The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of Italy 2005 published 18 May 2005.
A modest recovery is under way.
A recovery has been under way since early 2004 and proceed at a moderate pace in 2005 and 2006, with domestic demand continuing to rise faster than GDP. Real growth is projected to remain somewhat slower than the EU average. The gap in consumer price inflation is expected to widen again in 2006. The current-account deficit has increased and export market share losses were substantial until recently. Employment growth has been impressive throughout the slowdown, but the growth of productivity, including that of total factor productivity, has been very weak.
The public finances present a mixed picture.
Although declining, the debt level still exceeds 100% of GDP. The primary surplus has fallen significantly, and repeated resort to one-off measures has until now substituted for the implementation of deeper-seated reforms. The exceptional revenue measures have prevented the fiscal deficit from exceeding the 3% limit while limiting the negative impact on the economy. The Italian authorities are committed to pursue the phasing out of one-off measures by 2006. The OECD estimates that further structural measures may be needed to reach budget targets in 2005. Although the overall tax burden is not high, the tax system discourages entry in to the formal labour market: a €6 billion income tax cut is planned for 2005. Devolution is making it more difficult in practice to control public spending. A series of recent pension reforms will contain future spending in that area and encourage workers to remain longer in the labour market. A sustained rise in the primary surplus is required to put public finances on a sound footing.
Product-market competition needs strengthening.
Large parts of the service sector face competitive pressures that are too weak to encourage managerial or technological innovation, or to resist cost increases, which are then passed through to the traded sector. A stronger commitment to regulatory reform and liberalisation in product markets is required and remaining subsidies to industries should be based on social cost and benefit grounds. Once adequate competition is ensured in the electricity sector, and an adequate regulatory structure put in place, full privatisation should not be delayed. Other candidates for regulatory reform and other liberalisation efforts include the transport sector, road freight, professional services and retail trade. The latter often faces opposition from shopkeeper-captured local authorities and monitoring and benchmarking from central authorities would be crucial.
Further corporate governance reforms should not be delayed.
Recent scandals have highlighted particular corporate governance problems and the policy reaction was swift, but incomplete. The ability of minority shareholders to play an appropriate role could be improved. The division of competencies among the supervisory authorities is in need of adjustment. It is regrettable that recent proposals to rectify these issues have not yet been implemented. Bankruptcy proceedings for smaller firms are prolonged and too close to criminal proceedings, potentially productive assets are dissipated, and entrepreneurs discouraged from continuing their activities. Speeding up of reforms in this area also is desirable.
Labour market developments have been positive.
Reforms in the labour market have been far reaching and have delivered higher employment and falling unemployment. Job security for those on temporary contracts is being improved. Job protection for insiders remains high, however, and there are major differences in labour market outcomes between the regions. Large-scale immigration, much of it clandestine in the past, is a recent phenomenon, and immigrants find work in areas where there are chronic labour shortages. Repeated regularisation exercises show that large numbers are willing to work in the formal sector. More could be done to extend legal immigration and aid immigrants to fit into the Italian society and economy.
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