REPORT FROM THE COMMISSION. Italy. Report prepared in accordance with Article 126(3) of the Treaty

Transcription

1 EUROPEAN COMMISSION Brussels, COM(2016) 305 final REPORT FROM THE COMMISSION Ialy Repor prepared in accordance wih Aricle 126(3) of he Treay EN EN

2 REPORT FROM THE COMMISSION Ialy Repor prepared in accordance wih Aricle 126(3) of he Treay 1. INTRODUCTION Aricle 126 of he Treay on he Funcioning of he European Union (TFEU) lays down he excessive defici procedure (EDP). This procedure is furher specified in Council Regulaion (EC) No 1467/97 on speeding up and clarifying he implemenaion of he excessive defici procedure 1, which is par of he Sabiliy and Growh Pac (SGP). Specific provisions for euro area Member Saes under EDP are laid down in Regulaion (EU) No 473/ According o Aricle 126(2) TFEU, he Commission has o monior compliance wih budgeary discipline on he basis of wo crieria, namely: (a) wheher he raio of he planned or acual governmen defici o gross domesic produc (GDP) exceeds he reference value of 3 % (unless eiher he raio has declined subsanially and coninuously and reached a level ha comes close o he reference value; or, alernaively, he excess over he reference value is only excepional and emporary and he raio remains close o he reference value); and (b) wheher he raio of governmen deb o GDP exceeds he reference value of 60 % (unless he raio is sufficienly diminishing and approaching he reference value a a saisfacory pace). Aricle 126(3) TFEU sipulaes ha, if a Member Sae does no fulfil he requiremens under one or boh of he above crieria, he Commission has o prepare a repor. This repor also has o ake ino accoun wheher he governmen defici exceeds governmen invesmen expendiure and ake ino accoun all oher relevan facors, including he medium-erm economic and budgeary posiion of he Member Sae. This repor, which represens he firs sep in he EDP, analyses Ialy's compliance wih he deb crierion of he Treay, wih due regard o he economic background and oher relevan facors. Following he amendmens o he SGP in 2011, he deb requiremen has been pu on an equal fooing wih he defici requiremen in order o ensure ha, for counries wih a deb-o- GDP raio above he 60% reference value, he raio is brough below (or sufficienly declining owards) ha value. Aricle 2(1a) of Regulaion (EC) No 1467/97 sipulaes ha Member Saes ha were subjec o an excessive defici procedure on 8 November 2011 benefi from a hree-year ransiion period, saring in he year following he correcion of he excessive defici, during which hey are expeced o make sufficien progress owards compliance wih he deb reducion benchmark. In he case of Ialy, he ransiion period 1 OJ L 209, , p. 6. The repor also akes ino accoun he Specificaions on he implemenaion of he Sabiliy and Growh Pac and guidelines on he forma and conen of sabiliy and convergence programmes, endorsed by he ECOFIN Council of 3 Sepember 2012, available a: hp://ec.europa.eu/economy_finance/economic_governance/sgp/legal_exs/index_en.hm. 2 Regulaion (EU) No 473/2013 of he European Parliamen and of he Council on common provisions for monioring and assessing draf budgeary plans and ensuring he correcion of excessive defici of he Member Saes in he euro area (OJ L 140, , p. 11). 2

3 covers he years (i.e. 3 years afer he correcion of he excessive defici 3 ). The "Specificaions on he implemenaion of he Sabiliy and Growh Pac and guidelines on he forma and conen of sabiliy and convergence programmes" of 3 Sepember 2012 spell ou how he requiremen for he srucural balance is defined and assessed. In paricular, hey define a minimum linear srucural adjusmen of he srucural balance (MLSA) ensuring ha he deb reducion benchmark is me by he end of he ransiion period. On 13 January 2015 he Commission adoped a Communicaion on Flexibiliy, providing new guidance on how o apply he exising rules of he Sabiliy and Growh Pac, in order o srenghen he link beween effecive implemenaion of srucural reforms, invesmen, and fiscal responsibiliy in suppor of jobs and growh. The Communicaion does no amend any provision of he Pac bu aims o furher reinforce he effeciveness and undersanding of is rules and develop a more growh-friendly fiscal sance in he euro area by ensuring he bes use of he flexibiliy enshrined wihin he Pac, while preserving is credibiliy and effeciveness in upholding fiscal responsibiliy. In paricular, he Communicaion clarified ha in line wih he provisions of Aricle 2(3) of Regulaion (EC) No 1467/97 - he Commission in he conex of a repor according o Aricle 126(3) TFEU - will analyse carefully all relevan medium-erm developmens regarding he economic, budgeary and deb posiions. I has also clarified ha he implemenaion of srucural reforms in he conex of he European Semeser is o be considered among hese relevan facors 4. On 27 February 2015, he Commission issued a Repor under Aricle 126(3) TFEU, as Ialy was no expeced o make sufficien progress owards compliance wih he deb rule in 2014, including he assessmen of all relevan facors ha migh jusify he prima facie lack of compliance, noably: (i) he unfavourable economic condiions, and in paricular low inflaion, which made he respec of he deb rule paricularly demanding; (ii) he expecaion ha compliance wih he required adjusmen owards he Medium Term budgeary Objecive (MTO) was broadly ensured; and (iii) he expeced implemenaion of ambiious growhenhancing srucural reforms in line wih he auhoriies' commimen, which was expeced o conribue o deb reducion in he medium/long erm. Daa noified by he auhoriies on 1 April and subsequenly validaed by Eurosa 6 show ha Ialy s general governmen defici declined o 2.6% of GDP in 2015 (from 3% in 2014), while he deb coninued o rise, alhough marginally, o 132.7% of GDP (from 132.5% in 2014), i.e. above he 60% of GDP reference value. For 2016, Ialy s 2016 Sabiliy Programme plans a deb-o-gdp raio sar declining o 132.4%. In 2017, he deb-o-gdp raio is planned o decrease furher o 130.3%. 3 Council Decision 2013/314/EU of 21 June 2013 abrogaing Decision 2010/286/EU on he exisence of an excessive defici in Ialy. All EDP-relaed documens for Ialy can be found a: hp://ec.europa.eu/economy_finance/economic_governance/sgp/correcive_arm/index_en.hm 4 Aricle 2 of Regulaion (EC) No 1467/97 provides ha "[ ] The repor shall reflec, as appropriae [ ] he implemenaion of policies in he conex of he prevenion and correcion of excessive macroeconomic imbalances, he implemenaion of policies in he conex of he common growh sraegy of he Union [ ]". 5 According o Council Regulaion (EC) No 479/2009, Member Saes have o repor o he Commission, wice a year, heir planned and acual governmen defici and deb levels. The mos recen noificaion of Ialy can be found a: hp://epp.eurosa.ec.europa.eu/poral/page/poral/governmen_finance_saisics/excessive_defici/edp_noific aion_ables. 6 Eurosa news release No 76/2016 of 21 April 2016, available a: hp://ec.europa.eu/eurosa/documens/ / / ap-en.pdf/50171b df6- bb53-a23175d4e2de 3

4 Based on he noified daa and he Commission 2016 spring forecas, Ialy did no make sufficien progress owards compliance wih he deb reducion benchmark in 2015 (see Table 1), since he change in he srucural balance 7 falls shor of he required MLSA by a large exen in 2015 (0.1 percenage poins of GDP compared o he required MLSA of 2.6 percenage poins of GDP). In he 2016 Sabiliy Programme, he Ialian auhoriies do no plan o fully comply wih he deb rule in 2017 in is forward-looking dimension, alhough he gap is small in ha year (i.e. 0.2 percenage poins of GDP) also hanks o an ambiious privaisaion plan. Projecions based on he Commission 2016 spring forecas expec compliance wih he deb rule only by 2020, under a no-policy-change assumpion unil 2017 and assuming hereafer an annual srucural effor of 0.6% of GDP unil he MTO is aained. Table 1: General governmen defici or/and deb (% of GDP) a COM MS COM MS Defici General governmen crierion balance General governmen gross deb Gap o he deb Deb n.r. n.r. n.r reducion benchmark crierion Change in srucural balance Required MLSA n.r. n.r. n.r. n.r. Noes: a In percen of GDP unless oherwise specified Source: Commission services, Ialy's 2016 SP and Commission 2016 spring forecas Overall, Ialy s insufficien progress owards compliance wih he deb reducion benchmark in 2015 provides evidence of a prima facie exisence of an excessive defici in he sense of he Sabiliy and Growh Pac before, however, considering all facors as se ou below. The Commission has herefore prepared he following repor o comprehensively assess he deparure from he deb rule, while considering all he relevan facors. Secion 2 of he repor examines he defici crierion. Secion 3 examines he deb crierion. Secion 4 deals wih public invesmen and oher relevan facors, including he assessmen of compliance wih he required adjusmen pah owards he MTO. The repor akes ino accoun he Commission 2016 spring forecas, released on 3 May 2016, and he Commission's evaluaion of subsequen developmens. 2. DEFICIT CRITERION Ialy s general governmen defici was repored a 2.6% of GDP in According o boh he 2016 Sabiliy Programme and he Commission 2016 spring forecas, i is also foreseen o respec he 3% of GDP Treay reference value during he period Namely, according o he Commission 2016 spring forecas, he defici is expeced o furher decline o 2.4% of GDP in 2016 and o 1.9% in 2017, on a no-policy change basis and aking ino 7 Throughou he documen, all references o changes in he srucural balance refer o he cyclically adjused balance ne of one-off and emporary measures, eiher forecas by he Commission or recalculaed by he Commission on he basis of he informaion provided in he Sabiliy Programme, using he commonly agreed mehodology. 4

5 accoun he governmen commimen o repeal he VAT hike legislaed for 2017 hrough he 2016 Sabiliy Law, condiional however upon implemening defici reducion measures o ensure he achievemen of he planned 1.8% of GDP defici arge (from a rend of 1.4% ha includes he full VAT hike). The forecas decrease in he defici in 2016 mainly reflecs posiive GDP growh and declining ineres expendiure, while low inflaion sill weighs on he primary surplus; i also akes ino accoun he exisence of some reserves in he budge (including a so-called fondo per le esigenze indifferibili, amouning o around EUR 0.7 bn), which he governmen should, however, no spend if i wans o achieve is defici arge. The 2016 Sabiliy Programme projecs he general governmen defici-o-gdp raio o decline o 2.3% in 2016 and o 1.8% in The small difference wih he Commission 2016 spring forecas is mainly explained by lower ax revenues in 2016, also relaed o slighly weaker nominal GDP growh in he Commission 2016 spring forecas (1.9% vs. 2.2%). 3. DEBT CRITERION In 2015, he governmen deb-o-gdp raio peaked a 132.7%, 0.2 percenage poins higher han in For 2016, in he Sabiliy Programme, he deb-o-gdp raio is projeced a 132.4%, herefore showing a sligh decrease of 0.3 percenage poins relaive o The deerminans of he sligh increase in he deb-o-gdp raio in 2015 were he following. Despie posiive real GDP growh (0.8%) afer hree years of recession, low inflaion (GDP deflaor growh of 0.8%) led o a real implici ineres rae on he deb 8 ha, while gradually narrowing (o around 2.5%, from 2.8% in 2014), sill remained significanly higher han real GDP growh. Real spo ineres raes on new governmen securiies issuances close o zero in 2015 are in fac only gradually passing hrough ino he real servicing cos of he ousanding deb sock, given he duraion of he Ialian deb and he roll-over period (see also Graph 1). In his conex, he snowball effec (see Table 2), coninued enailing a large debincreasing impac (a sill 2.2% of GDP, down from 4% in 2014). On he oher hand, a sable primary surplus (1.6% of GDP, he same as in 2014) and a deb-decreasing sock-flow adjusmen (-0.4% of GDP) helped curb deb dynamics in In paricular, he sock-flow adjusmen benefied from he deb-decreasing impac of privaisaion proceeds (0.4% of GDP) and he reducion of he liquidiy buffer accumulaed in previous years (0.7% of GDP) bu was negaively affeced by he deb-increasing impac of derivaive conracs (0.4% of GDP) seled before he crisis, mainly in order o fix ineres raes on par of he deb (a around 4.4% on average) and hus limi possible risks relaed o higher refinancing coss. 9 Regarding 2016, he Sabiliy Programme projecs a sligh decrease in he deb-o-gdp raio, o 132.4%. The decline would be mainly driven by a marginally higher primary surplus (a 1.7%) and a lower deb-increasing impac of he snow-ball effec (of 1.2 percenage 8 The implici real cos of deb a ime can be defined as he nominal yield paid by he governmen o service he ousanding deb a ime -1, ne of he impac of inflaion a ime. In Table 2, he yearly change in debo-gdp raio due o he implici real cos of deb can be obained by adding he respecive conribuions from ineres expendiure (deb-increasing) and GDP deflaor (deb-decreasing). 9 See also Public Deb Repor 2014, Ialian Minisry of he Economy and Finance, rerievable a lic_deb_repor_2014.pdf and Indagine conosciiva sugli srumeni finanziari derivai (2015), rerievable a zione_alla_camera_dei_depuai_-_febbraio_2015_- _Indagine_conosciiva_sugli_srumeni_finanziari_derivai.pdf 5

6 poins). This would, in paricular, benefi from higher real GDP growh and a lower debincreasing impac of implici real ineres raes (by 2.7 percenage poins, as indicaed by he difference beween ineres expendiure and inflaion effec in Table 2). The sock-flow adjusmen is projeced by he Sabiliy Programme o have a minor deb-increasing impac in 2016, as he planned privaisaion proceeds (0.5% of GDP) are more han offse by debincreasing below-he-line ransacions, including in derivaives by around 0.4% of GDP. The deb raio is projeced o furher decrease in he ouer years of he programme and reach 123.8% of GDP in 2019 hanks o a seadily increasing primary surplus, a snow-ball effec becoming deb-decreasing as he GDP deflaor acceleraes owards he ECB inflaion arge, and furher privaisaion proceeds (0.5% of GDP per year over and 0.3% in 2019). In he 2016 Sabiliy Programme, he deb rule is projeced no o be fully complied wih in 2017 (in is forward-looking dimension), alhough wih a small gap in ha year. In he Commission 2016 spring forecas, deb developmens in 2016 and 2017 are slighly less benign han in he Sabiliy Programme. The deb-o-gdp raio is se o sabilise in 2016, mainly due o lower inflaion (GDP deflaor growh of 0.8%) han in he governmen projecions. In 2017, he Commission 2016 spring forecas expecs a smaller decrease in he deb-o-gdp raio han he Sabiliy Programme (of -1.0%, vs. -1.5%), due o a less favourable assessmen of he sock-flow adjusmen (0.4%, vs. -0.1%), also relaed o lower privaisaion proceeds (a 0.3%, vs. 0.5%), whose deails are no ye available. Overall, based on he Commission 2016 spring forecas, he deb rule is no expeced o be complied wih by Commission projecions expec compliance wih he deb rule only by 2020 in is forward-looking dimension (i.e. as of 2022), under a no-policy-change assumpion unil 2017 and assuming full compliance wih he fiscal effor required under he prevenive arm of he Sabiliy and Growh Pac as of 2018 (i.e. an annual fiscal effor of 0.6% of GDP unil he MTO is achieved). Table 2: Deb dynamics a COM MS COM MS Governmen gross deb raio Change in deb raio b (1 = 2+3+4) Conribuions: Primary balance (2) Snowball effec (3) of which: Ineres expendiure Real GDP growh Inflaion (GDP deflaor) Sock-flow adjusmen (4) of which: Cash/accruals difference Ne accumulaion of financial asses of which privaisaion proceeds Valuaion effec & residual Noes: a In percen of GDP unless oherwise specified b The change in he gross deb raio can be decomposed as follows: D D PD D i y 1 1 SF = + Y Y Y * Y y Y where is a ime subscrip; D, PD, Y and SF are he sock of governmen deb, he primary defici, nominal GDP and he sock-flow adjusmen respecively, and i and y represen he average cos of deb and nominal GDP growh. The erm in parenheses represens he snow-ball effec, measuring he combined effec of ineres expendiure and economic growh on he deb raio. Source : Commission services, Ialy's 2016 SP and Commission 2016 spring forecas 6

7 As shown in Graph 1, he expeced recovery in real GDP growh (see solid blue line) and he decrease in implici real deb servicing coss (see dashed blue line), only gradually reflecing he lower real spo yields a issuance (see red line), imply a shrinking snowball effec (see yellow shade) in 2016 and 2017, compared o he previous years. However, as he real financing cos is sill higher han he real GDP growh, he overall impac is sill debincreasing. Graph 1: Drivers of snowball effec on governmen deb Following he abrogaion of he EDP in June 2013, Ialy is subjec o a hree-year ransiion period o comply wih he deb reducion benchmark, which sared in In order o ensure coninuous and effecive progress owards compliance during he ransiion period, Member Saes should respec simulaneously he wo condiions below: a. Firs, he annual srucural adjusmen should no deviae by more han ¼% of GDP from he minimum linear srucural adjusmen (MLSA) ensuring ha he deb rule is me by he end of he ransiion period. b. Second, a any ime during he ransiion period, he remaining annual srucural adjusmen should no exceed ¾% of GDP (unless he firs condiion implies an annual effor above ¾% of GDP, which is he case for Ialy). Based on he Commission 2016 spring forecas, a surplus in he srucural balance of around 1.5% of GDP, i.e. well above Ialy s MTO of a balanced budge in srucural erms, would have been needed o mee he deb reducion benchmark in 2015, given an annual MLSA of 2.6 percenage poins in Insead, Ialy s srucural balance is esimaed o have 10 As indicaed in Secion 4, based on he Commission 2014 spring forecas, on which he Council based is fiscal recommendaion o Ialy a ha ime, he required MLSA was se a 0.7% of GDP in 2014 and 1.4% of GDP in 2015 (aking ino accoun he srucural adjusmen forecas for 2014). Once recompued on he basis of he Commission 2016 spring forecas, he required MLSA becomes subsanially higher: 1.2% of GDP in 2014 and, due o he 0.2 percenage poin deerioraion occurred in 2014, 2.6% of GDP in

8 improved by 0.1 percenage poins of GDP in 2015, o -1% of GDP, herefore falling subsanially shor of he requiremens of he ransiion period for he deb reducion benchmark (see Table 1). In 2016, neiher he 2016 Sabiliy Programme nor he Commission 2016 spring forecas expec compliance wih he deb rule, given he large gap o he deb benchmark (in is forward-looking dimension) of, respecively 3% and 5.6% of GDP. The overall analysis above hus suggess ha prima facie he deb crierion in he sense of he Treay and Regulaion (EC) No 1467/97 appears no o be fulfilled based on he 2016 Sabiliy Programme as well as he Commission 2016 spring forecas before, however, consideraion is given o all relevan facors as se ou below. 4. RELEVANT FACTORS Aricle 126(3) TFEU provides ha he Commission repor shall also ake ino accoun wheher he governmen defici exceeds governmen invesmen expendiure and ake ino accoun all oher relevan facors, including he medium-erm economic and budgeary posiion of he Member Sae. These facors are furher clarified in Aricle 2(3) of Council Regulaion (EC) No 1467/97, which also specifies ha any oher facors which, in he opinion of he Member Sae concerned, are relevan in order o comprehensively assess compliance wih defici and deb crieria and which he Member Sae has pu forward o he Council and o he Commission need o be given due consideraion. In case of apparen breach of he deb crierion, he analysis of he relevan facors is paricularly warraned given ha deb dynamics are influenced by facors ouside he conrol of he governmen o a larger exen han in case of he defici. This is recognised in Aricle 2(4) of Regulaion (EC) No 1467/97, which sipulaes ha he relevan facors shall be aken ino accoun when assessing compliance on he basis of he deb crierion irrespecive of he size of he breach. In his respec, a leas he following hree main aspecs need o be considered when assessing compliance wih he deb crierion given heir impac on he deb dynamics and susainabiliy. 1. Adherence o he MTO or he adjusmen pah owards i: he achievemen of he MTO or he progress owards i is supposed, under normal macroeconomic circumsances, o ensure susainabiliy or rapid progress owards susainabiliy a leas in he medium erm. By consrucion, he counry-specific MTO akes ino accoun he deb level and implici liabiliies. Compliance wih he MTO or he adjusmen pah owards i should ensure in he medium erm convergence of he deb raios owards pruden levels. 2. Srucural reforms, already implemened or deailed in a srucural reform plan: he raionale for aking ino accoun hese reforms is ha hrough heir impac on growh hey are expeced o enhance susainabiliy in he medium erm, conribuing o bring he deb-o-gdp raio on a saisfacory downward pah. Adherence o he MTO (or he adjusmen pah owards i) along wih implemenaion of srucural reforms (in he conex of he European Semeser) is expeced o bring deb dynamics on a susainable pah, hrough he combined impac on he deb level iself (hrough he achievemen of a sound budgeary posiion a he MTO) and on economic growh (hrough he reforms). 8

9 3. Besides hese wo main facors, he sill unfavourable macroeconomic condiions, and in paricular very low inflaion can hamper he reducion of he deb-o-gdp raio and make compliance wih he SGP provisions paricularly demanding, and hus needs o be aken ino accoun. In fac, he curren low-inflaion environmen requires he concerned Member Saes o achieve more demanding srucural adjusmens o comply wih he MLSA under he ransiional deb rule and negaive inflaion surprises have conribued o he upward revisions of he required MLSA over ime. In addiion, he ransiional deb rule assumes by consrucion ha GDP deflaor growh only reurns o he long-erm average value of 2% by 2020, which makes compliance wih he forward-looking deb rule paricularly demanding. Under such condiions, adherence o he MTO or he adjusmen pah owards i (as spelled ou in poin 1) is a key relevan facor in assessing compliance wih he deb crierion. I is worh noing ha, while a srucural balanced budgeary posiion ensures deb susainabiliy in principle, in he case of Ialy aaining he MTO would ensure compliance wih he deb reducion benchmark only in he presence of nominal growh of around 3% 11. In view of he above provisions, he following subsecions consider in urn: (1) he mediumerm budgeary posiion, including an assessmen of compliance wih he required adjusmen owards he MTO; (2) he medium-erm economic posiion, including public invesmen and he sae of play in erms of implemenaion of srucural reforms; (3) oher facors pu forward by he Member Sae; (4) he developmens in he medium-erm governmen deb posiion, including is susainabiliy prospecs, and oher facors deemed relevan by he Commission Medium-erm budgeary posiion The assessmen of Ialy s compliance wih he prevenive arm in 2016 hinges crucially upon he Commission assessmen on wheher o allow a emporary deviaion from he adjusmen pah owards he MTO. These consideraions are repored in he firs subsecion. On his basis, he following subsecion feaures he overall assessmen of Ialy s compliance wih he required adjusmen pah owards he MTO. Namely, Ialy appears o be broadly complian wih he required prevenive arm adjusmen in 2015 and 2016, once all he requesed flexibiliy is graned. Assessmen of requess for deviaing from SGP requiremens For 2015, Ialy benefied from a emporary allowance relaed o he enhanced consideraion of relevan cyclical condiions inroduced by he 2015 Flexibiliy Communicaion. In fac, Member Saes considered by he Commission o be in very bad imes (i.e. wih an oupu gap esimaed o be beween -4% and -3% of poenial GDP), as i was he case for Ialy based on he Commission 2015 spring forecas 12, and wih a general governmen deb-o- GDP raio above 60% are recommended o deliver a srucural adjusmen of 0.25% of GDP in order o make sufficien progress owards heir MTO. For 2016, Ialy requesed addiional admissible emporary deviaion pursuan o 2015 Flexibiliy Communicaion, in addiion o he already graned allowance of 0.4 % of GDP 11 For comparison, Ialy's nominal GDP growh averaged around 4% over , i.e. before he crisis. 12 See Commission Opinion C(2015) 8105 final. 9

10 from he prevenive arm requiremen under he srucural reform clause 13, whereby he counry was recommended in July 2015 o deliver a srucural effor of 0.1 percenage poins of GDP in 2016, in lieu of he benchmark adjusmen of 0.5 percenage poins of GDP. Namely, Ialy s 2016 Draf Budgeary Plan requesed an addiional allowance of 0.4% of GDP for 2016, of which 0.3% under he invesmen clause and addiional 0.1% under he srucural reform clause. Ialy also invoked an allowance in relaion o he governmen expendiure incurred o face he inflow of refugees over and included in he 2016 Sabiliy Law a package of exraordinary securiy-relaed expendiure, amouning o around EUR 3 bn or 0.2% of GDP. The Commission opinion on Ialy s 2016 Draf Budgeary Plan 14 announced ha i would assess Ialy s possible eligibiliy for admissible emporary deviaion under he SGP on he basis of: (i) he exisence of credible plans for he resumpion of he adjusmen pah owards he MTO; (ii) wheher a deviaion from he adjusmen pah is being effecively used for he purposes of increasing invesmens; and (iii) progress wih he srucural reform agenda, aking ino accoun he Council recommendaions. These condiions are discussed in order. As regards condiion (i), in a leer o he Commission 15, he Ialian governmen publicly declared is inenion o resume is adjusmen pah owards he MTO beyond 2016, by commiing o repeal he legislaed VAT hike for 2017 condiional upon implemening defici reducion measures o comply wih he prevenive arm of he SGP in 2017 (see also Secion 4.3). This public commimen was furher confirmed by reassurances made by he Ialian governmen o he Commission in a subsequen leer 16. This nowihsanding, i appears difficul a his sage o fully assess Ialy s plans o resume he adjusmen pah owards he MTO in 2017, for wo reasons. Firs, he 2017 Sabiliy Law will only be adoped in auumn 2016 and, in is absence, he Commission 2016 spring forecas for nex year is based on a no-policy change assumpion. Second, he 2016 Sabiliy Programme highlighs "he criicaliies affecing he curren mehodology for he calculaion of he oupu gap, ofen leading o underesimaions or resuls ha are a odds wih macroeconomic inuiions and provide a biased indicaion of Ialy's acual compliance wih he prevenive arm of he SGP" among he relevan facors ha explain why he governmen deems i inappropriae and counerproducive o achieve he fiscal consolidaion requesed by he prevenive arm rules, whereby he srucural balance should improve in 2017 by more han 0.5 percenage poins. Addiional work will be carried ou in he EPC-OGWG o analyse he issues raised by Ialy and oher Member Saes on he agreed mehodology. On he basis of he Commission 2016 spring forecas, he Commission assessmen of he planned fiscal effor for 2017 indicaes a gap of beween 0.15% and 0.2% of GDP depending on he precise parameers used for he calculaion of he oupu gap o ensure broad compliance wih he prevenive arm of he SGP in 2017 based on he expendiure benchmark. However, given Ialy s public 13 For he graning of he 0.4 percenage poin allowance under he srucural reform clause, please refer o European Commission (2015), Assessmen of he 2015 Sabiliy Programme for ITALY - hp://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2015/12_i_scp_en.pdf 14 See: hp://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/2015/i_ _co_en.pdf 15 See he cover leer accompanying he noe Relevan Facors Influencing Deb Developmens in Ialy (9 May 2016) - hp:// _Mr_Dombrovskis_-_Moscovicix1x.pdf 16 An exchange of leers ook place beween he European Commission and he Ialian governmen. The leers can be rerieved a: (leer from he Commission o Ialy) and _17_May_2016.pdf (Ialy s reply o he Commission). 10

11 commimen o comply wih he prevenive arm of he SGP in 2017, condiion (i) can be considered o be complied wih, albei a full assessmen of Ialy s plans for 2017 will only be possible in auumn, when he draf budge is available. The Commission will reassess he relevan facors in a new repor under Aricle 126(3) TFEU as furher informaion on he credibiliy and appropriaeness of Ialy s resumpion of he adjusmen pah owards he MTO for 2017 becomes available. As regards condiion (ii), Ialy s governmen gross fixed capial formaion is forecas by he Commission o increase furher in nominal erms in 2016 and 2017 (by 0.9% and 0.6%, respecively). As a resul, public invesmen is expeced o remain broadly sable as a share of GDP (a around 2.3%). The 2016 Sabiliy Programme projecs similar developmens for public invesmen over In his conex, he 2016 Sabiliy Programme expecs naional expendiure in invesmen projecs co-financed by he EU o reach around EUR 5 bn or 0.3% of GDP in 2016, which corresponds o he allowance invoked under he invesmen clause. While he informaion provided seems o confirm ha Ialy s deviaion from he adjusmen pah owards he MTO is being effecively used for he purposes of increasing invesmens, i does no dispel any reasonable doub on he feasibiliy of he repored amoun of co-financed invesmen for 2016, which maers for he magniude of he requesed allowance. For insance, as regards he EUR 1 billion projecs expeced under he Connecing Europe Faciliy (CEF), only around EUR 0.35 billion appear feasible in he course of 2016, as some EUR 0.65 billion have no ye been successfully submied o a CEF call o receive EU funding and are hus unlikely o be carried ou in On his basis, i seems ha an allowance of a mos 0.25% of GDP could be graned under he invesmen clause for 2016, bu wih he cavea ha significan downside risks exis and ha he Commission will carry ou an ex-pos assessmen in order o verify he acual amoun of he naional expendiure in co-financed invesmen projecs and he relaed allowance o which Ialy is eligible under he so-called invesmen clause. As regards condiion (iii), he 2016 Naional Reform Programme broadly confirms he reform imeable pu forward in he 2016 Draf Budgeary Plan, where he addiional allowance under he clause was requesed. The ambiious reform agenda includes a new compeiion law for 2016, he compleion of he implemenaion of he labour marke reform, as well as he long-awaied revision of he saue of limiaions and measures concerning collecive bargaining. I also encompasses measures o suppor access o finance, he implemenaion of he educaion and public adminisraion reforms according o he respecive imeables, and a sysemaic revision of ax expendiures. As regards he specific reforms for which he addiional allowance was requesed, i.e. measures o reduce he sock of non-performing loans and reform insolvency procedures, reasonable progress seems o be confirmed. Overall, given he exen of he srucural reforms pu forward by he governmen in he 2016 Naional Reform Programme, heir sae of legislaive progress/implemenaion, as well as he mehods used o simulae heir effecs, i seems ha Ialy could benefi in 2016 from he maximum amoun of admissible emporary deviaion allowed under he srucural reform clause, i.e. 0.5% of GDP. Overall, he abovemenioned condiions for Ialy o be allowed an addiional emporary deviaion from he adjusmen pah owards he MTO under he srucural reform and invesmen clause in 2016 appear o be saisfied. The Commission will review is assessmen of he relevan facors in a new repor under Aricle 126(3) TFEU based on he Commission 2016 auumn forecas, as furher informaion on he credibiliy and appropriaeness of Ialy s resumpion of he adjusmen pah owards he MTO for 2017 becomes available. 11

12 The 2016 Sabiliy Programme also invokes an addiional allowance in relaion o wo unusual evens. On he one hand, he Ialian governmen esimaes ha he ne expendiure incurred o face he excepional influx of refugee, paricularly in erms of sea rescue operaions and hospialiy, healhcare and educaion coss, increased gradually since 2012 and amouned o EUR 2 billion (0.13% of GDP) in 2014, and EUR 2.6 billion (0.16% of GDP) in The refugee-relaed expendiure is projeced a EUR 3.3 billion (0.2% of GDP) in The Commission clarified ha, for he purposes of fiscal surveillance and on a emporary basis (i.e. solely for 2015 and 2016), addiional refugee-relaed expendiure acually incurred by counry based on observed daa, would be aken ino accoun when assessing Member Saes fiscal effors. In fac, as fiscal effors required under he SGP are se in erms of change in he srucural balance, allowances for unusual evens, including he refugee crisis, should only reflec elemens ha direcly affec he change in he srucural balance in a cerain year. In he case of Ialy, he refugee-relaed expendiure ha can be aken ino accoun ex pos for 2015 is 0.03% of GDP. As for 2016, 0.04% of GDP is he amoun ha is currenly expeced by he Commission o affec Ialy s srucural effor his year. A final assessmen on he 2016 amoun will be made on he basis of observed daa provided by Ialy in nex year Sabiliy Programme. Moreover, Ialy s 2016 Sabiliy Law explicily menioned a package of excepional securiy measures, adding up o 0.2% of GDP, o be aken ino accoun by he Commission in assessing Ialy s compliance wih he prevenive arm. Overall, i appears ha he link of some of he menioned provisions o securiy may only be indirec, as in he case of EUR 1 bn earmarked for he requalificaion of urban areas and incenives o young people o aend culural evens. A preliminary assessmen hus suggess ha only 0.06% of GDP represens addiional direcly securiyrelaed expendiure affecing he srucural effor in 2016, which could be aken ino accoun in he overall assessmen of compliance wih he prevenive arm in 2016 o be made ex-pos in In conclusion, he Commission has assessed Ialy o be eligible, a his sage, for he following allowances: (i) 0.03% of GDP in 2015, due o he addiional refugee-relaed expendiure incurred in ha year, which leads o a correced requiremen of 0.22% of GDP for 2015 (insead of he 0.25% recommended in July 2015); (ii) 0.35% of GDP in 2016 under he srucural reform and invesmen clause aken ogeher, which leads o a correced requiremen of -0.25% of GDP for The acual addiional spending relaed o he refugee crisis and o direc securiy measures (currenly esimaed a 0.04% and 0.06% of GDP respecively) will be aken ino accoun ex-pos. Adjusmen owards he MTO The governmen plans enshrined in he 2016 Sabiliy Programme imply an improvemen in he recalculaed srucural balance 17 by 0.2 percenage poins of GDP in 2015, followed by a deerioraion of 0.6 percenage poins of GDP in 2016, wih a srucural posiion sill in defici in 2016 (a 1.6 % of GDP). This is only slighly beer han he srucural effors esimaed for 2015 (0.1 percenage poins of GDP) and expeced for 2016 (-0.7 percenage poins of GDP) on he basis of he Commission 2016 spring forecas. For 2017, boh he (recalculaed) governmen plans and he Commission 2016 spring forecas expec a sable srucural balance. However, he Ialian governmen publicly declared is inenion o comply 17 This refers o he cyclically adjused balance ne of one-off and emporary measures recalculaed by he Commission on he basis of he informaion provided in he Sabiliy Programme, using he commonly agreed mehodology 12

13 wih he prevenive arm of he SGP beyond 2016, by commiing (see above) o repeal a previously legislaed VAT hike for 2017 condiional upon implemening defici reducion measures o comply wih he prevenive arm of he SGP in Beyond 2017, he governmen plans confirm he medium-erm objecive of a balanced budgeary posiion in srucural erms, which reflecs he objecives of he Sabiliy and Growh Pac, and he achievemen of he MTO in 2019, i.e. one year laer han projeced in he 2015 Sabiliy Programme. However, based on he recalculaions by he Commission, Ialy s budgeary posiion would sill indicae a srucural defici of ½% of GDP in For 2015, Ialy was recommended o deliver a srucural adjusmen of a leas 0.25% of GDP, so as o make sufficien progress owards is MTO. Boh for 2015 alone and for 2014 and 2015 aken ogeher, he Commission 2016 spring forecas suggess some deviaion from he srucural balance pillar (a gap of 0.1 percenage poins of GDP), while he expendiure benchmark poins o compliance. Overall, Ialy is hus projeced o be broadly complian wih he required adjusmen owards he MTO in The consideraion of allowance under he so-called refugee clause (see above) would no change his conclusion. For 2016, he correced prevenive arm requiremen of -0.25% of GDP, i.e. discouning for he maximum flexibiliy ha can be graned under he srucural reform and invesmen clauses ogeher, will be aken ino accoun in he overall assessmen ha follows, ogeher wih he 0.1% of GDP furher allowance relaed o he addiional refugee relaed expendiure and excepional securiy-relaed direc coss currenly expeced for his year. The Commission 2016 spring forecas expecs Ialy s srucural balance o deeriorae by 0.7 percenage poins of GDP. Therefore, on he basis of boh he governmen plans and he Commission 2016 spring forecas and aking ino accoun he correced prevenive arm requiremen, here is a risk of some deviaion (a gap of -0.3 and -0.4 percenage poins of GDP, respecively) from he srucural balance pillar over one year in 2016, while he expendiure benchmark poins o compliance based on he Commission 2016 spring forecas. Over 2015 and 2016 aken ogeher, based on boh he governmen plans and he Commission 2016 spring forecas and aking ino accoun he correced prevenive arm requiremen for 2015 and 2016, here is a risk of some deviaion (a gap of -0.2 percenage poins of GDP in boh cases) from he srucural balance pillar, while he expendiure benchmark poins o compliance based on he Commission 2016 spring forecas. This calls for an overall assessmen. The discrepancy beween he wo indicaors is mainly due o he fac ha he expendiure benchmark benefis in 2016 from boh significan one-offs, as well as from he use of a higher GDP deflaor frozen also on he basis of he 2015 Commission spring forecas, which incorporaed a VAT hike enaced by he governmen as a safeguard clause bu subsequenly repealed. Following an overall assessmen, Ialy is expeced o be a risk of some deviaion from he required adjusmen owards he MTO in This conclusion would no change should he budgeary impac (i.e. 0.1% of GDP) of he excepional inflow of refugees as well as he securiy coss incurred in 2016 be excluded from he assessmen. In summary, based on boh he governmen plans and he Commission 2016 spring forecas, Ialy appears o be broadly complian wih he prevenive arm requiremens regarding progress owards he MTO in 2015 and 2016, alhough rigorous implemenaion of he 2016 budge remains crucial in his respec and his conclusion crucially hinges upon he allowance under he refugee clause in 2015 (which impacs on he wo-year average) and he graning of he maximum allowance of 0.75% of GDP for he srucural reform and invesmen clause in This allowance akes ino accoun Ialy s public commimen o comply wih he prevenive arm of he SGP in 2017 (see above), as well as he acual and expeced progress in 13

14 erms of srucural reforms and co-financed invesmen. Given he uncerainies hindering he possibiliy a his sage o fully assess Ialy s plans o resume of he adjusmen pah owards he MTO beyond 2016, he Commission will review is assessmen of he relevan facors in a new repor under Aricle 126(3) TFEU based on he Commission 2016 auumn forecas, as furher informaion on Ialy s compliance wih he prevenive arm of he SGP in 2017, in line wih he governmen s public commimen, becomes available Medium-erm economic posiion Unfavourable macroeconomic condiions, paricularly very low inflaion, have hindered Ialy s fiscal consolidaion over he recen years by making i harder o mainain higher primary surpluses and by worsening deb dynamics hrough a large snowball effec. This nowihsanding, Ialy has pursued some effors, keeping is headline defici wihin he 3 percen of GDP hreshold since 2012, aaining one of he highes primary surplus in he EU over Moreover, since he adopion of he 2015 CSRs, Ialy has made progress wih he implemenaion of an ambiious reform agenda, which should posiively impac on Ialy s medium erm growh prospecs and in urn enhance he susainabiliy of he counry s public finances. However, srong commimen o heir full implemenaion remains essenial. Macroeconomic condiions and public invesmen Real GDP growh in Ialy has been below he euro area average since he 1990s. More specifically, Ialy s average GDP growh amouned o 1.5% on average beween 1999 and 2007, as compared o 2.3% in he euro area, while beween 2008 and 2015, Ialy s GDP conraced by 1.1% on average, as compared o a 0.1% expansion in he euro area. Compared o is pre-crisis peak in 2007, real GDP had conraced in 2015 by more han 8%. Ialy s real GDP growh was 0.8% in 2015 and he 2016 Sabiliy Programme projecs real GDP o grow by 1.2% in 2016, slighly above he Commission 2016 spring forecas (1.1%). The negaive esimae of poenial growh -0.2% in 2016, afer -0.3% in 2015, implies a significan closure in Ialy s negaive oupu gap, from -3.9% of poenial GDP in 2014 o -2.9% in 2015 and -1.6% in 2016, based on he Commission 2016 spring forecas (a similar closure is projeced in he Sabiliy Programme). The acceleraion in real GDP growh in 2017, well above he sill sluggish poenial growh (esimaed o be around 0.1% ha year), would lead o an almos complee closure of he negaive oupu gap (o -0.4% of poenial GDP in 2017, based on he Commission 2016 spring forecas). Overall, since 2009, Ialy has experienced a negaive oupu gap combined wih negaive poenial growh (wih he excepion of a slighly posiive one in 2011). Price indicaors in Ialy have been on a downward pah since lae-2012: yearly HICP inflaion sood a 0.1% in 2015 and a -0.3% in April Low aggregae demand, limied wage pressures and he significan fall of energy prices are he main driving facors. The slump in oil prices is se o lead o negaive annual energy prices also in Overall, he Commission 2016 spring forecas expecs yearly HICP inflaion o remain broadly sable in 2016 (0.2%), and core inflaion is expeced o sabilise a low levels (0.5% afer 0.7% in 2015). In 2017, HICP inflaion is forecas o accelerae o 1.4% mainly because i facors in around half of he 0.9% of GDP VAT hike enshrined in he 2016 Sabiliy Law. In fac, in a leer o he Commission (see Secion 4.1), he governmen publicly commied o repeal i and o make he repeal condiional upon implemening defici reducion measures o comply wih he prevenive arm of he SGP in 2017 hrough he nex Sabiliy Law. 14

15 The deb-o-gdp raio and he srucural primary balance are highly affeced by he moderae GDP deflaor growh (0.8% in 2015), forecas o remain sable in 2016 before increasing, o 1.2% in In fac, as explained in Secion 3, he curren cyclical condiions negaively affec deb dynamics hrough heir impac on he snowball effec and by making i harder o achieve and mainain higher primary surpluses. I is worh noing ha, based on he Commission 2014 spring forecas, on which he Council based is fiscal recommendaion o Ialy a ha ime, he required MLSA was esimaed a 0.7% of GDP in 2014 and 1.4% of GDP in 2015 (aking ino accoun he srucural adjusmen forecas for 2014). Once recompued on he basis of he Commission 2016 spring forecas, which forms he basis of he presen assessmen, he required MLSA becomes subsanially higher: 1.2% of GDP in 2014 and, due o he 0.2% deerioraion occurred in 2014, 2.6% of GDP in The upward revision in he MLSA since 2014 has been driven by significanly lower inflaion and poenial growh esimaes. The achievemen of a srucural adjusmen of around 2.6 percenage poins of GDP in 2015 (i.e. he MLSA based on he Commission 2016 spring forecas) wih nominal poenial growh a around 0.4% would have required ceeris paribus a decrease in nominal primary expendiure of around 5.5% year-on-year in ha year. In addiion, persisenly low inflaion is making i more difficul o cu public expendiure as a share of GDP by freezing wages and pensions in nominal erms (insead of having hem indexed o inflaion). This policy was pursued by Ialy in recen years and led o a limied increase in primary expendiure in boh nominal and real erms. On he revenue side, persisenly low inflaion implies lower ax revenues han in normal circumsances (including inflaion around 2%) a he medium-erm sandard semi-elasiciy. Therefore, i can be argued ha Ialy s possibiliy o carry ou fiscal adjusmens is being hampered by macroeconomic condiions a his juncure; in urn, as he counry seems o be facing a "double-rap" of low inflaion and low produciviy growh hindering wage and labour marke adjusmens, oo resricive fiscal policies could worsen he low-inflaion problem. Lasly, bu no he leas, unfavourable macroeconomic condiions, paricularly low inflaion and igh financing condiions, have furher hindered Ialy s fiscal consolidaion over he recen years hrough heir impac on fiscal mulipliers heighened by he limied possibiliy o use economic sabilisers. On he on hand, i could be argued ha, in a period of consrained moneary policy simulus due o he zero lower bound limi and ongoing banking secor adjusmen hampering is full ransmission, Ialy s fiscal mulipliers are higher han in normal condiions. Tha is why he use of he flexibiliy embedded in he SGP could a his sage help avoid he risk of persisenly low inflaion (as highlighed by negaive HICP inflaion since February 2016), which would in urn make he necessary deleveraging of Ialy's public secor more difficul o be achieved in an orderly fashion. On he oher hand, he possibiliy o use economic sabilisers has been hampered by Ialy s precarious siuaion in he financial markes following he 2011 sovereign deb crisis, whereby Ialy had o adop a srongly procyclical resricive fiscal sance in in order o regain credibiliy vis-à-vis financial markes and oher sakeholders. While his resuled in an increase of around 3 percenage poins in he srucural primary surplus over he hree years, he large fiscal effor in a period of negaive oupu gap, overall weak demand, and impaired moneary policy ransmission affeced Ialy's shor-erm economic prospecs and a he same ime exacerbaed he impac of he crisis on he labour marke and on he resilience of he banking secor. Despie all hese difficulies, Ialy succeeded in achieving and mainaining primary surpluses of 1.7% of GDP on average over , he second highes in he EU afer Germany, 15

16 alhough a clear deerioraion in srucural primary surpluses from close o 4% of poenial GDP over o around 3.2% in 2015 can be observed. As regards public invesmen, Ialy s governmen gross fixed capial formaion averaged a around 3% of GDP over bu he need o adjus quickly o respond o he sovereign deb crisis led o a subsanial reducion in public invesmen o 2.3% of GDP over In 2015, public invesmen boomed ou, reaching 2.3% of GDP (+1% year-on-year in nominal erms), and is forecas by he Commission o increase furher in nominal erms in 2016 and 2017 (by 0.9% and 0.6%, respecively). As a resul, public invesmen is expeced o remain broadly sable as a share of GDP (a around 2.3%). The 2016 Sabiliy Programme projecs similar developmens for public invesmen over In summary, developmens in public invesmens, given heir broad decline over ime, do no appear o be he main relevan facor jusifying Ialy s lack of compliance wih he MLSA required under he deb rule over he ransiion period. Table 3: Macroeconomic and budgeary developmens a COM MS COM MS Real GDP (% change) GDP deflaor (% change) Poenial GDP (% change) Oupu gap (% of poenial GDP) General governmen balance Primary balance One-off and oher emporary measures Governmen gross fixed capial formaion Cyclically-adjused balance Cyclically-adjused primary balance Srucural balance b Srucural primary balance Noes: a In percen of GDP unless oherwise specified b Cyclically adjused balance excluding one-offs and oher emporary measures Source : Commission services, Ialy's 2016 SP and Commission 2016 spring forecas Srucural reforms In is Communicaion of 13 January 2015, he Commission srenghened he link beween effecive implemenaion of srucural reforms, invesmen, and fiscal responsibiliy in suppor of jobs and growh, wihin he exising rules of he SGP. In his 2016 Naional Reform Programme (NRP), he Ialian governmen confirmed is commimen o keep momenum in he adopion and implemenaion of an ambiious srucural reform plan covering a number of areas such as public adminisraion and judicial sysem, compeiiveness and produc markes, labour marke and educaion, as well as axaion. In 2015, under he Macroeconomic Imbalances Procedure (MIP), Ialy was subjec o a specific monioring by he Commission as a Member Sae displaying excessive imbalances. The specific monioring assesses he implemenaion progress for reforms conribuing o he unwinding of such imbalances. The 2016 Counry Repor acknowledges ha Ialy has made 16