Italy has the largest public sector of all developed countries. Until now, up to 50% of the economy and 70% of the country’s banking system has been under state control. Italy has one of the highest indicators of GDP production by the public sector among developed countries and the share of state-owned enterprises in the total number of companies. The result of this expansion of the public sector was a huge budget deficit and a very significant level of public debt, an extremely inefficient, bloated, corrupt public sector, high inflation and unemployment. The Italian public system began to be called “stable instability”, because there were too frequent changes in the composition of the government, there were constant scandals and revelations related to the activities of the mafia and corruption in the state apparatus. but the general course of the government has not changed. Italy has the glory of the most regulated country in Western Europe, in which there are almost 150 thousand different laws, and bureaucracy and red tape brought the time of creation of the company to 2-3 years.

Finally, during one of the operations to expose corruption among senior government officials, dubbed “Clean Hands”, such blatant facts of criminal activity of the state apparatus were revealed that the country’s public opinion simply rebelled against the previous system. As a result, the political and economic course of the government in the early 1990s underwent significant changes. Changes in the Italian economy became necessary in connection with changes in the world and European economy. In the 1990s, the military confrontation between East and West ends, Europe continues to unite, and European integration enters the next stage of its development. The formation of the European Monetary Union and the introduction of the euro pose new challenges for EU member states. If the Maastricht criteria for currency convergence assume low inflation, interest rates, budget deficits and public debt, respectively, at 3% and 60% of GDP, Italy in the early 1990s did not yet meet these requirements. In 1992, Italy had a budget deficit of 9.5% of GDP and a public debt of 108% of GDP. In addition, integration implied EU  control over state subsidies to various sectors of the economy. In order not to be at the tail end of European economic development, Italy needed not only to end corruption in the political system, but also to unbundle the public sector in the economy through liberalization, privatization and deregulation.

In 1992, the government of Silvio Berlusconi, a well-known businessman-TV mogul and supporter of the free market, came to power. The priority areas of reform are:

1) improvement of public finances by reducing the budget deficit and public debt;

2)  reduction of inflation;

3) accelerated privatization, and the transfer of state-owned enterprises into private hands was supposed not only to increase their efficiency, but also to bring the state considerable revenues from privatization;

4) stimulation of investments by reducing the level of taxation and introducing tax incentives;

5)  combating unemployment, especially youth unemployment, which is 30%.

  The policy of S. Berlusconi was called the “policy of austerity”,  since it implied the following measures:

– formation of a rigid state budget;

– limiting wage growth; since 1993 – revision of the payroll system. Abolition of wage indexation depending on the level of inflation; linking wages to productivity; monitoring wage growth in the public sector;

– change of the pension system; increasing the retirement age; changes in the procedure for calculating pensions;

– changing the health care system; reduction of free medical services.

As a result of reforms, the public sector in Italy began to shrink, production efficiency began to increase, new jobs began to be created, and public finances gradually recovered. Already in 1996, the budget deficit amounted to 6.7% of GDP, inflation was lower than in the UK (only 2.2%). However, it was not possible to stop the growth of public debt, which reached 124.4% of GDP; unemployment was 12 per cent and the share of the public sector remained at 53.4 per cent of GDP. Thus, the main result was  a decrease in inflation and the budget deficit.

The attack on the social rights of Italians led to social conflict in society and, as a result, the change of prime minister. It was Romano Prodi, who formed a center-left government. Berlusconi became the leader of the parliamentary opposition. The main task of the policy of R. Prodi was to bring Italy to a leading position in the EU, and, first of all, compliance with the criteria of currency convergence in the transition to the euro.

The priority was: the fight against inflation; lower interest rates; the continuation of market reforms and the democratization of Italian society. To implement these tasks, there were programs to control the level of inflation, a system of restrictions on public spending and further reduction of the public sector in the economy. The fight against corruption and organized crime continued. Privatization began to be carried out in the banking system. The sale of a 36.5% stake in Banka di Roma alone generated more than $1 billion. revenues to the state budget.

The most radical changes occurred in taxation. The corporate income tax rate was reduced from 53.2% to 37%, while VAT was increased. In general, the level of taxation in Italy can not be considered high. Taxes amount to 41% of GDP, which is not too much for Europe, but at the same time up to 15% of GDP is a tax evasion.

The main problems facing the country’s economy are: firstly, the choice of the path of further development;  secondly, the need to overcome differences in the regional development of the national economy. Until the late 1990s, Italy pursued a non-conservative course in its economic transformations. This course was exemplified by countries such as the United States and the United Kingdom. Nevertheless, an increasing number of Italian politicians, taking into account the wishes of their voters, are in favor of a socially oriented market state, the model of which for them are Germany and France.

As a result of the reforms, in  1998 alone, 12,000 small and medium-sized enterprises were created in Italy, a large part of which were youth firms.  Small and medium-sized firms provide about 30% of all jobs in the country.

Italy managed to achieve social harmony in society. Wages, as well as the number of jobs created, are growing; the former “black labor market” is gradually being eliminated.

The Italian model of the ratio of small, medium and large businesses is completely unique. In the 1950s and 1970s, economic growth led to the popularity of mass production and the predominant role of large companies. The region of basing of large companies was the North-West of the country. Especially many such enterprises are located in the so-called triangle of Turin – Milan – Genoa. The period of the 1970s and 1990s was a real boom in the development of small and medium-sized enterprises.

Currently, on the basis of small and medium-sized businesses, a “third Italy” has arisen – a region of the country covering the Center and the East. Here is concentrated the        largest number of companies producing textiles, clothing, shoes, furniture, ceramics. In addition, there are modern highly efficient production facilities in areas such as mechanics and mechanical engineering.

The Italian model of economic development is distinguished, first of all, by the strength of small and medium-sized businesses. Italian small and medium-sized enterprises are extremely efficient. About 70% of employment in the country is provided by companies with a staff of less than 50 people, including 30% of all those employed in the economy are individual entrepreneurs developing family business.

However, the most difficult task for Italy remains the normalization of the situation in public finances and, especially, bringing the level of public debt in line with the Maastricht criteria, which at the end of the XX century was equal to 121.6% of GDP.