The Italian economy: the outlook and the need for reform
Speech by Ignazio Visco
Governor of the Bank of Italy
National consultation
Rome, 13 June 2020
• The spread of the new coronavirus all over the world has led to an extremely
serious public health emergency and an economic crisis without parallel in modern
history. In order to contain the pandemic, in many countries it has been necessary
to introduce measures to curtail people's movements and social interaction, to
suspend teaching in schools and universities and to temporarily close down many
productive activities. The repercussions on global growth are severe.
•
Already in the first half of April, the International Monetary Fund estimated that
global GDP would fall by 3 per cent in 2020, compared with an increase of the same
amount forecast in January. At the start of this month, the World Bank estimated a
decline of 5.2 per cent. Last week the OECD released scenarios indicating a fall of
6.0 per cent in the least unfavourable scenarios and of 7.6 per cent in the event of
a second wave of contagion. It has been calculated that this year will see the most
widespread fall in per capita income since 1870.
• On 5 June, we presented a scenario analysis for the Italian economy as part of the
Eurosystem staff macroeconomic projections. The analysis was based on alternative
hypotheses regarding the duration and extent of the epidemic, its impact on the
global economy and the financial repercussions. The baseline scenario is for GDP
to fall by 9.2 per cent; in a second scenario based on more pessimistic hypotheses,
consistent, among other things, with the need to counter possible new outbreaks,
GDP would fall by 13.1 per cent.
• All the scenarios indicate that the decline in GDP, both in Italy and worldwide, will
be concentrated - and for the most part this has already occurred - in the first half
of this year. However, a great deal of uncertainty surrounds the speed and intensity
of the subsequent recovery and, in general, the outlook for the next two years. This
is due to multiple factors.
- First of all, what happens next depends on non-economic variables, such as the
course of contagion in different countries, including the possible appearance of
new outbreaks, and the duration of the lockdown measures. Put simply, there is
uncertainty about how long it will take and by what means the pandemic will be
defeated.
- Second, there is uncertainty about the ability of the support measures adopted
in the various countries to influence household confidence and consumption
as well as firms' expectations and investment. In other words, it is very difficult
to foresee in this situation what resources will be required, how they will be
employed, and how effective they will be.
- Finally, at a deeper level, we do not know how and how much this pandemic
will end up shaping our behaviour, consumption patterns, and the allocation of
potentially higher precautionary savings. We ask ourselves what new needs will
emerge and what social mores will be definitively left behind. And we wonder
about the possible consequences for how our society and productive activity is
organized. It is very difficult to predict what shape these 'new equilibria' will take
or what 'new normal' awaits us.
•
However, this heightened uncertainty must not become an excuse for inertia. It is,
on the contrary, another reason to act immediately to strengthen our economy and
to press on with a comprehensive package of reforms whose course, for the most
part, has already been charted. Two weeks ago, in the Concluding Remarks that
accompanied the publication of the Bank of Italy's Annual Report, I recalled the words
uttered by John Maynard Keynes 80 years ago, when he suggested ways of countering
the economic difficulties of a great war. In a nutshell, Keynes's idea was that the best
short-term strategy was to come up with a good plan for the medium-to-long term
(the same Keynes who to those suggesting that natural market forces should be left
to run their course famously responded 'in the long run, we are all dead').
•
Only time will reveal the results of this endeavour, but a comprehensive plan makes
the path ahead clearer, shapes expectations positively, and bolsters confidence.
The impulse for reform can draw on a number of strengths that characterize our
economy, which notwithstanding the last few difficult years have become increasingly
apparent and which it is well to recall. Despite the delays and difficulties in many
areas of the country, in recent months the network infrastructures have held up,
enabling millions of workers and students to continue to work and study remotely
during the most acute phase of the emergency. The manufacturing sector is flexible
and, already since the sovereign debt crisis of 2011-12 has rapidly recovered
competitiveness, bringing the balance of payments into surplus. Italy's net external
debt is practically nil. The real and financial wealth of households is high overall
and their level of indebtedness among the lowest in the advanced countries, while
those of firms are below the European average. In the private sector as a whole,
debt amounts to 110 per cent of GDP, even lower than that of Germany (114 per
cent) and half the level recorded in countries such as France (215 per cent) or the
Netherlands (258 per cent). The financial system has become stronger in recent
years and, despite the very serious effects of the double-dip recession, is in better
shape now than it was on the eve of the financial crisis.
•
For more than 20 years now, our economy's biggest problem has been low growth,
in turn due to very weak productivity growth.
- It is well known that the demographic projections are not favourable: even
taking account of the contribution of immigration (estimated by Eurostat to
amount to more than 200,000 persons on average per year), the population
aged between 15 and 64 will decline by more than 3 million in the next 15 years.
Nevertheless, assuming that the trends of the last ten years continue in a similar
vein, higher female labour market participation and the extension of working
lives can enable employment to make a positive contribution to growth, of more
than half a percentage point per year.
- To restore GDP growth to at least 1.5 per cent, the average annual level recorded
in the ten years leading up to the global financial crisis, will accordingly require
an average increase in labour productivity of almost 1 percentage point per
year.
•
This objective is within our reach, but its achievement presupposes a break from
the recent past; it calls for the resolution of those structural problems, which for too
long now we have failed to address, and which have become increasingly pressing
in a new technological context and a more integrated world.
•
Productivity gaps cannot be bridged through expansionary monetary or fiscal
policies. Indeed, these are macroeconomic stabilization measures that are essential
to achieving adequate levels of aggregate demand, facilitating full employment and
preserving price stability, but they cannot, in and of themselves, raise productivity
in the long term.
•
In this emergency phase, the measures in support of households and firms have
been crucial to mitigating the economic and social costs of the crisis; they will
continue to be so in the future, in order to support demand and thereby attenuate
the impact of the transition by tackling social hardship and the rise of inequality.
Now, however, it is essential to map out the path of reform that is best suited to
raising growth potential, and to achieving the broadest possible consensus, being
aware that, oftentimes, the costs of structural changes are immediate, while the
benefits only develop gradually and not always rapidly.
• Resources must be channelled to where the social returns are highest. The
accumulated lag in traditional infrastructure must be overcome by upgrading it and
making it more efficient, but it is possible to identify three macro-areas in which it
appears equally urgent to intervene.
•
The first is the public administration, which must truly be at the service of citizens and
firms. A substantial improvement in the quality and timeliness of public services is
required: the oft-cited necessary simplification of procedures must be accompanied
by the right allocation and mindful assumption of responsibilities on the part of
civil servants, managers and officials, who need to be rewarded and motivated:
we need a good bureaucracy, not an absent bureaucracy. We also need to speed up
the justice system to ensure full compliance with the rules. There are two variables
that have a profound impact on the functioning of any firm: technology and human
resources. As for the former, what we have learnt from this crisis has shown the
way forward, demonstrating the need to fast track the digitalization of all working
processes and to rethink their organization. Regarding the latter, we now have a
unique opportunity: the heavy turnover expected in the public administration in
the coming years will make it possible to hire young, highly skilled and motivated
workers from a variety of backgrounds, whose enthusiasm we must nurture and
whose skills we must foster; we must invest in them and in the training of staff.
• The second area is innovation; the measures to facilitate it can be plotted along
three main axes.
- First of all, the development of highly innovative infrastructure and sectors. For
example, the fixed ultrafast broadband network still only reaches less than one
fourth of Italian households, compared with 60 per cent on average in Europe,
and is especially penalized in the South of the country. The European Commission
ranks Italy nineteenth among the EU states for connectivity. The opportunities
that will come from the inevitably faster transition to a more environmentally
friendly economy with lower polluting gas emissions must be seized.
A second point is the need to improve the quality of human capital, by tackling
-
the underlying problems of schools and universities. Italy ranks second last
in the European Union on the proportion of young people aged between
25 and 34 with tertiary education; it is ranked first for the share of young
people aged between 15 and 29 who neither study nor work. Teacher quality
and motivational levels are of vital importance. In many cases, school and
university buildings fall short on security; they should instead be comfortable
and equipped with up-to-date technology. Moreover, it is necessary to
understand that the problems related to education are not only on the supply
side: households must also grasp the importance of investing in knowledge,
not only in school but also as a lifelong pursuit.
- Finally, it is necessary to invest in ensuring the high-quality of Italy's research.
The State spends about €8 billion in its university system, half of what countries
similar to Italy do, relative to GDP. Even just the reallocation of a modest portion
of the government budget would lead to a marked improvement in the training
of young researchers and in fostering innovation. This would strengthen Italy's
ability to tap into the European resources allocated to research; it would also
benefit the productive sector, which puts barely 0.9 per cent of GDP into research,
compared with 1.7 per cent, on average, in OECD countries. The hiring of new
researchers, envisaged in the decree issued on 19 May, marks a significant break
with the past.
• The third area to consider concerns the preservation of Italy's natural, historic and
artistic heritage, which constitutes this country's very identity. The crisis in the tourist
sector has made its economic importance immediately apparent. This sector must be
preserved and access to it made safe, increasing the use of new technologies so that,
after the pandemic, it can once again contribute to growth, even more so than before.
• The public resources needed to finance these measures and to promote the
productive use of private funds must come from a restructuring of the public budget,
the recovery of the tax base, a reduction in the risk premium on government bonds,
and the pragmatic and judicious use of European funds.
•
Excluding interest payments, Italy's public expenditure is in line with the average
for the euro area as a whole, even if the share of pension expenditure is higher
and destined to increase further, driven by an ageing population, as in many
other countries of the European Union. Tax revenues are also broadly aligned
with the average of the other countries, even if the tax wedge on labour is higher.
Where Italy differs most from the other advanced economies is in the extent of
its underground and illegal economy and tax evasion, which translates into an
excessive tax burden for those who always play by the rules. The resulting injustices
and profound distortionary effects reverberate on the economy's ability to grow
and firms' capacity to innovate; they generate rents that damage the efficiency
of the productive system. A comprehensive rethinking of the tax system that also
takes account of the changes in the social welfare system must adopt the objective
of reducing the tax levy on the factors of production.
•
The sustainability of the public debt is not in doubt, but its high ratio to GDP is
being maintained by the low growth potential of the country and is, at the same
time, an obstacle to economic growth. Economic growth and prudent fiscal policies
to encourage investment should, instead, reinforce each other, in a virtuous circle
that our country is capable of activating, favouring a reduction in the burden of
debt servicing costs.
• Italy's difficulties are amplified in the South of Italy. First and foremost the business
environment needs to improve in the southern regions, above all as regards
guaranteeing legality. The technology gap is even greater, public policies are less
effective: 75 per cent of unfinished works are located in these regions, of which only
30 per cent are public works. The South of Italy is fast becoming poorer, in part
owing to the emigration of its youngest and most highly-educated people to the
Centre and North of the country. It is a trend that has immediate social costs and
negatively impacts growth prospects.
• There have been numerous attempts to deal with 'the Southern question' over the
years, with interventions that have been as differently structured as the results have
been disappointing. The development of the South is essential to the development
of the country: about one third of the Italian population lives in the southern
regions, producing almost a quarter of Italy's GDP. Measures to support growth
in the regions that are lagging behind must not distort the incentives for firms
and workers, preventing the employment of the most productive resources. It is
necessary to act on the factors underlying the delays - it is not enough to try to
compensate for them with monetary transfers. The effects on the southern economy
of efforts to reform the public administration, schools and infrastructure can be
extremely significant.
* * *
•
Lastly, allow me to express my most sincere wish that these national consultations
may conclude with concrete actions that allow us to take the steps forward that the
country needs, now more than ever before, making the most of the opportunities
offered by the new European programmes that have already been approved or are
now being drawn up.
• European funds can never be free of charge: the debt of the European Union is
the debt of all the member countries and Italy will always make an important
contribution to the funding of common initiatives, because it is the third largest
economy in the EU. The benefits of European support measures should be valued
not only because of the considerable financial advantage that characterize
them, but also - and above all - for the opportunity to frame the national effort
within a common development strategy. This is the only way to respond to the
global challenges facing us, not only those of a geopolitical, technological and
environmental nature but also, as we have learnt the hard way in recent months,
to public health challenges.