OREANDA-NEWS. On July, 1, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Italy.

The economy is emerging gradually from a prolonged recession. Financial market sentiment and confidence indicators have improved substantially since end-2014. Despite the recent bouts in volatility, sovereign bond yields have fallen to pre-crisis levels buoyed by the European Central Bank’s quantitative easing (QE). Bank and corporate funding costs have declined. Rising business and consumer confidence has stemmed the decline in domestic demand. Against this backdrop, the economy is expected to recover moderately, with real GDP projected to expand by 0.7 percent in 2015, supported by domestic demand and net exports. With the favorable tailwinds from QE continuing and investment gaining further momentum, growth is projected to pick up to 1.2 percent in 2016.

Policies at the European level such as QE and more flexibility in the Stability and Growth Pact have been instrumental to support demand. At the national level, Prime Minister Matteo Renzi’s government has set out an ambitious agenda to overhaul Italy’s political and economic system. The Jobs Act, an overhaul of Italy’s labor market, was approved by Parliament in December and has largely been implemented. A new law to convert Italy’s largest cooperative banks into joint stock companies has spurred expectations of consolidation in the sector. Reforms of product and services markets, public administration, education, judicial, and tax system are also progressing.

There is now a window of opportunity to push ahead with deeper reforms to re-ignite growth. This requires continued actions and strong implementation efforts on multiple fronts, which are mutually reinforcing. A wide-ranging reform to raise the efficiency of public services is envisaged and would help tackle the long standing productivity problem. Product market reforms in sectors that remain highly regulated such as transportation would also improve productivity. A broad-based strategy to strengthen bank and corporate balance sheets, including an enhanced insolvency regime and standard criteria for bank assessments of the viability of small and medium enterprises, will support recovery. Fiscal rebalancing is needed to further reduce the high taxes on labor and capital, through savings from past and ongoing spending reviews.