Structural Reforms and the Potential Effects on the Italian Economy

Abstract

Since the second half of 2011, after a period of prolonged low growth, Italy has found itself at the center of a severe economic crisis. Concerns about the sustainability of its debt burden, along with gloomy growth prospects, have pushed up the cost of government borrowing, exacerbating current economic conditions. At the moment Italy is facing two mounting economic challenges: (i) achieve a rapid fiscal consolidation to restore financial market confidence; (ii) implement structural reforms to strengthen medium-term growth prospects. Using the European Commission's model QUEST III with R&D, adapted to Italy, we quantify the potential effects of a set of interventions inspired to the reform packages currently being undertaken or under discussion and consider different levels of policy effort. Results show that reforms are likely to bring about sizable gains in output, consumption, employment and net foreign assets position and that most of these gains derive from labor market reforms. However, the fiscal austerity plan is likely to severely mitigate ଝ We are very grateful to Werner Roeger, Janos Varga and Jan in't Veld for sharing with us many invaluable insights about their model, QUEST III. We gratefully acknowledge Antonio Maria Costa, the editor, and the anonymous referees for their helpful comments. We are also indebted to Alexandr Hobza, Gilles Mourre and the participants to the LIME Modeling Workshop 2010 and to the EcoMod2011 conference for useful discussions and suggestions on a earlier version of this paper. The usual disclaimer applies. The views expressed herein are those of the authors and not necessarily reflect those of the Italian Ministry of Economy and Finance.

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