Italy’s economy has passed the deep recession triggered by the global crisis and seems set for a gradual recovery. The strength of this recovery is uncertain: it would be wise to plan for no more than the rather sluggish growth seen in the decade prior to the crisis. Hence, the priority remains structural reforms to increase growth potential, while maintaining a stable fiscal framework oriented towards consolidation, as appropriately pursued during the crisis. Such a policy can sustain confidence in Italian public finances in the face of the large stock of government debt, in turn helping to support the financial system whose health is crucial for the recovery.

Italy’s economy has begun to recover from its worst post-war recession, following the global crisis, but the early signs are that growth may remain weak, as it has been for some years. This relatively poor past performance, with dismal productivity growth, underlines the importance of structural reforms that lead to more robust growth, as identified in past Economic Surveys. Another pressing challenge is to continue to improve fiscal sustainability. Although the budget deficit widened less than in many other countries, as a result of the government’s responsible fiscal policies, due to the impact of the crisis the public debt-to- GDP ratio is nonetheless rising once again from one of the highest levels in the OECD, against a positive background of relatively low private debt. With bond markets having become more sensitive to sovereign risk, action to bring the budget toward balance remains crucial. Stronger growth would of course also help the debt-to-GDP ratio to decline and public finances to improve. Thus, policies to sustain economic growth and secure fiscal sustainability together would increase the chance of success.

Italy has been recovering only slowly from its worst post-war recession. Despite recent reform efforts, many structural problems that have in the past been a serious drag on labour productivity persist. The government has contained the budget deficit to some extent, but with public debt among the highest in the OECD fiscal consolidation needs to continue. The weak state of the public finances underlines the importance of past pension reforms and reforming the tax system.

Tertiary education systems promote growth and well-being by providing the high level of skills and research output required in modern economies. Available evidence suggests, however, that Italian higher education learning outcomes lag behind international standards and that the benefits of university scientific output are not spread widely to society. This chapter argues that key reforms, in particular of university governance and funding, would contribute to a better performance of the higher education system. Making universities both more autonomous and more accountable would stimulate their performance. Better management of human resources, including performance-based careers and remuneration and improved recruitment processes, would also help. The new University Reform Act builds on principles which are in line with some of these recommendations. It will be important that the forthcoming secondary legislation translate these principles in effective operational rules and that regulation is then effectively implemented. Greater participation of private-sector funding could increase efficiency, both by expanding financing and providing clearer signals on the quality of education and research. The last section examines how universities could better contribute to advancing scientific knowledge and spreading new technologies throughout the economy.

In many areas environmental indicators are improving, although there have been frequent changes in some policy instruments, especially in energy related areas, where central government makes and enforces policy. Greater use of cost-benefit analyses of policies, regulations and investments, could improve the extent to which least-cost solutions are chosen. The decentralisation process in Italy has assigned responsibility for the implementation and enforcement of most environmental policy to sub-national governments and, while appropriate in many ways, this may be resulting in some excess costs and slower diffusion of best practices. Transport and energy policies contain a number of potential inefficiencies, particularly with regard to full implementation of the polluter-pays principle, since policy does not always succeed in making all polluters pay the same marginal cost for similar pollution. Policy with respect to household and packaging waste is advancing and innovative in some areas, but also overshadowed by recurring crises in the South which, while exacerbated by the involvement of organised crime, have also been the result of poor planning and mismanagement. In both waste management and water supply, the cost-efficiency of economic and environmental management would be improved by a programme of privatisation, provided independent national regulators are established to provide the appropriate framework.