Italy: Deeper Structural Reforms Needed to Jumpstart Growth and Create Jobs

Improving business environment essential to support investment, create jobs

Reducing spending, lowering taxes a priority, while taming government debt

Adequate bank capital and liquidity buffers can strengthen bank lending

However, without deeper structural reforms, growth prospects remain weak. “The euro-zone crisis hit Italy hard,” said Kenneth Kang, an assistant director in the IMF’s European Department, “but the seeds of Italy’s low growth pre-date the crisis and stem from its stagnant productivity, difficult business environment, and over-leveraged public sector. Accelerating reforms to address these structural impediments will be essential for securing a robust recovery.”

Structural reforms—Priorities to revive growth

Over the last few years, the authorities have embarked on a wide reaching reform agenda. However, more is still needed to boost productivity and raise employment.

Raising Italy’s low employment, especially of youth and women, is a priority. Closing half the employment gap with the rest of Europe (some 4½ percentage points) could lift the level of GDP by as much as 2½ percent by 2018.

On the labor market, IMF staff proposed improving programs that help people find work, simplifying contracts and decentralizing wage setting. “Currently, local authorities are in charge of job matching and training, which needs better coordination,” explained Sergi Lanau, an economist on the Italy desk, “while wage setting is very centralized and would benefit from more firm-level agreements that better match wages and productivity.”

The IMF’s report also welcomed efforts to improve the efficiency of the civil judicial system. It takes on average more than 1,200 days to enforce a contract in Italy, more than twice the average for advanced economies, so reforms here could have significant cross-cutting benefits for the economy more generally.

Taming government debt—Less spending and lower taxes

The government’s sizeable budget adjustment, which lowered economic growth but was essential for strengthening confidence in Italy’s fiscal position, is slowing in 2013. However, care must be taken to adhere to the...