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Since late 2011, Italy has introduced significant structural reforms while making progress in fiscal consolidation. The economy has re-entered recession, under pressure from weak European economies and the short-term consequences of fiscal tightening. Activity seems likely to continue to decline over the next year but will turn up in late 2013. Assumed rising oil prices and another increase in VAT will lead to temporarily higher inflation, but underlying price increases are moderate.

The planned spending cuts and tax increases should further reduce the deficit to a very low level in 2013 and are on track to eliminate it in 2014. Some additional fiscal action may be needed, given the projected recession but prudent government assumptions about revenues from anti tax-evasion measures provide a safety margin. With the primary budget balance recording a rising surplus, the debt ratio should start to fall in 2013. Structural reforms have already boosted longer-term prospects and must continue. Reductions in real wages to bring them more in line with productivity would boost competitiveness and contain unemployment.