Ignazio Visco: Overview of economic and financial developments in Italy
Concluding remarks by Mr Ignazio Visco, Governor of the Bank of Italy, at a meeting (public,
not restricted to shareholders alone) for the presentation of the Annual Report 2015 -
122nd Financial Year, Bank of Italy, Rome, 31 May 2016.
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Ladies and Gentlemen,
This year for the first time the presentation of these concluding remarks does not coincide
with the Ordinary Meeting of Shareholders called to examine and approve the Bank's annual
accounts. That meeting, as you may recall, was held on 28 April, and starting next year it will
be held by the end of March, as provided for in our new Statute. This is in line with the need
that has arisen within the Eurosystem to approve and publish the annual accounts of the
euro-area central banks according to a common deadline.
Our financial results for the year, then, are already known; let me briefly summarize them.
The monetary policy operations conducted in response to the crisis led to unprecedented
growth and recomposition of the assets of the national central banks, with the Bank of Italy
posting an increase of €57 billion in 2015; the gross profit for the year amounted to
approximately €6 billion, practically unchanged from 2014. Given the increased size of the
balance sheet and the risks associated with the progressive implementation of the asset
purchase programmes undertaken in furtherance of monetary policy aims, the provision for
general risks was increased by €2.2 billion. The Bank of Italy's net profit of €2.8 billion was
allocated as follows: €300 million to the ordinary reserve and a dividend of €340 million to
shareholders, the same as last year; the amount allocated to the State was €2.2 billion, in
addition to €1 billion in taxes.
The transition period that Parliament allowed for shareholders to dispose of their holdings in
the Bank's capital in excess of the 3 per cent ceiling expires at the end of this year. As of
April, almost 14 per cent of the capital had been transferred to 50 new shareholders. A plan
has also been drawn up to make the secondary market for the shares liquid.
In its internal management, the Bank has pursued the strategic objectives of consolidating
and further strengthening its role within the Eurosystem, improving its services to the public
and making more efficient use of resources. This year I will present the Report on Operations
and Activities that the Bank is required by law to make to Parliament. Here this morning I will
touch on the major events.
In 2015 we launched a new plan for the rationalization of the branch network to improve
service quality and achieve permanent cost savings. With the closure of 19 branches and
3 detached supervision divisions, chosen on the basis of local demand for the services of
each, the network now consists of 39 branches; there were 97 in 2008. With the definitive
abandonment of the old provincial branch structure, the branches located in the regional
capitals play a central role in the Bank's new configuration.
The larger branches will now take on greater responsibilities in supervising financial
intermediaries, safeguarding the interests of bank customers, performing monetary policy
operations, and handling the circulation of banknotes and coins. To meet growing public
demand, four new Banking and Financial Ombudsman panels will be established by the end
of this year in Bari, Bologna, Palermo and Turin, joining those already in operation in Milan,
Naples and Rome.
After lengthy talks with the trade unions, we have made highly innovative changes to our
personnel regulations. The reform reduces the number of hierarchical levels, fosters the
organization of work by objectives, and envisages pre-determined terms of office for
executives, review of managers' performance by peers and colleagues, and a strong
emphasis on the diversity of skills and professional profiles among our staff. The new
organization aims to promote the constant development of our human capital, favour
demographic turnover, encourage staff to take on responsibilities, and streamline
decisionmaking processes.
In order to create a working environment that guarantees respect, inclusion and well-being
for all, the Bank made nurturing diversity one of the objectives of its strategic plan for the
three-year period now nearing an end. In keeping with this philosophy, the Bank stands
ready to apply in full the principles laid down in the new law introducing and regulating civil
unions and strengthening the provisions concerning cohabitation.
The European Single Supervisory Mechanism has been in effect since November 2014. The
staff of the European Central Bank and those of the national supervisory authorities
cooperate closely; the joint supervisory teams responsible for the supervision of the most
important banks operate in a setting that exploits the diversity of experience. We are
committed, along with the other system authorities, to guaranteeing the complete
development of common supervisory practices.
After the Bank of Italy's designation as the national resolution authority for banking crises
under the new Single Resolution Mechanism, we instituted a Resolution and Crisis
Management Unit which reports directly to the Governing Board. The Unit intervenes in crisis
management, works with the Single Resolution Board, and oversees the liquidation of banks
and financial intermediaries.
The Bank of Italy endeavours to prevent money laundering and terrorist financing in Italy,
working directly with its Directorate General of Financial Supervision and Regulation and
through the Financial Intelligence Unit (FIU). The system assessment recently conducted by
the Financial Action Task Force (FATF) acknowledged its efficacy and full compliance with
global standards; its competencies and autonomy make the FIU an essential support in
investigations and legal proceedings. Targeted regulatory intervention in accordance with the
new European rules and with FATF recommendations could be achieved with the
transposition of the Fourth EU Anti-Money-Laundering Directive. In 2015 the number of
suspicious transaction reports continued to increase rapidly; cooperation with other Italian
and foreign authorities has deepened, a particularly important factor in the fight against
terrorist financing.
The TARGET2-Securities platform for the settlement of securities transactions in central
bank money, which the Bank of Italy manages jointly with Deutsche Bundesbank, began
operations last June. The launch of this complex infrastructure, developed with the central
banks of France and Spain, was a success; the Italian financial system migrated to the new
platform on 31 August. By the end of 2017 the TARGET2-Securities platform will be settling
securities transactions in 21 countries. This marks an important step towards the full
integration of European financial markets. With the completion of this project, we have further
consolidated the Bank's long-established role as provider of high-tech services to the
Eurosystem, such as the TARGET2 system for the gross settlement of euro-area payments.
We have increased our media presence. The serious episodes involving some Italian banks
have spurred us to redouble our efforts to explain, in rigorous technical terms and in the
clearest possible way, our supervisory action and the positions taken, in accord with the
Government, in discussions with European institutions. The main channel used to publish
documents, notes of clarification and interventions is our website. We have reported to
Parliament at special fact-finding hearings. We are aware of the importance of timely and
effective communication and we are striving to improve its quality, while complying with the
confidentiality constraints imposed on us by national law and European rules to safeguard
the efficacy of preventive supervisory action and any judicial inquiries.
In a year that was once again challenging, all the women and men who work at the Bank of
Italy have continued to demonstrate the highest degree of professionalism and a strong
sense of responsibility. It is no mere formality that I express, personally and on behalf of the
Governing Board, a profound appreciation of their dedication.
The monetary policy response to the risks of deflation
Notwithstanding signs of strengthening in the first quarter of this year, the euro-area
economy remains exposed to global risks. Trade continues to soften, and uncertainty
persists regarding the ability of China and other emerging countries to avoid a sharp
slowdown of their economies. In the euro area, domestic demand needs to consolidate
further in order to counter the slackness of foreign demand.
Concerns about the prospects for the European banking system continue to afflict the
markets, heightened by uncertainty concerning the macroeconomic outlook, the regulatory
stance, and the as yet incomplete configuration of banking union. In some countries, the
problems of the economy and public finance are interwoven with those of political instability;
in many, hostility to the European project is gaining traction. A negative outcome of the
referendum on the United Kingdom remaining in the European Union could engender
profound instability.
For monetary policy, the main challenge remains the persistence of excessively low inflation,
which turned negative in the first few months of this year. This phenomenon is not limited to
the euro area. In large part it stems from the fall in oil prices, but it also depends, to a
significant extent, on internal dynamics: the margins of unused plant capacity and available
labour are wider than in other advanced economies.
As I have recalled on several occasions in recent years, like excessively high inflation, an
overly subdued price dynamic is also harmful for economic and financial stability, especially
when public and private debt are high and growth is weak. Resolute action is being taken to
dispel the risk of a prolonged detachment of inflation expectations from the level consistent
with the central bank's objective. In the euro area, the responsiveness of longer-term
expectations to the fall in short-term expectations, which is very modest under normal
circumstances, remains pronounced, albeit less so than between the end of 2014 and the
start of last year.
We have acted with determination to encourage the return to price stability; as reiterated by
the Governing Council of the ECB at its last monetary policy meeting, in furtherance of this
objective we will continue if necessary to deploy all the instruments made available to us in
our mandate. Official interest rates have been reduced repeatedly, bringing the Eurosystem's
deposit facility rate to negative levels. At the start of 2015 the Governing Council extended its
Asset Purchase Programme to include public sector securities; in December the duration of
the programme was prolonged to at least the end of the first quarter of 2017; in March we
decided to increase the amount of monthly purchases and to begin, as of June, purchasing
investment-grade bonds issued by non-bank corporations. We also introduced new
longerterm refinancing operations with conditions rewarding banks that provide more credit to the
economy.
These measures are of an exceptional scale. The financial asset purchases reached 9.4 per
cent of euro-area GDP on 20 May and will reach 17 per cent in March 2017. In the other
main advanced countries, the programmes adopted by the central banks have attained even
larger dimensions: approximately 20 per cent of GDP in the US and the UK and upwards of
60 per cent in Japan.
The evidence demonstrates the efficacy of the expansionary measures. The cost of credit to
the economy has fallen and financial fragmentation in the euro area has lessened. The
measures have fostered a decline in yields and bolstered the prices of a wide range of
financial assets, with a positive impact on consumption, through wealth effects, and on
investment, through the fall in the cost of capital. They have buoyed business and household
confidence. According to our estimates, without the monetary policy measures introduced
between the middle of 2014 and the end of 2015, annual inflation and GDP growth would be
about half a percentage point lower in the euro area in the three years 2015-17. For Italy, the
estimated effects are more pronounced.
The highly expansionary monetary policy stance is the result of well thought out decisions
and reflects the weakness of the economy and the risk of deflation. The concerns voiced by
some observers that a long period of very low interest rates could have a destabilizing effect
on financial markets, adverse repercussions on the profits of banks and other intermediaries,
or undesired distributive consequences must be carefully considered; however, they must
not be overstated.
At present, in the euro area as a whole there is no evidence of an excessive increase in the
prices of shares, corporate bonds or houses. The growth in lending in relation to the cyclical
position of the economy is moderate. Risks that may possibly arise in specific sectors can be
addressed with selective macroprudential instruments, as has already happened in some
countries, without interfering with the stance of monetary policy.
Very low or negative interest rates can dent the profitability of banks and institutional
investors. For pension funds and insurance companies, the risks derive from maturity and
yield mismatches between assets and liabilities which may require greater diversification of
portfolios, stronger capital buffers, and changes to contractual conditions. For banks, the
lowering of rates squeezes interest margins but, besides producing capital gains on their
securities portfolios in the short term, it has a positive effect on loan demand and the quality
of credit. The impact differs according to the individual bank's characteristics; the information
available for euro-area banks indicates that the overall effects on profits have so far been
limited.
In the current cyclical conditions the main risks to financial stability, to the profitability of
banks and firms, and even to household income continue to come from the uncertain
macroeconomic outlook and the persistence of exceptionally low inflation. Strengthening the
economy is key to increasing medium- and long-term yields and to mitigating the risks to
financial stability.
All economic policies must contribute to this objective. Monetary policy must be accompanied
by fiscal policies that are consistent with cyclical conditions and with each country's debt
position, and by reform measures designed to permanently increase growth potential and job
creation.
The Italian economy: recovery and vulnerability
Last year, the Italian economy returned to growth for the first time since the onset of the
sovereign debt crisis. The positive signs are unmistakable, especially for domestic demand.
However, economic activity is still far below its pre-recession levels and is subject to the
same uncertainties weighing on the global and the European economy.
The recovery, initially concentrated in the manufacturing sector, later spread to services and,
somewhat hesitantly, to construction. The improvement in the labour market and the
Government's income support measures have been favourably reflected in consumption.
Following a prolonged contraction, capital formation has gradually picked up again. Our
surveys point to a further expansion in firms' investment plans in manufacturing and services.
The expansion now also involves industrial firms mainly producing for the domestic market.
Contributory factors have included the improvement in borrowing conditions and the
temporary fiscal incentives in force since the end of 2015. According to our estimates, the
incentives could increase investment by 2.5 percentage points overall in 2016-17.
The decline in lending to firms has virtually halted. Banks are actively seeking to use the
abundant liquidity at their disposal, above all by lending to firms in a stronger financial
position and operating in the manufacturing sector. The cost of credit has come down
appreciably for both large and small firms.
In relation to GDP, however, investment is still far below its pre-crisis levels, at historical
lows. Looking ahead, the main cause of uncertainty is the outlook for foreign demand: firms
see heightened geopolitical risks, which affect economic activity adversely both through their
direct impact on exports and through the greater caution in investment plans that they
induce.
As has been observed repeatedly and in many quarters, a relaunch of investment in
construction, principally to renovate existing buildings, enhance public facilities and mitigate
hydro-geological risks, would have major effects on employment and economic activity. A
substantial amount of Italian territory is in fact urban, but there are a great many buildings
and infrastructures in a state of disrepair, while little progress has been made to date on
environmental protection and energy efficiency. The modernization of our urban heritage also
requires legislative initiatives to forge a more effective linkage between national and local
norms and to create more favourable conditions for private investment. Achieving this
requires a broad consensus, on a par with that required for the conservation and
enhancement of Italy's extraordinary natural and artistic heritage.
The signs of economic improvement have now begun to spread to the South and Islands,
although the gaps with respect to the rest of Italy have continued to widen. Preliminary
estimates indicate that after seven consecutive years of recession, output in this part of the
country has stopped contracting. In areas lagging behind it is vital to exploit all the
opportunities for investment financing offered by the European Union. Fund utilization was
higher last year than in the past, thanks above all to the reallocation of resources from
projects behind schedule to those already under way. The impact of this financing on
economic growth could be amplified by improving the planning stage and by project selection
on the part of central and local authorities that favours direct investment over subsidies to
firms, whose lack of efficacy we have repeatedly documented.
The demand for labour has begun to grow again, at a higher rate than was expected a year
ago and involving areas, sectors and occupational categories passed over by the signs of
improvement of 2014. The new rules governing employment relationships have had a
positive effect and, as of today, social security contribution relief even more so. The rise in
employment has now extended to permanent hirings; it includes the South and Islands. After
decreasing for three years, the number of hours worked has risen, albeit slightly, in industry
too. Employment held firm in the early months of the year, even though many hirings had
been brought forward to the end of 2015 in view of the reduction in social security relief from
January onwards.
The youth unemployment rate has fallen for the first time since 2007, declining by more than
2 percentage points. Unemployment is still too high, however. Its progressive reduction,
crucial to ensuring citizens have adequate living conditions, is also necessary for bringing
inflation back in line with price stability. In Italy, as in other countries, the responsiveness of
wages to changes in unemployment is high; it is estimated that reducing the unemployment
rate by 1 percentage point would correspond to additional wage growth of nearly 1 point over
the following three years.
Job gains could be greater if the recovery of domestic demand strengthens. Its increase has
been greatly influenced by the strongly expansionary stance of monetary policy; fiscal policy
has also contributed, although the room for manoeuvre is inevitably limited, given Italy's high
public debt. Yet increasing the economy's capacity for growth is an essential objective. Both
quantitatively and qualitatively, the potential growth rate is not set in stone, a replication of
the disappointing performances of the past. Rather, it can be stimulated through appropriate
measures; it depends on investment decisions and resource allocation mechanisms.
Despite the highly fragmented nature of the productive economy, which curtails its overall
competitiveness, the positive performance of many firms on international markets shows that
Italy has the potential to recoup the growth gap it has accumulated in the last twenty years.
Our surveys show that a considerable number of firms use new technologies, even in the
traditional sectors. Signs of vitality are visible throughout Italy, both in manufacturing, with
highly innovative and technologically advanced processes, and in services. This has
benefited exports; despite the weakening of world trade, they grew faster in 2015 than the
potential demand from outlet markets, as they have done regularly since 2010. Italian
exporters also succeeded in expanding their market position in mature markets; the gain in
sales abroad was exceptionally positive for motor vehicles.
However, the high incidence of small firms in our productive economy is a continued source
of weakness. Since the beginning of the 2000s, the exports of firms with fewer than
50 workers have failed to keep pace with those of larger firms. Not only do Italian companies
start out smaller, on average, than those of the other main European countries, they also find
it harder to expand.
Support should be given to innovative entrepreneurial initiatives, to business incubation, and
to a quicker reallocation of productive resources to firms with better growth potential. In 2012
criteria were established for innovative start-ups to qualify for a broad range of benefits,
including incentives for those investing in their equity and a fast track for obtaining
guarantees on bank loans. Preliminary evidence indicates that the programme enabled these
firms to get larger flows of financing and to sustain higher rates of investment.
The priorities for reform are clearly identified: first and foremost, they are to eliminate the
obstacles to entrepreneurship posed by illegal activities, inefficiencies in general government
and civil justice, shortcomings in the regulation of firms' market entry and exit, limits to
competition, and insufficient resources and incentives for investment in innovation, research
and human capital. The results obtained in labour market reform and the reduction of the
backlog in civil justice, thanks mainly to the introduction in recent years of measures to
reduce litigation, are two examples demonstrating that the reforms undertaken can be
effective, even if their effects mostly unfold in the medium term.
The rule of law is the sine qua non for growth. Stepping up the fight against tax evasion,
corruption and organized crime, giving continuity to the measures put in place in recent years
and expediting their implementation, could make it possible to support the activity of the
many competitive and law-abiding firms, guaranteeing that everyone follows the rules and
that competition is not restricted or distorted.
The general government reform approved by Parliament last year is an important step. Its
effects on economic activity and on people's lives will depend on the manner and timeframe
of its implementation. The effort to simplify administrative activity and to revamp its
organization requires renewed impetus. The initiatives designed to facilitate user
identification and the payment of services via the Internet can further the digitization of Italy.
Last summer's changes to the legislation on the management of company crises and the
additional measures recently approved will facilitate the recovery of firms whose difficulties
are reversible and ease the exit from the market of those that are no longer profitable. To
stimulate the entry of new firms it is important that the annual legislative bill on competition
be speedily passed.
The increase of the ratio of debt to GDP, from just under 100 per cent in 2007 to almost
133 per cent last year, is largely a consequence of the crisis. If during that period real GDP
growth had been in line with that of the previous decade and the deflator had evolved in
keeping with the inflation target for the euro area, the debt burden would have risen by only
3 percentage points, slightly less than the increase stemming from Italy's financial assistance
to countries in difficulty; had the positive effects of stronger growth on the government deficit
been taken into account, the debt burden would have been lower. This simple exercise
highlights the risk posed to the economy of a country whose competitiveness is lagging
seriously behind and the importance of structural reforms to support its growth potential: they
are all the more necessary when the public debt is so high.
Following the recession triggered by the global financial crisis, fiscal policy limited the deficit,
curbing the growth of the debt-to-GDP ratio. The primary budget balance returned to surplus
in 2011 and net borrowing was brought back below the threshold of 3 per cent of GDP in
2012. Keeping primary current expenditure in check played an important role: after recording
modest growth in nominal terms up to 2014, it remained practically unchanged last year.
Since 2014, when a particularly difficult three-year period for the Italian economy ended, the
fiscal policy has become moderately expansionary. The Government seeks to reconcile
support for growth with the reduction of the debt-to-GDP ratio, which was appropriately
indicated as a strategic objective. In the Government's plans, the reduction is to begin this
year and gain pace in the next three. The way in which the macroeconomic context will
evolve could hinder the achievement of this goal in 2016. Careful monitoring of the public
finances and the implementation of a programme of privatizations could permit the
debt-toGDP ratio to approach the planned objective and ensure a significant reduction in 2017.
With a view to supporting a faster, more durable recovery, it is necessary to revamp
longdeferred targeted public investment, including in intangible infrastructure; it is also important
to further reduce the tax wedge on labour, bolster incentives to innovate and provide income
support for the less well-off, hit especially hard by the crisis. While the budget affords limited
leeway for these measures today, it is possible in any event to plan their implementation over
a longer time horizon.
Building Europe: progress and uncertainties
The present conditions and prospects of the individual countries of the euro area are closely
linked to those of the European construction. For years the area has withstood formidable
tensions. The effects of the global financial crisis had not yet been absorbed when the
sovereign debt crisis erupted. Triggered by weaknesses in individual countries, that crisis
was fuelled by the incompleteness of the Economic and Monetary Union. Hesitancy in
defining the procedures for support to countries in difficulty, due in part to the lack of
adequate tools, fed fears of a break-up of the area. The spreads on government bond yields
widened dramatically, in some cases much more than was justified by the economic
conditions and public finances of the countries affected.
Measures to deal with the emergency have been progressively flanked by reform of the
governance of the European Union and especially the euro area, initiated by intervention on
public finance rules and macroeconomic surveillance. In the summer of 2012 the President
of the European Council published the report "Towards a Genuine Economic and Monetary
Union", prepared with the Presidents of the Commission, the Eurogroup and the European
Central Bank. The report proposed taking, over a decade, concrete steps towards banking
and fiscal union and strengthening the democratic legitimation of the common institutions,
the embryo of political union. The Governing Council of the ECB reiterated its determination
to defend the single currency: the announcement of the possibility of purchasing government
bonds on the secondary market was immediately reflected in a drastic narrowing of yield
spreads.
The reform process outlined in the report envisaged a gradual renunciation of national
sovereignty in economic and financial matters and the flanking or replacement of national
intervention tools by corresponding common instruments. For banks, the report proposed
transferring supervisory responsibility to the euro area and establishing joint crisis resolution
and deposit guarantee mechanisms, to be supported with public funds through the European
Stability Mechanism (ESM). As to public finance, in addition to implementing the reforms
already approved (the Six Pack and the Fiscal Compact), it proposed gradual steps towards
the creation of a euro-area budget and the issue of common debt. Most of these proposals
were taken up again in subsequent reports, somewhat less ambitious on certain themes,
including the Five Presidents' Report of June 2015.
The results have been significant but uneven. The restrictions on the use of national
mechanisms were put in place quickly, but the introduction and sharing of their supranational
counterparts has been delayed. Likewise, a contained risk-sharing approach was adopted for
common intervention to help individual member states in difficulty. The establishment of the
ESM has superseded the restrictive tenor of the no-bail-out clause in the European Treaty
that would have precluded any form of assistance; however, the financial capacity of the fund
is modest as it is supported by limited guarantees of the member states.
The new institutional structure and many of the decisions that flowed from it were directed
primarily at reducing the risks proper to individual member states or banks, even aside from
the possible systemic implications.
This, in short, creates a situation of vulnerability: there is the danger not only that national
and European authorities will be unable to react adequately to major shocks, but even that
they will have trouble avoiding contagion triggered by circumscribed tensions. To effectively
reduce overall risk, the measures designed to attenuate specific fragilities must be
accompanied by adequate safety nets based on supranational instruments.
In the case of the banking system, the possibility of utilizing public resources, whether
national or European, as a means of crisis prevention and management has been virtually
eliminated. International experience demonstrates that, in the face of a market failure, prompt
public intervention can prevent the destruction of wealth without necessarily generating
losses for the State, and indeed often producing profits. Greater scope for intervention of this
sort, exceptional as it may be, should be reinstated.
Moreover, the European Commission's position on state aid precludes the use of mandatory
deposit insurance schemes for purposes of crisis prevention and orderly crisis resolution,
even though these funds are private, given that they are financed and independently
managed by banks; the effective conduct of recovery and resolution procedures, instead,
requires the use of all the tools available. There is no reason to stigmatize as improper state
aid those initiatives that help to correct market failures without undermining competition. A
rigid interpretation of the regulations on state aid, with little regard for financial stability, has
also hindered the plan for creating a company to manage Italian banks' non-performing
loans.
With burden sharing and bail-in, it was decided to protect taxpayers by imposing instead a
direct cost on savers and investors. The new regulations are a response to events in banking
systems other than the Italian one that were directly hit by the global financial crisis and
rescued by massive state aid. The new regulations were rightly designed to combat
opportunistic behaviour by banks, but their application must balance this objective against
that of stability. Contrary to what was proposed by the Italian delegation in official fora, an
adequate transitional period was not provided to give all the parties involved time to acquire
a full understanding of the new regime, nor has the application of the new system to debt
instruments already marketed, even to retail investors, been ruled out.
Banking union must ultimately incorporate all the elements envisaged in the original design.
The Single Resolution Fund has been created but the resources contributed by t