,304
Total amounts (in % of allocated resources)				90	%		57	%

¹  Article 7, Paragraph 9 bis, Decree-Law No. 35/2013, converted with amendments by Law No. 64/2013.

²  The data related to the resources appropriated refer to the amount established by Decree-Law No. 35/2013 and do not include the supplements provided by Decree-Law No. 102/2013, now being converted into law.

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VI.3.  ACKNOWLEDGEMENT OF THE PUBLIC SECTOR ARREARS

In accordance with the laws and regulations governing the payment of the public sector arrears, the entities are proceeding with the acknowledgement of the certain, liquid and enforceable debts, for administrations, supplies, contracts, and obligations for professional services, accrued as of 31 December 2012 and not yet settled.

It is not possible to supply any quantification in this regard: a complete understanding of the stock of the debts to be acknowledged would require the reprocessing and verification of the data received, so as to ascertain both the extent to which the entities involved have participated in the acknowledgement process, and the proper identification of the type of debts to be considered.

VI.4. MEASURES  FOR COMPLETING THE SETTLEMENT OF THE PUBLIC SECTOR ARREARS

In recent months, measures have been outlined for the purpose of accelerating the settlement of the public sector debts accrued as of 31 December 2012.

More specifically, a mechanism has been introduced for granting a State guarantee to back the public sector arrears certified through the acknowledgement process indicated above³. In this regard, a special fund is to be established by the MEF for the coverage of the charges arising from the issuance of the guarantee.

With subsequent measures, a €7.2 billion increase in the payment of the past-due debts of territorial entities was authorised for 2013, in addition to the €20.0 billion originally provided, as an advance disbursement of the tranche provided for 2014, by the first decree in April sanctioning the acceleration of the settlement of the debt⁴. It is also noted that the payment of up to €20 billion has been authorised for 2014. The Government's commitment is to provide a total of €50 billion, although the need for identifying additional measures can be evaluated when the final amounts of the debts outstanding are determined through the acknowledgement process provided by law.

³  Article 11, Paragraph 12 ter and the paragraphs thereafter of Decree-Law No. 76/2013, converted, with amendments, by Law No. 99/2013.

⁴  Decree-Law No.35/2013 convertito dalla L. No. 64/2013.

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APPENDIX

TABLE A1: IMPACT OF DECREE-LAW NO. 35/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		340		701		663		656		656
Increase in revenues		200		600		0		0		0
Increase in EU refunds		200		0		0		0		0
Incremental VAT income		0		600		0		0		0
Decrease in expenditure		140		101		663		656		656
Reduction in re-adjustable spending appropriations		0		0		570		570		570
Increase in revolving fund to ensure financial stability of local entities		130		0		0		0		0
Revolving fund to ensure financial stability of local entities		0		70		0		0		0
Other		10		31		93		86		86
USE OF RESOURCES		7,710		31		93		89		86
Decrease in revenues		7		31		93		89		86
Tax exemption on transfer of certain, liquid and collectible credits claimed from the PA		7		7		7		7		7
Interest income (not included in data at unchanged legislation)		0		24		86		82		79
Increase in expenditure		7,703		1		0		0		0
Increase in fund for extinguishing central government debts		500		0		0		0		0
Easing of Domestic Stability Pact for local entities		5,000		0		0		0		0
Domestic Stability Pact: Regions and Autonomous Provinces - Acceleration of transfers to local entities and payments to suppliers		1,400		0		0		0		0
National co-financing of EU structural funds – exception to the Domestic Stability Pact		800		0		0		0		0
Other		3		1		0		0
IMPACT ON NET BORROWING		-7,370		670		571		567		570

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TABLE A2: IMPACT OF DECREE-LAW NO. 54/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		369		89		39		0		0
Increase in revenues		259		0		0		0		0
Reduction of fund for social-welfare contributions relief for second-level salaries		250		0		0		0		0
Revenues from Antitrust Authority administrative sanctions		9		0		0		0		0
Decrease in expenditure		110		89		39		0		0
Reduction of fund for structural economic-policy measures		13		0		0		0		0
Reduction of fund for use of Antitrust Authority administrative sanctions		10		0		0		0		0
Italy-Libya partnerships and cooperation		50		50		0		0		0
Reduction of appropriation to development and cohesion fund		30		35		35		0		0
Other		7		4		4		0		0
USE OF RESOURCES		358		2		2		0		0
Decrease in revenues		1		2		2		0		0
Induced effects for decrease in employee compensation in relation to the exercise of political activity		1		2		2		0		0
Increase in expenditure		357		0		0		0		0
Interest due to increased Treasury advances		18		0		0		0		0
Social fund for employment - exceptional social safety nets		281		0		0		0		0
Solidarity contracts		58		0		0		0		0
IMPACT ON NET BORROWING		11		87		37		0		0

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TABLE A3: IMPACT OF DECREE-LAW NO. 63/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		66		287		380		265		262
Increase in revenues		66		244		229		229		229
Tax relief measures for upgrading energy efficiency		26		17		0		0		0
Tax relief measures for building restructuring and purchase of furnishings		39		18		0		0		0
VAT: food and beverage products sold via vending machines		0		104		104		104		104
VAT: publishing products		0		90		90		90		90
Fund to be used for exemptions from regional tax on productive activity (IRAP) for persons without any organisation		0		15		35		35		35
Deductions of expenditure new works to prevent property damage from earthquakes (VAT/IRAP)		1		0		0		0		0
Decrease in expenditure		0		43		151		36		33
Reduction with reference to Libya Treaty		0		23		55		35		32
Reduction of Ministry of Economic Development fund		0		0		20		1		1
State’s portion of taxpayer-designated fund (.008)		0		20		35		0		0
Reduction of special capital fund		0		0		41		0		0
USE OF RESOURCES		47		261		380		265		262
Decrease in revenues		18		188		380		265		262
Tax relief measures for upgrading energy efficiency		6		61		162		111		108
Tax relief measures for building restructuring and purchase of furnishings		12		124		214		151		151
Other		0		3		4		3		3
Increase in expenditure		29		73		0		0		0
Social fund for employment - exceptional social safety nets		29		73		0		0		0
IMPACT ON NET BORROWING		19		26		0		0		0

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TABLE A4: IMPACT OF DECREE-LAW NO. 69/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		269		819		956		729		372
Increase in revenues		24		311		235		125		125
Robin Tax		0		0		150		75		75
Reduction of standardised average consumption of diesel for farming works		14		35		35		0		0
Incoming payment from Intesa Sanpaolo current account held in the name of the special fund for applied research		0		150		0		0		0
VAT refunds: travel agencies		2		12		12		12		12
Increase in excise tax rate on fuels		0		75		0		0		0
Fund to be used for exemptions from regional tax on productive activity (IRAP) for persons without any organisation		0		16		4		4		4
Induced effects for decrease in employee compensation		2		16		27		27		27
Other		5		8		8		8		8
Decrease in expenditure		245		508		721		604		247
Revision of contractual relationships with the company Stretto di Messina		100		85		50		0		0
Reduction of financing for Libya-Italy Treaty		45		100		120		142		25
Turin-Lyon railway line		0		96		218		154		171
Giovi Pass road		50		189		274		250		0
Reduction of resources for service outsourcing contracts		0		25		50		50		50
Other		50		13		9		8		1
USE OF RESOURCES		242		789		923		700		345
Decrease in revenues		24		49		153		30		30
Reduction of excise tax of heating oil for crops growing in greenhouses		14		35		35		0		0
Relaunching of boats production for leisure		1		12		12		12		12
Extension of deadline for paying tax on financial transactions		7		0		0		0		0
Reduction of the A2 electricity rate		0		0		104		15		15
Other		1		3		3		3		3
Increase in expenditure		218		740		770		670		315
Interest subsidy of the Ministry of Economic Development for purchase of new plant, machinery and equipment for SMEs		0		8		21		35		35
Extension of tax credit for cinematographic industry		0		45		0		0		0
Fund to allow for continuing operations of construction work sites		195		470		662		547		196
Fund for school buildings’ restructuring		0		150		0		0		0
State university operating fund		0		21		43		43		43
Other		23		46		44		46		42
IMPACT ON NET BORROWING		27		30		33		29		27

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TABLE A5: IMPACT OF DECREE-LAW NO. 76/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		1,340		966		662		234		200
Increase in revenues		865		273		243		123		188
1% increase in personal income tax prepayment (from 99% to 100%) as of 2013		176		0		0		0		0
1% increase in corporate income tax prepayment and surcharge (from 100% to 101%) for 2013 only		281		0		0		0		0
1% increase in prepayment of regional tax on productive activity (IRAP) for physical persons and partnerships as of 2013 (from 99% to 100%) and for corporate income tax-payers only for 2013 (from 100% to 101%)		199		0		0		0		0
Increase in prepayment of taxes withheld on interest earned on bank current accounts and deposits (from 100% to 110%) for 2013 and 2014 only		209		0		0		0		0
Consumer tax on electronic cigarettes		0		117		117		117		117
Fund to be used for exemptions from regional tax on productive activity (IRAP) for persons without any organisation		0		150		120		0		0
Extension to 2016 of incoming payments to the Electricity Equalisation Fund		0		0		0		0		66
Other		0		6		6		6		6
Decrease in expenditure		476		694		419		112		12
Replanning of resources in revolving fund for initiatives financed under National Operating Programmes / Cohesion Action Plan - 2007-2013 structural funds		100		150		150		100		0
2007-2013 structural funds and reconfiguration of Cohesion Action Plan		108		208		179		0		0
Administrative federalism fund		65		77		78		0		0
Fund for structural economic-policy measures		98		0		0		0		0
Fund for building rentals		91		209		6		6		6
Other		14		49		6		6		6
USE OF RESOURCES		1,340		966		657		168		84
Decrease in revenues		1,214		700		464		157		73
Incentives for new full-time hiring of young workers in Southern Italy		100		150		150		100		0
Incentives for new full-time hiring of young workers in areas other than Southern Italy		48		98		98		50		0
Extension to 2016 of tax reliefs on investments in start-ups		0		0		0		0		66
Deferral of ordinary VAT increase to 1 October 2013 (from 21% to 22%)		1,059		0		0		0		0
1% increase in prepayment of regional tax on productive activity (IRAP) for physical persons and partnerships as of 2013 (from 99% to 100%) and for corporate income tax-payers only for 2013 (from 100% to 101%)		0		164		0		0		0
1% increase in corporate income tax prepayment and surcharge (from 100% to 101%) for 2013 only		0		281		0		0		0
Increase in prepayment of taxes withheld on interest earned on bank current accounts and deposits (from 100% to 110%) for 2013 and 2014 only		0		0		209		0		0
Other		7		7		7		7		7
Increase in expenditure		127		266		192		11		11
Measures for self-employment and entrepreneurship		26		26		28		0		0
Promotion and completion of projects promoted by young people and by the underprivileged for social infrastructuring and value enhancement to State properties in Southern Italy		26		26		28		0		0
Training scholarships for young people who are not working, attending school or participating in any training activity		56		16		96		0		0
Start-up of “Social inclusion promotion” programme		0		140		27		0		0
Right-to-work fund		10		20		0		0		0
Extension of labour contracts - Institute for Professional Training of Workers		0		6		0		0		0
National fund for civil service		2		10		0		0		0
Work activity for prison inmates		0		6		6		6		6
Other		7		16		8		6		6
IMPACT ON NET BORROWING		0		0		5		66		116

MINISTERO DELL’ECONOMIA E DELLE FINANZE 87

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

TABLE A6: IMPACT OF DECREE-LAW NO. 91/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		5		92		134		134		134
Increase in revenues		0		84		125		125		125
Increase in tax rate for consumption of lubricating oils		0		12		12		12		12
Increase in excise taxes on beer, ethyl alcohol, and intermediate alcoholic products		0		20		62		62		62
Increase in base tax rate on processed tobacco		0		50		50		50		50
Other		0		1		1		1		1
Decrease in expenditure		5		9		9		9		9
Incoming payment for special accounting items set up by the Ministry of Cultural Heritage and Activities and Tourism		2		9		9		9		9
Reduction TAB. B Ministry of Economy and Finance		3		0		0		0		0
USE OF RESOURCES		5		87		133		130		130
Decrease in revenues		0		0		9		14		10
Increase in tax rate for consumption of lubricating oils - Income taxes		0		0		9		13		10
Increase in expenditure		5		87		125		117		120
Urgent measures for inventorying and digitalising cultural and artistic assets, and implementation of “500 young people for culture”		0		3		0		0		0
Regular opening to the public of cultural institutions and landmarks		0		13		13		13		13
Measures to promote young artists’ music - tax credit		0		5		5		5		0
Tax credit for cinematography industry		0		45		90		90		90
Fund for structural economic-policy measures		2		11		8		5		13
Italian National Museum for Hebraism and the Shoah		1		2		2		0		0
“New Uffizi” project (Uffizi Gallery Museum)		1		4		4		0		0
Other		1		6		5		5		4
IMPACT ON NET BORROWING		0		6		1		4		4

88 MINISTERO DELL’ECONOMIA E DELLE FINANZE

APPENDIX

TABLE A7: IMPACT OF DECREE-LAW NO. 101/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		8		55		70		70		70
Increase in revenues		3		18		23		23		23
Decrease in expenditure		5		37		47		47		47
Reduction in spending appropriations for compensation to voluntary fire-fighting personnel		5		30		40		40		40
Different use of operating programme resources co-financed by European 2014-2020 structural funds		0		4		4		4		4
Revolving fund for implementation of EU policies		0		1		1		1		1
Other		0		2		2		2		2
USE OF RESOURCES		8		52		67		67		67
Decrease in revenues		3		15		20		20		20
Increase in expenditure		5		37		47		47		47
Increase in fire-fighting personnel		5		30		40		40		40
Enhancements of Prime Minister Office and several Agencies structures		0		6		6		6		6
Other		0		2		2		2		2
IMPACT ON NET BORROWING		0		3		3		3		3

MINISTERO DELL’ECONOMIA E DELLE FINANZE 89

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2013

TABLE A8: IMPACT OF DECREE-LAW NO. 102/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		2,830		744		851		550		490
Increase in revenues		2,075		459		661		490		490
Reduction in maximum personal income tax deduction for expenditure on insurance premiums		0		459		661		490		490
Reduction of fund for social-welfare contributions relief for second-level salaries		250		0		0		0		0
Compensation for lost revenue to concessionaires of electronic legal gaming network		600		0		0		0		0
Increased VAT revenue from payment of PA’s debts		925		0		0		0		0
Revenues derived from electricity rate components		300		0		0		0		0
Decrease in expenditure		755		285		190		60		0
Use of fund for offsetting the effects of multiannual contributions		0		120		0		0		0
Reduction of appropriations for expenditure items regarding intermediate consumption and gross fixed investment/spending authorisations		575		115		90		10		0
Reduction of spending authorisation for MOSE project		0		50		50		0		0
Reduction of spending authorisation for Italian National Railway programme contracts		0		0		50		50		0
Reduction of expenditure on employee compensation		180		0		0		0		0
USE OF RESOURCES		2,819		645		587		486		504
Decrease in revenues		2,519		114		105		105		105
Measures regarding single municipal property tax (IMU)		2,422		79		79		79		79
Reduction of the tax rate on rent income from the contracts with rents set at controlled prices (from 19% to 15%)		12		35		26		26		26
Other		85		0		0		0		0
Increase in expenditure		300		531		482		381		399
Allowances under Domestic Stability Pact for entities experimenting with new local government accounting system		0		120		0		0		0
Refinancing of exceptional social safety nets		300		0		0		0		0
Widening of ‘safeguarded’ workers		0		151		164		124		85
Interest expense arising from increase in PA’s debt settlements		0		190		248		257		314
Increase in solidarity fund for first-home mortgages / access to credit for first-home purchases / Fund for subsidies in cases of unintentional arrearage on house payments		0		70		70		0		0
IMPACT ON NET BORROWING		11		98		264		64		-14

90 MINISTERO DELL’ECONOMIA E DELLE FINANZE

APPENDIX

TABLE A9: IMPACT OF DECREE-LAW NO. 104/2013 ON GENERAL GOVERNMENT NET BORROWING (in € mn; including induced effects)

	2013		2014		2015		2016		2017
INCREASE IN RESOURCES		13		407		578		620		623
Increase in revenues		13		390		535		560		561
Excise taxes on beer and other alcoholic beverages		12		131		216		216		216
VAT on beer and other alcoholic beverages		2		19		31		31		31
Introduction, as of 2014, of a mortgage and cadastral tax equal to EUR 50 for each tax to be paid on acts of transfer against payment of properties subject to registration tax		0		120		120		120		120
Increase in fixed registration, mortgage and cadastral taxes		0		48		48		48		48
Induced effects for decrease in employee compensation		0		72		119		145		146
Decrease in expenditure		0		18		43		60		62
Support teachers for disabled - Reduction in Social Insurance for Employment (ASPI) - transfers to Social Security Fund (INPS)		0		8		31		47		47
Use of economies from State exams		0		8		8		8		8
Other		0		2		4		5		7
USE OF RESOURCES		13		334		538		590		592
Decrease in revenues		0		15		20		25		25
Deduction of donations to universities and institutions for advanced education in arts and music (AFAM)		0		4		2		2		2
Enhancements to training and education programmes - Free museum access for school teachers		0		10		0		0		0
Beer and other alcoholic beverages - effects on direct taxes and regional tax on productivity (IRAP)		0		2		18		23		23
Increase in expenditure		13		319		518		565		567
State supplemental fund for scholarships and grants for education in arts and music		0		121		100		100		100
School buildings - Mortgages with charges for State’s account		0		0		120		150		150
Not-eligible teachers		0		95		95		95		95
Increase in fund for structural economic-policy measures		0		3		50		15		15
Welfare benefits to students and measures to curb the number of school dropouts		10		30		15		15		15
Continuity of support teachers for the disabled and mandatory training for school personnel		0		40		118		168		168
School managers and managers for the national evaluation system - Personnel at research facilities		0		19		20		22		24
Other		3		11		0		0		0
IMPACT ON NET BORROWING		0		73		39		30		31

MINISTERO DELL’ECONOMIA E DELLE FINANZE 91

The Update of the

ECONOMIC AND FINANCIAL DOCUMENT 2013

is available on-line

at the internet address listed below:

www.mef.gov.it • www.dt.tesoro.it • www.rgs.it

ISSN: 2240-3280