Italy

A new government took office in June 2018 on a platform to improve growth and social outcomes. It has inherited a challenging situation—notwithstanding the recovery of the past few years, real incomes remain at the levels of two decades ago, unemployment is elevated, poverty has risen, and public debt is very high. Its policies center on a sizable fiscal stimulus, with plans to assist the poor, raise public investment and partially reverse pension reforms, among others. But this has increased debt sustainability concerns. In recent months, sovereign spreads vis-à-vis German bunds have jumped to multi-year highs while bank valuations have shrunk by about one third. Italy and the European Commission (EC) are discussing potential revisions of the fiscal plan in relation to the EC’s excessive deficit procedure.