The economy is struggling to emerge from its deep recession. Steady exports and a pickup in private consumption are offsetting the stiff headwinds to investment from tight credit conditions, especially for small firms.
The large economic slack has contributed to pushing down inflation to well below one per cent, increasing the real burden on debtors.
Growth is forecast to pickup this year, supported by exports and a gradual easing of financial conditions. However, the recovery remains fragile and unemployment unacceptably high, highlighting the need for bold and quick policy actions. Deep structural changes are needed to make Italy a more dynamic country that adapts quickly to a changing world and is home to innovative entrepreneurs. Labour markets, competition policy, small and medium enterprises (SMEs), and the judicial system are four connected areas where reforms would unlock significant growth potential. Fiscal rebalancing to allow lower tax rates and increased productive spending can also lift activity.
Prime Minister Renzi has outlined an ambitious agenda to reform the electoral law, the labour market, judicial system, and public sector. The passage of the delega fiscale provides a welcome framework for simplifying and improving the tax system. The government’s recent announcement builds on this agenda with measures to reform the public administration, support the corporate sector, and reduce corruption. Delivery of real change is now crucial for strengthening confidence and support for reforms. Building on this agenda, the mission sees the following areas as priorities to unblocking Italy’s productivity and growth potential.
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© International Monetary Fund
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