Italy

Return to low growth equilibrium

The economy has returned to its pre-pandemic levels and, in the face of several headwinds, will struggle to break away from near-stagnant growth rates. Chief among these are the delayed effects of ECB monetary tightening, which will continue weighing on the borrowing costs of households, firms and the state. Falling demand for housing and the dwindling backlog of projects cleared under the scrapped “superbonus” tax scheme will constrain construction activity. Private investment, more broadly, will intensify its slowdown, while public investment growth will provide resilience (with downside risk related to potential delays in EU-funded projects). Supported by easing supply pressures, manufacturing exports will continue to grow, albeit at a slower pace as wage catch-up erodes competitiveness and global demand cools down (notably in Germany and China). Service exports, on the other hand, will remain buoyant as demand for tourism continues to grow, resulting in a positive contribution to growth from the external sector. The tight labour market will cushion the effects of inflation on household income, and therefore on private consumption. Inflation will continue moderating but remain above the 2% target due to a persistent core component. Government consumption will be a drag on growth owing to the full phase-out of energy support measures and lower spending on intermediate consumption.

Fiscal outlook improves but remains vulnerable

Italy has the highest public debt burden in Europe apart from Greece and, as such, faces significant fiscal challenges. Unlike Greece, where debt is largely owed to official creditors, a non-trivial share of Italian debt (around 20%) is owned by foreign private investors, leaving it exposed to speculative attacks. Though the situation has improved, Italian banks remain strongly exposed to the sovereign (16% of assets, down from pandemic peak of 19%, and significantly above eurozone average of 6%), meaning the risk of the bank-sovereign nexus remains latent. Otherwise, the banking system is well capitalised (CET1 ratio of 15%), highly liquid (net stable funding ratio of 133%) and holds a solid asset portfolio (NPL ratio of 1%). The state, on the other hand, is exposed to the private sector through contingent liabilities, which amount to 16% of GDP, the vast majority of which are Covid-related. Thus far, these loans have exhibited a low NPL ratio of 2%, but their creditworthiness will be put to the test in 2026-2027 when most of them fall due. All these debt pressures will be aggravated by a “higher-for-longer” interest rate environment. Nonetheless, sovereign risk is strongly mitigated by the ECB’s willingness to purchase stressed Italian bonds provided that the government respects fiscal and reform conditions agreed with the EU.

The budget deficit will continue its narrowing path as the phase-out of pandemic and energy crisis support measures is completed. The deficit will also be supported by higher nominal growth, the cancellation of the “citizen’s income” welfare scheme and the “superbonus” tax incentive. The primary balance is expected to switch to a slight surplus in 2024.

On the back of moderating energy prices, import inflation is rapidly reversing, which, given Italy’s reliable export growth will restore the current account surplus. Nonetheless, the stronger role played by domestic demand (and investment in particular) and structurally higher energy prices will prevent it from returning to its pre-pandemic levels of around 3%.

Reform agenda and fiscal pressures will put the government to the test

Following the collapse of the technocratic Draghi administration in July 2022, a right-wing coalition secured a comfortable victory (43% of the vote) in the September 2022 snap elections. The new government is led by Giorgia Meloni, whose Fratelli d’Italia (FdI) secured 26% of the vote. She is joined by Forza Italia (8% of the vote) and Lega Nord (9%). After a prolonged period of volatility involving a string of unstable coalitions, the FdI appears to be consolidating the conservative vote. Given the weakness of centrist and progressive parties (Partido Democratico and 5SM), policy pragmatism and the economy’s resilient performance, the Meloni government has a good chance of serving a full mandate that is due to end in 2027. However, if these trends fail to hold and FdI loses significant popular support, snap elections would become probable as coalition partner and Lega leader Matteo Salvini would have an incentive to defect.

The strong dependence on European funds to finance investment is a strong incentive to comply with EU conditionality. Efforts to improve the business environment through structural reforms, fiscal consolidation and public investment are expected to continue. Nonetheless, the coalition’s inexperience in government and lingering populist tendencies create room for foot-dragging and unforced policy mistakes. This was the case with the poorly communicated and subsequently watered-down windfall tax on banks, which harmed investor confidence. Further delays in NGEU fund disbursements are expected as key reforms (taxi market liberalisation, tax evasion, court system efficiency) will be politically challenging, thereby creating fiscal and macroeconomic downside risk. Relationships with EU partners have been more collaborative than initially expected. Persistent and non-trivial risk of tensions regarding immigration and fiscal matters will remain, particularly in light of the fact that EU fiscal rules will reactivate in 2024.

Payment

Trade notes (cambiali) are available in the form of bills of exchange or promissory notes. Cambiali must be duly accepted by the drawee and stamped locally at 12/1000 of their value, being issued and payable in the country. When issued in the country and payable abroad, they are stamped at 9/1000, and finally stamped at 6/1000 in the country if stamped beforehand abroad, with a minimum value of €0.50. In case of default, they constitute de facto enforcement orders, as the courts automatically admit them as a writ of execution (ezecuzione forzata) against the debtor.

Signed bills of exchange are a reasonably secure means of payment, but are rarely used due to a high stamp duty, the somewhat lengthy cashing period, and the drawee’s fear of damage to his reputation caused by the recording and publication of contested unpaid bills at the Chambers of Commerce.

In addition to the date and place of issue, cheques established in amounts exceeding €1,000 and intended to circulate abroad must bear the endorsement non trasferibile (not transferable), as they can only be cashed by the beneficiary. To make the use of cheques more secure and efficient, any bank or postal cheque issued without authorisation or with insufficient funds will subject the cheque drawer to administrative penalties and listing by the CAI (Centrale d’Allarme Interbancaria), which automatically results in exclusion from the payment system for at least six months.

Bank vouchers (ricevuta bancaria) are not a means of payment, but merely a notice of bank domicile drawn up by creditors and submitted to their own bank for presentation to the debtor’s bank for the purposes of payment (the vouchers are also available in electronic form, in which case they are known as RI.BA elettronica).

Bank transfers are widely used (90% of payments from Italy), particularly SWIFT transfers, as they considerably reduce the length of the processing period. Bank transfers are a cheap and secure means of payment once the contracting parties have established mutual trust.

Debt Collection

Amicable phase

Amicable collection is always preferable to legal action. Postal demands and telephone dunning are quite effective. On-site visits, which provide an opportunity to restore dialogue between supplier and customer with a view to reaching a settlement, can only be conducted once a specific licence has been granted.

Settlement negotiations focus on payment of the principal, plus any contractual default interest as may be provided for in writing and accepted by the buyer.

When an agreement is not reached, the rate applicable to commercial agreements is the six-monthly rate set by the Ministry of Economic Affairs and Finance by reference to the European Central Bank’s refinancing rate, raised by eight percentage points.

Legal proceedings

When creditors fail to reach an agreement with their debtors, the type of legal action taken depends on the type of documents justifying the claim.

Fast-track proceedings

Based on cambiali (bills of exchange, promissory notes) or cheques, creditors may proceed directly with forced execution, beginning with a demand for payment (atto di precetto) served by a bailiff, preliminary to attachment of the debtor’s moveable and immoveable property (barring receipt of actual payment within the allotted timeframe). The resulting auction proceeds are used to discharge outstanding claims.

Creditors can obtain an injunction to pay (decreto ingiuntivo) if they can produce, in addition to copies of invoices, written proof of the claim’s existence by whatever means or a notarized statement of account. A forty-day period is granted to the defendant to lodge an objection.

Ordinary summary proceedings (procedimento sommario di cognizione), introduced in 2009, are used for uncomplicated disputes which can be settled upon simple presentation of evidence. Sitting with a single judge, the court determines a hearing for appearance of the parties, and delivers a provisionally executory ruling if it acknowledges the merits of the claim; the debtor however has 30 days to lodge an appeal.

Ordinary proceedings

The creditor must file a claim with the court (citazione) and serve summons to the debtor, who will file a defence (comparsa di constituzione e risposta) within ninety days via a preliminary hearing. The parties then provide briefs and evidence to the court. When the debtor fails to bring a defence, the creditor is entitled to request a default judgment. The court will usually grant remedies in the form of declaratory judgments, constitutive judgments, specific performance and compensatory damages but it cannot award any damages which have not been requested by the parties.

Undisputed claims are typically settled within four months, but the timescale to obtain an enforceable court order depends on the court. Overall, disputed legal proceedings take up to three years on average.

The current civil procedure code is intended to speed up the pace of proceedings by reducing the procedural terms, imposing strict time limits on the parties for submitting evidence and making their cases, and introducing written depositions in addition to oral depositions.

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Enforcement of a Legal Decision

A judgment becomes enforceable when all appeal venues have been exhausted. If the debtor fails to comply with a judgement, the court can order compulsory measures, such as an attachment of the debtor’s assets or allowing the payment of the debt to be obtained from a third party (garnishee order) – although obtaining payment of a debt via the latter option tends to be more cost-effective.

For foreign awards, decisions rendered from a country in the EU will benefit from special procedures such as the EU Payment Order or the European Enforcement Order. Judgment from a non-EU country will have to be recognized and enforced on a reciprocity basis, meaning that the issuing country must be part of a bilateral or multilateral agreement with Italy.

Insolvency Proceedings

OUT-OF COURT PROCEEDINGS

The 2012 legal reform allows a debtor to file an application for composition by anticipation. Negotiation on an agreement commences 60 to 120 days prior to the initiation of judicial debt restructuration proceedings. The debtor retains control over the company’s assets and activities. A new pre-agreed composition plan may be agreed with the approval of creditors representing 60% of the debtor company’s debt.

RESTRUCTURING PROCEEDINGS

This settlement is a court procedure which allows a company in financial difficulty to propose a debt restructuration plan. The debtor files a proposal to the court to repay the total amount outstanding to the secured creditors. If the court admits it, a commissioner trustee is appointed, and if the majority of the unpaid creditors accept the proposal, the court will officially validate the proceedings.

Alternatively, a debt restructuring agreement (accordi di ristrutturazione del debito) aims to restructuring the debt so as to rescue the debtor company from bankruptcy proceedings. The debtor must file a report on its ability to pay the remaining creditors in full, who otherwise can challenge the agreement before a bankruptcy court by requiring verification that their claims will be paid as normal.

LIQUIDATION

This procedure aims to pay out the creditors by realising the debtor’s assets and distributing the proceeds to them. The status of insolvency justifies the adjudication of bankruptcy by the court, even where the insolvency is not due to the debtor’s misconduct. The court hears the evidences of the creditors’ claims and appoints a receiver to control the company and its assets. This receiver must liquidate all of the company’s assets and distribute the proceeds to the creditors to have the proceedings formally concluded.

Last updated: September 2023