1. 1 Stability and Growth Economic recovery and fiscal adjustment in Italy Tommaso Padoa-Schioppa Italian Economy and Finance Minister London, July 25, 2007

2. 2 Cyclical recovery in the Eurozone Faster economic growth in the Eurozone than in the US, as a result of a stronger domestic demand.

3. 3 Italy is catching up...

4. 4 … but trend growth remains below EU standards 0,0 1,0 2,0 3,0 4,0 5,0 6,0 1960s 1970s1980s1990-19971998-2006 UKGermanyFranceItaly Growth rates, 10-year averages Italy

5. 5 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

6. 6 Domestic demand rising Domestic demand, and especially investment, led the upswing. Industrial output performance was particularly good, following years of weakness.

7. 7 Export recovering, as its composition changes Export performance positive despite strong euro. Traditional exports (textiles, leather) gradually replaced by higher-tech products (capital goods, metal products).

8. 8 FDI (in and out) rising gradually The Italian economy becomes increasingly open. Government measures to boost domestic competition and lower social security contributions support FDIs.

9. 9 Italy’s government bonds: a safe investment Over the 1990s Italy’s government bond spreads over Bunds have significantly shrunk.

10. 10 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

11. 11 The Government’s economic strategy  Reducing public debt  Improving the quality of public spending  Modernizing the welfare system  Deregulating, fostering competition

12. 12 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. 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. 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” 20072008200920102011 Budget balance (policy scenario) -2.5-2.2-1.5-0.70.1 Required adjustment (bn euro) 0.0 -6.3-12.8-24.2 % GDP0.0 -0.4-0.7-1.4

15. 15 The structural adjustment Structural adjustment of almost 2% of GDP in 3 years (2006-2008)

16. 16 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