Ignazio Visco: Overview of economic and financial developments in Italy
Concluding remarks by Mr Ignazio Visco, Governor of the Bank of Italy, at the Ordinary
Meeting of Shareholders 2013 - 120th Financial Year, Bank of Italy, Rome, 30 May 2014.
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Ladies and Gentlemen,
Since last autumn, monetary policy in the euro area has been faced with a scenario of very
low inflation inconsistent with the objective of price stability, in a setting of persistently
modest and uneven economic growth. Work directed to the launch of the Single Supervisory
Mechanism in November has been stepped up and the advance towards the completion of
Banking Union has continued. Substantial headway has been made in the full operation of
the single euro payments area. In Italy, the road out of the most acute phase of recession
has been rocky at times owing to political uncertainty. The recovery has not found a firm
footing, making it all the more urgent to proceed with reform action.
For the Bank of Italy, the most important change has been in ownership structure. Our
commitment to modernizing the Bank's organization and management systems has been
strengthened, and operating costs have been further curbed. The results for 2013 permit us
to submit to this Shareholders' Meeting a proposal for the distribution of profits which, in
addition to the allocation to the provision for general risks, calls for the assignment of
adequate resources to reserves against the risks connected with the crisis. Taking market
conditions into account, the proposal is for the distribution to shareholders of dividends
amounting to €380 million, with the remaining €1.9 billion going to the State, in addition to
taxes of €1.6 billion for the year.
The reform of the Bank of Italy's ownership structure, enacted by Parliament, involves
technical complexities that have distracted public attention from the objectives that have
been attained. The new arrangements maintain the model of shareholding centred on the
financial industry, a feature shared with other major central banks. They reaffirm that
shareholders have no power to influence the Bank in fulfilling its institutional functions. They
supersede anachronistic and anomalous features that had developed over the decades.
They make the process of profit distribution more transparent. And they clarify,
circumscribing them, the shareholders' economic and equity rights. Shareholders continue to
have no claim on the Bank's foreign exchange and gold reserves, whose public function is
beyond question.
The value of the Bank's capital, which the law now sets at €7.5 billion (against 300 million lire
established in 1936) is consistent with the estimate made by the Bank at the behest of the
Government. This valuation, which had specified both a minimum and a maximum value,
was endorsed by experts of undisputed competence and independence. The methods and
the results were made public. The increase was accomplished by means of the transfer to
capital of a portion of the statutory reserves, without affecting the Bank's own funds and at no
cost to the public finances.
The reform avoids undue transfers of wealth to the benefit or detriment of the shareholders.
Under the previous arrangement, in addition to dividends shareholders also received an
amount proportional to the Bank's statutory reserves, which were bound to increase
indefinitely owing to the automatic reinvestment of the return on them and the allocation to
reserves of a part of each year's profits. Eliminating any claim to the statutory reserves, the
new rules entitle the shareholders solely to a dividend drawn from net profits, up to a
maximum of 6 per cent of the Bank's capital, hence not more than €450 million. Amounts
increasing over time with no limit have been replaced by a dividend that is higher initially but
subject to a fixed ceiling.
The concentration of shareholdings in the hands of the main banking groups fuelled the
erroneous but persistent perception of possible interference in the Bank's performance of our
institutional functions. The reform has broadened the potential shareholder base, capped
single institutions' stakes at 3 per cent and instituted effective measures to foster a
redistribution of shares to bring holdings down within that ceiling. We expect shareholders to
act swiftly and on their own to dispose of their excess holdings. The rights associated with
shareholding have now been defined with certainty, which favours trading in the shares and
permits transparent price formation. We shall act to facilitate this process.
The actual amount of dividends will be decided, each year, subject to the results for the year
and the Bank's capital needs. In order to foster compliance with the limit on shareholdings,
the Bank may purchase its own shares temporarily; we shall avail ourselves of this option
only if necessary and in such a way as in no case to entail any risk of loss.
The newly acquired clarity concerning the amount realizable from sales of Bank of Italy
shares and the prospect of market transactions make it possible to include them in the
regulatory capital of banks and insurance companies, which could have a modest positive
effect on the supply of credit. The shares do not form part of the banks' initial capital for the
asset quality review that the ECB is currently conducting together with national supervisors.
The Bank of Italy: an institution open to change
In performing its functions the Bank manages resources entrusted to it in the national and
European interest, pursuing the express objective of efficiency. For some time now we have
been engaged in an operation of reorganization and rationalization. The initiatives
undertaken in this regard are described at length in our Relazione sulla gestione e sulle
attività (report on operations and activities), which has a specific section dedicated to cost
trends in the last few years.
Relying on new technology, we have imparted impetus to the modernization of the payment
system and made a sizeable investment in the computerization of our branches. Since the
mid-1990s this has resulted in a steady diminution in the resources allocated to cashier and
state treasury services. The reorganization carried out between 2008 and 2010 reduced the
number of branches from 97 to 58, of which 31 have been converted into more streamlined,
specialized units. The yearly cost of the branch network has been cut by about 25 per cent in
real terms. A reassessment, open to the contribution of representatives of the staff, is now
under way on the best way to guarantee the Bank's efficient presence throughout the
national territory.
At the start of this year our head office was reorganized. In place of the old functional areas,
we now have eight directorates general, with autonomous management responsibilities. The
directorates with responsibilities for human resources have been unified. Procurement has
been assigned to a single specialized unit. The number of units assigned to administrative
tasks has been reduced.
The total staff of the Bank of Italy, including the Italian Foreign Exchange Office personnel
taken on by the Bank in 2008, has come down from a peak of over 10,000 in the early 1990s
to 7,850 on the eve of the branch reform and to some 7,000 at present. Operating costs have
been lowered by 14 per cent in real terms over the past four years.
We will continue along these lines, carefully reviewing every expenditure item. Our ongoing
reform action has lowered costs and improved efficiency, maintaining high quality service
and capitalizing on staff skills.
The reduction in resources employed and costs incurred has been achieved despite an
increase in the number and complexity of the tasks performed. European integration, with the
creation of the European Central Bank, has not resulted in any diminution of the
responsibilities of the national authorities in the field of monetary policy or banking
supervision; nor will it in the future with Banking Union.
The ECB's monetary policy decisions are taken collegially by the Governing Council, which
consists of the governors of all the national central banks of the Eurosystem, acting in the
European common interest and using for this purpose the research and analysis of their own
institutions. The ECB's own preparatory analytical work is conducted through the intense
activity of committees and working groups that bring together experts from the various
national central banks.
Our capability for economic, statistical and legal research and analysis is also placed directly
at the service of the nation, with advisory services and operational support to Parliament, the
Government and other institutions, and with activity in international forums.
The implementation of monetary policy is delegated wholly to the national central banks:
open market operations, the refinancing of banks, and the acquisition, management and
valuation of the collateral they provide in exchange for liquidity.
The central banking function includes the production and distribution of banknotes. Our
works print about 18 per cent of the euro area's paper money, with a peak last year of
1.36 billion notes. The Bank of Italy regulates and controls the activities of banks and other
cash handlers, with off-site analysis and on-site inspections involving its branch network.
Our institution develops and manages the technological platforms and infrastructure for the
clearing and settlement of domestic financial transactions. Together with the Bundesbank,
we are entrusted with operating the euro area's TARGET2 gross settlement system, to be
flanked by the TARGET2 Securities system for the settlement of securities trades in the euro
area, now under development. The Bank of Italy is the Italian national authority competent for
the realization of the single euro payments area for retail transactions. The Bank and its
branch network also manage the state treasury service. We exercise oversight of the
payment system and financial market infrastructure in cooperation with our European
counterparts. Together with Consob, we oversee wholesale trading in government securities
and post-trading activities in financial markets.
In November, with the launch of Banking Union, the Single Supervisory Mechanism created
by the ECB and the national competent authorities of the participating EU member states will
be operational. With the decisive contribution of the national authorities, the ECB will
supervise banks identified as systemically important according to specific criteria, such as
size. For Italy, this group should include nearly all the fifteen intermediaries currently
subjected to the comprehensive assessment. The national authorities will maintain direct
supervision over all the other banks - in Italy they number around 600 - according to
common standards and methodologies to ensure uniform supervisory action.
The Supervisory Board, which is charged with preparing decisions to submit to the ECB
Governing Council, is already operational. It consists of representatives of the ECB and of
the national supervisory authorities, including the Bank of Italy. Committees in which experts
from individual countries can deal with issues of common interest are already active.
The quality of European banking supervision will depend strictly on the contribution of the
authorities that have had the most experience in this field. We are now actively working to
ensure the adoption of best practices in the Single Supervisory Mechanism, collaborating
within the European Banking Authority on the design of a Single Rulebook to ensure a level
playing field. In order to participate effectively in the decision-making process of European
banking supervision, we shall extend our analysis to the banking industry and the major
banks in other countries.
The launch of the Single Supervisory Mechanism will affect the daily activities of all the
authorities involved. Off-site controls on systemically important banks will now be carried out
by teams consisting of both ECB and national personnel. Inspections will be conducted by
groups in which national staff may be flanked by members from other countries.
The Bank of Italy is also entrusted with the prudential supervision of securities firms and
asset management companies, financial companies, payment institutions and electronic
money institutions. The Bank has full jurisdiction over all intermediaries, including banks, in
matters of consumer protection and transparency. It is engaged in the promotion of better
financial awareness on the part of the general public, in particular in schools. It will continue
to provide assistance to the panels of the Banking Ombudsman for dispute resolution. Our
branches contribute significantly to these activities.
Financial stability requires a macroprudential commitment. In this context the Bank is a
member of the European Systemic Risk Board and participates in the work of the Financial
Stability Board and the G20 to complete a series of reforms to make the financial system
sounder and more resilient.
We have intensified our efforts to combat money laundering and terrorist financing, both
within our directorate general for financial supervision and through the Financial Intelligence
Unit, an autonomously managed body instituted within the Bank of Italy, which regulates the
Unit's operation and provides the necessary human, financial and technological resources.
In January 2013 the new insurance supervisory authority (Ivass) was constituted, in close
relation with banking and financial supervision. It is chaired ex officio by the Senior Deputy
Governor of the Bank of Italy, who runs it together with two Councillors. Measures with
significant external implications are decided on and issued by the Governing Board of the
Bank enlarged to include the two Councillors. Cooperation between the operational
structures of the two institutions is extensive and growing.
The public functions assigned to us, which I felt it was appropriate to recall here today,
require adequate technology and, even more, high quality human resources. The
competence, motivation and commitment of individual staff members are essential to
effective action and to the Bank's reputation. We are taking steps to ensure that the Bank of
Italy maintains its ability to attract talented young people who have successfully completed
rigorous courses of study. We are well aware that we can still improve the organization of
work, through reconsideration of the assignments and the professional development of
individual employees, in fruitful dialogue with the trade unions. I join the Board of Directors
and the Governing Board in thanking the staff of the Bank for the capability, spirit and
dedication with which they perform their duties.
The exit from the sovereign debt crisis: monetary policy, Europe, Italy
Financial conditions have improved greatly in the euro area since last year. After Ireland,
Greece and Portugal too are once again issuing government securities. Yields on Italy's
tenyear BTPs have fallen to 3.0 per cent, less than half the peak figure recorded in November
2011. The yield spread with German securities is now around 160 basis points; it had hit
550 points in November 2011 and was still 470 points in July 2012.
The contribution of monetary policy has been crucial: during the most acute stages of the
crisis it prevented the situation from precipitating; it helped allay investors' fears for the
integrity of the Economic and Monetary Union; it accompanied the implementation of
important reforms at national level and in European governance.
Since last summer there have been large inflows of capital from the emerging economies,
mainly following the announcement by the Federal Reserve of its plan for tapering monetary
accommodation. The resulting downward pressure on long-term euro interest rates could be
transient; less expansionary monetary policy in the United States could provoke a rebound in
global yields. Volatility on the financial markets in the advanced economies has subsided to
well below the historical norm, reaching levels that in the past sometimes preceded rapid
changes in the orientation of investors. The fluctuations in government securities yields in
recent weeks remind us just how sensitive the markets can be to any signs of uncertainty.
The consolidation of the public finances in the countries hit by the crisis, necessary per se
and imperative to eliminate any doubts about debt sustainability, constitutes a guarantee
against the rekindling of tensions on the sovereign debt markets in the euro area. However,
the combined costs of the recession and restrictive budgetary policies have been high. The
economy and, in particular, the labour market remain fragile.
Structural reforms make our economies more resilient to future shocks, but it will take time
for them to yield their full fruits. Income support for those worst hit by the crisis and
reemployment mechanisms for workers forced out of traditional production work can make a
contribution. In addition to expansionary policies in the countries where the public finances
allow it, concerted action at European level could help to boost investment and consumption
demand. The opportunities provided by favourable external conditions must not be missed;
the conditions for transforming the capital now available into lasting productive investment
have to be guaranteed.
Monetary policy and Europe
Monetary policy in the euro area now faces challenges somewhat different from those
addressed over the last two years. Economic activity returned to growth in 2013, but only in
part of the euro area and at very uneven speeds. The most recent data confirm this. Credit
market conditions remain difficult. Financial fragmentation along national lines has
diminished but it has not disappeared. Above all, there has been a sharp reduction in
consumer price inflation; since the middle of last year the rate of inflation has been well
below the ECB Governing Council's definition of price stability.
During 2013 we lowered the official interest rates twice, in May and in November, bringing
the cost of the main refinancing operations to an all-time low of 0.25 per cent. In July we
began to provide explicit indications of our monetary policy stance, announcing that the
official interest rates would remain at or below the then current level for an extended period,
in consideration of the outlook for inflation, the weakness of the real economy, and monetary
and credit dynamics. This forward guidance attenuated the volatility of short-term interest
rates.
The rapidity of the fall in inflation has surprised the main forecasters, who have revised their
short- and medium-term expectations downwards. This pattern has been more pronounced
in the countries directly hit by the sovereign debt crisis, but it is common to the entire euro
area. It reflects not only the fall in energy prices, compounded by the appreciation of the
euro, but also the persistent weakness of the economy. Core inflation has fallen to its lowest
levels since the introduction of the single currency.
Just like excessively high rates of inflation - and we can still well remember how difficult it
was to overcome that problem more than twenty years ago - prices that are growing too
slowly are also detrimental to financial stability, especially when public and private debt is
high and growth is weak. Excessively low inflation must be countered with equal firmness,
also to prevent it from being incorporated into medium-term expectations. The formation of
expectations is not a linear process: even large changes can materialize very quickly,
discontinuously.
Since July 2012 the euro has appreciated by an average of 9 per cent against a basket of
other currencies; against the dollar it has gained 12 per cent. The appreciation began
following the announcement of Outright Monetary Transactions, which allayed fears about
the reversibility of the single currency that had turned investors away from financial assets
issued in some euro-area countries. The exchange rate is not in itself a monetary policy
target, but at this stage the euro's appreciation has compressed consumer price inflation,
both directly, by reducing the prices of imported goods, and indirectly, by increasing
competitive pressure on domestic products.
Eurosystem inflation projections will be made public on 5 June. According to those published
in March by the ECB, inflation is expected to remain well below 2 per cent over the next two
years. This is not consistent with our definition of price stability. If this pattern is confirmed,
the Governing Council is determined to act, even with unconventional policies, to ensure that
in the medium term price developments do not diverge from the desired path.
Albeit in a situation of emergency, and not without some hesitancy, European policies have
achieved significant progress during the crisis: the strengthening of fiscal rules, the extension
of multilateral surveillance to macroeconomic imbalances other than those of public finances,
the establishment of common funds for financial assistance to countries in difficulty, and the
launch of the Single Supervisory Mechanism.
As I have observed on other occasions, the euro is a currency without a state and suffers
from this deficiency. To complete the journey towards integration other essential elements of
sovereignty need to be shared; Banking Union, now being implemented, should be followed
by the creation of a true common budget. Designing instruments that will make it possible to
intervene in support of economic growth and better public welfare would help the European
Union to regain the consensus that has been partially lost.
In the shorter term, the central bank can support domestic demand through the pursuit of
monetary stability. But the return to sustained and balanced growth requires broader
economic policy action at European level. Measures must be taken immediately to speed up
the creation of infrastructure, both tangible and intangible, indispensable to the formation of a
true single market. Joint intervention would help to give market expectations a positive
orientation.
The Italian economy
In Italy, the long recession in progress since 2008 with only a brief interruption came to a halt
at the end of last year, mainly thanks to foreign demand and to the reduced need for fiscal
adjustment. A contribution came from the accelerated payment of general government
commercial debts. A real recovery is struggling to get under way, however. The gradual
improvement in expectations has been slow to translate into a solid upturn in economic
activity.
The recession has left a burdensome legacy. Many Italian companies have managed to
safeguard their shares of foreign markets and some have increased them; the current
account is back in surplus, even on a cyclically adjusted basis. But the contraction in
domestic activity has been dramatic: industrial production has shrunk by 25 per cent overall.
In the last quarter of 2013, while exports were almost back to the same level as at the end of
2007, household consumption was still down by about 8 per cent and investment by 26 per
cent, with a capacity loss in manufacturing of approximately 15 per cent. Although there are
signs that confidence is picking up, the need to compensate for the erosion of accumulated
savings and uncertainty about prospective income in the medium to long term will continue to
weigh on household consumption. Household spending can benefit from the recently
approved tax cuts, but it will not become the driving force of the recovery without an enduring
increase in employment.
The recession has had a heavy impact on the number of persons in employment and hence
on household income. Between 2007 and 2013 employment fell by more than a million, with
almost all of the contraction in industry; the average number of hours worked also
decreased. The unemployment rate has more than doubled compared with the low point of
2007, reaching 12.7 per cent in March. The supply of jobs will only begin to rise slowly;
usually the first variable to react to an increase in output is the number of hours worked per
employee.
We must not underestimate the risk that a further lengthening of the duration of
unemployment - and there are signs of this particularly in the South and among the younger
population - may erode individual skills and know-how and distance them from those that
firms require. In the past, deep recessions have been associated with extensive restructuring
of the productive system that has resulted in the introduction of new labour-saving
technologies and organizational models. But the crisis can be the occasion for our firms to
carry out and extend what up to now has often been missing: a profound renewal of the
mode of production in connection with the digital revolution, which can give life to new forms
of enterprise and employment in new fields of activity.
Productivity gains and employment growth can go hand in hand if domestic demand revives.
The key is the growth of fixed investment, which forms the linkage between demand and
supply. On the one hand, given the right external conditions, investment is the demand
component that reacts most promptly to changes in expectations, while on the other it
bolsters supply capacity by exploiting technical progress and responding to the globalization
of markets and production processes.
The ratio of gross investment to GDP has fallen by 4 percentage points since 2007, reaching
a post-war low of 17 per cent in 2013. The difficulty of many firms in accessing bank credit
has been a factor. But it is above all the widespread uncertainty over the prospects for
demand growth and the orientation of economic policies that is responsible for
postponements and cutbacks of plant restructuring and expansion plans.
Towards the end of 2013 opinions of the conditions for investment became more favourable,
especially among the largest companies. In manufacturing industry, spending plans suggest
a stabilization this year, thanks to the support of the capital goods component. These first
positive signs can strengthen if the business environment improves.
Economic policy measures that act on both the demand and the supply side in a
comprehensive, consistent framework can support economic activity in the short term and
lend strength to the reform project. If that project is vast, vigorous and credible, it can alter
the course of expectations, reinforcing the growth of investment, employment and
consumption. The response to the acute phase of the crisis was notable, but the results have
suffered from the fragmentary nature of the interventions and from the incomplete
implementation of many of the measures adopted, in some cases owing to successive, at
times substantial revisions made to them soon after.
It is important to build on the foundation of what has already been done. For example, thanks
to the measures in the service sector, the OECD indicators show that Italy is now more open
to competition. But at the end of last year only half of the implementing measures envisaged
by the 69 reform laws passed between November 2011 and April 2013 had been issued. In
the field of taxation, the rapid implementation of the enabling act can ensure greater certainty
in the application of rules and sanctions and make the fight against tax evasion and
avoidance more effective and closely targeted.
The main shortcomings of our economic system and the prospects for reform, which are also
the subject of the National Programme that the Government presented in April, are examined
in a chapter of this year's Report. The list of areas requiring action is long; among the most
urgent interventions are those to safeguard legality and efficiency in the public
administration.
Corruption, criminal activity and tax evasion not only undermine the community but also
distort the behaviour of economic agents and market prices, reduce the effectiveness of
governmental action, increase the tax burden on those who do their duty, and compress
productive investment and job creation. A well-functioning public administration improves the
operation of markets and competition, reduces firms' costs, and is reflected in the quality and
cost of public services and thus on the tax burden. The efficacy of the reforms depends on it.
Restrictive regulation and a legal and institutional environment that is unfriendly to
entrepreneurial activity hamper the transfer of resources towards the more efficient firms and
sectors and the growth of productivity. The same elements also affect the Italian economy's
ability to attract investment from abroad, which is very poor compared with other economies,
ultimately curbing the diffusion of innovative technologies and managerial practices. For
potential investors, both Italian and foreign, the lengthiness and complexity of administrative
procedures pose the most significant obstacle.
In many cases the benefits of reforms are inevitably deferred. This is true, for example, of
interventions on the education and training system, a subject to which we have dedicated
another chapter of the Report. But this is no reason to postpone action. The level of
education and skills on which the Italian productive economy can count is inadequate: a
recent OECD survey ranks Italy last for functional literacy and next to last for numeracy; the
gap with the average of the other countries is also found among the younger age groups and
increases with the level of educational qualification.
Important progress has been made in adjusting the public finances. The deficit is equal to
3 per cent of GDP, below the European average. With Germany, Italy has the highest
primary surplus in Europe, and Italy is close to achieving structural budget balance. The
reforms of the past years have reduced the pressure of demographic trends on public
expenditure, pressure which instead remains strong in many other countries of the Union.
The lowering of the ratio of debt to GDP remains the ineluctable challenge for our country; its
speed depends on a return to stable, rapid growth. Economic growth and budgetary balance
can only be pursued in tandem.
The results won with so much sacrifice must not be squandered. They make it possible to
undertake actions in support of growth, for example by continuing to shorten the payment
times of general government entities and to reduce the tax wedge on labour. The budgetary
rules that we have agreed in Europe and transposed into our national law are aimed at
ensuring the long-term sustainability of the public finances. The margins of flexibility that they
afford can be exploited as part of a cogent strategy of structural reforms directed at clear and
credible objectives.
Careful action to recoup efficiency in the public administration, conducted as part of the
spending review, can assist a reallocation of expenditure to the benefit of the more
productive items. This objective should be accompanied on the revenue side by greater
reliance on the less distortionary items at both central and local level.
The endowment of infrastructure, in which Italy is inferior to the other main European
countries, influences firms' productivity, their choices of where to locate and the quality of life
of the population. The delays accumulated in the past decades reflect not so much
insufficient resources as inefficiency in their use, but in the last four years public investment
expenditure has diminished by nearly 30 per cent. European resources and private capital
can contribute in greater measure to the financing of infrastructure and territorial protection,
with benefits for the building industry, which has been hit especially hard by the recession.
Banks, credit, supervision
In Italy, more than in other countries, the banks play a central role in financing the economy.
Their business is concentrated in the traditional intermediation of savings, mostly within the
country. This is one reason why they withstood the initial impact of the crisis, which
originated in foreign markets and speculative financial products. In recent years, however,
they have been badly hit by the protracted recession and the sovereign debt crisis. Our
Annual Report details the role of the banks in the intermediation of Italians' savings; the
Report on Operations and Activities describes the supervisory action of the Bank of Italy.
Bank loans to households and firms at the end of 2013 exceeded €1.4 trillion and 90 per cent
of gross domestic product. Credit accounts for almost two thirds of firms' financial debt. More
than one third of househo