Directorate General for Research
Directorate A: Medium- and long- Term Research
Division for Economic, Monetary and Budgetary Affairs
BRIEFINGECON 522 EN/rev.2
THE ITALIAN ECONOMY
The opinions expressed are the sole responsability of the author
and do not necessarily reflect the position of the European Parliament
Luxembourg, May 2003PE 168.090/rev.2
1
The Italian Economy
This document is available in
EN (original), FR, IT.
You will find the full list of the Economic Series' briefings at the end of this publication.
Summary
The purpose of this briefing is to give a general view of the state of the Italian economy and its perspectives over the medium term. The presentation is based on the criteria set out in the Stability and Growth Pact and on the fourth update of the Italian Stability Programme, which was presented in November 2002. Subsequent major developments in the economy have been taken into account to the extent that new data were available.
Publisher:European Parliament
L-2929 Luxembourg
Authors:Simone Roberti
Editor:Aila Asikainen
Economic, Monetary and Budgetary Affairs Division
Tel.:(352) 43 00-27002
Fax:(352) 43 00-27721
E-Mail:
Reproduction and translation for non-commercial purposes are authorized, provided the source is acknowledged and the publisher is given prior notice and sent a copy.
Manuscript completed on 6 May 2003.
1
The Italian Economy
CONTENTS
General Introduction......
Background to the Italian Stability Programme......
Results for 2001 and 2002......
Analysis and Future Prospects......
Economic growth......
External balance......
Inflation......
Unemployment......
Budget deficit......
Public debt......
Structural Reforms......
The Labour Market......
Taxation......
Pension and Health Care Expenditure (2001-2050)......
Privatisation Plan for 2002–2006......
Measures to foster growth in southern Italy......
Political Background......
The Political System......
Public opinion......
Economic Affairs Series Briefings......
Economic Affairs Series Working Papers......
Tables and Charts
Table 1: Main economic indicators for 2001 and 2002......
Chart 1: Gross domestic product 1992–2006......
Chart 2: Italian balances of trade and current account 1990–2002......
Chart 3: Italian inflation 1997–2006......
Chart 4: Annual inflation in 2001–2002......
Chart 5: Unemployment rate 1990–2006......
Chart 6: Italian employment rate 1996–2001......
Chart 7: General government balance......
Chart 8: General government consolidated gross debt 1990–2006......
Table 2: Results of the May 2001 elections......
Table 3: Opinion on the euro, Autumn 2002......
General Introduction
Under Article 99 of the Treaty, all EU Member States – whether they fully participate in the Single Currency or not – are required to regard their economic policies as a matter of common concern, and to co-ordinate them within the Council. Co-ordination is carried out within the framework of recommended "broad guidelines" for the economic policies of Member States.
In addition, under the pre-Single-Currency transitional provisions outlined in Treaty Article 116, Member States wishing to join the € area were asked to adopt multi-annual programmes intended to ensure the lasting convergence necessary for the achievement of economic and monetary union. These formed the basis of the May 1998 decisions on € area membership.
The requirement to submit such "convergence programmes" remains for those countries still outside the euro area. In the case of countries which have already adopted the €, the Stability and Growth Pact and Article 4 of the EU Council regulation 1466/97 of 7 July on tighter surveillance of budgetary implementation calls for similar "stability programmes" to be submitted. These are three-year rolling programmes, and focus on progress in meeting the Pact’s two major objectives:
- a budget deficit below 3% of GDP in any one year; and
- an overall budgetary balance over the economic cycle.
The credibility of the Stability and Growth Pact came under strain during the economic downturn in 2001 and 2002 as doubts arose concerning the commitment of some Member States to the rules. As a response, the Commission proposed slight modifications to the interpretation of the Pact[1].
It emphasised that budgetary objectives should be set in structural terms, i.e. taking account of the economic cycle. The underlying (structural) position can be analysed after adjusting the nominal position to the economic cycle. The Council endorsed in July 2002 the introduction of a common method of calculation of cyclically adjusted deficits. The Eurogroup endorsed on 7 October 2002 a transitional arrangement by which structural deficit should be reduced annually by 0.5% of GDP in Member States not having yet reached a structurally balanced position.
A softer interpretation of the balanced budget requirement was proposed for Member States, with a relatively low debt burden (less than 60% of GDP) and public finances on a sustainable footing. The Council, however, did not endorse this proposal but emphasised the need to assess the Programmes case by case, putting weight on the long-term sustainability of public finances and securing a sufficient safety margin, including an allowance for automatic stabilisers to operate fully, without breaching the 3% reference value. Further, the planned evolution and quality of public finances should be coherent with the close to balance requirement.
Each Stability/Convergence programme is the subject of a Commission assessment and a Council opinion, and forms part of the input to the Broad Economic Guidelines, together with the overall annual implementation report published by the Commission in January.
While the Broad Economic Policy Guidelines indicate the medium-term orientation for the Member States' policies, the annual updates of the Stability and Convergence Programmes set out the measures decided by the national governments for the achievement of the medium-term goals. They should reflect the budget proposals for the following year. The agreed timetable for submitting the annual updates is between mid-October and the beginning of December.
The initial Convergence and Stability programmes were published in late 1998. They have been updated four times. The fourth updates became available towards the end of 2002.
Background to the Italian Stability Programme
The fourth update of the Italian Stability Programme covering the period from 2002 to 2006 was published in November 2002[2]. It is based on the Forecasting and Planning Report (RPP) for 2003, on the Financial Bill for 2003, and on the Updated to the Economic and Financial Planning Document (DPEF) for 2003-2006. All three documents were presented to the Italian Parliament on the 30 September 2002.
The Commission gave its opinion on the fourth update of the programme on 8 January 2003[3]. The Commission concluded that the budgetary targets in the updated programme implied that the close-to-balance objective of the Stability and Growth Pact would not be respected by 2003, but only by 2006. The debt-to-GDP ratio was now expected to fall below 100% by 2005, three years later than the commitment made by Italy in 1998.
The programme complies in part with the 2002 Broad Economic Policy Guidelines. The analysis carried out by the Commission's services highlights the issues concerning the quality of adjustment and the risks threatening the attainment of these revised budgetary objectives. In 2003 the adjustment is achieved through substantial temporary measures which will subsequently need to be replaced with more durable ones. The risks concern both the programme's macroeconomic projection of very strong growth and the unspecified but very large underlying fiscal corrections which would be necessary from 2004 onwards in order to reach the deficit objectives. The lack of detailed information on the additional measures foreseen to achieve the budgetary targets beyond 2003 is contrary to the revised "code of conduct on the content and format of stability and convergence programmes".
The Council also observes that the lack of information on the additional measures foreseen to achieve the budgetary targets beyond 2003 is not in line with the requirements of the code. The economic policies as reflected in the planned measures in the updated programme only comply in part with the recommendations of the 2002 Broad Economic Policy Guidelines.
The Council notes that the cyclically-adjusted deficit improved by 0.6% of GDP largely due to one-off measures. The projected deficit for 2002 significantly exceeds the original objectives due to a much worse deficit in 2001 than estimated in last year's programme, together with the delayed recovery of the economy and in spite of corrective measure adopted in the course of the year. This implies that the "close-to-balance" position would be reached in 2004, rather than in 2003.
The Government now expects the reduction of the debt ratio below 100% of GDP to occur in 2005, two years later than in the commitment made in 1998.
The programme's macroeconomic scenario assumes a pick-up in economic activity. However, in light of the more recent developments, the recovery is likely to be slower than anticipated, and growth assumptions, both nominal and potential, appear optimistic.
Results for 2001 and 2002
In 2001, the world economy started to experience a slowdown that was confirmed in 2002. Italian GDP increased by only 1.8% in 2001 and by 0.4% in 2002. This result is worst than the EU average. Nominal GDP reached €1258 billion in 2002, which is about 14% of the total GDP in the 15 Member States of the European Union. Investment decreased in 2002 by 1.4%, in line with the trends in the rest of Europe. Private consumption grew sluggishly (0.3%, compared with 1.1% in 2001). The stimulus provided by the tax relief enacted in 2001 and the continuation of favourable labour market conditions have been partly offset by the erosion of purchasing power due to inflation. Exports remained constant, given a modest growth in world trade (2.3%).
Table 1: Main economic indicators for 2001 and 2002
Italy2001 / EU average 2001 / Italy
2002 / EU average 2002
Real GDP growth (%) / 1.8 / 1.6 / 0.4 / 1.0
Inflation rate - HICP (%) / 2.3 / 2.3 / 2.6 / 2.1
Unemployment rate (%) / 9.4 / 7.3 / 9.0 / 7.6
General government deficit (-) / surplus (+) (% of GDP) / -2.6 / -0.9 / -2.3 / -1.9
Public debt (% of GDP) / 109.5 / 63.0 / 106.7 / 62.5
Source: Eurostat
While in the European Union unemployment began to increase once more, in Italy it continued to decrease, reaching an annual average of 9.0%. The Italian unemployment rate now exceeds the EU average by only 1.4 percentage points. However, regional disparities still remain huge.
During recent years, prices have developed in line with the European Union average. The Italian rate of inflation (HICP) exceeded only slightly that of the EU in 2001. In 2002, the rate increased and the difference became larger.
Public finances went through another troubled year. The deficit targets for 2001 and 2002 were too optimistic, and could not be achieved. The Government used short-term measures to curb spending and to keep down the deficits.
Public debt continued to decline, progressing towards the Maastricht reference value of 60%. However, the reduction of the debt ratio below 100% of GDP is now envisaged by the Government to occur in 2005, two years later than in the commitment made by Italy in 1998.
Analysis and Future Prospects
The outlook for the Italian economy is uncertain, but with the potential for a very good performance. The Government has an ambitious economic policy agenda, including structural reforms, which are seen as necessary but which, despite the large majority in both houses of the Parliament, may prove difficult to implement. After two years, the Government has realised the reforms of the tax system and of the labour market. However, its financing is uncertain, with an immediate revenue cost (as in the case of the 2003 tax reduction) but no assured subsequent increase in the tax base.
In 2003 the Italian economy, like the rest of Europe, is expected to grow at a pace close to potential. GDP is expected to grow at the rate of 2.3%, basically in line with the main international organisations' forecast. The pick-up should accelerate in the second half of the year, fuelled by the international upswing as well as the stimulus provided by the Government's Finance Bill for 2003.
In the medium term, a marked improvement in international growth prospects is expected. Both in the United States and in the European Union growth should approach its potential rate as early as 2004. The output gap would thus begin to narrow in that year and be completely closed by the end of the projection period in 2006. This international forecasting scenario is subject to some risks, particularly given the geopolitical situation in the Middle East. The forecasting scenario posits stable oil prices, with Brent crude holding at around $23 a barrel. An aggravation of the political situation might result in a negative supply shock for the world economy, leading to economic stagnation and rising inflation. Making a quantitative estimate of these effects is difficult because of the uncertainty related both to the level that energy prices could reach and the duration of a possible crisis. The war in Iraq is over, but there are still a lot of uncertainties about the future.
Economic growth
The average annual growth of Italian GDP in 1990–2000 was some 1.6%, 0.6 percentage points below the EU average. Despite structural reforms made with the aim of increasing the flexibility of the economy, much growth potential remained unexploited or employed out of official records, in the underground economy.
Chart 1: Gross domestic product 1992–2006
(annual change in volume, %)
Source: Eurostat, Stability Programme
As in many other Member States, growth forecasts for 2002 and 2003 have also been scaled down in Italy in recent months. The 2002 Stability Programme forecasts that growth will pick up in 2003 after a sluggish year in 2001 and 2002, and that the pick-up will be strong enough to bring about an increase of 2.3% in real GDP.
The forecast assumes that growth potential remains roughly constant. This means that the slowdown in demand recorded in 2001 and 2002 is considered to be temporary, with no effect on the country's productive capacity. Also, the impact of the ongoing reforms, in particular of the labour market, on the economy's potential growth rate are not considered in the Stability Programme Update. Italy's output gap (i.e. the percentage difference between actual and potential GDP) is calculated as being negative, by 2 percentage points in 2003, owing to the lower than potential growth experienced in 2001 and 2002. It is expected to narrow towards zero by 2006.
The optimism of the Government is explained by the fiscal reform and by the so-called "mass tax concordat" aimed at revealing hidden taxable income and regularising taxpayers individual positions.
Moreover, one of the most important element of risk in the forecasting scenario was the uncertainty concerning the international political situation. Now that the war in Iraq is over, this risk seems to have disappeared.
External balance
The Italian external position has remained in surplus ever since the imbalances of the early 1990s were eliminated. However, the surplus on the current account narrowed again and turned to a small deficit in 2002.
Chart 2: Italian balances of trade and current account 1990–2002
(% of GDP)
Source: Eurostat
Inflation
The rate of inflation, which in the early 1990s was constantly at or above 5%, fell substantially in the latter part of the decade and remained relatively low until late 1999. Then, as in all Member States, high oil prices combined with a strong dollar created an upward pressure, which, combined with rising food prices, kept inflation figures clearly above the ECB's target level until autumn 2001. In the absence of exogenous shocks, the heightened competition spurred by reforms in the markets for goods and services and the continuation of wage behaviour consistent with productivity growth should allow inflation to stabilise at just over 1 percent.
Chart 3: Italian inflation 1997–2006
(HICP, annual change, %)
Source: Eurostat, Stability Programme
While the general trend of inflation in Italy has followed the European average, the gap between the EU average and the Italian rate narrowed and even disappeared temporarily, as can be seen by looking at monthly rates (Chart 4). However, in 2002 the gap increased again.
Chart 4: Annual inflation in 2001–2003
(HICP, change over 12 months, %)
Source: Eurostat
Last year, the Government expected price dynamics to be slower in 2002 than in 2001 and the average annual rate to decline by one percentage point to 1.7%. However, inflation remained above 2.5 percent. Price rises were nevertheless kept in check through wage moderation, the containment of profit margins, the fall in the cost of raw materials (except oil products) and the appreciation of the euro.
In this first months of 2003, inflation increased, coming close to 3 percent (2.9%). The Government target for 2003 indicated in the Stability Programme Update (1.9%) appears difficult to reach.
Unemployment
Unemployment was high throughout the 1990s, increasing during the recession of 1993–1994, and remaining stubbornly at high levels ever since. The high rate of unemployment is related to relatively low growth rates recorded by the Italian economy and to rigidities in the labour market. Youth unemployment was the highest in the EU in the last 3 years. However, it decreased from 30.7% to 27.2%, while in the EU it remained constant (around 15%). Long-term unemployment remains the highest in the EU. With regard to the overall rate of unemployment, Italy was fourth, after Spain, Greece and Finland. During five years (from 1995 to 1999) the rate remained stable around 11.5%. Between 2000 and 2002, unemployment fell from 10.4% to 9.0%.
Italian unemployment is further characterised by very large regional disparities. Rates are very low in many regions in the North (in particular the North-East) and the Centre, while massive unemployment is the rule in the South. These regional differences were accentuated in 2001, as unemployment continued to decrease in the North. In the near future, unemployment is expected to continue declining, helped by an early upturn in economic growth. Over the medium term, unemployment should fall to 6.9% in 2006.