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

THE REPUBLIC OF ITALY

(Name of Registrant)

Date of end of last fiscal year: December 31, 2015

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 communicationsfrom the Securities and Exchange Commission:

THE HONORABLE ARMANDO VARRICCHIO

Italian Ambassador to the United States

3000 Whitehaven Street, N.W.

Washington, D.C. 20008

It is requested that copies of notices and communications from the

Securities and Exchange Commission be sent to:

LORENZO CORTE, ESQ.

Skadden, Arps, Slate, Meagher & Flom (UK) LLP

40 Bank Street,

Canary Wharf

London E14 5DS

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," page 84 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 84 to 89 of Exhibit (1), which are 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 84 to 89 of Exhibit (1), which are 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.

II

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," page 84 of Exhibit (1), which is hereby incorporated by reference herein.

(b) External floating indebtedness of the registrant. (Total to be stated in the respective currencies in which payable.)

See "Tables and Supplementary Information," pages 84 to 89 of Exhibit (1), which are 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 2016 Economic and Financial Document," "— The Update of the 2016 Economic and Financial Document," "—  Revenues and Expenditures," "— Expenditures," "— Revenues," and "— Government Enterprises," pages 63 to 76 of Exhibit (1), and "Public Debt", pages 77 to 83 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 2015.

(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 2015.

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 57 to 58 of Exhibit (1), which are 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 50 to 55 of Exhibit (1), which are hereby incorporated by reference herein.

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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," page 53 of Exhibit (1), which is hereby incorporated by reference herein.

EXHIBITS

This annual report comprises:

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

(b)      The following exhibits:

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

Exhibit (2) — 2016 Stability Programme (Section I of the Economic and Financial Document of 2016, dated April 8, 2016).

Exhibit (3) — 2016 National Reform Programme (Section III of the Economic and Financial Document of 2016, dated April 8, 2016).

Exhibit (4) — Update of the 2016 Economic and Financial Document, dated September 27, 2016.

Exhibit (5) — Report on Public Debt in 2015, dated July 29, 2016.

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

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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 January 11, 2017.

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)	2016 Stability Programme (Section I of the Economic and Financial Document of 2016, dated April 8, 2016).
(3)	2016 National Reform Programme (Section III of the Economic and Financial Document of 2016, dated April 8, 2016).
(4)	Update of the 2016 Economic and Financial Document, dated September 27, 2016.
(5)	Report on Public Debt in 2015, dated July 29, 2016.

VI

EX-99.1

Exhibit 1

Description of

The Republic of Italy

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, 2015. 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 are contained principally in the sections titled "The Italian Economy", "Monetary System" and "Public Finance." 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", "aim" or other similar terms. These forward-looking statements include, but are not limited to, statements relating to:

·  The Republic of Italy's goals and strategies;

· potential changes to The Republic of Italy's legal and regulatory frameworks at the national, regional or municipal level, as well as changes to the European Union's legal, regulatory, and banking frameworks;

· the expected timing of proposed legislation and The Republic of Italy's ability to effectively implement such legislation;

· the aims of certain legal, regulatory, and economic measures, and the impact of such measures on The Republic of Italy's political and macroeconomic results and outlook, including with respect to projected government spending, economic growth, national, regional, municipal or local taxation levels, and deficit reductions;

· expected or potential improvements to The Republic of Italy's banking system and corporate governance regulations;

· forecasts in respect of The Republic of Italy's economy, including GDP growth, debt-to-GDP ratios and pension expenditures, as well as The Republic of Italy's implementation of the related government-designed policies;

· The Republic of Italy's public finance objectives, macroeconomic and finance indicators forecasts, and the potential financial impact of the 2016 National Reform Programme;

· The Republic of Italy's ability to reduce its net borrowing, net structural borrowings, primary balances and public debts, and the expected timing of such reductions;

· potential or expected improvements in The Republic of Italy's capital position and capital ratios;

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·  The Republic of Italy's ability to increase its revenues through its proposed privatization program, and the expected timing thereof;

· certain terms of bonds which may be potentially issued by The Republic of Italy;

· The Republic of Italy's inclusion in the European Financial Stability Facility and the European Stability Mechanism, The Republic of Italy's maximum commitment to such programs, and the expected timing of financings to any requesting countries; and

· the availability of funding for European Union members from the European Central Bank, including through its asset-backed securities, covered bonds and euro-denominated securities purchase programs.

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, those forward-looking statements are not a guarantee of performance and 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.

There are important factors that could cause actual outcomes to differ materially from those expressed or implied in the forward-looking statements. These factors include, but are not limited to:

· External factors, such as:

· interest rates in financial markets outside Italy;

· present and future exchange rates of the Euro;

· the impact of changes in the credit rating of Italy;

· the impact of changes in the international prices of commodities; and

· the international economy, and in particular the rates of growth (or contraction) of Italy's major trading partners, including the United States.

· Internal factors, such as:

· general economic and business conditions in Italy;

· the level of public debt, domestic inflation and domestic consumption;

· the ability of Italy to effect key economic reforms;

· increases or decreases in Italy's labor force participation and productivity;

· the level of budget deficit and investments;

· the strength of the banking sector;

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· the level of inventories; and

· the level of foreign direct and portfolio investment.

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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	9
	Membership of International Organizations	11
THE ITALIAN ECONOMY		12
	General	12
	Key Measures related to the Italian Economy	15
	Measures adopted in 2016	19
	EU Measures to Address the Eurocrisis	19
	Gross Domestic Product	24
	Principal Sectors of the Economy	26
	Role of the Government in the Economy	27
	Services	27
	Employment and Labor	31
	Prices and Wages	32
	Social Welfare System	33
MONETARY SYSTEM		36
	Monetary Policy	36
	Exchange Rate Policy	40
	Banking Regulation	41
	Measures to assess the condition of Italian Banking System	47
	Atlante Funds	49
	Credit Allocation	49
	Exchange Controls	49
THE EXTERNAL SECTOR OF THE ECONOMY		50
	Foreign Trade	50
	Geographic Distribution of Trade	51
	Balance of Payments	53
	Reserves and Exchange Rates	57
PUBLIC FINANCE		59
	The Budget Process	59
	European Economic and Monetary Union	60
	Accounting Methodology	62
	Measures of Fiscal Balance	63
	The 2015 Economic and Financial Document	64
	The Update of the 2015 Economic and Financial Document	66
	The 2016 Economic and Financial Document	68
	The Update of the 2016 Economic and Financial Document	70
	Revenues and Expenditures	72
	Expenditures	73
	Revenues	74
	Government Enterprises	76
PUBLIC DEBT		77
	General	77
	Summary of Internal Debt	81
	Summary of External Debt	82
	Debt Record	83
TABLES AND SUPPLEMENTARY INFORMATION		84

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Except as otherwise specified, all amounts are expressed in euro ("euro"). See "External Sector of the Economy—Reserves and Exchange Rates—U.S. Dollar/Euro Exchange Rate" for certain information concerning the exchange rate of the euro against the U.S. dollar and certain other currencies. 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.

· 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 16 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 ("ESA2010").

· 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.

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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 of 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 20, 2016 and appendices thereto (together the "2016 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, 2016 and appendices thereto (together the "2016 Bank of Italy Annual Report"). We also include in this Annual Report information published by the Statistical Office of the European Communities or Eurostat.

Certain other financial and statistical information contained in this Annual Report has been derived from other Italian Government sources, including: (i) the economic and financial document of 2016 (Documento di Economia e Finanza 2015), dated April 8, 2016 (the "2016 Economic and Financial Document"), which includes the 2016 stability programme (the "2016 Stability Programme") attached as Exhibit 2 to this Annual Report and the 2016 national reform programme (the "2016 National Reform Programme") attached as Exhibit 3 to this Annual Report; (ii) the update of the 2016 Economic and Financial Document (Nota di Aggiornamento del Documento di Economia e Finanza 2016), dated September 27, 2016 (the "Update of the 2016 Economic and Financial Document") attached as Exhibit 4 to this Annual Report; and (iii) the report on public debt in 2015 (Rapporto sul Debito Pubblico 2015), dated July 29, 2016 (the "2016 Report on Public Debt") attached as Exhibit 5 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.

Effective September 2014, ISTAT has adopted a new system of national accounts in accordance with the new European System of National and Regional Accounts (ESA2010) as set forth in European Union Regulation 549/2013. ESA2010 has introduced several key differences from its predecessor ESA95, reflecting certain developments in the methodological and statistical tools widely used at international level to measure modern economies. Unless otherwise provided in this Annual Report, Italy's GDP data were prepared in accordance with the ESA2010 accounting system. For additional information regarding Italy's accounting methodology, see "Public Finance—Accounting Methodology".

vii

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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 "Treasury" or the "Ministry of Economy and Finance" are interchangeable and refer to the same entity.

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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 2015 GDP (at current prices in U.S. dollars), is the eighth largest in the world. In 2015, Italy's real GDP increased by 0.8 per cent, compared to a 0.3 per cent decrease in 2014. In the last ten years, Italy's GDP growth rate has generally been lower than the average GDP growth rate of the euro area. This trend 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 to 2015, 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—2016 Stability Programme, and Exhibit 4—Update of the 2016 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 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. 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$1.1789. On December 31, 2015, the European Central Bank ("ECB") exchange reference rate was €1 for US$1.0887. 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. From 2004 to 2011, Italy's trade balance recorded current account deficits. Since 2012, Italy's trade balance has recorded a growing surplus, which was approximately €45.2 billion in 2015, up from €41.9 billion in 2014, €29.2 billion in 2013 and €9.9 billion in 2012. The improvement reflects principally a decrease in imports, specifically in the extractive industries.

Inflation.  In 2015, consumer prices in Italy increased at an annual rate of 0.1 per cent measured by the harmonized EU consumer price index (HICP), compared to 0.2 per cent in 2014. Among other factors, the decrease in inflation was driven by a reduction in energy costs, as a result of the decrease in oil price, which historically impacts the cost of energy in Italy. Inflation was negative in the first months of 2016, while as of April 30, 2016 inflation in Italy was 0.3 per cent.

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

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Maastricht Treaty in 2001 and each year during 2003-2006 and 2009-2011. Italy's deficit-to-GDP ratio was 3.0 per cent in 2014. As set out in the Update of the 2016 Economic and Financial Document, Italy's deficit-to-GDP ratio was 2.6 per cent in 2015 and its debt-to-GDP ratio (gross of euro area financial support) was 132.3 per cent in 2015. For additional information with respect to Italy's debt-to-GDP, see "The Italian Economy", "Public Finance", Exhibit 2—2016 Stability Programme, and Exhibit 4—Update of the 2016 Economic and Financial Document.

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 Il Partito Democratico, 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 Giorgio Napolitano appointed Mr. Enrico Letta, a member of Il Partito Democratico, to form a new government and Mr. Enrico Letta was sworn in as Prime Minister on April 28, 2013. On February 14, 2014, Mr. Enrico Letta presented his resignation to President Giorgio Napolitano. President Giorgio Napolitano subsequently appointed Mr. Matteo Renzi, as representative of Il Partito Democratico, to form a new government. Mr. Matteo Renzi was sworn in as Prime Minister on February 22, 2014. The new government, which was supported by a parliamentary vote of confidence on February 25, 2014, comprises members from and is supported by the following political parties: Il Partito Democratico, Scelta Civica, Unione di Centro, and Nuovo Centrodestra. On January 14, 2015, President Giorgio Napolitano resigned before the end of his term in 2020. On January 31, 2015, Parliament along with 58 regional delegates elected Mr. Sergio Mattarella as the new President. On December 7, 2016, Mr. Matteo Renzi presented his resignation to President Sergio Mattarella. Shortly thereafter, President Sergio Mattarella appointed Mr. Paolo Gentiloni, as representative of Il Partito Democratico, to form a new government that secured the support of the same political parties supporting the previous government. Mr. Paolo Gentiloni was sworn in as Prime Minister on December 12, 2016.

2016 Developments.  In 2016, the Government enacted measures aimed at fostering economic growth, reform the Italian banking system and organize and simplify the public administration. The purpose of these measures was to address corruption, improve the efficiency of local government bodies and the electoral system. The reforms provided a framework for enacting constitutional reforms of the local government bodies and Parliament which, however, were not approved following the negative vote in a popular referendum that was held on December 4, 2016. See "Summary of Information—Government and Political Parties". The main measures adopted by the Government in 2016 comprised, inter alia:

· Law Decree No. 18 of February 14, 2016 (converted into Law No. 49 of April 8, 2016), through which, among other things, cooperative banks (banche di credito cooperativo) have been required to join a banking cooperative group controlled by a joint stock company (società per azioni) having a share capital not lower than Euro 1.0 billion. In addition, the Government adopted Law Decree No. 50 of May 3, 2016 (converted into Law No. 119 of June 30, 2016) partially amending the existing insolvency and bankruptcy procedures and introducing measures to accelerate the process for collecting debt, as well as indemnity obligations in favor of investors in a number of banks in financial distress (Banca delle Marche, Banca Popolare dell'Etruria e del Lazio, Cassa di Risparmio di Chieti and Cassa di Rispamio di Ferrara). For additional details see "Monetary System—Structure of the Banking Industry.

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· Legislative Decree No. 90 of May 12, 2016, which reformed the structure of the financial statements of the State, to increase transparency and facilitate access to information. Among other things, this Legislative Decree introduced a mandatory spending review in the budgeting process and other provisions to make this process more flexible and simplify related administrative procedures.

· Legislative Decree No. 179 of August 26, 2016, which introduced a new code for the digital administration, principally aimed at increasing the efficiency and accelerating the digitalization of the Italian public administration.

· Law Decree No. 299 of December 23, 2016, which created a €20 billion fund to support the Italian banking system. This fund aims at supporting access to liquidity of Italian banks by providing a Government guarantee to the issuance of banks’ securities and by providing support to the recapitalization of banks that during the stress tests would suffer severe impacts as a result of adverse scenarios.

On December 7, 2016, Parliament approved the stability law for 2017 and the budget law for 2017-2019. The stability law for 2017 includes measures aimed at the reduction of the corporate income tax rate (IRES), several measures to reduce the tax burden for the self-employed as well as the general simplification of tax collection through the abolition, by a separate legislative decree, of Equitalia S.p.A., a subsidiary of the Italian revenue agency. The stability law also provides a voluntary disclosure regime for hidden capital, several credit incentives to small and medium enterprises, an extension of the tax breaks to selected investments in instrumental goods previously introduced by the stability law for 2016 and improvements to the pension system.

Rating of the Republic of Italy's Indebtedness.  As of the date hereof, the Republic of Italy's long-term credit is rated BBB- with stable outlook by Standard & Poor's, BBB+ with stable 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 1,200 kilometers (745,65 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 302,071 square kilometers(116,630 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, 2015, Italy's resident population was estimated to be approximately 60.665 million, accounting for approximately 12.0 per cent of the EU population, compared to approximately 60.795 million as of December 31, 2014. 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, 2015, the six regions in the southern part of the peninsula together with Sicily and Sardinia, known as the Mezzogiorno, had a population of approximately 20.8 million. As of the same date, northern and central Italy had a population of approximately 27.7 million and 12.1 million respectively.

As of December 31, 2015, the breakdown of the resident population by age group was as follows:

•	under 20	18.4%
•	20 to 39	22.9%
•	40 to 59	30.6%
•	60 and over	28%

________________________________

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 2.86 million as of December 31, 2015. The next largest cities are Milan, with a population of approximately 1.34 million, Naples, with approximately 0.97 million inhabitants, and Turin, with approximately 0.90 million inhabitants. Based on ISTAT data, as of December 31, 2015, population density was approximately 201.26 persons per square kilometer.

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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 2015, there were approximately 5.0 million foreigners holding permits to live in Italy. This number is substantially unchanged from 2014. Immigration legislation has been the subject of intense political debate since the early 1990s. Since 2002, Italy has tightened its immigration laws through Law No. 189 of July 30, 2002 (Legge Bossi-Fini), and in the past decade initiated bilateral agreements with several countries for 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, such as Legislative Decree No. 109 of July 16, 2012 and Law Decree No. 76 of June 28, 2013 (converted into Law No. 99 of August 9, 2013). While these legislative efforts have resulted in the regularization of large numbers of illegal immigrants, Italy continues to have a relatively large number of foreigners living in Italy illegally.

In 2015, over 1.0 million people – refugees, displaced persons and other migrants, who fled violence mainly from Syria and Iraq – have made their way to Europe. This migration flow is impacting transit countries, such as Italy and Greece. In this scenario, the EU recognized that immigration is a shared responsibility and started discussions on the possible development of a new common policy on legal migration. The EU has already in place a Common European Asylum System (EU Regulation No. 439/2010) and it is shaping a proposal for a permanent system on relocation and resettlement of people from the most affected Member States, such as Italy. In 2015, approximately 154,000 immigrants arrived illegally in Italy by sea. As of December 31, 2015, the Government hosted approximately 104,000 migrants in more than 1,800 temporary facilities set up for this purpose. Asylum seekers more than tripled between 2013 and 2015, with the number of applications rising from 26,000 in 2013 to more than 83,000 in 2015.

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, currently six, consisting of former Presidents of the Republic and prominent individuals appointed by the President. 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 Chamber of Deputies and the Senate rank equally and have substantially the same legislative power. Any statute must be approved by both the Chamber of Deputies and the Senate before being enacted.

On April 12, 2016, the Parliament approved an extensive reform (Riforma Renzi-Boschi) aimed at amending the Constitution in the parts concerning the allocation of powers between the Chamber of Deputies and the Senate, and the allocation of powers between the State and the regions (the "Constitutional Reform"). However, on December 4, 2016 the proposed changes to the Italian constitution set out in the Constitutional Reform were rejected by a majority of Italian voters in a popular referendum. As a result, the Constitutional Reform was not approved. See "Government and Political Parties" – "Referenda".

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. President Giorgio Napolitano was re-elected in April 2013 and resigned on January 14, 2015 before the end of his term in 2020. On January 31, 2015, Parliament along with 58 regional delegates elected Mr. Sergio Mattarella as the new President. The President nominates and Parliament confirms the Prime Minister, who is the effective head of Government. The President has the power to dissolve

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Parliament. The Council of Ministers is appointed by the President on the Prime Minister's advice. The Prime Minister and the Council of Ministers answer to the Chamber of Deputies and the Senate and must resign if Parliament passes a vote of no confidence in the administration. The Constitution also grants the President the power to appoint one-third of the members of the Constitutional Court, call general elections and lead the army.

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. Each of the President, the Parliament (in joint session) and representatives of the highest civil and administrative courts appoint five members of the Constitutional Court, for a total of 15 members.

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. Following the dissolution of Il Popolo delle Libertá, the largest party of the center-right coalition, on November 16, 2013, the main political parties are: (i) Il Partito Democratico, a center-left political party led by Mr. Matteo Renzi, (ii) Forza Italia – Il Popolo delle Libertá – Berlusconi Presidente, a center-right political party led by Mr. Silvio Berlusconi, (iii) Lega Nord e Autonomie – Lega dei Popoli – Noi con Salvini, a right-wing political party led by Mr. Matteo Salvini, and (iv) the Movimento 5 Stelle, a non-aligned political party led by Mr. Giuseppe Piero Grillo. Other significant political parties include: Scelta Civica per l'Italia (led by Mr. Mario Monti), Unione di Centro (led by Mr. Pier Ferdinando Casini), Nuovo Centrodestra (led by Mr. Angelino Alfano),  Sinistra Italiana - Sinistra Ecologia Libertà (led by Mr. Nichi Vendola), Fratelli d'Italia - Alleanza Nazionale (led by Ms. Giorgia Meloni) and Democrazia Solidale - Centro Democratico (led by Mr. Lorenzo Dellai). On 16 December, 2014, Unione di Centro and Nuovo Centrodestra linked to create a unitary parliamentary group named Area Popolare.

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 Il Partito Democratico, 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 Giorgio Napolitano appointed Mr. Enrico Letta, a member of Il Partito Democratico, to form a new government and Mr. Enrico Letta was sworn in as Prime Minister on April 28, 2013. On February 14, 2014, Mr. Enrico Letta presented his resignation to President Giorgio Napolitano. President Giorgio Napolitano subsequently appointed Mr. Matteo Renzi, as representative of Il Partito Democratico, to form a new government. Mr. Matteo Renzi was sworn in as Prime Minister on February 22, 2014. The new government, which was supported by a parliamentary vote of confidence on February 25, 2014, comprises members from and is supported by the following political parties: Il Partito Democratico, Scelta Civica per l'Italia, Unione di Centro and Nuovo Centrodestra. On December 7, 2016, Mr. Matteo Renzi presented his resignation to President Sergio Mattarella. Shortly thereafter, President Sergio Mattarella appointed Mr. Paolo Gentiloni, as representative of Il Partito Democratico, to form a new government that secured the support of the same political parties supporting the previous government. Mr. Paolo Gentiloni was sworn in as Prime Minister on December 12, 2016.

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Elections. Except for a brief period, since Italy became a democratic republic in 1946 no single 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 2005, Law No. 270 of December 21, 2005 was enacted introducing a new voting system for the Chamber of Deputies and the Senate. However, following ruling 1/2014 by the Constitutional Court on December 4, 2013, which declared Law No. 270/2005 partially invalid, the Parliament enacted an additional electoral reform through Law No. 52 of May 6, 2015. Law No. 52/15, which has been effective since July 2016, only regulates the voting system for the Chamber of Deputies, while the voting system for the Senate is still regulated by Law No. 270/05, as amended by the Constitutional Court with decision 1/2014.

As a result of Law No. 52/15, seats in the Chamber of Deputies are awarded through a two-round system with a party-list proportional representation. While parties are not eligible for any seats unless they attain 3 per cent of the total votes, if a party obtains more than 40 per cent of votes at the first round of elections, a majority bonus automatically awards the winning party 340 seats (i.e. 54 per cent of the total Chamber of Deputies' seats), therefore introducing a first-past-the-post system for the party winning a relative majority of the votes. In case no party reaches such threshold at the first round of elections, a second round must take place between the two parties having obtained the highest votes in the first round. The winner in that second round is awarded as many additional seats as it needs to reach 340 seats. However, Law No. 52/15 is currently under constitutional review, and its validity will be decided by the Constitutional Court, with the first hearing scheduled on January 24, 2017.

The voting system for the Senate, instead, is still regulated  by Law No. 270/05, as amended by the Constitutional Court with decision 1/2014. As a result, seats in the Senate are awarded based on the number of votes obtained by each party-list, but the minimum percentage of the total votes to be attained by multi-party coalitions and individual parties is determined on a regional basis. See "Government and Political Parties" – "The Legislative Branch".

Regional and Local Governments. Italy is divided into 20 regions made up of 103 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 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 July 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 budget deficits and convergence plans will be set up for local governments that record significant budget deficits in consecutive years. In addition, on April 3, 2014, Parliament approved a reform modifying the competences of the provinces and converting ten of them into metropolitan areas, a simplified local authority contemplated by the Constitution. This reform, effective January 1, 2015, aims to increase local government efficiency and reduce costs.

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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. Referenda cannot be held on matters relating to taxation, the State budget, the ratification of international treaties or judicial amnesties. A referendum can be held at the request of 500,000 signatories or five regional councils. 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.

Constitutional reforms can be approved by two thirds of the members of each of the Chamber of Deputies and the Senate. If a constitutional reform fails to be approved by this super majority, the relevant reform may be submitted to a popular referendum at the request of one-fifth of the members of either the Chamber of Deputies or the Senate, 500,000 petitioners or five regional councils. This is the case for the Constitutional Reform, which first failed to secure the approval of two thirds of the members of each of the Chamber of Deputies and the Senate, and was subsequently rejected following the negative vote in a popular referendum that was held on December 4, 2016. Unlike any other referendum, referenda called to amend the Constitution do not require a quorum of the majority of the Italian voting population to vote in such referenda.

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 510.1 million as of December 31, 2015.

The European Union is currently negotiating the terms and conditions of accession to the EU of the following candidate countries: Albania, the Former Yugoslav Republic of Macedonia, Montenegro, Serbia, and Turkey. Potential candidates are Bosnia and Herzegovina and Kosovo.

On June 23, 2016, a majority of the United Kingdom citizens voted, through a referendum, in favor of leaving the EU (referred to as Brexit). The vote to leave the EU marks the start of an unprecedented process, the precise timing of which is not yet known. Formal negotiations with the European Council to agree on the terms of Brexit are not expected to commence until the United Kingdom serves notice under Article 50 of the Lisbon Treaty, dated December 13, 2007. As soon as the United Kingdom formally notifies the European Council of its intention to leave the EU, a two-year time limit for negotiating and reaching a deal would be triggered, although this period can be extended if the European Council and the United Kingdom agree to do so. An agreement would need to be approved by a qualified majority of 72 per cent of all Members States (excluding the United Kingdom), representing 65 per cent of the total EU population. Such agreement would also need to be approved by the European Parliament, voting by simple majority. If the parties to the negotiations failed to reach agreement on the terms of the exit of the United Kingdom by the prescribed two-year term (as potentially extended), the United Kingdom would leave the EU without any agreement in place.  Pending negotiations under Article 50, EU treaties and laws will continue to apply to the United Kingdom.

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.

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The Council of the EU. The Council of the EU, or the Council, is the EU's main decision-making body. It meets in different compositions by bringing together on a regular basis ministers of the Member States to decide on matters such as foreign affairs, finance, education and telecommunications. When the Council meets to address economic and financial affairs, it is referred to as ECOFIN. The presidency of the Council rotates amongst Member States every six months according to a pre-set order. From July 1 to December 31, 2014, Italy was in charge of the presidency of the Council. Latvia and Luxembourg were in charge of the presidency of the Council from January 2015 to June 2015 and from July 2015 to December 2015, respectively.

The 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 Council implements EU policies.

The 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 Council:

· shares budgetary authority with 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.

Generally, decisions of the Council are made by qualified majority vote on a proposal by the Commission or the High Representative of the Union for Foreign Affairs and Security Policy. Starting from November 1, 2014, pursuant to changes enacted by the Treaty of Lisbon, qualified majority will be achieved if:

· 55 per cent of Member States vote in favor (72 per cent in case the proposal is not coming from the Commission or from the High Representative); and

· the proposal is supported by Member States representing at least 65 per cent of the total EU population.

A minority of at least four Council members representing 35 per cent of the population may block a qualified majority vote. The Council may apply the previous electoral system, under which each Member State was entitled to a certain number of votes largely based on the size of its population, until March 31, 2017.

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 Council the power to adopt directives, regulations and decisions.

· it shares budgetary authority with the Council and can therefore influence EU spending.

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

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Following the election held in 2014, each Member State was allocated the following number of seats in Parliament:

Austria	18	Latvia	8
Belgium	21	Lithuania	11
Bulgaria	17	Luxembourg	6
Cyprus	6	Malta	6
Croatia	11	Netherlands	26
Czech Republic	21	Poland	51
Denmark	13	Portugal	21
Estonia	6	Romania	32
Finland	13	Slovakia	13
France	74	Slovenia	8
Germany	96	Spain	54
Greece	21	Sweden	20
Hungary	21	United Kingdom	73
Ireland	11
Italy	73	Total	751

The European Commission. The European Commission traditionally 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 finance 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 2015 GDP (at current prices in U.S. dollars), is the eighth largest in the world after the United States, the People's Republic of China, Japan, Germany, the United Kingdom, France and India.

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. This trend 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.

Over the seven-year period from 2000 to 2007, average annual GDP growth in Italy was of 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		1.8		0.2		0.2		1.6		0.9		2.0		1.5
EU(1)		3.9		2.2		1.3		1.3		2.5		2.1		3.3		3.1

____________________________

(1) The EU 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 euro area, including Italy, for the period 2008 through 2015.

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Annual Per Cent Change in Real GDP (2008-2015)

	2008			2009			2010		2011		2012			2013			2014			2015
Italy		(1.1	)		(5.5	)		1.7		0.6		(2.8	)		(1.7	)		(0.3	)		0.8
EU(1)		0.5			(4.4	)		2.1		1.8		(0.5	)		0.2			1.4			2.0
Euro area(2)		0.5			(4.5	)		2.1		1.6		(0.9	)		(0.3	)		0.9			1.7

____________________________

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

(2) The euro area represents the 19 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 1.1 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.

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. Private consumption 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 private consumption 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. Based on calculations made in accordance with ESA95 accounting system, private consumption contributed to the GDP growth by approximately 0.6 per cent, gross 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 reflected the position on merchandise trade, which turned negative in 2010 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 0.6 per cent compared to 2010. Based on calculations made in accordance with ESA95 accounting system, private consumption contributed to GDP growth by 0.1 per cent and net exports contributed to GDP growth by 1.4 per cent while gross 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 2.8 per cent compared to 2011. Based on calculations made in accordance with ESA95 accounting system, the decrease in Italian economic activity was largely due to the EU sovereign debt crisis. The resulting tightening of the credit market led to a decrease in private consumption of 3.9 per cent in 2012. Business investment was also affected by constraints in the credit market, resulting in a 8.0 per cent decrease in gross fixed investment. Similarly, imports recorded a 7.7 per cent decrease in 2012, which was partly offset by a 2.3 per cent increase in exports.

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In 2013, Italy's GDP decreased by 1.7 per cent compared to 2012. The contraction of Italy's GDP, which began in the second quarter of 2011, continued through 2013 with the fourth quarter seeing a modest upturn in economic activity. The decrease in GDP was primarily due to a reduction in private consumption. Based on calculations made in accordance with ESA95 accounting system, private consumption and disposable income fell in 2013 due, in part, to the increase in unemployment of 1.5 per cent from 2012. Investment was negatively affected by widespread uncertainty on the outlook for the economy. Consequently, gross fixed investment decreased to 17.4 per cent of GDP, a reduction of 4.7 percentage points from 2012, which was partly offset by an increase of 0.1 per cent in net exports of Italian goods and services. In addition, the external current account was in surplus for the first time since 2001 and accounted for 1.0 per cent of GDP.

In 2014, Italy's GDP decreased by 0.4 per cent compared to 2013, primarily over the first three quarters. This decrease was mainly due to a decrease in disposable income caused, in part, by a 0.5 per cent increase in unemployment from 2013. Private consumption started to recover at the end of 2014, primarily due to measures adopted by the Government to foster the disposable income of the lower-middle classes, and, more generally, growing consumer confidence in the improving conditions of Italy's economic situation. Likewise, net exports of Italian goods and services increased at the end of 2014 after contracting in 2013 and during the first three quarters of 2014. This positive trend was partially due to the growth of the demand for Italian goods as a result of improved conditions in the global market.

In 2015, the Italian economy returned to growth for the first time since the financial and economic crisis, although at a moderate pace of 0.8 per cent. This increase in Italy's GDP was mainly due to the general fall in oil prices and the adoption of certain monetary and fiscal policies supporting growth. Domestic demand was the main driver for growth in 2015. Household spending moderately picked up in 2015, including on components other than durable goods. Export was negatively affected, particularly in the second half of the year, by a decline of global commerce; nevertheless, Italian export increased by 4.3 per cent in 2015, while import registered a significant increase from 2014. In 2015, the employment rate increased by 0.6 per cent. However, Italy's GDP still lagged some 8 percentage points behind pre-crisis levels. Germany and France instead, and, to a lesser extent, the Euro Area as a whole, recorded GDPs that were higher than pre-2009 levels.

In the past, the Government has historically experienced substantial government deficits. Among other factors, this has been 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 accounted 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 slightly increased in 2015 to 128.7 per cent net of euro area financial support and 132.3 per cent gross of euro area financial support, reflecting the gap of 2.2 points between the average cost of debt and the expansion of nominal GDP, which was partially offset by a primary surplus of 1.5 per cent. Excluding the financial support provided to European Monetary Union ("EMU") countries, the increase from 2014 was of 0.5 percentage points.

According to Italy's most recent projections, Italy's debt-to-GDP ratio is expected to increase to 132.8 per cent in 2016. In the period 2017-2019, debt-to-GDP is expected to contract by 6.2 percentage points to 126.6 per cent. For additional information on Italy's forecasts for its debt-to-GDP ratio, see "Public Finance—The 2016 Economic and Financial Document", Exhibit 2—2016 Stability Programme, and Exhibit 4—Update of the 2016 Economic and Financial Document.

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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 19.4 per cent in the period from 2001 to 2010. Private sector savings as a percentage of gross national disposable income were 18.1 per cent in 2014 and 17.9 per cent in 2015. The decline in disposable income was partially due to a slight increase in investments by 0.5 per cent, marking the first increase since the financial and economic crisis. 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 of December 31, 2015, internal debt and the external debt were 95.6 per cent and 4.4 per cent, respectively, of total debt.

The Italian economy is characterized by significant regional disparities, with the level of economic development of Southern Italy usually below that of Northern and Central Italy. However, in 2015 the per capita GDP in each of southern Italy, also known as the Mezzogiorno, and the North West area of the country increased by 1.0 per cent. GDP in the North-East of Italy increased by 0.8 per cent, while GDP in the Centre of Italy increased by 0.2 per cent. The Mezzogiorno registered an increase in GDP after seven consecutive years of contraction, mainly due to an upswing of private consumption, supported by an increase in the employment rate and investments, both in the public and private sector. 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".

The average harmonized inflation in 2015, as measured by the European Union harmonized consumer price index (HICP) was 0.11 per cent. For additional information on inflation, see "—Prices and Wages".

Key Measures related to the Italian Economy

Since 2009, the Government has 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. During the years 2009, 2010 and 2011, the Government adopted a series of measures aimed at increasing Government receipts, 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.

Measures adopted 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 (converted into law on December 17, 2012).

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

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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

In 2013, the Government adopted a series of measures aimed at sustaining economic growth, employment and family savings in Italy, as well as intervening on certain social emergencies and consequences of natural disasters. The main measures adopted by the Government in 2013 were introduced through: (i) Law Decree No. 35 of April 8, 2013 (converted into Law No. 64 of June 6, 2013); (ii) Law Decree No. 69 of June 21, 2013 (Decreto del Fare) (converted into Law No. 98 of August 9, 2013); (iii) Law Decree No. 54 of May 21, 2013 (converted into Law No. 85 of July 18, 2013); (iv) Law Decree No. 102 of August 31, 2013 (converted into Law No. 124 of October 28, 2013); (v) Law Decree No. 133 of November 30, 2013 (converted into Law No. 5 of January 29, 2014), (vi) Law Decree No. 63 of June 4, 2013 (converted into Law No. 90 of August 3, 2013), and (vii) Law Decree No. 76 of June 28, 2013 (converted into Law No. 99 of August 9, 2013).

The measures adopted by the Government in 2013 consisted of, inter alia:

· 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;

· 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;

· a series of measures to waive the payment of the first and second instalments due on primary residences for IMU (Imposta Municipale Unitaria), with the exception of primary residences exceeding a certain value and meeting certain requirements;

· measures to sustain domestic employment, including provisions aimed at financing social safety nets, extending the terms of employment of a number of employees in key areas of the public sector, and facilitating hiring of young workers on a permanent basis.

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.

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On December 23, 2013, the Italian Parliament approved the stability law for 2014 through Law No. 147 of December 23, 2013 and the budget law for 2014/2016 through Law No. 148 of December 23, 2013. The stability law for 2014 included measures aimed at sustaining economic growth and increasing employment through, inter alia, a decrease in taxes applicable to individuals and enterprises (including taxes on labor cost), several measures in the banking and insurance sectors, the allocation of financial resources to certain strategic investments (mainly infrastructure), and the reduction of public expenditure. Among other things, the stability law for 2014 introduced a new service tax to be levied by municipalities (Imposta Unica Comunale or IUC), which comprises a real estate property tax on primary residences and covers costs of certain services provided by local administrations, including waste management services and other public services.

Measures adopted in 2014

In 2014, the Government adopted, through Law Decree No. 16 of March 28, 2014 (converted into Law No. 80 of May 23, 2014), a series of measures aimed at addressing issues connected with the shortage of affordable housing in several parts of the country (so-called Piano Casa). Among other things, the new legislation provided for: (i) a reduction from 15 per cent to 10 per cent in the flat tax rate for short-term lease agreements meeting certain requirements (affitti a canone concordato) from 2014 to 2017; (ii) an increase in the number of council estate housing; and (iii) additional measures for the development of residential housing.

Law Decree No. 66 of April 24, 2014 (converted into Law No. 89 of June 23, 2014) provided for a reduction in the taxable income of employees with annual gross earnings of up to €24,000. In addition, effective May 2014, the new legislation introduced certain tax deductions which resulted in a net salary increase of up to €80 euro per month for most workers.

Law Decree No. 90 of June 24, 2014 (converted into Law No. 114 of August 11, 2014) introduced a set of measures reforming the Italian Public Administration. These measures included: (i) employment termination programs for public administration employees who are at least 62 years old; (ii) the possibility for the public administration to transfer employees, without having to show cause, between different offices that are no more than 50 Km apart; (iii) a 20 per cent decrease in the salary cap that applies to board members of companies controlled by the public administration; and (iv) broader powers being granted to the chairman of the National Anti-Corruption Authority (Autorità Anticorruzione).

On August 29, 2014, the Government presented a plan to speed up the pace of the Italian justice system and break down bureaucratic obstacles. Key reforms included halving courts' summer holidays, facilitating out-of-court settlements and reinforcing fast-track procedures for company and family disputes. On August 29, 2014, the Government also introduced the "Unblock Italy Decree" (Decreto Sblocca Italia), intended to accelerate infrastructure projects, such as motorways between the southern cities of Naples and Bari and the Sicilian cities of Palermo, Messina and Catania, support the implementation of digital systems throughout the public administration, simplify bureaucracy and reduce red-tape regulations. These reforms were converted into law on September 12, 2014, through Law Decree No. 132/2014 and Law Decree No. 133/2014, respectively.

Law No. 183 of December 10, 2014 (the so-called Jobs Act) introduced a set of measures designed to improve the flexibility of Italy's labor market. Key objectives of the Jobs Act are: (i) a reduction in the number of short-term contracts; (ii) a simplification of the many rules set forth by Law No. 300 of May 20, 1970 (the so-called Workers Statute); and (iii) a review of the system of protections and safeguards, mainly for senior workers. Among other things, measures included new rules on short-term contracts and changes to Article 18 of the 1970 Workers Statute, which regulates the rights of employees of companies with a workforce of more than 15 units against unfair dismissal. Implementing regulation was adopted by the Government on December 24, 2014.

On December 23, 2014, the Italian Parliament approved the stability law for 2015 through Law No. 190 of December 23, 2014 and the budget law for 2015/2017 through Law No. 191 of

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December 23, 2014. The stability law for 2015 included measures aimed at cutting taxes on labor (cuneo fiscale) for both employers and employees, allowing employees to have part of their statutory severance pay (TFR) included in monthly paychecks, and facilitating permanent employment of new workers by waiving social security contributions for a period up to three years. In addition, the stability law for 2015 introduced certain changes to the pensions regime, including an increase in the taxation applicable to pension funds.

Measures adopted in 2015

In 2015, the Government enacted measures aimed at fostering economic growth, as well as reforms affecting the public administration and political system. The purpose of these measures was to address corruption, improve the efficiency of local government bodies and the electoral system. The reforms provide a framework for enacting constitutional reforms of the local government bodies and Parliament, which did not come into effect following the vote rejecting the Constitutional Reform in a popular referendum that was held on December 4, 2016, see "Summary of Information—Government and Political Parties". The main measures adopted by the Government in 2015 comprised, inter alia:

· the mandatory conversion of co-operative Banks (Banche Popolari) with assets over €8 billion into joint stock banks (Societá per Azioni) through Law Decree No. 3 of January 24, 2015, converted into Law No. 33 of March 24, 2015, also known as the "Investment Compact". The goal of this measure is to ensure banks of a certain size benefit from a more suitable corporate and governance structure in line with European standards. Ultimately, the objective is to favor access to credit. The Investment Compact also extends the favorable tax and administrative regime for startups to innovative small and medium enterprises;

· the adoption of a new electoral law for the Chamber of Deputies through Law No. 52 of May 6, 2015. The goal of the reform is to ensure more stable governments by giving a majority prize to the winning party, as well as more representation through a party-list proportional system;

· anti-corruption measures providing for more severe criminal sanctions for a number of crimes, extending the applicable statute of limitations, and reintroducing certain criminal offences such as accounting fraud;

· on March 10, 2015, ruling No. 70/15 of the Italian Constitutional Court declared Law Decree No. 201 of December 6, 2011 partially unconstitutional as it had abolished annual appreciation of pensions in line with cost of living indicators for the period 2012 to 2013. In response to this ruling, the Government adopted Law Decree No. 65 of May 21, 2015, partially reintroducing the mechanism for appreciation of pensions based on cost of living indicators for the relevant period, and reimbursing pension holders part of the pension increases, which had not been awarded in respect of 2012 and 2013. For more information on ruling No. 70/15 of the Italian Constitutional Court, see "—Social Welfare System";

· Legislative Decree No. 147 of September 15, 2015, including fiscal measures aimed at incentivizing Italian nationals working abroad to return to Italy and supporting the activity of Italian companies operating abroad. Among other things, the new legislative framework allows companies doing business internationally to enter into agreements with the Italian fiscal agencies on a number of matters, such as transfer pricing, the allocation of profits and losses within the group, distribution of dividends, royalties or interests, and, more generally, the requirements to be considered an Italian company for fiscal purposes;

· in September 2015, the Government adopted several decrees implementing the fiscal reform (i.e., Law No. 23 of March 11, 2014) and concerning, inter alia, the rules governing tax litigation and advance rulings (interpelli) by the fiscal agencies (Legislative Decree No. 156

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of September 24, 2015), the organization of fiscal agencies (Legislative Decree No. 157 of September 24, 2015), the sanctioning system (Legislative Decree No. 158 of September 24, 2015), the collection process (Legislative Decree No. 159 of September 24, 2015), and monitoring tax evasion (Legislative Decree No. 160 of September 24, 2015).

On December 28, 2015, Parliament approved the stability law for 2016 and the budget law for 2016-2018 through Law No. 208 of December 28, 2015 and Law No. 209 of December 28, 2015, respectively. The stability law for 2016 includes measures aimed at cutting taxes on primary residential dwellings (TASI) and farmland (IMU), the reduction of the corporate income tax rate (IRES), and regional income tax (IRAP) for the agriculture industry. It also provides for certain tax breaks applicable to small businesses in the Mezzogiorno area and to selected investments in instrumental goods. The budget also includes several measures to reduce the tax burden on and simplify tax filing procedures for the self-employed and small businesses.

Measures adopted in 2016

During the first half of 2016, the Government continued to adopt measures to foster the economic growth of the country, reform the Italian banking system and organize and simplify the public administration. The main measures adopted by the Government in 2016 comprised, inter alia:

· Law Decree No. 18 of February 14, 2016 (converted into Law No. 49 of April 8, 2016), through which, among other things, cooperative banks (banche di credito cooperativo) have been required to join a banking cooperative group controlled by a joint stock company (società per azioni) having a share capital not lower than Euro 1.0 billion. In addition, the Government adopted Law Decree No. 50 of May 3, 2016 (converted into Law No. 119 of June 30, 2016) partially amending the existing insolvency and bankruptcy procedures and introducing measures to accelerate the process for collecting debt, as well as indemnity obligations in favor of investors in a number of banks in financial distress (Banca delle Marche, Banca Popolare dell'Etruria e del Lazio, Cassa di Risparmio di Chieti and Cassa di Rispamio di Ferrara). For additional details see "Monetary System—Structure of the Banking Industry";

· Legislative Decree No. 90 of May 12, 2016, which reformed the structure of the financial statements of the State, to increase transparency and facilitate access to information. Among other things, this Legislative Decree introduced a mandatory spending review in the budgeting process and other provisions to make this process more flexible and simplify related administrative procedures;

· Legislative Decree No. 179 of August 26, 2016, which introduced a new code for the digital administration, principally aimed at increasing the efficiency and accelerating the digitalization of the Italian public administration;

· Law Decree No. 299 of December 23, 2016, which created a €20 billion fund to support the Italian banking system. This fund aims at supporting access to liquidity of Italian banks by providing a Government guarantee to the issuance of banks’ securities and by providing support to the recapitalization of banks that during the stress tests would suffer severe impacts as a result of adverse scenarios.

On December 7, 2016, Parliament approved the stability law for 2017 and the budget law for 2017-2019. The stability law for 2017 includes measures aimed at the reduction of the corporate income tax rate (IRES), several measures to reduce the tax burden for the self-employed as well as the general simplification of tax collection through the abolition, by a separate legislative decree, of Equitalia S.p.A., a subsidiary of the Italian revenue agency. The stability law also provides a voluntary disclosure regime for hidden capital, several credit incentives to small and medium enterprises, an extension of the tax breaks to selected investments in instrumental goods previously introduced by the stability law for 2016 and improvements to the pension system.

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

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(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 being reduced. The first economies to be directly affected were Iceland, Hungary and Latvia in 2008, followed by Greece, Ireland and Portugal in 2010, Spain and Italy in 2011, and Cyprus in 2012. 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 2008, Hungary, Latvia, Greece, Ireland, Portugal, Romania, Spain and Cyprus 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 Greece, for which a third assistance programme was launched in August 2015, while Ireland, Spain, Portugal, Romania and Cyprus successfully completed the EU-IMF financial assistance program in December 2013, January 2014, June 2014, September 2015 and March 2016, respectively, and are now subject to Post-Programme Surveillance ("PPS") until at least 75 per cent of the financial assistance received (totaling €85 billion, €38.9 billion, €78 billion, €36 billion and €10 billion, respectively) has been repaid. In January 2015, the PPS was discontinued for both Hungary and Latvia as 70 per cent of the financial assistance received (€ 20 billion) and 75 per cent of the financial assistance received (€ 2.9 billion) was repaid, respectively.

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 programs 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 programs prepared in connection with the European Semester. For additional information on national reform programs 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 for a total commitment of €80 billion to be disbursed over the period May 2010 through June 2013. This amount was eventually reduced by €2.7 billion, because Slovakia decided not to participate in the Greek loan facility agreement while Ireland and Portugal stepped down from the facility as they requested financial assistance themselves. At the same time, the International Monetary Fund (the "IMF") undertook to provide Greece with an additional €30 billion in loans under a stand-by arrangement. Of the total €107.3 billion of financial assistance, €72.8 billion were disbursed by March 2012, when the program

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was superseded by a second round of financial support. Italy's portion of the total commitment under the first program of financial assistance to Greece equaled €14.7 billion.

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 could only grant new financings until June 2013; after this date, only existing financings could be administered.

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 programs and to finance the recapitalization of financial institutions; and (d) it was 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 March 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. The euro area Member States and the IMF committed the undisbursed amounts of the first program plus an additional €130 billion over the period 2012 to 2014. This second round of financial support differed from the package Greece received in May 2010, in that it received loans from the EFSF rather than directly from Member States. Under the second program of financial assistance Greece received approximately €141.9 billion and €12.0 billion from the EFSF and the IMF, respectively, to August 2014. Following general elections in Greece in January 2015, the Eurogroup and the new Greek government engaged in intensive negotiations, as a result of which the expiration of the second program was extended twice to June 2015. Due to the failure to reach an agreement on a further extension, on June 26, 2015 Greece interrupted negotiations with the Eurogroup and announced a referendum on whether to approve or reject the terms proposed by the Eurogroup for a further extension of the program of financial support. On June 30, 2015, Greece failed to make an IMF loan repayment of €1.55 billion. On July 5, 2015 a majority of Greek citizens voted to reject the bailout terms, and Greece subsequently made an official request for stability support to the European Stability Mechanism for meeting its debt repayment obligations. Such request was approved by the European Stability Mechanism on July 17, 2015. On August 19, 2015, the European Stability Mechanism and Greece entered into an agreement for €86 billion in financial assistance to Greece over a period of three years from 2015 to 2018, accompanied by a third economic adjustment program that will require the Greek government to approve further budgetary restrictions. Following the Eurogroup statement of May 25, 2016 and a positive assessment of the

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programme implementation by the European Commission in liaison with the European Central Bank and Greece, the European Commission, on June 16, 2016, updated the policy conditions of the financial assistance to reflect progress achieved in the programme implementation.

The ESM. From July 2013, the European Stability Mechanism ("ESM"), a facility with lending capacity of €500 billion, has assumed the role of the EFSF and the EFSM. The ESM has a subscribed capital of €700 billion, of which €80 billion is in the form of paid-in capital provided by the euro area Member States and €620 billion as committed callable capital and guarantees from euro area Member States, who have committed 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 is 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 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 programs; 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. It was also agreed that as of July 2012 the ESM has become the main instrument for financing new support packages. The EFSF will continue to operate until existing financing arrangements terminate.

Open Market Operations. In 2009 and 2011, the Eurosystem launched two covered bond purchase programs (the CBPP, which ended in June 2010, and CBPP2, which ended in October 2012). From May 2010 to February 2012, the ECB conducted interventions in debt markets under the Securities Markets Program (SMP), which was terminated in September 2012. In August 2012, the ECB announced the possibility of conducting outright open market operations in secondary sovereign bond markets to safeguard an appropriate monetary policy transmission and preserve the singleness of its monetary policy. The technical features of such operations, named Outright Monetary Transactions, were announced in September 2012. In early October 2014, the ECB announced the details of an estimated two-year program to purchase non-financial private sector asset-backed securities (ABSPP) in the Eurozone to facilitate new credit flows to the economy and to stimulate lending  under a new covered bond purchase program (CBPP3). In late October 2014, the ECB announced that executing asset managers had been appointed. Purchases under the ABSPP began in November 2014 following the approval by the Governing Council of a legal act on the implementation of the program. On January 22, 2015, the ECB announced an expanded asset purchase program ("Quantitative Easing") comprising the ongoing purchase programs for asset-backed securities (ABSPP) and covered bonds (CBPP3), and, as a new element, purchases of certain euro-denominated securities issued by euro area central governments, agencies and European institutions (PSPP). Combined monthly purchases will amount to €60 billion, and were initially intended to be carried out until September 2016 or until the ECB sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates close to 2% over the medium term. In early December 2015, the ECB announced the extension of Quantitative Easing, which will be carried out until March 2017, maintaining combined monthly purchases at the level of €60 billion. On March 10, 2016, the ECB announced an increase to €80 billion in the monthly purchase under the Quantitative Easing program and four new targeted longer-term refinancing operations (TLTRO II) to reinforce its accommodative monetary policy stance and to foster new lending, which will be conducted from June 2016 to March 2017, on a quarterly basis. On December

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8, 2016, the ECB decided to further extend the Quantitative Easing program maintaining combined monthly purchases at the level of €60 billion until the end of December 2017. With respect to the PSPP, in 2015 8.0 per cent and 12.0 per cent of the securities issued in the euro area were purchased by the ECB and by national central banks of a Member State different from the Member State where the relevant securities were issued, respectively. The residual 80.0 per cent of PSPP securities issued in the euro area were purchased by the national central bank of the Member State where the relevant securities were issued. Between March 9, 2015 and December 31, 2015, Bank of Italy purchased PSPP securities for approximately €62 billion.

Collective Action Clauses. Following recommendations of the IMF 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 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".

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Gross Domestic Product

In 2011, Italy's GDP grew by 0.6 per cent compared to 2010 (mainly due to the increase recorded in net exports).

In 2012, Italy's GDP decreased by 2.8 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 gross fixed investment negatively contributed to GDP growth by 1.5 per cent.

In 2013, Italy's GDP decreased by 1.7 per cent compared to 2012. The decrease in Italy's GDP began in the second quarter of 2011 and continued through 2013 with the fourth quarter seeing a modest upturn in economic activity. Italian economic activity was weighed down principally by the reduction in private sector consumption.

In 2014, Italy's GDP decreased by 0.3 per cent compared to 2013. Nonetheless, as a result of a steady increase in private sector consumption and net exports, Italy's GDP in the fourth quarter of 2014 stabilized and resulted in a substantially unchanged GDP compared to the fourth quarter of 2013.

In 2015, Italy's GDP increased by 0.8 per cent compared to 2014. After three years of contraction, the Italian economy returned to growth, which was mainly driven by the stimulus provided by expansionary monetary policy measures which, together with the positive impact of the falling oil prices, offset the weaker impetus coming from the world economy.

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;

· reform the educational system and the job market to improve the development and utilization of human capital;

· preserve 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 for the periods indicated.

GDP Summary

	2011		2012			2013			2014		2015
Nominal GDP (€ in millions)(1)		1,637,463		1,613,265			1,604,599			1,620,381		1,642,444
Real GDP (€ in millions)(2)		1,613,766		1,568,274			1,541,172			1,542,588		1,553,876
Real GDP % change		0.6		(2.8	)		(1.7	)		0.1		0.7
Population (in thousands)		59,394		59,685			60,783			60,796		60,666

___________________________

(1) Nominal GDP (€ in millions) calculated at current prices.

(2) Real GDP (€ in millions) at constant euro with purchasing power equal to the average for 2010.

Source: ISTAT.

Private Sector Consumption. In 2015, private sector consumption in Italy increased by 0.9 per cent compared to a 0.3 per cent increase in 2014. In 2015, private sector consumption

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represented approximately 61.5 per cent of real GDP. This increase was driven by a general improvement in employment conditions and measures adopted by the Government to strengthen the disposable income. Purchases of non-durable goods and purchases of semi-durable goods increased by 1.4 per cent and 0.3 per cent in 2015, respectively, while consumption of durable goods such as motor vehicles, white goods and consumer electronics increased by 6.9 per cent. However, the increase in private sector consumption in 2015 is mainly attributable to services, which increased by 0.7 per cent and represented 52.4 per cent of the total private sector consumption. Private sector consumption continued to contribute positively to real GDP growth by approximately 0.5 per cent in 2015, compared to a 0.4 per cent positive contribution in 2014.

Public Sector Consumption. In 2015, public sector consumption in Italy decreased by 0.7 per cent compared to a 1.0 per cent decrease in 2014. In 2015, public sector consumption represented approximately 19.1 per cent of real GDP. Public sector consumption contributed negatively to real GDP growth by approximately 0.1 per cent in 2015, compared to a negative contribution of 0.2 per cent in 2014.

Gross Fixed Investment. In 2015, gross fixed investment in Italy increased by 0.8 per cent compared to a 3.4 per cent decrease in 2014. In 2015, gross fixed investment represented approximately 16.6 per cent of real GDP. The increase in gross fixed investment in 2015 reflected the increase in expenditure for machinery of 3.4 per cent, which was partially offset by a 0.5 per cent decrease in expenditure for construction and by a 0.4 per cent decrease in expenditure for intellectual property products. Gross fixed investment contributed positively to real GDP growth by 0.1 per cent in 2015, compared to a negative contribution of 0.6 per cent in 2014.

Net Exports. In 2015, exports of goods and services increased by 4.3 per cent in volume compared to a 3.1 per cent increase in 2014. This was mainly due to exports of goods, increasing by approximately 4.4 per cent. Italy's world market share in 2015 slightly decreased to 2.79 per cent at current prices and exchange rates from 2.84 per cent in 2014. Over the last five years, on average exports of Italian goods and services have grown faster than the potential demand for them (calculated as the weighted average of imports by volume of Italy's trading partners, weighted by their shares of Italian exports by value). Notwithstanding a generally low demand from emerging economies and from countries producing raw materials, exports towards countries and markets outside the EMU has increased consistently over the past few years, also due to more favorable pricing conditions resulting from a steady devaluation of euro against several major currencies. In 2015, imports of goods and services registered a 6.0 per cent increase, compared to a 1.8 per cent increase in 2014. This increase mainly reflected the increase in imports of goods (8.1 per cent in 2015) driven, inter alia, by a recovery in household spending in durable goods and investments in transport means in the business sector. 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 in 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. 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). In

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2014 and 2015 general government expenditure for investments was 2.2 per cent and 2.3 per cent of GDP, respectively.

In 2013, Law Decree No. 69 of June 21, 2013, (Decreto del Fare) (converted into Law No. 98 of 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. In addition, Law Decree No. 133 of September 12, 2014, (Decreto Sblocca Italia) introduced further measures promoting Italy's economic infrastructure by allocating part of the financial resources for some projects awaiting authorization and planning approval to projects that have already been finalized and approved, such as motorways between the southern cities of Naples and Bari and the Sicilian cities of Palermo, Messina and Catania. Furthermore, Law Decree No. 133 of September 12, 2014, aims to incentivize private investments in infrastructure through the improvement of financial instruments such as project bonds.

Principal Sectors of the Economy

In 2015, value added increased by 0.6 per cent compared to 2014. This increase was mainly driven by a 3.8 per cent increase in agriculture, fishing and forestry (which collectively accounted for 2.1 per cent of the value added), a 1.3 per cent increase in industry (which accounted for 18.7 per cent of the total value added), and a 0.4 per cent increase in services (which accounted for 74.6 per cent of the total value added). The increase in services, was mainly due to a 0.5 per cent increase in various services to families and businesses, which accounted for 22.9 per cent of the value added, and a 2.2 per cent increase in commerce, repairs and goods for the home, which accounted for 11.6 per cent of the value added. Nonetheless, the overall increase was partially offset by a 0.7 per cent decrease in construction.

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 2010 prices.

Value Added by Sector(1)

	2011				2012				2013				2014				2015
	€ in millions		% of Total		€ in millions		% of Total		€ in millions		% of Total		€ in millions		% of Total		€ in millions		% of Total
Agriculture, fishing and forestry		28,960		2.0		28,210		2.0		28,603		2.1		27,932		2.0		28,997		2.1
Industry		273,676		18.9		266,606		18.8		260,529		18.7		258,685		18.6		262,047		18.7
of which: Manufacturing		232,880		16.0		224,835		15.9		221,193		15.9		220,405		15.8		223,652		16.0
Construction		76,979		5.3		71,649		5.1		68,054		4.9		64,927		4.7		64,465		4.6
Services		1,072,083		73.9		1,049,871		74.1		1,037,652		74.4		1,040,910		74.8		1,045,260		74.6
Commerce, repairs and goods for the home		166,011		11.4		159,122		11.2		158,086		11.3		159,756		11.5		163,116		11.6
Hotels and restaurants		52,095		3.6		51,612		3.6		49,745		3.6		50,374		3.6		51,164		3.7
Transport, storage and communications		76,834		5.3		73,886		5.2		72,217		5.2		72,218		5.2		71,698		5.1
Information and communication services		62,263		4.3		60,479		4.3		58,847		4.2		58,209		4.2		57,152		4.1
Financial and monetary intermediation		77,534		5.3		78,948		5.6		76,537		5.5		74,676		5.4		75,010		5.4
Various services to families and businesses		326,689		22.5		320,255		22.6		318,494		22.8		319,669		23.0		321,293		22.9
Public administration		102,200		7.0		100,923		7.1		100,161		7.2		99,068		7.1		98,484		7.0
Education		63,960		4.4		63,453		4.5		62,887		4.5		63,339		4.6		63,888		4.6
Public health, social and personal services		86,138		5.9		84,595		6.0		84,846		6.1		86,720		6.2		86,512		6.2
Other public, social and personal services		40,315		2.8		38,220		2.7		37,263		2.7		37,688		2.7		37,535		2.7
Domestic services to families and civil unions		18,045		1.2		18,372		1.3		18,437		1.3		19,023		1.4		19,161		1.4
Value added at market prices		1,451,697		100		1,416,148		100		1,394,602		100		1,391,953		100		1,400,297		100

_______________________

(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.

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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, the State exited 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.

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. As of December 31, 2015, there were 24,300 kilometers of railroad track, of which a large majority are controlled by State-owned enterprises, with the remainder controlled by private firms operating under concession from the Government.

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"): (i) Trenitalia S.p.A., managing the transportation services business; and (ii) 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 2015, FS's revenues amounted to €8,585 million compared to €8,390 million in 2014 and its net profit was of €464 million compared to €303 million in 2014. In February 2015, The Ministry of Economy and Finance announced that a potential privatization of FS was under discussion for the second semester of 2016. On May 16, 2016, the Government set the criteria for the privatization process and the procedure to be followed for the disposal of the stake held by the State in FS.

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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-Torino have been completed. Starting from the end of April 2012, Nuovo Trasporto Viaggiatori S.p.A. (NTV) 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 five 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. 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), and Wind Tre, the latter resulting from the business combination of Wind and H3G's Italian businesses.

Internet and personal computer penetration rates in Italy have grown consistently in recent years. In 2015, 24.5 per cent of the Italian population (57.7 per cent of total households) had an internet broadband connection, though the percentage of population having an internet ultrabroadband connection was only 2.4 per cent (5.5 per cent of total households). Nonetheless, the data significantly differs geographically and depending on the age group. For example, there is a significant difference between North and Center regions of Italy, where penetration of broadband connections is far higher, compared to Southern regions of Italy, even though significant investments have been made in 2015 in the Mezzogiorno area, aimed at bridging this gap. In addition, while 88.0 per cent of households including a family member under 18 years-old have an internet connection, only 18.0 per cent of households comprising only family members over 65 years-old have an internet connection. Telecom Italia remains the largest internet provider, followed by Fastweb, Wind, Vodafone Italia, BT Italia and Tiscali.

Tourism. Tourism is an important sector of the Italian economy. In 2015, tourism revenues, net of amounts spent by Italians traveling abroad, were approximately €13.5 billion. Spending by foreign tourists in Italy increased by 3.8 per cent, while spending by Italian tourists abroad increased by 1.4 per cent.

Financial Services. The percentage of domestic investment of households allocated to Italian shares and investment fund units amounted to approximately 27.5 per cent at the end of 2015, compared to 25.0 per cent in 2014. Historically, a significant portion of Italy's domestic investment has been in public debt.

 The general Italian share price index increased by 17.0 per cent in 2015, more than the average increase of the main euro-area index (i.e., 10.0 per cent). This higher-than-average increase was driven by confidence in the expected recovery of the Italian economy. However, in the first four

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months of 2016, the conditions of the Italian financial market and certain other euro-area countries worsened, and share prices fell sharply as a result due to uncertainty over the rate of global growth and direction of banking regulation in Europe.

From January 2016 to April 2016, the general Italian share price index decreased by 11.0 per cent.

Italian household indebtedness as a percentage of disposable income remained substantially unchanged in 2015 at 66 per cent. Lending to families increased by 1.2 per cent in 2015. The amount of mortgages granted increased by 39.3 per cent in 2015, compared to 11.7 per cent in 2014, while consumer credit by banks increased by 5.1 per cent, compared to a 0.7 per cent decrease in 2014. For additional information on the Italian banking system, see "Monetary System—Banking Regulation".

Manufacturing

In 2015, the manufacturing sector represented 15.8 per cent of GDP and 15.8 per cent of total employment. In 2015, value added in manufacturing increased by 1.5 per cent from 2014, compared to a 0.4 per cent decrease from 2013.

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. In 2015, the most significant companies included FCA Italy (automobiles and other transportation equipment), Finmeccanica (defense, aeronautics, helicopters and space), Luxottica (eyeglasses), Pirelli (tires and industrial rubber products), Prada (fashion), Barilla (food), Ferrero (food) and Parmalat (dairy and 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 enterprises, 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, investment in research and development ("R&D") has 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 1.29 per cent of GDP in 2014 (the most recent year for which data is available), compared to 2.84 per cent in Germany and 1.94 per cent in the EU.

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

Industrial Production by Sector (Index: 2010 = 100)

	2011		2012		2013		2014		2015
Food and tobacco		98.1		97.5		96.5		96.5		97.1
Textiles, clothing and leather		96.4		89.2		86.8		86.2		84.2
Wood, paper and printing		97.9		89.0		83.7		82.3		81.4
Coke and refinery		96.1		90.4		80.2		75.7		83.9
Chemical products		96.1		91.3		89.9		90.2		91.6
Pharmaceutical products		100.6		99.8		104.8		103.0		109.7
Rubber, plastic materials and non-ferrous minerals		100.1		91.3		87.8		88.8		90.3
Metals and ferrous products		104.5		96.4		95.1		95.2		92.7
Electronic and optic materials		96.8		87.6		85.9		87.5		91.3
Electric appliances for households		94.8		83.5		84.0		74.4		76.0
Machinery and equipment		108.1		105.4		100.3		98.8		99.8
Transport means		98.6		87.7		83.4		87.6		103.2
Other industrial products		102.6		94.3		89.1		88.9		89.2

________________________

Source: ISTAT.

Energy Consumption

Energy consumption, measured in terms of millions of tons of oil equivalent, or "MTOE", increased by 3.2 per cent in 2015 compared to a decrease of 3.8 per cent in 2014. In 2015 (in MTOE), oil represented 34.6 per cent of Italy's energy consumption compared to 34.5 per cent in 2014, natural gas represented 32.3 per cent of Italy's energy consumption compared to 30.6 per cent in 2014, renewable energy resources represented 19.3 per cent of Italy's energy consumption compared to 20.9 per cent in 2014, solid combustibles represented 7.9 per cent of Italy's energy consumption compared to 8.3 per cent in 2014, and net imported electricity represented 6.0 per cent of Italy's energy consumption compared to 5.8 per cent in 2014. In 2015, Italy's production (in MTOE) of oil, natural gas, renewable energy and solid combustibles represented over 24.9 per cent of the national energy consumption, compared to 26.9 per cent in 2014. Approximately 16.9 per cent of energy produced in Italy was exported in 2015 and, therefore, 92.0 per cent of national consumption was represented by energy imports in 2015, mainly of oil and natural 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 January 11, 2016, 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.

ENEL is the largest electricity company in Italy and is engaged principally in the generation, importation and distribution of electricity. As of March 31, 2016, the Ministry of Economy and Finance held approximately 23.6 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". As of May 28, 2015, CDP also indirectly holds approximately 29.85 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.

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Construction

In 2015, construction represented 4.9 per cent of GDP and 6.3 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, although contraction was less pronounced in the residential sector. Housing transactions increased by 6.5 per cent in 2015, compared to a 3.6 per cent increase in 2014, while house prices decreased by 2.4 per cent in 2015, mainly due to an increase in the disposable income of households and improved financing conditions. Investment in non-residential construction decreased by 1.3 per cent in 2015, compared to a 7.5 per cent decrease in 2014.

Agriculture, Fishing and Forestry

In 2015, agriculture, fishing and forestry increased by 3.8 per cent compared to 2014 and accounted for 2.3 per cent of GDP and 3.7 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 South-Eastern plains, olives are grown principally in Central and Southern Italy and grapes are grown throughout the country.

Employment and Labor

General. Job creation has been and continues to be a key objective of the Government. Employment increased by approximately 0.6 per cent in 2015, continuing the positive trend that began in 2014 with a 0.4 per cent increase.  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 decreased to 11.9 per cent in 2015 from 12.7 per cent in 2014, recording a 0.8 per cent decrease. In the euro area, the average unemployment rate was 9.4 per cent in 2015 compared to 10.2 per cent in 2014. The participation rate (i.e. the rate of employment for the Italian population between the ages of 16 and 64) was 64.0 per cent in 2015 compared to 63.9 per cent in 2014.

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

Employment

	2011		2012			2013			2014		2015
Employment in standard labor units (% on prior year)		0.1		(1.4	)		(2.4	)		0.3		0.8
Participation rate (%)(1)		62.1		63.5			63.4			63.9		64.0
Unemployment rate (%)(2)		8.4		10.7			12.2			12.7		11.9

_______________________________

(1) Participation rate is the rate of employment for the population between the ages of 16 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 2015, approximately 72.9 per cent were employed in the service sector, 17.0 per cent were employed in the industrial sector (excluding construction), 6.3 per cent were employed in the construction sector and 3.7 per cent were employed in the agriculture, fishing and forestry sector.

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Employment by geographic area and gender. Unemployment in Southern Italy, which in 2015 reached 19.7 per cent, has been persistently higher than in Northern and Central Italy, respectively 8.1 and 10.6 per cent. In 2015, unemployment in the South decreased by 1.3 per cent compared to a 0.8 per cent decrease in the Centre and a 0.5 per cent decrease in the North. Consistently, the number of persons employed increased throughout the country by 0.6 per cent. In 2015, the unemployment rate of females in Italy was 12.7 per cent, a 1.1 per cent decrease compared to 2014. In 2015, the unemployment rate of males in Italy decreased by 0.5 per cent compared to 2014. The participation rate of women decreased by 0.3 per cent in 2015 to 54.1, while the participation rate of men increased by 0.5 per cent to 74.1 per cent.

Employment of the population between the ages 16-24. The unemployment rate of the population in Italy aged 16-24 decreased by 1.9 per cent from 2014, reaching 40.3 per cent in 2015, compared to the rate in 2011 of 29.2 per cent. The unemployment rate of the population aged 16-24 in the euro area increased from 21.3 per cent in 2011 to 23.6 per cent in 2012, reaching 24.4 per cent in 2013. However, for the first time since 2007, in 2014 the euro area registered a decrease in its unemployment rate of the population aged 16-24, to 23.7 per cent. This negative trend continued in 2015, when unemployment rate in the euro area reached 22.4 per cent.

The following table shows the unemployment rate of the population between ages of 16-24 in Italy and the euro area for the periods provided.

Unemployment of the Population aged 16-24

	2011		2012		2013		2014		2015
Italy		29.2		35.3		40.0		42.7		40.3
Euro area(1)		21.3		23.6		24.4		23.7		22.4

__________________________

(1) The Euro area represents the 19 countries participating in the European Union.

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. For additional information on these measures and incentives, see Exhibit 2—2016 Stability 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 other collective redundancies are entitled to receive unemployment compensation for a period of 24 months, which is extendable to up to 36 months for workers nearing retirement age. In 2015, the number of hours of work paid through CIG decreased by 35.6 per cent compared to 2014. In total, the Istituto Nazionale di Previdenza Sociale ("INPS") authorized 677 million hours under the CIG, compared to the 1.0 billion hours authorized in 2014. However, as in previous years, protracted uncertainty prompted firms to take the precaution of applying for more hours than they actually used.

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.

Real earnings increased by 0.8 per cent in 2015, whereas nominal earnings increased by 0.9 per cent compared to 2014, mainly due to an inflation rate near to zero. The increase of employee earnings, of 2.0 per cent, was in line with the increase of self-employed workers' earnings, of 0.3 per cent. In the private sector, nominal earnings increased by 1.2 per cent compared to 2014, with a larger increase for those employed in the industry sector as opposed to services. In the public sector,

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nominal wages remained stable due to the freeze in both collective bargaining and seniority increments. Unit labor costs increased by 0.7 per cent in 2015, after increasing by 0.4 per cent in 2014. In 2015, unit labor costs rose by 0.2 per cent in industry excluding construction and rose by 1.2 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. The inflation rate in the euro area, as measured by the European Union harmonized consumer price index (HICP), was 0.0 per cent in 2015, compared to 0.5 per cent in 2014. Since Italy's entry into the euro area 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".

In 2015, inflation in Italy, as measured by the European Union harmonized consumer price index (HICP), decreased to an average of 0.1 per cent from 0.2 per cent in 2014. Inflation was negative in the first months of 2016, while as of April 30, 2016 inflation in Italy was 0.3 per cent. Among other factors, the decrease in inflation was driven by a reduction in energy costs, as a result of the decrease in oil price, which historically impacts the cost of energy in Italy. In addition, the average increase in the price of both goods and services in 2015 was 0.1 per cent, which remained consistent in the first six months of 2016.

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

Prices and Wages (in %)

	2011		2012		2013		2014		2015
Cost of Living Index(1)		2.7		3.0		1.1		0.2		(0,1	)
EU Harmonized Consumer Price Index(1)		2.9		3.3		1.2		0.2		0.1
Core Inflation Index(2)		1.3		1.7		1.1		0.7		0.5
Change in unit labor cost(3)		0.6		2.0		0.3		0.4		0.7

____________________________

(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, INPS and the Istituto Nazionale Assicurazioni e Infortuni sul Lavoro ("INAIL"), provide old-age pensions and temporary and permanent disability compensation for all government employees and employees of the private sector and their qualified dependents, as well as coverage for accidents in the workplace or permanent disability as a consequence of employment. In 2015, INAIL provided pensions to 15.7 million beneficiaries, totaling disbursements for approximately €273.1 billion.

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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.

· 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. The reform provided that from 2010, the retirement age of women would increase to 61, and then it would increase by one year every two years until 2018. 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 life expectancy calculated 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 allowed for 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. Law Decree No. 78 of 2010 required 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.

· Effective January 1, 2012, Law Decree No. 201 of December 6, 2011 (converted into Law No. 214 of December 22, 2011) introduced significant changes to the Italian pension system, contributing to improving the system's sustainability in the medium to long-term and guaranteeing greater equity among generations. Subject to a number of exceptions, the reform, among other things: (i) gradually increased the age requirement for retirement, providing for the retirement age of women to equal the retirement age of men by 2018; (ii) simplified the pension system by terminating the possibility to opt for an early retirement based on annual contributions only (i.e., age has become a mandatory requirement for retirement, subject to certain parameters); and (iii) required all newly granted pension benefits to be calculated through a contribution scheme, to be adjusted in accordance with certain standards. On March 10, 2015, ruling No. 70/15 of the Italian Constitutional Court declared Law Decree No. 201 of December 6, 2011 partially unconstitutional as it had abolished annual appreciation of pensions in line with cost of living indicators for the period 2012 to 2013. In response to this ruling, the Government adopted Law Decree No. 65 of May 21, 2015, partially reintroducing the mechanism for appreciation of pensions based on cost of living indicators for the relevant period, and reimbursing pension holders part of the pension increases, which had not been awarded in respect of 2012 and 2013. Following such Law Decree, in 2015 there was a 1.58 per cent increase in the total disbursements for pensions compared to 2014, which was partially offset by a 1.4 per cent increase in pension contributions.

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Law No. 92 of June 28, 2012 and Law Decree No. 69 of June 21, 2013 (Decreto del Fare) (converted into Law No. 98 of August 9, 2013) subsequently included additional reforms with a view to contributing to the economic and social development of Italy and stimulating 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 to workers that have lost their jobs certain unemployment benefits (indennità di disoccupazione), subject to certain conditions;

· provisions designed to increase flexibility of the labor market by introducing new circumstances under which employers will be able to make employees redundant;

· 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 for the younger population; and

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

The stability law for 2016 (Law No. 208 of December 28, 2015) included measures for the protection of certain income-deprived voluntary early retirees (so-called esodati) and allowed women with at least 35 years of contributions to elect to take early retirement subject to a pension reduction. Further, the stability law for 2016 introduced certain measures supporting the turnover of employees by allowing soon-to-be-retired employees to opt for part-time work and provided that, in the event of deflation, pensions for the following year would not be subject to negative adjustment.

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

Estimated Pension Expenditure (as a % of GDP)

	2015		2020		2025		2030		2035		2040		2045		2050		2055		2060
Current Legislation		15.8		15.3		15.5		15.7		15.9		15.9		15.6		15.0		14.3		13.9

__________________________

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 EMU, 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 and Latvia adopted the euro beginning on January 1, 2011 and January 1, 2014, respectively. Lithuania joined the Eurozone and adopted the euro on January 1, 2015.

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 ECB and the 19 national central banks of those countries that have adopted the euro. So long as there are EU Member States that have not yet adopted the euro (currently Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom), there will be a distinction between the 19-country Eurosystem and the 28-country ESCB. The nine 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 and managing the day-to-day business of the ECB;

· the Governing Council, composed of the six members of the Executive Board and the governors of the 19 national central banks, in charge of implementing the tasks assigned to the Eurosystem and formulating the euro area's monetary policy; and

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· 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, pro-rated, for each Member State that has adopted the euro, 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 January 1, 2015, the ECB had subscribed capital of approximately €10.8 billion and paid up capital of approximately €7.7 billion.

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. As of January 1, 2016, 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 12.3 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 in 2009. 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. As of December 31, 2015, the Bank of Italy had assets of approximately €587.8 billion, held gold in the amount of approximately €76.7 billion (including gold receivables) and capital and reserves of approximately €25 billion.

The ECB's Monetary Policy. The primary objective of the ECB 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 high 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.

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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 7.3 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 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 M3 money was 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 increased, 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 in 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.

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M3's growth slowed down considerably in 2013 to 1.0 per cent and continued at that pace in the first quarter of 2014 (1.1 per cent in March 2014), reflecting a shift towards investments in securities with a higher yield than monetary deposits and other components of M3. The impact of these factors on the money supply was only partially offset by an increase of liquid assets comprised in M1 and flows of foreign capital into euro-area financial assets. The following three quarters of 2014 registered an increase in M3's rate of expansion. As a result, in December 2014, M3 growth rate was 3.6 per cent, mainly due to a 4.3 increase of the M1 components.

In April 2015, the annual growth rate of M3 increased to 5.3 per cent, compared to an average growth rate of 4.1 per cent during the first three months of 2015. This trend is mainly attributable to the behavior of M1 components, whose annual growth rate increased to 10.5 per cent in April 2015. By contrast, the annual growth rate of M3 decreased to 5.0 per cent in May 2015. The three-month average of the annual growth rates of M3 in the period from March 2015 to May 2015 increased to 5.0 per cent, from 4.1 per cent in the period from January 2015 to March 2015. The annual growth rate of M3 stood at 4.9 per cent in September 2015, unchanged from the previous period, averaging 5.0 per cent in the three months up to September 2015. The annual growth rate of M1 increased to 11.7 per cent in September 2015, from 11.5 per cent in August 2015. In December 2015, the annual growth rate of M3 decreased to 4.7 per cent from 5.0 per cent in November 2015.  The annual growth rate of M1 decreased to 10.7 per cent in December 2015, from 11.1 per cent in November 2015.

In May 2016, the annual growth rate of M3 increased to 4.9 per cent from 4.6 per cent in April 2016, averaging 4.8 per cent in the three months up to May 2016. The annual growth rate of M1, decreased to 9.1 per cent in May 2016 from 9.7 per cent in April 2016.

ECB Interest Rates. 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, increased 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. In November 2013, the Governing Council decided to decrease the interest rate on the main refinancing operations by 25 basis points to 0.25 per cent. The interest rate on the marginal lending facility decreased by 25 basis points to 0.75 per cent and the interest rate on the deposit facility remained unchanged at 0.00 per cent. The Governing Council explained that this decision was taken in order to accommodate a weaker than expected Eurozone and to maintain the ECB's target of keeping inflation below but close to 2 per cent. In June 2014, the Governing Council introduced a negative deposit facility interest rate, and cut the interest rate on deposit facilities to (0.10) per cent. The benchmark rate decreased to 0.15 per cent and the marginal lending rate decreased to 0.40 per cent. The Governing Council explained that a reduction of all three rates was necessary to maintain a functioning money market and encourage commercial banks to lend to each other. The reduction in rates was part of a combination of measures designed to ensure price stability and sustainable growth over the medium term. In September 2014, the Governing Council took additional action to counter deflation by further reducing interest rates by 10 basis points, lowering

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the deposit rate to (0.20) per cent, the refinancing rate to 0.05 per cent and the marginal lending rate to 0.30 per cent. In December 2015, the Governing Council further decreased the interest rate on the deposit facility by 10 basis points to (0.30) per cent, while the interest rate on the main refinancing operations and the interest rate on the marginal lending facility remained unchanged at 0.05 per cent and 0.30 per cent, respectively. In March 2016, the interest rate on deposit facility was reduced by a further 10 basis points to (0.40) per cent; the interest rate on main refinancing operations and the interest rate on the marginal lending facility were both reduced by 5 basis points, dropping to 0.00 per cent and 0.25 per cent, respectively.

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
November 13		0.00		0.25		—		0.75
2014
June 11		-0.10		0.15		—		0.40
September 10		-0.20		0.05		—		0.30
2015
December 9		-0.30		0.05		—		0.30
2016
March 16		-0.40		0.00		—		0.25

___________________________

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

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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 2006/48/EC and Directive 2006/49/EC (collectively known as Capital Requirements Directive, or CRD I), as amended by Directive 2009/27/EC, Directive 2009/83/EC and Directive 2009/111/EC (collectively known as CRD II), by Directive 2010/76/EU (known as CRD III), and by Directive 2013/36/EU (known as CRD IV). 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.

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

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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.

Directive 2014/65/EU - The Markets in Financial Instruments EU Directive II (MiFID II). In April 2014, the European Parliament repealed and recast the MiFID into a new Directive ("MiFID II") alongside a new regulation (Regulation 600/2014) ("MiFIR"). The new framework aims to make financial markets more efficient, resilient and transparent. The measures are intended to increase investor protection by introducing more stringent organizational and conduct requirements and strengthen the role of management bodies and the supervisory powers of regulators.  Both MiFID and MiFIR came into force on July 2, 2014. Member States have until July 3, 2017 to transpose these new measures into national law and until January 3, 2018 to apply the relevant provisions.

Law No. 33 of March 24, 2015. In March 2015, Parliament converted Law Decree No. 3 of January 24, 2015, into Law No. 33 of March 24, 2015, also known as "Investment Compact". The Investment Compact requires co-operative banks with over €8 billion in assets to incorporate as joint stock banks by December 2016. Law No. 33/2015 also provides for a change in the corporate governance structure of those banks, providing for proportionality of voting rights to the number of shares owned by shareholders (as opposed to the previous method where every member of the bank held one vote, independently of its share ownership). These measures are intended to be a further step towards harmonization under the European Banking framework.

Supervision. Supervisory authorities, in accordance with the Consolidated Banking Law, include the Inter-Ministerial Committee for Credit and Savings (Comitato Interministeriale per il Credito ed 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.

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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.

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.

The SSM. On October 29, 2013, following Council Regulation 1024/2013 and Regulation 1022/2013, the EU approved the creation of the Single Supervisory Mechanism ("SSM") as the new system of banking supervision for Europe, which has been effective since November 4, 2014. The

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SSM grants the ECB, in conjunction with national supervisory authorities, a supervisory role to monitor the financial stability of banks based in eurozone countries. The SSM's main aims are to:

· ensure the safety and soundness of the European banking system;

· increase financial integration and stability; and

· ensure consistent banking supervision.

Eurozone countries automatically joined the SSM, while Member States of the EU outside the eurozone can voluntarily participate. As of December 31, 2015, none of the non-eurozone Member States had opted to join the SSM. The ECB directly supervises the 129 most significant banks of the participating countries, representing approximately 82 per cent of the total banking assets in the euro area. Banks that are not considered significant continue to be supervised by their national supervisors, in close cooperation with the ECB.

The SSM functions in conjunction with the Single Resolution Mechanism ("SRM"), created by Regulation 806/2014. The SRM is composed of the National Resolution Authorities ("NRAs") and the Single Resolution Board, a European agency that is also staffed by representatives of the NRAs. With Legislative Decree No. 180 of November 16, 2015, the Bank of Italy established the Italian National Resolution Fund, an essential part of the SRM which harmonizes the resolution procedures for credit institutions and some investment firms within the 19 member states of the euro area. The Italian National Resolution Fund is financed by contributions from the Italian banking sector and some investment firms. The SRM is also responsible for the orderly management of crises at banks that are classified as systemically important financial institutions or which operate across borders within the euro area, and at major investment firms, resolving any problems arising from the fragmentation of procedures along national lines.

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.

Basel III and the Capital Requirements Directive IV ("CRD IV"). In 2013, the European Union adopted a legislative package of measures aimed 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 with the effect of limiting the instruments that qualify as regulatory capital and increasing the amount of capital required.

The Basel III rules have been implemented in the EU through the Capital Requirements Regulation ("CRR") and Directive 2013/36/EU, or CRD IV, which replace CRD I, II and III. CRD IV came into force on January 1, 2014 with other provisions being phased in by 2019. Basel III rules require banks to meet certain minimum capital ratios. In addition, Basel III rules provide 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 begun in 2015 and has been increasing by 10 per cent annually, currently expecting to reach 100 per cent effective January 1, 2018. The definition of high quality liquid assets was expanded to include lower quality corporate securities, equities and residential mortgage backed securities.

CRD IV also introduces new rules for counterparty risk, and new macroprudential standards including a countercyclical capital buffer and capital buffers for systemically important institutions.

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CRD IV amends rules on corporate governance, including remuneration, and introduces COREP and FINREP, standardized EU regulatory reporting requirements which stipulate the information that firms will have to report to supervisory authorities in areas such as own funds, large exposures and financial information.

Italian capital adequacy requirements are mainly governed by CRD IV, the Consolidated Banking Law, CICR Regulations and other implementing regulations issued by the Bank of Italy (Nuove disposizioni di vigilanza prudenziale per le banche). 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 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, minus 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, minus h) net losses on equity investment; i) other negative items; and j) negative Tier II capital prudential filters.

Risk Concentration Limitations. The provisions of CRD I, as amended by CRD II, 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.

Implementing regulations adopted by the Bank of Italy in December 2013, and subsequently amended, have updated the legislation regulating equity participations by banks.

Prior approval of the Bank of Italy is required for any direct and indirect 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; or (2) resulting in the control of the share capital of, or significant influence on, a bank or financial or insurance company having its registered office in a non-EU State other than Canada, Japan, Switzerland or the United States.

The acquisition by banks and banking groups of shareholdings in non-financial companies is also subject to certain limitations. Aggregate shareholdings in non-financial companies purchased by banks and banking groups cannot exceed 60 per cent of the acquiring bank's regulatory capital. Banks and banking groups may not acquire shareholdings in any single non-financial company exceeding 15 per cent of the acquiring bank's regulatory capital.

Deposit Insurance. The Interbank Fund (Fondo Interbancario di Tutela dei Depositi) was established in 1987 by a group consisting of the main 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.

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Participation in the Interbank Fund is compulsory for all Italian banks. The Interbank Fund intervenes when a bank has entered into extraordinary administration (amministrazione straordinaria) or is undergoing mandatory liquidation (liquidazione coatta amministrativa). If a bank becomes subject to extraordinary administration, the Interbank Fund may make payments to support the business of the relevant 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 643 banks as of December 31, 2015, as compared to 663 banks as of December 31 2014 and 684 as of December 31, 2013. As of December 31, 2015, there were 75 banking groups in Italy, the same number as in 2014. In 2015, the five largest banking groups in Italy were: UniCredit S.p.A., IntesaSanpaolo S.p.A., Monte dei Paschi di Siena S.p.A., Banco Popolare and Unione di Banche Italiane S.p.A.. The degree of banking concentration in Italy, measured by the share of assets held by the 13 most significant banks in Italy under the SSM, was 73 per cent in 2015.

The ownership structure of the Italian banking sector has undergone substantial changes since 1992, reflecting significant privatizations through 1998. Since 1999, the Italian banking sector has experienced significant consolidation and this process resulted in the formation of Italian banking groups of international standing, such as UniCredit S.p.A. and IntesaSanpaolo S.p.A.. In 2014, 12 banks were put under control by government-appointed administrators, and two additional banks commenced winding up procedures. In 2015, four Italian banks (i.e., Banca delle Marche S.p.A., Banca Popolare dell'Etruria e del Lazio S.C. in amministrazione straordinaria, Cassa di Risparmio della Provincia di Chieti S.p.A. in amministrazione straordinaria and Cassa di Risparmio di Ferrara S.p.A. in amministrazione straordinaria) required funding from the Italian National Resolution Fund to fund their recovery plans for approximately €3.7 billion in aggregate.

On June 30, 2016, the European Commission approved the granting of a guarantee scheme to Italy's banks of up to €150 billion. This scheme allows Italy to use government guarantees to create a precautionary liquidity support program for banks. The program only applies to institutions which are solvent and will be valid until the end of 2016.

As opposed to other European countries, the Italian State’s contribution to Italian banks has been minimal throughout the financial crisis, reaching €4.8 billion in the first quarter of 2013. A large portion of this amount consists of the €3 billion loan made available by Bank of Italy to Monte dei Paschi di Siena S.p.A., Italy's third largest banking group, in February 2013. On July 1, 2015, Monte dei Paschi di Siena S.p.A. issued, as payment in kind for the interest accrued on this loan as of December 31, 2014, ordinary shares representing 4% of Monte dei Paschi di Siena S.p.A. total share capital to the Italian Ministry of Economy and Finance. The issuance increased Monte dei Paschi di Siena S.p.A.’s share capital by €243 million. On July 1, 2016, Monte dei Paschi di Siena S.p.A. paid in cash the interest accrued on the loan as of December 31, 2015. On July 29, 2016 the EBA stress test results showed a very severe impact for Monte dei Paschi di Siena S.p.A. in the adverse scenario; to mitigate the effects of said results, Monte dei Paschi di Siena S.p.A. announced a transaction envisaging (i) the increase in the coverage ratios of impaired exposures; (ii) the transfer of the entire bad loan portfolio to a securitization vehicle; and (iii) the recapitalization of the bank with an increase of its share capital by up to €5 billion. On November 14, 2016, Monte dei Paschi di Siena S.p.A. launched a voluntary public cash tender offer for certain subordinated securities issued or guaranteed by the bank, with proceeds to be mandatorily applied to subscribe for newly-issued ordinary shares, to last until December 21, 2016 for the general public and until December 22, 2016 for qualified investors. On December 22, 2016, Monte dei Paschi di Siena S.p.A. announced the unsuccessful outcome of the proposed capital increase and, on December 23, 2016, Monte dei Paschi di Siena S.p.A. requested the support of a newly created Government fund in support of its recapitalization plan. For additional information on this Government fund, see “Monetary System — Measures to assess the condition of Italian Banking System.”  On December 26, 2016, the ECB indicated that Monte dei Paschi di Siena S.p.A. will need to raise capital for at least €8.8 billion, an amount higher than the €5 billion previously estimated by the bank.

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Capitalization. In 2015, the Italian banking system's capital position improved from 2014. At the end of the year, consolidated regulatory capital amounted to €229 billion, a 2.3 per cent increase compared to the end of 2014. In 2015, Tier 1 capital increased to €194.3 billion compared to €189.4 billion in 2014.

In 2015 the banking system's capital ratios improved compared to 2014. At 31 December 2015, the Common Equity Tier 1 ("CET1") ratio was 12.3 per cent and the Tier 1 ratio 12.8 per cent. The total capital ratio rose to 15.1 per cent from 14.6 per cent in 2014. As of December 31, 2015, the Tier 1 ratio and total capital ratio of the five largest Italian banking groups were 12.5 per cent and 15.2 per cent, respectively, representing in each case a 0.5 per cent increase from 2014.

At the end of 2015, the capital ratios of the five largest Italian banking groups were lower than the average ratios observed by the EBA for a number of European banks of comparable size. In particular, the CET1 ratio of the five largest Italian banking groups was 11.7 per cent as opposed to a weighted average for the largest European banks of 13.6 per cent. In addition, the major Italian banking groups had higher leverage ratios than other major European banking groups in 2015. The latest available data for comparison, as of June 2015, put the average leverage of the two major Italian banking groups (calculated as the ratio of Tier 1 capital to unweighted risk assets) at 5.0 per cent. Based on the same ratio, the average leverage for the large internationally active European banks during the same period was 4.2 per cent.

Bad Debts and Non-Performing Exposure. Bad debts increased by 6.6 per cent in 2015 to €210,145 million, compared to €197,127 million in 2014. As a percentage of total outstanding loans, bad debts increased to 10.6 per cent in 2015 from 10.0 per cent in 2014. The non-performing exposure of Italian Banks generally increased in 2015, though it decreased at the five largest Italian banks. The non-performing exposures of the entire Italian banking system in 2015 amounted to 18.1 percent of the total outstanding loans compared to 17.7 per cent in 2014. However, for Italy's five largest banks, non-performing exposure amounted to 18.3 per cent in 2015, marking a 0.2 per cent decrease against 2014.

Measures to assess the condition 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 for 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.

On December 23, 2016, the Government created a €20 billion fund to support the Italian banking system. The fund aims at supporting access to liquidity of Italian banks by providing a Government guarantee to the issuance of banks’ securities.  Furthermore, the fund is intended to provide support to the recapitalization of banks that during the stress tests would suffer severe impacts as a result of adverse scenarios. Access to the fund is subject to the approval by the ECB of a recapitalization plan and requires the mandatory conversion of the bank’s outstanding junior bonds into shares.

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 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 assumed in the stress tests. 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

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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 assumed in the stress tests.

An IMF mission visited Italy during January 14-31, and March 12-26, 2013, to conduct an assessment under the IMF's Financial Sector Assessment Program ("FSAP"). The FSAP team and the Bank of Italy conducted a range of comprehensive solvency and liquidity stress tests to determine the resilience of the Italian banking system faced with the prolonged recession and crisis in Europe. Italian banks were evaluated against the Basel III requirements for CET1 and Tier 1 capital.

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.

In January 2014, the EBA announced that it would conduct EU-wide stress tests during 2014. The objective of the tests was to provide supervisors, market participants and institutions with consistent data to contrast and compare EU-banks' resilience under adverse market conditions. The tests were designed in conjunction with the ECB and were conducted on a sample of 124 banks covering at least 50 per cent of each national banking sector. The resilience of these banks was assessed under a period of three years (2014-2016) on the assumption of a static balance sheet which implies no new growth and constant business mix and model throughout the time horizon of the exercise. In terms of capital thresholds, 8 per cent CET1 was the capital hurdle rate set for the baseline scenario and 5.5 per cent CET1 for the adverse scenario. The EBA published the results of the stress tests in October 2014. On average, EU banks' CET1 ratio dropped by 260 basis points, from 11.1 per cent at the start of the stress test, after the asset quality reviews' (AQRs) adjustment, to 8.5 per cent after the stress test. Over the three-year horizon of the exercise, 24 banks would fall below the 5.5 per cent CET1 threshold and the overall shortfall would total €24.6 billion. These banks included nine Italian lenders, with a collective capital shortfall of €3.31 billion. Banca Monte dei Paschi di Siena S.p.A., had the largest shortfall of €2.11 billion in capital.

In February 2016, the EBA officially launched the 2016 EU-wide stress test exercise. The objective of the tests was to provide supervisors, banks and market participants with a common analytical framework to consistently compare and assess the resilience of large EU banks and the EU banking system to adverse economic shocks. The tests were designed in conjunction with the ECB and were conducted on a sample of 51 banks, covering approximately 70 of total banking assets in the European Union. The resilience of these banks was assessed under a period of three years (2016-2018) on the assumption of a static balance sheet, which implies no new growth and constant business mix and model throughout the time horizon of the exercise. Unlike the 2014 Comprehensive Assessment, the EU-wide stress test of 2016 was not a pass/fail exercise as it did not stipulate a minimum threshold for capital to be met by taking immediate strengthening measures. The results will be one of the elements to be used to establish Pillar 2 capital at the end of the SREP. The decisions on the outcome of the SREP will be taken at the end of 2016 and will become effective at the beginning of 2017. The EBA published the results of the stress tests on July 29, 2016. On average, from a starting point of 13.2 per cent CET1, the stress test demonstrates the resilience of the EU banking sector to an adverse scenario with an impact of 380 basis points CET1, that would bring down the sample to a CET1 ratio of approximately 9.4 per cent at the end of 2018. Furthermore, the CET1 fully loaded ratio would fall from 12.6 per cent to 9.2 per cent over the three-year horizon of the exercise, while the aggregate leverage ratio would decrease from 5.2 per cent to 4.2 per cent in the adverse scenario. Four of the five Italian banks featured in the EBA sample (i.e. UniCredit S.p.A., IntesaSanpaolo S.p.A., Banco Popolare-Società Cooperativa, and Unione di Banche Italiane S.p.A.)

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showed good resilience. For them, the weighted impact on the CET1 ratio of the adverse scenario would be 3.2 per cent. Including the fifth Italian bank featured in the EBA sample (i.e. Banca Monte dei Paschi di Siena S.p.A.), which was the only Italian bank obtaining a negative result in the adverse scenario, the weighted impact for the five Italian banks would be 4.1 per cent.

Atlante Funds

Fondo Atlante ("Atlante") is an alternative closed-end investment fund incorporated in Italy in April 2016 and regulated by Italian law. Atlante, which is managed by Quaestio Capital Management SGR S.p.A. ("Quaestio"), was set up to invest into the share capital of selected Italian banks and reduce their non-performing exposure. Quaestio initially raised €4.25 billion for Atlante among 67 institutional investors, including UniCredit S.p.A., IntesaSanpaolo S.p.A. and Cassa Depositi e Prestiti S.p.A.. In 2015, Atlante completed two major transactions by acquiring Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. for an aggregate amount of approximately €2.5 billion.

On August 8, 2016, after collecting €1.7 billion, Quaestio set up an additional closed-end investment fund to invest in non-performing loans of Italian banks ("Atlante II"). Quaestio is still in the process of raising capital for Atlante II, with the final closing currently expected by the end of July 2017.

 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 2015, lending activity, including repos and bad debts, decreased by 0.2 per cent as compared to a 0.6 per cent decrease in 2014. Lending activity in the Mezzogiorno showed an improvement in 2015, with an increase of 0.2 per cent compared to a 1.2 per cent decrease in 2014, whereas in the central and northern regions the decrease was of 0.3 per cent in 2015 compared to a decrease by 0.5 per cent in 2014.

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.

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 2015 representing 23.8 and 26.7 per cent of real GDP, respectively. Since the trade surplus recorded in 2003, Italy has recorded trade deficits from 2004 to 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. Since 2012, however, Italy has recorded a growing trade surplus. In 2012, 2013, 2014 and 2015 Italy recorded a trade balance surplus of approximately €9.9 billion, €29.2 billion €41.9 billion and 45.2 billion, respectively. In 2013 and 2014 imports decreased by 5.1 per cent and 1.1 per cent, respectively. By contrast, in 2015 imports increased by 3.3 per cent, mainly due to an increase in imports relating to manufactured products. Exports increased by approximately €8.6 billion in 2014 and €15 billion in 2015, mainly driven by manufactured products, which increased to €397 billion in 2015 from €382.7 billion in 2014.

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.

Foreign Trade (cif-fob)

	2011		2012		2013		2014		2015
	(€ in millions)
Exports (fob)(1)
Agriculture, forestry and fishing		5,800		5,822		5,982		5,936		6,604
Extractive industries		1,276		1,452		1,201		1,178		1,157
Manufactured products		360,102		373,595		373,831		382,772		397,025
Food, beverage and tobacco products		24,419		26,086		27,512		28,395		30,253
Textiles, leather products, clothing, accessories		41,979		43,101		44,975		47,235		48,023
Wood, wood products, paper, printing		7,503		7,635		7,775		8,005		8,328
Coke and refined oil products		16,845		20,497		16,366		14,057		12,455
Chemical substances and products		24,925		25,343		25,521		25,977		27,028
Pharmaceutical, chemical-medical, botanical products		15,314		17,240		19,635		20,933		21,872
Rubber, plastic, non-metallic mineral products		22,516		22,597		23,259		23,787		24,771
Base metal, metal (non-machine) products		48,386		50,842		45,543		44,623		43,711
Computers, electronic and optical devices		12,935		12,611		12,308		12,091		13,417
Electrical equipment		20,309		19,939		20,237		20,829		21,938
Machines and other non-classified products		68,447		70,439		71,607		74,142		75,767
Transportation means		36,518		36,288		37,236		40,061		45,137
Products from other manufacturing activities		20,006		20,928		21,857		22,638		24,324
Electrical energy, gas, steam, air conditioning		276		256		274		187		272
Other products		8,450		9,057		8,944		8,798		8,823
Total exports		375,904		390,182		390,233		398,870		413,881
Imports (cif)(1)
Agriculture, forestry and fishing		13,013		12,312		12,681		12,959		13,721
Extractive industries		69,151		74,262		59,649		48,254		39,170
Manufactured products		305,410		280,111		276,784		283,854		303,403

50

		2011		2012	2013	2014	2015
	(€ in millions)
Food, beverage and tobacco products		27,497		27,295	28,111	28,958	29,076
Textiles, leather products, clothing, accessories		28,876		26,526	26,623	28,770	30,357
Wood, wood products, paper, printing		10,158		9,248	9,213	9,455	9,974
Coke and refined oil products		10,077		10,588	12,205	10,167	7,328
Chemical substances and products		36,476		35,788	34,734	34,295	35,109
Pharmaceutical, chemical-medical, botanical products		19,187		19,737	20,730	19,827	22,106
Rubber, plastic, non-metallic mineral products		12,404		11,517	11,724	12,339	12,958
Base metal, metal (non-machine) products		42,468		37,782	35,239	36,012	37,989
Computers, electronic and optical devices		30,904		25,474	22,872	23,041	25,303
Electrical equipment		13,839		13,299	12,936	13,617	15,425
Machines and other non-classified products		24,138		22,495	22,367	23,893	25,969
Transportation means		38,334		30,578	29,543	32,158	39,073
Products from other manufacturing activities		11,051		10,485	10,488	11,324	12,736
Electrical energy, gas, steam, air conditioning		2,980		2,615	2,286	1,926	2,264
Other products		10,876		10,292	9,601	9,946	10,158
Total imports		401,428		380,292	361,002	356,939	368,715
Trade balance		(25,524	)	9,890	29,231	41,931	45,166

_______________________

(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 products, agricultural and food industry products,  wood and wood products, and 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. In 2015, the energy deficit decreased to 1.9 per cent of GDP, compared to 2.6 per cent of GDP in 2014 and 3.2 per cent of GDP in 2013, due to a continued decrease in oil prices.

In 2015, exports of goods and services increased by 4.3 per cent, mainly driven by an increase in exports of manufactured products such as transport means. Despite the slowdown in the demand from emerging economies, a marked depreciation of the euro contributed to a rapid increase in price competitiveness, resulting in an increase in exports from Italy and other EU Member States to non-EU countries. This increase in exports to non-EU countries, together with a 5.3 increase in exports to countries in the euro area, resulted in a €15 billion increase in exports in 2015.

During 2015, imports of goods and services increased by 6.0 per cent by volume, mainly due to a 8.1 per cent increase in imports of goods, as a function of a general increase in exports and stockpiling, which are the demand components with the most substantial input for imports.

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 now encompasses 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.

51

Distribution of Trade (cif-fob) - Exports

	2011		2012		2013		2014		2015
	(€ in millions)
Exports (fob)(1)
Total EU		210,666		211,867		209,289		218,824		227,284
of which
EMU		160,214		158,261		155,439		161,117		166,372
of which
Austria		8,724		8,675		8,504		8,396		8,530
Belgium		9,633		10,341		11,421		13,196		14,595
France		43,593		43,237		42,289		42,016		42,548
Germany		49,267		48,833		48,474		50,144		51,023
Netherlands		9,119		9,285		9,074		9,396		9,629
Spain		19,890		18,310		17,167		18,030		19,854
Poland		9,418		9,234		9,390		10,352		10,888
United Kingdom		17,542		18,957		19,595		20,939		22,484
China		9,996		8,999		9,843		10,494		10,422
Japan		4,732		5,632		6,023		5,357		5,517
OPEC countries(2)(3)		17,724		22,080		23,420		22,818		22,528
Russia		9,305		9,979		10,772		9,503		7,109
Switzerland		20,640		22,878		20,386		19,053		19,239
Turkey		9,634		10,591		10,085		9,734		10,005
United States		22,831		26,640		27,047		29,756		35,989
Other(4)		70,376		71,516		73,368		73,331		75,788
Total		375,904		390,182		390,233		398,870		413,881

___________________________

(1) At current prices.

(2) Gabon terminated its membership to the Organization of the Petroleum Exporting Countries ("OPEC") in January 1995 and rejoined as of July 2016. For the purposes of the above table, exports to Gabon are not included in OPEC countries.

(3) Indonesia suspended its membership to the Organization of the Petroleum Exporting Countries ("OPEC") in January 2009, but this was reactivated in January 2016. For the purposes of the above table, exports to Indonesia are not included in OPEC countries.

(4) 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.

Distribution of Trade (cif-fob) - Imports

	2011		2012		2013		2014		2015
	(€ in millions)
Imports (fob)(1)
Total EU		215,728		202,805		200,168		203,890		215,781
of which
EMU		174,070		162,572		160,019		162,107		170,551
of which
Austria		9,439		8,986		8,851		8,241		8,356
Belgium		14,568		14,545		15,020		15,082		17,156
France		33,603		31,580		30,551		30,803		32,109
Germany		62,388		55,130		53,299		54,388		56,809
Netherlands		21,037		20,544		20,689		20,815		20,667
Spain		18,111		16,974		16,355		17,236		18,391
Poland		7,518		7,121		6,632		7,222		8,575
United Kingdom		10,943		9,714		9,674		10,282		10,575
China		29,574		25,006		23,071		25,075		28,158
Japan		4,218		3,190		2,566		2,703		3,122
OPEC countries(2)(3)		34,317		41,128		29,213		20,652		18,120
Russia		16,904		18,321		20,197		17,276		14,259
Switzerland		11,294		10,972		10,642		10,401		10,847
Turkey		5,979		5,257		5,506		5,718		6,621

52

		2011	2012	2013	2014	2015
	(€ in millions)
United States		13,026	12,660	11,535	12,477	14,194
Other(4)		70,388	60,953	58,104	58,747	57,613
Total		401,428	380,292	361,002	356,939	368,715

___________________________

(1) At current prices.

(2) Gabon terminated its membership to the Organization of the Petroleum Exporting Countries ("OPEC") in January 1995 and rejoined as of July 2016. For the purposes of the above table, imports from Gabon are not included in OPEC countries.

(3) Indonesia suspended its membership to the Organization of the Petroleum Exporting Countries ("OPEC") in January 2009, but this was reactivated in January 2016. For the purposes of the above table, imports from Indonesia are not included in OPEC countries.

(4) 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 2015 over half of Italian trade was with other EU countries, with approximately 54.9 per cent of Italian exports and 58.5 per cent of imports attributable to trade with EU countries. Germany remains Italy's single most important trade partner and in 2015 supplied 15.4 per cent of Italian imports and purchased 12.3 per cent of Italian exports.

In 2015, the trade balance was the result of surpluses both with EU countries and with non-EU countries. Italy's trade balance with EU countries was positive in 2015, with a surplus of approximately €11.5 billion, which is lower compared to the surplus of €14.9 billion recorded in 2014. With respect to non-EU countries, the trade balance in 2015 resulted in a surplus of €33.7 billion, compared to a surplus of €27 billion in 2014. Such increase in the trade surplus was fostered by a sharp decrease in imports from OPEC countries and Russia.

In 2015, Italian exports worldwide increased by 3.8 per cent compared to 2014, as a result of a 3.9 per cent increase in exports to Eurozone countries and a 3.6 per cent increase in exports to countries outside the Eurozone.

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 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 updated 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.

53

In October 2014, ISTAT adopted new statistical standards outlined by the IMF in the sixth edition of Balance of Payments and International Investment Position Manual ("BPM6"). BPM6, which, consistent with ESA2010, provides the standard framework for the compilation of statistics on balance of payments and international investment positions between an economy and the rest of the world. Relevant methodological innovations include, among others, (i) computation of net revenues of merchanting, (ii) separation between primary income and secondary income, (iii) computation of goods for processing as manufacturing services, and (iv) sign conventions and nomenclature changes in line with national accounts. Unless otherwise provided, all data presented below was prepared in accordance with BPM6.

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

Balance of Payments

	2011			2012			2013			2014			2015
	(€ in billions)
Current Account(1)		(49.3	)		(5.8	)		15.2			30.9			36.0
per cent of GDP		(3.0	)		(0.4	)		0.9			1.9			2.2
Goods		(18.6	)		16.8			36.1			47.9			52.7
Non-energy products		39.5			76.3			87.6			89.3			84.5
Energy products		(58.1	)		(59.5	)		(51.5	)		(41.5	)		(31.9	)
Services		(6.2	)		(0.1	)		0.3			(0.8	)		(1.2	)
Primary Income		(5.3	)		(3.0	)		(3.1	)		(0.3	)		(0.9	)
Secondary Income		(19.3	)		(19.5	)		(18.1	)		(15.8	)		(14.6	)
EU Institutions		(13.4	)		(13.2	)		(14.6	)		(13.8	)		(12.2	)
Capital Account(1)		1.0			4.0			0.2			3.4			2.6
Intangible assets		(0.1	)		1.8			(3.1	)		(0.9	)		(1.1	)
Transfers		1.1			2.1			3.3			4.3			3.7
EU Institutions		2.7			3.2			4.2			5.1			4.7
Financial Account(1)		(64.4	)		(10.2	)		12.8			50.3			33.1
Direct investment		12.3			5.3			0.6			2.5			6.6
Outward		37.0			5.2			15.3			15.4			13.8
Inward		24.7			(0.1	)		14.6			12.9			7.2
Portfolio investment		11.4			(24.4	)		(13.2	)		1.0			89.6
Equity and investment funds		(2.7	)		16.0			48.2			73.1			75.5
Debt Securities		(30.4	)		(75.9	)		(26.2	)		25.6			36.6
Financial Derivatives		(7.3	)		5.8			3.0			(3.6	)		3.4
Other investment		(81.9	)		1.6			20.7			51.3			(67.0	)
Change in official reserves		0.9			1.5			1.5			(1.0	)		0.5
Errors and omissions		(16.1	)		(8.3	)		(2.6	)		16.0			(5.5	)

___________________________

(1) At current prices.

Source: Bank of Italy.

Current Account

Italy has had a current account deficit each year from 2000 to 2012. In 2013, 2014 and 2015, however, Italy recorded a growing current account surplus of €15.0 billion (0.9 per cent of GDP), €30.9 billion (1.9 per cent of GDP) and €36.0 billion (2.2 per cent of GDP), respectively. The improvement mainly reflected an increase in the goods surplus and a decrease in the energy deficit.

Visible Trade. Italy's fob-fob merchandise trade surplus increased to €52.7 billion (3.2 per cent of GDP) in 2015, compared to €47.9 billion (3.0 per cent of GDP) in 2014. The non-energy component recorded a surplus of €84.5 billion or 5.2 per cent of GDP in 2015, compared to a surplus of €89.3 billion or 5.5 per cent of GDP in 2014. At the same time, the energy deficit decreased to €31.9 billion or 1.9 per cent of GDP in 2015 from €41.5 billion or 2.5 per cent of GDP in 2014. In line with 2014, exports of goods continued to increase in 2015, mainly driven by exports to non-EU countries.

54

Invisible Trade. The deficit in services increased to €1.2 billion in 2015, compared to €0.8 billion in 2014. Inflows from tourism amounted to €35.5 billion in 2015, €1.3 billion increase from 2014 that was partially due to Expo 2015, the International exposition that took place in Milan from May 1, 2015 to October 31, 2015 under the theme "Feeding the Planet, Energy for Life". Tourism outflows in 2015 slightly increased to €22 billion from €21.7 billion in 2014. As a result, the surplus on travel increased to €13.5 billion.

Primary Income. The deficit on the primary income account increased to €0.9 billion in 2015, compared to €0.3 billion in 2014, mainly due to a €2.5 billion decrease in income from direct investment. By contrast, a positive contribution to primary income came from portfolio investments, the deficit of which decreased to €16.9 billion in 2015 from €20.2 billion in 2014.

Secondary Income. In 2015, the deficit on the secondary income account decreased to €14.6 billion, compared to €15.8 billion in 2014. The decrease in the deficit on public transfers (to €11.4 billion), mainly caused by the deficit on payments to EU institutions (€12.2 billion), was partially offset by the increase in the deficit on private transfers. In the latter category, workers' remittances, which nearly doubled between 2005 and 2011 with the sharp increase in the number of foreigners living in Italy, slightly decreased to €5.2 billion in 2015.

Capital Account

In 2014, the capital account ran a surplus of €2.6 billion, compared to a surplus of approximately €3.4 billion in 2014, mainly due to the surplus vis-à-vis the EU institutions, which decreased by 7.9 per cent in 2015 to €4.7 billion, compared to €5.1 billion in 2014.

Financial Account and the Net External Position

In 2015, the financial account surplus decreased to €33.1 billion from €50.3 billion in 2014 due to a net reduction of other investments, which decreased by €118.2 billion. The financial account showed that, at the end of 2015, Italy's net external debtor position amounted to €395.6 billion, or 24.2 per cent of GDP. The slight decrease in the net external debtor position compared to 2014 was due to an increase in the current account balance and other adjustments.

Direct Investment. Italian direct investment abroad decreased to €13.8 billion in 2015 compared to €20.0 billion in 2014, mainly due to the decrease of net investment in EU Member States, such as The United Kingdom and Luxembourg.

Foreign direct investment in Italy decreased to €7.2 billion in 2015, compared to €17.5 billion in 2014.

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)

	2011			2012			2013			2014			2015
	(€ in millions)
Direct investment abroad
Netherlands		1,127			(3,697	)		9,831			(112	)		394
Luxembourg		14,376			(10,685	)		2,539			2,794			(3,696	)
United States		1,945			910			226			(262	)		541
United Kingdom		1,967			(2,306	)		1,735			1,879			(2,182	)
France		(451	)		(1,710	)		247			820			1,185
Switzerland		(309	)		887			39			556			(86	)
Germany		1,509			(477	)		(1,715	)		1,004			(14	)
Spain		570			3,765			1,698			(1,127	)		(540	)
Brazil		141			782			466			566			964

55

	2011			2012			2013			2014			2015
	(€ in millions)
Belgium		1,874			(3,611	)		1,384			141			1,366
Argentina		259			67			126			201			122
Sweden		168			283			102			205			(18	)
Other		15,400			21,999			2,253			13,350			15,741
Total		38,576			6,207			18,931			20,005			13,777
Direct investment in Italy
Netherlands		4,251			6,057			3,722			2,388			972
Luxembourg		(1,369	)		(7,570	)		2,306			(846	)		(3,893	)
United States		896			2,609			504			498			(64	)
United Kingdom		4,309			1,598			(537	)		3,133			2,732
France		13,519			(2,175	)		3,232			5,069			5,513
Switzerland		3			4,091			1,074			1,466			(631	)
Germany		(99	)		(7,715	)		425			2,287			1,559
Spain		910			(47	)		1,578			(213	)		789
Brazil		42			89			11			125			32
Belgium		2,525			(1,029	)		(380	)		3,801			(408	)
Argentina		30			76			64			79			44
Sweden		(1,030	)		(650	)		340			64			76
Other		705			4,739			5,943			(346	)		447
Total		24,692			73			18,282			17,505			7,168

___________________________

(1) Figures do not include real estate investment, investments made by Italian banks abroad and investments made by foreign entities in Italian banks. Unlike data for the period 2013-2015, which is calculated in accordance with the sixth edition of the IMF Balance of Payments and International Investment Position Manual, data for the period 2011-2012 is calculated in accordance with the fifth edition of the IMF Balance of Payments and International Investment Position Manual.

Source: ISTAT and National Institute for International Trade.

Portfolio Investment. In 2014, the balance of portfolio investment registered net outflows of €89.6 billion. Italian residents' purchases of foreign securities (€112.1 billion) significantly exceeded foreign investors' purchases of Italian securities (€22.5 billion), the lowest rate of investment by foreigners in Italian securities since 2012.

After significant disposals of Italian public debt securities in connection with the sovereign debt crisis (€102 billion in the two years 2011-2012), in 2013 and 2014 foreign investors returned to the market for Italian securities. However, in 2015 portfolio investment decreased both in shares (€11.6 billion, compared to €19.3 billion in 2014) and debt securities (€10.9 billion, compared to €78.4 billion in 2014). The decrease in portfolio investment was mainly due to lower investments in government securities, which amounted to €21 billion in 2015, and other debt securities issued by banks.

In 2015, residents made foreign portfolio investments for a total amount of €112.1 billion, increasing exposure on both equity and debt securities. The investment in foreign funds amounted to approximately €70 billion in 2015. Part of these flows originated from the shifting of investments from Italian to foreign funds. The investment was not only made by insurance companies and investment funds, but also by households. This increase in investments from households is primarily the result of the Quantitative Easing approved by the ECB in January 2015, which contributed to a shift in allocation of investments by households towards investment funds rather than government securities or debt securities issued by banks. For additional information on Quantitative Easing, see "Italian Economy—Open Market Operations."

Other investment. There were net inflows of approximately €67 billion in 2015 under the heading other investment, compared to net outflows of €51.3 billion in 2014. In 2015, Italy's contributions of capital to the European Stability Mechanism and participation in the financial assistance operations of the European Financial Stability Facility, which also involved entering into

56

bilateral loans, were €14.3 billion and €43.9 billion, respectively. The latter entailed entering a corresponding liability item, with no impact on the external balance.

The Bank of Italy's Trans-European Automated Real-Time Gross Settlement Express Transfer ("TARGET2") debtor position increased in 2015 by approximately €40 billion. This increase was mainly caused by the net amount of foreign assets acquired by Italian residents, as well as by the uneven distribution of liquidity created by the Quantitative Easing, which seems to have generated a trend of liquidity flow from southern European countries, such as Italy and Spain, to northern Europe.

Errors and Omissions. In 2015, the item "errors and omissions" amounted to a negative €5.5 billion, compared to a positive €16.0 billion in 2014. 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.

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		High		Low
	(U.S.$ per €1.00)
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		1.3170		1.2630		1.3331		1.1826
2007		1.4721		1.3797		1.4874		1.2893
2008		1.3917		1.4726		1.5990		1.2460
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
2013		1.3791		1.3281		1.3814		1.2768
2014		1.2141		1.3285		1.3953		1.2141
2015		1.0887		1.1095		1.2043		1.0552

___________________________

(1) Average of the reference rates for 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.

57

Euro Exchange Rates

	Yearly Average Rate(1) per €1.00
	2011		2012		2013		2014		2015
Japanese Yen		110.96		102.49		129.66		140.31		134.31
British Pound		0.8679		0.8109		0.8493		0.8061		0.7258
Swiss Franc		1.2326		1.2053		1.2311		1.2146		1.0679
Czech Koruna		24.590		25.149		25.980		27.536		27.279

___________________________

(1) Average of the reference rates for the period.

Source: European Central Bank.

In 2015, official reserves increased to €120.1 billion from €117.1 billion in 2014. The increase mainly reflected the increase of other reserves. As of December 31, 2015, the contribution of the Bank of Italy to the capital of the European Central Bank was approximately €1.3 billion.

As of December 31, 2015, gold was worth €76.9 billion, compared with €77.9 billion in 2014.

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

Official Reserves

	2011		2012		2013		2014		2015
	(€ in billion)
Gold(1)		95.9		99.4		68.7		77.9		76.9
Special Drawing Rights		7.1		7.2		6.8		7.3		7.6
Total position with IMF		4.5		4.7		4.2		3.7		2.8
Other reserves		26.4		26.4		25.8		28.3		32.8
Total reserves		133.9		137.7		105.5		117.1		120.1

___________________________

(1) Valued at market exchange rates and prices.

Source: Bank of Italy.

58

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 "European Semester" is the first phase of the EU's annual cycle of economic policy guidance and surveillance. Following certain changes enacted by the Commission in October 2015, the European Semester starts in November with the publication by the Commission of the Annual Growth Survey, following which the Commission issues recommendations and opinions on draft budgetary plans, identifying the Member States for which a further analysis is required (i.e., the Alert Mechanism Report). During the period from December to January, bilateral meetings with Member States and discussions with the EU Council take place. During the same period, among other things, each Member State adopts the relevant budget law. In February, the Commission issues country-specific reports, analyzing the economic situation and policies of each Member State and assessing whether imbalances exist in the Member States for which a further analysis is required. In March, the EU Council, based on the Annual Growth Survey (after consulting the Economic and Financial Committee), identifies the main economic goals and strategies of the EU and the euro area and provides strategic guidance on policies. In April, the Member States, following bilateral meetings with the Commission and taking the EU Council's guidelines into account, provide to the Commission their medium-term budgetary strategies and reforms by submitting their updated stability programs and national reform programs. In May, the Commission makes country-specific recommendations and, in June or July, the EU Parliament and the EU Council discuss such country-specific recommendations before a definitive endorsement is made by the EU Council. These policy recommendations are incorporated by governments into their national budgets and other reform plans during the "National Semester" (i.e. the second phase of the EU's annual cycle of economic policy guidance and surveillance). Following the adoption in May 2013 of European Union Regulations No. 472/2013 and No. 473/2013 (Two Pack Regulation), Member States are now required to submit by October 15 a draft budgetary plan for the following year. The Commission then delivers an opinion on each draft budgetary plan by November 30 of that year.

Consistent with the European Semester, the Government submits to the Parliament, by April 10, the Economic and Financial Document (Documento di Economia e Finanza or "EFD"), which consists of three sections: (i) the stability program, 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 program, which sets forth the country's priorities and main structural reforms to be effected. Following Parliament's approval of the EFD, the stability program and the national reform program are submitted to the EU Council and the Commission by April 30. Following the EU Council's review, by September 20, 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 (a) to the Commission, by October 15, a Draft Budgetary Plan for the following year, and (b) to the Parliament, by October 15, 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

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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 31 of the following 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 30 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 (defined as a decrease of the excess debt by 5 per cent per year on average over three years).

For additional information on Italy's status under these covenants, see "—The 2016 Economic and Financial Document."

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 program and non-participating Member States are required to submit a convergence program. These programs cover the current year, the preceding year and 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 program such as government investment expenditure, real GDP growth, employment and inflation;

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· 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 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.

Finally, the Fiscal Compact contained within the inter-governmental Treaty on Stability, Coordination and Governance (the "TSCG") complements, and in some areas enhances further, key provisions of the SGP. Specifically, the Fiscal Compact requires Member States to enshrine in national law a balanced budget rule with a lower limit of a structural deficit of 0.5 per cent of GDP,

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centered on the concept of the country-specific medium-term objective ("MTO") as defined in the SGP. The Fiscal Compact's provisions also increase the role of independent bodies, which are given the task of monitoring compliance with national fiscal rules, including the national correction mechanism in case of deviation from the MTO or the adjustment path towards it. The TSCG, signed by 25 EU Member States (all but the UK and Czech Republic), entered into force on January 1, 2013 and is binding for all euro area Member States that have ratified it, while other contracting parties will be bound only once they adopt the euro or earlier if they sign it. Italy ratified the TSCG in July 2012.

Accounting Methodology

Pursuant to Law No. 196 of 2009 and its implementing regulation, 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.

ESA95 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. 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.

ESA2010 National Accounts. Effective September 2014, ISTAT adopted a new system of national accounts in accordance with the new European System of National and Regional Accounts (ESA2010) as set forth in European Union Regulation 549/2013. ESA2010 introduced several key changes to its predecessor ESA95, reflecting developments in the methodological and statistical tools widely used at international level to measure modern economies. Among others, changes are expected to harmonize accounting methods among EU Members States and include the following: (i) research and development expenditure have been recognized as capital assets; (ii) goods sent abroad, or received from abroad, for processing without change in ownership have been excluded from the corresponding export and import figures, which only include the related processing activity; (iii) public defense spending has been reclassified from intermediate consumption to gross fixed investment; (iv) the list of institutional units belonging to the General Government sector has been revised; and (v) interest accruing on financial derivatives (including public debt swaps) has been excluded from net borrowing. Unless otherwise provided in this Annual Report, Italy's GDP data for the years 2009 to 2015 was prepared in accordance with ESA2010 accounting system.

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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.

· 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(*)

	2011			2012			2013			2014			2015
	(€ in millions, except percentages)
General government expenditure(1)		804,735			819,221			818,982			825,534			826,429
General government expenditure, as a percentage of GDP		49.1			50.8			51.0			51.2			50.5
General government revenues		747,781			771,683			772,023			776,598			784,041
General government revenues, as a percentage of GDP		45.7			47.8			48.1			48.2			47.9
Net borrowing		(56,954	)		(47,538	)		(46,959	)		(48,936	)		(42,388	)
Net borrowing, as a percentage of GDP		(3.5	)		(2.9	)		(2.9	)		(3.0	)		(2.6	)
Primary balance		19,462			36,028			30,609			25,404			26,052
Primary balance, as a percentage of GDP		1.2			2.2			1.9			1.6			1.6
Public debt(2)		1,907,780			1,989,780			2,069,846			2,136,202			2,171,670
Public debt as a percentage of GDP(2)		116.5			123.3			129.0			132.5			132.7
GDP (nominal value)		1,637,463			1,613,265			1,604,478			1,611,884			1,636,372

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(*) Figures have been restated on the basis of data published in the 2015 Bank of Italy Annual Report and the 2015 ISTAT Annual Report.

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

(2) Figures are gross of euro area financial support.

Source: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. In 2011, net borrowing as a percentage of GDP decreased to 3.5 per cent, decreasing further to 2.9 per cent in each of 2012 and 2013. In 2014, net borrowing as a percentage of GDP remained substantially unchanged at 3.0 per cent, while in 2015 it further decreased to 2.6 per cent. As of December 31, 2015, Italy's net borrowing was approximately €42.4 billion.

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In the period from 2010 to 2015, Italy's debt-to-GDP ratio increased to 129.1 per cent net of euro area financial support (and 132.7 per cent gross of euro area financial support) from 115.0 per cent net of euro area financial support (and 115.3 per cent gross of euro area financial support) in 2010. This growth trend resulted from Italy's budget deficit (primarily resulting from the cost of servicing Italy's public debt) and its substantially stagnant nominal GDP in this five year period.

Since 2010, the Government has provided financial support in respect of Greece and other Participating States, via bilateral loans, participation to the ESFS and direct contributions to the ESM. Government expenditure on euro area financial support increased from €3.9 billion to €55.6 billion between 2010 and 2013. In 2014, Government expenditure on euro area financial support further increased by 8.5 per cent to €60.3 billion, while in 2015 it was €58.2 billion, of which €43.9 billion  via bilateral loans and participation to the EFSF and €14.3 billion through contributions to the ESM programme.

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 2015 was to maintain exposure to market risks, mainly interest rate and refinancing risks, within the limits set out in 2014. For additional information on Italy's debt-to-GDP ratio, see "Public Debt" and Exhibit 2—2016 Stability Programme.

The 2015 Economic and Financial Document

In April 2015, the Republic of Italy submitted to the EU its 2015 Economic and Financial Document, which included the 2015 Stability Programme and the 2015 National Reform Programme.

The 2015 Stability Programme. The 2015 Stability Programme confirmed Italy's commitment to reduce its public debt by increasing its primary surplus. The table below presents the main public finance objectives included in the 2015 Stability Programme.

Public Finance Objectives (in % of GDP)

2015 Stability Programme	2014			2015			2016			2017			2018		2019
Net Borrowing		(3.0	)		(2.6	)		(1.8	)		(0.8	)		0.0		0.4
Interest Expense		4.7			4.2			4.2			4.0			3.8		3.5
Primary Balance		1.6			1.6			2.4			3.2			3.8		4.0
Structural Net Borrowing		(0.7	)		(0.5	)		(0.4	)		0.0			0.1		0.2
Structural Change		0.0			0.2			0.1			0.3			0.2		0.0
Public Debt, gross of euro area financial support		132.1			132.5			130.9			127.4			123.4		120.0
Public Debt, net of euro area financial support		128.4			128.9			127.3			129.3			120.1		116.7

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Source: Ministry of Economy and Finance.

The table below sets out the macroeconomic forecasts prepared by the Republic of Italy through 2019 in connection with the 2015 Stability Programme.

Macroeconomic Forecasts (in %)

2015 Stability Programme	2014			2015			2016			2017		2018		2019
Real GDP		(0.4	)		0.7			1.4			1.5		1.4		1.3
Nominal GDP		0.4			1.4			2.6			3.3		3.2		3.1
Private consumption		0.3			0.8			1.2			1.4		1.3		1.2
Public consumption		(0.9	)		(1.3	)		(0.5	)		0.0		0.0		0.3
Gross fixed investment		(3.3	)		1.1			2.7			3.0		2.8		2.4
Inventories (% of GDP)		(0.1	)		0.0			0.1			0.1		0.0		0.0

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2015 Stability Programme	2014			2015		2016		2017		2018		2019
Exports of goods and services		2.7			3.8		4.0		3.9		3.7		3.6
Imports of goods and services		1.8			2.9		3.8		4.6		4.2		3.8
Domestic demand		(0.6	)		0.4		1.1		1.3		1.3		1.2
Change in inventories		(0.1	)		0.0		0.1		0.1		0.0		0.0
Net exports		0.3			0.4		0.2		0.0		0.0		0.1

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Source: Ministry of Economy and Finance.

The 2015 National Reform Programme. As part of the 2015 National Reform Programme, the Italian Government identified ten policy areas where structural reform is necessary. These areas are (i) containment of public expenditure; (ii) administrative efficiency; (iii) infrastructure and development; (iv) product market and competition; (v) labor and pensions; (vi) innovation and human capital; (vii) support to businesses; (viii) support to the financial system; (ix) energy and environment; and (x) federalism.

The table below shows the impact of the measures contained in the 2015 National Reform Programme in terms of expenditure cuts/additions or revenue decreases/additions for each of the ten policy areas described above for the years 2014 to 2019.

Financial Impact of the 2015 National Reform Programme (€ in millions)

2015 National Reform Programme	2014		2015		2016		2017		2018		2019
Containment of Public Expenditure
Additional revenues		4,200		14,247		28,736		35,064		37,557		34,023
Decrease in revenues		494		4,068		4,591		4,286		4,319		4,319
Expenditure cuts		2,369		3,527		3,423		3,513		2,523		1,903
Additional expenditure		187		411		309		321		355		304
Administrative Efficiency
Additional expenditure		0		36		314		314		314		314
Infrastructure and Development
Additional expenditure		36		408		429		1,458		2,314		416
Product Market, Competition
Additional revenues		0		350		250		100		0		0
Labor and Pensions
Additional revenues		4		2,614		5,933		6,096		3,941		1,864
Additional expenditure		6,948		21,944		28,046		28,728		26,695		23,524
Innovation and Human Capital
Additional expenditure		6		1,587		3,850		4,082		4,063		4,049
Support to Business
Additional revenues		31		898		1,229		1,023		1,042		389
Decrease in revenues		4		466		917		691		670		463
Additional expenditure		19,558		1,920		2,262		2,474		2,479		1,439
Energy and Environment
Additional expenditure		0		45		45		66		0		0
Additional revenue		0		1,004		316		0		0		0
Federalism
Additional expenditure		2		354		224		224		224		224
Additional revenue		350		350		350		350		350		350

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Source: Ministry of Economy and Finance.

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The Update of the 2015 Economic and Financial Document

In September 2015, Italy published its Update of the 2015 Economic and Financial Document, which included revised projections and forecasts reflecting the improvement of the economic situation in Italy and Europe.

The table below presents the main public finance objectives included in the Update of the 2015 Economic and Financial Document.

Public Finance Objectives (in % of GDP)

Update of the 2015 Economic and Financial Document	2014			2015			2016			2017			2018			2019
Net Borrowing		(3.0	)		(2.6	)		(2.2	)		(1.1	)		(0.2	)		0.3
Interest Expense		4.7			4.3			4.3			4.1			4.1			4.0
Primary Balance		1.6			1.7			2.0			3.0			3.9			4.3
Structural Net Borrowing		(0.7	)		(0.3	)		(0.7	)		(0.3	)		0.0			0.0
Structural Change		0.0			0.3			(0.4	)		0.4			0.3			0.0
Public Debt, gross of euro area financial support and acceleration of payments due by the public administration		132.1			132.8			131.4			127.9			123.7			119.8
Public Debt, net of euro area financial support		128.4			129.3			127.9			124.6			120.5			116.6
Public Debt, net of euro area financial support and acceleration of payments due by the public administration		126.2			126.8			125.5			122.3			118.3			114.6

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Source: Ministry of Economy and Finance.

The table below presents macroeconomic forecasts prepared by the Republic of Italy through 2019 in connection with the Update of the 2015 Economic and Financial Document.

Macroeconomic Forecasts (in %)

Update of the 2015 Economic and Financial Document	2014			2015			2016		2017			2018		2019
Real GDP		(0.4	)		0.9			1.3		1.3			1.3		1.2
Nominal GDP		0.4			1.2			2.9		3.0			3.0		2.8
Private consumption		0.3			0.8			1.1		1.1			1.0		1.1
Public consumption		(1.0	)		(0.2	)		0.9		(0.1	)		0.0		0.2
Investments		(3.3	)		1.2			2.0		3.1			2.7		1.8
Exports of goods and services		2.6			4.1			3.8		3.9			4.0		3.8
Imports of goods and services		1.8			5.3			3.8		4.1			3.8		3.6
Domestic demand		(0.6	)		0.6			1.2		1.1			1.1		1.0
Change in inventories		(0.1	)		0.4			0.1		0.1			0.0		0.0
Net exports		0.3			(0.2	)		0.1		0.1			0.0		0.0

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Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2015 Stability Programme and the Update of the 2015 Economic and Financial Document.

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Main Finance Indicators – 2015 Economic and Financial Document

v. Update of the 2015 Economic and Financial Document

	2014			2015			2016			2017			2018			2019
GDP growth rate
2015 Economic and Financial Document		(0.4	)		0.7			1.4			1.5			1.4			1.3
Update of the 2015 Economic and Financial Document		(0.4	)		0.9			1.3			1.3			1.3			1.2
Difference		0.0			0.2			(0.1	)		(0.2	)		(0.1	)		(0.1	)
Net Borrowing, as a % of GDP
2015 Economic and Financial Document		(3.0	)		(2.6	)		(1.8	)		(0.8	)		0.0			0.4
Update of the 2015 Economic and Financial Document		(3.0	)		(2.6	)		(2.2	)		(1.1	)		(0.2	)		0.3
Difference		0.0			0.0			(0.4	)		(0.3	)		(0.2	)		(0.1	)
Public Debt, as a % of GDP
2015 Economic and Financial Document		132.1			132.5			130.9			127.4			123.4			120.0
Update of the 2015 Economic and Financial Document		132.1			132.8			131.4			127.9			123.7			119.8
Difference		0.0			0.3			0.5			0.5			0.3			(0.2	)

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Source: Ministry of Economy and Finance.

The EU Council's policy recommendations to Italy for the period 2015-2016

As part of the European Semester process, in May 2015, 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 2015 Stability Programme and the 2015 National Reform Programme. ECOFIN recommended that Italy take action over the period 2015-2016 to:

· achieve a fiscal adjustment of at least 0.25 per cent of GDP in the medium-term objective in 2015 and of 0.1 per cent of GDP in 2016 by taking the necessary structural measures in both 2015 and 2016;

· implement the privatization program and use its proceeds to make further progress towards putting the general government debt ratio on an appropriate downward path. Implement the enabling law for tax reform by September 2015, in particular the revision of tax expenditures and cadastral values and the measures to enhance tax compliance;

· adopt the planned national strategic plan for ports and logistics, particularly to help promote intermodal transport through better connections. Ensure that the Agency for Territorial Cohesion is made fully operational so that the management of EU funds could markedly improve;

· adopt and implement pending laws aimed at improving the institutional framework and modernizing the public administration. Ensure that the reforms adopted to improve the efficiency of civil justice help reduce the length of proceedings, including by revising the statute of limitations by mid-2015;

· introduce binding measures by end-2015 to tackle remaining weaknesses in the corporate governance of banks, particularly the role of foundations, and take measures to accelerate the broad-based reduction of non-performing loans;

· adopt the legislative decrees on the use of wage supplementation schemes, the revision of contractual arrangements, work-life balance and the strengthening of active labor market policies. Establish, in consultation with the social partners and in accordance with national practices, an effective framework for second-level contractual bargaining. As part of efforts to

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tackle youth unemployment, adopt and implement the planned school reform and expand vocationally-oriented tertiary education;

· implement the simplification agenda for 2015-2017 to ease the administrative and regulatory burden. Adopt competition-enhancing measures in all the sectors covered by competition law, and take decisive action to remove remaining barriers. Ensure that local public services contracts not complying with the requirements on in-house awards are rectified by no later than end-2015.

The 2016 Economic and Financial Document

In April 2016, the Republic of Italy submitted to the EU its 2016 Economic and Financial Document, which included the 2016 Stability Programme and the 2016 National Reform Programme.

The 2016 Stability Programme. The 2016 Stability Programme confirmed Italy's commitment to reduce its public debt by increasing its primary surplus. The table below presents the main public finance objectives included in the 2016 Stability Programme.

Public Finance Objectives (in % of GDP)

2016 Stability Programme	2014			2015			2016			2017			2018			2019
Net Borrowing		(3.0	)		(2.6	)		(2.3	)		(1.8	)		(0.9	)		0.1
Interest Expense		4.6			4.2			4.0			3.8			3.6			3.5
Primary Balance		1.6			1.6			1.7			2.0			2.7			3.6
Structural Net Borrowing		(0.8	)		(0.6	)		(1.2	)		(1.1	)		(0.8	)		(0.2	)
Structural Change		(0.1	)		0.2			(0.7	)		0.1			0.3			0.6
Public Debt, gross of euro area financial support		132.5			132.7			132.4			130.9			128.0			123.8
Public Debt, net of euro area financial support		128.8			129.1			129.0			127.5			124.7			120.6

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Source: Ministry of Economy and Finance.

The table below sets out the macroeconomic forecasts prepared by the Republic of Italy through 2019 in connection with the 2016 Stability Programme.

Macroeconomic Forecasts (in %)

2016 Stability Programme	2015			2016			2017			2018			2019
Real GDP		0.8			1.2			1.4			1.5			1.4
Nominal GDP		1.5			2.2			2.5			3.1			3.2
Private consumption		0.9			1.4			1.4			1.7			1.6
Public consumption		(0.7	)		0.4			(0.3	)		(0.5	)		0.8
Gross fixed investment		0.8			2.2			3.0			3.2			2.4
Inventories (% of GDP)		0.5			0.0			0.0			0.1			0.0
Exports of goods and services		4.3			1.6			3.8			3.7			3.4
Imports of goods and services		6.0			2.5			3.8			4.6			4.2
Domestic demand		0.5			1.3			1.3			1.5			1.5
Change in inventories		0.5			0.0			0.0			0.1			0.0
Net exports		(0.3	)		(0.2	)		0.1			(0.2	)		(0.2	)

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Source: Ministry of Economy and Finance.

The 2016 National Reform Programme. As part of the 2016 National Reform Programme, the Italian Government identified eight policy areas where structural reform is necessary. These areas are (i) containment of public expenditure; (ii) federalism; (iii) administrative efficiency; (iv) product market and competition; (v) labor and pensions; (vi) innovation and human capital; (vii) support to

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businesses; (viii) support to the financial system; (ix) energy and environment; and (x) infrastructure and development.

The table below shows the impact of the measures contained in the 2016 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 2015 to 2019.

Financial Impact of the 2016 National Reform Programme (€ in millions)

2016 National Reform Programme	2015		2016		2017		2018		2019
Containment of Public Expenditure
Additional revenues		0		6,494		3,344		5,598		1,908
Decrease in revenues		0		20,091		14,935		15,394		12,217
Expenditure cuts		2,099		6,131		5,216		5,996		5,336
Additional expenditure		51		4,489		4,476		5,380		4,427
Administrative Efficiency
Additional expenditure		3		498		346		209		197
Infrastructure and Development(1)
Additional expenditure		451		1,231		684		672		793
Product Market, Competition
Additional revenues		0		15		15		15		15
Labor and Pensions
Additional revenues		0		138		607		450		160
Decrease in revenues		0		599		946		1,114		1,114
Expenditure cuts		0		706		1,492		1,927		1,775
Additional expenditure		1,779		4,723		5,973		5,763		4,555
Innovation and Human Capital
Additional expenditure		1,019		3,375		3,219		3,227		3,023
Support to Business
Additional revenues		300		232		1,125		657		109
Decrease in revenues		0		738		5,422		5,831		4,467
Additional expenditure		1,920		2,262		2,474		2,479		1,439
Energy and Environment(1)
Additional expenditure		501		658		238		74		12
Additional revenues		0		545		553		0		0
Decrease in revenues		0		106		1,103		927		11
Financial System
Additional expenditure		0		2,756		103		103		103
Federalism
Decrease in revenues		0		6		6		5		5

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(1) These items do not include additional expenses for approximately €8 billion in relation to the items set out in Table E, attached to the 2016 Stability Law, which include investments for ANAS S.p.A. (Azienda Nazionale Autonoma delle Strade) and RFI S.p.A. (Rete Ferroviaria Italana).

Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2015 Stability Programme and the 2016 Stability Programme.

Main Finance Indicators – 2015 Stability Programme v. 2016 Stability Programme

	2015			2016			2017			2018			2019
GDP growth rate(1)
2015 Stability Programme		1.4			2.6			3.3			3.2			3.1
2016 Stability Programme		1.5			2.2			2.5			3.1			3.2
Difference		0.1			(0.4	)		(0.8	)		(0.1	)		0.1
Net Borrowing, as a % of GDP
2015 Stability Programme		(2.6	)		(1.8	)		(0.8	)		0.0			0.4
2016 Stability Programme		(2.6	)		(2.3	)		(1.8	)		(0.9	)		0.1

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	2015		2016			2017			2018			2019
Difference		0.0		(0.5	)		(1.0	)		(0.9	)		(0.3	)
Public Debt, as a % of GDP
2015 Stability Programme		132.5		130.9			127.4			123.4			120.0
2016 Stability Programme		132.7		132.4			130.9			128.0			123.8
Difference		0.2		1.5			3.5			4.6			3.8

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(1) Nominal GDP growth rate.

Source: Ministry of Economy and Finance.

The Update of the 2016 Economic and Financial Document

In September 2016, Italy published its Update of the 2016 Economic and Financial Document, which included revised projections and forecasts reflecting the improvement of the economic situation in Italy and Europe.

The table below presents the main public finance objectives included in the Update of the 2016 Economic and Financial Document.

Public Finance Objectives (in % of GDP)

Update of the 2016 Economic and Financial Document	2014			2015			2016			2017			2018			2019
Net Borrowing		(3.0	)		(2.6	)		(2.4	)		(2.0	)		(1.2	)		(0.2	)
Interest Expense		4.6			4.2			4.0			3.7			3.6			3.4
Primary Balance		1.6			1.5			1.5			1.7			2.4			3.2
Structural Net Borrowing		(0.9	)		(0.7	)		(1.2	)		(1.2	)		(0.7	)		(0.2	)
Structural Change		(0.6	)		0.2			(0.5	)		0.0			0.5			0.6
Public Debt, gross of euro area financial support		131.9			132.3			132.8			132.5			130.1			126.6
Public Debt, net of euro area financial support		128.2			128.7			129.3			129.0			126.8			123.4

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Source: Ministry of Economy and Finance.

The table below presents macroeconomic forecasts prepared by the Republic of Italy through 2019 in connection with the Update of the 2016 Economic and Financial Document.

Macroeconomic Forecasts (in %)

Update of the 2016 Economic and Financial Document	2015			2016			2017			2018			2019
Real GDP		0.7			0.8			0.6			1.2			1.3
Nominal GDP		1.4			1.8			1.8			2.9			3.0
Private consumption		1.5			1.2			0.4			1.0			1.2
Public consumption		(0.6	)		0.4			0.0			(0.3	)		0.2
Investments		1.3			1.9			1.5			2.6			2.8
Exports of goods and services		4.3			1.3			2.5			3.3			3.5
Imports of goods and services		6.0			2.3			2.2			3.2			3.8
Domestic demand		1.0			1.1			0.5			1.0			1.3
Change in inventories		0.1			(0.1	)		(0.1	)		0.1			0.0
Net exports		(0.4	)		(0.3	)		0.2			0.1			0.0

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Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2016 Stability Programme and the Update of the 2016 Economic and Financial Document.

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Main Finance Indicators – 2016 Economic and Financial Document

v. Update of the 2016 Economic and Financial Document

	2015			2016			2017			2018			2019
GDP growth rate
2016 Economic and Financial Document		1.5			2.2			2.5			3.1			3.2
Update of the 2016 Economic and Financial Document		1.4			1.8			1.8			2.9			3.0
Difference		(0.1	)		(0.4	)		(0.7	)		(0.2	)		(0.2	)
Net Borrowing, as a % of GDP
2016 Economic and Financial Document		(2.6	)		(2.3	)		(1.8	)		(0.9	)		0.1
Update of the 2016 Economic and Financial Document		(2.6	)		(2.4	)		(2.0	)		(1.2	)		(0.2	)
Difference		0.0			(0.1	)		(0.2	)		(0.3	)		(0.3	)
Public Debt, as a % of GDP
2016 Economic and Financial Document		132.7			132.4			130.9			128.0			123.8
Update of the 2016 Economic and Financial Document		132.3			132.8			132.5			130.1			126.6
Difference		(0.4	)		0.4			1.6			2.1			2.8

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Source: Ministry of Economy and Finance.

The EU Council's policy recommendations to Italy for the period 2016-2017

As part of the European Semester process, in June 2016, 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 2016 Stability Programme and the 2016 National Reform Programme. ECOFIN recommended that Italy take action over the period 2015-2017 to:

· Limit the temporary deviation from the required 0.5 per cent of GDP adjustment towards the medium-term budgetary objective to the amount of 0.75 per cent of GDP allowed for investments and the implementation of structural reforms, subject to the condition of resuming the adjustment path towards the medium-term budgetary objective in 2017. Achieve an annual fiscal adjustment of 0.6 per cent or more of GDP towards the medium-term budgetary objective in 2017;

· Finalise the reform of the budgetary process in the course of 2016 and ensure that the spending review is an integral part of it. Ensure the timely implementation of the privatisation programme and use the windfall gains to accelerate the reduction of the general government debt ratio. Shift the tax burden from productive factors onto consumption and property. Reduce the number and scope of tax expenditures and complete the reform of the cadastral system by mid-2017. Take measures to improve tax compliance, including through electronic invoicing and payments;

· Implement the reform of the public administration by adopting and implementing all necessary legislative decrees, in particular those reforming publicly-owned enterprises, local public services and the management of human resources. Step up the fight against corruption including by revising the statute of limitations by the end of 2016. Reduce the length of civil justice proceedings by enforcing reforms and through effective case-management;

· Accelerate the reduction in the stock of non-performing loans, including by further improving the framework for insolvency and debt collection. Swiftly complete the implementation of ongoing corporate governance reforms in the banking sector;

· Implement the reform of active labor market policies, in particular by strengthening the effectiveness of employment services. Facilitate the take-up of work for second earners;

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· Adopt and implement the national antipoverty strategy and review and rationalise social spending;

· Swiftly adopt and implement the pending law on competition. Take further action to increase competition in regulated professions, the transport, health and retail sectors and the system of concessions.

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 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

	2011			2012			2013			2014			2015
	(€ in millions)
Expenditures
Compensation of employees		169,615			166,142			164,784			163,622			161,746
Intermediate consumption		87,166			87,023			89,579			88,564			88,831
Market purchases of social benefits in kind		44,608			43,345			43,552			43,784			44,194
Social benefits in cash		304,478			311,442			319,688			326,863			332,985
Subsidies to firms		23,521			25,864			27,547			30,429			27,711
Interest payments		76,416			83,566			77,568			74,340			68,440
Other expenditures		37,032			37,615			38,518			37,642			35,777
Total current expenditures		742,836			754,997			761,236			765,244			759,684
Gross fixed investments		45,288			41,306			38,439			36,871			37,256
Investments grants		17,651			17,029			13,977			13,170			15,684
Other capital expenditures		(1,040	)		5,889			5,330			10,249			13,805
Total capital account expenditures		61,899			64,224			57,746			60,290			66,745
Total expenditures		804,735			819,221			818,982			825,534			826,429
as a % of GDP		49.1			50.8			51.0			51.2			50.5
Deficit (surplus) on current account		5,794			(10,738	)		(1,470	)		(4,254	)		(19,002	)
Net borrowing		56,954			47,538			46,959			48,936			42,388
as a % of GDP		3.5			2.9			2.9			3.0			2.6
Revenues
Direct taxes		226,826			239,760			240,920			237,931			242,356
Indirect taxes		231,100			246,110			238,675			248,207			249,324
Actual social security contributions		212,216			211,733			211,200			210,392			214,660
Imputed social security contributions		4,078			4,104			4,089			3,948			3,875
Income from capital		10,231			8,846			10,236			11,403			10,968
Other revenues		52,636			55,182			57,586			57,617			57,503
Total current revenues		737,087			765,735			762,706			769,498			778,686
Capital taxes		6,981			1,524			4,154			1,581			1,074
Other capital revenues		3,713			4,424			5,163			5,519			4,281
Total capital revenues		10,694			5,948			9,317			7,100			5,355
Total revenues		747,781			771,683			772,023			776,598			784,041
as a % of GDP		45.7			47.8			48.1			48.2			47.9
Primary balance		19,462			36,028			30,609			25,404			26,052
as a % of GDP		1.2			2.2			1.9			1.6			1.6

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Source: Bank of Italy.

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General government revenue increased by 0.6 per cent or €4.6 billion in 2014 and increased by 1.0 per cent or €7.4 billion in 2015. The ratio of tax revenues and social contributions to GDP represented 43.5 per cent both in 2015 and 2014. Social security contributions in 2015 increased by 2.0 per cent, while current tax revenue increased by 1.0 per cent. This was mainly due to a 1.9 per cent increase in central government tax revenue. Revenue decreased by 2.1 per cent in 2015, mainly due to a decrease in the income generated by the regional tax on production (IRAP).

Direct taxes increased by 1.9 per cent in 2015, driven by the increase in personal income taxes (2.7 per cent increase) and corporate income taxes (3.2 per cent increase). Further, taxes on income from financial assets increased by 6.4 per cent, due to an increase in the applicable rates imposed by Law Decree No. 66 of April 24, 2014 (converted into Law No. 89 of June 23, 2014) and by the stability law of 2015. General government expenditures increased by 0.1 per cent in 2015, decreasing to 50.5 per cent of GDP in 2015 from 51.2 per cent of GDP in 2014. The slight increase in general government expenditures was due to the increase in social benefits in cash, which increased to €333 billion in 2015 from €326.9 billion in 2014. Italy recorded a current account surplus of €35.9 billion in 2015 (2.2 per cent of GDP), compared to an account surplus of €30.9 billion in 2014 (1.9 per cent of GDP) and of €15.0 billion in 2013 (0.9 per cent of GDP). Between 2010, when the current account deficit reached a post-1974 high of 3.5 per cent of GDP, and 2015, the current account improved by a total of 5.6 points, reflecting mainly an increase in foreign demand and growing surplus with non-EU countries, mainly the United States and OPEC countries, and a decrease in imports from Russia and the OPEC countries, mainly due to a reduction in prices for energy.

Expenditures

Compensation of employees. Compensation of employees decreased for the fifth consecutive year by 1.1 per cent in 2015, compared to a 0.7 per cent decrease in 2014. Contributing factors were a 5.1 per cent decrease in the number of employees between 2007 and 2014 due to limitations on hiring, and a continued freeze on the renewals of employment agreements and employee wages in the public sector between 2010 and 2015, pursuant to Law Decree No. 78 of 2010. Those limitations resulted in a reduction of expenditure for employee compensation in the public sector of €3.5 billion in 2012, €1.3 billion in 2013, €1.2 billion in 2014 and approximately 1.9 billion in 2015.

Intermediate consumption. Intermediate consumption, which measures the value of the goods and services consumed as inputs by a process of production, increased by 0.3 per cent in 2015 compared to a 1.1 per cent decrease in 2014 which resulted from the measures to curb spending introduced in 2011. This increase was mainly driven by a 1.0 per cent increase in public health spending.

Market purchases of social benefits in kind. Expenditure on social benefits in kind increased for the fifth consecutive year, increasing by 0.9 per cent in 2015 and 0.5 per cent in 2014. In each of 2015 and 2014, expenditure on social benefits in kind were 2.7 per cent of GDP.

Expenditure 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. Approximately 91 per cent of expenditure on social benefits in kind in 2015 related to health care.

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 1.9 per cent in 2015 and by 2.2 per

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cent in 2014. Expenditure on pensions increased by 0.8 per cent in each of 2015 and 2014, while the non-pension component grew by 5.6 per cent as a result of the introduction of certain welfare benefits through Law Decree No. 66 of April 24, 2014 (converted into Law No. 89 of June 23, 2014). For additional information relating to government expenditure in connection with the national pension system, see "The Italian Economy—Social Welfare System", Exhibit 2—2016 Stability Programme and Exhibit 3—2016 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 8.9 per cent in 2015 compared to a 10.5 per cent increase in 2014.

Interest payments. Interest payments by the Government decreased by €5.9 billion or 7.9 per cent in 2015 as compared to the €3.2 billion or 4.2 per cent decrease in 2014. The ratio of interest payments to nominal GDP was 4.2 per cent and 4.5 per cent in 2015 and 2014, respectively. For additional information on Italy's public debt, see "Public Debt".

Other Expenditures. Other expenditures decreased by 5.0 per cent in 2015 compared to a 2.3 per cent decrease in 2014.

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.

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 was 43.5 per cent in each of 2015 and 2014. This increase was mainly due to the increase in direct tax revenues by 1.9 per cent in 2015 compared to a 1.2 per cent decrease in 2014, which was partially offset by an increase by 0.5 per cent in indirect tax revenues in 2015, compared to a 4.0 per cent increase in 2014. Further, total tax revenues grew by 29.7 per cent of GDP in 2014 to 30.0 per cent of GDP in 2015.

The following table sets forth the composition of tax revenues for the periods indicated.

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Composition of Tax Revenues(1)

	2011		2012		2013		2014		2015
	(€ in millions)
Direct taxes
Personal income tax		165,903		166,607		166,250		165,118		182,442
Corporate income tax		37,688		38,630		41,590		34,797		36,590
Investment Income tax		7,233		10,625		13,620		16,031		16,253
Other		11,526		15,735		15,034		12,648		14,114
Total direct taxes		222,350		231,597		236,494		228,594		249,399
Indirect taxes
VAT		118,480		117,496		113,877		116,118		123,990
Other transaction-based taxes		19,952		19,822		20,922		20,748		20,115
Taxes on production of mineral oil		20,368		24,545		24,298		26,151		25,553
Taxes on production of methane gas		4,600		3,795		3,704		4,120		2,655
Tax on electricity consumption		1,306		2,611		2,506		2,734		2,561
Tax on tobacco consumption		10,803		10,942		10,400		10,294		10,679
Taxes on lotto and lotteries		12,128		11,059		10,987		12,124		11,026
Other(2)		5,655		4,139		4,616		4,609		4,561
Total indirect taxes		193,292		194,409		191,310		196,898		201,139
Total taxes		415,642		426,006		427,804		425,492		450,538

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(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 ESA2010. 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: Ministry of Economy and Finance.

In 2015, total taxation revenue (as reported in the "Composition of Tax Revenues" table on a cash basis) increased by 5.9 per cent compared to 2014. This was due to a 9.1 per cent increase in direct tax revenues, mainly driven by an increase in personal income taxes (IRPEF) that in 2015 amounted to €182.4 billion as compared to €165.1 billion in 2014, and in corporate income taxes (IRES) that increased to €36.6 billion in 2015 from €34.8 billion in 2014. In addition, indirect tax revenues increased to €201.1 billion in 2015 from €196.8 billion in 2014, driven by an increase by €7.9 billion in VAT.

Actual social security contributions. Actual social security contributions, which consist of payments made for the benefit of employees, increased by 2.0 per cent in 2015 compared to a decrease by 0.4 per cent in 2014.

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 1.8 per cent in 2015 compared to a decrease by 3.4 per cent in 2014.

Income from capital. Income from capital decreased by 3.8 per cent in 2015 compared to an increase by 11.4 per cent in 2014.

Other Revenue. Other revenue decreased by 4.8 per cent in 2015 compared to a 1.7 per cent decrease in 2014.

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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 continues to participate in the election of the 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, 2015	Total Assets	Total Liabilities	Net profit (loss)
			At December 31,		For the year ended December 31,
			2015	2015	2013	2014	2015
		(€ in millions, except percentages)
Cassa Depositi e Prestiti S.p.A.(3)	Financial Services	80.1	397,898	364,317	2,899	1,158	2,248
ENEL S.p.A.(4)	Electricity	25.5	161,179	109,428	4,780	772	3,372
ENI S.p.A.(5)	Oil and Gas	30.1	134,792	81,123	4,959	850	(9,378)
Ferrovie dello Stato Italiane S.p.A.	Railroads	100	62,977	25,141	460	303	137
Finmeccanica S.p.A.	Defense/Aerospace	30.2	26,236	21,934	74	20	527
Poste Italiane S.p.A.	Post/Financial Services	64.7	60,970	55,928	1,005	212	552

___________________________

(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 19.9 per cent of CDP was owned by various banking foundations.

(4) As of  April 30, 2016, 23.58 per cent of ENEL S.p.A. was owned by the Government.

(5) As of April 30, 2016, 25.76 per cent of ENI S.p.A. was owned indirectly through Cassa Depositi e Prestiti S.p.A., with 4.34 per cent owned directly by the Government.

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 aggregate amount of Government bonds issued in 2015 was approximately €410.1 billion, compared to an aggregate amount of approximately €455.3 billion in 2014. The aggregate amount of Government bonds with maturity in 2015 decreased to €378.2 billion from €391.8 billion in 2014.

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,
	2011			2012			2013			2014			2015
	(Millions of euro)
Debt incurred by the Treasury:
Short term bonds (BOT)(1)		131,693			151,119			141,098			125,496			115,074
Medium- and long-term bonds (initially incurred or issued in Italy)		1,386,937			1,427,338			1,524,751			1,600,822			1,646,806
External bonds (initially incurred or issued outside Italy)(2)		58,541			50,667			47,250			47,308			43,959
Total Treasury Issues		1,577,171			1,629,124			1,713,099			1,773,627			1,805,839
Postal savings(3)		22,079			20,933			18,853			17,577			16,088
Treasury accounts(4)		127,840			136,627			136,117			152,256			158,233
Other debt incurred by:
FS (bonds and other debt)(5)		-			-			-			-			-
ISPA (bonds and other debt)(6)		11,070			11,100			11,106			10,106			10,106
Central Government entities(7)		53,007			77,043			85,931			88,619			90,181
Other general Government entities(8)		116,312			115,051			104,907			94,936			92,248
Total public debt		1,907,479			1,989,878			2,070,013			2,137,120			2,172,674
as a percentage of GDP		116.4	%		123.3	%		129.0	%		131.9	%		132.3	%
Liquidity buffer(9)		(23,430	)		(33,603	)		(36,863	)		(45,594	)		(35,114	)
Total public debt net of liquidity buffer		1,884,049			1,956,275			2,033,150			2,091,526			2,137,560

___________________________

(*) Figures in this table 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 sections "Italian Economy" and "Public Debt".

(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 assumed part of the postal savings liabilities of CDP as described in detail below.

77

(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 line 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 pursuant to Italian 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 line item includes all internal and external liabilities incurred by other central Government entities and all residual liabilities incurred by the central Government.

(8) The line item includes all internal and external liabilities incurred by local authorities.

(9) The line item includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, mainly funded by privatization proceeds, as well as liquidity invested in the money market through Operations on Behalf of the Italian Treasury ("OPTES"). OPTES are overnight or very short-term transactions involving non collateralized deposits, conducted through auctions or bilateral trades undertaken between the Italian ministry of Economy and Finance and OPTES counterparties.

Source: Ministry of Economy and Finance.

In the period from 2011 to 2015, Italy's debt-to-GDP ratio increased from 120.0 per cent net of euro area financial support (and 116.4 per cent gross of euro area financial support) to 128.7 per cent net of euro area financial support (and 132.3 per cent gross of euro area financial support). This growth trend resulted from Italy's budget deficit (primarily resulting from the cost of servicing Italy's debt) and its substantially stagnant nominal GDP in this five year period. For additional information on the drivers of the decrease in GDP growth.

The Government's latest forecasts of the debt-to-GDP ratio are included in the Update of the 2016 Economic and Financial Document. The table below shows the Government's forecasts of the debt-to-GDP ratio for the period 2016-2019. For additional information on the Government's forecasts of the debt-to-GDP ratio, see "Public Finance—The 2016 Economic and Financial Document", "The Italian Economy", "Public Debt", Exhibit 2—2016 Stability Programme, and Exhibit 4—Update of the 2016 Economic and Financial Document.

Forecasted Debt-to-GDP Ratios

Update of the 2016 Economic and Financial Document	2015		2016		2017		2018		2019
Public Debt, gross of euro area financial support		132.3		132.8		132.5		130.1		126.6
Public Debt, net of euro area financial support		128.7		129.3		129.0		126.8		123.4

___________________________

Source: Ministry of Economy and Finance.

Conversion of Cassa Depositi e Prestiti. From December 12, 2003, the date of its conversion 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. In connection with the conversion of CDP into a joint stock company, in December 2003:

· the Ministry of Economy and Finance assumed €101 billion of CDP's postal bonds and accounts. Prior to December 2003, Italy accounted for CDP's entire postal savings liabilities;

· the remaining obligations of CDP in respect of postal savings (amounting to approximately €73 billion), guaranteed by the Government, ceased to be accounted for as a portion of public debt; and

· loans totaling €28 billion, granted by CDP to local Government entities, which previously had not been accounted for as public debt as they were loans made from one general Government entity to another, were thenceforth included in public debt of local Government entities or in the debt of central Government, when it was fully committed to the refunding.

78

CDP's obligations in respect of postal savings guaranteed by the Government have increased since December 2003 and, as of December 31, 2015, amounted to approximately €252.1 billion. For additional information on CDP, see "Italian Economy––Services".

Public Debt Management. Debt management continues to be geared towards lengthening the average residual maturity of public debt. In 2015, the average maturity of government debt increased, for the first time in the last five years, from 6.38 years at the end of 2014 to 6.52 years at the end of 2015. This increase was primarily due to an increase in the average maturity of floating rate securities, which was partially offset by a decrease in the average maturity of securities indexed to the inflation rate.

The Decree of the Ministry of Economy and Finance of December 23, 2014 (so-called Decreto Cornice) sets forth the general objectives for the management of public debt. These general objectives translated into the following guidelines for 2015:

1. increase the average maturity of Government bonds;

2. maintain the total amount of BOTs outstanding at the end of 2015, in line with the total amount of BOTs outstanding at the end of 2014;

3. control the debt exposure to inflation, potentially issuing only one series of BTPItalia;

4. decrease the total amount of CCTs/CCTsEu and CTZs outstanding at the end of 2015, compared to 2014;

5. decrease the total amount of BTPs with a maturity of 3 and 5 years, and increase the total amount of BTPs with a maturity of at least 7 years;

6. carry out exchange and buyback transactions to manage the average maturity of securities going forward;

7. carry out periodic transactions on the money market and mainly short-term transactions through OPTES.

The table below presents the breakdown of the total Governments bonds issued in 2013, 2014 and 2015, respectively.

Breakdown of Total Issued Governments Bonds

	2013		% on total		2014		% on total		2015		% on total
BOT mini		8,500		1.8		0		0		0		0
BOT 3 months		3,000		0.6		0		0		0		0
BOT 6 months		108,951		22.7		91,934		19.8		80,956		19.5
BOT 12 months		97,885		20.4		90,472		19.5		83,174		20
Commercial Paper		155		0		481		0.1		0		0
Total short-term		218,491		45.5		182,887		39.5		164,130		39.5
CTZ		38,157		7.9		32,969		7.1		27,388		6.6
CCTeu		19,544		4.1		24,452		5.3		29,503		7.1
BTP 3 years		38,553		8		38,046		8.2		28,924		7
BTP 5 years		40,722		8.5		46,543		10		33,729		8.1
BTP 7 years		5,000		1		30,411		6.6		31,340		7.5
BTP 10 years		41,960		8.7		40,064		8.6		40,712		9.8
BTP 15 years		16,966		3.5		16,933		3.7		18,703		4.5
BTP 30 years		10,175		2.1		7,250		1.6		14,391		3.5
BTP€i 5 years		5,902		1.2		4,170		0.9		1,614		0.4
BTP€i 10 years		3,687		0.8		8,256		1.8		4,048		1

79

	2013		% on total		2014		% on total		2015		% on total
BTP€i 15 years		1,167		0.2		1,536		0.3		6,872		1.7
BTP€i 30 years		0		0		525		0.1		562		0.1
BTPItalia		39,328		8.2		28,071		6.1		9,379		2.3
Foreign		1,000		0.2		1,250		0.3		4,000		1
Total medium/long-term		262,162		54.5		280,476		60.5		251,164		60.5
Total		480,653		100		463,364		100		415,294		100

___________________________

Source: 2016 Report on Public Debt.

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 of December 31, 2013, 2014 and 2015, respectively.

Breakdown of Total Outstanding Government Bonds (in %)

	December 31,
	2013		2014		2015
Fixed rate securities		71.9		72.6		73.1
Securities indexed to the inflation rate (BTP€i+BTP Italia)		11.8		12.9		13.7
Floating rate securities		16.3		14.5		13.2
Total Outstanding Government Bonds		100		100		100

___________________________

Source: Ministry of Economy and Finance.

As of December 31, 2015, Government bonds represented approximately 84.0 per cent of total public debt. The weighted average cost of debt decreased to 0.7 per cent in 2015 from 1.35 per cent in 2014, reaching an historical minimum low. Such decrease in the weighted average cost of debt was mainly due to a general decrease in interest rates, which was partially offset by an increase in the average maturity of Government bonds. Yields on short-term Government bonds recorded negative interest rates for the first time in 2015, whereas yields on long-term Government bonds slightly decreased to 1.63 per cent in 2015 from 1.73 per cent in 2014.

The table below shows the yields on 3-year and 10-year BTPs issued by the Treasury for each quarter of 2014 and 2015 and the first two quarters of 2016.

Quarterly Yields on 3-Year and 10-Year BTPs

	2014					2015					2016
		Q1	Q2	Q3	Q4		Q1	Q2	Q3	Q4		Q1	Q2
BTP 3-year		1.36	0.97	0.71	0.73		0.42	0.33	0.37	0.20		0.03	0.05
BTP 10-year		3.73	3.18	2.57	2.35		1.58	1.54	2.04	1.61		1.50	1.38

___________________________

Source: Ministry of Economy and Finance.

BTP-Bund Spread. The spread between Italian Government bonds (BTPs) and German Government bonds, in each case with a maturity of 10 years, decreased to approximately 96 bps as of December 31, 2015 from approximately 128 bps as of December 31, 2014, due to an improved perception of credit risk for Italy.

Privatization program. The Government also intends to reduce public debt through a program of privatization of public real estate assets and companies in which the Government holds interests. In February 2015, the Government disposed of a 5.74% interest in ENEL S.p.A., which generated approximately €2.2 billion. In addition, the Government disposed of a 35.3% interest in Poste Italiane

80

S.p.A. following completion of its initial public offering in October 2015, which generated approximately €3.1 billion. For further information on the largest companies in which the Government holds an interest, see "Public Finance—Government Enterprises".

The Government expects that the envisaged privatization program will result in additional revenues of approximately 0.5 per cent of GDP in each of 2016, 2017 and 2018.

Summary of Internal Debt

Internal debt is debt, payable in Euro, initially incurred or issued in Italy. The Republic of Italy's total internal public debt as of December 31, 2015 was €2,077,752 million, an increase of €39,222 million from December 31, 2014. The following table summarizes the internal public debt as of December 31 of each of the years indicated.

Internal Public Debt

	2011			2012			2013			2014			2015
	(Millions of euro)
Debt incurred by the Treasury:
Short-Term Bonds (BOT)(1)		131,693			151,119			141,098			125,496			115,074
Medium- and Long-Term Bonds
CTZ(2)		67,425			61,312			76,427			52,751			48,651
CCT(3)		143,727			122,590			124,717			119,151			121,181
BTP(4)		1,054,675			1,094,496			1,123,665			1,204,124			1,229,152
BTP€i(5)		121,110			121,829			133,566			130,350			143,995
BTP Italia(6)		-			27,111			66,376			94,447			103,826
Total		1,518,630			1,578,457			1,665,849			1,726,318			1,761,880
Postal savings		22,079			20,933			18,853			17,577			16,088
Treasury accounts(7)		127,840			136,627			136,117			152,256			158,233
ISPA loans(8)		500			500			500			500			500
Central Government entities		49,046			49,162			50,059			49,207			49,892
Other general Government entities		114,168			112,918			102,786			92,672			91,180
Total internal public debt		1,832,263			1,898,597			1,974,163			2,038,530			2,077,752
Liquidity buffer(9)		(23,430	)		(33,603	)		(36,863	)		(45,594	)		(35,144	)
Total internal public debt net of liquidity buffer		1,808,833			1,864,994			1,937,300			1,992,936			2,042,638

___________________________

(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 item includes all the funds of the Treasury deposited with the Bank of Italy, including the sinking fund, supplied by privatizations, as well as liquidity invested on the money market through OPTES. For additional information, see "Monetary System—Monetary Policy".

(8) The item includes the portion of Debt incurred by ISPA in Italy, guaranteed by the State, in connection with the financing of the high-speed railway link between Turin, Milan, Rome and Naples.

(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.

81

In 2014 and 2015, the ratio of short-term bonds to total debt issued was approximately 7.04 per cent and approximately 6.34 per cent, respectively.

The following table divides the internal public debt into floating debt and funded debt as of December 31 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,
	2011		2012		2013		2014		2015
	(Millions of euro)
Floating internal debt(1)		171,641		186,242		180,081		188,213		193,266
Funded internal debt		1,660,622		1,712,355		1,794,082		1,850,317		1,884,486
Total internal public debt		1,832,263		1,898,597		1,974,163		2,038,530		2,077,752

___________________________

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

Source: Ministry of Economy and Finance.

Summary of External Debt

External debt is debt initially incurred or issued in a currency other than Euro or outside Italy. Total external public debt as of December 31, 2015 was €94,922 million. Historically, Italy has not relied heavily on external debt. The following table summarizes the external public debt as of December 31 of each of the years indicated.

Summary of External Debt

	December 31,
	2011		2012		2013		2014		2015
	(Millions of euro)
External Treasury Bonds(1)		58,541		50,667		47,250		47,308		43,959
FS (bonds and loans)(2)		0		0		0		0		0
ISPA (bonds and loans)(3)		10,570		10,600		10,606		9,606		9,606
Central Government entities		3,961		27,881		35,872		39,412		40,289
Other general Government entities		2,144		2,133		2,121		2,264		1,068
Total external public debt		75,216		91,281		95,849		98,590		94,922

___________________________

(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) The item includes FS bonds and other debt incurred by FS outside Italy and assumed by the Treasury by law in 1996.

(3) The item includes the full amount of ISPA bonds and the portion of debt incurred by ISPA outside Italy, guaranteed by the state, in connection with the financing of the high-speed railway link between Turin, Milan, Rome and Naples.

Source: Ministry of Economy and Finance.

The following table sets forth a breakdown of the external public debt of Italy, by currency, as of 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 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.

	December 31,
	2011		2012		2013		2014		2015
	(in millions)
Euro(1)		22,323		21,946		22,522		23,523		27,389
British Pounds		2,450		2,450		2,450		2,050		1,750
Swiss Francs		3,000		3,000		3,000		3,000		1,000
U.S. Dollars		31,500		23,000		19,000		19,000		12,500

82

	December 31,
	2011		2012		2013		2014		2015
	(in millions)
Japanese Yen		585,000		585,000		585,000		460,000		335,000
Norwegian Kroner		4,000		2,000		2,000		2,000		0
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.

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$80 billion medium-term note program established in 1998 and updated in December of 2014, 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 has included the EU Collective Action Clauses, including Cross Series Modification Clauses, in the documentation of all bonds it has issued 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, 2015

Security	Interest Rate	Maturity Date	Outstanding principal amount
	(Millions of euro)
BOT (3 months)	various	various	0
BOT (6 months)	various	various	34,652
Treasury accounts	floating	none	158,614
Total floating internal debt of the Treasury			193,266
Liquidity buffer	floating	none	(35,114)
Total floating internal debt net of liquidity buffer			158,152

___________________________

(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, 2015

Security	Interest Rate	Maturity Date	Outstanding principal amount
	(Millions of euro)
BOT (12 months)	various	various	80,421
CTZ	various	various	48,651
CCT	various	various	121,181
BTP	various	various	1,229,152
BTP€I	various	various	143,995
BTP Italia	various	various	103,826
Total funded internal debt of the Treasury			1,727,227

___________________________

(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.

84

External Bonds of the Treasury as of December 31, 2015

The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2015.

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	6.88%	98.73	September 27, 1993	September 27, 2023	$3,500,000,000	€3,214,843,391
$2,000,000,000	5.38%	98.44	February 27, 2003	June 15, 2033	$2,000,000,000	€1,837,053,366
$2,000,000,000	4.75%	99.34	January 25, 2006	January 25, 2016	$2,000,000,000	€1,837,053,366
$3,000,000,000	5.25%	99.85	September 20, 2006	September 20, 2016	$3,000,000,000	€2,755,580,050
$2,000,000,000	5.38%	99.37	June 12, 2007	June 12, 2017	$2,000,000,000	€1,837,053,366
					$12,500,000,000	€11,481,583,540
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 20, 2031	€150,000,000	€150,000,000
€3,000,000,000	5.75%	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	4.43%	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	€1,145,980,000	€1,145,980,000
€250,000,000	2.00% Inflation Indexed	99.02	March 30, 2007	September 15, 2062	€286,560,000	€286,560,000
€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	€562,860,000	€562,860,000
€258,000,000	5.26%	99.79	March 16, 2009	March 16, 2026	€258,000,000	€258,000,000
€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	3.75%	99.89	November 22, 2010	September 1, 2018	€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
€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 23, 2021	€150,000,000	€150,000,000
€500,000,000	2.85% Inflation Indexed	99.48	January 4, 2011	September 1, 2022	€535,070,000	€535,070,000
€450,000,000	4.45%	99.59	February 26, 2011	August 24, 2020	€450,000,000	€450,000,000
€2,259,500,000	6.36%	100.00	July 1, 2011	December 31, 2027	€1,865,992,972	€1,865,992,972
€250,000,000	5.00%	99.19	September 22, 2011	September 22, 2017	€250,000,000	€250,000,000
€230,000,000	4.20% Inflation Indexed	100.00	February 1, 2012	July 25, 2042	€239,489,800	€239,489,800
€437,500,000	3.44%	100.00	February 13, 2012	December 31, 2024	€166,690,094	€166,690,094
€500,000,000	5.05%	99.53	September 11, 2013	September 11, 2053	€500,000,000	€500,000,000
€500,000,000	4.75%	99.85	May 28, 2013	May 28, 2063	€500,000,000	€500,000,000
€250,000,000	2.97% Inflation Indexed	100.00	January 24, 2014	January 24, 2044	€251,087,500	€251,087,500

85

Original Currency Nominal Amount	Interest Rate	Initial Public Offering Price (%)	Date of Issue	Maturity Date	Amount Outstanding	Equivalent in Euro
€1,000,000,000	1.51% Inflation Indexed	100.00	October 15, 2014	September 15, 2028	€1,004,760,000	€1,004,760,000
€1,000,000,000	1.86%	100.00	February 2, 2015	February 2, 2028	€1,000,000,000	€1,000,000,000
€500,000,000	2.19%	100.00	February 2, 2015	February 2, 2032	€500,000,000	€500,000,000
€300,000,000	1.19% Inflation Indexed	96.02	February 18, 2015	February 18, 2043	€300,876,000	€300,876,000
€500,000,000	1.77%	94.21	March 5, 2015	March 5, 2029	€500,000,000	€500,000,000
€500,000,000	2.00%	92.16	March 5, 2015	September 5, 2032	€500,000,000	€500,000,000
€500,000,000	1.67%	100.00	May 6, 2015	May 6, 2028	€500,000,000	€500,000,000
€700,000,000	2.13%	100.00	May 22, 2015	May 22, 2027	€700,000,000	€700,000,000
					€27,389,366,366	€27,389,366,366
Euro Ispa Bonds(3)
€750,000,000	2.25% Inflation Indexed	99.36	February 6, 2004	July 31, 2019	€906,262,500	€906,262,500
€3,250,000,000	5.13%	98.93	February 6, 2004	July 31, 2024	€3,250,000,000	€3,250,000,000
€2,200,000,000	5.20%	105.12	February 6, 2004	July 31, 2034	€2,200,000,000	€2,200,000,000
€850,000,000	Floating	100.00	March 4, 2005	July 31, 2045	€850,000,000	€850,000,000
€1,000,000,000	Floating	100.00	April 25, 2005	July 31, 2045	€1,000,000,000	€1,000,000,000
€300,000,000	Floating	100.00	June 30, 2005	July 31, 2035	€300,000,000	€300,000,000
€100,000,000	Floating	100.00	June 30, 2005	July 31, 2035	€100,000,000	€100,000,000
					€8,606,262,500	€8,606,262,500
Swiss Franc(4)(*)
ChF 1,000,000,000	2.50%	99.33	January 30, 2006	January 30, 2018	ChF 1,000,000,000	€922,934,933
					ChF 1,000,000,000	€922,934,933
Pound Sterling(5)(*)
£1,500,000,000	6.00%	98.56	August 4, 1998	August 4, 2028	£1,500,000,000	€2,043,735,949
£250,000,000	5.25%	99.47	July 29, 2004	December 7, 2034	£250,000,000	€340,622,658
					£1,750,000,000	€2,384,358,608
Japanese Yen(7)(*)
¥100,000,000,000	3.70%	100.00	November 14, 1996	November 14, 2016	¥100,000,000,000	€762,951,095
¥100,000,000,000	3.45%	99.80	March 24, 1997	March 24, 2017	¥100,000,000,000	€762,951,095
¥25,000,000,000	2.87%	100.00	May 18, 2006	May 18, 2036	¥25,000,000,000	€190,737,774
¥50,000,000,000	Floating	100.00	April 24, 2008	April 24, 2018	¥50,000,000,000	€381,475,547
¥30,000,000,000	Floating	100.00	July 8, 2009	July 8, 2019	¥30,000,000,000	€228,885,328
¥30,000,000,000	Floating	100.00	September 18, 2009	September 18, 2019	¥30,000,000,000	€228,885,328
					¥335,000,000,000	€2,555,886,168
Czech Koruna(8)(*)
CZK 2,490,000,000	4.36%	100.00	October 3, 2007	October 3, 2017	CZK 2,490,000,000	€92,143,729
CZK 2,490,000,000	4.40%	100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000	€92,143,729
CZK 2,490,000,000	4.41%	100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000	€92,143,729
					CZK 7,470,000,000	€276,431,188
TOTAL OUTSTANDING				€53,616,823,303

___________________________

(1) U.S. dollar amounts have been converted into euro at $1.0887/€1.00, the exchange rate prevailing at December 31, 2015.

(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 ChF1.0835/€1.00, the exchange rate prevailing at December 31, 2015.

(5) Pounds Sterling amounts have been converted into euro at £0.73395/€1.00, the exchange rate prevailing at December 31, 2015.

(6) Japanese Yen amounts have been converted into euro at ¥131.07/€1.00, the exchange rate prevailing at December 31, 2015.

(7) Czech Koruna amounts have been converted into euro at CZK27.023/€1.00, the exchange rate prevailing at December 31, 2015.

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

Source: Ministry of Economy and Finance.

86

	As of December 31, 2015
Currency	Before Swap (in %)	After Swap (in %)
US Dollars	21.41	3.93
Euro(1)	67.13	95.42
Swiss Francs	1.72	-
Pounds Sterling	4.45	0.65
Japanese Yen	4.77	-
Czech Koruna	0.52	-
Total External Bonds (in millions of Euro)	53,616.82	52,565.26

___________________________

(1) Including Euro ISPA Bonds.

Source: Ministry of Economy and Finance.

External Bonds of the Treasury as of September 30, 2016

The following table shows the external bonds of the Treasury issued and outstanding as of September 30, 2016.

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	6.88%	98.73	September 27, 1993	September 27, 2023	$3,500,000,000	€3,135,919,720
$2,000,000,000	5.38%	98.44	February 27, 2003	June 15, 2033	$2,000,000,000	€1,791,954,126
$2,000,000,000	5.38%	99.37	June 12, 2007	June 12, 2017	$2,000,000,000	€1,791,954,126
					$7,500,000,000	€6,719,827,974
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 20, 2031	€150,000,000	€150,000,000
€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	4.43%	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	€1,143,260,000	€1,143,260,000
€250,000,000	2.00% Inflation Indexed	99.02	March 30, 2007	September 15, 2062	€285,877,500	€285,877,500
€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	€561,520,000	€561,520,000
€258,000,000	5.26%	99.79	March 16, 2009	March 16, 2026	€258,000,000	€258,000,000
€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	3.75%	99.89	November 22, 2010	September 1, 2018	€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
€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 23, 2021	€150,000,000	€150,000,000
€500,000,000	2.85% Inflation Indexed	99.48	January 4, 2011	September 1, 2022	€533,800,000	€533,800,000
€450,000,000	4.45%	99.59	February 26, 2011	August 24, 2020	€450,000,000	€450,000,000
€2,259,500,000	6.36%	100.00	July 1, 2011	December 31, 2027	€1,865,992,972	€1,865,992,972
€250,000,000	5.00%	99.19	September 22, 2011	September 22, 2017	€250,000,000	€250,000,000

87

Original Currency Nominal Amount	Interest Rate	Initial Public Offering Price (%)	Date of Issue	Maturity Date	Amount Outstanding	Equivalent in Euro
€230,000,000	4.20% Inflation Indexed	100.00	February 1, 2012	July 25, 2042	€238,921,700	€238,921,700
€437,500,000	3.44%	100.00	February 13, 2012	December 31, 2024	€142,216,333	€142,216,333
€500,000,000	5.05%	99.53	September 11, 2013	September 11, 2053	€500,000,000	€500,000,000
€500,000,000	4.75%	99.85	May 28, 2013	May 28, 2063	€500,000,000	€500,000,000
€250,000,000	2.97% Inflation Indexed	100.00	January 24, 2014	January 24, 2044	€ 250,490,000	€ 250,490,000
€1,000,000,000	1.51% Inflation Indexed	100.00	October 15, 2014	September 15, 2028	€1,002,370,000	€1,002,370,000
€1,000,000,000	1.86%	100.00	February 2, 2015	February 2, 2028	€1,000,000,000	€1,000,000,000
€500,000,000	2.19%	100.00	February 2, 2015	February 2, 2032	€500,000,000	€500,000,000
€300,000,000	1.19% Inflation Indexed	96.02	February 18, 2015	February 18, 2043	€300,159,000	€300,159,000
€500,000,000	1.77%	94.21	March 5, 2015	March 5, 2029	€500,000,000	€500,000,000
€500,000,000	2.00%	92.16	March 5, 2015	September 5, 2032	€500,000,000	€500,000,000
€500,000,000	1.67%	100.00	May 6, 2015	May 6, 2028	€500,000,000	€500,000,000
€700,000,000	2.13%	100.00	May 22, 2015	May 22, 2027	€700,000,000	€700,000,000
€636,000,000	1,48% Inflation Indexed	100.00	May 4, 2016	May 4, 2046	€643,256,760	€643,256,760
€700,000,000	1.91%	100.00	May 18, 2016	May 18, 2029	€800,000,000	€800,000,000
€800,000,000	1.90%	100.00	June 22, 2016	June 22, 2031	€700,000,000	€700,000,000
					€26,497,864,265	€26,497,864,265
Euro Ispa Bonds(3)
€750,000,000	2.25% Inflation Indexed	99.36	February 6, 2004	July 31, 2019	€905,437,500	€905,437,500
€3,250,000,000	5.13%	98.93	February 6, 2004	July 31, 2024	€3,250,000,000	€3,250,000,000
€2,200,000,000	5.20%	105.12	February 6, 2004	July 31, 2034	€2,200,000,000	€2,200,000,000
€850,000,000	Floating	100.00	March 4, 2005	July 31, 2045	€850,000,000	€850,000,000
€1,000,000,000	Floating	100.00	April 25, 2005	July 31, 2045	€1,000,000,000	€1,000,000,000
€300,000,000	Floating	100.00	June 30, 2005	July 31, 2035	€300,000,000	€300,000,000
€100,000,000	Floating	100.00	June 30, 2005	July 31, 2035	€100,000,000	€100,000,000
					€8,605,437,500	€8,605,437,500
Swiss Franc(4)(*)
ChF 1,000,000,000	2.50%	99.33	January 30, 2006	January 30, 2018	ChF 1,000,000,000	€919,455,682
					ChF 1,000,000,000	€919,455,682
Pound Sterling(5)(*)
£1,500,000,000	6.00%	98.56	August 4, 1998	August 4, 2028	£1,500,000,000	€1,742,160,279
£250,000,000	5.25%	99.47	July 29, 2004	December 7, 2034	£250,000,000	€290,360,046
					£1,750,000,000	€2,032,520,325
Japanese Yen(7)(*)
¥100,000,000,000	3.70%	100.00	November 14, 1996	November 14, 2016	¥100,000,000,000	€884,251,481
¥100,000,000,000	3.45%	99.80	March 24, 1997	March 24, 2017	¥100,000,000,000	€884,251,481
¥25,000,000,000	2.87%	100.00	May 18, 2006	May 18, 2036	¥25,000,000,000	€221,062,870
¥50,000,000,000	Floating	100.00	April 24, 2008	April 24, 2018	¥50,000,000,000	€442,125,741
¥30,000,000,000	Floating	100.00	July 8, 2009	July 8, 2019	¥30,000,000,000	€265,275,444
¥30,000,000,000	Floating	100.00	September 18, 2009	September 18, 2019	¥30,000,000,000	€265,275,444
					¥335,000,000,000	€ 2,962,242,462
Czech Koruna(8)(*)
CZK 2,490,000,000	4.36%	100.00	October 3, 2007	October 3, 2017	CZK 2,490,000,000	€92,150,550
CZK 2,490,000,000	4.40%	100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000	€92,150,550
CZK 2,490,000,000	4.41%	100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000	€92,150,550
					CZK 7,470,000,000	€276,451,649
TOTAL OUTSTANDING						€47,953,799,856

___________________________

(1) U.S. dollar amounts have been converted into euro at $1.1161/€1.00, the exchange rate prevailing at September 30, 2016.

(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.

88

(4) Swiss Franc amounts have been converted into euro at ChF1.0876/€1.00, the exchange rate prevailing at September 30, 2016.

(5) Pounds Sterling amounts have been converted into euro at £0.8610/€1.00, the exchange rate prevailing at September 30, 2016.

(6) Japanese Yen amounts have been converted into euro at ¥113.09/€1.00, the exchange rate prevailing at September 30, 2016.

(7) Czech Koruna amounts have been converted into euro at CZK27.021/€1.00, the exchange rate prevailing at September 30, 2016.

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

Source: Ministry of Economy and Finance.

	As of September 30, 2016
Currency	Before Swap (in %)	After Swap (in %)
US Dollars	14.00	4.24
Euro(1)	73.10	95.15
Swiss Francs	1.90	-
Pounds Sterling	4.20	0.61
Japanese Yen	6.20	-
Czech Koruna	0.60	-
Total External Bonds (in millions of Euro)	47,953.80	47,567.07

___________________________

(1) Including Euro ISPA Bonds.

Source: Ministry of Economy and Finance.

89

EX-99.2

Exhibit 2

INTRODUCTION

The 2016 Economic and Financial Document (EFD) is the third prepared by this government. This document is thus part of a longer term economic planning strategy that started with the implementation of the initial measures in 2014. The main objectives of this strategy are widely known: the revivalof growth and the relaunching of employment. The operational mechanisms can be summed up in four points: i) ongoing structural reform of the country, and stimulus to private and public investment; ii) a budget-policy orientation that is both favourable to growth and aimed at ensuring gradual, but robust, fiscal consolidation, so as to allow for a gradual reduction of the debt-to-GDP ratio; iii) the reduction of the tax burden, which is associated with more efficient expenditure and more efficient general government; and iv) the improvement of the business environment and the Italian economy’s competitive capacity.

The government’s effort in recent years has been extensive and incisive, and it has produced rather significant results in relatively brief timespan, with the return to growth and the increase in employment in 2015 representing the incontestable evidence thereof. Looking ahead, the reform effort is also designed to improve the framework for investment decisions, which will be favoured by greater efficiency of the civil justice system and government overall, the gradual reduction of the tax burden, the growing availability of financing, and measures to stimulate demand. Alongside the new measures to be adopted in the near term, a special emphasis goes to the full-scale implementation of the reforms already initiated.

The government’s extensive reform effort is to be paired with new stimulus measures, including further reduction of the tax burden and a gradual increase in public investments.  These measures will serve to bolster the recovery at a time when there is significant economic uncertainty at an international level.

External environment and results achieved

The government has conducted its economic policy in recent months in the face of an external environment that has gradually grown more problematic. In 2015, the ongoing deceleration of the large emerging economies and the Euro Area’s continuing weakness negatively influenced the trend of foreign demand for Italian goods and services; the performance of the international economy was also affected by increased volatility in the financial markets and the threat of terrorism.

MINISTERO DELL’ECONOMIA E DELLE FINANZE I

ECONOMIC AND FINANCIAL DOCUMENT

Persistent deflationary pressure in the Euro Area (partly due to continuing decreases in commodity prices, but also due to weak domestic demand) has impeded the transmission to the real economy of the exceptionally expansionist monetary-policy measures adopted by the European Central Bank; this has slowed investment, while also increasing the burden of private and public debt.

The Euro Area is also characterised by uneven distribution of growth and employment that periodically exposes it to shocks, with serious risks for the sustainability of the European project. The less-than-satisfactory convergence process – including in areas in which the integration is proceeding with greater decision, for example, in banking and finance – is perpetuating the segmentation of the area, impeding the necessary structural reform of the various economies.

The inflow of migrants and asylum seekers constitutes only one of the new and exceptional challenges for Europe, which are vividly revealing the weaknesses of the European project incapable of adopting coordinated policies and outlining common initiatives. Euroscepticism and the consensus for populist proposals are on the rise in almost all of the Member States. Given the material risk of national interests prevailing over the common good, the Italian government has proposed a detailed European strategy for growth, work and stability, so to make Europe a part of the solution to the problems that it is facing and to restore the confidence among citizens and among Member States.

Despite the fragile framework of reference, the Italian economy was once again expanding in 2015 after three consecutive years of contraction, with GDP growing by 0.8 percent in real terms and 1.5 percent in nominal terms. The growth produced benefits for employment, which rose considerably, and the unemployment rate, which was significantly lower; the improvement in labour market conditions was also associated with a positive trend of households consumption.

The positive data on industrial production in the first months of 2016 suggest a new acceleration of GDP in the quarters ahead. In line with these trends, the EFD forecasts 1.2 percent growth of GDP for 2016; under the policy scenario, growth would continue to accelerate in 2017 and 2018, also benefitting from a budget policy supporting business activity and employment.

Investments: support policies and initiatives to improve the business climate

Whereas Italy’s economic recovery in 2015 was mainly driven by exports and consumption, in 2016, it will be necessary to weigh the less-than-satisfactory growth of world trade; further improvements in competitiveness and an acceleration of investment (the component of demand that suffered the most during Italy’s economic crisis) will also be necessary for propelling GDP growth.

II MINISTERO DELL’ECONOMIA E DELLE FINANZE

INTRODUCTION

In 2015, capital investment, including public investment, was once again on the rise. This is an important indication of a turnaround after years of contraction, when it became evident that it was rather easy to cut public investment spending, but also rather difficult to revive it in a relatively short time span.

The 2016 Stability Law has appropriated significant resources for the purpose of stimulating an acceleration in private and public investments. These measures have been rounded out by the request for the application of the public investments clause provided by European Union fiscal rules. The Stability Law’s key initiatives in this regard include the allowance of accelerated tax depreciation for investments made in 2016 and a tax credit for investment in southern Italy during the 2016-2019 four-year period. In addition to the aforementioned resources, the government has outlined measures capable of further improving the investment climate in Italy, and these specifically concern financing instruments, the efficiency of government and the civil justice system, as well as territorial cohesion.

In consideration of the financing difficulties encountered by small- and medium-sized businesses and start-ups, the government has made available several instruments, which are also aimed at supporting technological innovation, expenditure in research and development, and business expansion. New measures have been introduced to simplify credit access, and to encourage the capitalisation and the stock-market listing of businesses, as well as the value enhancement of patents and other intellectual property.

With numerous regulatory measures now being implemented, the Italian banking system has a more modern and competitive structure. The measures embrace: the reform of the mutual banks (banche popolari), cooperative banks, and banking foundations; the reform of insolvency and credit-recovery proceedings; the introduction of a system of public guarantees for the sale and securitisation of the non-performing loans; and the acceleration of the timing for tax deductibility of credit losses. Although remaining solid, the banking system has had to become more resilient as a result of the high level of non-performing loans. The government believes that the strategy of strengthening the credit system must also be based on changes to the civil justice system, so as to make it easier for banks to dispose of non-performing loans.

In order to facilitate business investment decisions, the Italian justice system must become more equitable and efficient, by conforming to European standards. In view of this objective, changes in the past two years have included:  introduction of online proceedings, new tax incentives for assisted negotiation and arbitration, the geographic restructuring and rationalisation of the courts, and the expansion of the sphere of application of out-of-court agreements. Reforms have also been initiated with respect to the civil process and the regulations governing troubled companies and insolvency – with the aim of increasing the opportunities for the turnaround of companies in crisis, and

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limiting their damage to the surrounding economic environment. The objectives are to simplify and streamline the judicial apparatus, with the transition aimed at engendering a more management-oriented approach for the court process.

Greater efficiency of the public administration is also essential to improving the investment climate in Italy. The public administration must be capable of delivering quality services to the public and businesses, and in this respect, regulations have already been approved regarding: the simplification and the acceleration of the administrative proceedings; the digital administration code; transparency in public tenders; and the restructuring of the police forces, port authorities, local public services, State-owned enterprises held by central and local government, and the chambers of commerce.  Other initiatives will regard:  the fight against corruption; reform of the managerial staff within the public administration; rules for full-time workers in the public sector; and the reorganisation of the Office of the Presidency of the Council of Ministers and non-economic public entities. The programme to reform the public administration will be rounded out by the implementation of the Agenda for Simplification.

National policies common to all regions need to be strengthened where delays continue to exist in developing the training of human capital, productivity and infrastructure. The changes will need to be supported with appropriate macroeconomic incentives, including those contained in the 2016 Stability Law. With the objective of contributing to reducing regional imbalances, the Masterplan for Southern Italy aims to develop productive chains, starting from areas most vital to the local economy, and increasing their entrepreneurial capacities and job skills.

The development of the projects promoted by the European Fund for Strategic Investments (the heart of the so-called Juncker Plan) is also contributing to the revival of private investment. According to the latest data in reference, Italy has 29 initiatives in process, between financing agreements and infrastructure projects, for €1.7 billion of resources. Considering the leverage effect, additional investments of approximately €12 billion can be made.

Budget policy focused on growth and public finance sustainability

The trend of Italy’s public finances is subject to certain limitations, first and foremost of which is the need to reduce the public debt as a percentage of GDP.

The debt-to-GDP ratio essentially stabilised in 2015; it is projected to decrease from 132.7 to 132.4 percent in 2016, and eventually drop to 123.8 percent by 2019. Reversing the trend of the debt is a strategic objective for the government. With the target of cutting net borrowing to 2.6 percent of GDP in 2015 having been met, the deficit is slated to decline further, to 2.3 percent in 2016. Additional budget leeway in later years should be provided from savings on expenditure, achieved through the expansion of the spending review process,

IV MINISTERO DELL’ECONOMIA E DELLE FINANZE

INTRODUCTION

which will also address tax expenditure, and tools to increase fiscal compliance and reduce the margins for tax avoidance. With the combination of these measures, the ratio of net borrowing to GDP should descend to 1.8 percent in 2017.

The fiscal consolidation effort is benefitting from the programme to privatise State-owned companies and real estate. This programme is an essential tool for modernising the State-held companies, and contributing to reduction of the public debt.

Current budget policy is in line with that adopted in the past two years in that it impacts the mix of revenue and expenditure in a manner favourable to growth, but it is also focused on budgetary discipline and respect of the European rules.  It is sufficient to note that Italy is the country that reported the highest cyclically adjusted primary surplus on average in the Euro Area during the years of the financial crisis; Italy was one of the few countries to have achieved a positive primary balance, while most Euro Area countries witnessed deterioration in their position during the period considered.

The government believes fiscal tightening is inappropriate and counterproductive in consideration of various factors: i) real risks of deflation and stagnation, referable to the international economy; ii) insufficient coordination of budget policies in the Euro Area, whose overall budget policy is inadequate when considering the evident lack of aggregate demand; and iii) the undesired effects of excessive fiscal tightening, which could end up exacerbating, rather than improving, the path of adjustment of the debt-to-GDP ratio.

***

Over the years, Italy has accumulated a high debt whose management has been made more difficult by i) the contraction of the economy caused by the recession, and ii) increasing deflationary pressures. In spite of this, budget policy can favour growth by synchronising the expectations of businesses and households with a credible outlook for reduction of the debt-to-GDP ratio and by an improved mix of public policy. With reference to the first objective, it is noted that budget policy achieved its targets in the past two years, without any corrective measures during the year and without increases in taxation on income from employment, corporate taxes or consumption; by contrast, a decrease in the tax burden of 0.8 percentage points was achieved during the period. With reference to the second objective, the spending review will be made more effective by the reform of the process for State budget preparation. This reform will help to overcome the ‘state of emergency’ reasoning that has inspired budget policy and economic policy in recent years; it will increase the accountability of the owners of spending decisions, while also facilitating an examination of the entire budget structure, instead of only changes implemented with the Stability Law.

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The institutional reforms approved by Parliament are also functional to an economic policy geared to the medium/long term. The reform of the electoral law, the abandonment of bicameral legislature, and the revision of the allocation of responsibility between the central and local governments will ensure more stable and effective political governance. These crucial reforms, which will allow Italy to get beyond some of its historical limitations, have been made even more significant by the growing fragility that the long economic crisis has been injecting into the political-institutional systems of various European countries. Given the prospect of uncertainty and weakness that is spreading across the global panorama, these reforms will reinstate Italy’s capacity to compete with, and to measure up to, the world’s leading economies.

Pier Carlo Padoan

The Minister of the Economy and Finance

VI MINISTERO DELL’ECONOMIA E DELLE FINANZE

CONTENTS

I. OVERALL FRAMEWORK AND ECONOMIC-POLICY OBJECTIVES

I.1 Macroeconomic forecasts

I.2 Aggregate demand:  recent trends and prospects

I.3 Public finance: 2015 final data and 2016 targets

I.4 Structural balances, European fiscal rules and medium-term objectives

I.5 Budget policy for 2017-2019

I.6 Reduction of debt-to-GDP ratio

II. MACROECONOMIC FRAMEWORK

II.1 Macroeconomic framework

II.2 Italy’s economy

III. NET BORROWING AND PUBLIC DEBT

III.1 Final data and forecasts at unchanged legislation

III.2 Margins of flexibility of the Stability and Growth Pact

III.3 Public finance: policy scenario

III.4 Immigration emergency and related costs

III.5 Financial impact of National Reform Programme measures

III.6 Trend of debt-to-GDP ratio

III.7 The debt rule and other relevant factors

IV. SENSITIVITY AND SUSTAINABILITY OF THE PUBLIC FINANCES

IV.1 Short-term scenarios

IV.2 Medium-term scenarios

IV.3 Long-term scenarios

V. QUALITY OF PUBLIC FINANCE

V.1 Actions taken and indications for future years

V.2 Spending review

VI INSTITUTIONAL ASPECTS OF PUBLIC FINANCE

VI.1 State budget reform

VI.2 Fiscal rules for local government

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TABLES

Table I.1 Public finance indicators

Table II.1 Macroeconomic framework based on unchanged legislation

Table II.2 Base assumptions

Table II.3a Macroeconomic prospects

Table II.3b Prices

Table II.3c Labour market

Table II.3d Sector accounts

Table III.1 General government budgetary prospects

Table III.2 Differences compared with previous Stability Programme

Table III.3 Amounts to be excluded from the expenditure rule

Table III.4 Scenario at unchanged policies

Table III.5 State sector and public sector: cash balances

Table III.6 Cyclically adjusted budget

Table III.7 Financial impact of measures in NRP grids

Table III.8 Public debt determinants

Table III.9 General government debt by subsector

Table III.10 Minimum Linear Structural Adjustment (MLSA)

Table III.11 Respect of the debt rule: forward-looking benchmark

Table IV.1 Heat map about variables underlying the SO indicator for 2015

Table IV.2 Summary of macro-fiscal shocks

Table IV.3 Sensitivity to growth

Table IV.4 Public expenditure for pensions, healthcare, long-term care, education and unemployment compensation

Table IV.5 Sustainability indicators

Table V.1 Cumulative net impact of 2015 main legislation on general government net borrowing

Table V.2 Cumulative impact of 2015 main legislation on general government net borrowing

Table V.3 Cumulative net impact of 2015 main legislation on general government net borrowing by sub-sector

Table V.4 Impact of the Decree-Law No. 185/2015 on general government net borrowing

Table V.5 Impact of the Decree-Law No. 191/2015 on general government net borrowing

Table V.6 Cumulative net impact of 2016 Stability Law and Decree-Law No. 18/2016

Table V.7 Cumulative impact of 2016 Stability Law and Decree-Law No. 18/2016

Table V.8 Cumulative net impact of the 2016 Stability Law and of the Decree-Law No. 18 of the 2016 on general government net borrowing by sub-sector

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Table V.9 Impact of 2016 Stability Law on general government net borrowing

Table V.10 Impact of Decree-Law No. 18/2016 on general government net borrowing

Table V.11 Measures to streamline expenditure (contribution to net borrowing)

Table V.12 2016 Stability Law – Measures to streamline expenditure (contribution to net borrowing)

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FIGURES

Figure I.1 Real GDP growth rates: trend and quarter-on-quarter changes

Figure I.2 Trend growth rates of GDP deflator and consumer prices

Figure I.3 Real effective exchange rates for Italy and the Euro Area

Figure I.4 Net borrowing, primary balance and interest expenditure

Figure II.1 Export and import volumes by geographic area - 2015

Figure II.2 Export and import volumes by sector – 2015

Figure II.3 Interest rates applied on loans to non-financial corporations and households

Figure III.1 Arrivals of migrants on Italy’s coasts (1991-2015)

Figure III.2 Migrants in reception facilities (2013-2016)

Figure III.3 Public debt determinants

Figure III.4 Trend of debt-to-GDP ratio (including and excluding loans to Euro Area countries)

Figure III.5 Minimum linear structural adjustment and debt rule at unchanged legislation

Figure III.6 Minimum linear structural adjustment and debt rule in policy scenario

Figure IV.1 Interest expenditure as percentage of GDP and weighted average cost at issuance

Figure IV.2 Trend of government securities yields:  1-, 5- and 10-year maturities

Figure IV.3 BTP-BUND yield differential:10-year benchmark

Figure IV.4A Stochastic projection of the debt-to-GDP ratio with temporary shocks

Figure IV.4B Stochastic projection of the debt-to-GDP ratio with permanent shocks

Figure IV.5 SO indicator and sub-components

Figure IV.6 Medium-term forecast of debt-to-GDP ratio in high and low growth scenarios

Figure IV.7 Public debt sensitivity to increase/decrease in net flow of immigrants

Figure IV.8 Sensitivity to macroeconomic assumptions. Higher/lower productivity growth

Figure IV.9 Sensitivity to macroeconomic assumptions. Higher/lower TFP growth

Figure IV.10 Sensitivity to macroeconomic assumptions. Rates of employment and rates of activity of the elderly

Figure IV.11 Sensitivity of public debt to assumptions of healthcare expenditure in risk scenario

Figure IV.12 Public debt sensitivity to the structural primary surplus

Figure IV.13 Impact of reforms on the debt-to-GDP ratio

Figure V.1 Italy’s primary current expenditure, net of social benefits, 1998-2019

Figure V.2 Primary current expenditure with and without social benefits (percentage cumulative change 2009-2015)

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FOCUS SECTIONS

Chapter II Recent labour market trends

Revision of growth estimates compared with Draft Budgetary Plan (DBP)

Risk analysis (sensitivity analysis) with respect to exogenous variables

ITEM model updating and verification of changes in fiscal multipliers

Chapter III Investments clause: principal developments with respect to projects

Assessment of significant deviations and the expenditure rule

The estimation of potential output: an enhanced methodology for Italy

Expenditure for the immigration emergency

Chapter IV Medium-term trend of debt in a low-growth and low-inflation scenario

Pension system reform

State guarantees

Chapter V Measures to fight tax evasion

Public Development Aid (PDA)

Public administration: measures to upgrade and to increase efficiency

Chapter VI Public investment and moving beyond the restrictions of the Domestic Stability Pact

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I. OVERALL FRAMEWORK AND ECONOMIC-POLICY OBJECTIVES

After three consecutive years of contraction, Italy’s economy was once expanding in 2015 (+0.8 per cent). In 2016, the growth continues and is getting stronger (+1.2 per cent). Employment is growing, unemployment is declining, the public accounts are improving, and taxes are decreasing: the government is maintaining a rigorous policy, but has also inaugurated expansionist measures that will finally make it possible for the country to get back on track. This scenario is unfolding even though the international framework showed clear signs of worsening in the final months of 2015, due to difficulties in the Euro Area, the gradual deceleration of the emerging economies, and the threat of terrorism.

I.1 MACROECONOMIC FORECASTS

ISTAT’s official estimates confirm that Italy’s economy was once again growing in 2015, after three years of contraction; GDP rose by 0.8 per cent in real terms and 1.5 per cent in nominal terms. Nominal GDP for 2015 was in line with the estimate published in September (€1,636.4 billion versus €1,635.4 billion), including for the effect of the revisions of the data for prior years.

FIGURE I.1:REAL GDP GROWTH RATES:  TREND AND QUARTER-ON-QUARTER CHANGES

Source: ISTAT.

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With reference to 2016 and the years thereafter, this Stability Programme estimates that real GDP will grow by an annual rate of 1.2 per cent for the 2016-2018 three-year period, based on unchanged legislation. The real growth forecast under the policy scenario is higher over the entire three-year period. The forecasts of inflation and the growth of the GDP deflator have been updated, resulting in a lower level of nominal GDP in 2019, the final year of the forecast.  In any event, the revisions are limited, with the new forecast of nominal GDP for 2019 only 0.9 per cent below that from September 2015, when based on unchanged legislation; the comparable figure under the policy scenario is lower by 1.5 per cent.

According to the new forecast, GDP is projected to grow this year by 1.2 per cent in real terms and 2.2 per cent in nominal terms. In the forecast based on unchanged legislation, the real growth rate for the next few years is projected to remain around the 2016 level, whereas the nominal rate should accelerate as a result of increased use of productive resources and the recovery of the prices of oil and other commodities.

Under the policy scenario, after increasing by 1.2 per cent in 2016, the real GDP growth rate for the 2017-2019 three-year period is higher than in the forecast based on unchanged legislation, with the differences due to fiscal policy that is still rigorous, but more focused on promoting economic activity and employment. Real GDP is pegged to grow by 1.4 per cent in 2017, 1.5 per cent in 2018, and 1.4 per cent in 2019.

FIGURE I.2: TREND GROWTH RATES OF GDP DEFLTOR AND CONSUMER PRICES

Source: ISTAT.

The growth of prices (and thus, the growth of the GDP deflator) is initially lower in the policy scenario than in the scenario based on unchanged legislation. As explained in Section I.5 below, this is because the total amount of the budget measures would be less, and the indirect tax increases provided by the safeguard clauses would be substituted with alternative measures for selective revision of

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expenditure, including of a fiscal nature. In the second part of the forecast period, (2018-2019 two-year period), nominal GDP would grow by a higher rate in the policy scenario than in the scenario based on unchanged legislation. This is explained by the better overall performance of the economy.

I.2 AGGREGATE DEMAND: RECENT TRENDS AND PROSPECTS

After posting a positive growth rate in 2015 (+0.8 per cent), the Italian economy should see a continuing and stronger growth rate in 2016 (+1.2 per cent). This scenario is developing despite a highly difficult and fragile European and international economic framework, and also when considering: the deceleration of the large emerging economies; the continuing slow pace of the European recovery; the economic and emotional toll of the terrorist attacks; and the performance of the international financial markets. Against this backdrop, GDP growth is expected to rise in the first quarter of 2016, since it is estimated that industrial production is growing close to 1 per cent quarter on quarter.

FIGURE I.3: REAL EFFECTIVE EXCHANGE RATES FOR ITALY AND EURO AREA

Source: Bank of Italy and ECB.

The new scenario has incorporated the deterioration of the international macroeconomic framework as indicated by market forecasts and by leading international organisations, such as the OECD, the IMF and the European Commission. It should also be noted that the decline of oil prices has sustained domestic demand in oil-consuming countries, such as Italy,but it has reduced the consumption and imports of oil-producing countries that were markets where Italian exports had grown significantly through the end of 2014. In addition, the euro exchange rate, though competitive in the long term, has recently appreciated on a weighted basis, rising to its highest level since the start of 2015.

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There is the risk that consensus estimates exaggerate the actual slowdown of the world economy, especially in the more advanced countries. Indeed, the compass of global growth is once again pointing in the direction of such countries, as a result of economic and political developments, such as the decline of the China’s growth and the decline of oil prices. In any event, the new forecasts are more cautious with respect to the future performance of exports and, to a lesser extent, the performance of investments, since international economic and geopolitical risks cannot be ignored.

The growth forecasts for household consumption presented in September have been essentially confirmed. Although consumer confidence indicators experienced a decrease during the winter months, their recent performance seems consistent with a moderately expansionist trend overall, with rather dynamic momentum for some components of durable goods (e.g. auto purchases). New car registrations had average year-on-year growth of 21.0 per cent in the first quarter of 2016, after having climbed by 17.2 per cent in the fourth quarter of 2015.

The latest available surveys indicate that gross fixed investment should grow in 2016, not only with respect to transportation means, but also the more quantitatively relevant components of construction, machinery, equipment and products developed from intellectual property. The updated forecast is slightly lower than in September, especially due to fewer carry-over effects from 2015. In any case, the forecast also contemplates that the rate of growth of gross fixed investment will accelerate from 0.8 per cent overall in 2015 to 2.2 per cent in 2016, and therefore, in the policy scenario, to 3.0 per cent in 2017 and 3.2 per cent in 2018.

I.3PUBLIC FINANCE: 2015 FINAL DATA AND 2016 TARGETS

The general government net borrowing target for 2015 was achieved (2.6 per cent of GDP). The decline of interest payments was accompanied by improvement of the primary balance, even though that was slightly less favourable than forecast; the surplus amounted to 1.6 per cent of GDP versus the 1.7 per cent forecast in September. The difference is explained by lower direct tax revenue and capital account revenue, and higher expenditures for intermediate consumption, when compared with the September projections. Instead, other aggregates outperformed the forecast; this was the case with the growth of indirect taxes, and the decreases in expenditure for employee compensation, social benefits in cash, and other primary current expenditure.

For 2016, the government is forecasting net borrowing of around 2.3 per cent of GDP, against a September target of 2.2 per cent, which was later increased to 2.4 per cent in connection with the security and culture measures ordered in November following the terrorist attacks in France. The projections for interest payments on the public debt for 2016 have been scaled down with respect to September, from 4.3 per cent to 4.0 per cent of GDP, while the primary surplus is estimated to be below the target of 2.0 per cent outlined in the EFD Update in September 2015.

The primary surplus is pegged at 1.7 per cent of GDP, for a slight increase over 2015. The forecast considers the following:  the actual capacity to spend the

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amounts provided by the spending authorisations; the significant administrative commitment to tax collections; and the actions undertaken for moderately growing the proceeds from the divestiture of real property.

TABLE I.1: PUBLIC FINANCE INDICATORS (% of GDP) (1)
	2014	2015	2016	2017	2018	2019
POLICY SCENARIO
Net borrowing	-3.0	-2.6	-2.3	-1.8	-0.9	0.1
Primary balance	1.6	1.6	1.7	2.0	2.7	3.6
Interest	4.6	4.2	4.0	3.8	3.6	3.5
Structural net borrowing (2)	-0.8	-0.6	-1.2	-1.1	-0.8	-0.2
Changes in structural balance	-0.1	0.2	-0.7	0.1	0.3	0.6
Public debt (including support) (3)	132.5	132.7	132.4	130.9	128.0	123.8
Public debt (net of support) (3)	128.8	129.1	129.0	127.5	124.7	120.6
Debt rule target (4)				123.6
Cumulative change in primary balance			0.0	-0.4	-0.6	-0.3
Privatisation proceeds		0.4	0.5	0.5	0.5	0.3
SCENARIO BASED ON UNCHANGED LEGISLATION
Net borrowing	-3.0	-2.6	-2.3	-1.4	-0.3	0.4
Primary balance	1.6	1.6	1.7	2.4	3.3	3.9
Interest	4.6	4.2	4.0	3.8	3.6	3.5
Structural net borrowing (2)	-0.9	-0.6	-1.3	-0.8	-0.1	0.1
Changes in structural balance	-0.2	0.2	-0.7	0.5	0.7	0.2
Public debt (including support) (3)	132.5	132.7	132.4	130.3	127.3	123.5
Public debt (net of support) (3)	128.8	129.1	129.0	126.9	124.0	120.3
MEMO: Draft Budgetary Plan 2016 (October 2015)
Net borrowing, based on unchanged legislation		-2.6	-2.2	-1.1	-0.2	0.3
Structural net borrowing (2)		-0.3	-0.7	-0.3	0.0	0.0
Public debt (5)		132.8	131.4	127.9	123.7	119.8
MEMO: 2015 EFD Update (September 2015)
Net borrowing	-3.0	-2.6	-2.2	-1.1	-0.2	0.3
Primary balance	1.6	1.7	2.0	3.0	3.9	4.3
Interest	4.7	4.3	4.3	4.1	4.1	4.0
Structural net borrowing (2)	-0.7	-0.3	-0.7	-0.3	0.0	0.0
Changes in structural balance	0.0	0.3	-0.4	0.4	0.3	0.0
Public debt (5)	132.1	132.8	131.4	127.9	123.7	119.8
Nominal GDP based on unchanged legislation (absolute value x 1,000)	1,611.9	1,636.4	1,671.6	1,715.8	1,764.8	1,818.4
Nominal GDP based on policy scenario (absolute value x 1,000)	1,611.9	1,636.4	1,671.6	1,712.9	1,765.3	1,822.2
(1) 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 loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. As of 2015, the amount of such outflows was approximately €58.2 billion, inclusive of €43.9 billion for bilateral loans and loans through the EFSF and €14.3 billion for the ESM programme (see Bank of Italy, Supplement to the statistical bulletin: Public finance, borrowing and debt, No. 15 of 15 March 2016).The estimates include the proceeds from privatisations amounting to approximately 0.42 per cent of GDP in 2015, 0.5 per cent of GDP in 2016, 2017 and 2018, and 0.3 per cent of GDP for 2019. In 2015, the provisional estimate of the public debt issued in March by the Bank of Italy was increased by approximately 0.1 percentage points of GDP following the reclassification within the General Government Account of the National Resolution Fund set up for the bailout of certain credit institutions (pursuant to Article 78 of Legislative Decree No. 180 of 16 November 2015). The estimates based on unchanged legislation incorporate the assumption of a modest reduction of the MEF’s liquidity balances (approximately 0.28 per cent of GDP in 2017 and 0.14 per cent of GDP in 2018); the policy scenario forecasts incorporate a further reduction of 0.14 per cent of GDP in 2019. The interest rate scenario used for the estimates is based on implicit forecasts derived from the forward rates on Italian government securities with respect to the period for compiling this document. (4) Level of the debt-to-GDP ratio that would ensure the observance of the rule in 2017 on the basis of the forward-looking criterion as of 2019.  For additional details, reference should be made to Section III.7 of this document. (5) Inclusive or net of Italy's portion of loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. The estimates include the proceeds from privatisations amounting to approximately 0.4 percentage points of GDP in 2015 and approximately 0.5 per cent of GDP for each year from 2016 to 2018.

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FIGURE I.4: NET BORROWING, PRIMARY BALANCE AND INTEREST EXPENDITURE (% of GDP)

Source: ISTAT. As from 2016, EFD objectives under policy scenario.

I.4 STRUCTURAL BALANCES, EUROPEAN FISCAL RULES AND MEDIUM-TERM OBJECTIVES

The structural balance corresponding to net borrowing of 2.3 per cent of GDP in 2016 would be equal to 1.2 per cent of GDP, with a deterioration of  approximately 0.7 percentage points compared with the level of 2015. As previously made known, on a basis consistent with the European Commission’s Communication on Flexibility in the Stability and Growth Pact (SGP) published in January 20151, Italy requested flexibility to the extent of 0.5 percentage points of GDP for structural reforms and 0.3 percentage points of GDP for public investment. Italy also requested additional flexibility amounting to 0.2 percentage points of GDP in order to take into account expenditures in relation to the immigration emergency2.

In July 2015, on the basis of Italy’s initial request for flexibility amounting to 0.4 percentage points, the European Council recommended that Italy improve its structural balance in 2016 by an amount equal to 0.1 percentage points of GDP3. Later, the ECOFIN Council decided to impose a limit amounting to 0.75 per cent of GDP on the total amount of the reform and investment clauses4.

Were Italy’s request for flexibility be granted completely, the Council’s original recommendation would translate into a change in the structural balance of -0.25 percentage points of GDP in 2016. In relation to this new benchmark, the change of -0.7 percentage points of GDP now forecast would not constitute a ‘significant deviation’, and therefore, it is compatible with the ‘preventive arm’ of the SGP.

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1 European Commission, ‘Making the best use of flexibility within the existing rules of the Stability and Growth Pact’, 13 January 2015.

2 EFD Update, September 2015 and Italy’s Draft Budgetary Plan, October 2015.

3 European Council recommendation of 14 July 2015 about Italy’s National Reform Programme, and opinion about Italy’s Stability Programme.

4 Common position adopted by the ECOFIN Council on 12 February 2016 (Document No. 14345/2015).

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The new policy scenario presented here provides for reducing general government net borrowing to 1.8 per cent of GDP in 2017 and to 0.9 per cent in 2018, thereby bringing the balance to a slight surplus in 2019 (0.1 per cent of GDP).

On a structural basis, the Department of the Treasury’s estimates, as based on the method agreed at a European level5, would lead to improvement in the balance, which goes from -1.2 per cent of GDP in 2016 to -1.1 per cent in 2017, -0.8 per cent in 2018 and -0.2 per cent in 2019. This last level would essentially ensure the achievement of Italy’s Medium-Term Objective (MTO).

As a matter of principle, the rules for moving back toward the MTO would require improvement of the structural balance of at least 0.5 percentage points of GDP in 20176. The government believes such fiscal tightening is inappropriate and counterproductive in consideration of the following main factors:

i) Risks of deflation and stagnation. As already argued, the global framework is marked by deflationary pressures, and by economic and geopolitical risks. European growth remains sluggish, and the downward pressures on prices from the energy and industrial sector are being transferred to the entire price system.  As such, there are risks of fuelling expectations of further price reductions, with possible adverse effects on growth.

ii) Insufficient coordination of budget policies in the Euro Area. The European Commission has recommended a budget policy for the Euro Area that is at least neutral, while also urging the countries with a more solid position to use fiscal expansion margins, particularly in favour of investment. However, such policy recommendations do not appear to be appropriately taking hold, with the result that the budget-policy stance appears restrictive in the face of an evident lack of aggregate demand, high unemployment, and under-utilisation of productive capacity. Also unsatisfactory is the progress in structural reforms, an area where Italy has instead made much improvement with reference to almost all of the Council’s recommendations.

iii) Undesired effects of excessive fiscal tightening. As argued in Chapter II of this document, fiscal multipliers have increased in the countries (including Italy) that have experienced long and severe recessions. This means that pronounced fiscal tightening could cause additional recessionary repercussions, and could undermine GDP growth prospects and public finance sustainability in the medium term. The government believes it is crucial to support aggregate demand and to improve Italy’s competitiveness. The recovery of investment is needed for improving growth potential.  This recovery is not likely to happen if the stagnation continues.

iv) Costs of structural reforms. As discussed in the National Reform Programme, the extensive and powerful reforms adopted by the government in 2014-2015, and the full implementation of these and other reforms planned for the years to come will have highly beneficial effects on the investment climate in

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5 The Treasury’s estimates differ only in (i) the underlying macroeconomic forecast (with the Treasury’s forecast horizon of four years versus the Commission’s forecasts of 2016 and 2017 only), and (ii) the initialisation of the variance for the calculation of NAWRU. See Focus in Chapter III of this document.

6 European Commission, ‘Vade Mecum on the Stability and Growth Pact - 2016 edition’, Institutional Paper 021, March 2016.

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Italy and on the country’s growth potential. However, the reforms need time to produce their positive effects, and can, in some cases, entail costs in terms of the public budget or have an initially unfavourable impact on the economy (one might consider, for example, all of the changes occurring in the banking system). For this reason, the implementation of highly restrictive policies is inopportune.

v) Underestimation of the output gap. As indicated repeatedly in previous official documents, the valuation of both potential growth and the output gap is the basis for calculating the structural balance of public finance. The government adopts the methodology established at a European level in calculating such variables. It is, however, evident that the valuation of Italy’s output gapproduces adverse and counter-intuitive results, that can be a source of pro-cyclical policies, and thus potentially recessive. Chapter III.3 presents alternative estimates of potential GDP, which improve the quality of the econometric estimate and demonstrate that the government’s planned strategy of deficit reduction would be fully in line with the preventive arm of the SGP if the output gap were to be more realistically valued.

I.5BUDGET POLICY FOR 2017-2019

The safeguard clauses that are slated to become operational in 2017 can be valued at the equivalent of approximately 0.9 per cent of GDP. The government’s intention in drafting the forthcoming Stability Law is that of neutralising the clauses by implementing a completely different budget. The budget will be finalised in the next few months, and will be designed to ensure the achievement of net borrowing equal to 1.8 per cent of GDP in 2017, through a mix of measures to revise public spending (including fiscal expenditures) and instruments to grow fiscal compliance while reducing the margins for tax avoidance and tax evasion. The foregoing applies without prejudice to the continuation, on a basis compatible with budget equilibrium, of the process to reduce the income tax burden for households and businesses.

More specifically, the initiatives regarding the spending review are to be broadened in the 2018-2019 period, while the organisational and regulatory effort aimed at boosting tax revenue will continue through measures designed to fight tax evasion and to improve fiscal compliance, in a scenario where tax rates are held constant.

I.6REDUCTION OF DEBT-TO-GDP RATIO

The reduction of the general government debt stock in relation to GDP remains a priority for the government. Italy was very close to achieving this objective in 2015, given the debt-to-GDP ratio rose only marginally, from 132.5 per cent in 2014 to 132.7 per cent in 2015.  One-half of the increase was moreover due to the classification of the National Resolution Fund for credit institutions as part of the general government budget. Contributing to the near stabilisation of the debt were privatisation proceeds and divestitures amounting to more than 0.4 per cent of GDP.

The debt-to-GDP ratio is projected to decrease to 132.4 per cent for 2016. While privatisations and divestitures should provide a contribution equal to 0.5 per

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cent, the decrease in the general government’s borrowing requirement is expected to be less than the decrease in the net borrowing. This difference should contract in subsequent years, and as such, the gross debt is projected to fall to 123.8 per cent of GDP in 2019 under the policy scenario.

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II.1 MACROECONOMIC FRAMEWORK

Global GDP grew by 3.0 percent in 2015, thereby decelerating with respect to 3.3 percent expansion for the previous year. Exports in goods and services in terms of volumes was basically stagnant, growing by only 1.6 percent on average for the year, according to the European Commission; such growth represents a decrease from the 2.9 percent increase posted for 2014 and is well below the long-term average1.

GDP growth for the Euro Area amounted to 1.6 percent, rising with respect to the previous year (0.9 percent). Most of the growth came from private consumption and fixed investment, which are, however, still below the levels recorded in previous cyclical recoveries. Though declining, the unemployment rate for the Euro Area still remained high (10.3 percent at January 2016).

Budget policy took on a less restrictive tone, partly due to the need to tackle the humanitarian emergency caused by the war in Syria and the wave of immigration from the Middle East and Africa. The highly expansionist bent of the European Central Bank’s monetary policy contributed to ensuring a certain degree of financial stability, but it has not yet achieved the results hoped for in terms of real growth and inflation. The inflation rate remains close to zero, while economic growth has not sufficiently been supported by a recovery of bank lending.

In an attempt to ward off deflationary trends and to facilitate the granting of loans to the economy, the European Central Bank (ECB) recently revised the rate on main financing operations, pegging it a zero; the marginal lending facility was cut to 0.25 percent; and the deposit facility rate was set at -0.40 percent. The ECB also inaugurated four new targeted long-term refinancing operations (TLTRO II) with maturity of four years; the refinancing rate on the TLTRO II could eventually be equal to the rate on deposits. Finally, the Quantitative Easing (QE) Programme has been expanded to cover €80 billion per month, and the programme has been changed to allow for purchases of bonds issued by non-financial businesses, provided the borrowings are for non-speculative investment.

In the United States, GDP growth in 2015 was on par with the previous year (2.4 percent), while the unemployment rate continued to decline, and hit a low level (4.9 percent). In view of the slowing of the global economy and the sluggish performance of investments, the Federal Reserve retreated from its tightening in December 2015, and left the target range for the reference rate unchanged between 0.25 percent and 0.50 percent, while also revising downward the magnitude of further increases planned in the near term.

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1Source: European Commission, Winter Forecast 2016.

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In Japan, GDP rose by 0.5 percent, accelerating with respect to 2014 (0.0 percent); the growth was mainly due to the positive contribution of exports and public consumption. The Bank of Japan’s monetary policy remains very accommodating, and embraces both negative rates on deposits (-0.1 percent) and a quantitative easing programme for JPY 80 trillion per year.

Turning to the main emerging economies, it is noted that China is transitioning from an export-based growth model to a model based on domestic demand; GDP growth in 2015 amounted to 6.9 percent, and was thus below prior-year levels. The manufacturing sector expanded by 5.9 percent, with fixed investment growing by 11.8 percent in real terms; the foreign sector witnessed a reduction in net exports equal to 7.0 percent.  India, instead, experienced a strong expansion in 2015, with GDP growth of 7.3 percent.

According to the European Commission’s most recent forecasts, the global economy growth rate should rise to 3.3 percent in 2016, with the international trade rising by 3.5 percent. More specifically, the forecasts indicate growth figures as follows: the Euro Area, +1.7 percent (with the unemployment rate at 10.5 percent); the United States, +2.7 percent; and Japan, +1.1 percent. In 2017, global GDP is expected to rise by 3.5 percent, with a 4.2 percent increase in trade. The global figure incorporates: the Euro Area, growth of 1.9 percent; the United States, +2.6 percent; and Japan, +0.5 percent. Current consensus estimates provide slightly lower figures2.

Even though the outlook for the global economy remains oriented toward a moderate recovery, the international scenario is still mainly associated with downside risks.  Financial vulnerability has increased, as shown by the worldwide declines in stock and bond prices in late 2015 and early 2016. The economic recovery in advanced economies is still fragile, and has been accompanied by exceptionally low rates of inflation. The declining price of oil and the difficulties encountered in the Chinese manufacturing sector (where there is a sizeable excess of productive capacity) have produced deflationary pressures whose effects have not yet been completely exhausted. Expansionist monetary policies have been, at least for now, only partially effective. In addition, certain emerging countries are looking increasingly vulnerable to international capital flows and high levels of domestic debt. The geopolitical situation in various areas of the planet is also a concern.

Among the upside risks are (i) low oil prices, which could stimulate the domestic demand of oil-importing countries for an even longer period, and (ii) the full manifestation of the expansionist effects of monetary policies, which are currently below expectations. On the other hand, a gradual increase in the prices of oil and other commodities would facilitate a more rapid recovery of the producer countries, thereby providing a greater impulse to global demand. A rally in the stock market and the reduction of financial market volatility could serve as a catalyst for the effectiveness of the expansionist monetary policy. Domestic demand in the Euro Area could be sustained by a more rapid recovery of the con-

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2 The new projections of the European Commission and leading international organisations (IMF, World Bank and OECD), which are to be made available in April and May, will most probably shave the growth estimates for 2016, and to a lesser extent, for 2017.

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struction industry, which, during the crisis, reabsorbed most of the imbalances that had accumulated previously.

II.2 ITALY'S ECONOMY

In 2015, the trend of real GDP was back in positive territory after three consecutive years of contraction: the result achieved (+0.8 percent) is essentially in line with the official estimates published in October in the Draft Budgetary Plan (+0.9 percent).

ISTAT’s estimates indicate that GDP growth slowed after a relatively robust phase of recovery in the first half of 2015. In actual fact, domestic demand, net of inventories, continuously expanded, reaching year-on-year growth levels of more than 1.5 percent by year end. The contribution of net exports was negative due to mostly the intense recovery of imports and, to a lesser extent, a partial slowdown of exports.

Already rising in 2014, private consumption accelerated further (+0.9 percent), driven by better labour market conditions, the recovery of real disposable income (+0.8 percent), and improvement of creditconditions. Durable goods proved to be the strongest performing component of household consumption, particularly in the first half of the year; this situation is typical of phases of recovery of the economic cycle, when the purchase of durable goods represents a leading indicator with respect to the consumption of other types of goods and services. On the other hand, the policies for holding down the general government expenditure on employee compensation and intermediate consumption were successful in reducing real public consumption (-0.7 percent), the trend of which has been negative, without interruption, since 2011.

Although the economy witnessed a sizeable increase in investment in transportation means (+19.7 percent), the growth of investment in machinery is still not satisfactory. Investments in construction recovered in the second half of the year, although the performance for the year was still negative (-0.5 percent).

Despite a slowdown in world trade, exports rose by 4.3 percent, partially benefitting from the depreciation of the euro. The trend of imports was more robust (+6.0 percent), with the strong increase possibly the consequence of various factors, some of which are temporary. One could argue at any rate that the growth of imports in 2015 was linked, on the one hand, to exports (importation of intermediate goods and reconstruction of inventories for the production of export goods) and on the other hand, to the recovery of consumption (considering that many durable and semi-durable goods are produced abroad).

On the supply side, a recovery was seen in the value added from the farm sector (+3.8 percent) and from the manufacturing sector (+1.3 percent); the construction industry was still contracting (-0.7 percent), although it experienced strong improvement in the final part of the year. The services sector, which is crucial for the entire economy because of its weight, ended 2015 with modest growth (+0.4 percent), with varied performance seen from component to component. The result incorporates the negative performance of the non-market component (-0.8 percent), while retailing, lodging, food-and-beverage,

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transportation, and warehousing services (which account for approximately 20 percent of GDP) experienced growth with respect to 2014 (+1.2 percent). The trend of real estate services and professional services was slightly positive (+0.5 percent), with the two components accounting for more than 20 percent of total economic activity.

The labour market data for 2015 demonstrate that the government’s measures have had positive effects on employment. The number of employed, in terms of both FTEs and the work force, was higher by 0.8 percent. On the basis of data referring to the work force, the increase in employment was derived from both workers on fixed-term contracts and workers on contracts without expiration date. The level of self-employment was instead lower. The improvement in employment has repercussions on the unemployment rate, which fell by 0.8 percentage points to 11.9 percent.

FOCUS   Recent labour market trends General framework. In comparison with 2014, employment increased by 0.9 percent in 2015. A slight deceleration was, however, seen in final three months of 2015 (+1.0 percent year on year versus +1.2 percent quarter on quarter). The trend in 2015 implied an apparent elasticity of employment to GDP raised to 1.36 compared to a 0.57 average in 2013-2014 period. The best performance affected workers aged between 50 and 64 (+4.6 percent in 2015). Instead, reductions were recorded for the other age classes, starting from -0.3 percent for the 15-24 age class, -0.6 for the 25-to-34 one, and through to -1.1 percent for the 35-49 age class. However, there were recovery signals for both the 15-24 and 25-34 age classes in the second half of 2015. In terms of geographic distribution, an employment upturn was recorded in southern Italy (+1.5 percent), which was about three times greater than that in the northern regions (+0.5 percent). In terms of gender composition, the trend was reversed with respect to the crisis with a considerable increase in male employment (+1.1 percent year on year), especially if compared with the lower  female employment (+0.6 percent). The gap  seems to have been reinforced in the second half of 2015. Most of the increase in employment was due to workers hired with fixed-term contracts (+4.6 percent) vis-à-vis workers hired with open-ended contracts (+0.7 percent). Self-employment, instead,  was slightly down year on year (-0.4 percent). The unemployment rate fell significantly, getting to 11.9 percent (-0.8 percentage points compared with 2014). Even remaining very high, the youth unemployment rate declined by 2.4 percentage points, falling below 40.4 percent on average in 2015. Improvement of job opportunities. A labour market flow analysis shows strong improvement in job opportunities. In the 2013-2015 period, the probability of remaining employed rose by 1.1 percentage points (+0.3 points only in 2015). More specifically, for fixed-term workers, the probability of persisting in such status rose (+2.8 percentage points for the entire period and +0.7 percentage points in 2015 versus 2014), thanks to a reduction in the risk of becoming unemployed or inactive (-4.1 percentage points and -2.3 percentage points, respectively). The probability of a convertion from a fixed-term contract to an open-ended one rose by 1.8 percentage points between 2014 and 2015. The probability of passing from a fixed-term contract to self-employment decreased (-0.3 percentage points in 2015). For the unemployed, the risk of persisting in such status decreased (-1.7 percentage points in 2015 versus 2014), particularly due to increased possibility of finding a job (+1.6 points in 2015 versus 2014). Also for the inactive, the risk of remaining at such status decreased.  

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Positive impact of reforms and tax benefits. A preliminary estimate of the impact of the labour market reform measures was made available in February 20163 by ISTAT, which examined hiring decisions for the first 11 months of 2015. Considering that multiple responses could be given to the questionnaire, the more favourable cyclical conditions emerged as the main reason among firms that increased their staffing; the improved trend of demand (domestic or foreign) obtained a positive response from close to 60 percent of those surveyed. However, the recent labour market reforms also represented a significant factor. About 50.2 percent of the manufacturing firms surveyed and 61.1 percent of the services firms also attributed their decision to increase staffing to the fiscal incentive for new stable hirings. In addition, also the introduction of the new open-ended contract with increasing level of protection according to tenure seems to have had a significant impact, as it was a factor in the hiring decisions of 35.1 percent of manufacturing firms surveyed and 49.5 of the services ones. The reduction in the Regional Tax on Productive Activity (IRAP) was, in turn, sited as an important factor by 19.6 percent of the manufacturing businesses and 39.0 percent of the services businesses.

Exemption from social security contributions (SSCs). In 2015, the 2.5 million of the new open-ended/converted contract recorded by the Italian Social Security Agency (‘INPS’), some 1.5 million benefitted from the exemption of SSCs provided by the Law No. 190/2014, with an incidence of  63.3 percent of the total. About 40.5 percent of the employees with this fiscal incentive concentrated in the final quarter of 2015, when the ratio between those hired with the incentive and total hires rose to 73.8 percent (with a maximum of 84.2 percent in December). Most of the hiring with the fiscal incentive recorded in southern Italy (30.6 percent of the total), followed by the northwestern regions (27.2 percent) and by the Central regions (22.6 percent).

First evidence about the effects of the reduction in the tax allowance in 2016. For full-time employees hired in 2016 with the new open-ended contract, the exemption from the SSCs provided by the Law No. 190/2014 has been reduced with respect to: (i) the percentage (from 100  to 40 percent), the maximum amount (from €8,060 to €3,250 per year) and (ii) the duration (from 3 to 2 years) except for the possibility of extending of the exemption (only for two years) to the southern Italy in case of stable hirings in 2017 (as provided by Paragraph 110 of the Law No. 208/2015),. This change  negatively affect new hirings  in first half of 2016, in contrast with  the positive results recorded in the end of 2015. The acceleration in hiring near the end of 2015 was partially linked to the full availability of the incentive; such effects were reported by ISTAT at the end of January 2016.

INPS data related to January 2016 also indicate the same trend, with a more subdued use of a weakening in the use of open-ended contracts. This trend seems to be confirmed also by the latest monthly ISTAT data. Morevoer, the employment data related to January and February 2016 are unchanged  comparing to the previous two-month period. Finally, if  considered separately, the monthly data show significant fluctuation, and are more difficult to interpret.

The trend of wages was moderate. Per capita income for full-time workers rose by an annual average of just 0.5 percent, while labour productivity, as based on FTEs, was down by 0.2 percent; as a result, the unit labour cost rose by 0.6 percent for the economy as a whole.

Inflation was close to zero, with the HICP rising by only 0.1 percent; the situation was affected by the sharp reduction of the prices of imported goods. On

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3 Obtained through an econometric analysis conducted on the ‘Qualitative ad hoc model on manufacturing and market services’. See ISTAT, “Rapporto sulla competitività dei settori produttivi”, February 2016, http://www.istat.it/it/archivio/180542 (Italian language version only).

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the other hand, the GDP deflator rose by 0.8 percent, reflecting improvement in the terms of trade.

The energy balance significantly improved, with a deficit of €33.6 billion reflecting a strong contraction compared with €43.5 billion for 2014. The current account surplus of the balance of payments (+2.1 percent of GDP) was at its highest level since the end of the 1990s.

Foreign trade

Despite the slowdown of global trade and industrial production4, 2015 was the third year of improvement in Italy’s trade balance. The increase in imports in volume terms was offset by the reduction of the prices of imports, which was greater than that for exports; in value terms, the growth of exports and imports stood at 3.8 percent and 3.3 percent, respectively.

The surplus reached €45.2 billion (€41.9 billion in 2014), and it continues to be among the highest in the European Union, following Germany and the Netherlands5.

In volume terms, total exports of goods grew by 1.8 percent with respect to the previous year. From a geographic perspective, the export flows were strongest toward European countries, partly due to the slowdown of the Chinese economy, the strong contraction of exports to Russia, the current fragility of northern Africa, and the crisis conditions in South America (in particular, in Brazil). After Europe, the biggest export market was North America, with exports to the United States up by 9.5 percent.

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4 In 2015, world trade and industrial production grew by 2.0 per cent and 1.9 per cent, respectively (-1.1 percentage points and -1.4 percentage points compared with 2014). Source: CPB Netherlands Bureau for Economic Policy Analysis, ‘World Trade Monitor’, 24 March 2016.

5 Source: Eurostat, 15 February 2016.

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FIGURE II.1: EXPORT AND IMPORT VOLUMES BY GEOGRAPHIC AREA – 2015 (% change y/y)
EXPORTS	IMPORTS
(*) DAE is the acronym for Dynamic Asian Economies. Such aggregate includes the following Asian countries: Singapore, South Korea, Taiwan, Hong Kong, Malaysia and Thailand. Source: Analysis of ISTAT data contained in the COEWEB Databank

FIGURE II.2: EXPORT AND IMPORT VOLUMES BY SECTOR – 2015 (% change y/y)
EXPORTS	IMPORTS
A= Agriculture, forestry and fishing; CA= Food, beverages and tobacco; CB= Textiles and apparel; CC= Wood and wood products; CD= Petroleum products; CE= Chemical products; CF= Pharmaceutical products; CG=Plastic materials and non-metal mineral products; CH= Metals and metal products (excluding machinery and systems); CI= Computers, electronic devices and optical devices; CJ= Electrical devices; CK=Machinery; CL= Transportation means; CM=Other manufactured products. Source: Analysis of ISTAT data contained in the COEWEB Databank.

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Italy’s imports recovered from the previous year’s negative trend for the effect of renewed domestic demand. Imports growth (7.1 percent) accelerated from most of the trading partners, with the largest increased posted with respect to the OPEC (24.0 percent) and Japan (13.0 percent). In Europe, the strongest increase in imports was with respect to Spain (5.9 percent).

From an industry perspective, the exports of petroleum products represented the highest increase (17.2 percent), followed by pharmaceutical products (7.7 percent), transportation means (7.6 percent) and agricultural products (6.0 percent). Imports were higher in most sectors, and especially, transportation means (15.7 percent) and electronic devices (9.5 percent). In addition, growth rates were above 4.0 percent in metal products, wood products and chemicals.

Considering the trend of average unit values (AUV), the increase of export prices in 2015 (1.8 percent) was flanked by an overall reduction of import prices (-3.5 percent). From a geographic perspective, the biggest changes in the AUV were seen in the non-European area with respect to both exports (+2.9 percent) and imports (-8.3 percent). The latter figure is largely due to the contraction of the prices of energy goods imported by the OPEC, Russia and northern Africa, which was influenced by the low levels of oil prices in the second half of the year.

Trend of lending

Though partially caused by lower demand, the contraction of the bank lending to the rest of the economy is one of the factors that contributed to aggravating the economic crisis starting in 2012, with negative impacts on the nation’s enterprise.

Credit conditions gradually improved in 2015, partly due to ECB intervention. The change in loans to the private sector (non-financial companies and households) was virtually zero, after three years of contraction. Bank lending rates to final customers continuously fell, and came close to the levels prevailing in other European countries that were not affected by the 2011 financial crisis.

With respect to non-financial companies, the decline in credit gradually abated, although the average change for the year was still negative (-2.3 percent). Interest rates on new corporate loans steadily decreased, going from 2.56 percent in December 2014 to 1.74 percent in December 2015.

The improvements were not the same across the board, and certain areas of difficulty still remain. While credit to financially healthy companies rose further (to the detriment of businesses in difficulty), the recovery of corporate lending is occurring with differences according to company size and sector of activity.

There is also a continuing large gap between the trend of lending to companies with more than 20 employees and companies that are smaller (+0.7 percent and -2.1 percent, respectively).

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FIGURE II.3: INTEREST RATES APPLIED ON LOANS TO NON-FINANCIAL CORPORATIONS AND HOUSEHOLDS (% change y/y)

Source: Bank of Italy.

Through November 2015, the stock of loans to the construction industry (the industry hardest hit by the crisis) continued to contract (-2.3 percent). Instead, loans to manufacturing companies rose by 4.0 percent, while those to the services sector were once again growing modestly.

Retail loans improved as from June 2015 (+0.1 percent y/y), with the year-on-year change for the month of December equal to 0.8 percent. The aggregate mainly reflects the growth of household mortgages, while the recovery of consumer credit has been slower. Interest rates declined throughout 2015, hitting historically low levels at the end of the year (2.49 percent compared with 2.83 percent in December 2014).

The most recent Bank Lending Survey for the Euro Area refers to the fourth quarter of 2015, and confirms the easing of supply conditions, mainly due to: competitive pressures between banks; lower perceived risk; lower funding costs; and some moderation of the balance-sheet restrictions on intermediaries. In the survey, intermediaries indicated a moderate increase of the amount of credit made available to businesses, and a slight lengthening of maturities.

The survey results also show an expansion of corporate loan demand, driven by the low level of interest rates and by increased needs to fund capital investment, inventories and working capital. Similar signs were also seen with respect to retail customers.

Problem credits, which were still slightly growing at the end of 2015, have reduced bank profit margins (as a result of risk provisions), and have limited the possibility of expanding credit (due to the need to respect the capital requirements set by the European banking supervisory system.

Italy’s government has implemented various measures to facilitate the ongoing reduction of problem credits, thereby laying the foundation for improvement of the situation. Such measures include tax incentives for

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recognition of related losses, and the creation of public guarantees on the senior tranches of securitized credits (guarantees that are nonetheless based on market mechanisms).

Outlook for the Italian economy and the scenario based on unchanged legislation

The most recent data point to a positive trend for the macroeconomic framework at the start of 2016. Following an unexpected decline in the final two months of 2015, industrial production experienced a greater-than-expected increase in January. The figure brings back levels of activity in the manufacturing sector on a path of moderate growth which started in the first months of 2015, and suggests an acceleration of GDP in the first quarter of 2016. The construction industry witnessed a recovery at the end of 2015, followed by an expected downturn in production in January, which only partially eroded the growth registered in the final three months of 2015. Property sales, and in particular, housing sales, showed signs of improvement in 2015, and housing prices essentially stabilized.

Favourable signs have also come from foreign trade data, which show a recovery of exports to non-EU countries in February. Other economic indicators, such as new car registrations, and airport and road traffic, suggest that economic activity continued to expand in the first months of the year.

Economic surveys conducted in March point to improved consumer confidence, which, although down from the highs of January, is at an historically high level. Also in March, the composite index on businesses deteriorated for the effect of a decline in the services sector, which is nonetheless still expanding. Instead, surveys of manufacturing businesses show greater optimism, including from assessments of purchasing managers.

In the financial sector, the aggregate of monetary-policy measures outlined by the ECB in March favoured a further decline in long-term interest rates, and a rally, albeit with varying performance, in the stock market. With its focus on increasing loans to the private sector, the expansionary monetary policy is likely to favour further easing of supply conditions, thereby reinforcing the expansion of consumption and investments.

The outlook also includes a gradual recovery of inflation. Prices appear poised to rise starting in the second half of 2016, if for nothing else but the absence of the deflationary pressure coming from the prices of energy goods.

According to the new forecast based on unchanged legislation, GDP in 2016 should grow by 1.2 percent in real terms and by 2.2 percent in nominal terms. The real growth rate thereafter should remain around the 2016 level, while nominal growth can be expected to accelerate due to: increased use of productive resources, a recovery of prices for oil and other commodities, and an increase in indirect taxes, as provided by the safeguard clauses contained in the 2016 Stability Law (which is to be addressed in the budget, as indicated in Section I.5 of this document).

Despite the favourable prospects for the first quarter of 2016, the 2016 growth forecast has been revised downward with respect to the figures indicated in the 2015 EFD Update published in September. The revision is partially based on

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a real GDP growth profile in the second half of 2015 that was weaker than expected (in the summer of 2015). The positive trend of domestic demand was initially more than offset by a drop in exports linked to the slowdown of the large emerging economies, and later, in the fourth quarter, by a decline in production. The latter phenomenon was reflected in a sizeable contraction of inventories. It is highly probable that the weakness on the supply side is also linked to the economic and emotional impact of the terrorist attacks in Paris, and to the trend of the economies and financial markets in China, Russia and Brazil.

TABLE II.1: MACROECONOMIC FRAMEWORK BASED ON UNCHANGED LEGISLATION (% changes, unless indicated otherwise)
	2015	2016	2017	2018	2019
INTERNATIONAL EXOGENOUS VARIABLES
International trade	2.5	3.0	3.8	4.6	4.8
Oil price (Brent, USD/barrel, futures)	52.3	39.4	45.7	48.1	49.8
USD-EUR exchange rate	1.110	1.095	1.094	1.094	1.094
ITALY MACRO DATA (VOLUMES)
GDP	0.8	1.2	1.2	1.2	1.3
Imports	6.0	2.5	3.2	4.3	4.0
Final national consumption	0.5	1.2	0.8	0.9	1.2
Household consumption and NPISH	0.9	1.4	1.0	1.3	1.4
Government expenditure	-0.7	0.4	-0.1	-0.4	0.8
Investments	0.8	2.2	2.5	2.8	2.5
- machinery, equipment and other fixed assets	0.5	2.2	3.6	3.7	2.9
- transportation means	19.7	14.3	2.4	2.1	2.1
- construction	-0.5	1.0	1.5	2.0	2.1
Exports	4.3	1.6	3.8	3.7	3.5
Memo item: Current account balance (% of GDP)	2.1	2.5	2.6	2.6	2.6
CONTRIBUTIONS TO GDP GROWTH (1)
Net exports	-0.3	-0.2	0.3	-0.1	0.0
Inventories	0.5	0.0	-0.1	0.0	0.0
Domestic demand, net of inventories	0.5	1.3	1.0	1.2	1.4
PRICES
Import deflator	-2.7	-2.3	2.2	1.9	1.7
Export deflator	-0.4	0.0	1.7	1.8	1.7
GDP deflator	0.8	1.0	1.4	1.7	1.7
Nominal GDP	1.5	2.2	2.6	2.9	3.0
Consumption deflator	0.1	0.2	1.8	1.8	1.8
Memo item: Planned inflation	0.2	0.2	1.5
Memo item: HICP, net of imported energy, % change (2)	0.3	1.1	1.3	1.5
LABOUR
Labour cost	0.5	0.4	1.0	2.0	1.8
Productivity (measured against GDP)	-0.1	0.3	0.5	0.5	0.7
Unit labour cost (measured against GDP)	0.6	0.1	0.5	1.5	1.1
Employment (FTEs)	0.8	0.8	0.7	0.7	0.6
Unemployment rate	11.9	11.4	10.9	10.4	9.9
Employment (ages 15 to 64)	56.3	57.0	57.4	57.8	58.1
Memo item:  Nominal GDP (in EUR mn)	1636372	1671584	1715832	1764755	1818439
(1) Discrepancies, if any, are due to rounding.
(2)  Source: ISTAT.
Note: The macroeconomic framework has been developed on the basis of information available at 16 March 2016. GDP and components in volume (concatenated values, base year of 2010), data not adjusted for business days.

From a longer term perspective, exports represent the component of demand accounting for the biggest downward revision with respect to the forecasts presented in September, with part of the revision due to the international developments mentioned above. The revised forecast also incorporates the

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deterioration of the international macroeconomic framework as indicated by market forecasts and by leading international organisations, such as the OECD, the IMF and the European Commission.

The revised forecast is also more cautious about the future trend of investment. The latest available surveys indicate that gross fixed investment should grow in 2016, not only with respect to transportation means, but also the more quantitatively relevant components of construction, machinery, equipment, and intangible assets. The growth of investment should get close to 3 percent per year in the medium term.

Household consumption should continue to sustain the growth of GDP, thanks to higher disposable income linked to the stability of prices and to gains in employment.

Taken altogether, the forecasts do not significantly differ from the consensus estimates. The latter reflect a reduction of the real growth forecast for Italy in 2016, from 1.3 percent last autumn to 1.1 percent as of March 2016. The focus section below provides a more technical explanation of the reasons for the revision of the growth forecast.

FOCUS   Revision of growth estimates compared with Draft Budgetary Plan (DBP) This focus section analyses the factors underlying the revision of the macroeconomic forecasts vis-à-vis the forecasts contained in the 2016 DBP published in October 2015. The latest projections take into account (i) ISTAT’s latest national accounting data with reference to the final two quarters of 2015 and (ii) the effects of the changes in international exogenous variables. To begin with, Table R1 shows the shifts between the forecast values of the main macroeconomic aggregates for 2015 in the DBP and the actual values as recently published by ISTAT6. The table also contains the difference between the values forecast for 2016 in the new forecasts and those indicated in the DBP in October. The shift is attributable to various factors that justify the revision of the growth rates.   First of all, there is an automatic carry-over effect as a result of the new quarterly data.  The column indicates the extent to which the forecasts would need to be revised if, as from the first quarter of 2016 and beyond, the variables were to develop as assumed in the DBP. In terms of GDP growth, the downward revision produced would be approximately 0.3 tenths of one point. With regard to the performance of the other main variables, it is possible to affirm that the expectations of the development of the macroeconomic scenario formulated in the DBP with reference to 2015 proved to be essentially correct with regard to domestic demand. The performance of the final consumption was in line with the forecasts, and this was also the case of the contribution of the change in inventories. Instead, investment was weaker than projected due to a weaker-than-expected recovery of the sector of plant, machinery and equipment, while the drop in construction was in line with expectations. With regard to foreign demand, the slowdown in world trade in the second half of 2015 was more intense than expected, and contributed to a weaker-than-expected performance of exports. Instead, with reference to imports, the increase was slightly higher than projected. With reference to the labour market, the creation of employment was in line with the forecasts. Finally, the trend of prices was slightly weaker for the consumer price component, while the growth of the GDP deflator was higher.  

___

6 In such case, reference was made to quarterly income data that are adjusted for business days.  Considering the annual figure, not adjusted for business days, the definitive increase of GDP in 2015 is 0.8 per cent, compared with a DBP growth forecast of 0.9 per cent.

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TABLE R1: MACROECONOMIC FRAMEWORK:  KEY VARIABLES (seasonally adjusted data)
	2015			2016
				Factors justifying the revision of the growth estimates (differences of growth rates)				Forecast
	2016 DBP	Actual Data	Delta A	EFD - DBP	Delta Carry-over effect	Delta International scenario	Other factors	DBP	2016EFD
GDP	0.8	0.6	-0.2	-0.44	-0.29	-0.05	-0.10	1.6	1.2
Imports of goods and services	5.6	5.8	0.2	-1.66	-0.55	-0.93	-0.18	4.2	2.5
Final consumption	0.5	0.5	0	-0.13	0.13	0.24	-0.50	1.3	1.2
Gross fixed investment	1.1	0.6	-0.5	-0.48	-0.28	-0.12	-0.08	2.7	2.2
Exports of goods and services	4.3	4.1	-0.2	-2.24	-0.72	-1.38	-0.14	3.8	1.6
GDP deflator	0.4	0.8	0.3	0.04	0.23	-0.07	-0.12	1.0	1.0
Consumption deflator	0.3	0.1	-0.2	-0.81	-0.14	-0.73	0.06	1.0	0.2
FTEs	0.7	0.8	0.1	-0.23	-0.20	-0.07	0.04	1.1	0.8
Employed – national accounts data	0.7	0.6	-0.1	-0.08	-0.05	-0.07	0.04	1.0	0.9

The revision of the forecasts also reflects changes in the international scenario and in other exogenous factors that contribute to determining the Italian economy’s performance. These components are also indicated in separate columns in the table. The Italian Treasury Econometric Model (ITEM) was used for estimating the effects of the new values of the key international exogenous variables vis-à-vis those considered during the preparation of the DBP. The estimated impacts for 2016 are reported in detail in Table R1.

Table R2 provides a different perspective, and indicates the impact on GDP of each of the international variables over the entire EFD forecast horizon.

TABLE R2: ESTIMATED EFFECT OF CHANGE IN INTERNATIONAL EXOGENOUS VARIABLES VIS-A'-VIS THE DBP (impact on projected growth rates)
	2016	2017	2018	2019
Oil price	0.5	-0.1	-0.1	0.0
Global demand weighted for Italy	-0.3	-0.1	0.0	0.0
Effective nominal exchange rate, price of manufactured goods	-0.3	-0.2	0.0	0.1
Interest rates	0.0	0.1	0.1	0.0
Total	-0.1	-0.3	0.0	0.1

The change made to the international scenario of reference contributes slightly to the downward revision of the GDP growth forecasts for the years of 2016 and 2017. A significant effect in this regard is the partial appreciation of the euro with respect to other main currencies, with the exception of the U.S. dollar. The resulting effect of a reduction in competitiveness is accompanied by a similar effect due to a weaker trend in the prices of foreign manufactured goods. A downward revision in the forecast of the growth rate is also seen with respect to global demand weighted for Italy; in reality, the impact on 2016 also incorporates the weaker-than-expected growth of this variable with respect to the values outlined in the DBP for the second half of 2015. According to the revised international scenario, the price of oil is projected to be at a level below that indicated in the projections

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of international exogenous variables in the DBP in October. The level of the interest rates in the money market is also lower in the revised international scenario than that projected in the DBP.

In essence, the indications provided from this analysis have been accepted overall, with only a few exceptions. Moreover, the impacts related to private consumption would have suggested an upward revision, particularly for 2016; instead, a downward revision was effected in order to keep the forecast conservative.

FOCUS   Risk analysis (sensitivity analysis) with respect to exogenous variables This focus section reports the results of a sensitivity analysis of the macroeconomic framework, which provides elements for evaluating certain risks underlying the revised growth forecasts. More specifically, the analysis assesses the impact on the rate of change of GDP derived from alternative assumptions about the performance of the more significant exogenous variables. The first simulation incorporates a 0.5 percentage point reduction in the growth of global demand with respect to the baseline scenario, in 2017, 2018 and 2019. In the scenario based on unchanged legislation, the assumption that exchange rates will remain at their recent levels (according to the random walk assumption) has been abandoned, and forward foreign-exchange rates have been used instead.  This change leads to a higher external value of the euro with respect to that projected in the scenario based on unchanged legislation. For oil prices, the assumption is that of a constant price, equal to an average of the most recent quotations (10 business days following 16 March: US$39.64). The baseline scenario is instead constructed using the prices for forward contracts. Finally, it is assumed that financial conditions are more favourable, through a 0.1 percentage point reduction of the spread between bank lending rates and money-market rates as from 2017.  

TABLE R1: EFFECTS ON GDP OF DIFFERENT ASSUMPTIONS ABOUT INTERNATIONAL EXOGENOUS VARIABLES (impact on growth rates)
	2016	2017	2018	2019
1. Global demand weighted for Italy	0.0	-0.1	-0.1	-0.1
2. Nominal effective  forward exchange rate	0.0	-0.1	-0.1	-0.1
3. Assumption of stable oil price	0.0	0.2	0.1	0.0
4. More favourable financial conditions	0.0	0.1	0.1	0.0

Both the deterioration of international demand and the appreciation of the euro (and in particular, the effective nominal rate weighted for Italy) constitute potential factors for reducing growth in the next few years. Instead, the prospect of oil prices remaining at current levels constitutes a positive risk for GDP growth. A more rapid reduction of bank lending rates, caused by less financial fragmentation in the economic system, would also have a positive impact on growth.

Policy scenario

Under the policy scenario, GDP grows by 1.2 percent in 2016, which is equal to the growth rate in the scenario based on unchanged legislation. The growth in the 2017-2019 period would be higher, taking into account a budget policy continuing to focus on achievement of a balanced budget in the medium term, but more concentrated on promoting economic activity and employment. Real GDP is projected to grow by 1.4 percent in 2017, 1.5 percent in 2018, and finally, 1.4 percent in 2019.

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TABLE II.2: BASE ASSUMPTIONS
	2015	2016	2017	2018	2019
Short-term interest rate (1)	n.d.	-0.15	0.0	0.31	0.75
Long-term interest rate (1)	1.7	1.67	1.91	2.23	2.53
USD-EUR exchange rate	1.11	1.095	1.094	1.094	1.094
Change in the real effective exchange rate	-3.8	1.7	-0.1	0.0	0.0
Global economy growth rate, excluding EU	3.2	3.4	3.7	3.8	3.8
EU GDP growth rate	1.9	1.8	1.9	2.0	2.0
Growth rate in Italy's key foreign markets	3.3	3.8	4.0	3.9	3.9
Growth of imports (in volume), excluding EU	0.8	2.2	3.5	4.7	5.1
Oil price (Brent, USD/barrel)	52.3	39.4	45.7	48.1	49.8
(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.

When compared with the scenario based on unchanged legislation, the repeal of the safeguard clause under the policy scenario should entail lower revenue from indirect taxes and a more modest increase in consumer prices. Inflation is projected to be 1.3 percent in 2017 and 1.6 percent in 2018. Against this backdrop, consumer spending can be expected to increase, with repercussions also on investment.  Stronger domestic demand would cause an increase in imports and as a result, the contribution of net foreign demand would be negative over the entire forecast horizon. The spending review policies are instead expected to drive real public consumption down with respect to the unchanged legislation scenario.

Under the policy scenario, the growth of prices (and therefore, growth of the GDP deflator) is initially lower than in the scenario based on unchanged legislation. This is because the increases in indirect taxes would be cancelled out, being substituted by alternative measures for selective revision of expenditure, including fiscal measures. However, in the second part of the forecast period (2018-2019), nominal GDP would grow more in the policy scenario than in the scenario based on unchanged legislation, basically due to better overall performance of the economy.

The improvement in economic conditions should impact the labour market, with the unemployment rate declining to 9.6 percent at the end of the period. Greater productivity matched with moderate wage growth is then expected to translate into even lower unit labour costs.

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TABLE II.3a: MACROECONOMIC PROSPECTS
	2015	2015	2016	2017	2018	2019
	Level (1)	% Change
Real GDP	1,547,233	0.8	1.2	1.4	1.5	1.4
Nominal GDP	1,636,372	1.5	2.2	2.5	3.1	3.2
COMPONENTS OF REAL GDP
Private consumption (2)	930,922.7	0.9	1.4	1.4	1.7	1.6
Public consumption (3)	310,901.9	-0.7	0.4	-0.3	-0.5	0.8
Gross fixed investment	258,887.9	0.8	2.2	3.0	3.2	2.4
Inventories (% of GDP)		0.5	0.0	0.0	0.1	0.0
Exports of goods and services	470,945.6	4.3	1.6	3.8	3.7	3.4
Imports of goods and services	429,885.6	6.0	2.5	3.8	4.6	4.2
CONTRIBUTIONS TO REAL GDP GROWTH
Domestic demand	-	0.5	1.3	1.3	1.5	1.5
Change in inventories	-	0.5	0.0	0.0	0.1	0.0
Net exports	-	-0.3	-0.2	0.1	-0.2	-0.2
(1) In € mn.
(2) Expenditure for final consumption of households and NPISH.
Note: Discrepancies, if any, are due to rounding.

TABLE II.3b: PRICES
	2015	2015	2016	2017	2018	2019
	Level (1)
GDP deflator	105.8	0.8	1.0	1.1	1.6	1.8
Private consumption deflator	107.3	0.1	0.2	1.3	1.6	2.0
HICP	100.0	0.1	0.2	1.3	1.6	2.0
Public consumption deflator	99.8	-0.1	-0.1	-0.5	0.0	0.4
Investment deflator	104.4	0.2	0.9	1.8	2.1	2.0
Export deflator	105.1	-0.4	0.0	1.7	1.9	1.7
Import deflator	102.9	-2.7	-2.3	2.2	1.9	1.7

TABLE II.3c: LABOUR MARKET
	2015	2015	2016	2017	2018	2019
	Level (1)
Number of employed (national accounts)	24,481.4	0.6	0.9	1.0	0.9	0.7
Employment, number of hours worked	42,226,340	0.9	1.1	0.8	0.9	0.7
Unemployment rate		11.9	11.4	10.8	10.2	9.6
Labour productivity, number of employed	63,200	0.2	0.3	0.4	0.6	0.7
Labour productivity, hours worked	36.6	-0.1	0.0	0.6	0.6	0.6
Total compensation of f.t.e. employees	651,294	1.9	1.6	1.9	3.1	2.7
Compensation per f.t.e. employee	40,015	0.5	0.4	1.0	2.0	1.8
(1) Units of measure: thousands for the number of employed (national accounts) and number of hours worked; labour productivity in euros at constant values; total employee compensation in millions of euros; compensation per employee in euros.

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TABLE II.3d: SECTOR ACCOUNTS
% of GDP		2015	2016	2017	2018	2019
Net lending/borrowing with the rest of the world		2.3	2.6	2.6	2.4	2.3
	Balance of goods and services	3.2	3.6	3.6	3.4	3.3
	Balance of primary income and transfers	-1.1	-1.2	-1.2	-1.2	-1.2
	Capital account	0.1	0.1	0.1	0.1	0.1
Net lending/borrowing of the private sector		4.9	5.0	4.4	3.3	2.2
Net lending/borrowing of the public administrations (1)		-2.6	-2.3	-1.8	-0.9	0.1
(1) Following the introduction of the new national accounting criteria, the accounting treatment of interest linked to transactions in financial derivatives instruments, as defined by excessive deficit procedure (EDP), has been aligned with that of the ESA 2010.

FOCUS   ITEM model updating and verification of changes in fiscal multipliers The Italian Treasury Econometric Model (ITEM) was recently updated in view of (i) the introduction of the new European system of accounts (ESA 2010) and (ii) the need to build an estimation sample that would include more recent data. Moreover, the Italian economy’s severe and lengthy recession has necessitated checking to verify if the recession caused structural changes in the relationships between the variables underlying the various equations in the model. Before the updating was initiated, an assessment was carried out as to the model’s capacity to incorporate the dynamics associated with the post-2007 recession period. A simulation in which the values of the exogenous variables were equal to those observed has yielded a GDP profile that is not much different from the actual profile (see first line of Table R1).  A counterfactual analysis was then conducted by assuming that the profile of the exogenous variables during the crisis period were to be different from the actual profile, and were indicative of what had been reflected in the consensus forecasts of 2007, immediately before the onset of the crisis. The analysis shows that the GDP profile resulting from the counterfactual simulation is significantly different from the observed values of GDP (see the second line of Table R1), and that the consensus forecasts include values significantly different from the values observed of the exogenous variables (see third line of the Table R1). The results of the analyses show that the ITEM’s performance during the crisis was satisfactory overall and that the shifts are mostly due to the incorrect forecasting of the exogenous variables in the pre-crisis consensus estimates. In any event, certain discrepancies were identified in the relationships between variables (for example, in the equation of investments in housing and in that of wages), and this result was also evident from a static and dynamic forecast analysis at the level of individual equations over the time horizon of 2007:Q1 – 2014:Q1.  

TABLE R1: GDP PROFILE DURING THE GREAT RECESSION: OBSERVED AND SIMULATED VALUES
	2007	2008	2009	2010	2011	2012	2013	2014
Percentage shift between the observed values and the simulated values with the actual exogenous variables	0.3	0.6	-1.9	-1.2	-1.1	-1.5	0.1	0.8
Percentage shift between the observed values and the simulated values with the exogenous variables forecast in 2007	0.1	-1.0	-7.8	-6.2	-6.8	-10.9	-14.8	-17.3
Percentage shift between the simulated values with the exogenous variables forecast in 2007 and the simulated values with the actual exogenous variables (Impact of the adjustment of exogenous variables)	-0.2	-1.6	-5.9	-5.0	-5.7	-9.4	-14.9	-18.1

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ITEM was then re-estimated with the times series of the national accounts constructed according to the ESA 2010, considering an estimation sample between 1996:Q1 (date of the start of the historical series constructed with the ESA 2010) and 2013:Q4. It was necessary to make certain changes and improvements in the specification of the various equations so as to capture, in the most appropriate manner, the relationships between the different aggregates in light of both the new system of accounts and the updating of the estimation sample with the recent data. The revision regarded, inter alia, the dynamic structure of certain equations and the inputting of specific intercept terms for the post-2007 period in order to capture certain discrepancies identified in those years in the relationships between the variables. Table R2 presents the results, and provides a comparison between the values of the multipliers estimated with the new version of the model and those resulting from the previous version. Numerous shocks on different types of fiscal variables were separately considered, with respect to both expenditure and revenue (different tax rates and different rates for social contributions). The dynamic response of GDP and of the principal macroeconomic aggregates to each of these fiscal shocks was calculated for every individual measure. Also calculated were “aggregate” dynamic multipliers, which reflect the weighted average of the effects estimated for the individual measures. For 2014, the weight of the aggregate dynamic multipliers reflects the percentage of the corresponding budget item vis-à-vis the overall expenditure or revenue referring to the measures considered. A summary multiplier is also presented, and was obtained by aggregating, with a simple average, the average effects for the aforementioned expenditure and revenue.

TABLE R2: ITEM: COMPARISON BETWEEN FISCAL MULTIPLIERS: UPDATED VERSION VERSUS PREVIOUS VERSION(percentage shifts compared with baseline simulation)
a) New model, estimated on ESA 2010 data
		Years
Type of measure	Weight	1	2	3	4	5
VAT	0.28	0.2	0.7	0.9	0.9	0.9
Social contributions	0.27	0.2	0.7	1.0	1.1	1.1
Personal income taxes	0.33	0.2	0.6	0.7	0.7	0.7
Corporate income taxes	0.06	0.2	0.3	0.3	0.3	0.2
Regional tax on productive activity	0.06	0.2	0.6	0.9	0.9	0.8
Revenue (weighted average effects)	1.00	0.2	0.6	0.8	0.8	0.8
Public investment	0.11	0.7	0.9	0.6	0.4	0.3
Investment subsidies	0.04	0.2	0.4	0.3	0.2	0.2
Intermediate consumption	0.39	1.0	1.0	0.5	0.3	0.2
Public employment	0.47	1.1	1.0	0.7	0.5	0.4
Expenditure (weighted average effects)	1.00	1.0	1.0	0.6	0.4	0.3
b) Previous model, estimated on ESA 95 data
		Years
Type of measure	Weight	1	2	3	4	5
VAT	0,28	0,2	0,5	0,7	0,7	0,6
Social contributions	0,27	0,3	0,9	1,0	0,8	0,7
Personal income taxes	0,33	0,3	0,6	0,6	0,6	0,5
Corporate income taxes	0,06	0,2	0,4	0,4	0,3	0,2
Regional tax on productive activity	0,06	0,3	0,8	0,9	0,7	0,6
Revenue (weighted average effects)	1,00	0,2	0,6	0,7	0,7	0,6
Public investment	0,11	0,8	0,8	0,4	0,2	0,2
Investment subsidies	0,04	0,2	0,3	0,3	0,2	0,2
Intermediate consumption	0,39	0,9	0,8	0,4	0,3	0,3
Public employment	0,47	0,9	0,7	0,6	0,5	0,6
Expenditure (weighted average effects)	1,00	0,9	0,7	0,5	0,4	0,4

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The characteristics and the properties of the new version of the ITEM do not vary significantly from those of the previous version. In comparison with the previous version’s values, the new version has higher values of the multipliers on individual shocks and overall. An analysis was also done to see if the values of the fiscal multipliers might be different when the model’s estimation sample excluded the entire post-2007 period. The results, which are not presented here due to constraints on space, show fiscal multiplier values that are higher whenever the model is estimated on the entire sample, including the crisis period.

Numerous contributions to economic literature document how the value of the multipliers differs depending on economic conditions, and that the magnitude of the multipliers during recessions is higher with respect to other cyclical phases (e.g. Auerbach and Gorodnichenko, 2012 and Blanchard and Leigh, 2013).

In ITEM and in standard econometric models, fiscal multipliers and the simulated effects of the shocks do not depend on cyclical conditions of the economy at the time when a shock is introduced. The macroeconomic impact assessments of the different shocks are therefore the same regardless of whether or not the initial conditions correspond to the baseline scenario and, in addition, the impact on GDP and other endogenous variables is proportional to the magnitude of the shock. The ITEM simulations are therefore not the most appropriate methodology for capturing the presence of non-linear effects of the conditional fiscal shocks with respect to the state of the cycle and for deriving differing fiscal multipliers depending on the state of the economy.

By way of indication, Table R3 presents a comparison between ITEM and the Global Economic Model, an Oxford Economics model that has characteristics similar to ITEM’s. The table compares the values of the fiscal multipliers developed with the two models. There seem to be no substantial discrepancies between the models overall. The degree of similarity of the multipliers is more evident starting in the second year, and is less evident in the first year with reference to the simulation of shocks on the revenue side, where the response of GDP is more rapid with the Oxford model.

TABLE R3: COMPARISON BETWEEN FISCAL MULTIPLIERS: ITEM AND GLOBAL ECONOMIC MODEL (Oxford economics) (percentage shifts with respect to baseline simulation)
	Years
ITEM	1	2	3	4	5
Revenue
VAT	0.2	0.7	0.9	0.9	0.9
Personal income taxes	0.2	0.6	0.7	0.7	0.7
Expenditure
Public investment	0.7	0.9	0.6	0.4	0.3
Intermediate consumption	1.0	1.0	0.5	0.3	0.2
	Years
Global Economic Model	1	2	3	4	5
Revenue
VAT	0.6	0.8	0.9	0.9	0.8
Personal income taxes	0.6	0.7	0.8	0.7	0.6
Expenditure
Public investment	0.9	0.8	0.8	0.6	0.4
Intermediate consumption	0.9	0.8	0.8	0.6	0.4

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III.1 FINAL DATA AND FORECASTS AT UNCHANGED LEGISLATION

According to the provisional estimates published by ISTAT on 4 April, the ratio between general government net borrowing and GDP amounted to 2.6 percent for 2015, with an improvement of 0.4 percentage points compared with the result achieved in 2014. This estimate indicates the achievement of the target set in the previous Economic and Financial Document (EFD) and confirmed in the EFD Update published last autumn.

In 2015, the general government net borrowing amounted to €42.4 billion, with a reduction of approximately €6.5 billion compared with 2014. The improvement is attributable to both the decrease in interest expenditure (approximately €5.9 billion), and the improvement of the primary surplus (approximately €650 million)1. Given the gradual reduction of the average interest rate on new issues of government securities (which fell below 1.0 percent in 2015), the general government interest expenditure declined for the third consecutive year, totalling €68.4 billion. The reduction was approximately 8.0 percent over 2014, after decreases of 7.2 percent and 4.2 percent, respectively, in 2013 and 2014. The ratio of interest expenditure to GDP fell to 4.2 percent (from 4.6 percent in 2014), and was approximately 0.1 percent less than the figure forecast last September.

The primary surplus came to 1.6 percent of GDP (€26.1 billion), which was 0.1 percentage points below the forecasts in the EFD and the EFD Update. Given Italy’s impressive results in terms of the primary surplus in recent years, it was possible to essentially stabilise the debt-to-GDP ratio in 2015.

According to European Commission data2, Italy’s ratio between the primary surplus and GDP for 2015 was second only to that for Cyprus (2.2 percent of GDP) and Germany (2.1 percent of GDP). Other European partners with a high public debt reported primary balances equal to zero or deficits. The overall primary surplus of the Euro Area amounted to 0.2 percent of GDP for 2015, while the European Union had a primary deficit of 0.2 percent. For the 2009-2015 period, Italy had the highest primary balance-to-GDP ratio in the Euro Area, exceeding the level of 1 percent.

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1 The extraordinary revisions of the historical series made by ISTAT led to a 0.1 percent improvement in net borrowing in 2012 compared with the reporting to Eurostat in October 2015, with the figure revised from 3.0 percent to 2.9 percent, whereas the estimates for 2013 and 2014 were left unchanged, at 2.9 percent and 3.0 percent, respectively.

2 AMECO data.

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In 2015, total revenue rose by 1.0 percent over 2014 in nominal terms. Current revenue increased by 1.2 percent, mainly due to the growth of social contributions (2.0 percent) and direct taxes (1.9 percent). Indirect taxes grew by 0.5 percent.

The stronger momentum of direct taxes is mostly related to personal income taxes withheld on employee compensation, whose acceleration implies a more favourable trend of the economy compared with 2014. The positive trend has also been influenced by the new procedures applicable to personal income tax returns3. The growth of corporate taxes also contributed to the positive performance of direct taxes. When compared with 2014, the higher advance payments computed through self-assessment in 2015 are linked to the absence of the effects of the increase for 2013 only of corporate tax advance payments, and the consequent reduction of the balances and advance payments in 2014.  Taxes derived from income on financial assets also rose significantly, reflecting the ongoing benefits of the increases in substitute tax rates introduced in past years4.

The decelerationof indirect taxes is due to a decline in revenue from the regional tax on productive activity (IRAP); such decline is due to the exclusion of the cost of full-time labour from the taxable base. In 2015, value-added taxes on transactions in the national market benefitted from i) the introduction of the split-payment mechanism, on the basis of which the public administrations pay the VAT directly to the tax collector for the account of their suppliers, and ii) the extension of the reverse-charge system to several sectors of the economy. Value-added taxes on imports were instead lower, reflecting the decrease of tax revenue on mineral oils, which, in turn, is a repercussion of the ongoing contraction of oil prices.

Both total revenue and current revenue decreased as a percentage of GDP in 2015, amounting to 47.9 percent and 47.6 percent, respectively. The largest variances compared with the 2015 EFD forecast presented in April 2015 can be observed with respect to direct taxes, which amounted to 14.8 percent of GDP (-0.3 percentage points compared with the forecasts) and social contributions, which amounted to 13.4 percent of GDP (-0.1 percentage points compared with the forecasts). In 2015, fiscal pressure decreased to 43.5 percent, and to 42.9 percent, net of the €80 bonus that was made permanent in 2015.

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3 A new procedure introduced by Legislative Decree No. 175/2014 went into effect in 2015 whereby taxpayers making use of withholding agents are guaranteed immediate reimbursement of the credits resulting on their income tax returns. The new method requires that the taxpayer declares total withholding to be paid and the deductions to be taken, whereas the previous system required the declaration of net taxes only. As a result, increases occurred in both the levels of personal income tax withholding and deductions.

4 The rate of the substitute tax on financial income was raised from 20 percent to 26 percent as of July 2014, with the exclusion of income from Italian government securities, securities similar to Italian government securities, and securities issued by government entities of countries on the so-called ‘White List’ (Decree-Law No. 66/2014, converted by Law No. 89/2014). The rate of the substitute tax on the net earnings from supplemental pension funds under management was raised from 11.5 percent to 20 percent as from 2015.

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Total primary expenditure rose by 0.9 percent in nominal terms in 2015, compared with the previous year, amounting to 46.3 percent of GDP (with a reduction of 0.3 percentage points compared with 2014). Primary current expenditure came to 42.2 percent of GDP, with a decrease of 0.7 percentage points; the change incorporates the increase of the social benefits in cash (+1.9 percent compared with 2014), which remained constant at the 2014 level, at 20.3 percent of GDP.

Public final consumption, instead, continued to decline in absolute terms and in relation to GDP, falling to 19.0 percent. The decrease in 2015 reflects the ongoing reduction of employee compensation, which fell by 1.1 percent in nominal terms when compared with 2014 (-4.6 percent when compared with 2011). The lower employee compensation reflects the impact of measures affecting turnover and the continuing freeze on contract renewals. Intermediate consumption rose slightly in nominal terms compared with 2014, but declined to 5.4 percent in relation to GDP. The dynamics described also reflect the impact of the spending-review measures adopted to contain expenditure and to improve the efficiency thereof.

Capital expenditure amounted to 4.1 percent of GDP for 2015, rising by 10.7 percent in nominal terms. After years of gradually declining, gross fixed investment increased by 1.0 percent over 2014, to a total of approximately €37.3 billion. Even though the nominal increase was lower than forecast in the EFD Update in September, public investment amounted to 2.3 percent of GDP in 2015, which is a level consistent with the forecast. The increase in capital account transfers in 2015 is partially related to the application of the Constitutional Court Ruling No. 70/2015, which provided for the restitution of arrears for pensions as from 2012.

The estimates at unchanged legislation for 2016 indicate general government net borrowing should decrease by 0.3 percentage points of GDP, to put the aggregate at -2.3 percent. A gradual improvement of the balance is projected for the years thereafter, to the point of reaching a surplus of 0.4 percent at the end of the forecast period. This projection reflects the combination of the reduction of interest expenditure and the expected improvement of the primary surplus. Interest expenditure is slated to decline gradually from 4.0 percent of GDP in 2016 to 3.5 percent in 2019. A slight improvement in the primary surplus (0.1 percentage points of GDP) is forecast for 2016, whereas the aggregate should reach 2.4 percent of GDP in 2017, 3.3 percent in 2018 and 3.9 percent in 2019, partly due to the expectation of greater economic growth.

The estimates of tax revenue and fiscal pressure in the years after 2015 reflect the effects of the revenue measures contained in the 2016 Stability Law. On the one hand, the estimates incorporate: the abolition of taxes on main dwellings as from 2016; the extension of the exemption of social contributions for the hiring of new workers under open-ended contracts; and the reduction of the corporate income tax rate starting in 2017. On the other hand, the estimates take into account the increase of tax revenue coming from the implementation of a guarantee clause with reference to public finance balances as reformulated by the 2016 Stability Law; this clause will produce increases in the ordinary and reduced

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VAT rates starting in 2017, and excise taxes on mineral oils starting in 2018, in the absence of offsetting expenditure or revenue measures5. The forecasts for 2016 incorporate an increase in capital taxes due to the revenue expected from the voluntary disclosureprogramme.

In 2016, the ratio of tax revenue to GDP falls by 0.5 percentage points, while fiscal pressure declines by 0.7 percentage points, to reach 42.8 percent. The estimates for 2017 put tax revenue growth at 3 percent, sustained by indirect taxes that are expected to rise by approximately 8 percent. Instead, as of 2018, the forecast calls for social contributions to increase by more than 4 percent, reflecting the growth of employee compensation underlying the macroeconomic forecasts; 2018 will also mark the end of the tax incentives for new hires. As a result of these increases, the ratios of tax revenue and social contributions to GDP should remain essentially stable in 2019, at close to 29.6 percent and 13.3 percent, respectively. A similar trend is observed for fiscal pressure, which should stand at 42.9 percent in 2019. The mix of tax revenue is nonetheless expected to change, with a greater weight of indirect taxes, which should amount to 15.5 percent of GDP at the end of the forecast period; instead, the ratio of direct taxes to GDP should fall to 14.0 percent.

The forecasts at unchanged legislation call for total primary expenditure to decrease from 45.6 percent of GDP in 2016 to 43.2 percent in 2019. The downward trend should mainly be driven by a decrease in primary current expenditure, which is slated to go from 42 percent of GDP in 2016 to 39.9 percent of GDP in 2019. The scenario contemplates a gradual downsizing of expenditure for public final consumption, which should decrease by approximately 1.3 percentage points of GDP between 2016 and 2019. Employee compensation and intermediate consumption are projected to descend respectively to 8.9 percent and 5.0 percent of GDP in 2019.

The ratio of expenditure for social benefits in cash to GDP should gradually move down from 20.3 percent in 2016 to 19.9 percent in 2019. This movement reflects the reforms implemented in recent years, including the adjustment to life expectancy of the requisites for pension eligibility, which began in January 2016. The estimate considers the effects of the 2016 Stability Law, which provides other measures for the protection of so-called safeguarded workers and a special option made available to women who plan to retire early (the so-called women’s option).

The expected trend of gross fixed investment in the next few years incorporates a revival of spending, with growth of 2 percent in 2016, followed by an increase of 3.0 percent in 2018. The estimates include the expenditure for national co-financing of the investment projects against the Italian government’s request for additional flexibility margins.

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5 The incremental tax revenue coming from the measure is estimated at €15.1 billion in 2017, €19.6 billion in 2018 and €19.6 billion in 2019, as outlined in the technical report of the 2016 Stability Law.

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TABLE III.1: GENERAL GOVERNMENT BUDGETARY PROSPECTS (1)
	2015		2016	2017	2018	2019
	Level (2)	% of GDP	% of GDP
Net borrowing by sector
1. General government	-42,388	-2.6	-2.3	-1.8	-0.9	0.1
Cumulative change in primary balance			0.0	-0.4	-0.6	-0.3
2. Central government	-46,768	-2.9	-2.6	-1.7	-0.5	0.2
3. State
4. Local government	2,108	0.1	0.1	0.1	0.1	0.1
5. Social security funds	2,272	0.1	0.1	0.1	0.1	0.1
General government
6. Total revenue	784,041	47.9	47.2	46.9	47.1	47.1
7. Total expenditure	826,429	50.5	49.6	48.4	47.5	46.7
8. Net borrowing	-42,388	-2.6	-2.3	-1.4	-0.3	0.4
9. Interest expenditure	68,440	4.2	4.0	3.8	3.6	3.5
10. Primary surplus	26,052	1.6	1.7	2.4	3.3	3.9
11. One-off measures (3)	-1,649	-0.1	0.1	0.0	0.0	0.0
Selected components of revenue
12. Total taxes	492,754	30.1	29.6	29.7	29.8	29.6
12a. Indirect taxes	249,324	15.2	14.7	15.4	15.6	15.5
12b. Direct taxes	242,356	14.8	14.7	14.3	14.1	14.0
12c. Capital taxes	1,074	0.1	0.2	0.0	0.0	0.0
13. Social contributions	218,535	13.4	13.1	13.0	13.1	13.3
14. Property income	10,968	0.7	0.7	0.6	0.6	0.6
15. Other revenue	61,784	3.8	3.8	3.7	3.7	3.6
15.a Other current revenue	57,503	3.5	3.5	3.4	3.4	3.4
15.b Other capital revenue	4,281	0.3	0.3	0.2	0.3	0.3
16. Total revenue	784,041	47.9	47.2	46.9	47.1	47.1
Memo item: Fiscal pressure		43.5	42.8	42.7	42.9	42.9
Fiscal pressure net of €80 bonus		42.9	42.2	42.1	42.4	42.3
Selected components of expenditure
17. Employee compensation + Intermediate consumption	250,577	15.3	15.1	14.7	14.2	14.0
17a. Employee compensation	161,746	9.9	9.8	9.5	9.2	8.9
17b. Intermediate consumption	88,831	5.4	5.3	5.2	5.0	5.0
18. Total social transfers	377,179	23.0	22.9	22.7	22.5	22.4
Incl: Unemployment benefits	14,615	0.9	0.9	0.9	0.9	0.9
18a. Social transfers in kind	44,194	2.7	2.6	2.6	2.5	2.5
18b. Social benefits other than in kind	332,985	20.3	20.3	20.1	20.0	19.9
19. Interest expenditure	68,440	4.2	4.0	3.8	3.6	3.5
20. Production subsidies	27,711	1.7	1.7	1.4	1.4	1.3
21. Gross fixed investment	37,256	2.3	2.3	2.3	2.3	2.2
22. Capital transfers	28,948	1.8	1.3	1.2	1.2	1.0
23. Other expenditure	36,318	2.2	2.3	2.3	2.2	2.2
24. Total expenditure	826,429	50.5	49.6	48.4	47.5	46.7
Memo item: Public final consumption	310,258	19.0	18.6	18.1	17.6	17.3
Primary current expenditure	691,244	42.2	42.0	41.1	40.4	39.9
Total primary expenditure	757,989	46.3	45.6	44.6	43.8	43.2

1) The first line of the table shows the policy-scenario targets; the remaining figures show estimates at unchanged legislation. Discrepancies, if any, are due to rounding.

2) Figures in millions.

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

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The scenario outlined is consistent with the latest forecasts published by the European Commission in February 20166. The Winter Forecasts provide for a reduction in the ratio of net borrowing to GDP equal to 0.1 percentage point, with the ratio falling from 2.6 percent in 2015 to 2.5 percent in 2016, while in 2017, the deficit is slated to decline to 1.5 percent of GDP. The primary surplus is projected to equal 1.5 percent of GDP in 2016, falling by approximately 0.3 percentage points compared with the 2015 Autumn Forecasts, whereas it is pegged at 2.3 percent of GDP for 2017. Interest expenditure in relation to GDP should total 4.1 percent in 2016 and 3.9 percent in 2017.

III.2 MARGINS OF FLEXIBILITY OF THE STABILITY AND GROWTH PACT

Reforms clause and investments clause

With the 2015 EFD, the government outlined its intention to make use of the reforms clause, against a structural balance adjustment of 0.5 percentage points of GDP requested for 2016 on the basis of the prevailing cyclical conditions. The government requested the European Council to allow a temporary deviation (0.4 percentage points of GDP) from the path toward the achievement of the Medium Term Objective (MTO) in order to favour the implementation of important structural reforms that would have a positive impact on the sustainability of the debt in the medium/long term. The request for the application of the reforms clause referred to various areas, including:  reform of the public administration; measures to promote competition; simplification of the justice system and the education system; implementation of labour market reforms; the rebalancing of fiscal pressure to the advance of taxes on profits and work; and the reinforcement of the spending review. This deviation was agreed to by the European Council in its specific recommendations made to Italy for the 2015 European Semester, with a suggestion that Italy needed to improve its structural balance in 2016 by the equivalent of 0.1 percentage points of GDP7.

In consideration of the additional progress made with respect to problem credits and bankruptcy proceedings8, the Italian government advanced another request for flexibility through the reforms clause (0.1 percentage points of GDP) with the Draft Budgetary Plan (DBP) presented in October 2015. At the same time, the government requested the application of the investments clause for another 0.3 percentage points of GDP in 2016, for the funding of investment projects co-financed by European Union funds (approximately €5.2 billion) that are aimed at positively impacting growth potential. Were Italy’s request for flexibility be granted completely, the Council’s original recommendation would translate into a deterioration of the structural balance of 0.25 percent of GDP in 2016.

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6 The comparison of the estimates at unchanged legislation in this EFD with the Commission’s latest estimates has been done in respect of the EU Directive No. 85/2011.

7 European Council recommendation of 14 July 2015 about Italy’s National Reform Programme and opinion about Italy’s Stability Programme.

8 For greater detail, see the focus of 2016 DBP entitled ‘The macroeconomic effects of certain measures contained in Decree-Law No. 83 of 27 June 2015.’

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In the opinion expressed on Italy’s DBP in November 2015, the European Commission had already verified that Italy’s request was consistent with the eligibility requirements for application of the additional flexibility, but the Commission decided to defer the decision about granting the added budget flexibility until the spring of 2016, on the basis of theSpring Forecastsandfollowing the presentation of the 2016 Stability Programme. The Italian government believes that these criteria, already verified upon the presentation of the 2016 DBP, continue to be satisfied.

First, the European Commission’s Communication of 13 January 2015, which governs the various clauses for budget flexibility, requires the respect of the parameters of the preventive arm of the Stability and Growth Pact. Under the policy scenario of this document, the structural deficit is estimated at 0.6 percent of GDP for 2015 (against a deficit of 0.3 percent in the 2016 DBP), whereas according to the Commission’s Winter Forecasts, the aggregate is equal to 1.0 percent. Both estimates ensure a gap of less than 1.5 percent of GDP from the MTO, as requested by European rules. In addition, the achievement of the MTO, though being deferred from 2018 to 2019, remains within the forecast period covered by the Stability Programme. Finally, in 2016, the year of application of the clauses, the structural deficit is estimated at 1.2 percent of GDP, a level below the safety margin9,which is 1.7 percent of GDP for Italy.

Second, the use of the flexibility is granted only if negative cyclical conditions (according to the Commission’s interpretation10) exist during the year of the application of the clauses. This implies that output gapmust not exceed -1.5 percent of potential GDP. In this document, the estimate of the output gap for 2016 has been revised from the -2.5 percent in the DBP of October 2015 to -2.3 percent of potential GDP. The Winter Forecasts peg the output gapfor Italy at -1.5 percent of potential GDP.

With reference to the investments clause, the Commission has clarified that co-financing expenditure does not have to substitute the investments financed completely with national resources, so that total public investment does not decrease in the forecast. The estimates at unchanged legislation contained in this document indicate growth of 2 percent in the gross fixed investment of the public administration. A similar trend is projected in the Winter Forecasts (+1.13 percent).

Finally, the Common Position approved by the ECOFIN Council in February 201611 has introduced several new elements compared with the Commission’s interpretation of January 2015. The applicability of the investments clause has been extended to all investment projects co-financed by the European structural and investment funds12, including the European Agricultural Fund for Rural Development (EAFRD) and the European Maritime and Fisheries Fund (EMFF), that

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9 The safety margin represents the cyclically corrected net borrowing, which, in the presence of ‘normal’ cyclical fluctuations, minimises the probability of surpassing the threshold of 3 percent for the ratio of net borrowing to GDP. In the Winter Forecasts, the structural balance estimated for 2016 is equal to -1.7 percent of GDP, and it coincides with the safety margin.

10 European Commission Communication ‘Making the best use of the flexibility within the existing rules of the Stability and Growth Pact’ of 13 January 2015.

11 ECOFIN Council Document No. 14345/2015.

12 Funds listed in Regulation No. 1303/2013.

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were considered in Italy’s request but not explicitly mentioned in the Communication of January 2015. Other changes include the introduction of a ceiling equal to 0.5 percent of GDP on the deviation from the MTO or from the path of adjustment toward the MTO granted for the investments clause (similar to what has been provided for the reforms clause), and a maximum limit of 0.75 percent of GDP with respect to the total deviation that can be obtained by the two clauses considered as a whole.

FOCUS Investments clause: principal developments with respect to projects This focus section reports some of the detailed data related to the investments plan that were sent to European institutions in February 2016. As of 15 February 2016, the procedures inaugurated encompassed co-financed national expenditure of €4.4 billion (inclusive of €2.6 billion for investment works and projects already financed), against national expenditure on projects co-financed by the European Union in the amount of €5.2 billion as considered for the investments clause.  

TABLE R.1: PROCEDURES INAUGURATED IN 2016 (in € mn)
	ERDF	ESF	YEI	EAFRD	EMFF	CEF	EFSI	Total
Procedures inaugurated	788	314	88	1,264		964	946	4,366
incl.: projects in process	362	151	87	495		964	546	2,605
Clause target	1,400	600	200	800	50	1,050	1,050	5,150

The summary data in Table R.1 show that Italy’s administrations heading up programmes financed by European structural and investment funds (ERDF, ESF, YEI, EAFRD, EMFF) for the 2014/2020 planning period, have inaugurated public tenders for the selection of investment projects in various strategic sectors. In particular, the procedures inaugurated essentially regard initiatives that are focused on sustainable employment, social inclusion, education and training, sustainable transport systems, and the reinforcement of research, technological development and innovation.

Many of the projects already under way regard transportation, research and innovation, culture and the tourism, the digital agenda, and protection and prevention of the risks of pollution.

In the first months of the year, the best results, in terms of procedural and financial development of the plan, can be observed for the projects aimed at strengthening transportation and infrastructure networks. The expenditure for the co-financed projects referring to the Connecting Europe Facility (CEF) was approximately €268 million for the projects that had already been inaugurated as of mid-February 2016. In addition to improving railway connections and certain strategic hubs along the trans-European corridors, the projects also regard studies and efforts to raise the levels of airport security and to transform cargo terminals into smart hubs. Other projects, covering approximately €663 million, have been proposed by Italy, but have not yet been financed due to the lack of EU resources; such projects are nonetheless considered compatible with the Commission’s CEF co-financing guidelines, given their significance for the European networks.

With reference to the investments co-financed by the European Fund for Strategic Investment (EFSI), the road development projects along the foothills of the Veneto and Lombardy Regions (Pedemontana Veneta and Lombarda) are to be presented to the EFSI Investments Committee (the body in charge of determining eligible projects) at the conclusion of an ongoing preliminary analysis being conducted by the Cassa Depositi e Prestiti (the bank responsible for the promotion of Italy’s investment projects).

Finally, the ultra-wideband plan represents one of the priorities of Italy’s digital agenda.  Discussions are currently under way with the European Commission for the purpose of securing direct financing from the EIB, that can, in turn, be associated with EFSI guarantees and co-financing from other structural funds (ERDF and EAFRD).

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III.3 PUBLIC FINANCE: POLICY SCENARIO

Results: structural balance and expenditure rule

The structural balance corresponding to net borrowing of 2.3 percent of GDP in 2016 would be equal 1.2 percent of GDP, a setback of 0.7 percentage points compared with 2015. As clarified in the preceding section, Italy has requested budget flexibility amounting to 0.5 percent of GDP for structural reforms and 0.3 percent of GDP for public investment. Were Italy’s request for flexibility be granted completely, the Council’s original recommendation of July 2015 would translate into a deterioration of the structural balance of 0.25 percent of GDP in 2016. In relation to this new benchmark, the change of -0.7 percent of GDP now forecast would not constitute a ‘significant deviation’, and therefore, it is compatible with the ‘preventive arm’ of the SGP.

The new policy scenario presented here provides for reducing general government net borrowing to 1.8 percent of GDP in 2017 and to 0.9 percent in 2018, thereby bringing the balance to a slight surplus in 2019 (0.1 percent of GDP).

On a structural basis, the Department of the Treasury’s estimates, as based on the method agreed at a European level1, would lead to improvement in the balance, which goes from -1.2 percent of GDP in 2016 to -1.1 percent in 2017, -0.8 percent in 2018 and -0.2 percent in 2019. This last level would essentially ensure the achievement of Italy’s Medium-Term Objective (MTO).

As a matter of principle, the rules for moving back toward the MTO would require improvement of the structural balance of at 0.5 percentage points of GDP2. The government believes such fiscal tightening is inappropriate and

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1 The Treasury’s estimates differ from the underlying macroeconomic forecast only for the fact that the latter has a four-year horizon whereas the Commission’s forecasts do not go past 2017, and in the initialisation of the variances for the calculation of NAWRU for which the MEF uses a grid search procedure for the optimal selection (in this regard, see the special focus section of the 2015 EFD entitled ‘Sensitivity of NAWRU to the initialisation parameters of latent factors’). With regard to the issue of the time horizon for the estimates of the output gap, it is necessary to note (both with respect to the actual and forecast data) that the estimate of the output gap is very sensitive with respect to the length of the forecast period chosen. In drawing up the Stability Programmes, the Member States are asked, based on the Code of Conduct, to present public finance objectives under a policy scenario, structural balances and data for the output gap with respect to a time horizon covering three/four years following the current year. Instead, the European Commission’s Spring Forecasts, which represent the information base for the evaluation of the individual countries’ compliance with the rules of the Stability and Growth Pact, do not extend beyond the year following the current year. Given the construction of the production function model used at a European level, the use of a different time horizon by the Commission makes the estimates of the output gapnarrower and more conservative vis-à-vis the estimates computed by the Member States on the basis of macroeconomic projections that encompass another three years. For example, if as part of the EFD policy scenario, the output gapwere to be estimated by using the initialisation parameters of the NAWRU variances as contained in the 2016 Winter Forecastsandby increasing and reducing the time horizon to 2019 and 2017, respectively, the average differential in the estimate of the output gap would be at least 0.5 percentage points of GDP. It follows that the deviations compared with the Commission’s figure mainly depend on the incremental effect on the level of the potential GDP due to a longer time horizon. This discrepancy due to the model’s technical characteristics can produce significant differences in the estimation of the structural balances and in the assessment of the compliance with the rules of the Stability and Growth Pact. Accordingly, in order to provide a better basis for comparison of results, it would be necessary for the European Commission to align its forecast time horizon to that required within the framework of the Member States’ Stability Programmes.

2 European Commission, ‘Vade Mecum on the Stability and Growth Pact - 2016 edition’, Institutional Paper 021, March 2016.

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counterproductive in consideration of various important factors that are discussed in detail in Section III.7.

Budget planning for the next few years

For 2016, the government is forecasting net borrowing of around 2.3 percent of GDP, against a September target of 2.2 percent (which was later increased to 2.4 percent in connection with the security and culture measures ordered in November following the terrorist attacks in France). The projections for interest payments on the public debt for 2016 have been scaled down with respect to September, from 4.3 percent to 4.0 percent of GDP, while the primary surplus is estimated to be below the target of 2.0 percent outlined in the EFD Update in September 2015.

TABLE III.2: DIFFERENCES COMPARED WITH THE PREVIOUS STABILITY PROGRAMME
	2015	2016	2017	2018	2019
REAL GDP GROWTH RATE
2015 Stability Programme	0.7	1.4	1.5	1.4	1.3
2016 Stability Programme	0.8	1.2	1.4	1.5	1.4
Difference	0.1	-0.2	-0.1	0.1	0.1
NET BORROWING (% of GDP)
2015 Stability Programme	-2.6	-1.8	-0.8	0.0	0.4
2016 Stability Programme	-2.6	-2.3	-1.8	-0.9	0.1
Difference	0.0	-0.5	-1.0	-0.9	-0.3
PUBLIC DEBT (% of GDP)
2015 Stability Programme	132.5	130.9	127.4	123.4	120.0
2016 Stability Programme	132.7	132.4	130.9	128.0	123.8
Difference	0.2	1.5	3.5	4.6	3.8

The primary surplus for 2016 is pegged at 1.7 percent of GDP, for a slight increase over 2015. The forecast considers the following: the capacity to effectively spend the amounts provided by the spending authorisations; the significant administrative commitment to tax collections; and the actions undertaken for moderately growing the proceeds from the divestiture of real property.

The safeguard clauses that are slated to become operational in 2017 can be valued at the equivalent of approximately 0.9 percent of GDP. The government’s intention in drafting the forthcoming 2017 Stability Law is that of proposing measures as alternatives to the safeguard clauses.  The budget will be finalised in the next few months, and will be designed to ensure the achievement of net borrowing equal to 1.8 percent of GDP in 2017, through a mix of measures to revise public spending (including fiscal expenditures) and instruments to grow fiscal compliance while reducing the margins for tax avoidance and tax evasion.

The initiatives regarding the spending review are to be broadened in the 2018-2019 period, while the organisational and regulatory effort aimed at boosting tax revenue will continue, in a scenario where tax rates are held constant.

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TABLE III.3: AMOUNTS TO BE EXCLUDED FROM THE EXPENDITURE RULE
	2015		2016	2017	2018	2019
	Level (1)	% of GDP	% of GDP
Expenditure on EU programmes fully matched by EU funds	4,300	0.3	0.2	0.1	0.1	0.1
Cyclical unemployment benefit expenditure (2)	2,621	0.2	0.1	0.1	0.0	0.0
Discretionary revenue (3)	-3,214	-0.2	-0.5	0.3	0.3	0.3
Revenue increases mandated by law	0.0	0.0	0.0	0.0	0.0	0.0
(1) Figures in millions. (2) The cyclical unemployment benefit expenditure has been calculated with the methodology currently used by the European Commission, based on the unemployment gap. (3) Discretionary revenues are inclusive of social contributions.

TABLE III.4: SCENARIO AT UNCHANGED POLICIES
	2015		2016	2017	2018	2019
	Level (1)	% of GDP	% of GDP
Total revenue at unchanged policies	784,041	47.9	47.2	46.9	47.1	47.1
Total expenditure at unchanged policies	826,429	50.5	49.6	48.4	47.5	46.7
Detail of expenditure
Current expenditure	759,684	46.4	46.0	44.9	44.0	43.4
incl.:
Employee compensation	161,746	9.9	9.8	9.5	9.2	9.0
Intermediate consumption	133,025	8.1	7.9	7.8	7.5	7.5
Capital expenditure	66,745	4.1	3.6	3.5	3.5	3.3
incl.:
Gross fixed investment	37,256	2.3	2.3	2.3	2.3	2.2
Investment subsidies	15,684	1.0	0.9	0.8	0.8	0.8
(1) Figures in millions.

TABLE III.5: STATE SECTOR AND PUBLIC SECTOR: CASH BALANCES (1)
	2015		2016	2017	2018	2019
	Level (2)	% of GDP	% of GDP
Public sector balance	-51,993	-3.2	-3.1	-2.3	-1.4	0.0
Central government	-60,212	-3.7	-3.3	-2.1	-1.3	-0.2
State sector	-59,079	-3.6	-3.3	-2.1	-1.3	-0.2
Local government	8,219	0.5	0.2	0.2	0.2	0.2
Social security funds	0	0.0	0.0	0.0	0.0	0.0
(1) The first line reports the policy-scenario figures; the remaining figures describe the trends at unchanged legislation. (2) Figures in millions.

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TABLE III.6: CYCLICALLY ADJUSTED BUDGET (% of GDP) (1)
	2014	2015	2016	2017	2018	2019
GDP growth rate at constant prices	-0.3	0.8	1.2	1.4	1.5	1.4
Net borrowing	-3.0	-2.6	-2.3	-1.8	-0.9	0.1
Interest expenditure	4.6	4.2	4.0	3.8	3.6	3.5
Potential GDP growth rate	-0.5	-0.2	-0.2	0.2	0.4	0.5
Factor contribution to potential growth:
Labour	-0.2	0.1	0.0	0.2	0.3	0.3
Capital	-0.2	-0.2	-0.1	0.0	0.0	0.1
Total factor productivity	-0.2	-0.1	0.0	0.0	0.1	0.2
Output gap	-4.5	-3.5	-2.3	-1.1	-0.1	0.7
Cyclical component of the budget balance	-2.4	-1.9	-1.2	-0.6	-0.1	0.4
Cyclically adjusted budget balance	-0.6	-0.7	-1.1	-1.2	-0.9	-0.3
Cyclically adjusted primary surplus	4.0	3.5	2.9	2.6	2.8	3.2
One-off measures	0.2	-0.1	0.1	0.0	0.0	0.0
Budget balance, net of one-off measures	-3.2	-2.5	-2.5	-1.8	-0.9	0.1
Cyclically adjusted budget balance, net of one-off measures	-0.8	-0.6	-1.2	-1.1	-0.8	-0.2
Cyclically adjusted primary surplus, net of one-off measures	3.8	3.6	2.8	2.7	2.8	3.3
Change in budget balance, net of one-off measures	-0.1	0.7	0.0	0.7	0.9	1.0
Change in cyclically adjusted budget balance, net of one-off measures	-0.1	0.2	-0.7	0.1	0.3	0.6
(1) Rounding to the first decimal point may cause inconsistencies in the values presented in the table.

FOCUS   Assessment of significant deviations and the expenditure rule For those countries to which the preventive arm of the Stability and Growth Pact (SGP) is applicable, the path toward achievement of the Medium Term Objective (MTO) is evaluated on the basis of two parameters: 1) the change of the structural balance; and 2) the expenditure rule. As far as the first parameter is concerned, the path of adjustment toward the MTO, as measured on the basis of the change in the structural balance, is modulated each year in relation to the following criteria15: i) the economy’s cyclical conditions as summarized by the measurement of the output gap; ii) the level of the opening structural balance; iii) the level of the debt-to-GDP ratio; and iv) the existence of medium-term risks to public finance sustainability, as evaluated on the basis of the S1 indicator. For example, in ‘normal’ cyclical conditions (represented by an output gap of between -1.5 percent and 1.5 percent of potential GDP), a country that has a debt-to-GDP ratio above 60 percent and, on the basis of S1, average risks of sustainability, must move toward its MTO through a reduction of the structural balance of more than 0.5 percentage points of GDP. The Commission’s Communication of January 2015 has clarified that modulated annual adjustments on the basis of cyclical conditions can be reduced for the application of the structural reforms and investments clauses. This implies that against the required annual adjustment of the structural balance (0.5 percentage points of GDP) in normal cyclical conditions, the joint application of the reforms and investments clauses can permitmaximum easing of the structural balance for up to -0.25 percentage points of GDP. With reference to the expenditure rule and to countries that have not yet achieved their MTO, European regulations establish that the aggregate expenditure of reference must grow

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15 See the matrix that specifies the annual adjustment toward the MTO on the basis of the situation for the economic cycle presented in the Commission’s Communication ‘Making the best use of flexibility within the existing rules of the Stability and Growth Pact’ of 13 January 2015.

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at a rate equal to the difference between the average growth rate of potential GDP16 and the so-called convergence margin. The convergence margin is, in turn, calibrated in relation to the economy’s cyclical conditions so that, for example, in ‘normal’ cyclical conditions (i.e. annual output gap of between -1.5 percent and 1.5 percent of potential GDP), the expenditure aggregate is reduced so as to ensure annual improvement in the structural balance that is equal to or greater than 0.5 percent of GDP. As clarified by the European Commission, the remodulation of the expenditure rule’s parameters also occurs in the event of the application of the flexibility granted for structural reforms and/or for the investments clause.

With regard to the path of adjustment toward the MTO, there are significant deviations if there is a shift of 0.5 percentage points of GDP over one year, or an average of 0.25 percentage points over preceding two years, compared with the path identified based on the change of the structural balance and the expenditure rule. However, only the existence of a significant deviation reported on ex-post data can lead to the opening of an infraction procedure.

In 2015, the macroeconomic assumptions in the EFD produce an output gap of -3.5 percent of potential GDP in the policy scenario (and -3.4 percent in the scenario based on unchanged legislation). The cyclical conditions would thus be defined as particularly adverse (‘very bad times’) and the required adjustment of the structural balance and the convergence margin of the expenditure rule would need to ensure improvement of 0.25 percentage points of GDP in structural terms. On an annual basis, the structural deficit of 2015 decreased in line with the required adjustment, whereas it deviated by approximately 0.1 percentage points of GDP with respect to the two-year average. With regard to the expenditure rule, the deviation on an annual base would be 0.4 points of GDP (below the threshold of 0.5 points that would trigger the alarm for a significant deviation) and 0.1 percentage points with regard to two years.

Given the cumulative application of the reforms and investments clauses, the structural deficit for 2016 can increase by 0.25 percentage points of GDP compared with 2015. Similarly, the expenditure aggregate can rise by 0.6 percent in real terms. With respect to these parameters, in 2016, there will be a deviation of the structural balance of 0.4 percentage points of GDP on an annual basis and 0.2 percentage points of GDP with respect to the 2015-2016 average, but neither of these is significant according to the SGP criteria. With respect to the expenditure rule, the deviations would be zero on an annual basis and limited with respect to the two-year average (approximately 0.2 percent). In 2017, under the EFD’s scenario at unchanged policies, there would be absolute compliance with the expenditure rule, matched by a required reduction of the structural balance amounting to more than 0.5 percentage points of GDP. The aggregate of reference would fall by 1.3 percent in real terms, with thus no deviations on an annual basis or when compared with the two-year average. The following table provides more detailed information about the application of the expenditure rule in the scenario at unchanged policies over the EFD’s entire time horizon.

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16 The average growth rate of potential GDP is computed on the basis of the production function method agreed at a European level, considering a 10-year average of the European Commission’s forecast centredon the year for which the estimation is being made. The 10-year average accordingly includes the four years prior to that for the estimation, and the five subsequent years (forecast of two years and mechanical extrapolation for the last three).

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APPLICATION OF THE EXPENDITURE RULE (1)
	2014	2015	2016	2017	2018	2019
1. Total expenditure	825,534	826,429	828,712	830,062	837,775	849,512
2. EU financed expenditure	5,500	4,300	2,600	1,900	2,500	2,500
3. Cyclical components of unemployment subsidies	3,069	2,621	2,186	1,463	634	-82
4. Interest	74,340	68,440	66,911	65,186	64,075	64,002
5. Gross fixed investment	36,871	37,256	38,014	38,633	39,780	40,622
6. Gross fixed investment – average for past 4 years	40,476	38,468	37,645	37,694	38,421	39,262
7. Step 1: Expenditure aggregate of reference (1-2-3-4-5+6)	746,230	752,280	756,647	760,573	769,207	781,732
8. Change in discretionary revenue	8,118	-3,214	-9,187	4,311	4,542	4,682
9. Step 2: Expenditure aggregate of reference	738,112	755,494	765,834	756,262	764,665	777,050
10. Step 3: Growth rate of the aggregate of expenditure, in nominal terms	0.0	1.2	1.8	-0.1	0.5	1.0
11. Step 4: Growth rate of the aggregate of expenditure, in real terms	-1.5	0.4	0.5	-1.3	-0.7	-0.2
12. Benchmark (maximum limit on growth of the expenditure aggregate)	0.0	-0.5	0.6	-1.3	-0.3	0.0
Impact of the deviation of the expenditure aggregate from the maximum limit in terms of structural balance over 1 year (<-0.5%)	0.2	-0.4	0.0	0.0	0.2	0.1
Impact of the deviation of the expenditure aggregate from the maximum limit in terms of structural balance (two-year average) (<-0.25%)	0.8	-0.1	-0.2	0.0	0.1	0.1
1) The expenditure aggregate of reference is consistent with the values presented in the general government account, with the following subtracted from total expenditure at unchanged policies: interest expenditure, expenditure financed with EU funds; and the cyclical component of unemployment subsidies. The average expenditure for investments is also considered (calculated for the current year and the preceding three years). Also subtracted are the discretionary revenue measures and social contributions. The growth rate of the expenditure of reference has been deflated for 2011-2015, as required by the Vademecum on the Stability and Growth Pact (section 1.3.2.3); the average deflator from the 2015 Spring and Autumn Forecasts was used for 2016 and the years thereafter. The 2016 benchmark was obtained by considering the 10-year average growth rate of potential GDP, as taken from the European Commission’s 2015 Spring Forecasts. For the years 2017-2019, the average potential growth rate considered was that centred on the current year of the 2016 Winter Forecasts. With respect to the definition of the convergence margin for 2017-2019, the level of primary expenditure for 2016 as reported by the 2016 Winter Forecasts was used. Note: the growth rates of the expenditure aggregate on line 10 were computed by considering the current value in line 9, net of the impact of the change of the discretionary tax measures compared with the value of the previous year’s expenditure aggregate, in nominal terms, as reported in line 7. In line with the method decided at a European level, past deviations were held constant. Accordingly, the deviation with respect to one year and two years of2014 was held constant, when compared with the ex-post assessment made by the Commission. Source: MEF analyses using data provided by the State General Accounting Department.

FOCUS   The estimation of potential output: an enhanced methodology for Italy Given its relevance in determining structural budget balances both under the framework of the Stability and Growth Pact and under the national legislation (Law n. 243/2012), the agreed production function methodology shared at the EU level to gauge potential output and output gaps has come increasingly under scrutiny in recent years. Both the European  Commission and the Output Gap Working Group (OGWG), in charge of monitoring the agreed methodology, have recognised the existence of theoretical and econometrical drawbacks and have largely discussed possible adjustments to the model. However, in some cases, like the Italian one, problems still remain. According to the mandate of the Output Gap Working Group (OGWG), the commonly agreed methodology should respect the following principles: a) It has to be relatively simple, fully transparent and stable. The trend extraction methods should be based on economic as well as statistical principles with the key inputs and outputs clearly defined; b) It should strive for

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equal treatment for all EU Member States, whilst in exceptional circumstances recognising country-specific characteristics; c) It should provide an unbiased assessment of the past and future potential growth in the EU Member States, while aiming to include the effects of all adopted structural reforms;  d) It should aim at limiting the pro-cyclicality of potential growth estimates.

As far as Italy is concerned, the Government is of the opinion that the current agreed methodology is not suited for providing an unbiased assessment of past and future potential growth. Results are pro-cyclical and not in line with macroeconomic intuition. More in details, when applied to Italian data, the commonly agreed production function performs poorly with respect to the estimation of the Non-Accelerating Rate of Wage Unemployment (NAWRU) and in the extrapolation of the trend and cyclical components of Total Factor Productivity. On both items, this note puts forward some enhanced solutions based on a slight modification of the commonly agreed methodology. The large volatility in the results vis-à-vis those produced by the Commission proves that the model is not stable neither over the historical period nor over the forecast horizon.

A new  Phillips curve for the estimation of Italian potential GDP

The Non-Accelerating Wage Rate of Unemployment (NAWRU) is a latent variable representing the unemployment rate consistent with no change in wage inflation. Given this definition, the NAWRU for Italy is estimated in the commonly agreed methodology through a very stylized model. A Kalman filter is applied to the series of the unemployment rate and to the so-called Phillips curve, i.e. the equation that expresses the inverse relationship between wage inflation and a concurrent and two-period lags measure of cyclical unemployment17.

Recent empirical analyses have shown that the wage/unemployment relationship featured by the Phillips curve may have weaken over past decades and, in particular, during the recent financial crisis18. In recent years, considerable increases in the unemployment rate experienced in some countries, including Italy, have not been matched by correspondent reduction in wage inflation in line with what would have been foreseen on the basis of the mechanisms underlying the Phillips curve.

In addition, in Italy's case, the Phillips curve model used for the estimation of the NAWRU as part of the methodology agreed at the European level for computing the output gaps and structural balances19 has, in most cases, produced estimates that are not robust  from a statistical point of view and not entirely in line with macroeconomic intuition.

For instance, according to the 2016 Winter Forecasts, the NAWRU for Italy  is expected to increase by 0.6 percentage points from 10.5 percent of 2015 to 11.1 percent of 2017 in

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17 For the complete specification of the commonly agreed methodology used for the NWRU estimation see Section III.1 of the Methodological Note attached to the EFD 2016.

18 Considering the current level of interest rates and low inflation, the relationship between the unemployment rate and labour cost seems to have lost significance.  Indeed, despite the sizeable increase in unemployment during the most recent recession, the effects on wage inflation have been modest. Some empirical studies estimate a gradual levelling of the curve due to the fact that price expectations have been anchored to the inflation targets declared and pursued by the respective central banks. Other researches have shown how the traditional Phillips curve tends to indicate a weakening of the relationship between unemployment and wages (or price inflation) because the traditional curve overlooks the broader weight assumed by long-term unemployment, which, since it cannot be reabsorbed quickly, contributes to creating additional hysteresis. With reference to the first effect, see: Ball L. Mazumder S., (2015) A Phillips Curve with Anchored Expectations and Short-Term Unemployment, IMF Working Paper, WP/15/39, available at:

http://www.imf.org/external/pubs/ft/wp/2015/wp1539.pdf. See also: Rusticelli E., Turner D. Cavalleri M.C. (2015) Incorporating Anchored Inflation expectations in the Phillips Curve and in the derivation of OECD measures of the unemployment gap, OECD Working papers. With reference to the effect of long-term inflation, see: Elena Rusticelli, (2014), Rescuing the Phillips curve: Making use of long-term unemployment in the measurement of the NAIRU, OECD Journal: Economic Studies, 2014, vol. 2014, issue 1, pages 109-127. As a general reading it is possible to refer to: IMF (2013) “The dog that didn’t bark: has inflation been muzzled or was it just sleeping”, World Economic Outlook, IMF, April

19 For additional details, see formula (8) of the Section III.1 of the methodological note attached to the EFD 2015.

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spite of the fact that: 1) over the same time horizon, the unemployment rate is projected to fall of 0.6 percentage points; 2) wage inflation is expected to be negative in 2015 and 2016 (respectively, -0.2 percent and -0.03 percent) and only in 2017  would be back in positive territory (0.6 percent); 3) the tax wedge has fallen from 44.7 percent in 2013 to 42.4 percent  in 2014 as a result of the implementation of structural reforms.

Furthermore, in the Winter Forecast 2016, even though the related coefficients that link wage inflation to the unemployment gap are highly significant, the entire Phillips curve model is marked by a very low coefficient of correlation R2 whose value is just above zero.

In an attempt to improve the fit of the model, it is possible to use an alternative specification of the Phillips curve, in which, in line with the approach previously adopted by other international organisations (such as the OECD and IMF), the endogenous variable currently represented by the series that measures the acceleration of wage inflation is to be substituted with the series that measures price inflation.

More specifically, the model has been re-estimated, by substituting the equation currently used by the European Commission for the estimation of the Phillips curve (see formula (8) of the Methodological Note in Section III.1 of this document) with the following formula:

DPt = a + b1Gt + b2Gt-1 + b3Gt-2 + gMGSt + e4t                        e4t ~ N(0, var (e4))

where P= the inflation rate calculated on the consumption deflator, Gt= unemployment gap and MGS= weight of imported inflation on the quota of domestic demand. The introduction of an exogenous variable capable of capturing the effects of import prices is in line with the OECD model and with the theoretical formula adopted by the European Commission20.

When using such specification for the Phillips curve, the model moves from the estimation of the Non-Accelerating Wage Rate of Unemployment (NAWRU) to the estimation of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) although remaining within the framework used by the European Commission.

The results reported in the table and figures below show a general improvement in the estimates of structural unemployment when compared with the results obtained by the European Commission for the Winter Forecast 2016 (see log likelihood figure), as well as a considerable increase in the goodness of fit of the Phillips curve witnessed by the huge increase in the R2 statistic (equal to approximately 48 percent under the new specification).

ESTIMATION OF PHILLIPS CURVE: CURRENT VS ALTERNATIVE SPECIFICATION
	NAWRU – Current specification			NAIRU – New specification
	Coefficient	Standard Error	T-Statistics	Coeficient	Standard Error	T-Statistics
Constant	-0.0015	0.0033	-0.4551	-0.0004	0.0023	-0.1590
Beta-Lag 0	-0.0339	0.0114	-2.9629	-0.0130	0.0063	-2.0745
Beta-Lag 1	0.0560	0.0191	2.9351	0.0211	0.0105	2.0111
Beta-Lag 2	-0.0272	0.0120	-2.2717	-0.0082	0.0063	-1.3139
Exigenous variable (imported inflation)	-	-	-	1.3941	0.2134	6.5332
Log-likelihood		-138.3580			-178.8720
R-squared (one step ahead)		0.0110			0.4723
Source: European Commission 2016 Winter forecasts and own elaborations.

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20 The model is based on annual data covering the period 1967-2017.

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PHILLIPS CURVE: THE IMPROVED FIT OF THE NEW SPECIFICATION
NANAWRU – CURRENT SPECIFICATION	NAIRU – NEW SPECIFICATION
Source: Commission Services, 2016 Winter Forecasts.	Source: Own elaborations on Commission Services, 2016 Winter Forecasts.

The figure below shows the comparison between the NAWRU of the Winter Forecast 2016 and the new estimate of the NAIRU. Even though the NAIRU has better statistical properties and is less pro-cyclical than the European Commission's NAWRU estimates, problems still remain with the macroeconomic interpretation of the results in real time and over the forecast period (2016-2017). Both the NAIRU and the NAWRU measures show an increasing pattern in spite of the decrease in the unemployment rate, the subdued dynamics of prices and wages and in spite of the fall in the tax wedge on gross wages. Such shortfall of both models, mostly imputable to the inability of such trend extraction methodology to take into account of the effects of structural reforms, remains to be dealt with.

UNEMPLOYMENT RATE, NAWRU AND NAIRU

Source: European Commission 2016 Winter forecasts and own elaborations.

A Labour hoarding measure to estimate the trend of Total Factor Productivity

In the commonly agreed methodology, the measurement of the trend and the cyclical components of the Total Factor Productivity (TFP) for Italy is subject to two relevant shortcomings which affect, respectively, the underlying macroeconomic intuition and the statistical features of the results. The first problem is related to the current estimates of the growth rate of the TFP trend which, quite counterintuitively, are negative as of 2002, thus

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contributing to the reduction of both the levels and the growth rates of potential output. The second drawback is related to the statistical properties of the capacity utilisation indicator (the so-called CUBS). This indicator, built by the Commission services to estimate the cycle of TFP on the basis of soft data (specifically, the capacity utilisation index for manufacturing and sentiment indicators for the services and construction sectors), seems not to follow the pattern of real activity as of 2012 (see figures below).

Indeed, as of mid-2012, survey-based data for Italy have shown a sudden disconnection with real activity measures. In the manufacturing sector, the increases in both the level of capacity utilisation and in the sentiment indicator has not been matched by expansion of similar magnitude in real activity as measured by the industrial production index. Likely, in the service sector, the increase in confidence shown by data as of 2012 has only mildly been reflected in services  value added metrics.

On the other hand, the swift surge in capacity utilisation and confidence indicators has been appropriately reflected in the so-called CUBS index currently used in the commonly agreed methodology for the estimation of TFP. Such a pattern has been treated by the Bayesian Kalman filter model currently used to estimate TFP trend as an indisputable indication of a strong and positive cyclical shock. Accordingly, in the last years of the sample, the Commission estimates show a fast increase in the cyclical component of TFP so that the gap with a trend that still grows at negative rates it is closed already in 2017.

In order to address both the issue of the protracted negative TFP trend growth and the misspecification of the current TFP cycle, the Italian Treasury developed an enhanced version of the commonly agreed methodology which, by introducing only a slightly different specification of  the variable used to disentangle the cyclical component of TFP, leads to a much different assessment of output gaps, both for the historical period and for the forecast years 2016-2017.

SURVEY-BASED INDICES: RECENT EVIDENCE OF A DISCONNECTION WITH REAL ACTIVITY MEASURES
MANUFACTURING	SERVICES
Source: ISTAT. Note: Data with different frequencies, normalized over the considered period. Industrial production index is monthly-based (2010=100).	Source: European Commission. Note: Data with different frequencies, normalized over the considered period. Chain-linked value addes series of the service sector with 2010=100.

Basically, in line with similar exercises presented by the Commission at the Output Gap Working Group, the Total Factor Productivity has been estimated by means of the commonly agreed methodology, by replacing the CUBS index with a measure of labour hoarding. Labour hoarding has been measured by using the data on the number of hours worked declared by firms to be paid to workers who, in case of reduction of the activity due to crisis or negative cyclical developments, are earmarked in the supplementary wage scheme (Cassa Integrazione Guadagni - CIG). This statistic, collected by INPS, presents the following

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advantages: 1) it is a real variable collected for the whole economy and not a survey based figure; 2) it is based on data collected monthly  since 1970, whereas the CUBS indicator  is available only since 1985; 3) as shown by the figure below, it performs relatively well as capacity utilisation indicator as it tracks exactly the turning points of the CUBS index.

HOURS PAID UNDER THE CASSA INTEGRAZIONE GUADAGNI (CIG) AND CUBS INDICATOR

Note: The CIG series is expressed as the log of the difference from the historical average (1970-2015)

Source: INPS and European Commission 2016 Winter forecasts.

The estimation by means of the commonly agreed Bayesian Kalman Filter of the trend and the cycle of Total Factor Productivity with a measure of labour hoarding as the CIG  (instead of the capacity utilization index adopted so far) would lead to a different picture both on the historical period and on the forecast horizon.

TOTAL FACTOR PRODUCTIVITY: THE ESTIMATES BASED ON THE CIG INDICATOR
CYCLE-TREND DECOMPOSITION	GROWTH RATE IN TREND TFP
Source: European Commission, 2016 Winter Forecasts and own elaborations. Note: the priors used for the estimation of the TFP with the CIG indicator are the same as the Commission Services 2016 Winter Forecasts.

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The estimates of potential output, output gaps and structural balances with the enhanced methodology

The inclusion in the commonly agreed production function of the NAIRU series (instead of the NAWRU ones) and TFP trend resulting from the application of the labour hoarding measure (CIG) would lead to significant changes in potential output growth and output gaps as estimated according to the macroeconomic framework underlying the 2016 Commission services Winter Forecasts.

Under the enhanced specification, potential growth will remain on a downward path. Nonetheless, it will move in a less procyclical manner with respect to the official estimates produced by the Commission. Potential growth is thus estimated to be lower than Commission results in the year 2000-2002 and higher during the recent financial crisis, resulting negative only during the years 2012-2015.

Likewise, the output gaps under the enhanced specification will result significantly wider than what estimated in the 2016 Winter Forecasts. Based on such improvements, Italy’s output gap would amount to -4.5 percent of potential output in 2015 (vis-à-vis -2.9 percent estimated by the Commission), -3.4 percent in 2016 (vs. -1.5 percent) and -2.4 percent of potential output in 2017 (vs. -0.3 percent). Such values of the output gaps would translate into structural deficits of -0.1 percent of GDP in 2015 (instead of -1.0 percent estimated by the Commission), -0.7 percent in 2016 (vs. -1.7 percent) and -0.5 percent of GDP in 2017 (vs. -1.4 percent). According to these figures, and in line with OECD and IMF estimates, Italy would have broadly achieved its MTO already in 2015 and the deviation in 2016 would be justified by the request of budgetary flexibility under the Provisions of the Stability and Growth Pact (SGP).

Moreover, countries that reached the MTO in the year preceding the application of SGP flexibility clauses are allowed to depart from it for three years and only return to their MTO at T+4 (2019).

According to the enhanced output gap model, the closing of the output gap in 2017 would remain sharp, but the required structural effort would be much smaller than the one implied by the current Commission estimates.

POTENTIAL GROWTH AND OUTPUT GAPS WITH THE ENHANCED MODEL
POTENTIAL GROWTH	OUTPUT GAPS
Source: European Commission, 2016 Winter Forecasts and own elaborations.

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ALTERNATIVE MODEL: POTENTIAL GROWTH AND OUTPUT GAP
Years	Output Gap		Structural Deficit
	2016 Winter Forecasts	Enhanced Methodology	2016 Winter Forecasts	Enhanced Methodology
2011	-1.6	-1.5	-3.3	-3.3
2012	-3.3	-3.8	-1.2	-1.0
2013	-4.2	-5.2	-0.7	-0.4
2014	-3.9	-5.3	-0.9	-0.4
2015	-2.9	-4.5	-1.0	-0.1
2016	-1.5	-3.4	-1.7	-0.7
2017	-0.3	-2.5	-1.4	-0.2
SOURCE: EUROPEAN COMMISSION 2016 WINTER FORECASTS AND OWN ELABORATIONS.

III.4 IMMIGRATION EMERGENCY AND RELATED COSTS

The European Union is facing an unprecedented challenge represented by the flow of the refugees and asylum seekers, as a result of the conflict in the Mediterranean basin. Though stressing the uncertainty that surrounds the development of this type of phenomenon, the European Commission indicates the arrival of more than 1 million people in 2015, and projects the arrival of another 3 million by the end of 201721. The sharp increase in the arrivals of migrants has put considerable pressure on various Member States, putting their receptive capacities to a test and, in some cases, aggravating political and social tensions. Italy has been at the forefront in managing this crisis, assuming the responsibility of ensuring border control, including for other countries within the European Union, and carrying out huge rescue operations in the Mediterranean.

The current emergency is occurring within profoundly changed geopolitical framework, which requires a common response from Europe, with regard to:  the re-evaluation of asylum system mechanisms22, the safeguarding of human rights, and the management of external borders.  These challenges require a coordinated policy in order to supply immediate aid, and to plan transition and integration processes that can balance the short-term costs with benefits in the long term23.

In consideration of the drastic increase of refugees and asylum seekers, Italy’s Draft Budgetary Plan (DBP) of October 2015 requested the European Union to recognise the exceptional nature of the economic and financial impact of the phenomenon.

Starting in 2014, the number of people landing on Italy’s coast exceeded 150,000, which was more than triple the number registered in 2013, and was by far greater than: i) the trend of the past 20 years, and ii) the numbers registered in 2011 and 2012 at the time of the North African humanitarian emergency (Figure

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21 See the European Commission’s Autumn Forecasts (5 November 2015), Box 1.

22 Currently governed by EU Regulation No. 604/2013 of 26 June 2013 (Dublin III) which establishes the criteria for determining the Member State responsible for reviewing an application for international protection presented in one of the Member States by a citizen of a third country or a person without citizenship.

23 The current phenomenon should nonetheless not be confused with other trends of immigration for the purposes of work or joining family members, which have also been increasing in recent years in Italy. Foreign citizens residing in Italy amounted to 2.2 percent of the total population in 2000, with the number rising to 8.2 percent in 2015. Italy is, along with Ireland and Spain, one of the European countries witnessing the highest increases (Eurostat data).

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III.1). The data for the first quarter of 2016 confirm the exceptional nature of the situation, with approximately 15,000 migrants arriving from the sea, compared with approximately 10,000 for the same periods of 2015 and 2014.  Alongside these figures, there were another 2,000 arrivals by land during the winter months of 2016.

The people housed at reception facilities are also at peak levels. As of 31 March 2016, there were approximately 107,000 migrants in the more than 1,800 temporary facilities set up by the government for this purpose, inclusive of the system for the protection of asylum seekers: the number of migrants was thus almost double that at the end of 2014 and more than ten times higher than the average for the 2011-2013 period (Figure III.2). The number of unaccompanied minors has surpassed 10,000, creating an enormous challenge (vis-à-vis previous wages of migration) in terms of the adequacy of lodging, supervision, and the introduction to schooling. Asylum seekers more than tripled between 2013 and 2015, with the number of applications rising from 26,000 to more than 83,000.

FIGURE III.1: ARRIVALS OF MIGRANTS ON ITALY’S COASTS (1991-2015)

 

Source: Port authorities.

FIGURE III.2- MIGRANTS IN RECEPTION FACILITIES (2013 – 2016)

 

Legend: CPSA: Emergency healthcare and reception facilities; CDA: Reception facilities, CARA: Reception facilities for asylum seekers; SPRAR: System of protection for asylum seekers and refugees run by local entities.

Source: Interior Ministry.

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The activation and management of a welcoming system capable of dealing with the pressure entails an effort on the part of all levels of government24. The resources are almost entirely booked to the State budget. Italy’s DBP indicated expenditure related to the refugee emergency in the amount of €3.3 billion (0.2 percent of GDP) for each of the two years of 2015 and 2016.

With the publication of the Winter Forecasts, the European Commission announced it would be carefully monitoring the situation related to expenditure for the refugees, on the basis of the data supplied by the authorities of the Member States affected, so as to determine eligible amounts, including for the calculation of the structural borrowing, as provided by Article 5.1 and Article 6.3 of the EC Regulation No. 1466/97, and Article 3 of the Fiscal Compact25. The information will be used for an ex-post evaluation of possible deviations from the 2015 and 2016 objectives due to the additional costs related to the refugee emergency.

The estimate of the expenditure related to the refugee crisis has been updated to take into account subsequent developments and more in-depth study of the data (see Focus below). The budget impact of the immigration emergency, in terms of net borrowing and net of EU subsidies, is currently quantified as €2.6 billion for 2015 and forecast at €3.3 billion for 2016 (based on a constant scenario, namely without further exacerbation of the crisis). The change in the expenditure is equivalent to 0.03 percent of GDP in 2015, compared with 2014, and 0.04 percent in 2016, compared with 2015.

With only the incremental year-on-year expenditure for 2015 and 2016 being excludable from the SGP limits, Italy is at a disadvantage because, since 2014, it has been annually spending some 2.0-2.5 times the average annual expenditure sustained in 2011-2013. The immigration emergency expenditure incurred is mostly due to Italy’s geographic position, with the refugees considering it primarily as a country of transit. This situation, when considering the short-term costs incurred, reduces Italy’s potential to reap the medium-/long-term economic benefit generated by the integration of the migrants in the productive fabric, which instead will occur in the various countries of the refugees’ final destinations.

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24 The National Operational Plan for dealing with the extraordinary inflow of non-EU citizens was approved in July 2014, and ratified by Italy’s regions and local governments. The plan provided for: expanding the administrative staffing at police headquarters in order to speed up the identification of asylum seekers and processing asylum applications; shoring up the territorial commissions to accelerate the timing for examining applications for international protection; expanding the government’s reception facilities to accommodate more people; and acknowledging the need to ensure a smooth transition between primary- and secondary-assistance services.

25 These provisions allow for a temporary deviation from the objective of the achieving a balanced budget in ‘exceptional’ circumstances, or when ‘there are unusual events occurring that are not subject to the control of the contracting party affected, and that have significant repercussions on the public administration’s financial situation’.

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Expenditure for the immigration emergency

Without a stringent definition at a European level of the concept of ‘expenditure for refugees,’ Italy has proceeded (as have other countries) to make an independent estimate that takes into account the expenditure for taking in the refugees, for sea rescues and for the immediate repercussions on healthcare and education26.

Compared with the data presented in the DBP in October 2015, the entire historical series has been revised to take into account the following elements: calculation of the effects on borrowing, net of induced effects (taxes and social contributions); better definition of the expenditure strictly linked to taking in the refugees; revision of the healthcare expenditure to take into account the actual number of asylum seekers; preliminary data for 2015; and updating of the borrowing requirement estimated for 2016 on the basis of the number of people at the reception facilities at the end of 2015.

The Interior Ministry has responsibility for registering the migrants arriving (with the help through 2014 of the Ministry of Labour and Social Policies, with respect to unaccompanied minors). The key expenditures refer to: the management and maintenance of reception facilities, temporary structures and the system of protection for asylum seekers and refugees (SPRAR)27; the fund for unaccompanied foreign minors; the territorial commissions in charge of examining applications for recognition of refugee status; and administrative costs, including for the Interior Ministry’s operation of an information system and the personnel directly involved. In addition to the expenditure included in the State budget, there is an estimate of the costs sustained by local government (which vary significantly from one area to another) for the SPRAR and unaccompanied minors.

The sea rescues involve the personnel and assets of the armed forces, the port authorities and the financial police; the estimate of the expenditure incurred is based on a reconciliation of the costs associated with the rescue operations (split, where possible, into personnel expense, other current expenditure and capital expenditure for the vehicles used).

The quantification of the costs for the national healthcare service (NHS) is based on feedback from local healthcare units regarding expenditure for illegal immigrants; such costs are annually reimbursed by the Interior Ministry. Added to this is another expenditure as from 2013 for new asylum seekers who are not individually tracked because they have been directly registered within the NHS. With respect to education, the expenditure is estimated by considering the average unit cost for the number of foreign students entering the national school system for the first time in a given year. For 2015, the number of new foreign students was around 40,000.

Finally, in addressing the Syrian refugee emergency in Turkey, the Member States reached an agreement in March 2016 to set up a fund entitled the Refugees Facility for Turkey (RFT), which provides for a total contribution of €3 billion28. Italy’s portion is approximately €225 million, split over a period spanning several years.

No value has been assigned to the indirect burden of the migrants’ overall social integration into the country.

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26 Article 21 of Legislative Decree No. 142/2015 governs i) healthcare for asylum seekers, by referencing the provisions of the Consolidated Act on immigration (Legislative Decree No. 286/1998) and ii) the schooling obligation for unaccompanied minors or children of asylum seekers.

27 The national asylum programme was created in 2001 by the Interior Ministry, the National Association of Italian Municipalities, and the UN High Commissioner for Refugees, and formalised by Law No. 189/2002. The SPRAR was set up by the network of the local entities that tap the National Fund for Asylum Policies and Services. The SPRAR was set up as a network of secondary reception facilities used for the social integration of persons already having some form of international protection; howe

ver, given the increase of migrant flows, the SPRAR is also now active at the level of the first reception facilities.

28 More precisely, €1 billion to be paid by the European Union budget and €2 billion to be paid by the Member States, split according to gross national income.

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The most significant part of the expenditure refers to the reception facilities (more than 50 percent of the total in recent years), following by the cost of sea rescues (between 25 percent and 30 percent). These are primarily classified as current expenditure, even though capital expenditure has increased over the years in view of the physical expansion of the reception facilities, and the maintenance and upgrade of the assets needed for rescue operations, which also include depreciation of aircraft, ships and land transportation vehicles and equipment.

In order to determine the incremental expenditure stemming from emergency, the data were compared with the average expenditure incurred during ordinary conditions (namely, 2011-2013, net of the costs for the North African crisis, which caused an extraordinary inflow of refugees between 2011 and 2012 after the Arab Spring29). The differential between the expenditure incurred (net of EU subsidies) for dealing with the current humanitarian crisis and that of the 2011-2013 period is approximately €5 billion in cumulative terms (Figure R.1).

TABLE R.1 - ESTIMATE OF EXPENDITURE INCURRED FOR MIGRANT CRISIS. YEARS: 2011-2016
	2011	2012	2013	2014	2015	2016
In € mn
Total constant scenario	922	899	1,356	2,205	2,736	3,431
Total growth scenario	-	-	-	-	2,736	4,227
% of total
Sea rescue	32.8	22.5	35.4	44.5	28.6	25.4
Welcome	36.2	43.6	41.5	33.1	51.2	58.3
Healthcare and education	31.0	34.0	23.1	22.4	20.2	16.3
% of total
Current	95.7	93.0	78.7	84.6	90.7	87.7
Capital	4.3	7.0	21.3	15.4	9.3	12.3
In € mn
EU subsidies	94	65	101	160	120	112
Total, net of EU subsidies	828	834	1,255	2,045	2,615	3,319
% of GDP
Total, net of EU subsidies	0.05	0.05	0.08	0.13	0.16	0.20
Diff. respect to t-1	0.00	0.00	0.03	0.05	0.03	0.04
Note: The data do not include the expenditure related to the North African emergency, which was classified as such in 2011 and was officially ended on 1 January 2013. The growth scenario considers the arrival of: another approximately 1,000 minors each year at an average cost of €45 per day; another approximately 62,000 people at the government’s reception and temporary facilities, at an average cost of €32.50 per day; and approximately 3,500 asylum seekers and refugees added to the protection system at an average cost of €35 per day. Source: Analyses by MEF, State General Accounting Department.

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29 The ordinance of the head of the Civil Defence Department (No. 33 of 28 December 2012) governs the closing of the status of humanitarian emergency due to the exceptional inflow of migrants, and the return to the ordinary status as from 1 January 2013

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FIGURE R.1 - TOTAL EXPENDITURE FOR MIGRANTS:  CONSTANT SCENARIO VS GROWTH SCENARIO

 

Source: Analyses by MEF, State General Accounting Department.

The following tables provide the classification according to the European Commission’s formats for estimating the expenditure incurred for the refugee emergency that were sent to the Member States as part of fiscal surveillance procedures.

TABLE R.2 - IMPACT ON NET BORROWING BY ECONOMIC CATEGORY. YEARS 2011-2016 (IN € MN)
	2011	2012	2013	2014	2015	2016
1.Employee compensation (D.1)	97	83	81	84	88	89
2.Intermediate consumption (P.2)	190	199	218	347	430	349
3.Social services (D.62, D.63)	149	160	306	637	1,172	1,721
4.Subsidies (D.3)	-	-	-	-	-	-
5.Gross fixed investment (P.51)	40	63	289	340	254	423
6.Transfers in capital account (D.9)	-	-	-	-	-	-
7.Other	447	394	462	797	792	848
8.Impact on net borrowing (8)=Ʃ(1..7)	922	899	1,356	2,205	2,735	3,431
9. EU subsidies	94	65	101	160	120	112
10.Impact on borrowing, net of EU subsidies (10)=(8)-(9)	828	833	1,255	2,045	2,615	3,318
11. Total impact on nominal deficit, net of EU subsidies (% of GDP)	0.05	0.05	0.08	0.13	0.16	0.20
Note: The data do not include the expenditure related to the North African emergency, which was classified as such in 2011 and was officially ended on 1 January 2013. The table incorporates certain approximations where unit costs were not available by economic category. In particular, the current expenditure for defence was considered fully as intermediate consumption (by prevalence); the other item includes expenditure related to education, healthcare, the payments to Turkey (excluded from the EU budget) and the EU funds and related national co-financing. Source: Analyses by MEF, State General Accounting Department.

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TABLE R.3 - IMPACT ON NET BORROWING BY FUNCTIONAL CATEGORY. YEARS 2011-2016 (IN € MN)
	2011	2012	2013	2014	2015	2016
1. Arrivals and initial assistance	245	270	479	684	1,304	1,884
2. Transportation (including rescue operations)	347	281	526	983	838	882
3. Healthcare	75	87	138	208	244	250
4. Administrative costs (including the examination of asylum applications)	44	43	39	44	40	39
5. Aid to Turkey (excluded from EU budget)	0	0	0	0	0	67
6. Other costs and measures (education)	211	219	175	287	310	310
7. Impact on net borrowing (7) = Ʃ(1..6)	922	899	1,356	2,205	2,736	3,431
Note: The data do not include the expenditure related to the North African emergency, which was classified as such in 2011 and was officially ended on 1 January 2013. Source: Analyses by MEF, State General Accounting Department.

III.5FINANCIAL IMPACT OF NATIONAL REFORM PROGRAMME MEASURES

The grids provided as exhibits to the National Reform Programme are subdivided and published by the 10 policy areas30. The grids contain both updates of the measures approved in preceding years, and new measures emerging during the review of provisions going into effect between April 2015 and March 2016.

The measures are thoroughly described in the grids, with respect to both regulatory and financial details31. The financial effects in the grids are stated in terms of higher/lower revenue and higher/lower expenditure both for the State budget and the public administrations and quantified with reference to the related balances. Except for certain cases, the quantification of the impacts in the grids highlights the measures’ costs and benefits for Italy’s public finances, regardless of the financial coverage with respect to each measure. The following table summarizes the impact on the State budget32 of the measures contained in the grids, subdivided by area. For additional details about the measures, reference should be made to Chapter II.3 of the National Reform Programme.

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30 The grids and the ‘Guide to the interpretation of the grids’ are available online in the section of the EFD 2016 ‘NRP – Provisions organised by area of action (grids)’ http://www.mef.gov.it/documenti-pubblicazioni/doc-finanza-pubblica/index.html#cont1.

31 See ‘Guide to the interpretation of the grids’, ibidem.

32 This decision is mainly due to the significance of the central government in defining and implementing the measures. In order to analyse the impacts in terms of net borrowing, reference should be made to the column ‘Impact on the public budget’ for each policy area.

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TABLE III.7: FINANCIAL IMPACT OF MEASURES IN NRP GRIDS (in € mn)
	2015	2016	2017	2018	2019
Containment of public expenditure and taxation
Incremental expenditure	51	4,489	4,476	5,380	4,427
Incremental revenue	0	6,494	3,344	5,598	1,908
Lower expenditure	2,099	6,131	5,216	5,996	5,336
Lower revenue	0	20,091	14,935	15,394	12,217
Administrative efficiency
Incremental expenditure	3	498	346	209	197
Lower expenditure	0	3	9	9	9
Lower revenue	0	2	2	2	2
Infrastructure and development (1)
Incremental expenditure	451	1,231	684	672	793
Lower revenue	0	132	76	76	76
Products market and competition
Incremental revenue	0	15	15	15	15
Labour and pensions
Incremental expenditure	1,779	4,723	5,973	5,763	4,555
Incremental revenue	0	138	607	450	160
Lower expenditure	0	706	1,492	1,927	1,775
Lower revenue	0	599	946	1,114	1,114
Innovation and human capital
Incremental expenditure	1,019	3,375	3,219	3,227	3,023
Incremental revenue	0	16	0	0	0
Lower expenditure	0	7	7	7	4
Lower revenue	0	13	13	14	16
Support to businesses
Incremental expenditure	22	2,465	3,981	3,116	3,016
Incremental revenue	300	232	1,125	657	109
Lower expenditure	0	330	280	454	7
Lower revenue	0	738	5,422	5,831	4,467
Energy and environment (1)
Incremental expenditure	501	658	238	74	12
Incremental revenue	0	545	553	0	0
Lower expenditure	0	0	85	0	0
Lower revenue	0	106	1,103	927	11
Financial system
Incremental expenditure	0	2,756	103	103	103
Federalism
Lower revenue	0	6	6	5	5
1) Net of the amounts included in Table E provided as an exhibit to the 2016 Stability Law. Source: Analyses of the State General Accounting Department using data in Annex No.3 of the technical reports and information reported in official documents. The figures exclude the resources of the cohesion and action programmes, and the various funds earmarked for European initiatives.

III.6 TREND OF DEBT-TO-GDP RATIO

ISTAT’s revisions33 to GDP, as well as the revisions made by the Bank of Italy, resulted in a debt-to-GDP ratio of 132.5 percent for 2014, with an increase of 0.4 percent compared with the final figure used in the EFD Update in September 2015. The revision, which was an approximately 0.3 percent decrease of GDP, also incorporates a broader revision of the series from 1995 to 2012, effected by ISTAT, together with an upward increase of the debt (approximately 0.1 percent).

The final debt-to-GDP ratio for 2015 was 132.7 percent, a slight increase over 2014. After numerous years of rising (since 2007, the average increase has been 4.7 percent per year), the ratio essentially stabilised for the first time in 2015.

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33 See ISTAT press releases ‘GDP and general government borrowing’ 1 March 2016.

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The better-than-expected nominal GDP growth (+1.5 percent, with the GDP deflator equal to 0.8 percent) made it possible to keep the debt-to-GDP ratio in in line with that of the previous year.

Contributing to this result was i) the robust improvement in the general government borrowing requirement (which was approximately 3.2 percent of GDP, and declined by approximately €18 billion over 2014) and ii) the approximately €11 billion reduction of the Treasury’s liquidity, which prompted some easing of the debt issues for the purpose of covering the borrowing requirement. Two other factors facilitated a reduction in issues: i) the decrease of interest rates, with the Treasury able to place significant volumes of debt with a price above par (with a debt reduction impact of approximately €6 billion), and ii) the use of resources accumulated in the Fund for the Amortization of Government Securities for part of the reimbursements coming due during the year (an amount equal to €3.9 billion).

FIGURE III.3: PUBLIC DEBT DETERMINANTS  (% of GDP)

 

A comparison between the final figure for 2015 and the forecast in the 2015 EFD Update shows the September 2015 figure had been overestimated by approximately 0.1 percent. Such difference can be explained by higher-than-expected nominal GDP growth (by approximately 0.08 percent) and a slightly less dynamic trend of the debt stock when compared with the estimate in the Update (by approximately 0.05 percent). The reduction of the debt can be analysed in terms of an improvement in public finance balances, with an approximately 0.44 percent reduction of the general government borrowing requirement, when compared with the forecasts, and an increase of 0.38 percent with respect to other factors, including the carry-over effect of the incremental debt from the previous year, and the reclassification of the National Resolution Fund, as already described in this document.

After eight years of continuously rising, the debt-to-GDP ratio should experience an initial, albeit modest, decrease in 2016, and should end the year at

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132.4 percent compared with 132.7 percent for 2015. This projection reflects a primary surplus slightly higher than the total expected effect of the snowball component (which quantifies the automatic effect on the trend of the debt-to-GDP ratio resulting from the difference between interest and nominal GDP growth) and the stock-flow adjustment, which is forecast to be positive and sizeable for 2016.

The estimate of 132.4 percent for 2016 is, however, higher by approximately 1 percentage point of GDP compared with the estimate of September 2015. The downward revision of the GDP estimate accounts for about one-half of the difference, whereas the other half relates to the higher debt stock at year end. The higher level of the debt is mainly due to a higher general government borrowing requirement (increased by approximately 0.9 percent of GDP), that is partly mitigated by other factors, such as: i) issues above par and revaluation for the effect of inflation, which would cause a reduction in the borrowing requirement that is greater than that forecast in September 2015 (approximately 0.28 percent); and ii) the usage of the National Resolution Fund due to the market sale of the banks for which the fund was created (sale expected by the end of 2016). The privatisation proceeds for 2016 are pegged at 0.5 percent of GDP, remaining unchanged with respect to the forecasts of September 2015, and they do not affect the new debt-to-GDP ratio estimated for 2016.

In 2017, the ratio is expected to experience a more pronounced decline: the current estimate of 130.9 percent reflects a drop of approximately 1.5 percentage points of GDP compared with the current year. This decrease will be the result of a significant contraction of the general government borrowing requirement (approximately 0.8 percent of GDP), accompanied by a modest decline in the Treasury’s liquidity (approximately 0.3 percentage points of GDP), compared with the 2015-2016 levels, in consideration of the volume and distribution of the maturities of securities in 2018, which will require a considerably less significant commitment in 2017. In such year, instead, there should be a turnaround in the impact of inflation on the debt (in relation to securities indexed to inflation), given a projected rebound in the trend of prices in 2017. In essence, the year of 2017 will benefit from a primary surplus that should be well above the snowball component (which will reflect lower interest and higher nominal growth), against a stock-flow adjustment that is negative and very limited.

The level of the debt-to-GDP ratio in 2017 is approximately 3 percentage points higher than estimates of the EFD Update in September: 1.0 percentage point can be explained by a higher ratio from the previous year; 1.6 percentage points from the lower level of nominal GDP; and 0.4 percentage points from a debt stock above preceding estimates.

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TABLE III.8: PUBLIC DEBT DETERMINANTS (% OF GDP) (1)
	2014	2015	2016	2017	2018	2019
Level (net of support) (2)	128.8	129.1	129	127.5	124.7	120.6
Impact of support (3)	3.7	3.6	3.5	3.4	3.3	3.2
Level (inclusive of support) (2)	132.5	132.7	132.4	130.9	128.0	123.8
Changes compared with the previous year	3.5	0.2	-0.3	-1.5	-2.9	-4.2
Factors determining changes in public debt
Primary surplus (accruals basis)	-1.6	-1.6	-1.7	-2.0	-2.7	-3.6
Snowball effect	4.0	2.2	1.2	0.6	-0.2	-0.5
incl.: Interest (accruals basis)	4.6	4.2	4.0	3.8	3.6	3.5
Stock-flow adjustment	1.1	-0.4	0.2	-0.1	0.0	-0.1
incl.: Difference between cash and accruals	0.9	0.2	0.4	0.1	0.1	-0.1
Net accumulation of financial assets (4)	0.2	-0.1	-0.2	-0.2	-0.1	-0.1
incl.: Privatisation proceeds	-0.2	-0.4	-0.5	-0.5	-0.5	-0.3
Impact of debt valuation	-0.4	-0.1	0.0	0.2	0.2	0.3
Other (5)	0.4	-0.4	-0.1	-0.3	-0.2	-0.2
Memo item: Implicit interest rate on debt	3.6	3.2	3.1	2.9	2.9	2.8
1) Discrepancies, if any, are due to rounding. 2) Inclusive or net of Italy's portion of loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. As of 2015, the amount of such outflows was approximately €58.2 billion, inclusive of €43.9 billion for bilateral loans and loans through the EFSF and €14.3 billion for the ESM programme (see Bank of Italy, Supplement to the statistical bulletin: Public finance, borrowing and debt, No. 15 of 15 March 2016).The estimates include the proceeds from privatisations amounting to approximately 0.42 percent of GDP in 2015, 0.5 percent of GDP in 2016, 2017 and 2018, and 0.3 percent of GDP for 2019. In 2015, the provisional estimate of the public debt issued in March by the Bank of Italy was increased by approximately 0.1 percentage points of GDP following the reclassification within the General Government Account of the National Resolution Fund set up for the bailout of certain credit institutions (pursuant to Article 78 of Legislative Decree No. 180 of 16 November 2015). The estimates incorporate the assumption of a modest reduction of the MEF's liquidity balances (approximately 0.28 percent of GDP in 2017 and 0.14 percent of GDP in 2018). The interest rate scenario used for the estimates is based on implicit forecasts derived from the forward rates on Italian government securities with respect to the period for compiling this document. 3) Includes the effects of Italy’s contribution to the Euro Area: Greek Loan Facility (GLF), EFSF and ESM. 4) Include the effects of the contributions for the GLF and the ESM programme. 5) The other account is a residual balance with respect to the accounts above, and includes:  changes in the MEF's liquidity balances; statistical discrepancies; Eurostat reclassifications; and contributions to support the Euro Area as provided by the EFSF programme.

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TABLE III.9 GENERAL GOVERNMENT DEBT BY SUBSECTOR (1) (in € mn and % of GDP)
	2014	2015	2016	2017	2018	2019
Level, net of Euro Area financial aid (2)
General government bodies	2,075,686	2,113,172	2,155,558	2,184,250	2,200,874	2,197,585
% of GDP	128.8	129.1	129.0	127.5	124.7	120.6
Central government (3)	1,988,203	2,030,047	2,075,661	2,107,610	2,127,533	2,127,754
Local government (3)	140,073	139,910	136,681	133,424	130,125	126,615
Social security and welfare agencies (3)	213	117	117	117	117	117
Level, inclusive of Euro Area financial aid (2)
General government bodies	2,136,015	2,171,403	2,213,790	2,242,481	2,259,106	2,255,817
% of GDP	132.5	132.7	132.4	130.9	128.0	123.8
Central government (3)	2,048,532	2,088,278	2,133,893	2,165,841	2,185,765	2,185,986
Local government (3)	140,073	139,910	136,681	133,424	130,125	126,615
Social security and welfare agencies (3)	213	117	117	117	117	117
1) Discrepancies, if any, are due to rounding.
2) Inclusive or net of Italy's portion of loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. As of 2015, the amount of such outflows was approximately €58.2 billion, inclusive of €43.9 billion for bilateral loans and loans through the EFSF and €14.3 billion for the ESM programme (see Bank of Italy, Supplement to the statistical bulletin: Public finance, borrowing and debt, No. 15 of 15 March 2016).The estimates include the proceeds from privatisations amounting to approximately 0.42 percent of GDP in 2015, 0.5 percent of GDP in 2016, 2017 and 2018, and 0.3 percent of GDP for 2019. In 2015, the provisional estimate of the public debt issued in March by the Bank of Italy was increased by approximately 0.1 percentage points of GDP following the reclassification within the General Government Account of the National Resolution Fund set up for the bailout of certain credit institutions (pursuant to Article 78 of Legislative Decree No. 180 of 16 November 2015). The estimates incorporate the assumption of a modest reduction of the MEF's liquidity balances (approximately 0.28 percent of GDP in 2017 and 0.14 percent of GDP in 2018). The interest rate scenario used for the estimates is based on implicit forecasts derived from the forward rates on Italian government securities with respect to the period for compiling this document. The estimates incorporate assumptions of a modest reduction of the MEF’s liquidity balances (approximately 0.28 percent of GDP in 2017 and approximately 0.14 percent of GDP in 2018 and in 2019). The interest-rate scenario used for the estimates is based on implicit forecasts derived from forward rates on Italian government securities with respect to the period in which this document was prepared.
3) Including non-consolidated interest.

In 2018, the decrease of the debt-to-GDP ratio becomes very significant, with a drop of almost 3 percentage points over 2017, to the threshold of 128 percent. The two crucial factors driving this trend are: i) another significant decline of the public sector borrowing requirement (approximately 0.8 percentage points of GDP) and ii) nominal GDP growth, which should be back above 3 percent in 2018. The snowball component accordingly becomes negative, albeit only marginally, with nominal GDP growth exceeding interests (implicit rate), with a primary surplus that is even higher than the preceding year.

Compared with the 2015 EFD Update, the current estimate of the ratio in 2018 is higher by approximately 4.3 percentage points of GDP. In addition to 3 points of GDP acquired from the previous year, this increase is attributable to nominal growth of approximately 0.3 points below the previous forecast, and a more pronounced increase of the debt stock (by approximately 0.9 percentage points).

In the final year of the forecast, the decline of the debt-to-GDP ratio is even greater; at the estimated 123.8 percent of GDP, the ratio is some 4.2 percentage points of GDP lower than the 2018 level and almost 9 percentage points lower than the 2015 level. The drastic reduction of the general government borrowing

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requirement (approximately 1.3 percentage points of GDP) is accompanied by a confirmation of nominal growth slightly above 3 percent. These factors more than offset a more subdued estimate of privatisation proceeds (0.3 percent of GDP) compared the previous two years (0.5 percent), and a higher forecast impact on the debt of the rise of inflation and consequent effect on indexed securities (estimated to be about 0.3 percent of GDP). From the standpoint of the components of the change from 2018 to 2019, the surplus is significantly greater than the snowball effect (which remains negative), whereas the stock-flow adjustment is also negative, albeit only marginally.

A final factor worth noting is the estimated descent of the debt-to-GDP ratio in 2019 to the level of 120.6 percent of GDP when netting out Italy's portion of loans to Member States of the Euro Area (bilateral or through the EFSF) and the ESM capital contribution.

FIGURE III.4: TREND OF DEBT-TO-GDP RATIO (including and excluding loans to euro area countries)

 

III.7 THE DEBT RULE AND OTHER RELEVANT FACTORS

The debt rule was introduced as part of European economic governance with the Six Pack, and was fully ratified at a national level with the law that provides for including a balanced budget in the constitution (Law No. 243/2012). Based on data reported for 2015, the debt rule has become fully applicable in 2016, thereby ending the three-year transition period following the closing of the Excessive Deficit Procedure.

The rule provides that at least one of the following criteria is respected in order to ensure that the debt-to-GDP ratio falls at an appropriate pace to the threshold of 60 percent:

1. in the three years preceding the year of reference, the debt in excess of 60 percent of GDP is reduced by an average of one-twentieth (backward-looking benchmark);

2. the excess of debt with respect to the first benchmark is attributable to the economic cycle (using an indicator that shows the debt-to-GDP ratio that

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would have been obtained if, for the preceding three years, the numerator were to have been adjusted for the impact of the economic cycle and the nominal GDP in the denominator were to have grown at the same pace as potential GDP)

3. the correction occurs in the two years subsequent to the year of reference (forward-looking benchmark).

For the first time this year, the compliance with debt rule on the basis of the first two criteria will be assessed entirely with respect to the ‘historical’ data reported by ISTAT. Previously, during the transition period (2013–2015), the required Minimum Linear Structural Adjustment (MLSA) had to be extrapolated based entirely or partially on forecast data, in order to ensure that the debt-to-GDP ratio could converge smoothly toward the most favourable of the three benchmarks identified above.

In the event of deviation from the path of adjustment identified on the basis of the rule (whether during the transition or when the rule is fully in effect), the Commission has the option of recommending, to the ECOFIN Council, the opening of an excessive deficit procedure. In any event, Article 126(3) of the Treaty on the Functioning of the European Union also establishes that, in the event of the non-observance of the debt rule, the Commission may first prepare an ad-hoc report outlining all of the relevant factors explaining the deviation with respect to the benchmark.

During the transition phase, the change in the structural balance achieved during the years of 2013-2015, both in the scenario at unchanged legislation and in the policy scenario, was not sufficient to ensure the minimum fiscal adjustment that would have allowed the respect of the debt rule, mainly due to highly adverse cyclical conditions. Regardless of the scenario considered, the additional cumulative adjustment that was needed by 2015 for respecting the debt rule during the transition phase was equal to approximately 2 percentage points of GDP (Table III.10).

TABLE III.10: MINIMUM LINEAR STRUCTURAL ADJUSTMENT (MLSA)

	2013	2014	2015
Scenario at unchanged legislation
Minimum linear structural adjustment (a)	0.8	0.8	0.8
Change from previous year (b)		0.4	1.4
Planned change of the structural balance (c)	0.4	-0.2	0.2
Additional change needed (d)=(a)+(b)-(c)	0.4	1.4	2.0
Policy scenario
Minimum linear structural adjustment (a)	0.9	0.9	0.9
Change from previous year (b)		0.5	1.5
Planned change of the structural balance (c)	0.4	-0.1	0.2
Additional change needed (d)=(a)+(b)-(c)	0.5	1.5	2.1

Starting in 2016, the debt rule becomes fully applicable, with the direct verification of the convergence of the debt-to-GDP ratio toward the most favourable benchmark of the three described above. For Italy, such benchmark is the forward-looking benchmark. With reference to this level, it is noted that Italy will not respect the rule in 2016 (based on the 2018 forecasts), whether under the

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scenario at unchanged legislation or under the policy scenario. The ongoing significant gap with the benchmark is mainly due to the downward revision of the nominal GDP growth forecasts compared with the estimates contained in the DBP in October 2015.

More specifically, in the scenario at unchanged legislation, the debt-to-GDP ratio in 2018 would be equal to 127.3 percent with a gap of 2.5 percent of GDP compared with the forward-looking benchmark. Similarly, in the policy scenario, the debt-to-GDP ratio for 2018 would amount to 128 percent of GDP, with a gap of 3.0 percent of GDP.

Instead, when considering compliance with the rule in 2017, the gap compared with the forward-looking benchmark under both scenarios would be significantly reduced due to the acceleration of nominal GDP growth, the positive contribution of the snowball effect, and the increase in the primary surplus. In particular, in the scenario at unchanged legislation, the debt-to-GDP ratio for 2019 would amount to 123.5 percent, which is only 0.3 percent of GDP above the forward-looking benchmark, whereas, in the policy scenario, the ratio for 2019 would be 123.8 percent, a value that is only 0.2 percent of GDP above the forward-looking benchmark.

TABLE III.11 RESPECT OF THE DEBT RULE: FORWARD-LOOKING BENCHMARK

	Scenario at unchanged legislation		Policy scenario
	2016	2017	2016	2017
Debt in the year t+2 (% of GDP)	127.3	123.5	128.0	123.8
Gap compared with the forward-looking benchmark (% of GDP)	2.5	0.3	3.0	0.2

FIGURE III.5: MINIMUM LINEAR STRUCTURAL ADJUSTMENT AND DEBT RULE AT UNCHANGED LEGISLATION
Debt rule in 2016	Debt rule in 2017
Note: FLB = Forward-looking benchmark Source: MEF analyses using Stability Programme 2016 data.

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FIGURE III.6: MINIMUM LINEAR STRUCTURAL ADJUSTMENT AND DEBT RULE IN POLICY SCENARIO
Debt rule in 2016	Debt rule in 2017
Note: FLB = Forward-looking benchmark Source: MEF analyses using Stability Programme 2016 data.

Should the debt-to-GDP ratio deviate from its path of adjustment toward the value of 60 percent, European regulations establish that the European Commission may evaluate the existence of possible relevant factors for avoiding the opening of an excessive deficit procedure pursuant to Article 126(3) of the Treaty on the Functioning of the European Union. In February 2015, the European Commission found an excessive deviation compared with the debt-rule benchmark, which would have required a cumulative correction of the structural balance equal to 2.5 percentage points of GDP in 2016. For this reason, the European Commission prepared a report34 to evaluate the presence of relevant factors, and to decide on whether or not to open an excessive deficit procedure. Following an accurate analysis, supported by technical considerations provided by Italy’s government35, the Commission concluded that it did not consider the gap with respect to the Italy’s MLSA required by the debt rule as significant, and decided not to proceed with the opening of an excessive deficit procedure. In particular, the following were considered as mitigating factors: i) the respect of the preventive arm of the Stability and Growth Pact; ii) adverse economic conditions (low growth and low inflation), which, at the time, made it imprudent to implement a massive fiscal effort that would have made it even more difficult to reduce the debt-to-GDP ratio according to the stringent pace set by the debt rule, and, finally, iii) the start-up of structural reforms capable of increasing potential growth and therefore, the sustainability of the public debt in the medium term.

Again this year, in view of available data, Italy’s government believes that the continuation of a series of relevant factors justifies the deviation of the debt-

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34 See the Commission’s report pursuant to Article 126(3) of the Treaty, available at: http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-03_commission/2015-02-27_it_126-3_en.pdf.

35 In February 2015, the government produced an ad hoc report explaining the decision to deviate from the path of convergence toward the benchmark compatible with the debt rule, and cited numerous relevant factors, mainly regarding: the continuation of the effects of the economic crisis; the need to avoid the excessive fiscal consolidation (as required in order to observe the conditions established by the rule) would further exacerbate the trend of the public debt in relation to GDP; the continuing risks of deflation that would have made the required reduction of the debt even more difficult and counterproductive; and, finally, the costs related to the implementation of an ambitious plan of structural reforms capable of favouring the recovery of potential growth and the sustainability of the debt in the medium term. For additional information, see the MEF’s report, 2015, ‘Relevant Factors influencing the debt dynamic in Italy’.

(http://www.mef.gov.it/inevidenza/documenti/Note_on_relevant_factors_-_IT.pdf)

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to-GDP ratio compared with the trend provided by the rule. These factors, in particular, regard:

1) the possible risks of deflation and stagnation, as also confirmed by the 2016Winter Forecasts;

2) insufficient coordination of fiscal consolidation in the Euro Area, in which an excessively restrictive budget policy could aggravate the deflationary trends;

3) the undesired effects of excessive fiscal tightening, namely, the role of the fiscal multipliers, which are traditionally wider during and after a serious recession, and that, as a result of strong fiscal tightening, could cause further recessionary repercussions and thereby exacerbate GDP growth prospects in the medium term;

4) the short-term costs of the structural reforms, and specifically, the reforms of banking system reform, which will undoubtedly have highly beneficial effects on the investment climate in Italy and the country’s potential growth, and which have encountered implementation difficulties in the short term;

5) the delayed impact on the debt-to-GDP ratio of the policies currently pursued by the European Central Bank, which, in aiming to reduce interest rates, mainly favour countries whose public debt structure is marked by a short average life of the securities on the market;

6) the existence of criticalities in the methodology for the calculation of the output gap, which often lead to underestimations and results in contrast with macroeconomic intuition, and which could produce a distorted indication about the real extent to which Italy’s public finances comply with the requisites of the preventive arm of the Stability and Growth Pact;

7) the high costs of the refugee/migrant crisis, sustained by Italy;

8) Italy’s maintenance of significant primary surpluses in recent years, despite the existence of very unfavourable cyclical conditions, and the respect of the preventive arm of the Stability and Growth Pact during 2015 and of 2016;

9) the outstanding assessment about the long-term sustainability as also supplied by the S2 indicator, with Italy’s indicator being better than those reported for all other EU countries.

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IV.1SHORT-TERM SCENARIOS

This section aims to measure the extent to which the government's public-finance objectives for 2016-2019 are sensitive to certain macroeconomic shocks. The first part of this section describes how the impact on interest expenditure of a shock to the yield curve. The second part describes the simultaneous effect of different growth profiles and different yield-curve dynamics through a stochastic simulation of the debt-to-GDP ratio. Finally, the concept of fiscal risk is expanded to include, through the construction of an ad hoc indicator, the overall risk of fiscal stress for the public finances in the next year.

Sensitivity to interest rates

The analysis of sensitivity to interest rates1 is designed to determine the consequences of a significant shock to the government securities yield curve on interest expenditure for the next four years.

The analysis has been carried out considering the share of debt represented by domestic government securities, which amounted to approximately 97.10 percent of the entire stock of securities outstanding as of December 2015. The shock is applied to this aggregate, on the basis of the actual composition and subsequent future trend of the securities stock, as determined by the forecasts of interest expenditure and the debt-to-GDP ratio under the policy scenario.

The mix of the debt by instrument, considering all government securities (both domestic and foreign), was similar in 2015 to that for prior years, with a reduction of the short-term components and an increase of the nominal medium-/long-term components. Instead, vis-à-vis 2014, the variable-rate component (CCTeu and CCT) essentially stabilised in 2015, with a modest increase of the indexed securities to 6-month EURIBOR offset by a reduction of the stock indexed to 6-month BOTs, with the latter no longer offered as part of the new issues.  The securities linked to the HICP2, namely, the rate of inflation in Europe, were slightly higher as a percentage of the whole stock of the securities, including due to the absence of maturities during 2015. In addition, with reference to the BTP Italia, the securities indexed to the FOI3, net of tobacco products, namely, to the rate of inflation in Italy, showed a slight increase in 2015, which was the by-

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1 Further analysis on public debt management in 2015 will be presented in the Annual Report on Public Debt, which will be publisched in the forthcoming months.

2 Index of the Harmonised Index of Consumer Prices of the Euro Area.

3 Consumer Price Index for Households Headed by Manual Labourers and Clerical Employees (FOI).

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product of the absence of maturities and a significant reduction of the quantities issued with respect to prior years (partly achieved through the concentration of the supply in a single issue). Given the very limited activity in terms of international issues (even though it was slightly higher than in recent years), the percentage of foreign securities continued to decline.

Considering also the medium-/long-term fixed-rate segment (where there was a substantial increase in the instruments issued with maturity of more than 10 years and a downsizing of the 2-, 3- and 5-year maturities), the debt-issuing policy for 2015 achieved its objective of significantly reducing the risks to which the debt stock is exposed, and in particular, interest-rate and refinancing risks. When referring to the summary measurements of the debt’s exposure to aforementioned risks, the first factor to note is that the average life of all government securities at 31 December 2015 was 6.52 years versus 6.38 years at the end of 2014. In terms of managing the refinancing risk, the 2015 figure, which is the first increase after four years, represents a significant result, which is consistent with the efforts to reduce the rate of decrease of such variable undertaken by the Italian treasury during the previous years.

A similar trend is evident with respect to the Average Refixing Period4, the key indicator used for measuring interest-rate risk. With reference to the entire aggregate of government securities, such indicator, increased from 5.30 years at the end of 2014 to 5.42 years at the end of 2015. Such result represents an important turnaround after the decreases of recent years.

Given the aforementioned statistics, it is possible to conclude that in 2015 an important contribution in favour of a the debt management of subsequent years has been settled, thanks to a more uniform distribution over time of the maturities to be refinanced.

In addition, the structure of the debt appears more solid in terms of the capacity to recover from possible tensions that might emerge through sudden, unexpected increases in the yields on government securities being issued. Assuming a market shock entailing of an increase 100 basis points across the entire government securities yield curve (as given by the current mix of the stock of domestic securities) and the projected future trend of interest rates, the ratio of interest expenditure to GDP would increase by 0.13 percent in the first year, 0.28 percent in the second year, 0.40 percent in the third year and 0.50 percent in the fourth year. These results, in line with the summary indicators of risk mentioned above, show a more-than-marginal reduction in the first two years (quantifiable between 0.2 percent and 0.1 percent) of the debt’s sensitivity to interest rates vis-à-vis the same exercise carried out for the 2015 EFD, while the sensitivity for the final two years would essentially be the same as that projected with the 2015 EFD.

In 2015, general government interest expenditure, calculated on the basis of the ESA2010 accrual criterion, continued to decline, and totalled €68.4 billion for the year, with a reduction of almost €6 billion over 2014. In terms of GDP, the

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4 The Average Refixing Period (ARP) measures the average time to reset security coupons. In the case of zero-coupon and fixed-rate securities, the ARP is equal to the residual life. For floating-rate securities, the ARP is equal to the time remaining until the setting of the next coupon.

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reduction was a significant 0.4 percentage points, with the ratio going from 4.6 percent to 4.2 percent of GDP.

FIGURE IV.1: INTEREST EXPENDITURE AS % OF GDP AND WEIGHTED AVERAGE COST AT ISSUANCE

More than €5 billion of this reduction refers to the central government: in particular, approximately €4 billion with reference to government securities, and the remainder with reference to the balances held at the State Treasury by entities that are not part of general government. In both cases, a crucial factor was the role of decreasing interest rates, mostly due to the start-up of the ECB’s PSPP programme5, but also the result of falling inflation, both in Italy and Europe as whole, considering the impact of this variable on the related indexed securities (BPT€i and BTP Italia).

Although the decline of rates was not uniform across the entire government securities yield curve and the slope of the curve increased for most of the year, the emphasis on the issuance of longer term issues and the reduction of shorter term maturities did not prevent the achievement of a further decrease in the weighted average cost of at issuance, which went from 1.35 percent in 2014 to 0.70 percent in 2015 (Figure IV.1). On the other hand, including also BOTs , more than 60 percent of the total issues referred to maturities of five years or less: in other words, more than one-half of the issues entailed maturities whose market interest rates fell in a more pronounced manner.

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5 Public Sector Purchase Program (PSPP) inaugurated by the ECB in March 2015 (announced in January 2015) which mainly regards government securities.

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FIGURE IV.2: TREND OF GOVERNMENT SECURITIES YIELDS: 1-, 5- AND 10-YEAR MATURITIES

 

These results were achieved against a market backdrop with phases of extreme volatility, as can be noted from analysing not only the market yields on the securities outstanding, but also the trend of the differential with German securities (Figure IV.3).

The market influenced the reduction of interest expenditure through two other channels: the variable-rate securities (CCTeu and CCT) and the securities indexed to inflation (BTP Italia and BPT€i) making up part of the stock of the securities outstanding. The former obviously benefitted from the decreases in the 6-month EURIBOR and the 6-month BOT rate, which are known to reflect the trend of monetary policy. The persistent decline in inflation (with the FOI6 going from 0.2 percent in 2014 to -0.1 percent in 2015, and the European HICP7 dropping from 0.4 percent to 0 percent over the same period) contributed to significantly containing the interest burden in 2015 on the revalued portion of the indexed securities.

The projected trend of interest rates and inflation over the next few years (a continuous, albeit modest overall, increase in both variables over the next four years) and the significant reduction of the general government cash balance (which will allow for holding down the volumes of securities being issued) are the basis for an estimated decline in interest expenditure both in absolute value and as a percentage of GDP. The ratio of interest expenditure to GDP should stand at around 4 percent for 2016, and then decline further to 3.8 percent of GDP in 2017, before stabilising around 3.5 percent in the final year of the forecast period.

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6 FOI, excluding tobacco products, average annual change.

7 HICP excluding tobacco products, average annual change.

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FIGURE IV.3: BTP-BUND YIELD DIFFERENTIAL: 10-YEAR BENCHMARK

 

These results are based first of all on the current and projected level of the interest rates on future issues, as inferred by the forward rates on Italian government securities which shows historically low levels, especially on short-term maturities where yields are currently close to zero, if not negative8. On the other hand, almost one-half of all debt issues every year refers to short-term maturities, and this fact alone tends to highlight the impact on the public accounts of a market situation mostly determined by the non-convention monetary-policy adopted by the ECB over the past year. In addition, the slope of the Italian yield curve is expected to level off, albeit only modestly, in the next few years, thereby allowing the MEF to continue pursing its strategy of lengthening the debt maturities at a fully sustainable cost. Finally, the projected trend of inflation incorporated into both the national and European forecasts in line with the ECB’s most recent estimates is another factor that will contribute to reducing the cost of the securities indexed to such parameters.

All of these factors are therefore the basis for a significant correction of the estmates of interest expenditure vis-à-vis the EFD Update of September 2015: on average, the annual reduction is equivalent to around 0.37 percent of GDP, with the largest decrease (equivalent to around 0.50 percent of GDP) being forecast for 2019, with the accrual of the savings of previous years.

Stochastic simulations of the trend of the debt

In order to consider the uncertainty of the macroeconomic forecasts about both the yield curve and economic growth, the projection of the debt-to-GDP ratio of the policy scenario has been subjected to several stochastic simulations that incorporate jointly: i) the historical volatility of short- and long-term interest

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8 During the drafting period of  the EFD, all public debt securities with residual maturity shorter or equal to two years present negative yields.

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rates and; ii) the possibility of shocks to nominal economic growth9. The simulations have been carried out using the Montecarlo method, by applying interest-rate and GDP growth shocks to the trend of the debt-to-GDP ratio of the policy scenario. These shocks were obtained from 2,000 extractions, starting frm a normal distribution with a zero average and variance-covariance matrix observed in the 1990-2015 period. More specifically, it is assumed that the interest-rate shocks are either temporary or permanent. In addition, it is assumed that the temporary shocks to nominal GDP growth also have effects on the cyclical component of the primary surplus. Accordingly, it is possible to identify the distribution of the debt-to-GDP ratio for each year of the forecast horizon and for each individual shock. Each distribution is represented in probabilistic terms through a fan chart(Figure IV.4A and 4B).

As shown by this analysis, the debt stands at a median value of approximately 124 percent of GDP through the end of the time horizon in the event of temporary and simultaneous shocks to growth rates and interest rates, whose amplitude is based on the past volatility of such variables. The uncertainty about the 2019 results is relatively high on both the upside and downside, as shown by a difference of approximately 24 percentage points between the tenth and ninetieth percentiles of the distribution of the resulting debt.

In the event of a temporary shock, the debt-to-GDP ratio would tend to fall starting in 2016 for the first 60 percentiles, while the reduction for the eightieth percentiles would start in 2017, and beyond the ninetieth percentile, it would start only in 2018. In any event, even in the case of the most severe shocks (which are positioned above the ninetieth percentile), the debt-to-GDP ratio would tend to level off after having reached a peak of around 139 percent.

The permanent shock would result in a broader distribution of the values of the debt-to-GDP ratio with respect to the baseline scenario, but, in this case too, the trend of the debt is rising only as from the ninetieth percentile.

FIGURE IV.4A: STOCHASTIC PROJECTION OF THE DEBT-TO-GDP RATIO WITH TEMPORARY SHOCKS	FIGURE IV.4B: STOCHASTIC PROJECTION OF THE DEBT-TO-GDP RATIO WITH PERMANENT SHOCKS

Nota: Note: The graphs illustrate the tenth, twentieth, fortieth, fiftieth, sixtieth, eightieth and ninetieth percentiles of the distribution of the debt-to-GDP ratio obtained with the stochastic simulation.

Source: MEF analyses

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9 Berti K., (2013), “Stochastic public debt projections using the historical variance-covariance matrix approach for EU countries”, Economic Papers 480.

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Overall analysis of fiscal risks in the short term

The S0 indicator was introduced by the European Commission after the recent crisis, and is used for identifying the risks related to fiscal sustainability in the short term, namely, in the year subsequent to the current year. The method used for calcuating S0 is different from that used for identifying risks in the medium/long term, as described below; S0 is a composite indicator that uses a broad range of fiscal and financial variables, which, in the past, have had predicting power with respect to situations of fiscal stress (early warnings).

In particular, the analysis is based on the signal-approach statistical methodology which has been applied to 28 variables, subdivided into two sub-groups: fiscal and macro-financial variables. The method developed by the European Commission10 allows for endogenously determining the overall risk thresholds and the two sub-indices (fiscal and macro-financial). The total value of the S0 indicator together with that of the sub-indices, when compared with the respective thresholds, can be used for measuring the probability of an imminent crisis. In particular, an S0 value above the threshold indicates a potential risk in the short term, while sub-indices values above the respective thresholds indicate a risk concentrated, respectively, in the fiscal or macro-financial areas. If one of the sub-indices indicates a risk, but the the overall S0 indicator is kept below the threshold, it means that the risk in the short term is not particularly high.

As shown by Figure IV.5, overal fiscal risk (S0) in the short term is essentially limited, as was the case for 2015. The total index fell considerably after peaking in 2012, reaching a value of 0.19, which is below the threshold of 0.43, a value that highlights a high probability of a crisis over the next year. The improvement seen in 2015 concerned both sub-components, but more so with respect to the fiscal area where the indicator amounted to 0.32 (or below the threshold of 0.35). Instead, the macro-financial component had a value of 0.14 (well below the threshold of 0.45). However, with the optimal thresholds being common to all EU countries subject to multilateral supervision, these values represent only an initial indicator of the sustainability of a country in the short term. The detailed analysis of the individual variables making up the S0 indicator shows that several critical elements could emerge in the short term, mainly in relation to the high level of public debt (in this regard, see the heat map presented in Table IV.1).

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10 Berti, K., Salto, M. and Lequien, M., (2012), “An early-detection index of fiscal stress for EU countries”, European Economy Economic Papers No. 475.

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FIGURE IV.5: S0 INDICATOR AND SUB-COMPONENTS

Source: MEF analyses using data from 2015 Stability Programme; AMECO; WEO; EUROSTAT

TABLE IV.1: HEAT MAP ABOUT VARIABLES UNDERLYING THE S0 INDICATOR FOR 2015

Short-term risk from fiscal variables	Net borrowing (% GDP)	Primary balance (% GDP)	Cyclically adjusted budget balance (% GDP)	Stabilising primary balance (% GDP)	Gross public debt (% GDP)	Change of gross public debt (% GDP)	Short-term public debt (% GDP)
	Net public debt (% GDP)	Gross borrowing requirement (% GDP)	Interest-growth differential	Change of public expenditure (% GDP)	Change of final public consumption (% GDP)	Rapporto of vecchiaia a 20 years	5-year average of annual changes in age-related expenditure (% GDP)
Short-term risk from macro-financial variables	L1. International investment, net (% GDP)	L1. Net savings of households (% GDP)	L1. Private sector debt (% GDP)	L1. Fluw of private-sector credit (% GDP)	L1. Ratio of debt of financial companies	L1. Short-term debt of non-financial companies (% GDP)	L1. Short-term debt of households (% GDP) (*)
	L1. Value added of building sector (% total VA)	L1. Current balance (3-term moving average) (% GDP)	L1. Change (3 years) of REER (based on export deflator)	L1. Change of nominal unit labour cost	Yield curve	Real GDP growth rate	Per capita GDP in PPP (%US$)

Note: The red and green colours respectively indicate the variables above and below the optimal threshold. The asterisks (*) indicate that the 2015 value is calculated as the 2012-2014 three-year average in the absence of current data. L1 indicates that the variable is reported with the delayed value of one period.

Source: MEF analyses

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IV.2 MEDIUM-TERM SCENARIOS

Alternative scenarios and sensitivity analysis

This section presents deterministic projection scenarios for the debt-to-GDP ratio in the medium term. The objective is to extrapolate, over a horizon extending to 2027, the debt-to-GDP dynamic under differing assumptions that concurrently revise GDP growth, the yield curve and the primary budget balances.

The debt-to-GDP ratio is projected over the medium term using a deterministic model, by assuming the mix and structure-by-maturity used in this EFD as the starting point (see Section IV.1). In all of the scenarios, the projections of the debt-to-GDP ratio are carried out by endogenous estimation of the implicit interest rate which, in turn, considers different assumptions on nominal GDP growth which are reflected on the evolution of the yield curve and on primary surpluses. The alternative scenarios allow certain interactions between macroeconomic variables so that, for example, lower growth rates are matched with lower primary surpluses which, in turn, are associated with higher borrowing costs.

These medium-term simulations include:

· A baseline scenario that incorporates the GDP and potential GDP growth rates of the 2016 EFD macroeconomic policy scenario for the years of 2016-2019. For the years subsequent to 2019, consistent with the so-called T+10 methodology discussed by the Economic Policy Committee-Output Gap Working Group (EPC-OGWG), the potential GDP growth rate is projected on the basis of the production function model, assuming that the variables related to individual productive factors are extrapolated with simple statistical techniques or converge toward structural parameters (Table IV.2)11. Starting from 2019, the output gap is closed in the three years thereafter. Also as from 2019, the yield curve is held constant until the end of the forecast horizon, while the growth rate of the GDP deflator converges to 2.0 percent in 2022. In addition, on the basis of unchanged policies, the structural primary balance in 2019 is held constant at the reference level of 3.2 percent of GDP until 2027.

· A lower growth scenario in which it is assumed that, over the period 2015-2019, GDP growth is reduced by 0.5 percentage points each year vis-à-vis the  baseline scenario12. The series of potential GDP for 2015-2019 is obtained by applying the production function methodology agreed at a European level13. From 2019 to 2027, the NAWRU and Total Factor Productivity (TFP) converge toward the corresponding average values reported for the years of the crisis, while the output gap closes in 2022. Given expectations of lower real growth of the Italian economy and concerns about the sustainability of the public

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11 For further details about the methods for convergence to the structural values, see the Methodological Note provided as an exhibit to Section III.3.

12 The lower growth scenario over the 2016-2019 horizon is obtained by starting from the macroeconomic policy scenario in the 2016 EFD and assuming a slowdown of the global economy (both highly industrialised and emerging countries) with effects on international trade. The Italian economy would have less growth of exports and investments. The poorer prospects for the labour market would contribute to raising the unemployment rate.

13 In this regard, see the Methodological Note provided as an exhibit to Section III.3.

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finances, the yield curve for 2016-2018 will suddenly increase of 100 basis points vis-à-vis the yield curve in the baseline scenario. This increase is gradually reabsorbed as of 2019, with the yields falling back to those in the baseline scenario. For effect of the lower growth, the primary surplus14 is rojected to decrease in 2016-2019, whereas it is held constant at its reduced structural level thereafter until the end of the forecast horizon. The growth rate of the GDP deflator converges to 2.0 percent in 2022.

· A higher growth scenario in which it is assumed that, over the period 2016-2019, GDP growth increases by 0.5 percentage points each year vis-à-vis the baseline scenario15. The series of potential GDP for 2016-2019 is obtained by applying the production function methodology agreed at a European level. From 2019 and by the end of 2027, the NAWRU converges to the 2007 value, while Total Factor Productivity (TFP) converges toward the average pre-crisis values. The output gap is closed on a linear basis as of 2022. At the end of the ECB’s Quantitative Easing Programme in 2018, the yield curve shifts downward by 40 points before converging to the curve in the baseline scenario in 2021; this shift reflects higher real growth of the Italian economy. For effect of the higher growth, the primary surplus experiences a corresponding increase in 2016-2019, whereas it is held constant at its structural level thereafter until the end of the projection horizon. The growth rate of the GDP deflator converges at 2.0 percent in 2022.

Table IV.2 illustrates in more detail the characteristics of the shocksapplied to the main macroeconomic and public-finance variables underlying the trend of the debt-to-GDP ratio. Table IV.3 reports the values of the main macroeconomic and public-finance variables of the different scenarios for the 2016-2019 period, and the values of convergence at the end of the medium-term projection horizon.

On the basis of the macroeconomic and public-finance assumptions considered, Figure IV.6 confirms the declining trend of the debt-to-GDP ratio in the medium term in all three scenarios. In the baseline scenario, the debt converges to a level of 97.7 percent of GDP in 2027. The forward-looking benchmark for the debt rule would essentially be achieved, except for a gap of 0.2 percent of GDP in 2017 (on the basis of the 2019 projections), and wouold be fully achieved in 2018 (on the basis of the projections to 2020).

In the high-growth scenario, the debt-to-GDP ratio would fall even more rapidly, reaching 81.8 percent of GDP in 2027, which is approximately 16 percentage points below the comparable level in the baseline scenario. In this case, Italy would comply with the forward-looking debt rule as from 2016 (on the basis of the projections to 2018). In the low-growth scenario, instead, the debt-to-GDP ratio would continue to fall, but at a slower pace. The ratio would be equal to 117.7 percent in 2027, with a difference of approximately 20 percentage points

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14 For additional details about the methodology for deriving the alternative series of the primary surplus in the high and low growth scenarios, see the Methodological Note provided as an exhibit to Section III.2 of the 2015 EFD.

15 Mirroring the low-growth scenario, the high-growth scenario assumes more robust growth of the global economy (both highly industrialised and emerging countries) and better performance of international trade. The Italian economy would enjoy higher growth of exports and investments. The better prospects for the labour market would contribute to reducing the unemployment rate.

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compared with the baseline scenario. With the lower growth scenario, the debt rule would never be complied with over the projection period.

TABLE IV.2: SUMMARY OF MACRO-FISCAL SHOCKS
	Scenario:
	High growth	Baseline	Low growth
GDP	a) +0.5 p.p. per year compared with the baseline projections in 2016-2019 period	a) EFD baseline scenario (2016-2019)	a) -0.5 p.p. per year compared with the baseline projections in 2016-2019 period
	b) convergence from 2019 to 2027 to the pre-crisis value (2007) per NAWRU (7.8%) and pre-crisis average for TFP (0.5%)	b) convergence at structural parameters of the OGWG T+10 scenario	b) convergence from 2019 to 2027 to average values of crisis years for NAWRU (10 %), and TFP (0.05%)
Yield curve	a) yield curve equal to baseline scenario at start of 2018 (end of QE). Reduction of 40 bp through 2021	a) Yield curve from EFD policy scenario (2016-2019)	a) +100 bp increase in yield curve in the 2016-2018 period
	b) as of 2021, convergence at the values of the yield curve in the baseline scenario	b) Constant yield curve as from 2019	b) in 2019, gradual convergence to the values of the yield curve in the baseline scenario
Primary surplus	a) redetermination of primary surplus based on elasticity (sensitivity analysis) in the 2016-2019 period	a) primary surplus as per EFD policy scenario (2016-2019)	a) redetermination of primary surplus based on elasticity (sensitivity analysis) in the 2016-2019 period
	b) in 2020-2027, structural primary surplus constant at 2019 level	b) in 2020-2027, structural primary surplus constant at 2019 level	b) in 2020-2027, structural primary surplus constant at 2019 level
Inflation	a) increase of deflator as per high-growth scenario in the years 2016-2019	a) baseline scenario dal 2016-2019	a) reduction of deflator as per low-growth scenario in the years 2016-2019
	b) convergence to 2% between 2019 and 2022	b) convergence to 2% between 2019 and 2022	b) convergence to 2% between 2019 and 2022

FIGURE IV.6: MEDIUM-TERM FORECAST OF DEBT-TO-GDP RATIO IN HIGH AND LOW GROWTH SCENARIOS

 

Source: MEF.

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TABLE IV.3: SENSITIVITY TO GROWTH (PERCENTAGE VALUES)
		2015	2016	2017	2018	2019	…	2027
	High-growth scenario	1.5	2.8	3.1	3.7	3.8	…	3.3
Nominal GDP growth rate	Baseline scenario	1.5	2.2	2.5	3.1	3.2	…	2.9
	Low-growth scenario	1.5	1.6	1.9	2.5	2.6	…	2.2
	High-growth scenario	0.8	1.7	1.9	2.0	1.9	…	1.3
Real GDP growth rate	Baseline scenario	0.8	1.2	1.4	1.5	1.4	…	0.9
	Low-growth scenario	0.8	0.7	0.9	1.0	0.9	…	0.2
	High-growth scenario	-0.4	0.1	0.5	0.7	0.8	…	1.3
Potential GDP growth rate	Baseline scenario	-0.2	-0.2	0.2	0.4	0.5	…	0.9
	Low-growth scenario	0.0	-0.4	-0.1	0.1	0.3	…	0.2
	High-growth scenario	-3.5	-2.0	-0.6	0.7	1.7	…	0.0
Output gap	Baseline scenario	-3.6	-2.3	-1.1	-0.1	0.7	…	0.0
	Low-growth scenario	-3.5	-2.6	-1.6	-0.8	-0.2	…	0.0
	High-growth scenario	-2.6	-2.2	-1.3	0.0	1.4	…	1.6
Net borrowing	Baseline scenario	-2.6	-2.3	-1.8	-0.9	0.1	…	0.4
	Low-growth scenario	-2.6	-2.9	-2.9	-2.6	-2.0	…	-1.1
	High-growth scenario	-0.7	-1.1	-1.0	-0.4	0.5	…	1.6
Cyclically adjusted net borrowing	Baseline scenario	-0.7	-1.1	-1.2	-0.9	-0.3	…	0.4
	Low-growth scenario	-0.7	-1.5	-2.0	-2.1	-1.9	…	-1.1
	High-growth scenario	1.6	2.0	2.7	3.8	5.0	…	4.1
Primary surplus	Baseline scenario	1.6	1.7	2.0	2.7	3.6	…	3.2
	Low-growth scenario	1.6	1.3	1.3	1.7	2.2	…	2.4
	High-growth scenario	3.5	3.1	3.0	3.4	4.1	…	4.1
Cyclically adjusted primary surplus	Baseline scenario	3.5	2.9	2.6	2.8	3.2	…	3.2
	Low-growth scenario	3.5	2.7	2.2	2.1	2.4	…	2.4
	High-growth scenario	3.2	3.1	3.0	2.9	2.8	…	2.8
Implicit interest rate	Baseline scenario	3.2	3.1	2.9	2.9	2.8	…	2.8
	Low-growth scenario	3.2	3.1	3.1	3.1	3.1	…	2.8
	High-growth scenario	132.7	131.3	128.3	123.5	117.1	…	81.8
Public debt	Baseline scenario	132.7	132.4	130.9	128.0	123.8	…	97.7
	Low-growth scenario	132.7	133.8	134.4	133.6	131.8	…	117.7

FOCUS Medium-term trend of debt in a low-growth and low-inflation scenario Both the 2016 EFD baseline and alternative scenarios assume that the ECB's quantitative easing (QE) programme can aid in driving inflation quickly back to the target of 2 percent in the next few years, thereby dispelling the risk of deflation. However, since the start of the QE programme, the risks of deflation and/or lower inflation have not yet been completely eliminated. Accordingly, in order to assess the  the medium-term pattern of the debt-to-GDP ratio in a context of deflation and persistent low inflation,  two additional deterministic scenarios which, shock the low-growth one have been built . The first alternative scenario assumes that, despite the QE programme  both Italy and Europe are caught in a deflationary spiral, (“QE failure scenario”). As from 2016, the rate of change of the GDP deflator contracts significantly vis-à-vis the figure in the low-growth scenario, remaining in negative territory until the end of 2018. Thereafter, the GDP deflator resumes on a positive growth trend, although without getting near the target of 2 percent, and converging instead toward the threshold of 1.0 percent in 2022. As a result of the deflation,

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the primary surplus of the low-growth scenario is reduced further and permanently by 1/4 percent for each point of  lower inflation16 with respect to the reference scenario.

DEFLATION SCENARIOS: DESCRIPTION OF WORKING ASSUMPTIONS
	QE failure scenario	Low-growth scenario	Decoupling versus Euro Area inflation and nominal devaluation
GDP	a) -0.5 p.p. per year compared with baseline projections for 2016-2019	a) -0.5 p.p. per year compared with baseline projections for 2016-2019	a) -0.5 p.p. per year compared with baseline projections for 2016-2019
	b) convergence in 2019-2027 to average values of the crisis for NAWRU (10 %), and TFP (0.05%)	b) convergence in 2019-2027 to average values of the crisis for NAWRU (10%), and TFP (0.05%)	b) convergence to structural parameters, such as OGWG T+10 in baseline scenario
Yield curve	a) increase in yield curve (+100 bp) in the 2016-2018 period	a) increase in yield curve (+100 bp) in the 2016-2018 period	a) increase in yield curve (+100 bp) in the 2016-2018 period
	b) in 2019 gradual convergence to the values of the yield curve in the reference scenario	b) in 2019 gradual convergence to the values of the yield curve in the reference scenario	b) in 2019 gradual convergence to the values of the yield curve in the reference scenario
			c) increase in interest expenditure due to repayment of debt indexed to Euro Area inflation
Primary surplus	a) redetermination of primary surplus based on elasticity (sensitivity analysis) in 2016-2019	a) redetermination of primary surplus based on elasticity (sensitivity analysis) in 2016-2019	a) redetermination of primary surplus on basis of elasticity (sensitivity analysis) in 2016-2019
	b) deflation impact on primary surplus: -0.2% permanent for 1 percentage point of reduction of GDP deflator		b) deflation impact on primary surplus: -0.2% permanent for 1 percentage point of reduction of GDP deflator
	c) in 2020-2027, structural primary surplus constant at 2019 level	c) in 2020-2027, structural primary surplus constant at 2019 level	c) in 2020-2027, structural primary surplus constant at 2019 level
Inflation	a) reduction of the deflator as per low-growth scenario in 2016-2019	a) reduction of the deflator as per low-growth scenario in 2016-2019	a) reduction of the deflator as per low-growth scenario in 2016-2019
	b) deflation assumption – further reduction of GDP deflator vis-à-vis low-growth scenario: 1 % in 2016, 1.5% in 2017-2018 and 1.25% in 2019 (negative deflator in 2016-2018, and then a gradual increase)		b) deflation assumption – further reduction of GDP deflator vis-à-vis low-growth scenario: 1 % in 2016, 1.5% in 2017-2018 and 1.25% in 2019 (negative deflator in 2016-2018, and then a gradual increase)
	c) convergence to 1% between 2019 and 2021, and constant thereafter	c) convergence to 2% between 2019 and 2021	c) convergence to 1% between 2019 and 2021, and constant thereafter

The second alternative scenario to the low-growth scenario is similarthe one previously describer, but its objective is to assess the assumption of decoupling. Under this assumption, a mix of deflation (or low inflation) and structural policies increases Italy’s overall competitiveness, but the level of the prices over the medium term remains

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16In case of deflation, the non-indexing of taxation rates can push large segements of taxpayers into lower tax brackets. In addition, the elasticity of the government revenues to prices can be significantly different from 1.0, leading to sizeable losses of tax revenue. Similarly, in the presence of nominal rigidities or previous multi-year contractual agreements (for investment projects or interest payment), there could be large segments of public expenditure that have a delayed reaction or no reaction to the deflationary shock. Accordingly, it is valid to assume sharply deteriorating primary balances as a result of low inflation or deflation. Recent empirical studies show that a permanent deterioration equivalent to approximately 0.4 percent of GDP of the primary balance can be expected on average for a reduction of the inflation rate equal to 200 basis points. In this regard, see: End N. et al., 2014, Sailing with no wind: ‘The Impact of Deflation and Lowflation on Fiscal Aggregates’, IMF research bulletin.

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permanently below the European average, which instead converges to the target of 2 percent. In order to take into account Italy’s competitiveness gains, this scenario assumes that the medium-term growth rate of potential GDP reverts to that assumed in the baseline scenario. At the same time, this second scenario also assumpts a negative impact on the public finances due to the share of Italy’s public debt (equal to approximately 7 percent of the total at the end of 2015) indexed to a higher rate of inflation at a European level17. The table below summarises the assumptions regarding the two alternative scenarios to the low-growth scenario, while the table thereafter presents main results of the simulations.

DEFLATION SCENARIOS: MAIN RESULTS
		2015	2016	2017	2018	2019	…	2027
	Low-growth scenario	1.5	1.6	1.9	2.5	2.6	…	2.2
Nominal GDP growth rate	QE failure scenario	1.5	0.5	0.4	0.9	1.4	…	1.2
	Decoupling scenario	1.5	0.5	0.4	0.9	1.4	…	1.2
	Low-growth scenario	0.8	0.7	0.9	1.0	0.9	…	0.2
Real GDP growth rate	QE failure scenario	0.8	-0.4	-0.1	0.1	0.3	…	0.2
	Decoupling scenario	0.8	0.7	0.9	1.0	0.9	…	0.2
	Low-growth scenario	1.6	1.3	1.3	1.7	2.2	…	2.4
Primary surplus	QE failure scenario	1.6	1.1	0.8	0.9	1.2	…	1.3
	Decoupling scenario	1.6	1.1	0.8	0.9	1.2	…	1.2
	Low-growth scenario	3.2	3.1	3.1	3.1	3.1	…	2.8
Implicit interest rate	QE failure scenario	3.2	3.1	3.0	2.9	3.0		2.7
	Decoupling scenario	3.2	3.1	3.0	3.1	3.1		3.1
	Low-growth scenario	132.7	133.8	134.4	133.6	131.8	…	117.7
Public debt	QE failure scenario	132.7	135.3	138.4	140.2	140.8		144.8
	Decoupling scenario	132.7	135.3	138.5	140.6	141.4		147.1

As shown in the chart that follows, Italy's public debt remains at high levels over the medium term in the alternative deflation scenarios, but the debt does not exhibit any explosive trend. The results also show that although the inflation-indexed debt allows for cushioning the increase of the total debt stock when prices are generally falling, in a situation of prolonged deflation, the debt-to-GDP ratio would increase (or not fall), including in the presence of large primary surpluses. Finally, the results of these simulations show the extent to which the return to a higher inflation rate (closer to the 2 percent target) is critical for ensuring that Italy's debt will be moving toward threshold of 60 percent of GDP in the medium term

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17 The simulation takes into consideration that, given the current composition of  the debt stock, vis-à-vis the negative impact due to the share of  debt indexed to EU inflation, there is a positive impact deriving from a share of securities indexed to domestic inflation which amounts approximatevily to 4.8 percent of total debt at the end of 2015.

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DEBT-TO-GDP RATIO IN DEFLATION SCENARIOS (PERCENTAGE VALUES)

 

IV.3LONG-TERM SCENARIOS

This section presents the results of the analysis of medium-/long-term debt sustainability through the updating of the projections of age-related expenditure and the traditional sustainability indicators. The timeline of reference is extended out to 2060 on the basis of the methodology agreed within the Economic Policy Committee – Working Group on Ageing (EPC-WGA), which benefits this year from Eurostat's new demographic projections (EUROPOP2013).

The impact of population ageing on fiscal sustainability

In line withthe methodological indications agreed at a European level as part of the EPC-WGA, Italy normally develops medium-/long-term projections in relation to five components of age-related expenditure: public expenditure for pensions, healthcare expenditure, long-term care (LTC) expenditure for the elderly and disabled, education expenditure and expenditure for social safety nets18.

The projections incorporate the demographic and macroeconomic assumptions underlying the baseline scenario defined and agreed at the level of the EPC-WGA19, as appropriately adjusted to consider the most recent developments in public finance and the short-term EFD macroeconomic scenario20.

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18 The projections are done on the basis of the long-term forecasting model of the State General Accounting Office.

19 European Commission-Economic Policy Committee (2014), 2015-Ageing Report: Underlying assumptions and Projection Methodologies.

20 In particular, the baseline EPC-WGA  projection scenario has been modified to take into account the following  modifications : i) national accounting data updated to 2014 and the data published by Istat with its note of 1 March 2016, for the year of 2015; ii) the 2016 EFD macroeconomic scenario at unchanged legislation; and iii) the adjustments needed for reconciling the short-term macroeconomic projections with the medium-/long-term structural data set out in the EPC-WGA's 2015 baseline scenario.

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The demographic assumptions used are those related to the Eurostat baseline long-term projection scenario, with base year of 2013. For Italy, this scenario provides for: i) an average net annual inflow of immigrants just under 310,000, with an increasing profile for the first 15 years and a decreasing profile thereafter; ii) average life expectancy in 2060 of 85.5 years for men and 89.7 years for women ; and iii) a total birth-rate of 1.61 in of 2060.

As to the macroeconomic variables, the projections incorporate the national accounting data until 2015. For the years 2016-2019, the assumptions about growth, constant prices and current prices are consistent with the macroeconomic framework outlined in the 2016 EFD. For the long term, the structural assumptions of the 2015 EPC-WGA baseline scenario were used, and appropriately reconciled, in the transitory phase, with short-term trends21. The long-term trends of the macroeconomic variables, as inferrd by the assumptions agreed by the EPC-WGA for the baseline scenario, provide that the average annual rate of change in real productivity will grow to reach 1.7 percent in 2035 and remain constant for 15 years thereafter before dropping to around 1.5 percent toward the end of the projection period. The employment rate for the 15-to-64 age bracket is projected to rise from 56.3 percent in 2015 to 60.3 percent in 2060. The interaction of these assumptions with demographic trends will result in an average real GDP growth rate of around 1.5 percent per year during the 2015-2060 period. Starting from 2020, the GDP deflator and the inflation rate are assumed to equal to 2.0 percent.

The projections reported in Table IV.4 have been updated on the basis of the scenario at unchanged legislation.  In addition to the legislative developments already included in the 2015 EFD, the forecasts consider the measures adopted thereafter, and in particular, with the 2016 Stablity Law.

With reference to pension expenditure, the forecast incorporates the provisions of the 2016 Stablity Law with regard to safeguarded workers (so-called seventh safeguarded group), a one-year extension of the experiment related to the so-called “women’s option” and the extension to 2017-2018 of the measure introduced in 2013 whereby state pensions for retirement totalling more than three times the minimum are not indexed to inflation. With reference to healthcare expenditure, the projections include the measures to hold down regional spending22 provided by 2016 Stablity Law and the application of the provisions provided by said law with respect to contract renewals.

With reference to the social safety nets, the forecast considers both the refinancing of the exceptional social safety nets for 2016 and the effects of the increased benefits as provided by decrees implementing the Jobs Act23. With reference to expenditure for education, the projections consider the

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21 Such reconciliation only regarded employment variables since the trend of productivity in the EPC-WGA's baseline scenario has been confirmed as from 2025. In particular, the employment differences evidenced in 2019 (coming from the comparison of the EPC-WGA baseline scenario and the short-term macroeconomic scenario at unchanged legislation included in the 2016 EFD) are gradually zeroed out over 15 years whereas the differences in the unemployment rates have been zeroed in 5 years.

22 The 2016 Stability Law outlined measures to cut 2016 healthcare expenditure in the amount of €1,783 million. In addition, the law provides for a contribution of the healthcare sector to the total budget for the regions. This contribution was defined in the State-Region accord of 11 February 2016, and amounts to €3,500 million in 2017, and €5,000 million in 2018.

23 See Legislative Decree No. 22/2015 and Legislative Decree No. 148/2015 for implementing Law No. 183/2014.

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appropriation provided by the 2015 Stability Law to be used for an extraordinary hiring programme, and the provisions of the 2016 Stability Law regardin contract renewals.

TABLE IV.4: 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	49.9	50.5	49.3	50.1	50.6	50.6	50.6	50.4	49.8	48.8	47.8
Incl.:
- Age-related expenditure	27.5	28.3	27.2	27.5	27.7	28.1	28.3	28.4	28.0	27.5	27.1
Pension expenditure	14.8	15.8	15.3	15.5	15.7	15.9	15.9	15.6	15.0	14.3	13.9
Healthcare expenditure	7.0	6.9	6.5	6.7	6.9	7.1	7.2	7.4	7.5	7.6	7.6
Incl.: LTC	0.8	0.8	0.8	0.8	0.8	0.8	0.9	1.0	1.0	1.1	1.1
LTC for elderl and disable	1.0	1.0	1.0	1.1	1.1	1.1	1.2	1.3	1.4	1.5	1.5
Education expenditure	3.9	3.7	3.5	3.4	3.4	3.4	3.4	3.5	3.6	3.6	3.6
Unemployment benefits	0.7	0.9	0.9	0.7	0.7	0.6	0.6	0.6	0.6	0.6	0.6
- Interest expenditure	4.3	4.2	4.0	4.5	4.8	4.5	4.2	4.0	3.7	3.3	2.7
Total revenue	45.6	50.5	50.4	50.4	50.4	50.3	50.3	50.3	50.3	50.3	50.3
Incl.: property income	0.5	0.7	0.6	0.6	0.5	0.5	0.5	0.5	0.5	0.5	0.5
ASSUMPTIONS	%
Labour productivity growth rate	2.6	-0.1	0.5	0.6	1.2	1.7	1.7	1.7	1.7	1.6	1.5
Real GDP growth rate	1.7	0.8	1.3	1.4	1.4	1.6	1.5	1.5	1.6	1.6	1.5
Male participation rate (20-64)	78.4	78.8	79.5	79.7	78.9	78.2	77.9	77.8	77.8	77.7	77.8
Female participation rate (20-64)	54.6	58.1	60.6	61.4	61.9	62.3	62.7	62.9	63.0	63.2	63.1
Total participation rate (20-64)	66.3	68.4	70.0	70.6	70.4	70.3	70.4	70.5	70.5	70.6	70.6
Unemployment rate	8.4	11.9	9.6	8.8	8.2	7.5	7.1	7.1	7.1	7.1	7.0
Population of age 65 and over/total population	20.4	21.7	22.3	23.4	25.1	27.1	28.8	29.7	29.9	29.9	30.0
Old age dependency ratio (65+/[20-64])	33.6	36.4	37.8	40.2	44.3	49.4	54.2	57.0	57.7	57.9	58.0
Note: The 2016-2019 four-year period incorporates growth assumptions in line with the indications provided in the short-term macroeconomic scenario set out in the 2016 Stability Programme Update. For the years thereafter, the structural assumptions of the appropriately reconciled 2015 EPC-WGA baseline scenario have been used.  The national accounting data have been used for expenditure on social benefits through 2015.  For the 2016-2019 period, the projected values are in line with those underlying the the EFD public finance framework. The projection for healthcare and the long-term care expenditure has been carried out according to the reference scenario methodology. The expenditure for education includes the International Standard Classification of Education (ISCED) levels of education 1-6, according to the OECD classification; it does not include expenditure for life-long learning and pre-primary schools. The rounding to the first decimal point may cause the discrepancies with the values presented in the table.
Source: MEF analyses using the State General Accounting Department long-term projection model.

Turning to the trend of the individual components of age-related expenditure, it is noted that the ratio between pension expenditure and GDP declines starting in 2015-2016 to a level of 15.3 percent of GDP in 2020, with such decrease attributable to more favourable economic growth and the gradual continuation of the process to tighten up the minimum requisites for pension eligibility. Later, the ratio starts to grow anew, hitting 15.9 percent of GDP around 2035. In the final phase of the projection period, the ratio of pension expenditure to GDP falls rapidly, to reach 13.9 percent of GDP in 2060.

The healthcare expenditure projection is based on the so-called reference scenario methodology which incorporates both the effects of population ageing and the effects of other factors capable of affecting the trend of healthcare expenditure24. After initially falling as of 2015 due to the effect of measures to

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24 The reference scenario applied from 2020 contemplates the following for the acute component of the healthcare expenditure: i) the partial application of the dynamic equilibrium method, according to which only 50 percent of the increase in life expenctancy are translated in years spent in good health conditions; ii) the trend in unitary costs moves in line with per capita GDP; iii) unitary cost elasticity with respect to per capita GDP is assumed above 1.0 (the elasticity falls on alinear basis during the projection period, going from an initial level of 1.1 to 1.0 in 2060). With regard to the LTC component of healthcare expenditure, the reference scenario provides for: i) the partial application of of the dynamic equilibrium method, ii) the trend in unitary costs  linked to productivity, and iii) the elasticity of the unit cost to productivity equal to 1.0 for the entire forecast period.

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contain spending (as provided by previous Stability Laws), the forecast of the ratio between healthcare expenditure and GDP has an increasing profile from 2020 and amounts to around 7.6 percent of GDP in the final decade of the forecast period.

The projection of the socio-assistance component of public expenditure for long-term care (LTC) refers to both  accompanying person allowances (80 percent) and socio-assistance services provided at the local level (20 percent)25. After remaining initially stable, the total expenditure for LTC presents a growing profile in terms of GDP that extends over the entire projection period, attaining  1.5 percent in 2060.

The projections of expenditure for social safety nets in relation to GDP goes from 0.7 percent in 2010 to 0.9 percent in 2015, before gradually descending to a value of approximately 0.6 percent as of the second half of the forecast period.

Finally, the projections of expenditure for education in relation to GDP is consistent with the aggregate of expenditure defined within the EPC-WGA26. The ratio of expenditure education to GDP shows a gradually decreasing trend, that extends out for approximately 15 years. As from 2020, this reduction is essentially the result of a decrease in the student population caused by demographic trends. The ratio then starts growing modestly in the final part of the projection period, to hit around 3.6 percent of GDP in 2060.

FOCUS Pension system reform The new rules introduced by the reform adopted with Law No. 214/2011 have significantly changed the pension system, improving its medium-/long-term sustainability and ensuring greater equity among generations. The reform foresees the extension of the notional defined contribution system to all workers as of 2012, including, pro-rata, the workers who, on the basis of preceding legislation, would have received a pension calculated according to the earnings-related system (namely, all individuals who had made more than 18 years of contributions as of 31 December 1995). In line with the regulatory-institutional structures of most European countries, the reform confirms two types of retirement: a) old-age retirement which requires at least 20 years of contributions and an age requirement set by law27; and b) early retirement at an age below the mandatory age, but with a longer period of contributions28.

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25 With reference to accompanying person allowances (cash benefits), the amount of the benefits  is structurally tied to the trend in per capita GDP as from 2021, in line with the methodology agreed at the level of the EPC-WGA.  For the socio-assistance services provided locally,  the projections of the expenditure as a ratio of GDP has been carried out in accordance with the assumptions of the baseline scenario, as defined for the healthcare component of the expenditure for LTC. For additional details, see: MEF-RGS (2015), Report No. 16, Chapter 4.

26 The definition of expenditure for education agreed within the EPC-WGA includes the International Standard Classification of Education (ISCED) levels of education 1-6, thereby excluding pre-prmary school (ISCED 0) and life-long education for workers (see European Commission, Special Report No. 1/2006). The expenditure aggregate has been constructed on data sourced from UNESCO/OECD/EUROSTAT (UOE) (see European Commission, The 2015-Ageing Report: Underlying Assumptions and Projecting Methodologies, 2014). The projections incorporate the updating of UOE data with respect to the 2011 financial year.

27 In 2016, 66 years, 7 months for men and women in the public sector, and 65 years, 7 months for full-time workers in the private sector (+6 months for self-employed workers). In any event, as from 2021, the age requisite may be no less than 67 for all workers, as adjusted thereafter to increases in life expectancy.

28 The minimum requirement for contributions in 2016 is 42 years, 10 months for men and 41 years and 10 months for women, as adjusted thereafter to increases in life expectancy. Workers enrolled in the pension system since 1 January 1996 may retire and receive their pensions three years before the statutory retirement age on the condition that they have earned a minimum pension amount (approximately €1,200 euro in 2012, as adjusted thereafter on the basis of the 5-year moving average of the nominal trend of GDP).

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Starting in 2013, all age requirements (including those for obtaining social allowances) and those e for qualifying for early retirement regardless of age are indexed to changes in life expectancy as measured by ISTAT with reference to the three previous years. The adjustment of the retirement 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 procedure29. In addition, starting from 2013, the calculation of the transformation coefficients30 at the time of retirement is extended until age 70. Other safeguard measures are likewise provided so as to guarantee more gradual application of the reform, namely, to take into account specific factors in relation to proximity to retirement and difficult situations related to staying in the labour market, cases that have all been outlined at a regulatory level31.

As a result of the overall reform process inaugurated in 2004, the average age at retirement (considering both statutory age retirement and the requirements for early retirement) rises from 60-61 during the 2006-2010 period to approximately 64 years in 2020, 67 in 2040 and 68 in 2050. On a cumulative basis, the lower ratio of pension expenditure to GDP resulting from the reform process begun 2004 amounts to approximately 60 percentage points of GDP as of 2050. Approximately one-third of this change is attributable to the reform introduced with Law No. 214/2011, whereas the other two-thirds are attributable to the preceding reform measures.

PUBLIC EXPENDITURE FOR PENSIONS AS % OF GDP UNDER DIFFERENT REGULATORY ASSUMPTIONS

Note: EPC-WGA baseline scenario - 2016 EFD. Source: State General Accounting Department long-term forecasting model.

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29 The adjustment of the requirements for pension eligibility as of 2013 was adopted with a decree of 6 December 2011, published in the Official Gazette of the Republic of Italy on 13 December 2011. The next adjustment, to take effect in 2016 (an additional four months), in accordance with the law (Article 12, Paragraph 12-bis of Decree-Law No. 78 of 31 May 2010, converted with amendments by Law No. 122 of 30 July 2010), had to be adopted at least 12 months before the adjustment's effective date, and was thus adopted with decree of 16 December 2014, published in the Official Gazette of the Republic of Italy on 30 December 2014. The law contains a safeguard clause on the basis of which the statutory age requirement for old-age pensions may be no less than 67 for anyone becoming eligible for retirement as from 2021.

30 The transformation coefficient is also to be adjusted with the same calendar used for adjusting the requirements for retirement. The adjustment taking effect on 1 January 2016 was adopted by decree of 22 June 2013, published in the Official Gazette of the Republic of Italy No. 154 on 6 July 2015.

31 The total amount of workers entitled to such safeguard measures is approximately 170,000. The safeguard is applied to workers entitled to a pension after 31 December 2011 (all people who have met the requisites by such date are expressly exempt from the application of the new requisites for pension eligibility) and who have had difficulty of remaining in the labour market. Such workers must also fall within the categories expressly defined by the law.  Pension access for such workers started in 2013, and will continue in the next few years.

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Fiscal sustainability indicators

The indicators (S1 and S2) provide an assessment of the impact of implicit age-related liabilities on fiscal sustainability over the medium/long term. The medium-term sustainability indicator (S1) shows the increase in the structural primary balance to be achieved cumulatively through 2020 so as to ensure, if the increase is maintained constant over the next ten years, the achievement of a debt-to-GDP ratio of 60 percent by 2030 and to repay age-related costs. The long-term sustainability indicator (S2) shows the fiscal adjustment in terms of structural primary balance which, if immediately realized and maintained, guarantees the compliance with the intertemporal budget contraint over an infinite time horizon.

Both indicators are based on the growth forecasts and budget balances of the policy scenario set out in the 2016 Stability Programme, and incorporate the medium-/long-term projections of age-related expenditure. 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. With other conditions being equal, as the projection of the age-related expenditure increases and as the maintenance of the intertemporal budget constraint becomes more difficult, the primary surpluses needed are increasingly more substantial.

Table IV.5 reports the results for the S1 and S2 indicators and of the respective components for the latest planning documents and the European Commission’s recent 2015 Fiscal Sustainability Report32. In comparison with the aforementioned documents, the value of S1 deteriorates for 2016. The breakdown of S1 by sub-components shows that the value that measures the effort needed to stabilise the debt-to-GDP ratio at the initial level has continued to be negative (and equals -2.3 percent of GDP). Accordingly, on the basis of this component, the government’s policy targets expressed in terms of the structural primary surplus would be sufficient to stabilise the debt at the 2019 level, counterbalancing the upward pressure that might stem from age-related expenditure and interest expenditure. Instead, the component that continues to negatively impact the indicator is that which measures the adjustment needed to reduce the debt-to-GDP ratio from the initial level to 60 percent of GDP in 2030. This component contemplates a fiscal adjustment equal to 5.0 percent of GDP. The overal value of the S1 indicator is 2.9, and thus above the threshold of 2.5, beyond which a country is considered to be a high risk in the medium term.

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32 European Commission, 2016, Fiscal Sustainabilty Report, Institutional Papers, No. 018. http://ec.europa.eu/economy_finance/publications/eeip/pdf/ip018_en.pdf.

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TABLE IV.5: SUSTAINABILITY INDICATORS (% OF GDP)

S1 indicator	2016 EFD	2015 DBP	2015 EFD	2015 Sustainability Report
Total adjustment	2.9	1.7	1.9	4.2
Including: For stabilisation of debt-to-GDP ratio	-2.3	-3.1	-2.9	-1.4
For delay in the adjustment	0.0	0.0	0.0	0.7
For achievement of the 60% target	5.0	4.7	4.7	5.1
For age-related costs	0.1	0.1	0.1	-0.2
S2 indicator
Total adjustment	-1.5	-2.4	-2.2	-1.0
Including: For stabilisation of debt-to-GDP ratio	-1.6	-2.4	-2.2	-0.9
For age-related costs	0.1	0.0	-0.1	-0.1
Source: MEF analyses.

The total value of the S2 indicator is -1.5, which is below the threshold of 2.0, under which a country is considered to be a low risk in the long term. With reference to the S2 sub-components, the value related to the component that measures the effort needed to stabilise the debt-to-GDP ratio at the 2019 level, coeteris paribus, remains negative (equal to -1.6 points of GDP), thereby indicating the capacity of Italy's public finances, given the budget conditions forecast for 2019, to cope with the accumulation of interest expenditure/GDP (snowball effect) expected over the long term. The other component of S2 (also seen with regard to S1) is that which measures the additional adjustment needed to cover the increase in age-related expenditure. In Italy's case, this adjustment remains close to zero, and thus indicates that the component of the age-related expenditure appears to be fully under control.

In conclusion, the fiscal consolidation planned by the government in the short term can be considered adequate to ensure the sustainability of the public finances in the medium/long term.

Analysis of sensitivity of the public debt dynamics over the long term

The sensitivity analysis presented in this section illustrates several scenarios containing demographic, macroeconomic and fiscal shocks. The analysis is aimed at (i) testing the robustness of the results in view of the uncertainty affecting them, 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.

The following scenarios therefore replicate the assumptions underlying the sensitivity analyses presented in the most recent European Commission Ageing Report33. In line with the European Commission's methodology, in projecting the debt-to-GDP ratio through 2060, the baseline scenario assumes that fiscal revenue will be constant as a percentage of GDP at the level planned for 2019 for the entire forecast period. Instead, public expenditure moves according to the change

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33 European Commission, 2015, The Ageing report, European Economy, n.3/2015. http://europa.eu/epc/pdf/ageing_report_2015_en.pdf

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in the age-related expenditure described above. The GDP deflator converges at 2.0 percent as of 2022, the year when the output gap closes, and the real interest rate starting at the 2019 level converges to 3.0 percent over 10 years. On the basis of these assumptions, the debt-to-GDP ratio under the EFD policy scenario is projected out to 2060. As shown below, the long-term projections of the debt-to-GDP ratio in the baseline scenario reflect a decreasing trend in which the ratio falls below the 60 percent threshold only as of 2058.

The baseline scenario is compared with the results derived from the other simulations which present demographic, macroeconomic and fiscal shocks. In addition, results are presented in relation to a risk scenario where the impact of non-demographic factors exerts additional pressure on the expected trend of healthcare expenditure and LTC expenditure for the elderly and disabled.

Simulations 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 the weight of migratory flows expected in coming decades, measuring their impact on Italy's public finances. In line with the assumptions agreed at the level of the EPC-WGA and based on an ad-hoc demographic scenario developed by EUROSTAT, the simulation assumes two alternative scenarios for the 2020-2060 period:  i) as from 2021, a 20 percent decrease in the average net flow per year of immigrants with respect to the base assumptions; and ii) as from 2021, a 20 percent increase of the same.

The trend of the public debt in the two alternative scenarios is compared with the baseline in Figure IV.7. With the government's planned 2019 structural primary balance held equal, and considering the starting level of the debt, an increased migrant flow would allow for significantly reducing the debt-to-GDP ratio in comparison with the baseline scenario, whereas a decrease would have a symmetrical effect. The debt-to-GDP ratio would continue to decrease, however at a much slower pace, getting to a level of less than 80 percent of GDP in 2060.

FIGURE IV.7: PUBLIC DEBT SENSITIVITY TO INCREASE/DECREASE IN NET FLOW OF IMMIGRANTS (% of GDP)

 

Source: MEF analyses using the State General Accounting Department long-term forecasting model,

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Simulations with regard 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 total employment rate, and the activity rate, with the last variable examined in particular with reference to elderly workers.

With reference to productivity, the simulation exercise calls for two alternative scenarios in which the labour productivity growth rate is permanently increased or decreased by 0.25 percentage points with respect to the baseline scenario, starting in 2025.

The impact on sustainability of a better (worse) trend of productivity is somewhat limited in the short term and medium term, but it becomes significant over time, so much so that it considerably accelerates (slows) the reduction of the debt-to-GDP ratio in the long term (Figure IV.8). In the lower productivity scenario, the debt-to-GDP ratio would be approximately 84 percent in 2060, while in the case of higher productivity, the ratio would be approximately 26 percent of GDP by that same year.

FIGURE IV.8: SENSITIVITY TO MACROECONOMIC ASSUMPTIONS. HIGHER / LOWER PRODUCTIVITY GROWTH (% of GDP)

 

Source: MEF analysess using the State General Accounting Department long-term forecasting model.

Another assumption is a permanent increase/reduction as from 2021 in the rate of change of total factor productivity (TFP) compared with the baseline, up to a 20 percent change as of 2035. The scenario with lower TFP over the long term is consistent with the assumption of a permanent loss of productive capacity caused by the recent economic crisis. In the case of higher TFP, the debt-to-GDP ratio is projected to fall gradually to get to just over 20 percent in 2060; in the case of falling TFP, instead, the debt-to-GDP ratio presents a stable or slightly increasing profile, which is far above that in the baseline, even though a slight decrease is estimated in the final years of the forecast to a value of just over 90 percent of GDP.

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FIGURE IV.9: SENSITIVITY TO MACROECONOMIC ASSUMPTIONS:  HIGHER/LOWER TFP GROWTH (% of GDP)

 

Source: MEF analyses using the State General Accounting Department long-term forecasting model.

Another simulation assumes that the rate of employment (20-64-year old population) rises as from 2021, with a gradual increase of up to 2.0 percentage points as of 2025. Under this scenario, the debt-to-GDP ratio would trend below the baseline, improving slightly as from the first of the simulation, and then more significantly in the long term (Figure IV.10), reaching a level of 20 percent of GDP in 2060.

Considering, instead, a gradual increase as from 2021 in the rate of activity of the population between the ages of 55 and 74 (to the point of being 10 percentage points higher in 2030 than the rate assumed in the baseline scenario), the curve of the debt-to-GDP ratio would shift significantly downward starting as of 2025 (Figure IV.10) and would continue decreasing until reaching negative values at the end of the forecast horizon.

FIGURE IV.10: SENSITIVITY TO MACROECONOMIC ASSUMPTIONS. RATES OF EMPLOYMENT AND RATES OF ACTIVITY OF THE ELDERLY (% OF GDP)

 

Source: MEF analyses using the State General Accounting Department long-term forecasting model

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Simulations with respect to a risk scenario for healthcare expenditure

In borrowing the European Commission's risk scenario methodology, this section evaluates 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 non-demographic factors34 . It follows that the medium-term risk scenario would cause the trend of the debt-to-GDP ratio to deteriorate only slightly, with the ratio mirroring that in the baseline scenario until 2035, and it would be kept below 90 percent after 2041 (Figure IV.11) and then converging to 70 percent in 2060.

FIGURE IV.11: SENSITIVITY OF PUBLIC DEBT TO ASSUMPTIONS OF HEALTHCARE EXPENDITURE IN RISK SCENARIO (% of GDP)

 

Source: MEF analyses using the State General Accounting Department long-term forecasting model

Simulations with regard 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 2019. For this purpose, the value of the primary surplus in the baseline scenario (equal to 3.6 percent of GDP in 2019) is reduced by 1.0 percentage point, to 2.6 percent and 1.6 percent, respectively (Figure IV.12).

The trend of the public debt changes significantly following the deterioration of the primary surplus as of 2019, and in particular for the levels below 3.0 percent of GDP. More specifically, for an initial level of 2.6 percent, the debt-to-GDP ratio has an essentially flat profile above that in the baseline scenario, standing at 110 percent at the end of the forecast horizon. Instead, a structural primary surplus of less than 2.0 percent of GDP would produce a significant

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34 More specifically, it is assumed that: i) in the case of acute care, the elasticity of the unit cost vis-à-vis per capita GDP is equal to 1.4 (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, and excluding cash benefits, the cost per recipient by age is assumed to converge at the EU-28 average only when its starting point is lower.

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increase in the ratio over the long term, hitting te level of 160 percent in 2060. It is evident from these simulations that the sustainability of the debt requires the maintenance of sizeable primary surpluses over time.

FIGURE IV.12: PUBLIC DEBT SENSITIVITY TO THE PRIMARY SURPLUS (% of GDP)

 

Source: MEF analyses using the State General Accounting Department long-term forecasting model.

Simulations with regard to pension reform

The sensitivity tests presented in the previous section demonstrate that, barring very reduced primary surpluses with respect to the current projections and despite the presence of forecasting risks, the government's fiscal targets through 2019 should ensure the sustainability of Italy's public debt, even if macroeconomic, demographic or fiscal conditions were to be different from those in the baseline scenario. It should be noted, however, that the conclusions about the sustainability of Italy’s public finances cannot be made without considering a series of important pension reforms over the past 20 years. These reforms have significantly contributed to reducing age-related expenditure and keeping the trend of the debt-to-GDP ratio under control.

Figure IV.13 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 and have caused overall a reduction in the ratio of pension expenditure to GDP vis-à-vis the projection based on previously enforced legislation, thereby impacting the present value of the expected expenditure flows (see Focus: Pension reform)

The results for the scenario that excludes the reforms adopted since 2004 show that the debt-to-GDP ratio, following an increase of around 20 percentage points of GDP due to the ongoing retirement of the baby boom generation, would not start to fall until after 2050, when its value would be at levels that are

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permanently higher than those reflected in the baseline scenario which instead incorporates the financial effects of all of the reforms adopted subsequently.

FIGURE IV.13: IMPACT OF REFORMS ON THE DEBT-TO-GDP RATIO (% of GDP)

Source: MEF analyses using the State General Accounting Department long-term forecasting model

FOCUS   State guarantees As of 31 December 2015, the guarantees granted by the State amounted to approximately €36.8 billion, or 1.9 percent of GDP, which reflects a reduction of €6.5 billion year on year. The guarantees granted to credit institutions following the financial crisis declined to €6.4 billion to 0.4 percent of GDP, falling by €17 billion as a result of the improved capitalisation of financial institutions.  

PUBLIC GUARANTEES (in € mn)
	2015
	Level	% of GDP
Total guarantees	36,840	2.3
Incl.: financial sector	6,421	0.4

Following are comments on the components of the aggregate balance:

·   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 2015, the residual debt guaranteed amounted to approximately €16,960 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 2015, the residual debt guaranteed amounted to approximately €1,834 million.

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·   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. New guarantees amounting to €30 million were granted during the year, and €34 million were enforced during the year.  As such, there was no residual debt guaranteed at 31 December 2015.

·   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 2015, the residual debt guaranteed amounted to approximately €3,591 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 2015, the residual debt guaranteed amounted to approximately €6,421 million.

·   Cassa Depositi e Prestiti S.p.A. bond issues. With decree of the Minister of the Economy and Finance No. 2545027 of 24 December 2015, a State guarantee was granted for the bonds of the Cassa Depositi e Prestiti S.p.A. for a maximum total amount of €5 billion, pursuant to and for the effects of Artcle 5, Paragraph 7, letter a), of the Decree-Law No. 269 of 30 September 2003, converted, with amendmens, by Law No. 326 of 24 November 2003, and Article 2 of the decreto of the Minister of the Economy and Finance of 6 October 2004. At 31 December 2015, the guarantees granted covered a total amount of €1,500 million.

·   First-home guarantee fund (Article 1, Paragraph 48, letter c of the 2014 Stability Law), which guarantees 50 percent of mortgage indebtedness for the purchase, restructuring and energy upgrade of properties classified as a primary residence. In 2015, the guarantees granted amounted to approximately €112 million against 2,010 eligibleloans disbursed by the banking system for a total of €225 million.

·   Fund for guarantee of non-market risks in favour of SACE. The guarantees granted amount to €6.022 million.

·   State guarantees in favour of ILVA. The guarantees granted amount to €400 million.

In a comparison with main European partners, Italy has one of the lowest stocks of guarantees. In recent years, the highest levels have referred to the countries whose financial systems were hardest hit by the crisis, including Ireland, Austria, Greece and Spain. The decreasing trend, which has been common for most EU countries, reflect the ongoing reduction of guarantees for the financial system. In 2014, almost one-half of Italy’s guarantees referred to the banking system (approximately 1.5 percent of GDP versus 2. 7 percent overall).

STATE GUARANTEES IN EU COUNTRIES (% OF GDP)

 

Source: Eurostat.

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V.1 ACTIONS TAKEN AND INDICATIONS FOR FUTURE YEARS

Measures adopted in 2015

During 2015, the government approved a series of urgent legislative measures that regarded: the reduction of the tax burden; social benefits; education; the labour market; the management of extraordinary events and disasters; and the banking system.

TABLE V.1: CUMULATIVE NET IMPACT OF 2015 MAIN LEGISLATION ON GENERAL GOVERNMENT NET BORROWING (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
Decree-Law No. 3/2015 (converted by Law No. 33/2015)	4	12	15	0	0
Decree-Law No. 4/2015 (converted by Law No. 34/2015)	0	0	0	0	0
Decree-Law No. 65/2015 (converted by Law No. 109/2015)	-2,180	-489	-479	-469	-460
Decree-Law No. 78/2015 (converted by Law No. 125/2015)	22	7	5	7	9
Decree-Law No. 83/2015 (converted by Law No. 132/2015)	20	25	35	45	45
Law No. 107/2015	0	11	0	3	0
Decree-Law No. 185/2015 (converted by Law No. 9/2016)	0	0	0	0	0
Decree-Law No. 191/2015 (converted by Law No. 13/2016)	0	200	206	6	6
NET BORROWING	-2,134	-233	-218	-408	-400
In % of GDP	-0.1	0.0	0.0	0.0	0.0
NET BALANCE TO BE FINANCED	-2,160	-488	-479	-469	1,639
In % of GDP	-0.1	0.0	0.0	0.0	0.1
BORROWING REQUIREMENT	-2,134	-233	-218	-408	-400
In % of GDP	-0.1	0.0	0.0	0.0	0.0

The legislative measures adopted lead to an increase in net borrowing equal to approximately €2.1 billion in 2015, €233 million in 2016, €218 million in 2017 and approximately €400 million in the years thereafter. The change in the balances (offset by the use of the margin of improvement at unchanged legislation already incorporated into the public finance forecasts) is essentially attributable to the provisions1 regarding the indexing of pension payments, following the Constitutional Court Ruling No. 70 of 20152. Subject to the presentation of a report to Parliament3, the government responded to the ruling through provisions

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1 Decree-Law No. 65/2015, converted by Law No. 109/2015.

2 This ruling declared as unconstitutional the provisions contained in Decree-Law No. 201/2011, which eliminated all indexing, for the 2012-2013 two-year period, of pensions amounting to more than three times’ the minimum pension amount.

3 Report presented pursuant to Article 10 bis, Paragraph 6 of Law No. 196/2009.

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for the partial revaluation of the pension payments due for the years of 2012-20134.

The impact on the net balance to be financed is approximately €2.2 billion in 2015 and approximately €0.5 billion in each of the years in the period 2016-2018, while such balance is projected to improve by approximately €1.6 billion in 2019 in relation to the confirmation, again for 2016, of the National Health Service (NHS) entities’ contribution to the public budget5. Such contribution was accounted for in the forecasts of the healthcare expenditure that were contained in the previous Economic and Financial Document (EFD).

The legislative measures approved result in gross budget funding (incremental resources funded through higher revenue and lower expenditure) equal to approximately €4.5 billion in 2015, €8.8 billion in 2016, €9.3 billion in 2017, €11.0 billion in 2018, and €7.4 billion in 2019 (Table V.2). In 2015, more than 77 percent of the resources were secured through expenditure reductions (with more than 80 percent of those reductions referring to current expenditure), through the utilisation of State budget funds previously appropriated for the implementation of specific legislative measures. On the revenue side, additional resources come from the revision of the tax treatment of the writedowns and credit losses taken by banking and financial institutions and insurance companies, and from the effects of personal income tax revenue related to the revaluation of the pension payments due for the years of 2012-2013. Other incremental revenue is related to measures that provide for hiring of personnel in the education sector, and for the police and armed forces.

TABLE V.2: CUMULATIVE IMPACT OF 2015 MAIN LEGISLATION ON GENERAL GOVERNMENT NET BORROWING (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
INCREMENTAL RESOURCES	4,506	8,786	9,263	11,054	7,386
Higher revenue	1,003	3,979	3,778	5,449	1,378
Lower expenditure	3,503	4,806	5,485	5,605	6,008
- current expenditure	2,991	3,466	3,304	3,310	3,308
- capital expenditure	511	1,340	2,181	2,295	2,700
USE OF RESOURCES	6,640	9,019	9,481	11,461	7,786
Lower revenue	620	4,913	5,521	7,153	3,913
Higher expenditure	6,020	4,106	3,960	4,309	3,873
- current expenditure	2,757	3,881	3,831	4,234	3,743
- capital expenditure	3,263	225	129	75	130
IMPACT ON NET BORROWING	-2,134	-233	-218	-408	-400
Net change in revenue	383	-934	-1,743	-1,703	-2,535
Net change in expenditure	2,517	-701	-1,525	-1,296	-2,135
- current expenditure	-234	414	528	924	435
- capital expenditure	2,751	-1,115	-2,053	-2,220	-2,570

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4 For 2012 and 2013, the revaluation is 100 percent for the pensions in an amount of up to three times’ the minimum (as already provided by Decree-Law No. 201/2011), 40 percent for those between three and four times’ the minimum, 20 percent for those between four and five times’ the minimum, and finally, 10 percent for those between five and six times’ the minimum. There is no adjustment contemplated for pensions exceeding six times’ the minimum, even though there is a safeguard clause for pensions in an amount close to this limit. For 2014 and 2015, the revaluation related to 2012 and 2013 is instead equal to 20 percent of the amount set for the monthly payments of the 2012-2013 two-year period, and as from 2016, equal to 50 percent of the amount set for the monthly payments of the 2012-2013 two-year period.

5 The corresponding reduction of the financing of the NHS is provided by Articles 9-bis/9-septies of Decree-Law No. 78/2015.

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The initiatives financed amount to approximately €6.6 billion in 2015, €9.0 billion in 2016, approximately €9.5 billion in 2017, approximately €11.5 billion in 2018, and €7.8 billion in 2019. For 2015, these measures mostly entailed an increase of expenditure, with about 60 percent of the increase related to capital expenditure.

From the standpoint of general government subsectors (Table V.3), the deficit is mainly attributable to the social security funds, with the bulk of the amount related to the measures for the partial revaluation of pension payments. Instead, the central government and local government balances show improvement for the years of 2016-2018.

TABLE V.3: CUMULATIVE NET IMPACT OF 2015 MAIN LEGISLATION ON GENERAL GOVERNMENT NET BORROWING BY SUB-SECTOR (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
CENTRAL GOVERNMENT	1,266	641	491	195	822
- net change in revenue	594	-634	-1,309	-1,437	-1,605
- net change in expenditure	-672	-1,274	-1,799	-1,632	-2,427
LOCAL GOVERNMENT	-545	159	333	423	-218
- net change in revenue	-73	-4	-118	43	-630
- net change in expenditure	473	-163	-452	-380	-412
SOCIAL SECURITY FUNDS	-2,855	-1,033	-1,042	-1,025	-1,005
- net change in revenue	-138	-296	-316	-309	-301
- net change in expenditure	2,717	736	726	716	704
TOTAL	-2,134	-233	-218	-408	-400

Key measures

Measures for the reduction of fiscal pressure include: a total exemption from the Single Municipal Tax (IMU)6 for certain categories of taxpayers and specific types of farmland; the creation of the category of innovative small-/medium-sized business (with the application of the tax relief measures previously provided for innovative start-ups); and the revision of tax incentives for income derived from intellectual property rights (the so-called patent box), with an increase in the taxable base eligible for the incentives.

Provisions regarding social welfare include not only the aforementioned revaluation of pensions, but also initiatives undertaken in May 2015 for the purpose of streamlining and standardising the procedures and the timing for the National Institute for Social Security’s (INPS) payment of social benefits7. With reference to the labour market, provisions were made to increase the Social Fund

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6 Decree-Law No. 4/2015, converted by Law No. 34/2015. Later, these measures were revised by the 2016 Stability Law which provided for a general revision of the application of single municipal tax with respect to farmland.

7 Decree-Law No. 65/2015, converted by Law No. 109/2015. With such legislation, a change was made to the coefficient of revaluation with respect to the total contributions used as a basis for the calculation of pensions; such change was made to avoid negative revaluation of the contributions made.  As such, the coefficient cannot be less than 1.0, except for the recovery of later revaluations (this recovery is not provided with respect to the initial application of the provision).

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for Employment and Training in order to refinance exceptional social safety nets and the salary supplement related to solidarity contracts8. In addition, during 2015, an enabling act was approved for measures relating to: the reform of the social safety nets9; job services and active labour policies; the reorganisation of the rules governing employment relationships and workplace inspections and protections; and the work-life balance10.

The reform of the national education and training system11 was approved in July 2015.  Amongst its provisions, the reform includes an extraordinary hiring plan for teaching personnel to be assigned to state scholastic institutions; it also establishes principle of the obligatory training for full-time teachers, enhances procedures for assessment of teaching activity, assigns new responsibilities to school administrators, and provides for the refinancing of the building projects for schools and universities.

Further initiatives for the reconstruction and the economic revival of the areas hit by earthquakes in 2012 provide for additional resources in favour of the affected communities, extending the IMU tax exemption to 31 December 2016 for buildings destroyed or deemed uninhabitable following the earthquakes, and introducing scaled-down targets within the Domestic Stability Pact for the municipalities and provinces of the Emilia Romagna Region. The Milano EXPO 2015, the Extraordinary Jubilee of Mercy, the management of the increasing migrant flows, and the intensification of terrorism at an international level are all factors that have necessitated the adoption of measures to guarantee public order and the security and safety of the public. As such, provisions have been approved for extending the operation entailing the use of the armed forces for control the national territory and the surveillance of sensitive sites and targets12, and for the extraordinary hiring of personnel to accommodate the needs of the police force and the national fire fighters corps. In addition, new resources have been allocated for strengthening the fight against infectious diseases and ensuring more efficient testing of international prophylaxes13. A special Jubilee fund has been established to provide resources for transportation and urban improvements for the City of Rome, while new resources have been appropriated for providing rail links with Vatican City and expanding emergency healthcare services. Specific resources are earmarked for the recovery of the areas used for the Milano EXPO, so to ensure the extraction of value from the site14. In addition, funding has been increased for non-deferrable needs that may arise during thebudget management15.

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8 Decree-Law No. 65/2015, converted by Law No. 109/2015 and Decree-Law No. 185/2015, converted by Law No. 6/2016.

9 Law No. 183/2014 (so called Jobs Act).

10 Legislative Decree No. 22/2015, Legislative Decree No. 23/2015, Legislative Decree No. 80/2015, Legislative Decree No. 81/2015, Legislative Decree No. 148/2015, Legislative Decree No. 149/2015, Legislative Decree No. 150/2015 and Legislative Decree No. 151/2015.

11 Law No. 107/2015.

12 Decree-Law No. 78/2015, converted by Law No. 125/2015 and Decree-Law No. 185/2015, converted by Law No. 6/2016.

13 Decree-Law No. 78/2015, converted by Law No. 125/2015.

14 Decree-Law No. 185/2015, converted by Law No. 9/2016.

15 Decree-Law No. 83/2015, converted by Law No. 132/2015.

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TABLE V.4: IMPACT OF DECREE-LAW NO. 185/2015 ON GENERAL GOVERNMENT NET BORROWING (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
INCREMENTAL RESOURCES	928	298	97	0	0
Higher revenue	1	5	0	0	0
Lower expenditure	927	293	97	0	0
‘8 per 1,000’ (taxpayer allocation of personal income tax)	10	18	0	0	0
Fund for Non-Deferrable Needs	0	45	0	0	0
Fund for additional initiatives regarding safeguarded workers under the pension reform	524	0	0	0	0
Special capital expenditure fund	5	120	75	0	0
Reduction of appropriations to the ministries	343	109	22	0	0
Other	45	2	0	0	0
USE OF RESOURCES	928	298	97	0	0
Lower revenue	0	0	0	0	0
Higher expenditure	928	298	97	0	0
Territorial continuity: Sicily and Sardinia (aerial insularity)	0	30	0	0	0
Subsidy: City of Reggio Calabria	10	0	0	0	0
Subsidy: Latium Region – increased railway service to St. Peter’s station, and healthcare services	47	0	0	0	0
Subsidy: Italian Institute of Technology	30	50	0	0	0
Fund for Jubilee initiatives	42	117	0	0	0
Social Fund for Employment and Training	400	0	0	0	0
Extraordinary fund for waste treatment and clean-up: Campania Region	70	32	47	0	0
Sports facilities in underprivileged city areas	20	40	40	0	0
Increase in National Civil Service Fund	100	0	0	0	0
Initiatives to enhance value of Milano Expo site – security	20	0	0	0	0
Urgent measures for the cinema and cultural heritage	25	0	0	0	0
Environmental clean-up and urban renewal: Bagnoli	50	0	0	0	0
Refinancing of the fund for national emergencies	50	0	0	0	0
Financial leeway for initiatives in underground public transport systems	50	0	0	0	0
Other	14	29	10	0	0
IMPACT ON NET BORROWING	0	0	0	0	0

TABLE V.5: IMPACT OF DECREE-LAW NO. 191/2015 ON GENERAL GOVERNMENT NET BORROWING (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
INCREMENTAL RESOURCES	0	202	213	13	13
Higher revenue	0	100	0	0	0
Voluntary disclosure	0	100	0	0	0
Lower expenditure	0	102	213	13	13
Special fund: current portion	0	0	13	13	13
Cohesion and Development Fund	0	100	200	0	0
Other	0	2	0	0	0
USE OF RESOURCES	0	2	7	7	7
Lower revenue	0	0	0	0	0
Higher expenditure	0	2	7	7	7
IMPACT ON NET BORROWING	0	200	206	6	6

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Refinancing has been provided for the funds dedicated to national emergencies and civil service16, while greater financial leeway has been given to the municipalities making investments in underground public transport systems17.

The banking and credit sector has been impacted by i) measures adopted in January 2015, providing for the transformation of mutual banks (banche popolari) with assets of more than €8 billion in joint-stock companies18, and ii) the change in the tax treatment of the writedowns and credit losses of banks, other financial institutions and insurance companies19.

During 2015, provisions were adopted to ensure the clean-up and urban renewal of the Bagnoli-Coroglio district within the City of Naples. As part of the execution of two rulings of the European Court of Justice20, an extraordinary plan has been financed for the processing and disposal of waste materials at sites located in the Campania Region, and the securing and clean-up of the sites21. Specific measures, with effects only in terms of net balance to be financed, have allowed for an acceleration of the divestiture of the ILVA industrial group, which is currently under extraordinary administration, so as to ensure business can be conducted and measures can be implemented for the environmental protection and an adequate public healthcare safety net in the areas where the industrial complex is located22.

2016 Stability Law and initial measures for 2016: impact on budget balances

The 2016 Stability Law results in an increase of net borrowing equal to approximately €17.6 billion in 2016, €19.1 billion in 2017, €16.1 billion in 2018, and €13.8 billion in 2019. Pursuant to the law, the borrowing requirement increases by approximately €19.1 billion in 2016, €19.2 billion in 2017, €16.2 billion in 2018, and €13.8 billion in 2019. The measures provided in the law are consistent with the public finance targets under the policy scenario outlined in the 2015 EFD Update, in consideration of: i) the borrowing margins authorised by Parliament for the updating of the adjustment plan for getting back on track with respect to the Medium-Term Objective (MTO); ii) the approval of the 2015 Report to Parliament; and the government’s communication presented to the Fifth Commission of the Chamber of Deputies on 13 December 2015.

The net balance to be financed is increased by approximately €22.8 billion in 2016, €24.7 billion in 2017, €24.2 billion in 2018, and approximately €20.0 billion in 2019. The greatest effects on the State budget balance, with respect to net borrowing and the borrowing requirement, are mainly related to the measures regarding local government (that do not impact the net balance to be financed), and modulation of certain capital spending appropriations provided by the Stability Law so as to align the level of the financing with the public finance forecasts incorporated in the planning documents. The budget for 2016 is also

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16 Decree-Law No. 185/2015, converted by Law No. 9/2016.

17 Decree-Law No. 185/2015, converted by Law No. 9/2016.

18 Decree-Law No. 3/2015, converted by Law No. 33/2015.

19 Decree-Law No. 83/2015, converted by Law No. 132/2015.

20 Rulings related to the lawsuits C-297/2008 and C-653/2013.

21 Decree-Law No. 185/2015, converted by Law No. 9/2016.

22 Decree-Law No. 191/2015, converted by Law No. 13/2016.

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affected by the appropriation of resources (without effects in terms of the borrowing requirement and net borrowing) earmarked for possible bridge financing of the EU Single Resolution Fund with respect to the management of failing banks and financial institutions.

TABLE V.6: CUMULATIVE NET  IMPACT OF 2016 STABILITY LAW AND DECREE-LAW NO. 18/2016 (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
2016 Stability Law (Law No. 208/2015)	0	-17,624	-19,136	-16,109	-13,769
Decree-Law No. 18/2016	0	0	0	0	0
NET BORROWING	0	-17,624	-19,136	-16,109	-13,769
% of GDP	0.0	-1.1	-1.1	-0.9	-0.8
NET BALANCE TO BE FINANCED	0	-22,825	-24,742	-24,154	-19,902
% of GDP	0.0	-1.4	-1.4	-1.4	-1.1
BORROWING REQUIREMENT	0	-19,138	-19,180	-16,183	-13,829
% of GDP	0.0	-1.1	-1.1	-0.9	-0.8

The decree-law containing urgent measures regarding, inter alia, the reform of the cooperative credit banks23 approved in February 2016 has instead entailed a recomposition of the items in the general government consolidated account, with effects mainly on 2016 and without affecting public finance balances.

The incremental resources from both legislative measures are equal to approximately €17.0 billion in 2016, €15.4 billion in 2017, €17.0 billion in 2018, and €17.1 billion in 2019. The expenditure reductions represent more than 60 percent of the additional resources for the 2016-2017 two-year period, and more than 70 percent in 2018 and 2019, with the bulk of the reductions referring to current expenditure.

TABLE V.7: CUMULATIVE IMPACT OF 2016 STABILITY LAW AND DECREE-LAW NO. 18/2016 (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
INCREMENTAL RESOURCES	26	16,987	15,385	17,028	17,133
Higher revenue	11	6,827	5,321	5,045	4,360
Lower expenditure	15	10,160	10,064	11,983	12,773
- current expenditure	0	6,888	8,075	9,866	10,963
- capital expenditure	15	3,272	1,989	2,117	1,809
USE OF RESOURCES	26	34,612	34,522	33,137	30,902
Lower revenue	11	24,812	27,756	26,832	24,718
Higher expenditure	15	9,800	6,765	6,305	6,184
- current expenditure	15	6,847	5,243	5,022	4,599
- capital expenditure	0	2,953	1,522	1,283	1,586
IMPACT ON NET BORROWING	0	-17,624	-19,136	-16,109	-13,769
Net change in revenue	0	-17,985	-22,435	-21,787	-20,357
Net change in expenditure	0	-360	-3,299	-5,678	-6,589
- current expenditure	15	-41	-2,831	-4,844	-6,365
- capital expenditure	-15	-319	-467	-834	-224

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23 Decree-Law No. 18/2016.

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The initiatives financed amount to approximately €34.6 billion in 2016, €34.5 billion in 2017, €33.1 billion in 2018, and €30.9 billion in 2019. In the 2016-2019 period, more than 70.0 percent of the additional resources used refers to measures for the reduction of fiscal pressure.

TABLE V.8: CUMULATIVE NET  IMPACT OF 2016 STABILITY LAW AND DECREE-LAW NO. 18/2016 ON GENERAL GOVERNMENT NET BORROWING BY SUB-SECTOR (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
CENTRAL GOVERNMENT	0	-15,315	-17,996	-17,153	-17,787
- net change in revenue	0	-13,274	-15,799	-15,785	-15,820
- net change in expenditure	0	2,041	2,197	1,367	1,966
LOCAL GOVERNMENT	0	-2,096	-30	1,386	3,010
- net change in revenue	0	-4,432	-5,017	-5,160	-5,063
- net change in expenditure	0	-2,336	-4,987	-6,545	-8,073
SOCIAL SECURITY FUNDS	0	-213	-1,111	-342	1,008
- net change in revenue	0	-279	-1,619	-842	526
- net change in expenditure	0	-65	-508	-500	-482
TOTAL	0	-17,624	-19,136	-16,109	-13,769

As for the subsectors of general government, for the years of 2016-2019 the central government budget is affected by the neutralisation of the safeguard clauses and the reduction of corporate income taxes. The resources obtained through the containment of the ministries’ spending are earmarked for: the financing of initiatives to fight poverty and social exclusion; tax benefits for businesses to promote new investment in capital goods; enhancements to national defence and security; promotion of culture; and the renewal of the employment contracts for State personnel. At the level of local government, the lower tax revenue resulting from the reduction of taxation on residential and business property is greater than the savings on expenditure during the first two years of the forecast. Instead, in 2018 and 2019, the positive trend of local government finances (in particular, expenditure) will have a greater effect than the contraction of revenue. With reference to social security funds, the budget calls for a deterioration of the balance of approximately €0.2 billion in 2016, €1.1 billion in 2017 and 0.3 billion in 2018, and an improvement of €1.0 billion in 2019. This trend is mainly attributable to the 24-month extension of the measures allowing for employer exemptions from the payment of socialcontributions in the case the hiring of full-time personnel under contracts without expiration date.

2016 Stability Law: key measures

Consistent with the measures adopted in previous years in support of economic growth, the 2016 Stability Law provides for the reduction of personal and corporate taxation, and incorporates provisions regarding employment, socio-cultural initiatives, education, and the enhancement of national security.

The law contemplates the neutralisation, for the year of 2016, of the safeguard clauses provided by previous legislation, for the equivalent of

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approximately €16.8 billion. In the years thereafter, the neutralisation of these clauses amounts to approximately €11 billion in 2017 and approximately €9.4 billion in 2018 and in 2019. Additional reductions of the tax burden on households are ensured through the revision of the regulations governing taxation on real properties. An exemption from the Indivisible Services Tax (TASI) and the Tax on Properties Abroad (IVIE) is provided in the case of primary dwellings, with the exception of villas, castles, and other types of luxury properties. An exemption from the Single Municipal Tax (IMU) has been granted in the case of properties leased without payment to blood relatives (approximately €3.7 billion in each of the years of the period 2016-2019).

The law renews the personal income tax benefits for the costs of building restructuring, energy upgrades, and the purchase of furnishings and household appliances, and introduces a personal income tax deduction for young couples purchasing furnishings for their primary dwelling for expenditures of a total amount of up to €8,000. Altogether, these provisions amount to net tax benefits of €460 million in 2017, approximately €1.0 billion in 2018 and approximately €0.7 billion in 2019. Personal income tax deductions have been increased for individuals earning the lowest levels of pensions (€147 million in 2016, €190 million in 2017, and €187 million for the years of 2018 and 2019).

As of 2017, the corporate income tax rate is to decline by 3.5 percentage points, going from 27.5 percent to 24 percent. This will lower net tax revenue by approximately €3.0 billion in 2017, €4.0 billion in 2018 and €3.8 billion in 2019. Additional tax benefits for businesses regard a single municipal tax exemption for so-called ‘bolted equipment’ (special-purpose fixed assets incorporating systems and machinery functional to the productive process), with the resulting reduction of tax revenue equal to €530 million for each of the years of the 2016-2019 period, and amendment to the single municipal tax rules for farmland, with a net benefit of €405 million in 2016, €243 million in 2017, and €310 million for the years of 2018 and 2019. The provisions regarding regional tax on productive activity regard i) the abolition of the tax for businesses operating in farming industry, small fishing cooperatives and their consortiums (€167 million in 2016 and €196 million in each of the years of 2017, 2018 and 2019), and ii) an increase in the lump-sum deduction (from €2,500 to €5,000) for small businesses (€339 million in 2017, €177 million in 2018, and €180 million in 2019).

With further reference to businesses24, the law provides for the possibility of additional tax depreciation with respect to 40 percent of the expenditure for investment in new capital goods, for the period from 15 October 2015 to 31 December 2016, including through leasing (so-called ‘super depreciation’); this measure will reduce tax revenue by €170 million in 2016, €943 million in 2017, approximately €1.3 billion in 2018, and approximately €967 million in 2019. In addition, tax credits have been introduced in favour of businesses acquiring new capital goods for production facilities located in underdeveloped areas of the country (€617 million in each year of the period considered). The law has increased the compensation and revenue thresholds for eligibility in the lump-sum

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24 With the exception of investments in capital goods whose normal depreciation rate is less than 6.5 percent, investments in buildings and construction projects, and any type of investments in assets made by industrial businesses operating in the following sectors: manufacturing, food, transportation, telecommunications, electricity, gas and water.

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tax system (the so-called ‘minimum tax system’) whose tax benefits will amount to approximately €512 million in 2017, approximately €290 million in 2018 and approximately €270 million in 2019.

With reference to the labour market, the law extends the employer exemption from social contributions with respect to the hiring of new personnel under contracts without termination date, with a benefit, net of the fiscal effects, equal to approximately €834 million in 2016, approximately €1.5 billion in 2017, approximately €0.9 billion in 2018, and €7.0 million in 2019. Tax deductions have been made available to private-sector workers earning no more than €50,000 in a prior year with respect to the compensation earned in relation to productivity gains, with the application of a 10 percent tax substituting personal income tax, additional regional taxes and municipal taxes. In addition, the Stability Law provides for the refinancing of €150 million of exceptional social safety nets for the year of 2016, as part of the transition toward a new social-safety-net system.

TABLE V.9: IMPACT OF 2016 STABILITY LAW ON GENERAL GOVERNMENT NET BORROWING (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
INCREMENTAL RESOURCES	26	16,767	15,385	17,010	17,115
Higher revenue	11	6,607	5,321	5,045	4,360
Additional corporate income taxes of 3.5% for banks and financial institutions	0	0	0	1,033	590
Farming sector incentives	0	88	173	120	112
Hiring of teachers and researchers - fiscal and social-security effects	0	46	67	67	67
Increase of the deduction for the  taxable base of regional tax on productive activity	0	0	0	6	3
Single municipal tax exemption:  farmland	0	0	162	95	95
Fund for second-level contracting	0	345	326	320	344
National healthcare fund for the specialisation in medicine - fiscal and social-security effects	0	23	34	50	28
Cultural initiatives - fiscal and social-security effects	0	0	10	10	10
Measures to streamline spending - revenue measures	0	816	419	417	388
Gaming industry measures	0	1,794	1,286	1,286	1,286
Women’s option: experimentation for early pension - fiscal effects	0	0	0	55	30
Extension of deductions for spending on residentialbuilding restructuring and purchase of furnishings	0	145	638	0	0
Extension of employerexemption from social contributions for hiring of full-time personnel - fiscal effects	0	0	550	349	94
Minimum tax system	0	469	1,212	821	854
Reduction of corporate income tax rates	0	0	0	0	172
Contract renewals for State sector personnel - fiscal and social-security effects	0	146	146	146	146
Reinstatement of revaluation of purchase values for land and equity investments	0	260	130	130	0
Revaluation of the pensions for the year of 2014 - fiscal effects	0	45	0	0	0
Voluntary disclosure	0	2,000	0	0	0
Other	11	433	169	142	142
Lower expenditure	15	10,160	10,064	11,965	12,755
Elimination of tax credit for diesel-powered heavy transport vehicles up to Euro 2 class	0	160	160	160	160
Fund for granting interest subsidies to local entities on borrowing transactions	0	95	70	70	70
Fund for Non-Deferrable Needs	0	33	11	12	12
Fund for the fight against poverty and social exclusion	0	600	0	0	0
Cohesion and development fund	0	1,037	382	382	1,067
Revolving fund for EU policies	0	50	100	100	100
Initiatives for workers safeguarded from pension reform	0	213	387	336	216
Measures to streamline expenditure	0	6,536	8,116	10,238	10,577
Reduction of tax credits on secured-loan instalment payments for reconstruction in Emilia	0	290	0	0	0
Revaluation of pensions for the year of 2014	0	0	230	0	0
Utilisation of the ERDF resources 2014/2020	0	250	250	250	250
Other	15	896	358	416	303

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TABLE V.9 (CONTINUED): IMPACT OF 2016 STABILITY LAW ON GENERAL GOVERNMENT NET BORROWING (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
USE OF RESOURCES	26	34,392	34,522	33,119	30,884
Lower revenue	11	24,592	27,756	26,814	24,699
Abolition of regional tax on productive activity for farming and fishing businesses	0	167	196	196	196
Farm sector tax relief	0	54	59	48	48
Increase of deduction for the  taxable base of regional tax on productive activity	0	0	339	183	183
Reduction of socialcontributions for trucking businesses	0	66	66	66	0
Full deductibility of interest expense for banks and financial institutions	0	0	0	1,020	576
Tax reduction with regard to income related productivity gains	0	434	589	584	584
Neutralisation of safeguard clauses	0	16,814	11,088	9,394	9,394
Increase of no tax area for pensioners	0	147	190	187	187
IMU exemption for bolted equipment	0	530	530	530	530
IMU exemption for farmland	0	405	405	405	405
Fund for second-level contracting - fiscal effects	0	23	116	72	74
Cultural initiatives	0	0	1	1	4
VAT for receivables not collected in bankruptcy proceedings	0	0	340	340	340
Increase in depreciation of tangible fixed assets	0	170	943	1,258	967
Measures to streamline expenditure - fiscal and social-security effects	0	176	381	680	724
Gaming industry initiatives	0	500	500	500	500
Part-time workers in private sector	0	60	120	60	0
Extension of deductions for spending on residential building restructuring and purchase of furnishings	0	121	1,097	969	696
Extension of employer exemption from social contributions for hiring of full-time personnel	0	834	2,094	1,337	101
Minimum tax system	0	186	1,725	1,113	1,127
Reduction of corporate income tax rates	0	0	2,978	3,970	3,970
Reduction of taxation on residential properties (TASI, IMU and IVIE)	0	3,694	3,695	3,694	3,694
Reinstatement of revaluation of purchase values for land and equity investments	0	0	0	0	33
Revaluation of the pensions for the year of 2014 - fiscal effects	0	0	45	0	0
Other	11	212	262	206	366
Higher expenditure	15	9,800	6,765	6,305	6,184
Modernisation and capital improvements: police and fire fighters	0	60	0	0	0
Hiring of teachers and researchers	0	99	145	145	145
Subsidy to provinces and metropolitan cities in ordinary-statute regions	0	495	470	470	470
Extraordinary subsidy to armed forces, police and fire fighters	0	511	0	0	0
International development cooperation	0	120	240	360	360
Tax credit: purchase of capital goods for production facilities	0	617	617	617	617
Tax credit: banking foundations	0	100	100	100	0
Scholastic publishing	0	480	0	0	0
Fund for purchase of local and regional public transport vehicles	0	0	0	0	210
Fund for the underprivileged classes	0	380	0	0	0
National solidarity fund - insurance incentives	0	100	40	0	0
Fund for Non-Deferrable Needs	0	643	865	10	10
Fund for the elderly and disabled	0	150	150	150	150
Fund for ordinary financing of universities (bonus portion)	0	25	30	30	30
Fund for extraordinary defence and public security initiatives	0	245	0	0	0
Fund for the fight against poverty and social exclusion	0	600	1,030	1,054	1,054
Fund for the national emergencies	0	70	80	85	100
Fund for EU sanctions	0	50	100	100	100
National healthcare fund for specialisation in medicine	0	57	86	126	70
Increase in unemployment subsidy (ASDI)	0	220	0	0	0
Initiatives in favour of communities affected by earthquakes on 20 and 29 May 2012	0	280	0	0	0
Initiatives to prevent hydrogeological instability	0	0	25	50	50
Initiatives regarding workers safeguarded from pension reform	0	213	387	436	358
Cultural initiatives	0	509	164	171	208
Waste management initiatives	0	100	150	50	0
Measures for supporting the seriously disabled	0	90	90	90	90
Women’s option: experimentation for early pension	0	160	405	757	623
Balanced budget for local entities	0	676	10	10	0
Enhancement of IT systems to fight terrorism	0	150	0	0	0
Extraordinary urban renewal programme	0	500	0	0	0
Refinancing of exceptional social safety nets	0	150	0	0	0
Contract renewal for State sector personnel	0	300	300	300	300
Revaluation of pensions for the year of 2014	0	230	0	0	0
Other	15	1,421	1,282	1,194	1,239
IMPACT ON NET BORROWING	0	-17,624	-19,136	-16,109	-13,769

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A new fund has been set up to ensure the implementation of a national plan to fight poverty and social exclusion, with an appropriation of €600 million in 2016 approximately €1.0 billion for 2017, and €1.1 billionfor 2018 and 2019. The new fund’s resources have been used in 2016for increasing the fund for the underprivileged classes (€380 million) and refinancing the unemployment subsidy (ASDI) (€220 million). As of 2017, the new fund’s resources will be earmarked for financing future initiatives to restructure the regulations governing allowances, indemnities, income supplements and other assistance-related payments. In the 2016–2019 period, additional resources will go to the financing of measures to support the seriously disabled who have no family assistance (€90 million per year) and increasing the fund for the elderly and disabled (€150 million per year).

Social-welfare initiatives include additional ‘safeguards’ for individuals who have not yet satisfied the requirements for retirement25; these additional provisions are to be financed through the economies achieved with respect to the safeguards already in place. The ‘women’s option’, an experiment for the retirement of women who have made 35 years of contributions, are at least aged 57 years, 3 months, and are for employed full time (58 years, 3 months for the self-employed), is to be extended to women who meet the age and contributions requisites as of 31 December 2015, regardless of the date when their pension goes into effect. The incremental expenditure in relation to this measure, net of the fiscal effects, is equal to €160 million in 2016, €405 million in 2017, €702 million in 2018, and €593 million in 2019.

The provisions regarding education and research include a plan for the hiring of young researchers and university professors, and increasing the bonus portion of the Fund for the Ordinary Financing of Universities. The 2016 Stability Law also finances the renewal of employments contracts for the 2016-2018 three-year period for State sector personnel, which involves incremental expenditure of approximately €155 million per year, net of fiscal and social-security effects.

Additional resources are addressed to the enhancement and promotion of culture, for a total amount, net of fiscal and social-security effects, of €509 million in 2016, €155 million in 2017, €163 million in 2018, and €201 million in 2019. As part of these measures, teens celebrating their eighteenth birthday in 2016 will be eligible for a €500 electronic card to be used for theatre and film events, or for entry at museums, exhibits and cultural event (€290 million in 2016); in addition, individuals may opt to donate the 2 per 1,000 of their personal income taxes to cultural associations (€110 million in 2016).

In view of the international terrorist events in November 2015, the Stability Law appropriates new resources for 2016 for the purpose of reinforcing public security and national defence (€245 million) and intensifying activities to fight and to prevent information technology crime (€150 million). An extraordinary annual subsidy equal to €960 will be paid in 2016 to the non-executive personnel of police corps, the armed forces and the national corps of fire fighters (approximately €511 million in 2016).

Given the new target for the public finance balance that replaces the previous rules of the Domestic Stability Pact, local entities will be granted greater financial leeway for investment expenditure (€676 million in 2016 and 10 million

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25 Stability Law No. 214/2011.

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in each of the years of 2017 and 2018).  The provinces and metropolitan cities of ordinary-statute regions have been allocated a subsidy for the financing of the expenditure related to areas responsible for road conditions and school construction (€495 million in 2016 and 470 million in each of the years of 2017-2019). In addition, it is expected that local entities’ spending for school building projects (for up to €480 million in 2016) will not be counted for the purpose of the new target for the public finance balance. Some €500 million of resources are also expected to be used in 2016 for financing the start-up of an extraordinary programme covering urban renewal and the securing of suburban areas of cities.

Additional resources are allocated to the Fund for Non-Deferrable Needs (with a net increase of approximately €610 million in 2016 and €854 million in 2017), the support of international cooperation for development (€120 million in 2016, €240 million in 2017 and 360 million in the years of 2018 and 2019), national emergencies (€70 million in 2016, €80 million in 2017, €85 million in 2018, and €100 million in 2019) and continuation of a waste-management operation (€100 million in 2016, €150 million in 2017, and €50 million in 2018).

The resources found amount to approximately €16.8 billion in 2016, €15.4 billion in 2017, €17.0 billion in 2018, and €17.1 billion in 2019.

On the revenue side, the additional resources come from the extension of the programme for the voluntary disclosure of capital held abroad (€2.0 billion in 2016 alone), which is backed by a safeguard clause. Measures referring to the gaming industry are expected to produce net resources of approximately €1.3 billion in 2016 and approximately €0.8 billion in each of the years of the 2017-2019 period. These measures include an increase in the lump-sum tax withheld (PREU) for gaming and entertainment devices, the revision of public-tender procedures for assignment of concessions for sports and non-sports betting, bingo and online games, and the amendment of the single tax for various types of fixed betting other than horse racing, introducing taxation on the difference between the sums played and the amounts won26.

The provisions related to the recalculation of the purchase value of land and equity investments have been extended to 2016, with a consequent increase in tax revenue of €260 million in 2016 and €130 million in 2017 and in 2018. The fund covering relief for social contributions with reference to second-level contracting has been reduced, with net social contributions revenue accordingly rising by €321 million in 2016, €210 million in 2017, €249 million in 2018, and €270 million in 2019. Amendments have been made to tax and social-contributions incentives and farm aid, which have a net effect of increasing tax revenue by €33 million in 2016, €114 million in 2017, €71 million in 2018, and €63 million in 2019. The measures with reference to banks and financial institutions are altogether neutral with respect to tax revenue, and include: the full deductibility, as of 2018 of interest expense as for the purpose of computing the income tax base for corporate income taxes and regional tax on productive activity; and the introduction, for the account of such taxpayers, of an additional corporate income tax of 3.5 percent.

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26 At the same time, the provision that required concessionaires of gaming and entertainment devices to pay agios and fees to the State has been repealed (with revenue loss of €0.5 billion in each of the years considered).

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A significant amount of financial coverage of lower revenue and/or higher expenditure comes from the measures to streamline public expenditure27, which, net of the fiscal and social-security effects, amount to savings of approximately €7.2 billion in 2016, €8.2 billion in 2017, €10.0 billion in 2018, and approximately €10.2 billion in 2019. These are savings achieved at all levels of government, and are derived from: i) changes in spending mechanisms and the organisational structure of the administrations; ii) increased efficiency in public procurement of goods and services; and iii) the abandonment of initiatives considered obsolete, when the related appropriations are not reused for the financing of initiatives for a same sector. In some cases, these initiatives have had their budget appropriations reduced, in order to favour a process of streamlining spending within the public administrations28.

Additional financial coverage of the use of resources is seen on the expenditure side, through the reduction and modulation of the Cohesion and Development Fund (€1.0 billion in 2016, approximately €0.4 billion in 2017 and in 2018, and €1.1 billion in 2019), the utilisation of EU resources, the national co-financing of the ERDF 2014-2020 (€250 million in each of the years considered) and the elimination of the tax credit on heavily polluting diesel-powered heavy transport vehicles  (€160 million in each of the years of 2016-2019).

Reform of Cooperative Credit Banks, securitisation guarantee, crisis procedures

Decree-Law No. 18 of 2016 provides urgent measures for the reform of the Cooperative Credit Banks (CCB) and other provisions for the credit sector, with no effects on the public finance balances.

The reform of the CCB is part of a broader based restructuring of the Italian banking system that was initiated with the reform of the Cooperative Banks approved at the start of 2015. The recent reform measures are aimed at improving the quality of the CCB governance, by simplifying the internal organisation and reducing the exposure of these banking institutions to local economic shocks, granting the institutions the possibility of obtaining capital from outside of the cooperative realm in the event of funding tensions.

The decree ratifies the agreement reached with the European Commission about the format for a guarantee to facilitate the banks’ sale of non-performing loans. In accordance with such objective, a special fund within the State budget has been established, with resources of €100 million for the year of 2016 and the simultaneous reduction has been made to the Fund for State Guarantees.

The decree also stipulates the irrelevance (for tax purposes) of voluntary contributions received by entities subject to crisis proceedings (approximately €18 million as from 2018), with the funds covered by a corresponding reduction of the

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27 Some of the measures (those related to the reduction of the fund for the reduction of the fiscal pressure, and those reflecting fiscal effects of the measures referring to public sector employment and the indexing of the pensions) have been booked as part of revenue in the consolidated general government account. The former have been booked as such since the amounts are used for the subsequent financing of measures to reduce fiscal pressure; the latter constitute the impact of spending cuts on tax and social-contributions revenues.

28 For additional detail, see Section V.2 ‘Spending review’.

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Fund for Structural Economic-Policy Initiatives. Additional measures to favour the recovery of lending include changes to the tax treatment of property transfers resulting from court-ordered sales (€220 million in 2016 only), with the coverage thereof insured through the additional revenue expected from the voluntary disclosure of capital held abroad. Finally, the decree contains rules for collective funds management.

TABLE V.10: IMPACT OF DECREE-LAW NO. 18 /2016 ON GENERAL GOVERNMENT NET BORROWING (before netting out induced effects; in € mn)
	2015	2016	2017	2018	2019
INCREMENTAL RESOURCES	0	220	0	18	18
Higher revenue	0	220	0	0	0
Voluntary disclosure	0	220	0	0	0
Lower expenditure	0	0	0	18	18
USE OF RESOURCES	0	220	0	18	18
Lower revenue	0	220	0	18	18
Reduction of registration tax on the court-ordered transfer of properties or real rights to real properties	0	220	0	0	0
Other	0	0	0	18	18
Higher expenditure	0	0	0	0	0
IMPACT ON NET BORROWING	0	0	0	0	0

FOCUS   Measures to fight tax evasion During 2015, the activity to recover taxes evaded resulted in collections of €14.9 billion. This extremely positive outcome reflects an increase of 4.9 percent over 2014, which, in turn, represented a peak over a 10-year period. The trend of collections derived from activity to fight tax evasion has shown record results in recent years: more than €42 billion of higher tax revenue was collected in the 2013-2015 three-year period; approximately €78.5 billion since 2010 (see Figure R.1); an increase of the 240 percent with respect to the recovery of 2006 (€4.4 billion), the year when the measurement based on collections was inaugurated. In recent years, the government's action to fight tax evasion has been increasingly aimed at pursuing the objectives of equity and efficiency, both at the level of recovering tax revenue (the ‘direct’ effect of the activity to fight tax evasion), and at the level of improving taxpayers’ spontaneous compliance (the ‘indirect’ effect). With regard to the latter effect, the notices sent to taxpayers soliciting spontaneous compliance with reduced sanctions and in a brief time window29 have generated spontaneous payment of €250 million. A significant improvement in tax compliance has been achieved as a result of a new relationship between taxpayers and the tax authorities, which is based on trust and transparency, and greater usage of databanks. In order to establish a direct link between the results of the fight against evasion and the reduction of fiscal pressure, Legislative Decree No. 160/2015 (part of the implementation of a fiscal enabling act) has provided that incremental revenue coming from the activity to fight tax and social-contributions evasion, and from the improvement in tax compliance, must be allocated (net of the revenue to maintain budget equilibrium and the reduction of the debt-to-GDP ratio) to the Fund for the Reduction of Fiscal Pressure. In addition, as part of budgeting procedures, the government will be required to prepare an annual report containing the results achieved with regard to measures to fight tax and social-contributions

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29 In cases in which the tax authorities have detected anomalies or inconsistencies in the preparation of tax returns, errors or omissions.

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evasion, and whre possible, the recovery of tax revenue attributable to the greater taxpayer compliance.

The strategies adopted by the government to provide incentives for spontaneous compliance are part of a revised and collaboration-based relationship between taxpayers and the tax authorities.

FIGURE R.1: RESULTS OF THE FIGHT AGAINST TAX EVASION: TAX DUE TO THE TREASURY AND NON- TREASURY TAX REVENUE (in € mn)

Source: Revenue Agency (Agenzia delle Entrate).

In particular, the government’s overall strategy aims to pair effective ex ante prevention with ex post control and repression measures, through legislative, procedural and organisational actions capable of obstructing, in a focused manner, the actual mechanisms of evasion. From an operational perspective, this strategy focuses, on the one hand, on the use of innovative methods for evaluating the degree of risk represented by taxpayer behaviour, acting in advance of the commission of the evasion, rather than reacting after it has occurred; on the other hand, on the cooperation of the taxpayer who wishes to comply, thereby reducing the cost of the taxpayer’s compliance. It is thus crucial to have adequate databases and advanced technologies that allow for using and cross-checking of data so as to identify taxpayer traits that may indicate a propensity toward non-compliance.

Part of this strategy is the ‘cooperative compliance’ programme that the tax authorities have used as the basis for a new enhanced relationship with ‘large taxpayers’ and the monitoring of tax risk, using an approach already adopted by various European countries on a basis consistent with the OECD’s recommendations in 2008.  Through this enhanced relationship, large taxpayers are given incentives for supplying spontaneous, complete and timely information, and for behaving in a transparent manner, against the tax authorities’ commitment to make tax compliance easier. Cooperative compliance recognises the capacity of the businesses to manage tax risk through their own internal control system, makes the framework more favourable for private investments, and encourages prevention and the resolution of tax disputes.

Preventive agreements have a similar function. Through these agreements, the tax authorities aim to prevent tax avoidance on the part of the businesses with an international structure and from the standpoint of protecting against fiscal risks. The agreements not only have the purpose of regulating in advance the tax treatment of various international transactions, but they also reward businesses that increase the value of the country’s

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intangible assets. The preventive agreement has also been extended to cover tax benefits associated with income earned on the use of intangible assets (the so-called ‘patent box’), including trademarks and products of innovation within the Italian system so as to incent investments in research and development.

Given the important efforts of the Agenzia delle Entrate and the financial administration overall, the government has intervened with various legislative measures aimed at stimulating the simplification of compliance with tax obligations, and favouring the spontaneous reporting of amounts subject to taxation. In particular, pre-compiled tax returns have been introduced for full-time workers and pensioners, who can view and download the return containing data input by the Revenue Agency30.  As of 31 March 2015, all suppliers to the public administration were required to start invoicing electronically31. Electronic invoicing has been encouraged through fiscal incentives and significant bureaucratic simplification in the relationships between businesses.

In addition, several preliminary assessments seem to confirm the effectiveness of the measures recently introduced to fight tax evasion. In particular, the 2015 Stability Law introduced: i) the application of a split-payment mechanism for purchases by the public administration32; ii) the extension of the reverse charge to: cleaning, demolition, plant installation and building services (no longer limited to relationships between a contractor and sub-contractor)33; the transfer of greenhouse gas emissions quotas; transfers of other units that may be used by operators, and certificates related to gas and electricity; and the sale of gas and electricity to a taxable dealer34. In 2015, the VAT on transactions carried out in Italy was increased, partly due to the slight recovery of consumption, but also due to the introduction of these measures (that contributed to a net increase of tax revenue in the amount of approximately €3 billion).Another tool used in fighting tax evasion is the simplified sector study, which has been identified as one of the fiscal-policy priorities outlined by the Ministry of the Economy and Finance for the 2016-2018 three-year period.

The government’s commitment to fight evasion also has an international bent. In an increasingly global economy, effective action to fight international tax avoidance cannot be limited to domestic measures, but must inevitably involve coordinated solutions. This makes it necessary to proceed in the direction of an international tax system based on common standards to be applied uniformly.

At the international level, Italy has been a promoter of all international treaties about the automatic exchange of information for tax purposes. Italy has also signed numerous bilateral treaties, mostly with administrations traditionally perceived as non-cooperative. Italy is one of the biggest proponents of the Base Erosion and Profit Shifting (BEPS) Project promoted by the G20 and developed by the OECD in order to prevent tax avoidance by multinational businesses. Once implemented, the BEPS will ensure greater consistency between national tax systems, more transparency and growing correspondence between taxation, the location in which business activity is actually carried out, and the related profits.

Added to this is the success of Italy’s Voluntary Disclosure Programme, which has involved the participation of almost 130,000 taxpayers. The incremental revenue expected as a result of the introduction of the programme amounts to approximately €3.8 billion, net of the interest, against a reported total taxable base of almost €60 billion.

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30 The 2016 pre-compiled tax return increases the set of data that the taxpayer can agree to in order to be excluded from a tax audit.

31 The public administration’s invoicing system has involved 23,000 administrations and 600,000 suppliers and handled 28 million invoices in the first 20 months since its introduction.

32 Article 1, c. 629, Letter b), of Law No. 190/2014.

33 Article 1, Paragraph 629, Letter a), Numbers 1) and 2) of Law No. 190/2014.

34 Article 1, Paragraph 629, Letter a), Number 3) of Law No. 190/2014.

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FOCUS Public Development Aid (PDA) According to preliminary estimates, PDA for 2015 amounted to 0.21 percent of gross national income; this would represent an increase of 0.02 percent with respect to the final figure for 2014 (0.19 percent). For 2016, the ratio of PDA to gross national income should grow further. The figures confirm the government’s determination to pursue Italy's gradual realignment to the international standards for cooperation in development (OECD average), as provided by Article 30 of Law No. 125 of 2014 (Reform of cooperation in development). Furthermore, the 2016 Stability Law has provided for significant increases in the resources earmarked for cooperation in development. For the 2017-2019 three-year period, the government’s commitment will entail the pursuit of the following expenditure targets: 0.25 percent of gross national income in 2017, 0.26 percent in 2018 and 0.28 percent in 2019. The aforementioned realignment – that will obviously be impacted by the expenditure to cover assistance to refugees (which can be booked as PDA) – will hopefully allow for achieving the target of the 0.30 percent of the gross national income by 2020.  As a whole, the European Union aims to reach the target of 0.7 percent by 2030 (the time horizon set by the New Sustainable Development Goals, adopted the United Nations summit held in New York in September 2015). Italy’s achievement of its objective entails not only the measures included in the 2016 Stability Law for the period covered by the same, but also the need for additional, steady increases in annual appropriations, with the simultaneous pursuit of the requalification and streamlining of the expenditure already initiated.

V.2 SPENDING REVIEW

Measures adopted

In recent years, the spending review activity has represented a critical part of budget strategy. This approach is aimed at improving control over public expenditure, and allowing more efficient and effective allocation of public resources, discarding the notion that spending needs to be regularly increased.

The initiatives adopted have contributed to gradually lowering the rate of growth of primary expenditure of the public administrations. Net of expenditure for social benefits (which reflects cyclical phases of the economy and factors linked to the ageing of the population), primary current expenditure had an average annual change that was close to zero or negative during the 2009-2015 period; this compares with growth of approximately 3.0 percent per year in the 2006-2009 period. Such expenditure aggregate is forecast to remain virtually stable in the next three-year period (Figure V.1), thus falling gradually in real terms and as a percentage of GDP. Italy has also outperformed other European countries in this regard: in the 2009-2015 period, Italy’s expenditure, net of the interest, rose by approximately 6 percent in relation to 2009 expenditure; this figure compares with 8 percent for the Euro Area and 13-14 percent for France and Germany (Figure V.2).

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FIGURE V.1 – ITALY’S PRIMARY CURRENT EXPENDITURE, NET OF SOCIAL BENEFITS, 1998-2019

(% change per year)

Source: ISTAT general government account, 1998-2015 (to 1 March 2016); scenario at unchanged legislation for 2016-2019.

FIGURE V.2. PRIMARY CURRENT EXPENDITURE WITH AND WITHOUT SOCIAL BENEFITS (% cumulative change, 2009-2015)

 

Source: European Commission, AMECO data, February 2016. For Italy, ISTAT general government account, updated as of 1 March 2016.

The measures to contain expenditure adopted in recent years have been concentrated on public sector personnel and intermediate consumption. Starting in 2010 and through the end of 2013 (the period when fiscal consolidation was increasingly urgent), measures were enacted to ensure both rapid containment of the expenditure, and the reduction of expenditure in structural terms. The key initiatives regarding expenditure for personnel regarded both the size of the public sector work force and employee compensation. More specifically:

· the already existing limits on turnover were confirmed and reinforced;

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· the ratio between the number of teachers and the number of students was decreased, with consequent reductions of the teaching personnel (as initiated by Decree-Law No. 112/2008);

· the public administration work force was reduced (as initiated by Decree-Law No. 95/2012);

· national collective bargaining was frozen as from 2010 (and until the Constitutional Court’s Ruling No. 178/2015);

· career advancement and promotions of personnel from 2011 to 2014 were made effective only from a legal standpoint;

· the reductions provided with respect to funds for supplemental contracting were made permanent based on the reduction of the personnel in service;

· ceilings were set with respect to the highest salary levels.

With respect to intermediate consumption, the measures have concentrated on streamlining expenditure for goods and services through:

· centralisation and enhanced governance of public procurement in order to hold down the unit price of purchases;

· enhancement of spending limits for specific categories of goods, such as automobiles, information technology, and so forth;

· adoption of spending limits with respect to mandates for consulting, analysis, research and so forth;

· containment of the trend of the various components of healthcare expenditure, such as spending on pharmaceuticals, outlays for services regarding tenders and supplies of goods and services, and the modulation of spending limits for the purchase of medical devices.

In some cases, these measures have been accompanied by the setting of savings targets, with the ministries selectively identifying the reductions to be made, typically with respect to the portion of expenditure (such as intermediate consumption) that they directly control.

As from 2014, the spending review has also been focused on promoting an overall reallocation of public resources, aiming at identifying fiscal margins i) to favour economic growth through reducing the tax burden on individuals and businesses, and ii) to allow for requalification of the education system, including through addressing the issue of personnel lacking job security (so-called ‘precariat workers’) with the ‘The Good School Programme’ reform.

As a result of these initiatives, the expenditure for employee compensation fell by approximately €10 billion between 2009 and 2015, while the number of public sector workers decreased by 110,000 during the same period. According to the forecasts at unchanged legislation, expenditure for personnel remains stable between 2015 and 2019, notwithstanding the additional resources provided by ‘The Good School Programme’. Expenditure for intermediate consumption (net of the agios, which have been booked to this account since 2013) had an average annual growth rate of 0.04 percent during the 2009-2015 period, compared with 3.9 percent for the 2006-2009 period.

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In 2014 and 2015, the legislative measures regarding personnel and limits on certain types of expenditure were continued and reinforced. In terms of methodology, extraordinary commissions provided the administrations with tools for achieving savings on the unit prices goods and services purchased, through the aggregation of demand and consequent economies of scale. In addition to new obligations and rights of recourse to the public central purchasing body, CONSIP, the number of central purchasing entities has been largely limited to a set of highly professional aggregating entities35 and enhancements have been made to the governance of the programme to streamline purchasing under coordination of the Ministry of the Economy and Finance, as part of the technical working group dedicated to ‘aggregating entities’.

In more general terms, the Ministry of the Economy and Finance has involved the spending administrations in the start-up of a detailed analysis (at the level of the individual budget items) in order to examine the means with which public administration services are supplied and to identify the initiatives that are basically not effective. The consequent budget reductions (which have regarded not only intermediate consumption, but also transfers to other public administrations and other categories of expenditure) also reflect the abandonment of obsolete activities, and the revision of appropriations in areas where they have proven over-abundant or in which there are delays in the implementation of initiatives.

Altogether, since 2014, the savings associated with the initiatives to streamline spending amount, in terms of net borrowing, to approximately €3.6 billion in 2014, €18 billion in 2015, €25 billion in 2016, €27.6 billion in 2017 and approximately €28.7 billion in 2018, and regard all levels of government (Table V.11).

TABLE V.11 - MEASURES TO STREAMLINE EXPENDITURE (contribution to net borrowing – in € mn)

Legislative measures	2014	2015	2016	2017	2018
Decree-Law No. 4/2014	488	773	565	565	565
Decree-Law No. 66/2014	3,120	2,972	2,800	2,727	503
Decree-Law No. 90/2014	0	75	113	123	153
2015 Stability Law	0	12,159	13,001	14,154	15,814
2015 Stability Law, revision at unchanged policies	0	2,024	1,375	1,921	1,668
2016 Stability Law	0	0	7,176	8,155	9,976
Total	3,608	18,003	25,030	27,645	28,678

Note: The savings are quantified net of fiscal and social-security effects, and, in the case of the regions and local entities, are indicated prior to their usage as part of the easing of the restrictions of the Domestic Stability Pact or from the changeover to new public finance target balance (as from 2016). It is noted that the legislative measures indicated have provided for spending cuts that exceed the amounts outlined in the spending review. The table presents only those amounts that refer to measures for streamlining expenditure and to make expenditure more efficient. In addition, some measures are booked as part of revenue in the general government account.

Due to rounding, the totals may not correspond to the sum of the components.

Source: State General Accounting Department analyses and estimates using data included in the summaries of the financial effects of the legislation.

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35 There are currently around 30 aggregating entities, and this compares with more than 33,000 purchasing centres previously.

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In line with the actions already undertaken in the previous years, the 2016 Stability Law contains measures attributable to the spending review, which are quantified at approximately €7.2 billion in 2016, approximately €8.2 billion in 2017, and approximately €10 billion in 2018. The most significant savings are represented by cuts in the appropriations to the ministries, the contribution of territorial autonomies, and the provisions to streamline the purchasing of goods and services, which affect the central government, the regions, the non-territorial public entities, and the social security funds (Table V.12).

TABLE V.12 - 2016 STABILITY LAW - MEASURES TO STREAMLINE EXPENDITURE (contribution to net borrowing – in € mn)
Measures	2016	2017	2018
Ministries	2,688	2,082	2,351
Regions:  balanced budget	1,850	1,022	660
Regions and autonomous provinces (including enhancements to centralised purchasing and healthcare sector)	0	3,980	5,480
Redetermination of standard national healthcare funding requirement	1,783	0	0
Measures related to the indexing of the pensions	0	335	747
Enhancements to centralised purchasing (excluding regions)	216	217	217
Measures related to public sector employment	59	117	200
Other	579	402	320
Total	7,176	8,155	9,976
Note: Due to rounding, the totals may not correspond to the sum of the components. Source: State General Accounting Department analyses and estimates using data included in the summaries of the financial effects of the legislation.

The savings projected for the State are largely based on selective initiatives to cut the expenditure of the ministries for approximately €2.7 billion in 2016, €2.1 billion in 2017, and €2.3 billion in 2018 (which, in terms of reduction of the appropriations available, amount to approximately €3.3 billion in 2016, €2.4 billion in 2017, and €1.8 billion in 2018). The most important provisions refer to savings arising from the processes to streamline and contain central government expenditure, in relation to the implementation of the public finance measures adopted in previous years; such savings can be quantified only with the definitive balances. In order to ensure their tracking, these savings flow into the Fund for the Reduction of Fiscal Pressure36, which, when zeroed out, will lead to a total contribution of approximately €0.8 billion in 2016 and approximately €0.4 billion in the years of 2017 and 2018. Other reductions have been achieved through the revision of transfers and subsidies to public and private businesses, including the Italian National Railways (€0.4 billion in 2016), the fund for tax relief to businesses (€35 million in 2016, €41 million in 2017, and €60 million in 2018) and interest subsidies related to the financing made available by the Revolving Fund for Support to Businesses (€55 million in 2016 and 50 million in each of the years thereafter). Cuts have also been made to the compensation paid to authorised tax assistance centres (€40 million in 2016 and €70 million for the years of 2017 and

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36 Article 1, Paragraph 431 of the Stability Law 2014.

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2018) and patronage centres (€15 million per year). Finally, measures have been outlined for: the replanning of resources for healthcare-related construction projects (€0.3 billion in 2016 and €0.6 billion in each of the years of 2017 and 2018); the sale of buildings used by the Ministry of Defence (€0.2 billion in 2016); a decrease (€10 million as from 2016) in the portion of the ‘8 per 1,000’ (taxpayer allocation of personal income tax) appropriated to the State; and a reduction of the sums paid annually to the political parties in relation to the assignment of the ‘2 per 1,000’ of the personal income taxes allocated by taxpayers (€10 million for 2016 and €20 million for the years of 2017 and 2018). The reduction for the Office of the Presidency of the Council of Ministers is €23 million for 2016; €21.7 million for 2017; and €18 million for 2018.

The national social-welfare and public social assistance entities have been charged with cutting current expenditure, excluding that for pensions and assistance, by at least €53 million in the 2016-2018 three-year period.

The provisions already provided for the 2014-2016 three-year period are to be temporarily continued with respect to the revision of the indexing of pension payments that are three times’ greater than the minimum pension, with savings, net of fiscal effects, amounting to approximately €335 million in 2017 and approximately €750 million in 2018.

The standard national healthcare funding requirement has been set at €111 billion for 2016, with a consequent impact of lowering net borrowing by approximately €1.8 billion. One portion of the financing of the national healthcare service (€0.8 billion) is subject the adoption of the new Essential Levels of Care (ELC). With further reference to the healthcare sector, the Stability Law supplies various tools for improving efficiency, including enhancements to the centralised purchasing procedures and the introduction of deficit reduction plans for hospitals (including university hospitals), Scientific Institutes for Research, Hospitalisation and Health Care (IRCCS) and, as from 2017, local healthcare units (ASL).

Turning to the regions, a significant saving is expected from the changeover to the new public finance target balance (approximately €1.8 billion in 2016, approximately €1 billion in 2017 and €660 million in 2018). In addition, the regions and autonomous provinces have been charged with improving their contribution by approximately €4 billion in 2017 and approximately €5.5 billion in 2018 (inclusive of the savings on expenditure to be derived from the use of centralised centres for the purchases of the regions’ goods and services in the amount €480 million in each of the years of 2017 and 2018). The breakdown of this contribution between segments, including healthcare, was approved on 11 February 2016 at the State-Regions Conference, leading to a redetermination of the national healthcare funding requirement amounting to €3.5 billion in 2017 and €5 billion as from 2018. The residual €480 million (related to the streamlining of expenditure for purchases and services) is to be subdivided by 31 January of each year.

With reference to public sector employment, the freeze on turnover has been enhanced for the 2016-2018 period, with 25 percent of the savings coming from terminations (which, net of the fiscal and social-security effects, amount to €23 million in 2016, €81 million in 2017 and €164 million in 2018). In addition, the resources for ancillary employee compensation have been limited and reduced (€36 million per year).

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Enhanced centralised procurement and e-procurement remain important elements of the spending review, as they will allow for efficiency gains in purchasing processes and costs (including the administrative charges related to the execution of purchasing procedures) and greater traceability, transparency and simplification of administrative action. In this regard, the 2016 Stability Law continues in the direction already outlined: the aggregate of entities required to purchase through centralised units has been extended with regard to social services entities and fiscal entities. The use of CONSIP’s procedures and tools has also been extended to maintenance work. Companies owned by the State and by local entities must use the price-quality benchmarks of the overall procurement system. Making purchases without the use of CONSIP’s procedures and tools has been discouraged through the introduction of limits on independent purchases, as based on the price margin achieved (the price must be at least 10 percent less than CONSIP’s price for telephony, and at least 3 percent less for non-network fuels, network fuels, electricity and gas for heating). The regulations also require greater attention to the planning of purchases, and provide indications for the control of IT expenditure. Finally, there is a greater emphasis on the use of the price-quality parameters, with the setting of the ‘essential characteristics’ of goods and services; these characteristics must be used as a reference by the administrations for effecting a comparison for purchases made outside of the CONSIP conventions. Every administration is required to abide by the guidelines, and to make use of the levers and instruments supplied for rationalisation that impact other components of the expenditure, such as quantities purchased, the re-engineering of production processes, and the termination of obsolete projects. The contribution required in terms of lower expenditure is equal to approximately €216 million in 2016, €697 million in 2017, and €698 million in 2018.

The spending review process can also gain further momentum from actions taken by a more efficient and modern public administration (see Focus below).

FOCUS Public administration: measures to upgrade and to increase efficiency The actions inaugurated during the currentlegislature and now in the final stages of implementation with regard to State-owned equity investments, the streamlining of the police forces, public procurement and the personal health record (PHR) are capable of producing significant effects in terms of making the public administration more efficient and more up-to-date. The effects of these actions will be seen over time at the level of the public accounts and with regard to the quality of services delivered. State-owned equity investments On the basis of MEF surveys, the public administrations currently have more than 40,000 equity investments in 8,300 companies or other entities. Almost 60 percent of the investee entities are stock companies (about 1,900 joint-stock companies and 2,700 limited liability companies). Following the implementation of the Enabling Act No. 124/2015 for the reform of the public administration, the public administrations holding the equity investments must present restructuring plans for them. More specifically, the implementation decree approved at the start of 2016 provides for a radical contraction ofinvestmentsin companies that, with respect to their business, size (number of employees less than the number of directors – a situation seen in 500-800 companies), and organisational model, do not meet the requisites for producing a public service that is effective and profitable. In particular, as part of this extraordinary review, the public administrations need to identify the equity investments held that must be sold or streamlined, merged or shut down, including through liquidation or transfer, inasmuch as they are not referable to any of the

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categories provided by applicable legislation or because they do not meet the requisites and conditions for retaining the investment. Savings can also be derived from the limitations set on the number of the members of the corporate governance entities, and from the ceilings set on compensation to directors and employees of the investee companies. Additional savings and efficiency gains can come from the combined effect of the provisions of the aforementioned decree regarding in-house provisioning and the provisions in the Consolidated Act on Local Public Services (which is now being implemented). Both pieces of legislation are based on promoting greater competition in the assignment of service contracts, whose total current volume is €16.5 billion per year.

Reordering of the police forces

As part of the broader process of reorganising the public administration, the legislative decree for the implementation of Law No. 124/2015 provides for the reordering of the police forces. The objective is to tackle various critical aspects of the current organisational structure in order to ensure a better allocation of responsibility and coordination between the various corps, and to optimise spending processes.  Altogether, Italy’s police forces have 311,000 employees. The initiatives will allow for exploiting economies of scale, with associated management of instrumental services and a consequent recovery of efficiency in the medium term, particularly with regard to operating expenses that are projected to exceed €120 million in 2016-2018 the three-year period. The police forces will go from five to four corps, following the elimination of the Forest Rangers (around 7,400 employees, who will mostly be transferred to the national military police, the Carabinieri), with the consequent reallocation of personnel.

Public procurement system

The centralisation of the purchasing of goods and services for the public administration and the streamlining of ICT expenditure are levers that can help generate savings, and are part of the requalification of expenditure. The 2016 Stability Law has addressed these issues by reinforcing the centralisation of purchases and the aggregation of demand through CONSIP and the other aggregating entities. The main measures focus on streamlining the procurements through a single buyer, the centralisation of ‘national’ agreements with suppliers, and the promotion of specific agreements with the individual aggregating entities in order to support the development of the system of aggregation nationwide37. Instead, with regard to ICT expenditure, 2016 Stability Law provides for a programme to streamline ICT purchases at a national level, bringing together all involved parties in an integrated, standardised and structured initiative aimed at increasing efficiency in the planning and public use of ICT and at achieving savings through the reduction of the unit prices for the related goods and services.

Acceleration of the process to produce personal healthcare records

The production of electronic personal healthcare records is to be accelerated through the institution of a national record hub that will get involved in the process, pending the activation of the regional hubs, which are expected to lead to savings of around €300-€600 million when they are fully operational. The key objective of the process is to rapidly ensure optimal interaction between healthcare facilities and individuals, and efficient monitoring of healthcare expenditure.

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37 See additional details in Chapter 3 of the National Reform Programme, and Chapter II of the Intermediate Report.

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Integrating the spending review into the budgeting cycle

The spending review cannot be limited to identifying public budget cuts only.  It must continuously promote the reorganisation of production factors, process innovation in the public administration, the identification of spending programmes entailing limited effectiveness and alternatives to meet new demands of the public and businesses for services, and more in general, the improvement of the quality of public services and initiatives.

In order to develop a continuous and systematic process in which all of the main areas of expenditure are involved, the government presented a proposed legislative decree in February 2016 for the completion of budget reform, with the decree providing for the integration of the spending review in the budgeting cycle (see Chapter VI.1: State budget reform). According to the provisions of current laws and regulations, the start of the financial planning cycle occurs with the presentation of the Economic and Financial Document (EFD) to Parliament by 10 April; the EFD indicates the government’s priorities and the economic/financial compatibility thereoffor the public administration. The enabling decree provides that, with decree of the Prime Minister, subject to deliberation by the Council of Ministers and upon the proposal of the Minister of the Economy and Finance, each administration will be given specific spending objectives by the end of May. On a basis consistent with the objectives assigned, central administrations will define their own financial planning by taking into account legislation in effect, efficiency improvements in the use of the resources that can be achieved through administrative procedures, and possible legislative/regulatory proposals aimed at achieving the expected results. These proposals will be evaluated for the purpose of their inclusion in the draft Stability Law and will be discussed by Parliament during the process of approving the budget.

The process envisioned entails significant action in advance with respect to the current system in which the proposals for the draft Stability Law have often been defined around the time of the approval of such law. The decision to act through of a decree of the Prime Minister, subject to deliberation by the Council of Ministers, is also aimed at strengthening the unity among the various participants in the budget process with respect to the decisions about the objectives to be assigned to each ministry, with consequent benefits in terms of the actual sustainability of the objectives and the vesting of responsibility, including political responsibility, with the ministries involved.

With this decision, the main emphasis is on attempting to reverse the order of the planning for the draft Budget Law and Stability Law. In other words, the overall proposal for defining the budget will no longer be the sum of individual proposals or requests of the spending administrations, but it will be developed within the objectives assigned to those administrations, which represent the boundaries of the planning. The necessity of evaluating (both simultaneously and in alternative terms) the financing of ‘historical’ activities and new spending proposals should facilitate the comparison between the respective effects and favour the reallocation of the resources among initiatives and activities in relation to their effectiveness.

In order to increase the focus on achievement of the projected results (from both a financial perspective and with regard to the outcomes of administrative

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action), the most important initiatives (possibly amended by Parliament with respect to the original proposals) will be the subject of specific three-year monitoring accords between the Ministry of the Economy and Finance and each spending ministry. The monitoring will regard the verification of the status of implementation of the administrative and legislative measures provided, and, where pertinent, the verification of the achievement of the quantity and quality of the goods and services produced.

The accords will need to be finalised by 1 March of each year, and thereafter, they will be the subject of periodic meetings between the administrations, for the purpose of monitoring the extent to which the results provided have been achieved, and for the timely identification of any criticalities that might necessitate corrective and/or supplemental measures to the original legislation. For this purpose, a report on the status of the implementation of the agreements is to be supplied in July to the Minister of the Economy and Finance and the President of the Council of Ministers, including for the purpose of providing information useful for subsequent planning and/or the revision of current planning.

The spending review for local entities is done with reference to the tools identified by the standard costs system and standard requirements38, which serve as the parameters to be used as the basis of the financing of fundamental expenditure for municipalities, metropolitan cities, and provinces, so as to ensure that the historical spending criterion is gradually and finally superseded. The process already initiated has been rounded out through the creation of a technical commission at the Ministry of the Economy and Finance for the purpose of simplifying procedures for the approval of the methodological notes and standard requirements, previously handled by the joint technical commission for the implementation of the fiscal federalism.

Finally, with reference to tax expenditures, the implementation of the fiscal enabling act has provided for the preparation of an annual planning report for recognition of the tax incentives in effect. This report will serve as the basis for an autumn evaluation of the initiatives aimed at reducing, eliminating or reforming tax expenditure, which are to be made operative as part of the budget. This recognition will be essential in order to ensure the implementation of the changes introduced with the revision of the annual budgeting process.

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38 The standard requirements were introduced by Legislative Decree No. 216 OF 26 November 2010, enacted as part of the implementation of the enabling act on fiscal federalism provided by Law No. 42 of 2009. The method for determining the requirements is technically complex, with the decree defining a series of elements to be used and leaving its implementation up to the Società per Gli Studi di Settore, now known as Soluzioni per Il Sistema Economico – SO.S.E. S.p.A.

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VI.1 STATE BUDGET REFORM

In recent years, Italy has adopted a series of regulatory measures to improve the rules and procedures that govern fiscal conduct and budget policy. Prepared on a basis consistent with developments in European laws and regulations, such measures allow for getting past some critical issues at a national level and completing the cycle of reform initiated with the revision of the Public Finance and Accounting Law of 20091.

Italy’s Constitutional Law No. 1 of 2012 ratified a general principle providing that all of the public administrations must ensure a balanced budget between revenue and expenditure and the sustainability of the debt. At a later date, Law No. 243 of 2012 was enacted and provided for: i) the implementation of the principle of a balanced budget in structural terms, consistent with a similar provision within European law, and ii) the obligation for the public administrations to ensure ‘at least’ the achievement of the Medium Term Objective, or in any event, the respect of the planned path toward achievement of such objective.

In 2016, the government has presented drafts of legislative decrees2 for completing the revision of the State budget’s structure and enhancing the function of the cash budget, in accordance with the guiding principles and criteria contained in Articles No. 40 and No. 42, respectively, of the Public Finance and Accounting Law.

The measures outlined with the legislation for the completion of the budget reform are aimed at: making the budget more significant and easier to interpret; improving the quality of revenue and expenditure data; enhancing the financial planning process and the role of the budget in allocating resources, including by making the spending-review process an integral part of the budget cycle; improving monitoring with respect to the achievement of pre-set targets; and simplifying procedures for provisions to change the budget during the year, so as allow for more timely availability of resources, for the purpose of the proper management thereof.

In relation to these objectives, the decree for the completion of budget reform provides for:

a) streamlining parliamentary voting units (State budget ‘programmes’);

b) introducing ‘actions’, such as further definition of the programmes, in order to make it easier to understand the activities carried out, the underlying policies, and the services delivered;

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1 Law No. 196 of 31 December 2009.

2 Government acts No. 264 and No. 265.

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c) adopting an integrated accounts plan and, for reporting purposes, an integrated income-capital accounting system;

d) gradually eliminating accounting systems operational at the State Treasury, and revising the Treasury’s summary account;

e) revising the budget cycle, with a stricter top-down approach with respect to the current system, and the assignment of spending targets by ministry at the start of the year to serve as the limits within which the financial planning and the definition of proposed budget measures will take place;

f) enhancing the monitoring of the public finance measures adopted, through the definition of accords between the Ministry of the Economy and Finance and the other ministries, and the integration of a continuous and systematic activity of analysis and assessment of expenditure as part of the budget cycle so as to provide information for assessing possible options in relation to the resources needed for public action, the implementation of the proposed measures, and the results expected from such measures;

g) granting more flexibility, both during the forecasting and operational phases, and streamlining the related administrative procedures;

h) booking resources (special purpose revenue) to the budget on 1 January, instead of assigning them to the ministries during the year (as done currently).

The main objectives of the legislative decree for enhancing the role of the cash budget regard: i) giving a greater emphasis to the role of cash forecasts, thereby creating a more direct link between parliamentary decisions about resource allocation in the budget and the point when such decisions impact the economic system through actual disbursement of the resources; ii) more detailed planning of cash flows, with consequent improvement of the management of the borrowing requirement, and the repercussions on the trend of the public debt; and iii) the revision and streamlining, including in quantitative terms, of the issue of residual amounts in the budget.

The decree regarding the cash budget provides for:

a) revising the concept of a spending commitment, getting it closer to the payment phase (in relation to the year in which the obligation assumed becomes payable) and adopting measures to improve the representation of the operational results at the level of revenue;

b) the mandatory preparation of a payment schedule by the managers heading budget programmes, at the time of the drafting of the forecast budget (with a consequent greater emphasis on the planning role of cash budget, and more timely payments);

c) revising the criteria for the budget carry-forward of residual liabilities from previous periods, including through their reconfiguration and assignment to future years, in relation to the forecast of the actual use of the resources;

d) amending the terms for the budget carry-forward of liquidity and residual liabilities concerning certain types of expenditure (for which very detailed procedures have been provided);

e) the publication, in a special exhibit to the State general account, of a reconcilement between the State budget and State Treasury, so as to supply (in special tables) quantitative information about the Treasury’s

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intermediation with respect to the budgeted sums disbursed, and thus, on the actual delivery of resources to the final recipients;

f) the possibility of renegotiating sums not committed at year end related to long-term spending authorisations and other capital expenditure in relation to the financial forecasts of payments.

In some cases, these measures entail changes and upgrades to information processes and systems involving various areas of government. In other cases, the measures impact the entire budget structure, with significant repercussions on resource management inthe fiscal year at the level of the central government and its information systems. A period of gradual application has been provided for some of the proposed changes, including through experimentation that will involve all of the areas impacted.

The legislative decrees have been outlined against a backdrop that is still changing. Additional measures will need to be defined for the implementation of Law No. 243 of 2012, in relation to State budget equilibrium and the consolidation of the legislative bills for the Budget and Stability Law, and for certain changes that the government has proposed to revise such law, for the part related to the governance of the regions, provinces and municipalities.

With regard to the first aspect, Law No. 243 of 2012 provided for consolidating the draft Budget and Stability Law with the objective of defining the budget at year end and deciding on resource allocation by focusing on the total amount of public resources in relation to the purposes for which they are used (instead of only marginal variations made every year with the Stability Law).

In any event, in order to distinguish the resources coming from the application of existing laws and regulations from those appropriated with the new measures, the law provides that the draft Budget Law is to be divided into two sections: the first contains the measures with reference to the public finance targets under the policy scenario indicated in the Economic and Financial Document (EFD); the second section illustrates the revenue and expenditure forecasts, expressed on an accruals basis and cash basis, as computed on the basis of unchanged legislation.

For the application of the balanced budget principle to the regions and local entities, the government has recently approved a legislative bill to amend Law No. 243 of 24 December 2012, with the aim of bringing the public finance restrictions on territorial entities in line with the reform of the territorial accounting, including through procedural simplifications. In particular, the new provisions will substitute the four budget balances of reference for the regions and local entities, that were initially set with Law No. 243 of 2012, and the new balance of reference is a single non-negative balance on an accruals basis between final revenue and final expenditure, for both the forecast and the definitive final accounts. The new provisions also govern borrowing transactions and the use of prior-year surpluses for investment transactions. Finally, the contribution of the regions, municipalities, provinces, metropolitan cities and the autonomous provinces of Trento and Bolzano, to the sustainability of general government debt is delegated to State law, and is based on payments to the Fund for the Amortisation of Government Securities, taking into account the trend of the economic cycle.

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VI.2 FISCAL RULES FOR LOCAL GOVERNMENT

Balanced budget rule

The Domestic Stability Pact (DSP) has represented the main basis for the coordination of local finance in Italy for approximately 16 years. Since its introduction in 1999, the pact has defined the contribution of the regions, provinces, and municipalities to the achievement of the net borrowing target pursued at a national level in respect of the Stability and Growth Pact. The protocol regarding the excessive deficit procedure, which is an exhibit to the Maastricht Treaty, requires EU Member States to ensure that national budgeting procedures would allow the Member States to respect the obligations arising from the treaty. Since its introduction, the DSP has thus had the purpose of containing local government borrowing.

The DSP rules have been significantly revised over time. Such changes have regarded the definition of the constraints to be respected, which were initially expressed as financial balances, then as ceilings on expenditure, and then again on an approach based on balances. The 2015 Stability Law moved ahead (from 2016 to 2015) the applicability of the balanced budget rule to the regions, while it retained the prevailing DSP rules for the local entities (provinces, municipalities and metropolitan cities with a population of more than 1,000), with some changes that allowed for obtaining positive results in terms of increasing investment and reducing current expenditure.

More specifically, in 2015, with the full adoption of a harmonised accounting system3 and the introduction of the Fund for Doubtful Receivables as one of the items for checking compliance with the DSP on the part of municipalities, provinces and metropolitan cities, expenditure on personnel decreased by 5.3 percent, while intermediate consumption declined by 7.3 percent, and such decreases were offset by increased expenditure on investment (+12.5 percent).

The 2016 Stability Law4 has provided for the phasing out of the DSP as of 2016 by introducing the balanced budget rule for all territorial administrations. The phasing out of the DSP is a direct consequence of the enhancement of the budget rules agreed at a European level. In March 2012, with the signing of the Fiscal Compact, the EU Member States agreed to introduce the balanced budget principle into their national law; such principle provides for the obligation of ensuring the achievement of the Medium Term Objective (MTO), or, in any case, ensuring rapid convergence toward such objective.

This principle was adopted by Italy through Constitutional Law No. 1 enacted in April 2012 and the related law for implementation (Law No. 243 of 2012), approved by an absolute majority of both the Senate and the Chamber of Deputies. The balanced budget principle, as set by Article 81 of the Constitution, has been defined in structural terms at the level of general government (consistent with the definition used in the rules of the preventive arm of the

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3 Legislative Decree No. 118/2011, amended by Legislative Decree No. 126/2014.

4 Law No. 208/2015, Article 1, Paragraph 707, Paragraphs 709 to 713, Paragraphs 719 to 734.

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Stability and Growth Pact); for the local entities, the principle is defined in nominal terms5, since it is not possible to replicate, at a local level, the correction of the deficit for effects of the economic cycle which is done at a national level.

The 2016 Stability Law thus provides that the regions and local entities will need to achieve a non-negative balance between final revenue and final expenditure on an accruals basis in 2016; such balance is stated net of new loans or the repayment of loans. The equilibrium must be ensured in the planning phase (ex ante) and in the final accounts (ex post). The new rules regard all levels of local government: regions, provinces, metropolitan cities, municipalities and the autonomous provinces of Trento and Bolzano. The 2016 Stability Law has also provided for i) the continuing application in 2016 of the entities’ monitoring and certification obligations, with certification of the achievement of the 2015 targets required by the DSP to be sent to the Ministry of the Economy and Finance, and ii) the application of sanctions in the event in which the entities do not respect the DSP for 2015 or preceding years.

The rule applicable for 2016 is less stringent compared with that provided by the law for implementation of the balanced budget6, which requires the respect of four restrictions: a non-negative balance between final revenue and final expenditure, on an accruals basis and a cash basis, and a non-negative balance between current revenue and current expenditure, inclusive of the principal portions of loan amortisation instalments, on an accruals basis and a cash basis. These restrictions are to be respected in both the forecast and the final accounts.

The government’s decision to limit the scope of the new rule is based on the objective of allowing the local entities to tap cash liquidity already available, which were not employed due to the constraints of the DSP7. The balanced budget rule as reformulated in this manner is expected to generate expansionist effects for municipalities equivalent to €400 million in 2016, €200 million in 2017, and €75 million in 2018; such expansion should favour greater capital expenditure, on a basis consistent with the new interpretation of European fiscal rules (which aim to promote public expenditure for investment). The adoption of the balanced budget rule is instead likely to entail restrictive effects for the provinces (approximately €390 million in 2016, €190 million in 2017, and €65 million in 2018), and the regions (approximately €1.9 billion in 2016, €1.0 billion in 2017, and €0.7 billion in 2018), and thus entails a corresponding improvement in the net borrowing of such administrations.

The 2016 Stability Law confirms the so-called Solidarity Pacts, namely vertical and horizontal regional pacts through which metropolitan cities, provinces, and municipalities can benefit from greater financial leeway for investments respectively transferred from the region of origin and from other local entities; the law has also prioritised the assignment of the financial leeway transferred by the regions against applications made by municipalities with a population of up to 1,000 and municipalities created from mergers since 2011.

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5 Law No. 243/2012, Article 9.

6 Law No. 243/2012.

7 For additional detail, see the focus entitled ‘Public investment and moving beyond the restrictions of the Domestic Stability Pact’.

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The 2016 Stability Law also confirmed the Horizontal National Pact that allows for the redistribution of financial leeway between local entities at a national level.

These provisions for flexibility are designed to combine the balanced budget target with the need for reinstating public investments that are fundamental to the local and national economy. Instead, the incentive-based vertical flexibility, as previously provided by the DSP, has been eliminated, with subsidies no longer paid to the regions that provide financial flexibility to municipalities in their territories for the purpose of carrying out investment.

With reference to the balanced budget, it is important to note the exclusion of expenditure sustained by local government for school construction works financed from local government surpluses and borrowing. This exclusion is effective for up to €480 million for 2016. For 2016 only, the achievement of the balanced budget is computed with the inclusion of the Fondo Pluriennale Vincolato di Entrata e di Spesa (Restricted Long-Term Revenue and Expenditure Fund, RLTREF), with reference only to the portion contributed by the local entities8. This is a financial fund that ensures the coverage of expenditure appropriated to years following the year covered by the budget, consisting of resources that are already certain but allocated to the financing of the entities’ expenditure in periods after the one in which the revenue was assessed. The fund is thus a link between two or more fiscal years. The consideration of the RLTREF as part of income in the computation of the overall budget balance will also likely entail further expansionist effects to the benefit of the municipalities, quantified at approximately €600 million. Municipalities are the entities that account for most of the investment spending of local government, and consequently are the entities that make the most use of the RLTREF. The expansionist effects in favour of the provinces and metropolitan cities are instead more limited, and are estimated to amount to €70 million overall.

In accordance with the 2016 Stability Law, the sanctions applicable for the failure of local administrations to achieve a balanced budget will not be applied to the Regions of Friuli Venezia Giulia, Valle d’Aosta, Trentino Alto Adige and Sicily and the autonomous provinces of Trento and Bolzano, during the 2016-2017 transition phase.

In consideration of the performance of Italy’s economy, which is now more favourable than in years past, but is still below expectations, the government intends to reform Law No. 243 of 2012 in the next few months, so as to address the issue of a balanced budget from a long-term perspective. Attaining equilibrium between budget rules and the flexibility at the root of Italy’s economic-policy strategy is also to be ensured with respect to local government, with changes to reverse some of the rigidity that has impeded the planning of new investment in years past.

___

8 The fund’s resources come from operating surpluses and from the borrowings of the entities.

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FOCUS Public investment and moving beyond the restrictions of the Domestic Stability Pact The recent debate recognises that the Domestic Stability Pact (DSP) has contributed to holding down deficits and stabilising the debt stock of local entities and, in general, has prompted more rigour on the part of local government leaders in budget preparation. In recent years, however, the sources of local government financing have diminished, due to i) the reduction of transfers from higher levels of government and the suspension, pending the implementation of fiscal federalism, of the powers of local entities to increase local tax rates, ii) lower income for local urban projects and the sale of capital assets. Against this backdrop, the restrictions set by the DSP have limited the planning and execution of investments by many local administrations. The outcome has been the opposite of what was intended by lawmakers, who had hoped the introduction of the DSP would have stimulated local entities to reorganise their total expenditure, by reducing current expenditure and allocating more funds to investment9. As shown by past data calculated on an accrual basis, the effort to hold down the net borrowing of local government became evident in 2007, with the deficit of local government going from 1.0 percent to 0.1 percent of GDP (see Figure R.1). The achievement of a budget surplus or near balanced budget in recent years has been accompanied by a major change in the mix of expenditure (see Figure R.2).  

FIGURE R.1: LOCAL GOVERNMENT NET BORROWING AND DEBT (% of GDP)	FIGURE R.2: LOCAL GOVERNMENT INVESTMENT AND PRIMARY CURRENT EXPENDITURE (% of GDP)
Note: With the changeover to the ESA 2010, gross fixed investment also includes the change in inventories. Source: MEF elaborations on data compiled by ISTAT (29 October 2015) and Bank of Italy.

After steadily growing as a percentage of GDP for almost one decade, local government expenditure for investment began to decelerate in 2005, declining from 2 percent of GDP in 2004, to 1.2 percent in 2014, the lowest level of the past 20 years. In 2002, local government investment accounted for approximately 80 percent of public investment, while in 2014, it was less than 55 percent of the total. Instead, the primary current expenditure of local government in relation to GDP had a positive trend over the time horizon considered, with contractions observable only in the years 2007, 2010 and 2011. Such expenditure has stabilised at a level of around 13 percent of GDP in recent years.

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9 Grisolia E., ‘Survey on local finance’, hearing at the Chamber of Deputies (Budget, Treasury and Planning Commission), 28 January 2010.

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The reduction of local government investment can be associated with lower borrowing on the part of the entities, with Article 119 of the Constitution requiring local government to borrow only for financing investment expenditure10. With less borrowing, the growth of the debt stock of local government has slowed. After almost four years of remaining virtually stable, in 2013, local government debt began to decline, reaching 5.4 percent of GDP in 2015.

The trends described can be attributed first to the rigidity of the main items of current expenditure, such as expenditure for employee compensation. As such, the fiscal consolidation required by the DSP has been realized mostly through a contraction of investment spending, which is easier to suppress. The rigidity of current expenditure is, however, a common element for the expenditure of all of the public administrations, while the DSP rules, with their impact exclusively on local finance over the years, can more directly explain the scaling down of the investment spending of the regions, provinces and municipalities.

From 1999 to 2015 (the years when the DSP was in effect11), there were repeated legislative measures that changed the target variables and accounting criteria, introduced a penalty/rewards system and various exceptions, as dictated mostly by contingent needs for which extraordinary capital expenditures were required.

With more specific reference to the individual changes, it was in 2005 (the year when public investment started to contract) that capital expenditure was included in the expenditure aggregates subject to the ceilings set by the pact. In the previous years, from 1999 to 2004, the correction required of local government was expressed in terms of financial balance between final revenue and current expenditure only.

In 2007, the inclusion of capital expenditure in the computation of the reference aggregates was confirmed. The ceilings on final expenditure were abandoned, and there was a return to the target financial balance, calculated by considering final revenue and expenditure (cash basis and accruals basis). This revision resulted in only some of the restrictions of the DSP being made comparable to the Stability and Growth Pact restrictions, since the ceilings on final expenditure (net of healthcare expenditure, which is subject to the specific regulations of the Healthcare Pact) were kept in place for the regions.

The revision of the DSP rules in 2007 did not includecash inflowsfrom borrowing in the computation of the target balance for municipalities and provinces, since such inflows were financial and classified outside of the final revenue category. Such exclusion was effectively a disincentive to debt-financed investment, since the balance would have included only the increase on the expenditure side.

The change that is believed to have further limited local government investment decisions came with the 2008 Budget Law12, when the budget objectives were defined by using different methodologies: current revenue and expenditure were valued on an accruals basis (assessments and commitments), while capital revenue and expenditure were valued on a cash basis (collections and payments). These different criteria explain one of the main factors for the decrease in investment spending, in terms of both payments and commitments. The introduction of this system caused an inevitable misalignment (in terms of the timing for recognition of expenditure) between i) the expenditure for investment appropriated in the forecast budget and ii) the margins allowed by the DSP. Therefore, there was an accumulation over time of resources committed to capital expenditure (especially

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10 The constitutional reform of 2011 also provided that the use of debt necessitated amortisation plans and that the debt was admissible on the condition that budget equilibrium would be respected for all of the entities of each region.

11 In 2015, the DSP was applicable to all entities, except for ordinary-statute regions and the Region of Sardinia for which the balanced budget rule had entered into effect, being moved ahead from 2016 to 2015.

12 Law No. 244/2007.

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for municipalities) that could not be actually paid because of cash restrictions. A recent study shows, in particular, that the use of this accounting system mainly penalised those municipalities that had a better financial situation, and namely, those entities that had cash balances that remained unemployed so that the municipalities would not violate the pact13.

This timing difference often prompted local governments to use available liquidity for paying past commitments (expenditure for the residuals account), while sacrificing payments related to capital expenditure commitments assumed in the same year. The contraction of the commitments for investment expenditure that resulted was in some cases greater than the contraction in payments. The evident drop in public investment as of 2005-2006 was a common phenomenon for the regions, provinces and municipalities, but the greatest reduction was seen with respect to municipal public investment, which declined from a high of 1.1 percent of GDP in 2004 to 0.5 percent of GDP in 2014 (see Figure R.3).

FIGURE R.3: INVESTMENTS OF REGIONS, PROVINCES AND MUNICIPALITIES (% of GDP)	FIGURE R.4: INVESTMENTS OF REGIONS, PROVINCES AND MUNICIPALITIES (% change y/y)
Note: With the changeover to the ESA 2010, gross fixed investment also includes the change in inventories. Source: MEF analyses using data compiled by ISTAT (29 October 2015) and Bank of Italy.

With the full-scale adoption of harmonised accounting in 201514, the DSP rules were revised, and provisions to the Fund for Doubtful Receivables could be included as current expenditure. This change has allowed for a renewed focus on local investment (+12.5 percent compared with 2014), with the emphasis now on reinforcing substantial budget equilibrium, on the one hand, and supporting precise planning of investments, on the other hand. The reform also entails the gradual reabsorption of the misalignment in timing between commitments (accruals basis) and payments. The new accounting criteria provide that local government investment spending is booked to the budget based on the state of completion of the works, namely, at the time when there is a legal obligation to pay the amount for the works executed.

With the balanced budget rule entering into effect in 2016, the DSP has been phased out. Lawmakers have definitely tried to reach a better balance between i) the need to achieve proper management of local public finances, and ii) the need to allow sufficient financial leeway for realising public investment, on a basis consistent with the changes introduced

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13 See Chiades P., Mengotto V., ‘Il calo degli investimenti nei Comuni tra Patto di Stabilità Interno e carenza di risorse’, QFE No. 210- Bank of Italy, November 2013.

14 Legislative Decree No. 118/2011, amended by Legislative Decree No. 126/2014.

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with the accounting harmonisation. A form of intra-regional flexibility has been envisioned for the purpose of boosting capital expenditure; this flexibility is similar to the mechanisms already in effect as part of the so-called Solidarity Pacts, conditional to the respect of overall targets at a regional level. In order to make the DSP operating mechanisms less rigid, the balanced budget for 2016 will be measured only on an accruals basis.

Healthcare Pact and ceilings on pharmaceutical expenditure

The regions’ spending on healthcare is subject to the rules contained in the Healthcare Pact, a three-year agreement negotiated between the State, regions and autonomous provinces of Trento and Bolzano. Through this pact (which has been in effect since 2000), the institutional parties involved agree on the amount of the resources to be appropriated for the financing of the National Healthcare Service (NHS) so as to ensure the resources necessary for medium-term planning. The pact also sets the instruments for governance of the healthcare sector, and the means for verifying the same.

The Healthcare Pact for the 2014-2016 three-year period signed on 10 July 2014 has defined the level of the State’s financing of the healthcare sector, and addressed issues related to the organisation and regulation of the NHS.

With the State-Regions agreement of 26 February 2015, the level of financing of the NHS, which was originally set at €112.0 billion for 2015 and €115.4 billion for 2016, was reduced to €109.7 billion for 2015 and €113.1 billion for 2016. This reduction was the result of the definition of the healthcare sector’s contribution to the overall budget of the regions, as provided by the 2015 Stability Law, which was quantified at approximately €2.34 billion as from 2015.

The 2016 Stability Law made another change to the financing of the NHS, setting it at €111 billion for 2016, which is above the level for 2015, but below the programmed level. As part of the implementation of the 2014-2016 Healthcare Pact, around €800 million of the financing of the NHS has been conditioned on the adoption of new Essential Levels of Care (ELC) to be outlined through a special Decree of the President of the Council of Ministers. For this purpose, the 2016 Stability Law provides for the establishment of a national commission to update the ELC and to promote the appropriateness in the NHS at the Ministry of Health. Such commission will proceed in evaluating the economic and scientific appropriateness of the healthcare services to be included in the ELC.

The adoption of stricter regulations regarding centralised procurement will facilitate the achievement of the savings on expenditure provided for 2016, by ensuring the reduction of unit purchase prices. The 2016 Stability Law provides that the entities of the NHS must purchase the types of goods and services identified in a Decree of the President of the Council of Ministers exclusively through regional procurement centres or CONSIP.

Another important aspect of the Healthcare Pact is the introduction of restructuring and deficit-reduction plans for those hospitals, including university hospitals, public institutions for hospitalisation and health, and other entities that provide hospitalisation and health services, which have significant cost-revenue

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Imbalances15 or do not meet specific quality and effectiveness parameters in providing their services. The entities identified by each region will be required present plans (for up to a three-year period) containing the corrective measures needed to re-establish earnings/financial balance or the appropriateness of services offered. The criteria for assessing divergence from the financial plan and qualitative standards will be outlined through a ministerial decree, taking into account the organisational characteristics of each region.

With reference to pharmaceutical expenditure, nothing has changed with regard to the ceilings on expenditure: the ceiling on territorial pharmaceutical expenditure is set at 11.35 percent of the State’s ordinary financing, while hospital pharmaceutical expenditure has a ceiling of 3.5 percent of the National Healthcare Fund16. Should the ceilings be violated, there is an automatic mechanism for correction, with pharmaceutical companies required to make paybacks to the regions.

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15 Cost-revenue imbalance of more than 10 percent of revenue, or at least equal to €10 million in absolute value.

16 The current ceilings were set by Legislative Decree No. 95/2012, converted by Law No. 135/2012.

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The

ECONOMIC AND FINANCIAL DOCUMENT 2016

is available on-line

at the internet address listed below:

www.mef.gov.it • www.dt.tesoro.it • www.rgs.mef.gov.it

ISSN 2239-5539

EX-99.3

Exhibit 3

INTRODUCTION

The 2016 Economic and Financial Document (EFD) is the third prepared by this government. This document is thus part of a longer term economic planning strategy that started with the implementation of the initial measures in 2014. The main objectives of this strategy are widely known: the revival of growth and the relaunching of employment. The operational mechanisms can be summed up in four points: i) ongoing structural reform of the country, and stimulus to private and public investment; ii) a budget-policy orientation that is both favourable to growth and aimed at ensuring gradual, but robust, fiscal consolidation, so as to allow for a gradual reduction of the debt-to-GDP ratio; iii) the reduction of the tax burden, which is associated with more efficient expenditure and more efficient general government; and iv) the improvement of the business environment and the Italian economy’s competitive capacity.

The government’s effort in recent years has been extensive and incisive, and it has produced rather significant results in relatively brief timespan, with the return to growth and the increase in employment in 2015 representing the incontestable evidence thereof. Looking ahead, the reform effort is also designed to improve the framework for investment decisions, which will be favoured by greater efficiency of the civil justice system and government overall, the gradual reduction of the tax burden, the growing availability of financing, and measures to stimulate demand. Alongside the new measures to be adopted in the near term, a special emphasis goes to the full-scale implementation of the reforms already initiated.

The government’s extensive reform effort is to be paired with new stimulus measures, including further reduction of the tax burden and a gradual increase in public investments. These measures will serve to bolster the recovery at a time when there is significant economic uncertainty at an international level.

External environment and results achieved

The government has conducted its economic policy in recent months in the face of an external environment that has gradually grown more problematic. In 2015, the ongoing deceleration of the large emerging economies and the Euro Area’s continuing weakness negatively influenced the trend of foreign demand for Italian goods and services; the performance of the international economy was also affected by increased volatility in the financial markets and the threat of terrorism.

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ECONOMIC AND FINANCIAL DOCUMENT

Persistent deflationary pressure in the Euro Area (partly due to continuing decreases in commodity prices, but also due to weak domestic demand) has impeded the transmission to the real economy of the exceptionally expansionist monetary-policy measures adopted by the European Central Bank; this has slowed investment, while also increasing the burden of private and public debt.

The Euro Area is also characterised by uneven distribution of growth and employment that periodically exposes it to shocks, with serious risks for the sustainability of the European project. The less-than-satisfactory convergence process – including in areas in which the integration is proceeding with greater decision, for example, in banking and finance – is perpetuating the segmentation of the area, impeding the necessary structural reform of the various economies.

The inflow of migrants and asylum seekers constitutes only one of the new and exceptional challenges for Europe, which are vividly revealing the weaknesses of the European project incapable of adopting coordinated policies and outlining common initiatives. Euroscepticism and the consensus for populist proposals are on the rise in almost all of the Member States. Given the material risk of national interests prevailing over the common good, the Italian government has proposed a detailed European strategy for growth, work and stability, so to make Europe a part of the solution to the problems that it is facing and to restore the confidence among citizens and among Member States.

Despite the fragile framework of reference, the Italian economy was once again expanding in 2015 after three consecutive years of contraction, with GDP growing by 0.8 percent in real terms and 1.5 percent in nominal terms. The growth produced benefits for employment, which rose considerably, and the unemployment rate, which was significantly lower; the improvement in labour market conditions was also associated with a positive trend of households consumption.

The positive data on industrial production in the first months of 2016 suggest a new acceleration of GDP in the quarters ahead. In line with these trends, the EFD forecasts 1.2 percent growth of GDP for 2016; under the policy scenario, growth would continue to accelerate in 2017 and 2018, also benefitting from a budget policy supporting business activity and employment.

Investments: support policies and initiatives to improve the business climate

Whereas Italy’s economic recovery in 2015 was mainly driven by exports and consumption, in 2016, it will be necessary to weigh the less-than-satisfactory growth of world trade; further improvements in competitiveness and an acceleration of investment (the component of demand that suffered the most during Italy’s economic crisis) will also be necessary for propelling GDP growth.

II MINISTERO DELL’ECONOMIA E DELLE FINANZE

INTRODUCTION

In 2015, capital investment, including public investment, was once again on the rise. This is an important indication of a turnaround after years of contraction, when it became evident that it was rather easy to cut public investment spending, but also rather difficult to revive it in a relatively short time span.

The 2016 Stability Law has appropriated significant resources for the purpose of stimulating an acceleration in private and public investments. These measures have been rounded out by the request for the application of the public investments clause provided by European Union fiscal rules. The Stability Law’s key initiatives in this regard include the allowance of accelerated tax depreciation for investments made in 2016 and a tax credit for investment in southern Italy during the 2016-2019 four-year period. In addition to the aforementioned resources, the government has outlined measures capable of further improving the investment climate in Italy, and these specifically concern financing instruments, the efficiency of government and the civil justice system, as well as territorial cohesion.

In consideration of the financing difficulties encountered by small- and medium-sized businesses and start-ups, the government has made available several instruments, which are also aimed at supporting technological innovation, expenditure in research and development, and business expansion. New measures have been introduced to simplify credit access, and to encourage the capitalisation and the stock-market listing of businesses, as well as the value enhancement of patents and other intellectual property.

With numerous regulatory measures now being implemented, the Italian banking system has a more modern and competitive structure. The measures embrace: the reform of the mutual banks (banche popolari), cooperative banks, and banking foundations; the reform of insolvency and credit-recovery proceedings; the introduction of a system of public guarantees for the sale and securitisation of the non-performing loans; and the acceleration of the timing for tax deductibility of credit losses. Although remaining solid, the banking system has had to become more resilient as a result of the high level of non-performing loans. The government believes that the strategy of strengthening the credit system must also be based on changes to the civil justice system, so as to make it easier for banks to dispose of non-performing loans.

In order to facilitate business investment decisions, the Italian justice system must become more equitable and efficient, by conforming to European standards. In view of this objective, changes in the past two years have included: introduction of online proceedings, new tax incentives for assisted negotiation and arbitration, the geographic restructuring and rationalisation of the courts, and the expansion of the sphere of application of out-of-court agreements. Reforms have also been initiated with respect to the civil process and the regulations governing troubled companies and insolvency – with the aim of increasing the opportunities for the turnaround of companies in crisis, and

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limiting their damage to the surrounding economic environment. The objectives are to simplify and streamline the judicial apparatus, with the transition aimed at engendering a more management-oriented approach for the court process.

Greater efficiency of the public administration is also essential to improving the investment climate in Italy. The public administration must be capable of delivering quality services to the public and businesses, and in this respect, regulations have already been approved regarding: the simplification and the acceleration of the administrative proceedings; the digital administration code; transparency in public tenders; and the restructuring of the police forces, port authorities, local public services, State-owned enterprises held by central and local government, and the chambers of commerce. Other initiatives will regard: the fight against corruption; reform of the managerial staff within the public administration; rules for full-time workers in the public sector; and the reorganisation of the Office of the Presidency of the Council of Ministers and non-economic public entities. The programme to reform the public administration will be rounded out by the implementation of the Agenda for Simplification.

National policies common to all regions need to be strengthened where delays continue to exist in developing the training of human capital, productivity and infrastructure. The changes will need to be supported with appropriate macroeconomic incentives, including those contained in the 2016 Stability Law. With the objective of contributing to reducing regional imbalances, the Masterplan for Southern Italy aims to develop productive chains, starting from areas most vital to the local economy, and increasing their entrepreneurial capacities and job skills.

The development of the projects promoted by the European Fund for Strategic Investments (the heart of the so-called Juncker Plan) is also contributing to the revival of private investment. According to the latest data in reference, Italy has 29 initiatives in process, between financing agreements and infrastructure projects, for €1.7 billion of resources. Considering the leverage effect, additional investments of approximately €12 billion can be made.

Budget policy focused on growth and public finance sustainability

The trend of Italy’s public finances is subject to certain limitations, first and foremost of which is the need to reduce the public debt as a percentage of GDP.

The debt-to-GDP ratio essentially stabilised in 2015; it is projected to decrease from 132.7 to 132.4 percent in 2016, and eventually drop to 123.8 percent by 2019. Reversing the trend of the debt is a strategic objective for the government. With the target of cutting net borrowing to 2.6 percent of GDP in 2015 having been met, the deficit is slated to decline further, to 2.3 percent in 2016. Additional budget leeway in later years should be provided from savings on expenditure, achieved through the expansion of the spending review process,

IV MINISTERO DELL’ECONOMIA E DELLE FINANZE

INTRODUCTION

which will also address tax expenditure, and tools to increase fiscal compliance and reduce the margins for tax avoidance. With the combination of these measures, the ratio of net borrowing to GDP should descend to 1.8 percent in 2017.

The fiscal consolidation effort is benefitting from the programme to privatise State-owned companies and real estate. This programme is an essential tool for modernising the State-held companies, and contributing to reduction of the public debt.

Current budget policy is in line with that adopted in the past two years in that it impacts the mix of revenue and expenditure in a manner favourable to growth, but it is also focused on budgetary discipline and respect of the European rules. It is sufficient to note that Italy is the country that reported the highest cyclically adjusted primary surplus on average in the Euro Area during the years of the financial crisis; Italy was one of the few countries to have achieved a positive primary balance, while most Euro Area countries witnessed deterioration in their position during the period considered.

The government believes fiscal tightening is inappropriate and counterproductive in consideration of various factors: i) real risks of deflation and stagnation, referable to the international economy; ii) insufficient coordination of budget policies in the Euro Area, whose overall budget policy is inadequate when considering the evident lack of aggregate demand; and iii) the undesired effects of excessive fiscal tightening, which could end up exacerbating, rather than improving, the path of adjustment of the debt-to-GDP ratio.

***

Over the years, Italy has accumulated a high debt whose management has been made more difficult by i) the contraction of the economy caused by the recession, and ii) increasing deflationary pressures. In spite of this, budget policy can favour growth by synchronising the expectations of businesses and households with a credible outlook for reduction of the debt-to-GDP ratio and by an improved mix of public policy. With reference to the first objective, it is noted that budget policy achieved its targets in the past two years, without any corrective measures during the year and without increases in taxation on income from employment, corporate taxes or consumption; by contrast, a decrease in the tax burden of 0.8 percentage points was achieved during the period. With reference to the second objective, the spending review will be made more effective by the reform of the process for State budget preparation. This reform will help to overcome the ‘state of emergency’ reasoning that has inspired budget policy and economic policy in recent years; it will increase the accountability of the owners of spending decisions, while also facilitating an examination of the entire budget structure, instead of only changes implemented with the Stability Law.

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The institutional reforms approved by Parliament are also functional to an economic policy geared to the medium/long term. The reform of the electoral law, the abandonment of bicameral legislature, and the revision of the allocation of responsibility between the central and local governments will ensure more stable and effective political governance. These crucial reforms, which will allow Italy to get beyond some of its historical limitations, have been made even more significant by the growing fragility that the long economic crisis has been injecting into the political-institutional systems of various European countries. Given the prospect of uncertainty and weakness that is spreading across the global panorama, these reforms will reinstate Italy’s capacity to compete with, and to measure up to, the world’s leading economies.

Pier Carlo Padoan

The Minister of the Economy and Finance

VI MINISTERO DELL’ECONOMIA E DELLE FINANZE

INDEX

I. ITALY'S REFORM STRATEGY

II. MACROECONOMIC FRAMEWORK

II.1. Macroeconomic framework

II.2. The macroeconomic impact of structural reforms

II.3. The financial impact of new measures in the 2016 NRP

III. POLICY RESPONSES TO KEY ECONOMIC CHALLENGES

III.1. Implementation: the focal point of the government’s action

III.2. Public debt reduction

III.3. Productivity and external competitiveness

III.4. Strengthening institutional capacity

III.5. Masterplan for Southern Italy

IV. PROGRESS TOWARDS NATIONAL EUROPE 2020 TARGETS

V. EUROPEAN STRUCTURAL FUNDS

VI. INSTITUTIONAL ISSUES AND STAKEHOLDER INVOLVEMENT

APPENDIX: REFORM TIMETABLE AND SUMMARY OF ITALIAN REFORM MEASURES

A. REFORM TIMETABLE

B. SUMMARY TABLES OF THE MACROECONOMIC IMPACT OF REFORMS

C. SUMMARY OF THE REFORM ACTIONS FOR THE EUROPEAN COUNCIL RECOMMENDATIONS 2015

D. SUMMARY OF THE REFORM ACTIONS FOR THE EU2020 TARGETS

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INDICE

TABLES

Table II.1: Macroeconomic framework based on unchanged legislation

Table II.2: Macroeconomic effects of structural reforms for area of interventions

Table II.3: Macroeconomic effects of reforms

Table II.4: Financial impact of measures in grids on NRP

Table III.1: Spending review

Table IV.1: Target ‘employment rate of the 20-64 year olds

Table IV.2: Employment rate of the population aged 20-64 by gender and geographical area - years 2012-2015

Table IV.3: Target level ‘R&D expenditure'

Table IV.4. R&D expenditure for Central Governments, Regions and Autonomous Provinces for social and economic target - Years 2012-2014

Table IV.5: Greenhouse gas emissions target

Table IV.6: Renewable sources targets

Table IV.7. Target ‘energy efficiency’

Table IV.8: Target level for ‘school dropout rates'

Table IV.9: Target level for ‘tertiary education'

Table IV.10: Target level ‘fight against poverty’

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

FIGURES

Figure III.1: Infraction procedures under Renzi government

Figure III.2: Juncker Plan beneficiaries

Figure III.3: Sector-specific mark up in Italy – 1992-2014

Figure III.4: Network contracts and participating businesses

Figure IV.1: Employment rate of the population aged 20-64 by gender in EU countries – 2014

Figure IV.2: Italy's position in the knowledge economy: human capital, research and the information society

Figure IV.3: Early school leavers (ESL) by gender, in EU Countries -  2014

Figure IV.4: Early school leavers (ESL) by gender and Regions - 2015

Figure IV.5: Population between 30-34 having a university degree, by gender in EU Countries - 2014

Figure IV.6: Population between 30-34 having a university degree, by gender and Regions - 2015

Figure IV.7: Population in households at risk of poverty or exclusion by total percentage and by the three indicators as part of Europe 2020 strategy, by Region - 2014

Figure V.1: Italy - Allocations of funds by thematic objective as a result of the adoption of Operational Programmes  EFRD and ESF

Figure V.2: Application of the rule for thematic concentration (EU Reg. 1301/2013, art. 5; EU Reg. 1304/2013, art.4)

Figure V.3: National Strategy for Domestic Areas: project areas to be selecte

MINISTERO DELL’ECONOMIA E DELLE FINANZE IX

INDICE

BOXES

Chapter II Macroeconomic Impact of Finance for Growth measures

The macroeconomic effects of the reforms for reducing non-performing loans (NPL) in the bank balance sheets

X MINISTERO DELL’ECONOMIA E DELLE FINANZE

I. ITALY'S REFORM STRATEGY

Over the past two years Italy's reform effort has been ambitious and far-reaching. The results achieved in a short period of time have been significant, as noted by the European Commission in the 2016 Country Report. However, considering the extent of the effort made, there is still a lot that needs to be done. Economic recovery needs to be fostered by both macroeconomic stimulus policies and structural reforms to strengthen potential growth.

The structural reform strategy must be accompanied and supported by a policy of fiscal responsibility which, by reducing the burden of taxation, enables business and household expenditure to be sustained and growth to be strengthened at a time of substantial global economic uncertainty, while the fiscal consolidation and debt reduction efforts are continued.

This National Reform Programme reviews and broadens the approach and the objectives of the previous year, bringing them into line with the latest Annual Growth Survey by the European Commission and the European Council's Recommendations for Italy and the Euro Area. It also sets out a series of measures to be adopted in the short term, with a special emphasis on the actual implementation of reforms aimed at supporting economic recovery by strengthening the policies set out in the 2016 Stability Programme.

Competitiveness and investment are the priorities for growth

Last year Italy's economic recovery was mainly led by export and then driven by household consumption. In the second half of 2015 a worsening of the economic situation in the newly industrialised countries and the still sluggish growth of the European economy affected export performance. Further worldwide competitiveness gains are therefore needed to increase market shares to offset the unsatisfactory growth of global trade in the short term. Increased competitiveness is needed to support GDP growth over the medium and long term.

In 2015 gross fixed investment increased by 0.8 per cent in real terms. Public investment increased by 1.0 per cent. After years of contraction this signals a major trend reversal. However, in order to return to more sustained economic growth, the ratio of investment to GDP, which reached the minimum level of 16.5 per cent in 2015, needs to increase again over the next few years and reach 20 per cent, which is the percentage it stood at before the crisis. Significant fiscal measures have been introduced by the 2016 Stability Law to stimulate gross fixed investment and their government component, including the specific request for flexibility. These measures must be supported by reforms to further improve the ‘investment climate’ in Italy, especially the propensity to invest in venture capital.

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A major contribution to investment will also be made by the implementation of projects included in the so-called 'Juncker Plan', as Italy is one of the countries that stand to gain from the plan. As far as Italy is concerned, the latest data on the European Fund for Strategic Investment (EFSI) show 29 initiatives, including funding agreements and infrastructural projects, for a total of €1.7 billion worth of funding. If financial leverage is considered, €12 billion worth of investment will be mobilised.

While the latest updates of the international investment climate indicators show an improved situation, they do not fully capture the progress Italy has made thanks to the reforms implemented in the last two years. This is due to a physiological time lag between legislative measures and their anticipated impact. In any case, surveys of the business climate in Italy show that, in addition to the weakness of demand expectations, the major impediments to investment are the slowness of judicial proceedings and issues such as the administrative burden, access to credit and taxation. The government's reform efforts will continue to focus on these areas.

In order to sustain productivity over the medium and long term, human capital needs to be further developed, which means retraining the unemployed, improving education and vocational training for young people, developing technological research, promoting science and culture and placing all these goals high on the nation's political agenda.

Institutional reforms

The constitutional reform bill submitted by the Government to Parliament in 2014 was passed by the Senate on its second reading on January 20 and will complete its passage through the Chamber of Deputies in April. A confirmatory referendum could take place next autumn.

The aim of the bill is to overhaul the current system of perfect bicameralism and change the allocation of law-making powers between the State and the regions. The bill creates the conditions for a marked improvement of Parliament’s decision-making ability while at the same time preserving the balance among democratic institutions. The Chamber of Deputies will be the main law-making body and will have a trust-based relationship with the government. The Senate will be a second-tier elective assembly, composed of no more than one hundred members, with responsibilities in areas such as the relationships between central and regional institutions, between Italy and the European Union, in addition to responsibilities for assessing policies and public appointments. The so-called 'fast-track vote' (voto a data certa) will ensure fast-track voting of bills that are particularly important for the government's programme. The reorganisation of responsibilities between the central government and the regional institutions will enable more effective governance of economic policy without prejudice to regional and local autonomies.

In addition, it is worth recalling that in 2015 Parliament approved the reform of the Electoral Law for the Chamber of Deputies. The new electoral law reconciles the representation requirements with the need for institutional stability; it provides for the establishment of multi-member electoral districts which are allotted a limited number of seats and the possibility for citizens to cast

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preferential votes; it gives the list which has received the highest number of votes (or which wins the highest number of votes in a later run-off, in the event that no list wins at least 40 per cent of valid votes in the first round at national level) a number of seats sufficient to reach 340 seats out of an unchanged total of 630 seats.

The Chamber of Deputies has already approved new regulations on the conflict of interests, which are now being considered by the Senate.

Public Administration

The key objective of the Enabling Law on the Reform of Public Administration, adopted by Parliament last August, is the achievement of greater efficiency and better services for citizens and firms.

The first legislative decree on regulatory simplification has been adopted and during its preliminary consideration the government has already approved twelve implementing decrees concerning the simplification and acceleration of administrative measures, the digital administration code, transparency in public procurement, the reorganisation of law-enforcement agencies and port authorities, rules governing employee dismissal, local public services, companies partly owned by the State or local authorities as well as the Chambers of Commerce.

The Enabling Law on the Reform of Public Administration provides for the adoption of additional legislative decrees containing provisions on corruption, the reform of public sector management positions, the reorganisation of provisions governing civil servants, the reorganisation of the Prime Minister's office and of non-economic public bodies.

The Public Administration reform programme will be supported by the implementation of the Simplification Agenda, 90 per cent of whose targets have already been achieved. In 2016 and 2017 the remaining activities envisaged in the Agenda will continue, including the shortening of the timeline for the 'conferenza dei servizi', as well as the exploration, simplification and standardization of procedures and the relevant forms.

Justice

The reform strategy aims at achieving the key objective of making the Italian justice system more equitable and efficient bringing it into line with European standards. Over the past two years important progress has been made with the introduction of electronic filing of cases and the extension of the scope of out-of-court settlements. In 2015 the government has also submitted draft delegated legislation on the reform of civil proceedings, which has been adopted by the Chamber of Deputies and is currently being considered by the Senate. Tax incentives have been introduced for assisted negotiation and arbitration, and have now been made a permanent part of the relevant regulations through the 2016 Stability Law.

In 2016 additional steps will be taken to achieve this objective. In March the Senate adopted a draft Enabling Law on the comprehensive reform of honorary judges and of the role of justices of the peace. The government has also recently

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set up a research committee on conciliation tools (mediation, assisted negotiation and arbitration) with the aim of streamlining the regulatory framework and ensuring these tools are easy to use.

On 10 February the government also approved a draft enabling law on the comprehensive reform of regulations on business crisis and insolvency. The law comes in the wake of the reform process initiated with Law 132 of 6 August 2015, which was adopted to provide urgent support to the activities of companies in financial distress by facilitating their access to credit. The aim of the law is to promptly tackle business failure, by creating opportunities for restructuring, thereby limiting the damage inflicted on the business environment where the company operates. In addition, bankruptcy procedures and the rules governing receivership have been simplified.

The 2016 reform program also envisages changes to criminal provisions and the statute of limitations, as well as measures to combat organised crime and illicit wealth. The reform of the criminal code has been approved by the Chamber of Deputies and is currently being considered by the Senate. It aims at increasing the efficiency of the criminal justice system while at the same time strengthening the safeguards of defence and the rights of people involved in proceedings. The Senate is also considering a draft law submitted by the government concerning the fight against organised crime and illicit wealth. Moreover, additional draft laws have been submitted by the government on important issues such as false accounting, self-laundering, corruption and mafia-style conspiracy.

With a view to strengthening its policy to counter delinquency, not just through law-enforcement, the government intends to strengthen prevention, including by raising the awareness of entrepreneurs operating in the local community.

To this end a joint Ministry of Finance/Ministry of Justice Committee has been set up which has been tasked with i) drawing up a series of proposals over the next few months aimed at addressing a number of problems that have arisen in connection with the enforcement of Legislative Decree 231 of 2001 and ii) revitalising the prevention approach introduced by the decree.

Banking system

As acknowledged by the European Commission in the 2016 'Italy’s Country Report’, in 2015 and the early months of this year there have been substantial developments towards a more modern and competitive framework for the Italian banking system: the reform of cooperative banks, new regulations on banking foundations, the reform of mutual banks, bankruptcy proceedings and debt recovery and lastly the introduction of a system of government guarantees for the disposal and securitization of banks' non-performing loans.

All these reforms are now being implemented. The Government is monitoring progress of the integration of cooperative banks and consolidation in the sector of mutual banks. There have been major developments in terms of mergers of cooperative banks.

The Italian banking system continues to be viable. However, the high level of non-performing loans in the system and the spillover effects of the introduction of

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European regulations on the resolution of financial institutions require that its resilience, both actual and perceived, be increased.

Given the limited leeway afforded by the existing European regulations on State aid and bail-in, the Government believes that the strategy to strengthen the banking system should be based on further shortening of the duration of bankruptcy procedure and debt recovery with a view to facilitating the disposal of banks' non-performing loans. The new measures will also aim at strengthening the efficiency of courts and increasing opportunities for out-of-court settlements.

A growth-friendly financial sector

Over the last few years the economic crisis has exacerbated the difficulties of raising capital and sustaining investment for smaller firms. The government has implemented a variety of instruments to support funding of SMEs, start-ups and technological innovation and also to incentivize the growth in size of Italian businesses.

New innovative tools have been introduced to simplify access to credit and promote productive investment and innovation, capitalisation and listing on the stock exchange. They include mini-bonds, credit-funds, equity crowd-funding stock-exchange listing. New incentives for productive investment and the capitalisation of firms have been provided, as well as measures to support innovation.

The Central SMEs Guarantee Fund has played an important role and it will be strengthened through corrective and supplementary action aimed at improving it. The 2016 Stability Law has broadened the guarantees that may be drawn from the Fund. At least 20 per cent of the Fund's resources shall be earmarked for investment and businesses located in the Mezzogiorno.

The European Investment Fund (EIF) and the Central Guarantee Fund, with the support of the European Strategic Investment Fund (ESIF), signed an agreement in March last year which lies at the heart of the Investment Plan for Europe. The counter-guarantee agreement enables the Guarantee Fund to sustain investment of over €1 billion for 20,000 Italian SMEs over the next 12 months.

With the aim of incentivizing the development of innovative start-ups a simplified procedure to access the Guarantee fund has been introduced. The establishment and consolidation of innovative businesses has also been pursued through the setting up of a venture capital fund for start-ups and innovative high-growth potential SMEs.

Incentives have been introduced to unlock the potential of patents and other intellectual property. More specifically, the optional concessionary tax regime for income from intangible assets (patent box) has been further finetuned, with provisions governing its conditions and timeframe.

The legislative framework for innovative enterprises has also been improved through the introduction of the new legal status of 'Innovative SME'. It benefits from a whole series of simplified rules and concessions similar to those envisaged for innovative start-ups, which ensure more flexible governance of these enterprises by deregulating compensation schemes and by strengthening access to credit thanks to the introduction of innovative tools and concessions for raising capital as well as favouring access to foreign markets. Regulations governing

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innovative start-ups have been further adjusted with a decree extending to 2016 tax concessions for individuals investing in these firms and by raising the threshold for eligible investment for each innovative start-up.

The government is planning to introduce a new package of measures to further develop policy orientations that have emerged as part of the 'Finance for Growth' initiative, by strengthening existing tools and introducing new ones with a view to consolidating the positive performance of investment in 2015.

Making enterprises more competitive also entails encouraging R&D spending. This goal has been pursued by the government with a number of tools and especially with the tax credit for R&D expenditure, which has been fully implemented. The concession is available to all enterprises regardless of their turnover, legal status, accounting regime or economic sector they operate in. The tax incentive amounts to 25 per cent of incremental costs incurred during the 2015-2019 period, and reaches 50 per cent of costs incurred for hires of skilled staff and the use of research contracts with universities or other equivalent institutions and innovative start-ups.

Competition

The government's strategy is to achieve greater competitiveness also through greater market openness. Through the Annual Competition Law for 2015, the government has transposed a great deal of the 2014 Competition Authority (Autorità Garante della Concorrenza e del Mercato) report. The law abolishes restrictive regulations that hinder competition and innovation. The sectors affected are: insurance, telecommunications, postal services, energy, banking, professional services (notaries, lawyers, engineers) as well as pharmacies. In October 2015 the Chamber of Deputies completed its consideration of the law and made several amendments to it, which affected professional services, pharmacies and postal services. The government expects the law to be finally adopted by June 2016.

As far as professional services are concerned, in February 2016 the Government submitted the National Plan for Professional Reform (Piano nazionale di riforma delle professioni), with a view to implementing the European Directive on the recognition of professional qualifications, and has now already initiated action on transparency and simplification of the regulation.

The government intends to continue along the path set out in the first annual competition law, mainstreaming it to improve market functioning. The second Annual Competition Law will be adopted in 2016 after receiving the report from the Competition Authority. The measures currently being examined may affect the following sectors: communications, healthcare, transport and other public services, and be linked to the Public Administration reform.

Labour market

The implementation phase of Enabling Law no. 183 of 2014 (Jobs Act) ended in September, with the issuing of all the relevant legislative decrees. It is a far-reaching labour market reform whose positive impact can already be seen by looking at data on open-ended employment.

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The process initiated with the Jobs Act will be completed in 2016 when the two national agencies established under the reform will be up and running: the Agency for Active Labour Policies (Agenzia per le Politiche Attive del Lavoro) (ANPAL) and the Labour Inspectorate (Ispettorato del Lavoro), which will be responsible for all the checks to be performed under the existing labour law, social security and occupational health and safety regulations.

With the establishment of ANPAL a National Network of services for labour policies has been set up. The new system of services, coupled with a set of passive income-support policies, is based on the development of tailored career paths instrumental for acquiring the necessary skills for the placement and re-placement of unemployed workers in the labour market. The recipients of income-support benefits will be required to participate in schemes aimed at enabling them to enter or re-enter the labour market; failure to participate in these schemes may entail curtailment, discontinuance or loss of entitlements.

In brief, those who receive the unemployment benefit (NASpI) for a duration exceeding the four months laid down by law, will be entitled to the new replacement cheque. The amount, calculated on the basis of the employability profile, can be spent at the Employment Centres or Accredited Centres that perform functions and tasks in the field of active labour policies.

At the end of January 2016 a draft legislation law entitled ‘Jobs Act for the self-employed and agile working’ was adopted; it aims at creating a system of rights and ensure protection for independent contractors who provide physical and intellectual work. Its aim is therefore twofold. On the one hand, a range of rights and opportunities (concerning training and welfare requirements, unfair clauses and late payments) are introduced for professionals working as self-employed individuals, while on the other organisational arrangements are developed for dependent work (in the form of smart or agile working) that may meet the flexibility needs of workers and enterprises, support technological change and favour productivity.

As to the policy for integrating young people into the labour market, this year has seen the launch of the second phase of the Youth Guarantee Programme. It includes a new measure, the so-called superbonus for the transformation of traineeships, designed for employers hiring a young person aged 16 to 29 who has attended or is currently attending an extracurricular traineeship as part of the Youth Guarantee Programme. The amount is twice that of an ordinary bonus: starting from a minimum of €3,000 to a maximum of €12,000, disbursed in monthly instalments of equal amount.

As far as wage bargaining is concerned, the 2016 Stability Law has introduced new elements to incentivise second-level bargaining through substantial changes concerning corporate productivity and welfare. In addition to the re-introduction, as of last year, of the tax exemption for productivity bonuses, tax exemptions shall also apply to bonuses disbursed in the form of services or vouchers to purchase goods. The above mentioned law also identifies funds to be earmarked for promoting work-life balance.

The reintroduction of the tax exemption through a 10 per cent concessionary rate is linked to productivity hikes, to be measured with well-defined criteria set out in an interministerial decree. The criteria relate to productivity increase, savings in the use of inputs and improvement of the quality of products and

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processes. The decree will be supplemented by an addendum containing the indicators to monitor decentralised bargaining.

In addition, in 2016 the government will concentrate on a reform of firm-level bargaining to make firm-level contracts more enforceable and effective and ensure industrial peace during the term of the agreement. Firm-level agreement may also override national agreements in areas such as work organisation and production.

Education and research

The education reform (Buona Scuola) came into force in July 2015 a number of implementing decrees must be issued for the reform to be fully implemented. After the extraordinary recruitment plan initiated in 2015, the process of adding new teachers to the government payroll to fill vacancies is being continued. The reform also led to the start of the school self-assessment process, the introduction of the external assessment groups for educational institutions and the assessment procedures of school managers.

The education reform has also introduced new forms of vocational learning through school-work alternation and apprenticeship linked up with the labour market reform (Jobs Act). The changes that have been introduced must now be fully implemented. The Italia Lavoro Agency is completing the selection of 300 training centres, which will conduct the pilot project. School-work alternation has been extended to high-schools (licei), with a view to guiding students through the process of choosing university courses and increasing the percentage of those who engage in school-work alternation.

The National Plan for Digital School, envisaged by the reform, was rolled out in October 2015. Funds for a total of €1.1 billion have been identified, €650 million of which for infrastructure, training facilities, technological equipment, administrative digitization and connectivity and €400 million for the so-called 21-century skills, entrepreneurship and the relation between digital skills and work, staff training, mentoring measures and monitoring. The first implementation of the entire policy will be completed by December 2016.

As far as university education is concerned, an extraordinary plan for hiring 861 university researchers has been initiated through a decree implementing the provisions of the 2016 Stability Law. By 2016 the Plan will increase the number of type B researchers (tenure track), working at public universities from the current 700 to over 1,500. These researchers can be confirmed as tenured associate professors after a three-year contract if they have the scientific qualifications and have received a positive assessment from their universities.

In addition to this plan, resources have been allocated to the 500 professorships awarded on the basis of merit named after Giulio Natta, an extraordinary recruitment plan for hiring full professors and associate professors predicated on excellence criteria based on international standards and characterised by competitive remuneration and research funds and by the mobility of winners across all the Italian universities willing to hire them.

The 2015-2020 National Research Plan includes six key programmes and is aimed at incentivising business competitiveness and promoting the country's development through research expenditure amounting to €2.5 billion for the 2015-

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2017 three-year period (and €4.7 billion for the whole 2015-2020 period) in areas that are considered key sectors for Italy's research system. In addition, for the same 2015-2017 three-year period, additional resources have been made available for a total of €3.8 billion (€9.4 billion for the whole 2015-2020 period), from Regional Operational Programmes and the Horizon 2020 Framework Programme.

The Plan is based on six pillars: internationalisation, human capital, selective support to research infrastructure, public-private partnerships, the Mezzogiorno, quality and efficiency of expenditure (broken down in 12 specialisation areas). The Plan also intends to attract internationally renowned scientists offering them a high degree of flexibility in the organisation of their research activities, as well as the possibility to receive matching funds for already existing excellence research programmes.

Reducing regional imbalances

Against a backdrop of social as well as regional cohesion, economic growth is poised to pick up. The policies for the Mezzogiorno are predicated on the conviction that the reform approaches should be the same for all the Italian regions, but that they should be strengthened to make them more effective in those areas that are lagging behind in terms of human capital formation, productivity and infrastructure, by supporting them also through appropriate macroeconomic stimuli.

The 2016 Stability Law introduced new tax incentives for investment in the Mezzogiorno, available for 4 tax years. An important economic policy initiative is the Masterplan for the Mezzogiorno, which builds upon the strengths and the vibrant nature of the economic fabric of Southern Italy and places them in a context of industrial, infrastructure and services development so as to broaden entrepreneurship and the occupational skills while setting up and developing production chains.

The fight against poverty

The Social Act recently submitted by the Government and currently being considered by Parliament is characterised by a comprehensive approach on the support of distressed families, with priority being given to those with dependent children. The Government is investing an unprecedented amount of resources in this area: an additional one billion euros per year starting from 2017. Thanks to these resources, measures will be introduced to provide coverage to over half of the poor families with dependent children. The Enabling Law provides for more equitable and homogeneous welfare benefits, while a new integrated management system will be established for social services.

The action plan to reduce poverty will involve all social actors, starting from non-profit sector organisations to the social private sector. An important role will also be played by foundations of banking origin, which will participate with the government in the establishment of a fund to combat educational poverty, which will fund projects for poor children with €130 million a year over the 2016-2018 period to improve access to quality education and educational tools and out-of-school personal development tools.

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Finally, the ‘Dopo di noi’ (literally 'After us') bill currently being considered by Parliament contains provisions relating to the care, treatment and protection of people with serious disabilities in the years after the death of their parents or family members.

Taxation

The reforms introduced over the past two years are those contained in Enabling Law no. 23 of 2014. A number of elements of the taxation system and the relationship between taxpayers and the tax authorities have been changed. In addition, the Government has taken tax policy decisions that have reduced the tax wedge on labour, incentivised hiring of permanent employees and reduced taxation for households, especially low-income households, and on main residences, so-called 'bolted' equipment and agricultural land. The 2016 Stability Law has also introduced a reduction of the IRES (corporate income tax) tax rate on corporate profits, which will be applied as of 2017.

The reform action will be continued in 2016. New rules will come into force to develop a stable and impartial system to gather, calculate and publish the results of strategies to combat tax evasion. Every year the Government will submit a Report on the results achieved in the fight against tax evasion and the new strategic plans together with the Update of the Economic and Financial Document. The Report will be a key tool for taking ever more effective and targeted initiative to improve tax compliance.

Monitoring of tax expenditures will also be introduced in view of their reorganisation. The annual process of reorganising tax expenditures will be temporarily included in the Update to the Economic and Financial Document in the form of policy guidelines, which, once approved by Parliament with a specific Resolution, will become binding when the Government develop the budget package. The action to reorganise tax expenditures is aimed at abolishing or reviewing those expenditures which are no longer warranted due to changed social and economic needs or those which are a duplication of government expenditure programmes. The Government will rely on a Committee of Experts established by the Ministry of the Economy and Finance, composed of fifteen experts of economic, statistical, tax or legal-financial issues.

New rules on electronic invoicing will help identify income that would otherwise go unreported on tax returns. Electronic invoicing has become mandatory for suppliers of general government entities as of March 31, 2015. As of January 1, 2017 taxpayers who choose to use automated invoicing or registering procedures of their compensation will benefit from major streamlined filing compliance procedures. These measures are in line with the OECD approach, according to which the tax authorities shall no longer review tax compliance ex-post but rather become an authority which facilitates tax compliance and reduces intrusive checks to a minimum by leveraging technology.

As to other programmes envisaged in the Enabling Law, which had not been implemented by the relevant decree laws, the Government has already intervened or will do so with specific measures. The reorganisation of the public gaming industry has started with action on key aspects such as the way in which the

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sector is taxed, greater ability to monitor gaming devices and advertising; the latter will be governed by rules in compliance with EU policies.

More comprehensive and systematic action will be taken in terms of the review of cadastral values, once the complex operations of database alignment are completed. This action is necessary to accurately assess the revenue impact as well as the distribution effects on taxpayers. For the time being, with the 2016 Stability Law the Government has given priority to action on particularly critical issues relating to the determination of cadastral rents of property used for industrial and production purposes.

Ordinary and extraordinary activities relating to the cadastral registration of real estate units in the cadastral archives are being continued along with those to determine and ascertain their cadastral rents. With regard to residential property, targeted intervention is in place to review the classification of real estate in urban areas every year.

Finally, in line with the programmes of the European and Italian Digital Agenda, in December 2015 electronic filing of tax proceedings has been introduced as a pilot project in the Tuscany and Umbria regions, and it will be extended to all other Italian regions within two years. The range of web-based services has also been broadened, thus improving the possibility of 'remote' interaction between the tax authorities and citizens as well as companies.

After taking action on the regulations governing proceedings, the Government also intends to start a comprehensive reform of tax justice for more efficient jurisdiction and to ensure that judicial decisions are taken in a reasonable short time, through measures aimed at strengthening the professional skills of tax judges.

Spending review

The Government's tax policy is based on reducing and streamlining government current expenditure to free up resources for public investment and for cutting tax rates on labour, businesses and households. The Spending Review initiated in 2014 has already achieved remarkable results, as current expenditure (adjusted for the disbursement of the €80 premium, which is basically a tax cut) has declined in absolute terms and not simply as a percentage of GDP. From 2013 to 2016, the incidence of government current expenditure on GDP has gone down by 1.6 per cent. It has been estimated that the impact of the Spending Review will reach €25 billion in 2016.

The cut in the number of expenditure centres and the introduction of e-procurement are two key aspects of the strategy implemented by general government entities for streamlining procurement processes and costs. The Technical Committee on Aggregate Entities has a range of tasks, including that of determining goods and services procurement requirements for general government bodies and favouring coordinated planning of initiatives to increase the percentage of aggregate procurement. Some results have already been achieved in this respect. The survey conducted in 2015 on procurement in the year 2014 shows a reduction in the purchase price for 20 categories of goods. In the health sector, purchases of 19 categories of goods and medical devices were concentrated through 35 central purchasing agencies.

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Budget reform

Over the next few years the spending review will be supported by the reform of the Government budget, which is already operational for the 2017-2019 three-year periods. The legislative decree for completing the reform was adopted in February. In the spring, Ministers will set expenditure targets for the following three years based on a new approach, in line with the policy targets of the Stability Programme (Economic and Financial Document).

As of 2017 the Stability Law shall no longer be separate from the Budget Law: there will be one single set of substantive measures, whose first part will contain rules changing revenues and expenditure while the second part will contain revenue and expenditure forecasts under the existing legislation. These changes set the stage for a systematic and structural spending review, with the whole overview of resources emerging several months ahead of the Budget Law, when Ministries will set expenditure targets earlier, i.e when they draw up the Economic and Financial Document which will be confirmed in the relevant Prime Minister's Decrees by May each year. Progress towards achieving the spending targets shall be closely monitored.

Privatisation

The Government is implementing a privatisation programme of its subsidiaries and property with the aim of reducing the public debt and opening capital to market companies. In 2015 tax revenues amounted to more than 0.4 per cent of GDP, i.e. €6.5 billion. The programme for the next few years forecasts revenues at 0.5 per cent of GDP per year in the years 2016, 2017 e 2018, and 0.3 per cent in 2019.

The transactions made in 2015 include the sale of a share of ENEL's capital and the listing of Poste Italiane's shares amounting to 33.2 per cent of capital.

Arrangements to divest a share of up to 49 per cent of ENAV's capital in 2016 have already been made. Other transactions will be agreed upon during the year depending on the revenue targets. The privatisation of Ferrovie dello Stato or some of its components is part of the Government's medium-term programme.

The sale of public property will play an increasing role in achieving the revenue targets. To give greater impetus to this process last year the Ministry of the Economy and Finance and the State Property Agency started the ‘Proposta Immobili 2015’ initiative, which led to the selection of real estate units owned by local authorities and other government agencies to be included in programmes for their regularisation, renovation and sale. Some parts of Government property have been sold to Cassa Depositi e Prestiti in December. In 2015 the sale of property by local authorities, which own most of government property, fetched €946 million, thus the target was exceeded by €500 million.

The ‘Proposta Immobili’ initiative will be continued in 2016, also thanks to the data collected by the Ministry of the Economy and Finance to assess the real estate owned by all general government bodies. Ongoing initiatives include ‘Vetrina Immobili PA’, ‘Valore Paese’ and the activities of INVIMIT, the asset management company specialising in the renovation and change of use of government property.

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II.1 MACROECONOMIC FRAMEWORK

In 2015, the trend of real GDP was back in positive territory after three consecutive years of contraction: the result achieved (+0.8 per cent) is essentially in line with the official estimates published in October in the Draft Budgetary Plan (+0.9 per cent).

The most recent data point to a positive trend for the macroeconomic framework at the start of 2016. Following an unexpected decline in the final two months of 2015, industrial production experienced a greater than expected increase in January. Other economic indicators, such as new car registrations and airport and road traffic, suggest that economic activity continued to expand in the first months of the year.

Under the policy scenario, GDP grows by 1.2 per cent in 2016, which is equal to the growth rate in the scenario based on unchanged legislation. Despite the favourable prospects for the first quarter of 2016, the 2016 growth forecast has been revised downward with respect to the figures indicated in the 2015 EFD Update published in September. The revision is partially based on a real GDP growth profile in the second half of 2015 that was weaker than expected (in the summer of 2015). The positive trend of domestic demand was initially more than offset by a drop in exports linked to the slowdown of the large emerging economies, and later, in the fourth quarter, by a decline in production. It is highly probable that the weakness on the supply side is also linked to the new international economic framework. The growth in the 2017-2019 period would be higher, taking into account a budget policy continuing to focus on achievement of a balanced budget in the medium term, but more concentrated on promoting economic activity and employment. Real GDP is projected to grow by 1.4 per cent in 2017, 1.5 per cent in 2018, and finally, 1.4 per cent in 2019.

When compared with the scenario based on unchanged legislation, the repeal of the safeguard clause under the policy scenario should entail lower revenue from indirect taxes and a more modest increase in consumer prices. Inflation is projected to be 1.3 per cent in 2017 and 1.6 per cent in 2018. Against this backdrop, consumer spending can be expected to increase, with repercussions also on investment. Stronger domestic demand would cause an increase in imports and as a result, the contribution of net foreign demand would be negative over the entire forecast horizon.

The improvement in economic conditions should impact the labour market, with the unemployment rate declining to 9.6 per cent at the end of the period. Greater productivity matched with moderate wage growth is then expected to translate into even lower unit labour costs.

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TABLE II.1: MACROECONOMIC FRAMEWORK BASED ON UNCHANGED LEGISLATION (% changes, unless indicated otherwise)
	2015	2016	2017	2018	2019
INTERNATIONAL EXOGENOUS VARIABLES
International trade	2.5	3.0	3.8	4.6	4.8
Oil price (Brent, USD/barrel, futures)	52.3	39.4	45.7	48.1	49.8
USD-EUR exchange rate	1.11	1.10	1.09	1.09	1.09
ITALY MACRO DATA (VOLUMES)
GDP	0.8	1.2	1.4	1.5	1.4
Imports	6.0	2.5	3.8	4.6	4.2
Final national consumption	0.5	1.2	1.0	1.2	1.4
Household consumption and NPISH	0.9	1.4	1.4	1.7	1.6
Government expenditure	-0.7	0.4	-0.3	-0.5	0.8
Investments	0.8	2.2	3.0	3.2	2.4
- machinery, equipment and other fixed assets	0.5	2.2	3.9	4.1	2.8
- transportation means	19.7	14.3	5.2	4.1	2.2
- construction	-0.5	1.0	1.9	2.2	2.1
Exports	4.3	1.6	3.8	3.7	3.4
Memo item: Current account balance (% of GDP)	2.1	2.5	2.5	2.4	2.2
CONTRIBUTIONS TO GDP GROWTH (1)
Net exports	-0.3	-0.2	0.1	-0.2	-0.2
Inventories	0.5	0.0	0.0	0.1	0.0
Domestic demand, net of inventories	0.5	1.3	1.3	1.5	1.5
PRICES
Import deflator	-2.7	-2.3	2.2	1.9	1.7
Export deflator	-0.4	0.0	1.7	1.9	1.7
GDP deflator	0.8	1.0	1.1	1.6	1.8
Nominal GDP	1.5	2.2	2.5	3.1	3.2
Consumption deflator	0.1	0.2	1.3	1.6	2.0
Memo item: Planned inflation	0.2	0.2	1.5
Memo item: HICP, net of imported energy, % change (2)	0.3	1.1	1.3	1.5
LABOUR
Labour cost	0.5	0.4	1.0	2.0	1.8
Productivity (measured against GDP)	-0.1	0.3	0.6	0.6	0.6
Unit labour cost (measured against GDP)	0.6	0.1	0.4	1.4	1.2
Employment (FTEs)	0.8	0.8	0.8	0.9	0.7
Unemployment rate	11.9	11.4	10.8	10.2	9.6
Employment (ages 15 to 64)	56.3	57.0	57.5	57.9	58.4
Memo item:  Nominal GDP (in EUR mn)	1,636,372	1,671,584	1,712,933	1,765,250	1,822,211
(1) Discrepancies, if any, are due to rounding.
(2)  Source: ISTAT.
Note: The macroeconomic framework has been developed on the basis of information available at 16 March 2016. GDP and components in volume (concatenated values, base year of 2010), data not adjusted for business days.

II. 2 THE MACROECONOMIC IMPACT OF STRUCTURAL REFORMS

In this section we document our estimates of the macroeconomic impact of structural reforms by focusing on a scenario where only the most recent reforms are considered, namely those eligible for the application of the structural reforms clause recently introduced by the European Commission. In particular, this scenario envisages only the new reforms of the Government, both approved and in the process of approval, which are expected to generate their effects starting from 2016. The estimates of the macroeconomic effects have been obtained through the quantitative models used at the Italian Ministry of the Economy and Finance (ITEM, QUEST III and IGEM). Moreover, the simulation results for this scenario of the recent reforms take into account some methodological revisions

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pertaining to the ways in which the provisions in each reform are translated into corresponding modifications of some of the relevant structural parameters of the models1. The main areas of reforms are the following: Public Administration (PA) and Simplification, Competitiveness, Labour Market, Justice, the reduction of the tax wedge and the school system. Moreover, interventions related to the nonperforming loans (NPL) in the bank balance sheets2 and the ‘Finance for growth’ have been included further relative to the NRP 2015.

TABLE II.2: MACROECONOMIC EFFECTS OF STRUCTURAL REFORMS FOR AREA OF INTERVENTIONS (percentage deviation of gdp from the baseline scenario)
	2020	2025	Long run
Public Administration	0.4	0.7	1.2
Competitiveness	0.4	0.7	1.2
Labour Market	0.6	0.9	1.3
Justice	0.1	0.2	0.9
School System	0.3	0.6	2.4
Tax Shift (total)	0.2	0.2	0.2
of which: Reduction of tax wedge (IRAP-IRPEF)	0.4	0.4	0.4
Increase in the taxation of capital income + VAT	-0.2	-0.2	-0.2
Spending Review	-0.2	-0.3	0.0
Nonperforming loans	0.2	--	--
Finance for growth	0.2	0.4	1.0
TOTAL	2.2	3.4	8.2

In Table II.2 the impact on output of each of the main reforms is presented. The overall effect of the reforms here considered is a GDP increase with respect to the baseline scenario of 2.2 per cent in 2020 and of 3.4 per cent in 2025. In the long run, the estimated impact on output is a 8.2 per cent increase.

FOCUS   Macroeconomic Impact of Finance for Growth measures The economic crisis of recent years has exacerbated the problem of the credit crisis and, more generally, the difficulties for companies in raising funds. Credit market rigidities represent a major obstacle on the path of recovery and a strong limitation for investment and employment expansion. The constraint is particularly burdensome for the peculiarities of the production structure of the country, characterised by a large network of small and medium-sized enterprises, which represent the real backbone of the Italian economy. In a context in which public resources tend to be scarce, it is crucial to implement the effective incentives to improve the propensity to invest of private enterprises. New tools available to businesses have been then introduced to facilitate access to credit, to promote productive investment and innovation, to encourage the capitalisation and stock exchange listing. New measures have broadened the variety of alternative sources of financing to the traditional ones: mini-bonds, credit-funds, equity crowdfunding and stock market. This represents a fundamental cultural shift, because access to the capital market implies more growth for firms which take advantage of them. Similarly new incentives for productive investment and capitalisation of the companies have been set, along with measures to support innovation.

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1 The simulations have been revised also in the wake of technical suggestions recommended in the report of the European Commission prepared in accordance with Article 126(3) of the Treaty (see http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-03_commission/2015-02-27_it_126-3_en.pdf).

2 L. 132/2015 and more recently the D.L. 18/2016 and AC 3671/2016.

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MEASURES	RELATED LEGISLATION
Measures for innovation
Enlargement of the pool of innovative startup and simplification measures	art. 4 of D.L. 3/2015 (Investment Compact)
Tax credit for R&D activities	art. 3 of D.L. 145/2013, modified by art. 1, subparagraphs 35 - 36 of Law  190/2014 (LDS2015)
Patent box	art. 1, subparagraphs 37 – 45 of Law. 190/2014 (LDS 2015) modified by art. 5, subpar. 1 of D.L. 3/2015
	art. 1, subparagraph 148 Law 208/2015 (LDS2016)
PMI (SME) Innovative	D.L. 3/2015 (Investment Compact) art. 4
Incentives for productive investments
Revision of New Sabatini	art. 2 of D.L. 69/2013, Law 190/2014 (LDS2015), art. 1, subparagraph 243, D.L. 3/2015 Art. 8
Guidi – Padoan  provision	art. 18 D.L. 91/2014
Super amortisation	art. 1, subparagraphs 1 91 -94 of Law 208/2015 (SL2016)
Access to capital market
Minibond	art. 32 of D.L. 83/ 2012, (Decree for Development) modified by art. 36, of D.L. 179/ 2012, (Decree for Development bis) and by art. 12 of D.L.. 145/ 2013, (Destinazione Italia), art. 21 of D.L.. 91/2014
Simplification measures for SMEs going public	art. 20 of D.L.  91/2014
Introduction of multiple vote securities and loyalty shares	art. 20 of D.L. 91/2014
Development of Equity Crowdfunding	art. 4 of D.L. 3/2015 (Investment Compact)
Measures for credit liberalisation
Direct lending for credit funds, insurance companies and and securitization vehicles	art. 22 of D.L. 91/2014,
System of public guarantees, FCG, Confidi and Juncker investment platforms
Guarantee Fund for SME	art. 8 - 8 bis of D.L. 3/2015
Juncker investment platforms	Reg. (UE) 2015/1017, Art. 1, subparagraphs 822-830 of Law 208/2015 (LDS2016)
Incentives to capitalization
ACE	art. 1. of D.L.. 201/2011 (Salva Italia), modified by art. 1, subparagraph 138 of Law 147/ 2013 (LDS2014) and art. 19 of D.L. 91/2014
Deductibility of goodwill	art. 1, subparagraphs 95 and 96 of Law 208/2015 (SL 2016)
Easier investment in infrastructure, real estate and project bonds
Revision of the legislation on project bond	art. 1 of D.L. 83/2012 and art. 13 of D.L. 133/2014
Revision of the legislation on SIIQ (REIT)	art. 20 D.L. 133/2014 (Sblocca Italia)
Measures to attract investments
International standard ruling	art. 8 of D.L. 269/2003
Consulting services for foreign investors provided by Agenzia delle Entrate (Revenue agency)	Provision of the Revenue Agency no. 149505 of 16 December 2013 (envisaged in D.L. 145/2013 art. 10 (Destinazione Italia)
Court for companies with headquarter abroad	D.L. 145/2013 art. 10 (Destinazione Italia)
Increase of the threshold above which to notify the acquisition or disposal of major holdings	art. 20 of D.L. 91/ 2014 converted with modifications  into L. 116/2014

A recent study by the European Commission shows how the financial distortions are particularly restrictive for some types of businesses, such as start-ups, innovative companies and small businesses3. The empirical analysis, based on an extensive survey

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3 European Commission, European Competitiveness Report, 2014 Report: Helping Firms Grow, chapter 2, available online at: http://ec.europa.eu/growth/industry/competitiveness/reports/eu-competitiveness-report/index_ehtm.

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of various European countries, documents how during the recent crisis the financial factors have greatly constrained the investment decisions of firms, although in a rather different way for countries and regions and depending on type of enterprise (in particular, the negative effects are different among micro-enterprises, companies in the manufacturing and high-tech companies).

MACROECONOMIC EFFECTS OF FINANCE FOR GROWTH MEASURES
(percentage deviation from the baseline)
	2020	2025	Long run
GDP	0.2	0.4	1.0
Consumption	0.1	0.4	0.8
Investment	0.6	1.4	3.3

An impact assessment of the measures contained in the package ‘Finance for Growth’ is reported in the Table. The simulation of these measures has been implemented with the IGEM model, assuming a rise in capital accumulation induced by easier access to credit businesses. In particular, it is assumed that in the long run the enhanced conditions of access to credit will result in a greater willingness of companies to invest. The assumption used in the simulation incorporates estimates by the European Commission (EC) about the impact on investment of an expansion in the availability of capital credit enterprise. In detail, it is considered the estimated impact of the increase of the flow of credit in the long term on the tangible investment, which, according to the EC of the estimates, is equal to 0.144.

It was therefore suggested that the full implementation of these rules over a period of ten years (until 2025) gives rise to an increase in the flow of loans to enterprises up to 10 per cent, which translates into an overall change in investments equal to 1.4 per cent. In IGEM model, this increase in investment has been achieved through an increase in the growth rate of physical capital by 0.07 per cent in four years5.

The results of the model simulations show how the positive effects of these measures translate into higher investments by 0.6 per cent already in 2020 and into higher GDP by 0.2 per cent. In the long run, investments increases by 3.3 per cent and GDP grows by 1.0 per cent compared to the baseline scenario.

FOCUS   The macroeconomic effects of the reforms for reducing non-performing loans (NPL) in the bank balance sheets   In this note we document the macroeconomic effects of three Government measures adopted between 2015 and 2016 with the aim of reducing the stock of non-performing loans (NPL) in the bank balance sheets (D.L. 18/20166)and increasing the speed and efficiency of the insolvency and liquidation procedures (D.L. 83/20157 and AC 3671/20168). The first measure envisages the possibility of providing a State guarantee to banks for securitization operations with non-performing loans as the underlying assets (GACS). The

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4 See the Table on p. 58 of the cited paper.

5 In the IGEM model the increase in the growth rate of physical capital is induced by an increase in the value of installed capital and therefore an increase of capital per unit of investment. In the simulation exercise the variation in the growth rate of capital (set at 0.07 per cent in four years) is such to generate an overall increase of investment equal to 1.4 per cent in ten years.

6 It is in the process of being converted into law.

7 Converted with modifications into L. 6, August 2015, no. 132).

8 Draft law (DDL) delegating the Government on the overall reform of the legislative tools to manage company crises and insolvency procedures. It has been approved by the Council of Ministers in February 10th 2016 and is currently under approval at the Chamber of Deputies (A.C. 3671).

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State guarantees on NPLs can be requested by banks which securitize in return for a commission to be paid to the Treasury whose amount is a percentage on the guaranteed assets. The price of the guarantee is in line with market prices. This provision is temporary, as the opportunity of requesting state guarantees in the securitizations of NPLs has been introduced over a 18-month period, with the possibility, however, of extending the  application of the provision for other 18 months (until February 2019).

The other two measures are aimed at reforming the legislative tools for managing the company crises, on the one side, and at reforming the bankruptcy, civil and civil procedure legislation as well as the functioning of the judicial system, on the other. In particular, important provisions have been introduced to reduce the foreclosure times and the length of the insolvency and liquidation procedures. This enhances the efficiency of the judicial procedures for debt recovery, thus increasing the prices that investors are willing to pay for the NPLs.

The macroeconomic effects of the first decree, the one on the bankruptcy legislation aimed at accelerating the liquidation procedures, have already been documented in the Draft Budgetary Plan (DBP) and they are now amplified as a result of the recent Draft Law delegating the Government to pursue further reforms on this area. In the simulation exercise with the ITEM model to assess these effects, we assumed that those reforms would induce an increased incidence of disposed nonperforming loans and a parallel reduction of the gap between book values on bank balance sheets and the price that investors are willing to pay (pricing gap). This was implemented in the simulation of the model through a gradual reduction of the discount that investors require for purchasing the nonperforming loans.

In addition to the effects from the measures in the first decree, the new provision introducing a state guarantee on securitization operations for NPL’s is likely to amplify the incidence of disposed nonperforming loans. In particular, the assumption in the simulation associated with the first decree was an increase in the amount of disposed NPLs as a fraction of its overall stock (in net value) by 10 percentage points (from 5 to 15 per cent). In light of the new provisions of 2016, the increase in the incidence of disposed NPLs is assumed to be more pronounced, reaching 30 per cent in 2019.

Moreover, the higher easiness in disposing NPLs and reducing their burden in banks’ balance sheets, combined with the interventions on bankruptcy law to accelerate the judicial procedures for debt recovery, may induce banks to ameliorate the cost of lending. In the simulation we therefore assumed a reduction by 10 basis point of the bank lending rate with respect to the baseline scenario up to 2019.

The improvement in the banks’ financial conditions due to the increased incidence of disposed NPLs has a positive impact on the credit supply to the economy. This increase, combined with the slight drop of the bank lending rate, would imply an increase of output with respect to the baseline scenario reaching 0.2 percentage points in 2020, driven by higher investment (0.7 per cent) and consumption expenditure (0.2 per cent). A possible reduction of credit, however, might be obtained in the first year of simulation (2016) with respect to the baseline scenario, as a negative effect on loans is induced by the reduction of total assets following the realized losses associated with the larger number of disposals of nonperforming loans. The impact on GDP would be therefore slightly negative in the first year, with a 0.1 per cent reduction with respect to the baseline scenario, driven primarily by a drop of investment by 0.4 per cent. In the subsequent years, on the contrary, the expansionary effects on credit supply and output would prevail. Given the temporary nature of the mechanism for providing state guarantee to banks in the securitization operations, the simulation exercise does not extend its focus beyond 2020.

Table II.3 reports the effects of the interventions eligible for the flexibility clause associated to structural reforms with a focus on the main macroeconomic variables. The expansionary character of these reforms clearly emerges, especially

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in the medium to long run, with an impact on both consumption and investment broadly in line with that estimated for output. By using the models it was also possible to calculate the impact of the reforms on public finance and the results point to an improvement in the indicators of the performance of public finance with the only exception of 2016, when a short run deterioration of the deficit-to-GDP and a slight improvement of the debt-to-GDP ratios is obtained with respect to the baseline scenario.

TABLE II.3: MACROECONOMIC EFFECTS OF REFORMS (percentage deviation from the baseline scenario)
	2020	2025	Long run
GDP	2.2	3.4	8.2
Consumption	2.7	4.2	6.3
Investment	3.3	4.8	11.5
Labour	1.5	2.1	3.7

II.3 THE FINANCIAL IMPACT OF NEW MEASURES IN THE 2016 NRP

The National Reform Programme is accompanied by the national grids of policy measures - born from the need to organically show the set of reform measures that the country is realizing - subdivided into 10 policy areas9. The grids contain both updates of the measures approved in preceding years, and new measures emerging during the review of provisions going into effect between April 2015 and March 2016. More specifically, there are 20 new measures and around 240 updates to measures already presented in the grids (equal to 55 per cent of the total).

The measures are thoroughly described in the grids, with respect to both regulatory and financial details10. The financial effects in the grids are stated in terms of higher/lower revenue and higher/lower expenditure both for the State budget and the public administrations and quantified with reference to the related balances. With the exception of certain cases, the quantification of the impacts in the grids highlights the measures' costs and benefits for the public finances, regardless of the financial coverage found in any measure.

Table II.4 summarizes the impact on the State budget11 of the updates of the grids made on the basis of the measures entered into force from April 2015 to March 2016. Various measures entailing higher or lower expenditure refer to refinancing, new institution, or reductions of budget funds.

For the five-year period 2015 - 2019, the most significant updates12 from the financial point of view are therefore:

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9 Grids and its "Guide to reading the grids" are available online in the section of the DEF 2016 "PNR - measures organized by area of intervention (grids)" http://www.mef.gov.it/documenti-pubblicazioni/doc-finanza-pubblica/index.html#cont1.

10 See. ‘Guide to reading the grids’.

11 This decision is mainly due to the significance of the central government in defining and implementing the measures. In order to analyze the impacts in terms of net indebtedness, please see the column "impact on the public budget" for each policy area.

12 It is recalled that in the measures of the grids are traditionally excluded contributions to public finance of local governments, either because they are better suited to the achievement of balance targets rather than to reform actions, and because in terms of net borrowing should be reported as "incremental revenue". To details on the contributions and the Understanding reached at the State - Regions Conference of 11 February 2016, see "Summary table of actions for CSR". In the area “Public expenditure and taxation” it is, instead, included the shift to the balanced budget of regional and local authorities, given the importance of the reform. Traditionally, variations of tables C and D of the Stability Law are not included. For the table E, see “Infrastructures and development” area.

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-   lower expenditures13 for about €31.9 billion for the State budget resulting mainly from measures of both "Public expenditure and taxation" (various reductions applied on State administrations, on the resources of the National Health Service and on purchases, as well as for the lower tax credit, deriving from the different fiscal discipline of write-downs and credit losses of credit and financial institutions and insurance companies) and "Labour and pensions" (including the reduction of the Fund for arduous work and measures of de-indexation of pensions) policy areas;

-   reduced revenues for about €85.5 billion in the period under consideration. The measures that give rise to lower receipts for the State budget concern several areas of intervention, including "Energy and Environment" (tax deductions), “Public expenditure and taxation” (for the extension of the deductibility of losses for the IRES and IRAP taxes for credit institutions and insurance companies; the sterilization of the safeguard clause of the 2014 Stability Law and of the increase in excise duty provided by the 2015 Stability Law; the postponement of the increase in VAT rates; and for the removal of payments due to the State by the Concession holders of authorized games), “Labour and pensions” (increase of the no-tax area for pensioners; tax exemption of productivity bonuses for compensation of employees not exceeding €50,000);

-   incremental revenue for about €22.3 billion are due, for the most part, to the interventions reported in “Public expenditure and taxation” policy area (including, different fiscal discipline of write-downs and losses; voluntary disclosure; increase of the State charge (PREU) on new slot (AWP) and video lotteries (VLT));

-   incremental expenditure  for about €86.1 billion related to all policy areas14, except for "Federalism" and "Products and competition”. With specific reference to the area "Infrastructures and development", the incremental expenditure  contained in Table II.4 (more than €3.8 billion over the five reference years) relate school buildings, the development of the intermodal chain for congestion of roads and railways, the great "cultural heritage" project, etc., but does not include the more than €8 billion provided in Table E attached to the 2016 Stability Law (including appropriations for ANAS and RFI investment program contracts - see. measures no. 4 and 615.

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13 In certain measures what is considered as incremental/lower expenditures for the State budget, is classified as incremental/lower revenue in terms of net indebtedness (for example see measure n. 7 of the “Support to businesses” area).

14 For instance, note the bridge financing to the single resolution Fund, measure n. 21 of the area “Financial system”.

15 It must also be considered the measure no. 28 of the area “Energy and Environment”, with regard to resources of Table E allocated for refinancing the mitigation of landslide risk.

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TABLE II.4: FINANCIAL IMPACT OF MEASURES IN GRIDS ON NRP (in € mn)
	2015	2016	2017	2018	2019
Public expenditure and  taxation
Incremental expenditure	51	4,489	4,476	5,380	4,427
Incremental revenue	0	6,494	3,344	5,598	1,908
Lower expenditure	2,099	6,131	5,216	5,996	5,336
Lower revenue	0	20,091	14,935	15,394	12,217
Administrative efficiency
Incremental expenditure	3	498	346	209	197
Incremental revenue	0	3	9	9	9
Lower revenue	0	2	2	2	2
Infrastructures and development*
Incremental expenditure	451	1,231	684	672	793
Lower revenue	0	132	76	76	76
Products and competition
Incremental expenditure	0	15	15	15	15
Labour and pensions
Incremental expenditure	1,779	4,723	5,973	5,763	4,555
Incremental revenue	0	138	607	450	160
Lower expenditure	0	706	1,492	1,927	1,775
Lower revenue	0	599	946	1,114	1,114
Innovation and human capital
Incremental expenditure	1,019	3,375	3,219	3,227	3,023
Incremental revenue	0	16	0	0	0
Lower expenditure	0	7	7	7	4
Lower revenue	0	13	13	14	16
Support to businesses
Incremental expenditure	22	2,465	3,981	3,116	3,016
Incremental revenue	300	232	1,125	657	109
Lower expenditure	0	330	280	454	7
Lower revenue	0	738	5,422	5,831	4,467
Energy and environment *
Incremental expenditure	501	658	238	74	12
Incremental revenue	0	545	553	0	0
Lower expenditure	0	0	85	0	0
Lower revenue	0	106	1,103	927	11
Financial system
Incremental expenditure	0	2,756	103	103	103
Federalism
Lower revenue	0	6	6	5	5
*Net of amounts included in Table E annexed to the 2016 Stability Law. Source: Analyses of the State General Accounting Office, technical reports and the information reported in official documents. The table excludes the resources of the Action & Cohesion Plan and of the various funds allocated to the interventions with a European dimension.

The update of the interventions planned under the Strategic Infrastructure Program this year is contained in the Appendix to Annex 2016 DEF 'Strategies for the transport and logistics infrastructure'.

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III.1 IMPLEMENTATION: THE FOCAL POINT OF THE GOVERNMENT’S ACTION

The 2016 National Reform Programme (NRP) represents the link between the planning of the reforms and their full implementation. It is an essential part of a three-year reform plan inaugurated by the current government upon its investiture; this reform plan has been enhanced over time, in response to the economic challenges that the country has faced in moving beyond the crisis. The reforms promoted in these years also originate from an awareness of the macroeconomic imbalances that have troubled Italy for decades, and that are at the core of continuing structural weaknesses: low productivity and high public debt.

The gradual recovery taking shape is mainly the result of the structural measures inaugurated by the government to respond to Italy’s long-standing problems. At the same time, the fragile economy still necessitates constant attention to the continuation of the reform process. In this regard, it is significant that the OECD’s recent report, “Going for Growth”, ranked Italy among the European countries having the highest rates of reform implementation, unlike the northern European countries where the pace of reform seems to have come to a halt.

The government is also aware that changes with such a strong structural impact (such as those legislated in the past two years) need to be carefully monitored and continually checked for their effectiveness. The 2016 NRP focuses on this implementation and verification process, while also outlining plans for new structural measures.

The government’s efforts are based on a strategy of supporting the growth and the competitiveness of the Italian economy, and promoting the excellence that distinguish some of its sectors. The Italian economy has been marked by the mediocre performance of productivity in recent decades. The government intends to revive the growth of various elements of productivity: labour productivity (with regard to employees and the self-employed), also through alignment of wages to productivity, including by means of enhancements to decentralised collective bargaining (with particular reference to recent measures contained in the 2016 Stability Law); capital productivity, through instruments aimed at stimulating investment, research and development, and measures to facilitate access to credit; and finally, total factor productivity, through a package of structural reforms, measures for deregulation, and policies to favour start-ups.

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Against this backdrop, the government remains committed to responsible management of the public finances, with the objective of gradually reducing the debt and consolidating growth (growth-friendly consolidation). With this objective in mind, the attention on budget discipline has been flanked by measures to support and revive public investment, which has been particularly weak in the wake of the economic crisis. These efforts will be undertaken in line with the EU flexibility designed to promote investment spending.

The government’s action with respect to key economic sectors (such as the labour market, training and education, the judicial system, tangible and intangible infrastructure, public spending and taxation, the banking system and the public administration) represents an effort without precedent in recent decades.

This chapter examines the principal measures approved in recent months and the status of implementation of the reforms inaugurated by the government upon its investiture, using an approach consistent with the 2015 NRP. In its recent Country Report1, the European Commission acknowledged that the Italian government has acted in accordance with the specific recommendations made by the European Council in 2015, achieving significant progress in the areas indicated as critical, and that this progress has been achieved notwithstanding the structural weaknesses that have continued to inhibit growth and Italy’s capacity to react to economic shocks. In any event, the crisis has shown how the effectiveness of national measures is also dependent on simultaneous reforms, including in other countries, and that the focus on the positive externalities of European integration needs to be revived.

Along with the measures to support businesses and the continuing attention on public expenditure, the reforms inaugurated by Italy are in line with the European Commission’s indications in the Annual Growth Surveys2, which identifies investments, structural reforms and responsible budget policies as the EU’s three economic-policy priorities. The government remains convinced3 that the growth of the country, and more importantly, of the entire European Union, is linked to greater convergence of the economies, the acceleration of structural reforms, and the strengthening of domestic demand. These objectives can be reached only if there is simultaneous strengthening of mutually reinforcing coordinated socio-economic policies.

The positive spillover effects of the reforms are the proof of the need (for each country) to move toward greater convergence and symmetry in macroeconomic adjustments. The EU Member States need to work together in order to complete processes crucial for the entire EU, from banking union to capital markets union to the completion of the Single Market, the promotion of investment, and the challenge of migrant flows.

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1 http://ec.europa.eu/economy_finance/eu/countries/italy_en.htm

2 http://ec.europa.eu/europe2020/making-it-happen/annual-growth-surveys/index_en.htm

3 In this regard, see Italy’s contribution about the future of the European Union, ‘A shared European strategy for growth, jobs and stability’

http://www.governo.it/sites/governo.it/files/ASharedPolicyStrategy_20160222.pdf

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This chapter is organised according to the Commission’s guidelines for the preparation of National Reform Programmes, and is much more condensed than in the past, with the presentation by policy challenges and areas of intervention. The more condensed form of this chapter is rounded out by an intermediate report published on the MEF web site4, which provides greater detail about the state of completion of the reforms5.

Finally, the NRP also includes an appendix that reports the overall time schedule for the reforms and summary tables regarding: the quantitative impact of the reforms; the measures for implementation of the country-specific recommendations; the implementation of the Europe 2020 targets.

Monitoring and legislative implementation

The data about the actual implementation of the reforms have shown the validity of the specific actions taken since the government’s investiture just a little over two years: with reference to the extent of implementation of the reforms launched by the government, the current rate of 69 per cent is more than triple than the rate reported at June 2014. The stock of 889 implementation decrees left behind by the two previous administrations has been reduced to 211 decrees (-76 per cent), with a rate of adoption of 79.3 per cent.

From 22 February 2014 to 29 March 2016, the government approved 328 Legislative Decrees; 201 were published in the Official Gazette of the Italian Republic, with 55.7 per cent thereof automatically going into effect without the need for any second-level implementation decrees.

This acceleration in implementation is the result of the first measures approved; in the second half of 2015, additional related and convergent measures were approved, both at a regulatory level6 and at an administrative level, in order to strengthen the coordination on the part of the Office of the Presidency of the Council of Ministers (for example, the organisation of technical working groups to resolve the complexities of inter-ministerial provisions).

With the full-scale use of the Monitor System as of June 2015, the ministries are making use of a shared operational dashboard to accelerate the process of implementing legislation. The month of April 2016 marked the start-up of the procedures contained in a protocol of intent signed in May 2015 by the State General Accounting Department and the Government Programme Office, with respect to indicators especially designed for measuring the status of implementation of the legislative measures for which each ministry is responsible. During 2016, the Government Programme Office will conduct special training sessions for officials of the cabinet and the legislative offices of the ministries, to consolidate and accelerate the administrative processes behind the reforms.

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4 #leriformeinItalia

http://www.dt.mef.gov.it/it/attivita_istituzionali/analisi_programmazione_economico_finanziaria/strategia_crescita/index.html (Italian text only).

5 The first report published regarded April-September 2015, and was a support to the EFD Update. The second report is related to October 2015-March 2016, and supports this EFD.

6 For example, the institution of the silent consent for the issuance of statements of agreement and opinions between administrations, as introduced by Law No.124 of 7 August 2015.

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Implementation of legislation also entails the continuous process of adjustment to European laws and regulations and reduction of the number of infractions. The European Policies Department is responsible for coordination of this process, and is committed to further reducing the number of pending infraction procedures, already cut by 30.25 per cent (from 119 to 83) between the date of the investiture of the Renzi government (February 2014) and March 2016.

This positive trend has been rounded out by the 2016 approval of the Law of European Delegation and the European Law, which will allow for settlement of other infractions pending at the time of the approval.

FIGURE III.1: INFRACTION PROCEDURES UNDER RENZI GOVERNMENT

Source: Office of the Presidency of the Council of Ministers – European Policies Department

III.2PUBLIC DEBT REDUCTION

Public finance

Consolidation and growth7

Between 2009 (the first year in which the Euro Area’s GDP contracted) and 2015, Italy maintained an average deficit of 3.5 per cent; only six Euro Area countries produced a lower deficit (Austria, Malta, Finland, Germany, Estonia and Luxembourg). Considering the significant fall in GDP during the same period, this was an extraordinary fiscal effort. If one looks at the primary balance, excluding the public debt burden, Italy is the country that maintained the highest primary surplus on average (1.1 per cent) in the Euro Area, and was one of the few

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1 For details, see the paper ‘Consolidation and support to growth’, published on the MEF web site.

 http://www.tesoro.it/focus/consolidamento/Consolidamento_e_sostegno_alla_crescita.pdf (Italian text only).

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countries to have produced a positive balance, with most of the other countries having witnessed a deterioration in their position during the period considered.

In addition, when assessing the cyclically adjusted primary balance, fiscal consolidation is even more evident, with Italy being the Euro Area country to have achieved the most significant consolidation. Italy’s prudent budget policy is related to the existence of a high public debt, which, however, has increased during the period at a considerably lower rate with respect other countries considered.

The new policy scenario (for additional details, see the 2016 Stability Programme, Section III.3) provides for cutting the net borrowing from 2.3 per cent of GDP in 2016 to 1.8 per cent in 2017 and 0.9 per cent in 2018, before getting to a slight surplus in 2019 (0.1 per cent of GDP). On a structural basis, the balance should improve from -1.2 per cent of GDP in 2016 to -1.1 per cent in 2017, -0.8 per cent in 2018, and -0.2 per cent in 20198. Under the policy scenario, the debt-to-GDP ratio is projected to equal 132.4 per cent in 2016, before declining significantly in the years thereafter, to reach 123.8 per cent.

Spending review

CSR1 – ‘Ensure that the spending review is an integral part of the budgeting process’.

Spending review: objectives and results

The ratio of current expenditure to GDP decreased by 1.4 percentage points (from 47.4 percent to 46.0 per cent) from 2013 to 2016. Net of expenditure for social benefits (which reflects cyclical phases of the economy and factors linked to the ageing of the population), primary current expenditure had an average annual change that was close to zero or negative during the 2009-2015 period, notwithstanding the lengthy economic and financial crisis, which caused a significant contraction in the economic growth rate. Such expenditure aggregate is forecast to remain virtually stable in the next three-year period, thus falling gradually in real terms. The containment of spending made a significant contribution to the reduction of the deficit, which goes from 3 per cent of GDP of 2014 to an estimated 2.3 per cent in 2016, which is a 9-year low.

The government’s commitment to the spending review has played a role in the achievement of these results. Altogether, since 2014, the savings associated with the initiatives to streamline spending amount, in terms of net borrowing, to approximately €3.6 billion in 2014, €18 billion in 2015, €25 billion in 2016, €27.6 billion in 2017 and approximately €28.7 billion in 2018, and regard all levels of government9. These savings are mostly derived from: i) changes in spending

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8 This last level would ensure the achievement of Italy’s Medium-Term Objective (MTO), which was set at zero in 2012, but which the country has the option of setting at -0.25 according to Commission’s most recent three-year assessments.

9 The savings are quantified net of fiscal and social-security effects, and, in the case of the regions and local entities, are indicated prior to their usage as part of the easing of the restrictions of the Domestic Stability Pact or from the changeover to new public finance target balance (as from 2016). It is noted that the legislative measures indicated have provided for spending cuts that exceed the amounts outlined in the spending review. The table presents only those amounts that refer to measures for streamlining expenditure and to make expenditure more efficient. In addition, some measures are booked as part of revenue in the general government account.

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mechanisms and the organisational structure of the administrations; ii) increased efficiency in public procurement of goods and services; and iii) the abandonment of initiatives considered obsolete.

The spending review was initially conducted by extraordinary commissioners appointed by the government, who mainly concentrated on cutting expenditure for the procurement of goods and services.

Later, a working relationship was established between the spending administrations and the MEF in order to identify i) areas where spending could be reduced, and ii) programmes that were less than efficient. This effort also included analysis of the individual budget items.

TABLE III. 1 SPENDING REVIEW
Legislative measures	2014	2015	2016	2017	2018
Decree-Law No. 4/2014	488	773	565	565	565
Decree-Law No. 66/2014	3,120	2,972	2,800	2,727	503
Decree-Law No. 90/2014	0	75	113	123	153
2015 Stability Law	0	12,159	13,001	4,154	15,814
2015 Stability Law, revision at unchanged policies	0	2,024	1,375	1,921	1,668
2016 Stability Law	0	0	7,176	8,155	9,976
Total	3,608	18,003	25,030	27,645	28,678

Due to rounding, the totals may not correspond to the sum of the components.

Source: State General Accounting Department analyses and estimates using data included in the summaries of the financial effects of the legislation.

More specifically, the 2016 Stability Law estimates savings (in terms of net borrowing) of approximately €7.2 billion in 2016, €8.2 billion in 2017, and €10 billion in 2018, with initiatives to be applied at all levels of government. The most significant savings are represented by cuts in appropriations to the ministries, the contribution of territorial autonomies, and the provisions to streamline the purchasing of goods and services.

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REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Spending Review and tax expenditures		With the new regulatory framework for tax expenditures (Lgs. D. 160/2015) the Gov.t will annually review existing tax expenditures according to their economic impact and present a Report to Parliament together with the Budget Law.	October 2016
	Spending review – Phase I (rationalisation of purchasing centres, processes digitalisation and standard costs) savings achieved: 3.6 bn in 2014 and 18 bn in 2015		2015
	Strengthening the programme of rationalization for e-procurement and of the central buyers bodies (‘centrali di committenza’); setting up of the ‘aggregators Table’; extension of the obligations for the PA and its subsidiaries to use Consip (the National e-procurement Agency) for their purchases.
		Annual decrees on market categories and maximum thresholds for independent tenders (if exceeded authorities must resort to Consip or to another party aggregator). Definition of new benchmark prices based on ‘essential characteristics’ of the goods and services	By 2016
		Standard requirements and fiscal capacity rules (Fiscal Federalism) for local authorities. Updating of the methodological notes
		Phase II of spending review (revision of Budget Law). Estimated savings: €25 billion in 2016, €28 billion in 2017 and 29 billion in 2018	Structural savings planned until 2018.
		Bill modifying L. 243/2012 providing for the implementation of the principle of balanced budget for regional and local authorities.	July 2016

Spending review: target areas

The savings projected for the State are largely based on selective initiatives to cut the expenditure of the ministries for approximately €2.7 billion in 2016, €2.1 billion in 2017, and €2.3 billion in 201810.

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10 Which, in terms of reduction of the appropriations available, amount to approximately €3.3 billion in 2016, €2.4 billion in 2017, and €1.8 billion in 2018.

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Other reductions have been achieved through the revision of transfers and subsidies to public and private businesses11.

Additional measures include, inter alia, the replanning of resources for healthcare-related construction projects (€0.3 billion in 2016 and €0.6 billion in each of the years 2017 and 2018) and the sale of buildings used by the Ministry of Defence (€0.2 billion in 2016).

The national social-welfare and public social assistance entities have been charged with cutting current expenditure, excluding that for pensions and assistance, by at least €53 million in the 2016-2018 three-year period. The provisions already provided for the 2014-2016 three-year period are to be temporarily continued with respect to the revision of the indexing of pension payments that are three times greater than the minimum pension, with savings, net of fiscal effects, amounting to approximately €335 million in 2017 and approximately €750 million in 2018.

The standard national healthcare funding requirement has been set at €111 billion for 2016, with a consequent impact of lowering net borrowing by approximately €1.8 billion. One portion of the financing of the national healthcare service (€0.8 billion) is subject the adoption of the new Essential Levels of Care (ELC). With further reference to the healthcare sector, the 2016 Stability Law supplies various tools for improving efficiency, including enhancements to centralised purchasing procedures and the introduction of deficit reduction plans for hospitals (including university hospitals), Scientific Institutes for Research, Hospitalisation and Health Care (IRCCS) and, as from 2017, local healthcare units (ASL).

The production of electronic personal healthcare records is to be completed through the institution of a national record hub that will get involved in the process, pending the activation of the regional hubs, which are expected to ensure optimal interaction between healthcare facilities and individuals, and efficient monitoring of healthcare expenditure.

Turning to the regions, a significant saving is expected from the changeover to the new public finance target balance (approximately €1.8 billion in 2016, approximately €1 billion in 2017 and €660 million in 2018). In addition, the regions and autonomous provinces have been charged with improving their contribution by approximately €4 billion in 2017 and approximately €5.5 billion in 201812.

With reference to public-sector employment, the freeze on turnover has been enhanced for the 2016-2018 period, with 25 per cent of the savings coming from terminations (which, net of the fiscal and social-security effects, amount to €23 million in 2016, €81 million in 2017 and €164 million in 2018). In addition, the resources for ancillary employee compensation have been limited and reduced (€36 million per year).

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11 Including the Italian National Railways (€0.4 billion in 2016), the fund for tax relief to businesses (€35 million in 2016, €41 million in 2017, and €60 million in 2018) and interest subsidies related to the financing made available by the Revolving Fund for Support to Businesses (€55 million in 2016 and 50 million in each of the years thereafter). Cuts have also been made to the compensation paid to authorised tax assistance centres (€40 million in 2016 and €70 million for the years of 2017 and 2018) and social services assistance centres (€15 million per year).

12 Inclusive of the savings on expenditure derived from the regions’ use of procurement centres for the purchases goods and services, which are equal to €480 million in each of the years of 2017 and 2018.

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Procurement units, public administration’s electronic market and streamlining of ICT purchases

Enhanced centralised procurement and e-procurement remain important elements of the spending review, as they allow for efficiency gains in purchasing processes and costs (including the administrative charges related to the execution of purchasing procedures) and greater traceability, transparency and simplification of administrative action. The start-up of the technical working group of aggregating entities is one of the more important initiatives already implemented. The group is charged with figuring out the requirements of the administrations in terms of purchases of goods and services, and facilitating coordinated planning of purchases, so as to increase the portion of purchases done in aggregate form.

This approach allows for fewer tenders by merchandise categories, with greater standardisation of purchasing procedures, and the achievement of fewer price differences for the purchase of the same goods and services, with consequent potential savings, without compromising the quality of the services. Some progress has already been made in this regard: a survey done in 201513 (with reference to purchases in 2014) showed an overall reduction of the unit purchase prices for 20 categories of goods, which were included in a basket of the most commonly used goods within the administrations. In addition, as a result of significant interaction between various areas of the State, the Healthcare Ministry, the Italian Anti-Corruption Authority and all levels of local and regional government, the purchases of 19 categories of goods and services (many of which are for healthcare) have been concentrated at 33 purchasing centres14.

The 2016 Stability Law continues in the direction already outlined and introduces more stringent restrictions15 in order to induce the administrations to increasingly make use of the CONSIP agreements for their purchases, providing for the obligation of justifying purchases not made through such agreements.

Every administration is required to use instruments for rationalisation as supplied by the centralised procurement system so as to impact the unit purchase price, coupled with expenditure rationalisation processes , such as the quantities purchased and the re-engineering of production processes to impact other aspects of expenditure. The contribution contemplated in terms of lower expenditure for public procurement is equal to approximately €216 million in 2016, €697 million in 2017, and €698 million as from 2018. The reductions for the ministries have been identified based on a criterion that rewards the administrations that made the most use of centralised purchasing in 2014.

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13 This is an annual survey of public administrations conducted by MEF, in collaboration with ISTAT. The survey is aimed at identifying the differential between the prices in agreements signed by CONSIP, the public administration’s central purchasing body, with respect to 22 categories of goods, and the prices actually paid by the administrations that did not purchase their goods through the CONSIP agreements. The survey refers to approximately 1,400 administrations.

14 Prime Minister Decree of 24 December 2015 for the implementation of Article 9 Paragraph 3 of the Decree-Law 66/2014 that identifies the types of goods and thresholds for which the State and regional administrations, NHS entities and local entities must go through CONSIP or another aggregating entity.

15 A forthcoming ministerial decree will identify the essential characteristics of the main services regarding goods and services covered by the CONSIP agreements; these will represent the qualitative and price benchmarks for the public administrations’ purchases of those goods and services.

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A critical aspect of this general framework is online purchasing, the substantial development of which has allowed for improving the public sector’s efficiency, while also ensuring significant savings. In 2015, the value of the purchases through the electronic market for Italy’s public administration (MEPA16), which is managed by CONSIP, was more than €2 billion (+39 per cent over 201417). In terms of the number of articles available (subdivided into 30 categories), MEPA is Europe’s largest electronic market for public procurement. With the 2016 Stability Law18, the obligation of centralised buying through the CONSIP agreements and the obligation of going through MEPA for purchases below the significant European threshold19 were extended to social services entities and fiscal entities (Revenue Agency, Customs and Monopolies Agency, and State Property Agency).

Another essential aspect of streamlining expenditure has been the rationalisation of outlays for ICT, which entails effects on operating costs, investments for process simplification and long-term strategic innovation.

Measures in addition to those outlined in the 2016 Stability Law are needed so as to reinforce CONSIP’s authority in situations where, despite existing legal obligations, it is possible to optimise the reliance on independent procedures. The MEF, as the head of the Programme for Rationalisation of Public Procurement, will need to act as the ‘sole buyer’ and later, as the ‘sole payer’, working together with CONSIP.

The 2016 Stability Law provides for a model to streamline ICT, which is based on roles and instruments assigned to various parties, and is to be developed through a ‘National Programme for Rationalisation of ICT Purchases’, which brings all of the parties involved together in an integrated, uniform and structured project (similar to the Programme for Rationalisation of Public Procurement). The new programme will require the definition of a regulatory framework, responsibilities, organisational and process measures, institutional coordination and adequate financing.

Additional instruments (alongside those mentioned above) are needed for maximising the leverage of public procurement (including an industrial policy instrument) and might include: the use of advanced negotiating tools (e.g. competitive dialogue) that stimulate research and investment, particularly for strategic goods or services; the definition of a national pre-commercial procurement strategy, connected with the role already assigned to the Agency for

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16 The MEPA is a system made available to the public administrations for purchases below the threshold defined for the purposes of the European Union (currently €135,000 for central government and €209,000 for other government). The main objective of the system is to support small- and medium-sized businesses in their efforts to supply the public administrations.

17 The result was achieved with an increase (from 523,000 to 650,000) of the number of contracts executed through the MEPA. Some 25 per cent of these contract refer to purchases made by the State administrations, while the remaining 75 per cent refers to the local public administrations (local entities, healthcare entities, and universities). More than 39,000 public ‘buyers’ made at least one purchase during 2015 (so-called active ordering points), with growth of +19 per cent over 2014. There are currently almost 55,000 authorised suppliers, with growth of +50 per cent over 2014. Some 99 per cent of the suppliers are small- and medium-sized businesses (micro-businesses: 72 per cent; small businesses: 23 per cent; medium-sized businesses: 4 per cent).

18 Law No. 208/2015, Paragraphs 494-503.

19 In relation to the threshold defined for the purposes of the European Union, it is noted that the values of €134,000 for the central government and €207,000 for other government entities come from the application of Article 28 of the Public Contracts Code (Legislative Decree No. 163/2006) and EU Regulations No.1336/2013.

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Digital Italy for ICT; incentives for the development (businesses) and usage (administrations) of new products/services, including through the use of EU Funds managed by Italian institutions; the involvement of the aggregating entities in the public demand start-up phase; the development of a high-tech, innovative solutions marketplace; the further usage of ‘green’ elements in public procurement of goods and services (all the way through to ‘circular economy’ concepts); the identification of innovative purchase formats, using, for example, pay-per-use tools.

A project for streamlining IT spending is the recently completed unification of the five data processing centres of the MEF’s General Administration, Personnel and Services Department. The project, which was inaugurated in 2013 as part of the spending review, has allowed for significantly cutting IT operating costs from €12.5 million (2013) to €8.6 million, with savings of 31.2 per cent. Considering that the related costs would have reached €15 million in 2015, the savings are even more impressive. The reduction of space and equipment translated into a 67 per cent decrease in spending on electricity, while other operating costs were also cut.

Budget reform

In February 2016, the government approved two Legislative Decrees20 for the revision of the State budget’s structure and enhancing the function of the cash budget; the decrees are now under review by the Senate and House Budget Commission for the related opinion.

The first decree regarding the completion of the budget reform is aimed at: i) making the budget more significant and easier to interpret and improving the quality of revenue and expenditure data; ii) enhancing the financial planning process and the role of the budget in allocating resources, including by making the spending review process an integral part of the budget cycle and improving monitoring with respect to the achievement of pre-set targets; and iii) simplifying procedures for provisions to change the budget during the year, so as allow for more timely availability of resources, for the purpose of the proper management thereof.

The second decree is aimed at enhancing the role of the cash budget in the budget forecast and from an operational perspective; its main objectives regard: i) creating a more direct link between parliamentary decisions about resource allocation in the budget and the point when such decisions impact the economic system through actual disbursement of the resources; ii) improving the management of the cash requirement, and the repercussions on the trend of the public debt; and iii) streamlining, including in quantitative terms, the issue of residual amounts in the budget.

With the focus on enhancing the financial planning process and the role of the budget in allocating resources, including through the integration of the spending

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20 The Enabling Act for completion of the Budget Reform according to the principles and criteria indicated in Article 40 and Article 42 of Law No. 196 of 31 December 2009 has been extended over the years, with the most recent extension on 15 February 2016 as provided by Article 1, Paragraph 2, letter c) of Law No. 9 of 22 January 2016, entailing the conversion, with amendments, of Decree-Law No. 185 of 25 November 2015.

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review in the budgeting cycle21, the first decree provides for a mechanism to set spending targets for the ministries and greater attention to the monitoring of the impact of the measures adopted for achievement of the targets. Therefore, specific spending targets are to be assigned to each administration by the end of May, on a basis consistent with the policy scenario priorities and objectives indicated by the government in the Economic and Financial Document (EFD). The central government will define its own financial planning by taking into account legislation in effect, efficiency improvements in the use of the resources that can be achieved through administrative procedures, and possible legislative/regulatory proposals aimed at achieving the expected results. These proposals will be evaluated for the purpose of their inclusion in the bill for the Stability Law and will be discussed by Parliament during the process of approving the budget.

Accordingly, the overall proposal for defining the budget will no longer be the sum of individual proposals or requests of the spending administrations, but it will be developed within the objectives assigned to those administrations, which represent the boundaries of the planning22.

Such procedure regards the central administrations of the State, while standard costs and standard requirements will continue to be the parameters to be used as the basis of the financing of fundamental expenditure for municipalities, metropolitan cities, and provinces, so as to ensure that the historical spending criterion is gradually and finally superseded, even in decentralised framework.

In addition, a Parliamentary bill is planned for defining the operational procedures for the final stage of the reform: The Stability Law will no longer be a separate law from the Budget Law; instead there will be a single law23. The unification of the two laws is aimed at getting beyond the traditional format for regulating public finance and improving the allocating role of the budget, by focusing the lawmakers’ attention on the aggregate of public revenue and expenditure, rather than their change in terms of margin.

Territorial entities’ contribution to spending review

The full-scale operation of the new accounting system for territorial entities24 is one of the key developments for 2016, and is an essential part of public-finance reform aimed at favouring coordination of the public accounts, fiscal consolidation, and the activities related to both the public spending review and the determination of standard costs and standard requirements. The new

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21 According to the provisions of current laws and regulations, the start of the financial planning cycle occurs with the presentation of the Economic and Financial Document (EFD) to Parliament by 10 April; the EFD indicates the government’s priorities and the economic/financial compatibility thereof for the public administration.

22 The necessity of evaluating (both simultaneously and in alternative terms) the financing of ‘historical’ activities and new spending proposals should facilitate the comparison between the respective effects and favour the reallocation of the resources among initiatives and activities in relation to their effectiveness.

23 The unification is provided by the law for the implementation of balanced budget principle (Article 15, Law No. 243/2012).

24 Such reform has been fully realised through the issuance of Legislative Decree No. 118 of 23 June 2011, as supplemented and amended by Legislative Decree No. 126 of 10 August 2014.

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accounting rules for territorial entities, which have been phased in from 1 January 2015, will be fully in effect as of 2016, through the consolidated budget, the income-capital accounting system, and the inclusion of all special autonomous entities.

The reform is fundamentally important for the regions, as it represents the first single set of accounting rules for local government, and requires major revision of the accounting systems of provinces, metropolitan cities and municipalities, along with their agencies and other operational entities. The budget forecasts and the final data of these entities will be transmitted directly to the Public Administration Databank using a single digital standard, according to the structure of the integrated account plan. The reform implementation process has been facilitated by the creation of a Commission for Territorial Accounting Harmonisation (ARCONET) at the MEF. The commission is charged with promoting the harmonisation of the accounting systems and budget formats of the regions, provinces, metropolitan cities and municipalities, along with their agencies and other operational entities.

The reform of the accounting system for the territorial entities produced its initial positive effects during 2015, and in particular, it contributed to an increase in investment, a reduction of the expenditure for intermediate consumption and employee compensation, and a reduction of the stock of accounts payable and of the related terms of settlement.

The government approved a Draft Law in March 2016 to introduce changes to Law No. 243 of 2012, with the aim of bringing the public finance restrictions on territorial entities in line with the reform of territorial accounting. The changes entail the substitution of the four budget balances of reference for the regions and local entities, with a single non-negative balance (accruals basis) between final revenue and final expenditure, for both the forecast and the definitive final accounts. The new provisions also govern borrowing transactions and the use of prior-year surpluses for investment transactions. Finally, the contribution of the territorial entities to the sustainability of the public debt is delegated to State law, and is based on payments to the Fund for the Amortisation of Government Securities, taking into account the trend of the economic cycle.

Healthcare

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Healthcare	Strengthening of Health Pact 2014-2016 (EAL, reference prices, drugs)		December 2015
		Health responsibility (AS2244)	By 2016

The spending review also continues to involve the healthcare sector25. By 30 June of each year (by 31 March 2016, the first year of application), the regions

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25 The 2016 Stability Law contains measures for such purpose, providing for: i) the update of the ELC and the creation of a commission for continuously updating the ELC and promoting the appropriateness thereof; ii) the deficit-reduction plans designed to increase the quality and the productivity of public service providers; iii) measures for hiring personnel, followed by validation of the requirements and plans for the reorganisation of regional healthcare services; iv) measures regarding activities for the prevention and management of clinical risk; and v) improvement of processes for the procurement of goods and services, with the aim of creating procurement centres for the purchases of certain categories of goods and the sharing of expertise, including on the basis of a national Health Technology Assessment (HTA) programme for medical devices.

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must identify the NHS entities that meet one or both of the following conditions: i) a cost-revenue imbalance; ii) an inadequate level of service with respect to essential levels of care. In such cases, the entity must present a plan (for up to a three-year period) to correct the shortcomings; the plan is to be assessed and approved by the region and, thereafter, to be checked on a quarterly basis. The directors general of NHS entities will be automatically dismissed in the event of any negative outcome to the region’s quarterly monitoring.

In addition, the government is committed to maintaining and consolidating the qualitative results achieved in the healthcare sector, thereby improving the rationality of spending in the regions subject to deficit-reduction plans. The government’s commitment in this regard entails both actions through special commissions located in the regions operating with a deficit, and the implementation of the Healthcare Pact. The pact is a three-year financial and planning agreement between the government and the regions regarding the National Healthcare Service’s spending and planning, and it is aimed at upgrading service quality, promoting the appropriateness of the services, and guaranteeing the unity of the system through the definition of ceilings on expenditure.

Other spending review measures

Other measures will involve various areas of the public administration, including the defence sector, where the reorganisation of the armed forces will allow for rebalancing defence spending, with the redeployment of resources toward greater investment. Such reform (as outlined in a Legislative Decree approved in February 2016) will affect the national military through:

-   the streamlining of the organisation, classification and structure of the armed forces;

-   rationalisation and standardisation measures, including, for example, the consolidation of the naval engineering corps and the weaponry of the navy and the reform of proceedings for appointment of the heads of the military;

-   measures aimed at securing additional savings, including, for example, the elimination of some specific forms for advancement to a higher rank that are no longer compatible with current resource levels.

Additional measures will be enacted in 2016 with respect to the defence sector (through enabling acts and provisions for immediate implementation) for the purpose of applying the provisions of the ‘Defence White Paper’ and the related reform programme26.

Finally, the spending review provides for action with respect to certain processes already inaugurated as part of the reform of the public administration.

26 With the ‘White Paper’, the government has aimed: to indicate, from a medium-term perspective, the military organisation that is best equipped to tackle the challenges and the opportunities regarding defence and international security; to identify the best governance model and consequent organisation on the basis of up-to-date criteria regarding effectiveness, efficiency and cost/income standards; and to develop the cultural and organisational elements that will allow the defence sector to contribute consistently to the country’s effort to build an indispensable security framework.

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For example, process digitalisation will make the entire public sector more efficient, while the reordering of investee companies will have an indirect impact on public expenditure.

Payments of the public administration’s trade debt

From 1 July 2014 to 31 December 2015, the monitoring of receivables claimed from the public administrations showed that 8.9 million invoices totalling €60.5 billion were paid against a total of 21.5 million invoices registered for a total of €129 billion, with the average payment period of 46 days (which declines to 44 days for the ‘active entities’). There are some 7,400 entities classified as ‘active’ on the monitoring system (entities that took action on more than 75% of the invoices addressed to them).

The participation of all of the public administrations in the monitoring system is aimed at making payment information available for 90 per cent of the invoices registered by the end of 2016 and 99 per cent by 30 June 201727. Considering the number of the administrations involved and the related services, getting all of the administrations on the system and the planning of the activities to implement the services (consistent with the digital expansion plan) should be done by December 2016.

As of March 2016, the number of top performing public entities in terms of the payment of electronic invoices (i.e. those that pay promptly) had risen from 300 to 50028.

Fiscal policies

Expansion of the taxable base, taxation and fight against the shadow economy

CSR1 – ‘Implement the enabling law for tax reform by September 2015, in particular the revision of tax expenditures and cadastral values and the measures to enhance tax compliance.’

In view of the spending cuts, the fiscal-policy measures provided by the 2016 Stability Law need to be considered in the context of a long-term strategy inaugurated in 2014 (with the €80 payroll bonus to low-/middle-income workers) and continued in 2015 (with the elimination of the labour component of the regional tax on productivity activity and with measures to cut the tax burden on businesses that invest in research and development). After an initial phase aimed at boosting the country’s competitiveness through measures aimed at reducing the tax wedge (which was consistent with the European Commission’s recommendations), the budget policy for 2016 and the years thereafter is associated with the process of implementing the structural reforms, and is aimed

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27 The objective of gathering information about 60 per cent of the invoices registered, by the end of 2015, was reached.

28 Selected from those entities that transmit information related to more than 75 per cent of the invoices addressed to them (classified as ‘active entities’) and that have received at least 1,000 invoices for a total amount of more than €1 million.

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at supporting employment and steadily guiding the Italian economy back to a path of solid growth.

The measures that have eased the tax burden on labour have been rounded out with the measures in the 2016 Stability Law directed at businesses: the corporate income tax rate is to be reduced from 27.5 per cent to 24 per cent as of 1 January 2017, while additional depreciation can be charged for tax purposes (an increase of 40 per cent of the cost recognised for tax purposes, for the purchase of new capital goods during the period from 15 October 2015 to 31 December 2016).

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Taxation	VAT and taxation on capital gains (D.L. 66/2014 cvt. in L. 89/2014).		June 2014
	Permanent reduction of tax wedge on labour (2015 Stability Law – L. 190/2014).		December 2014
	Reform of the local taxation on properties (IMU) and indivisible services for principal residences (TASI) (2016 Stability Law - L. 208/2015).		December 2015
	Reduction of corporate taxation (2016 Stability Law: reform of local taxation on farmland and on “bolted equipment”; reduction of IRES at 24% in 2017)
	Fiscal measures to boost investments (2016 Stability Law: amortisation of 140% for the purchase of capital goods; exclusion of instrumental properties from the firm’s assets)
		IRPEF: with the next Budget Law it will be evaluated the possibility of acting on IRPEF according to the available public finance space.	2017-2018
		Tax measures of VAT regime and taxation of business income	2016

Taxation of real property

The measures of the 2016 Stability Law with reference to local taxes, and in particular the Single Municipal Tax and the Tax for Indivisible Services, are also part of the government’s strategy of cutting the tax burden for individuals and businesses. In this regard, the strategy is based on an increase in household disposable income (with benefits, in particular, for lower income brackets) and a stimulus to consumption and investment. The main measures include: the elimination of taxation on primary dwellings (except luxury properties); the substantial reduction of cadastral income related to real properties classified in the D and E cadastral groups (so-called ‘bolted assets’); and changes concerning the exemption from the Single Municipal Tax for farmland.

As of 2016, the Tax for Indivisible Services will no longer be due with respect to primary dwellings, whether the property unit is the owner’s primary dwelling or the tenant of the property unit designates it as his primary dwelling. The Tax for Indivisible Services will continue to be levied on all real properties other than

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primary dwellings. The effects of the abolition of the Tax for Indivisible Services on primary dwellings, as estimated with the Treasury’s econometric model (ITEM), confirm the positive impact on consumption as of 2016. Considering the estimated growth of consumption of 0.25 per cent in 2017-2018, the effect on GDP would be a constant +0.1 per cent (compared with the baseline scenario) during 2016-2019.

The 2016 Stability Law’s other important measure regarding taxation of real property regards businesses, and provides for the redetermination of the cadastral income of productive assets classified in the D and E groups (the so-called ‘bolted assets’). The measure has excluded ‘machinery equipment, devices and other plant function to the specific productive process’ from the sphere of cadastral valuation.

Despite the elimination of the municipal taxes (the Single Municipal Tax and the Tax for Indivisible Services), the resources available to municipalities will remain virtually unchanged. The municipalities will be compensated for their loss of tax revenue through an increase of the resources in the Municipal Solidarity Fund in the amount of €3,767 million as of 2016.

Implementation of the fiscal enabling act

The deadline for the exercise of the fiscal enabling act expired in September 2015. Most of the law has been implemented through special implementation decrees. The specific structural and systemic measures adopted are illustrated in the table below, and are aimed at enhancing equity and transparency, by making the taxation system more growth oriented.

With reference to initiatives provided by the enabling act that were not implemented by specific legislative decrees, the government has already intervened (or will intervene in the next few years) with specific measures.

Through the 2016 Stability Law and forthcoming legislation, the government has initiated the reorganisation of gaming industry, with measures to address fundamental aspects such as taxation, greater control over gaming devices, and public disclosures according to European Union guidelines.

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REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Fiscal system	Enabling Law on tax reform (L. 23/2014).		March 2014
	Enabling legislative decrees of L.23/2014		November 2014
	Fiscal simplification and pre-compiled income tax return (Lgs.D. 175/2014).
	Tobacco products (Lgs. D. 188/2014);		December 2014
	Revision of Cadastral committees (Lgs. D. 198/2014).
		Cadastre: The revision of cadastral values will be subject to a general and organic intervention after an alignment of the databases needed to accurately assess the revenue and distributional effects on taxpayers.	2016-2018
	Legal certainty between tax authorities and taxpayers (Lgs. D. 128/2015		August 2015
	VAT electronic invoicing (Lgs. D. 127/2015).
	Simplifying taxation for international businesses (Lgs. D. 147/2015)		September 2015
	Simplification of collecting system(Lgs.D. 159/2015)		October 2015
	Monitoring of tax evasion (Lgs. D. 160/2015)
	Sanction system (Lgs. D. 158/2015)
	Litigation procedures (Lgs.D. 156/2015)
	Reorganisation of fiscal agencies (Lgs. D. 157/2015).

Among its main objectives, the fiscal enabling law aimed to make the taxation system more stable and certain. Frequent regulatory changes generate added costs for taxpayers and uncertainty for business investment decisions, with negative effects on the medium/long-term credibility and stability of the taxation system.

The government has accordingly taken broad-based actions aimed at: i) improving the tax regulation framework and the management of the relationship between the tax authorities and taxpayers, in all of its phases, including disputes; ii) simplifying the fulfilment of tax obligations; iii) favouring the voluntary disclosure of the taxable base.

The legislative decrees adopted to date as part of the implementation of the enabling act have provided for:

- the redefinition of the abuse of rights, extended to all taxes and accompanied by appropriate procedural guarantees (Legislative Decree No. 128/2015);

- the introduction of a cooperative compliance system, according to OECD guidelines, and taxpayer management and internal control of fiscal risk (Legislative Decree No. 128/2015);

- the enhancement of the tax authorities’ role in supporting businesses with international operations, and, in particular, the easing of restrictions on

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cross-border transactions and improvements with respect to the system of taxpayers applying for preventive rulings, litigation procedures, and the efficiency of the tax commissions (Legislative Decree No. 147/2015);

- the revision of tax litigation procedures and procedures for taxpayers applying for preventive rulings (Legislative Decree No. 156/2015);

- the revision of penal and administrative sanctions, which are assessed in proportion to the severity of the offence (Legislative Decree No. 158/2015);

- making tax collection more efficient (Legislative Decree No. 159/2015).

The improvement of relationships between the tax authorities and taxpayers (a strategic and indirect objective of the implementation of the enabling act) has also been pursued through the methodical simplification of unnecessarily complex taxation procedures and compliance obligations. In order to limit the impact of tax assessment activity on the business operations of taxpayers, the government has focused on improving voluntary compliance through stronger ex-ante prevention (compared with the traditional ex-post control and assessment activity) and making better use of the information already held in the databanks available to the tax authorities.

Simplification measures include the introduction of pre-compiled tax returns, whereby employees and pensioners can view and download the personal income tax return with the data already matched by the Revenue Agency. As of 2016, the pre-compiled tax returns will include a large portion of healthcare expenditure and a greater number of tax deductions and credits; this change is expected to increase the number of returns accepted by the taxpayers, with positive effects on the Revenue Agency’s audit activity. A forthcoming decree to amend the provisions of Legislative Decree No. 175/2014 will introduce additional, significant simplifications with respect to the taxpayer obligations regarding the declaration, communication and payment of state and local taxes. Another important regulatory change is the redefinition of the mission of the tax agencies and the criteria contained in the conventions that are used as the basis for incentives.

From an operational perspective, the use of new databases and the accurate cross-checking of the data have made it possible to evaluate more precisely the degree of taxpayer risk, and to identify taxpayer traits that may indicate a propensity toward non-compliance. The tax authorities have thus been able to significantly improve their dealings with taxpayers who wish to comply, thereby reducing the cost of compliance.

The voluntary disclosure of the taxable base has been favoured by electronic invoicing. As of 31 March 2015, all suppliers to the Public Administration were required to start invoicing electronically. With the decree to implement the provisions of the fiscal enabling act regarding the electronic transmission of VAT transactions and the related payments, as of 1 January 2017, taxpayers who decide to use electronic procedures for invoicing and payment registration will benefit from important simplifications in terms of tax compliance29. These

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29 Taxpayers who elect to use electronic invoicing will not be subject to the reporting obligations related to the register of income/expenses and the black lists. In addition, they will benefit from more rapid refunds of VAT.

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measures are in line with OECD guidelines providing that tax authorities must be transformed from ex-post auditors into entities that facilitate tax compliance and minimise invasive controls by exploiting the use of technology.

Fight against tax evasion

Enhancements to the measures to fight tax evasion and to favour voluntary disclosure of the taxable base have positive effects on the equity and neutrality of the taxation system.

As part of the implementation of the fiscal enabling act, structural measures were adopted with regard to: i) the reporting on tax and social-contributions evasion and the results achieved to prevent evasion; ii) the monitoring, revision and coordination of tax expenditure with budgeting procedures30.

The measures to fight against tax evasion include new rules going into effect in 2016 for defining a balanced and impartial method for the reporting, calculation and public disclosure of the results of the strategies of fight against tax evasion. The new rules contain important changes: i) the preparation of an estimate of the tax gap (namely, the difference between taxes and social contributions actually paid and the revenue that would have been realised under a scenario of full compliance) for all principal taxes; ii) the obligation of providing separate evidence of the recovery of sums declared and not paid, and of the correction of errors in settlement based on tax returns, iii) the distinction, where possible, of the recovery of tax and social-contributions revenue attributable to the greater propensity of taxpayers to meet their tax obligations, and iv) the institution of a commission of experts charged with developing methods and procedures for monitoring and analysing the activities to fight and prevent evasion.

The government is to present an annual report (along with the EFD Update) about the results achieved with respect to the fight against evasion and the new strategies planned. These important changes represent an opportunity for radically modifying the approach to analysing and fighting evasion – an approach that is functional to undertaking increasingly focused and effective actions.

Results of the fight against evasion

In 2015, the Revenue Agency recovered €14.9 billion through activity to fight evasion. The positive trend has thus continued, with a 240 per cent increase in collections over 10 years.

Important results have been achieved in relation to the measures introduced by the 2015 Stability Law to combat VAT evasion and fraud: the introduction of the split-payment mechanism for suppliers to the public administration31 and the extension of the reverse charge to cleaning, demolition, plant installation and building services. The effectiveness of these measures has been confirmed by preliminary assessments: in 2015, the increase of VAT on transactions in Italy for

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30 Legislative Decree No. 160/2015

31 Article 1, Paragraph 629, letter b), of Law No. 190/2014.

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the effect of the split payment and of the reverse charge was approximately €3 billion.

The voluntary disclosure programme has also been an important factor in uncovering income not reported to the tax authorities. The 129,000 taxpayers applying for participation in the programme have declared approximately €60 billion of previously unreported income, and have thus far paid taxes amounting approximately €3.8 billion (net of interest), most of which have come from northern Italy. The applications now being audited are expected to result in the issuance of approximately 500,000 assessments before the end of 2016. As a result of the greater efficiency of the tax authorities, the timing for the disbursement of refunds was also decreased between 2014 and 2015. Given the simplifications introduced with respect to tax returns, in 2015, the Revenue Agency refunded €480 million to taxpayers who have no more than one employer.

Reordering of tax expenditure

Tax expenditure has been monitored for the purpose of coordinating it with current budgeting procedures, so as to formally recognise it at the two significant stages of budgeting: the planning phase and the preparation of budget legislation (Stability Law and Budget Law). The annual reordering of tax expenditure will temporarily be done as part of the EFD Update as part of the policy scenario measures, which, once the Note from Parliament has been approved through a special resolution, will become binding on the government for the purpose of preparing budget legislation.

The process of reordering tax expenditure will be aimed at eliminating or revising those expenditure items that are no longer justified on the basis of the changing social and economic needs or those that duplicate public expenditure programmes. More specifically, tax expenditure items will be thoroughly examined five years after their adoption, including through analysis of their microeconomic and social effects and their repercussions on society as a whole. The incremental revenue derived from measures to reorder tax expenditure will be allocated to the Fund for the Reduction of Fiscal Pressure32.

Revision of cadastral values

The revision of cadastral values33 will entail more general measures that are needed for accurately evaluating the distributional and tax-revenue effects on taxpayers. The revision will be done following a complex database alignment.

As outlined in the 2016 Stability Law, the government’s near-term action will focus on measures in areas particularly critical to the process of determining cadastral income of real properties used for industrial and productive purposes (so-called ‘bolted assets’, that can be classed in the D and E cadastral groups). This action not only constitutes progress in the process of revising the estimates for the categories of buildings subject to direct estimation, but it also defines a

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32 Instituted by Decree-Law No. 138/2011

33 The review of the census commissions has been completed, and the related decree has been in effect since 2014.

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single criterion for identifying the types of plant and equipment to be excluded from the computation of cadastral income, and allows for resolving major technical-estimation issues in the process determining the cadastral income of production facilities.

The public administrations are nonetheless continuing their current, extraordinary activity in relation to the cadastral registration of the real property units in the cadastral archives and the determination and assessment of the related cadastral income. For residential real property, provisions remain in effect for specific types of annual revisions to the classification of the urban real-property units, namely, the ‘revision of the classification of the private real-property units situated in municipal micro zones’ and the ‘updating of the cadastral classification due to changes having been made to building construction’34.

The revision of the classification of the private real-property units situated in municipal micro zones is undertaken by the Revenue Agency upon the request of local government, in cases where there is a discrepancy with respect to average market value. Thus far, some 17 municipalities, including Rome, Milan, Bari, Lecce and Ferrara, have requested revisions producing an overall increase of cadastral income of approximately €184 million.

The updating of the cadastral classification due to changes having been made to building construction can also be undertaken upon the request of local government. To date, such proceedings have involved 1,300 municipalities, or 17 per cent of all municipalities in Italy. The proceedings have resulted in approximately 94,500 notifications from the municipalities involved, with 67 per cent thereof entailing the need for a cadastral update. The resulting increase in total cadastral income amounts to approximately €181 million.

Online court proceedings

The government has undertaken steps to accelerate the process of digitisation of the Public Administrations, and has implemented e-government policies with the priority of establishing more immediate and straightforward dialogue with businesses and the public. In line with the Italian and European Digital Agendas, in December 2015, electronic tax court proceedings were inaugurated on a pilot basis in the Tuscany and Umbria Regions, and over the next two years, this project is to be gradually extended to all of the other regions of Italy. Internet-based services have been expanded, and have improved the possibility of ‘remote’ dialogue with businesses and the public35. Such changes are aimed at simplifying the relationships between the tax authorities and taxpayers, and allow for access to the tax court’s information system (S.I.Gi.T.) for electronic filing of documents and acts related to proceedings and consultation of case files.

Having addressed the regulation of the proceedings, the government also intends to promote comprehensive reform of the tax courts in order to provide the

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34 Paragraphs 335 and 336 of the sole article of the 2005 Budget Law.

35 In particular, 100 per cent of the more than 818,000 requests for assistance were serviced within three days through the CIVIS channel.

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public with a more efficient jurisdiction structure and more rapid settlement of the cases, through measures to increase the level of professionalism of the tax court judges. A technical work group staffed by personnel from the Ministry of Justice and the Ministry of the Economy and Finance has been instituted for this purpose.

The measures for the implementation of the fiscal enabling act (including those already approved and the additional measures to be proposed) are aimed at significantly impacting a vital issue: the prospect of a changes in the country’s taxation system and in the relationship between tax authorities and taxpayers.

The design and development of a new, more straightforward, transparent and equitable taxation system is today the country’s most important challenge. Within such a system, tax revenue will be driven by the certainty of the law, the reduction of the compliance-related costs, and the restructuring of the taxation organisation. Such a system also offers the important prospect of the recovery of the trust in the relationships between tax authorities and taxpayers, and support to economic growth, through improvements of the business climate and the capacity to attract foreign investment.

All of the measures adopted to date (and those still to be adopted on the basis of the principles contained in the enabling act) have started to generate important results and to improve the perceptions of specialist international observers. These measures are part of an agenda that the government intends to advance with determination in the next few years, with the intention of bringing about a drastic change of course, not only from the standpoint of taxation, but also and more importantly from a technological and cultural perspective.

Privatisations

State-owned equity investments, privatisations and public assets

CSR1 – ‘Swiftly and thoroughly implement the privatisation programme and use windfall gains to make further progress towards putting the general government debt ratio on an appropriate downward path.’

Privatisations

The government is implementing the programme to privatise State-owned companies and to sell off State-owned real property, with the objectives of reducing the public debt, and opening up the ownership of the companies to the market. It is expected the privatisation programme will generate fiscal revenue amounting to 0.5 per cent of GDP per year in 2016, 2017 and 2018, and 0.3 per cent in 2019.

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REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Privatisation	Selling of public shares: Listing of Fincantieri (from CDP); dismissal of CDP Reti share; divestiture (from CDP) of Trans Austria Gasleitung GMbH – Tag; Listing of RAIWay.		2014
	Selling of further shares of ENEL, IPO of Poste Italiane.		2015
		ENAV, Ferrovie dello Stato. Further privatisations under consideration.	2016-2018

The most recent transactions include the sale of 5.74 per cent of ENEL on the market, through the use of accelerated book-building, and the market placement of shares of Poste Italiane through an initial public offering (IPO) of more than 35 per cent of the capital offered to retail investors in Italy, employees of the Poste Italiane Group and Italian and international institutional investors.

With the privatisation of Poste Italiane S.p.A., Italy exceeded the objective of 0.4 per cent of GDP (more than €6.5 billion) that had been set for the proceeds from the sales of equity investments (or similar transactions). Arrangements have also been finalised36 for the sale of up to 49 per cent of the share capital of ENAV during 2016.

The government has approved the draft of a Prime Minister Decree related to the stock-market placement of up to 40 per cent of the share capital of Ferrovie dello Stato Italiane S.p.A., without prejudice to the assignment of the ownership of the railway infrastructure to the State. The divestiture of the State-owned shareholding is expected through a public sale offering on the financial markets (including through two or more tranches) targeted to retail investors in Italy (including employees of the Ferrovie dello Stato Group) and Italian and international institutional investors.

In advance of the market listing, the holding company of the Ferrovie dello Stato Group has arranged for transactions to extract value from activities related to the core business: in particular, the electrical network was sold to Terna37, and Grandi Stazioni Retail, the company created from the divestiture of the company, Grandi Stazioni (the company managing the largest train stations in Italy), is to be privatised through a competitive public tender.

State-owned enterprises (SOEs)

As of January 2016, the approval of the draftsof executive legislative decrees for the implementation of the reform of the Public Administration has served as

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36 With Prime Minister Decree of 16 May 2014.

37 With the acquisition of the RFI network, Terna will have full availability of the high-voltage networks, and will be able to optimise their use, including in view of more widespread consumption of renewable energy sources. The assets covered by the transaction include: approximately 8,400 kilometres of power lines, and all of the rights and accessory relationships. The transaction had a total value of €757 million. The value of the network was established by the Authority for Electricity, Gas and the Water System. Part of the proceeds will be reinvested of railway infrastructure works, as provided by the 2015 Stability Law.

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the basis for restructuring the rules governing equity investments held by the Public Administrations. With the draft of the decree approved, a consolidated act has been adopted with reference to stock companies (joint-stock companies or limited-liability companies); this act provides for a major downsizing of the investments held in unprofitable companies (shell companies, inactive companies, companies operating at a loss, micro companies, and companies that do not produce essential public services). Clear criteria have been outlined to be used as the basis for setting up and operating investee companies in the future. The legislative decree’s objectives are: better governance of State-owned companies; greater operational efficiency of the companies, through a clearer and simpler regulatory framework; additional savings, through the requirement for a single director or a board of directors with 3-5 members, and the definition of criteria for determination of director compensation, with limits set on compensation in proportion to the size of the business. Significant savings on public expenditure are expected from this process of streamlining the portfolio of State-owned enterprises.

Value enhancement and disposal of real property assets

The extraordinary programme for extracting value from public real property assets is a single, long-term plan coordinated by the government (and the MEF, in particular) that concerns all of the institutional owners and/or operational managers of the assets. The various parties to the programme and their priority tasks are: i) the State Property Agency, as the facilitator of the development of initiatives to extract value from all public real property, with a specific role to act as a liaison and support to local entities, through the segmentation and definition of portfolios on a basis consistent with territorial development needs and with the most suitable investment instruments; ii) INVIMIT SGR, as the catalyst of public and private resources for enhancing the value of public real property and developing business in territorial areas, through direct and indirect investment; iii) CDP Group Real Estate, as the developer of property-related financial products that also appeal to the international market; iv) the public entities, as owners of the real properties covered by the various transactions.

In 2015, this programme generated income from property sales in the amount of €946 million, mostly related to real properties held by territorial entities, which contributed significantly to Italy’s exceeding its objective of €500 million; the target was surpassed despite ongoing problems related to the market’s absorption capacity, limited appetite for the type and location of the properties, and critical factors related to the regularity of documentation, including cadastral and urban records. The MEF and the State Property Agency inaugurated an initiative known as ‘The 2015 Real Property Offering’ in order to provide a greater impetus to the value-enhancement and divestiture processes; this initiative has led to the selection of portfolios of properties owned by local government and other public entities that will be processed for the purposes of regulatory compliance, value enhancement and divestiture. Altogether, some 234 entities applied for the initiative, with a total of 739 assets whose declared value is approximately €2.7 billion. Given the high level of participation and the entities’

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need for support in implementing strategies for bringing the properties to the market, the initiative has been continued in 2016.

Certain real properties proposed for ‘The 2015 Real Property Offering’ were immediately transferred to the portfolio containing the public real properties to be sold under the extraordinary programme. The remaining assets are now being analysed for the start-up of value-enhancement and re-use projects, with the input of the municipalities involved; this effort is aimed at preventing degradation, generating cultural and social value in local communities, and the start-up of important urban requalification plans, including with the use of market instruments such as real estate funds and other financial vehicles.

With the objective of supporting Italy’s competitiveness and attracting foreign investment, the Office of the Presidency of the Council of Ministers, through the ICE38, has inaugurated the ‘Public Administration Real Property Showcase’ project, for the design and development of a web application available to Italian and foreign investors for the purpose of presenting offers to invest in public real property39.

The activity to enhance the value of the assets owned by the State and of other public entities is also being conducted through the “Valore Paese” (Country Value) initiative which concerns a network of major historical, artistic or natural treasures that will be reclaimed for tourism-cultural purposes and for community development40.

The aforementioned initiatives are rounded out by the activity of Invimit41, with the objective of promoting the creation of a new market for public properties. In particular, the ‘State Segment’ action plan for 2016 aims to identify new ways to use decommissioned public buildings, to add value to, and to restore, public real property located in critical markets, and to support the managers of public asset portfolios, with policies to prop up demand. The action plan provides:

- the continuation of the acquisition from the provinces of the real properties leased to the Interior Ministry, for a value of €300 million, and, at the same time, the start-up of building restoration works;

- the continuation of the transfers of real property portfolios selected for various real estate funds42 for a value of €290 million, and the start-up of construction works needed for leasing of the properties;

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38 The agency for the promoting Italian businesses abroad and the international expansion of Italian businesses. The initiative has been developed in collaboration with the MEF’s Department of the Treasury and the State Property Agency.

39 To be sold, leased, traded or granted under concession for value enhancement.

40 As part of this project, the Valore Paese – Lighthouses project entailed the initiation in 2015 of public tenders for 11 State-owned lighthouses. Given the market’s positive response, the project will be promoted again in 2016, while the network initiatives will be rounded out by the development of trekking and walking routes (for religious pilgrimages, cycling, road worker houses and so forth).

41 Invimit is the public funds-management entity set up in May 2013, and it is currently focused on providing new ways of making use of public real property in portfolios that have been transferred to recently created real estate funds. The entity’s activity is totally concentrated on creating value for the assets under management, through processes to normalise, transform and regenerate public real property that is no longer instrumental to the running of the central government and, more importantly, local government.

42 I3-Universities, I3-Latium Region, and I3_INAIL.

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- the urban restoration of assets contributed by the State, the military and local entities to the I3-State-Defence real estate fund, in order to be able to sell areas and real properties having the authorisations needed for converting the assets for other market uses.

The 2016 ‘Territory Segment’ action plan of the I3-core Fund of Funds managed by Invimit SGR has instead provided for the structuring of investment transactions in target funds, as promoted by territorial entities with the support of the State Property Agency, and managed by funds management firms operating in various parts of the country.

For 2016, the value enhancement and divestiture of public property assets will also be continued through the use of software developed by MEF for the reporting of the real property assets of all of the Public Administrations (approximately 10,700 central and local entities), and the preparation of a statement of market value43. At the end of the latest reporting period (data for 2014), the Department of the Treasury’s information system had gathered detailed information on about 2 million properties (buildings and land).

The Treasury’s system is rounded out by the Open Demanio portal, another initiative which exclusively refers to property owned by the State. The portal, which is promoted and managed by the State Property Agency, has been operational since January 2016, and has made available to the public, in a transparent format, both detailed information and geographic location with reference to the real properties owned by the State (31,766 buildings and 13,631 plots of land, for an estimated value of more than €59 billion).

During 2015, the process of transferring State real property to territorial entities, as provided by the laws governing state-property federalism, was accelerated, and thus ensured the transfer of approximately 60 per cent of the assets potentially transferable. At 31 December 2015, a total of 3,496 assets had been transferred, for a total value of approximately €887 million. The re-opening of the deadlines will entail new activities functional to ensuring the gradual transfer of other portions of the State portfolio available. At the same time, the transfer of the State’s cultural assets to local entities continued44. As of the end of December 2015, the transfer formalities had been completed for 67 properties of historical-artistic interest, whose transfer value came to approximately €367 million.

The actions taken with respect to public real property represent a crucial factor for the achievement of the savings on expenditure provided by the spending review. The ‘federal building’ managed by the State Property Agency and already inaugurated in 18 Italian cities will allow for gradually concentrating central and local government offices in single territorial logistics hubs within each province, including by using assets made available by the Defence Ministry. This approach is expected to result in lower costs of rentals and utilities, and better service to the

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43 Article 2, Paragraph 222, point 11 of Law No. 191/2009 – 2010 Budget Law.

44 According to the procedure provided by Article 5, Paragraph 5 of Legislative Decree No. 85/2010.

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public, and should allow for the pursuit and achievement of the objectives of a 30 per cent reduction in space and a 50 per cent reduction in rents compared with the end of 2014.

The effort to achieve savings on spending also encompasses a focus on improving energy efficiency, including through the introduction of CONSIP’s first public tenders with reference to energy service companies. For this purpose, the State Property Agency has already published a first set of performance indicators (which are aligned with best practices in the field) that will serve as the benchmarks for the Public Administrations in future years. The State Property Agency has already begun collecting cost and consumption data for 2015 for all of the real properties in use by the State administrations, and this data will be used for monitoring the extent to which the administrations gradually move toward the benchmarks.

III.3 PRODUCTIVITY AND EXTERNAL COMPETITIVENESS

Structural policies

Transport, infrastructures, tenders, networks and environment

CSR 2 – ‘Adopt the planned national strategic plan for ports and logistics, particularly to help promote intermodal transport through better connections.’

Transport, infrastructures and liveable cities

Until now, the national system for infrastructure, transport and public tenders has suffered, on the one hand, from excessive regulation (which, moreover, has been fragmented and muddled) and, on the other hand, from an absence of planning and assessment.

In responding to these limitations, the government is implementing structural reform policies that should eventually get Italy back on par with Europe. These policies will reinstate the central and essential role of strategic decisions in ex ante planning and assessment, thereby simplifying the regulatory system and making it more flexible, along with the related implementation procedures.

With the abolition of the so-called “Legge Obiettivo” (Objective Law), the planning process will once again employ ordinary instruments which are the backbone of the forthcoming General Transport and Logistics Plan, and the Long-Term Planning Document (LTPD). The change is occurring by safeguarding the continuation of priority projects for the country’s development via a project review that is part of the planning process and that also includes unfinished projects.

Against this backdrop, the new Public Tenders Code introduces innovative solutions for project financing, with the institution of a fund for feasibility planning and a single fund for project financing. The latter fund will be used for proceeding with financing, project remodelling, and possible revocation of financing.

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Taken altogether, the regulatory measures regarding infrastructures should provide a strong impetus to the revival of public and private investment.

The transportation and network projects are considered priorities for reinforcing the country’s competitiveness, and for providing efficient logistical services and connections to both businesses and the public. The works recently completed and those very near completion (including, for example, the alternative route through the Apennine mountain passes, the Naples-Bari railway line, and the autostrada Salerno-Reggio Calabria toll highway) are proof of the intensity of the effort now in progress to modernise the country’s infrastructure. In addition, the facilitation of investments and incentives for their realisation are contributing to the achievement of national objectives as well as objectives at a European level. Noteworthy in this regard is the European Commission’s Annual Growth Survey 2016 which has made the revival of investment one of the EU’s three economic-policy priorities.

The government is continuing work on the National Ports and Logistics Plan approved in 2015, through a strategic unitary and integrated approach, with the new Public Tenders Code (and the related abolition of the so-called “Legge Obiettivo”) constituting the basis for action.

In the implementation of the enabling act to reform the Public Administration, the government initially approved a draft of a legislative decree for the administrative reorganisation of the port system, with the institution of 15 port authorities versus the 24 existing authorities.

The 15 port authorities will be headquartered at what are defined as ‘core’ port facilities according to European laws and regulations. A new governance model has also been outlined, with a streamlined management committee, while a working group with advisory functions has been established for partnerships referring to maritime resources. The Ministry of Infrastructure and Transport has created a national working group for coordination of the port authority system, with the aim of centrally managing and harmonising strategic decisions to be made for the development of the system. Finally, simplification provisions have been introduced, including the creation of a single administrative service centre and a single customs and control centre.

The development of the national transport system is also based on the measures outlined in the Airports Plan and the new investment strategy for the railway network, which represents one of the government’s priorities with respect to transportation and infrastructures. The 2015 and 2016 Stability Laws and other regulatory provisions have appropriated an additional €17 billion of resources for investments in the railway network: €9 billion appropriated with the 2015 update of the programme contract and another €8 billion to be appropriated with the 2016 update. These resources will allow for the concrete implementation of the government’s priorities with respect to railway infrastructures: the first €9 billion will be used for technological and security improvements to train transport, the upgrading of passenger transport services in metropolitan and regional areas and along the European corridors, and the further development of cargo transport services. Also important in this regard is the Transport Regulation Authority’s approval of the criteria for determination of the rates for accessing infrastructures and services, as this should provide greater stability to the economic regulation of the sector for the next five years.

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REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Infrastructures	National Plan for Ports and logistics (L. 164/2014) Agreement of 31 March 2016 in State-Regions Conference after the judgement of Constitutional Court.		August 2015
	Identification of national interest airports (Presidential Decree 201/2015)		September 2015
	National Plan for social and cultural re-development of deprived urban areas (2015 Stability Law).Prime Minister Decree for the establishment of the Committee for the evaluation of projects		October 2015
	Contributions for intermodal combined transport services (2016 Stability Law – “FerroBonus” and “MareBonus”)		December 2015
	National Plan for Defence and security (cyber security, defence systems, police forces – 2016 Stability Law - L. 208/2015)
	Enabling law for the reform of public tenders (L. 11/2016)		January 2016
	Implementation of Law 11/2016		April 2016
	Delegated legislative decree 50/2016 to implement EU Directives 23, 24 and 25 of 2014 and review public tender legislation.
		Guidelines for the implementation of the Code of public tenders and concessions (ANAC)	May 2016
	Ultra-Broadband Plan (2020 target: 85% of population covered with connection of at least 100Mbps)		2015-2020
	Implementation of the Ultra - Broadband Plan. Agreement with the Regions on the joint use of regional and national resources and the DCF allocation		February 2016
		Extraordinary Plan for the redevelopment of peripheries (Stability Law 2016)	By 2016
		Measures for the improvement of urban quality. Recovery program for the residential public building. University residences realization. New investment for underground. Interventions for the development of cycle-stations and soft mobility facilities. National Plan for electric vehicle recharging.

Turning to the road network, the ANAS45 2015-2019 long-term plan provides for investments over more than 3,600 kilometres of roads for a total amount of

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45 It is also noted that the 2016 Stability Law established that, ‘in order to improve the planning and spending of the investments for ANAS S.p.A. and to ensure a flow of resources in line with the financial needs, as from 1 January 2016, the resources booked to the State budget, howsoever appropriated to ANAS S.p.A., will flow into a special fund to be recorded in the forecast of the Ministry of Infrastructure and Transportation. For the implementation of the provisions during the first period, the Minister of the Economy and Finance is authorised to issue, by decree, upon a proposal by the Ministry of Infrastructure and Transportation, the appropriate changes to the budget in terms of residual amounts, accruals and cash balances.

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€15 billion, including €6.3 billion for the completion of routes, €7.3 billion for extraordinary maintenance, and €1.4 billion for new works, mainly in connection with urban hubs. The plan is mostly addressed to building up the country’s strategic infrastructure assets, improving access to metropolitan areas, and enhancing intermodal connections. The 2016 Stability Law has provided for some significant changes in order to reach such objectives, including the introduction of a single ANAS fund, whereby the assignment of resources to individual projects will be replaced with overall financing of programme contracts46.

The 2016 Stability Law calls for two other important developments: i) the prioritisation, with respect to soft mobility, of the planning, design and development of a national system of tourist cycleways47; ii) the start-up, design and development and/or improvement of the maritime services for the combined cargo transport (‘maritime bonus’) and intermodal railway transport of cargo arriving or leaving ports or logistics hubs (‘railway bonus’) so as to improve the intermodal chain, to make the system for cargo movement more sustainable, and to reduce congestion on the road network; the resources for this initiative have been appropriated, together with the funds for the purchase of the latest generation of heavy transport vehicles.

Infrastructure projects are also important for potentially improving the quality of life in cities. In this regard, the measures include: i) the adoption of an extraordinary programme for upgrading security in the suburban areas of metropolitan cities and provincial capitals; ii) a programme to recover and restore public housing; iii) a social housing plan to facilitate access to renting and owning residential property; iv) additional projects for design and development of university housing; v) investments for development of mass rapid transit; vi) the development of cycling stations, and projects for urban security; vii) energy upgrades of the existing stock of buildings; viii) the national plan for recharging electrical powered vehicles.

Digital Agenda and broadband

As part of the European Digital Agenda, the Ultra Broadband Plan operating programme was approved in August 2015, and appropriates €2.2 billion to be drawn from the resources in the 2014-2020 Cohesion and Development Fund (CDF), for immediate project implementation. A framework agreement signed with the regions in February 2016 provides that such resources will be used according to a territorial distribution that considers i) the estimated funding needed for public projects in the so called ‘white areas’ (‘market failure’) and ii) the other resources available for the financing of the Ultra Broadband Plan in each

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46 It is also noted that the 2016 Stability Law established that, ‘in order to improve the planning and spending of the investments for ANAS S.p.A. and to ensure a flow of resources in line with the financial needs, as from 1 January 2016, the resources booked to the State budget, howsoever appropriated to ANAS Spa, will flow into a special fund to be recorded in the forecast of the Ministry of Infrastructure and Transportation. For the implementation of the provisions during the first period, the Minister of the Economy and Finance is authorised to issue, by decree, upon a proposal by the Ministry of Infrastructure and Transportation, the appropriate changes to the budget in terms of residual amounts, accruals and cash balances.

47 Article1, Paragraph 640 of Law No. 208 of 28 December 2015

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region. In the ‘white areas’, direct project work will be undertaken with the construction of a network that will remain public (State-regions) and will cover 7,300 municipalities nationwide, and thus the completion of the project work will no longer rely on sinking fund subsidies.

As part of the implementation of the guidelines set out in the European Digital Agenda, a decree48 was approved in February that will allow telecommunications service providers i) to use other network infrastructures, ii) to be able to negotiate the inclusion of channels in the networks being planned, and iii) to access certain information about existing network infrastructures49.

As part of the 2014-2020 Rural Development Plan, the farming industry will be expected to contribute to ensuring the Digital Agenda objectives through infrastructures that will ensure connectivity of more than 30Mbps and up to 100Mbps for ultra broadband in rural areas. The funding as provided by the partnership agreement includes public resources of €566 million, including €258 million from the European Agricultural Fund for Rural Development (EAFRD). Around 3,000 Italian municipalities situated in intermediate rural areas and those with overall development problems will benefit from the direct project work. These are marginal areas affected by broadband market failure where only public intervention can guarantee high-speed connectivity.

An add-on to the Ultra Broadband Plan is the Smart Cities & Communities policy that is designed to facilitate adoption of smart technologies in Italy’s main cities, including through experimental projects.

Environment and sustainability

The new framework of rules approved by the Italian Regulatory Authority for Electricity Gas and Water (AEEGSI) for the determination of tariffs50 went into effect on 1 January 2016. The new framework will facilitate the needed investment in the water sector, while also ensuring the sustainability of the tariffs, service quality improvement, and the streamlining of operations, with effective recognition of costs only with respect to works actually completed.

The new rules are rounded out by the provisions of environmental legislation supporting the 2016 Stability Law51 that address the infrastructure deficiencies in the water sector, with the creation of a specific guarantee fund for projects aimed at building up water sector infrastructure nationwide. The fund’s resources will come from a specific component of the integrated water service tariff. The environmental legislation also contains a series of provisions regarding remuneration of environmental and ecosystem services, waste management, reclamation, river basin districts, and environmental damage.

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48 Legislative Decree No. 33/2016.

49 These are aspects already governed by Italian law, but in the new decree, they are systematised and, in many cases, redefined, with provisions for new compliance actions, obligations and sanctions. Many provisions specifically regard municipalities.

50 Water Tariff Method.

51 Law No. 221 of 28 December 2015, ‘Environmental provisions to promote green-economy initiatives and to prevent excessive use of natural resources.’

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In addition, from a competitiveness perspective, and with a view toward reviving ‘green’ investment and exploiting its potential in terms of employment, the legislation also provides for a series of measures to promote transition toward a more circular economy and to improve efficiency and sustainability in the use of the resources.

Consistent with European guidelines regarding the circular economy, the aforementioned measures provide for: the revision of the national sustainable development strategy; the inclusion of minimum environmental criteria as part of all public tenders; the drafting of a national action plan for sustainable consumption and production; a voluntary national environmental quality system (for additional details about the environmental legislation, see the intermediate report published on the MEF web site (Italian text only).

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Environment	Law on crimes against the environment (Law 68/2015).		May 2015
	Law to promote green economy measures and for the containment of excessive use of natural resources (L.221/2015)		December 2015
		Implementing legislation of L. 221/2015: L.D. concerning the remuneration of ecosystem and environmental services.	By 2016
		Remediation and environmental damage: simplification of remediation process; reform of SIN management
		Waste management: regulatory authority and progressive transition from tax (Tarsu) to tariff; Reform of the consortia	June-December 2016
		Hydro-geographic districts	November 2016
		Green Act Bill (environmental taxation; circular economy, renewables, mobility)	By 2017
		Reform of the governance of National Parks (AS 1034)	November 2016

The efforts to ensure environmental sustainability have been rounded out by the drafting of legislation (so-called ‘Green Act’) containing measures concentrated on the decarbonisation of the economy, efficient use of resources, restoration and protection of the natural ecosystems, and financing for development. Another legislative bill covers the reform of the governanceof parks and protected areas.

Juncker Plan

The development of the projects included in the Juncker Plan also represents an important contribution to infrastructure investments. According to the latest data in reference to the European Fund for Strategic Investments (EFSI, the fund that extends the European Investment Bank’s operations for implementation of

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European initiatives), Italy has 29 initiatives in process, between financing agreements and infrastructure projects, for €1.7 billion of resources. Considering the leverage effect, additional investments of approximately €12 billion can be made.

More specifically, within the ‘SMEs Window’, some 21 transactions for €318 million have been approved, to the benefit of more than 44,000 businesses, mobilising more than €7 billion of investments overall. The project basically covers financing agreements executed by the European Investment Fund and banks, which disburse new loans to small- and medium-sized businesses.

The ‘SMEs Window’ initiative is flanked by eight ‘Infrastructure and Innovation’ projects that have secured €1.4 billion of financing, for a total investment of €4.8 billion. These projects refer to various sectors: transport and telecommunications infrastructure (roads, railways, and broadband), energy efficiency with greater environmental protection, innovation and industry (bioplastics and technologies)52.

Finally, in accordance with the 2016 Stability Law, the Cassa Depositi e Prestiti (CDP) has been designated as the national institution for the promotion of the Juncker Plan projects. As a result, the financial transactions of the investment platforms admissible to the EFSI promoted by the CDP may be backed by State guarantees.

FIGURE III.2: JUNCKER PLAN BENEFICIARIES

 

Source: European Commission, ‘Investment Plan for Europe- State of play’ 2016

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52 For details, see the site, “Investment Plan-State of Play March 2016’

 http://ec.europa.eu/priorities/sites/beta-political/files/italy-ip-state-of-play-march-2016_en_0.pdf

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Reform of public procurement

The initiatives in support of infrastructure policies will also benefit from expected reform of the code for public procurement, which is needed for increasing the transparency of contracting procedures and upgrading the systems for awarding public contracts for specific jobs, services and supplies. The reform is slated for completion by 18 April 2016 with the definitive approval of the draft of the legislative decree53 by the Council of Ministers54. As provided by the enabling act55, the government has incorporated into a single decree the EU Directives No. 23-25 of 2014 on adjudication of concession contracts, public tenders, and contracting procedures for providers of water, energy, transport and postal services; the decree also restructures the regulations in effect regarding public contracts related to specific jobs, supplies of services and concessions56. The decree does not provide for implementation regulations, but instead relies on soft law, by using general guidelines and other instruments for flexible regulation, so as to allow for constant and prompt updating, consistent with ongoing changes in the public procurement system.

From the standpoint of furthering lawfulness in contracting, the new code provides for the strengthening of the role of the Italian Anti-Corruption Authority (ANAC) with respect to its functions of supervising, promoting and supporting best practices, including through the adoption of guidelines, classification of the publication of tenders, classification of tender specifications and facilitation of the exchange of information between contracting authorities. Among the changes worth noting are the provisions to promote the independence of selection boards, with members to be selected from a register held by ANAC, and the establishment of a steering committee, at the Office of the Presidency of the Council of Ministers, as the coordination and monitoring body.

All provisions of the new code are focused on quality: quality of planning, quality of contracting authorities, quality of businesses, quality in the methods for selecting contractors, with the most economically advantageous offer identified as the preferred criterion for adjudication. The new code also institutes a contracting evaluation system, with the creation of a graduated rating based on the complexity and monetary brackets of the tenders, which will classify the administrations on the basis of their organisational structures, inclusive of the specific expertise of their employees57. The system will also assign a legality

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53 Currently, the draft of the legislative decree (for implementation of the 2014/23/EU, 2014/24/EU and 2014/25/EU Directives of the European Parliament and European Council of 26 February 2014, on adjudication of concession contracts, public tenders, and contracting procedures for providers of water, energy, transport and postal services, as well as the restructuring of the regulations in effect regarding public contracts related jobs, services and supplies) is currently under review by the Parliamentary commissions (AG 283).

54 Following the preliminary approval on 3 March 2016 and the procurement of the related opinions of the State-Regions Conference (31 March 2016), the Council of State (1 April 2016) and the Parliamentary commissions responsible.

55 Law No. 11 of 28 January 2016.

56 As of the date when it goes into effect, the code will substitute the prevailing Legislative Decree No. 163/2006 and will abrogate tender regulations (Decree of the President of the Republic No. 207/2010), even though some provisions of the regulations, as expressly listed in the new code, will continue to be applied until the issuance of the acts (guidelines, decrees, and so forth), which the code has referenced for the discipline of specific aspects and/or institutions.

57 Particular attention is placed on the planning of public works, and the reform, in confirming the subdivision of the three planning phases, requires that the first level of planning must contain a costs-benefits analysis of the project.

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rating to businesses, which will reflect long-term reliability capacity and reputational capacity of the business, based on qualitative and quantitative indices, in accordance with criteria set forth in the ANAC guidelines.

As an incentive to transparency, the public contracting system will gradually be converted to a completely electronically managed operation, with consequent reduction of administrative charges.

Consistent with the abandonment of extraordinary procedures and in implementation of an express principle of delegation, the code provides for the abolition of so-called “Legge Obiettivo” (Objective Law) with the planning of the infrastructures and priority projects for the country’s development to go back to employing ordinary instruments, namely, the General Transport and Logistics Plan58 and the Long-Term Planning Document59 (LTPD). The first LTPD will provide for recognition of all of the projects already included in the project review.

Consistent with the foregoing, the notion of the general contractor has also been significantly revised, and has become a general point of reference. The contracting authority, however, will need to justify adequately reasons for requiring a general contractor, based on project complexity and other needs for the purpose of ensuring high levels of quality and security and cost-benefit results. In addition, in recognition of an express criterion of delegation, the code prohibits the general contractor from also taking on the role as the party managing the works. Therefore, in cases involving general contractors, the project presented in a public tender becomes definitive, and is no longer a preliminary project.

As required by European law, the new code has harmonised concessions, with a single set of rules applicable to concessions for specific jobs, services and supplies, clarifying that concessions are term contracts that entail operating risk for the private-sector counterparty. Another provision specifies that private-sector parties who are holders of concessions for specific jobs or public services as of the date when the new code goes into effect, and whose concessions are not covered by project financing or public tenders, must subcontract 80 per cent of the contracts in an amount above €150,000 through the use of public tender procedures60.

The new code likewise introduces specific regulations for the public-private partnerships (PPP), thus making it possible standardise procedures nationwide so as to improve the combined use of public and private resources, particularly with regard to research and innovation61.

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58 Which contains the strategic guidelines of the policies concerning the mobility of people and goods, and the country’s infrastructure development, adopted every three years, upon the proposal of the Minister of Infrastructures and Transportation, with Decree of the President of the Republic, subject to CIPE resolution, after having secured the opinion of the State-Regions Conference, and having consulted the Parliamentary commissions responsible.

59 Pursuant to Legislative Decree No. 228 of 2011 that contains the list of the projects related to the transport and logistics sector, which are considered eligible for financing according to feasibility planning, and which are to be planned and executed on a basis consistent with the General Transport and Logistics Plan.

60 The concessions already in effect are to be adjusted within 24 months of the date when the new code goes into effect. The verification will be done by ANAC and especially appointed personnel, according to the indications provided by the ANAC guidelines.

61 The code recognises a new partnership for innovation. Within the priority procedures to be used to provide an incentive for its use, the new partnership is considered key in terms of sustainable economic growth and efficiency and quality of public services. In line with the EU guidelines, within the new PPP procedure, a special emphasis is placed on the project planning phase both with regard to the allocation of the risks and with regard to the sustainability of the project’s economic financial plan. Other significant aspects of the tenders reform approved by the government concern the introduction of European standard tender document, which will facilitate participation of all business in procurement procedures, and ANAC’s assignment of a specific reputational ratings to businesses, so as to reward those meriting the highest ratings.

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Finally, the introduction of special proceedings in judicial chambers is very important for ensuring the effectiveness and the expeditiousness of the adjudication procedures and certain timing in the execution of the contracts62.

Security and defence plan

The government, including in consideration of increasing terrorist threats, has approved an important package of security measures aimed at reinforcing tangible and intangible infrastructure available to the armed forces. A monthly bonus of €80 has been provided for security and defence personnel63. The extraordinary annual subsidy of €960 will apply to around 500,000 employees, for an expenditure of €510 million in 2016.

With further reference to public order, €50 million has been appropriated for new instruments and equipment, including for personal protection, to be used by security and defence forces. An appropriation of €150 million has been made to reinforce cyber security and information technology at a national level. Finally, financing has been made available for personal income tax credits of up to €15 million for the installation of digital video-surveillance systems or execution of contracts with security firms.

A fund amounting to €245 million has been included in the Ministry of Defence’s budget forecast for 2016 in order to support extraordinary national defence and security projects.

Competition in services

CSR 6 – ‘Adopt competition-enhancing measures in all the sectors covered by the competition law, and take decisive action to remove remaining barriers. Ensure that local public services contracts not complying with the requirements on in-house awards are rectified by no later than end-2015.’

Annual law for the market and competition

Parliament’s approval of the draft of the 2015 annual law for the market and competition can provide a stimulus to the opening of markets and increased competition. In drafting the law, the government incorporated most of the indications of the antitrust authority provided July 2014. The law is designed to remove restrictive regulations that impede competition and innovation resulting

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62 In particular, the code provides that defects related to the composition of the tender commission, and/or the exclusion from the tender due to a lack of subjective, economic-financial, and professional-technical requisites, are considered immediately damaging, and may be brought before the Regional Administrative Court within 30 days of the publication of the composition of the commission, or of the list of the parties excluded and parties admitted. Moreover, the failure to challenge such measures precludes the right to assert illegality in subsequent acts of the tender proceedings, including through cross-appeal.

63 The bonus is not considered as part of wages, is not subject to social contributions, and is not considered as part of total income for personal income tax purposes.

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from continuing rent-seeking and privileges. The law will have its greatest impact on insurance, telecommunications, postal services, energy, banking, professional services (notaries, lawyers, and engineers) and pharmacies.

The Chamber of Deputies concluded its review of the law in October 2015, introducing various amendments that mainly regarded professional services, pharmacies and postal services.

The definitive approval of the law is expected by the end of June 2016; in the meantime, the government has taken action to revise regulations in sectors critical to competition. In February 2016, the government presented the National Plan for the Reform of Professional Services (provided as part of the implementation of the new European directive on the recognition of professional qualifications64); this plan was prepared with the active participation of all of the administrations and stakeholders involved. The plan calls for the continuation of three priority actions (which the government has already inaugurated): i) revision of training for certain technical professions (engineers and surveyors) in order to better outline their spheres of activity and expertise; ii) assessment and adjustment of State exams for qualifications, in order to align the qualifications with the professional activity that is to be carried out; iii) creation of technical work groups (with the participation of the Ministry of Labour and Social Policies, the Ministry of Education, Universities and Research, the regions, and the Institute for the Development of Professional Training of Workers) for the identification, through special agreements, of minimum national standards for those professions whose training is vested with the regions pursuant to State law, and for the identification of those professional positions which, in not being governed by State law, cannot be considered legitimate. As of February 2016, Italy was one of only six Member States that had completely ratified the new ‘Qualifications’ directive, and was one of 17 Member States that had presented a national plan.

The government intends to pursue the process inaugurated with the first annual law for competition, making this standard legislation for correcting market malfunctions, with the objective of making the deregulation process stable. In this regard, as provided by the initial law, the second annual law on competition will be enacted in 2016, upon conclusion of the antitrust authority’s reporting. The proposed legislation currently under review could impact communications, healthcare, transportation and local public services, in connection with other reforms of government (for example, reform of the public administration).

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Competition		2015 Annual law on competition (Draft Law)	Giugno 2016
		2016 Annual law on competition (Draft Law)	December 2016

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64 The Plan is an obligation provided by Article 59 of the new directive ‘Qualifications’ (Directive 2013/55/EU, which amends Directive 2005/36/CE, ratified with Legislative Decree No. 15 of 29 January 2016), which has required examination and assessment, with administrations and stakeholders, of all regulations related to the 175 professions regulated in Italy, for the purpose of checking their conformity to the criteria set at a European level (proportionality, non-discrimination, presence of overriding reasons of general interest).

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Many of the sectors affected by the annual law have already been the target of deregulation initiated some years ago, showing positive effects on the opening of the market and the reduction of the mark-up, as shown in the chart below.

FIGURE III.3: SECTOR-SPECIFIC MARK UP IN ITALY – 1992-2014

 

Source: MEF analyses using data ISTAT and EUKLEMS

Italy’s performance in terms of reduction of the sector-specific mark-up in services is generally in line with the other EU countries, if retailing is excluded65. This trend is also confirmed by the continuous improvement of the country’s position in the OECD’s indicators of Product Market Regulation (PMR). For Italy, the results of the PMR in 2013 showed a modest level of regulation in general66. Italy’s ranking continues to fall above the EU median, and its improvement has been greater than that reported for France and Germany.

At the same time, Italy is among the countries that continue to progress in the ongoing adoption of the Services Directive, by eliminating restrictions on the free circulation of goods and services. A recent report of the European Commission67 shows that, in a situation where implementation of the directive has varied from country to country, Italy is one of the top-ranking countries in terms of the number of restrictions eliminated.

Other sector-specific measures have regarded the energy industry, with reform of the tariff system for consumption, which went into effect on January

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65 See A. Thum-Thysen, E. Canton, ‘Estimation of service sector mark-ups determined by structural reform indicators’, European Economy, Economic Paper 547, April 2015.

66 With an improvement from 1.49 in 2008 to 1.26 of 2013. It is noted that a lower number reflects greater opening of the markets.

67 ‘Report on Single market integration and competitiveness in the EU and its Member States’ 2015

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2016. With this initiative, the current progressive structure of electricity tariffs and charges (which account for about 40 per cent of a utility bill) will gradually be phased out, and in three years, the tariffs will be equal for all consumers. The social bonus programme will be intensified in order to lessen the effects of the reform on the weaker segments of the population.

Reform of local public services and local transport

The government has incorporated provisions to reform local public services within the decrees for implementation of the law on the reform of the public administration68. Competitive means for public contract awards, standard costs and standard sized areas for service delivery, the latter of which must be at least at a provincial level, are some of the factors to ensure the quality and efficiency of services to the public. Local government leaders may only directly award contracts or handle services in house, if i) they can justify the reasons for not going to the market and in particular, that such decision is not comparatively disadvantageous for the public, including in relation to standard costs and ii) they can illustrate the benefits of their decision to the community69. Verification of this reasoning will be done on the basis of a directive issued by ANAC. Should local government elect not to award services contracts through public tender, the reasons, along with all of the information necessary (such the economic-financial plan), must be communicated to the Court of Auditors, the Observatory on Local Public Services (transferred to the Office of the Presidency of the Council of Ministers) and must be subject to the control of the antitrust authority, which may contest violations of the rules on competition. Finally, the functions regarding regulation of the waste management cycle will be vested with the Italian Regulatory Authority for Electricity Gas and Water (AEEGSI), whose name will be changed to the Italian Regulatory Authority for Energy, Networks and the Environment.

The legislative decree with reference to local public services also contains regulations aimed at reforming local transport, in line with the objectives established by the government in the preceding NRP. The main points of the reform, which aims at reorganising the sector through an overall restructuring of regulations, regard: i) the expansion of the functions of the Transport Regulation Authority with regard to in-house awards: the authority will determine the effectiveness and efficiency objectives for management, as well as the objectives for financial equilibrium; ii) the central role of consumers: reimbursements and better safeguards will be provided for commuters; iii) the definition of adequate levels of service for regional and local bus and railway transportation, which is consistent with the achievement of objectives of satisfying the demand for transport services; management’s obligation to publicly disclose updated versions of the service charters with respect to the services offered to the public; iv) the definition of tariffs, which will need to take into account social and environmental

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68 For the details on the law to reform the public administration, see Section III.4

69 For network services of general economic interest, the decision must contain the economic/financial plan. The draft of the resolution covering the decision is sent to the antitrust authority, which expresses an opinion thereon within 30 days.

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protection objectives, objectives for the efficient use of resources, and standard costs; v) tougher penalties on passengers travelling without tickets; vi) the recovery of investments for the purpose of renewing the transportation fleet; the change in the criteria for improving service efficiency; vii) the start-up of a new round of tenders to adjudication of the service, based on transparency and conformity with European rules.

As part of the executive decree about local public services, regulations have been introduced to promote competition and service quality, with additional powers vested with the transportation regulatory authority and incentives to use public tenders as a means for pursuing efficiency, on the basis of wide range planning and small tender lots.

The strategy to boost the value of local public transport is also based on an extraordinary investment in renewing the transportation fleet, so as to improve service quality, environmental sustainability, and development of competition. The fleet investment will be done with resources appropriated by the Stability Law, as well as resources from the Cohesion and Development Fund.

The government is also evaluating the possible introduction of new measures to support the use of public transport, such as tax deductions for local transport passes and tax incentives for employer expenditure to provide employees and their families with benefits encompassing the use of local public transport.

Efficiency in service delivery and equity in the distribution of state funding for the local public transport will be pursued through the issuance of a ministerial decree setting the standard costs for the different types of local public transport.

Financial sector

Financial services and the banking system

CSR 4 – ‘By end-2015, introduce binding measures to tackle remaining weaknesses in the corporate governance of banks, implement the agreed reform of foundations and take measures to accelerate the broad-based reduction of non-performing loans.’

In the past two years, the government has moved ahead with a broad and unified plan for the restructuring of Italy’s banking system, inclusive of long-awaited reforms needed for allowing banks to get back to providing an adequate level of financing to the real economy. The restructuring plan has concentrated on three main issues: reinforcing bank corporate governance so as to facilitate capital funding operations on the market; attaining a level playing field with the other banking institutions in Europe; improving the quality and efficiency of banking activity. The final aim is a solid banking system that is capable of respecting substantial capital requirements and increasing its support to the real economy. The three reform objectives have been pursued through:

- the reform of the mutual banks, the banking foundations and the credit cooperative banks (stronger governance);

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- fiscal provisions to reduce the timing for deductibility of credit losses from five years to one year70, for the purpose of resolving the question of the DTA71 (level playing field with the other European banks);

- measures to assist banks in working off non-performing loans, inclusive of provisions to simplify and streamline insolvency and executive proceedings and to accelerate credit recovery (quality and efficiency of the banking activity).

Reduction of problem loans

The package of measures aimed at improving the banking sector’s efficiency includes recent regulations that establish a ‘Guarantee for the Securitisation of the Non-Performing Loans’ (GSNPL) with respect to bank balance sheets; the guarantee has been reviewed by the European Commission and is not defined as State aid. The purpose of this mechanism is to favour the development of an Italian market for non-performing loans (NPLs), facilitating access to investors with a medium/long-term investment horizon and contributing to reducing the spread between the purchase and sale prices for NPLs.

The programme provides for the granting of State guarantees, as part of the securitisation of NPLs of banks and other financial intermediaries72.

The State will guarantee only the senior tranches of the securitisations, namely, the more secure credits, which serve as a buffer for losses arising from lower-than-expected credit recoveries. The guarantee is priced at market, as also acknowledged by the European Commission; the price increases over time both to take into account greater risks related to a longer duration of the notes, and to introduce a strong incentive for rapid recovery of the credits73.

The State will issue the guarantee only if the securities have secured a rating equal to or above Investment Grade, issued by an independent rating agency. The presence of the public guarantee will facilitate the financing of the sales/transfers of non-performing loans and the programme does not entail any charges to the State budget. Instead, the commissions collected are projected to exceed the costs, thus generating revenue.

Reform of the credit cooperative banks

The accord reached with the European Commission about the GSNPL was ratified into Italian law with a decree-law74 that was approved in February by the

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70 With the Decree-Law No. 83 of 27 June 2015, converted with amendments by Law No. 132 of 6 August 2015.

71 Deferred tax assets (DTA).

72 Registered on the register provided by Article 106 of Legislative Decree No. 385/1993.

73 The price provided for the first three years is calculated as the average of the mid-price of the 3-year CDS for issuers with a rating corresponding to that of the tranches guaranteed. As of the fourth and fifth year, the price will increase as the result of the application of a first step-up (5-year CDS) and the payment of an increase serving as an incentive, to offset the lower rate paid for the first three years. As from the sixth year, the guarantee will be priced at full value (7-year CDS). For the sixth and seventh years, another increase serving as an incentive will also be due, to offset the lower rate paid for the first five years.

74 Decree-Law No. 18 of 14 February 2016 (Urgent measures concerning the reform of the credit cooperative banks, the guarantee for the securitisation of non-performing loans, tax treatment in relation to crisis situations and collective funds management).

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Council of Ministers and contains urgent measures for both the reform of the credit cooperative banks (CCB) and the credit sector. In order to facilitate credit recovery, the law also provides for a tax benefit, as from the date on which the legislation went into effect and until 31 December 2016, for persons whose business activity is the sale of real properties resulting from legal enforcement procedures, with the registration, mortgage and cadastral taxes payable now reduced to €200 (instead of 9 per cent of the value of conveyance), on the condition that the property is resold in the two years thereafter. Property transfers as part of court-ordered sales to persons who do not carry out business activity are also subject to registration, mortgage and cadastral taxes in the fixed amount of €20075.

The law also contains the expected reform of cooperative credit. Such reform is aimed at increasing the efficiency of the capital resources already existing in the cooperative credit system – including through economies of scale and cost reduction - and opening up this system to outside capital, in order to facilitate and to accelerate transactions to strengthen the capitalisation of the CCB, while preserving the mutual specificity of cooperative credit.

The reform of the CCB will allow for resolving problems created by the current regulation of the sector – problems arising from the business model (which is highly exposed to the trend of the economy in the marketplace of reference), organisational structure and small size of the institutions. At the same time, the characteristics of cooperative credit are to be preserved. The reform of the cooperative credit sector essentially requires the CCBs to joint cooperative banking group76. The holding company, which is to be mostly owned by the credit cooperative banks, will handle the role of planning and coordination: on the one hand, it will support service to the shareholders, market development, and the capacity of the individual CCBs to generate a profit, and on the other hand, it will contribute to ensuring the stability and the liquidity of the individual CCBs. Joining a cooperative banking group will not change the CCB’s classification as a mutual cooperative.

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75 When the buyer meets the conditions provided by Article 1, Note II-bis) of the Consolidated Registration Tax Act (Decree of the President of the Republic No. 131 of 1986) and namely, when the buyer meets the legal requisites for taking advantage of the tax relief for the purchase of the primary dwelling.

76 In the event of merger and transformation of mutual banks, as well as the lump-sum transfer of legal relationships and divestiture through which the resulting entity is a bank incorporated as a joint-stock company, the effects of transfer of the capital to the mutualistic funds established by Article 17 of the 2001 Budget Law (Law No. 388/2000) shall continue to apply. The transfer effect is not applicable for the credit cooperative banks that, within 60 days from the date of effectiveness of the law to convert the mentioned decree, present a petition, including a joint petition, to the Bank of Italy for the conferral of the respective banking entities to a single joint-stock company authorised to carry out banking activity, including a newly incorporated company. The bank(s) presenting the petition must possess, as of 31 December 2015, net equity of more than €200 million, as reported in the financial statements of such date, which must be accompanied by an unqualified audit opinion. Pursuant to Paragraph 3-ter, upon the act of conferral, the bank making the conferral will pay to the State budget an amount equal to 20 per cent of the net equity as of 31 December 2015, as reported in the financial statements of such date, which must be accompanied by an unqualified audit opinion. Following the conferral, the credit cooperative bank making the conferral, which holds the indivisible reserves, net of the payment referenced in Paragraph 3-ter, amends its corporate purpose in order to exclude the exercise of banking activity and maintains the mutualistic clauses provided by the Civil Code.

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Reform of the mutual banks

The reform of the CCB was preceded by reform of the mutual banks77, in which the emphasis was placed on using the mutual bank model for smaller institutions serving the local community, in line with the original concept of a mutual bank. The mutual banks with assets of more than €8 billion (on a stand-alone or consolidated basis) will be transformed into joint-stock companies within 18 months from the date on which the Bank of Italy’s implementation regulations went into effect (and therefore, by 27 December 2016). Several transactions provided by the 2015 reform have already been realised, including the transformation of Ubi Banca (Italy’s largest mutual bank), whereas two important mutual banks are now in the process of merging, with the merger to be followed by transformation into a joint-stock company; the new company will become Italy’s third largest banking group and will serve as a catalyst for other aggregation transactions.

Reforms within the banking foundations

Another measure to reinforce the governance of the banking sector is the self-reform of the banking foundations, as supported by the MEF as the regulatory authority78. This process of self-reform provides for rules about investment diversification, limits on borrowing and the use of derivatives and rules for transparency and corporate governance (limits on compensation and terms of office for members of the foundations’ corporate governance bodies and criteria for the mix of the corporate governance bodies, including with respect to gender, professional credentials, and incompatibilities).

Banking crisis: ratification of recent directives

The provisions outlined above are added to the legislative decrees79 approved in November 2015 that govern the management of the banking crisis, and that have ratified the EU Bank Recovery and Resolution Directive into Italian law. The decrees have amended the Consolidated Banking Act and the Consolidated Financial Services Act, for the purpose of introducing rules for restructuring plans, infra-group financial support, and early intervention measures, and for aligning extraordinary administration proceedings to European rules. Instead, separate legislation provides for the governance of resolution plans, resolution procedures, the adoption of resolution measures, the management of cross-border failures, the powers and functions of the national resolution authority80 and the governance of the resolution fund. The bail-in is applied as from 1 January 2016.

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77 With the Decree Law no. 3 of 24 January 2015, converted with amendments by Law No. 33 of 24 March 2015.

78 Reference is made to the protocol of intent between the MEF and the Association of the Foundations and Savings Banks (ACRI) signed on 22 April 2015.

79 Legislative Decree No. 180/2015 and Legislative Decree No. 181/2015, approved as part of the implementation of Article 8 of Law no. 114 of 9 July 2015 (2014 European Delegation Law).

80 As part of the implementation of the specific delegation criterion, the functions of the resolution authority have been assigned to the Bank of Italy.

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The new resolution procedure was initially applied with the November 2015 adoption of measures for the start-up of the resolution of four banks already under extraordinary administration: Banca Marche, Banca Popolare dell’Etruria e del Lazio, Cassa di Risparmio di Ferrara, and Cassa di Risparmio di Chieti81. The resolution measures have been used for the creation of bridge entities and separation of assets. The resolution programme adopted has ensured the operational continuity of the banks and their restructuring, in the interest of the economy of the territories served.

Finally, the directive on the guarantee of depositors was ratified in Italian law82, and the system for insuring deposits of up to €120,000 has been made more uniform.

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Credit	Reform of ‘Banche Popolari’ (D.L. 3/2015 cvt. in L.33/2015).		March 2015
	Measure on non-performing loans and bankruptcy (D.L. 83/2015 cvt. in L. 132/2015).		August 2015
	Transposition into national law of the European Directive 2014/59/EU on Bank Recovery and Resolution (Lgs. D. 180/2015)		November 2015
	20% of Guarantee Fund to firms located in the South (Stability Law 2016)		December 2015
	Cooperative banks’ reform; State guarantee mechanism as part of securitization transactions whose underlying assets are banks’ non-performing loans (D.L.18/2016).		February 2016
	Implementation of directive 2014/49/UE on deposit guarantee schemes
	Self-reform of Foundations.		2015 - 2016
	‘Finance for growth’ measures: mini bond (D.L.83/2012); simplification for SMEs listing (D.L.91/2014); allowance for corporate equity (ACE and superACE - D.L. 201/2011; L. 147/ 2013)		2012 - 2016
		Measures ‘Finance for growth 2.0’	By 2016

Reform of insolvency law and insolvency proceedings

Lastly, the government has systematically reformed the regulatory framework and defined regulations on the subjects of insolvency and execution of judgements, in line with the demands of international investors. In February 2016, the enabling act was approved for the basic reform of the regulations covering business failures and insolvency. The enabling act is designed so as to support the activity of troubled businesses, providing relief for their restructuring, while also preventing a build-up of problem loans on bank balance sheets. The enabling act

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81 These are small banks whose total market share is equal to 1 per cent share of national deposits.

82 Legislative Decree No. 30 of 15 February 2016

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is a follow-up to the reform process inaugurated with the 2015 decree83 regarding bankruptcy, matters of civil proceedings and the running of the court system, which introduced important measures to increase the speed and efficiency of the insolvency proceedings and execution of judgements.

The new enabling act attempts to outline basic reform of insolvency law and related insolvency proceedings, including for the purpose of aligning Italy’s legislation with the updated regulations in effect in most of the European Union84. The enabling act’s main provisions are the following:

- delineation of procedure for alerts and assisted settlement of a crisis situation, in line with the indications of the European Commission, according to which the debtor must have access to a preventive restructuring framework, which allows for the early restructuring of the business in order to avoid insolvency;

- simplification of procedural rules with the reduction of uncertainty about interpretation and application, and creation of a single ‘judicial confirmation proceeding of the crisis and the insolvency’;

- identification of legal jurisdiction, with an emphasis on the need for judges specialised in insolvency proceedings;

- introduction of a more rapid and streamlined judicial liquidation procedure, to take the place of bankruptcy proceedings;

- addition of provisions for the review of extraordinary administrations and an increase in the thresholds for applying for the proceedings; commissioners are to be chosen from a special register, so as to balance the need for continuity of businesses’ production and employment with the need to protect the creditors;

- introduction of specific regulations to cover crisis situations and insolvency of groups of businesses, in line with the provisions of European regulations on cross-border insolvency.

Labour market

CSR 5 – ‘Adopt the legislative decrees on the design and use of wage supplementation schemes, the revision of contractual arrangements, work-life balance and the strengthening of active labour market policies. Promote, in consultation with the social partners and in accordance with national practices, an effective framework for second-level contractual bargaining.’

Implementation of the Jobs Act

The government has introduced mechanisms to reduce the dualism in the labour market and to rebalance the safeguards available to the stably employed and to workers without job security. These mechanisms include: the labour contract with employment protection increasing with tenure; the economic

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83 Decree-Law No. 83/2015, converted by Law No. 132 of 6 August 2015

84 Italy needed to restructure insolvency law and insolvency proceedings in order to bring its regulatory framework in line with that in other European countries. This change could no longer be deferred in view of the solicitation from the European Union (and specifically, the Commission Recommendation No. 2014/135/EU and the revised European regulations on cross-board insolvency – Regulations EU 848/15).

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incentives provided by the 2015 Stability Law to promote new full-time employment relationships and to transform various types of contracts into contracts without expiration date; and new rules applicable to ongoing working relationships between companies and outside consultants. The result of this effort has been a net increase of 846,498 in the number of workers employed with permanent contracts (new hires plus transformations less terminations), according to INPS data as of February 2016. Activity in January 2016 also indicated annual decreases in both the number of unemployed (-5.4 per cent, -169,000 workers) and the number of inactive workers (-1.7 per cent, -242,000 workers) according to ISTAT data published in March 2016.

The 2016 Stability Law confirmed, albeit with a decalage, the tax and financial benefits for the hiring of full-time workers with permanent contracts; these measures not only lead to more job security for workers, but they should also represent a stimulus to investments in training and productivity growth. The reform of social safety nets entailed the introduction in May 2015 of the so-called NASpI (new social insurance for employment), which guarantees one of the highest rates of coverage in Europe for employees. At the same time, the wage supplementation schemes (CIG) have been directed back to supporting only workers affected by corporate reorganisation and business crises. The expansion of the sphere of beneficiaries eligible for income-support measures has been accompanied by stricter conditions for accessing benefits, through the obligation of the participation in professional training or retraining programmes and community service projects.

In addition, measures regarding the work-life balance and family care have been strengthened.

The implementation of the Jobs Act was completed on schedule with the Council of Ministers’ adoption of the final four legislative decrees in September 201585. The programme will be finalised in 2016 with the full-scale operation of the two national agencies set up with the reform of the labour market: the National Agency for Active Labour Policies (ANPAL), which is charged with efficient management of employment services, and the Labour Inspectorate, which is to manage all of the controls regarding labour, welfare and workplace safety and security.

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85 Enabling act No. 183/2014

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REFORM TIMETABLE
Policy Area	Done	In progress	Timetable
Labour market and social policies	Enabling Law on labour market reform (L.183/2014).		December 2014
	Implementing decrees of L.183/2014:		March 2015
	Legislative decree on standard open-ended contract (Lgs. D.23/2015)
	Legislative decree on new unemployment benefit scheme (Lgs. D.22/2015).
	Legislative Decree on work-life balance (Lgs. D. 80/2015)		June 2015
	Legislative Decree on labour contracts and review of tasks’ regulation (Lgs. D.81/2015)
	Legislative Decree on wage supplementation scheme (Lgs. D.148/2015)		September 2015
	Legislative Decree on rationalization and simplification of inspection activities (Lgs. D. 149/2015)
	Legislative Decree on labour services, active policies and setting up of National Agency for active labour policies- ANPAL (Lgs.D.150/2015).
	Legislative Decree on simplification of procedures and equal opportunities (Lgs. D. 151/2015)
		Implementation of Lgs. D. 150/2015 Definition of the strategy implementing the new ALMPs and agreements with the regions. Implementation of the ALMPs strategy and issuance of activation vouchers for dedicated training paths.	By 2016
		Adoption of the ANPAL statute	June 2016
		Prime Minister Decree transferring resources from Ministry of Labour and ISFOL to ANPAL	May 2016
		Enabling law to reform the non-profit sector, the social enterprise and the universal social service (approved by the Senate and now before the Chamber of Deputies)
	Youth Guarantee - First Phase		May 2014
	Youth Guarantee - Second Phase (“Superbonus”; and “selfiemployment”)		March 2016
		Interventions on the second level contractual bargaining.	By 2016
		Bill on Jobs Act for self-employed workers and for flexible organisation of job’s time for work-life balance. Approved by the Council of Ministers 28th Jan. 2016- now before the Senate (AS 2233).	By September 2016
		Enabling Law for the reunification and coordination of the legislation on support to family. Single Family Code	December 2016
		Refinancing of the Plan for the early childhood’s educational services

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Jobs Act for the self-employed and smart working

In 2016, the government’s action with respect to the labour market will extend beyond the completion of the provisions contained in the Jobs Act. Legislation drafted at the end of January 2016 for the ‘Jobs Act for the self-employed and smart working’ has laid the foundation for building of a system of rights and safeguards for providers of manual labour and intellectual property. In the future, the government intends to introduce new performance criteria as part of full-time employment relationships, so as to increase labour productivity and to facilitate the work-life balance of workers.

More specifically, the proposed legislation for the self-employed (already under review by Parliament) outlines an array of safeguards and opportunities for self-employed professionals, and provides models for organising the salaried work force that are capable of responding to the needs for flexibility on the part of both workers and businesses. In particular, proposed legislation provides for:

- tax relief, with an increase in the deductibility of certain types of expenditure sustained by professionals in the execution of their work;

- the creation of advisory areas dedicated to self-employment at employment centres, and accredited entities committed to employment services and active policies;

- equal treatment of the self-employed and small business owners for the purpose of accessing European structural funds;

- the recognition of the right to take paid maternity leave86 and the extension of the duration and timeframe for making use of parental leave;

- the suspension of work, in the event of pregnancy, illness or accident, for a period of no more than 150 days per calendar year87, and the suspension of the payment of social contributions and insurance premiums for the entire duration of the illness or leave time due to injury or accident;

- a specific measure regarding protection against illness.

The proposed legislation has also addressed ‘smart working’, a flexible means (in terms of time and location) of carrying out full-time employment that is aimed at boosting labour productivity, while also facilitating a work-life balance. With this arrangement, full-time work is performed partially inside and partially outside of the company premises, with limitations only on the maximum number of hours worked per day and per week, in accordance with the law and collective bargaining contracts.

The 2016 Stability Law has introduced two important measures with reference to the policies aimed at facilitating the work-life balance and female participation in the labour market:

- a €600 monthly subsidy available to female workers at the end of maternity leave that can be used for baby-sitting service or for paying the cost of infant day-care;

- a lump-sum baby bonus for the years of 2015-2017.

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86 For the two months preceding delivery date and the three months thereafter, regardless of whether or not the worker is on leave.

87 Without pay and with respect to self-employed workers who carry out their work on a continual basis for a contracting entity.

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Active labour policies and Youth Guarantee

The Youth Guarantee Programme is designed to improve the employability of the NEET (Not in Education, Employment or Training). The first phase of the programme came to a conclusion on 31 December 2015, and the second phase is now in the start-up stage. As of 1 April 2016, there were some 1,016,600 youths registered in the programme, with an increase of 11.2 per cent with respect to 31 December 2015. An increase was also seen in the number of participants who had been taken on as apprentices/trainees or offered job- or training-related support from the services responsible: some 75 per cent of the participants, net of those cancelled, had been taken as apprentices/trainees, while 35 per cent of participants had been received at least one proposed job or training-related initiative.

As of February 2016, a new ‘super bonus’ is available to companies for their full-time hiring of apprentices/trainees between the ages 16 and 29 years who have carried out, or are carrying out, an apprenticeship/training assignment as part of the Youth Guarantee Programme. The amount is doubled with respect to the normal bonus: from a minimum of €3,000 to a maximum of €12,000, paid in 12 equal monthly instalments.

In January 2016, an important project phase was rolled out as part of the actions provided by the Jobs Act for improving the school-to-work transition: the start-up of the experimentation of the school-to-work programme. For details, see the section below entitled ‘Education and the school-to-work programme’.

A stimulus to active labour market policies

The active policies system outlined by Legislative Decree No. 150/2015 is to be operational in Italy by the end of May 2016. The formalities for the creation of the National Network of Services for Labour Policies have been completed with the identification of the assets and the financial, human and capital resources transferred from the Ministry of Labour and Social Policies and the Institute for the Development of Professional Training of Workers to the National Agency for Active Labour Policies (ANPAL). The new system of services, which is flanked by the income-support policies, is based on the construction of personalised plans functional to the acquisition of the skills needed for placement of the unemployed in the labour market.

Through a careful assessment of the level of employability of unemployed workers, the Labour Services will suggest training or re-training activities in relation to individual needs. Suitable job offers will be accepted through the execution of a personalised service pact, through which the unemployed worker receiving benefits through the ASpI, NASpI or DIS-COLL programme agrees to work proactively with the employment services system. In particular, the beneficiaries of income-support benefits who, without just cause, do not participate in the initiatives aimed at securing their employment, will be subject to penalties, ranging from the reduction, suspension or elimination of the benefit. In addition, such beneficiaries may be required to carry out community service in the area of the municipality in which they are residents.

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Persons receiving benefits under the NASpI programme whose unemployment extends beyond four months may also apply for getting a new allowance for job placement. The sum of the allowance, which is calibrated in relation to the beneficiary’s employability profile, may be spent at the employment centres or at the entities accredited for carrying out functions in relation to active labour policies. The allowance is not considered as taxable income.

Wages and wage bargaining

The 2016 Stability Law has introduced new provisions to provide incentives to second-level bargaining, with substantial changes with reference to productivity and corporate welfare.

In addition, the government will concentrate in 2016 on company-specific contracting, with the objective of ensuring enforceable and effective company-specific contracts, and a cooperative relationship with the unions as part of the contracting process. The company-specific contracts may likewise take precedent over the national contracts when it comes to the organisation of labour and production.

In addition to the re-introduction88 of lower taxation on productivity bonuses as of 2016 (at a 10 per cent flat rate)89, tax exemptions have been provided for bonuses paid through the offer of services or bonuses for the purchase of goods90. The 2016 Stability Law also redefined the financial resources to be used for promoting the work-life balance.

An interministerial decree issued in March91 inaugurated the full-scale application of the regulation reintroducing the flat tax (10 per cent) on performance bonuses and sums paid as part of employee participation in corporate earnings. Their payment is linked to increases in productivity, profitability, quality, efficiency and innovation, to be measured with precisely defined criteria. Such criteria include: productivity gains, savings in the use of productive factors, improvement in product or process quality, including through the reorganisation of the normal work schedule or the use of smart working.

The achievement of such increases must be objectively verifiable through the use of specifically identified numerical or other indicators. The decree also regulates i) the instruments and the means through which companies secure the equal involvement of workers in the organisation of work and ii) the disbursement via vouchers of goods, services and corporate welfare services.

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88 2016 Stability Law.

89 The tax benefit regarding productivity (limited to €2,000 on a pre-tax basis, or €2,500 for businesses securing equal involvement of workers in the organisation of work) is applicable only to the private sector and to full-time workers whose earnings are less than €50,000 for the year preceding the year in which the benefit is realised.

90 Daycare centres for young children; assistance to members of the family who are elderly or not self-sufficient; education services, including meals and supplementary services; attendance at recreational centres or summer/winter camps; scholarships for family members; bonuses for the purchase of textbooks or for transportation.

91 The decree, which was signed by the Minister of Labour and Social Policies and the Minister of the Economy and Finance, in collaboration with the Office of the Presidency of the Council of Ministers, was sent to the Court of Auditors for the related registration.

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Education and social inclusion

Education and the school-to-work programme

CSR 5 – ‘Adopt and implement the planned school reform and expand vocationally oriented tertiary education’.

The reform of the school system (so-called Good School Programme) went into effect in July 2015 and provides for the issuance of various enabling decrees for becoming fully operational.

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Education	‘La buona scuola’ reform (L. 107/2015).		July 2015
		Implementing decrees of Law 107/2015. Legislative Decrees on: - National education and training system; - Initial training and access to teaching positions in secondary school; - Promotion of inclusion in schools for students with disabilities and recognition of different forms of communication; - Review of vocational education pathways and link with education and training pathways; - Integrated system of education and school from zero to six years; - Effectiveness of the right to education; - Promotion and dissemination of culture and support to creativity; - Italian educational institutions and initiatives abroad; - Evaluation and certification of students skills.	July 2016
	Strengthening of measures for school building: EIB loans (L. 107/2015) and exclusion of the costs of school building projects from the budget balance of local authorities (2016 Stability Law)		July – December 2015
	National Plan for digital school (Min.D. 27 Oct. 2015).		2015
		National Plan of training on the job (ministerial decree by May 2016)	2016-2018
		National Plan for Research 2015-2020	2016
		Decree for the Charter of Rights and duties of students in school – work training	By June 2016

Following the extraordinary hiring plan inaugurated in 2015, the official registration of teachers is continuing for the purpose of filling vacant positions, in accordance with the provisions for the implementation of the ‘Buona Scuola’ reform. The new competitive examination for the hiring of teachers will allow for

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focusing on classes where resources are currently limited (e.g. mathematics), thereby ensuring a more balanced supply of educators.

The 2016 Stability Law92 amended the procedure for recruitment of headmasters. In particular, the competitive examination for recruitment and training is to be organised by the Ministry of Education, Universities and Research (after consulting the MEF) and no longer by the National Administration School, and the notice of the competitive examination no longer needs to be on annual basis, but it must include all vacant positions for a three-year period.

As part of the implementation of the ‘Buona Scuola’ reform with respect to integration, the recommendations and operational proposals of the National Integration and Intercultural Observatory of the Ministry of Education, Universities and Research have been sent to all schools. Resources of €1 million have been appropriated for improving the reception and integration of non-Italian students, with the distribution of the resources to give priority to those areas having the highest numbers of unaccompanied foreign minors.

Assessment of national education system

In 2015 the National Assessment System has emphasized three initiatives: self-assessment of academic institutions, external assessment and assessment of the school administration.

The ‘Buona Scuola’ reform has also regulated the assessment of school administration, linking previous regulations with new general criteria for assessment, in order to ensure compatibility with administrative and financial procedures, in relation to both administrative responsibility and the effects on additional performance-based pay93. The final objective is a system capable of tracking and improving the contribution of headmasters to improvement of education. The provisions for implementation are currently under review by the various institutional entities involved.

The first self-assessment reports (RAV) prepared by schools94, as provided by the reform of 2015, were published online in July 2015. In preparing the reports, each school compared its data with provincial, regional and national data and indicated its strengths and weaknesses, matching the latter with precise objectives for improvement. This self-assessment is supplemented by the external

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92 L.208/2015, co. 217-218.

93 The system outlined provides for an assessment process on a basis consistent with the regular three-year term of headmasters. At the end of the three-year period, the results of the administrative action are presented. The results are based on the outcomes indicated in self-assessment reports prepared by the schools, and other indicators with reference to the education process, professionalism, and the community’s perception of quality in education. In addition, during the three-year period, there is annual monitoring of the achievement of functional and organisational objectives for the purposes of a portion of additional pay, according to an assignment-levels ranking, except in the case of a negative outcome to the monitoring in which case there is no additional compensation paid on an annual basis.

94 More than 95 per cent of the schools, with peaks of 100 per cent in state institutions in certain regions, have already published the self-assessment report. The remaining schools will be able to complete the assessments in the next few months. Around 7 per cent of the state schools involved external parties (e.g. experts, parents) in their assessments, showing an inclination toward openness and dialogue. From an initial analysis, around 80 per cent of the self-assessment reports indicate conformity with the consistency and reliability criteria expected. The regional education offices may get in contact with the schools to request that the schools verify any misalignments. The reports are available on the ‘Scuola in Chiaro’ portal (Italian text only): http://cercalatuascuola.istruzione.it/cercalatuascuola/

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assessment of schools, the first phase of which entails the start-up of external assessment teams. In November 2015, the Minister of Education, Universities and Research signed a decree to revise the basic parameters for allocation of the Fund for the Operation of Schools (a fund provided by the law delineating the ‘Buona Scuola’ reform); this revision is aimed at providing schools with resources that are more substantial and are more closely linked to the schools’ specific characteristics, their specific areas of study, and the numbers of their students. The new parameters will be applied as from the 2016-2017 academic year.

School-to-work programme

The ‘Buona Scuola’ reform is also designed to facilitate the school-to-work transition, through the school-to-work programme and apprenticeships, with the objective of reducing early school-leaving and facilitating the employability of youths.

One key element of the effort to prevent early school-leaving is the single student register (that integrates the national register with the regional registers), which allows for integrated mapping of each student’s participation in the compulsory education system, whether through public education or regional training.

The introduction of the school-to-work programme represents a step forward in terms of incentives for offering students hands-on experience for a future job. The programme is mandatory for the students in the last two years or final year of their upper secondary school education and it provides for a mandatory minimum number of hours (400 hours for technical and professional institutes and 200 hours for upper secondary school) as well as a charter of rights and obligations for the students involved. A register established to list businesses involved in the programme will be used for schools finding companies available to host participating students and for monitoring of the programme. A sum of €100 million per year has been appropriated for the full-scale operation of the programme.

Another step in this direction is the signing of protocols of intent95 for the experimental start-up of the Dual System. The experimentation, which was approved through a specific State-Regions accord, will make it possible for some 60,000 young people to earn their diplomas with various types of training that is tantamount to a school-to-work programme. For some young students, the on-the-job training will be carried out on the basis of a first-level apprenticeship contract, while for others, it will be done through the introduction of an intensified work-to-school programme, with an additional 400 hours per year, as from the second year of upper secondary school or the professional training institute. Another €8 million has been appropriated for both 2015 and 2016 for the experimentation of the dual system, and this is in addition to the €189 million already provided for education and professional training.

These are important developments, partly because they are functional to the full-scale implementation of the provisions of the Jobs Act96 for reviving the first-

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95 The protocols of intent were signed by the Undersecretary of Labour and the regional assessors responsible for education.

96 In particular, from Legislative Decree No. 81 and Legislative Decree No. 150.

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and third-level apprenticeship positions and expanding the sphere of training opportunities. The State-owned company, Italia Lavoro, is completing the selection, through public tenders, of 300 professional training centres that will conduct the experimentation work.

The school-to-work programme has also been extended to schools previously not involved (upper secondary schools), so as to help guide students with their choice of university education and to increase the percentage of students who participate in the programme.

With further reference to the implementation of the law providing for the ‘Buona Scuola’ reform, the State-Regions Conference approved guidelines for simplification and for promoting new governance so as to encourage study at technical colleges (ITS). More specifically, the guidelines outline: the possibility for the students to pursue higher technical education also as apprentices97; initiatives to facilitate the participation of new businesses in the foundations that operate the ITS; the creation of a national commission to coordinate training, which will also have union involvement for the first time. The objective is to revive this branch of tertiary education (the ITS have significant potential, considering that almost 80 per cent of the graduates immediately find jobs).

These measures are rounded out by the €45 million appropriation98 for the activation of the new territorial labs for employability, as provided by the law for education reform. With these labs, students will get tools for transitioning to employment, and for creating employment with an educational programme that is concentrated on strategic Made in Italy sectors and closely linked to the productive, social and cultural orientation of each territorial area.

National Digital School Plan

The National Digital School Plan99 provided by the ‘Buona Scuola’ reform and launched in October 2015 encompasses resources of €1.1 billion, including €650 million for projects relating to infrastructure, learning environments, technological systems, administrative digitisation and connectivity, and €400 million for twenty-first century skills, entrepreneurship, the digital-/work-skills relationship, personnel training, accompanying measures and monitoring.

Some 14 of the 35 actions provided by the plan were inaugurated between October 2015 and April 2016, while the implementation of the entire policy is to be completed by the end of December 2016. Key actions include:

- with regard to connectivity: the accord signed by the Ministry of Education, Universities and Research and the Ministry of Economic

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97 Two business experts will become full members of examination commissions, and the admission of students to the final examination will require the assessment of the corporate tutor.

98 With a September 2015 decree of the Minister of Education, Universities and Research.

99 The plan contributes to activating th use of a range of resources in favour of digital innovation, starting from European Structural Funds (2014-2020 National Operational Programme for Educations) and the funds appropriated with Law No. 107/2015. The plan became operational on 27 October 2015 with the decree of Minister of Education, Universities and Research No. 851. The Italian text of the document is available at:

http://www.istruzione.it/scuola_digitale/index.html.

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Development, which has prioritised connectivity of academic institutions within the National Ultra Broadband Plan;

- with regard to skills: the imminent start-up (April 2016) of the first €5 million project for the production of open educational resources (OER) in favour of digital skills development (information literacy, computational thinking, media education, digital economy, open and big data literacy, making, educational robotics, and digital creativity and production); in addition, the first national curriculum for digital entrepreneurship is to be started up with a total annual investment of approximately €10 million;

- with regard to training(lifelong learning) the first phase of training programmes is under way as part of the National Digital School Plan: organised through more than 300 training centres, the training will involve 80,000 participants, from headmasters to teachers and administrative and technical personnel; a ‘digital excellences’ training programme dedicated to top-performing teachers and headmasters is now being organised in partnership with global leaders in technology and leading universities in order to provide intensive training abroad at innovation-focused institutions;

- with regard to accompanying actions a digital animator has been designated at each school; the 8,300 animators will take care of developing training policies within the school, activating best instructional and organisational practices and involving the academic community at large.

Once fully implemented, the ‘Buona Scuola’ reform100 provides for an annual investment of €40 million for permanent training, which is obligatory for all school personnel. The 2014-2020 National Operating Plan has also made available some €400 million for the planning period (which will come from resources appropriated by law, Structural Funds and other national resources)101. Through involving all school personnel, the plan provides for targeted actions for approximately 600,000 employees of the school system for the three-year period 2016-2018. A training institute for headmasters is also being set up and should be operational as of September 2016.

School construction projects

For the first time, Italy has outlined a three-year national plan for school construction projects as well as of a single register: more than 6,000 projects have been approved for the 2015-2017 period (total funding of €3.7 billion); the projects have been identified based on the priorities indicated by the regions, after consultation with local entities.

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100 Law No. 107/2015

101 The priorities for the 2016-2018 three-year period are: digital skills and instructional innovation, language skills, instructional and methodological innovation for skills development, school-to-work programme, entrepreneurship, inclusion and disability, integration and global citizenship, assessment and basic skills and a specific focus on full-scale implementation of Law No. 107/2015 with respect to school autonomy.

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In addition to the specific measures included in the ‘‘Buona Scuola’ reform for school construction projects, new resources were appropriated with the 2016 Stability Law: €480 million excluded from budget restrictions for local entities; €50 million for innovative schools as part of the real estate investments of the National Institute for Insurance against Accidents at Work102; €1.7 billion for the 2016-2025 period through EIB mortgages made available to the regions, whose amortisation will be charged to the State; and finally, subsidies to the provinces and metropolitan cities amounting to €495 million in 2016, €470 million from 2017 to 2020 and €400 million as of 2021 for investment in road maintenance and school construction projects.

The identification and planning of these projects will be facilitated by the full-scale activation (20 years after its institution) of the single school construction register as of September 2015. The register also supplies data regarding mobility, environmental sustainability and the quality of school infrastructures.

Finally, a recently approved decree-law contains urgent provisions for the operation of the school and research system, and the continuation of the ‘Scuole belle’ programme (from 1 April 2016 to 30 November 2016), so as to allow for continuation of projects for minor maintenance, decoration and functional restoration of school buildings. The appropriation provided is €64 million.

Research and universities

Various measures regard universities and research, the first of which is an extraordinary plan to recruit 861 university researchers through a decree implementing related provisions of the 2016 Stability Law. The plan is designed to increase the number of ‘type b’ researchers (tenure track) at state universities from 700 to more than 1,500 by the end of 2016. These are researchers that the universities may then confirm as associate professors after the three-year contract. The appropriation provided amounts to €47 million for 2016 and €50.5 million as from 2017, and it also covers the co-financing for the promotion to associate professor at the end of the three-year period for those researchers who are in possession of scientific qualification and who have received a positive evaluation from their universities. In addition to the aforementioned funding, resources have been appropriated for the award of 500 excellences tenure103 and the extraordinary recruitment of ordinary professors.

The resources appropriated by the Stability Law have also allowed for the hiring of 215 researchers at public research entities under the supervision of the Ministry of Education, Universities and Research. The appropriation provided for extraordinary recruitment amounts to €8 million for 2016 and €9.5 million as from 2017. The assignment of the research positions considers the quality of the

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102 Worth noting in this regard is the €300 million financing for the design and development of 52 schools nationwide that will stand out for innovation in terms of structure, instruction, and energy efficiency; project selection is based on a tender for the planning and prototyping of ‘schools of the future’.

103 This is the ‘Giulio Natta’ merit award programme, an extraordinary programme for recruiting ordinary and associate professors based on international standards of excellence; the professors hired will be offered salaries and funding for competitive research and the possibility of working at all of the Italian universities willing to accept them.

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research produced by the entities and their budgets: the entities may recruit only new personnel for these positions, through a public tender process, with the preference going to the hiring of ‘young scholars with high-level scientific qualifications’104.

A decree has recently been drafted concerning the conferral of national scientific qualification to university professors. Among the changes introduced, the decree provides for ‘single service desk’, namely, a system to certify scientific qualification for persons aspiring to become an ordinary or associate university professor; once the desk is activated, it will operate continuously. Aspiring professors may also present their candidature to qualify for university teaching at any time of the year and no longer during periods set by the Ministry of Education, Universities and Research. The qualification is now valid for six years (previously, four years), and the means for staffing the commissions have been revised so as to ensure greater representation of the academic disciplines.

National Research Plan

The soon-to-be-approved 2015-2020 National Research Plan is aimed at providing incentives for competitiveness in industry and promoting the country’s development, through the planning of €2.5 billion for the 2015-2017 period (€4.7 billion for the entire 2015-2020 period) in sectors considered strategic for the Italian research system. The resources include €1.9 billion from funds to finance research (including financing through a National Operating Programme) and €500 million from the Cohesion and Development Fund, which may be assigned by Interministerial Committee for Economic Programming subject to positive verification from the special steering committee, set up at the Office of the Presidency of the Council of Ministers. Additional resources of €3.8 billion are also provided for the 2015-2017 three-year period (€9.4 billion for the entire 2015-2020 period), which come from Regional Operational Programmes and the European Horizon 2020 Programme.

The plan’s organisation refers to six main factors: international expansion, human capital, selective support to research infrastructures, Public-Private Partnership, southern Italy and the efficiency and quality of expenditure. The plan also embraces 12 areas of specialisation: aerospace; agri-food; cultural heritage; blue growth; green chemistry; design, creativity and Made in Italy; energy; intelligent buildings; sustainable mobility; healthcare; smart, secure and inclusive communities; technologies for life environments.

Resources available for the new ‘Prin’ (Research Projects of Significant National Interest) tender have been increased in order to facilitate intensification of basic scientific research at a national level, and to allow Italy to participate more effectively in the Horizon 2020 Programme tender: €92 million provided by the tender at the end of 2015105 to finance basic research at universities and the

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104 In assessing the candidates’ profiles, the institutes will consider awards received in Italy or abroad, previous experience as project coordinators and/or previous experience within national or international research entities. 

105 If the assessments are also included, the total is €95 million, subdivided into €43 million for 2014 and €52 million for 2015.

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entities under the supervision of the Ministry of Education, Universities and Research.

Several key aspects of the national plan are aimed at boosting Italy’s capacity to attract a growing number of highly qualified Italian and foreign researchers. In this regard, the plan has outlined measures for the recipients of European Research Council (ERC) grants, such as the simplification of the procedures for the design and development of the projects in Italy, additional financing, coverage of additional expenditure for the creation of research teams, and career progression through direct professional affiliation with Italian universities and research entities. Similar programmes will be developed for other highly qualified scholars, according to international standards106.

Welfare and fight against poverty

With the 2016 Stability Law, the government confirmed the strategy regarding the fight against poverty, introducing certain measures for poor families with dependent children and increasing the available resources through the establishment of the Fund for the Fight Against Poverty and Social Exclusion. Resources allocated to the fund (€600 million for 2016 and €1 billion as from 2017) will be used for financing a special enabling act to comprehensively reform social assistance policies (Social Act).

The enabling act107 adopts a standardised approach to supporting households in difficulty, with the initial priority on families with dependent children. The enabling act was presented by the government in late January 2016 and is expected to be approved by Parliament by the end of July 2016. It introduces a national initiative for the fight against poverty based on the principle of active inclusion, and the resulting preparation of a personalised social/work-inclusion project for the beneficiaries, to be supported by the offer of assistance108. The enabling act streamlines assistance and welfare services, introducing the principle of ‘selective universalism’, and setting the objective of getting beyond the fragmentation of the existing measures. With the implementation of the enabling law, the social assistance services will be made more equitable and uniform, while social services will witness the start-up of an integrated system. An important role will also be played by members of the community and by banking foundations; the latter will team up with the government to design and develop a fund to combat the effects of poverty on education; the fund will finance projects for poor children so as to improve their access to quality education and training, and to allow for their individual growth outside of school.

With reference to the Fund for the Fight Against Poverty, the resources for 2016 will be used for extending the experimental purchases card programme

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106 In addition to the ERC grant recipients and ‘Giulio Natta’ award recipients.

107 Inclusive of regulations related to fight against poverty, the reordering of services, and the system of social and other services.

108 The project - within the limits of the resources available in the Fund for the Fight Against Poverty and Social Inclusion provided by the 2016 Stability Law – is to be gradually extended based on the resources that flow into the fund.

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across the country, financing of unemployment allowance (ASDI109), and experimentation of a special programme to support active inclusion. The resources appropriated for the years after 2016 are earmarked for introduction of a single national programme to fight poverty and the streamlining of existing instruments and economic benefits.

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Poverty and social inclusion		Enabling Bill attached to the 2016 Stability law, providing measures to fight poverty and reorganize social services -approved by the CoM on 28nd January 2016 and now before the Chamber (AC3594)	June 2016
		Bill on assistance for persons with severe disabilities without family support (Law “Dopo di noi” - A.S.2232)	July 2016

The actions to support social inclusion and the fight against poverty also encompass a €90 million appropriation provided by the Stability Law, starting in 2016, to be used for projects involved the seriously disabled who are without family support110. The Stability Law has furthermore instituted a ‘family card’ for households with at least three dependent children that can be used for securing discounts on the purchase of goods and services, or tariff reductions.

In February 2016, the State-Regions Conference approved the model to be adopted for preparing and implementing projects to assist households that are beneficiaries of the Support for Active Inclusion (SIA) programme. The SIA is an initiative to fight poverty that will be extended to the entire national territory in 2016, after experimentation in large cities. The model precisely clarifies the running and application of the SIA, providing for a new project format that will strengthen the national social services system through an integrated services network.

With reference to welfare in general, the government intends to introduce legislation for coordinating and unifying family law, with the preparation of a special consolidated act that will provide a single framework for the several currently existing regulations. The aim is to create a simple support framework that the public can understand, and that will strengthen the State’s support in favour of families.

This project for streamlining laws and regulations will be accompanied by a revision of direct and indirect supports in favour of households, including for the purpose of boosting the birth rate.

An extraordinary three-year plan continues for the development of socio-educational services for small children with the objective of ensuring family policies that are favourable to the work-life balance.

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109 The support paid to the unemployed every six months with depleted social safety nets and a household obligation equal to or less than €5,000.

110 The related implementation decree ‘Provisions on the subject of assistance to the seriously disabled without family support’ was approved by Chamber of Deputies upon initial review, and is now under review by the Senate (Senate Act No. 2232).

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Finally, the government will evaluate the feasibility of projects designed to provide greater flexibility to individual choices in welfare, safeguarding financial sustainability and the proper balance in relationships between generations, which have already been ensured by the reform measures enacted since 1995.

III. 4 STRENGTHENING INSTITUTIONAL CAPACITY

Public administration and business environment

The structural reforms already inaugurated and partially completed by the government originated from the need to overcome the country’s weaknesses in terms of competitiveness. Business climate indicators of leading international organisations reflect numerous difficulties for Italy, particularly with regard to the country’s capacity to support businesses, and the urgency to simplify the taxation system and to modernise the civil justice system. The removal of these obstacles has been the target of structured action on the part of the government, including action with regard to the public institutions. With the aim of ensuring institutional stability and decision-making capacity, the constitutional reform has been the point of departure for comprehensive political change (including electoral reform) stemming from Parliamentary initiatives supported by the government. Such political change is being pursued through projects to modernise the public administration and to overhaul the judicial system.

In addition, the Senate is now reviewing proposed legislation approved by the Chamber of Deputies for changes to current laws and regulations regarding conflicts of interests, with this initiative aimed at ensuring more transparent government and protecting the public interest. The proposed legislation contains measures aimed at preventing conflicts of interests for officials of the national government, through provisions that can, in the event of conflicts of interest regarding properties, lead to separatemanagement of assets or their sale. The new regulations provide stricter ineligibility criteria for elected office (Parliament and regional councils), and they require the regions to comply in the case of officials in regional government. The effects on the business environment have been emphasised by numerous projects to support businesses, which have intensified in recent years, including for the purpose of improving the Italian productive environment.

Institutional reforms

The parliamentary approval of the legislative bill for constitutional reform is ongoing: after gaining the Senate’s approval on 20 January 2016, the process should conclude with the approval of Chamber of Deputies in April 2016. The proposed legislation is mainly aimed at the abolition of the bicameral legislature and amendment of the distribution of legislative responsibilities between the State and the regions. The bill also outlines the conditions for institutional changes that will increase the decision-making capacity of the parliamentary democracy. The parliamentary approval process will be followed by a referendum for voter confirmation in the fall of 2016.

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To implement the enabling act provided by electoral reform for election of the Chamber of Deputies, a legislative decree was adopted111 that defines the multi-member constituencies foreseen by such law.

REFORM TIMETABLE
Policy Area	Done	In progress	Timetable
Institutional reforms	Electoral Law Chamber of Deputies (L. 52/2015)		May 2015
	Implementation Law of L.52/2015: Definition of electoral constituencies for the Chamber of Deputies		August 2015
		Bill for Constitutional Reform (overcoming the perfect bicameralism and modification of legislative powers’ allocation between State and Regions).	April 2016
		Confirmatory referendum on constitutional reform	By 2016
		Bill on the prevention of conflict of interest for Deputies and Government members (A.S. 2258).

Reform of the public administration and modernisation of the country

CSR 3 – “Adopt and implement the pending laws aimed at improving the institutional framework and modernising the public administration.”

The August 2015 approval of the enabling law reforming the Public Administration is an important step in the modernisation of the public sector112; it provides for 13 enabling acts and approximately 20 legislative decrees. The key aspects of the reform include: simplification of authorisation procedures and proceedings for individuals and businesses; the digitisation of services; the reorganisation of the State across the territory through the unification of offices and chambers of commerce; the streamlining of State-owned entities and companies the reordering of the public-sector senior management. Some measures of the law are automatically applied, including the definition of silent consent between administrations with specific timing and limitations on the process of self-protection, with resulting limitations on the powers of the State in revising its decisions.

In January 2016, the Council of Ministers gave preliminary approval to 11 of the implementation decrees113 of the enabling law. The decrees address: i) employee dismissal, and in particular, with respect to false certification of the presence at work, a mandatory suspension from work and pay in the event of being caught in the act of committing the offence; ii) streamlining and elimination

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111 Legislative Decree No. 12 of 7 August 2015.

112 Law No. 124/2015 ‘Delegations to the government on the subject of reorganising of the public administrations’.

113 The decrees need to be examined by the Council of State, the State-Regions Conference, and the parliamentary commissions responsible, and they may be definitely approved by the government after any amendments requested by the commissions; see Measure No. 58/Policy Area:Efficiency of the girds of the NRP measures.

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of the duplication of police functions; iii) healthcare senior management, with the institution of a national listing of the individuals meeting the requisites for appointment to the position of general director of local healthcare units and whose work has been subject to performance assessment; iv) public corruption prevention and transparency, including by providing free access of the public to all data in the administration’s possession; v) amendment and integration of the digital administration code, which will lead to a structural change in the relationship between the public and the public administration, by relying on a digital identity (SPID), through which public administration network services can be accessed and used; vi) certified reporting of the start-up of productive activity (SCIA); vii) reordering of procedures for Services Conferences, with the objective of reducing lengthy conference schedules; and viii) simplification and acceleration of the administrative proceedings for strategic investments with a strong employment impact.

The implementation decrees approved also include those regarding the single act on local public services of general economic interest, the reordering of the regulations regarding the State owned enterprises, and the reorganisation of the port authorities, as mentioned previously in this document. At the same time, with further reference to the implementation of the enabling law, a decree114 has been approved that provides for the repeal115 or amendment of laws requiring implementation decrees. The decree amends 12 laws and repeals 46, thereby representing an initial rational simplification of the regulatory system with reference to important areas, with a view toward increasing the effectiveness of the laws and facilitating their administrative implementation, to the benefit of the public and businesses.

The government is preparing a second package of measures regarding the new legal framework for senior management and a new single act for public employment.

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114 Legislative Decree No. 10 of 22 January 2016.

115 Repeals have been provided where the objectives set by the laws and regulations of reference have already been reached with other means, or in cases in which the subject matter was later regulated in a more comprehensive and uniform manner.

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REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Public Administration
	Enabling Law on reforming the Public Administration (L.124/2015).		August 2015
	Implementing legislation of L.124/2015: Lgs. D. 10/2016 on repeal of obsolete and out of date secondary legislation and implementing decrees.		January 2016
	Further 11 legislative decrees implementing L.124/2015, approved by the CoM of 22nd January 2016, related to: 1)   digital citizenship and Code of Digital Administration; 2)   reorganisation of State-Regions Services’ Conference; 3)   simplification and acceleration of administrative procedures; 4)   regulation of Segnalazione Certificata di Inizio Attività (SCIA); 5)   revision and simplification of regulation on public corruption and transparency 6)   rationalisation and simplification of ports’ authorities; 7)   reorganisation of state forestry and police corps; 8)   transparency on Health System Managers 9)   changes on dismissal rules on Public employment 10) single code on local public services 11) reorganisation of rules on State Owned enterprises		August 2016 (final approval)
		Further legislative decrees to fully implement L. 124/2015 on: - transparency and prevention of corruption; - Simplification and acceleration of administrative procedures; - Reform of public management; - Chambers of Commerce reform; - Reorganization of procedures for the judgements before the Court of Auditors; - Reorganization of the Presidency of the Council of Ministers, government agencies and non-public economic entities.	August 2016
		One or more legislative decrees for the reorganization of labour legislation in the public administrations	February 2016
		Implementation of the Defence White Book: Further revision of the National Military Forces, reconfiguration and streamlining of internal organisation of the Defense Ministry, the redefinition of careers.	By 2016

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Public-sector personnel mobility

Some rationalisation measures regarding the personnel of the Public Administration have been provided in the 2016 Stability Law, including for the purpose of accelerating the transfer of the staff employed at provinces that have been abolished. More specifically, the full-scale operation of the mobility portal will be ensured with reference to the mobility processes; the portal has focused in the start-up phase on routing the relocation of staff employed by metropolitan cities and larger entities (the former provinces). In order to favour this process, tables have been approved for equating the job levels provided by the collective bargaining agreements in relation to various contracting segments for non-managerial personnel, so as to allow for full-scale mobility within the Public Administration.

As of 1 January 2015 (when the laws and regulations on metropolitan cities, provinces, and combinations of municipalities116 went into effect), the provinces and metropolitan cities had 41,205 employees; as a result of the reform, such work force decreased to 21,974. The reform thus made it possible for the provinces and metropolitan cities to reduce their expenditure by an estimated €1.5 billion between 2014 and 2015, which represents a significant result in terms of contributing to fiscal consolidation117.

Simplification and reduction of administrative burden

CSR 6 – “Implement the simplification agenda for 2015-2017 to ease the administrative and regulatory burden.”

The Simplification Agenda for 2015-2017 aims to systematically deal with a necessary process of streamlining national and regional laws and regulations, which have been, for many years, one of the main obstacles to business activity in Italy. The agenda’s provisions have been implemented with continuous monitoring to ensure the respect of deadlines and of the commitments undertaken, with results published in a special report.

As of 15 March 2016, approximately 90 per cent of the deadlines provided by the agenda and by detailed planning of activity had been met. Key aspects include: i) the adoption of the standardised and simplified forms for construction work and the introduction of simplifications in forms for business activity; ii) the activity of identifying and analysing (with the aid of business associations) the main obstacles to be removed and the most suitable simplification solutions to be adopted in the implementation of the reform of the public administration (Services Conference, single certified reporting of the start-up of productive activity).

With regard to the single set of building regulations, some 42 uniform and mandatory definitions have been identified for all municipalities, while the

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116 Law No. 56/2014.

117 For details see (Italian text only):

http://www.affariregionali.it/il-sottosegretario/comunicati/2016/febbraio/24-febbraio-2016-riforme-audizione-camera-deputati/

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preparation of the necessary correction actions is in process with reference to the interoperability specifications.

One of the key elements of digital citizenship – the public digital identity system (SPID) – became operational on 15 March 2016. As of the same date, online services of Italy’s National Institute for Social Security and the Tuscany Region were accessible through the SPID. As of June 2016, the SPID can be used for the online services offered by: Italian Revenue Agency, INAIL, Equitalia, the municipalities of Florence, Lecce and Venice and the regions of Liguria, Emilia Romagna, Friuli-Venezia-Giulia, Umbria, Piedmont and Latium. More than 600 services will be available and accessible through the SPID in the future, with the full guarantee of security and the protection of privacy and personal data. The process of implementing the SPID login system for the entire public administration will take about 24 months.

The other activities provided by the simplification agenda will continue in 2016 and 2017. The simplification actions, as jointly reviewed by the government, regions and local entities, will mostly refer to the implementation of the measures provided by the enabling act for reform of the public administration: i) the restriction of the time schedule for the Services Conferences; ii) the identification, simplification and standardisation of proceedings; iii) the single certified reporting of the start-up of productive activity; and iv) the simplification of forms.

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Simplification	Simplification Agenda 2015-2017: (including the simplification measures of L.124/2015)		2015-2017

Digital Agenda

The implementation of the Digital Agenda will be facilitated by approval of the legislative decree that amends the Digital Administration Code, as provided by the enabling act for reform the public administration, with a view of promoting and making effective the rights of digital citizenship. The new Digital Administration Code will ensure: access to online services with a single digital identity; digital domicile for receipt of any communication from the public administrations; minimum quality standards for online services. The main projects regard:

- the public digital identity system (SPID), which is already operational (see above);

- electronic payments, with the participation of all public administrations (currently, more than 13,250) in the platform, so as to allow users to pay electronically;

- the national register of the resident population (ANPR): plans call for continuing the migration of all municipal registers to a single national register, and integrating the demographics software of the municipalities with the ANPR;

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- the start-up of electronic administrative proceedings;

- the electronic personal healthcare record: activity continues for the development of the electronic personal healthcare records on the basis of regional plans;

- the Single National Patient Code (CUNA): plans call for continuation of the actions needed to create the technological infrastructure for the assignment of the code, which will allow for tracking patient records within various clinical facilities of the NHS.

Business environment

Reviving the productivity of capital, through the instruments designed to stimulate investment, remains one of the government’s strategic objectives. During 2015, the government reaffirmed the business-support policies inaugurated in previous years, with various measures ranging from those to facilitate credit access to investment support via tax relief and dedicated incentives.

The significant reliance of Italian businesses on bank financing requires constant attention to the removal of obstacles that triggered business liquidity problems in years past. The measures directed at the banking sector are particularly relevant in this regard (see Section III.3 Financial sector) and are rounded out by alternative financing initiatives.

Some of these measures address the creation of enterprise, while others are directed at boosting the investments of existing businesses. The former include the incentives for the development and start-up of micro and small businesses by young people or women, who can obtain zero-rate financing for loans of up to 75 per cent of the investments up to €1.5 million per individual business. The total financial resources appropriated are equal to €50 million.

The instruments to support the financing of business investments include the Central Guarantee Fund for the SMEs, which has already played an important role and is to be reinforced with corrective, ameliorative and supplemental measures. The applications for the fund’s resources rose by 17 per cent in 2015, compared with 2014. The 2016 Stability Law has provided for expanding the guarantees that can be granted against the fund’s resources. In addition, a provision has been made whereby at least 20 per cent of the fund’s resources must be allocated to businesses and investments located in the regions of southern Italy.

The European Investment Fund (EIF) and the Central Guarantee Fund entered into an agreement in March 2016 so as to make use of the support of the European Fund for Strategic Investment (EFSI), the fulcrum of the investment plan for the Europe. With this counter-guarantee contract, the Central Guarantee Fund will be able to support financing of more than €1 billion in favour of 20,000 small and medium-sized Italian businesses during the next 12 months.

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Innovative firms (start-ups and SMEs)118

The legislative framework regarding innovative firms has been rounded out by the institution of the ‘Innovative SME’ model, which will be able to profit from simplifications and incentives along the lines of those already provided for innovative start-ups. In addressing various aspects of a business operation, the measures are aimed at making corporate management more flexible, deregulating compensation plans, enabling credit access, introducing innovative tools for raising capital, facilitating equity investment and favouring access to foreign markets. Such innovative businesses must obviously demonstrate their innovation through certain criteria, such as expenditure on research and development, the employment of highly qualified personnel and ownership of industrial property. In order to provide further momentum to the actions undertaken, the government intends to introduce a new package of measures that will further develop the policy guidelines adopted by the ‘Finance for Growth’ working group, thereby rounding out existing tools or introducing new tools to consolidate the positive trend of investment seen in 2015. More specifically, the new ‘Finance for the Growth 2.0’ package will contain a series of projects designed to i) promote investment in risk capital by retail and institutional investors and ii) facilitate the procedures for the stock-market listing of small- and medium-sized businesses.

The government has outlined procedures for new initiatives to assist high-technology businesses with expansion, while also making existing initiatives available to such businesses. One of these initiatives is the Guarantee Fund, which has contributed to the creation of a steadily growing number of start-ups and innovative SMEs119. The innovative SMEs’ access to the fund has been facilitated by the introduction of a simplified procedure. The creation and consolidation of innovative businesses has also been pursued through the incorporation a venture capital fund for the start-ups and innovative SMEs with high growth potential120.

Incentives have been introduced for the value enhancement of patents and other intellectual property. More specifically, improvements have been made to the optional programme for lower taxation with regard to income earned on intangible assets (Patent Box), with changes to the related terms and conditions. In 2015, businesses made some 4,500 applications to qualify for the Patent Box taxation scheme, with around 1,200 of those coming from businesses located in the Lombardy Region. Most of the applications (around 1,900) came from businesses with revenues between €5 million and €50 million, followed by businesses with revenues of less than €5 million (around 1,400).

As of October 2015, the micro-SMEs depositing or licensing patents and intending to pursue a strategy of intellectual-property value enhancement will be eligible for applying for sinking-fund subsidies of up to €140,000. In addition, the

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118 For a summary of the policy to support of innovative businesses, see (Italian text only):

http://www.sviluppoeconomico.gov.it/images/stories/documenti/Scheda_sintesi_policy%20Pmi_Innovative_25_02_2016.pdf

119 At the end of 2015, there were 5,143 innovative start-ups registered in the special section of the Business Register, for an increase of 439 units over the end of September (+9.3 per cent).

120 The fund, known as ‘Italy Venture I’, is managed by Invitalia Ventures, the Invitalia Group’s funds management company.

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incentives in favour of SMEs for economic value enhancement of industrial designs and marks will continue to remain in effect.

The governance of innovative start-ups is rounded out by the issuance of a decree121 that extends tax benefits to 2016 for anyone investing in these businesses, with the admissible investment threshold raised to €15 million for each innovative start-up during the entire period when the business is classified within the special section of the Business Register. CONSOB’s new regulations on ‘equity crowdfunding’ are a step in the same direction, allowing for more simplified web-based capital fund-raising than in the past, thus reducing the costs of funding and expanding the array of potential investors who can contribute to financing innovative business projects.

These measures are part of an overall framework of incentives that has witnessed the addition of numerous initiatives since the Growth Decree of October 2012. Among these are: the Italy Startup Visa and Italy Startup Hub programmes to attract and retain talented young non-Europeans interested in starting up innovative enterprise in Italy; interest-subsidised loans granted by Invitalia as part of the Smart&Start programme; a new online procedure for setting up an innovative start-up through standard articles of incorporation and by-laws and the use of digital signature; the extension of the duration of innovative start-up status from four to five years.

In addition to innovation, an emphasis has been placed on stimulating R&D expenditure so as to make Italian businesses more competitive. This is an objective that the government has pursued with various instruments, and in particular, a tax credit on expenditure in research and development that went into effect with the issuance of an interministerial special decree122. The tax credit is available to all businesses, without limitations regarding revenue, business form, economic sector or accounting system adopted. The tax incentive, which can be used to offset tax liabilities, is equal to 25 per cent of the incremental expenditure per year for the 2015-2019 period with respect to the average expenditure realised in the three previous years (2012-2014). The rate is increased to 50 per cent for the expenditure related to the employment of highly qualified personnel and for expenditure related to research contracts with universities, other comparable entities or innovative start-ups123.

Investment incentives

One of the government’s important initiatives for diversifying the sources of corporate funding is the ‘New Sabatini’ law, which incorporates a subsidised funding scheme that was recently amended with a decree-law approved by the

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121 Decree of 25 February 2016 signed by the Minister of the Economy and Finance and the Minister of Economic Development.

122 Decree of 27 May 2015 signed by the Minister of the Economy and Finance and the Minister of Economic Development.

123 The minimum investment to qualify for tax relief is €30,000, while the maximum annual benefit is allowed for up to €5 million for each entity.

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government in 2015. The amendments are already in effect124 and provide that the subsidies in favour of SMEs purchasing capital goods can also be granted for bank and lease financing that is funded through resources other than the special CDP plafond. The timing for granting the subsidies has been reduced, while the procedures have been simplified.

As of the end of February 2016, namely, 23 months since the ‘New Sabatini’ law went into effect, some 9,547 applications for financing had been filed for €2.88 billion of CDP financing and approximately €223 million of subsidies from the Ministry of Economic Development. The applications approved covered financing of €2.548 billion and the granting of €196.6 million of subsidies from the Ministry of Economic Development.

For the purpose of facilitating investment, the Stability Law provided for a 40 per cent increase in depreciation with reference to the purchase of all new capital goods by businesses and free-lance professionals. The booking of the additional depreciation for tax purposes will be applied for a specific period, and will regard investments made from 15 October 2015 to 31 December 2016. At the same time, the time period for amortization of commercial goodwill has been reduced from 10 to 5 years.

Finally, a new protocol of intent125 will allow SMEs to benefit from €1 billion of subsidised bank financing for investment in innovation and international expansion. The economic conditions of the financing must reflect the advantages of the backing of a CDP-SACE guarantee and a Juncker plan counter-guarantee.

International expansions and competitiveness

In recent years, the government’s strategy has been concentrated on promoting the strengths of Italian companies through incentives to innovation and support to international expansion. The policies for the international expansion and the attraction of foreign investments continue to play a key role for the competitiveness of the Italian economy. With the Extraordinary Made-in-Italy Plan126, the government aimed to reinforce the international image of Italian businesses, focusing on increasing exports and attracting foreign investment. The implementation of the plan has been accompanied by the appropriation of additional resources, as provided in the 2016 Stability Law, and the assignment of €1 million to the Association of Italian Chambers of Commerce Abroad.

At the same time, the ‘Manifattura Italia’ plan encompasses a detailed package of provisions to promote the digitisation of Italian businesses, including measures for: strengthening the regulatory framework dedicated to research and development; supporting integration and consolidation of Italian industrial production processes; tax incentives to favour mergers and incorporations between businesses; and higher education. The plan’s implementation

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124 With a decree of January 2016, signed by the Minister of the Economy and Finance and the Minister of Economic Development Decree.

125 Signed by the MEF, Cassa Depositi e Prestiti (CdP), SACE and the Italian Banking Association.

126 Provided by the ‘Sblocca Italia’ decree - Decree-Law No. 133/2014, Article 30, Paragraph 1.

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necessitates the design and development of adequate connectivity infrastructure and the promotion of technological standards and open inter-operability criteria.

On the other hand, the competitiveness of Italian businesses is today undermined by the unfair competition of illegal businesses that take advantage of investments in researching, innovating and advertising high-quality Made-in-Italy brands. According to some estimates, these illegal businesses take approximately €6.5 billion out of the legal economy, with a significant impact in terms of lost employment and lower revenue to the State. A National Counterfeiting-Prevention Plan is now being drafted with the objective of implementing effective strategies to protect businesses that wish to safeguard their intangible assets through trademarks, patents and designs.

At the same time, the government is pursuing its strategy to expand opportunities for the aggregation of Italian businesses. Business networks represent an organisational structure that can be useful in achieving a competitive advantage, by allowing the participants to overcome limits related to the typically small size of Italian companies. In order facilitate the creation of business networks, the 2016 Stability Law has provided for lowering the minimum number of employees (from 15 to 5) of the businesses that i) wish to participate in Temporary Business Associations (ATI) or Temporary Business Regroupings (RTI) or other business networks and ii) can benefit from the funds made available by the Ministry of Economic Development.

As of March 2016, some 2,699 network contracts had been signed involving 13,518 businesses127. The numbers confirm the strong growth trend in recent months (see Figure III.3).

The government intends to consolidate these processes through: the extension of subsidy measures for the businesses in network contracts; incentives for specific types of networks (green and international); support to the promoters; simplification of laws and regulations.

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127 InfoCamere data updated as of 6 March 2016. http://contrattidirete.registroimprese.it/reti/

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FIGURE III.4: NETWORK CONTRACTS AND PARTICIPATING BUSINESSES

Source: Analyses using InfoCamere data.

Finally, plans are now under way to provide incentives for long-term investment in SMEs by both retail and institutional investors, with the aim of giving these companies a greater role in the real economy.

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Competition and competitiveness	Measures for productive investments: ‘Nuova Sabatini’ (D.L.69/2013); ‘Competitiveness Decree’’ (D.L. 91/2014); ‘tax credit for R&D investments; Patent box		December 2015
		Extension of incentives for firms signing network contracts; incentives for specific networks (green and international); support for ‘catalyst subjects’ and regulatory simplification.	By 2016
		Provisions for relaunching of firms investment	June 2016
		Strengthening of Central Guarantee Fund for SMEs
		Plan for relaunching Italian manufacturing	By 2016
		Strengthening of incentives for start-up and innovative SMEs
	Extraordinary Plan for Made in Italy		2015-2017
		National Plan to fight counterfeiting	2016-2017

Sector-specific measures

Certain measures have involved specific sectors such as construction, farming and culture and tourism. In the construction sector, the government’s action has mainly been addressed to stimulating demand. The residential leasing scheme

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introduced with the Stability Law 2016 provides for tax incentives on the acquisition or construction of real properties to be used as primary dwellings. The measure is designed to facilitate the acquisition of housing through a financial lease, particularly for young people, and relies on the use of a financial lease as an innovative alternative to ordinary mortgage financing. A user’s guide recently drafted to promote this instrument128 clarifies the fundamental characteristics of the residential leasing, applicable taxation, and protections for the lessee, while also answering the most frequently asked questions.

The support to farming sectoris mainly addressed to improving competitiveness throughthe measures adopted with the 2016 Stability Law129. First, funding of €45 million in 2016 and €35 million per year as from 2017 will go to financing the purchase or lease, through an acquisition pact, of farm and forestry machinery and equipment that have innovative features for reducing polluting emissions, reducing noise, and improving yield. The Council for Farming Research and Analysis of the Farming Economy (CREA) is charged with preparing a three-year extraordinary research plan for the purpose of introducing new technologies.

Businesses operating in the farming and fishing sectors are exempt from the application of the regional tax on productivity activity. Farming businesses have the possibility of joining the ‘Quality Farm Work Network’, which aims to reinforce initiatives to combat irregularities in labour conditions in the sector. Finally, all of the necessary measures have been adopted to simplify the so-called ‘small farmers’ system, as defined by Europe’s new Common Agriculture Policy. This is consistent with Italy’s ‘Agriculture 2.0’ simplification programme and with Italy’s push, at a European level, for the near-term revision of the Common Agriculture Policy so as to make its rules simpler.

Finally, the measures of the ‘Free-Field Generation’ package have been implemented. As a €160 million plan (between domestic resources and EIB funding to the Food/Agricultural Market Services Institute (ISMEA)), the measures are designed to favour generational change, support the farming sector and create new farming jobs, through: zero-rate mortgages, credit to favour the involvement of young people in farming enterprise, funds to support the creation and development of agro-food start-ups and a tax credit for online marketing and sale of agro-food products.

With proposed farming-related legislation130 currently under a secondary review of the Senate, the government intends to introduce instruments useful for the purpose of controls and simplification, but also those for development, innovation and generational change in a sector that is central to the Italian economy.

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128 The Guide was created through the collaboration of the Italian Leasing Association, the National Board of Notaries, and the participation of 11 leading consumer associations and it was published with the aid of a subsidy of Department of Finance of the MEF.

129 In addition to the initiatives realised with Decree-Law No. 51/2015 and Law No. 141/2015.

130 Draft of law for ‘Delegations to the government and additional provisions on the subject of the simplification, streamlining and competitiveness of farming and agro-food sectors, as well as sanctions for illegal fishing’.

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REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Agriculture	Implementation and simplification of the Common Agricultural Policy Adoption of all non-legislative implementing act: DM 162/2015 Simplification of the CAP 2014 - 2020 management; DM Ref. 1922/2015 Additional provisions regarding the simplification of the management of the CAP 2014 - 2020; DM 5145/2015 National regulations for the implementation of delegated Regulation (EU) 2015/1383 of the Commission of 28 May 2015		March 2015
	Measures for the milk and dairy industry (D.L. n. 51/2015 cvt. into L. 91/2015).		May 2015
		Implementing legislation of the D. L. 51/2015: Urgent provisions to favour the reorganisation of the milk and dairy industry and for the implementation of the EU regulation 1308/2013 related to inter-professional organisations in the agricultural sector.	By 2016
		Rules for transparency of contractual agreements in agricultural supply chains.	June 2016
	Support measures for agricultural sector (2016 Stability Law): IRAP exemption, IMU exemption for farmland, tax credit for the purchase of capital goods for production facilities, fund for agricultural machinery, agro-energy tax, extension of the National Program of Fisheries and Aquaculture.		December 2015
		Enabling law for simplification, rationalisation and competitiveness of agricultural, agri-food and fishing sectors (before the Senate – A.S. 1328 B).	July 2016

The government’s action has also significantly reinforced the State budget dedicated to the cultural and tourism sector. In the cultural sector, the government has already acted with respect to strategic elements, and aims to consolidate this effort. Such elements include: value enhancement, with particular attention to museums, through increasing the quantity and quality of the services offered; the restructuring of the institutions responsible for safeguarding Italy’s cultural assets, so as to simplify service to the public and businesses; revitalisation of tourism, by leveraging the interdependence between tourism and culture, with strategies oriented toward sustainable development in social, economic and environmental terms.

The institutional and administrative actions are accompanied by tax-relief measures in the arts sectors, including, for example, a larger tax credit for the cinema, and, with regard to excellence in music, fiscal benefits for the restoration of the Symphonic and Lyrical Foundations.

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REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Culture and Tourism	Young Culture Card, tax credit for filmmaking industry, stabilisation of Art Bonus, 2x1000 to cultural associations (2016 Stability Law)		December 2015
		Bill attached to the 2016 Stability Law on “Regulation of Cinema, Audiovisual and Performing Arts” (A.S.2287)	By 2016
	Reform of RAI and TV public service		December 2015
		Update of the Strategic Plan for tourism development and the relaunch of ENIT	By 2016

The reorganisation of the MIBACT131 provides for the expansion of the number of the museums classified as autonomous, with a particular focus on archaeological holdings. The objective is to create a national museum network capable of offering visitors an integrated experience, reflecting the most advanced international standards and the application of the modern technologies. Through an international recruitment process, new directors have already been appointed to run independent museums. A tax credit has also been continued for physical and legal persons making unrestricted cash donations for projects in favour of culture and entertainment (the so-called ‘art bonus’). A revival of tourism has been planned through the updating of the strategic development plan for the tourism in Italy and enhancements to the organisational structure and the functions of the Italian National Entity for Tourism (ENIT)132.

Judicial system

Civil justice system

CSR 3 – “Ensure that the reforms adopted to improve the efficiency of civil justice help reduce the length of proceedings.”

The Italian judicial system has been the focal point of various processes of reform, which are necessary for getting beyond the system’s main bottlenecks. More specifically, reductions in the timing for proceedings and the case backlog in

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131 Plans also call for the merging of the General Archaeology Directorate with Art and Nature Directorate, thereby simplifying and streamlining procedures. Other measures include the merger by incorporation of Arcus into Ales (Law of 28 December 2015, Article 1, Paragraphs 322-324 and 326), which will not only ensure savings on public expenditure, but it will also allow for more rational, uniform support with respect to initiatives regarding cultural assets and cultural activity as more broadly defined. The strategic plan ‘Large cultural assets projects’ (Law No. 208 of 28 December 2015, Article 1, Paragraph 337) has also earmarked major resources for routine work of cultural safeguarding, restoration, promotion and value enhancement, also for the purpose of tourism at sites of exceptional value.

132 Another €50 million has been appropriated for the planning, design and development of a national system of tourist cycleways and cycling stations and projects to provide security to the cycling public, while €3 million has been earmarked for the planning, design and development of tourist walking and trekking routes. The cinema tax credit has been extended to investments in cinematography, with the spending authorisation increased from €115 million to €140 million as of 2016 (Law No. 208 of 28 December 2015, Paragraphs 331-334 and 336).

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the civil process, acceleration of the criminal process and regulations to prevent business crime are some of the urgent matters that the government has addressed in recent years. Some results are already evident, especially with reference to the reduction of the case backlog.

The analysis done as part of the work of the ‘Observatory for the monitoring of the effects on the economy of the reforms of the justice system’ (which has concentrated on approximately 2 million complex lawsuits133) has demonstrated that the overall performance of the civil justice system, though slightly improving, is still a long way from European benchmarks. Over the past year, some improvements have been seen in the courts, with respect to the case backlog (compared with 2014, there are 14 per cent less lawsuits on the books for more than three years) and the average duration of the proceedings nationwide (-5 per cent). The appellate courts have also achieved initial efficiency gains in terms of reduction of the case backlog (-8.2 per cent). The variability of the performance among the 140 Italian courts is very considerable, and confirms that the northern areas of the country are in line with European benchmarks while the southern areas are very distant.

In the year of 2015 alone, the backlog of civil cases fell from 5.6 million to 4.2 million. In addition, there were 200,000 fewer cases in 2015 compared with 2014. Such numbers reflect the effects of the use of alternative instruments for dispute resolution and also a different approach to certain areas of law. For example, the area of family law witnessed a reduction of 35,000 cases brought to court in 2015 (-9 per cent compared with 2014).

With reference to the business court, some 80 per cent of the cases were settled during the year compared with 46 per cent at the end of 2013.

Finally, it is noted that proposed legislation governing same-sex civil unions and new regulations for persons living together was approved by the Senate, and is now under review at the Chamber of Deputies.

Reform of civil justice system

Simplified proceedings can ensure more immediate and effective safeguarding of rights, as well as greater efficiency: this is the objective behind the presentation of the proposed enabling act for the reform of the civil justice system134. Approved by the Chamber of Deputies in March, the enabling act aims: to provide greater uniformity to the jurisdiction of the business court, consolidating its specialisation; to strengthen the guarantees of rights through the institution of special sections for the individual, the family and minors; to define lower civil court proceedings so as to make the judge’s recommendation for resolution more meaningful, with simplification of the proceedings and a more expeditious process. This final objective will also be reached through: enhancements to online proceedings, with the adjustment of procedural rules; stiffer sanctions for frivolous lawsuits; the reform of appeal rulings, in a manner functional to accelerating their settlement; the plan for bonus pay in resource

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133 With respect to a total of 5 million pending lawsuits in all courts (equal, therefore, to 37.5 per cent of the national total).

134 Proposed legislation containing provisions for the efficiency of civil proceedings (Senate Act 2284).

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allocation, in order to provide an incentive to judges to work off caseloads; and simplifications and measures regarding provisional execution with reference to injunctions.

The start-up of mandatory online civil proceedings is a fundamental step in simplifying of the civil justice system and is already producing significant results, as also noted in the World Bank’s most recent ‘Doing Business’ report. Sizeable investments in digitisation (approximately €150 million in 2015 alone) have been made for the purpose of pursuing the overall upgrade of all organisational and regulatory aspects involved in online proceedings.

Alternative proceedings for dispute resolution

The introduction of new forms of negotiation for dispute resolution (as alternatives to traditional court proceedings) has proceeded with various types of measures. The initial feedback with regard to 2015 indicates a positive trend: the data for a sample of 3,019 settlements reflect the applicability of the new practices, especially assisted negotiation, with particular impact on the subjects of marital separation, divorce and modification of the related conditions (such cases alone represented 75 per cent of all of successfully negotiated settlements).

During 2015, lawmakers extended the incentives for encouraging the use of alternative for dispute resolution, particularly with regard to assisted negotiation and arbitration. With these incentives, a tax credit accrues to the parties (using the same model already provided for mediation) for fees paid to attorneys authorised to lead assisted negotiation or for fees paid to arbitrators for the same proceedings. The 2016 Stability Law made the incentives permanent as of 2016.

However, the existence of a variety of different negotiating tools for alternative dispute resolution (resulting from various pieces of legislation on the subject) necessitates standardisation of such practices. A special evaluation commission has been charged with harmonising and streamlining the regulatory framework and fostering the development of a ‘resolution culture’, thereby facilitating the use of these tools and lowering their costs. The commission is to deliver a proposal by 30 September 2016, regarding overall regulations and reform that will develop the alternative resolution practices, with particular regard to mediation, assisted negotiation, and arbitration.

Reform of the honorary judiciary

In March 2016, the Senate approved the proposed enabling act for the overall reform of the honorary judiciary135. The act intends: to simplify and to streamline the rules through the preparation of a single statute for the honorary judiciary applicable to the justices of the peace, honorary court judges and honorary deputy prosecutors, so as to provide standards for appointment, duration of the appointment, regulatory responsibility and compensation; to reorganise the office for the justice of the peace and to expand the office’s responsibility with respect to both the subject matter and monetary value of the litigation; to remodel the

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135 Senate Act No. 1738 approved by the Council of Ministers on 29 August 2014.

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responsibilities and functions of the honorary judges and the honorary deputy prosecutors, by allowing them to perform other tasks compared with those already provided by prevailing legislation.

Reasonable duration of trials and organisational projects

The 2016 Stability Law contains provisions aimed at streamlining the costs consequent to the violation of the term of reasonable duration of civil, criminal, administrative and accounting proceedings. ‘Preventive remedies’ have been introduced for this purpose, to be pursued before filing for pecuniary compensation and without which the application for compensation is deemed inadmissible. The cases in which no compensation is due have grown in number, and other cases have been defined for which there is no damage for excessive duration of the trial. The sums than can be paid have been reduced with respect to previous provisions, and new rules for payment have also been determined136.

Other recently approved measures contributing to making the justice system stronger entail organisational projects and procedures regarding human resources. More specifically, these initiatives entail the transfer of some 1,000 administrative employees out of large entities in order to support the process of digitisation of the judicial system and the transfer to the Ministry of Justice of the mandatory expenditure for running judicial office. Also as a result of previous provisions, more than 4,000 administrative employees will be redeployed to judicial offices during the 2016-2017 two-year period.

Additional actions have been moving ahead to allow for support to organisational projects, such as the ‘office for proceedings’, while initiatives for training assignments as part of the reform of the civil justice system will allow the use of trainees at the Court of Cassation.

Looking ahead, the Italian justice system will need: i) to ensure new criteria for access to the magistracy, so as to favour the entry of new university graduates and ii) to change the overall rules regarding training assignments for the legal professions.

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136 Such rules also apply to criminal proceedings.

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REFORM TIMETABLE
Policy Area	Done	In progress	Timetable
Justice	Delegated law on non-prison penalties and reform of the sanction system (L. 67/2014)		April 2014
	Reform of criminal justice (D.L. 92/2014 cvt. L. 117/2014)		August 2014
	Reform of civil justice (D.L. 132/2014, cvt. in L. no. 162/2014)		November 2014
	Provisions on crimes against the Public Administration, ‘mafia’ association and false accounting (L. 69/2015)		May 2015
	D.L. 83/2015 cvt. L. 132/2015. Urgent measure on bankruptcy, civil procedure, judicial organization and functioning of the judicial administration		June 2015
	Implementation of L.67/2014: Provisions on de-criminalisation (Lgs. D.7/2016)		January 2016
	Measures to deflate the criminal justice system (Lgs.D. 8/2016)
		Enabling law for the reform of the honorary magistrates and other provisions for justice of the peace (L. 57/2016)	June 2016
		Bill to modify the criminal legislation for strengthening of the defensive guarantees and the reasonable duration of proceedings, already passed by the Chamber, currently before the Senate (AS2067)	August 2016
		Bill to reinforce the jurisdiction of firms and family courts; rationalisation of civil trials; revision of proceedings stages. Already passed by the Chamber, currently before the Senate (AS2284)	October 2016
		Bill on statute of limitations, already passed by the Chamber, currently before the Senate (AS1844)
		Bill delegating the Government to reform the rules on corporate crisis and insolvency procedures, approved by the Council of Ministers February 10, 2016, currently before the Chamber (A.C. 3671)
		Bill on measures to fight organized crime and illicit patrimonies (A.S. 1687)	By 2016

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Criminal justice system

The proposed legislation to amend the Penal Code and to address the reasonable duration of proceedings137 is an important aspect of the reform of the criminal justice system and is aimed at making the system more efficient, while also strengthening the guarantees of the defence and protection of the rights of the persons involved in the process. The proposed legislation also provides for a series of guiding principles and criteria for an overall review of the penitentiary system.

Criminal proceedings will furthermore benefit from the digital investments and organisational measures impacting the entire justice system: in this case, too, the introduction of online notifications and improvements to the automation of register will be followed by the implementation of online proceedings.

The provisions provided in the recently approved legislative decree138 (which is under preliminary review) will also go to supporting criminal proceedings by simplifying the rules for commissioning interpreters and translators, easing the burden on those involved and allowing for savings on travel expenses.

Other amendments to criminal law have been introduced through i) the government’s bill contained ‘Measures to intensify the fight against organised crime and illegal assets’ (now under review by the Senate) and ii) amendments incorporated into various legislative bills. These include provisions covering crimes of false accounting and the further laundering of money already obtained illegally, amendments regarding crimes of corruption and tougher penalties for the crimes of racketeering. Still to be approved are provisions related to i) proceedings for the seizure or confiscation of illegal assets, ii) the intensification of measures to seize and confiscate illegal assets and to redeploy those assets for social purposes and iii) the governance of so-called ‘remote’ participation in criminal proceedings139. Lastly, standard regulations have been introduced for eco-crimes.

In January 2016, Parliament approved two legislative decrees140 that addressed i) reducing the incidence of crime through the decriminalisation of certain types of offences having a limited social impact and ii) abrogating certain criminal offences. Without prejudice to the right for damage compensation, the

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137 ‘Changes to the Penal Code and the Code of Criminal Procedure for strengthening defensive guarantees and the reasonable duration of the trials, and for intensifying the fight against corruption, and changes to the penitentiary system for the effectiveness of prisoner rehabilitation’, definitively approved by the Council of Ministers on 12 December 2014.

138 Containing supplemental provisions and corrections to Legislative Decree No. 32 of 4 March 2014, covering the implementation of the EU directive 2010/64/EU on the right to interpretation and translation in criminal proceedings.

139 In implementation of the national strategy for the value enhancement of the businesses previously controlled by organised crime, the 2016 Stability Law created a special Fund, with resources of €10 million per year for the 2016-2018 three-year period, in order to ensure continuity in the flow of bank credit and the productivity and market competitiveness of companies that have been seized or confiscated from organised crime.

140 Legislative Decree No. 7/2016 ‘Provisions on the subject of abrogation of criminal offences and introduction of criminal acts with civil pecuniary sanctions, as provided by Article 2, Paragraph 3, Law No. 67 of 28 April 2014’ and Legislative Decree No. 8/2016 ‘Provisions on the subject of decriminalisation, as provided by Article 2, Paragraph 2, of Law No. 67 of 28 April 2014’. Such decrees are for the implementation of the delegations contained in Article 2 of Law No. 67/2014, ‘Enabling act to the government for the reform of regulations regarding penalties’.

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aforementioned decrees also provide for the institution of appropriate civil pecuniary sanctions in the event of decriminalisation.

Finally, as part of a broader programme of combatting international terrorism, a legislative bill regarding the fight against terrorism approved by the Council of Ministers in late July 2014 is under review in Parliament, and was approved by the Chamber of Deputies at the end of January 2016. Such legislation is rounded out by a recently approved Decree of the President of the Republic concerning regulations for the creation, operation and organisation of a DNA databank and a central laboratory for a national DNA databank. The regulations govern the exchange of DNA data for purposes of cross-border cooperation, particularly with regard to the fight against terrorism and cross-border crime, and for the purposes of working relationships with the police forces of other nations.

Fight against corruption and business crime

In January 2016, the Chamber of Deputies approved141 a draft law to supplement and expand protections142 for whistleblowers with regard to acts of corruption or crimes committed by business colleagues, extending these protections to workers in the private sector. The legislation provides that public employees who, in the interest of the Public Administration, report illegal conduct detected when performing their work, may not be sanctioned, dismissed or subject to any discrimination143 in relation to the whistleblowing. The reporting is done either to the Italian Anti-Corruption Authority (ANAC) or ordinary or accounting magistracy.

The government also intends to take action regarding business crime. A special commission established for this purpose144 is charged with developing an analysis so as to fight and prevent business crime, which represents a major factor in hampering growth and distortion of markets. The commission, which has been formed 15 years after the enactment of the legislative decree on corporate administrative responsibility145, has a mandate to propose amendments to laws and regulations and more in general, to provide a new impetus to prevention policies.

The reform of Book XI of the Code of Criminal Procedure already approved by the Chamber of Deputies and currently under review by the Senate (Senate Act 1949) is crucial to completing the process of adapting national law to the obligations undertaken at an international level on the subject of judicial cooperation.

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141 After the approval of the first draft by the Chamber of Deputies, the proposal has been sent to the Senate for its review and approval.

142 Provided by Law No. 190 of 2012

143 Discrimination measures, if any, against whistleblowers will be sanctioned by ANAC with fines from €5 to €30,000.

144 Established at the offices of the Ministries of Justice and the Economy.

145 ‘Regulations for the administrative responsibility of legal persons, companies, and associations, including those without legal status’.

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Statute of limitations

CSR 3 – ‘Revise the statute of limitations by mid-2015.’.

The proposed legislation containing ‘Amendments to the Penal Code on the subject of criminal statutes of limitations’ was approved by the Chamber of Deputies in March 2015, and is currently under review in the Senate. The reform: provides for an increase of the term of the statute of limitations for crimes of corruption; establishes that the statute of limitations for certain crimes concerning minors starts from the date on which the victim becomes an adult; introduces new cases of suspension of the terms of the statute of limitations, including those consequent to a conviction that is not final; specifies that the interrogation by the judicial police determines an interruption in the period of the statute of limitations; establishes that the suspension has effect only for defendants under indictment. The new regulations can be applied only with respect to criminal acts committed after the regulations go into effect.

Extracting value from assets confiscated from organised crime

Given the enormous magnitude of the real property and corporate assets seized and confiscated from organised crime, Italy continues to pursue actions to enhance and improve the mechanisms for extracting value from such assets and/or reusing the assets to the benefit of the national economy and the public. The 2016 Stability Law appropriated substantial resources in this regard146.

Added to these resources are those which can be obtained during the 2016-2018 three-year period, as part of the programmes co-financed by the European Union for 2014-2020 regional planning.

The value-enhancement process takes place through close coordination among the administrations involved, so as to ensure sound governance in the planning of national strategy, the operational planning of the initiatives, and the crucial phase of monitoring and verifying the results.

The preliminary phase, inaugurated in 2015 and to be completed in 2016, is to define a national strategy for the value enhancement and reuse of assets seized and confiscated from the mafia, which will indicate the guidelines for developing further action.

Once the strategy is delineated, the actions during 2016 will concentrated on the planning of operational projects, through the preparation of specific project proposals. One of the main objectives for bolstering this effort is to vest more powers, on a long-term basis, with the National Agency147 for the administration and allocation of the assets seized and confiscated from organised crime.

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146In particular: €5 million for each of the years of 2016, 2017 and 2018 for specific actions to strengthen and develop the skills, including internal skills, of the National Agency for the administration and the allocation of the assets seized and confiscated from organised crime, so as to ensure the effective execution of the institutional functions; €10 million for each of the years of 2016, 2017 and 2018 (€3 million to the Central Guarantee Fund for SMEs and €7 million to the Fund for Sustainable Growth) so as to ensure the continuity of bank credit, support to investment and to charges necessary for the corporate restructuring projects, safeguarding of employment levels, promotion of measures for detection of undeclared labour, etc.

147 During the 2016-2018 three-year period, the National Agency, together with the central administrations involved, the regions and local entities, will spearhead the following projects: changes to information systems to

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The final objective for the 2016-2018 three-year period is to create a more effective and structural process of recovery and value enhancement of assets confiscated from the mafia, so that the assets can be used for important public and social purposes, as hoped by European institutions, with the safeguarding of businesses and employment.

Operation of the Agency for Territorial Cohesion and structural funds

CSR 2 – “Ensure that the Agency for Territorial Cohesion is made fully operational so that the management of EU funds markedly improves.”

In its first year of activity, the Agency for Territorial Cohesion worked closely with central and regional administrations involved in the implementation of the 2007-2013 planning of the structural funds, identifying measures to accelerate the expenditure and intensifying the task-force activities set up to support programmes experiencing the greatest delays within the Regions of Calabria, Campania and Sicily, and the Ministry of Infrastructure and Transportation.

Such activity resulted in the achievement of the objective of full absorption of the 2007-2013 resources, as shown by provisional data available on the basis of the inputs provided by the central and regional administrations. The financial monitoring data updated to 31 December 2015 (as validated by the State General Accounting Department) reflect a considerable state of completion. The payments that can be booked against the 2007-2013 structural funds, as registered in the national system, have reached 93.5 per cent of the total resources, namely, €42.8 billion of the €45.8 billion appropriated for the seven-year period, following the latest replanning in favour of the Cohesion and Action Plan. The figure reported at 31 December 2015 confirms the forecast of full absorption of the available resources, with a reliable estimate in the range between 98 per cent and the 102 per cent148. The results show major acceleration in implementation, favoured by the calibrated actions of the central and regional administrations in recent months, with the support of the Agency for Territorial Cohesion, in particular for the programmes experiencing the greatest delays.

In relation to the 2014-2020 planning of the European Structural and Investment Funds (ESIF), all of the operational programmes were adopted by the European Commission in 2015 and are in the start-up phase. The agency is specifically heading up two operational programmes: i) the National Operating Programme for Institutional Capacity and Governance, which will ensure support to the reform of the public administration and stronger administrative capacity for managing programmes related to the funds, and ii) the National Operating Programme for Metropolitan Cities, which will support the implementation of the

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improve the monitoring of the seized and confiscated assets, including through the data exchange with other administrations; resolution of criticalities in the changeover from judicial proceedings to the actual management of the assets; definition of value-enhancement projects for specific assets; implementation of tools and methods to verify the actual use of the assets allocated; and definition of the specific means for the value enhancement of confiscated companies, so as to ensure their continuation as going concerns, and to get them back into the legal economy.

148 As known, the inputting process will be completed in the next few months before getting to the definitive certification as of 31 March 2017, as provided by EU regulations.

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‘Delrio Law’ and development of the territories of the 14 metropolitan cities. During 2015, ex ante monitoring was also inaugurated with respect to the Conditionality Action Plans as provided by the regulations concerning common provisions for the use of the ESIF, which are to be fully implemented by 31 December 2016. Already in the first months of implementation, the increase in spending capacity represents one of the agency’s strategic objectives for the 2014-2020 period, with an equal emphasis placed on project quality.

With regard to internal organisation, the agency is fully operational following the investiture of the related governance bodies. A Verification and Control Committee (NUVEC) was also established, with members appointed. The organisational rules and accounting system rules were both approved.

With reference to the management of rural development programmes, Italy closed the 2007-2013 planning at 31 December 2015 with 98.68 per cent absorption of resources amounting to €8.850 billion against total resources of €8.968 billion. This represents a major success when considering the sums to be spent amounted to approximately €1 billion at the end of October 2015.

The 2014-2020 planning provides for the implementation of the national programme for rural development, for a total amount of €2.1 billion, dedicated to agricultural risk management (approximately €1.6 billion), water infrastructure (approximately €300 million) and animal biodiversity (approximately €200 million).

Finally, the Committee for Prevention of Fraud with respect to the European Union (COLAF)149 is fully operational, and is in charge of delineating and developing a national strategy to fight irregularities/fraud that damage the European Union budget. As a result of the committee’s efforts, a roughly 20 per cent decrease was seen in 2015 in the number of the cases of irregularities /fraud, more than 90 cases of fraud were closed and more than €16 million of additional losses were avoided.

Again in 2016, the committee’s activities will be oriented toward more effective action for preventing and fighting fraud in the entire European Union. More specifically, the committee will further develop coordination with the European Anti-Fraud Office (OLAF), including through the proposal of specific project activities as part of the new ‘Hercule III’ financial programme, and the analysis of new regulatory instruments that allow for administrative mutual assistance among Member States in sectors currently not covered (including structural funds). The development of new models for controlling proper disbursement of funds also continues, and includes a feasibility study of a specific integrated platform of all available data, to be shared by all authorities that manage EU funds, and used in both prevention and ex post controls.

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149 Set up at the Office of the Presidency of the Council of Ministers – Department for European Policies (Law No. 234/2012 - Article 54).

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III. 5 MASTERPLAN FOR SOUTHERN ITALY

Revitalisation of southern Italy

Italy’s economy as a whole needs the southern regions to change tack and to become an area of growth that will positively interact with the rest of the country. Since the second quarter of 2015, some positive signs have been seen with respect to the recovery of the production-and-income gap between southern Italy and the central and northern regions in terms of employment and exports to international markets. Such signs attest to the fact that the economy in southern Italy is flourishing, with potential that needs to be exploited in order to turn around the past trend and recover the gap with respect to the central and northern regions. One of the instruments that the government has used for this purpose is the Masterplan for southern Italy, which starts from the strengths and vigour of the southern economic fabric (aerospace, electronics, steel, chemicals, farming, and tourism) and places them within an industrial-policy, services and infrastructure context that will allow exploiting the region’s excellent assets so as to generate entrepreneurship and works skills and to attract productive activity that will pave the way to recovery and a transformation of the area’s entire economy. The plan provides for approximately €95 billion of resources to be used for development through 2023.

REFORM TIMETABLE
Policy Area	Done	In Progress	Timetable
Reducing regional disparities	Masterplan for the Mezzogiorno		2015
		Implementation of the Masterplan: 16 Agreements for the South: 8 for the South Regions and 8 for Metropolitan cities to define specific strategic actions for each territory.	2015-2018
	Tax credit for investment in capital goods in the South (Stability Law 2016)		December 2015

This is a project endorsed by central government and the institutions of southern Italy, which has witnessed the active participation of the public and of the area’s socio-economic forces. The important results already obtained by the government and regional and local institutions include: i) the recovery of the delay in the use of the structural funds appropriated in the 2007-2013 European planning cycle, which has led to the achievement of the objective of the full absorption of the resources available; ii) the completion of the process of defining the planning of the 2014-2020 European Structural and Investment Funds (ESIF); iii) the response to business crises, through instruments such as development contracts and programme agreements that have allowed for tackling crisis situations at individual companies and areas at risk of industrial desertification. Such actions have been and will be included in the framework of a more general policy for southern Italy.

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An industrial policy for southern Italy

The first phase of the Masterplan regards conditions within the framework of reference, with respect to two elements: the rules for operating markets and the preparation and availability of common production factors, namely, infrastructures and human capital.

With reference to the rules, the starting point of the Masterplan is deregulation and market reform. The aim is to provide leeway to anyone willing to put to use their entrepreneurial capacity and work skills, and to provide an impetus to the aggregation of local utilities so they become dynamic companies which, by providing an industrial dimension to services, will grow service efficiency and effectiveness in the responding to the needs of the local community. New fiscal rules play an essential role in this framework since they focus on supporting the capitalisation of businesses, and making for more attractive investments and better regulations for the operation of the financial markets.

A major emphasis also needs to be placed on eliminating the infrastructure gap that separates southern Italy from the rest of the country. An important factor in this regard is an improved framework for planning, to be achieved through administrative simplification, reduction of regulatory restrictions, the vesting of responsibility with each administration, and the reform of Title V of the Constitution, so as to get beyond the overlap of responsibility between levels of government.

Major infrastructure projects are now getting under way (including with the contribution of State-owned businesses such as Terna, Snam, FS, and ANAS) so as to connect southern Italy with rest of the country, Europe, and international markets: the Ultra Broadband Plan; high-speed train service along the Adriatic Sea and Tyrrhenian Sea coastlines and between Naples, Bari and Taranto; modernisation of the railway systems in Sicily and Sardinia; the Ports and Logistics Plan and the Airports Plan; interconnections to get beyond major bottlenecks that are impeding the running of the energy sector.

The development of the innovative capacity – technological and organisational - of the southern Italian productive system is gaining momentum through the National Research and Competitiveness Operating Programme, the National Culture Operating Programme and the application of a Strategy of Intelligent Specialisation, which focuses efforts on strategic theme-related areas.

The development of southern Italy’s productive fabric is also benefitting from initiatives of market-oriented State-owned enterprises, such as Finmeccanica in high technological innovation; Fincantieri in ship construction and off-shore platforms; ENEL in renewable energy and gas; and ENI in refining conversion and green chemistry.

With reference to companies held by local governments, in particular public utilities, the aggregation processes inaugurated, especially in southern Italy, will allow for getting beyond market fragmentation and the achievement of industrial operations that are efficient and economically competitive. The larger companies in southern Italy and the area’s industrial tradition are likely to play an important role in supporting the process.

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Resources and governance

The Masterplan can count on resources of approximately €95 billion, which will come from 2014-2020 structural funds (ERDF and ESF), regional co-financing funds and the Cohesion and Development Fund. The government has already provided for strong coordination among the central and territorial administrations for such resources and for constant monitoring to improve their use.

The investments clause, as agreed with the European Union, will be able to create additional budget leeway equivalent to €5 billion so that appropriations become actual expenditure, thereby increasing the resources actually available to southern Italy for 2016. The government has also taken action to promote greater effectiveness of governance, both with simplifications and clarification of the distribution of responsibilities among the administrations and with the creation of a steering committee for the Cohesion and Development Fund150, which will be required to allocate resources in a manner to maximise synergies with the structural funds for the national and regional operating programmes and to provide for adequate monitoring so as to maximise the actual spending capacity. The steering committee, department for cohesion policy and agency for territorial cohesion will work closely with the central and local administrations to provide an impetus for administrative action, remove procedural hurdles and accelerate authorization processes.

Pacts for southern Italy

The government has taken action to create 16 Pacts for the South, one for each of the eight regions (Abruzzo, Molise, Campania, Basilicata, Apulia, Calabria, Sicily and Sardinia) and one for each of the eight metropolitan cities (Naples, Bari, Taranto, Reggio Calabria, Messina, Catania, Palermo and Cagliari). The objective is to define individually the priority projects, the actions to be undertaken to implement them, the obstacles to be removed, the timing and the reciprocal responsibilities. Each pact is structured in four chapters: i) the vision that the region or the city has about its future and that is endorsed by the government; ii) the recognition of the instruments and the resources available, with the objective of systemising the various sources of national, regional and European financing earmarked for the territory; iii) priority projects; iv) process governance.

The project plan is structured on the basis of four key macro areas common to all of the pacts (infrastructures, environment, economic and productive development and tourism and culture) which are rounded out by other areas for initiatives depending of territorial specifics (e.g. security and legality; schools and universities). The priority projects have been selected using criteria agreed by the central government and the territories with the objective of completing those works: i) most representative of the region’s or city’s development strategy; ii) offering potential in terms of attracting private capital; iii) with a feasible time schedule for realisation, also taking into account the need to resolve disputes with

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150 The steering committee involves the central and territorial administrations, and interfaces with the Department for Cohesion Policies, the Agency for Territorial Cohesion, Invitalia and their respective tools for intervention.

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the European Union (mostly with regard to environmental issues). The pacts provide for reciprocal commitment of the central, regional and local administrations with regard to timing and actions to be taken to plan and develop the projects identified and to remove the obstacles that may arise along the way.

Consistent with the Masterplan, the 2016 Stability Law has introduced an incentive, until 2019, dedicated specifically to the areas of the country where there is a greater need to support growth and create jobs. Businesses purchasing new capital goods for productive facilities located in assisted areas of the southern Italian regions151 will get a tax credit152 (total appropriation of €617 million per year) amounting to 20 per cent for small businesses, 15 per cent for medium-sized businesses and 10 per cent for large businesses. The tax credit is automatic, and the forms and instructions for taking the credit were approved by the Revenue Agency in March 2016.

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151 Basilicata, Calabria, Campania, Apulia, Sicily, Molise, Sardinia and Abruzzo.

152 In respect of the limits and conditions provided by the Commission’s Exemption Rules (EU) 651/2014.

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This chapter sets out the most important initiatives that have been taken to deliver on national targets of the Europe 2020 Strategy. Details of the reform action taken by the government to achieve the various targets are provided in Addendum D entitled ‘Summary of the measures to meet the Europe 2020 Strategy targets’, attached to the 2016 NRP. For areas of overlap with the Country-Specific Recommendations (CSR) refer to i) chapter III ‘The main policy responses to the most important economic challenges’, ii) Addendum C ‘Summary of the measures to respond to the 2015 Council Recommendations’ and iii) the Second Interim Report1.

Target No. 1 – Employment rate

Europe 2020 Strategy Target:increase to 75 per cent the employment rate of the 20-64 year-olds

TABLE IV.1: TARGET ‘EMPLOYMENT RATE OF THE 20-64 YEAR OLDS
Indicator	Current Level	Italy's 2020 target	Italy - Medium Term
Total employment rate	59.9% (2014) 60.5% (2015)	67-69%	63%

In 2014 (the most recent year available for a comparison between European countries) the average European employment rate of people aged 20 to 64 years was equal to 69.2 per cent, 5.8 points below the EU2020 target. This figure reflects a high degree of heterogeneity among the Member States: five countries (Sweden, Germany, United Kingdom, Denmark and the Netherlands) have already surpassed the 2020 target; but there are still 16 countries, including Italy, with indicator figures below 70 per cent. In the European ranking, only Greece, Croatia and Spain show rates equal or lower than Italy's unemployment rate.

As far as Italy is concerned, in 2015 the moderate increase in the employment rate of 20-64 years-old continued: from 59.9 per cent in 2014 to 60.5 per cent, still lower than the rate of 62.9 per cent registered in 2008 when the crisis began.

Last year's results were positive for both women (from 50.3 per cent to 50.6 per cent) and especially men (from 69.7 per cent to 70.6 per cent). Throughout

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The report is available at:

http://www.dt.mef.gov.it/it/attivita_istituzionali/analisi_programmazione_economico_finanziaria/strategia_crescita/index.html

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the national territory - especially in the Mezzogiorno (+1.0 points for men and +0.6 for women) - the indicator has risen for both men and women.

However, while the male unemployment rate (70.6 per cent) has already reached the level set for Italy for 2020, the share of employed women (50.6 per cent) is still notably far off the target value.

In the Mezzogiorno the employment rate for people aged 20 to 64 stands at 46.1 per cent, about 23 percentage points below the value reached by the indicator in the regions of northern Italy.

FIGURE IV.1: EMPLOYMENT RATE OF THE POPULATION AGED 20-64 BY GENDER IN EU COUNTRIES - 2014 (percentage values)

Source: Istat (Italy's Statistical Office) - Workforce Survey.

TABLE IV.2: EMPLOYMENT RATE OF THE POPULATION AGED 20-64 BY GENDER AND GEOGRAPHICAL AREA - YEARS 2012-2015  (data and differences in percentage)

Geographical areas	2012	2013	2014	2015	Difference 2015 - 2014
Males
North	77.8	76.8	77.0	77.9	0.9
North-west	76.9	75.8	75.9	77.2	1.2
North-east	79.2	78.0	78.4	78.9	0.5
Central Italy	75.0	73.3	73.5	74.2	0.7
Mezzogiorno	61.2	58.5	58.1	59.1	1.0
Italy	71.5	69.7	69.7	70.6	0.9
Females
North	60.8	60.4	60.8	61.0	0.2
North-west	60.0	60.4	60.7	61.0	0.3
North-east	61.8	60.4	60.9	61.0	0.1
Central Italy	56.0	55.9	57.3	57.6	0.4
Mezzogiorno	34.2	33.1	32.8	33.4	0.6
Italy	50.5	49.9	50.3	50.6	0.4
Total
North-west	68.4	68.1	68.3	69.1	0.8
North-east	70.5	69.2	69.6	69.9	0.3
Central Italy	65.3	64.5	65.2	65.8	0.5
Mezzogiorno	47.5	45.6	45.3	46.1	0.8
Italy	60.9	59.7	59.9	60.5	0.6

Source: Istat - Italy's Statistical Office - Workforce Survey.

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In southern Italy the situation is especially critical for women, with an employment rate of 33.4 per cent. Conversely, in the north, the incidence of male employment on the population aged 20-64 has exceeded 75 per cent.

TARGET No. 2 – Research and Development

Europe 2020 Strategy Target:improve conditions for R&D with the aim of raising public and private investment to 3.0 per cent of GDP.

TABLE IV.3: TARGET LEVEL ‘R&D EXPENDITURE'
Indicator	Current Level	Italy's 2020 target	Italy - Medium Term
R&D expenditure as a % of GDP	1.27% (2012) 1.31% (2013)  1.29% (2014)*	1.53%	1.40%
* ISTAT estimates on forecast data provided by companies, public institutions and non-profit private institutions.

In 2013, the most recent year for which final data are available, in-house R&D expenditure of companies, public institutions and non-profit private institutions and universities was approximately €21 billion. Compared to 2012 (€20.5 billion) expenditure increases both in nominal (+2.3 per cent) and real terms (+1.1 per cent). The percentage incidence of in-house R&D expenditure on GDP is equal to 1.31 per cent, i.e. it is increasing compared to 2012 (1.27 per cent).

Compared to 2012, R&D spending has increased in the business sector (+3.4 per cent) as well as in universities and non-profit private institutions (+3.3 per cent); on the contrary it has declined in public institutions (-3.4 per cent). The private sector's contribution to in-house R&D spending is increasing slightly, from 57.2 per cent in 2012 to 57.7 per cent in 2013. The contribution of public institutions declines by 0.8 percentage points (from 14.8 per cent to 14.0 per cent).

Compared to 2012, in-house R&D spending is increasing in all geographical areas, especially in the Mezzogiorno (+5,3) and the North-East (+4.0 per cent); smaller increases have been registered in Central Italy (+1.6 per cent) and in the North-West (+0.6 per cent). Employees engaged in research activities (expressed in terms of full-time equivalent units) were 246,764, with an overall increase of 2.7 per cent over 2012, across all sectors: businesses (+3.8 per cent), public institutions (+3.1 per cent), non-profit private institutions and universities (+1.0 per cent). In 2013, the number of researchers (expressed in terms of full-time equivalent units) was 116,163, increasing by 4.9 per cent over 2012. Here, too, the increase is across all sectors: non-profit private institutions (+7.7 per cent), universities (+5.1 per cent), businesses (+5.0 per cent) and public institutions (+4.0 per cent).

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FIGURE IV.2: ITALY'S POSITION IN THE KNOWLEDGE ECONOMY : HUMAN CAPITAL, RESEARCH AND THE INFORMATION SOCIETY

 

Source: Istat's calculations on Eurostat data.

Forecasts for 2014, made by ISTAT, show an increase in spending by public institutions (+2.3 per cent) and businesses (+0.7 per cent), as against a drop in terms of current figures for universities (-5.9 per cent) and non-profit institutions (-2.7 per cent).

TABLE IV.4: R&D EXPENDITURE FOR CENTRAL GOVERNMENTS, REGIONS AND AUTONOMOUS PROVINCES FOR THE SOCIAL AND ECONOMIC TARGETS- YEARS 2012-2014 (%)
	%
Social and economic targets	2012 (a) (b)	2013 (a)	2014 (c)
Exploration and use of land	4.9	5.5	5.9
Environmental protection and monitoring	3.4	2.7	2.9
Exploration and use of space	8.7	8.7	9.4
Transport, telecommunications and other infrastructure	2.0	1.2	1.3
Production, distribution and rational use of energy	3.7	3.8	3.9
Industrial production and technology	13.4	11.7	9.6
Protection and promotion of human health	10.3	9.6	9.6
Agriculture	3.0	3.4	3.2
Education and training	4.1	3.9	3.9
Culture, leisure time, religion and mass media	2.7	0.9	0.7
Political and social systems, structures and processes	6.6	5.7	3.3
Promotion of basic knowledge - Fund for ordinary financing of State Universities	35.3	39.4	43.8
Promotion of basic knowledge - Resources other than the ordinary university funding facility	1.1	1.6	1.6
Defence	0.7	0.8	0.8
Total	100.0	100.0	100.0
(a) Adjusted expenditure forecasts (b) For 2012 the distribution by socio-economic target has been reviewed: changes depend on variations in the estimates for central government, regional authorities and autonomous provinces. (c) Initial expenditure forecasts.

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Target No. 3 – Greenhouse gas emissions

Europe 2020 Strategy Target:20 per cent reduction in greenhouse gas emissions over 1990 levels.

TABLE IV.5: GREENHOUSE GAS EMISSIONS TARGET
Indicator	Current level	Italy's 2020 target
Greenhouse gas emissions for non ETS sectors	344.8 (2005)1 272.5 (2013) 264.1 (2014)	13% cut against the 2005 level by 2020, with linear trajectory as of 2013 (308.2 MtCO2eq in 2013 and 294.4 MtCO2eq in 2020)

The progress against the targets as shown in the table above are detailed in the ‘Report of the Minister of the Environment and Protection of Land and Sea on the progress towards the reduction of greenhouse gas emissions, in compliance with Italy's international and EU obligations and on relevant policies’, drawn up in accordance with art. 2, paragraph.9 of Law 39/2011 and attached to the Economic and Financial Document.

Target No. 4 – Renewable sources

Europe 2020 Strategy Target:increase the share of renewable energy in final energy consumption to 20 per cent.

TABLE IV.6: : RENEWABLE SOURCES TARGETS
Indicator	Current level	Italy's national target for 2020
Share of energy from renewal sources	12.88% (2011) 15.44% (2012) 16.74% (2013) 17.07% (2014) 17.3% (2015 – preliminary estimate)	17%

In 2014, six years ahead of the deadline set by the EU, Italy has achieved its target, with 17.1 per cent of gross final consumption covered by renewable sources. Average growth in the 28 Member States between 2013 and 2014 against the European target of 20 per cent was 1 percentage point approximately, with around 16 per cent of final gross consumption covered by energy from renewable sources in 2014.

The strategy to pursue the national target has been set out in the National Action Plan (Piano di Azione Nazionale per le energie rinnovabili -PAN)2, which sets the targets and describes the most important actions that have been taken to cover 17 per cent of gross domestic consumption through the use of renewables.

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2 In 2005 actual non-ETS emissions were equal to 352.9 because according to ETS Directive 2003/87/UE the sectors falling within the scope of the Directive were fewer than those regulated by ETS Directive 2009/29/UE.

3 Envisaged by Directive 2009/28/EC of the European Parliament and the Council, of 23 April 2009, on the promotion of the use of energy from renewable sources.

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Over the last few years the production of energy from renewable sources has increased, also thanks to the incentivising policies that have been implemented. According to data from Gestore Servizi Energetici (GSE)1, installed electricity generation capacity from renewable sources has grown from 18.3 GW in 2000 to 24 GW in 2008, to more than 47 GW in 2012, reaching 50.5 GW in 2014 (+6.9 per cent over 2012).

From 2013 to 2014 the number of power stations fuelled by renewables has increased by 9.7 per cent, from 598,108 to 656,213 units. The change compared to 2013, is again ascribable to the growth in photovoltaic plants, which have increased from 591,029 to 648,418 units; between 2013 and 2014 the level of installed capacity for these stations stood at 18.6 GW, accounting for 36 per cent of the overall capacity of stations fuelled by renewables, equal to the capacity of hydro-powered stations, which remained stable at around 18.4 GW approximately over the same period.

The contribution of wind energy is also constantly increasing; more specifically, both the number of wind turbines (+33.3 per cent) and capacity (+1.7 per cent), which in 2014 stood at 8.7 GW approximately, have grown; as far as biomass-fuelled stations are concerned, installed capacity stands at 4 GW approximately and the number of wind turbines at 2,500 approximately.

With regard to electricity generation, overall generation from renewable sources has increased in the last 13 years, from 54.4 TWh of 2001 to 92 TWh in 2012 and to 120 TWh in 2014, thus reaching a new high and accounting for 43.1 per cent of the national overall gross production, an increase of 7.7 per cent over 2013. In terms of final consumption of electricity from renewable sources, Italy, with 33.4 per cent, stands above the EU28 average (27.5 per cent).

The contribution of individual sources to the 66TWh of additional production over the 2001-2014 period is highly diversified. More specifically, 33.3 comes from solar energy (from 19GW of 2001 to 22.306 of 2014), 25.1 per cent from bioenergy (from 1,505 to 18,732), 21.1 per cent from wind energy (from 1.179 to 15.178), and 17 per cent from hydropower (from 46.810 to 58.545); finally, 2.1 per cent, from geothermal energy (from 4.507 to 5.916 ).

Law No.13/2009 lays down that the efforts to meet EU renewable energy targets should be shared between the Italian regions on the basis of agreed criteria, through the development of a mechanism for statistical transfer among the regions of energy quotas to be produced from renewable sources. In 2014 in the electricity sector the percentage of renewable energy on the total of gross domestic consumption was very high in the Aosta Valley, Trentino-Alto Adige (where production exceeds consumption) and Molise. At the other extreme, the indicator shows very low figures in Liguria (6.7 per cent) and Latium (10.5 per cent). In 2014 49 per cent of gross production from renewable sources came from the northern regions (where most of the hydroelectric power stations are concentrated), 14.6 per cent from the centre (where hydroelectric power is supplemented by geothermal) while the remaining 36.5 per cent approximately came from the south. Among the southern regions, Apulia continued to show an increase of approximately 2 per cent between 2013 and 2014, thanks to ‘new' sources such as biomass, wind and photovoltaic.

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4 Gestore dei Servizi Energetici (GSE): Statistical Report “Energy from renewable sources in Italy– 2014”.

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More specifically, completely opposite developments can be observed with regard to the supply of district heating from municipalities, which in 2014 involved as many as 35 provincial capitals (their number was 11 in 2000), almost all of them in northern and central Italy, with a 100 per cent incidence in Emilia Romagna and 75 per cent in Lombardy.

Target No. 5 – Energy efficiency

Europe 2020 Strategy Target:20 per cent cut in energy consumption.

TABLE IV.7: TARGET ‘ENERGY EFFICIENCY’
Indicator	Current level(*)	Italy's target by 2016(**)	Italy's target by 2020(***)
Energy efficiency (Annual savings on final uses)	7.57 Mtep/year (2013)	10.88 Mtep/year	15.5 Mtep/year
(*) Cumulative savings on final uses achieved over the 2005-2013 period. (**) Energy efficiency target as provided for in Directive 32/2006/CE. (***) Efficiency Target set by the National Energy Strategy and confirmed by Legislative Decree No. 102/2014 transposing Directive 27/2012/UE.

Target No. 6 – School drop-outs

Europe 2020 Strategy Target:reducing school drop-out rate to below 10 per cent by 2020.

TABLE IV.8: TARGET LEVEL FOR ‘SCHOOL DROPOUT RATES'
Indicator	Current Level (2015)	Italy's target by 2020	Italy - Medium Term
Dropouts	14.7% (Italy) 19.4% (Convergence area)	16%	17.3% in 2015

In 2014 (the most recent year for which data are available) the EU average rate of Early Leavers from Education and Training stood at 11.1 per cent (0.8 percentage points less than the previous year). In 2014, in nineteen EU countries the indicator showed figures below the target value of 10 per cent set by the Europe 2020 Strategy.

In Italy there have been significant improvements: the percentage of young people aged 18 to 24 who leave school without a second-degree diploma or a vocational training certificate, has gone down from 19.2 per cent in 2009 to 14.7 per cent in 2015. With this figure Italy has hit its national target set at 16 per cent.

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FIGURE IV.3: EARLY SCHOOL LEAVERS (ESL) BY GENDER IN EU COUNTRIES - 2014 (percentage values)

Source: Eurostat. Workforce Survey

In absolute terms, in 2015 young people aged 18-24 who have dropped out of school have declined to 620,000 (21,000 fewer than 2014) 61.0 per cent of whom are males.

Italy is among the countries with the highest difference between male and female dropout rates: the dropout rate is higher for men (17.5 per cent as against 11.8 per cent for women).

More specifically, assuming an Italian population of 18-to-24-year olds equal to 100, the indicator shows a dropout rate of 12.8 per cent for Italian students, whereas the rate for foreigners is 34.1 per cent, more than twice that of Italian students.

The Regions which in 2015 performed better than the Italian average and achieved the European target (10 per cent) are the Marches, Umbria, Veneto, Friuli-Venezia Giulia (with the lowest rate - 6.9 per cent) and the autonomous province of Bolzano.

School dropout continues to affect southern Italy comparatively more than other regions, with peaks of 24.3 per cent in Sicily and 22.9 per cent in Sardinia.

Higher-than-average rates are also registered in Campania (18.8 per cent), Apulia (16.7 per cent), Aosta Valley (16.3 per cent) and Calabria (16.1 per cent).

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FIGURE IV.4: EARLY SCHOOL LEAVERS (ESL) BY GENDER AND REGION - 2015 (percentage values)

Source: Istat. Workforce Survey

Target No. 7 – Tertiary education

Europe 2020 Strategy Target:increase the percentage of people aged 30-34 completing third-level education.

TABLE IV.9: TARGET LEVEL FOR ‘TERTIARY EDUCATION'
Indicator	Current Level	National target by 2020	Italy - medium term
Tertiary education	23.9% (year 2014) 25.3% (year 2015)	26-27%	23.6% by 2015

In 2014 (the most recent year available at European level), sixteen European countries reached or surpassed the target set in the Europe 2020 Strategy.

For the EU average the indicator shows 37.9 per cent, with a 1.1 point increase over 2013. Again with regard to 2014, Italy, with a yearly increase of 1.4 points, reaches 23.9 per cent (18.8 per cent for men and 29.1 per cent for women).

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FIGURE IV.5: POPULATION BETWEEN 30-34 HAVING A UNIVERSITY DEGREE. BY GENDER IN EU COUNTRIES – 2014 (percentage values)

Source: Eurostat. Workforce Survey.

In 2015 Italy’s average was 25.3 (200 per cent for men and 30.8 per cent for women). Annual changes of the indicator show an average increase of 1.4 points: the increase is 1.2 points for men, 1.7 points for women.

FIGURE IV.6: POPULATION BETWEEN 30-3 HAVING A UNIVERSITY DEGREE. BY GENDER AND REGION - 2015 (percentage values)

Source: Eurostat. Workforce Survey.

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Increases of more than two percentage points are found in the Aosta Valley, Lombardy, the autonomous provinces of Bolzano and Trento, Veneto, Emilia Romagna, Tuscany, Marche, Molise and Basilicata. Molise, Umbria and Latium have the highest number of graduates among the 30 to 34 year olds, higher than 30 per cent.

Conversely there have been significant drops in Liguria (from 31.3 per cent to 26.2 per cent) and Apulia (from 21.2 per cent to 18.6 per cent), and more moderate ones in Abruzzo, Friuli Venezia Giulia and Piedmont.

Target No. 8 – The Fight against Poverty

Europe 2020 Strategy Target:at least 20 million fewer people in or at risk of poverty and social exclusion.

TABLE IV.10: TARGET LEVEL ‘FIGHT AGAINST POVERTY’
Indicator	Current Level	Italy's national target by 2020
Number of people who are poor, materially deprived or belong to households with low work intensity	18,194,000 (2012) 17,326,000 (2013) 17,146,000 (2014)	Reducing by 2,200,000 the number of people who are poor, materially deprived or belong to households with low work intensity.

The European target linked to the fight against poverty and marginalisation requires that at national level 2,200,000 people be lifted out of poverty or deprivation by 2020. To this end the government has introduced a specific Fund to combat poverty and social exclusion, which will be accompanied by a comprehensive reform of welfare policies (Social Act).

The poverty and exclusion synthetic indicator5 shows 28.3 per cent for Italy in 2014.

With regard to sub-indicators, taking into account the disposable income of households after social transfers (which in Italy are mainly pension benefits), nearly a fifth of the resident population (19.4 per cent) is at risk of poverty.

11.6 per cent of people are seriously deprived.

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5 Three indicators have been identified in order to reach this target across the EU:

1.     the percentage of people at risk of poverty after social transfers (those living in families with income equal to or below 60 per cent of the median disposable income);

2.     the percentage of people in serious material deprivation, i.e. those living in families that report having at least four deprivations out of the following nine: 1) not being able to sustain unexpected expenses; 2) being in arrear in payments (mortgage, rent, bills, debts other than mortgage); not being able to afford: 3)a week's holiday away from home once a year 4) a proper meal (with protein) at least every other day; 5) heating to keep their home sufficiently warm; not being able to buy 6) a washing machine; 7) a colour TV set; 8) a telephone or 9) a car;

3.     the percentage of people living in households with very low work intensity (the percentage of people under 60 living in families where in the previous year adults worked less than 20 per cent of their potential).

From their synthesis a fourth indicator has been developed, which is a tool for monitoring the target, resulting from the percentage of people at risk of poverty or exclusion, i.e. who experience at least one of the situations identified by the three above indicators. The indicator, originally developed at European level (risk of poverty), based only on income distribution, has thus been extended to cover a dimension of poverty which is not strictly monetary and covers situations of labour market exclusion.

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The labour market exclusion indicator shows that in Italy in 2014, 12.1 per cent of people under 60 belong to a household with very low labour intensity; the figure is slightly higher than both European averages (11.1 for EU27 and 11.9 for the 17 euro area countries).

Compared to 2013, the overall indicator remains stable: the drop in the percentage of seriously deprived people (the estimate has gone from 12.3 per cent down to 11.6 per cent) is offset by the increase in the percentage of people living in households with low work intensity (from 11.3 per cent to 12.1 per cent); conversely, the poverty risk estimate has remained unchanged. The drop in serious deprivation over 2013 is due to the decline in the percentage of individuals in households, who, if they wished, could not afford a proper meal with protein at least every other day (from 13.9 per cent to 12.6 per cent), a week's holiday away from home every year (from 51.0 per cent to 49.5 per cent) or face unexpected expenses equal to 800 euros (from 40.2 per cent to 38.8 per cent).

FIGURE IV.7: POPULATION IN HOUSEHOLDS AT RISK OF POVERTY OR EXCLUSION BY TOTAL PERCENTAGE AND BY THE THREE INDICATORS AS PART OF EUROPE 2020 STRATEGY BY REGION - 2014 (percentage values)

Source: ISTAT calculations on EUSILC data.

The Mezzogiorno is the area with the highest poverty or exclusion rates. All three indicators show the highest figures for Sicily: 40.1 per cent of residents are at risk of poverty, 26.0 per cent is in conditions of serious deprivation and 25.0 per cent live in households with low work intensity. Also the figures for Campania and Calabria are very high. Molise is identified as an outlier by the indicator on the risk of poverty (32.1 per cent) and Apulia by that relating to serious deprivation (23.2 per cent).

At the other extreme is the North, especially the North-East, which is the area least exposed to the risk of poverty and exclusion; Triveneto and Emilia Romagna are the regions that fare best; in these regions the percentage of population at risk of poverty or exclusion is below 17 per cent; the autonomous province of Bolzano has the lowest risk of poverty or exclusion (9.7 per cent).

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V. EUROPEAN STRUCTURAL FUNDS

Following the adoption of operational programmes, the planning process for the structural funds and European investment funds (EIS) for 2014-2020 was completed in 2015, in line with the strategic decisions set out in the Partnership Agreement adopted in October 2014. To implement the strategy 51 ERDF and ESF operational programmes are used: 12 National Operational Programmes (NOP), 5 of which are multi-fund, and 39 Regional Operational Programmes (ROP), 3 of which for the Calabria, Apulia and Molise regions are multi-fund for an overall investment volume of €51.7 billion, including the national co-financing.

Based on the strategic decisions set out in the Partnership Agreement, each operational programme has implemented the 11 Thematic Objectives (TO) set out in the EU Regulation on common provisions for the use of EIS funds1.

In analysing the development requirements and identifying the areas of intervention of the 2014-2020 programming period, great attention has been paid to the European Council's Country-Specific Recommendations for Italy. Even if Italy’s CSR point out that action needs to be taken above all through national mainstream policies, the contribution made by structural funds is very significant in the various sectors 'relevant' to the funds' intervention areas (transport infrastructure, ports and logistics, reforms of Public Administration and civil justice, simplification, labour market, education and tertiary education aimed at acquiring job-oriented skills). With particular reference to the administrative capacity, as part of the dedicated thematic objective (Thematic Objective 11), significant action has been planned both in terms of improving the ability to manage structural funds and in terms of the support provided to the implementation of the main Public Administration reforms in areas that are relevant to government investment policies, such as the efficiency of the justice system, simplification for businesses, the prevention and fight against corruption, transparency and open government. These actions will guide both the intervention of the dedicated national programme (NOP - Governance and institutional capacity) and of regional programmes. The Administrative Reinforcement Plans (ARP) has been identified as an experimental tool to strengthen the administrative

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1THE EU Regulations have identified the following 11 Thematic Objectives (TO) representing the major areas for possible action through EU funds: Thematic Objective 1: Strengthening research, technological development and innovation; Thematic Objective 2: Enhancing access to, and use and quality of, information and communication technologies; Thematic Objective 3: Enhancing the competitiveness of SME, the agricultural, fisheries and acquaculture sectors; Thematic Objective 4: Supporting the shift towards a low-carbon economy in all sectors; Thematic Objective 5: Promoting climate change adaptation, risk prevention and management; Thematic Objective 6: Preserving and protecting the environment and promoting resource efficiency; Thematic Objective 7: Promoting sustainable transport systems and removing bottlenecks in key network infrastructures; Thematic Objective 8: Promoting sustainable and quality employment and supporting labour mobility; Thematic Objective 9: Promoting social inclusion, and combating poverty and discrimination ; Thematic Objective 10: Investing in education, training and vocational training for skills and lifelong learning; Thematic Objective 11: Enhancing institutional capacity of public authorities and stakeholders and efficient public administration.

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capacity of general government bodies that run operational programmes through timely identification of measures that need to be taken to overcome administrative weaknesses by systematically and closely monitoring them during the whole programming period. The specific recommendation made by the EU Council to Italy in July 2015 (See Section CSR No.2) has been acted on: the Regional Cohesion Agency is fully operational, all its bodies have been set up and its organisational framework has been established.

The decisions concerning allocations, made as part of the Partnership Agreement, have been confirmed, albeit with slight variations, as a result of negotiations with the European Commission on operational programmes; they are shown below, including national co-funding (See Figure V.1).

FIGURE V.1: ITALY ALLOCATIONS OF FUNDS BY THEMATIC OBJECTIVE AS A RESULT OF THE ADOPTION OF OPERATIONAL PROGRAMMES EFRD AND ESF ( in € mn , including national co-funding)

Source: PMC - Department for Cohesion Policies. Data processed on adopted operational programmes.

These allocation decisions have been made in full compliance with the rules of thematic concentration of funds provided for in the EU Regulations (so-called ring-fencing). The aim of such regulatory provisions is to strengthen the alignment of cohesion policy with the targets of the European strategy for smart, sustainable and inclusive growth (Europe 2020)2. A minimum threshold of fund concentration on Europe 2020 targets has been set for each category of regions; more specifically, on thematic objectives devoted to research and innovation (Thematic Objective 1), digitization (Thematic Objective 2), SME support (Thematic Objective 3), sustainable development and energy (Thematic Objective 4), the fight against poverty and social exclusion (Thematic Objective 9). Italy has also

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2 EU Reg. 1301/2013, art. 5; EU Reg. 1304/2013, art.4.

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strengthened rules on thematic concentration, by raising the minimum thresholds provided for in the Regulation (See Figure V.2).

FIGURE V.2: APPLICATION OF THE RULE FOR THEMATIC CONCENTRATION (EU REG. 1301/2013, ART. 5; EU REG. 1304/2013, ART.4)
Allocation of ERSF Fund on TO1-TO2-TO3-TO4 (million euro)	Allocation of ERSF Fund on TO4 (million euro)
Allocation of ESF Fund on TO9 (million euro)
Source: PMC - Department for Cohesion Policies. Data processed on adopted Operational Programs .

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The implementation of the National Strategy for Domestic Areas continued in 2015, supported by the ESIF and national funds. Through a public preliminary investigation3, 65 project areas have been identified throughout the national territory (See Figure V.3), including 981 Municipalities, with an overall area accounting for 16 per cent of the national territory and a resident population of 1.9 million inhabitants approximately according to the 2011 census. In line with the provisions of the Partnership Agreement, the selected areas are those where the loss of population is highest (4.6 per cent between 2000 and 2011) and which have serious structural problems in terms of accessibility. Among the 65 project areas the Regional Authorities have identified pilot areas where the activities to define the Strategy are underway for the signing of the Partnership Agreement by all the parties concerned as a means to implement the Strategy.

FIGURE V.3: NATIONAL STRATEGY FOR DOMESTIC AREAS: PROJECT AREAS TO BE SELECTED

Finally, the government intends to develop a series of programs on sectoral topics of direct interest to citizens in mountain areas, which will lead to a perceivable improvement in their quality of life. The decision, in terms of

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3 The public preliminary investigation process is available on the page Aree Interne of the website of the Agency for Regional Cohesion: http://www.agenziacoesione.gov.it/it/arint/index.html.

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investment priorities and identification of the funds to be allocated to each of them, will be taken by developing a national Strategy for mountain areas as part of the broader National Strategy for Domestic Areas.

As far as the 2007-2013 programming period is concerned, 31 December 2015 marked the beginning of the last phase in the 2007-2013 EU programming cycle which will end on 31 March 2017 with the final certification of expenditure as provided for in the relevant EU Regulation.

The financial monitoring data updated at December 31, 2015 (validated by the General Accounting Office) show significant progress. Overall, reportable payments from 2007-2013 structural funds, recorded in the national system, have reached 93.5 per cent of the total endowment, i.e. €42.8 billion, as against a total financial endowment of €45.8 billion for the seven-year period, after the latest re-programming in favour of the Action and Cohesion Plan. These data at December 31, 2015 predict a full take-up of available resources, with a reliable estimate between 98 and 102 per cent (as is known, data loading will be completed in the next few months and will then lead to final certification by March 31, 2017 as provided for by EU regulations).

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VI. INSTITUTIONAL ISSUES AND STAKEHOLDER INVOLVEMENT

The regions and autonomous provinces play a key role in implementing structural reforms to promote Italy's growth and development. Consultations as well as collection of contributions relating to the implementation of reforms at regional and local level have played an important role in the drawing up the 2016 National Reform Programme (NRP). All regions and autonomous provinces have compiled a progress report on the implementation of the reforms adopted to respond to the European Commission's Country-Specific Recommendations and taking stock of progress towards the Europe 2020 targets. Based on these contributions, the technical support structure (the Regional Working Group for the National Reform Programme called Re.Te. PNR1), has written the Region's report following standard models and guidelines to facilitate data uniformity2. The process includes a monitoring stage of regional reform processes, based on a comparative analysis of regional data.

The regional part of 2016 NRP is made up of all legal, regulatory and implementing measures emphasized by the Regions, set out as precise reform priorities and embodied in a structured system. The result is a coherent set of all the initiatives, ranked according to overarching issues and summed up in sequentially numbered macro measures.

The drawing up of the regional report includes a series of work stages: analysis and study of the annual CSRs (Country-Specific Recommendations), awareness- raising of the regional contact persons for the NRP (including through the setting up of thematic workshops, e.g. on economic governance), timely dissemination of information, monitoring, fine-tuning of surveying tools, selection and development of interventions based on the reforms, link-up with the 2014-2020 ESIF programming cycle.

The framework that has been adopted to draft the regional contribution to the NRP is to be regarded as a best practice for administrative capacity and multi-tier governance. The Regions have in their turn set up internal coordination activities, organised according to specific working practices3.

This year, in addition to the usual end-of-year activity, (which is reported in the contribution and in the grids of regional reforms) for the first time, specific and additional information on best practices has been provided, as set out in the relevant document ‘List of regional best practices'.

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1 The Re.Te PNR was set up as part of the cooperation effort between Cinsedo and Tecnostruttura delle Regioni.

2 See ‘Contributo delle Regioni e delle Province autonome al PNR 2016’ http://www.regioni.it/pnr

3 Appointment of a PNR contact person, setting up of specific task forces, involvement of different regional activity sectors, in line with the different issues and skills required.

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While the 2016 NRP was being drawn up by the Department for European Policies also other national stakeholders, especially the social partners, have been consulted (via CNEL4), in agreement with the Ministry of the Economy and Finance. Within the framework of government policies, the Department takes care of the national coordination during the drawing-up stage of EU acts and, with regard to activities that fall within its remit, ensures coordination in the compilation of the NRP, through the involvement of central and regional government bodies, as well as other stakeholders and the social partners.

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4 See ‘Temi ed aspetti di rilevanza economica e sociale in vista del Piano Nazionale di Riforma 2016’ http://www.cnel.it/53?shadow_documenti=23734

130 MINISTERO DELL’ECONOMIA E DELLE FINANZE

The

ECONOMIC AND FINANCIAL DOCUMENT 2016

is available on-line

at the internet address listed below:

www.mef.gov.it•www.dt.tesoro.it•www.rgs.mef.gov.it

ISSN 2239-5539

EX-99.4

Exhibit 4

INTRODUCTION

Italy remains on the path to recovery that started in 2014

The government has worked to relaunch growth and employment since it took office. This objective is being pursued through a multi-year programme of structural reforms aimed at improving: the competitiveness of the productive system; the support of private investment and the revival of public investment; the increase of household disposable income and therefore, consumption; and the reduction of taxes over the entire taxation spectrum, starting with the lowering of taxes on labour.

In the wake of a severe, double-dip recession in 2009-2013, Italy witnessed a return to positive growth in 2014; the growth accelerated in 2015 and is gaining momentum in 2016. Even so, the recovery to the pre-crisis GDP level is proving to be slower than desirable. The unsatisfactory pace of the recovery – like the severity of the recession – reflects, on the one hand, the delays and insufficiencies of the pre-crisis reform of the Italian economy, which only marginally managed to identify and correct impediments to growth, and on the other hand, the time needed so that the structural reforms will wield their full effects.

The speed of the recovery has also been influenced by the deterioration of GDP growth prospects at an international level, which, when compared with expectations, now appear modest, uneven, and marked by significant risks of downward revision. Despite highly expansionary monetary policies, the growth projections have been adversely affected by excess savings and an insufficient propensity to investment, which are associated with low interest rates and inflation at historically low, near-zero levels.

Against this backdrop, the Euro Area appears more exposed than other areas to the risk of a prolonged period of low growth on account of a greater rate of population ageing, a reduced rate of innovation, and more widespread expectations of low inflation rates, including as reflected by the markets. The uncertainty about the governance of the Euro Area, the persistent macroeconomic imbalances, which also regard countries traditionally in a surplus position, and the costs of inaugurating the needed reform of the financial system are the factors impeding the prospect of an acceleration of growth in the short term.

As fully acknowledged by international institutions, the G20 and the G7, the global economy can sustain its growth only through the simultaneous interplay of monetary policy, budget policy, and structural reforms, and in a manner in which

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these tools effectively support one another. The coordinated support of the different components of demand and supply will make it possible to grow the effects of cyclical measures, and, at the same time, to realize, ahead of schedule, the effects of structural measures. These actions must definitively clear regulatory, bureaucratic and administrative obstacles from the path to recovery, creating a dynamic system of incentives to support potential growth.

Public finance to support growth, in the balances and the composition

From the start of its mandate, the government has pursued the delicate balance between supporting growth and fiscal consolidation, in order to prevent future generations from bearing the burden of a high debt accumulated in prior years. In view of a cyclical framework that is less favourable than projection by international organisations only a few months ago, the government has decided to reformulate budget policy so as to make it more growth-oriented: more specifically, adjustments to both the expenditure and the revenue sides of the budget have been made so as to prioritise measures that will boost investment and productivity, whereas the process of fiscal consolidation continues.

The net borrowing for 2016 is estimated at 2.4 percent of GDP, essentially in line with the projection presented in the EFD (2.3 percent); the reduction to 2.0 percent is confirmed for 2017. The cyclically adjusted budget balance is in line with a fiscal-consolidation process that has made Italy one of the most virtuous countries in the Euro Area.

This result has been made possible by the continuation of the spending-review process, which has freed up the resources necessary for the implementation of the tax-reduction strategy, starting from the cost of labour; in 2016, about €25 billion of savings will be generated due to the measures implemented in 2014 and in 2015. Wasteful spending has systematically been reduced, but there are still appreciable margins for further growing the efficiency of the services provided by the public administration. The recent State-budget reform will make the planning of expenditure even more sustainable, effective and transparent, and will allow for continuously revising the measures adopted according to their effectiveness.

In line with the reduction of expenditure and the lowering of taxes on personal and business income, the decrease of fiscal pressure continues. Given the sum of the various tax cuts or equivalent measures (i.e., the €80 payroll bonus for low-income workers), fiscal pressure has fallen from 43.6 percent in 2013 to 42.1 percent in 2016. Following the tax-wedge cuts implemented through measures affecting the personal income taxes (IRPEF) of lower income workers, the cancellation of the labour component of the regional tax on productive activity (IRAP), and the elimination of Indivisible Services Tax (TASI) on primary dwellings (which has significant redistribution effects in a country where 81.5 percent of households own their homes), the corporate income tax (IRES) rate will fall from 27.5 percent to 24 percent in 2017. Additional measures to reduce fiscal pressure are to be realised with the next Budget Law, including: i) the

II MINISTERO DELL’ECONOMIA E DELLE FINANZE

INTRODUCTION

repeal of the planned VAT increase for 2017; and ii) the introduction of other relief measures for businesses.

These measures will also be financed through the revenues collected from the strategy employed to fight tax evasion, which has given more emphasis to schemes providing incentives for the fulfilment of tax obligations and encouraging the spontaneous reporting of taxable income, with respect to the traditional control measures and ex-post audits.

Reflecting the lower-than-projected intensity of the recovery and the weak trend of prices, the debt-to-GDP ratio is projected to reach 132.8 percent in 2016; the ratio then starts to decline as of 2017, reaching 126.6 percent in 2019.  The government is firmly committed to carrying on with its programme covering the sale of State-owned real property assets and privatisations, although there were setbacks in 2016 due to conditions of high volatility in the financial markets and the need to adequately assess the value of State-owned companies through the use of ambitious business plans.

Investments and structural reforms for greater productivity and competitiveness

Among the measures to support demand, a particular emphasis has been placed on initiatives to boost public and private investments because of their very high impact on growth in a low interest rate environment. More specifically, the investments in infrastructure are capable of stimulating demand and growing productivity in various sectors of the economy, while they are also being carried out within a favourable environment in Europe. To date, Italy is the second-ranking European country in terms of investments accorded through the Juncker Plan (the European Fund for Strategic Investment, EFSI) with 13 financed projects equal to €1.8 billion invested, whose leverage effect is €5.7 billion.

The effort to relaunch public investment produced appreciable results in 2015: growth of 1.2 percent after five consecutive years of contraction. The crucial acceleration of public investment does not so much depend on the appropriation of funds through the Budget Law, but rather on the effectiveness of the public administrations that have been urged to revive appropriations, spending, and monitoring procedures, after years of uncertainty and downsizing. The magnitude of public investment is expected to expand again in 2016 and in the next few years, to reach an average growth rate of around 2.3 percent for the 2016-2019 period: in essence, during these years, borrowed funds will be used to finance fixed investment, a formula favourable to raising potential growth. This medium-term budget orientation incorporates the expenditure for the national co-financing of the investment projects for which the government secured additional margins of flexibility as provided by the Stability and Growth Pact.

Alongside the revival of public investment, the government considers the role of private investment crucial for the recovery of productivity and competitiveness. In order to promote a firm recovery of private investment, the

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government has adopted various measures as part of the Finance for Growth Programme; these measures have: i) introduced tax-relief instruments for investment in capital goods (refinancing of the so-called ‘Legge Nuova Sabatini’ and ‘super depreciation’) and for innovative businesses; ii) encouraged businesses to bring in new capital and to seek a stock-market listing; iii) steered private savings into the real economy in order to make businesses larger, and to facilitate their international expansion; and iv) reformed the banking sector, with the objective of making banks larger and more efficient, and reducing the weight of non-performing assets.

These are complementary measures to those already undertaken as part of the structural reform of the economy, and whose combined impact is shaping a new industrial policy, where the increase in competitiveness is measured according to individual productivity factors.

Within this framework, the Jobs Act has improved prospects for the stable employment of workers, while also making the labour market more flexible to the adjustments of the economy, and managing to combine the reform of social safety nets with active labour policy instruments. With the purpose of contributing to the improvement of Italy’s human capital and competitiveness, ‘La Buona Scuola’ reform increases the competition and flexibility of educational facilities, thereby favouring the stabilisation of educational programmes, providing merit-based incentives vis-à-vis the more stringent mechanisms for teacher assessment. The reform of the justice system has reduced the number of proceedings and their duration, including due to the development of alternatives for the settlement of disputes. The reform of the public administration is creating the conditions for greater efficiency and productivity in the public sector, increasing the certainty of the State’s undertakings. Even the mentioned State-budget reform will contribute to the transparency, certainty and stability of public action.

Sustainable growth through inclusive development, systematic management of emergencies, and the relaunching of Europe

Given the effect of the measures implemented and planned, GDP is projected to grow by 1.0 percent in 2017. However, in order for budget policy to stimulate growth and create employment and for the structural reforms to produce increasing benefits over time, Italy needs political and institutional stability. The institutional reforms promoted are accordingly aimed at making the current system more stable and efficient. In particular, the Constitutional reform intends to streamline the legislative process, by moving beyond what is commonly known as ‘bicameralismo perfetto’- or ‘perfect bicameralism’ - and achieving more efficient allocation of responsibilities and reducing litigation  between central and local government; the electoral law intends to ensure governability, stability and accountability.

In addition, stability has to be combined with an inclusive economic system capable of counteracting the growing inequality that is impeding greater growth. From this standpoint, the recent enabling act on the fight against poverty has

IV MINISTERO DELL’ECONOMIA E DELLE FINANZE

INTRODUCTION

introduced social-inclusion income, an economic-support measure accompanied by personalised services to facilitate social and work inclusion. This is not a passive welfare policy measure: the beneficiaries are required to participate proactively in a personalised project developed with the input of employment services, which will guide the household toward independence. Awaiting the conclusion of the legislative process will not be necessary for the use of these resources since the government has recently restructured the Support of Active Inclusion (‘SIA’) programme as an interim ‘bridge’ until the definitive introduction of the new instrument.

Measures to shield pensioners from the risk of poverty and to promote flexibility for retirees entering the pension system are to be included in the forthcoming Budget Law, without modifying the fundamental parameters therefor and without jeopardising the system’s long-term sustainability, which continues to represent on the strengths of Italy’s public finances.

After six years at a standstill due to the dramatic events of the economic and financial crisis, negotiations are now under way for the renewal of public employment contracts, with the objective of rewarding merit and favouring greater productivity, so that the public sector work force will be positioned to contribute to the efficiency of the public administration.

In addition to its ongoing efforts to continue supporting growth and employment, the government is faced with tackling several particularly severe exceptional events: immigration and the consequences of the earthquake on 24 August 2016.

Aside from the necessary rebuilding of the areas hit by the earthquake, the tragic events of recent years demand that Italy must prioritise plans for precautionary measures with respect to earthquakes, in order to provide for the safety and security of the population, cities, housing stock, and artistic and cultural monuments. There are also exceptional assets for tourism and the agro-food industry to be preserved for future generations. Within this framework, the projects for the extraordinary maintenance and securing of school buildings are a high priority, as they represent a significant aspect of the new investment in the national educational system inaugurated with ‘La Buona Scuola’ initiative and a symbolic testimonial of the government’s strong commitment to the next generations and Italy’s future. The securing of the overall national territory through urgent hydro-geological and environmental restoration projects is also of vital importance.

It will furthermore be necessary to set out better responses in Europe, as well as in Italy, to address several important systemic challenges, including, for example, the dramatic events prompted by unprecedented migratory flows to which the region is exposed, which have severely tested the resiliency of borders and the application of the Schengen Treaty.

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Greater sharing of efforts – greater solidarity – in receiving and managing migratory flows would make it easier for Europe not only to control its frontiers, but also to respect human rights and human dignity. Furthermore, in considering the significant short-term investment needed for managing the flows, the common efforts would generate important long-term benefits for the labour markets, the sustainability of pension systems, and the public finances of the Euro Area.

In view of the extraordinary demands, the government may use additional budget margins where necessary, up to a maximum of 0.4 percent of GDP for 2017.

More in general, the effectiveness of national economic policies would benefit from greater European coordination to pair the ECB’s expansionary monetary policy with coordinated national fiscal policies, supported in particular by the countries having sufficient budget leeway. Europe would thus make a contribution to its cohesion other than supporting the global economy, placing the relaunching of growth and employment at the centre of its strategy.

Pier Carlo Padoan

Ministro dell’Economia e delle Finanze

VI MINISTERO DELL’ECONOMIA E DELLE FINANZE

CONTENTS

I. OVERALL FRAMEWORK AND ECONOMIC-POLICY OBJECTIVES

II. MACROECONOMIC FRAMEWORK

II.1 International macroeconomic framework

II.2 Italy’s economy, recent trends

III. NET BORROWING AND PUBLIC DEBT

III.1 Final data and projections at unchanged legislation

III.2 Public finance: policy scenario

III.3 Trend of the debt-to-GDP ratio

III.4 The debt rule and other relevant factors

III.5 Main public finance measures adopted in 2016

III.6 Plan to enhance the value of public property and privatisations

III.7 Fiscal rules for local government

IV. REFORMS AND COUNCIL RECOMMENDATIONS

IV.1 The Council recommendations

IV.2 Response to the recommendations: key initiatives

APPENDIX

Table A.1 Impact of Decree-Law No. 18/2016 on general government net borrowing

Table A.2 Impact of Decree-Law No. 59/2016 on general government net borrowing

Table A.3 Impact of Law No. 112/2016 on general government net borrowing

Table A.4 Impact of Decree-Law No. 67/2016 on general government net borrowing

Table A.5 Impact of Decree-Law No. 113/2016 on general government net borrowing

Table A.6 Reform timetable

ANNEXES

Report to Parliament pursuant to Law No. 243/2012, Article 6, Paragraph 5

Reports on investment expenditure and related multi-year laws

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TABLES

Table I.1 Public finance indicators

Table II.1 International exogenous variables

Table II.2 Macroeconomic framework at unchanged legislation

Table II.3 Macroeconomic impact of policy-scenario measures vis-à-vis the scenario at unchanged legislation

Table II.4 Macroeconomic framework under policy scenario

Table III.1a General government account at unchanged legislation (in € mn)

Table III.1b General government account at unchanged legislation (% of GDP)

Table III.1c General government account at unchanged legislation (% change)

Table III.2 Summary of public finance under the policy scenario

Table III.3 Cyclically adjusted public finance

Table III.4 One-off measures at unchanged legislation

Table III.5 General government debt by subsector

Table III.6 Respect of the debt rule: forward-looking benchmark

Table III.7 Impact on the debt-to-GDP ratio of financial aid to Euro Area

Table III.8 Cumulative impact of the latest budget measures approved in 2016 on general government net borrowing

Table III.9 Cumulative net impact of the latest budget measures approved in 2016 on general government net borrowing by subsector

Table III.10 Privatisations proceeds

Table IV.1 Recommendations for 2016 and 2015

FIGURES

Figure I.1: Real GDP growth rates: trend and quarter-on-quarter changes

Figure I.2: Growth rates of GDP deflator and consumer prices (% change y/y)

Figure I.3: Net borrowing, primary balance and interest expenditure

Figure II.1 World trade and PMI

Figure II.2 USD/EUR exchange rate and price of Brent

Figure II.3 Productivity in Italy

Figure II.4 Daily yields on FTSE Italia All-Share Banks

Figure IV.1 Trend of measures referable to previous governments

VIII MINISTERO DELL’ECONOMIA E DELLE FINANZE

CONTENTS

FOCUS TOPICS

Chapter II Preliminary analysis of the effects of Great Britain’s exit from the EU

Italy’s trade

Recent labour market trends

Non-performing bank loans, credit availability and economic growth

Validation of the macroeconomic forecasts

The revision of the growth estimates at unchanged legislation compared with the EFD and risk analysis

Chapter III Planning and budget reform

Integrating the spending review into the economic and financial planning cycle

Assessment of the amounts collected through activities to fight tax evasion

Assessment of significant deviations

The estimation of potential GDP, output gapandstructural budget balance

using an alternative model to the commonly agreed methodology

Medium/long-term trend of Italy’s pension system

Pension reform

Chapter IV The National Industria 4.0 Plan

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I. OVERALL FRAMEWORK AND ECONOMIC-POLICY OBJECTIVES

With this Update, the government confirms the economic-policy orientation outlined in the Economic and Financial Document (EFD) in April 2016, adapting it to a macroeconomic and geopolitical framework that has become even more challenging. Furthermore, greater efforts have been necessitated for: i) re-launching investment; and ii) tackling emergencies in view of the recent earthquakes and the strong immigration flows.

The year of 2016 started off on a positive note for the Italian economy, which witnessed a 0.3 percent increase in real GDP in the first quarter, in line with the projections. Employment grew at a steady rate into the second quarter (0.8 percent q/q and 2.0 percent y/y). The growth of GDP, in contrast, has slowed down. From the standpoint of supply, this appears mostly due to the weaker-than-expected momentum of industrial production, while activity in the services sector continued to grow moderately. From the standpoint of demand, exports rebounded, but domestic demand weakened, with the trend of both consumption and investment proving softer than expected.

FIGURE I.1:REAL GDP GROWTH RATES: TREND AND QUARTER-ON-QUARTER CHANGES

Source: ISTAT.

The slowdown in growth in the second quarter (which was nonetheless a common phenomenon across the entire Euro Area) was rounded out during the summer by new risks to expansion originating from Great Britain’s exit from the

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European Union, the political events in Turkey, and a new wave of terrorism in Europe. Business confidence has shown signs of holding up, improving in July and then moderately weakening in the past two months. It furthermore seems probable that Italy’s GDP growth rate may be below the level projected in April, when quarterly growth of 0.4 percent had seemed plausible for the second half.

Considering these factors, the forecast of real GDP growth for 2016 has been lowered from 1.2 percent to 0.8 percent.1 The projected growth of nominal GDP declines from 2.2 percent to 1.8 percent, against the assumption of 1.0 percent growth of the GDP deflator, unchanged with respect to April.

As to the later years, real GDP growth for 2017 decreases from the 1.2 percent in the EFD to 0.6 percent, based on unchanged legislation, and without considering the public finance measures that are outlined in this Update. Such reduction is based on a downward revision of the expected growth of international trade and the expectation of greater caution on the part of Italian households and businesses.

Great Britain’s exit from the European Union could have an impact on the Italian economy through four main channels:

• the trend of the financial markets, as also demonstrated by the contagion effect seen in June-July with respect to Italian banks;

• the impact of the uncertainty on the duration and outcome of European Union’s negotiations regarding the British economy, together with the sterling exchange rate, which are likely to have repercussions, via international trade, on Italy’s exports;

• the expectations and the decisions about investment and inventory building on the part of Italian businesses and other businesses in Europe;

• the trend of consumption in Italy, including in relation to the financial channel (expectations effect and wealth effect).

In formulating the new post-Brexit projections for Italy, it has been assumed that i) the weakness of the sterling will continue through the entire year of 2017, including as a result of the Bank of England’s expansionary measures, and ii) the sterling will gradually recover as from 2018. As outlined in more detail in Chapter II, there could also be impacts on the euro exchange rate and the BTP-Bund spread, even though it is plausible that the absolute level of yields could be lower, given the sharp decline in the rates on Bunds.

With reference to international trade, the growth of the global import volumes is likely to be slower than in 2015, instead of the acceleration projected in the EFD in April. This would obviously have a negative impact on Italian exports. All things considered, the impact of Brexit on the Italian economy can be quantified overall as 0.5-1.0 percentage points of GDP for the 2016-2017 period as a whole, depending on the magnitude and duration of the effects outlined here.

___

1 The projection is to be updated when ISTAT publishes new quarterly data based on annual data that were released on 23 September.  The latter indicate a higher level of GDP in 2014 and 2015.  Since the 2014 estimate has been increased to a greater extent than the estimate for 2015, there could be changes in the quarterly profile of GDP through the second quarter of 2016. The estimate of 2016 growth could vary as a result.

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I. OVERALL FRAMEWORK AND ECONOMIC-POLICY OBJECTIVES

The Brexit has been recently rounded out by events in Turkey and a wave of terrorism in Europe. Turkey accounts for approximately 2.4 percent of Italy’s exports, which, though well below the 5.4 percent for the UK, is still not negligible. In addition, a total of 1.9 percent of Italy’s imports comes from Turkey. To date, the growth forecasts for Turkey have been revised downward only marginally, which would have a negligible effect on Italy’s GDP. However, the geopolitical implications of the recent events are a less-than-negligible risk factor over a longer time horizon.

Given this revised international framework and signs of a slowdown in domestic demand, the government has decided to adopt a highly growth-oriented budget policy in terms of the composition of the budget for 2017-2019.

FIGURE I.2:GROWTH RATES OF GDP DEFLATOR AND CONSUMER PRICES (% change y/y)

Source: ISTAT.

Under the policy scenario, Italy’s real GDP for 2017 is projected to grow by 1.0 percent, or 0.4 percentage points above the projections in the scenario based on unchanged legislation. The projected growth for the next two years amounts to 1.3 percent in 2018 and 1.2 percent in 2019, both of which are 0.2 percentage points below the forecast contained in the 2016 EFD, as a result of the lower rates of growth expected for the global economy and international trade. The impact of the international factors is only partially offset by the expectation, and the aspiration, that the Euro Area monetary and fiscal policies will respond to the revised international framework through a more expansionary orientation.

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TABLE I.1: PUBLIC FINANCE INDICATORS (% of GDP) (1)
	2014	2015	2016	2017	2018	2019
POLICY SCENARIO
Net borrowing	-3.0	-2.6	-2.4	-2.0	-1.2	-0.2
Primary balance	1.6	1.5	1.5	1.7	2.4	3.2
Interest	4.6	4.2	4.0	3.7	3.6	3.4
Structural net borrowing (2)	-0.9	-0.7	-1.2	-1.2	-0.7	-0.2
Change in structural balance	-0.6	0.2	-0.5	0.0	0.5	0.6
Public debt (including support) (3)	131.9	132.3	132.8	132.5	130.1	126.6
Public debt (net of support) (3)	128.2	128.7	129.3	129.0	126.8	123.4
Debt rule target (4)				126.6
Privatisation proceeds		0.4	0.1	0.5	0.5	0.3
SCENARIO BASED ON UNCHANGED LEGISLATION
Net borrowing	-3.0	-2.6	-2.4	-1.6	-0.8	0.0
Primary balance	1.6	1.5	1.5	2.1	2.8	3.4
Interest	4.6	4.2	4.0	3.7	3.6	3.4
Structural net borrowing (2)	-1.0	-0.8	-1.4	-0.8	-0.4	-0.2
Change in structural balance	-0.6	0.2	-0.5	0.6	0.3	0.2
Public debt (including support) (3)	131.9	132.3	132.8	132.2	129.6	126.1
Public debt (net of support) (3)	128.2	128.7	129.3	128.8	126.3	122.9
MEMO: 2016 EFD POLICY SCENARIO (April 2016)
Net borrowing	-3.0	-2.6	-2.3	-1.8	-0.9	0.1
Primary balance	1.6	1.6	1.7	2.0	2.7	3.6
Interest	4.6	4.2	4.0	3.8	3.6	3.5
Structural net borrowing (2)	-0.8	-0.6	-1.2	-1.1	-0.8	-0.2
Change in structural balance	-0.1	0.2	-0.7	0.1	0.3	0.6
Public debt (including support) (5)	132.5	132.7	132.4	130.9	128.0	123.8
Public debt (net of support) (5)	128.8	129.1	129.0	127.5	124.7	120.6
Nominal GDP based on unchanged legislation (absolute values x 1,000)	1,620.4	1,642.4	1,672.2	1,703.0	1,751.6	1,803.7
Nominal GDP based on policy scenario (absolute values x 1,000)	1,620.4	1,642.4	1,672.2	1,704.1	1,754.9	1,810.0
(1) 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 loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. As of the end of 2015, the amount of such outflows was about €58.2 billion, inclusive of €43.9 billion for bilateral loans and loans through the EFSF and €14.3 billion for the ESM programme. The debt-to-GDP ratio for 2014 and 2015 includes the upward revision of the nominal value of the debt (about €1 billion) with respect to the most recent publication available, which will be updated by the Bank of Italy in the ‘Supplement to the statistical bulletin: Public finance, borrowing and debt’, October 2016. The next notification by ISTAT will contain data consistent with those outlined here.The estimates include the proceeds from privatisations amounting to about 0.1 percent of GDP in 2016, 0.5 percent of GDP in 2017 and 2018, and 0.3 percent of GDP in 2019, as well as additional savings to be allocated to the State Securities Amortisation Fund. In addition, these estimates incorporate the assumption of a gradual withdrawal from the Unified Public Treasury as from 2017, and a modest reduction of the MEF’s liquidity balances amounting to 0.28 percent of GDP in 2017 and about 0.14 percent of GDP in 2018. The interest rate scenario used for the estimates is based on implicit projections derived from the forward rates on Italian government securities with respect to the period for compiling this document. (4) Level of the debt-to-GDP ratio that ensures the observance of the rule in 2017 on the basis of the forward-looking criterion as of 2019. (5) Inclusive or net of Italy's portion of loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. The estimates include the proceeds from privatisations amounting to approximately 0.42 percentage points of GDP in 2015 and about 0.5 percent of GDP for each year from 2016 to 2018, and 0.3 percent of GDP in 2019.

Turning to budget policy, the updated objectives outlined in this document reflect the new assessments about growth. The estimates of potential growth and the output gap have been calculated, as usual, according to the European Commission’s methodology.

4 MINISTERO DELL’ECONOMIA E DELLE FINANZE

I. OVERALL FRAMEWORK AND ECONOMIC-POLICY OBJECTIVES

Chapter III of this document presents alternative estimates that suggest the output gapis greater than that calculated according to the approach adopted by the European Commission. Such estimates not only appear more consistent with the actual trend of growth, employment and inflation in the Italian economy, but they also indicate that Italy would get near a balanced budget as early as 2018, and that no further significant restriction would be needed in 2019, the final year of the forecast period. The government intends to continue working with the appropriate European institutions for the purpose of modifying the methods used for calculating potential GDP, so that the estimates are more realistic. This effort is also aimed at precluding fiscal policies that will impede the European economy from returning to a path of solid growth that is more uniformly distributed among the Member States of the Euro Area.

According to the latest estimates, the general government net borrowing for 2016 should amount to 2.4 percent of GDP, with an increase of 0.1 percent compared with the 2.3 percent projection in the EFD. The change reflects the downward revision of real GDP growth for 2016, but the new estimate is essentially in line with that provided by the 2016 Stability Law.

The net borrowing target for 2017 rises from the 1.8 percent of GDP as set out in the EFD to 2.0 percent of GDP, which implies a structural borrowing of 1.2 percent, unchanged with respect to the level estimated for 2016. The net borrowing for 2017 calculated on the basis of unchanged legislation has been revised from 1.4 percent of GDP as outlined in the EFD to 1.6 percent of GDP, with the change reflecting the deterioration of the macroeconomic framework. In the policy scenario, the 1.6 percent figure is increased by 0.9 percentage points of GDP that refer to safeguard clauses that the government intends to deactivate. In addition, the government intends to implement policy measures for socio-economic development and growth, including: incentives for investment, innovation, research and development; support to SMEs; greater public investment; and initiatives to support families and the lowest levels of government pensions.

The new net borrowing target accordingly requires a budget for 2017 equal to 0.5 percent of GDP, to be detailed in the Budget Law. The budget for 2017 will be based on new measures for the structural reduction of current expenditure, and measures designed to recover the taxable base and to increase taxpayer compliance.

The government also intends to implement other measures aimed at securing the national territory, the country’s housing stock and school infrastructure, and at managing the issue of migration. The package of measures for emergencies represents a socio-economic priority for Italy, and it will be detailed in the 2017 Budget Law.

In view of the pressing challenges that the country is facing, the net borrowing for 2017 could be increased by up to 0.4 percent of GDP. The possible stimulus effects to economic activity have not been included in the macroeconomic estimates under the policy scenario. The actual growth of the Italian economy in 2017 and in the years thereafter could therefore exceed the prudent projection reported in this document.

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For the 2018-2019 two-year period, the trend of net borrowing should sharply decelerate (-1.2 percent of GDP in 2018 and -0.2 percent in 2019). The structural balance under the policy scenario should improve to -0.7 percent of GDP in 2018 and -0.2 percent in 2019.

The projected revenue from privatisations for 2016 has been revised downward, from 0.5 percent to 0.1 percent of GDP. The government has carried out the planned sale of 46.6 percent of ENAV, and additional revenue will come from the sale of real estate. The government remains firmly committed to proceeding with the privatisation process, on a basis compatible with market conditions. The projections of revenue from privatisations for 2017, 2018 and 2019 have remained unchanged.

The national accounting data released by ISTAT on 23 September include an upward revision of the level of nominal GDP, and have thus reduced the debt-to-GDP ratio as of the end of 2015 (from 132.7 percent to 132.3 percent). The projection of the public debt for 2016 has however been increased when compared with the EFD (from 132.4 percent to 132.8 percent), with the change due to the lower estimate of nominal GDP growth and lower revenue from privatisations. As a partial offset to such factors, the estimate of interest expenditure for 2016 has been revised slightly downward compared with the EFD, and the issuance of government securities above par has produced a debt reduction equal to approximately 0.1 percent of GDP.

The debt-to-GDP is projected to decline during the 2017-2019 three-year period, reaching 126.6 percent in the final year of the forecast under the policy scenario. The government is firmly committed to pursuing a more pronounced reduction of the public debt in relation to GDP over the medium/long term, not only through higher primary surpluses, but also through the return to higher rates of nominal GDP growth. Under the policy scenario in this Update, nominal GDP growth will climb above the average financing cost as from 2018, and this will considerably accelerate the decrease of the debt-to-GDP ratio.2

In full compliance with European regulations, the macroeconomic forecasts in this Update have been submitted for validation to the Parliamentary Budget Office (PBO), the independent fiscal institution created within Parliament in 2012 that became fully operational in the second half of 2014. The macroeconomic scenario for 2016 and 2017 as based on unchanged legislation has secured the validation of the PBO.

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2 The financing cost at issuance fell below the nominal GDP growth rate in 2015 (0.7 percent versus 1.4 percent). The average cost of general government borrowing is nonetheless equal to 3.2 percent, due to higher yields on past issues.

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FIGURE I.3: NET BORROWING, PRIMARY BALANCE AND INTEREST EXPENDITURE (% OF GDP)

Source: ISTAT. FROM 2016, the targets in the EFD Update under the policy scenario.

In accordance with the provisions of the Public Finance and Accounting Law about the mandatory content of the EFD Update, the net balance of the State budget to be financed, on an accruals basis, is set at the maximum limit of €40.5 billion in 2017 (consistent with a maximum net borrowing target of 2.4 percent), €28.1 billion in 2018 and €9.7 billion in 2019. The corresponding net balance of the State budget to be financed, on a cash basis, is set at the maximum limit of €103.9 billion in 2017, €78.3 billion in 2018 and €58.1 billion in 2019.

Finally, as part of the 2017-2019 budget, the government has confirmed that all of the legislative bills indicated in previous planning documents will be bills accompanying the budget.

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II.I INTERNATIONAL MACROECONOMIC FRAMEWORK

The international economy, including the European economy, experienced some weakening starting from the spring months despite the mitigation of financial market tensions and less volatile commodity prices. The low growth in the second quarter appears once again related to world trade stagnation. Imports growth for the Asian economies continued to decelerate, and although some of the commodity-producing countries were marked by continuing crisis, others (for example, Russia) seemed to show signs of improvement. Economic indicators do not provide any signs of cyclical strengthening, and the consolidation of global growth is primarily linked to expansionary monetary policies; in the meantime, the role of fiscal policies has gained increasing attention. As suggested by leading international forecasts, it is difficult to foresee any acceleration of the global economy in the second half of 2016.

The performance of world trade in the first half of 2016 was marked by a negative trend. According to the latest data from the Netherlands Bureau for Economic Policy Analysis (CPB), as of July, the international trade in goods (volumes) suffered a decline -1.1 percent m/m (following an increase of June), which was more pronounced for emerging nations (-2.0 percent m/m) than for highly developed economies (-0.5 percent m/m); trade for the Euro Area remained stable.

FIGURE II.1: WORLD TRADE AND PMI (indices)

 

Source: Thomson Reuters Datastream.

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As a result, purchases for the first seven months of the year contracted by 0.2 percent, thus suggesting that global trade will grow by less than 1.0 percent for 2016, a figure well below the long-term average. Such an outcome would put the elasticity of world trade to GDP at less than 1.0, thereby confirming the decline of recent years. Some signs of recovery are present nonetheless; in August, the global PMI reflected a second consecutive improvement; were this trend to continue, a gradual recovery of trade might be seen in late 2016 or early 2017.

In the United States, annualised GDP growth amounted to 0.8 percent in the first quarter, and slightly accelerated to 1.1 percent in the second quarter. The economy was mainly driven by exports and household consumption, while aggregate demand was tempered by imports, investments and inventories. The growth of the U.S. economy is expected to continue in coming months at a moderate pace. The labour market is close to full employment, with the unemployment rate at 4.9 percent, while the reduction of the unutilised resources and the gradual increase in wages are ongoing processes. Given this domestic framework, and considering the uncertainties affecting the international scenario, market expectations are once again oriented toward a modest increase in interest rates, though it would not likely take place before the November presidential elections.

In Japan, the expectations of a GDP increase in the second quarter were overturned by official data: economic growth has stalled following the 0.5 percent expansion in the first three months of the year. Investments in housing (favoured by negative interest rates), public investments and private consumption have been the main factors in growth. Exports and private investment outside of housing have instead performed negatively. More recently, industrial production slowed, but the estimates for the summer and autumn months are more encouraging. The news in relation to the labour market is also positive: the latest data available (July) indicate that the unemployment rate has fallen to a 20-year low (3 percent). This is partially reflected in household consumption, which, though still decreasing on an annual basis, improved to an extent greater than expected when compared with June. The appreciation of the yen starting in the summer months and the stagnation of growth have translated into a turnaround in core inflation, which is once again falling. The expansionary monetary policy has thus far proven insufficient in sustaining growth and inflation. Fiscal policy is thus once again the focus for 2016-2017, but it remains uncertain as to whether it will succeed in exerting long-term effects on the acceleration of growth.

The Chinese economy is witnessing a continuing transition toward a more services- and consumption-oriented economic system; the current deceleration (also evident in the latest quarterly data) is consistent with this transition, as also sustained by the International Monetary Fund (IMF). The weakness of demand from abroad continues: exports in August fell for the ninth consecutive month, with a negative impact on the labour market, as companies defer new hiring. In any case, according to the national government, the current pace of growth is sufficient for reaching the estimated target for 2016. The prospects seem more encouraging for the second half of the year: manufacturing production was once again expanding in the summer months, and in August, accelerated at the highest rate seen in the past two years, even though the growth of the sector remains below the rates of expansion in the last 20 years.

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GDP in the Euro Area decelerated in the second quarter (0.35 percent q/q following the 0.6 percent rise in the first three months of the year); the slowdown was mostly expected. The fears of the recovery being compromised in the short term by the weakness of the financial markets (linked to Brexit) have mostly abated. Though it is still possible that Brexit will affect the area’s exports and investments, Euro Area economic fundamentals and domestic demand should support the stabilisation of the recovery. Details of the economies of the Member States once again suggest a mixed picture, with increased risk of further divergence within the Euro Area. Spain and Germany are the countries with the most dynamic economies, even though their momentum is also slowing. The latest data on industrial production actually also point to some weakening in Germany. Taken altogether, the indicators for the Euro Area suggest further moderation of growth for the coming months. The new forecasts of the Organization for Economic Cooperation and Development (OECD) and the European Central Bank (ECB) incorporate slight downward revisions.

The ECB continues to monitor the economic situation. The deceleration depicted by key economic indicators could prompt a new expansionist bent of monetary policy, which would have to be weighed against the risk of increasing distortions linked to excess of liquidity in the system.  Decisions and clarifications from the ECB are expected in December in view of the scheduled end-date of March 2017 for the Quantitative Easing (QE).

FIGURE II.2: USD/EUR EXCHANGE RATE AND PRICE OF BRENT

Source: Thomson Reuters Datastream, Bloomberg.

The continuing excess of oil supply on the international markets at present and in the near/medium term suggests that the price of Brent will get close to USD 60/barrel, as indicated by the corresponding futures curve. The USD/EUR exchange rate has stabilised to some extent, partly in response to the weaker-than-forecast growth of the American economy and the more cautious attitude of the Fed in increasing the policy rate. The forward rate curve suggests slight appreciation of the euro over the next year (USD 1.14/EUR 1.00), to get to around USD 1.21/EUR 1.00 at the end of 2017. The technical assumption used as the basis for Italy’s latest growth forecasts calls for the euro to remain constant at the

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average of the 10 business days prior to the cut-off dates for the international exogenous variables.

Considered overall, the international scenario underlying this EFD Update is slightly less favourable than that assumed for the EFD (Table II.1). In particular, the trends for the next three-year period incorporate a downward revision of the growth of world trade amounting to 0.9 percentage points in 2016 (to 2.1 percent) and 1.2 percentage points in 2017 (to 2.6 percent). However, the revision of global demand weighted for Italy is decidedly less.

TABLE II.1: INTERNATIONAL EXOGENOUS VARIABLES
	2016		2017		2018-2019
	2016 EFD	EFD Update	2016 EFD	EFD Update	2016 EFD	EFD Update
International trade (% change)	3.0	2.1	3.8	2.6	4.7	3.8
Oil price (USD/barrel, futures, Brent)	39.4	46.6	45.7	52.5	48.9	56.1
USD-EUR exchange rate	1.10	1.12	1.09	1.13	1.09	1.13

In this EFD Update, the price of oil is assumed to average USD 46.6/barrel in 2016, and to climb to USD 52.5/barrel in 2017. It is also assumed that the euro will marginally appreciate against the dollar, to hit USD 1.12/EUR 1.00 in 2016 and 2017 (at USD 1.13/EUR 1.00).1 The forecasts for 2018-2019 are also revised downward with respect to the world trade, in line with leading international forecasts, whereas they incorporate a gradual increase in oil prices.

The risks associated with the international scenario are still mostly downside. The following continue to represent the risk factors: the fragile economic recovery; low inflation rates in industrialised countries; the uncertain momentum of the emerging markets; and a certain degree of stabilisation of Chinese growth. Added to these factors are the geopolitical tensions heightened by the events in the summer months, and the risk that the global economy will decelerate further in coming months, once the stimulus of low commodity prices has waned.  Expectations have also been influenced by the imminent uncertain results of the U.S. elections, and the fact that it is difficult to quantify the medium-term effects of Brexit.

The upside risks instead refer to the possible expansionist effects a recovery of commodity prices on the imports of emerging countries, and the ‘inflation’ effects on growth and prices, the stabilisation of financial markets and the easing of credit conditions might also have a favourable impact. Greater-than-forecast economic growth would lead to a reduction of borrowing rates and the start of a positive cycle.

 FOCUS Preliminary analysis of the effects of Great Britain’s exit from the EU The most unexpected event in the international domain in recent months is undoubtedly the outcome of the British vote that ratified Great Britain’s exit from the European Union (EU).  Three months after the vote, Brexitcontinues to be  an evolving issue; the structure of the long-term relations between Great Britain and the EU and the extent to which financial

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1 For the USD-EUR exchange rate, reference is made to the technical assumption of the average of the 10 business days ending on 31 August 2016. For the price of oil, reference is made to futures contracts as of 31 August.

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and trade flows will be influenced, will very probably only be clear in several years. The destabilising effects of the referendum have been rounded out by the increased uncertainty about the political inclinations of other European countries and the propensity of those countries to take on more protectionist and nationalist strategies in the future. Even though the financial markets reacted to the initial shock in an orderly manner, the ultimate impact of Britain’s choice remains less than clear.

The analyses preceding the UK referendum estimated that the effects of Brexit would be transmitted through multiple channels to the EU and to the global markets, and that intensity of the effects would be modified over the time horizon considered (i.e. short-term and medium-/long-term effects). The principal transmission channels indicated by various analyses were: i) trade, ii) financial and iii) ‘political’ linked to the major uncertainty generated about the future of the European Union and the single market.

Short-term effects. The immediate effects mostly regarded financial markets. Indeed, the financial channel mainly reflected the effects of the vote through the trend of the exchange rate, share prices, and interest rates at an international level. Following an initial period of high volatility (that included a predictable flight-to-quality, an increase of the spreads for the so-called periphery countries and tensions on equity markets), the financial framework seems to have stabilised. As to the exchange rate (Figure R.1), the sterling initially depreciated by almost 10 percent against leading currencies, and since then has essentially stabilised around the levels seen in early July.

FIGURE R.1: EXCHANGE RATES BETWEEN THE GBP AND OTHER LEADING CURRENCIES

 

Source: Bloomberg.

The prices of the financial assets listed on the London Stock Exchange and Wall Street have mostly recovered from the shock of the referendum; in the United States, the main stock index actually hit an historical low in August. The foregoing does not apply to banking-financial shares that have been penalised by expectations about weaker sector profitability in light of regulatory changes.

Table R.1 reports the percentage changes for leading stock and commodity indices in comparison 23 June, prior to the announcement of the referendum results. The FTSE MIB and the EUROSTOXX50, which have a significant weighting of banking-financial and insurance issues, were still below their pre-referendum levels at the end of September, although they have gradually reabsorbed the initial decline. The S&P500 and the FTSE100 have more than offset their initial losses. Gold once again proved to be a safe haven, whereas oil prices from the date of the referendum to the end of September have been

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affected by a climate of uncertainty, exacerbated by the known question of excess inventories.

TABLE R.1: LEADING EQUITY AND COMMODITY INDICES (% change)
	FTSE MIB	EUROSTOXX50	S&P500	FTSE 100	Oil	Gold
One day post-referendum
(24 June - 23 June)	-12.5	-8.6	-3.6	-3.1	-4.9	4.7
1 month post-referendum
(25 July - 23 June)	-7.1	-2.1	2.6	5.9	-13.1	4.7
2 months post-referendum
(23 August - 23 June)	-6.6	-1.5	2.8	7.9	-4.0	6.4
3 months post-referendum
(16 September - 23 June)	-9.9	-3.4	1.2	5.9	-12.6	4.3
Source: Bloomberg.

In the aftermath of Brexit, the Bank of England (BoE) cut policy rates, bolstered its QE programme, and undertook a series of other measures to support market confidence. The risk premiums have fallen, and by mid-September, the 10-year GILT yield had fallen by 50 basis points compared with June 2016. The BTP-Bund spread decreased from 162 basis points on 23 June, before the results of the referendum, to a low of 113 basis points in mid-August, before recently climbing back to 128 basis points.

Financial analysts have also turned their attention to the recent tensions on the UK property market. In the days immediately following the outcome of the referendum, seven large investment funds active in the sector initially suspended redemptions, and then gradually began paying out investors who were exiting. A slowdown of the sector could reasonably give rise to a decrease in property prices, a reduction of the granting of mortgages, and an increase in non-performing mortgages. On the other hand, with regard to major cities (such as London), analysts suggest that the depreciation of the sterling could lead to renewed interest of foreign investors.  All things considered, it is possible to assume some weakening of the market for residential and commercial real estate, but the magnitude of any setbacks will largely depend on the terms and conditions for Great Britain’s exit from the EU.

Turning to the trade channel, the greatest short-term impact is likely to come from the predictable contraction of UK imports linked to a possible economic recession and the trend of the exchange rate. However, with three months since the vote, the economy’s reaction to Brexit has been better than expected. The effects on trade flows have been marginal and accompanied by moderate, further depreciation of the sterling. The labour market has proven resilient, with the unemployment rate having stabilised at 4.9 percent, the lowest level since September 2005. The initial indications about private consumption have fluctuated, only partially in relation to the impact of the vote on consumer confidence. The trend of manufacturing production in July provided confirmation of the continuation of the growth in the second quarter. Surveys about the economy conducted in August yielded results on par with those prior to the referendum, after having reflected the Brexit media impact in July.

There are three factors that have tempered short-term effects of the referendum: i) the phase of political uncertainty has been reduced to a minimum (the government crisis ended rapidly); ii) the new government has adopted a wait-and-see attitude (against expectations that this approach would have had negative effects, by prolonging the uncertainty; instead, this approach has reduced the volatility of expectations, by suggesting that there will be a gradual transition and not a sudden change), and iii) the economic policy response has been consistent in its orientation to stem the negative impact on demand (cutting official rates, reinstatement of government securities purchases, and elimination of the restrictive budget policies announced by the Cameron government).

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Medium-/long-term effects. The effects for the Italian economy through the trade channel will partially depend on how the trade balances with the Union will settle. In the medium term, there could be a reduction in the trade of goods and services, the magnitude of which could vary depending on the trade agreements put in place between Great Britain and the EU (and with the ‘rest of the world’). The medium-term effects on direct investment still remain to be seen due to regulatory uncertainty and the possible increase of trade and financial barriers that could occur in coming years. It is worth noting that the EU will remain the world’s largest market and Great Britain’s largest trading partner.

Brexit will have dynamic effects, and the long-term relations between Great Britain and the EU will not be precisely known for a long period. The vote was not only a symptom of the erosion of consensus about the benefits of economic integration in long periods of low growth, but it is also an outcome that might propel protectionist pressures in other countries of the European Union. Despite these risks, the agreements between the EU and Great Britain will need to be drawn up for the pursuit of mutual interest, and in such a way as to avoid a significant increase in trade, financial and economic barriers.

A trade-off comes from the trade integration inside and outside of the EU: the economic benefits are associated with ‘political’ costs in terms of waiving certain degrees of national sovereignty. One possible option for Great Britain following its exit from the single market would be that of adopting the ‘Norwegian model.’ This option would minimise trade costs, but it would imply continuing to contribute to the EU budget for approximately 83 percent of the portion currently paid as a Member State, as well as the respect of EU regulations (without, however, having any decision-making power about the definition of regulations). A second option could be the adoption of the ‘Swiss model’ with bilateral negotiations with the EU, and the payment of 40 percent of what is currently paid for free access to the EU market for goods only (such option would, however, exclude access to the market for services, a market accounting for a large portion of Great Britain’s exports). A final option could be that of participating in international trade as a member of the WTO. This option would provide greater autonomy to the country, although at the price of a reduction of the trade volume, even if Great Britain were to decide to abolish all tariffs. Though affording Great Britain the possibility of independently negotiating individual accords with non-EU countries, Brexit could reduce the UK’s bargaining power, especially in comparison to that of a Member State of the EU.

II.2 ITALY’S ECONOMY, RECENT TRENDS

Though remaining on the path to recovery originating in 2014, the Italian economy has witnessed a slowdown in growth in 2016. While the quarter-on-quarter change in GDP was still satisfactory in the first quarter (+0.3 percent) and in line with the expectations, the growth was flat in the second quarter. The growth remains positive (+0.8 percent) on an annual basis. The quarterly trend of the key components of GDP evidences a contraction of domestic demand (which had a negative impact on growth) and an improvement in net demand from abroad.

While the data for the first six months of the year provide confirmation of an essentially positive trend of private consumption, the second-quarter data reflect a slowdown in the purchases of durable goods (in particular, motor vehicles), which was only partly offset by greater demand for semi-durable goods. After benefitting from a strong recovery in transport infrastructure and vehicles through the start of 2016, the investments component of GDP produced disappointing results in the second quarter. Investments in machinery and equipment did not demonstrate the momentum expected, while investments in the construction

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sector are slowly get back on a positive growth track. In terms of volumes, exports grew as expected, despite the presence of a less-than-favourable international backdrop. As a result, the trade surplus for the first seven months of 2016 rose to €31.1 billion; net of energy, the surplus was approximately €46 billion (in line with the 2015 figure). During the same period, the current accounts of the balance of payments exhibited a favourable trend (surplus of €29.4 billion, an increase of €13 billion compared with the same period of 2015).

  FOCUS Italy’s trade International trade continued to slow in the first half of 2016, due to the deterioration of the economic performance of emerging countries and of energy producing economies. The trend has also been confirmed by the latest data on volumes (-1.1 percent m/m in July).  

FIGURE R.1: WORLD TRADE AND ITALY’S EXPORTS (% change, y/y)

Source: CPB, ISTAT.

In terms of volumes, the performance of Italian exports has nonetheless been satisfactory (Figure R.1).

In the first half of 2016, the data on Italian exports in value terms were stable with respect to the same period of 2015, while imports decreased by 2.9 percent. The non-EU markets were a determinant in the weak performance of both trade flows (-3.9 percent for exports; -8.8 percent for imports), while the exports to EU countries were more robust (+3.1 percent) compared with imports (+1.3 percent).

Figure R.2 shows the average semi-annual changes in exports to key countries and/or economic blocs, comparing the same periods of 2015 (x-axis) and 2016 (y-axis). In particular, it is noted that exports to the United States and China slightly deteriorated, and the growth of exports moderated in general. With regard to energy-producer countries, exports to Russia improved (the pace of contraction started to ease), whereas exports to the OPEC and Mercosur countries weakened.

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FIGURE R.2: ITALY’S EXPORTS (% change y/y)

Note: The green spheres indicate the countries to which exports grew by between 1.1 percent and 6.2 percent in the first half of 2016; the yellow spheres represent the countries in which exports decreased by less than 2.0 percent; the red spheres refer to situations in which the decrease was between 2.5 percent and 24.1 percent. The size of the spheres represents the weight of the country with respect to Italy’s exports.

Source: ISTAT.

As shown by an analysis breaking down the data by main industrial groupings (MIGs), Italy’s exports performed favourably at the level of capital goods and consumer goods (+1.8 percent and 1.5 percent, respectively, compared with the first half of 2015). The exportsof intermediate goods were instead slightly lower (-0.4 percent), while the year-on-year changes for energy goods remained negative (-29.5 percent). In terms of imports, investment goods reflected the largest increase (+7.0 percent), followed by consumer goods (+1.3 percent). The energy sector showed the largest contraction (approximately -31 percent); the reduction for intermediate goods was smaller (-2.9 percent). The trade surplus amounted to €23.3 billion.

The latest data (July) show both trade flows decelerating when compared with the same month of 2015, with a greater weight of the non-EU area on the reduction of purchases compared with sales.

Considering Italy’s position in the international marketplace, the average share of exports in value terms to total international trade is equal to 3.1 percent for the past three years. In the first half of 2016, the share increased slightly (3.2 percent) compared with the same period of 2015 (+0.2 percentage points), mainly in relation to changes in global demand. Indeed, on the one hand, low prices for energy goods have benefited countries with a manufacturing specialisation, and on the other hand, the emerging economies have increased their demand for consumer goods.

Additional considerations can be derived from the Shift and Share Analysis (SSA)3 which allows for evaluating the latest performance of Europe’s major countries (Germany, France, Italy and Spain) in the international markets.4

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2 Considering Europe’s largest countries, the market share of global exports in comparison with the first half of 2015 was higher for Germany (+0.6 percentage points to 9.4 percent), while it remained virtually stable for France (+0.1 percentage points to 3.5 percent) and Spain (2.0 percent). Source: WTO, Short-term trade statistics, https://www.wto.org/english/res_e/statis_e/short_term_stats_e.htm

3 This analysis examines the performance of a country in the international markets, considering the difference between the growth rate of a country’s exports and the growth rate of global exports in a given period. This differential, which corresponds to the change in market share, can be broken down into four factors:

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FIGURE R.3: SHIFT AND SHARE ANALYSIS OF EXPORTS OF MAJOR EUROPEAN COUNTRIES (differences in the growth rates of global exports and exports of the individual countries, %)
Italy	France
Germany	Spain
Note: The difference between the growth rate of a country’s exports and the growth rate of  global exports corresponds to the change in the country’s market share. Source: Analyses based on UN Comtrade data.

In 2015, all four countries show improvement compared with the previous year. With reference to Italy, during 2013-2015: i) in cumulative terms, Italy’s productive specialisation did not push the country in the direction of losing market share; ii) the loss of market share for products in which Italy is specialised seems to have abated (the biggest negative impact in this regard was seen in 2010); iii) similar considerations apply for the capacity to gain (or to lose) share in different end markets; in 2013-2014, Italy made impressive gains; and iv) it is clear that Italy benefitted in 2015 from orienting its exports mostly to the EU, because there was a more limited slowdown in trade in the EU. Similar trends can be seen for other European countries for the three-year period, and the greatest similarities are seen with Germany.

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A) the effect of initial sector specialisation of exports; B) the impact of initial geographic specialisation; C) the performance of the country in the international market at a commodity level; D) the performance of the country in the international market on a geographic level. The final two components reflect the competitive capacity of a country to export products with greater demand and to higher growth markets. The sum of components C and D is a tool useful for comparing competitiveness in space and time.

4 The analysis is based on data available (90 percent of the total) in the UNComtrade databank at 14 September 2016.

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The labour market has continued expanding, benefitting from the Jobs Act reform and from the exemption of social contributions in the case of newly hired employees. With the elimination of a good portion of the social-contribution exemptions, employment in the first two quarters of the year continued to grow, albeit at rates below 2015. In the second quarter, there were further signs of improvement in the demand for labour by businesses, and reliance on long-term wage supplementation schemes (‘CIG’) was reduced.

FOCUS   Recent labour market trends As a whole, the statistical data available confirm that a process of qualitative improvement in employment is ongoing, due both to the economic recovery and to labour market incentives and regulatory innovations. Currently, this process is more evident for the higher occupations, with better wages and higher education, if compared with lower qualified occupations with lower paid and skilled workers. At the same time, the transition to a more services-oriented economy is continuing, with a loss of employment in industry (excluding construction) and an increase in service sector. After the exceptional results of 2015, the process of reabsorbing of unemployment has been slowed by an increase in the participation rate. The labour market has nonetheless recorded a reduction in youth unemployment. Over more recent months, the process of job creation has slowed, albeit still in positive territory. The benefits, both in terms of jobs changes and employment structure, are consolidated and there are no moving back signs, even though the lower foreseen social-contribution incentives than in 2015.  

FIGURE R.1: TREND OF EMPLOYMENT AND UNEMPLOYMENT RATES

Note: Seasonally adjusted monthly data

Source: MEF analyses based on RFL-ISTAT data.

In the first half of 2016, the total number of employed rose by 1.4 percent compared with the previous year, an acceleration vis-à-vis the second half of 2015. In the first half of 2016, employment grew by 1.5 times the GDP growth, against an ‘apparent’ elasticity of just 0.7 over the three-year 2012-2014 crisis period.5 The employment rate thus achieved the level of 57.0 percent, almost returning to the value during the second half of 2009 (57.2 percent). At the same time, unemployment rate dropped to 11.6 percent (-0.7 percentage points

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5 This part of the analysis was done based on quarterly data published on 2 September.

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compared to 2015), despite an increasing participation rate (+0.6 percentage points on an annual basis), without which the drop in unemployment would have been even greater.

Differences of gender and age. In terms of gender composition, the first half of 2016 confirmed the reversing of the trend with respect to the trend during the crisis, with an increase of male employment exceeding female (+1.6 and +1.2 percent, respectively, for males and females). In terms of age, ISTAT data show a growth of jobs in the over-54 age group (+4.4 percent). These workers even registered an increase in their labour supply, due both to the higher retirement age and to population ageing (+0.6 percentage points, the increase of the incidence of the over-49 people on the over-14 population). A positive noteworthy performance is also registered for 15-24 aged workers (+10.3 percent in 2016), showing a strong recovery of emplopyment levels. More specifically, although remaining extremely high, youth unemployment rate fell by 4.2 percentage points compared with the previous year, declining to 37.5 percent in the first half of 2016.

Differences by level of education and skills. With regard to educational achievement, in the first half of 2016 employment increased especially for the graduates (+3.3 percent on an annual basis), against a decrease for the unskilled workers (-0.6 percent). Medium-skilled workers (+1.9 percent) even increased. ISTAT quarterly data show a higher growth for professionals and technicians (+2.0 percent on an annual basis in the first half of 2016), and clerks, information service and shop and market sales workers (+1.9 percent). Instead, decreases were recorded for blue collar and craft workers (-0.5 percent in the first half of 2016), albeit with signs of recovery if compared with the fourth quarter of 2014. Finally, elementary occupations showed a higher volatility, closing the first half of 2016 at a value equal to the average change (+2.4 percent). The increasing labour demand of qualified occupations seems to be consolidated, and is included in available forecasts. For example, according to Unioncamere Excelsior projections for 2016-2020, firms’ demand growth of high-skilled workers (+29.0 percent) will exceed the growth in demand of medium-skilled workers (+16.0 percent) and low-skilled ones (+21.0 percent).

Contract types and wages. The employment growth is mostly the result of a greater number of employees with open-ended contracts (+2.2 percent in the first half of 2016 vs. +0.5 percent in the first half of 2015), rather than of fixed-term contract workers (+1.6 percent and +3.4 percent, respectively). Self-employed instead slightly contracted (-0.4 percent). Part-time work showed an annual increase by 3.4 percent in the first half of 2016. The increase of full-time work amounted to +1.0 percent. Part-time contracts in 2016 represented 38.5 percent of the new contracts, with a year-on-year increase by 2.0 percentage points compared with 2015.

The labour productivity per hour worked in Italy has been again declining since the second half of 2015 after slightly improving at the start of recovery, with a more pronounced decrease in the second quarter of 2016. One part of the reduction is related to the employment structure, with a significant job creation in low productivity sectors; for example, the decrease in productivity was relevant in the arts, entertainment and recreation sector (-2.1 percent per hour worked). The negative change in productivity in industry excluding construction (-1.1 percent) was more difficult to explain: the second quarter signed a drop in the sectoral value added. Moreover, the use of Wage Supplementation Schemes (‘CIG’) was also reduced and workers were re-absorbed into the productive process. Excluding the above mentioned sectors, productivity would have declined by only 0.3 percent q/q.

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FIGURE II.3: PRODUCTIVITY IN ITALY (quarterly changes)

Note: Seasonally adjusted quarterly data.

Source: Analysis based on ISTAT data – Quarterly economic accounts.

In the first half of 2016, the cost of the labour at industrial businesses and in the services market experienced no change on an annual basis, while the change with respect to the second half of 2015 was very limited. Aside from wage moderation, this outcome reflects the significant reduction in social contributions that has been linked to new hiring incentives. Incorporating the results with respect to the cost of labour and productivity, the growth of unit labour costs was rather modest.

Inflation remained in negative territory until the summer months; the significant decrease in energy prices continues to have a considerable impact on the year-on-year data. The trend of consumer prices hit a low in April, before slightly climbing and remaining at -0.1 percent year on year in July and August. In August, core inflation also decelerated (0.4 percent from 0.6 percent on an annual basis). Conversely, the GDP deflator grew at a greater rate, through the first quarter of the year. The contrast between the performance of the two variables is linked to improvement in the terms of trade occurring with the decrease of oil prices: the import deflator experienced negative changes, pushing the GDP deflator higher. With there no longer being any abrupt, significant changes in the prices of imported energy products, the quarterly trends of the two variables (inflation in consumer prices and growth of the GDP deflator) should converge during the remainder of the year.

The credit supply to the private sector has gradually increased during 2016. The most favourable indications are coming from consumer credit, that has expanded since mid-2015, while loans to non-financial companies are no longer shrinking. With reference to credit quality, the ratio between bad loans and total loans outstanding has nearly stabilised.

The Italian banking sector has attracted the attention of international markets as a result of domestic and international tensions that have affected the sector. The broad-based reduction of interest rates has not only destabilised the profits of Italian banks, but it has affected the entire European banking sector, and the issue has gained additional momentum following the results of the British

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referendum and the stress test results published by the European Banking Authority (EBA) at the end of July.

Current analyst expectations indicate policy rates as well as rates across the yield curve should remain low and stable. The performance of the banking sector across Europe has felt the effects of this framework. The FTSE Italy All-Share Banks index has lost one-half of its value since the beginning of the year, and almost one-fifth of its capitalisation since the day before the Brexit referendum. In the day following the referendum, the index lost more than 20 percent.

FIGURE II.4: DAILY YIELDS ON FTSE ITALIA ALL-SHARE BANKS

Source: Thomson Reuters Datastream.

At a time when market values are low, Italy’s banks remain solid and well capitalised. Except for one institution, Italy’s banks passed the EBA stress tests whose results were published on 29 July.

FOCUS   Non-performing bank loans, credit availability and economic growth The Bank of Italy’s latest data indicate that bank credit is once again growing following four years of contraction. Such growth is nonetheless very modest, and more evident at a consumer level than at a corporate level.6 Given bank credit shrank by more than 4 percentage points between the end of 2011 and second quarter of 2016, and that nominal GDP grew by 1.6 percent over the same period, the Italian economy’s credit intensity dramatically declined. There is broad-based evidence to support the theory that the sovereign debt crisis of 2011 caused a sharp restriction of credit in Italy, and that this exacerbated the recession. Looking ahead, the crucial issue is whether a credit shortage still exists today, and if so, if it is significantly impeding economic activity.  If this is the case, it would at least explain part of the weakness of the economic recovery as indicated thus far by national accounting data.

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6 Reference is made to the balances adjusted for securitisations. See Bank of Italy, Supplements to Statistical Bulletin, Money and Banks, September 2016.

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Surveys of banks7 and small-/medium-sized non-financial companies (SMEs)8 indicate that the availability of credit to Italian companies has gradually improved over the 2014-2016 period. Figure R.1 reports some of the ECB survey results about changes in the conditions for SME access to credit in the Euro Area.

Aside from indicating a lower cost of bank credit, a growing percentage of SMEs that requested bank credit in the past three years has affirmed that credit conditions improved in the past six months. Figure R.1 shows that Italy remains in an unfavourable position, even though it has improved in line with the trend of the other EU-28 countries. In the latest two surveys, some 15 percent approximately all SMEs perceives improvement in credit conditions, against a European average of approximately 20 percent.

FIGURE R.1: PERCEPTION OF THE CONDITIONS FOR CREDIT ACCESS IN THE EU

Note: The chart reports the percentages of businesses that perceive improvement in credit conditions in the past six months, against the total businesses that applied for loans.

Source: MEF analyses based on ECB data.

Surveys of medium- and large-sized companies administered by ISTAT and the Bank of Italy also provide more optimistic indications from non-financial companies than in the past (with the significant exception of construction firms).9

The level of the non-performing loans (NPLs) in Italy is gradually stabilising, with trends that vary within the different economic sectors. Figure R.2 shows the trend of the ratio of bad loans (‘sofferenze’) to total loans disbursed for certain key sectors. The data have been made available by the Bank of Italy.10

The ratio of bad loans  to total loans disbursed started to increase steadily at the end of 2010, with the phenomenon seen across all sectors.

An initial slowdown in the rate of bad loans growth became visible in the manufacturing and commercial sectors in early 2014. The latest data show that bad loans for both sectors clearly stabilised during 2015, with a turnaround later seen in the manufacturing sector. In

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7 Bank of Italy and European Central Bank, Survey on Bank Credit, July 2016.

8 European Central Bank, Survey on Access to Finance of Enterprises in the Euro Area, June 2016.

9 Bank of Italy, Survey on Inflation and Growth Expectations, June 2016; ISTAT, Consumer and Business Confidence Survey, June 2016.

10 Bank of Italy, Supplements to Statistical Bulletin, Money and Banks, September 2016.

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2015, the real estate sector also witnessed a slowdown in the rate of growth of bad loans, while the construction sector continues to reflect the difficulties of recent years, with ratio of bad loans to total loans disbursed that is still rising.

FIGURE R.2: TREND OF BAD LOANS TO TOTAL LOANS BY SECTOR

Source: MEF analyses based on Bank of Italy data.

Table R.1 reports the ratio of bad loans to total loans for key economic sectors as of July 2016.  While both the construction sector and the commercial sector have almost equivalent balances in terms of total loans outstanding (approximately €140 billion disbursed), the commercial sector’s bad loans are almost one-half of those for the construction sector, at approximately €27 billion. In terms of bad loans, the real estate sector is virtually in line with the commercial sector in terms of the ratio of bad loans to total loans. Finally, the manufacturing sector has consolidated its recovery, with approximately €35 billion of bad loans against more than €200 billion of loans disbursed.

In all sectors, the ratio of bad loans to total loans is below 20 percent, except in the construction sector where the ratio is approximately 30 percentage points.

TABLE R.1: LOANS AND BAD LOANS BY SECTOR (balances in € mn at July 2016, unless otherwise indicated)
	Manufacturing	Construction	Commerce	Real Estate
Total loans	210,746	139,314	142,308	114,392
Total bad loans	35,107	43,102	26,880	21,776
Ratio of bad loans to total loans	16.7	30.9	18.9	19.0
Source: Bank of Italy.

In any event, there are two main concerns in relation to the future trend of credit to the economy and GDP growth.

First, with reference not only to several emblematic cases, but to the entire banking system, many experts believe that the Italian banks’ high ratio of NPLs to total loans to the economy (17.8 percent) is a strong disincentive to the disbursement of new credit. The transaction for the sale of NPLs (and consequent recapitalisation) recently announced by Italy’s third largest bank, if replicated in other cases where necessary, should lead to gradual improvement of the availability of credit to the economy. However, the question is if this

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process is occurring at the pace needed, and if the banks will reinstate more dynamic lending practices after the balance of NPLs is restored to a level more in line with historical averages.

The second concern relates to the smaller banks, which did not undergo the EBA stress test and are not subject to the ECB’s Supervisory Review and Evaluation Process. These banks account for 27 percent of the Italian banking system assets.  Smaller bank corporate customers are mostly SMEs. The reforms of the mutual banks and the cooperative credit banks introduced in 2015-2016 represent an important step in the restructuring of the sector. However, there are reasons to believe that the economic crisis in recent years has intertwined the problems in the real economy and the problems in the banking sector, with a situation that still needs to be resolved, including through a reduction of NPLs to levels more in line with the historical averages.

With reference to the first concern, an empirical analysis has been effected of the trend of bank credit at the level of the individual banks so as to verify if there is evidence that credit disbursement is linked to the stock of NPLs. Considering Italy’s 13 largest banks, there seems to be a clear negative correlation between the initial stock of NPLs and the change in credit during a specific period. Figure R.3 contains a scatter plot and a regression line that compares the stock of NPLs at the end of 2014 with change in loans in the year of 2015. The banks with highest NPLs have generally made greater reductions to the stock of loans outstanding.

FIGURE R.3: RELATION BETWEEN NPL AND CREDIT

Source: MEF analyses based on 2015 financial statement data and Bank of Italy data.

It is evident that the change in credit disbursed by a bank depends not only on the bank’s willingness to lend, but also on customer demand. Given that the credit market is segmented, a high level of NPLs indicates not only the less-than-prudent lending policies of certain banks in the past, but also a situation that is still critical with respect to customer segments and the local businesses in the areas where those banks are most active. In such case, the sale of NPLs and recapitalisation might not be sufficient to stimulate a strong recovery of credit to the economy.

The two variables are co-determined, since the banks, in practice, have a lesser propensity to lend to sectors or regions most susceptible of giving rise to NPLs. A crisis in specific industries or areas causes an increase in NPLs, but once the NPLs of a single bank start to rise, the bank has less leeway in disbursing new credit.

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This vicious circle is broken through less segmentation of the credit market, and initiatives to promote stronger bank capitalisation. However, a macroeconomic stimulus from the demand side is also needed; this stimulus must come from expenditure for investments, in particular for infrastructure and public works. Such investment would support the construction sector, which is the sector that has experienced the largest increase in NPLs in more recent years.

Table R.2 reports the percentage change of the gross fixed investment in Italy, and shows the steady negative trend of public investment from 2010 to 2014. The weak contribution to demand has influenced private expenditure, which, though alternating in recent years, also contracted between 2012 and 2014. A turnaround for both series is visible as from 2015.

TABLE R.2: GROSS FIXED INVESTMENT IN ITALIA (% change at current prices)
	2008	2009	2010	2011	2012	2013	2014	2015
Public sector	3.8	11.5	-13.7	-3.2	-8.8	-7.0	-3.9	1.1
Private sector	-0.8	-12.7	5.0	1.2	-7.8	-6.5	-3.2	1.1
Source: MEF analyses based on Ameco database, European Commission.

Demand conditions for the second half of 2016 are expected to continue to be rather weak, although consistent with GDP growth, albeit limited. Economic surveys show a decrease in consumer confidence when compared with the very high values at the start of the year; the assessments are less optimistic with regard to main survey questions. However, certain indicators about consumption (for example, retailing indices or fiscal data related to indirect taxes) are providing more comforting signs.

The indicators available regarding investments do not provide any signs of a strong recovery; the qualitative information coming from ISTAT surveys shows less favourable assessments about orders and the levels of capital goods production, which the expectations about production are declining. Accordingly, the rates of growth of investments in the coming quarters are expected to be very limited, accelerating only as from 2017.

With reference to foreign demand, order levels are not particularly high, and exports in volume terms are accordingly expected to stabilise in the third quarter. Such stabilisation should be followed by a gradual recovery in relation to an improvement of the international trade.

On the supply side, there are somewhat mixed signals from the industrial sector, on the one hand, and the services sector, on the other hand.

There are no expectations of a decisive turnaround for the manufacturing sector in the coming months. As expected, the industrial production index in July reflected a moderate rise after two consecutive months of decline; the qualitative indicators all seem to suggest a standstill, if not a slowdown, in production, especially in relation to order trends. Similar conditions of uncertainty are affecting construction firms; following a recovery in June, the production index descended for the month of July; the levels of production are still lower than the relative high registered in the spring months. Still, business confidence for the sector has slightly recovered.

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The assessment of the prospects for the services sector is more complex, and more positive overall. ISTAT’s most recent surveys indicate a drop in confidence, although the opinions of purchasing managers are somewhat different and decidedly more optimistic: the PMI for the services sector in relation to orders shows improvement, even in the presence of less optimistic expectations. Encouraging signs are coming from the retailing sector, from tourism-related spending in Italy by residents and foreigners, and also from toll-highway traffic. In essence, the available data suggest that the trend toward growing added value in the services sector should remain unchanged in coming months.

In conclusion, the information currently available suggests that growth will be modest in the second half of the year, with GDP rising by 0.1 percent to 0.2 percent compared with the first half. The growth for 2016 should amount to 0.8 percentage points, which reflects the positive contribution of domestic demand, and the negative contribution of inventories and net exports (which should cut GDP growth by a total of approximately 0.4 percent points).

FOCUS Validation of the macroeconomic forecasts In accordance with Italian and European laws and regulations regarding the validation of the macroeconomic forecasts used in the preparation of planning documents, the macroeconomic scenario at unchanged legislation underlying this EFD Update has been evaluated with a positive outcome. The validation process is governed by the protocol of intent signed by the Ministry of the Economy and Finance (MEF) and the Parliamentary Budget Office (PBO) on 16 September 2014. The MEF has complied with all rules provided in relation to the exchange of information between the two institutional entities. A preliminary version of the forecasts was sent by the MEF to the PBO on 7 September, with the PBO later expressing findings thereon. In preparing the final macroeconomic scenario at unchanged legislation, the MEF took into account the observations received, and transmitted the final forecasts on 19 September. The validation was transmitted on 26 September.

Scenario at unchanged legislation

The EFD Update presents a scenario based on unchanged legislation and a policy scenario, which are consistent with updating of international exogenous variables, as described in the previous section, and national accounting data.11 The two scenarios differ starting in 2017 in relation to future fiscal-policy measures.

The projections at unchanged legislation are based on legislation in effect, and take into account the effects on the economy of the increase in indirect taxes in 2017 and 2018 (as provided by the so-called ‘safeguard clauses’). The scenario based on unchanged legislation also includes a reduction in corporate taxation as from January 2017, and other measures to stimulate growth, as approved by the 2016 Stability Law, which will obviously be confirmed. The policy scenario incorporates fiscal-policy measures that are to be included in the draft of the 2017 Budget Law.

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11 The quarterly accounting data available through the second quarter of 2016 and the annual data that ISTAT revised on 23 September in relation to 2014 and 2015. On 3 October, ISTAT is going to publish new quarterly data consistent with the new annual data.

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TABLE II.2: MACROECONOMIC FRAMEWORK AT UNCHANGED LEGISLATION (% change unless otherwise indicated)
	2015	2016	2017	2018	2019
INTERNATIONAL EXOGENOUS VARIABLES
International trade	2.5	2.1	2.6	3.5	4.1
Oil price (Brent, futures)	53.5	46.6	52.5	55.1	57.1
USD-EUR exchange rate	1.109	1.119	1.126	1.126	1.126
ITALY MACRO DATA (VOLUMES)
GDP	0.7	0.8	0.6	1.2	1.3
Imports	6.0	2.3	2.2	3.2	3.8
Final national consumption	1.0	1.0	0.3	0.7	1.0
Household consumption and NPISH	1.5	1.2	0.4	1.0	1.2
Government expenditure	-0.6	0.4	0.0	-0.3	0.2
Investments	1.3	1.9	1.5	2.6	2.8
- machinery, equipment and other fixed assets	1.4	0.6	1.8	3.1	3.6
- transportation means	18.2	24.6	3.0	2.6	3.3
- construction	-0.4	0.6	1.0	2.2	2.0
Exports	4.3	1.3	2.5	3.3	3.5
Memo item: Current account balance (% of GDP)	2.2	2.4	2.5	2.6	2.6
CONTRIBUTIONS TO GDP GROWTH (*)
Net exports	-0.4	-0.3	0.2	0.1	0.0
Inventories	0.1	-0.1	-0.1	0.1	0.0
Domestic demand, net of inventories	1.0	1.1	0.5	1.0	1.3
PRICES
Import deflator	-2.6	-3.4	1.7	1.8	1.7
Export deflator	-0.4	-0.8	1.5	1.8	1.7
GDP deflator	0.6	1.0	1.3	1.6	1.6
Nominal GDP	1.4	1.8	1.8	2.9	3.0
Consumption deflator	0.0	0.1	1.7	1.7	1.6
Memo item: HICP inflation, net of imported energy, % change (**)	0.7	0.5	1.0	1.2	1.4
LABOUR
Labour cost	0.4	0.5	1.0	1.5	1.6
Productivity (measured on GDP)	-0.1	-0.2	0.2	0.6	0.6
Unit labour cost (measured on GDP)	0.5	0.7	0.9	0.8	1.0
Employment (FTEs)	0.8	0.9	0.4	0.6	0.8
Unemployment rate	11.9	11.5	11.1	10.6	10.2
Employment rate (ages 15 to 64)	56.3	57.2	57.6	57.9	58.3
Memo item: Nominal GDP (absolute values in € mn)	1,642,444	1,672,226	1,703,023	1,751,639	1,803,746
(*) Discrepancies, if any, are due to rounding.
(**) Source: ISTAT.
Note: The macroeconomic framework has been prepared based on the information available at 23 September 2016.  For the international exogenous variables, reference is made to the information through 31 August 2016.
GDP and components in volume (chain-linked volumes, base year of 2010), data not adjusted for business days.

In consideration of the revised outlook for the international framework, the forecasts of GDP growth in the scenario at unchanged legislation have been revised downward for 2017 (from +1.2 percent to +0.6 percent); the revision is related to a more limited carry-over effect from 2016 and a profile of exogenous variables that slightly worsens with respect to 2016. The growth prospects have remained unchanged for 2018 and 2019, when the change in the international framework should be less significant, and the government’s structural reforms and stimulus measures should wield their full effects (see Focus section entitled, The revision of growth estimates at unchanged legislation compared with the EFD and

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risk analysis). At the end of the forecast period, the Italian economy should be continuing to grow at a pace of several tenths of a point above 1.0 percent.

FOCUS   The revision of the growth estimates at unchanged legislation compared with the EFD and risk analysis This section presents an analysis of the main factors that led to the revision of the macroeconomic forecasts at unchanged legislation, when compared with 2016 EFD. The projections of this EFD Update take into account new information about Italian economy (in particular, the national accounting data for the first two quarters of 2016) and changes in the prospects for the international framework. This analysis has been used for preparing new official macroeconomic forecasts, even though its results have not been completely and automatically incorporated into the growth forecasts. As in the previous documents, Table R.1 shows the ‘mechanical’ effect of the new quarterly data on the forecasts of key economic variables, namely, the extent to which the 2016 forecast should be revised, while keeping the EFD assumptions unchanged for the second half of the year.12 The revisions in the table are broken down as follows: a) statistical revisions of data related to 2015 (revision of carry-over effect); and b) effect of forecast errors made for the first two quarters of the year. Considered together, these two factors would lead to a downward revision of 0.13 percent for forecast GDP growth.  

TABLE R.1: PRINCIPAL MACRO VARIABLES (seasonally adjusted data)
	Revision of 2015 series (carry-over to 2016)			Forecast error (1S 2016 data, net of carry-over effect)			Delta C (A+B)
	2016 Update	2016 EFD	Delta A	2016 Update	2016 EFD	Delta B
GDP	0.3	0.2	0.1	0.3	0.6	-0.2	-0.13
Imports	1.1	1.0	0.0	0.9	0.7	0.2	0.21
Household consumption	0.6	0.5	0.0	0.4	0.6	-0.2	-0.21
Investments	1.0	0.7	0.3	0.6	0.9	-0.3	-0.01
Exports	0.7	0.6	0.0	0.3	0.2	0.0	0.04
GDP deflator	0.5	0.5	0.0	0.5	0.3	0.2	0.22
Consumption deflator	0.1	0.1	0.0	-0.2	-0.1	-0.1	-0.09
Employment (FTEs)	0.4	0.3	0.1	0.5	0.4	0.2	0.26
Note: Delta C measures the total impact of the revision of the data.

With reference to the components of the demand, the results for household consumption are slightly lower than forecast, while investments failed to meet the expectations of an acceleration. Instead, exports were higher than expected, despite the slowdown in global demand. The contribution of inventories was in line with the forecasts. With reference to prices, the increase in the growth of the GDP deflator was not expected, though it reflects the pronounced reduction in the prices of imported goods and services. The labour market, too, performed better than expected.

The revision of the growth forecasts also considered the new international scenario. Table R.2 indicates the estimated impact through the ITEM model of the revision of the main exogenous variables, which, when considered altogether, suggest a lowering of the growth estimates. The main impact comes from the increase in oil prices (some USD 6.00-7.00 higher on average than assumed in the EFD). The partial appreciation of the euro against the U.S. dollar and other leading currencies and the slowdown of the global demand weighted for Italy are factors that contributed modestly to the downward revision across the

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12 This part of the analysis was done on the profile of quarterly data published on 2 September. ISTAT’s release of new data on 3 October could lead to slightly different conclusions.

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entire forecast horizon. With reference to the second variable, the downward revision was much more limited than the downward revision of total international trade. The interest rate variable shows the impact of: i) the change in European reference rates compared with the EFD (3-month EURIBOR); and ii) the shifting of the rates for 10-year Italian government securities. The expansionary monetary policy has contributed to a further reduction of interest rates, and has partially offset the negative contribution of other factors.

In conclusion, the downward revision of the forecasts resulting from exogenous variables is modest in 2016 and more pronounced in 2017; for the 2018-2019 two-year period, the exogenous variables would suggest an upward revision that was nonetheless not introduced in order to keep the forecasts prudent.

TABLE R.2: ESTIMATED EFFECTS ON GDP OF CHANGE IN INTERNATIONAL EXOGENOUS VARIABLES COMPARED WITH THE EFD (impact on forecast growth rates)
	2016	2017	2018	2019
Oil price	-0.06	-0.27	0.11	0.04
Global demand weighted for Italy	-0.02	-0.07	0.02	0.01
Effective nominal exchange rate, price of manufactured goods	-0.01	-0.12	-0.07	0.07
Interest rates	-0.02	0.05	0.07	0.11
Total	-0.12	-0.42	0.13	0.23

Table R.3 of this section supplies other valuation elements that regard the risks of the macroeconomic forecasts. The values in the table show the impact on GDP growth of different assumptions about the exogenous variables, in other words, a sensitivity analysis of the macroeconomic scenario at unchanged legislation. The first two simulations respectively refer to global demand and the effective nominal exchange rate for Italy. The underlying assumptions consider a less robust recovery of world trade from 2018 (with a shift of just over 0.5 percentage points in 2018 and in 2019); in this scenario, the recovery of exports would be weaker, eroding growth. The technical assumption adopted for exchange rates13 has been substituted by the use of forward rates that indicate gradual appreciation of the euro. The opposite has been done with respect to oil prices: the forecast based on Brent futures contracts has been replaced by the adoption of an average of recent prices (10 business days ending on 31 August). Finally, an alternative interest rate curve has been introduced as from March 2017, the scheduled end-date for the ECB’s QE programme, with the BTP spread assumed to expand by 50 basis points. The spread is associated with a higher cost for accessing credit vis-à-vis that assumed in the scenario at unchanged legislation.

The results show that the appreciation of the euro (and in particular, the effective nominal rate weighted for Italy) and the increase of the bank lending rates are factors potentially slowing growth in the coming years. On the other hand, the assumption about oil prices represents an upside risk for growth, and appears feasible when considering the prices’ stability in recent months.

TABLE R.3: EFFECTS ON GDP OF DIFFERENT ASSUMPTIONS ABOUT INTERNATIONAL EXOGENOUS VARIABLES (impact on growth rates)
	2016	2017	2018	2019
1. Global demand weighted for Italy	0.0	0.0	-0.1	-0.1
2. Effective nominal exchange rate	0.0	0.0	-0.3	-0.3
3. Oil price	0.0	0.1	0.1	0.0
4. Less favourable financial conditions	0.0	0.0	-0.3	-0.3

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13 Equal to an average observed in the 10 business days ending 31 August 2016.

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Policy scenario

The macroeconomic framework under the policy scenario incorporates the effects on the economy of the measures that the government intends to present to Parliament with the draft of the 2017 Budget Law. Such measures are part of the government’s economic and fiscal-policy strategy for the coming years.

With reference to 2017, the policy scenario eliminates the tax increases provided by the 2016 Stability Law’s safeguard clauses for maintaining public finance commitments. Measures to be introduced to favour growth will be related to the planned reduction of the fiscal and social-contributions burden for businesses. In addition, the government intends to promote measures that will increase private investment and productivity, and generate additional positive repercussions on the labour market. Other initiatives with respect to expenditure are designed to increase public investments and support household income.

Taken altogether, these measures produce a significant positive impact on growth in 2017 when compared with the forecast at unchanged legislation. The forecasts under the policy scenario are based on simulations done with the Treasury’s econometric model (ITEM).

The measures are grouped by area in the following table in order to facilitate the interpretation thereof. Compared with the scenario at unchanged legislation, the policy scenario provides for an increase of the GDP growth rate of 0.4 percentage points in 2017.

TABLE II.3: MACROECONOMIC IMPACT OF POLICY-SCENARIO MEASURES VIS-A-VIS THE SCENARIO AT UNCHANGED LEGISLATION (differences between the rates of change of GDP)
	2017	2018	2019
Remodelling of indirect taxes	0.3	0.1	-0.2
Measures with expansionary effects	0.2	0.1	0.1
Unchanged policies	0.1	0.0	0.0
Financial coverage	-0.2	-0.2	0.0
Total	0.4	0.0	-0.1

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TABLE II.4: MACROECONOMIC FRAMEWORK UNDER POLICY SCENARIO (% change unless otherwise indicated)
	2015	2016	2017	2018	2019
INTERNATIONAL EXOGENOUS VARIABLES
International trade	2.5	2.1	2.6	3.5	4.1
Oil price (Brent, futures)	53.5	46.6	52.5	55.1	57.1
USD-EUR exchange rate	1.109	1.119	1.126	1.126	1.126
ITALY MACRO DATA (VOLUMES)
GDP	0.7	0.8	1.0	1.3	1.2
Imports	6.0	2.3	3.3	3.4	4.0
Final national consumption	1.0	1.0	0.8	0.6	0.8
Household consumption and NPISH	1.5	1.2	1.0	0.9	0.9
Government expenditure	-0.6	0.4	0.5	-0.4	0.3
Investments	1.3	1.9	3.2	3.6	3.8
- machinery, equipment and other fixed assets	1.4	0.6	3.2	3.4	3.7
- transportation means	18.2	24.6	4.4	2.9	3.7
- construction	-0.4	0.6	2.9	3.9	4.0
Exports	4.3	1.3	2.5	3.3	3.3
Memo item: Current account balance (% of GDP)	2.2	2.4	2.3	2.3	2.3
CONTRIBUTIONS TO GDP GROWTH (*)
Net exports	-0.4	-0.3	-0.2	0.1	-0.1
Inventories	0.1	-0.1	0.0	0.1	0.0
Domestic demand, net of inventories	1.0	1.1	1.2	1.1	1.3
PRICES
Import deflator	-2.6	-3.4	1.5	1.8	1.7
Export deflator	-0.4	-0.8	1.6	1.9	1.9
GDP deflator	0.6	1.0	0.9	1.7	2.0
Nominal GDP	1.4	1.8	1.9	3.0	3.1
Consumption deflator	0.0	0.1	0.9	1.9	2.2
Memo item: Programmed inflation	0.2	0.2	0.9
Memo item: HICP inflation, net of imported energy, % change (**)	0.7	0.5	1.0	1.2	1.4
LABOUR
Labour cost	0.4	0.5	1.2	1.6	1.6
Productivity (measured on GDP)	-0.1	-0.2	0.3	0.5	0.4
Unit labour cost (measured on GDP)	0.5	0.7	0.9	1.1	1.2
Employment (FTEs)	0.8	0.9	0.6	0.8	0.8
Unemployment rate	11.9	11.5	10.8	10.3	9.9
Employment rate (ages 15 to 64)	56.3	57.2	57.8	58.2	58.6
Memo item: Nominal GDP (absolute values in € mn)	1,642,444	1,672,226	1,704,099	1,754,855	1,809,961
(*) Discrepancies, if any, are due to rounding.
(**) Source: ISTAT.
GDP and components in volume (chain-linked volumes, base year of 2010), data not adjusted for business days.

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III.1 FINAL DATA AND PROJECTIONS AT UNCHANGED LEGISLATION

The EFD Update’s projections presented this year are based on the 2015 preliminary estimates for GDP and net borrowing released by ISTAT on 23 September, owing to the Public Finance and Accounting Law reform, which has postponed the deadline for the Update’s presentation. The estimates confirm a general government deficit of 2.6 percent of GDP for 2015. The achievement of a primary surplus of 1.5 percent of GDP was matched by the stabilisation of primary current expenditure and a turnaround in public investment, which grew by 0.2 percent after five consecutive years of decline. Interest expenditure decreased from 4.6 percent of GDP in 2014 to 4.2 percent in 2015. On the revenue side, fiscal pressure remained at the 2014 level (43.4 percent), while it was 42.8 percent net of the €80 payroll bonus for low-income workers.

The trend of the public-finance framework at unchanged legislation for the 2016-2019 period covered in this document reflects a slowdown in growth prospects for the near term, compared with the EFD’s projections presented in April. It also considers the results of the monitoring of the public finances and the impact of the provisions adopted by the government following the 2016 EFD.

For 2016, the estimate of the general government net borrowing based on unchanged legislation has been revised compared to the EFD’s forecast, from 2.3 percent to 2.4 percent of GDP. The primary surplus is projected to remain at 1.5 percent of GDP.

The net borrowing is expected to gradually improve in 2017-2019, reaching a zero balance at the end of the period, against a surplus of about 0.4 points of GDP forecast in April. The trend of net borrowing reflects the combined effect of lower interest expenditure and a higher primary surplus, the latter of which is based on the expected consolidation of economic growth as from 2018. The outlays for interest expenditure gradually decline from 4.0 percent of GDP in 2016 to 3.4 percent in 2019, with reductions in nominal terms over the entire forecast period. The primary surplus is projected to rise to 2.1 percent of GDP in 2017, 2.8 percent in 2018, and 3.4 percent in 2019.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2016

In 2016, tax revenues are expected to increase by a rate below the economic growth rate, thus contracting by 0.6 percentage points in relation to GDP.

In 2017, the 2.6 percent growth of tax revenue is mostly driven by indirect taxes, which are expected to increase by approximately 7.2 percent. The 2017 increase in indirect taxes, in turn, is due to the effect of the safeguard clauses provided as a guarantee of the public finance balances by previously adopted legislation. Indeed, such clauses will be deactivated in the 2017 Budget Law. The increase in total tax revenue is more limited than that for indirect taxes since it takes into account the impact of the measures to reduce the tax burden on household and business income.1

Social contributions should gradually increase (4.1 percent in 2019), reflecting the growth of employee compensation underlying the macroeconomic forecast, as well as the expiry of the exemption of social contributions for the hiring of new employees in effect in 2015-2016. The ratio of social contributions to GDP should slightly rise, reaching 13.3 percent in 2019.

Given the factors described above, in 2016 fiscal pressure at unchanged legislation is expected to decrease by 0.8 percentage points compared with 2015, reaching the level of 42.6 percent. In 2017, the variable marginally rises, by about 0.1 percentage point of GDP, and then remains constant at 42.7 percent through 2019. Net of the €80 bonus on low income workers, fiscal pressure decreases to 42.1 percent in 2016, and stands at 42.2 percent in 2019.

The government has nonetheless confirmed its commitment to revoke the planned VAT rates increase in 2017, through the adoption of specific provisions in the draft Budget Law to be presented to Parliament by 20 October 2016. Thus, the repeal of the VAT hike will entail a further reduction of fiscal pressure.

The ongoing process of changing the public expenditure mix to enhance economic growth is benefiting from the effects of structural-rationalisation and containment measures initiated through the spending review in prior years.

In line with the trend set in 2015, the ratio to GDP of expenditure net of interest is expected to decline further, from 45.5 percent in 2016 to 43.5 percent of GDP of 2019 (43.2 percent of GDP in the April forecast). The reduction is partially explained by primary current expenditure, which is expected to decrease by about 1.7 percentage points, from 42.0 percent of GDP in 2016 to 40.3 percent of GDP in 2019. The estimate for primary current expenditure at the end of the period is in line with previous projection (slightly below 40 percent of GDP according to the EFD).

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1 As from 2017, the corporate income tax (IRES) rate is to be reduced from 27.5 percent to 24 percent.

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More specifically, after declining since 2011, employee compensation is expected to start growing again in 2016, with a nominal increase of about 1 percent compared with 2015. The forecast considers the effects of: the outlays arising from the creation of a fund for the execution of the ‘La Buona Scuola’ plan; the payment of an extraordinary subsidy to the nation’s security and defence forces and firefighters, as provided by Article 1, Paragraph 972 of the 2016 Stability Law; monitoring, which indicates a deceleration in spending, particularly by local government; and the presumed impact of expenditure for renewal of collective bargaining contract as from 2017, inclusive of arrears.

Expenditure for employee compensation should remain stable in 2017, while it should begin to contract again in 2018 (-0.5 percent). As a percentage of GDP, such expenditure is forecast to fall from 9.7 percent in 2016 to 9.0 percent of GDP in 2019, and thus confirms the projections outlined in the EFD.

Intermediate consumption is also expected to contract, from 8.0 percent of GDP in 2016 to 7.6 percent in 2019.

Outlays for social benefits in cash show a decreasing trend as a share of GDP, dropping from 20.3 percent in 2016 to 20.0 percent in 2019, and thus reflecting the impact of the reforms implemented in past years. The forecast of the aggregate also incorporates the measures contained in the 2016 Stability Law, and in particular, measures to safeguard the category of ‘protected workers’, measures to fight poverty, and initiatives to expand the protection through social safety nets as provided by the legislative decrees for the implementation of Law No. 183/2014.

Gross fixed investment is forecast to grow by about 1.0 percent in nominal terms in 2016, peaking at 3.6 percent in 2017. In terms of GDP, public investment will average around 2.3 percent per year during the 2016-2019 period. The estimates include the expenditure for the national co-financing of the investment projects against which the government has secured additional flexibility margins.

The sharp reduction of capital transfers outlined for 2016 is mainly related to the expenditure incurred in 2015, including: the incremental charges connected with the application of the Constitutional Court’s Ruling No. 70/2015, which provided for the payment of arrears for pensions paid as from 2012; and subsidies provided for the bailout of credit institutions with financial difficulties.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2016

TABLE III.1a: GENERAL GOVERNMENT ACCOUNT AT UNCHANGED LEGISLATION (in € mn)
	2015	2016	2017	2018	2019
EXPENDITURE
Employee compensation	161,453	162,908	162,966	162,071	162,406
Intermediate consumption	133,393	133,433	133,821	133,885	137,194
Social payments	332,985	339,460	344,730	353,030	360,960
Incl: Pensions	258,804	261,650	264,670	271,730	278,620
Other social payments	74,181	77,810	80,060	81,300	82,340
Other current expenditure	63,777	66,398	63,827	64,292	65,665
Total current expenditure, net of interest	691,608	702,199	705,343	713,278	726,226
Interest expenditure	68,216	66,478	63,580	62,579	61,973
Total current expenditure	759,824	768,677	768,923	775,857	788,199
Incl: Healthcare expenditure	112,408	113,654	115,440	116,821	119,156
Total capital expenditure	67,956	58,280	59,759	59,892	58,523
Gross fixed investment	36,770	37,112	38,453	39,600	40,302
Capital subsidies	15,627	15,115	13,953	13,067	12,854
Other transfers	15,559	6,053	7,353	7,225	5,367
Total final expenditure, net of interest	759,564	760,479	765,102	773,171	784,749
Total final expenditure	827,780	826,956	828,682	835,749	846,722
REVENUE
Total tax revenue	493,557	493,081	505,887	518,036	530,916
Direct taxes	242,678	248,248	245,832	247,863	254,364
Indirect taxes	249,662	240,968	258,433	269,342	275,711
Capital taxes	1,217	3,865	1,622	831	841
Social contributions	218,552	219,669	222,304	230,068	239,558
Actual contributions	214,680	215,714	218,300	226,001	235,420
Imputed contributions	3,872	3,955	4,004	4,067	4,138
Other current revenue	68,460	69,755	69,510	70,373	71,694
Total current revenue	779,352	778,640	796,079	817,646	841,327
Non-tax capital revenue	4,280	3,697	3,145	3,511	3,932
Total final revenue	784,849	786,202	800,846	821,988	846,100
Memo item: Fiscal pressure	43.4	42.6	42.8	42.7	42.7
Fiscal pressure, net of €80 bonus	42.8	42.1	42.2	42.2	42.2
BALANCES
Primary balance	25,285	25,723	35,743	48,817	61,352
% of GDP	1.5	1.5	2.1	2.8	3.4
Current balance	19,528	9,963	27,156	41,789	53,128
% of GDP	1.2	0.6	1.6	2.4	2.9
Net borrowing	-42,931	-40,754	-27,836	-13,762	-622
% of GDP	-2.6	-2.4	-1.6	-0.8	0.0
Nominal GDP at unchanged legislation (x 1,000)	1,642.4	1,672.2	1,703.0	1,751.6	1,803.7
Note: Discrepancies, if any, are due to rounding.

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TABLE III.1b: GENERAL GOVERNMENT ACCOUNT AT UNCHANGED LEGISLATION (% of GDP)
	2015	2016	2017	2018	2019
EXPENDITURE
Employee compensation	9.8	9.7	9.6	9.3	9.0
Intermediate consumption	8.1	8.0	7.9	7.6	7.6
Social payments	20.3	20.3	20.2	20.2	20.0
Incl.: Pensions	15.8	15.6	15.5	15.5	15.4
Other social payments	4.5	4.7	4.7	4.6	4.6
Other current expenditure	3.9	4.0	3.7	3.7	3.6
Total current expenditure, net of interest	42.1	42.0	41.4	40.7	40.3
Interest expenditure	4.2	4.0	3.7	3.6	3.4
Total current expenditure	46.3	46.0	45.2	44.3	43.7
Incl.: Healthcare expenditure	6.8	6.8	6.8	6.7	6.6
Total capital expenditure	4.1	3.5	3.5	3.4	3.2
Gross fixed investment	2.2	2.2	2.3	2.3	2.2
Capital subsidies	1.0	0.9	0.8	0.7	0.7
Other transfers	0.9	0.4	0.4	0.4	0.3
Total final expenditure, net of interest	46.2	45.5	44.9	44.1	43.5
Total final expenditure	50.4	49.5	48.7	47.7	46.9
REVENUE
Total tax revenue	30.1	29.5	29.7	29.6	29.4
Direct taxes	14.8	14.8	14.4	14.2	14.1
Indirect taxes	15.2	14.4	15.2	15.4	15.3
Capital taxes	0.1	0.2	0.1	0.0	0.0
Social contributions	13.3	13.1	13.1	13.1	13.3
Actual contributions	13.1	12.9	12.8	12.9	13.1
Imputed contributions	0.2	0.2	0.2	0.2	0.2
Other current revenue	4.2	4.2	4.1	4.0	4.0
Total current revenue	47.5	46.6	46.7	46.7	46.6
Non-tax capital revenue	0.3	0.2	0.2	0.2	0.2
Total final revenue	47.8	47.0	47.0	46.9	46.9
Memo item: Fiscal pressure	43.4	42.6	42.8	42.7	42.7
BALANCES
Primary balance	1.5	1.5	2.1	2.8	3.4
Current balance	1.2	0.6	1.6	2.4	2.9
Net borrowing	-2.6	-2.4	-1.6	-0.8	0.0
Note: The ratios to GDP are calculated on the projections at unchanged legislation. Discrepancies, if any, are due to rounding.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2016

TABLE III.1c: GENERAL GOVERNMENT ACCOUNT AT UNCHANGED LEGISLATION (% change)
	2016	2017	2018	2019
EXPENDITURE
Employee compensation	0.9	0.0	-0.5	0.2
Intermediate consumption	0.0	0.3	0.0	2.5
Social payments	1.9	1.6	2.4	2.2
Incl.: Pensions	1.1	1.2	2.7	2.5
Other social payments	4.9	2.9	1.5	1.3
Other current expenditure	4.1	-3.9	0.7	2.1
Total current expenditure, net of interest	1.5	0.4	1.1	1.8
Interest expenditure	-2.5	-4.4	-1.6	-1.0
Total current expenditure	1.2	0.0	0.9	1.6
Incl.: Healthcare expenditure	1.1	1.6	1.2	2.0
Total capital expenditure	-14.2	2.5	0.2	-2.3
Gross fixed investment	0.9	3.6	3.0	1.8
Capital subsidies	-3.3	-7.7	-6.3	-1.6
Other transfers	-61.1	21.5	-1.7	-25.7
Total final expenditure, net of interest	0.1	0.6	1.1	1.5
Total final expenditure	-0.1	0.2	0.9	1.3
REVENUE
Total tax revenue	-0.1	2.6	2.4	2.5
Direct taxes	2.3	-1.0	0.8	2.6
Indirect taxes	-3.5	7.2	4.2	2.4
Capital taxes	217.6	-58.0	-48.8	1.2
Social contributions	0.5	1.2	3.5	4.1
Actual contributions	0.5	1.2	3.5	4.2
Imputed contributions	2.1	1.2	1.6	1.7
Other current revenue	1.9	-0.4	1.2	1.9
Total current revenue	-0.1	2.2	2.7	2.9
Non-tax capital revenue	-13.6	-14.9	11.6	12.0
Total final revenue	0.2	1.9	2.6	2.9

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FOCUS   Planning and budget reform The revision of the Public Finance and Accounting Law was concluded with the approval of two legislative decrees and a special provision2 issued in application of the Constitutional law of April 2012 and the related implementation legislation.3 The first legislative decree4 on the completion of the reform of the State budget is aimed at: i) making the budget more transparent and easier to interpret; ii) improving the quality of revenue and expenditure data; and iii) enhancing the financial-planning process and the role of the budget in resource allocation, including through the introduction of a spending-review process incorporated into the financial cycle. In relation thereto, improvements have been made to the procedures for monitoring the extent of the actual achievement of pre-set targets, with the planning and the consequent public finance measures. The procedures for making in-year changes to the budget have also been simplified so as allow for more timely availability of resources for the purpose of the efficient management thereof. The other legislative decree5 for enhancing the role of cash budget is aimed at more rigorous preparation of the budget projections, so as to create a stronger link between i) parliamentary decisions about resource allocation in the budget, and ii) the moment when these decisions impact the economic system through actual disbursement of resources. The goal is to optimise the planning of cash flows, with consequent improved management of: the borrowing requirement; the trend of the public debt; and the issue of residual amounts in the budget. The new rules about the content of the Budget Law are aimed at validating the accounting document’s ‘substantive’ role following the amendment in 2012 of Paragraph 3 of Article 81 of the Constitution and the consequent elimination of a previous provision that had prohibited establishing new taxes and new expenditure with the Budget Law. In this regard, a key element of the reform is the unification of the Budget Law and the Stability Law in a single document. This integration will allow for drawing Parliament’s attention, and the attention of the public, to the priorities of public intervention, while also allowing Parliament to simultaneously assess the new and existing spending programmes, within a framework of constraints defined by i) the total resources available, and ii) the policy objectives indicated in the planning documents. In other words, the aim is to focus the policymakers’ attention on the aggregate of public revenue and expenditure, rather than on the marginal change thereof. The draft Budget Law is divided into two sections so as to distinguish between the resources already contemplated by current legislation from those appropriated with the new measures: the first section contains the measures needed for achieving the public finance objectives under the policy scenario outlined in the EFD, and as possibly updated within the EFD Update; the second section illustrates the revenue and expenditure projections, expressed on an accruals basis and a cash basis, as computed on the basis of unchanged legislation. In any event, the draft Budget Law will be defined within the limits of the public finance balances outlined in the policy scenario. It follows that, in reinforcing the allocative role of the budget for the implementation of the government’s economic policy preferences, the changes introduced could provide for initiatives in favour of development, a possibility not admitted in the past. Finding the resources for achievement of the public finance objectives and for the financing of the new measures may, as a result, be defined and assessed simultaneously, including in terms of the impact on the economic system and on the individual sectors affected.

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2 Legislative Decree No. 90/2016 covering provisions for the completion of the State-budget reform; Legislative Decree No. 93/2016 covering provisions for the reordering of the rules governing the management of the budget and the enhancement of the role of the cash budget; Law No. 163/2016 containing amendments to Law No. 196/2009. See Chapter V for additional information about budget reform.

3 Constitutional Law No. 1/2012 and Law No. 243/2012 which ratified the principle of a balanced budget into Italian law.

4 Legislative Decree No. 90/2016.

5 Legislative Decree No. 93/2016.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2016

The reform has revised the timing for the presentation of the planning and budget documents, though maintaining the distinction between the time when the policy scenario objectives are set and the time when the measures aimed at achieving those objectives are to be realised. The shifting of the presentation of the EFD Update from 20 September to 27 September is to allow for incorporating into such document the data from ISTAT’s second notification on general government net borrowing and debt, so as to ensure the consistency between i) the macroeconomic and public finance projections presented in the EFD Update and ii) the corresponding projections presented in the Draft Budgetary Plan. It is also expected that the Draft Budgetary Plan, to be presented to the European Commission and Eurogroup by 15 October, will be transmitted to the Italian Parliament. Finally, the date for presentation of the draft Budget Law to Parliament has been shifted from 15 October to 20 October. This deferral should allow for presenting Parliament with a budget integrating the financial effects of amendments introduced on the basis of unchanged legislation.

FOCUS   Integrating the spending review into the economic and financial planning cycle One of the aims of the reform of the Public Finance and Accounting Law is to reinforce the top-down approach to economic-financial planning, through integrating the spending-review process into the budget cycle.6 In this regard, a revision is planned in the process for the preparation and examination of proposed budgets, so as to ensure the proposals are tied to specific objectives assigned to each administration in advance of the time when the individual spending requests are presented. In this manner, it will be possible to assess alternatives about the financing of ‘historical’ activities vis-à-vis new spending needs, thereby facilitating a system for the re-allocation of resources among the various initiatives, in relation to their effectiveness. For this purpose, special spending objectives for each central administration of the State will be established in May of each year through a decree of the Prime Minister, based on the proposal of the Minister of the Economy and Finance. Consistent with the objectives assigned, each ministry will need to develop its own financial plan, indicating the programmes and measures to be adopted with the Budget Law for the achievement of the results expected. Upon the approval of the Budget Law, the Ministry of the Economy and Finance (MEF) will sign a special three-year agreement with each ministry so as to focus on the extent of the achievement of the forecast results, and to define the means for monitoring the spending objectives, including in terms of the quantity and quality of the goods and services produced/supplied. These agreements are to be finalised by 1 March of each year and will published on the MEF’s website. During the year, the monitoring is to be discussed in periodic meetings between the administrations involved, including for the purpose of identifying any critical factors and corrective measures needed. In this regard, a report on the status of the implementation of the agreements is to be sent during the month of July to the Minister of the Economy and Finance and to the Prime Minister, including for the purpose of providing information useful for subsequent planning and/or the revision of the current plan. With reference to the agreements in effect in a prior year, each ministry is required to send a report to the Prime Minister and the MEF by 1 March so as to illustrate the extent of achievement of the expected results, or to outline, in the event of a negative outcome, the reasons for their non-achievement. The information and the results expected from the change in conduct and administrative activity consequent to the adoption of this new process can thus be uniformly incorporated in the public finance planning, as early as the preparation of the EFD in the month of April thereafter.  

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6 Reference is made, in particular, to the amendments introduced to Law No. 196/2009 (Public Finance and Accounting Act) by Article 4 of Legislative Decree No. 90/2016 covering provisions for the completion of the reform of the State budget.

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FOCUS Assessment of the amounts collected through activities to fight tax evasion The assessment of the collections from the activities to fight tax evasion in comparison with corresponding budget projections for the current year is done at the time of the EFD Update, pursuant to Article 1, Paragraph 434, Points 1 and 2 of the 2014 Stability Law.7 The assessment of the incremental resources is done by comparing the current year’s collections from the activities to fight tax evasion with the budget projections for the current year and with the sums actually collected in the preceding year.8 The assessment is aimed at verifying that all of the following three conditions have been met: i) the existence of incremental revenue derived from the activities to fight tax evasion vis-à-vis budget projections for the current year (2016); ii) the existence of incremental revenue derived from the activities to fight tax evasion vis-à-vis revenue actually collected in the preceding year (2015); and iii) the permanent nature of the aforementioned incremental revenue.   When these three conditions are all met, the permanent resources arising from the activities to fight tax evasion are to be booked, upon the preparation of the draft Budget Law, to the pertinent chapter/article of revenue projections, and simultaneously, to the Fund for Fiscal Pressure Reduction, solely with reference to the first year of the three-year reference period (2017). The assessment considers final data and projections for i) taxes booked as tax revenue in the State budget as part of tax assessment and audit activities, and, ii) non-tax revenue with reference to related interest and sanctions. The final data include payments booked to the State general account through the end of 2015 and payments received through the end of August 2016; the projections incorporate estimates at unchanged legislation (cash basis) presented in the State budget’s revenue projections for 2016-2017, as well as the subsequently updated estimates of collections expected in 2016.

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7 Law No. 147/2013.

8 Article 1, Paragraphs 431 and 434 of Law No. 147/2013.

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UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2016

The following table illustrates principal taxes (personal income taxes, corporate income taxes and value-added taxes) and other minor taxes (inclusive of revenue derived from tax agreements/conciliations), with the following reported for each: the collections realised in 2015, as booked to the State general account (first column); the estimate of permanent collections realised in 2015 (second column); the estimate of collections expected in 2016 and the portion thereof considered as permanent resources (third and fourth columns, respectively); the budget projections for 2016 and 2017 (the figures for 2016 refer to cash projections inclusive of budget changes, while the figures for 2017 refer to cash projections booked to the budget at unchanged legislation); the difference between the permanent collections estimated for 2016 and the projections booked to the budget for each of the years of 2016 and 2017; the difference between the estimate of permanent collections expected in 2016 and those realised in 2015 (final column).

AMOUNTS COLLECTED FROM ACTIVITIES TO FIGHT TAX EVASION (in € bn)
	2015 collections  (State General Account)	Estimated 2015 permanent collections  (a)	Estimated 2016 collections  based on data to August	Estimated 2016 permanent collections (b)	Budget projections  (2016 inclusive of budget changes and 2017 at unchanged legislation) (c)		Differences: estimated 2016 permanent collections – budget projections (d)=(b)-(c)		Difference: estimated 2016 permanent collections – 2015 permanent collections (e)=(b)-(a)
	2015	2015	2016	2016	2016	2017	2016	2017	2016
Personal income tax	3.70	3.52	3.76	3.58	3.20	2.90	0.38	0.68	0.06
Corporate income tax	2.20	2.09	1.80	1.71	2.00	1.80	-0.29	-0.09	-0.38
Value-added tax	3.10	2.95	3.59	3.41	2.90	2.40	0.51	1.01	0.46
Other minor taxes	0.62	0.54	0.76	0.70	0.51	0.31	0.19	0.39	0.16
Total tax rolls	9.62	9.10	9.91	9.40	8.61	7.41	0.79	1.99	0.30
Total non-tax rolls	2.80	2.66	2.89	2.74	2.00	2.10	0.74	0.64	0.08
Total	12.42	11.76	12.80	12.14	10.61	9.51	1.53	2.63	0.38

For 2016, the estimate of the resources derived from activity to fight tax evasion is computed on the basis of the collections already realised in the January-August period, which amounted to €7.6 billion, inclusive of €5.9 billion of tax revenue. Such collections are then rounded out by the amount realisable during the remaining four months of the year (September-December): such estimate is computed by assuming, in the case of each tax, a similar trend to that observed in the first eight months of the year, with the resulting amounts reduced by approximately one-third, if positive, and increased by approximately one-third, if negative.

The computation of permanent resources excludes collections in relation to taxes that, even though booked to the State account, are no longer in effect, and whose revenue stream is thus not continuous and recurring (examples include: local income tax (ILOR), property tax, taxation on income from personal property assets, the progressive complementary tax on total income, and so forth). After netting out such component, the permanent revenue is further reduced by a lump-sum factor of 5.0 percent calculated on the collections realised in 2015 (€12.42 billion), and on the estimated collections to be realised in 2016 (€12.8 billion). On the basis of this criterion, the permanent collections realised in 2015 and the estimate of the permanent collections for 2016 are respectively €11.76 billion and €12.14 billion. The permanent collections realisable in 2016 are estimated by considering an actual

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figure, which corresponds to the amount actually collected in the January-August 2016 period in the pertinent budget accounts (€7.59 billion), and an estimated figure in relation to a prudential assessment of the collections for the September-December 2016 period (€4.55 billion).

The analysis yields the following results: i) the estimate of the permanent collections expected for 2016 (€12.14 billion) is above the cash budget projections inclusive of budget changes for the year (€10.61 billion), and reflects incremental permanent resources equal to €1.53 billion; and ii) the comparison between the estimate of the permanent collections for 2016 and the permanent revenue actually collected in 2015 (€11.76 billion) shows incremental resources of €0.38 billion.

The amount of permanent resources to be allocated to the Fund for Fiscal Pressure Reduction is conservatively set at the lower of the aforementioned amounts. Accordingly, upon the preparation of the draft 2017 Budget Law, and with respect to 2017 only, €0.38 billion will be booked to revenue projections, and also accrued to the aforementioned fund. Indeed, these incremental resources were not incorporated into the estimates at unchanged legislation, and the level of the permanent revenue derived from tax assessment and tax audit activity estimated to be collected for 2016 (€12.14 billion) is greater than the amount booked as revenue to the cash projections at unchanged legislation for 2017 (€9.51 billion).

III.2 PUBLIC FINANCE: POLICY SCENARIO

Results: structural balance and expenditure rule

In May 2016, the European Commission revised the path to be taken by Italy toward achievement of the Medium-Term Objective (MTO), in consideration of the eligibility of both the flexibility clauses and the additional expenditure in relation to the refugee crisis and acts of terrorism.

For 2015, according to the Commission’s 2016 Spring Forecasts the output gap is estimated to be -2.9 percentage points of potential GDP, which represents a lower level with respect to 2014, and confirms the ongoing weakness phase of the economic cycle. The correction of the structural balance of 0.25 percentage points, which is consistent with the presence of adverse cyclical conditions, is further reduced in order to take into account the incremental expenditure (estimated at 0.03 percentage points of GDP) sustained by Italy the refugee emergency in 2015. This expenditure is recognised as eligible pursuant to provisions of both the Stability and Growth Pact (SGP) and the Fiscal Compact that allow for temporary deviations in the presence of exceptional events.9 The correction of the structural balance required in 2015 is thus reduced to 0.22 percentage points of GDP.

For 2016, the Council’s original recommendation in July 2015 allowed for an annual deterioration of the structural balance equal to 0.25 points instead of a consolidation of 0.5 points, in consideration of both the presence of adverse cyclical conditions (output gapof -1.6 percent), and the temporary deviation for the flexibility clauses in relation to structural reforms and public investments, for a total equivalent to 0.75 percentage points of GDP. In assessing the rules of the

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9 Articles 5.1 and 6.3 of the EU Regulations No. 1466/97 and Article 3 of the Fiscal Compact.

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SGP, the European Commission has also recognised as eligible the incremental expenditure related to the management of growing migratory flows and the intensify of international terrorist events in 2016. The overall impact of these additional charges on Italy’s structural balance is estimated to be equal to 0.1 percentage points of GDP for 2016 (respectively, 0.04 percentage points for the refugees and 0.06 percentage points for the so-called security package). The increase in the structural deficit allowed for 2016 is therefore revised from 0.25 percentage points of GDP to 0.35 percentage points. The European Commission has nonetheless made it clear that the assessment about 2016 will be done on the basis of the costs actually sustained for exceptional events in 2016, which will be reported on the basis of final data in the 2017 Stability Programme.

For 2017, according to the Commission’s Forecasts of April 2016, the output gapis expected to be -0.4 percent of potential GDP, which suggests a return to normal cyclical conditions. The correction of the structural balance required in 2017 is more than 0.5 percentage points (0.6 percentage points according to the recommendations published in May 2016 with reference to the EFD), including as a result of the presence of the high public debt.

In comparison with the path outlined by European rules, the policy scenario presented here provides for an estimated structural deficit of 0.7 percent of GDP in 2015, and an output gap of -3.5 percent of potential GDP. The improvement compared with 2014 of about 0.2 percentage points of GDP is in line with the required correction. The aggregate of expenditure, though increasing, does not reflect any significant shift away from the required benchmark.

In 2016, the general government net borrowing target is projected at 2.4 percent of GDP. The corresponding structural balance would be 1.2 percent of GDP, reflecting a deterioration of about 0.5 percentage points compared with 2015. This deterioration is greater than the maximum increase allowed, but it does not constitute a significant deviation, and it is therefore compatible with the preventive arm of the SGP. In addition, the trend of the expenditure aggregate is consistent with the objective set for the current year.

The estimate of the output gapfor 2017, based on the methodology agreed at a European level,10 is expected to be -1.7 percent of potential GDP under the

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10 The Treasury’s estimates differ from the underlying macroeconomic forecast. The latter has a four-year horizon whereas the Commission’s forecasts do not go beyond 2017. In addition, in support of the analysis, the MEF has provided for the option of using an appropriately calibrated grid search procedure for the statistically optimal definition of the initial level of variances for the computation of NAWRU. With regard to the issue of the time horizon for the estimates of the output gap, it is necessary to note (both with respect to the actual and forecast data) that the estimate of the output gap is very sensitive with respect to the length of the forecast period chosen. In drawing up the Stability Programmes, the Member States are asked, based on the Code of Conduct, to present public finance objectives under a policy scenario, structural balances and data for the output gap with respect to a time horizon covering three/four years following the current year. Instead, the European Commission’s Spring Forecasts, which represent the information base for the evaluation of the individual countries’ compliance with the rules of the Stability and Growth Pact, do not extend beyond the year following the current year. Given the construction of the production function model used at a European level, the use of a different time horizon by the Commission makes the estimates of the output gapnarrower and more conservative vis-à-vis the estimates computed by the Member States on the basis of macroeconomic projections that encompass the following three years. Previous years have shown that the average differential in the estimate of the output gap due to the different time horizon can make the output gap larger by at least 0.5 percentage points of GDP. It follows that the deviations compared with the Commission’s figure mainly depend on the incremental effect on the level of the potential GDP due to a longer time horizon. This discrepancy due to the model’s technical characteristics can produce significant differences in the estimation of the structural balances and in the assessment of the compliance with the rules of the Stability and Growth Pact. Accordingly, in

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policy scenario. This level, which is more than the representative threshold of -1.5 percent of potential GDP, would suggest a continuation of adverse cyclical conditions again in the coming year. In presence of adverse cyclical conditions, the required fiscal consolidation would amount to 0.5 percentage points of GDP; this represents a difference with respect to the Commission’s 2016 Spring Forecasts, which, in estimating an improvement in the output gapin 2017 (towards a level of -0.4 percent), have envisioned ‘normal’ cyclical conditions for Italy, and accordingly require a reduction of the structural balance of 0.6 percentage points.

According to the government’s estimates, in consideration of a net borrowing target of 2.0 percent of GDP for 2017, the structural balance in 2017 would remain unchanged at 1.2 percent in comparison with the forecast for 2016, and as such, it would not represent a significant deviation.

The Commission will use the 2017 Draft Budgetary Plan (which Italy is to send to the European institutions by 15 October) to assess Italy’s compliance with fiscal consolidation obligations. The Commission’s assessment will be based on the Autumn Forecasts that are to be released in November.

Following 2017, the structural deficit is projected to decrease to -0.7 percent in 2018 and -0.2 percent in 2019, in line with the projections outlined in the EFD and substantially in line with Italy’s Medium-Term Objective.

Budget planning for the years ahead

The 2017 macroeconomic projections in this Update have been revised downward with respect to the April projections. The projections for the years following 2017 are more encouraging, even though they are part of a forecast scenario that remains prudent, given the onerous legacy of the crisis of the past few years. The revision of public finance targets reflects new assessments about growth and the output gap.

Given this revised international framework and signs of a slowdown in domestic demand, the government has decided to adopt a highly growth-oriented budget policy in terms of net borrowing targets and the mix of the budget for 2017-2019. According to the government, the conditions indicated in Article 6 of Law No. 243 of 2012 are applicable for revising the adjustment path of the structural deficit. The trend of the public accounts contained in this document and illustrated in the Report to Parliament attached to this Update shows a more gradual fiscal adjustment compared with the EFD in April 2016.

According to the estimates at unchanged legislation, the general government net borrowing is estimated to be 2.4 percent of GDP in 2016, a level that is 0.1 percent higher with respect to the 2.3 percent outlined in the EFD, but substantially in line with the figure provided in the 2016 Stability Law.

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order to provide a better basis for comparison of results, it would be necessary for the European Commission to align its forecast time horizon to that required within the framework of the Member States’ Stability Programmes.

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TABLE III.2: SUMMARY OF PUBLIC FINANCE UNDER THE POLICY SCENARIO (% of GDP)
		2015	2016	2017	2018	2019
NET BORROWING	(EFD Update)	-2.6	-2.4	-2.0	-1.2	-0.2
	(2016 EFD)	-2.6	-2.3	-1.8	-0.9	0.1
INTEREST	(EFD Update)	4.2	4.0	3.7	3.6	3.4
	(2016 EFD)	4.2	4.0	3.8	3.6	3.5
PRIMARY BALANCE	(EFD Update)	1.5	1.5	1.7	2.4	3.2
	(2016 EFD)	1.6	1.7	2.0	2.7	3.6
STRUCTURAL NET BORROWING (1)	(EFD Update)	-0.7	-1.2	-1.2	-0.7	-0.2
	(2016 EFD)	-0.6	-1.2	-1.1	-0.8	-0.2
DEBT (including support) (2)	(EFD Update)	132.3	132.8	132.5	130.1	126.6
	(2016 EFD)	132.7	132.4	130.9	128.0	123.8
DEBT (net of support) (2)	(EFD Update)	128.7	129.3	129.0	126.8	123.4
	(2016 EFD)	129.1	129.0	127.5	124.7	120.6
PUBLIC SECTOR BALANCE	(EFD Update)	-3.2	-3.2	-2.7	-1.9	-0.4
	(2016 EFD)	-3.2	-3.1	-2.3	-1.4	0.0
STATE SECTOR BALANCE	(EFD Update)	-3.6	-3.4	-2.9	-2.1	-0.6
(1) Net of the one-off measures and the cyclical component. (2) Inclusive or net of Italy's portion of loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. As of 2015, the amount of such outflows was approximately €58.2 billion, inclusive of €43.9 billion for bilateral loans and loans through the EFSF and €14.3 billion for the ESM programme.

The net borrowing target for 2017 has been revised from 1.8 percent of GDP to 2.0 percent, which is consistent with a structural balance target of 1.2 percent of GDP. The budget package for 2017 is expected to amount to about 0.5 percent of GDP, and will be detailed in the Budget Law for 2017. As outlined in the EFD, the VAT increases provided by current legislation for 2017 will not go into effect. With reference to investment, the new public projects will entail enhancements to infrastructure and environmental investment. Fiscal incentives to the private sector are to be boosted, as already provided by previous legislative provisions, and new mechanisms will be introduced to favour the recovery of the capital accumulation that is essential for expanding the Italian economy’s potential to grow and to innovate. Other measures will be aimed at shielding retirees from the risk of poverty, and facilitating flexibility for accessing the retirement system. Additional programmes will regard the strengthening of measures to provide assistance to families.

The financing of these initiatives will partially come from measures aimed at increasing taxpayer compliance and reducing tax evasion and tax avoidance, and with regard to expenditure, from new measures covering the structural reduction of current expenditure, inclusive of the savings realised from integrating the spending review process into the economic-financial planning cycle.

The government also intends to implement, where necessary, other measures addressing the earthquake emergency, the security of the country’s housing stock and the national territory, and the management of migration.

In view of the pressing challenges that the country is facing, the net borrowing target for 2017 could be increased by up to 0.4 percent of GDP, according to scenario outlined in the Report to Parliament attached to this Update.

The measures underlying any increase in net borrowing in 2017, which are to be detailed in the Budget Law, will entail effects to stimulate growth that have not explicitly been included in the macroeconomic projections under the policy

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TABLE III.3: CYCLICALLY-ADJUSTED PUBLIC FINANCE (% of GDP)
	2014	2015	2016	2017	2018	2019
GDP growth rate at constant prices	0.1	0.7	0.8	1.0	1.3	1.2
Net borrowing	-3.0	-2.6	-2.4	-2.0	-1.2	-0.2
Interest expenditure	4.6	4.2	4.0	3.7	3.6	3.4
Potential GDP growth rate	-0.5	-0.3	-0.2	0.2	0.3	0.4
Factor contribution to potential growth:
Labour	-0.1	0.1	0.0	0.3	0.3	0.3
Capital	-0.2	-0.1	-0.1	0.0	0.0	0.1
Total Factor Productivity	-0.2	-0.2	-0.2	-0.1	-0.1	0.0
Output gap	-4.4	-3.5	-2.5	-1.7	-0.7	0.0
Cyclical component of budget balance	-2.4	-1.9	-1.3	-0.9	-0.4	0.0
Cyclically adjusted budget balance	-0.6	-0.8	-1.1	-1.1	-0.8	-0.2
Cyclically adjusted primary surplus	4.0	3.4	2.9	2.6	2.8	3.2
One-off measures	0.2	-0.1	0.1	0.1	-0.1	-0.1
Budget balance, net of one-off measures	-3.2	-2.5	-2.5	-2.1	-1.1	-0.1
Cyclically adjusted budget balance, net of one-off measures	-0.8	-0.7	-1.2	-1.2	-0.7	-0.2
Cyclically adjusted primary surplus, net of one-off measures	3.8	3.5	2.8	2.5	2.8	3.3
Change in budget balance, net of one-off measures	-0.2	0.7	0.0	0.4	1.0	1.0
Change in cyclically adjusted budget balance, net of one-off measures	-0.5	0.2	-0.5	0.0	0.5	0.6
Note: Discrepancies, if any, are due to rounding.

TABLE III.4: ONE-OFF MEASURES AT UNCHANGED LEGISLATION (in € mn)
	FINAL	PROJECTIONS
	2015	2016	2017	2018	2019
Total one-off measures	-1,645	1,391	-42	-820	-830
% of GDP	-0.1	0.1	0.0	0.0	0.0
a) Revenue	1,102	4,116	1,138	140	10
% of GDP	0.1	0.2	0.1	0.0	0.0
Various substitute taxes	750	958	328	130	0
Tax amnesty programme – construction activity	29	15	10	10	10
Alignment of financial statement values with IAS	95	267	0	0	0
Capital gains substitute tax - Bank of Italy	16	101	0	0	0
Voluntary Disclosure Programme for assets held abroad	212	2,775	800	0	0
b) Expenditure	-3,693	-3,475	-2,080	-1,860	-1,740
% of GDP	-0.2	-0.2	-0.1	-0.1	-0.1
Pension arrears under Constitutional Court Ruling No. 70/2015	-1,670	0	0	0	0
Measures for natural disasters	-1,973	-2,290	-2,060	-1,860	-1,740
Dividends paid	-50	-30	-20	0	0
New EU decision on own resources: 2014	0	-1,155	0	0	0
c) Divestiture of real property	946	750	900	900	900
% of GDP	0.1	0.0	0.1	0.1	0.0
Distribution of one-off measures by sub-sector
Central government	-2,566	691	-592	-1,340	-1,280
Local government	569	400	250	240	150
Social security funds	352	300	300	280	300

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scenario. As such, the actual growth of the economy could exceed the forecast reported in this document.

For the subsequent two-year period, the trend of net borrowing is projected to sharply decline, until the achievement of a near balanced budget (-0.2 percent of GDP) in 2019. The primary surplus is projected to climb from 1.5 percent in 2016 to 3.2 percent in 2019, mostly due to continuous control over expenditure and to new clauses established to guarantee public finance balances.

The structural balance under the policy scenario is set to improve to -0.7 percent of GDP in 2018 and -0.2 percent in 2019, essentially reaching the MTO.

FOCUS   Assessment of significant deviations For those countries to which the preventive arm of the Stability and Growth Pact (SGP) is applicable, the path toward the achievement of the Medium-Term Objective (MTO) is evaluated on the basis of two criteria: i) the change in the structural balance; and ii) the expenditure rule. As far as the first criterion is concerned, the path of adjustment toward the MTO, as measured on the basis of the change in the structural balance, is modulated each year according to the following criteria:11 i) the economy’s cyclical conditions as represented by the level of the output gap; ii) the starting level of the structural balance; iii) the level of the debt-to-GDP ratio; and iv) the existence of medium-term risks to public finance sustainability, as evaluated on the basis of the S1 indicator. For example, in ‘normal’ cyclical conditions (represented by an output gap of between -1.5 percent and 1.5 percent of potential GDP), a country that has a debt-to-GDP ratio above 60 percent and, on the basis of S1, medium sustainability risks, must move toward its MTO through a reduction of the structural balance of more than 0.5 percentage points of GDP. The Commission’s Communication of January 2015 clarified that annual adjustments modulated on the basis of cyclical conditions can be reduced in the event of the application of the structural reforms and investments clauses. This implies that against the required annual structural balance (0.5 percentage points of GDP) in normal cyclical conditions, the joint application of the reforms and investments clauses can permit maximum easing of the structural balance for up to -0.25 percentage points of GDP. With reference to the expenditure rule and to countries that have not yet achieved their MTO, European regulations establish that the aggregate expenditure of reference must grow at a rate equal to the difference between the average growth rate of potential GDP12 and the so-called convergence margin. The convergence margin is, in turn, calibrated in relation to the economy’s cyclical conditions so that, for example, in ‘normal’ cyclical conditions (i.e. annual output gap of between -1.5 percent and 1.5 percent of potential GDP), the expenditure aggregate is reduced so as to ensure annual improvement in the structural balance that is equal to or greater than 0.5 percent of GDP. As clarified by the European Commission, the remodulation of the expenditure rule’s parameters also occurs in the event of the application of the flexibility granted for structural reforms and/or for the investments clause. With regard to the path of adjustment toward the MTO, there are significant deviations if there is a shift of 0.5 percentage points of GDP year on year, or an average shift of 0.25

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11 See the matrix that specifies the annual adjustment toward the MTO on the basis of the situation for the economic cycle presented in the Commission’s Communication ‘Making the best use of flexibility within the existing rules of the Stability and Growth Pact’ of 13 January 2015.

12 The average growth rate of potential GDP is computed on the basis of the production function method agreed at a European level, considering a 10-year average of the European Commission’s forecast centredon the year for which the estimation is being made. The 10-year average accordingly includes the four years prior to that for the estimation, and the five subsequent years (forecast of two years and mechanical extrapolation for the last three).

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percentage points over preceding two years, compared with the path identified on the basis of the change in the structural balance and the expenditure rule. However, only the existence of a significant deviation as indicated by ex post data can lead to the opening of an infraction procedure.

In 2015, according to the macroeconomic assumptions under the policy scenario of this Update the output gap is estimated at -3.5 percent of potential GDP. The cyclical conditions would thus be defined as particularly adverse (‘very bad times’) and accordingly, the structural balance adjustment required by the preventive arm of the SGP and the convergence margin of the expenditure rule were reset so as to ensure improvement of only 0.25 percentage points of GDP. In its assessment of Italy’s 2016 Stability Programme, the European Commission reduced this correction to 0.22 percentage points of GDP in consideration of the incremental expenditure sustained by Italy for the refugee emergency (estimated to be 0.03 percentage points of GDP).13 Similarly, the reduction in the expenditure aggregate was set to about 0.5 percent in real terms. In 2015, the structural deficit was reduced by almost 0.2 percentage points of GDP on an annual basis, in line with the adjustment required. The change in the structural deficit deviated by about 0.1 percentage points of GDP from the average correction required for the 2014-2015 two-year period. With regard to the expenditure rule, the reference aggregate rose by 0.65 percent in real terms, thereby evidencing a deviation (vis-à-vis the reduction required) slightly lower than the threshold of 0.5 percentage points that would be considered a significant deviation. The deviation with respect to the reduction to deliver over the two years is almost 0.2 percentage points of GDP. Therefore, according to the ex post assessment, there are no significant deviations to report, either on an annual basis or with respect to the two-year average.

Given the activation of the reforms and investments clauses that equal to 0.75 percentage points of GDP, the structural deficit for 2016 can increase by 0.25 percentage points of GDP with respect to 2015. The expenditure aggregate can increase by 0.6 percent in real terms. In May, in assessing the rules of the SGP, the European Commission also recognised as eligible for 2016 the incremental expenditure related to the management of growing migratory flows and the intensification of international terrorist events, quantifying the total therefor at 0.1 percentage points of GDP (respectively, 0.04 percentage points for the refugees and 0.06 percentage points for the so-called security package). The increase in the structural deficit allowed for 2016 was thus revised from 0.25 percentage points of GDP to 0.35 percentage points, while the expenditure aggregate can increase by 0.8 percent in real terms. Compared with these parameters, the deviation of the structural balance in 2016 is expected to be 0.15 percentage points of GDP on an annual basis and almost 0.2 percentage points of GDP on average for 2015 and 2016, which are not considered significant according to SGP criteria. In addition, the estimates related to the expenditure rule imply full compliance on an annual basis, and a limited deviation of almost 0.2 percentage points on average for the two years.

Finally, in 2017, the presence of normal cyclical conditions (according to the European Commission’s estimates), and a high debt-to-GDP ratio would require a structural balance correction of 0.5 percentage points of GDP and a corresponding reduction of 1.3 percent in aggregate expenditure in real terms. The estimate of the output gapunder the policy scenario of this documenthas been revised to -1.7 percent of potential GDP in 2017 (-1.1 percent in the EFD in April), which would suggest the continuation of mostly adverse cyclical conditions with the possibility of: i) reducing the structural balance by only 0.5 percentage points of GDP; and ii) reducing the expenditure aggregate by 1.1 percent in real terms. For 2017, the government expects a zero change in the structural deficit under the policy scenario compared with 2016, while the reference expenditure aggregate, calculated at unchanged legislation is projected to fall by about 1.4 percent in real terms, thus by a rate exceeding the SGP requirement.

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13 European Commission, ‘Assessment of 2016 Stability Programme for Italy’ of 26 May 2016.

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FOCUS   The estimation of potential GDP, output gapandstructural budget balance using an alternative model to the commonly agreed methodology Given the relevance of the output gap (the difference between actual and potential GDP) in determining structural budget balances both under the framework of the Stability and Growth Pact and under the national legislation (Law No. 243/2012), the agreed production function methodology shared at the EU level to estimate potential output and output gaps has acquired increasing relevance in recent years. As pointed out in the 2016 Stability Programme, the government is of the opinion that the methodology agreed at a European level for the estimation of potential GDP and the output gap is not suited for providing an appropriate assessment of Italy’s growth potential, with respect to both past years and the years ahead. In addition, the estimates produced by using the commonly agreed methodology are pro-cyclical and not in line with key macroeconomic indications.   On this topic, it is useful to refer to the focus titled ‘Changes to methodology for the estimation of potential GDP, as agree at a European level’ which is contained in the 2016 Stability Programme (pages 44-51). With the update of the macroeconomic estimates contained in this Document, it has been possible to test the robustness of the alternative methodology proposed and to produce estimates of Italy’s potential growth more in line with macroeconomic intuition. This section presents the results in terms of the output gap and the structural budget balance as derived from the application of the alternative methodology for estimation of Italy’s potential GDP. In essence, starting from the European Commission’s specification of the production function, the methodology developed by the Italian Treasury substitutes the Non-Accelerating Wage Rate of Unemployment (NAWRU) with the Non-Accelerating Inflation Rate of Unemployment (NAIRU), and estimates the trend of total factor productivity (TFP) through the cyclical-trend decomposition that is obtained by using a labour-hoarding measure (such as the time series of the Cassa Integrazione Guadagni, CIG)) as the endogenous variable instead of the current measure based on confidence surveys (the CUBS index).  Such an enhancement of the official methodology leads to significant changes in the estimates of Italy’s potential GDP and output gap. In this regard, the analysis proposed in this section is different than that included in 2016 Stability Programme, as the alternative methodology has been applied to the macroeconomic projections under the policy scenario included herein, and not to the macroeconomic forecasts published by the European Commission. Given the changes introduced, the estimates of Italy’s potential growth are better than those obtained by the methodology agreed at a European level. More specifically, the level of potential GDP is solidly higher across the entire 2016-2019 forecast horizon, with the values of the output gap consequently being significantly larger. More specifically, Italy’s output gapwould be -3.4 percent of potential GDP in 2016 (versus -2.5 percent under the policy scenario in this Document), -2.8 percent in 2017 (versus -1.7 percent), -1.9 percent in 2018 (versus -0.7 percent) and -1.3 percent of potential GDP in 2019 (versus a gap of almost zero as provided by the official estimates). As one can note, with the alternative specification of the model, the gap between real growth and potential growth does not close at the end of the forecast horizon, but it still remains negative, thereby suggesting the continuation of the Italian economy’s negative cyclical phase, with significant consequences on fiscal policy. Indeed, the structural budget balance corresponding to these output gap values would be equal a deficit of -0.7 percent in 2016 (versus -1.2 percent under the policy scenario in this document), a deficit of -0.6 percent in 2017 (versus -1.2 percent) and a surplus of 0.6 percent at the end of the forecast horizon.

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POTENTIAL GROWTH AND OUTPUT GAP WITH THE ENHANCED MODEL
POTENTIAL GROWTH	OUTPUT GAP
Source: MEF analyses.	Source: MEF analyses.

OUTPUT GAP AND STRUCTURAL BALANCE WITH THE ENHANCED MODEL
	Output Gap		Structural deficit
	2016 EFD Update	Alternative model	2016 EFD Update	Alternative model
2015	-3.5	-4.2	-0.7	-0.2
2016	-2.5	-3.4	-1.2	-0.7
2017	-1.7	-2.8	-1.2	-0.6
2018	-0.7	-1.9	-0.7	-0.1
2019	0.0	-1.3	-0.2	0.6
Source: MEF analyses.

The analysis and development of the enhanced model for estimating potential GDP are currently under further review, with particular reference to the capital stock component. The commonly agreed methodology uses a simplified assumption for the estimate of depreciation rate of capital, which does not consider any changes in the capital stock occurring in Italy’s most recent economic recession. Considering the characteristics of the model, which is based on a Cobb-Douglas production function, alternative valuations of the depreciation rate would entail significant additional effects on the trend of the capital stock and therefore, on the estimate of potential GDP and of its components, in particular on the structural level of the total factor productivity. In the event of a downward revision of the capital stock for the effect ofa more acute crisis, TFP would be revised upward.  In a scenario where investment is recovering, this would increase the economy’s potential growth rate for the next few years.

III.3 TREND OF THE DEBT-TO-GDP RATIO

ISTAT’s revision of GDP14 and the Bank of Italy’s revision of the nominal value of the general government debt stock15 have produced a reduction in the debt-to-GDP ratio for 2014 and 2015 with respect to the EFD estimates published in April.

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14 See ISTAT press release ‘National Economic Accounts’issued on 23 September 2016.

15 The updated series of the general government debt is to be published in October 2016 in the Bank of Italy’s ‘Supplement to the Statistical Bulletin:  Public Finance, Borrowing Requirement and Debt’.

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More specifically, the new estimate of the final debt-to-GDP ratio for 2014 stands at 131.9 percent, 0.6 percent below its previous estimate, while the final ratio for 2015 is equal to 132.3 percent, also in this case lower than estimated in April (0.4 percentage points). The new levels of the debt-to-GDP ratio are mainly the result of higher GDP, which accounts for 0.7 percent in 2014 and 0.5 percent in 2015; on the other hand, revisions that entail an increase in the nominal value of the debt are equal to 0.1 percent for both years, with the level of GDP held constant.

The debt-to-GDP ratio for 2016 is forecast to be 132.8 percent, which is above 132.4 percent outlined in the EFD policy scenario in April. The change is due to i) less robust growth than expected for nominal GDP, which is forecast to decelerate to 1.8 percent from 2.2 percent, and ii) the significant reduction of the privatisations proceeds with respect to those contemplated for this year.

These effects have been partially offset by several placements of government securities at prices above par, due to the downward trend of interest rates in 2016. On the other hand, the estimate of the public sector borrowing requirement remains substantially in line with the level forecast in April, and therefore, without any significant impact on the upward revision of the debt-to-GDP ratio.

TABLE III.5: GENERAL GOVERNMENT DEBT BY SUBSECTOR (in € mn and % of GDP) (1)
	2015	2016	2017	2018	2019
Inclusive of financial aid to Euro Area (2)
General government	2,172,673	2,220,662	2,257,141	2,283,302	2,290,832
% of GDP	132.3	132.8	132.5	130.1	126.6
Central government (3)	2,089,028	2,139,875	2,179,667	2,209,213	2,220,369
Local government (3)	135,696	132,839	129,525	126,140	122,514
Social security funds (3)	114	114	114	114	114
Net of financial aid to Euro Area (2)
General government	2,114,442	2,162,431	2,198,909	2,225,071	2,232,601
% of GDP	128.7	129.3	129.0	126.8	123.4
Central government (3)	2,030,797	2,081,643	2,121,436	2,150,982	2,162,138
Local government (3)	135,696	132,839	129,525	126,140	122,514
Social security and welfare agencies (3)	114	114	114	114	114
(1) Note: Discrepancies, if any, are due to rounding. (2) Inclusive or net of Italy’s portion of loans to Member States (bilateral or through the EFSF) and the ESM capital contribution. As of 2015, the amount of such outflows was about €58.2 billion, inclusive of €43.9 billion for bilateral loans and loans through the EFSF and €14.3 billion for the ESM programme. The policy scenario estimates include the proceeds from privatisations amounting to about 0.1 percent of GDP in 2016, 0.5 percent of GDP in 2017 and 2018, and 0.3 percent of GDP for 2019, as well as additional savings to be allocated to the State Securities Amortisation Fund. In addition, these estimates incorporate the assumption of a gradual exit from the Unified Public Treasury as from 2017, and a modest reduction of the MEF’s liquidity balances amounting to 0.28 percent of GDP in 2017 and about 0.14 percent of GDP in 2018. The interest rate scenario used for the estimates is based on implicit projections derived from the forward rates on Italian government securities with respect to the period for compiling this document. (3) Inclusive of liabilities with respect to other subsectors.

The profile of the debt-to-GDP ratio starts to fall as from 2017, reaching a level of 126.6 percent in 2019, with a rate of decline that is only marginally less than that projected in April.

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More specifically, the debt-to-GDP ratio for 2017 is forecast at 132.5 percent, decreasing by about 0.3 percentage points compared with 2016. In the EFD, this reduction was greater (around 1.5 percentage points) as it reflected a more pronounced decrease of the public sector borrowing requirement, and a significantly stronger nominal GDP growth.

In 2018, the debt-to-GDP ratio under the policy scenario is projected to decrease further, to 130.1 percent. In this case, too, the reduction compared with 2017 is less pronounced than provided by the EFD in April, although the disparity between the two estimates is smaller (2.9 percentage points in the EFD versus the current level of 2.4 percentage points). Nominal GDP growth is substantially in line with that forecast in April, while the reduction of the public sector borrowing requirement, though significant, is forecast to be slightly more modest.

At the end of the forecast period, in 2019, the ratio continues to fall steadily year on year (around 3.5 percentage points), due to forecast trends of nominal GDP and the public sector borrowing requirement substantially in line with the policy scenario provided in April.

FOCUS   Medium/long-term trend of Italy’s pension system The projections of the medium/long-term trend of the pension expenditure-to-GDP ratio16 incorporate assumptions about the birth rate and net migratory flow underlying ISTAT’s baseline scenario (with 2011 as base year).17 The assumptions about the mortality rate have been updated in order to take into account the estimate related to life expectancy at birth for 2015 recently published by ISTAT.18 With reference to the macroeconomic framework, real GDP growth is set at an annual average of 1.5 percent in the long term. The employment rate (age 15 to 64) increases by 9-10 percentage points with respect to the figure for 2010. The growth assumptions for the 2015-2019 period are consistent with those outlined in this document under the macroeconomic scenario at unchanged legislation. The projections at unchanged legislation incorporates the effects of the measures contained in the reforms adopted19 as well as the adjustment applied every three years (every two years as from 2021) of the transformation coefficients and, with same frequency, the update, in line with the developments of life expectancy, of the eligibility requirements for retirement. This adjustment is made through proceedings which are fully within the sphere of administrative action and which guarantee the certainty of the calendar established for future revisions.20

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16 The medium/long-term trend of the pension expenditure-to-GDP ratio is presented in accordance with the provisions of Article 1, Paragraph 5 of Law No. 335 of 1995. The national accounting data related to pension expenditure and GDP are in line with the new European system of national and regional accounts (ESA 2010).

17 More specifically, the assumptions are: i) a birth rate that gradually converges to 1.6, and ii) a net flow of immigrants that goes from an annual average of approximately 280,000 in the first 10 years of the projections, to an annual average of approximately 180,000 at the end of the forecast period. See ISTAT (2011), http://demo.istat.it.

18 ISTAT press release dated 19 December 2016. With regard to the figures indicated in the press release, the increase in life expectancy to 2060 is 5.8 years for men and 6.1 years for women.

19Including those provided in Decree-Law No. 201/2011, converted with amendments by Law No. 214/2011 and the measures adopted thereafter for the purpose of further increasing the number of workers safeguarded from the more stringent requisites for pension eligibility as established by the aforementioned Decree-Law No. 201/2011.

20 The adjustment of the requisites as of 2016 (4 additional months), as legally required (Article 12, Paragraph 12-bis of Decree-Law No. 78/2010, converted with amendments with Law No. 122/2010), was adopted with managerial decree dated 16 December 2014 published in the Official Gazette of the Republic of Italy on 30 December 2014 and at least 12 months prior to the effective entry into force of such provision. Likewise, the

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After an increase in the 2008-2010 period (exclusively as a result of the severe recession), the pension expenditure-to-GDP ratio has been further negatively impacted by the recession in later years (and in particular, the contraction of GDP during the 2012-2014 period).

As from 2015-2016, in view of a more favourable growth outlook and of the gradual, ongoing increase in the minimum requirements for pension eligibility, the pension expenditure-to-GDP ratio decreases for a period of approximately 15 years, reaching 14.9 percent around 2030. Such level reflects the containment of pension spending due to i) the gradual increase of the average age for pension eligibility (due to adjustment of the minimum requirements) and ii) the introduction of a contributions-based system, with both developments largely offsetting the negative effects of demographic transition.

PUBLIC EXPENDITURE FOR PENSIONS  (% of GDP)

In the 15 years thereafter, the more pronounced negative demographic trends and the effects on the amounts of pensions due to the deferral of retirement in the preceding years will offset the effects of containment measures exercised by the regulatory framework. The growth of the pension expenditure-to-GDP ratio continues through 2044, when it reaches 15.6 percent. In the final part of the projection period, the ratio decreases significantly to 13.7 percent in 2060. The decrease is essentially due to i) the completion of the changeover from a mixed pay-as-you-go/contributions system to a full notional defined contributions system, which determines the trend of newly paid pensions to diminish (including for the effect of the revision of the transformation coefficients), and ii) the gradual elimination of the cohorts of retirees born during the baby boom years.

The projections show how the process of reforming pension system undertaken in the past two decades has substantially succeeded in offsetting the potential medium/long term effects of the demographic transition on public expenditure for pensions, as also evident at an international level.21

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adjustment of the transformation coefficients has been adopted well in advance of its entry into force with managerial decree dated 22 June 2015, published in the Official Gazette of the Republic of Italy on 6 July 2015.

21Economic Policy Committee - European Commission (2015), 2015 Ageing Report: Economic and Budgetary Projections for the EU-28 Member States, 2013-2060.

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FOCUS   Pension reform The new rules introduced by the reform adopted with Law No. 214/2011 have significantly changed the pension system by improving its medium/long-term sustainability and ensuring greater equity among generations. The reform provided for the extension of the contributions-based system to workers as from 2012, therefore including the workers who, under prior legislation, would have received a pension calculated according to earnings-related system (namely, individuals who had more than 18 years of contributions as of 31 December 1995). In line with the regulatory/institutional framework of most European countries, the reform confirms two types of retirement: i) retirement at a mandatory age as set by law, with at least 20 years of contributions and an age requirement set by law; and ii) early retirement at an age below the mandatory age, but with a longer period of contributions.22 Starting in 2013, all age requirements (including those for obtaining social allowances) and the requisite for qualifying for early retirement regardless of age are indexed to changes in life expectancy as measured by ISTAT with reference to the three previous years. The adjustment of the retirement requisites to changes in life expectancy occurs every three years and, starting from the adjustment subsequent to 2019, every two years, on the basis of an entirely administrative procedure.23 In addition, starting from 2013, the calculation of the transformation coefficients24 at the time of retirement is extended until age 70. Other safeguard measures are likewise provided so as to guarantee more gradual application of the reform, namely, to take into account specific factors in relation to proximity to retirement and difficult situations related to staying in the labour market, cases that have all been dealt with at a regulatory level.25 As a result of the overall reform process undertaken as of 2004, the average age at retirement (considering both the statutory and the early requirements) rises from 60-61 during the 2006-2010 period to approximately 64 years in 2020, 67 in 2040 and 68 in 2050. On a cumulative basis, the lower ratio of pension expenditure to GDP resulting from the reform process begun in 2004 amounts to approximately 60 percentage points of GDP as of 2050. Approximately one-third of this change is attributable to the reform introduced with Law No. 214/2011, whereas the other two-thirds are attributable to the preceding reform measures.

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22 For details about the minimum age and contribution requirements with reference to the eligibility requirements for the statutory retirement age, early retirement and social allowances, reference should be made to the special section of the Update of the 2012 Stability Programme entitled ‘Reform of the pension system’.

23 The adjustment of the requisites for pension eligibility as of 2013 was adopted with a decree of 6 December 2011, published in the Official Gazette of the Republic of Italy on 13 December 2011.  The next adjustment, to take effect in 2016 (an additional four months), in accordance with the law (Article 12, Paragraph 12-bis of Decree-Law No. 78 of 31 May 2010, converted with amendments by Law No. 122 of 30 July 2010), was adopted at least 12 months before the entry into force of the provision, and was thus adopted with managerial decree of 16 December 2014, published in the Official Gazette of the Republic of Italy on 30 December 2014.  Prevailing law contains a safeguard clause on the basis of which the minimum age requirement for old-age pensions may be no less than 67 for anyone becoming eligible for retirement as from 2021. In any event, on the basis of ISTAT’s more recent demographic projections, the aforementioned objective could be assured as early as 2019.

24 The transformation coefficient is also to be adjusted with the same calendar used for adjusting the requisites for retirement. The adjustment taking effect on 1 January 2016 was adopted by decree of 22 June 2013, published in the Official Gazette of the Republic of Italy No. 154 on 6 July 2015.

25 The total number of workers entitled to such safeguard measures is approximately 170,000. The safeguard is applied to workers entitled to a pension after 31 December 2011 (all people who met the requisites by such date are expressly exempt from the application of the new requisites for pension eligibility) and who have had difficulty of remaining in the labour market. Such workers must also fall within the categories expressly defined by the law.  Pension access for such workers started in 2013, and will continue in the next few years.

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PUBLIC EXPENDITURE FOR PENSIONS AS % OF GDP UNDER DIFFERENT REGULATORY ASSUMPTIONS

Note: For the short term, the EPC-WGA baseline scenario incorporates the indications of the macroeconomic projections based on unchanged legislation of the 2016 EFD Update. Then the forecast takes into account the overall effects of Decree-Law No. 65/2015, converted with Law No. 109/2015, including the effect of the implementation (Article 1) of the Constitutional Court Ruling No. 70/2015 booked according to the criteria indicated by the statistical authorities and therefore, with exclusion from the 2015 expenditure of the charges for arrears to be booked to line item D99 (capital account transfers).

Source: State General Accounting Department long-term forecasting model.

III.4 THE DEBT RULE AND OTHER RELEVANT FACTORS

The debt rule was introduced as part of European economic governance with the Six Pack, and was fully ratified at a national level with the law that provides for including a balanced budget in the constitution (Law No. 243/2012). Based on data reported for 2015 in April 2016, the debt rule became fully applicable for Italy after the three-year transition period that began with the closing of the Excessive Deficit Procedure in 2012.

The rule provides that at least one of the following criteria is respected in order to ensure that the debt-to-GDP ratio falls at an appropriate pace to the threshold of 60 percent:

i. in the three years preceding the year of reference, the debt in excess of 60 percent of GDP is to be reduced by an average of one-twentieth (backward-looking benchmark);

ii. the excess of debt with respect to the first benchmark is attributable to the economic cycle (using an indicator that shows the debt-to-GDP ratio that would have been obtained if, for the preceding three years, the numerator were to have been adjusted for the impact of the economic cycle and the nominal GDP in the denominator were to have grown at the same pace as potential GDP);

iii. the correction occurs in the two years subsequent to the year of reference (forward-looking benchmark).

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In 2016, compliance with the debt rule on the basis of the first two criteria was evaluated for the first time completely on the basis of ‘historical’ data published by ISTAT. Previously, during the transition period (2013–2015), in order to ensure that the debt-to-GDP ratio could converge smoothly toward the most favourable of the three benchmarks identified above, a minimum linear structural adjustment (MLSA) was required whose quantification had to be extrapolated based entirely or partially on forecast data.

As from 2016, the rule is fully in effect, and therefore, the convergence of the debt-to-GDP ratio toward the most favourable of the three benchmarks described above is verified directly, and in Italy’s case, the forward-looking benchmark is applicable. With reference to this benchmark, it is noted that Italy does not comply with the rule in 2016 (on the basis of the projections for 2018), either under the scenario at unchanged legislation or under the policy scenario.

More specifically, in the scenario at unchanged legislation, the debt-to-GDP ratio in 2018 (two years after the current year) would be equal to 129.6 percent with a gap of 4.2 percent of GDP with respect to the forward-looking benchmark. Similarly, in the policy scenario, the debt-to-GDP ratio for 2018 would stand at 130.1 percent of GDP, with a gap equal to 4.6 percent of GDP.

Instead, considering compliance with the rule in 2017, in both cases, the gap with respect to the forward-looking benchmark would be significantly reduced as a result of the acceleration of the growth of nominal GDP, the positive contribution of the snowball effect, and the increase in the primary surplus. More specifically, in the scenario at unchanged legislation, the debt-to-GDP ratio of 2019 (two years after 2017, the year for assessing compliance with rule) would amount to 126.1 percent, approximately 1.5 percent of GDP above the forward-looking benchmark, while in the policy scenario, the debt-to-GDP ratio of 2019 would be equal to 126.6 percent, which is 1.8 percent of GDP above the forward-looking benchmark.

TABLE III.6 RESPECT OF THE DEBT RULE: FORWARD-LOOKING BENCHMARK (% of GDP)

	Scenario at unchanged legislation		Policy scenario
	2016	2017	2016	2017
Debt t+2	129.6	126.1	130.1	126.6
Gap with respect to the forward-looking benchmark	4.2	1.5	4.6	1.8

During the transition phase and when the rule is fully applicable, the Commission may recommend to the ECOFIN Council the opening of an excessive deficit procedure in the event of any deviation from the path of adjustment identified on the basis of the rule. However, Article 126(3) of the Treaty on the Functioning of the European Union also establishes that, in the event of non-compliance with the debt rule, the Commission is first to prepare an ad-hoc report that considers the relevant factors identified by the corrective arm of the Stability and Growth Pact (SGP), as well as other relevant factors reported to the European institutions by Member States, which may explain the deviation with respect to the benchmark.

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In February 2015, the European Commission found an excessive deviation compared with the debt-rule benchmark for 2014, and prepared a report26 to evaluate the possible presence of relevant factors and to decide on whether or not to open an excessive deficit procedure. Following an accurate analysis, supported by technical considerations provided by Italy’s government,27 the Commission concluded that it did not consider the gap with respect to the adjustment required by the debt rule as significant, and decided not to proceed with the opening of an excessive deficit procedure. In particular, the following were considered as mitigating factors: i) the compliance with the preventive arm of the Stability and Growth Pact; ii) adverse economic conditions (low growth and low inflation), which, at the time, would not advocate  to implement a massive fiscal effort that would have made it even more difficult to reduce the debt-to-GDP ratio according to the stringent pace set by the debt rule, and, finally, iii) the start-up of structural reforms capable of spurring potential growth and therefore, the sustainability of the public debt in the medium term.

In May 2016, the Commission evidenced new risks about Italy’s compliance with the debt rule in 2015. The government therefore sent the Commission a new report on the relevant factors28 that influence the trend of Italy’s debt, as already presented in the Stability Programme in April, and the government requested that these factors be considered for a correct evaluation of Italy’s budget position and the prospects for reducing the debt over the next few years.

These factors, in particular, regard: i) the possible risks of deflation and stagnation, as also confirmed by the 2016 Winter Forecast, including when considering the negative impact about the possibility of a rapid reduction of the debt-to-GDP ratio; ii) the adverse effects of excessive fiscal tightening, or the role of fiscal multipliers, whose magnitude is traditionally greater during and after a severe recession, and that, as a result of pronounced fiscal tightening, could cause additional recessionary repercussions and thereby worsen GDP growth prospects in the medium term; iii) the near-term costs of the structural reforms, (including, last but not least, the banking system) that will surely have highly beneficial effect on the investment climate in Italy and the country’s growth potential, but which at the moment have encountered some difficulties during their implementation; iv) the existing critical factors regarding the methodology for computing the output gap, which often supplies results that are underestimated and contrary to macroeconomic intuition, and that could produce a biased indication of the extent to which Italy’s public finances actually comply with the requisites of the preventive arm of the SGP; v) the results in terms of large primary surpluses, and the focus of the preventive arm on fiscal rules; vi) the outstanding evaluation about long-term sustainability provided by the S2 indicator, which, for Italy, is the second best value among all EU Member States;

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26 See the Commission’s report pursuant to Article 126(3) of the Treaty, available at: http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-03_commission/2015-02-27_it_126-3_en.pdf.

27 In February 2015, the government produced an ad hoc report explaining the decision to deviate from the path of convergence toward the benchmark compatible with the debt rule, and cited numerous relevant factors. For additional information, see the MEF Report, 2015, ‘Relevant Factors influencing the debt dynamic in Italy’ (http://www.mef.gov.it/inevidenza/documenti/Note_on_relevant_factors_-_IT.pdf)

28 See the MEF Report, ‘Relevant Factors influencing debt developments in Italy’ (http://www.tesoro.it/inevidenza/documenti/Relevant_Factor_Influencing_Debt_Developments_in_Italy.pdf)

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and vii) the high costs of the migrants and the refugee crisis, as sustained by the Italian government.

In response to the Italian government’s analysis about the relevant factors, on 18 May 2016, the Commission prepared another report, pursuant to Article 126(3) of the Treaty on the Functioning of the European Union, in order to evaluate Italy’s compliance with the debt rule.  The report states that the debt rule, as defined in the Treaty and in the EU Regulations No. 1467/1997, is considered complied with. This conclusion was also reiterated in the Assessment of the 2016 Stability Programme, published on 26 May 2016. More specifically, the report pursuant to Article 126(3) favourably evaluated the following factors: (i) the currently unfavourable macroeconomic conditions and, in particular, low inflation, which make the respect of the debt rule particularly challenging, (ii) the compliance with the required structural adjustment toward the MTO in 2016, considering the temporary deviation of 0.75 percentage points of GDP as acknowledged through the flexibility clauses for structural reforms and investments, and additional expenditure of 0.1 percent of GDP in relation to the exceptional inflows of refugees and the exceptional security measures directly related to the fight against terrorism; and (iii) the expected realisation of ambitious structural reforms, which will promote growth (in line with the commitment of the authorities) that would contribute to reduction of the debt over the medium/long term.

TABLE III.7: IMPACT ON THE DEBT-TO-GDP RATIO OF FINANCIAL AID TO EURO AREA
	2014	2015	2016	2017	2018	2019
Total impact of financial aid, % of GDP	3.7	3.5	3.5	3.4	3.3	3.2
including: ESFS	2.2	2.1	2.0	2.0	1.9	1.9
ESM	0.9	0.9	0.9	0.8	0.8	0.8
Direct aid to Greece	0.6	0.6	0.6	0.6	0.6	0.6

III.5 MAIN PUBLIC FINANCE MEASURES ADOPTED IN 2016

In the months following the presentation of the 2016 EFD in April, the government adopted several urgent provisions29 regarding: reform of the cooperative bank system and the banking sector; initiatives in favour of investors in banks undergoing liquidation; social measures; the extension of international missions involving the armed forces and the police; initiatives for cooperation in development and consolidation of peace processes; and measures for local government.

Overall, the measures adopted are substantially neutral in terms of the deficit and the borrowing requirement over the 2016-2019 period.

The measures adopted (incremental expenditure and lower revenue) amount to about €2.8 billion in 2016, €417 million in 2017, €390 million in 2018 and €298

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29 Decree-Law No. 18/2016, converted by Law No. 49/2016, Decree-Law No. 59/2016, converted by Law No. 119/2016, Law No. 112/2016, Decree-Law No. 67/2016 converted by Law No. 131/2016 and Decree-Law No. 113/2016 converted by Law No. 160/2016.

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million in 2019 (Table III.8). Approximately 70 percent of the financing for the period considered will come from reduction of other expenditure, and in particular, current expenditure, mostly through the use of previously appropriated budget funds. On the revenue side, another part of the financing comes from the forecast of a fee due by businesses that opt to maintain, as provided by prevailing legislation, the possibility of transforming deferred tax assets into a tax credit, and from the higher resources expected through the continuation of the voluntary disclosure programme for assets held abroad.

TABLE III.8: CUMULATIVE IMPACT OF THE LATEST BUDGET MEASURES APPROVED IN 2016 ON GENERAL GOVERNMENT NET BORROWING (in € mn; before netting out induced effects)
	2016	2017	2018	2019
Gross fiscal package	2,844	417	390	298
Incremental revenue	664	207	180	150
Lower expenditure	2,180	210	210	148
- current expenditure	1,897	189	200	148
- capital expenditure	283	21	10	0
Measures financed	2,823	417	390	298
Lower revenue	433	157	105	97
Incremental expenditure	2,390	260	286	201
- current expenditure	2,272	243	276	201
- capital expenditure	118	17	10	0
Effects on net borrowing	21	0	0	0
Net change in revenue	231	50	76	53
Net change in expenditure	210	50	76	53
- current expenditure	375	54	76	53
- capital expenditure	-165	-4	0	0
Note: Discrepancies, if any, are due to rounding.

With reference to the government subsectors (Table III.9), the measures will cause a deficit over 2016-2019 for local government, which is mainly due to the assignment of resources to provinces of ordinary-statute regions for extraordinary maintenance of the road network, and measures covering assistance to the disabled who have no family support. This deficit is offset by the improvement in net borrowing of the central government.

TABLE III.9: CUMULATIVE NET IMPACT OF THE LATEST BUDGET MEASURES APPROVED IN 2016 ON GENERAL GOVERNMENT NET BORROWING BY SUB-SECTOR (in € mn; before netting out induced effects)
	2016	2017	2018	2019
CENTRAL GOVERNMENT	323	78	85	83
- net change in revenue	278	69	84	60
- net change in expenditure	45	9	0	24
LOCAL GOVERNMENT	-254	-78	-85	-83
- net change in revenue	1	-19	-8	-7
- net change in expenditure	-255	-58	-76	-76
SOCIAL SECURITY FUNDS	-47	0	0	0
- net change in revenue	-47	0	0	0
- net change in expenditure	0	0	0	0
TOTAL	21	0	0	0
Note: Discrepancies, if any, are due to rounding.

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More specifically, the measures in relation to the banking sector include provisions to ensure improvement in the quality of cooperative credit bank governance, through the simplification of the internal organisation and the reduction of these institutions’ exposure to shocks within the local economy, making it possible for them to source capital from outside of the cooperative bank system in the event of non-performing assets.30 Other provisions address changes to executive and insolvency proceedings, regulations to facilitate the sale of non-performing loans, and measures to protect retail investors who made investments in banks undergoing forced liquidation.31 In terms of social services, the new measures are aimed at ensuring assistance, care and full social inclusion for the gravely disabled who have no family support.32 A special fund within the State budget has been established for this purpose, with the resources to be disbursed by the regions; in addition, the maximum deductible expense of premiums paid for life insurance has been increased, while new tax incentives have been introduced for trusts set up in favour of persons with severe disabilities. The assistance measures include the refinancing of a fund for distribution of food to the poor.33 With reference to the defence sector, the measures cover resources appropriated for the continuing participation of the armed forces and police in international peacekeeping missions.34 More specifically, initiatives have been undertaken to support reconstruction efforts and participation in programmes managed by international organisations for consolidation and stabilisation of the peace processes, and as part of the financial mechanisms established within international agreements, a specific subsidy has been provided to support the Afghan security forces. In addition, Italy has financed programmes for cooperation aimed at: i) improving living conditions for the population and for refugees, and ii) supporting the civil reconstruction of the central and eastern regions of the Middle-East countries. The use of the armed forces has been confirmed and stepped up in relation to the extraordinary Jubilee of Mercy and the guarding of other sensitive sites and objectives. With the aim of strengthening the nation’s firefighting service, resources have been allocated to the addition of new units of personnel, increases in the existing units, and the upgrade of equipment and machinery used for protecting the population. Measures contained in Decree-Law No. 113/2016 provide relief to: i) municipalities, provinces and metropolitan cities that did not manage to comply with the Domestic Stability Pact in 2015; ii) local administrations in distress situations; and iii) local administrations involved in adopting measures to reduce services costs and to streamline their organisational structures as well as their shareholdings. As another measure benefiting the territorial entities, resources appropriated to the Region of Sicily for 2016 have been increased through a change in the calculation for assignment of the region’s joint participation in revenue from personal income taxes. Such measure is offset by the region’s improvement in its budget target.Other measures have regarded the appropriation, for 2016, of resources to provinces within ordinary statute

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30 Decree-Law No. 18/2016 converted by Law No. 49/2016.

31 Decree-Law No. 59/2016 converted by Law No. 119/2016.

32 Law No. 112/2016.

33 Decree-Law No. 113/2016 converted by Law No. 160/2016.

34 Decree-Law No. 67/2016 converted by Law No. 131/2016.

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regions for extraordinary maintenance of the road network, the creation of a fund to cover municipal expenditure for disputes related to executive rulings regarding natural disasters or structural failures, and the appropriation of funds to allow for disbursing subsidies for municipalities’ early, total or partial extinction of mortgages and bond loans. As part of the agreement between the Region of Valle d’Aosta and the Ministry of the Economy and Finance, the region will get a subsidy in 2016 as partial compensation of the loss of tax revenue in 2011-2014 through the quantification of the joint participation in tax revenue from electricity excise tax, and taxes on spirits and beer. For the period of 1 September 2016 to 31 December 2016, the increase in the municipal surcharge tax on airlineboarding fees has been suspended. Initiatives in the farming sector include measures to support milk, dairy and cereal producers so as to promote overall improvement of the competitiveness of the production-distribution chain. Other measures regard: the expansion of the group of persons suffering from thalidomide syndrome who are to receive compensation; the disbursement for 2016 of compensation in favour of the victims of the Andria and Corato railroad disaster; and the refinancing of the fund for structural economic-policy measures.

III.6 PLAN TO ENHANCE THE VALUE OF PUBLIC PROPERTY AND PRIVATISATIONS

Plan objectives

The plan to enhance the value of public assets is an integral part of the government economic and budget strategy since it not only entails benefits for the public finances in terms of expenditure savings and public debt reduction, but it also has significant implications for the efficiency of managing such assets.

With respect to real property assets, the plan has two main objectives: i) the generation of an income stream with respect to the most attractive properties, through changing their destination of use, and their transfer to managed funds for subsequent sale on the market; and ii) more efficient economic management of properties used for institutional purposes, through the streamlining of the space used, and more careful analysis of the extent to which rental payments are consistent with market conditions. The actions for upgrading and selling properties call for the involvement of all institutional levels, as a necessary step for completing implementation of fiscal federalism, aimed at enhancing, in functional terms, the value of State-owned assets conferred to local government, and reducing debt at a local level.

These actions are rounded out by transactions for the market placement of the State-owned shareholdings in companies, and the shareholdings involved in the process initiated in 2015 to streamline the equity portfolios of local government. Amongst other things, these transactions are designed i) to improve economic/financial efficiency and business development of the State-owned companies, including through the procurement of new capital from domestic or international investors; and ii) to improve market regulation and the growth of competition within the sectors involved.

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Current regulations provide that the income derived from the sale of the State’s direct shareholdings will be used for public debt reduction. The income derived from the placement of shareholdings held indirectly by the MEF through subsidiary companies may instead be distributed to the public shareholder under the form of payment of an extraordinary dividend, and therefore allocated to public debt reduction, or to contributing to increasing the capital of the holding company. The execution of the transactions is nonetheless contingent on the presence of favourable market conditions, that will allow for maximising the value of these assets.

As part of the programme to maximise the value of public assets, the MEF makes use of an information system implemented in February 2010, which is aimed at the annual inventorying of the components of the general government asset portfolio (real properties, shareholdings, assets leased to third parties). This system makes it possible to quantify the mix of assets and, in the future, the value of public property, which is essential information for efficient management and value optimisation.35 With an emphasis on the spending review and rationalisation, and the simplification and unification of information sources, the Minister of the Economy and Finance and the Chair of the State Audit Court signed a protocol of intent in May covering the unification of reports concerning shareholdings. As a result of this agreement, the State Audit Court has abandoned its own information system, and starting with the reporting of data for the year of 2015 (initiated in July 2016), the Department of the Treasury will collect through its information system all of the information needed not only for the reporting of shareholdings and the representatives of government in the governance bodies of companies and entities, but also for the audit and reporting activity of the State Audit Court.

Value enhancement of real property

The second edition of the ‘Real Properties Proposal 2016’ programme has been initiated in collaboration with the State Property Agency for implementing the plan to sell off State-owned real property assets as envisaged by prevailing laws and regulations. The programme is aimed at involving territorial entities in selecting a portfolio of real properties to be considered as candidates for value enhancement and sale.

The procedure for selecting the real properties involved 241 entities, with a total of 544 assets distributed almost across the entire national territory. The real property portfolio will be earmarked for sale or for other transactions to enhance value, as provided by legislation (public auction, restricted procedure, sale through direct negotiation, transfer to real estate funds managed by INVIMIT).

At 30 June 2016, the income from the sale of the real property assets made available by local entities amounted to about €243 million. It is estimated that income for the full year will reach €400 million.

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35 The results of the surveys concluded to date are contained in reports available in the respective sections of the site:http://www.dt.tesoro.it/it/attivita_istituzionali/cartolarizzazioni/patrimonio_pa/.

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In addition, the proceeds expected for 2016 from the sale of real properties owned by social security funds are estimated at €300 million.

With reference to the sales of State-owned real properties in 2016, the income to date amounts to about €15.7 million. The full-year estimate is around €50 million.

As for the direct funds managed by INVIMIT,36 the following new funds have become fully operational subsequent to transactions entailing the transfer of State-owned real properties: ‘i3-Inail’, ‘i3-Regione Lazio’, ‘i3-Università’ and ‘i3-Sviluppo Italia – Subfund 8-quater’. More specifically, according to the data reported in semi-annual reports about the funds as of 30 June 2016, the public real properties transferred are valued at about €360.5 million;37 fund units have been issued against these properties, and will be later placed on the market. Proceedings are currently under way for other transfers of State-owned real properties to the Subfund 8-ter and the Subfund 8-quater of the ‘i3-Sviluppo Italia’ Fund whose total value is €42.9 million. The income generated from the placement of INVIMIT fund units on the market can be booked as a reduction of net borrowing in the years in which these sales are realised, thereby indirectly contributing to public debt containment.

In addition, in proceeding with the acquisition of real properties owned by local government and rented to public administrations, INVIMIT has set up the ‘i3-Patrimono Italia’ fund, which is partly owned by Fund of funds ‘i3-Core - Stato Subfund’38, with the objective of supplying local government entities the liquidity they need to manage the delicate process of transitioning toward the new institutional framework.

With the aim to increase the value of country’s historical and artistic properties and landscapes, a project known as ‘Lighthouses, towers and coastal buildings 2016’ has been initiated, with the involvement of the State Property Agency: this project is part of a larger programme known as ‘Valore Paese Dimore’. An institutional agreement between the Ministry of Arts, Culture and Tourism, the Ministry of Defence and the MEF has been signed for the purpose of supporting and promoting the initiative. The project entails the market offering of State-owned lighthouses, towers and coastal buildings by means of concessions (for up to 50 years) finalised to promote the properties, in line with Italy’s identity and the safeguarding of the environmental ecosystem. The investment for upgrading the structures is about €6 million, while the State will earn more than €340,000 of annual fees, which, when considering the different terms of the concessions, will yield more than €7 million over the entire concession period.

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36 INVIMIT (‘Investimenti Immobiliari Italiani Società di Gestione del Risparmio S.p.A.’) is a company incorporated in May 2013, whose capital is 100 percent held by the Ministry of the Economy and Finance. Its objective is to enhance the value of, and/or to sell, State-owned properties through the funds set up pursuant to Article 33 of Decree-Law No. 98/2011 and known as i3-INAIL, i3-Regione Lazio, i3-Inps, i3-Università, i3-Sviluppo Italia, i3-Patrimonio Italia and the Fund of the funds i-3 Core.

37 At 30 June 2016, the value of the real properties transferred to the funds managed by INVIMIT was €72.899 million for the i3-INAIL fund; €148.281 million for the i3-Regione Lazio fund; €62.940 million for the i3- Università fund; €76.348 million for the Subfund 8-quater of the i3-Sviluppo Italia fund.

38 The i3-Core fund includes two subfunds (Territorio and Stato), which are used for investment in units of closed mutual investment funds promoted or owned respectively by i) regions, provinces and municipalities and ii) the central government. Public real properties have been contributed to both subfunds (so-called target funds).

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The transfer of State-owned real properties to regions, provinces and municipalities also continues in accordance with the regulations governing fiscal federalism. The objective is to allow for more efficient use of the property assets on the part of the entities that are responsible for governance over the territory.

Privatisations

An in-depth analysis of the State’s shareholdings has been done in order to identify various options for privatisations, some of which have already been realised in recent years. In 2014, the sales of shareholdings indirectly held by the State through subsidiaries included the divestiture of interests in Fincantieri, CDP Reti, TAG (Trans Austria Gasleitung), which were done through the Cassa Depositi e Prestiti (CDP) and Ray Way, a company indirectly held by MEF, which was done through RAI. The income realised, amounting to about 0.4 percentage points of GDP, was used entirely for reinforcing the capital of the holding companies. In 2015, the shares held directly by the State in Poste Italiane (first tranche of 35.3 percent) and ENEL (5.74 percent) were sold, with additional income, equal to 0.4 percentage points of GDP, which made it possible to hit the pre-established target of 0.4 percent of GDP for the year.

Important progress has been made in 2016. The month of July marked the completion of the global offering of ENAV shares on Borsa Italiana, pursuant to the provision set in the decree of the Prime Minister dated 16 May 2014.

Considering the full exercise of the greenshoe option by the institutional placement consortium,39 which allowed for expanding the supply of shares in relation to market demand, ENAV’s capital is now about 46.6 percent held by the private sector, with the transaction yielding gross proceeds of around €834 million. After placement commissions of €1 million paid to the joint global coordinators, for their account and for members of the consortium, the net proceeds were credited to the State Securities Amortisation Fund.

With its decree dated 1 June 2016,40 the Minister of the Economy and Finance transferred to the CDP a 12.5 percent share in the Fondo Italiano di Investimento SGR S.p.A.. The transfer was valued at €1.7 million, as determined by a court-sworn appraisal produced by KPMG Advisory S.p.A., in accordance with the provisions of applicable regulations. Approximately €1 million of the aforementioned amount was credited to the State Securities Amortisation Fund.

The month of June marked the conclusion of the transaction related to Grandi Stazioni, a company held by the Italian State Railways (Ferrovie dello Stato Italiane S.p.A.), active in managing and renovating railways stations and increasing the value thereof. The income of about €850 million realised on the transaction was used for increasing the capital of the holding company.

The structure of the shareholder base of Poste Italiane, which was first modified through an Initial Public Offering (IPO) in October 2015, has been redefined through the ministerial decree dated 25 May 2016, which authorised the Department of the Treasury to subscribe a paid capital increase, resolved by CDP.

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39 Article 1, Paragraph 5, of Decree-Law No. 332/1994, converted by Law No. 474/1994.

40 Adopted pursuant to Article 5, Paragraph 3, l. b), of Decree-Law No. 269/2003, converted by Law No. 326/2003.

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This capital increase, approved in June to ensure additional capitalisation of CDP to the extent needed for the achievement of business plan objectives, was reserved, in its entirely, to the MEF, and is to be freed up through the transfer (by the end of 2016) of a 35-percent shareholding in the capital of Poste Italiane.

The significant complexity of the regulatory aspects for the privatisation of the Italian State Railways planned for 2016 has entailed a deferral of the transaction, with a plausible delay to 2017.  Such regulatory aspects mainly refer to the definition of the ownership and operation of the infrastructure network.

The following table summarises the results achieved and the objectives set. Considering the transactions already concluded and the current GDP growth projections, the income realised in 2016 from the privatisation of direct and indirect shareholdings should amount to about 0.1 percentage points of GDP.

TABLE III.10: PRIVATISATION PROCEEDS (1)
	2015				2016
	Level (2)		% of GDP		Level (2)		% of GDP
Direct shareholdings and other financial income		6.9		0.4		0.9		0.1
Indirect shareholdings		0.0		0.0		0.9		0.1
Total proceeds realised		6.9		0.4		1.7		0.1
Memo: 2016 EFD targets				0.4				0.5
(1) Discrepancies, if any, are due to rounding. (2) Amounts in € bn.

III.7 FISCAL RULES FOR LOCAL GOVERNMENT

The regulatory framework for local public finance has been completely redefined in recent years. In 2015, the full-scale accounting harmonisation of territorial entities41 and, in particular, the application of the principle of ‘enhanced’ financial accrual, have made it possible i) to achieve greater substantial equilibrium in budgeting, and ii) to support more precise planning of investments.  Accordingly, the booking of receivables (assessments) and payables (commitments) to the budget is done when such amounts are respectively actually enforceable and payable during the year of reference. As from 2016, the balanced budget rule has permanently replaced the Domestic Stability Pact. The achievement of national public finance targets thus involves the regions, the Autonomous Provinces of Trento and Bolzano, the metropolitan cities, the provinces and all municipalities, regardless of the number of inhabitants. For the current year, the limitation for the aforementioned territorial entities is less stringent than that originally introduced by Law No. 243 of 2012, with the objective of freeing up available funds: local governments must achieve a non-negative balance (accruals basis) between final revenue and final expenditure, net of the items referring to the procurement or reimbursement of loans.

The initiatives undertaken have laid the bases for a revision of Law No. 243 of 2012, so as to get beyond critical factors related to the complexity of territorial

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41 Legislative Decree No. 118/2011 amended by Legislative Decree No. 126/2014.

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III. NET BORROWING AND PUBLIC DEBT

entities to achieve a number of balances simultaneously,42 as already experienced by the regions, which, in 2015, advanced a less rigid version of the rule.

The revision of Chapter IV of Law No. 243 of 2012, definitively approved by Parliament on 12 August,43 has firmly maintained the principle of a balanced budget, in respect of the commitment undertaken by Italy in its signing of the Fiscal Compact, which provides for the obligation of ensuring achievement of the Medium-Term Objective (MTO) or, in any event, ensuring rapid convergence toward the objective. The new regulations identify a single non-negative balance, on an accruals basis, between final revenue and final expenditure, net of the items referring to the procurement or reimbursement of loans, with respect to both the forecasting and reporting phases, with the objective of: i) ensuring the balance of public finance; ii) simplifying the public finance limitations of local entities, without prejudice to the current and cash equilibria already provided by current ordinary law, which are aimed at ensuring operating balance and the requalification of the expenditure in the medium/long term; and iii) supplying a certain framework for medium-/long-term planning, which is aimed, inter alia, at reviving investments across the country.

The framework is rounded out with the inclusion of the Fondo Pluriennale Vincolato (Restricted Long-Term Fund, RLTF) in the balance; as indicated previously, such fund is an accounting mechanism to ensure coverage of expenditure booked to future years, and consists of resources already ascertained during the current year. The fund resources are allocated to an entity’s financial liabilities enforceable in years after the year in which the revenue is ascertained. The inclusion of the RLTF is to be considered within the Budget Law for the 2017-2019 three-year period, for the purpose of ensuring public finance equilibrium. As from 2020, the inclusion of the fund will be limited to the portion thereof financed by final revenue.

Except for minor revisions aimed at ensure public finance targets, the means for correcting and recovering imbalances on the part of territorial entities remain unchanged; in the event of such imbalances, the entities must adopt corrective measures for reabsorbing the deficit recorded within the subsequent three-year period.

Sanctions have been provided should public finance equilibrium not be met. Incentives have also been envisioned for the most virtuous entities in terms of good practices in territorial finance, with the accent on continuous improvement of public finance equilibrium and the quality and reconfiguration of public expenditure. This system of sanctions and incentives is to be defined through subsequent State law.

The revision of Law No. 243 of 2012 has also covered the provisions related to borrowing by regions and other local entities. First of all, it is worth noting that limitations on local public finance have had, over the years, a positive effect on both containing expenditure and stabilising the debt stock. From the standpoint of medium-/long-term sustainability and reliance on borrowing, the following general principles have been firmly maintained: i) the regions, municipalities,

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42 Article 9, Law No. 243 of 2012, now substituted by Article 1 of Law No. 164/2016.

43 Law No. 164/2016.

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provinces, metropolitan cities and Autonomous Provinces of Trento and Bolzano may only borrow for investment expenditure; and ii) borrowing transactions must be accompanied by amortisation plans over a term equal to or less than the useful life of the investment, with the disclosure of the charges to be sustained and the funds to cover them. These principles are designed to ensure the sustainability of the investment over the medium/long term.44

The change, introduced through amendment of Paragraph 3 of the Article 10, is the provision for relying on special regional agreements for defining the means through which the borrowing transactions can be realised, and the use of the previous surpluses for investment transactions. The agreements should, in any case, ensure the respect of public finance objectives set for all territorial entities of the region involved as a whole, including the region itself. The role of the regions will accordingly be fundamental for achieving positive results in terms of reviving the economy at a local level. This will be possible through the agreements signed, and through indispensable coordination and negotiation among the different levels of government (regions, metropolitan cities, provinces and municipalities). Considering the strategic role of the regional agreements for reviving investment across the country, the substitute power of the State is envisioned as fundamental in cases in non-action or delays by the regions and the Autonomous Provinces of Trento and Bolzano.

Furthermore, a National Solidarity Pact has been outlined in order to optimise the redistribution across the country of the financial flexibility for borrowing and the use of past surpluses for the purpose of investment transactions. The foregoing applies, however, without prejudice to the respect of public finance objectives for all territorial entities as a whole.

Finally, the simplification of the relationship between the State and territorial entities is provided in the event of a favourable economic cycle, in cyclical downturns, or upon the manifestation of exceptional events. More specifically, in cyclical downturns, or upon the manifestation of exceptional events, the reliance on the State for financing essential levels of services concerning the civil and social rights to be ensured nationwide is to be maintained; during favourable phases of the economic cycle, the territorial entities will be required to contribute to reducing the general government debt through payments to the State Securities Amortisation Fund.

In clearly, completely and coherently outlining the contribution of the regions and other local government entities to national public finance objectives, the new regulatory framework has paved the way for precise medium-/long-term planning of resources across the nation, which, on the one hand, will allow the respect of budget equilibrium, and, on the other hand, will favour the revival of local public investment and the respect of the average terms for payment of business invoices across the country.

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44 Article 10 of Law No. 243/2012.

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IV. REFORMS AND COUNCIL RECOMMENDATIONS

IV.1 THE COUNCIL RECOMMENDATIONS

On 28 June 2016, the Council of the European Union approved five specific recommendations for Italy focused on: i) the medium-term budget objective, reform of the public budget, privatisations and tax reform; ii) the efficiency and quality of the Public Administration, the statute of limitations and the civil process; iii) non-performing loans and reform of the banking system; iv) active labour policies, incentives for workers who represent the second earners, the fight against poverty and rationalisation of social spending; and v) competition.

The Council of the European Union commended the efforts undertaken by Italy in the past year and reduced the number of the recommendations to five (from six in 2015, see Table IV.1). The Council eliminated indications related to the National Strategic Plan for Ports and Logistics and the operations of the Agency for Cohesion since Italy has already implemented these recommendations. The Council also downscaled the recommendations in view of the effective action of the reforms of the labour market and the education system. Some of the recommendations made in 2015 were again presented, given the ongoing need for intensifying the related reform. Finally, some of the recommendations were made more specific. This is the case, for example, of the labour market, where the need for the reform of active policies was reiterated, but a recommendation was also made to supplement current laws and regulations with provisions that will provide incentives to second earners. The text of the recommendations about the medium-term budget objective was modified in view of the flexibility granted to Italy for planning and completing structural reforms and investments. The need for completing the reform of the public budget was also emphasised, while a recommendation was made for the adoption of a national strategy for the fight against poverty and the rationalisation of the social spending.

IV.2 RESPONSE TO THE RECOMMENDATIONS: KEY INITIATIVES

Italy’s reform effort in recent years has been ambitious, broad-based and in-depth. Even though important results have been achieved (as also acknowledged by the European Commission at the end of the European Semester), much remains to be done for: supporting households and businesses; strengthening growth in a period of considerable economic uncertainty at an international level; and continuing the fiscal-consolidation and debt-reduction efforts.

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TABLE IV.1: RECOMMENDATIONS FOR 2016 AND 2015
Policy Area	2016 recommendations	2015 recommendations
Public finance and spending review	Rec. 1 - In 2016, limit the temporary deviation from the required 0,5 % of GDP adjustment towards the medium-term budgetary objective to the amount of 0,75 % of GDP allowed for investments and the implementation of structural reforms, subject to the condition of resuming the adjustment path towards the medium-term budgetary objective in 2017. Achieve an annual fiscal adjustment of 0,6 % or more of GDP towards the medium-term budgetary objective in 2017. Finalise the reform of the budgetary process in the course of 2016 and ensure that the spending review is an integral part of it; […]	Rec. 1 - Achieve a fiscal adjustment of at least 0,25 % of GDP towards the medium-term budgetary objective in 2015 and of 0,1 % of GDP in 2016 by taking the necessary structural measures in both 2015 and 2016, taking into account the allowed deviation for the implementation of major structural reforms. Ensure that the spending review is an integral part of the budgetary process. […]
Privatisations and public debt	Rec. 1 - […] Ensure the timely implementation of the privatisation programme and use the windfall gains to accelerate the reduction of the general government debt ratio; […]	Rec. 1 - […] Swiftly and thoroughly implement the privatisation programme and use windfall gains to make further progress towards putting the general government debt ratio on an appropriate downward path. […]
Fiscal policy	Rec. 1 - […] Shift the tax burden from productive factors onto consumption and property. Reduce the number and scope of tax expenditures and complete the reform of the cadastral system by mid-2017. Take measures to improve tax compliance, including through electronic invoicing and payments.	Rec. 1 - […] Implement the enabling law for tax reform by September 2015, in particular the revision of tax expenditures and cadastral values and the measures to enhance tax compliance.
Transportation, infrastructure and public tenders - Structural funds		Rec. 2 -Adopt the planned national strategic plan for ports and logistics, particularly to help promote intermodal transport through better connections. Ensure that the Agency for Territorial Cohesion is made fully operational so that the management of EU funds markedly improves.
Reform of the  Public Administration	Rec. 2 - Implement the reform of the  Public Administration by adopting and implementing all necessary legislative decrees, in particular those reforming publicly-owned enterprises, local public services and the management of human resources; […]	Rec. 3 - Adopt and implement the pending laws aimed at improving the institutional framework and modernising the  Public Administration. […]
Criminal justice system and corruption	Rec. 2 - […] Step up the fight against corruption including by revising the statute of limitations by the end of 2016; […]	Rec. 3 - […] Revise the statute of limitations by mid-2015 […]
Civil justice system	Rec. 2 - […] Reduce the length of civil justice proceedings by enforcing reforms and through effective case-management.	Rec. 3 - […] Ensure that the reforms adopted to improve the efficiency of civil justice help reduce the length of proceedings.
Services financial and banking system	Rec. 3 - Accelerate the reduction in the stock of non-performing loans, including by further improving the framework for insolvency and debt collection. Swiftly complete the implementation of ongoing corporate governance reforms in the banking sector.	Rec. 4 - By end-2015, introduce binding measures to tackle remaining weaknesses in the corporate governance of banks, implement the agreed reform of foundations, and take measures to accelerate the broad-based reduction of non-performing loans.
Labour	Rec. 4 - Implement the reform of active labour market policies, in particular by strengthening the effectiveness of employment services. Facilitate the take-up of work for second earners; […]	Rec. 5 - Adopt the legislative decrees on the design and use of wage supplementation schemes, the revision of contractual arrangements, work-life balance and the strengthening of active labour market policies. Promote, in consultation with the social partners and in accordance with national practices, an effective framework for second-level contractual bargaining […]
Education		Rec. 5 […] As part of efforts to tackle youth unemployment, adopt and implement the planned school reform and expand vocationally-oriented tertiary education.
Poverty	Rec. 4 - […] Adopt and implement the national antipoverty strategy and review and rationalise social spending.
Competition	Rec. 5 - Swiftly adopt and implement the pending law on competition. Take further action to increase competition in regulated professions, the transport, health and retail sectors and the system of concessions.	Rec. 6 -Implement the simplification agenda for 2015-2017 to ease the administrative and regulatory burden. Adopt competition-enhancing measures in all the sectors covered by the competition law, and take decisive action to remove remaining barriers. Ensure that local public services contracts not complying with the requirements on in-house awards are rectified by no later than end-2015.

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IV. REFORMS AND COUNCIL RECOMMENDATIONS

This chapter of the EFD Update illustrates the reforms adopted and the status of implementation following the publication of the National Reform Programme in April 2016.

 Public Administration

Italy is proceeding with the implementation of the enabling Act for reform of the Public Administration,1 which is aimed at increasing the efficiency and the quality of the services delivered to individuals and businesses. In addition to a decree simplifying the regulatory framework, 11 legislative decrees have been published to date, while 6 decrees secured preliminary approval from the Council of Ministers in August 2016. Other implementation decrees, which are already at an advanced stage in terms of their drafting, are to be approved by February 2017.

Streamlining the timing for public decision-making is the subject of new Services Conference rules,2 which ensure certain and more rapid timetables for concluding administrative proceedings.3

Another tool for considerably simplifying and accelerating administrative action was adopted through provisions governing the reduction of the terms and the Prime Minister’s exercise of substitute powers for the planning and execution of large productive facilities, works of general public interest, and the start-up of entrepreneurial activities capable of exerting positive effects on the economy or employment.

Leaner and more efficient governance of the Public Administration has also been pursued through the new guidelines for reorganisation of the port authorities.4 For additional details, see the paragraph of this chapter covering infrastructure and new Public Procurement Code.

Changes to criteria regarding employment termination for disciplinary reasons5 are aimed at more effectively and seriously tackling false certification of employee attendance, as flagrantly ascertained through alteration of automated attendance systems. Disciplinary dismissal and swifter sanctioning proceedings, including injunctions, have been outlined for such cases for the protection of the Public Administration.

A new system introduced for senior management positions in the healthcare sector6 provides for the redesign of procedures for appointment, performance evaluation, and the term of mandates, based on principles of transparency and

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1 Law No. 124/2015.

2 Legislative Decree No. 127/2016.

3 Maximum 45 days or 90 in the event in which the proceedings involve administrations responsible for the protection of the environment, territorial landscapes, cultural properties or public health; in the case of complex projects or projects involving disagreements, the maximum term can be extended to five months. The Services Conference will normally take place through the sending of documents electronically (so-called asynchronous Simplified Conference). The synchronous Simultaneous Conference (with a meeting, including online) will take place only when strictly necessary in relation to specific complexity of the decision to be made. Furthermore, the presumption of unconditional consent (silent consent) is adopted when an administration does not respond within the time indicated. The term of the Conference (which has been open-ended to date) is now definitively set at a maximum of five months.

4 Legislative Decree No. 169/2016.

5 Legislative Decree No. 116/2016.

6 Legislative Decree No. 171/2016.

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merit. The system provides for the approval of merit-based criteria for the appointment of senior managers, who will be evaluated by a specially instituted commission; in addition, the sector will maintain a national listing of executives meeting established requisites.7

With the reorganisation of the State Forestry Corps8 and its eventual phasing out, the responsibilities for protecting agro-environmental areas and maximising their value will mostly be turned over to the Carabinieri (although a residual portion thereof will be assigned to the Tax Police and State Police). This streamlining of the police forces is aimed at improving their efficiency and presence in the territory.

The Certified reporting of the start-up of productive activity (SCIA) has been significantly simplified so as to get beyond the criticalities of its concrete application. The start-up of economic and building activity will require single, standardised forms that will be published on the websites of the Public Administrations, together with a list of the required requisites.9

Planned, major changes on the subject to transparency will also support the modernisation of the Public Administration.10With the revision and the simplification of provisions regarding the corruption prevention, public disclosure and transparency, there will be a new form of access to public data and documents, similar to the Freedom of Information Act (FOIA) in the Anglo-Saxon system. It will also be possible to request and obtain data and documents that the Public Administrations are not required to publish. Such provisions will open up the databanks of the administrations that manage them.11

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7 More specifically, there will be a national list at the Ministry of Health of persons suitable for appointment to the position of director general, and specific regional lists of persons suitable for appointment to the position of administrative manager and healthcare manager, and, where provided by regional legislation, the director of the social-healthcare services. The national list and the regional lists will be established through special selection procedures. Names on the national list (to be updated every two years) will be selected following a public notice and based on qualifications; the selection will be done by a commission of very high-level experts (split equally between representatives of the state and regional administrations)1. The individuals appointed as directors general of the NHS entities will be given challenging objectives, and if they are not able to provide proof of good management, they will be removed from office, with consequent cancellation from the list and the possibility of being reconsidered only at the time of a new selection process. Any form of renewed mandate will be excluded.

8 Legislative Decree No. 177/2016.

9 Legislative Decree No. 126/2016. The violation of these regulations about public disclosure and a citizen’s request for additional documents with respect to those provided and published on the site will be considered as insubordination, and may be subject to disciplinary procedures. A single front office is planned in order to assist citizens and businesses, and it will be responsible for interacting with all other offices and/or administrations involved; with the single front office, it will be possible to file a single SCIA, which will take the place of all notices and reporting needed for the activity, thereby making it possible to start up the activity immediately. The regions and the local entities will be required to comply with the new regulations as of 1 January 2017. Reviews are now under way for the definitive approval of the complete mapping and precise identification of the activity covered by the SCIA, and will indicate whether such activity will be subject to express authorisation, simple prior notice or silent consent. This arrangement will be very useful and practical for both the public entities and the users.

10 Legislative Decree No. 97/2016.

11 The website ‘Soldi pubblici’ (Public money) (http://soldipubblici.gov.it) has become a permanent site of the Public Administration. An additional effort regarding transparency is represented by the ‘Bilancio Aperto’ (Open Budget) application, created by the State General Accounting Department in collaboration with SOGEI, in order to provide civilian access to Italy’s State budget. A ‘glossary’ that is part of the application is designed to help in understanding the technical terms in the budget documents. The application represents a point of convergence for citizens and the State administration, and it will gradually be enhanced with new functions, while it will also become a point of access to other public-finance databanks.

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Guidelines for the Public Administrations’ shareholdings have recently been published.12 First of all, the shareholdings may only be retained if they refer to services of general interest (including the planning and development of public works, networks and systems) or activity to support non-profit entities. Within these two spheres, a second level of criteria must be satisfied13 thereby further limiting the possibilities for holding the investments.

The month of August 2016 marked the introduction of the Accounting Code,14 which is a single document containing all procedural provisions regarding Court of Auditors rulings, with the objectives of making the accounting process more rapid, reinforcing the guarantees of the defence and introducing the principle of ‘due process’.15

The August approval of the legislative decree to amend the Digital Administration Code16 is part of the ongoing fundamental change in the relationship between citizens and the Public Administration, with the focus on the rights of digital citizenship. A key aspect of this change is the Public Digital Identity System (SPID) whereby citizens can access and use the online services provided by the Public Administrations.17

The remaining legislative decrees for implementation of the reform were approved by the government on a preliminary basis in August and regard: the regulation of the Public Administration’s senior management; the reordering of the Chambers of Commerce; the simplification of the activity of the public research; the creation of the Italian Paralympic Committee; and the regulation of local public services.

More specifically, the reform of senior management envisions three macro roles (state senior managers, regional senior managers and senior managers of entities) for all public-sector senior managers, who will be recruited and trained in a standardised manner,18 with the objective of facilitating job transfers, in terms of both location and duties. The senior manager position will be a single position, and any senior manager will be able to cover any managerial role. Senior

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12 Legislative Decree No. 175/2016. The guidelines do not apply to companies with listed shares, to companies with publicly traded financial instruments as of 31 December 2015, or to companies that are part of the related groups.

13 These criteria are: average turnover of no less than €1 million for the past three years; the number of directors cannot be more than the number of employees; the company in which the investment is held may not be a company active in sectors that are the same as or similar to those of other investee companies; and, excluding those that supply services of general interest, the companies may not have closed with a loss in four of a preceding five-year period. In addition, according to a current plan, the Public Administrations will need to prepare a rationalisation plan by 23 March 2017 (a process that will continue annually as from 2018) that provides for the closure, privatisation or combination of the companies that do not meet the aforementioned requisites. If the entity does not present a plan, it will get an administrative fine of up to €500,000. The excess staff of the reorganised State-owned companies will be placed on a list maintained by the regions and the National Agency for Active Policies, until placed into new jobs. In addition, quantitative and qualitative parameters are now being defined so as to classify the companies in one of up to five categories; each category will have limits on the compensation that can be paid to corporate officers and employees.

14 Legislative Decree No. 174/2016.

15 The main aspect is represented by greater oversight powers vested with Court of Auditors, including for the purpose of allowing for execution of the rulings, with the objective of actually recovering damages, at the level of tax revenue, caused by illegal accounting practices.

16 Legislative Decree No. 179/2016.

17 As of 1 August 2016, the system included 292 active administrations, three accredited ID providers (Infocert, Poste Italiane, TIM), 648 available services, and more than 86,000 persons with SPID IDs.

18 For this purpose, the measure affects the organisation and functions of the National School of the Administration (SNA), providing for its transformation into an agency in order to ensure its greater efficiency and independence.

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managers will be recruited through competitive selection processes. The creation of a single commission is planned for each managerial role; the commission will be responsible for pre-screening candidates for placement as directors general, and for evaluating ex post the decisions made by the administrations for other positions.19

With reference to the Chambers of Commerce, the decree provides for a rationalisation plan, with an emphasis on improving efficiency and reforming governance. Within 180 days of the date when the decree goes into effect, the total number of the chambers will need to fall from the current 105 to no more than 60, in respect of the following management constraints: at least one Chamber of Commerce per region, and combination of the Chambers of Commerce with less than 75,000 registered businesses.20 Finally, the Ministry of Economic Development will step up its oversight through an independent committee of experts that will evaluate the performance of the Chambers of Commerce.

The regulation now being approved with respect to the public research entities will eliminate many of the operational constraints, and identify a more streamlined system of rules that is more appropriate to the sector’s needs.21

Finally, the new regulation of local public services is under review by Parliamentary commissions (following the Council of Ministers’ preliminary approval); such regulation is aimed at ensuring the clarity of the rules, regulatory simplification and protection and promotion of the fundamental principle of competition.22

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19 Senior management mandates have a term of four years, and may be renewed for another two. Senior managers no longer having a mandate (after the conclusion of the mandate) will need to participate in at least 5 consultations per year; in absence of any mandate, the managers will receive basic compensation for the first year and during the second year, the compensation will be reduced by one-third. Later, the Department of Public Function may place them in vacant positions. The senior manager whose mandate is revoked for non-compliance has one year to get a new mandate, or otherwise may be subject to termination.

20 Unioncamere will be required to send a reorganisation plan to the Ministry of the Economic Development and the Ministry will need to approve the plan within 60 days in order to start the rationalisation process. The decree provides for four other actions to decrease the costs of operating the Chambers: 50-percent reduction of the annual fee paid by businesses; 30-percent reduction of the number of directors; and the elimination of compensation to all officers, except for the boards of auditors. The decree also provides greater clarity about the responsibility of the Chambers, with the objective of focusing their functions on institutional activities, thereby avoiding duplications of responsibility with other public entities.

21 The entities are to be treated like universities in terms of their statutory and operational independence. The decree also provides for ratification of the European Charter for Researchers in order to ensure more freedom in research, project portability, maximisation of the value of professional resources, and adequate evaluation systems. The entities will also be released from the obligation of using the electronic market for purchases of scientific equipment and devices; preventive controls on contracts for experts and professional associates will be eliminated; and more flexible rules will be introduced for spending when researchers are on assignment. The decree’s provisions are favourable to researcher mobility, project portability, and the return of Italian researchers to Italy. Once approved, the Three-Year Activity Plans (PTA) will become the only documents needed for the hiring of personnel, without any other proceedings. As a result of the decree, the hiring freeze will be lifted in 2017, one year ahead of originally scheduled.

22 For this purpose, the decree, which consists of 38 articles, responds to the most urgent needs identified by Parliament, with the following measures: i) specification of the sphere of application of the regulation (with exclusion of the specific sector regulations) for integrated water service, integrated waste management service, local public transport, electricity distribution service, natural gas distribution service, and the operation of pharmaceutical service; ii) indication of the general principles for the assumption, regulation and operation of the local public services of general economic interest; iii) planned conditions and limits for the assumption of the public service, with indication of the concrete means for pursuing the objectives of public interest; iv) revision of sector regulations for the purpose of their harmonisation and coordination with the general regulations regarding the means for commissioning services; v) introduction of specific, required means for operating the service: commissioning through public proceedings, commissioning to private-public company, direct management or in-house operation, and, with regard to services other than network services, direct management by local authorities or through special companies; vi) reordering of the regulation regarding ownership and operation of

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The public administration reform programme is unfolding alongside the implementation of the simplification agenda, whose deadlines have been more than 90 percent achieved.

Justice system

The justice system is going through a broad-based reform process that affects various aspects, from civil to criminal proceedings and the governance of business crises.

The legislative bill to reform civil proceedings was approved by the Chamber of Deputies and is now under review by the Senate; the reform focuses on simplification and efficiency, and regards lower court and appellate court proceedings, executive proceedings, the jurisdiction of the businesses tribunal, the creation of special integrated sections for families, individuals and minors, and the activity of bailiffs. The Chamber of Deputies also approved the legislative bill to reform criminal proceedings in order to promote stronger guarantees to the defence and the reasonable duration of the proceedings. The bill also introduces principles and criteria for the reform of the prison system and the reform of the statute of limitations.

The measures recently approved by the government23 are aimed at implementing initiatives to recover efficiency within the justice system. An extraordinary plan authorised for the hiring of 1,000 new employees to be assigned to the court offices is flanked by the ongoing complete digitalisation of such offices. The start-up of new online administrative proceedings is scheduled for 1 January 2017, following experimentation that began on 1 July 2016. Measures have been adopted for settling disputes in the Court of Cassation and for improving the efficiency of the court offices. An increase was made in the number of the positions made available through the competitive selection of judges, while the duration of the training assignments has been reduced for judges qualifying in the most recent competitive selection processes. In addition, a ban has been placed on the assignment of justice system personnel to other administrations. Numerous actions have been taken to facilitate the operation of the online administrative proceedings, including the plan for an information system for filing legal documents (that is an alternative to certified electronic mail) and the creation of a monitoring commission; a competitive selection process has been authorised for recruitment of IT personnel, while a special office is to be created for the administrative process.

The government has also been empowered for the basic reform of the honorary judiciary and justices of the peace.

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networks, plants and other essential assets; vii) reordering and rationalisation of the rules regarding organisation of the services, including through the definition of the optimal territorial areas; viii) introduction of specific rules for distinction between regulation functions and operational functions; ix) completion of the regulation regarding local public transport; x) rationalisation of the functions of independent authorities, so as to ensure transparency in managing and delivering services; xi) definition of instruments for tracking the public service obligations mandated and quality standards, in respect of the principles dictated by national regulations on the subject of transparency; and xii) definition of the system for penalties and replacements, in the event of violation of the general regulations.

23 Decree-Law No. 117/2016 converted by Law No. 161/2016 and Decree-Law No. 168/2016.

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The Ministry of Justice is currently reviewing the conclusive report of the work of a ministerial commission for the reform of the Judicial Council, whose objectives include, inter alia, accelerated decision-making procedures for appointment of senior managers of the court offices. This reform, which will be ratified through a draft of an enabling act, is focused on improving the organisational models of court offices with a view toward reducing the time for settling disputes and optimising available resources.

The data about efficiency of the tax courts provide confirmation that the actions taken have produced positive results:24 in April-June 2016, the tax disputes pending were reduced by 9.5 percent year on year, thereby substantiating the positive trend that originated in June 2012. The online tax court proceedings, after initial experimentation as from December 2015 in Tuscany and Umbria, will be extended to six regions (Abruzzo, Molise, Liguria, Piedmont, Emilia-Romagna and Veneto) by the end of 2016. In this initial implementation phase, however, the online process has remained optional.

Finally, it is noted that a law was enacted to govern same-sex civil unions, and new regulations were introduced for cohabitation.

Banking system

The Italian banking system is solid and has shown a good capacity of resilience. Such affirmations are also backed by the results of the stress tests conducted by the EBA, with four of the five Italian institutions examined having passed the test, thereby showing that the capital held by these institutions would also allow them to withstand a severe recession. Monte dei Paschi di Siena has presented a restructuring plan that has already been approved by the ECB. The restructuring plan consists of two essential initiatives: the complete sell-off of the bank’s portfolio of non-performing loans and a capital increase.25

In demonstrating an understanding of several historical limitations of the credit system (including, for example, the excessive fragmentation of supply, the scarce availability of financial as alternatives to bank credit and the excessive time required for recovering doubtful loans), the Italian government began to propose radical changes to the banking sector as from 2015. Such changes involve: the reform of the mutual banks; the self-reform of the banking foundations, as supported by the government; the reform of the cooperative credit banks; the acceleration of credit recovery times; and the introduction of the Guarantee on the Securitisation of the Non-Performing Loans (GACS). A summary of the final two points is provided below, while the other points are reviewed fully in the National Reform Programme published in April 2016.

The credit recovery time for doubtful loans is longer in Italy than in other countries. However, the gap with the best practices is gradually closing as a result

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24 Worth mention, for example, are the measures regarding the reform of the tax-dispute process, as adopted with Legislative Decree No. 156/2015, which is part of the implementation of the Enabling Act No. 23/2014.

25 The non-performing loans are to be sold to the Atlante 2 Fund, a private fund that invests in this type of credit, with the objective of recovering the credit and earning a reasonable profit therefrom. The capital increase is backed by an underwriting consortium of international banks.

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of i) the online civil proceedings (which have cut the average time for a lower court ruling in civil proceedings to 367 days) and ii) the business tribunal, where 80 percent of the case load is settled within one year. In the past two years, these developments have been reinforced by other measures.

First of all, there are initiatives to simplify compliance and to streamline credit recovery procedures,26 partly due to the use of information and communication technologies.27

In order to assist companies in producing income, a ‘non-possessory lien’ has been introduced, whereby the debtor who pledges the personal property asset used in business activity can continue to use it in the productive process (while under the previous system, the borrower lost the use of the asset covered by the lien). Instead, the ‘Marciano Pact’ provides for the out-of-court assignment of real properties used to secure financing to a business.28 These provisions are added to those already enacted in the summer of 2015 with Decree-Law No. 83/2015 which regarded: credit access for troubled businesses; the opening of pre-bankruptcy settlements with creditors to competitive bidding; debt restructuring; the status of the bankruptcy trustee; acceleration of sale transactions; and changes to regulations governing deductibility of losses.

Another measure aimed at facilitating the recovery of non-performing loans is represented by incentives for the auction sale of real properties. All of the measures are part of basic reforms that will have positive repercussions on banks, which will be able to collect their loans more promptly, and will thus have more balance-sheet leeway for extending new credit to businesses. At the same time, it becomes easier for businesses to secure financing from the credit institutions, which can count on more rapid and streamlined procedures for recovering the sums disbursed in the event of the debtor’s default in paying instalments.

The legislation referenced above also introduced reimbursements to investors of four troubled banks, the first application of the regulations on the recovery and resolution of banking crises, as provided by the EU Bank Recovery and Resolution Directive (BRRD). This backdrop is rounded out by the Guarantee on the Securitisation of Non-Performing Loans (GACS), that the State will provide to

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26 Decree-Law No. 59/2016, converted by Law No. 119/2016.

27 The introduction of the use of information instruments will make a key contribution, through the creation of a register of property repossession proceedings, insolvency proceedings, and the crisis management tools functional to the creation of a market for non-performing loans. The parties managing the insolvency proceedings will also have access to the information contained in databanks. Finally, the insolvency proceedings will be accelerated, with the increased use of information technology not only during the creation of the creditors’ committee, but also during the hearings for ascertaining the bankrupt party’s liabilities, and at the time of the pre-bankruptcy settlement, at the hearings of the creditors.

28 When financing is made available, the parties may sign a contract for the sale of an asset as a guarantee of repayment. Should the debtor default (the non-payment for more than nine months from the due date of at least three monthly instalments, even if not consecutive, or the non-payment of a single instalment when instalments are payable more frequently than monthly), the bank takes possession of the asset with very basic proceedings, without going through the judicial system. The value of the real property pledged as security is estimated by an appraiser, and when the value is above the debt balance due, the difference is paid to the owner. This measure makes it possible to set up financing contracts, with the creditor being able to take possession of the pledged asset in roughly 12 months versus the 40 months currently estimated for securing real property through judicial proceedings. The introduction of the Marciano Pact has radically changed the prospects for credit recovery in the future, but it also has an impact on the working off of loans in arrears, since the new doubtful loan will be greatly reduced and will thus have a smaller impact on a bank’s current operations.

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requesting intermediaries in order to facilitate the selling off of non-performing bank loans.29

The changes in the Italian banking system also include an alternative investment fund (FIA) known as Atlante Fund. This is a private-sector initiative set up by an independent funds management company that invests in financial institutions (banks, insurance companies and foundations that participate on a voluntary basis).30 The fund has recently been split into Atlante 1 and Atlante 2, the latter of which is concentrated on the NPL market.

Finance for growth and other business-support measures

In addition to increasing the number of instruments available to businesses, the government has stepped up the revision and evaluation of the measures already implemented, reinforcing a process that involves various Public Administrations and outside parties on regular and structured basis.

The measures outlined in the 2017-2019 Budget Law regarding the Finance for Growth programme will be supplemented by the ‘Industria 4.0’ Plan and will concentrate on the need to channel capital into the Italian productive system and in particular, to small - and medium-sized enterprise (SMEs). The aim is to stimulate, via access to the capital markets, the growth in size of the businesses, reinforcing their competitive capacity and managerial force. Italian businesses suffer a productivity deficit due to their reduced size vis-à-vis foreign competitors. With size being held constant, Italian companies are actually more competitive, and expansion in size is therefore a key strategy for the country’s productive fabric. The ‘Industria 4.0’ objectives include greater flexibility and speed of the productive process, due in part to the use of innovative technologies; productivity improvement, and enhancement of the quality of goods and services, with a consequent increase in competitiveness. Through a steering committee set up by the government, the plan involves the Public Administration, universities, research entities, business and unions, with a public-private governance architecture. The plan embraces two key elements (innovative investments and skills) and two supporting elements in relation to enabling infrastructure (such as the ultra-broadband plan) and public support tools (such as innovative investments and decentralised contracting).

The measures subject to evaluation include: i) refinancing of ‘super amortisation’ and its quantification based on the type of investment made by the businesses; ii) extension and enhancement of the tax credit for research and development; iii) amendment of tax breaks for productivity bonuses; iv) refinancing of the SME Guarantee Fund; and v) certain measures in favour of start-

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29 The State will only guarantee the senior tranches of the securitisations (i.e. those that are more secure), which are the final form of support for possible losses from lower-than-expected levels of credit recovery: the riskier tranches cannot be reimbursed until the senior tranches guaranteed by the State have been fully paid out. The guarantee is priced at market, as also recognised by the European Commission, which agrees that the formula does not contemplate State aid that would distort competition.

30 In acting as a back-stop facility, the fund is able to ensure the success of the capital increases required by the regulatory authority for banks that are today facing objective market difficulties. In addition, it will contribute to the start-up of the operation of a market for non-performing bank loans: Atlante will concentrate its investments in the junior tranches of securitisation vehicles, thereby being able to leverage those with greater seniority that have greater investor demand.

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ups, such as individual savings plans (PIR), a tax incentive to channel savings into the financial markets to the benefit of the real economy, so as to provide greater liquidity to those markets. Specific financing solutions through the Cassa Depositi e Prestiti are also under review.

FOCUS   The national Industria 4.0 Plan The digitalisation of the economy is completely changing productive processes and industrial organisation, particularly in the manufacturing sector. Italy has a great opportunity to make competitive gains, but reaching this objective means supporting businesses in transforming their productive cycles, focusing on an increase in productivity and product quality. Italy’s economic fabric is made up of small- and medium-sized enterprise (SMEs): for this reason, Italy’s policies cannot be organised by sector (as what occurs in other European countries), but must be concentrated on factors that consolidate growth and development. In an environment marked by rapid and continuous change, it is also not possible to focus actions on a specific set of enabling technologies. The national ‘Industria 4.0’ Plan therefore starts from the premise of technological neutrality, and entails lateral actions and the orientation of existing tools to support innovation, productivity and flexibility. The plan entails key elements and accompanying elements:  

	KEY ELEMENTS		ACCOMPANYING ELEMENTS
	Innovative Investments	Skills	Enabling Infrastructure	Public Support Tools
•	• Provide incentives for private investments in I4.0 technologies and assets	• Promote the I4.0 culture through digital school and work-study programmes	• Ensure adequate network infrastructure (Ultra-Broadband Plan)	• Guarantee private investments
	• Increase private-sector expenditure in research, development and innovation	• Develop I4.0 skills through programmes at universities and vocational secondary schools	• Contribute to definition of inter-operability standards and criteria for the Internet of Things	• Support large-scale innovative investments
	• Intensify financing to support I4.0, venture capital and start-ups	• Finance I4.0 research by supporting clusters and PhDs		• Strengthen and renew the governance of international markets
		• Create competence centres and digital innovation hubs		• Support wage-productivity interchange through decentralised corporate labour contracts
	Governance and awareness:		Assure sensitivity regarding the importance of I4.0 and create public-private governance.

The main measures proposed to support this productive improvement are:

a) continuation of super-amortisation; b) introduction of hyper-amortisation on I4.0 assets; c) reinforcement of the tax credit for research, development and innovation; d) shoring up of finance to support I4.0, venture capital, start-ups and innovative SMEs; e) reform and refinancing of the Guarantee Fund with a focus on covering I4.0 investments; f) creation of I4.0 digital innovation hubs and competence centres; g) intensification of public investment in I4.0-related training and research; h) strengthening of the ‘Intelligent Factory’ and ‘Agri-food’ technological clusters; i) Ultra-Broadband Plan; l) Extraordinary Plan for ‘Made in Italy’; m) focus of the resources on development contracts on I4.0 projects; and n) reinforcement of the wage-productivity interchange.

In May 2016, the Interministerial Committee for Economic Programming (CIPE) assigned €40 million for the refinancing of the so-called ‘Self-employment’ incentive, part of which has been financed with structural funds. The bulk of the

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funds (80 percent) will go to the southern regions in the form of subsidies in favour of small-business initiatives. Another €200 million was assigned to the Ministry of Agricultural and Forestry Policies31 for the subsidised financing of production-distribution and district contracts.

In addition, the so-called Sabatini Ter provision went into effect on 2 May for the granting and disbursement of a subsidy related to bank financing, and this will cut the time needed for disbursing financing to SMEs, compared with the schedule provided by the Sabatini II provision. With the new arrangement, banks and financial intermediaries will be able to grant the related financing through the use of a special fund set up as part of the separate accounts of Cassa Depositi e Prestiti, or through alternative funds, thereby being able to optimise and simplify procedural flows.

The SME Guarantee Fund - a key industrial-policy tool during the crisis - has been recently modified and will be refinanced. A rating model has been adopted to allow for more precise evaluation of the businesses requesting the guarantee. More specifically, applicants will be divided into five merit classes, with the guarantee coverage calibrated in relation to the probability of default. In addition, the guarantees will be mainly focused on financing related to investment.

The enabling act for reforming the collective-loan guarantee consortiums (Confidi) was approved in July 2016, and regulates the use and value enhancement of an instrument that, first and foremost, is designed to support micro businesses and the SMEs in accessing credit. The guiding principles and criteria are related to: the adjustment of the level of capitalisation; the expansion of the sources and means for tapping public resources, capital and other funding; and administrative simplification.

An ongoing, key aspect of the government’s strategy is the support to the internationalisation process. As from May 2016, a portion of the Fund for Sustainable Growth can contribute to the financing of programmes for international expansion into non-EU markets and the capitalisation of exporting SMEs.32 The semi-annual results at 30 June 2016 of Italy’s Export Credit Agency,‘SACE’ (CDP Group) attest to the intensification of the agency’s role in supporting the competitiveness of ‘Made in Italy’ products, with a significant increase of the transactions concluded in the first half of the year.33

The Italy Startup Visa programme, which is aimed at simplifying granting visas to innovative business owners from outside the EU who intend to open innovative start-ups in Italy, witnessed a 12.1 percent increase in applicants in the May-August 2016 period compared with the previous quarter.

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31 These resources will be drawn from the 30 percent of the unused resources of the Revolving Fund for Support to Businesses and Investments in Research (FRI).

32 The resources within the Fund for Sustainable Growth earmarked for these instruments amount to €80 million. The process to favour the internationalisation of Italian businesses also includes an interministerial decree (Ministry of Economic Development/Ministry of Economy and Finance) dated 6 September 2016 concerning the reform of the financial instruments to support such expansion. Using the dedicated revolving fund (as provided by Decree-Law No. 251/1981), these instruments are designed to facilitate and promote investment programmes aimed at launching and distributing new products in markets outside of the EU.

33 More specifically, the new transactions approved entail €20 billion (+36 percent over the first six months of 2015), and an acceleration can be seen in all lines of business. The activities to support exports and international expansion grew by 70 percent, in terms of new volumes guaranteed.

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The Cassa Depositi e Prestiti has made available €1 billion in order to grow the volume of credit to SMEs. In this regard, CDP inaugurated a securities purchase programme in May 2016, with reference to credits to SMEs.34 In addition, CDP’s new 2016-2020 business plan focuses on supporting the country’s growth by making available some €160 billion in resources over the next five years. Furthermore, given the status of a ‘National Promotional Institution’ (as assigned by the Italian government and the EU), the CDP Group is positioned to attract another €100 billion of national- and foreign-sourced public and private funding. This funding will mainly come from three sources: the resources made available by the EU and the EIB, including as part of the Juncker Plan; co-financing with other financial intermediaries, including other National Promotional Institutions; and the capital of international and Italian institutional investors through permanent projects.35

Labour

As provided by the enabling act for the reform of the labour market (Law No. 183/2014), the government, as a follow-up to its monitoring of the effects of the reform, has ratified several supplemental provisions to the decrees for the implementation of the Jobs Act.

The main changes regard:

· The regulation of temporary part-time work, so as to allow for complete tracking of the use of temporary part-time work vouchers and to prevent fraudulent or duplicitous use of the same.36

· The possibility of transforming ‘defensive’ solidarity contracts into ‘expansive’ solidarity contracts, in order to facilitate expansion of the work force and addition of new skills.37

· Several specific supplemental measures regarding social safety nets and active labour policies.

· Greater appropriations to support apprenticeships.

Other measures adopted to prevent behaviour harmful to the dignity of workers and unfair competition among businesses include a legislative bill to

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34 The programme is rounded out by instruments to facilitate access to medium-/long-term credit made available by CDP as from 2009 (total value of €31 billion) that have benefited more than 110,000 businesses operating in all economic sectors.

35 The CDP business plan provides for core actions addressing Italy’s growth across four key development areas: support to government institutions and local entities; reinforcement of infrastructure; development of real estate properties; and support to businesses. More specifically, with respect to businesses, the plan earmarks €117 billion (+73 percent over the preceding five-year period) and provides for support initiatives across all phases of the business life cycle.

36 The parties hiring temporary, part-time workers are required to report the following to the local office of the National Labour Inspectorate (via text message or email): the worker’s personal data or fiscal code, and the place and term of the work.

37 The transformation may regard the defensive solidarity contracts in effect for at least 12 months as well as those signed before 1 January 2016. The transformation cannot entail a work schedule reduction greater than that already agreed. The workers are to receive a wage supplement equal to 50 percent of the wage supplement provided prior to the transformation of the contract, and the employer is to add to this supplement, at least up to the amount of the original wage supplement. The employer does not pay any social security contributions on the part of the supplement it pays, and the workers benefit from the crediting of a social security contribution (which is actually not paid).

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combat illegal hiring and undeclared work in the farming industry; the bill was approved by the Senate at beginning of August, and is currently under review in the Chamber of Deputies.

The legislative bill covering measures to support the self-employed and measures to facilitate flexibility in full-time employment with respect to work locations and work schedules was approved by the government in January 2016 and is currently under review in Parliament.38 With reference to the self-employed, the main measures are aimed at setting up a system of rights and welfare, which is capable of supporting these workers in the present and protecting them in the future. The bill also refers to ‘smart working’, whereby full-time employees work both inside and outside of company premises, with the accent on increasing worker productivity, and also accommodating the work-life balance.

The ‘transitional part-time’ scheme introduced by the 2016 Stability Law39 has become operational.

The sphere of application of the tax exemption for productivity bonuses was modified with the 2016 Stability Law for the purpose of improving the effectiveness thereof and facilitating additional productivity gains.40 With the new Budget Law, the government is also examining the possibility of enhancing tax breaks for performance bonuses.

After approval of their statutes in February, the National Labour Inspectorate and the National Agency for Active Labour Market Policies (ANPAL)41 are continuing the process of starting up their activity. The administrative bodies have

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38 Approved by the Council of Ministers on 28 January 2016 and under review in the Senate (Senate Act No. 2233).

39 The transitional part-time programme regards workers in the private sector, who have made pension contributions for at least 20 years, and are within three years of mandatory retirement. More specifically, such full-time workers, who meet the minimum contributions requirement for a retirement pension (20 years of contributions) and who meet the age requirement for retirement by 31 December 2018, may agree with their employer on a changeover to part-time, with a 40-/60-percent work schedule reduction; each month, these workers will receive their pay for the part-time work, plus a tax-exempt sum equal to the employer’s social welfare contributions on the wages for the hours not worked. In addition, for the period of the part-time work, the State records a social security contribution (which is actually not paid) for the worker in relation to the hours not worked, so that once the worker reaches the retirement age, he/she will get his/her entire pension, without any penalties.

40 A special interministerial decree (MLPS-MEF) defines the rules for implementation, which also regard corporate welfare programmes. The productivity bonuses, which are taxed at the rate of 10 percent, are defined as variable sums, whose payment is linked to increases in productivity, profitability, quality, efficiency and innovation. The criteria for measuring and verifying the productivity increases (which are a condition for the tax breaks) must be established in the agreements. According to the regulations, the targets may consist of production increases, savings with regard to productive factors, or improvements in product and process quality. The achievement of the objectives can also occur through the reorganisation of labour. The bonuses provided by second-level bargaining in relation to worker involvement in the organisation of work for the purpose of achieving productivity gains are also eligible for the tax breaks. At the 15 July 2016 deadline for the electronic filing of corporate and territorial contracts (second-level bargaining), some 13,543 contracts had been filed, including 10,547 referring to performance bonuses and profit sharing in 2015. A breakdown of the contracts by category shows 10,574 in relation to productivity objectives, 7,907 in relation to profitability and 6,121 in relation to quality. The region accounting for the largest number of contracts was Lombardy (3,860), followed by Emilia Romagna (2,245) and Veneto (1,931).

41 Among its provisions for the reordering of regulations regarding employment services and active policies, Legislative Decree No. 150/2015 provided, inter alia, for the creation of ANPAL; as a result, Italia Lavoro S.p.A., a company within the Ministry of Labour and Social Policies, was merged into ANPAL, which became the owner of the Italia Lavoro S.p.A. shares, and this changed the company’s governance, with the sole director now being the ANPAL chairman.

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been formed, and the transfer of the personnel of the entities involved in the reorganisation has begun.

The reorganisation of the entities supervised by Ministry of Labour and Social Policies has also included important enhancements to the role of the Institute for Development of Professional Training for Workers (ISFOL), which has been renamed the National Institute for Analysis of Public Policies (INAPP) and will carry out broad-based monitoring of the labour-related public policies.

The new direction of active labour policies provides for the introduction, by the end of 2016, of an employment incentive to facilitate reallocation of workers remaining unemployed for more than four months. The initiative is designed to increase the capacity and the efficiency of the public and private employment services in the redeployment of people affected by involuntary unemployment.

The new distribution of responsibilities as provided by the constitutional reform will also allow for more effective and uniform management of the new instruments across the national territory. The government has invested sizeable financial and organisational resources in launching ‘An Italian Approach to the Dual System’,42 which is based on increasing students’ work experience during school years, and securing greater involvement of Italian businesses in the professional development of students of the final years of upper secondary school.

With a view toward providing incentives for a second source of household income, the government intends to continue its effort to support families through measures to facilitate access to child care for infants and young children, so as to avoid penalising the female employment rate and to ensure an ongoing work-life balance.

The first report on ‘Employment contracts following the Jobs Act’ was published in September 2016 as part of a scientific committee’s monitoring and evaluation of the labour market reforms provided by Law No. 92/2012.43

New data on the Youth Guarantee Programme show a 50.9 percent increase in the number of the young people actively benefitting from the programme between 31 December 2015 and 9 September 2016. At the same time, the number of the young people registering for the programme rose by +24.4 percent compared with 31 December 2015. The report of the Institute for Development of Professional Training for Workers (ISFOL) on the Youth Guarantee in Italy was updated in May 2016, so as to examine the first two years since the start-up in May 2014:44 approximately 40 percent of the young people completing the

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42 For additional information, see http://www.sistemaduale.lavoro.gov.it (Italian text only)

43 This first monitoring exercise analysed and evaluated the impact of the reforms and the measures placed into effect with regard to employment relationships. The prevalent result for 2015 was a pronounced recovery of full-time employment, and in particular, the robust growth of the employment under contracts without expiration date, which was undoubtedly aided by the 2015 Stability Law’s tax breaks and exemptions from social contributions. The number of self-employed workers was instead lower. Total data for the labour market for first quarter of 2016 have instead shown a deceleration of the increasing trend of the total number of employed, mostly linked to the transition from total exemptions to partial exemptions from social contributions, as provided by the 2016 Stability Law, and therefore, a significant concentration of hiring activity in the month of December 2015. The introduction of an open-ended employment contract with provisions for increasing benefits also seems to have made an important contribution. More specifically, the most evident stimulus of the new regulations seems to have regarded the trend of transforming fixed-term employment into full-time employment under contracts without expiration date.

44 First of all, it is evident that the Youth Guarantee Programme has triggered a change in the attitude of the young people with respect to their search for employment and access to services: as of 31 March 2016, some

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programme formalities had obtained a job (with almost 30 percent securing full-time employment) with peaks of more than 60 percent in the north-western regions.

Education and research

In the year since the ‘Buona Scuola’ reform went into effect, the most significant actions have regarded:

· School independence. A staff enhancement plan went into effect in November 2015 for the purpose of making schools more independent: each school secured 6-7 additional teachers, in order to expand course programmes, to execute projects and activities to prevent early school leaving and to provide for scholastic inclusion, and to cover brief terms of substitute teaching. The first cycle witnessed enhancements in linguistic and artistic-musical studies, while the second cycle was focused on socio-economic, artistic-musical, linguistic and scientific studies.

· National performance evaluation system. For the first time, Italy has launched a standard system for the evaluation of schools and the professional resources.45 The first report on external assessment of the schools is to be completed by December 2016.

· Inspections. An extraordinary programme launched for inspection of some 673 officially recognised private schools is verifying the maintenance of the requirements needed for official recognition. A special emphasis has been placed on upper secondary schools.

· Maximising the value of the teaching personnel. A special fund of €200 million per year has been established for this purpose, with each school getting an average of €24,000 per year that can be used for providing incentives for its teachers to increase the value of their skills.46

· School administrator evaluation and mandates. In the decree covering the conferral of a three-year mandate at the school, the school administrators

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57 percent of the estimated total NEET (15-29 age bracket) had registered in the programme. The data show a growing tendency in the capacity of the services to take on the registered users, with the coverage ratio climbing from less than 50 percent in 2014 to 77.3 percent in June 2016.

45 With reference to school evaluation, a self-assessment programme was completed for the 2014-2015 academic year, and this programme will be updated and expanded for the 2015-2016 academic year. All state schools completed the self-assessment through a form supplied by the Ministry of Education, Universities and Research, and published their self-assessment reports on their school websites. Today, the self-assessment reports can be easily accessed for consultation, and are available to families at the time of registration (on the ‘Scuola in chiaro’ portal). In the meantime, the schools have embarked on the planning of improvements to achieve, within a three-year period, the priorities identified in the self-assessment reports. In 2015, the Ministry of Education, Universities and Research set up internal assessment units and made available €3 million for the purpose of promoting the best practices with reference to the schools’ improvement plans. The next phase of the National Evaluation System, which provides for external evaluation of the schools, will be activated in the 2015-2016 academic year. During the 2016-2017 academic year, the visits will continue, and around 10 percent of the schools will be involved.

46 The school principal is vested with the power to assign the ‘bonus’ to teachers, on the basis of the indications provided by the Assessment Committees (principal, three teachers, two parents, and an outside party identified by the Regional Education Office). The Ministry of Education, Universities and Research monitored the distribution of the bonus from April to August 2016. Some 95 percent of the schools participated, and, based on the initial definitive data, some 97 percent of the committees used all three criteria provided by law for the evaluation of merit, and 94 percent of the committees adopted their decisions unanimously. The bonus was assigned to 247,782 teachers out of a total of 623,820. The school administrator will also be evaluated, in turn, on his/her ability to maximise the various professional resources.

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will find the improvement objectives identified in the self-assessment reports, which are thus part of the National Evaluation System, and national strategic objectives and possible regional objectives. The Ministry of Education, Universities and Research has developed a standard format for conferral of the mandate across the country, with the possibility of monitoring and controlling the development and the achievement of the objectives.47

· School personnel. In two years, the government has added almost 120,000 teachers to the official school register, either through the extraordinary hiring plan or registrations related to the current academic year. In 2016, some 10,294 people were hired for administrative, technical and auxiliary positions. The Ministry of Education, Universities and Research is planning a competitive selection process for school administrators for all positions vacant and available for the 2016/2017 academic year, as well as for those positions that become vacant and available in the subsequent three-year period. This will allow for limiting the position of regent (about 1,400 out of a total of approximately 7,200 principals) to only 335 very small schools.

· National Plan for Teacher Training. The plan to be ratified in October indicates clear priorities and contents for the professional development of teachers, aligning Italy’s education system with the best international standards. The financing of the plan contemplates €300 million over the next three years, for a total investment of €1.4 billion, when including the €387 million per year for the Lecturer/Tutor Charter (the so-called ‘500 Euro’ bonus). The plan covers the resources for school independence and for ‘vertical’ actions defined at a national level.

· Enabling acts, between inclusion and right to education. A review is currently in process regarding the implementation of the enabling acts provided by the reform in relation to: advance training of teachers, the right to education, the reordering of school-related regulations, the promotion of scholastic inclusion, the creation of an integrated educational system, and education for young children (0-6 years old).

· Scholastic inclusion. Around 90,000 special needs professors have been hired, and 6,000 new jobs have been created to strengthen the teaching staff (organico di potenziamento). In addition, 106 special service desks have been become operational nationwide to facilitate the scholastic inclusion of autistic students.

· Funds for school operation. The resources for daily operation of the schools have been doubled (€230 million).

· ‘Scuola al centro’. Schools will be seen as civic centres open to the public, as a place for preventing early school leaving, and a point of reference for

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47 For the first time in Italy, senior managers (more than 7,000) will be evaluated during the September 2016-June 2017 period. The evaluation will be followed by the annual performance bonus payment based on supplemental contracting at the regional level. Some 60 percent of the evaluation will be based on: the contribution to improvement of students’ achievements and the learning processes; the promotion of the participation of, and working relationships between, the different components of the school community and relationships with the community; and managerial and organisational skills. The remainder of the evaluation will look at maximising the value of the commitment and the professional merits of the school staff (30 percent) and the appraisal of the manager’s work within the professional community and society (10 percent).

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the community, above and beyond class time, on the weekends andin the afternoon, both in summer and winter.48

· School building. As one of the government’s major commitments, school construction is getting a significant boost in terms of governance and appropriated resources, as a result of the application of the reform: after 17 years, the National Observatory for School Building has been reintroduced, and a new single services desk is soon to be activated for building projects. In addition, a current three-year plan has identified the entire national financial requirement and reordered all financing.49 Diagnostic surveys are now being made of school buildings, and a National Register of School Building is being used by the Ministry of Education, Universities and Research as the basis for the completion of an electronic dossier of each scholastic institution.

· Integration. Resources of €1 million have been appropriated for language projects and initiatives to integrate unaccompanied foreign minors. The revision of the classifications of the competitive selection processes has included the creation of a competitive selection process for the teaching of Italian as a second language.

· Higher technical institutes (ITS). A new method for assigning resources to the ITS went into effect in March 2016. Some 30 percent of the resources have been assigned on the basis of qualitative parameters, which are 40 percent weighted according to the employability of young people. Any ITS whose evaluation amounts to less than 50/100 will not receive financing, and, after three years of negative evaluations, it may no longer issue diplomas.

· Territorial labs for employability. Some €45 million has been appropriated for highly technological work space; schools will be able to use this space in their work-study programmes, and their efforts to prevent early school leaving; the labs will also involve the NEET (Not in Education, Employment or Training).

· National Plan for Digital School. In the first seven months of the plan’s implementation, some 65 percent of the 35 planned actions have been initiated, with the use of more than €360 million of the €1 billion appropriated. The remaining actions are expected to take shape by the end of 2016.50

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48 Four large cities (Milan, Rome, Naples and Palermo) were involved during the summer of 2016, with €10 million appropriated for summer openings. More than 400 schools participated in this initiative. On the basis of this prototype, a €240 million tender was published for the purpose of allowing for the afternoon opening and opening at other hours for approximately 6,000 schools across the country. The financing will come from the European Social Fund as part of the 2014-2020 National Operating Programme; the tender focuses first of all on enhancing extracurricular activities for basic studies and sports, as well as other aspects of school, such as music, theatre and art. The schools will be encouraged to become ‘centres for attracting the local community,’ given the involvement not only of teachers and families, but also local associations and other stakeholders. With this tender, the coverage climbs to 72.4 percent of the schools in the country.

49 The total resources in favour of the school building projects amount to €6.7 billion, while the only investment for improvements/earthquake-resistance projects totals €240 million for 430 projects financed. In October, an effort got under way to conduct diagnostic surveys with respect to 7,304 buildings. As part of the application of the reform, the data on the buildings were finally published after 20 years, with a national register of school buildings. The Ministry of Education, Universities and Research is using such data to develop an electronic record of school buildings, automatically linked with all of the ministry’s monitoring systems and databanks.

50 Among the main policies: a) Broadband and Connectivity: investment of €88 million for the internal wiring of all schools that were not online as of 2015; b) Instant Internet access for schools: an agreement

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· Mandatory school-job transition. With the ‘Buona Scuola’ initiative, the work-study programmes moved from an experimental phase to become a permanent and mandatory practice for all students, regardless of whether the students are in technical schools, professional institutes, or traditional high school. Fixed financing of €100 million per year has been appropriated in order to guarantee 400 hours of work experience in the final three-year period of technical schools and professional institutes and 200 hours in regular high school. Once the system is completely on stream, some 1.5 million young people will be involved.51 In addition, new instruments will be made available to the schools and hosting businesses, including, for example, a charter of the rights and obligations for the students involved in the programmes (starting from the fourth quarter of 2016), and a steering committee established by the Ministry of Education, Universities and Research and the Ministry of Labour and Social Policies in order to strengthen the links between education and professional development, and to facilitate the transition from school to work.

· School Bonus. The government has launched a communications campaign about the School Bonus, a tax break provided by the ‘Buona Scuola’ law. Unrestricted donations to a scholastic institution will give rise to a tax credit equal to 65 percent for donations made in the years of 2016 and 2017 and 50 percent for 2018.52

A 2016-2018 three-year plan for development of the university system was approved in August 2016. As provided by the plan, universities will have greater independence in: the creation of degree programmes; planning innovative and flexible teaching methods; and ensuring courses better respond to the needs of

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between the Ministry of Education, Universities and Research and the Ministry of Economic Development for the ultra-broadband plan (calls for proposals in 700 municipalities) and with the regions and private-sector service providers to lower the average cost of the fees; and c) Skills: the Ministry of Education, Universities and Research has published a call for proposals (€4.3 million) for the creation of 25 course programmes for digital skills, including in connection with the Industria 4.0 plan; the call for proposals will include digital skills for every class in the next school year; d) Learning environments: digital environments for the integrated instruction in more than 5,500 schools (with an investment of €140 million); 58 territorial labs for employability (€45 million for blending lab instruction with innovation, and the involvement of the community and business world); creative workshops for elementary and lower secondary schools (€28 million to intensify lab instruction); 750 innovative school libraries, information and documentation centres (including digital centres), open to the public (€7.5 million). The training of 157,000 employees in the school system is now in process: all digital specialists (8,500), a team for innovation of at least three people per school to support the digital specialists (25,000), all school administrators (7,000), all directors of general and administrative services (8,500), administrative personnel, technical personnel for elementary and secondary schools, and teachers.

51 In the 2014-2015 academic year (before school-job transition programmes were mandated), there were some 270,000 students who participated in school-job transition programmes, and only 42 percent had actually elected for these programmes. An operational guide has been made available to schools for the purpose of creating school-job transition programmes, and some 36 protocols of intent have been signed with museums, companies and associations for the purpose of promoting the programmes. Around 50 agreements have been signed by regional school offices. The Ministry of Education, Universities and Research and the regional school offices are working on a portfolio of protocols of intent, and together with Unioncamere, they are developing a national register for school-job transition programmes, which will be the online source where demand and supply can meet. Registration on the register is free, and it represents a guarantee of quality of programmes proposed.

52 The donations can have three purposes: the planning and development of new school, the maintenance and enhancement of existing structures, and the support to programmes that improve the employability of the students. The maximum amount eligible for the tax break is €100,000 per tax period. Taxpayers may choose the school to which they make a donation. The school will get 90 percent of the disbursement, while the remaining 10 percent will go into an equalisation fund that will be distributed to the schools receiving donations that are less than the national average.

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students.53 The Fund for the ‘Giulio Natta’ Merit Professorships54 has been established for financing the direct recruitment of renowned scientific scholars.

With reference to research, in July 2016, the Ministry of Economic Development outlined the operating conditions for businesses to be able to qualify for the tax incentives related to the Digital Agenda and Sustainable Industry Project.55

The incentive for research and innovation on behalf of SMEs and professionals in southern Italy has become operative with the publication of the Ministry of Economic Development’s decrees for disbursement of €380 million of European Regional Development Funds. The incentive is part of the 2014-2020 Businesses and Competitiveness National Operating Programme, and is aimed at reducing the divide between the country’s northern and southern regions.

Resources have been appropriated for the implementation of the initial measures provided in the 2015-2020 National Research Programme that was definitively approved on 1 May 2016. More specifically, the programme provides for total investments of approximately €2.4 billion in the first three-year period (2015-2017), including: €1.9 billion booked to the budget of the Ministry of Education, Universities and Research and the Research National Operating Programme; and €500 million booked to the 2014-2020 Development and Cohesion Fund (FSC). Current plans call for developing comprehensive projection of the use of resources through 2020, for a total of €4.6 billion.56

As illustrated in the paragraph of this chapter dedicated to the  Public Administration, the government has approved a draft of a legislative decree that will grant public research entities a significant amount of independence in planning; the decree also provides for extension of the plan for direct recruitment of outstanding scholars and has reset the turnover at 100 percent.

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53 The universities have been given greater leeway in planning degree programmes (except for courses entirely managed at a national level by the Ministry of Education, Universities and Research) so that their programmes can emphasize: employability, instructional experimentation, and the international scope of the course offerings. In addition, as from 2017, 20 percent of the bonus portion of the Ordinary Financing Fund (FFO), approximately €300 million, is to be split, on the basis of indicators identified by the universities, in a basket proposed by the Ministry of Education, Universities and Research, that will include indicators for research, instruction, and international expansion. Finally, the regulations have gone into effect for indicating the hiring authority of each university, with national coverage of the turnover at 60 percent (compared with 50 percent for the preceding year), and a guarantee to all universities of minimum fixed quota of 30 percent of their turnover. The variable quota is instead split based on budget sustainability indicators. As a result of an extraordinary plan ratified with the 2016 Stability Law, some 1,076 researchers have been assigned to the universities and public research entities under the supervision of the Ministry of Education, Universities and Research. Another €10 million has been made available for recruitment of ordinary professors.

54 Article 1, Paragraphs 207-211 of Law No. 208/2015.

55 More specifically, the tax incentives related to the Digital Agenda project (available funds of €120 million) are designed to support major R&D projects in the information and communications technologies sector for the purpose of the implementation of the Digital Agenda. The tax incentives related to the Sustainable Industry project (available resources of €410 million) regard major R&D projects for sustainable growth, from an environmental perspective.

56 In addition, there are other resources coming from: i) the regional operating programmes (POR) financed by European structural and investment funds for the 2014-2020 period and ii) the EU Horizon 2020 initiative, namely, competitive financing that will put the programme’s total financial resources at €14.056 billion for the 2015-2020 six-year period.

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A first tranche of €20 million57 has been appropriated for promoting the first 230 innovative PhD programmes mainly related to industry. Some €30 million is also to be made available for programmes to attract outstanding researchers and measures to support Italian scholars who intend to participate in European tenders for the European Research Council (ERC).58 In addition, some €3 million of resources from the Special Supplemental Fund for Research (FISR) have been earmarked for setting up four new clusters (Made in Italy, Cultural Properties, Energy and Blue Growth) to be added to the eight existing clusters;59 the new clusters will be able to participate in bidding for approximately €400 million to be allocated in late 2016 and early 2017 for projects involving industrial research and public-private cooperation.60

Finally, the year of 2016 has included a consolidation of ordinary resources for advanced training in music and the arts (AFAM) and a merit-based distribution of the financing on the basis of rigorous parameters.61

Reduction of territorial imbalances

The financial data monitored as of 30 June 2016 have confirmed the estimation of full absorption of EU resources for the 2007-2013 planning cycle.62 Currently available data indicate a recovery of spending capacity due to systematic action of the central and regional administrations, as supported by the Agency for Territorial Cohesion, and including with respect to the programmes experiencing the greatest delays.

In relation to the complementary planning of the European structural funds, the Interministerial Committee for Economic Planning (CIPE) approved the use of €846 million, to be drawn from the national co-financing resources, to ensure the completion of the projects included in the 2007-2013 planning of the European structural funds and not concluded as of 31 December 2015. CIPE also approved €696 million for the Complementary Action Programme for 2014-2020, known as ‘Businesses and Competitiveness’, presented by the Ministry of Economic Development. This programme will involve projects in Basilicata, Calabria, Campania, Apulia and Sicily, on a complementary basis with respect to the 2014-2020 Businesses and Competitiveness National Operating Programme. Added to this is the Complementary Programme for Cohesion Action presented by the Region of Campania. The region’s total availability is approximately €1.2 billion,

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57 The €61.8 million related to the National Operating Programme is rounded out by €30 million from the Development and Cohesion Fund and €299 million from the Ordinary Financing Fund, for the ‘re-routing’ provided by the guidelines of the National Research Programme.

58 In this case, the measures, which also provide for consolidating the offices that take care of the competitive financing of the entities under supervision, are aimed at increasing the number of ERC grant recipients who choose an institution in Italy as their host institution. The dedicated site with a special IT platform is managed by the Ministry of Education, Universities and Research.

59 Aerospace, Agri-food, Green Chemistry, Intelligent Factory, Transport and Mobility Systems of Land and Ocean Surface, Life Sciences, Technologies for Life Environments, Technologies for Smart Communities.

60 For additional information about the National Research Programme, see: http://hubmiur.pubblica.istruzione.it/web/ministero/cs020816 (Italian version only)

61 A Decree of the President of the Republic is soon to be finalised regarding new rules for recruitment, while a review is in process for the nationalisation of historical academies and equivalent musical institutes. The enabling acts of the ‘The Good Schools’ law provide for a comprehensive review of the musical education network in close collaboration with the education system as a whole.

62 The data indicate the use of 99.2 percent (€45.3 billion) of total funding of €45.8 billion.

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net of €497 million the completion of the projects included in the 2007-2013 European Regional Development Fund programmes and not concluded as of 31 December 2015.

In August 2016, the Interministerial Committee for Economic Planning (CIPE) approved the means for using the resources appropriated by the 2015 Stability Law (total of €90 million for 2015-2017) for reinforcing the national strategy for development of the domestic areas. CIPE also approved the following programmes: i) complementary operating programme to the 2014-2020 Research and Innovation National Operating Programme (€412 million); ii) complementary operating programme to the 2014-2020 Culture and Development National Operating Programme (€133.622 million); iii) complementary operating programme to the 2014-2020 Metropolitan Cities National Operating Programme (€206 million); and iv) complementary operating programme to the 2014-2020 Governance and Institutional Capacity National Operating Programme (€247 million). Finally, CIPE assigned additional resources to the completion of the projects included in the 2007-2013 planning of European structural funds and not concluded as of 31 December 2015, with €204 million to be drawn from national co-financing resources and €75 million to come from resources in the 2014-2020 Development and Cohesion Fund (FSC).

Welfare and the fight against poverty

The 2016 Stability Law established the ‘Fund for the Fight Against Poverty and Social Exclusion’ with resources of €600 million for 2016 and €1 billion as from 2017. The fund finances the implementation of the National Plan for the Fight Against Poverty;over the three-year term of the plan (the same time horizon as the Budget Law), a gradual determination will be made of the measures, on the basis of the resources available. As from 2017, the use of the fund and the measures covered by the plan will be governed by legislative decrees for implementing the enabling act for the fight against poverty, which was already approved by the Chamber of Deputies upon its initial presentation. The enabling act contemplates, inter alia, the introduction of inclusion income, a broad measure to fight poverty that is based on economic support subject to the recipient’s initiation of certain actions to become independent.

Pending the implementation of the enabling act, which also calls for streamlining the tools to fight existing poverty, the plan for the fight against poverty is financing two measures in 2016: the Support for Active Inclusion (SIA) and unemployment allowances (ASDI). After being tested in 12 of Italy’s largest cities, the SIA was extended to the entire national territory as from 2 September 2016.63 The resources available for the SIA for 2016 amount to €750 million,64 and

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63 The measure was completely reshaped so as to consider, ahead of schedule, the provisions applicable for the inclusion income, which should become a permanent programme as from 2017. The inclusion income is an economic subsidy to households experiencing harsh economic conditions (equivalent financial situation index (ISEE) of €3,000 or less) in which at least one family member is a minor, or in which there is a disabled child or a woman who is pregnant. The assignment of the benefit (disbursed through an electronic card) is done on the basis of a comprehensive evaluation of need that takes into account the number of dependents, the earnings situation and the employment situation. In order to obtain the benefit, the applicant must participate in a personalised work/social programme that involves all civic services, from the municipalities to employment

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they are due to increase in 2017. A planned mechanism for monitoring and evaluating the SIA will involve the Social Security Administration (INPS) and the Ministry of Labour and Social Policies. The SIA is flanked in 2016 by the ASDI, an unemployment allowance paid to persons who, after having received unemployment compensation (NASPI) for the full term possible, have still not found a new job, and are dealing with economic hardship.65 As from 2017, the resources available for this measure amount to approximately €1 billion per year.

Resources to support people with low income have also been appropriated through the ‘Fund for European Aid to the Most Deprived’ (FEAD), with total funding of €789 million for 2014-2020 (including €671 million of European funds and €118 million referring to national co-financing). This amount of the resources depends on Italy’s participation in the financing of a voluntary quota. The measures are fully integrated into the Plan for the Fight Against Poverty, and include, in particular, the distribution of food (approximately €480 million) and several initiatives to prevent poverty from affecting education (such as the distribution of school materials and the running of meal services in schools located in rundown areas, for the purpose of ensuring the afternoon operation of the same). The 2016 Stability Law also established the ‘Fund to Fight Child Poverty in Education’ which will finance projects worth approximately €400 million over a three-year period.

With the preparation of the forthcoming Budget Law, the government is reviewing possible measures that can affect poverty and welfare, including, for example, an increase in the lowest pensions, the financing of flexible channels - such as incentives for early retirement (APE) - for supplemental pensions, the recognition of high-stress work, and possible additional resources for the plan to fight poverty.

In May, the reform of the non profit sector66 was approved with the aim of making structural changes in a sector that involves more than 300,000 non-profit organisations.

The 2016 Stability Law also established the After Us Fund, with the appropriation of €90 million per year as from 2016 to be used for assisting the severely disabled who have no family support.67

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centres, from schools to healthcare services, with the involvement of the services sector. Participation in the programme implies the reciprocal assumption of responsibilities and commitments.

64 In addition to the resources identified in the 2016 Stability Law, other resources were previously allocated to enlarging the experimentation. The benefit is to be paid partly in 2016, with the applications to be presented as from 2 September 2016; in 2017, the benefit will be paid for the full year through payments every two months. In order to actively participate in the running of the SIA, by intensifying the planning, services and activities in favour of the beneficiaries, municipalities and/or territorial areas can tap the resources of the National Operating Programme for Inclusion, which is co-financed by the European Social Fund, in an amount of more than €1 billion over the next seven years.

65 The allowance is to be paid for a maximum of six months to the unemployed who have signed a service pact, have an equivalent financial situation index (ISEE) of €5,000 or less, and have one minor in the household or are 55 years or older without having met the requisites for early or regular retirement. The resources available for 2016 amount to €600 million (including, in this case, the resources appropriated in the Stability Law and others previously appropriated).

66 The resources appropriated amount to approximately €900 million, and the measures regard: the simplification and reordering of regulations (both in relation to the recognition of legal status and the promotion/maximisation of value of volunteer work); civil service as a whole (which can also be rendered in one of the Member States of the European Union); the simplification of tax regulations; and the institution of support measures (such as some types of social financing). The reform also requires greater transparency of organisations in the non profit sector.

67 Law No. 112/2016.

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Competition

The 2015 annual draft law on competition was approved in August 2016 by the Senate’s Industry Commission, and is currently under review in the Senate, following the Chamber of Deputies’ numerous amendments to the text ratified by the Council of Ministers. The draft law should be approved by the end of the year. The law will impact numerous sectors, including: insurance, postal services, telecommunications, electricity, gas and fuels, free professions, pharmacies, and banking services. In addition, the law proposes a basic review of the governance of unscheduled public transport services, as well as numerous provisions for simplification.

The second annual law on competition is to be enacted in 2017, including in view of the new required reporting to the Antitrust Authority.

In February 2016, Italy sent a National Plan for Reform of the Free Professions to the European Commission. In March 2016, Italy was one of only six Member States that guaranteed complete ratification of the new Professional Qualifications Directive and among 17 that presented plans.

Infrastructure and new Public Procurement Code

In August 2016, the Interministerial Committee for Economic Planning (CIPE) authorised the assignment of approximately €40 billion for the planning regarding public investments. More specifically, after having approved the identification of the specific theme-based areas at a national level and the general distribution of the resources of the Development and Cohesion Fund (FSC), CIPE ordered the assignment of €13.4 billion of resources to finance, through such fund, the projects within the ‘Pacts for the South’ programme, thereby giving the go-ahead to the Masterplan for Southern Italy, the government’s plan for reviving the economy of the country’s southern regions. CIPE also approved the distribution of €12.6 billion, also coming from the Development and Cohesion Fund (FSC), for the transportation and transport infrastructure. The so-called Iron Cure (Cura del Ferro) includes €8.9 billion for a Programme Agreement for the Italian Railways Network (RFI) (which includes the construction lots of the major corridors), and another €2.1 billion for regional railway projects and €300 million for securing the regional railways whose construction and operation had been granted by the State to private industry. Such resources are rounded out by €1.7 billion for the high-speed rail network in southern Italy (in particular, Naples-Bari and Catania-Palermo). A €1.35 billion financing has been planned for the system of underground urban rail networks. The Development and Cohesion Fund (FSC) will also be used for financing some €5.8 billion agreed with the regions for use by Italian Highway Authority (ANAS) for completion and enhancement of the road network. These projects refer to major routes, and also envision the strengthening of intermodal and logistics services and works for connecting ports with rail and road corridors. Finally, €300 million has been appropriated for securing the national system of dams.

In July 2016, the European Commission approved Italy’s 2016-2020 National Ultra-Broadband Plan, considering it in line with the regulations regarding State aid. With a budget of approximately €4 billion, the plan provides for design and

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development of the public ultra-broadband network in the so-called ‘white areas’, those affected by market failure, which have been grouped into Clusters C and D as provided under the National Ultra-Broadband Plan.68

With the development of the National Registry of Infrastructure, as provided by the decree of the Ministry of Economic Development, a national federated information system for infrastructure (SINFI) has been established with a single database to house all information related to infrastructure in the national territory, inclusive of both underground and surface infrastructure. This will allow for accelerating the development of the ultra-broadband networks and for saving on the costs for the laying of fibre.

The administrative reorganisation of the port system has been definitively approved, and entails the creation of 15 system authorities in place of the current 24. The key aspects of the decree covering the reorganisation include: simplification of procedures to facilitate cargo and passenger transit; promotion of strategic decision-making centres with respect to the port activity in established areas; the reorganisation of governance; and central coordination by the Ministry of Infrastructure and Transport.69 The port system reorganisation is part of the policies and actions embraced by the government with the National Strategic Plan for the Relaunch of Port and Logistics Services.70 Many actions have already been taken in 2016, including changes in logistics, with enhancements made to maritime customs clearance procedures (today available at 17 ports), and an increase in the number of fast corridors (16 currently in operation for more than 1,400 containers).

The 2014-2020 Infrastructure and Networks National Operating Programme provides €63 million for the planning and development of the Digital Logistics Chain, and the projects submitted for implementing the entire system are now under review.

The implementation of the Italian National Railways Programme Agreement continues in relation to the ‘Last Mile-to-Port’ project, for connecting railways with ports. Territorial steering committees have been established in all five ‘Convergence Objective’ regions for integrated logistics areas, between ports, airports, interports and infrastructures. Memoranda of Understanding are now

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68 16 regions and the Province of Trento signed specific Programme Agreements with the Ministry of Economic Development and related operating conventions for the use of the European Regional Development Fund (ERDF) and the European Agricultural Fund for Rural Development (EAFRD), for the purpose of planning, developing, maintaining and operating an inbound/outbound network with wholesale access, that will allow telecommunications companies to supply services to final users at 100Mbps or in any case, at no less than 30 Mbps. The network will be the subject of a 20-year concession and will remain public property. The first public contract covers 6.5 million inhabitants, more than 3.5 million property units, and 3,000 municipalities. Completion of the investment plan for development of the ultra-broadband service includes €2.2 billion to be drawn from the Development and Cohesion Fund (FSC) for the 2014-2020 planning cycle (approved by resolution of the Interministerial Committee for Economic Planning (CIPE) 65/2015), and €1.8 billion of resources from the ERDF and the EAFRD. Infratel Italy S.p.A., a company owned by the Ministry of the Economic Development, will be the party responsible for implementation.

69 Compared with the current 113 administrative procedures carried out by 23 entities, the decree provides for the creation of two single services units: the One-Stop shop for Customs for checking goods, and the One-Stop Shop for Administrative procedures for all other procedures and for other productive activity at any port not operating exclusively for trade purposes.

70 The plan sets 10 objectives: streamlining and simplification, competitiveness and competition, accessibility, integration of the logistics system, infrastructure enhancement, innovation, sustainability, certainty of resources, national coordination, and new governance.

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being signed with all of the southern regions that will benefit from the National Operating Programme, while a special selection process has been initiated to identify priority projects.

Finally, work continues on the implementation of the extraordinary programme for the urban redevelopment of suburban areas.

The new Public Procurement Code71 went into effect on 19 April 2016, inaugurating sweeping, structural reform of procurement practices, in the wake of the objectives set out in the enabling act. The new code introduces numerous changes that will significantly alter the overall approach of the public procurement market. A key development is the introduction of the General Transportation and Logistics Plan that replaces the Strategic Infrastructure Plan provided by the so-called ‘Objective Law’ referenced in the EFD.72

The new system focuses on quality: i) technical-economic quality and the centrality of the project, so as to eliminate the need for project modifications, which represent the main cause for driving up the cost of public works, and the plan for assignment of the executive project through a competitive tender; ii) quality of the participating businesses, with the introduction of criteria for business accreditation, including, for example, legality ratings; iii) quality of the contracting units, through a reduction of their total number and an upgrade of their professional skills; and iv) quality of supply, through the use of the most economically advantageous bid as the ordinary criterion for project adjudication, in line with the overall approach at the EU level.73

It is a self-application code that leaves ample leeway for the decisions by the administrations, combining flexibility and discretion as is the case in all European countries, promoting an administration capable of interacting with the business system. The implementation of the code has involved intense efforts in 2016.

The detailed regulations are defined by Italian Anti-Corruption Authority (ANAC) guidelines, decrees of the Ministry of Infrastructure and Transport, and a Decree of the Prime Minister. ANAC has already given preliminary approval to four implementation guidelines and another four are ready for final draft following public consultation.74 The Ministry of Infrastructure and Transport has also published the guidelines for compiling the European Single Procurement Document

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71 Legislative Decree No. 50/2016. The code is innovative in many aspects, and it is hoped that it will represent an opportunity for relaunching the country’s economic development and modernising the country’s administrative system, given a regulatory system that has proven to be complex, cumbersome, and an often-disabling formalism that has made it incapable of stimulating efficiency. Guiding principles: streamlining and simplification of regulations and procedures; greater safeguarding of transparency, competition and legality; better qualification of all parties involves - planners, businesses, contracting units; and fewer disputes.

72 For detail about the other measures introduced, see the 2016 National Reform Programme.

73 For the first time, the new code has methodically addressed the concept of concessions, as requested by EU lawmakers. Current plans call for a single set of regulations for concessions of jobs, services, and supplies, clarifying that concessions are term contracts, marked by the concessionaire’s operating risk in the event of a lack of return on the investment made.

74 The guidelines already approved regard: the award of contracts for engineering services; the assignment of public contracts using a system based on the ‘most economically advantageous’ bid; the tasks of the ‘Single Party Responsible’ for public contract procedures; and the criteria for selecting tender commissioners. The four guidelines to be approved regard: shortcomings in the execution of previous public contracts; reputation-related criteria for qualification of businesses; the systems for monitoring of the contracting administrations with respect to the business(es) involved in public-private partnership contracts; and procedures for awarding public contracts whose amounts are below the EU threshold.

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(ESPD) and has adopted a decree related to the parameters to be used as the basis for planning tenders.75

Environment and sustainability

As the environmental legislation included in the legislation attributed to the 2016 Stability Law has gone into effect, the government is committed to the implementation of the law’s main measures regarding remuneration of the ecosystem and environmental, waste management, reclamation, river basin districts and environmental damages.76

In addition, a Natural Capital Committee was set up at the end of April 2016 to effect ex-ante and ex-post assessments of the effects of public policies on natural capital and ecosystem services, and to promote the local authorities’ adoption of environmental accounting systems.

Some€35 million has been appropriatedin order to promote the use of sustainable transport77 for home-school and home-work commutes; the funding will be assigned with a public tender addressed to local entities. A Decree of the Prime Minister to be published shortly will pinpoint the overall capacity for the treatment of urban and assimilable waste through existing incineration plants and through waste-to-energy plants to be developed for covering residual needs for urban waste treatment. A catalogue of subsidies (environmentally dangerous or favourable) is now being developed for transmittal to Parliament and to the office of the Prime Minister, and will later be updated on an annual basis.

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75 The Ministry of Infrastructure and Transport sent three documents to the Council of State: a decree approving guidelines about the party responsible for the works and the party responsible for execution; guidelines for identification of projects entailing high-technology works or components, or significant technical complexity; and guidelines covering specialisation requisites needed for project execution. The Ministry of Infrastructure and Transport has also approved a decree to set up an analytical commission responsible for identifying the means and timing for the gradual, obligatory adoption, by the contracting units, of specific electronic tools and methods, such as those for the modelling of construction and infrastructure. The Ministry has requested agreement or opinions from the administrations involved, with respect to four decrees regarding: qualification of the contracting units; planning of public works, services and supplies; planning levels and requisites for parties involved in architectural and engineering services. Finally, a steering committee has been set up within the Office of the Prime Minister (as also provided by the document covering strategy on public contracting, which Italy sent to the European Commission) for the purpose of ensuring the unitary governance of all policies regarding public contracting, with the responsibility for verification and impact measurement on the basis of unchanged legislation.

76 The following decrees have been adopted: 1) Decree No. 176 of 17 June 2016 (publication in Official Gazette of the Italian Republic pending) covering the definition of the terms and conditions for granting the corporate tax credit on expenditure for asbestos removal from productive facilities and assets; 2) Decree (signed by the Minister for the Environment on 28 July 2016) containing regulations for using the fund for preliminary and definitive planning of reclamation operations regarding asbestos contaminated property of the  Public Administration; 3) Decree of 26 May 2016 (published in the Official Gazette of the Italian Republic on 24 June 2016, No. 146) containing guidelines for calculating the percentage of recycling of urban waste; the measure is designed to standardise the method for calculating the percentage, creating a set of technical recommendations, to be applied across the entire country, so as to provide for comparable data (in terms of both space and time) with reference to the different territorial areas; 4) Decree No. 140 of 10 June 2016 (so-called RAEE Decree) with the objective of favouring eco-compatible planning and production of electrical and electronic devices, so as to facilitate processing, re-use and recovery at the end of their use; 5) Decree 24 May 2016, published in the Official Gazette of the Italian Republic No. 131 on 7 June 2016, which addresses the provisions referenced in Article 34, Paragraph 3 of the new public procurement code, and regulates, for supplies and public contracts not related to energy, a gradual increase in the percentage of 50 percent of the base auction value to which it will be mandatory to apply specific techniques and contractual clauses concerning minimal environmental criteria.

77 In line with the national and European objectives for reducing greenhouse gas emissions and pollutants coming from the transportation sector, as also provided by the National Experimental Programme on Sustainable Mobility.

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Finally, implementation is ongoing with respect to the measures to facilitate the transition toward a more circular economy and to improve efficiency and sustainability in the use of resources. Such measures include the preparation and updating by the end of 2016 of the national strategy for sustainable development, the inclusion of minimum environmental criteria for all public tenders, the preparation of a national action plan for sustainable consumption and production, and a voluntary national programme for environmental quality (Made Green in Italy).

Taxation system and compliance

The implementation of the fiscal enabling act for a transparent, fair and growth-oriented taxation system has required the revision of the strategy to fight tax evasion, and a true change of direction with respect to relationships between taxpayers-citizens and the State-financial administration. In this new relationship model, taxpayers become principals who are active in managing their taxation position, while the tax authority becomes a transparent and reliable guide, called upon to supply services and to carry out activity to prevent tax evasion, thereby reducing the weight of repressive action.

It will also be possible to evaluate the effects of the new strategy adopted in terms of improvements in tax compliance: with a greater level of trust between the taxpayers and the tax authorities, it will be possible to stabilise the flow of revenue from spontaneous payment of taxes.78

International institutions recognise the existence of numerous entities that operate within Italy’s taxation system (MEF-Department of Finance, tax assessment bodies, tax police, and a tax collection agent) and they have recommended their increased synergy at a strategic and operational level. Specifically, it has been recommended that the conventions governing the relationships between the MEF and the tax assessment bodies provide for a few general and strategic objectives, and that such conventions avoid concentrating on numerous micro-objectives, which are mostly output objectives. The MEF is already moving in this direction. The new formats for the conventions between the MEF and the tax assessment bodies for the 2016-2018 three-year period have identified several strategic and general objectives, and the results are to be evaluated in terms of services rendered to the taxpayer and the prevention of non-compliance, while the actions to fight tax evasion are ongoing and have produced positive outcomes.

Italy was one of the countries promoting the Anti-Tax Avoidance Directive (ATAD) approved at the end of June 2016, which contains a series of measures to

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78 The effectiveness of this approach seems to be also confirmed by the latest indications from the IMF and OECD in their reports on the status of Italy’s financial administration (the reports were commissioned by the MEF and delivered in July 2016). Even though prepared independently, the reports have very similar conclusions and recommendations: improve taxpayer compliance and reduce the tax gap, particularly with regard to VAT. The reports contain a positive opinion about the tax assessment bodies, which, since they were set up in 2000, have increasingly improved the performance of the Italian taxation system and the capacity to fight tax evasion, thereby favouring the taxpayers’ fulfilment of their tax obligations.

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prevent cross-border tax avoidance by businesses.79 The Italian legal system already includes various regulations to prevent tax avoidance, which meet most of the minimum standards contained in the directive.

Public finance measures for regions and local entities

New rules80 have been introduced for balancing the budgets of regions and local entities. The National Solidarity Pact is the agreement provided for optimising national redistribution of the financial borrowing capacity available and usage of the past surpluses for investment transactions.

The new rules are aimed at ensuring a recovery of investment, which in the past has suffered from the difficulties that the entities have encountered in managing the mismatch in time between i) resources acquired (collected) and ii) works planned and developed (paid). The new rules also provide for an acceleration of payments to suppliers for work already completed.

For additional details about the balancing of the budget, see Paragraph III.7 of this document.

As part of the implementation of the 2014-2016 Health Pact, the State-Regions Conference approved the National Chronicity Plan on 15 September 2016. The plan governs the conditions for the treatment and safeguarding of patients affected by chronic illnesses, so as to promote continuity in care and the proper functioning of the care networks, which, in turn, can be assured through strong integration between primary care provided by the general practitioner and specialist care. The plan also provides for tools to improve home care services, and to reduce hospital stays, including through the use of innovative technologies.

Two important documents have been approved for more efficient and effective territorial management of users: i) a supplement to the planning document for renewal of the agreement with general practitioners and primary care paediatricians, which provides indications (as part of the reform of primary care) for the full implementation of new forms of organisation;81 contracting between social partners was initiated following the approval of this document; and ii) a supplement to the planning document for renewal of the agreement with pharmacies so as to adapt them to the innovative resolutions within the Health Pact; the pharmacies’ activity can thus be uniformly integrated with the needs

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79 The Anti-Tax Avoidance Directive incorporates into EU legislation several of the recommendations approved internationally as part of the OECD/G20 project known as Base Erosion and Profit Shifting. The directive establishes minimum common rules regarding: limits on the deductibility of interest expense by businesses (up to 30 percent of the gross operating margin); taxation of foreign subsidiaries; non-recognition, for tax purposes, of transactions carried out by businesses for the sole purpose of securing a taxation advantage, and thus, transactions without valid business logic; exit taxation on the movement of corporate assets; and prevention of abuse of treaties against double taxation (abuse deriving from mismatches in the legal definitions that differing legal systems assign to financial instruments or entities).

80 Law No. 164/2016 incorporating amendments to Law No. 243/2012.

81 The new forms of organisation refer to: i) functional territorial combinations (AFT) which are single-professional organisations that share, on a structured basis, treatment methods and objectives, tools for evaluating treatment quality, guidelines, audits and similar procedures; ii) comprehensive primary-care units (UCCP) which provide healthcare services through coordinating and integrating the work of physicians, other professionals under contract with the NHS, and other social partners having a significant impact on healthcare.

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and programmes of the NHS, especially for prevention and cure of chronic illnesses.

With reference to the updating of essential levels of care (ELC),82 a draft of a Prime Minister Decree appropriates, as part of the implementation of the 2016 Stability Law, resources for €800 million per year. The draft of the decree was discussed and agreed with the regions and autonomous provinces on 7 September 2016, and it defines activities, services and treatments guaranteed to the public via public resources made available through the NHS. The draft also updates and redefines the lists of rare diseases and chronic and disabling illnesses, as well as the treatments and activities already included in essential levels of care.

The decree also provides for rapid implementation of the programme for completely automating healthcare service, taking into account the online prescriptions procedures already developed as part of the Healthcare ID Card System managed by the MEF. More specifically, the ‘Digital Healthcare Pact’ ratified by the government and regions in July 2016 is a strategic plan designed to i) remove obstacles that are slowing the development and use of online services for the NHS, and ii) avoid system development that is partial or not fully in conformity with the needs for public healthcare. The development of the electronic personal healthcare record (FSE) system continues with the first decree for implementation.83 In addition, the national infrastructure for the inter-operability of the FSE was made available by Italy’s Digital Agency as of 31 December 2015. Finally, the FSE is already available in seven regions, with implementation proceeding in the other regions. The conversion from a paper-based to an electronic-based prescriptions system is proceeding on schedule.84

Spending review

The spending review represents one of the pillars for growth, and this explains the numerous provisions adopted by the government in this regard, which have also made it possible to respond to the first Recommendation of the Council of the European Union in relation to the public finance balances (for a detailed analysis, see Paragraph III.1 of this document).

One of more recent initiatives is the obligation for all municipalities, provinces, Chambers of Commerce and non-economic public entities to use centralised procurement centres for the purchase of goods and services as from August.85 The list of the procurement centres.86 included 33 public entities operating at a local and national level.

Administrations using the online channels available must go through the centralised procurement centres when their purchase refers to any of 19 categories of goods87 for amounts of €1,000 or more, with the following order to

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82 Article 10, Paragraph 7 of the 2014-2016 Health Pact provides for the updating of the Ministerial Decree of 12/12/2001, and the preparation of the new ‘system of guarantees’ for monitoring healthcare.

83 Decree of the Prime Minister No. 178/2016.

84 Article 13, Paragraph 1, Decree-Law No. 179/2012 and subsequent modifications.

85 The other administrations to which this obligation is applicable are identified Article 9, Paragraph 3 of Decree-Law No. 66/2014.

86 The list is contained in the ANAC Resolution No. 784 of 20 July 2016.

87 Identified in the Decree of the Prime Minister dated 24 December 2015.

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be respected: metropolitan city, region, CONSIP (the public company active in consulting, assistance and support for public procurement). A major emphasis has been placed on the group of local entities whose aggregate purchases account for approximately 40 percent of expenditure on goods and services.

A decree issued by the MEF in July has established the quality and price parameters for 34 categories of goods that represent benchmarks in terms of prices and essential characteristics to be respected in the event of independent purchases, including in case of i) purchases regarding the administrations not required to abide by the CONSIP conventions and ii) purchases effected on the Public Administration’s electronic market (MEPA). The 2016 Stability Law also provided for CONSIP to become active in the market for maintenance work. In view of this change, CONSIP has published different calls for bids in relation to the maintenance of buildings, roads, railways and other public property (excluding the maintenance work for which the State Property Agency is responsible), and interested businesses can apply for accreditation with MEPA in order to participate in tenders for maintenance works for the Public Administration for amounts up to €1 million.

With reference to the projects to streamline State ownership of shareholdings, a Memorandum of Understanding was signed by the MEF and the Court of Auditors to simplify information/reporting formalities for the territorial entities involved and improve data quality, thereby also lowering the costs for gathering data. With the memorandum, a single databank to be managed by the MEF will be created for all shareholdings of the Public Administrations.88 The working relationship between the MEF and the Court of Auditors will not only avoid duplication of information so as to ensure better quality, but it also responds to the spending-review objectives.

As another step toward simplifying information/reporting formalities for the territorial entities and their organisations and supporting entities, the MEF has provided for the integration89 of accounting data into a single transmission to be sent to the Public Administrations Databank (BDAP), which is managed by the MEF. This will allow for sizeable economies of scale and greater efficiency, in line with the provisions of recent regulations for the review and containment of public expenditure.

According to an August report published by the European Commission about the implementation of the Services Directive, the average terms of Public Administration payments to businesses in Europe had been cut by 10 days since the directive went into effect, and Italy achieved the best results among the 28 countries, with a reduction of 15 days during the 2011-2014 period.

The data reported through the electronic platform for monitoring trade payables have confirmed a 20-percent reduction in the average terms of payment for electronic invoices issued from 1 July 2015 to 30 June 2016, and a 30-percent reduction with respect to the invoices booked in the previous 12 months (the figure refers to payments in relation to 60 percent of the amount invoiced).

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88 The reporting of the data for the year of 2015 began at the end of July and is to be completed by 15 October 2016.

89 Ministerial Decree dated 12 May 2016.

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As outlined in the next paragraph, the spending review is now included in the budget cycle.

Budget reform

With Law No. 163/2016, the State budget has become the main decision-making tool with respect to resource allocation, and a key reference for verifying results. The Stability Law and the Budget Law have been integrated into a single document divided into two sections: the first contains the measures aimed at the achievement of the policy-scenario objectives, while the second formulates revenue and spending forecasts at unchanged legislation, and may also contain parts of the budget that do not necessitate changes in legislation. As previously provided for the Stability Law, the Budget Law contains a prohibition against provisions for delegation, organisational provisions, and legislative provisions, and territory- or sector-specific measures. The timing for the budget cycle has also be amended, with the EFD Update deferred to 27 September and the presentation of the integrated Budget Law decree to Parliament to take place by 20 October.

The spending review process has been integrated into the budget cycle: every year, on the basis of the medium-term public-finance objectives and the policy priorities indicated in the EFD, the government will establish, through a decree of the Prime Minister, three-year spending targets for each ministry, in terms of limits to be observed and/or savings to be achieved. On the basis of these objectives, the administrations may then formulate their proposals for the next Budget Law.

Measures have also been introduced for enhancing the cash forecast of the budget, with a revision of the concept of spending commitments, so as to provide for closer alignment with the payment phase. For additional details, reference should be made to Paragraph III.7 of this document and the 2016 National Reform Programme.

Privatisations and enhancing the value of public property

In July 2016, shares of ENAV S.p.A. were placed on the market, while at the end of May 2016, the MEF transferred a 35-percent holding in Poste Italiane to the Cassa Depositi e Prestiti, through a reserved rights issue for €2.9 billion. Also in May 2016, the Council of Ministers approved the definition of the privatisation criteria and the terms and condition for divestiture of the MEF’s holding in the capital of Ferrovie dello Stato Italiane S.p.A.

In July, the Treasury Department ‘Shareholdings’ portal began reporting State-owned shareholdings and the representatives of the Public Administrations serving on corporate governance bodies of companies and entities for the year of 2015.90

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90 The Department of the Treasury is handling this reporting pursuant to Article 17, Paragraph 4 of the Decree-Law No. 90/2014. In order to reduce the costs of regulatory compliance and to streamline the databanks involved, a protocol of intent has provided that the data collected through the Department of the Treasury’s application will be made available to the Court of Auditors, which has accordingly interrupted its reporting of the shareholdings of local entities.

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The State Property Agency has published data on the management of State-owned property in 2015, with a review of the past five years, outlining the trend of the objectives reached and the transactions in process. For the 2011-2015 period, the sales of State-owned assets generated €568 million. Activities are ongoing for the transfer of assets to support initiatives and projects to maximise the value of the national territory. More specifically, as of 31 August 2016, some 3,807 assets with a total value of €963.8 million had been transferred as part of the move toward fiscal federalism, and 80 assets of historical/artistic interest with a total value of €430.7 million had been transferred as part of the so-called cultural federalism plan. For additional details about the privatisation plans and plans to maximise the value of State-owned property, see Paragraph III.6 of this document.

Artistic and cultural properties

The Culture and Tourism Plan, approved by resolution of the Interministerial Committee for Economic Planning (CIPE) in May 2016, has allocated €1 billion of the 2014–2020 Development and Cohesion Fund (assigned by CIPE) for design and development of 33 projects for i) safeguarding and maximising the value of cultural properties, ii) reviving cultural tourism; and iii) revitalising the competitiveness of the country’s cultural and natural attractions. In addition, as part of the implementation of the 2016 Stability Law, some €120 million is now being employed for 75 conservation, maintenance, restoration and value-enhancement projects with respect to cultural assets nationwide.

The support to tourism was further enhanced in August 2016 through a Memorandum of Understanding signed by Ministry of Cultural Heritage and Tourism, the Ministry of Economic Development and Italy’s Digital Agency for the creation of new digital services in the sphere of tourism that will be able to facilitate the public’s and visitors’ access to artistic, natural and cultural properties, and to create a fertile environment for the private sector’s development of value-added applications and services.91 The memorandum has a term of three years, extendable for another two, and a technical committee will be set up for its implementation.

Monitoring and legislative implementation

Some two years and six months since the installation of the government, the rate of actual implementation of the reforms programme is 74.9 percent. The stock of 889 implementation decrees left behind in 2014 by the previous two governments has since been reduced to 162 today, with rate of adoption equal to 83.8 percent (Figure IV.1).

During the same period, the government has approved 369 legislative provisions and 275 have been published in the Official Journal of the Italian Republic. Some 56.7 percent of the latter can be defined as immediately applied,

___

91 Ultra broadband for linking all tourism and cultural sites, a broad-based and federated Wi-Fi network with a single-access system, also compatible with SPID, and open public and private data, with standards and rules of use that will allow for development of services.

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in other words, not requiring any second-level implementation legislation. The trend of the immediately applicability of legislative decrees thus reflects constant growth, going from 29 percent reported in May 2014 to the current level of 56.7 percent.

FIGURE IV.1: TREND OF MEASURES REFERABLE TO PREVIOUS GOVERNMENTS

Source: Office of the Prime Minister – Government programme office.

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APPENDIX

TABLE A1 - IMPACT OF DECREE-LAW NO. 18/2016 ON GENERAL GOVERNMENT NET BORROWING (in € mn; before netting out induced effect)
	2016		2017		2018		2019
INCREMENTAL RESOURCES		220		0		18		18
Incremental revenue		220		0		0		0
Voluntary disclosure		220		0		0		0
Lower expenditure		0		0		18		18
Reduction of Fund for Structural Economic-Policy Measures		0		0		18		18
USE OF RESOURCES		220		0		18		18
Lower revenue		220		0		18		18
Fiscal insignificance of voluntary contributions received by persons subject to crisis proceedings		0		0		18		18
Reduction of registration tax on transfer of properties or real rights on real properties subject to expropriation proceedings		220		0		0		0
Incremental expenditure		0		0		0		0
IMPACT ON NET BORROWING		0		0		0		0

Note: Discrepancies, if any, are due to rounding.

TABLE A2 - IMPACT OF DECREE-LAW NO. 59/2016 ON GENERAL GOVERNMENT NET BORROWING (in € mn; before netting out induced effect)
	2016		2017		2018		2019
INCREMENTAL RESOURCES		229		203		176		142
Incremental revenue		224		200		173		142
Option payment of fee for deferred tax assets		224		200		173		142
Lower expenditure		4		4		4		0
Reduction of Special Current Account Fund		4		4		4		0
USE OF RESOURCES		228		203		176		142
Lower revenue		0		98		45		37
Option payment of fee for deferred tax assets		0		98		45		37
Incremental expenditure		228		105		132		105
Preparation and management of register of possessory liens		0		0		0		0
Increase in Fund for Structural Economic-Policy Measures		0		102		128		105
Increase in Fund for Peace Missions		124		0		0		0
Increase in Fund for Non-Deferrable Needs		100		0		0		0
Creation of list of professionals who sell seized assets		0		0		0		0
Creation of register for insolvency proceedings and crisis management tools		4		4		4		0
IMPACT ON NET BORROWING		1		0		0		0

Note: Discrepancies, if any, are due to rounding.

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TABLE A3 – IMPACT OF LAW NO. 112/2016 ON GENERAL GOVERNMENT NET BORROWING (in € mn; before netting out induced effect)
	2016		2017		2018		2019
INCREMENTAL RESOURCES		90		90		90		90
Incremental revenue		0		0		0		0
Lower expenditure		90		90		90		90
Reduction of Fund for Support to Disabled Persons without Family Assistance		90		90		90		90
Reduction of Special Current Account Fund		0		0		0		0
USE OF RESOURCES		90		90		90		90
Lower revenue		0		52		34		34
Tax relief for trusts set up in favour of seriously disabled persons		0		10		10		10
Deductibility of donations and other gratuitous acts with respect to trusts set up in favour of seriously disabled persons		0		6		4		4
Tax deductions for insurance policies to cover seriously disabled persons		0		36		20		20
Incremental expenditure		90		38		56		56
Creation of Fund for Support to Disabled Persons without Family Assistance		90		38		56		56
IMPACT ON NET BORROWING		0		0		0		0

Note: Discrepancies, if any, are due to rounding.

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TABLE A4 - IMPACT OF DECREE-LAW NO. 67/2016 ON GENERAL GOVERNMENT NET BORROWING (in € mn; before netting out induced effect)
	2016		2017		2018		2019
INCREMENTAL RESOURCES		1.485		0		0		0
Incremental revenue		217		0		0		0
Use of Armed Forces for Jubilee and surveillance of sensitive targets (fiscal effects)		8		0		0		0
International missions of the Armed Forces and Police (fiscal effects)		162		0		0		0
Budget entry of sums related to reimbursements paid by the United Nations, for services rendered by Italian Armed Forces as part of international peace missions		46		0		0		0
Lower expenditure		1.268		0		0		0
Reduction of Fund for Non-Deferrable Needs		30		0		0		0
Reduction of Fund for Extraordinary Defence and Public-Security Measures		112		0		0		0
Reduction of Special Current Account Fund		15		0		0		0
Reduction of €80 bonus for Armed Forces, Police, and Firefighters		24		0		0		0
Reduction of Fund for Peace Missions		1.062		0		0		0
Reduction of Special Capital Account Fund		17		0		0		0
Other		8		0		0		0
USE OF RESOURCES		1.465		0		0		0
Lower revenue		150		0		0		0
Reduction of Fund for Peace Missions (fiscal effects)		150		0		0		0
Incremental expenditure		1.315		0		0		0
Contribution in favour of Afghan security forces		120		0		0		0
International missions involving the Armed Forces and Police		1.031		0		0		0
Use of Armed Forces for Jubilee and surveillance of sensitive targets		24		0		0		0
Cooperation in development of Middle Eastern countries		90		0		0		0
Support to reconstruction and participation in initiatives of international organisations to strengthen peace processes		50		0		0		0
IMPACT ON NET BORROWING		21		0		0		0

Note: Discrepancies, if any, are due to rounding.

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TABLE A5 - IMPACT OF DECREE-LAW NO. 113/2016 ON GENERAL GOVERNMENT NET BORROWING (in € mn; before netting out induced effect)
	2016		2017		2018		2019
INCREMENTAL  RESOURCES		820		124		106		48
Incremental revenue		3		8		8		8
National Firefighters Corps: operations and operational enhancements (fiscal effects)		3		8		8		8
Lower expenditure		818		116		98		40
Italian Highway Authority (ANAS) extraordinary maintenance		100		0		0		0
Agricultural research and experimentation (MIPAAF)		9		0		0		0
Tax credit for investments for development of e-commerce systems, purchase of production equipment and development of production-distribution chains		10		0		0		0
Reduction of Special Capital Account Fund		10		10		10		0
Reduction of Fund for Granting Interest Subsidies to Local Authorities, for borrowing transactions in 2015		14		0		0		0
Reduction of Fund for Discounting of Deferred Subsidies		25		0		0		0
Reduction of Fund for Structural Economic-Policy Measures		0		20		20		20
Reduction of Fund for Non-Deferrable Needs		135		0		0		0
Use of resources booked to Fund for Administrative Federalism		0		48		48		0
Reduction of Special Current Account Fund		4		4		4		4
National Firefighters Corps: operations and operational enhancements		5		16		16		16
Reduction of Fund for Extraordinary Re-assessment of Residual Capital Liabilities (MIPAAF)		1		11		0		0
Region of Sicily 2016 achievement of improvement of public finance balance		500		0		0		0
Reduction of sums accruing to Department of Civil Protection for damages to families of victims of the Sarno flood		6		8		0		0
USE OF RESOURCES		820		124		106		48
Lower revenue		63		8		8		8
National Firefighters Corps: operations and operational enhancements (fiscal effects)		3		8		8		8
Suspension of the increase in the municipal surcharge  tax on airline boarding fees		60		0		0		0
Additional expenditure		758		116		98		40
Assignment to provinces of ordinary-statute regions for extraordinary maintenance of road network		100		0		0		0
Creation of Fund for Reduction of Indemnities for Prepayment of Municipal Mortgages		14		48		48		0
Creation of Fund for Disputes Related to Executive Proceedings: Natural Disasters or Structural Failure		20		20		20		20
National Firefighters Corps: operations and operational enhancements		15		26		26		16
Refinancing of Fund for Distribution of Food to the Poor		6		4		0		0
Measures to support milk, dairy and cereal producers		13		7		0		0
Provisions in favour of victims of the Andria-Corato railroad disaster		10		0		0		0
Assignment of resources to the Territorial Prefecture of Salerno for damages to families of victims of the Sarno flood		6		8		0		0
Compensation in favour of persons affected by Thalidomide syndrome:  expansion of the group of beneficiaries		4		4		4		4
Region of Sicily: change in method for calculating joint participation in personal income tax revenue		500		0		0		0
Contribution to assign to Region of Valle d'Aosta to compensate the loss of tax revenue through the joint participation in excise taxes		70		0		0		0
IMPACT ON NET BORROWING		0		0		0		0

Note: Discrepancies, if any, are due to rounding.

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TABLE A6 - REFORM TIMETABLE
Policy Area	Done	In progress	Timetable
Institutional reforms	Electoral Law Chamber of Deputies (L. 52/2015)		May 2015
	Implementation Law of L. 52/2015:  Definition of electoral constituencies for the Chamber of Deputies (Lgs. D, 122/2015)		August 2015
	Constitutional Law  to overcome the perfect bicameralism and modify the allocation of legislative powers between State and Regions.		April 2016
		Confirmatory referendum on constitutional reform	By 2016
		Bill on the prevention of conflict of interest for Deputies and Government members (A.S. 2258).	March 2017
Labour market and social policies	Enabling Law on labour market reform (L.183/2014).		December 2014
	Implementing decrees of L.183/2014		March 2015
	Legislative decree on standard open-ended contract (Lgs. D.23/2015)
	Legislative decree on new unemployment benefit scheme (Lgs. D.22/2015).
	Legislative Decree on work-life balance (Lgs. D. 80/2015)		June 2015
	Legislative Decree on labour contracts and review of tasks’ regulation (Lgs. D.81/2015)
	Legislative Decree on wage supplementation scheme (Lgs. D.148/2015)		September 2015
	Legislative Decree on simplification of procedures and equal opportunities (Lgs. D. 151/2015)
	Legislative Decree on rationalisation and simplification of inspection activities (Lgs. D. 149/2015)
	Legislative Decree on labour services, active policies and setting up of National Agency for active labour market policies- ANPAL (Lgs.D.150/2015)
	Legislative decree (approved by the CoM of September 23, 2016) taking integrative and corrective provisions to the Lgs.Ds  n. 81, 148, 149, 150 and 151 of 2015).		September 2016
		Implementation of Lgs. D. 150/2015 Definition of the strategy implementing the new ALMPs and agreements with the Regions. Implementation of the ALMPs strategy and issuance of activation vouchers for dedicated training paths.	By 2016
	Presidential Decree – transferring resources from Ministry of Labour and ISFOL to ANPAL		April 2016
	Adoption of the ANPAL statute (Presidential Decree 108/2016)		May 2016
	Adoption of the statute of the National Labour Inspectorate (Presidential Decree 109/2016)
	Enabling law to reform non-profit sector, social enterprises and Universal social service regulation (L. 106/2016)		June 2016
		Implementing decrees of L.106/2016 Legislative decrees for: -revision of Title II, Book I of the Civil Code relating to associations and foundations; -revision of the legislation on national civil service; -revision of the legislation on social business; -reorganisation and organic revision of the special legislation and other provisions related to the non-profit sector organisations (the Non-Profit Sector Code)	June 2017

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In progress	Timetable
Labour market and social policies	Youth Guarantee - First Phase		May 2014
	Youth Guarantee - Second Phase (“Superbonus”; and “selfiemployment”)		March 2016
	Interventions on the second level contractual bargaining. (Ministry of Labour  and Ministy of Economy and Finance Decree of March 25, 2016)
		Draft Law attached to 2016  Stability Law  for self-employed workers and for flexible organisation of job’s time for work-life balance. Approved by the Council of Ministers on January 28, 2016- now before the Senate (AS 2233).	By 2016
		Enabling Law for the reunification and coordination of the legislation on support to family. Single Family Code	June 2017
		Refinancing the Fund for the Plan for the early childhood’s educational services	By 2016
	Provisions  on the donation and distribution of food and pharmaceutical products for social solidarity and to limit waste (L. 166/2016)		August 2016
		Provisions against undeclared work,  labour exploitation and wage realignment in the agricultural sector (approved by the Senate, now before the Chamber of Deputies - A.C. 4008)	By 2016
Justice	Delegated law on non-prison penalties and reform of the sanction system (L. 67/2014)		April 2014
	Reform of criminal justice (D.L. 92/2014 cvt. in L. 117/2014)		August 2014
	Reform of civil justice (D.L. 132/2014, cvt. in L. 162/2014)		November 2014
	Urgent measure on bankruptcy, civil procedure, judicial organisation and functioning of the judicial administration. (D.L. 83/2015 cvt. in L. 132/2015)		August 2015
	Implementation of L. 67/2014: Provisions on de-criminalisation (Lgs.D.7/2016)		January 2016
	Measures to deflate the criminal justice system (Lgs.D. 8/2016)
		Draft Law to modify the criminal legislation so as to strengthening the defensive guarantees and the reasonable duration of proceedings, already approved by the Chamber of Deputies, currently before the Senate (A.S. 2067)	By 2016
		Draft Law on statute of limitations, already approved by the Chamber of Deputies, currently before the Senate (A.S. 1844)
		Enabling Draft Law to reinforce the jurisdiction of firms and family courts; rationalisation of civil trials; revision of proceedings stages. Already approved by the Chamber of Deputies, currently before the Senate (A.S. 2284)	March 2017
	Enabling law for the reform of the honorary magistrates and other provisions for judges of the peace (L. 57/2016)		April 2016
	Implementation of L. 57/2016: Lgs.D. on appointments to honorary judges (Lgs. D. 92/2016)		May 2016

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Justice	D.L. 168/2016 to define litigation before the Cassation Court, for the efficiency of judicial offices and for administrative justice		November 2016 (for conversion into Law)
		Draft Law delegating the Government to reform the rules on corporate crisis and insolvency procedures, approved by the Council of Ministers on February 10, 2016, currently before the Chamber of Deputies (A.C. 3671)	June 2017
		Draft Law on measures to fight organized crime and illicit patrimonies (A.S. 1687)
	Provisions on crimes against the Public Administration, ‘mafia’ association and false accounting (L. 69/2015)		May 2015
	Provisions on same-sex civil partnerships and discipline of cohabitation (L. 76/2016)		May 2016
Fiscal system	Enabling Law on tax reform (L. 23/2014).		March 2014
	Implementation of Enabling Law on tax reform L. 23/2014: Lgs.D. 175/2014: Fiscal simplification and pre-compiled income tax return.		November 2014
	Lgs. D. 188/2014: Tobacco products; Lgs. D. 198/2014: Revision of Cadastral committees.		December 2014
		Cadastre: The revision of cadastral values will be subject to a general and organic intervention after an alignment of the databases needed to accurately assess the revenue and distributional effects on taxpayers.	2016-2018
	Lgs. D. 128/2015: legal certainty between tax authorities and taxpayers; Lgs. D. 127/2015: VAT electronic invoicing		August 2015
	Lgs. D. 147/2015: simplifying taxation for international businesses; Lgs. D. 156/2015: litigation procedures; Lgs. D. 157/2015: reorganisation of fiscal agencies; Lgs. D. 158/2015: sanction system; Lgs. D. 159/2015: simplification of collecting system; Lgs. D. 160/2015: monitoring of tax evasion.		September 2015
Taxation	VAT and taxation on capital gains (D.L. 66/2014 cvt. in L. 89/2014).		June 2014
	Permanent reduction of tax wedge on labour (2015 Stability Law – L. 190/2014).		December 2014
	Reform of the local taxation on properties (IMU) and indivisible services for principal residences (TASI) (2016 Stability Law)		December 2015
		IRPEF: with the next Budget Law the possibility of acting on IRPEF, will be evaluated according to the available public finance space.	2018
	Reduction of corporate taxation (2016 Stability Law: reform of local taxation on fa rmland and on “bolted equipment”; reduction of IRES at 24% in 2017)		December 2015
	Fiscal measures to boost investments (2016 Stability Law: amortisation of 140% for the purchase of capital goods; exclusion of instrumental properties from the firm’s assets)
		Tax measures of VAT regime and taxation of business income	By 2016

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Privatisation	Selling of public shares: Listing of Fincantieri (from CDP); dismissal of CDP Reti share; divestiture (from CDP) of Trans Austria Gasleitung GMbH – Tag; Listing of RAIWay.		2014
	IPO of Poste Italiane  and selling of further shares of ENEL.		2015
	IPO of ENAV (49% of capital)  and stock exchange listing		July 2016
		Ferrovie dello Stato. The Council of Ministers of May 16, 2016 approved the Prime Minister decree defining privatisation criteria and methods for disposal of the participation held by the MEF in the capital of Ferrovie dello Stato S.p.A.	By 2017
Infrastructures	National Plan for Ports and logistics (L. 164/2014)		August 2015
	Identification of national interest airports (Presidential Decree 201/2015)		September 2015
	National Plan for social and cultural re-development of deprived urban areas (2015 Stability Law).Prime Minister Decree for the establishment of the Committee for the evaluation of projects		October 2015
	Contributions for intermodal combined transport services (2016 Stability Law – “FerroBonus” and “MareBonus”)		December 2015
	Enabling law for the reform of public tenders (L. 11/2016)		January 2016
	Implementation of Law 11/2016 Lgs. D. 50/2016 to implement EU Directives 23, 24 and 25 of 2014 and review public tender legislation		April 2016
	Four guidelines by Anti-Corruption Authority (ANAC) implementing the new Code of public procurement 1)to entrust engineering services; 2)to assign tenders with the ‘most economically advantageous’ criteria; 3)to define tasks of the responsible of tender procedures; 4)to define criteria for selecting commissioners.		June 2016
		Other 4 guidelines by Anti-Corruption Authority (ANAC) are still being approved: 1) criteria in case of insufficient execution of a previous procurement contract; 2) reputation criteria to qualify firms; 3) monitoring systems for awarding administrations on economic operator’s activity in public-private partnership contracts; 4) procedures for awarding contracts of amount lower than the European threshold.	By 2016
		Three MIT decrees on: a) the approval of ANAC guidelines on the works director; b) approval of ANAC guidelines on the managers responsible for executing contract; c) the identification of the works for which is needed highly technological works or components or relevant technical complexity and requirements of specialisation for their execution

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Infrastructures	MIT – Ministerial Circular no. 3/2016: Guidelines to fill the European form for tender (DGUE)		July 2016
	Ministerial Decree Min. of Justice in concert with Ministry of Infrastructure on parameters to be used as baseline in tenders for planning design. (M.D. June 17, 2016)		June 2016
	National Plan for Defence and security (cyber security, defense systems, police forces) (2016 Stability Law).		December 2015
	Ultra-Broadband Plan (2020 target: 85% of population covered with connection of at least 100Mbps)		2015-2020
	Implementation of the Ultra - Broadband Plan. Agreement with the Regions on the joint use of regional and national resources and the DCF allocation		February 2016
	Extraordinary Plan for the redevelopment of peripheries (Prime Minister Decree May 25, 2016)		May 2016
	Measures for the improvement of urban quality: National Plan for electric vehicle recharging.(Prime Minister Decree  April 18, 2016) New investments for subways (CIPE Decision of  August 10, 2016)		August 2016
		Other measures for the improvement of urban quality: Recovery program for the residential public building. University residences realisation. New investment for underground. Interventions for the development of cycle-stations and soft mobility facilities.	By 2016
Competition and competitiveness	Measures for productive investments: ‘Nuova Sabatini’ (D.L. 69/2013); ‘Competitiveness Decree’ (D.L. 91/2014); tax credit for R&D investments; Patent box		December 2015
		Extension of incentives for firms signing network contracts; incentives for specific networks (green and international); support for “catalyst subjects” and regulatory simplification.	By 2016
		Provisions for relaunching of firms investment. - Provided tax credit for investments in SME capital. The measure will be implemented in the Plan for Industry 4.0
		Strengthening of Central Guarantee Fund for SMEs  -  Starting the reform of Fund and the funding
		2015  Annual law on competition (Draft Law)
		2016  Annual law on competition (Draft Law)	By 2017
		Plan for relaunching Italian manufacturing (Manifattura Italia)	By 2016
		Strengthening of incentives for start-up and innovative SMEs
	Extraordinary Plan for Made in Italy		2015-2017
		National Plan to fight counterfeiting	2016-2017

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Credit	Measure on non-performing loans and bankruptcy (D.L. 83/2015 cvt. in L. 132/2015).		August 2015
	Reform of mutual-loan banks (Banche Popolari) (D.L. 3/2015 cvt. in L.33/2015).		March 2015
	Transposition into national law of the European Directive 2014/59/EU on Bank Recovery and Resolution (Lgs. D. 180/2015)		November 2015
	20% of Guarantee Fund to firms located in the South (2016 Stability Law)		December 2015
	Cooperative banks’ reform; State guarantee mechanism as part of securitisation transactions whose underlying assets are banks’ non-performing loans (D. L.18/2016 cvt. in L. 49/2016).		April 2016
	Self-reform of Foundations.		2015 - 2016
	‘Finance for growth’ measures: mini bond (D.L. 83/2012); simplification for SMEs listing (D.L. 91/2014); allowance for corporate equity (ACE and superACE -  D. L.  201/2011; L. 147/ 2013)		2012 -  2016
		Measures  ‘Finance for growth 2.0’	By 2016
	Implementation of directive 2014/49/UE on deposit guarantee schemes (Lgs. D. 30/2016)		February 2016
	D. L. 59/2016 (cvt. in L. 119/2016) concerning executive and bankruptcy proceedings, and for investors in banks in liquidation		June 2016
	L. 150/2016 – Enabling law to reform the system of Confidi. Delegated laws to be adopted within February 20, 2017		July 2016
Education	‘La Buona Scuola’ reform (L. 107/2015).		July 2015
	Tax credit for donations from private to schools – School Bonus (M.D. April 8, 2016)		April 2016
		Implementing decrees of Law 107/2015. Legislative Decrees on: - National education and training system; - Initial training and access to teaching positions in secondary school; - Promotion of inclusion in schools for students with disabilities and recognition of different forms of communication; - Review of vocational education pathways and link with education and training pathways; - Integrated system of education and school from zero to six years; - Effectiveness of the right to education; - Promotion and dissemination of culture and support to creativity; - Italian educational institutions and initiatives abroad; - Evaluation and certification of students skills; - National Plan of training on the job; - Charter of rights and duties of students in school-job transition.	By 2016

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Education	Strengthening of measures for school building: EIB loans (L. 107/2015) and exclusion of the costs of school building projects from the budget balance of local authorities (2016 Stability Law)		July – December 2015
	National Plan for digital school (M.D. October 27, 2015).		October 2015
	National Plan for Research		May 2016
Public Administration and simplification	Simplification Agenda 2015-2017:		2015-2017
	Enabling Law on reforming the Public Administration (L.124/2015).		August 2015
	Implementing legislation of L.124/2015: Lgs. D. 10/2016 on the repealing of obsolete and out of date secondary legislation and implementing decrees. Lgs. D. 97/2016 on the revision and simplification of regulation to prevent corruption and for the transparency of PA (FOIA). Lgs. D. 116/2016 changing dismissal rules on Public employment Lgs. D. 126/2016 on regulation of Segnalazione Certificata di Inizio Attività (SCIA) Lgs. D. 127/2016 on reorganisation of State-Regions Services’ Conference Lgs. D. 169/2016 on rationalisation and simplification of ports’ authorities Lgs. D. 171/2016 on transparency on Health System Managers Lgs. D. 174/2016 on the reorganisation of procedures for the judgements before the Court of Auditors Lgs. D. 175/2016 related to Single Code on State Owned enterprises Lgs. D. 177/2016 on reorganisation of state forestry and police corps Lgs. D. 179/2016 on digital citizenship and Code of Digital Administration		January – August 2016
	Presidential Decree finally approved on simplification and acceleration of administrative procedures (CoM on July 28, 2016)		July 2016
		Further legislative decrees implementing L.124/2015, approved as provisional draft by the CoM, related to: - single code on local public services (CoM on January 21, 2016); - administrative regulation of private activities (SCIA 2); CoM on June 15, 2016); - reform of public management (CoM on August 25, 2016); - Chambers of Commerce reform; (CoM on August 25, 2016); - simplification of the activity of public research entities (CoM on August 25, 2016): - provisions for Paralyimpics Committee (CoM on August 25, 2016).	By 2016

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Public Administration and simplification		Further legislative decrees to fully implement L. 124/2015 on: - reorganisation of the Presidency of the Council of Ministers, of Agencies, of non-economic public entities, of Independet Authorities and of local offices of Government - reorganisation and rationalisation of public entities, and ACI-Pra; - redefinition of careers of the police force, fire department and sea forces; - one or more legislative decrees for the reorganisation of labor discipline in the employ of PA	February 2017
		Implementation of the Defence White Book: Further revision of the National Military Forces, reconfiguration and streamlining  of internal organisation of the Defense Ministry, the redefinition of careers.	By 2016
Reducing regional disparities	Masterplan for the Mezzogiorno		2015
	Implementation of the Masterplan for the Mezzogiorno: signed Agreements forAbruzzi, Molise, Campania, Basilicata, Calabria, Sardinia, Sicily, Apulia and the following towns: Bari, Taranto, Reggio Calabria, Catania, Palermo.		July 2016
		Implementation of the Masterplan for the Mezzogiorno: signature of the remaining Agreements planned for metropolitan cities (Naples, Messina, Cagliari) to define the specific strategic actions to each local context.	2016-2018
	Tax credit for investment in capital goods in the South ( 2016 Stability Law)		December 2015
Poverty and social inclusion		Enabling Draft Law attached to the 2016 Stability law, providing measures to fight poverty and reorganize social services -approved by the CoM on  January 28, 2016 and now before the Chamber of Deputies (A.S. 2494)	By 2016
	Provisions on assistance for persons with severe disabilities without family support (L. 112/2016 – ‘Dopo di noi’ Law )		June 2016

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APPENDIX

REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Agriculture	Implementation and simplification of the Common Agricultural Policy Adoption of all non-legislative implementing act: MD 162/2015 Simplification of the CAP 2014 - 2020 management; MD 1922/2015 Additional provisions regarding the simplification of the management of the CAP 2014 - 2020; MD 5145/2015 National regulations for the implementation of delegated Regulation (EU) 2015/1383 of the Commission of 28 May 2015: MD 3282/2015 National program to support for the wine sector. Distribution of the overall budget for the 2015-2016; MD ‘National implementing provisions of Regulation (EU) No. 1308/2013 of the European Parliament and the Council on the common organisation of the markets in agricultural products. Authorisation system for viticulture; MD 5811/2015 ‘National implementing provisions of Regulation (EC) No. 436/2009 of the EU Commission of 26 May 2009 on harvest and wine production’; MD 765/2016 ‘Allocation methods of financial resources contained in the Delegated Regulation (EU) no. 2015/1853 of the EU Commission of 15 October 2015, which provides for exceptional aid of a temporary nature for farmers in the livestock sectors’; MD 2173/2016 establishing rules for the application of Article 55 of Regulation (EU) No. 1308/2013 on a common organisation of the agricultural products market, as regard aid in the beekeeping sector.		March 2015
	Measures for the milk and dairy industry (D.L. n. 51/2015 cvt. in L. 91/2015).		July 2015
	Implementing legislation of the D.L. 51/2015: Setting a quarterly survey of milk production costs, entrusted to ISMEA, based on a methodology approved by the Ministry (Rules for transparency of contractual agreements in agricultural supply chains)		August 2015
	Provisions on the recognition of Producer Organisations (POs) (MD 387 on February 3, 2016)		February 2016
		Implementing legislation of the D.L. 51/2015: Provisions on organisation of Single National Commissions for each type of agricultural product to increase transparency in prices.	By 2016
	Forecast framework agreements for the definition of essential contractual conditions in the dairy sector (Art. 23 D. L. 113/2016) (Rules for transparency of contractual agreements in agricultural supply chains)		June 2016
	Support measures for agricultural sector (2016 Stability Law): IRAP exemption, IMU exemption for farmland, tax credit for the purchase of capital goods for production facilities, fund for agricultural machinery, agro-energy tax, extension of the National Program of Fisheries and Aquaculture.		December 2015
	Enabling law for simplification, rationalisation and competitiveness of agricultural, agri-food and fishing sectors (l. 154/2016)		July 2016

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REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Healthcare	Strengthening of Health Pact 2014-2016 (EAL, reference prices, drugs)		December 2015
		Implementation of the Health Pact 2014 - 2016: - upgrade of the Essential Assistance Levels; - National Plan of chronicity; - New guarantee system for healthcare monitoring.	By 2016
		Health responsibility (A.S. 2244)
Culture and Tourism	Young Culture Card, tax credit for filmmaking industry, stabilisation of Art Bonus, 2x1000 to cultural associations (2016 Stability Law)		December 2015
		Draft Law attached to the 2016 Stability Law on Regulation of Cinema, Audiovisual and Performing Arts (A.S. 2287)	By 2016
	Reform of RAI and TV public service		December 2015
Environment	Law on crimes against the environment (Law 68/2015).		May 2015
	Law to promote green economy measures and for the containment of excessive use of natural resources (L.221/2015)		December 2015
		Enabling Law on Government concerning the remuneration of ecosystem and environmental services.	By 2017
		Remediation and environmental damage: simplification of remediation process; reform of SIN management (provisions contained in Lgs. D on SCIA 2)	By 2016
		Waste management: regulatory authority and progressive transition from tax (Tarsu) to tariff; Reform of the consortia (provisions contained in Lgs. D on SCIA 2)
		Hydro-geographic districts
		Green Act Draft Law (environmental taxation; circular economy, renewables, mobility)	By 2017
		Reform of the governance of National Parks (AS 1034)	By 2016
Spending Review and tax expenditures		With the new regulatory framework for tax expenditures (Lgs. D. 160/2015) the Government will annually review existing tax expenditures according to their economic impact and present a Report to Parliament together with the Budget Law.	By 2016
	Spending review – Phase I (rationalisation of purchasing centres, processes digitalisation and standard costs) savings achieved: 3.6 bn in 2014 and 18 bn in 2015		2015
	Strengthening the programme of rationalisation for e-procurement and of the central buyers bodies (‘centrali di committenza’); setting up of the ‘aggregators Table’; extension of the obligations for the PA and its subsidiaries to use Consip (the National e-procurement Agency) for their purchases.
	Annual decrees on market categories and maximum thresholds for independent tenders (if exceeded authorities must resort to Consip or to another party aggregator). Definition of new benchmark prices based on ‘essential characteristics’ of the goods and services (MEF MD on June 21, 2016)		June 2016

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APPENDIX

REFORM TIMETABLE (CONTINUE)
Policy Area	Done	In Progress	Timetable
Spending Review and tax expenditures	Standard requirements and fiscal capacity rules (Fiscal Federalism) for local authorities. Updating of the methodological notes (MEF MD on May 13, 2016		May 2016
	Phase II of spending review (revision of Budget Law). Estimated savings: €25 billion in 2016, €28 billion in 2017 and 29 billion in 2018 - Lgs.D. 90/2016 on completing the reform of State budget structure - Lgs.D. 93/2016 on reordering the State budget management		Structural savings planned until 2018 May 2016
	Draft Law modifying L. 196/2009, providing for Budget law contents, implementing art.15 L. 243/2012 (L. 163/2016)		July 2016
	Draft Law modifying L. 243/2012 providing for the implementation of the principle of balanced budget for regional and local authorities (L. 164/2016)		August 2016

Note: Reforms are split according to their state of advancement in two categories: i) reforms presented in Parliament for approval (in progress) and ii) reforms who have already completed the process of approval and have been published in the Official Journal (done).

MINISTERO DELL’ECONOMIA E DELLE FINANZE 119

UPDATE OF THE ECONOMIC AND FINANCIAL DOCUMENT 2016

The Update of the

ECONOMIC AND FINANCIAL DOCUMENT 2016

is available on-line

at the internet address listed below:

www.mef.gov.it • www.dt.tesoro.it • www.rgs.mef.gov.it

ISSN 2240-3280

120 MINISTERO DELL’ECONOMIA E DELLE FINANZE

EX-99.5

Exhibit 5

CONTENTS

I.	DEBT MANAGEMENT OBJECTIVES FOR 2015	1
I.1	International practice	1
I.2	Institutional framework	2
I.3	Debt cost containment with focus on cost/risk profile	5
I.4	Monitoring and management of the Liquidity Account aimed at stabilising the balance	15
II.	TREND OF ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK	18
II.1	Monetary policies and the money market in the Euro Area	18
II.2	Euro Area bond markets	22
II.3	Trend of the market of the Italian government securities	26
III.	PUBLIC FINANCE FRAMEWORK	43
III.1	Trend of State Sector borrowing requirement	43
III.2	Maturities, issues and coverage of the State Sector borrowing requirement	44
III.3	State Sector borrowing requirement	46
III.4	General government debt and debt-to-GDP ratio	47
III.5	Net borrowing	48
III.6	Reconciliation between requirement and borrowing	49
IV.	PUBLIC DEBT MANAGEMENT IN 2015	51
IV.1	Activity in government securities on the domestic and foreign markets	51
IV.2	Derivatives portfolio management	71
IV.3	Results of issuing activity and of debt management transactions in relation to the objectives	73
IV.4	Treasury’s liquidity management	86

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TABLES

Table I.1: Domestic government securities

Table III.1: State sector – consolidated cash account (data in € mn)

Table III.2: Issues, maturities and coverage of State Sector borrowing requirement (data in € mn)

Table III.3: Public Sector – consolidated cash account (data in € mn)

Table III.4: Key public finance aggregates (data in € mn)

Table III.5: Reconciliation between Public Sector borrowing requirement and general government net borrowing (data in € mn)

Table IV.1: Summary of debt exchange transactions in 2015 (nominal amounts in € mn)

Table IV.2: Reimbursements at maturity in 2015 with charge against the amortisation fund (nominal amounts in € mn)

Table IV.3: Private placements through MTN programme

Table IV.4: Mix of 2013-2015 issues in absolute value (€ mn) and as a percentage, inclusive of debt exchange transactions

Table IV.5: Average life of stock of government securities (in years)

Table IV.6: Trend of duration and ARP in 2013-2015 in relation to the governement securities in stock, before derivatives (in years)

Table IV.7: Trend of duration and ARP in 2013-2015 in relation to government securities in stock after derivatives (in years)

Table IV.8: Market trend of government securities stock (€ mn)

Table IV.9: Derivatives instruments portfolio – 2014 and 2015 (data in € mn)

Table IV.10: Liquidity Account and uses of Treasury liquidity at month end – 2015 (€ mn)

IV MINISTERO DELL’ECONOMIA E DELLE FINANZE

CONTENTS

FIGURES

Figure I.1: Maturities of medium/long-term securities outstanding at 31-12-2014 (€ mn)

Figure I.2: Monthly profile of the maturities – Medium/long-term securities for the years 2015-2016 outstanding at 31-12-2014 (€ mn)

Figure I.3: Issues portfolios analysed for 2015

Figure II.1 ECB monetary policy: interest-rate corridor 2012-2015 (rates in %)

Figure II.2 Trend of overnight money market rates and rates at OPTES auctions in 2015 (rates in %)

Figure II.3 Trend of European government securities yield curve – 10-year maturity (rates in %)

Figure II.4 Market rates on government securities – 2-/3-/5-/10-/15-/30-year issues (rates in %)

Figure II.5 Yield differential between 10- and 2-year government securities (basis points)

Figure II.6 Yield differential bewtween 30- and 10-year government securities, 2014-2015 (basis points)

Figure II.7 BTP-BUND yield differential on 10-year benchmark, 2015 (basis points)

Figure II.8 Monthly volumes traded on MTS platform (€ mn)

Figure II.9 Quarterly volumes traded on MTS, by segment (€ mn)

Figure II.10 Quarterly volumes traded on MTS, by maturity (€ mn)

Figure II.11a Bid-ask differential on 10-, 15- and 30-year BTPs, benchmark securities, as reported on the MTS platform

Figure II.11b Bid-ask differential on 3- and 5-year CCTeus and BTPs, benchmark securities, as reported on the MTS platform

Figure II.11c Bid-ask differential on 5- and 10-year BTP€is, benchmark securities, as reported on the MTS platform

Figure II.12 Monthly volumes traded by contract maturity on MTS platform (€ mn)

Figure II.13 Annual volumes traded by Specialists on MTS platform (percentages)

Figure II.14 Monthly volumes traded by Specialists on platforms other than MTS (€ mn)

Figure II.15 Quarterly volumes traded by Specialists by type of counterparty (€ mn) – fund managers, banks, pension funds, insurance companies and hedge funds

Figure II.16 Quarterly volumes traded by Specialists by geographic area of counterparty residence (€ mn)

Figure II.17 Price trend of BTP futures and trend of yield on BTP benchmark on 10-year maturities (inverted scale on the right, in %)

Figure II.18 Volumes traded on the EUREX market of BTP futures contracts on 10-year maturities (number of batches traded)

Figure II.19 Pricing trends of italian and german CDS (USD) for 5-year maturities and of the BTP-bund spread for 5-year maturities (basis points)

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Figure III.1 Trend of debt-to-GDP ratio, 2005-2015

Figure IV.1 Government securities yield curve 2014-2015 (% rates)

Figure IV.2 Average auction adjudication rate for 6 and 12-month BOTs – 2010-2015 (rates in %)

Figure IV.3 Yield at issuance of 6-month BOT and comparison with EURIBOR rate – 2014-2015 (rates in %)

Figure IV.4 Yield at the issuance of CTZs – 2015 (rates in %)

Figure IV.5 BTP 1 september 2046 – distribution by investor type

Figure IV.6 BTP 1 september 2046 – geographic distribution

Figure IV.7 BTP 1 march 2032 – distribution by investor type

Figure IV.8 BTP 1 march 2032 – geographic distribution

Figure IV.9 Yields at auction on BTPs with maturity between 3 and 10 years - 2015

Figure IV.10 Yields at auction on long-term BTPs - 2015

Figure IV.11 Yields at auction on BTP€i – 2015

Figure IV.12 BTP€i 15 september 2032 – distribution by investor type

Figure IV.13 BTP€i 15 september 2032 – geographic distribution

Figure IV.14 Composition by type of counterparty by orders placed by Specialists in government securities at auctions of nominal BTPs– 2014-2015

Figure IV.15 Composition by geographic origin of orders placed by Specialists in government securities of nominal BTPs – 2014-2015

Figure IV.16 Amount repurchased through non-recurring transactions – 2011-2015 (nominal amounts in € mn)

Figure IV.17 Mix of the stock of government securities at 31 december 2014 and at 31 december 2015

Figure IV.18 Structure of the stock of domestic government securities

Figure IV.19 Maturities by residual life, 2013-2015

Figure IV.20 Euro swap curves

Figure IV.21 Projected trend of notional value of derivatives portfolio assuming the exercise of swaptions (data in € mn)

Figure IV.22 Structure per maturity of derivatives portfolio assuming exercise of swaptions (data in € mn)

Figure IV.23 Cost at issuance of government securities – 2005-2015

Figure IV.24 Average cost of government securities before and after derivatives – 2005-2015 (data in %)

Figure IV.25 Average infra-monthly changes of Treasury liquidity: variations compared with the monthly minimum – 2015 (€ mn)

Figure IV.26 Variation between maximum and minimum monthly balances and available liquidity of the Treasury – 2014-2015 (€ mn)

Figure IV.27 Average daily use at OPTES auctions (€ mn)

Figure IV.28 Trend of overnight money market rates and rates at OPTES auctions 2014-2015 (rates in %)

Figure IV.29 Average use at daily OPTES auctions – 2012-2015 (€ mn)

Figure IV.30 Average distribution of liquidity at month end, by type of use – comparison between 2014 and 2015

VI MINISTERO DELL’ECONOMIA E DELLE FINANZE

I. DEBT MANAGEMENT OBJECTIVES FOR 2015

I.1 INTERNATIONAL PRACTICE

The Treasury bases its debt management objectives on international best practice. In fact, management criteria are in line with the policies followed by public debt managers within the international community and recommended multi-lateral financial institutions, known fundamentally as international best practice. The latter is based on recognition of the debt’s inverse relationship between cost and risk (of refinancing and of the interest rate) and therefore of the need to minimise costs in accordance to risk levels that are deemed acceptable, over a timeframe covering a medium- to long-term period.1

The Treasury’s process of identifying and calibrating its objectives benefits from a close and constant international coordination with the relevant foreign and supranational institutions, as well as through regular contact with international institutional investors and rating agencies.

In particular, regular relations with European public debt managers are ensured within the relevant sub-committee (European Sovereign Debt Markets – ESDM) of the EU Economic and Financial Committee. The latter has the mandate to review and delineate actions required for coordination of economic and financial policies among the Member States, with consultative and regular reporting responsibilities to the Council and the Commission on this subject.

Furthermore, a regular, consistent presence in work groups is ensured within supranational institutions such as the OECD, IMF and the World Bank; the Treasury participates in, among others, the OECD Working Party on Public Debt Management, which provides a regular venue for comparing public debt management policies and techniques among OECD member countries.

Another key opportunity for institutional coordination at European level is presented by participation in Eurostat statistical work groups and contributions to the preparation of semi-annual reports regarding Excessive Deficit Procedure EDP), particularly in relation to the proper registration of entries that are directly connected to the public debt according to European criteria for national accounting (namely, the European System of Accounts or ESA). The Public Debt Directorate’s participation in this seam of activities does not just strengthen awareness of impacts, in accordance with European-level harmonised accounting rules, of debt management activity, but also can, in turn, influence public debt

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1 The International Monetary Fund and World Bank’s guidelines, published in 2001 and revised in 2014, state (p. 11 of the 2014 Revised Guidelines for Public Debt Management): “The main objective of public debt management is to ensure that the government’s financing needs and it s payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk. ... Minimizing cost, while ignoring risk, should not be an objective. Transactions that appear to lower debt servicing costs often embody significant risks for the government and can limit its capacity to repay lenders. Managing cost and risk therefore involves a trade-off.”

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management decisions themselves, depending on the constraints and implications they provide in addition to general considerations of a financial nature and effects on the State Treasury balance.

In essential accordance with the model generally adopted by institutional units in charge of public debt management in advanced economies, the identification and monitoring of objectives are carried out by offices involved in middle-office functions. The latter include: a) analytical activities that allow for the delineation of a cost/risk profile needed to define operations and identify the most appropriate issuance and hedging strategies; b) long-term forecasts of interest expenditure and the debt of the Public Administration for planning documents and institutional reporting2; and c) monitoring counterparty risk that determines the restrictions to be observed for both management of the derivatives portfolio as well as transactions for employing liquidity.3

I.2 INSTITUTIONAL FRAMEWORK

The broad definition of public debt encompasses the gross consolidatedliabilities of all of the public administrations (central government, local government and social security institutions); instead, a more limited definition corresponds with the amount of government securities outstanding and,therefore, it relates only to the securities issued by the State, on both the domestic market and the foreign market.

This Report refers to the latter, more limited definition, which is also the subject of legislation known as the Consolidated Public Debt Act4 (CPDA). At 31

December 2015, the public debt represented by government securities accounted for approximately 84 percent of the total public debt.

___

2 More specifically, the Economic and Financial Document (EFD) provided by Law No. 39 of 7 April 2011 (where the contribution of the Second Directorate is included in the first part “Stability Programme” and in the second part “Public Finance: Analysis and Trends”), the EFD Update, the Draft Budgetary Plan (DBP) instituted by EU Regulation No. 473/2013, the Appendix to the Quarterly Cash Report (with Article 14 of Law No. 196/2009 known as the Report of the Consolidated Cash Account of the Public Administrations), the Report to Parliament on the Fund for the Amortisation of Government Securities (attached to the General Government Account) referenced in Article 44, Paragraph 3 of the Decree of the President of the Republic No. 398/2003, the Semi-Annual Report to the Court of Auditors on public debt management pursuant to the Ministerial Decree 0/11/1995.

3 Whereas the front office activities involving direct contact with the market are concerned with the issuance of debt through the domestic and foreign programmes, short-term liquidity management, non-recurring debt exchanges and repurchase transactions, and transactions in derivatives. Tasks required for the effective carrying out of front-office activities include the monitoring of the secondary government securities market, and the selection and assessment of Government Bond Specialists.

The functions of the back office include the preparation of the issuance decrees and all other documentation regarding the granting of loans – such as drafting of the prospectuses for international issuance programmes (Global, MTN) and other securities placed outside of auction – and the finalization of derivatives. The back office is also responsible for activities related to payment procedures.

The Public Debt Directorate also performs other functions. Among these are functions that can be categorised as relating to communications: real-time reporting of information about issuance activity; the production of statistics on the structure, dynamics and composition of government securities and the related market; and the production of statistics from the monitoring of the debt and the derivatives exposure of local entities. Possible non-recurring debt intervention on local entities, which are governed by specific regulations, forms an additional function assigned to the Directorate.

4 Consolidated Law and regulations on the subject of the public debt (Decree of the President of the Republic No. 398 of 30 December 2003).

2 MINISTERO DELL’ECONOMIA E DELLE FINANZE

I. DEBT MANAGEMENT OBJECTIVES FOR 2015

The main characteristics of government securities outstanding – maturity, type of remuneration, means and frequency of issuance – are summarised in Table I.1.

TABLE I.1: DOMESTIC GOVERNMENT SECURITIES
	BOT	CTZ	CCT/CCTeu	BTP	BTP€i	BTP Italia
	Treasury Bills	Zero-coupon Treasury bonds	Treasury Certificates	Treasury Bonds	Treasury Bonds Indexed to European Inflation	Treasury Bonds Indexed to Italian Inflation
Maturity	3, 6 & 12 months and under 12 months (flexible BOTs)	24 months	5 & 7 years	3,5,7,10,15 & 30 years	5,10,15 & 30 years	4,6 & 8 years
Remuneration	Issued at a discount	Issued at a discount	Semi-annual variable coupons indexed to the 6-month BOT auction rate or to the 6-month Euribor, possible issue at a discount	Semi-annual fixed coupons, possible issue at a discount	Semi-annual coupons indexed to European inflation (HICP index, net of tobacco products), possible issue at a discount and revaluation of principal on maturity.	Semi-annual coupons indexed to Italian inflation (FOI index, net of tobacco products), semi-annual revaluation of principal and loyalty bonus* on maturity
Issuance Method	Competitive auction on yield	Marginal auction with discretionary determination of price and quantity issued	Marginal auction with discretionary determination of price and quantity issued	Marginal auction** with discretionary determination of price and quantity issued	Marginal auction** with discretionary determination of price and quantity issued	Through the MOT (Borsa Italiana’s Electronic Bond Market)
Issuance Frequency	Monthly	Monthly	Monthly	Monthly and based on market conditions for 15- and 30-year BTPs	Monthly	One/two times a year
*) For individual investors and other similar investors who acquire the security at issuance during the first phase of the placement period. **) The first tranches of the new long-maturity BTPs (15 and 30 years) or BTP€is may be offered on the market through a placement syndicate.

In 2015, public debt management activity, for the quota referring in fact to negotiable debt traded on the markets and represented by Treasury securities, has been carried out as set out by the Minister’s official guidelines, and by the General Directive for the administration and management of the Ministry for the Economy and Finance (MEF) and by the ministerial decree (the so-called “Framework Decree”5) which outlines the objectives of reference for the execution of administrative activities concerning financial transactions aimed at public debt management. These provisions and what they envisage have been since been rendered in operational terms in the “Guidelines for Public Debt Management” (hereafter referred to as “Guidelines”).

In 2015 as well – as extensively illustrated in the first “Public Debt Report” with reference to 2014 – the Guidelines included among their priority policies that of a “…continuation of public debt management aimed at containing the cost of debt and at stabilising or extending its average life”, and the General Directorate

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5 Decree of 23 December 2014 published in the Official Journal, no.1, 2 January 2015.

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has translated this priority policy into the two strategic objectives of containing the cost of the debt, with a particular focus on its cost/risk profile, and the monitoring and management of the Liquidity Account, aimed at a stabilisation of the balance.

The 2015 Framework Decree has, as preceding years, provided greater detail on the operational tools that the Public Debt Directorate is authorised to make use of in order to reach its objectives. Article 2, in particular, provides for the coverage of the securities maturing during the ensuing year, in addition to the public sector borrowing requirement, taking care to “[…] balance the need to gain market approval with that of containing the total cost of the debt in the medium- to long-term, considering the need for protection against refinancing risk and exposure to changes in interest rates”.

To this end, the Article in question also sets out specific percentage intervals in terms of debt composition at end-2015, described as follows:

· BOTs (short-term securities) between 4 percent and 12 percent (a slight reduction on the previous year’s fixed range of 5 to 15 percent);

· BTPs (“nominal” fixed-rate securities) between 55 percent and 75 percent (unchanged with respect to the preceding year);

· CCTs/CCTeus (“nominal” variable-rate securities) between 5 percent and 10 percent (unchanged with respect to the preceding year);

· CTZs no more than 6 percent (a slight increase on the previous year’s fixed limit of 5 percent);

· BTP€s e BTPs Italia (“real” securities) no more than 17 percent (a slight increase on the previous year’s fixed limit of 15 percent to take into account the absence of securities maturing in this sector in the year).

Moreover, in relation to foreign securities, the decree has established that these could be issued, net of the reimbursements, for an amount not exceeding 30 percent of the total of net issues.

With the aim of contributing to the containment of the total cost of borrowing and to protection against market and refinancing risks, Article 3 authorises the use of debt restructuring transactions on a consensual basis; that is to say, the use of repurchase transactions, debt exchanges or early redemption of securities, as well as transactions in derivatives.

Finally, with regard to the Liquidity Account, Article 6 of the Framework Decree deferred the ministerial decrees dated 29 July 2011 and 25 October 2011, which regulate the means for the movement of the Treasury’s liquidity and the selection of the counterparties that participate in related transactions.

In the 2015 Guidelines, in complete accordance with the above-mentioned provisions, the Treasury has specifically committed to:

1. increasing the average life of the stock of government bonds;

2. stabilising the stock of BOTs at end-year with respect to 2014;

3. controlling the debt’s total exposure to inflation, by also scaling down BTP Italia issues to a single one;

4. reducing the quota of CCTs/CCTeus and CTZs on the value of the debt stock as compared to 2014;

4 MINISTERO DELL’ECONOMIA E DELLE FINANZE

I. DEBT MANAGEMENT OBJECTIVES FOR 2015

5. in relation to nominal BTPs, decreasing the weighting on the total annual issues of the 3- and 5-year maturities in favour of 7-year and above maturities;

6. implementing adequate number of debt exchange and repurchasing transactions, aimed above all at managing the burden of maturities of upcoming years;

7. maintaining a constant presence on the money market on short- and very short-term maturities, through financial transactions in compliance with the Treasury’s Liquidity Account services (OPTES).

For these reasons, during 2015, as in the preceding year, the Public Debt Directorate had been called upon to guarantee that debt management, including the issues required for coverage of the securities reaching maturity and the public sector borrowing requirement that year, be sufficient to allow for the containment of the cost of the debt, keeping chief risks under control, while also contributing to guaranteeing an adequate level of stability and predictability of the Liquidity Account balance.

\

I.3 DEBT COST CONTAINMENT WITH FOCUS ON COST/RISK PROFILE

The cost/risk trade-off: characteristics of Italy’s case

In Italy’s case, normal management of the cost/risk trade-off, mentioned above, takes its cues from the analysis of different debt issuing strategies, the relative cost of which is first calculated, in terms of debt service burden, which in turn depends on the market interest rates placed on the securities. The relative risks involved in each strategy are also examined, as these risks may take on various dimensions as, likewise, can the various risk measures adopted.6

As already stated in last year’s report, debt management in Italy has focused on two principal risks: that posed by the interest rate, with the aim of minimising its impact on the debt burden and resulting unexpected movements of market interest rates, and that of refinancing, in order to distribute the maturities uniformly over time so that new debt may be placed with greater ease, thus presenting significant market trading volumes with an absorption capacity and avoiding undesirable increases in financing costs.

This approach to debt management, consistent with international practice, has, in Italy, historically taken into account (and the country still measures itself against it) the notable size of the public debt, both in absolute terms and in relation to GDP, which has inevitably led to an even more prudent attitude with regard to risks for two sets of reasons.

First, the size of the debt itself implies that a significant component determining interest rate levels when there are government bond issues is made up by the credit risk premiums requested by the investors to finance a highly

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6 For further details on cost and risk measures see paragraphs provided below in this chapter.

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indebted subject7: a component of this kind tends to have little structural correlation with the economic cycle and this makes the situation in Italy significantly different compared to countries with a more contained debt and a higher creditworthiness. In fact, where the latter are concerned the effects of movements of interest rates on public debt are by far more consistent with the economic cycle: when rates rise it is because the economy is growing, with a consequent automatic improvement in public fiscal balances, which therefore tends to neutralise potentially negative effects on deficits and debts springing from higher interest expenditure. And, conversely, interest rates tend to decrease when an economy shows a decrease in growth rates, and therefore have a positive effect on deficits and debts. This mechanism does not generally recur in countries with high public debt, precisely because a non-negligible quota of movements of market interest rates may in fact be derived from the credit risk component which is often completely unrelated to the economic cycle; furthermore, the same risk premium requested by the investors could actually increase in situations involving a slowing down in growth or an economic recession, in so far as these factors tend to have a negative influence on perceptions, especially with regard to debt sustainability. For these countries, as for Italy as well, it is therefore clearly crucial to tend towards the least vulnerable debt composition possible with respect to market interest rate trends.

Second, in a country with a high public debt, interest expenditure normally represents a considerable part of current government expenditure8 and therefore of the deficit. It would thus follow that stabilising and turning this item of expenditure into a predictable one would be particularly useful in order to be in line with the public finance stability requirements provided for in the treaties currently in force involving Euro Area countries, based in particular on deficit control and debt dynamics.

With respect to both profiles, it is therefore crucial for Italy to set up an approach to debt management that places at the centre of its strategy risk control, and particularly those risks posed by rates and refinancing.

Refinancing risk: measurement and instruments for management

The performance indicator used to measure the extent of this risk is the overall average life of government securities stock: it is calculated as an average of all securities outstanding, weighted by the nominal value9 of each security. At

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7 Following the introduction of the single currency, the perception and pricing of high debt Euro Area countries’ credit risk became reduced; they nonetheless re-emerged after the onset of the global financial crisis of 2007-2008, to be further strengthened with the subsequent sovereign debt crisis.

8 On average, in Italy, interest expenditure between 2012 and 2015 represented about 10 percent of total current expenditure (see ISTAT release “Sintesi dei conti ed aggregati economici delle Amministrazioni pubbliche”/“Summary of general government accounts and economic aggregates”, 24 May 2016).

9 The definition of “nominal value” used here is that adopted by EC Council Regulation No 479/2009 of 25 May 2009: “The nominal value of a liability outstanding at the end of the year is the face value. The nominal value of an index-linked liability corresponds to its face value adjusted by the index-related change in the value of the principal accrued to the end of the year. …… Liabilities denominated in the national currency and exchanged through contractual agreements to a foreign currency shall be converted into the foreign currency at the rate agreed on in those contracts and shall be converted into the national currency on the basis of the representative market exchange rate prevailing on the last working day of each year. …… Liabilities denominated

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I. DEBT MANAGEMENT OBJECTIVES FOR 2015

end-2014, the average life of the debt in government securities equalled 6.38 years, indicating a substantial degree of stabilisation as compared to 6.43 years at end-2013.

In accordance the Guidelines and the Minister’s Directive mentioned above, the objective of the containment of the cost of the debt, with specific attention paid to the cost/risk profile, has been clearly expressed in the Guidelines in terms of carrying out a debt issuance and management policy aimed at increasing the average life of the debt on a basis compatible with market conditions, and thus halting the decline that started in 2011 and substantially came to a close in 2014.

Concurrently, refinancing risk management was to be pursued through a gradual reduction in the volumes of securities maturing in years most affected by high concentrations of reimbursements, making their profile more uniform. More specifically, in view of the annual profile of the maturities at end-2014 (see Figure I.1), a reduction in volumes maturing in 2017 was deemed necessary, trying to contain, as much as possible and on terms compatible with market conditions, the issuing of the securities maturing that year and putting in place repurchase and debt exchanges, preferably selecting securities with a maturity in 2017.

FIGURE I.1: MATURITIES OF MEDIUM/LONG-TERM SECURITIES OUTSTANDING AT 31-12-2014 (€ mn)

 

In the shorter term, when analysing the monthly profile of the maturities (Figure I.2) in 2015 and 2016 with more precision, the issuing policy should have focused on making the maturities of the months of June and December 2015 and of April, August and September 2016 more manageable, particularly by limiting the amounts of the BOTs being issued, as well as through repurchase and debt exchanges. Furthermore, in 2015 the aforementioned tools also needed to focus on stabilising the Treasury’s liquidity balance, counteracting – as much as possible – the fluctuations of the Treasury’s liquidity.

in a foreign currency and converted through contractual agreements into the national currency at the rate agreed on in those contracts”.

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FIGURE I.2: MONTHLY PROFILE OF THE MATURITIES – MEDIUM/LONG-TERM SECURITIES FOR THE YEARS 2015-2016 OUTSTANDING AT 31-12-2014 (€ mn)

Interest-rate risk: measurement and instruments for management

As detailed in the in-depth focus included in last year’s Report10, the interest-rate risk may be captured through the use of a number of different measures, including namely duration (or financial duration) or the average refixing period (average time for pegging the debt to market interest rates), which measure these risks to the debt structure in an immediate and concise way, as well as the Cost at Risk (CaR), which provides a quantitative measurement of the maximum added cost in terms of interest expenditure in the event of adverse-rate scenarios, along with the probability of having to sustain this additional cost, derived, in turn, from the probability of these adverse scenarios.

The provisions set out by Article 2, Paragraph 2 of the Framework Decree make explicit reference to the need to manage the exposure to changes in interest rates. This led to the implementation, in 2015, of the objective of containment of the cost of the debt with a particular focus on its cost/risk profile with reference to the cost/risk profile requirements, as set out in the Guidelines and compatible with conditions on the financial markets, to continue increasing the financial duration of the debt and its average refixing period. Both of the indicators needed to take into consideration the effect of the portfolio of derivatives instruments.

The CaR analysis was used to measure the expected cost of the debt portfolio that cannot be surpassed with a given degree of probability, as well as to identify all the compositions of securities issuances with cost/risk combinations that are positioned at an efficient frontier, and are thus advantageous – at a given level of

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10 See Focus entitled “The main quantitative indicators of interest rate risk”, in Public Debt Report 2014, p. 23.

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I. DEBT MANAGEMENT OBJECTIVES FOR 2015

cost or of risk – in relation to any other hypothetical composition of the issues portfolio.

In order to test the characteristics of each hypothetical, alternative issues portfolio, a model was used that was internally developed and has been in use for several years at the Public Debt Directorate, known as SAPE1 (Software for Analysis of Issues Portfolios), which allows for estimating over a given future time period both the cost, in terms of interest expenditure, of a specified portfolio, as well as its rate risk with respect to a representative sample of possible scenarios of changes in interest rates and inflation.2

The role of the issuing strategy in managing the trade-off between rate risk and cost for 2015

A debt portfolio characterised by the repayment on deferred capital over time and by stable interest (hence with indicators such as the average life, the average refixing period or duration characterised by relatively high values) entails lower refinancing and interest rate risks. At the same time, however, greater costs would be entailed because of the higher rates normally associated with longer maturities, as compared with a debt portfolio characterised by lower values in the very same set of indicators. Therefore, there is a trade-off between cost and risk, which is why the objective of minimising the risk is reached at the expense of the cost and vice versa. Alternative, hypothetical debt portfolios with longer (shorter) duration are associated with greater costs and lower risks (lower costs and higher risks).

In order to identify and quantify the magnitude of the trade-off and the efficient frontier, the modeling described in this report has focused on domestic securities, which represented around 97 percent of the total government securities outstanding at end-2014.

In the final weeks of 2014 and the first weeks of 2015, the Public Debt Directorate, following a comprehensive analysis of research provided by the principal market intermediaries and through consultation of vast array of forecast documents produced by the leading research centres – both public and private – that are heavily specialised in financial subject areas, evaluated, as is now the practice, different issues portfolios deemed compatible with market conditions and the fundamental characteristics of public debt management in Italy and its market.

As a precondition, all of the portfolios had to allow for refinancing:

a. the maturities of medium-/long-term securities planned for 2015 (equal to just under €196 billion);

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11 For a description of SAPE – Software for the Analysis of Issues Portfolios, used by the Public Debt Directorate, see the relevant in-depth Focus in Public Debt Report 2014, p. 27.

12 The database for the outstanding debt used by SAPE at end-2014 was still was made up only by the domestic securities provided in Table I.1. The SAPE model’s integration is currently being completed to allow for the testing of issues portfolios that also include securities denominated in USDs and strategies that combine issues and derivatives instruments, using all of the instruments outstanding, including foreign securities and transactions in derivatives as the database.

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b. the BOTs already outstanding (equal to €125.5 billion), together with the rollover of BOTs issued during the year, namely the BOT issues needed to cover the maturities of the same volume of BOTs issued during the same year;

c. the State Sector borrowing requirement (in the forecast amount of approximately €70 billion13);

as well as to generate a sufficient stock buffer in terms of the Treasury’s liquidity balance, so as to provide for all cash management needs. The following is a concise listing of the characteristics of the nine portfolios analysed:

FIGURE I.3: ISSUES PORTFOLIOS ANALYSED FOR 2015

Portfolio 2014: the mix of domestic issues adopted in 2014;

Portfolio B: compared to Portfolio 2014 it shows a reduction in the 3- and 5-year nominal BTP segment, a moderate increase in the 7- to 10-year and 15- to 30-year BTP segments, a reduction in the quota of inflation-indexed securities   and a fairly small rise in CCTeus;

Portfolio C: compared to Portfolio 2014 it shows a fairly small increase in CTZs, a reduction in CCTeus, inflation-indexed and 3- and 5-year BTPs, and a consistent increase in 15- and 30-year BTPs;

Portfolio D:compared to Portfolio 2014 it shows a moderate increase in BOTs, a significant reduction in and 3- and 5-year BTPs, a modest reduction in 7- to 10-year and inflation-indexed BTPs, offset by an comparable increase in 15- and 30-year BTPs;

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13 The figure underlying the public finance forecasts for 2014 included in the 2014 EFD Update.

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Portfolio E:compared toPortfolio 2014 it shows a moderate increase in BOTs and in CTZs, a sharp reduction in indexed securities and variable-rate CCTeus, and a reduction in the 3- and 5-year and 7- to 10-year nominal BTP segments in favour of the 15- and 30-year BTPs;

Portfolio F:compared to Portfolio 2014 it shows a drastic reduction in 3- and 5-year BOTs, CTZs and BTPs, a massive increase in 7- to 10-year and 15- and 30-year BTPs and a modest reduction in inflation-indexed securities;

Portfolio G:compared to Portfolio 2014 it shows a 50 per cent increase in BOTs and CTZs, a massive, equally proportioned reduction of the entire BTP segment, and a modest reduction in inflation-indexed securities;

Portfolio H:compared to Portfolio 2014 it shows a slight increase in CTZs and CCTeus, a significant reduction in the entire BTP sector, particularly on the 3- and 5-year segment, and a doubling of issues of indexed securities;

Portfolio I:compared to Portfolio 2014 it shows a sharp reduction in CTZs, a doubling of 15- and 30-year BTPs and a significant reduction in indexed securities.

This analysis is based on the four-year outlook for 2015-2018. One hundred scenarios, applied to each of the different issues portfolios, were generated by a model in relation to the trend of Italian securities yield curve, the zero coupon inflation swap curves14 of Italian and European inflation-indexed securities and the six-monthly Euribor rate. Three further alternative scenarios were calculated for European and Italian inflation rates, of which a base one in line with the scenario of the European Central Bank (ECB) was put in place at end-2014, and two scenarios with slower and more accelerated dynamics respectively as compared with the base scenario.

The cost measurement system employed was the monthly average change in interest expenditure over the four-year period in question. Risk measurement was based on the related standard deviation of the average monthly change in cost calculated for the 100 scenarios.

For those portfolios that were examined an analysis of their characteristics in terms of cost and exposure to risk and ability to lengthen the average life in 2015 was carried out. First of all, it was clear that the issues portfolio followed in 2014 had proven to be efficient, in that none of the others taken into consideration would have allowed for a reduction in risk with cost being maintained equal or vice versa.

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14 The zero coupon inflation swap curves are commonly used to price swap contracts in which two counterparties exchange a nominal floating rate for an inflation-indexed variable one, so as to bring the actual values of the two flows on a par. These curves are crucial to the SAPE model because they allow for the modeling of future issues of indexed securities starting with nominal yield curves.

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Similarly, portfolios B, C and D were also shown to be efficient. However, both that for 2014 as well as portfolios B and D would have allowed only for a slight increase of average life in 2015, but not in the following years. Portfolio C, on the other hand, aside from being efficient, would have guaranteed a stable, albeit gradual, increase in the average life of the stock of government bonds throughout the four-year period. The main characteristics of portfolio C as compared to that followed in 2014 are:

1. same weighted average yield for BOT issues;

2. a slight increase of the CTZ compartment and a downwards revision of  CCTeus;

3. a reshaping of the 3- and 5-year BTP compartment;

4. a significant confirmation of the 7- and 10-year BTP compartment;

5. a considerable increase on the 15- and 30-year BTP compartment; and

6. a reduction of the inflation-indexed securities (both Italian and European) segment.

The role of derivatives operations in managing the trade-off between rate risk and cost for 2015

Interest rate derivatives are public debt management instruments aimed at reducing interest rate risk, changing the composition of rates without changing those of the debt already allocated among investors and newly issued.15 Possible misalignment between the portfolio structure, as made possible by the capital market, and operational objectives can be corrected with the use of derivatives.16 In Italy’s case, considering the cost of the debt, ordinary issuance activity must necessarily be managed with continuity and predictability, with the aim of creating conditions that favour interaction with the market and those who need to acquire the securities being offered, especially as the execution of transactions in derivatives does not follow a pre-set calendar, but depends on the issuer and market conditions.

The Framework Decree, which authorises the use of derivatives instruments, expected these to contribute to the achievement of the decree’s general operational objectives of the containment of the overall borrowing cost and the protection against market and refinancing risks over the medium-/long-term, on the basis of available information and market conditions.

In 2015, and particularly following the September 2014 publication of the new regulations set out by Eurostat on accounting records of the market value of swaps that are the result of previous restructuring agreements or the exercise of swaptions. With regard to debt management objectives this inevitably led to yet further management restrictions, as the impact of such regulations on the amount

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15 For a summary of the types of transactions in derivatives instruments used by the Treasury’s Debt Directorate please see Section III.3 of the Public Debt Report 2014.

16 A 2008 document jointly drafted by experts at the OECD, the IMF and the World Bank outlines that practice adopted by many sovereign debt managers, emphasising that “The implementation of the debt strategy may include the use of derivatives to separate funding decision from the optimal portfolio composition decision, reduce the cost of borrowing, and manage risks in the portfolio (in particular interest rate refixing risk and refinancing risk).” OECD (2008) “Use of Derivatives for Debt Management and Domestic Debt Market Development: Key Conclusions”.

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of debt stock could not be ignored, even though it did not correspond to actual market transactions, but merely to accounts held. Transactions in derivatives should have hence complemented issuing activity to achieve public finance objectives in debt management, and thereby contribute to the lengthening of the average refixing period and of the financial duration of the debt17, based on market conditions and considering possible accounting effects on debt management produced by European regulations.

Means for implementing the objective of debt cost containment with focus on cost/risk profile

Issuing decisions with respect to domestic and foreign securities

In line with the content of the 2015 Guidelines, and in consideration of the above-mentioned objectives in terms of average life, duration and average refixing period and in view of the results of an analysis of the cost/risk trade-off, the issuing policy for 2015 aims to:

a. adjust the BOT issues to arrive at end-2015 with a stock in line with that of 2014, guaranteeing regularity to the 6- and 12-month maturities, yet maintaining the maximum flexibility for the quarterly or flexible BOTs, issued only in the event of specific cash needs;

b. modify the flow of CTZ placements so as to obtain a just moderately positive net flow of issues – considering the reduced volume of maturities – with the aim of reducing the CTZ quota in relation to the debt;

c. reduce the issues of the 3- and 5-year BTP segment, both in absolute terms as well as in relation to the total issuances compared to 2014, while safeguarding the regularity of the issues;

d. increase, in a way that is compatible with demand, the volumes of 7- and 10-year BTPissues, in a context characterised by regular placements;

e. increase the volumes of 15- and 30-year BTP issues offered in relation to the total issues as compared with 2014, while always taking into account the demand status;

f. maintain continuity of CCTeu issues, yet reduce their end-year debt quota and seek to favour the 7-year maturity out of the new securities;

g. adjust the BTP€i issues so as to merely marginally increase their end-year debt quota, considering there would be no maturities in that segment;

h. offer a single placement of BTP Italia securities with maturities even over six years, aimed at also containing overall exposure to inflation in a year in which maturities are absent;

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17 Pursuant to the 2005 Budget Law (Law No. 311 of 30 December 2004), certain derivatives contracts were executed with reference to public entity mortgage receivables transferred to the Treasury from the budget of the Cassa Depositi e Prestiti, following the transformation of the latter into a joint-stock company (Article 5 of Decree-Law No. 269 of 2003 – a decree attached to the 2004 Budget law - converted, with amendments, by Law No. 326 of 2003). The notional amount of these contracts is just over 2 percent of the Treasury’s entire derivatives portfolio, as shown in detail in Table IV.9 (Chapter IV). These contracts are not included in public debt management, and accordingly, are not addressed in this Report.

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i. assess the possibility of issuing on the U.S. dollar market again; continue to issue MTN programme securities to meet the needs of primary institutional investors, in response to specific requests and at a lower financing cost as compared to that of comparable domestic instruments, thereby also avoiding negative repercussions on normal issuances in a public format.

Debt management transactions

To achieve the objectives cited above, the Treasury can also make use of non-recurring debt exchange transactions, repurchases of government securities and of derivatives.

Debt exchange and repurchase transactions are public debt management instruments aimed at containing refinancing risk, reshaping the maturities profile and facilitating, at the same time, the liquidity and efficiency of government securities on the secondary market. Unlike ordinary issuing activity, the execution of these transactions does not follow a pre-set calendar, but depends on the Treasury’s specific needs and market conditions. Participation in the non-recurring transactions is normally reserved for the Government Bond Specialists.

More specifically, the debt exchange transaction consists of the issuing of a security against the simultaneous repurchase of one or more securities outstanding. It therefore entails the exchange of government securities of different maturities, which can favour containment of the refinancing risk. For these transactions, the Treasury may use the Bank of Italy auction system or the electronic trading system.

The repurchase transactions are, on the other hand, operations through which the Treasury reimburses government securities outstanding in advance of maturity. The financial resources used for this purpose may be drawn from the Liquidity Account or the Fund for the Amortisation of Government Securities. Repurchase transactions may be executed through a Bank of Italy auction or through bilateral agreements.

As stated in the 2015 Guidelines, in 2014 the Treasury therefore made significant use of the non-recurring swap debt exchange and repurchase transactions among the instruments available to it in view of the high concentration of maturities forecast for the years of 2015 and 2017.

The Guidelines did not rule out the Treasury’s use of non-recurring transactions with more frequency also in 2015, pointing out that these would be in any event dependent upon conditions prevailing on the secondary market and, for repurchases, the balances in the Liquidity Account and the Fund for the Amortisation of Government Securities.

Finally, the opening of new derivatives positions, taking into consideration the tangible constraints with regard to prudential supervisory regulations affecting banks in the absence of collateralization, were to be limited to hedging through cross currency swaps for any new foreign-currency denominated issues. There also remained the need to monitor the portfolio of derivatives outstanding, intervening actively where possible, with the aim of contributing to achievement of the objective of debt cost containment with a focus on the risk profile and to paying appropriate attention to financial and market constraints.

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I.4 MONITORING AND MANAGEMENT OF THE LIQUIDITY ACCOUNT AIMED AT STABILISING THE BALANCE

The Liquidity Account for the Treasury service

In recent years, the Treasury, in collaboration with the Bank of Italy, adopted its own liquidity management aimed at improving its capacity to forecast the Treasury’s flows and the related balances.

The management project – known as OPTES – was also set up to satisfy the requests of the European Central Bank (ECB), which called for easing monetary policy through an efficient forecasting of the liquidity balances held by public entities at Eurozone national central banks.

In Italy, such liquidity balances are held mainly in the Liquidity Account, the account held by the Treasury with the Bank of Italy for the collections and payments that are recorded as part of the State Treasury service. The balance of this account is basically the sum of all accounts opened with the State Treasury. In line with EU regulations, which prohibit the central banks of Member States from granting any form of financing to their governments, the Account cannot carry a debt balance.

The balance of the Liquidity Account is noted for being highly volatile, as a result of both the number of entities moving funds through the State Treasury, as well as the importance of certain cycle flows, normally occurring monthly. In particular, tax revenues are found to have a strong impact on collections, which tend to be concentrated in a few days in the second half of the month. Whereas among payments, disbursements of pensions stand out (mostly made on the first working day of the month) as having a strong impact on payments. The issues, and further still, the maturities of government securities may cause strong fluctuations in the Liquidity Account balance.

The obstacles encountered led to the decision in 2015, as in preceding years, that the Treasury continue to pursue a specific strategic objective of “monitoring and managing the Liquidity Account availability aimed at stabilisation of the balance”.

OPTES programme

Liquidity management – or cash management – consists of daily transactions aimed at ensuring an adequate level of available liquidity, in relation to the multiple movements of the State Treasury. This activity is strictly linked to public debt management, and forms the means for tying in the issuance of medium-/long-term securities with the daily fluctuations of the Liquidity Account. As already stated, the use of cash management comes into play in the sphere of the so-called OPTES programme, which monitors Treasury balances and flows and the execution of money-market transactions.

The monitoring is based on a continuous exchange of information between the

MEF and the Bank of Italy, with forecasting and final data related to all of the collections and payments through the accounts held at the State Treasury and with the consequent estimation of the Liquidity Account’s balance.

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The use of cash management instruments involves, instead, transactions on the money market, through daily auctions and possible bilateral transactions, in which the Treasury normally employs its liquidity. The Treasury’s active liquidity therefore consists of both the balance in the Liquidity Account as well as the amount of deposits made in relation to the daily OPTES transactions with financial intermediaries.

The regulatory framework for liquidity management in 2015

The General Directive for the administrative action and management of the Ministry of the Economy and Finance for 2015 provided for the monitoring and management of the Liquidity Account with the aim of stabilising the balance; this would be based on a careful assessment of trends affecting the account, the use of cash management instruments and the monitoring of credit risk linked to these transactions, while taking into account government securities issuing strategies.

In this respect, with reference to liquidity management transactions, the Guidelines expected the Treasury to have maintained its continuous presence on the money market, with short- and very short-term maturities, and through the OPTES programme that provides for a daily transactions activity. It furthermore specified that the carrying out of its transactions consisted chiefly of holding auctions or bilateral negotiations on liquidity deposits, with overnight or longer maturity, in relation to the borrowing requirements and market conditions.

From a regulatory point of view, the Framework Decree referred to liquidity management, essentially referring back to the relevant ministerial decrees dated 29 July 2011 and 25 October 2011. 2015, however, started with some relevant and significant regulatory innovations, seeing as the Stability Law 2015 (L.190/2014) generated some changes to the Consolidated Public Debt Act, with the aim also of bringing national regulations in line with recent ECB directives.

In fact, on 5 June 2014, the European Central Bank had announced the reduction in the monetary-policy rates corridor, setting the deposit facility rate at a negative figure for the first time (at -0,10 percent). This intervention had important consequences on the entire monetary system, also because it was accompanied by ECB regulations that set the application deposit facility rate at a negative figure thereby penalising deposits held in Eurozone central national banks that exceeded the near zero threshold. These regulations affect deposits held by both financial institutions as well as by public administrations. More specifically, the new regulations have introduced the application of the deposit facility rate – if negative – on government deposits that exceed a rather contained predefined threshold which, for Italy, is of 0.04 percent of GDP.

The lowering of the Euro Area reference rates and the change in the system for government deposits held at national central banks have penalised the balances held by the Treasury with the Bank of Italy, providing a disincentive for the placing of restricted deposits with the central bank. From a regulatory standpoint, this has made interventions necessary to allow for an analysis and the identification of the actual limits of government deposits subject to the ECB decisions, and to then be able to adopt solutions aimed at achieving a uniform and efficient liquidity management.

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In more detail, the regulatory intervention introduced by the 2015 Stability Law concerned Articles 2, 3, 5 and 44-52 of the CPDA and principally pursued the objective of adapting the national legislation to meet needs created by recent EU provisions, while also cutting back on certain procedures and thus facilitating the movement of the Treasury’s liquidity and a more efficient use of public debt management instruments.

The arrangement used to determine the management and remuneration of the cash balances held in the Bank of Italy must conform with the ECB directives, with the possible application of negative interest rates, in line with monetary policy decisions. In this respect, the regulation has provided that the limits of government deposits subject to monetary policy directives are defined by the designated decree issued by the Ministry of the Economy and Finance, in agreement with the Bank of Italy.

Another significant change concerned the balances of the Fund for the Amortisation of Government Securities, related to the above-mentioned ECB directives since the latter pertain to all total government deposits and do not permit distinctions to be made between deposits according to specific, related purposes. The regulation has therefore provided for the transfer of the Fund for the Amortisation of Government Securities to the Cassa Depositi e Prestiti S.p.A., in order to contain – to the degree possible – the application of penalising interest rates on the balances concerned.

In 2015, preparations were therefore made for a demanding year ahead, one in which the objectives of achieving a new regulatory framework would be pursued, by identifying solutions that are effective yet far from easy, in line with EU directives and, at the same time, consistent with the needs of the MEF and with money-market conditions.

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II. TREND OF ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK

II.1 MONETARY POLICIES AND THE MONEY MARKET IN THE EURO AREA

Monetary policies in the Euro Area

2015 was characterised by a European macroeconomic context with low growth prospects in GDP and commodity prices, despite efforts by the European Central Bank to use all measures and new, non-conventional instruments at its disposal, to cope with the risks involved in such a prolonged period of low inflation.

Already at the time of the 4 December 2014 press conference given by the ECB Governing Council, the latter believed the stimuli produced by the provisions then in place to be inadequate, and had expressed intentions to speed up the technical preparation of further non-conventional measures, which, if necessary, would be promptly adopted. These statements implied that a wide-ranging Quantitative Easing (QE) programme would soon be launched and would include direct purchases of government bonds issued by Euro Area Member States, by implementing the Asset Purchase Programme (APP) that began in 2014.1

The expected expansion of the APP was announced on 22 January 2015 by the ECB Governing Council, allowing also for the purchase of central government bonds issued by Eurosystem countries. In this way, combined monthly public and private asset purchases would amount to a total of €60 billion. The new programme, entitled Public Sector Purchase Programme (PSPP) was launched on the secondary market on 9 March, and was planned to continue up until September 2016 or until improvements in the inflation profile became discernible. Purchases would take place and be divided on the basis of the ECB’s capital key by Euro Area central banks, each with an initial share purchase limit set at 25 percent.

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1 At its 4 September 2014 meeting, the ECB Governing Council had announced, starting October, two purchasing programmes involving refinancing operations: one related to securitised assets such as ABS (asset-backed securities), on the basis of which the Eurosystem can acquire securities issued credit securitisations in the non-financial private sector of the Euro Area, and the other related to bonds guaranteed and issued by monetary financial institutions based in the Euro Zone (covered bonds).

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II. TREND OF ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK

These interventions, in addition to preceding monetary-policy measures, have in fact produced significant results on the financial markets, contributing further to bring down the main money-market rates and lessen the debt load held by businesses and families, whose requests for credit have been facilitated.

Furthermore, on 25 March and 24 June the third and fourth operations aimed at longer-term refinancing were announced. Known as Targeted Longer-Term Refinancing Operations (TLTRO-I and II), TLTROs are aimed at supplying credit to the non-financial private sector. These operations consist in the carrying out of quarterly auctions for two years, starting September 2014, and are aimed at improving the monetary-policy transmission mechanism and facilitating the conditions for the disbursement of credit to the real economy, while also promoting economic recovery and the achievement of levels of inflation in line with the European Central Bank’s targets.2

At the meeting in early September, even in the face of the new risks of a decline in growth and inflation prospects, additional ECB accommodating monetary-policy measures were announced. Specifically, in relation to a government asset purchase programme, the ECB decided to increase the single issue share limit, after the first six months of purchases, from 25 percent to 33 percent.

The combined effect of these interventions was that of producing a yet more marked increase in the banking system’s liquidity, to the extent of causing a highly reduced participation at the fifth allocation of the TLTRO on 30 September.

The expansive operations conducted by the European Central Bank during 2015 widely favoured the flow of credit to the private sector and an additional moderate curve towards historically low levels of the main money-market rates. This demonstrated the capacity of such instruments, which did not however lead to satisfactory results in terms of inflationary trends.

At its meeting on 3 December, the ECB Governing Council then intervened again with various provisions. First of all, the monetary-policy rates corridor was revised through a lowering of the interest rate on the deposit facility by 10 basis points to -0.30 per cent. The interest rate on the main refinancing operations (MRO) and the rate on the marginal lending facility (MLF) instead remained unchanged, at 0.05 percent and 0.30 percent respectively.

The interest rate on the main refinancing operations and the rate on the marginal lending facility remained unchanged at their levels of 0.05% and 0.30% respectively during 2015. The TLTROs are targeted operations, as the amount that banks can borrow is linked to their loans to non-financial corporations and households.

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2 In TLTRO transactions each operator has access to financing proportional to the total borrowing already supplied to the non-financial private sector of the Euro Area (excluding house mortgages for households) and the liquidity conceded through this type of operation may be returned by the counterparties after 24 months and not later than September 2018.

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FIGURE II.1: ECB MONETARY POLICY: INTEREST-RATE CORRIDOR 2012-2015 (rates in %)

At the same meeting held in December 2015, it was decided to extend the APP: the monthly purchase of €60 billion under the APP would continue to run until end-March 2017 or, if necessary, beyond, until the ECB could see adjustments consistent with its aim of achieving inflation rates below, but close to, 2% over the medium-term period. Moreover, the PSPP’s types of purchases increased to include euro-denominated marketable debt instruments issued by regional and local public administrations of the Eurosystem. Furthermore, it was decided that the principal payments on securities purchased under the APP as they mature, for as long as necessary, would be reinvested in the same project.

The ECB also reaffirmed its intention to continue conducting the main refinancing operations and those longer-term ones with 3-month maturity through fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2017.

Finally, in the last month of the year, the sixth TLTRO allocation took place on 16 December and was marked by a very contained participation, as had been the case in September.

The Euro Area money market

As already seen, the 2015 market trend was significantly impacted by the ECB’s monetary-policy decisions, starting in 2014 and extending significantly throughout the following year.

In fact, with the decisions taken in June 2014, the ECB had cut the reference rates for the sixth consecutive time, setting a negative rate for the first time – the deposit facility interest rate at -0.10 percent. They had also established that government deposits held in national central banks that exceeded a threshold of 0.04 percent of the GDP would be penalised by being subject to the deposit facility when negative. A similar penalty had been introduced for financial institutions that hold liquidity at a level above the reserve requirement.

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These and many other interventions put into action during 2014 had already led to interest rates being reduced to extraordinarily low levels and generated a huge liquidity injection into the money market, causing a decisive fall in resources demand.

As mentioned, during 2015, although the reference rate for the Eurosystem (main refinancing operations, MRO) and the marginal lending facility (MLF) remained unchanged at 0.05 percent and 0.30 percent respectively, the deposit facility (DF) rate was reduced in December 2015 by an additional 10 basis points, from -0.20 percent to -0.30 percent. With this arrangement the ECB therefore adopted a monetary policy approach that widened the corridor rates downwards: whilst maintaining unchanged and in positive territory the cost of borrowing from the system’s liquidity, the penalty rate applied by the central bank to excess balances was increased. These arrangements are therefore attempting to have an impact on credit supply to the economic system and to promote a more efficient functioning of interbank market liquidity.

As for monetary market rates, during 2015 there was a continuous decline, which led to yields being firmly placed in negative territory. This trend is summarised below in Figure II.2 by the 3-month EURIBOR rate (Euro Interbank Offered Rate), which at the start of the year was still positioned at positive levels, even if close to zero, but gradually declined to ever more negative levels.

FIGURE II.2: TREND OF OVERNIGHT MONEY MARKET RATES AND RATES AT OPTES AUCTIONS IN 2015 (rates in %)

The cut in the deposit facility (DF) by the ECB in December immediately led to a variation in the EONIA (Euro OverNight Index Average) rate, the money market’s reference rates on very short-term maturities. This situation is clearly shown by the Figure above, which demonstrates the associated decrease in the two rates at year-end. Furthermore, an analysis of the trend of the EONIA rate in 2015 shows how it is coming closer to the DF level, gradually differentiating itself from the MRO rate; this may be viewed as a clear symptom of excess liquidity in the system.

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II.2 EURO AREA BOND MARKETS

During the final months of 2014, the macroeconomic indicators, both final and leading, did not predict any clear signs of a European economic consolidation in terms of real interest rate and inflation growth, with the latter still far from reaching the European Central Bank target, and confirming the overall trend that had emerged with regard to the remainder of the year. This macroeconomic context fostered a decline in European government securities rates which was distributed quite generally across the entire range of the yield curve, starting from very short-term maturities up to longer ones such as the 30-year segment.

What drove the trend in government securities rates, both in the last months of 2014 and the beginning of 2015, was largely the anticipation – later confirmed – of an intervention of an extraordinary nature on the part of the ECB aimed at bringing inflation rate expectations back to levels in line with its objective. On 7 January, following the publication of Eurostat’s HICP3, that showed the December annualised rate of inflation at -0.2 percent and the fall in oil prices headed towards 50 USD a barrel, market participants’ expectations regarding an imminent, additional move by the ECB became widely prevalent. However, in this instance the markets turned less towards traditional political monetary interventions, to do with the rates or monetary aggregates, but rather towards the use of non-conventional instruments such as Quantitative Easing. The effects of these expectations on absolute rate levels and on the slopes of the curves became increasingly evident. Participants, in fact, expecting the ECB intervention (then confirmed by decisions made by its Governing Council transmitted at a press conference held 22 January), began to preempt the ECB action by accumulating massive purchase orders largely of government securities issued by Euro Area countries, and above all, those that were offering the highest yield. Therefore, from January until the first ten days of March 2015, the absolute rates on 10-year maturities of countries such as Italy and Spain were reduced by over half a percentage point, while that of countries like Germany and France declined by about one-quarter of a percentage point.

At the above-mentioned ECB January meeting, details regarding the QE were communicated under the title of Public Sector Purchase Programme (see in-depth Focus provided below). Following the launch of the operational programme in March, the tendency towards reductions in rates continued, albeit with greater intensity in so-called “core” countries, namely Germany and France, which has consequently brought with it a progressive weakening of the trend of reduction in the rate spread between the “core” countries and the “non-core” ones like Italy and Spain. In fact, at mid-March, the Italy-Germany spread on 10-year maturities reached a minimum level of approximately 90 basis points, after having started off at about 140 basis points at the beginning of January.

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3 HICP: the acronym for Harmonised Index of Consumer Prices, which measures consumer price inflation in the Euro Area.

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FOCUS   Implementation details on the Public Sector Purchase Programme (PSPP) On 22 January 2015, the Governing Council of the European Central Bank (ECB) announced its programme of making purchases of marketable debt instruments issued by Euro Area central governments and public agencies, as well as European supranational institutions, known as the Public Sector Purchase Programme (PSPP). Government bonds have therefore become a part of the assets acquired by the Eurosystem – along with the ABSs and the government-guaranteed bank bonds – aimed at supporting expectations regarding inflation and, more generally, at stimulating economic activity by reinforcing business and consumer confidence. With the implementation of the PSPP, the Eurosystem proposed to conduct purchases gradually and with the use of a wide base of instruments, aimed at achieving neutrality vis-à-vis the market and to avoid interference with the market price formation mechanism. In its decisions of January 2015, the ECB announced an intervention period lasting until at least September 2016 and, in any case, until the ECB Governing Council sees a sustained adjustment in the path of inflation, consistent with its objective of achieving inflation rates below, but close to, 2 percent over the medium term. The overall size of the programme of public and private (ABSs and government-guaranteed bank bonds) asset purchases amounted to €60 billion per month. During 2015, purchases of securities under the PSPP were distributed among the national central banks (NCBs) on the basis of their respective shares of participation in ECB capital (capital key).4 Part of the purchases, equal to 8 percent of the total, was executed by the ECB itself; an additional 12 percent was carried out by the NCBs, having exclusively involved securities of a number of European supranational institutions. These two shares, equivalent to 20 percent of PSPP asset purchases by NCBs, will be subject to a regime of loss sharing. With regard to the sharing of possible losses, risk management for the remaining 80 percent will fall upon the individual NBCs. This share comprises public national bonds acquired by each NCB on the basis of a criterion of specialisation, calling for each NCB to conduct purchases of securities issued by its own national government. PSPP purchases in 2015 involved bonds with a life of between two and 30 years; the programme also includes inflation-indexed and variable rate coupon government securities (therefore, in Italy’s case, even the BTP€i, BTP Italia and CCTeu). The PSPP allowed into its programme transactions that had a secondary market yield, when purchased, above the Eurosystem’s overnight deposit rate. Finally, additional limits on issues were introduced in order to avoid distorting the market price-setting process and/or potential obstacles to the possible application of Collective Action Clauses (CAC). Specifically, the issuances respected the 33 percent limit on each individual issue5 and that of 33 percent on debt securities issued by each national government and public agency in the Euro Area or by European institutions. Respect of the two thresholds was assessed by taking into account the overall holdings of the Eurosystem, also in terms of aims other than those concerning monetary policy, including securities held in NCB’s investment portfolios. Moreover, in order to preserve the markets’ liquidity and functionality, securities held by the Eurosystem after the purchases were made available by the NCBs to financial intermediaries though securities lending transactions. On 9 March 2015, the Bank of Italy, on behalf of the Eurosystem, started making purchases of Italian public sector securities. The purchases were carried out on the secondary market through the main national and international dealers. Between 9 March 2015 and the end of the year, the Bank of Italy purchased around € 62 billion of bonds, with a total value of slightly more than €71 billion due to the bonds’ prices

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4 Italy’s capital key is approximately 17.5 percent.

5 The threshold was raised from 25 percent to 33 percent with the decision of 3 September 2015.

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which for the most part were issued at a premium. Purchasing activity during the course of 2015 was very constant (the daily average of purchases was slightly over €300 million) and distributed in a way that was consistent with the actual debt structure based on the residual life of each security. Hence the purchases were conducted in a neutral manner with regard to debt management policy, without excessively influencing certain maturities or segments of yield curves. At end-2015 the average residual life of the PSPP portfolio made up by Italian government bonds was of 9.3 years (for the overall public bonds bought by the Eurosystem it was equivalent to 8 years).

As of 2 April 2015, securities purchased under the PSPP were made available for securities lending, to avoid non-compliance phenomena and to counteract distorted market episodes. The securities lending service takes place in a decentralised manner by Eurosystem national central banks, and is provided by the Bank of Italy6 through the international central securities depository Clearstream and includes fail coverage activities in support of settlement (Automated Securities Lending and Borrowing Service – ASL) and strategic market activities (Automated Securities Lending Plus – ASLplus). These transactions take place on a cash neutral basis under the system’s liquidity profile: collateral-guaranteed spot transactions are offset by complementary transactions for the same value date, and in principle, with the same counterparty.

From the standpoint of the impact on the market’s functioning, the analyses carried out and the feedback received from market participants, the purchases of Italian government bonds under the PSPP do not appear to have had particularly significant consequences during 2015. Market dynamics continued to produce their own effects; there was neither an apparent structural change nor changes in its operations or participants. Despite the continuous presence of the central bank in purchases, neither were particular tensions noted on the securities outstanding overall nor problems related to a lack of availability on the securities’ settlement days. In this sense the repo market (market sale and repurchase agreement collateralised with government bonds) has carried out its essential function satisfactorily, guaranteeing successful trading on the repo market. Even the listing of securities on the repo market has been quite steady and does not appear to have been affected by the central bank’s purchasing activity.

The feedback received from participants has collectively confirmed that the central bank’s purchasing programme has not altered the liquidity or the process of trading in Italian government bonds.

The scenario at the end of April, however, changed radically. After months of accumulated positioning on a number of Euro Area countries’ securities, various market participants put in place concrete strategies. This took place in a context that was characterised by a degree of liquidity that was in any case structurally inferior to that of the years preceding the financial crisis beginning in 2007-2008, leading to a sudden rise in the bond yields of all European countries. From 28 April, in a little less than a week, yields on German and French 10-year issues rose more than 40 basis points (0.40 percent) and the Italian yield by about 35 basis points. In just a few days, the movement reached 20 basis points, even in the absence of any specific news sufficient to induce these kinds of market dynamics.

The volatility described above has triggered an extensive debate between sector analysts and participants on the subject of the liquidity of government bonds on the secondary market, bringing to the fore several considerations that

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6 This service came into operation on 11 May 2015.

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had already emerged as the result of certain market events during 2014.7 There was a renewed questioning of the underlying causes of market reduction in structural liquidity, to which there continued to be two prevailing replies: on the one hand, the diminished capacity of dealers and market makers to absorb the shocks dealt by elevated directional buy/sell flows, mainly due to the strong deleveraging process that many banks had undergone after the crisis and reorganisation within the regulatory framework for banks and financial intermediaries at both global and European levels; and on the other hand, the spontaneous aggregation processes in the asset management industry that led to a sharp concentration of securities positions at the few large investment funds available.

With regard to the first case, new regulations defined a revision of the business model for many investment banks, taking into consideration the heightened cost of capital and a series of new criteria to be used to place that capital within different operational areas; as for the second case, the highest level of asset management concentration not only determined the conditions for holding massive amounts of liquidity managed by only a few stakeholders, but it also provided an incentive to the so-called herding behaviour, on the basis of which investment choices made by a significant number of smaller investors are increasingly led by the few large investors, bringing about a significant, growing  uniformity in market views with those of the chief players. This shows that market fluctuations tend to become increasingly more sudden and expansive, as the market is unable to find a solid base of counterparties characterised by diversified investment choices and therefore also dissimilar to each other. The market’s strong inversion at end-April continued in the months of May and June, aided by the concurrent talks between the Eurogroup and the Greek government on extending a bail-out plan and the related risks of a breakdown, which could have led to Greece’s failure to reimburse securities reaching maturity and technically defaulting with all the risks involved, not least of which being having to exit the Euro Area. The matter reached more dramatic proportions when, in the month of June, Greece decided to hold a popular referendum on whether to accept the bail-out conditions proposed by the Eurogroup. Although the outcome was against the plan’s adoption, during the following days the Greek government and the Eurogroup were in any case able to conclude their agreement and update the bail-out plan. A degree of recovered optimism on the markets allowed for a decline in rates, also allowing for a renewed reduction in the Italy-Germany spread for 10-year maturities, after having reached a peak of 210 basis points in the wake of this latest Greek crisis.

This new phase of optimism was, however, short-lived, seeing as the state of the world economy had once more become a chief concern with, from one angle, increasingly concrete signs of a slowing down of the Chinese economy and its resulting effects on emerging countries  – the economies of which are particularly tied to the export of primary products – and, from another, the continuing fall in oil prices, resulting from both geopolitical causes and the perception of a global economic slow-down in and of itself. In this context, the trend in government

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7 For more information see Chapter IV, Public Debt Report 2014.

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securities rates during the summer months lacked any real direction, with rather wide variations in the fluctuation bands, due also to the typically scarce liquidity at this time of year.

On the other hand, September started off with on a relatively positive note, after an ECB meeting on 3 September at which an increase was announced, within the public sector purchase programme, in the issue share limit from the initial limit of 25 percent to 33 percent of nominal volume circulation. This intervention, together with other signals sent out during the press conference that followed, persuaded the intermediaries to anticipate additional ECB action if the measures taken failed to effectively restore a stable process aimed at returning to inflation levels at close to 2 percent. Another positive impetus given to the performance of the bond market – increasingly driven by the expectations and outcomes of the various central banks’ meetings – came as a result of an ECB meeting on 22 October, at which a multitude of risks was outlined: growth well below its potential level; a fall in the price of oil; appreciation of the euro’s nominal exchange rate and an excessive correlation between short-term consumer price dynamics and long-term expectations. Consequently, once again expectations were established among institutional investors that there would be a timely intervention on the part of the central institution if these risks should become more marked. Rates have therefore resumed a downward trend in all of the Euro Area’s government bond curves and on all points of the yield curve. This trend has enabled the Treasury to finance itself for the first time at negative rates: on 28 October 2015 an auction was held of 6-month BOTs at a rate of -0.05 percent.

The last part of 2015 saw yet again a change in the market participants’ disposition. Even though expectations regarding the ECB’s future moves continued to play a decisive role in stabilising markets, the decline in yields had substantially come to a halt in all European countries. Driving this phenomenon were the expectations of a rates increase on the part of the U.S. Federal Reserve (FED) – which was then postponed – and geopolitical factors causing uncertainty, linked firstly to expectations, and then to the outcome of electoral consultations, in October in Portugal and in December in Spain. In this context, the effects of worsening rates on core and peripheral markets were nonetheless limited thanks to the above-mentioned encouraging signs given by the ECB.

II.3 TREND OF THE MARKET OF THE ITALIAN GOVERNMENT SECURITIES

Trend of the yield curve

Overall, in 2015, the dynamics of yield rates of Italian government securities (see Figure II.3) displayed a change for the most part similar to that generally shown by securities of other issuing European governments. The macroeconomic events and monetary policies that have taken place have had rather homogeneous effects over the whole Euro Area, as described in more detail in the preceding paragraph.

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FIGURE II.3: TREND OF EUROPEAN GOVERNMENT SECURITIES YIELD CURVE – 10-YEAR MATURITY (rates in %)

During 2015, the yield ranges on the 10-year segment have been quite clear. In the month of March the minimum low of 1.12 percent was hit to then reach the year’s maximum in the month of June at 2.38 percent. However, a comparison between the yield levels at the start and end of the year shows that rates stayed almost unchanged or lowered slightly from 1.73 percent to 1.63 percent.

FIGURE II.4: MARKET RATES ON GOVERNMENT SECURITIES – 2-/3-/5-/10-/15-/30-YEAR ISSUES

(rates in %)

In the case of more short-term instruments, aside from the BOTs, which had already shown negative yields on the secondary market during 2014, even rates for securities with residual life of up to two years entered, for the first time, negative territory. More generally, it should be noted how the whole nominal segment of the yield curve up to the 5-year segment showed more strength than the 10-year

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segment, with a change in rates that is markedly less volatile and a clearer long-term trend towards reduction as, for example, in the 5-year segment where the rate at the start of the year was 0.93 percent and declined to almost 0.55 percent at year-end. Hence, after the first quarter of 2015, during which market forces largely favoured the 10-year rate, the tensions that arose on the macroeconomic and geopolitical front – especially due to the initial absence of a deal on the financial assistance programme to Greece – penalised the intermediate segment of the curve. On the other hand, if one looks at the slope of the structure of final Italian rates across the entire range of 2- to 10-year issues, it can be seen how this has increased, moving from 97 basis points – the minimum at mid-March – up to about 160 basis points at the end of the year (see Figure II.5). Consequently, the ECB action has, both through the PSPP as well as the reduction in deposit rates, clearly allowed for a form of anchoring of all money market rates, which have inevitably steered short-term segment government rates to a relatively greater extent.

FIGURE II.5: YIELD DIFFERENTIAL BETWEEN 10- AND 2-YEAR GOVERNMENT SECURITIES (basis points)

Another key element during 2015 was that of the performance of the long-term stretch of the Italian’s yield curve, thanks also to the inclusion of issues of securities with up to the 30-year maturity in the PSPP. The position of 30-year maturities has in fact gone from approximately 3.20 percent at the start of the year to 2.70 percent at the year’s end. Therefore, the slope in the 10- to 30-year stretch of the curve declined by about 40 basis points, reaching a level of around 110 basis points (see Figure II.6). This aspect played a very relevant role for Italy with regard to that segment - the 15- and 30- year stretch – which has historically tended to sustain an extra cost that is decidedly above that of many other European issuers: in so far as this increase has been scaled down, spaces have been opened up that allow for the pursuit of an issuing policy aimed at lengthening the average life of debt in conditions permitting greater cost effectiveness.

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FIGURE II.6: YIELD DIFFERENTIAL BEWTWEEN 30- AND 10-YEAR GOVERNMENT SECURITIES, 2014-2015 (basis points)

Even the trend of the spread of Italian government securities as compared to that of the German government bonds (see Figure II.7) showed a profile similar to that of absolute rates of yield, with a compression in the yield spread in the first quarter, a widening up until the middle of the year and then, with the agreement reached between the EU and Greece, a gradual decline that stopped at around 100 basis points in the last months of the year.

FIGURE II.7: BTP-BUND YIELD DIFFERENTIAL ON 10-YEAR BENCHMARK, 2015 (basis points)

The improvement in perception of Italy’s credit risk was also reflected by the narrowing of differentials in Italian government bond asset swaps8, which measure the credit spread on Italian bonds against a monetary rate such as the 6-month

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8 Government bond asset swap refers to the spread to add to the 6-month Euribor rate to obtain a stream of 6-month Euribor-indexed variable cash flows equivalent, on present value terms, to those of the reference security.

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Euribor. Compared to end-December 2014, this differential shrank from +44 basis points to +6 basis points for 3-year BTPs, from +109 basis points to +63 basis points for 10-year BTPs and from +207 basis points to +115 basis points for 30-year BTPs.

While, as already discussed extensively, the performance of the Italian debt compared to money markets and countries with higher creditworthiness and is largely the result of ECB interventions. One should not, nonetheless, overlook the role played by improvements in the public financial framework which, as described below in Chapter III, saw in 2015, both a deficit level that remained steadily below 3 percent of GDP, as well as a debt-to-GDP ratio that, after consistently increasing over several years, finally stabilised. These outcomes mean that it is possible to confirm the structural improvement of public accounts even in view of a return to a positive real GDP growth, and therefore a definitive improvement in the perception of Italy’s quality as a debtor country by investors in its sovereign public debt market.

Trend of the secondary market

General premise

In 2015, the secondary market for government securities obviously suffered from the various events that characterised that year, but it also continued to supply interesting evidence regarding certain structural tendencies already mentioned in Section II.3 of this chapter, when it referred to the new ECB regulatory and supervisory framework in the banking and financial sector and the restructuring of the asset management industry. However, 2015 did bring with it an element of novelty that was widely predominant throughout the year, and that was the ECB’s continuous presence as purchaser, both with its central entity and through national central banks.9

The ECB’s presence on the market as a new, important counterparty – and the fact that its behaviour was characterised by regular operational modalities and sufficient transparency extending across all the government’s maturities profile (from two years to the 30-year segment) – has enabled market makers to carry out their role as dealers, placed between issuer and final investor, thus maintaining greater containment of the related risk of holding long positions on securities. The activities of these intermediaries have therefore been facilitated, consequently favouring the liquidity of the secondary market.

On the other hand, having a counterparty that trades sizeable volumes in only one side of the market, purchasing significant amounts on each bond, could represent a concrete risk in terms of liquidity reduction. This was not the case of the Italian government securities market in 2015, given also the high number of securities making up the public debt and the average available nominal amount of each of these.10

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9 See the in-depth Focus included in this chapter.

10 It should be added that in May the Bank of Italy established a securities loan mechanism through which it can in fact lend the market securities in its issues portfolio through purchases executed under the PSPP (see in-depth Focus at the beginning of the chapter). This mechanism was brought about by the international central securities depository Clearstream.

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Wholesale market and related contribution of Government Bond Specialists

The regulated MTS Italia platform, where dealers and market makers operate exclusively (known as the interdealer market), is the one on which the Treasury currently monitors and evaluates the Government Bond Specialists’ activity on the wholesale secondary market, and as such represents the point of reference for analysing changes in this market.

Repo segment

Compared to 2014, the volumes traded on the MTS platform in 2015 registered a significant decrease, which was particularly pronounced in the second and third quarters, but saw partial recoveries during the last months of the year.

FIGURE II.8: MONTHLY VOLUMES TRADED ON MTS PLATFORM (€ mn)

In terms of the various sectors (see Figure II.9), the BOT segment was the only one to show a degree of resilience – with an annual rate decrease of only around 4 percent. The sector that suffered most from the reduction in trading was that of the nominal BTPs, which suffered an annual decline of over 25 percent. Periodic reductions were seen also in all of the other segments – of the CCTeus, CTZs and BTP€s – albeit within annual percentage ranges closer to those of the BTPs than of the BOTs. The infra-annual data for the various segments reflect the overall trend, with very pronounced declines in the second and third quarters and a significant recovery in the last quarter, particularly in the case of BOTs and CTZs, which recorded volumes above those of the last quarter of 2014.

Therefore during 2015, despite the substantial presence of the ECB through the QE, the inter-dealer market for Italian government bonds witnessed a substantial contraction in volumes traded in the periods of the year that were characterised by heightened tensions, resulting in a considerably increased volatility.

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FIGURE II.9: QUARTERLY VOLUMES TRADED ON MTS, BY SEGMENT (€ mn)

When analysing the volumes by maturity ranges, it is clear in this case as well as that of very short-term securities (namely BOTs, CTZs and BTPs with residual life under the time remaining until end-year) had suffered a modest decline, while for all other segments – except for the 7-year segment – the reductions have been more substantial, even above 30 percent in many cases.

FIGURE II.10: QUARTERLY VOLUMES TRADED ON MTS, BY MATURITY (€ mn)

Liquidity, as already extensively discussed in other sections of this report, is a multi-dimensional phenomenon that lends itself to being measured on the basis of a number of different perspectives. Ordinarily the bid-ask differential on the market makes it possible to obtain an initial and immediate perception of the phenomenon even though its actual measurement remains one that is absolutely non-exhaustive. The figures that follow demonstrate the trends exhibited by this measurement of a series of maturities: the effects of a diminishing liquidity would appear to have had a particularly notable effect on long-term instruments, while the performance of the short-term ones was very satisfactory. As can in fact be

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deduced from Figures II.11a, II.11b and II.11c, for the points of the 3-year nominal BTP curve and of the CTZ the differential remained steadily within the range of a few one-hundredths of the price. The volatility of this differential on 5-year BTP and CCTeu segments has been more wide-ranging, while always remaining within contained levels. Among the long-term securities the performance of the 10-year BTP securities, as opposed to the 15- and 30-year BTP securities, has been very stable. The latter two spreads suffered a substantial widening, reaching up to 60 and 80 basis points on the price respectively during the year’s more turbulent phases.

FIGURE II.11a: BID-ASK DIFFERENTIAL ON 10-, 15- AND 30-YEAR BTPS, BENCHMARK SECURITIES, AS REPORTED ON THE MTS PLATFORM

FIGURE II.11b: BID-ASK DIFFERENTIAL ON 3- AND 5-YEAR CCTEUS AND BTPS, BENCHMARK SECURITIES, AS REPORTED ON THE MTS PLATFORM

The inflation segmen, in addition to being a segment which in 2015 saw a modest share of trading with respect to total government securities, showed an

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erratic movement on the bid-ask differential front, typical of securities that are characterised structurally by reduced liquidity.

In this case as well, it should be therefore noted how, in spite of the ECB having been actively trading in all of the segments (obviously excluding the BOTs and CTZs), as in 2014 the performances in terms of the liquidity of the different categories of instruments on the various maturities turned out to be widely differentiated and exceedingly tied to their intrinsic riskiness. This aspect tends to validate the theory that the phenomenon would appear to have been driven by structural factors linked to the development of market making and investors’ behaviours, which lead to their attributing far more weight to the risk characteristics affecting individual categories of securities.

FIGURE II.11c: BID-ASK DIFFERENTIAL ON 5- AND 10-YEAR BTP€IS, BENCHMARK SECURITIES, AS REPORTED ON THE MTS PLATFORM

Repo segment

Overall, in 2015, the repo market continued to play a fundamental role in ensuring the orderly execution of market-trading activity on the cash market, with volumes substantially in line with those of 2014. Although even this sector had been – and will be – impacted by the introduction of a number of excerpts from European legislation on the regulation and supervision of intermediaries and of financial markets, activity has continued to be quite vigorous on the part of market makers. After the migration, with reference to the new EU settlement cycle, to  T+211 came into force in October 2014, the importance of

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11 The change of settlement to T+2 as from 6 October 2014 was done as part of the measures aimed at removing cross-border settlement barriers at a European level, and was designed to increase the efficiency of the related process and the harmonisation in view of the migration to T2S (the new, ECB integrated European platform for managing securities settlement), while also reducing counterparty risk. In addition, European regulation on centralised management (Central Securities Depository Regulation – CSDR, EU Regulation No. 236 of 2012 and subsequent modifications) provides that the settlement of market transactions must occur, at the latest, within the second day subsequent to execution.

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II. TREND OF ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK

tomorrow/next contracts was reinforced as one of the chief contracts used immediately after spot/next ones (see Figure II.12).12

FIGURE II.12: MONTHLY VOLUMES TRADED BY CONTRACT MATURITY ON MTS PLATFORM (€ mn)

Government Bond Specialists on the platform used for evaluation

The weight of the Specialists, valued in terms of volumes traded to total volumes traded on the MTS platform, has remained almost constant at around 90 percent even in 2015. The remaining quota of about 10 percent is mainly traded by other market makers (non-Specialists).13 A remaining quota below 1 percent is traded by operatives who are dealers, not market makers.

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12 The tomorrow/next contract is used when a transaction is settled on the next business day after the day of the contract and matures the following business day; the spot/next contract is when a transaction is settled two business days after the day of the contract and matures the following business day.

13 Pursuant to Article 1, Paragraph 5-quarter of the Consolidated Law on Finance (TUF), “market maker” is an entity that offers its services at trading venues, on a continuous basis, and is willing to trade as a direct counterparty by buying and selling financial instruments at prices it has established. Qualification as a market maker is one of the essential requirements for acceptance as part of the List of Government Bond Specialists pursuant to Article 23, Paragraph 1 of Ministerial Decree 216 of 2009.

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FIGURE II.13: ANNUAL VOLUMES TRADED BY SPECIALISTS ON MTS PLATFORM (percentages)

Government Bond Specialists’ trading activity with investors

Volumes traded

The secondary market for Italian government securities comprises a number of additional segments aside from the regulated market of reference, selected for the monitoring and evaluation of the Government Bond Specialists. The principal source of information on activities carried out at these other trading venues is the Harmonized Reporting Format (HRF) report, a highly standardised and shared model on a European scale, which the Specialists compile themselves documenting all their trading activities with their clientele, whether through trading platforms or bilateral transactions in electronic or vocal formats. Since 2014, this reporting contains complete information on individual transactions executed by the Specialists, with the exception of transactions carried out with the ECB and national central banks when the latter are operating with the aim of executing their monetary policies (QE), with an indication, for each of the trades, of the security, quantity, counterparty’s country, counterparty type, and the platform or means for negotiation.

In 2015, on the MTS cash segment, as on all of the aggregate of the other electronic and over-the-counter platforms, the trend of the monthly volumes traded profile saw a particularly sharp decline largely in the second and third quarters (see Figure II.14), with reductions of around 27 percent and 33 percent respectively. Whereas, on an annual basis, the decline, while significant, levelled off at around 15 percent, thanks to a good first quarter and a far more contained reduction in the final quarter.

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II. TREND OF ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK

FIGURE II.14: MONTHLY VOLUMES TRADED BY SPECIALISTS ON PLATFORMS OTHER THAN MTS (€ mn)

Trades by type of counterparty

Information attained through HRF data, especially from the start of 2014, has taken on a far from negligible reporting significance, in that it can lead to highly in-depth analyses of the ongoing dynamics among investors in government securities. By gathering together the items of information contained in these reports,it is possible to monitor trends by segment, by geographical area and type of investor, as well as the liquidity present on the different trading platforms.

In relation to developments in demand by investor type, the charts below illustrate the trend of absolute volumes and net quantities (purchases less sales) traded by the main investor categories – banks, investment funds, pension/insurance funds and hedge funds – with the Specialists. As shown in Figure II.15, the chief investors in government securities were fund managers and banks, in terms of both absolute volumes and net purchases/sales. However, while the buy/sell flows of bank counterparties – after a particularly positive first quarter – showed a consistently downward trend, of over 50 percent compared to the first quarter, the investment funds maintained sizeable volumes throughout 2015, despite the decline as compared to the first quarter. It is worth noting how, for both the banks and the funds, net purchases were consistently registered throughout the whole year. With respect to 2014, the pension/insurance funds maintained constant trading flows in both absolute values as well as in terms of net quantities, even though they contributed relatively low percentage shares in comparison to the banks and investment funds. Finally, the hedge funds were generally net sellers of government securities and further reduced their presence with regard to absolute volumes traded.

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FIGURE II.15: QUARTERLY VOLUMES TRADED BY SPECIALISTS BY TYPE OF COUNTERPARTY (€ mn) – FUND MANAGERS, BANKS, PENSION FUNDS, INSURANCE COMPANIES AND HEDGE FUNDS

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II. TREND OF ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK

Trades by geographic area of counterparty residence

As for the analysis of the trend of demand by geographic area (subdivided into two categories of investors: Italian and foreign), 2015 did not show any particular divergences (see Figure II.16) in behaviour between domestic and foreign investors. Italian investors, after an excellent first quarter, sharply reduced absolute volumes traded in the second and third quarters and marginally increased volumes traded in the last quarter, going from approximately €370 billion in volumes traded in the first quarter to just €250 billion in the fourth quarter. The trend of quarterly absolute volumes traded by foreign investors was quite similar, as was the reduction of volumes traded between the first and final quarters, which was in the region of €140 billion.

Even in terms of net quantity acquired by Italian and foreign investors, the outcome was close to identical between the two: both provided an important contribution, reaching between €15 and €25 billion each quarter.

FIGURE II.16: QUARTERLY VOLUMES TRADED BY SPECIALISTS BY GEOGRAPHIC AREA OF COUNTERPARTY RESIDENCE (€mn)

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Trend of the BTP futures market

With regard to the trend of BTP futures contracts on Italian government securities with 10-year maturity – that which by far provides more liquidity than contracts on securities with 3- and 5-year maturities - Figure II.17 illustrates how the price trend correlates perfectly with the performance of the BTP benchmark on 10-year maturities.

FIGURE II.17: PRICE TREND OF BTP FUTURES AND TREND OF YIELD ON BTP BENCHMARK ON 10-YEAR MATURITIES (inverted scale on the right, in %)

It should be noted how the BTP futures contract on 10-year maturities continued to gain strength in terms of volumes and liquidity in 2015 (see Figure II.18).

FIGURE II.18: VOLUMES TRADED ON THE EUREX MARKET OF BTP FUTURES CONTRACTS ON 10-YEAR MATURITIES (number of batches traded)

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II. TREND OF ITALIAN GOVERNMENT SECURITIES MARKET IN THE INTERNATIONAL FRAMEWORK

From this viewpoint, using this instrument has become a means of protection against risks on the part of BTP holders, therefore increasing the desirability of purchasing of the Italian bonds by an increasingly wide-ranging pool of investors. On the other hand, in their daily trade flows, market intermediaries report trading activity on the futures segment carried out with counterparties with investment strategies based on macroeconomic analyses, or aimed at covering the risk taken by holding positions assumed on national asset classes other than sovereign debt. One cannot therefore exclude the existence of a degree of activity on BTP futures contracts that is detached from needs strictly tied to transactions in Italian debt securities, but which inevitably has consequences on the latter’s pricing activity, as the two instruments (securities on the one hand and futures contracts on the other) require a high level of correlation. It therefore follows that in certain phases or moments on the market, insofar as it is the futures market that is giving direction to the securities market and not vice versa, the latter market may feel the effects of strategies based on macroeconomic views (known as macro-hedges) and/or risk coverage derived from asset holdings in other sectors of the national economy.14

Trend of the sovereign Italian CDS

As Figure II.19 illustrates, the pricing trend of credit default swaps (CDS) on Italian sovereign securities with 5-year maturity (in USD) displayed a trend similar to that of the BTP-Bund spread on the same maturity. However, a more detailed analysis leads to recognition of some differences that became apparent in the trends of the two variables during the course of the year.

FIGURE II.19: PRICING TRENDS OF ITALIAN AND GERMAN CDS (USD) FOR 5-YEAR MATURITIES AND OF THE BTP-BUND SPREAD FOR 5-YEAR MATURITIES (basis points)

During the first months of the year and up until June, the BTP-Bund spread’s volatility was decidedly lower: once the PSPP had been announced this variable

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14 For example, in the case of banks and large companies of national importance.

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PUBLIC DEBT REPORT

fluctuated within a range of around 20 basis points while, in the same period, the CDS moved approximately twice as much. In some way, therefore, the ECB action resulted in a stabilisation of yield differentials between securities affected by the same purchasing activity of the central bank. With the intensification of the Greek crisis, and in spite of the PSPP, the spread’s level rose until it essentially reached the level of the CDS and displayed a degree of volatility similar to that of the latter. From this viewpoint, it is possible to affirm that the PSPP has proven to be essentially neutral in tense situations when perceptions of credit risk are heightened. During the second half of the year the securities spreads continued to narrow, due also to the effect of ECB purchases, while the CDS were characterised by the same dynamic, albeit in a less marked manner.

42 MINISTERO DELL’ECONOMIA E DELLE FINANZE

III. PUBLIC FINANCE FRAMEWORK

III.1 TREND OF STATE SECTOR BORROWING REQUIREMENT

In 2015, the State Sector cash balance was a deficit equalled €59,079 million, lower than that of 2014 by €16,675 million, and as compared to estimates calculated at end-2014 by approximately €10 billion.

The improvement with respect to 2014 stemmed both from an increase in the current account balance (+€6,651 million) and the increase in the balance in relation to financial transactions (+€10,219 million).

Among payments made in 2015, those that decreased were to social security institutions (-€468 million), local government institutions (-€1,569 million) and other local administrations, excluding the Regions and health expenditure (-€1,487 million), as well as transfers to the Treasury’s accounts from cash balances held by the Chambers of Commerce.1 In addition, transfers to the European Union decreased (-€1,015 million) and spending on interest payments (-€6,784 million), including that on the State Treasury’s current accounts which has itself decreased by €1,738 million.

There were increases on current transfers to households (+€5,739 million), partly due to the €80 bonus payment2, aside from sums for tax reimbursement and compensation (+€11,566 million)3and the transfers to State Railways (+€1,012 million) and to Poste Italiane S.p.A. (+€1,062 million), for the payment of arrears on the 2012 programme contract.

The improvement in the financial transactions balance is due to the fact that 2014 saw the disbursement of approximately €2,800 million for the final capital subscription to the European Stability Mechanism4 and the outflow of around €12,400 million for loans awarded to local entities for the liquidity to pay the public administration debts.5 In 2015, the above-mentioned loans decreased to approximately €3,750 million while, on the other hand, funding for the structuring of the Regions’ liabilities went ahead for a sum of around €3,240 million.6

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1 Decree-Law No. 190 of 23 December 2014.

2 Decree-Law No. 66 of 24 April 2014; converted with amendments in Law No. 89 of 23 June 2014.

3 Decree-Law 175/2014.

4 Law No. 116 of 23 July 2012.

5 Decree-Law No. 35 of 8 April 2013; converted with amendments in Law No. 64 of 6 June 2013.

6 Article 45 of Decree-Law No. 66 of 24 April 2014; converted with amendments in Law No. 89 of 23 June 2014.

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TABLE III.1: STATE SECTOR – CONSOLIDATED CASH ACCOUNT (data in € mn)
	2014	2015
Current receipts	516,290	543,970
including interest income	1,394	702
Capital accounts receipts	3,721	2,001
Total receipts	520,011	545.971
Current payments	556,332	577,361
Including interest expenditure	80,825	74,041
Capital account payments	23,370	21,845
Total payments	579,702	599,206
Financial accounts: net primary balance	19,740	20,104
Net interest expenditure	79,431	73,339
Financial accounts: net balance	-59,691	-53,235
Financial accounts	-16,063	-5,844
Primary balance	3,677	14,260
Final receipts	521,834	548,150
Final payments	597,588	607,229
State Sector balance	-75,754	-59,079

III.2 MATURITIES, ISSUES AND COVERAGE OF THE STATE SECTOR BORROWING REQUIREMENT

Maturities and reimbursements

In 2015, the volume of government securities maturing amounted to €378,204 million, less than the €391,836 million total maturing in 2014.

For the short-term segment, the maturities came to €174,552 million of BOTs, a balance that was significantly lower than the €198,490 million for 2014, which also included €481 million of commercial paper, thanks to a strategic reduction in the use of short-term debt instruments that began in recent years.

For the medium-/long-term segment, the securities maturing in 2015 equalled €203,516 million, made up by €195,958 million of domestic issues and €7,964 million of foreign issues: a considerable amount considering that reimbursements for 2014 totalled €193,396 million, of which €190,690 million were of domestic securities and €2,706 million of foreign securities.

To these figures must be added capital account payments corresponding to debt exchange transactions (of BTPs, CCTs and CCTeus), totalling €5,771 million. Therefore, the overall volume of reimbursed securities amounts to €383,975 million.

However, since €3,947 million was drawn from the resources of the Fund for the Amortisation of Government Securities, in 2015 the loan repayments budget chapters registered outflows of €380,028 million.

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III. PUBLIC FINANCE FRAMEWORK

Issues

In 2015, the amount of government securities issued7 came to €410,058 million, approximately 9.94 percent lower than the €455,300 million placed in 2014. On the domestic market, the volume of securities issued amounted to €406,058 million, whereas €453,569 million had been placed in the previous year.

In the short-term segment, €164,130 million of BOTs were issued, including €83,174 million of annual securities and €80,956 million of six-monthly securities. Given the already sizeable liquidity held by the Treasury, the issue of quarterly BOTs or flexible BOTS, characterised by non-standard maturities, was not deemed necessary. Including also debt exchange transactions, the total issues of securities for the year equalled €415,294 million.

Net issues8 for the year, namely, the coverage in terms of cash guaranteed by government securities, amounted to €41,579 million, and therefore approximately €17.5 billion lower than the State Sector’s final cash balance. The remaining quota was covered through the use of the Treasury’s Liquidity Account for around €11 billion and available liquid balances within the Treasury for approximately €6.5 billion, a part of which is already entered in the State Sector’s cash balance: this, for example, refers to payments made to Treasury accounts assigned to entities outside the public administration (such as funding the interest on mortgages payable to the Cassa Depositi e Prestiti [CDP] S.p.A., as well as the remuneration of the account held by the CDP S.p.A. at the State Treasury).

It should also be noted that the Treasury’s available resources need to take into consideration the balance of inflows and outflows due to the funding of the postal system carried out by the CDP S.p.A. with respect to the instruments for which it is responsible (with a negative value of around €4 billion), and the capital reimbursement of the postal savings bonds pertaining to the MEF for the approximate amount of €900 million.

TABLE III.2: ISSUES*, MATURITIES AND COVERAGE OF STATE SECTOR BORROWING REQUIREMENT (data in €mn)
	2015
Nominal issuesi	415,294
Issues at net proceeds (a)	421,157
Reimbursements (b)	379,578
Net issues (c) = (a) – (b)	41,579
Other forms of coverage held by the State Treasury (f) = -(d) + (e) – (c)	6,511
Total coverage (c) + (f)	48,090
State Sector cash balance (d)	-59,079
Change in the balance of the Treasury Liquidity Account as of 31-12-2015 vs. 31-12-2014 (e)	-10,989
*) Calculated for the entire year with the criterion of settlement date, and not the auction date.

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7 The aggregate is calculated by settlement date of the placement, and not the auction date.

8 Net issues are calculated by subtracting the maturities and the reimbursements from the value of the issues, valued at net proceeds. The BOTs, however, are calculated at nominal value (price 100) in that the difference with respect to 100 is advanced by the State Treasury. Reimbursements on non-recurring debt Securities (equal to €3,947 million) are obviously not included.

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III.3 STATE SECTOR BORROWING REQUIREMENT

The Public Sector borrowing requirement (balance), which corresponds to a considerable extent with the general government borrowing requirement9, is the aggregate of reference used to explain the change in the level of total general government debt determined over the course of a year. This is calculated starting from the State Sector borrowing requirement, which is governed by the same cash accounting and classification criteria, but with the addition of the cash balances of all the entities comprising the general government, with any necessary adjustments for consolidation.

In 2015, the Public Sector borrowing requirement amounted to €51,993 million (3.2 percent of GDP), a decrease of €18,138 million compared with the balance for 2014 (€70,131 million, equivalent to 4.4 percent of GDP). In comparison with the preceding year, the steady decrease in the borrowing requirement in 2015 can be attributed to the positive change in final receipts, which increased by €38,219 million compared to 2014 (+5.0 percent), but partly lessened by an increase in final payments by approximately €20,000 million (+2.4 percent) with respect to the level registered in the same period of 2014.

The interest expenditure that contributes to the Public Sector cash balance totalled €76,824 million, declining by approximately €7 billion against the corresponding figure reached in 2014.

TABLE III.3: PUBLIC SECTOR – CONSOLIDATED CASH ACCOUNT (data in € mn)
	2014	2015
Current receipts (a)	758,460	795,185
Capital accounts receipts	6,675	4,957
Financial accounts receipts	1,748	4,961
Final receipts (b)	766,883	805,102
Current payments (c)	786,185	802,842
of which interest expenditure (d)	83,830	76,824
Capital accounts payments	42,154	44,121
Financial accounts payments	8,675	10,133
Final payments (e)	837,014	857,095
Current account balance (a-c)	-27,725	-7,657
Primary balance	13,699	24,831
Balance* (b-e)	-70,131	-51,993
* The balance may not correspond to the differences in the components due to rounding.

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9 The two aggregates are calculated on the basis of the same account classifications, but they differ because of the criteria with which the privatisations proceeds are booked. In addition, the Public Sector balance is calculated by the State General Accounting Department (MEF) with respect to its components (receipts and payments), whereas the general government balance is computed by the Bank of Italy from the standpoint of coverage, namely, the quantities of new liabilities issued.

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III. PUBLIC FINANCE FRAMEWORK

III.4 GENERAL GOVERNMENT DEBT AND DEBT-TO-GDP RATIO

The revisions to nominal GDP made by ISTAT10, as those calculated for the general government debt by the Bank of Italy, resulted in a debt-to-GDP ratio for 2014 of 132.5 percent, a 0.4 percentage point increase on the level reported in the September 2015 Update of the EFD. In particular, a downward revision of GDP (of approximately 0.3 percent) was made, which incorporated the revision of national accounts data for the 2012-2014 three-year period carried out by ISTAT, and the debt increase (around 0.1 percent) as per regular statistical revisions.

The final debt-to-GDP ratio for 2015 totalled 132.7 percent, slightly above that of 2014. After seeing a continual rise in this ratio over many years (it had increased on average 4.7 percent each year since 2007), 2015 represents the first year to show substantial stabilisation.

Essentially, three factors contributed to this result: the best figure, in terms of expectations, for nominal GDP growth, which reached 1.5 percent (the GDP deflator was at 0.8 percent); strong improvement in the general government borrowing requirement, at approximately 3.2 percent of GDP (approximately €18 billion lower than in 2014, as described above); and finally, the reduction in the Treasury’s available liquidity of around €11 billion, which entailed a reduction in the issues of securities for coverage of the borrowing requirement. Furthermore, the reduction in issues over the year was also determined by the concurrent progressive descent in market interest rates that allowed for placements of significant volumes of low-priced debt securities (the impact on debt reduction due to low-priced issues was of approximately €6,000 million), and the use of resources accumulated by the Fund for the Amortisation of Government Securities, part of which went to reimbursing securities maturing during the year for a total of €3,947 million.

Comparing the 2015 outcomes with those forecast by the 2015 EFD Update, it is apparent how these had been over-estimated by around 0.1 percent in September of that year. This difference can be explained by the higher nominal GDP growth (of approximately 0.80 percent) on the one hand, and the fact that the debt stock dynamic was slightly lower than that estimated by the EFD Update (by around 0.05 percent), on the other hand. Specifically, the reduction in debt with respect to the estimates stemmed from an improvement in public finance balances, along with a reduction in comparison to forecasts of approximately 0.44 percent of general government borrowing requirement. To the latter, however, was linked an increase of 0.38 percent due to other factors, including the effect of carrying over much of the debt of the preceding year and the reclassification carried out by the general government’s National Resolution Fund – established to rescue certain credit institutions pursuant to Article 78, Decree-Law No.180 of 16 November 2015.

Also contributing to the public debt’s near stabilisation of 2015 were proceeds from privatisations and withdrawals of over 0.4 percent of GDP. The latter more than compensated for the impact on the public debt from the application of

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10 See ISTAT release, “PIL e Indebitamento delle AP” (“GDP and general government net borrowing”) of 1 March 2016.

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Eurostat rules regarding interest rate swaps (IRS) from exercising swaptions, an impact that is quantifiable by roughly 0.2 percent of GDP.

FIGURE III.1: TREND OF DEBT-TO-GDP RATIO, 2005-2015

III.5 NET BORROWING

General government net borrowing11 for 2015, as calculated on an accrual basis according to harmonised criteria at a European level defined by the European System of National and Regional Accounts (ESA 2010), reached approximately €42 billion, with a decrease of approximately €6.5 billion against the comparable figure for the preceding year. The ratio between net borrowing and GDP attained the target of 2.6 percent, in line with the value indicated in the 2015 EFD Update presented in September 2015.

Thanks to the ongoing decline in interest rates in 2015, interest expenditure (accrual basis) – as already seen in 2014 – has also been in decline: spending on interest reached €68 billion, falling by almost €6 billion compared with 2014. In terms of the ratio of interest expenditure to GDP there was a significant decrease of 0.4 percentage points, from 4.6 percent to 4.2 percent, a level which was slightly below the 4.3 percent estimate indicated in the 2015 EFC Update. Over €5 billion of this reduction was achieved by the general government: in particular, on approximately €4 billion in government securities, and on stock held by the State Treasury on behalf of non-general government entities for the remaining amount. In both cases, as noted above, falling interest rates played a crucial role, due in large part to the ECB’s launch of the PSPP12, aside also from the fall in inflation, both European and national, considering the impact on inflation-indexed securities (BTP€i and BTP Italia).

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11 See the “Notifica dell’indebitamento netto e del debito delle amministrazioni pubbliche secondo il trattato di Maastricht”, ISTAT, 21 April 2016.

12 See in-depth Focus “Implementation details on the Public Sector Purchase Programme (PSPP)" above, in Chapter II.

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III. PUBLIC FINANCE FRAMEWORK

TABLE III.4: KEY PUBLIC FINANCE AGGREGATES (DATA IN € MN)
	2014	2015
Net borrowing	-48,936	-42,388
% OF GDP	-3.0	-2.6
Public Debt	2,136,204	2,171,671
% OF GDP	132.5	132.7
Interest expenditure	74,340	68,440
% OF GDP	4.6	4.2
Primary balance	25,404	26,052
% OF GDP	1.6	1.6
GDP	1,611,884	1,636,372

III.6 RECONCILIATION BETWEEN REQUIREMENT AND BORROWING

The reconciliation between general government borrowing and the Public Sector borrowing requirement is prepared by the Ministry of the Economy and Finance and permits for representing the monetary offset of the economic transactions of the general government account.

The working components of the reconciliation1 between the Public Sector borrowing requirement and general government net borrowing are the following:

-   the financial accounts;

-   the cash-accrual difference;

-   the reclassification of transactions; and

-   the statistical discrepancy.

Notably, the financial asset accounts (receivables collection, granting of loans, equity investments and conferrals, etc.) form a component of the borrowing requirement, but are not included in the calculation of the net borrowing, which details only transactions of an economic nature. The layout for the reconciliation of the two aggregates therefore requires that they be subtracted from the Public Sector borrowing requirement in order to determine general government net borrowing. In 2015, the financial asset transactions amounted to €9,007 million.

In the general government account, transactions are quantified in accordance with accrual principles, while the accounting for the Public Sector account is carried out on a cash basis. The cash-accrual difference notes the time differences stemming from the booking of the income/expenditure transactions, and represents the changes in trade receivables/payables, or from timing differences in monetary regolarisation. In 2015, this difference totalled €4,941 million.

The general government net borrowing was also affected by interest received on the net cash balance from derivatives contracts, which is not permitted to be entered in borrowing accounts as of the entry into force of ESA 2010, but amounted to almost €3,200 million in 2015.

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13 See “Notifica dell’indebitamento netto e del debito delle amministrazioni pubbliche secondo il trattato di Maastricht”, ISTAT, 21 April 2016.

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As mentioned above, the classification of individual transactions by economic and financial categories are pursuant, with regard to the general government account, to ESA 2010 definitions and regulations; the calculation of the Public Sector borrowing requirement, however, is carried out in accordance with public accounting rules. The accounting reclassifications amounted to -€2,809 million in 2015.

Finally, the statistical discrepancy is calculated as a residual value and represents the aggregate of the differences between the borrowing requirement and net borrowing, resulting from factors other than those described above; this is mainly attributable to the use of different information sources in the calculation of the two aggregates. The residual item, or discrepancy, came to -€1.534 million in 2015.

TABLE III.5: RECONCILIATION BETWEEN PUBLIC SECTOR BORROWING REQUIREMENT AND GENERAL GOVERNMENT NET BORROWING (data in € mn)
	2014	2015
Public Sector borrowing requirement	-70,130	-51,993
Financial accounts, including in the Public Sector borrowing requirement	10,498	9,007
Cash-accrual difference	11,423	4,941
Reclassifications of transactions	-814	-2,809
Statistical discrepancy	86	-1,534
General government net borrowing	-48,936	-42,388

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IV. PUBLIC DEBT MANAGEMENT IN 2015

IV.1 ACTIVITY IN GOVERNMENT SECURITIES ON THE DOMESTIC AND FOREIGN MARKETS

The Treasury’s issuing policy has been chiefly aimed at reversing the downward trend in the average life of the debt, following its substantial stabilisation during 2014, and designed to help contain refinancing risk, as well as manage exposure to other market risks – including interest-rate and inflation risks – while prioritising the regularity and predictability of the issues. This strategy had the objective of ensuring the refinancing of the debt and to allow for the reduction of the cost of debt in the long term. The decisions had been clearly influenced by the macroeconomic and market contexts outlined above in Chapter II, upon which weighed heavily the ECB’s 22 January 2015 announcement regarding the PSPP and the subsequent launch, on 9 March 2015, of the programme of purchases of public sector securities by the Bank of Italy on behalf of the Eurosystem’s central banks.

Following the turbulence that affected nearly all of 2011 and 2012, and a gradual move towards normalisation on the part of the secondary and primary markets for Italian government securities during 2013-2014, 2015 continued to show a yet further strengthening of the Italian government securities market.

Already in 2014, improved market conditions led to a decrease in the cost of issues and a change in the mix of demand, with a rebalancing of investors’ portfolios in favour of longer maturities. There was also a full return to normal operations in the segments most adversely affected during the most acute phase of the crisis, namely the BTP€i and CCT/CCTeu segments.

FIGURE IV.1: GOVERNMENT SECURITIES YIELD CURVE 2014-2015 (% rates)

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In 2015, the return on short-term maturities revealed new lows from an historical perspective, reaching a negative value starting with the October auctions, while the annual cost of borrowing (measured on the basis of average yield weighed against the issues of each type of government security), hit an absolute low of 0.70 percent, declining notably as compared to the 1.35 percent figure for 2014. Again in 2015, compared to 2014, in terms of percentage of total issues it was possible to obtain a reduction in the share of shorter-term issues of segments – thereby increasing longer-term securities in both the nominal and inflation-indexed segments. As for the variable rate, the weighting of CCTs/CCTeus in relation to outstanding debt stock stabilised, even though net issues resulted positive.

Domestic securities

BOT

In line with the strategy outlined in Chapter I, based on a reduction in the issues of short-term instruments, the key operational objective for the BOT segment has been to continue the containment of issues (already initiated in preceding years), while both guaranteeing adequate liquidity to the BOTs on the secondary market and satisfying customer demand at the related auctions.

Consistent with this approach, the Guidelines for 2015 provided that the BOT issues for the year would be kept at levels that were relatively close to those of the preceding year. To reach this objective the placements would take place regularly for the 6- and 12-month maturities only, without prejudice to the Treasury’s option of also issuing quarterly or flexible securities, in the event of specific cash needs.

As arranged, starting in 2014, the percentage of the reopenings reserved for Specialists continued to be cut to 10 percent of the quantities offered at ordinary auction and, similarly, the scheduling of the auctions was left unchanged.

At end-January, however, a number of technical and regulatory changes to auction procedures managed by the Bank of Italy were introduced, to permit transactions at negative rates, which had previously been automatically excluded. These changes were needed because of the change in money-market yields, which first reached levels close to zero and then even negative ones. In this respect, it is helpful to keep in mind that BOTs, unlike other categories of government securities, are offered at auctions in which traders express their requests in terms of yield rather than price.

Thanks to a liquidity balance that exceeded expectations and the good performance of medium- and long-term placements, the Treasury was able to continue, even in 2015, cutting quantities issued through shorter-term instruments, as has already proven effective for several years. In fact, in 2015 a total of €164,130 million of BOTs was issued, compared with €182,407 million in 2014, with a 10 percent reduction in total amounts placed. The net issues were negative for both the 12-month security (-€7,299 million) and the 6-month security (-€3,123 million), for a total BOT reduction of approximately €10,422 million.

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Despite the fact that a slightly higher quantity was offered of the 12-month BOT as compared with the 6-month securities (€83,174 million vs. €80,956 million), the annual amount of securities outstanding decreased due mostly to the greater volume of reimbursements on this maturity during 2015. By virtue of the Treasury’s increased liquidity balance, there were no quarterly BOTs nor flexible BOTs placed at auction during the year.

The total amount of BOTs outstanding was hence reduced by over €10 billion and, at year end, accounted for 6.34 percent of total government securities outstanding, in line with the objective set out in the Framework Decree, which fixed the aggregate at between 4 and 12 percent. Comparing this figure with that seen in preceding years, shows what can be interpreted quite clearly as a strategic reduction of the short-term segment in relation to total government securities, with the additional aim of lengthening the average life of the debt: at end-2014 the quota of the BOT in fact totalled 7.04 percent, as compared with 8.19 percent in 2013 and 9.22 percent in 2012.

The reduction of the amounts offered contributed to keeping the bid-to-cover ratio higher; the ratio averaged 1.74 for the quarterly BOT and 1.70 for the annual security, compared with 1.64 and 1.65 respectively in 2014, and market participants’ fall in interest in shorter-term securities in a situation marked by a continuing reduction in yields.

In fact, 2015 stood out as having been the first year to register the placement of negative-yielding government securities. As mentioned above, a quick-paced decline in yields had been observed from the start of the year, bringing the average value to exactly zero, as measured on the basis of average yield weighed against issues at auction of quarterly securities in April (where, for the first time, placements included both positive and negative rates). The auctions that followed witnessed a slight upward shift in yields, to just above zero, while a renewed decline began during the last few months of the year, to the extent that historical lows were hit in November for both 6-month (-0.112 percent) and 12-month BOTs (-0.30 percent).

FIGURE IV.2: AVERAGE AUCTION ADJUDICATION RATE FOR 6 AND 12-MONTH BOTs -  2010-2015

(rates in %)

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This strong downward trend of short-term rates was obviously facilitated by a continuation of the ECB’s accommodating monetary-policy measures and the effect of the ECB’s buying government bonds, which – although not directly concerned with short-term instruments such as BOTs – also led to a progressive fall in yields on the money market. As shown in the preceding Figure, in 2015 the average auction adjudication interest rate for BOTs equalled 0.07 percent for the annual securities and 0.05 percent for the six-monthly ones, confirming a continuing, uninterrupted downward trend since 2011, aside from the shrinking of yields differentials between the two maturities, by now in the region of a few basis points.

The good performance of Italy’s short-term securities segment found confirmation in a comparison between the yields at auction and the interbank market rates for similar maturities observed the same auction day on the Euribor yield curve. Figure IV.3 in fact shows how the curve of the 6-month BOT in 2015 lies almost always below that of the 6-month Euribor, seeing as, with the exemption of the two auction placements in January and end-June, the BOT-Euribor spread has been consistently negative.

FIGURE IV.3: YIELD AT ISSUANCE OF 6-MONTH BOT AND COMPARISON WITH EURIBOR RATE – 2014-2015 (rates in %)

Note: This figure is based on the dates of tender operations; end-December issuances govern the first working day of the subsequent.

CTZs

The Treasury issued a total of €27,388 million CTZs with 24-month maturity in 2015, with a reduction of 16.93 percent compared with €32,969 million issued in 2014. With the maturities being reached amounting to over €31 billion (approximately half of the securities reimbursed the preceding year), the net issuances equalled -€4,100 million. The Treasury’s past issuing policies, such as the overall reduction in placements allotted to this segment and the introduction of a lower number of securities maturing in 2015, have in fact led to an easing in the refinancing of the year’s total volume. As was the case with the BOTs, at the

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last two auctions in 2015, the yields of CTZ issues were also marked by historic negative lows.

The outstanding principal of CTZs continued to decline in 2015 in proportion to net issuances. At end-2015, the 24-month CTZ securities represented 2.68 percent of the stock of the government securities, as compared with 2.96 percent recorded at end-2014. Therefore, the objective of reducing the share of CTZs on the debt stock at end-2015 with respect to 2014 was fully accomplished, remaining comfortably below the maximum threshold of the 6 percent set by the Framework Decree.

The bid-to-cover ratio of the auctions was always fully satisfactory, registering an average value of 1.71 at auction in October and peaking quite exceptionally at end-November at 5.25, when demand reached €7,880 million against a maximum bid of €1,500 million.1 At this same auction an absolute minimum was reached in terms of yield for CTZs, at -0.095 percent. The first negative value had been recorded at end-October, returning for the first time below values recorded in May; in fact, with respect to CTZs the rebound in yields seen in June was reabsorbed far more slowly than was the case with the BOTs. Figure IV.4 shows how the reduction in yield was particularly marked between January and May (almost 43 basis points), whereas after the relative maximum figure for June it became far more gradual, but then accelerating just towards the end of the year.

FIGURE IV.4: YIELD AT THE ISSUANCE OF CTZs – 2015 (rates in %)

Note: This figure is based on auction settlement dates.

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1 Due probably to an error on the part of one of the auction participants, but which was nonetheless inconsequential in determining the adjudicated price.

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BTPs

Within the nominal BTP segment, gross issues totalled €164,561 million, net of the debt exchanges, with a decrease of 3.87 percent compared to the €171,184 million placed in 2014. The fixed-rate medium-/long-term BTP segment as a percentage of the total debt came to 67.74 percent, fully within the 55-75 percent bracket required by the Framework Decree.

With reference to the BTP compartment’s segments with shorter-term maturity, that is, with 3- and 5-year maturities, the Treasury adopted a policy of reducing issues both in terms of absolute value as well as in percentage of total issues, in accordance with the Guidelines and the strategy outlined in Chapter I. In the 3-year segment, the net issues equalled -€13,996 million and -€17.785 million for the 5-year segment, and this also in view of significant amounts maturing that year.

As for the recently introduced 7-year BTP, which was integrated into the monthly auction programme in 2014, effectively becoming a benchmark on the Italian yield curve after its first syndicated placement on 16 October 2013, the total issues were slightly above those of 2014, compensating for the reduction in quantities of other, shorter-term types of securities offered.

 The 10-year BTP confirmed its role as the benchmark for the entire nominal yield curve, and hence total issues remained in line with those of 2014. The net issues, however, amounted to -€5.896 million, but given the maturities of the two securities outstanding, a combined balance of €44,945 million was reached.

With regard to the segments beyond 10 years, the Treasury guaranteed a steady presence and, while total issues of the 15-year BTP had been in line with those of the preceding year, the 30-year segment registered a considerable increase, up from overall issues (including the use of off-the-run securities) amounting to €7.701 million in 2014 to €14,391 in 2015. This was also made possible by the fact that, during the first months of the year, two new securities were launched through syndicated placement, one on the 15-year segment and the other on the 30-year segment.

By launching new, intrinsically more complex securities, or securities with more sector-specific demand, the Treasury adopted an issuing method involving a syndicate of banks affiliated with a group of Government Bond Specialists, headed by four or five lead managersfor each transaction, while the other Specialists participate as co-lead managers.2

With the market in good shape at the start of the year, and expectations of an imminent announcement by the ECB of further quantitative easing measures, it was possible to satisfy institutional investors’ strong demand for long-term securities with less yield compression by launching the new 30-year benchmark securities.

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2 The selection of the banks to serve as the lead managers of a syndicated issue is based on numerous factors: first, the position in the ranking of overall performance of the Specialists’ activity with regard to all primary-and secondary-market segments; second, the specific capacity of penetrating the market segment in which the individual transaction is placed; and third, the quality of the observations made about the opportunities, means, and timing for the transaction and the pricing techniques proposed for the issuance. Where compatible with the successful outcome of the transaction, a rotation criterion is applied on a residual basis.

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Thus, after the Treasury had guaranteed, during 2014, a continuous presence with various reopenings of the 30-year benchmark (BTPs maturing 1 September 2044), the syndicate of five leader managers (made up by Citigroup Global Markets Ltd., HSBC France, JP Morgan Securities PLC, Société Générale Inv. Banking and UniCredit S.p.A.) and the other Government Bond Specialists as co-lead managers, managed the placement in January of €6,500 million of the BTP 01/09/2014–01/09/2046, with coupon of 3.25 percent, settled 22 January. The total demand equalled €13.1 billion, with the participation of around 275 investors. Among the latter, those with a longer-term investment horizon were adjudicated approximately 28 percent of the issuance, whereas 45 percent of the placement was subscribed by fund managers. The banks purchased 17 percent of the issue and hedge funds 7 percent, while the non-financial private sector was adjudicated 2.5 percent of the total amount.

Investor participation turned out to be extremely diversified from the point of view of geographic distribution, with just 43.4 percent of the issuance having been subscribed by domestic investors. Of note was also the quota subscribed by investors from the UK and Ireland (20.8 percent), while, among European traders, there was a significant degree of participation on the part of France (6 percent), Germany and Austria (7.4 percent), Scandinavian countries (6.5 percent), the Iberian peninsula (2.9 percent) and Swiss investors (1.4 percent). Outside Europe, a significant share was made up by North American investors, who subscribed nearly 10 percent of the placement.

FIGURE IV.5: BTP 1 SEPTEMBER 2046 – DISTRIBUTION BY INVESTOR TYPE

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FIGURE IV.6: BTP 1 SEPTEMBER 2046 – GEOGRAPHIC DISTRIBUTION

On the 15-year segment, following the launch in 2014 of the BTP with a maturity date of 1 March 2030 (which in February 2015 had exceeded the amount of €16 billion outstanding), again through a syndicate placement, there was the launch of the BTP 01/03/2015 – 01/03/2032, with coupon of 1.65 percent, of which – under the Bank of Italy’s regulation of 24 March - €8,000 million was issued against demand of €16 billion. This syndicate was made up by Barclays Bank PLC, Crédit Agricole Corp. Inv. Bank, Goldman Sachs Int. Bank, Monte dei Paschi di Siena Capital Services, Banca per le Imprese S.p.A. and Royal Bank of Scotland PLC, which participated as lead managers, and other Government Bond Specialists as co-leads.

The base of investors who subscribed proved to be particularly satisfactory: approximately 34 percent of the placement was purchased by investors with long-term investment horizons, 17.8 percent of which were represented by central banks and government institutions and 16.2 percent by pension and insurance funds. The banks adjudicated 29.4 percent of the total amount, while 21.7 percent was assigned to asset managers and investment funds. Finally, 11.1 percent was subscribed by hedge funds and 3.8 percent by the non-financial private sector.

Even the geographic distribution was highly diversified, confirming a broad interest in the new security. In fact, a significant share of 44 percent of the issuance went to domestic investors, while of the non-resident intermediaries, 20.2 percent was subscribed by UK and Ireland investors and a large amount went to Continental European intermediaries (25.8 percent), with the notable presence of Scandinavia (8.4 percent), Germany and Austria (6.5 percent), France (4.3 percent), the Iberian Peninsula (3.1 percent), the Benelux (1.9 percent) and Switzerland (1.7 percent). Outside Europe, North American investors adjudicated 7.1 percent of the placement. Finally, the remaining 2.6 percent went to investors residing in the Middle East and Asia.

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FIGURE IV.7: BTP 1 MARCH 2032 – DISTRIBUTION BY INVESTOR TYPE

FIGURE IV.8: BTP 1 MARCH 2032 – GEOGRAPHIC DISTRIBUTION

With regard to the cost of the financing, the yields on issues of nominal BTPs, which had in 2014 already registered a marked downturn on all of the maturities, fell further in 2015. More specifically, the decline estimated from the weighted average yield came to 0.68 percent per 3-year security, 0.94 percent per 5-year security, 1.09 percent for the 7-year segment, 1.30 percent for the 10-year segment, 1.52 percent for the 15-year segment and 1.13 percent for the 30-year segment. In all, the weighted average yield of on-the-run BTPs was placed at 1.31 percent.

The bid-to-cover ratios at auction were even more satisfactory than in 2014, ranging between a low of 1.28 (recorded at the 10-year BTP auction at end-December settled the first business day of 2015) and a high of 2.35 for the BTP 2032, placed for €778 million at the mid-June auction together with the BTP 2046 (placed for €947 million). Generally, lower quantities offered have been matched

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by a greater degree of coverage, but auctions have also taken place with higher amounts offered in which the bid-to-cover ratio was above the norm, as was the case at end-February, when €4,500 million of the new 10-year BTPs maturing on 1 June 2025 were adjudicated with a weighted ratio of 1.53 (and on the following day the entire supplementary tranche of €1,350 million reserved for the Specialists was also offered).

FIGURE IV.9: YIELDS AT AUCTION ON BTPs WITH MATURITY BETWEEN 3 AND 10 YEARS - 2015

FIGURE IV.10: YIELDS AT AUCTION ON LONG-TERM BTPs - 2015

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Inflation-indexed securities: BTP€i and BTP Italia

In the indexed segment, the Treasury has placed both the BTP€i, the security indexed to European inflation (excluding tobacco products) and whose capital revaluation is paid upon redemption of the security, as well as the BTP Italia, the financial instrument indexed to Italian inflation (the FOI general consumer price index, excluding tobacco products, for families, workers and employees), the revaluation of which is paid bi-annually via coupon.

FIGURE IV.11: YIELDS AT AUCTION ON BTP€i – 2015

With regard to the BTP€i, the offering at auction was focused on securities maturing at 10 or more years, also taking into consideration the trend of inflation in Europe. The securities were not issued until January; they were originally 5-year securities maturing 15 September 2018.

Of particular relevance, during the last quarter of the year, was the launching of new securities in the 15-year segment, which was necessary considering that by then the preceding benchmark had a residual life of only 12 years and no longer adequately represented that feature of the yield curve of the inflation compartment.

Consequently, the new BTP€i was issued on 9 October (with settlement on 14 October), starting 15/09/2015 and maturing 15/09/2032, with the real annual coupon rate set at 1.25 percent. This security was offered through a placement syndicate made up by five lead managers: Banca IMI S.p.A., BNP Paribas, Citigroup Global Markets Ltd., ING Bank N.V. and Nomura Int. PLC, while other Government Bond Specialists participated as co-lead managers. In view of a request of above €9.3 billion, €3,500 million were allotted, of which 52 percent to investment funds and asset managers and 25 percent to the banks. A share above 19 percent was allotted to investors with long-term investment horizons (18 percent to pension and insurance funds and 1.4 percent to central banks), while the share subscribed by hedge funds amounted to 2 percent. The non-financial private sector also participated, subscribing approximately 1.4 percent of the total issued.

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The geographic distribution was quite diversified: the share allotted to domestic investors was slightly above 34 percent, while investors residing in the UK adjudicated 46 percent of the placement. There was an important presence on the part of North American investors whose participation reached a share of over 9 percent. Also worthy of note were the amounts subscribed by investors residing in France (5.4 percent) and Central and Northern European investors, especially from Germany and Scandinavian countries, with a combined share of approximately 4.5 percent.

FIGURE IV.12: BTP€i 15 SEPTEMBER 2032 – DISTRIBUTION BY INVESTOR TYPE

FIGURE IV.13: BTP€i 15 SEPTEMBER 2032 – GEOGRAPHIC DISTRIBUTION

On the whole, in terms of nominal value, the gross issues of the BTP€i equalled €13,097 million, 9.6 percent less than those allotted in 2014, but there were no BTP€i securities reaching maturity in 2015. More specifically, regarding the on-the-run securities, the placements were €692 million in the 5-year

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segment, €2,901 million in the 10-year segment, €6,872 million with 15-year maturity and €562 million with 30-year maturity. Additionally, there were reopenings of two off-the-run securities with a residual life of 6 and 8 years for €921 million and €1,147 million respectively.

In 2015, the outstanding balance (revalued for inflation) for the BTP€i was up by €13,645 million and amounted at the end of the year to 7.94 percent of total government securities, compared with 7.31 percent for 2014.

As for Italian inflation, the Treasury’s Guidelines had included just one BTP Italia placement, since there were no indexed securities maturing that year and, excluding any possible exceptional events, the aim was that of keeping the overall risk exposure to inflation under control. This issue in April, with settlement on the 20th of the month, extended the security’s maturity to 8 years.

The allocation mechanism accepted for the second placement in 2014 was retained, as it divides the transaction into two phases: in the first phase, developed over the course of the first three days and reserved for retail investors, bids taken were to be satisfied entirely; the second, reserved for institutional investors and for which the Treasury provided a maximum amount that could be allocated, applied a pro-rata process in the event of bids exceeding the maximum amount set. As a result, the issue of BTP Italia securities maturing 20 April 2023 (the definitive real annual coupon rate of which was set at 0.50 percent) amounted to €9,379 million – of which €5,379 million were assigned to the first phase and €4,000 million to the second – corresponding to the contracts settled for the overall countervalue equivalent on the MOT (Borsa Italiana’s electronic market for placement of bonds and government securities), through the Banca IMI S.p.A. and UniCredit S.p.A., the designated dealers in this operation.

Specifically, during the first phase of the placement reserved for retail investors, which took place 13-15 April, 75,374 contracts were settled, of which over 45 percent had a unit value of less than €20,000, and 75 percent of which had a unit value of under €50,000. With regard to the investor base, the share of private-banking clients (69 percent) was above that of individual investors – strictly physical persons (31%). In both categories the investors were almost exclusively from the domestic market.

During the second phase of the placement reserved for institutional investors, which opened at 9 a.m. on 16 April and closed two hours later, the number of contracts amounted to 687, with a countervalue of €4,000 million. During this phase, it is estimated that approximately 59 percent of the countervalue was subscribed by banks and financial institutions, while 25 percent was subscribed by asset managers.

A share of 14 percent was subscribed by insurance companies, while the remaining amount issued (approximately 3.3 percent) was subscribed by central banks and corporations. As in the first phase, Italian investors predominated again; subscribing 88 percent of the new security, but the participation of foreign investors was not negligible, with significant amounts going to investors from Switzerland, the UK, France and countries in Asia.

At end-2015, the stock of BTP Italia grew by €9,379 million, reaching 5.72 percent of the total outstandings on State Sector government securities, compared to 5.30 percent at end-2014.

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Overall, the indexed segment made up by the BTP€i and BTP Italia securities had outstandings, revalued for inflation, of €247,821 million, thus growing by 10.24 percent compared to €224,797 million in 2014. This growth essentially results from the absence of securities reaching maturity. In terms of percentages, at end-2015 this segment amounted to 13.66 percent of total government securities, compared with 12.61 percent the previous year. Therefore, it remained well under the 17 percent threshold provided by the Framework Decree while overall exposure to inflation increased by a very modest degree.

CCTeu

In the variable-rate segment, the CCTeu made continual improvement during 2013-2014, in terms of both performance and volumes traded on the secondary market, enabling yields to become gradually aligned with those on the nominal BTPs with equivalent maturity. In response to the growing interest of investors – chiefly domestic, institutional and retail investors, but also international ones – in 2014 the Treasury increased the supply and gradually lengthened the maturity by issuing new securities within a 5- to 7-year range, confirming a monthly placement schedule with related auctions held at the month end concurrently with the issues of 5- and 10-year BTPs, in order to provide liquidity to the market.

During 2015, the above-mentioned process of normalisation of market conditions for the segment was consolidated; so that the new CCTeu opened that year could fully renew the 7-year maturity. Regular monthly auctions were held and net issues amounted to €2,461 million, as determined by the gross issues amounting to €27,503 million and by the two securities’ maturities for an approximate total of €25 billion.

The yields at issues declined over the course of 2015, hitting a minimum of 0.51 percent at auction on 1 December, while an increase of above 1 percent occurred at the start of July, during a tense phase on bond markets.

Over the course of 2015, the total outstanding balance of the CCT and CCTeu increased by €2,030 million, also taking into account non-recurring transactions described below in this Chapter. The variable-rate securities, at end-2015, came to 6.68 percent of the debt stock, short of end-2014’s 6.69 percent by barely a sliver. This quota remained fully within the 5-10 percent range set by the Framework Decree and consistent with the declared strategy of continuing to reduce this percentage over time, while taking market conditions into account.

Characteristics of demand at auction for nominal BTPs in terms of counterparty type

An analysis of the orders that the Specialists received from their clients just before and after the closing of placements by auction allows for a breakdown of the fundamental trends of the final demand for government securities in 2015, and a better understanding of what causes the actual auction results. The present report focuses on the nominal BTP auctions. In fact, in 2015 the Specialists adjudicated 99.40 percent of all volumes of nominal BTPs issued at auction.

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As for the composition of investors by type, the categories that proved to be the most important, in terms of quantity, were banks, investment funds and hedge funds.

Investment funds continued to represent on average approximately 40 percent of demand at auction, but in 2015 their participation became more volatile, as a result of changes in market conditions as described in Chapter II.

FIGURE IV.14: COMPOSITION BY TYPE OF COUNTERPARTY BY ORDERS PLACED BY SPECIALISTS IN GOVERNMENT SECURITIES AT AUCTIONS OF NOMINAL BTPs– 2014-2015

Figure IV.14 shows, for example, how the funds gradually increased their activity at auction during the first quarter but then contracted partially in the months of April and May when the market underwent a particularly significant tendency towards reversal. Afterwards, the demand on the part of funds began to rise again, in spite of the financial distress linked to negotiations between the EU and Greece, but then contracted again up until November. In fact, apart from the first quarter, when dealers probably concentrated long positions on securities in expectation of the ECB’s launch of quantitative easing, during the remainder of the year the behaviour of the funds at auction appeared to be essentially influenced by absolute level of money-market rates.

Acting in a partially complementary role with respect to the funds, were the banks (this category includes orders placed by primary dealers, investment banks, commercial banks and orders coming from separate and independent portfolios of banks participating in the auction), which during the first quarter also concentrated position so as to become, on the one hand, more prudent in phases marked by volatility and turbulence and, on the other, more aggressive in purchases made in phases when prices were on the rise. On average, the share of

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participation of banks was approximately 25 percent and therefore in line with that of 2014.

The participation of hedge funds was continuous throughout the year, averaging a share of 15 percent of demand, with considerable peaks in the months of January, May and October, all months marked by a very directional trading, with upward or downward trends. The presence of central banks3 was significant in the months of April, June and July, with an annual average share of approximately 3 percent.

Participation at auction by pension and insurance funds remained marginal, whereas certain months saw less than negligible participation by corporations and retail investors. On average, the latter categories adjudicated a total of approximately 2 percent of the volumes offered at auction.

Characteristics of demand at auction for nominal BTPs in terms of geographic residence

Despite the peaks in January, April, June and October, during the year the demand from domestic investors fell gradually, as a percentage of total demand at auction. These investors however regained their importance precisely in the months mentioned above because of the volatility and tensions affecting the market during those particular periods. Domestic demand averaged 33 percent of the total.

Therefore, with the exception of the above-cited months, foreign demand increased, albeit in unequal ways in different parts of the world.  In 2015, the contribution from North American investors was yet again significant and continuous, reaching a year average of approximately 32 percent of the total demand at auction; this contribution increased considerably further – as a percent of final demand – in the last months of the year. The demand from investors residing in Europe was less stable, which normally would present a profile that complemented the domestic one. During the year, this component – as an average and net amount within far from negligible ranges – represented about 30 percent of the total. The demand from other parts of the world amounted on average to 5 percent of the total, with a significant peak in the month of June and very modest values in the months of January, March, September and December.

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3 This data obviously does not include the ECB and Eurosystem banks because, as is known, quantitative easing activity may not be undertaken on the primary market.

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FIGURE IV.15: COMPOSITION BY GEOGRAPHIC ORIGIN OF ORDERS PLACED BY SPECIALISTS IN GOVERNMENT SECURITIES OF NOMINAL BTPs – 2014-2015

Non-recurring debt-exchange and repurchase transactions

As announced in the Guidelines for 2015, the Treasury continued to be active in non-recurring debt-exchange transactions and the repurchase of government securities during the year, taking particular care to intervene in market conditions that favoured these particular transactions.

In more detail, the Treasury carried out three debt exchange transactions, in the months of April, July and September, using the electronic trading system which operates directly and with flexibility on the regulated secondary market platform (MTS). Debt exchange transactions can allow for possible secondary market dysfunctions to be corrected – that might have negatively influenced issuances and thus the cost of the debt – aside from remodelling the maturity profile, avoiding the concentration of reimbursements in particularly demanding months and thereby containing refinancing risk.

In its choice of securities to repurchase, the Treasury preferred to concentrate on BTPs and CCTs with maturities closest in year. The securities issued, on the other hand, were selected from among those under particular pressure in terms of demand on the secondary market (following also the trend in the repo segment). The choice of securities in issuance with higher prices and longer maturities, compared to those repurchased, allowed for the pursuit of additional objectives such as reduction of the debt in nominal terms and lengthening overall average residual life.

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As mentioned above, the three debt exchange transactions in 2015 were all executed through the electronic trading system, which in recent years has become the preferred instrument for these types of transactions. More specifically, the transactions entailed the offer through issuance of two BTPs, one maturing in 2025 and the other in 2030, and the issuance of one CCTeu maturing in 2020. As for repurchases, securities maturing in 2016-18 were chosen; these were mainly BTPs (58 percent of the total acquired), and CCTeu and CCT (the remaining 42 percent).

In each exchange, which is neutral by definition and does not cause cash movements, the prices of the securities issued – well above par and above the prices of securities withdrawn from the market – have led to a decrease in the nominal debt stock, thanks to the quantitative value of repurchases exceeding the nominal amount issued (as illustrated in Table IV.1). The overall reduction in debt stock amounted to approximately €534 million.

TABLE IV.1: SUMMARY OF DEBT EXCHANGE TRANSACTIONS IN 2015(nominal amounts in € mn)
Settlement date	Securities issued		Securities purchased		Amount issued	Amount purchased
	Type	Maturity	Type	Maturity
21/04/2015	BTP	2025	BTP & CCTeu	2016 & 2017	1,663	2,069
21/07/2015	BTP	2030	BTP & CCTeu	2016, 2017 & 2018	1,574	1,693
18/09/2015	CCTeu	2020	BTP, CCT & CCTeu	2016, 2017 e 2018	2,000	2,009

The above-mentioned non-recurring transactions enabled the Treasury to repurchase government securities outstanding for a total of just under €5.7 billion, compared with the approximately €13 billion acquired in 2014, the year in which the repurchase transaction also took place. The lesser amounts involved in 2015 transactions can also be traced back to the Treasury’s different needs, which – thanks to fewer maturities expected in 2016 – did not need to intervene much on the reimbursement profile of government securities. Furthermore, the ECB’s launch of the quantitative easing programme affecting government securities had tangible effects on the market, making it at times difficult to select the securities to reimburse; in fact, the increase in demand necessitated an increase rather than a decrease in the amounts outstanding, with the aim of continuing to guarantee that liquidity of all the securities remained at good levels.

For this reason, as can be seen in Figure IV.16, during 2015 repurchase transactions were not carried out on securities on the market.

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FIGURE IV.16: AMOUNT REPURCHASED THROUGH NON-RECURRING TRANSACTIONS – 2011-2015 (nominal amounts in € mn)

In 2015, resources of the Fund for the Amortisation of Government Securities were however used, in November, for the partial reimbursement at maturity of a BTP, for a total of €3,947 million. This transaction contributed to the reduction of the debt, as it allowed for reducing the reimbursements charged against the Liquidity Account, meaning fewer issues for renewing the maturing securities would be required during the year.

TABLE IV.2: REIMBURSEMENTS AT MATURITY IN 2015 WITH CHARGE AGAINST THE AMORTISATION FUND (nominal amounts in € mn)
Settlement date	Security reimbursed		Amount reimbursed
	Type	Maturity
01/11/2015	BTP	2015	3,947

This transaction almost entirely used up the balances of the Fund, which were mainly made up by proceeds from the sale of shareholdings and deposits of commissions paid against government-guaranteed bank bonds (Decree Law No. 201, of 2011, Art.8), as well as – to a lesser degree – by private donations.

Foreign securities

With the objective of diversifying the institutional investor base for Italian government securities and reducing issuance costs, the Treasury may issue securities on international markets by taking advantage of various issuing channels characterised by specific documentation consistent with international standards:  namely, Commercial Paper, the Global Bond programme and the Medium Term Note programme. The first of these instruments can be used to round out the issuances of BOTs and is characterised by its great flexibility, both from the standpoint of maturity as well as amount and currency.

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The Global Bond programme is directed towards institutional investors on the U.S. dollar market who are high-profile and very diverse in geographic origin. Finally, the extreme flexibility of the securities issued under the Medium Term- Note Programme, in public or private format, allows for reaching mostly European and Asian investors interested in holding a securities portfolio in Euros or other currencies.

Commercial Paper

During 2015, the Treasury did not issue commercial paper notes, taking into account the absence of any of the Treasury’s specific, very short-term cash needs, and in line with the objective of lengthening the average life of the debt and the resulting reduction of the BOT segment, characterised, as already noted, by negative net issues of approximately €10.4 billion.

Global and MTN programmes

During 2015, financial market conditions continued to not allow for the international issuance of global bonds.

Instead, the Treasury completed seven private placements through the MTN programme, all in Euros and carried out during the first quarter; in one case, the securities were indexed to European inflation (harmonised index excluding tobacco - HICPxTo) using the same indexing mechanism as that for the BTP€i.

The security indexed to European inflation was issued with a 28-year maturity, while the others were fixed-rate securities, with 12- to 17-year maturities. All of these issues benefitted from rate arbitrage with regard to the BTP and BTP€i yield curves of corresponding interpolated duration, thus reducing the cost of borrowing.

The volumes issued, amounted to €4 billion, results that were well below the limit of 30 percent of net issues set by the Framework Decree. On 31 December 2015, the amount of foreign currency-denominated bonds following cross-currency swaps equalled 2.89 percent of government securities stock, unchanged in comparison to the 2.80 percent recorded at end-2014.

TABLE IV.3: PRIVATE PLACEMENTS THROUGH MTN PROGRAMME
Notional amount (€ mn)	Settlement date	Maturity	Type	Coupon
1.000	02/02/2015	02/02/2028	Nominal	1.862%
500	02/02/2015	02/02/2032	Nominal	2.192%
300	18/02/2015	18/02/2043	Inflation	1.19%
500	05/03/2015	05/03/2029	Nominal	1.771%
500	05/03/2015	05/09/2032	Nominal	2%
500	06/05/2015	06/05/2028	Nominal	1.666%
700	22/05/2015	22/05/2027	Nominal	2.127%

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IV.2 DERIVATIVES PORTFOLIO MANAGEMENT

As outlined in greater detail below in this Chapter, the derivatives portfolio with reference to the debt include: cross-currency swaps (CCS), hedging the issues denominated in foreign currency; interest rate swaps (IRS), covering issuances of MTN programme securities, largely euro-denominated; and finally, euro transactions aimed at lengthening the duration of the average refixing periodto mitigate risk of a rise in interest rates within the debt portfolio: the IRS, which in some cases are associated with the sale of receiver swaptions, and stand-alone receiver swaptions, that is, not linked to pre-existing IRS. The portfolio also includes IRS hedging liabilities of the company, Infrastrutture S.p.A., which were assumed by the Treasury as provided by the 2007 Budget Law.

In 2015, the value of the derivatives portfolio remained distinctly negative, although it did show some improvement at end-2015 as compared to end-2014, as will be explained further below. The negative value, in the current market scenario, is the inevitable and direct consequence of the insurance provided by derivatives. The derivatives portfolio is in fact used by the Treasury to contribute to hedging interest-rate risk on the debt, and hence contributes to increasing the quota of long-term fixed rate components of the overall debt portfolio, to levels in accordance with market conditions in the periods that, over the years, the transactions were executed. A derivatives portfolio set up in this way will necessarily have a financial duration and an average refixing period that are well above those for the underlying debt, so much so that it increases the average values of these risk indicators with reference to the entire debt portfolio (hence reducing risk) to the extent analysed below. Even though the value of the stock of the derivatives is quite limited in percentage terms when compared to securities stock, the marked decline of interest rates in 2015, despite the momentary and modest rise seen between May and December, inevitably produced a negative value of the derivatives portfolio in 2015.

In light of these market developments and the objectives established for debt management in 2015, as well as lingering, objective constraints tied to bank regulations and the absence of collateralisation, during the year there was only limited intervention in the restructuring of a pre-existing situation, represented by a swaption for the total notional value of €3,500 million.

Given the protraction of a situation in which interest rates were exceptionally low, further accentuated at the start of 2015 by the market’s reaction to the ECB announcement of the expanded assets purchase programme within the Euro Area, it became certain that the Treasury’s counterparty would exercise a swaption contract leading to an interest-rate swap with a 10-year maturity starting 1 February 2015, and in which the Treasury would pay a fixed rate of 3.5325 percent and receive 6-month Euribor rate for a total notional value of €3.5 billion.

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In light of the new regulations involved in booking financial transactions as dictated by Eurostat upon the adoption of ESA 2010, an additional debt has resulted (even if only in accounting terms) of approximately €960 million. Furthermore, in the event of activation of the interest-rate swap, the interest payment on this category – while not affecting net borrowing of the revenue accounts – in terms of actual cash outlays would increase by approximately €60 million in 2015 and €120 million in 2016.

Taking all of this into consideration, a remodelling of the position was therefore undertaken, reacquiring the earlier option through the sale, at an equivalent market value, of four new swaptions, each with a notional value of €875 million (that is, a quarter of the €3,500 million allotted by the earlier option), and by postponing the exercise of the swaptions by two years. At the same time, the maturity of the underlying swaps was extended by five years and related strike prices were lowered to levels between 3.20675 and 3.2215 percent, in order to also slightly reduce the probability of an early exercise of option. Additionally, while the original swaption had physical delivery (an ordinary Treasury operation, given the protection against a rise in interest rate risk that the use of this type of option traditionally promotes), the four new options, all receiver swaptions, were characterised by cash settlement. This situation made it possible to work on the remodelling itself, in that it reduced the counterparty’s credit exposure to the Treasury and thus making the former open to renegotiation. Finally, the splitting up of the original swaption into four distinct contracts allowed for a phasing over time of settlement transactions within a period of a few weeks, optimising the Treasury management’s cash flow needs and the interest rate levels involved in executing the transactions.

When the new options were exercised, four new IRS in current market rates will take off – these rates will therefore be lower than corresponding strikes – thus safeguarding the function of lengthening the duration of the debt.

In conclusion, as a result of the restructuring described above, it was possible to pursue the twin objectives of avoiding the onset of a debt account and of increasing the level of hedging interest-rate risk, meanwhile preventing added spending to the Government’s two-year period budget for 2015-2016.

It was not possible to effectively intervene on other analogous positions, so another five swaps originating from swaptions were exercised, for a total notional value of €10,834 million, which generated a debt accounting entry of €3,644 million.

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IV.3 RESULTS OF ISSUING ACTIVITY AND OF DEBT MANAGEMENT TRANSACTIONS IN RELATION TO THE OBJECTIVES

The final mix of the portfolio issues for the year

Chapter I outlined the portfolio of issues which the Treasury has proposed to put in place during 2015, with the aim of containing the cost of financing, managing interest-rate and refinancing risks as effectively as possible and also attaining better margins of efficiency – given the numerous future scenarios of changes in interest rates and inflation – with regard to an ensemble of other possible portfolios of issues, deemed “realistic” in terms of their actual viability on the market.

This portfolio, compared to that of 2014, specifically called for:

1) equal shares to be allocated to BOT issues;

2) a slight increase in the CTZ segment and a downward adjustment of the CCTeu;

3) a reshaping of the 3- and 5-year BTP segment;

4) a substantial confirmation of the 7- and 10-year BTP segment;

5) a significant boost to the 15- and 30-year BTP segment; and

6) a reduction in the inflation-indexed issues segment (both Italian and European).

The analysis provided by Table IV.4 indicates a number of conclusions, listed here below.

The BOT objective has been fully reached, in that the share of 39.5 percent is exactly the same as that of 2014.

With regard to the CTZs, the share of the portfolio of issues fell, from 7.1 percent to 6.6 percent, but the net flow of issues was nonetheless positive, thanks also to the limited volume of securities maturing. The value of the offer was calibrated in a way that maintained regularity of the placements of the segment, even in the context of its general reshaping in terms of stock.

The decline in the 3- and 5-year BTP sectors has been achieved: the 3-year BTP fell from 8.2 percent in 2014 to 7 percent in 2015; the 5-year BTP from 10 percent in 2014 to 8.1 percent in 2015; in both cases there was also reduction in the volumes offered on the market in terms of absolute value. The 7- and 10-year BTPs increased slightly, in line with that provided for by the objective of consolidating their role, rising respectively from 6.6 percent in 2014 to 7.5 percent in 2015 and from 8.6 percent in 2014 to 9.8 percent in 2015; even in terms of absolute value, issues of the two maturities rose slightly. The 15- and 30-year BTP segments also grew, as desired – and therefore in a significant way – even though their sizes were still limited within the overall portfolio of issues: the 15-year BTP went from 3.7 percent in 2014 to 4.5 percent in 2015, while the 30-year BTP over the same period rose from 1.6 to 3.5 percent. Once again, in this case placements grew in terms of absolute value, especially on the 30-year security, where a substantial doubling of volumes offered was obtained.

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The share of the BTP€i issues remained substantially unchanged, at around 3.1 percent, while that of the BTP Italia fell significantly, from 6.1 percent in 2014 to 2.3 percent, due also to a halving of the number of placements (from two to one).

The objective of reducing inflation-indexed segment issues was attained, considering that even the volumes traded in absolute terms fell on the BTP€i segment (from approximately €14.5 billion in 2014 to about €13.1 billion in 2015), but above all on the BTP Italia, where the decline was from over €28 billion in 2014 to €9.4 billion in 2015.

As for foreign securities, even though there has not been a return to public format placements, the issues have increased due to a series of private placements carried out under the MTN programme, this strategy being in line with the objectives set out at the start of the year. In fact, the securities issued were all long term; specifically, there was an issue amounting to €300 million in a European inflation-indexed security maturing February 2043 (with a duration of 28 years), and seven nominal securities with a maturity of between 12 and 17.5 years, some with an annual coupon and others with a six-monthly coupon, for a total of €3,700 million. Furthermore, for all of the issuances, the interest rate conditions were lower than the levels seen on the secondary market for BTPs with the same characteristics.

If one therefore views the overall portfolio, one can state that, in spite of the critical aspects affecting Italian government securities in 2015, the objective in terms of the mix of the portfolio of issues was essentially reached.

TABLE IV.4: MIX OF 2013-2015 ISSUES IN ABSOLUTE VALUE (€ mn) AND AS A PERCENTAGE, INCLUSIVE OF DEBT EXCHANGE TRANSACTIONS
	2014 issues	% of total	2015 issues	% of total
Mini BOT	0	0.0%	0	0.0%
3-month BOT	0	0.0%	0	0.0%
6-month BOT	91,934	19.8%	80,956	19.5%
12-monthBOTi	90,472	19.5%	83.,74	20.0%
Commercial Paper	481	0.1%	0	0.0%
Total short term	182,887	39.5%	164,130	39.5%
CTZ	32,969	7.1%	27,388	6.6%
CCTeu	24,452	5.3%	29,503	7.1%
3-year BTPi	38,046	8.2%	28,924	7.0%
5-year BTPi	46,543	10.0%	33,729	8.1%
7-year BTP	30,411	6.6%	31,340	7.5%
10-year BTP	40,064	8.6%	40,712	9.8%
15-year BTP	16,933	3.7%	18,703	4.5%
30-year BTP	7,250	1.6%	14,391	3.5%
5-year BTP€i	4,170	0.9%	1,614	0.4%
10-year BTP€i	8,256	1.8%	4,048	1.0%
15-year BTP€i	1,536	0.3%	6,872	1.7%
30-year BTP€i	525	0,1%	562	0.1%
BTP Italia	28,071	6.1%	9,379	2.3%
Foreign	1,250	0.3%	4,000	1.0%
Total medium/long term	280,476	60.5%	251,164	60.5%
TOTAL	463,363		415,294

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The mix of securities stock at end-year

The mix of the debt by instrument, taking into account all domestic and foreign government securities, continued to confirm the declining trend seen in previous years in the short-term and variable-rate components, alongside an increase in the medium-/long-term and fixed-rate components.

In fact, on the total securities stock outstanding, in 2015 with respect to 2014 there was a decrease of approximately 4 percent in the share of issues of short- and medium-term components, such as BOTs, CTZs and BTPs with 3- and 5-year maturities; whereas the share of issues in the long-term nominal and inflation-indexed segments, with 10-year and above maturities, increased by over 4 percent.

The role played by the BOT in the reduction of the short-/medium- term segment, in accordance with the objectives set, was minimal, falling from 7.04 percent at end-2014 to 6.34 percent on 31 December 2015. The same can be seen with the 24-month CTZs, which fell from 2.96 percent at end-2014 to 2.68 percent at end-2015. The large part of the remaining reduction in the short-/medium- term segment was registered on BTPs with 3- and 5-year maturities with over 3 percentage points. As for the growth of securities with long-term maturities, the predominant role was played by nominal 15- and 30-year BTP segments.

The variable-rate component (CCTs and CCTeus) reached 6.68 percent of the debt, in marginal decline and in line with the objective with respect to the value registered at end-2014 (6.69 percent). In contrast, the stock of the nominal BTP increased marginally, from 67.56 percent to 67.75 percent of the total. Within this segment, during 2015, the share of securities with residual life of more than 5 years also grew.

The component linked to the European HICP (BTP€i) showed a slight increase with respect to 2014 (from 7.3 to 7.94 percent, in revalued terms), as was the case with the share of BTP Italia (from 5.30 to 5.72 percent, again in revalued terms). Generally, due also to the absence of maturities, the segment of securities indexed to inflation in 2015 grew approximately 1 percent in relation to the total debt - from 12.6 percent in 2014 to 13.66 percent at end-2015 - in line with the Treasury’s portfolio decisions, aimed at guaranteeing continuity in the issuance of securities with all maturities, while also keeping total exposure to inflation under control.

As in recent years, the ratio of foreign securities to total debt deceased slightly, from 3.14 percent in 2014 to 2.89 percent in 2015.

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FIGURE IV.17: MIX OF THE STOCK OF GOVERNMENT SECURITIES AT 31 DECEMBER 2014 AND AT 31 DECEMBER 2015

Finally, the structure of the debt stock at the end of 2015 was influenced by the reimbursement of the securities at maturity drawn from the Fund for the Amortisation of Government Securities and the swaptions described above.

With reference to aggregate domestic securities only, Figure VI.18 shows the trends illustrated thus far over a longer time span: the progressive decrease of the variable-rate component; the structural relevance and tendency to increase of the fixed-rate component; the birth in 2003 and the stabilisation of an 8 percent threshold linked to European inflation; the birth in 2012, the developments made in 2013-14 and the consolidation in 2015 of the component linked to Italian inflation (FOI), as a result of the BTP Italia programme.

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FIGURE IV.18: STRUCTURE OF THE STOCK OF DOMESTIC GOVERNMENT SECURITIES

Exposure to refinancing risk and to interest-rate risk

Tables IV.5 and IV.6 measure the exposure of the government securities stock to interest-rate and refinancing risk, which summarises the effects of issuing policy choices made and carried out during 2015. As these indicators show, the prevalence of these risks is in line with the objectives outlined in Chapter I.

TABLE IV.5: AVERAGE LIFE OF STOCK OF GOVERNMENT SECURITIES (in years)
	31/12/2013	31/12/2014	31/12/2015
Domestic securities	6,.9	6.26	6.38
Foreign securitiesi	10.62	10.16	11.01
Stock of government securities	6.43	6.38	6.52

With reference to refinancing risk, it should be noted that the overall average life of all government securities on 31 December 2015 came to 6.52 years, a figure above that of 31 December 2014 (6.38 years). Therefore, the average life of the debt, which had been reducing gradually since 2011 (with respect to 2010) and had substantially stabilised in 2014, increased in 2015.

Looking at the three-year trend of the structure by maturity of the stock of government securities (see Figure IV.19), one first of all notes the reduction in securities with less than one year maturities. The situation for securities with 1- to 7-year maturities is fundamentally stable, with a very slight drop in the 1- to 3-year segment, an increase of an analogous degree in the share of securities with a residual life of between 3 and 5 years and a nearly unchanged situation with regard to the segment between 5 and 7 years. A modest, yet significant, growth can instead be seen with regard to securities with 7- to 10-year maturities, and even more so for securities with residual life of over 10 years.

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All this reflects efforts to contain the short-term securities segment, the healthy demand on the medium-term segment (which limited the possibility of moderating the offering at auction of securities with 3- and 7-year maturities) and the gradual increase of longer-term issues. To be noted, as factors contributing to the increase in the segment between 7 and 10 years, aside from increased issuances of nominal BTPs, were the lengthening to 8 years of the BTP Italia’s maturity and the full reinstatement of the CCTeu’s 7-year maturity. Finally, the most conspicuous issues of securities with maturities between 15 and 30 years, whether nominal or indexed to inflation, have led to a widening of the longer-term maturity segment. These have contributed to countering the pressure on shortening the average life exercised by the considerable pre-existing debt stock.

FIGURE IV.19: MATURITIES BY RESIDUAL LIFE, 2013-2015

Note: The stock of the securities indexed to inflation takes into account the revaluation of the principal coming due at the end of each year. The securities denominated in foreign currency are valued after the cross-currency swaps.

Instead, with reference to interest-rate risk, one sees how the value of the financial duration of the stock of government securities on 31 December 2015 had increased further with respect to that of end-2014, going from 5.26 to 5.48 years, due to issuing policy and the general level of interest rates. The relevant objective set out in Chapter I has therefore been met.

As for the average refixing period, during the last months of the year a method to calculate this parameter has been fine-tuned based on specifications that emerged at European level.4 The methodology agreed on at European level has in fact led to some variations in the calculation of the ARP, with a significant impact on the foreign debt component.

___

4 A working group of EU Economic and Financial Committee (EFC), sub-committee of the European Sovereign Debt Markets (ESDM), was established in response to a specific request from the Eurogroup for an analytical contribution regarding debt management in the current context charaterised by extremely low interest rates. This contribution concentrated on the selection of a number of risk indicators which Eurozone countries will need to adopt and share. The average refixing period(ARP) is in fact included among the risk indicators selected.

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Table IV.6 provides the ARP values with reference to the end of the last three years: the 2013 and 2014 stock assessments have been recalculated with respect to those published last year, to take into account changes since adopted. These actions have not in any event altered the trend of the risk indicators over the years and the effect on the overall figure (referred to within the portfolio) is limited to only the second decimal point.

The ARP, with reference to the government securities stock, went from 5.30 years end-2014 to 5.41 years at end-2015, thus highlighting an increase of this indicator and an associated reduction in the portfolio’s risk profile, once more we see a case that is in line with the objectives set out in Chapter I.

TABLE IV.6: TREAD OF DURATION AND ARP IN 2013-2015 IN RELATION TO THE GOVERNMENT SECURITIES IN STOCK, BEFORE DERIVATIVES (in years)
	Duration			ARP
	31/12/2013	31/12/2014	31/12/2015	31/12/2013	31/12/2014	31/12/2015
Domestic securities	4.73	5.25	5.45	5.35	5.30	5.39
Foreign securities, before derivatives	4.97	5.46	6.45	5.89	5.32	6.11
Government securities stock	4.74	5.26	5.48	5.37	5.30	5.41

Derivatives portfolio management during 2015 was also carried out in accordance with the objectives assigned. In fact, the derivatives portfolio contributed to the lengthening of the overall duration of the debt over 2015, bringing it from 5.48 years before derivatives to 6.06 years after derivatives, with an increase equal to approximately seven months.

Similar to what is shown in Table IV.6 with regard to government securities stock, the total duration after derivatives at the end of 2015 rose to 6.06 years, an increase on the 5.90 years registered on 31 December 2014. A comparison between the duration figures at end-2015 with that of end-2014 therefore shows an increase of approximately two months, due on the one hand to securities issuing policies and derivatives management in 2015 and, on the other hand, the trend of interest rates. This increase is therefore similar, whether viewing government securities stock before or after derivatives, and is a continuation of the trend that was registered by around six months into 2014.

The derivatives portfolio has also contributed to lengthening the average refixing period of the debt: at the end of 2015, the overall ARP reached 6.05 years, growing with respect to the 2015 before derivatives figure of 5.41 years (an increase of nearly eight months) as well as compared to the 6.01 years registered on 31 December 2014.5

___

5 Even the method for calculating the contribution of derivatives instruments to the duration and ARP of the debt has been further advanced and aligned with the criteria in the process of being adopted by the ESDM and among EU Member Countries. In light of this change, both risk indicators relating to the overall debt (after derivatives) have be recalculated with reference to 31 December 2013 and 31 December 2014.

In the past, the planning documents, and more specifically, the EFD and the Stability Programme, reported a duration generated by the IT system used by the Public Debt Directorate, which was based on a criterion of separating the derivatives portfolio from the securities portfolio. Therefore, the actual impact of the derivatives portfolio on the overall duration – which is obviously a weighted average of the duration of the individual instruments – was underestimated since it did not take into account the hedging function (whether with respect to individual securities or a portfolio) of the derivatives in place, using the sum of the value of securities and derivatives as the denominator.

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TABLE IV.7: TREND OF DURATION AND ARP IN 2013-2015 IN RELATION TO GOVERNMENT SECURITIES IN STOCK AFTER DERIVATIVES (in years)
	Duration			ARP
	31/12/2013	31/12/2014	31/12/2015	31/12/2013	31/12/2014	31/12/2015
Domestic securities after derivatives	5.42	5.91	6.04	6,08	6.01	.04
Foreign securities after derivatives	5.22	5.64	6.55	6,43	5.76	6.50
Government securities stock after derivatives	5.42	5.90	6.06	6,09	6.01	6.05

The mark-to-market of the derivatives portfolio gave a negative result of €37.1 billion on 31 December 2015 and of €42.6 billion on 31 December 2014. Considering only the derivatives referring to the debt6 (see Table IV.9), the market value was negative by €42 billion at end-2014 and by €36.7 billion at end-2015.

The mark-to-market of the stock of government securities without derivatives over the same period went from approximately €2,027.2 billion in 2014 to €2,086.3 billion at end-2015. As illustrated by Table IV.8, the difference between the market value and the nominal value of the stock of government securities, which came to approximately €245 billion at end-2014, was about €272 billion at end-2015, with an increase of about €27 billion. Therefore, the increase in market value of the government securities, by approximately €59 billion, can be attributed to variations in the securities stock (with respect to approximately €32 billion of this amount) and to the interest-rate trend (for the remaining €27 billion).

TABLE IV.8: MARKET TREND OF GOVERNMENT SECURITIES STOCK (€ mn)
	MTM	Nominal value	MTM – nominal value
31/12/2015	2,086.319	1,814.445	271,874
31/12/2014	2,027.152	1,782233	244,919
Change	59.167	32.212	26.955

A comparison of the trend in the market value of the derivatives portfolio and that of the securities stock between end-2014 and end-2015 shows that the two values have gone in reverse directions: specifically, there was a reduction of approximately €5.5 billion in the market value of the derivatives portfolio, while there was, in fact, an increase in the market value of securities stock (net nominal value) of approximately €27 billion, as mentioned above.

The different trends can be attributed to the interest rates of reference curves: while the 31/12/2015 swap curve, compared to that of 31/12/2014, is on average higher by approximately 23 basis points in the long-term range (10-30 years) and by about 10 basis points in the above 30-year range (see Figure IV.20),

With respect to the aims of this report, the calculation methods used were reviewed and brought in line with the criteria which are in the process of being adopted among European Union Member States, with the goal of representing the actual impact of the derivatives portfolio on the debt stock from the standpoint of hedging rate risk.

6 In this case, the derivatives executed with reference to mortgages receivable, pursuant to the 2005 Budget Law, have been excluded.

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that of Italian securities interest rates decreased by approximately 30 basis points on the 10-year segment and an average of about 54 basis points on the 15- and 30- years segment. In other words, the comparison between end-2014 and end-2015, showing a reduction of the component that counteracts credit risk, inherent in government yields, is decisive in explaining the diverse trends of securities and derivatives.

FIGURE IV.20: EURO SWAP CURVES

The following table (IV.9) provides the notional and market values of the different segments that make up the portfolio of the derivatives instruments. With regard to the derivatives on the debt, the cross-currency swaps refer to the issues denominated in foreign currency, while the IRS for hedging purposes refer to the issues of euro-denominated securities as part of the MTN programme. Furthermore, the IRS for the purposes of duration category includes all positions referable to the strategy of protection from a rise in interest rates, which, in some cases, entail the sale of receiver swaptions in association with the IRS.

The IRS ex-ISPA segment includes all derivatives associated with the liabilities of the company, Infrastrutture S.p.A., which were assumed by the Treasury as provided by the 2007 Budget Law. In the swaption category, there are also stand-alone receiver swaptions, or those not relating to pre-existing IRS. The table also presents the values in relation to derivatives on assets and to the overall portfolio.

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TABLE IV.9: DERIVATIVES INSTRUMENTS PORTFOLIO – 2014 AND 2015 (data in € mn)
	31/12/2014				31/12/2015
Derivatives instruments on debt
Instrument	Notional	In %	MTM	In %	Notional	In %	MTM	In %
IRS ex-ISPA	,500	2.19%	-1,524	3.62%	3,500	2.32%	-1,375	3.75%
CCS (Cross-currency swaps)	21,329	13.37%	1,093	-2.60%	13,771	9.13%	1,570	-4.28%
IRS (Interest-rate swaps) for hedging purposes	12,309	7.71%	643	-1.53%	10,338	6.85%	665	-1.81%
IRS (Interest-rate swaps) for duration purposes	102,948	64.51%	-33,087	78.66%	108,282	71.76%	-31,527	86.01%
Swaptions	19,500	12.22%	-9,188	21.84%	15.,00	9.94%	-5,988	16.34%
Total derivatives on debt	159,586	100.00%	-42,064	100.00%	150,891	100.00%	-36,655	100.00%
Government securities outstanding	1,782,233				1,814,445
Derivatives on debt/Government securities	8.95%				8,32%
Derivatives instruments on assets (2005 Budget Law)
Instrument	Notional		MTM		Notional		MTM
IRS (Interest-rate swaps)	3,454		-586		2,899		-448
Total derivatives instruments portfolio
Instrument	Notional	In %	MTM	In %	Notional	In %	MTM	In %
Derivatives on debt	159,586	97.88%	-42,064	98.63%	150,891	98.11%	-36,655	98.79%
Derivatives on assets	3,454	2.12%	-586	1,37%	2,899	1.89%	-448	1.21%
Total derivatives instruments	163,040	100.00%	-42,649	100.00%	153,790	100.00%	-37,103	100.00%
N.B.: The mark-to-market (MTM) value does not include the statistical calculations made by the Bank of Italy for the purpose of the publication of the financial accounts.

More specifically, eight CCS matured during 2015 due to maturities associated with foreign-currency denominated issues. The overall notional value in Euro resulting from these eight transactions equalled €7,558,056,834. Of the IRS for hedging purposes of issues of foreign securities as part of the MTN programme, two transactions matured during the year (one in Euro and the other in Swiss francs), with a notional value of €2,033,625,427. With regard to the IRS and swaptions for macro-hedging risk of an interest-rate rise affecting the entire portfolio, during 2015 two IRS matured; while five IRS were generated by the exercise of swaptions during that year and a swaption with a notional value of €3,500,000,000 was restructured, as described above in this chapter. The two matured IRS had an overall notional value of €2,000,000,000. The five IRS that emerged following the exercise of swaptions had an overall notional value of€10,834,000,000.

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Regarding the derivatives instruments on the debt, thus excluding the positions assumed on mortgages receivable pursuant to the 2005 Budget Law, the following two charts show the trend of the notional value by year, starting from 31/12/2014 and from 31/12/2015 and through to the final maturity of the portfolio (2062), assuming that all the receiver swaptions that are present in the portfolio are exercised. After 2048, the last year which shows an IRS with a sizeable notional value (€1 billion), there would remain just one position referring to a security within the MTN programme, with a notional value of €250 million, which will expire in 2062.

FIGURE IV.21: PROJECTED TREND OF NOTIONAL VALUE OF DERIVATIVES PORTFOLIO ASSUMING THE EXERCISE OF SWAPTIONS (data in € mn)

Note: In the comparison between 31/12/2014 and 31/12/2015, the notional value of the increase during the period from 2015 to 2023 refers to a contract already in existence on 31/12/2014. It involves a swaption with a notional value of €2,834,000,000 associated with a pre-existing IRS, which, from the portfolio’s perspective, was not producing additional notional value. At the time of the exercise of the swaption Eurostat accounting rules led to the registering of the notional value of the IRS, both the pre-existing one and that generated by the exercise of the swaption, even though they financially cancel each other out. Whereas on the restructuring, section IV.2 provides an explanation of the difference in notional value over the time span between 2025 and 2032.

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FIGURE IV.22: STRUCTURE PER MATURITY OF DERIVATIVES PORTFOLIO ASSUMING EXERCISE OF SWAPTIONS (data in € mn)

The cost of the debt

The weighted average cost of the new issues in 2015 declined further, down to 0.70 percent from 1.35 percent in 2014. The fall in market rates, described in Chapter II, thus more than compensated the gradual rebalancing of the issues towards longer maturities, which normally have higher rates at issuance.

FIGURE IV.23: COST AT ISSUANCE OF GOVERNMENT SECURITIES – 2005-2015

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The average cost of debt, calculated as the ratio between the cash interest generated by government securities during the year t to the stock of government securities during the year t-1 was equal to 3.39 percent 2015 compared to 3.70 percent in the preceding year.

Considering the impact of the overall transactions in derivatives, the figure for 2015 rises to 3.55 percent, with an increase of 0.16 percent, and is therefore substantially in line with that for 2013 (equal to 0.17 percent) and of 2014 (equal to 0.19 percent) and with the forecasts at the start of the year.

In fact, the preparation of public finance forecasts included in the planning documents, and also in the State budget forecast, takes into account the effect produced by the derivatives using simulation hypotheses consistent with the rest of the estimates. Similarly, all the final data also incorporate the effects of amounts collected or expended as a result of transactions in derivatives.

The difference in cost between the debt portfolio before and after derivatives represents the marginal cost sustained by the Treasury to obtain a longer duration, and thereby a greater coverage of the risk of a rise in interest rates, as opposed to what would be possible by only making use of the instrument of bond issues.

Finally, the average cost of transactions in derivatives for management of the duration of the domestic debt stock was equal to 4.35 percent at end-2015; at the same date, the domestic debt stock before derivatives with a coupon cost of more than 4.35 percent totaled approximately €583 billion.

FIGURE IV.24: AVERAGE COST OF GOVERNMENT SECURITIES BEFORE AND AFTER DERIVATIVES – 2005-2015 (data in %)

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IV.4 TREASURY’S LIQUIDITY MANAGEMENT

2015 was a year characterised by the Treasury’s decidedly high volumes of available liquidity, seeing as the average stock was slightly above that seen the preceding year, the latter having been already considered a significant amount.

The growth in the balance was undoubtedly facilitated by the ECB decisions, launched in part in 2014 and intensified starting in March 2015 with the expansion of the quantitative easing programme (QE). As already discussed, monetary-policy regulations have produced a considerable increase in liquidity available to the system, creating market conditions that favour a decline in yields and sustaining the demand for government securities, which have benefitted greatly as a result. On the other hand, these conditions have made cash management a more demanding process for all Eurozone countries, which have found that they needed to expend higher amounts of stock on the money market, in a scenario in which negative rates prevailed.

The Treasury’s liquidity management took place, as in the past, through the Operations on Behalf of the Treasury (OPTES) described in Chapter I, which monitor the Treasury balances and flows, through a continuous exchange of information between the MEF and the Bank of Italy as well as the use of cash management instruments. These instruments include daily auctions and bilateral transactions – for employing or tapping liquidity – carried out with selected counterparties.

Monitoring the Liquidity Account and trends in daily and monthly liquidity balances

During 2015, efforts by the Treasury and the Bank of Italy continued towards the monitoring of available liquidity and forecasting Treasury cash flows, carried out each business day of the year. As noted in Chapter I, the activities are based on a daily exchange of information between the above-mentioned institutions, with estimated and final data relating to all the receipts and payments through the accounts held at the State Treasury and with the consequent estimation of the Liquidity Account’s balance.

The exchanges of estimated forecasts mentioned above are updated by the Bank of Italy six times a day and substantiated by the Treasury, with the aim of estimating the account balance at the close of the business day. The institutions also share a longer-term estimation scenario, with weekly updating and for time periods of between 30 and 60 days, in line with monetary-policy needs.

In spite of the complexities of the Treasury’s flows, which are due largely to the multitude of players in operation and the relevance of certain movements, monitoring of the Liquidity Account produced satisfactory results in terms of the capacity for estimation even in 2015. The available balances estimated by the Treasury during the weekly exchanges of information with the Bank of Italy in fact registered deviations of 10-15 percent as compared to the final data, correlating these divergences with the totalling up of the daily movements being estimated. However, the percentage deviation is reduced on average by only 1 percent, if correlated to the value of the amount of available liquidity held by the Treasury on the day the estimate refers to.

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Thanks to the monitoring activity and management of the Liquidity Account it has been possible to stabilise balances – between estimated and final data – albeit on rather high levels.

As noted, the Treasury flows are influenced by the trend of the borrowing requirement, which on some days of the month cause the liquidity balance to vary by billions of Euro. The potent volatility of the Account over the span of an average month is illustrated in the Figure below, which shows the fluctuations observed in 2015. For the sake of simplicity, the Figure pegs at zero the minimum balance (which generally occurs between the 15th and the 17th of the month), so that infra-monthly cyclical fluctuations that characterise the Treasury’s liquidity balance can be more easily seen. One may therefore observe how the variation between the maximum and minimum liquidity balance recorded in an average month, even in 2015, could reach over €24 billion.

FIGURE IV.25: AVERAGE INFRA-MONTHLY CHANGES OF TREASURY LIQUIDITY: VARIATIONS COMPARED WITH THE MONTHLY MINIMUM – 2015 (€ mn)

The Figure clearly shows an increase of over €20 billion, which occurred between the 17th and the 21st of the month, as well as the decrease of approximately €10 billion during the first days of the month, unlike 2014 when it was on the first day of the month (in fact, in 2015, on six out of the 12 months of the year the first day was a holiday and therefore there were no Treasury movements those days, or the immediate following days). These variations are largely attributable to collections of tax revenues, which take place in the second half of the month, and to social security payments, concentrated on the first day of the month.

In this regard, it is useful to note that during 2015 a regulatory action was introduced which arranged for all the welfare benefits managed by the INPS (INPS pensions, ex-INPDAP, ex-ENPALS, etc.) be paid on the first day of the month, in order to streamline and standardise the procedures and payment times.7 This

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7 In more detail, Article 6 of Decree Law No. 65of 21 May 2015 established that: “As of 1 June 2015, with the aim streamlining and standadising the procedures and times for the payment of social security benefits from the INPS, pension payments, cheques, pensions and caregivers’ allowances granted to civilian disabled or invalids, as well as the 'INAIL annuities are payable the first day of each month or the following day if a holiday or a non-banking day, with a single payment order where there are no hindrances, with the exception being made for the month of January 2016, in which payment is made on the second banking day. As of 2017, these payments are to be made the second banking day of each month”. Prior to the passage of this law, payments were made on three different days of the month: all the social security benefits dispensed by the INPS (already prior to 2012) on the 1st, the payments dispensed by the ex-ENPALS on the 10th and those dispensed by the ex-INPDAP on the 16th.

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action is not particularly apparent in the Figure, both because it started mid-year and because of the calendar aspects mentioned above.

The decision to aggregate the social security payments, anticipating some of them, also came in response to the need to adopt measures that would not have a burdensome social impact on households – in a context still influenced by the negative effects of the global economic and financial crisis – but does not facilitate the Treasury’s liquidity management. To mitigate the above-mentioned obvious infra-monthly fluctuations, it would be appropriate to adopt measures that would allow for the matching, or at least bringing closer, the days characterised by the largest Treasury receipts with those in which the largest payments take place, so as to reduce the net daily variations and enable the Treasury to lessen the liquidity buffer it holds for the purposes of social security payments.

The high level of liquidity held by the Treasury comes also in response to the need to address the movements stemming from relevant maturities of government securities, which are not always correspondingly balanced out by an equivalent amount of issues, especially with regard to medium- and long-term securities. In fact, according to market practices, the issues of different BOTs are normally distributed within different tranches over a period of a few months, whereas the related reimbursements take place in a single installment on the day securities mature.

The fluctuations illustrated in the preceding Figure are therefore also connected to the issues and, above all, to the maturities of the securities, which at times contribute specifically to the considerable decline seen at the start, middle and end of the month.

Further evidence of the volatility of the Treasury’s liquidity stock can be obtained through a comparison of the trend of balances in different months of the year. For example, Figure IV.26 below shows the minimum and maximum variations observed within each month of 2014 and 2015. This collection of data furnishes results that differ from those of the preceding figure, which presented average monthly data and therefore tended to partially diminish the extent of the fluctuations (since the minimum and maximum days do not coincide in all months, especially because of calendar-related factors). Looking at the data points, variations between the monthly minimums and maximums are apparent, and in 2015 these have on average exceeded €32 billion, an increase on the approximately €30.5 billion registered in 2014.

the INPS, pension payments, cheques, pensions and caregivers’ allowances granted to civilian disabled or invalids, as well as the 'INAIL annuities are payable the first day of each month or the following day if a holiday or a non-banking day, with a single payment order where there are no hindrances, with the exception being made for the month of January 2016, in which payment is made on the second banking day. As of 2017, these payments are to be made the second banking day of each month”. Prior to the passage of this law, payments were made on three different days of the month: all the social security benefits dispensed by the INPS (already prior to 2012) on the 1st, the payments dispensed by the ex-ENPALS on the 10th and those dispensed by the ex-INPDAP on the 16th.

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FIGURE IV.26: VARIATION BETWEEN MAXIMUM AND MINIMUM MONTHLY BALANCES AND AVAILABLE LIQUIDITY OF THE TREASURY – 2014-2015 (€ mn)

The depiction of the monthly data is useful also because it shows the annual cyclical trends of the borrowing requirement, which have a significant effect on liquidity levels. The peak in June, for example, is easily spotted both in 2014 and 2015 as it mainly depends on the tax revenues concentrated in that month of the year. In general, the monthly trend appears to be quite similar in both years represented, but with a considerable difference with regard to August (essentially due to the fact that the first day of this month was not a business day in 2015). The curve trend shows divergences in just a few other months, which mainly show a different distribution of government securities maturities; in this respect the trend of December 2015 is particularly significant, a month burdened with sizeable reimbursements.

The volumes and trends of the Treasury flows and of the public debt illustrated here are therefore such as to require, especially during particular periods of time, the Treasury to maintain a sizeable liquidity reserve, aimed at countering the fluctuations in balances and tackling expected and unexpected movements with prudence.

The efficiency of cash management and the market situation

The need to move large balances of liquidity on a daily basis has not, however, been matched by results on the money market. The effectiveness of OPTES in 2015 was in fact marked by a strong reduction in the quantities allocated compared the preceding year; specifically, from the month of March, and therefore coinciding precisely with the launch of the QE, there was a drastic fall in demand on the part of market intermediaries accompanied by an analogous trend of the yield curve.

The contraction in the employment of liquidity at OPTES auctions led to an increase in balances held by the Treasury at the Bank of Italy, in response to which greater use was made of bilateral transactions; the latter, having a longer

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duration, enabled the Treasury to limit risk due to the impact of negative rates to within reasonable margins.

Figure IV.27 – which relates the average use of liquidity at Treasury auctions to other relevant episodes in monetary policy-making, from the start of the new OPTES in November 2011 – shows the gradual decline in demand starting from the ECB decisions of June 2014, and then further accentuated from the time of the introduction of the PSPP. As can be seen in the Figure below, the quantities allocated since March 2015 were similar to those relating to 2012, when the European Central Bank launched two LTRO auctions placing a large volume of liquidity on the market.

The Figure does not show, in order to allow for legibility, the four auctions carried out during 2015. These operations, held quarterly in March, June, September and December, were not however particularly successful among market intermediaries; the apparent lack of interest in the funds was confirmed by the limited request for liquidity seen at OPTES auctions in those same months.

FIGURE IV.27: AVERAGE DAILY USE AT OPTES AUCTIONS (€ mn)

The impact of monetary policy is also clear in the trend of interest rates. For example, Figure IV.28 shows during 2014-2015 both the EONIA rate  - market reference for overnight maturities – as well as the weighted average yield rate  at the daily OPTES auctions when there was participation (as mentioned, these auctions have the same overnight maturity).

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FIGURE IV.28: TREND OF OVERNIGHT MONEY MARKET RATES AND RATES AT OPTES AUCTIONS 2014-2015 (rates in %)

As can be seen, from the second half of 2014 there was a slow but continuous decline in money-market yields, chiefly due to reductions in reference rates resulting from ECB interventions. In particular, it is possible to make out the typical cyclical trend characterised by peaks of demand and yield on the last day of the month. This tendency gradually disappears as the market becomes saturated, and by the second quarter of 2015 the market no longer appears to express any demand for liquidity, to the point of leading the ECB to even lower rates in December (the only intervention of the year), the effects of which are clearly visible in the Figure.

The Figure also shows how this trend is reflected on the yields of the OPTES auctions, although the end of 2014 shows split between the EONIA rate and the weighted average yield on the auctions. This phenomenon can be attributed to the minimum rate set by the Treasury at such auctions, which – quite clearly – had, since June 2014, been kept at zero in order to avoid market transactions at negative rates. The situation changed in December 2015, when further monetary-policy cuts in rates made it no longer possible to employ liquidity at auction without applying negative rates. This led the Treasury to reduce the minimum rate level accepted by 10 basis points, while retaining higher levels for those more prevalent securities on the market with the same overnight maturity.

Use of Treasury liquidity

Even though the market has been characterised by the above-mentioned decline in liquidity preference and significant reduction in yield balances, 2015 OPTES auctions have registered, as a whole, just somewhat less available liquidity use than in preceding years. In fact, during 2015 the Treasury decided on a marked increase of both the liquidity offered at auction as well as the ongoing use of bilateral transactions.

In more detail, the OPTES auctions allowed the Treasury to employ a total of approximately €145 billion in the overnight maturity (95 percent of which was

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allotted in the morning auctions and the residual amounts allotted in the afternoon auctions), compared to the peak of €730 billion of the preceding year, which – as illustrated by the following Figure – had benefitted from an exceptional money-market liquidity demand, especially in the first quarter, to be later drastically reduced by the effects of the ECB decisions of June 2014.

FIGURE IV.29: AVERAGE USE AT DAILY OPTES AUCTIONS – 2012-2015 (€ mn)

The largest share of liquidity was therefore invested through bilateral transactions, aimed at using the most stable base of available liquidity that had previously been mostly held in restricted deposits at the Bank of Italy. In fact, from mid-2014 on the use of OPTES transactions have not included restricted deposits, since resorting to such instruments has become undesirable with the coming into force of European regulations which penalise the balances held by governments at central banks.

In 2015, liquidity invested through bilateral transactions totalled on average €51 billion at month end, compared to approximately €33 billion in 2014. The OPTES bilateral transactions have an average duration of 14 days, which enabled the Treasury to limit the impact of negative rates, which was more prominent on very short-term maturities such as the overnight maturity.

It is worth pointing out, given the Treasury’s sizeable liquidity, that no OPTES funding transactions were carried out in 2015.

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FIGURE IV.30: AVERAGE DISTRIBUTION OF LIQUIDITY AT MONTH END, BY TYPE OF USE – COMPARISON BETWEEN 2014 AND 2015

The preceding figures illustrate the types of employment of the Treasury’s liquidity, according to subdivisions observed at month end. The comparison between 2014 and 2015 clearly reveals the impact of monetary-policy regulations, which – aside from having led to the exclusion of restricted deposits – has made it more difficult to place liquidity on the market and has consequently increased the share of balances held by the Liquidity Account.

In order to have a view of the trend of Treasury liquidity over the year, the following Table IV.10 shows the total size of the liquidity at each month’s end in 2015, using the same subdivision by type of use illustrated immediately above, between Liquidity Account and market transactions.

TABLE IV.10: LIQUIDITY ACCOUNT AND USES OF TREASURY LIQUIDITY AT MONTH END – 2015 (€ mn)
Month	Liquidity Account balance	OPTES liquidity transactions	Treasury’s total liquidity
January	26,023	56,130	82,153
February	11,462	67,030	78,492
March	14,473	63,830	78,303
April	24,934	57,630	82,564
May	41,357	56,430	97,787
June	40,816	57,030	97,846
July	36,035	57,200	93,235
August	12,047	58,700	70,747
September	7,249	53,800	61,049
October	24,584	52,700	77,284
November	22,978	51,000	73,978
December	4,752	30,000	34,752

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The table highlights the Liquidity Account’s elevated balance, particularly during the first quarter of 2015, held also for the prudential purposes of dealing with the considerable reimbursement of government securities which came successively throughout all of 2015, but which stood out in the months of June and December in particular. The balances also benefitted from the favourable trend in debt borrowing, discussed in Chapter II, as well as the ECB’s QE programme, which facilitated government securities issues and – within the limits permitted by policies aimed at reducing the public debt – pushed European sovereign issuers to guarantee the right amount of liquidity to all the debt instruments in use, to meet the market’s increase in demand.

Within this context, the Treasury continued to carry out careful analyses, to both assess the adequate margin of liquidity to be held to achieve efficient debt management, and the choice of different instruments to aid liquidity use, all with the goal of identifying solutions that guarantee a correct balance between costs and risks.

The regulatory context

The monetary-policy provisions have also required a considerable effort in their concrete adaptation to Italian law. This was particularly true of the year the modifications generated by the 2015 Stability Law were applied, as a consequence of the developments produced by the ECB Decision of 5 June 2014 on the remuneration of government deposits at national central banks.

The Stability Law’s enactment required a preliminary research phase, conducted by the MEF (the Treasury Department and the State General Accounting Department) in collaboration with the Bank of Italy, to precisely identify the government deposits that are subject to the ECB decisions. A ministerial decree was therefore issued on 26 June 2015 that defines and lists these deposits – pursuant to Article 5, paragraph 5, of the Consolidated Law on the Public Debt of 30 December 2003 – and adopts solutions aimed at achieving a unified management of the Liquidity Account. Please note that the list does not include the Fund for the Amortisation of Government Securities because it was transferred to the Cassa Depositi e Prestiti S.p.A. as of 1 January 2015, following the stipulations of the relevant Convention.

Adaptation to the system formed by this new context of EU regulations has also brought about a new, revised OPTES Convention, which establishes conditions for the holding of the Liquidity Account and accounts similar to it, with the aim of stabilising the balances of the aforementioned government deposits held at the Bank of Italy, promoting efficiency in the markets and facilitating the carrying out of monetary policy by the competent authorities. The new law, which came into effect in December 2015, in place of the preceding convention stipulated in 2011, has therefore positioned the OPTES in line with the most recent monetary-policy decisions and directions.

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Conclusions

In spite of the decidedly adverse conditions facing liquidity management, in 2015, the Treasury was nonetheless committed to maintaining its continuous presence on the money market with short- and very short-term maturities, through OPTES auctions and operations under the Liquidity Account.

Cash management activity has become more demanding due to the excess liquidity on the market and the presence of negative rates on short-term maturities, which have made the use of the Treasury’s considerable resources burdensome. Nevertheless, as outlined in this Report, for countries like Italy above all, market conditions have generally produced positive effects with regard to debt management, with wide-ranging benefits affecting the demand for government securities and the decline in their yields.

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