Summary:Context. The economy has started to recover from a prolonged recession. The recovery, however, is modest and fragile, against the backdrop of long-standing structural rigidities, strained bank balance sheets, and high public debt that leave very little room to cope with shocks. On current projections, the economy is not expected to return to its pre-crisis (2007) output peak until the mid-2020s, implying nearly two lost decades, a growing income gap with euro zone partners, and a protracted period of balance sheet vulnerability. The challenge is to turn around productivity performance, facilitate faster bank balance sheet cleanup, and lower public debt. Policies. Recognizing Italy’s complex challenges and incomplete efforts to address them in the past, the government is pursuing a multi-pronged strategy to boost potential output, support the recovery, and restore balance sheet health. This includes institutional, public administration, fiscal, labor market and banking sector reforms, which once fully implemented should yield benefits gradually over time. To support the recovery, it has eased fiscal policy quite markedly this year, and while efforts are made to start bringing public debt down, structural adjustment has been backloaded to 2019.
