World Economy

Italy Reform Plan Succeeds

Italy Reform Plan SucceedsItaly Reform Plan Succeeds

Italy has finally succeeded in restoring growth. The economy is at the end of a double dip recession that contracted the country’s GDP by 10%. The Budget Law 2016 forecasts real GDP growth at 0.9% in 2015 and 1.6% in 2016.

 This recovery is the result of structural reforms aimed at strengthening productivity and economic policies that in the short/midterm reinforce and bring forward the positive effects of external and domestic factors at play, Pier Carlo Padoan, minister of economy and finance wrote for GlobalCapital.

About external factors: oil and commodity prices remain at historically low levels, interest rates are close to zero (if not negative) and the euro exchange rate is competitive.

The ECB’s readiness to expand its QE program has triggered a renewed depreciation of the euro, while the government’s action reassured the markets and narrowed the BTP/Bund sovereign spread. Italy’s financial condition is markedly improving. However, the ECB’s unconventional monetary policy is a necessary but not sufficient condition to boost recovery in Europe. Structural reforms improve the business environment, strengthen QE’s transmission channels and enable the benefits of the bounce back in advanced economies.

 Government Strategy

To reverse the trend of 20 years of untouched structural impediments the government is implementing structural reforms aimed at boosting potential growth and productivity while at the same time supporting internal demand.

The extreme ambition of this comprehensive reform strategy will not only boost the Italian growth potential in the long run but it will also allow Italy to benefit fully of the positive exogenous factors at play in the current conjuncture.

The reform action is so comprehensive that hardly any sector of the economy remained untouched. It included a radical reform of the labor market? an ambitious modernization of the banking and financing sectors? measures to boost productivity, competition and infrastructure? a significant reduction and reshaping of the tax burden? a broad spending review? a comprehensive privatization program, together with institutional reforms, a reform of the public sector and of the education system.

In 2015, within this comprehensive strategy the government’s priority was the reform of the labor market and of the banking and financing sectors.

 Labor Market

The government has given full implementation to a labor market package (Jobs Act) introducing, among others: open-ended contracts with increasing protection according to tenure? a universal unemployment insurance scheme associated to stronger active labor market policies? further flexibility in hiring? labor law reshuffling and simplification.

The government accompanied the Jobs Act with incentives for new hires with open-ended contracts. The cases for reinstatement had already been reduced for new hires by firms with more than 15 employees.

 Banking, Business Sectors

The government has introduced the so-called “finance for growth” program addressing the constraints on credit to businesses. Insurance companies and credit funds can now lend directly to firms while EU-based investors no longer pay a withholding tax. The Central Guarantee Fund’s program was extended to include mini-bonds, which are issued by SMEs meeting certain criteria.

The finance for growth program also provides incentives for SMEs to expand their operations, favoring stock market listing and enhances capitalization through the Allowance for Corporate Equity. The government is engaged in a comprehensive and long awaited structural reform of Italy’s banking system, including the cooperative banks, banking foundations, better management of deferred tax assets and the transfer of nonperforming loans.

In the banking sector, a reform of major cooperative banks was adopted in 2015. In the new system, cooperative banks holding assets beyond €8 billion ($8.69 billion) will become limited companies by the second half of 2016. A protocol to reform regulation around banking foundations has also been signed.

Italy’s stock of NPLs impeded growth of the credit market. To facilitate the absorption of the NPL stock, the government approved a law introducing measures to accelerate bankruptcy procedures. The ECB has recently expressed an explicit appreciation for the renewed framework for bankruptcies set up in Italy by the latest reforms.

Regarding NPLs, the ministry, with the support of the Bank of Italy is involved in a fruitful debate with the EU Commission, pursuing a shared, wide-ranging and market oriented solution.