Executive Summary

Confidence in economy is weak. Striking a balance between fiscal restraint, stimulus
In recent years, Italy has experienced one of its most serious economic crises, which has negatively affected industry, employment and government budgets. National and international confidence in the economy have been seriously damaged and are yet to fully recover. Increased immigration with refugees arriving from Africa, and a major earthquake in 2016 have added new challenges. Recent governments have faced a difficult dilemma of pursuing fiscal stabilization or promoting economic recovery. The Monti government’s strong austerity measures, which included deep public expenditure cuts and a substantial reform of the pension system, were followed by the Renzi government’s more expansionary policies. Yet, the current Gentiloni cabinet has tried to achieve a delicate balance between fiscal sustainability (and respect for EU rules) and promoting economic development. Gentiloni has adopted a more cooperative style with the European Commission on budgetary policies, in contrast to Renzi’s more aggressive approach.
Shifting political landscape
A few months before the upcoming national elections (to be held in the spring of 2018), the political landscape is characterized by three political poles: the center-left Democratic Party (Partito Democratico), the anti-establishment Five Star Movement (Movimento Cinque Stelle), and a fragmented center-right coalition in which Berlusconi (Forza Italia) and Salvini (Lega) are competing for the leadership. As the new electoral system is largely proportional, the probability of any of these three political poles winning a majority in both chambers of parliament is low. Forming a coalition able to command a majority in the next parliament will be far from easy. At present, the Five Star Movement has said it would reject any coalition with the other parties. Meanwhile, internal dissensions within and between the center-right and center-left will make the formation of a grand coalition difficult. Political uncertainty is once again on the rise.
Renzi’s leadership style rejected…
The strong personalization of leadership that prevailed under the Renzi government produced mixed effects. On the one hand, it enabled the government to embrace an ambitious reform agenda, which included constitutional, labor market, tax and public administration reforms. On the other hand, it placed the prime minister at the center of every political battle. The defeat of the Renzi government in the constitutional reform referendum persuaded the new prime minister, Gentiloni, to adopt a more collegial style.
…but economic priorities retained
The Gentiloni government has fundamentally maintained the economic priorities of the previous government, namely promoting economic growth and addressing high unemployment. This has meant continuing a mildly expansionary approach to fiscal policy, although the current government has also paid close attention to fiscal sustainability. This approach is justifiable in the short term in view of the difficult economic conditions. Yet, the high level of public debt, which leaves the economy vulnerable to external financial shocks, will require a more aggressive policy of fiscal consolidation in the near future. A bolder approach to the spending review process should be adopted with the twin purpose of cutting waste and enhancing the efficiency of state bureaucracy.
Regional banking weaknesses pose risks
The government has also had to deal with a serious regional banking crisis. With the European Commission’s agreement, the government invested heavily in stabilizing the regional banking sector. This response has made a positive contribution to the economic climate and ensured the availability of loans within the economy. The government should continue to promote the rationalization of the banking system to make it more efficient and robust.
Public administration reforms slow
The reform of public administration initiated under the Renzi government has been continued by the current government. However, not enough progress has been made. The quality and efficiency of public administration is still far from satisfactory. Civil service recruitment at all levels needs quicker and more selective. At the same time, a rigorous performance evaluation process must be fully implemented for senior civil servants. The efficiency and speed of judicial procedures must also be significantly improved and the evaluation of the quality of judicial work must be stricter.
Corruption remains
serious problem
Corruption continues to be a key factor undermining the quality of public administration. It distorts public service provision and economic activity and inhibits modernization. The government has made important progress in addressing this problem but must continue its efforts.
The relationship between central government and local authorities has not found a satisfactory equilibrium. A clearer division of responsibilities is required, while sufficient funds must be made available to local authorities to fulfill their functions and mechanisms of accountability must be improved.
Since the end of 2014, the economy has slowly begun to recover, but remains below pre-crisis levels. Further economic modernization and liberalization is required, while recent labor, social and industrial reforms are only just beginning to affect economic growth.
Failings in family and
social policies exposed
The recent economic and financial crises have exposed failings in family and social policies. Italy has an aging population and very low birthrate, which current policies are failing to address. Fiscal support for families with children is still too low. Similarly, measures to improve gender equality in the work place, and reconcile work and family life are weak. Poverty also needs to be a much more important priority.
Italy’s role in EU
remains open
A significant proportion of the political elite and public now believe that Italy must adopt a more active role within the European Union. To achieve this, an assertive leadership is necessary, but the government must also gain greater credibility in the European Union by fully respecting commitments made by previous governments. It must also avoid courting public skepticism regarding supranational integration. The respective development of these tendencies will be key to shaping Italy’s role in the European Union.
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