Italy has embarked on a wide-ranging strategy to restore fiscal sustainability and improve long-term growth. Combined with measures at the euro area level, these welcome actions have reduced downside risks and the economy should emerge from recession during 2013. However, with the public debt-to-GDP ratio nearing 130% and a heavy debt redemption schedule, Italy remains exposed to sudden changes in financial market sentiment. Large and sustained reductions in public debt are therefore the top fiscal priority. The gains from recent structural reforms must also be consolidated and further measures to promote growth and improve competitiveness need to be implemented, to return Italy to healthy growth.