IMF ‘Consultation with Italy’ Says Faster Reforms Needed

The IMF conducts regular (usually annual) missions to member countries “under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.” Today, the IMF posted the concluding statement of the mission to Italy. Basically, progress is being made toward fixing the country’s economy, but more needs to be done at a faster pace:

The euro zone crisis hit Italy hard, but the seeds of Italy’s low growth pre-date the crisis and follow from its stagnant productivity, difficult business environment, and over-leveraged public sector. Accelerating reforms to address these structural weaknesses will be crucial to limit the risks of long-term unemployment, especially for the youth, and raise Italy’s trend growth.

The IMF mission concluded that Italy must boost business competition by lowering barriers to entry and reducing regulations. The high cost of electricity (up to 40% greater than in France and Germany) has also been a drag on Italy’s competitiveness. The justice system is woefully inefficient with a significant backlog of cases, which increases the cost of doing business. There are too many small firms. As for fiscal policy, the IMF wants to see stepped-up efforts to combat tax evasion, “including through better use of anti-money laundering tools, and increasing the inheritance tax would also raise revenue and more fairly distribute the tax burden.” Italy’s banking system is in woeful shape as the “ratio of nonperforming loans has almost tripled since 2007, while provisioning coverage has declined.” The mission statement recommends that Italian banks sell, dispose, or write down impaired loans. The ECB and the EU could help as follows:

Direct asset purchases by the ECB, such as for SME credits, another LTRO of considerable tenor, and lower haircuts on eligible collateral would help lower bank funding costs and lending rates. Greater progress in the banking union, especially the single resolution mechanism and ESM backstop, would help sever the sovereign banking link. Moves to strengthen the common market, such as the Services Directive, would enhance the cross-border benefits of reforms. Progress in European policies combined with vigorous reforms in Italy would go far in producing a more vibrant and dynamic currency union.