Transcript

MS. LOTZE: Good morning. Thank you for coming. You have all the documents. You see that there's an embargo of 12 o'clock on the documents. The same goes for this briefing, so everything is embargoed until 12 o'clock.

To my left Is Maxwell Watson. He's the mission chief to Italy. And next to him is Gian Maria Milesi-Ferretti who is the Deputy Division of the division that is in charge of Italy.

Max will start with an introduction, and then we'll go further. Thanks.

MR. WATSON: Thanks, Conny.

Just before we start, just a word to say on a personal note, the dreadful news from Afghanistan, which I think included Corriere della Sera. It weighs over on a bit. Just personally, one's sympathy to friends and colleagues of those affected.

Now, on the record, I suppose what might be useful is perhaps to pick out at the beginning half a dozen main messages which I think came out of the Board's conclusions on the consultation, the object being really to help guide you towards the documents rather than towards the glosses I'll put on them.

I think the first message from the Board—and it was an interesting discussion. People were really genuinely curious what is happening in Italy. And the Fund staff reports, unlike some other institutions, do have this dialogue in the middle of them where they report what the authorities' views are—I'll try to get this roughly right—and the Executive Director Mr. Padoan put out a buff, which I think is in the package. So you have the authorities' views there. So Directors were obviously really extremely interested and curious what does this hold.

The first message was that the government's agenda is seen as encouraging, and in implementing it, the message seemed to be: Be consultative, yes, as the government is being— [inaudible] pensions—be consultative, but then be decisive. Decisive reforms are needed to improve Italy's growth performance.

Probably the second important message was that Directors I think universally welcomed Italy's efforts to live up to its Stability Pact commitment, its fiscal deficit commitments, but were concerned that more should be done to restrain the growth of public spending. They noted the use of asset sales. Their problem was not the sale of assets. Their problem was: Is enough being done to control underlying public spending in 2002?

The third message I think was that they really welcomed the principle of continuing to shoot for budget balance in 2003, but looking beyond that, they considered or recommended the idea of going into a larger budget surplus, a larger surplus in the public finances than the government is currently envisaging, because of increased debt, because of the demographic problem, but it was clear in the discussion that Directors were suspending a definitive assessment of that, suspending a definitive assessment of the appropriate size of surplus until more was clear on the pension front particularly. Perhaps one should say on the pension front, on labor markets, on structural reforms, but especially on pensions.

The fourth message, I think closely related, was that for Directors, I think universally, public expenditure reform was seen as the litmus test for progress in improving the performance of the economy, the one thing that is wholly within the grasp of the public authorities, and they welcomed the health care deal with the regions. They thought that was very promising. They welcomed the commitment to continue slimming numbers in the public sector, taking advantage of the demographic shift in the public sector. And then they were waiting to see what happened on pensions, on subsidies, on active labor market policies, and they noted that active labor market policies tend, if anything, to benefit the North of the country more than the South. So in all of these areas, pensions, subsidies, active labor market policies, Directors thought there was scope to restrain expenditure growth, but recognized that in a sense the jury was out at the moment on what could be achieved and would be achieved. So expenditure control seen as crucial in order to cut taxes and in order to address through reforms, expenditure reforms, the question of debt sustainability.

A fifth message, Directors noted that the economic performance of the South has been improving. They welcomed that. They welcome the government's strong attention to give priority to the South, including [inaudible] and so forth, with the emergence of the informal economy. And in that connection, they also added, I think, to paraphrase Directors, infrastructure is welcome but the South cannot be built by infrastructure alone. They emphasized labor market policies, including wage differentiation, training, active labor market policies; that labor market policies would be crucial for the South, crucial to get national unemployment down, and crucial to get growth up.

The last point, the financial sector, praise for the authorities' handling of the financial sector, including the intention to strengthen banks' capital ratios, but a point of emphasis on perhaps a need to reform the bankruptcy law for non-financial corporations and to improve the judicial process, which was seen as fairly fundamental in terms of ensuring good credit policy and getting financing available throughout the economy.

So those were perhaps half a dozen messages out of the consultation. Most of those you'll find, not necessarily in my words, in the press information notice and the Board's assessment, and some others probably. One thing I would perhaps say on the trade-offs between expenditure reform, fiscal surpluses, there is in the Staff Report—Box 3 is the staff's attempt, which quite a lot of Directors liked, to explore trade-offs between the different groups to addressing the issue of the public debt and demographics. So the Staff Report attempted to draw out some different trade-offs, different directions, and Directors thought that was a useful—without blessing any particular numbers, they thought that was a useful way of thinking about the challenges facing Italy.

I think I will stop there and then try to answer your questions.

QUESTIONER: Can you just explain the output gap that you note is the highest in the euro area, can you just explain a little bit what you're actually looking at there? Is that just the difference between Italy's growth rate and the rest of the European Union, the average?

MR. WATSON: What we're looking at there in the case of Italy is the difference between the actual level of output and the potential output compared with that difference in the rest of the euro area on average. I speak a little under the control of Gian Maria.

MR. MILESI-FERRETTI: Yes, the definition of the output gap is the difference between the potential level that output could reach and the current level output, and what is noted there is that the difference between—this difference with respect to the same difference for other euro area countries is larger.

QUESTIONER: And what's your estimate of the growth potential—

MR. MILESI-FERRETTI: The growth rate, the potential growth rate estimated at the moment for Italy is 2 percent. You will notice that since you have now a positive output gap, Italy's output level is below, Italy could draw at higher rates than 2 percent while still remaining below the output gap moving towards closing the gap.

MR. WATSON: And perhaps, Conny, you would probably appreciate it if I just said a word to clarify the growth numbers that have been out there in the press. I think you were asking me to do that. I perhaps should have done it. But it wasn't a subject—it wasn't entered into in the Board.

In these papers, at the time of the Board meeting on November 5, the staff's projection for growth in 2002 was, I think, 1.4 percent. And that, as you have seen from the Ottawa papers and press notices, that has now been lowered. And the staff's current projection is 1.2 percent. That is, in fact, I see from today's press, identical with the OECD's projection and is about 0.1 below the consensus forecast.

QUESTIONER: Was that for—

MR. WATSON: 2002.

QUESTIONER: 2002.

MR. WATSON: And in 2001, it's still—

MR. MILESI-FERRETTI: Is still 1.8 percent, which is, again, in line with the OECD.

MR. WATSON: I think this sounds—the sort of coincidence of the Fund and the OECD sort of sounds as if there's some precision there worth bearing in mind. You know, the forecast is put together by teams. They try to look at interactions. Most of the really new information is on, I guess, probably Germany and the United States rather than on Italy itself.

I think some humility is needed on the forecasts. I think it was, in fact, Ignacio Visco was quoted in today's FT as saying, you know, forecasts are a useful way of thinking about the numbers in our policy responses. But as the Managing Director said in Ottawa, it's like reading the tea leaves at the moment. So undue precision probably a mistake.

Also, there were some reports that were incorrect about the inflation forecast because some people picked up the GDP deflator. The inflation forecast for next year is, I think, 1.4. It was occasionally reported as 1.8, but that is not the CPI, that 1.8 GDP deflator. The headline inflation forecast is 1.4 for next year.

Sorry to answer a question that wasn't asked, but Conny had asked me if I could cover that.

QUESTIONER: Let me just follow up on that. I'm a little bemused by the fact that the Board didn't really discuss the growth rates—

MR. WATSON: But the number is new, so they couldn't—sorry. They didn't discuss 1.2 because it didn't exist. The number would have been 1.4. So I didn't include it in my account. But the main comment of the Board, I think, there isn't a number in the assessment, you see, it was just to stress the uncertainty and the need in that uncertainty for a fairly decisive medium-term cast of policies to reduce it. So the target was moving on growth at the time, and I think many Directors knew that.

QUESTIONER: As you say, even given the uncertainty and the malleable nature of forecasts, it's still fairly clear looking at Italy over the medium-term history we've just had that growth remains weak compared with its other European counterparts, its debt remains high, structurally the deficit is still a problem. And there is a decided lack of decisiveness about it. In fact, the Staff Report notes the disappointment that there has been with the lack of structural reform effort.

So, looking ahead, I mean, how can one draw any confidence that Italy is actually going about the right steps to actually engender a medium-term growth outlook?

MR. WATSON: Well, I think the Board in its conclusions, at the beginning, when you read the assessment, essentially doesn't underestimate what's been achieved in the sense when one thinks of where one was on the fiscal deficit a few years ago, where one was on inflation, the habit of continual devaluation.

What we see today is a different Italy measured against those, and I think that's a very appropriate reminder from the Board. And on privatization and so forth, things have been achieved in sorting out the banking system, things have been achieved of importance.

The worry is more, I think, in structural public expenditure and the labor market particularly, and there the government's ideas—without going into the detail of this and that idea. The government's basic priorities look very, very welcome. Some Directors said why have they not already acted, and others said but surely we in the Fund advise people to consult with the labor unions, to consult—this does take some time. They have not been in power long. They deserve the benefit of the doubt. And I think that's where the meeting came out. Benefit of the doubt, but before long, decisiveness will be needed.

QUESTIONER: Before long? In what sort of time frame is "before long" in IMF terms?

MR. WATSON: Before long, I think the staff—the Board was not crystal clear on that. The staff is fairly clear of its view, and that is that I think the implicit message is by the spring, once a number of these consultations and decisions have been taken and have been sorted out, then maybe if firm action is taken on public spending, maybe there would be scope to reduce—to tighten a bit the fiscal stance, to [inaudible] the expansion in 2002, to get it more neutral.

Perhaps even if the progress were substantial in areas like pensions, perhaps even to increase slightly the level of tax cuts, but not at the expense of the deficit.

And the question, in a way, your deeper question perhaps is what's the nature of growth and job-rich growth, and there is—there are a couple of background papers I should mention. There are joint background papers from France, Germany, Italy, and Spain. They're out there on the Web on each of the sites, and they talk about what it is that has made growth rich in jobs in some cases, including to some degree Italy emphasizing wage moderation, which Italy has been very—it's been very notable. Labor unions have taken a very responsible attitude on wage moderation, but also structural reforms, which is the other part.

I did notice, when you asked the question on output gap, I suspect that your eyes were on the paragraph of the PIN of the assessment that referred to monetary conditions. Just to avoid a possible misunderstanding, there's a paragraph there saying they're a little bit on the tight side for Italy. That is not a criticism of ECB policy. The ECB should set its policies, and does, for the average of the euro area. But it was an interpretation of how the policy mix is working in Italy at the moment, just because it would be possible that some people out there might read it as saying the ECB is too tight, and it doesn't say that. It says relatively speaking Italy is; it will vary across countries.

QUESTIONER: I wonder, not specifically on anything in the report, but you might have seen an economist survey on Italy in the summer that was put out, and it was a very scathing—I found it very interesting to look at how they said that a decade ago we were talking about "il sorpasso", how Italy had gone beyond the U.K. in terms of size. Now the U.K. economy is a third larger than Italy, and Italy runs the risk of falling behind Spain in terms of its per capita output.

Do you get the sense that the Italians are really falling behind in terms of reforms? Are they running the risk of becoming a second stroke power, economically speaking, within the euro area if they do not?

MR. WATSON: It's a good question. I think there are really two halves to the question. The first half is, to be fair to what's been achieved, Italy in pensions has already done in terms of reforms much more than quite a lot of European countries, but it had a much worse problem. So in a way, it's a question of what your counterfactual is. There have been some really big changes in Italy, and the fiscal deficit is another one. So there's been no immobilism in policy. But in terms of really getting growth up and growing at a rapid pace, this kind of reform agenda of the government I would say comes not a moment too soon. I think people in Italy were genuinely questioning, Is there risk of falling behind? And as the government and the Bank of Italy said, yes, there is a risk of slow growth if reforms are not accelerated, and I think this message was quite on the mark.

QUESTIONER: What is it about the health system that's actually dragging so much on just unexpected discretionary spending?

MR. WATSON: There are probably three things there. One is if you look at the sort of amount of money that's spent in Italy on health as a proportion of the national income, it's not especially high. It's really a very reasonable level. And so—and if you look at the government's plan, the idea isn't to scale it back a lot. It's rather to stop it sliding upwards or out of control. But there isn't a great deal—there's a little saving perhaps could be made by greater efficiency. But the idea is, as you've rightly flagged, to get control over it.

The second thought would be that health now is going to be very much in the regions, and the question is—more full-bloodedly in the regions. The question is: How does one get an internal Stability Pact to work? And you can see other European countries—Belgium, Spain—grappling with this problem in different ways, some believe the routes that Spain is going, others go routes of internal understandings. And there the deal with the regions now, which was basically conceived in the summer, seems to us rather promising in terms of saying, look, if you spend more, you have to tax more or cut something else. It sounds more credible. Italy, far from alone, Italy has had this problem of saying we'll give you so much money to the regions, and then actually they've had to top it up. Hopefully this reform will work. It's got a reasonably fair wind, I think.

The third thing is there are some micro aspects to the slippages, and there the decision taken before the present government took power this year to abolish copayments, medical copayments, is, I would describe this, pretty unfortunate in terms of trying to get some reasonable discipline. You mentioned other areas like public pharmaceuticals.

MR. MILESI-FERRETTI: Yes, the pharmaceuticals, just this now—a good aspect of this proposal is this notion that you would refund—provide refunds on the basis of generics' prices because pharmaceutical—expenditures in pharmaceuticals have been rising very, very fast. This is one of the main components of [inaudible].

QUESTIONER: Two questions. Do you see any differences in the attitude of the new government as opposed to the last government as towards the public expenditure or the IMF economic goals? And, second question, were you surprised by the negative comments, criticism by the Italian central bank towards the last IMF reports on Italy and on global growth?

MR. WATSON: I think that if you break it up into chunks, the slimming down of central government employment and the effort to redeploy people to the regions and so forth, the numbers were falling over the last few years. And in that area, I think quite a lot was underway.

In health, I think that the attempts—there were genuine attempts to get a better system of control of health care spending, and there was a sort of reform that was—if I remember rightly, in 2000 there was a reform which was underway with various, fairly complicated financing things. The efforts were the same, but they weren't succeeding. Let's hope that this effort on health does succeed.

And in the area of pensions, I think, which is clearly very important, in that it, of course, does remain to be seen. The Brambilla report, I think it's right to say, is not a set of recommendations. It sets out a set of issues that need to be looked at, and the question is which of those prove possible to grab and to implement. And that will probably be, as I said earlier, one of the litmus tests.

On the comments on growth, one or two of Governor Fazio's comments caught my eye. His criticisms were expressed so gracefully and with humor that they were taken in the spirit intended, and I took it that the spirit intended was a call for some humility on the part of forecasters, that they haven't a monopoly of wisdom about what's going to happen to growth.

But, as you know, the Fund and the OECD have been revising downwards at times a little bit ahead of the curve of a number of national forecasts, and if by chance we have now gone too far, we would be pleased rather than sorry, as you can imagine.

There are elements of uncertainty. The fall in oil prices that's going on is just an illustration of another uncertainty.

So I read these as a call to humility on the side of forecasters, which was taken in the spirit intended.

QUESTIONER: I would like to ask you, what kind of assumptions—what are the main assumptions you have taken into account in estimating especially the growth of Italy for this year, especially next year? What kind of international scenarios have you expected, for example, war, Italian and military contribution to the war? And at the beginning of your intervention, you said that, of course, the Italian Government program is encouraging, but much more has to be done. I would like to ask you whether the figures you have already published on the expected growth of Italy for next year do take into account the possible improvements you have suggested to the Italian Government or are they only based upon the current program of the government?

MR. WATSON: On the global scenario, probably the best—one of the best sources of that is on the Web, and it is the Managing Director's statement on the global situation, which, apart from words—and this was posted on November 15 in the Ottawa context—it also has quite a nice table showing growth for the key areas and how it's changed from the WEO.

But to give you a sort of basic reference point, this is on a scenario where the U.S. grows by 1.1 this year and 0.7 next, and where the EU, the whole European Union, grows by 1.7 this year and 1.4 next.

On the question of growth, the answer is that some elements of reform are built in here, largely the ones that have really happened. For example, there is some impact build on of the Tremonti-bis and so forth. But what is clearly not in there is the potential effect on expectations, investment and so forth of what might come out of the area of what I would call the pension/labor market kind of reforms. Those don't yet—they're not yet there. They're not yet in the numbers.

You'll find, again, in Box 3 of the Staff Report some different scenarios, reform scenarios, baseline scenarios, which try to explore those numbers and sort of illustrate what might be achieved. And they illustrate, for example, a reform scenario with slightly more ambitious fiscal targets, slightly less tax cuts than the government has, and quite a sobering path for public expenditure that's implied, although I think there was a number out there in some early reports of 24 billion, was it, of cuts of public spending, which was slightly misleading.

MR. MILESI-FERRETTI: Yes, let me just say one word quickly on growth. One of the reasons why the growth rate for 2002 is low is that the general assumption is that the recovery would come a bit later than expected. And for purely statistical reasons, when you have weak fourth quarter of 2001 and less than brilliant beginning of 2002, even if growth picks up very fast towards the end of the year, that would still keep you a low growth rate for 2002. It is just a statistical fact, even though you may have quite rapid growth by the end of 2002.

QUESTIONER: Unless you did the fourth quarter on fourth quarter.

MR. MILESI-FERRETTI: Unless you did—exactly. The fourth quarter on fourth quarter would be much higher than the—

MR. WATSON: The year.

MR. MILESI-FERRETTI: Exactly. That's exactly right. That's exactly right.

On the numbers that were circulating on slashing public expenditure, my guess is that they are taken from one of the tables—Table 4 in the Staff Report which outlines these three possible scenarios that we have constructed.

I should emphasize that the one we call the reform scenario, which is the one we favor, has a decline in public spending as a ratio of GDP. But quite a significant part of it is driven by a decline in interest payments because of the decline in the public debt. And if you net those out, your overall decline in the ratio of public spending to—primary spending to GDP is much more modest than 24 trillion, which would be 1 percent of GDP per year. It's something above 3 percent over five years, makes about 0.6 percent per year.

And I should also emphasize that this number is low—is a smaller number, a somewhat smaller reduction than the one that is envisaged in the government's medium-term plans. So overall a reduction in primary spending would be considerably below the number provided in this 24 trillion. And you should also take into account that 24 trillion is calculated statically, but you have GDP which is growing over time. So 24 trillion is above 1 percent of GDP today. It's not 1 percent of GDP five years down the road as prices go up and GDP goes up.

MR. WATSON: There was another question?

QUESTIONER: Yes. I know you touched on this slightly. Just to clarify, the comments in the PIN about the ECB, about monetary conditions still being tight, that's not to do with the ECB.

MR. WATSON: Let me try to be clear. If you take Italy within the euro area, as you might take a large state in the United States, relative to Italy's economy with its quite large output gap, monetary conditions are a little on the tight side for Italy, just as they would be a little on the easy side for some of the other economies which are more cyclically advanced. So this is a reflection on the impact of interest rates and to some degree the exchange rate on Italy, but it's not a suggestion that it calls for any change in the central policy, monetary policy of the euro area. But in order to try to assess what's going to happen to Italy, one needs to stack up a little bit where are monetary conditions, where is the fiscal impulse. We try to do that in each of the countries as we go around, and then, as you know—as we have done—we publish a report on the euro area as such, and that's the report that discusses the pros and cons of ECB monetary policy itself. So this is a product but not a source of discussion of the policy, if I can put it like that.

QUESTIONER: Do you think the ECB has done the right—needs to go further?

MR. WATSON: Well, we have a self-denying rule where we don't discuss ECB policy, but you will find the Managing Director discussed it in his remarks in Ottawa, which is sufficiently recent to give you a feel.

QUESTIONER: Do you believe that Italy has a sufficiently liberalized and open capital market for an advanced economy?

MR. WATSON: That's a good question. In a formal sense, it obviously doesn't have restrictions. There are two or three areas where for the economy to grow and all that, you would need to see evolution, and they're not really areas that are under formal regulation. I'm saying that there probably are some things in securities markets, but they're not the big things that would jump at you. I think the things that would jump at you, one I mentioned is this bankruptcy law question. As you put it, by analogy with the U.S., one way of putting it, clearly, would be perhaps Italy doesn't have a Chapter 11 and it doesn't have quickly operating courts. So this is a bad place to be because the combination of those two things, slow courts and a fairly formal bankruptcy procedure that doesn't provide ongoing management. That's really critical for the financial sector.

The second point is that the Italian banks have notably diversified their income, and they've diversified it to a high degree from internalizing the gains from money market mutual funds and all that, investment trusts and so on, so that those are largely within the banking groups, and they've achieved already a lot of what can be done in income growth out of that area, which ultimately is an area where margins can be competed down. So then the question is: Have they done enough to expand other areas of fee earning and to cut costs, contain costs? And I guess that there we and the Bank of Italy would see it exactly the same way, which is there is a good deal more to do in containing the growth of banking costs and continuing further types of income diversification.

Then, lastly, the question, you know, why the securities market is not highly developed. It's been growing. What is it that—is there something that's impeding that. And maybe there something that will help a little bit is the government's efforts to get more transparency, to get better disclosure, and more clear and effective tax collection. And you see tax collections in Italy just rise relative to GDP, I mean, structural tax reform.

As the system gets more open and transparent, people have less to lose by issuing quoted securities, but that's a gradual process. Are there other things that strike you perhaps?

MR. MILESI-FERRETTI: Well, no, the only thing I would possibly mention, and it's within the plans to develop private pension funds here, probably, you know, a larger role for other types of institutional investors once these take off.

MR. WATSON: And in Italy, of course, there's scope—you're thinking to kick-start that a bit with the TFR (Trattamento Fine Rapporto).

MR. MILESI-FERRETTI: Exactly.

QUESTIONER: You mentioned before that the IMF will be patient until next spring in evaluating the efforts of the Italian Government. What will happen next spring if Italy doesn't comply with the expectations of IMF?

MR. WATSON: Well, that sort of puts it as if we have a very medical idea of what should be done. But the sense of your question, I think the most important thing that will happen is that if the reforms don't reach very deep, then growth will be slower. I mean, that's always a difficulty because, in a way, when you make reforms, you shake up people's expectations. And you can see that [inaudible], you never know the effect of a reform completely. You don't know what people are truly expecting. You know, if you improve the equity and efficiency of pensions and you move social transfers a little bit from old-age type of transfers to other kind of income-targeted transfers, what were people expecting?

Some people will suffer. Other people will gain a bit. But I think the main effect would be to instill a sense of forward movement, of a reform agenda that has gone through consultation, which I think is quite important because, I mean, some previous experiences have just resulted in a shock and a stand-off, gone through consultation, then been pursued. Then you should see somewhat higher growth over the medium term than we have in our numbers, I would think. That would be the main effect.

As for our own assessment, which is really the tail on the elephant, for our own assessment, if that was your question, I guess we would be going back again next summer. Or I won't personally because I am literally finishing in a few days my work on the regional questions in our department, but I'm sure that Gian Maria will be going back next summer with other colleagues.

MR. MILESI-FERRETTI: Next summer for the next Article IV.

MR. WATSON: For the next Article IV consultation, indeed. My thought around next spring, why did I say next spring? You won't find these words anywhere in the reports. It was because I guess it's going to take a number of months to get through these consultations, and yet if one doesn't get somewhere by the spring, how can you affect the fiscal outcome next year very much? It's normally, I guess, around March, April, one gets the second look at the budget, how it's all developing. That might be an opportunity to do a few improvements.

QUESTIONER: May I ask just a personal question? Italy is perhaps the only country between the G-7 countries which is really paying attention to what the IMF is suggesting in terms of the newspaper's attention for your regular visits there, et cetera. And, in fact, perhaps it's the only country between the G-7 countries which doesn't comply with the indications of the IMF. Is that a little frustrating for you?

MR. WATSON: That's a delightful question.

[Laughter.]

MR. WATSON: I've worked, I guess, in the last decade on more than half a dozen industrial countries in Europe, and I guess the press attention in Italy is the most active—I really hesitate to say this, but the best informed in many cases. It really—when I come out of the hotel in Italy, I mean, people are really curious to know, and these are informed questions, targeted questions. It's very interactive. It's very interesting, but dangerous at times. You wonder what you'll end up saying as you walk out of the hotel and how the headline will come out. Usually they come out fine, with a few glitches.

So, yes. And why? I guess traditionally the IMF was quite involved in Italy. I mean, the United Kingdom actually, which is my native country, judging by when I go there, quite often, and from what people say, the IMF's views on public expenditure things also get quite a lot of coverage. And, remember, the U.K. was another country where the Fund was engaged in programs really within living memory in a sense. Belgium, also, a lot of attention. But I take your point. There's a lot of attention.

But I don't quite agree that when you said, I'm sure slightly ironically, Italy is the only one that sort of didn't follow all of this, you know, given that our preoccupations are essentially macroeconomic and then, through macroeconomics, you know, including growth, but macroeconomic stability is always around here very high on the agenda. In terms of macroeconomic stability, Italy has had a remarkable performance, remarkable. I don't know if the Fund can claim much credit. There have been episodes perhaps when the Fund was consulted a bit and was—or was lending money back, way back. But the progress recently has been staggering under the whole Maastricht and Stability Pact system, been really impressive on the macroeconomic front.

And on the structural front, I think many European countries are struggling to find ways of liberalizing structural policies without getting completely gridlocked in terms of social dialogue. And you can see family resemblances in Europe, whether it's part-time work and temporary work, whether it's the building of additional pillars of pension reform, of pensions systems, make it rather easier at the time to make the state pillar more efficient, whether it's on product markets where people are attacking the network industries and say, well, did we deregulate enough, and that's something Italy's grappling with in electricity, for example.

I can see a lot of family similarities on the structural front between Italy and other European countries. And if you ask me did I find it frustrating, I mean, you asked a personal question. A personal answer is that work on Italy is among the most interesting work I've done in the Fund. It is, and partly because so much has been achieved and partly because the potential is so considerable, I think, for what could be achieved.

QUESTIONER: I just wanted to check whether the CPI forecast for this year is still the same, 2.6.

MR. MILESI-FERRETTI: Yes, it's the same as the—

QUESTIONER: As in the report?

MR. WATSON: 2.6 from 1.4. And the way things are going, you know, for next year inflation—I would put the risks on the optimistic side on inflation next year. I think we'll stay with the forecast, but when you look at oil prices and so forth, moderate wages, a better inflation forecast next year is certainly not ruled out.

MR. MILESI-FERRETTI: And the GDP forecast is 1.2 now.

MR. WATSON: Is 1.2, with humility, for next year.

[Laughter.]

MR. WATSON: That was the one which was released in Ottawa, and understandably, when some of these papers escaped—some escaped perhaps slightly early somewhere, the number of 1.4 hit the press, which was a little bit out of our control.

MS. LOTZE: Okay. Thank you very much.

MR. WATSON: Thanks very much.