1

Stability and GrowthEconomic recovery and fiscal adjustment in Italy

Tommaso Padoa-Schioppa Italian Economy and Finance Minister

London, July 25 , 2007

2

Cyclical recovery in the Eurozone

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-1

0

1

2

3

4

5

6

1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07

% y

ear-

on

-yea

r

-2

-1

0

1

2

3

4

5

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% y

ear-

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-yea

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US real GDP growth

Euro area real GDP growth

Faster economic growth in the Eurozone than in the US, as a result of a stronger domestic demand.

3

Italy is catching up...

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-3

-2

-1

0

1

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3

4

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1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07

% q

oq

saa

r

-4

-3

-2

-1

0

1

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3

4

5

6

% y

ear-

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-yea

r

GDP, quarterly annualised change (LHS)

GDP, annual change (RHS)

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… but trend growth remains below EU standards

0,0

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2,0

3,0

4,0

5,0

6,0

1960s 1970s 1980s 1990-1997 1998-2006

UK Germany France Italy

Growth rates, 10-year averages

Italy

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Italy’s current recovery:

In 2007: GDP growth projected at 2.0 per cent

Domestic demand improving

Machinery investment recovering

Exports performance positive, despite strong euro

Personal consumption sustained by rising confidence (linked to employment growth)

Output growth above potential (shrinking output gap)

In 2008: growth pattern roughly unchanged

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Domestic demand rising

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0

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5

1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06

% y

ea

r-o

n-y

ea

r

-3

-2

-1

0

1

2

3

4

5

% y

ea

r-o

n-y

ea

r

GDP, contribution by:Final domestic demandNet exports

Domestic demand, and especially investment, led the upswing. Industrial output performance was particularly good, following years of weakness.

7

Export recovering, as its composition changes

-10

-5

0

5

10

15

20

25

30

35

1Q2005 2Q2005 3Q2005 4Q2005 1Q2006 2Q2006 3Q2006 4Q2006 1Q2007

% y

ea

r-o

n-y

ea

r

Food Textiles Leather Wood & prodMetals & prod Machinery Electronic eq.t Transport

Exports by sector:

Export performance positive despite strong euro. Traditional exports (textiles, leather) gradually replaced by higher-tech products (capital goods, metal products).

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FDI (in and out) rising gradually

0

50000

100000

150000

200000

250000

300000

350000

2000 2001 2002 2003 2004 2005

mil

lio

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US

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urr

en

t p

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es

Inward FDI stocks Outward FDI stocks

The Italian economy becomes increasingly open. Government measures to boost domestic competition and lower social security contributions support FDIs.

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Italy’s government bonds: a safe investment

0,0

100,0

200,0

300,0

400,0

500,0

600,0

700,0

800,0

07

/03

/19

91

07

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/19

92

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93

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94

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95

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96

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97

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99

07

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/20

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07

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/20

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07

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07

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07

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07

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pe

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nt

Spread over Bund at 10 Years

Over the 1990s Italy’s government bond spreads over Bunds have significantly shrunk.

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Italy’s deep rooted economic challenges

Strengthening labor participation (women, young)

Attracting business through better regulation and lower tax burden

Reducing public debt

Reducing and improving public expenditure

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The Government’s economic strategy

Reducing public debt

Improving the quality of public spending

Modernizing the welfare system

Deregulating, fostering competition

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Specific areas for action

Pension system; labor market

Competitiveness policies (liberalizations, education, research, environment)

Quality of public finance

Budget classification reform

Spending review

Reform of public administration

Agreement with Trade Unions to improve productivity

Rationalization of public offices

13

Public finances

Compliance with the EU targets: deficit below 3% of GDP in 2007 and beyond

Buoyant revenues: effective implementation of measures against tax evasion (tax base growing faster than GDP)

However: current expenditure is not yet under control

14

The Government medium-term fiscal strategy

No need for corrective fiscal adjustment in 2007 (mid year) and 2008

“Use part of extra revenues for social and growth policies:

6.5 bn in 2007, 1.5 in 2008”

2007 2008 2009 2010 2011

Budget balance (policy scenario) -2.5 -2.2 -1.5 -0.7 0.1

Required adjustment (bn euro) 0.0 0.0 -6.3 -12.8 -24.2

% GDP 0.0 0.0 -0.4 -0.7 -1.4

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The structural adjustment

Structural adjustment of almost 2% of GDP in 3 years (2006-2008)

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-1

0

1

2

3

4

2006 2007 2008 2009 2010 2011

Cumulative change in structural deficit

Structural deficit

Output gap

% of GDP

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Conclusions

• Cyclical upswing is underway

• Deep rooted supply-side challenges remain

• Government strategy: enhancing potential growth; making Italy more attractive to investors

• Fiscal consolidation is underway

• Public finances still vulnerable due to high debt