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, 2017. 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 Any statement contained herein, or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this document to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be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 Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this document.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:

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The Republic of Italy’s goals and strategies;

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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;

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

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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;

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

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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;

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The Republic of Italy’s public finance objectives, macroeconomic and finance indicators forecasts, and the potential financial impact of the 2017 National Reform Programme and the 2018 National Reform Programme;

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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;

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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;

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

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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

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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:

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External factors, such as:

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interest rates in financial markets outside Italy;

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present and future exchange rates of the Euro;

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the impact of changes in the credit rating of Italy;

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

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

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Internal factors, such as:

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general economic and business conditions in Italy;

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

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the ability of Italy to effect key economic reforms;

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

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the level of budget deficit and investments;

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the strength of the banking sector;

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the level of inventories; and

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the level of foreign direct and portfolio investment.

TABLE OF CONTENTS

DEFINED TERMS AND CONVENTIONS			7
SUMMARY INFORMATION			10
RECENT DEVELOPMENTS			13
REPUBLIC OF ITALY			32
	Area and Population		32
	Government and Political Parties		35
	The European Union		37
	Membership of International Organizations		40
THE ITALIAN ECONOMY			42
	General		42
	Key Measures related to the Italian Economy		44
	Gross Domestic Product		50
	Principal Sectors of the Economy		52
	Role of the Government in the Economy		53
	Employment and Labor		58
	Prices and Wages		59
	Social Welfare System		60
MONETARY SYSTEM			62
	Monetary Policy		62
	Exchange Rate Policy		65
	Banking Regulation		65
	Risk-Based Capital Requirements and Solvency Ratios		69
	Equity Participations by Banks		70
	Measures to assess the condition of Italian Banking System		72
	Atlante Funds		74
	Credit Allocation		75
	Exchange Controls		75
THE EXTERNAL SECTOR OF THE ECONOMY			76
	Foreign Trade		76
	Geographic Distribution of Trade		77
	Balance of Payments		79
	Current Account		81
	Capital Account		81
	Financial Account and the Net External Position		81
	Reserves and Exchange Rates		83
PUBLIC FINANCE			85
		The Budget Process	85
		European Economic and Monetary Union	86
		Accounting Methodology	88
		Measures of Fiscal Balance	88
		The 2017 Economic and Financial Document	90
		The Update of the 2017 Economic and Financial Document	92
		The 2018 Economic and Financial Document	94
		The Update of the 2018 Economic and Financial Document	96
		Revenues and Expenditures	98
		Expenditures	99
		Revenues	100
		Government Enterprises	102
PUBLIC DEBT			104
		General	104
		Summary of Internal Debt	108
		Summary of External Debt	109
		Debt Record	110

TABLES AND SUPPLEMENTARY INFORMATION

111

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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.

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

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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.

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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.

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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.

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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”).

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

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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.

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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:

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all annual rates of growth as average annual compounded rates;

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

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all financial data in current prices.

Amounts included in this Annual Report are normally rounded. In particular, amounts stated as a percentage are normally rounded to the first decimal place. Totals in certain tables 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 16, 2018 and appendices thereto (together the “2018 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 29, 2018 and appendices thereto (together the “2018 Bank of Italy Annual Report”) and in the Annual Report of the Bank of Italy dated May 30, 2019 and appendices thereto (together the “2019 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 2018 (Documento di Economia e Finanza 2018), dated April 26, 2018 (the “2018 Economic and Financial Document”), which includes the 2018 stability programme (the “2018 Stability Programme”) attached as Exhibit 2 to this Annual Report and the 2018 national reform programme (the “2018 National Reform Programme”) attached as Exhibit 3 to this Annual Report; (ii) the update of the 2018 Economic and Financial Document (Nota di Aggiornamento del Documento di Economia e Finanza 2018), dated September 30, 2018 (the “Update of the 2018 Economic and Financial Document”) attached as Exhibit 4 to this Annual Report; (iii) the report on public debt in 2017 (Rapporto sul Debito Pubblico 2017), dated July 26, 2018 (the “2018 Report on Public Debt”) attached as Exhibit 5 to this Annual Report, and (iv) the economic and financial document of 2019 (Documento di Economia e Finanza 2019), dated April 9, 2019 (the “2019 Economic and Financial Document”), which includes the 2019 stability programme (the “2019 Stability Programme”) attached as Exhibit 6 to this Annual Report and the 2019 national reform programme (the “2018 National Reform Programme”) attached as Exhibit 7 to this Annual Report.

Revised National Accounts

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. Under ESA2010, all European Union countries apply a uniform methodology and present their results on a common calendar. ESA2010 has introduced several key differences from its predecessor European System of Accounts (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”.

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All references herein to “we”, “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 2018 GDP (at current prices in U.S. dollars), is the eight largest in the world. In 2017, Italy’s real GDP increased by 1.5 per cent, compared to a 0.9 per cent increase in 2016, mainly due to a continued expansion of domestic demand (net of inventories) and private consumption. In 2018, Italy’s GDP increased by 0.9 per cent compared to 2017, mainly due to a continued expansion of domestic demand (net of inventories), albeit at a slower rate than in 2017. 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, 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”.

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 (“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 €1.00 for US$1.1789. On December 29, 2017, the European Central Bank (“ECB”) exchange reference rate was €1.00 for US$1.1993. 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. In recent years, Italy has recorded a growing trade surplus, increasing from €29.2 billion in 2013 to approximately €47.1 billion in 2018. The improvement reflects principally a decrease in imports, specifically in the extractive industries.

Inflation. In 2017, Italy recorded an average inflation of 1.3 per cent measured by the European Union harmonized consumer price index (HICP), compared to an average deflation of 0.1 per cent in 2016. Among other factors, the inflation was driven by an increase in food and energy prices in the first six months of 2017, which was partially offset by historically low core inflation. The average increase in the price of both goods and services in 2018 was 1.2 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. However, since the mid-90s Italy has attempted to reduce its net borrowing amounts as a percentage of GDP although they continued to be higher than the 3.0 per cent ratio imposed by the Maastricht Treaty in 2001 and each year during 2003-2006 and 2009-2011 (in this latter case mostly due to the effects of the international financial crisis followed by the Eurozone sovereign debt crisis). Italy’s deficit-to-GDP ratio was 2.5

per cent in 2016. As set out in the Update of the 2018 Economic and Financial Document, Italy’s deficit-to-GDP ratio was 2.4 per cent in 2017 and its debt-to-GDP ratio (gross of euro area financial support) was 131.2 per cent in 2017. Italy’s debt-to-GDP ratio marginally increased in 2018 to 128.8 per cent net of euro area financial support and 132.2 per cent gross of euro area financial support. For additional information with respect to Italy’s debt-to-GDP, see “The Italian Economy”, “Public Finance”, Exhibit 2—2018 Stability Programme, Exhibit 4—Update of the 2018 Economic and Financial Document, and Exhibit 6—2019 Stability Programme.

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 March 4, 2018 resulted in no political party or coalition having a majority of either the Chamber of Deputies or the Senate. The center-right coalition, led by Lega, obtained the highest number of votes on a national level for the elections of both the Chamber of Deputies and the Senate, while Movimento 5 Stelle obtained the highest number of votes on a national level for an individual political party. On May 31, 2018, President Sergio Mattarella appointed Mr. Giuseppe Conte to form a new government, and Mr. Giuseppe Conte was sworn in as Prime Minister on June 1, 2018. The government comprises members from and is supported by Lega and Movimento 5 Stelle. In the European Parliamentary elections held in Italy on May 26, 2019, Lega, won approximately 34 per cent of the votes, increasing significantly the votes won in the 2018 Italian Parliamentary elections. Partito Democratico, a left-wing political party, remained the second largest party with approximately 23 per cent of the votes. Movimento 5 Stelle, which had come first in the 2018 Italian Parliamentary elections, fell to third place with approximately 17 per cent of the votes.

2018 Developments. During 2018, the Italian Government adopted a series of measures aimed at improving, among other things, the flexibility of Italy’s labor market. The main measures adopted by the Government in 2018 comprised, inter alia:

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Law Decree No. 38 of April 27, 2018 (converted into Law No. 77 of June 21, 2018), extending the term for repayment of the bridge loan to Alitalia Società Aerea Italiana S.p.A. to December 15, 2018, and Law Decree No. 135 of December 14, 2018 (converted into Law No. 12 of February 11, 2019), which further extended the maturity of the bridge loan to the date falling 30 days after completion of a sale of Alitalia;

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Law Decree No. 87 of July 12, 2018 (so-called Decreto Dignità) (converted into Law No. 96 of August 9, 2018), which reduced the maximum term applicable to fixed-term employment contracts to 24 months, increased minimum compensation for wrongful dismissals, introduced fines for companies relocating abroad after having received State aid, increased employer social contributions and abolished the so-called split payment for professionals; and

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Law Decree No. 91 of July 25, 2018 (converted into Law No. 108 of September 21, 2018), which extended the culture bonus programme for young Italians until the end of 2018, and introduced a new 180 days deadline for small co-operative banks to adhere to the ‘cohesion contracts’ introduced for co-operative banking groups.

On December 30, 2018, Parliament approved the stability law for 2019 and the budget law for 2019-2021 through Law No. 145 of December 30, 2018. The stability law for 2019 includes measures for the introduction of a basic universal income (so-called Reddito di Cittadinanza), a partial flat tax rate for self-employed workers and certain changes to the pensions system.

2019 Developments. During 2018, the Italian Government adopted a series of measures aimed at implementing, among other things, the key measures included in the 2019 Budget. The main measures adopted by the Government in 2019 comprised, inter alia:

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Law Decree No. 1 of January 8, 2019, which provided for a state guarantee of up to €3 billion for future bonds issued by Banca Carige S.p.A., as well as a guarantee to enhance the quality of collateral in order to access emergency liquidity assistance, and allowing for the Italian Government’s potential participation in a capital increase;

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Law Decree No. 4 of January 28, 2019, which adopted the basic universal income (Reddito di Cittadinanza) aimed at preventing poverty and social disparity, and allowed people to qualify for an early retirement (Quota Cento);

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Law Decree No. 32 (the so-called Decreto Sblocca Cantieri, converted into Law No. 55 of June 14, 2019) aimed at fostering economic growth by reviving public investment;

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Law Decree No. 34 (the so-called “Decreto Crescita”) (converted into Law No. 58 of June 28, 2019) aimed at fostering the economic growth of the country, and including fiscal and financial measures, as well as measures intended to promote private investments and at protecting “made in Italy”.

Issuer Rating of the Republic of Italy. As of the date hereof, the Republic of Italy’s long-term credit is rated BBB with negative outlook by Standard & Poor’s, BBB with negative outlook by Fitch Ratings and Baa3 with stable outlook by Moody’s.

RECENT DEVELOPMENTS

The information contained in this section supplements the information about Italy corresponding to the headings below that are contained in this Annual Report. This information is not necessarily indicative of the Italian economy or fiscal results for the full year or any other period. You should read the following discussion of recent developments together with the more detailed information appearing elsewhere in this Annual Report.

REPUBLIC OF ITALY

Area and Population

Population. According to ISTAT data, as of December 31, 2018, Italy’s resident population was estimated to be approximately 60.391 million, compared to approximately 60.484 million as of December 31, 2017.

According to ISTAT data, as of December 31, 2018, there were approximately 5.2 million foreigners holding permits to live in Italy, a 1.7 per cent increase from December 31, 2017.

The European Union

In the European Parliamentary elections held in Italy on May 26, 2019, Lega, a right-wing political party, which is part of the Identity and Democracy coalition, won approximately 34 per cent of the votes increasing significantly the votes won in the 2018 Italian Parliamentary elections. Partito Democratico, a left-wing political party, remained the second largest party with approximately 23 per cent of the votes. Movimento 5 Stelle, which had come first in the 2018 Italian Parliamentary elections, fell to third place with approximately 17 per cent of the votes. These election results did not result in a change in Italy’s Government or trigger national elections. For further information relating to the current composition of the European Parliament, see “Republic of Italy – The European Union – The European Parliament”.

THE ITALIAN ECONOMY

General

Italy’s debt-to-GDP ratio marginally increased in 2018 to 128.8 per cent net of euro area financial support and 132.2 per cent gross of euro area financial support, while the primary surplus amounted to 1.6 per cent. Excluding the financial support provided to European Monetary Union (“EMU”) countries, the increase from 2017 was of 0.8 percentage points.

According to Italy’s most recent estimates, Italy’s debt-to-GDP ratio, gross of euro area financial support, is expected to reach 132.6 per cent in 2019. In the period 2020 to 2022, debt-to-GDP is expected to contract by 3.7 percentage points to 128.9 per cent.

In 2018, following a 1.33 per cent average harmonized inflation in 2017, Italy recorded a 1.24 per cent average harmonized inflation as measured by the HICP.

Annual Per Cent Change in Real GDP (2014-2018)

	2014		2015		2016		2017		2018
Italy		0.1		0.9		1.1		1.6		0.9
EU⁽¹⁾		1.8		2.3		2.0		2.4		2.0
Euro area⁽²⁾		1.4		2.1		2.0		2.4		1.9

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(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.

Key Measures related to the Italian Economy

On April 18, 2019, the Italian Government adopted Law Decree No. 32 (the so-called Decreto Sblocca Cantieri, converted into Law No. 55 of June 14, 2019) (the “Decree Favoring Construction”) aimed at fostering economic growth by reviving public investment. In particular, the Decree Favoring Construction aims at incentivizing investment in public infrastructure and construction sites through several measures designed to facilitate the public procurement process. These measures include the implementation of simplified bidding procedures to counter the difficulties faced by firms, especially smaller sized ones, when participating in public procurement. Moreover, the Decree Favoring Construction includes ad hoc measures aimed, among other things, at facilitating and promoting the reconstruction of those areas of Italy that have been affected by earthquakes, reconstructing the Morandi bridge in Genoa which collapsed on August 14, 2018 and simplifying the authorization process for the construction of waste facilities in Rome.

On April 30, 2019, the Italian Government adopted Law Decree No. 34 (the so-called “Decreto Crescita”) (“Growth Decree”) (converted into Law No. 58 of June 28, 2019) aimed at fostering the economic growth of the country. The Growth Decree includes:

fiscal measures such as (a) reduced corporate income tax rates; (b) measures allowing companies and professionals to apply a higher base price for capital goods for depreciation purposes; (c) additional deductions on tax payable on real estate; (d) reduced income tax rates for certain categories of Italian citizens moving their tax residence to Italy from abroad;

financial measures such as (a) measures intended to simplify the securitization process of non-performing loans; (b) the introduction of simplified investment companies with fixed capital; and (c) simplified regulation for companies operating in the financial technology sector;

measures intended to promote private investments such as measures extending the circumstances in which small and medium enterprises (or SME) can access the SMEs Protection Fund; and

measures aimed at protecting “made in Italy” including (a) the creation of a fund for venture capital investments into entities that own or license historical Italian brands; and (b) provisions for the protection of Italian products against Italian sounding (i.e. the practice of using names, images, geographical indications or brands reminiscent of Italy in marketing products which have no connections with Italy).

Gross Domestic Product

In 2018, Italy’s GDP increased by 0.9 per cent compared to 2017, mainly due to continued expansion of domestic demand (net of inventories) albeit at a slower rate than in 2017. In the first quarter of 2019, Italy’s real GDP increased at a seasonally adjusted rate of 0.1 per cent, compared to the last quarter of 2018, driven by higher consumption expenditure and exports and a lower level of imports.

In the fourth quarter of 2018 and the first quarter of 2019, Italy’s GDP decreased by 0.3 per cent and 0.7 per cent compared to the fourth quarter of 2017 and the first quarter of 2018, respectively. This decrease was mainly due to higher uncertainty in global trade and financial markets, which led companies to adopt a more cautious approach for their investments and production strategies.

Italy’s real GDP increased by 0.1 per cent in the first quarter of 2019 compared to the fourth quarter of 2018 (or 0.5 per cent at an annualised rate), partially offsetting the negative carryover from 2018.

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

GDP Summary

	2014		2015		2016		2017		2018
Nominal GDP (in € millions)⁽¹⁾		1,621,827		1,652,085		1,689,824		1,727,381		1,756,981
Real GDP (in € millions)⁽²⁾		1,542,924		1,557,180		1,574,604		1,601,123		1,614,865
Real GDP % change		0.1		0.9		1.1		1.7		0.9
Population (in thousands)		60,796		60,666		60,589		60,484		60,391

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(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 2018, private sector consumption in Italy increased by 0.6 per cent compared to a 1.4 per cent increase in 2017. This slow-down in the increase of private sector consumption was mainly due to Italian families marginally increasing savings.

Public Sector Consumption. In 2018, public sector consumption in Italy increased by 0.2 per cent compared to a 0.1 per cent increase in 2017, mainly due to an increase in the social monetary benefits granted to Italian families.

Gross Fixed Investment. In 2018, gross fixed investment in Italy increased by 3.4 per cent compared to a 3.8 per cent increase in 2017, representing the main driver of the GDP growth.

Strategic Infrastructure Projects. Italy’s infrastructure is still significantly underdeveloped compared to other major European countries. In 2018 general government expenditure for investments was 2.0 per cent of GDP, in line with the 2.0 per cent of GDP rate recorded in 2017.

Principal Sectors of the Economy

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⁾

	2014				2015				2016				2017				2018
	in € millions		% of Total		in € millions		% of Total		in € millions		% of Total		in € millions		% of Total		in € millions		% of Total
Agriculture, fishing and forestry		27,939		2.0		29,221		2.1		29,280		2.1		28,143		1.9		28,385		4.0
Industry		259,892		18.6		262,717		18.6		268,281		18.8		277,725		19.2		282,782		19.3
of which: Manufacturing		222,534		15.9		228,673		16.2		234,571		16.4		243,113		16.8		248,109		16.9
Mining Industry		6,767		0.5		5,924		0.4		7,243		0.5		7,600		0.5		7,514		0.5
Supply of Energy, Gas, Steam, and Conditioned Air		21,615		1.5		19,744		1.4		18,539		1.3		19,019		1.3		18,912		1.3
Water Supply Drainage and Wasting		9,463		0.7		9,212		0.7		9,384		0.7		9,629		0.7		9,853		0.7
Construction		64,171		4.6		63,627		4.5		63,853		4.5		64,293		4.4		65,384		6.5
Services		1,046,823		74.9		1,055,388		74.8		1,065,261		74.7		1,080,251		74.5		1,087,144		74.3

	2014				2015				2016				2017				2018
	in € millions		% of Total		in € millions		% of Total		in € millions		% of Total		in € millions		% of Total		in € millions		% of Total
of which: Commerce, repairs, transport and storage, hotels and restaurants		283,935		20.3		289,949		20.6		295,170		20.7		305,037		21.0		310,869		21.2
Information and communication services		59,774		4.3		60,490		4.3		63,277		4.4		64,268		4.4		62,503.6		4.3
Financial and monetary intermediation		76,301		5.5		75,627		5.4		75,946		5.3		76,820		5.3		75,812		13.6
Real estate activities		191,477		13.7		194,167		13.8		193,601		13.6		195,890		13.5		199,119		13.6
Professional, scientific and technical activities		129,733		9.3		130,897		9.3		133,272		9.3		137,820		9.3		135,314		9.2
Public administration and defense, mandatory social insurance, education, public health, social and personal services		294,195		17.8		247,855		17.6		245,536		17.2		245,149		16.9		244,411		16.7
Recreational and artistic activities, repairs of goods and homes, and other services		56,320		4.0		56,295		4.0		58,542		4.1		58,214		4.0		58,554		4.0
Value added at market prices		1,398,237		100		1,410,389		100		1,426,096		100		1,449,889		100		1,463,241		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: Istat.

Employment and Labor

Employment

	2014		2015		2016		2017		2018
Employment in standard labor units (% on prior year)		0.2		0.6		1.3		0.9		0.9
Participation rate (%)⁽¹⁾		63.9		64.0		64.9		65.4		65.6
Unemployment rate (%)⁽²⁾		12.7		11.9		11.7		11.2		10.6

__________________________

(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: ISTAT.

Employment by sector. In 2018, approximately 73.4 per cent of the employed population was employed in the service sector, 16.9 per cent was employed in the industrial sector (excluding construction), 6.1 per cent was employed in the construction sector and 3.6 per cent was employed in the agriculture, fishing and forestry sector.

Employment by geographic area. The unemployment rate in Southern Italy, which reached 18.4 per cent in 2018, has been historically higher than the unemployment rate in Northern and Central Italy, reaching 6.6 per cent and 9.4 per cent, respectively. Against 2017, unemployment rate in the South of Italy decreased by 1.0 per cent compared to a 0.6 per cent decrease and a 0.3 per cent decrease in the unemployment rate in the North of Italy and the Center of Italy, respectively.

Prices and Wages

Social Welfare System

The following table shows estimated public expenditure for pensions as a percentage of GDP for the periods 2020 to 2070 based on the implementation of the various reforms described in the “Social Welfare System” section of this Annual Report.

Estimated Pension Expenditure (as a % of GDP)

		2015				2020				2025				2030				2035				2040				2045				2050				2055				2060				2065				2070
Current Legislation			15.7				15.8				16.0				16.8				17.8				18.3				18.1				16.9				15.6				14.7				14.1				13.8

__________________________

Source: Ministry of Economy and Finance.

THE EXTERNAL SECTOR

Balance of Payments

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

Balance of Payments

	2014			2015			2016			2017			2018
	(in € billions)
Current Account⁽¹⁾		31.0			22.2			42.9			44.9			44.0
per cent of GDP		1.9			1.3			2.5			2.6			2.5
Goods		47.4			51.1			57.7			55.0			47.1
Non-energy products		88.9			83.3			83.1			87.0			86.6
Energy products		(41.4	)		(32.2	)		(25.5	)		(32.0	)		(39.5	)
Services		(1.1	)		(3.2	)		(3.4	)		(4.3	)		(2.7	)
Primary Income		0.5			(10.4	)		5.4			9.3			17.3
Secondary Income		(15.9	)		(15.3	)		(16.8	)		(15.1	)		(17.6	)
EU Institutions		(14.3	)		(13.2	)		(14.9	)		(11.7	)		(14.9	)
Capital Account⁽¹⁾		2.7			6.2			(3.1	)		0.6			(0.6	)
Intangible assets		(0.9	)		(1.2	)		(2.0	)		(1.2	)		(1.5	)
Transfers		3.6			7.4			(1.1	)		1.8			0.9
EU Institutions		4.8			8.7			0.5			3.3			2.1
Financial Account⁽¹⁾		51.5			35.2			59.9			51.4			30.0
Direct investment		2.3			2.4			(9.7	)		3.3			(3.1	)
Outward		15.3			14.4			13.7			12.0			23.4
Inward		12.9			12.0			23.4			8.7			26.5
Portfolio investment		4.1			97.5			159.5			87.5			121.7
Equity and investment funds		78.5			84.3			53.6			86.6			29.1
Debt Securities		23.3			36.5			30.7			29.6			16.9
Financial Derivatives		(3.6	)		2.3			(3.0	)		(7.3	)		(2.8	)
Other investment		49.6			(67.6	)		(85.8	)		(34.7	)		(88.5	)
Change in official reserves		(1.0	)		0.5			(1.2	)		2.7			2.6
Errors and omissions		17.9			6.8			20.0			5.9			(13.5	)

__________________________

(1)	At current prices.

Source: Bank of Italy.

Current Account

In 2018, Italy maintained a current account surplus of €44.0 billion (2.5 per cent of GDP), compared to a current account surplus of €44.9 billion (2.6 per cent of GDP) in 2017. Similar to 2017, Italy’s current account surplus in 2018 was driven principally by the sale of non-energy products, which in 2018 accounted for €86.6 billion as compared to €87.0 billion in 2017.

Visible Trade. Italy’s fob-fob merchandise trade surplus decreased to €47.1 billion (2.7 per cent of GDP) in 2018 compared to €55.0 billion (3.2 per cent of GDP) in 2017. The non-energy component recorded a surplus of €86.6 billion or 4.9 per cent of GDP in 2018, compared to a surplus of €87.0 billion or 5.0 per cent of GDP in 2017. At the same time, the energy deficit increased to €39.5 billion or 2.2 per cent of GDP in 2018 from €32.0 billion or 1.9 per cent of GDP in 2017, mainly due to an increase in the cost of energy.

Invisible Trade. The deficit in services decreased to €2.7 billion in 2018, compared to a deficit of €4.3 billion in 2017. The lower deficit mainly resulted from a 3.4 per cent decrease in transport services deficit compared to 2017, and a 11.0 per cent increase in the surplus in tourism services, mainly due to a 6.5 per cent increase in inflows from foreign tourists, mainly European and American tourists.

Primary Income. For a third consecutive year, the primary income account ran a surplus in 2018, mainly due to a material decrease in the deficit between capital gains generated from investments in Italian financial instruments by foreign investors, and capital gains generated from foreign financial instruments by Italian investors. The surplus in 2018 increased by €8 billion to €17.3 billion, from a surplus of €9.3 billion in 2017.

Secondary Income. In 2018, the deficit on secondary income account increased to €17.6 billion, compared to €15.1 billion in 2017. The increase in the deficit was mainly caused by an increase in repatriation expenses of immigrants and payments to EU institutions, which increased from €11.7 billion in 2017 to €14.9 billion in 2018.

Capital Account

In 2018, the capital account ran a deficit of €0.6 billion, compared to a surplus of €0.6 billion in 2017, mainly due to net capital transfers from the EU to the Italian public administration being phased out.

Financial Account and the Net External Position

In 2018, the financial account surplus decreased to €30.0 billion from €51.4 billion in 2017 due to a net increase in portfolio investments, which increased by €34.2 billion from 2017. In 2018, the financial account showed that, at the end of 2018, Italy’s net external debtor position amounted to €69.0 billion, or 3.9 per cent of GDP. The continued decrease in Italy’s net external debtor position recorded since 2015 (€114.7 billion, €249.2 billion and €395.6 billion in 2017, 2016 and 2015, respectively) is mainly due to a surplus in the current account.

Direct Investment. Italian direct investment abroad doubled to €23.4 billion in 2018 compared to €12 billion in 2017, mainly due to an increase in the value attributed to foreign companies acquired in 2018 by Italian companies, mostly in the infrastructure, energy and telecommunication sectors. Foreign direct investment in Italy increased to €26.5 billion compared to €8.7 billion in 2017, mainly due to the effects of the merger between Luxottica and Essilor, which accounted for €7 billion of the increase, and capital increases and inter-company loans from foreign parent companies to Italian subsidiaries.

Portfolio Investment. In 2018, the balance of portfolio investment registered net outflows of €121.7 billion. In addition to Italian residents purchasing foreign securities for €46 billion in 2018

(compared to purchases for €116.2 billion in 2017), foreign investors disposed of Italian securities for €75.8 billion in 2018 (compared to purchases for €28.7 billion in 2017).

Investments in foreign funds recorded the lowest amount since 2011 (€22.2 billion). Similarly, purchases in foreign debt securities decreased to €16.9 billion. The decrease in investments was mainly due to net disposals of Italian equity and investment funds by foreign investors, and in particular Treasury bonds in an amount of €50.9 billion.

Following significant investments in 2017 in both equity shares (€86.6 billion, compared to €53.6 billion invested in 2016) and debt securities (€29.6 billion, compared to €30.7 billion in 2016),in 2018 there was a decrease in investment both in equity (€29.1 billion) and debt Italian securities (€16.9 billion).

Other Investment. Other investment includes trade receivables, deposits and other transactions, recording a net reduction of €88.5 billion in 2018, compared to a net reduction of €34.7 billion in 2017. In 2018, Italy’s cumulative contributions to financial support of EMU countries stood at €58.2 billion (substantially unchanged since 2015). This amount included Italy’s exposure to the financial assistance operations of the European Financial Stability Facility, which also involved entering into bilateral loans (€43.9 billion) as well as capital contributions to the European Stability Mechanism (€14.3 billion).

Errors and Omissions. In 2018, the item “errors and omissions” amounted to a negative €13.5 billion, compared to a positive €5.9 billion in 2017. 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.

PUBLIC FINANCE

The 2019 Economic and Financial Document

In April 2019, Italy submitted to the EU its 2019 Economic and Financial Document, which included the 2019 Stability Programme and the 2019 National Reform Programme.

The 2019 Stability Programme. The 2019 Stability Programme confirmed Italy’s commitment to reduce its public debt by increasing its primary surplus. The table below presents the main public finance trends included in the 2019 Stability Programme.

Public Finance Trends (in % of GDP)

2019 Stability Programme	2017			2018			2019			2020			2021			2022
Net Borrowing		(2.4	)		(2.1	)		(2.4	)		(2.1	)		(1.8	)		(1.5	)
Interest Expense		3.8			3.7			3.6			3.6			3.7			3.8
Primary Balance		1.4			1.6			1.2			1.5			1.9			2.3
Structural Net Borrowing		(1.4	)		(1.4	)		(1.5	)		(1.4	)		(1.1	)		(0.8	)
Structural Change		(0.4	)		0.0			(0.1	)		0.2			0.3			0.3
Public Debt, gross of euro area financial support		131.4			132.2			132.6			131.3			130.2			128.9
Public Debt, net of euro area financial support		128.0			128.8			129.4			128.1			127.2			125.9

__________________________

Source: Ministry of Economy and Finance.

The table below sets out the macroeconomic forecasts prepared by Italy through 2022 in connection with the 2019 Stability Programme.

Macroeconomic Forecasts (in %)

2019 Stability Programme	2018			2019			2020			2021		2022
Real GDP		0.9			0.2			0.8			0.8		0.8
Nominal GDP		1.7			1.2			2.8			2.6		2.3
Private consumption		0.6			0.6			0.7			0.7		0.6
Public consumption		0.2			(0.4	)		0.8			0.1		(0.1	)
Gross fixed investment		3.4			1.4			2.0			1.8		1.6
Inventories (% of GDP)		0.0			(0.2	)		0.0			0.0		0.0
Exports of goods and services		1.9			2.1			2.3			2.4		2.6
Imports of goods and services		2.3			2.2			2.7			2.6		2.5
Domestic demand		1.0			0.6			0.9			0.8		0.7
Change in inventories		0.0			(0.2	)		0.0			0.0		0.0
Net exports		(0.1	)		0.0			(0.1	)		0.0		0.1

__________________________

Source: Ministry of Economy and Finance.

The 2019 National Reform Programme. As part of the 2019 National Reform Programme, the Italian Government identified ten policy areas where structural reform is necessary. These areas are: (i) administrative efficiency; (ii) energy and environment; (iii) federalism; (iv) infrastructure and development; (v) innovation and human capital; (vi) labor and pensions; (vii) product market and competition; (viii) support to the financial system; (ix) support to businesses; and (x) public expenditure and taxation.

The table below shows the main impact of the measures contained in the 2019 National Reform Programme in terms of expenditure cuts/additions or revenues decreases/additions for each of the ten policy areas described above for the years 2019 to 2021.

Financial Impact of the 2019 National Reform Programme (in € millions)

2018 National Reform Programme	2019		2020		2021
Administrative Efficiency
Additional expenditure		159.3		303.2		329.2
Additional revenues		0.0		0.0		0.0
Energy and Environment
Additional expenditure		914.9		1,047.1		1,073.7
Additional revenues		222.6		697.6		92.2
Expenditure cuts		36.3		82.8		36.3
Federalism
Additional expenditure		0.0		12.0		9.7
Additional revenues		0.0		414.8		221.7
Expenditure cuts		0.0		0.0		0.0
Infrastructure and Development
Additional expenditure		7,931.6		7,079.6		4,310.4
Additional revenues		0.0		0.0		1.0
Decrease in revenues		2,502.1		2,510.7		9.9
Innovation and Human Capital
Additional expenditure		524.7		864.9		884.0
Additional revenues		0.0		0.0		0.0
Labor and Pensions
Additional expenditure		23,729.2		34,469.1		35,436.2
Additional revenues		298.9		55.8		111.2
Expenditure cuts		1,072.8		2,084.5		2,942.1
Decrease in revenues		174.7		523.1		816.7
Product Market, Competition
Additional expenditure		234.5		74.5		0.5

2018 National Reform Programme	2019		2020		2021
Financial System
Additional expenditure		556.2		574.5		574.5
Support to Business
Additional expenditure		1,492.2		567.7		525.7
Additional revenues		17.7		2,155.7		1,228.3
Expenditure cuts		390.8		396.4		398.1
Decrease in revenues		388.4		2,664.1		3,017.8
Public Expenditure and Taxation
Additional expenditure		5,548.5		4,953.8		3,453.1
Additional revenues		11,260.9		12,254.7		19,275.2
Expenditure cuts		893.2		724.0		1,438.4
Decrease in revenues		16,679.4		6,530.2		7,108.6

__________________________

Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the Update of the 2018 Economic Financial Document against the main finance indicators included in the 2019 Economic and Financial Document.

Main Finance Indicators – Update of the 2018 Economic and Financial Document and the 2019 Economic and Financial Document

	2018			2019			2020			2021
Nominal GDP growth rate
Update of the 2018 Economic and Financial Document		2.5			2.7			2.8			2.6
2019 Economic and Financial Document		1.7			1.2			2.6			2.5
Difference		(0.8	)		(1.5	)		(0.2	)		(0.1	)
Net Borrowing, as a % of GDP
Update of the 2018 Economic and Financial Document		(1.8	)		(2.4	)		(2.1	)		(1.8	)
2019 Economic and Financial Document		(2.1	)		(2.4	)		(2.1	)		(1.8	)
Difference		(0.3	)		0.0			0.0			0.0
Public Debt, as a % of GDP
Update of the 2018 Economic and Financial Document		130.9			130.0			128.1			126.7
2019 Economic and Financial Document		132.2			132.6			131.3			130.2
Difference		1.3			2.6			3.2			3.5

__________________________

Source: Ministry of Economy and Finance.

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 outstanding securities issued by the Treasury 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

	2014			2015			2016			2017			2018
	(in € millions, except percentages)
Expenditures
Compensation of employees		163,468			162,074			164,096			166,683			171,826
Intermediate consumption		88,890			89,940			92,084			96,831			97,967
Market purchases of social benefits in kind		44,210			43,859			44,568			44,913			45,888
Social benefits in cash		326,863			332,792			336,354			341,258			348,893
Subsidies to firms		30,413			28,177			29,317			25,931			26,113
Interest payments		74,379			68,057			66,288			65,598			64,979
Other expenditures		37,126			37,152			38,536			36,486			39,587
Total current expenditures		765,349			762,051			771,243			777,700			795,253
Gross fixed investments		37,008			36,643			35,823			38,765			37,081
Investments grants		12,573			15,682			13,986			9,649			13,899
Other capital expenditures		10,572			16,036			7,624			18,781			7,385
Total capital account expenditures		60,153			68,361			57,433			67,195			58,365
Total expenditures		825,502			830,412			828,676			844,895			853,618
as a % of GDP		50.9			50.3			49.0			48.9			48.6
Deficit (surplus) on current account		(4,146	)		(16,022	)		(7,973	)		(19,295	)		(17,168	)
Net borrowing		49,340			43,140			42,656			41,285			37,505
as a % of GDP		3.0			2.6			2.5			2.4			2.1

Revenues
Direct taxes		237,107			242,471			247,633			250,642			248,876
Indirect taxes		248,849			247,270			242,016			248,384			253,607
Actual social security contributions		210,414			215,126			216,636			221,405			230,822
Imputed social security contributions		3,932			3,938			4,012			4,161			4,142
Income from capital		11,865			11,363			11,341			12,034			13,949
Other revenues		57,328			57,905			57,578			60,369			61,025
Total current revenues		769,495			778,073			779,216			796,995			812,421
Capital taxes		1,582			1,214			5,363			2,318			1,478
Other capital revenues		5,085			7,985			1,441			4,297			2,214
Total capital revenues		6,667			9,199			6,804			6,615			3,692
Total revenues		776,162			787,272			786,020			803,610			816,113
as a % of GDP		47.9			47.7			46.5			46.5			46.4
Primary balance		25,039			24,917			23,632			24,313			27,474
as a % of GDP		1.5			1.5			1.4			1.4			1.6

__________________________

Source: Bank of Italy.

General government revenues increased by 1.6 per cent or €12.5 billion in 2018 compared to a 2.2 per cent increase or €17.6 billion in 2017. In 2018, the ratio of tax revenues and social contributions to GDP remained steady at 42.1 per cent as in 2017, compared to 42.4 per cent in 2016. Social security contributions in 2018 increased by 4.2 per cent, while current tax revenues increased by 0.7 per cent. This was mainly due to a 0.7 per cent decrease in direct taxes and a 2.1 per cent increase in indirect taxes related to a 1.2 per cent increase in VAT and a 6.4 per cent increase the regional tax on production (IRAP).

Direct taxes decreased by 0.7 per cent in 2018, driven by a 10.2 per cent decrease in corporate income taxes partially offset by a 1.8 per cent increase in personal income taxes. Capital taxes decreased by approximately €0.8 billion in 2018 to €1.5 billion, mainly due to a reduction in additional revenues collected under the voluntary disclosure regime introduced by the 2017 Stability Law.

General government expenditures increased by 1.0 per cent in 2018, although decreasing to 48.6 per cent of GDP in 2018 from 48.9 per cent of GDP in 2017. The increase in general government expenditures was due to an increase in intermediate consumption from €96.8 billion in 2017 to €98.0 billion in 2018, and an increase of social benefits in cash from €341.3 billion in 2017 to €348.9 billion

in 2018, partially offset by a decrease in capital account expenditures, which decreased from €67.2 billion in 2017 to €58.4 billion in 2018. In 2018, the total current primary expenditures increased by 2.6 per cent, compared to an average increase of 1.1 per cent between 2010 and 2017.

Expenditures

Compensation of employees. Compensation of employees increased by 3.1 per cent in 2018, mainly due to a 3.5 per cent increase in the gross salary per employee, resulting from the lift of the statutory freeze on renewals of employment agreements and related wages in the public sector, which persisted in Italy between 2010 and 2015 pursuant to Law Decree No. 78 of 2010.

Intermediate consumption. Intermediate consumption, which measures the value of the goods and services consumed as inputs by a process of production, increased by 1.2 per cent in 2018, compared to 2.3 per cent in 2017. As in 2016 and 2017, this increase was mainly driven by expenditure on innovative pharmaceuticals.

Market purchases of social benefits in kind. Expenditure on social benefits in kind increased by €0.8 billion or 2.1 per cent in 2018, compared to an increase of 1.7 per cent and 1.9 per cent in 2017 and 2016, respectively, mainly due to expenditure connected to the public healthcare system including pharmaceuticals and general medical assistance. In 2018, expenditure on social benefits in kind remained steady at 2.6 per cent of GDP, as in each of 2017 and 2016.

Social benefits in cash. Social benefits in cash include expenditures for pensions, disability and unemployment benefits. Social benefits in cash increased by 2.2 per cent in 2018, compared to increases of 1.5 per cent in 2017 and 1.1 per cent in 2016. Expenditure on pensions increased by 2.0 per cent in 2018, and by 1.1 per cent and 0.8 per cent in 2017 and 2016, respectively, while the non-pension component grew by 3.1 per cent following the 2.8 per cent and 2.1 per cent increases in 2017 and 2016, respectively, mainly driven by an increase in expenses for severance indemnities and maternity leave payments.

Subsidies to firms. Subsidies to firms, which are current payments by the Italian Government to resident producers that are not required to be reimbursed, marginally increased by 0.7 per cent in 2018, compared to a 11.5 per cent decrease in 2017.

Interest payments. Interest payments by the Italian Government decreased by €0.6 billion or 0.9 per cent in 2018, compared to the €0.7 billion or 1.0 per cent decrease in 2017 and to the €1.8 billion or 2.6 per cent decrease in 2016. The ratio of interest payments to nominal GDP was 3.7 per cent, 3.8 per cent and 3.9 per cent in 2018, 2017, and 2016, respectively. For additional information on Italy’s public debt, see “Public Debt.”

Other Expenditures. Other expenditures increased by 8.5 per cent in 2018, compared to a 5.3 per cent decrease in 2017, mainly due to a 26.2 per cent increase in the amount of contributions to the EU.

Revenues

Taxes. Italy’s fiscal burden, which is the aggregate of direct and indirect tax revenues and social security contributions as a percentage of GDP, remained stable at 42.1 per cent in 2018, compared to 2017.. Indirect tax revenues increased by 2.7 per cent in 2018 compared to a 2.1 per cent increase in 2017, while direct tax revenues slightly increased by 0.8 per cent in 2018, mainly due to a 2.8 per cent increase in personal income tax. Further, total tax revenues remained stable at 20.6 per cent of GDP in 2018, compared to 2017.

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

Composition of Tax Revenues⁽¹⁾

	2014		2015		2016		2017		2018
	(in € millions)
Direct taxes
Personal income tax		163,650		176,220		180,004		182,354		187,457
Corporate income tax		32,293		33,402		35,251		35,162		32,646
Investment Income tax		16,125		16,285		11,580		11,410		11,030
Other		12,926		14,152		18,459		16,695		16,498
Total direct taxes		224,994		240,059		245,294		245,620		247,631

Indirect taxes
VAT		114,490		119,376		124,336		129,574		133,433
Other transaction-based taxes		20,789		20,034		20,585		20,107		21,468
Taxes on production of mineral oil		25,560		25,412		25,428		25,795		25,514
Taxes on production of methane gas		4,468		2,900		3,416		3,447		3,448
Tax on electricity consumption		2,914		2,531		2,853		2,537		2,629
Tax on tobacco consumption		10,304		10,647		10,882		10,498		10,584
Taxes on lotto and lotteries		11,021		11,245		13,621		13,212		13,698
Other⁽²⁾		4,916		5,905		4,666		4,854		4,891
Total indirect taxes		194,462		197,240		205,787		210,024		215,665
Total taxes		419,456		437,299		451,081		455,645		463,296

___________________________

(1)

The data presented in this “Composition of Tax Revenues” table does not correspond to the general government direct and indirect tax revenues 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 2018, total taxation revenues (as reported in the “Composition of Tax Revenues” table on a cash basis) increased by 1.7 per cent compared to 2018. This was due to a 2.7 per cent increase in indirect tax revenues, mainly driven by an increase in VAT that in 2018 amounted to €133.4 billion as compared to €129.6 billion in 2017 and, to a lower extent, by a 6.8 per cent increase in other transaction-based taxes, and by a 3.6 per cent increase in tax on electricity consumption. Direct tax revenues increased in 2018, amounting to €247.6 billion compared to €245.6 billion in 2017.

Actual social security contributions. Actual social security contributions, which consist of payments made for the benefit of employees, increased by 4.3 per cent in 2018 compared to a 2.2 per cent increase in 2017, mainly due to a general increase in the payroll of employees both in the public and private sector and higher social security contributions from employers to employees employed under a permanent contract following the lift of the contribution cap established under the 2015 and 2016 budgetary plans.

Imputed social security contributions. Imputed social security contributions, which refer to unfunded benefits and other social security contributions paid to employees, former employees and other eligible persons in the absence of an applicable insurance cover or pension fund, and without recourse to any specific reserve or dedicated means of funding, marginally decreased by 0.5 per cent in 2018 compared to an increase by 3.7 per cent in 2017, reflecting a stable trend in the compensation of public employees.

Income from capital. Income from capital increased by 15.9 per cent in 2018 compared to an increase of 6.1 per cent in 2017, mainly due to dividends paid by government enterprises (for a description of government enterprises, see “Public Finance—Government Enterprises”).

Other Revenues. Other revenues decreased by 0.7 per cent in 2018 compared to a 2.2 per cent decrease in 2017, mainly due to current transfers from families and companies.

PUBLIC DEBT

General

The following table summarizes Italy’s public debt as of the dates indicated, that is mainly represented by debt incurred by the Treasury.

Total Public Debt^(*)

	December 31,
	2014			2015			2016			2017			2018

Debt incurred by the Treasury:
Short term bonds (BOT)⁽¹⁾		125,496			115,074			107,113			106,601			107,453
Medium- and long-term bonds (initially incurred or issued in Italy)		1,600,822			1,646,806			1,712,257			1,755,585			1,810,949
External bonds (initially incurred or issued outside Italy)⁽²⁾		47,308			43,959			39,240			35,589			32,399
Total Treasury Issues		1,773,627			1,805,839			1,858,609			1,897,776			1.950,802
Postal savings⁽³⁾		17,577			16,088			16,232			14,323			14,124
Treasury accounts⁽⁴⁾		152,256			158,223			154,064			159,012			165,266
Other debt incurred by:
ISPA (bonds and other loans)⁽⁵⁾		10,106			10,106			10,105			10,114			10,127
Central Government entities⁽⁶⁾		88,619			90,172			89,710			101,975			98,474
Other general Government entities⁽⁷⁾		95,139			93,001			91,650			80,911			77,961
Total public debt		2,137,323			2,173,429			2,220,370			2,264,110			2,316,754
as a percentage of GDP		131.8	%		131.6	%		131.4	%		131.3	%		132.1	%
Liquidity buffer⁽⁸⁾		(45,594	)		(35,114	)		(34,835	)		(29,323	)		(35,078	)
Total public debt net of liquidity buffer		2,091,729			2,138,315			2,185,535			2,234,787			2,281,676

__________________________

^(*)	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 medium and long-term certificates issued by CDP that may be withdrawn by the holder 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 in the amount that is referred to in the table.

(4)	Treasury accounts are demand, short- and medium-term deposit accounts held by non-central Government entities at the Treasury. Treasury accounts also include liabilities for Euro coins minted by Italy.

(5)	The liabilities of Infrastrutture S.p.A., or “ISPA,” in relation to the TAV project (high-speed railroad infrastructure), have been included in the Government debt since 2006, when such liabilities were assumed by the Government following their reclassification.

(6)	The line item includes all internal and external liabilities incurred by other central Government entities.

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

(8)

The line item includes all the funds of the Treasury deposited with the Bank of Italy and the sinking fund, which is 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 and Bank of Italy.

In 2018 Italy’s debt-to-GDP ratio increased by 0.8 per cent compared to 2017, reaching 132.1 per cent of GDP gross of euro area financial support and 128.8 per cent net of euro area financial support. Such increase in the debt-to-GDP ratio is mainly due to the increase in public sector expenditures.

The table below shows the Italian Government’s forecasts of the debt-to-GDP ratio gross of euro area financial support for the period 2018 to 2022.

Forecasted Debt-to-GDP Ratios

		2018				2019				2020				2021				2022
Public Debt, gross of euro area financial support			132.2				132.6				131.3				130.2				128.9

__________________________

Source: Ministry of Economy and Finance.

Public Debt Management. In 2018 the average maturity of government debt decreased from 6.90 years in 2017 to 6.78 years, after three consecutive years of growth. The average refixing period, the main index for measuring interest risk, also decreased from 5.76 years in 2017 to 5.67 years in 2018.

Excessive Deficit Procedure. In accordance with the Treaty on the Functioning of the EU (“TFEU”), the EU Commission monitors compliance with budgetary discipline of each Member State, on the basis of two criteria: (1) whether the ratio of the planned or actual government deficit to GDP exceeds the reference value of 3.0 per cent; and (2) whether the ratio of government debt to GDP exceeds the reference value of 60.0 per cent, unless the ratio is diminishing and approaching the reference value at a satisfactory pace. Further, the EU Commission takes into account whether the government deficit exceeds government investment expenditure and all other relevant factors, including the medium-term economic and budgetary position of the Member State. For additional information on the budget process, see “Public Finance – The Budget Process.”

On May 23, 2018, the EU Commission issued a report to Italy under Article 126(3) of TFEU stating that, although the 2017 debt requirements should have been considered as complied with by Italy at the time, Italy showed a significant deviation from the adjustment path towards the medium-term budgetary objective recommended by the EU Council to Italy for 2018.

On November 11, 2018, the EU Commission issued an additional report under Article 126(3) of TFEU, identifying in Italy’s Draft Budgetary Plan for 2019 a case of a “particularly serious non-compliance” with the fiscal recommendations previously made by the EU Council. This report prompted discussions between the Government and the EU Commission, which resulted in certain amendments to 2019 Draft Budgetary Plan in the course of December 2018.

On May 23, 2019, the EU Commission notified Italy that it was considering the issuance of a further report under Article 126(3) of TFEU and requested Italy to provide any documentation with respect to the relevant factors Italy wanted the EU Commission to take into account in preparation of this report.

On May 31, 2019, the Government responded to the EU Commission’s letter by providing certain documents concerning relevant factors to take into account and observing, among other things, that:

with respect to 2018, the Government limited its activity to the actions required to meet the budgetary commitments of the prior government and refrained from adopting any additional fiscal measures;

with respect to 2019, the Government expected a deficit of 2.3 per cent of GDP (as compared to the 2.4 per cent deficit which was forecasted in the 2019 Stability Programme and the 2.5 per cent deficit which was forecasted by the EU Commission in 2019 spring forecast), as a result of higher-than-expected revenues and lower-than-projected public expenditure incurred by Italy on the basic universal income (Reddito di Cittadinanza) and the new early retirement scheme (Quota Cento) measures recently adopted by the Government; and

with respect to 2020, the Government confirmed the 2.1 per cent of GDP deficit target, and renewed the commitment to finding alternative financing measures to meet such target.

On June 5, 2019, the EU Commission issued a report to Italy under Article 126(3) of TFEU. In this report, the EU Commission stated that Italy’s public debt-to-GDP ratio, which stood at 132.2 per cent in 2018, was well above the 60.0 per cent of GDP reference value set for in the TFEU, and that Italy did not comply with the debt reduction benchmark in 2018.

In addition, the EU Commission noted that, among other things:

contrary to Italy’s forecast, the EU Commission expected Italy’s debt-to-GDP ratio to rise in both 2019 and 2020, to over 135.0 per cent, due to a debt-increasing “snowball effect” (i.e., if interest rates are higher than the sum of inflation and growth (nominal growth), debt will grow even if there is a budget surplus), a declining primary surplus, and lower than expected privatization proceeds;

in the absence of prudent fiscal policies, Italy’s public debt exposes the country to market confidence shocks on sovereign yields, with a negative impact on both the interest bill paid by the country and the overall financing cost for the real economy, which would negatively impact growth; and

with respect to the following recommendations previously made by the EU Council to Italy, Italy made:

some progress in fighting corruption, in reducing the stock of non-performing loans in the banking sector, and in implementing the reform of active labor market policies;

limited progress in tackling tax evasion through the introduction of compulsory electronic invoicing, in improving market-based access to finance, in enforcing the framework for publicly owned enterprises, in encouraging women to work, as well as in fostering research, innovation, digital skills and infrastructure and vocational oriented tertiary education;

no progress in reducing the share of old-age pensions in its public spending to create space for other social spending; and

no progress in shifting taxation away from labor.

In particular, with respect to the recommendation to reduce old-age pensions, the newly introduced early retirement option (Quota Cento) was considered by the EU Commission as backtracking on major reforms adopted in the past. For those provisions, the 2019 Budget earmarked

funds totaling 0.2 per cent of GDP in 2019 and 0.5 per cent of GDP in 2020 and 2021, but additional costs are also expected in the following years. Additional expenditure in the amount of €7.1 billion and €8.0 billion are also expected for 2019 and 2020, respectively, to finance the basic universal income (Reddito di Cittadinanza), see “The Italian Economy – Key Measures related to the Italian Economy – Measures adopted in 2019”.

With respect to the recommendation to shift taxation away from labor, the EU Commission scrutinized the 2019 Budget Law, which included certain measures that, in the opinion of the EU Commission, may negatively affect tax compliance, such as:

a reformed process for the settlement of past tax liabilities, including the possibility to pay in instalments over several years, with favorable interest rates and no fines. Such measures have an estimated positive impact on revenues of approximately 0.1 per cent of GDP in 2020;

a measure allowing taxpayers, under specific conditions and limits, to disclose past unreported income and requiring them to pay only 20.0 per cent of the corresponding tax liability. Such measures have an estimated positive impact on revenues of approximately 0.1 per cent of GDP in 2020;

an extension to the scope of the simplified tax regime for the self-employed, resulting in an expected decrease of revenues of 0.1 per cent of GDP starting from 2019;

a flat 20 per cent tax rate for workers engaged in entrepreneurial activities with a yearly turnover of up to €100,000, resulting in an expected decrease of revenues of 0.1 per cent of GDP starting from 2021; and

a reduction of the corporate tax rate from 24.0 per cent to 15.0 per cent on firms’ profits used to increase investment or to hire new employees, resulting in an expected structural revenues loss of around 0.1 per cent of GDP in 2019.

On June 19, 2019, the Government responded to the EU Commission confirming Italy’s intention to comply with the applicable budgetary rules. Among other things, Italy stated that:

the 2019 Budget is in compliance with the SGP rules;

the reformed process for the settlement of past tax liabilities has generated higher than expected revenues to date;

with effects from 2020, the Government expects to improve the debt to GDP ratio by 0.2 per cent annually through an increase of indirect taxes in an amount equivalent to approximately 1.3 per cent of GDP;

with respect to the 2020-2022 period, the Government intends to adopt a reform of the personal income tax, and implement a comprehensive spending review.

On July 1, 2019, the Government adopted certain fiscal correction measures for 2019 in an aggregate amount of €7.6 billion or 0.42% of GDP in nominal terms and €8.2 billion or 0.45% of GDP in structural terms. This intervention allowed for a lower deficit of 2.04 per cent of GDP for 2019, in line with the EU Commission’s recommendations. Among others, key measures included a freeze on certain funds (€1.5 billion) which, under the 2019 Budget, were originally allocated to the basic universal income (Reddito di Cittadinanza), and the new early retirement scheme (Quota Cento). Such fiscal correction measures were described in a letter by the Government to the EU Commission dated July 2, 2019. In this letter, the Government reiterated the commitment to achieve a

structural improvement for 2020 in line with the SGP rules, through a revision of tax expenditures and an implementation of a comprehensive spending review.

On July 3, 2019, the EU Commission formally informed the EU Council that the fiscal correction measures for 2019 adopted by Italy on July 1, 2019 were material enough for the EU Commission not to recommend to the EU Council the opening of an excessive deficit procedure against Italy. The EU Commission will continue to monitor and assess compliance of Italy’s 2020 draft budgetary plan with the SGP rules and the implementation by Italy of the structural reforms suggested in the country-specific recommendations.

TABLES AND SUPPLEMENTARY INFORMATION

External Bonds of the Treasury as of June 30, 2019

The following table shows the external bonds of the Treasury issued and outstanding as of June 30, 2019.

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	€	3,075,571,177
$	2,000,000,000		5.38	%		98.44	February 27, 2003	June 15, 2033	$	2,000,000,000	€	1,757,469,244

									$	5,500,000,000	€	4,833,040,421

Euro⁽²⁾

€	905,000,000	Floating				101.60	June 28, 1999	June 28, 2029	€	905,000,000	€	905,000,000
€	1,000,000,000	Floating				100.75	August 30, 1999	August 30, 2019	€	1,000,000,000	€	1,000,000,000
€	150,000,000	Zero Coupon				100.00	February 20, 2001	February 19, 2031	€	150,000,000	€	150,000,000
€	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 2, 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
€	192,000,000		4.42	%		100.00	March 28, 2006	March 28, 2036	€	192,000,000	€	192,000,000
€	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	€	1,197,470,000	€	1,197,470,000
€	250,000,000	2.00% Inflation Indexed				99.02	March 30, 2007	September 15, 2062	€	299,432,500	€	299,432,500
€	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	€	588,145,000	€	588,145,000
€	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
€	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	€	559,110,000	€	559,110,000
€	450,000,000		4.45	%		99.59	February 24, 2011	August 24, 2020	€	450,000,000	€	450,000,000
€	2,259,500,000		6.07	%		100.00	July 1, 2011	December 31, 2027	€	1,490,311,134	€	1,490,311,134
€	230,000,000	4.20% Inflation Indexed				100.00	February 1, 2012	July 25, 2042	€	250,251,500	€	250, 251,500
€	437,500,000		3.44	%		100.00	February 13, 2012	December 31, 2024	€	40,904,836	€	40, 904,836
€	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

Original Currency Nominal Amount		Interest Rate			Initial Public Offering Price (%)		Date of Issue	Maturity Date	Amount Outstanding		Equivalent in Euro
€	250,000,000	2.97% Inflation Indexed				100.00	January 24, 2014	January 24, 2044	€	262,367,500	€	262, 367,500
€	1,000,000,000	1.51% Inflation Indexed				100.00	October 15, 2014	September 15, 2028	€	1,049,900,000	€	1,049,900,000
€	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	€	314,391,000	€	314,391,000
€	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	€	673,759,320	€	673,759,320
€	800,000,000		1.91	%		100.00	May 18, 2016	May 18, 2029	€	800,000,000	€	800,000,000
€	700,000,000		1.90	%		100.00	June 22, 2016	June 22, 2031	€	700,000,000	€	700,000,000
€	900,000,000		1.45	%		100.00	October 17, 2016	April 17, 2027	€	900,000,000	€	900,000,000

									€	23,321,042,790	€	23,321,042,790
Euro Ispa Bonds⁽³⁾

€	750,000,000	2.25% Inflation Indexed				99.36	February 6, 2004	July 31, 2019	€	928,980,000	€	928,980,000
€	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

									€	8,628,980,000	€	8,628,980,000
Pound Sterling^(4)(*)
£	1,500,000,000		6.00	%		98.56	August 4, 1998	August 4, 2028	£	1,500,000,000	€	1,673,080,140
£	250,000,000		5.25	%		99.47	July 29, 2004	December 7, 2034	£	250,000,000	€	278,846,690
									£	1,750,000,000	€	1,951,926,830
Japanese Yen^(5)(*)
¥	30,000,000,000	Floating				100.00	July 8, 2009	July 8, 2019	¥	30,000,000,000	€	244,698,206
¥	30,000,000,000	Floating				100.00	September 18, 2009	September 18, 2019	¥	30,000,000,000	€	244,698,206
¥	25,000,000,000	Fixed				100.00	March 29, 2019	March 29, 2023	¥	25,000,000,000	€	203,915,171
									¥	85,000,000,000	€	693,311,583
Czech Koruna^(6)(*)
CZK 2,490,000,000			4.40	%		100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000		€	97,850,434
CZK 2,490,000,000			4.41	%		100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000		€	97,850,434
									CZK 4,980,000,000		€	195,700,868
TOTAL OUTSTANDING											€	39,624,002,492

___________________________

(1)	U.S. dollar amounts have been converted into euro at $1.138/€1.00, the exchange rate prevailing at June 30, 2019.

(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)	Pounds Sterling amounts have been converted into euro at £0.89655/€1.00, the exchange rate prevailing at June 30, 2019.

(5)	Japanese Yen amounts have been converted into euro at ¥122.6/€1.00, the exchange rate prevailing at June 30, 2019.

(6)	Czech Koruna amounts have been converted into euro at CZK25.447/€1.00, the exchange rate prevailing at June 30, 2019.

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

Source: Ministry of Economy and Finance.

	As of June 30, 2019
Currency	Before Swap (in %)		After Swap (in %)
US Dollars		12.2		4.93

	As of June 30, 2019
Currency	Before Swap (in %)		After Swap (in %)
Euro⁽¹⁾		80.6		94.38
Pounds Sterling		4.9		0.70
Japanese Yen		1.7		-
Czech Koruna		0.5		-
Total External Bonds (in millions of Euro)		39,624.00		40,111.36

__________________________

(1)	Including Euro ISPA Bonds.

Source: Ministry of Economy and Finance.

REPUBLIC OF ITALY

Area and Population

Geography. Italy is situated in south central Europe on a peninsula approximately 1,200 kilometers (745.645 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 302,073 square kilometers(116,631 square miles), and it has 8,970 kilometers (5,574 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.

The following is a map of Italy.

Population. According to ISTAT data, as of December 31, 2017, Italy’s resident population was estimated to be approximately 60.484 million, accounting for approximately 12.0 per cent of the EU population, compared to approximately 60.589 million as of December 31, 2016. Italy is the fourth most populated country in the EU after Germany, France and the United Kingdom. For additional information on Italian population, see “Recent Developments.”

According to ISTAT data, as of December 31, 2017, the six regions in the southern part of the peninsula together with Sicily and Sardinia, known as the Mezzogiorno, had a population of approximately 20.7 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, 2017, the breakdown of the resident population by age group was as follows:

•	under 20	18.3%
•	20 to 39	22.4%
•	40 to 59	31.1%
•	60 and over	28.2%

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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. The average age of the resident population is increasing, mainly due to resident population decreasing in recent years.

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 2.87 million as of December 31, 2017. The next largest cities are Milan, with a population of approximately 1.37 million, Naples, with

approximately 0.97 million inhabitants, and Turin, with approximately 0.88 million inhabitants. Based on ISTAT data, as of December 31, 2017, population density was approximately 200.23 persons per square kilometer.

According to ISTAT data, as of December 31, 2017, there were approximately 5.1 million foreigners holding permits to live in Italy, a 1.9 per cent increase from December 31, 2016. 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 Italian 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 2017, approximately 0.2 million people – refugees, displaced persons and other migrants, mainly from Nigeria and Syria – have made their way to Europe, impacting transit countries, such as Italy and Greece. This represented a decrease by approximately 0.3 million from 0.5 million people arriving in 2016, and 1.6 million from 1.8 million people arriving in 2015. In the first two quarters of 2018, approximately 60 thousand people – refugees, displaced persons and other migrants, mainly from Syria, Iraq and Afghanistan –made their way into Europe, a decrease of approximately 45 per cent compared to the same quarters of 2017. This decrease was largely attributable to several measures adopted by the EU in 2016, including the establishment of the European Border and Coast Guard Agency, which operates integrated European intervention teams comprising escorts, monitors and return specialists, and certain arrangements entered into with Turkey on March 18, 2016, pursuant to which, inter alia, all irregular migrants or asylum seekers whose applications are declared inadmissible crossing from Turkey to Greece are returned to Turkey.

The EU has in place a Common European Asylum System (EU Regulation No. 439/2010) regulating the allocation of asylum applications among Member States and providing for a common set of rules to simplify and shorten the asylum procedure, discourage secondary movements and increase the prospect of integration. In addition, on June 26, 2013, the EU introduced the so-called Dublin Regulation (EU Regulation No. 604/2013) providing for criteria and mechanisms for determining the Member State responsible for examining an application for international protection lodged in one of the Member States by a third-country national or a stateless person. In May 2016, the European Commission submitted proposals to amend the Dublin Regulation seeking to make the current rules more transparent and efficient, while providing for a mechanism to deal with situations of disproportionate pressure on Member States’ asylum systems. To this end, the European Commission proposed the introduction of a structured EU resettlement framework, which has not been adopted to date.

In 2018, approximately 23,370 immigrants arrived illegally in Italy by sea, compared to approximately 119,400 and 181,400 arriving illegally in 2017 and 2016, respectively, a decrease due to intensified activities of the Libyan Coast Guard to monitor migration via the Central Mediterranean route as a consequence of additional training provided by European Border and Coast Guard Agency to the Libyan Coast Guard.

As of August 31, 2017, the Italian Government hosted approximately 196,000 migrants. Asylum seekers more than quadrupled between 2013 and 2017, with the number of applications rising from 26,000 in 2013 to more than 128,000 in 2017.

The number of migrants entering Italy by sea has been decreasing significantly since July 2017. In large part this is due to Italy’s decision in June 2018 to limit the ability of refugees and

migrants rescued off the coast of Libya by NGOs and merchant vessels to disembark at Italian ports. This decision has caused tensions with other Member States, prompting Italy to renew its request that the EU organize a dedicated search and rescue operation in the Mediterranean. No agreement has been reached among EU Member States on a dedicated search and rescue operation organized and managed by the EU, and disembarkation following rescue at sea operations continue to be handled on a case by case basis by coastal EU States in coordination with other EU Member States willing to consider relocations.

Generally, a proportion of refugees and migrants attempt to move on from the country in Europe where they had first arrived. In response to this irregular onward movement from Italy, neighboring States and others have introduced measures such as the reintroduction of border controls and strict implementation of bilateral agreements for joint patrols of the border and readmission procedures. This onward movement poses challenges for Member States such as administrative duplication and additional costs because of the increased demands on the ability of those Member States to absorb additional refugees and migrants.

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 Italian 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 tenure 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.

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 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. The main political parties are: (i) Movimento 5 Stelle, a non-aligned political party led by Mr. Luigi Di Maio, (ii) Lega, a right-wing political party led by Mr. Matteo Salvini, (iii) Partito Democratico, a center-left political party led by Mr. Nicola Zingaretti, (iv) Forza Italia, a center-right political party led by Mr. Silvio Berlusconi, (v) Fratelli d’Italia, a center-right political party led by Ms. Giorgia Meloni and (vi) Liberi e Uguali, a center-left political party led by Mr. Pietro Grasso.

The general Parliamentary elections held on March 4, 2018 resulted in no political party or coalition having a majority of either the Chamber of Deputies or the Senate. The center-right coalition, led by Lega, obtained the highest number of votes on a national level for the elections of both the Chamber of Deputies and the Senate, while Movimento 5 Stelle obtained the highest number of votes on a national level for an individual political party.

After 89 days of consultations with the main political parties, and following a political agreement between Lega and Movimento 5 Stelle, on May 31, 2018 President Sergio Mattarella appointed Mr. Giuseppe Conte to form a new government, and Mr. Giuseppe Conte was sworn in as Prime Minister on June 1, 2018. The government, which was supported by a parliamentary vote of confidence on June 6, 2018, comprises members from, and is supported by, Lega and Movimento 5 Stelle.

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 coalition governments.

On October 26, 2017, Parliament adopted Law No. 165, the new electoral law (so-called Rosatellum) that became effective on November 12, 2017 (the “2017 Electoral Law”). The 2017 Electoral Law provides for a mixed system of proportional and majority method with 35% of seats awarded using a first past the post electoral system and 64% of seats awarded using a proportional method, with one round of voting. As a result of the adoption of the 2017 Electoral Law, the 630 seats in the Chamber of Deputies are awarded as follows: (i) 232 seats are awarded through a first past the post vote in an equivalent number of single-member districts, (ii) 386 seats are awarded by vote based on regional proportional representation, and (iii) 12 seats are awarded by vote of Italians abroad. Excluding the life tenure Senators (currently six), who includes senators appointed at the discretion of the President, and former presidents of The Republic of Italy, the 315 seats in the Senate are awarded as follows: (i) 109 seats are awarded through a first past the post vote in an equivalent number of single-member districts, (ii) 200 seats are awarded by vote based on regional proportional representation, and (iii) 6 seats are awarded by vote of Italians abroad. Both the Senate and the Chamber of Deputies are elected on a single ballot. Parties are not eligible for any seats unless they obtain at least 3 per cent of the total votes, while the minimum threshold for party coalitions is 10 per cent (on the assumption that at least one party in the coalition obtain at least 3 per cent of the total votes).

Regional and Local Governments. Italy is divided into 20 regions made up of 14 metropolitan areas, 84 provinces and 6 municipal consortia. 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 designed to increase the fiscal autonomy of regional and local governments. Under the new system, lower levels of government are able to levy their own taxes and will have a share in central tax revenues, including income tax and value added tax. In addition, a “standard cost” for public services such as health, education, welfare and public transport has been determined to set budgets for local governments.

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. 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 511.5 million as of December 31, 2017.

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 registered voters in a referendum voted in favor of leaving the EU (referred to as Brexit). On March 29, 2017, the United Kingdom served notice under Article 50 of the Lisbon Treaty, dated December 13, 2007, triggering a two-year time limit for negotiating and reaching a deal on the terms of Brexit, although this period was subject to extension if the European Council and the United Kingdom agreed to do so. On November 14, 2018, the EU and the government of the United Kingdom agreed the terms of a withdrawal agreement that had to be ratified by the United Kingdom and the European Parliament ahead of the United Kingdom’s withdrawal, which was expected on March 29, 2019. The agreement was not ratified by the Parliament of the United Kingdom by such date and the EU and the United Kingdom agreed to an

extension of such term until April 12, 2019 and, subsequently, until October 31, 2019. If the withdrawal agreement is not ratified by the Parliament of the United Kingdom by October 31, 2019, and the parties fail to agree on a different deal or a further extension of the deadline for the United Kingdom to leave the EU is not agreed, the United Kingdom would be leaving the EU without a deal regulating the terms of Brexit and its future relationship with the rest of the EU (the “No-Deal Brexit”). Pending negotiations under Article 50 of the Lisbon Treaty, EU treaties and laws will continue to apply to the United Kingdom.

A No-Deal Brexit could impact negatively European and international markets, negatively affecting trade and causing fluctuations in exchange rates between the Pound Sterling and other currencies and great market volatility in general, with possible negative consequences on the Italian financial sector and economy. In order to mitigate the negative effects of a No-Deal Brexit on the Italian economy, on March 20, 2019, the Italian Government adopted Law Decree No. 22/2019, which includes a number of measures that, for an extended period of time of 18 months, are intended to protect the stability of the Italian financial, banking and insurance system and the relationship between Italy and the United Kingdom. The effects of a negotiated Brexit on the Italian financial sector and economy and the future relationship between Italy and the United Kingdom will largely depend on the timing and terms of Brexit. Regardless, the result of the June 2016 referendum has created and will continue to create considerable uncertainty with respect to the political and economic prospects of the United Kingdom and the EU, and the possibility of other EU Member States holding a referendum similar to the one held in the United Kingdom in 2016 or otherwise debating their continued membership of the EU, or prolonged periods of uncertainty related to these eventualities, could cause harm to financial stability in Italy and the rest of Europe.

Independent of Brexit, a general worsening of the macroeconomic framework may have a negative impact on the Italian economy and the economy of other Member States. In a downturn, the economy of Italy and other Member States may suffer and certain events such as a credit crisis may have material negative consequences on their financial stability.

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

The Council of the EU. The Council of the EU, 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. Malta was in charge of the presidency of the Council from January 2017 to June 2017, while Estonia took the place of the United Kingdom for the presidency of the Council from July 2017 to December 2017, due to the results of the Brexit referendum and the notice under Article 50 of the Lisbon Treaty served on March 29, 2017. Bulgaria, Austria and Romania were in charge of the presidency of the Council from January 2018 to June 2018, from July 2018 to December 2018, and from January 2019 to June 2019, respectively. Finland is currently in charge of the presidency of the Council, and will remain in charge until December 2019.

The Council mainly exercises, together with the European Parliament, the European Union’s legislative function and promulgates:

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

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

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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:

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shares budgetary authority with the European Parliament;

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

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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 is achieved if:

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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

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

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

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

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

Following the election held between May 23, 2019 and May 26, 2019, each Member State was allocated the following number of seats in the European 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 five largest political groups in the European Parliament as a result of the 2019 elections are:

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the European People’s Party (Christian Democrats), which comprises politicians of Christian democratic, conservative and liberal-conservative orientation, cumulatively representing approximately 24 per cent of the total seats;

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the Progressive Alliance of Socialists and Democrats in the European Parliament, which is the political group of the Party of European Socialists, cumulatively representing approximately 20 per cent of the total seats;

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Renew Europe, which comprises politicians of liberal-centrist orientation, cumulatively representing approximately 14 per cent of the total seats;

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the Greens/European Free Alliance, which comprises primarily of green and regionalist politicians, cumulatively representing approximately 10 per cent of the total seats; and

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Identity and Democracy, which comprises politicians of nationalist orientation, cumulatively representing approximately 10 per cent of the total seats.

For further information on the results of the 2019 European Parliamentary in Italy, see “Recent Developments – Republic of Italy – The European Union”.

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:

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

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the Court of Auditors, which checks that all the European Union’s revenues 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

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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 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 Seven (G-7) industrialized nations, together with the United States, Japan, Germany, France, the United Kingdom and Canada, and a member of the Group of Twenty (G-20), which brings together the world’s major advanced and emerging economies, comprising the European Union and 19 country members. Italy is also 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.

THE ITALIAN ECONOMY

General

According to IMF data, the Italian economy, as measured by 2018 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, India and France.

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 4.0 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 Italian 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 2.2 per cent. Between 2008 and 2012, as a result of the global financial and economic crisis, average annual GDP growth in Italy was negative 1.4 per cent compared to negative 0.2 in the euro area.

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 2013 through 2017.

Annual Per Cent Change in Real GDP (2013-2017)

	2013			2014		2015		2016		2017
Italy		(1.7	)		0.1		0.9		1.1		1.6
EU⁽¹⁾		0.3			1.8		2.3		2.0		2.4
Euro area⁽²⁾		(0.2	)		1.4		2.1		2.0		2.4

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(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 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, the Italian economy returned to growth, although at a moderate pace of 0.1 per cent compared to 2013, primarily due to measures adopted by the Italian 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, resulting in a recovery of private consumption at the end of 2014. 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 continued its growth at a pace of 1.0 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 2016, Italy’s GDP increased by 0.9 per cent compared to 2015, primarily due to fiscal and monetary policies adopted by the Italian Government to support growth, and to a continued increase in domestic demand from 2015. The decline in global commerce first measured in the second half of 2015 continued in the first half of 2016, with resulting low prices impacting GDP growth, partly offset by low financing costs, and leading to deflation. Domestic demand further increased, mainly due to a 1.9 per cent increase in disposable income.

In 2017, Italy’s GDP increased by 1.6 per cent compared to 2016, further consolidating the growth trend started in the second half of 2013. This increase in Italy’s GDP was mainly due to a general increase in global commerce, resulting in a 1.3 per cent increase in domestic demand and a 1.6 per cent increase in exports of goods and services. Exports, in particular, benefitted from lower increases in prices compared to Italy’s trading partners, offsetting the negative impact of the euro nominal exchange-rate appreciation.

In the past, the Italian 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 Italian Government has been to control Italy’s debt-to-GDP ratio. Italy’s debt-to-GDP ratio marginally decreased in 2017 to 127.8 per cent net of euro area financial support and 131.2 per cent gross of euro area financial support, reflecting the gap of 1.1 points between the average cost of debt and the expansion of nominal GDP, which was partially offset by a primary surplus of 1.4 per cent. Excluding the financial support provided to European Monetary Union (EMU) countries, the decrease from 2016 was of 0.1 percentage points.

According to Italy’s estimates, Italy’s debt-to-GDP ratio, gross of euro area financial support, was expected to reach 131.7 per cent in 2018. In the period 2019-2021, debt-to-GDP was expected to contract by 2.5 percentage points to 128.2 per cent. For additional information on Italian debt-to-GDP ratio, see “Recent Developments.”

Historically, Italy has had a high 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 19.2 per cent in 2016 and 18.8 per cent in 2017. The increase in disposable income was correlated to a slight increase in investments by 0.1 per cent. Because of the historically high savings rate, the Italian 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 October 31, 2018, non-resident holders owned 32.8% of the total outstanding government securities, while the European Central Bank and resident holders owned 19.7% and 47.5% of the total outstanding government securities, respectively.

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 2017 the per capita GDP in Southern Italy, also known as the Mezzogiorno, increased by 1.4 per cent. GDP increased by 1.8 per cent in both the North West and the North East of Italy, while GDP in the Centre of Italy increased by 0.9 per cent. The Mezzogiorno registered a third consecutive increase in GDP after seven consecutive years of contraction, following a 1.5 per cent increase in 2015 and a 0.8 increase in 2016. 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.”

In 2017, following a 0.05 per cent average harmonized deflation in 2016, Italy recorded a 1.33 per cent average harmonized inflation as measured by the European Union harmonized consumer price index (HICP). 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 to 2015, 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 2016

In 2016, the Italian 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 Italian 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, co-operative banks (banche di credito cooperativo) have been required to join a banking co-operative group controlled by a joint stock company (società per azioni) having a share capital not lower than Euro 1.0 billion. In addition, the Italian 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 (e.g. Banca delle Marche, Banca Popolare dell’Etruria e del Lazio, Cassa di Risparmio di Chieti and Cassa di Risparmio di Ferrara). For additional details see “Monetary System—Equity Participations by Banks —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, introduced a new code for the digital administration, principally aimed at increasing the efficiency and accelerating the digitalization of the Italian public administration; and

•

Law Decree No. 237 of December 23, 2016 (converted into Law No. 15 of February 17, 2017), 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 (e.g. Monte dei Paschi di Siena).

On December 7, 2016, Parliament approved the stability law for 2017 and the budget law for 2017-2019 through Law No. 232 of December 7, 2016. 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 revenues 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.

Measures adopted in 2017

In 2017, the Italian Government adopted a series of measures aimed at supporting the Italian banking system, improving the flexibility of Italy’s labor market, and simplify the public administration. The main measures adopted by the Italian Government in 2017 comprised, inter alia:

•

Law Decree No. 8 of February 9, 2017 (converted into Law No. 45 of April 7, 2017), which provided for urgent measures in support of populations affected by certain earthquakes which occurred in 2015 and 2016, including an extension of certain tax breaks until November 30, 2017, financial support for small and medium sized companies, simplified procedures for public procurement and the application the government’s revenues from the so-called 8x1000 personal income tax to reconstruction and reparation of heritage sites affected by the earthquakes;

•

Law Decree No. 25 of March 17, 2017 (converted into Law No. 49 of April 20, 2017), which repealed the voucher system for ancillary work and provided for a transitional period to allow for the use of the vouchers already issued until December 31, 2017;

•

Law Decree No. 50 of April 24, 2017 (converted into Law No. 96 of June 21, 2017), which, inter alia, introduced certain measures to facilitate the securitization of bad loans and exclude pension funds from bail-in risk, provided funds in the amount of €600 million for a bridge loan to Alitalia Società Aerea Italiana S.p.A. (“Alitalia”), introduced a revised ancillary work framework, and determined the required steps for a potential merger of ANAS with Ferrovie dello Stato Italiane S.p.A. (“FS”);

•

Law No. 81 of May 22, 2017, aimed at introducing social and economic protection for self-employed workers;

•

Legislative Decrees No. 74 and No. 75 of May 25, 2017, which implemented a reform of the public administration designed to increase the efficiency and transparency thereof by introducing independent evaluation bodies and performance based mechanisms, among other things;

•

Law Decree No. 91 of June 20, 2017 (converted into Law No. 123 of August 3, 2017), which introduced certain measures to support economic development in Southern Italy, including financial support to young entrepreneurs and the creation, where so requested by regional governments, of special economic areas (Zone Economiche Speciali) benefitting from fiscal advantages and tax credits, focusing on ports and connected areas; and

•

Law Decree No. 148 of October 16, 2017 (converted into Law No. 172 of December 4, 2017), which extended the term for discounted tax debts, recovery of VAT evasion and the so-called split payment, and increased by an amount of €300 million the bridge loan to Alitalia, among other things.

On October 26, 2017, Parliament adopted Law No. 165, the new electoral law (so-called Rosatellum) that became effective on November 12, 2017, providing for a mixed system of proportional and majority method with 35% of seats awarded using a first past the post electoral system and 64% of seats awarded using a proportional method, with one round of voting. For additional information, see “Republic of Italy––Government and Political Parties––Elections.”

On December 4, 2017, Parliament approved the stability law for 2018 and the budget law for 2018-2020 through Law No. 172 of December 4, 2017. The stability law for 2018 includes measures for the promotion of new hires, particularly in the Mezzogiorno, the creation of a €150 million fund for financing SMEs in the Mezzogiorno, alongside other provisions incentivizing machinery investment by SMEs, and the introduction of a new tax on digital transactions.

Measures adopted in 2018

During 2018, the Italian Government adopted a series of measures aimed at improving, among other things, the flexibility of Italy’s labor market. The main measures adopted by the Italian Government in 2018 comprised, inter alia:

•

Law Decree No. 38 of April 27, 2018 (converted into Law No. 77 of June 21, 2018), extending the term for repayment of the bridge loan to Alitalia to December 15, 2018, and Law Decree No. 135 of December 14, 2018 (converted into Law No. 12 of February 11, 2019), which further extended the maturity of the bridge loan to the earlier of the date falling 30 days after completion of a sale of Alitalia, and June 30, 2019;

•

On December 30, 2018, Parliament approved the stability law for 2019 and the budget law for 2019-2021 through Law No. 145 of December 30, 2018 (the “2019 Budget”). The 2019 Budget includes measures for the introduction of a basic universal income (so-called Reddito di Cittadinanza), a flat tax rate and certain changes to the pensions system (so-called Quota Cento).

Measures adopted in 2019

During the first months of 2019, the Italian Government adopted Law Decree No. 4 of January 28, 2019 aimed at implementing some of the key measures included in the 2019 Budget, namely:

Reddito di Cittadinanza, a basic universal income aimed at preventing poverty and social disparity. This measure will allow people with low income to apply for the so-called assegno di cittadinanza, a monetary support of up to €500 per month, and a contribution for accommodation of up to €150 per month for citizens owning a property that is subject to a mortgage and up to €280 per month for citizens renting (but not owning) a property, respectively.

Quota Cento, allowing people to qualify for an early retirement. The measure will allow workers with at least 62 years of age and 38 years of social contribution to the national pension fund to apply for retirement.

For further information on the effects of such measures on the Italian economy, see “Recent Developments – Public Debt – Excessive Deficit Procedure”.

Financial Assistance to EU Member States

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 ability to issue bonds or other debt instruments in the financial markets. Such debt is guaranteed by the Member States on a several basis based on each Member State’s participation in the ECB’s share capital. Initially, the limit to these guarantees (and therefore of the facility itself) was capped at €440 billion. Italy’s share of the EFSF is approximately 18 per cent. Financing granted by the EFSF increases the public debt of the participating countries proportionally to the share of the EFSF.

The EFSF financing is combined with the financing granted under 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 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 expand the EFSF’s role were approved during the course of 2011: (i) the cap to guarantees provided by the euro area countries was increased from €440 billion to €780 billion; (ii) the facility was authorized to make purchases of Member States’ government bonds in the primary and secondary markets; (iii) it was authorized to take action under precautionary programs and to finance the recapitalization of financial institutions; and (iv) 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.

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.

Quantitative Easing. 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 were originally capped at €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 2.0% over the medium term. In early December 2015, the ECB announced the extension of Quantitative Easing 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 8, 2016, the ECB decided to extend the Quantitative Easing program decreasing the combined monthly purchases to €60 billion until the end of December 2017. On October 26, 2017, the ECB decided to further extend the Quantitative Easing program until September 2018, decreasing the combined monthly purchases to €30 billion from

January 1, 2018. With respect to the PSPP, the percentage of securities issued in the euro area and purchased by the ECB was increased from 8.0 per cent in 2015 to 10.0 per cent in 2016, while the percentage of securities issued in the euro area and purchased by national central banks of a Member State different from the Member State where the relevant securities were issued was decreased from 12.0 per cent in 2015 to 10.0 per cent in 2016. 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 19, 2018, the ECB purchased Italian PSPP securities for approximately €365,353 billion in nominal value. On December 13, 2018, the ECB announced that net purchases under Quantitative Easing would end in December 2018. At the same time, the ECB announced that it would continue reinvesting, in full, the principal payments from maturing securities purchased under the Quantitative Easing for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.

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.”

Gross Domestic Product

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 increased by 0.1 per cent compared to 2013, mainly due to a steady increase in private sector consumption and a 2.7 increase of net exports driven by increased prices competitiveness.

In 2015, Italy’s GDP increased by 1.0 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.

In 2016, Italy’s GDP increased by 0.9 per cent compared to 2015. Both domestic demand (net of inventories) and private consumption continued to expand, benefitting from better labour market conditions, a sizeable recovery of real disposable income and the improvement of the general conditions for having access to credit.

In 2017, Italy’s GDP increased by 1.5 per cent compared to 2016, mainly due to a continued expansion of domestic demand (net of inventories) and private consumption, with continuing improved conditions for having access to credit offsetting a decrease in real disposable income.

The following table sets forth information relating to nominal (unadjusted for changing prices) GDP and real GDP for the periods indicated. For additional information on GDP, see “Recent Developments.”

GDP Summary

	2013			2014		2015		2016		2017
Nominal GDP (in € millions)⁽¹⁾		1,604,599			1,621,827		1,652,085		1,689,747		1,724,954
Real GDP (in € millions)⁽²⁾		1,541,172			1,542,924		1,557,180		1,570,018		1,599,773
Real GDP % change		(1.7	)		0.1		0.9		1.1		1.6
Population (in thousands)		60,783			60,796		60,666		60,589		60,484

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(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 2017, private sector consumption in Italy increased by 1.4 per cent, in line with a 1.4 per cent increase in 2016. In 2017, private sector consumption represented approximately 60.7 per cent of real GDP compared to 61.1 per cent in 2016. This overall increase in disposable income was mostly driven by a general improvement in the employment rate and wages. Purchases of non-durable goods and purchases of semi-durable goods increased by 0.3 per

cent and 1.1 per cent in 2017, respectively, while consumption of durable goods such as motor vehicles, white goods and consumer electronics increased by 4.9 per cent. However, in line with 2016, the increase in private sector consumption in 2017 is mainly attributable to services, which increased by 1.7 per cent and represented 53.0 per cent of the total private sector consumption. Private sector consumption continued to contribute positively to real GDP growth by approximately 0.8 per cent in 2017, compared to a 0.9 per cent positive contribution in 2016. For additional information on private sector consumption, see “Recent Developments.”

Public Sector Consumption. In 2017, public sector consumption in Italy increased by 0.1 per cent compared to a 0.6 per cent increase in 2016. In 2017, public sector consumption represented approximately 18.6 per cent of real GDP. Public sector consumption contributed to real GDP growth by approximately 0.0 per cent in 2017, compared to a positive contribution of 0.1 per cent in 2016. For additional information on public sector consumption, see “Recent Developments.”

Gross Fixed Investment. In 2017, gross fixed investment in Italy increased by 3.8 per cent compared to a 3.2 per cent increase in 2016. In 2017, gross fixed investment represented approximately 17.5 per cent of real GDP. The increase in gross fixed investment in 2017 reflected the increase in expenditure for machinery of 8.2 per cent compared to 7.4 per cent in 2016, which was complemented by a 1.4 per cent increase in expenditure for intellectual property products and a 1.1 per cent increase in expenditure for construction. Gross fixed investment contributed positively to real GDP growth by 0.6 per cent in 2017, compared to a positive contribution of 0.5 per cent in 2016. For additional information on gross fixed investment, see “Recent Developments.”

Net Exports. In 2017, exports of goods and services increased by 5.4 per cent in volume compared to a 2.4 per cent increase in 2016. This was mainly due to exports of goods, increasing by approximately 5.2 per cent. Italy’s world market share in 2017 slightly increased to 3.1 per cent at current prices and exchange rates from 2.9 per cent in 2016. 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). Exports towards countries and markets outside the EMU continued to grow, due to favorable pricing conditions resulting from a slight appreciation of euro against several major currencies being offset by higher industrial producer prices in partner countries. In 2017, imports of goods and services registered a 5.3 per cent increase, compared to a 3.5 per cent increase in 2016, mainly due to a 8.8 increase in imports of goods compared to a 0.7 per cent decrease in 2016 due, inter alia, to an increase in imports of raw materials, base metals and energy and reduced investments in transport means. For additional information on Italy’s exports and imports, see “The External Sector of the Economy—Foreign Trade.”

Strategic Infrastructure Projects. Italy’s 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 2016 and 2017 general government expenditure for investments was 2.1 per cent and 2.0 per cent of

GDP, respectively. For additional information on strategic infrastructure projects, see “Recent Developments.”

Principal Sectors of the Economy

In 2017, value added increased by 1.5 per cent compared to 2016. This increase was mainly driven by a 3.7 per cent increase in industry (which accounted for 19.2 per cent of the total value added) and a 1.1 per cent increase in services (which accounted for 74.4 per cent of the total value added), partially offset by a 4.3 per cent decrease in agriculture, fishing and forestry (which collectively accounted for 1.9 per cent of the value added). The increase in services was mainly due to a 1.4 per cent increase in commerce, repairs and goods for the home, which accounted for 12.0 per cent of the value added, and a 3.8 per cent increase in hotels and restaurants, which accounted for 3.8 per cent of the value added. Financial and monetary intermediation services also increased by 1.6 per cent compared to a 0.4 per cent increase in 2016.

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. For additional information on value added by sector, see “Recent Developments.”

Value Added by Sector⁽¹⁾

	2013				2014				2015				2016				2017
	in € millions		% of Total		in € millions		% of Total		in € millions		% of Total		in € millions		% of Total		in € millions		% of Total
Agriculture, fishing and forestry		28,603		2.1		27,939		2.0		29,221		2.1		29,280		2.1		28,143		1.9
Industry		260,626		18.7		259,892		18.6		262,717		18.6		268,281		18.8		277,725		19.2
of which: Manufacturing		221,287		15.9		222,534		15.9		228,673		16.2		234,571		16.4		243,113		16.8
Mining		6,235		0.4		6,767		0.5		5,924		0.4		7,243		0.5		7,600		0.5
Supply of Energy, Gas, Steam, and Conditioned Air		22,989		1.6		21,615		1.5		19,744		1.4		18,539		1.3		19,019		1.3
Water Supply Drainage and Wasting		10,257		0.7		9,463		0.7		9,212		0.7		9,384		0.7		9,629		0.7
Construction		68,017		4.9		64,171		4.6		63,627		4.5		63,853		4.5		64,293		4.4
Services		1,038,024		74.4		1,046,823		74.9		1,055,388		74.8		1,065,261		74.7		1,080,251		74.5
of which: Commerce, repairs, transport and storage, hotels and restaurants		280,032		20.1		283,935		20.3		289,949		20.6		295,170		20.7		305,037		21.0
Information and communication services		49,735		3.6		59,774		4.3		60,490		4.3		63,277		4.4		64,268		4.4
Financial and monetary intermediation		76,592		5.5		76,301		5.5		75,627		5.4		75,946		5.3		76,820		5.3
Real estate activities		189,889		13.60		191,477		13.7		194,167		13.8		193,601		13.6		195,890		13.5
Professional, scientific and technical activities		128,520		9.2		129,733		9.3		130,897		9.3		133,272		9.3		137,820		9.3
Public administration and defense, mandatory social insurance, education, public health, social and personal services		247,905		17.8		294,195		17.8		247,855		17.6		245,536		17.2		245,149		16.9
Recreational and artistic activities, repairs of goods and homes, and other services		55,671		4.0		56,320		4.0		56,295		4.0		58,542		4.1		58,214		4.0
Value added at market prices		1,395,029		100		1,398,237		100		1,410,389		100		1,426,096		100		1,449,889		100

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

Source: Istat.

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 Leonardo S.p.A., formerly known as Finmeccanica S.p.A.). For additional information on the role of the Italian Government in the Italian economy, see “Monetary System—Equity Participations by Banks—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 Italian 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 40 per cent of the network carries 80 per cent of the traffic, resulting in congestion and under-utilization of large parts of the network. 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-Salerno and Milano-Torino have been completed. As of June 30, 2018, there were 24,477 kilometers of railroad track, including 1,467 kilometers of high-speed railroad track, of which 68.6 per cent are managed by State-owned enterprises, with the remainder managed by private firms operating under concession from the Italian Government.

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 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 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. 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.

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 Italian 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. As of the date of this Annual Report, no further steps have been formally taken with regards to this privatization process. In 2018, FS’s revenues amounted to €12,078 million compared to €9,293 million in 2017 and net profit of €559 million compared to €552 million in 2017.

Alitalia, which used to be Italy’s national airline, was sold in 2008 and as a result the Italian Government no longer owns an interest in any air carrier. However, due to the strategic importance of the services rendered by Alitalia and in order to support its day-to-day operation in the context of receivership proceedings which began on May 2, 2017, through Law Decree No. 50 of April 24, 2017 (converted into Law No. 96 of June 21, 2017), the Italian Government granted an unsecured bridge loan to Alitalia in an aggregate amount of €300 million, with a term of six months and an annual interest rate of 6-month Euribor plus a spread of 1.000 basis points. The stability law for 2018 provided for an extension of the term of such bridge loan for a further six months period and an increase in its aggregate amount to €600 million. Law Decree No. 38 of April 27, 2018 (converted into Law No. 77 of June 21, 2018), further extended the maturity of the bridge loan to December 15, 2018 and provided for an increase in its aggregate amount to €900 million. Law Decree No. 135 of December 14, 2018 (converted into Law No. 12 of February 11, 2019) subsequently extended the maturity of the bridge loan to the earlier of the date falling 30 days after an acquisition of Alitalia, and June 30, 2019. The Growth Decree further extended the bridge loan to Alitalia providing for an indefinite maturity date. For further information on the Growth Decree, see “Recent Developments – The Italian Economy – Key Measures related to the Italian Economy”.

In an effort to restore the current financial situation of Alitalia, a number of parties have been in discussions to acquire part or all of Alitalia’s assets through a newly incorporated entity that is known as “Nuova Alitalia”. In that regard, the Growth Decree has envisaged the possibility that Italy could hold an equity stake in Nuova Alitalia or otherwise by converting part or all of the interest accrued on the bridge loan into equity securities of Nuova Alitalia.

The uncertainty over the future of Alitalia was one of the reasons for which a number of employees’ unions called strikes (affecting both Alitalia and other airlines carriers) on March 25 and May 21, 2019. The two strikes did not have a material impact on the conduct of the business of Alitalia, other than causing disruptions to passengers.

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. Wind Tre, resulting from the business combination of Wind and Hutchison 3G’s Italian businesses in 2016, is the largest mobile operator by revenues, followed by Telecom Italia Mobile (TIM) and Vodafone Italia (controlled by the Vodafone Group). On July 25,

2016, the Italian Government granted a Mobile Network Operator licence to a new operator, Iliad Italia, which commenced its operations in May 2018.

Internet and personal computer penetration rates in Italy have grown consistently in recent years. In 2017, 27.4 per cent of the Italian population (63.9 per cent of total households) had an internet broadband connection, though the percentage of population having an internet ultrabroadband connection was only 7.5 per cent (17.4 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 91.6 per cent of households including a family member under 18 years-old have an internet connection, only 24.5 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 Tre, Vodafone Italia, Linkem and Tiscali.

Tourism. Tourism is an important sector of the Italian economy. In 2017, tourism revenues, net of amounts spent by Italians traveling abroad, were approximately €14.6 billion. Spending by foreign tourists in Italy increased by 7.1 per cent, while spending by Italian tourists abroad increased by 8.2 per cent, compared to 2.3 per cent and 2.4 per cent, respectively, in 2016.

Financial Services. The percentage of investment of households allocated to shares and investment fund units amounted to approximately 34.5 per cent at the end of 2017, compared to 36.3 per cent in 2016. Bank deposits accounted for 26.5 per cent (27.0 per cent in 2016), insurances and pension funds accounted for 24.1 per cent (23.3 per cent in 2016), and bonds accounted for 6.9 per cent (8.6 per cent in 2016). In the past, a significant portion of Italy’s households used to be invested in public debt. In 2017, however, households investments in public securities accounted for only 2.8 per cent of total households financial assets (3.1 per cent in 2016).

The general Italian share price index increased by 14.0 per cent in 2017. This increase was mainly driven by higher expected profits, only partly offset by a general uncertainty in the conditions of the Italian financial market and other euro-area countries.

Italian household indebtedness as a percentage of disposable income remained substantially unchanged in 2017 at 61.3 per cent. Lending to families increased by 3.2 per cent in 2017. The amount of mortgages granted increased by 1.4 per cent in 2017, compared to 0.4 per cent in 2016, while consumer credit by banks increased to 7.0 per cent of total loans, compared to 4.4 per cent in 2016. For additional information on the Italian banking system, see “Monetary System—Banking Regulation.”

Manufacturing

In 2017, the manufacturing sector represented 14.2 per cent of GDP and 15.6 per cent of total employment. In 2017, value added in manufacturing increased by 3.8 per cent from 2016, compared to a 2.6 per cent increase from 2015.

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 2017, the most significant companies included FCA Italy S.p.A. (automobiles and other transportation equipment), Leonardo S.p.A. (formerly known as Finmeccanica

S.p.A.) (defense, aeronautics, helicopters and space), Luxottica Group S.p.A. (eyewear), Parmalat S.p.A. (dairy and food), Pirelli & C. S.p.A. (tires and industrial rubber products), Prada S.p.A. (fashion), Barilla S.p.A. (food), and Ferrero S.p.A. (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, production machinery, 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 subdued 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 2016 (the most recent year for which data is available), compared to 2.93 per cent in Germany and 1.93 per cent in the EU.

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

Industrial Production by Sector (Index: 2015 = 100)

	2013		2014		2015		2016		2017
Food and tobacco		99.5		99.5		100.0		101.9		104.5
Textiles, clothing and leather		102.9		102.3		100.0		97.7		97.2
Wood, paper and printing		103.0		101.2		100.0		98.3		97.9
Coke and refinery		95.6		90.2		100.0		97.9		101.4
Chemical products		98.2		98.4		100.0		101.7		104.8
Pharmaceutical products		95.5		93.9		100.0		100.5		106.6
Rubber, plastic materials and non-ferrous minerals		97.2		98.2		100.0		103.1		106.9
Metals and ferrous products		102.6		102.7		100.0		102.3		106.1
Electronic and optic materials		94.1		95.9		100.0		99.2		99.6
Electric appliances for households		110.8		98.1		100.0		98.9		99.4
Machinery and equipment		100.3		98.6		100.0		103.0		109.2
Transport means		80.5		84.7		100.0		104.1		108.8
Other industrial products		99.6		99.4		100.0		102.9		107.3

__________________________

Source: ISTAT.

Energy Consumption

Energy consumption, measured in terms of millions of tons of oil equivalent, or “MTOE”, increased by 1.5 per cent in 2017 compared to a decrease of 0.5 per cent in 2016. In 2017 (in MTOE), oil represented 33.6 per cent of Italy’s energy consumption compared to 34.4 per cent in 2016, natural gas represented 36.2 per cent of Italy’s energy consumption compared to 34.6 per cent in 2016, renewable energy resources represented 19.2 per cent of Italy’s energy consumption compared to 19.1 per cent in 2016, solid combustibles represented 6.1 per cent of Italy’s energy consumption compared to 7.0 per cent in 2016, and net imported electricity represented 4.9 per cent of Italy’s energy consumption, the same as in 2016. In 2017, Italy’s production (in MTOE) of oil, natural gas, renewable energy and solid combustibles represented 23.8 per cent of the national energy

consumption, compared to 23.9 per cent in 2016. Therefore, in 2017 Italy continued to rely heavily on energy imports, 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 Italian 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 April 2019, 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”).

ENEL is the largest electricity company in Italy and is engaged principally in the generation, importation and distribution of electricity. As of April 2019, the Ministry of Economy and Finance held approximately 23.6 per cent of ENEL’s share capital directly.

CDP is a privately held corporation in which the Ministry of Economy and Finance owns approximately 82.8 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—General—Public Debt Management.” As of April 2019, CDP also indirectly holds approximately 29.8 per cent of the share capital of Terna S.p.A. (“Terna”). Formerly owned by ENEL, Terna is a profitable public company that pays dividends regularly, which owns and operates a major portion of the transmission assets of Italy’s national electricity grid.

Construction

In 2017, construction represented 3.8 per cent of GDP and 6.2 per cent of total employment. Investment in construction (characterized, as in the past, by more persistent cyclical fluctuation) represented 45.7 per cent of fixed investments in 2017, and continued to expand for a second consecutive year in all sectors of the economy, mainly in the non-residential sector. Housing transactions increased by 5.1 per cent in 2017, compared to a 18.9 per cent increase in 2016, while house prices slightly decreased by 0.4 per cent compared to a decrease of 0.8 per cent in 2016, as the growth trend in housing transactions has not been reflected in the growth of house prices. Investment in non-residential construction increased by 0.2 per cent in 2017, compared to a 0.4 per cent decrease in 2016, while investment in residential construction increased by 1.9 per cent, compared to a 2.6 per cent increase in 2016.

Agriculture, Fishing and Forestry

In 2017, agriculture, fishing and forestry decreased by 4.3 per cent compared to 2016 and accounted for 1.6 per cent of GDP and 3.6 per cent of total employment. Agriculture’s share of Italian GDP has generally declined with the growth of industrial output since the 1960s. 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 Italian Government. Employment increased by approximately 1.2 per cent in 2017, continuing the positive trend that began in 2016 and 2015 with increases of 0.9 per cent and 0.6 per cent, respectively.

The unemployment rate in Italy decreased to 11.2 per cent in 2016 from 11.7 per cent in 2016, marking a 0.5 per cent decrease. In the euro area, the average unemployment rate was 9.1 per cent in 2017 compared to 10.0 per cent in 2016. The participation rate (i.e. the rate of employment for the Italian population between the ages of 16 and 64) was 65.4 per cent in 2017 compared to 64.9 per cent in 2016.

The following table shows the change in total employment in standard labor units, labor market participation rate and unemployment rate for each of the periods indicated. 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. For additional information on employment, see “Recent Developments.”

Employment

	2013			2014		2015		2016		2017
Employment in standard labor units (% on prior year)		(2.5	)		0.2		0.6		1.3		0.9
Participation rate (%)⁽¹⁾		63.4			63.9		64.0		64.9		65.4
Unemployment rate (%)⁽²⁾		12.2			12.7		11.9		11.7		11.2

__________________________

(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: ISTAT.

Employment by sector. In 2017, approximately 73.4 per cent were employed in the service sector, 16.8 per cent were employed in the industrial sector (excluding construction), 6.2 per cent were employed in the construction sector and 3.6 per cent were employed in the agriculture, fishing and forestry sector. For additional information on employment by sector, see “Recent Developments.”

Employment by geographic area and gender. Unemployment in Southern Italy, which in 2017 reached 19.4 per cent, has been historically higher than in Northern and Central Italy, respectively 6.9 and 10.0 per cent. In 2017, unemployment in the South decreased by 0.2 per cent compared to a 0.4 per cent decrease in the Centre and a 0.7 per cent decrease in the North. However, the number of persons employed increased throughout the country by 1.1 per cent. In 2017, the unemployment rate of females in Italy was 12.4 per cent, a 0.4 per cent decrease compared to 2016. In 2017, the unemployment rate of males in Italy decreased by 0.6 per cent compared to 2016 and was 10.3 per cent in 2017. The participation rate of women increased by 0.7 per cent in 2017 to 55.9 per cent, while the participation rate of men increased by 0.2 per cent to 75.0 per cent. For additional information on employment by geographic area and gender, see “Recent Developments.”

Employment of the population between the ages 16-24. The unemployment rate of the population in Italy aged 16-24 decreased by 8.2 per cent from 2016, reaching 34.7 per cent in 2017, compared to 37.8 per cent in 2016. In 2014, the euro area registered a decrease in the unemployment rate of the population aged 16-24 for the first time since 2007, to 23.7 per cent. This positive trend continued in 2015, 2016 and 2017, when unemployment rate in the euro area for the population aged 16-24 reached 22.3 per cent, 20.9 per cent and 18.8 per cent, respectively.

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

	2013		2014		2015		2016		2017
Italy		40.0		42.7		40.3		37.8		34.7
Euro area⁽¹⁾		24.4		23.7		22.3		20.9		18.8

__________________________

(1)	The Euro area represents the 19 countries participating in the European Union. For Euro area countries other than Italy, Spain, and the United Kingdom, data is related to population aged 15-24.

Source: Eurostat and ISTAT.

Government programs and regulatory framework. The Italian 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.

Through the Cassa Integrazione Guadagni (“CIG”), or Wage Supplementation Fund, the Italian 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 2017, the number of hours of work paid through CIG decreased by 39.5 per cent compared to 2016. In total, the Istituto Nazionale di Previdenza Sociale (“INPS”) authorized 349 million hours under the CIG, compared to the 577 million hours authorized in 2016.

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 0.6 per cent in 2017, following an increase by 1.7 per cent in gross earnings compared to 2016. The 2.3 per cent increase of employee earnings was in line with the increase of self-employed workers’ earnings of 1.9 per cent. In the private sector, nominal earnings increased by 0.6 per cent compared to 2016, with a larger increase for those employed in the industry sector and agriculture as opposed to services. In the public sector, nominal wages remained stable due to the freeze in both collective bargaining and seniority increments. Unit labor increased by 0.9 per cent in 2017, after increasing by 1.3 per cent in 2016. In 2017, unit labor rose by 1.3 per cent in industry excluding construction and rose by 1.0 per cent in the private sector.

Prices. The 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 HICP, was 1.7 per cent in 2017, compared to 0.3 per cent in 2016. 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 2017, as measured by the HICP, Italy recorded an average inflation of 1.3 per cent compared to an average deflation of 0.1 per cent in 2016. Among other factors, the inflation was driven by an increase in food and energy prices in the first half of 2017, which was partially offset by historically low core inflation. The average inflation in 2018 was 1.2 per cent. For additional information on inflation rate, see “Recent Developments.”

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

Prices and Wages (in %)

	2013		2014		2015			2016			2017
Cost of Living Index⁽¹⁾		1.1		0.2		(0.1	)		(0.1	)		1.1
EU Harmonized Consumer Price Index⁽¹⁾		1.2		0.2		0.1			(0.1	)		1.3
Core Inflation Index⁽²⁾		1.1		0.7		0.5			0.5			0.7
Change in Unit Labor Cost⁽³⁾		0.7		0.1		0.8			0.6			0.3

__________________________

(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, OECD, Eurostat.

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 Italian 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 2017, INAIL provided pensions to 16.0 million beneficiaries, totaling disbursements for approximately €287.3 billion.

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 Italian Government adopted several measures designed to control the growth of pension expenditures. The Italian Government adopted additional pension reforms in 1995, 2004 and 2007. Then in each of 2009, 2010 and 2011, the Italian Government adopted further reforms of the pension system.

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) 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 are:

•

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 stability law for 2017 (Law No. 232 of December 1, 2016) included measures for the increase in the amount of the so-called fourteenth month payment and its extension to retirees with income between 1.5 and 2 times the minimum pension threshold (i.e. €6,596.46 p.a.), and facilitations for accessing retirement for certain categories of workers. Further, the stability law for 2017 provided for a further extension of the term by which the pension safeguard mechanism (the so-called eighth safeguard), that has tightened the eligibility requirements for accessing retirement, will come into effect.

The stability law for 2018 (Law No. 172 of December 4, 2017) included measures to exempt certain categories of workers from the increase to 67 years in the age requirement allowing workers to retire. The stability law for 2018 also included measures providing for an extension to December 31, 2019 of the experimental pension advance scheme introduced by the budget law for 2017 (so-called voluntary APE), and expanded its scope to additional categories of workers whose-fixed term contracts expire close to the age requirement.

The 2019 Budget included measures to allow workers with at least 62 years of age and 38 years of social contribution to the national pension fund to apply for early retirement. These measures were implemented through the adoption of Law Decree No. 4 of January 28, 2019.

The following table shows estimated public expenditure for pensions as a percentage of GDP based on the implementation of the various reforms described above. For additional information on estimated public expenditure, see “Recent Developments.”

Estimated Pension Expenditure (as a % of GDP)

		2015				2020				2025				2030				2035				2040				2045				2050				2055				2060				2065				2070
Current Legislation			15.7				15.1				15.8				16.7				17.8				18.4				18.2				17.2				15.8				14.9				14.2				13.8

__________________________

Source: Ministry of Economy and Finance.

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);

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

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issuing banknotes in the euro area;

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promoting the smooth operation of payment systems; and

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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:

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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;

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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, 2019, the ECB had subscribed capital of approximately €10.8 billion and paid up capital of approximately €7.5 billion. As of January 1, 2019, 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 11.8 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, 2018, the Bank of Italy had assets of approximately €967.8 billion, held gold in the amount of approximately €88.4 billion (including gold receivables) and capital and reserves of approximately €25.9 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 2003, clarifying previous positions taken since October 1998, the Governing Council stated that the ECB monetary strategy, in the pursuit of price stability, aims to maintain inflation rates below, but close to, 2% over the medium term. Inflation rate has been defined as an annual increase in the HICP for the euro. 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.

In December 1998, the Governing Council set the first quantitative reference value for monetary 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 reference value has not been changed since.

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. Following a gradual recovery in the money supply in the countries most exposed to the financial crisis in the last part of 2012, the growth of the broad monetary aggregate M3 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.

In May 2017, the annual growth rate of the broad monetary aggregate M3 decreased to 4.9 per cent in April 2017, from 5.3 per cent in March 2017, averaging 5.0 per cent in the three months up to April 2017. The annual growth rate of the narrower aggregate, including currency in circulation and overnight deposits (M1), stood at 9.2 per cent in April 2017, compared against 9.1 per cent in March 2017. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to -2.8 per cent in April 2017, from -2.5 per cent in March 2017. The annual growth rate of marketable instruments (M3-M2) decreased to 1.5 per cent in April 2017, from 9.0 per cent in March 2017.

In May 2018, the annual growth rate of the broad monetary aggregate M3 increased to 4.0% from 3.8% in April 2018. The annual growth rate of M1, increased to 7.5 per cent in May 2018, compared against 7.0 per cent in April 2018. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to -1.7 per cent in May 2018, from -2.1 per cent in March 2018. The annual growth rate of marketable instruments (M3-M2) decreased to -5.1 per cent in May 2018, from -1.2 per cent in April 2018.

ECB Interest Rates. The following table shows the movement in the ECB interest rate on main refinancing operations and on marginal lending and deposit facilities from 2012 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
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 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:

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joint stock banks; or

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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:

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the free movement of capital among member countries;

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the easing of restrictions on new branch openings;

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

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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 (Legislative Decree No. 385 of September 1, 1993) consolidated most Italian banking legislation into one statute. Provisions in the Consolidated Banking Law relate, inter alia, to the role of supervisory authorities, the definition of banking and related activities, the authorization of banking activities, the scope of banking supervision, special bankruptcy procedures for banks and the supervision of financial companies. Banking activities may be performed by banks, without any restriction as to the type of bank. Furthermore, subject to their respective bylaws and applicable regulations, banks may engage in all the business activities that are integral to banking.

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

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

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

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

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

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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 II and MiFIR came into force on July 2, 2014. Member States had until January 3, 2018 to transpose these new measures into national law.

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.” Law No. 33/2015 required co-operative banks exceeding €8 billion in assets to incorporate as joint stock banks by December 2016. Law No. 33/2015 also mandated 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).

Law No. 49 of April 8, 2016. In April 2016, Parliament converted Law Decree No. 18 of February 14, 2016, into Law No. April 8, 2016, also known as “BCC Reform.” The BCC Reform requires co-operative banks to join a banking group in order to obtain or maintain their authorization for carrying out banking activities. Alternatively, co-operative banks with net assets in excess of €200 million could opt to maintain such authorization by re-incorporating as joint stock banks by June 14, 2016.

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.

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. Furthermore, the Ministry of Economy and Finance may exercise certain powers in relation to regulating wholesale markets for government securities.

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. Furthermore, the Bank of Italy may exercise a supervisory authority on wholesale markets for domestic government securities.

On December 28, 2005, a new law was passed to modify the powers 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 powers 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 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:

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ensure the safety and soundness of the European banking system;

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increase financial integration and stability; and

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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, 2017, none of the non-eurozone Member States had opted to join the SSM. The ECB directly supervises the 125 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 eligible for ECB supervision 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. By 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, 2019. 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. 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.

Risk Concentration Limitations. 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 stand-alone entities.

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.

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 538 banks as of December 31, 2017, as opposed to 604 banks as of December 31, 2016. As of December 31, 2017, there were 60 banking groups in Italy, from 70 banking groups as of December 31, 2016. 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 has resulted in the formation of Italian banking groups of international standing. In 2017, the five largest banking groups in Italy were: UniCredit S.p.A., IntesaSanpaolo

S.p.A., Banco BPM S.p.A., Monte dei Paschi di Siena S.p.A.and Unione di Banche Italiane S.p.A. The degree of banking concentration in Italy, measured by the share of assets held by the 11 most significant banks in Italy under the SSM, was 74 per cent in 2017.

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 consisted of the €3 billion loan made available by the Bank of Italy to Monte dei Paschi di Siena S.p.A., Italy’s third largest banking group, in February 2013. However, the intervention of the Italian Government in the Italian banking system has seen a gradual increase since 2013.

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., Cassa di Risparmio della Provincia di Chieti S.p.A. and Cassa di Risparmio di Ferrara S.p.A.) required the support of the Italian National Resolution Fund established by Legislative Decree No. 180 of November 16, 2015. For additional information on the Italian National Resolution Fund, see “Monetary System—Banking Regulation—Supervision.” Nuova Banca delle Marche S.p.A., Nuova Banca dell’Etruria e del Lazio S.p.A. and Nuova Cassa di Risparmio di Chieti S.p.A. were subsequently acquired by Unione di Banche Italiane S.p.A. on May 10, 2017. Nuova Cassa di Risparmio di Ferrara S.p.A. was subsequently acquired by BPER Banca S.p.A. on June 30, 2017.

On July 1, 2015, Monte dei Paschi di Siena S.p.A. issued to the Italian Ministry of Economy and Finance, as a payment in kind for the interest accrued to December 31, 2014 on the €3 billion loan made available by the Bank of Italy in 2013, ordinary shares representing 4% of Monte dei Paschi di Siena S.p.A.’s total share capital. 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, inter alia, an increase of its share capital by up to €5 billion. 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 for its recapitalization plan. For additional information on this government fund, see “Monetary System—Measures to assess the condition of Italian Banking System.” On July 4, 2017, the European Commission approved state aid in the amount of €5.4 billion for a precautionary recapitalization of Monte dei Paschi di Siena S.p.A. by the Italian Government, subject to certain conditions. Monte dei Paschi di Siena S.p.A.’s recapitalization completed on August 11, 2017, as a result of which the Italian Government’s shareholding Monte dei Paschi di Siena S.p.A. increased from 4.0 per cent to 52.2 per cent. The Italian Government’s shareholding has further increased to 68.3 per cent as a result of Monte dei Paschi di Siena S.p.A.’s purchase on its behalf of certain ordinary shares resulting from the compulsory conversion on November 23, 2017.

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 allowed Italy to use government guarantees to create a precautionary liquidity support program for banks. The program only applied to institutions which are solvent and expired at the end of 2016.

On June 25, 2017, the Italian Government, upon recommendation from the Bank of Italy and with the prior approval of the European Commission, approved Law Decree No. 99 of June 25, 2017 appointing liquidators for both Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. On June 26, 2017, the liquidators approved a plan providing for the sale of all assets and selected liabilities of Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. to IntesaSanpaolo S.p.A. for a nominal amount of €1.00. The residual liabilities of Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. were transferred to a government-controlled entity that will be liquidated in due course with an

expected aggregate liability for the Italian Government (including cash injections and state guarantees for approximately €4.8 billion and €12.0 billion, respectively) of up to €16.8 billion.

On January 2, 2019, the ECB imposed temporary administration on Banca Carige S.p.A., which had been under its direct supervision since November 2014 and failed to meet ECB capital requirements and obtain shareholders’ approval for an increase of its CET1 capital by €400 million. On January 8, 2019, the Italian Government approved Law Decree No. 1 of January 8, 2019 providing for a state guarantee of up to €3 billion for future bonds issued by Banca Carige S.p.A., as well as a guarantee to enhance the quality of collateral in order to access emergency liquidity assistance, and allowing for the Italian Government’s potential participation in a capital increase. The Growth Decree extended the term for granting the guarantee on future bonds issued by Banca Carige S.p.A. to December 31, 2019. More recently Banca Carige S.p.A. has sought out potential private investors to prevent recourse to State aid. Two potential private investors pulled out of rescuing the bank for reasons which were not made public at the beginning of May and the end of June, respectively. Nevertheless, negotiations are currently pending between Banca Carige S.p.A. and other private investment funds.

Capitalization. In 2017, the Italian banking system’s aggregate capitalization increased from 2016. At the end of the year, consolidated regulatory capital amounted to €234.0 billion, a 12.0 per cent increase from the end of 2016. In 2017, Tier 1 capital increased to €204.0 billion compared to €176.8 billion in 2016.

In 2017 the banking system’s capital ratios increased compared to 2016. As of December 31, 2017, the Common Equity Tier 1 (“CET1”) ratio was 13.8 per cent and the Tier 1 ratio 14.7 per cent. The total capital ratio increased to 16.8 per cent from 14.2 per cent in 2016. As of December 31, 2017, the Tier 1 ratio and total capital ratio of the five largest Italian banking groups were 14.7 per cent and 17.2 per cent, respectively, representing a 3.7 per cent and 3.5 per cent increase from 2016, respectively.

At the end of 2017, 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 13.4 per cent as opposed to a weighted average for the largest European banks of 14.8 per cent.

Bad Debts and Non-Performing Exposure. Bad debts (i.e. debts whose full repayment is uncertain because the relevant debtors are insolvent) decreased by 20.8 per cent in 2017 to €178,057 million, compared to €215,029 million in 2016. As a percentage of total outstanding loans, bad debts decreased to 9.1 per cent in 2017 from 10.7 per cent in 2016. The non-performing exposure (i.e. material exposures that are more than 90 days past-due) of Italian banks continued to decrease in 2017, both generally and at the five largest Italian banks. The non-performing exposures of the entire Italian banking system in 2017 amounted to 14.5 per cent of the total outstanding loans compared to 17.3 per cent in 2016. Similarly, for Italy’s five largest banks non-performing exposure amounted to 14.5 per cent in 2017, marking a 2.5 per cent decrease against 2016. The average provisioning ratio against non-performing exposure of Italian banks exceeded 50% as of December 31, 2017.

Measures to assess the condition of Italian Banking System

In order to stabilize the banking system and protect private savings, the Italian 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 Italian 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 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 per cent 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 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.) 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. 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.

In October 2018, the EBA launched a further EU-wide stress test exercise. The 2018 EU-wide stress test does not contain a defined pass/fail threshold. However, the exercise is an important supervisory tool and an input for the Pillar 2 assessment of banks. The 2018 exercise was conducted on a sample of 48 banks from 15 EU and EEA countries, including 33 banks from euro area countries and 15 banks from Denmark, Hungary, Norway, Poland, Sweden and the UK. The results of the stress test were published on November 2, 2018. The 48 banks in the 2018 stress test sample reported a 14.5 per cent weighted average transitional CET1 capital ratio as of December 2017, 14.4 per cent considering the IFRS 9 restated data. The 2018 aggregate capital ratio at the starting point is above the aggregate ratios reported by banks at the beginning of previous EU-wide stress test exercises, an evolution that reflects a continuous and significant strengthening of the capital position by the major EU banks since the end of 2010. The CET1 fully loaded ratio would fall from 14.2 per cent to 10.1 per cent over the three-year horizon of the exercise, while the transitional leverage ratio would decrease from 5.4 per cent to 4.4 per cent in the adverse scenario. As regards the four Italian banks included in the sample (i.e., UniCredit S.p.A., IntesaSanpaolo S.p.A., Banco BPM S.p.A. and Unione di Banche Italiane S.p.A.), the average CET1 ratio depletion under the adverse scenario is 3.9 percentage points on a fully loaded basis. This result is in line with the SSM average and with the EBA sample.

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 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. Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. were subsequently put into liquidation through Law Decree No. 99 of June 25, 2017.

On August 8, 2016, after raising €1.7 billion, Quaestio set up Fondo Atlante II, an additional closed-end investment fund to invest in non-performing loans of Italian banks, and which was subsequently renamed Italian Recovery Fund (“IRF”). As of October 2017, IRF had completed four securitization transactions in non-performing loans having an aggregate value of €31 billion for an aggregate investment amount of €2.5 billion. These non-performing loans were acquired by IRF from Nuova Banca delle Marche S.p.A., Nuova Banca dell’Etruria e del Lazio S.p.A. e Nuova Cassa di Risparmio di Chieti S.p.A., concurrently with their acquisition by Unione di Banche Italiane S.p.A., from Nuova Cassa di Risparmio di Ferrara S.p.A.

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 2017, overall lending activity, including repos and bad debts, increased by 1.4 per cent as compared to a 0.4 per cent increase in 2016. Lending activity in the Mezzogiorno showed an improvement in 2017, with a slight increase by 1.3 per cent compared to a 1.2 per cent increase in 2016, whereas in the central and northern regions the increase was of 1.4 per cent in 2017 compared to an increase by 0.2 per cent in 2016.

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.

THE EXTERNAL SECTOR OF THE ECONOMY

Foreign Trade

Italy is fully integrated into the European and world economies, with imports and exports in 2017 representing 23.3 and 26.1 per cent of real GDP, respectively. Following 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. In recent years, however, Italy has recorded a growing trade surplus, increasing from €29.2 billion in 2013 to €49.6 billion in 2016. In 2017, the trade surplus was €47.4 billion, mainly boosted by the export of production machinery, textiles, and leather products. In 2017, imports increased by 9.0 per cent, mainly due an increase in imports relating to extractive industries, base metals and electrical energy, compared to a 0.8 decrease in 2016. Exports increased by approximately €5.0 billion in 2016 and €30.8 billion in 2017, mainly driven by manufactured products, which increased to €429.8 billion in 2017 from €400.2 billion in 2016.

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)

	2013		2014		2015		2016		2017
	(in € millions)
Exports (fob)⁽¹⁾
Agriculture, forestry and fishing		5,982		5,936		6,620		6,852		7,084
Extractive industries		1,201		1,178		1,158		1,018		1,239
Manufactured products		373,831		382,772		395,331		400,189		429,748
Food, beverage and tobacco products		27,512		28,395		30,274		31,577		33,942
Textiles, leather products, clothing, accessories		44,975		47,235		48,033		48,725		50,953
Wood, wood products, paper, printing		7,775		8,005		8,331		8,348		8,593
Coke and refined oil products		16,366		14,057		12,376		10,040		13,471
Chemical substances and products		25,521		25,977		27,032		27,552		30,042
Pharmaceutical, chemical-medical, botanical products		19,635		20,933		19,923		21,361		24,774
Rubber, plastic, non-metallic mineral products		23,259		23,787		24,767		25,319		26,446
Base metal, metal (non-machine) products		45,543		44,623		43,731		43,433		47,209
Computers, electronic and optical devices		12,308		12,091		13,698		13,642		14,430
Electrical equipment		20,237		20,829		21,947		22,065		23,100
Machines and other non-classified products		71,607		74,142		75,807		75,960		80,061
Transportation means		37,236		40,061		45,095		47,634		50,796
Products from other manufacturing activities		21,857		22,638		24,315		24,533		25,931
Electrical energy, gas, steam, air conditioning		274		187		265		351		360
Other products		8,944		8,798		8,918		8,860		9,677
Total exports		390,233		398,870		412,291		417,269		448,107

Imports (cif)⁽¹⁾
Agriculture, forestry and fishing		12,681		12,959		13,757		13,836		14,460

	2013		2014		2015		2016		2017
	(in € millions)
Extractive industries		59,649		48,254		39,551		31,179		39,740
Manufactured products		276,784		283,854		304,934		311,165		333,026
Food, beverage and tobacco products		28,111		28,958		29,143		29,235		30,538
Textiles, leather products, clothing, accessories		26,623		28,770		30,421		30,571		31,146
Wood, wood products, paper, printing		9,213		9,455		9,983		9,803		10,318
Coke and refined oil products		12,205		10,167		7,325		6,648		8,158
Chemical substances and products		34,734		34,295		35,248		34,726		37,153
Pharmaceutical, chemical-medical, botanical products		20,730		19,827		22,153		22,942		24,003
Rubber, plastic, non-metallic mineral products		11,724		12,339		13,042		13,510		14,247
Base metal, metal (non-machine) products		35,239		36,012		38,069		35,806		41,665
Computers, electronic and optical devices		22,872		23,041		25,845		25,673		26,974
Electrical equipment		12,936		13,617		15,474		15,654		16,892
Machines and other non-classified products		22,367		23,893		26,090		27,984		29,394
Transportation means		29,543		32,158		39,375		45,452		48,890
Products from other manufacturing activities		10,488		11,324		12,766		13,161		13,649
Electrical energy, gas, steam, air conditioning		2,286		1,926		2,245		1,681		2,081
Other products		9,601		9,946		9,998		9,765		11,353
Total imports		361,002		356,939		370,484		367,626		400,659
Trade balance		29,231		41,931		41,807		49,643		47,448

__________________________

(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, computers, electronic and optical devices.

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 2016 and 2017, the energy deficit remained substantially unchanged at 0.1 per cent of GDP, compared to 2.0 per cent of GDP in 2015 and 2.6 per cent of GDP in 2014, due to a continued decrease in oil prices.

In 2017, exports of goods and services increased by 7.4 per cent, mainly driven by a widespread increase in global trade, in particular with countries in the euro area. Despite a moderate appreciation of the euro vis-a-vis several major currencies, price competitiveness on exports from Italy remained substantially unchanged in 2017 due to a 2.6 per cent increase in industrial production prices, lower than the average increases of partner countries. This resulted in a 3.9 per cent increase in exports to non-EU countries, together with a 6.3 per cent increase in exports to countries in the euro area, leading to a €30.8 billion increase in exports in 2017.

During 2017, imports of goods and services increased by 5.3 per cent by volume compared to a 3.5 per cent increase by volume in 2016. Such increase was mainly due to higher imports of raw materials, base metals and energy in 2017 compared to 2016, driven by an increase in investment in plants and machinery partially offset by a continued slowdown in imports of transportation means.

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.

Distribution of Trade (cif-fob) - Exports

	2013		2014		2015		2016		2017
	(in € millions)
Exports (fob)⁽¹⁾
Total EU		209,289		218,824		225,975		233,413		249,129
of which
EMU		155,439		161,117		165,086		171,293		182,330
of which
Austria		8,504		8,396		8,586		8,884		9,453
Belgium		11,421		13,196		13,520		13,525		13,553
France		42,289		42,016		42,664		44,008		46,164
Germany		48,474		50,144		50,764		52,703		55,877
Netherlands		9,074		9,396		9,562		9,710		10,455
Spain		17,167		18,030		19,762		21,054		23,194
Poland		9,390		10,352		10,901		11,240		12,592
United Kingdom		19,595		20,939		22,358		22,417		23,130
China		9,843		10,494		10,413		11,057		13,514
Japan		6,023		5,357		5,507		6,022		6,564
OPEC countries⁽²⁾		21,289		20,623		20,289		17,226		16,439
Russia		10,772		9,503		7,093		6,690		7,985
Switzerland		20,386		19,053		19,228		18,966		20,611
Turkey		10,085		9,734		9,978		9,599		10,094
United States		27,047		29,756		35,977		36,888		40,496
Other⁽³⁾		73,368		73,331		75,609		74,802		80,482
Total		390,233		398,870		412,291		417,269		448,107

__________________________

(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. Equatorial Guinea and the Republic of Congo became full members of OPEC in May 2017 and June 2018, respectively, while Qatar left OPEC in January 2018. For the purposes of the above table, exports to these countries are not included in OPEC countries.

(3)

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

	2013		2014		2015		2016		2017
	(in € millions)
Imports (fob)⁽¹⁾
Total EU		200,168		203,890		217,390		223,337		240,851
of which
EMU		160,019		162,107		171,740		175,930		190,566
of which
Austria		8,851		8,241		8,486		8,428		9,225
Belgium		15,020		15,082		17,120		17,756		17,968
France		30,551		30,803		32,173		32,767		35,210
Germany		53,299		54,388		57,591		59,959		65,347
Netherlands		20,689		20,815		20,567		20,182		21,175
Spain		16,355		17,236		18,583		19,820		21,175
Poland		6,632		7,222		8,586		8,791		9,852
United Kingdom		9,674		10,282		10,882		11,254		11,404

	2013		2014		2015		2016		2017
	(in € millions)
China		23,071		25,075		28,232		27,346		28,430
Japan		2,566		2,703		3,121		4,018		4,184
OPEC countries⁽²⁾		27,243		19,010		16,305		14,913		17,980
Russia		20,197		17,276		14,408		10,643		12,309
Switzerland		10,642		10,401		10,761		10,618		11,178
Turkey		5,506		5,718		6,648		7,468		8,301
United States		11,535		12,477		14,195		13,917		15,013
Other⁽³⁾		58,104		58,747		57,355		52,475		57,273
Total		361,002		356,939		370,484		367,626		400,659

__________________________

(1)

At current prices.

(2)

(3)

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 2017 over half of Italian trade was with other EU countries, with approximately 55.6 per cent of Italian exports and 60.1 per cent of imports attributable to trade with EU countries. Germany remains Italy’s single most important trade partner and in 2017 supplied 16.3 per cent of Italian imports and purchased 12.5 per cent of Italian exports.

In 2017, the trade balance was the result of surpluses both with EU countries and non-EU countries. Italy’s trade balance with EU countries was positive in 2017, with a surplus of approximately €8.3 billion, which is lower compared to the surplus of €10.1 billion recorded in 2016. With respect to non-EU countries, the trade balance in 2017 resulted in a surplus of €39.2 billion, compared to a surplus of €39.6 billion in 2016. Such increase in the trade surplus was driven by an increase in exports to the United States and to other countries, partially offset by an increase in imports from OPEC countries.

In 2017, Italian exports worldwide increased by 7.4 per cent compared to 2016, as a result of a 6.4 per cent increase in exports to Eurozone countries and a 7.5 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.

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

	2013			2014			2015			2016			2017
	(in € billions)
Current Account⁽¹⁾		16.0			31.1			25.0			43.5			47.8
per cent of GDP		1.0			1.9			1.5			2.6			2.8
Goods		36.1			47.4			51.1			57.7			56.0
Non-energy products		87.6			88.9			83.3			83.1			87.8
Energy products		(51.5	)		(41.4	)		(32.2	)		(25.5	)		(31.8	)
Services		0.4			(1.0	)		(2.6	)		(2.7	)		(3.7	)
Primary Income		(2.4	)		0.6			(8.2	)		5.2			10.3
Secondary Income		(18.1	)		(15.9	)		(15.3	)		(16.7	)		(14.7	)
EU Institutions		(14.7	)		(13.9	)		(12.7	)		(14.4	)		(11.2	)
Capital Account⁽¹⁾		(0.7	)		2.7			3.9			(3.1	)		(0.9	)
Intangible assets		(3.1	)		(0.9	)		(1.2	)		(2.0	)		(1.2	)
Transfers		2.4			3.6			5.1			(1.1	)		0.3
EU Institutions		3.6			4.8			6.4			0.5			1.8
Financial Account⁽¹⁾		21.9			51.5			35.2			65.4			47.2
Direct investment		0.6			2.3			2.4			(4.1	)		(11.2	)
Outward		15.3			15.3			14.4			13.7			6.5
Inward		14.6			12.9			12.0			17.8			17.8
Portfolio investment		(4.1	)		4.1			97.5			159.5			98.4
Equity and investment funds		57.93			78.5			84.3			53.6			97.4
Debt Securities		(26.2	)		23.3			36.5			30.7			29.7
Financial Derivatives		3.0			(3.6	)		2.3			(3.0	)		(5.7	)
Other investment		20.7			49.6			(67.6	)		(85.9	)		(36.9	)
Change in official reserves		1.5			(1.0	)		0.5			(1.2	)		2.6
Errors and omissions		6.6			17.7			6.3			25.0			0.2

__________________________

(4)	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, 2015, 2016 and 2017, however, Italy recorded a current account surplus of €16.0 billion (1.0 per cent of GDP), €31.1 billion (1.9 per cent of GDP), €25.0 billion (1.5 per cent of GDP),€43.5 billion (2.6 per cent of GDP) and €47.8 billion (2.8 per cent of GDP), respectively. The improvement has mainly reflected an increase in the goods surplus and a decrease in the energy deficit over the relevant period.

Visible Trade. Italy’s fob-fob merchandise trade surplus decreased to €56.0 billion (3.2 per cent of GDP) in 2017 compared to €57.7 billion (3.4 per cent of GDP) in 2016. The non-energy component recorded a surplus of €87.8 billion or 5.1 per cent of GDP in 2017, compared to a surplus of €83.1 billion or 4.9 per cent of GDP in 2016. At the same time, the energy deficit increased to €31.8 billion or 1.8 per cent of GDP in 2017 from €25.5 billion or 1.5 per cent of GDP in 2016. In line with 2016, exports of goods continued to increase in 2017, mainly driven by an increase in exports of consumer and intermediate products.

Invisible Trade. The deficit in services increased to €3.7 billion in 2017, compared to €2.7 billion in 2016. Such deficit was mainly caused by a 16.0 per cent increase in transport services deficit compared to 2016, partially offset by a 5.8 increase in the surplus in tourism services.

Primary Income. For a second consecutive year, the primary income account ran a surplus in 2017, mainly due to a material decrease in the deficit between capital gains generated from investments in Italian financial instruments by foreign investors and capital gains generated in foreign financial instruments by Italian investors. The surplus in 2017 accounted for €10.3 billion, a €5.1 billion increase compared to a surplus of €5.2 billion in 2016 and a €18.5 billion increase compared to a deficit of €8.2 billion in 2015.

Secondary Income. In 2017, the deficit on the secondary income account decreased to €14.7 billion, compared to €16.7 billion in 2016. The decrease in the deficit was mainly caused by the reduction of payments to EU institutions, which decreased from €14.4 billion in 2016 to €11.2 billion in 2017, while within the private transfers category, workers’ remittances remained substantially consistent with previous levels.

Capital Account

In 2017, the capital account ran a deficit of €0.9 billion, compared to a deficit of approximately €3.1 billion in 2016, mainly due to increased expenditure, stemming from certain interventions of the Italian Government in the banking system. For additional information, see “Monetary System—Equity Participations by Banks—Structure of the Banking Industry.”

Financial Account and the Net External Position

In 2017, the financial account surplus decreased to €47.2 billion from €65.4 billion in 2016 due to a net decrease in portfolio investments, which decreased by €61.1 billion from 2016. The financial account showed that, at the end of 2017, Italy’s net external debtor position amounted to €114.7 billion, or 6.7 per cent of GDP. The continued decrease in Italy’s net external debtor position recorded since 2015 (€249 billion and €395.6 billion in 2016 and 2015, respectively) was mainly due to cumulative and increasingly positive current account balances and other adjustments.

Direct Investment. Italian direct investment abroad decreased to €6.5 billion in 2017 compared to €13.7 billion in 2016, mainly due to the decrease of net investment in EU Member States, such as Belgium, Germany and Poland. Foreign direct investment in Italy remained on substantially the same level as in 2016 at €17.8 billion, with a decrease in equity investment being offset by increased intra-company loans from foreign parent companies to Italian subsidiaries.

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⁾

	2013			2014			2015			2016			2017
	(in € millions)
Direct investment abroad
Netherlands		4,758			(2,296	)		(5,766	)		2,371			896
Luxembourg		1,630			(1,337	)		(4,386	)		(386	)		862
United States		497			(575	)		1,997			(1,129	)		111
United Kingdom		2,592			3,786			(2,510	)		(1,540	)		(113	)
France		267			1,401			1,348			1,681			872
Switzerland		(197	)		1,076			570			1,124			239
Germany		(750	)		(97	)		1,913			(962	)		(2,598	)
Spain		659			(121	)		1,273			(543	)		(50	)
Brazil		631			303			331			1,295			(72	)
Belgium		1,052			45			2,241			1,978			(2,009	)
Argentina		141			161			277			(1,118	)		120
Sweden		111			313			750			(260	)		172
Other⁽²⁾		4,451			12,378			15,763			11,121			7,119
Total		15,288			15,259			14,395			13,678			6,523
Direct investment in Italy
Netherlands		(1,351	)		204			1,743			6,672			6,645
Luxembourg		1,398			(4,977	)		(1,362	)		(9,653	)		3,923
United States		775			193			(291	)		1,031			375
United Kingdom		320			5,050			1,263			3,259			33
France		3,253			5,707			6,112			11,387			906
Switzerland		838			2,017			1,681			1,784			296
Germany		1,390			1,191			3,491			(3,429	)		2,151
Spain		539			808			1,321			609			682
Brazil		176			(127	)		124			(44	)		81
Belgium		(713	)		3,708			(3,142	)		(3,217	)		687
Argentina		79			40			59			79			87
Sweden		349			172			383			94			145
Other⁽³⁾		7,384			(1,145	)		377			1,956			1,173
Total		14,638			12,928			11,975			17,774			17,758

__________________________

(1)

Figures do not include real estate investment, investments made by Italian banks abroad and investments made by foreign entities in Italian banks. Data for the period 2013-2017 is calculated in accordance with the sixth edition of the IMF Balance of Payments and International Investment Position Manual.

(2)

This category includes the following countries: Russia, Algeria, Egypt, China, Indonesia, Malaysia, Kuwait and Qatar.

(3)

This category includes the following countries: Malta, Japan and America (excluding the United States).

Source: ISTAT and National Institute for International Trade.

Portfolio Investment. In 2017, the balance of portfolio investment registered net outflows of €98.4 billion. In addition to Italian residents purchasing of foreign securities for €127.1 billion in 2017 (compared to purchases for €84.3 billion in 2016), foreign investors purchased Italian securities for €28.6 billion in 2017 (compared to disposals for €75.2 billion in 2016).

Part of these flows originated from the continuing trend of investments in foreign funds and by an increase in purchases in 2017 by Italian residents of equities and mutual fund shares. 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 a shift in allocation of investments by households towards investment funds rather than debt securities issued by banks.

Following significant disposals in 2016 both in shares (€2.9 billion, compared to €11.6 billion invested in 2015) and debt securities (€72.2 billion, compared to €11.8 billion invested in 2015), in 2017 Italian securities experienced renewed foreign investment both in shares (€15.5 billion) and debt securities (€13.1 billion).

Other Investment. Other investment includes trade receivables, deposits and other transactions, recording a net reduction of approximately €36.9 billion in 2017, compared to a net reduction of €85.9 billion in 2016. In 2017, Italy’s cumulative contributions to financial support of EMU countries stood at €58.2 billion (the same figure as in 2016 and 2015). This amount includes Italy’s exposure in the financial assistance operations of the European Financial Stability Facility, which also involved entering into bilateral loans (€43.9 billion) as well as capital contributions to the European Stability Mechanism (€14.3 billion). The bilateral loans entail 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 2017 by approximately €82.5 billion. As in previous years, this increase was mainly caused by the net amount of foreign assets acquired by Italian residents, offset by the impact of four Targeted Longer-Term Refinancing Operations (“TLTRO II”) between June 2016 and March 2017, which has favored the repayment of obligations by Italian banks.

Errors and Omissions. In 2017, the item “errors and omissions” amounted to a positive €0.2 billion, compared to a positive €25.0 billion in 2016. 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

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

US Dollar/Euro Exchange Rate

Period	Period End		Yearly Average Rate ⁽¹⁾		High		Low
	(U.S.$ per €1.00)
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
2016		1.0541		1.1069		1.1569		1.0364
2017		1.1993		1.1297		1.2060		1.0385

__________________________

(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.

Euro Exchange Rates

	Yearly Average Rate⁽¹⁾ per €1.00
	2013		2014		2015		2016		2017
Japanese Yen		129.66		140.31		134.31		120.20		126.71
British Pound		0.8493		0.8061		0.7258		0.8195		0.8767

	Yearly Average Rate⁽¹⁾ per €1.00
	2013		2014		2015		2016		2017
Swiss Franc		1.2311		1.2146		1.0679		1.0902		1.1117
Czech Koruna		25.980		27.536		27.279		27.034		26.326

__________________________

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

Source: European Central Bank.

In 2017, official reserves decreased to €126.1 billion from €129.1 billion in 2016. The decrease was mainly due to the value adjustments of gold reserves. As of December 31, 2017, the share held by the Bank of Italy into the capital of the European Central Bank stood at approximately €1.3 billion, in line with previous years.

As of December 31, 2017, gold reserves were worth €85.3 billion, compared with €86.6 billion in 2016.

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

Official Reserves

	2013		2014		2015		2016		2017
	(in € billion)
Gold⁽¹⁾		68.7		77.9		76.9		86.6		85.3
Special Drawing Rights		6.8		7.3		7.6		6.5		6.4
Total position with IMF		4.2		3.7		2.8		2.5		2.2
Other reserves		25.8		28.3		32.8		33.5		32.3
Total reserves		105.5		117.1		120.1		129.1		126.1

__________________________

(1)

Valued at market exchange rates and prices.

Source: Bank of Italy.

PUBLIC FINANCE

The Budget Process

Italy’s fiscal year is the calendar year. The budget and financial planning process of the Italian Government is governed by Law No. 196 of 2009, as amended by Law No. 39 of 2011 and Law No. 163 of 2016.

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 and economic strategies 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 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 Italian Government submits to 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 in the following year. 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 27, the Italian 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 Italian Government submits (i) to the Commission, by October 15, a Draft Budgetary Plan for the following year, and (ii) to Parliament, by October 20, 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 Parliament by April of the subsequent year the Report on the General Economic Situation of the Country, which details the performance of the Italian economy of the previous year.

Approval of financial year. In addition, by May 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 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 2018 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 revenues 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;

•

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, 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.

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 European System of Accounts (ESA95), reflecting developments in the methodological and statistical tools widely used at international level to measure modern economies. Among others, changes are aimed at the harmonization of 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. Italy’s GDP data for the years 2009 to 2018 was prepared in accordance with ESA2010 accounting system.

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^(*)

	2013			2014			2015			2016			2017
	(in € millions, except percentages)
General government expenditure⁽¹⁾		819,381			825,546			831,174			829,451			839,599
General government expenditure, as a percentage of GDP⁽²⁾		51.1			50.9			50.3			49.3			48.9
General government revenues		772,488			777,120			788,607			787,813			799,908
General government revenues, as a percentage of GDP⁽²⁾		48.1			47.9			47.7			46.9			46.6
Net borrowing		(46,893	)		(48,426	)		(42,567	)		(41,638	)		(39,691	)
Net borrowing, as a percentage of GDP⁽²⁾		(2.9	)		(3.0	)		(2.6	)		(2.5	)		(2.3	)
Primary balance		30,712			25,951			25,451			24,802			25,950
Primary balance, as a percentage of GDP⁽²⁾		1.9			1.6			1.5			1.5			1.5
Public debt⁽²⁾		2,070,254			2,137,320			2,173,387			2,219,546			2,263,056
Public debt as a percentage of GDP⁽²⁾		129.0			131.8			131.6			131.4			131.2
GDP (nominal value)		1,604,599			1,621,827			1,652,085			1,689,748			1,724,954

__________________________

^(*)	Figures are taken from the data published in the 2017 Bank of Italy Annual Report and the warehouse of statistics produced by ISTAT. Accordingly, figures do not necessarily match GDP and Public Debt data included elsewhere in this 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 to comply with the three per cent threshold set by the Maastricht Treaty. In 2013 and 2014, net borrowing as a percentage of GDP remained substantially unchanged compared to 2012 at 2.9 per cent and 3.0 per cent, respectively. In 2015 and 2016, net borrowing as a percentage of GDP decreased to 2.6 per cent and 2.5 per cent, respectively. As of December 31, 2017, Italy’s net borrowing was approximately €39.7 billion, representing 2.3 per cent of GDP.

Since 2010, the Italian 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 cumulative expenditure on euro area financial support increased from €3.9 billion to €60.3 billion between 2010 and 2014. In 2015, government cumulative expenditure on euro area financial support decreased by 3.6 per cent to €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. In 2016 and 2017, government cumulative expenditure on euro area financial support remained substantially unchanged.

Since 1999, the Italian Government has taken steps to lengthen the average maturity of debt and reduce the floating rate portion. This element, 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 2017 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.”

The 2017 Economic and Financial Document

In April 2017, the Republic of Italy submitted to the EU its 2017 Economic and Financial Document, which included the 2017 Stability Programme and the 2017 National Reform Programme.

The 2017 Stability Programme. The 2017 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 2017 Stability Programme.

Public Finance Objectives (in % of GDP)

2017 Stability Programme	2015			2016			2017			2018			2019			2020
Net Borrowing		(2.7	)		(2.4	)		(2.1	)		(1.2	)		(0.2	)		0.0
Interest Expense		4.1			4.0			3.9			3.7			3.7			3.8
Primary Balance		1.5			1.5			1.7			2.5			3.5			3.8
Structural Net Borrowing		(0.5	)		(1.2	)		(1.5	)		(0.7	)		0.1			0.0
Structural Change		0.3			(0.7	)		(0.3	)		0.8			0.8			(0.1	)
Public Debt, gross of euro area financial support		132.1			132.6			132.5			131.0			128.2			125.7
Public Debt, net of euro area financial support		128.5			129.1			129.1			127.7			125.0			122.6

__________________________

Source: Ministry of Economy and Finance.

The table below sets out the macroeconomic forecasts prepared by the Republic of Italy through 2020 in connection with the 2017 Stability Programme.

Macroeconomic Forecasts (in %)

2017 Stability Programme	2016			2017			2018		2019		2020
Real GDP		0.9			1.1			1.0		1.0		1.1
Nominal GDP		1.6			2.3			2.7		3.0		2.8
Private consumption		1.4			0.9			0.6		0.7		0.7
Public consumption		0.6			0.2			0.1		0.1		0.7
Gross fixed investment		2.9			3.6			3.0		2.7		3.2
Inventories (% of GDP)		(0.5	)		0.0			0.0		0.0		0.1
Exports of goods and services		2.4			3.7			3.2		3.5		3.5
Imports of goods and services		2.9			4.4			2.9		3.4		4.1
Domestic demand		1.4			1.2			0.9		1.0		1.1
Change in inventories		(0.5	)		0.0			0.0		0.0		0.1
Net exports		(0.1	)		(0.1	)		0.1		0.1		(0.1	)

__________________________

Source: Ministry of Economy and Finance.

The 2017 National Reform Programme. As part of the 2017 National Reform Programme, the Italian Government identified ten policy areas where structural reform is necessary. These areas are (i) containment of public expenditure and taxation; (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) energy and environment; (ix) support to the financial system; and (x) federalism.

The table below shows the impact of the main measures contained in the 2017 National Reform Programme in terms of expenditure cuts/additions or revenues decreases/additions for each of the ten policy areas described above for the years 2016 to 2020.

Financial Impact of the 2017 National Reform Programme (in € millions)

2017 National Reform Programme	2016		2017		2018		2019		2020
Containment of Public Expenditure
Additional revenues		0		7,981		11,101		11,011		10,344
Decrease in revenues		0		15,370		5,419		3,010		3,098
Expenditure cuts		8		1,630		2,290		3,808		76
Additional expenditure		3		3,902		5,273		5,098		5,109
Administrative Efficiency
Additional expenditure		0		171		61		58		54
Infrastructure and Development
Additional expenditure		400		2,089		3,668		3,834		3,328
Product Market, Competition
Additional revenues		0		50		50		0		0
Labor and Pensions
Additional revenues		0		34		55		73		101
Decrease in revenues		0		573		754		813		788
Expenditure cuts		0		742		456		107		77
Additional expenditure		1,662		4,207		4,402		4,237		4,000
Innovation and Human Capital
Additional expenditure		4		321		1,518		1,588		1,442
Support to Business
Additional revenues		0		381		1,519		352		446
Decrease in revenues		220		266		1,628		2,996		2,201
Additional expenditure		1,017		427		550		611		482
Energy and Environment
Additional expenditure		51		358		557		592		356
Additional revenues		542		167		675		84		84
Decrease in revenues		0		138		1,513		1,603		1,624
Financial System
Additional expenditure		330		20,144		129		134		38
Federalism
Decrease in revenues		0		3		3		3		3

___________________________

The table above does not include amounts allocated to the current account reserve funds and capital account reserve funds set out in Tables A and B, respectively, attached to the 2017 Budget Law.

Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2016 Stability Programme and the 2017 Stability Programme.

Main Finance Indicators – 2016 Stability Programme v. 2017 Stability Programme

	2016			2017			2018			2019
GDP growth rate⁽¹⁾
2016 Stability Programme		2.2			2.5			3.1			3.2
2017 Stability Programme		1.6			2.3			2.7			3.0
Difference		(0.6	)		(0.2	)		(0.4	)		(0.2	)
Net Borrowing, as a % of GDP
2016 Stability Programme		(2.3	)		(1.8	)		(0.9	)		0.1
2017 Stability Programme		(2.4	)		(2.1	)		(1.2	)		(0.2	)
Difference		(0.1	)		(0.3	)		(0.3	)		(0.3	)
Public Debt, as a % of GDP
2016 Stability Programme		132.4			130.9			128.0			123.8

	2016		2017		2018		2019
2017 Stability Programme		132.6		132.5		131.0		128.2
Difference		0.2		1.6		3.0		4.4

__________________________

(1)	Nominal GDP growth rate.

Source: Ministry of Economy and Finance.

The Update of the 2017 Economic and Financial Document

In September 2017, Italy published its Update of the 2017 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 2017 Economic and Financial Document.

Public Finance Objectives (in % of GDP)

Update of the 2017 Economic and Financial Document	2016			2017			2018			2019			2020
Net Borrowing		(2.5	)		(2.1	)		(1.6	)		(0.9	)		(0.2	)
Interest Expense		4.0			3.8			3.6			3.5			3.5
Primary Balance		1.5			1.7			2.0			2.6			3.3
Structural Net Borrowing		(0.9	)		(1.3	)		(1.0	)		(0.6	)		(0.2	)
Structural Change		(0.8	)		(0.4	)		0.3			0.4			0.4
Public Debt, gross of euro area financial support		132.0			131.6			130.0			127.1			123.9
Public Debt, net of euro area financial support		128.5			128.2			126.7			123.9			120.8

__________________________

Source: Ministry of Economy and Finance.

The table below presents macroeconomic forecasts prepared by The Republic of Italy through 2020 in connection with the Update of the 2017 Economic and Financial Document.

Macroeconomic Forecasts (in %)

Update of the 2017 Economic and Financial Document	2016			2017			2018		2019		2020
Real GDP		0.9			1.5			1.2		1.2		1.3
Nominal GDP		1.7			2.1			3.0		3.0		3.0
Private consumption		1.5			1.4			1.0		1.0		1.2
Public consumption		0.5			1.0			0.1		0.3		0.8
Investments		2.8			3.1			2.7		2.2		3.0
Exports of goods and services		2.4			4.8			3.5		3.6		3.6
Imports of goods and services		3.1			5.5			3.4		3.7		4.5
Domestic demand		1.5			1.5			1.1		1.1		1.4
Change in inventories		(0.4	)		0.1			0.0		0.0		0.0
Net exports		(0.1	)		(0.1	)		0.1		0.1		(0.2	)

__________________________

Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2017 Stability Programme and the Update of the 2017 Economic and Financial Document.

Main Finance Indicators – 2017 Economic and Financial Document
v. Update of the 2017 Economic and Financial Document

	2016			2017			2018			2019			2020
Nominal GDP growth rate
2017 Economic and Financial Document		1.6			2.3			2.7			3.0			2.8
Update of the 2017 Economic and Financial Document		1.7			2.1			3.0			3.0			3.0
Difference		0.1			(0.2	)		0.3			0.0			0.2
Net Borrowing, as a % of GDP
2017 Economic and Financial Document		(2.4	)		(2.1	)		(1.2	)		(0.2	)		0.0
Update of the 2017 Economic and Financial Document		(2.5	)		(2.1	)		(1.6	)		(0.9	)		(0.2	)
Difference		(0.1	)		0.0			(0.4	)		(0.7	)		(0.2	)
Public Debt, as a % of GDP
2017 Economic and Financial Document		132.6			132.5			131.0			128.2			125.7
Update of the 2017 Economic and Financial Document		132.0			131.6			130.0			127.1			123.9
Difference		(0.6	)		(0.9	)		(1.0	)		(1.1	)		(1.8	)

___________________________

Source: Ministry of Economy and Finance.

The EU Council’s policy recommendations to Italy for the period 2017-2018

As part of the European Semester process, in May 2017, 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 2017 Stability Programme and the 2017 National Reform Programme. ECOFIN recommended that Italy take action over the period 2017-2018 to:

•

pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which translates into a substantial fiscal effort for 2018. When taking policy action, consideration should be given to achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Italy’s public finances;

•

shift the tax burden from the factors of production onto taxes less detrimental to growth in a budgetary neutral way by taking decisive action to reduce the number and scope of tax expenditures, reforming the outdated cadastral system and reintroducing the first residence tax for high-income households;

•

broaden the compulsory use of electronic invoicing and payments;

•

reduce the trial length in civil justice through effective case management and rules ensuring procedural discipline;

•

step up the fight against corruption, in particular by revising the statute of limitations;

•

complete reforms of public employment and improve the efficiency of publicly-owned enterprises;

•

promptly adopt and implement the pending law on competition and address the remaining restrictions to competition;

•

accelerate the reduction in the stock of non-performing loans and step up incentives for balance-sheet clean-up and restructuring, in particular in the segment of banks under national supervision;

•

adopt a comprehensive overhaul of the regulatory framework for insolvency and collateral enforcement;

•

with the involvement of social partners, strengthen the collective bargaining framework to allow collective agreements to better take into account local conditions;

•

ensure effective active labor market policies;

•

facilitate the take-up of work for second earners; and

•

rationalize social spending and improve its composition.

The 2018 Economic and Financial Document

In April 2018, the Republic of Italy submitted to the EU its 2018 Economic and Financial Document, which included the 2018 Stability Programme and the 2018 National Reform Programme.

The 2018 Stability Programme. The 2018 Stability Programme confirmed the Republic of Italy’s commitment to reduce its public debt by increasing its primary surplus. The table below presents the main public finance trends included in the 2018 Stability Programme.¹

Public Finance Trends (in % of GDP)

2018 Stability Programme	2016			2017			2018			2019			2020		2021
Net Borrowing		(2.5	)		(2.3	)		(1.6	)		(0.8	)		0.0		0.2
Interest Expense		4.0			3.8			3.5			3.5			3.5		3.5
Primary Balance		1.5			1.5			1.9			2.7			3.4		3.7
Structural Net Borrowing		(0.9	)		(1.1	)		(1.0	)		(0.4	)		0.1		0.1
Structural Change		(0.8	)		(0.2	)		0.1			0.6			0.5		0.0
Public Debt, gross of euro area financial support		132.0			131.8			130.8			128.0			124.7		122.0
Public Debt, net of euro area financial support		128.6			128.4			127.5			124.8			121.6		119.0

__________________________

Source: Ministry of Economy and Finance.

The table below sets out the macroeconomic forecasts prepared by the Republic of Italy through 2021 in connection with the 2018 Stability Programme.

Macroeconomic Forecasts (in %)

2018 Stability Programme	2017		2018		2019		2020		2021
Real GDP		1.5		1.5		1.4		1.3		1.2
Nominal GDP		2.1		2.9		3.2		3.1		2.7
Private consumption		1.4		1.4		1.0		0.9		1.2
Public consumption		0.1		0.5		0.1		0.4		0.6

__________________________

At the time the 2018 Economic and Financial Document was approved, a new Government had not yet been appointed following the general elections held on March 4, 2018. Therefore, the 2018 Stability Prorgamme included in the 2018 Economic and Financial Document was prepared based on available public finance trends, excluding the impact of legislation to be adopted by the impending Government to pursue its public finance objectives.

2018 Stability Programme	2017			2018		2019			2020			2021
Gross fixed investment		3.8			4.1		2.8			2.4			1.7
Inventories (% of GDP)		(0.2	)		0.0		0.1			0.0			0.0
Exports of goods and services		5.4			5.2		4.2			3.9			3.2
Imports of goods and services		5.3			5.4		4.0			3.4			3.5
Domestic demand		1.5			1.5		1.1			1.1			1.2
Change in inventories		(0.2	)		0.0		0.1			0.0			0.0
Net exports		(0.2	)		0.0		(0.2	)		(0.2	)		0.0

__________________________

Source: Ministry of Economy and Finance.

The 2018 National Reform Programme. As part of the 2018 National Reform Programme, the Italian Government identified ten policy areas where structural reform is necessary. These areas are (i) administrative efficiency; (ii) energy and environment; (iii) federalism; (iv) infrastructure and development; (v) innovation and human capital; (vi) labor and pensions; (vii) product market and competition; (viii) support to the financial system; (ix) support to businesses; and (x) public expenditure and taxation.

The table below shows the main impact of the measures contained in the 2018 National Reform Programme in terms of expenditure cuts/additions or revenues decreases/additions for each of the ten policy areas described above for the years 2017 to 2020.

Financial Impact of the 2018 National Reform Programme (in € millions)

2018 National Reform Programme	2017		2018		2019		2020
Administrative Efficiency
Additional expenditure		90.0		310.2		416.1		324.6
Additional revenues		309.0		398.1		175.1		177.6
Energy and Environment
Additional expenditure		30.5		65.8		92.9		122.3
Additional revenues		0.7		162.6		618.9		8.9
Expenditure cuts		0.0		0.5		94.5		1.2
Federalism
Additional expenditure		21.0		337.2		11.4		11.4
Additional revenues		81.3		139.3		139.3		139.3
Expenditure cuts		70.0		100.0		100.0		100.0
Infrastructure and Development
Additional expenditure		1,496.0		2,851.2		3,621.5		3,159.7
Additional revenues		0.5		162.6		130.7		76.7
Decrease in revenues		111.9		146.1		66.4		78.4
Innovation and Human Capital
Additional expenditure		55.6		328.2		659.3		707.1
Additional revenues		0.0		1,304.3		81.0		331.0
Labor and Pensions
Additional expenditure		390.8		4,103.4		5,860.6		6,778.7
Additional revenues		4.4		16.5		208.7		440.6
Expenditure cuts		0.0		59.8		102.7		111.8
Decrease in revenues		0.1		85.9		693.7		1,040.2
Product Market, Competition
Additional expenditure		0.3		21.9		21.9		20.9
Financial System
Additional expenditure		0.0		325.0		25.2		25.2
Support to Business
Additional expenditure		991.0		1,492.2		567.7		525.7
Additional revenues		52.0		142.0		176.0		176.0
Expenditure cuts		143.0		89.0		111.0		111.0

2018 National Reform Programme	2017		2018		2019		2020
Decrease in revenues		0.0		21.0		556.5		1,047.0
Public Expenditure and Taxation
Additional expenditure		1,301.5		5,548.5		4,953.8		3,453.1
Additional revenues		2,288.2		16,617.1		13,521.3		10,130.2
Expenditure cuts		1,743.3		3,993.8		3,367.0		3,268.2
Decrease in revenues		0.3		26,847.0		14,876.6		5,952.9

__________________________

Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2017 Stability Programme and the 2018 Stability Programme.

Main Finance Indicators – 2017 Stability Programme v. 2018 Stability Programme

	2017			2018			2019			2020
Nominal GDP growth rate⁽¹⁾
2017 Stability Programme		2.3			2.7			3.0			2.8
2018 Stability Programme		2.1			2.9			3.2			3.1
Difference		(0.2	)		0.2			0.2			0.3
Net Borrowing, as a % of GDP⁽²⁾
2017 Stability Programme		(2.1	)		(1.2	)		(0.2	)		(0.0	)
2018 Stability Programme		(2.3	)		(1.6	)		(0.8	)		0.0
Difference		(0.2	)		(0.4	)		(0.6	)		0.0
Public Debt, as a % of GDP⁽²⁾
2017 Stability Programme		132.5			131.0			128.2			125.7
2018 Stability Programme		131.8			130.8			128.0			124.7
Difference		(0.6	)		(0.2	)		(0.2	)		(1.0	)

__________________________

(1)	Nominal GDP growth rate.

(2)

At the time the 2018 Economic and Financial Document was approved, a new government had not yet been appointed following the general elections held on March 4, 2018. Therefore, the 2018 Stability Programme included in the 2018 Economic and Financial Document was prepared based on available public finance trends, excluding the impact of legislation to be adopted by the impending government to pursue its public finance objectives.

Source: Ministry of Economy and Finance.

The Update of the 2018 Economic and Financial Document

In September 2018, Italy published its Update of the 2018 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 2018 Economic and Financial Document.

Public Finance Objectives (in % of GDP)

Update of the 2018 Economic and Financial Document	2017			2018			2019			2020			2021
Net Borrowing		(2.4	)		(1.8	)		(2.4	)		(2.1	)		(1.8	)
Interest Expense		3.8			3.6			3.7			3.8			3.9
Primary Balance		1.4			1.8			1.3			1.7			2.1
Structural Net Borrowing		(1.1	)		(0.9	)		(1.7	)		(1.7	)		(1.7	)
Structural Change		(0.2	)		0.2			(0.8	)		0.0			0.0
Public Debt, gross of euro area financial support		131.2			130.9			130.0			128.1			126.7
Public Debt, net of euro area financial support		127.8			127.6			126.8			125.0			123.8

__________________________

Source: Ministry of Economy and Finance.

The table below presents macroeconomic forecasts prepared by The Republic of Italy through 2021 in connection with the Update of the 2018 Economic and Financial Document.

Macroeconomic Forecasts (in %)

Update of the 2018 Economic and Financial Document	2017			2018			2019			2020		2021
Real GDP		1.6			1.2			0.9			1.1		1.1
Nominal GDP		2.1			2.5			2.7			2.8		2.6
Private consumption		1.5			1.1			0.7			0.8		1.1
Public consumption		(0.1	)		0.4			0.6			0.6		0.5
Investments		4.3			4.4			2.2			1.5		1.6
Exports of goods and services		5.7			0.4			2.7			3.4		3.6
Imports of goods and services		5.2			1.7			2.6			2.9		3.5
Domestic demand		1.6			1.4			0.9			0.8		1.0
Change in inventories		(0.3	)		0.1			(0.1	)		0.0		0.0
Net exports		0.3			(0.3	)		0.1			0.2		0.1

__________________________

Source: Ministry of Economy and Finance.

The following table compares the main finance indicators included in the 2018 Stability Programme and the Update of the 2018 Economic and Financial Document.

Main Finance Indicators – 2018 Economic and Financial Document
v. Update of the 2018 Economic and Financial Document

	2017			2018			2019			2020			2021
Nominal GDP growth rate
2018 Economic and Financial Document		2.1			2.9			3.2			3.1			2.7
Update of the 2018 Economic and Financial Document		2.1			2.5			2.7			2.8			2.6
Difference		0.0			(0.4	)		(0.5	)		(0.3	)		(0.1	)
Net Borrowing, as a % of GDP
2018 Economic and Financial Document		(2.3	)		(1.6	)		(0.8	)		0.0			0.2
Update of the 2018 Economic and Financial Document		(2.4	)		(1.8	)		(2.4	)		(2.1	)		(1.8	)
Difference		(0.1	)		(0.2	)		(1.6	)		(2.1	)		(2.0	)
Public Debt, as a % of GDP
2018 Economic and Financial Document		131.8			130.8			128.0			124.7			122.0
Update of the 2018 Economic and Financial Document		131.2			130.9			130.0			128.1			126.7
Difference		(0.6	)		0.1			2.0			3.4			4.7

__________________________

Source: Ministry of Economy and Finance.

The EU Council’s policy recommendations to Italy for the period 2018-2019

As part of the European Semester process, in May 2018, 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 2018 Stability Programme and the 2018 National Reform Programme. ECOFIN recommended that Italy take action over the period 2018-2019 to:

•

ensure that the nominal growth rate of net primary government expenditure does not exceed 0.1% in 2019, corresponding to an annual structural adjustment of 0.6% of GDP;

•

use windfall gains to accelerate the reduction of the general government debt ratio;

•

shift taxation away from labour, including by reducing tax expenditure and reforming the outdated cadastral values;

•

step up efforts to tackle the shadow economy, including by strengthening the compulsory use of e-payments through lower legal thresholds for cash payments;

•

reduce the share of old-age pensions in public spending to create space for other social spending;

•

reduce the length of civil trials at all instances by enforcing and streamlining procedural rules, including those under consideration by the legislator;

•

achieve more effective prevention and repression of corruption by reducing the length of criminal trials and implementing the new anti-corruption framework;

•

ensure enforcement of the new framework for publicly-owned enterprises and increase the efficiency and quality of local public services;

•

address restrictions to competition, including in services, also through a new annual competition law;

•

maintain the pace of reducing the high stock of non-performing loans and support further bank balance sheet restructuring and consolidation, including for small and medium-sized banks, and promptly implement the insolvency reform; and

•

improve market-based access to finance for firms.

For information on the 2019 Economic and Financial Document, see “Recent Developments.”

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

	2013		2014		2015		2016		2017
	(in € millions, except percentages)
Expenditures
Compensation of employees		164,784		163,468		162,072		163,896		164,007
Intermediate consumption		89,579		88,890		89,853		92,343		94,759
Market purchases of social benefits in kind		43,552		44,210		43,859		44,674		45,415
Social benefits in cash		319,688		326,863		332,792		336,354		342,072
Subsidies to firms		27,547		30,413		28,177		29,359		26,387
Interest payments		77,605		74,377		68,018		66,440		65,641
Other expenditures		38,514		37,126		37,131		38,864		35,645
Total current expenditures		761,269		765,347		761,902		771,930		773,926

	2013			2014			2015			2016			2017
	(in € millions, except percentages)
Gross fixed investments		38,555			36,911			37,271			35,679			33,683
Investments grants		13,866			12,683			15,943			14,207			13,387
Other capital expenditures		5,691			10,605			16,058			7,635			18,603
Total capital account expenditures		58,112			60,199			69,272			57,521			65,673
Total expenditures		819,381			825,546			831,174			829,451			839,599
as a % of GDP		51.1			50.9			50.3			49.3			48.9
Deficit (surplus) on current account		(2,451	)		(5,106	)		(19,852	)		(9,076	)		(21,177	)
Net borrowing		46,893			48,426			42,567			41,638			39,691
as a % of GDP		2.9			3.0			2.6			2.5			2.3

Revenues
Direct taxes		240,920			238,021			243,255			248,264			250,477
Indirect taxes		239,813			248,849			250,202			243,097			249,922
Actual social security contributions		211,200			210,414			215,126			216,678			222,264
Imputed social security contributions		4,089			3,932			3,939			3,954			3,980
Income from capital		10,760			11,866			11,135			11,293			11,734
Other revenues		56,938			57,371			58,097			57,720			56,726
Total current revenues		763,720			770,453			781,754			781,006			795,103
Capital taxes		4,154			1,582			1,214			5,365			2,222
Other capital revenues		4,614			5,085			5,639			1,442			2,583
Total capital revenues		8,768			6,667			6,853			6,807			4,805
Total revenues		772,488			777,120			788,607			787,813			799,908
as a % of GDP		48.1			47.9			47.7			46.9			46.6
Primary balance		30,712			25,951			25,451			24,802			25,950
as a % of GDP		1.9			1.6			1.5			1.5			1.5

__________________________

Source: Bank of Italy.

General government revenues increased by 1.5 per cent or €12.1 billion in 2017 compared to a slight decrease by 0.1 per cent or €0.8 billion in 2016. In 2017, the ratio of tax revenues and social contributions to GDP decreased to 42.1 per cent compared to 42.4 per cent and 43.1 per cent in 2016 and 2015, respectively. Social security contributions in 2017 increased by 2.5 per cent, while current tax revenues increased by 1.8 per cent. This was mainly due to a 1.2 per cent increase in central government tax revenues, benefitting from the Italian Government programme providing for discounted tax debts and recovery of VAT evasion and a 2.8 increase in indirect taxes, mainly due to a 5.7 increase in income generated by VAT and a 8.9 increase in income generated by the regional tax on production (IRAP).

Direct taxes increased by 0.9 per cent in 2017, driven by a 1.7 per cent increase in personal income taxes partially offset by a 0.4 decrease in corporate income taxes. Taxes on income from financial assets decreased by 5.3 per cent to €12.9 billion, generally driven by lowering yields. Capital taxes decreased by approximately €3.1 billion in 2017 to €2.2 billion, mainly due to the reduction of additional revenues collected under the voluntary disclosure regime introduced by the 2017 Stability Law.

General government expenditures increased by 1.2 per cent in 2017, although decreasing to 48.9 per cent of GDP in 2017 from 49.3 per cent of GDP in 2016. The increase in general government expenditures was due to the increase in capital account expenditures, which increased from €57.5 billion in 2016 to €65.7 billion in 2017, and a 2.6 per cent increase in intermediate consumption from €92.3 billion in 2016 to €94.8 billion in 2017.

Italy recorded a current account surplus of €47.8 billion in 2018 (2.8 per cent of GDP), compared to an account surplus of €43.5 billion in 2016 (2.6 per cent of GDP), and of €25.0 billion in 2015 (1.5 per cent of GDP). Between 2010, when the current account deficit reached a post-1974 high of 3.5 per cent of GDP, and 2017, the current account improved by a total of 6.2 points, reflecting mainly an increased surplus in primary income to €10.3 billion , offsetting a slight reduction in the surplus on goods due to an increase in prices for energy.

Expenditures

Compensation of employees. Compensation of employees marginally decreased by 0.1 per cent in 2017, mainly due to the decrease in the number of public sector employees, which followed a 1.2 per cent increase in the number of public sector employees in 2016, partially stemming from a statistical reclassification. In 2017, compensation of employees as a percentage of GDP decreased to 9.5 per cent compared to 9.8 per cent in both 2016 and 2015, mainly due to the persisting effects of 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. At the end of 2017, the pre-existing freeze on the renewals of employment agreements was lifted, and it is expected that compensation of employees will generally increase in 2018 due to the payment of arrears due.

Intermediate consumption. Intermediate consumption, which measures the value of the goods and services consumed as inputs by a process of production, increased by 2.3 per cent in 2017 compared to a 1.1 per cent increase in 2016. As in 2016, this increase was mainly driven by expenditure on innovative pharmaceuticals.

Market purchases of social benefits in kind. Expenditure on social benefits in kind increased by €0.7 billion increasing by 1.7 per cent in 2017, compared to an increase of 1.9 per cent in 2016. In 2017, expenditure on social benefits in kind was 2.6 per cent of GDP, slightly decreasing from 2.7 per cent of GDP in each of 2016 and 2015.

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 Italian Government. Local health units adopt their own budgets, establish targets and monitor budget developments. Approximately 80.1 per cent of expenditure on social benefits in kind in 2017 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 1.7 per cent in 2017 and by 1.1 per cent in 2016. Expenditure on pensions increased by 1.2 per cent and 0.9 per cent in 2017 and 2016, respectively, while the non-pension component grew by 3.4 per cent following a 3.3 per cent increase in 2016 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.”

Subsidies to firms. Subsidies to firms, which are current payments by the Italian Government to resident producers that are not required to be reimbursed, decreased by 10.1 per cent in 2017 compared to a 4.2 per cent decrease in 2016.

Interest payments. Interest payments by the Italian Government decreased by €0.8 billion or 1.2 per cent in 2017 as compared to the €1.6 billion or 2.3 per cent decrease in 2016. The ratio of interest payments to nominal GDP was 3.8 per cent and 4.0 per cent in 2017 and 2016, respectively. For additional information on Italy’s public debt, see “Public Debt.”

Other Expenditures. Other expenditures decreased by 8.3 per cent in 2017 compared to a 4.7 per cent increase in 2016.

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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 Italian 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 Italian Government has been under-reporting of income by self-employed persons and small enterprises. The Italian 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 42.1 per cent in 2017, compared to 42.4 per cent in 2016. Indirect tax revenues increased by 4.2 per cent in 2017 compared to a 3.7 per cent increase in 2015, while direct tax revenues slightly increased by 0.1 per cent in 2017, mainly due to a 1.1 per cent increase in personal income tax. Further, total tax revenues decreased slightly from 29.2 per cent of GDP in 2016 to 29.1 per cent of GDP in 2017.

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

Composition of Tax Revenues⁽¹⁾

	2013		2014		2015		2016		2017
	(in € millions)

Direct taxes
Personal income tax		163,631		163,650		176,220		180,004		182,661
Corporate income tax		40,026		32,293		33,402		35,251		35,246
Investment Income tax		10,747		10,083		11,123		9,024		8,541
Other		11,171		8,956		9,461		13,732		11,521
Total direct taxes		232,631		224,994		240,059		245,294		245,887

Indirect taxes
VAT		112,273		114,490		119,376		124,336		129,595
Other transaction-based taxes		19,857		19,774		18,846		22,213		21,700
Taxes on production of mineral oil		25,774		25,560		25,412		25,428		25,726

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	2013		2014		2015		2016		2017
	(in € millions)

Taxes on production of methane gas		3,700		4,468		2,900		3,416		3,460
Tax on electricity consumption		2,716		2,914		2,531		2,853		2,584
Tax on tobacco consumption		10,371		10,304		10,647		10,882		10,520
Taxes on lotto and lotteries		10,689		11,021		11,245		13,621		13,209
Other⁽²⁾		3,331		2,722		2,893		2,433		2,408
Total indirect taxes		192,002		194,462		197,240		205,787		209,830
Total taxes		424,633		419,456		437,299		451,081		455,717

__________________________

(1)

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

Source: Ministry of Economy and Finance.

In 2017, total taxation revenues (as reported in the “Composition of Tax Revenues” table on a cash basis) increased by 1.0 per cent compared to 2016. This was due to a 2.0 per cent increase in indirect tax revenues, mainly driven by an increase in VAT that in 2017 amounted to €129.6 billion as compared to €124.4 billion in 2016 and, to a lower extent, by a 1.1 per cent increase in taxes on production of mineral oils. Direct tax revenues remained substantially unchanged in 2017, amounting to €245.9 billion compared to €245.3 billion in 2016.

Actual social security contributions. Actual social security contributions, which consist of payments made for the benefit of employees, increased by 2.6 per cent in 2017 compared to a 0.7 per cent increase in 2016.

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, increased by 0.7 per cent in 2017 compared to a decrease by 3.3 per cent in 2016.

Income from capital. Income from capital increased by 3.9 per cent in 2017 compared to an increase of 10.4 per cent in 2016.

Other Revenues. Other revenues decreased by 12.0 per cent in 2017 compared to a 16.2 per cent increase in 2016.

Government Enterprises

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

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Largest Government Companies⁽¹⁾⁽²⁾

				Total Assets		Total Liabilities		Net profit (loss)
				At December 31,				For the year ended December 31,
Company	Industry Sector	Per cent of Government Ownership as of December 31, 2017		2017		2017		2015			2016			2017
		(in € millions, except percentages)
Cassa Depositi e Prestiti S.p.A.⁽³⁾	Financial Services		82.77		419,533		419,533		(857	)		1,225			4,462
ENEL S.p.A.	Electricity		23.58		155,641		103,480		3,372			3,787			5,329
ENI S.p.A.⁽⁴⁾	Oil and Gas		30.10		114,928		66,849		(8,778	)		(1,464	)		3,374
Ferrovie dello Stato Italiane S.p.A.	Railroads		100.00		63,013		24,383		137			638			230
Leonardo S.p.A.⁽⁵⁾	Defense/Aerospace		30.20		25,029		20,545		527			507			274
Monte dei Paschi di Siena S.p.A.	Banking		68.25		139,154		97,802		388			(3,241	)		(3,502	)
Poste Italiane S.p.A.	Post/Financial Services		29.26		67,235		64,476		552			622			689

___________________________

(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)	As of December 31, 2017, the residual 17.23 per cent of CDP was owned by various banking foundations.

(4)	As of December 31, 2017, 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.

(5)	Finmeccanica S.p.A. has changed its name to Leonardo S.p.A. with effect as of January 1, 2017.

Source: Ministry of Economy and Finance.

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PUBLIC DEBT

General

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

The Treasury manages the Italian Government 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 Italian 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 2017 was approximately €427.1 billion, compared to an aggregate amount of approximately €408.5 billion in 2016. In both cases such amounts include bonds issued in switch-bond transactions. The aggregate amount of government bonds with maturity in 2017 increased to €368.5 billion from €345.2 billion in 2016.

The following table summarizes Italy’s public debt as of the dates indicated, that is mainly represented by debt incurred by the Treasury.

Total Public Debt^(*)

	December 31,
	2013			2014			2015			2016			2017
	(Millions of euro)
Debt incurred by the Treasury:
Short term bonds (BOT)⁽¹⁾		141,098			125,496			115,074			107,113			106,601
Medium- and long-term bonds (initially incurred or issued in Italy)		1,524,751			1,600,822			1,646,806			1,712,257			1,755,585
External bonds (initially incurred or issued outside Italy)⁽²⁾		47,250			47,308			43,959			39,240			35,589
Total Treasury Issues		1,713,099			1,773,627			1,805,839			1,858,609			1,897,776
Postal savings⁽³⁾		18,853			17,577			16,088			16,232			14,323
Treasury accounts⁽⁴⁾		136,117			152,256			158,233			154,064			159,012
Other debt incurred by:
ISPA (bonds and other loans)⁽⁵⁾		11,106			10,106			10,106			10,105			10,114
Central Government entities⁽⁶⁾		85,931			88,619			90,172			89,710			100,187
Other general Government entities⁽⁷⁾		105,120			95,139			92,976			90,861			82,068
Total public debt		2,070,226			2,137,323			2,173,404			2,219,582			2,263,479
as a percentage of GDP		129.0	%		131.8	%		131.6	%		131.4	%		131.2	%
Liquidity buffer⁽⁸⁾		(36,863	)		(45,594	)		(35,114	)		(34,835	)		(29,323	)
Total public debt net of liquidity buffer		2,033,363			2,091,729			2,138,290			2,184,746			2,234,156

__________________________

^(*)	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)

(4)	Treasury accounts are demand, short- and medium-term deposit accounts held by non-central Government entities at the Treasury. Treasury accounts also include liabilities for Euro coins minted by Italy.

104

(5)	The liabilities of Infrastrutture S.p.A., or “ISPA,” in relation to the TAV project (high-speed railroad infrastructure), have been included in the Government debt since 2006, when such liabilities were assumed by the Government following their reclassification.

(6)	The line item includes all internal and external liabilities incurred by other central Government entities.

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

(8)

Source: Ministry of Economy and Finance and Bank of Italy.

In the period from 2013 to 2017, Italy’s debt-to-GDP ratio increased from 123.9 per cent net of euro area financial support (and 129.0 per cent gross of euro area financial support) to 128.4 per cent net of euro area financial support (and 131.8 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 unchanged nominal GDP from 2013 to 2016. However, Italy’s debt-to GDP ratio decreased by 0.2 per cent in 2017, primarily due to an increase by 2.1 per cent in nominal GDP from 2016 and a reduction in the Treasury’s cash reserves. For additional information on the GDP trends, see “The Italian Economy—General.”

The Italian Government’s latest forecasts of the debt-to-GDP ratio are included in the Draft Budgetary Plan 2019. The table below shows the Italian Government’s forecasts of the debt-to-GDP ratio for the period 2018-2021. For additional information on forecasted debt-to-GDP ratio, see “Recent Developments.”

Forecasted Debt-to-GDP Ratios

		2017				2018				2019				2020				2021
Public Debt, gross of euro area financial support			131.2				131.7				130.7				129.2				128.2

__________________________

Source: Ministry of Economy and Finance.

Government Guarantees. Government guarantees on liabilities or assets of third parties are contingent liabilities that may become actual government liabilities if specific conditions are met. They include (i) standardised government guarantees, which are guarantees issued in large number, usually for fairly small amounts, among identical lines, and (ii) one-off government guarantees, which are provided on a case-by-case basis, generally for rather significant amounts and under individual contractual arrangements.

The table below shows data on Government standardised and one-off guarantees as a percentage of GDP in the years 2013 to 2017.

Government Guarantees

	2013		2014		2015		2016		2017
	(% of GDP)
Standardised Government guarantees		0.68		0.9		1.0		1.2		1.4
One-off Government guarantees		5.41		1.8		1.2		1.2		2.5
Total Government guarantees		6.10		2.7		2.2		2.4		3.9

__________________________

Source: Eurostat.

Public Debt Management. Debt management continues to be geared towards lengthening the average residual maturity of public debt. In 2017, the average maturity of government debt

105

increased, for a third consecutive year, from 6.76 years at the end of 2016 to 6.90 years at the end of 2017. The average refixing period, the main index for measuring interest risk, also increased from 5.64 years in 2016 to 5.76 years in 2017.

The Decree of the Ministry of Economy and Finance of December 23, 2015 (so-called Decreto Cornice) sets forth the general objectives for the management of public debt. These general objectives translated into the following guidelines for 2017:

maintain the current average maturity of government bonds;

marginally increase the issuance of BOTs, without incurring in any material change in their total amount as compared to the end of 2016;

access the market with a higher volume of debt instruments indexed to the Eurozone, potentially including a new 10 year debt instrument indexed to the Eurozone inflation;

offer CCTeu on a monthly basis and with higher volumes as compared to 2016, maintaining control of the debt exposure to inflation;

potentially issue two series of BTPItalia and manage their average maturity by carrying out exchange and buyback transactions;

increase the total amount of BTPs with a maturity of 3 and 5 years, and maintain the total amount of BTPs with a maturity of 7 and 10 years, in line with the total amount of BTPs outstanding at the end of 2016; diversify the BTP offering further to the issue for the first time of new BTPs with a maturity of 20 and 50 years in 2016;

carry out exchange and buyback transactions to manage the average maturity of securities with the objective of managing debt reaching maturity in 2018-2019, in order to stabilize and reduce the amount of debt generally;

carry out management activities of derivative portfolios in order to improve their performance, and implement hedging transactions with respect to new transactions on foreign currencies.

At the end of 2017, the debt represented by government bonds was 84.50 per cent of the aggregate public debt of Italy. The table below presents the breakdown of the total government bonds issued in 2015, 2016 and 2017, respectively.

Breakdown of Total Issued Government Bonds

	2015		% on total		2016		% on total		2017		% on total
BOT mini		0		0.0		0		0.0		0		0.0
BOT 3 months		0		0.0		0		0.0		0		0.0
BOT 6 months		80,956		19.5		76,669		18.8		75,000		18.1
BOT 12 months		83,174		20.0		76,025		18.6		76,601		18.5
Commercial Paper		0		0.0		0		0.0		0		0
Total short-term		164,130		39.5		152,694		37.4		151,601		36.65
CTZ		27,388		6.6		18,991		4.7		28,660		6.9
CCTeu		29,503		7.1		28,854		7.0		31,023		7.5
BTP 3 years		28,924		7.0		25,215		6.2		35,148		8.5
BTP 5 years		33,729		8.1		33,747		8.3		36,404		8.8
BTP 7 years		31,340		7.5		33,328		8.2		29,762		7.2
BTP 10 years		40,712		9.8		42,604		10.4		37,902		9.2
BTP 15 years		18,703		4.5		12,910		3.2		11,634		2.8

106

BTP 20 years	1,150	0.3	12,015	2.9	7,513	1.8
BTP 30 years	13,241	3.2	14,436	3.5	14,041	3.4
BTP 50 years	0	0.0	5,000	1.2	750	0.2
BTP€i 5 years	692	0.2	4,942	1.2	2,895	0.7
BTP€i 10 years	3,823	0.9	4,082	1.0	7,856	1.9
BTP€i 15 years	8,019	1.9	2,691	0.7	2,326	0.6
BTP€i 30 years	562	0.1	707	0.2	472	0.1
BTPItalia	9,379	2.3	13,234	3.2	15,697	3.8
Foreign	4,000	1.0	3,036	0.7	0	0.0
Total medium/long-term	251,164	60.5	255,793	62.6	262,084	63.35
Total	415,294	100	408,486	100	413,685	100

__________________________

Source: 2018 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 inflation rate (BTP€i+BTP Italia) and floating rate securities as of December 31, 2015, 2016 and 2017, respectively.

Breakdown of Total Outstanding Government Bonds (in %)

	December 31,
	2015		2016		2017
Fixed rate securities		72.4		73.5		75.5
Securities indexed to the inflation rate (BTP€i+BTP Italia)		13.9		13.0		11.5
Floating rate securities		13.7		13.4		13.0
Total Outstanding Government Bonds		100		100		100

__________________________

Source: Ministry of Economy and Finance.

In 2017, the weighted average cost of debt slightly increased to 0.7 per cent from 0.5 per cent in 2016, maintaining financing costs close to a historical minimum low. Such increase in the weighted average cost of debt was mainly due to less favorable market conditions compared to 2016. Aggregate average yields on government bonds increased to 1.55 per cent in 2017 from 1.14 per cent in 2016. Yields on short-term government bonds continued to record negative interest rates in 2017, whereas yields on long-term government bonds increased to over 2.00 per cent in the first months of 2017 from 1.50 per cent in the first months of 2016. Yields on extra long-term government bonds reached 3.30 per cent by the end of 2017, slightly decreasing from an average yield of 3.50 per cent in the first six months of 2017.

The table below shows the yields on 3-year and 10-year BTPs issued by the Treasury for each quarter of 2016 and 2017 and the first three quarters of 2018.

Quarterly Yields on 3-Year and 10-Year BTPs

	2016						2017					2018
		Q1	Q2	Q3		Q4		Q1	Q2	Q3	Q4		Q1	Q2	Q3	Q4
BTP 3-year		0.03	0.05	(0.03	)	0.14		0.22	0.37	0.15	0.10		0.03	0.30	1.15	2.31
BTP 10-year		1.50	1.38	1.24		1.53		2.24	2.23	2.14	1.93		2.03	2.08	2.93	3.19

__________________________

Source: Ministry of Economy and Finance.

107

BTP-Bund Spread. The spread between BTPs and German government bonds, in each case with a maturity of 10 years, increased to approximately 187 bps as of December 31, 2017 from approximately 172 bps as of December 31, 2016. In 2018, the spread between BTPs and German government bonds significantly increased, reaching approximately 253 bps as of December 31, 2018, due to an extended negative perception of credit risk for Italy.

Privatization program. The Italian Government also intends to reduce public debt through a program of privatization of public real estate assets and companies in which the Italian Government holds interests. In February 2015, the Italian Government disposed of a 5.74 per cent interest in ENEL, which generated approximately €2.2 billion. In October 2015, the Italian Government disposed of a 35.3 per cent interest in Poste Italiane S.p.A. following completion of its initial public offering, which generated approximately €3.1 billion. In addition, the Italian Government disposed of a 46.6 per cent interest in ENAV S.p.A. following completion of its initial public offering in August 2016, which generated approximately €834 million. For further information on the largest companies in which the Italian Government holds an interest, see “Public Finance—Government Enterprises.”

The Italian Government expects that the envisaged privatization program will result in additional revenues of approximately 0.3 per cent of GDP in each of 2018, 2019 and 2020.

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, 2017 was €2,176,295 million, an increase of €48,898 million from December 31, 2016. The following table summarizes the internal public debt as of December 31 of each of the years indicated.

Internal Public Debt

	2013			2014			2015			2016			2017
	(Millions of euro)
Debt incurred by the Treasury:
Short-Term Bonds (BOT)⁽¹⁾		141,098			125,496			115,074			107,113			106,601
Medium- and Long-Term Bonds
CTZ⁽²⁾		76,427			52,751			48,651			39,607			40,692
CCT⁽³⁾		124,717			119,151			121,181			134,707			132,936
BTP⁽⁴⁾		1,123,665			1,204,124			1,229,152			1,300,594			1,368,729
BTP€i⁽⁵⁾		133,566			130,350			143,995			147,337			146,847
BTP Italia⁽⁶⁾		66,376			94,447			103,826			90,012			66,381
Total		1,665,849			1,726,318			1,761,880			1,819,370			1,862,186
Postal savings		18,853			17,577			16,088			16,232			14,323
Treasury accounts⁽⁷⁾		136,117			152,256			158,223			154,064			159,012
ISPA loans⁽⁸⁾		500			500			500			500			500
Central Government entities		50,059			49,207			49,883			46,907			58,733
Other general Government entities		102,999			92,875			91,908			90,325			81,541
Total internal public debt		1,974,377			2,038,733			2,078,482			2,127,397			2,176,295
Liquidity buffer⁽⁹⁾		(36,863	)		(45,594	)		(35,114	)		(34,835	)		(29,323	)
Total internal public debt net of liquidity buffer		1,937,514			1,993,139			2,043,368			2,092,562			2,146,972

__________________________

(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) are zero-coupon notes with maturities of twenty-four months.

108

(3)

CCTs (Certificati di Credito del Tesoro) are floating rate medium-term notes indexed to the six-month BOT rate with maturities of typically seven years and a semiannual coupon. The BOT rate is the interest rate at the BOT auction held at the end of the month prior to the one in which the coupons become payable. CCTs also include CCTEUs, which are indexed to six-month Euribor. As of December 31, 2017, no CCTs remain outstanding.

(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)	Treasury accounts are demand, short- and medium-term deposit accounts held by non-central Government entities at the Treasury. Treasury accounts also include liabilities for Euro coins minted by Italy..

(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)	The item includes all the funds of the Treasury deposited with the Bank of Italy and the sinking fund, which is mainly funded by privatizations, as well as liquidity invested on the money market through OPTES. For additional information, see “Monetary System—Monetary Policy”.

Source: Ministry of Economy and Finance and Bank of Italy.

In 2016 and 2017, the ratio of short-term bonds to total securities issued by the Treasury was approximately 5.74 per cent and approximately 5.59 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,
	2013		2014		2015		2016		2017
	(Millions of euro)
Floating internal debt⁽¹⁾		180,081		188,213		193,266		189,214		191,764
Funded internal debt		1,794,296		1,850,520		1,885,215		1,938,184		1,984,531
Total internal public debt		1,974,377		2,038,733		2,078,482		2,127,397		2,176,295

__________________________

(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, 2017 was € 87,184 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,
	2013		2014		2015		2016		2017
	(Millions of euro)
External Treasury Bonds⁽¹⁾		47,250		47,308		43,959		39,240		35,589
ISPA (bonds and loans)⁽²⁾		10,606		9,606		9,606		9,605		9,614
Central Government entities		35,872		39,412		40,289		42,803		41,454
Other general Government entities		2,121		2,264		1,068		536		527

109

		December 31,
Total external public debt			95,849				98,590				94,922				92,184				87,184

___________________________

(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 the full amount of ISPA bonds and a portion of loans incurred by ISPA 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,
	2013		2014		2015		2016		2017
	(in millions)
Euro⁽¹⁾		22,522		23,523		27,389		27,321		26,815
British Pounds		2,450		2,050		1,750		1,750		1,750
Swiss Francs		3,000		3,000		1,000		1,000		1,000
U.S. Dollars		19,000		19,000		12,500		7,500		5,500
Japanese Yen		585,000		460,000		335,000		235,000		110,000
Norwegian Kroner		2,000		2,000		0		0		0
Czech Koruna		7,470		7,470		7,470		7,470		4,980

__________________________

(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 last updated in December 2014, and a US$15 billion commercial paper program established in 1999 and last updated in December 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— Key measures related to the Italian Economy— Financial Assistance to EU Member States.”

Debt Record

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

110

TABLES AND SUPPLEMENTARY INFORMATION

Floating Internal Debt⁽¹⁾ as of December 31, 2017

Interest Rate		Maturity Date	Outstanding principal amount
	(Millions of euro)
BOT (3 months)	various	various		0
BOT (6 months)	various	various		32,752
Treasury accounts	floating	none		159,012
Total floating internal debt of the Treasury				191,764
Liquidity buffer	floating	none		(29,323	)
Total floating internal debt net of liquidity buffer				162,441

__________________________

(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 and Bank of Italy.

Funded Internal Debt⁽¹⁾ as of December 31, 2017

Interest Rate		Maturity Date	Outstanding principal amount
	(Millions of euro)
BOT (12 months)	various	various		73,848
CTZ	various	various		40,692
CCT	various	various		132,936
BTP	various	various		1,368,729
BTP€I	various	various		146,847
BTP Italia	various	various		66,381
Other funded internal debt	various	various		155,098
Total funded internal debt of the Treasury				1,984,531

__________________________

(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 and Bank of Italy.

111

External Bonds of the Treasury as of December 31, 2017

The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2017.

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	€	2,918,369,049
$	2,000,000,000		5.38	%		98.44	February 27, 2003	June 15, 2033	$	2,000,000,000	€	1,667,639,456

									$	5,500,000,000	€	4,586,008,506

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		4.42	%		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	€	1,166,760,000	€	1,166,760,000
€	250,000,000	2.00% Inflation Indexed				99.02	March 30, 2007	September 15, 2062	€	291,755,000	€	291,755,000
€	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	€	573,065,000	€	573,065,000
€	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		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	€	544,775,000	€	544,775,000
€	450,000,000		4.45	%		99.59	February 26, 2011	August 24, 2020	€	450,000,000	€	450,000,000
€	2,259,500,000		6.22	%		100.00	July 1, 2011	December 31, 2027	€	1,641,724,318	€	1,641,724,318
€	230,000,000	4.20% Inflation Indexed				100.00	February 1, 2012	July 25, 2042	€	243,834,500	€	243,834,500
€	437,500,000		3.44	%		100.00	February 13, 2012	December 31, 2024	€	82,028,612	€	82,028,612
€	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	€	255,640,000	€	255,640,000
€	1,000,000,000	1.51% Inflation Indexed				100.00	October 15, 2014	September 15, 2028	€	1,022,980,000	€	1,022,980,000
€	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

112

Original Currency Nominal Amount		Interest Rate			Initial Public Offering Price (%)		Date of Issue	Maturity Date	Amount Outstanding		Equivalent in Euro
€	300,000,000	1.19% Inflation Indexed				96.02	February 18, 2015	February 18, 2043	€	306,330,000	€	306,330,000
€	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	€	656,485,560	€	656,485,560
€	800,000,000		1.91			100.00	May 18, 2016	May 18, 2029	€	800,000,000	€	800,000,000
€	700,000,000		1.90			100.00	June 22, 2016	June 22, 2031	€	700,000,000	€	700,000,000
€	900,000,000		1.45			100.00	October 17, 2016	April 17, 2027	€	900,000,000	€	900,000,000

									€	26,815,377,990	€	26,815,377,990

Euro Ispa Bonds⁽³⁾

€	750,000,000	2.25% Inflation Indexed				99.37	February 6, 2004	July 31, 2019	€	913,680,000	€	913,680,000
€	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	%		105.13	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

									€	8,613,680,000	€	8,613,680,000
Swiss Franc^(4)(*)
ChF 1,000,000,000			2.50	%		99.33	January 30, 2006	January 30, 2018	ChF 1,000,000,000		€	854,554,777
									ChF 1,000,000,000		€	854,554,777
Pound Sterling^(5)(*)
£	1,500,000,000		6.00	%		98.57	August 4, 1998	August 4, 2028	£	1,500,000,000	€	1,690,655,185
£	250,000,000		5.25	%		99.48	July 29, 2004	December 7, 2034	£	250,000,000	€	281,775,864
									£	1,750,000,000	€	1,972,431,049
Japanese Yen^(6)(*)
¥	50,000,000,000	Floating				100.00	April 24, 2008	April 24, 2018	¥	50,000,000,000	€	370,342,938
¥	30,000,000,000	Floating				100.00	July 8, 2009	July 8, 2019	¥	30,000,000,000	€	222,205,763
¥	30,000,000,000	Floating				100.00	September 18, 2009	September 18, 2019	¥	30,000,000,000	€	222,205,763
									¥	110,000,000,000	€	814,754,463
Czech Koruna^(7)(*)
CZK 2,490,000,000			4.40	%		100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000		€	97,513,217
CZK 2,490,000,000			4.41	%		100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000		€	97,513,217
									CZK 4,980,000,000		€	195,026,434
TOTAL OUTSTANDING											€	43,851,833,220

__________________________

(1)	U.S. dollar amounts have been converted into euro at $1.1993/€1.00, the exchange rate prevailing at December 31, 2017.

(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 ChF1.1702/€1.00, the exchange rate prevailing at December 31, 2017.

(5)	Pounds Sterling amounts have been converted into euro at £0.88723/€1.00, the exchange rate prevailing at December 31, 2017.

(6)	Japanese Yen amounts have been converted into euro at ¥135.01/€1.00, the exchange rate prevailing at December 31, 2017.

(7)	Czech Koruna amounts have been converted into euro at CZK25.535/€1.00, the exchange rate prevailing at December 31, 2017.

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

Source: Ministry of Economy and Finance.

	As of December 31, 2017
Currency	Before Swap (in %)		After Swap (in %)
US Dollars		10.46		4.24
Euro⁽¹⁾		80.79		95.12
Swiss Francs		1.95		-

113

Pounds Sterling	4.50	0.64
Japanese Yen	1.86	-
Czech Koruna	0.44	-
Total External Bonds (in millions of Euro)	43,851.83	44,203.16

__________________________

(1)	Including Euro ISPA Bonds.

Source: Ministry of Economy and Finance.

External Bonds of the Treasury as of December 31, 2018

The following table shows the external bonds of the Treasury issued and outstanding as of December 31, 2018.

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	€	3,056,768,559
$	2,000,000,000		5.38	%		98.44	February 27, 2003	June 15, 2033	$	2,000,000,000	€	1,746,724,891

									$	5,500,000,000	€	4,803,493,450

Euro⁽²⁾

€	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
€	192,000,000		4.42	%		100.00	March 28, 2006	March 28, 2036	€	192,000,000	€	192,000,000
€	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	€	1,191,380,000	€	1,191,380,000
€	250,000,000	2.00% Inflation Indexed				99.02	March 30, 2007	September 15, 2062	€	297,912,500	€	297,912,500
€	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	€	585,160,000	€	585,160,000
€	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
€	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	€	556,270,000	€	556,270,000
€	450,000,000		4.45	%		99.59	February 26, 2011	August 24, 2020	€	450,000,000	€	450,000,000
€	2,259,500,000		6.22	%		100.00	July 1, 2011	December 31, 2027	€	1,490,311,134	€	1,490,311,134
€	230,000,000	4.20% Inflation Indexed				100.00	February 1, 2012	July 25, 2042	€	248,979,600	€	248,979,600
€	437,500,000		3.44	%		100.00	February 13, 2012	December 31, 2024	€	52,311,958	€	52,311,958
€	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	€	261,035,000	€	261,035,000

114

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	€	1,044,560,000	€	1,044,560,000
€	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	€	312,795,000	€	312,795,000
€	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	€	670,337,640	€	670,337,640
€	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
€	900,000,000		1.45	%		100.00	October 17, 2016	April 17, 2027	€	900,000,000	€	900,000,000

									€	24,456,052,832	€	24,456,052,832
Euro Ispa Bonds⁽³⁾

€	750,000,000	2.25% Inflation Indexed				99.36	February 6, 2004	July 31, 2019	€	927,202,500	€	927,202,500
€	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

									€	8,627,202,500	€	8,627,202,500
Pound Sterling^(4)(*)
£	1,500,000,000		6.00	%		98.56	August 4, 1998	August 4, 2028	£	1,500,000,000	€	1,676,858,238
£	250,000,000		5.25	%		99.47	July 29, 2004	December 7, 2034	£	250,000,000	€	279,476,373
									£	1,750,000,000	€	1,956,334,611
Japanese Yen^(5)(*)
¥	30,000,000,000	Floating				100.00	July 8, 2009	July 8, 2019	¥	30,000,000,000	€	238,379,023
¥	30,000,000,000	Floating				100.00	September 18, 2009	September 18, 2019	¥	30,000,000,000	€	238,379,023
									¥	60,000,000,000	€	476,758,045
Czech Koruna^(6)(*)
CZK 2,490,000,000			4.40	%		100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000		€	96,796,766
CZK 2,490,000,000			4.41	%		100.00	October 3, 2007	October 3, 2019	CZK 2,490,000,000		€	96,796,766
									CZK 4,980,000,000		€	193,593,531
TOTAL OUTSTANDING											€	40,513,434,969

__________________________

(1)	U.S. dollar amounts have been converted into euro at $1.145/€1.00, the exchange rate prevailing at December 31, 2018.

(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)	Pounds Sterling amounts have been converted into euro at £0.89453/€1.00, the exchange rate prevailing at December 31, 2018.

(5)	Japanese Yen amounts have been converted into euro at ¥125.85/€1.00, the exchange rate prevailing at December 31, 2018.

(6)	Czech Koruna amounts have been converted into euro at CZK25.724/€1.00, the exchange rate prevailing at December 31, 2018.

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

Source: Ministry of Economy and Finance.

	As of December 31, 2018
Currency	Before Swap (in %)		After Swap (in %)
US Dollars		11.90		4.79
Euro⁽¹⁾		81.70		94.53
Pounds Sterling		4.80		0.68
Japanese Yen		1.20		-

115

	As of December 31, 2018
Currency	Before Swap (in %)		After Swap (in %)
Czech Koruna		0.50		-
Total External Bonds (in millions of Euro)		40,513.44		41,026.53

__________________________

(1)	Including Euro ISPA Bonds.

Source: Ministry of Economy and Finance.