Mario Draghi: 2011 World Savings Day
Address by Mr Mario Draghi, Governor of the Bank of Italy and Chairman of the Financial
Stability Board, at the 87th World Savings Day, organized by the Association of Italian
Savings Banks, Rome, 26 October 2011.
* * *
The crisis
Economic activity in the euro area is expanding at a very modest pace, curbed by the
slowdown in world demand, the fall in the confidence of firms and households, and the
adverse effects on financial conditions of the strains in some sovereign debt markets. The
risk of a further deterioration of the growth outlook is significant, in a context marked by
pronounced uncertainty.
The worsening of the crisis is a world and a European phenomenon, but Italy's particular
vulnerability has domestic roots: the large public debt, the doubts about the prospects for the
growth of our economy, the hesitancy and delay with which steps to correct imbalances have
been taken and measures to foster growth adopted. After declining in August, the gross yield
on ten-year BTPs has returned to a very high level (more than 5.9 per cent yesterday).
After six months of virtual stagnation, in the second quarter of this year Italy's GDP began to
grow again, but at a very modest pace. Although they continue to sustain economic activity,
exports have been affected by the less vigorous growth in world demand. In their responses
to surveys, firms report a worsening of their short-term outlook and a deterioration in their
assessment of investment conditions. Domestic demand is weighed down by the weak trend
in households' disposable income, the slow recovery in employment, and the uncertainty
about the economy's prospects. The leading forecasters have reduced their expectations for
growth next year; according to the International Monetary Fund, it will barely be positive.
The Eurosystem is preventing, with its use of non-standard measures, the malfunctioning of
the money and financial markets from obstructing the monetary transmission mechanism.
With the provision of liquidity and the allotment modes used for refinancing operations, we
are continuing to ensure that banks are not constrained on the liquidity side. We have
announced a programme for the purchase of covered bonds. All the non-standard measures
adopted in response to the financial strains are, by their nature, temporary. It remains
essential to ensure price stability, anchoring inflation expectations in the euro area in line
with the objective keeping inflation below, but close to, 2 per cent over the medium term.
The interventions prevent the imbalances from worsening; on their own they cannot
overcome the underlying causes. At European level there is an urgent need for a governance
in which budgetary discipline and solidarity are mutually supportive; there is also an
immediate need to implement the instruments of financial support for managing the crisis.
But without a decisive and lasting response from appropriate domestic policies that, by
promoting growth, remove the imbalances in the public finances, the first objective is
unattainable, the second a palliative.
The work begun with the first report of the Financial Stability Board in April 2008 has
proceeded to good effect. Much has been done, both in implementing it and in drawing up
new regulations. It is now necessary to continue with the transposition of the new rules into
national legal systems. International coordination has been a key factor in imparting impetus
to the reform of international finance; it remains crucial to its implementation. The
contribution of the G20 leaders has been fundamental.
To crown the process, the Financial Stability Board will submit a report to the next G20
summit in Cannes in November with specific recommendations regarding systemically
important financial institutions, the limits to be imposed on the shadow banking system, and
the reduction of the systemic risk associated with OTC derivatives business.
The Italian banks
Italy's banks have to face the impact of sovereign risk on their funding, on the value of the
collateral they provide for refinancing, and on their capital market.
But our banks' exposure to Greece, Ireland, Portugal and Spain is modest, amounting to
about 1 per cent of total system assets. Their investment in Italian government securities is
substantial.
Although the banks' short-term liquidity position continues to be in balance as a whole, it is
affected by the persistence of strains, particularly on the wholesale markets, where
fundraising has slowed markedly since the summer. The Bank of Italy continues to ask banks to
maintain balanced liquidity positions; these positions undergo careful monitoring at weekly
intervals by the Bank's supervisory area.
Though diminishing, the rate of growth in lending to both households and firms remained
higher in August than the rates for the euro area. In September the three-month growth came
to 3.9 per cent on an annualized basis. However, surveys of firms find a tightening of lending
standards and growing difficulty in obtaining credit. The bank lending survey conducted by
the Eurosystem also finds signs of a tightening of supply conditions by Italian banks, limited
for now to requests for higher interest rates.
Strong capital bases enable banks to cope with the cyclical worsening, and to contain the
cost of fund-raising on the markets. On more than one occasion we have insisted that the
banks should carry out capital increases. The response has been prompt so far and we trust
it will continue to be so in the future.
At European level, the largest banks are expected to equip themselves with adequate buffers
of high-quality capital by the middle of next year. The amount is determined for each bank
taking its exposure to sovereign risk into account.
The request for temporarily higher capital ratios is necessary in order to address investors'
current worries, with benefits for banks' funding on the wholesale markets.
Our banks are up to this new challenge. We are fully confident that, as in the past, the
banking foundations will shoulder their share of responsibility. If necessary, adequate
backstops will be identified and put into operation in a timely manner.
The difficulties that the Italian banking system finds itself facing today have origins that lie
beyond it. In the longer term, the problems can be solved at the root only by increasing the
growth potential of the Italian economy as a whole and acting on the sustainability of the
public finances. The September budgetary package needs to be implemented completely
and swiftly, in particular by rapidly setting up and carrying out the envisaged public
expenditure revision.
Savings and young people
Historically, the capacity to save has always been a resource for the Italian economy. Last
year Italian households' net wealth was equal to eight times their disposable income, a value
that is higher, sometimes considerably higher, than the ratios in the other leading advanced
countries. For Italy, excluding government securities held directly or indirectly by households
changes this ratio only marginally.
Today's accumulated wealth, however, is the product of the saving of the past. Unless it is
fed by new inflows, it will soon be dented.
The risks are not lacking. Since the turn of the century the propensity to save has fallen by
about 4 percentage points, down to 12 per cent of income in 2010, almost 2 points below the
euro-area average. The decline has been sharpest among the less affluent families, who
have found it harder, in the face of stagnating disposable income, to reduce spending on
essential goods and services. ACRI's latest survey of Italians and savings found that only
13 per cent of those interviewed - the lowest value ever recorded - hope to save more next
year.
In part, the decline in the saving rate is due to the ageing of the population. It is accentuated
not only by the diminished relative size of the younger generations but also by their
diminished capacity to save. The deterioration of labour market entry-level wages, not offset
by more rapid career advances, has helped to compress the propensity to save among
households headed by young people.
The share of young families with nil or negative saving has risen. Among those headed by
persons under 35, it increased from 26 per cent in 2000 to 32 per cent in 2008. Heightened
income instability also affects young people's savings opportunities and decisions.
In the absence of more equitable intergenerational redistribution of resources, young people
today will have to contribute more heavily than in the past to the public finances. For a
35-year-old in 1990, the incidence of taxes and social security contributions on income,
calculated on the basis of remaining life expectancy and net of the value of social benefits,
was equal to approximately 20 per cent; for someone 35 years old today, it exceeds 25 per
cent. A factor in this increase has been the excessively slow transition to the
contributionsbased pension system. The older generations have been less severely affected.
The recession has exacerbated economic difficulties above all for the young. The
unemployment rate of Italians aged 15-24 rose by nearly 7.6 percentage points between
2007 and 2010 (nearly 3 points more than the average for the EU-15) and that of those aged
25-34 by 3.6 points; in the 35-64 age-group, the increase was 1.8 points. One source of
difficulty has been the marked dualism of the labour market. Young people who lose their
jobs are relatively unprotected by the existing income support programmes.
Attenuating the segmentation that now exists in the labour market and making income
protection programmes more universal, as well as more effective and rigorous, would help
equalize employment opportunities and income prospects, which are now heavily tilted in
favour of the older generations. Contracts providing for protection that builds over time and
the introduction of a modern system of unemployment benefits would make the labour
market more fluid and efficient, as well as more equitable. Well-designed measures along
these lines could also help stimulate labour market participation. In addition, this would
benefit the propensity for forms of saving more oriented to the long term, which in turn,
suitably channeled, could facilitate the birth and growth of new enterprises with greater
potential for innovation.
Reforms for growth
Policies that stimulate growth and economic dynamism expand the opportunities for young
people. At the same time, the measures required to impart renewed impulse to growth will
hinge on young people, easing the constraints on their contribution.
Removing the barriers to economic activity by lowering the cost of forming and running new
enterprises will increase economic participation by the younger generation. New enterprises
- in which economists place their hopes both for their high potential for innovation and for
their capacity to stimulate efficiency in others - are mostly in the hands of entrepreneurs
under the age of 40. And they tend to employ younger workers. But they will be more
dynamic and competitive only if the work force has a suitably high level of educational
attainment, which is an essential factor for growth in the "knowledge-based economy."
In the short term, macroeconomic policy measures can help to support growth. The
composition of fiscal revenue can be modified, shifting the burden from levies on labour and
productive activity to taxes on property and consumption.
But above all the durable achievement of faster sustainable growth requires the structural
reforms invoked for so long, broadly endorsed but as yet unimplemented: heightening
competition in the product markets, especially in the service sector; creating a more
enterprise-friendly administrative and regulatory environment; stimulating the accumulation of
physical and human capital; and raising the levels of labour market participation.
Such measures imply the substantially recasting the priorities and overhauling the modus
operandi of public policy and administration. They must not be allowed, under the pressure of
vested interests, to leave particular areas untouched. Properly designed and communicated,
these measures can have an immediate propulsive impact, enhancing business confidence
and expectations, increasing the propensity to invest, and narrowing the spread on Italy's
public debt.
This is my last official speech as Governor of the Bank of Italy.
I end my term amidst a confused and dramatic situation at home and abroad on both the
political and the economic fronts.
When I took the floor in this venue six years ago, incidentally with a speech on growth, the
situation was very different. Its apparent tranquility, the generally indulgent, indeed admiring,
attitude towards finance as the engine of growth concealed the seeds of the future disaster.
Italy bore none of the blame for the crisis. But because of never redressed structural
weaknesses Italy was overwhelmed by it, penalized more than others, to the point that today,
owing to its slowness in overcoming its own crisis, Italy itself has become a cause of general
crisis.
Nevertheless, the gravity and complexity of the situation must not make us forget our
strengths.
The first of these is our Head of State, whom I wish to thank both personally as a citizen and
institutionally on behalf of the Bank of Italy. He is a beacon, an inspiration, an example.
The second strength comes from looking back on what has been accomplished. In these six
years we have done a great deal. The Bank of Italy has made outstanding contributions at
domestic and international level to the efforts to cope with the crisis, to revamping
supervisory action, to the design and management of European monetary policy, to the
formulation and implementation of the reform of European and global regulation. The
autonomy of the Bank of Italy has been essential for all this.
The Bank's autonomy is not an end in itself. It is an essential element of the way in which the
Bank exercises the powers and performs the duties defined in its Statute, the Italian
Constitution and the European Treaty. In exercising these powers, the Bank is called upon to
safeguard the common good, for it is always perceived as impartial and not subject to
external controls or interventions. The General Council does not represent private interests; it
does not intervene in matters for which the Bank or its top management is alone responsible;
it oversees the Bank's administration, its management and its choices.
I now take leave of the Bank with a peaceful mind, with, I believe, your warm feelings that will
accompany me to Frankfurt. The new governor epitomizes all the best that the Bank has
produced in its tradition of training authentic central bankers. The Bank's organization is
sound and strong.
But you too - Italy's banking foundations and banking system - have done much in these
years to cope with the crisis by increasing resources, making sacrifices, changing operating
rules, and aligning incentives with results, and you deserve ample credit for this.
It is, then, from the strength of some of our institutions, from the awareness that we have
succeeded in accomplishing things that seemed impossible, that we draw courage, security,
the belief we will succeed.
But we are experiencing a historical discontinuity. We are moving towards a new European
pact, towards a shared management of the underlying problems of our economies in which
each is called on to shoulder more responsibility in serving the common good.
Although the forms may be mortifying, the substance of the problems to be solved does not
depend on the person who enunciates them. It is in the interest of the individual member
states to recognize this substance, to recognize the ways to go forward - and without hoping
in others - to trust in themselves, their own strength, their own history - to save themselves
in Europe.
This is the fundamental lesson of the crisis: to build the future in Europe together. Only by
doing so will we be able to remake Italy.