The The Governor's Governor's
Concluding Concluding Remarks Remarks
Annual Report
Rome, 31 May 2021
year
financial
127th
The Governor's
Concluding Remarks
Annual Report
2020 - 127th Financial Year
Rome, 31 May 2021

Ladies and Gentlemen,
The pandemic has had a very high cost in terms of human lives the
world over. Keeping it under control has called for restrictions on individual
freedoms and has deeply affected all of our lives. Many people have lost their
jobs; our interpersonal relationships and the ways in which we study, produce
and work, and spend our free time have changed.
From an economic perspective, the ensuing recession is the worst since the
end of the Second World War. In 2020, global GDP declined by 3.3 per cent,
with uneven effects across the various geographical areas, productive sectors,
firms, and households. There was an even greater decline, of almost 9 per cent,
in world trade, characterized by the temporary halt of production chains and a
sharp fall in tourism flows. Job losses hit young people, women and temporary
workers the hardest. For the first time in over twenty years, it is estimated that
the number of people living in extreme poverty has begun to climb again,
today accounting for about 10 per cent of the population according to the
World Bank, with an increase of more than 100 million people in the last year.
Without the decisive and rapid economic policy responses, the damage
would have been more serious. Cooperation between countries and coordination
among the monetary and fiscal authorities marked a clear change of direction
compared with the recent past. By last March, governments had approved
spending increases, tax reductions and loan guarantees, valued at more than
$16 trillion, equivalent to 15 per cent of global GDP, with the immediate
objective of strengthening health systems and supporting household income
and credit to firms. The prompt provision and exceptional quantity of liquidity
provided by the central banks staved off tensions in the markets and restored
broadly accommodative financial conditions. The measures enacted prevented
a generalized tightening of credit, thus averting the risk of a spiralling crisis.
Thanks to the extraordinary efforts made, first and foremost by the
scientific community, to develop vaccines and treatments for the virus,
many countries are gradually nearing the end of the health emergency. The
effectiveness of the vaccination campaigns that began at the end of 2020 and
the still very accommodative economic policies led the International Monetary
Fund to revise its global growth estimates for this year upwards in April, to 6
per cent (Figure 1). This scenario is nonetheless still subject to high levels of
uncertainty, linked above all to the course of the pandemic and to the uneven
pace of vaccination campaigns around the world, which could lead to marked
divergences in economic performance and to sudden movements of capital.
The global scale of the risks calls for close international cooperation,
assigning an important role to the Group of Twenty (G20), which Italy
is chairing this year for the first time since it was set up in 1999. We will
only be able to exit the crisis securely and definitively, from both a health
and a socio-economic perspective, if progress is made by all countries. The
economic policy responses must continue in a coordinated and coherent way;
the support measures for households and firms must be withdrawn gradually
and only when the economic situation has been sufficiently consolidated and
uncertainty significantly reduced.
Economic policies in the euro area
The continuation of the pandemic and the effects of uncertainty on
consumer demand and investment decisions are still holding back economic
activity in the euro area. Net of temporary factors, price changes remain very
moderate.
GDP growth is expected to regain momentum in the second half of the
year and, according to the latest estimates, to exceed 4 per cent on average
in the two years 2021-22, after contracting by 6.6 per cent in 2020. This
scenario assumes further progress in vaccination campaigns and a decline in
infections; it continues to depend on maintaining the interventions to support
the economy. While consumer prices are recovering, mainly due to the increase
in commodity prices, the medium-term outlook for consumer price growth is
still weak: expectations that ample spare capacity will persist for a long time are
restraining both wage growth and the return of inflation to levels consistent
with the price stability objective.
The extraordinary measures taken by the Governing Council of the
European Central Bank (ECB) swiftly counteracted the economic repercussions
of the public health crisis. Since March 2020, additional funds amounting
to almost €1,500 billion have been provided to banks on very favourable
terms and there have been net purchases of public and private securities
worth roughly the same amount, mostly in order to cope with the pandemic
emergency. These interventions have helped to maintain a monetary stance
consistent with the inflation aim; they have allowed intermediaries to satisfy
the economy's funding requirements and governments to access the necessary
resources to support households and firms without the emergence of market
tensions (Figure 2).
The lessons of the global financial crisis of 2008-09 show that a premature
reduction in monetary stimulus increases risks to the economy and to price
stability. The uncertainty over the timing and intensity of the recovery requires
that financing conditions remain accommodative for a long time: large and
lasting increases in interest rates are not justified by the current economic
outlook and must be countered, including with the full deployment of the
existing securities purchase programmes. In addition to curbing the impact
of the pandemic, the expansionary monetary policy stance is still designed to
ensure that inflation, after many years of weak growth, returns to and stays at
levels close to 2 per cent as soon as possible.
The actions taken by the supervisory authorities have also been geared
towards limiting the severity of the recession. Changing the timing of the
entry into force of certain prudential rules has preserved the ability of banks
to lend and to absorb losses at this delicate juncture; temporary measures on
reserves and capital requirements have countered the potentially procyclical
effects of regulation.
Banking supervision is now balancing the need to ensure that banks
continue to provide the necessary support to the economy with that of
adequately safeguarding against risks. Following its suspension in 2020,
the regular supervisory review and evaluation process whereby supervisors
determine bank-specific capital requirements has now resumed. Under the
coordination of the European Banking Authority, stress tests are being carried
out to assess the solidity of intermediaries, including in a particularly adverse
economic scenario. Though in a less rigid form than that decided for last
year, the recommendation to limit profit distribution has been renewed until
September.
The extraordinary fiscal policies swiftly adopted by governments have
greatly limited the fallout from the recession. The European Union's response
has differed from the inadequate ones provided during the global financial
crisis and subsequent sovereign debt crisis. At the onset of the emergency, the
suspension of the application of the Stability and Growth Pact, the temporary
easing of restrictions on State aid and greater flexibility in the use of cohesion
funds permitted all the Member States to adopt highly expansionary policies.
In the euro area as a whole, net borrowing increased by 6.6 percentage points of
GDP (Figure 3). Public debt as a share of GDP rose in all European countries;
with the exit from the emergency, the stronger the recovery, the faster GDP
will return to the levels prevailing before the pandemic crisis.
The Union's decisive intervention in support of Member States has taken
an innovative approach that envisages the deployment of very substantial
resources. It was decided to use a specially designed instrument to finance the
measures to counter unemployment risks adopted in the various countries.
Even if it does not constitute a common income support mechanism, nor
does it presuppose a harmonization of national social insurance schemes,
this instrument has nonetheless enabled recipient countries to reduce direct
recourse to the market, to limit their debt burden, and to take advantage of
very long maturities.
The agreement on the Next Generation EU (NGEU) programme is of
special significance. With this instrument, the European Union will be able
to raise up to €750 billion on the market for loans and transfers to Member
States (with over €200 billion going to Italy) to finance commonly agreed
spending and reform plans. Together with monetary policy, this agreement
has been decisive in sustaining the confidence of economic operators and the
financial markets.
The architecture of the economic and monetary union
At the beginning of 2020, the ECB Governing Council launched a review
of its strategy in response to the changes observed in the economy over the
last two decades. All the main aspects of the conduct of monetary policy are
being considered, from the definition of price stability to the symmetry of
the objective and how to ensure it is achieved. Under our mandate, account
will also be taken of the importance of protecting employment, safeguarding
financial stability and combating climate change, while respecting the roles of
the various authorities.
The quantitative definition of the price stability objective today consists of
an inflation rate below, but close to, 2 per cent, to be pursued over the medium
term. Both our surveys of households and firms and the listening events
conducted in the Bank of Italy in February and March of this year indicate
that this definition is difficult to interpret and is sometimes misunderstood.
A numerical objective of 2 per cent, with a symmetrical assessment of the
upward and downward deviations, would be clearer and would strengthen the
anchoring of medium and long-term expectations.
The topics covered in the review include the interaction between fiscal
policies and the single monetary policy. In the current circumstances, the
Eurosystem should continue to provide its support during the recovery,
making it easier to implement the structural interventions needed to create
a more favourable environment for a return to stable and sustainable growth.
The Governing Council is determined to adopt all the measures necessary to
fulfil the mandate of price stability and the preservation of financial stability.
Without prejudice to the independence from governments as established in
the Treaties, at times of profound crisis a close harmony between the actions
of governments and monetary authorities is crucial. The response to the
pandemic is clear proof of this.
During the economic recovery phase, ensuring the maintenance, extended
over time, of the monetary stimulus could foster a more solid revival, with
positive effects on employment and income, and a stronger anchoring of
inflation expectations. In the United States, the Federal Reserve's new strategy
envisages that, following a protracted phase of low inflation, monetary policy
will likely aim for a growth in prices that is moderately above the target for
some time. The reasons for this seem commendable: how to pursue them in the
euro area will be assessed, taking account of the contextual and institutional
differences.
There has long been the conviction that Europe's economic architecture is
incomplete in areas other than monetary policy. The debate, which was already
wide-ranging prior to the launch of the single currency, has continued between
economists and in the institutions, fuelled in part by the reports that drew up
ambitious reform projects in the wake of the sovereign debt crisis. Nowadays,
the need for a joint budgetary capacity has become even more evident. The
launch of the Next Generation EU programme, which only partly has such
characteristics, testifies to the awareness that common shocks require the use of
a European instrument able to flank the single monetary policy. Nevertheless,
a joint response may also be necessary in the event of asymmetric shocks, so as
to strengthen national policies where the room to manoeuvre is reduced, or to
supplement them if individual countries' actions are weak because they do not
consider the possible implications for other countries.
As has happened in the past, the seriousness of the crisis has overcome any
doubts or inertia. Even if the programmes launched over the last year do not
resolve the problem of the economic and monetary union being incomplete,
the more they are used effectively, the more they will be a reference point for
creating permanent mechanisms that function in a more agile way. This is a
path fraught with difficulties: the countries that will benefit most from the
resources made available, which include Italy, have a twofold responsibility:
they must seize this decisive chance to resolve their structural problems and
demonstrate with concrete results the importance of a stronger and more
cohesive Union.
A joint budgetary capacity, accompanied by a review of the rules on
national public finances, should be based on the possibility of a stable debt
issuance, guaranteed by autonomous sources of revenue. This would, among
other things, provide the markets with a financial instrument with a high credit
rating, making it easier to diversify the portfolios of European banks and to
integrate capital markets, increasing the effectiveness of monetary policy and
allowing the euro to assume in full its role as an international currency.
A debt issued under a European fiscal policy would be very different
from the pre-existing debt of individual countries, which would continue
to be a national responsibility. Nevertheless, the joint management of a part
of the liabilities issued in the past by each country, for example through an
amortization fund, would also make it possible to swiftly provide the European
government bond market with the depth and liquidity that it is currently
lacking. Proposals of this kind have been criticized for fear that they might lead
to systematic transfers of resources to countries with the highest debts, a fear
that can be dispelled by an explicit definition of the mechanisms designed to
prevent this. It would clearly not be a question of cancelling national liabilities,
but of reducing the fragmentation and volatility that today characterize the
sovereign debt market in the European Union.
Government action and economic activity in Italy
The epidemic first struck Italy back in February last year. In the first half of
2020, GDP fell by almost 12 per cent compared with the previous six months.
As in the rest of the world, the subsequent waves were more severe than was
generally anticipated; however, the impact on the economy was smaller than
in the spring, owing to the easing of the new restrictions and the adaptation
of firms and workers to social distancing requirements. Developments during
the year highlighted the economy's ability to recover but also their heavy
dependence on trends in infection and support policies.
Government action succeeded in blunting the repercussions of the
pandemic on households and the production system. The impact on
employment was mitigated by the extension of wage supplementation to all
categories of firms and by the temporary restrictions on dismissals. Faced
with a drop in GDP of almost 9 per cent, public transfers limited the fall
in households' disposable income in 2020 to 2.6 per cent in real terms
(Figure 4). Government guarantees on new loans, moratoriums on
outstanding debts, and more favourable financing conditions for banks within
the Eurosystem, enabled the liquidity needs of businesses to be met: loans
increased by more than 8 per cent, compared with a contraction of 2 per cent
in the years of the global financial crisis and of 7 per cent during the European
sovereign debt crisis.
Most of the budgetary support measures targeted the hardest hit sectors.
The Government provided a considerable amount of resources: subsidies,
tax credits and contributions to businesses and the self-employed exceeded
€20 billion in 2020; tax deferrals and reductions were approved worth
more than €25 billion. The support has continued this year with resources
comparable to those deployed in 2020.
Taken together, the measures succeeded in combating rising inequality
(Figure 5); they also prevented healthy firms, severely impacted by the
pandemic, from being forced to shut up shop. As uncertainty subsides, public
intervention must become more selective, focusing on the sectors that will
continue to struggle due to the public health crisis and seeking to avoid
subsidizing companies that have no chance of survival, while guaranteeing
support for their workers.
Production is now regaining momentum. Over the coming months, as the
vaccination campaign proceeds, the recovery could accelerate. According to
our latest surveys, firms are already planning a decisive increase in investment;
households appear more cautious, but with the normalization of the health
situation and less uncertainty, the high levels of savings accumulated could
gradually translate into a rise in consumption. On average this year, GDP
could expand by more than 4 per cent.
Firms
The production system has faced the crisis triggered by the pandemic in
better shape than it was in during the financial crisis. Since then, weaker firms
have exited the market and resources have been reallocated, albeit insufficiently
and with delays, thereby leaving only the most competitive firms with the
soundest financial structures to succeed, especially in the manufacturing
industry.
The COVID-19 crisis has caused a drastic drop in production and
revenues, creating imbalances for the firms hit hardest by the restrictions
on activity, thus worsening the situation for those businesses that were
already weak prior to the pandemic. It has been a significant, but not
generalized, phenomenon: in 2020, the financial balance of the sector as a
whole (i.e. the difference between the change in financial assets and that in
financial liabilities), fuelled in part by the support measures, was positive by
€38 billion, three times more than the year before (Figure 6). A sizeable part
of the loans received is held by firms in the form of deposits and other liquid
assets, which can be used in the coming months to finance the upswing in
production and planned investment.
Potentially fragile firms account for about one sixth of total jobs. For
those with the ability to recover, there is justification for offering them
capitalization support measures. In light of this, the recent boosting of tax
incentives to encourage an increase in net worth is important, especially for
small and medium-sized enterprises. Larger firms will have access, under
certain conditions, to the funds allocated through the 'Patrimonio Rilancio', a
special capital enhancement instrument recently set up, which is run by Cassa
Depositi e Prestiti.
Banks are and will continue to be the main financing channel for firms.
However, corporates should seize the opportunities, which are better now
than in the past, provided by the ample liquidity available to investors in the
capital markets, to bridge the gap vis-à-vis firms of the other main European
economies. Since the beginning of 2020, net issues of debt securities and listed
shares by Italian companies have amounted to €16 billion, compared with
€101 billion for French firms and €87 billion for German firms.
The completion of the capital markets union would help to diversify
financing sources, but it is an objective that at present is made challenging
both by differences in legislation across Member States in key areas, such
as bankruptcy, corporate and tax laws, and by the limited availability of
comparable information on companies. For the capital market to develop
in Italy, external and internal constraints on the production system must be
removed. As is well known, one particularly important factor is the extremely
small size of most Italian firms, whose growth is frequently hampered by the
lack of good management practices, in addition to an unfriendly business
environment.
Although Italy can count on a growing segment of dynamic and innovative
firms, which are responsible for the country's improving competitiveness on
international markets over the last ten years and which has made an important
contribution to our return to a net creditor position after thirty years,
the production system still has its weak points (Figure 7). The number of
micro-businesses with modest levels of productivity remains extremely high,
while the incidence of medium and large firms is lower, although their efficiency
is comparable to those of the neighbouring major economies. Non-financial
services firms with fewer than 10 employees account for almost 50 per cent of
all workers, which is double the figure for France and Germany.
Their specialization in traditional activities and their small size reduce the
demand for skilled workers, creating a vicious cycle of low wages and limited
job opportunities, which discourages investment in training. Despite the
progress made, spurred in part by economic policies, private-sector research
and development spending remains much lower than in France and Germany,
and below the average for the advanced countries.
Closing the large gap in how Italy's civil justice system functions compared
with those of the other European countries would improve the efficiency
of resource allocation in the production sector, thereby also stimulating
investment in financial instruments issued by firms. The length of credit
recovery procedures via the court system is almost double the EU average. In
addition to the complexity of procedures, the system is weighed down by the
limited degree of specialization of judges and the incomplete digitalization
of their activity. The substantial differences between courts in terms of the
duration of legal proceedings, a matter of much discussion for many years,
suggest that organizational factors play a significant role in this problem.
Households and employment
Public transfers to households reached very high levels in 2020, increasing
by more than €30 billion net of pensions. This exceptional support required a
marked expansion of social shock absorbers, also to reach people not otherwise
covered. The reduction in the number of persons in employment was much
smaller than that in the number of hours worked, but it was nonetheless
significant owing to the fall in fixed-term hires and the sharp drop in new
businesses. Young people and women, who are widely employed in the service
sectors hit hardest by the crisis, such as those linked to tourism and leisure,
were especially penalized.
Consumption declined by 10.7 per cent, four times the reduction in
disposable income (Figure 8). Our surveys indicate that, unlike what typically
occurs in a recession, the contraction in spending was significant even for
households that declared they did not experience financial difficulties: the
restrictions on commercial activities, fear of infection and increased uncertainty
about the economic outlook all contributed. The share of income devoted to
savings exceeded 15 per cent, double that recorded in 2019.
The end of the health emergency and the economic revival will initiate a
recovery in the number of hours worked and in income. Given the magnitude
and nature of the crisis, and in view of the intensification of the processes of
digitalization and decarbonization under way, it is not easy today to foresee
all the ramifications of the structural changes that the productive system will
have to address. Yet one of the main issues will be how best to facilitate the
redeployment of workers currently employed in activities that are bound to be
downsized.
Those who lose their jobs must continue to receive support. It will be
necessary to remedy the significant weaknesses in the social welfare system's
design and reach, which persist despite the reforms of recent years, and which
have been laid bare by the pandemic, requiring the adoption of extraordinary
interventions. Moreover, we are still far from the definition of a modern
system of active labour policies, capable of accompanying people throughout
their working lives: in Italy, one unemployed person in ten receives assistance
through an employment centre, compared with seven in ten in Germany.
It is not only a question of the resources allocated, which in any case are
modest in Italy; above all, it is about raising and harmonizing the standards
of the services provided throughout the country.
It will be necessary, in particular, to strengthen in-house company
training schemes and increase knowledge and skills, also when it comes to
using new technologies, which are still largely lacking. The need to raise what
economists, using the undoubtedly reductive expression, call human capital, is
something I have returned to again and again and which I consider absolutely
vital for our country. Education and culture are fundamental for ensuring
active participation in social and economic life, reinforcing respect for the
rules and promoting the consolidation of shared values.
The possibility for businesses to leverage qualified workers and managers
depends on adequate training. Accelerating entry into the labour market and
encouraging lifelong learning depends on the overall quality of education and
training systems. In Italy, more than 3 million young people between the ages
of 15 and 34 are neither employed nor engaged in education or training; this
is almost one quarter of the total, the highest share among European Union
countries (Figure 9). This must be taken into account when redefining the
priorities for economic and social development and directing efforts towards
the construction of a truly knowledge-based economy, the main instrument
available to an advanced country to consolidate and increase the wellbeing of all.
The role of public intervention in boosting development
In modern economies, the State has roles that go well beyond the minimum
ones of public order, defence and the administration of justice. In response
to 'market failures' or for the purposes of social equity, the State regulates
private economic activity; it directly produces or finances basic services such
as education and health; it provides for the building of infrastructures and
supports research and development; and it defines and manages the social
welfare system. By means of the public budget, the State performs a function
of macroeconomic stabilization.
Before the pandemic, public spending net of interest payments
amounted to 45 per cent of GDP in Italy. Efficiency in the use of such a
sizeable amount of resources and the capacity to secure them with the least
distortionary instruments both help to determine Italy's potential growth.
There is considerable room for improvement in the quality of infrastructures
and public services, in the distribution of the tax burden, made unfair by
high levels of tax evasion and avoidance, and in the effectiveness of the social
welfare network, fragmented by the stratification of regulatory interventions.
The severe recession caused by the pandemic has restored State action to
a central role, both in emergency interventions in favour of households and
firms and in drawing up and implementing a strategy for recovery and for
boosting development. The breadth of the response to the crisis has reignited
the debate over the role of the public sector in the economy.
Nevertheless, the need for a State that is more effective in carrying out the
functions already entrusted to it must not be confused with the need to extend
its tasks. Past experience suggests that public production of market goods and
services brings with it non-negligible risks of 'State failure', especially if it is
not subject to market discipline or if it is not accompanied by institutional
rules and safeguards that guarantee its autonomy and accountability.
The contrast between State and market is misleading, as they are actually
complementary. A healthy economy needs them both: the former provides
good rules and high-quality public services, and intervenes in areas where social
returns are high but private business is insufficient, and the latter generates
dynamic and innovative firms able to promote their work and to be rewarded
for the quality of their output. This complementarity is not limited to the State
and the market; it also embraces the many organizations that in the modern
world, and increasingly so in Italy, are non-profit making and, often thanks to
voluntary work, contribute to the wellbeing of the community.
The NGEU programme offers us the chance to improve how the
public sector works, and to stimulate private enterprise and modernize the
economy. Without undue emphasis, we can agree with the argument that
the opportunities Italy will be able to offer future generations depend on the
success of the reforms and measures of the National Recovery and Resilience
Plan (NRRP) which will implement the programme.
The NRRP's analysis of the structural weaknesses of Italy's economic
and institutional system is agreed with across the board. The objectives and
missions into which it is divided address the challenges posed by climate
change and some of the most obvious lags in Italy: innovation, digitalization,
education and research and the network and transport infrastructures (Figure
10). Measures to reinforce labour policies and the social welfare and the health
systems are envisaged.
The NRRP includes measures worth more than €235 billion over six years:
this is an impressive plan that needs to be transformed into executive projects,
calls for tender, and public works. The design challenge and the commitment
necessary for it to be effectively realized are considerable. The disbursement
of European funds is conditional upon the availability of evidence on how
interventions are progressing and on the objectives achieved, to be provided by
continuous monitoring. The discipline thus imposed on general government,
accompanied by the hiring of specialized staff, could have positive and
lasting repercussions on its functioning and on its planning and operational
capabilities.
The reform agenda is equally ambitious and must also be implemented
according to a strict timetable. Measures are identified to improve the working
of general government, expedite judicial proceedings, simplify legislation
and remove the limits on competition - all areas in which the need for a
change of pace has been apparent for some time. To these can be added the
announced reforms of the tax system and of social safety nets which, while not
included in the plan, are among the areas in which the Government intends
to intervene. Unity and awareness of the absolute necessity of stepping up to
the commitments made is required of all the actors involved: policymakers,
institutions, social partners and citizens.
Reducing regional disparities in economic and social development, which
are even more evident today after a decade of stagnation, is a key priority of the
plan. The investments and reforms can prove especially beneficial in areas where
accessibility to infrastructures is most lacking, and where the quality of public
services and the dynamism of private initiatives is less satisfactory. To the more
than €80 billion that the plan assigns to modernizing and developing Italy's
southern regions can be added the allocations from the Fund for Development
and Cohesion, European structural funds, and other programmes, taking the
total of available funds to more than €200 billion between 2021 and 2030.
Setting aside differing visions of the role of the State, Regions and
local government in implementing the interventions, valid solutions must
be identified to ensure that these are effective. The planning and execution
phases, together with the outcomes, must be constantly monitored, with a
clear assignation of responsibilities to overcome shortcomings and delays, so
as to avoid a repeat of past errors when the resources available were not always
used fully and well.
The country will be called on to make a lasting commitment, extending
beyond the time horizon of the NGEU, to give concrete expression to the
reforms. Some areas, such as hea